Booming, but Risky: The Ukrainian Banking Sector – Hot Spot for Foreign Strategic Investors

This paper gives an overview and assessment of the evolution of the Ukrainian banking sector since the outset of transition, focusing on the most recent developments. While the 1990s saw turbulent changes against the backdrop of continuous economic contraction, the Ukrainian banking sector has been on a strong expansion path ever since the turn of the millennium, a path which appears to have been only briefly interrupted by the minor crisis of late 2004 and early 2005. Although the National Bank of Ukraine has certainly improved banking regulations and supervision, the country’s credit boom (sevenfold real increase of credit volume between 2000 and 2005, albeit from a modest base) has raised serious concerns about credit risks. Financial fragility continues to loom large in an environment where the practice of "pocket banking" (credit institutions acting as extended financial departments of owner firms) is still widespread. Over the past months, foreign strategic investors have started to move in: Led by Raiffeisen, which purchased the second-largest Ukrainian bank in October 2005, takeovers and business expansions have raised foreigners’ share in total banking assets from 13% to 26% within a year. Austrians account for somewhat less than half of all foreign-owned banking assets in Ukraine.