The price of Alliance Bank's shares traded on the London Stock Exchange has declined by more than half since its IPO in June. There is growing skepticism among international investors about how the bank will be able to refinance its foreign loans and whether it will be able to stop the continuing outflow of deposits. Talking to the chairman of Alliance Bank Dauren Kereybayev, however, it appears that the bank is trouble-free and in perfect shape to continue its fast growth in the Kazakh retail banking sector. Below is an interview with Kereybayev published in Kazakh business weekly "Business and Power". The original version in Russian can be found here.
Not long ago, you returned from a road show where you met with international investors? What can you say about their attitude towards Kazakh banks?
I think it is more correct to talk about their attitude towards the Kazakh banking system as a whole. If you noticed, the stock prices of Kazakh banks tend to move up or down together; if the prices are decreasing, then they are decreasing for all the banks; and if they are going up, it’s also the same. In principle, the investors’ mood is reflected in a wait-and-see attitude and their willingness to immediately forget past problems. The wait-and-see attitude that is found mainly among the Western investors is the result of their belief that we have not yet seen the end of the global credit crisis. Only after it is over, can we realistically assess who was affected by the crisis and how. The concern of British investors, specifically, is understandable because even an institution like Northern Rock with a two-hundred-year history suffers massively from the liquidity crisis. On the other hand, investors have short memories, and are ready to approach previously problematic markets, if they see that potential profits outweigh the inherent risks. Therefore, we can assume that in February of next year, when all banks publicly show the results of their 2007 activities, the Eurobond market will slowly start to resurrect.
Do you think that Kazakh banks will be able to refinance their current outstanding debt at more or less attractive terms?
Of course, the rates will be slightly higher than in the recent past but nevertheless they should allow the banks to refinance their debt and continue their activities. The result of this, however, will be that the growth of Kazakh banking sector will not exceed 30 percent next year.
Some analysts predict a second wave of the current crisis because of possible defaults in the American mortgage market. Are you ready for this scenario?
Even if there is a second wave, and there will be one, it should not affect us. I think that Kazakh banks are facing their most difficult period right now. Once they refinance their debt, there will no longer be such indiscriminate issuance of loans, especially mortgage loans. The first wave of the crisis was so distressing because it happened suddenly. It’s like a typhoon --- the first wave brings maximum destruction and damage, but by the time the second wave comes, people have time to prepare. Incidentally, I wish to point out that investors appreciate the actions of our regulators aimed at maintaining the stability of Kazakhstan's financial system.
Do you think that Western investors see today as an opportune time to enter the market and pick up the suddenly inexpensive shares of Kazakh banks?
Absolutely. They are observing the markets and trying to determine when the market sentiment changes not just in Kazakhstan but everywhere. This is the wait-and-see attitude that I already mentioned. At one point I even thought that the market players were attempting to escalate the crisis to cause an even greater fall in the prices of securities, so that they could buy them even cheaper. There is a whole army of professional markets participants with their own rules of the game and a plethora of financial instruments that they use to their goals.
What about the current liquidity situation at Alliance Bank?
We exceed all the liquidity rations. As far as the bonds accumulated in the National Bank as minimum reserves are concerned, we are not creditors. All this, in my view, clearly shows the status of the bank. We have openly spoken about our need to refinance $406 million in foreign loans by the end of the year. The non-critical bank liquidity stands currently at more than $2 billion, and as you know, our shareholders have placed on the accounts of Alliance $220 million from the IPO proceeds. Additionally, the bank receives monthly another $120-150 million from repayments of our outstanding consumer credit. Also, the recently altered method of calculating the minimum reserve requirements resulted in the lowering of these by another 15-17 billion tenge ($125-141 million) which provides additional liquidity for the bank. Therefore, the current state of liquidity will allow the bank to fulfill its internal and external obligations.
Will consumer lending continue to be the top priority for Alliance Bank?
Sure. Consumer lending has proven its viability in the face of the mortgage crisis. Consumer lending is based on the real income of the population which is generally not declining but rather increasing because of the encouraging macroeconomic situation in the country. This is why the current crisis has not been reflected in the retail lending market --- not in the volume of loans issued, not in the terms of repayment. We did not stop for a second, and we continue to grow in the same direction. It is necessary to understand that this is a specific product and it’s necessary to be able to work with it. Today, the approach that we chose has confirmed its viability, as opposed to concentrating the loan portfolio in mortgage and construction lending. In our bank, construction and mortgage only make up 22 percent of the loan portfolio. This, according to our estimates, is lower than for Halyk Bank, Bank CenterCredit and Kazkommertsbank. We have, incidentally, begun issuing consumer loans because we did not want to compete in the overcrowded mortgage market. The rivalry between participating banks led to seriously declining rates and low profitability.
The emergence of the savings product “Excellent” (its rates greatly exceed those of the competition) has caused talks that this could be an evidence of problems in the bank?
If you take a look at the market, you will see that we have the highest rate of return on our loan portfolio. That allows us to play with rates depending on the market situation. Also, if you added the cost of prizes, raffles and other promotional activities that other banks incur with their loans, I am sure that you would come up with the same rate that we pay our customers. A few years ago, Alliance Bank started an initiative to abolish these promotional activities but none of the other banks supported our efforts. Today, we no longer look at the other banks on this issue --- Alliance Bank is conducting an independent deposit policy, and the rejection of promotional activities like raffles or lottery is an integral part of our policy.
