JOHN MARONE, KYIV
FOREIGN BANKS BUY INTO UKRAINE’S CONSUMER CRAZE
European banking giants continue to buy up an ever larger share of Ukraine’s banking market with the aim of getting in on the country’s lending boom.
Is this a good thing?
The share of foreign capital in Ukraine’s banking system could go from today’s 32 percent to as much as 45 percent by the end of this year, according to Ukraine’s National Bank (NBU).
And this has got some people worried.
The Association of Ukrainian Banks has more than once called on parliament to pass legislation limiting the presence of foreign banking groups in Ukraine.
Even traditional defenders of free-market economics like heavyweight Ukrainian businessman Petro Poroshenko have raised concerns.
“If foreign banks with state capital will play a significant role in Ukraine’s economy, and these banks will be able to pursue the policies of foreign powers in Ukraine’s financial system, then this issue demands unusually decisive measures and means for decisions to be taken,” he said while still serving as the head of the country’s National Security and Defense Council earlier this year.
International Ratings agency Fitch has taken a more positive view of foreign investment into Ukraine’s financial sector.
In a report released at the beginning of this month, Fitch said more foreign capital will lead to increased consolidation and credit worthiness among Ukraine’s more than 150 banks. Risk management and funding will also improve, according to the international rating agency. Like the NBU, Fitch expects foreign purchases of Ukrainian banks to continue a two-year trend.
Following on the heels of the report, Italy’s UniCredito Italiano SpA, through its subsidiary Bank Austria Credianstalt AG, has announced that it signed a purchase agreement to acquire 95 percent of major Ukrainian bank Ukrsotsbank for over $2 billion.
Ukrsotsbank is Ukraine’s fourth largest bank in terms of assets. If the sale goes through, which is expected to happen later this year, it will be the largest bank sale in Independent Ukraine.
It will also mean that three of Ukraine’s top four banks are controlled by foreign, i.e. European, banking groups.
Seeking growth opportunities in emerging markets, European banking groups have moved fast to snap up the country’s largest and several of its smaller banks in the last two years.
The deals that have already been completed have boosted the presence of European banking groups in Ukraine and tripled their net assets on the Ukrainian market in a relatively short period of time.
Austria’s Raiffeisen International moved in with the first big acquisition, paying $1 billion in 2005 for Bank Aval, Ukraine’s second largest bank in terms of assets. Later that year, France’s BNP Paribas paid hundreds of millions of dollars for a 51-percent stake in Ukrsibbank, currently Ukraine’s third largest bank.
A number of smaller transactions followed, racking up billions of dollars in foreign direct investment from Western as well as Eastern Europe.
Russia also got in on the buying spree with its purchase of at least two midsized Ukrainian banks.
Double-digit growth has been recorded in recent years on corporate credit lines, household loans and deposits. The arrival of larger banking groups eager and more capable of fighting for market share could spark competition, bringing rates down and improve services.
The number of urban Ukrainians who use banking services rose from 71 percent to 74 percent from the first to the second half of 2006, according to the market research company GfK Ukraine.
Fitch, however, warned of continuing problems for the majority of Ukrainian banks, such as low capitalization, profitability and liquidity.
The assets of the entire Ukrainian banking system pale by comparison to a single European bank. Even the largest of Ukraine’s banks enjoys far less than 10 percent of the domestic market of loans and deposits.
Considering that most Ukrainian banks were set up to serve the borrowing needs of their owners, industry warnings should come as a surprise to no one.
Until very recently, Ukrainian banks did almost everything in their power to put off borrowers and investors. To the former, they offered high interest rates, and the later – reams of bureaucracy.
Even depositors were not terribly excited by the high interest rates, as there was always the very real risk of the bank going belly up. And everyone knew that the best way to get a personal or business loan was to grease the palms of an acquaintance who worked at a bank. A system of credit ratings in Ukraine is only now coming into use.
Most Ukrainians used to prefer to keep their money under their mattresses or buy anything that would hold value.
Then came the plastic payment cards, via which more and more employees have accessed their salaries.
This necessitated lots of branch offices and ATM machines for the small number of banks that were developing their customer services.
And it was precisely these banks that have proved the most attractive to foreign buyers, who have heated up the market for personal and business loans.
The resulting cycle of increased earnings and spending has led to the current credit boon in Ukraine.
Now more than ever before, post-Soviet Ukrainians are making decent salaries and have lots to spend them on. Retail is driving the economy, and more accessible credit is facilitating spending.
According to a recent report by the International Center for Policy Studies (ICPS), a Kyiv-based think tank, Ukraine’s GDP will grown by 8 percent this year, led largely by personal consumption.
ICPS said private consumption will grow an average of 13.5 percent per annum over the next three years, while salaries are expected to go up 14 -16 percent per annum.
At the same time, Ukrainian banks are also increasing their borrowing, from abroad.
In 2006, bank external debt grew by over 126 percent year on year, reaching $13.9 billion, or 12.5 percent of GDP.
Top-10 Ukrainian bank Finance and Credit recently announced that it planned to attract over $700 million on international capital markets this year.
Western European banks are estimated to hold as much as $100 billion in excess capital, providing them with the means and motivation to invest in growth markets.
So to return to our original question as to whether more foreign banks awash with cash to lend Ukrainian consumers and business is a good thing or not, the answer is: not for most of the country’s inefficient and non-transparent pocket banks. A few will change with the times, others will get bought up, and most will fold. As for the Ukrainian consumer, he looks set to catch up with the rest of the debt ridden, consumer oriented world – for better or for worse.
John Marone, Kyiv Post Senior Journalist, based in Ukraine.
July 9, 2007
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