Banks' Rapid Growth Not Sustainable

Kazakhstan's banks increased their net profits to $750 million in the period from January to May of this year which is 89.2 percent higher than the same period of last year. The impetus for this increase was the growth of their credit portfolios, including the booming retail loans. The enhanced competition between the banks, however, is causing the banks to decrease their requirements on borrowers which indirectly influences the quality of their loan portfolios.

According to Kazakhstan's financial watchdog AFN, the banks' revenues in the period from January to May grew to $4.9 billion, 92.3 percent compared to the same period of the previous year. Their loan portfolios grew 7.3 percent to $60.8 billion just in the month of May.

According to experts, the main factor behind the increase of the banks' net profits is the growth of their credit portfolios, especially consumer loans. This has been financed by the availability of cheap credit from abroad which also explains why 75 percent of the profits are concentrated among the four biggest Kazakh banks that are most active in attracting financing from abroad.

This rapid growth, however, reflects itself in the deterioration of the quality of the banks' credit portfolios. According the AFN, doubtful loans make up 52.8 percent of the total loan portfolio of the banks, while standard and bad loans make up 46 percent and 1.2 percent, respectively.

As far as the rapid growth goes, it's very likely that it will slow down. One of the reasons is the tightened regulation and supervision by the authorities concerned over the recent credit boom. A new law, effective on August 27, will increase the level of liquid reserves the banks are required to hold. Also, over the long-term, the banks will be required to diversify their portfolios and decrease their reliance on (cheap) foreign financing.