Anticipated Steady Expansion of Kazakhstan's Financial Sector in the Year 2025
Central Asia and the Caucasus Banking Sectors Expected to Remain Resilient in 2025
A newlypublished report by S&P Global Ratings anticipates that banking sectors in Armenia, Azerbaijan, Georgia, Kazakhstan, and Uzbekistan will maintain their resilience next year. The report, outlining the banking sector of Central Asia and the Caucasus for 2025, highlights low double-digit lending growth and stable asset quality as key factors supporting profitability and capital levels.
The report also points out that favorable economic growth prospects, high lending demand, particularly in the retail segment, sound funding and liquidity metrics, and steady capital buffers on account of solid profitability will bolster ratings in 2025. Experts suggest that banks benefit significantly from strong GDP forecasts, with actual 2024 GDP growth outperforming projections.
While economic prosperity in the region is expected to be solid but less pronounced in 2025, oil producers like Kazakhstan and Azerbaijan will benefit from recent oil price dynamics. The countries, however, face declining oil production. Non-oil-related growth in these nations is slated to exceed growth in the oil and gas sector.
However, the report outlines various risks that could potentially impact the banking sectors. Among the most significant risks are rising geopolitical tensions, a global or regional economic slowdown, aggressive retail lending expansion, and rapidly rising housing prices leading to financial imbalances. A potential resolution of the Russia-Ukraine war would have limited impact on the banking systems in the region, according to the report.
According to the report, Kazakh banks are expected to remain resilient despite a slowdown in lending growth and changes in business models. Despite these shifts, high profitability and stable margins allow banks to accumulate financial buffers, mitigating risks in uncertain circumstances. Banks have primarily relied on retail lending to drive profitability, although this has also increased their dependence on consumer demand.
Retail loans made up 60% of total loans at the end of 2024, with net interest margins expanding by about 150 basis points since 2021 to an average of 6.4% in 2024. Experts anticipate that net income and return on equity in Kazakhstan will remain robust, with profitability levels likely reaching their peak.
While credit risk remains under control over the long term, increased household debt among low-income borrowers could lead to higher financing costs. The report indicates that retail growth will slow to 18%-20% in 2025 but will continue to be the major lending growth driver. A more measured growth rate will support banks' risk profiles, while rapidly increasing indebtedness among lower-income households may increase banks' credit costs during a credit cycle downturn.
The report finds that regulatory oversight of banking sectors in the region has evolved but still lags behind developed markets in terms of transparency and predictability. In recent years, tangible measures have been observed that point to a strengthening of the Kazakhstani financial regulator’s oversight and control framework. The regulatory oversight in Azerbaijan has also improved significantly over the past few years. However, the report suggests that banking regulation and supervision in Georgia remain the most advanced in the region.
S&P reviewed and upgraded Kazakhstan's Banking Industry Country Risk Assessment (BICRA) in 2024, moving the country from group eight to group seven. The upgrade reflects improvements in financial supervision and oversight, and further improvements in BICRA assessments could positively impact the credit ratings of financial institutions in Kazakhstan.
The S&P report predicts that the resilience of banking sectors in Kazakhstan will be maintained due to high lending demand, sound funding and liquidity metrics, and steady capital buffers. Moreover, favorable economic growth prospects and strong GDP forecasts will bolster ratings in the Central Asian nation's banking sector.
