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Volume 4, issue 08 August 2010 Kharkiv was not originally included among Ukraine`s four first choice Euro 2012 host cities, but the East Ukrainian capital forced itself into contention by pushing ahead impressively with a variety of infrastructure projects. This determination was finally rewarded when Kharkiv replaced Dnipropetrovsk as a UEFA host city in 2009.
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Metalist maracles win UEFA respect
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Kharkiv airport: ready for take off
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23:41 Saturday, September 4, 2010 |
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Industry Credit sector climate change
Ukrainian credit market looks towards corporate clients and Euro 2012 to ease liquidity woes
Anna Parkhomenko & Vadym Kuntsevych, KPMG Volume 4, issue 6 June 2010
Since first impacting on the Ukrainian economy in late 2008, the ongoing global financial downturn has given rise to a number of risks for Ukraine’s banking sector that have forced the country’s banks to rethink their approach to the Ukrainian market. The lower level of lending transactions that have been witnessed following the onset of the global credit crunch in Ukraine, coupled with a downturn in most Ukrainian retail customers’ creditworthiness, have combined with the devaluation of the Ukrainian hryvnia currency to result in an increased number of problem loans throughout the sector. This has inevitably led to much soul-searching within the banking sector and could now help to push forward reform and the long-overdue rationalisation of the domestic Ukrainian market for loans. New banking sector realities: Debt restructuring and downsizing A few years ago Ukraine’s banking sector was widely regarded as one of the hottest tickets in the world of emerging market investment, with major European high street banks lining up to enter what was touted as one of the last great European marketplaces. However, those heady days of growth and almost limitless demand now see a long time ago. At present, Ukraine is still coming to terms with the new realities produced by a significant decline in lending activities both in the corporate and retail sector of the domestic banking industry. Among Ukraine’s nearly 200 registered banks only 25 are currently granting loans to corporate customers, while the number of Ukrainian banks that provide retail loans has shrunk to just 13. For Ukraine’s banking sector, restructuring debt and downsizing the burden of problem loans are been placed at the very top of the priority list. Tougher terms for potential borrowers The current state of relative stagnation on Ukrainian credit markets is driven by a variety of factors including limited opportunities to make any kind of long-term economic forecasts, the devaluation of the Ukrainian national currency (as loans denominated in foreign currency were often granted to customers who did not have foreign currency receipts), a broad decline in household incomes, and significant portfolio concentrations in the hard-hit real estate sector and in long-term financing projects. The remedial strategies adopted by Ukrainian banks will involve a more detailed and thorough risk assessment process and tightened lending procedures, reflecting the newly tempered risk appetite of the chastened market. Consequently, potential borrowers’ financial performance will be put under a probing eye, current creditworthiness analysis methodologies will be fundamentally revised, and more complex and strict credit criteria will be adopted. How will this impact on both the corporate and retail credit markets in the coming 12 months? At present the Ukrainian banking sector’s liquidity has yet to be restored to the levels enjoyed around 2008 and most banks continue to lack sufficient resources to resume and expand their retail operations. Due to the ongoing Ukrainian economic downturn and the slow recovery of the country’s consumer sector, the creditworthiness of the majority of potential retail customers remains quite low. This economic reality is forcing Ukraine’s banks to seek a solution to liquidity problems by focusing on the development and implementation of loan restructuring plans rather than by seeking an expansion of their retail business. In the near future it is likely that Ukrainian banks will give priority to short-term loans, e.g. car purchase loans with a maturity of 2 to 3 years. However, issuing long-term loans and launching mortgage credit programmes on a massive scale appears too precocious in the current credit climate. At present, just over 10 Ukrainian banks are involved in the mortgage business, with the minimum initial installment required currently standing at 30% - far higher than in most European countries. Can Euro 2012 save the corporate loan sector? The situation in the corporate lending sector appears to be considerably more optimistic compared to the realities facing the retail lending sector, as corporate lending requires a narrower scope of techniques and methods to be employed. Furthermore, the corporate sector also benefits from having a relatively smaller number of loans which are exposed to the potential risks brought on by the global credit crunch and economic downturn. Agriculture, the food industry, the power sector and pharmaceuticals all appear to be priority targets for the country’s lenders. Due to the fast approaching Euro 2012 European football championships, Ukrainian banks are also likely to show a special interest in construction companies, airport operators and road builders in the coming months, tailoring loan facilities and credit lines in order to attract some of the business generated by the projects planned to bring Ukraine up to speed as a co-host of Euro 2012. Despite this relative optimism, corporate clients seeking loans can expect to experience new levels of scrutiny in the coming months. Whatever the priorities adopted by the country’s lenders may be, it should be noted that the majority of Ukraine’s banks will take decisions on granting loans on a strictly case-by-case basis depending on the borrowers’ sustainability, their ability to generate cash flows, the feasibility of individual projects, the nature of business and the overall creditworthiness of the potential customers. Following the recovery of the Ukrainian banking sector’s corporate loan segment most domestic banks will likely treat those corporate entities that were able to service their debt in a timely manner as preferred customers and work hard to provide them with the additional services that they require. A chance to move emphasis from quantity towards quality At present it is only possible to say that the full recovery of the lending activities will depend on broader macroeconomic conditions, the country’s political and economic stability, the growth of borrower creditworthiness, and a restoration of credibility between the banks and their potential customers. Whatever the new shape of the Ukrainian credit landscape the test provided by the recent global financial crisis should lead to a more robust and sustainable position for the country’s financial institutions. Ultimately, it may enable Ukraine’s growing banking sector to transfer the emphasis away from quantity towards quality based performance and to introduce more sustainable risk management concepts into their lending business. Anna Parkhomenko is an Audit Partner with KPMG in Ukraine. Vadym Kuntsevych is Audit Senior Manager of the Financial Services Group within KPMG in Ukraine
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