Kazakhstan will have trouble making its bad-loan reduction targets, Standard & Poor’s says31 march 2014, 12:45
Kazakhstan’s banking system has been wallowing in bad loans ever since the global economic downturn of 2008 and 2009.
In fact, it has the dubious distinction of having the highest percentage of bad loans of any country in the world – about 32 percent of all loans at the start of this year.
The bad-loan problem has not only hurt the financial system but the economy as a whole. That’s because it has limited the number of new loans that banks can issue to help the economy grow.
Aware of the economic impact, and impatient with banks’ inability to reduce their bad loans, President Nursultan Nazarbayev has ordered regulators to get non-performing loans down to 15 percent of all loans in 2014 and to 10 percent in 2015.
This will be a daunting task. In fact, too daunting, according to the international credit rating agency Standard & Poor’s. It says Kazakhstan is unlikely to achieve the targets, even with new legislation that will give banks more incentives to write off bad loans.
The head of the National Bank of Kazakhstan, Kairat Kelimbetov, is spearheading the bad-loan reduction effort, starting with drafting the revised bad-loan-write-off legislation. The definition of a bad loan is one on which the borrower has paid no interest or principle for three months.
In a recent report on the health of Kazakhstan’s financial system, Standard & Poor’s said it’s worried that last month’s devaluation of the tenge will make the bad-loan problem worse. Those who borrowed money in dollars or who pay for imported products in dollars are the most vulnerable. They find themselves needing to earn 19 percent more in tenge – the amount the currency was devalued -- to meet their dollar obligations.
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Another important prediction in Standard & Poor’s report was that Kazakhstan’s largest banks, as a group, will see no profit growth this year. Some of the big banks – such as Halyk – have shown solid profit growth in recent quarters, but most have not.
The dominant banks are likely to strengthen their positions in such segments as number of accounts held by individuals and the value of corporate loans, auto loans and consumer loans, however, Standard & Poor’s said.
Most Kazakhstan banks have been reluctant to lend in recent years, although there have been exceptions. And the exceptions – such as Eurasian Bank -- are likely to see their profits surge in the next few years, Standard & Poor’s said.
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The ratings agency’s report, written by Annette Ess in Frankfurt and Natalia Yalovskaya in Moscow, also predicted that Russian banks such as Sverbank “will continue strengthening their foothold in Kazakhstan.”
Kazakhstan’s banking sector is a mixed bag. A few, mostly smaller banks are growing rapidly and are very profitable. Others are healthy but have had minimal profit growth in recent years. And a few are almost catatonic – the prime example being BTA, whose bad loans account for 80 percent of its entire portfolio.
To offer the best grasp of Kazakhstan’s banking sector, the Standard & Poor’s report divided banks into three groups. The groupings were based on quality of assets -- in particular, quality of loans:
- Group One consists of such big banks as KazKommertsBank, Halyk Bank, Bank CenterCredit, ATF and Nurbank, which have a combined bad-loan rate of 25 percent.
- Group Two consists of banks that were in such bad shape after the global economic downturn that they needed to be restructured: BTA, Alliance and Temirbank. Their combined bad-loan rate is a staggering 76 percent.
- Group Three consists of rapidly growing or small banks. Their combined bad-loan rate is a manageable 5.3 percent.
One of Standard and Poor’s key conclusions about the continuing impact of the bad-loan problem is that the banks in Group One and Two have lost a combined market share of 11 percent the past two years. And the trend is likely to continue, the Standard & Poor’s report suggested.
“We expect core earnings” in Groups One and Two, “with the exception of Halyk Bank, to be negative or near break-even,” the ratings agency said.
Standard & Poor’s noted that, unfortunately, government initiatives to address the bad-loan situation have had little impact.
One initiative was a Distressed Assets Fund, a tool the United States has used to help bring its financial sector out of crises.
The idea of a Distressed Assets Fund – or Toxic Assets Fund, as America dubs it – is for a government agency to buy banks’ bad loans, then sell them at a discount to bargain hunters. If a borrower actually ends up paying off a loan that is long overdue, the bargain hunter earns a handsome profit.
“The problem is, what value do you put on a bad loan?” said a banker friend of mine who requested anonymity. “The government may want to give you 10 cents for every dollar of the face value of the loan, but the bank may want 20 or 30 cents. This gets you into endless wrangles, and in the end, few bad loans go into the Distressed Assets Fund.”
Another Kazakhstan initiative to reduce the bad-loan rate was legislation giving banks tax breaks for writing off bad loans.
The problem was that the legislation offered tax breaks that were too small, my banker friend said.
Some government officials felt that full write-offs of bad loans would lead to too little tax revenue from the banking industry, a major source of revenue.
“Because the legislation offered banks so little incentive to write off bad loans, banks just kept them on the books, meaning that Kazakhstan’s bad-loan rate continued to be one of the world’s highest,” the banker said.
Kelimbetov is trying to address that issue by creating more generous tax-writeoff legislation that Parliament is supposed to take up in June.
If it offers full write-offs of bad loans, it could substantially reduce Kazakhstan’s bad-loan rate in the next couple of years, industry observers say.
Although the rapidly growing banks in Standard & Poor’s Group Three list would seem to be a blessing, both government officials and the ratings agency are concerned that some of these banks are lending too much too fast – and are vulnerable to a crash.
Such a crash could help precipitate another financial crisis, the experts worry.
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Standard & Poor’s said it expects the National Bank of Kazakhstan “to introduce preventive measures to curb” Group Three banks’ rapid growth so those institutions don’t “follow in the footsteps of the banks in the first two groups.”
“For example, the regulator recently introduced a cap on the growth of consumer loans of 30% annually,” Standard & Poor’s noted. This means that no Kazakhstan bank will be able to increase the value of its consumer-loan portfolio by more than 30 percent in a year.
Consumer loans are small loans to individuals, typically for such household items as refrigerators or television sets.
The Standard & Poor’s report makes these additional points:
- The percentage of foreign-currency deposits in Kazakhstan’s banks rose from 31 percent at the end of 2012 to 38 percent at the end of 2013 because of expectations that the tenge would be devalued. The devaluation did occur – on February 11, 2014.
The ratings agency said it did not expect another surge in foreign-currency deposits this year “because another devaluation in the short term is unlikely, and interest rates on foreign-currency deposits remain significantly lower than those on tenge-denominated deposits.”
- Kazakhstan companies and individuals still lack viable savings alternatives to banks, a situation that which continue to help banks attract deposits, even in uncertain environments such as currency devaluations.
- Small and medium-sized businesses in such sectors as trade, agriculture, consumer goods and infrastructure construction will continue to drive the demand for new bank loans. That’s because Kazakhstan’s biggest corporations – which are mostly in oil, gas and minerals – are in such good financial shape that they have little need to borrow for expansion or other purposes.
- Infrastructure projects will continue to spark both economic growth and bank-lending growth. Kazakhstan is modernizing and expanding its highway and rail systems, increasing the capacity of its airports, building new oil and gas pipelines, and refurbishing its three refineries.
- Kazakhstan’s exports are unlikely to increase – which means they’ll have no impact on economic growth over-all -- until the troubled Kashagan oilfield comes back on line. Production at Kashagan started on September 11 of last year but was suspended on September 24 because of a gas leak in the pipeline that carries oil and gas from the offshore production area.
Although Kazakhstan’s exports are unlikely to increase, the country will continue to enjoy a substantial balance-of-payments surplus, experts say. The value of the country’s exports has been almost double the amount of its imports for many years.
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