22 October 2016

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Ukraine’s banks in anticipation of potential buyers

The Ukrainian banking system has survived a deep crisis and needs investment to grow. It is actually best to buy when the market is at the bottom. But the experts doubt that in the current realities, the investors are willing to take a chance and buy Ukrainian banks.

Experts doubt that investors are now willing to take a chance and buy Ukrainian banks /
Experts doubt that investors are now willing to take a chance and buy Ukrainian banks /

For the past eight years, foreign investors have not spoilt the Ukrainian banking sector with their attention and haven’t rushed to enter in the Ukrainian market. According to economists' estimates, the banking system, having gone through the main stage of the crisis, is now "at the bottom." In this period, it’s most profitable to buy banks, but so far, potential investors have not lined up to do so. UNIAN tried to figure out what the reason is for the low interest of investors in Ukraine.

According to the latest estimates of the State Statistics Service, the banking system of Ukraine ranks second in terms of attractiveness for foreign investors – it accounts for about 27% of the previously attracted foreign direct investment. The data of the State Statistics for the second quarter is about to be released, and the banks may as well go up to the top spot, given that the National Bank estimated the net increase in investments in the first half of 2016 at $2 billion. Most of these funds, according to the regulator, were allocated to the banking sector to replenish the banks’ capital.

The NBU stats on key indicators of the banking system as of July 1 also looks optimistic. According to the data available, the share of foreign capital in the Ukrainian banking system, without regard to insolvent banks, in June alone, increased by 15.1 percentage points, to 54.7%.

Financial statements of the Ukrainian banks as of this date show the increase of the authorized capital of operating banks in the first half of the year by more than UAH 65 billion, which is exactly nearly $2 billion, if converted at the average exchange rate. The lion's share, or 75% of this increase, accounts for the largest foreign banks operating in Ukraine.

At first glance, the trend has broken, and foreign investors have decided to increase the capital of their financial institutions and the volume of their activity in Ukraine. And following the increased activity of the investors already present in the country, new buyers can also come to purchase some good bank at a low price and sell it after a while or make some money in the growing market. But it’s not so smooth in practice.

Overcoming a barrier

Experts: At the moment, Ukraine’s banking system is not interesting for investors /
Experts: At the moment, Ukraine’s banking system is not interesting for investors /

The experts interviewed by UNIAN believe that the Ukrainian banking system at the moment, after the purge and shrinking of the market, is quite a lure for foreign investors, but there are some fairly weighty constraints.

"In general, I don’t see those willing to enter in the local banking market of Ukraine to extend lending under the existing economic conditions and a debt load of most sectors of the economy," notes the analyst of the banking sector at ICU Group, Mykhailo Demkiv. However, in his opinion, even now, potential investors can be interested in the big banks with foreign, primarily Russian, capital. "Potential buyers may be interested in the problematic portfolios of corporate loans of these banks, as there is the possibility of restructuring and the resumption of payments on these loans," he says.

Director of the Center for Economic Research and Forecasting Financial Pulse Serhiy Mamedov believes that the Ukrainian banking system is attractive to investors due to the low cost of the financial institutions and low competition after the closure of a large number of banks, and also owing to the low rates of management services and building a network, at the same time with an extensive customer base and rapid growth of non-cash payments. Among the disadvantages, the expert highlighted the economic slowdown in the country, hostilities in Donbas, political instability, rumors about the re-election in the fall or spring, delayed IMF tranche, the low level of protection of the rights of creditors and poor-quality judicial system.

Mamedov predicts that this year, most likely, only speculative transactions or transactions on the absorption of banks or the purchase and sale between the current shareholders to determine the primary owner will take place in the market. "In 2017 and 2018, given political and economic stability, serious players, banking groups will start to invest in the Ukrainian banking system similarly to the case with the countries of Eastern Europe. They will be interested in profitable network banks with clear and comfortable beneficiaries and clearly defined development strategy, international audit and those working under international programs with the EBRD or of KFW, or those actively working on documentary operations," Mamedov said.

Partner of the corporate finance department at Deloitte Dmytro Anoufriev called a fundamental factor for restoring a healthy banking system and increasing its attractiveness for investment the stable economic growth, which will allow banks to have demand for credit resources and to ensure the solvency of borrowers. "I hope that significant progress in this direction will start in one or two years. At the same time, lending growth will be cautious, as the borrowers are still to prove their solvency," he said.

The expert doubts that the former interest of the investors – at the level of 2005-2008 – will return in the foreseeable future. At the same time, he notes that the interest of the Ukrainian investors in the subsidiaries of foreign banking groups, which are withdrawing from the Ukrainian market, has prevailed since 2008 and remains today.

President of the Ukrainian Society of Financial Analysts Yuriy Prozorov also doubts that the banking system of Ukraine will be able to return to its pre-crisis state after the shocks it had to survive through. "A particular blame for this crisis lies with the supervision of the National Bank. It needs to be strengthened radically and translated into forward-prudential risk-based approach, rather than regulations. Stress tests and NBU curators who supposedly control everything in problematic banks is not enough. Massive bank failures of 2016 is a clear evidence," he says.

The expert stresses that the cleanup of the banking system needs to be completed quickly, and not be protracted for years, while the remaining banks should start their work to ensure proper control in the usual way, by paying deposits and making payments in a timely manner – then the system will begin to recover. However, according to the expert, this is possible not earlier than in 2018-2019.

Neither love, nor money

Judging by the performance of statutory capital of banks in the financial statements as of July 1, the foreign owners of Ukrainian banks have invested almost UAH 50 billion in the Ukrainian economy in the first half of 2016. But it does not mean that foreign investors are willing to enter the Ukrainian market or at least expand their presence as additional capitalization is required by the National Bank on the results of stress testing.

"The influx of foreign investment - some $2 billion – did not happen "out of love", it was rather "a forced measure." Either you pour money into your bank or see such losses next year that you will regret it. Therefore, the money was poured into the banking sector," says the executive director of the International Blazer Fund Oleh Ustenko.

In fact, the currency did not come into Ukraine. "Usually, foreign banks when they increase the capital, convert funding from parent institutions. The new currency does not come in. This is the currency that has come in before," says Deputy Head of the NBU Oleh Churiy, noting that even such additional capitalization is an unequivocally positive thing for the country, because it improves the balance of payments, turning debt financing into the long-term capital.

Thus, despite positive statistics, potential buyers of banks are in no hurry to come into Ukraine with suitcases full of money. There was just one real investment in the banking sector this year, after a long halt. It was the purchase of the Italian UniCreditGroup’s subsidiary by Alfa Group holding. Maybe there will be another one – Prominvestbank, which has been put up for sale and, according to our sources in the market, is undergoing a preliminary assessment by investors.

The banks are at the bottom now, and their cost is unlikely to become lower. But, apparently, with respect to Ukraine, the price is no longer the determining factor for the investor. Given the forecasts of experts, bankers still have a couple of years to deal with problematic issues and meet their potential buyers in a much better condition. In the meantime, the Ukrainian banking sector will get by on its own, without foreign money. Perhaps this is not the worst option to first win trust in the internal market and only then – to look over the ocean.

Olha Hordienko (UNIAN)

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