After two years of indifferent performance, Ukraine’s bankers have renewed optimism that their struggling sector will finally begin to take off.
Political developments are the source of this optimism, with bankers hopeful the new government will ease conditions that have so long stunted the industry’s growth.
With the promotion of Ukraine’s former central bank governor to the post of prime minister, bankers are confident that now one of their own is in charge, things can only get better.
The appointment of Yushchenko, widely touted in the Western media as a reformer, was well-received by financiers throughout Ukraine.
‘Bankers were phenomenally unanimous in welcoming Yushchenko’s appointment,’ said Natalia Napadovskaya, spokeswoman for the Dnipropetrovsk-based Pryvatbank.
And two months later, the banks are seeing their confidence in Yuschshenko start to pay dividends.
Bankers were cheered in early February by the government’s decision to lower reserve requirements from 17 percent to 16 percent. The reserve requirement stipulates what percentage of total deposits the banks must hold in cash and other liquid assets. Although lower, the rate is still twice that required of banks in neighboring Poland.
All the same, the move resulted in a cash windfall for the banks of 1 percent of their total deposits, money that the banks can now put to use, according to Ruslan Piontkovsky, an analyst with the International Center for Policy Studies, a Kyiv-based think tank.
But further cuts in the reserve requirement are dependent both on Ukraine’s ability to sidestep default on its foreign debt this year, and the success of the government’s efforts to achieve macroeconomic stability, Piontkovsky cautioned.
Parliament achieved a key stage in achieving both those goals – the setting of an austere, zero-deficit budget for 2000 – in late February.
The budget was good news for commercial banks. For the first time in independent Ukraine’s history, the government says it will not rely on them to finance a budget deficit.
The banks are also hopeful that the government will make good on a series of other promises. The government has declared that it will no longer require the banks to credit loss-making industries, such as metallurgy and agriculture. That’s good news for the banks, who saw the level of bad loans rise in 1998 by 230 percent to Hr 1.7 billion, according to the U.S. law firm White & Case.
The government has also pledged to cease a practice that foreign experts claim has been an impediment to the industry’s development – the mandatory seizure of tax arrears from companies’ accounts in commercial banks.
A report released by the Harvard Institute for International Development in December last year cited the government’s use of banks as tax collectors, as well as weak bankruptcy procedures, as important factors slowing the development of the sector.
Many businesses, seeing banks as an extension of the state tax collection agencies, operate outside the banking system.
Pryvatbank’s Napadovska, while agreeing that the sector might see growth this year, was cautious about the government’s promises, which she said she had heard for the last three years. ‘Only time will show what happens,’ she said.
With Hr 19.9 million in profits last year, Pryvatbank is one of the major players in Ukraine’s banking market. Together with two other big banks, it controls almost a third of the industry’s total capital. Not that the industry is that big.
Economic mismanagement has stunted the industry’s growth for years, banking analysts say.
Total bank capital was slightly more than Hr 5 billion at the turn of the year, or some 4 percent of gross domestic product, according to Piontkovsky. In contrast, the figure in central European countries is closer to 40 percent, and in the West it is as high as 80 percent.
According to White & Case, seven of Ukraine’s 162 commercial banks control more than a half of the industry’s funds, most of the other banks being tiny in comparison.
Some 24 banks struggled last year to meet the NBU’s lowest limit for capital – 1 million euros or slightly under Hr 6 million.
Eight foreign banks are active in the country only to service corporate clients.
Bankers say the industry is not growing simply because it’s not profitable to be a bank in Ukraine. First and foremost, the banks are lumbered with a poor public image.
Millions of Ukrainians saw their bank savings wiped out by hyperinflation in the first years of independence. And in 1998, when the hryvna declined sharply in value in the wake of the regional financial crisis, banks locked their doors on angry mobs of depositors desperate to withdraw their dwindling savings.
To be fair, the banks were also victims of the crisis – losing a third of their total capital, according to White & Case.
But the public’s mistrust of the sector is deep. According to some surveys, only 12 percent of the population used the services of a bank last year. Deposits from individuals account for only a third of the banks’ total deposits, compared to two thirds in country’s with more developed banking sectors, according to Piontkovsky.
Neither have the banks been helped by the effective removal of one of their main sources of income – government treasury bills. When the government failed to make a repayment on its T-bills in 1998, the market collapsed and has yet to revive.
Throw weak bankruptcy laws and a ban on the use of land as collateral into the mix, and it becomes obvious why the country’s banks lent just Hr 11 billion ($2.4 billion) last year, a mere 9 percent of the value of Ukraine’s GDP, according to White & Case.
The industry did manage to record a combined net profit last year, thanks to currency trading. But the near 60 percent slump in the value of the national currency meant that these hryvna profits actually represented a loss in dollar terms.
