Kazakh Banks Keep Growing Fast
Alexei Kechko, Junior Director of the Fitch Ratings Bank Group answers questions from our magazine
What is the current alignment of forces in Kazakhstan's banking sector? Who, in your opinion, are the leading market players?
So far, our agency has rated nine commercial banks in Kazakhstan with an aggregate share in the total banking assets of almost 90% as of the end of last year. The six leading banks account for around 80% of this share. We conventionally divide these into the first and second 'threesomes' of the sector leaders. Kazkommertsbank, Bank TuranAlem and Halyk Bank have been running first for quite a long time. They dominate most market segments, accounting for around 60% of the banking system's assets. The first threesome is followed by a dynamically growing group – ATF Bank, Alliance Bank and Bank CenterCredit. This group of banks has doubled its share from 10% to over 20% over the past four years and successfully competes against the leaders in certain market segments.
What is your assessment of the general situation in the banking system of the country?
Thanks to high GDP growth rates, a relatively stable exchange rate and booming energy prices, the banks are enjoying a favourable operating environment in Kazakhstan. The banking sector is growing rapidly, and the dynamics are likely to be maintained over the next few years. The banking structure is characterised by high consolidation. As I mentioned above, the major six banks account for around 80% of the entire system. This leads to "scale saving" and the increase in profitability. The sector can be effectively regulated by the supervisory authority – the Financial Supervision Agency (FSA). The FSA's strong positions foster relative conservativeness among the Kazakh banks, which is reflected in a low level of related-parties transactions, large liquid assets and sensible liquidity management, as well as moderate market risks. Besides, most Kazakh banks today demonstrate good assets quality, that is, low level of loans on arrears and problem loans.
What are the stronger sides of Kazakh banking as compared to other CIS banking sectors?
As I said above, Kazakhstan's regulation of the financial sector is, perhaps, the most developed among the CIS countries. The transition to international accounting standards, timely rehabilitation of the banking sector, and conservative limitations of financial institutions' risks are the basic success factors in the national supervisory bodies' policy.
The potential support of the leading national banks by the state also contributes greatly to the relatively high creditworthiness of the banking sector. Only Kazakhstan and Russia among the CIS countries have 'investment grade' sovereign credit ratings. Given that the government of Kazakhstan is aware of the importance of the banking sector and possesses serious funds, our agency believes that the likelihood of the state's support of the six leading banks, should the need arise, is quite high. Currently the default ratings of these issuers are at the level defined by potential government support.
What risks are the most critical for the Kazakh banks today?
The key risk is the growth rate of the system itself. It is one of the highest in the CIS. This is fraught with higher credit exposure and operational risks that could lead to the threat of worsening assets quality. This growth is generally attributed to the new sectors: loans to individuals, small and medium-sized enterprises (SMEs).
The still high (although generally reducing) concentration of loan portfolios is a worrying sign. Quite often, the twenty largest debtors of a bank account for around 200% of its capital. If one or several major debtors default, the bank may find itself in a tough situation.
The expansion of Kazakh banks into new markets may be potentially dangerous, as they are less familiar with their operating environment and risks. On the other hand, a successful expansion into the CIS may lead to diversification of country risks.
There's one more thing: most Kazakh banks have a limited group of entities as owners. When developed corporate management systems are lacking, this may lead to infringement of the interests of other parties such as creditors and depositors.
You've mentioned a broader geography of our banks' operations. What is Fitch's perspective on this process? Is this expansion timely for the Kazakh banking and what are the possible consequences?
Your banks have several advantages over local banks in CIS countries. They offer relatively cheap funding, boast of a large portfolio of products and risk management systems of a slightly higher quality. On the other hand, the ongoing expansion of major foreign players in these markets is levelling these advantages down. A large-scale expansion may be profitable only if it is carried out into the regions or countries with weaker competition and lower development than Kazakhstan's, yet with attractive markets. The number of such markets has been decreasing steadily: competition in the major markets such as Russia and Ukraine is already very fierce. However the Kazakh banks can have the advantage of servicing their clients' daughter companies which have also expanded abroad and servicing the operations that are directly or indirectly tied to Kazakhstan. There is enough room for growth within Kazakhstan, especially in the new banking segments such as retail and SMEs. Making full use of financial and human resources in Kazakhstan may turn out to be more profitable and less risky than outside the country. Taking all of this into account, we can make an assumption that the share of foreign operations in the Kazakh banking business will not grow significantly in the medium-term perspective. As a rating agency, we believe that expansion should be moderate and advantageous for business and lead to a sensible diversification.
What changes in the risks structure are to be expected in the long-term perspective?
There is a possibility of lowered assets quality in the future as a result of fast development. The soundness of today's loan procedures and standards can only be tested by time: the growth of loan portfolios may disguise the actual amount of problem loans; these loans may become problem ones not all at once. The issue of deteriorating assets quality will be especially acute should the economic situation in Kazakhstan worsen. Whatever the case, today, taking account of current data we cannot state that the assets quality of local banks has reduced seriously.
The inevitable toughening of competition may also facilitate the reduction in the banking sector's profitability. As a result, its ability to build up and attract capital will reduce, whereas the level of risks will go up.
I also assume local banks will face higher market risks due to the development of the stock market and increased complexity of banking transactions and products. For instance, previously the risk of interest rates changing was almost virtual, but today banks seek ways to control it, as more foreign loans are attracted at a floating rate.
Many experts agree that Kazakhstan's accession to WTO will be a big challenge for the local banks. What is Fitch's position on the issue?
Kazakh banks have a number of competitive advantages such as stable market positions, developed networks, recognizable brands and, possibly, more flexible decision-making. Their funding cost is not overwhelmingly higher than that of foreign banks at the present time. According to our estimates, currently Kazakhstan has no serious non-market barriers to the arrival of foreign players. Nevertheless, foreign financial institutions are not rushing to conquer the Kazakh banking market by their own forces due to the competitiveness of the local banks, which I mentioned above.
The accession to WTO as it is will not change the situation drastically. Firstly, quite a long transition period is provided for radical changes in the legislation such as changes allowing foreign banks' branches to be opened. Secondly, the FSA had already claimed it was going to introduce certain limitations of such branches' activities to ensure fair competition between them and resident banks.
What is your forecast for the Kazakh banking sector's development?
We believe that your banking sector will keep growing actively. Above all, this increase will be due to the new segments (SMEs and retail). As the market is saturated, the competition will get tougher leading to certain changes in the power line-up. Much will depend on whether large foreign players come to Kazakhstan. This arrival might speed up the trend and lead to a noticeable reduction in profitability.
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