“Too Big To Fail”: Kazakhstan Saving Its Systemically Major Bank – Kazkommertsbank
December teemed with news regarding major banks in the region. After expected nationalization of Ukrainian PrivatBank, information appeared about problems of Kazakh “Kazkommertsbank” and possible scenarios of its bailout, reports KazWorld.info with reference to the “CENTRE FOR RESEARCH INTO ECONOMIC AND SOCIOCULTURAL UPWARD ENHANCEMENT OF CIS COUNTRIES CENTRAL AND EASTERN EUROPE”.
The rumors appeared after president’s Nazarbayev interview to Bloomberg, when he spoke about a necessity of bank resolution. According to Bloomberg, Kazakhstan has extended an emergency loan to the country’s biggest bank, the first step in what could be a rescue that may reach 1.5 trillion tenge ($4.5 billion). Kazkommertsbank has borrowed about 400 billion tenge from the central bank from Dec. 15 to support liquidity. Officials were instructed to stave off the collapse of the nation’s biggest holder of deposits and are discussing various scenarios for how a bailout might occur
Halyk Bank, the nation’s second-biggest lender controlled by president’s daughter and her husband, may start talks about gaining control of Kazkommertsbank at a later stage of the rescue.
Note: Kazkommertsbank, owned by Kazakh businessman Kenges Rakishev, is the largest bank by total assets in Kazakhstan among 34 banks, and Halyk Bank is the second large.
President Nursultan Nazarbayev said last month that the government sees two possibilities for improving Kazkommertsbank’s health: either shareholders will find funds to boost its assets — “make it viable and it will pay back its credits normally” — or the lender will turn to the state for a loan.
The National bank confirmed that the Board approved a loan in amount of KZT 400.8 billion under the standard procedures on provision of short-term liquidity to the second-tier banks. The regulator also informed that Kazkommertsbank was in compliance with all the regulatory requirements including capital adequacy and liquidity.
In turn, Kazkommertsbank reported that to evidence the short-term nature of the raised funds the Bank had already liquidated KZT 200 bn part of the loan to the National Bank of Kazakhstan. The remaining part is scheduled for repayment by the end of Q1, 2017.
“Last week, Bloomberg with reference to anonymous sources commented that the Bank has been granted an emergency loan, which has been assumed as a first step of the special government-sponsored KZT 1.5 trillion rescue program being discussed between the Management of the Bank and the National Bank of Kazakhstan. The Bank hereby officially states that it is not in any negotiations with the National Bank and the Government on bailout,” the statement of Kazkommertsbank reads.
According to the press release, the Bank used the standard procedure of the National Bank, which is available for all commercial banks to support short-term liquidity, ahead of upcoming holidays in December. For the last decade, the Bank has used this procedure at least 10-12 times. Kazkommertsbank also encouraged its clients to trust the official releases only and follow official announcements of the Bank’s shareholders and the Management, as well as the National Bank of Kazakhstan and the Government.
The loan has been used to service certain clients’ payments prior to year-end closing. In addition, the Bank became fully prepared for upcoming seasonal increase in payments and transfers of the clients through the network of Qazkom branches and ATMs, which are also providing banking services to the clients of other 9 (nine) Kazakh banks. Based on annual statistics data the volume of cash/payment operations increases substantially during holiday season. In December 2015 the Bank’s ATM network serviced clients’ transactions for the amounted of about KZT140 bn against KZT90 bn back in December 2014. The Bank expects such transactions to exceed KZT 200 bn. for December 2016. Taking into account that two thirds of payments in Kazakhstan are processed via Kazkommertsbank payment systems, the Management pledged to put all efforts to prevent any delays or inconveniences for the Bank’s clients.
To confirm its stable situation the Bank promised to publish the financial report over nine months, approved by external audit.
The National Bank reported that banks’ capital increase is one of the priorities to improve competitiveness of the banking sector. For this, the Central Bank is holding talks with Kazkommertsbank shareholders on increase of capitalization.
At the same time, Bloomberg insists that a bailout is among the alternatives under discussion between officials from Kazkommertsbank JSC and the central bank as Kazakhstan edges closer to its biggest bank rescue since the global financial crisis seven years ago led to $20 billion in debt restructurings by the country’s lenders.
Bloomberg cites S&P Global Ratings estimates made in October, according to which battered by a collapse in oil prices and a recession in neighboring Russia, the Central Asian nation’s financial system is facing mounting distress, with almost one in three loans either non-performing or renegotiated. Bloomberg also refers to a Moscow-based analyst at Fitch Ratings, who says that Kazkommertsbank’s problems are mounting because of its structurally loss-making performance. According to Fitch Ratings base-case expectation, the state will not provide support to Kazkommertsbank in the amount sufficient to prevent losses for its senior creditors.
Problems of Kazkommertsbank are also linked to twice-defaulted BTA Bank. As a reminder, the BTA bank was nationalized in 2009, but mass withdrawal of capital worsened the problems, caused by the mortgage crisis of 2008. The bankruptcy procedure was not applied, though. Various teams of managers failed to fix the problems, and the government asked Kazkommertsbank to take the problem bank off its hands. The Bank complied, saving BTA from bankruptcy, the government from legal proceedings and the country from rating downgrade. Six years after purchasing BTA, Kazkommertsbank opened 630 bn tenger and $5.6 bn credit line till June 30, 2024, which makes 49.8% if its loan portfolio.
According to Today.kz, rumors about problems, nationalization or merge of Kazkommertsbank appeared when the Bank announced disposal of pledged property of BTA bank, which mostly includes buildings, real estate land and agricultural land. Thus, if we admit that Kazkommertsbank is indeed the target of mass media attack, the reasons are the following: budget money frauds over rehabilitation of BTA bank, and unwillingness of owners of pledged assets to pay off loans.
At the same time, the National Bank admits that current macroeconomic situation may force some players of the banking sector to merge in order to improve competitiveness. According to the NB governor, banks lacking capital may try to increase their assets with the help of investments of their shareholders or through purchasing other banks. Merge is a regular practice in the sector, enabling its players to become more profitable and efficient.
As for the prospects of possible merge with Halyk Bank, Bloomberg says the nation’s second-biggest lender may start talks about gaining control of Kazkommertsbank at a later stage of the rescue, if Kazakhstan government agrees to provide about 1.5 trillion tenge to plug holes in the troubled lender’s balance sheet. Otherwise, Halyk may not benefit from the deal, as possible acquisition of large distressed banks, such as Kazkommertsbank, could be detrimental for financially stronger acquirers, their shareholders and creditors.