Banking sector insiders say that retail banking and especially retail lending are growing very quickly
Fueled by the population’s growing purchasing power, strong demand for real estate,along with a moderate inflation rate, the Ukrainian credit and loan market has been experiencing unprecedented growth in retail banking, with the gap between private and corporate lending diminishing sharply.
The major tendency observed in the bank lending sector is a growing demand for loan products driven by the appetites of retail customers and high-value financial instruments for the corporate segment, which is generally expanding with the economy.
Banking sector insiders say that retail banking and especially retail lending are growing very quickly in significance in Ukraine. Car and mortgage loans represent the largest share in the demand-driven consumer lending market.
According to the National Bank of Ukraine (NBU), in 2005 Ukrainian private individuals obtained bank loans in the amount of Hr 33.5 billion ($6.7 billion). In 2006 this figure amounted to Hr 78.5 billion ($15.7 billion) – more than doubling over the course of a year.
The rate of lending to private individuals grew by 28.6 percent since the beginning of this year. In the first five months of 2007 alone, private individuals obtained bank loans totaling Hr 101 billion ($20 billion).
By contrast, corporate crediting has been growing at a lower rate, but the volumes remain much higher. This is leading to a constantly dwindling gap between the two types of lending. In the first five months of 2007, corporate clients took out loans for around Hr 193 billion ($38.6 billion) with a growth rate of 16 percent since the beginning of the year.
“Our clients want to live today, not tomorrow. They are prepared to sacrifice today for tomorrow’s dream. So they will pay higher loan prices and buy that vehicle or apartment or vacation already today,” said Marcin Dyczak, head of Product Development and Marketing with Alfa-Bank (Ukraine). His bank has been operating in Ukraine since 2001 and represents the powerful financial arm of Alfa Group, the large Russia-based industrial and finance consortium controlled by Lviv-born Mikhial Fridman. Dyczak added that bank-loan clients are the primary reason the retail banking market is booming.
According to Dyczak, the average growth rate of sectors such as retail consumer lending, including car loans and different types of mortgages, has totaled 60-80 percent in the last five years in Ukraine.
“That means that market volumes are almost doubling every year,” said Dyczak. He said that growth will eventually slow down as the market matures, but for the next three to four years retail lending will continue to grow in Ukraine.
“Those banks that manage to prepare the retail lending infrastructure today will be tomorrow’s winners,” added Dyczak.
According to Oleksandr Slobodyanyk, head of the strategy and development department with Nadra Bank, a full-service bank operating in Ukraine since 1993 and rated among Ukraine’s 10 largest banks in terms of assets, another important trend observed on the lending market is its maturity in terms of the substantial changes that have occurred in the product range that customers are demanding and ready to accept.
This means that Ukraine’s leading banks are currently not only competing by offering different products, as was the case several years ago, but are also beginning to take into account a complexity of market success factors, including the convenience of their products, quality of their services, customer opinions, pressure from competition, and others.
“For instance, in retail lending it is not enough to just offer a product, for example, a car loan. To expand your market share in this segment you have to offer more attractive features of your product than those offered by your competitors (for example, longer maturity terms for the loan, better repayment options, and so on), and offer better processing and servicing procedures as well,” said Slobodyanyk.
“And most customers will pay higher prices for a product that does not require them to waste time in applying to a bank, waiting for its response, running into problems with future repayment procedures, and so on.”
Industry insiders say that expectations concerning the quality of services offered corporate clients looking for bank loans are also constantly growing.
While some Ukrainian banks still service only corporate customers, others are beginning to understand that they can offer their clients more value-added products in such areas as trade finance, project and structured finance, cash management and other sophisticated modern corporate finance facilities.
“A lot of advanced corporate customers have appeared in the market lately,” said Slobodyanyk.
“Due to the further globalization of the Ukrainian economy, many corporate customers, especially from middle-sized and modern companies are ready to understand the specifics of such products and ready to pay for them.”
Concerning the growing potential of bank lending in Ukraine, industry insiders agree that another important source for expansion of bank lending in the country is the small and medium-sized business (SME) sector.
“The share of small business within domestic GDP will grow significantly in the nearest future,” Slobodyanyk said.
“And taking into consideration the very low level of satisfaction of customer needs in this area, it brings enormous opportunities for the banks in this market.”
Today only a small number of banks are treating SME customers as an absolutely separate segment requiring a separate product range and individual approaches to services, said Slobodyanyk, adding that SME clients are involved in both the corporate and consumer lending sectors.
Among the problems that currently exist within the country’s lending sector, market insiders mentioned the absence of an official inter-bank credit infrastructure, which means the absence of credit bureaus that study the credit history of banking clients, and a limited number of Ukrainian banking databases with information about a potential client’s reliability.
Another problem is the low levels of official incomes that are reported by the population, since some Ukrainian employees still obtain their salaries partially “under the table” so that employers avoid paying benefits and taxes.
As a result, banks are unable to evaluate a client’s true paying capacity when determining whether it is safe to honor a loan application.
Concerning a general forecast for the lending sector in the nearest future, Slobodyanyk said the sector can expect further growth, although volumes will gradually fall.
He said to expect about a 20 percent average annual growth rate for the next five years for corporate loans, and a growth rate of about 50 percent for retail and SME customers. He said that quality in this sector will improve with increased competition between domestic and foreign market leaders.
