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 KAZAKHSTAN International Business Magazine №2, 2008
 Banking Sector. Every alley is a dead end
Banking Sector. Every alley is a dead end
The information life of the banking sector got into full swing in the last month of spring 2008. While proclamations were being made announcing that there was no crisis in the country and that the economy was continuing to develop rapidly (and the IMF agreed with that), the ratings agency Standard & Poor's sprang another unpleasant surprise on us having revised its outlook on Kazakhstan's sovereign credit ratings from stable to negative. However the country's long-term ratings (foreign and local currency debt ratings of 'BBB-' and 'BBB' respectively) remain unchanged. The question is – for how long?
Pros and cons
"We expect the outlook to be resolved within 12 to 18 months," Standard & Poor's credit analyst Ben Faulks noted. "The outlook revision reflects the increasing risk that deteriorating bank asset quality in combination with funding challenges will weaken the country's fiscal indicators external balance sheets."
"The negative outlook indicates the likelihood of a downgrade if financial sector problems increasingly weigh on economic prospects or become a material fiscal burden," Mr. Faulks said. "The ratings would likely be lowered if a large portion of the National Fund were used for bank recapitalisation. External financing difficulties would also bring downward pressure on the ratings. Conversely, the outlook will revert to stable if banking sector difficulties are contained in a manner that has limited impact on the economy and public finances."
According to S&P's, economic growth is likely to fall to below 4% in 2008, putting pressure on banks' asset quality. Meanwhile, our government would like this figure to be 5-7%.
The Kazakh response was not long in coming. Bolat Zhamishev, Minister of Finance, was the first to react – speaking to the Mazhilis meeting he stated that one needs to accept S&P's decision "as it is". Bakhyt Sultanov who is heading the Ministry of Economy and Budget Planning took quite a different position and was rather categorical and irreconcilable. In his view the agency analysts base their conclusions on the most pessimistic near-term scenario whereas the mid-term positive factors indicative of sustainable growth of the Kazakh economy must be taken into account. Overall, the official Astana has agreed neither with S&P's forecast on the GDP growth in 2008, nor with the statement that our banks will encounter problems with repayments on external debt.
Meanwhile, the revision of the sovereign ratings has entailed similar changes for a whole range of national companies and their affiliates. The outlook has been revised to negative on the ratings of the National Company KazMunaiGas together with its offshoots, KazMunaiGas Exploration Production and KazTransGas. Later, the list was updated to include Development Bank of Kazakhstan, KEGOC, Mortgage Guarantee Fund of Kazakhstan, Agrarian Credit Corporation, and Kazpost. The outlook on KazTransOil – another offshoot of KazMunaiGas – has been changed from positive to stable.
Considering these steps it would be logical to expect the S&P to revise its ratings or outlooks on the Kazakh banks as well. Nevertheless, instead of this, the agency has affirmed its credit ratings for the twelve second-tier banks at a time, viz.: Kazkommertsbank, Halyk Bank, BTA Bank, ATFBank, Temirbank, Nurbank, Eurasian Bank, Lariba-Bank, Tsesnabank, Kazinvestbank, Alliance Bank, and BTA Ipoteka Company. It remains unknown why Bank CenterCredit and Caspian Bank have failed to enter this list.
The S&P's analysts note: "Although asset quality continues to deteriorate, agency analysts consider that problems are manageable, due to the loss absorption capacity of the banks and ongoing state support."
It seems that the agency has not yet come to a decision about its forecast on the development of our banking sector. According to S&P’s, the coming half year, or full year, will make it clear whether or not the slowdown in the banking sector growth rate will be 'soft'. S&P's believe that the trends in the real estate market and in the whole economy will play a vital role in the issue.
Moody's agency has also made its contribution and lowered Temirbank's long-term ratings from Ba2 to Ba3 referring to the intention of BTA Bank (Temirbank's principal shareholder) to sell its offshoot. Besides this, the Moody's regards Temirbank's reserve coverage as not quite adequate for the level of its assets deterioration. The agency also points to the pressure to which the liquidity profile is being exposed due to the outflow of deposits and the high dependence on external borrowings.
"I wonder who the judges are!"
Late in April, Fitch ratings agency published a special report "Kazakh Banks’ Asset Quality Shows Negative Trend; Disclosure Opaque", with the title alone looking none too promising. The report claims that asset quality in the Kazakh banking system has deteriorated significantly since end-Q3 2007.
The increase in the loan impairment ratios has been most marked at Alliance, followed by Caspian and Kazkommertsbank. However, analysts think this process has not reached the critical threshold as "loss absorption capacity for the system as a whole, and for these banks in particular, is also significant". Highlighting the existing risks Fitch mentions potential asset quality deterioration as "the main near-term risk for Kazakh banks, driven by a gradual seasoning of loan portfolios, slower economic growth, tighter corporate liquidity, falling real estate prices and potential pressure on the Kazakh tenge."
In its report Fitch refers to data from the FSA (Financial Supervision Agency of Kazakhstan) mentioning that the proportion of the system’s individually assessed loans falling into the statutory Doubtful 5 and Loss categories has risen from 2.0% at end-Q307 to 4.0% at end-February 2008. The proportion of individually assessed loans falling into the Doubtful 2/4/5 and Loss categories, which should capture most loans overdue by seven days or more, has also increased markedly, from 3.6% to 8.8%.
In terms of individual players, Fitch notes that "analysis of loan impairment trends at Alliance is complicated by a significant change in that bank’s approach to assessing homogenous loan pools in Q4 2007, but Alliance’s reserve coverage of impaired loans is now much tighter than at other Kazakh banks." The experts are of the opinion that the increase in reported loan impairment at Kazkommertsbank "is partly explained by the prudent classification of a large, currently performing exposure".
Bank Caspian was the first to respond to the Fitch report. Mikhail Lomtadze, CEO of Bank Caspian, has diplomatically emphasised that the trend mentioned by Fitch analysts is naturally following from the slowdown in lending. Mr Lomtadze argues that this trend developed when some portion of clients started to refinance their debt with one bank drawing funds from another, in the pre-correction period. And now when lending has dropped, these clients cannot refinance their debts anymore and fall into arrears. As regards the assessment of Bank Caspian, Mr Lomtadze criticised the statistics used by Fitch experts in their conclusions. The data were taken from the regulating body, the FSA, while "the approach to loan classification and formation of reserve coverage applied by the FSA differs from international practice," Lomtadze said. "It would be more correct to stick to the analysis based on international standards where the number of days of loan arrears is a key factor (90 days). Bank Caspian has introduced this practice in late 2007 and today this indicator has approximated 3.2 % in Q1 as compared with 3% at the end of 2007.” On the other hand, the banker admits that "not all the banks follow this approach" and therefore it is hard for Fitch to make a comparison.”
In its press-release Alliance Bank acknowledged the Fitch findings as "generally objective". However the bank deemed it necessary to clarify the reasons behind the increase in the loan impairment, and "give its own assessment of the current situation." The bank attributes the upsurge in loan impairment ratios to three factors, namely, reduction of credit portfolio along with a growing share of overdue loans; portfolio entering a maturing phase, and tightening of internal policy pertaining to classification of existing borrowers. This maturing phase is understood as expiration of the average term of a consumer instalment loan which averages 2.5 to 3 years. Alliance Bank started to actively develop consumer lending segment in 2006, with maximum sales reported in spring 2007. Moreover, the Bank did not share the Fitch viewpoint with regard to the inadequate level of the Bank's reserve for loan repairment. "Since Alliance Bank embarked on the development of consumer lending, it has deliberately accepted a rather conservative method to calculate reserves for a portfolio of homogenous loans. The bank's unique business model implied application of non-standard tools, in particular, insurance of retail credit portfolio to minimise credit risks."
Finally Alliance Bank mentioned that it had the highest levels of profitability and capitalisation in the sector, which "enable the bank to absorb potential losses connected with the quality of the current credit portfolio much better than any other bank in Kazakhstan". Alliance Bank management is convinced that to assess the quality of assets and the associated risks it is necessary to take into account the difference of its business model from that of their competitors whose business is focused on financing corporate clients and SMEs.
Standard & Poor's have also expressed their view on the quality of Kazakh banks' assets saying that the actual level of problem assets is much higher than that mentioned in the banks' reports. The analysts note that when calculating the amount of a problem loan they take into account every factor, namely: the total balance on the overdue loans, rather than the balance for the last period, restructured loans, foreclosed mortgaged property, and loans connected with all above components. The special highlight is given to the banks with "the most aggressive development strategies" since, according to the analysts; the quality of consumer and mortgage loans is deteriorating.
Strange statistics
Another surprise has come with the news that this year our banks will have to repay over $17 billion on external borrowings instead of $12 billion as was reported earlier. It may be recalled that both FSA and the National Bank referred to the first figure for a long period of time. The new target for the Kazakh banks in 2008 has been voiced by Nina Zhusupova, CEO of Kazkommertsbank. As no official comments have followed, analysts have had to investigate this strange discrepancy on the basis of the National Bank's data.
The total sum of Kazakhstan's external debt amounted to $96.4 billion at the beginning of 2007. The banking sector accounted for $39.8 billion while the bigger share ($48.8 billion) was pertaining to other sectors of economy. The same is the case with the long-term part of the external debt – more than a half of its total amount ($84.6 billion) belongs to non-banking sectors. Another noteworthy fact is that some 56.8% ($22.6 billion) of the banks' external debt are the debts of bank-affiliated organisations (non-resident companies in direct investment relations with the resident borrower are regarded as bank-affiliated organisations by the National Bank) while the bank creditors and other financial institutions owe approximately $13 billion.
The payment schedule 2008-2009 looks optimistic at first sight. The largest payments fall on the first half 2008 and then diminish gradually. During Q1 the banks have already transferred almost $6 billion from the total amount of $45.9 billion. They are expected to repay $4.5 billion in Q2, $3.2 billion in Q3 and $3.3 billion in Q4. However, it is difficult to say for certain that this sum will be final.
Given the repayment schedule in 2008, the next year is expected to be easier for the bankers. They will need to make quarterly payments of $2.4 billion, $1.5 billion, $1.5 billion, and $2.5 billion respectively. All in all in 2009 foreign creditors will have received $7.9 billion (the banks will have to repay the remaining $24.4 billion in the ensuing years). Some $15.4 billion will be repaid by the other sectors of economy in 2008-2009, and $4.6 billion will be transferred as inter-corporation debt.
Favourites and outsiders       
Criticised as they may be, the FSA statistics remain the only source of data for evaluation of the state of affairs in the financial sector. Based on the operational data of non-consolidated and non-audited banks' reporting documentation, these statistics can show that for example in April the amount of BTA Bank assets (the leader in terms of amount of assets) diminished by 6.7 billion to 2,725.6 billion tenge. Its immediate successor, Kazkommertsbank, has seen a decrease by 54.9 billion (2,546.8 billion tenge). In all appearances, the assets have flown to their nearest competitor – Halyk Bank who has increased its assets 30.8 billion to 1,659.3 billion tenge. The assets of Alliance Bank have diminished by 23.4 billion to 1,129.1 billion tenge, and the last one in the cohort of 'trillionaires' is ATFBank whose weight has dropped by 26.8 billion to 1,010.6 billion tenge. It is easy to reason out that altogether the five have shrunk in their assets by 81 billion tenge and the banking sector assets have declined by some 121.6 billion to amount to 11,692.4 billion tenge. All this proves that the hard times continue.
BTA Bank continues to lead in terms of shareholders' equity (411.6 billion tenge), which incresead by 2.1 billion tenge in April. Kazkommertsbank with its capital increased by just 0.8 billion to reach 281.6 billion tenge is ranking second. A little farther from these two goes Alliance Bank together with Halyk Bank. The first one has seen a growth by 1.7 billion to 165.2 billion tenge. The Halyk Bank equity has grown by 3.9 billion to 153.5 billion tenge. ATFBank is tailing this procession with a 0.6 billion increase (74.5 billion tenge). As regards the whole sector, the cumulative equity of home banks in April 2008 has grown by 16.9 billion to reach 1,478.9 billion tenge.
As regards retail deposits, their overall volume has grown by 13.1 billion to 1,513 billion tenge which shows increasing trust in our banks. Halyk Bank is still leading in the market with its household deposits having risen by 5.3 billion to 372.4 billion tenge. Its nearest competitor, Kazkommertsbank, is also getting well – household deposits have increased by 4.4 billion reaching 302.3 billion tenge. Kazkommertsbank is followed by BTA Bank whose retail deposits continue to fall (by 0.8 billion, to reach 267 billion tenge). In ATFBank, on the opposite, household deposits have grown by 2.7 billion totalling 145.7 billion tenge which has enabled ATF to outstrip its rival, Bank CenterCredit. The retail deposits in the latter have declined by 1.5 billion to drop to 139.4 billion tenge.
In terms of corporate deposits as per the FSA statistics Kazkommertsbank headed the list in April (growth by 13.7 billion to 1,347.2 billion tenge). BTA Bank comes next though its corporate deposits have dropped by 7.2 billion to 1,050.8 billion tenge. Halyk Bank ranks third (growth by 53.5 billion to 879.2 billion tenge). Alliance Bank is the fourth (decrease by 10 billion to 424.8 billion tenge) and Bank CenterCredit brings up the rear though it has increased the figure by 17.5 billion to reach 375.9 billion tenge. Altogether, the cumulative amount of corporate deposits has grown by 55.1 billion reaching 5,126.2 billion tenge in Kazakhstan.
On the whole the banking sector has seen no major changes in its table of ranks recently. However both analysts and the players themselves acknowledge that the growth of bank assets this year will be insignificant and some banks may even show negative dynamics. But the bankers' headache is not about further growth but about the reducing possibilities for attraction of funds to maintain liquidity and stand to its external obligations. The trust of investors and the people to Kazakhstan's banking system will depend on whether or not the Kazakh banks will be able to get through this situation.
Noticeable changes have occurred in the banks' positions in the traditional stock analysts' Top 30 ranking of the most capitalised companies whose stocks are in the KASE official list of securities. On the one hand, these changes are connected with appearance of the giant ENRC Plc who has taken the leading position with capitalisation of $33.3598 billion. This figure is almost one-third more than the cumulative figure of ex-leaders Kazakhmys Plc ($14.3614 billion) and RD KazMunaiGas ($11.8616 billion). On the other hand, the other banks were not at a standstill either, thus, for example the March leader BTA Bank has shrunk by $437.3 million to $4 billion 590.1 million in April and has shifted from the third place to the fifth position giving up its place to Kazkommertsbank whose capitalisation has grown by $107.1 million to $4 billion 967.8 million. Halyk Bank ranks fourth with its $4 billion 370.3 million. ATFBank found itself in eighth place as its capitalisation has increased by $190.5 million to $2 billion 219.2 million in April. The ninth player, Alliance Bank, has thrown off $277.4 million to $1 billion 597.3 million. As a result, Bank CenterCredit ($1 billion 591.6 million), tailing the line, has closely approached Alliance Bank though its capitalisation has also decreased by $113.1 million. Among the other banks, only Temirbank ($1 billion 229.7 million) has made it into the group of 'billionaires'.

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