Page 87 - bne Magazine February 2023

bne February 2023
capabilities), despite certain benefits to revenues currently. Longer-term business prospects lie in a haze of uncertainty, while no rouble earned is allowed to leave Russia in
the meantime. Basically, we see an “exit” dilemma on various fronts.
Firstly, any transaction would require an eligible counterparty plus full local consent, i.e. by Russian and Western authorities. Russian authorities, by and large now represented by the Kremlin, are possibly a more consolidated counterpart to negotiate with. Hence a sanction waiver might be more feasible to get (depending on the discount). The same
holds possibly true for the US and OFAC. However, within the complex EU structures European banks would have to negotiate a more complex market exit deal with several competent national and/or supra-national authorities.
Secondly, any divestment is definitely not a “normal” M&A transaction where long due-diligence periods and/or deal walk-away options are feasible. Not to mention complex accounting issues plus valuation topics given overall (FX) market dislocations and blocks to outright capital transfers. Furthermore, the question of operational feasibility of previous “Western banking models” under new ownership is not given.
Thirdly, currently the feasibility of any bold strategic movement is getting more and more limited in light of ever tightening sanctions and worsening of the conflict. Among the big foreign lenders only SocGen managed to arrange
a quick withdrawal in April, which cost the group €3.2bn, though it still seems to have been a special case (divestment of the Rosbank subsidiary basically to the same investor – Interros Group – from whom it was purchased in 2006-2008). Otherwise, the window for orderly exits was promptly shut
“The window for orderly exits was promptly shut with the adoption of a presidential bill that banned foreign banks from selling their stakes in Russian entities”
with the adoption of a presidential bill that banned foreign banks from selling their stakes in Russian entities. Even though special waivers are possible, the government clearly has an upper hand in negotiations over exit strategies for investors from “unfriendly states”.
And let’s not forget that for the time being both sides possibly have a certain interest in keeping channels for (limited) economic and financial exchange open. Any further
Opinion 87 divestments by Western/EU owners would possibly change
the rules of the game here.
For the time being EUR and USD payments are still in demand, although note the high speed of switching to alternative currencies in Russian export settlements. The Q4 respective shares of dollar and euro were down to 33.9% and 18.7% (FY 2021: 54.5% and 29.7%, correspondingly), replaced mainly by the RUB and CNY already representing 50% of export settlements (close to 15% in CNY), up from just below 20% in 2021. Here we assume the largest local state banks will dominate in payment services on the Russian side.
The Russian military aggression against Ukraine has caused
a super-adverse environment for the Ukrainian banking sector. In particular, credit and operational risks increased tremendously due to the seizure and destruction of assets as well as a significant deterioration in the financial performance of both customers and the banks.
It was not a surprise to us to see a deterioration in the quality of banks’ loan portfolios caused by the war. Hence, NPL
rates have increased from 31.5% to 37.5% for the corporate sector and from 15.9% to 27.6% for the household sector over the first seven months of the war. We expect that NPLs will continue to increase on the risks tied to war, but it is unlikely they will exceed the 55% maximum recorded after the previous crisis in 2014-15 given the clean-up effort made by the regulator since then.
Therefore, the probability of a mass bankruptcy of the sector (in the manner of 2014-2015) remains low, while recapitalisation needs will be possibly shared within the IFI community (if needed). It is worth noticing that the war has not been as disastrous for the hryvnia as during the previous crisis in 2014-2015. A sound volume of foreign currency reserves and emergency measures applied by the NBU saved the market from collapse at the beginning of the war. Therefore, in the first nine months of 2022, the banking sector posted still a remarkable positive (!) return on equity of 4%.
So much for the "good" news from the war-torn country. In the context of the previously sketched geopolitical risk awareness of Western banks, it is somewhat bitter that risk reduction
in the case of Ukraine has led to Western banks now having lower exposures here (at around 1% of their CEE assets) than in the case of Slovenia. Definitely, this is not the exposure needed for a sustainable rebuilding of Ukraine.
This opinion piece was written Gunter Deuber, Ruslan Gadeev, Jovan Sikimic and Oleksandr Pecherytsyn of Raiffeisen Research in Vienna & Kyiv.
The full report it was based on can be accessed here. www.bne.eu