Kazakhstan’s banking assets continued to grow in 2005. The 68% rise was slightly less than last year but the outlook is for continued growth. Banking assets have reached 60% of gross domestic product (GDP), which leads former central bank governor Grigory Marchenko to say that Kazakhstan could soon catch up with Poland.
A third of this portfolio is made up of loans of one year or less, though, and there is concern that to help develop local businesses, Kazakh banks should borrow and lend less but for longer.
Also, the local component of the assets-to-GDP is only half or 30%, and some experts say it should be higher. As these assets have grown, worries about their quality have also been expressed. Mortgage loans, in particular, have been growing at a fast clip and the smaller banks are perceived as being less picky than the top three banks.
Nevertheless Citibank subsidiary head Dan Connelly says: “This is a well-managed, stable and predictable economy. Monetary and fiscal policy are good and all the indicators are positive except for the transparency index.”
Transparency International rates Kazakhstan among the most corrupt countries in the world, 107th out of 158 countries surveyed for the Corruption Perception Index.
Three strategies
Amid this rising tide, the three top banks – Kazkommertsbank, Bank TuranAlem and Halyk Bank – have adopted strikingly different strategies.
Kazkommertsbank, the largest bank with a market share of 25%, is still concentrating on corporate lending. Bank TuranAlem (BTA), the second largest with about 22%, is moving aggressively beyond Kazakhstan’s borders and seeks to become one of the top private financial institutions in the former Soviet Union. Halyk Bank, the third largest bank with 17% market share and the most profitable in the sector, is branching out into multiple financial services.
“The benchmarks have changed,” says André Küüsvek, director for Kazakhstan of the European Bank for Reconstruction and Development (EBRD). “In the early 1990s, Kazakhstan compared itself to other central Asian countries. In the late 1990s, to Russia, and now it shares ratings with Romania (S&P), India and Croatia (Moody’s) and Romania (Fitch). Of course, that has a big influence on the borrowing abilities of the Kazakh banks.”
Organic growth
Nina Zhussupova was the chief operating officer of Kazkommertsbank for a long stint when Nurzhan Subkhanberdin, the bank’s founder and main shareholder, left the board to concentrate on other ventures. Ms Zhussupova replaced him as chairman of the board in 2002. “I’ll tell you in what way we are different from other banks,” she says. “Our growth is very organic and quiet. There is no drastic increase in any performance indicators, but our corporate business portfolio has been growing quite steadily,” she says.
“We cannot boast about doubling or tripling our assets or similar indicators. However, return on assets figures and return on capital figures are not bad at all. We have similar good numbers from year to year. Our profits last year were $144m,” she says.
“We want to continue being a leader in Kazakhstan. We are quite active in other Commonwealth of Independent States (CIS) countries, but our tactics are a bit different from those of BTA. We don’t buy shares in small regional banks in Russia, Ukraine, Azerbaijan or Georgia. We prefer to go for deals; we prefer to do business together with clients. When it comes to opening an office or buying a regional bank, the question is whether we have clients or deals there, whether there is anyone there, needing our services.”
International outlook
BTA, the country’s second-largest bank by assets, has a strong international outlook. Mukhtar Ablyazov, its chairman, says: “BTA is going to the former Soviet Union (FSU) because our clients are exporters who are oriented toward FSU countries.”
Like many members of Kazakhstan’s elite, he studied in one of Moscow’s top universities. “Because we studied in Moscow, we do not see neighbouring markets as foreign,” he explains, “We all have the same language and standards and we believe that the FSU is really one market.”
Mr Ablyazov says that TuranAlem has shares in several Russian banks, along with a number of banks in other FSU countries. “We led the way to Russia and now all five top Kazakh banks want to increase their Russian risk,” he says.
“We hope to be either the biggest in CIS, or one of the top five within three years, now we’re seventh or eighth. Sberbank is number one, Vneshtorgbank is number two and Gazprom Bank is number three. After that, you have three or four Russian private banks. Our goal is to catch up with Alfa Bank.”
Domestic focus
Halyk Bank, formerly the Kazakh unit of the old Russian and Soviet state savings bank, Sberbank, has a huge network of branches – there are 540 – and it is leveraging this advantage to grow internally at a rapid clip.
“We are following a completely different strategy than the other top five [banks],” says Mr Marchenko, chairman of Halyk, who pushed through key reforms during his four-year tenure at the central bank, which gave him a reputation for intelligence and integrity. “For instance, we are not borrowing a lot abroad, to put it mildly, but we are growing rapidly.”
Halyk boasts a 40% asset growth for 2005, with a net profit growth of 74% to $106m. Its capital/risk weighted assets ratio is 15%, its return on average equity is 52% and the return on average assets is 2.86%. “These numbers are twice as high as the average for the banking system in Kazakhstan,” says Mr Marchenko, who took over Halyk in January 2004.
“We are the most profitable bank in the top six,” he adds. “We adopted a new start a year ago to develop ourselves as a financial group. We have by far the largest pension fund in the country with 26% of the market. Our insurance company has 25% of the product, we are getting a licence for life insurance; our brokerage subsidiary Halyk Finance had a return on equity of 73%. So the whole structure has been changing from a banking-only mentality to a financial-group mentality.”
Halyk is the only Kazakh bank that is overtly seeking a foreign partner, though it is only offering a blocking share of 25% plus one – no control or path to control (see story on p88).
“A strategic partner would bring us new products, new technology, an IT platform and training,” he says. It would also help Halyk to expand into a niche market in western China. “Under Chinese World Trade Organization (WTO) accession plans, you need $10bn in assets to open a subsidiary in China. Currently, our assets are $4.5bn and it will take us a couple of years to grow to that, but if we had a large European partner, we could already have opened a joint venture in Xinjiang under their umbrella.”
The bank would be operated by Halyk on the basis of the large and growing trade between the neighbouring Chinese province of Xinjiang and Kazakhstan.
“It’s not interesting for the big European banks or for the big Chinese banks, which concentrate on the booming maritime provinces. For them, Xinjiang is too small,” says Mr Marchenko. “Our trade with China is $5bn but for them it’s peanuts, so there is a niche, but we can’t go in by ourselves. Same as Russia, it would be better to go in with a strong European partner.”
Talks with suitors are continuing, he says, but agreement on price remains elusive.
The WTO effect
In addition to the possible entry of European players, the Kazakh banking sector could be affected by accession into the WTO, which calls for its members to allow foreign banks to open branches, says Anvar Saidenov, governor of the National Bank of Kazakhstan, the central bank.
“But you could negotiate the transition period,” he says. “And for example (Russian president Vladimir) Putin strongly opposes this, so I don’t know how it will fit with their WTO accession.”
No date has been set for Kazakhstan’s admission, although it is expected to take place simultaneously with Russia’s, its main trading partner, and Ukraine’s. Early this year, the ministry of industry and trade announced that accession would not happen before 2007.
Kazkommertsbank’s Ms Zhussupova is concerned about more than competition from foreign banks opening branches. “WTO accession concerns not only the banking community or the financial community, it concerns everyone,” she says. “Because it is clear that we don’t know whether our goods and services will be competitive given such an enormous economy next door – China. Given that competing with China is hard for such developed economies as the US and Europe, with much more diversified economies, it seems to me that Kazakhstan may face some problems.”
Mr Küüsvek of the EBRD sees two ways in which the banking sector could improve Kazakhstan’s competitiveness. The key impediments to business, according to a World Bank-EBRD study, are access to finance, taxes and the cost of money. “So you need to satisfy long-term demand for credit,” he says. “You should adjust regulations so that banks borrow long-term and lend long-term.
“It has become a bit of a competition about who gets the biggest syndicated loan. But these are one-year loans, and they lend for one year. I think it is bad and dangerous. They should borrow for five to 10 years with an amortizing repayment schedule, and try to match their assets locally with these long-term loans.”
Mr Küüsvek adds: “I understand that long-term loans costs more because the risk increases. Short-term loans look better on the books because they are cheap and they are big. But it would be more useful for the economy to have smaller and costlier loans, but longer-term.”
He says that, although achieving assets worth 60% of GDP is an impressive achievement in just seven years (the proportion was 15% in 1999, according to Mr Marchenko), a look at the aggregate domestic loan portfolio – loans that have been lent inside Kazakhstan and not abroad – gives less grounds for optimism. “The aggregate loan portfolio of Kazakhstan is 30%-35% of GDP, while in Poland I would guess it’s 80%. In western Europe, it is at least 70%, and the highest is Portugal with 180%.”
Luxembourg and Switzerland, for instance, have very high assets/GDP ratios but all the money is not lent there, Mr Küüsvek points out. “Domestic loans to GDP, not assets to GDP, is what matters,” he says. “That’s the money lent to enterprises. Here, too, the margins are lower but it’s better for the economy.”.
Signal to market
Mr Küüsvek sees the fact that Halyk Bank has the best return on equity as a very positive signal to the market because it has concentrated on the sector that is under-serviced: private individuals, micro-businesses, small and medium-sized enterprises (SMEs). “Now, banks tend to think: as long as I can make my 5%-6% margins with my corporates, why should I bother? But the margins are bound to go down and the banks are bound to move toward SMEs and retail. And Halyk has demonstrated that it can be done: they have the capacity and the ATMs and the branches.
“Mr Marchenko has put more emphasis on retail and it’s a good thing. First you start lending to those with collateral, but then you think you can lend to those who don’t because eight out of 10 is good enough to make money.
Portfolio degradation
An asset growth of 60% a year inevitably yields concerns that the quality of the portfolios may be degrading.
Mr Küüsvek, whose EBRD has partnerships with 10 local banks, is not worried. “The quality of assets is not necessarily going down,” he says. “In developed markets, yes, that could happen, but not necessarily in developing markets. In eastern Europe, for instance, growth went from 100% to 30% and you never saw a big problem.”
Pedro Rodriguez, senior economist at the World Bank in Almaty, disagrees. “Credit booms always end in tears, with banking crises, and that’s likely to happen here, too. Since the growth rate of credit is so much greater than the interest rate, so borrowers repay one bank by borrowing from another. When the booms stops, we find out that the rules that measure quality were always rosier than reality.”
Insider lending
Also, most large banks in Kazakhstan have close ties to conglomerates and do much of their lending to them, he says. “In group lending can be a problem and very difficult to assess if the financial group owns both the bank and the industrial company,” says Mr Rodriguez.
Mr Marchenko believes that some degradation has already taken place. “Several of the smaller banks are going for market share. And if the top 10 banks were fully provisioned and paying taxes, two of them would be making zero net profits,” he says, without identifying the two banks.
Ms Zhussupova has mixed views. “We believe that there is no particular deterioration of the quality of loans because all the banks are facing over-liquidity now,” she says. Portfolio deterioration can be avoided “if you stick to some basic rules, if the credit decision-making process within the bank is organised properly, if you weigh what is called credit appetite right”.
However, loan portfolio quality may become an issue if the economic situation deteriorates, Ms Zhussupova adds. “Then it would be possible to finally determine if the quality of the loan portfolio is good or not.”
With no end in sight to economic growth, “clients are able to repay loans because the overall growth in the country allows the large number of projects that we provide financing for to bring profits to the owners and also to repay their bank loans,” she says. However, she still believes that inadequate credit policies that some financial institutions follow represent a threat to the financial stability of the country.
Ms Zhussupova worries about small banks, especially those whose market position does not allow them to keep their loan requirements tight. “So, when borrowers start facing problems or if they cannot get a loan from larger banks that have quite, in my opinion, well-organised risk-assessment systems in place, they approach small and medium-sized banks and get loans from them very easily.”
Those banks tend to give more money to such clients than bigger banks, which have tighter requirements for such borrowers, are ready to give. They give them more money for a longer time on softer terms than bigger financial institutions, she says. “We shall see what will ultimately come out of it.”
Mortgage concerns
Even the top banks’ exposure to the fast-growing mortgage market is cause for concern to Ms Zhussupova. “We have been acting as an end-risk taker, making mortgage loans that are now very popular,” she says. “I think that the current wages of many of the borrowers are not adequate. They do not yet correspond to current prices for homes in Kazakhstan, especially in the two largest cities, Almaty and Astana.”
She is especially worried by the fact that most banks trying to compete in this market tend to loosen requirements while analysing clients. She says: “I believe that this poses a threat to the banking sector. It is clear that, sooner or later, if something goes wrong and the client was not analysed properly, if his actual income was not considered, then both clients and banks may face problems when repaying the loans. This is what concerns banks.”
