AO Alliance Bank, the first Kazakh lender to default in 2009, plans to transfer as much as $1 billion of bad loans to a special-purpose vehicle to help cover a capital shortfall as it looks to revive lending and cut costs.
“We expect positive capital under international financial reporting standards, but not enough to comply with Basel rules,” Chief Executive Officer Maksat Kabashev said in an interview yesterday in Almaty, where the bank is based. The “big task” is plugging a gap of about 26 billion tenge ($173 million), he said, adding that the lender has a capital surplus under Kazakh accounting standards.
A collapse of property prices three years ago saddled Kazakh banks with billions of dollars in delinquent loans, triggering defaults and forcing the government to take over Alliance, Temirbank and BTA Bank. The nation’s 37 percent share of non-performing assets is the highest of 50 emerging-market banking systems tracked by Fitch Ratings.
The sovereign wealth fund Samruk-Kazyna is discussing a merger of Alliance and Temirbank, both of which issued new bonds and offered shares and cash to creditors in 2010 after writing off and extending payments on some of their debt. The Kazakh government will probably refrain from injecting more capital into banks after deploying the equivalent of 8 percent to 9 percent of economic output since 2008 to shore up the industry, Fitch said yesterday.
Loans overdue by more than 90 days at the country’s 38 banks reached 3.5 trillion tenge of Oct. 1, led by defaulted BTA with 1.5 trillion tenge, central bank data show. In April, the central bank created a “problem-loan” fund to remedy strains in the financial industry and said it was planning a pilot project to buy non-performing assets from commercial lenders.
Alliance probably “won’t be able to make a profit next year that will allow it to cover the capital shortfall,” Kabashev said. It plans to earn 2.3 billion tenge this year and predicts net income will be “no worse” next year, he said.
The bank projects its “good” loan holdings of about 300 billion tenge will grow 10 percent next year, according to Kabashev. The bank will continue to focus on lending to individuals and small and medium-sized businesses, using online services as a new means to cut costs, he said.
Alliance plans to transfer about half of its toxic loans to a special-purpose vehicle, or SPV, a move that will allow the lender to take non-performing assets off the books and release 50 percent of provisions, Kabashev said. The bank must set aside cash equal to 10 percent of a bad loan moved to the SPV every year until it’s fully covered if asset quality doesn’t improve, he said.
The bank may also put up more cash against under-provisioned bad loans and move them to the SPV, Kabashev said.
Alliance’s move to offload bad debt follows similar steps taken by Kazakhstan’s two biggest lenders, Kazkommertsbank and Halyk Bank. Halyk said in August it planned to move about 4 billion tenge of bad loans to an SPV, while Kazkommertsbank said this month it will form two entities to manage industrial assets and commercial and residential real estate.
Kazkommertsbank didn’t say how much it will transfer to the SPVs, which were allowed by the financial regulator to help banks manage toxic loans.
A merger with Temirbank, which has a capital surplus of about 30 billion tenge, will result in the “No. 1 retail bank” with positive capital, Kabashev said. He didn’t elaborate on the details on a possible merger, adding that the issue “will become clear” by the end of the year.
Samruk-Kazyna holds the government’s 67 percent of Alliance and 79.9 percent of Temirbank after the banks were brought under state control in 2009.
Alliance may try to sell debt only after accumulating sufficient capital, Kabashev said.
“We have some expensive bonds, which must be bought back,” he said. “The question is what will replace them.”