Kazakhstan’s fragile banking system: will it hold?

by Charles van der Leeuw, KZW senior contributor

Kazakhstan's fragile banking system: will it hold?Four out of seven leading banks in Kazakhstan as of mid-August had still to report to the Almaty Stock Exchange’s supervising board on their results over the first half of the current year. “Preliminary” figures, reported to and divulged by the country’s overall financial watchdog, however, show worse situations in the country’s bruised and battered banking sector than feared. Kazakh banks have posted losses in the order of just over 10 billion euro over the first half of 2009. But it is not just the losses that alarms both interested parties and sideliners. Looking at what happened since the beginning of this year with assets and equity can only result in the conclusion that Kazakhstan’s banking sector has become a terrible mess.

If one includes the National Bank, Kazakhstan has 38 commercial banks, until recently all private-owned following a drastic privatisation campaign back in 1997, led by the same man who today finds himself at the helm of the National Bank – Grigory Marchenko. Considered a technocrat without political ties and unhindered by Kazakhstan’s paralysing family-and-business intertwinements, he is nevertheless known for his outspoken views and blunt statements. Seven banks lead the sector, with the rest by and large consisting of niche-market banks with limited market extent. This has not kept them entirely aloof from the financial storms that batter the world these days, but it has spared them most of the pit-dark headlines surrounding Kazakhstan’s leading all-round banks.

The bulk of the trouble hits thereby the sector’s core banks. “Kazakhstan’s 38 banks lost a collective 2.2 trillion tenge in the first half, with assets totalling 12.1 trillion tenge,” a news report dated August 3 by Bloomberg, quoting the FSA, reads. “In the year-earlier period, 35 Kazakh banks had a total profit of 68 billion tenge. […] The country’s banks had 3.1 trillion tenge in reserves to cover nonperforming loans as of uly 1, up by 143 billion tenge in June. Banks had 4.9 trillion tenge in liabilities to foreign investors on July 1, including 1.2 trillion tenge they must pay back after more than five years.”

According to the agency’s reporting, Kazkommertsbank is the only major bank to have posted a net profit over the fist six months, worth 126.5 million tenge, though asset value fell to 2.546 trillion tenge as of July 1. Alliance Bank, since early spring this year in default on its paper pay-out, posted a net loss of 645 billion tente, with Halyk Savings Bank of Kazakhstan, the inheritor of the Kazakh branch of the one-time Soviet all-union people’s savings bank, suffered a net loss of 13 billion tenge. Neither Kazkommertsbank nor Halyk Bank had officially posted their half-year results as of mid-August.

More than two-thirds of the banking sector’s losses over the first six months of this year have been on the sole account of Bank TuranAlem, the country’s largest bank in terms of assets which was bailed out by the government over the winter, now being 75.1 per cent state property, with a loss of 9.9 billion US dollar in the first six months of this year on top of $7.9 billion over the past year. The bank – thereby now meaning the government – wants the bulk of its debts worth in all some 13 billion US dollar written off by its western creditors. The Kazakh Financial Supervision Agency (FSA) on August 12 made a statement in which it set September 18 as a deadline for BTA to reach an agreement with its western lenders or else start bankruptcy procedures.

For the first time, the bank’s new board has openly declared that failure to “restructure” its debt, which according to experts could inflict losses of up to 97 per cent of the $13 billion lump sum owed to its syndicated lenders, would indeed lead to the bank’s collapse. One of the stumbling blocks in the current negotiations is whether or not to include so-called trade finance liabilities into the debt clearing proccess. This would bring lenders’ damage back to the order of 55 per cent of the lump sum at stake, but it would make Kazakhstan’s economy at large liable for payments within the settlement’s framework – at the expense of earnings on commodity exports and other direct income chunneled through the bank. Fears also exist that it might affect the deposits held in the bank by corporate and individual clients.

Both BTA and Alliance Bank have manoeuvred in what to western eyes must seem an astonishing series of moves, including not ust eating into equity capital in order to fill gaps in the face of bad retail loans beyond recovery, but has done it to the extent that total equity value switched to negative. Alliance’s equity capital, which on the balance sheet as of April 1 this year stood at 143 billion tenge, on July 1 had sunk into the red figures to the amount of 469.6 billion tenge, resulting in a negative par value of stock of minus-46,785 tenge per common share, from a tangible value of 14,340 tenge as of April 1. In the same way, BTA’s equity’s as of April 1 already negative value multiplied by 40 times, turning stock value from its end-first-quarter 14.340 tenge to minus-46,785 tenge at the end of the first six months.

This in fact puts liabilities under the banks on the accounts of their shareholders – apart from loss of dividend for which with 631.1 billion tenge in net losses shows little sign of hope to begin with. Given the fact that BTA now has the state as its manority and Alliance Bank as its sole shareholder, little legal trouble is to be expected from it. But in case the government wants to sell it, an eventual buyer will be entitled to demand payment for its takeover rather than paying – at least up to the equity-asset ratio which for BTA amounts to around 1.65 trillion tenge but which in the case of Alliance hardly exceeds 100 billion tenge.

Sceptic commentaries by local and international media prompted state officials to react not without irritation. Thus, news reports and reactions by commentators indicating that current developments in bank policy could hurt Kazakhstan’s international reputation as an investment target, prompted Grigory Marchenko to state to react with the words, as quoted by Reuters: “Image is nothing. I remember 1998 very well. Everybody has come back – and not even in 2 to 3 years but in 18 months.”

However, there are major differences, both globally and within post-Soviet territory, between the turmoil triggered by “black August” 1998 to which Marchenko refers and today’s financial whirlwinds. At the time, over-speculative pricing of liabilities held by mainly second-tier maverick banks and lending companies, along with overstatements of assets led to financial markets distortions to which all paper, including state bonds of the Russian Federation and other former Soviet republics, fell victim. Even though asset-overvaluation both in Kazakhstan and on a global level has also played a crucial role in the overall financial implosion, this time state securities have held (except in the case of Iceland) against the tide and major overnight losses for the public at large have been avoided – so far, that is.

For Kazakhstan should not be considered out of the danger zone yet, as, just to name one example, the International Monetary Fund in a recent report warns. “The slowing economy and the exchange rate devaluation have added to the pressures on bank balance sheets, and as asset quality inevitably deteriorates further, these pressures will only rise,” the IMF report reads. “Several banks are now facing solvency issues, two large banks and one smaller institution have stopped making principal payments, and the banks are now in negotiations with their creditors to restructure their liabilities. The continuing drop in asset prices has also impacted the assets of the pension funds.”

Earlier predictions expressed by Kazakh state officials that the economy is set to pick up as early as in the second half of this year are being belied in the IMF’s report. “The [Kazakh] economy is expected to contract by 2 per cent this year, recovering modestly in 2010 to grow by 2 per cent,” the text reads – thereby indicating a process of stagnation that is set to impose itself on economic development well into the new decade. “The weakening economy and large ‘anti-crisis’ spending will push the fiscal position into a deficit this year, the first since 2000,” the report concludes.

This somewhat less than cheerful scenario, however, can only become true if the clean-up operation in Kazakhstan’s financial system proceeds and succeeds within a limited period of time. Not much is noticed on the streets of Almaty and other major cities of serious trouble by large groups of people making ends meet. But this is mainly because people keep draining personal reserves – something for which the way the state engages the public treasury serves as the perfect example. Fact remains, however, that in the same way the government has mobilised its coffers, saving less than the source of income can justify can give some comfort but it can never be without limits both in terms of quantity and time. For Kazakhstan and its multi-level household book, the clock keeps ticking.

(in million Kazakh tenge)

bank equity assets net income
Alliance Bank (469608.989) 583016.636 (631109.907)
ATF UniCredit*) 98248.603 1135176.990 2668.976
Bank TuranAlem (890290.710) 2566014.572 (1518395.078)
Bank CenterCredit*) 96280 943772 2100
Kaspi Bank 44787.236 323226.255 888.137
Kazkommertsbank*) 322866 3031533 9099
Halyk Bank*) 220934 1982661 4068

*) as of April 1, 2009; net income over the first quarter

source: KASE