Kazakhstan – Kazkommertsbank

A SUPPLEMENT TO EUROMONEY – April 1997

Founded in 1991 as a 100% private commercial bank, Kazkommertsbank has, within a short period of time, grown into one of leading banks in Kazakhstan. Kazkommertsbank is active in foreign trade, corporate finance and privatization consulting and advisory businesses. The bank’s mission is to provide banking services at an international standard and local financial expertise to foreign partners. Kazkommertsbank’s network of 15 branches covers Almaty and several regional centres. The bank has stakes in a number of Kazakhstan’s joint venture banks including ABN-Amro Bank Kazakhstan and KZI Bank. Kazkommertsbank is also a financial operator and a primary bank for Air Kazakhstan National Airlines, Kazak National Railways and Kazatomprom, the state uranium monopoly. Additionally, Kazkommertsbank is a loan administrator for the EBRD, the World Bank and the Asian Development Bank in Kazakhstan. The bank is connected to SWIFT and Reuters and is a member of Europay/MasterCard and Visa International. Like the Republic of Kazakhstan, Kazkommertsbank was assigned a B-minus long-term international debt rating by Thomson BankWatch – BREE.

Banking in Kazakhstan

Last year was one of macroeconomic stabilization and modest economic growth for Kazakhstan. The country was assigned its first sovereign ratings from Standard & Poor’s, Moody’s and IBCA: BB-minus long-term and B short-term for foreign currency debt. The ratings were supported by the country’s successful shift to a market-based economy combined with the sharp tightening of fiscal and monetary policies. Hyperinflation was reduced to 29% at the end of 1996 (compared to 1,256% and 60% at the end of 1994 and 1995 respectively). For 1997, 2% economic growth, a 17.5% inflation rate and 3.16% state budget deficit are forecast.* To establish confidence in the country’s financial system, Kazakhstan launched its first Eurobond in December 1996. The $200 million deal was three times oversubscribed and was priced to yield 350 basis points over US Treasuries ­ inside the trading spread on the Russian Federation’s $1 billion Eurobond. The launch spread paid testimony to Kazakhstan’s growing stock in the eyes of international investors.

In the monetary field, the major challenge for Kazakhstan was to create a modern banking system along global lines and it is evident today that it has made significant advances in this direction. Kazakhstan has a two tier banking system comprising the National Bank of Kazakhstan (NBK) and second tier banks. The law on banks and banking in Kazakhstan, which came into effect in January 1996, separated banking activity into investment and commercial areas. Commercial banks are not permitted to deal with or invest in equity except that of banking institutions. Investment banks in turn are prohibited from maintaining customer deposits except for time deposits of other banks. However, the investment banking base is currently limited by the securities market development in Kazakhstan. Foreign banks’ participation is currently limited to 25% of the aggregate stock, but the National Bank announced that there will be market liberalization in 1998.

According to foreign experts, Kazak banking supervision is more advanced than in other CIS countries and continues to benefit from the focused attention of the National Bank of Kazakhstan. Stricter regulations which approach Basle G10 norms were introduced in 1996. As part of its plan to create a core of top quality commercial banks, the NBK established a fast-track plan for leading Kazak banks such as EximBank Kazakhstan, Kazkommertsbank and Narodny Savings Bank. Fast-track banks were required to institute accrual accounting and to ensure that their internal accounts were up to international accounting standards (IAS) by July 1996, and also to join a bank deposit insurance scheme and have audits in line with IAS.

Despite this considerable progress, Kazakhstan’s banking sector remains fragile. Banks operate in a difficult banking environment characterized by tight liquidity and asset quality concerns. Public sector banks are burdened with high levels of non-performing loans related to state-directed lending in past years. In addition, the portfolios of many private banks have performed poorly following the stabilization of the macroeconomic environment.

With the combined problems of capital adequacy and insufficient management skills, 1995 and 1996 were years of contraction for the banking sector. Nearly a quarter of Kazak banks were closed or merged during 1996. Although the National Bank of Kazakhstan has intervened to support some of Kazakhstan’s larger banks, it has stated that no bank is guaranteed protection from failure. As an example of this fact, the National Bank bailed out Turan Bank and dealt harshly with KRAMDS Bank, withdrawing its banking licence and initiating liquidation procedures.

To improve capital adequacy levels, the National Bank of Kazakhstan has asked banks to introduce recapitalization plans. Kazkommertsbank announced a $27.6 million share issue in November and some $20 million worth of shares had been placed as of January 1 1997. Consequently, the bank’s BIS capital adequacy ratio was 15.6% at the end of November 1996.

Recent Developments

The first issue of Treasury bills in April 1994 gave birth to Kazakhstan’s government bond market and allowed banks to improve their asset quality. Currently the Kazak government bond market consists of Treasury bills (GKOs), National Savings Bonds (NSOs) and National Bank of Kazakhstan notes. At present, foreign investors have access to GKOs and NSOs. The National Bank of Kazakhstan is the central depository for GKO issues and all GKO deals are handled through a primary dealer acting as a subdepository.

Custody business is limited by an unsophisticated securities settlement and processing system, and the dematerialized form of securities in Kazakhstan. In line with the development of a modern securities market, the National Securities Commission plans to grant licences for custody and fund management.

The Kazak banking system is being actively integrated into the world system. A number of banks are connected to SWIFT and Reuters and are members of VISA and Europay as well as having marketing agreements with American Express. Kazkommertsbank is one of two Kazak banks included by the International Chamber of Commerce in the list of banks which follow Uniform Customs and Practice (UCP) for documentary credits. The Kazak Bankers Association plans to formally acknowledge its adherence to the UCP in the near future.

Two commercial banks, Kazkommertsbank and CentreCredit Bank, have obtained EBRD funding for twinning contracts under the Financial Institutions Development Programme (FIDP). FIDP is designed to improve the quality of banking operations in assistance with recognized European banks. Kazkommertsbank’s twinning partner is Crédit Commercial de France.

The successful Kazakhstan Eurobond issue established the country’s credit history and Kazkommertsbank was the first Kazak bank to apply to Thomson BankWatch-BREE for international credit ratings. BREE specializes in rating financial institutions in eastern Europe and the CIS and it assigned a B-minus long-term international debt rating to Kazkommertsbank.

Kazkommertsbank’s operations

Kazkommertsbank’s core corporate customers are private holding companies, each with diverse subsidiaries, as well as state-owned industrial companies, foreign companies and joint ventures. The bank has also successfully built a trusted relationship with the Kazak authorities. Kazkommertsbank was named as the official adviser to the Kazakhstan government on the restructuring and privatization of the country’s oil and gas sector. Kazkommertsbank was also appointed as the issuer of promissory notes to finance the grain procurement programme of the Kazakhstan government in 1995 and financial agent of the 1996 programme. In addition, Kazkommertsbank was named the trust manager for Kazak National Airlines and acts as a primary bank for uranium producer Kazatomprom and Kazak National Railways.

The bank also acquired the government’s controlling stakes in two industrial Kazak banks: Kazenergoinvestbank and Gazprombank. Kazenergoinvestbank and Gazprombank have five branches and one branch, respectively. The acquisition of these banks has contributed to the improvement of the Kazkommertsbank’s client base and the expansion of its presence in the regional and industrial centres of Kazakhstan.

The bank’s financial performance has proved the value of Kazkommertsbank’s policy of getting to know its customers well. Unlike its peers, Kazkommertsbank has fewer asset quality problems as it did not inherit a high level of non-performing loans. However, as of the end of November 1996 loan loss reserves had been accumulated for around 10% of Kazkommertsbank’s total lending which reflects Kazakhstan’s high risk banking environment and the need for adequate provisioning.

Kazkommertsbank is actively engaged in trade finance. In 1996 the amount of guarantees, letters of credit and lending commitments issued by Kazkommertsbank relating to foreign trade increased 10-fold compared to 1995. A number of foreign correspondent banks had established credit lines to KKB, primarily for letter of credit and documentary transactions.

Kazkommertsbank’s securities transactions are limited, but expanding. Kazkommertsbank is an authorized primary dealer and covers a substantial share on the GKO primary and secondary markets. It is also the financial agent for NSO placement and market-making. The bank managed the offering of Pavlodar municipal bonds in March 1996. Kazkommertsbank also conduct investment banking activities through its associated investment company Global Kazkommerts Securities, Inc.

Kazkommertsbank is active in Kazakhstan’s privatization process too. Together with Merrill Lynch, Price Waterhouse and Banque Paribas, Kazkommertsbank was named as an official adviser to the government of Kazakhstan on privatization and restructuring of the oil and gas industries. Kazkommertsbank also provides advisory services on privatization in the mining, metals, telecommunications, transportation and power sectors. Related companies are involved in the privatization and trust management of state-owned industrial enterprises.

In line with its policy of expanding cooperation with leading foreign banks and financial institutions, Kazkommertsbank together with the largest Turkish state bank, TC Ziraat Bankasi, established KZI Bank (Kazkommerts-Ziraat International) in 1993. In 1994 Kazkommertsbank was also a founding partner in ABN-Amro Bank Kazakhstan, a joint venture with ABN-Amro Bank and the International Finance Corporation. Kazkommertsbank has a 29% stake. ABN-Amro Bank Kazakhstan is the only western bank actively working in the Kazakhstan market which provides a full range of banking services on an international level. Kazkommertsbank has therefore been able to expand its foreign trade-related financing which is much in demand by companies in Kazakhstan. Kazkommertsbank and Global Securities Inc of Turkey are also establishing a joint investment bank on the base of investment company Global Kazkommerts Securities. The bank also plans to establish a joint leasing company with the help of the EBRD and the IFC.

Kazkommertsbank has successfully found foreign strategic partners for a variety of projects and places great emphasis on international cooperation. The bank recognizes clearly that the Kazak banking sector will continue to experience dramatic evolutionary changes and has all the typical emerging market problems, including weak management, undercapitalization and asset quality problems. But these challenges also create opportunities for foreign involvement for which Kazkommertsbank has gained an appropriate experience and provides competent local expertise.

*Source: ‘The statement of the government and National Bank of Kazakhstan on economic and financial policies for 1997, December 20, 1996.