INTERVIEW: Banking on Kazakhstan's "healthy correction"

By bne IntelliNews March 17, 2008

Clare Nuttall in Almaty -

After a turbulent 2007, Kazakhstan's banking sector faces more disruption should the country's troubled construction sector collapse. Even so, Grigoriy Marchenko, chairman and chief executive of Kazakhstan's largest bank Halyk Bank, is positive about recent developments and the prospects for local banks.

Marchenko considers the last eight months - which have seen the sudden and rapid shutdown of international capital markets and the slashing of market values of many Kazakh banks - to have been a "healthy correction" for the sector.

Marchenko, former first deputy prime minister and governor of the National Bank of Kazakhstan, considers there were several factors that helped some of the country's banks - most notably Halyk - to weather this storm, while others suffered. Worst hit were those banks with a high exposure to international capital markets and Kazakhstan's overheated property sector.

"For some of our peers, 60-70% of their overall liabilities were to international capital markets through syndicated loans or Eurobonds. That was definitely too high," says Marchenko. "Obviously those affected do not see it this way, but as a party which has benefited quite handsomely from overall developments, we see this as a very healthy correction for the banking sector."

Halyk managed to grow its deposit base rapidly during 2007 - it increased by 26% in the third quarter of 2007 alone - at a time when other banks were losing deposits. Marchenko attributes this to a "flight to quality" and the bank's extensive network of branches across Kazakhstan. Again, this meant that the need for external credit was limited. The third factor in Halyk's resilience is its relatively low exposure to the construction and real estate sector.

But while worries about a collapse of this sector is currently causing tremors throughout Kazakhstan's economy, Marchenko does not expect the current difficulties to be a long-term problem. "People are jumping to conclusions," he says. Firstly, he points out, any problems the sector is experiencing are very much concentrated in the two capitals, Almaty and Astana, which together account for only around 15% of the country's population. In the rest of the country, construction has been slower and prices are expected to remain stable or even increase. Secondly, he says, before the relocation of the capital to Astana and the start of Almaty's construction boom in 2003, construction had been minimal. "In general there is very strong pent up demand for housing all over the country, so in the medium to long term, we are still quite positive about the construction sector providing that the prices are right," says Marchenko. "I believe this could be a healthy correction in the construction sector too, both in terms of prices and in the behaviour of construction companies and developers who will have to rely less on bank loans, and be more careful in evaluating demand and drawing up their business plans.

"It could be a blessing in disguise for our construction sector if they start to pay more attention to economy and business-class types of housing, and concentrate less on expensive housing which they are now either unable to sell or unable to complete."

Foreign inroads

Meanwhile, the consolidation of Kazakhstan's banking sector is on the cards, and is virtually certain to come from foreign rather than local players. "We don't believe there would be any substantial internal consolidation, because we are the only bank with enough liquidly to buy someone sizeable and we are not planning to buy anyone," says Marchenko.

Following last year's takeover of ATF Bank by Italy's UniCredit, Marchenko forecasts further acquisitions during 2008. "We believe that one of the top tier banks - the six largest in Kazakhstan - will be taken over by foreigners, and we may see one or two of the second-tier banks - those ranked seventh to 12th by assets - also being taken over."

The first is likely to be Kazakhstan's sixth largest bank by assets, Bank CenterCredit, which is in talks with South Korean Kookmin Bank. This had been one asset that Halyk was interested in acquiring, but as Marchenko says, "obviously they found a more generous suitor."

However, Marchenko warns of the difficulties of entering the Kazakh market, and insists he is confident of Halyk's ability to withstand foreign competition. The prohibitive costs of rolling out a branch network or installing enough foreign executives across a local bank's network to be effective, coupled with a banking system significantly different from those in other East European and CIS countries, make it difficult for new entrants to go up against established local players.

Kazakhstan's banking sector is expected to gradually move towards the adoption of EU standards. Halyk aims to be fully compliant with EU standards in areas such as risk management, IT, corporate governance and Basel II by January 2010. But without EU accession on the agenda, full convergence is likely to be a matter of decades rather than years, Marchenko says. "It's quite clear that Kazakhstan will never be in the EU. In fact, I think that in 10 to 15 years time we will be like Norway is now - the EU will be pleading us to join them because of their hunger for oil and natural gas, and we will be kicking them away."

There is still a belief within Kazakhstan that a move towards similar banking legislation to in the EU would be beneficial, but with accession not on the agenda, there is no set timeframe and, according to Marchenko, adoption of EU standards by the banking and other sectors is likely to be a matter of "decades rather than years". Indeed, Halyk is likely to be the first to become compliant; this is on its list of objectives for 2008-12.

Viewing Kazakhstan as an extension to a bank's Russia or Ukraine operations is also an error, he says. "The divergence between us and countries like Russia and Ukraine on the regulatory side is quite substantial, and it's not diminishing, it's increasing."

Halyk in particular feels secure with its 670-strong branch network (three times larger than its closest competitor's) and the largest network of ATMs in the country. "Whoever wants to replicate our distribution network should spend half a billion dollars," says Marchenko. "None of the domestic banks have that money, and I don't believe that any of the international banks would like to spend that much money. It's a substantial investment, and most of those banks don't have remits to invest that much money in Kazakhstan. In the current market, in these turbulent times, that is even less likely."

Halyk's plans

In 2008, Marchenko forecasts growth of 12-15% within the banking sector as a whole, but expects Halyk - currently in its 85th year of operation - to achieve double that figure.

Its network of branches is at the core of the bank's growth strategy. "Financial services is all about cross-selling," he says. Already, 30% of the insurance premiums collected by its insurance subsidiary Kazakhinstrakh are sold through Halyk bank branches, as are half of the leasing contracts sold by Halyk Leasing, Kazakhstan's largest private financial leasing company. Recently, the bank also started selling life insurance policies through its branch network. And until August 2007, sales of Halyk's mutual funds through its branches were also thriving.

The second strand of its long-term plans is expansion across Kazakhstan and adjacent countries and provinces. "In the case of Russia, we are interested in those provinces which are next to our northern border - the belt between Rostov-on-Don and Krasnoyarsk," explains Marchenko. "In China, we don't plan to be active in places like Beijing or Shanghai, but we are very interested in providing financial services in Xinjiang province, which again is neighbouring Kazakhstan." In keeping with this focus, Halyk has turned down approaches by two banks in Turkey, one in India and one in Vietnam.

The bank has had a presence in Russia and Kyrgyzstan since 2004, but recently has begun to accelerate its expansion. This year it has obtained licences to provide financial services in both Georgia and Mongolia through its local subsidiaries Halyk Bank Georgia and Halyk Astana Dornod. It is also in negotiations to buy a bank in Azerbaijan, and is planning to open a branch in Tajikistan.

"There are several reasons for keeping to this region at present - the similar structure of the economies in these countries, substantial and growing cross-border trade, traditional ties due to most of these countries having been part of the Soviet Union," says Marchenko. "And - the most important factor - margins are higher than they are here because most of these countries are lagging behind Kazakhstan in the level and quality of financial services provided."

This is part of a special report, "Eurasia Investment."

Kazakh bank sector stumbles but won't fall

To read more click here.

COMMENT: Kazakh stock market remains fragile

To read more click here.

FUNDS: Frontier investing with Eurasia Capital

To read more click here.

Turkmenistan opens up economy to foreign business

To read more click here.

Kazakhstan looks in, out and shakes it all about

To read more click here.

Send comments to The Editor

INTERVIEW: Banking on Kazakhstan's

Related Articles

Retail trade slows in Kazakhstan amid economic uncertainty

Naubet Bisenov in Almaty - A free-floating exchange regime for Kazakhstan’s currency, the tenge, is taking its toll on retail trade as the cost of imports rise. While prices have not changed ... more

bne:Chart - Russia begins to steady the ship according to latest Despair Index

Henry Kirby in London - Ukraine and Russia’s latest “Despair Index” scores suggest that the two struggling economies could finally be turning the corner, following nearly two years of steady ... more

New Kazakh central bank governor re-adopts free floating regime

bne IntelliNews -   The National Bank of Kazakhstan, the central bank, has re-adopted a free-floating exchange regime under the new governor, Daniyar Akishev, who has ... more

Register here to continue reading this article and 2 more for free or 12 months full access inc. Magazine and Weekly Newspaper for just $119/year.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

IntelliNews Pro subscribers click here

Thank you. Please complete your registration by confirming your email address. A confirmation email has been sent to the email address you provided.

Thank you for purchasing a bne IntelliNews subscription. We look forward to serving you as one of our paid subscribers. An email confirmation will be sent to the email address you have provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

If you have any questions please contact us at

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

IntelliNews Pro subscribers click here

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

If you have already registered, enter the information below with the same email you used previously and you will be granted immediate access.

Thank you. Please complete your registration by confirming your email address. The confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.