Swedbank to scale back after big losses

2011-10-14 15:17:56

After paying billion-dollar price tags to buy their way into Ukraine’s bank sector, only to end up saddled with piles of bad debt during the 2008-09 economic crisis, European banks that once had a 40 percent market share are sharply scaling back.

They’re doing so to limit overexposure to a once-promising market now categorized as “risky.”

Latest figures show a troubling trend reminiscent of the crisis three years ago, with retail deposits contracting by Hr 2.7 billion and the central bank’s foreign reserves plunging 8.4 percent in September.

On Sept. 19, the nation’s 20th largest bank by assets – Sweden’s Swedbank – announced that it is rolling down retail operations with plans to chisel its nationwide 170-branch network to 10 by September.

The bank is urging local deposit clients to collect the full amount of interest accrued on their accounts to date during the early deposit agreement termination lasting until Nov. 30. Regarding its 170 bank branch offices in Ukraine, Swedbank said it has no specific plans for a network selloff although it is willing to consider purchase offers.

Swedbank’s Ukrainian subsidiary posted a net profit of $5.5 million for the first half of 2011, 7.3 percent down year-on-year. But the relatively small profits don’t show the entire picture and pain that the Swedish banking group has felt in Ukraine.

Like most banks in the nation, it has since the 2008 global financial crisis relied heavily on large capital infusions from its parent group, with double-digit non-performing loan levels.

Anastasia Tuyukova, a banking analyst at Kyiv-based Dragon Capital, said more than $8 billion in fresh capital was injected by private investors ($4 billion from European parent groups) into Ukrainian subsidiary banks since late 2008 just to keep them financially afloat.

Nearly $600 million in fresh capital was pumped into Swedbank’s Ukrainians subsidiary in this period, according to Tuyukova. That is painfully close to the $1 billion the Swedes paid to buy the bank years earlier from current Deputy Prime Minister Sergiy Tigipko.

Swedbank said the decision to scale down in Ukraine is part of a strategic shift.

Increasingly, the focus of Swedbank and other European banks in Ukraine will now be not on lending to a cash-strapped middle class, but to the corporate segment – yet another sign that the only ones prospering in the nation’s economy nowadays are billionaires and their companies. In an identical move last year, Swedbank started the process of phasing out of Russia’s retail market.

“In general, European banks have enough issues at hand at home [with the Euro debt crisis] so their strategies in ‘perennially troubled’ Ukraine are likely to be defensive – including closing down retail banking altogether,” said Konstantin Golovynsky, an analyst at the Ukraine office of Renaissance Capital.

“More banks may well follow,” he cautioned.

Dutch ING Bank exited Ukraine’s retail banking segment in 2009.
Renaissance Capital in March sold its retail banking unit to SCM Finance, the financial arm of Ukraine’s richest man, Rinat Akhmetov. Dutch-controlled Home Credit Group was in February sold to Platinum Bank, a medium-sized domestic bank which started out in mortgage lending but is now diversifying given that Ukraine’s residential real estate market remains in a deep freeze.

Experts said big European banks tried selling their domestic operations in the wake of the 2009 recession, but struggled to find buyers. Swedbank described its decision as a way to decrease exposure to risk.

“The change is in line with our strategy to offer universal banking on our four home markets [of Sweden, Estonia, Latvia and Lithuania] and have more focused offering in niche markets. Clearer focus will also enable us to improve Swedbank’s cost efficiency related to operations in non-home markets,” said Swedbank’s CFO Goran Bronner.

Alexander Valchyshen, head of research at Kyiv-based Investment Capital Ukraine, said European banks in Ukraine are “making backward steps regarding investments into Ukraine and other Central and Eastern European countries”

Bank Forum, bought just before the 2008 crisis by Germany’s Commerzbank group for close to $1 billion, on Oct. 12 addressed market rumors that it will close down retail banking operations.

“Nonsense. It is true that our corporate business currently accounts for a larger part of our loan portfolio compared to our retail business. However, we have ambitious plans to increase our retail loan portfolio and we are convinced that we are able to achieve these plans,” said Vadym Berezovyk, Chairman of the Board of Bank Forum Commerzbank Group.

Golovynsky said that although usually more profitable, Ukraine’s retail banking sector for the time being is unattractive while corporate banking is more predictable and easier to manage.

Valchyshen said that Ukraine’s retail sector remains promising noting the recent aggressive expansion of Russian banks onto the market, some backed by their government.

“Russian banks are in a counter-business cycle compared to European banks. They were exposed less to the financial crisis. They didn’t race into foreign markets like the French and Austrian banks did,” Valchyshen added.

Swedbank said it has already sold its non-performing portfolio of unsecured retail loans in Ukraine and will consider purchasing offers for its portfolio of secured loans. Its second quarter report states that its loan portfolio was $1.5 billion, of which $666 million was in retail.