EBRD takes 30% stake in Ukraine's Raiffeisen Bank Aval

By bne IntelliNews November 25, 2015

The European Bank for Reconstruction and Development (EBRD) has taken a 30% stake in Raiffeisen Bank International's (RBI) troubled Ukraine subsidiary as part of a €122mn capital injection, the bank said in a press release. Raiffeisen Bank Aval is Ukraine's seventh largest bank by assets.

The long-awaited move comes shortly after EBRD announced on November 23 it would recapitalise another European-owned top ten Ukrainian bank, BNP Paribas subsidiary Ukrsibbank, where EBRD's stake will grow to 40% in the process of a $130mn capital injection.

The moves demonstrates the retreat of European-owned banks in Ukraine and represent another example of how the EBRD is stepping up its equity investments in the banking sector in Central and Eastern Europe, because of the region's continuing problems since the global financial crisis.

RBI's stake in Raiffeisen Bank Aval will decrease from 96.2% to around 67%, EBRD said in a statement, as part of the €122mn capital injection, leaving the EBRD with 30% of RBA's total shares.

"By becoming an equity partner, the EBRD is strengthening the capital base of Raiffeisen Bank Aval alongside with RBI, contributing to a much-needed recapitalisation of Ukraine's banking sector as a whole," Nick Tesseyman, EBRD Managing Director Financial Institutions, said in a statement. "The partnership with the EBRD is a confirmation of Raiffeisen Bank Aval's stability as well as strength and it proves that RBI is on the right track in the challenging environment provided in Ukraine at the same time," said Karl Sevelda, RBI's CEO and Chairman of Raiffeisen Bank Aval's Supervisory Board.

RBI and the EBRD told bne IntelliNews in May that they were in negotiations on a deal.  "The proposed project along with the planned contribution to the capital of parent Raiffeisen Bank International (RBI, Austria) will support the development strategy of [Aval], give a strong positive signal to the market during the difficult political and economic crisis in Ukraine," the EBRD confirmed in July. 

The move is part of a concerted drive by the EBRD to strengthen its role as crisis manager in troubled East European markets. The EBRD has acquired a 20% stake in the Balkans operation of nationalised Austrian bank Hypo Alpe Adria alongside private equity firm Advent International, and 20% in NKBM in Slovenia alongside Apollo Global Management. It is also in negotiations to take a 15% stake in Erste's loss-making Hungarian unit alongside the Hungarian government. In Moldova it is trying to extend its 15% stake in the second largest bank Victoriabank to a majority, but it is struggling to win control from local oligarchs. 

In Ukraine, the March 2014 annexation of Crimea by Russia forced Raiffeisen Aval to sell its branches there and shutter those in conflict-torn East Ukraine, which was a major factor in 52% of its loans in the country becoming non-performing.

Austria's Raiffeisen is the second major European banking holding to scale back exposure to Ukraine. In August, Italian giant Unicredit agreed to offload its Ukrainian subsidiary, Ukrsotsbank, another top five bank, to the Russian banking group Alfa - a development regarded with concern in Ukraine, which is in a quasi-war situation with Russia.

News that the EBRD will prop up Raiffeisen Aval will come as a relief to Ukraine's embattled government, who would have looked askance on any further Russian banking expansion. Prime Minister Arseny Yatsenyuk headed the Aval legal department before the bank's acquisition by Raiffeisen.

Troubled history

Raiffeisen symbolically acquired the bank in the immediate aftermath of the pro-European Orange Revolution of 2005, paying $1bn to become the first major European banking group to acquire a local subsidiary.

But its operations in Ukraine never recovered after the 2008-2009 financial crisis, when the bank was badly hit by politically connected borrowers reneging on debts, according to leaked US diplomatic cables.

"Second-tier oligarchs and members of the Ukrainian parliament are extorting from the country's banks and threatening bankers," a representative of Raiffeisen Aval told US diplomats, according to the cable dated 2010.

"The powerful borrowers act with impunity, having paid off the court system to evade their debt obligations," the cable continued. The Raiffeisen representative estimated that one-third of Raiffeisen's non-performing loans comprises "deliberate non-payment", by politically connected businessmen.  

But the Raiffeisen retreat is also part of a broader story of the Austrian bank's overexpansion in Eastern Europe. High levels of problem loans in other key markets such as Croatia, Romania and Hungary, together with adverse currency movements in Russia and Ukraine, plus bank levies and forced conversion of Swiss franc loans in Hungary, have all led to losses that the rest of the network could not counter-balance.

The sheer diversity of the bank's operations has become a weakness, something that the disposal programme starts to address. "A bank of our size should be more focussed," Karl Sevelda, RBI’s chief executive since June 2013, told bne IntelliNews recently, while adding "what we want is a more balanced structure".

RBI claims that its diversity helped it stay profitable in the past, notably during the global financial crisis, as not all its markets turned down at the same time or pace. But today RBI is exposed to several of the most problematic markets in the region at the same time, putting severe pressure on management resources. Jiri Stanik, founder of consultants Helgi Analytics, argues that RBI is spread too thinly. "Right now that looks a potential problem," he says.

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