Clare Nuttall in Almaty -

Kazkommertsbank initially established itself as Kazakhstan's largest corporate lender, but the 2007 crisis forced it into an increased focus on its retail business. However, the bank's managing director, Andrey Timchenko, says that KKB and its competitors had adequate measures in place to weather the downturn with no major casualties, and to play a larger role on the international stage in future.

Being the only one of Kazakhstan's major banks not to emerge from the Soviet era has been a mixed blessing to KKB since its launch in 1991. It started out as a corporate lender, unencumbered by retail customers, which at that time were an unprofitable drain on many of its competitors. Borrowing heavily on international capital markets, it rapidly progressed to become the country's largest corporate lender. As of 2007, it accounted for 34% of corporate lending market.

According to Timchenko, the need to build the business up from scratch has forged a business culture closer to that of many western banks. "We have had to be very cost conscious, very growth oriented, and balanced in terms of aggressiveness and risk-consciousness," he says.

KKB has also been able to invest heavily in a state-of-the-art IT infrastructure, without the need to link together old legacy systems. Most functions take place in its centralized back office, rather than in its branches, thereby reducing risks and bringing down administrative costs. "We have by far the best cost-to-income ratio in the Kazakh banking system; it's around 70%," says Timchenko.

However, starting from scratch has put KKB at a disadvantage in other respects. All the other major banks in Kazakhstan inherited their branch network, client base and brand name. As incomes have increased, retail clients started to become an asset rather than an encumbrance to their bankers. And after the crisis of July 2007, Halyk Bank led the way in focusing in attracting deposits - rather than loans - to fund its operations. KKB and other banks have since followed.

KKB's retail business started out in 2000 catering to the higher end of the market, servicing what it describes as "VIP clients" with deposits of $500,000 or more. Five years after launching its retail business, the bank moved into mass retail. However, it wasn't until 2007, that KKB really started to push its retail business, rebranding its retail arm as Kazkom and opening 80 new branches across the country. By the end of 2007, it had a 15.7% share of the retail deposit market and 14.4% of retail loans. "Mass retail banking has not been very profitable but it is becoming more so as the wealth of the population is growing," says Timchenko.

Today, KKB is still growing its branch network, as well as maintaining its corporate business, and diversifying into a range of other financial services such as insurance, brokerage, asset management, pension funds. The business has also grown internationally, initially to provide financial services to its Kazakh clients working in Russia, Kyrgyzstan and Tajikistan, though with a view to growing its business abroad in future. Most recently, it has completed its consolidation of Moskommertsbank, buying the outstanding 48% of the bank for RUB1bn.

Risk strategy

Like the other banks in the sector, KKB had to abruptly review its business last year when the crisis hit. "It's not something we didn't prepare for, but it was the worst case scenario," says Timchenko. "The international liquidity crunch and the sub prime crisis coincided with local crises in Kazakhstan - the decline in real estate prices after the bubble burst and substantial inflation. The government reported around 20% last year, but it is much higher in places like Almaty, where the prices for some foods have doubled."

He adds that under the circumstances, "I think the banking sector is doing a fantastic job of standing firm in the face of all this. None of the major banks have collapsed, or breached the liquidity ratios of the central bank. I don't expect to see any failures among the big players in our sector."

Banks' asset bases and loan books are shrinking at present, as they amortise their loan books in order to meet their repayment obligations. But despite the lavish scale of the banking sector's borrowing in the past, Timchenko says that banks had the correct procedures in place which are now enabling them to weather the crisis. "For example, there are no currency mismatches, and we aren't having to squeeze our clients in order to meet our obligations."

KKB modeled its risk management structure on that of French bank Credit Commercial de France (acquired by HSBC in 2000), and it has been working with ABN Amro's risk management advisory group for the last three years. "Basically we meet international standards in how we manage risks," says Timchenko, though he admits that, "unfortunately, the key risks are somewhat outside of our control - for example insufficient transparency of the corporate sector is to some extent a risk factor. In retail banking too, it can be difficult to verify even such basic data as customer telephone numbers.

"On the positive side, we have learnt ways to get to know clients and collect information about them, which is not something that I think any foreign bank would be able to do easily. It is therefore an obstacle for the foreign actors to take market share from us."

There have, of course been some changes to KKB's lending practice since the credit crunch hit but these are adjustments rather than fundamental changes in direction. For example, it has increased interest rates on average by 3-4%. It also no longer finances projects without current cash flows. In the retail sector, it has made the loan-to-value ratios substantially stricter. And the decline in real estate prices has made the bank more cautious in terms of how it evaluates collateral.

Long-term prospects

As well as the banking sector, Timchenko forecasts that the Kazakh economy as a whole will recover from the current crisis far more quickly than it did after the collapse of the Russian economy ten years ago. At that time oil, Kazakhstan's main export, was fetching just $10 a barrel. Today, prices are more than 10 times higher. "We are lucky in having very strong fundamentals. World prices for oil, metals and grain are high, and there are substantial pools of liquidity in this country," he says.

Although the combination of high oil prices, inflation and rising labour costs mean that Kazakhstan cannot hope to compete against China or even Central Asian countries such as Kyrgyzstan and Tajikistan in manufacturing, other sectors show great potential. "There is still enormous demand for housing, office and retail space. In the mid to long term, agriculture will remain very attractive as world food prices rise. And a lot of people are getting richer very quickly, which means consumption driven industries will grow. That side of the economy is at an early stage and is going to grow massively."

Despite the current retrenchments in the Kazakh banking sector, Timchenko is confident KKB and its peers have the potential to grow internationally, at least within the CIS. They are also central to Kazakhstan's aim of becoming a regional financial and business hub. "I think the banking industry will be a very competitive area," he says. "We expect it to become internationally competitive, though of course this will very much depend on our ability to borrow, and the cost at which we can borrow."

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