Ben Aris in Kyiv -

The US sub-prime crisis has been a boon for Kyrgyz bankers. Asia Universal Bank (AUB), the fastest-growing bank in the country, was preparing to see its business eaten into by Kazakhstan's five biggest banks in the small and mountainous Central Asian Republic. Then the credit crunch struck.

"The five major Kazakh banks are already here and we are expecting [Russia's] VTB Bank to come soon. But the crisis was a blessing, as the Kazakh banks have put all their development plans in our country on ice for the moment," says Mikhail Nadel, chairman of AUB's board.

Now the bank is racing to take advantage of a window of opportunity that will probably slam shut sometime next year. AUB maybe big by local standards, but it's dwarfed by the financial power-houses of its oil-rich neighbour. Currently, AUB only has one branch in Bishkek, the country's capital, but after a capital injection by the shareholders, it should have 80 by the end of this year. "We are going to drastically expand the branch network and extend our service culture through the whole country even to markets that can't be reached by other banks. Even if VTB comes, it will be a long time before it can challenge us across the country," says Nadel, who as befits a banker, has a penchant for fine suits and big cigars.

Kyrgyzstan has been amongst the most backward of all the republics created following the collapse of the Soviet Union. It is probably the best example of the arbitrary drawing of borders that Joseph Stalin subjected the region to as part of his effort to contain nationalism in the region. The country is cut in two by the Tien Shan, or Mountains of Heaven, so that during the winter you have to drive into neighbouring Uzbekistan to get from the capital in the north to Osh, the main city of the south.

While Kazakhstan has oil and Uzbekistan has cotton, the only natural resources Kyrgyzstan can boast are one big gold deposit in the middle of a mountain made of granite and water. But despite its disadvantages, the country has been lifted by the tide of economic growth in the region and has, belatedly, started to recover.

Slow start

When AUB was founded in 1997, it was technically a subsidiary of an offshore bank called the International Business Bank. "[The original management] ran it into the ground. When the current shareholders bought it out [in 2000], it needed a change of name, license type and management - very little of the original bank remained," says Nadel, who is an ethnic Russian.

At that time, there were 23 banks in Kyrgyzstan, a lot for a small mountainous country of 5m people, but the total capital of the banking sector remains a mere $140m. But that is starting to change. While the banking sectors in Russia and Kazakhstan have been growing strongly for three or four years, the Kyrgyz bank sector has only just taken off. "The capitalisation of the banking sector is expected to double every year for the next few years; the bank sector is set for a 40-50% growth a year for the foreseeable future," reckons Nadel.

Once the bank was brought onshore, Nadel and his partners set about building a real business. The first task was to raise some money. The shareholders are a diverse group, a quarter of whom are from the US, half live in the EU and UK, and the rest distributed between Russia and Kyrgyzstan. Most of the investors are private individuals, although there are one or two small US hedge funds that hold small stakes. However, the three largest shareholders, who are also the managers, own more than 50% of the bank between them.

As it's way too early for Kyrgyz banks to raise money on the international debt markets or manage something like an IPO, all the expansion capital has come from the shareholders, who have been steadily injecting money into the bank. From the KGS300m the bank had as capital at the start of 2007, an injection by shareholders raised this to KGS700m (€12.3m) at the start of this year and again to KGS1.2bn at the end of the first quarter of this year. By the end of 2008, the capital is due to reach KGS1.7bn - a five-fold increase in capital in only two years. "We were looking at the possibility of selling a stake to a fund, but when we issued new shares, they were all bought by the existing shareholders," says Nadel.

Bank business

The bank is small, but thanks to its outward looking mentality it has been fast to introduce many of the services expected of any western bank. It was the first bank in the country to carry out swap and forward deals in 1999, and then launched its online banking services the following year. It is already a leader in the credit card segment and in 2002 it opened offices in Riga. The following year, it began to cater to a growing number of Chinese customers with Chinese language services. (The pass between China and Kyrgyzstan was reopened at the end of the 1990s and much of Central Asia's trade flows over this route.) And in 2006, AUB became the first Kyrgyz bank to receive a credit rating from Moody's Investor Services ('Caa2' long-term foreign currency rating), even before the agency had issued a sovereign rating.

"AUB is a universal bank, but for the last two years we have been focusing on the corporate client business. However, in 2006 we launched a new strategy and went into the retail banking business. Our penetration is still very small - about 5% of the market - but we expect the strong growth for at least decade," forecasts Nadel.

Corporate clients still make up about a third of the bank's income, but the future is in retail banking. The bank already offers a wide range of services like mortgages, consumer loans and international payments (it is a member of the Russian Unistream payment network). However, AUB is being cautious not to make the mistake of many of the Kazakh banks and throw itself too fast into the consumer business - while profitable, the consumer loans programme is capped at 10% of the bank's entire loan portfolio. Kazakh banks borrowed heavily to fuel triple-digit growth based on consumer lending before coming a cropper from the fallout from the US sub-prime debacle. AUB doesn't want to make the same mistake, says Nadel.

"We already have 1,000-2,000 debit cards and we are just finishing talks with the major international card providers to become members. We still at the very start of this process, but we have the fortune of being able to learn from the mistakes of our neighbours in Kazakhstan, so the whole process will go much faster here," says Nadel.

Thus far, the bank has been fuelled by a combination of capital injections by the shareholders and deposits. Until the state gets a sovereign rating from the major ratings agencies, international credit markets are off limits to banks like AUB, which has turned to the multilateral lending institutions in the meantime. The bank has applied for an EBRD trade facilitation programme and also to OPIC, the US fund, for funding. The next on the list will be the Asian Development bank. "So far, we have had no access to the external debt markets, so we are relying on organic growth within the country, but we are approaching the point where we can borrow aboard soon," says Nadel.

The next few years will be key for AUB, as the race is on to build up its business before the competition can thaw. But Nadel is very optimistic about the bank's chances and says the Bank of Georgia's IPO last year has inspired all bankers in the region by showing them what is possible. AUB is already preparing for the possibility and in 2007 brought US senators Bob Dole and John Bennett Johnson onto the board of directors where they join Dr Michael Merit, who used to run the IMF office in Kyrgyzstan. "An IPO in two or three years time is possible so we are starting to get ready now," says Nadel.

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