When will Alfa-Bank Ukraine be nationalized, and how much could it be sold for later?

14 November 2022, 04:55 PM
Alfa-Bank (Photo:Alfa-Bank Ukraine)

Alfa-Bank (Photo:Alfa-Bank Ukraine)

JSC Alfa-Bank Ukraine could be nationalized by late 2022, NV Business reported on Nov. 14.

The need is dictated by the decline in the bank’s liquidity and the inability of its Russian owners to recapitalize it. Analysts believe the bank could be an attractive asset if it were to be sold on.

The Verkhovna Rada, Ukraine’s parliament, on Oct. 6 passed a law on the nationalization of systemically important banks during martial law. There are 14 such banks in Ukraine, including Alfa-Bank.

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However, Russian businessmen Mikhail Fridman, Petr Aven and Andrei Kosogov are among its owners. They all found themselves under sanctionsin the United States, Great Britain, and Ukraine after Russia’s full-scale invasion of Ukraine.

In October, Fridman informed the National Bank of Ukraine (NBU) about his readiness to hand the bank over to the state or to recapitalize it with $1 billion. This amount includes the need for $500-600 million to comply with the capital adequacy standards and resources to increase lending, said Roman Shpek, the chairman of the bank’s supervisory board.

But such a scenario is unlikely. After the news about the recapitalization, Ukraine’s Ambassador to the United States Oksana Markarova said the United States hopes for the synchronization of Ukraine’s sanctions, in particular that they should also apply to Alfa-Bank.

Given this, the NBU is unlikely to meet Russian shareholders, informed interlocutors on the banking market told NV Business.

On what grounds can Alfa-Bank Ukraine be nationalized?

According to the adopted law on the peculiarities of withdrawing a systemically important bank from the market under martial law conditions, the only legal basis for the nationalization of such a bank is its loss of liquidity. That is, the fact that the bank has not fulfilled its obligations to depositors and other creditors due to insufficient funds.

This may happen by late 2022, interlocutors of NV Business say. The bank is gradually losing liquidity due to outflows of clients’ funds, while there are no real possibilities to maintain capital levels. Average indicators of daily outflows amount to UAH 100-200 million ($2.7-5.4 million) per day, and these are increasing as news of the bank’s problems spread.

Therefore, the decision on nationalization will be made at the first signs of problems with making payments and/or fulfilling obligations to depositors.

So far, Alfa-Bank’s standards are within the norm, but on the limit of what is acceptable, both in terms of capital (H2 – 11.1% as of Oct. 1, 2022) and liquidity (NSFR – 108.7% as of Oct. 1, 2022), Andriy Prykhodko, head of the analytical department of the Millstone&Co investment company, told NV.

Shpek noted the necessary volumes of recapitalization will be clear after the end of the war or its active phase.

“Today they are slightly smaller, based on the quality of the loan portfolio, but I would like to emphasize the war is not over yet,” he said.

“For its part, based on the expertise of the team and the priorities set by the government, the management prepared proposals for the bank’s participation in active lending, restoration/reconstruction of relevant sectors of the economy, infrastructure, social life of the country, etc.”

According to him, the presentation of these intentions has been submitted to the authorities of Ukraine, the European Commission, as well as to the relevant authorities, where the owners applied for the unfreezing of $1 billion.

“Thus, we can create a mechanism of voluntary financing by private investors for the reconstruction of Ukraine. I think this issue is important for everyone,” he said.

Why is the nationalization of Alfa-Bank necessary?

The bankruptcy of a systemically important bank (SIB) with a volume of client funds of about UAH 70 billion ($1.9 billion) is a significant threat to the country’s financial stability, especially during wartime.

If case the bank is declared insolvent, the Deposit Guarantee Fund must pay 100% of the funds to private depositors and individuals. The bank also serves more than 30,000 legal entities, which in this case will lose their funds. This will trigger a negative “domino” effect in the economy.

In fact, the nationalization of an SIB would effectively be to rescue it for the period of the active phase of the war, with its subsequent sale to a strategic investor.

How will the nationalization procedure proceed?

The nationalization will take place in accordance with the law on amendments to the Tax Code of Ukraine and some other laws of Ukraine regarding the peculiarities of withdrawing a systemically important bank from the market under martial law.

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In accordance with its provisions, the bank will be declared insolvent due to loss of liquidity and will be transferred to the Deposit Guarantee Fund. The state, represented by Ukraine’s Finance Ministry, will be able to become its owner, buying its shares for UAH 1. At the same time, the bank will continue to work in the usual mode according to its own business model. Bank customers will not be affected by this process.

Unlike the case of PrivatBank, nationalization will take place without recapitalization.

The management board and the supervisory board will be suspended. For a complete or partial replacement of the management, the new bank’s owner (the Finance Ministry) will put forward candidates, which the NBU is to approve.

Is there a procedure by which the owners will be able to recapitalize the bank?

According to NV Business, the NBU did not receive any package of documents regarding the recapitalization of Alfa-Bank, while only individual owners of significant participation announced the relevant intentions. The implementation of these intentions is unlikely, given the sub-sanctioned status of the specified owners.

At the same time, Shpek told NV Business today they are actively working with the European Commission, the relevant authorities of the Principality of Monaco, as well as the UK regulator.

“Since the funds are in Monaco, but the bank (from which the shareholders want to get the money) is British,” he said. Now they are waiting for the decision of the authorities of these countries and hope to be able to recapitalize the bank.

Are there risks of lawsuits from the bank’s former shareholders after nationalization?

Yes. According to NV Business, the NBU is ready for such a development. However, the court decision adopted regarding PrivatBank, with reference to the so-called “anti-Kolomoisky law,” makes it impossible to return the nationalized bank to its former owners. Lawsuits can only be submitted for compensation for damages.

Shpek emphasized that, if necessary, the shareholders are ready to sell the bank and not sue, but they are open to recapitalizing the bank with their own funds.

“It’s obvious the banking system will need recapitalization,” he said.

“One question is whether these are state budget funds or private ones. Shareholders are ready to recapitalize the bank using their own private funds.”

Shpek claims the situation has changed now and there is an opportunity to save the bank without nationalizing it.

“There was a period when calls for the bank’s nationalization were heard from various political platforms,” the banker said.

“In my opinion, the situation is currently stabilizing, and the issue of nationalization is not the first priority.”

Is Alfa-Bank interesting to strategic investors and how much might it cost?

Alfa-Bank will be sold to a strategic investor after nationalization.

Analysts believe that Alfa-Bank has an effective business model, as well as developed operational and IT platforms, which may interest a strategic investor – in particular one with foreign capital.

“Alfa-Bank’s main problem is its shareholders who were sanctioned,” says the analyst of the ICU group, Mykhailo Demkiv.

“In general, the bank’s performance is not significantly worse or better than that of other systemic banks with private capital. The outflow of clients’ funds from the bank due to their fears and an extremely negative sentiment towards everything that is in any way related to Russia was the biggest difference.”

During the period from Feb. 24 to October, the funds of this bank’s clients, excluding the effect of devaluation, decreased by a third, by 53% for legal entities and 20% for individuals, respectively.

Alfa-Bank Ukraine, market share, %

“Alfa-Bank is one of the largest banks in Ukraine and a very prominent player on the market,” Demkiv said.

“According to the indicator of individuals’ funds, the bank ranks 4th, followed by Raiffeisen, during the war. The bank has been actively expanding consumer lending and is one of the leaders in this segment.”

According to Demkiv, the number of active bank cards has decreased by a third since the beginning of the year, which is significantly more than in the banking system as a whole, which saw a drop of only 4%.

“On the other hand, large depositors remained more loyal as the number of deposits with a balance of UAH 600,000 ($16,407) and above has decreased by only 8% since the beginning of the year.”

The bank provides a wide range of services, primarily for individuals, Demkiv noted.

In late 2021, it was the first to launch a service for the sale of foreign shares in a banking app and set up the trading of domestic government loan bonds from its balance sheet, in particular the sale of military bonds through the Diia mobile app.

“We can recall fierce competition with other players, primarily Universal Bank (the Monobank brand),” Demkiv said.

“And competition is beneficial primarily to consumers and clients.”

Prykhodko from Millstone&Co considers Alfa-Bank’s retail business an attractive asset since Alfa-Bank is comparable in retail to Monobank in terms of the number of customers, cards issued, and the volume of the loan portfolio.

In his opinion, the risks for a future investor are primarily related to the corporate portfolio, and this applies to all Ukrainian banks – the main skeleton in the cupboard, in the form of hidden NPLs, is there.

“Alfa-Bank was also involved in the process of absorbing the problematic portfolio of Ukrsotsbank,” he said.

According to Prykhodko, since there is currently no market in Ukraine, i.e. there are no agreements on the merger and acquisition of banks, it is hardly possible to estimate market value now.

“It’s unlikely that any strategic investor will have a desire to invest in the Ukrainian banking sector under martial law,” he said.

“We can only guess how much such a bank will cost after the war. Provided that the world economy and investor sentiment recover,and the management of the bank after nationalization is competent, such a bank may be worth more than its capital.”

It (the capital) amounted to UAH 8.6 billion ($235.1 million) as of Oct. 1.

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