Eastern Europe Banking & Deposits: Ukraine – Central bank revokes license of small commercial bank in Kiev after its solvency and liquidity decline, deposit guarantee fund begins payouts to depositors

On 15 January 2013 Ukraine’s Deposit Guarantee Fund (Фонд гарантування вкладів фізичних осіб) initiated payouts to former depositors of the Kiev commercial bank Erde Bank (АТ “Ерде Банк”), whose license was revoked by the National Bank of Ukraine on 9 January. From 15 January through 22 February holders of deposits at Erde Bank may receive their compensation at Khreshchatyk Bank, and after that time they may obtain compensation directly from the Deposit Guarantee Fund.

Erde Bank’s troubles began after Ukrainian millionaire Ruslan Demchak (Руслан Євгенійович Демчак) was arrested by police on 31 August 2012 on suspicion of money laundering and tax evasion. Demchak, who heads the Ukrainian Business Group (Украинская бизнес группа), is majority owner of Erde Bank: as of 1 August 2012 the bank was owned 91.8785% by Ruslan Demchak, 7.1880% by his younger brother Bogdan Demchak (Богдан Євгенійович Демчак), and 0.9335% by a third man, Mikola Mikolaiovich Sazansky (Микола Миколайович Сазанський).

The arrest of Ruslan Demchak, who had long been rumored to have obtained his wealth through fraud in the privatization of formerly state-owned land, precipitated a run on Erde Bank. While a decline in deposits reduced the bank’s liquidity, at the same time a decline in loan payments also threatened the bank’s solvency, since a high percentage of the bank’s loans had been made to companies related to Demchak.

Ruslan Evgeniyovich Demchak

On 24 October 2012 the management of Erde Bank announced that on the previous day, as required by law, the bank had stopped accepting new deposits until such time as its solvency and liquidity had recovered. On 30 October the Deposit Guarantee Fund announced that on the previous day it had appointed an interim administration for the bank for a period of three months. On the same day, the Fund also issued a public tender – with a document submission deadline of 14 November – for the acquisition of the bank and/or its assets or liabilities, and published detailed information on the bank’s loan portfolio.

Founded in October 2006, Erde Bank as of 1 October 2012 ranked precisely 100^th among 175 commercial banks in Ukraine in terms of assets, with total assets of 1,244.6 mln UAH (118 mln EUR; 1 EUR = 10.5076 UAH as of 1 Oct. 2012). On that date the largest bank in Ukraine, PrivatBank (ПриватБанк), had total assets of 164,562.8 mln UAH (15,661 mln EUR), or 132 times more than Erde Bank, while the smallest bank, Bank Alliance (Банк Альянс), had total assets of 84.8 mln UAH (8 mln EUR), or 14.7 times less than Erde Bank. Erde Bank’s market share in assets among Ukrainian banks was 0.11%.

The banking license of Erde Bank, issued by the National Bank of

Ukraine

in 2006, revoked in 2013

According to Erde Bank’s financial statements for 3Q 2012, as of 30 September 2012 its ratios and performance indicators stood as follows:

Ratio no.	Description of ratio or indicator	Value at reporting date	Regulatory requirement
1	Regulatory capital (in thousands of UAH)	231,784	120,000
2	Capital adequacy ratio (%)	16.72	at least 10 %
3	Ratio of regulatory capital to total assets (%)	17.03	at least 9 %
4	Current liquidity ratio (%)	53.82	at least 40 %
5	Maximum credit exposure to a single counterparty (%)	24.93	no more than 25 %
6	Major credit risk(%)	304.71	no more than 800 %
7	Maximum ratio of loans and guarantees granted to one insider (%)	3.73	no more than 5 %
8	Maximum aggregate rate of loans, guarantees, and sureties granted to insiders (%)	3.92	no more than 30 %
9	Return on assets (%)	0.12	–
15	Net income per share (UAH)	0.09	–