REVIEW

A New Lease

With high consumer demand for credit products, rationalization among local banks, and renewed confidence from depositors, Kazakhstan’s banking sector has emerged from a challenging crisis period with strong future prospects.

Kazakhstan’s banks have bounced back strongly from the global financial crisis, largely thanks to a considerable state stimulus package and the prudent stabilization of liabilities. Overdue and non-performing loans (NPLs) remain the Achilles’ heel, but post-crisis regulatory revisions emphasizing quality over growth have sent a positive message to the market about the sector’s resilience.

Following the burst of the real estate bubble in 2008 and 2009, three lenders defaulted and the government intervened in the four largest institutions. The subsequent restructuring of three banks is now seen as one of the most successful crisis responses in the region. Once the scourge of the sector, the restructured banks, along with the field of 38 institutions, are hallmarks of Kazakhstan’s overall economic recovery, supporting the “first in, first out” position of the country among its Central Asian peers.

Despite having a high concentration level—13.9% on the Herfindahl-Hirschman index—the sector also appears to be piquing the interest of foreign investors. Among the enticements are that consumer demand for lending is extremely high, undeveloped capital markets mean the banking sector remains the main creditor of the economy, and an increasingly savvy customer base is rewarding large and financially stable institutions with deposits.

THE NUMBERS

Banking indexes reflect a sector in recovery. Excluding the three banks that were in debt restructuring at the time of data collection in 2010, total assets stood at KZT11.7 trillion with obligations of KZT9.5 trillion. With proceeds going to loan portfolio reserves, the sector recorded flat profitability but a healthy capital adequacy ratio (CAR) of 12%.

As of October 1, 2010, foreign currency assets constituted 39.1% of total assets. The banks’ overall loan portfolio, inclusive of interbank loans, equaled KZT9,259 billion. Loans to non-residents and foreign currency loans constituted 16.9% and 53.1% of the overall loan portfolio, respectively.

That portfolio was comprised of 26% standard loans, 50.7% doubtful loans, and 23.3% loss loans. While NPLs peaked at 33.7% in 2010, up from 12.05% the previous year, a revision of regulatory policy promises to transform the nation’s overall loan folder. In addition, banks are improving portfolio quality through loan restructuring, partial transfer to debt recovery companies, and immunization of the mortgage base.

Liabilities in 2010 totaled KZT10,697 billion. Liabilities to non-residents equaled KZT2,523 billion, while foreign currency liabilities accounted for 44.7% of the total. Deposits equaled KZT6,731 billion, with KZT4,594 billion coming from corporate deposits and KZT2,137 billion from retail. Foreign currency deposits constituted 37.8% of total retail deposits.

As of October 1, 2010, the total income of Kazakhstan’s 38 tier two banks was KZT5,144 billion, total expenses were KZT3,662 billion, net earnings were KZT1,474 billion, and the ratio of liquid assets to total assets was 22.5% on average.

THE PLAYING FIELD

Kazkommertsbank is Kazakhstan’s largest bank in terms of assets with KZT2,688 billion and a loan portfolio of KZT2,344 billion. Net profits in 2010 rose 15.6% from KZT19 billion in 2009 to KZT22 billion. Gross loans to customers increased by 3% year-to-date, while deposits (excluding those made through the government’s stabilization program) increased 23.2%. Retail deposits alone jumped 37.8% year-to-date.

Listed on both the London Stock Exchange (LSE) and the Kazakhstan Stock Exchange (KASE), Kazkommertsbank has subsidiaries active in pension fund management, asset management, insurance, and brokerage. It also has foreign subsidiaries in the Russian Federation, Kyrgyzstan, and Tajikistan.

Halyk Bank has the largest customer base and distribution network among Kazakhstani banks and is currently its star performer. In 1Q2011 Halyk reported a net income of KZT106 billion, with a return on average equity (RoAE) of 13.6% and return on average assets (RoAA) of 1.9%. Its market share in the sector’s net fee and commission income was 28.3%, and its pension fees were up 46.4% compared to 1Q2009.

Liquidity, funding, and capitalization numbers for Halyk are in sharp contrast to the figures that plagued the sector during the crisis. Liquid assets comprise 40.8% of total assets and its loan-to-deposit ratio is 0.69, well below a proposed government cap. Its CAR for the period was 20.6%, with 16.8% in the tier one category. Halyk’s strong financial management and healthy capitalization were rewarded with a rating upgrade from Fitch in April 2011, moving from BB- to B+.

Halyk is currently developing a universal financial group for banking, pensions, insurance, leasing, brokerage, and asset management. As of March 31, 2011 its total assets amounted to KZT2,249 billion with equity of KZT293 billion, a loan portfolio of KZT1,079.4 billion, and deposits of KZT1,562 billion. The bank is also listed on both the LSE and the KASE.

Formerly Bank TuranAlem, BTA Bank is the third largest lender in Kazakhstan by assets and one of three major banks restructured in 2010. In 2009 the bank accounted for the highest percentage of bad loans of all Kazakhstani banks, and court proceedings against its former chairman made it a highly visible element of the crisis period. Today, its strong financials are an example of Kazakhstan’s rapid recovery model.

At the end of 2010, BTA had KZT2,000 million in liabilities and KZT1,896 million in assets. Between the end of 2009 and the end of 2010, its amount due to credit institutions dropped from KZT836.38 million to KZT155.64 million.

BTA is a major player in Kazakhstan’s SME market, with a share of 12%. It has over 50,000 SME clients, including 12,000 borrowing clients and over 18 loan products exclusively for the segment. It processes over 22,000 SME customer payments per day.

BTA has approximately 1.2 million customers and 132,000 corporate clients, with 22 branches and 230 cash settlement units in Kazakhstan. The bank’s post-restructuring strategy aims to leverage the core strengths of its branch network and solid retail and SME platforms.

Kazakhstan’s traditional “Big Four” leader board has been unsettled by restructuring, creating healthy competition for the top spots in terms of assets size. Lenders in line for top billing include Alliance Bank, ATF Bank, Centercredit Bank, and Kaspi bank.

It should also be noted that several smaller banks have made significant inroads as well. Eurasian Bank, for example, capitalized on not having the debt burden of its competitors by issuing $600 million in new loans in the first three quarters of 2010.

CRISIS & RECOVERY

With an average pre-crisis loan-to-deposit ratio of 1.36, local banks financed lending largely through external sources rather than deposits. When asset quality materially deteriorated in 2008, several banks defaulted and the nervous shadow of a liquidity crisis was cast over the sector as a whole.

According to statistics, that risk has all but disappeared. In February 2010, the share of liquid assets increased to 22.76%, or KZT2,072 billion, of total assets. At the apex of international loan repayment in 2009, banks took substantial measures to normalize liabilities, restructure funding, and improve balance liquidity in order to service their foreign debts. Now that the sector is once again liquid, banks may boost their share of loans in assets so as to raise transaction profitability.

The state played an important role in creating the recovery, injecting significant funds into the capital and deposit base of the banks. It has also taken measures to work with distressed assets, extending loans and subsidizing interest rates for important projects, particularly in export-oriented sectors such as energy and agriculture.

In addition, the government is reforming the regulatory structure. In 2011 it introduced a list of allowed transactions as well as put a limit on asset growth. Under discussion is the idea of limiting foreign liabilities to no more than 30% of total obligations and capping loan-to-deposit ratios at 1.5. By the end of 2009, gross external debt decreased to 20% of GDP and earned $31.9 billion. Of this total, $14.9 billion was restructured.

LOCAL & FOREIGN

Foreign participation in Kazakhstan’s banking sector, currently at approximately 24%, is distinctive. Given the current market dynamics, this landscape may change if big-name international banks step in to capitalize on increasing credit demand. Currently there are three types of banks with foreign capital. The first includes banks that provide trade-financing services, such as letters of credit, guarantees, and credit lines. The second category includes well-known foreign banks such as Citibank, HSBC, and RBS, which have the potential to be direct competitors to local banks, but choose to stay limited to international custodial services. The third category is local banks that have changed ownership structure to accommodate foreign participation, such as ATF Bank.

In contrast to local banks, foreign banks in the second category benefit from a cross-flow of local deposits and thereby have high CARs and strong liquidity. Half of the credit portfolio of the foreign banks is financed by local deposits. With an average loan to deposit ratio of 1.36, local banks were much more dependent on external borrowing to finance loans to their customers. The three banks that defaulted were fully funded at the expense of attracted loans.

Considering the growing requirement for business and household credit, this scenario creates substantial niche opportunities, such as microcredit, as well as gives highly liquid category-two foreign banks the ability to quickly consolidate their positions in the lending market should they choose to offer a full-range of retail banking products.

The changing consumer base further enhances these opportunities. Pre-crisis, deposit figures indicated that residents of Kazakhstan strongly favored local banks, which enjoyed double-digit growth over 1998–2008. During the crisis, there was an outflow from local banks and a corresponding growth in the deposit base of banks with foreign participation. At the same time, however, rationalization among local banks as well as the government’s program to increase the guaranteed amount on deposits to KZT5 million appears to have restored depositors’ trust and halted outflows. Regardless of how the local-to-foreign balance shifts, the stage has been set for a competitive sector with a strong growth potential.