Kazakh banks cannot avoid the market forever

Issue: 1024 - 2 October 2007

Kazakhstan’s banks have been among the stars of the European bond and syndicated loan markets in the last few years. Now, they have had a rude shock: pricing has gone up. The banks don’t want to pay up, but they would be wise to recognise their dependence on international markets.

Kazakhstan’s banks are feeling the strain of this summer’s credit squeeze. No, they have not declared huge losses on US subprime mortgage backed securities or funky structured credit products.

But then, neither had Northern Rock. Like the UK mortgage bank, Kazakh banks have grown extremely fast in recent years, and have excellent assets. Domestic credit in Kazakhstan has grown by 75% a year for three years, yet non-performing loans at Bank TuranAlem, for example, remain below 1%. Also like Northern Rock, the Kazakh banks have financed their growth largely in the international debt markets — and are therefore to some extent reliant on those markets for refinancing.

The sector’s foreign borrowing grew from 38% of total liabilities in 2004 to 52% at the end of 2006. Between then and June this year, foreign debts leapt from $33bn to more than $40bn.

This funding exposure has been enough for the rating agencies to flag short term concerns about Kazakhstan’s banks. In August, Standard & Poor’s issued a report highlighting the vulnerability of Kazakhstan’s banks to the global credit turmoil and expressing concern that a slowdown in growth could reveal the true extent of asset quality problems.

The similarities with Northern Rock end there. Customers are not queuing around the block to withdraw their deposits from Kazakhstan’s banks, and there is no crisis of confidence in their credit among investors, domestic or international. And yet the flow of international funding has all but dried up, and there are no new mandates on the horizon.

In the loan market, deals mandated before the credit crisis really bit — such as for Kazkommertsbank, Halyk Bank and Eurasian Bank — have been grinding their way painfully through syndication during August and September and are now largely complete. But no new loan mandates have been given since the troubles began. The main reason appears to be that the Kazakh banks, which have become used to pricing each new loan at ever tighter margins, do not want to pay more for new money. The same goes for the bond market.

Last week in Almaty, at the Bank TuranAlem Interbanking Conference, the talk in the corridors among capital markets specialists was all about how and when Kazakh banks were going to re-enter the international markets.

Outwardly, funding officials at Kazakhstan’s top banks are bullish. No, they declare, they will not return to the syndicated loan market until spreads return to “reasonable” levels. No, they are not concerned about the $6bn of debt, mostly syndicated loans, they will have to refinance before the end of this year.

They have ample liquidity to simply repay maturing loans and bonds and hold out until the market recovers before returning for more.

They are backed up by National Bank governor Anvar Saidenov. “The National Bank believes that commercial banks will be in a position to settle their debts if they have limited access to foreign markets,” he told EuroWeek last week. “If needs be, the National Bank is prepared to grant second tier banks short term loans.”

Indeed, the Bank of England’s Mervyn King could arguably learn a thing or two from Saidenov. He acted swiftly to free up liquidity for Kazakhstan’s banks and ease the impact of the crisis in global credit markets.

In mid-August, the National Bank offered banks short term liquidity in the form of one week tenge loans against balances of their reserve accounts.

From this month, reserve requirements are looser — perpetual bonds and interbank repo operations are excluded from the list of liabilities against which banks have to make reserves.

Fifteen banks have taken advantage of the National Bank of Kazakhstan’s short term liquidity measures. But these funds are just that — short-term — and are offered at a punitive 9%.

Some Kazakh bankers say they will rely more on local deposits for funding until international markets recover. But retail deposits are a slow and inflexible means of attracting money — and just as in the capital markets, pulling in cash means paying up. At some point the banks will need to return to foreign lenders for fresh money — and until they have done so, the questions over their access to liquidity cannot be resolved. Talk to the London-based investment bankers who guard the gates to international capital, and you get a different story from what the Kazakh banks are giving out. Syndicated loan bankers say they are being rung up every day by Kazakh banks’ funding officials, wanting to do deals.

So far, bankers say the main problem is their stubbornness about not wanting to pay higher margins — though some are now beginning to talk about paying higher fees. The lenders argue that the market reality has changed since June, and the Kazakhs have not accepted it. For example, Deutsche Bank and ICICI Bank are among several institutions said to have cut credit lines to the country.

In this new phase, they argue, when Deutsche Bank has been forced to price a 10 year bond at 65bp over mid-swaps, Kazakhstan’s banks will simply have to accept a new pricing paradigm.

It is a bitter pill for the likes of Bank TuranAlem and Kazkommertsbank. They have not been through a crisis like Russia’s in 1998, and the present turbulence is not of their own making.

But the underlying worry is that no one really knows how much the Kazakh banks would have to pay to access the market, and how much demand they would find.

It is a chicken and egg situation. Foreign bankers are reluctant to give the borrowers firm guidance on pricing, partly because, in the absence of deals, they have little evidence to go on.

The only answer anyone has come up with yet is “we’re not sure”, and it is this hesitancy which is hardest to cope with for Kazakh banks. Who can blame them for not wanting to do a deal when no one will tell them what price would secure a successful transaction? Kazakh banking officials appear to believe that the market disruption will only last until year-end, and that after that things will return to normal. But their faith may be misplaced. Sooner or later, one of them is going to have to take the plunge, possibly pay an embarrassing margin higher than its rival’s last deal, and find out where the market is. The lesson of Northern Rock is, it can be dangerous to leave it too late.

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