BTA Bank Probably Understated Bad-Loan Total by 20%, Strategy Adviser Says

May 30. Bloomberg

By Erik Larson and Nariman Gizitdinov

BTA Bank Probably Understated Bad-Loan Total by 20%, Strategy Adviser SaysBTA Bank, Kazakhstan’s biggest lender before its nationalization and default two years ago, probably understated its bad-loan total by as much as 20 percent and may require more government aid or risks being broken up.

Negotiations with creditors were based on projected losses of about $14.2 billion on bad loans, according to John Howell and Co. Ltd., BTA’s adviser on its asset recovery strategy. The bank is currently off that estimate by 5 percent to 10 percent and could eventually miss it by as much as 20 percent, said Nick Dove, the director at the consulting firm in London. Twenty percent of the initially projected loss is $2.84 billion.

Creditors “negotiated quite hard, leaving BTA with less wiggle room for potential further deterioration than it would have liked,” Dove said in a phone interview in London. “The options are a split of the bank, or further support.”

BTA, which was taken over by a state-run fund in February 2009, defaulted on $12 billion of debt before winning 92 percent creditor approval of a restructuring plan in May 2010. The bank is still finding new evidence of bad loans stemming from an alleged fraud by ousted Chairman Mukhtar Ablyazov and former Chief Executive Officer Roman Solodchenko, Dove said.

‘Overly Optimistic’

Royal Bank of Scotland Group Plc (RBS), Wells Fargo & Co. (WFC) and other lenders that financed BTA’s rapid growth before the global credit crisis, used “overly optimistic” estimates and sought to avoid bigger write-offs during debt negotiations, Dove said.

The Almaty-based lender declined to comment on the size of its bad loans or a possible reason for the discrepancy, according to a statement released by its press service May 26. Eric Lalo, a Paris-based representative of Lazard Freres & Co., which advised BTA on its debt restructuring, didn’t respond to a message left on his phone or an e-mailed request for comment.

BTA set aside 1.7 trillion tenge ($11.7 billion) against bad loans as of May 1, 2010, less than a month before it reached a deal with creditors.

Its loan holdings were at 2.2 trillion tenge at the time, based on unconsolidated data published by the nation’s financial regulator in accordance with Kazakh accounting standards.

BTA’s restructuring allowed it to reduce $16.7 billion of debt to $4.2 billion after paying cash and distributing shares. The bank’s growing pool of delinquent loans stems from an international portfolio and its “good” domestic loans would perform much better, Dove said.

Moody’s Upgrade

Moody’s Investors Service on May 24 upgraded BTA’s debt rating three notches from Caa3 to B3, six levels below investment grade. The revision was prompted by an $11 billion recapitalization that followed BTA’s restructuring and a “moderate probability that systemic support would be extended to the bank’s depositors in case of need” by the government, the rating company said in a statement.

BTA won’t seek money from the state-owned National Wellbeing Fund Samruk-Kazyna, which now holds about 81 percent in the bank, Chief Executive Officer Anvar Saidenov said in Astana on May 20. The lender plans instead to use profit from operations to bolster its capital, he said.

The deviation from the earlier bad-loan estimate is the result of new evidence of fraud, Dove said. The lender has sued Ablyazov and Solodchenko in a U.K. court, seeking the return of more than $4 billion the men allegedly siphoned from the bank through fake loans and share sales before fleeing from Kazakhstan to London.

Worse Than Expected

“The information we’re finding continues to be worse than was originally expected,” Dove said. The margin of error “is not yet fixed in stone, and could move either way from here.”

Locksley Ryan, the London-based spokesman for Ablyazov and Solodchenko, said the men are innocent of the claims and cannot be blamed for the bank’s current financial problems.

“The previous management maintains the damage done to the bank is the result of nationalization and the mismanagement of the loan portfolio – post-restructuring,” Ryan said in a phone interview in London.

Ablyazov and Solodchenko say the case is politically motivated due to Ablyazov’s attempt to start a political challenge to Kazakh President Nursultan Nazarbayev, who has been in power for two decades in the former Soviet Union’s second- biggest energy producer.

Commerzbank, Barclays

BTA, whose creditors include Commerzbank AG (CBK) and Barclays Plc (BARC), last year issued 10-year “recovery notes” to creditors for about $5 billion of bad loans as part of its restructuring. The lender will share with creditors, on a 50-50 basis, recoveries from impaired assets, including damages from the U.K. lawsuits.

BTA’s shares, traded in Luxemburg, dropped to $11.9 on May 26, the lowest price since they started trading in March at $20.90 under the restructuring plan.

The yield on BTA’s dollar-denominated notes due in 2018 reached a record high of 14.142 percent on May 27.

Other creditors that stand to benefit from BTA’s asset recovery include Wells Fargo & Co., Bank of America Corp. (BAC), Standard Chartered Plc, HSBC Holdings Plc (HSBA) and New York-based Goldman Sachs Group Inc. (GS), which in July 2009 quit as BTA’s restructuring adviser.