investing
Kazakh IPOs in London: Past and Future
Currently, ten Kazakh companies are listed on the Main Board of the London Stock Exchange (LSE), all of which have conducted their IPOs in the last three years. The post-IPO performance of their shares on the exchange may an indicator of the trends and prospects of the Kazakh economy.
Consolidation of Kazakhstan’s Banking Sector Likely
Two weeks ago, Korean Kookmin Bank announced that it held talks with Bank CenterCredit to buy a controlling stake in the mid-size Kazakh bank.
Kazakh Residential Real Estate Sector Ripe for Consolidation
Translated from the Kazakh weekly Business & Power - the original article in Russian can be found here.
Kazakhstan’s construction companies have been forced to search for new sources of capital. As local analysts suggest, now is the time for the builders to switch from relying on bank loans as a sole source of financing to partnering with strategic investors. This may result in increased mergers and acquisitions activity in local real estate and construction sector.
The mid- and long-term outlook of purchasing power among the Kazakh population will likely be lowered - not only as a result of the liquidity crisis, but also because of the of the deteriorating health of the entire economy. Accordingly, builders need to search for alternative sources of funds, and reexamine their strategies and financial models. “Today’s lack of liquidity affects big builders with excellent reputation just as much as small construction companies. The absence of acceptable bank financing shapes no longer only the market for real estate, but the whole consumer sector of the economy as well”, says Bakhytbek Katen, director of NAI Kazakhstan Aristan, a consultancy.
“Recent freeze of construction shook the reputation of the entire real estate market”, says Oleg Alferov, the vice president of National Association of Realtors. “As a consequence, buyers’ activity in the fourth quarter of 2007 was at its lowest level in the last three years.”
Present situation is favorable for those interested in entering the Kazakh real estate and construction sectors. The barriers to entry are low compared to the last few years, and interested parties may be able to acquire shares in new and unfinished projects relatively cheaply.
Alexander Kalinin, the chairman of Kazakhstan Estimators Association agrees: “The banks were focused excessively on the construction sector. Mortgage banking, construction and other real estate loans and similar financing deals accounted for 56-70 percent of the banks’ credit portfolios.” Under the current conditions, the sector is ripe for consolidation. According to Kalinin, the market will soon be dominated by large corporations characterized by high quality of their property portfolios, balanced price policies and additional sources of financing besides Kazakh banks. “One such institution could be, for example, corporation ‘Basis A’. I have no doubts that it is backed by serious shareholders with strong interest in Kazakhstan’s economy.” Other business models will have difficulties surviving in the new conditions, suggests Kalinin.
Kazakhstan’s Economy: Curve, Here Is Another Curve!
The main consequences of the problems that have emerged in the financial and construction sectors for the Kazakh economy may turn out to be a significant reduction in GDP growth rates. The result of the August events is obvious – a recession in Kazakhstan’s economic system, which seems to be gaining an impetus.
The Lessons from Kazakhstan’s Real Estate Crisis
Kazakhstan has been hit hard by the recent banking and real estate crisis. Will the lessons from this crisis lead to a more developed, resilient and just economy in the future?
Background:
Kazakhstan’s GDP grew by 10.6 percent in 2006 but slowed to 8.7 percent in 2007, and according to the forecasts of local analysts, will slow even further to 6 percent in 2008. Inflation, at the same time, grew from 8.6 percent in 2006 to 18.8 percent in 2007. The main factor that led to worsened economic conditions was the local credit crisis triggered by this summer’s subprime woes in the United States and the subsequent global liquidity crunch. This crisis has hit hard Kazakhstan’s praised banking sector and exposed its reliance on cheap foreign credit and overexposure to the speculative construction and real estate sectors.
A shake-up of such magnitude was a first for Kazakhstan. Until this summer, the market has been increasing steadily, and Kazakh real estate was among the most attractive investment plays in Central Asia. The growth came after nearly a decade of stunted development following the collapse of the Soviet Union in 1992 and the Asian financial crisis in 1998.
With the introduction of mortgages in the early 2000’s, the real estate industry began expanding quickly, especially in the more affluent urban areas. Residents of Almaty, the largest city in Kazakhstan, have been particularly active and have held almost half of all outstanding mortgages in Kazakhstan. In the last two years, however, the market has clearly been showing signs of troubles lying beneath. The unprecedented pace of growth in real estate prices has started to crowd out potential middle-class homebuyers and gave way to unregulated speculation.
As the market boomed on and reached its peak in the summer of 2007, the presence of the bubble was obvious and widely discussed. But only the global credit crisis triggered by the uncertainties about the U.S. mortgage sector has finally brought the exuberant growth to a stop. The crisis and the lack of global liquidity have forced banks to make credit standards more stringent and raise interest rates. This has virtually overnight turned Kazakhstan’s speculative demand-driven real estate market into a state of near-panic, and the years of double- and triple-digit growth in real estate prices in metropolitan have come to an end. So far, the price of one square meter on Almaty’s real estate market has fallen almost a quarter from a June peak of nearly $4,000.
Buying into Kazakhstan’s Booming Stock Market
As the equity markets around the world keep on delivering double-digit returns, investors venture further and further out into the periphery of emerging markets to find untapped sources of alpha. “Established” emerging markets like South Korea, Turkey or Taiwan are part of portfolio investors’ mainstream nowadays, and markets like Vietnam or Azerbaijan that nobody would touch with a pole just a few years ago become all the rage for adventurous investors seeking high returns. Kazakhstan, after five years of double-digit growth, appears to be profiting from the increased appetite for risk as well. Several specialized equity funds have been launched in the last year that focus on Kazakhstan and have ridden the wave of interest in this Central Asian country.
While the Kazakhstan Stock Exchange (KASE) remains small and illiquid and its listings are largely nominal, a growing number of Kazakh companies seek financing in the West and register their shares as GDR’s on exchanges in Frankfurt or London. Kazakhmys, the Kazakh copper mining company, even listed its primary shares on the LSE and is a constituent of the FTSE 100 share index. The Vienna stock exchange Wiener Boerse launched an investable Kazakh Traded Index (KTX) last month that includes the most actively traded stocks and Global Depositary Receipts (GDRs) of companies with their principal business activities in Kazakhstan and listed on the London Stock Exchange: Kazkommerzbank, Kazakhmys, KazMunaiGas Exploration Production, Halyk Savings Bank and KazakhGold Group. These recent developments have allowed investors to cash in on Kazakhstan’s booming oil economy without having to go through the KASE.
In the last year, several high-profile launches of hedge funds focusing on Kazakhstan and Central Asia have made headlines. One was the launch of the Sturgeon Fund by former Permal analyst Clemente Capello. The fund is a Cayman Islands-based vehicle which primarily invests in fixed-income and equities of the Central Asian countries of Azerbaijan and Kazakhstan. The other was May’s launch of Tau Capital, a joint venture between British Spencer House Capital Management and Kazakh Compass Asset Management. The fund, which is traded as a closed end fund on London’s AIM, raised $250 million against an earlier target of $200 million. Later the same month, Compass with Capital Partners Securities floated the Compass Kazakhstan Fund on the Irish Stock Exchange. In addition to these two products, Compass is looking to launch a third fund, Compass Kazakhstan Ltd., at the end of September. Minimum value of one stake in Compass Kazakhstan Ltd. is set at $2 ml, Tau Capital - $100,000, Kazakh Compass Fund - $10,000.
The funds invest in both public equities of companies focusing on Kazakhstan traded as GDR’s on western stock exchanges and the KASE (at least 50 percent of the fund) and private companies in various stages (up to 50 percent). Furthermore, the fund may invest on companies operating in other Central Asia countries, equity derivatives and commodity futures, and real estate projects. The fund will operate as a long/short portfolio with up to 50 percent leverage. Compass Asset Management has been running three other mutual funds marketed in Kazakhstan since 2005 with considerable success, their annual returns range from 26.19% to 38.01% with Sharpe rations ranging between 1.20 and 1.77.
While Compass as a domestic investment company with cleverly structured partnerships may be the leader in portfolio investment in Kazakhstan, the country has received much attention from other fund groups as well. Many Russian focused investment managers add Kazakh holdings to their portfolios, and even start their own Kazakhstan-focused funds.
Investors with a very healthy appetite for risk wanting to expand their portfolios to cover Kazakhstan have many options that did not exist as recently as three or four years ago. But it is wise to remember that investing in Kazakhstan comes with serious risk, as the latest, rather disappointing Kazakh debut on the LSE has shown.
Alliance Bank’s Debut on LSE
As Kazakhstan’s economy keeps on growing at a fast pace, more and more Kazakh companies turn to Western exchanges as sources of financing. Alliance Bank, Kazakhstan’s third largest bank and its largest retail lender, is the latest newcomer to join the club of British-listed companies from this former Soviet Union country. Yesterday, on July 17, its major shareholder, the Almaty-based holding company Seimar Alliance Financial, raised $704 billion in its listing on the LSE.
Alliance whose common shares have already been listed on the Kazakhstan Stock Exchange (KASE) placed 50.28 million GDR’s, each representing-one thirtieth of a share, to offer around 17.4 percent of the bank. The sale price implies a market value of around US$4.05 billion. Seimar sold the GDR’s at $14.00 each which is the bottom of the indicated range of $14.00 and $17.30. During the first day of trading the shares lost 6.7 percent and closed at $12.80.
Alliance is the third Kazakh bank that listed its GDR’s on LSE. Kazkommertsbank has listed its shares in London in November 2006 and Halyk Savings Bank followed in December 2006. Two other larger Kazakh banks are currently considering secondary offerings in London (Bank TuranAlem and Bank CenterCredit) while Unicredit, the Italian banking group, agreed to buy another Kazakh bank, ATF Bank, for $2.2 billion.
While Alliance’s GDR’s were listed at the low end of the estimated range, the share price indicates a huge premium to its peers. The issue price was a multiple of 4.8 times book value of $2.91 per GDR as of March 2007, a 78 percent premium to Kazkommertsbank which trades at just 2.7 times book value of $8.269 per GDR.
Alliance has been growing aggressively over the last several years and moved from being a tenth largest retail lender in Kazakhstan at the end of 2004 to being the leader today. To fuel this aggressive growth in the near future, the London listing was a logical step. However, the fast growth brings several risk factors that need to be considered.
First, the often discussed and highly praised growth of the banking sector in Kazakhstan is fueled mainly by retail credit and lending to construction companies and real estate developers. The product and services range of most Kazakh banks, and especially small and medium-size banks, is not wide, and the risks tend to be concentrated in certain areas. For Alliance, retail lending represents a total of 45 percent of its loan portfolio which makes it vulnerable to both systematic and unsystematic risks.
As most Kazakh banks, Alliance strongly depends on international capital markets as a source of capital, and as a result, is vulnerable to exchange rate, refinancing and interest rate risks. In addition, as the bright economic situation in Kazakhstan and the strength of the Kazakh tenge (especially compared to its neighbors) can be attributed to the high oil prices, at least as much as to President Nazerbayev’s economic policies, the banks are highly vulnerable to macroeconomic shocks like a sudden drop in the price of oil that would almost certainly take the tenge down as well.
Second, as already mentioned, Alliance’s growth was mainly thanks to the aggressive increasing of its market share in Kazakhstan’s retail lending. Today, its share represents 20 percent of the Kazakh market. However, as the volume of loans and the speed with which they are approved increase, so do the risks. Alliance uses a proprietary credit ranking system that allows it to grant or reject a retail loan in a matter of minutes. This, while allowing the processing of a large number of loans, naturally leads to a degradation of quality of the loan portfolio. As of the end of 2006, the non-performing loan of the ration was 3.6 percent. While this is an increase from the year before, it is mainly the result of Alliance’s strategy to focus on retail lending which is both more lucrative and riskier, and it is difficult to assess the effectiveness of the credit issuance system. The fact of the matter is that as the bank is fighting for market share, it cannot afford to cherry-pick worthy borrowers and the number of non-performing loans is almost certain to increase. As the retail loan portfolio makes up almost half of the entire loan portfolio of the bank, this may cause difficulties in the future. In addition, it should be noted that the growth occurred during a period of highly favorable macroeconomic conditions which may or may not last.
Kazakhstan has certainly been a success story, especially compared to its neighbors, and it attracts attention of not only oil and gas and mining companies but increasingly of portfolio managers around the world. However, it remains to be seen whether its almost double-digit growth of the past several years was thanks to the market-friendly policies of the presidential administration or merely to the high prices of oil and gas. The debut of Alliance Bank on the London stock exchange shows that investors are growing cautious of risky deals whatever the success story may be.
