Kazakh banks' bad loans under IFRS 9 (International Financial Reporting Standards) are mostly well above their impaired loans under regulatory accounting, and at some medium-sized banks are so large relative to loss absorption capacity that these lenders may need fresh capital injections or other external support, Trend reports with reference to Fitch Ratings' report.
Furthermore, asset quality continues to be the sector's main rating weakness.
"Stage 3 loans (impaired) were 21.7 percent of gross loans at end-2018 across Kazakhstan's 15 largest banks (96% of sector assets), which is way above the regulatory non-performing loans ratio of 9.3 percent. Most Stage 3 loans in Kazakhstan are deep-seated long-term project finance exposures," the report said.
The report further states that Stage 2 loans (not impaired, but with a significant increase in credit risk) also represent a significant risk to asset quality, with a weighted average ratio of seven percent across the sample. The ratio was significantly higher at Alfa-Bank (17.6 percent) and Tsesnabank (15.6 percent).
The weighted average coverage of Stage 3 and Stage 2 loans with specific loan-loss allowance was respectively 37 percent and seven percent at end-2018 across the sample, the information said.
"Apart from Tsesnabank, the largest stocks of net problem loans relative to equity at end-2018 were at Centercredit (2.8 times), ATF Bank (2.6 times) and Nurbank (1.9 times). The banks' pre-impairment profits are unlikely to cover the potential additional impairment losses, in our view, making their financial viability more reliant on external support," the statement said.
"We estimate that increasing coverage of Stage 3 and Stage 2 loans to 80 percent and 20 percent respectively would have cost the sector 1.4 trillion tenge in extra loan-loss allowances at end-2018. While the sector's pre-impairment profit is reasonable, profitability is uneven and the quality of revenues is undermined by uncollected interest, particularly at banks with the highest proportions of problem assets," Fitch Ratings stated.
"Some banks have large non-core assets, mostly commercial property and other repossessed collateral, that are not captured by IFRS 9 loan quality disclosures. Non-core assets are particularly high at ATF Bank, Centercredit, Forte and Nurbank, and could give rise to additional impairment or revaluation losses," the rating agency noted.
"We think off-government balance sheet transactions could be used again to provide further government bank support if it were needed. However, such state support is highly uncertain, in our view, reflected in Support Rating Floors of 'B-' for Fitch-rated medium-sized banks," the rating agency concluded.
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