Editor’s Note: This new feature by the Kyiv Post explores the public and private financial forces that shape the economies of Ukraine and the world. Please email story ideas to [email protected].Low liquidity and an escalating sovereign debt crisis in the European Union are preventing Ukrainian banks from lending more.
In a sign of what’s to come, European banks are scaling down operations in Ukraine and other Eastern European countries, particularly in the retail segment that serves ordinary citizens.
On Nov. 22, Austrian regulators instructed their banks – many of which are big players on the Ukrainian market – to curb lending to local subsidiaries in Central and Eastern Europe, limiting exposure as the eurozone crisis turns from bad to worse.
Since the 2008 global financial crisis, Ukrainian banks sharply cut down on foreign currency loans.
Lending in domestic currency has inched up as have deposits. But overall lending levels remain low compared to developed economies.
Deprived of working capital, Ukraine’s businesses could find themselves in a tough spot. Given that local banks are being squeezed by domestic problems, it now looks like the situation could get much worse before it gets better.
The 2008 crisis hit Swedish-owned SEB’s operations in Ukraine and the Baltics hard, prompting the bank to refocus on its core market.
Now it has decided to leave the retail segment in Ukraine altogether, further drying up lending to consumers for homes, cars and other items.
On Nov. 18, SEB announced it would sell its Ukrainian retail business to the much smaller Eurobank, Ukraine’s 108th in terms of assets.
At just over 2.4 billion hryvnias in loans, including around Hr 1.8 billion in retail, SEB is far from a market giant. It is, however, part of a growing group.
Swedbank, another Swedish bank, announced in October it had decided to cut its retail network from 170 branches to 10 and focus on corporate clients. Dutch ING Bank scaled back operations in Ukraine in 2009.
“Banks are withdrawing from non-core markets that are in poorer shape than the emerging markets closer to core markets,” said Alexander Valchyshen, head of research at ICU, a leading Ukrainian investment bank.
Stormy Europe
Europe’s escalating debt crisis has added fuel to fire.
On Nov. 22, Germany failed to place almost 40 percent of a bond issue in what is now a historical auction. This sparked apocalyptic rhetoric, with talk of “unprecedented disaster” and contagion “to the very heart of the eurozone.”
Perhaps more worryingly for Ukraine, a day earlier Austrian bank supervisors told the country’s banks to limit future lending to their Central and East European subsidiaries.
The central bank singled out three banks – Bank Austria (owned by Italy’s Unicredit, which recently wrote down a half-billion dollars of goodwill on its Ukrsotsbank investment), Erste Group and Raiffeisen Bank International – whose Central and Eastern European exposure alone is bigger than the Austrian economy.
These banks were told to limit local lending at “particularly exposed branches,” keeping the ratio of new loans to deposits at no more than 1.1. While it has fallen considerably over the past two years, the current national average for Ukraine is 1.7, one of the highest in the region.
Raiffeisen Bank Aval, the Austrian bank’s local outfit, is holding up strong, boosting net income to $35 million in the three months to September, up 78 percent quarter-on-quarter.
Yet a loan to deposit ratio of 1.64 suggests that it would have to attract $10 in deposits for every $11 it lends going forward.
Indeed, this has been a problem for years already, as the National Bank of Ukraine has consistently refused to provide foreign-owned banks with refinancing, urging their parent groups in Europe to carry the burden.
Internal squeeze
In the wake of the 2008 crisis, Ukrainian banks saw the quality of their assets deteriorate considerably, explained Anastasia Golovach, macroeconomic analyst at Renaissance Capital, an investment bank. Desperate to attract deposits, many offered extremely high rates, at times topping 20 percent.
The problem, however, was what to do with the money. Government bonds, which offered high returns initially, soon became uninteresting. The banks found themselves with high costs on deposits and low revenue of loans – the medicine turned out worse than the sickness.
“Their core business simply became unprofitable,” Golovach said.
The big difference with corporate lending was tempo. Indeed, lending in this segment was renewed much slower than in retail. Moreover, many sectors enjoyed a good year, ensuring a number of reliable clients.
At present, however, local banking is being squeezed dry by a national bank determined to keep the hryvnia’s exchange rate fixed.
A combination of methods, ranging from stricter controls at exchange booths to dollar-indexed bonds, has been dedicated to micromanaging the amount of money available on the market.
The incessant auctioning of bonds, which often see no buyers, explained Golovach, is meant to keep banks from using any loose hryvnia to purchase dollars.
One effect has been that overnight rates, at which banks lend money to each other to balance accounts against possible shocks during the night, have shot up from a couple percent to more than 50.
Golovach claims this may have been the Ukrainian central bank’s plan – to bring in foreign capital to buy hryvnias and lend them overnight at lucrative rates.
The only problem, she points out, is that the central bank did not realize that foreign banks would have no money to bring.
Kyiv Post staff writer Jakub Parusinski can be reached at [email protected].
