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Fitch Ratings-Moscow/London-21 April 2008: Fitch Ratings has said in a special report published today that asset quality in the Kazakh banking system has deteriorated significantly since end-Q307, although sector-wide loan impairment is not yet at critical levels. Reported loan impairment ratios have risen most markedly at Alliance Bank (BB- (BB minus)/Negative Outlook), followed by Bank Caspian (B+/Stable Outlook) and Kazkommertsbank (KKB, BB+/Negative Outlook). However, loss absorption capacity for the system as a whole, and for these banks in particular, is also significant, reflective of sound profitability and capital ratios that are often well above minimum regulatory levels. Fitch views potential asset quality deterioration as the main near-term risk for Kazakh banks, driven by a gradual seasoning of loan portfolios, slower economic growth, tighter corporate liquidity, falling real estate prices and potential pressure on the Kazakh tenge. Underlining this risk, Fitch notes that the proportion of the systems individually assessed loans falling into the statutory Doubtful 5 and Loss categories (the best publicly available proxy for non-performing loans (NPLs) in individually-assessed portfolios, in Fitchs view) has risen from 2.0% at end-Q307 to 4.0% at end-February 2008. The proportion of individually assessed loans falling into the Doubtful 2/4/5 and Loss categories, which should capture most loans overdue by seven days or more, has also increased markedly, from 3.6% at end-August 2007 to 8.8% at end-February 2008. Reported asset quality deterioration in the construction industry has been significant, but is not at present markedly higher than for corporate lending as a whole. Although reported loan impairment ratios have risen at all banks, the increase has been most marked at Alliance, followed by Caspian and KKB. Analysis of loan impairment trends at Alliance is complicated by a significant change in that banks approach to assessing homogenous loan pools in Q407, but Alliances reserve coverage of impaired loans is now much tighter than at other Kazakh banks. The increase in reported loan impairment at KKB is partly explained by the prudent classification of a large, currently performing exposure. Generally sound profitability and reasonable capital ratios provide meaningful loss absorption capacity for Kazakh banks. Based on certain simplifying assumptions, Fitch estimates that rated banks could absorb FY08 loan impairment charges equal to between 6.1% (ATF) and 12.2% (Alliance) of gross loans before regulatory total capital ratios fell below 12%. Basel capital ratios are often much higher than regulatory ones because of the stricter risk-weightings applied to certain exposures in calculating regulatory ratios. Nevertheless, the continuation or acceleration of recent asset quality trends could result in downgrades of Individual ratings, which reflect banks stand-alone financial strength. However, the Long-term Issuer Default ratings (IDRs) of the largest six banks - KKB, BTA Bank (BB+/Negative Outlook), Halyk Bank of Kazakhstan (BB+/Negative Outlook), Alliance, ATF Bank (BBB+/Negative Outlook) and Bank Centercredit (BCC, BB- (BB minus)/Evolving Outlook) - are underpinned by potential sovereign or shareholder support, and would likely be downgraded only if the ratings of the Kazakh sovereign (BBB/Negative Outlook) were lowered. In addition to analysing asset quality trends, the report provides a guide to the various reported loan impairment measures. Interpretation of statutory asset quality data is complicated by the fact that classification of individually assessed loans is based not only on loan performance, but also on a number of other factors. The introduction in 2007 of collective assessment of homogenous pools of loans has further complicated analysis, in particular at Alliance, Halyk and BCC, as NPLs in collective pools are not captured in the Doubtful 5 and Loss numbers. Asset quality disclosure in IFRS accounts, meanwhile, has generally been very weak, and has not improved markedly in most FY07 accounts despite the introduction of IFRS 7. The report, entitled Kazakh banks asset quality: trends negative, disclosure opaque, is available on the agencys subscription website, Contact: James Watson, Alexei Kechko, Moscow, Tel.: +7 495 956 9901. Media contact: Alla Izmailova, Moscow, Tel.: + 7 495 956 9901/03, Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.


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