The crisis at Ukraine’s PrivatBank threatened the country’s entire banking system, President Petro Poroshenko said in a statement hours after the government moved to take over the bank on December 19.

News of the nationalisation of the country’s largest lender by assets was followed by acknowledgements by the central bank that the hole in PrivatBank’s capital stood at UAH148bn ($5.6bn) as of early December.

“A direct threat to both the bank itself and the entire banking system of Ukraine has emerged. It is obvious for us as well,” Poroshenko said. “Over the past six months serious concern over this issue has been raised by our key financial partners - the IMF, World Bank, EBRD.”

The governor of the National Bank of Ukraine (NBU) Valeriya Gontareva said the same day that the bank’s potential capital gap stood at UAH148bn ($5.6bn) as of early December. The amount is close to the funding ($7.6bn) so far provided to Ukraine by the International Monetary Fund (IMF) under its $17.5bn support programme agreed in 2015.

“Our decision is based on saving the bank and guaranteeing property rights to financial resources to everyone who put money in this institution,” Poroshenko added.

Earlier this year, PrivatBank signed off on a three-year road map with the NBU for boosting its capital and purifying its credit portfolio, but failed to implement these plans. “Measures taken by private owners and top managers over the past two years have turned out to be insufficient,” Poroshenko added.

PrivatBank’s problems have been piling up “for years” and have “taken a turn for the worse in conditions of war and economic crisis”, according to the president.

“Shareholders have not found the resources to perform the compulsory programme of additional capitalisation, as the current business model has apparently sputtered out,” Poroshenko said, blaming the lender’s main shareholders, oligarchs Ihor Kolomoisky and Hennady Boholyubov, for the crisis.

The Ukrainian authorities say that after the takeover they will contribute UAH116bn ($4.415bn) in state bonds to the bank’s equity, and plan to raise UAH32bn ($1.2bn)  by converting related party loans and unsecured lending to the bank into its equity. At the initial stage, the government will increase the bank’s equity by UAH43bn ($1.64bn) via contribution of state bonds.

Related parties

Gontareva said that as of April 2015, more than 90% of the bank’s corporate loans were provided to related parties, according to the NBU’s stress tests.

However, Oleksandr Dubilet, who headed PrivatBank prior to the decision on its nationalisation, called the central bank’s assessment of related parties loans in the lender’s portfolio of corporate loans exaggerated.

NBU first deputy governor Yakiv Smoliy added that despite the record high level of related parties loans, this fact cannot be classified as siphoning off funds from Ukraine. “To think that this is capital was withdrawn abroad to offshores? No, I would not say so, because most of the loans were issued to companies operating in Ukraine,” Smoliy told journalists. “It’s another matter that there should be appropriate collaterals and reserves for this category.”

Meanwhile, Christine Lagarde, Managing Director of the International Monetary Fund (IMF), said in a statement on December 19 that it is now important that the process of nationalisation be followed by “firm efforts to maximise the repayment of related-party loans, and the appointment of an independent management team to restore the bank’s viability, minimising the cost to the state and taxpayers in line with existing legislation and international best practice”.

Lagarde described Kyiv’s decision to take over PrivatBank as “an important step” in  efforts to safeguard financial stability and “ensure the smooth operations of the bank given its systemic role in Ukraine’s financial system, and in view of insufficient efforts to strengthen its capital adequacy in recent months.”

EBRD input in new management

Meanwhile, Poroshenko stressed on December 18 that the European Bank for Reconstruction and Development (EBRD) had taken part in forming a new team of top managers of PrivatBank. “A new group of top professionals has already been hired to manage the bank,” he said. “The process of forming the group has been joined, among others, by the EBRD.”

EBRD President Sir Suma Chakrabarti said the same day that the multinational lender “strongly supports” the NBU’s continuing efforts to reform the banking system in Ukraine and ensure good governance across the industry.

“The long-term stability of PrivatBank, the largest bank in Ukraine, is crucial to the country’s economic health,” Chakrabarti added. “We believe the decision to nationalise it is the right one and have offered our expertise to the authorities whenever it is needed.”

The EBRD added that "a respected Western firm that is well known to the EBRD will be advising the Ukrainian authorities in the bank’s management and transformation".

Meanwhile, former finance minister Oleksandr Shlapak was appointed to head the nationalised PrivatBank. “Shlapak’s appointment appears to be welcomed by PrivatBank’s former management... This has led some to speculate that Shlapak’s appointment may be part of a deal struck between the NBU and the bank’s oligarch owners Kolomoisky and Bogolyubov,” the Kyiv Post newspaper wrote on December 19.

The same day, the EBRD’s Managing Director for Eastern Europe and the Caucasus Francis Malige said the multinational lender under certain conditions may participate in the process of a possible future privatisation of PrivatBank.

“It is too early to say that it is going to be privatised. But for now it is important that it should be nationalised properly, stabilised, restructured and then privatised after some time. When the decision time comes, of course we would like to support that,” Malige told Interfax news agency.