A Crack-Down on Kazakh Banks

The Assets Quality Review (AQR) was launched in Kazakhstan on August 1 and is supposed to be completed by the end of 2019. Who needs it and why?

Let us quote from the National Bank’s press-release (text in bold by kz.expert).

«Following the order of Kazakhstan’s President Tokayev K.K. given in April at the meeting devoted to summarizing the results of the 2018 National Bank’s operations, we are to conduct the Assets Quality Review (AQR). The process will be launched on August 1 of the current year and will affect the 14 largest banks that constitute about 87% of the assets of the country’s banking sector.

The AQR is a generally recognized world market’s practice for conducting a comprehensive assessment of financial stability of the banking sector. It is a type of diagnostics that allows to determine banks’ need for the capital, to assess the quality of their portfolios, to analyze their loan-providing practices.

The work conducted by the National Bank in this area is pursuing three basic objectives.

First, to ensure the transparency of the entire banking system via improving the quality of accessible information on the major banks’ financial status.

Second, to reinforce financial stability via developing and introducing corrective measures aimed to improve the banks’ financial status (if necessary).

Third, to increase the investors’ and clients confidence via demonstrating reliability of the Kazakhstan-based banks.

The procedure will result in the improvement of the banks’ existing business-processes (in accordance with the best international practices), the revitalization of loan-provision to the real sector of the economy and the improvement of the services provided to Kazakhstan’s population. Apart from that, due to the increase of the financial sector’s transparency for potential investors, we expect the investment climate in Kazakhstan to improve».

«We plan to complete the AQR in December 2019. The program will result in the assets quality evaluations transparent for the banks participating in the review. If necessary, following the results of the project, we will present an action plan for introducing the middle-term corrective measures and give necessary recommendations to the second-tier banks on how to further improve the existing business-processes».

Let us remind you that President Kasym-Zhomart Tokayev spoke of the necessity of conducting the assets quality review and continuing implementing the 7-20-25 Program on April 24 at a meeting in Akorda after he had heard the NBK Chairman Erbolat Dosayev’s report and had been informed by the latter «on the situation with the tenge exchange-rate, on how the external and internal factors affect it as well as on the reduction of the country’s external debt and the increase of the inflow of foreign investments».

In our opinion, the decision to conduct the AQR has to do with the critical state of affairs in the Kazakh banking system that looks much better on paper than it does in reality.

Akorda has long been trying to resolve the issue, however, the authorities were postponing the decision since acknowledging the depth and the scale of the problem would:

  • first, be dangerous since it would provoke the citizens «hasty retreat» to foreign currency and cause panic among the savers,
  • second, inflict a serious blow to the state’s image,
  • third, call in question the quality and efficiency of the First President Nursultan Nazarbayev’s economic policy.

As a result, Kasym-Zhmart Tokayev who has inherited not only the chair and the powers of the head of the state but the numerous economic, social and domestic policy problems from the Leader of the Nation was forced to give the AQR a green light which had been insisted on by the professionals including those from the National Bank for a long time.

Not surprisingly, many interested parties has taken participation in the public discussion of this topic. Among them, there is head of the NBK Banking Regulation Department Olzhas Kizatov, Chairperson of the Association of Financiers of Kazakhstan’s Council Elena Bakhmutova and Chairman of Bank CenterCredit JSC Galim Khusainov. We single out these three speakers since what they say allows us to register the existing details that, in our opinion, are being consciously suppressed or masked by the Kazakh authorities and the banks themselves.

First, let us quote several key passages from the interview given by Kizatov to Kapital.kz (text in bold by kz.expert).

«Starting from August 1, the 14 banks whose collective assets cover 87% of the sector have been undergoing the portfolio quality review. Within the framework of the AQR, the National Bank of Kazakhstan has no hidden aims such as, for instance, the consolidation of the banking sector. This is stated by the Director of the Department of Regulation of the NBK Olzhas Kizatov in his interview to Kapital.kz. Olzhas Kizatov voices the main goals and tasks set before the regulator as part of the review of the second-tier banks’ assets quality.

-Olzhas, Tolegenovich, what motivated the National Bank when making the decision to conduct the AQR? Speaking of the financial reports, the Kazakh bankers remark that the regulator knows everything anyway since the reports are presented on a daily basis.

-On August 1, we did indeed start reviewing the country’s 14 largest banks. Prior to it, we had begun the preparatory work and, in May, chose the external consultant — Oliver Wyman Limited who had conducted the AQR for the European Central Bank. We had developed the methodology and approved it at the NBK Board meeting, completed the selection of the loans and collateralized properties subject to review. We plan to complete the work in December. It is true that the National Bank is aware of the real situation in the local banks. And, on the basis of these data, we as you know are conducting a large-scale operation on the rehabilitating of the sector. In particular, for example, the changes have affected the three largest banks — Qazqom strategically invested in by Halyk Bank JSC, Bank RBK invested in by Kazakhmys and Tsesnabank JSC invested in by First Heartland Bank JSC. In other words, we have helped the three large systemically-important banks and changed the approach to the regulatory process — we have switched from the formalized regulation to the risk-oriented one. Also, everyone knows that we have helped some of the largest banks — Bank CenterCredit, Eurasian Bank and ATF Bank — with actively engaging their shareholders in the capitalization of these banks. Apart from that, as part of purging the insolvent banks, we have revoked the licenses of five second-tier banks. In other words, we have done a lot but, at the same time, the clients’ confidence in the banking sector has been diminished. Therefore, the most important goal that we are pursuing as part of the AQR is to restore the confidence inthe sector.

-And to achieve this goal, you need the help of a third independent party that will give its unbiased assessment?

-Yes, you are correct. Perhaps the most important aspect is that this assessment will be conducted by auditors on the basis of the methodology developed by an independent external consultant. The AQR methodology includes the best international practices, the standards of the banking business. Therefore, when the Kazakh banks will undergo the review conducted by the independent auditors in accordance with the AQR methodology worked out on the basis of the methodology developed for the ECB, the doubts will fall away and the confidence in our banks will be restored.

-Whose confidence is of a higher priority?

-Everyone’s opinion in important, but, first of all, that of the international financial organizations, investors, the rating agencies.

-Will the AQR result in the restructuring of the banking system? 

-We have voiced the three main goals that we are pursuing as part of the AQR: ensuring the transparency of the banking sector via increasing the accessibility of the information on the banks’ real financial status, improving the banks’ stability and restoring the confidence in the sector. If, based on the results of the AQR, we will have discovered some deficiencies in the second-tier banks’ operations which will require corrective measure to improve the quality of the assets, we will implement them in those banks. On other words, over a period of time approved by the NBK, these banks will take measures to eradicate the deficiencies. This will result in increasing the stability of the banking sector of the country.

There is no other goal such as, for instance, to consolidate the banking sector with via the AQR. Therefore, we do not expect that the review will result in the banking sector’s restructuring and optimization. As likely as not, this process will be tied not to the AQR but to the challenges of our times. Starting from January 1, 2019, banks must make provisions on the basis of the expected losses model. Apart from that, the banks have switched to prudential regulation in accordance with the Basel II standards, in other words, with the capital adequacy ratio and the liquidity ratio. We all know that, over recent years, digital technologies have been aggressively introduced in the banking sector, and all these changes cause the necessity to capitalize the sector in a significant way. It is these changes that serve as the main reason for our banks to have started the consolidation process».

In our opinion, Olzhas Kizatov as well as the NBK Chairman Erbolat Dosayev who is standing behind him are being seriously economical with the truth. We cannot accuse the Director of the Department of Banking Regulation of lying, but, even if he did indeed speak the truth, it was obviously not a complete one.

The thing is that 90% if not everything that is happening in the banking sector today depends on the National Bank of Kazakhstan. And it is enough for it to refuse to give support to a bank or to reveal the real scale of the problems in one bank or another, and the latter cannot but «drown». Interestingly, judging by the information provided by our sources, it concerns all Kazakhstan’s financial institutions including the Halyk Bank of Kazakhstan.

As a result, the regulator and its top-management are kept under constant pressure. In the meantime, the AQR will allow the National Bank and Erbolat Dosayev personally to secure a footing in the dialogue (battle) with the representatives of the Kazakh elite controlling the banks.

In other words, the results of the independent review of the assets will invariably turn into a baton in the regulator’s hands. But whether or not it will be used to make the financial institutes increase loan-provision to the real economy, reveal the problems and stimulate the owners to increase the banks’ capitalization would mostly depend on further developments not so much in the banking sector and the economy as in the domestic policy and the inter-elite relationships.

As for Chairperson of the Association of Financiers of Kazakhstan’s Council Elena Bakhmutova, her opinion expressed in the interview to Forbes.kz is worthy of attention for these two reasons:

  • first, she has played quite an important and, in our opinion, an extremely negative role in the fact that, today, the Kazakh banking system has found itself in such a critical state (it is a subject for a separate research to determine what that role is),
  • second, she openly supports Akorda’s position and actions which, of course, is not at all surprising. At the same time, it casts a shadow over the civil organization she is in charge of.

On the other hand, the situation in the financial sector seems to be so critical that she was also forced to demand the AQR results to be made public (text in bold by kz.expert).

«What results of the review can be predicted already?

-For more than four and a half months, they will review a bank’s internal procedures including book records in re the compliance with the standards, assess the quality of its loan portfolio and its collateral securities. As a result, they will assess the adequacy of the banks’ working capital against the assessed quality of the assets. The uncovered deficiencies will then be corrected.

In order to achieve the set goal of increasing the market’s, investors’ and the international community’s confidence, we must, in my opinion, adhere to the three conditions. First is that the most significant deficiencies uncovered in the course of the review must be made known to the market and investors. Second is that the necessary corrective measures aimed to increase a bank’s capitalization and improve the business-processes must be very specific and must be implemented before a set deadline. Third, the implementation of these measures must be monitored, and its completion must also be made known to the market and investors. If we fulfill all these conditions, I believe the confidence in the banking sector will eventually be restored».

As for Chairman of Bank CenterCredit JSC Galim Khusainov, his words deserve attention only because his bank is on the list of the 14 financial institutes that will undergo the AQR and, in our opinion, for BCC JSC, the outcome of the review may turn out to be much more unfortunate than it appears at the first glance.

The problem here has to do not only with the conflict between Bakhytbek Bayseitov and Bekzhan Kulbayev that can very well be called a «survival war» but also with the tight connections between Bayseitov’s private business and some of his partners with the bank.

If, for some reason, this attracts the auditors’ attention and they are able to confirm the numerous (according to our insiders) facts of the use of BCC’s money for providing loans to its affiliated structures (particularly, for launching the oil-and-gas projects), it may not only cause a high-profile scandal but provide a reason for remapping the control of the bank.

Then Galim Khusainov’s interview may backfire on him.

Let us quote this interview in order to come back to it at the end of 2019 when the National Bank will have completed the AQR and we will have prepared special reports — on how the financial institutes controlled by the relatives and allies of Nursultan Nazarbayev are now dominating the banking sector and on what the business-group led by Bakhytbek Bayseitov is made of.

«Kazakhstan’s second-tier banks must comply with a number of norms and rules and present a lot of different kinds of reports anyway. Is the conducting of the review necessary you think?

 -Unfortunately, reporting does not always allow to assess all the risks existing in the banking system since the portfolio quality depends not only on the internal but on the external factors that are not always under a bank’s control. The influence of the external factors can be calculated only with the use of a specific methodology. It is the international practices that can help calculating it. For instance, the quality of securities’ assessment, the timeline for the disposal of pledged property, the discounting rates, etc».

 «How will the AQR affect BCC and how will it affect the other banks?

«We are living in the single operational and economic environment. Therefore, I think the system will have the same problems whose solutions will demand systemic measures. The banks and the regulator will have to implement these systemic measures together. As for BCC, we do not expect significantly negative results since, up until 2017, we as a financial institute had been a part of one of the biggest Korean banks and our requirements to the assets quality assessment had been high enough».

«Should your bank and the banking system as a whole be worried about certain things while the AQR is being conducted?

-As I have said, we are quite optimistic about it. The project was initiated by the National Bank and we do not think that its goal is to worsen the financial or investment climate in the country. This is a new type of financial audit for which we are prepared. If, based on the results of the AQR, they will discover some weak spots, it will serve as an additional reason to analyze and improve the banking models and processes».


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