You're reading: Erste’s Cetkovsky: Good times will come later than expected

Current high rates are unsustainable, says Erste Bank CEO in Ukraine Pavel Cetkovsky, and lending will not revive until they are brought down.

As a result, previously upbeat Western banks could limit their business in Ukraine.

Erste recently surprised the market by announcing it was considering the sale of its Ukraine operations. “We are looking at two basic strategies: the first is to keep things as it is and understand that the good times will come a bit later than initially expected,” explained Cetkovsky.

“The second scenario is to look at the market and to see what prices can be achieved,” Cetkovsky said. If an attractive price is offered, he added, the company would consider its options, both in terms of its current operations in the country and the group’s long term regional strategy.

Should Erste sell it would join a growing group of Western banks to move out or curtail their business in Ukraine. Even moneyed Russian banks, without the home market problems of European competitors, are putting plans on hold. Sberbank Rossii, which saw rapid expansion over the past year, announced this week it was looking to sell its Volksbank subsidiary based in Lviv, bought in February 2012, rather than integrate it in its business.

Ukraine’s banking sector has gone through several rough years. The “golden boom of retail lending” took place in the years after 2004, the Erste CEO said, when retail borrowing, mostly for mortgages and car loans, shot up. “Until 2008, this seemed a very profitable and fast growing area,” he explained.

But the segment was hit hard by the crisis and the subsequent hryvnia devaluation, Cetkovsky said. According to Erste’s estimates, up to 40 percent of transactions at the time were speculative, buying property just to flip it a year later at a profit and thus unsustainable once the bubble burst. “That business model collapsed completely,” he said.

Now the situation is moving back, Cetkovsky said, but until something changes and hryvnia rates drop, large-scale lending is probably not going to return.

Erste Bank CEO Pavel Cetkovsky

Having reached a critical mass in terms of size or regional presence, he said, most Western banks are staying in the market. The only difference, he added, is that they are now refocusing on the corporate segment, as was the case before 2004.

But firms, too, are dissuaded from taking out large loans at present rates. Foreign currency lending is banned for most companies, while rates in hryvnia are simply too steep.

“What we see in the market at the moment is that legal entities are taking the financing, but they are taking it mostly for working capital, to finance current production,” the banker said. “We see very little or close to no major investment projects.”

Credit quality erosion is also a major worry. A situation in which real interests rates above 20 percent, which started already three months ago, is not sustainable for a long time, Cetkovsky said. At first it was not so bad, he explained, but since the end of summer it has worsened dramatically.

Companies could traditionally rely on inflation to reduce their debt burden, he explained. Assuming revenues increased with price rises, a loan taken out a year ago under conditions of high inflation would see its real value crumble, even if the sum kept growing.

Right now, however, the lack of inflation means that companies end up paying a real rate almost equal to the nominal one, the banker said. Add the prospect of devaluation and you have a high risk that paying for a longer term loan is unsustainable for most businesses.

“For a legal entity, in industry or agriculture … if you want to take a loan at 20 or more percent, to finance a sowing campaign for instance, it is quite a lot of money. It means you margins have to be at least 20 percent,” Cetkovsky said.

“I want to believe that the situation is short term, and will not last for longer than a few months,” he added. “It’s very hard to imagine that Ukraine will be in the middle of 2013 with interest rates of over 20 percent and inflation as low as 5 percent.”

Kyiv Post editor Jakub Parusinski can be reached at [email protected].