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Asia-PacificAugust 3 2009

Survivors plan their escape from crisis

At the helm: Umut Shayakhmetova, CEO of Halyk BankIn May, The Banker examined the fate of Kazakhstan's fallen giant, Bank BTA. The Kazakh banks that have stayed solvent now explain their recovery strategies. Writer Philip Alexander
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Survivors plan their escape from crisis

When Grigory Marchenko left Halyk Bank, one of the country's top four banks, to return to his previous role as central bank governor, only the timing came as a surprise to his successor Umut Shayakhmetova. He was a much-admired governor at the National Bank of Kazakhstan (NBK) until he moved to Halyk in January 2005, and the possibility that he would resume duties as the country's monetary policy supremo to help tackle the financial crisis had been mooted since the credit crunch began in mid-2007.

"But I am also surprised that Halyk decided to take a risk and appoint a woman as head of the bank, it is not so common in Kazakhstan," jokes Ms Shayakhmetova. This is undoubtedly modest - in addition to serving as Mr Marchenko's deputy for the past four years, she was previously the deputy-head of ABN Amro's operations in Kazakhstan.

Like other leading Kazakh banks, Halyk scrambled to raise liquidity and capital in the fourth quarter of 2008 as the global crisis was compounded by local fears over the real estate market. The two most troubled banks, BTA and Alliance, were prepared for nationalisation in February 2009 as loan losses threatened to wipe out their capital. And the sovereign wealth fund Samruk-Kazyna has also taken a 21% stake in Halyk, along with 21% in Kazkommertsbank (KKB), the other of the country's top four banks. Halyk and KKB have agreed to use the government funds primarily to increase provisions against non-performing loans (NPLs).

Real estate exposure

At Alliance and BTA, these NPLs have reached crippling levels of more than 40%, but the other two large banks have kept a tighter handle on the situation. KKB reported NPLs of 12.2% as of March 2009, based on a definition of 30 days overdue for corporate loans and 60 days for retail loans. Halyk reports all loans more than 30 days overdue, a ratio that came out at 14.6% in March 2009. Both banks have provisioned for at least 110% of current NPLs, and both stayed in profit in 2008 and the first quarter of 2009.

"We are doing everything possible to keep asset quality at acceptable levels, improving our collection system and involving call centres on the retail side. On the corporate side, we work with clients on a case-by-case basis to make the correct decisions for their finances during the crisis," says Sergey Mokroussov, executive director for international affairs at KKB.

Mr Marchenko's one-off 18% devaluation of the Kazakh tenge against the US dollar, upon returning to the central bank in February 2009, threatens to undermine the financial position of anyone with a net short exposure to the dollar. "We kept very tight constraints on the open currency position, in line with the requirements set by the regulator, so we match assets and liabilities in currency terms," says Mr Mokroussov.

But for the bank's clients, the story is rather different. "On the consumer side, about 50% of loans are in dollars, mainly on mortgages, whereas all the salaries are in tenge and not indexed to the dollar, so the ability of our clients to repay loans in dollars has gone down since the devaluation," says Ms Shayakhmetova. By contrast, on its corporate portfolio, Halyk made dollar loans only to those borrowers who had access to export receivables or other dollar-linked revenue streams such as apartment rentals.

The sharp fall in real estate markets, which were heavily reliant on global financing to maintain valuations, has inevitably created additional problems with mortgage portfolios. Loans to real estate developers, commercial property operators and construction companies have also been hit hard.

"In Almaty and Astana, rent and sales are down by up to 40% per office, but the top class 'A' offices are only down about 10% to 15% because there is still a shortage of international-quality office space," says Arda Alpakut, Kazakhstan managing director for DTZ, the world's largest real estate advisory firm.

Halyk had already begun taking some evasive action before the real estate crash took place. "We closed the loan programme for apartment buildings in Astana in 2006. We had some retail and business centres there, but all of them are completed, operational and running with an occupancy rate of about 70%, which still generates cash," says Ms Shayakhmetova.

"In Almaty, we were more exposed to construction of apartments, as well as retail and business centres, and we have some problem projects, mostly among the higher-end apartments, where we do not now expect demand for another year or two, so we froze those projects," she adds.

Outside the top four banks, some had significantly lower loan concentration in the most vulnerable sectors. Bank CenterCredit, once the country's fifth largest bank by capital, is now potentially the third largest, following the huge losses at BTA and Alliance.

"Our exposure to construction was relatively small, and we have not needed to co-operate with government support schemes for this sector," says Timur Ishmuratov, management board member and managing director of CenterCredit's international department, which is responsible both for trade finance activities and for arranging the bank's own cross-border funding.

Even so, conditions are challenging and there has been some deterioration, especially on CenterCredit's mortgage portfolio and on loans for the smallest companies. "The NPL ratio rose to about 5% in the first quarter [of 2009], from 3.4% at the end of 2008, but we believe this is still the lowest of any major Kazakh bank," says Mr Ishmuratov.

State support for assets

Kazakhstan's government has gone beyond capital injections to try to shore up the country's banking sector, creating several programmes to refinance specific groups of bank assets. Samruk-Kazyna is refinancing residential mortgage and real estate development portfolios. The maximum interest rate on refinanced residential loans is 11% for private sector employees and 9% for public sector employees, which is a significant decrease on rates available before the crisis.

In addition, Samruk-Kazyna's microfinance unit, Damu Fund, is providing funds for loans to small and medium-sized enterprises. The SME fund allocations are to be split 70:30 between refinancing of existing debt and extending new credit.

One potential negative consequence of the government support is that it will discourage diversification away from the real estate sector. According to KKB's full-year 2008 results, released in April, real estate and construction-related loans constituted nearly 30% of the total portfolio.

"Obviously we would like to decrease our real estate exposure in the end, but we believe it is important to complete projects that make economic sense, because then our clients get a product that can start generating cash to pay back their loans," says KKB's Mr Mokroussov.

And Mr Alpakut says the fundamental picture in the real estate market suggests valuations will recover once global and local financing becomes available again. "There is only one true international-standard shopping centre in Almaty, and there is a big lack in the supply of quality residential apartments as most are still from Soviet times. On the 'A' class offices the vacancy rate is still quite low, at 10% to 15%, so we are hopeful, although we expect more selectivity about what projects banks will finance," he says.

Battle for deposits

In the meantime, foreign funding for Kazakh banks looks to be off the agenda, especially while many creditors are awaiting the outcome of the restructuring processes at BTA and Alliance. For some of the smaller banks that had been less reliant on the Eurobond markets, this is less of a concern.

"We were very conservative on international borrowing. About 80% to 85% of new funds from 2005 to 2007 were from public markets, but before that it was almost all bilateral loans, some of which we have repaid early at an attractive discount, earning us about $100m," says CenterCredit's Mr Ishmuratov.

KKB has a $500m Eurobond due to mature in November 2009, and a $300m maturity due a month later, and these are most likely to be repaid out of the bank's cash balance and amortisation of its own loan portfolio, rather than being refinanced.

To replace the lost wholesale funding, there is clearly a battle between Kazakh banks to win market share in the country's deposit base. CenterCredit's total deposit base rose 36% in 2008, including a remarkable surge of 51% in the retail sector.

The increased deposit funding left the loan-to-deposit ratio at 140% by the end of 2008, and the bank is targeting a safer ratio of 120% by the end of 2009. This is still high in a global context, but low by Kazakh standards. KKB's loan-to-deposit ratio was much higher, at 219%, but Halyk has a strong funding position, with loans at just 110% of deposits.

"We see the crisis as a time of opportunity," says Ms Shayakhmetova. "Since the beginning of 2009, we have had a big increase in the number of client deposits, both corporate and individual, as people are flying to the stability and reputation of the bank; they are not so concerned about the interest rates offered," she says. As the opportunities for major project-based lending have become scarce, she is focusing the bank's attention on fee-generating activities such as cash management, and cross-selling pensions and insurance products.

Although funding may be more difficult to obtain, foreign strategic investors have so far kept faith with Kazakh banks. South Korea's Kookmin Bank increased its stake in CenterCredit to 30.5% in December 2008, from the 23% it had originally purchased at the start of last year. "This really showed that it is serious about the investment in CenterCredit, and it is still eager to increase its stake to more than 50%. It is a tough time, but the economy will recover, and Kookmin can use its experience of Korea's own crisis in 1997," says Mr Ishmuratov.

Abu Dhabi-based investment fund Alnair Capital had its 25% stake in KKB diluted to 18.6% by the Samruk-Kazyna investment, but the largest shareholders will have an option to buy out the sovereign wealth fund at some point between the first and fourth anniversary of the agreement, and Alnair retains a member on the bank's board.

Kazakhstan Banks: Government Financing Allocations, 2009 (TG BN)

Kazakhstan Banks: Government Financing Allocations, 2009 (TG BN)

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