Kazakh banking sector clean-up continues with Tsesnabank sale

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By:
Lucy Fitzgeorge-Parker
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State-owned brokerage buys number two lender as total bill for bailouts tops $10 billion.

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The end of a protracted and pricey restructuring of Kazakhstan’s banking sector came a step closer in February with the sale of troubled lender Tsesnabank to a well-connected local brokerage.

First Heartland Securities (FHS), part of a group controlled by state-owned Nazarbayev University, bought the bank after Kazakh authorities agreed to take a further KZT604 billion ($1.6 billion) of bad debts off its balance sheet.

It was the second purchase of impaired loans from Tsesnabank by Kazakhstan’s problem asset fund in less than six months, following a KZT450 million transfer in September. The state also provided a liquidity injection to the lender and supported a restructuring of its domestic bonds, taking the total bill for the bailout to more than KZT1.1 trillion.

Until last year, Tsesnabank was Kazakhstan’s second-largest lender, with big franchises in the north of the country and in the agricultural sector. The bank ran into trouble in late 2015, however, when large portfolios of foreign currency loans started to turn sour following the devaluation of the tenge.

Lax risk management and high levels of related party lending also played a part in Tsesnabank’s downfall, according to locals. 

“It had been a zombie bank for a while now,” says Ilias Tsakalidis, head of capital markets at Tengri Capital in Almaty.

“Officially their non-performing loan ratio was around 7% but, in reality, it was much higher. Management and shareholders were reluctant to accept losses so they kept restructuring existing loans and prolonging payments. It was bound to blow up at some point.”

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Ilias Tsakalidis,
Tengri Capital

The bailout of Tsesnabank comes just two years after Kazakh authorities took more than $6 billion worth of bad debts – a legacy of twice-defaulted BTA Bank – off the books of ailing market leader Kazkommertsbank (KKB) ahead of its sale to Halyk Bank.

Other Kazakh banks have been less fortunate. The central bank has revoked the licences of half a dozen smaller lenders – including Kazinvestbank, Delta Bank, Bank Astana and Kazakh Bank – over the past three years in a bid to clean up a sector plagued by problem loans and weak governance.

Policymakers have been accused of inconsistency in their approach, however, notably in relation to a $2 billion liquidity injection provided to second-tier lender RBK Bank in 2017.

“They have taken a very selective approach, which is hard to explain by market mechanisms and economic motivations,” says a regional banker. “It’s fairly clear though what the guiding principle has been. There are a number of individuals close to the presidential family in the Kazakh banking sector.”

Connections

Both Tsesnabank and FHS are politically well-connected. The former was until this month controlled by the family of president Nursultan Nazarbayev’s former chief of staff, while Nazarbayev University, which owns FHS, was set up by the president in 2010.

Tsakalidis says the purchase of Tsesnabank offers substantial benefits for FHS. “They have acquired a clean bank fairly cheaply,” he says. “Tsesnabank has good infrastructure and a huge client base in northern Kazakhstan. With most of the NPLs cleared from its books, it represents a good opportunity for a smaller bank.”

Ivan Kachkovski, a bank analyst at Renaissance Capital, agrees. “Tsesnabank has a strong brand in Kazakhstan and there could be some synergies with the brokerage operations of FHS,” he says.

Like the rest of the Kazakh banking sector, however, the merged bank may struggle to find ways to grow. Despite a relatively robust economic outlook – Renaissance Capital expects Kazakhstan’s GDP to expand by 2.9% this year and 3.3% in 2020 – demand for corporate lending remains weak.

“The problem is that most of the growth is still likely to be concentrated in the natural resources sector, where investors generally borrow internationally,” says Kachkovski. “They don’t necessarily need financing from local banks.”

As a result, Kazakh lenders have started targeting other customers. The past two years have seen an increased focus on retail lending across the sector – however, Tsakalidis says universal banks will struggle to compete with established consumer finance specialists Kaspi Bank and Home Credit Bank.

“Kazakhstan is a small market and retail lending is already covered by two players who are aggressive, experienced and financially successful,” he says. “Other banks are a long way behind, both in terms of infrastructure and clients. I don’t see them catching up any time soon.”

Bad debts

Banks’ ability to grow is also being hampered by weak asset quality. Tsakalidis notes that a recent slump in base rates – from 17% in 2016 to 9% at the end of last year – has not been passed on to clients because large parts of the existing loan stock are non-performing.

“Lenders simply can’t afford to drop rates because they fund much higher than that,” he says.


The best option would be to do a one-off clean up of the sector – bail out the banks they want to bail out, revoke the licences of the others that are struggling, and start over  
 - Ilias Tsakalidis, Tengri Capital

Officially, bad debts account for around 11% of outstanding loans in Kazakhstan but analysts say an overly generous approach to the classification of problem assets means the real level is much higher. According to Fitch Ratings, many of the country’s mid-sized banks would have NPL ratios of at least 20% under IFRS9 accounting standards.

On top of that, corporate loans often have multi-year grace periods on interest payments. “Banks recognize accrued interest from these loans but don’t receive it as cash,” says Dmitri Vasiliev, a bank analyst at Fitch.

For the moment, locals say further bailouts are unlikely as Kazakhstan’s larger lenders are all relatively well-capitalized. Nevertheless, Tsakalidis says policymakers need to address the issue, along with high levels of related party at many banks.

“The best option would be to do a one-off clean up of the sector – bail out the banks they want to bail out, revoke the licences of the others that are struggling, and start over with a more rigorous approach to regulation,” he says.

“As long as they put off doing this, we will continue to see banks defaulting every year. The money is there to do it – but unfortunately the will is lacking.”