By Rustam Botashev, Equity Analyst at Unicredit Securities
Total non-performing loans (NPLs) in Kazakhstan reached 30.8% as of 1 July, but a more manageable 14.4% excluding BTA and Alliance, and we expect a gradual economic recovery to keep banks from being washed away in an NPL flood.
The aggregate 30.8% figure is skewed by the two defaulting banks – BTA and Alliance – which hold 33% of all loans and reported NPL of 65%-66%. Without these two banks, NPL was 14.4%, slightly up from 13.8% in May.
Although the problem of loan quality has not yet run its course and NPLs should continue to increase (we believe the full effect of tenge devaluation has yet to be felt), we do not expect loan quality for the healthy core of the banking sector to fall sharply, assuming our forecast for 2010E economic growth of 3% yoy proves correct.
Given lower reserves and a smaller economy, Kazakhstan began to feel the economic downturn well before Russia. When Russia was still widely regarded as a safe haven, Kazakhstan (especially its construction and banking sectors) were already feeling the impact of the global downturn.
We visited Kazakhstan and witnessed the effects first-hand, and later saw similar developments in Russia. We believe the downturn in Russia is likely to play out much as it has in Kazakhstan, making the former Soviet republic a good proxy for Russia over the next several months.
We think the Kazakhstani industry can operate with NPLs of around 15% and even sustain a higher level. We previously estimated that Russian banks will not need additional capital if NPL does not grow above 17%, and the development of NPLs in Kazakhstan reassures us about our forecast of around 20% of bad loans in Russia by year-end.
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