Banks have a constant need for financial resources to expand their business.
The country’s booming banking sector is eager to attract additional funding in order to realize plans for expansion. And while large Ukrainian banks have been successful in acquisition deals with strategic investors, some of the country’s midsized banks are seeking additional equity funding by way of offering their shares on stock exchanges.
Banks have a constant need for financial resources to expand their business. But traditional sources, such as individual and corporate bank accounts, are no longer satisfying the sector’s needs. Financial institutions are thus tapping into alternative sources, such as emitting corporate bonds, entering international markets to raise funds via syndicated loans, credit notes, Eurobonds and asset securitization.
According to banking sector insiders, these alternative sources require banks to pay returns according to fixed terms. Emitting shares, in contrast, provides a way of attracting cheap financial resources without strict time limitations.
Analysts and market insiders point out that in the economically-advanced West, the emission of shares by banks is mostly connected with mergers and acquisitions due to a more developed banking system in these countries. In Ukraine banks normally offer shares on the stock market with the aim of attracting new sources of funding.
According to Shyam Mehta, a senior investment banker with Millennium Capital, a Kyiv-based investment bank, of a total of 173 Ukrainian banks, 18 are publicly traded, all on the Ukrainian stock market.
Mehta said that one of the advantages of a local listing is that existing shareholders can buy shares from or sell them to other local investors more easily. Another benefit is that banks listed on the stock exchange will have greater opportunities to accumulate and allocate capital in Ukraine, thus fueling the country’s general economic growth.
“If a bank or other company has its shares traded on a local Ukrainian market, it becomes easier for people in Ukraine to benefit from owning shares,” said Mehta.
According to Yuri Kamenetsky, director of the investment department with Ukrgazbank, investors are currently interested in the shares of no more than 10 banks in Ukraine, the shares of which are most actively traded on the organized Ukrainian stock market.
Admitting that investor interest in a bank’s shares is always a signal of growth, which in turn positively affects a bank’s rating, Kamenetsky emphasized the crucial role of a bank’s transparency when it decides to go public.
Ukrgazbank, operating on the Ukrainian market since 1993, is rated 17th among Ukrainian banks in terms of equity capital and has from 8 to 10 percent of its shares traded on the PFTS, the Ukrainian Stock Trading System.
“Any public placement of securities could be successful if the issuing company sticks to the principle of transparency before its potential and current investors,” said Kamenetsky.
He added that success on the public markets can only be insured by a high level of corporate culture – relations between the investors and a bank’s management. So far, this culture is still underdeveloped in Ukraine, he said.
According to Denis Gorbunenko, chairman of the board at Rodovid Bank, a midsized Ukrainian bank in terms of capital stock, apart from the quest for additional equity funding, another aim pursued by the midsized banks offering their shares for public trade is to increase publicity and obtain a market estimate of the bank’s value in line with global economic principles.
“Ukraine’s banking system cannot be separated from the global economic community. Today Ukrainian banks understand they need to be overt, transparent and public,” said Gorbunenko.
Rodovid has been operating on the Ukrainian market since 1990. In April 2006 the bank placed around 19 percent of its shares on the PFTS.
Meanwhile, lawyers point out that certain obstacles continue to exist for Ukrainian banks when it comes to the public trading of their shares. These barriers include regulatory restrictions and imperfect legislation that partially restrain banks from expanding by placing public shares.
“For example, if a bank is planning a transaction with 10 percent or more of its shares, it must obtain approval from the National Bank of Ukraine,” said Natalia Selyakova, head of the banking and finance group with Salans, a full-service international law firm.
“This procedure also applies for transactions on the secondary market and, as a rule, takes several months to complete,” she said.
She also noted the factor of bureaucracy, saying that reports on a bank’s 20 largest shareholders, including audited financial reports and other documents, are required under different NBU regulations before a bank is allowed to place shares on the stock market.
Nevertheless, analysts and banking sector insiders predict the rapid development of the Ukrainian financial sector in the short term. The expansion of the banking sector will be fueled by the growth of consumer crediting, mortgage lending, the payment card industry and Internet banking. Furthermore, the entrance of additional strategic investors in the coming one to two years is expected to seriously facilitate competition on the market.
“When this sector experiences growth, there is a corresponding rise in the value of the business and thus of the shares,” said Kamenetsky of Ukrgazbank. He said that foreign investors are welcome in the Ukrainian banking sector, but they better act quickly. Kamanetsky said that opportunities currently exist to purchase abundantly available undervalued assets in the sector, including shares, which will soon cost dozens of times more.
