International Equity Investor Perspectives on the Kazakhstan Banking Sector

27 September 2007

Is it time to buy Kazakhstan banks?

Overall, we believe that the Kazakhstan banking sector offers great long term investment value due to the strong macroeconomic and regulatory environment.

But is the credit crunch going to cause further weakness in banking stocks that have depended on foreign debt?

Or has the potential for a financial crisis been exaggerated, creating opportunities for inexpensive equity shares?

The answer is likely external, as opposed to based on these banks, which still have strong fundamentals.

We do believe there are interesting, specific investment opportunities, regardless of the global climate.

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The adoption of financial reforms and a strict regulatory regime has outpaced that of other CIS countries

European-style regulatory regime enforced by the National Bank and AFN (the financial sector regulator)

IFRS reporting since 2002 (versus late 2004 in Russia)

KASE-listed companies required to publish quarterly financial statements and submit monthly data to AFN

Basel capital adequacy requirements have been implemented, augmented by additional local capital rules

10% minimum reserve requirements on foreign debt are due to be implemented as of 9 October 2007

Capital-based foreign debt limits being phased in after being implemented as of 1 April 2007

Credit bureau generating first credit history database in the CIS should be fully operational by 2009

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Before the recent liquidity squeeze, banks had been experiencing faster growth rates than the overall economy

As Kazakhstan’s real GDP has grown by more than 9% every year since 2000, bank assets have grown at more than 50% CAGR

We expect the sector to reach maturity with slowing growth in the next few years due to natural market forces and regulatory tightening

Source: AFN, Statistical Agency of Kazakhstan, National Bank

25% 31% 36%46%

59%

91%

108% 113%121%

13.5%

9.8% 9.2% 9.4% 9.4%10.6%

9.9%8.8% 8.8%

0%

2%

4%

6%

8%

10%

12%

14%

0%

20%

40%

60%

80%

100%

120%

140%

2001A 2002A 2003A 2004A 2005A 2006A 2007E 2008E 2009E

Assets / GDP Loans / GDP Deposits / GDP Real GDP Growth (rhs)

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Risk factors relate to both the possibility of regulatory changes and the macroeconomic picture

Increased cost of borrowing is likely to slow growth, and also could squeeze margins. While we have already factored such issues increase into our forecasts, we cannot precisely predict changes in international liquidity.

Inflationary pressure may push regulators to continue to increase reserves requirements, raise refinancing rates, further limit foreign borrowing or take other measures that would slow sector growth.

Asset quality has been strong, but there is the perception of a real estate bubble that could lead to higher NPL rates. We do not, however, expect a sharp decline in real estate prices because, despite abundant construction, there is still a significant real estate shortage.

We do not see a high risk level for the broader economy Oil production expected to nearly triple by 2015 Gold & currency reserves > $38 billion (20 months of imports) Non-oil revenues cover all government budget expenditures Kazakhstan’s government debt remains minimal

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Our valuation approach is comparable since banks are still in their growth phase

We use a comparative valuation methodology based on forecast price/book ratios and return on equity of Kazakhstan banks.

We also adjust for overall franchise risks as well as share liquidity.

The comparative approach is more useful than traditional models because only one of the eight banks we have under coverage is currently paying dividends on common shares (Halyk).

Most Kazakhstan banks now appear less expensive than their emerging market peer group

Bank TuranAlem

Kazkommertsbank

Halyk Bank

Alliance Bank

Bank CenterCredit

Bank CaspianTemirbank

ATF Bank

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

10% 15% 20% 25% 30% 35%

2007

E P

rice

-to

-Bo

ok

Rat

io

Compounded Annual ROE 2008-09E

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