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Asia-PacificMarch 7 2005

From ‘small and risky’ to a target for partnership

Kazakhstan’s spectacular financial boom is beginning to attract the attention of European banks, reports Christopher Pala from Almaty.European banks have long perceived Kazakhstan, the largest after Russia of the former Soviet republics, as “too far, too small, too risky”. Five times the size of France with its economic capital, Almaty, close to the Chinese border and as far from Paris as Paris is from New York, Kazakhstan’s population is only 15 million: a small market spread over a huge area, ruled by an authoritarian president unwilling to make the transition to democracy.
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As a result, while European bankers were gobbling up banks in eastern and central Europe and the Baltic countries in the 1990s, Kazakhstan was left to fend for itself. ABM AMRO, Citibank and HSBC opened banks here, but limited themselves to working with the top local blue-chips and to managing Eurobond issues, syndicated loans and export agency financings. Today they are steadily losing market share, insofar as they have no presence in the big growth sectors of consumer finance, SMEs, cards and retail.

Change of tune

Today, foreign bankers are streaming to the country’s former capital and financial centre with an eye to buying a stake in a Kazakhstani bank and participating in the booming retail market. “We’re meeting with a foreign bank practically every week,” says AFF Bank chairman Timur Issatayev.

Starting in 2000, Kazakhstan’s economy took off, and has sustained growth of about 10% a year. Last year, the economy grew by 9.4%. Foreign investment is pouring in at the rate of about $2bn a year, mostly in the giant Caspian oilfields of Kashagan, Tengiz and Karachaganak, and revenues from oil and minerals are fuelling the boom. Banking assets are continuing to more than double every two years. By growing 60% in 2004, they brought the assets-to-GDP ratio to 49% – only a quarter of what it is in western Europe but within grasp of the level of eastern Europe.

Strict and cautious banking supervision – minimum capital requirement, at 12%, is higher than the Basel-mandated 8% – has made finance an island of relative transparency in a society riven by corruption, rated 122nd out of 145 countries surveyed by Transparency International.

“We have achieved good transparency in operations, but we need to make more progress on ownership,” says Bolat Zhamishev, head of the Agency for Financial Supervision, the banking industry’s widely praised regulator.

Oil companies and other foreign investors complain of government harassment, unpredictable regulatory behaviour and a predatory tax police, but foreign bankers have nothing but praise for the way the agency – and, before that, the National Bank of Kazakhstan – has nurtured the industry.

Reforms succeed

Thanks to the supervision of the central bank during the 1999-2003 tenure of Grigori Marchenko – the country’s most respected technocrat – Kazakhstan’s banking reforms have consistently outpaced Russia’s and trailed those of eastern Europe, which today is the standard to which Kazakhstan’s bankers compare themselves.

As a result, Kazakhstan’s banks are showing spectacular results. Kazkommertsbank, the largest, grew its assets by 60% to $5.4bn. Last year it raised a $610m syndicated loan, the biggest in the Commonwealth of Independent States (CIS). Its profits of $67m would have risen by 30% to over $100m, but tax authorities presented KKB, as the bank is known, with a back-tax bill of $30m for the years 1998-2003.

Political objection

After presidential adviser Yermukhamet Yertisbayev called Nurzhan Subkhanberdin, the bank’s founder, the “Kazakh Khodorkhovsky” for his open support of the pro-democracy opposition party Bright Path, many commentators tied the tax bill to Mr Subkhanberdin’s endorsement of the party.

“We are appealing the tax assessment and we are optimistic,” says Magzhan Auezov, a KKB managing director. “We have made it clear that our bank is not involved in politics.”

Although Bank TuranAlem, the second-largest bank, saw its assets grow 92% last year to $5bn and its equity soar from $237m to $600m, the bank was struck by tragedy: Yerzhan Tatishev, its founder, chairman and main shareholder with 24%, was shot fatally during a hunting trip on January 19. The death was described as an accident but bank and law-enforcement officials, noting that an investigation is under way, have declined to provide details.

Mr Tatishev’s deputy, Saduakas Mameshtegi, replaced him as chairman the next day. In an interview, Mr Mameshtegi said he intended to pursue the goal set by Mr Tatishev: to make TuranAlem the biggest private bank in the CIS. “We are already the fifth-largest,” he said, noting that Russia’s two largest banks, Sberbank and Vneshekonombank, are state-owned.

Branching out

Last year, TuranAlem bought shares in banks in Moscow and Omsk, Russia, in Kiev, Ukraine, and in Minsk, Belarus, and is in talks to buy shares in two other foreign banks. It has opened nine representative offices, including one in Beijing.

“There is a limit to the local market,” Mr Mameshtegi says. “As assets increase, the quality decreases, although our portfolio is in better shape than the industry average. So our strategy has been geographical diversification, because we have a good comparative advantage.”

Mr Mameshtegi admits that taking on a strategic partner with management responsibilities is something the bank is discussing with a number of foreign banks. Bank Raiffeisen of Austria has a 10% share in TuranAlem but is not considered a strategic partner.

Making the news

The third largest bank by assets – but first in deposits – is the Kazakhstani branch of the old Soviet national savings bank, which is still called Sberbank in Russia but changed its name to Halyk Bank in Kazakhstan. Halyk made news this year when in January it announced the appointment of Mr Marchenko as CEO.

Mr Marchenko, after his four-year stint at the central bank, had briefly served as deputy prime minister for the economy and clashed openly with prime minister Daniyal Akhmetov over housing policy. President Nursultan Nazarbayev had then taken him as an adviser, but Mr Marchenko had made it known he wished to return to the private sector.

Halyk is controlled by Mr Nazarbayev’s son-in-law, Timur Kulibayev, who as deputy head of Kazmunaigas, the state oil company and industry regulator, is widely considered the second most influential man in the country. Halyk has by far the largest number of branches in the country and 70% of its payment cards. Its mortgage lending grew eight-fold last year, it has the largest pension fund with 25% of the market and its insurance and leasing companies are either industry leaders or second.

Mr Marchenko says the bank wants to streamline its operations, improve its automatic teller machines to cut the bank’s queues and free personnel to focus on selling the different products. The goal is to make Halyk the country’s top financial institution within five years.

A second goal has attracted more attention: Mr Marchenko is the first bank CEO to announce publicly that he is looking for a strategic investor who will buy a blocking 25% plus one share and participate in management, notably in IT development and in risk management.

He says he is in serious talks with five European banks – all in the top 20 – which he declined to name but all of which “are offering to buy a majority of shares”, he says. He says he expects to be able to start working with the foreign partner by July 1.

European bankers say they are mostly interested in controlling shares but admit that to start with a blocking share, with the possibility of an increase, might be acceptable.

Smaller banks

Although Halyk’s call has attracted much attention, “when banking delegations come this far, they don’t stop at just one bank,” says the resident representative of a foreign bank. So even though the top three banks account for 75% of assets, smaller banks are also getting attention.

ATF’s Timur Issatayev says that for the assets-to-GDP share to reach 80% in the next few years: “We will need to triple assets. And for that, we simply don’t have the capital or the know-how, so will have to surrender to the European banks. I think the purely Kazakh bank will go the way of the purely east European bank: into virtual extinction,” he says.

“The foreign banks bought east European banks on the cheap when they were in trouble,” he says. “But here, they missed the boat and now they are going to have to pay a lot more because we are doing very, very well at the moment.”

ATF, for instance, last year more than doubled its assets to $1.46bn, doubled its capital to $150m and its profits to $23m. “We opened four more branches, we now have 18,” he said. It is now the fourth largest in terms of assets.

Inevitable incursion

Mr Mameshtegi agrees that European entry in the Kazakhstani market is inevitable. He guesses that half of Kazakhstan’s 35 banks will be under Western control within a decade.

But Daniel Connelly, local Citibank head, says local banks might not be in a hurry to sell out. “The longer they can continue to grow and be successful, the more attractive they become to a would-be purchaser,” he says. “And I’m sure there are some banks that don’t view falling under control of a Western bank as an attractive option, or even a necessary one.”

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