Italian bank Intesa Sanpaolo agreed to acquire Pravex Bank, giving Intesa entry into one of the fastest growing sectors in Ukraine.
"With this acquisition, the Intesa Sanpaolo Group continues implementing its strategy of selective expansion in Central and South-Eastern Europe and the Mediterranean Basin, where it already enjoys strategic coverage through its local retail and commercial subsidiaries," Intesa reported.
The deal, worth 504m euro, is expected to be finalised within months once approval is given from authorities in Italy and Ukraine.
Intesa, a relatively new banking group resulting from the merger between Banca Intesa and Sanpaolo IMI, has been looking to enter the Ukraine market for quite some time. Last year, it lost out to its main rival, Italy's UniCredit Group, in its attempt to buy Ukrainian bank Ukrsotsbank. The UniCredit Group was able to secure a 1.5bn euro deal giving it a 94.2% stake in Ukrsotsbank, which is ranked as one of the top five banks in Ukraine.
More and more European banking groups are looking to expand into the Ukrainian market, where total deposits of commercial banks reached $49bn in September 2007, a 50% increase year-on-year. According to the Financial Times, foreign financial institutions have increased their market share in Ukraine through acquisitions from below 10% to more than 35% over the past few years. Today, foreign shareholders from France, Germany, Austria, the Czech Republic, Hungary, Russia and Georgia are estimated to own roughly half of Ukraine's top 10 banks
Dmitry Zinkov, the CEO of OTP, a Hungarian-based bank with a significant presence in Ukraine, told OBG, "Foreign banks are very much interested in the size of the market as Ukraine has a population of nearly 50m people and great potential when it comes to gross domestic product and consumption. Foreign banks also recognise that the market is not yet mature and that there is still room for newcomers to gain market share and grow either organically or through acquisition."
Indeed, there are around 150 banks in Ukraine but most of them work as pocket-banks for Ukrainian business groups, while the top 20 banks account for about half of the country's banking market.
Still, the previous government had publicly expressed concerns about the rapid expansion of foreign players into the market on the grounds that it could have negative consequences and therefore suggested that restrictions should be placed on the share that foreign organisations can own. Zinkov, however, told OBG, "I believe that the presence of foreign capital in the banking market is the driver for rapid development and process improvements."
Zinkov may be correct. Banks have been at the forefront of change in the business community in terms of corporate governance. Valentin Zelenuk, chief strategist and banking analyst at Kiev's Millennium Capital, told local media, "Banking is the only sector where you can get financial statements on a monthly basis, not to mention detailed quarterly reports. Overall, and now in particular, banking is way ahead of other industries in this regard."
Overall, the Ukrainian banking system is gradually closing the gap with Western standards with noticeable improvements being made in maintaining capital and liquidity ratios, adjusting to standard international practices, establishing risk-management systems and reducing sole-borrowers exposure. Ukrainian banks are also becoming more involved in areas such as mortgages. The total mortgage portfolio for Ukrainian banks was up 110% in 2007. The banks have added retail services and the overall return on equity not stands at 12% making Ukraine's banking sector one of the best performing in Eastern and Western Europe. As a result of new products, growing consumer lending and increased efficiency Ukrainian banks Profitability is expected to rise further in 2008, which will continue to lure foreign banks to Ukraine.