With consolidation under way, non-performing loans finally showing a downward trend and banks readying for the implementation of Basel III, Kazakhstan’s banking sector finally appears to be in recovery mode after a difficult period.

Slowly, Kazakhstan’s banking sector is coming back to life. Non-performing loans (NPLs), which have been running at 30% on a system-wide basis since 2011, are gradually coming down and the regulator’s target is 10% by the end of 2015.

All the measures needed for banks to restructure and clean up their balance sheets are now in place, say bankers. Consolidation is also under way and is likely to increase in pace as banks adhere to new requirements to hold minimum capital reserves of Tg100bn ($550m) by 2019. This is 10 times existing levels and only five out of 38 banks in the country currently have capital levels of this order – Kazkommertsbank (KKB), Halyk Bank, Bank CenterCredit, Sberbank Kazakhstan and ATF Bank.

Still, it may be a long time before foreign banks return to Kazakhstan after getting badly bruised in the country’s 2008 financial crisis. UniCredit, for example, bought ATF for more than $2bn in 2008, but sold it to a Kazakh investor in 2013 for a quarter of that value. The Italian bank entered the market at the worst possible time, just as property prices crashed, and it was forced to make huge provisions.

HSBC sold its operations to local lender Halyk Bank in 2014 for $176m, but this may have had more to do with the global bank’s wider restructuring than to a mistiming of the market, as HSBC began operating in Kazakhstan in 1998.

Evening the playing field

The other challenge facing foreign banks is the lack of a level playing field in terms of working with state-owned companies, as well the difficulties of recovering unpaid debts. Bankers refer to the need for 'administrative leverage' to recover debts in Kazakhstan, something that foreign banks usually lack.

Equal treatment for all banks is one of a number of key areas listed by Janet Heckman, the Kazakhstan country director for the European Bank for Reconstruction and Development, that would improve the sector’s prospects. Others include early implementation of Basel III, improvements in corporate governance, progress towards transparent shareholdings, the establishment of independent compliance and audit functions in banks, strengthening of supervision, constraints in consumer lending, further consolidation, resolution of NPLs, improvement of anti-money laundering safeguards, diversification of funding sources, and a move away from the dollarisation of the economy.

But how much foreign banks are deterred from investing in Kazakhstan because of local conditions and how much they are because of the problems they face in their domestic markets is a matter of debate.

Magzhan Auezov, managing director of KKB, says: “Foreign banks [from Europe and the US] are leaving many overseas markets, not only Kazakhstan, [and because of their domestic issues] it’s unlikely they will be back any time soon.

“At the same time, the Kazakh banks have matured in terms of the product range that we can offer clients. The tech and product gap [between local and foreign banks], which existed five or six years ago, has largely disappeared.”

Turning around


Kaspi's forward thinking

Most banks are worrying that e-commerce and payments sites are stealing their business. Kazakhstan's Kaspi Bank decided to avert this threat by launching its own. In a country where the online and payments business is largely undeveloped, the newly launched Kaspi Store will allow users to buy electronics goods online as well as providing them with loan finance. "We believe that people do not need money [for its own sake], they need money to buy something. We want to focus on the 'something'," says Mikhail Lomtadze, Kaspi Bank’s CEO.

He describes what the bank is doing as setting up an ecosystem in which buyers and sellers can interact with each other and make a purchasing decision. At this point, the bank can provide funds for the purchase if necessary. The platform took 18 months to build and required an investment of about $20m.

"I am not a banker," says Harvard Business School-educated Mr Lomtadze, who remains a partner with Baring Vostock Capital Partners, the private equity firm which invested in the bank. He became CEO five years ago. "We are a customer relationship IT company. We are investing a lot in IT and the future is to build the ecosystem." But if it has got the formula right, Kaspi Store has the potential to contribute handsomely to the bottom line even in a bank with a return on equity of 49% and a cost-to-income ratio of 28%. "What other bank has a return on equity almost twice the cost-to-income ratio?” he asks.

For every item sold on Kaspi Store the bank will receive a sales commission and then buyers will be offered different repayment options. Payment in three months will be free with interest charges for longer repayment periods giving the bank additional income. About 30% of electronics goods in Kazakhstan are currently bought on instalment, so this style is in keeping with local custom.

Most existing Kaspi Bank customers will get pretty much instant credit. Non-Kaspi clients will fill out an online form and get an answer in minutes. They will then be asked to bring ID and other verification details to the electronics store when they pick up their purchase.

Kaspi has placed 1800 of its employees in the stores to do the credit checks. "We rarely hire staff from other banks as we have to retrain them in our way of working. We prefer to hire students and train them ourselves," says Mr Lomtadze.

In a country where several large banks are still working out bad loans picked up in the 2008 crisis and are not in a position to focus on new business, eighth placed Kaspi (in Tier 1 capital terms according to The Banker Database) is a leading player in the retail segment. It has 1000 points of sale and 3 million clients.

KKB is in the process of merging with BTA, which was bailed out in 2009 by the sovereign wealth fund Samruk-Kazyna. The merger will further cement KKB’s position as the largest bank in the country. Mr Auezov says that KKB will benefit from incorporating BTA’s extensive branch network into its own.

“The first thing we did was to merge IT systems and optimise the branches. We also combined the ATM networks of the two banks,” he says. Despite the complexities of the merger, the aim is to hit the central bank’s 15% NPL target by 2015, and 10% by 2016. (Financial regulation was brought back under the control of NBK in 2011, after previously being separated in 2004.)

Mr Auezov says that work is currently under way on deciding the right time and the right way to rebrand the bank and that eventually the BTA name will disappear.

“The combined bank will be a leading small and medium-sized enterprise bank and will continue to have a very strong presence in the retail sector,” he says. “In terms of the [large] corporate portfolio, we will become more diversified. We will continue to play a role in the construction sector but the share will be much less than before.” Construction-related loans were a main cause of problems during the crisis. 

As far as income is concerned, Mr Auezov expects strong pressure on interest rate margins so there will be more emphasis on fees and commissions.

Restructuring under way

The other big consolidation in Kazakhstan is between Alliance Bank, Temirbank and ForteBank, which will create a bank using the Forte name with capital of about $900m, according to CEO Timur Issatayev in an interview with news agency Reuters. At current capital levels, as used in The Banker’s 2014 Top 1000 Banks ranking, this would make the consolidated entity Kazakhstan’s third largest bank.

But, with capitalisations set to rise substantially, further consolidation is more or less inevitable. The chairman of the management board of ATF Bank, Anthony Espina, thinks this will be a positive development. “There will be continuing consolidation in the banking industry. Fragmentation in a banking industry is a bad thing because it promotes cut-throat competition and competition based on the lowest common denominator,” he says.

But ATF is unlikely to be a player in the consolidation, as it is currently preoccupied with sorting out internal problems and making the bank more efficient, says Mr Espina.

In fact, the tendency of a number of major banks to look inwards as they restructure has allowed mid-sized banks such as Eurasian Bank and Kaspi Bank (see box) to significantly increase their market shares. Eurasian’s CEO, Michael Eggleton, says he sees a lot of competition from Kaspi in retail and from Halyk and Sberbank in the corporate sector but adds that “almost everyone is restructuring”.

Eurasian, which was picked as The Banker’s Bank of the Year in Kazakhstan in 2014, increased its net profits by 34% in 2013, and return on average equity has been between 21% and 25% for the past three years. NPLs at just less than 10% are low by the sector’s standards. The bank seeks to split its business evenly between the retail and corporate sectors as well as within sectors to diversify risk.

On the retail side, the portfolio is spread across auto loans, payroll loans, consumer and mortgage lending. The bank claims to have about half the country’s auto financing market and Mr Eggleton explains how this was achieved by putting auto lending into car dealerships and working with the dealers to increase sales. “Once people find the car they like they generally want to drive it away as soon as possible,” he says. Eurasian Bank has a 24-hour scheme that completes all the paperwork in less than a day.

Setting higher standards

Another key initiative at Eurasian Bank has been securitisation of retail loans, thus freeing up the balance sheet and allowing it to keep an even business mix while taking advantage of strong retail growth. Rival banks may be tied up for now but this will not last forever and strong competition is going to be a feature of Kazakh banking going forward. The prospects for recovery in the banking sector, of players damaged in the crisis, have improved markedly due to a number of initiatives taken by the National Bank of Kazakhstan (NBK), the country's central bank, including the setting up of a distressed assets fund and provision of tax incentives for write-offs. Consumer lending restrictions have also been put in place.

NBK governor Kairat Kelimbetov says that the costs of the financial crisis were equivalent to about 6% of gross domestic product and that the NPL situation creates “a bad perception” of the country. “People do not want to invest in a country that has NPLs of 33%,” he says.

Mr Kelimbetov adds that Kazakhstan will move to Basel III compliance by 2019, and may even impose stricter standards to take account of local risk conditions. There are also plans for an asset quality review as recommended by the International Monetary Fund (IMF). Global financial advisory firm Rothschild will undertake the project, says Mr Kelimbetov, adding that the distressed asset fund will solve the bad debt problem at KKB-BTA, which accounts for a large proportion of system-wide NPLs and will go a long way towards resolving the issue.

An IMF statement issued in December 2014 says: “We commend recent legislative amendments in the tax regime [to help ease NPL resolution] and the recapitalisation of the problem loan fund, and urge the authorities to follow through expeditiously with their plans to attain the end-2015 NPL target of 10%, which hinges on a successful reduction of the KKB-BTA’s NPLs. More generally, and especially in light of increased vulnerabilities associated with falling oil prices, we urge full implementation of the financial sector assessment programme recommendations, including closely monitoring systemic risks with greater emphasis on risk-based supervision, and conducting a banking asset quality review.

Some way to go

Yet problems still remain. A report by ratings agency Standard & Poor’s published in mid-2014 says: “Lending practices and underwriting standards in Kazakhstan are ‘aggressive’. This is demonstrated by the still high, although decreasing, 38% share of foreign-currency denominated loans in banks’ portfolios; high concentrations to single borrowers… and undiminishing material concentrations in lending to the risky and volatile construction and real estate sectors, 24% as of year-end 2013.”

But however successful, or otherwise, are the measures taken by the NBK, the ultimate panacea to the banking sector’s difficulties will be economic growth. Estimates are for Kazakhstan's economy to grow at 4.5% to 5% in 2015 and 2016, although a falling oil price may curtail these projections. The country has low company and household debt levels with scope for substantial increases in both. Despite the problems with large loans to the construction sector, bankers report that small mortgages up to $100,000 have a good repayment record.

An additional boost to the economy is expected from the formation of the Eurasian economic union with Russia, Belarus and Armenia, which comes into effect on January 1, 2015, and has enlarged the market from one of 18 million people to one of 170 million people. Any Kazak bank that can exploit the upside in that is one worth watching. 


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