Despite the decrease in volume of liquidity withdrawal of the NBK, the aggregate volume and the share of liquid assets of banks demonstrate the dynamics of growth. Thus, the volume of liquid assets of banking system in July increased by 3.5% (+2.6% ytd) and amounted to T9.9tn, which contributes to 41% of total assets of the banking system. Therefore, disregarding the observed reduction of liquidity withdrawn by the instruments of NBK, banking sector began to significantly increase the volume of correspondent accounts (+T0.65tn, +25% mom, +7% ytd) and cash (+T0.09tn, +16% mom, +8.8% ytd). The growth in correspondent accounts, which are mainly represented by bank’s currency deposits, is largely due to a significant increase in the currency deposits of legal entities in July (+7% mom).

This significant amount of liquidity (T9.9tn of liquid assets on bank balances) is concentrated in the banking system mainly consists of correspondent accounts (32%), debt securities (47%), which are mostly represented by notes of the NBK and from bank deposits in NBK (7%).

Based on this structure, it can be seen that these funds are not involved in lending to the economy, but are used to obtain risk-free income at an equal base rate from the NBK and interest income from correspondent deposits, which are mainly nominated in US dollars. Thus, instead of fulfilling its primary function of redistributing funds in the economy, by making loans and accepting credit risk, banks prefer to receive low risk-free returns on the instruments of the NBK and revenues from the placement of correspondent deposits.

Thus, a significant surplus of liquidity in the banking system is caused on the one hand by a significant write-off of bad loans from banks, on the other hand by imbalance between accumulation and lending. Failure of the banking system to effectively allocate savings efficiently indicates certain structural problems in the economy. These structural problems are based on the commodity orientated economy of Kazakhstan and the lack of development of private business. Thus, Kazakhstan companies cannot show sufficient solvent demand for banks' credit resources due to the lack of sufficient conditions for investment and expansion of their activities. The most profitable companies in the commodity sector, majority of which are controlled by the state, prefer to borrow funds through debt securities and preferential government funds. In these conditions, only the retail sector demonstrates sufficient demand and high profitability corresponding to the credit risk. However, active lending to consumer demand leads to an increase in inflationary pressures on the economy. Therefore the NBK keeps the base rate at the current level, to prevent an even greater transition of excess liquidity to lending to the population.

Gross liquidity withdrawals by the national bank decreased by 7.6% mom (+8.4% ytd) in July and amounted to T4.2tn, which is 31% of the total loan portfolio of the banking system. The volume of issue of notes in July continued to decrease, since June, thus by the end of July the volume of issue of notes was T3.3tn (-T0.32tn, -8.7% mom, +4% ytd). 

In July, there was a growth in lending by 0.93%  (+ 1.9% ytd). Loans of legal entities increased by 0.2% mom (-1.9% ytd). In the retail lending sector, there was an increase of 2.2% mom (+ 8.8% ytd). Consumer lending in July showed a significant decrease of 4% mom (+ 4.7% ytd). The main contribution to the growth of loans for T120bn in July, despite the reduction in consumer loans, was made by lending to the retail sector (+T106bn), with most of these loans issued to the population for other purposes (not mortgages, not consumer loans) and for the purchase of fixed assets (car loans). Restrained growth in lending since the beginning of the year is associated with a significant amount of write-offs amounting to T520bn (T341bn is accounted for by KKB), attributable to TOP-10 banks, according to the financial statements of banks for 6 months. Without these loans, the growth in lending to the economy amounted to 6.3% (+T765bn) from the beginning of the year.

According to official data, the quality of loans in the system has not changed: the share of loans with overdue debts over 90 days in July remained practically unchanged at 8.8% (-0.6pp ytd). The level of provisioning in July decreased by 0.1pp and amounted to 14% (-1.5pp ytd).

In July, deposits increased by 1.7%   (+3.6% ytd). Deposits of legal entities increased by 2.9% mom (+3.7% ytd), deposits of individuals increased slightly by 0.3% mom (+3.5% ytd). The main contribution to the aggregate increase in deposits (+T299bn) was provided by an increase in foreign currency deposits of legal entities by T287bn. It is worth noting that the corresponding increase in foreign currency loans in July was not observed and most likely these deposits served as a source of growth of correspondent accounts of banks.

In July, KZT weakened by 5.75 points against the USD. The weakening of the national currency is observed for four months period. At the same time, the total trading volume on the stock exchange in July was lower than 4.8% in last month, and below the average monthly trading volume since the beginning of the year.

Dollarization of household deposits in July decreased by 0.57pp to 45.6%, dollarization of deposits of legal entities as a result of growth in foreign currency deposits increased by 1.26pp to 43%. The total dollarization of deposits in July was 44.2% (+0.4pp per month). The volume of purchase of US dollars in currency exchange offices increased by 101%. In absolute terms, the volume of purchase by the population of US dollars is $471mn, which is slightly higher than the value in July 2017 ($416mln), but above the maximum in January 2018 ($334.7mn). The growth of US dollar purchases is influenced by the growth of devaluation expectations associated with a significant weakening of the KZT and the possible emergence of a negative shock for the economy of Kazakhstan as a result of the expansion of anti-Russian sanctions.

NIM and NIS showed a decrease in July: NIM 5.18% (-0.26pp), NIS 4.2% (-0.08pp). The growth of banks' net interest margin (NIM) since the beginning of the year amounted to 0.09pp, the growth of the net interest spread (NIS) since the beginning of the year was 0.04pp. The decrease in these figures is explained by the significant write-off of distressed assets and accrued interest income in the framework of the final integration of KKB and Halyk, as well as a reduction in the volume of high-yield consumer loans in July.

In July the profit of banking sector was T47.6bn (T368.8bn ytd). Seven banks showed losses for the month. 

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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