S&P REVISED KAZAKHSTAN BICRA TO GROUP 9 FROM GROUP 8

/Standard & Poor's, November 9, 11, Standard & Poor's English translation, KASE headline/ - Standard & Poor's Ratings Services said that it is revising its Banking Industry Country Risk Assessment (BICRA) on to group '8' from group '9'. It is also revising the economic risk score to '8' from '9', and assigning an industry risk score of '8'. RATIONALE We have reviewed the banking sector of the Republic of Kazakhstan (foreign currency BBB+/Stable/A-2; local currency BBB+/Stable/A-2; Kazakhstan national scale 'kzAAA') under our updated BICRA methodology. Our criteria define the BICRA framework as one "designed to evaluate and compare global banking systems". A BICRA analysis for a country covers rated and unrated financial institutions that take deposits, extend credit, or engage in both activities. A BICRA is scored on a scale from '1' to '10', ranging from the lowest-risk banking systems (group '1') to the highest-risk (group '10'). Other countries in BICRA group '8' include Nigeria, Georgia, Lebanon, Latvia, Argentina, Bolivia, and Uruguay. Our economic risk score for Kazakhstan is '8'. This reflects our opinion that Kazakhstan has "high risk" in "economic resilience" and "economic imbalances", and "extremely high risk" in "credit risk in the economy", as our criteria define these terms. Kazakhstan has a highly concentrated economy (oil, gas, and metal industries represent almost one-half of GDP); low GDP per capita; and inflationary pressures. In our view, Kazakhstan has high political risk, and presidential succession is uncertain. That said, economic growth will remain high over the medium term because the oil and gas production are expected to increase significantly. We see the effects of the 2008-2009 global financial crisis on the Kazakh banking sector over the coming two to three years remaining high. The estimated level of problem loans is currently about 50%, which we anticipate will reduce only gradually. Our view of Kazakhstan's economic imbalances is underpinned by a dramatic increase in real estate prices in 2005-2007, followed by a slightly less dramatic decrease. Current prices are about 50% below their peak value. The boom was largely fueled by an extremely rapid expansion in loans, and the average annual growth rate exceeded 50% in 2005-2007. While major corrections have occurred, we believe that the economy remains prone to asset price bubbles. There are no apparent imbalances on the external side. Kazakhstan benefits from consistently high coverage of its current account gap with foreign direct investments. We expect the current account to remain in surplus in the short to medium term and the narrow net external debt position to reduce further. Our view of credit risk in Kazakhstan's economy takes into account the aggressive lending practices and relaxed underwriting standards of the country's banks, as well as weak payment culture and rule of law in the country. During the economic boom, amid rising property prices, these deficiencies set the stage for dramatic asset quality deterioration during the economic slowdown, and the subsequent crash in the real estate market. Systemwide nonperforming loans were a high 35.6% of total loans under local regulatory standards on Sept. 1, 2011. Kazakh banks' high exposure to the real estate and construction sector, high single-name concentrations, and high proportion of foreign currency lending (about 50%) also support our view of credit risk in the economy. Our industry risk score of '8' for Kazakhstan is based on our opinion that the country faces "very high risk" in its "institutional framework", "high risk" in its "competitive dynamics", and "very high risk" in "systemwide funding", as our criteria define these terms. The Kazakh banking sector is characterized by weak governance and transparency, and high incidence of corruption and fraud. The failure in 2009 of three large banks in the system, including BTA Bank J.S.C. (B-/Stable/C; Kazakhstan national scale 'kzBB-') and Alliance Bank JSC (B-/Stable/C; Kazakhstan national scale 'kzBB-'), illustrates weaknesses in Kazakhstan's banking regulation and supervision. While regulators aim to impose stricter and more proactive regulation, it remains to be seen whether they will have the capacity and authority to prevent future problems. The banking industry's performance and stability has been weak over the past decade, displaying an aggressive risk appetite. While margins were wide in absolute terms, the ability of banks to price risks proved poor and led to dramatic fluctuations in earnings. Three of Kazakhstan's 10 largest banks defaulted in 2009. Subsequently, the government's ownership in the banking sector increased to about 25%. We expect this to reduce over the medium term. Our assessment of systemwide funding reflects structural deficiencies, including the short-term nature of funding and reliance on cross-border resources. Core customer deposits accounted for about 50% of total loans on June 30, 2010, while the domestic capital markets are underdeveloped. Significant debt restructuring among the defaulted Kazakh banks, as well as the inability of the banks to raise funds internationally, have markedly reduced their reliance on foreign debt (24% of total liabilities at year-end 2010, from a peak of more than 50% in 2009). Despite the reduction, however, it remains significant and is a negative factor in our assessment. In addition, the sustainability of state-influenced deposits remains critical for the liquidity of the banking system. We classify the Kazakh government as "supportive" toward domestic banking. We recognize the government's track record of providing ongoing indirect support to the banking system, as well as liquidity facilities and capital injections to systemically important banks. However, this extraordinary support did not prevent BTA and Alliance Bank from defaulting on their foreign debts during the last crisis. Analysts: Annet Ess, Frankfurt, 49 (69) 33 99-9-1-57 annette_ess@standardandpoors.com Magar Kouyoumdjian, London, (44) 20-7176-7217 magar_kouyoumdjian@standardandpoors.com FIG_Europe@standardandpoors.com [2011-11-10]