Kazakhstan’s KKB not expected to follow IBA into the abyss

Kazakhstan’s KKB not expected to follow IBA into the abyss
By Kanat Shaku in Almaty June 7, 2017

The recent news of brewing scandals concerning a Kazakh pension fund’s involvement in the debt restructuring of the defaulting International Bank of Azerbaijan (IBA) has fuelled worries that the troubles at Azerbaijan’s largest lender could infect Kazakhstan’s financial sector, and more specifically the largest Kazakh lender Kazkommertsbank (KKB). 

Though no direct link between the two banks exists, Bloomberg suggested at the end of May that the two banks – both of post-Soviet origin, with similar levels of debt (KKB’s $3.8bn against IBA’s $3.3bn) and over-reliant on hydrocarbons export-oriented economies in their respective countries – could potentially share a similar fate. 

The presence of an unexploded bad loan bomb in the Kazakh banking sector certainly adds to the worries. KKB is struggling after it acquired failed bank BTA in 2015, a situation aggravated by the country’s economic recession. As both Kazakhstan and Azerbaijan have been hit by low oil prices, with a negative impact on their banking systems as well as the wider economies, this has raised the question of whether KKB, like IBA, will abandon its creditors and enter debt restructuring The parallels certainly exist; however, the answer is less straightforward. 

Bondholders’ fears

Lutz Roehmeyer, who manages about $2.2bn including IBA and KKB bonds at Landesbank Berlin Investment, told Bloomberg that “certainly some bondholders fear” the Kazakh bank will follow in IBA’s footsteps, since “the ranking of the bonds is similar”.

After the restructuring announcement, Moody’s Investors Service cuts its long-term issuer default rating on IBA from ‘CCC’ to ‘RD’ (restricted default). The same rating category on KKB presently stands not too far off from ‘CCC’ at ‘B3’. “I think the fear here is simply non-payment,” Lurtz said.   

Moody’s warned back in January that as of June 30, 2016, “Kazkommertsbank's exposure to its largest borrower – which Moody's considers problematic despite its non-overdue status – peaked at KZT2.4tn or about 56% of the bank's gross loans”. KKB’s regulatory filings on September 30 showed another 7.99% of its gross loans were nonperforming.

“In a free market scenario, KKB would have drowned long ago,” a Kazakh banker tells bne IntelliNews. “But KKB is primarily a family bank,” he added – a reference to KKB’s ties to Kazakh President Nursultan Nazarbayev. 

Adding to the argument against KKB suffering a similar fate to IBA, Kazakhstan’s past banking failures have given a strong incentive to both government and bankers to ensure that there is not another high profile debt restructuring in the country. “The 2008 financial crisis has weakened investors’ trust in Kazakh banks, as demonstrated by the collapse of BTA Bank and Alliance Bank with subsequent attempts at debt restructuring,” the banker says. “That resulted in the drying up of any opportunities for Kazakh lenders to access foreign investors’ cheap money.”

Kazakhstan’s banks borrowed heavily from abroad between 2005-2007, with their loans totalling around 44% of the ex-Soviet nation’s GDP; the banks then loaned a significant portion of those funds to non-tradable sectors. “As financial conditions tightened with the onset of the global financial crisis, banks lost access to foreign financing,” the International Monetary Fund noted in a 2014 report.

“There is no reckoning in sight for creditors when you consider Kazakhstan’s past banking failures,” the banker says. “As cheap money presently does not exist as an option, the Kazakh top brass would not risk further damaging the banking sector’s reputation, as it would lead to even more losses in funding.” 


Kazakhstan’s approach to tackling its debt pains already differs from that of Azerbaijan. The Kazakh authorities are now trying to avert KKB’s troubles via a buyout of $7.5mn worth of the bank’s bad loans by the Problem Loans Fund. The next step in rescuing KKB will be its takeover by Halyk Bank, which also has indirect ties to the Kazakh president. Halyk has already agreed to buy the stakes of the two biggest shareholders in KKB for a nominal price of KZT1 (€0.0028) each, demonstrating that the full takeover of the bank as outlined in a provisional March agreement is only a question of time. The plan was deemed credit positive for KKB by Moody’s.

There is no foreseeable scenario where KKB could try to fix its problems, consisting mostly of bad loans it was forced to purchase along with the embattled BTA bank in 2015, by restructuring its debt, let alone by following IBA’s example of swapping its obligations for sovereign ones.  

Even if the mounting issues at KKB might pass on to Halyk, “KKB’s creditors are the least likely ones to get hit by an unprecedented threat of a looming default,” the Kazakh banker says. He also mentions “KKB [having] too many depositors” to default during an economic crisis, which has already left many embittered and willing to take to the streets for protests when given an excuse.

This mood alone is sufficient to ensure the authorities would simply not allow the bank to crash in the foreseeable future.