Galim Khussainov
Inflation and the tengeBankingLending and mortgagesTaxationEconomy and public policyManagement

Banking · 2 min read

Why Rapid Bank Growth Is a Reason for Caution

Translated from Russian with the help of AI. Original: Russian version

Rapid growth in a bank's assets can mask bad loans and should be treated as a warning sign rather than evidence of strength.

Kazakhstan's Banking System

In the early 2000s, Kazakhstan experienced a banking boom. High oil prices, a strong tenge and a real estate boom meant there was plenty of money in the economy, and naturally it flowed into second-tier banks, which expanded their funding and gave them a great deal of power. Bankers now controlled huge sums of money. With low capital and a large volume of borrowings and deposits, the owners' own risk was minimal. Yet they could build out bank-affiliated holdings: they bought land, business centers, plants, mineral deposits and so on. Profits were window-dressed and capital grew, partly through loans to the owners' own companies, which in turn went on to increase the banks' capital.

All this led to a situation in 2009, when Western funding stopped and the money had to be repaid, but there was simply no money. The assets were illiquid and there was nothing to pay with. As a result, the state bailed out all the systemically important banks, which accounted for more than half of Kazakhstan's banking system: BTA, Halyk, Kazkommertsbank and Alliance. BTA and Alliance suffered the most and ended up in a rather sorry state.

The essence of the business in such a banking system is not to earn money from classic banking, but to earn it in bank-affiliated structures.

While a bank is growing, it is hard to spot its ailments at first glance, because:

a) new loans, even those issued to bad borrowers, become bad at best two to three years later;

b) while assets are growing rapidly, the share of non-performing loans does not rise proportionally, so it will always seem that the share of problem assets is falling and the bank is making progress.

Why am I writing this? Because I sometimes read the rankings of our banking system published in the press and am amazed. Being the first, second or third bank by assets does not mean being high-quality and stable.

So when you see a bank growing at a rapid pace, just stop and think. In the current environment, I would rather trust a bank that is not growing than one that is.

And most importantly, I would not want us to make the same mistake twice...

Published in: Facebook, 27 January 2016

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