Pri­vat­bank’s En­gin Ak­cakoca: Con­di­tions not ripe for lend­ing

Kyiv Post Legal Quarterly - - Contents - By Josh Koven­sky koven­[email protected]­post.com

For most Ukraini­ans, eco­nomic life is still hard.

But for En­gin Ak­cakoca, head of Pri­vat­bank’s su­per­vi­sory board and a long­time ag­i­ta­tor for re­form of Ukraine’s fi­nan­cial sec­tor, there’s a clear so­lu­tion to im­prove pros­per­ity.

“This gov­ern­ment’s ad­her­ence to fis­cal dis­ci­pline, which will be sup­ported by the ap­pli­ca­tion of pru­dent mone­tary pol­icy by the (Na­tional Bank of Ukraine), cou­pled with the re­newal of co­op­er­a­tion with the (In­ter­na­tional Mone­tary Fund), will def­i­nitely re­sult in a stronger Ukraine and hap­pier Ukrainian cit­i­zens,” he told the Kyiv Post.

These days, the 67-year-old Ak­cakoca is mostly oc­cu­pied with bring­ing Pri­vat­bank into fis­cal health be­fore 2022, when the lender is set to be pri­va­tized.

But broader con­cerns over a spate of un­passed leg­is­la­tion meant to for­tify cred­i­tor’s rights and re­design the over­sight of state-owned banks has him wor­ried.

“Ev­ery amend­ment to the laws that were aim­ing to im­prove the rights of the cred­i­tors to im­prove were never fi­nal­ized prop­erly,” he said. “If the cred­i­tors are not pro­tected ad­e­quately, lend­ing will not start in Ukraine. Maybe this is a very sig­nif­i­cant com­ment, but in sim­ple terms it is this: If I, as the lender, am not sure what is go­ing to hap­pen to my mort­gage, I will not lend.”

Pri­vat­bank risks

Pri­vat­bank’s na­tion­al­iza­tion has sparked a bat­tle to re­turn $5.6 bil­lion that was stolen from the lender’s cof­fers, al­legedly by its for­mer own­ers, Ihor Kolo­moisky and Gen­nadiy Bo­golyubov.

The bank has filed a $2.5 bil­lion law­suit in Lon­don, as well as smaller cases in Ukraine and Switzer­land. The lender also sued Big Four au­di­tor PWC in Cyprus, ac­cus­ing it of mis­ap­prais­ing col­lat­eral used to se­cure in­sider loan agree­ments by which the cash was al­legedly ex­tracted.

Im­me­di­ately af­ter the na­tion­al­iza­tion, Pri­vat en­gaged Kolo­moisky in ne­go­ti­a­tions to col­lat­er­al­ize some of the re­lated-party lend­ing agree­ments through Roth­schild & Co., the in­ter­na­tional fi­nan­cial ad­vi­sory group. Those talks fell apart within months. “There was no com­mon un­der­stand­ing be­tween the two par­ties,” he said, be­fore adding that the bank “is try­ing to do its best to re­coup the losses that the bank pre­vi­ously in­curred.” Other risks face the bank. A law­suit from Pri­vat­bank eu­robond hold­ers that were bailed in dur­ing the na­tion­al­iza­tion have filed an ar­bi­tra­tion law­suit in Lon­don, which could cost the bank up to Hr 15 bil­lion ($532 mil­lion) in the event of a loss. Ak­cakoca de­clined to com­ment on that is­sue.

But yet an­other chal­lenge is that of Pri­vat24. As the coun­try’s mostad­vanced on­line bank­ing sys­tem, it con­tin­ues to process a plurality of pay­ments in Ukraine.

But the plat­form — though a big ad­van­tage to the bank — faces cru­cial is­sues in that cer­tain soft­ware on which it re­lies be­long to out­side or­ga­ni­za­tions, cre­at­ing vul­ner­a­bil­i­ties given al­leged ties be­tween those own­ers and the bank’s for­mer man­age­ment.

Ak­cakoca said that the bank in­tends to de­velop its own soft­ware to re­place the sys­tems, con­ced­ing that that may cause “court cases in the fu­ture.”

“Look, if you have any soft­ware that you bor­row or rent, or you bought from third par­ties that you may have dif­fi­culty main­tain­ing in the fu­ture, you have to de­velop your own at some point,” he said. “You have to de­velop your own ar­chi­tec­ture.”

Pri­vat plan

The lodestar of Pri­vat­bank’s fu­ture is a strat­egy for the bank, ap­proved by the Cabi­net of Min­is­ters in April. The plan en­vi­sions the bank be­ing sold by 2022 to a pri­vate in­vestor.

Ak­cakoca em­pha­sized that he made “no seg­re­ga­tion” be­tween a po­ten­tial for­eign or Ukrainian in­vestor.

The essence of the plan is to pump up the bank’s re­tail bank­ing com­po­nent by in­creas­ing lend­ing and ex­pand­ing Pri­vat’s in­fra­struc­ture around the coun­try.

For ex­am­ple, the bank plans to raise the num­ber of ATMS it has around Ukraine to 200,000 from its cur­rent num­ber of 166,000.

Lend­ing presents the trick­i­est part of the plan. The same prob­lems around cor­rup­tion, rule of law, and ac­count­ing stan­dards that pre­vent for­eign in­vest­ment in Ukraine also cur­tail wide­spread lend­ing.

At the same time, open­ing up Pri­vat­bank’s loan port­fo­lio to the Ukrainian econ­omy could pro­vide a real boon to the coun­try’s busi­nesses. The $5.6 bil­lion stolen by the for­mer own­ers was si­phoned out through in­sider lend­ing agree­ments; un­leash­ing that cap­i­tal to pro­duc­tive in­dus­try could be a game-changer for Ukraine.

Ak­cakoca said that he be­lieves that large loans to huge cor­po­rate clients are more likely to go bad than those to small and medium-sized busi­nesses.

“For a banker, it's eas­ier to ex­tend a whole­sale loan, a big ticket item, but it's eas­ier for it to be­come a bad as­set,” he said. “So we de­cided to be se­lec­tive in cor­po­rate bank­ing.”

“Cor­po­rate for us is big ticket items,” Ak­cakoca said. “As long as it’s in line with our rules and pro­ce­dures and un­der­stand­ing of risk man­age­ment and as long as it pro­vides syn­ergy to the bank, we will be in it.”

He added that while the agri­cul­tural and me­tal­lur­gi­cal sec­tors in Ukraine are the most in­ter­est­ing, for­eign-owned com­pa­nies would likely hold the most prom­ise for fu­ture loan agree­ments.

“In de­vel­op­ing coun­tries, when you talk about this kind of a strat­egy for cor­po­rate bank­ing, nat­u­rally for­eign com­pa­nies rank num­ber in your tar­get mar­ket,” he said. “That does not ex­clude the Ukrainian com­pa­nies as long as they fall into the con­di­tions.”

Though the 2022 plan will dic­tate Pri­vat­bank’s de­vel­op­ment un­til then, Ak­cakoca said he would be open to an of­fer from a suit­able in­vestor. “To­day’s cash is more valu­able than to­mor­row’s cash,” he said. At the same time, state own­er­ship presents pe­cu­liar is­sues for the long­time pri­vate lender. In many coun­tries, state-owned banks make loans that ben­e­fit the pub­lic in­ter­est, but may not nec­es­sar­ily be prof­itable on the open mar­ket.

Ak­cakoca said that there had been “no pres­sure” to un­der­take di­rected lend­ing.

”And I am very happy of that be­cause we have a com­mon un­der­stand­ing with the ma­jor share­holder that if we have state risk in the bank it may make it dif­fi­cult to pri­va­tize it by the end of 2022,” he said.

An­other risk is that of the 2019 pres­i­den­tial elec­tion. With the bank’s for­mer share­holder said to be back­ing the Ukrainian op­po­si­tion, many ob­servers have come to see Pri­vat­bank as a po­ten­tial bar­gain­ing chip, depend­ing on the elec­tion out­come.

But when asked what role the pres­i­den­tial elec­tion would play in the bank’s fu­ture, Ak­cakoca de­murred.

“Sorry, I don’t un­der­stand English,” he joked in lieu of a “no com­ment.”

In­ter­na­tional fi­nan­cial in­sti­tu­tion emis­sary

A na­tive of Tur­key, Ak­cakoca has decades of ex­pe­ri­ence in the fi­nan­cial sec­tors of emerg­ing mar­kets.

Be­fore join­ing Pri­vat­bank, he worked as an ad­vi­sor to the IMF. He helped de­velop a pack­age of leg­is­la­tion to re­vamp Ukraine’s fi­nan­cial sec­tor, el­e­ments of which are cur­rently slouch­ing through the Rada.

The main piece is a bill in­tended to fur­ther strengthen cred­i­tor’s rights, partly by im­prov­ing col­lat­eral re­quire­ments and re­mov­ing ob­sta­cles to le­gal set­tle­ments.

An­other piece of leg­is­la­tion aims to re­vamp the man­age­ment of Ukraine’s state-owned banks. Backed by the IMF, the bill in­tro­duces changes to the lenders’ boards of di­rec­tors that makes them more in­de­pen­dent, and at­tempts to bring their cor­po­rate gov­er­nance in line with in­ter­na­tional stan­dards.

It’s an im­por­tant move: since the De­cem­ber 2016 na­tion­al­iza­tion of Pri­vat­bank, state-owned banks in Ukraine have come to ac­count for more than half of the coun­try’s mar­ket share.

The Rada passed the bill on July 5. Poroshenko has not yet signed it into law.

Say­ing that the changes were “pend­ing the pres­i­dent’s sig­na­ture,” Ak­cakoca added: “And I hope that sig­na­ture will be ob­tained as soon as pos­si­ble.”

(Cour­tesy)

Pri­vat­bank Su­per­vi­sory Board Chief En­gin Ak­cakoca said that the con­di­tions do not yet ex­ist in Ukraine to restart lend­ing, in part due to stalled cred­i­tor pro­tec­tion leg­is­la­tion.

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