The recently appointed National Bank of Kazakhstan governor, Kairat Kelimbetov, tells Philip Alexander that he is focused on stepping up the quality of corporate governance in the country's banking sector and financial markets.

Kairat Kelimbetov assumed the role of governor of the National Bank of Kazakhstan (NBK) in complicated circumstances. His high-profile predecessor, Grigory Marchenko, resigned from the post well ahead of his planned retirement date, after publicly criticising proposed government reforms of the Kazakh pension system. However, Mr Kelimbetov is no stranger to crisis. He was deputy head of the sovereign wealth fund Samruk-Kazyna in 2009 when the fund was called in to bail out several of the country’s largest banks, amid a real estate crash and two instances of large-scale fraud at BTA Bank and Alliance Bank. Today, he sees his move to the NBK, after spells as Kazakhstan's economy minister and deputy prime minister, as a chance to complete the circle.

“In 2009 at Samruk-Kazyna, it was about fire-fighting in the banking sector. Now, I have a better opportunity to think strategically, to finish the work we started then by rebuilding the model for the banking sector and for financial regulation,” Mr Kelimbetov tells The Banker.

He inherits a single unified bank regulatory structure. In 2011, the Kazakh government concluded that the creation of a separate financial services agency in 2004 had contributed to the impact of the 2009 crisis, and therefore brought the agency back under NBK control.

“If NBK stands behind the banking sector in a crisis, then it must have full regulatory control. My plan is to integrate the financial regulator more fully into central bank departments. Our voice must be strong, but at the same time, regulation needs to be well structured to avoid killing the core business of providing credit to the real economy,” says Mr Kelimbetov.

State looks for exit

One of his first priorities in the banking sector is to oversee the process of returning the banking sector to private ownership after the 2009 bail-outs. Minority Samruk-Kazyna stakes in Halyk Bank and Kazkommertsbank have already been sold, so the main challenge is in selling BTA, Alliance, and smaller retail bank TemirBank, which was demerged from BTA after its rescue.

During his time at Samruk-Kazyna, Mr Kelimbetov publicly expressed the hope that foreign investors would buy into these banks, to help bring governance in the Kazakh banking sector up towards international standards. Both Russia’s Sberbank and Halyk Bank have walked away after initially considering bids for BTA, but Mr Kelimbetov says there is now another bank undertaking due diligence. Meanwhile, Verny Capital, the investment vehicle for leading Kazakh businessman Bulat Utemuratov, which already owns small Kazakh corporate lender Fortebank, is in the running to buy TemirBank and Alliance. Verny Capital executives believe merging several banks would generate extra capital and significant cost savings.

Mr Utemuratov sold ATF Bank to Italy’s UniCredit in 2006 for more than $2bn. In April 2013, UniCredit sold ATF to a Kazakh investor for just a quarter of that, after suffering several years of losses driven by non-performing loans, which hit 46% of the total portfolio in 2012. Mr Kelimbetov says Kazakhstan remains open to foreign investors, and the government has approached potential buyers from Russia, China and western Europe.

“The global situation is complicated at the moment, so foreign banks did not want to invest. We therefore decided to sell locally if necessary, because the government wants to exit so that the banking sector can return to normal," he says.

However, this switch of strategy for reprivatising the banks does not diminish his determination to improve corporate governance in the banking sector. He says that pre-crisis, governance only existed on paper rather than in reality, and the country cannot afford a repeat of the massive frauds revealed in 2009.

“We are looking at changes to increase the responsibility of shareholders, boards of directors and chief executives, perhaps even including criminal code reforms. What is also needed is a better understanding of the role of chief risk officer inside the banking sector, to realise that this position is not just someone who is an obstacle to granting credit, and that this person must not be too influenced by demands from the chief executive,” says Mr Kelimbetov.

Asset quality challenge

While international investors may be hard to find, Mr Kelimbetov is keen to draw on ideas from experiences of banking sector crises elsewhere. Reforms to bring in criminal responsibility for bankers could be based around those enacted in Turkey after its 2001 financial crisis, and Mr Kelimbetov is keeping one eye on Ireland in terms of its progress toward a state exit from rescued banks, and the European Central Bank’s asset quality review in 2014 could provide a model for Kazakhstan.

“We need to bring in an independent valuation of assets that is not carried out by the banks’ own auditors, and we could use a stress-test to force a clean-up and recapitalisation of the banking sector. That would also be a step towards implementing Basel III in Kazakhstan. We will start work in mid-2014 but we need to move carefully,” says Mr Kelimbetov.

He says NPLs are currently about 30% sector-wide, mainly due to the overheated real estate market that collapsed in 2007. Changes to the tax code and other legislation are needed to facilitate write-offs, and in some cases individual programmes of support for certain banks may also be required. Following several years of very small profits, Kazkommertsbank delivered a $1.1bn loss in 2012, after NBK required it to reclassify a large part of its real estate loan portfolio, which more than quadrupled total impairments and provisions. Mr Kelimbetov says NBK is in dialogue with Kazkommertsbank to make important decisions around the bank’s future business plan.

Support for pension reform

In contrast with his predecessor, Mr Kelimbetov supports proposed pension reforms, and sees them as an essential part of building a stronger financial sector in Kazakhstan. The government has transferred several large private pension funds into a single fund administered by NBK, which also runs Kazakhstan’s surplus international reserves known as the National Fund. Mr Kelimbetov emphasises that this reform is not a 'renationalisation' of pension funds to be mixed in with the state coffers, as the fund will remain entirely separate from the general budget.

“The banking crisis was linked to the way that pension funds were operating. We had a private pension model similar to that in Chile, but without such a developed capital market. About 20% of the funds were invested in low-grade bonds, especially those issued by the banking sector,” he says.

Mr Kelimbetov envisages the new single fund investing mainly in government or quasi-government debt plus the shares issued by quasi-government companies such as KazMunayGas under the so-called ‘People’s IPO’ programme of initial public offerings. It may also be allowed to invest up to 10% of its funds overseas.

“Improving the operations of financial markets in Kazakhstan is not about simply creating private pension funds. It is more about defining the responsibilities of the company owners and executives, the reporting requirements for chief financial officers and so on,” he says.

Mr Kelimbetov says the reform is not a 'panacea' that could in isolation have avoided Kazakhstan’s financial crisis. But it has already improved the efficiency of government bond issuance and budget financing, increased revenues for the pension fund and halved its commission fees paid, which will ultimately benefit the pension holders. The next major decision is whether the government will also begin making contributions to the fund.

Kairat Kelimbetov is the governor of the National Bank of Kazakhstan.

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