S&P: Banking industry country risk assessment on Kazakhstan affirmed in Group 8

/Standard & Poor's, Paris, July 28, 08/ - Standard & Poor's Ratings Services said today that it had affirmed its Banking Industry Country Risk Assessment (BICRA) on Kazakhstan in Group 8. At the same time, Standard & Poor's affirmed its estimate of the incidence of gross problematic assets (GPAs) in the Kazakh financial system under a reasonable (but not catastrophic) scenario of economic recession at 35%-50%. "The ongoing severe banking market readjustment in Kazakhstan since August 2007 is the consequence of challenges related to the rapid growth of Kazakh banks in the last decade, their high dependence on foreign financing, concentration risks, and weak risk management, plus the substantial dollarization of loans and deposits in Kazakhstan, insufficient regulatory responses, and other structural weaknesses," said Standard & Poor's credit analyst Ekaterina Trofimova. "All these are long-standing concerns of Standard & Poor's, reflected in our BICRA and GPA estimate on Kazakhstan" These concerns are partly mitigated by the domestic economy's continued, albeit slower, expansion; high commodity prices, which constitute the country's main liquidity and expansion driver; support from the authorities and shareholders; fairly advanced regulatory framework; banks' adequate stress and asset liability management; demonstrated, albeit vulnerable, revenue and liquidity resilience; and still high, but unsustainable, earning margins. (See "Bank Industry Risk Analysis: Tightened Liquidity Makes Banks In Kazakhstan Slam On The Brakes," published Feb. 18, 2008, on RatingsDirect.) "As painful as this correction is in the short term, it should be healthy for the financial sector in the long term, leading to more sustainable business strategies, better developed domestic funding, and more conservative financial profiles," said Ms. Trofimova. Kazakh banks have entered a new phase as the market turbulence lingers on, with asset quality becoming a determinant factor in their creditworthiness, solvency, liquidity, and in the longer-term health of the banking system. We estimate "loans under stress" at 15%-20% for the banking sector and think that this is unlikely to get close to the upper end of the current GPA assessment, even if asset quality woes have not peaked yet (see "Credit FAQ: Asset Quality Has Become The Critical Factor For The Health Of Kazakh Banks And Banking System," published June 30, 2008, on RatingsDirect). "If we see no signs of recovery--or at least stabilization--in asset quality at banks and of an improvement in their ability to absorb losses, recognize credit losses, and raise the capital they need, we could downgrade our BICRA and GPA assessment in the next couple of quarters," added Ms. Trofimova. For detailed information please contact to: Ekaterina Trofimova, Paris, (33) 1-4420-6786; ekaterina_trofimova@standardandpoors.com Magar Kouyoumdjian, London (44) 20-7176-7217 magar_kouyoumdjian@standardandpoors.com Annette Ess, CFA, London, (44) 20-7176-7206; annette_ess@standardandpoors.com [2008-07-28]