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Kazakh Strategy to Repair Bank Capital Won’t Work, Moody’s Says

The Kazakh central bank’s strategy of allowing lenders to hide bad debts while they rebuild capital ratios through profits probably won’t work because credit growth is too slow, Moody’s Investors Service said.

“The regulator’s anti-crisis policy facilitated the preservation of banking-system stability,” Moody’s Moscow-based analyst Maxim Bogdashkin said today in an interview. “Today, that stability is imaginary.”

Capital levels at many banks are overstated because insufficient reserves have been set aside to cover bad debts, Moody’s said in a June 22 report. Credit growth won’t exceed 4 percent in real terms this year, the ratings company predicts. The central bank didn’t immediately reply to an e-mailed request for response.

Central Asia’s biggest energy producer tapped its oil fund for $10 billion to support banks and companies after credit markets froze and a property bubble burst in 2008. BTA Bank, the biggest lender at the time, Alliance Bank and Temirbank agreed with creditors to discount and extend payments on about $20 billion of debt after they defaulted the following year.

With reserves of 32 percent of gross loans in 2011, Kazakh banks will probably have to write off most of their problem loans, Moody’s said in its June 22 report. Creating sufficient loan-loss provisions would trim the banking industry’s capital adequacy ratio to about 8 percent from 14.2 percent at end-2011, below the 12 percent regulatory minimum, it added.

Credit Risks

Banks are significantly underestimating credit risks, Bogdashkin said. Net interest margins of 3 percent to 4 percent aren’t enough for Kazakh banks to withstand another economic crisis, he said.

Loans overdue by more than 90 days at Kazakhstan’s 38 banks reached 3.43 trillion tenge ($23 billion) as of June 1, or 31.7 percent of the total, led by BTA with 1.6 trillion tenge, central bank data show. State-owned BTA is seeking its second debt restructuring in as many years, predicting its capital shortfall will grow to $6 billion by end-2012.

Kazakh lenders may continue to operate for “ a very long time” as their capital gradually disappears, Bogdashkin said.

“There are two possible scenarios: in the first, banks make profits and replenish capital to an acceptable level; in the second, banks’ capital will become so depleted that even with an understanding regulator they’ll no longer be able to work,” he said. “Neither scenario will happen soon but, in the current conditions, the second is more probable.”

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