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 KAZAKHSTAN International Business Magazine №4, 2009
 Banks. The Strategy of Counter-cyclic Policy
Banks. The Strategy of Counter-cyclic Policy 

Despite high activity, observed in the banking industry this summer, the beginning of autumn is characterized by the lack of banking-related news. Nonetheless, in September we have witnessed a number of events that can radically change the layout of the financial system of Kazakhstan in the near future.

First of all, we are talking about the draft concept of financial sector development in the post-crisis period, prepared by the National Bank. According to the draft, its major principle of regulation will become counter-cyclic policy. In the opinion of analysts, however, vigorous application of counter-cyclic measures will lead to slower growth rates in the economy and banking system. Such conclusions were also partially confirmed by Grigory Marchenko, the Head of the National Bank, during a press-conference in September; however, in the opinion of Mr. Marchenko, the slower growth will also contribute to higher sustainability of the financial system.

"Counter-cyclic policy is one of the three major directions of the entire concept. It will reflect compromise. We are not going to see such rapid expansion that we observed in 2005, 2006 and first half of 2007. On the other hand, we will avoid the problems, currently faced by BTA and Alliance banks", Mr. Marchenko noted. "We will sacrifice some growth and share of profit, but they will have more reserves in the condition of the recession". The Chief banker of the republic believes that as a result of the concept implementation there will be "no dramatic peaks" and "sharp downfalls". Comparing to 2005-2006 the growth rates will diminish, but they will be "significantly higher than in 2008-2009".

At the same time, the head of National Bank underlined that one cannot expect high economic growth in the post-crisis period as well as big problems in the financial sector. "We admit there will be certain losses in growth. On the other hand though, our benefit will be the sustainability of the system and we will not need to spend money to support the financial sector in a crisis condition. Those problems, we see today, could be mainly anticipated and minimized. Therefore, if our economic growth will reach not 10% but 7% it will be very good".

The National Bank is planning to finish the concept development by the end of October. It will reflect the ideas of Kazakhstani experts and international experience. "Generally, we should finish everything by November 1. Our initial deadline was August 1, but we expect a meeting of G-20 in Pittsburg soon. We would like to consider those suggestions, formulated by the international community. If we prepared the concept by August 1, it would have been uncompleted", Mr. Marchenko explained. 

At the same time, Sabit Khakimzhanov, the Director of JSC Halyk Finance Research Department, believes that counter-cyclic policy will produce the lack of and the appreciation of credit resources. He is also affirmed that this will not happen today, but in the uncertain future when economic conditions will strongly discourage the conditions of 2004-2006. "In that period massive foreign borrowings made credit resources accessible as never before, but the economy failed to "digest" them. As a result, the funds flowed in the construction and produced higher salaries, not backed up by growth of productivity, and the formation of a "bubble" in the real estate market. Ultimately, borrowers and banks suffered but biggest victims became foreign moneylenders", the analyst said.

Meanwhile, during the press-conference Grigory Marchenko made it clear that additional state support is not expected so far since not all governmental funds, allocated under the anti-recession program, were "injected" into the economy. According to him, since 2007 state support cost $19 billion to the government. The consequences of the financial injections of the government will be totally seen no earlier than next year. "In our opinion, so far we are not seeing the full effect of the entire economic stimulation measures, launched by the government. We will see them in the beginning of next year", the Head of the National Bank announced, adding that the Ministry of Economy came up with the same approximated estimate.

"Not all the money of this package is employed. It reached its destination but in many cases this money did come back to the banks and they is stored in deposits. The short-term liquidity went up. When this money is gradually placed in the form of loans to the real sector then we can discuss what kind of additional package, if at all, is necessary", he explained.

Nevertheless, it looks like that National Bank Chairman is boggling, rejecting the necessity of additional economic stimulation by the government in the near future because only a few days, following the press-conference, it was announced that Asian Development Bank will provide Kazakhstan with a loan for financing the state budget deficit and implementation of governmental anti-recession measures in the amount of $500 million. The Finance Ministry press-service reported that the appropriate agreement between ADB and the Finance Ministry had been signed on September 14.

The offer, hard to ignore

Another significant event at the beginning of autumn was the final offer of a debt restructuring plan to the lenders of BTA Bank that was announced on September 3-4. It contains four options. First of all, the bank offers the repurchase of its debt with a discount of 82.25% for the maximum amount of $1 billion. Secondly, the option assumes the prolongation of liabilities for the medium-term period with 60% discount. Third option is the subordinated long term prolongation of debt, considered in 2nd level capital. The Final option is the exchange of debt per share with 80% discount. At the same time, the bank promises to provide the lenders with bonds upon the return of assets.

BTA presentation says that in a case of simultaneous performance of these conditions, in five years the bank assets will reach $19 billion while net profit will reach $1 billion. However, the achievement of these indicators must be backed up mainly due to the recovery of earlier cancelled loans. Overall, within five years it is planned to recover $3.3 billion of the $14 billion of provision.

As per analysts, the final restructuring plan, proposed to investors, will coincide with the worse case scenario that is reflected in the first bank’s presentation, dated July 23. Thus, former BTA CEO Roman Solodchenko states that, considering the debt on trade financing, the total requested discount reaches 80% while the debt, to be cancelled, is $8 billion. In his opinion, this can only imply that "despite the cancellation of half of bank’s loan portfolio, in July-August the quality of assets, remaining in the balance, continued to rapidly deteriorate".

"As for the foreign portfolio, the level of provision reached almost 100%; the same coefficient for investment loans and the domestic corporate portfolio reached 80% and 60% accordingly. Considering the continuing contraction of the Kazakh economy one can assume that the negative trends of a deteriorating portfolio quality will grow regardless of restructuring of the foreign debt of the bank", Mr. Solodchenko noted.

At the same time, he reminded that according to the estimates of the new management of the bank, by the end of 2009 its assets will reach $14.2 billion. This means that "in order to meet minimum norms of capital adequacy at the level of 10%, it should reach $1.42 billion in absolute amount. Considering the creation of additional provisions the total need in cash is $12.5 billion. Of this amount, $4.5 billion is covered by Samruk-Kazyna by already invested funds while $8 billion is proposed to be cancelled by the lenders", the former CEO of BTA underlined.

According to the last presentation of BTA, the total volume of the Samruk-Kazyna funds, directed to support the bank’s liquidity reached $7 billion and the national wealth fund is not going to provide additional funds above this amount. "However, earlier announced support by Samruk-Kazyna through participation in capital and swap on subordinated bonds was $5.7 billion plus $300 million of deposits – equals to six. One can only guess where one billion comes from and how it was injected in the bank", Roman Solodchenko is puzzled.

In this concern, he assumed that in spite of preliminary estimates all six billion was directed to support the liquidity and now the national wealth foundation will need to find an additional one billion in order to pay off the debt to the lenders. "This means that one either needs to beg the President or draw another creative scheme for money withdrawal from the National foundation". In his opinion, the preservation of the bank will come at a high cost for the lenders. On one hand, it is expected to pay back only the principal amount of debt; on the other hand, the accumulated interest is either written off, based on first and fourth options, or reduced, based on second and third", the ex-Chairman says.

"At the first option of immediate repayment of debt the assumed bank’s discount will reach 82.25%. Today, there are many reasons to believe that this option will become most popular. Therefore, the bank artificially limited the volume of satisfied requirements in the amount of one billion dollars. Those, willing to purchase a stake in the bank, will be offered to convert the debt into shares with 80% discount. So far the price of these shares is unknown. Finally, the rest of the lenders will be offered to extend the debt for seven years with 60% discount or for 15 years, based on the nominal value. In such cases, the payments can be expected no earlier than after 5 and 10 years respectively".

Hence, Mr. Solodchenko highlights, "the selection for the last ones is limited by two options: to take an incomplete 18 cents per dollar and forget about Kazakhstan as a nightmare or to reject the offer and engage in a lawsuit with Samruk-Kazyna, hoping to receive more money from the bankruptcy of the bank. The first offer looks as attractive as the second one looks unattractive. It is quite possible that for the prospect of never dealing with "most developed financial system of CIS", the lenders will be ready to sign up for shares and extended debts, having no illusions on the possibility to return them in the future. Overall, one billion in cash for eight billion of debt is 12.5% – it is good money too", he concluded.

Losses are up, assets are down

In August, Kazkommertsbank returned its crown as the leader of the banking sector by the size of assets. However, this took place not due to the growth of assets. Moreover, the asset size shrank by 53 billion tenge (-2.1%) to 2,493.4 billion. Considering the fact that the losses of BTA Bank came out twice as much – 116.1 billion tenge (-4.5%) – overall, Kazkom took the top spot while BTA (with an asset size of 2,449.9 billion tenge) ranked second. Third spot is stably occupied by Halyk Bank of Kazakhstan whose assets increased by almost 3% or by 58.5 billion tenge in July, reaching 235 billion tenge. ATFBank ranked fourth, demonstrating the growth of 76 billion tenge (+7%) with an asset size of 1,150.4 billion tenge. The last in the top five is Bank CenterCredit, whose assets grew by 47.5 billion tenge (+4.9%), totaling 1,013.8 billion.

By the size of bank stock the leader is also Kazkommertsbank that increased its size to 259.2 billion tenge (+1.8%) within a month. Halyk Bank of Kazakhstan ranks second with 222.6 billion tenge (+0.3%), Then goes ATFBank with 94.2 billion tenge (+4.2%). The reduction of bank stock to 89.8 billion tenge (-2.1%) was demonstrated by Bank CenterCredit while Nurbank, taking 5th line of the ranking, increased its bank’s stock to 44.9 billion tenge (+2.7%).

FSA data, reflecting the losses in the banking sector, are depressing. The first among outsiders is BTA, whose losses in July increased by 131.5 billion tenge and reached 1649.9 billion. Second place is held by Alliance Bank with losses, equal to 687.4 billion (the growth of 42.1 billion). The total losses of these two banks, controlled by the government, reached $15.6 billion. Temirbank ranks third with 34.5 billion tenge of losses. Negative profit was also shown by Halyk Bank of Kazakhstan whose losses reached 13.1 billion tenge. The fifth spot among second-tier unprofitable banks is shared by Bank Positive Kazakhstan and Bank Astana-Finance with 0.5 billion tenge.

In the beginning of August the list of most profitable banks is topped by Citibank Kazakhstan – 4.7 billion tenge (+9.3%) that pushed aside Bank CenterCredit. BCC profit indicator dropped by twice – to 2.2 billion tenge. Further go Kaspi bank with 2.1 billion tenge and Tsesnabank with 1.9 billion tenge. Nurbank concludes the top five leaders with a profit of 1.8 billion tenge.

By the total volume of the deposit base the first place belongs to Kazkom, which is number one by the size of legal entities deposits and number two by individual deposits. As of August 1, the corporate clients’ deposits in this bank reached 1,532.7 billion tenge, dropping by 2.2% in July. BTA Bank ranks second, where the deposits of legal entities are down to 1,262.7 billion tenge (-2.7%). Third-listed Halyk of Bank of Kazakhstan increased the deposit volume to 987.9 billion tenge (+3.7%). The level of legal entities deposits in Alliance Bank shrank to 470.1 billion tenge (-2%). Bank CenterCredit reported an increase of the deposit volume to 434.9 billion tenge (+8.9%).

Halyk Bank of Kazakhstan maintains its leading position by individual deposits, which grew to 372.9 billion tenge (+0.9%). On contrary, Kazkom witnessed its reduction to 303.8 billion tenge (-1.1%). The same figure of Bank CenterCredit increased to 243.2 billion tenge (+3.5%). BTA Bank is fourth listed, where individual deposits dropped to 166.8 billion tenge (-3%). ATFBank fell short in the fifth line, demonstrating the growth of the individual deposit base to 165.5 billion tenge (+5.5%) in July.


Table of contents
Caspian Gas: One for All?   Sergei Smirnov 
Insurance Market: Sight from Outside  The special report of Standard & Poor’s 
Macroeconomy. September 2009  Sergey Kasyanenko, Edilberto L. Segura 
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