In a report titled "High Problem Loans And Provisions Expose Sharp Imbalances In Kazakhstan’s Banking Sector, Hampering A Lending Revival", Standard & Poor’s analyzes the asset-quality problems and recapitalization needs of Kazakh banks, using two different sets of stress-testing scenarios, one for the system as the whole and another for nondefaulted banks.

"We estimate that defaulted banks would need at least US$16 billion of fresh capital to compensate for negative equity and to increase equity to the regulatory minimum, if they are to remain operational in the current business environment," said Standard & Poor’s credit analyst Mikhail Nikitin.

Over the past several months, nondefaulted Kazakh banks have, in our view, made significant efforts to build up their loan loss provisions, especially under local accounting standards, which should enhance their ability to absorb problem loans. However, we believe that depressed earnings and capitalization ratios leave most Kazakh banks only limited room to increase provisions significantly.

"By our analysis, some banks might find it advisable to increase their capitalizations to be able to weather the current turmoil," said Standard & Poor’s credit analyst Ekaterina Trofimova. "Even before the crisis, we considered the Kazakh banking system to be largely undercapitalized, a situation that appears evident in the current downturn."

For most Kazakh banks, the prospects, sources, and timing of recapitalization are very uncertain. In our view, the willingness and capacity of existing shareholders and potential investors to recapitalize domestic banks is constrained by their own difficulty in managing through the crisis. What’s more, lower profitability restricts Kazakh banks’ internal capital generation, in our view. The Kazakh government has so far only allocated capital support to the top four systemically important banks, which was still insufficient to cover their credit losses.