Ukraine’s modern banking industry was thrust into the spotlight in 2005 with the USD 1.028 billion purchase of Bank Aval by Raiffeisen Bank. It has not stepped out of the limelight since. 2007 is no exception, and as far as industry analysts and operators can determine, 2008 should be more of the same. Acquisitions by foreign banks, continued improvements to corporate governance and expanding product ranges to an increasingly sophisticated clientele are to be expected.
International acquisitions
Foreign companies are purchasing two particular types of Ukrainian banks. The first is the stuff of headline news, and the acquisition of a major bank occurs with regularity here. There are still banks to be bought, notes Valentin Zelenyuk, Chief Strategist and Banking Analyst at Kyiv’s Millennium Capital. “The largest of them all, PrivatBank, is still in Ukrainian hands,” he points out. “Also, the government-owned Oshchadbank and UkrEximBank could also be privatised.”
Though the previous government had publicly raised questions over the influx of foreign capital into the domestic banking sector, the incoming Cabinet might take a different view. “A transparent privatisation of Oshchadbank, with its extensive network, could be worth a couple of billion dollars,” Zelenyuk points out.
At the other end of the scale, more and more small banks are finding foreign partners and owners. Incoming banks find it more convenient to purchase a clean and practically empty bank than to work through the red tape of getting a new license. The tendency by small Ukrainian banks, though, has been to build branches in order to set themselves apart from the pack. “Quickly building a branch network may be unprofitable in the short term, but it does help attract buyers who want more than a license, so we’re seeing this happen quite often. Fleshing out ATM networks also helps, and that’s a noticeable trend as well,” Zelenyuk remarks. With lending rates that are often far beyond what is imaginable at home, there is still no shortage of potential buyers for the Ukrainian banker who puts in the effort to build up an organisation.
Bank branding
Though the wave of acquisitions will continue unabated through 2008, the problem for both foreign buyers and the Ukrainian bankers who are building their institutions is largely the same once it comes time to actually creating a profitable company. Despite the unsaturated market, how does a bank set itself apart, especially when some of Europe’s major competitors can be found down the street?
Russia’s Standard Bank has provided a general guide for the many banks in Ukraine that see consumer lending as a key to success. However, while Standard Bank has received a license in Ukraine, local startups have stolen a march on it and have already rolled out similar products.
One reason for the delay is that despite the close geographic proximity, a cookie-cutter approach to banking will not work within the region. Ukraine’s market responds best to a mixture of Russian and Central European campaigns, and local knowledge is a help as well. “While our basic approach is that of Standard Bank, we’ve taken some pages from Central Europe’s markets, especially from Hungary and the Czech Republic,” notes Vitaliy Masyura, Head of the Treasury of Delta Bank, which focuses solely on consumer lending. Rodovid Bank made a name for itself, among other ways, by co-branding plastic cards with mobile telephone operator UMC, now MTS.
Catering for consumers
Lou Naumovski, Senior Vice-President and General Manager of VISA International’s CEMEA Region, says that new possibilities for plastic card use are often picked up very quickly by banks trying to catch consumer attention. “Plastic cards first appeared here in 1988 and after independence the first financial institutions we saw in the region had great innovators, but poor bankers. Since then things have evolved. In August 2000, there were 2.5 million cards in the FSU, with 1 million in the Russian Federation itself, and in 2002 the first revolving credit cards hit the market. Nowadays, there are 66 million VISA cards alone in the FSU. It’s a differentiator, and I’d say that this has been an instrument for moving banks in the region away from acting like corporate treasuries.”
Valentin Zelenyuk sees the expansion of services beyond lending to be a key starting point in 2008 as well. “The savings potential in Ukraine hasn’t been exploited fully,” he says, “and though savings accounts have high interest rates, it isn’t quite enough. Alternatives such as mutual funds and private pension finds are now being rolled out. Ukraine’s banking clients have gotten over their distrust of banks and once they put behind them the memory of the 1990s collapses of what were termed mutual funds, the instruments should take off.” This is expected to be a feature of the industry in 2008, as Ukraine’s banking clients are becoming increasingly sophisticated.
Leading the transparency charge
Overall, banks have led Ukraine’s business community in terms of corporate governance. Because they were among the first companies to tap into the global finance markets as well as look for foreign buyers, outward-looking banks have been accustomed to dealing with the tasks that companies in many other industries are only now coming to terms with. “If you want a good example,” says Valentin Zelenyuk, “banking is the only sector where you can get financial statements on a monthly basis, not to mention detailed quarterly reports. Overall, and now in particular, banking is way ahead of other industries in this regard.”
Corporate governance as well as the capability of the staff will continue to rise through 2008. The expansion of consumer lending in particular has given rise to the importance of risk management – a term completely unheard of in the industry even a few years ago. Competition for well-educated employees will only strengthen. A stint abroad has always been helpful in landing a good job in the industry, but local education is on the rise. “When I lectured in Moscow in 1996,” says Shyam Mehta, a London-based banker now in Ukraine. “There was almost no knowledge of Western finance, but nowadays many students study for exams such as the US-based CFA.” A locally-educated young professional with foreign experience in risk management should have no problem in finding a job in Ukraine in 2008.
The sub-prime mortgage problem in the United States and the general world-wide credit crunch has had little direct effect on Ukraine’s banks. Nor should some of the factors that led to the collapse become issues here for a long time, despite a risk management culture that is only now beginning to mature.
“Ukraine hasn’t had a mortgage industry long enough to warrant prime and sub-prime lending as the US had,” Valentin Zelenyuk says, “so there’s little to collapse. Also, unlike Kazakhstan, the banks here didn’t engage in international borrowing to a great extent, so the tightening of credit hasn’t affected them. What we have seen is that foreign banks that were thinking of coming into Ukraine might have had their own issues to take care of, and others have taken a ‘wait-and-see’ attitude regarding expansion.” Once these are taken care of, Ukraine could well be in for another wave of acquisitions.
