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INTERVIEW: BTA Back from Brink but Still has Legacy Issues

05.08.2010 / Business New Europe, http://www.businessneweurope.eu 

With its $11bn debt restructuring agreed, BTA Bank, once Kazakhstan's largest lender, is set to resume its position as a serious competitive force within the sector. Along with other banks, BTA is benefiting from the revival in the Kazakh economy, though it still has to clean up some of the legacy issues from the boom years before the crisis.

The revival of the Kazakh economy, which has been mainly driven by commodity prices, has helped BTA and other crisis-hit Kazakh banks. "The problems in 2008 and 2009 were caused by the financial sector - by bubbles in real estate, bubbles in bank lending, bubbles in borrowings by banks," says Anvar Saidenov, chairman of BTA's management board. "Now that commodities prices have recovered, sectors linked to oil and metals are recovering in turn, which is being translated into income for [small businesses] and individuals. The banking sector will capitalise on that."

Despite the damage inflicted on the Kazakh economy, Saidenov believes this has been a setback rather than a total dismantling of progress made during the boom years in diversifying the economy. "There are ruins, but they are diversified ruins, not the ruins of a mono-economy."

It was the availability of Kazakhstan's oil revenues, stashed in the National Fund, which made it possible for the government to respond quickly to the crisis, taking over BTA and Alliance Bank in early 2009 and injecting capital into other top four banks. According to Saidenov, the survival of the banking system was very much based on transfers from the national oil fund, as was help for small and medium-sized buisnesse (SMEs), agriculture and mortgage holders. The government and other state-run institutions are expected to retain this pivotal role for some time. State holding company Samruk-Kazyna is unlikely to exit its investment in BTA in the next three years, although earlier sales of its stakes in the smaller Alliance Bank and TemirBank are on the cards.

Rebuilding

Meanwhile, BTA has been rebuilding its business, seeing an increase in household deposits since November. "If you look at the domestic market, I think BTA could return to being a strong competitor within two years," says Saidenov, though he acknowledges it will take longer to work through the bank's portfolio of bad loans.

"In terms of the quality of the loan portfolio, especially that section which was based on projects in Russia or loans to offshore companies, it will take longer to recover those assets. A number of schemes were purely fraudulent," he says. "Recovery experts from Lovells say that historical data shows a recovery rate of around 20% in such cases - this is based on historical data rather than an analysis of our particular portfolio."

An important change in BTA's strategy is to put less emphasis on the corporate sector. In its loan portfolio, BTA plans to cut the share of corporate business from 80% to 50% by 2014, and increase the share of SME business to 30% and retail to 20%. Within the SME and retail sectors, BTA's market share fell to 8% in, for example, deposits, loans and non-interest transactions. However, the bank plans to regain market share and return to the pre-crisis level of around 15% by 2014.

Cost reduction measures have been carried out, including the closure of some branches, cancellation of bonuses in 2009 and staff cutbacks that reduced the bank's headcount by just over 20%. While the management and supervisory board have seen major changes during the restructuring, most department managers, regional managers and junior level staff - many of whom have been with the bank since the 1990s - remain in place.

Before the crisis, BTA was among the six largest banks in the CIS, with ambitions far beyond Kazakhstan's relatively small banking sector. Already established in most CIS countries, it was ultimately planning to move its headquarters to London under an expansion strategy developed with HSBC. Now the management team is dealing with the legacy of that expansion. "We are busy cleaning the house at the moment," says Saidenov. However, he doesn't rule out keeping some of BTA's international operations. "Kazakhstan is a small market, and if you have a number of big players, they will not be able to operate within these limits. Taking into account the customs union with Russia and Belarus, there will definitely be some opportunities for financial institutions in these countries."

"The idea of the regulators is to limit the negative aspects of such expansion - when it is too rapid, or based on risky investments, or targeted outside the financial sector for example into telecoms or real estate - as BTA did in Ukraine and Georgia. If BTA can have a well run, profitable bank with a clear strategy in, for example, Belarus, then why not?"

BTA will look at asset disposals on an individual basis, agreeing any decisions with our creditors, Saidenov adds. "In cases such as Ukraine or Georgia where there is still a possible presence of BTA's former owners, or like in Russia where there is a directly hostile attitude, then the question of disposing of these assets arises."

BTA is also cleaning up its operations within Kazakhstan where it is currently developing a strategy for its five Kazakh insurance companies. "We need to increase efficiency and reorganise the legacy we have inherited. We are going to merge three companies, sell one, and end up with a more optimum structure," explains Saidenov.

Although BTA has restructured its debt burden, the bank is not yet in a position to consider returning to the capital markets to raise new funds. "National companies and sovereign borrowers like the Ministry of Finance could return to international capital markets this year, probably on relatively favourable terms," says Saidenov. "A number of our banks have already announced plans to borrow. For private borrowers maybe the market will come back next year, but for banks such as BTA and Alliance which were affected by the crisis and went through restructuring, it will take longer. We should go through the process of regaining our international ratings, and demonstrating the viability and sustainability of the bank as an institution."