The news of another large Ukrainian bank about to be acquired by one of the leading European financial institutions seems to confirm the trend that foreign bankers are willing to bet on Ukraine, and to do so in spite of political instability ahead of the March parliamentary elections.
Societe Generale, Hungary’s OTP and Italy’s Banca Intense were identified by the Central Bank this week as the final three players still in the running for Ukrsotsbank – the fourth-largest bank in Ukraine, with net assets of $1.45bn at the end of 2006.
Ukrsotsbank is part of a financial-industrial group owned by former President Leonid Kuchma’s son-in-law, Viktor Pinchuk. It was initially courted by eight foreign banks and is considered to be the only large bank left for sale, with other local candidates in the top ten group apparently reluctant to sell up.
If the sale goes through, the share of foreign capital in the Ukrainian banking sector is expected to rise even further.
After a recent wave of foreign acquisitions – the sale of Aval to Raiffeisen, Uksribbank to BNP-Paribas and the relatively small Mria bank to Russia’s Vneshtorbank – the foreign stake in the banking sector has reached 23%.
Yet the figure is still very low by Central and East European standards, where foreign banks play a dominant role and represent well over 50% of local banking assets.
At the same time, not everyone in the sector would like Ukraine to follow the same path of development as Eastern Europe.
Some local players have expressed concern about the arrival of foreign players and are lobbying the regulators to set a limit to foreign ownership.
The Association of Ukrainian Banks has on numerous occasions called on Parliament and the Central Bank to limit the share of foreign capital in the Ukrainian banking sector.
The National Bank of Ukraine (NBU), however, has so far shown no intention to block any of the foreign acquisitions, even though the first deputy chairman of NBU, Anatoly Shapovalov, was cited recently in local media as saying that the regulator intends to restrict access to the Ukrainian market for government-owned foreign banks.
Olexander Sugoniako, president of the Association of Ukrainian Banks, said in an interview with OBG last year that the financial sector represents a strategic interest and should not be handed over to foreign control.
Vadim Lyashko, chairman of Ukrgazbank, expressed a similar view, arguing that foreign banks have an unfair competitive advantage over local players because they have access to cheaper capital in the West.
However, this view has been rejected by a number of analysts who argue that the Association of Ukrainian Banks is representing the interest of small- and medium-sized banks that are apprehensive of fierce competition coming from well capitalised foreign players.
The biggest challenge for medium and small banks, analysts say, is that they are unable to keep up with the pace of growth in the sector due to their low levels of capitalisation.
As the economy grows, the demand for larger loans is increasing, with small banks unable to compete. Analysts therefore expect the share of top ten banks to increase.
Meanwhile, the only solution for small- and medium-sized banks is to either merge with other players, sell out or to find ways to increase their capital and funding base. Several medium-size players willing to hang on in the race have sought to raise low-cost capital on foreign capital markets.
The instrument of choice for most large- and medium-sized banks has been syndicated loans and bonds issues. According to a study done by Ukrsotsbank, in 2005, Ukrainian banks attracted $1.32bn in Eurobonds and syndicated credit – some three times more than in 2004.
The willingness of foreign investors to purchase Ukrainian bonds at yields sometimes as low as 6% has been the clearest sign of faith that the banking sector is poised for rapid growth.
While some analysts argue that this may be a self-fulfilling prophesy, the main hindrance to banking asset growth in the past has been the absence of cheap, long-term capital. Having improved their long-term funding base, banks can finally attack the lucrative retail market, with pent-up demand for consumer credit waiting to be unleashed.
Add to that the clear intention of foreign banks to bet on a potentially 47m person-strong retail banking market and 2006 is almost sure to be a dynamic year in the financial sector. Bankers also seem confident that, come what may, no political event can derail this unstoppable market force.