Despite avoiding the worst effects of the global credit crunch, Kazakh banks will need to undertake reforms in the coming months if they are to regain trust and confidence, concludes Standard & Poor’s credit analyst Ekaterina Trofimova. She says: "The Kazakh banking system has reached a decisive point in its development, with the continuing turbulence highlighting the need for a deep transformation of business practices, strategies and regulation."
She adds that Kazakh banks’ creditworthiness remains constrained by limited disclosure of ownership, a corporate sector in need of restructuring, high lending and funding concentrations, rapidly built unseasoned loan portfolios, substantial dollarization of operations, tight capitalization and untested risk management.
Although acknowledging that through a combination of good risk management, internal liquidity buffers and government and shareholder support, Kazakh banks have so far coped well with the initial impact of the global credit crunch, Trofimova says that their asset quality is increasingly threatened by a slowdown in economic growth and the tight domestic credit and liquidity conditions. These, she says, are likely to persist throughout 2008 and even possibly into 2009.
"We think that uncertainty and the continued risk repricing will keep liquidity tight, credit spreads wide, and volatility elevated in the Kazakh banking sector, at least for the near future," she says, adding that the longer the downturn persists, the higher the probability that it will hurt bank fundamentals, leading to a greater potential for negative rating actions on Kazakh banks. "Painful though this correction is in the short term, however, it ultimately should be healthy for the financial sector, leading to more sustainable business strategies, more developed domestic funding and more conservative financial profiles."
Trofimova says that any return to large-scale international borrowing by the country’s banks would be viewed negatively by S&P. There are signs, however, that increased foreign bank interest in Kazakhstan is helping to underpin valuations in the sector. "There has been a pick-up in interest in the sector and all bank shares are up from the lows of 2007," says Rinat Gainoulline, Kazakh equity strategist at Alfa Bank in Moscow.
"Kazakh banking stocks were significantly oversold last year but with the increasing M&A activity in the sector, we are seeing investors starting to buy again." He adds that it is still too early to talk of a wholesale recovery of portfolio investor confidence in Kazakh banks, though, as concerns about declining asset quality and the threat of a global recession persist.
Foreign banks continue to enter the Kazakh banking market as strategic investors, however, with Korea’s Kookmin Bank set to buy an initial 30% stake in Bank CenterCredit for $634 million, with an option to acquire an additional 30.1% holding in the future.