Stagnation in store for Kazakhstan's banking sector

Kazakhstan's banking sector has been shored up by government cash, but this isn't sustainable in the long run. Until new sources of funding can be tapped, the sector is in for a period of stagnation, a new report from Renaissance Capital says.

The days of rapid growth are well and truly over. "Corporate loan book growth is fluctuating around zero, and the outstanding amount of loans issued to individuals has fallen. On the liabilities side, corporate deposits have been a major, but insufficient, source of funding to replace foreign debt," says Renaissance Capital in its report, "Kazakh banks: Making it cleaner and clearer."

There are two issues that need to be resolved if growth in the sector is to resume: first, is to find new sources of funding; second, find areas where funds can be applied with an appropriate level of risk.

Staying at home

Kazakhstan's banking system has already changed dramatically over the past two years, going from a largely independent sector to one with a high level of government control. Among the "Big 4″ banks, the government already controls BTA Bank and is set to take over Alliance Bank when its debt is successfully restructured; it also owns minority stakes in Halyk Bank and Kazkommertsbank. "The government's influence on these four banks through deposits is far more significant," says the report. "On our estimates, government-controlled funding represents almost 60% of domestic corporate deposits and thus the state, to a significant extent, can determine banking policy."

Corporate deposits have replaced foreign debt as the most important source of funding for banks. In the third quarter of 2007, foreign debt accounted for 54.7% of funding sources. By the second quarter of 2009, this percentage had fallen to 41.1%. Meanwhile, corporate deposits were up from 22.9% to 31.7%. Most of these corporate deposits are either funds deposited through state programmes to support the economy, or they are deposits from state-controlled companies.

Individual deposits have also increased in recent months, in one of the first signs of improvement for the troubled sector. According to Zareena Tagimbetova, executive director of Eurasian Bank, this increase was inevitable. "It is due to limited alternative investment opportunities in Kazakhstan," Tagimbetova says. "After the crisis started, people withdrew their money from wherever they had invested it in, and were basically sitting on piles of cash, which from an investment point of view is not a good thing to do. Now some of it is coming back to the banking sector."

Meanwhile, Kazakh banks' exposure to foreign debt has already fallen 30% from its peak in 2007, to $32.2bn. "If banks do not start borrowing heavily from abroad in 2010 (which currently seems unlikely), banking sector foreign debt will be reduced to around $21bn, primarily due to the write off of BTA and Alliance debt," Renaissance Capital says. Only KKB and ATF bank will remain substantially exposed to foreign funding

However, the current system cannot continue in the long term. "Government-origin funding, which became the main source of funding for the replenishment of deposits, is also limited and cannot be a long-term driver for the banking system," writes Renaissance Capital. "Moreover, a situation in which 60% of corporate deposits are from state-controlled companies is not sustainable in the long run, in our view."

Lookign ahead

Going forward, Renaissance Capital sees three possible ways in which the Kazakh banking sector could develop.

The report forecasts several years of stagnation in Kazakhstan's banking system, since domestic source of funding - including government funds - are too limited to replace international borrowing. This may have positive consequences. "Stagnation could make the banking system healthier, cleaning it up on the asset side and bringing liabilities more in line with domestic sources, reducing reliance on international sources," says the report.

Foreign borrowing is not completely out of the question - Halyk Bank, for example, could probably secure a new syndication loan or issue Eurobonds. However, for the banks who do need it, the market is closed, reckons Renaissance Capital.

There is also a chance that foreign banks will increase their share in the Kazakh market. "We don't rule out more international banks entering Kazakhstan," says Timur Ishmuratov, head of the international department at Bank CenterCredit, which has South Korea's KookminBank as a strategic investor. "It's difficult to say who, since Western Europe and the US are also suffering from the crisis, but we expect Asian investors to come."

More foreign funding could also come to Kazakhstan via the corporate and quasi-sovereign sector. "The amount of corporate foreign debt reached $72.7bn as of the second quarter... We believe the trend of falling banking and growing corporate debt will extend in the near future," says Renaissance Capital.

The report concludes that a combination of all three scenarios - stagnation, entry of new foreign banks and increased investments by corporates and quasi-sovereign investors - is likely. However, the Kazakh state will remain the most important investor in the banking sector for some time. "It is almost undoubted for us that the state's influence over the banking sector and economy, being already significant, will get even higher in the short-to-medium term," it says.

SRI