EBRD @25: Ukraine lures EBRD investments to its troubled banks

EBRD @25: Ukraine lures EBRD investments to its troubled banks
EBRD increased its stake in the Ukrainian subsidiary of BNP Paribas, UkrSibbank.
By Sergei Kuznetsov in Kyiv May 4, 2016

Over the past year, the EBRD has actively supported commercial banks in Ukraine by providing badly needed capital injections. But now the Ukrainian government has more ambitious plans for cooperation with the multinational lender, specifically looking for a partnership agreement to help privatise the country’s biggest state-owned banks.

In February, the EBRD increased its stake in the Ukrainian subsidiary of BNP Paribas, UkrSibbank, from 15% to 40%. This was the latest in a series of moves by the EBRD to contribute to the badly needed recapitalisation of its partner banks in the war-torn country.

The volume of investment was not disclosed, but there is little doubt that UkrSibbank, Ukraine’s ninth largest lender by assets, has been as badly affected by two years of economic crisis as almost every other bank in the country. The lender posted a net loss of UAH1bn ($39.8mn) in 2014, while eking out a net profit in 2015 of just UAH23mn ($915,445).

The Ukrainian banking sector has been badly hit by a combination of massive capital outflows from the country, deposit withdrawals, a sharp rise in bad loans, and the loss of banking assets in Crimea after Russia’s annexation of the peninsula, as well as in the war-torn eastern region of Donbas. More than 70 lenders have been declared insolvent as a result of financial collapse and the central bank’s efforts to purge the market of institutions involved in fraudulent transactions and money laundering.

In late November, the EBRD obtained a 30% stake in the local operations of Raiffeisen Bank International (RBI) through a €122mn capital increase, which boosted the Tier 1 ratio of Raiffeisen Bank Aval, the sixth lender by assets in Ukraine. The Ukrainian subsidiary reported a net loss of UAH4.36bn ($357mn) in 2014, and a net loss of UAH1.86bn ($84mn) in 2015. “By becoming an equity partner, the EBRD... is contributing to a much-needed recapitalisation of Ukraine’s banking sector,” Nick Tesseyman, the EBRD’s managing director of financial institutions, explained after the deal had been secured.

Eight months earlier the EBRD, alongside the German development bank KfW and the International Finance Corporation (IFC), injected €1.8mn into Megabank, Ukraine’s 19th largest lender by assets, participating in a pro-rata capital increase that kept their collective stake in the bank at a level of 36%.

Now, the EBRD has apparently reached the limits of its efforts to support the capital of Ukraine’s banks. Kyiv-based market experts have no information about possible new injections, while the multinational lender underlines that there is “nothing to disclose” at this stage. However, the Ukrainian government is already relying on the EBRD in other spheres – in particular, in the possible strategic privatisation of the country’s biggest state-owned banks.

Roadmap to recovery

In February Ukraine’s finance ministry published a five-year roadmap for reforming the state-run banks. According to Kyiv’s financial authorities, these banks, which account for 26% of the banking sector, play an important role in stabilising the situation during crises. However, “a lack of clear targets and tasks”, as one official termed it, affects their commercial performance, and the established tradition of administrative interventions in their commercial decision-making is still a hazard for them.

The authorities believe that two core state-owned lenders – Oschadbank, the second largest bank by assets in the country, and Ukreximbank, the third largest – could sell up to 20% of shares to “a qualified investor or international financial institution via a transparent tender” in the mid-term (by mid-2018).

To implement this goal, the supervisory boards of the two banks need to select a priority method for selling their shares and coordinate it with the finance ministry in 2018, based on the financial results of the banks during 2017. “The final decision on the sale of shares must be made by the cabinet not later than first quarter of the 2018,” the road map states.

Then, with the help of experts, the banks should prepare an investment memorandum and “information for data exchange”. According to the document, the state is interested in attracting such international financial institutions as the EBRD, the IFC and the German Investment Corporation (DEG) as partial owners or investors in a subordinated debt scheme.

“This is a gradual process. We need to see their strategy first, then engage them into servicing one of our products, such as trade finance,” Anton Usov, the EBRD’s spokesman in Kyiv, tells bne IntelliNews. “It would be good to see if there is any interest from potential investors, as we can only eventually look at a minority stake.”

Meanwhile, the Ukrainian authorities are ready to consider the possibility of fully privatising the banks, as they do not intend to preserve their “ownership share longer than the time necessary to maximise the value for taxpayers”. The decision on the amount of shares for sale and the terms of such a sale will be made by the government not later than the end of 2020.

Alexander Valchyshen, head of research at Kyiv-based brokerage Investment Capital Ukraine, has mixed feelings about the finance ministry’s initiative. The analyst believes that the possible privatisation of the state-owned banks could “serve as an insurance policy against excessive lending” to individuals and companies that have close ties with the authorities.

At the same time, the move could have some negative consequences, as independent directors might limit lending activities of the state-owned banks to the government’s fiscal programmes, specifically the necessary enhancement of Ukraine’s defences, Valchyshen tells bne IntelliNews. Kyiv intends to allocate up to UAH113bn ($4.5bn), or 5% of the country’s GDP, for military and security expenditures in 2016.

Multinational shareholders will also support credit activities in foreign currencies, but the country’s economy “is not able to absorb the gross [FX] debt”, Valchyshen believes.

This is part of a series of articles marking the 25th anniversary of the foundation of the European Bank for Reconstruction and Development.