State moves to stabilise Kazakh banking sector01.03.2009 / Issue 32 February/ March 2009
The Kazakhstan government has now moved to control a significant portion of the countries major banks in an effort to stabilise the banking system. The state holding company Samruk-Kazyna, via its investment fund, the Samruk-Kazyna National Welfare Fund has now taken stakes in the country’s top four banks and has begun to appoint Samruk-Kazyna executives to the boards of directors of the banks. Samruk-Kazyna, was set up to manage energy, mining and infrastructure assets with a total value of about $40bn as of the beginning of October last year. It was created by combining assets held by the Samruk Holding Company and the Kazyna Development Fund and shares held directly by the Kazakh government. We look at the immediate implications for the banking sector, evinced by the experience of BTA Bank, one of the top three banks in Kazakhstan. Francesca Carnevale reports.
At a recent a Nur Otan political party rally, Karim Masimov, Kazakhstan’s prime minister said that stabilisation of the banking system, “is impossible without interference of the state,” reported the Kazakhstan state news agency. “We have made a number of important decisions that will allow us to be certain that the Kazakh banking system is stable. And we will not allow uncontrolled events and defaults of the banks,” added Masimov. Moreover, Masimov stated that the government regarded Alliance Bank, BTA, Halyk and KKB as the “four backbone banks of the country” and offered, “to inject extra funds in their equity capitals in order maintain adequacy of their capitals [sic]”.
Meanwhile, Grigory Marchenko, formerly chief executive officer of Kazkommertsbank (KKB) and now chairman of the National Bank of Kazakhstan, told local press in early February that funds allocated to the banks through the Fund of National Welfare Samruk-Kazyna will not be used for repayment of external loans, “currency manipulations, as well as for the repayment of external loans”.
The government took a 25% stake in both KKB and Halyk Bank back in October 2008, investing a reported $1bn in each institution. It was a significant move, after two difficult years for Kazakhstan’s leading banks which had seen much of their international funding activity dry up and, as a consequence, their onward lending to local corporates. The banks are significant players in the local market, with aggregate assets equal to 34.8% of the total banking market: accounting for 36.9% of the domestic loan market and 41% of total retail deposits and 42.6% of total corporate deposits as of the end of September last year, according to National Bank figures.
At the time of the acquisition of shares in the banks official government statements highlighted the fact that Samruk-Kazyna will be guided by market principles and will act as an investor only and not interfere with the operating activities of banks and it will not play an active role in their day-to-day management. It was also agreed that bodies of corporate management of the banks will abide by the existing laws, requirements to second-tier banks which are prescribed by financial watchdogs, articles of association and other bylaws of banks, according to the government news release. “Participation of the government in the capital of the two above-mentioned banks will be transient,” stresses the government’s release and “will depend on the situation in the financial markets. Subsequently its stakes will be sold in line with market principles.”
At the beginning of February the government took a 78% controlling interest in BTA Bank. Citing mounting concerns over the state of Kazakhstan’s economy in the last three months, the government of Kazakhstan announced that it had accepted the recommendation by the Agency on Regulation and Supervision of Financial Market and Financial Organisations (FSA) that the state should acquire a controlling interest in the bank. According to Masimov, “Without the assistance of the state BTA Bank is unable to cope with the difficulties [sic], therefore, it was decided that the state through the Fund Samruk-Kazyna will own approximately 78% of the bank’s shares. The acquisition was undertaken via the issue of an extra 29,915,425 common shares at a price of KZT8,401 a share. As a result, the bank will receive KZT251,319,485,425 of extra capital, says a BTA statement.
In some respects the move by the government to shore up BTA was inevitable. The bank in national terms, was simply too prominent to fail and has a substantive market share in the all-important small business segment in the country. As of the end of the third quarter (Q3) 2008, BTA Bank’s consolidated assets were KZT3,671bn (around $30.6bn), credit portfolio amounted to KZT2,814bn and the bank’s consolidated net profit totalled KZT35.2bn ($293m). The bank has one of the largest branch networks in Kazakhstan (22 branches and 279 service outlets) along with an extensive chain of ATMs (787) and self-service terminals (160). BTA serves about 1.3m retail and 150,000 corporate clients.
Inevitably, in line with the move, there was some reshuffling at senior management level. At a BTA board meeting in early February Arman Dunayev, who is also head of state holding company Samruk-Kazyna, was elected chairman of the board of directors of BTA. In other changes, former governor of the National Bank Anvar Saidenov had been appointed adviser to Roman Solodchenko, the chairman of BTA Bank’s management board. Subsequently, on February 16th Saidenov became chairman of the management board and Solodchenko, was appointed as his deputy. Additionally, Sadwaqas Mameshtegi, formerly chairman of the board of directors of JSC Astana Finance, and Seitkali Rakhimov, a representative of the Samruk-Kazyna National Welfare Fund, were both appointed members of the management board.
Dunayev confirms that KZT212bn ($1.7bn) was transferred by Samruk-Kazyna to a designated account with the National Bank of Kazakhstan, the central bank, and that there was a resumption in the flow of funds into accounts of state-owned companies. Dunayev points out that with the government as a shareholder, BTA is in a much better position as far as confidence in the bank on the part of depositors and lenders was concerned. There were reports in early February that depositors were withdrawing money out of the Kazakh banking system in droves. Dunayev concedes that, “In the first couple of days or so after the government went public with the news of the takeover, there were delays in the processing of payments, purely for technical reasons, as every major payment had to be confirmed, in particular, by the beneficiary’s bank. Soon after, the situation worsened as the National Bank devalued the tenge and a wave of rumours began doing the rounds, which of course had a combined negative effect on us.”
Nonetheless, the management of the bank now says the situation has ameliorated. “I [can] assure everybody that any negative information out there about our operations comes from sources that are untrustworthy and is not accurate, plain and simple. We are certain that as Kazakhstan’s largest financial institution, BTA will take part in the KZT120bn government SME lending programme,” says a spokesman.
According to Dunayev, SMEs are precisely the part of the bank’s overall loan book that will “keep the bank going,” providing the bank with the opportunity to use the proceeds for rolling over “the existing portfolio or issuing new loans.” The SME segment at the bank is significant. SME lending by BTA had ballooned from $650m on January 1st 2006 to $2.4bn by the middle of July 2007. “Had the trend continued, we would be sitting on a $6bn loan book by now,” explains deputy chief executive officer of BTA, Genrig Kholodzinsky, who is charge of the SME segment at the bank. Kholodzinsky maintains that: “quality had been build into the portfolio, right from the beginning.”
Growth in SME lending at the bank was matched by profits; the bank earned $37m in 2006 on the portfolio, and as much as $100m in 2007, he avers. “First of all there are three sub-segments in our SME book: micro, small and medium-sized firms. Second, construction loans and residential mortgages make up a mere 10%. You be the judge. Last year, only 1.2% of all loans were restructured by number of loans issued; if you look at it by value of loans, it is 9.5% of the loan book. This portfolio is brimming with health,” he adds.
Kholodzinsky holds the intervention of the government in the bank can only be positive for the SME sector. “Keep in mind that interest rates are going down. Moreover, the government has capped the effective rate at 12.5%, which illustrates its commitment to growing this sector and getting their dues in the form of increased tax revenues.” The going will not be easy however. Kholodzinsky concedes that a loan book’s growth and its deterioration also go hand it hand. “It is normal,” he says. “the SME loan quality has only increased, or had been increasing, with non performing loans going down from 3.2% to 0.7% by mid 2007.” He grants however that the situation is testing. “It is 7% now. It is a crisis out there.”
There are also other issues to contend with. For one, BTA Bank’s international ambitions are being trimmed over the short term. “Under previous management, the plan was that BTA would grow into a global bank. It is quite obvious now that the financial crisis has called for a major adjustment in that strategy. Definitely it will not be the same and what it will be [sic] is going to be up the majority shareholder Samruk-Kazyna. It is also clear that when you are facing the kind of turmoil we are in now, it is the domestic matters that you should turn to first, which means coordination of efforts by all of our domestic subsidiaries, including insurance, leasing, investment and other operations. What we would like to focus on now is providing quality services to our customers.”
Even so, Anvar Saidenov, BTA Bank’s chairman of the management board asserts that the bank will not be leaving the international markets. “BTA has always been dominant in trade finance and this potential must be utilised in full, especially now that long term funding, such as bonds, syndicated loans and bi-laterals, are much harder to come by,” he says. Additionally, both Saidenov and Dunayev are keen to stress the bank’s commitment to its overseas debt obligations. “Inclusive of trade finance and accrued interest, foreign payments due this year are around $3bn. About $100m was repaid in February, under the guidance of the new management. As for Samruk-Kazyna, it stands firmly behind the bank’s obligations, in case we might need their help with repayments or in negotiations with creditors. Chances are it won’t be easy and will take a lot of time, but I am very hopeful of success. Our advisors and Samruk-Kazyna are working on investment and legal matters in London as we speak.”
The future of BTA Bank as an independent entity remains clouded however. There have been consistent rumours that a trade sale to Russia’s Sberbank might be in the works; if not of the bank in its entirety, then at least Samruk-Kazyna’s shareholding. “We are working with them now,” concedes Dunayev, “A team from Sberbank, including some senior-level management, were over here for about three days and we did a lot of talking. However, any kind of certainty over a deal of this kind will only be possible after an independent audit of the bank by KPMG. We expect that this will take up to two months or so.”
Irrespective of any strategic sales, the KPMG audit will also serve to define the bank’s business strategy over the immediate term. “It is a well known fact that 47% of our loan portfolio has, for a good number of years now, been related to projects outside of Kazakhstan,” explains Dunayev, “as part of BTA’s management to build a global franchise. Now, in order to evaluate the quality of our assets, loan portfolio and most importantly to examine the bank’s business with related parties, subsidiaries included, outside Kazakhstan, we are conducting an internal review supported by KPMG as independent auditors. Once the results are out, one will be able to talk about a strategy for the bank and the group.”