More than four years passed after the beginning of the global financial crisis and the situation in Kazakhstan's banking sector still causes alarm. The issue is not only about the problems of the nationalized banks and first of all BTA, it is about the system failures of the entire banking system of the republic.
Risks continue to grow
First we give a few figures to define the situation of the domestic STB based on the results of last year. Total assets of the banking sector for the year increased by 6.6% and on January 1st, 2012 amounted to 12,821.8 billion tenge (KZT). At the same time, the total liabilities for that period increased by more than 7.5%, or 801 billion tenge and reached 11,516.3 billion. Equity capital of banks also rose to 1,964.1 billion tenge. The opposite picture was observed in point of consolidated returns of STB, which on January 1 of this year was in the red zone and amounted 35.4 billion tenge. It is entirely possible that this negative trend may continue until the end of 2012.
As the analysts of Halyk Finance note, lending at the "good" banks after dramatic upturn in December, slowed down again. Partly it occured due to mid-market banks, which had been actively growing, begin to drop back. Thus, Tsesnabank already faced the issue of capital adequacy, while Kazakhstani Sberbank is still approaching to this limit. Liquid assets of ATF continue to melt due to the outflow of corporate deposits: for three months the liquidity of this bank was reduced by half. BTA lost 106 billion tenge of deposits in January, and now ordinary investors have joined to the "flight" of legal entities also. In addition, the BTA was the only domestic bank from Kazakhstan’s banks with a deficit of capital left over, as the Alliance has restored its capital to a level of 11 billion tenge.
The fact, that the situation in the banking sector of Kazakhstan remains very disturbing accept even official authorities. And the National Bank does not hide his fears. The analysts of the main bank of the country presented their own view in the Report on Financial Stability in Kazakhstan (RFSK) in the section "Risks of the institutions of financial mediation." Moreover, this section was the biggest: two-thirds of the 60-page report, excluding applications.
It is necessary to give specialists of the National Bank their dues, who did not colour the truth, and called things by their proper names. Thus, for example, they admit that "the main problem of the banking sector remains the poor quality of assets due to the materialization of credit risk in 2008–2010, and low levels of substitution of the problem loans by newly issued ones". At the same time the analysts of the National Bank emphasize that the high level of liquidity of STB and their credit conservatism are the factors of profitability reducing.
However, in their opinion, in the case of a new wave of global financial crisis the banking sector still has its "safety factor," and first of all "due to the high level of liquidity and sufficient capitalization of its participants." True, there are nationalized banks such as BTA, Alliance and Temir as exceptions here.
The National Bank also noted that the growth of total bank assets, which was observed in 2010–2011, accompanied by a deterioration in their quality. Thus, it is observed the decrease of assets and contingent liabilities of the 2nd (-24 %) and 4 (-11 %) categories. Meanwhile, even without the nationalized trio there is observed an increase of assets of STB, classified as an asset of 3rd, 5th and bad categories, which respectively increased by 38.5 %, 11 % and 23 %. Thus, the National Bank makes it clear that the deterioration in bank asset quality remains a major challenge for the whole system.
Separately, analysts outlined the status of the nationalized banks. It was found that the total amount of their assets from April 2009 to October 2011 decreased 2.1 times (2,847 billion tenge) – up to 2,485.6 billion tenge. And it happened due to the revaluation and write-off the assets from the balance.
Against this background, a sharp increase in nonperforming assets and contingent liabilities was observed at the nationalized STBs. During this period Category 5 assets and bad assets increased from 751 billion tenge to 1,806 billion, which was mainly due to a "series of violations of regulatory requirements by the asset allocation and their subsequent classification". At the same time, JSC BTA Bank on the results of the audits was forced to restore the part of the assets which were written off from the balance in the second quarter of 2011 that "led to the bank capital deficit".
Three scenarios for STB
Not less interesting there were the results of the National Bank stress tests of the banking sector for its sustainability in the event of a decrease of the world oil prices. To do this, 18 leading banks were selected (which now account for 72.6 % of total sector assets) engaged in lending at the sectors affected by external shocks such as industry, construction and trade. Stress testing was carried out according to the data on October 1st, 2011 and the forecast period until the third quarter of 2012.
The National Bank take as a basis for evoluation the three scenarios of developing, in respect of the global oil market conditions. Thus, the base scenario reflects the current trend in oil prices changing with its fall to $105 per barrel by autumn of 2012. The stress scenario is modelled taking into account a possible second wave of the global crisis and global recession, and suggests a gradual decline in oil prices during the year to $40 per barrel. As for the shock scenario, this is the most pessimistic version which is based on a sharp drop in oil prices to $40 even at the end of last year and keeping it at that level in the current year.
And if the shock scenario is considered in the National Bank as having only a theoretical value, then the stress scenario is taken as the primary test for the possible deterioration of the banks. Meanwhile the testing was carried out using the following two models: the Multi-Factor Portfolio (MFP), developed with the participation of Deutsche Bundesbank, and Panel Data Model (PDM).
Eventually it turned out that under stress scenario for the MFP in the third quarter of this year, four banks will break the capital adequacy ratio K2 and three banks – the coefficient K1-1, whereas by the assessment of MPD "offenders" will be only three. If we talk about the shock scenario, their number for MFP will be 9 and 10 respectively, and by PDM – 11 and 10 banks. Losses of self-estimated annualized capital under the stress scenarios may reach 34 % by MFP and – 24.6 % by PDM, and by the shock – 53.4 % and 60.1 % respectively.
For calculations of the analysts of the National Bank, in case of realization of the stress scenario, to improve the financial stability of the sample of STB, their owners will need to increase Tier 1 to 1,011.2 billion tenge, which is 9.2 % of their total capital. Therefore, it must not be excluded the fact that the regulator will continue to increase its requirements of banks capitalization.
Expert evaluations of the National Bank in point of foreign currency risk and liquidity risk look also quite notable. According to the RFSK data, sector last year hyper liquidity dominated in the banking when the proportion of high liquid assets to total assets of STB did not fall below 20 %. Meanwhile an increase of such assets for the first nine months of last year amounted to 17 % and their share for the beginning of October rose to 24 %.
However, the coverage degree of short-term liabilities of highly liquid assets and on demand obligations has decreased from 42 % to 39 % for the first nine months of last year. It has happened as a result of increasing the share of deposits in the structure of funding of banks.
As for the nationalized banks, after the completion of the restructuring of debts, the coverage degree of obligations of liquid assets has grown considerably first, and then, by the end of the third quarter, it fell back due to the payment of external debt and a lack of sources for the attraction of liquidity, besides the repo transactions with the National Bank.
Moreover, it is noted that in the structure of the securities portfolio of the nationalized banks dominate the bonds of their key shareholder – NWF Samruk-Kazyna. And the remuneration on these bonds is a solid source of new revenues. In addition, the new leadership of the state holding is considering an opportunity to raise the yield on these securities in order to increase support for nationalized trio and firstly BTA.
From our side we can add that the summary of the National Bank, as contained in RFSK make it very clear that the situation in the banking sector remains quite unstable and could become worse in case of a second wave of crisis. And even if this does not happen, it is still obvious that in that state, in which today there is the domestic banking sector, a significant contribution to the lending and economic growth is not to be expected from it.
BTA in a turbulence zone
Against this background, it should be noted the interview of the Head of NWF Samruk-Kazyna, Umirzak Shukeyev given to the Russian newspaper Kommersant. In it, he, in addition to plans on reforming the structure of the state fund and conduct of massive layoffs in the national companies, described the situation in BTA Bank whose leadership is trying to force lenders conduct re-restructuring of debts after next default of the bank in early January 2012. But, let’s start from the beginning.
As the new head of state holding told, NWF will be divided into four major blocks. The issues of the banking sector will be supervised in the financial and economic block. We would remind you that earlier, to engage the banks under the control of fund was entrusted to the former head of the AFS Elena Bakhmutova, who was recently appointed deputy chairman of the board of JSC Samruk-Kazyna.
However, perspectives of the development of financial and economic block of NWF in its controlled banking assets remain vague. So, speaking of the BTA, Mr. Shukeyev was forced to admit that it "is still in a turbulent zone," and the only way to withdraw the bank of this state is the second restructuring of its liabilities. But also after its implementation, the aids of Samruk-Kazyna will be only "if all parties will be convinced of the viability of the bank after the restructuring."
Meanwhile, Mr. Shukeyev made it clear that new investments mean not only investing money in the bank's equity. Thus, he said: "It is worth noting that when we talk about the financial aids, we are not talking necessarily about new money. Probably cheaper forms of funding will be provided. Besides, there is considered the issue of increasing the value of the coupon on the securities of Samruk-Kazyna, which a bank already owns. There are several scenarios of development".
What scenarios these are, Mr. Shukeyev did not explain. In his speech at the enlarged meeting of the fund he did not rule out the possibility of supporting of BTA Bank with money from subsidiaries of the state holding in the part of placement of deposits and opening new accounts.
It is also remarkable that the new head of NWF has no clear stand on the issue of consolidation of the banking assets of the state holding. On the related question of the journalist, he answered evasively: "Still I can’t say exactly, there may be different mechanisms: a merger or some kind of partnership. The main problem is that we have a lot of financial institutions which are engaged in the same activities – the analysis and selection of projects. We have about a dozen of investment funds at least. And the banks, the Fund Damu, Development Bank of Kazakhstan are engaged exactly in the same. There is a duplication".
The Deputy Head of the NWF Samruk-Kazyna, Elena Bakhmutova "came into the spotlight" in the information field also. She caused a sensation with his statement to Interfax-Kazakhstan about the possibility of merging the Alliance and Temir. However, she said, the final decision is pending. "There are considered various options to improve the efficiency of the banks activity included in the structure of the fund Samruk-Kazyna. While no decision is made, and different ideas could be considered," – she said, adding that this process will be very length and complex.
As she noted, to take any decision on the reorganization of the Alliance Bank and Temirbank, it is necessary to hold preliminary talks with the lenders under the terms of the restructuring ". Therefore, any announcements may cause misunderstanding from the part of lenders. Without them, any action on the reorganization of these two institutions cannot be conducted" – she said. The negotiations with creditors have not commenced. Nevertheless, among the considered variants “the ability to functioning in the combined financial institution" of these two banks is studied too.
However, the head of the National Bank, Grigory Marchenko dots the i’s in the possibility of merging the Alliance and Temir, saying that such variant is not expected in the medium term, and plans for the unification of the nationalized banks, including BTA had been not presented to the regulator.
As for plans to sell Temirbank, the state, according to Ms. Bakhmutova, refused to sell it "because the probability that the offtaker will be not found is high, taking into consideration the problems with leading financial institutions."
Speaking about the future of the BTA, she made it clear that a complete uncertainty prevailed in its prospects. "Everything is possible, but for the first phase it is necessary to complete the restructuring. It has only just begun".
True, the deputy chairman of the NWF rushes things, as far as re-restructuring of BTA commitments has not begun yet: now only a committee of creditors has been formed, which included not all financial institutions that participated in the first restructuring of the debts of bank.
From what went away to that and came back
The previous point is necessary to consider more detailed. According to the management of BTA Bank, the new membership of the creditors' committee is representative enough, representing lenders in the private and public sectors, and therefore it is able to express their consolidated position in the frame of planned re-restructuring of liabilities.
Thus, the committee includes representatives of the creditors of Ashmore Investment Management Limited, D.E. Shaw Group, FFTW UK Limited – BNP Paribas Investment Partner, Gramercy Funds Management LLC, J.P. Morgan Securities Ltd., Nomura International Plc and VR Capital Group Ltd., as well as the Asian Development Bank (ADB).
However, two seats of the committee are still not occupied – they are reserved for EKN (Swedish Council on export credit guarantees) and representative members of RCTFF (Revolving Committed Trade Finance Facility).
If to compare the current membership of the committee with the former one, formed in the first debts restructuring of BTA Bank, it may be noted that the committee did not get a very respectable representatives of the creditors. Among those are ABN AMRO Bank N.V., Commerzbank Atkiengesellschaft, KfW, Euler Hermes Kreditversicherungs AG, Export-Import Bank of the United States, Fortis Investment Management UK Limited, ING Asia Private Bank Limited, JP Morgan Chase Bank, NA, Mediabanca – Banca di Credito Finanziario Spa, Standard Chartered Bank and Wachovia Bank NA.That is, it was not entered by the representatives of leading financial groups in the West and the Federal Republic of Germany.
In turn, the members of the new committee stated that their participation in this structure "does not mean a waiver of any rights in respect of the bank, the Fund Samruk-Kazyna or other parties regarding any securities issued by the bank, as well as any other similar obligations or the trust management contract.” That means, in case of disagreement with the new restructuring options, investors included in the Committee, may withdraw from it at any time and require the repayment of the obligations of BTA towards them in full.
The creditors' committee will have to delegate its representatives to the Board of Directors of BTA Bank which work now in fact is paralyzed after the former committee members had left it. Recall that one member of the Board of directors will be appointed from the holders of senior bonds, and the second one – from the holders of special debt instruments with discount.
The next step for the committee will be a development of a joint plan of restructuring with the bank and after the approval of which by the shareholders' meeting of BTA Bank the document will be confirmed the National Bank and the Financial Court.