The economic recovery in Kazakhstan, driven by strong commodities prices, helped pull the country's troubled banking sector out of the crisis. And lending, which starting to resume in late 2010, is expected to pick up as Kazakhstan enters a new credit cycle.
Kazakhstan's banks are recovering more slowly than their Russian peers, even though the Kazakh economy was one of the first to exit the crisis. In its report, "Kazakh Banks: A Steppe in the Right Direction", Uralsib forecasts that positive momentum within the sector will become clearly evident in the second half of this year as the government introduces new regulations. "We see banks' balance sheets being cleaned out, provisions releases, and demand for loans returning," says the report. "Signs of lending growth are still not as evident in Kazakhstan as in Russia, though we would bet on the second half of 2011 when the state is to support the sector and growth."
The Kazakhstani economy was already outperforming Russia's in both 2009 and 2010, and the government expects the economy to expand by around 3% in 2011-12. "Overall the market is very attractive. There is a sense that people want to make things better for the future," says Simen Munter, CEO of HSBC Bank Kazakhstan. "We are seeing optimism in business and new investment projects being started."
But while commodity-related industries have grown strongly, other sectors, including banking, were slower to follow suit. Enterprises in the commodity-related sectors typically have access to cheaper sources of funding than bank loans, while many businesses in other sectors took on too much debt before the crisis and are still deleveraging.
Banks have until recently been unwilling to take on new risks while non-performing loans continue to rise. However, corporate lending was flat or rising versus the month before in the second half of 2010, and the sector posted 1.2% year-on-year growth in December after almost a year of decline. Banking debt has also halved since its peak in 2007. "We are counting on a turnaround in the second half of 2011, as we believe long-awaited regulatory changes will be finally introduced," says Uralsib. "This should trigger a new stage of the credit cycle with the release of provisions supporting both lending growth and profitability – as we currently see in the Russian banking sector."
Customer is king
Several Kazakh banks are looking to boost their presence in the retail segment of the business. "We see 10–12% year-on-year lending growth as entirely possible this year on the back of a recovery in demand, while in 2012-13 the sector may achieve 20% year-on-year growth," predicts the Uralsib report.
To tap into this market, Eurasian Bank in February took over one of Kazakhstan's largest consumer finance companies, ProstoCredit. The bank's chairman, Michael Eggleton, forecasts that the majority of the bank's growth this year will be from the retail sector. Meanwhile, Nurbank, which launched a new long-term strategy after a change of ownership in 2010, plans to boost the share of small business and retail loans in its portfolio by 50%. However, the bank's deputy chairman, Rauan Daukenov, points out that, "Although some difficulties connected to the global crisis are behind us now, there are still a number of post-crisis matters we as well as most our peers have to deal with, such as deterioration of the loan book and asset quality."
The Uralsib report notes that asset quality remains one of the major risks for the Kazakh banking sector, as banks have so far preferred not to write off bad loans in the "absence of a proper mechanism." The share of non-performing loans has remained above 30% since June 2009, though it had fallen to 33% in February after peaking at 36.5% in December 2009. "The banking sector is head and shoulders better than a year ago, but there's still a long way to go," says Eggleton. "Although there has been incredible change, and the risk of a sectoral failure is pretty much gone, that doesn't mean that all banks are good. For the next one to five years, some banks will be spending a lot of time dealing with the problems of the past rather than focusing on the opportunities of the future."
The Kazakh government was supportive to the sector through the crisis, injecting capital into the four largest banks, and new measures are now expected. The National Bank of Kazakhstan, which took over the financial services regulator after the April elections, is currently considering new mechanism for dealing with bad loans. Proposed measures include changes to tax legislation to make it easier for banks to write off bad loans, and the creation of a second distressed-assets fund.
Another proposal would be to separate part of the banks' doubtful loans into special purpose vehicles (SPVs). When new write-off schemes are introduced, banks are expected to transfer up to KZT900bn ($6.2bn) worth of bad loans into SPVs, which could bring substantial improvement for the sector. This would allow the banks to release around 7% of provisions. "These measures, coupled with non-performing loan restructuring, are set to bring gradual asset quality improvement to the sector, triggering some provisions release, and reducing pressure on banks' rerurn on equity," says the Uralsib report.
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