The banking sector in Ukraine has flourished during the past four years. Banks were passed over in the scramble to get rich during the 1990s and a series of effective banking reforms built the foundations of a relatively solid financial sector. Now that the economy is taking off, the banks are reaping the rewards.
The sector remains small and undercapitalised but, on the back of ballistic economic growth, banks’ capital is rising by about 60% a year, going from 2% of GDP in 2000 to just over one-third of GDP now. Ukraine’s banks have become a real force for economic change.
Real reforms began under the National Bank of Ukraine (NBU) chairman, Viktor Yushchenko, in 2000. The state now owns just two banks: the export promotion bank Ukreximbank and savings giant Oschadbank. Neither has special privileges.
“Unlike America or other Exim banks, we have no special legislation for the Ukrainian Eximbank,” says Ukreximbank chairman Oleksandr Sorokin. “We have the same general banking licence as the others and have to compete on an equal basis.”
Healthy sector
Ukraine has 157 banks and the market is fairly evenly divided among the biggest players, with the top 10 accounting for about 80% of assets.
Despite the corruption that marred Ukraine’s birth as an independent country, the NBU has imposed regulations on the sector, which is well-managed and healthy. No Ukrainian banks went bust in the aftermath of the 1998 financial crisis that swept the region and only one big bank has gone belly up since then – the agricultural specialist Bank of Ukraine, which was widely abused by corrupt officials.
“Compared with Russia, the effects of the crisis were very small – the sector trembled a little and then things went back to normal,” says Anja Lepp, the vice-president and chairwoman of ProCredit Bank. “It shows that the sector must be rather stable if it can shake off something like that.”
The banking sector was spared the worst by its underdevelopment. Ukraine had not had time to build up a big bond market, foreign investment was limited and there were none of the forward currency contracts with international banks that did so much damage in Russia. So when the hrivna lost three-quarters of its value over a few months, it was painful but not disastrous.
Strategic trend
Now that good times have arrived, all the banks are following the same strategy: building up a universal banking business. While most of the larger banks already have close ties with the leading industrial enterprises – either as affiliated companies or businesses they inherited from the Soviet era – the focus has changed. Diversification is the new banking mantra. For example, some two-thirds of Ukraine’s GDP is exported.
Ukreximbank functions both as a commercial bank, financing trade, and as a government agent in international deals. Thanks to the importance of trade, it has 100,000 corporate clients. However, it has only 300,000 retail clients, almost all of which came with the payroll services it offers to its biggest customers. Like other banks, it has managed to increase its capital – 39-fold in its 12 years of operation to Hrv470m ($94m) – as the government has ploughed all profits back into the bank as capital.
“Ukraine is a young country and a developing market. We have to serve all business segments, as all business is just being started so we have a diversified customer base, and try to maintain our presence in all segments,” says Mr Sorokin.
Corporate lending
The big industrial clients are still the most important customers. Prominvest was created out of the Soviet-era industrial bank but started life as a commercial bank in 1992 with nothing.
“All the bank’s capital was in Promstoibank in Moscow and after independence it all stayed there. We have had to build up our capital from scratch and 80% of today’s Hrv1.1bn capital was accumulated from the bank’s profit,” says Sergey Savluk, a member of Prominvest’s board of directors.
Traditionally, the bank worked with large enterprises but in recent years it has been diversifying to cover all sectors of the economy.
Tax and legal reforms have also encouraged the development of Ukrainian banks, which are more willing to make loans than their peers in neighbouring countries: bank credits as a share of total invested capital have risen from virtually nothing in the 1990s to 8%-9%. “We prefer credit as it is the least risky of risks facing us: instability in the economy, inflation and politics,” says Mr Savluk.
The bankruptcy law remains the key piece of legislation for banks and Prominvest complains that disputes still take years, rather than months, to resolve.
Expensive resources
However, a more serious problem is the lack of resources, and those that do exist are expensive. Interest rates are high – the NBU overnight rate is about 7% and industry can borrow money at 12%-15% – but as growth is so strong companies have been willing to borrow even at these high rates. Banks are casting around for ways to raise cheaper money to meet an insatiable demand for loans.
In addition to the lack of long-term resources, the maturity of loans remains very short. Only 20% of all corporate credits have maturities of more than one year, whereas corporate clients are crying out for three-to-five year money.
“Banks don’t have access to long-term funding. Big companies accept six-month loans with the possibility of rolling the debt over, which almost always happens,” says Ms Lepp.
Only a tiny fraction of credits are longer than two years because, although the banking sector is reasonably well developed, there are no domestic institutional investors such as private pension funds. The few insurance companies are linked to the big industrial groups and mortgage reforms are just beginning.
Many of the banks are turning to their international peers and raising syndicated loans as a more affordable source of capital than Eurobonds, which are just starting to become popular now. The first few deals have already been struck and all the leading banks have syndicated loan plans for this year.
SME business
In the meantime, most banks are focusing on developing the burgeoning small and medium-sized enterprises (SMEs) that are proliferating as retail turnover grows at 20% a year. ProCredit was established as a joint venture to promote the development of SMEs and its shareholders include the European Bank for Reconstruction and Development, International Finance Corporation and the German Kreditanstalt fur Wiederaufbau (KfW).
It lends exclusively to SMEs starting with micro-credits of up to $3000 without collateral, to larger loans of between $10,000 and $50,000, and a few loans to medium-sized companies up to $1m. The vast majority of its loans are less than $10,000, however.
“The bigger the enterprises, the bigger the problems,” says Ms Lepp. “There is a very quick rotation of capital so company returns are very high – typically 30%-40% – so the high interest rates are not a problem for now. The returns for bigger enterprises are low but economic growth is still strong enough to allow them to pay.”
Ukrsotsbank, which was a light industry specialist in the Soviet system, is making the transition from the Soviet-era to the market economy. Since it was privatised at the start of the 1990s, the share of assets from budget enterprises has fallen from 50% 10 years ago to 2%-3% today, while its number of retail clients has risen from 1% a decade ago to 43% of the bank’s liabilities today.
“The pace of change has picked up in the past three years. Today the only strategy is to be a universal bank,” says Boris Timonkin, Ukrsotsbank’s CEO. “We have kept most of our traditional clients but since 2001 we have added both big and medium-sized companies.”
Retail banking
Retail deposits overtook corporate deposits for the first time last year and all the banks are rushing to expand their retail services. Oschadbank, the Soviet-era savings bank, has the largest branch network of 20,000 but, as a large number of the branches run at a loss, its grip on the retail market is not strong enough to crush competition. Most of the commercial banks have built up networks of 300-600 branches, with PrivatBank and Aval Bank leading the market with more than 1000 branches each.
“We don’t have the resources to satisfy the big companies so retail has developed in Ukraine earlier than other countries in the region,” says PrivatBank’s chairman Alexander Dubilet.
A deposit insurance scheme was set up in 1999 and membership is mandatory for any bank with a general banking licence. Bankers complain that all banks have to contribute the same percentage of their liabilities to the fund regardless of their reputation and stability, and deposits remain guaranteed to a maximum of Hrv3000, although this is due to be raised to Hrv5000 this year.
Real wage growth is soaring, up 16.2% year-on-year in December, and the average monthly income climbed to Hrv551 by the end of last year. With money in their pockets and secure jobs, consumers are starting to indulge themselves a little and banks are scrambling to lend the money to pay for this.
Consumer lending has grown from 4% of total loans in 2000 to 12% by the end of last year. But the market is still wide open: according to a recent survey, 50% of Ukrainian households do not have a bank account, most of the other 50% only use banks to pay their utilities bills and only 7% of the population have debit cards.
“Before, risks were concentrated because all the loans were to the same few big companies. But bankers have realised that they need to diversify and they are trying to extend themselves to households,” says Ms Lepp.
Anja Lepp: vice-president and chairwoman, ProCredit Bank
Consumer loans
The structure of consumer loans is already diversifying: 90% of credits were spent on household items in 2002 – items such as fridges and TVs – but now car loans typically account for 40% of loans, mortgages 30% and borrowing to pay for weddings, holidays and white goods accounts for the rest.
While all the leading banks are rapidly rolling out retail, some banks are pushing it harder than others. Aval bank still makes most of its money from its big clients, such as the industrial Union of Donetsk, a large metallurgical group, as well as administering some of the state’s money, like the customs accounts.
On the other hand Aval’s main rival, PrivatBank, which is based in Dnipropetrovsk, is throwing all its weight into retail and installing a new ATM machine nearly every day.
The NBU is encouraging all this activity but is concerned about the rapid increases in lending of all sorts. In March, it increased the capital adequacy ratio from 8% to 10% to ensure the stability of banks and is beefing up its inspection and regulation regime as part of a wider fight against corruption and money laundering.
The progress has been real. At the end of the February, Ukraine was rewarded for it efforts when the Financial Action Task Force said the country had made “remarkable” progress in cleaning up the banking sector and removed it from its money laundering blacklist.
