When Vasyl Klos plunked $9,000 into a bank branch in his hometown of Lviv,
Ukraine, in 2013, he assumed it was safe because it was German owned. He was
wrong.
Bank Forum JSC had already been sold by Commerzbank AG to Ukrainian
businessman Vadim Novinsky, a fact Klos only found out as he completed the
deposit. He decided it was too late to back out, but within a year, Forum was
declared insolvent and the cash was returned to him in hryvnia, whose later
plunge cut the value of his original deposit by about half. The experience has
left him poorer, but wiser.
“I’m not going to open any more deposit accounts until the economy
stabilizes,” said Klos, a 33-year-old field researcher. “And even then, I would
only put money in a foreign-owned bank.”
As if fighting a year-long war against pro-Russian separatists wasn’t
enough, Ukraine is also scrambling to shore up a banking system that’s bleeding
assets amid a tumbling economy, wavering talks with creditors about overdue
debt and skyrocketing inflation, which the central bank estimates will end this
year at between 45 percent and 50 percent. A run of liquidations has shaken
consumers’ confidence in the often mismanaged financial institutions they once
trusted to protect their money.
Insolvency Wave
Since 2014, the central bank has declared a quarter of the former Soviet
republic’s 180 domestic banks insolvent, liquidated 37 of them as of the end of
May and earmarked 36 billion hryvnia ($1.7 billion) for bailouts this year
alone.
Cleaning up the troubled banks, left with insufficient supervision for
years, has been a painful process as the country fights rebels in a conflict
that’s killed at least 6,400 and displaced 1 million citizens. Thousands of
Ukrainians and some oligarchs, such as egg magnate Oleg Bakhmatyuk and chemical
tycoon Dmitry Firtash, saw some of their assets vanish as banks were declared
insolvent.
The cleanup is needed to “rebuild people’s trust in banks,” said Anastasia
Tuyukova, an analyst at Dragon Capital investment company in Kiev. “This is a
step they should have made in 2008-2009, but didn’t.”
The reorganization is also designed to cut reliance on the public purse at
a time when the government is trying to restructure $23 billion in sovereign
debt.
The affected banks, ranging from small players to the country’s
fourth-largest, Delta Bank, have suffered from their inability to drum up
enough capital in the economy expected to contract 9 percent this year,
according to the International Monetary Fund’s forecast. Many of the smaller banks
only served affiliated businesses and ran into troubles when debtors didn’t
repay loans.
Bank Bailouts
Ukraine follows other east European nations that have had to bail out their
banks since the 2008 global financial crisis. Household lending in dollars and
a sharp hryvnia depreciation in 2008 during years of political turmoil has
caused the share of non-performing loans in Ukraine to soar.
Bad loans rose to 25.5 percent of the total of all loans from January to
April alone, compared with 19 percent at the end of 2014, the central bank said
on Thursday. The International Monetary Fund calculated the ratio of
non-performing loans was at 32 percent as of Jan. 1.
Ukraine and Russia both sustained too many lenders for the size of their economies while still often failing to provide
basic services to all, said Anastasia Nesvetailova, a professor at City
University London.
Yevhen Hrebeniuk, a financial sector consultant at the World Bank’s office
in Kiev, also pointed to similar events in Turkey and Indonesia, which
governments eventually overcame.
Bank Surfeit
“There was no particular good reason for Ukraine to have so many banks,”
Nesvetailova said by phone on Thursday. “A lot of them were either very corrupt
or implicated in strange economic activities.”
The crisis escalated last year when former President Viktor Yanukovych fled
Kiev, Russia annexed Crimea in March and the separatist insurgency in Ukraine’s
easternmost regions pitted Russia against the U.S. and the European Union in
their worst standoff since the Cold War. The conflict deepened the woes of an
already fragile economy and banking sector, Nesvetailova said.
“There are villages or small towns where there is absolutely no cash,” she
said. “People dependent on pension transfers or basic banking systems don’t get
it fulfilled.”
New Team
Premier Arseniy Yatsenyuk took power last year and picked Natalie Jaresko,
an American-born investment banker, to head the Finance Ministry. The task of
Jaresko and Valeriya Gontareva, who has chaired the central bank since June
2014, was clear: stabilize the economy and overhaul the banking system.
“Their back is against the wall now, they have don’t have an option, they
have to reform,” Nashwa Saleh, a London-based analyst at Exotix Partners LLP,
said in a phone interview on Thursday. “They also have the right technocrats in
place to undertake the reforms.”
Ukraine has so far compensated retail savers with about 50 billion hryvnia
through the state guarantee fund, representing about 10 percent of the
country’s annual budget revenue, Gontareva told lawmakers in March. Retail
deposits are covered up to 200,000 hryvnia per person.
Stress tests carried out last year showed a 66 billion-hryvnia capital
need. Still, there’s a “high chance” the government may not need to use all the
funds it earmarked for bailouts this year, central bank Deputy Governor
Oleksandr Pysaruk said in a May 22 interview in Kiev.
Delta Blues
The biggest case in the country so far was Delta Bank, the country’s
fourth-largest lender, which was declared insolvent in March after failing to
repay a 4.2 billion-hryvnia loan. The government declined to nationalize the
lender, saying its assets were of poor quality and it needed a 22
billion-hryvnia capital injection.
Banks owned by Yanukovych’s associates also haven’t been spared.
Nadra Bank, owned by billionaire Firtash, was declared insolvent in
February as its owner was detained in Austria pending a U.S. extradition
request. The request was rejected in April, allowing Firtash to leave the
country.
The list of failed banks also includes VBR Bank, run by Yanukovych’s son,
Oleksandr.
Other wealthy Ukrainians such as Bakhmatyuk, whose empire includes the
country’s largest egg producer, had his majority shareholding in VAB Bank wiped
out in insolvency proceedings. The bank was, along with others, taken over by
the Deposit Guarantee Fund for administration and is now being liquidated.
Foreign Lenders
Foreign lenders with Ukrainian units that include Italy’s UniCredit SpA,
Raiffeisen Bank International AG in Austria and Hungary’s OTP Bank Nyrt., have
also had to inject fresh capital to keep up their presence in the country.
Finding buyers for such units has proven a tougher option.
Authorities say the cleanup effort may be nearing its end more than a year
after it started.
“Just a few troubled banks remain,” Pysaruk said. “We are working
thoroughly with their shareholders to solve their problems.”
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