Seeking to ease pressure on the budget, the Ukrainian government is looking for ways to reduce its stakes in loss-making state banks.
At a roundtable on state asset development strategy held on Feb. 8 deputy Finance Minister Artem Shevalev said this was part of the state’s strategy to reform government-owned assets, which will be included in the new agenda for Kyiv’s cooperation with the IMF.
The Finance Ministry currently owns all of Oshchad Bank, Ukreximbank and a 95-percent stake in Ukragazbank. These are the country’s second, third and 11th biggest lenders respectively, and together they make up 30 percent of the banking sector.
While this percentage is even higher in some former Soviet republics, such as Belarus, where state-owned banks make up 60 percent of the banking sector, in more economically developed countries the percentage is generally less than 10 percent.
Such a high level of state ownership in the banking sector causes several problems, according to banking experts.
For one thing, Ukrainian state banks have been abusing their positions by offering loans to state companies and private banks that simply don’t make economic sense, and that lose them money, Deputy National Bank Head Katerina Rozhkova said at the Feb. 8 roundtable.
“This results in a need to re-capitalize the state-owned banks, which adds pressure to the budget and the country’s citizens – who are the ultimate owners of the state-owned banks,” Rozhkova said.
The large state-owned commercial banks are also used by politicians to curry favor with voters, both through bloated staffing levels and by granting cheap loans, while their ability to obtain state recapitalization in turn weakens these banks’ risk management.
For instance, in January the government approved additional financing for the two wholly state owned banks in 2016: Oshchad Bank and Ukreximbank together received Hr 15 billion ($578 million) worth of long-term government securities.
That was after the two state-owned banks racked up record losses in 2014 – Oshchad Bank lost Hr 8.6 billion ($546 million) and Ukreximbank Hr 9.8 billion ($622 million). Last year wasn’t much better – from January to September 2015 the banks reported Hr 5.4 billion ($250 million) and Hr 8.3 billion ($384 million) in losses respectively.
So to reduce this burden on state coffers, the Finance Ministry is trying to draw down its involvement in Oshchad Bank and Ukrexim Bank – by 2019 it plans to cut its stakes in them by 25 percent, while injecting revenues from the privatization into strengthening their balance sheets. In this way, the government is also trying to make these banks attractive to foreign investors.
But without an overhaul in the system of corporate governance at the state-owned banks, “the arrival of international, institutional or strategic investors is unrealistic,” Deputy Finance Minister Artem Shevalev said at the roundtable.
Still, Oleksandr Talavera from Sheffield University Management School said that the two largest state-owned banks “could be transformed into a strong competitor to (Ukraine’s largest privately-owned bank) Privatbank, which would be beneficial both to customers and to the banking system. Greater competition might result in cheaper loans and more efficient bank management,” Talavera told the Kyiv Post.
He added that “both banks are large, with extensive branch networks. In particular, Oshchad Bank, having inherited from Sberbank (the former Soviet State Savings Bank) one of the largest networks in Ukraine, is present in practically nationwide. Thus, it might be a good entrance point into the Ukrainian bank sector for a foreign bank that wants to have an established presence in all regions (immediately).”
Nevertheless, critics argue that privatization can’t solve all the problems of these state-owned assets.
“The sale of 25 percent will not solve anything; it just opens up (other sources of) capitalization for the banks,” said Ruslan Bondarenko, a financial analyst from the Reanimation Package of Reforms think tank. “The worst thing to do would be for us to place these institutions in an uncompetitive environment – we’d have hybrid monsters of government and international corporations.”
At the same time, Bondarenko said that Ukraine still needs state banks with some limited functions.
Kyiv Post writer Olena Savchuk can be reached at [email protected].
