Moody's maintains negative outlook for Kazakhstan's banking system, driven by currency depreciation and oil price declines

Moody's Investors Service is maintaining its negative outlook for the Kazakhstan banking system over the next 12-18 months, according to its latest outlook, as banks confront mounting challenges from currency depreciation and declining global oil prices.

Moody's report, entitled "Banks - Kazakhstan: Rising Currency Risks Drive Negative Outlook," is available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.

"The 46% slump in the tenge since August 2015 and the decline in global prices for oil -- Kazakhstan's top export -- is creating headwinds for banks on multiple fronts," says Semyon Isakov, an Associate Vice President at Moody's. "This difficult operating environment will weigh on banks' financial fundamentals over the outlook horizon."

As a result of the currency depreciation, interest rates have risen and inflation has accelerated, contributing to a decline in investor confidence and consumer demand. The currency depreciation will also make it more difficult for borrowers to stay current on foreign currency denominated loans, which account for 34% of banks' gross loans, according to the rating agency.

This is likely to create knock-on effects for banks' overall corporate and retail portfolios, in Moody's view. As real disposable income declines and borrowers' repayment capacity remains under pressure, non-performing loans are likely to rise, driving up credit costs.

Moody's also expects several banks in Kazakhstan to report losses in 2016, with rising credit and funding costs -- and the resulting drop in retained earnings -- exerting further pressure on capital. "The aggregate Tier 1 Ratio for the banking system in Kazakhstan has dropped to 13.1% as of January 1, 2016, from 15.0% in mid-2015, with many banks reporting a decline in their Common Equity Tier 1 and Tier 1 ratios of more than 200 basis points," explains Mr. Isakov.

While liquidity buffers are currently healthy -- due to liquidity support from the National Bank of Kazakhstan -- a shortage of local-currency liquidity will continue to negatively affect banks' funding dynamics over the outlook horizon, in Moody's view.

Finally, Moody's considers it likely that the Kazakh authorities would provide some assistance to banks that encounter financial stress to maintain the stability of the overall system. Due to the relatively small size of the Kazakhstan banking system, the capacity of the government to recapitalize banks that face increasing solvency risks remains strong, according to the rating agency.