Even though Ukraine’s banking sector was in the throes of crisis only three years ago, the European Bank for Reconstruction and Development is optimistic about its future.
The international financial institution, which invests in emerging economies, sees no signs of any future banking crisis as bad as the one the country faced right after the EuroMaidan Revolution that toppled President Viktor Yanukovych in 2014.
From 2014–2016, Ukraine’s central bank — the National Bank of Ukraine — applied long-overdue shock therapy to the sector and quickly liquidated more than 90 unviable banks.
“We’re not looking at another crisis. We’re actually looking at a significant improvement in the banking system and an increase in lending, and new lending to normal private companies,” Alexander Pavlov, the head of EBRD’s financial institutions operations in Ukraine, told the Kyiv Post during an hour-long interview.
“A lot of banks are coming out of the crisis actually much stronger, much better, more efficient, and their risk appetites have started to increase.”
Pavlov expects the banking sector to become one of the drivers of Ukraine’s economic recovery. And even if the country does face another economic crisis like the one in 2014–2016, any damage to the banking system will be much less serious, as most pocket banks — banks used by owners to finance their own businesses — have now been closed.
“The bad guys are gone, that’s it,” Pavlov said. “They are not present in the banking sector right now. Everybody now is trying to do normal banking business — watching over risks, profitability.”
Today there are 81 banks that are operating in Ukraine.
Pavlov expects that some more banks will be liquidated, as some are not sustainable.
“There are still too many banks in this country, but it is not a critical situation,” Pavlov said. “The stress test the NBU is performing now on a regular basis shows a much stronger and more robust banking system in terms of organization, funding, foreign exchange, and risk management.”
From state to private
The priority now is to reform the state-owned banks through privatization.
Today the main challenge is to transform the state-owned banks — Oschadbank, Ukrgazbank, Ukrsibbbank, Ukreximbank and Privatbank — which are responsible for more than half of the market.
The top three priorities in reforming Ukraine’s state-owned banks are: good corporate governance through the establishment of an independent supervisory board, internal optimization, and the creation of lending programs targeting at the real sector of the economy and not other state-owned enterprises.
In Ukraine, the EBRD has run 406 projects and has invested over $12.5 billion into Ukraine’s economy since 1992, a substantial part of that into the financial sector. One of its traditional approaches has been to use banks as intermediaries to finance various economic sectors, typically targeted at small and medium companies or energy efficiency projects, and partnering with such banks as OTP Bank, ProCredit Bank, and Oschadbank.
EBRD is also a shareholder in three banks in Ukraine: Raiffeisen Bank Aval, Ukrsibbank, Megabank.
Together with other major international organizations, it is also helping the government to reform the state-owned banks and is involved in drafting legislation to restructure state enterprises.
State reform
So that they do not require more recapitalization from the state, the state-owned banks will have to become financially sustainable and be run on a commercial basis. In the long-run, they will be privatized.
“The state does not really need banks and the government should use other means of transmitting their loans and financial resources to the economy,” Pavlov said.
The government submitted its state-bank reform legislation during the beginning of this year and it was approved in July. But Ukrainian President Petro Poroshenko has yet to sign it.
“That remains basically the key element of permission needed to begin the actual reform,” Pavlov said.
Once approved by the president, the law will require state-owned banks to have independent supervisory boards that will oversee the privatization strategies of the banks.
Based on how well the reform goes, the EBRD might purchase shares in Oschadbank itself.
The EBRD has been eyeing bank assets for a while in Eastern Europe. On Oct. 2 it purchased a 41 percent stake in Moldova’s largest bank, Agroinbank, with the aim of bringing more transparency to Moldova’s financial system, which has been recovering from a $1 billion fraud case, according to Reuters.
The financial organization has been collaborating with Oschadbank for the last three years, providing technical assistance and a $50 million trade facility for lending to smaller enterprises.
But first, the EBRD needs to see some crucial legislative changes before it or any other credible investor can start purchasing the state-owned shares.
For example, the state-owned bank governance law has to remove Oschadbank from the list of entities that cannot be privatized.
In addition, the state-owned bank, rather than being recapitalized from the state budget, should be under the wing of the Deposit Guarantee Fund, which makes sure that depositors have some form of guarantee.
“Right now their deposits are fully guaranteed by the state, this is definitely an element that sets the bank apart from the rest of the competition,” Pavlov said. This will also benefit the fund, as state-owned banks will pay fees for insuring their depositors.
“It’s not normal for a country to have banks that have a different kind of deposits status while working with the same types of clients,” he said.
EBRD’s collaboration with Oschadbank has been a “journey,” as it is not a quick process to reform a bank of such size, he said. There have been significant and positive changes in the bank, including in its approach to management.
But the two parties still have some disagreements regarding priorities.
“Do you want to become the number one bank in the country, or do you want to be the most efficient bank in the country,” he said. “People in banking in Ukraine still like to think in terms of being the number one, the biggest bank in the country.”
State pocket banks
For years, like other state enterprises, state-owned banks have operated as cash cows for corruption. Oligarchs, officials and politicians would use them to finance their businesses, and when the banks turned in poor results, they would be recapitalized from the state budget — or taxpayers.
“That’s the whole point of reforming the state-owned banks,” Pavlov said. “The reason why these traditional state-owned banks have suffered in previous years was that they were not operating on a fully commercial basis… and there have been loopholes in place that allowed practices which were not fully compatible with proper risk management practices.
“But since the EuroMaidan Revolution we’ve seen a major change in the government’s attitude toward running the state-owned banks, and a lot of work has already been done and improvements made so that this kind of thing won’t continue.”
To fully reform these banks will take years. For example, Pavlov predicts that Oschadbank will take anywhere from five to 10 years to prepare for privatization. The state-owned banks will have to adopt proper management systems and retrain employees to stamp out abuses and corruption.
“Is it go going to be the same semi-Soviet monster, requiring a lot of attention from everybody all of the time, or is it going to be a normally functioning, growing commercial bank, making money for all of the stakeholders?”
