Kazakhstan’s plans to launch its distressed assets fund (DAF) later this year, and Kazkommertsbank’s issue last week of $300 million in seven-year 8.5% eurobonds, shows that the banking sector is on its way to recovery, analysts said.
The issue on Wednesday of committal proceedings in London on Mukhtar Ablyazov, former chairman of the largest failed bank, BTA, added to the sense that the long recovery process is entering a new phase. BTA said Ablyazov had breached numerous court orders requiring disclosure of assets.
The DAF will absorb up to 10% ($2.1 billion) of banks’ non-performing loans, which assumes a 50% average haircut, the National Bank has said.
Ainur Medeubayeva, analyst at Troika Dialog Kazakhstan, told Emerging Markets: “While not big in size – 3.3% of loans – a payment of 50% of the face value could provide banks up to $1 billion in capital.”
Medeubayeva warned, though, that restoration of the failed banks would take time. “Alliance Bank and BTA Bank recently reported audited IFRS financials under which their capital is negative despite debt restructuring.
“These banks have yet to make large asset recoveries and retrieve operational efficiency to restore capital. Business restoration is very challenging due to high competition and weak sector recovery – but still possible.”
In BTA’s case, the progress of legal proceedings against Ablyazov had been positive. “A UK court rejected Ablyazov’s claim that he was forced into his actions by political persecution from the Kazakh government,” Medeubayeva said.
In March, lending by the sector was up 0.7% in the year-to-date and net interest margins were up to 4.4%, Medeubayeva said. “It has yet to be confirmed whether this is the start of Kazakh banks’ belated recovery, but we are hopeful.”
The commodity-centred character of Kazakhstan’s economy meant that lending recovery was bound to be slow, Medeubayeva argued. “Large commodity exporters mainly act as creditors to banks but not as borrowers as they have their own access to cheap wholesale funding which is better than what banks can offer.
“This is the main reason for weak lending recovery in Kazakhstan – banks understandably view those sectors they currently can work in – real estate, trade, retail, and small and medium enterprises – as risky.
Standard & Poor’s said in a report last month that credit costs - also referred to as credit losses, measured by the ratio of net new provisions (net of recoveries) to average loans - are stabilizing for banks in Kazakhstan and other troubled CIS banking systems.
The agency estimated credit costs in Russia, Ukraine, Belarus, Azerbaijan, Georgia and Uzbekistan as well as Kazakhstan, and concluded that the general trend of credit costs to stabilize or fall would continue in 2011, but at a slower pace than last year.
“That’s because asset quality is only improving very slowly while lending growth is picking up, which usually requires banks to add new provisions”, Ekaterina Trofimova at S&P in Paris told Emerging Markets.
“Large stocks of problem debts and a host of remaining uncertainties are a drag on lending growth, particularly in Kazakhstan, Ukraine and Russia – and in that order”, she added.
S&P estimates that problem loans, “including restructured loans and foreclosed assets” still account for 40-50% of total system loans in both Kazakhstan and Ukraine, and that Ukraine was clearly lagging behind Kazakhstan in creating provisions and writing off problem loans.