Kazakhstan bites bullet and completes $3.4bn bailout of second largest lender

Kazakhstan bites bullet and completes $3.4bn bailout of second largest lender
Officials would not like to stomach the impact the liquidation of Tsesnabank would have on the Kazakh economy.
By bne IntelliNews February 7, 2019

Kazakhstan has finalised a $3.4bn bailout of its second largest lender Tsesnabank. The move involved state-run brokerage First Heartland Securities taking over the lender for an undisclosed amount, the Kazakh central bank said on February 5.

“The package of measures implemented by the central bank and the government and the entry of a new investor have made it possible to restore Tsesnabank’s stability,” the regulator added, confirming that the rescue involved the government adding aid worth $1.6bn to the initial $1.8bn package.

The necessity for the bailout last week drew the anger of President Nursultan Nazarbayev in a cabinet meeting, during which he told his ministers that they were “cowards” for not doing enough to clean up the banking sector. In April last year, he declared that bailouts worth nearly $10bn for several banks in 2017 would be the last.

Last week, Kazakhstan’s state-owned “bad bank”, the Problem Loan Fund (PLF), sold KZT604bn (€1.4bn) in domestic bonds to fund asset purchases from Tsesnabank. The lender has been attempting to restructure its bad loans stemming from overexposure to the agricultural sector, in which some borrowers have been unable to repay their debts. Their debt difficulties were largely caused by the Kazakh currency, the tenge, losing half of its value in 2015 in the switch to a free float.

$1bn in retail deposits
Tsesnabank, which holds $1bn in retail deposits, could not be liquidated without it having a wider effect on Kazakhstan’s economy, the largest in Central Asia. That scenario prompted the authorities to organise an emergency rescue complete with the full takeover.

The bank’s troubles started last year, when it sold €1.1bn in bad loans to the PLF. In the second quarter of 2018, Tsesnabank recorded a 30% plunge in liquid assets in a first sign of the bank experiencing troubles. The announcement on the sharp decline in liquidity was followed up by the bank taking out a short-term loan of KZT150mn to raise liquidity and its receipt of state support worth KZT450bn to boost its financial strength.

First Heartland Securities is part of a financial group, including First Heartland Bank, which is ultimately controlled by state-run Nazarbayev University. Prior to the takeover, Tsesnabank was controlled by the family of former chief of the presidential staff Adilbek Zhaksybekov.

Lingering difficulties
Lingering difficulties are still troubling the Kazakh banking sector despite 2017’s bailout of banks by the state. Earlier this month, Kazakh analytical firm Halyk Finance predicted that Kazakh banks would continue experiencing deterioration in 2019.

Kazakhstan's banking industry was almost destroyed by the 2008 financial crisis and the later shock from the 2014 collapse of world oil prices.

Last year, the two largest Kazakh lenders Halyk Bank and KKB completed their merger process, arranged after Halyk bought a controlling stake in KKB in a move to rescue the bad-loans-ridden lender.

Halyk Finance also said it expected a continued decline in the role of the banking system in the development of Kazakhstan’s economy. The share of the loan portfolio of the banking sector accounted for 23% of GDP in 2018. That figure fell from 26% of GDP in 2017 and 33% in 2016.