The biggest face onerous debt repayments in unpropitious domestic circumstances after a splurge of Eurobond issuance. With little activity about, only Halyk seems to be flourishing. Elliot Wilson reports from Almaty.
ON THE SURFACE at least, rumours about the demise of Kazakhstan’s debt capital markets appear to have been greatly exaggerated. In early April, Halyk Bank, the country’s third-largest lender by market capitalization, surprised many by launching the first Eurobond issuance by a Kazakh lender since July 10 2007.
The $500 million five-and-a-half-year bond, underwritten by JPMorgan and UBS, came at a hefty premium, with a 9.5% yield. It attracted strong ratings – a BB+ by Standard & Poor’s and a Baa3 investment grade by Moody’s – and showed that Halyk Bank at least has access to global debt markets. It was also the first Eurobond issuance by a CIS region lender in 2008.
Dauren Karabayev, deputy chairman of the board at Halyk, tells Euromoney that the bank "wanted to leave something on the table" for investors. "The premium over the secondary curve that we paid was higher than in previous deals," he says. "Still, the transaction was very good in terms of price and tenor, and demonstrated our ability to raise financing in the international capital markets. This marks a point where we should see if the market has turned and become favourable to Kazakh banks."
Halyk’s exuberance isn’t wholly shared with the rest of Kazakhstan’s banking market. Global market turbulence and the credit crunch have not helped, but Kazakhstan’s leading banks are now paying the price for a debt-raising binge that lasted for most of the past three years, and came to a head in January 2007, when local lenders issued five investment-grade Eurobonds worth a combined $2.6 billion. The following month, Kazkommertsbank (KKB) issued a whopping $1.656 billion investment-grade Eurobond underwritten by ABN Amro, Dresdner Kleinwort and JPMorgan.
It was heady stuff, but such binges are often followed by starvation diets. By April 15 2007, Kazakh lenders had sucked in $5.81 billion from global investors, just from Eurobond sales. In the same period this year, Halyk Bank’s $500 million bond is flying solo.
Those Kazakh lenders with the greatest exposure to foreign debt – KKB, BTA Bank (formerly Bank TuranAlem) and Alliance Bank – face a daunting repayment plan. The first two are probably worst off. KKB started 2008 owing $2.3 billion, about $600 million of which it paid out in the first quarter, according to bank executives. BTA Bank is in hock to the tune of $1.2 billion, although it repaid $530 million of that total in the first three months of the year, with the remaining $670 million set to be repaid in October and November 2008. Analysts reckon that Kazakh banks owe $13 billion in foreign debt repayments this year alone.
Jason Hurwitz, the director of financial sector research at Visor Capital, Kazakhstan’s leading investment bank, says KKB, BTA and Alliance are the banks facing the biggest liquidity concerns. Repayments are forcing them to trim existing loans or cut new and existing clients altogether. "Most of the banks are sacrificing the size of their loan books in order to repay their debts," he says. "BTA and KKB targeted loan growth of 20% to 25% this year, and we think that that is unachievable. Any expansion of their credit portfolios in 2008 could prove challenging." Analysts say the two banks are most likely to see their loan books expand at a rate in the low single digits. The worst-case outlook is that loan growth at the two will remain flat this year, or even negative.
Lost traction
Executives at the banks in question agree that banking sector growth will lose traction in 2008, although they are convinced that the slowdown can be contained.
George Iosifyan, managing director at BTA Bank, predicts that his company’s loan book will grow in 2008 at about double the rate of GDP – about 10% to 14%, adding that "under no assumption will growth turn negative". But as a warning to any investor expecting the bank to return to its former freewheeling days, Iosifyan admits that "the growth rates that we have seen in the past will be reduced significantly and won’t be repeated".
Maral Amrina, head of financial institutions at KKB, says the bank’s total balance sheet will "decline by 5% to 10%" in 2008, with the loan portfolio shrinking at a commensurate rate. KKB has also ruled out raising any further capital in 2008, says Amrina, who notes that marginal growth in the bank’s domestic deposit base will "only partially replace the international borrowings coming due this year".
Rising non-performing loan rates are another serious cause for concern, particularly with Kazakhstan’s economy set to grow at just 5% to 7% a year between now and 2013, down from 9%-plus earlier this decade. NPLs are expected to rise by about 4% this year across the banking sector, and analysts fear that default rates could be particularly damaging for BTA and KKB, both of which are highly exposed to the construction sector.
KKB’s Amrina is also fearful of rising default rates, admitting that failed loans as a percentage of total lending will "continue to grow in 2008, reflecting the sharp slowdown in loan growth, and potential troubles in several industries like construction, which has already affected the level of NPLs". Yet Amrina insists that rising default levels are "manageable". KKB’s NPL ratio stood at 3.3% at end-2007.
BTA Bank predicts that its NPL ratio will rise by nearly two percentage points this year, albeit from a low base of just 0.7% at end-2007, reaching 2.5% by the end of 2008. The bank’s Iosifyan says pointedly: "The situation with bad loans is very fluid, and they can snowball at any given time, so we are keeping a close eye on the situation and managing it accordingly."