THE KAZAKH BANKING SYSTEM: DYNAMIC GROWTH CONTINUES, SMALL PLAYERS UNDER PRESSURE

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THE KAZAKH BANKING SYSTEMDYNAMIC GROWTH
CONTINUES,SMALL PLAYERS UNDER PRESSURE
15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest

• History
• 1991 more than 300 banks, lack of regulation,
  post-Soviet transition problems
• 1995 consolidation, 5-year stabilisation program
• privatisation, recapitalisation, creation of
  different categories of banks with different
  requirements
• Limited influence of the 1998 Russian crisis
• Since 2003 Leading Kazakh banks expansion to
  CIS countries

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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest

• Governments 2003-2006 Fiscal Sector Development
  Plan
• Liberalisation of FX regime (from 1 January
  2007 FX licensing to be cancelled)
• CB monetary policy inflation targeting
• Creation of consolidated financial supervision
  (AFS launched in 2005)
• NBK only central bank in CIS with pure CB
  functions
• Creation of a complex banking system
• Move to consolidated reporting
• Credit bureau (created by 7 large banks, begins
  work on 1 February 2005)
• The Presidents initiatives
• Banks expected to support governments
  long-term development plans
• KZ banks should expand abroad
• Limitations on foreign capital in KZ banks
  lifted

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Consolidation of the banking industry /1
15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
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Consolidation of the banking industry /2
15th BACEE Country and Bank Conference 14-16
November 2006, Budapest

• More consolidation expected as competition
  intensifies. Problems with Valut-Transit Bank.
  Nauryz Bank closed in 2005. Industrial Banks
  license suspended for 6 months in December 2005.
  License of Bank of China KZ suspended for 2
  months for operations in national and FX currency
  markets.
• 2-3 European banks, 1-2 Russian banks may enter
  the market within 1-2 years. Sberbank buys
  TexaKaBank, Société Générale wants to establish a
  subsidiary.
• Foreign branches to be authorised!
• BTA buys 51 of Temirbank

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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest

• Regulation
• Mega-regulator (Agency for Financial Supervision)
• Main issues transparency, corporate governance,
  foreign borrowing
• KZ banks sign memorandum on co-operation on
  transparency
• Limitation of foreign assets growth 150 risk
  weight for assets rated under BB by SP
• Tighter reserve requirements
• First measures taken on 27 May 2006
• Minimum reserve requirements (MRR) introduced
• 6 for domestic liabilities
• 8 for other liabilities
• Second set of measures not expected until
  year-end 2006

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The banking systems structure as of September,
2006
15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Number of banks outlets falling without
State Development Bank of Kazakhstan Zhilstroyba
nk of Kazakhstan 24 banks have
branches Source AFS
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Aggregated market share of top-3 banks (KKB, BTA,
HSBK) (in )
in
In 2006, Top-3 banks lose market shares by all
indicators. This coincides with the Presidents
policy
Source NBK, AFS
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Dynamic growth T.A. / GDP
Quick increase of penetration (06 Sep 01 Dec
index 770.31)
2005 T.A growth 68 2006 (8 months)
39.2 External assets grow by 140.6, reach 26.5
of T.A. T. A. as of 1 September compared to GDP
forecast for 2006
Source NBK, AFS
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Dynamic growth Loans / GDP
Loans grow quicker than T.A. (index844.23) Loans
include internal placements (7 of gross loans)
Source NBK, AFS
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Dynamic growth Banks equity / GDP
(index 702.91) Subordinated debt included into
equity according to KZ regulation. Still low
level of foreign investment. SP Kazakh banks
have lower capitalisation than banks in Russia,
Bulgaria, Czech Republic, Turkey
Source NBK, AFS
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Kazakh banks capitalisation (in bn KZT)
Substantial and increasing share of Tier-2
capital. Subordinated debt 299.2 bn KZT
Source NBK, AFS
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Dynamic growth Client deposits / GDP
Deposits grow slower than T.A. or loans. Reserve
requirements 6 of current liabilities (to be
raised). (index 727.73)
Source NBK, AFS
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Structure of banks assets
15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Dynamic assets growth, driven by lending, the
share of which reaches 65.4 (1
January 65.4).
Source NBK, AFS
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Share of retail loans in total lending
2002
May 2005
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Funding Resident deposits (M KZT), end of period
15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
In 2005 deposits increase by 56.9, private
deposits only by 33.2.In 2006 July-August, the
growth rate equal to 40.6 and 36.6(Indexes
727.73 445.17)
Source NBK
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Term structure of resident deposits
Share of corporates sight accounts in total
deposits 49.8 Share of FX deposits in total
deposits 56.6
Source NBK, AFS
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest

• Pension funds
• 14 pension funds registered (2 less than at the
  beginning of 2005)
• 10 fund management companies
• commercial banks act as custodians for the
  pension funds (HSBC (KZ), CenterCredit, HSBK,
  Temirbank, ATF, Eurasian Bank)
• 7,528,281pension accounts (641,134 in 12
  months) of which 7,492,820 (99.5) obligatory

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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Pension funds savings on the level of private
bank deposits!
PF Market shares
Private funds share growing at the expense of
the State Pension Fund
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Investment portfolio of KZ PF
Growing role of PF in banks funding
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Funding Deposits and Loans (M KZT)
Aggressive lending policy, deposits not
sufficient to support lending growth. Loans to
deposits ratio grows in 4 years from 106 to
121.4. In 2006, it increases further to 123.0

Source NBK, AFS
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest

• Kazakh banks foreign funding/1
• Reasons longer maturities, lower funding costs
• Largest banks (Top 1-3)
• KKB USD 850 M syndication (August 2006), USD 200
  M eurobond (July 2006)
• BTA 2006 funding program USD 1.3 bn eurobonds
  USD 1.5 bn syndication, USD 500 M eurobonds
  (September 2006), USD 1.11 bn syndication
  (September 2006) raised from USD 800 M, 18/36
  months, LIBOR0.35/0.65, USD 250 M eurobond
  (April 2006)
• Halyk Savings Bank different strategy,
  relatively low level of foreign borrowing, USD
  300 M eurobond (June 2006)

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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Kazakh banks foreign funding/2 Other large banks
(Top 4-6) Alliance USD 200 M syndication
(October 2006), USD 350 M 7-year eurobond
(September 2006), USD 400 M eurobonds (April
2006), USD 150 M perpetual eurobonds (April
2006), USD 46 M syndication (March 2006) ATF
USD 400 M syndication (September 2006), USD 350 M
eurobond (May 2006) CenterCredit USD 200 M
eurobond (September 2006), USD 100 M eurobond
(April 2006)
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Kazakh banks foreign funding/3 Medium sized
banks (No. 7 and further down) Bank Caspian USD
140 M syndication (October 2006) Tsesnabank
USD 22 M syndicated loan (July 2006) Nurbank
USD 135 M syndication (June 2006) Temirbank USD
50 M syndication (September 2006) raised from USD
35 M 369 days, LIBOR1.65, USD 150 M eurobonds
(March 2006)
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest

• Kazakh banks foreign funding/4
• Growing amounts, longer maturities,
  oversubscription, borrowers appetite growing
• Enlarged group of investors (Asia, Islamic banks)
• Innovative financial instruments (future flows
  deal, other structured finance
• instruments)

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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Capital adequacy ratios ()
Subordinated debt included into equity. Still
comfortably high, nominal CAR
Source NBK, AFS
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Profitability ratios 1
ROE increases in 2005, falls back in 2006
Source AFS
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Profitability ratios 2
ROA increases in 2005 and further improves in 2006
Source AFS
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Provisioning (New provisions to T.A.)
In 2005, lower provisioning substantially
contributes to higher profitability
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Income statement of Kazakh banks for 2004 and
2005 (in KZ bn)
Profitabilitys main driver is increasing net
interest income
Low profit tax helps internal capital accumulation
Source AFS
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest
Kazakh banks main indicators (2005), in
M KZT
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15th BACEE Country and Bank Conference 14-16
November 2006, Budapest