The government recomends abstinence to the banks
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The government recomends abstinence to the banks

Elena Dudka


One would agree that the past year was not calm for banks. It was rather successful and productive. In the first 11 months, the aggregate assets of the domestic banking system increased by 53%, and now amount to almost 7 trillion tenge ($54 billion). This is about 80% of GDP. Kazakhstan’s’ Kazkommerzbank and TurakAlem Bank became the largest private banks in the CIS by assets, leaving behind the leading private banks of Russia. Each of the banks manages a portfolio of more than $11 billion. During the same period, capital increased by 45% — up to 849 billion tenge ($6.6 billion). However, the aggregate net profit of second-tier banks decreased from 62 billion tenge to 44 billion tenge ($345 million) within the same 11 months of the past year. According to the data collected by AFS (Agency of Financial Supervision), this is explained by the losses of Valut Tranzit Bank influencing the aggregate data, rather than by some systematic factors.


Star wars
They say that nothing bonds a group of colleagues as strongly as a common hatred towards the boss. In the past year the managers of leading Kazakhstani banks were united as ever against charges and limitations they faced. The role of “beloved” boss was played by Prime Minister Danial Akhmetov, who has held a grudge against financiers for a long time, and started seriously biting this year. The head of the government accuses the largest banks of monopolistic behaviour, collusion, boosting inflation and simultaneous capital flight abroad. The financial community, in turn, blames him for the rise of inflation because of the increase of budgeted expenditure (not because of the growth of bank lending) and in the failure to provide the banks with promising investment projects within the country. With respect to monopolistic behaviour and collusion, even official statistics speaks of the opposite.
This squabble between these enemy camps has been going on for a long time. However, at the beginning of the year, the government turned from psychological attacks towards direct operations. These included the toughening of antimonopoly regulations, a further increase in National Bank reserve requirements, and a reduction of the limitations for open cash positions, all of which were adopted one after another within several months.
According to the main opponent of the Prime Minister, Grigory Marchenko, the hastily adopted amendments to the antimonopoly regulations not only weren’t discussed with the banking community, but weren’t even submitted for approval by AFS and the National Bank. Previously, it was considered a monopoly if one bank had more than 35% of some segment of the market, 2 banks held 60%, or 3 banks had 70%. This also agreed with the standards accepted in the EU. Now antimonopoly actions can be taken against three players if their market share is over 50%. Although the market share by aggregate assets of KKB, BTA and Halyk is gradually decreasing, it still is 55%, which makes the leading three banks a subject of attention of the antimonopoly department. However, the department doesn’t conceal that it isn’t sure how to regulate the activity of financial institutes which sell, not oil, gas nor electricity, but many different financial services, and have various market shares according to each of these services. Nevertheless, the banking monopoly is now proven, even though this required a change in the law.


Medication for weight loss
Since last year the rapid growth of banks’ external debts, especially short-term, was worrying not only the government but also financial analysts assessing the condition of the Kazakhstani banking system. At that, there wasn’t a unanimity concerning the external borrowing policy among the top ten banks. Some borrowed everything possible to take on the external market, others made modest borrowings and the third group had a conservative opinion about external borrowing. Nevertheless, last year the external debt of domestic banks increased more than twice and, according to official announcements, amounted to more than $12 billion ($6 billion in 2005).
Since last year, AFS requires financial institutions to transfer reserves corresponding to foreign borrowings made to special accounts with the National Bank, in order to moderate the appetite of financial institutions for foreign capital. In addition to that, the agency toughened this requirement this year. Now the minimum reserve requirement for foreign liabilities is 8%. This leads to a rise in the cost of obtaining funds from abroad, which made the banks search for financial resources more thoroughly within the republic.
But the costs of obtaining funds increased even domestically, because a 6% reserve requirement for domestic borrowings has been introduced. However, not all borrowings, but only the most risky from the point of view of the regulators, are subject to the requirements (both domestic and foreign). According to the assessment of the chairman of the board of directors of the National Bank, Anwar Saydenov, after the introduction of the new requirements, the internal liabilities of banks which are subject to the minimal reserve requirements (MRR), increased more than twice, and some liabilities by more than 3.3 times. The data on the actual amounts is discrepant, but by the end of the year the amount held in reserves by the banks in the deposits with the National Bank reached hundreds of billions of tenge, and the profit missed is measured in tens of billions. The National Bank established that the return on those deposits was equal to 4%. Of course, that is better than nothing (which was also discussed), but far less than the market rate of return.


Under the flag of competitiveness
The financial regulators have taken these uncommon actions to decrease the excessive liquidity of the banks and increase market interest rates in order to slightly decrease the heat in the growing economy. However, against expectations, there hasn’t been a significant increase in interest rates. It appears that the banks are ready to lose profit in order to retain their market share, which again indicates a high degree of competition among them. Actually, there are additional reasons for the increase in interest rates, such as the rise of inflation and increase in the cost of foreign borrowing. But the banks, fighting for the clients, shut their eyes to those reasons.
The critics of the strong measures point out that the limitations introduced decrease the competitiveness of Kazakhstan’s banks comparing to foreign banks. The latter had better conditions for obtaining funds anyway, and now this advantage was increased. However, the domestic financial institutions have already found ways to circumvent the measures without breaking the introduced requirements. For example, if short-term borrowing is defined to last for one year, the banks take the borrowings for one year and two days. The essence of the borrowing doesn’t change, but it is no longer subject to the new requirements.
In such a way, the opponents of introducing strong measures try to show that the actions not only negatively effect the competitiveness and profitability of Kazakhstan’s banks, but they also do not achieve the defined goals; credit is provided under the same interest rates, inflation is not decreasing, and foreign borrowings are on the rise. It is hard to say how close the above is to reality, because the official statistical summary of the year is not ready yet, and the assessments of various experts differ very much. In September, Mr. Saydenov noted with a cautious optimism that the growth rates of banks’ domestic borrowings is 25%, whereas the amount of foreign borrowings increased by 20% since the beginning of this year. However, experience predicts that “the most delicious bit” banks usually leave for later time during the year. For example, at the beginning of the previous year the growth rate of foreign borrowing was 40%, but it exceeded 100% by December 2005.
Interestingly, the criticism of the current financial policy can lead to the effect contrary to the one pursued by the banks. “Well, if the actions taken didn’t have the due effect, it means we need to further toughen the regulation”, said IMF. This is exactly what the banks are afraid of. They have been humbled by the current losses, and now try to prevent a new wave of financial repressions, the possibility of which nobody can exclude.
The banks came up with a great PR move in this fight by asking, what is the main goal of the country and its economy? To become one of the fifty most competitive countries in the world, diversification of the economy, and the development of non-resource industrial exports is required. Which non-resource industry is the most competitive in the country, and which also exports the services abroad? Of course, the banking industry. Thus, any limitation of the competitiveness of this vanguard contradicts the highest state policy. An impressive argument, isn’t it?
The financial regulators, in turn, oppose this with the idea of national economic security, which is also a strong argument. The battle of intellects continues.


Housing problem
Another stone thrown into the garden of the banks refers to the overheating of the real estate market. At the VIth Conference of Financiers, the Prime Minister Akhmetov stated that this, first of all, is the result of the inefficient activity of all financial institutions that do not provide investors with attractive investment instruments. In return, the members of the conference amended the concluding resolution with the suggestion to introduce a range of limitations for speculative real estate investors, such as to increase taxes for the purchase of additional houses or the resale of real estate within a short period after its purchase. This, of course, will not create new investment instruments, but it will reduce risk for the banks and might decrease the speculative demand on the market.
There are as many opinions as experts with regard to what can happen to the real estate market in the nearest future. Some say that within the nearest 2 years the situation may change significantly (at least in Almaty and Astana), while others state that prices will rise for approximately five more years, taking into account the high demand from the population and insufficient number of houses built in the past. The banks are monitoring every breath of the market not to miss the moment after which it is too late to escape from the pyramid. For example, limitations are introduced for funding the construction of expensive houses in Astana, where the supply of elite apartments begins to exceed demand. The resources are re-oriented to, for example, the market of expensive housing in Western Kazakhstan. Infrastructure projects also have a large potential, such as construction of bridges, roads, etc.
The growth rates of the mortgage portfolio continue to exceed all expectations. Summarising the previous year we wrote that, in 2003, mortgages amounted to $100 million, in 2004, $350 million, in 2005, about $1billion, and in 2006, according to forecasts, it should increase to between $1.4 and 1.5 billion. However, the preliminary data already indicates that mortgages provided already exceed $2 billion.
Formally, the risk inherent in providing mortgages is low. The default level is now less than 1% of the total number of mortgages provided. Still, regulatory organisations and international financial institutions are more worried by the excessively fast growth of the mortgage portfolio, rather than by its volume or quality. According to the research made by JP Morgan, the volume of mortgage and consumer lending in Kazakhstan is about 8.3% of GDP, which is more than in Russia, Ukraine, Turkey and Argentina. Still, it is far less than in Malaysia, Hong Kong and South Korea, where this figure is over 50%. So there is still room for growth in the domestic mortgage market. However, in order that the market does not grow too quickly, AFS and the National Bank do not exclude the possibility of a new toughening of minimum reserve requirements, now in the sphere of financing real estate operations. The chairman of the board of directors of Halyk bank, Grigory Marchenko, has already calculated that, if the regulators realise this intention, he would have to hold additional reserves of about 6 billion tenge, which would deprive him of the greater part of the bank’s semi-annual profit.


Tune of the season
As was once figuratively said at a conference, IPO “is the tune of the season that everyone sings”. After several successful IPOs of Kazakhstan’s manufacturing companies in London, the leading Kazakhstani bank also entered the British trading arena. Strictly speaking, this offering was not an IPO; that is, a debut of Kazkommerzbank on the external market as an issuer. Its first global issue of depository receipts was made several years ago, but since this issue was for such a small amount, the current offering is said to be initial.
This IPO was very successful. The demand for depository receipts of Kazkommerzbank exceeded the supply 20 times over, and the amount drawn was about $850 million, which made the offering the largest in the history of banking sector of the CIS (initially the bank was expecting to raise $480 – 580 million). The financial resources acquired from the sale of depository receipts was used by the largest shareholders of Kazkommerzbank, Nurjan Subkhanberdin and Central Asian investment company (the only activity of this company is holding the shares of the bank), to take part in the internal placement of shares of KKB. As a result of this, its capitalisation exceeded $5 billion.
According to the “Financial Times”, the IPO of Kazkommerzbank is a positive sign for other Kazakhstani banks, which also plan to arrange IPOs on the foreign markets. For example, at the end of this year Halyk bank announced its intention to place depository receipts on the LSE amounting to 20% of its total volume of common stock. These stocks belong to the “Almex” holding group, which in turn belongs to Timur Kulibaev and Dinara Nazarbaeva. Like the main shareholders of KKB, “Almex” plans to use the financial resources obtained in London to realise the stockholder’s right of primary purchase of stock within the country. Thus, they intend to increase capitalisation and attract new foreign portfolio investors, while retaining the company’s control over the bank.
Alliance Bank is also considering the possibility of issuing 25% of its stock on the international markets, which it expects to sell for $100 to $150 million. According to the managers of the bank, its capitalisation is far more than the regulators require. The IPO is necessary to improve financing conditions. In saying this, it may turn out not to be an IPO at all, but rather an attraction of a strategic investor. The final decision is to be made next year.
Analysts forecast that, in general, the volume of IPOs of Kazakhstan’s banks and companies in the years 2006 to 2009 inclusive would amount to about $5 billion. Next year a large IPO of a metallurgical company, which is being created now, is expected; this company unites the assets of a Eurasian group. It is assessed to be at a level of $2 to $2.5 billion. Halyk bank can attract $500 million into shareholders’ capital. The IPO by BTA, which would bring it $1 billion, is also expected in 2009.


Investment expansion
The continuation of the expansion of levels of Kazakhstan’s capital abroad can be emphasised as another noticeable tendency of the year. According to Grigory Marchenko, the investment of Kazakhstan’s banks in Russia is approaching $3 billion. Judging by the strategy of the largest domestic financial institutions, this figure is going to increase. For example, Halyk bank intends to run up to 30% of the banking group’s business abroad. Kazkommerzbank, the most conservative in this respect, expects to keep the share of foreign assets in its portfolio at a level between 10 and 15%. It is not known what share of business BTA is planning to run abroad, but it hopes to occupy not less than 2% of the Russian banking sector by 2015, and not less than 5% in other countries where it has representatives. At that, there were few purchases of daughter companies abroad during this passing year. The bases for settling on neighbouring markets were prepared in 2004 and 2005.
The government, which sees large amounts going abroad, prepared infrastructure investment projects for $12 billion and suggested that the banks invest in the construction of electric power stations, roads, and other infrastructure within the country, rather than investing into Russia. The banks had a reserved enthusiasm regarding the projects; they considered there to be too many questions about transparency of the projects, the mechanism of the guaranteed returns of the investments, etc.
Another method to activate investment processes in the country is the development of a regional financial center in Almaty (RFCA). There were a lot of talks about that, and the first players have already registered in the center, but what is going to happen and how it is going to happen is not completely clear. Even the chairman of RFCA warns colleagues from holding too high expectations. The conceptions of the RFCA development are still being discussed and amended.


That’s how the year generally looked for banks. And, as always, the next year promises to be more interesting.




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