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Kazkommertsbank’s (KKB) five-year CDS widened by 15bps-20bps today (21 August), despite the bank’s attempts to mollify debt investors yesterday during a 1H07 earnings call. The bank is one of several Kazakhstani financial institutions that have fallen victim to their own recent popularity as issuers.
“Banks in Kazakhstan have borrowed a lot from international lenders over the last year and a half and now the market is pricing in the perception that the debt could be difficult to refinance,” said one fund manager. “The bank bonds were beaten up pretty badly before the credit crunch, even though the banks are performing well and Kazakhstan’s economy is fine.”
Kazakhstani banks raised USD 18bn of international debt last year, doubling their external borrowing to just over USD 33bn by the end of 2006, according to a recent Moody’s Investor Services report. The country’s banks now hold USD 40bn of international debt, which is more than half of their overall funding, the rating agency said.
KKB released what several fund managers described as a strong set of results, with net profit, net interest income and net interest margins all up year-on-year. Nevertheless, the bank’s five-year CDS levels moved up to 485bps/505bps this morning before retracing to 480bps/495bps, according to one fund manager and an emerging markets bond trader. That compares to 440bps/455bps three weeks ago before a broader sell-off in emerging markets and global credit markets, according to a second FM.
“The spread was marked tighter this afternoon, but there have been no actual CDS trades and surprisingly little activity in cash [bonds],” said the EM trader. “The market seems to have realised that there is value at these levels but people aren’t willing to take additional risk at this stage, at least not until the bigger picture becomes clearer.”
Other top-tier banks like Bank TuranAlem (BTA) and Halyk Savings Bank (Halyk) have also been hit. BTA’s five-year CDS reached 590bps/620bps earlier today before settling at around 580bps/605bps, 5bps wider than levels three weeks ago. Halyk’s five-year CDS is now quoted at 275bps/285bps, up from 240bps/260bps earlier in August.
In contrast to the protection market, cash security trading remains extremely illiquid, said the EM trader. Quotes on BTA’s bonds range from 96 at the short end of its curve to the mid-80s at the long end, offering investors double-digit yields. KKB’s USD 500m 7.5% 2016s are bid at around 83-84 yielding roughly 10.2%, down from 94-95 with an 8.4% yield in mid-June. Only state-owned banks like Development Bank of Kazakhstan, or those that will soon become foreign-owned like ATF Bank, have avoided the sell-off, said a third fund manager.
KKB stressed on yesterday’s 1H earnings call that it has postponed plans to raise debt on international markets until conditions settle down. Management also reiterated that the National Bank of Kazakhstan (NBK) has pledged to support the country’s banking system and help banks that experience liquidity problems.
The NBK made that commitment during a conference call held last Wednesday (15 August) to try and calm investors’ nerves over the sudden growth of Kazakhstani banks’ foreign-currency debt and the concomitant expansion of the country’s banking sector.
“The NBK has sufficient reserves – around USD 40bn – to assuage concerns,” said the third FM. “Oil prices are high and if commodity prices remain where they are, then there shouldn’t be too many problems.”
“Freeing up the reserves is all very well but it encourages excessive behaviour in banks,” said a fourth FM. “To some extent maybe they [the NBK] should just be prepared to live with investors’ concerns.”
KKB told investors yesterday that its short-term external liabilities are limited to USD 700m of debt due in December 2007, and that long-standing relationships with lenders in the syndicated loan market should enable it to roll over that commitment.
BTA said on a conference call with debt investors last week that over the next six months it has to repay a USD 300m bridge loan and a USD 500m syndicated loan. The bank’s shareholders are prepared to commit up to USD 1bn in liquidity support if necessary, two of the FMs said.
The third fund manager noted that syndicated loans make up 70% of foreign borrowing by Kazakhstani banks, and described redemptions due over the next two years as “limited”.
If credit market volatility persists for several months, banks could shift to the domestic debt market to compensate for any shortfall in funding, several investors said, but all agreed that this market lacks the depth to provide a long-term solution.
BTA also said last week that it will make greater use of local-currency deposits to fuel its growth if a lack of access to international markets persists, according to two fund managers.
KKB said its tenge-denominated (KZT) deposits should increase over the rest of the year, buoyed by the strong performance of Kazakhstani grain and oil exporters, as well as deposits from local pension funds. This will allow the bank to keep growing its loan portfolio, even though some large companies may cut bank deposits to fund help projects that might previously have been backed by loans from Kazakhstani banks.
“I’m comfortable with Kazakhstani bank paper over the next one or two years,” said the fourth fund manager. “The current levels pose a bit of a puzzle, because the banks themselves seem to be performing strongly and the National Bank of Kazakhstan has a good reputation. This could be a buying opportunity, but perhaps not quite yet.”
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