After Ukraine’s central bank took over management of Forum, the country’s 25th biggest bank, on March 14, its clients got caught in a dispute between the financial institution’s current owner, billionaire Vadim Novinsky, and Germany’s Commerzbank, the former owner.
Novinsky’s side accused the Germans of rigging the bank’s balance sheet, which led to its ongoing financial problems. However, pre-acquisition due diligence conducted by global auditor PricewaterhouseCoopers did not show Novinsky that the bank was in poor condition.
PwC declined comment for this article. However, auditors worked with the figures provided by the company and came up with the conclusions to the best of their knowledge.
Both sides did not disclose the price of the deal, but several reliable sources who are bound by a confidentiality clause have said that Novinsky bought Forum in 2012 for $80 million. Oleksandr Morozov, acting head of Forum’s supervisory board, told the Kyiv Post that Novinsky’s Smart Holding paid only 20 percent of the amount as part of a gradual payment plan. However, when the new management uncovered serious problems with servicing liabilities, Novinsky refused to pay the remaining 80 percent.
Interestingly, Commerzbank bought Forum Bank for $600 million in 2007, when the nation’s banking industry was flourishing and Forum was its 10th largest bank. In 2009-2011, Forum lost $600 million, closing 20 branches throughout Ukraine and laying off 10 percent of its staff in 2009 alone.
Due diligence flaws began in 2007 when the German law firm Beiten Burkhardt completed an inspection of Forum’s legal records for Commerzbank. Forum’s finances were in disarray. Mykola Dolenko, a founding partner at KPD Consulting in Kyiv, who worked on Beiten Burkhardt’s audit of Forum Bank in 2007, told the Kyiv Post that there were significant problems with Forum’s records.
However, Dolenko emphasized, Commerzbank “understood the risks,” and was ready to take them on. A source close to the deal said that Commerzbank had received information that Forum would be the last large bank approved for sale to foreign buyers, and many believe that this may have driven Commerzbank to overpay for Forum. That was not the case since Pravex Bank was sold in 2008 to Italian banking group Intesa Sanpaolo.
Novinsky presumably purchased Forum in order to provide cheap loans for his Smart Holding Group that controls assets in the ore enrichment, steel and agriculture sectors. Forum was expected to become Novinsky’s third bank in addition to his smaller Unex bank, and BM, whose sale hasn’t been finalized.
After the deal with Commerzbank was inked, Forum chief executive officer Andriy Yatsyura said that he wanted to “bring the bank back to the list of the country’s top-10 banks.”
This was a daunting task. Forum had contracted considerably under Commerzbank’s leadership, and was only the 22nd largest bank by assets in 2013.
Smart Holding hired PricewaterhouseCoopers to audit Forum’s finances before completing the deal. PwC declined to comment on its pre-acquisition due diligence of Forum though Oleksandr Morozov of Forum, has been adamant that Commerzbank withheld documents from PwC’s auditing team: “The German management manipulated financial statements and concealed real figures on non-performing loans,” Morozov told the Kyiv Post.
A spokesperson for Commerzbank vehemently denied Morozov’s allegations.
The Ukrainian government can do little to rein in this chaos because it does not regulate due diligence. According to Ukrainian law, due diligence is the right of the buyer, but not an obligation.
In September 2013, Forum Bank filed a lawsuit against Commerzbank, and the case remains in arbitration. The Kyiv Post has sought comment from Commerzbank twice since March 2014. Both times, spokespersons declined to comment, citing the ongoing arbitration process.
However, it seems that Forum Bank is moving away from the precipice of collapse. Since taking over temporary administration of the bank, the National Bank has put Forum on the path to recapitalization.
For the last three months, the central bank has been seeking out investors to save Forum. On May 12, Smart Holding announced that Yernamio Consulting LTD had transferred $50 million to a special NBU account, confirming its intent to invest in Forum Bank. On May 21, NBU governor Stepan Kubiv announced that after receiving a second $50 million installment, the bank would be audited and recapitalized for investors and clients.
The Insider news website reported that, according to Kubiv, “only non-standard tradeoffs by depositors, investors, and the NBU can help bailout the bank.” Kubiv added that the Deposits Guarantee Fund will return deposits of up to Hr 200,000, or $16,800, to all depositors after the bank is recapitalized.
Since Kubiv took office on Feb. 24, five other banks have come under the NBU’s administration: Interbank, Promekonombank, Merkuriy Bank, Brokbiznesbank, and Real Bank. Vadym Berezovyk, the former chairman of Forum predicts that “now we have not just currency instability, but political turbulence that undermines client confidence…we will probably hear more news about the National Bank temporarily administering other banks soon.”
Forum bank reported a net loss of $67.4 million in the first quarter of 2014, while it had an income of $230,000 for the first three months of 2013. Its book value stands at $45.3 million, according to the bank’s financial report.
Kyiv Post staff writer Isaac Webb can be reached at [email protected] on Twitter at @IsaacDWebb
