document (7)

Kazakh Banks: Challenges Mounting as Economy Slows

Roman Kornev, Director

James Watson, Managing Director

1 www.fitchratings.com

Low Oil Prices Drive Tenge Devaluation

• Tenge lost 46% against the US dollar in 2015 as the authorities abandoned currency peg

• Devaluation is hurting businesses with FC costs and KZT revenues

Economic Headwinds

Source: National Bank of Kazakhstan (NBK), Intercontinental Exchange

100

200

300

400

500

60020

30

40

50

60

70

Ja

n 1

5

Jan 1

5

Ma

r 1

5

Ma

r 1

5

Ap

r 1

5

Ma

y 1

5

Ju

n 1

5

Ju

l 15

Au

g 1

5

Se

p 1

5

Oct 1

5

Nov 1

5

De

c 1

5

Ja

n 1

6

Fe

b 1

6

Ma

r 1

6

Ap

r 1

6

Brent oil (USD/bbl) (LHS) Tenge per USD (RHS)


Recession Risks Significant Despite Large Reserves

• Kazakh economy may be sliding into recession in 2016 before picking up moderately in

2017 (real GDP growth was 1.2% in 2015, 4.3% in 2014)

• Economic stimulus potential remains given sovereign reserves at about 40% of GDP

Sovereign Reservesa

85

90

95

100

105

Fe

b 1

5

Ma

r 1

5

Ap

r 1

5

Ma

y 1

5

Ju

n 1

5

Ju

l 15

Au

g 1

5

Se

p 1

5

Oct 1

5

No

v 1

5

De

c 1

5

Ja

n 1

6

Fe

b 1

6

Ma

r 1

6

Ap

r 1

6

(USDbn)

Current account deficit

in 2015: 3% of GDP

Source: National Bank of Kazakhstan (NBK), Intercontinental Exchange

a Includes National Fund of Kazakhstan


Moderate Decline in Capital Ratios

• Devaluation boosted sector risk-weighted assets, which increased by 32% in 2015

• Limited new lending, moderate provisioning and hedged FC positions supported sector

capital ratios (Tier 1: 12.7%; Total: 15.6% at end-2015)

Regulatory Capital Point-in-time and changesa

- -3.2 +3.0 -0.3 -0.1 -3.9 -5.7 -2.0

-1.9

+3.6

-0.5

+0.5 +4.9

+1.0 +1.4 +2.9 -0.2

-1.3

5

10

15

20

AsiaCredit Halyk Alfa ATF BCC Kazkom Bank ofAstana

Sberbank Tsesna-bank

Tier I Tier II(% of RWAs)

a Point-in-time data is at end-2015; changes are relative to end-2014 Tier I and Tier II ratios, respectively, recalculated by Fitch in line with 2015’s NBK

methodology. Source: NBK, Fitch’s calculations


Banks Have Refrained From Lending

• Sector loans contracted by 2% in 2015, adjusting for devaluation and the removal of

BTA’s licence (loans increased by 5% in 2014)

• Fitch expects near-zero loan growth in 2016, although state funding inflows may

moderately support lending activity

Loan Growtha

a Growth of gross loans, including accrued interest, in 2015 b Adjusted for: USD/KZT rate change in 2015; asset –liability transfers between Kazkom and BTA; and loan reclassifications by Bank of Astana, ATF and Alfa

Source: NBK, bank data, Fitch’s calculations

-20

0

20

40

60

80

Bank ofAstana

Kazkom Tsesna-bank

Halyk Asia-Credit

Sberbank BCC ATF Alfa

Nominal Fitch-adjustedᵇ (%)


Loan Book Clean-Ups Mostly on Paper

• Sector NPLs fell to 10% from 24% in 2015 due to BTA licence withdrawal and

loan write-offs

• Upward pressure on NPLs is likely to mount in 2016, partially offset by restructurings

Non-Performing Loans

Source: NBK, Fitch

0

10

20

30

40

Ap

r 1

4

Ju

l 14

Oct 1

4

Ja

n 1

5

Ap

r 1

5

Ju

l 15

Oct 1

5

Ja

n 1

6

Ma

r 1

6

Total sector Non-restructured banks(% of gross loans)


Problem Loans: Significant and Growing

• Restructured/distressed loans have recently risen and could continue growing in 2016

• Kazkom’s exposure to BTA equalled 54% of its gross loans at end-2015

Problem Loans Point-in-time and changesa

-22 -15 +5 - -1 -3 - /+8

+5 - /+2

+19 +11

+22 +6 +3 -3 +1

0

20

40

60

80

Kazkom ATF Sberbank BCC Bank ofAstana

Halyk AsiaCredit Alfa Tsesna-Bank

Non-performing Restructured (distressed)ᵇ (% of gross loans)

a Point-in-time data is at end-2015; changes are relative to end-2014 non-performing and restructured (distressed) loan ratios, respectively b For Kazkom includes: (i) at end-2015: outstanding loan exposure to BTA; (ii) at end-2014: performing loans subsequently transferred to BTA

Source: NBK, bank data, Fitch’s calculations


Problem Loans: Significant and Growing (Cont.)

• Most large banks’ capital buffers are modest compared with unreserved problem loans;

Halyk is a notable exception

• Kazkom’s exposure to BTA has soared to 6x FCC due to devaluation and capital erosion

Net Problem Loans Point-in-time and changes

a End-2015 FCC estimated on the basis of (i) IFRS statements at end-2015 (Halyk, AsiaCredit and Alfa) and (ii) IFRS statements at end-3Q15 adjusted for

changes in regulatory equity in 4Q15 (other banks).

Source: NBK, IFRS statements and other bank data, Fitch’s calculations

-0.6 -0.7 +0.2 +0.3 - /+0.3

- - /-0.2

+3.1

+1.4

+1.8 +0.9

+0.6/ - -

0

2

4

6

Kazkom ATF Sberbank BCC Bank ofAstana

Asia-Credit

Tsesna-Bank

Halyk Alfa

Non-performing Restructured (distressed)(X Fitch Core Capitala)


Further Downside Risks Due to FC Lending

• Considerable FC lending in most banks, most notably Tsesnabank

• Significant FC loans were reported as performing, although mostly to unhedged

borrowers

Foreign-Currency Loans

0

20

40

60

80

Tsesna-bank

Kazkom ATF Sberbank Bank ofAstana

Halyk BCC Alfa AsiaCredit

Non-performing, restructured (distressed) Performing(% of gross loans)

Source: NBK, IFRS statements and other bank data, Fitch’s calculations. Data at end-2015


Further Downside Risks Due to FC Lending (Cont.)

• A potential deterioration of FC loan quality would add to pressure on capital across

the board

• Halyk’s capitalisation is less sensitive to FC loan deterioration than large peers

Net Foreign-Currency Loans

0

2

4

6

8

10

Tsesna-bank

Kazkom ATF BCC Sberbank Bank ofAstana

Halyk AsiaCredit Alfa

Non-performing, restructured (distressed) less reserves Performing

(x Fitch Core Capital)

Source: NBK, IFRS statements and other bank data, Fitch’s calculations. Data at end-2015


Profitability Modest Relative to Potential Credit Losses

• Pre-impairment profits have not suffered from devaluation due to hedged currency

positions

• Banks are recognising impairment gradually, supported by flexibility in loan

classifications

Sector Profitabilitya

a Annualised quarterly ratios b Excluding Alliance Bank’s restructuring gains in 4Q15

Source: NBK, Fitch’s calculations

-20

-10

0

10

20

-10

-5

0

5

10

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

Loan imp. charges/average net loans (LHS)

Pre-imp. profitᵇ/average net loans (LHS)

Net income/average equity (RHS)(%)


Profitability Modest Relative to Potential Credit

Losses (Cont.)

• Halyk’s pre-impairment profitability is strong; weak to moderate at other large banks

• Large accrued-but-unreceived loan interest weighs on earnings quality, especially

at Kazkom

Pre-Impairment Profit

-12

-6

0

6

12

Alfa Halyk Sberbank Bank ofAstana

Tsesna-bank

BCC ATF Asia-Credit

Kazkom

IFRS pre-impairment profit Uncollected interest, FV and FC gains

Core pre-impairment profit(% of net loans) a

a IFRS pre-impairment profit net of uncollected interest (except Bank of Astana), non-recurring fair-value (FV) and foreign-currency (FC) gains

Source: 2015 IFRS (Halyk, AsiaCredit, Bank of Astana), 3Q15 IFRS (annualised; Kazkom), and 9M15 IFRS (annualised; other banks), Fitch’s calculations


FC Positions Largely Hedged With NBK

• Currency positions were close to zero at most banks at end-2015

• Hedging was mostly done with the NBK; Fitch expects most swaps to be rolled over in

2016, if required

Foreign-Currency Positions (% of FCC)

Source: NBK, bank data, Fitch’s calculations. Data at end-2015

-30

-20

-10

0

10

20

30

-300

-200

-100

0

100

200

300

Alfa ATF Bank ofAstana

Tsesnabank

Kazkom Halyk BCC Sberbank AsiaCredit

Short balance sheet position (LHS) Long off-balance sheet position (LHS) Net OCP (RHS)

40 =


FC Deposits High, Reverse Conversion Limited

• FC deposits grew to 70% of sector deposits at end-2015 due to devaluation, delayed

policy response

• Retail deposit rate cap rise to 14% from 10% in 4Q15 aims to make clients switch to

KZT savings

Foreign-Currency Deposits

0

20

40

60

80

100

Ma

r 1

3

Ma

y 1

3

Ju

l 13

Se

p 1

3

No

v 1

3

Ja

n 1

4

Ma

r 1

4

Ma

y 1

4

Ju

l 14

Se

p 1

4

No

v 1

4

Ja

n 1

5

Ma

r 1

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Ma

y 1

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Ju

l 15

Se

p 1

5

No

v 1

5

Ja

n 1

6

Ma

r 1

6

Retail Non-retail

(% of deposits)

Up from 40% to 78%

Up from 25% to 60%

Source: NBK, Fitch


FC Liquidity Comfortable, Tenge Scarce

• Most banks have amassed sizeable liquidity cushions, chiefly in US dollars and placed

with NBK

• High funding dollarisation holds back conversion of liquid assets back into tenge

Liquid Assetsa

0

10

20

30

40

50

Halyk AsiaCredit Alfa Bank ofAstana

Sberbank ATF BCC Kazkom Tsesnabank

Tenge Foreign currencies

(% of total liabilities)

a Cash, interbank placements and securities (excl.investments in subsidiaries and associates) less obligations under securities repurchase agreements

Source: NBK, bank data, Fitch’s calculations. Data at end-2015


Significant State Funding, Limited Upcoming Injections

• Quasi-state entities remain the main

funding source (about 30% of

sector liabilities)

• Largest three banks (Halyk, Kazkom and

Tsesna) account for a sizable proportion

of the state funding

• Additional SPF funding to banks equal to

4% of sector loans is likely in 2016

a Total quasi-state entities’ cash, cash equivalents and interbank placements less placements with foreign banks (to the extent in formation is available)

Source: Samruk Kazyna (9M15 IFRS), Baiterek and KazAgro (1H15 IFRS) State pension fund (End-2015), NBK, bank data, Fitch’s calculations

Samruk Kazyna

11.4

State pension

fund 9.4

Baiterek 4.7

KazAgro 2.8

Problem loan fund 1.1

NBK 1.0

Quasi-State Entities’ Fundinga (% of sector liabilities)


Ratings of Kazakh Banks (21 April 2016)

a House Construction Savings Bank of Kazakhstan has only a local-currency IDR. Development Bank of Kazakhstan is rated BBB in foreign currency and

BBB+ in local currency

Source: Fitch

Bank LT IDR Outlook

Viability

Rating

Support

Rating

Support

Rating Floor

HCSBKa -/BBB+ Stable - 2 BBB+

DBKa BBB/BBB+ Stable - 2 BBB

Sberbank BB+ Negative b+ 3 -

Halyk Bank BB Stable bb 4 B

Altyn Bank BB Stable - 3 -

Alfa Bank B+ Stable b+ 4 -

Tsesnabank B+ Negative b+ 5 No floor

Home Credit B Stable b 4 -

Bank Centercredit B Stable b 5 No floor

Bank of Astana B Stable b 5 No floor

AsiaCredit B Negative b 5 No floor

ATF Bank B- Stable b- 5 No floor

Eximbank B- Negative b- 5 No floor

Kazkommertsbank CCC - ccc 5 No floor


Fitch Ratings’ credit ratings rely on factual information received from issuers and other sources.

Fitch Ratings cannot ensure that all such information will be accurate and complete. Further, ratings

are inherently forward-looking, embody assumptions and predictions that by their nature cannot be

verified as facts, and can be affected by future events or conditions that were not anticipated at the

time a rating was issued or affirmed.

The information in this presentation is provided “as is” without any representation or warranty.

A Fitch Ratings credit rating is an opinion as to the creditworthiness of a security and does not

address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned.

A Fitch Ratings report is not a substitute for information provided to investors by the issuer and its

agents in connection with a sale of securities.

Ratings may be changed or withdrawn at any time for any reason in the sole discretion of

Fitch Ratings. The agency does not provide investment advice of any sort. Ratings are not

a recommendation to buy, sell, or hold any security.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE

LIMITATIONS AND DISCLAIMERS AND THE TERMS OF USE OF SUCH RATINGS AT WWW.FITCHRATINGS.COM.

Disclaimer

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