By the summer of next year, less than a hundred banks out of the current 120 will remain on the market.
The National Bank is preparing to release a "Concept for Simplifying the Process of Bank Mergers Through Acquisition." As the agency's press service told DS, the document's purpose is to help financial institutions smoothly navigate the next stage of the banking system's transformation. It is already clear that many banks will not be able to meet all of the regulator's requirements. This primarily affects financial institutions in the 3rd and 4th asset groups.
In early November, First Deputy Governor of the NBU Oleksandr Pysaruk set the following conditions at a meeting with the heads of medium-sized and small banks: "By the end of the first quarter of 2016, all banks must have a transparent ownership structure, and by July, their authorized capital must be at least UAH 120 million." As of October 1 of this year, approximately 20 banks did not meet these requirements, six of which had issues with ownership transparency. Going forward, the minimum capital requirement for financial institutions must increase annually by an average of UAH 50 million and reach UAH 500 million by 2024.
It's fun to walk together
Liquidating dozens of banks due to undercapitalization would be illogical. Especially since over 60 financial institutions have already left the market over the past two years. Therefore, the NBU is proposing five possible solutions to this problem. Bank mergers or amalgamations are a priority. According to Yegor Perelygin, Head of Strategic Planning at UniCredit Bank, approximately 7-10 banks may decide to merge in 2016. This will allow them to reduce administrative expenses, align regulatory indicators, diversify revenues, and resolve liquidity issues. "Some large players are willing to acquire a Group 4 bank. Their main demand is a transparent ownership structure and a level playing field for insider lending," says Olena Korobkova, Executive Director of the Independent Association of Banks of Ukraine (NABU).
About 10 small and medium-sized financial institutions may merge with larger banks in the next six months, while another ten may receive "truncated" banking licenses or re-register as financial companies. About five may begin voluntary liquidation procedures.
The National Bank has identified approximately two dozen potential problems that could await its wards during the merger. The most important is the length of the process: "The process of merging one bank with another currently takes several years. Just recall the merger of Ukrsotsbank and UniCredit Bank—it took them about 2,5 years to complete all the formalities," says Elena Korobkova. According to her, the banking authority is currently working to reduce the merger process to five months to a year.
According to the NBU, changes will also affect the procedure for calculating the share conversion ratio, which is currently calculated at par value during a merger. The current principle does not allow for differences in the market value of the merging banks' securities to be taken into account when exchanging shares, which could pose tax risks for shareholders. The NBU plans to allow banks to convert shares at market value. Independent experts will be required to guarantee compliance with market approaches when valuing securities and calculating the conversion ratio. Significant changes are also envisaged for liquidation tax audits, which are currently prolonging the merger process. "The National Bank is completing its internal approval of the draft and will submit it for review by government agencies and banking associations in the coming weeks," the NBU promises.
With things to go
However, bank mergers are not a panacea for the market: "For two financial institutions to merge, clear agreements between their owners and an understanding that this process is mutually beneficial are necessary. This will clearly present difficulties, and conflicts are possible," believes Anna Apostolova, Director of the Financial Department at IBI Rating. According to her, the regulator should also provide other options for a civilized solution to the problem of increasing capital for financial institutions seeking to remain in the market. For example, allowing banks to work only with certain banking operations by establishing more lenient requirements for their authorized capital. "Until 2011, banks, when receiving a general license, also received permission to conduct certain banking operations. Later, the regulator decided that financial institutions will operate under a single general license, which covers broad banking activities. It would be possible to return to past experience," believes Anna Apostolova. The NBU is also considering issuing limited licenses for certain types of banking activities. For example, restrictions may apply to the volume of deposit funds attracted or to settlement and cash services.
Another option for banks that cannot meet even the "reduced" standards is re-registration as a financial company. Banks that no longer wish to operate in the banking sector should be able to exit the market voluntarily through voluntary liquidation. Rumor has it that one bank has already approached the NBU with such a proposal, but the regulator is dragging its feet. This procedure is not clearly defined by law and is extremely cumbersome. There have been no such precedents in the history of the Ukrainian banking system. "A bill is currently being developed that would provide for a highly simplified procedure for bank liquidation at the request of the shareholders themselves. A shareholder would be able to 'lay the keys on the table,' take their assets, and transfer their deposit and loan portfolio to another financial institution," says Elena Korobkova. The banking authority is still debating who will inherit the liquidated banks—one of the state-owned banks or a financial institution selected through a tender.
According to Yegor Perelygin, in 2016, approximately five banks will declare their intention to begin liquidation, while another seven to ten will reclassify as financial companies. "Everything will depend on the legal process and the mechanisms the regulator provides to the market," the analyst concludes. The remaining banks will be able to utilize two fallback options provided by the NBU to recapitalize: asking shareholders for cash or sub-debt from their general investors.
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