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For Whom the Bell Tolls

The image of Kazakhstan as the country with the most advanced banking system in the CIS is fading away. The reason is the default of three of the largest financial institutions. At the same time, the analysts forecast further deterioration of the situation and believe that following the termination of payments on its liabilities by BTA, Alliance and Astana-Finance, other banking and financial institutions may also declare default.

Who is next?

Less than two months has passed from that moment, when, following Alliance Bank, the nationalized bank BTA Bank also terminated the repayment of principal on its foreign debts. The domestic financiers came up with another unpleasant "surprise". This time the capital-based financial group declared defaults on paying the foreign and some domestic debts.

"In concern with the recent deterioration of JSC Astana-Finance financial condition, even deeper deteriorated by lowering of the ratings, Astana-Finance and Astana-Finance B.V. are announcing a decision to stop payments of interests and principal amount, effective of May 15, 2009, on foreign liabilities and payments, linked to principal debt on some local liabilities", the official communiqué of the company reports. The reasons of such decisions are devaluation of Tenge, collapse of real estate prices, serious liquidity problems as well as further deterioration of the financial condition of domestic corporations and financial institutions.

Meanwhile, Astana-Finance is affirmed that termination of payments "will ensure equal rights of all creditors, provide time to evaluate the situation and propose the restructuring plan that will be fair in relation to investors and facilitate continuous financial invigoration of the company". At the same time, it is expected that any restructuring proposals will cover both foreign and domestic debts.

However, the announcement of Astana-Finance was not something unexpected for the market. Moreover, the analysts forecast that Kazkommertsbank may be the next to announce a default on paying the debts. In the opinion of Bauyrzhan Tulepov, the Director of the Analysis and Risk Management Department of JSC Tengri Finance, Kazkom faces serious problems. "The bank has significantly depleted the reserve of free cash balance while the money is spent on paying foreign debt. In 2008, the bank experienced a significant outflow of deposit money. This cannot positively affect the banks condition", he shared in an interview with the Respublika newspaper. At the same time, "oil and gas accounts of bank generated considerable cash inflow. If it was not for this money, they would have a difficult situation. Nonetheless, this trend could not prevent a cash deficit in the bank in order to serve foreign debt".

The head of JSC Asyl Invest’s analytical center, Damir Seysebayev, also realizes the possibility of a Kazkom default. According to him, the bank has the highest level of overdue loans among Kazakhstani second-level banks and faces a liquidity deficit. In this concern, the experts believe that KKB needs additional state funding, in addition to the support, already provided by Samruk-Kazyna.

Nevertheless, the top management of the bank has another opinion. At a press-conference, held at the end of May, the Executive Director of Kazkommertsbank, Sergey Mokrousov, and its Managing Director, Andrey Timchenko, declared that Kazkom was not planning to restructure the foreign debt and will repay the debt this year from its own funds. According to Mr. Morkrousov, the peak of the bank’s foreign payments took place last year when KKB repaid about $2 billion, while this year the bank is going to repay $1.5 billion. At the same time, there was no answer as to whether the bank has the required amount available.

The problems are all around

While Kazkommertsbank continues to operate under a normal regime, the situation around BTA remains tense especially after the bank’s decision to restructure debts in response to the claims of the investors on early repayment of debts. The officials explicitly explained their position: the government is not going to take all the debt of the bank and satisfy the claims of creditors in full volume. Specifically, visiting London in the mid of May for negotiations with foreign creditors of BTA, the Chairman of the National Bank, Grigory Marchenko, noted the following in the interview to foreign mass media: "If the investors expect that the government will repay and redeem all their loans and bonds with the purpose to save the bank, they are mistaken. The government is not going to spend this significant amount of reserves in order to help the investors".

Nonetheless, after the negotiations with foreign investors Bolat Zhamishev, the Finance Minister, was very optimistic. He says that the investors of BTA are ready to restructure the debts of this financial institution in the case it further continues to repay its debt. "Many creditors showed their position that they are generally ready to restructure (foreign debt of BTA Bank – Editor’s note). However, their main concern is that the bank should repay its debts after the restructuring. This means that the position of creditors is quite positive and this builds quite a good background for further certain negotiations".

It is not excluded that such optimism of Mr. Zhamishev is reasoned by the fact that in the case of failure of negotiations on restructuring the bank’s debt the government has another option. Thus, giving a speech at the National Business Forum, which took place in Almaty at the end of May, the head of the Financial Control Agency (FCA), Elena Bakhmutova, noted that in the case they successfully manage to restructure BTA Bank debts and keep it alive, FCA will apply the scheme, recently adopted in the banking legislation. She implied the establishment of a stabilization bank with the right of voluntary and forced alienation of assets and liabilities of the problem banking structures. However, Mrs. Bakhmutova did not specify how this scheme is going to be implemented, and what will happen to the liabilities of the bank before Kazakhstani depositors.

The government views another option to avoid the bankruptcy of BTA in selling it to Sberbank of Russia. Nonetheless, the negotiations on this issue are being delayed and the parties cannot go beyond the framework of preliminary consultations. Giving a speech at a press-conference in Astana, dedicated to the implementation of the first package of an anti-crisis program at the end of May, the CEO of the Samruk-Kazyna National Wellbeing Fund, Kairat Kelimbetov, one more time mentioned that NWF is ready to sell its entire or part of the stake in BTA to the Russian bank. Now, however, this issue will be discussed in August after the restructuring of the bank’s debts. "We are ready to hold a parity stake, have less than 25% and sell the entire stake. During our meeting with Mr. Gref (the head of Sberbank – Editor’s note) we reached the agreement that in August, once the initial negotiations on restructuring of BTA Bank debts are completed, we will get together one more time to return to more detailed negotiations on the conditions of Sberbank’s participation".  According to him, the decision on what amount of the BTA stake will be sold to Russians "depends on the conditions and combination of various factors".

Nevertheless, whatever the conditions and combinations of factors are, one thing is clear: the hopes of the government on the earliest liquidation of the problem asset fell short.  Additionally, in the case of a successful restructuring of BTA’s foreign debts there are no guarantees that Sberbank will still process the purchase.

First of all, the process of reaching the arrangements with the foreign investors can be delayed for an uncertain term since the list of creditors includes those, who bought the credit default swaps (CDS) and, therefore, wants to get back a larger chunk of money upon the bankruptcy of the bank than under the restructuring, based on general conditions.

Secondly, in a case the debt restructuring issue is settled, it is still necessary to conduct restructuring. However, considering the size of BTA, its geographic and industrial diversification, this procedure may take up to more than one year. Therefore, the bank will be ready for sale no earlier than after 1 year.

Third, it is unclear whether the Russian bank is able to carry Kazakh illiquid assets. The point is that the situation in the banking sector of our northern neighbor also needs to be much desired. Being a backbone banking institution, Sberbank is actively involved in the governmental programs of state assistance and, therefore, given the continuous deterioration of the situation it has to accumulate problem assets in its balance sheet.

The only reason why Sberbank can buy BTA is the political decision of Russian Prime Minister, Vladimir Putin. However, in order to persuade him of the profitableness of this purchase, the Kazakhstani government must have serious arguments and guarantees that go far beyond the level of the banking sector.

Meanwhile, the restructuring of the bank’s debts is not the only pain for its management and the government. Evaluating the losses from joining by Samruk-Kazyna NWF as the bank shareholder, the minority stakeholders of the bank filed lawsuits against Kazakhstan for $3 billion. According to unofficial data, this amount can reach $20 billion. However, in the opinion of Mr. Kelimbetov, these legal claims do not have a future. "As a rule, such processes last for years. I believe it will lead nowhere. This is my personal opinion", he notes. He also states that, today, the government "hires an appropriate law firm that will run these judicial proceedings".

Still, a number of Kazakhstani experts do not share such optimism and believe that the officials should be liable for the claims of foreign shareholders. Specifically, the Director of Kazakhstan Development Institute, Magbat Spanov, announced: "Our homebred state officials do not have a longer term vision. This is why I hope that not the government, but they themselves will repay these debts. The problem is very serious. I suppose that the cases will be successfully won by those foreign shareholders that filed the claims. Therefore, those people need to start getting ready to pay multi-billion losses that are responsible for the unprofessional actions, leading to the current situation".

In his point of view, the consequences will be very negative. One of them may become the arrest of foreign assets of Kazakhstan abroad, specifically, those of the KazMunayGas National Company, since "the legal base of the current situation assumes various interpretations and different positions".

All indicators are down

Given this negative information about the largest Kazakhstani banks, the Financial Control Agency published a negative report on the condition of the sector in general. In April, all major indicators were down. According to data, provided by the regulating agency, the total assets of domestic second-level banks shrank 2.5% within a month to 13,762.9 billion Tenge. At the same time, the share of liquid assets reached 15.3%, the total calculated equity capital dropped by 0.05% to 1,911.4 billion Tenge while the losses grew by 7.2% to 317.9 billion Tenge.

The loan portfolio of the banking sector shrank by 0.5% in April to 10,204.5 billion Tenge. Meanwhile, the loans extended to nonresidents of Kazakhstan increased by 0.8% to 1,921.5 billion Tenge. BTA Bank continues to hold the leading position on the amount of loans extended to nonresidents – 1,356.8 billion Tenge that equals to 70.6% of total amount of such loans across the sector and 51.6% of the loan portfolio of BTA itself. Those loans provided in foreign currency are also not in the best condition – 6,125.7 billion Tenge, or 60% of the total loan portfolio. The amount of the 5th category doubtful loans and bad loans, increased by 21.7% in April to 1,550.7 billion Tenge, while the amount of overdue debts grew by 25.5% to 984 billion Tenge.

It has to be mentioned that in the first four months of 2009 the share of 5th category doubtful loans and bad loans in the loan portfolio of banks increased from 8.1% to 15.5% while overdue debts grew from 5.2% to 9.6%. At the beginning of May, the share of standard loans in the portfolio structure reached 43.2%. At the same time, the share of doubtful loans was 49.3% and the part of bad loans was 7.5%.            

At the same time, the amount of loans to sectors of the economy (not including those to individuals) decreased by 3.5% in April to 7,878.5 billion Tenge. In the absolute terms, the figure dropped by 281.8 billion Tenge, i.e. almost $2 billion. The total liabilities of banks before nonresidents dropped by 4.5% in April to 5,002.5 billion Tenge, although since the beginning of the year they have grown by 6.7%.

The evidence of the lower trust of clients to the domestic banking sector became the significant reduction in April of the total volume of deposits by 4.7% to 7,707.1 billion Tenge, of deposits of legal entities by 3.9% to 3,630.4 billion Tenge, of deposits of special-purpose subsidiary banks by 8.4% to 2,470.7 billion Tenge, and of deposits of individuals by 0.5% to 1,606.0 billion Tenge. At the same time, since the beginning of the year the volume of deposits of legal entities dropped by 32.4%. The special-purpose subsidiary indicator fell by 10% while the deposits of individuals demonstrated a growth of 7%.

The calculations of FCA analysts, presented in the "Review of Aggregated Financial Stability Index (AFSI) in the Banking System of RK", as of April 1st of the current year, do not show optimism. Specifically, the review indicates a significant drop in the operations performance figures of the banking sector. For instance, ROA (return on assets) factor dropped from 1.88 to minus 21.51. Overall, since the beginning of the year, AFSI grew from 2.73 to 2.87. This way it gradually comes closer to the upper floor of the range from 2.5 to 3.0 that stands for a satisfactory performance of this indicator with an excessively high level of risk. According to FCA experts that the major growth factors of AFSI became the devaluation of Tenge in February, the increase of capitalization indexes from 1.0 to 2.0, and the improvement of the loan portfolio quality from 3.8 to 4.0.

Well, based on the official data of FCA, we have a pessimistic outlook of the domestic banking sector. At the same time, the rating agencies forecast a further deterioration of the situation. Specifically, James Watson, Fitch Ratings Managing Director of an analytical group on financial organizations, says that the level of doubtful loans in the banking sector of Kazakhstan will exceed 25%, considering the scale of the problem in the construction sector as well as the problems with the foreign loan portfolio of BTA and consumer loans of Alliance. He thinks that the examples of these banks will put under question the ability and readiness of the state to provide the support for Kazkom and Halyk Bank in a case the negative events scenario comes real.

Editorial



Table of contents
Macroeconomy. May 2009  SigmaBleyzer Company 
· 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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