Ben Aris in Berlin -
Ukraine's banking sector has nearly doubled in size over the last six years. A raft of mergers and acquisitions has foreign investors licking their lips, but sent valuations shooting sky-high. Has the sector got ahead of itself?
Crowds have been gathering on Mai'dan again - the central square that was the epicentre of the Orange Revolution in the winter of 2004 - but business and the banking sector have barely noticed. Despite the country being in almost perpetual political crisis since President Viktor Yushchenko snatched power out of the hands of Ukraine's incumbents in the popular street protests in 2004, the economy has barely blinked.
Investment and growth officially stalled the year following the revolution, but analysts say that was more of a statistical glitch than a real pause, as the cash flows that fed the troughs of officialdom through domestic tax havens were re-routed and started to go through official channels.
The banking sector has been the first and by far the biggest winner of the remaking of Ukraine's economy under the liberal, if unstable, Yushchenko administration. Foreign investors have jumped into the Ukrainian banking sector with both feet since 2004 when the first two foreign acquisitions were registered. Since then, more than 20 acquisitions of Ukrainian banks by foreign strategic investors have been completed for a total value of $6.1bn, with UniCredit Group's recent acquisition of Ukrsotsbank for $2.2bn the largest to date. As of the end of the first half of this year, foreign-owned banks accounted for a third of the country's banking assets, or $28.3bn, and two fifths of all retail loans, or $8.9bn.
Ukraine's total banking sector assets have grown by 45% per year on average between 2000 and 2006 to reach $67.4bn, which is equivalent to almost two-thirds of the size of Ukraine's economy at the end of last year.
And the growth is continuing to accelerate. Just last year, consumer lending grew by 71% year-on-year to reach $48.5bn, while retail lending was up a whopping 137% year-on-year to $15.5bn. Even corporate lending grew by half to $33bn as businessmen ploughed profits back into production in a failing effort to keep up with soaring demand; the share of corporate lending in banks' total lending portfolio has been falling steadily and dropped from 77% in 2005 to 68% at the end of last year.
And there is still plenty of room for growth: the penetration of retail lending is still a relatively low $330 per person at the end of 2006, rising to $453 in July. This compares with the $1,000-3,000 that is normal in Central and Eastern Europe.
The growth is even more pronounced in mortgages, which only really started to take off last year. The total amount of retail mortgages was $5.4bn in 2006, or 5.1% of 2006 GDP, even after the volume of mortgages issued soared by 155% between 2002 and 2006. On average, Ukrainians owe $177 per person as a mortgage against the $700-per-capita borrowing in Poland and $30,000 that is the EU average. This business has a very long way to go indeed.
Where's the catch?
Despite this impressive growth, Ukraine's banks still have their work cut out if they are to match their European peers in terms of penetration. The sector's total assets-to-GDP ratio was 66.3% in the first half of this year, against the 74-101% range in Central European countries and well behind the 224% EU average in 2006. And in reality the penetration is even lower, as at least a third of the economy remains in the shadows.
In the midst of this frenetic lending activity is the fear that the naÃ¯ve Ukrainian consumers will over extend themselves. However, as following privatisation of the banking virtually no one had any debt to speak of, the bulk of the average Ukrainian's income is disposable so non-performing loans (NPL) have yet to appear. The NPL ratio to total borrowing is about 4.8%, according to the National Bank of Ukraine, and banks have an average 264% coverage ratio - in other words the lending business is still rock solid.
Another source of problems could be difficulty in accessing the capital needed to finance all these loans, but here too the picture is very rosy. The Orange Revolution was not only a seminal political event in Eastern Europe, it was also the best possible piece of marketing the country could have hoped for and threw open the doors to Western capital for Ukraine's banks.
The leading banks have built up a diversified range of funding sources to support their lending. At the end of the first half of this year, funding was pretty evenly spread with interbank loans, retail deposits and corporate deposits all accounting for about a quarter of the funds each. Taken together, the bank sectors' capital adequacy ratio was a robust 14% and analysts expect it to remain over 12% for several years to come.
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