Global Insight Perspective | |
Significance | The establishment of a stressed asset fund has been anticipated for some time, although the fund's capitalisation is much lower than expected. |
Implications | This marks a further step in official policy to contain the banking crisis. |
Outlook | The authorities are actively seeking solutions to the banking crisis in Kazakhstan, and although no immediate outcome is yet apparent, the measures taken recently should promote stability and confidence. |
Plans for the creation of a fund to buy stressed assets from banks, and thus to alleviate some of the strains appearing in the banking sector, were first announced in July 2008. Since then a few more details have appeared (see Kazakhstan: 24 September 2008: Finance Minister of Kazakhstan Reveals Plans for Additional Financing of Distressed Asset Fund), although the current announcement indicates a much lower level of initial capitalisation, of US$430 million, than the US$1 billion originally indicated by the government. It was also originally intended to attract private investors, including commercial banks themselves, to increase the size to US$5 billion. A number of factors have arisen in the intervening period that appear to have led to the original plans being modified. Investment conditions on domestic and external markets have worsened further since July, making it unlikely that private investors would be attracted to the fund, and the government has recently announced separate plans to recapitalise the major banks by taking equity stakes of up to 25%. This in theory puts the banks in a stronger position to absorb any losses arising from non-performing loans and thus reduces the need for substantial investment in the new fund. It is also possible that the scale of the problem of stressed assets may have been overestimated and that a smaller fund may be deemed to be sufficient to meet current needs. This seems unlikely, however, as all indications have pointed to further deterioration in asset quality throughout the banking sector. It seems probable that additional capital may have to be injected into the new fund if it is to be able to absorb all the non-performing loans that the government ultimately has to purchase.
According to FSA chairwoman Yelena Bakhmutova, the fund intends to buy from banks doubtful loans that require provisions of 20% or 50% and are secured by any type of real estate including commercial, residential, or development land. The discount to be applied to the book value of these loans is currently being discussed by the banks and the government, but it is thought this could be set at 10%—although in view of market conditions this seems quite low and a higher discount may be imposed on the banks. The FSA reports that approximately US$3 billion of total banking sector loans fall within the targeted loan categories, out of total loans of US$67 billion net of provisions as at end-2007. The figure of US$430 million as the capitalisation for the new fund may have been based on the sum of US$3 billion net of provisions and collateral values, although stagnation in the real estate market suggests that collateral values may not be realised for some time and so the size of the fund may have to be increased.
The government has also announced that commercial banks now intend to ease pressure on household mortgage borrowers who may be experiencing difficulty in servicing mortgages. Rescheduling of loans may be made easier to enable banks and borrowers to avoid the need for foreclosure, although this will apply only to individual "non-speculative" borrowers and not commercial businesses renting out property. This decision follows closely the announcement last week of government capital injections for the banking sector, although this was supposedly not to be accompanied by government involvement in the management of the banks concerned.
In a separate FSA announcement, capital adequacy norms are to be increased within the next three months, although it is not yet clear by how much and to what levels. The banks involved in the government's recapitalisation plans last week were all strongly capitalised under current international standards, with Tier 1 ratios ranging from 10.3% for Halyk Bank to 18.0% for Alliance Bank. Whereas until recently these would have been seen as high compared with the international minimum Tier 1 ratio of 4% (which had already been superseded by market-imposed requirements for higher levels), what should be regarded as acceptable in current conditions is still open to debate in financial centres around the world.
Outlook and Implications
The continuing flow of announcements of new measures from the government and the regulator indicates that the authorities are determined to contain what is still a deteriorating situation and to restore stability and confidence to the financial market in Kazakhstan. In this they are taking their lead in many respects from developments in Western markets, thus the final outcome and nature of these stability measures will not be apparent for some time. But the underlying direction is clear, in that the government and the regulator are actively seeking solutions themselves.