EBRD takes 41% in Moldova’s biggest bank MAIB as banking sector turnaround begins

EBRD takes 41% in Moldova’s biggest bank MAIB as banking sector turnaround begins
EBRD takes 41% in Moldova’s biggest bank MAIB as banking sector turnaround begins / wiki
By Ben Aris in Berlin October 2, 2018

Moldova has been a banking black hole for more than two decades. Tiny, poor and unreformed, the country has been used by businessmen from across the former Soviet Union as a willing banking base to launder money as the most convenient entrepôt into the European financial system. But that could be about to change, as Moldova follows the likes of Russia and Ukraine in cleaning up its banking sector.

On October 2 the European Bank for Reconstruction and Development (EBRD), together with two private equity investment funds — Horizon Capital from Ukraine that used to be run by former finance minister Natalie Jaresko, and the Latvia-based AB Invalda INVL fund — agreed to buy a 41% stake in the country’s largest bank Moldova-Agroindbank (MAIB) after that stake was confiscated from “non-transparent shareholders” by the central bank. The three paid MDL451.533mn (€23mn) for the stake.

“Moldova’s banking sector has been plagued by non-transparent shareholders for too long. You would remember the $20bn money-laundering scandal, the so-called Moldovan Laundromat, and the $1bn theft from three key banks (12% of Moldova’s GDP),” says Francis Malige, the EBRD's managing director for Eastern Europe and the Caucasus. “But Moldova now proves that a turnaround is possible.”

The Vilnius-based Invalda INVL group’s companies have more than €600mn of assets under management, entrusted to them by over 190,000 clients in Lithuania and Latvia as well as international investors. Horizon Capital is a private equity firm managing funds which provide financing to businesses in Ukraine and Moldova. Its funds have attracted investments from the EBRD and other investors. Malige told bne IntelliNews that none of the partners dominate the ownership in the consortium.

The new shareholders are operating through UK-based company HEIM Partners, which is owned by the EBRD and Invalda INVL, with 37.5% of shares each, and Horizon Capital, which holds the remaining 25%. Horizon is responsible for strategic direction and management of the MAIB stake on behalf of the consortium, an EBRD statement said. 

MAIB is the largest commercial bank in Moldova, with assets at the end of 2017 of €1.078bn and equity of €180mn. It is also one of the oldest, having been established in Soviet times. The shares that went under the gavel on October 2 have had a complicated history, Malige explains. They have changed hands several times in the last two decades, but were bought by the non-transparent shareholders in 2012.

“None of the new shareholders has a controlling share and we will work together with the like-minded shareholders, local Moldovan investors,” Malige told bne

On the block

These shareholders were using the bank in various scams to launder money and although the stake was split up into various holdings, they were illegally coordinating their actions.

The determination to do something about the corrupt nature of the Moldovan banking sector has been gathering momentum, especially after there were mass demonstrations following the $1bn bank theft in 2014.

The 41% stake in MAIB was confiscated by the state, under the new banking regulations introduced last year that provide improved ownership transparency, from non-transparent shareholders spotted by the central bank as operating in a coordinated manner. The stake was controlled by controversial local investor Veaceslav Platon according to reports. Platon is currently in jail for frauds related to Moldova’s savings bank Banca de Economii (BEM). 

The National Bank of Moldova (NBM) had already blocked the voting and other shareholder rights of the bank in March 2016 after the shareholders had been found to be illegally coordinating their actions: the stake had been split up into small pieces so as not to raise the central bank’s red flags on collusion. An appeal to the Stockholm arbitration court by the shareholders failed in 2017, clearing the way for the stake to be sold by the government to new investors. In June this year the EBRD threw its hat into the ring and said it would buy the stake in a consortium with the two private equity firms.

Regional banking clean-up

Moldova has become famous for its banking scams. In one popular version a shell company offers a guarantee on a loan made by a second shell company. Then the first is bankrupted and transfers cash to the second as an award ordered by the courts, cleaning the money in the process.

In another popular scheme, one company deposits money in an account in Moldova. A second company sues the first on some charge like breach of contract and takes the case to a fake arbitration tribunal, which then awards the second company the deposits of the first. A court order is obtained to make the transfer and the money becomes white in the process.

While MAIB was not involved in this sort of scam the whole banking sector has been infected by an environment of dodgy dealing that the regulator wants to put behind it.

The changes in Moldova are part of a region-wide trend where central banks are attempting to clear out the banking rot that set in during the wild days of the 1990s.

Central Bank of Russia (CBR) governor Elvira Nabiullina has closed down half of the sector's banks since taking office in 2013 at a steady pace of 100 banks a year. That has caused its own problems and nearly sparked a banking crisis last autumn when the CBR shuttered several of the country’s biggest commercial banks, the so-called Garden Ring banks.

There were 518 banks left in Russia as of the end of August, down from over 4,000 in the 90s, and well on the way to reaching the unofficial target of 300 banks in the next few years. In parallel the CBR has been beefing up regulation and reporting. It has introduced the Basel III regulations, banks were made to report using IFRS standards long before the rest of the economy, and more sophisticated prudential rules have been introduced for banks that offer retail loans, among other measures.

Ukraine has seen a similar story. Although reforms are going very slowly under the International Monetary Fund (IMF)-sponsored programme, the changes to the banking sector carried out by former central bank governor Valeriya Gontareva have been a stunning success. She also closed about half the banks to bring the total down to 86 as of the end of August and shuttered many of the money laundering scams posing as banks. In November 2016 the National Bank of Ukraine (NBU) took its boldest step yet and nationalised PrivatBank, the largest commercial lender in the country, where 98% of the loan book was discovered to have been made to shell companies belonging to the owners, in what was a wholesale theft of depositors’ money.

“It is not enough for the regulator to want to clean the sector up — you need everyone on board,” says Malige. “In the case of the nationalisation of PrivatBank in Ukraine the deposit insurance agency, the NBU, the Ministry of Finance, the legal authorities, the parliament and the international partners all had to be on board before the bank could be nationalised. In the last years we have seen a similar alignment of interests happen in Moldova. The authorities have said enough is enough and the people have suffered enough. They want change.”

Now it’s Moldova’s turn. The NBM has taken control over two of the three top banks for breaking transparency laws, as the first steps to a sector clean-up. In addition to MAIB, the central bank took over Moldindconbank in April, and put both under the control of the Public Ownership Agency (APP), which will sell the stakes off to investors. Moldinconbank was at the heart of Moldova’s Laundromat system.

“As new owners of MAIB, the EBRD-led consortium will bring new discipline, new technologies and effective incentive structures to continue to make MAIB the leading bank in Moldova, better serving SMEs and supporting the economy more broadly,” Malige explained. “In a nutshell, we want to ensure that the country’s largest lender is clean, healthy and works for the benefit of people, businesses and the economy — and not a selected few.”

The EBRD already owns another bank in the country, but goes up a tier with the MAIB deal. In January, together with Romania’s Banca Transilvania, the EBRD bought another 27% in Victoriabank, the third largest bank in the country and one of the few well respected local banks, taking its share to a controlling stake in what one EBRD banker called a watershed moment

“This gradual and fundamental clean-up of the Moldovan banking sector, the entrance of robust and transparent shareholders, which abide by highest standards of corporate governance mean that the country’s lenders can no longer be used for money laundering or other illegal transactions. As money-laundering concerns grow, Moldova is a ray of light, proving that a turnaround is possible,” Malige said.

Once the MAIB deal goes through, the EBRD will have significant stakes in two out of the three biggest banks in the country and since the state took control of Moldindconbank that too could well be sold to new investors soon.

Exit strategies

For investors the potential exit is as important as finding a good business to invest into, and there are plenty of options. The funds must have an eye on the Bank of Georgia, which was the leading bank in the similarly small country of Georgia, but managed to list on the London stock exchange where its valued soared.

“I’m not sure we can list MAIB in London, but the regional exchanges are attractive, especially the Warsaw Stock Exchange as one possible exit,” Malige told bne.

The other alternative is to sell to a strategic investor. Romania’s Banca Transilvania has already gone with the EBRD into Victoriabank and there are a bevy of other banks with business across the region from Austria and Hungary in particular. Moldova is not a big market but the experience of the Bank of Georgia has shown even small markets can make big profits for their investors.

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