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WorldApril 1 2014

New entrants drive Kazakhstan’s bid to consolidate

Kazakhstan’s sovereign wealth fund is in the process of extricating itself from banks it rescued during the crisis, but poor asset quality is posing a serious challenge to the new owners. 
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New entrants drive Kazakhstan’s bid to consolidate

The reprivatisation of restructured banks rescued by the sovereign holding company Samruk-Kazyna in 2009 promises to precipitate a much-needed banking consolidation in Kazakhstan. The country has 38 banks, but this number could be reduced by as much as 10% if mergers go through.

The catalysts in the process of banking consolidation are local magnate Bulat Utemuratov, who is currently seeking to push together Alliance and Temir banks, and Kazkommertsbank (KKB), with its new partner Kenges Rakishev, which is seeking to acquire BTA Bank. Both deals are currently under negotiation with Samruk-Kazyna, which took over BTA and Alliance, and spun Temir out of BTA, during the financial crisis.

Consolidation is anticipated by Alexander Kottmann, PricewaterhouseCooper’s financial services director in Kazakhstan. “We will see some consolidation happening. The marketplace and the bank population look as if Kazakhstan is overbanked,” he says.

The introduction of Basel III capital regulations will push smaller banks into the arms of the larger. “If you look at the overall proposed capital increases, this is quite significant,” says Mr Kottmann. “By full introduction in 2019, it will require banks to go to the market to look for additional equity funding, which is quite difficult given the overall state of the Kazakh banking sector. [Banks] compete for equity not only against other banks but also other industries, which is obviously difficult if there’s a more promising return for investors.”

New blood

Potential acquirers have deep pockets. Mr Utemuratov, for example, who has bought an 80% stake in Temir Bank as a prelude to buying Alliance Bank and merging the two, is one of the country’s long-standing banking investors. He not only controls Forte Bank and Kassa Nova Bank but is a limited partner of Verny Capital, a venture capital firm.

Verny has bank management skills and these will be harnessed to manage the merger of Temir and Alliance. Verny’s senior partner is Timur Issatayev, who as managing director worked with Mr Utemuratov to found and build ATF Bank in the early 2000s.

Verny, which has assets in a wide range of local sectors, including hotels, is funded by the proceeds of what has been termed the Kazakh ‘banking deal of the century’, when Mr Utemuratov sold ATF Bank, then the country’s third largest lender by assets, to Italy’s UniCredit for $2.1bn at the height of the credit boom in 2007. In late 2012, UniCredit offloaded ATF for no more than book value, or less than one-quarter of the original acquisition price.

The buyer was KazNitrogenGaz, which is the vehicle of Galimzhan Yesenov. Mr Yesenov is the son-in-law of Akhmetzhan Yesimov, the mayor of Almaty, Kazakhstan’s largest city. Mr Yesenov junior has stakes in two small insurance companies, but no previous experience running a bank.

New money is also set to enter the banking market with the sale of 46.5% of BTA Bank to Mr Rakishev. The 35-year-old Mr Rakishev, who is the son-in-law of former Kazakh prime minister Imangali Tasmagambetov, controls the conglomerate SAT and Company, which has interests spread around engineering, technology and natural resources, rather than financial services. Mr Rakishev has formed a partnership with KKB, and each partner will buy 46.5% from Samruk-Kazyna to gain overall control of BTA. Samruk-Kazyna will later transfer its remaining 4.26% stake to KKB, giving KKB majority control of BTA. According to KKB, it paid $465m for its 46.5% stake, valuing BTA at exactly $1bn – just half of book value.

Loan quality questions

The process of consolidation is unlikely to be straightforward for two reasons. First the non-performing loan (NPL) picture is far from clear, with daily surprises making the prospect of fixing the loan books more arduous. NPLs are a feature of almost every Kazakh bank loan book – a legacy of an unresolved pre-crisis property boom – with an aggregate of 30% of loans currently in that category. Second, an organisational restructuring is required for all the banks involved in consolidation, including staff and IT systems.

“We are puzzled. The banks the government is selling are in very bad shape. Why are people prepared to risk so much money trying to make money? Most of us are very doubtful. We don’t know what their motives are,” says Almas Chukin, a board member of local investment group Visor Holding and a former executive of sovereign private equity fund Kazyna Capital Management.

Alliance Bank announced a debt restructuring in January 2014, less than four years after it completed a previous round of debt write-downs. The rapid deterioration of its loan portfolio was outlined by Mr Issatayev, speaking to the bank’s bondholders in January 2014, who said: “This minefield hasn’t been cleared yet and mines keep exploding.” Two of Alliance Bank’s major borrowers in the agricultural sector were “about to declare bankruptcy”, which could lead to a non-payment of $100m worth of loans, he added.

The combined bank also will have an extensive property portfolio, ranging from prime real estate to countryside greenfield investments. Most of this was acquired from property developers that defaulted on their loans. Mr Issatayev warned that one property, which was on the books at Tg30m ($164,388), could be sold for no more than Tg7m, while another that was on the books at Tg100m could be sold for just Tg50m. Consequently, the bank is looking at holding and developing the real estate.

“There are huge holdings of real estate which all banks have on their balance sheet. We would depress the market if we put the holdings of each bank up for sale at half [its original] price. We realise the challenges. No one has ever done something of this magnitude before in Kazakhstan,” said Mr Issatayev.

Strategic challenge

Overstaffing and incompatible IT systems also confront the managers of Verny tasked with pushing together Temir and Alliance. The greater strategic challenge is building a unified IT system says Guram Andronikashvili, chief executive of Forte Bank. Forte is a much smaller corporate bank acquired by Verny in 2011, and Mr Issatayev was at one stage a board member. Mr Andronikashvili has a long association with the Verny investors, having advised them on the sale of ATF in 2007 while at JPMorgan.

“Alliance runs two systems, one for retail and one for corporate. Temir runs an outdated system. The first challenge will be to move all the business of Alliance into a new expanded banking system, then put the Temir business into the Alliance platform. The IT platform needs to be improved to accept Temir. It is two-step process,” says Mr Andronikashvili.

Alliance managers are driving a process that will result in Temir’s absorption, he adds. “The size of tasks Alliance is facing is much bigger. The expertise required devoted to Alliance is much greater, so that is the centre of expertise.”

The planned job cuts could be controversial. Verny is planning to dispense with 3500 staff of the combined total of 6100. Mr Andronikashvili says this is “a huge challenge. This would be an unprecedented shedding of labour”.

Asset recovery process

Similar to Alliance and Temir, the likely structure of the merger between BTA and KKB remains mired in concerns about the scale of the NPL portfolio. BTA Bank, whose assets were valued at $10.4bn in October 2013, continues to track down the loans made by former chairman and majority owner Mukhtar Ablyazov, who is currently in jail in France and facing extradition to Russia. He is charged with perpetrating a massive fraud on the bank.

Pavel Prosyankin, the BTA board consultant (and former managing director) pursuing the loans over the past four years, says that “there is no possible value placed on what can be recovered”. He says that “no more than a few hundred million dollars’ worth of assets recovered have been turned into liquid cash”.

Chris Hardman, a partner at Hogan Lovells, the London law firm hired to pursue the assets of Mr Ablyazov, alleges that the former chairman made $15bn-worth of fraudulent loans. Mr Ablyazov denies all charges against him. Court judgments in the UK to date have gone against Mr Ablyazov, resulting in the confiscation of about $3.5bn of his assets, to be returned to BTA.

One local banker speculated that Ablyazov-related loans may be amalgamated with other BTA bad loans and placed into a bad bank inside BTA. KKB would put BTA’s performing loan portfolio into a good bank based around KKB. KKB itself established three subsidiaries to manage distressed loans, the most recent (for distressed real estate) launched in January 2014. Mr Prosyankin says KKB and BTA may function as two separate banks for some time.

“It doesn’t affect the asset recovery. The new shareholders have to decide whether the experts at KKB should examine the bad loan book at BTA that is not Ablyazov-related. KKB has a great deal of experience, as the largest bank, in dealing with bad loans in Kazakhstan,” says Mr Prosyankin.

Merger costs will be saved if BTA is retained as a retail-facing brand and KKB focused on corporates, says Anton Soroko, an analyst from Russian brokerage Finam. “The most likely scenario of this deal would be to divide the business between the two owners into retail and corporate ones. This way there will be no need to spend money on a rebranding, since BTA Bank is well known in Kazakhstan and the new owners should build up on the brand’s visibility,” says Mr Soroko.

The growing consumer market remains of keen interest to all banks. Eurasian Bank, which has refocused from corporate onto retail banking since the crisis, has seen considerable growth in mortgages, personal and car loans. The 150,000 customers the bank acquired when it bought local consumer bank ProstoKredit from Société Générale in 2011 have grown to “close to 1 million”, according to chief executive Michael Eggleton.

He says: “The retail side has been very profitable. We are looking at 22% to 23% asset growth for 2013, and our return on assets was 2.4%. I could squeeze that higher, but we try and keep 15% of our assets in cash because we are in a volatile country and we want to make sure there are no concerns for depositors if they want their money back.”

Consumer finance focus

Mr Eggleton says small and medium-sized enterprise lending has declined across the entire banking sector, while corporate lending is ‘sluggish’ and largely restricted to a group of state-owned giants in the natural resources sector. The rate of consumer growth carries concerns for Charles Seville, sovereign analyst at Fitch Ratings.

“Household debt to GDP [gross domestic product] is very low compared to the developed world, but the level of household debt is rising, and the share of debt to disposable income is rising to high levels. It is not frightening yet, but we could see problems in the banks’ loan books if this growth in consumer lending continues,” says Mr Seville.

While Kazakhstan’s banks struggle from one crisis to the next, few will be complacent about their capacity to handle the National Bank of Kazakhstan’s (NBK) decision to devalue the fixed exchange rate of the Kazakh tenge by 20% in February 2014. The underlying Kazakh economy remains strong, with GDP growth of about 5%. But the NBK’s decision followed pressure on a number of emerging market currencies due to the US Federal Reserve’s move to begin tapering its quantitative easing bond purchases, and jitters over China’s economic growth. The Central Bank of Russia, one of Kazakhstan’s main trading partners, has allowed a depreciation of about 10% in the Russian rouble since the start of 2014.

“Banks that are in compliance with their regulatory requirements for currency exposure should not be affected. But longer term, it may affect their largest clients and it will squeeze their liquidity positions. They may then turn to the banks for additional lending, but the banks may not have the resources to lend to the corporate clients. The devaluation may have a knock-on effect on their deposit base, and that could cause a run on the bank,” says Mr Prosyankin.

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Read more about:  Asia-Pacific , Kazakhstan