KAZAKHSTAN: FATE OF LARGEST BANKS TO BE DECIDED

UNCLAS SECTION 01 OF 03 ASTANA 001174

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: KAZAKHSTAN: FATE OF LARGEST BANKS TO BE DECIDED
IMMINENTLY (PART 1 OF 3)


1. (U) Sensitive but unclassified. Not for public Internet.


2. (U) This is the first in a three-part series analyzing recent
developments in Kazakhstan's banking sector, the possible future
liquidation of its assets, and potential implications for
international export credit agencies.


3. (SBU) SUMMARY: U.S. Department of Treasury Advisor Tom Lanier
and International Economist in the Office of Europe and Asia Larry
Norton visited Almaty and Astana June 10-13 to assess current
conditions and trends in Kazakhstan's economy and the overall health
of its financial sector. Lanier and Norton's interlocutors reported
that Kazakhstan's Financial Supervision Agency (FSA) has ordered the
country's largest private banks - Alliance and BTA - to submit
proposals for the restructuring of their foreign obligations to
their international creditors. The fate of BTA and Alliance,
according to the FSA, is entirely contingent upon the level of
investor acceptance of the proposed restructuring. Should creditors
reject the offers, the FSA will be forced to liquidate the banks'
assets, with no promises of preferential treatment for predominantly
western Export Credit Agencies (ECA). END SUMMARY.

THREE DEBT RESTRUCTURING OPTIONS


4. (SBU) Financial Supervision Agency (FSA) deputy head Kuat
Kozhakhmetov told Lanier and Norton that both BTA and Alliance Banks
are now seeking to restructure their external debt of around $33
billion.


5. (SBU) According to the FSA, Alliance Bank will be the first to
offer three possible options to its international creditors:

Option A - 20% immediate cash repayment at an 80% discount;
Option B - 50% repayment over seven years with 7% interest; and
Option C - 100% repayment over 15 years with 5% interest.

The response of international creditors to Alliance's offer is
expected to serve as a litmus test for BTA's subsequent debt
restructuring.

ALLIANCE UNDER THE MICROSCOPE


6. (SBU) According to the FSA's Kozhakhmetov, Alliance is in a
more precarious position than BTA due to the poor quality of its
assets and the increasing likelihood that the Kazakhstani government
will not come to its rescue, should the debt restructuring plan
fail. Kozhakhmetov said that there is currently a $1.1 billion
deficit in the Alliance Bank balance sheet, which is likely linked
to the discovery of a $1 billion contingent liability that had been
secured by U.S. Treasury bonds. The Managing Director for
International Relations at Alliance Bank, Gaziz Shakhanov, told
Lanier and Norton that the bank's recent discovery of its
"shockingly bad asset quality" was confirmed in a recent report to
the FSA showing that the bank has a negative equity balance.
According to Shakhanov, Alliance Bank is now operating under a
"special regime" (i.e., the first stage of bankruptcy according to
FSA regulations) but he remains guardedly optimistic that the bank
may recoup its equity by either restructuring its debt, or by
receiving a significant capital injection from the Samruk Kazyna
National Welfare Fund. With the possibility that there may be other
hidden liabilities, the goal is to determine the bottom line for
Alliance. "We need to show the size of the hole," said Shakhanov.

BTA HOLDING ITS BREATH


7. (SBU) The First Deputy Chairman of the BTA Management Board,
Galymzhan Pirmatov, told Lanier and Norton that the much anticipated
KPMG audit of BTA has been completed, and the results were
unofficially shared during a BTA conference call on June 4. At
this point, said Pirmatov, BTA is awaiting official shareholder and
FSA approval before going public with the final numbers. According

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to the CEO of ATF Bank Alexander Picker, the results are likely to
show that BTA now has a negative equity of at least $7 billion.

ASSET QUALITY IN CRITICAL CONDITION


8. (SBU) European Bank for Reconstruction and Development (EBRD)
Senior Banker Tatyana Tyo said that she is "very concerned" about
the declining asset quality and increasing percentages of
non-performing loans (NPL) in loan portfolios. She added that many
of the banks that have participated in the Kazakhstani government's
anti-economic crisis program to provide relief to small and medium
enterprises (SME) have simply dispersed the funds allocated by
Samruk Kazyna by refinancing existing loans. As she sees it, funds
designated for needed SME support to kick-start the economy are
largely being used to adjust the terms of non-performing loans by
refinancing them at a 1-2% discounted interest rate, and granting
6-12 month grace periods. In essence she said, this will only
extend the loan period, but "they will eventually surface."


9. (SBU) The biggest risk for most Kazakhstani banks with
non-performing loans in their portfolios remains their exposure to
the real estate markets. Alliance's Shakhanov said that Alliance
has "significant exposure to the real estate market, particularly
for the construction of elite residential complexes." Describing
the banking sector as a whole, Astana Finance Chairman of the Board
Ketal Islamov said, "the situation overall is being described more
optimistically than it is in reality." Astana Finance is heavily
exposed to the "frozen" real estate market, Islamov said that he
expects no increases or improvements in the value of its mortgage
portfolio. He believes that government anti-crisis support for the
market is largely inadequate and has only allowed for the
refinancing of existing loans.

CREDITORS MAKE THE CALL


10. (SBU) According to the FSA, Kazakhstan's banks have little time
to develop detailed plans for debt restructuring (which must be
acceptable to their international creditors) and present them to the
Kazakhstani financial authorities. The FSA's Kozhakhmetov said
Alliance must complete its restructuring by July 15, and BTA by
August 1. He believes that by offering several options, different
types of investors/creditors will find one of the three options
acceptable. However, if the debt restructuring is not accepted by
creditors, then the next phase will be to place the bank into a
conservatorship and move forward with the liquidation of assets.
The work of the court appointed liquidator "ideally would go
quickly, because I understand that the faster you liquidate, the
more value you recover" said Kozhakhmetov.

ALLIANCE REPORTS MOU WITH CREDITORS

11. (SBU) In a recent positive development, Alliance Bank reported
in a press release dated July 8 that it had signed a Memorandum of
Understanding with the committee of creditors, which includes the
Asian Development Bank, HSBC Bank, and Wachovia Bank to name a few.
According to the agreement, Alliance Bank expects to offer a cash
payout of as much as $500 million to some of its creditors, in
return for their acceptance of a 77.5 percent haircut. While
details regarding the specific creditors and exact timeline have not
been fully specified, it as apparent that Alliance Bank stands to
retire $1.85 billion in debt as a result. The restructuring plan
will be sent for official review by the FSA on July 15.

PRIORITIES IN REPAYMENT UNDER LIQUIDATION


12. (SBU) Should it come to liquidation for either or both Alliance
and BTA, FSA Control Department Director Mukhtar Bubeyev, says
liquidated assets will be used, in priority order, to pay: a)
salaries; b) fines; c) individuals with deposits under $5 million;
4) individuals with deposits over $5 million; and 5) corporate
deposits. According to Bubeyev, the current intention of the FSA is
to treat all trade finance the same as any other international

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creditor. As for groups like EBRD, "personally, I think they should
be put at the very bottom of the list because they are a development
bank" he said.


13. (SBU) According to FSA Deputy Chairman Kozhakhmetov, despite
the fact that the Government of Kazakhstan has put $1.8 billion in
equity, and $2.2 billion in deposits into the banking sector to
date, it would "stand in line with everyone" in the event of
liquidation. This point was corroborated by the FSA's Bubeyev, who
said that even if the National Bank of Kazakhstan (NBK) has given
funds to a bank which fails, it will not be the first creditor in
line for repayment, but rather would be grouped with other
creditors.

PREFERENTIAL TREATMENT FOR EXPORT CREDIT AGENGIES?


14. (SBU) EBRD Senior Banker Tatyana Tyo claimed that there will be
no special treatment for export credit agencies (ECAs),despite
reports that the WTO has reportedly sent letters to Samruk-Kazyna
specifically describing the long-term credit risk to Kazakhstan of
not offering preferential conditions. "We want to treat everyone
equally. If we do give preferential treatment to BTA's $3.5 billion
in trade finance, it will cause more pain to the creditors," said
BTA First Deputy Chairman Pirmatov. However, Pirmatov acknowledged
that this may depend on the Kazakhstani government's strategic
priorities, for example, the future importation of critical
industrial equipment.


15. (SBU) Several Kazakhstani bank representatives agreed that the
situation may become problematic if export credit agencies (ECAs)
are not given preferential treatment. "It will create a risk to the
system if the export banks are treated the same as other creditors"
said KazKommertsBank Executive Director Sergey Mokroussov. Option
Three, he believes, may have been specifically designed for such
Western agencies.


16. (SBU) Samruk Kazyna Managing Director Abay Iskanderov delivered
a slightly different message to Lanier and Norton that distanced the
government from the plight of the banks, while still trying to
reassure ECAs that they would likely be offered beneficial terms.
"When it comes to the ECAs, everyone knows who you are messing with.
There will probably be no haircut to the ECAs, but very likely the
repayment timeline will be extended. However, it will be the
government's decision whether or not to treat the ECAs differently."
Further elaborating Samruk-Kazyna's position, he said "the
government is not a historic partner to BTA and the other banks, and
most of the negotiation now will have to be between the banks and
the creditors." Iskanderov explained that the decisions by
Samruk-Kazyna regarding the banks had been made in close
consultation with the National Bank, the FSA, the Ministry of
Finance, and the Prime Minister's office, and said, "It is clear now
that the government will not supply all the capital needed." With
$18 billion in outstanding loans, including $11.5 billion in
non-performing loans, the government cannot be expected to assume
all of these liabilities, he concluded.


17. (SBU) According to the EBRD, some large depositors (over $5
million) are already reporting difficulties in retrieving assets
from both BTA and Alliance. For smaller depositors, EBRD also says
it is highly unlikely that the Kazakhstani Deposit Insurance Scheme
would realistically be able to repay them in the event of
liquidation. Tyo cited as an example the continued failure of the
Deposit Insurance Scheme to repay in full customers of Valut Transit
Bank, which was liquidated by the FSA starting in December 2007.
(NOTE: According to the Chairwoman of the Deposit Insurance Fund,
96% of all depositors with guaranteed deposits less than or equal to
700,000 tenge -- approximately $4670 -- were repaid in full by
December 2008. END NOTE.)

HOAGLAND