Ukraine's banking sector has been transformed in the last 18 months. A wave of foreign banks have bought many of the country's biggest lenders, often in fierce bidding competitions.
The prices west European banks are willing to pay worry some observers, but as Julian Evans reports, the sector is growing so fast that there should be plenty of room to make money, and the foreign-owned players have the advantage of a ready source of capital.
One of the brightest spots in the Ukrainian economy is the banking sector, which has attracted almost $4bn of foreign capital in the last 18 months, as foreign banks paid sometimes surprisingly high prices for Ukrainian banks.
The wave of deals began in October, when Raiffeisen International bought Aval Bank, the country's second largest bank by assets, for $1bn.
Herbert Stepic, chairman of Raiffeisen International, says: "We've really gained momentum strategically with the acquisition of Aval. It gives us an ideal position in the retail market, with 3.4m customers and 1,373 branches."
Raiffeisen's obvious confidence in Ukraine encouraged other banks, says Ivan Levkivskiy, head of debt origination at Ukrsibbank: "The deal set a benchmark for the market which other banks wanted to follow."
Ukrsibbank, the third largest bank by assets, was next to be bought in December, after a hot bidding contest involving Erste Bank, Société Génerale, BNP Paribas and Hungary's OTP Bank. BNP Paribas emerged the winner, paying $349m for a 51% stake.
Next, oligarch Viktor Pinchuk sold his Ukrsotsbank, the fifth largest bank by assets, to Banca Intesa for $1.16bn, after another intense bidding battle with other European banks.
In March, Crédit Agricole stormed into the market, buying Index Bank, the 21st largest bank, for $257m.
Now, it looks like OTP has finally managed to get hold of a Ukrainian bank, with sources suggesting it is the likely winner of a bidding battle for Raiffeisen's 100% owned Ukrainian subsidiary, Raiffeisen Ukraine.
Raiffeisen decided it was too complicated to merge the subsidiary with Aval, and was clearly attracted by offers of up to $500m for the bank. "We can make a substantial capital gain on it," says Stepic.
Natalie Jaresko, managing partner of private equity firm Horizon Capital, says she expects two or three more acquisitions by foreign banks — she points out that Erste Bank has yet to get hold of a Ukrainian bank, and several Greek banks, including Eurobank EFG, have said they are in the market to buy.
Only a few attractive targets remain. The country's biggest and most profitable bank, Privatbank, is still owned by Ukrainian shareholders, but it does a fair amount of related party lending, and would need a lot of work.
Finance and Credit Bank is a possible target, as is Nadra Bank. The owners of the latter bank are considering selling a stake to portfolio investors through a private placement, which is a path both Forum Bank and MegaBank have taken in the last six months, each raising around $20m.
And foreign banks haven't just been buying Ukrainian banks, they have been fighting tooth and nail for them.
For example, Erste Bank incurred the wrath of Raiffeisen by coming in to bid for Aval when Raiffeisen was already in the closing stages of negotiations, driving up the price by hundreds of millions of dollars.
Raiffeisen paid around four times book value for Aval, which is steep by CIS standards, but low by Ukrainian standards.
By contrast, Intesa paid over six times book value for Ukrsotsbank, and Crédit Agricole paid an amazing seven times book for Index Bank.
Some investors think foreigners might have got carried away in their eagerness to get hold of assets. Jyrki Talvitie, manager of East Capital's Eu330m financial institutions fund, says: "There's huge hype in the Ukrainian banking market. The danger is foreign buyers' expectations will then be extremely high, and if banks are not able to perform well, you'll have very unhappy investors on your hands."
He adds ruefully: "Investors who don't know the market well but have a lot of money are bad news for us. They lead to unrealistic price expectations."
So what is so attractive about Ukrainian banks? "Foreign banks are realising Ukraine is the biggest country in Europe, with a very undeveloped banking market and huge potential," says Ivan Levkivskiy of Ukrsibbank. "The Orange Revolution perhaps also contributed to foreign banks' interest. It showed them that we exist, and that we can stand up for ourselves."
In contrast to the Russian banking sector, there is no Sberbank in Ukraine, no state-owned banking monopoly to scare off competitors. Most of the top 10 banks are or were owned by private Ukrainian businessmen, in stark contrast to Russia, where the top three banks by assets are all state-owned.
The government and the central bank, unlike the Russian central bank, are also happy to let foreign banks dominate the sector (as long as they are not Russian).
The retail lending market is particularly rich terrain for foreign banks, because it is so undeveloped. There are estimated to be just $173 of retail loans per capita, compared to around $1,000 in Poland or $2,000 in Slovenia. And the market is growing fast. Natalie Jaresko says: "Just 18 months ago, there was practically no consumer finance. Now, there are four or five big players."
Banks that used to be mainly commercial banks are rapidly expanding their retail lending portfolios.
Erik Naiman, head of financial analysis at Ukrsotsbank, says: "We expect that by June, our consumer loan portfolio will be bigger than our corporate loan portfolio."
Such is the lure of the consumer lending market that some top managers from Ukrsibbank left in April to set up a specialised consumer finance bank called Delta Bank. "The reason is simple," says Levkivskiy. "The effective rates for consumer loans are much higher than for corporates, at around 40%-45%."
With loan portfolios growing so fast, banks with deep-pocketed foreign parents will have a clear advantage in protecting their capital adequacy ratios.
Naiman at Ukrsotsbank says: "It will be difficult for those without a strategic partner, because banks like ourselves can get easy access to tier one capital through our parents. We aim to raise up to $1bn of capital from Intesa in the next four years."
In the debt markets, too, banks with a foreign owner have a clear advantage.
"It's certainly easier for us to raise capital, thanks to our partnership with BNP Paribas," says Levkivskiy at Ukrsibbank. "There are all the ratings upgrades, and just their logo on our offering circular is a good sign for investors."
Fitch upgraded Ukrsibbank from B- to BB- following the Paribas takeover and Moody's also rated it B1, the country ceiling.
But domestically owned banks say they can compete. Nickolay Udovychenko, deputy chairman of Ukreximbank, the largest state-owned bank, says: "Competition will be stronger in the banking sector, that's for sure. But Ex-Im is ready to compete. We improved our capital adequacy ratios, partly through subordinated debt offerings and partly through direct capital injections from the state. We believe the government will support us in the future."
Besides, as Ukrainian bankers point out, they were doing well enough before the foreigners arrived. Assets have grown 40% over the last three years, and among the top 10 banks, asset growth is at over 100%.
And they are making good money — Privatbank, for example, was last year the first Ukrainian bank to make a profit over the $100m mark. But long term, the bank may have trouble competing with foreign banks.
At the same time, foreign banks might not find it that easy. Raiffeisen, for example, lost most of the senior management of Aval after its acquisition.
Russia's state-owned Sberbank and Vneshtorgbank, both of which have bought mid-tier Ukrainian banks in the last 12 months, may face obstacles from the central bank. It is concerned about them using their banks for political purposes, which is a sign of how bad relations with Russia have got. And all foreign banks are going to be under pressure to make a return on their investments quickly, which could be hard in an economy only growing by 2%-3% a year.
If the trend for the last 12 months has been foreign acquisitions, then the next 12 months may well see a wave of acquisitions and mergers by Ukrainian banks. There are 165 banks in the country, and smaller ones will have to band together if they are to compete with foreign-owned banks.
"There's been no real banking consolidation acquisitions," says Levkivskiy. "It's not very easy, because of the bureaucracy. It's always difficult to be the first to do something in Ukraine."
Consolidation may be slow, but in general, the sector is changing very quickly, and it has been completely transformed over the last year by the arrival of so many foreign banks.
In fact, one could say that, of all the changes since the Orange Revolution, the developments in the banking sector have been the most encouraging. One hopes the rest of Ukraine will follow the sector's lead.