The nationalisation of Ukraine’s biggest lender PrivatBank in December has dramatically changed the landscape of the country’s banking sector. After the takeover, state-owned banks control around 52% of the country's market, compared with around 26% in early 2015.
The latest developments have resulted in extra hurdles on the government's path towards a planned reduction of the state’s share in the banking sector. This mid-term strategy is supposed to be carried out through reforms and sales of state-run banks, and should provide an opportunity to strengthen competition on the market and reduce corruption.
International financial institutions, such as the EBRD, are offering to help with this process, given the likely shortfall in potential foreign investor interest in the near future.
"The state cannot be an efficient owner. That is why the EBRD, other international institutions and the Ukrainian government will work together to reduce the state's share in the banking sector," Anton Usov, the EBRD’s spokesman in Kyiv, tells bne IntelliNews.
The International Monetary Fund (IMF) said in its report published on April 4 that Ukraine intends to accelerate the reform of state banks, introduce new corporate governance and risk management standards, and develop an efficient business model.
In February 2016, the Ukrainian authorities published an IMF-compliant five-year roadmap for reforming state-run banks. According to the document, two state-owned lenders that were considered as core – Oschadbank and Ukreximbank – could sell up to 20% of shares to a qualified investor or international financial institution via a transparent tender 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 Ukrainian government no later than the first quarter of 2018.
According to the roadmap, Oschadbank could specifically target credit risk and currency risk entailing products for retail and small- and medium-sized businesses (especially projects in the agricultural sector and in the area of energy efficiency), as well as large businesses (energy, agricultural sector and infrastructure), which "will enable a managed transition to diversification".
Key client segments formulated for Ukreximbank include export-oriented enterprises, enterprises that implement import-related projects, and Ukrainian companies that fulfil contracts abroad.
However, due to the recent hike of the state's share in the banking sector, Kyiv is forced to amend the roadmap. On April 19, the Ukrainian government approved a tender to select an internationally recognised consulting company as an advisor to draw up the adjustments to the document. The adviser's services will be paid using funds from state-owned PrivatBank, Oschadbank, Ukreximbank and Ukrgasbank.
According to the latest memorandum on economic and financial policies between Ukraine and the IMF, Kyiv should prepare amendments to the roadmap in light of the nationalisation of PrivatBank, to be approved by the Ukrainian cabinet this spring.
"By end-June 2017, the finance ministry ... in consultation with IMF staff, will establish memorandums of understanding with all state-owned banks [PrivatBank, Oschadbank, Ukreximbank, Ukrgasbank] in order to inter alia define a relationship framework between the finance ministry and each bank, and safeguard each bank’s commercial independence in achieving its objectives," the document says.
EBRD steps in
"Ukraine has too consistently demonstrated an insufficient capacity for reform when left to its own devices and without being dragged or even threatened by Western institutions, and in particular the IMF," Mark McNamee, a London-based analyst at Frontier Strategy Group, tells bne IntelliNews. "To my knowledge, the EBRD is eager to participate in such an important process that would potentially lay the groundwork for a transparent and effective banking sector for years."
Indeed, the EBRD and the Ukrainian government have already agreed on steps to support reforms at Oschadbank. As per a memorandum of understanding signed by the EBRD, the Ukrainian Finance Ministry and Oschadbank in November 2016, the multinational lender will help Oschadbank prepare the implementation of a comprehensive programme for its commercialisation and partial privatisation, scheduled for 2018.
As a first step, the EBRD will bring Oschadbank into its Trade Facilitation Programme (TFP), providing guarantees of up to €50mn in support for Ukrainian exporters and importers. The TFP promotes foreign trade to, from and within the EBRD’s countries of operation, including Ukraine.
In a parallel effort, the EBRD will support Oschadbank with a broad technical cooperation package focused on strengthening its capacity for micro- and small business lending and increasing the operational efficiency of its branch network.
The EBRD's Usov says that the multinational lender could have an interest in eventually becoming a shareholder of Oschadbank; however, its possible share is "a subject for future negotiations".
The governor of the National Bank of Ukraine (NBU) Valeriya Gontareva has publicly stated that the ministry’s roadmap should be revised, and that PrivatBank could fill a vacant space on the mortgage market when it is created in Ukraine.
"With good management, this would become a real success story," Gontareva said in an interview with Novoye Vremia magazine. "It [PrivatBank] could be also a good platform for work with small- and medium-sized enterprises. There is liquidity and a good platform to do this."
However, PrivatBank's finances are currently in need of stabilisation. The restructuring of the bank’s corporate credit portfolio by its former owners, Ukrainian oligarchs Ihor Kolomoisky and Hennady Bogolyubov, is a crucially important step towards this goal.
The two businessmen have committed to carrying out a restructuring programme by the middle of 2017. If Kolomoisky and Bogolyubov are able to successfully restructure 75% of the portfolio, the NBU will consider the possibility of extending the restructuring for the remaining 25% until late 2017, NBU officials told bne IntelliNews.
According to the central bank, some shares of PrivatBank could be offered to potential investors in three to four years. "This may seem ambitious but it could be possible," McNamee says. "Of course the problem will be in finding investors interested in a bank that currently has such severe problems. Still, four years is a long time and the government is incentivised to get this done."
In December, Francis Malige, the EBRD'S Managing Director for Eastern Europe and Caucasus, joined the supervisory board of the nationalised PrivatBank. However, commenting on possible investments to the battered lender in the future, the EBRD's Usov said that while the Ukrainian authorities continue their assessment of the lender's financial shape, "it would be too early to discuss any participation".
Meanwhile, the IMF noted in its report published on April 4 that it is now crucial that the nationalisation of PrivatBank is followed by "firm and transparent" efforts to collect related-party loans, to minimise the cost to the state and taxpayers. "Over the medium term, PrivatBank should be privatised," the document reads.