Wednesday, December 21, 2016

Insolvency of PrivatBank Ukraine: Euphemisms Abound

Моя Україно,За що тебе сплюндровано, За що, мамо, гинеш?

Would his anger be tempered today by knowledge that the perpetrators are Ukrainians? 

AA doubts it.

Now to the post.

AA prides himself on his skill in using euphemisms to describe financial weaknesses and ethical slips. 

This Tuesday The Bloomberg lit up with news that The National Bank of Ukraine—the country’s central bank—announced it had declared PrivatBank insolvent and that Ukraine’s Government would assume complete ownership. 
By way of background, Privatbank is the largest bank in the country.  It is privately owned with two biznesmen—described by some as “oligarchs” but always as “pro-Western”—holding over 90% of the bank’s shares. Besides his many business ventures, one of them, Mr. Kolomoiskyi, has been accused of funding the Azov Battalion.

As I read the speech by the Governor of The National Bank of Ukraine and other news, I was in utter awe at her and her colleague’s command of euphemisms. 

Professional honor compels me to acknowledge their skill.  Frankly my own efforts seem rather small and paltry in comparison.  Therefore, I offer a humble tip of AA’s enormous tarbush to Governor Ms. Gonatraeva and to NBU First Deputy Chairman Yakiv Smoliy.  
First, to the Chairman’s 19 December speech reported at The NBU website in English.  Strangely, AA was unable to find the Ukrainian language version. Italics courtesy of AA.

Inspections and stress tests carried out by the NBU revealed that PrivatBank had capital shortages. As of 1 April 2016, the bank had capital shortages amounting to UAH 113 billion, which, apart from crisis-related factors, were caused by imprudent lending policies pursued by the bank. As of 1 November 2015, related-party loans accounted for 97% of the bank’s loan portfolio, totaling UAH 150 billion.

Now for the comments: 
  1. Capital “Shortage”:  As per its 3Q16 financials, Privatbank had some UAH 30 billion in capital and total assets of UAH 271 billion.   Given those amounts, calling a UAH 113 billion capital deficit— which is equivalent to 380% of equity or 42% of total assets—a “shortage” is like calling The Grand Canyon a “river valley”.  Or 2008 a “recession”.  Technically correct to be sure, but somehow the full picture is lost.
  2. “Imprudent” lending policies:  When a bank needs to raise new capital equal to 380% of existing capital or equivalent to 42% of total assets, one doesn’t need a lot of financial analysis to figure out that lending standards left quite a lot to be desired.  The good folks at Bloomberg had a slightly different translation “ill-considered loan policy” which is an even better euphemism. 
  3. “Related Party Loans”:  When related party loans are 97% of loans and 4 times the maximum limit set by The NBU, such behavior seems to rise to a level well above “imprudent” or “ill-considered”.  AA might apply descriptors such as “patently immoral” and perhaps even “criminal”.   That being said, AA is not familiar with the legal status of Ukrainian banking regulations.  It may be that they only rise to the level of “suggestions” sort of like the Pirates’ Code, which seems apt given the location.  On a positive note, lending to oneself has certain advantages in streamlining the underwriting process.
But at SAM we never fail to be “fair and balanced”. 

So let’s let Privatbank speak for itself.
As per its unaudited 3Q16 financials, Note 13 shows the bank’s related party exposure as minimal only UAH 8 billion down from about UAH17.8 billion at 31 December 2015.    

One note, there is no auditor’s review statement in the 3Q16 financials and so it’s impossible to know if they were reviewed (but not audited) and whether these are IFRS statements. I believe they are not.  

Privat’s IFRS AR for 2015 shows a higher figure for related party loans roughly twice the UAH 17.8 billion above (see note 31) but quite a long way from 97%.  PWC’s local firm did qualify its audit report but related to collateral seized on past due loans and the economic/security situation in the country. 
Beyond that Interfax Ukraine reported that
“Oleksandr Dubilet, who had headed PrivatBank (Dnipro) for a long time prior to the decision on its nationalization, has said the National Bank of Ukraine's (NBU) statement on 97% of insider loans in PrivatBank's portfolio of corporate loans is exaggerated.”

Also that
"At the same time, NBU First Deputy Chairman Yakiv Smoliy said the share of loans to related parties in PrivatBank exceeds 90%.  At the same time, he stressed this cannot be classified as withdrawal of funds from Ukraine."
What FDC Smoliy appears to be saying is that the related party lending scheme cannot be “classified” as a ruse to loot the bank and transfer the loan proceeds offshore.  This may be the biggest “euphemism” (one last attempt by AA to score a point) in the story. 
A side note on the dickering over percentages.  

Corporate loans comprise some 74% and 84% of total gross loans as of 3Q16 and 4Q15 so the key question is whether the percentage is of “total” loans or “corporate” loans and of course whether the percentage is being figured against net or gross loans. 

But when a bank is in this range, the exact figure is in some sense meaningless. 

What’s the practical difference between 75% and say 97%?   The bank is bust and its management and board have some explaining to do at the very least.

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