Quest to Remake Ukrainian Banks Meets Hardest Test at Finale

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  • Authorities restoring trust by shutting down weak lenders
  • Nationalizing Privatbank marks culmination of financial revamp

After squirreling her cash away at home for a year, more fearful of Ukraine’s shaky financial industry than a burglary, Olena Shkarpova has finally opened a new savings account.

The 34-year-old project manager entrusted her money to two banks, including the local unit of France’s Credit Agricole SA. She’s convinced it’s now safe after a sweeping 2 1/2-year purge closed 80 lenders deemed too rickety or too shady to operate. In the sternest test yet, the authorities this week took over the nation’s biggest bank, home to a third of retail deposits and too big to fail.

“It took me about three months to choose,” said Shkarpova, who works at the Vox research institute in Kiev, Ukraine’s capital. “I was watching the cleanup process closely.”

For Ukraine, an ex-Soviet economy battered by revolution and war, the overhaul of a banking sector once dubbed an “ATM for oligarchs” is rare good news. Rebuilding faith in lenders is key to jumpstarting the flow of credit and underpinning a so-far meager recovery from recession. Continued transfers from a $17.5 billion bailout also hinge on making the financial system more robust. Nationalizing No. 1 lender Privatbank completes that process.

“With the elephant now out of the room in Ukrainian banking, the path seems clear for further IMF financing,” Nick Piazza, chief executive officer and founder of investment bank SP Advisors, said by e-mail. “We’re hopeful the central bank will shift its focus from fighting ‘zombie’ banks to recapitalizing and lifting its punitive regulations, breathing some life back into the crippled banking sector and helping build long-term economic growth.”

Plans for the revamp were drawn up with the International Monetary Fund after political upheaval triggered a 15.5 percent dive in gross domestic product in 2014 and 2015, turning the hryvnia into the world’s worst-performing currency. Many banks couldn’t cope; others flunked stress tests.

Led by Governor Valeriya Gontareva, the central bank put lenders that failed to replenish capital buffers or disclose murky ownership structures under temporary administration, with new managers empowered to decide whether they were beyond rescue. She also targeted “zombie” banks, essentially tools to shift deposits to offshore accounts and launder cash.

The initiative is working: retail deposits rose almost 5 percent in the year through October after plunging in 2014 and 2015. While still unprofitable, lenders’ total net loss in the first 10 months plummeted 77 percent to 12.6 billion hryvnia.

Nationalization “sends a strong signal about the country’s commitment to structural reforms,” BMI Research said in an e-mailed note. “This will bolster investor confidence.”

The toughest challenge may be yet to come. The central bank unearthed a 148 billion-hryvnia ($5.6 billion) capital shortfall at Privatbank, whose billionaire owners asked for state assistance having failed to meet recapitalization goals. More than 97 percent of the lender’s credit book is to related parties, according to the central bank. Considering Privatbank’s systemic importance, Gontareva said she “couldn’t wait any longer.”

‘Deep-Rooted’ Problems

The aim is an orderly transfer, with Finance Minister Oleksandr Danylyuk speaking of a “clear, stabilizing effect” from the deal. But there are already signs of stress. The central bank sought to sell as much as $50 million on Tuesday to support the hryvnia, the first time in more than a month that it’s intervened on that scale. The currency slid 0.9 percent, rebounding 0.2 percent Wednesday.

The takeover shows “the problems of the bank to be more deep-rooted than expressed in its official statements,” Kiev-based Empire State Capital Partners said in a research note. Lawmakers on Tuesday supported President Petro Poroshenko’s initiative to guarantee all deposits at Privatbank. More than 1,900 new accounts were opened in past day, the lender’s press office said Wednesday.

Footing the bill for Privatbank will be costly. While its Eurobond holders will contribute via a bail-in, the government is selling an initial 43 billion hryvnia of bonds to shore up the lender, enraging opposition parties intent on calling early elections. The borrowing will incur additional interest costs in next year’s budget, approved in the early hours of Wednesday.

Industrywide, the cleanup has wiped out 46,000 jobs, from bank executives to tellers and loan officers.

Right Time

But the rewards are nearing, with the sector set to turn profitable and loans to the credit-starved economy poised to recover in 2017, according to the central bank.

“When this machine starts to work, you’ll see a lot more lending,” said Francis Malige, managing director for Ukraine, Moldova and Belarus at the European Bank for Reconstruction and Development, which may buy a stake in Privatbank once it’s been restructured. “It’s all about creating confidence.”

It took conversations with “lots of analysts” before Vox’s Shkarpova was confident enough to start using banks again. But having witnessed economic turmoil in recent years, she’s now allowing direct deposit of her paychecks.

“I felt the time was right,” she said. “But I’m still choosing with mega-caution.”