Banking overview
KAZAKH BANKS ACCUMULATED $45 billion of foreign debt in a few years of heavy borrowing to fuel their dynamic growth. As a result they became the first victims of the global financial crisis sparked off by the US sub-prime crisis in July 2007. Nearly two years later, the crisis is still being worked through. BTA, the country’s largest bank, has been virtually nationalised; another two of the ‘big six banks’ have been partially recapitalised with state money, while two have been helped out by their new foreign bank owners; and the sixth, Alliance Bank, is still struggling to find a future either through nationalisation or a foreign takeovers.
BTA, the largest pre-crisis bank, has been virtually nationalised, and Samruk, its effective new owner after a $1.7 billion partial re-capitalisation in February, is seeking both to re-schedule its $11 billion foreign debt and attract a new foreign owner. Russia’s Sberbank is one interested party, but others may come forward. The future of Alliance Bank, the fourth largest, was still in doubt at time of writing, but Central Bank president Grigori Marchenko hinted that it could be allowed to fail if creditors cannot agree a debt restructuring deal acceptable to Samruk/Kazyna, the state holding company charged with re-capitalising and restructuring the banking system.
Halyk Bank and KazkommertzBank (KKB), the surviving duo of the former ‘big three’ leading Kazakh-owned banks, ceded 25 per cent of their shares to Samruk in return for capital injections in February, when the state intervened to restore confidence in the battered financial system. They expect to return to full private ownership within the next few years. The government insists that de facto nationalisation of some banks and state-financed re-capitalisation of others is a short- to medium-term emergency operation to cope with the effects of a global crisis – and not an attempt permanently to expand the state’s role in financial markets.
In the three years leading up to the crisis, Kazakh banks grew at a phenomenal rate – virtually doubling h their assets and liabilities every year – before being halted in their tracks in August 2007. As they struggled to recall loans or refinance at higher rates, the ensuing credit squeeze throttled the construction h industry and lending for consumer goods and mortgages, and non-performing loans, rose.
The creation of a well-regulated domestic banking system, together with pension funds, a stock market and a government-run National Fund to absorb and conservatively invest ‘surplus’ oil money for a rainy day, was one of the biggest successes of the first years of independence. It was therefore reassuring when Grigori Marchenko, one of the main architects of banking reform and probably the country’s most experienced banker, was recalled by President Nazarbayev in January to head the National Bank, as the wider economy reeled from the collapse of commodity prices, which followed the demise of Lehman Brothers.
Record high commodity prices cushioned the impact of the first stage of the Kazakh banking crisis and made it possible for banks to repay all their maturing loans over the first 15 months or so of the crisis. But the collapse in the value of the country’s main exports ushered in a new and more acute phase of the crisis. The partial recovery of oil, copper and other key commodity prices in the second quarter of 2009 provided the first chink of light at the end of what has already been a nearly two-year tunnel.
Marchenko, an acerbic free-thinker with experience of both international financial institutions (such as the World Bank) and the private sector, where he worked at Deutsche Bank, masterminded Kazakhstan’s successful navigation of the post-1998 Russian rouble crisis when he was last president of the Central Bank.
For four years before his re-appointment, Marchenko ran Halyk Bank, the privatised former state savings bank. In 2006 Halyk raised $748 million from a London IPO in 2006, which brought in foreign h institutional investors while retaining control by the bank’s well-connected main shareholders, Timur Kulibayev and his wife.
While Halyk’s main competitors – KKB, which had similarly raised $845 million from an IPO in 2006, and BTA – opted for foreign-funded growth at breakneck speed, Marchenko ran a more conservative ship. He repeatedly warned of the dangers of reckless borrowing. He warned that Halyk’s own internal research indicated that the banking sector had become “an accident waiting to happen” months before the crisis erupted.
Those banks with foreign equity from IPOs and/or foreign shareholders have fared best in the current crisis. But when foreign lending dried up and commodity prices collapsed in 2007-8, globalisation became a double-edged weapon as Kazakhstan got lumped together indiscriminately with much less well-endowed and well-run economies. Fortunately for Kazakhstan, but less so for the foreign banks who paid top dollar before the crisis broke, Italy’s Unicredito paid $2.3 billion for ATF Bank and South Korea’s Kookmin Bank paid $1 billion for a majority stake in BankCentreCredit (BCC) a few months before the crisis broke. Anvar Saidenov, National Bank president at the time, was delighted to welcome the deep-pocketed newcomers, noting that “Kookmin alone had more assets than the entire Kazakh banking system put together.”
Significantly the only ‘top three’ bank not ready to launch an IPO three years ago was BTA Bank, which has been the main casualty of the banking crisis, together with the much smaller Alliance Bank. The latter’s headlong leap into consumer and mortgage finance made it vulnerable and it was unable to lock in a foreign buyer in time.
In the months leading up to the 2007 crisis, dozens of foreign banks were looking for Kazakh acquisitions, although many of them, such as Austria’s Raiffeisen, were deterred by the high multiples demanded. Now the boot is on the other foot, as BTA spearheads the search for new foreign investors and smaller banks seek either foreign partners or mergers as the government raises minimal capital and other requirements.
The crunch came in early February this year when Marchenko, who had privately advocated devaluing the Kazakh tenge in the autumn of 2008 in line with the Russian rouble, announced an 18 per cent devaluation from around tenge 120 to the US dollar, to a 3 per cent margin around a new tenge 150 central rate. Devaluation added to the foreign currency repayment burden of all banks – but especially to BTA, the biggest borrower of all, with over $11 billion in foreign liabilities. In March, BTA’s new chairman, Anvar Saidenov, announced that UBS and Goldman Sachs had been appointed as financial advisers to help the bank re-schedule its debts and find a new owner.
Tough rescheduling negotiations lie ahead for Kazakh banks. But Marchenko told the Eurasia Media Forum in Almaty in April that Kazakhstan’s foreign debt had already been reduced from $56 billion, or around 50 per cent of GDP, in summer 2007 to $35 billion by the beginning of April 2009. “The banks will still be servicing their debts after the second quarter and by June it will be clear that the foreign borrowings issue will be resolved,” he added.
A leaner, wiser and temporarily smaller and more locally-focused banking system is emerging. The government wants banks to concentrate more on financing small and medium enterprises (SMEs) and institutions like the EBRD and the Asian Development Bank are supporting this. The EBRD, for example, recently provided two loans totalling $100 million to support SME lending by ATF Bank. Its parent bank, Unicredit, also stepped in to shoulder repayment of $500 million-worth of ATF’s maturing foreign loans.
Increasingly, Kazakhstan is looking to the Middle East and Asia for finance, trade and banking links. President Nazarbayev signed a $10 billion oil and infrastructure investment and financing deal with China during his state visit in April, for example, and a month later a major South Korean delegation came to Kazakhstan to sign finance and investment commitments totalling $5 billion.
Meanwhile, the rise in oil prices above $60 a barrel and a lift in commodity prices generally in April/May helped restore liquidity to some of the banks’ main customers and the banking system itself. It has been a heart-stopping ride since summer 2007 – but, as markets gradually recover and new sources of finance open up, Kazakh banks should also benefit.
Invest in Kazakhstan An official publication of the Government of the Republic of Kazakhstan, 2009. Page: 80 – 81.
Tags: bank, BTA, crisis, financial, foreign companies, Halyk Bank, Investment, Kazakhstan, KazkommertzBank, Samruk, Timur Kulibayev
