Although the debt restructurings at three of the leading Kazakh banks have now been completed, there are few signs of a meaningful revival in risk appetite among many of the countrys lenders.
According to the latest statistics, although net lending rose by 0.3% in August, it has shrunk by 5.4% over the year, despite the fact that the Kazakh economy expanded by 7.9% over the same period and the full-year forecast is for GDP growth of at least 5%.
Although there are signs that asset quality is stabilizing, with provisions for non-performing loans falling to 33.2%, overall NPLs remain a drag on lending sentiment in the sector.
"We believe that the recently completed BTA debt restructuring and state support programmes will support loan portfolio expansion in the autumn"
Milena Ivanova-Venturini, Renaissance Capital
According to Kazakh financial regulator AFN the level of NPLs in August was at 34.2% for the banking system as a whole and 20.6% excluding BTA and Alliance, two of the banks that had to undertake a debt restructuring.
Tax code revision
There has been welcome news on the regulatory front though, with the announcement that the government intends to amend the countrys tax code so that banks will be able to write off bad loans without additional charges. Bad loans that have to be written off will not be included as part of the banks income. Banks had previously been reluctant to write off loans because of the resulting tax liability on "revenues" from provisions according to the tax regulations. Banks have instead focused on debt restructurings.
In September, for example, BTA finally signed off on its debt restructuring the biggest ever by a lender from emerging Europe cutting its liabilities from $16.7 billion to $4.2 billion. Alliance Bank and Temirbank had earlier signed off on their debt restructurings.
Commenting on the effect on investor sentiment of the debt restructurings, Askar Yelemessov, chairman of Troika Dialog Kazakhstan, says: "The three banks restructurings have been already priced into valuations and will not change investor attitudes much."
He adds, however, that the banking sector has undergone a big deleveraging process over the past few years. Banks foreign debt has been slashed from $45 billion or 47% of GDP in 2007 to $16 billion or 13% of GDP now a welcome development. Furthermore, he says there is now a better understanding of Kazakh banking risk, with investors differentiating between the different banks in the country rather than viewing them all as risky investments.
Another lender, Astana Finance, has published terms for its debt restructuring, which it hopes to complete by the end of the year. Under the latest proposals international creditors (except export credit agencies) will be offered an 88.5% haircut and a cash payout capped at $120 million. Astana Finance expects to write off about $921 million of debt under this option. For domestic creditors, the company proposed a 79% haircut that will allow it to retire around $430 million of debt and issue new subordinated zero-coupon, five-year notes. Export credit agencies, which are owed $272 million, will not suffer any haircut, but the maturities of the debt will be extended to 2025 with an annual interest rate of 1.5%.
Among the banks that have already completed their restructurings the key priority in the short term is to slash the high levels of NPLs, which are running at 75.5% at BTA, 58.1% at Alliance and 51% at Temirbank.
Yerzhan Shaikenov, chairman of Temirbank, says the bank has adopted an ambitious target whereby it is looking to cut NPLs to just 5% by the end of 2012. "Its a huge challenge to cut NPLs by such an amount in such a short time but we dont want to have a toxic balance sheet for the rest of time," he says. He expects that ultimately 80% of the NPLs will be restructured and 15% will be sold off.
Shaikenov says that after restructuring Temirbank, which is now completely independent of one-time parent BTA, will maintain its core focus on retail banking but will also expand its coverage to small and medium-sized enterprises. Although the bank has cut its branch network from 140 in 2007 to 120, Shaikenov says: "We still have the sixth-biggest branch network in the country, which gives us a competitive advantage compared with other second-tier banks."
Although Shaikenov concedes that sentiment towards Kazakh banks was hit hard by the news and terms of the debt restructurings, he claims that theres now no shortage of lender or investor interest in Temirbank. "Banks still want to talk about lending to us and about buying us people view Temirbank as a good investment opportunity."
Other banks too report that there has been a recovery in sentiment towards the sector in recent months. "It looks like everyone was looking for the restructurings to be completed. We are seeing more positive signals following the restructurings, with more and more relationship banks reopening credit lines," says Timur Ishmuratov, head of the international department at Bank CenterCredit.
He adds that with risk appetite for Kazakh banks increasing there is the prospect that the syndicated loan and Eurobond markets will reopen in the near future, although he emphasizes that BCC is not in need of any fresh capital. "We have liquidity, which is very important," he says, adding that as a result the bank has been one of the few to increase its lending, which it expects to expand by 15% in 2010. "The challenge is to find the right customers as the majority of borrowers are overleveraged."