Ukraine central bank to determine Privatbank future soon

Ukraine’s central bank, the National Bank of Ukraine (NBU), will decide the future of the nation’s leading financial institution Privatbank (PRBANK) after it completes verification of an earlier approved recapitalization program, Deputy NBU Head Kateryna Rozhkova told journalists on Nov. 16. She said the NBU is currently finalizing the verification of the second stage of its recapitalization program and it could be competed in week or two, Interfax-Ukraine reported.

Among the options to resolve the capital issues of systemically important banks like Privatbank, as hinted by a recent IMF memorandum, is the bank being nationalized and recapitalized by the state. The memorandum reserves about UAH 150 bln of state expenditure for the recapitalization of banks in 2H16.

Alexander Paraschiy: As was written in Privatbank’s semi-annual report, as a part of its restructuring program it should have obtained additional collateral for a significant part of its loans by Sept. 1, as well as repossess some collateral from failed borrowers. In the same report issued in late August, the bank reported on the repossession of UAH 11 bln in collateral in July-August, but reported nothing on obtaining additional collateral. From this, we conclude that the bank did not fulfill on time all the items of its recapitalization program, which means there are formal reasons to recognize its efforts as unsatisfactory. In turn, this means that the risk of the bank’s nationalization is rising.

The probability of the bank being nationalized still does not look high, we believe. Nationalization would be related to high risks of panic and even social revolt if something goes wrong with it (the bank holds 36% of household deposits). The central bank and the government have no experience and no intellectual capacity to ensure this task will occur smoothly, in our view.

Still, we continue to consider Privatbank’s Eurobonds to be a highly risky asset. The nationalization risk still exists and it presents uncertainty on what the government will do with the bank’s bondholders in case it goes through with it. Recall, the IMF memorandum considers a “bail-in” of non-deposit unsecured creditors as one of the preconditions for nationalization.