PrivatBank has come a long way since its nationalization, but it still faces challenges and still wants its money back.
When the National Bank of Ukraine (NBU) took over in 2016, the lender was facing collapse. There were $5.5 billion missing from its balance sheet. Independent forensic auditors said a large-scale, orchestrated embezzlement had taken place.
Without passing judgment, courts in the U.K. have since agreed, recognizing that “fraud on an epic scale” occurred at the bank. Proceedings continue.
In 2016, the NBU and Finance Ministry pointed their fingers at the former co-owners, oligarchs Ihor Kolomoisky and Hennadiy Boholyubov. They strongly deny all wrongdoing.
State-owned PrivatBank has tried to move on, but it has not been easy.
Gontareva and PrivatBank
“Nobody could imagine the magnitude of what had taken place at PrivatBank,” said former NBU Governor Valeria Gontareva. “We saw that 97% of the loan portfolio was related-party lending,” she said, referring to the practice in which a bank’s owner funnels money into connected businesses.
According to Gontareva, it turned out that the PrivatBank loan portfolio was actually more like 100% insider lending: “It was a Ponzi-like pyramid scheme,” she said. The bigger picture was even more concerning, with some 20% of banks in the country being used only for money laundering.
The country faced economic collapse, she says, largely because of the alleged fraud going on inside PrivatBank, where a third of the country’s privately held deposits were banked, and half of all the country’s business transactions were taking place.
Bleak picture
“It was real chaos,” she said. “When I saw the real picture (of the Ukrainian banking system) it was a shock.”
“We had to start from scratch,” remembered Gontareva, who described the NBU of that time as an “old monster” in a state of chaos and in need of plenty of upgrades.
“We immediately started to do reforms,” she said.
The first issue she tackled was the fixed rate policy, which she replaced with a floating exchange rate. This had been repeatedly requested by the International Monetary Fund. The next step was the liquidation or nationalization of unreliable banks.
Getting justice for banks and taxpayers who lost out during this period of rampant bank fraud was more difficult, however. “It looked like we couldn’t punish anyone. It was a fairy tale that the NBU could control these banks,” she said, “Corruption was everywhere.”
She described the 89 banks shuttered under her leadership as “empty shells” used by oligarchs and fraudsters to steal money from Ukrainian citizens.
In total, there were $15 billion in recapitalizations due to non-performing loans, and there is still a large amount of legacy non-performing loans (NPLs) throughout the banking sector, many at PrivatBank.
NPLs cannot be resolved without rule of law, said Gontareva, who added that despite thousands of cases being filed with law enforcement by the NBU, nobody of significance has been brought to justice.
She blamed the lower courts in Ukraine and two prosecutors general for this: Viktor Shokin and his successor Yuriy Lutsenko. “Totally ineffective and totally corrupt,” said Gontareva.
Throughout this chaotic time, however, one bank stood out as just too big to fail: PrivatBank.
Better times
PrivatBank did not collapse. It is now the most profitable bank in the country, accounting for 60% of profits in the entire banking sector.
“We are the third-largest taxpayer in the country,” said a spokesperson, referring to dividends paid back to the state. “90% of the profit – which is more than Hr 11 billion ($460 million) – PrivatBank paid to the state as dividends.”
But reaching this stage, from the point of near-collapse back in 2016, was a challenge. It was a difficult path of cleanup, reform and constant improvement.
Artem Shevalev, deputy chairman of the supervisory board at PrivatBank, said that the biggest change was setting up proper risk control structures, which did not exist at the old PrivatBank, where most loans went to related parties without any risk assessment processes.
“An efficient corporate governance structure was also put in place, which ensures that accountability and transparency are enshrined in all processes,” he told the Kyiv Post.
As for restoring confidence in the bank’s customers, who witnessed an orgy of banking fraud and near economic collapse only a few years ago, Shevalev says clients are feeling more secure now.
“The bank has been fully capitalized by the state, whilst the new management ensures the bank is operated profitably and efficiently,” he said.
“To put it simply, regardless of the NPL portfolio left by the previous owners, PrivatBank is both fully equipped to be the best and most advanced transactional bank in Ukraine, but also fully prepared to support Ukraine’s economic recovery through responsible lending activities.”
At the same time, PrivatBank wants its money back, and litigation efforts inside and outside of Ukraine are continuing actively.
“We are making sure that we recover as much value as possible from that NPL portfolio, which can then be returned to the Ukrainian taxpayers through dividend payments,” concluded Shevalev.
Looking forward
Anna Samarina, the acting CEO and chair of the management board at PrivatBank, says that reform and independent oversight at the bank has been vital.
“The major change was the introduction of adequate corporate governance, with the independent supervisory board at the top,” she told the Kyiv Post. “As a result, the bank’s risk management and compliance functions have been introduced (pretty much from scratch) and this made it possible to obtain good results…”
As for repairing customer confidence in PrivatBank, Samarina says that government support is extremely valuable, but internal policies were overhauled too.
“The interests of clients at leading banks are usually guaranteed by proper investment policies, strong compliance procedures and clear rules in the area of client relationships,” she said.
Samarina spoke with the Kyiv Post shortly after temporarily stepping into the shoes of PrivatBank CEO Petr Krumkhanzl. She does so at a challenging time in which the bank finds itself under increased pressure and harassment from its former owners.
Krumkhanzl was hospitalized following a reported heart attack that took place on Nov. 23 amid ongoing protests by workers from the Kolomoisky-owned Nikopol Ferroalloy Plant at PrivatBank’s headquarters in Dnipro.
The acting CEO is confused about why they are targeting PrivatBank and she has strong words for the protest organizers.
Workers of the Kolomoisky-owned Nikopol Ferroalloy Plant rally in front of the PrivatBank headquarters in Dnipro on Sept. 23, 2019. “PrivatBank didn’t pay its debt to us. Who’s next?” the sign says. (Ukrinform)
“We are not a party to the settlement agreement between the NBU and the Nikopol Ferroalloy Plant,” she said, in a rebuke to protesters, who blame PrivatBank for unpaid salaries.
Billionaire Kolomoisky has withheld salary payments to these workers and then blamed the NBU and PrivatBank for this.
“In this situation, the organization of a protest by workers of a factory that is not a client of PrivatBank and has no contractual relations with the bank raises many questions and may be another attempt to destabilize the work of the largest bank in the country,” said Samarina.
Due to the excessive noise levels generated by picketers outside the PrivatBank headquarters, the bank said it has evacuated 300 call center employees to an office with normal working conditions.
Following similar protests at the NBU in Kyiv, Samarina says “we were forced to close branches in the offices and to enhance security. This has a certain cost for the bank and its clients. The employees are stressed and we are concerned about this situation which seems to be frozen.”
