Kazakh Banks: Dire Outlook
Warnings by the international rating agencies, Standard & Poor's (S&P) and Fitch, about the possibility of yet another reduction in the ratings of Kazakh banks were perhaps one of the most noteworthy events in the first half of this year. At the same time, these far from favourable (or welcome) warnings came against a background of the repayment of the banks’ external liabilities.
However, as is evident from the latest report by S&P analysts focusing on the Kazakh banking sector, they are more concerned by the deterioration of their asset quality than whether domestic second-tier banks will be able to pay off their external debts. Moreover, S&P have actually blamed our bankers and the Financial Supervision Agency (FSA) for underestimating the reported information on the level of overdue loans. “According to our estimates, the loan collection rate is a way lower than the reported overdue debts rate. In addition, we believe that Kazakh banks stepped onto a new development stage while the market remains tense: now it is quality that determines their creditworthiness, solvency, liquidity and general long-term prospects for development,” the report says.
At the same time, the analysts of the agency note that the share of ‘stressed loans’ accounts for 15-20% of the domestic banking sector’s aggregate loan portfolio. “This is much higher than the reported overdue loans of the Kazakh banks, which are equal to 2-4% on average,” they said. “In order to reduce the overdue debts’ rate in their statements, Kazakh banks are restructuring problematic loans and extending the grace periods for payments.”
In S&P’s opinion, there are no convincing signs of improvement in the situation, and the negative tendency towards the deterioration of the quality of assets “will remain at least until the end of 2008”. “We believe that the quality of assets has not reached the lowest point. It may even get much worse if consumption and economic activity further decrease in the country. The quality of bank assets mainly depends on the level of home consumption as the consumption-related sectors make up 70% of the issued loans,” the agency’s report said.
Analysing one banking system or another, S&P calculates the rate of gross problematic assets (GPA), which may arise during the implementation of a more or less realistic but not catastrophic scenario of economic recession. In the analysts’ opinion, in case of recession, “the GPA rate in the Kazakh banking system can grow up to 35-50%.” In terms of this indicator, Kazakhstan can be compared with countries such as Russia, Thailand, China, Indonesia and Romania.
Besides this, the agency’s report notes that additional reasons for the worsening of the quality of assets were credit cost increases and real estate price falls. While construction is shrinking against its maximum level, as observed in the middle of 2007, real estate price falls averaged 30%, and in some segments of the market 60%. As at the end of May 2008, the share of loans issued to the economy’s most affected sectors – construction and real estate – and housing mortgage loans accounted for 19% and 9% of the Kazakh banks’ total loan liabilities, respectively. At the same time, over 50% of the loans were secured with real estate.
Based on these figures, S&P analysts are coming to rather deplorable conclusions: “Unless the main vulnerable points, particularly the pressure on the quality of assets, are neutralised, the dynamics of the factors disorganising the banking system operation remain very unsteady, new perturbations may appear and neither market nor regulating authorities will be able to prepare for them.”
The report also notes that the debt load is reducing, “but this process is not complete yet and still far from the point of natural balance.” In order to achieve this, S&P believes, there is a need for at least two things: the stabilisation of market prices, particularly those for real estate, and financial organisations’ clear understanding of the extent of losses, which would stimulate them ‘to patch gaps’, for instance, by issuing additional shares.
Moreover, according to S&P ratings, the uncertainty in the banking system, which is preventing investors from recovering their trust, “will remain, especially until the balance recovers on the real estate market.”
Based on this, S&P warns that the ratings of some banks may be reduced in the second half of the year unless the agency sees recovery signs or, at least, the stabilisation of their asset quality, the strengthening of reserve and capital level for paying possible credit losses, better transparency with regard to credit problems, the speeding-up of acknowledging bad debts and, if need be, the mobilisation of additional funds.
Unconventional steps by the National Bank
In this background, the National Bank’s decision to reduce the annual refinancing rate from 11% to 10.5% as of 1 July seems remarkable. The central bank’s plan is clear – it is to give a signal to the financial market to reduce profitability, which, for its part, will maintain the banking sector’s credit activity and economic growth. In other words, the National Bank is trying to make the second-tier banks cut their crediting rates in order to make loans more available for borrowers, thus increasing their number.
As for inflation, the National Bank relies on its previous estimates, which provided for a significant slowdown of its annualised growth rate. As a result, in real terms, i.e. after deduction of inflation, the official refinancing rate level must become slightly positive. Therefore, bankers will not come off the loser if they cut their loan rates. Of course, unless the inflation rate exceeds the limit, which the National Bank estimates at no more than 10%, but this, by the way, seems rather doubtful given the results of the first half of the year.
The National Bank’s decision to cut the minimum reserve requirements from 6% to 5% for internal liabilities and from 8% to 7% for external liabilities is no less important. Analysts from the National Bank have estimated that the decrease in the minimum reserve requirements will allow domestic second-tier banks to release about 90 billion tenge, which will fill up the short-term liquidity of the banking sector and can be directed at maintaining the Kazakh banking institutions’ credit activity.
You will recall that the National Bank was initially pursuing a different course, parallel with the FSA, intending to introduce a new framework that was not in favour of external borrowings. From 1 July, the minimum reserve requirements on other liabilities should have been raised to 10%, whereas on internal liabilities, decreased to 5%. The new manoeuvre means that Kazakhstan now needs external borrowings for the banking sector as never before in order to rescue the processing industry, the small and medium business and other related sectors from stagnation.
It should be noted that the National Bank’s latest decisions are unconventional during high inflation pressure. For their part, its leadership set as a priority the task of reviving economy at the cost of second-tier banks’ credit activity, while the struggle against inflation was pushed into the background. The National Bank has not voiced officially the change in priorities but its latest actions speak for themselves. The country’s main bank’s leadership has begun to soften its monetary and credit policy, which may increase inflation risks during high price increases on the one hand, as indicated by the IMF, but, on the other hand, it may stimulate the obviously ‘fatigued’ non-primary sector.
In addition, it is necessary to note another decision by the National Bank’s management, namely, to double the authorised capital of the Kazakhstan Deposit Insurance Fund (KDIF) from 16 billion tenge to 30 billion tenge. The National Bank said that it had undertaken this measure “with the aim of increasing the population’s trust in the banking system” and “expanding KDIF’s opportunities”.
At the same time, the amount of guaranteed deposits by individuals can be increased to 1 million tenge. On the one hand, this decision by the National Bank is quite clear – the fact is that, following the Valyut-Tranzit Bank’s crash, the fund exhausted its reserves and the participating banks simply have no funds to replenish them urgently. In addition, court litigations among creditors of the Valyu-Tranzit Bank are preventing the fund from obtaining reserves that are required for its replenishment. On the other hand, the increase in the KDIF’s authorised capital can be interpreted as a sign of upcoming shocks in the banking sector, which will require the fund to make significant payments to depositors. But there is one ‘but’. The KDIF is quite capable of managing the problems of small banks, but if the matter concerns at least one of the top ten second-tier banks, then one would not envy either the fund or its depositors. One can do nothing but hope that the FSA and the National Bank will join forces to prevent this kind of development of the situation.
Results of the poll that the National Bank conducts among bankers have become another piece of remarkable news. A report distributed by them says that domestic second-tier banks believe that the problematic assets of Kazakh banks have not yet reached the critical level and are within a controllable range. The National Bank believes that second-tier banks “have not used all the arsenal of existing market instruments to overcome existing problems.” In particular, except for activating and expanding internal structures in working on problematic loans, banks are establishing relations with debt collection agencies, and considering proposals by foreign banks in terms of purchasing problematic assets and the use of securitisation instruments. In addition, “credit market players may consider the possibility of setting up a special organisation to clean the balance sheets of banks from problematic assets with the state’s participation,” the report says.
On the whole, the National Bank has noted that the results of the poll show that the domestic credit market’s situation in the first half of 2008 was characterised by a sharp fall in the demand for mortgage loans, a growth in non-financial institutions’ demand for credit resources and the banks’ further steps to toughen their credit policies.
Kazakhstan Mortgage Company off the business
A report by a news agency saying that the state-run Kazakhstan Mortgage Company (KMC) intended to buy the loans of second-tier banks, which were issued to people as part of the first state housing programme for 2005-2007, has caused a stir. You will recall that mortgage loans were then being given at 10% per annum for up to 20 years provided that borrowers paid a deposit amounting to 10% of an apartment’s cost. But now, as news agencies put it, the borrowers are refusing to keep up interest payments and prefer just to give away their mortgaged apartments to the bankers. The deal between the KMC and banks provides that the latter keeps 2.2% and the rest will go to the KMC as profit. It is clear that thanks to this operation second-tier banks would not only improve the quality of their credit portfolios but also shift the responsibilities for low-income borrowers onto the state company. People with low income are in the worst situation today – they just have no choice between the rising costs of consumption goods and services on the one hand, and paying off loan interest on the other.
Responding to this information, the KMC leadership has said that no talks with bankers are under way on this matter. At a news conference, KMC Chairman Azamat Ibadullayev said that the company would buy from partner banks and mortgage institutions only the mortgage loans that were issued for the houses that the administrations of cities failed to commission by the end of last year as part of the first state programme. Overall, according to Mr Ibadullayev, the total number of applications amounted to 36 billion tenge, but this included the cost of all the houses under commissioning and 40-45% of them will be in the category of affordable houses.
A bit later, the KMC made a statement, extensively disclaiming the information about the talks with second-tier banks over the purchase of both bad loans, which were issued as part of the state programme, and the bad housing loans of the banks. In its news release, the KMC said that the company was set up “not for issuing mortgage loans on a par with commercial banks, but with the aim of establishing, developing and regulating a mortgage market.” Therefore, its main directions are “acquiring the right of claiming long-term mortgage loans, which were issued by partner banks for purchasing/renovating/constructing residential properties and secured on real property in line with the laws of Kazakhstan and attracting long-term resources for mortgage crediting, also by issuing owned mortgage securities.” As for the first state housing programme for 2005-2007, the KMC has already bought the rights of claiming loans, which were issued to partner banks for buying houses that were commissioned before 31 December 2007, and, therefore, the programme simply does not have ‘bad’ loans.
The case is somewhat different with the refinancing of mortgage loans, which were issued as part of the state housing programme and funded by the local executive bodies before 31 December 2007 in line with legislation. In this case, the KMC signed a memorandum on cooperation with the regional administrations. As far as the new state programme for 2008-2010 is concerned, the KMC is not participating in it.
Tables of ranks
In conclusion, we will introduce the traditional rating of major second-tier banks as at 1 July 2008. The FSA’s statistics shows that the BTA Bank ranks first in terms of assets – 2,939.7 billion tenge. It is followed by Kazkommertsbank with 2,603.2 billion tenge. Further down comes the Halyk Bank of Kazakhstan with 1,700.1 billion tenge. The Alliance Bank (1,089.6 billion tenge) and the ATFBank (1,046.7 billion tenge) are at the bottom of the top list.
The BTA Bank also holds first place in terms of equity (430.4 billion tenge), followed by Kazkommertsbank (268.2 billion tenge), the Halyk Bank of Kazakhstan (171.4 billion tenge) and the Alliance Bank (167.3 billion tenge). The ATFBank has equity of 99.5 billion tenge and is very close to reaching the 100 billion-tenge level.
According to the FSA, the second-tier banks’ aggregate deposits reduced by 1.1% to 1,476.9 billion tenge. At the same time, another significant decrease in individual deposits was observed in the Halyk Bank of Kazakhstan – down by 4.8% or 17.7 billion tenge (to 349.8 billion tenge). The bank sees the main reason for the fall in the household deposits in lower rates than in other second-tier banks. They averaged 7.8% on fixed-period deposits and 4.9% on the total individual deposit portfolio whereas competitors are offering interest rates of 14-16%. However, in any case, the Halyk Bank of Kazakhstan remains leader in terms of household deposits. This indicator is also down by 4.8% or 14.7 billion tenge (to 349.8 billion tenge) at Kazkommertsbank, which ranks second. This indicator grew by 3.4% to 279.9 billion tenge at the BTA Bank in the same period. The Bank CenterCredit increased this indicator by 4.5% to 147.5 billion tenge and the ATFBank – by 3% to 134 billion tenge. The Alliance Bank is lagging considerably behind the top five with a decrease by 0.7% to 80.3 billion tenge.
In terms of deposits by legal entities, Kazkommertsbank is leading as before with (1,429.9 billion tenge). The BTA Bank ranks second with 1,117.2 billion tenge. The Halyk Bank of Kazakhstan (882.6 billion tenge) and the Alliance Bank (438.1 billion tenge) come next. The Bank CenterCredit (416.9 billion tenge) is in fifth position.
Now let’s say a few words about the losses and the income of banks. According to the FSA statistics, as at 1 July five second-tier banks showed losses. Their total losses amounted to 10.4 billion tenge. As at 1 July, the banking sector’s retained earnings were 68 billion tenge, a 16.8% monthly increase. This is down by 41.6% on the same date of 2007, when the sector’s aggregate earnings stood at 116.1 billion tenge. This is how the top list looks in terms of retained earnings: Kazkommertsbank gained 22.8 billion tenge in the first half of this year against 21.2 billion tenge in the same period of last year. The income of the BTA Bank, which topped the list in the first half of 2007 (26.4 billion tenge), amounted to 16.1 billion tenge as at 1 July 2008. The Alliance Bank is third with 10.8 billion tenge against 19.1 billion tenge in 2007. The Halyk Bank of Kazakhstan is last in the top four list, whose retained earnings amounted to 9.9 billion tenge in the first half of this year (against 17.6 billion tenge last year).
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