December 7 – D-day or doomsday for Kazakh banks?

December 7 is set to be the day on which the fate of the three rotten apples in Kazakhstan’s banking system is supposed to be sealed. State officials on various levels have already made it clear: the billions of taxpayers’ money pumped into the sector was no Christmas present and the government expects to see it back either in the form of new capital or in revenue. The new board of the most troubled bank TuranAlem is engaged in a bitter struggle to reconcile its multinational creditors and the state. Whatever its fate is going to be, it is bound to affect the rest of the financial sector in Kazakhstan as well.

by Charles van der Leeuw, KZW senior contributor

December 7 - D-day or doomsday for Kazakh banks?In the third week of September, word was spread that the banks of Kazakhstan has suffered net losses amounting to a total of 2.6 billion tenge, which is equivalent to 17.2 billion US dollar, or 12 billion euro at exchange rates as to date. The main reason for the losses consisted of provisions against defaulting borrowers. The bulk of that money came on the account of Bank TuranAlem (BTA) and Alliance Bank, which together mobilised 2.3 billion tenge in provisions over the period. Kazakhstan’s financial watchdog, the Agency for Financial Supervision, was quoted by Bloomberg as stating that out of all loan portfolios held by banks, 34.4 per cent, equivalent to 3.5 trillion tenge, should be viewed as “bad loans” – meaning that it is doubtful whether even part of the money can ever be recovered.

True: when taking a glance at the balance sheets of Kazakhstan’s seven largest banks, discrepancies may be striking and in the cases of Alliance Bank and BTA, both in the process of debt-restructuring, losses look distressing. But other banks have managed to remain profitable, even though profits have been reduced to mere trifles in comparison of the enormous amounts of net income they used to gather at booming times. And then of course, there was outside help for some of them. In the cases of Halyk Savings Bank and Kazkommertsbank the state’s shares-for-cash formula has saved the day. As for their peer CenterCredit, it bearishly called on the global corporate takeover market for support. But in this manner, it did manage to provide itself with a safety net through a buy-out by South-Korea’s Kookmin Group.

CenterCredit has found itself in the company of ATF, fully owned by Italy’s UniCredit through the latter’s Austrian subsidiary Creditanstalt. In the first half of this year, ATF managed to earn a net profit amounting to the equivalent of 14 million euro, making it outstanding among its peers. This leaves Kaspi Bank, which is controlled by a group of independent domestic investors through a joint holding based in The Netherlands, as a survivor on its own without any support from the state having been required. All banks among the “big seven” except the two “cases of trouble” mentioned have kept their equity by and large intact.

This leaves the two bad guys in the limelight, along with Astana Finance, which is no bank in a proper sense but has lost substantial amounts of cash through over-the-counter credits to borrowers with flimsy backgrounds. As it looks as though other banks are able to keep aloof from the dark clouds of pending bankruptcy that loom over the “bad three”, December 7, the day when the government has said it is to decide on the final destiny of BTA, the latter’s fate is now less dependent on the state than on the attitude of its corporate creditors outside Kazakhstan.

In the latter case, the National Bank of Kazakhstan under the law has to make sure that all deposit holders get their money back. An earlier news report by Bloomberg, dated September 14, suggests that the government is thinking of getting back to taxpayers once more rather than draining more reserves. One of the proposed measures is to freeze further tax cuts, including corporate tax rate which was brought down from 30 to 20 per cent this year with the intention to fix it at 17.5 per cent for the upcoming year and to 15 per cent for 2011. The reversal should bring in an extra income for the state slightly topping 400 billion tenge. Whether this will bring relief for the population, though, remains doubtful. As always, small and medium businesses will be hit hardest by the setback in taxation, and there will be a general feeling among the population that the weak are being tapped to keep up the big ones’ plush.

Within the government’s plans, only up to one trillion tenge each year can be tapped from the National Oil Fund, which consists of money earned on oil and gas exportation in surplus of the export prices as determined in the state budget. Following a multi-billion one-time cash operation last winter, the NOF has now in the order of 23.2 US dollar left in its coffers. But the money drained from it will only be used to cover state budget deficits and will no longer go directly into bail-outs. In this way, the government hopes to restart the fund’s build-up to a target of $31 billion as of end-2012. For the upcoming year, the state expects an income for its annual budget amounting to 3.2 trillion tenge, including 1.7 trillion from taxes paid by the population, Bloomberg wrote. But its report did not clarify whether or not this is to include the contribution derived from the Oil Fund.

For BTA, now 100 per cent state-owned, the easy way out is the so-called haircut method, through which creditors are forced to take only a percentage of the money they are owned on the spot as an alternative to wait for money that may or may not be recovered at some point. BTA’s debts, according to the latest update as of September 7, amount to $10.3 billion. The bank’s latest proposal to creditors is a maximum-$1 billion pay-off which would come down to a 82.25 per cent pardon. According to the bank, this would enable BTA to turn its net loss of 1.12 trillion tenge expected over the current year into a net profit of 76 billion in the upcoming year, in turn to grow to the amount of 160 billion as of 2014. The detriment for large corporate creditors is less than it looks, as most of the money lent to BTA has been hedged in so-called credit default swaps, transferable paper traded on the open market which serves as a kind of insurance to holders of portfolios containing interbank loans. The more risky variant is expected to be taken up by creditors who have no such refuge because of their low levels of liquidity. Simply said: the rich make sure they lose peanuts (proportionally speaking), while the poor remain exposed.

Profitability is needed in order to make a parallel scheme designed by the government and the state holding Samruk Kazyna which acts on the state’s behalf in governing state-held assets. Today, BTA stock and corporate bonds are being traded on the Almaty Stock Exchange (KASE) at prices in the order of 5 and 35 per cent of their par value on issue. Putting bonds forward as leverage for creditors by changing them into equity requires a spectacular recovery of stock prices. BTA was quoted as expecting in the order of 55 per cent of its creditors to accept the cash buyback option, with 15 per cent opting for debt-for-paper swaps and the remaining 25 per cent willing to reschedule the debt owed to them on a premium basis. But Samruk Kazyna wants to go one step further, according to news reports, and extend the paper-for-cash deal to deposit holders as well. The latter will have little choice since virtually none of them could afford to lose a substantial part of their money even in exchange for the rest being paid out in ready cash. In a country where average salaries do not exceed 250 euro per month and the price of a loaf of bread comes close to half a euro, commoners have little choice but to hang on to their assets however risky they tend to become.

In the same way as schemed for BTA, the government hopes to give enough value to the 86 per cent stake it obtained in Alliance Bank to find a buyer ready to put hard cash on the table for it. “Alliance, which went into default this year, is close to a deal with creditors that would cut its $4.3 billion debt by over $3 billion and give state welfare fund Samruk-Kazyna the 67 percent stake,” Reuters reported on October 6. “When asked about the price of the stake, [Alliance Chief Executive Maksat] Kabashev said it would have an estimated value of between $700 million and $1 billion.” However, how “close to a deal” the bank really is has ben shrouded in evasive statements ever since. The same day, the agency wrote in a separate report that Alliance Bank had “signed a debt restructuring agreement with its creditors’ committee. “The term sheet contains details of the different options that will be proposed to the bank’s creditors under the restructuring to recapitalise the Bank and the basis by which JSC National Welfare Fund Samruk Kazyna will take control of the Bank,” the agency quoted the bank’s management as saying in a statement.

During the laborious process of the bank bail-outs, with criminal proceedings against their former management teams, now on the run, in the making alongside, observers must have lost count of the number of near-deals and would-be agreements that were reached between various parties. Thus, Alliance Bank was quoted as stating that “it expects” two-thirds of its creditors to go along with the haircut deal – but whether they will indeed has remained uncertain. In all, the scenario for Kazakhstan’s “bad three” can still unfold in different directions. Bankruptcy for one or more of them is likely to mean a setback for the sector as a whole, and make existing creditors of other banks all the more nervous for it.

Obtaining new corporate credits, in any case, will remain extremely difficult for Kazakh banks for a number of years to come. This is set to put a brake on domestic corporate and retail credits, as clients will be faced with higher interest rates and far more conservative assessments of collateral. Meanwhile, the state is being put up with assets hardly worth more than the paper they are printed and stamped on, and can only sell it with a loss if at all. Keeping control over the state’s assets for some time to come instead could well be the only remedy to restore consumers’ confidence in the sector – which is the only manner in which eventually investors’ confidence could be restored. Add to this volatile commodity prices on world markets, and the true picture starts turning from a virtual image into a tangible one.

(amounts in million Kazakh tenge; 1USD=KZT152; 1EUR=KZT225)

bank equity assets H1’09 net income
Alliance Bank (469608.989) 583016.636 (631109.907)
ATF Bank 118107.511 1093484.833 3238.388
BTA Bank (890290.710) 2566014.572 (1518395.078)
Bank CenterCredit 98.643 972.008 3.797
Kaspi Bank 44787.236 323226.255 888.137
Halyk Savings Bank 269.259 2035.138 4.318
Kazkommertsbank 378.593 2802.522 9.867

source: KASE

(amounts in million Kazakh tenge; 1USD=KZT152; 1EUR=KZT225)

bank Moody’s Standard&Poor’s Fitch
Alliance Bank Caa3/evolving/NP D/- RD/-/RD
ATF Bank Ba1/negative/NP BBB/negative/F3
BTA Bank Caa3/evolving/NP D/- RD/-/RD
Bank CenterCredit Ba3/negative/NP B/evolving/B
Kaspi Bank B1/negative/NP B/negative/B
Halyk Savings Bank Ba2/negative/NP B+/negative/B B+/negative/B
Kazkommertsbank Ba3/negative/NP B/negative/C B-/negative/B

source: KASE