Ukrainian banking: moving from crisis to cure

A Google search for ‘banking transformation’ yields 35 million results. It’s a popular – some might say vastly oversaturated – topic. Transformational activity is typically undertaken on a voluntary basis as part of a prescribed strategic initiative to drive either an individual institution or the wider financial industry forward.

Kiev

In the case of Ukraine, the luxury of choice isn’t an option. Sectoral change is being forcibly performed in response to the complex geopolitical and economic challenges blighting the country, with the new pro-democracy government of President Petro Poroshenko keen to usher in an era of transparency, integrity and improved corporate conduct as a much-needed replacement for opaqueness, criminality and arrogant oligarchical behaviour.

The National Bank of Ukraine (NBU) has the unenviable task of cleansing the industry of its debilitating ills and ailments. However, under the governorship of Presidential appointee Valeria Gontareva, the NBU is explicitly demonstrating that it’s perfectly capable of – in Gontareva’s own words – “turning an ugly duckling into a swan”. The evidence of banking’s metamorphosis is plentiful. As of March 2017 (when I visited Kiev to address the CIS Bankers Forum), the NBU has hastened the closure of 87 banks, for a variety of entirely appropriate reasons. Some of the now defunct firms were actively engaged in money laundering, washing the funds of criminal enterprises operating at home and abroad. Other institutions had become zombified, possessing a stack of liabilities but with insufficient assets against which to offset them. And ridding the sector of oligarch-controlled banks, where unscrupulous individuals were flagrantly using the deposits of private account holders to invest in their [non-bank] business ventures as if the money were their own, has also commenced.

Significantly, the transformation of the competitive environment isn’t restricted to the wholesale removal of non-desirable players. In December 2016, the NBU nationalised PrivatBank following the shock discovery of a capital shortfall amounting to $5.65bn. PrivatBank is a textbook example of an institution which operated with undue oligarch influence, as an astonishing 97 per cent of corporate loans were made to companies linked to its shareholders.

And the decisive interventionist actions don’t end there. The government recently placed sanctions on five Russian state-owned banks operating in Ukraine. BM Bank, Prominvestbank, Sberbank, VS Bank and VTB are no longer able to transfer funds to their subsidiary or parent companies outside of Ukraine. This step, taken in mid-March 2017 as a response to Sberbank’s decision to begin accepting documents issued from the breakaway republics of Donetsk and Luhansk, is already acting as a catalyst for change in the composition of the banking landscape. On March 28th, Sberbank announced a plan to sell 100 per cent of its Ukrainian subsidiary to a consortium, including Latvia’s Norvik Bank and a private company from Belarus. Sberbank has a decent presence in Ukraine – it’s the sixth largest bank by asset, with an established network of 150 branches and nearly 1m customers – and so the consortium’s acquisition is notable. It remains to be seen as to what direction the new owners decide the [presumably] renamed bank will go in, but digital transformation will likely feature on the To Do lists of the incoming leadership team.

While it seems utterly trivial to talk digitalisation as conflict rages violently on a daily basis between the army and Russian-backed separatists in Eastern Ukraine, it is a subject which needs to be understood. Better performing retail banks, in every part of the world, have routinely migrated customers to digital channels in order to achieve a balance between the service(s) provided and the costs incurred. Online and mobile banking penetration has increased exponentially as a result of technological advancements and client acceptance, but customers of Ukrainian banks aren’t making extensive use of these mechanisms. Research from Finalta indicates that just 9 per cent of account holders access online banking regularly, compared with 52 per cent across the CEE region and 61 per cent in Ukraine’s neighbour to the west, Poland. Mobile banking is even lower: 3 per cent in Ukraine, versus 11 per cent in CEE and 26 per cent in Poland. Clearly, there’s much work to be done. But based on my observations in Kiev, and in-depth conversations with bank executives, there is a strong desire to accelerate the digitalisation of Ukrainian banking.

Digital needs to penetrate every operational area, starting with transaction and interaction channels, continuing into the middle office where relevant products and services are created, and extending to the back office where core processing and risk reporting activities are performed. Failure to undertake wide-reaching digital transformation will place additional strain on an already inefficient industry, and will prevent Ukraine from making further essential progress on the long road to recovery.

Ukraine’s situation vis-à-vis transformation is different to many of its peers, in that the degree of change is far greater due to the severity of the ongoing situation and the short, medium and long-term implications of the crisis in the rebellious regions in the east. During 2017 and beyond, the NBU must continue its work to rehabilitate the banking sector, by ensuring that the firms under supervision increase transparency, comply with new prudential regulations, improve corporate governance and develop adequate risk management practices. Encouragingly, the NBU is a passionate proponent of digital banking, and has extolled its virtues publicly as a means of improving operational efficiency (e.g. by allowing the substitution of paper documents for electronic versions) without increasing risk.

Progressive regulators are those who recognise the benefits afforded by new technologies, and can see how it can benefit banks, their customers, their investors and industry overseers themselves. To my mind, the NBU unquestionably belongs in this ‘progressive’ category. The implementation of an open data project designed to provide easier access to key information is underway, and Artem Rumiantsev, the Head of the Digital Communications Division has spoken candidly about what the initiative is aiming to achieve. According to Rumiantsev, “when it comes to digital communication channels, we seek to shift away from presenting data in conventional formats toward the concept of information centricity, meaning that the NBU would regard the entire content as data and gradually turn  unstructured data into structured data.  The provision of structured data via the Application Programming Interface (API) will enable the maintenance of functional compatibility, ensure data openness and make sets of data available for use in the public and corporate sectors, as well as to individual users.   Users will be able to use this data at their convenience: to disseminate, refer to and incorporate this information.”

When placed in context, I think an air of cautious optimism is justified: the latest macroeconomic indicators suggest that recessionary conditions have ended, and Poroshenko’s government is determined to ensure the banking sector receives the necessary assistance, interventions and reforms to prevent the system from collapsing with catastrophic consequence. Against this backdrop, institutions are making tangible material improvements around liquidity, profitability, capital adequacy and reducing financial crime, with their work overseen by an enthusiastic, committed and capable regulator. There is a renewed willingness among banks to digitalise, along with a keenness to learn lessons from previous failed attempts to increase the adoption of mobile and online banking and avoid repeating the mistakes of prior years.

Ukraine is still enduring turmoil, but there’s a perceptible sea change in the banking sector which will help improve conditions in a nation whose geographic proximity to Russia has been the source of friction for centuries. To this end, the efforts being made by the Valeria Gontareva and her team at the NBU should be lauded, given the difficult circumstances under which they’re operating. Ukraine will emerge from this crisis (hopefully sooner rather than later), and while digitalisation is not the sole curative in a highly complex situation, it does undoubtedly have an intrinsic role to play in the future development of both the banking sector and the country at large.