Alliance Bank's Debut on LSE

As Kazakhstan’s economy keeps on growing at a fast pace, more and more Kazakh companies turn to Western exchanges as sources of financing. Alliance Bank, Kazakhstan’s third largest bank and its largest retail lender, is the latest newcomer to join the club of British-listed companies from this former Soviet Union country. Yesterday, on July 17, its major shareholder, the Almaty-based holding company Seimar Alliance Financial, raised $704 billion in its listing on the LSE.

Alliance whose common shares have already been listed on the Kazakhstan Stock Exchange (KASE) placed 50.28 million GDR’s, each representing-one thirtieth of a share, to offer around 17.4 percent of the bank. The sale price implies a market value of around US$4.05 billion. Seimar sold the GDR’s at $14.00 each which is the bottom of the indicated range of $14.00 and $17.30. During the first day of trading the shares lost 6.7 percent and closed at $12.80.

Alliance is the third Kazakh bank that listed its GDR’s on LSE. Kazkommertsbank has listed its shares in London in November 2006 and Halyk Savings Bank followed in December 2006. Two other larger Kazakh banks are currently considering secondary offerings in London (Bank TuranAlem and Bank CenterCredit) while Unicredit, the Italian banking group, agreed to buy another Kazakh bank, ATF Bank, for $2.2 billion.

While Alliance’s GDR’s were listed at the low end of the estimated range, the share price indicates a huge premium to its peers. The issue price was a multiple of 4.8 times book value of $2.91 per GDR as of March 2007, a 78 percent premium to Kazkommertsbank which trades at just 2.7 times book value of $8.269 per GDR.

Alliance has been growing aggressively over the last several years and moved from being a tenth largest retail lender in Kazakhstan at the end of 2004 to being the leader today. To fuel this aggressive growth in the near future, the London listing was a logical step. However, the fast growth brings several risk factors that need to be considered.

First, the often discussed and highly praised growth of the banking sector in Kazakhstan is fueled mainly by retail credit and lending to construction companies and real estate developers. The product and services range of most Kazakh banks, and especially small and medium-size banks, is not wide, and the risks tend to be concentrated in certain areas. For Alliance, retail lending represents a total of 45 percent of its loan portfolio which makes it vulnerable to both systematic and unsystematic risks.

As most Kazakh banks, Alliance strongly depends on international capital markets as a source of capital, and as a result, is vulnerable to exchange rate, refinancing and interest rate risks. In addition, as the bright economic situation in Kazakhstan and the strength of the Kazakh tenge (especially compared to its neighbors) can be attributed to the high oil prices, at least as much as to President Nazerbayev’s economic policies, the banks are highly vulnerable to macroeconomic shocks like a sudden drop in the price of oil that would almost certainly take the tenge down as well.

Second, as already mentioned, Alliance’s growth was mainly thanks to the aggressive increasing of its market share in Kazakhstan’s retail lending. Today, its share represents 20 percent of the Kazakh market. However, as the volume of loans and the speed with which they are approved increase, so do the risks. Alliance uses a proprietary credit ranking system that allows it to grant or reject a retail loan in a matter of minutes. This, while allowing the processing of a large number of loans, naturally leads to a degradation of quality of the loan portfolio. As of the end of 2006, the non-performing loan of the ration was 3.6 percent. While this is an increase from the year before, it is mainly the result of Alliance’s strategy to focus on retail lending which is both more lucrative and riskier, and it is difficult to assess the effectiveness of the credit issuance system. The fact of the matter is that as the bank is fighting for market share, it cannot afford to cherry-pick worthy borrowers and the number of non-performing loans is almost certain to increase. As the retail loan portfolio makes up almost half of the entire loan portfolio of the bank, this may cause difficulties in the future. In addition, it should be noted that the growth occurred during a period of highly favorable macroeconomic conditions which may or may not last.

Kazakhstan has certainly been a success story, especially compared to its neighbors, and it attracts attention of not only oil and gas and mining companies but increasingly of portfolio managers around the world. However, it remains to be seen whether its almost double-digit growth of the past several years was thanks to the market-friendly policies of the presidential administration or merely to the high prices of oil and gas. The debut of Alliance Bank on the London stock exchange shows that investors are growing cautious of risky deals whatever the success story may be.