"The regulators did what they were supposed to do, but nothing more. They didnt think out of the box or act pre-emptively"
Grigory Marchenko, National Bank of Kazakhstan
As Askar Yelemessov, chairman of the supervisory board at investment bank Troika Dialog in Almaty, notes, after investors have suffered tens of billions of dollars of losses from exposure to the countrys financial institutions, the quickest way to ensure a brief telephone conversation with an emerging market fund manager has been to say youre calling from a Kazakh bank. "The line will go dead instantly."
That state of affairs might begin to change in the wake of the completion of the restructuring of about $20 billion in debt racked up by one-time market leader BTA and other lenders, including Alliance Bank, Astana Finance and Temirbank. Local bankers are now hoping for a revival in funding opportunities in the international capital markets on the back of the countrys improving growth prospects. In the first quarter the Kazakh economy grew 7.1%, sharply up on the full-year 1.2% and 3.2% numbers for 2009 and 2008 respectively but still shy of the 10% average between 2000-07.
And after the billions of dollars of losses and bad debts racked up by the banking sector in recent years there have been calls for much tighter banking regulation.
"The regulators did what they were supposed to do, but nothing more. They didnt think out of the box or act pre-emptively," says Grigory Marchenko, governor of the National Bank of Kazakhstan since January 2009 when a number of banks were effectively nationalized to save them from bankruptcy. He adds that the preceding lack of forceful regulatory action resulted in a lack of market discipline whereby several Kazakh banks overborrowed and then overlent in the period 2006/07, with ultimately disastrous results. Although investors that face 80%-plus haircuts as a result of the debt restructurings at such institutions as Alliance Bank and BTA Bank have plenty of reasons to rue ever taking on Kazakh bank risk, Marchenko argues that the debt workouts are ultimately "market-based solutions to market-based problems". He adds: "Borrowers have to take responsibility for their actions but investors were also overly aggressive and should have been more circumspect."
Although theres almost universal agreement among the financial sector community in Kazakhstan on the need for improved regulatory oversight, there are also concerns that ill-conceived, populist changes could ultimately make life for banks and their customers harder rather than easier. "Overregulation would limit banking activity in the country," says Mikhail Lomtadze, chairman of Kaspi Bank, adding for example that moves to limit the ability of banks to repossess collateral in the event of non-payment would have a deleterious effect on the tentative pick-up in lending activity that should occur this year.
Rebuilding trust and confidence in the Kazakh banking sector will play an important role in boosting overall economic development, claim bankers. Lomtadze at Kaspi Bank says: "There are no strong economies with weak banking systems." Sergey Mokroussov, managing director at the countrys number one lender, Kazkommertsbank, points out: "Banks will remain the prime source of funding for major projects in Kazakhstan as the capital markets here are still relatively undeveloped."
Kaspi Bank for its part is one of the financial institutions in Kazakhstan that gives the lie to the received wisdom of late that all the countrys banks are still firmly mired in retrenchment rather than in expansion mode.
With enthusiastic backing from co-owner Baring Vostok Capital Partners, one of the leading private equity groups in the Russia/CIS region, Kaspi is seeking to establish itself as the number one player in retail banking/consumer finance over the next three years. That is in preparation for an eventual exit by BVCP, either through a trade sale to a strategic investor or an initial public offering, market conditions permitting. The bank is adding new outlets and staff and thanks to an aggressive marketing campaign is attracting valuable customer deposits.
"Weve grown our deposit base substantially and are now the number one bank in the country in terms of the rate of growth in deposits," Lomtadze says. He adds that the fact that Kaspi is likely to face increased competition from such rivals as Home Credit & Finance from the Czech Republic and Russias Renaissance Credit in consumer finance is confirmation of the attractiveness of the business prospects for the sector in Kazakhstan. "You expect competition in a good market," he says.
Another lender with ambitious plans in Kazakhstan is Al Hilal Bank, which in April was the first Islamic finance bank to be established in the CIS. Chief executive Prasad Abraham says that Al Hilal, which is 100% owned by the Abu Dhabi government, is looking first to finance government-supported corporate and investment projects and then roll out a retail banking platform over the next 12 to 18 months.
Looking further ahead, Abraham says: "Kazakhstan will act as a launch pad for our expansion into other CIS countries that are looking to introduce legislation governing Islamic finance principles."
While local players such as Alliance Bank and BTA Bank have clearly had an extremely testing time in the past year, it has been a rewarding period for a number of the well-established foreign lenders in the country.
Daniel Connelly, chief executive of Citi in Almaty, says: "For us 2009 was an excellent year a lot of the other banks in the sector were dealing with problems, while Citibank was the most profitable bank in the country based on locally reported financial data." He adds that Citi never had any meaningful exposure to the real estate sector, where valuations have tumbled by more than 50% since the onset of the credit crunch in 2007, and it cut credit lines to many of the local banks way ahead of them getting themselves into trouble. "We had concerns systemically about the banking sector, but no direct exposure to speak of."
Theres a similarly upbeat message from Simen Munter, head of HSBC in Kazakhstan, who relates that the bank has benefited from the troubles at local rivals, picking up high-quality clients from financially embattled lenders in a classic flight-to-quality market environment. "Were on track to have our best ever year in 2010 clients like the safety factor of dealing with us. Kazakhstan was overbought and then oversold, but the risk-return opportunities here are very attractive."
There are certainly grounds for optimism about the financial prospects of the banking sector but whether that will translate into increased investor/lender support remains a moot point. As a recent note to investors by Russia/CIS fund manager Pharos Financial Group points out, the legacy issues from the credit-fuelled boom years of the noughties will continue to affect banks for years to come. "Kazakhstan went through a real estate boom pre-crisis, and still has excess capacity that will take years to work off."
The report adds that the real estate sector, which consumed nearly 50% of pre-credit crunch bank lending, is likely to remain moribund for the foreseeable future and so will act as a brake on lending activity this year and beyond. "But banking officials are still forecasting strong loan growth for the year, projections that look too optimistic to us. With markets already pricing in a moderately strong growth pick-up, they are increasingly vulnerable to growth disappointments."
estimate of NPLs as a proportion of total lending
estimate of NPLs as a proportion of total lending
There are also concerns over developments on the non-performing loans front, with bad debt constituting about 40% of total lending. Alexander Picker, chief executive of ATF Bank, owned by Italian banking group UniCredit, notes: "Were seeing a growing unwillingness to pay, which is worrying a lot of borrowers think that they deserve special treatment." He adds that with banks such as Alliance Bank and BTA having secured 80% debt write-offs, some corporate and retail borrowers are seeking similar terms, which means banks are reluctant to grant new loans.
For all the recent problems, though, theres also hope of better times ahead. "The Kazakh banking sector was the best in the CIS and it still is. But Kazakhstan was and still is an emerging market," says Picker.
Mokroussov at Kazkommertsbank says that big Kazakh banks whose funding needs cannot be fully covered by either domestic deposits or local bond issuance will be able to regain access to international markets as investors are looking for high-quality, high-yield plays.