Ukrainian central bank calls for $1.5 billion more capital for PrivatBank

Ukraine’s central bank asked the country’s cabinet on June 23 to authorise a further capital injection of 38.5 billion hryvnia ($1.5 billion) for the country’s biggest commercial bank.

It says this is “as a result of the mismanagement by the former bank’s owners and managers”. The Ukrainian state has already injected approximately $4.5 billion of capital into PrivatBank, since its nationalisation in December 2016.

Audit firm EY discovered the loss after being appointed to investigate the bank’s accounts after the nationalisation, the National Bank of Ukraine (NBU) says in a statement giving further details on the proposed recapitalisation.

“The auditor was unable to verify the bank’s profits and losses  as well as cash flows due to the lack of documented evidence to support audit findings about the period when the impairment of loans and advances to customers occurred”, the NBU says. It adds that the auditor’s findings suggest that PrivatBank “fell into distress long before 2016”.

The EY audit estimates that PrivatBank had a negative capital balance of 882 million hryvnia and a negative regulatory capital balance of 2.6 billion hryvnia. Of the latest capital injection, the NBU says 22.5 billion hryvnia is “needed to plug a capital shortfall stemming from the former management’s involvement in fraudulent operations before nationalisation”. Another 16 billion hryvnia will cover impairment charges on fixed assets.

The NBU says it suggested that the extra capital should be raised by issuing domestic sovereign bonds, adding that “the monetisation of this capital will not be required at this stage”, and that it had monetised government bonds worth 27.2 billion hryvnia in December 2016 and January this year as part of the earlier recapitalisation of PrivatBank. The bank had liquid assets of over 17 billion hryvnia and did not need a cash injection.

A forensic audit aimed at identifying whether “wrongdoing or bad banking practices” took place before the bank’s nationalisation is set to be completed by mid-September 2017, the NBU says, in accordance with its memorandum with the International Monetary Fund. Ukraine is receiving a $17.5 billion bail-out package from the IMF in tranches.

‘Empty shells’

PrivatBank was founded in 1992 by Ihor Kolomoisky, a Ukrainian businessman with significant influence in the political world. Prior to its nationalisation, PrivatBank was audited by the Kyiv office of PwC.

Valeria Gontareva, who left the post of central bank governor in May this year, told Central Banking in a recent interview that she had faced strong opposition when she began taking action against the bank. “PrivatBank’s corporate portfolio consisted of loans to ‘related parties’,” Gontareva said, which “were not normal businesses, but empty shells that had no collateral nor any cashflow”.

As a commercial banker, Gontareva said, she had known that PrivatBank had “major problems”, but ”when I learned the true picture as governor of the central bank, I was really shocked”. She said she had faced a negative media campaign and death threats as a result of her actions against PrivatBank and other measures in the “the de-oligarchisation of the Ukrainian economy”. But she said Ukrainian president Petro Poroshenko had given the NBU crucial support in pushing through the bank’s nationalisation.