Kazakh banks are attempting to recover after a period in which the economy has been hit by devaluation and low to zero growth, a slump resulting from falling oil prices and stubbornly low commodity prices, on which the Kazakh economy is heavily dependent. Structural failings such as high levels of non-performing loans (NPLs) and an overbanked sector have exacerbated the banks’ problems, but now Michael Eggleton, CEO at Almaty-based Eurasian Bank, says: “We are seeing some light after an exceptionally difficult period.”
Marc Holtzman, CEO of Kazkommertsbank (Kazkom), the country's second largest bank by Tier 1 capital, says a team of bankers and government officials is tackling the bad loans problem, and bankers are in complex discussions with the newly appointed prime minister, Bakhytzhan Sagintayev, and first deputy prime minister Askar Mamin. It is understood a resolution based on the Spanish model of a publicly owned ‘bad bank’ will be implemented in the first half of 2017.
Ratings upgrade
Kazakhstan’s banking sector was partly restructured in 2015 when three banks that had been hit by the 2008 economic crisis and nationalised were passed over to private management. This restructuring appears now to be bearing fruit, as rating agency Moody’s recently upgraded ForteBank.
ForteBank, whose majority shareholder is Kazakh businessman Bulat Utemuratov, acquired two ailing banks from the government in 2015. Moody’s says the merger of Forte with Alliance Bank and Temir Bank has been effective, and it has upgraded Forte’s long-term local and foreign currency deposit ratings to B3 from Caa1 and its senior unsecured debt ratings to Caa1 from Caa2.
“The upgrade of ForteBank’s ratings reflects reduced concerns related to the complex integration of the group’s three predecessor banks following their merger in early 2015 and its limited track record of operations. The bank has demonstrated stable operational performance with progress in the recovery of problem loans, improved recurring profitability and reduced refinancing risks,” says the agency. However, it added the caveat that “the high level of problem loans and low provisioning coverage remain rating constraints, despite the high reported capital ratios”.
A merger between Kazkom and BTA, the latter of which was rescued by the government after a $7bn fraud case, is still under way, according to Abay Iskanderov, chief operating officer at Kazkom. “BTA still exists legally. Legally we are not related; we are sister companies and we have the same shareholder in Kenges Rakishev, a local businessman. We regard BTA as a borrower of Tg2300bn [$6.9bn] from Kazkom. We are fully focused on integrating BTA into the single bank.”
BTA is expected to strengthen Kazkom’s retail customer base. Mr Holtzman says: “Kazkom had been primarily corporate and BTA, which has merged into us, had been retail. [The merger has led to a change in] culture so that we become both a retail and a corporate bank. If you can become a retail bank, it diversifies the risk level.”
The NPL problem
Government action is required to deal with bad loan portfolios, according to Mr Holtzman. However, this will very probably require public sector support and shareholder pain. “Banks could increase lending and make the economy vibrant again [if] the government would fulfil its role of providing liquidity and freeing up the system,” he says. “Only the public sector can provide this role. The vitality of the economy requires it. It must happen sooner rather than later. Some smart people in the public sector are working on the project. It is reasonable to expect something to happen in the near future.”
Mr Holtzman, an American, was brought into the bank in April 2015 at the specific request of Kazakhstan president Nursultan Nazerbayev, who said he hoped a non-Kazakh professional banker could bring some fresh thinking to the country's economic management. Previously he had worked in private equity in the central Asian region. Mr Holtzman expects the state to take over the NPLs at a discount to their value, and transfer them to the government’s balance sheet. A separate institution where they are worked down will be required.
“A lot of the balance sheet at Kazkom is made up of grade A prime Almaty real estate. Is it better sitting on our balance sheet until the market recovers, or in a public sector company? This real estate is of great value and would not be written down to nothing. The government entity would give some reasonable discount, not requiring a bank to take too big a hit to the balance sheet,” he says.
Shareholders would be required to “take some pain” to obtain public and government support for the plan, he adds. “No one wants or will allow a situation where the shareholders get a bailout without having to pay a big price and experience a lot of pain,” says Mr Holtzman.
Call for convertibles
Other voices are pressing for the government to issue convertible shares, with banks under pressure to work down the loan portfolio. The bad bank concept is particularly attractive, says Mr Holtzman, because in due course it could be floated, providing the government with a substantial return.
He points to several Chinese models. “You can recover most of the investment to stimulate the sector. In some cases, investors in bad banks have been able to make serious returns in the preferred shares taken by governments,” says Mr Holtzman.
The National Bank of Kazakhstan, the country's central bank, has said that an average of 8.2% of all loans are non-performing across the banking system and a recent report from the bank showed that NPLs have grown by 10% over the past year to September. Yerzhan Tajiyakov, chairman of Astana-based Tsesnabank, says: “We expect NPLs to grow in the banking sector of Kazakhstan due to the volatility of the financial and currency markets, the latest currency correction [being] in August 2015. This is also the result of the reduction of lending volumes.”
The weight of bad loans is skewed towards the largest banks, with Halyk Bank having an NPL ratio of 11%, Bank CenterCredit 9.8% and Kazkom 9.7%. Of the larger banks, Tsesnabank appears to managing the situation the most successfully, with an NPL ratio of 5.2%. All the banks are engaged in reducing bad loans, however.
Vladislav Lee, CEO at Almaty-based Bank CenterCredit, says: “We have an instrument whereby we set up a daughter company into which we can transfer bad loans. This company benefits from tax exemptions. We are also selling down loans. There is a whole set of measures to deal with NPLs.”
At Halyk Bank, CEO Umut Shayakhmetova says: “We are busy working on selling our collateral and we are writing off some loans. At the same time, our loan portfolio has grown and that will lead to a decrease in the total levels of NPLs.” Mr Holtzman says he goes through Kazkom’s 30 largest bad loans every week to check their status, and expects most can be worked down over time.
SME strategy
In addition to managing bad loans, banks have responded to the crisis by curbing costs and increasing their marketing efforts. Halyk Bank has put particular focus on costs, and now has a cost-to-income ratio of 30%, “one of the best” says Ms Shayakhmetova.
Bank CenterCredit has employed professional services company KPMG in an attempt to boost the bank’s market share among small and medium-sized enterprises (SMEs). It currently has 6.5% of the Kazakh SME market but Mr Lee expects this to rise to 10% by 2020, saying: “We want to have a more aggressive position in the SME market. We have already adopted a new IT platform to assist that expansion.”
Government support is available to banks seeking to increase their share of the SME sector, in line with its plan to double the number of SMEs over the next five years. Kazkom is undertaking a similar drive for a bigger stake in the SME market. Mr Iskanderov says: “We are trying to rebalance the lending portfolio structure to increase retail lending, and we are trying to get bigger in SMEs. We are only the sixth largest bank in SMEs but we are planning to double our share, from a current level of $400m to $1bn of the lending portfolio. The market is there. Competition is going to grow for the existing market.”
Kazkom has employed management consulting firm McKinsey to drive through efficiencies in the branch network, according to Mr Holtzman. “We are working on a huge system-wide customer-centred transformation. We have instituted a pay-for-performance, key performance indicator-specific set of goals and objectives, which have never been done in the bank before,” he says. Meanwhile, at Tsesnabank improved risk management and internal controls are being handled by professional services firm EY.
External buys
Efforts to build revenue outside Kazakhstan have seen the acquisitions of some foreign banks. In September 2016, Tsesnabank bought Russian Plus bank. Mr Tajiyakov says: “This will help us to activate our position in commodity turnover between Russia and Kazakhstan. This will also be beneficial for our clients who have counterparties in Russia. This will ultimately lead to increased revenue, particularly with non-interest and commission incomes, both of which will increase their share in our income structure.”
A far-reaching partnership between Kazkom and China UnionPay promises to be the bank’s spearhead into Asia, according to Mr Holtzman. “We are building relationships with Chinese companies and banks, with the strong support of the president and the prime minister,” he says. Kazcom has created a joint venture with China UnionPay to issue credit cards, and numbers are expected to rise from 40,000 in the current year to “several hundred thousands” in succeeding years, according to Mr Holtzman.
He adds that the joint venture will enable the bank to take advantage of flows of cash worth $5bn a year on the grey, or parallel, market between China and Kazakhstan, according to figures from China Construction Bank.
“If we could bring half of that into the formal economy and obtain a 1% credit card fee, that’s $25m in fees for our bank. We have a strong alliance with China UnionPay. We are just starting the relationship,” says Mr Holtzman. He expects the joint venture – and others with various Asian entities – to include an expansion of Kazkom’s interest in insurance.
Tenge devaluation
Kazakhstan’s most recent economic crisis occurred in August 2015 when the tenge was devalued, precipitating a flight to the dollar. This hurt the banks, says Eurasian Bank’s Mr Eggleton. “The most recent devaluation was a shock to the population. Things were difficult; banks were caught in the middle. Interest rates shot up, people were buying dollars and banks were maintaining their positions at huge cost.
“The population was buying dollars or putting their money under the bed. The banks didn’t have the capital to hedge their position and there was danger of banks collapsing. There was certainly some emergency overnight funding from the government to keep them going. That said, it was more of a liquidity crisis than a solvency crisis. The government was willing to help banks as an interim measure.”
Tenge-denominated corporate loans fell in the course of the crisis from 80% of portfolios to 30% and lower, while retail customers deserted the tenge altogether. Mr Eggleton says confidence in the tenge is recovering to a more normal 55% level. Interest rates on loans remain at 15%, placing a burden on investment in the real economy. “We are not yet at the point where business people are ready to borrow to build their business. They have to be able to borrow the tenge at 10% or 12% for the economy to start revving,” he says.
Ms Shayakhmetova says corporates have been quicker to revert to tenge, and half all corporate loans are now tenge denominated. Retail loans remain at levels of 70% to 80%, after reaching 90% at their peak. “The tenge-dollar rate is more stable and we are not now seeing people switching their salaries into dollars as soon as they receive them,” she says.
Bond issue in offing
Ms Shayakhmetova gives a strong signal that Halyk Bank will shortly return to the Euromarkets with a bond issue of between $300m and $500m, in a further sign of confidence in the Kazakh banking system. The bank currently has two outstanding bond issues: the first (of $700m) matures in 2017 and has a 4.9% yield, while the second matures in 2021 and has a 5.2% yield.
Some rebound in the economy as well as the banks is expected by the forecaster Trading Economics, which observes that the Kazakh economy, having fallen to a negative 0.2% in January 2016 (from a peak of 6% GDP growth in January 2014), is now set for a rebound to record positive growth as of July 2016.
The critical factor in determining the country’s continued GDP growth, however, is the stabilisation of oil and commodity prices – and that is something that neither the banks nor the government can predict or guarantee.
