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In early April, Alliance Bank became the latest Kazakh lender to conclude its debt-restructuring programme. With the country's economy now accelerating and restructuring of the sector all but complete, it looks like only government regulation can slow the growth of the banks.

The restructuring of the Kazakh banking sector is a green flag that many investors have been waiting to see raised, central as the sector was to the country's rough ride through the global economic crisis. The Kazakh economy was hit hard and hit early by the crisis - as much as a year before the downturn began in Russia - because the local banks were so heavily exposed to foreign debt.

However, the economy managed to maintain some momentum, with GDP growth scraping in at 1.2% last year compared with, for instance, the 7.9% contraction that Russia suffered. Since the start of 2010, the economy, boosted by higher oil prices and growing production, has returned to the type of growth seen before the crisis hit (growth had been rattling along at 8.5-10% each year from 2000-2008); the first two months of the year saw industrial output rise 10% on year, while GDP growth was close to 7%.

Unsurprisingly, equities have started to move in tandem. Renaissance Capital's Rencasia Index grew 8% in the first three months of 2010, with most of the increase driven by energy exporters, just as it was before the crisis. However, the input of the banking sector is expected to swell going forwards, with Renaissance predicting its index will end the year 22% above current levels.

Not that all the country's banks have been slouching; shares in Halyk Bank, for example, rose 14% over the first quarter. As Peter Westin at Aton puts it: "higher oil prices and oil exports [and] a rebound in disposable income, [should lead to] acceleration in economic activity, and therefore a favourable platform for growth in the banking sector and its profitability." Aton predicts GDP will grow at an annual average growth rate of 4.3% in 2010-12.

Currency appreciation is another vital side to the banking story, as it will help raise asset quality and stabilise non-performing loans (NPLs). A one-off devaluation of the tenge in February 2009 did much to kick-start the recovery of export industries, but a stronger local currency now will make the country's high liabilities in foreign currencies easier to pay off to strengthen balance sheets, which in turn Renaissance expects to "drive earnings and returns."

All of which makes the ongoing task to stabilise the banking sector that much easier. The government has spared neither carrot nor stick: alongside capital injections and state deposits, loan loss provisions were raised, deposit insurance increased, and regulation and oversight strengthened.

Still not over

The banks aren't yet out of the woods, Westin warns. With dependence on foreign currency still strong on both sides of the banking sector's balance sheet, not just foreign-currency denominated liabilities but also assets will drop in local terms. He adds that there is still scope for further deleveraging, while NPLs, though improving, were still estimated by regulators to stand at 36% at the end of 2009.

Still, the regular news flow on restructuring looks optimistic. Grigori Marchenko, governor of the central bank, says that the banking system's foreign debt was reduced to $28.4bn in 2009, from $39.2bn the previous year. Renaissance suggests that in 2010, "successful bank debt restructuring, which we think now looks very likely, will result in a write-off of about $10bn of external debt."

At the same time, some analysts are now worrying that the same government limits on leverage, borrowing abroad, and foreign-currency lending that are helping lick Kazakh banks into shape could be drag on them as they start hunting for growth. Results for 2009 released by Kazkommertsbank in April illustrate the point. While the bank is now on a far surer footing thanks to debt reduction and cost cutting, results suffered under state pressure to squeeze interest rates and provision charges reaching 19% of the portfolio.

On the other side of the coin, however, the government is helping to ease the funding issues introduced by the regulations. According to Troika Dialog, Kazkommertsbank saw inflows of $490m in corporate deposits in 2009, with its largest depositor KMG Holding recently revealing it holds $2.8bn with the bank. Renaissance reports that around 70% Alliance Bank's corporate deposits are "related to government entities."