Kazakhstan’s financial institutions were once the toast of foreign debt and equity investors alike – and its banking sector a prize jewel for numerous international financiers.
That changed when the financial crisis struck Kazakhstan in 2007, laying waste to the sector and exposing an era of over-zealous borrowing and lending and, in some cases at least, outright mismanagement.
Post-crisis, Kazakh banks now find themselves the target of scorn from one-time supporters, many of whom are still smarting from the sector’s reversal of fortunes. As Milena Ivanova-Venturini, head of research at Renaissance Capital in Almaty, puts it: “There’s a sense of ‘the emperor’s new clothes’ about the sector.”
Meanwhile international capital markets have been effectively closed to Kazakh financial sector borrowers for the last 18 months, and the domestic funding base is “insufficient to meet the economy’s need for credit stimulus”, according to Standard & Poor’s, the rating agency.
CLAMPING DOWN
Calls have predictably grown for much tighter regulation, in the wake of multi-billion dollar losses and bad debts racked up by Kazakh banks.
“The regulators did what they were supposed to do, but nothing more. They didn’t think out of the box or act pre-emptively,” Grigory Marchenko, governor of the National Bank of Kazakhstan, tells Emerging Markets in an interview.
Marchenko – who returned to the central bank in January 2009 when a number of banks were effectively nationalized to save them from bankruptcy – adds that an earlier lack of forceful regulatory action led to poor market discipline. As a result a number, but by no means all, Kazakh banks over-borrowed and then over-lent in the period 2006/7, with ultimately disastrous results.
While investors who face 80%-plus haircuts as a result of the debt restructurings at the likes of Alliance Bank and BTA Bank have plenty of reasons to rue ever taking on Kazakh bank risk, Marchenko argues that the debt workouts are ultimately “market-based solutions to market-based problems”.
He adds: “Borrowers have to take responsibility for their actions, but investors were also overly aggressive and should have been more circumspect.”
While there’s almost universal agreement on the need for improved regulatory oversight among the financial sector community in Kazakhstan, there are also concerns that ill-conceived, populist changes in legislation could ultimately make life for banks and their customers much harder rather than easier.
“Over-regulation would limit banking activity in the country,” says Mikhail Lomtadze, chairman of Kaspi Bank. He adds that moves, for example to limit the ability of banks to repossess collateral in the event of non-payment, would have a damaging effect on the tentative pick-up in lending activity that is expected this year.
STILL GROWING
Sergey Mokroussov, managing director at the country’s number one lender, Kazkommertsbank, points out: “Banks will remain the prime source of funding for major projects in Kazakhstan as the capital markets here are still relatively undeveloped.”
Kaspi Bank is one of the financial institutions in Kazakhstan that gives the lie to the received wisdom of late that all the country’s banks are still firmly mired in retrenchment rather than expansion mode. With enthusiastic backing from co-owner Baring Vostok Capital Partners (BVCP), one of the leading private equity groups in the Russia/CIS region, Kaspi is seeking to establish itself as the number one player in the retail banking/consumer finance field over the next three years, in preparation for an eventual exit by BVCP, either through a trade sale to a strategic investor or an initial public
offering, market conditions permitting.
Lomtadze says the fact that Kaspi is likely to face increased competition from the likes of Home Credit & Finance from the Czech Republic and Russia’s Renaissance Credit in the consumer finance sphere where it operates, is confirmation that consumer finance in Kazakhstan is an appealing business prospect. “You expect competition in a good market.”
Another lender with ambitious plans in Kazakhstan is Al Hilal Bank, which in April was the first Islamic Finance bank to be established in the CIS. Chief executive Prasad Abraham says that Al Hilal, which is 100% owned by the government of Abu Dhabi, is looking first to finance major government-supported corporate and investment projects and then to roll out a retail banking platform over the next 12–18 months.
Looking further ahead he says: “Kazakhstan will act as a launch pad for our expansion into other CIS countries which are looking to introduce legislation governing Islamic Finance principles.”
While the likes of local players Alliance Bank and BTA Bank have clearly had an extremely testing time in the past year, the last 12 months have proved rewarding times for a number of the well-established foreign lenders in the country. Daniel Connelly, head of Citibank in Almaty, notes that his bank never had any meaningful exposure to the real estate sector, where valuations have tumbled by over 50% since the onset of the credit crunch in 2007, while it cut credit lines to many of the local banks way ahead of their getting themselves into trouble.
“We had concerns systemically about the banking sector, but no direct exposure to speak of,” he says.
There’s a similarly upbeat message from Simen Munter, head of HSBC in Kazakhstan, who relates that the bank has benefited from the troubles at local rivals, picking up high-quality clients from financially embattled lenders in a classic flight-to-quality market environment. “Kazakhstan was overbought and then oversold, but the risk-return opportunities here are very attractive.”
LEGACY ISSUES
While there are certainly grounds for optimism about prospects for the banking sector, whether that will translate into increased investor/lender support remains a moot point. As a recent note to investors by Russia/CIS fund manager Pharos Financial Group pointed out, despite the improving economic outlook for Kazakhstan, the legacy issues from the credit-fuelled boom years of the noughties will continue to impact the country’s banking sector for years to come: “We believe that Kazakhstan has the strongest overall growth prospects of any CIS country due to the structural growth of the Caspian Sea oilfields and its aggressive expansion towards China. However, Kazakhstan went through a real estate boom pre-crisis, and still has excess capacity that will take years to work off.”
The report adds that with the real estate sector, which consumed nearly 50% of pre-credit crunch bank, lending likely to remain moribund for the foreseeable future that will act as a brake on lending activity this year and beyond. “But banking officials are still forecasting strong loan growth for the year, projections that look too optimistic to us. With markets already pricing in a moderately strong growth pick-up, they are increasingly vulnerable to growth disappointments.”
There’s also a growing recognition that it will take a long time before the banking sector is able to make a meaningful contribution towards economic growth.
Sergei Kasyanenko, economist at CIS-focused investment firm Sigma Bleyzer, says: “It will take at least another year for the sector to complete its recovery. And it will lag behind the economy for at least two years. Its ability to stimulate growth by lending will remain negligible for some time.”
Standard & Poor’s, the rating agency, was similarly scathing in a report issued last month. It noted there are “few indications of banking sector recovery”. The agency estimates that problem loans are “likely to peak in the second half of 2010” and that gross problematic assets, including restructured loans, “exceed half of the system’s total loans, but represent only about 40% for non-defaulting banks”. Alliance and BTA, the two largest banks, defaulted in 2009, along with Temir Bank and Astana Finance.
S&P considers that “any growth in banks’ capitalization and development dynamics in 2010–11 might lag a potential turnaround in the overall economy”. It adds that the sector’s domestic funding base remains “insufficient to meet the economy’s need for credit stimulus” and warns that a return to fast, leveraged growth “may have a negative ratings impact”.
The agency argues that Kazakhstan’s controlled currency regime and relatively high inflation have produced “a broad mispricing of credit risk”. So the banking system “has become both the perpetrator and the main victim of the recent economic downturn”.
RESTRUCTURING
Meanwhile, Thomas Sommer, director, loan syndication for financial institutions in central and eastern Europe at UniCredit in Vienna, says that syndicated loan participants will want to fully digest the final results of the debt restructurings at the likes of Alliance Bank and BTA Bank before they feel ready to put valuable cash to work in the country again.
There are also concerns over developments on the non-performing loans (NPLs) front, with NPLs representing around 37% of total lending across the banking sector as a whole, and 18% for the sector excluding Alliance and BTA, according to Sigma Bleyzer’s Kasyanenko.
He believes the shake-out of bad debts by borrowers in the construction and real estate sectors – which accounted for about 40% of Kazakh lending up to 2007 – is not yet complete.
Concerns were further raised at the end of April when Bank CenterCredit, the country’s fourth biggest bank, was raided by Kazakh financial police, after an anonymous accusation that it was violating credit policies. The bank strenuously denied any wrongdoing, while analysts pointed out that the authorities have been critical of the sector for some time for under-reporting the level of non-performing loans.
As Alexander Picker, chief executive of ATF Bank, owned by Italian banking group UniCredit, notes: “We’re seeing a growing unwillingness to pay, which is worrying – a lot of borrowers think that they deserve special treatment.”
He adds that with banks such as Alliance Bank and BTA Bank having secured 80% debt write-offs, some corporate and retail borrowers are seeking similar terms in response, which is making banks more cautious about sanctioning new loans.
As Mokroussov at Kazkommertsbank acknowledges, regaining access to international capital markets is key for major Kazakh banks such as Kazkommertsbank, whose funding needs cannot be fully covered by either domestic deposits or local bond issuance. “In the medium to long term, we will not be able to grow without international capital market funding.”
He adds that in the current low interest rate environment, investors are looking for high-yield investment opportunities in the emerging market arena, and that well managed banks such as Kazkommertsbank that have not needed to restructure their debts are likely to receive a warm welcome from would-be buyers.
For all the trials and tribulations of the banking sector in Kazakhstan in recent years, for many bankers working in the country there’s a palpable sense that there are better times ahead.