You're reading: Firtash acquires Pravex in cheap, risky move

Ukrainian billionaire Dmytro Firtash strengthened his Group DF’s presence in the Ukrainian banking sector after purchasing Pravex Bank from Intesa Sanpaolo, an Italian banking group, as other foreign banks line up to leave the country.

Centragas Holding, which consolidates Firtash’s banking businesses, paid €74million for Pravex, a €400 million discount over the original price that the Italians paid for it in 2008. In addition to Pravex, Firtash bought Nadra Bank in 2011, and analysts predict the two will merge to reach €3 billion in total assets. The merger would make it the seventh largest bank out of 175 registered banks in Ukraine by assets, according to the Association of Ukrainian Banks.

Group DF’s chief executive Borys Krasnyansky said that the banking business is one of the conglomerate’s priorities. “Our strategy involves further development and expansion of this business line,” he told the Kyiv Post, explaining the group’s acquisition.

Intesa Sanpaolo is leaving the Ukrainian market due to losses. Pravex ended last year with a net loss of €5.84 million, though in 2012 losses were even greater at €102 million.

According to the Pravex Bank’s balance sheet, by the end of 2013 it had €398 million worth of assets, including €97 million of owner’s equity, with a loan portfolio of €212 million, of which 53.5 percent were bad loans at the end of the third quarter. Pravex currently is the 34th largest bank in Ukraine by assets.
Following the announcement of the sale, global credit worthiness rating agency Fitch stated it may downgrade Pravex’s credit rating from the current B-.

Foreign pessimism

The sale of Pravex, according to analysts, is part of a significant trend of foreign banks exiting the country. “They are being substituted with home-grown oligarchs or Russian financial industrial groups,” said Kyiv Mohyla Business School professor Oleskiy Herashchenko.

A December Standard & Poor’s report on Ukraine stated the exodus started since the beginning of the 2008 financial crisis “in view of difficult operating conditions in Ukraine resulting in low risk-adjusted returns and high delinquencies as well as prevailing financial and economic problems in Europe, higher minimum capital requirements from banks …and downscaling of operations.”

Consequently, Ukrainian subsidiaries of foreign banks are being sold at great discounts because many sellers are willing to exit as soon as possible. S&P, however, doesn’t anticipate the share of foreign capital in Ukraine’s banking system to dip beyond 35 percent in the next two years from the height of 42 percent at year-end in 2011.

Since 2009, more than 15 banks with foreign capital left the Ukrainian market. Recovery of defaulted loans in Ukraine is next to impossible. Non-repayment of debt has become a widespread practice among Ukrainian borrowers.

Furthermore the banking business model that is commonly used in Europe is not efficient in Ukraine, Herashchenko added. Doing business in Ukraine requires a substantially higher level of risk tolerance. Bad loans in the loan portfolios of European banks usually do not exceed 1 percent, while banks in Ukraine may keep 10-15 percent of risky loans in their portfolios. According to S&P, problem loans of Ukrainian banks may reach 40 percent. Its latest country risk report on Ukraine says it has one of the riskiest banking systems in the world.

More to leave

Other banks are following suit. The Ukrainian subsidiary of Bank of Cyprus, whose parent company is facing serious financial problems and has been struggling to find a buyer for its Ukrainian assets during the past two years, is now being sold to the Russian Alfa Bank for €225 million. The latter has been doing business in Ukraine since 1992.

Herashchenko believes that Raiffeisen Bank Aval and Ukrsibbank BNP Paribas Group – the biggest banks with foreign capital – are also getting ready to leave Ukraine. “They want to go, the only question is the price,” he said.

Vitaliy Vavryshchuk, head of research at Ukraine-based investment boutique SP Advisors, agreed that subsidiaries of foreign banks will keep leaving the country. “There is no hope that the investment climate will improve in the near future and enforcement of loan agreements will become possible,” he said. “We don’t expect the trend to change in the next 2-3 years.”

Kyiv Post staff writer Nataliya Trach can be reached [email protected]