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Ukrainians seem to have a keen interest in the ownership of their banks. This has a lot to do with the country’s recent history, and with a banking sector that is having to regain people’s trust in the aftermath of the crisis of 2014. Since its inclusion in responsAbility’s private equity portfolio, western Ukrainian Bank Lviv has successfully positioned itself as a “reliable, Swiss-owned bank,” with client deposits skyrocketing as a result.

This article was published in the Neue Zürcher Zeitung, Switzerland’s most renowned financial newspaper, on 12 April, 2019. All highlights have been added by responsAbility.  

Why a Ukrainian bank stresses its Swiss connection

The story of Bank Lviv illustrates how the country is emerging from a major downturn

“Reliable, Swiss-owned bank” – the ad jumps out with its slogan, written in white on red background, adorned by an eye-catching Swiss cross. Bank Lviv, based in the western Ukrainian city of Lviv, launched the new ad campaign several months ago to land new business, with the Swiss cross a fixture on billboards and the bank’s website. Since mid-2018, the bank has been majority-owned by a private equity company managed by Zurich-based responsAbility, a specialist for sustainable investments in developing countries.

“Reliable, Swiss-owned bank” – the ad jumps out with its slogan, written in white on red background.

“Being able to use our Swiss ownership in our ads is very important to us,” explains Natalia Osadcii, who heads Bank Lviv together with three colleagues. From the bank’s head office in a more than 500-year-old building, the view stretches over the magnificent historic market square of Lviv. “The launch of our ad campaign was followed by a steep increase in client deposits,” Osadcii explains. Apparently, Ukrainians have a keen interest in the ownership of their banks. This has a lot to do with the country’s recent history, and with a banking sector that has yet to regain people’s trust.

Hit hard by the economic crisis that struck Ukraine following the Euromaidan revolution in early 2014, Bank Lviv struggled for several years.

Hit hard by the economic crisis that struck Ukraine following the Euromaidan revolution in early 2014, Bank Lviv struggled for several years. “It was hell,” Margeir Petursson, sole owner at the time, remembers. “Every morning, I wondered what problems I would encounter that day.” The Icelander with a soft spot for eastern Europe had bought the small bank in 2006 when the Ukrainian economy was booming. Now it was all about survival. “We had to reassure our clients and look for ways to weather the crisis together.”

In the aftermath of the Euromaidan revolution, the economic imbalances that had built up as a result of economic mismanagement during the Yanukovych era began to unwind.

At the time, Ukraine was experiencing a veritable bank run. In the aftermath of the Euromaidan revolution, the economic imbalances that had built up as a result of economic mismanagement during the Yanukovych era began to unwind. For example, Ukraine’s central bank had spent almost all foreign exchange reserves to keep the hryvnia exchange rate against the US dollar artificially high. This encouraged excessive private consumption in Ukraine and led to a large trade deficit. The house of cards collapsed when the Russian aggression in the eastern part of the country sent Ukraine into economic and financial hardship. The central bank was forced to abandon attempts to prop up the currency and let it float freely against other currencies, and the hryvnia collapsed. “Everybody wanted to withdraw their money,” Petursson recalls. But dollars could not be handed out because the central bank had imposed strict capital controls.

The crisis ravaged the Ukrainian banking sector. About half of the country’s financial institutions have since foundered or been closed by the regulator.

The crisis ravaged the Ukrainian banking sector. About half of the country’s financial institutions have since foundered or been closed by the regulator. Many banks had merely served as “vacuum cleaners” for their oligarchic owners, attracting client deposits only to then pass them on to associated companies as dubious loans. When these banks went bankrupt or saw their shady business model stopped by the regulator, which had been modernised following the Euromaidan revolution, many private customers and companies lost their savings – hence the widespread mistrust of banks among Ukrainians and their keen interest in banks’ ownership.

Bank Lviv was not among the dodgy banks. It had always been solid and conservatively managed; it generally had sufficient capital reserves and relatively few bad loans in its books. But once the situation had stabilised somewhat, sole owner Petursson decided to look for a partner. “I knew that I wouldn’t be able to grow the bank on my own,” he says in retrospect. That is how he came into contact with Swiss-based responsAbility.

The Swiss set out clear conditions. “First of all, we took a lot of time to inspect the bank for bad loans,” responsAbility manager Scott Richards says. “We didn’t want a restructuring case, but a bank ready for growth.” In a second step, in mid-2017, the Swiss installed a new management team with extensive experience in the central and eastern European banking sector. The team is made of up Natalia Osadcii from Moldova, Tamar Tkhelidze from Georgia, Victor Khimyak from Ukraine and the Armenian-born CEO Ashot Abrahamyan. The responsAbility-managed private equity company waited until summer 2018, when the restructuring began to pay off, to acquire 51% of the bank’s shares. Richards explains the investment as follows: “We see great growth potential at Bank Lviv, especially as other banks have withdrawn from the SME and agricultural finance business.”

In a second step, in mid-2017, the Swiss installed a new management team with extensive experience in the central and eastern European banking sector.

The challenges that the new management is facing say much about Ukraine and its economy. “The first major task is to build up the necessary personnel resources for a modern banking business,” management team member Osadcii explains. For example, many employees were unfamiliar with the concept of actively marketing loans. The bank replaced a third of its staff, appointed new people to all key positions and set up its own banking school to promote talented individuals. The lending and client acquisition processes underwent a comprehensive modernisation.

responsAbility waited until summer 2018, when the restructuring began to pay off, to acquire 51% of the bank’s shares from Petursson.

The small bank has ambitious growth plans for the coming years and is focusing its efforts above all on the small and medium-sized businesses that are predominant in western Ukraine. These include restaurants in the thriving tourism industry in the historic city of Lviv: The picturesque town, which for several centuries was part of the Austrian empire and the Kingdom of Poland, has been attracting growing numbers of tourists. The bank’s clients also include small industrial companies that can export cheaply thanks to the very low regional wages, as well as agricultural businesses, a sector with immense potential in Ukraine. Demand for loans is high as economic prospects in the Lviv region are currently quite good.

Demand for loans is high as economic prospects in the Lviv region are currently quite good.

The second major task is to restore people’s trust in banks. Bank Lviv strongly profits from its Swiss ownership in this respect. Other foreign banks, such as the local subsidiary of Austrian Raiffeisen Bank International (RBI), also enjoy a higher level of trust in Ukraine. However, people want to know for sure. “Clients ask us: Is this majority owner really Swiss or is it just a Ukrainian with a Swiss domicile?”, Osadcii explains. The bank’s clients welcome the fact that responsAbility is backed largely by Swiss financial institutions.

The second major task is to restore people’s trust in banks. Bank Lviv strongly profits from its Swiss ownership in this respect.

A third challenge for Bank Lviv is to find enough qualified employees. Ukraine has experienced a large emigration wave since the crisis of 2014/15. About one million Ukrainians alone work in neighbouring Poland, where average wages are three to four times higher. As a result, the bankers in Lviv are in direct competition with Polish companies across the border, which is just 70 km away. “That’s probably our biggest challenge,” Osadcii says. The bank responds by raising its employees’ wages several times a year – most recently by more than 30% on an annualised basis – and tries to attract university graduates by offering them the prospect of a career as a professional banker in a modern environment.

Bank Lviv wants to be a “clean” bank. That is no small task as endemic corruption remains one of Ukraine’s darkest sides.

Finally, Bank Lviv wants to be a “clean” bank. That is no small task as endemic corruption remains one of Ukraine’s darkest sides. Asked how the bank can maintain proper business operations in such an environment, Osadcii says that it takes a clear stance: “We have a culture of meritocracy and do not hire anybody because of their relationships. We don’t hand out loans in exchange for bribes. We stay away from companies with shady business models. And we don’t pay bribes to authorities.”

responsAbility started out as a microfinance pioneer during the 2000s. Now the Zurich-based company is helping to advance the development of Ukraine’s banking sector and economy.

In this way, Bank Lviv also wants to contribute to the development of a clean economy in Ukraine. As such, the bank fits well into responsAbility’s portfolio. The Swiss company does not just pursue business interests with its investments, but above all development objectives. Part of its mission is to bring banking services to people and companies that would otherwise have no access to these services. responsAbility started out as a microfinance pioneer in the 2000s. Now the Zurich-based company is helping to advance the development of Ukraine’s banking sector and economy.

The author: Matthias Benz[1]

Degree in History, Economics and Journalism from the universities of Zurich and Santiago de Compostela. PhD in Economics from the University of Zurich (thesis: “Institutions and human welfare”). From 2004 to 2005: Visiting Research Fellow at the University of California at Berkeley. Since mid-2006: member of the editorial department for economics and finance at NZZ. From mid-2009 to mid-2014: economic correspondent in Berlin. From autumn 2014: Vienna-based economic correspondent for Austria, central and eastern Europe and Ukraine. Since 2009: non-tenured professor at the University of Zurich. End of 2016: appointment as Honorary Professor for Economics at the University of Vienna. Bruckhaus Prize 2012 of the Schleyer Foundation for his work as NZZ correspondent in Germany.

[1]Source: NZZ