As Kazakhstan enters its third year of crisis, the long-awaited clarity about BTA Bank and Alliance Bank's restructuring is imminent. Kazakhstan's two other "Big 4" lenders - Kazkommertsbank and Halyk Bank - appear to be stable, but for the sector as a whole the growing burden of problem loans means that things could still get worse before they get better.
The Kazakh government has sought to draw a line under funding for the banks, saying it won't write a blank cheque and supply unlimited funds to shore up the sector. Alliance has already signed a non-binding agreement with its creditors committee and on July 15 announced it had finalised an agreement with the National Wellfare Fund Samruk-Kazyna, under which it will receive an $857m capital injection. An announcement on BTA's debt restructuring - which is being viewed as a significant milestone for both the banking sector and the economy as a whole - is expected in late July or early August.
Meanwhile, both Kazkommerts and Halyk have already received their allocations of funds from Samruk-Kazyna, and the government now holds a minority state in each bank. Both have continued to perform stably, allaying fears voiced earlier this year of another default among Kazakhstan's top banks.
According to Milena Ivanilova-Venturini, director of equity research, banking and finance for Renaissance Capital in Central Asia, concerns that KKB could follow BTA, Alliance and Astana Finance in defaulting on its debt are likely to be unfounded. "Some people are fearful that KKB may either restructure or default, but we don't see it. KKB would need a very good reason if it were to default and, at the end of the day, we do not expect this to happen," she says.
KKB's total repayments due in 2009 amount to $1.3bn. It has already paid off loans due in February and June, and has a $500m Eurobond due in November and a $300m syndicated loan in December.
Halyk's three pillars
Halyk relied more on its deposit base rather than foreign borrowing during Kazakhstan's boom years, and its repayment schedule as such is lighter. Later this year, Halyk will have to repay a $300m syndicated loan in September and a $200m Eurobond the following month. In 2010, it will have to pay off a total of $700m. The next repayments after that are not until 2013 and 2017. "Halyk is fine," says Ivanova-Venturini. "It has made some losses, but repayments for this year are much lower than KKB's."
While it husbands its resources to pay off debt, KKB's focus is on maintaining its position. "Since last year our strategy has been to focus on our existing client base and existing products," Sergey Mokroussov, executive director at KKB, tells bne. "The three pillars of our strategy are asset quality, liquidity management and cost control. We have several cost-cutting programmes. For example, we are optimising our branch network. We are also obviously working to increase our domestic funding, by which I mean trying to attract more depositors."
According to Mokroussov, the bank has a number of initiatives to work with depositors on both the retail and corporate sides of the business. However, he admits, "We do not expect an overall increase in our deposits during 2009, but we are working on maintaining their volume, and, where possible, increasing our deposit base and our number of clients."
On the lending side, Mokroussov is equally cautious, acknowledging that: "We are forecasting that our asset and loan volumes will decline this year in real terms. This is why we are focussing on servicing current clients rather than expansion. We obviously still provide loans, but we expect our loan book will continue to shrink during 2009. Like most banks in the world, we are particularly cautious about making new loans in the current environment."
However, with the fresh injection of capital from its shareholders and the government support, confidence in the bank has increased. Deutsche Bank analyst Bob Kommers forecast on July 10 that the bank's share price would shoot up by as much as 50% by the end of this year.
Halyk Bank was in a more positive position at the start of the crisis due to its reliance on deposits rather than international borrowing as a source of funds. In the first half of 2009, Halyk achieved 23% growth in its asset base - more than double the 10% it initially forecast for the whole of this year. Announcing the bank's first-half results, CEO Umut Shayakhmetova said the bank may show a profit for the whole year, but this will be smaller than in 2008 because of the increase in provisioning.
Ivanova-Venturini notes that Halyk has already been successful in growing its deposit base at the expense of BTA and Alliance, and forecasts a strong performance for 2009.
However, Halyk is also retrenching to an extent, and plans to focus mainly on Kazakhstan, though it will maintain its subsidies in Georgia, Kyrgyzstan and Russia, which together account for around 5% of its total income. The bank has decided to shut down its two subsidiaries in Mongolia - Halyk Dornod and Halyk NBFO - which were set up in late 2007, and to postpone its expansion in Mongolia for at least three years.
Like other Kazakh banks, both KKB and Halyk are having to deal with growing non-performing loans (NPLs), which has become a critical issue for the sector as a whole.
Both KKB and Halyk have seen their NPLs rise this year, along with other Kazakh banks. As of the end of the first quarter, KKB's NPLs increased to 12.2% of its loan portfolio, compared with 8.1% at the beginning of the year. Halyk's were up to 14.6%.
Across the sector, NPLs reached 29% on June 1, according to data from the financial services regulator, AFN, although the data was skewed by the 61% NPL ratios at BTA and Alliance. "The trouble is that with NPLs over 20% and unbelievably high interest rates, there is no consumer confidence," says Darryl Hadaway, managing partner at Deloitte Kazakhstan. "If the banks were to cut some of their losses and restructure, they would take a hit but it would at least build confidence. At the moment it's harder on the companies who do have cash and are still making repayments, because the banks are squeezing out money from them. It's an evil equation and is getting uglier and uglier."
With real estate typically used as collateral, it has been difficult for banks to recoup their losses from defaulting borrowers, since property has lost much of its value in the last two years.
KKB's Mokroussov says the bank has been working with its borrowers. "Since 80% of our loans are to the corporate sector, we spend a lot of time with our corporate clients, prioritising their financing needs and working together to find out how best to help them in this difficult economic environment," he says.
Despite the government injections of funds into the largest banks, the issue of NPLs continues to weigh on the sector and the problems continue to grow month by month. Kazakhstan's banking sector may be about to turn a corner as it gets closer to resolving BTA's and Alliance's debt problems, but there could be many twists and turns before it finally emerges from the crisis.
Send comments to