Ukraine Said to Mull PwC Measures as Privatbank Bill Grows

  • Documents seen by Bloomberg show capital shortfall was bigger
  • Government mulling punishment for PwC, person familiar says

Already reeling from a $4.5 billion bill to save its ailing No. 1 lender, Ukraine is now bracing for an even costlier rescue, and says audits by PwC’s local office were instrumental in the bank’s failure.

The government may have to stump up 38.5 billion hryvnia ($1.5 billion) more to recapitalize Privatbank after last year’s state takeover, according to documents seen by Bloomberg. The figure is from due diligence carried out by Ernst and Young Audit Services LLC, which estimated a “conservative” shortfall of 192 billion hryvnia before nationalization. EY declined to comment publicly on client work.

Ukraine has already injected more than 100 billion hryvnia into Privatbank, while also wiping out holders of the lender’s bonds. The cabinet will approve the additional capital this week, two people familiar with the matter at the central bank told Bloomberg, asking not to be identified as the information isn’t public.

The new figure compares with a hole of 148 billion hryvnia as calculated by the central bank before nationalization. The lender’s accounts were audited by PwC from at least 2007 to 2015. Ukraine is considering banning the company from auditing any more banks, according to a person at the central bank who asked not to be identified. PwC said by email that it remain’s committed to Ukraine, and that its 2015 audit of Privatbank met international standards.

“At the time of issuance of the 2015 opinion Privatbank had agreed with the National Bank of Ukraine a comprehensive restructuring plan,” it said, “The National Bank of Ukraine confirmed that restructuring was on track in a meeting with PwC Ukraine the day before signing the audit opinion.”

‘No Progress’

The additional costs, equivalent to almost a 10th of Ukraine’s $17.5 billion international bailout, underscore the challenge in remodeling the former Soviet republic’s economy after years of corrupt rule. As well as the rising expenses, legal action is possible over the fate of the bank’s related-party loans and from disgruntled former bondholders. Privatbank’s nationalization marked the culmination of efforts to shore up the financial industry in the wake of a revolution and a Russian-backed insurgency.

The central bank said Tuesday that while nationalizing Privatbank solved a systemic problem, it created a long-term challenge stemming from the state now accounting for more than half of banking assets and deposits. “There’s been almost no progress in reforming state lenders in the past year and the strategy approved by the government isn’t being implemented,” it said in a report on financial stability.

Privatbank was the biggest contributor to this year’s increase in non-performing loans, according to Vitaliy Vavryshchuk, head of the central bank’s financial stability department. The figure represented almost 57 percent of total loans in April, compared with 38 percent in January, according to the report. Privatbank’s NPLs were confirmed after nationalization.

Credit Quality

Related-party loans are also an issue, comprising 99.4 percent of Privatbank’s corporate portfolio at the end of 2016. EY said in its report that 164 of the 168 borrowers it analyzed are certain to default. Repayment of interest on the loans also declined after nationalization, it said.

“There’s a lack of instruments for adequate control over credit risks,” according to the EY report. “A lack of constructive dialogue with the previous owners strengthens the uncertainty over the credit portfolio’s quality.”

Igor Kolomoisky and Gennady Bogolyubov, the billionaires who owned Privatbank until requesting government assistance in December, have promised to restructure related-party loans by July 1. The government hired Rothschild & Co. to help handle those talks. Companies affiliated with the tycoons are suing the central bank and the government in a bid to undo the nationalization.

— With assistance by Luca Casiraghi

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