IMF/World Bank 2007: A pause for breath
Banking has long dominated CIS issuance, making up over three quarters of all deals in the region so far this year. However, investor appetite is waning, especially in the oversupplied Kazakh space, even though the prospect of merger and takeovers does provide some speculative support to the sector. John Weavers reports.
Kazakh banks started their funding year in 2007 aggressively as six banks – BTA, BCC, Alliance, Tsesnabank, KKB and ATF – printed nine Eurobonds worth almost US$5bn-equivalent by mid-February. Since then, just Halyk Bank and Temirbank have come to the market – with US$700m 10-year and US$500m five-year deals in April and May respectively. Eurobond supply is likely to continue tailing off as the combination of waning investor appetite and excessive external borrowing concerns contain issuance amid doubts about the future of some second-tier institutions.
By the end of June, Kazakh banks' total international borrowings stood close to US$40.7bn, according to Moody's. This followed an extremely busy 2006 when external borrowing more than doubled to US$33.3bn, representing over half of the banking sector's total funding, according to the rating agency.
Concerns about oversupply weighed on the secondary market even before the late spring/summer EM sell-off, which triggered a marked acceleration in this year's losses. KKB five-year CDS more than doubled from 210bp in early June to over 500bp at the peak of the EM sell-off, while in the cash market BTA 2037s and Alliance Bank euro 2012s had collapsed to 87.25 and 89.00 by early September from their 99.165 and 99.251 reoffer prices earlier this year.
Despite the jump in interest rates, many Kazakh banks will be willing to pay up in the new environment since Eurobond yields remain attractive compared with the bumper returns received from lending on locally. On the demand side there is plenty of value after the sharp sell-off, particularly for shorter-dated Kazakh issues of two or three years, which have spreads of 400bp–500bp over Libor and where the default risk is limited.
In the primary market, however, investor appetite has plunged for a sector that has left many badly burned, including the crucial Asian private bank bid. "A lot of Kazakh bank issues were upsized and priced inside guidance before tumbling in the illiquid secondary market. This has left a bad taste in many investors' mouths," said one London-based fund manager, who only sees decent demand for the very top Kazakh names, specifically Halyk and KKB.
"Despite double-digit yields, hedge funds may also be reluctant to get involved given the traditional lack of liquidity in Kazakh issues," he added.
Further down the credit curve the fund manager believes the market will be shut to banks for some time while origination desks say they will attach "health warnings" to returned RFPs.
"An investor strike will act as a clear signal to Kazakh banks to stop their excessive annual loan book growth of around 100%, which would undoubtedly be a good thing. Up to 40% of loans are related to the real estate market, which has obvious potential to deteriorate," said an EM syndication manager.
Indeed, hefty real estate exposure coupled with the need to refinance maturing Eurobonds has raised questions about the future of some banks. The National Bank of Kazakhstan (NBK) has sought to allay fears over banks' ability to repay Eurobonds, with its chairman, Anvar Saidenov, seeing "absolutely no cause for any concern among investors".
The central bank is able to provide banks with short-term loans as its very liquid stabilisation portfolio has just been increased by US$2bn, while Saidenov has indicated that banks will be allowed to forgo proposed increases in reserve requirements. The NBK is hardly likely to allow the top three Kazakh banks to fail, perhaps the top five. Below this there is potential for some smaller banks to go under, though struggling credits could of course be taken over by the large domestic banks or foreign institutions.
Grigori Marchenko, a former central bank governor and the current Halyk Bank CEO, believes new regulations to limit foreign borrowing could trigger mergers among second-tier Kazakh banks, in view of their need to boost capital and the limits on domestic borrowing. One or two banks may be open to foreign partnerships or even takeovers as major European banks look to take majority stakes in the fast-growing Kazakh banking sector, where growth rates are well in excess of 50% per year, he suggested. Indeed Italy's UniCredit has become the first buyer of a leading Kazakh bank in June when it purchased ATF Bank for about US$2.3bn.
Ukraine banks on the other hand have a history of openly courting foreign partnerships and ownership. Aval, the second-largest Ukrainian bank, has been acquired by Raiffeisen International, Banca Intesa has agreed to buy 88% of Ukrsotsbank's assets, while BNP Paribas purchased a 51% stake in UkrSibbank at the end of 2005. In September 2007 Commerzbank purchased a 60% plus one share in Bank Forum – Ukraine's 13th largest bank in terms of assets.
Ukrainian banking is less concentrated than in other CIS countries with the 10 largest banks accounting for only about 50% of the sector in Ukraine, with the biggest, Privat Bank, having a 14% share of total deposits.
Following Absolut Bank’s acquisition earlier this year, the focus of takeover speculation in the CIS banking sector shifted from Ukraine to Russia. Russian private banks enjoyed a bond market boost, as players speculated on the prospects for further foreign takeovers. Fortified by the 200bp plunge in Absolut Bank spreads following its acquisition by Belgium's KBC, other banks were suddenly in demand. KBC paid €704m for a 92.5% stake in Absolut, making it the largest overseas purchase in Russia, overtaking Raiffeisen's US$550m acquisition of Impexbank last year.
Rapidly growing Russian banks require additional capital, and if they cannot secure this from existing shareholders they need to sell strategic stakes or launch IPOs. Among potential merger partners, SG CIB has a 20% stake in Rosbank with an option to purchase a controlling stake, while Commerzbank owns 15% of Promsvyazbank.
Russian Standard Bank (RSB) is another possible takeover candidate, having come very close to a deal with BNP Paribas in 2005. MDM Bank, with US$9.5bn of assets, is believed to be planning the sale of a sizeable minority stake to a foreign strategic investor, while Uniastrum (US$1.56bn worth of assets) is expected to sell at least US$1bn of itself in a coming auction.
Commerzbank analyst Steve Cook expects more takeovers to come from Russia than Ukraine – and more from Ukraine than Kazakhstan. "Kazakhstan is not quite as exciting as the other two countries given its smaller population [15 million] and limited retail reach. In any case, some Western banks have entered the market already or directly under their own names," he said. Over the past few years, Western banks have been more aggressively buying into Ukrainian banks than Russian ones and maybe it is time for its larger neighbour to play catch-up.
Cook also emphasised restrictions on the demand side as many Western banks are generally only interested in securing controlling stakes, a position underlined by Raiffeisen's sale of its 10% stake in Kazakhstan's BTA when it became clear it would not secure a majority holding.
Even without potential takeover bids, Russian private banks should enjoy better intrinsic demand than their Kazakh counterparts. "With Kazakh banks you have the same old names coming to the market every few months while with Russia you get four to five time as many issuers who spread their supply out far more and thus enjoy some individual scarcity value," an EM syndication manager pointed out.
Though Russia suffered a mini banking crisis in 2004 things have improved markedly since then, the manager added. "There has been a lot of consolidation in the sector while there has been very strong annual growth with banks becoming more sophisticated in their funding. Of course the proof will be in the fourth quarter. The market has not really been tested since July and it is only when supply restarts will we know the extent of the premium needed for Kazakh over similarly rated Russian bank names."