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The Bankers are in Trouble

The nationalization of BTA Bank and Alliance Bank, 25% devaluation of tenge and another downgrade of international ratings of Kazakhstan second-level banks are the major events in the financial market that will make the first quarter of 2009 remembered.

Under governmental protection

Kazkommertsbank and Halyk Bank, receiving one billion US dollars each from the government, put "their signatures with blood before the President", the Prime Minister said. BTA Bank and Alliance Bank had to "sacrifice" 78.14% and 76% of their stock, respectively, in favour of the government.

While "the samurais" from the Alliance Bank "got nothing" back for issued bank shares (100 tenge for entire stake), the situation with BTA shareholders developed the other way: the government washed out the stake of previous owners and made a decision to organize additional issue of bank stock unilaterally.

The official representatives reasoned their historic decision of February 2 by the fact that due to the dramatic change in the quality of BTA assets, it urgently required huge help from the government. New Board of Directors Chairman of JSC BTA Bank, Arman Dunayev, noted that "the main reason why the government acquired a share in BTA capital is the violation of liquidity coefficient and capital adequacy ratio, allowed by the bank".

According to Deputy Head of the Financial Regulation Agency (FRA), Kuat Kozhakhmetov, the government exercised its right set out in the new amendments to banking legislation. "In accordance with the latest amendments, if the bank violates the capital adequacy ratio, the government is entitled to make a decision to purchase at least 10% of additionally issued stock that will help bank improve the situation and meet all the standards. Therefore, the decision on additional capitalization was produced. It was defined at the level of 251.3 billion tenge. This will allow ensuring the government’s participation in the bank at 78.14%". At the same time, Mr Kozhakhmetov believes that government’s actions in relation to the BTA Bank are not a nationalization attempt: "The participation of the government is a temporary action and it is limited by one year. If current shareholders or potential investors do not have enough resources, the state will continue participating in the bank as a shareholder".

Nonetheless, it was officially declared earlier that state support will be limited "only and exclusively" by a 25% state participation in the capital of four backbone banks – BTA Bank, Alliance Bank, Kazkommertsbank and Halyk Bank. The government promised to offer the preemptive right to current shareholders on the purchase of additional issue stocks, based on the previous version of the law On joint stock companies, but not the new amendments. The latest changes in the banking legislation introduced the norm, according to which if the bank is not able to maintain a capital adequacy ratio, the government can take unilateral action on conducting the additional issue of stock.

Born in the devaluation

Soon straightaway after the public digested the information about the transfer of BTA and Alliance under state control, suddenly, in the following two days, the "old-new" Chairman of National Bank, Grigoryi Marchenko, announced a 25% devaluation of Tenge on February 4.

In the first days after making the decision to devaluate the Tenge, many foreign and domestic analysts supported this measure. Later on, however, a number of critical comments arose. Specifically, Standard & Poor’s and Fitch Ratings reported that the rapid devaluation of the Tenge would produce further deterioration of the banking assets quality due to the significant volume of loans, issued in foreign currencies (and this is over 50% of the principal receivable in the banking sector) and issued to non-hedged corporate clients and individuals that receive their income in Tenge.

In the opinion of S&P experts, another risk, associated with devaluation, "is in the possibility of losing confidence in the stabilization of the monetary system and, therefore, further loss of confidence in the banking sector, as a result of which the exchange rate of the national currency can drop even lower. This, in its turn, is likely to become the reason for a new outflow of deposits from banking system". Moreover, the rating agencies note that business conditions for "not large banks" (second group) are getting worse and the level of associated risks also increased.

The domestic experts also give critical comments on the actions of the National Bank. For instance, the head of the Group for Macroeconomic Studies, Olzhas Khudaibergenov, explained why the demand for foreign currency will remain at the high level, even if the exchange rate drops to 200 tenge per US dollar: "First of all, the borrowers need to service foreign loans to the total volume of $105 billion. Secondly, they need to repay foreign currency loans, issued in the country". This year, only the first group mentioned above has to repay $12-13 billion while the second group has to repay another $6 billion. As a way out, Mr Khudaybergenov suggests "abandoning the financial ideology that supplied foreign currency loans to the economy and population at least in those sectors and operations, where foreign currency is not highly needed". He suggests to transfer all foreign currency loans, issued to legal entities and individuals before February 4 of this year, into Tenge loans, based on the old exchange rate, and to remove all the fixations to the exchange rate fluctuations from the Tenge-issued loans. At least, it is expected to apply such mechanism in the banks with state participation in order to "zero out unnecessary demand inside the country".

In his turn, in an interview with the Respublika weekly edition the director of Kazakhstan Development Institute, Magbat Spanov, noted "Our managers, economists try to follow the same aggressive way of Mr Marchenko. He applied the same strict measures that we experienced twice. They took place in the beginning of 1990s and in the beginning of 1999. I believe these were not the right steps".

According to the expert, today, the situation in the economy is totally different; therefore, "the correct action had to be to launch a floating rate of the Tenge and its gradual devaluation", since "the population owes money to the banks and state – overall, the entire country sinks in mortgage and consumer loans". Now, up to 60-70% of the economy is likely to go illegal that will, therefore, produce the radicalization of political life.

Ex-Head of BTA Bank, Mukhtar Ablyazov, gave the most critical comments on devaluation. In his interview to Azattyk radio the banker says that this time the devaluation was organized in a "very rude and cynical” manner while "the state has many optional instruments". Mr Ablyazov also informed that in January of this year during his meeting with the President of Kazakhstan he "proposed his own plan of devaluation and warned that this step requires very serious preparation". Moreover, Mr Ablyazov affirms that the preparation to devaluation in April of 1999 was initiated six months prior to its launch.

To change, but not to leave

In taking care of banks and running this shocking devaluation, the government had to see the results of its efforts. At first, Standard & Poor’s agency lowered long term counterparty credit ratings of Kazkommertsbank, Halyk Bank, Alliance Bank, BTA bank and its two subsidiaries – Temirbank and BTA Mortgage. At the same time, the rating forecasts for Kazkommertsbank and Halyk Bank remained "negative" while the rating of other banks "was under re-consideration".

Later on, Standard & Poor’s disseminated another message. This time it mentioned the second group banks representatives – Eurasian Bank, KazInvestBank, Lariba Bank, Nurbank and Tsesnabank. Unlike the largest banks, which received governmental support, these five banks were analyzed by the agency that confirmed their long term counterparty credit ratings with a "negative" forecast, although, prior to that, Lariba Bank and Tsesnabank had been awarded a "stable" forecast. The agency reasoned its conclusion by the fact that "despite deterioration of assets quality and pressure on liquidity, the funding opportunity for many small and medium size banks looks better than for some large credit organizations in Kazakhstan, because they have less needs in refinancing of external debt". Another advantage, highlighted by analysts, is the different crediting base, since "the second group banks are mostly oriented at the Kazakhstan market and it also received a deposits inflow from larger second-level banks. Although devaluation also negatively impacted the quality of assets of these banks, their level of foreign currency loans is significantly lower across the banking sector.

Unlike S&P, on February 19 Fitch Ratings reported more a pessimistic conclusion in relation to Kazakhstan. First of all, it moved the sovereign ratings of the republic into the “Negative" list – long term issuer’s default rating (IDR) in foreign ("BBB-") and national ("BBB") currency, short term foreign currency IDR ("F3") as well as country ceiling rating ("BBB"). The agency states that the reason for this decision is higher pressure on the banking sector that "can potentially weaken state finance". According to Fitch, very soon the government will have to offer a new financial assistance package to second-level banks that will be, first and foremost, used by nationalized banks to perform their liabilities.

The Fitch Ratings analysts report that since September of last year foreign state-owned assets have diminished by 7.2%. Considering the fact that $14 billion must be repaid on external debt in 2009 the pressure on foreign finance of Kazakhstan will inevitably get intensified. However, it seems that so far our country is not yet in trouble since total state debt of Kazakhstan is equal to 7% of GDP while the position of the government as foreign net-creditor equals to 28% of GDP. And this is considering the fact that average indicators for countries with "BBB" rating category reach 28% and 8%, respectively. However, if the foreign creditors demand massively early repayment of external debt from banks and national companies, the situation is likely to get complicated rapidly.

Fitch also turned out to be stricter than S&P, in relation to leading of second-level banks of the country. The long-term issuer’s default rating for BTA Bank and Alliance Bank were lowered by two grades – to "B+" and "B", respectively. Six other banks saw their IDR, lowered by one grade to "BB-" for Kazkommertsbank and Halyk Bank, "B+" for BankCenterCredit, "B+" for Temirbank, "B" for КASPI BANK, and even "CCC" to Tsesnabank. The agency also awarded low rating to capital-based Astana-Finance, controlled by Samruk-Kazyna NWF, and its subsidiary – same-name leasing company, whose rating had been lowered to "B+".

Regarding the rating forecast, Fitch lowered the ratings of КASPI BANK, Tsesnabank and Eurasian bank from "Stable" to "Negative". The rating of all other banks, including ATFBank, Kazakhstan Development Bank and KazAgroFinance state company, were moved to the "Negative" list under monitoring.

However, some of our bankers were not surprised with the downgrade of the ratings. According to КASPI BANK CEO, Mikhail Lomtadze, today the world financial system is revising its working mechanisms. The ratings are also reconsidered under the influence of world recession. "The agency reports are influenced by the world dynamics and these are predictable steps". Mr. Lomtadze believes that nothing has changed for Kazakhstan banks, especially for those that do not have as much in foreign loans. "To be honest, today, the ratings do not play so much of an important role for decision-making in general. I am affirmed that we will witness the downgrade of ratings throughout the world and Kazakhstan is not an exception. The investors throughout the world lost a great amount of funds. The value of many companies dropped to 10 year old figures. The ratings are under high pressure of the world economic crisis, and this is the reason for lowering the ratings of countries, companies and banks. We can expect higher ratings only after improvement of the global economic situation in general and, unfortunately, their upgrade does not depend on individual efforts of certain companies".

This happened in February. In the following month, during March 23-30, for the worse, the international rating agencies published another bunch of negative information in relation to nationalized Kazakhstan banks.

The first statement, oriented at state-owned banking institutions of Kazakhstan, was made by Fitch Ratings that had lowered the long term foreign currency issuer default rating (IDR) of BTA Bank and its subsidiary Temirbank from "B+" to "CC". Moreover, the ratings were moved to the Rating Watch list under monitoring with negative forecast. Fitch analysts say that downgrade of ratings "is reasoned by possible default, at least for some financial liabilities of banks and that became the answer to BTA Bank statement made on March 17, 2009". It mentions the consideration "of possible debt structure change of BTA group" and notes that "in case of accelerated repayments of certain financial liabilities of BTA group prior to their repayment deadlines, Samruk-Kazyna may be no longer capable to provide financial support". Fitch notes that in accordance with the methodology of forced exchange in liabilities, this exchange is considered to be valid in the following cases. First of all, if "the terms of organization’s financial liabilities are changed dramatically, resulted in overall aggravation of the situation for creditors with regard to their initial contractual obligations". Secondly, if such changes take place "due to forced or de facto necessary exchange, even if, from technical point of view, the exchange is processed voluntarily". The analysts note that the organization of forced exchange of debts leads to downgrade of issuer’s rating to "D" level (default) or "RD" (limited default).

Fitch was less critical in relation to Alliance Bank. The agency lowered its IDR from "B" to "CCC", moving its rating under monitoring to Rating Watch list with negative forecast. The agency analysts report that the downgrade of rating reflects the presence of uncertainty about the level of support, to be provided to the bank by the government of Kazakhstan, as well as high risk of possibility that the bank will restructure part of its financial liabilities. At the same time, Fitch made it clear that forced exchange of debts will influence the downgrade of Alliance bank rating to "D" or "RD". Nonetheless, the agency increased the rating of Alliance bank by one grade, unlike the case with BTA Bank and its subsidiary Temirbank. Fitch motivates its decision by three factors. First of all, Alliance Bank had not been acquired by that time by the government of Kazakhstan "and, therefore, certain norms on change of control in the documentation on bank’s debts had been launched with less lower probability". In their words, this means that "the current scale of possible acceleration of debt is possibly much smaller while the need in restructuring the bank’s liability in short term may become less serious". Secondly, the substantially smaller size of the bank, comparing to BTA, means that the size of governmental support, which Alliance bank may need, will also possibly be less. Third, bank "has not made official statements on potential restructuring of its debt".

In its turn, Standard & Poor’s lowered the ratings of BTA Bank and its subsidiaries, Temirbank and BTA Mortgage, twice, on March 24 and 26. At first, S&P downgraded their ratings to "CCC+/C" and then to "CC/C". Alliance Bank was not missed out: S&P lowered its ratings from "B/B" to "CC/C" on March 26. At the same time, the ratings of Alliance, BTA and its subsidiaries also remain included in CreditWatch with a negative forecast that increases the probability of their further downgrade to "D" level or issuer’s default rating. According to Annet Ess, on the one hand, the decision of lowering the ratings is reasoned by "very high probability of debt restructuring by BTA and Alliance Bank". On the other hand, there is "less probability" for these financial institutions to receive state funding for the debt repayment. Moreover, S&P rating reports were also influenced by problems with funding, liquidity and deposit base instability in the banks, as well as pressure on their creditability "also due to substantial deterioration of assets quality". S&P warns that it will lower the ratings of BTA and Alliance to "D" level, if there is absolute necessity of debt restructuring or their failure to repay debts on time.

Moody’s agency also mentioned nationalized banks, lowering the ratings of BTA Bank and its subsidiary, Temirbank. The foreign and local currency deposit rating of BTA fell from "B1" to "Caa3". The rating of senior unsecured foreign currency debt dropped from "B1" to "Ca". The Bank financial strength rating was lowered from "E+" to "E". Speaking of Temirbank, Moody’s lowered its foreign and local currency ratings from "B3" to "Caa3" whereas the financial strength rating dropped to "E". Herewith, the agency analysts report that banks’ financial strength ratings have stable forecast while their deposit ratings and senior unsecured debt ratings remain in the reconsideration list with possible downgrade. As well as Fitch and S&P, Moody’s highlights that the downgrade of ratings reflects the higher probability of default and debt restructuring of BTA and Temirbank in connection with continuous weakening of financial strength of these banks as well as lower probability of state support for covering their foreign liabilities.

After a while, the agency made the same conclusions in relation to Alliance Bank, lowering its local and foreign currency deposit ratings from "B2" to "Caa3". The foreign currency senior unsecured debt rating dropped to from "B2" to "Ca". At the same time, all ratings of Alliance remain in the reconsideration list with the possibility of further downgrade.

Editorial



Table of contents
Mining Tax Thaw  Editorial 
Macroeconomy. April 2009  Macroeconomy. April 2009 _KAZAKHSTAN International 
· 2016 №1  №2  №3  №4  №5
· 2015 №1  №2  №3  №4  №5  №6
· 2014 №1  №2  №3  №4  №5  №6
· 2013 №1  №2  №3  №4  №5  №6
· 2012 №1  №2  №3  №4  №5  №6
· 2011 №1  №2  №3  №4  №5  №6
· 2010 №1  №2  №3  №4  №5/6
· 2009 №1  №2  №3  №4  №5  №6
· 2008 №1  №2  №3  №4  №5/6
· 2007 №1  №2  №3  №4
· 2006 №1  №2  №3  №4
· 2005 №1  №2  №3  №4
· 2004 №1  №2  №3  №4
· 2003 №1  №2  №3  №4
· 2002 №1  №2  №3  №4
· 2001 №1/2  №3/4  №5/6
· 2000 №1  №2  №3





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