Gross liquidity withdrawals by the national bank remained unchanged in June and amounted to T4.5tn, which is 33% of the total loan portfolio of the banking system. This amount of excess liquidity continues to be maintained in the banking system from the beginning of 2018. The national bank sterilizes the main part of this liquidity by issuing short-term notes. The volume of issue of notes in June was T3.65tn having decreased for a month by 9%, but in comparison with the beginning of the year the volume of notes in circulation increased by 14%.

It should be noted that, despite the gradual decrease in the base rate, the volume of notes held by banks is not reduced. The program of financial assistance to the banking sector and elimination of Kazkommertsbank's problems last year also contributed to the growth of excess liquidity. This significant volume of liquid assets is not transformed into expanding lending to the economy. The most likely obstacle to this is the lack of real solvent credit projects due to structural problems in the economy.

Now a significant demand for credit resources is being created by the population, which is reflected in the growth of unsecured consumer lending. The banks' implementation of this high-yield lending allows maintaining a profit margin at an acceptable level, allowing the gradual drop in yields on the notes of the NBK to smoothen.

Further rapid decline in the base rate without overcoming structural problems in the economy can lead to an even more significant growth in consumer lending, crediting of doubtful projects and the movement of free funds to the foreign exchange market, which in turn will lead to an increase in the exchange rate, problem debt, pressure on inflation and import. In addition, the implementation of significant public investments and direct support programs of certain sectors of the economy for state-subsidized non-market rates displaces the demand for standard bank loans from the business, leading to a distortion of the credit mechanism.

The deterioration of the financial condition of the three problem banks (Qazaq banki, Bank of Astana, Eximbank) continued. These banks in June again committed violations of prudential liquidity standards. The Bank of Astana in June commited a violation of K2 capital adequacy ratio as a result of a loss of T11.6bn accumulated since the beginning of the year. In the Bank of Astana and Eximbank, there is a gradual recognition of bad debts. According to the NBK, in June the level of bad debts in the Bank of Astana was 21.6%, in Eximbank - 44.2% of the total loan portfolio. It should be noted that, despite the fact that these banks cannot service their obligations, decision to terminate their activities has not yet been taken.

In June, there was a slight increase in lending by 0.91% (+0.99% since the beginning of the year). Loans of legal entities increased by 0.3% mom (-2% since the beginning of the year). In the retail lending sector there was an increase of 1.9% mom (+6.4% since the beginning of the year). Consumer lending continues to show growth, in June the increase was 2.4% mom (+6.4% since the beginning of the year).

According to official data, the quality of loans in the system has improved: the share of loans with arrears over 90 days decreased by 0.3pp in a month and amounted to 8.8% (-0.6pp since the beginning of the year). The level of provisioning in June decreased by 0.5pp and amounted to 14.04% (-1.6pp from the beginning of the year).

In June, there was a significant increase in deposits by 3.6% (+1.9% since the beginning of the year). Deposits of legal entities increased by 4.2% mom (+0.8% since the beginning of the year), deposits of individuals increased by 3% mom (+3.2% from the beginning of the year). It is worth noting that the growth of deposits in June blocked the decline in corporate and aggregate deposits of the banking sector observed since the beginning of the year.

In June, the tenge weakened by 10.64 tenge against the US dollar. This weakening occurs against the general small volume of trading compared to the average from the beginning of the year volume of trading on the foreign exchange market.

Despite the weakening of the tenge, the de-dollarization of deposits continued. So, the dollarization of household deposits in June decreased by 1.64pp to 47.8%, dollarization of corporate deposits decreased by 1.87pp to 43.6%. The total dollarization of deposits in June was 43.8% (-1.8pp per month). At the same time, the purchase volume of US dollars in exchange offices increased by 129%. In absolute terms, the volume of purchase by the population of US dollars is $234mn, which is much lower than the values recorded in 2017 ($316mn in June 2017) and below the maximum of January 2018 ($334.7mn). The growth of purchases of the US dollar in addition to the growth of devaluation expectations is heavily influenced by the factor of seasonality.

NIM and NIS indicators continued to show multidirectional dynamics in June: NIM 5.44% (+0.02pp mom), NIS 4.28% (-0.01pp mom). The growth of banks' interest margin (NIM) since the beginning of the year amounted to 0.35pp, the growth of the interest spread (NIS) amounted to 0.12pp since the beginning of the year.

The growth of these indicators primarily reflects the gradual reduction in deposit rates. At the same time, the reduction in deposit rates is stronger than for loans. So the spread between the average interest rate on loans to the population and the average rate on household deposits in June is 9.1pp (9.4pp in May), since the beginning of the year this spread has increased by 0.6pp from 8.5pp (6.2pp at the beginning of 2016). Spread at the rates of legal entities is highly volatile, but in general, it is approximately at stable levels since the beginning of the year.

In June, the banking sector recorded a loss of T6.9bn (T321.2bn profit from the beginning of the year). This negative result is almost entirely connected with the loss of KKB at T44.8bn recorded in June, most likely this loss is related to the accelerated clearing of the loan portfolio at the threshold of the merger with Halyk Bank. Excluding KKB, the banking sector's profit for June was T38bn, Which is 21% more than last month's results and 0.5% less than last year's results for the same period, also not taking KKB into account.

The table in Appendix 2 provides more detailed information on changes in key indicators of each bank.

  • Monetary policy and FX market;
  • Assets of the banking sector, deposits of the banking sector;
  • Loans of the banking sector and credit to economy;
  • Interest rates;
  • Banking sector's liquidity;
  • Banking sector's profitability;
  • Top 10 banks major changes.

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