Kazakhstan’s Banks. Debt Hangover
Lately, new pessimistic forecasts have appeared concerning the perspectives of the development of Kazakhstan’s banking sector. Some experts, following international rating agencies, have begun to express their misgivings about the deterioration in the quality of domestic second tier banks assets. But, unlike the S&P and Fitch analysts, our ‘enlightened intellectuals’ are making much more grave conclusions. In their opinion, if the banks try to close their ‘financial gaps’ by selling out in large amounts their mortgaged property, the lion’s share of which is real estate, house prices will collapse and the construction market and the banking sector itself will follow the suit.
Who’s to blame and what to do?
However, not all experts share this opinion. Oleg Alferov, Director of the consulting company Qncepto, says in his interview with one of Kazakhstan’s weekly newspapers, that “the banks have long and regularly been selling their mortgage real estate, but the turmoil about this subject has arisen in the spring and summer this year.” In his opinion, the importance of this problem is being exaggerated artificially, perhaps, even intentionally: “There are always people who are interested in stirring panic. Today their pretext is houses for mortgage. No one can deny that the number of mortgage non-payments has increased. But the question is, has it increased enough to tear one’s hair and augur the end of the world?”
Mr Alferov supports his point by presenting concrete figures. It appears that the portion of mortgage loans in the banks’ overdue debts does not exceed 2.5%, while the figure for other loans goes up to 40%. That is why, he considers, if there is any ground for worrying about non-payments of loans, it certainly does not lie in the mortgage sector. “For example, in Europe the share of mortgage loans in Gross Domestic Product reaches 70%-80%, while our figure is below 6%. That is, our mortgage market is not merely underdeveloped, it is nothing more than an embryo.” Moreover, in his opinion, in case of need “the banks themselves wouldn’t ever allow a mass sale of mortgage assets: they are not their own enemies.”
Grigory Marchenko, the President of Halyk Bank of Kazakhstan, regards the situation from the same point of view. In the banker’s opinion, it is the mass media who are guilty of everything. “The media shout that the banks have 100,000 mortgaged houses, and when they throw them out on the market through auctions, house prices will ‘collapse’ again. But frankly, I tell you, they’ve spun this figure out of thin air. By our estimation, the average number of mortgaged flats in the banking system is not more than 6,000 or 7,000.”
However, the president of Kazakhstan has also admitted that the banks have problems with mortgaged property. At the opening of a session of Parliament, Nursultan Nazarbayev spoke to the delegates and talked “about the poor condition of our banks and the possibility of further worsening. This happens due to the fact that the price of mortgaged property falls and it does not compensate for the banks’ expenses.”
At the same time, the mortgage problem has a reverse side: mortgage loans. Experts call the existing mortgage situation a crisis, and put the blame for it on the Government.
According to the economist Kanat Berentayev, the Government is responsible for the mortgage crisis. From the very beginning it should have “aimed at the provision of all the citizens of Kazakhstan with affordable houses, both for purchase and rent. That is, it should have increased the supply of such houses, in which mortgage occupies quite a small place.”
But in reality, as Mr Berentayev asserts, the state programme of house construction, adopted in 2004, was mainly aimed at creating and developing a mechanism to stimulate house construction oriented “to the demand, but not to the supply”.
“The mortgage lending market in Kazakhstan is very narrow; it became clear when only less than one third of all who wished to purchase flats under a state programme did meet the demands that the second tier banks imposed,” the expert argues. Nevertheless, the Government was actively introducing and stimulating mortgage lending: suffice it to recall all the advertising campaigns. Our banks did not have sufficient resources for supplying the required amount of loans to the population. They solved the problem through external loans, which grew rapidly; that resulted in the increase of gross external debt. They could have used National Fund’s resources, which would have lowered interest rates. But they had been frozen up to the end of last year.”
During this period the people had felt ’mortgage fatigue’, when they could not starve any more, year after year, to pay the mortgage and consumer loans they had taken out. According to Kanat Berentayev, the rate of inflation, which proved to be much higher than the Government expected, aggravated the situation; while the “winding-up” of small business and the “freezing” of wages in state-financed sectors created a situation in which the public “could not physically” pay the loans they had took out.
Certainly, the borrowers took out the loans of their own accord, and therefore they are responsible for the consequence of this action. However, the expert considers that as the development of the mortgage business was initiated by the Government, it must take part of the responsibility upon itself. “As the Government itself was the initiator of the campaign to develop mortgage lending, and as there are so many people involved in these programmes that the failure of a programme takes on social significance, then both the borrowers and the lenders should receive a certain governmental support.”
In respect of the borrowers, Mr Berentayev suggests delaying, with the concurrence of the banks, payments “until better times”, without penalty, or reducing the sum due with an extension of the loan terms. As for the lenders, the banks should be enabled directly to borrow resources on a repayable basis without the participation of development institutions which are mere intermediaries increasing loan cost.
At the same time Richard Heinsworth, the President of the group of rating agencies GlobalRating and the General Manager of KzRating, believes that the problem lies in the banking system per se. Promoting aggressively the mortgage lending products, the banks failed to realise how the altered market influenced the borrowers.
Probably, stress assets fund (SAF) may become one of the main arguments of the Government against the pessimistic forecasts. In his speech at the opening of Parliament, the head of the country charged the Government and Kazyna Foundation with the task of creating SAF, “taking account of the leading world practice and attracting international financial institutions”. However, the executors of this assignment have not yet given any intelligible comment on how they will accomplish this idea. The Ministry of Finance and Financial Supervision Agency (FSA) consider that SAF’s activity must be based on purchasing from the second tier banks “a considerable part of the portfolio of the acting mortgage loans with a big 40%-80% discount, with a possibility for the banks to buy back.” Thus, the Government suggests that taxpayers should compensate for the bankers’ mortgage portfolio losses.
However, Mr Karim Masimov, Prime Minister of Kazakhstan, made it clear that Kazakhstan banks should not regard the fund as an easy solution of the problem of ’bad’ assets, which must be paid by the citizens. “I would like to warn everybody, that the banks must not regard the fund as an easy and painless way of disposing of problematic assets. The citizens must not pay for the unreasonable investment decisions of certain banks”, he said in his speech at the conference Investment Opportunities. The New Silk Road, organised by Renaissance Capital.
Mr Masimov also said that they had already made a decision to change the initial name of the stress assets fund to the assets stabilisation fund, and to support banks through an “assets base restructuring” mechanism which would become its main goal. And the “bad” loans would be sold at market-prices, while the fund would play a stabilising role. But this must not be the cause of decreasing the efficiency of banks’ operations and assets management.”
Meanwhile, the Kazakhstan Financiers’ Association (KFA) has already made its proposals on Assets Stabilisation Fund (ASF) to the Government, noting that “there are different points of view on the problem of selling problematic mortgage loans by the banks.”
“On the one hand, the real estate price movement and the borrowers’ behaviour give us reasons for more optimistic suggestions. On the other hand, there is a possibility of mortgage portfolio losses of 40% and more,” says Serik Akhanov, the head of KFA, in his letter to Bolat Zhamishev, the Minister of Finance.
In his letter he also speaks about the principal directions of the new fund activity. First, the Financiers’ Association suggests using the ASF to solve the three key tasks: to raise liquidity, to maintain the banks’ loan portfolio quality, and to avoid the ’fall’ of the prices on the real estate market. Second, KFA’s approach is that “the fund is not established to maximise profitability, but to solve concrete macroeconomic and social tasks.” Third, the financiers consider the usage of the standard procedures of Kazakhstan Mortgage Company unreasonable.
To raise liquidity KFA suggests that ASF should purchase from the banks the mortgage loans pool on a buyback-at-discount basis, which would reflect the second level banks’ credit risk. However, the buyback procedure will be applied to loans without overdue payments, and the discount to cover the big banks’ credit risk will be about 10% of the sum of the principal debt before provisions. The banks have the obligation to buy back by the end of a five years’ period, and have the right to do it by the end of one year, while the liquidity cost is equal to the National Bank’s refinancing rate.
KFA suggests solving the task of maintaining the loan portfolio quality by purchasing from the banks the mortgage loan pools past due for more than 30 days. While the discount depends on the quantity of days of delay, and the banks retain the right to buy back. At the same time, collector agencies are invited to work with the loans.
And, finally, KFA considers that the task of avoiding “price-falls” in the real estate market could be solved by way of creating a stress real estate fund. The Financiers Association thinks that to set a minimum price when selling mortgaged property through court should become the main principle. As a result, such an approach would allow the bankers to keep up the mortgage price for some time, while there was a liquidity shortage in the market, and after that, as this market went up again, they could sell the mortgaged property at a higher price.
The Financiers’ Association suggests discussing the possibility of buying problematic business loans after ASF begins its work.
The questions are: what sum the taxpayers will pay for creating new funds; whether the National Fund resources will be attracted for this purpose; how effective and transparent their activity will be.
Neither good nor bad
FSA’s loan statistics on 1 August is another argument against negative estimations of the banking sector’s prospects. However, the Agency's analysts presented another novelty in the past due loans data. They changed the accounting “amount of loans classified as doubtful of the 2nd, 4th and 5th categories and hopeless” for the information based on the accounts of past due loans. As a result, the loans statistics immediately improved, showing the shortening of their amount. According to this new loan calculation method, the volume of past due loans in the banking sector amounted to 510.4 billion tenge (5.7% of the whole loan portfolio), as against 765.9 million tenge (8.6%), using the previous calculation method.
If we take each bank separately, Kazkommertsbank was the leader in this rating, and by 1 July its share of past due loans was 319.4 billion tenge or 14.4% of the loan portfolio, and 193.11 billion tenge or 8.8% by 1 August.
The results of the Halyk Bank of Kazakhstan, which is in second place, rose to 92.5 billion tenge (7.9%). While according to the previous methods, it ranked the 4th place. Bank CentreCredit took the 3rd place – 47.3 billion tenge (7.5%), though the previous month it held the 6th position. Nurbank moved from the 7th to the 5th place – 45.1 billion tenge (28.7% in loan portfolio). Though according to the previous assessment methods, the past due loans at this bank by 1 July were 33.6 billion tenge, (21.1% of the overall loans).
The publication of data on loans remaining past due for 90 days and more became another novelty from the FSA. The leader here is Kazkommertsbank – 69.0 billion tenge (3.2% of the loan portfolio), then come the Halyk Bank of Kazakhstan – 36.2 billion tenge (3.1%), Alliance Bank – 26.9 billion tenge (3.8%), BTA Bank - about 22 billion tenge (1%), Bank CentreCredit – 15.2 billion tenge.
The Agency did not show any innovations on written off loans. The leader here is still BTA Bank with a figure of 30.1 billion tenge, followed by Alliance Bank – 10.4 billion tenge, the Halyk Bank of Kazakhstan – 8.2 billion tenge, Kazkommertsbank – 5.4 billion tenge, and Bank CentreCredit – 4.9 billion tenge.
During July the total sum of inactive loans also increased by 9.6% up to 503.4 billion tenge. Kazkommertsbank's increase was 4.3% up to 186.1 billion tenge, the Halyk Bank of Kazakhstan’s – 20.6% up to 73,7 billion tenge, BTA Bank – 20.5% up to 69.9 billion tenge, Alliance Bank – 10.5% up to 50.4 billion tenge, and ATFBank – 11.8% up to 37 billion tenge.
The largest sum of past due loans including overdue interest rates was in Kazkommertsbank – 83.9 billion tenge (3.8%) as compared to 61.8 billion tenge (2,8%) at the beginning of July. Then come Alliance Bank 34.4 billion tenge (4.6%), the Halyk Bank of Kazakhstan – 26 billion tenge (15.6%), BTA Bank – 23.3 billion tenge (12%), Temirbank – 14.1 billion tenge.
Thus we face an evident worsening of bank assets quality. In consideration of all loans given for 8,955.3 billion tenge, the share of bad loans increased from 1.5% by the beginning of the year to 2.8% by 1 August, this year. The domestic banks’ volume of loans past due for over 90 days came up to 385.9 billion tenge (4.3%) whereas the total amount of doubtful and bad loans reached 503.4 billion tenge, i.e. 1.3 times more. In the meanwhile the FSA says that “this worsening of the loan portfolio quality was expected and it corresponds to the situation in the financial market.” However, according to international rating agencies, the share of ’bad’ loans in the Kazakhstan banks’ portfolio comes to 15% - 20%, and in the event of recession it may increase to 40%.
At the same time, according to FSA statistics, the volume of provisions formed by the second tier banks for their loan portfolios had by 1.4 times exceeded the amount of loans classified as doubtful and hopeless of the 5th category. So, it reached 717.8 billion tenge by the beginning of August. It means that using their provisions, the banks may not only cover possible losses on these loans, but also preserve an extra safety factor.
In this connection, the Agency says that “today the formed provisions cover the amount of inactive loans both by the Agency’s calculation method, and by the international organisations method. It is significant that the Agency’s calculation method of “bad” loans shows a more conservative approach in comparison with international standards.
As for the retained net profits, in the banking sector, in one year this decreased almost two times – to 75.8 billion tenge and by 65.8% from the beginning of the current year, though in July this figure increased by 11.6%. The overdue principal debt and interest rates increased almost by 90% up to 222.9 billion tenge from the beginning of the current year. Nevertheless the standard loans share in the banks’ loan portfolio structure increased from 39.7% to 41.4%. At the same time doubtful loans decreased from 58.8% to 55.8%.
The dynamics of other parameters characteristic of the banking sector’s state, went down by the end of July, according to the forecasts some analysts and participants of the bank market had made early this year. During one year after the start of the correction in August last year, the growth of the banking system’s overall assets has considerably decreased – to 8.8%. In absolute figures they reached 12187.1 billion tenge and the banks’ own capital increased by 24.3% – to 1982.8 billion tenge. So from the beginning of the year the capital adequacy ratio k1 increased from 0.11 to 0.12, and k2 from 0.14 to 0.15. The share of liquid assets with respect to the banks’ total assets came to 14.1% on 1 August.
We don’t care
And yet, in spite of all the negativism, foreign banks keep on visiting Kazakhstan’s market actively, and the country’s second tier banks go on taking external borrowings.
The Halyk Bank of Kazakhstan, for instance, attracted a $300 million consolidated loan for the period of 370 days.
Kookmin Bank, in its turn, purchased a 23% share holding of CentreCredit for $500bn and became its second biggest shareholder. Before the end of the year, South Korean bankers are planning to purchase another 7% of the stock of CentreCredit and in 30 months increase their part in it up to the major share holding. The total investments volume of Kookmin Bank will be about $1.27bn.
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