Even if the recent political turbulence in Kiev kept most Ukrainian bankers on their toes, there were no signs of the kind of panic that occurred during the Orange revolution. Back then, a run on the banks and the local currency, the hryvnya, had a powerful effect, but this time, capital migration was widely thought much smaller.
“We saw a slight migration of capital into real estate,” Vladimir Khlyvnyuk, the chairman of Finance and Credit Bank, told OBG last week. “But it was quite light stress compared to last year’s events.”
Faced with the political crisis in December last year, many companies and individuals decided to pull out their savings from the banks, causing a temporary liquidity crisis.
The National Bank of Ukraine (NBU) was forced to introduce administrative measures to conserve liquidity and threw an emergency credit line to some 30 troubled banks to keep them afloat.
As one Western banker based in Kiev recently told OBG, it was quite fortunate that Ukraine did not lose a single bank. Indeed, he added, according to Western practice, some of these lenders would have been declared insolvent and obliged to file for bankruptcy.
Yet a partial shakeout might even have been a good thing, some analysts suggest. With 150 banks active in Ukraine today, the country remains significantly over-banked.
But while the Orange revolution nearly led to a financial collapse, it also managed to stoke new interest in the Ukrainian banking sector, as many foreign lenders rushed in to explore what they reckoned to be a virgin market.
“Suddenly, it dawned on many Westerners that Ukraine is actually a big country which they had overlooked,” said Gerd Wriedt, chairman of the management board of HVB Bank, Ukraine, which has been present in the country since 1998.
“However, It remains to be seen how many of them will actually decide to set up shop here. I think the expectations fuelled by the Orange revolution will be hard to meet,” he told OBG.
Nevertheless, the Vienna-based Raiffeisen Bank chose to brave the elements when it announced in August that it had concluded acquisition talks for a 93.5% share of Aval Bank, the second-largest bank in Ukraine. Aval is a major catch as it has an extensive branch network in country.
At the same time, the acquisition not only marks the biggest deal ever in the Ukrainian banking sector, but will also mean that Raiffeisen will become the biggest bank in Ukraine after the merger, with an estimated 12% market share.
Herbert Stepic, CEO of Raiffeisen International, described this acquisition as “a further important step in securing… Raiffeisen International’s leading local presence. Ukraine is one of the most important markets for us.”
Other banks are also said to be waiting in the wings and analysts believe that some seven other large banks could come up for sale in the next year or so. Ukrsotsbank, one the most attractive targets, apparently, has as many as 15 banks analysing its loan books.
If these rumoured sales are realised, analysts say, they will galvanise the sector, bringing better management practices and access to cheaper sources of liquidity.
Meanwhile, local analysts hail the arrival of Western banks and continued interest in the sector as evidence of its resilience in the face of a difficult political environment.
Yet the sector’s capacity to manage liquidity in a year of sharp economic slowdown, strong inflationary pressures and political uncertainty remains under close scrutiny.
The list of threats which could still cause a financial meltdown in the future include weak public confidence, undercapitalisation and inadequate legislation skewed in favour of debtors rather than creditors.
Ukrainian banks, sceptics say, need to secure a more solid long-term liquidity base to withstand economic shocks in the future and, more importantly, to be able to finance their ambitious loan portfolio growth to increase the level of financial intermediation, which is very low at 30% of GDP.
Loan growth in the first seven months of 2005 has helped to increase total banking assets by 23.5%, from around $25bn recorded at the end of 2004. Yet, with demand for loans getting ever stronger and consumer lending on the rise – albeit from a low level – the banks need to watch their risk exposure to ensure there is no rapid deterioration in asset quality.
Some observers are concerned that banks in Ukraine continue to give out loans faster than they can attract new deposits, creating the so-called liquidity gap. While the loan maturity is being gradually extended, with the arrival of popular mortgage finance, the source of funding, for the most part, is still short-term and unstable. According to Khlyvnyuk, there are few people who place money for more than a year.
“Whether we like it or not the biggest investor in the banking sector today is still the Ukrainian public,” says Oleksandr Soltus, chairman of Ukrprombank – one of the fastest-growing banks in Ukraine today.
Soltus told OBG last week that in the absence of established pension and insurance funds and with limited access to international capital markets, Ukrainian as well as foreign banks will have to rely on private deposits as the main source of funding.
National Bank of Ukraine (NBU) statistics show that during the first seven months of the year individual deposits amounted to $3bn, compared to $1.4bn brought in by the corporate sector.
Meanwhile, a number of banks have attempted to secure more long-term sources of funding on international capital markets through syndicated loans and bond issues. According to market sources, a total of $575m has been attracted in this fashion by the state-owned Ukreximbank and private UkrSibbank and Ukrsotsbank.
According to Vadim Lyashko, chairman of Ukrgazbank, “The successful placement of these issues on international markets is a sign of confidence in the Ukrainian banking system and will hopefully establish a more long-term source of financing.”
Yet, international analysts and credit rating agencies say the appetite for Ukrainian syndicated loans and bonds is still limited. While no one questions the growth potential, foreign analysts have yet to be convinced of the banks’ ability to manage growth efficiently.
Last year, international credit rating agency Fitch argued in its report that Ukrainian banks will find dealing with a sharp increase in business volume a challenge in itself. This will be especially the case as they diversify into new, more profitable lines of businesses such as retail banking, where Ukrainian banks still have relatively little experience.
Separately, a report produced by Calyon Bank Ukraine says that a difficult operating environment and limited enforcement capabilities translate into significant intermediation costs for the local banks, which need to be provided with at least an 8% to 10% margin between the cost of liabilities and interest rate revenue to cover non-performing loans. The same margin in the West is normally between 2 and 4%.
Ultimately, analysts say, the health of this all-important sector depends on economic growth and macroeconomic indicators. As Lyashko puts it, “Objectively speaking, the banking sector is a reflection of strengths and weaknesses of our economy and the sector cannot be more robust than the economy itself.”
More immune to political stress, the sector will thus no doubt be looking for signs of greater stability and firm policy goals that will help to revive the spectacular growth witnessed last year. By all accounts, the road ahead promises to be a bumpy ride.
