Money is becoming more expensive all over the world. Therefore, assets will be sold despite the political situation. Evidence of this is foreign investors’ interest in acquiring Ukrainian banks. What is most interesting, however, is that foreign capital has lately been attracted not only by the opportunity to become a strategic investor. Portfolio investments are also attracting significant interest.
Ukrainian banks, in turn, seeking to enhance capitalization, are benefiting from selling small blocks of shares “on the side.” Kharkiv’s Megabank recently announced the sale of a 20% interest to foreign portfolio investors from Switzerland, Austria, Germany, and Russia. Some shares were also bought by a Ukrainian investment fund. According to the head of the bank’s board, Viktor Subbotin, this move is explained by the desire to expand their presence on the stock market. He believes that in the conditions of the mounting struggle between system banks (the top ten according to banking ratings), the only way to avoid bankruptcy for smaller banks is either by combining forces or selling themselves to foreign investors.
Not all stockholders want to lose full control over their bank. Megabank had its reasons not to do this: this bank runs the only energy and municipal payments center that allows payment of all bills with one invoice. This service is being used by 10 percent of the Ukrainian population. Subbotin added that the bank has had several offers to sell everything, but the bank chose portfolio and not strategic investors.
This banking service allowed Megabank to sell its shares for a handsome sum of around 20 million dollars, and the shares were sold at a 4.1 ratio compared to owned capital, while the system Ukrsotsbank was sold at a ratio of approximately 5. Ihor Mazepa, director general of the investment company Concorde Capital, which took care of placing Megabank’s shares, says it is better to sell either system banks with large stocks and assets or banks that occupy considerable space in a certain niche, or banks that provide unique services. In the presence of these characteristics investors can really count on substantially increasing their capitalization.
Mazepa says that the sale of some shares to foreign investors will noticeably enhance the bank’s possibilities to attract credits: “The very fact of the presence of significant portfolio investors in Megabank’s capital will add to the bank’s ability to acquire greater amounts of cheap money and allow its management to deal with international creditors from stronger positions.”
After successfully selling shares, the bank decided on an additional emission worth 65 million hryvnias. This money will eventually be added to the bank’s capital. In other words, after becoming partially “foreign,” the bank plans to join the system banks in the next couple of years.
This method of joining the top ten was used by Forum Bank, which sold 10 percent of its shares to foreign investors in the fall of 2005. According to Mazepa, this had a positive effect on its development, and its ratings may soon noticeably rise. Therefore, such partial sales may well prove effective for small banks that do not want to experience what happened to Harant and Interkontynentbank, but which have no intention of denying themselves the status of Ukrainian banking institutions.
In fact, Mazepa says that the trend of selling whole banks is losing popularity. “The most aggressive buyers have sated their interest.” He adds that banks in Eastern Europe are being sold at rates ranging between 2.7 and 3.5. Our rate has risen to 4.5-5. A number of Western investors regard this as very high for full purchase. At the same time, Western investors are interested in Ukrainian banks because of their quickly growing history. The main thing is that investors are benefiting from such investments. Forum, for example, has earned its portfolio investors 80 percent annual interest since last November. But this profitability is only a lower margin, Mazepa says.
Foreigners will thus most likely realize their desire to invest in the Ukrainian banking system as portfolio investors. Mazepa predicts that this demand will last for 1.5-2 years, since the elections had no adverse effect on the market’s attractiveness. Megabank sold its shares in the last week before the elections.
Concorde Capital’s broker Lucas Romriell says that most investors realize that despite its political instability, Ukraine remains an attractive market. He believes that the formation of a government coalition in any format, orange or blue, will have a positive effect on the market because it will show that political forces have reached a compromise. His estimates show that shares of banks are now second only to those of start-up companies.