Kazakhstan's second largest lender Halyk Bank has provisionally agreed to take over larger rival Kazkommertsbank (KKB), the banks said on March 3.

The central bank in Kazakhstan said the authorities had agreed to support the deal by helping KKB get rid of bad loans via the state-owned 'bad bank', the Problem Loans Fund.

Critics were not slow to express concern about the Halyk/KKB merger, saying it was important to note that with this deal more than one-third of the Kazakh banking sector would be controlled by one bank whose owners are presidential family members. Together KKB and Halyk Bank, account for 37% of Kazakhstan's banking system assets.

Kazakhstan's banking system remain in need of clean-up efforts, having struggled to recover from the 2008-9 financial crisis. Banks in Kazakhstan have been beset by bad loans since the slump in world crude prices, oil being the country's number one export.

The size of the KKB stake to be acquired by Halyk Bank has not yet been announced. A full merger would create a bank with assets of $27bn, outdoing the country's third largest bank Tsesnabank fourfold, and the local unit of Russia's Sberbank, which currently ranks as the no.4 Kazakh lender, sixfold. While the two banks are currently owned by two political groups, both banks are linked to President Nursultan Nazarbayev.

Nazarbayev’s daughter Dinara Kulibayeva, together with her husband Timur Kulibayev, have a controlling stake in Halyk Bank, while KKB is controlled by Kazakh businessman Kenges Rakishev, a son-in-law of Defence Minister Imangali Tasmagambetov. In April, Rakishev increased his stake in the lender from 28.67% to 43.15%. He now directly and indirectly (through Qazaq Financial Group) controls 71.23% of KKB's common shares.

The merger plans echo the 2014 KKB merger with the embattled BTA bank in which Rakishev and KKB each acquired 46.5% in BTA from the Samruk-Kazyna sovereign wealth fund in 2014. As part of that deal, KKB acquired BTA bad debts left over from the financial crisis - BTA's non-performing loans accounted for more than 80% of its loan portfolio at the time of the acquisition. While BTA’s shares were later removed from KKB’s consolidated statements via Rakishev and other KKB’s shareholders’ direct purchases of BTA’s ordinary shares in 2016, KKB's current troubles likely reflect mounting difficulties stemming from the merger with BTA.

Half of KKB's assets of $15.7 billion are tied up in a single loan to BTA, which has been turned into a distressed asset management company. No repayments on the debt have been missed by BTA, but there is an uncertain outlook where future instalments are concerned.

Given that Halyk Bank stated in January that it will not acquire a controlling stake in KKB until the bank sheds its bad loans, it is still unclear if the support available from the authorities will be sufficient to enable the deal to go ahead. On 13 February, Reuters reported that Kazakhstan planned to inject KZT2.4tn ($6.2bn) into the Problem Loans Fund to buy distressed assets from local banks. It cited central bank deputy chairman Oleg Smolyakov.

If the deal proceeds regardless of KKB’s woes, the merger could come to be seen as having contributed to a time bomb in the Kazakh banking sector. Halyk Bank would face the same problems as KKB encountered when it took control of BTA.

It will only be possible to complete the merger after May, when Halyk Bank redeems a $638mn Eurobond issue. Until then the bond covenants would stand in the way of the deal.