Kazakh Bank’s American CEO Sees Need for Bailouts of Lenders

  • Holtzman seeking turnaround with backing from new shareholder
  • New CEO says bank suffering from ‘actions not taken’ in 2008

Marc Holtzman, the American jack-of-all-trades brought in to turn around Kazakhstan’s largest lender, has big plans for Kazkommertsbank JSC. Starting with a cleanup.

Kazakhstan needs to tackle the large stock of soured loans that are burdening banks, said Kazkom’s new chief executive officer, who has been discussing options with top officials.

Marc Holtzman

Source: Kazkommertsbank

“I predict there will be some recognition of this by the government in the coming months,” he said.

Holtzman, 56, takes over as rating companies question Kazkom’s survival without a capital injection. His comments are the first open admission by the bank that it needs further help in sorting out bad loans. The government already restructured and nationalized three of the largest lenders during the financial crisis and took stakes in others, including Kazkom.

A systemic institution, Kazkom controls more than a fifth of deposits and processes 65 percent of bank card transactions in Central Asia’s largest economy. It had 5.1 trillion tenge ($15.2 billion) in assets as of May 1, about 21 percent of the total in Kazakhstan.

“We are suffering right now from actions that were not taken in 2008 and 2009” to deal with bad loans, Holtzman said in an interview at the bank’s headquarters in Almaty. The building, surrounded by dust-barren fields, was designated as the site of the city’s future financial district under a plan presented to the government in 2007. Like other landmark real-estate projects in pre-crisis Kazakhstan, the $6 billion complex of 80 office buildings never materialized.

Spain, Irish Models

The crisis left this former Soviet republic holding one of the world’s biggest piles of bad loans -- as many as one-third of the country’s loans have soured. Graft has been pervasive in banking, with every seventh borrower saying they paid a bribe to secure a loan, according to a 2012 poll conducted by Sange Research Center in Almaty. The company hasn’t produced a survey since then.

Eight years on, failed assets are a growing worry as the economy stagnates under pressure from low commodity prices and the recession in Russia, its main trade partner. The region’s biggest oil exporter with vast mineral reserves, Kazakhstan switched to a free-floating exchange rate last year to help it cope, weakening the tenge and exposing banks to losses on foreign currency loans.

Holtzman, a vice chairman at ABN AMRO Bank NV before it was nationalized in 2008, was appointed CEO in April as his predecessor left. At the time, he was serving as Kazkom’s chairman, a position now occupied by the new majority shareholder, Kenges Rakishev, 36, the son-in-law of the defense minister. Holtzman came to Kazkom from Meridian Capital HK, a Hong Kong-based private equity firm and also served on the board of Kazyna, Kazakhstan’s state-development company.

While corporate clients, including developers, have been the backbone of Kazkom’s business, the bank now wants to focus on consumers and smaller companies and may also expand into Islamic finance in this predominantly Muslim country. Kazkom, still 11 percent state-owned, also may sell minority stakes to potential partners in China, Japan, Central Europe and Iran as early as 2018 to support President Nursultan Nazarbayev’s goal of creating a regional financial hub, Holtzman said.

The bailouts in post-crisis Ireland and Spain could serve as a model for Kazakhstan to work through the bad debt, he said. Those countries set up bad banks to offload failed assets and recapitalize broken lenders with external aid from Europe. Kazakhstan has already borrowed $1 billion each from the Asian Development Bank and the World Bank just to cover this year’s budget gap.

"The government could study those models and the result could be a very positive outcome," he said. It could result in a "much more diversified shareholder base for all the banks" and "a big boost" for the country’s capital markets.

Kazakhstan’s state-run single pension fund holds 7 percent of its investments in Kazkom’s debt, shares and deposits as of May 1, according to the fund’s data on its website.

Rating Downgrades

S&P Global Ratings last month lowered Kazkom’s long-term credit rating from B- to CCC+, deep in junk territory, citing its 2015 net loss, the weak environment and the large number of problem assets. While Kazkom’s liquidity and capitalization appear to assure its short-term survival, the bank is increasingly vulnerable in the long term, S&P said.

Annette Ess, a Frankfurt-based credit analyst at S&P Global Ratings, said factors in the government’s decision on whether to support Kazkom would include whether the bank’s default would hurt its own ability to raise money and that it could cause panic and trigger runs on other lenders. Kazkom, with 265 branches in 59 cities, is one of 35 lenders in the country.

Kazakh authorities would probably not provide support to Kazkom in an amount that would be sufficient to avert losses for senior creditors, Roman Kornev of Fitch Ratings said by e-mail.

“Moderate state financial assistance and regulatory flexibility in recognizing impairment losses can support the bank’s operations in the medium term,” Kornev said. Fitch downgraded the bank earlier in the year, saying Kazkom will probably need outside capital support or a restructuring to restore solvency, possibly both.

In a show of strength after the S&P rate cut, Kazkom said it would spend as much as $500 million to buy back three notes falling due in coming months. Just $35 million was redeemed, leaving about $4 billion in outstanding debt, according to data compiled by Bloomberg. Rakishev said then that Kazkom didn’t need capital but that he would support the bank “as a shareholder” should the issue arise. The central bank said in March that lenders have adequate capital for now.

Kazkom’s euro-denominated bonds due February 2017 trade at 97.50 cents on the euro, yielding 10.69 percent on Wednesday, according to data compiled by Bloomberg. The bank proposed to buy those bonds at 980 euros per 1,000 euros in principal. The lender’s Dec. 2022 bonds fell for the first time in five days on Wednesday, lifting the yield 10 basis points to 12.50 percent.

New Shareholder

Rakishev gained a foothold in Kazkom in 2014 when it bought BTA Bank, a twice-defaulted nationalized lender. Over the past year he built a 71 percent stake as founder Nurzhan Subkhanberdin reduced his position.

Kenges Rakishev

Source: Kazkommertsbank

Rakishev belongs to a new generation of entrepreneurs who want to use new technology to expand banking services, Holtzman said. He is a majority shareholder in SAT & Co., a Kazakh industrial conglomerate, and owns 13 percent of Net Element Inc., a Miami-based technology company specializing in mobile payments.

Holtzman, who remains chairman of Rwanda’s Bank of Kigali Ltd., is the first foreigner to head a major domestic bank. He served as the executive director of Citizens for America, former President Ronald Reagan’s national issues advocacy group and was a candidate for the Colorado governorship in 2006.

Kazakhstan’s president gave Holtzman some advice when they met at an economic forum last year.

"‘You have my full support. Don’t let anyone get in your way,’” Holtzman recalled Nazarbayev saying. "‘And if you have any problems, come to me. I want this bank cleaned up.’"

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