Real-life stress tests expose Ukraine's rotten banks

By bne IntelliNews December 10, 2014

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City Commerce Bank might ring a bell with visitors to Kyiv - if only because a giant advertising display bearing the bank's name recently topped one of Kyiv's highest buildings, the Parus office tower, and because the bank ran an equally eyecatching VAT cash reimbursement scheme at the airport.

The bank was declared insolvent on November 21, the airport booths are now closed and the towering ad board is now being dismantled piece by piece – putting an end to a longstanding banking tradition. Before it became City Commerce Bank in 2012, the billboard for many years displayed the bank's former name, Converse Bank, owned by Baltic banking baron Vladimir Antonov,  currently in the UK awaiting extradition to Lithuania on fraud charges that he denies.

When law enforcement agencies moved against Antonov's banks in Lithuania and Latvia, prompting him to flee to the UK, his business partners in Converse Bank took over Antonov's Ukrainian bank, together with a low-profile Ukrainian businessman and MP, Nurulislam Arkallaev.

Ukraine's security service SBU had already investigated massive deposit insurance fraud at a number of minor banks in which Arkallaev-linked businesses were allegedly involved, which bne wrote about in 2012

Arkallaev and Antonov's former associates thus formed a banking dream team at the rebranded City Commerce Bank – with predictable results. Ukraine's national bank (NBU) closed down City Commerce Bank on November 21 after it turned into a financial black hole after running an apparent pyramid scheme – the bank throughout 2013 offered 24% interest on deposits, 6 percentage points over the market rate. Internet portal Forbes Ukraine viewed the bank's accounts following the NBU takeover, and found that over half of the bank's loan book comprised of UAH1.3bn ($80mn) in loans made to a dozen interlinked firms all associated by market participants with money laundering activities, according to the report. City Commerce Bank's former owners could not be contacted for comment.

Picking the pockets

City Commerce Bank is just one of nearly a dozen banks the NBU has declared insolvent since the ousting of former president Viktor Yanukovych and the ensuing economic and political meltdown, many of which were basically small money laundering institutions.

But on the same day, November 21, that the National Bank of Ukraine declared City Commerce Bank insolvent, it also declared a mid-ranking bank, VAB, insolvent -  a bank owned by one of Ukraine's leading businessmen, agriculture oligarch Oleh Bakhmatyuk. Bakhmatyuk is owner of the Avangardco and UkrLandFarming agribusinesses, the former an LSE-listed egg producer and the latter a grain producer. Both firms are heavily leveraged with hundreds of millions of dollars worth of eurobonds.

VAB Bank went insolvent – defaulting on a eurobond coupon payment of $2mn - in early October. With VAB Bank heavily involved in agrobusiness lending - officially 35% of its loan portfolio went to agriculture companies – market participants speculated that the bank's funds had flowed to Bakhmatyuk's businesses, something the businesses have denied, saying there exist Chinese walls between the group's different divisions.

Figures quoted by Zerkalo Nedeli purport to show that in the third quarter of 2014, the NBU provided UAH3bn ($192mn) in refinancing funds to another bank owned by Bakhmatyuk, mid-ranking bank Finansovaya Initsiativa, although NBU head Valeriya Gontareva in an interview with Zerkalo Nedeli in late September denied stabilisation credits had been provided to Bakhmatyuk's banks.

While the bank's accounts indeed show an unexpected increase of UAH3bn under "funds from banks" the increase may not necessarily have been provided by the NBU, but by other commercial banks, including the aforementioned VAB.

According to Zerkalo Nedeli, Finansovaya Initsiativa boosted its loan book in the third quarter by nearly the same amount, UAH2.72bn, which Zerkalo Nedeli suggests would have been directed to related parties, such as Bakhmatyuk's agribusinesses. "Finansovaya Initsiativa does not have deposits at or provide loans to Avangardco or UkrLandFarming," a spokesperson for Bakhmatyuk told bne

Zerkalo Nedeli also pointed to Bakhmatyuk's alleged political ties: the oligarch's sister, who is head of the supervisory board at VAB bank and Avangardco, ran for parliament in President Petro Poroshenko's eponymous party, and only failed to enter due to Poroshenko's party underperforming in elections.

Looming nationalisation?

According to a new report on Ukraine's banks published by Investment Capital Ukraine (ICU) - a securities brokerage founded and run by NBU head Valeriya Gontareva until taking over at the helm of the NBU in June – some top 10 banks are candidates for imminent nationalisation, as the banking system comes under massive stress. “We predict the nationalisation of some systemically important financial institutions. The key criteria for nationalising will be whether the target bank has a viable business model and whether it is not crucially dependent on shareholder businesses,” ICU writes in the report.

One candidate for nationalisation according to ICU is the ninth largest bank, Nadra Bank, controlled by gas oligarch Dmitro Firtash, which has been lossmaking since the global credit crunch in late 2008. Shareholders recently promised a massive capital injection of UAH5.5bn, more than doubling shareholder equity, but ICU analysts are sceptical. “Given the magnitude of the increase, we see this move more as a verbal intervention than a realistic reflection of the additional capital injection,” they write pessimistically.

Another of the systemic important banks with "critically low" capitalisation, according to ICU, is Ukraine's fourth largest bank by assets, Delta Bank, which holds 6% of retail deposits. According to ICU, the capital adequacy ratio of Delta Bank is languishing at the minimum required level of 10%, despite a declared recapitalisation in September, and there has been a strong deposit outflow of 15% during the year. "Though steep, the decline is still below the sector average of 17.0%, since many withdrawal applications have been significantly delayed," write ICU analysts, adding that "current high interest rates on deposits are expected to reverse the outflow of funds from the bank." The liquidity ratio is also at the minimum allowed level of 40% after depositor panic, says the report.

Majority shareholder and chairman Mykola Lagun together with minority shareholder global commodities and financial trader Cargill agreed to a 31% capital injection in September, and called off a deal to acquire Universalbank, the Ukrainian subsidiary of Greek bank Eurobank. 

On December 9 and 10, Delta Bank's website was down, giving rise to fears on internet forums that the end was nigh. A group of hackers circulated a message claiming they had brought down the site, due to the bank's failure to pay out deposits, along with the site of the state-owned Ukreximbank, which was also down. However, Delta's sophisticated online banking service was still running. 


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