The banking system of Kazakhstan

KAZAKHSTAN INSTITUTE OF MANAGEMENT, ECONOMICS

AND STRATEGIC RESEARCH UNDER THE PRESIDENT OF THE

REPUBLIC OF KAZAKHSTAN

(KIMEP)

Department of Arts in Economics

 

 

TERM PAPER

“The banking system of Kazakhstan”

 

 

instructor:

 

 

 

 

 

 

 

Fall 2002

Contents

 

1. Introduction
2. The banking system of Kazakhstan
3. Kazkommertsbank, the largest private bank in Kazakhstan
4. Analysis of banks (KKB, HSBK, BTA)
5. Conclusion

 

Introduction

In the beginning of the 90’s there were a rapid growth of number of private commercial banks. After laws "On banks and banking in Republic of Kazakhstan" and "On the National Bank of Republic of Kazakhstan" approval in 1995 advanced banking regulation was implemented. At the end of 1996 the “Program of transition of second tier banks to the international standards” was accepted. Because of requirements of the Program for the level of capitalization the mergers and acquisition of banks were begun. As a result within the period of 1993-2001 the number of second tier banks was reduced from 204 to 48. In 1995 the requirement on loan provisioning was implemented. The quality was the main indicator for classification of assets and liabilities. The share of the standard loans in January 2001 achieved 76,3%, increased in comparison with the beginning of the year on 21%, the share of doubtful - 21,8%, decreased on 17,4%, the share of loss loans - 1,9%, decreased in 2,9 times. The quality of an aggregate loan portfolio of a banking sector during 2000 considerably improved. The classification of a loan portfolio of banks is based on the following criteria: financial position of the borrower, repayment of debts under the credit in time by the borrower, relation between the bank and the borrower, credit history, collateral. Assets diversification is also introduced. Banks’ overall risk to all related parties should not exceed the size of the own capital of a bank. The National Bank also provides electronic database on the borrowers of banks for sharing information between banks.

 

The banking system of Kazakhstan

Let’s discuss the current situation of the banking sector. Almost all banks of Kazakhstan has been privatized except one completely state-owned bank (Eximbank Kazakhstan). Halyk Savings Bank of Kazakhstan has the government share of 33,3 %. In January 2001 in republic there were 48 second tier banks including 1 inter-state, 1 state–owned and 16 with foreign participation. Only 26 banks have a branch network, a number of branches - 418, including 178 of Halyk Savings Bank.. There are 15 representative offices of foreign banks in Kazakhstan. 46 pawnshops were registered in republic in January 2001, 42 from them have the National Bank’s license, 8 credit partnerships and other 55 organizations, which are providing solitary bank operations. In November 1999 the domestic Deposit Insurance Scheme was introduced. During 2000 a number of participating banks increased from 16 up to 18. In January 2001 the aggregate own capital of the banking sector was KZT99 billions or 0,7 billion USD. The growth during the year was 43%. The increase of the own capital is based on the growth of the shareholders equity of banks. Aggregate own capital of the banking system was 3.9 % of GDP at the end of 2000, which is quite large amount. Among the CIS countries, Kazakhstan is a leader due to the volume of the average aggregate own capital per one bank. Ratios of capital adequacy of the banking sector are on a high level. The size of aggregate assets of banking sector has reached KZT530 billions or USD3,7 billions, which dramatically increased on 55% or KZT189 billions. The greatest parts of assets are: a loan portfolio – KZT292 billions (USD2 billions) or 55% of assets which grew during the year on KZT125 billions or 74%, portfolio of government securities – KZT99 billions (0,7 billion USD) or 19% of aggregate assets which increased on KZT62 billions or 2,7 times.

	01.01.2000		01.01.2001		Growth for the year
	KZT, bln	USD, mln	KZT, bln	USD, mln	KZT, bln	USD, mln	KZT,%
Assets, including:	341.1	2468.3	530.0	3668.0	188.9	1199.7	55.4
Loan portfolio	167.4	1211.6	292.0	2020.7	124.6	809.1	74.4
Government securities	37.0	267.6	99.2	686.5	62.2	418.9	168.3
“Nostro” accounts	68.0	492.0	33.8	233.9	-34.2	-258.1	-50.3
Deposits, placed with other banks	11.5	82.9	26.7	185.0	15.2	102.1	132.2
Fixed & intangible assets	18.5	133.6	23.2	160.3	4.7	26.7	25.6
Other	38.7	280.6	25.1	381.6	16.4	101.0	42.3

 

We can say that the greatest share of the loans in 2000 was given to the enterprises of the real

sector of economy   in October 2000, which is 58,7 % of a total sum of a loan portfolio

of banks and the loans given to the trading companies are also significant – 31,6 %. Also from our analysis we see that the growth of loans given to the small business is KZT34,2 billions or 85,3 % during the year, and KZT74,2 billion on January  2001. In the case of the structure of the liabilities the greatest share occupied by clients’ deposits, for example, in January 2001 their size was KZT308 billions or USD2,1 billions, which had the growth during the year of KZT128 billions or 71,3%. Among them time deposits increased on KZT 94 billions or 2,4 times and demand deposits - on KZT34 billions or on 30 %. Individuals’ deposits grew on KZT37 billions or 67 %, including growth of time deposits – KZT31 billions or 91 % and growth of demand deposits KZT6 billions or 28 %. Also deposits of the legal entities increased on KZT91, 5 billions or on 73 %, including growth of time deposits – KZT63 billions or 3 times, demand deposits - KZT28 billions or on 30 %.

	01.01.2000		01.01.2001		Growth for the year
	KZT, bln	USD, mln	KZT, bln	USD, mln	KZT, bln	USD, mln	KZT,%
Liabilities, including:	270.8	1959.7	437.4	3027.1	166.6	1067.4	61.5
Legal entities’ deposits	124.9	903.9	216.4	1497.7	91.5	593.8	73.3
Demand deposits	93.9	679.8	122.2	845.6	28.3	165.8	30.1
Time deposits	30.9	223.4	93.9	649.8	63.0	426.4	204.1
Other deposits	0.1	0.7	0.3	2.3	0.2	1.6	214.2
Individuals’ deposits:	55.0	397.9	91.7	634.5	36.7	236.6	66.7
Demand deposits	21.1	152.5	26.9	185.8	5.8	33.3	27.6
Time deposits	33.9	245.4	64.8	448.7	30.9	203.3	91.1
Individuals’ deposits placed with banks-participants of the DIS	49.4	357.7	85.0	588.0	35.6	230.3	72.1
The inter-bank credits, deposits	18.7	135.5	25.7	177.6	7.0	42.1	37.4

 

From our point of view it is necessary to note, that the ratio of deposits of the clients to GDP on January  2001 reached 12,1 % (as of 01.01.2000 – 9,5 %). All this says us that the positive trend of the growth deposits is caused by growth of confidence to banking sector.

 

	1999	2000	Growth, KZT bln	Growth, %
Interest earned	30.3	46.1	15.8	52.1
Interest paid	12.2	18.7	6.5	53.3
Net Interest Income	18.1	27.5	9.4	51.9
Provisioning	18.4	14.1	-4.3	-23.4
Net Income of credit and deposit operations	-0.3	13.4	13.7
Net commissions and free income	7.6	11.2	3.6	47.4
Net income of financial(dealing operation)	5.2	10.1	4.9	94.2
Net income(loss)  from valuation	11.8	-0.3	-12.1	-102.5
Net income from other operations	24.6	21.1	-3.5	-14.2
Administrative expenses	21.1	23.2	2.1	10.1
Taxes(except income tax)	2.0	4.5	2.5	125.0
The pre-tax profit	10.0	8.3	-1.7	-17.0
Net profit	9.5	7.8	-1.7	-17.9
Total revenues	135.6	125.9	-9.7	-7.2
Total expenses	126.1	118.0	-8.1	-6.4

 

The total income of the banking sector for 2000 decreased in comparison with 1999 on KZT9,7 billions or on 7,2 %, the total expenses decreased on KZT8,1 billions or on 6,4 %. Return on assets decreased from 0,028 to 0,014 and return on equity decreased from 0,138 to 0,079. The main source of high earnings of banking sector in 1999 was high devaluation of the Tenge because of the growth of the Net Income from valuation and losses of the basic banking operations (increased credit risk). So we can conclude that the quality of the assets in 2000 looks more preferably, than in 1999. The liquidity of banks is excessive because the aggregate ratio of current liquidity of banking sector during 2000 was kept unchanged (0,98), while the minimum limit for bank 0,3. The ratio of liquid assets to total assets is 0,3. The concentration of the banking sector was very high and increased further during 2000. For example, the share of 3 largest banks in aggregate assets increased from 51,7 % to 55,3 %, in aggregate liabilities from 55,5% to 59,2 %, in aggregate own capital from 20,8% to 36,5 %, in aggregate revenues decreased from 44,8% to 42,8 %, in aggregate expenses from 44,8% to 40,8 %. 14 banks took licenses of the NBK for issuing credit cards and providing related services. Because of the transition to the international standards of accounting the National Bank requires banks to apply an appropriate IT, including requirements for security of data input, transfer and databases.

Secondly we will analyze regulation and supervision of banks. There are a lot of amendments made to the law “On banks and banking in the Republic of Kazakhstan”, which was approved on August 1995. The main purpose of amendments to the banking legislation was to approach the banking system and banking system regulation to the international standards.

This law has allowed National Bank, as banking supervision authority, to begin the restructuring of banking system in1995. As the result, the amount of the second tier banks decreased to 48, while it was more than 200 banks. Despite of the reduction in banks amount, the growth of aggregate figure of banking sector is significant. Amendments to the law approved at the end of March, 2000 have resulted in growth of deposits of the clients, which shows the increase of banking sector confidence. The National Bank pays significant attention to the organization of the internal control of banks, and also risks management. A bank’s board of directors approves the general types of banking operations, policies and procedures. These policies and procedures cover the following areas:

• Risk limits and standard terms for loans and deposits;

-    Credit granting procedures for bank insiders;

-    Fees and commissions for various bank operations;

-    Duties and responsibilities of bank management and customers;

• Other conditions, requirements or restrictions.

The internal guidelines of a bank determine:

• The organizational structure and function of each division within the bank;
• The bank’s committee structure and functions for internal audit, credit committee and others standing committees;
• Duties and responsibilities of the department heads;
• Duties and responsibilities of the officers and personnel of bank, acting on behalf of the bank.

The National Bank of Kazakhstan is responsible for regulation of banking activity in Kazakhstan through its Banking Supervision Department. The organizational structure of banking supervision consists of  “off-site” and “on-site” supervision. The off-site supervision of banking activity is about supervision of complex financial groups, supervision over bank activity, special supervision of problem institutions. All banks are required to maintain accounting records and present their financial statements according to the Kazakhstan Accounting Standards, which are based on International Accounting Standards. During 2000, the National Bank used the following limited measures of influence and sanction:

- 10 letters of agreements were demanded;

- 30 orders were issued;

- 55 written warnings were issued;

- 11 monetary sanctions were imposed;

- 5 banking licenses were revoked resulting in liquidations.

The National Bank does not prefer liquidation of troubled banks and wants to increase competitiveness through encouraging mergers and acquisitions.

Kazkommertsbank, the largest private bank in Kazakhstan

Now let’s move on to the second part which is about the activities of a second-tier banks at the example of Kazkommertsbank.

First, we will start with discussing position and operations of KKB. Kazkommertsbank is the largest private bank in Kazakhstan by assets, equity and time deposits. 53% of the issued share capital is controlled by Senior management of the bank. International investors through the Bank of New York hold approximately 27% of the capital. Kazkommertsbank meet the requirements of international standards of transparency and efficiency and its activities made it the most profitable financial institution in the country. Its net profit under IAS exceeded US$36 million in 2001, which is 50% of the profit made by the sector. The Bank is the dominant provider of banking services and other financial products to large and medium-sized corporations in all sectors of Kazakh economy. KKB estimates that its share of the corporate lending market in Kazakhstan is approximately 28.3%. Its commercial banking business primarily consists of corporate banking, trade and project finance, personal banking, debit and credit card services and foreign currency trading. Its principal activities are the acceptance of deposits and the provision of loans and credit facilities in Tenge and foreign currencies. The Bank is also a major participant in the securities market and the foreign currency market in Kazakhstan. The Bank can issue both VISA and MasterCard credit cards and its debit and credit cards provide access to the CIRRUS/Maestro system. The Bank is also an authorized agent for distribution of American Express and Diners Club cards. The Bank provides a wide range of current account related services. As of 31st December 2001 it operated 147 ATMs and over 685 POS-terminals in the principal cities of Kazakhstan. The Bank is present in Kazakhstan's major business and population centers through a network comprising 44 full-service branches and, 40 settlement outlets. The Bank has foreign representative offices in London, United Kingdom, and Bishkek, Kyrgyzstan and plans to establish a subsidiary in Russia. Kazkommertsbank got International Recognition because bank was the first to promote itself and Kazakhstan to international capital markets:

• first and the only private institution in Kazakhstan that made equity offering in 1997;
• first private institution in Kazakhstan that obtained ratings from international rating agencies;
• first private institution recognized by most European export credit agencies;
• first private institution in Kazakhstan that issued US$100M Eurobond (repaid in 2001);
• first private institution in Kazakhstan to receive an international syndicated loan.

Second, we will show the main structure of the management of the bank. The Bank has a Board of Directors, the management body of the Bank, a Management Board, which is the executive body of the Bank. Shareholders elect the members of the Board of Directors, while the Board of Directors elects the members of the Management Board. The Board of Directors represents the interests of shareholders, is responsible for the general management of the Bank and approves its strategic and operational plans. The Management Board is responsible for the administration of the Bank's current activities.

Chairman of the Board of Directors    Nurzhan S. Subkhanberdin

 

Third, the main KKB indicators will be analyzed. From the table we see that assets

increased from 1,293,9 thousand USD in 31.12.2001 to 1,401,89 in 30.06.2002. Also capital went up from 162,6 to 180,1. Also we see that deposits and loan portfolio increased. As a result Net Profit reached 23,29 thousands USD.

 

Main KKB Indicators:
30.06.2002
	USD,  thousand  (IAS*)	%Market  (KAS*)
Assets	1.401,89	22,84
Capital	180,1	15,65
Deposits	735,6	26,36
Loan Portf	1.036,73	29,90
Net Proft	23,29	30,47
31.12.2001
	USD,  thousand  (IAS*)	%Market  (KAS*)
Assets	1,293,9	23,47
Capital	162,6	16,16
Deposits	725,5	22,57
Loan Portf	916,52	28,28
Net Proft	36,043	54,44
*KAS - Kazakh Accounting Standards  *IAS – International Accounting Standards

 

Then we will descuss the strategy of the bank. KKB's development strategy in the mid-term perspective is based upon maximum diversification both of the assets of the Bank, and the funding sources, focusing on several strategic directions. First, main efforts will be focused on large (annual sales above USD9.0 million) and medium (sales between USD2.5 and USD9.0 million) size corporate clients with significant growth of the latter group. It is estimated that there are between 300 and 400 companies falling within these groups and KKB may assertively claim to dominate this niche. Second, consistent improvement of the overall economic situation in Kazakhstan and, consequently, increasing number of people with steadily high level of income creates plentiful opportunities in private banking. The Bank will continue operations with small an medium-sized businesses. For over six years KKB was actively involved in SME financing, micro-lending, mortgage and consumer financing. Third, KKB intends to increase it’s branches and set up subsidiaries in Russia and some other CIS countries, which are major trading partners of Kazakhstan. CIS market has enormous capacity and extremely promising prospects.

Fifth, let’s see on the  Kazkommertsbank’s credit ratings made by the world widely known organizations as Standard & Poor’s, Fitch and Moody’s. For example, according to S&P rating system bank has long-term rating B+, short-term C and rating outlook stable.

 

Kazkommertsbank’s credit ratings  updated as of September 2002
Standard & Poor’s		Current rating
Long term		B+
Short term		С
Rating outlook		Stable
Fitch
Long term		BB-
Short term		B
Individual		C/D
Support		4T
Moody’s
Long term deposits		Ba3
Financial strength (short-term)		D

 

 

Sixth, there are two main subsidiaries of KKB. One of them is OJSC Kazkommerts Securities, which is a wholly owned subsidiary of the bank. It was established on October 30, 1997 with shareholders’ equity of KZT760 million. It provides investment services both to foreign and domestic clients, participates in privatization projects and other transactions. Another one is Kazkommerts Policy Insurance Company, which was established in 1996. The main types of it’s activities are the development of insurance market, insurance protection of individuals and legal entities, rendering consulting and research services to the insurers and other participants insurance market. 

At last, shares and shareholders' equity is the next important thing. In January 2002 authorized capital of KAZKOMMERTSBANK OJSC was announced and equaled to KZT5 bln., paid-in capital - KZT3.498.102.070. There were eight issues of shares since 1994. The first seven issues were common shares only, whereas the eighth was preferred shares issue. The issue type is non-documentary. The shareholders register is maintained by Reestr-Service LLP (Almaty). On the table below there is the information on structure of KAZKOMMERTSBANK OJSC shares issues:

№ in State register	Issue registration date	Issue volume, KZT	Issue volume, shares	Face value, KZT
А3948	10.01.94	4,248,200	424,820	10.00
А3948-1	19.04.95	123,018,800	12,301,880	10.00
А0040-2	06.09.96	1,903,233,000	190,323,300	10.00
А0040-3	29.05.97	800,000,000	80,000,000	10.00
А0040-4	19.05.98	23,787,780	2,378,778	10.00
А0040-5	10.05.99	2,907,948,390	285,428,778	*10.188
А0040-6	17.08.01	2,942,200,690	294,220,069	10.00
А0040-7	20.12.01	1,250,000,000	125,000,000	10.00