Ukraine Takes Over Biggest Lender to Cap Sweeping Bank Purge

Updated on
  • Central bank says Privatbank has $5.6 billion capital hole
  • Eurobond holders subject to bail-in, finance minister says

Ukraine will nationalize its No. 1 bank as the former Soviet republic concludes a cleanup of ailing lenders and seeks to snuff out threats to economic recovery.

The government will take 100 percent of PJSK Privatbank after its billionaire shareholders requested help, according to an announcement late Sunday. Home to a third of retail deposits, the lender had a capital shortage of 148 billion hryvnia ($5.6 billion) on Dec. 1, the central bank said. While savers are protected, Eurobond holders must help plug the gap.

Privatbank’s fate has loomed large over efforts to stabilize the financial industry following a recession brought on by revolution and a separatist conflict. Addressing the lender’s struggles is key to preserving Ukraine’s $17.5 billion bailout, resuming the flow of credit and preventing a disorderly collapse later on. The banking purge is part of wider reforms to breathe new life into Ukraine’s economy, though many initiatives are behind schedule.

“Privatbank’s long-term stability is absolutely crucial to the country’s economic health,” said Suma Chakrabarti, president of the European Bank for and Development. The government’s steps “are the most viable way of securing the bank’s future -- and ultimately of strengthening the wider banking system.”

The lender’s short-term stability has been at risk for some time. Daily withdrawals reached 2 billion hryvnia in the past two weeks, more than at the peak of Ukraine’s war with Russian-backed insurgents, Oleksandr Dubilet, Privatbank’s chief executive officer, said in comments broadcast by 112 TV.

Finance Minister Oleksandr Danylyuk said outflows from the bank hadn’t risen much on Monday. Central bank Governor Valeriya Gontareva said she doesn’t envisage increased withdrawals as a result of the nationalization and stressed that Ukraine’s $15.5 billion of reserves can smooth currency-market volatility if needed. The hryvnia, eastern Europe’s worst performer against the dollar this year, was 0.1 percent weaker in Kiev.

The government’s decision “actually had a very clear, stabilizing effect for the depositors and clients of the bank,” Danylyuk told Bloomberg Television in an interview. “The state is determined for serious changes.”

Privatbank, based in the eastern city of Dnipro, ran into trouble as Ukraine’s economy plunged more than 15 percent in 2014 and 2015. The central bank said an “ill-considered loan policy” left more than 97 percent of the lender’s credit book as related-party transactions, including the Eurobonds. The bank’s $220 million bond due 2021 traded last week at 57 cents on the dollar, a yield of more than 29 percent, data compiled by Bloomberg show.

The takeover was coordinated with the International Monetary Fund and the government promised “a smooth transition and stable operations for the bank.” Ukraine has closed more than 60 banks in the past 1 1/2 years, citing inadequate capital buffers or illegal activities.

The deal “is an important step” in efforts to safeguard financial stability, IMF Managing Director Christine Lagarde said in a statement. “It’s now important that the process of nationalization be followed by firm efforts to maximize the repayment of related-party loans, and the appointment of an independent management team.”

‘Couldn’t Wait’

Ex-Finance Minister Oleksandr Shlapak will take over management of Privatbank, where he worked in the past, according to current CEO Dubilet.

Ukraine will gradually plug the capital shortage, with the initial funds to come from a 43 billion-hryvnia bond sale, Danylyuk told a news conference with Gontareva Monday morning in Kiev. Privatbank will eventually be sold, according to Danylyuk, who said next year’s budget will remain within IMF targets.

Nationalization marks an end to attempts by owners Igor Kolomoisky and Gennady Bogolyubov to replenish Privatbank’s capital. Kolomoisky had served as governor of the region where Privatbank was created in 1992. He was forced to step down as President Petro Poroshenko vowed to curb the influence of the tycoons who’ve dominated Ukrainian business and politics since communism collapsed in 1991.

“Taking into consideration Privatbank’s problems and its systemic importance to the financial industry and the economy, the central bank couldn’t wait any longer,” Gontareva said. “Shareholders failed to follow the recapitalization plan.”