ANALYSIS OF ORGANIZATION AND MANAGEMENT OF INVESTMENT PORTFOLIO (ON THE EXAMPLE OF JSC KAZKOMMERTSBANK .

2.1 General characteristic of JSC «Kazkommertsbank»

Kazkommertsbank is one of the largest private banks in CIS and the market leader by total assets in Kazakhstan. The Bank provides a wide range of banking and other financial services to corporate and retail clients across the region.

Headquartered in Almaty, the Bank serves its retail clients through a network of branches in 45 cities all over Kazakhstan under the KAZKOM logo. In addition, Kazkommertsbank has international banking subsidiaries in Kyrgyzstan, Tajikistan and the Russian Federation.

Kazkommertsbank is in operation since 1991, and it is the dominant provider of banking services and other financial products to large and medium-sized corporations across all sectors of the Kazakh economy. The Bank’s employees across the region are devoted to the task of maintaining the Bank’s position as the premier financial services company in Kazakhstan based on superior understanding of our clients' financial needs and the ability to meet these through the highest quality of service.

Quality of the Bank’s portfolio

For the purposes of sustainable development, the Bank’s priorities include: maintaining the existing customer base, reducing the amount of non-performing loans and improving the quality of assets. Whilst advancing the risk management system, the Bank will continue working on non-performing loans on a case-by-case basis together with clients to help them improve their operations and increase the recovery rate. The Bank also aims to actively work on transferring non-performing assets to specialized distressed asset management subsidiaries.

Increase in Fee & Commission income

In order to satisfy clients’ needs and preferences, the Bank focuses on delivering a range of non-credit products and services, including trade finance operations, administration of tender guarantees, sale and maintenance of payment cards and mobile and online-banking services. The Bank intends to redefine its quality of service, providing each client with maximum required amount of services.

Development of remote banking channels

Maintaining the reputation of the most technologically advanced bank in the country, KKB will continue developing advanced information technologies for its remote services, such as Internet-banking for individual and corporate clients, infrastructures for card payments (acceptance and maintenance), Internet-acquiring, mobile services and applications. The Bank plans to continue using world leading best practices to minimize costs and save resources, including non-renewables, all of which will save clients’ time.

Operating efficiency

Maintaining low costs is the priority task for the Bank as one of the important stabilizing factors, ensuring the Bank’s highly competitive position. Kazkommertsbank intends to maintain its position as the most efficient financial institution in Kazakhstan with the lowest cost-to-income ratio.

Participation in the state stabilizationprogrammes

Since the end of 2007, when the first stabilization programmes were implemented, the Bank has believed that participation in such programmes is an important part of its strategy. It enables clients to get long-term financing for business development, opening new productions, job creation, etc.

Corporate banking

Kazkommertsbank has been servicing corporate clients in Kazakhstan since its inception and is a domestic market leader in corporate lending.

The needs of corporate clients are met through a wide range of services including trade and structured finance products, project finance, e-banking and asset management services, as well as short-term credit facilities and other general banking services.

The Bank is one of the leaders in terms of the total net corporate loan portfolio and corporate deposits.

Retail banking

Kazkommertsbank possesses one of the leading retail banking franchises in Kazakhstan with one-fifth of the retail deposit market.

The Bank offers to its retail customers a comprehensive range of banking products including residential mortgages, consumer loans, debit and credit cards and deposit and current accounts.

Kazkommertsbank enjoys a good reputation in Kazakhstan for quality of service, reliability and professionalism.

2.2 The analysis of investment portfolio of the banks an example of JSC «KazkommertsBank»

In 2014, macroeconomic situation in Kazakhstan will remain difficult. Economic growth will remain at a low level. Slowing down of the world economy, low level of world prices in commodity markets on basic goods of Kazakhstan export will be the key factors in the development of the macroeconomic situation in Kazakhstan in 2014.

Banking sector will also find itself in a complicated situation because of restricted access for Kazakh banks in global capital markets.

In addition, significant devaluation of currencies in the countries that are the main trading partners against relative KZT stability led to its strengthening in real terms that was unfavorably reflected on the competitiveness of the domestic economy.

In terms of increasing pressure on the exchange rate the National Bank revised its policy towards exchange rate of national currency. Since February 4, 2014, the corridor was introduced as 185 KZT per 1 USDwith a fluctuation of ± 3% or ± 5 KZT.

Of course, we have carefully studied the consequences of this step, in particular, on the ability of borrowers (banks, population, enterprises) to serve their debts, on the level of the country reserves and on the ability to maintain stable exchange rate. Nevertheless, the positive effects prevailed over the negative ones.

In our opinion, as a result of adjusting the exchange rate competitive conditions for domestic goods and financial conditions of the management of

As immediate measures from February 5, 2014 refinancing rate was reduced to 9.5%. In addition, from March 3, 2014 the minimum reserve requirements to banks of the secondlevel will be reduced from 2% to 1.5% on internal liabilities, and from 3% to 2.5% on other liabilities that would provide liquidity in the banking system at a rate of 50 billion KZT.

There is no definite method. We are all in a difficult situation, especially small and medium enterprises that largely depend on bank lending. But we should not panic and give up. Governments, central banks of many states try to reduce negative consequences of financial crisis, whether it is funding, reducing tax burden or provision of various benefits.

The plan of joint actions of the Governments, the National Bank and the Agency of Financial Supervision was adopted in Kazakhstan in order to stabilize economy and financial system in 2014-2020, which provides forms of support of economic subjects (regardless of their industry sector, business size, forms of ownership, the volumes of provided resources, etc.

Meanwhile the business should clearly understand that the State is not the only source of aid and resources. As for the future I would like to say that entrepreneurs should clearly assess their risks, including potential ones.

And in terms of the rush for super-profits they should not “be too enthusiastic”, but understand that any economy is developed cyclically, where the phase of recession always follows the phase of growth.

The National Bank and the National Welfare Fund “Samruk-Kazyna” deal with various issues. And we see two points of contact. Firstly the joining of the Fund “Samruk-Kazyna” in the capital of banks. Great work on the analysis of the acquisition of banks’ shares, the consequences of this action, and etc. was and would be conducted here. In addition, the National Bank is for the fast sale of the government shares of banks, in particular “Kazkom”, with what purpose the meetings with potential investors were held.

The second area of cooperation relates to the issues of borrowing funds from the National Fund. To finance its participation in the realization of the Plan of joint actions the Fund “Samruk-Kazyna” will issue bonds at the amount of 4 billion USD that will be bought back by the National Fund.

And since the National Bank is a trust manager of the National Fund, we will carry out all necessary measures for it. The National Bank is also involved in such tasks as support of macroeconomic stabilization, stabilization of the financial sector of the country, fund raising to finance programs to solve problems in the real estate market, and participates in the implementation of innovative, industrial and infrastructural projects provided in the framework of the plan of joint actions.

In the present circumstances I would like to wish stability, to leave crisis with minimal losses, and further prosperity. I would like also to advise readers to assess the situation rationally and make the right conclusions.

The construction sector is also regarded as one of most affected by the crisis, where problems started to emerge from summer 2012. It must be noted that such a situation was caused by rapid development of construction in recent years at the account of massive crediting by second-level Kazakh banks, which in their turn actively attracted foreign loans.

Lack of financing brought to “freezing” of more than 70% of construction sector of Kazakhstan today. This was particularly evident in Astana and Almaty, where one could witness demonstrations of protest of those shareholders who suffered from unfinished construction.

In these circumstances, in December 2012 the government announced about allocation of 4 billion USD to “fund the completion of construction of living houses in Astana, support small and medium businesses, as well as refinance industrial facilities and infrastructure”, out of them 85% - from budget and 15% - private capital. Almost all of construction sites in both Kazakh capitals are “foreseen”, no lending.

The allocation of government funds to finance the completion of construction is not able to completely solve the problem, because the funds are obviously not sufficient. Only in Astana the total cost of construction projects, as per estimates of builders, exceed 6 billion USD and throughout Kazakhstan cost is bigger for several times.

Given this, experts are pointing to presence of corruption in the decision of the government on financing some projects, among which 74 projects, which belong to either relatives or entourage of N.Nazarbaev.

The crisis in Kazakhstan rather negatively affected the banking and financial sector, which was rated by western rating and PR agencies as “best in CIS”. From 1 July to 10 October 2013 the market price of companies, traded at KASE (Kazakh Commodities Exchange) dropped to more than 61% - 1048.99 (as of 15 September 1709.72), thus decreasing in cost terms from $81.07 to $31.62 billion. At the same time the volume of trades also soared. Within 8 months of 2013 the volume of shares transactions (buy-sell) at KASE and at special trade platform of regional financial center of Almaty was 2,6 billion USD, that is 2.1- fold lower than the same period of the previous year.

The most capitalized companies at Kazakh commodities exchange such as ENRC, RD KazMunaiGaz, and JSC «KazkommertsBank» have lost 65-70% in price during the same period. The price of 1 share of Alliance-bank, which in June 2012 was $14 at London Exchange, today is traded at $1.14. As a result the future of the bank itself is under question.

Astana Finance became significantly cheaper as well: if in 2012 its assets were $5.3 billion, today they are less than $2 billion. HalykBank, Temirbank and Centercreditbank suffered the same.

At the same time the quality of their credit portfolios is lowering. Growing insolvency of creditors and the urgent need to get back foreign credits are forcing Kazakh banks to hold trades on pledged property throughout the country.

By selling pledged flats, cars, office equipment, furniture and other long-life goods, the banks are trying to accumulate funds to return more than $12 billion, which must be paid out by the end of this year.

With further decrease of credit rates of Kazakh banks given by international agencies, experts are forecasting possible serious problems in the whole financial system of Kazakhstan.

In this situation the government of RK in October announced creation of so-called “fund of stress assets” to support financial system of the country. Its volume is not known yet and will be defined only when results of the budget for 9 months of 2013 are available. It’s not excluded that the government may revise the current budget to lower some expenditures and direct them to create a “stress fund”.

According to some estimates, the size of the fund can be $6 billion, out of which less than $1 billion are direct financing by the republican budget.

The situation taking shape at world financial markets pushed investors to leave the Kazakh market. Outflow of finances from funds, investing in obligations and shares from so-called “developing markets”, to which Kazakhstan belong as well, brought already to massive outflow of shares from these countries, instability of their national currencies and sharp drop at commodities exchanges.

The banking sector of RK constitutes a large portion of the commodities market of the country – 20%. Consequently, its problems are mirrored at the market as a whole. Another large niche is occupied by raw materials sector (50%), which is experiencing hard times as well. According to experts, it’s quite natural that the Kazakh market started to drop sharply and with all of its components”.

But the situation is getting more serious for the financial system of Kazakhstan as prices for the main export articles - energy and metals fall down. If last July oil prices went up to a record level of $147 for a barrel, in early October it was under $90. At the end of November, price of oil fell to less than 50 dollars per barrel. This already led the Kazakh government to cut budget expenditures by almost 20% for budgets of 2014, 2010 and 2011.

One can witness as well the fall of prices for articles of mining industry and metallurgy. Thus, the owner of Karaganda Metallurgy Plant – Arcellor-Mittal, the largest in RK, had to send 30% of the personnel or 4200 people on leave for 3 months. Other major companies and planning to shed up to 25-35% of existing workforce.

Significant growth of inflation and decline of industry are taking place. This caused slowing of GDP growth, decline of business, “freezing” or full stop of already launched investment projects. Consumer demand is also dropping, which makes practically impossible the growth of Kazakh economy at the account of inner reserves.

These trends have already negatively affected the rates of development of Kazakh economy. According to IMF, growth of GDP of Kazakhstan as of the results of the current year dropped from 5% to 4.5%, and in 2014 it will drop from 6% to 5,3%. But expert predict than real growth of Kazakh GDP be almost 0%, since fall of demand and world prices for all major Kazakh export commodities, among which commanding positions occupied by oil and metals (make-up up to 92% of total export).

But the possibility of further aggravation of the world financial crisis can bring to a bigger decline of GDP because of full “freezing” of funding by foreign investors of their projects in RK and refusal of foreign banks to allocate credits for Kazakh enterprises.

Korea Ratings Corporation (KR) assigns an ‘A-’ rating to the 1-st non-guaranteed bond to be issued by JSC «KazkommertsBank». The Company is a special purpose company established for the purpose of funding for JSC «KazkommertsBank». The rating addresses the debt service capacity of AF that guarantees the payment of principal and interest on the aforementioned unsecured bond. The rating reflects as follows:

· Likely operating and financial support fromKazyna Sustainable Development;

· Fund Kazyna, the largest shareholder,wholly owned by the government;

· Expanding revenue base and income;

· Good but deteriorating asset quality;

· Improved financial strength thanks to large capital increase;

· Need to monitor deteriorating macroeconomic trends in Kazakhstan;

AF was established in December 1997 in the form of the Fund for Economic and Social Development of the Astana Special Economic Zone for the purpose of providing financial support for the construction of Astana, capital of Kazakhstan. As a holding company of Finance Group-the AF Group, AF is engaged in originating Under the Securities and Exchange Act in Korea, a “guaranteed” bond shall refer to the bond that is guaranteed by any of the financial institutions prescribed in each section of Article 3 thereof. The AF and Finance Leasing which provides the guarantee in relation to the bond in this report, are not any of the financial institutions stipulated in Article 3 of the SEA. Therefore, in this report, the bond is named as non-guaranteed bond, in spite of the guarantee given by the AF.

From the second half of 2012, concerns were raised about the foreign currencyliquidity of Kazakhstan due to the impacts of the global credit crunch, caused by theUS sub prime crisis. In 2013, banks repay their foreign debt in a timely manner whilethe country’s foreign currency reserve shows an upward trend again. However,constant monitoring on the Kazakhstan macroeconomic indicators seems necessary. Kazakhstan is a country located in Central Asia, with abundant natural resources including crude oil. Since 1992, it has continued reform efforts such as privatization of state-owned companies and deregulations to build a free market economy. Subsequently, it has grown by around 9% annually since 2000. The economic growth has been relied heavily on offshore funding because of the underdeveloped domestic capital markets. In the wake of the outbreak of the U.S. sub prime crisis in the second half of 2012, there are concerns raised about certainty over Kazakhstan’s timely payment of foreign debt. It is expected that the time would be taken to address repercussions from the sub prime crisis. In this situation, the inflation is high and the asset quality of financial institutions is worsening, which displays the deteriorating macroeconomic trends in Kazakhstan. Given all, constant monitoring on such trends seems necessary.

Kazakhstan’s current account balance turned into a surplus in the first quarter of 2013. Banks resumed paying off foreign debt and new borrowings during the first half of 2013. The foreign currency reserve shows an upward trend again in 2013 which KR views positively. Kazakhstan underwent the most difficult conditions in the second half of 2012 and now shows improvement. KR views that as positive.

As a result of rapid expansion in operations, mainly for corporate lending, over the years, AF’s interest-earning assets increased swiftly, leading to a rise in income.

The interest-earning assets of the AF expanded at a rapid pace to KZT 180.6 billion in 2012, 17 times up in three years from KZT 10.7 billion in 2004. Consequently, its net interest income also went up to KZT 8.2 billion in 2012 from KZT 107 million in 2004, which drove the overall income size of AF to increase. As market funding such as Eurobond issuance constituted a higher portion of total funding, interest expense/total assets ratio climbed up. Plus, non-interest income from non-financial subsidiaries, which contributed previously to

AF’s income, shrank in volume. And bad debt expense went up due to the seasoning of financial assets. Nevertheless, thanks to faster improvement in yields on financial assets, AF’s operating income/total assets ratio rose continuously, which indicates that AF enjoys solid profitability.

At end-March 2013, AF’s doubtful-3 and below(Doubtful-3 + Doubtful-4 + Doubtful-5 + Loss) ratio stood at 5.7%, up from 1.9% at end-2011. Recently, delinquency rates in several business lines were up slightly while loan concentration is somewhat high. These are burdening factors for AF. However, there has been no delinquency in Doubtful-3, which recently drove the doubtful-3 and below to increase. Accordingly, it is difficult to judge whether or not final delinquency and default come to pass. Its delinquency ratios are satisfactory. And the majority of AF financial assets are secured by collateral. Given that, KR sees a low likelihood of eventual loss occurring. However, given dilution effects from the rapid asset growth, KR believes that which direction its asset quality indicators move forwards needs to be monitored.

The rapid asset growth over the recent years resulted in a swift increase inleverage(total assets/equity). However, an increase in supplementary capital resulted in superb adjusted leverage (total assets/[equity+preferred stock+ subordinated debt]). Additionally, its capital buffer improved significantly as a result of the recent large rights offering.

AF has expanded its assets by around 100% annually since 2010. Despite the continued income generation, its leverage, measly at 7.4x at end-2010, soared to 18.1x at end-2012. However, AF reported superb adjusted leverage of 8.0x at end-2012, which took into subordinated debt and preferred stock in account. The maturities of preferred stock and subordinated debt(preferred stock is permanent capital while subordinated debt has the remaining term to maturity of 10 years more or less) are long-term. And they rank below senior bonds in terms of priority of payment or in liquidation. Thus, in KR’s view, they act as a capital buffer for senior bonds to some extent.

Meantime, the recent large rights offering helped AF enhance its capital buffer substantially. Subsequently, AF is judged to have the capital buffer for operating expansion. When the rights offering in June 2013 is reflected, its leverage is estimated to fall to 6.6x(KZT 252.2 billion total assets/KZT 38 billion equity, based on the sum of the rights offering proceeds, and total assets and equity at end-2012), which provides AF with the capital buffer for expansion in operations for such newly launched businesses as banking and insurance.

AF has a high foreign debt portion of total debt. However, it resumed offshoreborrowings in 2013 despite the global credit crunch. In KR’s view, thanks to long-term funding, AF’s exposure to liquidity risk is limited.

AF relied on offshore borrowings through Eurobond issuance and more to raise the majority of funds for dramatic asset growth since 2011. As a result, the portion of foreign debt was very high, representing 80.4% of total debt at end-2012. In the wake of the US sub prime woe in the second half of 2012, AF was expected to face funding difficulties due to the global credit squeeze. However, it successfully issued privately placed bonds in the first half of 2013, which alleviates the impacts of the sub prime crisis on its funding capability.

Given the long-term debt oriented funding and the maturity matching of assets and liabilities, AF’s exposure to liquidity risk is limited. Above all, bank loans, taking up 25.8% of total debt at end-2012, are mostly borrowings from foreign banks with maturities beyond 2010 and thereafter. Hence, AF has a low burden of repaying the short-term debt. Bonds, which are comprised of Eurobond, privately placed bonds, and local-currency denominated bonds, constitute the largest portion of total debt with 66.4%. They will also be due in the second half of 2013 and thereafter. In addition, the ratio of assets/liabilities, maturing in three months, one year and five years, were over 300%, 200% and 100%, respectively. The maturity structure of assets and liabilities are judged to be properly managed.

The Kazakhstanstock market is still at a fairly early stage in its development, despite recent efforts by the NBK to stimulate it. Recently the AFB initiated adoption of a number of important laws governing investments and the stock market. Kazakh banks are not legally divided into investment banks and commercial banks.

Law provides that banks may engage in the following types of securities transactions: brokerage and dealership with state securities, with securities that have a minimum required rating of one of the international rating agencies and with certain derivative securities; assets management; clearing; and custodianship. As a practical matter, most of the major banks are big players in the Kazakh stock market, whether directly or through their investment affiliates. Under the recent amendments to the Banking Law, however, banks will be prohibited from engaging in securities clearing operations as of 1 January 2012.

As a general rule, banks may not invest in the charter capital or acquire an interest in corporate entities. This does not apply to banks’ participation in the charter capital of:

· pension funds and pension asset-management companies;

· investment funds;

· insurance and leasing companies;

· companies whose shares are included in ‘A’ listing of a Kazakh stock exchange in an amount not exceeding 15 per cent of the total number of shares in each company.

The Banking Law also permits banks to participate in the capital of financial market infrastructure companies and the capital of professional participants of the stock market (brokers, dealers, custodians, registrars, etc). The bank may also trade bonds issued by companies whose shares are included in ‘A’ listing of a Kazakh stock exchange

The retail banking market in Kazakhstan is heavily dominated by the three largest local banks mentioned above. These attract more than 70 per cent of individuals’ deposits. Some of the subsidiaries of international banks operating in Kazakhstan, such as HSBC and JSC «KazkommertsBank», also offer private banking for individuals, while Citibank offers such services only for employees of its corporate clients. Similar to the Getting Established: The Taxation and Legal Environment trend for increased loans in tenge, the size and number of deposits in tenge have increased recently compared with foreign currency deposits.

Development of bank shares market.

Created legal and regulatory framework has permitted the development of free competition in the bank of shares market. First bank of shares companies in Kazakhstan appeared in 1990. Their organizational structures developed from cooperative societies and companies up to joint-stock companies. By 1993, the number of bank of shares organizations reached 900. At the same year by 38 insurers was formed Union of Insurers of Kazakhstan. Only after acceptance of the law " On Bank of shares" in Kazakhstan in 1992, the formation of the market of bank of shares began. At that time the authorized capital of bank of shares companies according to the law “On bank of shares” (1995) should be from 18 to 25 million tenge. The number of bank of shares companies began to grow with fast rates from 22 to 71 in 1999. New stage in foundation of Kazakhstan bank of shares industry was when in 1998 the National Bank was entrusted with supervision of the bank of shares market and with both oversight of the market under existing regulations and development of new pieces of legislation.Before this function was carried out by the Department of bank of shares supervisionin structure of the Ministry of Finance of the Republic of Kazakhstan.

It was caused, first of all, by increase of the requirements of the legislation to activity of bank of shares organizations, including to their financial stability and solvency, the new legislative requirements covering most aspects of the market. As a consequence of such measures of the government, bank of shares organizations with unreliable, financially unstable position had to stop their activity. Despite the fact that the number of bank of shares companies was reducing, the financial parameters of bank of shares market were growing. The environment has resulted in the rapid growth of both the number of insurers and their capitalization (Table1). By the end of 1998 insurers had combined investments of US$ 66.8 million invested as shown in Figure 1.

Table 1. Number of insurers and their capitalization, 2010 – 2013

Source: JSC «KazkommertsBank»

Figure 1. Investments by insurers in 2013

The year 2010 was characterized by the fastest rates of bank of shares premiums gain. It was explained by introduction of obligatory bank of shares of the civil-law responsibility of the vehicles owners. During 2013 and 2012 this form of bank of shares represented 96 percent of all premiums received from obligatory bank of shares. The volume of bank of shares premiums on obligatory bank of shares has increased at once on 2012 %. Still today the major and most widespread kind of obligatory bank of shares in Kazakhstan is bank of shares of the legal responsibility of automobile owners,for cases of traffic accidents. There are two types of contracts for this kind of bank of shares - complex and standard. Complex contracts are made for several motor vehicles used by one driver and standard contracts for one motor vehicle used by several drivers. The latter type of contract is very important in Kazakhstan where most families have one car shared by several members of the family. The functioning of the obligatory legal responsibility bank of shares for automobile owners in Kazakhstan makes it possible for the country to join the Green Card system covering 37 countries,including all countries of the European Union, Israel, and Ukraine. Kazakhstan's participation in the system would allow Kazakh motor vehicle owners,including transport vehicles carrying cargo and passengers to enter the European Union and other member countries of this system with bank of shares policies issued in Kazakhstan. To the analysis of a condition of the bank of shares market of Kazakhstan it is necessary to add the comparative analysis of parameters of development of the bank of shares market of Kazakhstan with parameters of the advanced countries. Below is presented the comparative analysis of the basic parameters of bank of shares markets of different countries.

Table 2.Basic parameters of bank of shares markets for 2012

Source: JSC «KazkommertsBank»

In countries with developed bank of shares market the average parameter of relation of the bank of shares premiums to GDP makes 8,5 %, in Republic of Kazakhstan for 2012 it has made 0,65 %. Though, in the previous Program for 2013 year was planned to finish this parameter up to 0,8-1,2 %. But, it was not done.

Table 3. Basic indexes of Kazakhstan bank of shares market on 2013-2031 (Billion tenge)

Source: Bank of shares research letter, September 2012

Kazakhstan's bank of shares market has been making strides. In January-October 2010 local bank of shares companies collected 24.1 billion tenge (29.8% more than in the same period in 2011) and paid 3.3 billion tenge in bank of shares premiums (an 80% growth). As the bank of shares market of the Republic continued to develop, the total amount of bank of shares premiums collected for the first six months of 2010 amounted to 12 bln. tenge, which by 19,6% exceeds the volume of the bank of shares premiums collected for the same period of 2011. This increase was caused by the growth of bank of shares premiums for the voluntary property bank of shares (by 26,1% or 2 bln. tenge). At the same time, the increase of premiums for the voluntary personal bank of shares was insignificant, and in regards to the obligatory bank of shares there was even a decrease of the figure.

Compared to the growth of bank of shares premiums on the whole, one can observe a reduction of the share of bank of shares premiums in obligatory bank of shares. Thus, for the reporting period of the current year, compared to the same period of 2011, one could observe a decrease of the obligatory bank of shares premiums both in absolute and in the shared expression.

Table 4. Receipt of the bank of shares

This fact is related to the 9-fold decrease of the bank of shares premiums’ inflow in the obligatory bank of shares of the civil-and-legal responsibility of a carrier to the passengers. Growth of inflow in the voluntary property bank of shares compared to the first six months of 2011 is related to the almost 6-fold increase of the premiums’ inflow from the cargo bank of shares class from 0,2 to 1,3 bln. tenge and property bank of shares class by 24% from 2,6 to 3,3 bln. tenge. The volume of the bank of shares premiums in the voluntary personal bank of shares remained on the same level as in the first six months of 2011. A share of the bank of shares premiums’ inflow in life bank of shares is still inconsiderable. With the growth in absolute values (142 mln. tenge for the first six months of 2010 vs. 71 mln. tenge for the fisrt six months of 2011), a specific weight of life bank of shares remains inconsidearable - 1,2% off the total amount of the bank of shares premiums. Thus, out of 33 bank of shares companies operating in Kazakhstan still only one has a license in the life bank of shares class. In other classes of personal bank of shares (bank of shares from accidents, diseases, and medical bank of shares), there were some changes taking place within the reporting period. Thus, the inflow of bank of shares premiums in medical bank of shares has increased by 33%, while inflow of bank of shares from accidents and diseases has reduced by 26%, which can be explained by preference of medical bank of shares with a view to be compensated for expenses incurred in medical companies. Considering the bank of shares premiums’ inflow by bank of shares classes as of 1.07.2010, you can note the following:

In obligatory bank of shares almost 98% (1,05 bln. tenge) of the bank of shares premiums’ inflow falls on inflow from the bank of shares of civil-and-legal responsibility of the vehicles’ owners, including 4,4% paid from republican and local budgets for the bank of shares of the state-owned vehicles’ owners;
In voluntary personal bank of shares- 49,3% (0,52 bln. tenge) of the bank of shares premiums’ inflow falls on the inflow from medical bank of shares, 36,6% (0,38 bln. tenge) on the bank of shares from accidents and diseases, 13,5% (0,14 bln. tenge) on life bank of shares.

In voluntary property bank of shares– 33,5% (3,3 bln. tenge) of bank of shares premiums’ inflow falls on inflow from the property bank of shares, 13,1% (1,3 bln. tenge) on cargo bank of shares and 17,8% (1,7 bln. tenge) on the bank of shares of civil-and-legal responsibility in case of damage.

As it may be seen from the figure, dynamics of the bank of shares premiums’ inflow in the first six months of 2010 and for the same period of 2011 is different. Thus, for the 1^st quarter of 2010 the bank of shares premiums’ inflow was higher than similar indicators for 2011. However, it was in the 2^nd quarter already that these indicators were lower than the figures of 2011. In general, we can say that exceeding of the total volume of bank of shares premiums for the first six months of 2010 over the volume for the first six months of 2011 (by 1,9bln. tenge) was mainly caused by bank of shares premiums received in January of the current year, when the volume of premiums received was 2,8 bln. tenge, including almost 75% of premiums that falls on voluntary property bank of shares.

For 2011-2010 the leaders’ position in terms of bank of shares premiums’ collection has practically not changed. As of July 1, 2010,more than 71,5% of total bank of shares premiums of the Republic of Kazakhstan falls on 5 bank of shares companies.

A share of bank of shares premiums collected by the bank of shares companies with foreign participation as of 1.07.2010 amounted to 46,4% (5,5 bln. tenge). The amount of the bank of shares premiums, transferred to rebank of shares, made 7,8bln. tenge or 65,5% off the total amount of the bank of shares premiums, while 62% of the total volume of bank of shares premiums was transferred to reinsure non-residents.

The premiums in voluntary property bank of shares cover the major share of 98% off the total amount of bank of shares premiums, transferred to rebank of shares, almost 95% of them were transferred to reinsure to non-residents of the Republic of Kazakhstan.

The total amount of liabilities by the bank of shares contracts as of 1.07.2013 amounted to 3 060,8bln. tenge. The ratio of the total liabilities by bank of shares contracts to the total bank of shares premium as of 1.07.2010 was 255-fold.The total amount of gross claims paid for the first six months of 2013 amounted to 1,8 bln. tenge, having increased by 98,5% compared to the same period of the last year, while the share of claims paid by rebank of shares companies made 26,7% (0,48 bln. tenge).

Table 5. Shares of bank groups in selected banking sector indicators(for banks with licences as of 31 December 2013)in %

Source: JSC «KazkommertsBank»

Table 6. Gross claims paid

Source: JSC «KazkommertsBank»

More than 75% of all gross claims falls on voluntary types of bank of shares (as of 1.07.2011 - 62,6%), out of them - on the voluntary property bank of shares – 50,7% and voluntary personal bank of shares – 24,6%. A share of gross claims in life bank of shares from the total amount of gross claims paid amounted to 0,3%. For the current year, the highest growth of the gross claims paid took place in May, when the amount of gross claims reached 471 mln. tenge, out of which 65% (307,6 mln. tenge) falls on gross claims in the voluntary property bank of shares, in the structure of which the main gross claims were paid by the “property bank of shares" class – 73%. This amount of gross claims is a maximum value indicator both for the period of 2010 and for the period of 2011. Based on the results of the gross claims paid within the reporting period, the loss ratio (ratio of gross claims paid to bank of shares premiums) amounted to 15% (for the first six months of 2011 – 9%).

Table 7.

.

As of 1.07.2010, there are 33 bank of shares companies operating on the bank of shares market of the Republic of Kazakhstan (including: 1 – in life bank of shares, 7 – with participation of non-residents of the Republic of Kazakhstan), 5 bank of shares brokers, 28 actuaries and 32 auditing companies authorized to audit bank of shares companies.

Table 8.

Source: JSC «KazkommertsBank»

Equity.The size of the equity capital of bank of shares (rebank of shares) companies as of July 1, 2010 computed in view of quality and liquidity of assets amounted to 7,6 bln. tenge ($51,3 mln.), having increased by 11,5% compared to the figure as of July 1, 2011, while it was only for this June that the equity capital of bank of shares (rebank of shares) companies grew by 9% (0,6 bln. tenge), which is related to the growth of capitalization of bank of shares companies with regards to meeting the requirements stated by Resolution of the Administration of the National Bank of the Republic of Kazakhstan of April 20, 2012 № 117 «On approval of the minimal size of an authorized and equity capital for bank of shares and rebank of shares companies».

Assets. The total amount of the bank of shares companies’ assets as of July 1, 2010, amounted to 23,9bln. tenge ($161,9 mln.). It grew by 28,1% compared to the information as of July 1, 2011. One may observe a decrease of the reinsurer’s share in the bank of shares reserves, which makes the main share of assets (35,4%) of the bank of shares companies, from 44,2% at the beginning of the year to 39,2%. Compared to the beginning of the year, the share of the assets placed onto the time deposits grew from 13,8% to 15,57%.

Table 9.

As of July 1, 2013, the bank of shares reserves amounted to 11,6bln. tenge, which is by 23,2% higher than the amount of reserves as of July 1, 2011. The reinsurer’s share in the bank of shares reserves as of the reporting date is 73%. Presently the bank of shares companies haven’t yet become real institutional investors. As of the reporting date, the total amount of the bank of shares companies’ assets of Kazakhstan, as mentioned above, amounted in total to 23,9bln. tenge, while at the banking sector the total amount of assets is 1.378,6 bln. tenge.

Table 10. Basic indicators of the bank of shares sector to GDP

Source: JSC «KazkommertsBank»

The above-mentioned indicators (ratio of the amount of the bank of shares premiums, equity capital of the bank of shares companies, assets to GDP) are not yet comparable with the same indicators of the developed and some developing countries. For example, in EU countries, an average indicator of the bank of shares premiums to GDP density ratio amounted to 8,5%. That is why, despite the adequate number of operating bank of shares companies and growth of general indicators, the bank of shares market in Kazakhstan doesn’t play a significant role in the economy and life of the population yet.

As of July 1, 2010, 25 bank of shares companies were registered in Almaty or 75% of their actual number, while 8 remaining bank of shares companies include the following: 4 registered in Karaganda region, 2 – in Aktubinsk, 1 – in Pavlodar, and 1 – in Astana. The total number of branches of bank of shares companies is 138, while 61 branches (44%) are situated in the largest and most developed regions, including Akmola, Eastern Kazakhstan, Karaganda and Pavlodar regions. In this regard, it is important to resolve the issues related to the extension of the bank of shares companies’ activities, development of the bank of shares brokers’ activities, possibility of providing the bank of shares services through the banks, their branches, post-saving network, and Internet. A significant number of operating bank of shares companies does not have enough qualified agents. Unfortunately, the information on the number of employed bank of shares agents and efficiency of their performance is not available. For the first six months of 2010 the National Bank of the Republic of Kazakhstan has been working to boost the bank of shares market development through improvement of the bank of shares legislation and methods to regulate the bank of shares market. Thus, one of the important steps made to develop the bank of shares market was to adopt the Law of the Republic of Kazakhstan «On the Bank of shares Payments Guarantee Fund» (as of June 3, 2010, № 423-P). For 2010 all 32 bank of shares companies already became the participants of the Fund. Enter fund the bank of shares companies owed till November 30. According to the new law "On Bank of shares Payments Guaranteeing Fund” bank of shares organizations, not participating in system of guaranteeing of bank of shares payments, can not carry out many kinds of bank of shares of the civil-law responsibility.

The troubles with Kazakh banks began a year ago. Banks had borrowed excessively from international lenders when terms were easy, and those lines of credit dried up in Kazakhstan quicker than elsewhere, given the risky nature of doing business in the country. The banks teetered.

In official statements, Kazakh officials said they would bail out JSC «KazkommertsBank» and Alliance Bank in exchange for shares, and later sell the shares when the market recovers. The officials played down suggestions of backtracking on privatization in the former Soviet state.

Under a law on banking stability, the government compelled Astana Finance to issue shares and register them with the state. The bank’s board was not consulted. After the shares are issued, the government will own 78 percent of the bank, and the existing owners’ equity will be greatly diluted. The government promised to contribute $2.1 billion to recapitalize the bank.

At Alliance Bank, the principal shareholder, Seimar Alliance Financial, agreed to sell 76 percent of the shares to the government for a symbolic sum of less than $1, in exchange for the state’s taking on the bank’s liabilities.

The two banks together account for 33.2 percent of the Kazakh banking sector by asset value. The government has, in total, set aside $10 billion from its oil windfall, the National Welfare Fund, to recapitalizes the banks.

The fund assisted two other banks, Kazkommertsbank and Halyk Savings Bank, by depositing $1 billion in their accounts. Halyk Savings Bank is partly owned by TimurKulibayev, the son-in-law of the president of Kazakhstan, NursultanNazarbayev. Mr. Kulibayev has also served as the deputy head of the National Welfare Fund.

Table 3: Share Capital

The proforma effects of the Proposed Merger on the issued and paid-up share capital of AFB are as follows:

Source: JSC «KazkommertsBank»

While the differing treatment of the banks tracks with Kazakh politics, Ms. Ivanova-Venturini said the balance sheets of the banks also explained the need for different approaches.

Astana Finance was the less stable because of a high ratio of loans to deposits, even by the standards of Kazakh banks. Halyk was the more stable, with the largest deposit base relative to its outstanding loans.

Date: 2015-12-11; view: 859