Fixed Income Analysis /

Kazakhstan banks: Results of asset quality review not as bad as feared

  • Halyk and ForteBank do not require additional external support

  • ATF Bank and Bank CenterCredit will receive guarantees from the Fund for Problem Loans and support from shareholders

  • The EBRD has decided against investing in Kazakhstan banks this year

Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

Tellimer Research
3 March 2020
Published byTellimer Research

Overall, lenders do not seem to have fared as bad as may have been feared in Kazakhstan’s asset quality review. Halyk and ForteBank do not require additional support. Some other lenders – including ATF Bank and Bank CenterCredit – will receive guarantees from the Fund for Problem Loans, and support from shareholders. The expectation is that this review, which was based on methodology developed by the European Central Bank, will help banks draw a line under long-running legacy problem asset concerns, improve transparency and increase the attractiveness of Kazakhstan to investors. Following the review, the EBRD has decided against investing in Kazakhstan banks this year and has opted for ‘diagnostic studies’ and ‘technical assistance’ instead, according to a Bloomberg article. This may not be the outcome authorities in Kazakhstan had hoped for. We note that (a) the EBRD already partners with lenders including ForteBank and BankCenterCredit, in providing loans to MSMEs and women entrepreneurs, and (b) bank investments in the future have not been completely ruled out.

On 28 February, the National Bank of the Republic of Kazakhstan and the Agency for Regulation and Development of the Financial Market published results of the Asset Quality Review (AQR) carried out on the 14 largest lenders. These banks account for 87% of total assets and 90% of total system loans. The detailed disclosures came after a 30 December release in which the Kazakhstan authorities stated that there was no system-level capital shortage.

The review found that there was no capital shortage at any of the 14 banks. Having said that, the authorities state that taken together, the banks need to set aside an additional KZT429bn in provisions. This figure is down from the estimate of KZT450bn disclosed on 30 December. The estimates are based on figures at 1 April 2019. Using more recent figures, the Kazakhstan authorities state that lenders have covered ‘more than KZT180bn’ of the shortfall through debt recovery, securing additional collateral, boosting provisions, write-offs and capital injections.

There are four banks which are to receive support totalling KZT117bn, in the form of loan guarantees from Kazakhstan’s Fund for Problem Loans. The lenders are ATF Bank, Bank CenterCredit, Eurasian Bank and Nurbank. Nurbank will also sell KZT31.3bn in subordinated debt to the central bank. There will be limits placed on dividend payments and restrictions on higher risk loans. There will also be restrictions on management compensation, management of assets in the programme and strict cost optimisation requirements. Measures to address shortfalls are to be completed before the end of March.

The banks covered by the review which currently have USD-denominated eurobonds outstanding (and which we follow) are Halyk Savings Bank (HSBKKZ), ForteBank (ALLIBK), Bank CenterCredit (CCBNKZ) and ATF Bank (ATFBP).

Halyk has stated that the AQR was ‘confidently passed’ and the conclusions from the review ‘will not affect the capital adequacy and financial performance of the bank.’ We have Hold recommendations on the HSBKKZ 2021 and 2022 bonds. Separately, we note that the issuer launched a consent solicitation process last month. Halyk is seeking to (a) change restrictions on dividend payments, and (b) align definitions of ‘fair market value’ between the 2021 and 2022 bonds. Regarding dividend payments, this change should have been expected. During the last investor day, Halyk stated that it was looking to pay out 50-100% of net income as dividends, given its excess capital position. Bond terms do not currently allow for this. Halyk stated that it could redeem the bonds or change the terms. The issuer has chosen the latter (for now – we note that the 2022s may be redeemed at par, at any time, with 30 days’ notice and Halyk has not ruled out redeeming more of that bond early). Profitability at Halyk is exceptionally strong, as are capital and liquidity metrics, so we do not think the change in dividend policy should concern bondholders. As we’ve said before, Halyk is becoming more of an equity story – the bank has excess FX liquidity and doesn’t need to return to the eurobond market, but changes such as the dividend policy and the partial sale of shares held by the largest holder have been positive for equity investors. Regarding definitions of ‘fair market value,’ Halyk is seeking to change the language in the 2022s, such that fair market value is now determined by the auditor or by ‘any other independent appraiser of international repute’ rather than the board or a reputable third party. The purpose is to align the language of the 2022s with that of the 2021s. Halyk is paying a consent fee of 0.25% of par, and the final consent expiration date is 10 March. 

ForteBank has disclosed that at April 2019, the provisions shortfall amounted to 1.2% of the bank’s capital. It is noteworthy that ForteBank is not one of the lenders that will need support from the Fund for Problem Loans.

Bank CenterCredit also issued a press release discussing results of the AQR. The bank disclosed that KZT26.4bn in additional provisions were required at the start of this year. This provisions deficit is down from KZT59.7bn at April 2019, due to repayments and additions to provisions. Focusing on the KZT26.4bn deficit, Bank CenterCredit shareholders will provide KZT5.8bn ‘within three months.’ The remainder (KZT20.6bn) is to be guaranteed by the Fund for Problem Loans, for five years. Bank CenterCredit further notes that KZT5bn in additional provisions has already been set aside this year and, given solid operating income, the lender believes the provisions deficit can be absorbed within one year. 

ATF Bank is yet to comment on the AQR (based on press releases posted on the bank’s website at the time of writing). According to the Kazakhstan authorities, actions taken by this bank and its shareholders have covered KZT80bn of the shortfall. Of the KZT44.2bn that now remains, guarantees from the Fund for Problem Loans will cover KZT33.8bn, with the bank’s shareholders expected to cover what remains. At end-September 2019, ATF Bank reported total assets of more than KZT1.5tn and shareholders’ equity of almost KZT146bn.