bne IntelliNews -

The European Bank for Reconstruction and Development (EBRD) said on January 19 that it is prepared to increase its stake in Moldova’s Victoriabank in an attempt to restore effective corporate governance at the bank.

By stepping in to protect Victoriabank, the EBRD hopes to send out a strong message that it will not stand by while non-transparent shareholders run one of Moldova’s largest banks.

The EBRD, which currently owns 15.06% of Victoriabank, is planning to acquire a large enough stake to allow it to call an extraordinary general shareholders’ meeting and re-establish corporate governance at Moldova’s third largest bank. The EBRD said on January 19 that it has applied for and received regulatory approval to acquire up to 50% of Victoriabank shares.

Henry Russell, EBRD director for Moldova, Belarus, Ukraine and the Western Balkans in the financial institutions group, said in a January 19 statement that the bank is aiming to take a “significantly larger stake” in Victoriabank.

“We are determined to try to prevent Victoriabank from being taken over by non-transparent shareholders. Increasing our stake will give us a more solid base to exert influence for more effective corporate governance at the bank,” Russell told  bne IntelliNews. Ultimately the EBRD hopes “to prevent Victoriabank being abused by non-transparent shareholders, and in the long term to attract a long-term strategic partner.”

As well as the direct impact on Victoriabank, “this action will be positive for the sector as a whole, and we hope it will encourage the government to take action", Russell added.

Victoriabank first attracted EBRD funding in 1995. However, in 2006, non-transparent shareholders took control of Victoriabank’s supervisory board.

While Victoriabank was an early target, a series of Moldovan banks have since been taken over by non-transparent entities believed to be linked to local oligarchs.

The EBRD and other international financial institutions active in Moldova have responded by cutting lending to the sector. The EBRD reduced its funding to Moldovan banks from €40mn in 2010 to just over €10mn in 2014.

“There has been virtually no new lending to local banks with non-transparent ownership in the last 18 months because lenders don’t know who the new shareholders are or who is responsible for running these banks. This will continue if the situation does not improve,” Russell said.

However, in a January 19 statement, Russell said that the bank will continue to work closely with the Moldovan government and regulators to ensure that only “transparent, reputable and sound investors” can hold shares in Victoriabank and other Moldovan banks.

The situation has been damaging both for the banking sector and for economy as a whole, as several of Moldova’s largest banks have redirected lending to entities connected to their new owners.
 
Unlike many countries in Central and Eastern Europe, Moldova’s banking sector emerged relatively unscathed by the international economic crisis. However, the wave of takeovers is now undermining the financial health of the sector.

The International Monetary Fund warned in December that, “Severe governance problems in the banking system continue to represent a risk to financial stability”, and called for “vulnerabilities in the banking sector, and strengthening the financial sector regulatory framework and its enforcement” to be addressed as a matter of urgency.

Chisinau has taken positive steps in introducing new legislation, most importantly by reducing the threshold for share transactions in banks and financial institutions requiring central bank approval from 5% to 1%. However, concerns remain about the enforcement of existing rules.

In late 2014, the central bank took three banks under special supervision after a series of large transfers between the banks that left them short of liquidity.

On December 30 the central bank said that it had put in place special administrative procedures, including external management, at Unibank, the country’s fifth largest bank. This followed similar measures taken at Banca de Economii a Moldovei (BEM) and Banca Sociala on November 29. As a result of these moves, 30% of the banking sector by assets is now under central bank administration.

The central bank cited unusually large deals involving Unibank, which has a 9.8% market share by assets, BEM, the country’s third largest bank, and the smaller Banca Sociala, The size of the resources transferred was around MDL17.8bn (€937mn) - more than 10% of the country's GDP.