Compared to its neighbours, Ukraine’s banking sector offers high profit margins, while consumer demand for innovative products is virtually untapped. As of September 2007, total deposits of commercial banks reached USD 49 billion, a 50% increase year-on-year. Meanwhile, individual bank assets are increasing steadily.
Foreign interest fuelling consolidation
With over 150 banks in operation, consolidation of the sector is far from complete. The banking sector is currently riding high on a wave of mergers and acquisitions led by European players. Austria’s Raiffeisen Zentralbank Group paid a record USD 1 billion for Ukraine’s second largest bank Aval Bank in 2005, spawning a tide of consolidation.
According to the Financial Times, foreign financial institutions now represent 30% of the banking market based on net assets, having tripled since the Orange Revolution. The share of foreign activity in Ukraine is highly encouraging considering that the share of foreign assets in Russia’s largely state-owned banking sector is only expected to reach 25% in five years.
Second-tier entry points
The relative lack of market consolidation has attracted a queue of foreign banks clamouring for entry into this lucrative market. This November, Stockholm-based SEB (Skandinaviska Enskilda Banken) announced its purchase of Faktorial-Bank for USD 120 million.
Following suit, Bank of Cyprus – the largest financial institution in that country – inked plans to buy 95% of AvtoZAZbank for USD 76 million.
Buy-outs of second-tier financial institutions fit well with foreign banks’ overall strategy to create stronger nationwide networks. For instance, SEB’s latest acquisition follows its purchase of Bank Agio three years ago, and will create a network of more than 110,000 customers.
Larger foreign-owned institutions are now in a favourable position to invest capital into smaller and medium-sized banks. This autumn, Greece’s Piraeus Bank gained a controlling share of International Commercial Bank for USD 75 million. Piraeus is also competing with rival National Bank of Greece for shares in Kreditprombank, which stands among Ukraine’s 20 largest banks.
Deals are expected to continue through the end of this year and 2008. Through a subsidiary, European giant UniCredit Group is moving forward to finalise the purchase of a controlling USD 2 billion stake in Ukrsotsbank, the country’s fourth largest bank by net assets. The Ministry of Economy hinted this month that Deutsche Bank may open a branch in Ukraine after its long delayed World Trade Organisation entry, which is now scheduled for 2008.
Inflation fears and subprime woes
Risks remain for the banking sector. Stimulated by record-high oil prices, inflation will soar to 14.5% this year according the Ministry of Economy. That means that many Ukrainians will be less inclined to stow savings in banks. The shrinking value of the US dollar also is creating headaches for Ukraine, which adheres to a tight peg to the greenback and holds over USD 22.3 billion in dollar foreign reserves.
Recently, international financial markets have been shaken by bearish forecasts for US economic growth as well as the sub-prime mortgage crisis. As Ukrainian financial institutions have increased borrowing, the current global situation has created a less than ideal external environment for Ukraine’s banking sector.
Ongoing global hiccups, however, will likely see top Ukrainian banks looking abroad to float shares on international markets. According to Concorde Capital’s Oleksandr Omelchuk, PrivatBank, Raiffeisen Aval, and Ukrsibbank could each achieve market capitalisation of around USD 3 billion.
Earlier this month, Moody’s praised Ukraine for “improving its financial fundamentals” but warned of structural weaknesses in the banking sector. Given political uncertainties, however, fiscal policy is unlikely to change. In October, Chairman of the National Bank of Ukraine Volodymyr Stelmakh indicated that the central bank may push forward measures to combat inflation by strengthening the hryvnia. With presidential elections in 2009 looming in the distance, enthusiasm for wide-scale banking and fiscal reform will by and large be kept at a minimum.
So far, investors have been virtually unshaken by Ukraine’s seemingly never-ending political turmoil.
As foreign bankers continue to enjoy steady growth in eastern Europe’s most lucrative market for financial services, Ukraine’s dynamic banking market remains a healthy prospect.
