A Controversial Asset: Why Ukraine Decided to Sell Two of “Its Own” Banks as Quickly as Possible
11 May 13:08
ANALYSIS 
Ukrainian authorities have once again raised the issue of the advisability of privatizing state-owned banks. And the reason for this is not limited to corruption allegations against one of them. "Komersant Ukrainian" investigated why the sale of state-owned banks is back on the agenda.
Sens Bank and Ukrgasbank must be privatized without delay, and it is desirable to do so before the end of this year—this is the task the head of state has set for the government. This was announced the day after a meeting of the Verkhovna Rada’s temporary special commission on the “Midas” case, where Sens Bank once again faced accusations regarding the non-transparent appointment of supervisory board members, manipulation of tariffs, and involvement in schemes to process illegal payments from the gambling industry.
Some viewed the president’s directive to accelerate privatization as a swift response to the current state of affairs at the bank. However, the question of the advisability of selling state-owned banks, as is well known, did not arise yesterday or the day before. Moreover, reducing the state’s share in the banking sector is identified in the government’s action plan as one of the Ministry of Finance’s eight priority goals.
More is not always better
Back in early October of last year, the government decided to begin preparations for the sale of state-owned stakes in the authorized capital of JSC “Sens Bank” and JSC “Ukrgasbank.” Prior to this, in mid-August of that year, the Financial Stability Council reviewed the potential risks of selling stakes in Sens Bank and Ukrgasbank to the financial system and confirmed that such a sale would not have a negative impact on the stability of the banking system.
And on March 31 of this year, the Ministry of Finance announced a tender to select an advisor for the sale of stakes in Sens Bank and Ukrgasbank. Those wishing to participate in the tender still have a little over a month to submit their documents. In other words, preparations for the privatization of these banks are ongoing. Investment banker Serhiy Fursa reminds us of this.
“The sale of Sens Bank and Ukrgasbank has been in the works for a long time. Another matter is that I personally do not believe this will happen. Unfortunately, because it is necessary. And the statements that have been made recently are a consequence of the scandal in which Sens Bank was involved. De facto, nothing has changed in the privatization plans,” the expert notes.
In other words, the “fresh” information about the “scheme” at one of the state-owned banks can be viewed merely as yet another argument in favor of the state needing to divest itself of such an asset as quickly as possible. When the decision was made to prepare Sens Bank and Ukrgasbank for sale, other arguments were decisive, particularly the fact that the state’s share in the banking system, measured by net assets, has exceeded 50% for several years now.
In the fourth quarter of last year, for example, it stood at 52%. And the share of public funds in state-owned banks is even higher—61.8%. Ivan Kompan, founder of the First Kyiv Investment Club, continues.
“Privatization is long overdue, because state-owned banks dominate the banking system; they account for more than half of the system. This is bad; this is wrong. That is why privatization is long overdue,” the expert notes.
Of course, the fact that the state’s presence in banks is so large is not due to Sens Bank or Ukrgasbank. The significant increase in the state’s share occurred due to PrivatBank. But the state’s significant influence on the banking sector isn’t always a bad thing. This is the perspective of financial analyst Oleksiy Kushch.
“A large state share is indeed abnormal in peacetime. But we must be frank: during the war, this saved the banking system. We’re talking about the ability to exert influence. Because if we had a private banking system, it would have collapsed in the first months of the war. It would have been simply destroyed by a massive outflow of deposits from the public, who would not have trusted private banks. The state, however, provided guarantees; state-owned banks were trusted, and thus state-owned banks effectively became the backbone of this system during the war, and they effectively saved the banking system. It may also be possible to maintain a large share of state-owned banks after the war—while the economy is recovering,” the expert notes.
But in peacetime, he says, this distorts competition in the banking market because, on the one hand, large state-owned banks have the support of the state, and on the other hand, the state uses them as a sort of “cash cow,” that is, for its own interests.
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The fewer, the better
The easiest way to explain why Sens Bank and Ukrgasbank are the first on the list of state-owned banks up for sale is by looking at the asset sizes of these institutions. Sens Bank, with assets of 103.5 billion hryvnias, rounds out the top ten largest banks in Ukraine, while Ukrgasbank, with 156.5 billion hryvnias, ranks seventh.
The other three state-owned banks rank higher: Ukreximbank is in fifth place, while PrivatBank and Oschadbank top the list of the largest.
Moreover, these three banks have their own distinct systemic role in the market and corresponding functional responsibilities. But the main factor is still size. Because the smaller the bank, the easier it is to sell. This is emphasized by financial analyst Oleksiy Kushch.
“Finding a buyer right now, for example, for PrivatBank or Oschadbank is very difficult. And these two banks are easier to sell. And, by the way, Sens Bank is quite interesting from a buyer’s perspective because it didn’t have any major problems or significant capital shortfalls. It is a fairly liquid bank; it can be bought cheaply, that is, with the aim of development. And then simply extract several times more money from it than was spent on the purchase,” the expert emphasizes.
Moreover, the allegations that have recently been leveled against Sens Bank may also affect the purchase price. But will this, above all, determine the asset’s fate? The perspective of investment banker Serhiy Fursa:
“It is unlikely that the sale will take place this year. I believe that if they really wanted to sell it, they could do so. The thing is, I don’t believe there is a genuine desire to sell. Because the government does not want to lose control over the state-owned bank.”
Ivan Kompan, founder of the First Kyiv Investment Club, also takes a pessimistic view of the prospects for the sale of Sens Bank and Ukrgasbank, though for different reasons:
“Will there really be anyone willing to buy them? I don’t know. From the perspective of macroeconomic indicators and the overall situation in Ukraine, I think it’s difficult to say that the situation is improving and the investment climate is changing for the better. So the question is how successful these sales will be. And if we suddenly see that one of these banks is sold to a major foreign bank, I will be very, very surprised. Pleasantly surprised. That would be a good sign for the country.”
And, one might add, a positive signal to Ukraine’s foreign creditors, who have long been reminding Ukrainian officials that the state’s share in the banking system needs to be reduced.
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