Experts say that if Ukraine’s banking sector is going to thrive, the share of state-owned banks — now roughly half of the sector — will have to shrink.
One way to achieve this is privatization. To do that, PrivatBank, the nation’s largest and most scandal-ridden bank, will have to end up in private hands again. It was nationalized in December 2016 and has been showing profits since record bank fraud under billionaire owners Ihor Kolomoisky and Hennady Boholyubov cost taxpayers $5.5 billion.
“Very few markets of Ukraine’s size have so much unrealized potential in the banking and financial sector,” said Artem Shevalev, a member of PrivatBank’s supervisory board. To him, selling PrivatBank is part of the larger arc toward a healthy, growing economy and huge potential for investments in the banking sector. The three other large state-owned banks slated for eventual sale to private investors are Oshchadbank, Ukreximbank and Ukrgazbank.
PrivatBank is on track to go on sale by 2024, according to Anna Samarina, its acting CEO. There are two major approaches. One is through an initial public offering, which would be a major milestone in Ukraine’s banking sector, support the local capital market’s development, and “put Ukraine’s economy firmly on the investment map.” The other option is through a strategic buyer.
Before that happens however, the government has to approve its privatization strategy and the bank has to complete a series of transformations that began under state ownership. Since nationalization almost five years ago, the plan has always been to prepare the bank for privatization. In order to sell the bank, the new leadership has had to transform its internal corporate culture, while fighting to keep the bank out of the hands of its previous owners and recovering lost and looted money from them.
Taking over
Since its founding in 1992, the bank had seen massive growth, with a customer base that includes roughly half of Ukraine’s population, or 20 million people. Its innovative technology in customer services made it wildly popular.
Over the years however, massive amounts of depositor funds flowed out of the bank and into the pockets of the owners and their related companies, known unofficially as “Privat Group.”
“To fund your related party lending, you need liquidity. And to get liquidity you create a vacuum on the other side to suck up customer deposits. And to do that efficiently you need to be super friendly, open, innovative, and very nice. That’s why the front end was so well designed and welltuned,” says Shevalev.
In 2015, the National Bank of Ukraine could no longer turn a blind eye and performed a stress test on the bank. The team found that the bank had a massive capital shortfall of $5.65 billion and that loans to related companies made up 97% of the corporate profile.
The NBU and Ukrainian government had no choice but to step in and bail out the bank in 2016. It was too big to liquidate like other sham banks.
In the years following nationalization the bank’s new leadership undertook the massive task of transforming the personal piggy bank of a few owners and their friends to a professional bank that could eventually be resold. In the meantime, court cases to regain the bank and lost assets during the nationalization have disrupted the process.
Culture clash
In the weeks following nationalization, the new management feared a bank run. But these concerns were short-lived: after a 15% outflow of deposits worth around $1 billion, things returned to normal.
The immediate task of the new management team was to put in place standard banking practices vital for a bank of this size, but nonexistent under the old ownership.
The bank got a new CEO and a chief risk officer. Internal audits, corporate governance checks and balances and risk management systems were implemented.
It wasn’t an easy task. For one, the bank’s former leadership preferred to run it like a “family office,” says Shevalev. After nationalization, many records were destroyed, making it difficult to ascertain how things were done before.
And, according to Samarina, the new leadership team faced fierce internal opposition.
One of PrivatBank’s central features was that it grew entirely from the inside; its employees “grew up” in the bank instead of coming from the outside banking world. PrivatBank employees were used to an “aggressive” company culture where employees competed against each other and chased after the leader. When the new team arrived at PrivatBank, Samarina says they were perceived “like Martians.”
To transform the company culture, it was necessary to replace members of the team. Without making changes to top-level managers, it was like “fighting windmills,” says Samarina.
For her, the turning point was a critical mass of new people and a new company culture. “When a person arrives speaking another language, he’s just one Martian, when there are already three, people begin to take note,” Samarina said.
Becoming a real bank
By 2018, the bank had its strategy: privatize by 2021–2022, refuse further bailouts from the government, increase the loan portfolio without taking on too much risk, optimize the information technology architecture, strengthen risk management and reduce staff and branches.
The bank no longer had the capacity to do proper corporate lending, which translated into a strategy that tilted heavily towards retail banking. That meant focusing on promoting creativity and new products, while maintaining efficiency and putting customers first.
One of the biggest goals of the new team has been to lend to small and medium sized businesses (SMEs). As the biggest bank in the country, PrivatBank has a lot of liquidity and wants to use that to support the growth of the economy by loaning to SMEs, Shevalev says.
Under the state program “Affordable Loans 5–7–9%,” the bank has issued more than 2,500 loans, and is continuing to develop medium-sized business lending. The indicator of non-performing loans (NPL) for the new portfolio is about 6%.
Since nationalization, the bank has attracted 5 million new clients, allowing it to quadruple its income on transactions. The increase in customers also doubled the size of its retail loans. In 2020, PrivatBank was able to invest in government bonds, increasing its portfolio by $2 million, or 39%.
Hitting these milestones was all very well. But Oleksiy Puznyak, an executive at Raiffeisen Bank Aval, told Forbes that the new management’s main achievement was showing that PrivatBank can work normally without the previous owners, while fighting an incessant legal war.
Yuriy Hudymenko, leader of the Demokratychna Sokyra party, holds a playing card with a portrait of Ihor Kolomoisky, oligarch and former owner of PrivatBank, in protest against Kolomoisky attempts to take back control over the bank in Kyiv on Feb. 8, 2021. (Volodymyr Petrov)
The battle over the bank
When it became clear that the former owners had no intention of meeting the goals laid out in the letter they signed when they handed over the bank, PrivatBank’s new leadership had no choice but pursue domestic and international litigation.
It was not long after that Kolomoisky decided to go after the bank, filing a lawsuit in 2017 claiming that the nationalization was illegal. A couple of years later in 2019, Boholyubov filed a different challenge to the nationalization. Both cases are still ongoing.
Ukraine’s parliament passed the so-called “anti-Kolomoisky” bill last spring, outlawing the return of nationalized banks to their former owners. This law is crucial in preventing the former owners from getting the bank back. However, the law doesn’t prevent the former owners from claiming compensation from the state, provided that the court unconditionally recognizes any part of the nationalization illegal.
But that law’s constitutionality is being challenged in Ukraine’s constitutional court which puts the fate of the law under a question mark, according to Svetlana Cherpurna, head of the legal department at PrivatBank. These challenges also delay many other court cases related to the appeal of the nationalization as some courts have suspended appeals while the battle rages over the law’s constitutionality.
Cases related to nationalization have totaled over 500 since 2017. Creditors who were considered related to the bank during the bail-in process are also pressing charges.
The most notable of these cases involved Ihor and Hryhoriy Surkis, Ukrainian oligarchs and ex-business partners of Ihor Kolomoisky. The two brothers filed a lawsuit against the bank to reclaim $350 million included in the bail in. After a lower court ordered the bank to pay it back, Ukraine’s Supreme court blocked the decision.
The battle is happening within the bank’s ranks as well. PrivatBank’s labor union, headed by Maxim Shevchenko, has filed a lawsuit declaring the closed competition for PrivatBank’s head illegal.
According to Ukrainian law, banks do not have to hold an open tender to choose a head. In the meantime, the lawsuit has blocked the supervisory board from electing a new leader after the former chairman of the management board, Petr Krumphanzl, ended his term in January.
While there is no available proof that the labor union is working for anyone, its “motives coincide with the motives of those people who want to destabilize the bank’s work,” said Yuriy Sak, a PrivatBank spokesman.
Samarina says however, that even in the absence of a chairman, the bank is running smoothly, able to fulfill all of its responsibilities and move towards privatization.
It’s difficult to speculate who would be interested in buying the bank in 2024.
What PrivatBank can say is that the investor should be someone who can bring something useful to the country. “This can’t be some kind of captive transaction, or some kind of window dressing. The task is to find a quality investor who will meet the target,” said Samarina.
