Ukraine’s banking sector remains in a holding pattern following a crisis that saw depositors rush to withdraw cash in late 2008 and borrowers struggle to pay back U.S. dollar loans as the hryvnia plummeted against the greenback in the wake of the global financial crisis.
The Kyiv Post sat down with Steven Fisher, who recently arrived from Moscow to head Citibank Ukraine, to discuss what the Ukrainian authorities need to do to spur the banking sector out of its continuing malaise, how China could soon become a big player in Ukraine, and how Citi – which currently offers corporate and commercial banking services – is actively looking at starting a consumer banking arm.
KP: How would you compare working in Russia and Ukraine?
SF: When you’re doing banking, the same rules still apply. The Ukrainian market offers some advantages. It’s a smaller country so you can get to know your clients a lot faster. You can visit their operations faster. This allows you to quickly form a more holistic view of their overall needs and future directions. In general, I believe Ukrainian corporations are more open to working with foreign banks, especially since the crisis when lending significantly decreased.
KP: What will kick start lending?
SF: It’s starting to pick up. Most of the large banks have a lot of liquidity they’d like to employ. It’s a question of lenders finding the right opportunities. Now, we are seeing previously postponed expansion or capital equipment replacement plans being reinvigorated. Or, look at the agricultural sector. The key players are acquiring more productive land, and are seeking funding for acquisitions, and construction of silos and elevators for storage and transportation. That’s a good story.
The other story which isn’t good, but could be good, is that the steel sector is in deep morass. All of the restructurings need to be finished. There are competitive pressures mounting. There has recently been a significant amount of progress in corporate restructurings which make me believe that in 2011, most of the key players would be able to return to some form of normalcy in operations. With the recent upturn in the steel markets and progress in restructurings I refer to, 2011 should certainly be a better year for this sector. And accordingly, banks will again become more active.
Banks are just not acting as banks right now
KP: What should the National Bank of Ukraine be doing?
SF: The NBU should continue certain reforms. The remaining troubled banks have to be either recapitalized or liquidated. We would like to see the NBU support certain changes to the current legal procedures and methodology regarding bankruptcy and on provision of security to come closer to international best practices. This would support an increase in lending activity. At the minute it’s inhibiting making loans. Banks are just not acting as banks right now.
The NBU’s independence also needs to be addressed. I’m not sure we have that yet.
The deposit guarantee fund system should be reformed. This would introduce greater confidence into deposit making activity as well as reduce the costs the government incurs in providing the guarantee insurance.
Developing local capital markets infrastructure is also crucial. Currently, we can’t say there is any long-term borrowing market. This is important for project finance, for infrastructure projects and in general, for financing any intensive capital expenditure program with a longer payback period. The insurance and pension sector and the investment fund sector have to be improved to become a more integral part of the long term capital market infrastructure in the country.
KP: What can the government and the NBU do to support lending?
SF: First, they need to look at consumer lending. They have to revise how credit bureaus work. Banks aren’t required to submit certain information to credit bureaus, and credit bureaus aren’t allowed to share their information. Banks are requested to provide information only if it is negative, but why not also positive information? Greater and more complete flow of information can increase lending confidence.
Second, the basic rules concerning the provision of security need updating. If a bank wishes to lend to someone who wants to set up a new factory, the regulations don’t allow the lender to take security on an unfinished facility. This reduces the ability and flexibility of the potential lender interested in supporting such a project.
Third, the rules on bankruptcy have to be changed because creditor protection rights are not perfect. There are a lot of loopholes in the system which borrowers can use to delay procedures, or assets can be sold without having creditors involved.
KP: What’s your take on the current authorities and the much-trumpeted stability?
SF: Stability is a fact because enormous progress has been made in the past seven months. Ukrainian sovereign bond rates have rallied impressively in the last three months in particular although compared to other emerging market countries, they are still high. The newly approved International Monetary Fund program for Ukraine continues to be backed up by consistent Ukrainian government statements and actions.
There remain definite economic pressures though. Inflation and the pressure for the government to raise more money are two areas of continuing concern. It’s a tough act, but the IMF program approval was a key in maintaining international financial market confidence. For that to not have happened would have been a serious issue.It would have really set everyone back.
China’s a big player, doing a lot of investing. Russian money is good, but it comes tied. It’s a different game than the Chinese money. The Chinese money is larger, it’s cheaper, and it’s tied only economically, not politically.
KP: What are the risks that threaten this stability? Do you see any on the horizon?
SF: The main threat is the government bowing to various political, sectional, regional pressures to water down their commitment on IMF reforms. Second – spending needs to be cut. One of the risks is tax receipts. The government did well collecting revenues in the first half of the year, and there were some big one offs. The second half of the year is more challenging.
This country still has a lot of challenges both in terms of its current macroeconomic situation, the state of industry, the need for various reforms and very low level of foreign direct investment. Ukraine has achieved a period of stability right now, but no one should get too comfortable with that as its the initial stage out of a crisis and there’s a lot more that needs to be done and keeping the course is going to be tough.
KP: What do you think about Russia and China seeming to want to get more involved in Ukraine?
SF: We’re very excited about this. China’s a big player, doing a lot of investing. Russian money is good, but it comes tied. It’s a different game than the Chinese money. The Chinese money is larger, it’s cheaper, and it’s tied only economically, not politically. The Russian money is a little more complex and a little more focused. You can understand why, because they’re neighbors and they have a much larger agenda. The Chinese are looking to build business and I think they’ve been underrepresented in Ukraine, so think of the growth opportunities.
KP: What sort of projects will the Chinese be looking for?
SF: Oil development, rigs, telecom equipment, automotive. Agriculture could be very interesting. The steel sector, once it emerges from restructuring.
KP: What about foreign banks in Ukraine? There was a huge jump before the crisis, and many seem to have overstretched. What’s the future?
SF: I don’t believe we’ll see any new foreign bank acquisitions in the near future. Looking back, those that came in paid far too high premiums and found themselves saddled by a lot of problems and complexities that they didn’t expect. They are still in a stage of indigestion. If Citi wanted to expand, we’d do it organically rather than by making an acquisition.
KP: What are your aims at Citi? What do you want to change or do differently?
SF: I think we’re good at choosing our customers and procedures. We want to continue to be even more proactive members of the community. I would like to continue the growth of our local client base and increase our lending activity. We’ll do it in a measured way, but we’re definitely looking upward. We’re evaluating starting our own consumer retail bank here. No final decisions have been taken, but we’re actively looking at that. We’d do that from scratch, not purchase, and we’d bring in the latest in technology. Our consumer banking arm in Russia is large, and it’s a model we could use.
KP: Who are Citi’s main clients in Ukraine?
SF: Citi is the banking partner for most international companies doing business in Ukraine. If you look at the top 100 Ukrainian corporations, we’re very heavy in there. We’re working with 50 percent of them. That’s a conscious decision: We want to be working with the best firms in each sector.
KP: Is there any moment where will be more interested in small- and medium-sized enterprises?
SF: It’s a natural progression. We first work with the big multinationals. Then very quickly we expand into the key industrial sectors. We like to work with the top names. The next logical step is moving down to the SMEs. In some countries we work on the microfinance level. Finally, there is consumer lending, which is totally different.
