VZCZCXRO5983
OO RUEHIK
DE RUEHTA #2235/01 3620041
ZNR UUUUU ZZH
O 280041Z DEC 09
FM AMEMBASSY ASTANA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 7105
INFO RUCNCLS/ALL SOUTH AND CENTRAL ASIA COLLECTIVE
RUCNCIS/CIS COLLECTIVE 2295
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBJ/AMEMBASSY BEIJING 1658
RUEHKO/AMEMBASSY TOKYO 2359
RUEHUL/AMEMBASSY SEOUL 1287
RUEAIIA/CIA WASHDC
RHEFAAA/DIA WASHDC
RHEHNSC/NSC WASHDC 1853
RUEKJCS/SECDEF WASHDC 1703
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
RHMFISS/DEPT OF ENERGY WASHINGTON DC
RUEATRS/DEPT OF TREASURY WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RHMFIUU/CDR USCENTCOM MACDILL AFB FL
RUEKJCS/JOINT STAFF WASHDC
RUCNDT/USMISSION USUN NEW YORK 2650
RUEHNO/USMISSION USNATO 2945

UNCLAS SECTION 01 OF 03 ASTANA 002235 
 
SENSITIVE 
SIPDIS 
 
STATE FOR SCA/CEN, EEB/ESC 
STATE PLEASE PASS USTDA AND OPIC 
 
E.O. 12958: N/A 
TAGS: PGOV PREL ECON EFIN KZ
SUBJECT:  KAZAKHSTANI BANKS:  ADJUSTING TO A CHANGING LANDSCAPE 
 
ASTANA 00002235  001.2 OF 003 
 
 
REFTEL:  ASTANA 2200 
 
¶1.  (U) Sensitive but unclassified.  Not for public Internet. 
 
¶2.  (SBU) SUMMARY:  Financial analysts, bank executives, managers, 
and customers alike agree that the Kazakhstani government's efforts 
to restructure debt and successfully keep afloat ailing BTA and 
Alliance banks are critical to the overall recovery of the financial 
sector.  A failure of both these institutions would not only 
translate into the loss of billions of dollars of Kazakhstani 
taxpayer funds, but could also result in a loss of foreign-investor 
and local confidence in the country's financial system.  In the wake 
of new government regulations intended to strengthen the banking 
sector, banks in Kazakhstan must adapt, or disappear.  Because of 
the narrow banking-customer base, overall tightness of financial 
markets worldwide, and marginal quality of existing bank assets, 
foreign sources of capital will remain important despite the 
government's efforts to limit access to relatively cheap foreign 
cash.  While ample evidence for continued pessimism remains, many 
perceive opportunity and growth over the horizon, as long as the 
restructuring of BTA and Alliance banks are seen as a success.  END 
SUMMARY 
 
THE CHANGING LANDSCAPE 
 
¶3.  (SBU) On the eve of Kazakhstani Independence Day (December 15), 
Chairman of the Kazakhstan Association of Financial Institutions, 
which represents 238 local and foreign banking institutions,  Serik 
Akhanov termed this period critical for the local banking sector. 
He recounted President Nazarbayev's November 16 meeting with bank 
leaders, which outlined the government's strategy to address 
concerns over transparency and portfolio risk.  The four-point 
strategy, according to Akhanov, will implement new regulations to 
mandate minimum-liquidity ratios, invest billions in low-interest 
loans to provide an alternative source of funds for banks and 
businesses, establish standards for better qualified bank 
management, and continue to restructure large, defaulted banks. 
 
¶4.  (SBU) While he admitted that the picture is not pretty, Akhanov 
adamantly asserted that the Kazakhstani public remains confident in 
the banking system.  To illustrate his point, he pointed to the 23% 
increase in bank deposits in 2009, due in part to the National 
Bank's new guarantee of up to 5 million tenge (approximately 
$338,000) per deposit.  Separately, ATF bank branch manager Aderna 
Nurtaeva told EmbOff about her bank's 78% increase in deposits -- 
equivalent to an additional $1 million -- over the past year. 
However, she qualified her statement by explaining that these 
one-year-term deposits are usually under $1,000.  Nurtaeva claimed 
the lucrative flood of deposits resulted from the new 
deposit-guarantee rules and ATF's reputation as a large, foreign 
bank with 154 branches located throughout the country.  Although 
deposits significantly increased, she admitted that loan activity 
has ground to a halt despite the bank's "attractive" loan program 
offering 21-35% mortgage rates, depending on income and risk. 
 
¶5.  (SBU) Assuming a more somber tone, Akhanov asserted structural 
obstacles in the Kazakhstani economy could threaten the government's 
plans.  He claimed that many people continue to hold dollars "under 
the bed" as a possible hedge against devaluation and inflation, and 
highlighted the growing rate of unemployment, which officially is at 
just under 7% but may be twice this number, including underemployed. 
 He asserted that this situation further curbs any appetite to 
invest, let alone spend.  (NOTE:  The same day, Prime Minister 
Masimov claimed a falling unemployment rate of 6.3% (reftel).  END 
NOTE.) 
 
¶6. (SBU) On December 14, Deputy Akim of Almaty Marat Kudyshev -- and 
city budget chief -- pointed to rising unemployment as his main 
concern.  Now at historic levels, he said unemployment threatens the 
general mood of consumer confidence and undermines his ability to 
 
ASTANA 00002235  002.2 OF 003 
 
 
raise city funds.  A recent survey of employers published by 
"Focus," a business daily, showed that two-thirds of employers plan 
to cut or curtail salary expenses through lay-offs or salary cuts. 
In separate meetings with Emboff, KZ Rating Deputy Director Denis 
Rybalkin echoed these same concerns and lamented that the National 
Bank's recent decision to leave interest rates unchanged will not 
improve the investment climate because of uncertainty over jobs.  He 
asserted that people are not spending and jobs are not being 
created, despite the apparent stabilization of inflation. 
Therefore, he argued for a stimulus in the form of lower interest 
rates. 
 
COMPETITION IN A NARROW MARKET 
 
¶7. (SBU) Separately, both Akhanov and Rybalkin claimed that the 
government's proposed policy to mandate at least $33 million in bank 
equity (5 billion tenge) is intended to encourage bank mergers and 
an overall "thinning" of the banking community.  KZ Rating's 
analysis suggested that many non-performing banks might be forced to 
leave the market because of their higher percentage of 
non-performing assets (i.e., loans, investments).  Akhanov also 
argued that current consumer demand does not support the existing 
number of banks.  He argued that Kazakhstan's relatively small, 
dispersed population translates into a wage-earning population of 
less than 5 million, which generally has little discretionary money 
to save or invest given GDP per capita of under $5,000.  (NOTE: 
According to the official statistics, 7.9 million people earn wages 
in Kazakhstan.  END NOTE.)  For example, 28-year old taxi driver 
Abay Okeu complained to Emboff that he has no disposable income left 
after he pays for rent, food, clothes, and gas. 
 
¶8.  (SBU) Nurtaeva also expressed concern about bank competition and 
market over-saturation.  Located in the NurliTau Business Center 
amidst one of the more upscale neighborhoods in Almaty, Nurtaeva 
competes with nine other bank branches in the building, making it 
hard for individual banks to stand out to potential customers.  She 
also complained about significant expenditures on training programs 
and supervision because the monthly salary of 45,000 tenge ($300) is 
insufficient to attract qualified cashiers.   KZ Rating's Rybalkin 
asserted that the government recognizes the problem of bank 
over-saturation in certain market areas and under-representation in 
others.  He mentioned discussion of bank "regionalization," 
concentrating activities in specific areas, due to the decision by 
many banks to work only in big cities. 
 
FOREIGN BANKS -- CHANGE OR DIE 
 
¶9.  (SBU) In separate meetings with Emboff on December 15, HSBC and 
RBS (Royal Bank of Scotland) Chief Executive Officers Simen Munter 
and Rudi Geerdink acknowledged the necessity of successful 
government intervention in the wake of the payment defaults.  Munter 
told Emboff that while "one man's bust may be another's gain," he 
loathes seeing any banks fail because of the overall impact on 
confidence.  Despite problems in the banking industry, Geerdink more 
bluntly declared the necessity due to the absence of any other 
obvious investment or money-holding options in the country.  While 
Munter viewed the long-term prospects of many local banks with a 
large degree of skepticism because of the banking system's rigid 
nature and lack of transparency, Geerdink remained cautiously 
optimistic about the government's bank takeovers.  Both men argued, 
using very different approaches, that foreign banks -- while 
comparatively small -- serve an important function, offering top 
services not available through domestic banks, such as RBS' on-line 
bill-pay services. 
 
¶10. (SBU) Unlike HSBC, RBS, Geerdink said, chose not to offer 
mortgages due to the unsound price point in the real estate market. 
Munter, however, argued for HSBC's focus on mortgage business, 
because he views these customers as long-term business partners 
provide selective, risk-averse underwriting.  He claimed that HSBC 
 
ASTANA 00002235  003.2 OF 003 
 
 
now offers the most competitive rates in the country, averaging 
11.5-15% (retail rates average just above 15% now according to KZ 
Rating). 
 
¶11.  (SBU) Despite its absence from the mortgage market and lower 
deposit interest rates, Geerdink asserted RBS continues to increase 
its market share.  He attributed RBS' success to strategic planning 
and the absence of alternatives because of local banks' "poor 
service and outrageous fees."  Geerdink viewed only Halyk bank as 
having a legitimate, long-term future.  While he was upbeat about 
RBS compared to its competition, Geerdink criticized the National 
Bank's decision to limit non-Kazakhstani deposits in banks to 50%. 
 
 
¶12. (SBU) According to Geerdink, higher oil prices and the tenge's 
creeping value against the dollar (148 up from a high of 152) have 
caused many of his customers to switch from dollar to tenge 
deposits.  In recent months, he observed a reversal of the 30/70 
split between tenge and dollar deposits last year to a 70/30 split 
today.  He noted the large cash holdings of all major foreign banks 
due to flat-lined lending coupled with increased retail and 
corporate deposits.  Because this trend extends beyond Kazakhstan, 
Geerdink believes foreign banks will act as a source of borrowing 
for other domestic banks. 
 
¶13. (SBU) COMMENT:  The effect of new banking regulations designed 
to address weaknesses in Kazakhstan's banking regime remains 
unclear.  Proposed measures to regionalize banks and require minimum 
thresholds for bank equity might not have the intended outcome on 
competitiveness nor result in better services/access to the public. 
In the end, market forces on oil prices could have a bigger impact 
on the direction and speed of the banking sector's recovery than any 
government regulation.  END COMMENT. 
 
HOAGLAND