The first decade of February turned out to be not unlucky for three Kazakhstan banks and the regulator, the National Bank of Kazakhstan. Standard&Poors, the famous international rating agency whose analysts, once again, had made their contribution into the discussion of the situation in the country’s financial sphere was the source of the problems. 

On February 8, 2018, S&P assigned its B-/B long- and short-term issuer credit ratings and kzBB- national scale rating with stable outlook to Kazakhstan-based JSC AsiaCredit Bank.  And even though the ratings of this financial institute were not changed, its financial situation and prospects gave rise to the agency’s concern (as well as the prospects of the Kazakhstan banking sector in general).

Here are some quotes from the press-release (text in bold ours – Kazakhstan 2.0).

“Even though we assume that the bank is likely to follow the conservative growth strategy, we believe its business-model is prone to the influence of the negative changes in the operational environment”.

“Nonetheless, AsiaCredit Bank, as well as the other small Kazakhstan banks, is dependent on the possible loss of the clients’ trust and does not have a sustainable access to the funding from the state-affiliated organizations. In our ratings, we do not take into consideration the bank’s ability to receive state support since we believe this bank is of a low systemic significance”.

“We also notice the significant discrepancy in the volumes of the accrued and received interests on the bank accounts according to the financial reporting standards. In2106, only62% of the accrued interests reflected in the profits and losses report we in fact received in accordance with the movements of funds report. We assume that, for the bank, it may create additional difficulties in calculating the interest income in the future”.

The other two banks were much less fortunate.

On February 9, 2018, Standard&Poor’s  lowered the long- and short-term issuer credit ratings as well as the national scale rating of Capital Bank Kazakhstan from B-/B to CCC+/C and from kzB+ to kzB, respectively. The agency also put the financial institute’s long-term rating and the national scale rating on the CreditWatch Negative list.

The reasons for such a harsh evaluation of the financial situation and the prospects of Capital Bank Kazakhstan lie in the doubts about the fact that “the viability of CBK’s operations in the Kazakh banking sector are uncertain and hinge on the bank’s ability to secure stable funding sources, and generate new, profitable business on a sustainable basis”.

At the same time, it turns out that, before the end of the first quarter, the financial institute will have to pay back a large sum to the National Bank of Kazakhstan. Here is a quote: “The CreditWatch placement reflects our uncertainty regarding the bank’s ability to assemble sufficient liquid assets in order to repay its 26.5 billion tenge loan (about $82 million on February 9, 2018) to National Bank of Kazakhstan by March 31, 2018”.

S&P also underscores that “the bank’s weak market position, the low brand recognizability, and the small distribution network limit its abilities to attract customer deposits. Apart from that, there are risks of deposits withdrawal by the organizations affiliated with the state that have a large cash volume. There are also similar risks linked to the NBK funding. As we understand, the bank management plans to attract deposits of such organizations although we believe this source of funding remains largely dependent on the trust to small Kazakhstan banks”.

Eskimbank Kazakhstan became S&P’s third victim. On February 9, 2018, the agency lowered its long- and short-term credit ratings and the national scale rating from B-/B to CCC+/C and from kzB+ to kzB-, respectively. The agency also placed all the ratings on the CreditWatch Developing list.

The S&P analysts believe that “the long-term effectiveness of the business-model and the viability of Eskimbank Kazakhstan in the banking sector of the country raise doubts” and its ability to meet its financial commitments “depends on the wholesomeness of the business-environment as well as the financial and economic situation. This, in its turn, determines the bank’s vulnerability to the negative influence of the external and internal factors. The bank may not experience problems with credit provision or making payments in the next12 months, however, we believe, in the long-run, it may be incapable of fulfilling its financial obligations in the absence of the extraordinary support from its shareholders”.

The agency also evaluates the whole banking sector of Kazakhstan (text in bold ours – Kazakhstan 2.0).

“The tendencies in the banking sector of Kazakhstan observed during the past 13 months show the poor credit quality of the small players whereas the larger banks receive support from the state. The defaults of Kazinvestbank, Delta Bank, Bank RBK were caused by the poor quality of the assets not reflected in the official reports during the prior-to-default period. Apart from that, in 2017, the regulator toughened its approach to the banks with a large volume of problem assets, among other things, demanding to create additional reserves whose volume must be subtracted from the regulatory capital. At the same time, NBK offered financial aid in the form of the 15-year subordinated loans at the lower than market rate to the large Kazakhstan banks whose capital amounts to more than 45 bln tenge which, among other things, helped these banks’ capitalization indicators in the form of one-time capital increase”.

Continuing to explain the lowering of the Eksimbank Kazakhstan ratings, the S&P analysts note: “According to our estimates, about one third of the bank’s aggregate loans (or half of its loans to the non-energy companies) are problem despite the fact that, according to the regulatory data as of the end of 2017, the problem loans constituted less than 1% of the aggregate loans. This estimate is based on the fact that, according to the report data, 56% of the loans were restructured and only 33% of the interest received in monetary terms (compared to the 2017 data). These indicators are the weakest among the Kazakhstan banks rated by the agency. On average, about 20% of their loans are restructured and about 70-80% of their interest received in monetary terms”.

It turns out that Eksimbank Kazakhstan also received support from the National Bank of Kazakhstan. “Esimbank Kazakhstan accumulated liquid assets in the amount of 13 bln tenge. This is enough to pay back the NBK loan (due date May 2018). We believe Eksimbank Kazakhstan will be able to pay back the NBK loan fully and in a timely fashion using the saved liquid assets in in the event that it will be unable to refinance this loan or extend the deadline”.

Since all the three banks belong to the “small banks” category, we may assume that the following points are the main problems of the latter (we exclude the affiliated structures of foreign banks from this category).

• High level of association with the non-banking business activity of the majority shareholders which de-facto makes them their “pocket” financial institutes;
• High dependency on the shareholders’ money and the affiliated business-structures which, given the deficit of incomes and money in the country, is critical;
• Lower trust on the part of the clients including the quasi-state agencies;
• Embellishing of the financial situation accompanied by a dramatic decrease of the “live” incomes share;
• High dependency on the state support including that of the National Bank of Kazakhstan, the government, and the quasi-state agencies;
• Inability to find a new business-model amidst the dramatically escalated competitive fight for the financially reliable borrowers and depositors.

Considering that the state financial resources could only save one super-systemic bank, namely Halyk Bank, and the five mid-sized banks (ATF Bank, Eurasian Bank, Tsesnabank, TsentrCredit, and Bank RBK), the rest of the Kazakhstan financial institutes will have to survive on their own.

Moreover, since, on February 9, 2018, at the extended government meeting, Daniyar Akishev, the Chairman of the National Bank, received yet another carte blanche from the President, it seems the hidden regulatory support of these banks will be reduced significantly if not at all. Under these conditions, the majority shareholders of the small Kazakhstan banks will have only two reasonable courses of action – either to join someone stronger or trust in the Lord.

And it seems this is exactly the course Orifiszhan Shadiyev, Capital Bank Kazakhstan shareholder, has chosen.

First, he tried to calm the market be releasing a special address with the promise to exert every effort to keep the financial institute afloat and then completely rejected the S&P rating services. Perhaps in the hopes that something will still come of it.