“In a classic free market scenario, Halyk Bank wouldn’t buy Kazkommertsbank,” says a Kazakh banker about the recent preliminary agreement by Halyk, the country’s second largest lender, to purchase a controlling stake in struggling KKB, the country’s biggest bank. Halyk’s willingness to buy its larger rival bank is “possibly political in nature”, he suggests.
The Kazakh government sees the takeover as the best way to solve KKB’s bad loans problems, which stem largely from its takeover of failed bank BTA in 2015 but have been aggravated by the country’s economic recession.
Kazakhstan’s banking sector – which has still not fully recovered from the 2008-9 financial crisis – has been hit by a rise in bad loans since the slump in world crude prices, which has depressed the whole economy. It didn’t help that the authorities also allowed the tenge to float in 2015, leading to a more than 40% depreciation of the national currency.
"Asset quality remains weak across Kazakhstan's banking sector as the depreciated tenge, combined with challenging operating conditions and declining real incomes, have fuelled a rise in problem loans in 2016 to 37% of total loans, on average, among our rated banks in Kazakhstan," Semyon Isakov, vice president at Moody's Investors Service, said in February.
The ratings agency noted a month earlier that KKB faces an “increased probability that the bank will require external support to address problems related to its large stock of problem assets, as well as its recently increased reliance on liquidity facilities from [the central bank]” as it downgraded KKB’s baseline credit assessment to ‘ca’ from ‘caa2’.
The agency elaborated that KKB’s loan loss reserves, as of September 30, “amounted to only 12.6% of total gross loans and provide only a limited buffer for the above-mentioned asset risks, given weak macroeconomic conditions”. Moreover, on December 1, the bank reported a capital adequacy ratio of 12.8%, which, the agency pointed out, was modest given the high risk of asset deterioration related to its large stock of problem assets.
Nevertheless Moody’s reassured in February that the capacity of the government to provide liquidity or to recapitalise certain large banks remained “strong due to the relatively small size of the Kazakhstan banking system”. The agency also noted on March 6 that the planned takeover of KKB was credit positive for Halyk, implying that it could benefit from a merger if the terms are right.
The provisional agreement between the two banks in March included the condition that KKB should get rid of its bad assets before any further takeover plans could be discussed. In order to make the deal a reality, Kazakh authorities decided to buy out a significant portion of KKB’s bad loans via the central bank-operated “bad bank”, Problem Loans Fund (PLF), for KZT2.4tn ($7.5bn). President Nursultan Nazarbayev’s regime has already signed a decree allotting KZT1.1tn ($3.2bn) to nurse the country’s banking sector back to health – the amount would presumably be one of several such allocations.
The exact amount of bad loans being acquired, or the price as a percentage of book value are not publically available, so it is impossible at the moment to assess whether Halyk is getting a good deal.
Critics were not slow to express concern about the deal, pointing out that more than one-third of the Kazakh banking sector would now be controlled by one bank whose owners are presidential family members. A full merger would create a bank with assets of $27bn, outdoing the country's third largest bank Tsesnabank fourfold, and the local unit of Russia's Sberbank, ranked fourth, sixfold.
Both Halyk and KKB are owned by two different politically-connected groups, but both are directly or indirectly linked to Nazarbayev’s regime. His daughter Dinara Kulibayeva, together with her husband Timur Kulibayev, have a controlling stake in Halyk Bank, while KKB is controlled by Kazakh businessman Kenges Rakishev, a son-in-law of Defence Minister Imangali Tasmagambetov. In April, Rakishev increased his stake in the lender from 28.67% to 43.15%. He now directly and indirectly (through Qazaq Financial Group) controls 71.23% of KKB's common shares.
While the first intimations were that the deal would be a merger agreement, it now looks like the potential transaction would make KKB Halyk Bank’s subsidiary. The size of the KKB stake to be acquired by Halyk Bank has not yet been announced.
Marat Kairlenov, director of Ulagat Consulting Group, told Kapital.kz that KKB will most likely become a subsidiary, possibly a "bad bank" where Halyk will pour its bad loans. This, according to Kairlenov, is due to a number of restrictions that would complicate the merging process, such as the need to integrate different IT systems.
Kazakh bankers do not see much of a difference between the two outcomes. Full merger or not, together KKB and Halyk Bank account for 37% of Kazakhstan's banking system assets, transforming Halyk into a Kazakh equivalent of Sberbank in Russia.
“Sberbank controls around 30% of Russia’s banking system by total assets - Halyk looks to be heading down that direction,” a Kazakh banker from one of Halyk’s rivals tells bne IntelliNews. “This will allow Halyk to hold price-setting power over the Kazakh banking system’s financial products; whenever Halyk will change its deposit rates, for instance, other banks will see it as signal and follow its lead.”
But there could also be an upside for smaller banks. “A merger would significantly slow down Halyk’s decision making speed, which determines how quickly a given client could receive requested financing,” the banker says. “Smaller clients rely on fast decision-making, which would result in many of them flocking towards the smaller banks.”
“Even if KKB merely becomes Halyk’s subsidiary, the initial adjustment phase will involve changes in KKB’s top management – a long process which will slow down decision-making speed,” the banker adds. “During the nationalisation of BTA bank in 2009, the Kazakh branch of Sberbank was able to take advantage of BTA’s management change process to capture many of its low-level clients.”
The banker argues the small size of Kazakhstan’s banking system and the lack of “sufficient certainty for big banks to operate successfully” make it a better environment for smaller, more mobile banks. “Halyk might find it problematic to deal with a lower share of smaller clients and a larger share of risky big clients”.
Beyond the deal’s implications for banking sector competition is a worry that the deal echoes the 2015 KKB merger with the embattled BTA bank and will yet again postpone a real reckoning with the failed bank’s problem loans.
Eight years after BTA was nationalised in early 2009 following the financial crisis, the bank’s collapse has continued to have repercussions for the Kazakh banking sector. After years of searching for a buyer, it was eventually taken over by KKB. Rakishev and KKB each acquired 46.5% in BTA from the Samruk-Kazyna sovereign wealth fund. As part of that deal, KKB acquired BTA’s bad debts left over from the financial crisis – BTA's non-performing loans accounted for more than 80% of its loan portfolio at the time of the acquisition.
KKB's current troubles reflect mounting issues stemming from this merger with BTA. Half of KKB's assets of $15.7bn are tied up in a single loan to BTA, which has been turned into a distressed asset management company. No repayments on the debt have been missed by BTA, but there is an uncertain outlook where future instalments are concerned.
It is these BTA-tied bad assets, which make up “about 50% of [KKB’s] loan portfolio”, that the Problem Loans Fund aims to buy out, central bank deputy chairman Oleg Smolyakov pointed out during a press conference. “The funds of the PLF will not go...towards recapitalisation of KKB,” but will instead help “unhook” the high concentration of bad assets resulting from the BTA merger by removing them from its balance sheet.
Moody’s stated in January that “as of 30 June 2016, Kazkommertsbank's exposure to its largest borrower – which Moody's considers problematic despite its non-overdue status – peaked at KZT2.4tn or about 56% of the bank's gross loans”. KKB’s regulatory filings at September 30 revealed another 7.99% of its gross loans were nonperforming.
“Halyk will certainly receive a headache from acquiring KKB; even if the Problem Loans Fund aims to buy out the bank’s bad assets left over from the BTA-merger, the ‘real picture’ is probably much worse than shown in official figures, since many of KKB’s own bad assets left over from the 2008 credit crisis were written off,” the banker says. “Halyk would have to find the means to recapitalise KKB; considering that Halyk is smaller than Kazkom, this would place Halyk in a problematic situation.”
If the deal proceeds without a complete solution to KKB’s woes, the merger could come to be seen as just another stage in the procrastination over the Kazakh banking sector’s unexploded time bomb. Halyk Bank would face the same problems as KKB encountered when it took control of BTA. “History may well repeat itself,” the banker suggests.