Kazakhstan banks are the victims of their own success

How do you estimate the prospect of development in Kazakhstan banking sector?
Internal and external market realities have been changed. The stage of heavy irrepressible growth of Kazakhstan banks, doubling, tripling, and in some cases quadrupling of assets and loan portfolios for year has come to the end. Such state of affairs raises new tasks before the bankers and regulators, namely, new work principles development, new business — models on further deeper home market development. Here relate to expansion of a product scale, increase of product commitments for each separate client (quantity of sold services to each separate client), a home market resources development in particular with the help of more compound products in assets management sphere. At present time, Kazakhstan banks basically are focused on short-term tasks of business reorganization, its adaptation to new realities, and also on the liquidity state management tasks solution and preservation of an adequate degree of assets quality.
 And that, as far as we see, will be prime tasks of the majority of banks for last months of 2008 and in the most part of 2009. Understanding of how the Kazakhstan banks will develop at a new stage is extremely important. The markets are stabilized; the cyclic historical development of the markets testifies that the periods of recession are replaced with the periods of restoration of the markets. And the stabilization will come for sure. It is now not clear yet, when it will take place, but it will be unconditionally. Quite naturally there is a question, how the Kazakhstan banks will develop at a new stage. There is no any accurate answer to this question for a while from the Kazakhstan bankers. We would not like to return to old practice of unchecked upgrades of assets at the expense of a gain of foreign borrowings. We hope, much balanced politics will be worked out both from the point of view of formation of a credit portfolio, and from the point of view of banks resources. From our point of view, the question of correct balance in general is a key question in financial planning and work out of commercial politics of banks.
All over the world, coming months will be the period of hard work, frequently and «work above mistakes «, accomplished in the previous period of «welfare», which will require huge efforts from all participants of the market. It will be the period of serious understanding and adaptation to new realities, and in particular of the Kazakhstan bank system. From decisions and steps, which will be undertaken by both banks, and regulators, and state the coming months, in many respects will depend success of bank system long-term development. Now there is an exclusive historical opportunity on acceleration of process of reforming and very important, that it was completely used. Right now regulators can meet understanding from banks about necessity, in particular, toughening of the requirements on foreign borrowings and active abroad operations, that FMSA and National Bank of Kazakhstan undertake now. Last years some braking of regulative restrictions introductions was observed. In many respects it was connected to rigid lobbying from bank community and complete misunderstanding of given necessity. For long-term leadership securing of the Kazakhstan bank system, which gets more difficult to keep now, it is necessary to solve and to struggle with present lacks. The neighbors are not sleeping, they actively step up the development and improve a control system, product proposal, quality of service, risk management. The new turn of reforms similar to that which occurred in Kazakhstan at the end of 90 s and beginning of 2000 years is necessary, which has put in pawn base for development and achieved successes of the Kazakhstan banks. Despite of spent and new regulative measures, the bank system very strongly progressed for this time; the business became substantially more complicated. Unfortunately, for some last years the reforming frequently lagged behind requirements and features of business.  

Do you see the signs of situation improvement?
During the period from August till December, 2007 liquidity volume in Kazakhstan was essentially reduced, but from the beginning of 2008 the situation was a little improved, and now it cannot be treated as stressful. These positive changes can be partly explained by proceeding inflow of money resources caused by the favorable export prices for the raw goods, and also reduction of import and charges. From other factors promoting liquidity increase of the money-market, it is possible to name monetarism and repatriation of a number of external assets, decrease of investment activity and foreign investments in construction and adjacent branches, regularly accepted by government liquidity support measures, some increase of trust of the investors, renewal of growth of the  clients deposits, and also some volume of foreign borrowings and direct foreign investments (in particular, in corporate sector). The Kazakhstan banks set proactive approach to liquidity management.
However we do not see convincing steady signs of situation improvement. Until the basic vulnerable places, in particular pressure on quality of assets are not neutralized, dynamics of the factors, disorganization work of bank system, will remain rather changeable, and the new perturbations are possible, by which neither market, nor the regulating bodies will not be ready. Debt commitment is reduced, but this process is not completed yet and is still far from a point of natural balance. Two things are necessary as a minimum for its achievement: the stabilization of the market prices (especial on the real estate market) and precise understanding by financial organizations of the sizes of the suffered losses, that would stimulate «closing up of gaps « (for example, by means of additional issue of the shares). We consider, that the bank system uncertainty  prevents complete win back of trust of the investors, will remain, in particular, until the balance in the market of the real estate will be restored.
We believe that the quality of assets, probably, is not at the lowest point yet. It can even more worsen in case of the further decrease of consumption and economic activity in the country. The quality of assets of banks in many respects depends on a level of internal consumption, as more than 70 % of the given loans fall at economics branches are connected to consumption. During recent boom of crediting in Kazakhstan, volumes of the credits which are given out to households and the companies, representing not raw branch (that is not connected with production and processing of minerals) most quickly grew. Such borrowers substantially rely on refinancing of the obligations through the new bank credits. The  available personal income of the population , in particular, testifies to growth to debt commitment the high attitude of the bank credits which in 2-d half-year of 2007 made more than 40 %, though five years back it did not reach 5 %. For economy of Kazakhstan are still characteristic the low income on soul of the population and significant disproportions in levels of development of various regions. The investments in development and modernization of economy (except for a petroleum and gas industry) grow slowly. The practice of risk — management in the majority of the Kazakhstan banks does not correspond to the best world standards. Aggressive rates of growth and the increases of the profit last years put under doubt quality and coordination of procedures of distribution of the credits.
We positively mark complete understanding of a problem of quality of assets from banks and regulating bodies’ side, and also their active job on concrete problem cases decisions. By our estimations, general trend in development of economy of Kazakhstan remains positive, and the growth of GDP in 2008 will exceed parameters of many other developing countries, though will be lower, than the last year.

What can help bank system of Kazakhstan to overcome these difficulties?
Different political forces of the country aspire not to admit aggravation of problems, and the government especially is disturbed with social consequences of crisis in housing sector. The governing bodies of Kazakhstan fairly consider, that stability of national currency — is major condition of preservation of trust of the population both corporate sector and reduction of potential pressure of the course factor by process of repayment of the loans. Further devaluation of Tenge can negatively affect ability of the borrowers to pay on the duties — especially if to take into account, that the currency loans make about 50 % of general loan debts in bank system. Financial support of government, high prices for the raw goods spent by banks re-structuring of the problem loans, and also some regulative indulgence should promote reduction of problems of bank sector, but can not remove their origin. The functional failures in bank sector have entered a new phase. The difficulties with liquidity attraction and credit resources are negatively reflected in quality of assets that can become the reason of the further infringements in work of sector. The problems with quality of assets create threat for liquidity of banks and their ability to execute the obligations in time.  If the banks opened the information on true quality of their assets (about full recurrence of the given credits) and more operatively have arranged on restoration of the systems and capital, they could get trust of the investors, more reliable resource base and opportunity of its further expansion. For the prompt restoration and realization of potential of development of the Kazakhstan bank system at a qualitatively new level the realization of emergency measures, instead of extension of this job for long years is necessary. 

The forecast of Standard&Poor’s on ratings of the largest Kazakhstan banks remains «Negative». Whether the downturn of ratings threatens to them?
The coming two quarters we can lower ratings of some banks, if in a course of monitoring we shall not see attributes of restoration — or even stabilization — quality of their actives, strengthening of a level of reservation and capitalization for absorption of possible credit losses, increase of transparency concerning credit problems, acceleration of a recognition of irretrievable debts and — if necessary — mobilization of the additional capital. In short-term prospect we do not expect occurrence at banks of serious financial problems in connection with decrease of quality of assets, which is not to the full appreciable yet due to re-structuring of the problem loans and regulative indulgences. It would be desirable to pay attention to that fact, that despite of current volatility of the market, the ratings of the Kazakhstan banks are at the high levels among financial institutions of the countries of CIS. The fall of quality of assets increases probability of downturn of ratings, but this probability is not the same for different banks.

Whether you agree with the statement, what for large banks on former Union space there comes time of consolidation of the market and creation transboundary empires in CIS?
Despite of obvious and for a long time ripened economic preconditions for activization of process of merges and absorption in the Kazakhstan bank market, dynamics of last years testifies to the existing internal contradictions between banks and insufficient stimulation of process on the part of regulating and legislative bodies. As the world practice shows, for development of processes of merges and absorption either constructive interest in them from management and proprietors, or the external pressure, in particular from the investors or legislative and regulating bodies are necessary , but none of them is observed on the Kazakhstan bank market. For fulfillment of any transaction of merge and absorption in the Kazakhstan bank market the interest in the transaction and good will of both banks is important, that very uneasy to achieve. The unfriendly absorption practically is impossible, in connection closure and high concentration of the property, and also very much limited revolution of the shares. Without cardinal changes in the legislative requirements both strategic positions of management and proprietors of banks Standard and Poor’s does not expect acceleration of process of merges and absorption in the Kazakhstan bank market in the nearest prospect. Though, we do not exclude, that the individual transactions are possible. At the same time it is represented, that in long-term prospect the consolidation of the Kazakhstan bank system at the expense of activization of process of merges and absorption is inevitable. It is obvious, that the existing quantity of banks in system is unfairly high, that complicates bank supervision, overloads monitoring and management of risks for banks and creates the additional potential centers of intensity, while the economic feedback and efficiency for a national economy of many banks is minimal.

The chairman of Board of directors BTA Bank Mukhtar Ablyazov has declared: «I think, some East-Europe and the Asian banks become large financial groups soon and quite can make a competition to Citgroup, HSBC and Unicredit, including BTA». What strategy will help banks of the countries of CIS to leave on a level of largest western banks? When will it happen?
The strengthening of multipolarity of a world financial system gets brightly last years, both Standard and Poor’s predicts continuation of the given process. Already now among 20 biggest financial groups of the world there are such large Asian banks as Japanese Mitsubishi UFJ Financial Group, Mizuho Financial Group and Sumitomo Mitsui Financial Group, and also Chinese ICBC, Bank of China and China Construction Bank Corporation. One of major conditions of promotion of banks of CIS on a level of the largest world financial groups is strengthening of their capital base, but there is no sufficient definiteness in this area. 

What, under your forecast, will be the next year for banks of Kazakhstan, and BTA of Bank in particular?
We see sufficient safety factor in the Kazakhstan banks to consult with the current period of intensity without especially deep shocks for a national economy. We hope that all participants of the market will take from the given stage correct lessons that will promote only strengthening and further prosperity of bank system and economy of Kazakhstan. «What does not kill me makes me stronger», told Friedrich Nitzsche. At all morbidity of the current changes at the end they should promote improvement of financial sector, development of steadier and viable business — strategy, development of internal funding sources and formation of more conservative financial politics of banks. At present conditions the greatest difficulties test rather weak credit organizations. As to stronger banks, they have an opportunity to strengthen the market positions. The bank system of Kazakhstan became a victim of the own success which has allowed her per last years to attract the large volumes of financing from the world market. The bodies of regulation and banks long time could not start to undertake the decision of growing structural problems connected with would seem by uncontrollable growth of business. However now they have unique opportunity to restore balance, to ensure long-term stability and to improve prospects of development of bank system. 
The following tendencies will be basic in the Kazakhstan bank system on the nearest prospect
• Liquidity and resources under a pressure
• Brighter display of credit risks
• Further diversification of business
• Banks’ reassessment of opportunities 
• Shift of accent from «accumulation» of balance to management of balance
• Role increase of risk management 
• Toughening of decisions principles 
• Growth of cost of resources for banks and borrowers (but it is not the same)
• More volatile financial results
• Economy of expenses
• Re-understanding of investment priorities by the shareholders
• Reforming of bank supervision, legislation and regulation

Certainly, the development of bank sector of Kazakhstan cannot be considered in a separation from proceeding vorticity in the world financial markets. It is important to recognize, that the world has changed. Also that especially guards, that the change of world financial and economic realities   was not finished completely yet. The new balance of values in the world financial markets was not established, and only then it will be possible to speak about stabilization of a situation. Fear and uncertainty are still steering international financial markets with short bursts of optimism. If already there has come some clearness with volumes of losses on investments in tools subprime, secondary consequences subprime shock and that the pressure on macro-economical tendency and parameters, in particular, inflation is more important, just come to be shown, that does not allow speaking about end of crisis. The temporary forecasts concerning to development of world financial crisis in many respects depend on breadth of used definition, that means, that almost all the stated forecasts (that already ascertain its end, that prophesy to it still many years) are correct if to take into account specificity of used concepts and meanings. In this connection it would be desirable to recollect primary meaning of a word «crisis» in the Greek language, which means «a rotary point «. Use of nominal this definition is not casual right now, when the credit, bank, product crises, crises of the real estate and natural resources in the world have coincided.

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