Kazakh banks' bad loans to peak in 2010 - S&P

* Sees 2010 loan growth at 5-10 percent

* Foreign investors probe market for fresh debt

By Olzhas Auyezov

ALMATY, Feb 1 - Bad loans held by Kazakh banks are set to peak this year and investors are already showing interest in fresh Kazakh debt, despite a number of unfinished restructuring deals, a Standard & Poor's analyst told Reuters.

The Central Asian state's once-booming financial sector was hit hard by the global crisis with four lenders going into default last year citing asset quality problems and, in some cases, management fraud.

The region's largest economy briefly slipped into recession last year as a result of the credit crunch and a slump in commodity prices, but the government sees it growing by 1.5-2.0 percent this year.

"As a positive sign, we see that the key problems have been exposed and we see a sharp deceleration of bad loan growth," S&P banking analyst Ekaterina Trofimova said in an interview.

"In 2010 we expect to see a sustainable change in the asset quality dynamics which will start to improve."

This will enable banks to grow their aggregate loan books by five to 10 percent and may allow some lenders to report profits this year, although the sector as a whole will remain stressed, she said.

"It is more likely that we will see more visible positive shifts in profitability not earlier than in 2011 which ... would be due to the recovery of provisions -- a process we expect will speed up by that time."

LOWER PROFITS

But stellar profits seen before 2007, a year when banks were hit by a liquidity crunch following the U.S. subprime mortgage meltdown, are unlikely to be seen again.

"Kazakh banks' fundamental profitability indicators at this new development stage would clearly be lower than during the pre-crisis boom," Trofimova said.

"This will happen, in particular, due to interest margin compression and higher expenses linked among other things to the changes in the banks' funding structure."

Kazakh regulators have said they will limit banks' foreign borrowing in the future and require them to rely more on domestic deposits, which are more costly than wholesale funding.

For those still interested in foreign borrowing, however, opportunities may already be out there.

"However surprising this may sound, but already since the second half of the fourth quarter of 2009 we see increasing interest from certain investors towards new Kazakh bank debts," Trofimova said.

"This has not resulted in any visible concrete deals but there is active 'probing' going on. On the other hand Kazakh banks themselves are not very eager to get involved in a new spiral of borrowing."

Kazakhstan's largest bank, BTA is still in the process of restructuring over $10 billion in debt along with three smaller local lenders, Alliance <ALLBq.L>, Temirbank <TEBN.KZ> and Astana Finance <ASFI.KZ>.