OREANDA-NEWS. April 21, 2009.
Full Year 2008 highlights:
Record revenue of KZT 200 billion (USD 1.7 bn), up 37.9% from prior year

Net profit declined to KZT 20 billion (USD 166 mn) after KZT 151 billion (USD 1.3 bn) of provisions for credit losses

Total Bank assets declined 12.8% from prior year

Deposits increased 9.4% year-on-year

Cost-to-income ratio decreased to 16.9% as a result of tighter cost control

Core Tier 1 ratio increased to 13.5%

Total capital ratio increased to 17.7%

Provisioning rate of 11.9% of gross loans, fully covering non-performing loans, which represented 8.1% of gross loans

Net interest margin before provisions for impairment losses up to 8% from 6.1% in 2007

EPS decreased from KZT 80.85 (USD 0.67) in 2007 to KZT 32.01 (USD 0.27)

Kazakh government agency Samruk-Kazyna to take major stake of up to 25% in the Bank
 
Nina Zhussupova, Chairperson of the Management Board, said:
"This has been a very difficult year for global markets and the Kazakh banking sector, and our business has not been immune. We demonstrated robust performance in very difficult conditions and have achieved this by focusing on asset quality and liquidity management, whilst maintaining our operational efficiency.

“Samruk-Kazyna is becoming a significant shareholder and we see this investment as an important development as it will give us an opportunity to participate in the Government’s stabilisation programmes.”
 
Overview of current macroeconomic situation
The global economy is currently going through major crisis and the banking sector has been particularly badly affected by the poor market conditions. Persistent concerns about the health of the financial sector in many countries, the downturn in commodity markets, and the restricted liquidity in capital markets have contributed to increased market volatility and diminished expectations for economic growth around the world.

Kazkommertsbank (“KKB” or “the Bank”), in line with other banks in Kazakhstan, has also been affected by the current crisis. The deteriorating economic conditions in the second half of 2008 and year to date have had an adverse effect on asset quality, leading to a higher effective provisioning rate, and weaker financial performance.

In view of the slowdown of the Kazakh economy, significant turbulence and uncertainty in the global financial system and worsening economic conditions in key markets, the Bank is focusing on asset quality and liquidity management, whilst continuing to maintain operating efficiency.

The Bank has strengthened its focus on key home markets such as banking, insurance and pension fund management in Kazakhstan. Although it continues to maintain a presence in the neighbouring countries of Russia, Kyrgyzstan and Tajikistan through its subsidiaries, the share of loans to non-residents in the Bank’s consolidated loan portfolio decreased from 21.6% in 2007 to 19.6% in 2008.      
 
Net interest income
Net interest income before provisions for impairment losses increased by 37.9% to KZT 199.5 billion for the year ended 31 December 2008, compared to KZT 144.7 billion for the year ended 31 December 2007. This increase resulted from the growth in the average yield on interest-earning assets from 13.3% in 2007 to 15.2%, in 2008, compared to the smaller increase in average cost of interest-bearing liabilities from 7.36% in 2007 to 7.58% in 2008.

Net interest margin before provisions for impairment losses as a percentage of average interest-earning assets for the year ended 31 December 2008 was 8.0%, compared to 6.1% for the same period in 2007.
 
Non-interest income
Net non-interest income decreased 93.5%, to KZT 2.2 billion in 2008 from KZT 33.2 billion in 2007. This decrease was primarily caused by a loss from operations with financial assets of KZT 28.4 billion, including an unrealized KZT 23.7 billion loss on derivatives.

The loss is attributable to an unrealized negative revaluation of swap transactions entered into to hedge currency and interest rate risks. The Bank entered into interest rate swap transactions to hedge its floating-rate liabilities and into cross-currency swaps to hedge bonds denominated in Euros, Pounds Sterling, Singapore Dollars and Japanese Yen. Declining interest rates and the strengthening US Dollar in 2008 resulted in a negative revaluation of these swaps.

The Bank realized a gain of KZT 5.6 billion on foreign exchange operations and precious metals operations in 2008, compared to a loss of KZT 15.4 billion during 2007. Translation losses were KZT 1.9 billion and KZT 22.9 billion in 2008 and 2007, respectively.

Net fee and commission income decreased by 16.4% in 2008 compared to 2007, and amounted to KZT 17.4 billion as a result of a drop in the volume of new loans. The Bank experienced a decline in income from cash settlement operations of 17.3%, foreign exchange operations of 39.7% and documentary operations of 6.8%.
 
Operating expenses
Operating expenses increased by 9.1% to KZT 34.0 billion during the year ended 31 December 2008 compared to KZT 31.3 billion in the year ended 31 December 2007.

Personnel expenses accounted for 48.4% and 51.2% of operating expenses in 2008 and 2007, respectively. Personnel expenses increased by 3.1% to KZT 16.5 billion in 2008, up from KZT 16.0 billion  in 2007, despite a decrease in the number of employees of 8.5% to 7,297 as at 31 December 2008. In the second half of 2007 the Bank was rapidly adding new outlets to its branch network. However, the impact of the operating expenses, including personnel expenses, associated with this expansion of the branch network was only fully felt in 2008. 
 
In line with our policy of maximizing the effectiveness of our branch network, we opened 17 branches and closed 21 during 2008. The number of branches therefore decreased to 186 by the end of financial year 2008 from 190 at the end of 2007.

Leasing expenses increased by 50.2%, and depreciation and amortisation by 34.1% due to the expansion of the Bank’s client service network. As a percentage of total operating expenses, leasing expenses increased from 7.7% in 2007 to 10.6% in 2008. Depreciation and amortisation amounted to 9.9% of operating expenses compared to 8.1% in 2007.
 
Impairment losses
Provision for credit impairment losses increased to KZT 289.3 billion in 2008, compared with KZT 140.4 billion in 2007. The Bank experienced a pronounced increase in impairments in the second half of the year, as the impact of the global crisis affected a broad range of its customers. 
Non-performing loans (NPLs) represented 5.2% of gross loans in the first half, but reached 8.1% by the end of 2008. KKB defines NPLs as total exposure to clients with overdue payments (30 days and more for corporates, and 60 days and more for retail customers). For comparison, NPLs were 3.1% at the end of 2007.  The level of NPLs for retail customers reached 13% at the end of 2008 while corporate client NPLs stood at 7.3% of gross loans and advances.
 
The Bank continues its conservative policy of building sufficient provisions for expected credit losses. The provision for credit impairment losses represented 11.9% of gross loans and advances in 2008 compared to 5.6% in 2007.  As of 31 December 2008, the provision-to-NPL ratio was 149%, compared with 184% at 31 December 2007. Provision coverage of loans of more than 90 days delinquent represented 202% in 2008.

In 2009, the management expects a continuing, difficult trading environment that may negatively impact the amount of non-performing loans and lead to a continuing build-up of provisions for impairment losses. 
 
Taxation
Effective 1 January 2008, the tax code of the Republic of Kazakhstan was changed such that there is no longer a tax exemption on interest income from mortgage loans.

The tax rate used for the Bank’s 2008 financial statements is the corporate tax rate of 30%. However, an amendment to the Tax Code introduced in December 2008 promulgates a reduction in the corporate income tax rate from 30% to 20% after 1 January 2009, then to 17.5% after 1 January 2010 and to 15% effective from 1 January 2011. These changes in future tax rates caused the Bank to revalue its deferred tax liabilities, which in turn resulted in tax recovery of KZT 8.7 billion.     
 
Profit
Profit before tax and minority interests for the year ended 31 December 2008 decreased 84.4% to KZT 11.5 billion compared to KZT 73.7 billion for the year ended 31 December 2007.

In 2008, recovery on corporate income tax was KZT 8.7 billion, compared to income tax expense of KZT 15.9 billion in 2007.

Net profit after tax and minority interest for 2008 decreased 65.1% to KZT 20.2 billion compared to KZT 57.8 billion for 2007.

The decrease in net profit during 2008 resulted from much increased provision charges on impairment of loans (by 115.4%).  Another major factor in the decline of net profit in 2008 were significant, unrealised losses from the revaluation at fair value of swap transactions due to volatility in the currency markets.
 
Capital ratios
Risk-weighted assets declined to KZT 2,446 billion at 31 December 2008, or by 10.8% compared to the situation at the end of 2007.

On a consolidated basis, the Bank’s Core Tier 1 ratio at 31 December 2008 was 13.53%, compared with 11.72% at 1 January 2008, and the total capital ratio was 17.7% (15.15% at 1 January 2008).

On 15 January 2009 the Bank announced an agreement with Samruk-Kazyna, a Kazakh national fund for managing state assets. Under this agreement Samruk-Kazyna will purchase new common shares in the Bank, which will help to strengthen the Bank’s balance sheet. Following this agreement, Samruk-Kazyna placed a term deposit totalling KZT 36 billion with the Bank that it will use to purchase the new shares. Once the investment is completed, Samruk-Kazyna will have an equity stake of up to 25%.
 
Business line performance
Corporate and SME banking
The share of corporate loans in the Bank’s total net portfolio increased from 80.9% in 2007 to 83.6% in 2008.

As of 31 December 2008 corporate deposits had increased by KZT 130.3 billion to KZT 715.7 billion from KZT 585.4 billion at 31 December 2007. The share of time deposits within the Bank’s total corporate deposits increased to 81.5% from 75.9% at 31 December 2007. 
The Bank is the domestic market leader in corporate lending, with a market share of 25.9% at the year end (calculated by the Bank on the basis of FMSA data). The Bank intends to maintain its position in this market by implementing the following strategy:

Focusing on asset quality. The Bank continues to concentrate its efforts to reduce the negative impact of macroeconomic conditions on the quality of its loan portfolio. The Bank is working closely with its corporate clients in order to prioritise their capital expenditure and investment programmes, to reduce costs, and to assist in mergers, acquisitions and asset disposals. The Bank has established a dedicated unit to monitor and manage its exposure to the construction sector. In the case of problematic loans, the Bank may seek restructuring of the loans’ terms, reach an out-of-court restructuring agreement with a borrower, improve the collateral base, or proceed with liquidation of assets.

Maintaining the corporate deposit base. The Bank has traditionally maintained strong relationships with large corporate clients, which has enabled it to defend its position in corporate deposit market.  

Participation in the government’s stabilisation programmes. Participation in government programmes provides the liquidity required to continue financing residential construction and other sectors of the economy. The Bank is the leading participant in the Samruk-Kazyna residential construction programme (outstanding deposits under this programme totalled KZT 32 billion at 31 December 2008). On 30 January 2009 the Bank received a KZT 84 billion deposit from Samruk-Kazyna to refinance the Bank’s corporate clients. The terms of the deposit enable the Bank to decrease interest rates for its borrowers.

Focusing on non-loan fee income. The Bank has established a dedicated unit to sell banking and non-banking products to its non-credit customers.

Maintaining its SME loan portfolio with specific focus on asset quality. The Bank continues to refinance its SME clients under the Government stabilisation programme. The total funds received from Samruk-Kazyna to finance and refinance SME clients were KZT 18.7 billion at 25 March 2009. Under the current SME programme, the borrowers are able to refinance or receive new money at lower rates, reducing their cash financing costs. The Bank is strengthening its workout and problem loan group in this segment.
 
Retail banking
The share of retail loans in the total net portfolio was 16.4% in 2008, with mortgages constituting 56.3% of the retail loan portfolio.

As at 31 December 2008, the Bank had 23 branches and 163 outlets in Kazakhstan. In addition, it has an extensive alternative distribution network consisting of 911 ATMs, more than 9,000 point of sale terminals and offers customers internet banking and a call centre.

Retail deposits decreased by 14.8% to KZT 263.8 billion at 31 December 2008 from KZT 309.7 billion as at 31 December 2007. The decline resulted from withdrawals by large depositors including business owners who used the cash for business purposes and to pay back loans. The share of time deposits within the Bank’s total retail deposits increased to 90.7% from 88.7% as at 31 December 2007.
 
The Bank’s strategy in retail banking includes:
Maintaining and seeking opportunities to increase its existing retail deposit base. The Bank is focusing its retail sales effort on selling deposits and non-loan products.

Focusing on increasing non-interest, fee-based income. The Bank concentrates its efforts on offering a wide range of non-interest, fee-based products to its retail customers, including cash settlement operations, credit and debit cards and telephone and internet banking. 

Restructuring its branch network. The Bank is increasing efforts to optimise its branch network by locating outlets in areas that continue to have a high density of business activity and/or population; closing less profitable branches; negotiating reductions in property costs, and reducing personnel.

Developing alternative distribution channels. The Bank continues to exploit its leadership in information technology to further develop its alternative distribution channels, including its ATM network, internet banking and telephone banking. The Bank is also aiming to acquire new retail clients and to retain existing clients by providing a wide range of products, such as payment services and foreign currency exchange through these channels.

Optimising business processes related to retail banking. The Bank is focusing on optimising business processes related to retail banking through the automation of those processes, and the introduction of queue control systems. The Bank is implementing these initiatives to improve the speed and quality of its client services.

Security and anti money laundering measures. In co operation with its consultants, the Bank has implemented security procedures and policies for all of its sites. All of the Bank’s branches contain video surveillance systems and each of its ATMs is monitored by CCTV. The Bank maintains a strict anti money laundering policy in relation to all of its customers.
 
A conference call on the full year 2008 results is planned for May 2009.