The growing capital of Ukraine's banks

By bne IntelliNews November 1, 2006

Nicholas Watson -

Raiffeisen Aval is the latest in a long line of Ukrainian banks scrambling to raise new equity capital to fund a rapid expansion.

It may seem counterintuitive, but Ukrainian banks are running out of money because they are growing so fast. The problem is that the growth in lending is easily outstripping the ability of the banks to boost capital by simply reinvesting profits, so owners are investing heavily in a raft of capital increases.

Raiffeisen International, which took over the largest bank in Ukraine when it bought Aval in 2005, is the latest to boost capital, announcing it would plough UAH1.5bn ($300m) into the bank – now called Raiffeisen Aval – in new equity capital at the end of October. Shareholders are expected to approve the plan at a meeting scheduled for December 8 and the subscription is scheduled for February 2007.

The CEO of Raiffeisen International, Herbert Stepic, made it clear why his organisation had decided on this course of action. "In Russia and Ukraine we have been buying banks and distribution networks, and we can multiply it by further expansion," Stepic told a news conference, which also coincided with the closing of another of Raiffeisen's Central and Eastern European deals, the acquisition of Czech Republic-based eBanka.

Analysts applauded Aval's decision to increase its equity capital, saying it should give the bank the necessary financial muscle to expand its operations next year.

"This news is very positive," says Alexander Viktorov of Concord Capital. "The planned additional share issue will significantly strengthen the bank's position, suggesting further rapid expansion [and] looks like the bank is being geared up by the new owner to achieve the recently announced goal of gaining a 20% market share in retail lending by 2010."

As well as building up the retail side of the business from the current 15% market share, the new equity will be used to launch new lending products for small and medium-sized enterprises (SMEs) in Ukraine.

"Aval intends to become the market leader in consumer, mortgage and car lending in Ukraine and rank among the top three banks in the corporate lending segment by 2010," says Andriy Dmytrenko, chief strategist for Dragon Capital.

Dmytrenko says that by the end of this year, Aval hopes to complete the restructuring of its regional network to include universal branches, specialized outlets for SME clients, mortgage centres and VIP service offices.

Aval faces stiff competition, though, from locally owned banks as well as those banks controlled by foreign institutions, which account for a quarter of the sector's capital. Many of these banks have already raised new equity capital to fund their growth and shore up their capital adequacy ratios (CAR) to meet the central bank's minimum requirements.

On October 17, International Mortgage Bank (IMB), the 126th largest bank by assets announced it had tripled its statutory capital to $22.4m via an additional share issue. Svetlana Dryhush of the Moscow investment bank Renaissance Capital says IMB, a specialised mortgage lender set up by the Western NIS Fund in 2004, required the equity capital "to increase its active lending operations as well as maintain its CAR in compliance with the national bank's regulations."

At a September emergency shareholder meeting, the retail-focused Pravex Bank, Ukraine's 24th largest bank by assets, voted to approve a 21%, or UAH30m, share capital increase to enable its branch network development programme and lending growth.

On July 13, Bank Forum completed a 68% increase worth $49.5m in its share capital. "The higher-than-expected growth achieved in the first half of 2006, in combination with the share capital increase, suggests higher CAR that will support the bank's further rapid expansion, and has led us to project higher growth rates of the bank's basic fundamentals," says Viktorov of Concord Capital.

Other capital increases carried out earlier this year include those from Bank Mriya, SEB Bank Kiev, Brokbiznessbank and Bank Khreschatyk.

And it's not just in Ukraine that banks are raising new capital. Across the border in Russia the giant state savings bank Sberbank said during an analyst meeting October 26 that a new share issue, its timing and amount are all under internal discussion. Speculation in the market is that it will be worth around $10bn.

A good time to be in banking

According to analysts, banks have every right to be optimistic about their business in Ukraine right now.

In a September report on the Central and Eastern European banking markets by Raiffeisen, the bank said Ukraine recorded the strongest growth of banking assets in 2005 at 58.7%, "despite the continuation of political and economic turbulences."

Even so, banking assets as a percentage of GDP in Ukraine remain small compared with Central Europe, meaning the market still offers huge potential. In Central Europe, banking assets as a proportion of GDP stand at around 80% compared with Ukraine's roughly 60% at the end of 2005.

Overall, Ukraine offers a huge market that is still relatively untouched in most segments. Dragon Capital's Dmytrenko says the growth in personal loans and mortgages is running at nearly 100% per annum. "This is due to robust consumer demand driven by strong disposable income growth and still quite low penetration of cars, houses, large home appliances," he says.

Likewise the corporate part of the business is expected to take off as manufacturing and service companies from Central Europe and the West expand their operations further east in search of new opportunities, while domestic businesses ramp up their production to meet local demand.

"The economic recovery drives demand for corporate lending. Second, access to cheaper and longer-term foreign financing – via syndicated loans and Eurobonds – helps to finance lending growth," says Dmytrenko.

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