Banking on Consolidation

Economic News

22 Jul 2010
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The lack of consolidation in the Ukrainian banking sector has attracted a new queue of foreign banks clamouring for entry into this lucrative market. On November 16, Stockholm-based SEB (Skandinaviska Enskilda Banken) announced its purchase a controlling stake of Faktorial-Bank for $120m.

Following suit three days later, Bank of Cyprus - the largest financial institution in the newly joined EU member state - inked plans to buy 95% of AvtoZAZbank's shares for $76m.

Buyouts of second-tier financial institutions fit in nicely with foreign banks' overall strategy to create stronger nationwide networks. For instance, SEB's latest acquisition follows its purchase of Bank Agio three years ago and will create a network of more than 110,000 customers.

Sustained interest in the Ukrainian banking sector from foreign investors and financial institutions is fuelling growth and investment. In the first nine months of this year, foreign investments increased year-on-year by 70.5% to $5.24bn. According to the State Statistics Agency, the main driving factor was the financial and banking sector.

According to media reports, foreign financial institutions now represent 30% of Ukraine's banking market based on net assets, having tripled since the Orange Revolution in 2004. The share of foreign activity in Ukraine is highly encouraging considering the share of foreign assets in neighbouring Russia's largely state-owned banking sector is expected to reach 25% in five years.

Larger foreign-owned institutions are now in a favourable position to invest capital in smaller and medium-sized banks. This autumn, Greece's Piraeus Bank garnered a controlling share of Ukraine's International Commercial Bank for $75m. In the meantime, Piraeus is competing with rival National Bank of Greece for shares in Kreditprombank, which stands among the 20 largest banks in Ukraine and which market analysts believe will sell from more than $500m.

Deals are expected to continue through the end of this year and 2008. Through a subsidiary, Europe's UniCredit Group is moving forward with plans to purchase a controlling $2bn stake of Ukrsotsbank, the country's fourth largest by net assets. The ministry of economy hinted this month that Deutsche Bank may open a branch in Ukraine after World Trade Organisation entry, due for 2008.

Compared to Ukraine's neighbours, profit margins remain high. While the country remains underbanked by European standards, consumer demand for innovative products is virtually untapped. As of September 2007, total deposits of commercial banks reached $49bn, a 50% rise on the previous year. Meanwhile, bank assets are increasing steadily.

With over 150 banks in operation, consolidation of the sector is far from complete. The banking sector is riding high on a wave of mergers and acquisitions led by European players. Austria's Raiffeisen Zentralbank Group paid a record $1bn for Ukraine's second largest bank Aval Bank in 2005, spawning a tide of consolidation.

Still, risks remain for the banking sector. Stimulated by record high oil prices, inflation will soar to 14.5% this year, according the ministry of economy. That means that many Ukrainians will be less inclined to set aside savings in banks. The shrinking value of the US dollar is also creating headaches for Ukraine, which maintains a de facto peg to the greenback and holds over $22.3bn in foreign reserves and.

Recently, international financial markets have been shaken by bearish forecasts for US economic growth as well as the sub-prime mortgage crises. As Ukrainian financial institutions have increased borrowing, the current global situation has created a less than ideal external environment for Ukraine's banking sector.

Ongoing global hiccups, however, will likely see top Ukrainian banks looking abroad to float shares on international markets. According to Concorde Capital's Oleksandr Omelchuk, PrivatBank, Raiffeisen Aval and Ukrsib each could achieve market capitalisation of around $3bn.

Earlier this month, Moody's praised Ukraine for "improving its financial fundamentals" but warned of structural weaknesses in the banking sector. Given political uncertainties, however, fiscal policy is unlikely to change. In October, Volodymyr Stelmakh, chairman of the National Bank of Ukraine, indicated the central bank could push forward measures to combat inflation by strengthening the hryvnia. With presidential elections in 2009 looming in the distance, enthusiasm for wide-scale banking and fiscal reform will by and large be kept to a minimum.

So far investors have been nearly unshaken by Ukraine's seemingly never-ending political turmoil. As foreign bankers continue to enjoy steady growth in Eastern Europe's most lucrative market for financial services, Ukraine's dynamic banking market is set for future healthy prospects.

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