Ukrainian Bankers Not Afraid of Competitors
Ukrainian bankers have had a difficult year. As experts say, the financial market has finally started to live its own life. They, however, prefer not to talk about the effect of such self-sufficiency on its actors. Ukgasbank Chairman of the Board Vadim Lyashko told LIGABusinessInform reporter of his vision of the immediate outlook for domestic financiers.
What are the key aspects of last year’s profile of the banking market?
The number one aspect is the arrival of foreign capital and high activity of the secondary market of commercial banks’ stocks. According to official statistics, the share of foreign capital in Ukraine’s banking system neared one third at the end of 2006. This is a substantial proportion, sufficient for foreign capital to make a decisive effect on the competitive environment, banking policy and even the management level of the banks which still remain independent. The second aspect is the changes in the asset-liability structure. I feel that the growing share of assets in the retail sector is currently an established trend. A very serious factor for me is the growing share of non-residents’ capital in the liabilities of the banking system.
What will be the share of large Ukrainian-owned banks on the market by the end of the current year?
I would put it differently. I feel that 2007 will be marked by progressing concentration. While in 2006 the share of the top ten banks slightly decreased, in 2007 concentration in the economic segment serviced by the top ten-twenty banks will be on the rise. In this case, the size of the foreign capital share matters not as much as the question of what will happen to the remaining 140 commercial banks. They are likely to be driven by quite legitimate market methods into the shadow segment of the economy, into the substandard zone. I take it as a challenge to the National Bank, which should consider ways to preserve the diversity of the banking segment and face the risks arising out of such concentration.
Will the question of whether small banks are really needed become more topical?
Actually, I did not say that such banks would not be needed any more. I just said the National Bank, as the regulator, would have to develop absolutely new methods of control and monitoring of their activities because they will have to operate in a riskier economic environment.
Which of the bills and laws adopted last years is of key importance, in your opinion?
I assume you mean those initiatives that received support in view of Ukraine’s intention to join the WTO. As for me, I would not dramatize the adoption of the legal norms liberalizing the approaches to foreign bank’s opening their affiliates in Ukraine. I said this during the discussion on the possibility for foreign bank to set up their affiliates in the country, and I still keep saying the same. At the moment, I do not see any solid global player, which shows a strong desire to set up an affiliate in Ukraine. Those, which want to be present on Ukraine’s market, enter it as full-bodied banking institutions. Yes, there is a risk of affiliates opened for suspicious operations. But there are also investment banks which would like to have their representative offices here. And I believe the regulator has enough powers to eliminate all the involved concerns. What affiliates are we talking about, what concerns? Just take a look at the neighboring European countries. The share of foreign capital there is nearing 80-90 percent. I do not want the same to take place here. I am for diversity. I believe we are currently able to compete with foreigners economically and professionally. For this reason, let me repeat that I do not believe that the recent changes in our banking legislation relating to access of foreign banks to Ukraine through affiliates are something significant. In fact, the most significant changes on our financial market occurred within the current framework of national legislation or contrary to the banking legislation currently in effect.
There are many talks about a possible decrease in credit and deposit rates in this connection…
What does the cost of money means? When we talk about price for an iron, we mean that its lowest mark equals the cost of the product while its topmost value is the current demand price. What is money as a commodity? Currently, the cost of money should be considered in terms of its devaluation due to inflation. Given 10 percent inflation last year and 12 percent in the year before last, how much should the hryvnia cost to retain its value and offer some income? If I offer a deposit rate below inflation, I actually set the owner of this money for losses. At the same time, the cost of foreign currency is the cost of borrowings which currently makes the international financial market, plus a quite justified margin needed to cover non-interest costs. The Ukrainian banking system is currently growing, and this margin should ensure its growth. At the same time, it should support growing wages and the formation of sufficient reserves to back up lending operations. Thus, we are saying that credit rates on foreign currency loans will comprise all these costs and, of course, may be different from the cost of the hryvnia. And I am sure that contrary to the talks about administrative measures to restrict lending in foreign currency, the National bank will have resort to market methods which will have a tangible effect on the cost of such loans. Keeping in mind these arguments, I predict that deposit rates on hryvnia loans will fluctuate between 13 and 14 percent this year and between 8 and 9 percent on foreign currency loans.
So, which loan is cheaper?
Let us take the most illustrative segment as an example. The retail credit portfolio of Ukrainian commercial banks neared UAH 70 billion according to last year’s results. Provided that this figure is correct, UAH 22-25 billions of the total is mortgage loans, with nearly 80 percent of this amount being loans in foreign currency. The question is, if external factors are discounted, are there any risks for the bank? None. Its position is stable, assets and liabilities in control, so there are no risks. But let us consider this situation in the context of the market. What does this UAH 18 billion in foreign currency lent to citizens who receive hryvnia wages actually mean? This means that all those who take out a loan of USD 1,000 today, an equivalent of UAH 5,000, will have to repay UAH 5,500 tomorrow. And here we face colossal risks as in this case the currency position of the bank is actually not under threat, but the borrower’s ability to service his/her loan because his/her wages come in national currency. Here we have a problem, a very serious problem.
How should we tackle it?
As I said, I believe the National Bank has effective market regulation instruments. Those are the mechanisms in the hands of the regulator responsible for the national monetary policy. And I believe the National Bank (NBU) will try to do all it can to make the US dollar less attractive in terms of value than the hryvnia.
The past year was rife with external borrowings and IPOs. This year is predicted by some experts to see some downturn in this trend. Are you of the same opinion?
I do not believe there will be fewer borrowings. I just believe this year’s borrowings will be of a better quality in terms of characteristics and acquisition instruments. In fact, there are no grounds to predict fewer borrowings. The most illustrative example here is the fact that some seven to eight commercial banks are currently considering Eurobonds. I am not saying that they all will necessarily step into the market. But this is still a fact.
International observers claim that Ukrainian banks work very little with securities. Is it true?
I absolutely agree with the international observers. I would highlight three points here. First, when we talk about securities, we tend to forget that in order for securities to circulate on the market, stock market infrastructure should be created, the institutes, which form demand on this market. In view of this, I believe that banks are able to form this demand and maintain liquidity of the stock market. Unfortunately, even the NBU has a biased approach to banking assets in the form of securities. All our regulatory documents that address valuation and liquidity are made so as to discourage commercial banks to deal with securities. The third point is the lack of unified (agreed upon) legislative and regulatory approaches to financial markets. It appears that we do not actually need a liquid, transparent and effective stock market, ignoring even the fact that a debt in the form of securities is much more liquid than in the form of a loan.
What do you have to say about the future of mortgage securities?
I believe proper legislative regulation is one of the necessary prerequisites for a mature mortgage market as well as for the formation of understandable and quality funding sources.
There is an opinion that credit unions will somewhat overshadow banks as regards lending…
They have already done this and will do no more. I believe that at present, banks have broader and better possibilities and outlooks than credit unions do. I understand but do not accept the current alternative consumer lending forms and channels. I am certain that tomorrow, absolutely difference approaches, motives and possibilities to finance this demand will come on top. Even today, banking products, especially card products are much more attractive and competitive in comparison with alternative express lending options despite the regulatory preferences granted to non-banking financial institutions. Of course, credit unions will be able to compete with banks for a while thanks to the more liberal administrative approach to them. But in fact, such establishments have their own absolutely clear segment known as the segment of mutual aid funds.
Currently we see universal financial groups coming into fashion. How sustainable is this fashion? Is it justified?
It is not a fashion. It is a market imperative. At present, when promoting banking products, we are compelled to integrate our services with the services of insurance companies and pension funds. We are currently interested in an effective market of lease-purchases. Such a conglomerate generates synergy and additional advantages, including for the involved bank.
Many banks seek to open foreign representations. Why?
The bank must be present where the economic interests of its customer lie and that is actually where its own economic interests lie, too.
What do you think about the idea to make banks more open, disclose more details about themselves?
I am for transparency in banking. I believe we have serious achievements in this regard since we are absolutely honest before our partners-investors and the general public when presenting the structure of our equity capital, financial results and development plans.
22.02.2007