One of the main attractions for foreign investors in Ukrainian banks is the consistent increase in household personal income, and the corresponding potential for continued growth in the retail-banking sector. The sector showed 84% growth in the first nine months of 2006.
According to the National Bank of Ukraine, average interest rates on credit stood at 13.9% in September, which represents a steady month-on-month reduction and acts as a persistent stimulant for growth in consumer credit.
The number of plastic cardholders has rapidly grown this year along with the number of transactions in the country, providing fresh opportunities for foreign investment in both the card technology and the underlying software. There have been 15m plastic cards issued, 2m of which are credit cards, representing a growth rate of 66% in 2006.
The mortgage sector is continuing to expand. With 120% growth in 2006, it is considered the star of the retail-banking sector, along with car loans. Mortgages currently represent 4% of GDP, which is still low compared to countries at a similar stage of development and points to high potential. However, 85% of mortgage loans are issued in foreign currencies.
Growth in deposits is significantly lower at around 60%. This gives rise to future liquidity concerns for the lenders, with most loans being taken over a period of around five to seven years. The average length of the loans, with some being repaid early, is not yet known as a full credit cycle has not been experienced since the introduction of mortgages to the country. This risk is mitigated slightly by the typically high interest rates of around 19.5%, which lead to expectations that many will be paid back early.
The arrival of large foreign banks with greater experience in retail finance will lead to increased competition, which could bring rates down. This will not be without risk however, due to a lack of advanced credit control systems. Although Ukraine currently has two major credit reference agencies, these are in an embryonic stage when compared to similar Western agencies. Some shortcomings include a lack of a shared credit reference database, no customised scoring model and no coherent strategy for analysing loan risk across the sector. The population tends to be risk averse and reluctant to provide information. Legislation is in place however, with laws on both credit history and consumer protection.
As a result of this increased risk, it is expected that growth in retail banking will lead to a corresponding increase in the number of non-performing loans. These currently run at around 12% in Ukraine.
A major constraint on the expansion of retail finance in Ukraine lies in the thin capitalisation of many of the banks, and the banking industry in general, which although showing growth rates of around 6% in 2006, maintain assets that represent only 59% of GDP compared with around 200% for Western European countries. Securing loans for investment from outside of Ukraine is expensive and complicated due to the BB rating given the country by Standard & Poors and Fitch rating agencies. On October 25, Finance Minister Mykola Azarov announced that the government expected these ratings to be upgraded.
Privatbank, the largest bank in Ukraine by assets, also announced on October 25 that it had secured a $300m loan from an international syndicate.
The interest rate on the one year loan, LIBOR + 1.8%, represents the lowest to date in the Ukrainian banking sector. The bank will use the loan to develop a micro-credit business.
Many insiders expect further consolidation in the banking sector throughout 2007. This will include the entrance of more foreign investors to the market with the purchase of shares in financial institutions. Vitaly Strukov, managing director for corporate finances at Concord Capital, told the conference, “In 2007 there will be at least five transactions valued at $2bn to sell controlling stock interests in Ukrainian banks to strategic investors.”