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Kazakhstan 2014 | FINANCE | REVIEW: BANKING

M&As are underway in Kazakhstan's banking sector, while new players are showing the road ahead for the sector.

While the effects of the 2008 global financial crisis are still being felt by many of Kazakhstan's banks, shoots of growth are being seen in terms of lending across the economy. As well, efforts are being renewed to restructure the so-called bad banks, with M&A deals and sector consolidation in the offing. In May 2014, Samruk-Kazyna, the national wealth fund created in the wake of the crisis, sold off a 79.88% stake in Temir Bank and 16% of Alliance Bank to Bulat Utemuratov, owner of Forte Bank and Kassa Nova Bank. While Samruk-Kazyna retains a 51% controlling stake in Alliance Bank, an eventual merger of the two entities is being mooted. Another one of Samruk-Kazyna's charges—BTA Bank—was also sold off earlier in February 2014 to Kazkommertsbank (KKB) and Kazakh businessman Kenes Rakishev for $930 million, after brushing off an attempt by market leader Halyk Bank to take over BTA in exchange for its substantial pension fund in November 2013. A merger of KKB and BTA is also being hinted at for later in 2014, though the deal had not been finalized at the time of writing.

Another driver behind consolidation is the 2015-2019 introduction of Basel III rules for the banking system, with the National Bank of Kazakhstan (NBK), the local central bank, seeing this as a key measure to return the banking sector to full health. As higher asset levels will be required, and with an illiquid local capital markets pool, many of the smaller players will likely be forced to merge. As part of the Basel process over 2013, the NBK increased the level of tier-one and tier-two capital that the banks are required to have, as well as upping consumer loan conditions to ensure that the retail banking market did not overheat, as it did in the past.

In April 2013, the government approved amendments to legislation on sharia-compliant leasing activities, giving a boost to local lender Al Hilal Bank. However, the current ban on conventional banks opening up sharia-compliant windows has kept a lid on the potential growth of this component of the finance sector. A second entrant into the market is currently being created through the joint efforts of the Islamic Corporation for the Development of the Private Sector (ICD), a member of the Islamic Development Bank (IDB) Group, and locally owned Zaman Bank, with a view to fully converting the latter small bank into a fully functional sharia-compliant bank.

WATCH THE RESULTS

The results presented below reflect the audited results as issued by the institutions themselves at YE2013 (where available), and NBK figures, and were calculated at a rate of KZT152.5:$1. These results were issued prior to the 18.9% devaluation of the tenge in February 2014, which will have a strong impact on the financials of banking sector participants.

As of YE2013, Kazakhstan had 38 licensed banks and 10 non-bank institutions, with two of the latter being mortgage providers, according to the NBK. Total assets at the end of 2013 were at KZT15.5 trillion ($98.89 billion), up by 11.4% in YoY terms. The credit portfolio of the banking sector rose by 14.5% over 2013 to KZT13.3 trillion ($84.85 billion), while provisions in line with IFRS standards amounted to 34.8% of the total loan portfolio, or KZT4.6 trillion ($29.35 billion).

The high NPL level of Kazakhstan's banks remains the bugbear, with a sector-wide average of 31.2% at YE2013, according to the NBK. Most of these NPLs were added to bank balance sheets following the global financial crisis, and aspects of Kazakhstan's tax code make it highly unattractive for the banks to write off these bad loans and move on. Any write-off would attract a 20% tax on the benefit it would bring to the balance sheet, making this standard method of addressing NPLs an unpopular option. As well, that much of the NPLs are related to real estate further complicates the picture, as the property often used as security has substantially depreciated in value since.

KAZKOMMERTSBANK

KKB is Kazakhstan's largest bank by assets, reporting KZT2.59 trillion ($16.5 billion) in assets for YE2013, up 6.6% in YoY terms and taking a 16.2% market share, according to the company's audited financials and Halyk Finance. It had liabilities of KZT2.21 trillion ($14.13 billion), also making it the leader in this metric for the sector. Net income turned around from a loss of KZT132.3 billion in 2012 to KZT52.5 billion in the black. Total deposits were up 10.5% over the year to KZT1.68 trillion, while the return on average assets (ROAA) came in at 1.8% and the return on average equity (ROAE) was a healthier 11%, although in both of these latter metrics the bank was behind the sectoral average for the top six banks (2.2% and 16.1%, respectively). The bank reported a provisioning rate on its loan portfolio of 34%, indicating the NPL level the bank is looking to bring down. Should KKB finalize the purchase of third-ranked BTA, the merged entity would account for roughly one-quarter of all banking assets, leaving close rival Halyk Bank far behind in second place in terms of asset market share (15.8% at YE2013). One potential arrangement could be to merge all of the bad debts owned by KKB and BTA and shift them to a “bad bank," thus supporting the bottom line of the sister “good bank."

HALYK BANK

Halyk Bank reported total assets of KZT2.51 trillion ($16.32 billion), up 4.1% in YoY terms, and giving it second place in the market. Asset growth was mainly attributed to a 12.4% rise in its loan portfolio. Its 90-day NPL position was at a comparatively rosy 18.0% at YE2013, while provisioning was at 97.8% in IFRS terms. The bank continues its solid lead in the retail market, with retail account numbers rising from 6.5 million in 2012 to 8.8 million in 2013. Halyk Bank reported an ROAA of 20.8% and an ROAE of 2.9%, while its net interest income was up a healthy 6.5%. In February 2014, the bank announced it would purchase a 100% stake in HSBC Bank's local operations in Kazakhstan, in a deal valued at $176 million. The deal is set to be finalized over the final quarter of 2014.

BTA BANK

BTA is third place in terms of net assets, at KZT1.6 trillion ($10.22 billion), giving it a market share of some 9.8% at YE2013. As its English website states on the front page “Time for new opportunities," and for BTA Bank that time is certainly now. The bank was badly hit by the global financial crisis and ensuing real estate crash, and was placed under the aegis of national wealth fund Samruk-Kazyna as a result. Samruk-Kazyna is looking to offload its 97.26% shareholding in the bank to sector leader KKB, in a deal that is set to be finalized in July 2014. According to Halyk Finance research, BTA had a 90-day NPL ratio of 86.5% at YE2013, indicating the hill it still has to climb to return to full health. The ROAA came in at 1.8%. Assets under BTA Bank's helm, including Temir Bank, have been sold off over the year, while it has wound down its external shareholdings in foreign markets, such as its former asset Şekerbank in Turkey. It has set aside provisions estimated at 91.6% to cover gross loans.

BANK CENTERCREDIT

Bank CenterCredit (BCC) reported a quiet year over 2013, with total assets rising by 0.6% to KZT1.09 trillion ($6.97 billion), though reported a strong CAR of 15.96% for the year. The SME specialist posted an ROAE of 0.36%, well under the top-six average of 2.2%, while the ROAA was at 0.03%. However, its net interest margin improved from 1.4% in 2012 to 3.7% over 2013, while the operating cost to income ratio fell to 35%, well down on the 62% recorded for FY2012. The NPL level for the bank was at a relatively strong 16.35%. The bank's largest shareholder, Kookmin Bank of Korea, holds a 41.9% stake, while the IFC retains a 10% shareholding in BCC.

SBERBANK

Russian giant Sberbank has benefitted from a massive increase in total assets over 2013 of 41% at its Kazakh subsidiary. Unaudited financials indicated the bank had total assets of KZT1.04 trillion ($6.6 billion) at YE2013, giving it a 6.7% market share. Sberbank entered the Kazakh market slightly before the economic storm hit in 2006 through a takeover of TexakaBank, a smaller player at the time. The bank's 90-day NPL level was at 2.1%, the lowest among the big six. The bank's strong growth over recent years will likely see it surpass BCC over 2014 in terms of total assets. Sberbank recorded an ROAA of 2.4%, while the ROAE came in at an enviable 21%. Retail deposits spiked 87.6% over 2013, indicating just where and how the bank is expanding in the Kazakh marketplace.

TSESNA BANK

Another fast mover in the market, Tsesna Bank has tripled its market share in terms of total assets since 2010 from 1.9% to 6% by YE2013, coming in at KZT883 billion ($5.63 billion). The bank recorded an ROAA of 2.1%, while the ROAE was at a healthy 26.5%. NPLs were low at just 3.7%, while provision coverage for bad loans was at 100.4%. The bank was the strongest performer in terms of asset growth, coming in at 49% and beating out rival Sberbank to the top spot. Tsesna Bank has shown strong growth on the domestic deposits side, up 33% in 2013, while the loan book grew by 41% to KZT702.4 billion ($4.6 billion) over the same period. The ROAA was at 2.1%, while the ROAE was a solid 26.5%. Overall, the strong showing of Tsesna Bank indicates that when you do banking right in Kazakhstan, the results can be pleasing.