Encouraging Dynamics

Economic News

22 Jul 2010
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Despite concerns that economic growth is slowing, recent figures have shown a sharp increase in lending by Ukraine's banks. For some, this points to a likely renaissance in the country's financial and banking sectors.



Improved liquidity following a number of successful bond issues, plus a 39% increase in banking deposits since the beginning of this year, have facilitated rapid growth in banking assets. These rose by 42.9% between January and October this year, up from $26.8bn to $38.2bn.



Banking liquidity saw another boost last week too, when parliament announced it was going to channel some $120m into the Savings Bank (Oschadbank) and the Export-Import Bank, both of which are still in the hands of the state. The funds come from the recent reprivatisation of Ukraine's largest steel mill, Kryvorizhstal.



Meanwhile, stabilisation, bank restructuring and some continuous growth - together with better liquidity and supervision since the 1998 financial crash - have encouraged a renaissance in credit demand. This has gone alongside an expanded credit supply, as more positive reassessments of borrowers' creditworthiness have also been facilitated.



Traditional economic weak spots in Ukraine used to include low capitalisation, a difficult operating environment and still few good lending opportunities. Interest rates on loans also used to be prohibitively expensive for many. Yet now, the banking sector seems to be turning the corner.



Ukrainian banks, according to the National Bank of Ukraine (NBU), managed to generate 57% more revenue during the first nine months of 2005, compared to the same period last year. Return on assets (ROA) edged up from 0.9% to 1.4%, while the average return on equity (ROE) still stood at a somewhat low 10.5%.



The total volume of loans issued to corporate entities increased by 38.6% to some $20.01bn. Loans to individuals have risen by 92.4% since the beginning of this year, albeit from a low base. This is despite still high levels of interest, which now average 16.1% in local currency and 11.4% in foreign currency.



Total banking assets now account for 41% of GDP compared to 47% achieved at the end of 2004. While this is still low compared to other Central and East European countries, where average banking assets to GDP ratios are around 110%, it nevertheless confirms a positive trend in the banking sector.



Such positive growth dynamics, analysts say, may go some way to validating the high premium paid for Aval Bank, the second largest Ukrainian bank. A 93.5% stake in this was sold to Raiffeisen for an unexpected $1.028bn - over three times its book value.



"The rush in financial intermediation, from admittedly low base levels, is offering investors a lot of scope for growth," one analyst explained to OBG. "Ukraine has entered a catch-up game with Central Europe, albeit outside the coveted EU framework."



Despite being a landmark deal, Raiffeisen's purchase secured them only a 10% total market share, as the Ukrainian banking sector is highly fragmented, with no single bank enjoying a commanding position.



Low-level entry requirements for setting up a bank have resulted in a large number of captive banks, lenders owned by industrial groups which conduct themselves like in-house treasuries.



Meanwhile, the high premium paid by Raiffeisen for Aval, according to analysts, is expected to stall the consolidation process in the short term. The previous owners of Aval, for example, have already announced they plan to launch a new bank in December using the proceeds from their sale.



Yet while consolidation may not be looming large on the horizon, the entry of Raiffeisen into Ukraine is expected to trigger a much anticipated boom in retail banking. With loans to individuals, currently standing at around $5.1bn, or around 8% of GDP, the scope for growth in retail banking is evident.



Boasting around 1370 retail outlets all around the country, plus plenty of experience in riding consumer finance waves in other East European countries, Raiffeisen is in a good position to take financial intermediation to individuals.



However, although the consensus among Kiev-based analysts that this process is inevitable, negative macroeconomic dynamics could still drag down the banking sector.



Average disposable incomes, economists point out, were artificially boosted last year by a significant social budget stimulus, contributing to a higher inflation rate and higher imports from abroad.



While the successful sale of Kryvorizhstal has temporarily fixed the state finances, market watchers remain concerned about any other popular handouts ahead of the parliamentary election in March 2006.



Yet so far, the Ukrainian banking sector seems to be unconcerned, enjoying a period of ample liquidity, rising revenues, more diverse loan portfolios, strong demand for credit and increasing interest from the West.



Finally, it seems, there is a growing impression that the troubles of the past are being left behind - even though there are a number of pitfalls still on the road ahead.

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