“The sector's non-performing loans (NPL) ratio was almost flat in 3Q19 at 11.3% of gross loans. We believe that the real amount of problem assets is at least twice as high, as according to IFRS 9 disclosures the sector average ratios of Stage 3 and Stage 2 loans are 22% and 7%, respectively. However, the magnitude of asset-quality risks relative to banks' capacity to absorb impairment losses is very uneven across the sector. A significant share of high-quality liquid assets also contributes to overall asset quality at some banks,” reads the report.
“By the end of this year the NBK plans to complete its asset-quality review (AQR), which may reveal more impaired loans and result in significant additional provisioning needs at some of the banks. Based on IFRS 9 at end-2018, we estimate that there are a few banks (with a combined market share of over 15%) with significant legacy problems. These include net Stage 3 loans (KZT600 billion), net Stage 2 loans (KZT250 billion) and non-core assets (KZT150 billion) totalling 2.7x equity of these banks,” said Fitch.
According to the Head of the NBK, a support programme is possible in 1Q20, although its scope and volume are as yet uncertain. “We believe that some banks could receive state support either in the form of subordinated debt from the NBK or in the form of problem asset buy-outs. It is unclear, however, if such a state support package would be combined with a bail-in of state-owned creditors (as in the case of Tsesnabank in 1Q19). It will most likely depend on the significance of capital needs at the affected banks,” reads the statement.
Sector average credit metrics remained stable over the quarter, although there is large divergence between banks, particularly in profitability and capital adequacy. Annualised return on average equity (ROAE) equalled a high 28% in 3Q19, and 16 out of 24 banks posted double-digit annualised ROAE in 3Q19, supported by an ongoing gradual reduction of funding costs (4.1% in 3Q19, a 100bp decrease yoy) in the banking sector.
Photo source: picture from an open source