Despite the unexpectedly high GDP growth in Kazakhstan in 1H2017 (4.2%), assets and deposits of the banking system declined during this period, and lending continued to stagnate. Especially large changes in assets and loans of the banking system occurred in July, which was due to the settlement of problem loans in Kazkommertsbank and its subsequent purchase by Halyk Bank. In this regard, we included the analysis of the banking system for 7 months in this review. Among the main characteristics of the banking system in this period there is also recognition by the National Bank of Kazakhstan that the actual amount of non-performing loans in banks may be more than it is reflected in the statements, and the expected losses on them may exceed formed provisions. This may lead to further worsening of the banking sector indicators, while the government's program for the improvement of the banking system continues.
Since the beginning of this year, Kazakhstan's banking sector has entered a period of large-scale transformation, which has already begun to have a significant impact on indicators of the banking system. Since 2017, the capital adequacy ratio has been increased, the regulator's supervision has become tougher, and from the beginning of 2018, banks must switch to a new accounting for the formation of reserves (IFRS 9). Such changes pushed banks’ consolidation. This review contains more detailed information on this matter.
However, the biggest impact has already had and will continue to have is the Program of NBRK: «Improvement of banking sector financial stability" (hereinafter – the Program). This program was developed by the NBRK in June. During July it was actively discussed with banks and on August 9 the NBRK announced its approval. Despite the fact that the main work within the program was carried out in summer, one of the key parts of the program "recovery of the systemically important bank" (Kazkommertsbank) was implemented during the first half of the year with the final completion of all measures in July. Thus, the recovery of a systemically important bank can be divided into two stages. Within the framework of the first stage, the non-performing loans of the bank were settled. With the help of state support, BTA Bank repaid its debt in the amount of T2.4 trillion to Kazkommertsbank. By the results of checking the remaining loan portfolio by Halyk Bank and the NBRK, additional provisions were added. At the second stage, after settling problem loans, Halyk Bank purchased 96.8% of common shares of KKB. In addition to the purchase price Halyk Bank provided additional capital to Kazkommertsbank in the amount of T185 bn.
In general, in the first half of this year there was an unexpectedly high growth in the GDP of Kazakhstan (4.2%). The main growth driver was again the oil and gas sector, as well as the mining sector (metals production). Compared to the first half of 2016, the average price for oil increased by 30% to $52/bbl, and due to Kashagan field, oil production increased by 10%. However, despite the favorable economic environment, during this period, deposits and assets of the banking system declined, which greatly accelerated the decline in their share in relation to GDP.
Assets of the banking sector in 1H2017 decreased by 1.6% to T25.1 trillion (according to the NBRK's statistics "Information about own capital, liabilities and assets"), as a result the share of assets in the country's GDP decreased by 6pp to 52% (58% according to the results of 2016). This share is very low compared to the world levels, which indicates a weak contribution of the banking system to the development of the economy. For comparison, the share of assets of the Russian banking sector in the country's GDP as of end of 1H2017 amounted to 91.9% (93% at the end of 2016).
The reduction in assets in the first half of the year was due to the reduction in the deposit base of the sector by 2.6%. In turn, the main outflow of deposits was caused by corporate sector, whose funds decreased by 4.6% (-0.3% for retail deposits). It is difficult for us to explain such a strong decline in deposits from legal entities and the lack of growth in retail deposits. Perhaps, due to the improvement in the economy, bank depositors began transition from the "savings" regime to the "spending and investing" regime. Also, the outflow of deposits could be affected by negative news about the quality of assets in the banking system and the financial condition of some banks.
In July, due to the settlement of problem loans in Kazkommertsbank and its further acquisition by the Halyk Bank, the assets of the banking system for the month decreased by 5.2% (a decrease of 6.8% over 7 months). In this case, the main driver of asset reduction was the repayment of Kazkommertsbank's debts to state creditors: T625bn to the NBRK (which were attracted by the bank from the NBRK in several tranches since December 2016 as part of stabilization measures to maintain current liquidity), T202bn debt through repo operations, T41 bn to Samruk-Kazyna in frame of BTA Bank's share purchase and sale agreement.
As a result, in July the share of banks' assets in GDP fell to 49%. Deposits for the month showed a slight increase of 0.4%, which was due to the growth of retail deposits (+1.8% mom, +1.5% ytd), while corporate deposits continued to decline (-0.8% mom, -5.3% ytd). Tenge exchange rate free float, in which frequent movements of the exchange rate make it pointless to attempt to win on devaluation, and also the effects of a significant difference in rates on deposits in national and foreign currencies continue to yield results. Thus, taking into account the adjustment for the exchange rate, the dollarization of household deposits for the first half of 2017 decreased from 61.9% (at the beginning of the 2017) to 55.5% (at the end of June 2017), and the dollarization of legal entities declined from 49.1% to 46.3%. As a result, for the first half of the year, taking into account the adjustment for the exchange rate, the dollarization of total deposits decreased from 54.6% to 50.3%.
The loan portfolio of the banking sector for the six months of 2017 increased by 0.1% to T15.5 trln (according to the NBRK's statistics "Information on equity, liabilities and assets"). As the country’s GDP increased nominally, the share of the banks' loan portfolio in the country's GDP decreased to 32% (35% in 2016). This also indicates a further decline in the role of the banking sector in the economy to ensure its growth. For comparison, in Russia the share of the credit portfolio of the banking sector in the country's GDP for 1H2017 was 64.1% (64.5% at the end of 2016).
In July, due to the state support, BTA Bank’s problem loan was fully repaid to Kazkommertsbank. As a result, the loan portfolio of the bank (gross) decreased by T2 trillion. This led to a considerable decrease for the month and 12.9% ytd. At the end of July, the share of the loan portfolio of banks in the country's GDP was 27.8%. On the other hand, full repayment of BTA loan increased the volume of KKB liquidity and the entire banking sector. At the end of July, the share of liquid assets in the bank amounted to 64.9%. In general, the level of liquid assets in banking sector at the end of this month was 35.6% (28.3% at the beginning of the year). Thus, there is enough liquidity in the banking system to accelerate the growth of lending to the economy. However, in our opinion, such growth is constrained by low demand for unsubsidized commercial loans and the presence of hidden problems in banks' loan portfolios.
Share of non-performing loans in the banking system for the first half of the year increased by 4pp to 10.7%. Provisions for credit losses under IFRS for this period increased by 0.6pp to 11.2%. However, in the Program, the NBRK acknowledged that the actual volume of non-performing loans in banks may be greater than reflected in financial reports, and the expected losses on them may exceed the formed provisions. This situation was clearly demonstrated by the settlement of problem loans in Kazkommertsbank. Despite the fact that the problematic loan of BTA Bank was fully repaid and provisions for it were to be released, after checking the quality of the remaining portfolio by the regulator and the Halyk Bank, Kazkommertsbank was forced to add provisions in the amount of T401 bn. As a result, the provisions of the bank accounted for 64.9% of the remaining loan portfolio and at the end of July it showed losses of T406 bn. In addition, KKB showed a significant increase in NPL for the remaining loan portfolio, which at the end of July amounted to 35.5% from the loan portfolio.
Recognition of problems in KKB's remaining loan portfolio worsened the indicators of the entire banking system. At the end of July, the share of provisions for credit losses reached 16.1%, and the share of problem loans overdue more than 90 days increased to 12.8%. The profit on the banking system in the amount of T204 billion at the end of June turned into a loss of T204 billion at the end of July. Given that, according to the Program, banks will be forced to show real level of problems with their loan portfolios, by the end of this year we can expect deterioration in the indicators of the banking system.
Liquidity of the banking sector in 1H2017 remained at high levels and was also distributed unevenly across banks. The regulator continued to seize excess liquidity from the banking system and at the end of 1H2017 gross liquidity withdrawal through NBRK instruments (notes, deposits, repo, currency swaps) amounted to T4 trillion (25% of the loan portfolio of banking sector).
As of the end of July, the gross amount of withdrawn liquidity decreased by 11% mom and amounted to T3.6 trillion. This decrease was mainly due to the settlement of problems in KKB. As indicated above, the bank repaid the stabilization loan to the NBRK in the amount of T625 bn and the NBRK loan in the form of a REPO transaction in the amount of T202 bn. Also, excess liquidity in the banking system was absorbed through the acquisition by the Kazkommertsbank of treasury securities of the Ministry of Finance for T1 trillion.
The base rate during the first half of 2017 decreased by 1.5 pp to 10.5% and in August it was further lowered by 0.25pp to 10.25%. So far, such a reduction in the rate has had a weak effect on the activation of lending. As we noted earlier, in our opinion, the growth in lending is constrained by low demand for unsubsidized loans and the presence of hidden problems in banks' loan portfolios.
We expect that by the end of 2017, the base rate will be lowered to 10%. In general, lower base rate, further improvement of the economic environment, recognition of problems in banks' loan portfolios, and government support towards the financial stability of large banks should lead to lending acceleration by banks.
We expect that by the end of 2017, taking into account such factors as the growth in economy, the reduction in the base rate, the recovery of the banking system, and various government programs to stimulate lending, the total nominal growth of sector bank loans (excluding the BTA bank loan at) will be in the region of 2-3% in annual terms. However, given the level of inflation, the real growth is likely to be negative. Taking into account that, according to our expectations, real GDP growth in 2017 will be about 3%, the share of bank loans in Kazakhstan's GDP will decrease even more.
In the first half of 2017, we observed a decrease in the deposit base of the banking sector, which was due to the outflow of corporate customers, which are more responsive to changes in the banking system and in the economy. However, at the end of 2017 against the background of improved economic situation and the continuing level of government spending we expect a turning point in the reduction of corporate deposits, as well as the further growth of retail deposits. Total growth of the deposit base, according to our expectations, will be 4-5% yoy. At the same time, taking into account the gradual decrease in the base rate, the interest rates on deposits will also decrease, which may be a decelerating factor for the active growth of savings in banks.
Major changes in the top-10 banks are presented at the end of this report.
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