OREANDA-NEWS. The sharp devaluation of the tenge, which follows the scrapping of managed exchange rates on Thursday, is likely to affect both the asset quality and capital ratios of Kazakhstan's banks, says Fitch Ratings.

Impairments across foreign-currency (FC) loans are expected to increase as unhedged borrowers struggle to repay their loans. Risk-weighted assets will automatically swell when FC risks are translated back into tenge, triggering a fall in regulatory capital ratios. Such risks are already reflected in our ratings, with most Kazakh banks in the 'B' range, but further sustained devaluation could add negative pressure to some ratings. Risks faced by Halyk Bank are significantly lower than those faced by other banks and this is reflected in the bank's higher 'BB' rating.

Around 30% of assets held by Kazakh banks are denominated in FC. The Kazkommersbank/ BTA Bank group and ATF Bank are the most exposed, with FC loans representing one-third of risk-weighted assets at end-2014, a figure now set to increase. Net FC loans extended by Fitch-rated banks, which represent 70% of sector assets, were already equivalent to 200% of their combined equity at end-2014. Unhedged FC borrowers tend to be real estate-related and importers, often of consumer goods.

Loan book quality varies considerably across the banks with some, such as AsiaCredit and Alfa, reporting impaired loans to total loans ratios well below 5% - but sector-wide non-performing loans tend to be significant, reaching around 30% of total lending at end-March. Impaired FC loans already reached around one-third of total FC loans extended by Kazkom, ATF Bank and BCC at end-2014. This is likely to increase, unless restructurings and/or sales of impaired loans to special purpose vehicles helps to conceal the rise.

Direct foreign exchange-related losses will be limited, as most rated Kazakh banks hedge their open FC positions with swaps entered into with National Bank of Kazakhstan (NBK), the central bank. We expect NBK to continue to provide such swaps and to extend them as they mature, which should reduce the impact of tenge devaluation on the banking sector. Kazakhstan has plentiful foreign-exchange reserves of USD97bn and tenge devaluation should preserve these as domestic products become increasingly competitive, stemming the steady inflow of cheap imports.

A revaluation of FC loans to around the level the tenge fell to on Thursday using an exchange rate of KZT255/USD1 will increase RWAs, and hit core Tier I capital ratios of Fitch-rated banks by up to 1.8pp. All Fitch-rated Kazakh banks should still be in compliance with minimum requirements, unless the tenge weakens further. Alfa Bank (Kazakhstan) and ATF Bank are most vulnerable because of their small buffers above the regulatory core Tier I capital ratios.