Clare Nuttall in Astana -

The high level of bad loans at Kazakh banks is a worrying legacy from the recent crisis, persisting despite strong economic growth over the last four years. The central bank says it is taking a tough line on non-performing loans (NPL), and government support is likely to be offered to address the problem.

Kazakhstan's new central bank governor, Kairat Kelimbetov, who took over from Grigory Marchenko on October 1, said on November 15 that NPLs were one of the three main challenges the bank needed to address, alongside implementation of Basel II regulations and the fast growth of consumer loans.

Kelimbetov told a conference marking the 20th anniversary of Kazakhstan's currency, the tenge, that the bank will ask the government to take steps including introducing tax breaks to encourage write downs of bad loans and amending bankruptcy laws, Bloomberg reported.

As of October 1, Kazakhstan had KZT3.8 trillion ($24.5bn) worth of loans overdue by more than 90 days, equivalent to 29.6% of banks' total loan portfolios, according to the central bank. This total includes KZT1.7bn of bad debts at BTA Bank, Kazakhstan's largest bank before the crisis. A 2012 report by the World Bank showed that Kazakhstan had the highest level of NPLs among the 73 countries surveyed.

Borrowing binge

The high ratio of NPLs has remained even though Kazakhstan's economy has returned to steady growth after a brief slowdown in 2009, with the European Bank for Reconstruction and Development (EBRD) recently raising its 2013 GDP growth forecast from 4.9% to 5.6%. Most of the debt-laden problem projects, including those in Kazakhstan's real estate sector, which was the first part of the economy to succumb to the crisis back in 2007, have now been completed. Yet this has not substantially reduced the proportion of bad loans.

Part of the problem is that while consumer lending is booming at a rate that has alarmed the government, many of Kazakhstan's banks are still cautious about corporate lending while their NPL ratios remain high. "The National Bank and the government recognise this as a problem that will continue to cause stagnation in the banking sector. The unfortunate aspect is that the banks have not made progress, and the last three years have proved that they can't grow themselves out of this situation," the EBRD's first vice president, Philip Bennett, tells bne in an interview.

Almaty-based investment bank Visor Capital forecasts that substantial changes in asset quality in the 2014 financial year are "unlikely", though the year "could mark a turning point for the Kazakh banking sector" if the central bank acts decisively. "From talks with the banks, we understand that the recovery process in Kazakhstan will be both time-consuming and complicated, due to a number of bureaucratic and legal issues, which is one of the reasons for the slow recovery in Kazakhstan," Visor analysts wrote in a November 18 note.

The other legacy from the crisis is the state's presence as a shareholder - through sovereign wealth fund Samruk-Kazyna - in several of Kazakhstan's largest banks. In February 2009, Samruk-Kazyna took over BTA Bank, its subsidiary TemirBank and Alliance Bank, as well as taking minority stakes in Halyk Bank and Kazkommertsbank. While this was intended as a temporary measure, to date it has only managed to exit its stake in Halyk.

While there were initially hopes of getting either foreign strategic buyers or distressed asset investors to take on Kazakhstan's troubled banks, nearly five years on from the nationalisation this no longer appears a realistic option, and the high level of NPLs naturally makes the sector less attractive to potential investors. "The government is committed to moving Samruk-Kazyna out of the banking business, but they have three fairly significant banks to deal with, and this stagnation has caused a lot of external actors to be reluctant to get involved in NPL restructuring," says Bennett. "We would love to see external capital involved in some of these bank resolutions, but at this point we expect Samruk-Kazyna and the National Bank will find a domestic solution."

In late 2013, there has finally been progress with Alliance and TemirBank, as on October 10 Samruk-Kazyna confirmed it is in negotiations with Verniy Capital owner Bulat Utemuratov, who already owns two banks - Forte Bank and Kassa Nova. If the acquisitions go ahead, Alliance and TemirBank may be merged with Forte.

It is still unclear what will happen to BTA, Kazakhstan's largest bank by assets until the crisis, although the government has proposed offloading it onto Halyk in exchange for Halyk's pension fund, which would be transferred to the central bank as part of Kazakhstan's pensions reform programme.