The results of 2018.
Deposits in the economy. For 2018, deposits in the economy, excluding deposits at the National Bank, increased by 2% (+T333bn). Retail deposits showed an increase of 6.6% (+T536bn), while corporate deposits decreased by 2.5% (-T202bn). Thus, the main increase in deposit funding in the banking system was mainly due to deposits of the population replacing the outflow of corporate deposits. At the same time, corporate deposits during the year showed a fairly high mobility between banks, which is not the case for deposits.
The increase in deposits of the population occurred mainly in the national currency, the tenge deposits of the population increased by 17% over the year (+T666), foreign currency deposits decreased by 3% (-T130bn). Dollarization of household deposits adjusted for the exchange rate was 44% for the year, down from 52% as a result of a decrease in foreign currency deposits and the inflow of tenge deposits. The dollarization of corporate deposits at the end of the year increased from 44% to 46% due to an increase in dollar deposits with a decrease in tenge deposits. Thus, the total dollarization of deposits adjusted for the course, taking into account deposits in the national bank, decreased from 48% to 45% over the year.
The lack of growth in corporate deposits with overall good economic growth in our opinion is due to the strong dependence of the economy on the export of natural resources. The main contribution to the growth of Kazakhstan’s GDP is made primarily by the commodity sector, whose revenues are formed in foreign currency. At the same time, companies participating in this sector prefer to place their funds in accounts in foreign banks that can provide higher returns with a lower level of risk. As a result of a number of restrictions imposed by the National Bank and limited foreign currency lending in the economy, Kazakh banks are forced to keep minimum rates on foreign currency corporate deposits, which affect a very moderate increase in foreign currency deposits. However, the decrease in tenge corporate deposits after stagnation in 2017, in our opinion, indicates the lack of sufficient development of the domestic sectors of the economy, which mainly operate in the national currency.
Lending. Over 2018, loans in the economy increased by 3% (+T386bn). Loans to legal entities decreased by 5% (-T375bn), loans to individuals showed a rather high increase of 17% (+761bn). The share of loans in the economy at the end of 2018 was 22% (24% in 2017, 27% in 2016). In most developed countries, this figure is more than 50%. Such a low share of lending in relation to the country's GDP is formed as a result of the current export-oriented structure of the economy of Kazakhstan, a significant impact of public funding that displaces and distorts the mechanism of bank lending and the lack of sufficient conditions to expand the investment activity of private, non-commodity business.
The decline in corporate lending in 2018 was influenced by a significant write-off of previously hidden problem loans mainly in the corporate segment, the withdrawal of troubled banks from the banking system and the redemption of Tsesnabank problem loans.
Newly issued corporate loans for 2018 show an increase of 22% to the amount of newly issued corporate loans in 2017. However, according to the structure of newly issued corporate loans, most of them fall on short-term loans to finance working capital (75% of the total loans issued in 2018). The main sectors of the economy that accounted for the majority of new corporate loans were: trade 52% of the total issued for the year, other not defined within the main sectors 13%, production of mineral products (construction) 6.2%, construction 6%, mining industry 5%. Thus, 70% of the issued new loans (issued including those written off) accounted for industries that have a direct impact on the increase in imports.
Bank loans to small businesses have decreased by 15% since the beginning of the year (-T425bn). The main segments of SME lending are trade 23% (27% in 2017), other sectors not related to the main 36% (29%). The share of loans to SME from total loans to the economy continued to decline, reaching 18% at the end of 2018 (22% in 2017), while the average share of loans to SME from total loans in OECD countries is 44%.
The main driver of growth in the loan portfolio in 2018 was retail lending. Its growth was observed mainly in two segments: consumer lending +14% (share in total loans 25%) and mortgage lending +19% (share in total loans 10%). he share of retail lending at the end of the year was 41% (36% in 2017), which is the maximum value over the entire existence of the banking system. In 2018, the population’s debt load increased as well: according to the data of the First Credit Bureau, the ratio of loans to borrowers was 1.74 (1.56 in 2017), which is also a record value over the past 10 years.
Liquidity in the banking system. A significant surplus of liquid assets remained in the banking system throughout the year: at the end of the year, the share of liquid assets in the banking system was 40% (37% at the beginning of the year). This excess liquidity should be divided into dollar excess and tenge excess.
The dollar excess of liquidity was formed as a result of the inability to direct dollar deposits to lend to the domestic economy. So the ratio of foreign currency deposits/foreign currency loans in the economy is 300% (250% in 2017). These dollar funds are mainly placed on correspondent accounts at the National Bank, the payment of interest on which is not provided.
Tenge surplus in the system was formed as a result of a number of injections of concessional funds in support of the banking system from the state and the inability to direct these funds to lending due to the lack of a sufficient number of high-quality borrowers. As a result, these funds are withdrawn by the National Bank through open market operations at the interest rate corresponding to the lower limit of the NBK base rate. These free tenge funds account for 31% of the total loan portfolio of the banking system. At the same time, the ratio of tenge deposits/tenge loans is 95% (98% in 2017) and indirectly indicates the almost complete involvement of deposit funds in banks' lending activities. The transformation of these excess funds by lending without leading to overheating of the economy and deterioration in the quality of the loan portfolio is possible only when solving structural problems and creating additional investment incentives for private business.
Problem loans and provisions. According to the NBRK, the level of bad debts NPL90+ in the system at the end of the year was 7.4% (-2pp from the beginning of the year). Provisions at the end of the year accounted for 13% of the total loan portfolio of the banking system and cover the amount of bad debts NPL90+ by 175%. However, the officially reflected level of bad debts does not reflect the real state of the loan portfolio of the banking system, which in reality is much worse and the current level of provision is insufficient. An example of this is: Tsesnabank — before repurchasing non-performing loans, the level of NPL90+ did not exceed 4%, before the official announcement of problems in the Bank of Astana NPL90+ was 6.6%, Qazaq Bank — 4.4%, Eximbank — 3.6%. Considering these precedents, it is very problematic to draw conclusions about the state of the loan portfolio based on the NPL90+. At the same time, an additional increase in provisions will negatively affect the level of profitability, as well as the already low capitalization of the banking sector. In the case of a sharp deterioration in the quality of the portfolio at current levels of profitability, capital and liquidity, a significant part of banks may face certain financial difficulties.
Profit of the banking sector. In 2018, the net profit of the banking system amounted to T638bn, which is a record value over the past 7 years.This high result was influenced by the receipt of concessional funds to support the banking system in 2017, more conservative provisions as a result of significant provisioning in 2017 and the creation of provisions from own capital as a result of applying IFRS 9 at the beginning of the year. Provisioning expenses in 2018 amounted to T302bn, which is 75% less than the 2017 results.
The net interest income of the banking system in 2018 amounted to T982bn, which is 6% less than last year. Revenues from loans issued decreased by 17% (-T322bn), while expenses on attracted deposits decreased by 18% (-T174bn).
The highest income for 2018 was demonstrated by the following banks: Halyk Bank T285bn (45% of sector profits), Kaspi T99bn (15%), Sberbank T44bn (7%). Two banks ended the year with a loss: Asia Credit T2bn, Bank of Pakistan T0.1bn.
At the end of the year, NIM and NIS show a decrease: NIM 5.09% (+0.03pp ytd), NIS 3.99% (-0.2pp ytd). The decline in these indicators is explained by a decrease in the return on assets of the banking system throughout the year (-0.4pp), while the cost of funding is reduced to a lesser extent (-0.2pp).
Forecasts and expectations for 2019.
According to our expectations, the development of the banking sector will continue to lag behind the growth of the economy. The transition to more active lending and the growing share of the banking sector in the economy are possible only after resolving a number of structural problems in the economy and building a more efficient market mechanism for the provision of financial services. Retail lending, as well as, in general, the emphasis on public services (card products, online banking, etc.), will continue to be the main driver of the development of the banking system of Kazakhstan.
The aggregate increase in corporate deposits will continue to lag behind nominal GDP growth. The increase in deposits of large businesses will be positively influenced by the restoration of confidence in the banking system and a fairly good economic growth expected in 2018-2021. However, the increase in tenge corporate deposits that are the main resource in the implementation of corporate lending is highly dependent on the stability of the tenge rate and the development of business oriented to the domestic market. As a result of the recovery in income growth, the population will continue to increase deposits, which will be slightly higher than the results of 2018 and will continue to be the main source of funding inflows in the banking system.
The liquidity surplus in the banking system will continue persist as a result of poor functioning of the lending channel and the preservation of structural problems in the economy. Nevertheless, there will be a gradual increase in lending in response to economic growth and the recovery quality of the loan portfolio of banks. However, in conditions of a limited corporate lending market, this liquidity will to a large extent be aimed at increasing retail lending.
Retail lending growth will continue to show high rates, continuing the current trend with a gradual slowdown. This significant growth will be supported by high margins, demand and short-term nature of this type of lending.
Growth in corporate lending will remain fairly moderate and will be significantly lower than nominal GDP growth. The increase in corporate lending will mainly depend on the resolution of structural problems, the growth of the share of SME in the economy and the increase in corporate tenge deposits in the banking system.
The profit of the banking system will be at a lower level than in 2018 as a result of the growth of deductions for the provision of new loans and the absence of the influence of one-off factors.
We do not expect significant growth of officially reflected NPL90+ problem loans in the system above 10%. At the same time, as before, the NPL90+ indicator will not reflect the real quality of the banks' loan portfolio. The deterioration of the state of banks, which indicates a significant proportion of problem loans, will primarily affect the liquidity ratios of these banks.
In 2019, the tendency to further deterioration of the financial condition of small banks and their consolidation or withdrawal from the market will continue. This process will occur due to inefficient business models of these banks and increased competition for high-quality borrowers and depositors with large banks.
We do not exclude that under a stress scenario that takes into account the sharp withdrawal of a large amount of deposits, the deterioration in the quality of new loans and previously restructured problem debts in a number of banks may cause the National Bank to provide emergency assistance as a lender of last resort.
