Kazakhstan: Spectre Of BTA Comes Back To Haunt KKB

Kazkom and BTA: Together is better / www.kazworld.info

Echoes of the financial crisis and the 2014 oil price crash continue to reverberate in resource-rich Kazakhstan and Azerbaijan, where authorities have been forced to step in after bad debts threatened to swamp both countries’ biggest banks, writes euromoney.com.

On February 13, Kazakhstan’s central bank announced plans to add KT2 trillion ($6.4 billion) to the Problem Loan Fund, a state-owned bad bank set up in 2012. No details were given as to which banks would be the recipients of this largess, but analysts say the assumption is that it will be used to buy distressed assets from market leader Kazkommertsbank.

KKB’s problems stem from its takeover three years ago of BTA, the Kazakh bank that was nationalized after the global financial crisis. The legacy portfolios of BTA were hived off into a separate entity in January 2016, but the deconsolidation was structured as a loan from KKB to the bad bank, leaving the former on the hook for $7.5 billion of poorly provisioned pre-2009 bad debts.

The injection of cash into the Problem Loan Fund by Kazakh authorities comes a month after the start of merger talks between KKB and Halyk Bank, the country’s second-largest lender.

Halyk, which is controlled by the daughter and son-in-law of president Nursultan Nazarbayev, is currently the only Kazakh bank generating returns much above break-even. Its chairwoman, Umut Shayakhmetova, has indicated that the BTA loan would need to be taken off KKB’s books ahead of a merger with Halyk.

Support

Analysts say policymakers are likely to support this position. “The last thing they want is to undermine Halyk’s credit ratings,” says Mikhail Nikitin, a credit analyst at VTB Capital. “They need Halyk as a properly capitalized lender, not a consolidator of problem assets in Kazakhstan.”

For KKB’s shareholders, as well as  holders of its $1.15 billion-worth of outstanding Eurobonds, the key question will be how the transfer of its bad debts to the state will be managed.

As Nikitin notes, the bailout last year by Azeri authorities of International Bank of Azerbaijan (IBA) saw Am10 billion ($5.6 billion) of distressed assets bought by the state at par. “That would be trickier in the case of KKB, which unlike IBA is privately owned,” he adds.

Policymakers in Azerbaijan could have bailed in holders of IBA’s Eurobonds but chose not to, possibly because the $600 million outstanding would not have gone far towards fixing the bank’s problems. Analysts say these are far from over, despite a Am500 million recapitalization by the state in January.

Dmitri Vasiliev, a sector analyst at Fitch Ratings, says a further transfer of Am5 billion of bad debts from IBA to the state’s problem asset fund is expected later this year.

IBA’s situation is superficially similar to that of KKB in that both banks are struggling to cope with large portfolios of legacy bad debts. Analysts note that in IBA’s case, however, the problems are of its own making rather than, as in the case of KKB, the result of taking on a failed bank.

“IBA’s issues are the result of years of questionable lending practices and misreporting of concentrations in its loan book,” says Nikitin. Jahangir Hajiyev, who stepped down as head of IBA in 2015, was jailed for 15 years in October for misappropriation of up to Am5 billion of bank funds.

Analysts note that IBA’s weak asset quality is also due to the use of the bank by Azeri authorities to fund a construction spending spree over the past decade.

“IBA used to have huge exposure to project finance loans with long tenors and grace periods on principal – even on interest payments, in some cases,” says Vasiliev.

These problems came to a head last year following the Azeri government’s decision in December 2015 to move to a floating exchange-rate regime. The manat promptly lost a third of its value against the dollar, creating huge pressures in the banking system due to high levels of dollarization and large currency mismatches on banks’ balance sheets.

Even AccessBank, previously one of the country’s best-performing lenders, required recapitalization this year by its multilateral shareholders – which include the IFC and EBRD – after non-performing loans jumped to more than 25% of the total.

The crisis has prompted a restructuring and downsizing of the bank. “We are doing a lot to get our opex down, including a major staff reduction,” says CEO Michael Hoffmann. “Our balance sheet has also shrunk to about half what it was two years ago.

“We are becoming a leaner, smaller institution that is more adapted to the new reality in Azerbaijan.”

Kazkom and BTA: Together is better / www.kazworld.info

Kazkom + BTA: Together is better. Photo credit: igraphic.kz

Shut downs

Banks with less robust shareholders have struggled to survive. Eleven smaller lenders were shut down by authorities last year – out of a total of around 40 banks – and more closures are expected following a further 18% depreciation of the manat in the four months to the end of January.

Analysts are gloomy on the outlook for the sector. “It’s very unlikely that there will be any marked improvement this year,” says Vasiliev. “Banks still have substantial amounts of weakly reserved problem loans, and on top of that there is sizeable exposure to restructured loans and reportedly performing project finance loans.”

Kazakhstan’s banking sector is less stressed at present, mainly due to earlier action by policymakers to devalue and stabilize the currency. Nevertheless, the IMF said in February that weaknesses in the system should be addressed as a matter of urgency.

“The banking sector has long been characterized by complex and opaque finances and operations,” the Fund said. “This has inhibited investment in the sector and its contribution to growth. Addressing this history will be critical for the sector to move forward.”

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