Bankers Talks in Difficult Times
The 2015 Ukrainian Banking Forum, as arranged by CIS bankers, took place on October 29-30 in Kiev. The professional discussion revealed painful but nevertheless extremely important challenges bankers and its clients have been facing of late.
In his opening remarks Viktor Yushchenko, the third President of independent Ukraine, dwelled on the recent macroeconomic situation, which is the most difficult one since 1996. He emphasized that the banking system has to demonstrate initiatives on its part. “Ukraine is now experiencing historical maximums of economically negative developments – the highest inflation rate, the deepest devaluation of the national currency – 320%, the highest level of unemployment for 24 years”, he said. The economic recession of 14% and 11.7% fall in GDP are historical maximums. Moreover, the annual outflow of investment from Ukraine is USD 2-2.5 billion, and the sovereign debt increased by 88% in the last 12 months. Mr Yushchenko also noted that one third of deposits outflow from commercial banks is not a sectoral problem, but a problem of the government’s economic and financial policy. There is no doubt that the banking system cannot function normally without financial stability in the country. “The war is not a reason for financial destabilization”, he summed up.
Yaroslav Sovgyra, associate general manager of Moodys, gave a briefUkrainian banking sector outlook from the perspective of the international rating agency. He pointed out that Ukraine’s sovereign rating is at the lowest point at the moment as the country is formally at the default position. As practice shows such countries that found themselves in a situation of post-default are able to renew access to capital markets within a few years. This is the reason why existing access to international funding is critically important for Ukraine at the present time. Among traditional weaknesses that affect the rating, Mr. Sovgyra sounded the low level of international liquidity and weak institutional capacity of governmental authorities – low institutional policy. In terms of prospects, Moodys predicts that the level of non-performing loans will increase and could cross the 40% threshold, while the share of restructured loans may constitute 20-25%. In order to increase its rating the banking system requires serious recapitalization. Meanwhile, a cut in credit rates is the logical way to re-launch lending in the country. In general, according to the estimates made by Moodys, the Ukrainian banking system will remain unprofitable next year.
Having analyzed the banking strategies in terms of crisis, Sebastian Rubaj, deputy CEO of FUIB, stated that many banks have carried out exit strategies and left the country. These were some big banks that got into problems with their liquidity and portfolio policy. The second strategy, as the banker said, is a freeze, which means waiting for stabilization. The third one is consolidation and it could be a good opportunity to acquire good assets. And the last one is entering moderate growth and using the opportunity to find a niche on the market either in short-term lending or in the transactional business. Sharing brief insights into the merger between the FUIB and Renaissance Credit Bank, Mr. Rubaj noted that there was all the rationale for the acquisition during times of prosperity time and currently this is a strategy of merger focused on operational efficiency and consolidation of the balance sheet in the equity base. He named business synergy; consolidation of the business model and consolidation of the equity base (as currently the task for banks is strengthening the equity base); obtaining growth opportunities; working for unified database for corporate and retail customers and identifying cross-sale opportunities as being among the major pre-requisites for the merger. “Merger during crisis could be compared with driving a boat in a storm and, at the same time, replacing the engine”, he said. Among the preconditions of the business match were FUIB’s strong corporate business foundations with a complete business model including investment banking, treasure operations, processing center, acquiring business, etc. Renaissance was called a mass market player with well-established and convenient financial products. The “perfect match” became visible in completeness of the unified offer and unified network of brunches. The recent outcome of the merger includes doing the same business with much less resources; keeping the market share in retail lending; reducing operational expenses for running retail business. And the current task, which is not visible for the final customer, is an operational and system merger. “It is a quite complicated task as their architecture was quite different in nature”, concluded the banker.
Sergey Budkin, managing partner of FinPoint, drew attention to the fact that in 20 years there have only been three mergers in the Ukrainian banking sector (FUIB with Dongorbank and then Renaissance Credit; Ukrsotsbank and UniCredit) and all these mergers were controlled by shareholders. Moreover, the merger processes lasted for years. That is why the speaker does not share the opinion that small banks have to merge to overcome the crisis. In his predictions about the Ukrainian banking sector for the next 5 years, Mr. Budkin paid particular attention to several banking groups. In particular, in his opinion VTB Bank will decrease its portfolio and optimize its business in Ukraine. The expert assumes that VTB or Alfa-Bank can adjoin Prominvestbank (branch of Russian VEB, which is currently under sanctions). UniCredit Group is currently undergoing huge transformations and is widely discussed to sell its retail operations in Austria. “The general course on reducing its presence on foreign markets may entail the group’s exit from Ukraine”, the speaker noted. Raiffeisen Group is experiencing problems with capital and resulted in a reduction of assets in the number of countries, including Russia and Ukraine. At the same time, while Russia is traditionally a profitable market that generated about 50% profit, Ukraine has been a non-performing asset for the last couple of years. In Mr. Budkin’s expert opinion, the group will look for exit opportunities. Greek banks are under the pressure of the European regulator, which requires them to leave non-profitable markets and, eventually, they may also leave the country. “I guess that something revolutionary might happen with PrivatBank”, he said, and added that the bank will be divided either in insistence of the regulator or it could be restructured by its shareholders. In his mind, it would be divided into conventional retail and corporate banks. Therefore, over the coming 5 years the trend of foreign banks to exit the country may continue, excluding those foreign banks as Citi and ING that were initially focused in the corporate segment.
In his comments on the current situation, Volodymyr Lavrenchuk, CEO, Raiffeisen Bank Aval, believes that the market share of a bank will depend on its capital, as banks are currently experiencing a dramatic shortage of capital. He sounded the figure of UAH 100-150 billion as being the sum of this shortage. The competition for capital will prevail in the near future, in his opinion.
Tamara Savoshchenko, CEO at UniCredit Bank, assumes that quite a few banks may leave the market – both small and big ones. She is confident that those banks where shareholders will be capable of meeting the requirements of recapitalization may survive.
By way of conclusion, all the speakers agreed that the banking sector could turn around and demonstrate stabilization in one fundamental case when the general situation in the economy shows some signs of stabilizing.
