Kazakhstan's commercial banking sector has grown dramatically in recent years. While the sector, like that in many other countries, is currently stressed as a result of the credit and liquidity crises that have rippled around the globe since the Fall of 2007, the longer term prospects of  Kazakhstan's banks remain bright primarily because of Kazakhstan's very positive economic outlook associated with its vast oil, gas and mineral resources. In addition, Kazakhstan's Government took relatively quick action in response to the crises by establishing a large program to deposit State reserve fund moneys with certain large banks to be used to support the country's real estate, construction and small and medium sized business sectors that began to experience difficulties toward the end of 2007. The Government's action appears to have helped most of the country's top banks, although international rating agencies continue to express concern about the banks' asset quality and levels of foreign borrowings. Despite near term issues connected to the crises, Kazakhstan's banking sector presents an attractive investment opportunity for foreign banks. 

Kazakhstan's Banking Sector

Kazakhstan's banking sector has two tiers. The National Bank of Kazakhstan (NBK) is the central bank and represents the first tier of the sector. The NBK develops and pursues the State's monetary and credit policy, issues the national currency (the tenge), maintains the country's foreign currency and gold reserves and carries out foreign exchange control and regulation. The NBK has delegated to the Agency for Regulation and Supervision of Financial Markets and Financial Institutions (FMSA) the general authority to oversee and supervise the second tier banks, although the NBK retains authority in certain limited areas. The FMSA generally supervises and regulates, among other things, the chartering of banks, the establishment of representative offices of foreign banks, the acquisition of banks or significant interests in banks, minimum reserve and capital adequacy requirements and the level of external borrowings that may be made by banks. The FMSA also monitors the asset quality of the banks and periodically inspects their operations and, together with the NBK, continuously works toward improving the governance and transparency of Kazakhstan's banking system.  Kazakhstan is generally considered to have the strongest bank regulatory regime in the countries of the former Soviet Union.

The second tier of the Kazakhstan banking sector is made up of 35 commercial banks. Roughly half of these banks have foreign ownership. As of December 31, 2007, the four largest second tier banks, Kazkommertsbank, BTA, Halyk Bank and Alliance Bank, accounted for roughly 70% of the Kazakhstan banking market share measured by assets. These banks operate in Kazakhstan as well as certain other countries in the former Soviet Union. The next six largest second tier banks accounted for an additional 25% of the country's banking assets. The remaining 5% of the year-end 2007 banking market share was divided among a number of small banks, some of which are general commercial banks, some of which target limited market segments and some of which are the local operations of foreign banks such as Citibank, HSBC, Sberbank and China Bank. The top 10 second tier banks, particularly the top four, grew dramatically over the five year period ending December 31, 2007. Asset growth has moderated significantly for virtually all second tier banks during 2008 as they work through the credit market turmoil. Some banks have actually shrunk in asset size as they have repaid or are positioning themselves to repay foreign debts. Fallout from the credit and liquidity crises has impacted the share prices of many of the larger second tier banks over the last half year.

Recent Transactions and Developments

There have been a number of recent transactions and developments that underscore the attractiveness of the Kazakhstan banking market to foreign investors.

In 2007, two Kazakhstan banks were acquired by foreign banks. The first was Demir Bank, a relatively small bank that was acquired by a Turkish banking subsidiary of the Israeli bank, Bank Hapoalim. The second was ATF Bank, the country's fifth largest bank, which was acquired by Bank UniCredit, a large Central and Eastern European banking concern headquartered in Italy. ATF Bank's operations are now being re-branded under the UniCredit name.

In March 2008, Bank Center Credit, Kazakhstan's sixth largest bank, entered into an agreement with Kookmin Bank, Korea's largest bank, pursuant to which Kookmin would initially acquire a 30% stake in Bank Center Credit and thereafter increase its ownership stake over time to 50.1%. The transaction, which is subject to regulatory approvals, will ultimately enhance Bank Center Credit's capital position. It is expected to be completed later this year.

In June 2008, Alnair Capital, an investment group based in the United Arab Emirates reportedly affiliated with Sheik Tahnoon bin Zayed, began to acquire a significant stake in Kazkommertsbank, Kazakhstan's largest bank as of the end of 2007. Recent reports indicate that Alnair Capital now holds a 25.15% stake in Kazkommertsbank.

In July 2008, Raiffessen International, a banking group headquartered in Austria, announced plans to open a banking subsidiary in Kazakhstan and HSBC announced an expansion of its banking operations, including opening a branch in Astana, Kazakhstan's capital city, and a planned opening of two other branches in major Kazakhstan cities by the end of 2008.

Several large banks are currently considering transactions. BTA has indicated that it might sell Temir Bank, a retail-oriented subsidiary. Alliance Bank, which has suffered more than most from the credit and liquidity crises, is reportedly seeking a substantial investor.

Credit Suisse and VTB Bank (Russia) have opened representative offices in Kazakhstan. VTB expects to convert its office into a banking subsidiary in a year or so. Recent press reports indicate that Morgan Stanley is in the process of establishing a representative office in Almaty, Kazakhstan's financial center.

Regulatory Issues

Foreign banks seeking to commence banking operations in Kazakhstan must comply with various regulatory approval processes.

Representative Offices; Subsidiary Banks. Foreign banks may generally create representative offices simply by notifying FMSA. FMSA regulatory approval will be required if the foreign bank desires to convert its representative office to a banking subsidiary or to establish a de novo banking subsidiary.

Acquisitions of Banks. Foreign banks seeking to acquire all or a significant part of a Kazakhstan bank must obtain several advance regulatory approvals:

FMSA Approval. A foreign bank seeking to acquire at least 10% of the voting shares of a Kazakhstan bank must obtain the approval of FMSA. A foreign bank seeking to acquire 25% of the voting shares of the bank in one or more transactions or otherwise obtain control of bank decisions by agreement must also obtain FMSA approval.

Agency on Competition Protection. Kazakhstan legislation provides that the consent of the Agency on Competition Protection must be obtained before a foreign bank can acquire at least 25% of the voting shares of a Kazakhstan bank in one or more transactions, obtain rights to determine the conduct of activities by a Kazakhstan bank or perform functions of its executive body, or appoint the same individual to positions in the executive bodies or boards of directors of both the acquirer and the Kazakhstan bank.

Tender Offer for Joint Stock Companies. An entity that acquires 30% or more of a Kazakhstan joint stock company in the secondary market must, within 30 days of the acquisition, publish in the mass media an offer to buy the company's shares owned by other shareholders. Shareholders may accept the offer and sell their shares within 30 days after publication of the offer.

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