Kazakhstan: Problem loans subside but growth still subdued


Lucy Fitzgeorge-Parker
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Loan write-off legislation delayed; Banks “too cautious”, analysts allege

Bad debt levels finally look to have stabilized in Kazakhstan but analysts are still predicting a lean year ahead for the country’s banks as new lending remains subdued.

Non-performing loans for the sector (excluding restructured banks BTA and Alliance) declined to 23.6% of the total outstanding at the end of June from 25.8% in March, according to central bank statistics, while the ratio of debts more than 90 days in arrears fell 30 basis points to 18.6% and coverage remained high at 99.9%.

Lending growth, however, remained sluggish at 3.2% in the first half and is expected to come in at just 5% to 7% for the full year – well below both the double-digit levels targeted by many banks in January and current estimates of up to 15% nominal growth in the wider economy.

Part of the problem, say analysts, lies with the government’s failure to push through reforms to the tax legislation to make loan write-offs less painful for lenders. At present, writing down bad debts incurs tax liabilities on any provisions made against them – with the result, says Ainur Medeubayeva, equities analyst at Troika Dialog in Almaty, that banks are still extending "hopeless" loans from long before the financial crisis.

Changes to the law had been promised for July but have since been postponed until the start of 2012. Milena Ivanova-Venturini, head of research for Kazakhstan at Renaissance Capital, says further delays are likely if parliamentary elections are called before the end of the year.

"If the banks had wanted to write off their bad loans they would have done so two years ago"

Renat Syzdykov, Visor Capital

She questions, however, whether the proposed reforms will have much impact on the centre. "NPLs look pretty chunky because the gross exposure stays on banks’ balance sheets but most banks are fully covered, so the change in tax legislation would basically be just nominal and in terms of economic effect there would be no difference," she says.

Renat Syzdykov, senior financial sector analyst at Almaty-based investment bank Visor Capital, adds that changes to the tax law are unlikely to overcome banks’ reluctance to crystallize losses. "If the banks had wanted to write off their bad loans they would have done so two years ago," he says. "Psychologically they’re still not ready to take the hit – it’s a mentality, not only a tax issue."

Plans to create a distressed asset fund to help clean up banks’ balance sheets also appear to have been put on hold, although analysts say the scheme – which would oblige pension funds and commercial banks to buy bonds from the fund – was always likely to founder on the issue of valuations. "It might happen for the government-owned banks but I don’t see the incentive for privately owned banks to agree on a pricing mechanism," says Ivanova-Venturini.

Too cautious?

Some analysts, however, blame the lack of lending growth on banks’ conservatism rather than on the failure of government programmes. "After such a deep crisis, banks have become probably too cautious and are very reluctant to resume lending aggressively, even though they are very liquid," says Jean-Christophe Lermusiaux, head of research at Visor Capital.

But as Medeubayeva points out, structural issues in the Kazakh economy make it hard for banks to grow their loan books without returning to pre-crisis recklessness. "The majority of GDP is accounted for by national commodity companies which have their own access to the international markets and don’t need to borrow from Kazakh banks," she says. "So what the banks are left with is the much riskier sectors – construction, retail, agriculture and trade."

banking sector assets represent this amount of Kazakh GDP

banking sector assets represent this amount of Kazakh GDP

She suggests that, given the lack of suitable lending opportunities, Kazakhstan is overbanked and that this is also putting a crimp in banks’ net interest margins. Ivanova-Venturini disagrees: "Banking sector assets were close at 91% of GDP at the peak in 2007 and they’re now at 70% of GDP, so if anything Kazakhstan is under-banked at the moment.

"Kazakhstan is an emerging market that has had massive leverage more similar to what’s happened in the western world. They are now going through the process of deleveraging, driven by the banking sector, and you can’t expect to have deleveraging and lending growth at the same time."

Lermusiaux, however, says increased competition from new foreign entrants to the market could yet inspire banks with highly liquid balance sheets, such as leading local player Halyk Bank, or strong foreign shareholders (UniCredit’s ATF Bank and Kookmin’s CentreCredit) to restart lending. "Halyk is in a very strong position so when there is more competition on the lending side they will be able to take more risk," he says. "At the moment they are still cautious but if foreign banks penetrate the market a bit more aggressively they will have to catch up to maintain their leadership, which they can easily afford."

Sberbank has already expressed an interest in moving into the Kazakh market – although it was unable to agree with the government on a price for BTA – and other Russian lenders are also rumoured to be looking for opportunities.