Shareholders' equity decreased over the period from 413.746 to 353.466 million kzt that is decreased for 60, 294 million kzt or 14,6 %.

Note - Compiled by the author according to the data of website www.afn.kz

Figure 5.Changes in Total equity 2010-2012 (mln. KZT)

Return on equity

Shows the return on shareholders' investment, in terms of accounting profits.

The formula for calculating the return on equity:

ROE = Net Income / Equity, (1)

Table 2

Return on Equity

	2010	2011	2012
Net Income	20 789	23 520	20 992
Book value of equity	413 746	436 632	353 466
ROE, %	5,18%	5,53%	5,31%
Note - source website www.kase.kz

At calculation of ROE, we used data on net income and book value of equity excluding preferred shares.

In fact, the main indicator for strategic investors help determine the efficiency of capital invested by the owner of the enterprise. Return on equity shows how much currency net profits earned each unit invested owners of the company. Return on equity shows the amount of net profit that was generated net worth companies, characterizes the degree of attractiveness of the object for investment of the shareholders. The higher the coefficient of ROE, the higher the profit attributable to the share, and the larger the potential dividends.

Management of the Bank’s own Capital

In accordance with the established quantitative targets for capital adequacy The Bank is required to comply with the requirements to maintain minimum amounts and ratios of capital adequacy and Tier I capital to assets weighted by risk.

Capital adequacy requirements are set by the FMSC and controlled using the principles, methods and factors identified by the Basel Committee on Banking Supervision.

Table 3

Execution of prudential and other standards of JSC Kazkommertsbank

	31 December 2012 (mln. KZT )	31 December 2011 (mln. KZT )	31 December 2010 (mln. KZT )
Composition of regulatory capitala: Tier 1 capital:
Share capital (ordinary shares)	7,776	7,784	7,786
Share premium reserve	194,721	194,924	195,024
Retained earnings b	225,918	202,380	180,609
Net (loss)/income b for the year	(131,131)	23,480	21,879
Non-controlling interest	1,315	1,112	1,074
Goodwill	(2,405)	(2,405)	(2,405)
Innovative instrument c	10,868	14,729	14,649
Total qualifying tier 1 capital	307,062	442,004	418,616
Property and equipment revaluation reserve d	5,710	4,866	5,940
Share capital (preference shares)	1,232	1,239	1,245
Subordinated debt e	66,176	82,947	92,030
Total qualifying tier 2 capital	73,118	89,052	99,215
Total capital	380,180	531,056	517,831
Risk weighted assets and contingent liabilities	2,249,073	2,379,633	2,579,090
Ratio of tier 1 capital adequacy	13.65%	18.57%	16.23%
Capital adequacy ratio	16.90%	22.32%	20.08%
Note - source website www.kkb.kz

^a According to the principles applied by Basel Committee.

^b As at 31 December2012 and 2011, in the computation of total capital for capital adequacy purposes the line “Retained earnings” included statutory reserve, which is required by legislation of the Republic of Kazakhstan and reflected in IFRS financial statements since 1 July 2011.

^c Innovative instruments represents perpetual bonds.

^d The line “Property and equipment revaluation reserve” includes discounted amount of investments available-for-sale securities revaluation reserve/(deficit) (in accordance with the Basel standards).

^e As at 31 December 2012, 2011 and 2010, the Group included in the computation of total capital for capital adequacy purposes the subordinated debt received, which is not to exceed 50% of Tier 1 capital. In the event of bankruptcy or liquidation of the Bank, repayment of this debt is subordinate to the repayments of the Bank’s liabilities to all other creditors.

During the years ended 31 December 2012, 2011 and 2010, the Group complied with all set capital requirements.

The Group manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to stakeholders through the optimisation of the debt and equity balance.

The capital structure of the Group consists of debt, which includes subordinated and perpetual debt and equity comprising issued capital, reserves and retained earnings as disclosed in the consolidated statement of changes in equity.

Based on the recommendations of the Management Board by making decisions on the Board of Directors or shareholders meeting, the Group balances its overall capital structure through new share issues, issues of new debt or the redemption of existing debt, and the payment of dividends.

The Group’s overall capital risk management policy remains unchanged in comparison with 2011and 2010.

Risk-weighted assets and contingent liabilities decreased by 5.5% to KZT 2,249 billion at 31 December 2012 compared to KZT2,380 billion as at 31 December 2011. On a consolidated basis, the Bank’s Core Tier 1 ratio at 31 December 2012 was 13.7% compared with 18.6% at 31 December 2011. Total capital ratio was 16.9% as at 31 December 2012 compared to 22.3% at 31 December 2011.

Based on the analysis of the possible impact of planned changes in the regulations, the Bank identified negative consequences for its regulatory capital, open currency position and liquidity. The impact of these negative consequences was avoided as a result of additional one-off specific provisions under IFRS out of excess capital and earnings of 2012. Consequently:

• IFRS reserves equalled reserves under Kazakh regulations

• Capital adequacy remained well above the minimum requirements 

• Core Tier 1 ratio of 13.7% which is 2.7 times higher than the minimum  5% ratio

• Total capital ratio of 16.9% which is 1.7 times higher than the minimum requirement of 10%

• Provisioning rate at 32.5% of gross loans up from 24%

• NPLs did not change significantly and stood at 29.0% of gross loans compared to 28.6% in 2011

As a result of one-off additional IFRS provisioning charges net loss amounted to KZT130.9 bn compared to net income of KZT23.5 bn in the previous year.

Bank capital adequacy

The capital adequacy of commercial bank - the bank rate, expressed as the ratio of shareholders' equity to total volume of assets weighted for risk.

This ratio should not be less than 10%, follows from the calculations - the coefficient of compliance.

BCA= Total equity/Total assets * 100% (2)

BCA2010= 413 746/2 688 108*100=15% (2)

BCA2011=436 632/2 565 689*100=17%

BCA2012=353 466/2 598 337 *100=14%

where,

BCA- bank capital adequacy

Table 4

Capital adequacy

Capital adequacy	2012	2011	2010
Equity/Total Assets	0,17	0,11	0,11
Liquidity
Current Ratio (k4)	0,64	0,68	0,59
Cash Ratio(k4-1)	8,32	10,54	3,58
Quick Ratio (k4-2)	2,892	4,15	1,17
Capital adequacy (k1-1)	0,13	0,12	0,13
Capital adequacy (k2)	0,16	0,15	0,15
Note - source websitewww.kase.kz

According to the FSA as at 01.07.2012. Bank with a margin carries out prudential standards on capital adequacy K1-1 and K2, as well as the current liquidity K4.

Note - Compiled by the author according to the website www.afn.kz

Figure 6. Capital adequacy ratio (2010-2012)

In calculating the capital adequacy ratio as at 31 December 2012, 2011 and 2010the bank included in the calculation of capital obtained a subordinated loan in the amount not exceeding 50% of Tier I capital. In the event of bankruptcy or liquidation of the Bank, repayment of this debt is the Bank's liabilities to all other creditors. For the years ended December 31, 2012, 2011 and 2010the bank fully complied with all established requirements for the capital.

2. Analysis of activity of Kazkommertsbank in formation of deposit market and implementation of deposit policy.

About 75% of liabilities of Kazakh banks are deposits of legal entities and individuals, and for some time there is tendency to growth in weight of retail deposits as liabilities of commercial banks. However, respondents' Ks' experts can hardly call deposits as a reliable source of funding. According to the National Bank of Kazakhstan, from December 2011 to December 2012 the total amount of deposits in Kazakhstan's commercial banks increased by 607.9 billion KZT (7%), the volume of deposits of legal entities decreased by about 40 billion KZT (about 7%), while retail deposits increased by 650 billion KZT (about 20%).

This suggests that the strategy of many Kazakh banks have recently focused on the increase in the share of deposits, including the consumer in the overall structure of their liabilities. Retail deposits and deposits of legal entities constitute a significant share of liabilities in commercial banks of Kazakhstan at the beginning of 2013. They amounted to 75% of the market average. In number of banks, such as Halyk and CenterCredit, the share of liabilities is above average market share over 80%.

According to research by Standard & Poor `s, provided by the business portal Kapital.kz, indicators of funding and liquidity of the banking sector in Kazakhstan will remain adequate, stimulating the growth of lending without attracting significant external funding. Taking the limited investment opportunities in Kazakhstan into consideration, experts expect a further increase in the volume of deposits of Kazakhstan banks with economic growth in the country.

Analyst of Halyk Finance Bakay Madybaev outlined two polarity of deposit funding of second tier banks. On the one hand, attraction of deposits reduces the concentration of funding sources, but on the other hand, a relatively short period of time of deposits hinders corporate and mortgage lending, and the risks of an early withdrawal of funds make banks hold excess liquidity, thereby reducing the return on assets.

A large percentage of the risks is noted by director of the Center for Macroeconomic Research Olzhas Hudaybergenov, noting that the overall volume of deposits is growing, but among them short-term deposits dominate. In addition, the depositor may withdraw the deposit at any time. As well as deposits are now the main source of funding for banks, but quite unreliable.

An analyst "Uralsib Capital" Natalia Berezina has another opinion, noting that in more or less stable macroeconomic deposits of the population can be considered a reliable source of funding. According to her, the high proportion of retail deposits makes sense in case of the corresponding share of retail lending, or lending to small and medium-sized businesses. For example, Kaspi Bank can afford to keep 60% of liabilities in retail deposits, but if we take the" Halyk ", in which retail deposits are about 20% of the loan portfolio, or" Kazkommertsbank " where the share reaches only 10%, it seems reasonable that the share of retail deposits in the liabilities is about 30% that banks have.

The most popular terms for investors are usually the first, deposits in KZT at 6.5-8% with the possibility of partial withdrawals and replacements, and, second, the deposits by more than 8% (up 9.4%), but with a higher minimum deposit amount or without the option of partial withdrawals.

According to statistics of the National Bank of Kazakhstan as of February 1, 68% of the deposits of legal entities and 88.5% of retail deposits were made in KZT. National Bank statistics show a trend of popularity of KZT deposits. According to data as of February 1, 2013, deposits of legal entities in Kazakhstan's commercial banks amounted to more than 1,467 trln. KZT or about 68% of the total amount of deposits of this group of investors. The volume of retail deposits in KZT amounted to nearly 323.7 billion KZT, or 88.5% of total deposits of individuals. These do not include data on deposits of non-residents.

Contributions are often made for a period of 12 to 36 months in the national currency. The banks themselves encourage Kazakhstanis to save in the national currency. Taking into consideration the fact that for the bank the national currency is preferred for maintaining needs of business units, the highest interest rates are set on deposits in KZT. As a result customers usually place deposits in the national currency.

In addition, the Kazakhstan Deposit Insurance Fund (KDIF) recommends a nominal interest rate of 9% per annum for deposits in KZT and 5.5% for deposits in foreign currency. In December 2012 average rates for the system on retail deposits in KZT (6.7%) and foreign currency (4.7%) were below the maximum recommended rate (from 1 January 2013 - 9% and 5.5%, respectively, in the second half of 2012 was 9% and 6%).It is obvious that the Kazakh banks offering more than 9%, involve the effective rate (which is always above par), or offer award to depositors, which in the case of a bank failure may be unwarranted. The scheme is built like this: the bank itself determines what he wants to guarantee deposits, and in proportion to the volume of this contributes to the KDIF and the fund, in turn, sets the recommended rates at size of which will be guaranteed reward. The Bank may establish a higher rate, but there is no guarantee on difference.

Table 5

Volume of deposits in banks

Bank	Volume of deposits, 2013 KZT million	Volume of deposits, 2012 KZT million	Outflow/inflow, %
Tsesnabank	515916	341222	51,2
Kaspibank	412781	318055	29,8
Eurasian Bank	295670	229932	28,6
Sberbank	493770	388912	27,0
AllianceBank	334405	292504	14,3
Halyk bank	1656041	1519278	9,0
Bank CenterCredit	753587	691552	9,0
ATF Bank	473465	522672	-9,4
BTA Bank	541185	736085	-26,5
1 Note - top ten banks were taken in terms of assets on January 1, 2013 2 Note - source website www.kapital.kz

The amount of deposits in Kazkommertsbank on 31 December 2012 was 1,554 trillion KZT, in comparison with 2011, it increased by 6,2%.

Table 6

Volume of deposits of Kazkommertsbank

	31 December 2012 (KZT million)	31 December 2011 (KZT million)	31 December 2010 (KZT million)
Volume of deposits	1 553 576	1463077	1506800
Note - source financial statement of Kazkommertsbank

If we look at diagram we can see that the volume of deposits decreased in 2011, and increased in 2012. In comparison with 2011, we see positive tendency to the growth.

Note - Compiled by the author according to the financial statement of Kazkommertsbank

Figure 7. Dynamics of change in volume of deposits of Kazkommertsbank from 2010- 2012, million KZT

The volume of retail deposits was 656,844 billion KZT on 1 January 2013, 592,688 billion on 1 January 2012.The increase in retail deposits was 10.8% .

Table 7

Volume of retail deposits in banks

Bank	Volume of retail deposits, 2013, (KZT million)	Volume of retail deposits, 2012, (KZT million)	Outflow/inflow, %
Sberbank	119053	70567	68,7
Tsesnabank	159219	99338	60,3
Eurasian Bank	97571	63659	53,3
Kaspibank	319162	222724	43,3
AllianceBank	156469	112836	38,7
ATF Bank	211479	155200	36,3
Halyk bank	686426	559209	22,7
Kazkommertsbank	656844	592688	10,8
Bank CenterCredit	391869	376139	4,2
BTA Bank	291933	302214	-3,4
1 Note - top ten banks were taken in terms of assets on January 1, 2013 2 Note - source website www.kapital.kz

The volume of deposits of legal entities was 896,732 billion KZT on 1January 2013, 870,389 billion on 1 January 2012. The growth of deposits of legal entities was 3%.

Table 8

Volume of deposits of legal entities in banks

Bank	Volume of deposits of legal entities, 2013 KZT million	Volume of deposits of legal entities, 2012 KZT million	Outflow/inflow, %
Tsesnabank	356697	241884	47,5
Eurasian Bank	198099	166272	19,1
Sberbank	374717	318346	17,7
Bank CenterCredit	361718	315414	14,7
Kazkommertsbank	896732	870389	3,0
Halyk bank	969614	960069	1,0
AllianceBank	177936	179668	-1,0
Kaspibank	93619	95331	-1,8
ATF Bank	261986	367471	-28,7
BTA Bank	249252	433871	-42,6
1 Note - top ten banks were taken in terms of assets on January 1, 2013 2 Note - source website www.kapital.kz

Note - Compiled by the author according to the data of website www.kapital.kz

Figure 8. Dynamics of change in volume of retail and deposits of legal entities of Kazkommertsbank on 1 January 2012, 2013, mln. KZT

The share of retail deposits is 42,3%, the share of deposits of legal entities is 57,7% in 2012 . Nowadays we can see that retail deposits grow rapidly. Earlier in the structure of deposit portfolio the deposits of corporate clients dominated, in the last couple of years, there is such a tendency that retail deposits pursue deposits of legal entities.

Note - Compiled by the author according to the data of website www.kapital.kz

Figure 9. The share of retail deposits and deposits of legal entities on 1 January 2013

In comparison with other banks, we can see that an increase in retail and legal entities deposits is not high. This is can be explained by the fact that Kazkommertsbak has sufficient liquidity and sufficient funds to provide growth. As a result during 2 years Kazkommertsbank has reduced interest rates on deposits which reduced interest rates on loans to public. Another reason why bank decreases interest rate on deposits is that in July of this year, Kazakhstan Deposit Insurance Fund (KDIF) lowered the recommended interest rate for banks. So, KDIF lowered the recommended rate on KZT deposits from 10 to 9% per annum in foreign currency - from 7 to 6% per annum. According to managing director of bank Andrey Timchenko, the bank has no plans to revise interest rates on deposits. Effective annual rate of KZT deposits for individuals in Kazkom ranges from 7.2-7.7% per annum.

Table 9

Deposits with high interest rates

Bank	Name of deposit	Interest rate
		12 month	24 month	36 month
Eurasian Bank	«Казына Премиум»	8%	9%	-
Kaspi bank	«Каспийский»	8,65%	-	-
Halyk bank	«Стандартный»	8%	8%	8%
Kazkommertsbank	«Лучший»	7,5%	8%	-
BTA Bank	«Сберегательный»	7%	7,5%	8%
Bank CenterCredit	«Чемпион»	7%	4%	-
Temirbank	«Урожай»	8% (13 month.)	-	6% (37 month)
Note - source website www.kapital.kz

Let’s consider deposit portfolio of Kazkommertsbank. We can see that time deposits exceed demand deposits. Bank encourages people to put money in time deposits by setting high interest rates in comparison with demand deposits. For a bank fixed deposit is advantageous because it can use these funds for a longer time for making loan to the borrower and receiving high interest rates.

Note - Compiled by the author according to the financial statement of Kazkommertsbank

Figure 10. The share of time deposits, demand deposits, JSC National Welfare Fund’s “Samruk-Kazyna”, JSC Entrepreneurship Development Fund’s “Damu” and JSC Stress Assets Fund’s deposits, accounts in precious metals in 2012.

There is a tendency to an increase in volume of time deposits and opposite tendency to decrease in volume of demand deposits.

Table 10

Dynamics of change in time and demand deposits

Types of deposits	31 December 2012 (mln. KZT)	31 December 2011 (mln. KZT)	31 December 2010 (mln. KZT)
Time deposits	1064077	894543	893814
Demand deposits	379974	457588	459480
JSC National Welfare Fund “Samruk-Kazyna”, JSC Entrepreneurship Development Fund “Damu” and JSC Stress Assets Fund	105883	107689	152383
Accounts in precious metals	3642	3257	1123
Total	1553576	1463077	1506800
Note - source financial statement of Kazkommertsbank

Note – Compiled by the author according to the financial statement of Kazkommertsbank

Figure 11. Dynamics of change in volume of time and demand deposits from 2010-2012, mln. KZT

Statistics shows that customers prefer to keep their money in KZT. KZT is the most popular currency. Dollar takes second place, euro the third place. Deposits in KZT amounted to 55,3% in 2012. For the bank the national currency is preferred for maintaining needs of business units, the highest interest rates are set on deposits in KZT . As a result customers prefer to place deposits in the national currency.

Note - Compiled by the author according to the financial statement of Kazkommertsbank

Figure 12. Shares of deposits in KZT, dollar, euro, ruble, another currency in 2012

Why do people prefer to make deposits in Kazkommertsbank?

The main reasons is an advertisement.

Nowadays advertisement plays an important role in attracting new depositors.

Kaskommertsbank is one of the leaders in volume of funds directed at advertisement.

More than 19.4% of the market of advertising budget belongs to Kaspi bank, the second place is taken by Eurasian Bank 15.2%. Kazkommertsbank 14.3% took the third place.  So, in 2012, Kaspi bank spent on advertising more than 1.3 billion, "Eurasian Bank" -1.0 billion, Kazkom - 953.6 million in 2012.

In comparison with 2011, Kazkommertsbank reduced its expenses on advertisement by 11.2%, according to website www.kapital.kz.

Table 11

Leaders in volume of funds directed at advertisement.

Bank	Expences on advertisment, (KZT million)
Kaspi bank	1296
Eurasian Bank	1017
Kazkommertsbank	954
Sberbank	740
Halyk bank	640
Tsesnabank	551
Bank CenterCredit	465
BTA Bank	413
AllianceBank	382
ATF Bank	210
Note – source website www.kapital.kz

As at 31 December 2012, interest on customer accounts was KZT 65,986 billion (2011: KZT 85,490 billion, 2010: KZT 96,997 billion).The volume of deposits was 1,554 KZT trillion in 2012, KZT 1,463 trillion in 2011, KZT 1,507 trillion in 2010.

The cost of deposits is equal to:

65,986 billion / 1,554 trillion *100% =4,2 % in 2012

85,490 billion /1,463 trillion=5,8 % in 2011

96,997 billion / 1,507 trillion=6,4% in 2010

We see the tendency to the decrease in cost of deposits. It is explained by the fact that bank reduces interest rate on deposits.

Note - Compiled by the author according to the financial statement of Kazkommertsbank

Figure13. The cost of deposits in 2010, 2011, 2012