Dutch bank becomes major financial player on nation's market
rket as a representative office, ING Bank, a major global banking institution, opened ING Bank Ukraine in 1998 as a fully‑fledged commercial bank. Today, with over 70 employees, ING Bank has grown to become one of the most successful Dutch companies doing business in Ukraine.
As a representative office, ING Bank entered the trade finance market and managed to close a number of deals. ING Bank said that it was the trade finance area, together with the potential that the bank saw in Ukraine’s investment and commercial banking sectors, that convinced it to open its banking branch in Ukraine.
“Before opening as a bank, we had procured a number of trade finance deals in commodities, but we could not book them in Ukraine,” said Hans Broucke, deputy board chairman and head of corporate banking at ING Bank Ukraine. “As a result, in 1997 we decided that Ukraine had strong potential for business and started working on opening a fully functional bank.”
At the beginning of its banking operations in Ukraine, ING Bank said that commodity finance and investment banking dominated its activities. It said that the Ukrainian government became one of the major clients for the bank’s investment banking arm following the 1998 financial crisis, when the government needed to restructure its sovereign debt.
Broucke said that the government continued to use ING Bank’s investment banking services until 2000. After that, no additional debt restructuring was needed, and investment banking work subsided as a result.
“However, in a number of years the situation might change, and we will be ready to start offering such services in the future,” Broucke said.
ING Bank also began offering custody services, which involves safekeeping and registration of securities. ING bankers say the custody services business has been growing steadily since the bank opened in 1998.
“The custody business has also been steadily increasing, and it holds strong potential for the future,” said Hans Abma, deputy board chairman and chief operating officer at ING Bank Ukraine.
“We are the market leader in the custody segment. The market itself, however, is relatively small,” Broucke said. “Custody depends directly on the state of investment activity in Ukraine … If the financial sector picks up and new instruments are introduced, our business will certainly grow.”
However, the bank said that its fastest growing area has been corporate banking services, which includes accounts management, cash services, as well as lending activity, letters of credit and guarantees.
Broucke said one factor that accounts for the steady growth of commercial banking area is the increasing share of Ukrainian companies in ING Bank’s portfolio.
He said that early on, the bank concentrated mostly on multinational companies working in Ukraine. However, as ING Bank acquired experience and increased its commitment to the market, it began to approach Ukrainian blue‑chip firms, and business in this segment has been growing ever since, contributing to the overall increase in corporate banking.
“We consciously changed our strategy and started actively pursuing Ukrainian clients. It represented a deliberate strategy change on our part, because we understood that in order to succeed in Ukraine, we have to work with local companies,” Broucke said.
“For example, two years ago, only 10 percent of our loans went to local companies. Now that number has climbed to 30 percent, and we expect the trend to continue.”
Broucke said that the multinational market is a highly competitive one and multinationals know where they can go to get the best rates, since they are backed by the guarantees of their parent companies. Meanwhile, Broucke said that while Ukrainian firms present a higher risk to the bank, they are more attractive in terms of profitability.
Despite the competitive market, Broucke said that ING Bank has managed to draw an increasing number of multinationals, which has given a boost to its corporate banking business.
Broucke said that Dutch companies constitute a relatively small proportion of ING Bank Ukraine’s international clients. He said this was because there were a small number of 100‑percent Dutch‑owned companies in Ukraine.
“Dutch companies are our natural clients, because we most likely have relationships with these companies in the Netherlands. However, there are very few pure Dutch businesses in Ukraine,” Broucke said.
He said, however, that judging by foreign direct investment figures, the Netherlands would become the most active investor in Ukraine.
ING Bank said that while it is trying to develop its business in Ukraine, a number of factors still constrain the bank’s activities and limit further growth. These factors are not unique to ING Bank and are common issues that limit the development of Ukraine’s financial sector, bankers say.
One factor cited by bankers is a lack of transparency due to Ukraine’s poor accounting disclosure requirements. They say the problem is made worse by Ukrainian accounting standards which are incompatible with international accounting rules.
Poor financial disclosure has led to higher lending costs, since a lack of information has forced banks to spend money on doing detailed due diligence and auditing in‑house.
“Processing a credit application in Ukraine is quite expensive, since we have to do our due diligence, look at the creditworthiness of a company, the quality of management, the market environment, and the industry in general. We perform a very in‑depth risk analysis before we commit,” Broucke said.
Experts say that poor disclosure has also limited the development of Ukraine’s capital market, since a lack of reliable information has made investor wary of investing in local firms.
“We currently see a growing appetite not only from Ukrainian firms but also from subsidiaries of international firms to raise capital on the Ukrainian market. However, this positive tendency is constrained by the undeveloped state of Ukraine’s capital markets, which to a large extent is due to poor disclosure standards,” Broucke said.
“Poor disclosure also prevents even large Ukrainian companies from raising capital abroad, because most firms currently cannot comply with these requirements,” he added.
ING Bank said that another problem with regulation is the lack of adequate insurance laws, which prevents the bank from actively starting an insurance business in Ukraine.
“The insurance business is a major part of our business worldwide, but the current lack of legislation … keeps us from opening this business in Ukraine,” Abma said.
“Despite slow progress, Ukraine will follow other Central and Eastern European countries in pension reform and insurance, then we will be ready to enter that market,” he added.
“That will be good both for our business and for the Ukrainian economy as a whole. Insurance will take care of the well being of Ukrainian citizens, as well as channel savings from under the mattresses into the economy.”
However despite the drawbacks, ING Bank managers said that they are bullish about their prospects in Ukraine and see potential in virtually all areas of the bank’s business.
“We expect the corporate banking business to continue growing steadily, and we are happy with this growth rate,” Broucke said.
“The corporate banking business has been consistently growing, and we expect this tendency to continue … this lack of volatility allows for the healthy development of our business,” Amba said.
“In addition to corporate banking, we are also optimistic about investment banking prospects in Ukraine,” said Broucke. “There are an increasing number of Ukrainian companies, as well as subsidiaries of multinational firms, that are interested in raising capital locally through bond issues, and we expect to gain a large share of this investment banking business.”
ING Bank already has investment banking experience with corporate bond issues in Ukraine.
Last fall, the bank served as a consultant and co‑underwriter for a Hr 85.95 million bond issue placed by Kyivstar.
