Optimistic banks make the best of the crisis

  • 10 Sep 2008
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The turmoil in the Kazakh banking system has been a healthy correction, or a sign of worse things to come, depending on whom you ask. Kazakhstan’s financial institutions are claiming that the worst is over, yet international rating agencies and lenders are increasingly worried about the quality of banks’ loan portfolios. Sarah White reports on an industry trying to adjust to a post-credit crunch world.

Worries about a deepening banking crisis, a rescue package from the central bank, lenders tightening their belts and a slumping housing market. A now familiar story that has given bankers from the UK to the US many a sleepless night since the global credit crunch began to bite. And Kazakhstan’s banking sector is suffering from many of the same symptoms that have blighted the financial systems of the West.

One of the first victims of the credit turmoil, Kazakhstan hit the headlines for all the wrong reasons when the US subprime mortgage market crisis began to unravel in 2007. Foreign lenders, themselves reeling from the ensuing crisis, withdrew from the capital markets overnight. Kazakhstan’s banks, so reliant on cheap overseas borrowing terms, have since been trying to adjust.

But the issues that prompted foreign lenders to flee the scene last year have stubbornly refused to go away. Concerns about the Kazakh banking sector’s dependence on international funding were only the tip of the iceberg. Fears are now focused on the quality of banks’ loan portfolios, their exposure to the country’s troubled real estate sector, and on how successfully they can adapt to funding themselves domestically.

Despite assurances from the National Bank of Kazakhstan that it would come to the rescue of any potential bank failure, and despite the banks’ persistently upbeat outlook on the crisis, international rating agencies and analysts maintain a gloomy view of the market.

Deteriorating asset quality and non-performing loans in banks’ portfolios are the biggest causes for concern. On the back of cheap money offered to them by foreign lenders, Kazakh banks grew at an extraordinary rate in the last five years, leading to an sharp increase in unsecured lending to consumers and businesses, and in particular to the residential real estate and construction markets.

With real estate prices continuing to fall, many are worried that Kazakh banks could be in for a worse crisis than they have so far experienced.

"The housing markets were inflated everywhere, and Kazakhstan was one of the most inflated, from an emerging markets context, as well as one of the hottest in terms of foreign liquidity," says David Lewis, a research analyst at Merrill Lynch in London. "Suddenly this was shut off, and it is hard to believe the system can survive — it is usually a disastrous cocktail."

According to Ekaterina Trofimova, a primary credit analyst at Standard and Poor’s in Paris, asset quality is continuing to deteriorate. S&P thinks that true problem loans largely exceed the reported non-performing loans.

"Exacerbating the asset quality pressures are the higher cost of borrowing and the drop in residential real estate prices, down by more than 30% on average, and even 60% in some segments, since their peak in mid-2007," she says.

By the end of May, S&P estimated that banks’ lending to the most affected sectors, such as construction and real estate, totalled 19% of their total loans, and residential mortgages represented a further 9%. Moreover, more than 50% of bank loans in Kazakhstan are collateralised with real estate.

   
 

Bank profile:
Alliance looks on the bright side of life 

   

Anvar Khaltaev, managing director in Alliance Bank’s capital markets and financial institutions division, is keen to dispel international ratings agencies and analysts’ views about the severity of the banking crisis in Kazakhstan.

"It shouldn’t be as bad as some analysts expect, maybe another 24-36 months, and we’ll be through it," he says. "A lot will depend on the US economy and their political cycle."

Khaltaev’s outlook for Alliance is equally bullish. Despite the challenges of the last year, and the downbeat forecast from analysts, he is confident that the bank is holding up well.

For one, Alliance’s exposure to the housing market is not as high as it is among its peers, according to Khaltaev.

"We chose consumer lending and short term lending rather than going in for 30 year mortgages and the like," he says. "Mortgages are only 8% of our total loan portfolio."

The bank is also exposed to other areas of the construction industry, but this is because Alliance counts civil construction firms among its borrowers, says Khaltaev — and these are companies with government guarantees, which are, for example, involved in building roads in Kazakhstan.

The big worry that analysts have been focusing on, however, is the quality of Alliance’s loan portfolio, after the bank grew at an extraordinary rate in the last years on the back of express loans — short term facilities that were, for consumers, fast and easy to secure.

According to Luis Costa, emerging markets strategist at Commerzbank in London, Alliance is one of the banks where non-performing loans have jumped the most — up to 10%, as opposed to the 1% or 2% average in 2006 (see table on page 12).

David Lewis, a research analyst at Merrill Lynch in London, describes Alliance as one of the riskiest banks in the country because of its aggressive growth and its previous dominance in the unsecured loan market.

But Alliance has made big adjustments since last year, moving away from the express loans model and, as Costa puts it, is learning lessons.

According to Khaltaev, Alliance, and Kazakh banks in general, are working towards better standards and procedures which they had no time for in periods of such fast growth.

"We are now cultivating the culture of good borrowers, to minimise the risk of over-leverage for one single borrower," he says.

He also suggests that the outlook for non-performing loans at Alliance might not be as bad as analysts have made out — the shrinkage of the bank’s overall loan portfolio means the percentage of non-performing loans within it has therefore increased, he argues.

For now, Alliance has no plans for a public issue this year, and is instead focusing on its repayment schedule. The bank had $1.22bn maturing in 2008 in loans and bonds, and has already repaid more than 70%, Khaltaev says.

"The schedule of repayments is a top priority for Alliance Bank, to minimise any types of worries, as repayments are a focus for regulators and rating agencies," says Khaltaev. "But timely redemptions of our liabilities once again confirm that we are capable of honouring our liabilities."

And although most analysts remain cautious about Alliance, many say they are encouraged by the shift in the bank’s model, as well as the fact it is known to be looking for a foreign partner.    

Enough government support?

Analysts concede, however, that Kazakhstan may possess the tools it needs to ward off an even worse crisis. As Merrill Lynch’s Lewis points out, one of the key variables is what the government can and will do to avert the crisis.

The government is more than aware of the problems facing the banking system. As prime minister Karim Massimov tells EuroWeek, the effects of the global credit crunch were felt acutely on a daily basis.

"In August last year, after the subprime mortgage crisis in the US, it shook up everything," says Massimov. "Kazakhstan is an open economy and was probably one of the first countries in the world that, almost the next day, felt the influence of the international financial problems. Almost the next day, Kazakhstan’s banks had problems getting capital from international markets."

Massimov admits it has not been an easy task for the government to manage the various problems it has faced in the last 12 months, but says it is seeking to help the system where it sees fit.

"If you look at the issue of pure free markets’ rules and conditions, governments should not be involved in these problems — this is a pure free market," he says. "Banks, construction companies, everybody should solve their own problems. But we made a decision through the macroeconomic rules to support some of this."

In the wake of the US subprime mortgage crisis, the government pledged assistance to the banking system by offering $4bn to institutions in need of liquidity, through Kazyna, the national investment fund of Kazakhstan.

Despite this display of support, however, analysts are still split over whether or not the government has done enough, especially to help the ailing construction sector. Delivery of assistance, they say, has so far been poor — of the $4bn, only $1.5bn-$2bn has been disbursed so far.

Others, although they have reservations about how fast the situation is improving, have been more optimistic, and complimentary of the government’s support.

"The state and the banks are all aware of the current developments and are not playing down the situation — they are acting on corporation taxes and increasing liquidity in the system," says Luis Costa, an emerging markets strategist at Commerzbank in London. "Generally speaking, they are doing their homework."

Kazakh banks are prone to looking on the bright side. Many argue, for example, that their reluctance to tap into the Kazyna money on offer is a further demonstration of their strength, that they do not need emergency funding. Many are also confident that steps are being taken in the right direction to help the banking sector nurse itself back to health.

"The National Bank of Kazakhstan has been able to change its approach from reactive to proactive towards managing the challenges of a global financial system," says Anwar Khaltaev, a managing director in Alliance Bank’s capital markets and financial institutions division in Almaty. "For the Kazakh banking system, the current situation is the beginning of a new stage of development, which requires a more proactive approach."



Global crisis will help banks

One characteristic that has set the turmoil in Kazakhstan’s banking system apart from the credit crunch in Europe and the US is that the country’s financial institutions remain remarkably upbeat. While some analysts have accused the banks of painting too bright a picture, Kazakh banks have almost all rejected the pessimistic forecasts of most rating agencies and analysts.

"The effects of the credit crisis on Kazakhstan are overblown," says Grigoriy Marchenko, chief executive of Halyk Bank in Almaty. "Borrowing costs have gone up, there is no denying this. But in general, the Kazakh economy is reliant on commodities, and we have high commodity prices. Kazakhstan is richly endowed in natural resources and is much better positioned than other countries."

Not only are Kazakhstan’s banks very optimistic about economic forecasts, but many also see a silver lining in the current crisis — as an opportunity to learn from their mistakes, and to improve the banking system.

"The events of 2007 and 2008 allowed Kazakh bank managers and regulators to experience the influence of the global situation, and look how the banking sector can absorb this as a sort of immunisation," says Khaltaev at Alliance Bank. "There are improvements and necessary qualitative changes to be made — we cannot be growing all the time."

Khaltaev says he believes the worst is now behind for the country. After Kazakh banks were hit by the global credit crunch and became, as he describes it, unpopular with foreign investors, the good thing is that the system is going through a period of stress-testing which will help it emerge stronger. He also argues that banks can now work on improving standards further and procedures that, during what he calls a "growth disease", or a period of high growth, banks did not focus on enough.

The view that the crisis will ultimately have a beneficial effect on Kazakhstan’s banking sector is one widely held by the banks themselves.

"The country has been growing for seven years at a rate of 10%," says Marchenko. "We believe what is happening now to be a very healthy correction, and it is even a bit overdue. The quality of the business plans we are receiving has improved."

When it comes to showing their strength in the face of adversity, Kazakhstan’s banks have also made the point that they have been steadily and successfully meeting bond redemptions and repaying all outstanding syndicated loans.

Indeed, as it became clear that the banks would have great difficulty in returning to the international capital markets to refinance existing debt — except at levels that most deemed unacceptable — many pledged to repay any maturing bonds or loans. In 2008, it is estimated that between them, the banks had $12bn to repay in total. So far they have defied expectations — according to a range of sources they are on track with repayments.



Capital markets still shut

But despite Kazakh financial institutions’ impressive efforts to repay their debt, rating agencies, analysts and lenders still worry about how banks are funding themselves, and how they plan to do so in the future.

The capital markets have remained pretty much closed for most Kazakh banks. Many have been able to tap international lenders for bilateral loans, partly in order to meet their redemption schedules. Others say that they are looking at domestic funding, and adapting their business models with a bigger emphasis on deposit growth, in order to find the cash.

But banks are also hopeful that "affordable" international markets will return in the not too distant future, and that it will become possible to borrow in the bond and loan markets again — albeit, perhaps not as heavily as before.

These hopes have been bolstered by the successful return this year of Halyk Bank to both markets. The borrower tapped the bond market in April with a $500m 5-1/2 year Eurobond, and at the end of August, completed a $300m syndicated loan.

Both were successes — the most recent transaction, the $300m loan, was increased from $200m after an oversubscription. BNP Paribas, ING, Landesbank Berlin, Standard Bank, UniCredit and WestLB arranged the deal.

It was a surprise to many in the loan market, who thought that Kazakh banks would not be able to return at all this year, and let alone raise enough money in commitments to increase a deal by $100m.

Indeed, ATF Bank, which is owned by UniCredit, attempted a return to the loan market in February for a $550m facility, but the loan was eventually cut to $500m after a cool reception from the market, despite the borrower’s backing from its parent.

Bankers are still sceptical, however, about whether or not Halyk’s success will open the floodgates for other Kazakh banks to return to market.

"You can be sure than if the deal is increased to $300m, I will have requests for proposals from the likes of Kazkommerzbank and BTA landing on my desk the next minute," said one loans banker in London in August. "The problem is, Halyk Bank is something of an exception, and it will be much harder for others to return."

While Halyk has endeared itself to the market as the ex-savings bank of Kazakhstan (see box on page 13), it has also had to pay large premiums on both its Eurobond issue and the loan in order to secure a deal — the highest ticket on offer on the loan, for example, paid 185bp over Libor. The borrower had a tough time in the market when it came in September last year for a $400m facility, and that loan, which struggled in syndication and closed at $300m, paid margins of 40bp and 60bp on its three and five year tranches.

Other banks, however, are not necessarily willing to pay the high rates banks are asking for. Loans bankers are now saying that all-in pricing of 200bp would be the minimum requirement for any Khazakh bank. But as Alliance Bank’s Khaltaev argues, expectations between lenders and borrowers differ greatly.

"Lenders may think it’s adequate to pay a lot in this environment, but we believe that in the market driven environment, the pricing should be adequate to the levels of risk and uncertainty," he says. "Current levels of pricing offered to emerging market borrowers are often speculative."

Some smaller names have been touted for a return to the loan market, such as Bank Caspian and Bank CenterCredit. But bankers say that this is likely to involve multilateral support from development banks like the European Bank for Reconstruction and Development or the International Finance Corporation.



Weighing up funding options

The prognostic for new bond issues is even more difficult. Borrowers are reluctant to pay the high premiums lenders are demanding, now that spreads have widened so much since last year — even though, as analysts point out, they no longer necessarily reflect the underlying credit fundamentals.

KKB and Bank TuranAlem bonds widened across the curve by 100bp in early August, versus a 10bp-15bp widening on five year sovereign credit default swaps in the same period.

"There has been a toxic mix of factors driving spreads up," says Costa at Commerzbank. "You cannot put the blame of a 200bp-300bp widening solely on the back of how Kazakh banks have been performing. There is a discrepancy between fundamentals and reality in most cases, and you have to look at the technicals."

Costa argues that Kazakh banks are being penalised for borrowing so heavily in the international markets — the Kazakh bank market has been so overbought, he says, that any trigger of uncertainty is likely to spark a big sell-off.

While Kazakhstan’s financial institutions weigh up their options in the international markets, analysts and ratings agencies are looking closer to home. They are scrutinising how the banks plan to fund themselves, beyond looking for foreign partners, which is one possible course of action.

With the exception of Halyk Bank, deposit growth has been slow, if not non-existent, for most of the year so far. But there are signs that the trend could be improving. Recent data from Merrill Lynch research on deposit growth for Kazakh banks in July this year showed that there had been a 1.2% increase in retail deposits across the sector after two consecutive monthly losses.

This is not, analysts say, enough to call it a sustainable improvement yet. And despite the optimism of Kazakhstan’s banks, no one is predicting that the country’s banking sector will be back on its feet at least until the end of this year, if not for another two or three years — or even five years, depending on who you ask. But one thing that rating agencies, analysts and officials at Kazakh financial institutions seem to agree on, is that there are unlikely to be any bank failures in the course of the crisis. No small blessing, considering the beating the rest of the banking world has taken since last year.


   
  

Bank Profile: Halyk leads the Kazakh pack

 
 Halyk Bank has stood out from the crowd this year as the only bank borrower from Kazakhstan to have made convincing returns to both the international bond and the loan markets — a feat many bankers and analysts predicted was impossible for any Kazakh bank to pull off in 2008, so dire was the forecast for the country’s banking sector.

In April, Halyk proved the cynics wrong when it priced a $500m 5-1/2 year Eurobond. It came at a hefty premium, but attracted $1.6bn of orders. Halyk also made a successful return to the loan market, and signed into a $300m loan in September, after the deal was oversubscribed and increased from $200m.

But if Halyk has managed to attract international lenders, it is because it has bucked the trend among Kazakh financial institutions and has avoided some of the ills which have affected its peers — its deposit base is not waning, it has a low exposure to the country’s real estate sector, and it does not have any large borrowing redemptions coming up in the rest of 2008.

Indeed, although Halyk has made its mark on the international markets this year, it has never relied excessively on foreign funding, as Grigoriy Marchenko, the bank’s chief executive, explains.

"We’ve traditionally relied on the deposits of our customers for funding, and it has typically been two-thirds of our finding in the past," he says.

According to Merrill Lynch research, Halyk is the only Kazakh bank to have actually seen a recent growth in deposits — by April of this year, its growth in deposits had reached 41% since August 2007, versus an average 7% contraction for all others.

Halyk has also maintained a conservative approach to real estate lending, which means it is not as exposed to the sector as others.

"We have always said that our overall lending to the construction industry should not be more than 30%," says Marchenko. "It is currently below 29%."

Although the government of Kazakhstan no longer has a controlling stake in Halyk, the perception that it is backed by the state has also stood it in good stead in the last year, according to Luis Costa, an emerging markets strategist at Commerzbank.

"It is now private, but it has better links with the government than other banks," he says. "This has helped with the perception that it is still a safe place to invest,"

Despite these reassuring figures and the bank’s enviable position in the Kazakh banking sector, Halyk is not planning to tap the Eurobond market again this year or to return for another syndicated loan, says Marchenko. But the bank is set to try out a novel form of financing — an onshore securitisation of Halyk’s mortgage loans in the works.

"In Kazakhstan, there have been offshore mortgage securitisations before, but we are now working with rating agencies and lawyers to finalise this new transaction in the next few weeks," says Marchenko. "We believe the cost of this will be two, or 2-1/2 lower than offshore securitisations."

Like many other Kazakh banks, Halyk has big ambitions when it comes to regional growth. It is ploughing ahead with expansion plans in Russia, with a special focus on Rostov-on-Don and Krasnoyarsk, and there are plans to open a subsidiary in Mongolia, as well as in the Xinjiang province of China.
 
   

  • 10 Sep 2008

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 Citi 300,564.69 1167 8.07%
2 JPMorgan 292,705.55 1273 7.86%
3 Bank of America Merrill Lynch 274,298.19 930 7.36%
4 Barclays 227,796.85 849 6.12%
5 Goldman Sachs 201,953.92 668 5.42%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 BNP Paribas 43,084.26 173 7.10%
2 JPMorgan 38,694.99 77 6.38%
3 Credit Agricole CIB 32,927.59 157 5.43%
4 UniCredit 32,342.86 144 5.33%
5 SG Corporate & Investment Banking 31,187.44 119 5.14%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 12,840.88 54 8.97%
2 Goldman Sachs 12,059.06 58 8.42%
3 Citi 9,451.48 53 6.60%
4 Morgan Stanley 8,054.41 48 5.62%
5 UBS 7,829.15 30 5.47%