KAKAKHSTAN'S BANKING ASSETS may be equivalent to only a third of GDP, but the sector has been growing at a rate of 50% a year for the past four years. "The place is booming," says Ray Webber, CEO of HSBC Kazakhstan, one of the three western banks operating in the country. While foreign investors complain of a difficult business climate, Kazakh paper is routinely oversubscribed and retail assets grow at a dizzying rate.
Tight supervision has been the secret of Kazakhstan's banking success. The central bank, the National Bank of Kazakhstan, played the key role in cleaning up the sector in the mid-1990s.
Today, it is a measure of its confidence that it relinquished control over the supervision of the country's financial sector as of January 1 to the Agency for Financial Supervision, under the leadership of Balat Zhamishev, who was appointed to head the body during his second stint as deputy governor.
"Local banks are well managed and well capitalized," says Douglas Kennedy, manager of the Kazakh subsidiary of ABN Amro. "They don't yet have the entire product range that a western bank would have, but they are using conservative practices to deliver." Banking supervision is very tight, even over-controlled, "but I'd rather see that than the opposite", he says. "We have to produce a lot of paperwork, but I'm surprised at the extent to which it actually gets read."
Remarkably, the supervision has created a banking system that is widely perceived as transparent in a society where corruption is rife.
"Most corrupt money doesn't go through the banking system," explains Timur Issatayev, chairman of ATF Bank. "Most corrupt money probably never even comes into Kazakhstan. Also, you have to remember the economy is still very cash-based."
Today, some regulations are more stringent even than those recommended by the Bank for International Settlements. For instance, BIS recommends a minimum capital adequacy ratio of 8%, while the National Bank of Kazakhstan requires 12%.
"Kazakhstan has one of the best-regulated banking sectors in the emerging markets," says Stephen Evans, an analyst with ING Capital Markets. "It is particularly stringent in limiting exposure to shareholder-related borrowers, which makes it almost unique among developing countries."
Banks flourished in Kazakhstan in the chaos that followed the collapse of the Soviet Union. At the peak in 1993, there were 230.
"Provisions were not created, loans were not classified and the vast majority of these banks played the foreign exchange market with government securities," central bank governor Grigori Marchenko says. When they did lend money, it was without adequate collateral.
In 1995, tax laws that allowed banks to form provisions after taxes were reversed. "Before that," Marchenko recalls, "the banking sector was artificially profitable and the government was happily taxing these profits. When people started sorting out all these things, it turned out that quite a few banks were not profitable at all and were not able to attract or to generate enough capital."
Dozens went bankrupt or lost their licences. Today there are 35 left, including a state export-import bank, a state development bank and, of course, the central bank.
The top four banks account for more than 60% of the system's assets. The largest is Kazkommertsbank, with $2.3 billion. It is widely seen as a trailblazer. Nurzhan Subkhanberdin, its founder, was the first to abandon the top-down culture that pervades both the Kazakh tradition and Soviet practice and to adopt a western approach of hiring the best people and delegating tasks. The bank has published IAS accounts since 1994 and in 1997 was the first Kazakh entity to make an international share offering. This year, the European Bank for Reconstruction and Development bought a 15% share for $30 million. Senior management owns most of the rest.
The next largest bank, with assets of $1.9 billion, is Bank TuranAlem. It was formed in 1997 when the central bank ordered two failed state banks – the old Soviet-era industrial bank and the foreign trade bank – to merge. Raiffeisen of Austria bought 10% and its chairman, Yerzhan Tatishev, owns 20.12 %.
Halyk Bank, the third of the big four, was the former Kazakh branch of Soviet savings bank Sberbank. It was only last year that the state sold its remaining share of 33%.
ATF Bank (formerly Almaty Trade Finance) is the fourth-largest. It was created in 1995 in partnership with two banks – MeesPierson of the Netherlands and FMO, the Dutch development bank. When Fortis bought MeesPierson, it sold its share in the Kazakh bank. "We have retained a Dutch discipline and culture," says chairman Timur Issatayev.
Although the banks at first concentrated on corporate clients, in the past few years there has been an explosion in retail banking.
"We started our retail network four years ago and at that time our goal was to have $20 million to $30 million in retail deposits," says Magzhan Auezov, a managing director at Kazkommertsbank. "Today we have $500 million."
Kennedy of ABN Amro sees this growth as "not a rush to retail but prudent, calculated steps".
Issatayev says: "We are growing very fast, which worries the rating agencies. They rightly point out the extensive growth of bank credit portfolios and the need to establish better and stricter risk management mechanisms."
In the past two years, banking industry management has been focusing on improving these mechanisms.
"Now, we are in major consolidation fever," Issatayev says. Because Marchenko says that the central bank wants to introduce EU-harmonized financial sector regulation by 2007, "there will be further consolidation". Issatayev adds: "I don't see more than 20 banks surviving in five years, including foreign banks."
Kennedy says: "I don't think the big three will buy a lot more banks, given that they control nearly 60% of the assets already.
But in two years, I could see four or five big banks and a few niche players, which for instance service specific groups of companies."
Kazakhstan's credit success, bankers say, is due to two factors – strong banking supervision and a good track record, in that order.