By Simon Pirani
Could you comment on the state of Kazakhstan's banking sector? Is the low level of banks' capital base of concern?
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Banks have been growing much faster than the rest of the economy. Average GDP growth over the past five years was about 10% a year, whereas banking sector growth was 40% to 50%. Average banking sector assets rose by 57% last year; Halyk Bank's assets also increased by 57%. The large and medium-size banks are profitable but even this profitability is not a guarantee that they can grow organically: they need more capital.
The banks' average capital ratio in Kazakhstan is substantially higher than in other countries. The financial supervisory authority here requires that banks maintain a minimum level of capital equal to 12% of risk-weighted assets, compared with the 8% required by the Basle Accord. For the banking system as a whole, the ratio is now about 14%; a few years ago it was 20%.
Banks are adopting a variety of approaches to this question. Some are attracting international financial investors: Kazkommertsbank has brought in the European Bank for Reconstruction and Development, which owns a 15% share. At Halyk Bank, we are talking to a potential strategic investor from Europe. Other banks are taking subordinated debt or issuing preferred shares.
So I would say that the limited capital base is an issue, and that banks are paying attention to it. But it's not a serious problem yet. If this growth continues for another two or three years, though, banks will definitely need capital infusions either from existing shareholders, or from new shareholders – whether through strategic partnerships, as in our case, or from IPOs on the international capital markets.
Do you expect further consolidation in the banking sector?
The number of banks has come down dramatically. Twelve years ago it was more than 200; now it is 34, of which 16, almost half, are foreign-owned. There will be more changes in the next 18 to 24 months. One, two or three major foreign banks – either those that are already active here, or others – could come into the retail market and the SME sector. This happened in Moscow in 2004, and in the medium term it could happen in Almaty, Kazakhstan's financial centre, and eventually in other places around the country. That would shake up the banking system and lead to further consolidation. Such market entrants would probably increase competition in mortgage lending and consumer finance, and this would also hasten consolidation.
The mortgage market is seen as one of Kazakhstan's strong points. Why is that?
The mortgage market, of which Halyk Bank has a share of about 30%, really started moving in the second half of 2003. Two factors helped. First was the availability of long-term funding from the pension funds. This means we can issue 10-year bonds and grant 10-year loans, with no mismatch of term and currency. Second was strong legislation and robust implementation by the courts. People know that if they default they will lose their homes. In other countries, in Russia, for example, it's a problem for banks to foreclose on customers, but here the courts have correctly interpreted the law and made banks feel comfortable issuing mortgages.
How large is the mortgage market?
In 2004, the market grew several times over from a very low base, and we expect it to grow by 80% this year. There are now 60,000 mortgage borrowers in Kazakhstan. We estimate that there are three or four times that number of potential customers. Then we will be testing the market's limits.
The pensions system has been important, too, and perhaps exceptional among former Soviet states.
Yes, in this respect we are on our own in the CIS. Kazakhstan is the only country with a funded pension system. There are voluntary pension funds in Russia, Kyrgyzstan and Ukraine. We are ahead of Russia, as we are in the development of the mortgage market. Pension fund assets here amount to 10% of GDP, and in this respect we are 10 times better off than Russia.
Russia started trying to create the framework for a pensions system sooner than we did, in 1997 – but it was delayed, and we succeeded in establishing our system in 1998. Russia made a second attempt to establish a pensions system in 2004, but this was also unsuccessful. I personally believe that the Russian authorities should thoroughly reconsider their whole approach, instead of trying to mend the existing system and preserve parts of it piecemeal.
How would you compare the course of economic reform in Russia and Kazakhstan generally?
Here, there are fewer policy-makers. We had much more political support in pursuing financial goals, both in the mid-1990s and in 2000/01, when most of the reforms were carried out. In Russia, there are many very smart people, very qualified people, who raise pertinent issues. But these then became bogged down in political discussions.
Halyk Bank has two strong competitors in the Kazakh market, Kazkommertsbank and Turan Alem Bank. What difference does that make to your strategy?
First, we wish them luck. Competition is good for our customers and good for us. It keeps us on our toes. We remember the old times: Halyk Bank used to be part of the state-owned savings bank of the USSR, the only game in town. If people wanted to deposit money, they could only do it with us. That was wrong.
Secondly, we shouldn't try to follow or copy our competitors' strategy. We should use our own strengths. We are the oldest bank in the country. We have by far the largest branch network and we are very strong in retail. And so our strategy is very different. We are using our branch network, and our brand, to sell all the products of our whole financial group, not only the banking products but also insurance, mutual funds, leasing products. We are not only the largest retail bank in the country, we also have the biggest pension fund in the country with $1.1 billion in assets, that is, 26% of the market. We have the second-largest insurance company and the second-biggest leasing company. We have a brokerage subsidiary, a private-banking division and we are now working on establishing a life insurance subsidiary. We adopted this strategy in February, and it's working already. It will require a couple more years to implement it.