ArrowArtboardCreated with Sketch.Title ChevronTitle ChevronIcon FacebookIcon LinkedinIcon Mail ContactPath LayerIcon MailPositive ArrowIcon PrintIcon Twitter
Finance

Kazakhstan's banks not yet back on solid ground

Kazakh bankers have been on a rocky ride this past decade.

     The country's banks emerged from the 1990s as regional standouts. Professionally managed, highly capitalized and smartly regulated, they were rock-steady institutions in a Wild East resource economy sandwiched between China and Russia and powered by the twin engines of oil deposits and booming trade with Europe.

     The narrative turned as a residential property bubble in the mid-2000s crashed hard against the global financial crisis. Samruk-Kazyna, the country's sovereign wealth fund, stepped in to avert the banking system's collapse, emerging with control of half of Kazakhstan's banking assets.

     It's still sorting out that mess. BTA Bank used to be the country's biggest commercial lender, but Samruk-Kazyna's investigators allege that Mukhtar Ablyazov, the bank's former chairman, fled the country in 2009 with $6 billion of BTA's money. He's now the subject of an extradition battle in France, with the U.K., Russia and Ukraine each seeking to take him away.

     On the whole, Kazakh banks still have one of the highest nonperforming lending portfolios in the world, amounting to 32% of their loan books, or more than $30 billion. But rather than tighten credit, the banks have flooded the market with unsecured consumer loans, financing Kazakh weddings and shopping trips to Dubai at annual interest rates of 25-40%. The consumer portfolio has been growing at an annualized rate of 40%.

     Now the banks face a new test. As the U.S. Federal Reserve's tapering of its bond purchases rocked emerging markets, the Kazakh central bank on Feb. 11 effectively devalued the tenge, the country's currency, by 19% against the U.S. dollar.

     The $10.9 billion that Kazakh banks owe foreign creditors will now be a more sizable burden as it is mostly denominated in dollars. In turn, about a third of the banks' loan portfolio is also in dollars and other foreign currencies, according to Moody's Investors Service. Most Kazakh borrowers are not hedged and will have a harder time making payments while inflation stemming from the devaluation will also affect the quality of tenge loans.

     Yet the Kazakhstan banking sector is in some important ways in a healthier overall position than just a few years ago. Maria Malyukova of Moody's said that this devaluation should pass more smoothly than the last one in 2009 when the banks owed more overseas and had lent more foreign currency.

Tail wind from Astana

A distressed asset fund launched by the government last year has also allowed banks to take some troubled loans off their books. A 2013 rule change gives banks a tax break when they write down bad debt, reversing the previous policy. As a result of these policy moves, bank loan/deposit ratios are down to 135% from an unsustainable 228% at their peak in 2007.

     "Loan growth has come back, margins are strong, liquidity is reasonable," said Olga Veselova, a financial services analyst at Merrill Lynch Securities in Moscow.

     Veselova cited locally listed Halyk Bank, which on Feb. 26 said it would buy HSBC's local operations for $176 million, as "a standout name ... with low leverage, high capital, better than average nonperforming loans, and a high liquidity cushion." The local unit of Russia's Sberbank has also been performing well, largely free of its competitors' legacy of bad loans.

     Further improvements can be expected after Nursultan Nazarbayev, Kazakhstan's president, on Feb. 14 set a goal of bringing the industry nonperforming-loan ratio down to 15% by next Jan. 1 and to 10% a year later. He blamed pre-crisis insider lending for the banks' troubles but said those making progress on bad loans could get aid from a national reserve fund.

    Nazarbayev's prompting has also prodded Samruk-Kazyna into deals to sell down its stakes in BTA and the other two large but still weak banks it controls, Alliance and Temirbank.

     Kazkommertsbank, now the country's largest bank, and local businessman Kenes Rakishev are to buy a combined 93% stake in BTA for $930 million. Businessman Bulat Utemuratov is buying 80% of Temirbank and an initial 16% of Alliance Bank, which is meanwhile asking its creditors to exchange existing notes they hold for new ones at a steep discount.

     Kazakhstan's banks are on the uptick but foreign investors remain wary. Standard & Poor's on March 12 said it doubted that nonperforming loans will decline much this year, calling the 15% target "very difficult to achieve". But the agency is also optimistic on the outlook, saying it expects banks with growing loan pools will show better profitability.

Ilan Greenberg, previously based in Kazakhstan, is a professor in the Globalization and International Affairs Program at Bard College.

Sponsored Content

About Sponsored Content This content was commissioned by Nikkei's Global Business Bureau.

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this monthThis is your last free article this month

Stay ahead with our exclusives on Asia;
the most dynamic market in the world.

Stay ahead with our exclusives on Asia

Get trusted insights from experts within Asia itself.

Get trusted insights from experts
within Asia itself.

Try 1 month for $0.99

You have {{numberArticlesLeft}} free article{{numberArticlesLeft-plural}} left this month

This is your last free article this month

Stay ahead with our exclusives on Asia; the most
dynamic market in the world
.

Get trusted insights from experts
within Asia itself.

Try 3 months for $9

Offer ends October 31st

Your trial period has expired

You need a subscription to...

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers and subscribe

Your full access to Nikkei Asia has expired

You need a subscription to:

  • Read all stories with unlimited access
  • Use our mobile and tablet apps
See all offers
NAR on print phone, device, and tablet media

Nikkei Asian Review, now known as Nikkei Asia, will be the voice of the Asian Century.

Celebrate our next chapter
Free access for everyone - Sep. 30

Find out more