Kazakh banks 22 Oct - Renaissance Capital

Kazakh banks Blessing in disguise

Alexey Bulgakov +7 (495) 725 5229 [email protected] Alexey Moisseev +7 (495) 258-7946 [email protected]

Fixed income research 22 October 2007

Banking Kazakhstan

Gradual recovery. Grigory Marchenko, the president and CEO of Halyk Bank and the former governor of the National Bank of Kazakhstan, has said that the current liquidity squeeze could serve as a “blessing in disguise” for the whole Kazakh banking system. We concur with this view and believe that the banks, over the medium term, are likely to recover from the current shock, slowing growth rates to emerge as more domestically focused institutions. However, over the short term, we are likely to see some pricing volatility.

Recent rating downgrades served as a late warning. Very little news about developments in the local banking system has come out of the country until recently therefore recent rating downgrades provided investors with a valuable external assessment of the situation.

The refinancing situation of the individual banks (within the top six) appear to be manageable on a standalone basis: (1) most have already managed to refinance part of their short-term debt through syndicated or bilateral loans; (2) all banks report a balanced asset/ liabilities maturity profile and many state that they are preparing repayments of due loans from gradually matured assets. However, we believe the signs of funding redistribution within the system are worrying.

Industry recapitalisation appears to be on the cards and will likely be assisted by state support (the announced creation of a state property fund) and support from current shareholders, actively fostered by the authorities.

New large-scale issuance is unlikely. Whatever the outcome of the current situation (i.e. either a ‘hard’ or ‘soft landing’), it could be taken for granted that the country’s banks will receive external funding in the volumes necessary to cover their refinancing needs, but would see little new money.

The purpose of this report is to present different views, as discussed by investors, exploring the subject.

Figure 1: Real estate exposure of local banks – state should help Figure 2: Redistribution of local funding base is a concern

0.00.51.01.52.02.53.03.54.04.5

BTA

KKB

Allia

nce

CCr

Halyk AT

F

Temi

r

Nurba

nk

Casp

ian

AstF

in

Loan

s to

con

stru

ctio

n/ e

quity

18.0% 22.8% 21.0%

18.7%17.5% 24.4%

19.0% 19.2%18.5%

10.8% 11.0% 9.4%11.2% 9.6% 7.0%6.7% 8.7% 8.9%15.6% 11.2% 10.8%

0%

20%

40%

60%

80%

100%

Dec. 06 June 07 Sept. 07KKB Halyk BTA CCr Alliance ATF Other

Source: MSCI, Bloomberg Source: FMSA, Kazkommertsbank, Renaissance Capital

Important disclosures begin on page 42. This research material is released by Renaissance Securities (Cyprus) Limited. Regulated by the Cyprus Securities & Exchange Commission (License No: KEPEY 053/04).

22 October 2007 Kazakh banks Renaissance Capital

2

Investment summary 3

A. Macroeconomics 3 B. Refinancing and funding base 4 C. Asset quality and recapitalisation 5 Recommendations 7

Macro backdrop 8 Problem 1: Too much external debt 11

Local money markets 13 External funding – appears to be too much 13 Rebalancing of funding structure – what are the options? 15 Rating agencies 16 Equity view – a very important angle 18 Impact on M&A activity 18 ATF bank – a special situation 19

Problem 2: Short-term refinancing 20 Assessment of short-term refinancing requirements 20 Refinancing – still available, but in limited volumes 21 Redistribution of deposit base – Halyk benefits, small banks lose 22 Corporate deposits 25 Other factors that can potentially distort refinancing schedules 26 A. Covenants of syndicated loans 26 B. Bond buybacks 26 Liquidity and funding assessment of individual banks 26 A. Kazkommerzbank 27 B. TuranAlem and Temir 28 C. Alliance Bank 29 D. ATF 30 E. Halyk Bank 31 F. Centercredit 31 G. Caspian 32 H. Astana Finance 33 NBK as the lender of last resort 33

Problem 3: Asset quality 35 Potential remedies 38

Verbal interventions 38 Liquidity support 38 Rebalancing of funding base 38 Asset quality and potential recapitalisation of the sector 40 1. Creation of a state-controlled construction fund 40 2. Other forms of real estate refinancing 40 3. Increase of allocations of local pension funds 40 4. ‘Assets go home’ 40

Appendix I: Summary financial statements 41 Important disclosures 42

Contents

Renaissance Capital Kazakh banks 22 October 2007

3

Kazakhstan’s financial sector is significantly exposed to the increasing price and declining availability of credit. Banks are exposed to the recent trend of rising credit spreads on both the funding and asset sides of their balance sheets. Within emerging markets, the Kazakh banking sector is one of the more exposed on the liability side of the balance sheet, given sector-wide dependence on international credit for funding. This perception of market participants is captured in the current level of credit spreads.

Figure 3: Credit spreads widened by 250-300 bpts from mid-July levels

100

200

300

400

500

600

700

800

900

1000

06/2007 06/2007 06/2007 07/2007 07/2007 08/2007 08/2007 09/2007 09/2007 10/2007

pbs

Alliance 5Y ATF 5Y BTAS 5YBCC 5Y Halyk 5Y KKB 5Y

Source: Bloomberg

Figure 4: Moody’s ‘official’ and ‘market implied’ ratings show significant discrepancies Senior unsecured rating Market implied rating Difference, notches KKB Baa2 B3 7 Bank TuranAlem Baa3 Caa1 7 ATF Ba1 B2 4 Halyk Savings Bank Baa2 Ba3 4 Centercredit Ba1 Caa1 6 Alliance Ba2 Caa3 7 Temirbank Ba1 Ca 9

Source: Moody's, Renaissance Capital estimates

The situation in the Kazakh banking sector can be viewed from three different angles: (1) macroeconomic fundamentals; (2) short-term refinancing and redistribution of funding; (3) high probability of impairment of a substantial part of local assets and adverse impact on the capitalisation of the banking system.

A. Macroeconomics The country’s current account deficit is a major structural problem (resulting

from significant outflows of direct investment interest). In 1H07, Kazakhstan’s current account deficit was $2.0bn; other things being equal, we estimate that the full-year current account deficit is approximately $6bn.

We believe the NBK will aim to maintain nominal exchange rate stability in the short term, even at the cost of spending reserves. Basically, considering the current rate of reserve spending ($1.0-1.5bn per month), we think that the NBK will continue to intervene for 2-2.5 months unless access conditions of the local banks to international markets

Investment summary


4

improve (hence intensified communication between the major banks and international investors).

The aforementioned presumes a high probability of attempts to allocate new supply (bonds and syndicated loans) from Kazakh banks by the year end.

If the need arises, we expect the Kazakh authorities to be prepared to revert to foreign financing, which, in our view, will be readily available. In the medium to long term, however, risks for the currency remain in place, and we expect the currency to start depreciating – eventually to much weaker levels in early 2008.

We think that there is a relatively high probability that the government might apply for standby financing from international monetary institutions or to issue a large sovereign bond. If the bid for external financing takes place, then similarly to issuance of a deeply discounted rights issue by a corporate in distress, it should be taken positively by the creditors, since it would assure currency stability and free more reserves to provide support to the banking system.

B. Refinancing and funding base As of the end of June, we estimate Kazakh banks’ short-term external

financial liabilities at $12bn, $4.3bn of which has been refinanced or redeemed. These numbers can be amplified by the redistribution of funding within the system (i.e. individual depositors gradually shifting money from private banks to Halyk or just taking money out of the system).

We believe the large Kazakh banks’ (within the top six) refinancing requirements can be viewed as manageable on a standalone basis: (1) most of them (with the notable exception of Alliance) have already managed to refinance part of the short-term indebtedness through syndicated or bilateral loans; (2) all banks report a balanced asset/ liabilities maturity profile so, in theory, can repay maturing loans from gradually matured assets; (3) owners of several banks and the banks themselves have large identifiable and, potentially, valuable assets outside of Kazakhstan and, in theory, can use them as collateral for/ sources of financing and recapitalisation.

Figure 5: Kazakh banks: Estimated short-term refinancing requirements, Oct 2007, $bn 30 June 2007, <1M 30 June, 1-12M Refinanced in 3Q07 To be refinanced

BTA + Temir 1.0 2.5 1.9 0.6 KKB 2.1 2.6 0.6 2.0 Alliance 0.9 2.2 0.2 2.0 CCr 0.1 1.2 0.6 0.7 Halyk 1.0 0.6 0.4 0.2 ATF 0.6 0.5 0.4 0.0 Caspian 0.2 0.2 0.2 0.1 less repos -4.1 0.0 0.0 0.0 Total 2.0 9.9 4.3 7.6

Source: Company data, Renaissance Capital estimates

Option number (2) from the above is negative from a systemic point of view, since the country needs currency inflow, and the bank borrowing abroad is one of the major sources.


5

Potential payment acceleration events. We believe a number of bank rating revisions is possible from the rating agencies. All straight Kazakh banks’ eurobonds have very limited covenant protection; however, many syndicated loans, especially ones signed recently, might contain rating change triggers and other covenants (Alliance’s comments about a possible violation of its loan covenants has illustrated this point).

Figure 6: Alliance and the smaller banks are clear net losers (30 June – 31 Aug, absolute change)

-25.0%

-15.0%

-5.0%

5.0%

15.0%

25.0%

35.0%

KKB

BTA

Allia

nce

Halyk AT

F

CCr

Temi

r

Casp

ian

Nurb

ank

Eura

sian

Tses

na

Othe

r

Abs

olut

e ch

ange

in re

tail

depo

sits

Source: FMSA, Renaissance Capital estimates

In an emergency, the National Bank of Kazakhstan (NBK) appears capable of providing extraordinary liquidity to one or two large institutions if necessary (we estimate its disposable reserves as of the end of September totalled $13bn); however, it also has to defend the national currency.

Kazakh banks have to substitute a material amount of external funding with domestic funding, and we cannot see any obvious immediate sources for such a substitution as the size of the banking sector has clearly outgrown the development of other country’s financial institutions (such as pension funds and insurance companies).

Over the medium term, we believe the system could readjust its funding structure; however, due to the limited size of available local funding, it would only be at the price of a growth slowdown or even a fall in the aggregate asset base, as the alternatives of domestic funding are quite limited.

C. Asset quality and recapitalisation Most Kazakh banks have a relatively high exposure to real estate and

construction financing (KKB 2.8x equity, BTA 1.8x, ATF 2.4x, Centercredit 2.2x). The banks stopped providing new loans to the industry several months ago, and now there are visible signs of a deterioration in the asset quality.

A large amount of the liquidated collateral can create pressure on the secondary real estate market (additional pressure might come from


6

currency depreciation and many residential mortgages are provided in dollars). If real estate prices decrease materially, the crystallised losses taken from the disposal of collateral might exert a very negative impact on banks’ capital.

The are several ways for recapitalisation of the system if the above scenario is realised: (1) equity contributions from current owners (see the liquidity section); (2) support from foreign shareholders (for banks like Caspian or ATF; (3) a bail-out from the state (the creation of a special ‘state property fund’ with money from the National Fund that would buy out distressed ’nationally important’ property on painful, but excessively so, conditions for the banks.

Figure 7: Loans to construction & real estate as a proportion of the loan portfolio and shareholders' equity

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

BTA

KKB

Allia

nce

Cente

rcred

it

Halyk AT

F

Temi

r

Nurba

nk

Casp

ian

Astan

a Fina

nceLo

ans

to c

onst

ruct

ion/

tota

l loa

ns

0.00.5

1.01.52.0

2.53.03.5

4.04.5

BTA

KKB

Allia

nce

Cente

rcred

it

Halyk AT

F

Temi

r

Nurba

nk

Casp

ian

Astan

a Fina

nce

Loan

s to

con

stru

ctio

n/ e

quity

Source: Company data, Renaissance Capital estimates Source: Company data, Renaissance Capital estimates

With regard to the last scenario, we do not think that external debt holders will be hurt intentionally, i.e. the restructuring terms, if the system goes through this exercise, are likely to be onerous. It seems to us that the reputation of the country and its institutions as trustworthy borrowers is a very important component of the current political/ economic regime.

We do not think that industry consolidation is very likely, since Kazakhstan’s banking system lacks a dominant well-capitalised institution, there are no sizable state-controlled banks and soon there may be a lack of capital in the system.

In the recapitalisation scenario, the best chance for a successful completion of the exercise, in our opinion, is to have large transparent institutions with an established presence on the international markets, which have identifiable valuable assets outside of the country.

From the pricing prospective, we think that the volatility in the sector is not over as we are likely to hear more negative news flow (i.e. KKB remains on Moody’s negative watch, and we believe more negative rating action may follow).

Any sign of debt markets becoming more accommodative to Kazakh debt should be taken positively, as this would help the NBK to keep


7

reserves to protect the national currency. However, sector restructuring (i.e. reduction of foreign activities and shifting funding towards domestic sources) will likely take some time.

Recommendations It is difficult to make a particular pricing recommendation in any tradable

instrument in a volatile sector, and any directional trades should probably be based on momentum. We still believe that the best sign for foreign investors would be a bid from the NBK for external funding and the worst signal would be a gradual decline of foreign currency reserves without immediate action from the authorities.

Under a recovery scenario, putting aside the question of new supply, over the medium term we would prefer to be in the largest banks (KKB, BTA and Halyk); the former two have to materially rebalance their funding mix or history will repeat itself in the future. Of the smaller banks, we favour Centercredit (which, over the medium term, would remain the most attractive acquisition target, in our view). ATF’s credit standing obviously benefits from the pending bid from UniCredit, but the execution risk does not appear to be fully priced in.

As per the unlikely distress scenario – typically, when fears of serious distress intensify, people pay more attention to which bonds are deliverable or not deliverable for settlement of CDS contracts; the pricing premium is applied, of course, to the former category. In the context of Kazakhstan, bonds which are definitely undeliverable under ISDA are (1) all local bonds (Kazakh and Russian); (2) bonds of subsidiaries (for example, those who hedge Temir with BTA CDS at some point will start looking for BTA paper); and (3) all subordinated bonds.

Figure 8: Kazakh banks: Current view, Oct 2007 Issuer Funding and assets Credit view

Kazkommertsbank Larger retail deposit base, also serves many state-controlled entities, but appeared to lose $1bn of deposits in 3Q. High exposure to construction.

Has the highest short-term refinancing requirements

Most transparent and well-known bank on the market. Would likely have state support in case of distress. 3Q accounts show increased proportion of debt on

balance sheet. Should cut foreign presence in order to improve funding structure

Bank TuranAlem Retail deposits appear to be stable, also serves many state-controlled

entities. High exposure to construction. Has materially covered refinancing requirements. Temir appears to have lost deposits

Less transparent intuition if compared with KKB. Would likely have state support in case of distress. Should cut foreign presence in order to improve funding

structure. Has identifiable assets

Halyk Bank An obvious benefactor of the depositors' flight to quality. Increased

market share from 17% to nearly 25% in three months. Conservative lending policies

Clearly the most stable institution in the country. However, if the overall situation develops negatively, it will likely suffer along with the others

Centercredit Well known for its retail and SME business; however, surprisingly, has

many assets in construction and appears to have lost deposits recently. Half of the financial funding is domestic

The market looked at CCr as the next potential acquisition target. All M&A activities in Kazakhstan are temporarily off, but we believe this will return after

the sector recovers

Alliance Highest exposure to external funding. Shareholder support helps, but we do not like the buying out of minority shareholders in the midst of a crisis

The only bank that has not rolled over any syndicated loans

Likelihood of government support is uncertain, but the bank seems to be able to redeem due liabilities from maturing assets. Recent comments from rating

agencies are quite neutral

ATF Relatively high dependence on international lending and high exposure

to construction. However, serves accounts of many state-controlled entities

Pending deal with UniCredit is obviously its strongest supporting factor. However, it appears that some execution risks remain

Caspian For a retail-oriented bank, high dependence of financial funding, substantial part of liabilities is short term

Support from the current shareholder is very positive; however, the bank has to rebalance its funding profile quite materially

Source: Renaissance Capital


8

Small open economies are vulnerable to exogenous shocks. The global liquidity squeeze came as a specific exogenous shock for Kazakhstan, amplifying its own structural problems.

In July and August, Kazakhstan was hit by the global financial turmoil, and has experienced significant capital outflows – a major event given that the country crucially depends on capital flows in order to finance its (widening) current account deficit. Capital outflows were combined with tenge weakening to KZT126/USD, and up to KZT135/USD on the cash market. In August, the NBK lost $1.6bn of its reserves, followed by a $1.6bn decline in September and $0.6bn in the first half of October. This is partially explained by NBK’s interventions to support the tenge.

Figure 9: Change in reserves, capital and financial, and current account in Kazakhstan

-4,000

-2,000

0

2,000

4,000

6,000

8,000

1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07

$mnChange in gross foreign reserv es, eop Capital and financial account Current account

Source: National Bank of Kazakhstan

The country’s current account deficit is a significant structural problem (resulting from significant outflows of direct investment interest in the projects, developed in the framework of production-sharing agreements (over a third of the total oil export value), and the limited ability of the domestic industry to cater for domestic demand, particularly for higher quality goods, as well as for investment needs. The 2Q current account deficit was 7.8% of GDP on a quarterly basis, and we see very little – if any – room for that to decline going forward.

We think that a slowdown in banking asset growth would not significantly impact import growth (45-50% YoY currently), and the only way to remedy the current account situation is to renegotiate all PSA agreements, significantly increasing Kazakhstan’s share – which, in our view, is not doable in the short term. It should be noted that FDI net inflow has essentially stopped – down to $265mn in 2Q from $1.8bn in 1Q, and suspension of the Kashagan licence will likely make matters worse. For a long time, banks were the only channel to finance the current account deficit, through the inflow of capital – particularly in the form of loans, mostly in the short-term segment. This window is now closed. Other things being equal, we estimate that Kazakhstan’s full-year current account deficit will be approximately $6bn.

Macro backdrop

The country is experiencing significant capital outflows

Current account deficit is the major structural problem


9

Over August- September, NBK has been spending reserves to support the currency. This policy is not sustainable. However, NBK has supported the currency in order to (1) allay the population’s fears and (2) protect the local banking system from additional pressure. The NBK has also said that it fears that if devaluation occurs, the dollarisation of the economy will rise again, and will be increasingly difficult to reduce.

Figure 10: Kazakhstan’s current account components

-15,000

-10,000

-5,000

0

5,000

10,000

15,000

1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07

$mn

-8%

-6%

-4%

-2%

0%

2%

4%

6%

8%% of GDP

Other Income Net current transfers Imports, goodsImports, serv ices Direct inv estment interest Inv estment income on credits netEx ports, serv ices Ex ports, goods Current account, % of GDP


We believe the NBK will aim to maintain nominal exchange rate stability in the short term, even at the cost of spending reserves. Basically, considering the current rate of reserve spending ($1.0-1.5bn per month), we think that the NBK will continue to intervene for 2-2.5 months unless access conditions of the local banks to international markets improve (hence the intensified communication between major banks with international investors).

Figure 11: Local currency exhibited material volatility over the past months

117.00

118.00

119.00

120.00

121.00

122.00

123.00

124.00

125.00

126.00

127.00

26/06/2007 10/07/2007 24/07/2007 07/08/2007 21/08/2007 04/09/2007 18/09/2007 02/10/2007

KZT/USD

Source: Bloomberg

NBK spending reserves to support the currency

We think that, all things being equal, this policy can be sustained only over the short term…


10

Afterwards, if the need arises, we expect the Kazakh authorities to revert to foreign financing, including from international financial organisations, which, in our view, will be readily available. In the medium to long term, however, risks for the currency remain in place, and we expect the currency to start depreciating – eventually to much weaker levels in early 2008.

We see devaluation next year to KZT135-140/USD as essentially inevitable, but well within expectations of local investors, so the shock to the economy should not be unexpected. Currency devaluation will put additional pressure on the domestic banking system (higher servicing costs of foreign debt, additional requirements for customers, borrowing in dollars, approximately 50% of all loans to individuals).

. . . and the NBK would have to get external funding if capital outflows are sustained


11

The growth of Kazakhstan’s banking system over recent years has surprised many observers. A large proportion of asset growth was financed by external financial debt and it appears that the market (with the notable exception of Kazakh banks themselves) agrees that the key problem the system currently faces is the very high proportion of foreign funding. Following reassessment of credit risk on the international capital markets, the country’s banks started to experience difficulties rolling over outstanding debt obligations and raising new funds.

The gross outstanding external debt of Kazakhstan’s financial system as of end-June 2007 was reported at $42.4bn.

Figure 12: Funding structure of Kazakh banks, 30 June 2007

$2.9bn, 3.2%

$21.1bn, 23.1%

$30.3bn, 33.2%

$9.6bn, 10.5% $4.1bn, 4.5%

$11.2bn, 12.3%

$12.1bn, 13.3%

Money markets (NBK) Domestic bonds Corporate deposits Retail depositsEx ternal debt - short term Ex ternal debt - long term Capital


Approximately $20bn of the outstanding external long-term debt is represented by outstanding eurobonds, the rest is in longer-dated portions of syndicated and bilateral loans.

We estimate Kazakh banks’ short-term external financial liabilities to be approximately $12bn (see our assessment of short-term refinancing requirements provided in the following sections of this report). These are mostly short-dated portions of syndicated and bilateral loans (see our liquidity assessment in the sections below).

Corporate deposits ($21bn) are another large component of the bank’s funding1. The total probably contains a large proportion of speculative money (Kazakhstan does not have zero-rate double-taxation agreements with any foreign jurisdiction, so back-to-back deposits have been a popular scheme to provide funding for offshore entities for acquisitions of local assets). Some comments provided in the media (e.g. Financial Times) estimate the mid-summer amount of ‘hot money’ in the Kazakh banking system at approximately $7bn. The NBK estimates that, as of the end of June 2007, foreigners directly owned $3.7bn of Ministry of Finance and NBK notes (or 35% of the outstanding volume); in addition, there were $1.5bn of foreign deposits in individual commercial banks. Also,

1 Official statistics, published monthly by NBK, puts the total of corporate deposits outstanding as of end June 2007 at $40.7bn. This amount includes all outstanding eurobonds

Problem 1: Too much external debt

Too much external debt – the major problem of the banking sector

Corporate deposits – essentially a mixture of cash of resource companies, ‘hot money’ and local buy side


12

approximately $2bn of total corporate deposits are accounts of local insurance companies and pension funds. The balance represents deposits and current accounts from companies belonging to resource-oriented sectors and infrastructure (approximately 40% or $8bn of the reported corporate deposits) and consumer-oriented sectors of the economy ($6bn).

Local bonds represent a relatively minor funding component of Kazakh banks due to the relatively small size of the local buy-side base (the total size of the local pension funds’ assets and investment portfolios of insurance companies is approximately $11bn, while the National Fund can invest only in foreign currency instruments) and transactional difficulties for foreign investors, willing to take direct access to the market. We estimate that out of $4bn of local banking bonds outstanding, approximately $3-3.5bn are kept with the local pension funds and insurance companies. It should be noted that all local banking bonds are relatively long term, only 3% of the outstanding notional amount matures in 2007-2008.

Figure 14: Notional amount of local bonds, issued by Kazakh banks, Oct 2007

0

200

400

600

800

1,000

1,200

1,400

1,600

KKB BTA Alliance Halyk ATF CCr Temir Nurbank Tsesna

$mn

Source: KASE, Renaissance Capital estimates

Figure 13: Breakdown of corporate deposits of major Kazakh banks, 30 June 2006, $bn KKB BTA incl.

Temir Alliance Halyk *ATF Centercredit Total, 6 largest banks

Individuals 2.6 2.2 1.0 2.1 0.5 1.2 9.6 Oil, gas and chemical 1.8 0.9 0.0 0.5 0.7 0.2 4.0 Mining and metallurgy 0.1 0.5 0.1 0.2 0.1 0.1 1.1 Transport and communication 0.5 0.4 0.0 0.3 0.4 0.1 1.6 Other 2.9 2.2 1.0 1.9 1.3 1.2 10.5 Total deposits 7.8 6.1 2.2 5.0 3.0 2.7 26.8 Corporate deposits 5.2 3.9 1.1 2.9 2.4 1.5 17.2 Deposits from ‘natural resources’, % of corporate deposits 45% 43% 9% 35% 47% 23% 39% Deposits from ‘natural resources’, % of total deposits 30% 28% 5% 20% 38% 13% 25% Deposits from individuals, % of total deposits 33% 36% 48% 42% 18% 44% 36% * 31 Dec 2006


Local bonds are a relatively minor funding component; new issuance is limited by the relatively small size of the local buy-side


13

Local money markets The NBK currently employs several instruments for provision of additional liquidity to the system.

Repo transactions with banks, with 28-day durations using government securities as underlying assets. Out of $7.0bn of government securities outstanding, approximately $2.5bn are held by pension funds and insurance companies and around $2.0-2.5bn are still probably held by speculative accounts, so the amount of liquidity available to the system through this instrument is $2.0-2.5bn.

Banks can receive liquidity in the form of currency swaps for the currency proportion of the reserves, held at the NBK (KZT500bn out of KZT800bn total reserves) of up to 50% (many Kazakh banks have traditionally funded their reserve requirements with the NBK through taking loans in low-yielding currencies, such as yen). The NBK can supply up to $2.0bn liquidity to the market through this instrument.

The NBK currently provides approximately KZT300bn of liquidity to the system via both of these instruments; this is more than early September (KZT250mn), but lower than during the peak of the currency crisis at the end of August (KZT360-400bn).

External funding – appears to be too much The absolute size of external liabilities of the Kazakh banking segment has doubled over the past 15 months. Kazakh officials and bank representatives, while publicly commenting on the change in pricing of external bonds issued by Kazakh banks, are often quoted as saying they unduly suffer because of the spill-over effects of global liquidity tightening. These comments seem to miss the fact that, the first implications of a very large new supply overhang were first seen in 1H07, when spreads of long-term bonds issued by Kazakh financial institutions widened by 50-100 bpts after huge amounts of primary bond placements and signings of new syndicated loans in 4Q06-1Q07.

Figure 15: New supply overhang was the first factor that affected Kazakh bond spreads

200250300350400450500550600650700750

16 O

ct 20

06

01 N

ov 20

06

20 N

ov 20

06

06 D

ec 20

06

22 D

ec 20

06

19 Ja

n 200

7

07 F

eb 20

07

27 F

eb 20

07

15 M

ar 20

07

02 A

pr 20

07

19 A

pr 20

07

11 M

ay 20

07

29 M

ay 20

07

14 Ju

n 200

7

02 Ju

l 200

7

18 Ju

l 200

7

03 A

ug 20

07

21 A

ug 20

07

07 S

ep 20

07

25 S

ep 20

07

11 O

ct 20

07

Z-sp

read

to U

ST, b

ps

BTAS'15 KKB'13

Spread tighteing, exceptionally good

sentiment

Spread widening after huge offerings of primary issues

M&A talk intesifies, ATF

annonuncement

Liquidity squeeze

Source: Bloomberg, Renaissance Capital estimates

The NBK currently provides KZT300mn of liquidity to the system

External liabilities of Kazakh banking segment doubled over the past 15 months

New supply overhang was the first factor that affected Kazakh banking bonds


14

Overall, in Oct 2006-Mar 2007, Kazakh banks attracted slightly less that $15bn of new external funding, this was approximately equally split between new bonds (all of which were long term) and syndicated loans (a material proportion of which was short and medium term). According to our observations, trading and investment allocations of all types of international investors, who traded in Kazakh issues, reached their limits very quickly, and secondary bond quotes reacted very negatively to any attempt to place external tradeable issues (we can recollect at least three attempts from BTA to make a eurobond placement in spring-summer 2007, all of which led to immediate selling of the outstanding bonds and were unsuccessful). The increased new supply of structurally subordinated bonds (like a large new issue of Temir, a subsidiary of BTA, which offered bonds at 180 bpts spread over BTA itself, or a large subordinated placement of KKB) also affected the secondary pricing quite negatively.

Figure 16: Total debt issuance – outstanding debt doubled within 15 months Figure 17: Net debt issuance – very large placements late 2006 – early 2007

8.7 10.1 12.018.5 21.0

11.713.6

21.4

19.921.4

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2Q06 3Q06 4Q06 1Q07 2Q07

LoansBonds

1.3 1.4 1.9

6.5

2.51.7 1.9

7.7

-1.5

1.5

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2Q06 3Q06 4Q06 1Q07 2Q07

LoansBonds

Source: FMSA, Bloomberg, Renaissance Capital Source: FMSA, Bloomberg, Renaissance Capital

It terms of proportion, however, external funding remained a relatively stable component of the system’s funding base, staying around 45% for the past three years. However, banks’ individual exposures to external funding vary greatly.

Figure 18: External funding as a percentage of total liabilities, excl. shareholders equity, 30 June 2007

67.4%

25.0%

53.7%

64.6%

45.5%

31.5%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

Alliance Centercredit *BTA **KKB ***ATF Halyk

* including Temir ** as of 31 Mar 200 *** as of YE06



15

The highest proportions are observed in banks which are very active internationally (BTA and KKB, which report 38% and 35% of consolidated assets located abroad, respectively) and banks which consciously pursued an external wholesale funding strategy of Kazakh local retail operations (i.e. Alliance).

Rebalancing of funding structure – what are the options? Basically, Kazakh banks have to substitute a material amount of external funding with domestic funding, and we cannot see obvious immediate sources for such a substitution as the size of the banking sector has clearly surpassed the development of other financial institutions.

The current size of domestic buy-side accounts (insurance companies and pension funds) is $11bn (or 12% of the current size of the banking system). Approximately half of their funds are already invested in banking instruments (bonds and deposits), so the increase in allocations of the domestic buy-side – a measure, currently being promoted by BTA and KKB – is unlikely to help in the medium term.

Retail deposits over the past 12 months grew at $300-350mn per month. However, how this will be sustained in the short term is unclear –recent sector statistics suggest a material slowdown in deposit growth. During a recent conference call, KKB suggested that customers take cash to buy real estate; they also might take cash to repay bank loans if rollovers were not easily available.

Short-term dynamics of corporate deposits is unclear – on the one hand, there is no reason to assume that transactional balances of the country’s resource companies (40% of corporate deposits) will be reduced; however; a material proportion of the ’hot money component’ creates uncertainty. Foreign speculative money, invested in Kazakh government securities, is positioned with a view of currency appreciation (which we do not support) and we might see further contraction here.

We think it is probable that the system will be able to readjust its funding structure towards more balance over the medium term; however, it would only be at the price of a slowdown in growth or even a decline in the aggregated asset base, as the alternatives of domestic funding are quite limited.

Figure 19: Local sources of funding appear to be limited

Sources of funding Estimated volume of inflows, 12 months, $bn Comment

Retail deposits 2.0-3.5bn

Retail deposits have been growing by approximately $300mn per month over the past two years. May slowdown as banks reduce lending programmes, people will pay back from savings. Also, we see evidence of a redistribution of the deposit base

Increase of allocations of local pension funds plus new money

0.5-1.5bn

The measure is lobbied by BTA and KKB; total assets of local pension system are $9.0bn. Note: pension

funds are already keeping 50% of their assets in local corporate bonds and bank deposits. Seem to be

opposed by Halyk’s Marchenko

Corporate deposits 0.0-2.0bn Difficult to estimate; over the past two years have been

growing by approximately $500mn per month, but probably two-thirds of this was speculative capital

Source: Renaissance Capital

The banking system seems to have surpassed other domestic financial institutions

Material changes in the funding structure are feasible, but in the medium term


16

Rating agencies All three major international rating agencies have traditionally assessed the Kazakh banking system and individual banks in the context of benefiting from being located in a country whose economy is strongly exposed to international commodity prices (which remains obviously a very positive factor), and benefits from the presence of high quality regulatory supervision and a visibly high-quality asset base. High exposure to external funding has been traditionally mentioned as a potential credit-constraining factor (and, actually, was the major reason for Moody’s changing outlook of the country’s largest banks to stable from positive in May 2006); however, until recently, all comments have been moderately worded.

In early October, several rating agencies looked at the implications of the global liquidity squeeze on the Kazakh banking system, resulting in a wave of negatively worded statements, not previously seen with regard to the country’s banks for quite a while. The rating actions caused subsequent critical comments from a number of highly ranked Kazakh politicians, including President Nazarbayev.

In the first week of October, S&P downgraded Kazakhstan’s sovereign credit rating by one notch, together with the ratings of some state-controlled institutions (such as the Development Bank of Kazakhstan). The major reason for the statement was to reflect the adverse situation in the local banking system. The wording of the rating statement was quite negative; in particular, the agency talked about "tighter liquidity conditions” in the banking system and "potentially compromising asset quality", and the initial market reaction to the statement was very negative.

S&P also changed its rating outlook of Bank TuranAlem (rated at BB flat) from Positive to Stable, basically saying that it is probably inappropriate to expect a medium-term rating upside for any financial institution (with the exception of special situations such as ATF, which remains on watch Positive) in a time when the whole banking system of the country is experiencing severe liquidity pressure. The rating action statement presumes that the agency is going to review all individual banks’ ratings after it assess the systemic risks (the review of the sovereign rating is scheduled to conclude within a week, quite a short timeframe in our view). Although no other negative rating action in respect of individual banks followed, it would be reasonable to assume that they are still likely to follow, given that the reason for a sovereign downgrade was problems of individual banks.

Following S&P’s announcement about a then-possible downgrade of Kazakhstan’s sovereign rating, Moody’s put Kazakommertsbank (senior debt currently rated at Baa2, previously the rating had a negative outlook) on negative review, saying, that it will assess the bank’s short-term liquidity position and the “significant possibility of a material deterioration of the bank's loan portfolio quality due to the rapid growth in lending and the high concentration of construction and real estate exposure". Moody’s does not say how large the rating cut might be or when the review will conclude. It should be noted that compared with other rating agencies, Moody’s assigns material weight to the implied opinion of the credit markets about quality of the particular issuer (as manifested by observed credit spreads),

Several negative rating actions in October caused critical political comments

Moody’s review of KKB – probably the most aggressive rating action so far


17

so we would not be surprised to see ratings of major Kazakh banks aligned with ratings of S&P and Fitch.

Figure 20: Moody’s ‘official’ and ‘market implied’ ratings show great discrepancy Senior unsecured rating Market implied rating Difference, notches KKB Baa2 B3 7 Bank TuranAlem Baa3 Caa1 7 ATF Ba1 B2 4 Halyk Savings Bank Baa2 Ba3 4 Centercredit Ba1 Caa1 6 Alliance Ba2 Caa3 7 Temirbank Ba1 Ca 9

Source: Moody's, Renaissance Capital estimates

Fitch revised its outlook of Kazakhstan’s sovereign rating and ratings of Kazkommrzbank, Bank TuranAlem and Halyk (all rated BB+) from Positive to Stable, providing arguments very similar to S&P about BTA (see above). Interestingly, Fitch also said that its credit ratings for all six of the largest Kazakh banks (KKB, BTA, Halyk, ATF, Alliance and Centercredit) are based on the strong probability of sovereign support, and therefore those will be downgraded only with Kazakhstan’s sovereign rating or if individual banks show signs of deteriorating asset quality. We believe the agency means that the state is likely to help the country’s largest banks if liquidity problems arise but does not specify in what form and over which timeframe it expects this support to be manifested. It may also mean that Fitch remains so far the most moderate of all three agencies and we are unlikely to see it make any sudden moves (or provide early warning).

Figure 21: Summary of rating agencies' opinions, Oct 2007 Moody's S&P Fitch Before Oct 2007

Rates senior debt of large Kazakh banks two to three

notches above Moody's and Fitch. However, comments over

the past year suggest the increased attention towards

concentration of funding of all large banks (downgrade of KKB,

BTA and Temir ratings in summer etc). Assigns high

likelihood of state support to KKB, BTA, Halyk and ATF

Quite vague reports, which list all observable factors, putting

stress on the asset side (desirable decrease of loan

concentration) and maintenance of capitalisation; seem not to

treat concentration of funding as material risk. Assigns high

likelihood of state support to KKB, BTA and Halyk

Quite vague reports about individual banks, mentions refinancing risks of some of

them but never classifies as a key factor. Assigns high

likelihood of state support to KKB, BTA and Halyk

Oct 2007 Put KKB on negative review, talks about liquidity and

potential asset impairment because of excessive exposure

to the real estate and construction sectors. So far no

rating action on other banks and no official comments about

Kazakhstan's sovereign rating. Difference between senior debt ratings and CDS/bond implied

ratings of individual banks is four to nine notches

Cut Kazakhstan's sovereign rating over concerns about the

developing situation in the banking system (mentions tight

liquidity and potential imparement of assets). Apart

from reducing rating outlook of BTA to 'stable' has not yet

announced any negative action about private banks

Reduced outlook of sovereign ratings and KKB, Halyk and BTA

to ‘stable’. In subsequent comments said that it is not going to take any action on individual banks because it

assumes a high probability of state support to all banks.

Describes the liquidity position of all banks as “manageble”. Says will review individual ratings only if it sees quality problems on the

asset side Source: Rating agencies, Renaissance Capital estimates

Negative implications of potential rating downgrades of individual banks are threefold:

Fitch will probably refrain from sudden moves for now


18

Informational effect. Any negative (or positive) statement from rating agencies about any large bank will be taken as a confirmation from an independent third party about negative (or positive) developments in the sector. The rating agencies are also aware of the flipside after high-profile political statements about “victimisation” of Kazakh banks.

Technical effect. A material downgrade of a high-rated bank (such as KKB or BTA) might cause a supply overhang from the current holders whose mandate specifies a high credit rating as a necessary investment criterion.

Negative liquidity effect. A number of Kazakh banks’ syndicated loans might have minimum rating requirements. Bond documentation and financial reports of individual banks do not provide details about covenant arrangements for syndicated loans.

Equity view – a very important angle While analysing the current situation in the Kazakh banking system from a credit perspective, it should be noted that, as in any emerging market economy, both equity and debt sides of the same events complement each other. Three Kazakh banks have equity, tradable on international stock exchanges and the rest have been constantly engaged in negotiations with potential industrial partners. We believe that for many institutions fulfilment of equity holders’ expectations is often the priority.

The major driver behind the (until recently) very high equity valuations of Kazakh banks was the expectation of sustainable high growth rates. During our July visit to Almaty, the county’s major banks see nothing wrong in that, forecasting 2008 “moderate” growth rates of 25% pa. Some of them point at the high proportion of loans extended to projects outside of Kazakhstan (KKB and BTA have 20-25% of their loan book outside of the country), but the major argument went along the lines of “as long as we see good demand for financing from our customers we see no reason to worry”.

Impact on M&A activity

When we visited Almaty mid-July, the assumption of the large banks was that toughening regulatory measures will lead to the consolidation of independent smaller players, as the cost of running the business notably increased. Apparently, all of the independent smaller banks were for sale – Eurasian, Tsesna, Caspian (by

Figure 22: Summary of credit ratings of Kazakh banks, 9 Oct 2007 Moody's S&P Fitch Rating Outlook Date last

changed Rating Outlook Date last changed Rating Outlook Date last

changed Development Bank of Kzh Baa1 SO May 06 BBB- SO Oct-07 BBB SO Oct 07 KKB Baa2 NW Oct 07 BB+ SO Feb-06 BB+ SO Oct 07 Bank TuranAlem Baa3 SO Jun 07 BB SO Oct-07 BB+ SO Oct 07 ATF Ba1 PW Jul 07 B+ PW Jun-07 BB- PW Jun 07 Halyk Savings Bank Baa2 SO May 07 BB+ SO Jul-06 BB+ PO Dec 06 Centercredit Ba1 SO May 07 - - - BB- SO Dec 05 Alliance Ba2 SO May 07 B+ SO Oct-07 BB- SO Dec 05 Nurbank B1 SO May 07 B SO Jul-05 - - - Caspian Ba3 SO May 07 - - - B+ SO Sep 05 Astana Finance Ba1 SO Jan 06 - - - BB+ SO Jan 06 Temirbank Ba1 SO Jun 07 B+ SO Nov-06 BB- SO Dec 06 Tsesna Bank B1 SO Nov 04 B- SO Aug-06 B- SO Sep 06

Source: Rating agencies

Assumption of high growth rates – the main contributor to the recent equity valuations in the sector


19

definition, the controlling shareholder is a private equity house, Barings Vostok) and Temir (BTA later publicly announced its decision to sell the bank, saying that it is planning to complete the disposal by YE07, later putting the sale on hold).

Figure 23: Equity valuations decreased materially over the past several months

5.00

7.50

10.00

12.50

15.00

17.50

20.00

22.50

25.00

27.50

02/11

/2006

02/12

/2006

02/01

/2007

02/02

/2007

02/03

/2007

02/04

/2007

02/05

/2007

02/06

/2007

02/07

/2007

02/08

/2007

02/09

/2007

02/10

/2007

$

KKB LI Equity HSBK LI Equity ALLB LI Equity

Source: Bloomberg, Reuters, Renaissance Capital estimates

The current M&A landscape has definitely changed, with equity valuations of the largest tradable bank (once again with the exception of Halyk) down by some 30-50%. For example, VTB representatives said in September that the bank had abandoned its talks about the potential acquisition of an unnamed Kazakhstan-based mid-sized bank. In mid-June, we think that all Kazakh mid-sized banks had been engaged in active talks with potential foreign buyers. However, it seems very likely that in the current environment all negotiations are temporarily off. BTA’s decision to put the disposal of Temir Bank on hold also illustrates this.

ATF bank – a special situation

At the end of June, Italian banking conglomerate, UniCredit, announced that it had reached a deal with the common equity holders of Bank ATF to purchase 100% of the bank at approximately $2.3bn. The deal is scheduled to conclude by the end of 2007, subject to regulatory approval. While waiting for the deal to close, ATF enjoys quite healthy liquidity support from the parent-to-be and, along with Halyk, sees considerable inflow of private and corporate deposits. UniCredit’s CEO publicly stated mid-October that his bank intends to complete the transaction.

However, we think it is obviously facing some execution risks here. It will be reasonable to assume that, seeing a material correction in sector asset prices, UniCredit might be willing to renegotiate the pre-agreed price. Also, the lasting dispute between common and preferred equity holders about the conversion ratio does not help as the conflict might increase the timeframe for completion of the deal thus increasing execution risk.

All M&A deals seem to be temporarily off


20

The ability of Kazakh banks to refinance their financial liabilities in an orderly manner in the difficult conditions on the international capital markets is viewed by many investors as the major short-term problem currently faced by the Kazakh banking system. It should be noted that, due to the sustained negative dynamics of the current account, re-opening access of the local banks to foreign funding is a task of paramount political importance. Improved conditions of access would help to improve the country’s balance of payments and prevent NBK from bidding for external liquidity.

Assessment of short-term refinancing requirements It is important to note that official external debt statistics, published by the NBK, classifies short-term external liabilities as only liabilities with ‘original contractual maturities shorter than one year’; these liabilities as of 30 June 2007 totalled $7.35bn. This presentation does not take into account the redemption of instruments with longer contractual durations and therefore materially underestimates the size of real short-term servicing requirements.

It should be noted that the observed redemption schedule of outstanding eurobonds issued by Kazakh banks (i.e. the debt category, where debt redemption statistics can be received from multiple publicly available sources) is very light; the covenant packages of all outstanding bonds also does not contain any rating triggers or other restrictive financial covenants, which theoretically could accelerate the repayment. Therefore, an attempt to construct a short maturity profile schedule for individual banks essentially boils down to the review of the outstanding syndicated loans, the breakdown of which is often provided in published IFRS financials.

In the table below, we provide a summary of the short-term maturities of financial obligations (excluding deposits) of Kazakhstan’s largest banks. The disclosure was taken from the latest available IFRS accounts or calculated using local accounts with certain adjustments. The material part of the financial liabilities with a duration shorter than one month represent repo transactions (with the NBK and other counterparties), whose rollover should not represent any practical difficulties, so we estimate the total short-term external liabilities of Kazakh banks as of 30 June at $11.9bn.

Figure 24: Kazakh banks - estimated short-term refinancing requirements, Oct 2007, $bn 30 June 2007, <1M 30 June, 1-12M Refinanced in 3Q07 To be refinanced

BTA + Temir 1.0 2.5 1.9 0.6 KKB 2.1 2.6 0.6 2.0 Alliance 0.9 2.2 0.2 2.0 CCr 0.1 1.2 0.6 0.7 Halyk 1.0 0.6 0.4 0.2 ATF 0.6 0.5 0.4 0.0 Caspian 0.2 0.2 0.2 0.1 less repos -4.1 0.0 0.0 0.0 Total 2.0 9.9 4.3 7.6


This assessment approximately equals the estimate of the NBK, which, during its October conference call, put the short-term redemption schedule of the country’s banks at $3bn per quarter.

Problem 2: Short-term refinancing

Redemption schedule of Kazakh banking eurobonds is relatively light

The NBK estimates short-term refinancing requirements of the system at $3bn per quarter for the next nine months


21

Figure 25: Estimated quarterly breakdown of short-term external financial liabilities Maturity Amount 3Q07 $2.4bn 4Q07 $3.8bn 1Q08 $2.8bn 2Q08 $2.9bn Total $11.9bn

Source: NBK, Renaissance Capital estimates

Figure 26: Maturity profiles of Kazakh banking eurobonds is relatively light Bond maturities excluding ABS, adjusted to embedded calls

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

2007 2008 2009 2010 2011 2012 Afterwards

$mn


Refinancing – still available, but in limited volumes Altogether, in 2Q07-4Q07, Kazakh institutions placed approximately $4bn of eurobonds, one-third of this amount in the form of asset-backed securities with senior tranches, insured by specialised international agencies. All unsecured bond placements occurred in May-June during a window of relatively benign market sentiment.

Since mid-July the market access was largely constrained. According to our estimates (which are based, basically, on the search through media headlines and web-sites of individual banks), since the end of July, all Kazakh financial institutions managed to attract approximately $3.7bn of external financing, most of it was probably spent on refinancing of outstanding financial liabilities. The financing came in various shapes and forms, all of the money seemed to be aimed for refinancing of maturing facilities or substitution of decreasing deposits.

Figure 27: Recent bond placement from Kazakh banks, 2Q07-4Q07

Issue Volume, mn

Ratings (for ABS – senior tranche) Type Issue date Maturity Coupon, % Sec.

yield G+, bpts Note

Turan Alem $750 Aaa/AAA ABS 08/10/2007 2015 - - - DPR, sinkable, insured Turan Alem $250 Baa1/BB/BB+ Senior unsecured 10/07/2007 2037 8.25 - - Tap, the total issue size is now $1bn KKB ¥25bn Baa1/BB/BB+ Senior unsecured, floater 21/06/2007 2009 qL+150 2.25 - - KKB $250 Baa2/BB-/BB Subordinated Tier II 07/06/2007 2017 8.50 8.50 350 5Y call + coupon step-up Astana Finance €300 Ba1/-/BB+ Senior unsecured 01/06/2007 2010 7.875 8.00 361 placed at c. 50-60 premium to sec. quotes Temir $500 Baa3/B+/BB- Senior unsecured 11/05/2007 2014 9.50 9.75 523 180 bpts over BTA, very good demand Halyk $700 Baa1/BB+/BB+ Senior unsecured 25/04/2007 2017 7.25 7.375 273 - KKB $500 Aaa/AAA ABS 05/04/2007 2017 qL+20bps - - DPR, 3rd tranche, sinkable, insured



22

Bonds. The last straight issue placed on the market was a relatively small $250mn BTA tap of its longest senior unsecured bond maturing 2037. The placement, albeit small, severely affected secondary quotes. By early October, BTA concluded placement of its $750mn DPR securitisation programme, where two senior tranches were secured by specialised international insurance agencies. The bank commented that the placement “was not aimed to refinance its financial liabilities” (probably a mere courtesy remark); the cost of placement was not disclosed. It also should be noted that by early August KKB cancelled the solicited exchange of $500mn of bonds maturing in 2009 into longer-dated issue due to unfavourable market conditions.

Shareholders’ support. Three banks – Alliance, ATF and Caspian – announced liquidity support from their current or prospective shareholders. Alliance’s support came in the form of a $220mn deposit from its controlling shareholder, Seimar Group (we discuss this transaction in more detail below), and Caspian announced a $150mn standby liquidity facility from one of its controlling shareholders, private equity fund Barings Vostok. ATF Bank received two smaller loans from Unicredit, one senior short-term (money market) and one subordinated $220mn and said that it could also agree to an increase of the money market line of up to $450mn. It is unclear however to what extent the availability of money market funds is linked to the successful conclusion of the ATF acquisition by UniCredit.

Several banks announced full or partial rollovers of existing syndicated loan facilities. The most notable examples include KKB (rollover of $400mn in August with an increase of the principal to $660mn), Centercredit (a rollover and increase of a $300mn facility matured in August by $150mn to $450mn) and ATF (a $210mn three- and five-year syndicated line).

Redemption of matured liabilities through available funds/ maturing assets. In theory, all Kazakh banks report balanced short-term asset/ liabilities maturity profiles and should be able to repay liabilities falling due from gradually maturing assets. In September, BTA said it fully redeemed a $600mn loan facility from Deutsche/ HSBC, using available funds. Alliance uses the ‘balanced asset/ liabilities profile’ argument, while explaining how it is going to refinance its syndicated loans falling due.

Redistribution of deposit base – Halyk benefits, small banks lose Several circumstances distinguish Kazakhstan as a place to conduct retail banking. The country occupies territory slightly less than four times the size of Texas, but has a population of only 15mn people, of which 8-9mn are economically active – of these only 3-4mn can be classified as ‘commercially attractive’. Large income dispersion and the relative poverty of a large proportion of retail customers means that, en masse, retail deposits are a source of funding of secondary importance (hence the uniform strategy to pursue only ‘high income retail customers’ until recently adopted by several banks). Many retail clients keep low cash balances; for example, the current average size of a retail deposit in Halyk – the largest deposit taking bank in the country (which however has a high proportion of pensioners and public servants as depositors) – is approximately $300.

Refinancing seem to be available, but in limited volumes

Shareholder support is very important in times of crisis

Retail deposits were until recently only the secondary source of funding


23

The absolute size of retail deposits nearly doubled over the past year (the local banks point at a recently concluded public campaign, which encouraged private citizens to ‘legalise’ their savings and real estate); however, they remained a relatively stable proportion of the banks’ funding base (12.0-12.5% of total funding since the end of 2005).

.Figure 28: Kazakhstan – growth of retail deposits (left) and size of average deposit, FY06 (right)

0

200

400

600

800

1,000

1,200

1,400

1,600

Dec-0

5

Feb-0

6

Apr-0

6

Jun-0

6

Aug-0

6

Oct-0

6

Dec-0

6

Feb-0

7

Apr-0

7

Jun-0

7

Aug-0

7

0500

1,0001,5002,0002,5003,0003,5004,0004,5005,000

KKB BTA+ Temir Alliance Halyk

$

Average retail account balance

Source: FMSA, Renaissance Capital estimates Source: FMSA, Renaissance Capital estimates

Over recent months, evidence has appeared that the local deposit is becoming (1) hotly competed for and (2) has already shown signs of a flight to quality. The news is obviously negative for systemic stability and indicates that the funding base of at least some Kazakh banks may be under pressure due to the redistribution of resources within the system.

In August and September, Halyk gained a material share of the country’s individual deposit market, once again becoming the country’s leading retail deposit bank. Over two months, the bank saw retail deposit inflows of $652mn, a significant part of which seemed to be individuals transferring their savings from competing institutions.

Over the same timeframe, Bank Alliance, despite increasing its rate to flat 15.0% in KZT for any term deposit longer than one month, lost approximately $200mn of retail deposits, 20% of its total. Over the same timeframe, both BTA and ATF reported moderate inflows, while Centercredit, Temirbank and Nurbank lost private clients. In its 3Q IFRS results presentation KKB said that it had lost $1bn of deposits (corporate and private) since the end of June.

Halyk Bank Chairman Grigory Marchenko during the recent conference call was also talking about “fully booked” deposit boxes in his bank, implying that part of the deposit withdrawals might have temporarily left the system.

Reuters, while commenting on the NBK officials, mentioned in one of its articles that, during September the country’s banking system lost 3% of its total deposits ($1.5bn or 1.7% of total funding). However, the official statistics for the period were not available at the date of this report publication, so verification is difficult.

Funding base at some banks may be under pressure due to the redistribution of resources within the system


24

Figure 29: Halyk is a clear beneficiary of retail depositors’ flight to quality (market shares at indicated dates)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

KKB

BTA

Allia

nce

Halyk AT

F

CCr

Temi

r

Casp

ian

Nurb

ank

Eura

sian

Tses

na

Othe

r

Mar

ket s

hare

30.06.2007 31.08.2007


Along with the intensive, but not necessarily accurate coverage of the events on the international capital markets by local media, the major factor that is seen by the local banks as the major contributors to the apparent depositors’ run is the recent volatility on the local currency market. By the end of August, reportedly due to a change in customs legislation, the local currency exchange offices started to experience a shortage of dollars. High street KZT/USD cash exchange rates jumped to 140, and making simple conclusions, many private citizens reduced balances on their bank accounts. The NBK quickly intervened and the local currency exchange rate returned to pre-run levels; however, so far it seems that the retail depositors have not returned quickly.

Figure 30: And Alliance, Temir and Nurbank are clear net losers (30 June – 31 Aug, absolute change)

-25.0%

-15.0%

-5.0%

5.0%

15.0%

25.0%

35.0%

KKB

BTA

Allia

nce

Halyk AT

F

CCr

Temi

r

Casp

ian

Nurb

ank

Eura

sian

Tses

na

Othe

r

Abs

olut

e ch

ange

in re

tail

depo

sits


It also should be noted that the national deposits insurance fund is technically a very small entity, with annual funds inflow of approximately $70mn and with the size of total assets as of July 2007 of KZT5bn ($40mn) – the amount, not large

Late August currency volatility is seen by the local banks as the major contributor to the depositors’ run

Some of the safeguarding institution are simply too small to be effective


25

enough to cover in full private deposits of any bank within the top 20. Back in February the fund fell short of the recently failed Valut-Tranzit Bank (then 12th largest, rated at B1 by Moody's half a year before the licence was revoked) – a fact, actively discussed then by the media. For comparison, the Russian deposit insurance fund currently holds approximately $2.1bn, which is enough to cover individual deposits of any private bank with quite a good margin (perhaps the significant factor here is the presence of a dominant state-controlled retail institution such as Sberbank).

All of the above, coupled with the intention of all major country’s banks to increase the proportion of retail deposits in the funding base, creates material pre-requisites of a deposit war.

Corporate deposits

As mentioned above, corporate deposits form one of the major components of Kazakh banks’ funding, totalling approximately $21bn or 23% of the system’s funding base. Those can be roughly broken down as transactional balances and term deposits from cash rich natural resources and infrastructure companies (approximately 40% of the total), speculative ‘hot money’ (difficult to asses: say, 25% of the total) with the rest being accounts of social institutions and consumer-oriented companies. The first category, obviously, represents the most coveted type of corporate client for any local bank; in fact, accounts of major state-controlled corporates are relatively evenly distributed between the country’s largest banks.

Figure 31: Change in corporate deposits (adjusted for new debt issuance), July-Aug 2007

-200-150

-100-50

050

100

150200

250300

350400

KKB

BTA

Allia

nce

Halyk AT

F

CCr

Temi

r

Casp

ian

Nurba

nk

Euras

ian

Tses

na

Othe

rAbs

olut

e ch

ange

in

corp

orat

e de

posi

ts, $

mn


In early September, Grigory Marchenko, when commenting about the early consequences of the deposit run, was quoted as saying that during the late August deposit run, Halyk received “several hundred million dollars worth” of large, state-controlled corporate accounts. It is difficult to assess for the outsider whether such transfers really took place, and the aggregated monthly data, provided by the regulator, do not provide any conclusive evidence. It would be reasonable to assume that the government, especially taking into account its relatively aggressive and supportive public statements, would discourage account transfers of all state-controlled corporates for the time being. Subsequently Marchenko refrained from making any statements on the subject. The previous chart provides inconclusive

Statistical data are inconclusive

Apart from private deposits, Halyk also receives inflows of corporate accounts


26

data; however, the increase of corporate balances with ‘other’ banks (i.e. probably local subsidiaries of international banks) can be attributed to the consequences of the August capital flight.

Other factors that can potentially distort refinancing schedules A. Covenants of syndicated loans

In the short term, we might see material rating downgrades from rating agencies, as evidenced by recent statements from S&P and Moody’s. All straight Kazakh bank’s eurobonds have very limited covenant protection (with the likely exception of DPR securitisation programmes) – something that would probably change for the new primary placements from the sector. However, many syndicated loans, especially signed recently, might contain rating change triggers or other types of covenants that might accelerate payments and distort published liquidity schedules.

Thus, in early October, Bank Alliance said that it is close to a breach of covenants of one of its smaller syndicated loans, which stipulated the minimum acceptable proportion of deposits to loans (the bank was the major victim of a flight to quality of retail depositors in August-September). The bank later specified that the amounts involved are relatively immaterial ($45mn), nevertheless, as is the case with all ‘unknown unknowns’, the potential threat of similar statements Alliance or other banks probably should not be underestimated.

B. Bond buybacks

In our opinion, one should take statements about ‘market buybacks’ from Kazakh banks with a pinch of salt. All external bonds are long term and the major point of concern currently seems to be orderly redemption of short-term debt obligations. As long as external investors are in doubt, whether the system has enough liquidity or not, it might not make sense from the point of view of improvement of investor sentiment to use the valuable money to redeem the long-term debt. In addition, potential downgrades and redistribution of deposits might lead to a violation of covenants for syndicated loans (as we heard from Alliance) and subsequent acceleration of payments, i.e. the banks might suddenly discover that they need more available cash than planned. Through buybacks, banks can probably achieve some reduction of funding costs, although they would obviously reduce the asset base. However, if any particular bank felt comfortable to do so, market repurchases of bonds would obviously be positive for the secondary pricing.

Liquidity and funding assessment of individual banks We think that the large Kazakh banks’ (within the top six) refinancing requirements can be viewed as manageable on a standalone basis: (1) most of them have already managed to refinance part of the short-term indebtedness through syndicated or bilateral loans; (2) all banks report a balanced asset/ liabilities maturity profile so, in theory, can repay maturing loans from gradually matured assets; (3) owners of several banks and the banks themselves have large identifiable and, potentially, valuable assets outside of Kazakhstan and, in theory, can use them as collateral for/ sources of financing and recapitalisation.

Covenants of syndicated loans – ‘unknown knowns’

Bond buybacks would not make sense in the environment of deficit financing


27

A. Kazkommerzbank

The largest Kazakh bank has probably the highest short-term refinancing requirements. Excluding short-dated repo transactions, it has to refinance approximately $2.6bn of financial liabilities, falling due until June next year. Since June $600mn of refinancing has been completed; in early August, KKB cancelled the solicited exchange of $500mn of bonds maturing in 2009 into longer-dated issue due to unfavourable market conditions. The closest large redemption is in December, when the bank has to repay or rollover a $700mn syndicated loan facility. As a potential redemption source the bank’s representatives mentioned the possibility of using cash from maturing assets.

Supporting points: (1) KKB is the country’s largest bank and obviously can count on extraordinary liquidity support if needed. (2) 33% of the bank’s assets are located abroad and might be used as a source of extraordinary cash. (3) The bank’s shares are actively tradable on the international stock exchanges and are very liquid, so there is always the potential of additional equity funding. (4) The bank can also count on other forms of support from local authorities, as evidenced by the recent statements of highly ranked Kazakh officials (share purchases on the open market etc.).

Negative points: (1) So far, KKB is the only Kazakh bank on a negative rating review (Moody’s). (2) The bank has the highest refinancing requirements in the whole sector. (3) KKB probably cannot issue more new insured DPRs, like BTA did, since it already has an established DPR programme. (4) 3Q IFRS accounts show that the bank lost $1bn of deposits (retail and wholesale) in the quarter (local accounts suggested only $120mn in July-August).

Figure 32: Debt maturity profile, $bn <1M 1-12M 12M< Total

31/12/2006 2.7 1.6 6.0 10.2 30/06/2007 2.1 2.6 9.6 14.4 Change, 6 months -0.6 1.0 3.6 4.1


Figure 33: Maturity profile - short dated syndicated loans Type Amount, $bn Timing Partial repayment of $850mn syndicated loan facility 0.40 01/09/2007 EBRD, bilateral loan 0.03 16/09/2007 Amortising Tranche B syndicated loan facility 0.07 13/09/2007 Moskommertsbank, Russian local bond, put 0.04 05/12/2007 Amortising Tranche B syndicated loan facility 0.07 12/12/2007 $700mn syndicated loan facility 0.70 22/12/2007 Partial repayment of $850mn syndicated loan facility 0.45 28/02/2008 Amortising Tranche B syndicated loan facility 0.07 14/03/2008 Eurobond 0.25 16/05/2008 Moskommertsbank, Russian local bond, put 0.12 19/08/2008 Total 1.83


Figure 34: Recently completed refinancing Type Amount, $bn Timing Syndicated trade facility 0.60 29/08/2007 Total 0.60


KKB – largest refinancing requirements, largest victim of capital flight


28

B. TuranAlem and Temir

Temir was consolidated by TuranAlem in late 2006; the former also reports on a standalone basis. Excluding short-dated repo transactions, BTA has to refinance approximately $2.5bn of financial liabilities, falling due until June next year. Roughly $1.25bn of refinancing is already completed; in addition in September, BTA said it fully redeemed a $600mn loan facility from Deutsche/ HSBC, using available funds.

In early October, BTA concluded a placement of its $750mn DPR securitisation programme, where two senior tranches were secured by specialised international insurance agencies. The bank commented that the placement “was not aimed to refinance its financial liabilities” (probably a mere courtesy remark); the cost of the placement was not disclosed. We view this as a very supportive event. According to the arranger, the transaction contains rating triggers based on its own underlying transaction ratings (which are currently BBB-/Baa3).

Supporting points: (1) Similarly to KKB, BTA is the one of the country’s largest banks and can count on extraordinary liquidity support if needed. (2) BTA has a strategic vision to develop as a ‘pan-Eurasian’ financial institution; consequently 38% of the bank’s assets are located abroad and can theoretically be used as a source of extraordinary cash. (3) Temir Bank itself is a very sellable asset, should BTS still be willing (as it was announced in September) to sell it given decreased equity valuations in the sector. (4) The bank has already refinanced or redeemed a material part of its short-dated financial liabilities.

Negative points: (1) BTA is one of the least transparent institutions with multiple financial subsidiaries. (2) On the asset side, the bank has exposure to some of the large problem clients such as KKB (i.e. Kuat), so if Moody’s decides to proceed with KKB’s downgrade because of concerns over asset quality, BTA might also be affected. (3) The bank still has to refinance a material amount of short-dated financial liabilities. (4) The latest industrial statistics show that Temir suffered large withdrawals of retail deposits in July-August.


31/12/2006 1.2 1.1 8.2 10.5 30/06/2007 1.0 2.5 11.2 14.7 Change, 6 months -0.1 1.3 3.0 4.2


Figure 36: Maturity profile – short-dated syndicated loans Type Amount, $bn Timing Islamic facility, Tranche 1 0.14 04/07/2007 Bridge Term Facility, HSBC/ Deutsche 0.60 14/09/2007 3rd tranche of $110mn amortising facility 0.03 01/12/2007 Syndicated loan 0.53 01/03/2008 Russian local bond, put 0.12 08/04/2008 4th tranche of $110mn amortising facility 0.03 01/06/2008 Kazakh local bond 0.02 04/06/2008 Syndicated loan 0.06 01/07/2008 Islamic facility, Tranche 2 0.06 04/07/2008 Syndicated loan 0.20 01/09/2008 Syndicated loan 0.18 01/11/2008 FRN 0.20 23/11/2008 Total 2.03


BTA – the only bank which managed to place new bonds in 3Q07


29

Figure 37: Recently completed refinancing Type Amount, $bn Timing Syndicated line, Deutsche/ HSBC, redemption 0.60 14/09/2007 DPR securitisation 0.75 08/10/2007 Islamic syndicated loan, 2Y 0.25 12/07/2007 New bond issue, tap of 2034 bond 0.25 10/07/2007 Total 1.85


C. Alliance Bank

Alliance’s 1H07 IFRS accounts show that, at the end of June, the bank had approximately $0.9bn of financial liabilities to be redeemed within a month and a further $2.2bn of liabilities redeemable within 12 months. All $0.9bn of very short-term debt seems to comprise primarily repos (which, presuming good quality of the underlying assets, should not be difficult to roll over). The maturity schedule of the disclosed short-dated syndicated loans and other forms of financing is presented in the table below; we note that the major part of short-dated loans to refinance fall due between Nov 2007 and Apr 2008.

Several other interesting observations:

Alliance probably suffered the most from the recently observed retail depositors’ flight to quality. Over July and August, the bank lost $200mn or 20% of its retail deposits. The bank is also the only Kazakh bank to date, which said that under certain conditions the bank would be in breach of the covenants on some of its syndicated loans (loans to deposits ratio). The comment implies that a breach will not accelerate payments; subsequently the bank quantified the total amount of loans in question at $45mn.

Alliance states that it intends to use cash from maturing assets to meet payments of its syndicated loans ($1bn is maturing in Nov 2007 though Apr 2008). The bank reports a balanced short-term asset/liability profile; however, the statement could also be interpreted that the bank could be having difficulties rolling over its syndicate loans falling due.

Alliance publicly said that it is considering buying back its bonds on the open market. We understand that market purchases really took place, but the volumes involved are low so far. Debt buybacks are always supportive to market pricing; however, they consume liquidity which might be needed if there is a crystallisation of any contingent liabilities.

Mid-July, the bank’s controlling shareholder received $700mn from the bank’s IPO. Subsequently, in September, the owner spent $480mn on ’pre-agreed buybacks’ of minority shareholders and placed the residual cash ($220mn) on deposit with the bank.

Supporting points: (1) Alliance has a substantial proportion of short-term assets. (2) The bank’s shareholders seem to have shelved ambitious expansion plans; at least the planned acquisition of Russia’s Bank Petrocommerts was abandoned. (3) On the asset side the bank has a liquid portfolio of relatively short-dated retail loans. (4) The bank has low exposure to the construction sector and, unlike major Kazakh banks, we have not yet heard any negative rating comments about Alliance. In fact, in September, it received a new rating (B+/ stable from S&P) with a fairly neutral

Alliance – may be able to refinance liabilities with maturing assets, but two many questions remain

The bank suffers materially from asset withdrawals

Support from the controlling shareholder is clearly positive


30

accompanying comment. (5) Support from the existing shareholders is always positive in times of crisis.

Negative points: (1) Despite its IPO in July, Alliance is not a very transparent institution with multiple financial subsidiaries. (2) Alliance is probably the only one of the large Kazakh banks that has not yet announced any successful refinancing of its syndicated loans. (3) Spending a major part of IPO proceeds in a “buyout of minority shareholders” is, in our opinion, a suboptimal use of liquidity in current market conditions. (4) To date, Alliance is the only Kazakh bank which has mentioned a potential covenant breach of one of its syndicated loans. (5) The apparent depositors’ flight is obviously a very negative development if not quickly contained. (6) The degree of potential government support is unclear. Alliance is an undoubtedly large institution, but rating agencies are divided on this instance. In August, the bank announced its new “programme of socially conscious development”, which can be viewed as a bid to add more weight to the claim of being “socially important”.


31/12/2006 0.5 1.6 2.5 4.6 30/06/2007 0.9 2.2 4.1 7.3 Change, 6 months 0.4 0.6 1.6 2.6


Figure 39: Maturity profile - short dated syndicated loans Type Amount, $bn Timing Syndicated - Standard Bank 0.19 06/11/2007 Syndicated - ING 0.07 07/11/2007 Syndicated - Citibank 0.16 24/12/2007 Syndicated - Standard 0.03 31/03/2008 Syndicated - Caylon 0.09 01/04/2008 Syndicated - Caylon 0.09 01/04/2008 Kazakh local bonds 0.04 24/04/2008 TR Commodity Trading 0.09 28/05/2008 Syndicated - Sumitomo Mitsui 0.18 17/06/2008 Eurobond 0.15 27/06/2008 Syndicated Tokyo-Mitsubishi 0.15 17/06/2008 Syndicated - Standard 0.07 01/04/2008 Total 1.30


Figure 40: Recently completed refinancing Type Amount, $bn Timing Deposit from Seimar 0.22 13/09/2007 Total 0.22


D. ATF

At the end of June, Italian banking conglomerate, UniCredit, announced that it had reached a deal with the common equity holders of ATF to purchase 100% of the bank at approximately $2.3bn. The deal is scheduled to conclude by the end of 2007 subject to regulatory approval. While waiting for the deal to close, ATF enjoys quite healthy liquidity support from the parent-to-be, receiving two smaller loans, one senior short-term (money market) and one subordinated $220mn and said that it could also agree to an increase of the money market facility of up to $450mn. It is unclear, however, to what extent the availability of money market funds is linked to the successful conclusion of the ATF acquisition by UniCredit.

ATF – pending acquisition by UniCredit – is the major positive supporting factor for the bank’s credit


31

Supporting points: (1) The pending acquisition by UniCredit is the obvious and major positive supporting factor for the bank’s credit. (2) The current bank owners enjoy very good political connections. (3) The absolute size of reported refinancing requirements is not that significant and the bank has already refinanced nearly all of its short-dated financial liabilities. (4) Over 3Q, the bank, together with Halyk, saw an inflow of corporate and retail deposits.

Negative points: (1) We are obviously facing some execution risks here. It will be reasonable to assume that, seeing a material correction in the sector asset prices, UniCredit might be willing to renegotiate the pre-agreed price. Also, the approval of the Italian banking regulator has not yet been received. (2) Too much exposure to construction on the asset side.


31/12/2006 0.8 1.7 2.4 4.9 30/06/2007 0.6 0.5 2.8 3.9 Change, 6 months -0.2 -1.2 0.5 -1.0


Figure 42: Recently completed refinancing Type Amount, $bn Timing BACA subordinated loan, 7Y, closed 0.10 11/09/2007 Syndicated facility, 3Y and 5Y tranches, SME lending 0.21 27/08/2007 1Y line from BACA, can be increased to $470mn 0.12 21/06/2007 Total 0.43


E. Halyk Bank

Similar to Sberbank in Russia, Halyk Bank is the clear net beneficiary of current market conditions. On the funding front, it is mostly deposit-funded, while July and August saw a flight to perceived quality as sector deposits shifted back to Halyk. Furthermore, Halyk is positioned as one of the only liquid banks in Kazakhstan, continuing to lend as usual, and should also reap market-share gains. Hence, Halyk should offer investors a relative safety card, combined with an outperforming growth profile the longer this situation persists.


31/12/2006 0.4 0.4 1.2 2.0 30/06/2007 1.0 0.6 2.5 4.2 Change, 6 months 0.7 0.2 1.3 2.2


Figure 44: Recently completed refinancing Type Amount, $bn Timing Syndicated trade facility, 3Y and 5Y tranches 0.4 03/09/2007 Total 0.4


F. Centercredit

Supporting points: (1) The bank is a relatively conservative institution with the lowest dependence in the sector on external funding (25% of total liabilities excluding equity). (2) With a high proportion of domestic bank funding, the bank is one of the most active issuers on the local bond market. (3) The absolute size of reported refinancing requirements is not that large and the bank has already

Halyk – the major beneficiary of redistribution of the local funding base

Centercredit – already refinanced financial debt, but appears to have lost deposits


32

refinanced nearly all of its short-dated financial liabilities. (4) The bank has long been viewed as the prime potential acquisition target in the sector. All M&A activity in the country might be off due to depressed asset prices; however, this consideration might become important again, once the situation stabilises.

Negative points: (1) Smaller size if compared with its peers; uncertainty in respect of potential state support if needed. (2) Relatively high exposure to construction. (3) Over 3Q, the bank saw some outflow of deposits.


31/12/2006 0.1 0.7 1.6 2.4 30/06/2007 0.1 1.2 1.9 3.3 Change, 6 months 0.0 0.5 0.3 0.9


Figure 46: Maturity profile – short-dated syndicated loans Type Amount, $bn Timing Syndicated loan, Raiffeizen 0.27 23/11/2007 Syndicated loan, Overseas Chinese Banking Corp. 0.09 19/12/2007 Eurobond 0.20 14/02/2008 JPY short-dated facility 0.09 20/12/2007 Total 0.55


Figure 47: Recently completed refinancing Type Amount, $bn Timing Syndicated, roll-over, increase from $300mn 0.45 06/08/2007 5Y, Asian development bank 0.05 07/08/2007 6mn syndicate, yen 0.09 21/06/2007 Total 0.59


G. Caspian

In Dec 2006, the shareholding base of the bank changed once again with private equity fund Barings Vostok becoming one of the controlling shareholders (45% of the voting stock). In September, the bank said that it had obtained a $150mn credit facility from BVCP. We think the provided facility should adequately cover Caspian’s immediate refinancing requirements (i.e. refinancing of several syndicated loans); however, the headline could also mean the bank has difficulties in rolling over its syndicated loans.

Supporting points: (1) Committed support from the current shareholders is always good; reputed international shareholders also presume good transparency and quality of supervision. (2) The money from shareholders has already refinanced part of its short-dated financial liabilities. (3) The nature of the business of the one of controlling shareholders (private equity) suggests a disposal of the bank in the intermediate term; mid-summer the local media were discussing potential interest from Raiffeisen.

Negative points: (1) Smaller size if compared with its larger peers, uncertainty in respect of potential state support if needed. (2) High proportion of financial debt in the funding mix (approximately 50%) – external debt is not available and domestic market is not functioning.

Caspian – another bank with demonstrated shareholder’s support


33


31/12/2006 0.11 0.24 0.38 0.72 30/06/2007 0.24 0.24 0.38 0.86 Change, 6 months 0.13 0.00 0.00 0.13


Figure 49: Maturity profile – short-dated syndicated loans Type Amount, $bn Timing Unicredit & Citibank, Tranche A 0.08 Sept. 2007 Total 0.08


Figure 50: Recently completed refinancing Type Amount, $bn Timing Committed facility from the controlling shareholder 0.15 28/08/2007 Total 0.15


H. Astana Finance

Supporting points: (1) The company (actually, not a bank, but a holder of a limited banking licence) has a very long-dated funding maturity structure, 60% of financial liabilities are represented by long-dated local bonds. (2) Presence of City of Astana among shareholders (a minor supporting point per se, but might be important when there are apparent problems on the real estate market).

Negative points: (1) Very high exposure to construction (35% of the total loan portfolio, 4.2x of equity). (2) Potential transfer of the City’s 25.5% stake to Kazyna (a state-controlled holding that manages some state-controlled assets) if it resulted in a rating downgrade, could trigger a change of control put, which would distort the debt refinancing schedule.


31/12/2006 0.04 0.07 0.67 0.78 30/06/2007 0.00 0.07 1.27 1.34 Change, 6 months 0.0 0.0 0.6 0.6


Figure 52: Maturity profile – short-dated syndicated loans Type Amount, $bn Timing Merill Lynch 0.02 12/01/2008 Sachsen LB 0.00 19/12/2007 Repo – Dresdner 0.02 14/02/2008 Repo - Moore's Creek 0.03 06/08/2007 Total 0.07


Figure 53: Recently completed refinancing Type Amount, $bn Timing Syndicated loan – Deutsche Bank 0.05 28/09/2007 Total 0.05


NBK as the lender of last resort As of 15 Oct, the NBK reported $17.8bn in foreign currency reserves; a further $18.75bn is contained in the country’s National Fund (Kazakhstan’s sovereign

Astana Finance – good refinancing profile, changes in shareholders need to be watched

The NBK cannot use all of the country’s currency reserves


34

wealth fund accumulating various taxes paid by the country’s large oil & gas companies and from privatisation proceeds). Of the $17.8bn, approximately $4.0bn comprises currency in the commercial banks’ statutory reserves (all banks are allowed to keep part of their liability reserves with the NBK in foreign currencies), so the disposable part of the NBK’s reserves totals $13.8bn.

Why is money from Kazakhstan’s National Fund not readily available to help the banking system? In essence, the Fund is viewed as ‘money for all’, with a restricted list of qualified spending targets. The Fund, which is owned by the government and managed by the NBK, is essentially a savings and development fund, which can also be used to support the country’s budget in times of cyclically low energy prices. The Fund assumed its ’development’ function in 2007, annually transferring a predetermined sum (approximately $2.8bn for each of the years 2007, 2008 and 2009) to the government for the realisation of ‘nationally important development projects’. The government can also borrow money from the Fund, but only to cover the budget deficit and no more than 1% of the country’s GDP in any single year (i.e. $1bn in 2007). Direct support of the banking system (or short-term stabilisation loans to any financial institution, including the NBK), is not listed among the Fund’s potential spending targets, while nationally important development projects should involve investment, i.e. of a long-term nature. However, certain angles of government assistance to the national banking system can be wrapped in the above framework (e.g. officials can express ideas about what projects can be considered of ‘national importance’) as evidenced by the recent order of President Nazarbayev to create a $4bn construction and property fund (see ’potential remedies’ section below).

In our opinion, other things being equal, in an emergency the NBK would be able to provide extraordinary stand-by financing to one or two large institutions if necessary. The current legal framework presumes that extraordinary financing can be provided following a specific request from a bank which is experiencing temporary liquidity difficulties. Such a request should first receive an approval from the regulator (i.e. FMSA), which has to basically conclude that the reason for the request is of a temporary nature, and that the institution does not have any qualitative problems (mismanagement, fraud etc.). In the past, there was only one instance of an application for extraordinary financing from a commercial bank (Bank Valut Transit in 2005), and the application was actually rejected. An NBK representative told us that, in terms of timing, the decision about the provision of stand-by financing can be reached quite quickly, within several days, and both institutions (i.e. the NBK and FMSA) would be working in close co-operation.

The National Fund represents ‘money for all’

In an emergency, the NBK would be able to provide extraordinary stand-by financing to one or two large institutions


35

A high proportion of external funding and the volatility at the external markets presume that there might be some scarcity of available credit resources on the local market. Facing restricted access to funding, the banks often respond by cutting new financing to the industries they deem to be too risky or too capital intensive. A top candidate for a funding cut is the construction industry with its long production cycles and volatile pricing. A construction company which has projects in the early development stage, might face severe liquidity problems if it is not receiving enough funding to continue and a default could offer the lenders collateral with a potentially low realisable value.

Since 2003, most Kazakh banks, similar to their Russian counterparts, materially increased their exposure to the construction industry. As of 1H07, all Kazakh banks directly provided $18bn of loans to the real estate and construction industry (not all of it in Kazakhstan; Kazakh banks very actively finance development of real estate in neighbouring countries including Russia); all the banks also have very significant exposure to the mortgage market.

.Figure 54: Dynamics of composition of loan portfolio of KKB (right) and Halyk (left)

0%

20%

40%

60%

80%

100%

2002 2003 2004 2005 2006 1H07

Other Construction Energy, oil & gasTrade Individuals

0%

20%

40%

60%

80%

100%

2003 2004 2005 2006 1H07

Other Construction Energy, oil & gasTrade Individuals

Source: FMSA, Bloomberg, Renaissance Capital estimates Source: FMSA, Bloomberg, Renaissance Capital estimates

As of the end of June, loans to the construction sector constituted 2.8x the equity of KKB, 1.8x that of BTA, 2.4x of ATF and 2.2x of Centercredit, and it is reasonable to assume that the overload of assets to dispose of could result in losses on the banks’ balance sheets, which might create a shortage of capital in the system.

Figure 55: Loans to construction & real estate as proportion of loan portfolio and shareholders' equity

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

BTA

KKB

Allia

nce

Cente

rcred

it

Halyk AT

F

Temi

r

Nurba

nk

Casp

ian

Astan

a Fina

nceLo

ans

to c

onst

ruct

ion/

tota

l loa

ns

0.00.5

1.01.52.0

2.53.03.5

4.04.5

BTA

KKB

Allia

nce

Cente

rcred

it

Halyk AT

F

Temi

r

Nurba

nk

Casp

ian

Astan

a Fina

nce

Loan

s to

con

stru

ctio

n/ e

quity

Source: Company data, Renaissance Capital estimates Source: Company data, Renaissance Capital estimates

Problem 3: Asset quality


36

Observable mid-summer real estate prices in Almaty were quite high in absolute terms – for example, during our mid-summer visit to the city we heard about a ‘normal level’ of Class A office rental prices (a common measure for office property valuations) of around $1,000/ m2, i.e. close to Moscow levels. Data on residential prices are very inconsistent (small market, not many observable deals, high market segmentation etc.), but most banks we spoke to agreed that over 1H07, market prices for most types of real estate doubled (we have heard about the average price of m2 of residential property in the city of $3,000-$3,500). It should be noted that Kazakhstan’s real estate market (as with any real estate market) is not really transparent (for example, we are not aware of any international real estate broker operating in the country) so it is not easy to make a conclusive statement about the direction of the current market development.

During our early-September trip to Kazakhstan, we and our colleagues met representatives of several of the largest banks. All the banks we met pointed to the weakness in the real estate market, and an expectation of asset-price stability (at best) to a dramatic fall-off of (at worst) property prices from current, lofty levels. The focus was on the Almaty market. All banks have stopped (or almost stopped) writing new construction loans, and mortgage-lending criteria at some banks have become more stringent (increasing rates by up to 3% and lowering LTV rates to 50% for all mortgage loans), which will effectively also slow growth in this space. It should be noted that optically there are quite a lot of construction projects in the centre of the city at quite an early development stage, so the reduction of provided credit, also an obviously prudent measure, poses a direct threat for the current level of real estate prices.

Regarding specific companies, we were told that KUAT, the country’s largest real estate group, has liquidity problems. The view is that the company has been overzealous in starting new projects, while in the process paying increasingly higher prices for new land banks and simply not finalising enough projects – which have brought on a cash crunch. Dependent on whom we spoke with, KUAT has $500mn–$1bn of debt from the banking system, and KKB and BTA are core creditors of the group, which is confirmed by both management teams.

The view taken by most banks is that they want to clear up and consolidate any risk and positions currently on their books before writing new risk in the real estate space. However, they do realise that choking-off funding from developers and, almost as importantly, to the mortgage market, could create more problems then it solves; hence credit lines are still open to current borrowers and mortgages are available.

Once again, and similar to the other issues highlighted (funding and liquidity), banks and authorities seem to be broadly aware that they should not allow a sizeable property developer to default, as the knock-on ramifications for the Kazakh property sector (and real estate prices) could be disastrous. Banks are working with their creditors in this space, while there appears to be healthy demand for some of the real estate projects should they have to be sold to realise cash to meet credit demands. However, we will continue to watch this space closely, as it clearly poses risks for many aspects of the Kazakh banking system and the economy in general.

Several recent news headlines provide some colour for the current situation:

Observed mid-summer prices were quite high

One of the largest borrowers of KKB and BTA has problems

Sentiment in the local banking circles changed early September


37

In mid-September Kazakhstan’s Trade and Industry Minister Galym Orazbakov made public comments about a severe slowdown of financing of construction projects by local banks. The official was quoted as saying that “some of the biggest companies, controlling more than 80% of the commercial building market, have stopped work at some construction sites”.

In private discussions with analysts, representatives of some large Kazakh banks estimate the current correction of real estate prices at 20% from mid-summer levels; they also point out at very moderate deal flow.

During a recent conference call with investors, Halyk CEO Grigory Marchenko said that his bank over August-September received “approximately $2bn in applications for loans” from corporate customers whose funding was cut off by competing banks. Halyk said that it decided to open new credit lines to 10% of such applicants (or $200mn in newly issued loans), selecting better quality borrowers. It is unclear if we can view rejected applications worth $1.8bn (2.5% of systemic loans) as potential bad debts, since they do not receive refinancing from their current banks and have been rejected by Halyk based on quality reasons.

Marchenko also stressed that the concerns of external investors regarding the situation in Kazakhstan’s construction industry may be exaggerated. As an example, he stated that all of the construction sites financed by Halyk are operating (not a surprise, given that Halyk has no shortage of funding). However, Marchenko stressed that it has not accepted any single application from a construction company, previously financed by competitors.

In early October, Moody’s put KKB on a review rating, citing, among other reasons, “concerns about potential deterioration of asset quality”. From recent bank comments, we understand that it currently engaged in the loss-cutting exercise, going through the construction projects it finances case by case. KKB also says that it is finding some local buyers for certain office properties, citing as examples a disposal of one of Kuat’s office building by Kazalh Temir Zholy and possible bids from the government for another unfinished development.

Real estate prices might have decreased, but no reliable statistics are available

Rating agencies, for the first time ever, express concerns over potential deterioration of asset quality


38

Verbal interventions In early October, the NBK issued a statement condemning “international speculators” for causing material volatility in the Kazakh banks CDS market. The statement was seemingly interpreted by both the equity and debt markets as a form of verbal intervention by the NBK. Consequently, various highly ranked Kazakh officials, including President Nazarbayev, made a series of strong statements, referring to undeserved punishment of Kazakhstan and rating agencies “not considering all the strengths of the Kazakh economy”. Also, Kazakh officials suggested the introduction of several measures, aimed to alleviate various negative aspects of the current banking crisis (see below).

Liquidity support The NBK currently provides approximately KZT300bn of liquidity to the system via repo transaction and currency swaps (see above), this is more than early September (KZT250mn), but lower than during the peak of the currency crisis at the end of August (KZT360-400bn). The bank can potentially provide up to KZT600-700mn of additional liquidity in the system if needed.

Also, at the end of September, the NBK officially shifted the date for increasing the foreign borrowing reserve requirement (by 2 ppts to 10%) from 7 Oct 2007 to 15 Jan 2008 (see below). The increase, originally scheduled to take effect in July, was initially designed to motivate banks to limit the scale of their foreign borrowings, but was put on hold in the light of tightening market liquidity. We think the move is very reasonable in the current situation.

The question of NBK’s ability to provide support to the system in case of material systemic stress essentially boils down to the macro picture, i.e. how much effort and funds the bank is willing to spend for currency protection. Other things being equal, the NBK is definitely able to provide dedicated support to one or two large banks while continuing support of the systemic liquidity for a while. However, we still think that it should continue to protect the local currency at the current rate (i.e. at a cost of $1.0-1.5bn currency outflow per month), and it would be best to bid for external funding. The worst signal for the investors would be a gradual decline of foreign currency reserves without immediate action from the authorities.

Rebalancing of funding base Actually, the Kazakh regulator took note of the problem of excessive reliance of local banks on international borrowing quite a while ago, but the introduced measures did not appear to work. Kazakhstan might have the best banking supervision in the whole of the former Soviet Union; however, it seems that the regulator should take at least partial blame for the situation developing in this way.

From Jan 2006, the FMSA has been introducing a number of measures designed to restrict growth in borrowing by local banks, all of them developed after several rounds of consultations with the banks themselves.

From May 2006, banks have to allocate 8% of external funding to low-interest reserve accounts at the NBK (international loans and bonds had been previously exempt from such reserve requirements). Most institutions passed the additional cost onto their customers.

Potential remedies

Extensive media comments from highly ranked officials

Using the current set of instruments, the NBK can provide up to KZT600-700mn of additional liquidity in the system

The ability of the NBK to provide support to the system in case of material systemic stress boils down to the macro picture

The regulator took note of the problem quite a while ago, but the introduced measures did not appear to work


39

External short-term liabilities are not permitted to exceed total regulatory capital (for the purposes of this regulation, ‘short-term liabilities to non-residents’ uses the traditional ‘shorter than 12 months’ maturity definition).

Loans to non-residents receive a 150% weighting for the purposes of calculating domestic statutory capitalisation ratios (i.e. the same loan made to a foreign entity has a risk weighting 50% higher than it would were it made to a local entity).

Limits on foreign borrowings. In July 2006 and Apr 2007, the FMSA introduced new prudential requirements on maximum allowed foreign borrowing, relative to its own capital. All banks must fully comply with the new regulations by 1 Apr 2008. The FMSA is currently thinking of further reducing the multiples of non-deposit borrowing as a multiple of bank capital, and it is the most likely the next step, if any, in regulatory tightening.

It should be noted that all of the introduced measures had a rather muted effect on the overall international borrowings of Kazakh banks, as evidenced by the rapid increase of foreign debt of the banking sector. Also, most banks passed additional costs onto their customers due to oligopolistic price setting in the country’s market for banking services.

Figure 56: Reserve requirements – recent changes Internal liabilities Foreign borrowing Previous to May 2006 6% 6% May 2006 6% 8% Jan 2008 5% 10%


Figure 58: Foreign borrowing limits as a function of a bank’s equity Equity, KZTbn Max foreign borrowing ex–securities/equity Max total foreign borrowing/equity <50 2 4 50 – 100 2.5 4.5 100 – 150 3 5 150 – 200 3.5 5.5 >200 4 6

Source: FMSA

Figure 59: Banks' compliance with foreign borrowing limits, 1 July 2007

Bank Foreign borrowing up to one year/ Equity

Foreign borrowing ex–securities/Equity

Total foreign borrowing/ Equity

KKB 0.9 2.6 4.6 Requirement 1.0 4.0 6.0 Halyk 0.8 1.2 3.1 Requirement 1.0 3.0 5.0 Alliance 0.6 3.1 5.2 Requirement 1.0 3.5 5.5

Source: FMSA, Company data

Figure 57: Directives on foreign borrowing Date introduced Ratio Maximum allowed July 2006 Foreign borrowing up to one year/equity 1x Apr 2007 Foreign borrowing ex–securities/equity 2 – 4x, depending on size of bank's equity Apr 2007 Total foreign borrowing/equity 4 – 6x, depending on size of bank's equity

Source: FMSA


40

Asset quality and potential recapitalisation of the sector 1. Creation of a state-controlled construction fund

The creation of a state-controlled construction fund represents a commonly used solution to a real estate crisis in a developing economy (used, for example, by Czech Republic in mid 90s).

By mid-October, Kazakhstan President Nursultan Nazarbaev ordered the creation of a special fund, aimed at supporting local banks. According to the news headlines, the fund is supposed to buy residential and industrial developments from banks willing to sell them (banks in Kazakhstan cannot own real estate and the headline probably presumes real estate developed by construction companies, local bank borrowers). The projected size of the fund is $4bn, and we assume the money will come from the National Fund (current size is $18.7bn). The rules under which real estate may to be purchased are unclear so far.

In our opinion this news is positive and aimed at solving one of the material problems of the Kazakh banking system, i.e. an overload of loans to unfinished construction projects. Therefore, a non-systemic vehicle for warehousing impaired assets could be useful for saving the system’s capitalisation. The fund should also provide some liquidity to the system, but only in the intermediate term.

2. Other forms of real estate refinancing

Ongoing refinancing of the banking system is provided by the state-controlled National Mortgage Corporation; however, its ability to refinance the system is also constrained by the relatively small size of the local buy-side clientele, the current size of its mortgage portfolio is approximately $400mn. Some recent media reports suggested the possibility of large scale mortgage buyouts from commercial banks through provision of additional funding from the state.

3. Increase of allocations of local pension funds

At first glance, the measure, lobbied by BTA and KKB, makes sense. However, the necessary scale is lacking – total assets of the local pension system are $9.0bn (receives approximately $1bn of new contributions a year) and total investment portfolios of local insurance funds comprise $1.5bn. Moreover, the pension funds are already keeping 50% of their assets in local corporate bonds and bank deposits. The idea seems to be opposed by Halyk’s Marchenko.

4. ‘Assets go home’

According to various media reports, the NBK is currently conducting a round of consultations with the commercial banks, which use its liquidity (KKB is probably the largest user), encouraging a gradual transfer of many types of banking operations onshore. We believe it is a good and prudent measure, if it is realised properly.

State-controlled construction fund – a very useful vehicle, but its effectiveness will depend on the rules of engagement

National Mortgage Corporation is a medium-sized institution, and also needs large one-off volumes of state funding

Asset repatriation campaign – a good measure, will see, if it works


41

Figure 60: Comparative financial statement, 1H07, IFRS and adjusted local accounts, $mn BTA KKB Alliance Centercredit Halyk ATF Temir Nurbank

Balance sheet Net loans 17,718 19,435 6,794 4,835 6,392 5,776 2,023 1,290

Corporate loans 13,772 16,980 3,642 3,039 6,392 5,776 725 1,042 Consumer loans 4,616 3,281 3,390 1,973 1,911 1,048 1,360 290 LLP -670 -826 -237 -177 -331 -164 -61 -42

Other earning assets 2,639 3,806 2,893 1,075 1,622 710 402 80 Interbank loans 751 1,541 1,024 323 51 136 219 15 Trading & investment securities 1,887 2,265 1,869 752 1,571 574 183 65

Other assets 858 131 95 57 169 258 44 27 Fixed and intangible assets 78 222 160 58 191 129 18 25 Cash 2,669 1,332 973 465 2,167 856 142 135 Total assets 23,961 24,925 10,914 6,490 10,542 7,729 2,630 1,557 Customer deposits 6,096 7,790 2,159 2,748 5,013 3,159 753 483

Deposits from individuals 2,422 2,553 1,040 1,203 2,098 939 243 78 Corporate deposits 3,674 5,237 1,119 1,545 2,915 2,220 511 405

Interbank deposits & repo 1,136 6,116 2,489 769 494 1,977 317 0 Total LT financial debt 12,081 7,440 4,811 2,202 3,439 1,577 1,187 696

Syndicated loans 5,912 1,864 1,778 801 1,733 0 59 279 Debt securities issued 6,169 5,576 3,033 1,401 1,705 1,577 1,128 417

Other liabilities 237 330 75 31 205 143 8 17 Minorities 129 138 0 3 8 0 0 0 Total capital funds 4,283 3,112 1,380 737 1,382 873 364 360

Subordinated debt 1,453 853 263 313 235 349 42 58 Common stock and reserves 2,829 2,259 1,117 424 1,148 524 323 302

Income statement

Interest income 1,092 608 659 320 446 388 162 89 Interest expense -626 -333 -334 -192 -197 -268 -74 -54 LLP -112 -163 -64 -54 -50 -54 -30 -20

Net interest 353 112 260 74 199 67 58 15 Fees & commissions 108 51 13 36 93 16 12 8 Net trading income (loss) 111 17 4 15 44 12 9 1 Other operating items -197 -46 -67 -62 -98 -45 -35 -15

Pre-tax income 375 134 210 62 238 50 43 9 Taxes -47 -22 -51 -14 -63 -12 -2 -1 Exceptional & minorities -19 -4 0 -2 -2 0 0 0

Net Income 309 107 159 45 173 38 41 8 Capitalisation Tier I capital ratio *12.9% 9.5% 17.0% 7.9% 13.5% - 12.0% - Total capital ratio *16.1% 13.5% 18.3% 13.7% 15.9% - 14.3% - Total equity/ total assets, % 11.8% 9.1% 10.2% 6.5% 10.9% 6.8% 12.3% 19.4% Shareholders equity/ net loans, % 16.0% 11.6% 16.4% 8.8% 18.0% 9.1% 15.9% 23.4% Loans to construction/ equity, x 1.9 2.9 1.1 2.2 0.9 3.2 0.5 1.2 Profitability and efficiency ROE, % 29.0% 10.1% 36.4% 24.5% 33.1% 15.5% 32.7% 6.2% Pre-tax ROA, % 3.7% 1.2% 4.6% 2.3% 5.2% 1.2% 4.1% 1.1% Net spread 5.4% 2.4% 7.4% 5.0% 5.2% 3.9% 8.4% 3.7% Net margin 4.0% 1.1% 6.4% 2.9% 4.5% 1.9% 5.9% 2.2% Interest income/ interest earning assets 12.5% 5.8% 16.1% 12.5% 10.1% 11.1% 16.6% 13.0% Interest expense/ interest -bearing liabilities 7.1% 3.4% 8.7% 7.5% 4.9% 7.2% 8.2% 9.3% Cost to income ratio 42.3% 16.6% 20.7% 48.8% 30.6% 37.3% 40.2% 42.7% Asset quality LLP/ gross loans, % 3.6% 4.1% 3.4% 3.5% 4.9% 2.8% 2.9% 3.1% % loans to construction 28.5% 31.8% 17.8% 18.5% 13.1% 24.9% 7.4% 26.8% % loans to individuals 25.1% 16.2% 48.2% 39.4% 28.4% 17.7% 65.2% 21.8% Funding and liquidity Customer deposits/ total assets 25.4% 31.3% 19.8% 42.3% 47.6% 40.9% 28.6% 31.1% Financial liabilities/ total assets 61.2% 57.8% 69.3% 50.6% 39.5% 50.5% 58.8% 48.5% Total loans/ total deposits, x 3.0 2.6 3.3 1.8 1.3 1.9 2.8 2.8 Liquid assets/ total assets, % 19.0% 14.4% 26.0% 18.7% 35.5% 18.5% 12.4% 12.8% % deposits from individuals 39.7% 32.8% 48.2% 43.8% 41.8% 29.7% 32.2% 16.2%


Appendix I: Summary financial statements


42

Analysts certification and disclaimer This research report has been prepared by the research analyst(s), whose name(s) appear(s) on the front page of this document, to provide background information about the company or companies (collectively, the “Company”) and securities which are the subject matter of this report. Each research analyst hereby certifies that with respect to each of the Company and such securities, all the views expressed in this document accurately reflect his or her personal views about any and all of such securities or the Company.

Any recommendations, opinions, forecasts, estimates or views herein constitute a judgment as at the date of this report. This document has been produced independently of the Company and the recommendations, forecasts, opinions, estimates, expectations and views contained herein are entirely those of the research analysts. While all reasonable care has been taken to ensure that the facts stated herein are accurate and that the recommendations, forecasts, opinions, estimates, expectations and views contained herein are fair and reasonable, none of the research analysts, the Company nor any of its directors, officers or employees has verified the contents hereof and, accordingly, none of the research analysts, the Company nor any of its respective directors, officers or employees, shall be in any way responsible for the contents hereof, and no reliance should be placed on the accuracy, fairness or completeness of the information contained in this document.

No person accepts any liability whatsoever for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. Each research analyst and/or persons connected with any of them may have acted upon or used the information herein contained, or the research or analysis on which it is based, before its publication. This document may not be relied upon by any of its recipients or any other person in making investment decisions with respect to the Company’s securities. This report does not constitute a valuation of the Company’s business, assets or securities for the purposes of Russian or other CIS countries legislation on valuation activities.

Each research analyst also certifies that no part of his or her compensation was, or will be directly or indirectly related to the specific recommendations, opinions, forecasts, estimates or views in this research report. Research analysts’ compensation is determined based upon activities and services intended to benefit the investor clients of Renaissance Securities (Cyprus) Limited, RenCap Securities, Inc., Renaissance Capital Limited and any of their affiliates (the “Firm”). Like all of the Firm’s employees research analysts receive compensation that is impacted by overall Firm profitability, which includes revenues from other business units within the Firm.

Each research analyst or his or her affiliated company or other persons is or may be a member of underwriting group in a respect of proposed offering of the securities of the Company. Each research analyst may in the future participate in an offering of the Company’s securities.

For a complete set of disclosure statements associated with the companies discussed in this report, please contact Renaissance Securities (Cyprus) Limited, 9th Floor, Capital Center, 2-4 Arch Makarious III Ave., Nicosia Cyprus, Attention: Research Administration.

Important disclosures

For Renaissance Securities (Cyprus) Limited Research, see Bloomberg page Rena, or contact the relevant Renaissance Capital office. © 2007 Renaissance Securities (Cyprus) Limited. All rights reserved. This document and/or information has been prepared by and, except as otherwise specified herein, is communicated by Renaissance Securities (Cyprus) Limited, an indirect subsidiary of Renaissance Capital Holdings Limited ("Renaissance Capital"). This document and/or information is for distribution only under such circumstances as may be permitted by applicable law. This document and/or information is not and should not be construed as an offer, or a solicitation of an offer, or an invitation to subscribe for, to buy or sell, any securities or other financial instruments, and cannot be relied upon as a representation that any particular transaction necessarily could have been or can be effected at the stated price. The information contained herein is solely for information purposes only. Descriptions of any company or companies or their securities or the markets or developments mentioned herein are not intended to be complete. This document and/or information should not be regarded by recipients as a substitute for the exercise of their own judgment and has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. The information and opinions contained herein have been compiled or arrived at based on information obtained from sources believed to be reliable and in good faith. Such information has not been independently verified, is provided on an “as is” basis and no representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness, reliability, merchantability or fitness for a particular purpose of such information and opinions, except with respect to information concerning Renaissance Capital, its subsidiaries and affiliates. All such information and opinions are subject to change without notice, and Renaissance Capital is not under any obligation to update or keep current the information contained herein or in any other medium. Opinions expressed herein may differ or be contrary to opinions expressed by other business areas or groups of Renaissance Capital as a result of using different assumptions and criteria. Renaissance Capital and its affiliates, their directors, representatives, employees (excluding the US broker-dealer unless specifically disclosed), or clients may have or have had interests or long or short positions in any of the securities or other financial instruments mentioned herein, or of issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case as principals or as agents. Renaissance Capital and its affiliates (excluding the US broker-dealer unless specifically disclosed) may act or have acted as market-maker in the securities or other financial instruments described herein, or in securities underlying or related to such securities. Renaissance Capital may have or have had a relationship with or provide or have provided investment banking, capital markets and/or other financial services to the relevant companies. Employees of Renaissance Capital or its affiliates may serve or have served as officers or directors of the relevant companies. Renaissance Capital may rely on information barriers, such as "Chinese Walls," to control the flow of information contained in one or more areas within Renaissance Capital, into other areas, units, groups or affiliates of Renaissance Capital. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Options, derivative products and futures are not suitable for all investors and trading in these instruments is considered risky. Past performance is not necessarily indicative of future results. Foreign-currency- denominated securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or the price of, or income derived from, the investment. In addition, investors in securities, mentioned herein, the values of which are influenced by foreign currencies, effectively assume currency risk. Investing in Russia or other CIS countries and Russian or other CIS countries securities involves a high degree of risk and investors should perform their own due diligence before investing.

Neither Renaissance Capital, nor any of its affiliates, nor any of Renaissance Capital's or any of its affiliates', directors, employees or agents accept any liability for any direct or consequential loss or damage arising out of the use of all or any part of the information contained herein. The information contained herein may not be reproduced, redistributed or published, in whole or in part, for any purpose without the written permission of Renaissance Capital and Renaissance Capital accepts no liability whatsoever for the actions of third parties in this respect. This information may not be used to create any financial instruments or products or any indices United Kingdom & the rest of Europe: This report has been issued and approved for publication in the United Kingdom and Europe by Renaissance Capital Limited, which is authorized and regulated by the Financial Services Authority. Except as otherwise specified herein, this document is being distributed only by or with the approval of an authorized person or to (i) persons who have professional experience in matters relating to investments falling within article 19(1) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 (the “Order”) or (ii) persons to whom it may otherwise lawfully be communicated under the Order (together “Relevant Persons”). The investments to which this document relates are available only to, and any invitation, offer or agreement to subscribe, purchase or otherwise acquire such investments will be engaged in only with Relevant Persons. Any person who is not a Relevant Person should not act or rely on this document or any of its contents. It is not available for, and should not be relied upon by, private customers. Russia, Ukraine & other CIS countries: This document does not constitute an advertisement or an offer of securities in Russia or other CIS countries. It is not intended to be and must not be publicly distributed in Russia or other CIS countries. United States: This research report is being distributed in the United States by RenCap Securities, Inc.; or by a non-US subsidiary or affiliate of Renaissance Capital Holdings Limited that is not registered as a US broker-dealer (a "non-US affiliate"), to major US institutional investors only. RenCap Securities, Inc. accepts responsibility for the content of a research report prepared by another non-US affiliate when distributed to US persons by RenCap Securities, Inc. Any US person receiving this report who wishes to effect transactions in any securities referred to herein should contact RenCap Securities, Inc., not its non-US affiliate. Further information on the securities referred to herein may be obtained from RenCap Securities, Inc. upon request. Although it has accepted responsibility for the content of this research report when distributed to U.S. investors, RenCap Securities, Inc. did not contribute to the preparation of this report and the analysts authoring this are not employed by, and are not associated persons of, RenCap Securities, Inc. Among other things, this means that the entity issuing this report and the analysts authoring this report are not subject to all the disclosures and other U.S. regulatory requirements to which RenCap Securities, Inc. and its employees and associated persons are subject. RenCap Securities, Inc. is a subsidiary of Renaissance Capital Holdings Limited and forms a part of a group of companies operating outside of the United States as "Renaissance Capital". Contact: RenCap Securities, Inc., 780 Third Avenue, 15th Floor, New York, New York 10017, Telephone: +1 (212) 824-1099. Bermuda: Neither the Bermuda Monetary Authority nor the Registrar of Companies of Bermuda has approved the contents of this document and any statement to the contrary express or otherwise, would constitute a material misstatement and an offence. Other distribution: The distribution of this document in other jurisdictions may be restricted by law and persons into whose possession this document comes should inform themselves about, and observe, any such restriction.

Renaissance Securities (Cyprus) Ltd. Palais D’Ivoire, 12 Them. Dervis Street, Office 402, 1066 Nicosia Republic of Cyprus F + 357(22) 670 670 Regulated by Cyprus Securities & Exchange Commission (Licence No: KEPEY 053/04)

Renaissance Capital 22 Voznesensky Pereulok Moscow 125009 Russia T + 7 (495) 258 7777 F + 7 (495) 258 7778 www.rencap.com

Renaissance Capital Ltd. One Angel Court Copthall Avenue London EC2R 7HJ United Kingdom T + 44 (20) 7367 7777 F + 44 (20) 7367 7778 Regulated by the Financial Services Authority

Renaissance Securities (Nigeria) Ltd Regus Temporary Offices, 4th Floor Fortune Towers, Adeyemo Alakija Victoria Island, Lagos, Nigeria. T +234 1 271 9135 T +234 1 271 9137

Renaissance Capital 7th Floor, Regus Business Centre Purshottam Place Westlands Rd, Westlands Nairobi, Kenya T +254 20 360 1828 F +254 20 360 1100

Renaissance Capital Ukraine Velyka Vasylkivska, 77-A. Kyiv 03150, Ukraine T + 38 (044) 492 7383 F + 38 (044) 492 7393

Renaissance Capital Research

Head of Research Roland Nash + 7 (495) 258 7916 [email protected]

Head of Equity Research Alexander Burgansky + 7 (495) 258 7904 [email protected] Deputy Head of Equity Research Natasha Zagvozdina + 7 (495) 258 7753 [email protected]

Head of Fixed Income Research Alexei Moisseev + 7 (495) 258 7946 [email protected]

Head of Africa Equity Research Matthew Pearson + 44 (207) 367 7734 [email protected] Head of Africa Fixed Income Research Gordon Smith + 44 (207) 367 7781 [email protected]

Automotive & Transport + 7 (495) 258 7747 Eduard Faritov [email protected] Banking + 7 (495) 258 7748 David Nangle [email protected] Svetlana Kovalskaya Chemicals & Engineering +7 (495) 783 5653 Marina Alexeenkova [email protected] Rinat Kirdan Consumer/Retail + 7 (495) 258 7753 Natasha Zagvozdina [email protected] Ivan Nikolaev Victor Dima Ulyana Tipsina Equity Strategy + 7 (495) 258 7916 Roland Nash [email protected] Tom Mundy Ovanes Oganisian Metals & Mining + 7 (495) 258 7743 Rob Edwards [email protected] Yury Vlasov

Oil & Gas + 44 (7880) 841 669 Adam Landes [email protected] + 7 (495) 258 7904 Alexander Burgansky [email protected] Elena Savchik Roman Elagin Irina Elinevskaya Real Estate + 7 (495) 258 7770 x4959 Alexei Yazykov [email protected] Telecoms, Media & Technology + 7 (495) 258 7902 Alexander Kazbegi [email protected] Ivan Kim Tibor Bokor David Ferguson Ukraine Equities/Strategy + 7 (495) 258 7703 Katya Malofeeva [email protected] Vladimir Dinul Svetlana Dryhush Yulia Goleusova Vladislav Nosik Serhiy Petrenko Utilities + 44 (20) 7367 7777 Derek Weaving [email protected] Vadim Borokhov Vladimir Sklyar

Fixed Income + 7 (495) 258 7946 Alexei Moisseev [email protected] Nikolai Podguzov Petr Grishin Alexey Bulgakov Maxim Raskosnov Valentina Krylova Anastasiya Golovach (Ukraine) Nargiz Sadykhova Olesya Cherdantseva Economics + 7 (495) 258 7703 Katya Malofeeva [email protected] Elena Sharipova Olesya Cherdantseva Igor Lebedinets

Macro & Strategy + 44 (207) 367 7781 Gordon Smith [email protected] Samir Gadio Viriya Tim Credit Analysis +44 (207) 367 7931 John Bates [email protected] Technology/ Media/ Telecoms + 44 (207) 367 7734 Matthew Pearson [email protected] Financials + 44 (207) 367 7754 Sruti Patel [email protected] Metals & Mining + 44 (20) 7367 7777 Mark Smith [email protected] East Africa + 254 (203) 60 1822 Robert Bunyi [email protected] Mbithe Muema Southern Africa + 263 11 634 463 Dzika Danha [email protected] West Africa + 234 1271 9132 7 Oluyemisi Lanre-Philips [email protected] Adedapo Temitayo Orekoya Esili Eigbe

Kazakh banks 22 Oct - Renaissance Capital

Documents

Transcript of Kazakh banks 22 Oct - Renaissance Capital