Ben Aris -

It is the Sberbank of Ukraine, but unlike its Russian cousin Oschadny bank was fighting for its life until the World Bank lifted a ban on its lending last year. Now the biggest retail bank in Ukraine is aiming to be a top three player within two years. bne talks to Artemiy Ershov, first deputy chairman of Oschadny Bank.

Oschadny should be a monster. As the Ukrainian branch of the Soviet State savings bank, it had a virtual monopoly on retail banking when it was cut loose form Moscow in 1991, the year Ukraine declared its independence.

Artemiy Ershov, first deputy chairman of the board, Oschadny Bank
Instead, the government largely ignored the bank, leaving it to compete with more nimble commercial banks that sprang up to seize the nascent banking market. By the end of the 1990s, the lack of capital and mismanagement had brought the bank to the verge of bankruptcy as its bad debts piled up.

Then in 2003, the World Bank slapped a ban on it increasing its lending as part of a loan package to the government. What scared World Bank officials was that Oschadny is one of two state-owned banks and so 100% of its deposits are guaranteed by the state; if Oschadny goes down, it would take most of the government's budget with it.

"The restrictions were part of the World Bank's Programme Adjustment Loans for the government of Ukraine [in 2003]. According to article 57 of the Law on Banking, Oschadny enjoys a 100% state guarantee. The World Bank thought this posed a threat to the budget of the country in the case that the bank failed, and so imposed restrictions on our activity," says Artemiy Ershov, first deputy chairman of Oschadny.

A secret memorandum of understanding that capped the bank's activities was signed by the cabinet, the National Bank of Ukraine and Oschadny, and witnessed by the World Bank.

The World Bank insisted on a formula that provided specific limits on what is considered "risky business." The bank's ability to lend to both companies and private individuals, spending on running-costs, capital investment and the interest rates the bank could charge borrowers were all capped. The ban didn't put the bank out of the retail business, but it did mean Oschadny had to stand by and watch while the retail banking market exploded over the last few years.

For example, interest rates paid on retail deposits were capped at 65% of the average rate of the top-10 banks: if the average was 10%, then Oschadny was allowed to offer punters no more than 6.5% return on their deposits.

Now that has all changed. Last year the World Bank agreed to remove the caps after the bank restructured and the government pumped in a big dollop of fresh capital.

"The World Bank was not keen on the idea at first and said we should sell or liquidate the bank, but we persuaded them after reforming the internal procedures and improving transparency to ensure loans won't go bad," says Ershov.

The bank still has a portfolio of UAH300m of non-performing loans, but it has created a reserve fund and once those offending enterprises are bankrupted, the debt can be removed from the bank's books.

The caps prevented the bank from aggressively marketing to retail customers, but more painful was the ban that stopped the bank from picking up corporate clients. The fastest retail banking growth comes by offering payroll services to big industrial clients and thereby forcing workers to accept a bank card.

Oschadny took on its first new big corporate clients in the first week of November, signing up Energorynok, and is now lobbying the government hard to encourage more state-owned companies to switch banks to Oschadny.

Starting over

This year marks the beginning of a new life for Oschadny and its prospects look good.

As a legacy from its Soviet past, Oschadny inherited a massive 6,000-strong branch network, almost five times bigger than its closest rival. However, the bank was unable to capitalise on its de facto monopoly on the retail business, as the government basically ignored it for much of its first decade of independence.

"There was no decision to support our bank after 1991. Unlike the Russian and Hungarian governments, there was never a decision to open up all the state's accounts in Oschadny and so there was no support for the development of the bank," says Ershov. "Our market share in the retail loan business is pretty miserable at less than 5%, but we do better in utility payments; some 60% of utility charges are paid through Oschadny."

Prime Minister Yurii Yekhanurov made a start on putting Oschadny's house in order during his brief tenure last year. The state used part of the $4.8bn it received from the sale of the Kryvorizhstal steel mill in October last year to boost Oschadny's capital: the state doubled the bank's capital by pumping in an extra UAH400m ($80m) of fresh money. As a result the bank went from being 7th largest in the country, with UAH900m of capital, to number six.

However, Oschadny has been left in limbo since then by the constant changes in government. Viktor Yanukovych replaced Yekhanurov as prime minister this August and as one of only two state-owned banks in the country (the other is Ukreximbank, the state-owned trade bank), Oschadny is waiting for the government to get round to formulating a long-term plan for it. It lays most of its hopes on persuading the government to steer more business from state-owned enterprises its way.

In the meantime, the bank is getting on with its marketing efforts. Next year will see Oschadny re-launch as a contender for the top slot in Ukraine's retail banking segment. A tender is currently out with international advertising agencies to re-brand the bank and direct a big marketing campaign to make over its dilapidated image.

"The strategy is to become a normal commercial bank with transparent accounts that can compete on the market using only market mechanisms," says Ershov.

Ironically, the bank doesn't expect to gain much from its status as the only bank in Ukraine that can guarantee the return of 100% of deposits should it go belly up.

"State banks have a poor image. The guarantee should be an advantage, but most Ukrainians associated state banks with the loss of their savings following the collapse of the Soviet Union, not with stability," says Ershov.

Ershov has high hopes for the coming marketing campaign and says the bank should be a top-three player within two or three years with about 15% of the market.

"We are doomed to work in the retail banking sector thanks to our very big branch network," says Ershov, "but the second direction is to bring in big corporate clients and develop new services such as investment banking."

Oschadny's future will remain uncertain until the new administration gets round to developing a plan. Last year, President Viktor Yushchenko told the then-Austrian president that the bank could be sold off. Yet the bank's new management is pushing for an IPO in two or three years' time. As Oschadny is on the list of strategic enterprises that can't be privatised, the parliament will first have to vote on removing it from that list before it can be sold.

"If you have something, then you always have the possibility to sell it," says Ershov. "We are trying to persuade the government that the best strategy is to invest in the bank. Every hryvnia put into the capital of the bank will at least triple in two years if you look at what banks have been sold for recently. With an IPO, the government can recover all the money invested in development of Oschadny and still end up owning 70% of the bank."

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