Confident Bankers

Economic News

22 Jul 2010
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Although Ukrainian banks have shown great resilience recently in the face of political uncertainties, not all of them are out of the woods yet - with three small lenders now reportedly in trouble. Meanwhile though, some foreign banks are pressing on with acquisitions, despite the political risks.

On March 24 - just two days ahead of the parliamentary elections - the French group Credit Agricole announced it had agreed to acquire Index Bank, a medium-sized Ukrainian bank.

According to their press release, "Credit Agricole SA has signed a sale and purchase agreement with Index Bank shareholders for the acquisition of at least 98% of its share capital." The deal is valued at $254m, according to local investment bank Concorde Capital.

Index Bank has 25 branches around Ukraine and with its assets estimated at $456m; it has a market share of about 2%.

Jacques Mounier, the general manager of Credit Agricole's Ukrainian subsidiary, explained to OBG that Credit Agricole believes in the potential of extending retail services to Ukrainians, given the size of the country.

Mounier explained that contrary to other foreign players, Credit Agricole decided it was more in line with its strategy to buy a medium-sized institution such as Index Bank. Previous entries by Raiffeisen, BNP Paribas and Banca Intesa were all made through the acquisition of banks in the top-10 league. According to Mounier, it could take some two years to restructure the bank fully, to prepare it for the ultimate path of growth in retail services.

With the valuation of Index Bank at 5.4 times the book value, the latest deal pushed the price of Ukrainian banking assets even further. According to Dragon Capital, the Kiev-based brokerage house, price multiples in the past have ranged between 3.5 and 5 times.

Analysts believe this shows that attractive banking assets are hard to come by, even with some 150 banks still in operation in Ukraine today. The remaining top-10 players that are still in the hands of locals, market-watchers say, are either too expensive or want to try their hand at retail banking.

The Achilles heel of local banks, however, is that in contrast to foreign players, they do not have access to cheap long-term credit lines. The main source of liquidity is still the population, which continues to be vulnerable to disturbing political news and could still force a run on local banks.

The National Bank of Ukraine (NBU), the regulator of the banking sector, has recently sounded a note of caution too, calling on the banks to bridge the time gap between their loans and deposits.

"We warn the banks," Deputy Chairman Oleksandr Savchenko told the local press on April 2. "When they grant loans for 10-20 years, they should have deposits for 10-20 years in liabilities and credit lines from other banks for 10-20 years to prevent [a] disproportion in timelines of drawing or giving funds."

While the regulator was presenting a tougher prudential stance on banks' long-term liquidity problems, it was receiving flak from the depositors of three small banks that seem to have run into dire straits.

The Ukrainian News agency reported on March 26 that depositors of OLBank, Harant Bank and Premierbank - all of which are undergoing liquidation - have criticised the NBU for overlooking the financial problems within those institutions.

The chairmen of OLBank and Harant Bank's strike committee told a press conference that a total of 12,000 depositors had suffered in the liquidation of these three banks. They also accused the NBU of not carrying out financial checks on the three small lenders.
Although the news of these liquidations shows not all is well within the Ukrainian banking sector, analysts believe that severe liquidity problems affect mostly small banks, the so-called "pocket banks" that are notorious for related party lending.

The IMF has on several occasions called upon the regulator to weed out this widespread phenomenon, with the NBU introducing tough related party requirements, but ultimately, analysts say, the regulator does not yet have the capacity or political muscle to reign in all the offenders.

Inevitably, therefore, in an overpopulated banking sector, some smaller banks will be forced to close up shop, especially as the competition intensifies. Market-watchers are confident that the top end of the sector - inhabited increasingly by foreign owners and more progressive and transparent banks - is looking pretty robust and poised for fast expansion.

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