In this report, we provide brief earnings update on the two leading Kazakhbanks in our coverage – Halyk savings bank (Halyk) and Kazkommertsbank(KKB), review their bond recommendations and KKB’s latest buybackannouncement. Overall, results for both the banks look optically weaker inUSD terms due to KZT depreciation and reflect the ongoing systemic issues ofelevated NPLs, slowdown in lending activity and core earnings, dollarization ofdeposits and constrained capitalization (mainly in case of KKB). This weaknesscan be attributed to subdued macroeconomic backdrop in Kazakhstan whichhas been impacted by steep decline in oil prices (reached multi year low in1Q16) and sharp KZT depreciation (touched all time low in mid January). Oilprices have recovered since then and KZT depreciation has also reversed, bothof which prompt us to expect slight improvement in overall economic/ bankingactivity in 2Q16. However, considering the pronounced dent in Kazakh banks’financial metrics over the last few years, we believe that it would require asustainable period of stabilization in the economic activity for the bankingsystem to fully recover and overcome its pain points.