Kazakh Banking Sector Boasts Growing Resilience, Says Latest Fitch Report

ASTANA – Kazakhstan’s banking sector has displayed increased resilience in recent years despite the criticism from President Kassym-Jomart Tokayev regarding the business models of banks in his recent address to the nation, according to the latest Fitch Ratings report on Sept. 8.

Photo credit: Fitchratings.com.

Fitch notes that the credit profiles of most Kazakh banks have substantially improved over the past few years.

The report commends the efforts undertaken by the National Bank of Kazakhstan and the Agency for Regulation and Development of the Financial Market to strengthen banking sector supervision and oversight. 

It cited a massive clean-up in 2017-2022, including the bail-out of a large bank and its merger with another large bank, capital support to five medium-size banks by the National Bank of Kazakhstan, and liquidation of small insolvent banks.

“In addition, the regulator has become less tolerant of under-provisioning for problem loans,” says Fitch.

In his Sept. 1 state-of-the-nation address, President Tokayev voiced several criticisms about the poor work of the country’s banking sector. Specifically, he spoke about their little involvement in the development of the economy and reluctance in corporate lending.

In July, the volume of lending to businesses made only 40% of the total volume of loans, reaching 14.9 trillion tenge (US$32 billion), while consumer loans made 15.8 trillion tenge (US$34 billion). 

Fitch notes corporate lending in Kazakhstan has proved to be “risky” compared to retail loans. 

“This is due to remaining structural weaknesses in the local operating environment. These include significant dollarisation of non-retail loan books, large single-borrower and industry concentrations, some deficiencies in financial transparency, and occasional asset-price bubbles stemming from the Kazakh economy’s reliance on commodities exports,” reads the report.

In 2022, the net profits of banks reached 1.5 trillion tenge (US$3.2 billion), and in the first half of 2023, exceeded 1 trillion tenge (US$2.2 billion). 

Tokayev said such profits do not stem from banks’ efficient work but due to the high key interest rate used by the National Bank to fight inflation. Kazakhstan’s inflation rate stands at 13.1%, while the base rate is now at 16.1%. 

“The government and Parliament should consider a more equitable redistribution of these profits, taking into account the interests of the country,” said Tokayev, tasking the government to introduce a tax on banks’ income from government bonds. 

According to Fitch, it “should not materially affect profitability.”

“Fitch estimates that 20% tax [the current corporate tax rate in Kazakhstan] on government debt income would have reduced the ten largest banks’ return on average equity in 2022 to about 31% from 33%. In our baseline scenario, profitability will continue to benefit from high-interest rates as the slowdown in inflation is likely to be gradual over the next 12-24 months. This should mitigate the effect of a likely increase in regulatory expenses,” says the report. 

Following Tokayev’s state-of-the-nation address, National Bank Chairman Galymzhan Pirmatov was dismissed, replaced by Timur Suleimenov, a former deputy chief of the presidential staff and well-known economist.  

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