Foreign banks on the financial market of Kazakhstan

     Source: Financial report of ATF bank 2007,2008, 2009  

     When ATF signed a contract with UniCreditGroup amount of their share capital was 57 897 607 tenge. But in 2008 we can see a shell increase by 54%. So,   we can say that enter to this agreement was favorable for bank. Increase in share capital influenced to relative density in 2008, because of it there was increase the total equity of commercial bank  by 31%. Also were decrease in returning earnings of bank by 56% and decrease in minority interest by 28%. 

     In 2009 the amount of share capital increased by 19,86%. It means that the inputs to this bank increased.  It is connect with increase of credits, that bank gives, increase in amount of deposits and return of  loans by physical and legal entities. There were no changes in additional-in paid capital and general reserve in 2009.  Relative density in additional-in paid capital increased by 0,2266%, and general reserve increased by 14,20% in 2009.  But we can see that there are also decrease in revaluation reserve and returning earning by 0,85% and 57,7%. According to R/E we can conclude, that the profit of bank increased according to the 2008, because of increase of operations of bank. We can see decrease in important for bank stages for it’s development and it brings the growth of capital of ATF bank. So we can conclude, that in 2009 ATF bank had better financial year than it was in 2008 and perspectives of development of this bank increase.[7]

     Rating is the face for every commercial bank with foreign participation. Rating is assigned to an independent credit agency and is an expression of willingness of the banking institutions to fulfill their financial obligations. Ratings of banks have become a major information resource in the banking sector. The importance ratings, suggests not only that customers of banks and bankers are listening to these indicators. Rating agency is still the most important criterion for the reliability of the financial institution or financial and credit system of the whole state. Rating agencies tend to define the degree of riskiness of financial transactions in various markets, and banks are grouped in the rankings on the riskiness of deposits in them. Various rating agencies have different factors that determine the position of a bank in the ranking, as well as different calculate these or other economic indicators for assigning to the bank places in the ranking. Therefore, an experienced investor, lender or investor will never rely on only one rating, using just a few. First rating of ATF bank done by “Fitch Ratings” :

• Long-term issuer default rating in foreign currency: confirmed at level' BBB'; the prognosis is changed from negative to stable.
• Short-term issuer default rating in foreign currency: confirmed at level 'F3'
• Long-term issuer default rating in national currency: confirmed at level 'BBB'; the prognosis is changed from negative to stable.
• National long-term rating: confirmed at level‘ AAA’, The prognosis is stable
• Support rating: confirmed at level'2'
• Individual rating: confirmed at level 'D / E'
• Priority unsecured rating of debt obligations: confirmed at level            ‘ BBB’
• National priority unsecured rating of debt obligations: confirmed at level "AAA".

      Moody ' s rating :

• Rating of financial stability: ”E+”
• Deposit rating in local currency: ”Ba1”
• Rating of priority unsecured debt in foreign currency: ”Bа1”
• Rating of subordinated debt in foreign currency: was changed from Ba3 to B1.

     “Negative” prognosis was changed to “stable”.

     We can conclude that the presence of foreign subsidiary banks in Kazakhstan is a positive factor in creating the necessary Kazakhstan banks to compete in the market. National Bank of Kazakhstan created equal conditions of work for Kazakhstan banks and foreign subsidiaries on the territory of country. Kazakhstan banks, adopting the experience of foreign banks, must gradually become a transnational, first gaining the trust of its main customers, and then, with their growth beyond the borders of Kazakhstan.[8] 
 
 
 
 

     CHAPTER 3. PROSPECTS OF THE DEVELOPMENT OF BANKING SYSTEM OF KAZAKHSTAN 

     There are 31 banks with non-resident capital contribution were registered in the beginning of the year 2009.

     There are 3 main types of strategy which determine positioning of foreign banks on internal market of banking services:

• Universal (multi-product or multi-clients). Bank tries to expand its presence in all promising sectors of banking activities. It may not have any key competitive advantages in any sector but it aims to achieve them in the future. 
• Specialized (mono-product or mono-clients). Bank has key competitive advantage in some client or product niche (mortgages, auto credits, plastic cards etc). This market or client niche has promising growth prospects which justify bank’s narrow specialization. Once bank consolidated its position it is trying to save its competitive advantages in the future and this lets him to get maximum benefit from expected extension of the chosen segment;
• Mixed (either multi-product and mono-clients or mono-product and multi-clients). Bank either takes into account its present competitive advantages or focuses on one type of clients giving them wide range of services or it provides wide range of clients with one type of service. This choice is explained by the difficulty of identifying fast-growing narrow niches or by ineffectiveness of trying to embrace the unembraceable. 

     Universal strategy was the main field for competition among Kazakhstan and foreign banks at pre-crisis period. Approximately ¾ of foreign banks’ aggregate assets were held by banks following this strategy in Kazakhstan.  As time went by more and more foreign banks chose the strategy. Among Kazakhstan banks this strategy was most popular as well. As a result presence expanding of foreign banks was accompanied by strengthening of competition with Kazakhstan private banks and mild crowd out of the latter including market of basic banking products and services for mass client. During pre-crisis period foreign banks primarily were sources of capital inflows to Kazakhstan market. For most of them net investment from abroad became important source of active operation funding for internal markets. It made the process of their expansion responsive to instability on foreign financial markets.

During the crisis period universal strategy oriented on standard products and wide range of clients may become inefficient. Mass markets are most inclined to contagion effects.

     Banks with foreign capital which took universal strategy probably will have to choose among next decisions.

• «Freezing» expansion to internal markets, using funds accumulated on internal markets for net capital outflow to external markets (including support of the parent companies).  
• Return to specialized and combined strategies, e.g. more active positioning as banks working with multinational companies doing business in Kazakhstan and with Kazakhstan business owned by foreigners.

     New conditions will give Kazakhstan banks some respite from fight for borrowers with foreigners. At the same time fight for depositors and corporate clients may get tough.  [5]

     ATF bank, as a foreign bank made a strong strategy on its development. In the main directions of the bank's fixed strategy to achieve general goals, the main directions of its activity the Bank's lending strategy has been implemented in the reporting year, the two main lines of lending: lending to large businesses, and lending to small and medium businesses, focused on the implementation of consumer goods and services.

     One of the strategic objectives of ATF Bank in 2007 continued to be a further development of lending to small and medium enterprises of the Republic of Kazakhstan, which was manifested in the facilitation of the review, approval and issuance of loans to create multi-level decision-making, increase efficiency making and improving the quality of loan portfolio management, diversion of the modified on subjects of credit relations, industry sector borrowers, the loan term and type of security provided. This problem was solved by careful pre-screening of credit applications, a comprehensive analysis of borrowers and credit transactions, continuous monitoring of changes in financial position of borrowers throughout the loan period, to identify early signs of problem loans, and work on their maturity, as well as by the existing system of risk control at each stage of the credit. Expanding the resource base has allowed the Bank is increasingly oriented to lending to the real economy. The growth of lending to the real sector of the economy caused by a combination of factors. On the one hand, this increase in demand from enterprises for loans to finance productive activity for the acquisition of fixed assets and working capital. On the other hand, this increase in credit supply due to the competitive environment in the banking market, expanding the scope and urgency of increasing the resource base of the Bank, reducing the systemic risk of lending to real sector enterprises in the relatively stable macroeconomic situation.

     In 2007, the largest proportion of loans accounted for spheres: construction, wholesale trade, real estate and food industries, because of long-term credit policies in terms of portfolio diversification across different sectors of the economy. The basic principle of interaction with the Bank's corporate clients is to create long-term mutually beneficial relationship and full satisfaction of banking services at the highest level.

     ATF is positioned on the financial market, retail business, as the largest universal bank offering the widest range of financial products and services throughout the Republic of Kazakhstan. Among them - the traditional deposit accounts, consumer, mortgage and car loans, servicing credit cards and more. This corresponds to the strategy of the Bank's activities in the development of retail business, a key element of which is the creation in all regions of the country's network of retail centers in which to introduce a single standard of service that offers its clients a wide range of high quality financial services. At present, in all branches of the Bank's standardized food bank and introduced a number of common competitive rates. According to the results of changes in the composition of the founders in 2007, ATF Bank has been able to offer its customers the highest quality of service level and is constantly working on improving existing products and services for compliance with European standards of quality.[9]

     In 2007, the Bank  improved the program of lending to individuals. The Bank currently provides loans to individuals:

• To purchase real estate;
• For consumer purposes, including: the purchase of cars, consumer durables, education, treatment, celebrations, holidays, repairs and other purposes.

     It should be noted that in order to make loans more accessible to the public, the Bank is conducting a proactive policy of lowering interest rates and extend credit on loans to the population as a whole was carried out on the market of consumer loans. During 2007 a number of activities to implement the program of lending to individuals: the introduction of new products, implementation of joint programs with the construction companies . We can see some positive and negative factors of work and development of ATF bank.

     Positive factors:

     • good business opportunities in the domestic market;

     • more dynamic and competent than the other Kazakh banks, the management team;

     • well-developed system of risk management.

     Negative factors:

     • rapid growth in outstanding loans against the backdrop of high external risks;

     • increased concentration of the resource base and loan portfolio;

     • declining profitability;

     • minimally adequate level of capitalization.

     The ratings of Kazakhstan's ATF Bank  is determined by the rapid growth of credit portfolio of the bank against the backdrop of high external risks, increased concentration of its resource base and loan portfolio, declining profitability and minimally sufficient level of capitalization. The negative effect of these factors partially neutralized good commercial position of the ATF in Kazakhstan, as well as the availability of a dynamic and competent management team and well developed risk management systems.

     The fact that in the past three years, the volume of loans issued by AMB, has increased by an average of 92% per year, the bank is exposed to risks associated with a possible recession. However, in the medium term, this decline is not expected. ATF bank  operates mainly with corporate clients and slower than other domestic banks, developing retail activities, the business has high concentration on the individual contractors. Standard & Poor's believes that the increase in business volumes will contribute to improving the profitability of ATF in the medium term. Regular contributions to the shareholders, as well as the capitalization of retained earnings can support the capital at a level ensuring business growth rates.

     ATF strategy involves not only preservation of a strong position in the segment of banking services to corporate clients and the expansion of financial advisory entities, but also the development of services for customers. It is not excluded that the ATF  will buy  new assets, but in the Kazakh market, he plans to grow primarily by organic growth. According to the strategy of bank  after five years the proportion of assets located in other CIS countries, should reach 15-20% of the total value of its assets.

     According to Standard & Poor's, the bank is well positioned to implement its expansion strategy in the medium term, as he has the necessary infrastructure, professional and experienced management team and staff, and a well-developed methods and procedures for risk management. Although ATF is able to increase its market share at the expense of crowding out smaller players, it will be difficult to bridge the gap between himself and the three leading banks. To achieve medium-term strategic goal - to become one of the largest banks in Kazakhstan and expand operations in other CIS countries - it requires a significant infusion of capital, additional professional experience and advanced technologies.

     Weak point of ATF is very prominent in its profile of risks is credit risk. The reasons for this risk lie in the peculiarities of the Kazakh economy, as well as a weak credit culture and people. Concern is the high concentration of ATF in the loan portfolio of individual borrowers and sectors, as well as a significant percentage of foreign currency loans. On the other hand, asset quality supported by factors such as sustained economic growth and the trend towards facilitation of credit protection and improve the repayment of loans issued.

     For all the boldness of its strategic objectives of the bank adheres to a conservative lending policy and the choice of borrowers. All loans are granted to corporate clients at the head office. Approval process for loans to individuals and SMEs, carried out mainly in the branches, standardized and occurs with the participation of staff of risk management and collateral inspectors from the relevant branches

     The system for managing market and operational risk management is well developed - in this respect ATF  stands out against other Kazakh financial medium-sized organizations. Bank reduces interest rate risk by limiting the positions at risk and the calculating lending limits with technology Value-at-Risk (VAR), as well as hedges its operations through non-speculative nature. Most loans and deposits are at fixed interest rates, and a small portion of retail loans with floating rate financed using subordinated debt, indexed to inflation. However, as the average maturity of loans issued increased level of interest rate risk. The Bank implements the methodology of calculation of duration for all classes of assets and liabilities.

     According to the whole banking system of  Kazakhstan we can say that rating agency Moody `s Investors Service has left the forecast of the banking system of Kazakhstan at the level of " negative ". The agency believes that banking system is still has many serious problems with this view and agree to Kazakhstani experts.

     According to the agency, the decision was taken due to a poor level of reserve funds and low capitalization of domestic banks, as well as the complexity of access to wholesale capital markets. This is despite the fact that the economy is showing signs of improvement, the agency predicts GDP growth in Kazakhstan at the level of 2,8% this year, compared to 1,2% in 2009, Kazakhstan's banking system remains vulnerable. [10]

     Ratings agencies are based on the fact that, in it’s opinion, the current level of problem loans is 40% of total loans, as well as on expectations that the majority of problem loans final loss reached 60% of the unpaid balance. Overall, this assessment can agree: Kazakhstan's banking system is really experiencing now is not the best time.

     The deputy director general KzRating Denis Rybalkin says that Kazakhstan's banking system is really experiencing and it is not the best time to it.  This happens because of disparity of development and the impact of the global economic crisis. The problem of low capitalization and poor the level of redundancy in the present really exists. He not dramatize the question of lack of foreign funding and Kazakh banks are not experiencing a liquidity shortage. Denis Rybalkin think that  the demand for bank loans is not low, the economy is still in need of credit resources. The first reaction of banks to deteriorating loan portfolio has stricter requirements for borrowers. It is a vicious circle: the companies in need for development funds, can not get money in banks, banks also can not find good clients. The situation in banking system of Kazakhstan is still far from normal, however, positive trends I have mentioned, in the medium term can make a difference for the better.

     Trader of  “Central Securities”  Denis Kim think that now deteriorating quality of loan portfolio, provisions are still charged. Also there are problems with capitalization, it is a small problem, but it exists. A huge problem is a lack of long-term funding, placing bonds in recent years was not, while only paying for them. There is a deposit base, but increase it substantially does not happen. Now there is excess liquidity, but it is insufficient to fully deploy the new lending program, the fact that it is suitable only for operating on short-term instruments.

     Sabit Hakimzhanov, director of research of “ Halyk Finance” believes that this estimate reflects the state of development prospects of the banking system in the next 2-3 years. He said that demand for bank loans now is down, but  he added that there also exists, and unmet need. That it transformed into a high-quality demand, it is necessary that the debt to the banks of the population has declined by 10-15%, and that there are new companies capable of making these conditions.

     The Agency believes that the second tier banks will be limited to making profits. In the short term, the ability of banks to increase their loan portfolios will be hindered low demand and lack of good borrowers. The agency also added that the liquidity of some big banks remain vulnerable due to heavy reliance on short-term funding from a small number of public or quasi-state companies.

     Thabit Hakimzhanov told that after the losses in 2008 and 2009, large banks are either unwilling or unable to lend. Expectations of growth in lending in the first half did not materialize. Gross lending in the economy fell by 3%. Net loans decreased in almost all major banks, for than Bank Center Credit. He admitted that some second-tier banks in the first half of 2010 increased its loan portfolio by 10-20%, but they all have much better portfolio quality and greater stock of capital and a more reliable funding than the average for the system. Their loan portfolio by the end of the year may still grow, but at the sector and the economy, this growth will not have much impact. On the whole sector, he does not expect significant growth in lending due to a lack of borrowers with good credit risk due to lack of capital, without which it is impossible to turn liquid assets in loans, and partly because of lack of banks' long-cheap money.