Clare Nuttall in Almaty -

While Kazakhstan's other big banks floundered, Halyk Bank came through the financial crisis in relatively good shape and accounted for the lion's share of banking sector profits in the first quarter of this year. Halyk expects to grow this year as the Kazakh economy revives on the bank of higher commodities prices, but this will also inevitably mean greater competition from other banks.

Halyk's CEO, Umut Shayakhmetova, says she is confident in the recovery of the Kazakh economy and sees many positive signs, notably the rise in real estate prices, the increase in retail borrowing and the resumption of investment programmes by large corporates. But it's commodities that still drive the Kazakh economy, and prices of those have risen as the global economy recovers. "The oil and gas, and metals and mining sectors attract FDI [foreign direct investment] into Kazakhstan for major infrastructure projects [and] these have a multiplicative effect on the economy, stimulating growth in related sectors," she says.

If the Kazakh economy grows by 4% in 2010, as forecast by the International Monetary Fund, Shayakhmetova expects the banking sector to grow by 8-10%.

Unsurprisingly then, most of the growth in Halyk's corporate loan portfolio has been in commodity-related sectors. "Blue-chip companies are restarting their investment and capital programmes, which were frozen last year as a result of low commodity prices amid the global economic crisis, [and] this has indirect benefits for the banking sector, since contractors and sub-contractors working with these companies are now looking for financing," explains Shayakhmetova.

These companies represent the relatively small pool of expansion-minded and credit-worthy businesses being targeted increasingly aggressively by Kazakhstan's major banks. "Competition is growing among Kazakh banks, on both the lending and the deposit side. We are seeing increased competition from BTA Bank and Alliance Bank as they complete their debt restructuring processes, as well as from Sberbank, ATF Bank, Bank CenterCredit and KazKommertsBank," she says. "On the lending side, competition is relatively fierce as the number of good borrowers is limited. Many of the banks are targeting [small and medium-sized businesses], but we see severe problems with over-leveraging in this segment of the market."

Lending again

Halyk is targeting a 10% expansion of its loan portfolio by the end of this year. While analysts have questioned Kazakh banks' ability to raise their lending substantially in the current climate, Shayakhmetova considers the target to be achievable. "According to our Q1 results, there was no growth in the portfolio because though we issued new loans, the repayment of existing loans was almost at parity. While there has been an increase on the corporate side, our retail portfolio has continued to decline. However, we saw a more positive trend in May and June, with several of our branches reporting an increase in retail loans."

Mortgage lending is also up, as signs of a tentative recovery in the real estate sector emerge, although the average mortgage loan is only half as much as before the crisis. This is due to lower real estate prices coupled with tighter controls on lending, although these will be gradually relaxed in future.

Halyk also has managed to increase its non-interest income, which has been particularly important given that the bank's core business, interest generation, will take some time to recover. "We are increasing our efforts on the commission side of the business in order to generate more non-interest income," explains Shayakhmetova. "Our affiliated companies in the pensions and insurance fields are performing well. We have attracted more clients for our payroll services, which not only generate commission but are also a cross-selling opportunity for cards, overdrafts, credit lines, mortgages, pension funds, insurance and other products." Halyk is also growing its treasury business and building up Halyk Finance, which was the local placement house for Kazatomprom's recent successful Eurobond issue.

Meanwhile, competition is also growing on the deposit side of the business, which is a problem for some Kazakh banks, as this has been a crucial source of funding given the frozen international capital markets. However, Halyk actually has an excess of liquidity at present, which was behind the decision to shelve a proposed Eurobond issue for the time being. "There is definitely no need for us to go back to the capital markets in the first half of this year," says Shayakhmetova. "However, we still need long-term liabilities, so we will look at the situation in the second half of the year, though will probably return to the markets next year."

The bank's management is also in discussions with the government about the return of funds it received through the anti-crisis programme. "Halyk was a very active participant in the Kazakh government's anti-crisis programme, receiving KZT60bn to support big corporates. We are already in discussions with the government about returning this money, and I expect that within one or two months the government will withdraw it," says Shayakhmetova.

Halyk is also in discussions with the government over when it or the bank's main shareholders can consider buying back the shares held by the government. "However, this is still at the discussion stage and there are not yet any clear plans," says Shayakhmetova. "When these two targets are reached, they will benefit the bank by reducing liquidity. It will also give out a positive signal by demonstrating that Halyk is strong enough to return money to the government."