Kazakhstan announced an aggressive $5bn capital injection in four systemically important banks on Tuesday to ward off the persistent threat of a banking system collapse.
The government plans to buy up to $5bn of stocks in Alliance Bank, BTA Bank, Halyk Bank and Kazkommerzbank. This will be in the form of common and preferred shares and the state could end up with 25% of stock from existing shareholders in these banks. The government insisted it was not seeking majority stakes and announced it was discussing similar proposals with the foreign majority shareholders of ATF and Bank CenterCredit.
"There has been a little bit of a rally in the last 24 hours, by about 100bp or 200bp on BTA and Halyk spreads and those of the other banks involved," said Luis Costa, EM debt strategist at Commerzbank in London. "These moves show a lot of commitment from the government but to be honest, this measure was long overdue."
The government’s partial nationalisation is an about-turn. Speaking on the occasion of the IMF annual meeting on 12 October, the country’s vice-minister of economy and budget planning Galymzhan Pirmatov rejected calls to recapitalise banks through direct equity stakes. "The banking system felt the impact of the liquidity crunch very early on so the government and private sector have had time to adjust so we are used to the challenging times," he told EuroWeek’s sister publication Emerging Markets. But with monumental global deleveraging over the last month, dollar and domestic currency liquidity has dried up.
BTA is set to receive the biggest support with up to $2.3bn of government investment in its common and preferred stock and subordinated debt. Kazkommertsbank, expects an injection of up to $300 million while Halyk and Alliance will receive $500 million, respectively. Pricing and shareholder approval have yet to be finalised.
From the onset of the credit crunch in August 2007, the Kazakh banking system has been dangerously exposed through its large external borrowing, overexposure to the speculative real estate industry and poor risk management. In the first half of the year, banks repaid $10.5bn of debt obligations and currently have around $6.5bn to finance by the end of the year.
Daniyar Akishev, deputy governor of the National Bank of Kazakhstan, foresees consolidation among the 26 smaller banks in the country over the next year as the top 10 control 90% of the banking system. He said: "I hope that banks bring their risk management to prudent levels because next year we will increase our capital adequacy requirements," he said in the same interview with Emerging Markets during the IMF annual meeting.
SamurukKazyna (the National Well-being Fund) will fund the bailout via capital transfer from the National Fund with another $5bn of liquidity provided to support infrastructure projects and small and medium-sized enterprises.
In addition, Kazakhstan’s answer to the $700bn US mortgage bail-out plan, the Distressed Asset Fund, will be operational shortly with initial capitalisation of $1bn, rising to potentially $6bn. This is designed to buy impaired assets and beef up loan quality. "At the initial stage, we will buy impaired mortgage loans from commercial banks at a slight discount from net book value and there is understanding that maybe commercial banks will share some of the losses of the funds," Pirmatov explained. "At a later stage, loans that have been collaterised by real estate will be targeted."
While market participants welcomed the capital cushion for systemically important Kazakh banks, a solid and sustained rebound in Kazakh debt securities is unlikely as investors shun emerging market risk.