Clare Nuttall and Ben Aris in Almaty -

Predictions that Kazakhstan would be first in, first out of the crisis have proved to be not far from the truth. The rise in commodity prices over the last year has boosted the natural resources sector, which has in turn dragged the rest of the economy, including the banking sector, along with it. Yet despite lessons learned from the crisis, many banks still have a lot of pre-crisis issues to deal with.

Kazakhstan has seen GDP growth of 8.3% in the first half of this year, according to official data, indicating a quick return to the heady days of the mid-noughties when growth averaged just under 10% a year. Even taking Visor Capital's more modest forecast of just 3% growth in 2010, Kazakhstan is still outperforming most western economies, driven largely by healthy prices for oil and metals. As a result, optimism has returned to the economy as a whole. "Oil prices will determine the speed of Kazakhstan's recovery," says Michael Eggleton, chairman of Eurasian Bank. "At $60 per barrel, we will have to wait two years or more. At $75 upwards, everything will be accelerated."

Healthy commodity prices are having a trickle-down effect to other parts of the economy, starting with companies connected to the natural resources sector. "Now that commodities prices have recovered, sectors linked to oil and metals are recovering in turn, which is being translated into income for SMEs [small and medium-sized enterprises] and individuals. The banking sector will capitalise on that," says Anvar Saidenov, chairman of BTA Bank.

Yerzhan Shaikenov, chairman of Temirbank, forecasts that investors will return to Kazakhstan post-crisis with the same enthusiasm that they piled back into Russia after the 1998 crisis. "Kazakhstan has oil, minerals and wheat. The political situation is stable, and we expect the economic situation to rebound very quickly. Nobody should leave Kazakhstan out of their calculations," Shaikenov tells bne.

However, he agrees that the recovery will be from the top down, only after time bringing benefits to small businesses and consumers. "When the corporates see their business increase, then SMEs who work with them will grow, and increase the salaries they pay, which will then increase retail spending," he says.

At present, the companies in best shape are those working with major corporates especially in the oil sector, or on the "Roadmap 2020" and other government programmes.

Not so bad loans

The banking sector's recovery might lag other parts of the economy, but the picture here is also looking brighter. The conclusion of the restructuring of BTA, Alliance Bank and Temirbank also sends out a strongly positive message to the market about the sector's resilience and future stability. The restructured banks, along with others in the sector, still have to work through their overdue and non-performing loan (NPL) portfolios, but overall Kazakhstan's banks are getting down to business.

The latest data from Kazakhstan's financial regulator, the AFN, showed a significant fall in loans with overdue payments, NPLs and provisioning ratios, although Visor Capital points out in a research note that this seeming improvement was largely due to technical factors, in particular the loan write-offs at BTA and Alliance.

Since the collapse of the real estate bubble in mid-2007, and the government intervention into the "Big Four" banks 18 months later, there had naturally been some major changes in the sector. Among the largest banks, Halyk and BankCenterCredit in particular are performing well. Smaller banks have also managed to win new clients. Unencumbered with the debt burden of its rivals, Eurasian Bank, for example, has issued $600m in new loans since January 2010.

Following an outflow of deposits in early 2009, BTA, Alliance and Temir have since managed to win back a lot of customers. According to Maxat Kabashev, chairman of Alliance Bank, the speed of recovery in the Kazakh banking sector was "unprecedented". "Even last year, the system was still stable and operational. There will be some changes on the regulatory side in the next couple of years, but overall the system is working and the population wasn't hit by the banking sector's problems," Kabashev tells bne.

However, Eurasian Bank's Eggleton warns of continued problems within the sector. "The crisis is nowhere near being over," he says. "One symptom of this is the ratio of accrued interest to equity on banks' balance sheets, representing uncollected earnings and a large overhang in the real estate sector."

In the build-up to the crisis, he points out, "People stopped paying attention to fundamentals. Banks need to live within their means, offer better service, reduce expenses and overall learn how to be a low-cost provider. In short, to act like normal institutions."

Bankers generally agree that some lessons have been learned from the crisis. Not only have the government, the National Bank and the financial regulator been working to ensure there is not another crisis, banks are also adopting a more cautious approach. Gone are the days when loans were handed out to any punter with a real estate plan. While being more cautious on the lending side, several banks have said they are building up their non-interest income, streamlining their operations, investing into better IT systems and - especially - into consumer service. "Service is sexy," Temir's Shaikenov sums it up.

Legacy issues

But while bankers say the lessons have been learned, there are some signs that the old pre-crisis problems with the Kazakh economy remain. The biggest issue for the banks at present is NPLs. In addition to the burden on banks' balance sheets, the continuing indebtedness of many Kazakh companies means that potential clients, running otherwise healthy companies, are still bogged down with debt.

Several of the banks complain of too much liquidity and too few successful companies to lend it to. In effect, they have been caught between their own desire to be more cautious backed up with stricter regulation from the AFN, and government pressure to start pumping more money into the economy. This has been a particular problem for Halyk Bank, although the sovereign wealth fund Samruk-Kazyna is expected to withdraw its deposits, made through the anti-crisis programme, in the near future, which will go some way towards solving the problem. Eggleton says that too much liquidity is also Eurasian's biggest problem. "The money in deposits is overflowing, and this is the biggest drain on our earnings. We are expending our credit portfolio, but this is slower than we would like, as it is not easy to find good creditors," he says.

It was a similar situation in the run-up to the crisis when the absence of growing companies to lend to caused banks to turn to the real estate sector, with disastrous results. The of the lack of alternative instruments in Kazakhstan encouraged people to invest their money into real estate. "There were three drivers behind the real estate bubble: greed, a herd mentality and the sense of endless optimism," says Kabashev. "This may have been the first crisis in Kazakhstan, but I don't think it will be the last. We don't yet have another bubble, but the banking sector has a problem with over-liquidity. We have also seen many companies that have recently recovered from the crisis, where the management is already thinking about real estate investment again. It's very important that the regulator puts out some red flags to moderate investment in real estate."

While the energy sector is growing, there are limited opportunities for banks to lend to companies within the sector, although they are keen to lend to sub-contractors of the oil and gas industry. "We need to find ways of developing businesses in Kazakhstan outside the energy sector," says Kabashev. "For us, the government's diversification programme is interesting. We will be happy to credit stable clients with understandable business models who are trying to raise money to set up something new."