Foreign banks seize the moment in Kazakhstan

By bne IntelliNews September 10, 2008

Clare Nuttall in Almaty -

Kazakhstan used to be an expensive proposition for international banks, but with their local rivals under pressure following the global liquidity squeeze, these banks have found changed circumstances. The latest newcomers to the country are Raiffeisen International and Bank of Tokyo Mitsubishi, while Alnair Capital has bought a stake in Kazkommertsbank and HSBC is also expanding aggressively.

Raiffeisen's announcement that it has applied to the Kazakh banking regulator, the FSN, for a license to set up in the country comes after several unsuccessful attempts to enter the market through an acquisition. The bank first bought a minority stake in BTA (then Bank TuremAlen) back in 2001, on the understanding it would later be able to increase its holding to a majority. However, when former CEO Erzhan Tatishev died in a hunting accident, the new management were opposed to the idea.

"We wanted to be the majority shareholder to be able to take and execute decisions, so in 2006 we got out," says Raiffeisen vice president and head of communications Michael Palzer. A fruitless two-year search for another acquisition target then began. According to Palzer, "We observed the market but the prices did not reflect the environment and potential risks, so we decided to start from scratch. Our aim is to get to a similar same level to HSBC and Citibank. We plan to take a market share of around 1% within our first 12 months."

Raiffeisen expects to open an office in Almaty in the first half of 2009, and will initially be a provider of corporate finance, starting with Russia-focused clients due to its status as the largest foreign bank on the Russian market. It will later develop retail banking and roll out a branch network.

The Bank of Tokyo-Mitsubishi UFJ is also set to open an office in Almaty in early 2009. BTMU says the move is primarily to meet the needs of the increasing number of Japanese companies moving into the Central Asian market due to its abundant raw materials. "Among other Central Asian countries, Kazakhstan with the world's second-largest uranium reserves is, in particular, experiencing an increasing volume of projects involving Japanese companies including fuel development for nuclear power plants," the bank said in a statement. "The relationship between Kazakhstan and Japan has grown closer in recent years as the two countries have begun discussion on the conclusion of a nuclear energy cooperation pact and a tax treaty."

New wave

Raiffeisen and BTMU are part of a new wave of foreign banks setting up in Kazakhstan. They follow UniCredit's acquisition of ATF Bank, Kookmin's purchase of a 30% stake in Bank CenterCredit and Bank Hapoalim's purchase of Kazakhstan Demir Bank. Abu Dhabi-based private equity fund Alnair Capital has also entered the market, buying a 25.15% stake in Kazkommertsbank. Meanwhile, longer-established foreign banks are also stepping up their activities as most local players are forced to cut back in order to focus on their loan repayments.

HSBC, which entered Kazakhstan almost 10 years ago, recently announced the opening of its first branch in Astana. The bank plans to follow this up with several other new branches by the end of this year. Preparations for a second branch in Atyrau are already underway. "We had mainly been servicing the large institutional banking market, but a little more than a year ago we started changing," says Simen Munter, CEO of HSBC Bank Kazakhstan. "First, we increased our focus on commercial banking, taking our experience with the very big companies and applying it to medium sized companies. The other area we are looking at is on the personal customer market. HSBC has a good product offering for people with an international mindset and international requirements; there is now a large number of this type of person in Kazakhstan."

Munter has moved from one emerging market to the next since he joined HSBC in 1992. He arrived in Kazakhstan from India early this year. We are sitting on the black leather sofas on one side of his office, while a workman attacks the light fittings on the other. Munter explains that he has just moved into this particular office, although HSBC has been in this downtown Almaty business centre for several years. Starting off in a single suite, it has been gradually colonizing new offices as they become available. However, the bank plans to move to new offices as its expansion continues.

"I'm a bit more bullish than many people here," Munter says confidently. He points out that several indicators of Kazakhstan's economic performance are less negative than they seem at first glance. The alarming 20% year-on-year inflation rates were caused by a significant jump in September-October, and will therefore start dropping significantly in the next couple of months. Foreign debt also tends to be overestimated, as a significant part is intra-company, he says. Meanwhile, he notes positive factors such as the country's young population and the focus on education, in particular the Bolashak programme, a scholarship system funded by the government of Kazakhstan and administered in the US by American Councils.

"In the short term, we will see a further slowing of the economy, but I think beyond 2009, there will be a significantly more positive economy in Kazakhstan, without the speculating on the property side," says Munter. "With raw material prices likely to remain at a high level, I think Kazakhstan is very well placed."

Palzer agrees on the positives in Kazakhstan's economy. "Kazakhstan is very interesting because it's by far the biggest Central Asian economy, with a GDP-per-capita between Russia's and Ukraine's. Based on natural resources, it's a rich country. It's also important due to its location on trading routes between Asia and Europe." Raiffeisen will also use its base in Almaty to check out other Central Asian markets, in particular Azerbaijan and Uzbekistan.

Seize the day

For foreign banks looking to set up or expand in Kazakhstan, it's a case of seizing the moment. Until last summer, cheap international loans made it easy for local banks to offer loans and expand their operations as necessary. At that time, it was no easy matter for a foreign competitor to enter the market. Today, however, international banks with money behind them can keep up their operations while many Kazakh banks are strapped for cash.

"Cuts in local banks' access to international capital markets could definitely be considered an advantage for us. We're confident we will be able to generate business in a short time," says Palzer.

HSBC's push into commercial banking, Munter says, "coincided more or less with the challenges which our competitors, many of the local banks, have been facing. This has been quite successful, and we think there's a significant ongoing growth opportunity in the space."

Munter forecasts the story for Kazakh banks will get worse before it gets better. "Clearly to some extent the funding challenges is being underestimated, I think it's not going to get easier this year, and probably not next year either," he says. "Most of the funding which was earlier given to fully local banks has not really been repaid, it's just been changed into another form so most of the debt is still there. There has been some reasonably bad news from the rating agencies, who have said that they are expecting some significant losses in the sector. A downgrade will make it very difficult and expensive for banks to get funding."

Munter is in favour of more government support for the banking sector, which would benefit the economy in general. "The full cost of this crisis is not being borne by the banks; it's being born by the Kazakh economy in general," he says. "Kazakh banks tend to be very well run with have professional management and a professional supervisory regime, so they don't necessarily need liquidity to survive. However, if the government increased the availability of liquidity for local banks, this would make it easier to do business in Kazakhstan."

But while it may be bad news for local banks and companies, it's the opposite for international banks. "Foreign banks are not being impacted in line with local markets and are therefore able to be active in the market. The banks that are advertising their ability to finance are all foreign dominated," says Munter. "Most of the local banks are focusing on repaying their debts, which means that it has become difficult or at least very expensive for local companies to obtain finance. We are being very aggressive towards high quality companies."

Kazakhstan is a long way from the situation in some Central and Eastern Europe markets, which are almost completely dominated by foreign banks. At present, foreign ownership is under 15%, compared with around 80% in the Czech Republic, Poland and Romania. "It will take time, but it's a trend we see all over the CIS," says Palzer. "The six leading banks hold around 80% of the market, so if another of these was taken over the percentage would increase significantly. I can imagine Kazakhstan looking more like Russia once the market opens."

There are no significant regulatory challenges to entering the Kazakh market, with investors saying the FSN is open minded towards foreign entrants. However, speaking from Raiffeisen's recent experience, Palzer believes that pricing is still an issue. Munter agrees that, "foreign investors are very sceptical about the state of local banks' balance sheets."

However, if the right price can be agreed, there are some strong arguments for entering the Kazakh market. A report from Renaissance Capital shows that despite the highly developed corporate lending market, penetration of the retail market and in particular mortgage lending is relatively low. Moreover, any discussion on Kazakhstan's emergence from the current slowdown centres on when - not if - growth will resume its previous rapid pace. "We believe there are some big changes happening in the world, and one of those is the emergence of Asia. Economies like Kazakhstan are very well placed to take a better position overall in the world economy," says Munter. "That's why we really want to be here."

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