Kazakh banks’ post-crisis potential

analysis

By SRI ⋅ May 13, 2008 ⋅

Some Kazakh banks are better situated than others to weather the current domestic crisis. The levels of exposure to the main source of risk, foreign debt financing, differ greatly among the banks, and may prove to be the deciding factor in their further growth.

A useful indicator to assess a bank’s stability is the loan to deposit ratio. Generally, the ideal ratio is about one-to-one, or 100 percent. A higher ratio often indicates the bank’s reliance on borrowed funds and exposure to external risk factors. A lower ratio tends to be a sign of inefficient use of the bank’s capital. In Kazakhstan, the overall loan to deposit ratio among the ten leading banks is 214 percent — meaning that for every dollar deposited, the banks have issued $2.14 in loans.

This situation, of course, is the result of the banks’ borrowing spree prior to the liquidity crisis in the fall of 2007. The banks fueled the credit boom in the country and their own growth with (then) cheap financing from abroad. Attracting domestic deposits, especially retail deposits, was secondary. The situation changed dramatically in the fall of 2007, however, when raising funds on global capital markets suddenly became impossible or prohibitively expensive.

According to KZRating, a Kazakhstan-focused rating agency, as of April 1, 2008, the ten largest banks in Kazakhstan controlled 95 percent of issued loans and 88 percent of banking deposits (of those 94 percent were individual deposits while 85 percent were corporate deposits.

KazKommertsBank was the leading lender with 2,218 billion tenge ($18.5 billion) in issued loans, followed by BTA Bank with 2,140 billion tenge ($17.8 billion) and Halyk Bank with 1,119 billion tenge ($9.3 billion). Halyk Bank, the Kazakh legacy bank of the Soviet Sberbank had the largest deposit base with 988 billion tenge ($8.2 billion). KazKommertsBank and BTA Bank followed with 827 billion tenge ($6.9 billion) and 594 billion tenge ($5.0 billion), respectively. Among the top three, BTA Bank’s loan to deposit ratio is the highest at 361 percent, while Halyk Bank’s is the lowest at 113 percent. In addition, Temir Bank, BTA Bank’s subsidiary, had a loan to deposit ratio of staggering 492 percent.

The mean deposit to asset ratio among the ten largest banks was 35 percent — again, suggesting a strong reliance on outside capital. This ratio ranged from 17 and 22 percent for Temir Bank and BTA Bank, respectively, to 61 percent for the Halyk Bank.

Clearly, there are significant differences among the banks - their business models, sources of financing, and strength of their balance sheets - which are reflected in the discrepancies in their financial ratios. On the one end of the spectrum, there is Halyk Bank, a large, established institution with significant retail presence across the entire country and a strong balance sheet. On the other end of the spectrum, there are lending institutions like Alliance Bank - smaller, newer, more aggressive and more dependent on foreign financing.

These differences will likely be crucial in determining further growth of the banks and further development of the entire banking system. Banks like Halyk Bank will have more options in attracting capital to expand their business and will continue to grow and possibly gain market share on the expense of other, less flexible players. This, in fact, has already shown when Halyk was able to place a $500 million Eurobond at a time when other banks still see their access to international bond markets closed. Other players, especially the smaller domestic banks without a deep-pocketed partner, will likely remain cut off from these options for some time and will have to strive to obtain funding by other means.

Therefore, it is almost certain that the recent fast-paced growth of the Kazakh banking industry that has helped to jumpstart the housing and consumer markets is history. Many banks will find no alternative to issuing foreign debt as a source financing - at least for the time being. The domestic capital market remains undeveloped, the deposit base is unlikely to increase significantly in the short or medium term, and global investors’ appetite for new IPO’s of Kazakh has seemingly disappeared as well.

However, it would be premature to write off all Kazakh banks based solely on these indicators. The large inflow of funds from abroad in the past several years has significantly contributed to development of the Kazakh banking system and has helped in expanding the middle class in Kazakhstan. Through the banks, the population was able to participate in the benefits of the commodity boom that has made Kazakhstan one of the fastest growing economies in the world since 2000. The banks were very innovative in creating financial instruments tailored to this new consumer market and are likely to reap benefits from this in the future as well.

And while the Kazakh banking system is considered the most developed among the former Soviet states (with the exception of the Baltics), the market is still far from saturated. The loan to GDP, mortgage to GDP and similar indicators suggest that Kazakhstan actually finds itself in an early stage of the development, and the banks still have a large, untapped market to fill.

Therefore, it is likely that the current so-called crisis, albeit painful for many, will actually benefit the Kazakh banking system in the long run. The banks will be forced to get their balance sheets in order. They will need to orient themselves increasingly on domestic depositors in order to attract financing. And they will have to convince international lenders that they will be a reliable partner in the future as well.

This, naturally, may be a difficult adjustment for some of the banks that thought to have found the license to print money in the years prior to the crisis. Borrowing abroad at a low rate and lending at home at a high rate seemed the natural order of existence. However, the fall of 2007 was a wakeup call that the banks had to heed. For some, the adjustments will likely be too difficult to make and those institutions will collapse or be acquired by other, stronger banking houses. Others will seek out financial partners, both domestic and foreign, in order to take advantage of the post-crisis opportunities. And yet others will adjust and continue thriving by themselves.

Yet, the fact still remains that Kazakh banks currently find themselves in a precarious situation. They are facing a slowdown in domestic economy, lack of liquidity on international capital markets and mistrust of risk-averse global investors. At the same time, they need to reinvent themselves and quickly adjust to a new market environment. However, it is important to consider the banks on an individual basis because clearly the range of risks that they face and the consequently their future outlook range greatly among the individual institutions.