As the banking market becomes saturated in many parts of central and eastern Europe, foreign banks are taking a keen interest in Ukraine and have begun to acquire a significant stake in the market.
Over the past two years, foreign players have purchased seven Ukrainian banks. Recently, Hungary's OTP has looked set to buy TAS Commercebank, which also holds an insurance company. OTP already acquired the Ukrainian unit of the Austria-based Raiffeisen International in June, which had itself bought Ukraine's second-largest bank, Aval, for a record $1bn. OTP paid $818m, its biggest-ever acquisition.
The TAS deal could cost around 200m-300m euros ($255m-383m), which would make it the fourth- or fifth-largest acquisition in OTP's history, according to online financial journal Portfolio.hu. Industry insiders say OTP also has its eye on two other lenders in the country.
The Hungarian lender is reportedly one of the strongest banks in central Europe, and is making major acquisitions across central and eastern Europe.
With a population of 49m people and an improving business environment, investors expect Ukraine to develop a lucrative banking market emulating that of Poland or Hungary. It has also been suggested that, except for Russia, the other eastern European markets have become saturated, with Ukraine remaining relatively virgin territory.
While other economic issues still loom large in the country, the banking sector continues to improve and grow. Bank acquisitions by major foreign players are also helping to strengthen the system from the outside. They are doing this by bringing in expertise and years of experience, new technologies and products, international best practice, higher risk management standards and access to external credit lines. Although believed to benefit the sector, there is some concern that foreign players will end up dominating the local market.
The share of foreign capital in the Ukrainian banking system rose from just 9% in 2004 to 19% in 2005.
Although the recent World Bank's Doing Business report gives Ukraine's business environment rather poor rankings overall for 2005 - worst of all in paying taxes (151 out of 155 countries) - the situation has had marked improvement. This is especially significant in contract enforcement as it ranks 39 out of 155 countries monitored by the World Bank. It takes 28 steps, against a regional average of 29.8 and an OECD average of 19.5, to enforce a contract in Ukraine, and just 269 days, against a regional average of 393, very close to the OECD average of 225.7 days.
The cost of contract enforcement in Ukraine, expressed as a percentage of debt, was 11%, only 0.4% above that of the OECD average, which stood at 10.6% in 2005, against a regional average of 17.4%.
It was also in the top half when it came to obtaining credit as it ranked 75th out of 155. Though access to credit information through public registries or private bureaus is virtually non-existent according to the World Bank report, its score of 8 out of 10 on the Legal Rights Index was actually higher than that of the OECD countries, which was 6, reflecting that Ukraine has laws better designed to expand access to credit. The result is testament to the country's drive for development.
According to Standard & Poor's, loan activity grew by 20% in 2005, as opposed to 10% in neighbouring Russia. The total of loans given out last year equalled 35% of GDP.
Ukraine did rank low, 141, on protecting investors, but the government that came to power with the Orange revolution in late 2004 has been working continuously to improve the country's banking sector.
Just last week at the country's national bank, President Viktor Yushchenko convened a gathering of bankers, key government ministers and heads of law enforcement agencies to discuss co-operation to protect the interests of depositors in Ukrainian banks. At the meeting, Yushchenko said that the sector has been developing "dynamically and successfully" since 2004, but that serious problems remain, caused by some financial institutions, which then undermine the reputation of the country's other banks.
According to online journal forUm, the President said that depositors in eight banks had been the victims of fraud, and that the National Bank of Ukraine and law enforcement agencies must work together to monitor commercial banks.
In January 2005, the Ukraine Banking Corporate Governance Project began in co-operation with the International Finance Corporation, the private sector arm of the World Bank, in partnership with the Association of Ukrainian Banks. The main donor to the project is the State Secretariat for Economic Affairs of Switzerland.
The project is scheduled to finish in December of this year, and aims to: improve the current state of internal governance in Ukrainian banks; promote the use of corporate governance in the credit assessment of corporate clients by banks; strengthen non-governmental organisations active in the banking sector; and to facilitate and improve the public private dialogue on banking reforms.