New Frontier

Economic News

22 Jul 2010
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Shortly after the EU rewarded Ukraine with the much-coveted "market economy" status last week, another bank acquisition helped further anchor Ukraine's image as Europe's newest investment frontier.

As expected, on December 1, British Prime Minister Tony Blair and the European Commission President Jose Manuel Barroso delivered the good news on the market economy status at a EU-Ukraine summit in Kiev.

Although largely symbolic, the news acted as a major boost for President Viktor Yushchenko, whose European aspirations had so far gone unanswered in expansion-fatigued EU countries.

While the actual market economy status still needs to go through formal procedures, it should eventually make it easier for Ukrainian producers to export to EU markets. In particular, analysts say, it should help to end the anti-dumping proceedings against Ukraine's metallurgical exporters.

Commenting on the importance of the EU-Ukrainian summit in Kiev, Blair said on December 1, that the latest developments symbolised a newer, deeper and stronger relationship between the EU and Ukraine.

Meanwhile, as these diplomatic events were claiming the central stage in Kiev, it was revealed that French bank BNP Paribas had succeeded in agreeing the purchase of a 51% stake in UkrSibbank - one of Ukraine's leading lenders.

Although the fact that the bank had been acquired did not come as a major surprise, few analysts had expected BNP Paribas to win the bidding war for Ukraine's fourth-largest bank. Other significant European players such as Société Générale, Erste, Intensa and Commerzbank were apparently courting UkrSibbank.

This acquisition also followed hot on the heels of the landmark deal in the Ukrainian steel industry at the end of October and the purchase of Ukraine's second largest bank, Aval, by Raiffeisen International. The latest deal in the banking sector has helped reinforce the positive message that Ukraine is, indeed, open to foreign business.

"It is a testimony to Ukraine's high growth potential that investors are willing to enter the market, regardless of current political uncertainties," the CEO of one of Ukraine's leading banks told OBG this week.

The acquisition also refuted the previously held market view that the high price paid by Raiffeisen for Aval Bank in October had reduced the acquisition appetite of foreign banks, due to a consequent sharp increase in local bank valuations.

While the deal's value may never be disclosed, market watchers speculate that a 51% stake in UkrSibbank could be worth around $400m-600m - a valuation close to the $1.028bn Raiffeisen paid for 93.5% of Aval Bank.

Although the valuation of the two banks is not deemed to be too far apart, the CEO of one of Ukraine's 10 largest banks told OBG after the deal was announced that UkrSibbank was a very different sort of bank.

"It is less focused on retail and, unlike Aval, it still has a significant captive portfolio, which investors should have made provisions for," he explained.

According to local media sources, the Ukrainian Metallurgical Company in Kharkiv was the bank's principal shareholder, enjoying a 58.69% stake, with parliamentary deputies Ernest Haliev and Oleksandr Yaroslavskyi as the main co-owners.

UkrSibbank is expected to continue operating under its current brand name and is eying up a 10% market share by 2009, increasing the number of its branches from the present 750 to 970. Its net assets as of October 1, 2005, were valued at around $1.78bn with a loan and investment portfolio reaching $1.4bn and $200m in capital.

However, although the arrival of another major foreign bank is expected to drive growth, especially in the retail segment, this does not amount to the much needed wave in bank consolidation.

Most banking industry insiders interviewed by OBG argue that the main weakness of the Ukrainian banking sector is that with 160 banks having licences to perform financial transactions, there is a lack of concentration of assets, which hampers financial intermediation.

"The capital of the banks is still quite dispersed, with many banks very thinly capitalised," the CEO of one Western bank in Ukraine told OBG last week.

The requirements for setting up a bank in Ukraine, insiders say, used to be very low. Only after the National Bank of Ukraine (NBU) raises the minimum capital requirements is Ukraine going to see a wave of domestic or foreign-led consolidation.

Olexander Sugoniako, president of the Association of Ukrainian Banks, argues, however, that there should not be any administrative pressure on small- and medium-sized banks to consolidate. It should instead be up to the free market to decide which ones should survive.

"There are a number of regional banks, which are doing a very good business," Sugoniako says. "Why should it be the role of the NBU to decide who is allowed to exist?"

Meanwhile, market-watchers say the reality is that the Ukrainian banking sector is undergoing a major shake-up.

With almost three years of average asset growth at around 50%, the game in town is all about capturing growth and increasing market share before selling out to foreign investors at the highest possible value.

Foreign banks, dulled by stagnating growth rates in Europe and increasingly less inspired by the saturated markets in other Central and Eastern European countries, are very keen to capitalise on Ukraine's fast growth rates.

For all the problems of a complicated business environment, high banking valuations and political uncertainties in the next few months, the opportunities in the banking sector, it seems, are just too good to be missed.

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