Kazakh banking – devaluation, consolidation and bad loans

Kazakh banking is in a state of disarray, as banks assimilate the consequences of a recent 20% devaluation of the tenge. But there is also consolidation taking place, adding to the flux; and those bad loans…

Nick Kochan
17 May 2014

Kazakh banking is in a state of disarray, as banks assimilate the consequences of a recent 20% devaluation of the tenge, a surprise bid by the Central Bank to maintain export competitiveness with Russia, the country’s largest market. As a result, and notwithstanding Kazakhstan’s membership of the Customs Union, which includes Russia and Belarus, companies and individuals have had to pay a high price in terms of more expensive imports from Russia and the Russian bloc. The government, moreover, wants to deal with the consequences of its economic crisis of 2008, and is looking hard at the banking sector. Some restructured state banks are set to be sold to the private sector, with owners promising to initiate a much-needed banking consolidation in Kazakhstan.

Kenges Rakishev stands smiling in front of his company's logotype in a posed shot.

Kenges Rakishev - one of the well-connected businessmen vying for control of BTA Bank. CC Kenges RakishevKazakhstan has 38 banks, but this number could be substantially reduced if some mergers go through. The catalysts in the process of banking consolidation are: local oligarch Bulat Utemuratov, who is currently seeking to push together Alliance and Temir banks; and Kazkomertzbank, with its partner Kenges Rakishev, who is seeking to acquire BTA. Both deals are currently under negotiation with Samruk-Kazyna, the sovereign wealth fund, which owns the stakes.

Both Utemuratov and Rakishev are well-connected confidants of the president. Utemuratov is married to the president’s daughter Dinara, while Rakishev is married to the daughter of Imangali Tasmagambetov, the mayor of Astana, and a former prime minister in the early 2000s. Rakishev, who is 34, owns the SAT conglomerate, and is regarded as a young turk in the business establishment.


Banks in Kazakhstan can broadly be divided into four groups. Some Kazakh banks suffered badly post-2008, and were taken over either by Samruk-Kazyna or the government directly; these banks are routinely described as ‘restructured banks,’ and they are under close watch. Their balance sheets need to be cleaned up, with some three-quarters of their loans non-performing.

Even those first-tier banks that experienced difficulties in the crisis but managed to ride it out without support have NPLs (Non Performing Loans) of between 15% and 40% of their balance sheets.

The third tier of some 15 banks has found market opportunities in the carnage that was the crisis; and they have started growing their business. Eurasia is one such bank, with between 5% and 15% of NPLs.

The final group of banks entered the country after the crisis, and they have remained relatively unscathed from the economic downturn. Their NPLs stand at less than 5%. 

Market growth

Corporates are proving a rich source of revenue for banks; and the oil and gas, mining and infrastructure sectors have all expanded with the economy. However, banking for small- and medium-sized enterprises, on the other hand, has seen little growth, and is experiencing marginal stagnation, a result of regulatory hurdles and poor credit worthiness.

The highlight for Kazakh banking has been the retail sector, which has grown considerably as GDP has increased and the general population has started consuming again. The rate of growth over the last four years has been impressive, and this has resulted in a boom in car loans, credit cards, and mortgage business.

‘The marketplace and the banking population show that Kazakhstan is over-banked.’


Looking at this mixed picture, Alexander Kottmann, PWC’s financial services director in Kazakhstan, thinks consolidation is a given: 'We will see some consolidation happening. The marketplace and the banking population show that Kazakhstan is over-banked.’ The introduction of Basel Three capital ratios will push smaller banks into the arms of the larger, he says. ‘If you look at the proposed capital increases, this is quite significant, and by full introduction in 2019 it will require many banks to go to the market to look for additional equity funding, which is quite difficult given the overall state of the Kazakh banking sector. They compete for equity not only against other banks but also other industries, which is obviously difficult if there's a more promising return for investors.’

Potential buyers have deep pockets. Bulat Utemuratov, for example, who has bought an 80% stake in state-owned Temir Bank, as a prelude to buying Alliance Bank and merging the two, is one of Kazakhstan’s long-standing banking oligarchs. He not only controls Forte Bank and Kassa Nova Bank, but is also involved with Verny Capital, a well financed private equity fund, which owns a 1.33% stake in Glencore Xstrata, the massive commodities and natural resources trader and operator. Verny has bank management skills – the senior partner is Timur Isatayev, former managing director of ATF Bank – and these will be harnessed to manage the merger of Temir and Alliance.


Verny, which has assets in a wide range of local sectors including hotels, is funded by the proceeds of what has been termed the Kazakh ‘banking deal of the century,’ when Utemuratov sold ATF Bank, the fifth largest lender by assets, to the Italian UniCredito for £1.25 billion at the height of the credit boom, in 2007. In late 2012, UniCredito offloaded ATF, which had been founded by Utemuratov, for no more than the size of its equity, valued at less than £300m, to KazNitrogenGaz, the vehicle of Galimzhan Yesenov, the son-in-law of Akhmetzhan Yesimov, the influential mayor of Almaty.

BTA Bank headquarters in Kazakhstan.

BTA Headquarters in Kazakhstan. Though widely known as a retail bank, BTA Bank is suffering from a mass of bad loans. CC Esetok

New money is also set to enter the banking market with the sale to Kenges Rakishev of 46.5% of BTA Bank. Rakishev’s interests, through his SAT conglomerate, are spread around engineering, technology and natural resources, rather than financial services. Rakishev has formed a partnership with KazKommertsBank (KKB), where KKB has an interest in a 4% stake held by Samruk-Kazyna, to give it overall control. Local analysts say the deal cost the two parties between £120m and £268m.

Bad loans

The process of consolidation, however, is unlikely to be straightforward for two reasons. First, the outstanding bad loan picture is still far from clear, with daily surprises making the prospect of improving the loan book, everywhere more arduous. Bad loans are a feature of every Kazakh bank loan book – a legacy of an unresolved pre-crisis property boom -– with an average of 30% of bad loans. Second, an organisational restructuring is required for both Temir and Alliance banks, involving staff and IT systems.

‘This minefield hasn’t been cleared yet and mines keep exploding.’

The rapid deterioration of the bad loan portfolio was outlined by Timur Issatayev, who explained to a group of analysts that, ‘This minefield hasn’t been cleared yet and mines keep exploding.’ Two of the banks’ major state borrowers in the agricultural sector, he said, were ‘about to declare bankruptcy,’ leading to a non-payment of £60m worth of loans. The combined Alliance and Temir banks will also have an extensive property portfolio, ranging from prime real estate to countryside greenfield investments. Issatayev, however, warned that one property, which was on the books at 30m tenge, could be sold for no more than 7m tenge, while another that was on the books at 100m tenge could be sold for just 50m tenge. He said, ‘There are huge holdings of real estate which all banks have on their balance sheets. We realise the challenges; we will only depress the market by putting up for sale half of each bank. No one has ever done something of this magnitude before in Kazakhstan.’

‘No one has ever done something of this magnitude before in Kazakhstan.’

Incompatible IT systems

Overstaffing and incompatible IT systems also confront the managers of Verny, tasked with pushing together Temir and Alliance. The greater strategic challenge is building a unified IT system says Guram Andronikashvili, CEO of Forte Bank (Kazakhstan): ‘It is a two-step process. Alliance runs two systems, one for retail and one for corporate. Temir runs an outdated system. The first challenge will be to move all the business of Alliance into a new expanded banking system, then put the Temir business into the Alliance platform. The IT platform at Alliance also needs to be improved to accept Temir.’ Alliance managers are driving a process that will result in Temir’s absorption, says Andronikashvili. ‘The size of tasks Alliance is facing is much bigger. The IT expertise required for Alliance is much greater, so that is the focus.’

Moreover, the planned job-cuts threaten to create a storm in the country say the bank’s leaders. Verny is planning to dispense with 3,500 staff out of a combined total of 6,100. Andronikashvili says, ‘A huge challenge is disposing of staff. This would be an unprecedented shedding of labour.’

BTA Bank, whose assets were put at £6.2 billion in October 2013, continues to track down the loans made by former CEO Mukhtar Ablyazov.


The likely structure of the merger between BTA and KKB remains mired in concerns about the scale of the bad loans portfolio. BTA bank, whose assets were put at £6.2 billion in October 2013, continues to track down the loans made by former CEO Mukhtar Ablyazov, who is a fugitive currently in jail in France, and facing extradition to Russia. He is charged with perpetrating a massive fraud on the bank. Pavel Prosyankin, the BTA board consultant (and former managing director) who has been pursuing the loans over the last four years, says that ‘there is no exact value placed on what can be recovered.’  He says that ‘no more than a few hundred million dollars’ worth of loans have been turned into liquid cash. Chris Hardman, the lawyer at Hogan Lovells, the London lawyers hired to pursue Ablyazov, says that the former CEO made £8.9 billion worth of fraudulent loans.

Mukhtar Ablyazov, currently in prison in France, may have made up to £8.9bn in fraudulent loads.

Mukhtar Ablyazov, currently in prison in France, may have made up to £8.9bn in fraudulent loads. CC 1612TV

One local banker speculated that Ablyazov-related loans may be amalgamated with other BTA bad loans and placed into a ‘bad bank’ inside BTA. KKB would put BTA’s performing loan portfolio into a ‘good bank’ based round KKB. Prosyankin says, ‘they may function as two separate banks for some time. It doesn’t affect the asset recovery. The new shareholders have to decide whether the experts at KKB should examine the bad loan book at BTA that is not Ablyazov-related. KKB has a great deal of experience, as the largest bank, in dealing with bad loans in Kazakhstan.’

Merger costs will be saved if BTA is retained as a retail-facing brand, and KKB focused on corporates, says Anton Soroko, an analyst from FINAM Investment Holding: ‘The most likely scenario of this deal would be to divide the business between the two owners into retail and corporate ones. This way there will be no need to spend money on a re-branding, since BTA bank is well known in Kazakhstan, and the new owners should build on the brand's visibility.’

NPLs present a particular problem to Kazakh banks because tax rules make it particularly difficult to allow banks to wipe off bad loans.

A write off

NPLs present a particular problem to Kazakh banks because esoteric tax rules make it particularly difficult for banks to wipe off bad loans. According to one Kazakh banker, ‘In most jurisdictions, banks say, ‘We are never going to get back the money we lent so we’ll write it off; this is the difference between a provision and a write off… when you write it off, that’s it. In most countries, when you write it off, eventually your NPL rate comes down. But in Kazakhstan, if you take a write off, under current rules, they make you pay back the 20% of the tax benefit; in short it costs you money to do a write off.’  As a result of this rule, he says, ‘No one in Kazakhstan writes anything off; they just sit there forever with this NPL. When our competitors deem something unrecoverable, they write it off and move on. Now, if a Kazakh bank has a 30% NPL rate and a Russian bank has a 8% NPL rate, some would say on that basis that the problem in Kazakhstan is four times worse than in Russia. But Russian banks are able to include write-offs over time. Kazakh banks are being unfairly penalised against their peers because the statistics look worse than they are on a relative basis.’

The broader picture

The growing consumer market remains of keen interest to all banks. Eurasian Bank, for example, which focuses on the retail consumer, has seen considerable growth in mortgages, personal and car loans, says Michael Eggleton, the CEO. This rate of general consumer growth, however, causes concerns for Charles Seville at Fitch Ratings, ‘household debt to GDP is very low compared to the developed world, but the level of household debt is rising, and the share of debt to disposable income is rising to high levels. It is not frightening yet, but we could see problems in the banks’ loan books if this growth in consumer lending continues.’

Visual map of Kazakhstan's economy by sector. Oil and Gas continue to predominate and make up 56% of economy

Visual map of Kazakhstan's economy by sector. Oil and Gas continue to predominate. CC Haussmann, Cesar Hidalgo, et.al.

How will Kazakhstan’s banks handle the recent 20% in the devaluation of the tenge? Pavel Prosyankin says, ‘Banks that are in compliance with their regulatory requirements for currency exposure, shouldn’t be affected. But longer term, it may affect their largest clients and it will squeeze their liquidity positions. Clients may then turn to the banks for additional lending, but the banks may not have the resources to lend. The devaluation may have a knock-on effect on their deposit base, and that could cause a run on a weak bank.’

‘We don’t understand why anyone would risk money in this way.’

While the underlying Kazakh economy remains strong, with annual 5% GDP growth, based on a high oil price, scepticism about current banking sector manoeuvres pervades the local market. Almas Chukin, a former executive with Kazyna Capital Management, says ‘We are puzzled. We don’t understand why anyone would risk money in this way. The banks the government is selling are all in very bad shape. Why are people prepared to risk so much money trying to make money? Most of us are very doubtful. We don’t know what their motives are.’ 

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