Moody's Investors Service's negative outlook on Kazakhstan's banking sector reflects the rating agency's expectation that banks will continue to face solvency risks amid a challenging business environment.
The outlook expresses Moody's expectation of how bank creditworthiness will evolve in the GCC over the next 12-18 months.
Moody's report, entitled "Banks -- Kazakhstan; Heightened Insolvency Risks Drive the Negative Outlook," is available on www.moodys.com. Moody's subscribers can access this presentation via the link provided at the end of this press release.
"Asset quality remains weak across Kazakhstan's banking sector as the depreciated tenge, combined with challenging operating conditions and declining real incomes, have fuelled a rise in problem loans in 2016 to 37% of total loans, on average, among our rated banks in Kazakhstan," says Semyon Isakov, Vice President at Moody's.
While liquidity conditions for banks in Kazakhstan are improving, local currency funding will remain scarce, according to the rating agency. Although confidence in the tenge is beginning to gradually recover, savers continue to favor the dollar overall and, in order to lend, banks needs to maintain costly hedges. Banks also face the risk that funding costs might suddenly rise in the event that the tenge weakens again.
Weak profitability is also limiting lenders' ability to absorb credit losses. Without special measures to address provisioning needs, it will likely take years for the banking system to work through accumulated problem loans. Moody's forecasts net interest income to remain low in 2017 because a large share of banks' loans.
Finally, the capacity of the government to recapitalize or provide liquidity to certain large banks remains strong due to the relatively small size of the Kazakhstan banking system.