Description

KAZAKHSTAN    

     The stans - Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan & Uzbekistan were absorbed into the Soviet Union in the 1920's and 30's. With the collapse of the Soviet Union in 1991, the stans became independent nations once again. Although they were independent, the same people who ruled under the aegis of the Soviet Union continued to rule. I have no idea how the war in Ukraine will be resolved, but I believe that "a come to Jesus" moment has arrived for the people of the stans. The rulers of these countries are powerful and, like the oligarchs in Russia, have become immensely rich. I imagine that they would like to continue to enjoy both their power and their money. To do so, they will need to modernize their political systems and spread some of the country's wealth more widely. Otherwise, there is the risk of serious civil discord and the possibility of sanctions from the West. Uzbekistan is the most populated of the stans with 35,000,000 people, GDP of $66 billion, and a GDP per person of $1,900. Kazakhstan has a population of almost 20,000,000, GDP of $570 billion, and a GDP per person of $9,700. Kazakhstan is rich. What do rich people need? They need banks. They need banks to house their money, transfer their money, loans to build their businesses, and loans to finance their housing. The Halyk Savings Bank of Kazakhstan (HSBK KZ, HSBK.LI, HSBK.EU) does all of this and does it in an efficient and highly profitable manner.

     But before going into the numbers of the business, we need to look at the modern history of Kazakhstan and the history of the ownership of HSBK. Nursultan Nazarbayev joined the Communist Party of the Soviet Union in 1962. He became Prime Minister of Kazakh SSR in 1984. In 1990 he was appointed Kazakhstan's first president by the Supreme Soviet. In 1991, after the dissolution of the Soviet Union, he ran for president and won with 98% of the vote. In 2019 he resigned amid protests and was succeeded by Kassym Tokayev, who continues to lead the country. Nursultan had a very good 35 year run. It was also a profitable run. An article in 1999 disclosed that $85 million, intended or the Kazakh treasury, ended up in an account belonging to him. In 2002 an article in a Kazakh newspaper reported that he had stashed away $1 billion of state oil revenues. In 2020 a Radio Free Europe report identified $785 million of European and US real estate purchases made by his family. Nursultan is now 82. He and his family are very rich. As he watches the Russian oligarchs become persona-non-grata, their fortunes seized, and their lives being made very much less pleasant, I believe that he should become more interested in protecting his family and their wealth than in getting more.

     Nursultan has three daughters. The middle one is Dinara who is married to Timur Kulibayev. Both worked in the energy sector and each are reported to be worth over $3 billion. They bought Prince Andrew's house, Sunninghill Park, for 15 million GBP which was 3 million GBP over the asking price. They tore it down and built a 14 bedroom home. They own castles in Germany as well as hotels there. In addition to his wife and their three children, he has two children with his mistress, Goga Ashkenazi. He is on the BOD of Gazprom but seems to enjoy life in the West. Some years ago, Dinara and Timur formed ALMEX Holding Group which owns a majority of Halyk Bank. In 2019 ALMEX reduced its holding in the bank from 74.7% of the outstanding to 64.7% in an offering of GDR shares underwritten by Deutsch Bank & JP Morgan. The prospectus for this offering is maintained on the Halyk Bank website. The offering price was $11.75. In late 2021 Halyk Bank decided that it had excess capital and that it should return the excess to its shareholders. In an unfortunately timed tender, the bank repurchased 7.4% of its outstanding shares at $16.78 in December. ALMEX did not participate in the tender. As a result, its ownership of the bank increased from 64.7% to 69.5%. ALMEX's only other holding is a 30% interest in AON Insurance Broker Kazakhstan LLC.

     This is a very long introduction to Halyk Bank. I thought it necessary because if you don't like the neighborhood, there is no reason for you to travel further. One last warning. I am not an expert on bank stocks, so be careful.

     The tenge is the currency of Kazakhstan. One tenge is worth about $0.002 US. On 12/31/21 there were 431.67 tenge to the dollar. On 2/21/22 there were 427.13. Since the invasion of Ukraine, the tenge declined to 524.87 on 3/11/22 and has recovered slightly to 493.30. I will use the 12/31/21 rate for the historic data and 500 for forward looking estimates.

     Kazakhstan GDP growth ran about 4% a year in recent years with the exception of 2020 when GDP declined 2.6%. It is projected to be 3.8% in 2022. The base lending rate is 13.5%. The exchange rate floats. Government debt is 27% of GDP. Inflation had been running at about 6% over the last several years. It has recently picked up to 8%+.

     HSBK KZ is the local symbol for Halyk Bank. There are 10.908 billion shares outstanding. One Depository Receipt is the equivalent to 40 shares. The total equivalent shares count is 272.7 million shares. The US$ market cap of the bank is $2.5 billion.

     Halyk Bank is the largest private banking institution in Kazakhstan. It is 4x to 5x larger than its next competitor. Scale counts in the banking industry, and it especially counts today as more banking services are delivered online at a lower cost. The bank seems to be exceptionally well run.

     Points of Interest

• Ratings - Moody's - Baa2 Stable 1/21/22 / Fitch - BBB Stable 2/4/22 / S&P - BBB-  Stable 3/4/22
• Market Share Rankings - #1 - Total Deposits 32.3% / #1 - Retail Deposits 32.2% / #1 Retail Accounts 30.2% / #1 - Corporate Deposits 32.4% / #1 Corporate Accounts 32.6% / #1 Total Assets 30.9% / #1 Gross Loans 30.8% / #1 Net Loans 31.1% / #1 Net Income 39.7% / #1 Net Interest Income 35.8% / #1 Equity 34.1% / #2 Net F&C Income 20.9%
• 9 million active retail clients / 8 million internet users in a country of 20 million
• Return on Average Equity 29.7%
• Net Interest Margin 5.2%
• Cost-to-Average Assets 2%
• Efficiency Ratio 24.6%
• Provision for loan Losses 6% / Coverage Ratio 238.3%
• Non-performing Loans 90+ Days  2.6% / Cost of Risk 0.2%
• Loans/Deposits 69.3%
• Liquid Assets/ Total Assets 36.9%
• CET1 19.3% / k1 Capital Adequacy 19.6% / k2 Capital Adequacy 20.4%
• Russia Exposure - 1.0% of Total Assets / 0.6% of Net Income / 0.5% of Loan Portfolio / 0.0% to Sanctioned Entities
• Ukraine Exposure - 0.0%

     At the end of 2020 a Tier 1 capital adequacy ratio of 24.4%. Halyk Bank's policy is to return excess capital to its shareholders. In December 2022 Halyk tendered for 7.2% of its outstanding shares at $16.78. (ALMEX did not participate) This reduced their Tier 1 capital adequacy ratio to 19.3%. With hindsight, the return of capital was a mistake. The war in Ukraine will affect their business. In 2020 Halyk delayed paying its April dividend while it watched to see what effects Covid would have on its customers. In July Halyk was satisfied that the effects from Covid would be manageable and paid a dividend of $1.60 on the GDRs. In 2021 Halyk paid a $1.64 dividend. Because of war in Ukraine, Halyk has announced that it will not pay a dividend in 2022 until there is greater clarity. This is a sound business decision as capital is valuable in times of uncertainty. All in all Halyk is a soundly managed company.

     In 2021 Halyk earned $3.70 a GDR. For 2022 Halyk is planning for loan growth of 10% which approximates the inflation rate. They are predicting 2-3% loan losses for which they are fully covered. They are budgeting net income of 300 - 350 billion tenge. At 500 tenge/US$ that is EPS of $2.20 to $2.57 - averaging to $2.38. In the future, perhaps, they can match and exceed their best results. They appear to have the management and market to do so.

Catalyst

End of the war in Ukraine.

The reurn of excess capital to shareholders.

A benign poliical situation in Kazakhstan.