EBRD on bank­ing sec­tor: ‘The bad guys are gone’

Kyiv Post - - Business - BY I LYA TIMTCHENKO TIMTCHENKO@KYIVPOST.COM The Eu­ro­pean Bank for Re­con­struc­tion and De­vel­op­ment's of­fice in Kyiv is shown in May 2014, when Ukraine's bank­ing sec­tor was fac­ing a melt­down. To­day, the EBRD says that the bad days are gone and Ukraine's bank

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 per- cent 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 sta­te­owned shares.

For ex­am­ple, the state-owned bank gov­er­nance law has to re­move Oschad­bank from the list of en­ti­ties that can­not be pri­va­tized.

In ad­di­tion, state-owned banks, 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 sta­te­owned 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?”

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