http://www.kyivpost.com/nation/46933Banks still hobbled by corruption, bad loans, crisis in confidence
13 August, 21:33 | Oksana Faryna, Kyiv Post Staff Writer Print E-mail to a friend E-mail to an editorial Many banks still falling as fall approaches.
Ukraine’s banks survived the first year of recession mainly by falling into deep-freeze mode. They put holds on the withdrawal of deposits and stopped payments on debts owed to foreign lenders.
Looking ahead, the country’s fragile banking sector is bracing for a possibly more severe crunch starting this fall. The hryvnia is expected to fall as external debt obligations come due, both for Ukraine’s government and private businesses.
So, what will happen?
“After us, the deluge” is one saying that may fit the situation. With respect to the current banking crisis, this means that politicians and central bankers are working to put off a day of reckoning – perhaps until the Jan. 17 presidential election is safely behind them.
The National Bank of Ukraine recently extended bans on the withdrawal of deposits from four problem banks for another six months. This was not a good sign that recovery is on the way. The fact that banks still are not able to pay back citizens’ deposits – or stop a run on banks – also shows that measures taken to date have not solved underlying imbalances.
“This means that government and the National Bank couldn’t make a decision how to help those banks in time,” said Yaroslav Stetsyk, an analyst for Astrum Investment. He said, had issues with problem banks been solved more quickly, then “all the problems would be finished at once and there would be only positive news from then on.”
Had the National Bank lifted the moratorium on withdrawals, the problem banks may have faced payouts of 17 billions hryvnias of citizens’ deposits, as of Sept. 1. The banks clearly were not ready to take on this burden.
Among them are the two biggest and most troubled banks, Nadra and Ukrprombank. They are on the hook to depositors for Hr 8.6 billion and Hr 7.3 billion, respectively. Ukrprombank can now freeze deposits until Jan. 21, while Nadra Bank can hold them until Feb. 10. Both dates are safely after the first round of the coming presidential election.
Although the central bank has already started bankruptcy proceedings involving two small banks, Odesa and Prychornomorya, such a fate is seen as not likely for Nadra and Ukrprombank. “Liquidation of big banks won’t be allowed because the [government’s] deposit insurance fund [with some 4 billion hryvnias] just doesn’t have enough money to pay off its depositors,” explained Oleksander Zholud, analyst for Kyiv-based International Centre for Policy Studies.
He believes Nadra and Ukrprombank “will be either nationalized or banks with such names will stop existing and its liabilities and assets will be put on the balance sheet of a state bank.”
The government has reasons not to rush to solve the problem.
“A lot of banks have shareholders who probably even helped to bankrupt their banks. That’s why the state does not wish to help them,” explained Stetsyk from Astrum Investment, referring to Nadra and Ukrprombank.
He said that Nadra has foreign debt of almost one billion dollars and Ukrprombank is involved in a lawsuit with shareholders. “If the state starts helping them, then the quantity of such problems will increase many times,” Stetsyk said.
Another key issue is alleged corruption – theft – of government money used to recapitalize banks. Stetsyk said that “imperfect Ukrainian legislation” allows bankers to misuse money without breaking the law. “These shareholders did nothing illegal; they operated according to the law,” he said. “Due to the imperfect Ukrainian legislation hardly anybody will be punished.”
Analysts with Erste Bank have kept track of how much money the state has injected into the bank sector and how it was used and whether it helped.
In July, the government recapitalized and took over ownership of three banks: Ukrgazbank, Rodovid Bank and Bank Kyiv, for Hr 9.5 billion, and a plan to recapitalize the banking sector with Hr 11 billion.
Additionally, the NBU has continued to give long-term loans to banks, reaching some Hr 80 billion by Erste’s estimate. “These measures brought some stability into the troubled banks and helped banks to go through the illiquid times, but did not have a major impact towards global stabilization of the market,” said Jozef Sikela, chief executive officer of Erste Bank. One of the reasons, according to Sikela, is that the NBU does not operate transparently.
“One of the problems in Ukrainian banking sector is the level of non-transparency of the official authorities’ actions. This creates a room for rumors and distrust in the system,” Sikela said.
The NBU, for example, doesn’t announce the amount of refinancing each bank has received and how it is spent.
Ukrainska Pravda’s news website published leaked documents about how much of the NBU’s money each bank has received, and how money in Nadra and Ukrprombank was allegedly being misused.
Accusations of theft of state bailout money or refinancing assistance have appeared in the press regularly, combined with charges from politicians that their opponents are involved in illegal activity.
At a meeting with depositors of problem banks, Prime Minister Yulia Tymoshenko talked about misuse of money in Nadra Bank.
“A group of companies that belong to criminal circles and is headed by [Dmitry] Firtash [Tymoshenko’s political foe and a Nadra shareholder], 21 companies to be exact, took Hr 2.5 billion in unsecured credits,” she said. “These credits have not returned to this day. They are not being served and [overdue] debt on them has already come to Hr 300 million.”
At the same time, Serhiy Lyovochkin, deputy from Party of Regions, blamed Tymoshenko for pumping funds into the banks of oligarchs who are financing her political force. Lyovochkin said “recapitalization has become the government’s tool of pumping public money into Tymoshenko’s campaign fund.”
Depositors are worried and angry.
Ihor Stepanov from the United Independent Committee of Depositors said that people are sure that bankers operate in cahoots with bankers and politicians to create elaborate, non-transparent schemes to pump money from banks.
In a response, his organization – together with the civil movement Khvylya – announced a new wave of protests that they are planning at the end of August and beginning of September.
“There is no father [Josef] Stalin to hang them [bankers and politicians] all upside down,” said 73-year-old Ivan Vasylyovych, pensioner and depositor, who has $10,000 in Ukrprombank. He sold his apartment in Kyiv last year before the crisis and had the misfortune of putting part of the proceeds in Ukrprombank. His deposit term ends at the beginning of September, but he is unsure if he will see his money again.
At the end of July, the Razumkov Center, a Kyiv think tank, found that 77 percent of Ukrainians surveyed do not trust banks. The delay of solutions for Ukrprombank and Nadra – including the continued freeze on deposits – does nothing to restore people’s faith in banks. It also negates the positive steps taken by nationalizing three banks which are slowly starting to return deposits.
In early August, some relief arrived for depositors who had their money frozen in Rodovid Bank. On Aug. 3, the bank started paying back deposits to household clients after nationalization in July. To get their money back, people – mainly pensioners – took their place in line up to two hours before the bank’s offices opened.
One day 69-year-old Borys Panchenko, a retired engineer, came to the bank to get his money back, but changed his mind and accepted higher interest rates in exchange for keeping his deposits in the bank.
“I’ll take a risk,” Panchenko said. “I wonder if there are more heroes such as me. Two men behind me took out the whole deposits. I don’t want to go to commercial banks any more or to keep it at home either. What else shall I do?”
Last year, after selling a one-room apartment, Panchenko deposited part of the money – Hr 150,000 – in return for a 16.5 percent annual interest rate. When the deposit term ended, he couldn’t withdraw it because of the moratorium. But since Aug. 3, he has regained control of his deposits.
During the first two days after the moratorium was lifted, Rodovid Bank paid back Hr 29 million in deposits and attracted Hr 9 million in fresh deposits. The bank offered Panchenko to keep his money in the bank for another year, in exchange for a rise in the annual interest rate to 20 percent.
The probability that banks under temporary outside administration will recover on their own is low, said Roman Syrotyan, an analyst for Sokrat investment group.
“We expect that the NBU will start the process of liquidating small banks that are today under temporary administration,” he said. “These will be banks whose owners and temporary administrators didn’t find investors willing to put money into renewing the normal work of the bank.”
But no one knows for sure what will happen.
“The situation in the Ukrainian banking sector is as bad as the overall situation in the country, taking into account that Ukraine has been the hardest hit economy in Europe,” said Sikela, the Erste Bank chief executive officer.
Presidential candidate and former Verkhovna Rada Speaker Arseniy Yatseniuk is predicting a second wave of the crisis this autumn. However, the International Monetary Fund sees stability and recovery and thinks that the global economy may have already bottomed out. In addition, the IMF forecasts 3 percent growth in Ukrainian industrial production in 2010.
Stetsyk from Astrum Investment has this outlook: “The situation has normalized. Assets stopped flowing out from the banking system. Since May, balances on citizens’ accounts remain on the same level and there is even a small increase. At the same time, the quality of assets remains as bad as it was three or four months ago. The main risk for the banking sector this fall is a probable rise of the dollar [relative to the hryvnia.] If the dollar rate grows, this will be a very heavy blow on the banking system as the share of problem loans will increase substantially. If the dollar rises significantly, we will see a second wave of bankruptcies among small banks.”
