The Kazakh economy was one of the world’s top performers in the first half of 2011, expanding by more than 7% as the economy continues to bounce back from its particularly severe financial crisis. But the banking sector appears to be one of the last to benefit.
Assets at the country’s largest banks declined after real estate markets tumbled and Eurobond financing became inaccessible in 2007, and they have yet to stage a meaningful recovery. In July 2011, total bank lending finally returned to the peak originally reached at the start of 2009, just before two of the country’s largest banks, BTA Bank and Alliance Bank, had to be nationalised to prevent their collapse.
Even for the banks that survived intact, recovery has been slow. Non-performing loans (NPLs) are stubbornly high, and a significant proportion of bad loans relate to real estate development. Nick Tesseyman, head of financial institutions at the European Bank for Reconstruction and Development (EBRD), says there is progress on tax and technical issues to clear the way for creating a nationwide scheme that can shift NPLs off bank balance sheets.
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“Despite the fact that we see the highest level of provisioning across the region in the Kazakh banking sector, at about 20% to 30%, there is a feeling that even those levels may not quite represent some of the problems still in the sector, particularly as far as lending to develop real estate is concerned,” he says.
Success story
Kazakh banks have so far taken a gradualist approach, hoping that real estate values will recover over time and facilitate sales of collateral. Halyk Bank has arguably been one of the success stories of the financial crisis, expanding its portfolio since 2007, while many competitors shrank. But even there, NPLs have hovered at about 16%, and new lending was stagnant until the second half of 2010. The bank is targeting 10% loan growth in 2011 as a whole.
“NPLs are gradually improving. We keep most of them classified as bad loans because the overdue sums have not been fully repaid, but we see many clients partially repaying the loan. It is also much easier today to sell collateral on loans that are foreclosed,” says Umut Shayakhmetova, CEO of Halyk Bank.
She says most property valuations have bottomed out, but whereas residential and commercial property in the lower and middle price range is in demand, more luxury developments are not yet recovering.
Widespread losses
Halyk recorded profits of $304m in 2010 and $143m in the first half of 2011, but other leading banks are still suffering losses. ATF Bank, bought by Italy’s UniCredit in June 2007 just weeks before Kazakh bond yields began to soar, recorded a second year of losses in 2010 totalling $216m, and was still losing money in the first half of 2011.
Romeo Collina, appointed CEO of ATF in October 2010, says the more sustained losses reflect the bank’s cautious approach to provisioning and conservative collateral valuations. Provisions peaked in June 2010, but he says this is due more to overhauling the organisation and assigning extra staff to work-outs and recoveries, rather than to any improvement in market conditions.
NPLs are gradually improving... It is also much easier today to sell collateral on loans that are foreclosed
“We are confident that the improvement will be consistent. It would be a great success to break even in 2011, not just by relying on decreasing loan loss provisions, but also by increasing revenues through new business and new customers trusting us. That is a signal we would like to give to the market,” says Mr Collina.
The bank has been rationalising its branch network, shutting about 25 to 30 branches over the first nine months of Mr Collina’s tenure. ATF is also seeking to optimise credit processes. Corporate clients complained that loan application processing slowed almost to a halt after UniCredit’s takeover of ATF, as the Italian bank sought to impose new underwriting standards in a deteriorating market.
“We were not so efficient in giving an answer to the customer; either yes or no. We launched a project in 2010 to reduce the time to yes and the time to disbursement, and I have reiterated the concept that we do not always have to answer yes, but we do have to answer as soon as possible,” says Mr Collina.
Slippery slope
Even some banks that initially appeared to weather the crisis well – posting profits in 2009 when the economy dipped into recession for three quarters – suffered negative surprises in 2010. A change of ownership at Nurbank in April 2010 resulted in the bank recording a loss of $476m in 2010. The bank had originally projected a profit for the year, but the new owners reclassified much of the loan portfolio and gave Nurbank a $650m capital injection.
Bank CenterCredit (BCC), which has become the country’s third largest by capital after the fall of BTA and Alliance, tipped to a loss of $210m in 2010. However, Timur Ishmuratov, a member of the management board, says that this was mainly due to the one-off provisioning on two large corporate clients in the food processing and agribusiness sectors.
“We have already returned to profit, and we expect that the reserves created on those two customers will be recovered either this year or next. These clients had temporary problems, and by restructuring the loans we will be able to achieve full recovery,” says Mr Ishmuratov.
BCC’s loan portfolio grew 6% in the first half of 2011, and Mr Ishmuratov says the bank is targeting 10% to 15% loan growth by the end of the year. The bank is retaining its large 200-branch network, while using technological input from its 42% South Korean shareholder Kookmin Bank to centralise back-office operations and design more sophisticated retail banking products.
Funding challenges
A key advantage shared by BCC and Halyk is their strong funding position. Before the crisis, the Kazakh banking sector developed an extraordinary appetite for wholesale funding, with the loan-to-deposit ratio for the top five banks reaching 233% in 2007. When funding markets slammed shut, this triggered a painful deleveraging process, and the loan-to-deposit ratio for today’s top five is just 124%.
However, that level disguises wide variations between the banks that have been seen as safe havens by depositors, and those that remain relatively exposed to financial markets. Kazkommertsbank (KKB), the country’s largest, has cut its loan-to-deposit ratio from 220% in 2007 to a still relatively high 150%. This has been done by paying down maturing Eurobonds and amortising the loan portfolio, which dampens the bank’s growth potential.
The bond priced tight to our yield curve, and in fact it was the best pricing for us since 2007, when the bank was rated two notches higher, as investors looked through the country ceiling on Kazakhstan to judge the credit quality of the bank
By contrast, BCC benefited from the positive perceptions engendered by the combined shareholdings of Kookmin and the International Finance Corporation (which owns 10%), and by its limited exposure to distressed real estate. While the bank ended 2007 with a loan-to-deposit ratio of more than 200%, today this has declined to little over 100%. Mr Ishmuratov says retail customers are putting more money on deposit as they no longer want to invest in real estate.
“The deposit inflows and low loan growth were putting pressure on net interest margins, but we increased the margin to 2% in the first half of 2011 by growing the loan portfolio and reducing the interest rates on deposits,” says Mr Ishmuratov.
Back in the game
Halyk, the legacy Soviet era savings bank, always retained a strong retail deposit base, with its loan-to-deposit ratio at just 111% in 2007. That has now declined to 77%, again presenting the bank with a challenge to find new lending opportunities. The strength of its balance sheet is such that the bank became the first to re-enter the Eurobond market since the crisis, with a $500m 10-year issue in January 2011.
“The bond priced tight to our yield curve, and in fact it was the best pricing for us since 2007, when the bank was rated two notches higher, as investors looked through the country ceiling on Kazakhstan to judge the credit quality of the bank,” says Halyk's Ms Shayakhmetova.
She says the bank is keen to obtain more dollar funding, because it already has substantial liquidity in Kazakh tenge from its deposit base. Local interest rates are likely to rise, prompting Halyk’s clients to request dollar-denominated loans.
Playing it safe
Second-tier Kazakh banks had been less aggressive in the run-up to the crisis, and are therefore in a healthier position. Tsesna Bank is distinctive because it originated not in the commercial centre Almaty, but in Astana. The northern Kazakh town of Astana was transformed into the country’s capital city in 1997, and is the fastest-growing city in central Asia. Tsesna’s loan-to-deposit ratio was less than 130% in 2007, and is now below 90%.
Although its asset base is less than 10% that of Halyk or KKB, Tsesna is now looking to push into the country’s top 10 banks, recording 29% asset growth in 2010 and increasing its capital by 32% to maintain expansion. Deputy CEO Samat Balkenov, a former Citi banker, says that the Kazakh subsidiary of HSBC is the only bank growing faster than Tsesna.
The growth rate might look risky, but we have achieved it by attracting high-quality clients who have good cross-selling potential
“The growth rate might look risky, but we have achieved it by attracting high-quality clients who have good cross-selling potential. We stopped funding long-term investments at the peak of the crisis, but what we never stopped was providing working capital to customers who needed it. They did not forget that, and some of those who were let down by their own banks became our clients,” says Mr Balkenov.
The bank aims to expand its presence outside the north, especially in Almaty, where it already has a 5% market share, and to increase its retail banking activity. Tsesna provides corporate banking services to major auto producers and importers including Skoda and Honda, and is now aiming to secure auto lending business through their dealership networks.
New riser
Another bank on the rise is Metrocombank, which changed ownership in 2010. The entrepreneurs who built and sold ATF Bank bought Metrocombank and in March 2010 installed as CEO Guram Andronikashvili, the Georgian investment banker from JPMorgan who had advised them on the sale of ATF to UniCredit in 2007.
The new owners had anticipated problems with the bank’s retail loan portfolio at purchase, because the previous owners had expanded aggressively into unsecured retail lending right at the height of the boom in 2007. A special audit in the first half of 2010 provisioned 80% of the existing portfolio and recapitalised the bank, allowing a fresh start.
“What was attractive about Metrocombank was its existing infrastructure – including 16 branches giving us a presence in every major regional centre – as well as the licence, IT infrastructure and the connections to other banks to facilitate payments,” says Mr Andronikashvili.
The new strategy focuses on mid- and large-cap banking and trade finance, and Mr Andronikashvili says the bank will not seek to compete on price, but rather on quality of service. He is telling staff that small and medium-sized enterprises (SMEs) benefit not just from financial products, but also from advice to improve their cash flow management.
“We can explain to businesses that if they improve their financial management and disclosure, it lowers the risk for the bank so we can give them access to cheaper funding. And we want to compete on the speed of our service, because the difference between a one week or one month review time for loan decisions is important for an SME,” he says.
Competitive market
Like Tsesna, Metrocombank has been acquiring staff and business from troubled larger banks. Most of BTA’s trade finance team – one of the few areas where it still had a strong franchise – joined Metrocombank in 2010. And the regulator’s new minimum capital requirement of Tg10bn ($68m) from July 2011 may close down some of the smallest banks.
But the consensus is that Kazakhstan remains a competitive market, especially for the small pool of high-quality corporate clients. KKB dominates services for the cash-rich resources companies, and other banks are all pursuing similar targets, including the larger end of the SME scale, agribusiness and trade finance.
“Kazakhstan is not enormous in population terms, and it is an economy that is dominated by a handful of sectors and a handful of companies in those sectors. There is a growing middle class, but not yet a large one, and therefore the need for a lot of sophisticated banks to provide banking services is probably not there,” says Mr Tesseyman at the EBRD.
Aggressive strategies
Finding itself with excess capital and funds, Halyk Bank became the first of the four that received capital injections from Kazakhstan’s sovereign wealth fund, Samruk-Kazyna, to return some of that capital. The bank repurchased the sovereign wealth fund’s 20% common equity stake for Tg33bn in May 2011, but even after the buy-back, Halyk still finds it hard to put its liquidity to work.
“We have seen some banks offering five-year tenge loans at about 6%, but I would guess that the margins on them are negative, and we are not going to rush into that kind of business. We want to maintain due diligence standards and profitability on every loan,” says Halyk's Ms Shayakhmetova.
We want to maintain due diligence standards and profitability on every loan
Kazakh bankers say the local subsidiary of Russia’s Sberbank is particularly aggressive. The bank has announced plans to issue a Eurobond for up to $700m some time in the next year. This drive for organic growth casts doubt on the willingness of Sberbank to buy the remains of BTA – no other bank has so far expressed an interest in BTA publicly.
Mr Collina at ATF is looking for new business by offering unsecured loans for university students, on the basis that their earnings potential makes them reliable borrowers. And of course, non-interest income will be vital. Halyk’s large retail network gives it an edge, with fee and commission income accounting for up to 30% of the total. Foreign exchange brokerage fees and insurance premiums both grew by about 20% in 2010.
