Why ALMEX choose to offer additional GDR’s of Halyk bank to public

Halyk Bank of Kazakhstan is one of the rare examples of CIS-based venture whose shares proved to be a profitable investment, at least in some cases. For example, the HSBK GDR price has risen from its 2016 minimum 3.60 to as much as 14.75 in 2018. Since then the price has retreated but generally performed well. That may be not the case anymore as a sudden slump came in September 27. The causes of the unexpected fall in the share price (-8.40%) is not of purely manipulative nature.

What led to the massive Halyk shares sell-off

ALMEX, a major shareholder of Halyk bank offered as much as 5 percent of current portfolio for sale. ALMEX owns 74,7 percent of the Halyk GDR to date. The offer was registered simultaneously at the London Stock Exchange and the local Astana International Exchange.

By offering an additional 5 percent of HSBK shares ALMEX exposes nearly 20 percent more of the securities to the free market. The attempt to sell the stake comes in a very unfortunate time and is not the first in this year alone.

This is not unprecedented though. ALMEX attempted to put 10 percent of their Halyk interest on sale. The offer was made in a H1 2019 and wasn’t met with excitement. ALMEX retracted the offer because of lack of investor interest.

Why ALMEX gets short on HSBK: The problems with the bank

Kazakhstan banks are undergoing comprehensive international auditing. Even without the final results announced Moody’s considers the banking of the country unsustainable. An extra 400-600 billions tenge (£1,258B) might be needed to keep the major banks afloat. Minor banks will be acquired by majors. Bailout of the major banks are a part of the Kazakhstan government practice.

Bad loans are the main cause of the need to infuse more and more cash in the banking.

Halyk Bank, as a bank #1 by declared assets, credits and deposits is not an exclusion to the rule. Asset Quality Review routine may and will reveal multiple troubles in the asset portfolio. Bank is doomed to face a number of issues. It may loose the current favourable ratings and even lead to further investigations. Those proceedings are imminent and the results are obvious to ALMEX owners. Thus they intend to get rid of at least five percent of the shares before it will be too late.

The origin of the bad loans in Halyk Bank

It is not easy to get the particular credit in the Halyk Bank. Contrary to the presidential vision and in strong opposition to the governmental rhetoric Halyk hesitates to provide credit lines for the business. Out of the outstanding 9059B tenge (£19B) in assets and £4,428B in cash the bank gave only 7,37,3B loans. Those loans came with a high premium and multiple string attached and are not exactly popular within the national business. Does it mean that Halyk bank is chasing the quality in its credit portfolio?

Well, not at all. The reason that the loans are nearly unavailable to citizens and business entities while the portfolio is full of low quality assets is the infamous self-service practice.

Self-service as a receipt for failure

CIS Banks are relatively young. They were founded by the early pioneers of capitalism. In Halyk case bank was founded on the grounds of the Soviet «Sberegatelny Bank» by president Nazarbaev’s daughter Dinara and her husband Timur Kulibaev. Needless to say that president’s clan was eager to conquer every important business that was left by USSR. Nazarbaev and his relatives get hold on mines, plants and land. Halyk, a rebranded «Sberegatelny Bank», was only one of the assets that fell into their hands.

All the assets that they got under control were in need of cheap loans. And Kulibaev’s own bank provided it without hesitation. It’s even unnecessary to return a loan in such setup: the asset changes hands in a formal way. It will remain the property of the Kulibaev family. And all the expenses are to be covered by the government – i.e. from the state budget. The scheme is truly a win-win, except for the Kazakhstan itself.

It’s obvious that bank will lose liquidity and will eventually go bankrupt if not supported by the state. But is exactly the case: Kulibaev bank will definitely get the needed influx of cash provided by his father-in-law.

The trouble comes only with internationally performed AQR. And that’s why Halyk bank management has been strongly opposed to it. Asset Quality Review will uncover those assets and loan manipulations easily and expose the bank to all the consequences.

Of course in such case it is wise to get short on own shares and sell at least five percent of the portfolio. It is more than £100M for now, but who knows what it will be a month from now? It seems that the market got the signal right and the price will go down further with some possibility to bounce back before going down further.

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