Kazakh banking recovery will take time

04/05/2010 | Simon Pirani

It will take another two years before Kazakhstan’s banking sector is able to make a contribution to economic growth, analysts warned this weekend

It will take another two years before Kazakhstan’s banking sector is able to make a contribution to economic growth, analysts warned this weekend.

Sergei Kasyanenko, economist at the CIS-focused investment firm Sigma Bleyzer, told Emerging Markets: “The two largest banks [Alliance and Bank Turan Alem (BTA)] are restructuring. Others have no sources of funding to speak of.

“It will take at least another year for the sector to complete its recovery. And it will continue to lag behind the rest of the economy for at least two years. Its ability to stimulate growth by lending will remain negligible during that time.”

Standard & Poor’s, the rating agency, made a similarly scathing assessment in a report issued last month. It classified as gross problematic assets (GPAs) more than half of the Kazakh banking sector’s total loan portfolio, although that figure is only 40% if the restructuring banks – Alliance, BTA, Temirbank and Astana Finance – are excluded.

“We do not expect the asset-quality indicators to recover to the levels of those seen before mid-2007, at least in the next two years”, S&P noted. It added that in 2010-11 banks’ capitalization and development dyanmics “might lag a potential turnaround in the overall economy”.

Concerns were further raised last week when Bank CenterCredit, the country’s fourth biggest, was raided by Kazakh financial police, after an anonymous accusation that it was violating credit policies. The bank strenuously denied wrongdoing. Analysts pointed out that the authorities have for some time been critical of the sector for under-reporting the level of non-performing loans (NPLs).

NPLs comprise 37% of the total loan portfolio, and 18% for the sector excluding Alliance and BTA, Kasyanenko said. He believes that the shake-out of bad debts by borrowers in the construction and real estate sectors – which accounted for about 40% of Kazakh lending up to 2007 – is not complete.

Prospects for new lending are little brighter than those for restructuring old portfolios, Roman Luchkovsky, an analyst at VTB Capital in Moscow who covers Kazakh banks, told Emerging Markets.

“The demand for loans will only pick up when the economy picks up”, he said. Real estate and construction borrowers will not return to the market for now – and the corporate bond market, which is helping to revive activity in the Russian banking sector, remains problematic in Kazakhstan.

“The Kazakh national bank has decreased its deposit rates to about 1%, to try to encourage banks to lend. But there are still problems.

“In Russia, banks can buy corporate bonds. But in Kazakhstan, there are few corporates able to issue them, and the bonds are not repurchasable with the central bank.”

International capital markets have effectively been closed to Kazakh financial sector borrowers for the last 18 months, and the domestic funding base is “insufficient to meet the economy’s need for credit stimulus”, S&P said. It expects cross-border lending to resume in 2011-12.

Progress has been made with restructuring. Alliance Bank has completed the process and is now 67% owned by the state holding company Samruk Kazyna, which injected about $1.4 billion of capital.

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