Record Bank Profits: Where They Come From
Translated from Russian with the help of AI. Original: Russian version
An estimate of the excess income earned by four large banks from arbitrage on current accounts and foreign-currency deposits: about KZT 693 billion.
Every month we read headlines about record profits in the banking sector. I even read somewhere that the National Bank of Kazakhstan has awarded grants for research into the factors behind banks' income. Trying to curb excess profitability without understanding its causes has produced solutions that are extremely hard to find anywhere in international practice: the decision was to fight it with a 5% higher CIT and a higher MRT. Given that the banking sector's excess profitability is entirely a product of the high base rate, as soon as the rate falls and the sector's income returns to normal, the debate over CIT will begin again.
The MRT does take away part of the income, but it has a problem: it also limits lending capacity and, most importantly, it applies to all banks, including those that do not earn the excess income the large banks do. I once calculated that the MRT would resolve the excess profitability issue only partially. But its most significant consequence is unequal competitive conditions for small and medium-sized banks relative to the large ones, because the MRT will cut the profitability of small and medium-sized banks far more than that of the large banks.
The causes of the excess profitability are obvious. It is arbitrage on interest rates for current accounts and foreign-currency deposits, created by the ban on paying interest on current accounts and the 1% cap on rates for foreign-currency deposits. No large or complex calculations are needed: as a result of the ban, banks attract money at zero percent, that is, for free, and then re-lend it at the market rate, which on average equals the base rate minus one percentage point, currently 17%. It is not hard to calculate that if tenge balances on current accounts across the system amount to roughly KZT 6 trillion, then income from current accounts alone is now about KZT 6 trillion x 17% = KZT 1.02 trillion.
In my spare time I decided to read the financial statements of the four largest banks and estimate indirectly how much they earned on current accounts and foreign-currency deposits in 2024. The picture will not change much in 2025, so we can roughly estimate what the banks will earn for 2025. And if we want a rough figure for the entire period in which the arbitrage has existed, we can safely multiply by three.
I took the data from audited statements, in which the auditors disclose the amount of customer current accounts. The total of current accounts includes both foreign-currency and tenge balances. To isolate the tenge portion, I indirectly calculated the share of customers' tenge-denominated liabilities and divided it by total customer liabilities. This gave me the tenge share of total customer liabilities. I then multiplied that share by the total amount of current accounts (assuming that the structure of current accounts and deposit accounts is the same). To be accurate, I took balances at the end and at the beginning of the year and averaged them.
For the re-lending rate I used 15% per annum in tenge and 4% in US dollars.
I then calculated annual income and subtracted CIT using each bank's effective CIT rate. The effective CIT rate is itself a curious matter: it varies across the banks from 8% to 21%, owing to the tax exemptions that existed for securities.
According to my calculations, the share of profit coming from arbitrage is smallest at Kaspi Bank: just 27% of net profit, or KZT 146 billion. The largest share of earnings from state-backed arbitrage goes to Bank CenterCredit: 68% of net profit, or KZT 133 billion. At Halyk the share is 36%, or KZT 327 billion, and at Forte it is 55%, or KZT 87 billion. The four banks account for KZT 693 billion of excess income generated by the arbitrage, which is roughly 70% of the sector's total arbitrage. These four banks are therefore the most profitable, and this has nothing to do with consumer loans or any supernaturally profitable products.
Banks make money by borrowing from some economic agents at interest and lending to others at interest. When the state lowers the cost of money through bans and restrictions, the bank earns an excess profit that should have been the income of those on whom the restrictions were imposed. These are mainly public-sector organizations (schools, hospitals, theaters and so on) and individuals who keep money on a card for everyday spending.