The default of the International Bank of Azerbaijan (IBA) has stirred worries among investors that Kazakhstan’s Kazkommertsbank (KKB) might be the next in line to fall into severe trouble, Bloomberg reported on May 30, quoting a number of international experts.

KKB and IBA, however, have no direct relation to each other. The Kazakh pension fund, facing losses and under fire because its $250mn IBA bond acquisition has become trapped in IBA's debt restructuring, also holds some KKB holdings, but apart from that there is no cross-over between the two banks. As such, the default of IBA cannot be automatically viewed as the beginning of a domino effect that will hit KKB.

The Kazakh central bank has been working on a merger deal between KKB and Halyk Bank, which includes an agreement by the state-run Bad Loans Fund to buy out $7.5mn worth of bad loans held by KKB. The merger echoes a previous merger between KKB and embattled BTA bank in 2015. That amounted to an attempt by the authorities to avert a bad loan bomb exploding in the banking sector - the ongoing consolidation demonstrates the possibility that issues in the Kazakh banking sector will not be resolved, but will only be postponed.

Moody’s stated in January that “as of 30 June 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 revealed another 7.99% of its gross loans were nonperforming.

If the merger deal proceeds without a complete solution to KKB’s woes, it could come to be seen as just another stage in the procrastination over the Kazakh banking sector’s unexploded time bomb. Halyk Bank would face the same problems as KKB encountered in taking control of BTA.

As such, additional recapitalisation is being considered by the central bank to provide a complete solution to KKB’s issues.