Kazakhstan 2017 | FINANCE | ROUNDTABLE

TBY and the American Chamber of Commerce in Kazakhstan jointly organized a roundtable with the heads of leading financial institutions to discuss the state of banking and their vision for the sector's development.

Gordon Haskins
Al Hilal Bank Kazakhstan
Sabit Khakimzhanov
Head of Financial Stability
National Bank of Kazakhstan (NKB)
Aigul Djailaubekova
Deputy Chairperson
Aiman Mukanova
Bank of Tokyo-Mitsubishi UFJ Ltd.
Andrey Kurilin
Citibank Kazakhstan
Valeriy Khegay
Head of Market Data
Kazakhstan Stock Exchange
Gani Uzbekov
Capital Bank

How would you assess the success of some of the regulatory changes that the National Bank has put in place since 2014?

SABIT KHAKIMZHANOV The main issue that we face currently is the quality of reporting: Unless we know what is going on in a bank we cannot regulate it. In that regard, the biggest changes have yet to come, as the main problem of Kazakhstan's banking sector is the uncertainty surrounding the quality of assets. Until we resolve this, we cannot move forward. In the short term, we believe the solution lies in an asset quality review—a type of inspection of a loan portfolio using methodology adapted from the ECB's recent practices. However, it is too expensive to do this on a regular basis. So, in the longer term we envision a more systemic approach that includes a return to the regulatory provisioning, a greater focus on managerial reporting and its quality as opposed to only financial, and development of banks' data collection capabilities to build a basis for risk management. Our focus on the quality of financial reporting is not just a whim; it is global trend. We see it recognized by Basel and national regulators. Accounting standards bodies IASB and FASB have developed new standards in response to these trends.

How have the National Bank's regulations impacted commercial banks?

AIGUL DJAILAUBEKOVA Generally, we understand that stricter regulations are vital during tough economic conditions, which naturally impact the quality of borrowers and are reflected in the portfolio of commercial banks. Nevertheless, at times banks may experience an additional pressure on management resources as there have been a number of changes in the regulations, particularly in terms of reporting requirements. In terms of core banking activities, our bank has not been negatively affected due to its moderate growth and consistent strategy. Generally, we see a tendency for consolidation of the banking sector, which has been widely discussed in the last few years.

What is your general opinion of the banking sector consolidation?

ANDREY KURILIN Just 20 years ago Kazakhstan had about 100 banks and the economy then was much smaller. Over the years, the number of banks has significantly reduced. There is no rule of thumb regarding the ideal number of banks for a given size of the market. It is the underlying economy, rather than temporary variables like the exchange rate or inflation, that truly determines the volume of assets and banks in the country. Kazakhstan's economy predominantly involves trade, cross-border flows, exports, and imports, which in turn determine the demand for banking services.

GANI UZBEKOV The sector will neither have the best corporate governance, nor the highest level of reporting, unless other sectors of the economy are reformed, as the banking sector is interconnected. If we truly want to improve the banking sector, we have to start in other areas of the national economy and society, as a whole. For instance, liquidity in the banking sector is only available to a certain number of banks, which therefore can afford to deal with NPLs, whereas the remaining ones cannot. It is interesting to hear that CEOs of large banks are pro consolidation, as in my opinion small banks are crucial for the economy, since they serve as market disruptors in terms of technology and customer service models. For us, innovation is a matter of survival, whereas for large banks it is not as important, since they will always rely on a fixed stream of revenue. This reflects Kazakhstan, in general: When there is fixed revenue from the oil industry, there is less need to care about other areas of revenue. Small banks and fintech should exist in one form or another. If banks are consolidated, it should be market-driven rather than enforced by governmental authorities. The main point is: If there is a clear regulatory vision for the next five years, then it will be fairly easy to understand and adapt to for a smaller bank or other entity that wishes to enter the market. It will allow shareholders to plan their actions accordingly, whether they should keep up the work and develop in one or another direction, or inject more funds, talk to other banks about a possible merger, or just return the license.

How would you respond to concerns over the lack of regulatory vision in the sector?

SK I understand Gani's comments about the lack of some document of concept of development. I also agree there are other larger problems; however, when the NBK is entrusted with regulating the sector, it has specific instruments and fields of responsibility that it cannot shirk away from. The financial market first and foremost deals in information; it tells us something about the economy, something that we do not like, and in such circumstances there is a sort of denial about those underlying problems and a tendency to blame the sector and the financial regulator, although the sector is just the messenger.

GU I fully agree that the NBK cannot do everything and is solely responsible for the financial sector; however, there are other sectors that need improvement. For instance, tax reform, criminal law, and civil laws are issues of importance. As long as we have laws that are not seen as applicable to everyone, then such issues will persist. There should be clear transparent rules that apply to everyone. I hope and believe we will hear from the governor that in order to improve the banking sector we need to tackle other areas, and if the political leadership agrees, it will only be a matter of time until we have what we are calling for.

AK We all seem to be saying the same thing and there is no disagreement. There indeed have been reports on consolidation. In market economies, the environment is always changing. What we are saying is that banks do not exist in isolation from the rest of the economy. Kazakhstan as a country depends on exports, so the country requires funding in foreign currency, which local banks may have difficulty providing. A solution could be either a robust diversification of the economy away from exports, or the government playing a more tangible role in the banking sector.

GU The government currently regulates our markets largely through liquidity and funding, and 95% of all funding comes from state-run institutions. If it wishes to do away with a bank, it just prevents it from getting liquidity. For a bank like us, in order to earn a reputation in retail, we need years before people start to trust us with their money. This is a competitive market in terms of building that reputation and infrastructure, in terms of service and convenience for the client; and since liquidity plays a major part in building this for new entrants like us, we are dependent on state funding at the moment. Taking into account the fact that allocation of state funding management is chaotic and unpredictable, it is hard for smaller banks to work in this environment. State funding and state finance should not be in one hand, and there should be a more rigorous risk policy; however, such smaller banks are of vital importance. Larger banks typically go after big accounts, whereas we want to work closely with SME clients. This is an area for diversification and there are many independent and experienced professionals who have weathered numerous crises and do not need any assistance from the government, though sometimes they need help in terms of working capital finance, rate finance, and so on. Forcing banks to have a certain level of NPLs and, if they are unable to, making them merge or seek a buyer is not right as there should always be a flow of dialog, whereby those banks have the right to be heard and express their opinion. Unfortunately, at the moment we do not feel it.

GORDON HASKINS I would agree with a number of the points that have been made around the table, in particular Gani's comment on disruption. The digital platform that Capital seeks to disrupt the market with can be potentially good for the market. We take a different approach toward disruption. It is not a digital type but an alternative offering for certain types of clients that seek this. Currently we have less than 0.5% of the overall asset base in the country and are clearly a relatively small player in the market; however, we do offer something that is of interest to clients. In Kazakhstan at present the demand for Islamic products is not particularly strong, and that is something that we have to deal with and are working to change. However, it is not just the Islamic nature of the banking products that we offer that is necessarily attractive; the rates we offer and the security of a state-owned parent institution that is rated A+ are also attractive to people worried about the current state of the local market. Also, we are looking to launch a retail program in 2017, which we think will be attractive to clients for the same reasons, though it will be in line with the approach that we have taken since Al Hilal was established in 2010: a conservative, targeted approach. We are not looking to go out to the mass market on the retail side but rather will have a targeted approach. Likewise, we will continue to seek conservative growth in the corporate sector with our existing clients and with select new clients.

Can you tell us about the recent changes at the stock exchange and what that means for 2017?

VALERIY KHEGAY We do not directly face banking regulations from the National Bank; on the contrary, we work together with the National Bank on the further regulation of the stock market as a whole. This joint effort is aimed at finding the optimum balance between the necessity and sufficiency of the stock market regulation. Talking about visions for change in the market, in 2016 we saw a maximum traded value of KZT95 trillion, and due to de-dollarization we could see extra liquidity in tenge, which moved to the money market. In 2016 the value traded on the repo market more than doubled. Speaking about the allocation of financial resources in the economy, bank credit is not the only source for raising funds and unfortunately the degree of the local stock market involvement in the economic processes still remains quite low.

What is the reason behind the low stock market activity in Kazakhstan?

VK It has to do with a lack of awareness and financial education in the country. There are nearly 2,300 joint-stock companies registered in Kazakhstan and only 102 are listed on the stock exchange. This is one of our strategic tasks: to increase the awareness of small and medium business representatives about the stock market as an alternative to bank credit.

Are banks worried that the stock exchange would compete with banking products?

AK In Kazakhstan there is no major activity in the local stock and fixed income markets, which is an impediment for any business operating on the ground. Worldwide there are billions of dollars available for placement into the Kazakhstani securities; today, this is almost entirely invested outside of Kazakhstan. The question is why this appetite is not translated into onshore investments. Addressing the investor perception of the rule of law and the guarantees of investor rights would unleash this appetite. We would love to see a more developed fixed income and stock market in the country. Any foreign investor would definitely mention the need for more activity on the local exchange.AIMAN MUKANOVA I would second that: as an entirely foreign bank that only deals currently in foreign currencies and only with top-rate borrowers, we would nevertheless welcome this development and would love the tenge market to flourish. We would welcome an option to fund our operations in tenge in the longer term. The creation of a tenge foreign exchange market would encourage local and foreign investors to invest locally; that would only improve our business in this country and not compete with it.

AD It is not just regulations and education of the retail investors; there is a whole complex list of reasons why investment has not happened. Presently, there is an evolving project on creation of the International Financial Center in Astana. It is too early to predict to what extent it will stimulate an influx of new investors, especially international ones; however, this initiative has just started to develop so we have to give it a chance. In my opinion, political will alone for a new platform will not work if all the other components remain the same in terms of an appropriate legislative framework, investor appetite, investor climate, and diversification of the economy. One of the factors that I believe has hampered the development of the stock market here is that there was simply no availability of long-term liquidity, and only in the past year has it started easing thanks to the monetary policy of the National Bank, though more in terms of short-term funding.

AK The longer the availability of financial instruments, the stronger the banks and the more liquid the market. Today, any long-term funding offered by Kazakhstani banks may be a matter of high market risk because of the limited interbank liquidity and illiquid secondary fixed income market. Anything the National Bank could do to lengthen the availability of local currency funding would be a positive.

What is your macroeconomic outlook for the year ahead and for your institution?

GU The regulator has a concept in place in terms of how it will deal with NPLs, so at least there is transparency as to what we can expect in the NPL area. We have entered the retail market, which is a scale business, and our horizon projection is at least five years, so it is difficult to make predictions for 2017. We are still waiting for a clear response and concrete information from the regulator as to what to expect in the next three to five years. Globally speaking, anything can happen in the year ahead, but we keep a positive outlook.

AD In terms of the market sentiment, the worst seems to be over and bottomed out after two devaluations and sharply declined commodity prices in 2014-2016, when we saw many companies holding back on their CAPEX plans, the market had no tenge liquidity, and overall the situation was gloomy. Now, the country is running a tighter ship and is getting used to the environment of lower oil prices and to the fact that they are not likely to return to their previous high levels. At least it looks like the returning of the low levels of USD20-30 per barrel is unlikely. However, this year the markets face more political unknowns than we are used to seeing. President Trump's election is a major factor, with its significant impact on the markets. There are some major European countries going through political changes that will test the strength of the European Union. As Kazakhstan becomes more integrated into the world economy, we cannot underestimate the role these factors will play. Generally, the mood and perspective for growth around the world will definitely impact Kazakhstan so there remains quite a significant uncertainty; however, it feels like to a certain extent that there will not be a deep dive.

AM Next year we will continue to support our key clients in Kazakhstan; we hope the worst is over for many of them. There is quite significant liquidity and reasonable interest in international markets for top Kazakh credits and Kazakhstan in a way benefits from what is happening in other emerging markets. There are not many investment-grade emerging markets and they will continue to enjoy strong investor demand, at least for the next few months. As a bank we will carefully watch the development of the tenge market, follow the progress of the privatization program, and continue to look into innovative products such as Islamic finance.

GH I would echo what has been already said around the table; there are cautiously optimistic, certainly positive, signs for the start of the year. Predictions of growth for the economy in 2017 are not what they were a few years ago, but they are better than last year around 2% to 2.5%. The privatization program, subject to some important reforms in the economy generally, should be good for the economy. And I agree that we need to pay attention to external factors, as the economy is much more intertwined with regional and global markets, and therefore we have to monitor events in our neighboring countries as well as in the US and Europe, which are throwing up a great deal of political uncertainty right now. That said, Al Hilal is positive about the launch of our retail program this year and look forward to asset growth for the bank.