Naubet Bisenov in Almaty -
It’s been a difficult eight years for Kazakhstan’s banks since the global credit crunch starting squeezing the country’s lenders in 2007. Which makes Halyk Bank’s achievement of being the only Kazakh company to make Forbes magazine’s Global 2000 list of the world’s biggest, most powerful companies all the more remarkable.
Halyk, the country’s second largest bank in terms of assets and first in terms of equity capital, came 1,608th on the 2015 Forbes list of the world’s largest public companies, released on May 6. The ranking is based on a composite score derived from revenue, profit, assets and market value; “one barometer alone would represent a biased and incomplete account”, Forbes explains.
In 2014, Halyk made a net profit of KZT114.4bn ($637mn) on sales of $1.7bn. At year-end the bank's assets stood at $15.4bn, while it had a market capitalisation of $2.1bn. “This is one of the highest valuations not just in the banking sector, but in the entire Kazakh economy,” Dauren Karabayev, deputy chairman of the board of management, tells bne IntelliNews in an exclusive interview.
The bank, which boasts the largest clientele base, both retail and corporate, in the country and processes the highest number of banking transactions, has managed to meet rigid requirements set by the National Bank of Kazakhstan for the ratio of non-performing loans (NPLs) to total loans: it reduced the share of NPLs to 12.9% at the end of 2014, below the central bank target of 15%, down from 17.2% at the beginning of the year. “The bad loan portfolio is being reduced through the restructuring of bad loans and moving 100% provisioned loans to off-balance accounts without debt forgiveness,” Karabayev explains. “We are also forgiving uncollectable debt in case of bankruptcy or by court ruling, or when the bank exhausts all legal means to recover debt.”
The bank intends to continue this work to comply with the regulatory threshold for NPLs of 10% of the total loan portfolio by the end of 2015, although the problem of bad loans is continuing to haunt Kazakhstan's banking system despite significant progress in solving the problem through regulatory stimulus, improvements in taxation and judicial practice. The share of NPLs in the entire Kazakh banking system stood at 23% as at April 1, though this figure masks some big variations. Bad loans reached a staggering 87% at the embattled BTA Bank, which accounts for over 55% of the total NPLs.
Karabayev says that his bank was able to increase its net profit in 2014 by 58% to nearly $640mn, about 30% of which will be paid out as dividends, even without the profit its pension fund used to contribute: as a result of the merger of private pension funds into the Kazakh state-owned Single Accumulative Pension Fund, Halyk decided to voluntarily dissolve its pension fund at the end of 2014.
Halyk was one of the few Kazakh banks not involved in reckless lending to high-risk projects and in aggressive borrowing in the global capital markets during the credit boom preceding the 2008 financial crisis. Historically, the bank says it has always adhered to the highest corporate governance standards that have allowed it to make the right strategic decisions. “In terms of attractiveness to investors, Halyk Bank could have drawn much more funds than any other bank in Kazakhstan. However, strategically the board of directors and management decided not to opt for this,” Karabayev explains.
With over 500 branches, 2,000 cashpoints, about 600 “multikiosks” and nearly 16,000 terminals, the bank adopted a well-designed business model, including the most successful retail franchise. Its expansive network has allowed Halyk to target retail customers and develop services, putting a stress on the development of a payment card business, including payroll cards, and enabling the bank to count public sector companies and organisations among its clients. Halyk “is present in places where other banks do not operate”, Karabayev explains.
The bank did not need to borrow funds in the global capital markets because foreign funding was mostly obtained in dollars while local companies preferred to borrow in tenge. Therefore, the bank focused on local sources of funding in tenge, for example, tenge-denominated deposits and bonds, while most other Kazakh banks before the 2007 global credit crunch relied on foreign borrowing and the most attractive business activity was to lend to the property and construction sector. Halyk had a more conservative policy in the property and construction sector, and was more focused on lending to the real sector of the economy. “All this helped the bank to avoid major problems with bad loans, but this doesn’t mean that the 2008-09 crisis did not affect the bank completely,” the deputy chairman says, “but its board and management took timely decisions to optimise the business, reduce costs and boost efficiency to navigate through the difficult times.”
Kazakh banks do not lend to the local blue chips and state-owned companies like KazMunayGas and Kazakhstan Temir Zholy, because these companies prefer to obtain funding more cheaply on global markets rather than from local banks, as their credit ratings are usually higher than those of Kazakh banks, Karabayev explains. Local banks like Halyk lend to the next tier down of companies and enterprises, which often cannot access global markets themselves perhaps because of a lack of audited financial statements. These are companies involved in telecommunications, food, transport and logistics, trading, agricultural and car making; they are not large enough to be of interest to foreign investors and creditors, but good enough to attract local banks’ attention.
Another major problem the Kazakh banking system is facing is that expectations of a currency devaluation among the local population have led to a run on the tenge and to a squeeze in tenge liquidity, resulting in a temporary stop to lending.
In response to tight tenge liquidity at the end of 2014 and beginning of 2015, caused by a massive conversion of tenge-denominated deposits into dollars by people worried about devaluation, Halyk raised about KZT450bn (€2.3bn) in swaps and bonds from the central bank and the State Pension Fund. “With this money, we have closed the gap between tenge assets and tenge funding,” Karabayev says.
When the bank faced shortages of tenge it also, in line with the market, increased interest rates on tenge-denominated deposits and decreased those on dollar-denominated deposits to encourage clients to convert their dollar deposits to tenge ones. “Even when the problem of tenge liquidity peaked in December and January, Halyk continued to offer loans.” Despite difficulties with tenge funding, the bank plans to increase the loan portfolio and further expand its business, Karabayev adds.
The Kazakh government’s successful placement of a 10-year sovereign Eurobond worth $1.5bn and 30-year bonds worth $1bn has had a positive impact on the yield curve of existing Eurobonds from Kazakh issuers, including Halyk. Karabayev notes the bank is in a position to successfully place more Eurobonds, but “since we see the growing demand more for tenge-denominated loans, the issue of Eurobonds is not expedient for us. There are not much opportunities for investing dollars in the country.”
At the same time, Halyk has been placing bonds in the local capital market and is planning more, the banker says. Since the beginning of 2015 the bank has placed bonds to the tune of KZT80bn with a maturity of 10 years and at a yield of 8.3%. The bank’s bond issue programme totals KZT170bn for this year, of which KZT80bn has already been placed.
Halyk’s success is often credited to the bank’s political links rather than its business model: President Nursultan Nazarbayev’s second daughter Dinara and her tycoon husband Timur Kulibayev – who jointly occupy the second and third spot on Forbes Kazakhstan’s rich list with $1.9bn each – own 69.66% in Halyk via their Almex Holding Group.
But Karabayev argues that a key reason for the bank’s success “is the clear separation of responsibilities between the board of directors and management, and preventing of conflict of interests”. “Our shareholders do not interfere to the bank’s day-to-day operations. This is one of the factors of our sustainability and success. The bank’s servicing of certain public sector organisations is not linked to political influence our shareholders may have but to the fact that Halyk is the leading provider of retail, SME and corporate banking services, including in remote locations.”
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