BRICKS & MORTAR: Kazakh banks hope for more funds from mortgage programme

July 8, 2009. business new europe

Clare Nuttall in Almaty

The Kazakh government’s mortgage refinancing programme has been eagerly accepted by banks and their clients, with several banks hoping for additional funds to satisfy additional demand. However, low consumer confidence is holding back the recovery of the retail lending and real estate markets.

A total of KZT120bn (about $800m at current rates) has been allocated to Kazakhstan’s 12 most active mortgage lenders to refinance existing mortgages. The programme is specifically targeted at the middle and working classes. Only customers with only one property, not more than 120 square metres in size, can be refinanced under the programme. It is also limited to customers who are not overdue with their mortgage payments.

It is mainly these people who are struggling with their mortgage repayments at present. After property prices started to fall from mid-2007, many of the speculators who had bought several apartments on the assumption they would continue to increase in value, simply handed their keys over to their bank when it became apparent that their mortgage repayments would far exceed the new value of the property. However, individuals and families who had taken out a mortgage and made a downpayment did not have this option when they entered a negative equity situation.

“This is really a social programme designed to keep people in their homes and avoid political unrest,” says Shukhrat Sadyrov, managing director of ATF Bank, one of the programme’s participants. “Before the crisis, real wages were increasing by an average of 10% a year, so many people would take out a large mortgage in the expectation that it would become easier to pay over time. In 2007, salaries stopped going up and some companies laid off workers or reduced salaries. The second trigger was the devaluation, which added to the problems because a lot of mortgages are either dollar denominated or linked to the dollar. It was quite a shocking situation for people, because their salaries were falling or flat and their expenses increased. The ratio of overdue loans increased across the banking sector.”

Devaluation blues

The government had already stepped in to support the construction sector, and ensure that at least some of the many unfinished developments were completed. Astana had been worried about the social consequences of the construction sector’s collapse, in particular the effect on the dolzhniki, as the large number of people who had made large downpayments on as yet unbuilt properties are known. After the tenge’s depreciation in February, banks reported increasing difficulties on the part of their customers to meet their mortgage payments.

The refinancing programme has been welcomed by banks as a way to resolve these difficulties, and bring down the interest rates – typically ranging from 14-18% down to 11% (and as low as 9% for government workers). There are, however, some questions about how the money has been divvied up, with the banks in which the government has a stake receiving a larger share proportional to their actual share of the mortgage market. Meanwhile, other participants in the programme say they could have used more funds than they actually received.

“ATF has over 10% of the mortgage market in Kazakhstan, but we received just KZT3bn from the KZT120bn allocated to the programme. This is much less than we could have used,” says Sadyrov. “The state-owned banks got a much larger share of the funds. Officially, this was to support mortgage refinancing, but by giving more to the banks with state ownership, this also helped to solve their liquidity issues. Some of the banks which received more of the funds than they deserved couldn’t utilise all the money by the May 15 deadline, and the government is now trying to extend the period of utilisation. This does not make us happy, because we could have used those funds for our customers.”

Sadyrov also believes the government is making a mistake in setting close to commercial rates for its lending. “Reducing interest rates from 14-16% to 11% (or 9% in some cases) doesn’t make a huge difference; it just takes us back to the pre-crisis scenario. In order to really ease up this situation, the interest rates charged to mortgage holders should be around 6-7%. This would really make a difference to the country. It would either stimulate consider spending, or people would deposit the money with the banks,” he says.

The director of Eurasian Bank’s retail lending department, Aliya Bergaripova, says that her bank could also have used more funds and faces unmet demand for refinancings. However, she says she is optimistic the bank will receive further funds from the government to support this need. “Eurasian Bank received KZT3bn under the programme, and granted 868 refinancing applications from our customers,” she says. “We have already received additional requests worth another KZT1.5bn and expect to receive more funds from the government to refinance these additional mortgages.”

“We believe this programme was very successful, as it’s reduced the pressure on our customers by lowering their interest rates from 18-19% to 9-11%. If additional finance is issued, we would be very happy to participate once again, as we believe this and other state programmes are timely and appropriate,” she added.

Banks are continuing to issue some new mortgages outside the programme. According to Bergaripova, Eurasian Bank at least has not had to significantly change its conditions, since the bank has always taken a conservative approach to granting mortgages.

However, both banks say the issue is less to do with the lack of availability of funds for new mortgages and tighter conditions than with the lack of consumer confidence. “We are issuing some new mortgages, but few people want to take out a mortgage at present, as the confidence level is very low right now,” says Sadyrov. “Nobody is sure if they will stay in their jobs for the next six months. For the loans that are taken out, typically the loan-to-value ratio is not very high, it’s often around 30-40%.”

“Eurasian Bank is still granting new mortgages, but, of course, there is a difference in the volume compared to the peak in 2006-07,” says Bergaripova. “What we see now is demand being postponed. Fewer people are asking for mortgages, as the price of real estate is still falling, and they expect it to fall further.”

She forecasts that there could be a further drop in real estate prices, “but a very small one. We believe this market is close to the bottom.” She also notes that in May there was already an increase in demand for mortgages, and says Eurasian Bank has seen an upturn generally in consumer lending in recent months.

But with visibility about pricing in the real estate market extremely low, most people are expected to put off buying until there is some clarity. This – as much as the crisis itself – is postponing recovery of the housing market. “Transparency is really required in this market. When it was booming no one really cared – people could take out an easy loan, look at an apartment, like it, buy it,” says Sadyrov. “Now, they are trying to decide if a price is high or low, but there are no clear indications. The market is very untransparent.”