Stakes rise as Ukraine looks towards Europe

  • 13 May 2005
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Last year's disputed presidential elections and the triumph of Viktor Yushchenko have given Ukraine new visibility in foreign investors' eyes. West European banks, in particular, are keen to capitalise on Ukraine's bright prospects. Kathryn Wells examines what this will mean for the country's banking sector.

Ukraine's Orange Revolution of December 2004 raised the country to a level of global prominence that few could have imagined. The new government of President Viktor Yushchenko has begun its tenure with the strongest possible support and goodwill from the international community outside the Commonwealth of Independent States, and has set Ukraine on a course towards eventual EU membership.

The peaceful way in which the opposition presidential candidate and his supporters challenged the rigged elections and managed to bring about a re-run impressed millions of television viewers around the world, as they watched pictures of orange-clad protesters in the streets of Kiev and other big cities.

Ukraine's economy is also the fastest growing in Europe — GDP rose by around 12% in 2004.

Ukraine's Top 10 Banks by assets (March 6, 2005)
RankBankAssetsMarket shareEquity capital
7Raiffeisenbank Ukraine$836m3.64%$67.1m
Source: Association of Ukrainian Banks

But as the novelty of the new regime wears off and Ukrainians begin to demand the political and economic change that politicians have promised, investors, too, will be watching closely to see whether the country's progress lives up to expectations.

"In 2005, everyone is excited about Ukraine," says Nickolaj Udovichenko, deputy chairman of the board at Ukreximbank in Kiev. "There has been a logical period of time to overcome questions arising from the new government, to define real targets. It was very positive that the government was able to reach and get approval for the 2005 budget. It looks a little bit optimistic, but we believe that the government knows how to get it completed. They are making many efforts to find additional sources of budget revenues and reduce unnecessary spending."

For Ukraine's banks, the next year is likely to be a turning point. The banking system appears to be healthy, but analysts say there are vulnerabilities, and that it will need to rise to a new level of sophistication if it is to support and profit from Ukraine's present growth.

And recent economic and political developments are bringing the banks into the sights of acquisitive Western financial institutions.

"There is a lot of money in the banking system right now, as banks have regained clients' confidence," says Serhiy Shvets, head of fixed income research at Ukrsotsbank in Kiev. In January, banks had Hr8bn ($1.6bn) in their accounts with the National Bank of Ukraine; by February that had risen to Hr15bn ($3bn).

But as Shvets adds: "At the moment banks are hesitating from crediting the economy. There are various theories about why this is, for example that they are waiting to see about reprivatisation."

Banking bonanza
The Ukrainian banking landscape could be altered very soon, if Austria's Raiffeisen Bank reaches a successful outcome in its talks with Aval Bank, Ukraine's second largest bank with $2.2bn of assets.

Raiffeisen is interested in buying up to 100% of Aval. And other banks are also thought to be considering Ukrainian acquisitions, including France's BNP Paribas and Société Générale.

Virtually any of the country's top 20 banks could be up for grabs. "By the first half of 2006, I believe that we will see a different face to the Ukrainian banking sector, with many changes in the top 10," says Andrey Snegirev, chairman of the management board at Alfa Bank in Kiev. "Ukraine needs a breakthrough in this field of activity. Once one foreign player is successful in buying a Ukrainian bank, that will create a benchmark. At least two top 10 banks could change shareholders this year. Starting next year, the Ukrainian banking sector then becomes much higher profile for strategic and even portfolio investment.

"If a deal happens by May or June, then things will start moving. Otherwise it will become a play for portfolio investors, who will look at buying 10%-15% of the top 20 banks."

The banking sector's traditional emphasis on corporate lending is being challenged by the emergence of consumer lending, as disposable incomes soar.

This poses challenges to banks such as Alfa, which had previously served the needs of large corporate clients. "In order to diversify, Alfa Bank will penetrate more deeply into medium sized companies," says Snegirev. "The banking sector is competitive for the country's largest clients. Although the largest Ukrainian banks are shifting more and more to retail, competition increases from foreign players, who can offer big syndicated facilities. We will also go in a more aggressive way into retail and consumer lending." 

EBRD forecasts investment boom
The European Bank for Reconstruction and Development is rethinking its strategy for Ukraine, and is expected to announce new plans around the time of its mid-May annual meeting, this year in Belgrade. Kamen Zahariev, the bank's director for Ukraine, tells EuroWeek how the EBRD views recent political and economic developments, and points to some of its new strategies.

What is the EBRD's opinion on recent developments in Ukraine?
There is a tremendous opportunity for more true foreign investment. We also expect various elements of the investment climate to improve.

There have been plenty of positive noises from the government and from foreign investors, but so far we have not seen any really large foreign investors coming in. This is natural. The government needs to sort out its priorities relating to privatisation, reprivatisation, import and export tariffs and so on first.

In the medium and longer term, there needs to be more significant reform of the legal and judicial framework. Necessary reforms include a new joint stock law, the abolition of the commercial code and priority given to the civil code, and a new bankruptcy law. The joint stock company law is especially important as this would include minority shareholder provisions.

How strong is Ukraine's banking sector?
There is now an onslaught of foreign banks looking to enter the Ukrainian banking sector. There is some movement towards consolidation, although this is not yet a trend.

But the banking sector is still vulnerable, as it is undercapitalised and there are currency and maturity mismatches.

What are the EBRD's plans Ukraine?
We are moving into municipal lending without a sovereign guarantee. Our first such deal, with Dnipropetrovsk, was originally planned with a guarantee, but then we decided to go ahead without it. This will create a benchmark in terms of pricing and conditions.

We are also looking at developing instruments for local currency lending, which will eventually lead to the EBRD issuing in local currency. But first, we need backup lines in place with local banks in local currency, to use for lending to our existing clients, before we issue in hryvnia ourselves.

Are you concerned about the hryvnia appreciating?
There are conflicting signals coming from the government on hryvnia appreciation. The Ministry of Economy is quite bullish, but there are certain dangers if too much inflation leads to a drop in GDP growth. Our understanding is that the National Bank of Ukraine will remain in control and will not allow spikes. 

  • 13 May 2005

All International Bonds

Rank Lead Manager Amount $m No of issues Share %
  • Last updated
  • Today
1 JPMorgan 132,387.73 545 8.30%
2 Citi 123,981.47 487 7.78%
3 Bank of America Merrill Lynch 105,093.26 413 6.59%
4 Barclays 99,545.40 383 6.24%
5 HSBC 81,053.20 424 5.08%

Bookrunners of All Syndicated Loans EMEA

Rank Lead Manager Amount $m No of issues Share %
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1 Bank of America Merrill Lynch 11,525.35 30 7.25%
2 BNP Paribas 8,422.96 46 5.30%
3 UniCredit 8,389.55 43 5.28%
4 Deutsche Bank 8,298.69 30 5.22%
5 Commerzbank Group 7,837.68 40 4.93%

Bookrunners of all EMEA ECM Issuance

Rank Lead Manager Amount $m No of issues Share %
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1 Morgan Stanley 4,425.28 19 11.23%
2 Goldman Sachs 4,006.06 15 10.16%
3 Citi 3,527.84 22 8.95%
4 JPMorgan 2,809.08 19 7.13%
5 UBS 2,241.39 12 5.69%