OREANDA-NEWS. The outlook for Kazakhstan's rated banks is stable to negative, reflecting their increased refinancing risks and possible deterioration in asset quality, but also their improved profitability and reasonable capitalisation to date, says Moody's Investors Service in its new Banking System Outlook for Kazakhstan, disclosed by the Kazakhstan Stock Exchange (KASE).

"Kazakhstan's banks have experienced very rapid asset growth over the past three years, supported by mounting wholesale international borrowings, which accounted for over half of their total funding as of the end of the first half of 2007," says Armen Dallakyan, a Moody's Analyst and co-author of the report. "This level of dependence on market funding poses a significant refinancing risk for both individual banks and the banking system as a whole. As proven by the current liquidity crunch, the Kazakh banks are highly vulnerable to a decline in the international investor's sentiment."

In recognition of this increased refinancing risk, on November 1, 2007, Moody's downgraded and/or changed the outlook to negative on the ratings of six large Kazakh banks (Kazkommertsbank, Bank TuranAlem, Halyk Bank, Alliance Bank, Bank CenterCredit and Temirbank). Moody's cautions that a lack of access to international capital markets for a prolonged period of time, thus preventing the banks from refinancing their maturing foreign debt, will slow down many of the banks' operations and is likely to exert pressure on their margins, capitalisation and franchise value.

More positively, in 2007 Kazakh banks have considerably improved their profitability, thanks largely to somewhat slower asset growth, increased retail lending activity and reduced operating expenses. However, despite some expansion in retail lending, currently over 65% of Kazakh banks' net income comes from corporate lending, thus posing a significant bottom-line volatility going forward. Moody's believes the main challenge for the banks' profitability is a possible deterioration in asset quality, chiefly from their very high borrower concentration and their significant exposures to the real estate and
construction segments' risks.

The average bank financial strength rating (BFSR) for the Kazakh banking system is D- and the average local and foreign currency deposit ratings are Ba2. The BFSRs of the large Kazakh banks mainly benefit from their strong franchise value and improved financial indicators. The chief factors that constrain their BFSRs are high risk appetite and a reliance on external
wholesale borrowings, as well as the evolving nature of corporate governance and risk management standards.

"Given the importance of the banking system for the country's economy and political stability, Moody's maintains the view that, in a stress situation, the support would likely be provided by the Kazakh financial authorities and/or by banks' shareholders. This was evidenced by a range of actions taken by the National Bank and the government of Kazakhstan, including over US$10 billion of short-term liquidity support to the Kazakh banks in August 2007, an easing in their mandatory reserve requirements and the allocation of US$4 billion to support the country's banks and construction companies," notes Yaroslav Sovgyra, Vice-President/Senior Analyst and the co-author of the report.