The central bank of Kazakhstan, where authorities used $10 billion from the nation’s oil wealth fund to bail out lenders eight years ago, is discussing how to stress-test the financial industry as concerns mount that capital injections or a restructuring to restore solvency may be needed.
“This is a very sensitive issue so we consult with banks constantly,” central bank Governor Daniyar Akishev said in an interview on Friday in Almaty. “There are many questions from banks regarding the mechanisms and methodology of stress testing.”
Prime Minister Karim Massimov called on the central bank last month to clean up lenders after the 2007-2009 global financial crisis left the former Soviet republic with one of the world’s biggest piles of bad loans, accounting for as much as a third of the total. Delinquent debt is a growing worry as the economy stagnates under pressure from low commodity prices and the recession in Russia, its main trade partner. With Kazakhstan switching to a free-floating exchange rate last year, a weaker tenge also exposed banks to losses on foreign-currency loans.
“All banks in Kazakhstan are currently complying with prudential norms and show a sufficient degree of solvency,” Akishev said. “In the conditions of high turbulence in global financial markets and the lack of confidence that all crisis developments in the world economy are overcome, risks for our banks remain.”
Kazakhstan is discussing the question of hiring consultants to conduct stress tests, he said. While the regulator wants the results disclosed as quickly as possible, there’s no timeline yet for when they will be published since that will depend on the outcome of discussions with banks, according to Akishev.
Distress is mounting across the banking industry. S&P Global Ratings lowered the outlook for Halyk Bank, Kazakhstan’s second-largest by assets, to negative on Friday, saying it “expected the bank’s asset quality will deteriorate further over the next 12-18 months. The nation’s largest lender, Kazkommertsbank is rated CCC+ by S&P, meaning it’s vulnerable to nonpayment.
In April, Fitch Ratings said it considered “efforts to clean up loan books since mid-2015 largely cosmetic, and many borrowers are likely to struggle to service foreign-currency loans.” Capital buffers at most large banks “are modest compared with unreserved problem loans,” with the stress tests likely to “result in some regulatory actions on troubled institutions,” the ratings company said.
If stress tests reveal that some large banks require assistance, a decision will be taken jointly by the central bank and the government, according to Akishev. When it comes to possible central bank support for a bank in a “stress situation,” any actions will depend on the specific case, he said.
“For now, no such support is under consideration,” Akishev said. “Banks have surplus reserves of liquidity.”