Central Asia: Are Kazakh Banks Getting In Over Their Heads?

Wanna share? (AFP) LONDON, February 5, 2007 (RFE/RL) -- About 300 banking analysts and other interested parties converged on the London Stock Exchange in late January to tout Kazakhstan's banking sector. Some cautious notes were struck, but it was mostly couched in a symphony of praise for a post-Soviet emergence.

The growth of Kazakhstan's oil-drenched economy has combined with international trading in Kazakh bank stocks to raise those banks' profiles above those of their Central Asian neighbors.

The financial publications "Financial Times" and "The Banker" organized the London gathering, and Kazakh banks were footing the bill.

But financial analysts' enthusiasm appears to be fueled by hardy economic growth and predictions of more of the same. The Kazakh economy has grown from $18 billion in 2000 to nearly $80 billion, and Fitch Ratings agency has predicted a doubling of the economy over the course of seven years.

About $40 billion in foreign investment has already poured into the country, which is the wealthiest of Central Asia's five postcommunist republics.

Top Tier

Lord Renwick, vice chairman of investment banking for JPMorgan Europe and vice chairman of JPMorganCazenove, was among the panelists in London. He sang the praises of a few Kazakh banks at the London gathering, particularly those that are exposing themselves to the scrutiny of international investors.

"Within Kazakhstan, there are at any rate three or four banks which have very good standards by international standards. And that is why the IPOs [initial public offerings] of, for instance, Kazkommertsbank and Halyk Bank, have been very successful to date," Lord Renwick said. "Clearly, Bank TuranAlem is in the same category. It's a very large and well-run bank, very successful, and we think that if it comes to the market next year -- as it may do -- they will be a very successful IPO."

Lord Renwick stressed that he couldn't speak for all 34 of Kazakhstan's banks. But a decade of consolidation has weeded out more than 150 banks, and Renwick insisted the "best examples" now are increasingly well managed.

The sector has been helped by a thriving local stock exchange, by regional standards, and the full convertibility of the Kazakh currency, the tenge. Add to that the relative strength in the region of Kazakhstan's financial laws and recent regulatory improvements, and investment bankers see a brighter future for at least the sector's best performers.

"Today, Kazakhstan's banks are operating close to international standards, and they are absolutely ready to accept international laws completely," said Kairat Berikov, who specializes in financial institutions at ATF Bank, one of Kazakhstan's five largest. "When opening an account and during any operation made by a client, Kazakh banks follow all international standards. It is possible to say that our banking system has achieved fantastic results."

Present And Accounted For

Banks like ATF say they are holding themselves to international accounting standards, and their risk-management systems and international reporting practices are not far behind.

Berikov and his Kazakh colleagues acknowledge that without greater disclosure, their banks don't have a hope of attracting foreign investors to their shares or global depositary receipts (GDRs), which represent domestic shares but are traded on foreign exchanges.

Sadyr Shaguzhaev heads the debt capital markets division at Kazakhstan's Bank TuranAlem. He said he is pleased that Kazakh banks are being praised, but he also thinks they should be seizing on the growth potential among other CIS states.

"We see that the Kazakhstani banking market will saturate in the nearest future because of [the] limited nature of the economy and the limited number of population," Shaguzhaev said. "So [the] impressive growth which we have seen in the past years will stop in two, three, [or] five years in the future. In order to sustain such a reliable growth for our shareholders, we have to look at the opportunities which arise and exist in the other neighboring countries -- such as Russia, for example."

Potential Pitfalls

Martin Kimming, a portfolio manager for the International Finance Corporation (IFC), stressed to the London conference that healthy growth depends on the strength of some fundamental indicators.

Only room for growth in Astana? (epa file photo)

Kimming noted that foreign debt in the Kazakh banking sector of over 40 percent, wage growth, and consumer-driven inflation of about 8.5 percent that makes for a "dangerous situation."

He called it the "darker side of Kazakhstan's success story."

"The system is under stress," Kimming said. "Credit proceeds versus the assets booked are not the same quality of assets typical in any country where you have this type of credit growth. On top of that, credit growth is typically accompanied by significant real-estate appreciation. And the real estate is typically the security for credit growth. Obviously, the banks have to be very cautious."

Even President Nursultan Nazarbaev has warned that Kazakh banks are dangerously exposed in the area of corporate loans. And many analysts have warned that the Kazakh economy risks overheating at its current pace.

Anvar Saidenov, the governor of the Kazakh National Bank, acknowledged challenges for regulators and monetary policymakers, but he rejected the bleakest assessments.

"I would not call it 'dangerous,' because in a way this credit growth is linked very much to the growth of the general economy -- and we are experiencing more than 10 percent GDP growth," Saidenov said. "So I would say more like...it 'gives certain concern' for the central bank and for the supervision agency."

With rumors of another Kazakh bank considering a dive into the international waters in the form of an IPO, there is little doubt that investment bankers will be ready. But can they persuade investors that the Kazakh banks themselves are sufficiently prepared?