UPDATE 2-Kazakhstan won't guarantee bank debt -watchdog

(Adds details, background)

ALMATY, April 21 (Reuters) - Kazakhstan will not provide state guarantees to facilitate bank debt restructuring, the head of the country’s banking watchdog said on Tuesday, adding banks’ loan loss provision could double this year.

“I want to say that state guarantees will not be used under any circumstances, not in the case of Alliance bank, not in any other case,” Yelena Bakhmutova told a financial conference.

Kazakhstan's No.4 bank Alliance ALLBq.L defaulted on a loan last month and is drafting a restructuring proposal, while No.1 bank BTA BTAS.KZ, nationalised in February, is also considering restructuring its debt.

“All proposals can be used: buying back at a discount, exchanging debt,” Bakhmutova said.

She said banks’ asset quality continued to decline. Kazakh banks grew rapidly before 2007, using foreign borrowing to fund their expansion.

“By the end of this year one could expect provisions at 25 percent of loan book,” Bakhmutova said. “The most conservative estimate is 30 percent.”

Kazakh banks currently have provisions of 14.6 percent of loan book, she said. The need to build up reserves is likely to hit banks’ profits and dent their capitalisation.

The government has allocated $5 billion to bail out the troubled sector. Nearly half of that sum was spent on BTA which the government took over in February saying it would have collapsed otherwise.

The state is also buying stakes of up to 25 percent in Kazkommertsbank KKGByq.L and Halyk bank HSBKq.L.

The government plans to take over Alliance bank as well, but has said it should agree with its creditors first to avoid early debt redemption demands.

Bakhmutova said investors should not expect further “surprises”, referring to the cases of BTA and Alliance.

“What could happen, has happened already,” she said. (Reporting by Masha Gordeyeva; Writing by Olzhas Auyezov)