Ukraine's largest lender PrivatBank has survived a stormy week of speculation over its future, but there are larger rocks ahead, with some market participants anticipating the bank will be nationalised.

It is not every week that starts with the deputy CEO of the country's largest bank – owned by two of the country's richest men – moved to effusively thank the public, ranging from VIPs to pensioners, for their support in the face of adversity.

"Dear friends! Over the last few days we received many words of support from the NBU and the State Deposit Insurance Fund, from politicians and major corporate clients, from top bloggers, writers and famous journalists, and from individual VIP clients and pensioners... I thank you all enormously!" Oleh Gorokhovsky wrote on November 9.

According to Gorokhovsky, a wave of mass text messages and calls to the bank's clients had been made by people warning that the National Bank of Ukraine (NBU) is on the verge of sending in a temporary administration to PrivatBank.

"Of course, [the NBU] has not and will not introduce temporary administration. İnstead we have got a huge boost due to your faith in us and the responsibility that the bank's entire staff bears before you – our clients," Gorokhovsky added in the note to the public.

To dispel the information attack, PrivatBank had solicited and received a statement of support directly from the NBU on November 5: "PrivatBank is systemically important for the financial system and it is the largest saving specialised bank servicing 34% of individuals' deposits in the country," first deputy head of the NBU Oleksandr Pisaruk said in the statement. "The regulator permanently monitors its operations via curators and pays special attention to all systemic banks. At present, PrivatBank observes liquidity requirements, it is operating as usual and is stably servicing clients," Pysaruk added.

Insider lending

The situation has been tense around PrivatBank ever since disclosures in late October for the third quarter of 2015 started to uncover the full extent of insider lending at the bank, as anticipated by bne IntelliNews already in August 2015.

With the NBU having toughened its definition of related parties, PrivatBank's share of related party lending took a breathtaking leap from 3.9% declared in 2014 to as much as 44.2% of regulatory capital, with the regulator's limit set at 25%. Lending to one counterparty reached 25.2%, exceeding the regulatory limit of 20%.

This confirmed what has long been suspected – PrivatBank, despite holding 34% of the country's retail deposits and having the largest branch network and a state-of-the-art IT system, is little better than other oligarch 'captive banks', such as iron ore tycoon Konstantin Zhevago's Finance and Credit Bank, and agriculture tycoon Oleh Bakhmatyuk's two banks, placed under administration in 2015.

"In Finance and Credit, one person gave himself 76% of the credit portfolio. And of Bakhmatyuk's two banks, one lent 64% to insiders, another 96%," NBU head Valeriya Gontareva lamented in an interview on October 2.

PrivatBank is owned by two of Ukraine's largest oligarchs, Ihor Kolomoisky and Hennady Boholyubov, who also control a business empire encompassing oil and fuel, metals and mining, aviation, media, as well as banks. Many of the enterprises are based in the same region of Dnipropetrovsk where PrivatBank is headquartered, and where Kolomoisky himself was governor from February 2014-March 2015. Some media reports have claimed as much as 90% of PrivatBank corporate lending goes to firms from the Dnipropetrovsk region.

The NBU has now calculated recapitalisation requirements based on the new definitions of insiders, as incorporated into stress tests, but PrivatBank disputes the results. "As a result of the stress tests the NBU is now demanding recapitalisation of UAH8bn. We do not agree with this assessment and are consulting with the NBU on the issue," Oleksandr Dubilet, CEO of PrivatBank, said in early October.

But the consequences for the bank if it refused to comply with NBU demands for recapitalisation are clear. "If this certain bank fulfils all our demands, I do not see any problems with its liquidity," Gontareva said in another October interview, identifying PrivatBank by its unique position, not by name. "If not, then [the same] will happen [to it] as with any bank which does not fulfil our demands," she warned.

Deposit campaign

PrivatBank has run an aggressive campaign in 2015 to to stem deposit outflow that is sapping the entire sector. As a result, the bank's share of retail deposits has surged from 26% in 2014 to 34% in third quarter of 2015, roughly double the retail deposits placed with the state savings bank Oschadbank.

PrivatBank has achieved this by offering significantly higher interest on retail deposits than its closest competitors, including not only the state banks, but the Ukrainian subsidiaries of European-owned banks such as Raiffeisen Aval, according to an analysts by investment company ICU. This has caused depositors from banks already closed by the NBU, such as the unfortunate fourth largest retail lender, Delta Bank, to flock to PrivatBank.

But it is questionable whether such a strategy is sustainable, according to analysts. The bank's interest rate expenses surged 51% on the year in the third quarter of 2015, which "was the result of high deposit rates that the bank has been offering to retail clients", according to Alexander Paraschiy, head of research at investment company Concorde Capital. The surge in interest rate expenses was compensated for by a 75% drop in loan loss provisioning, leaving the loan portfolio "significantly under-provided", according to Paraschiy.

Privatbank's deputy CEO Oleh Gorokhovsky dispelled worries in a Facebook post on November 9 about the danger of a bank run. "98% of depositors hold sums less than UAH200,000 and thus are covered by state deposit insurance, and thus such depositors remain calm. Secondly, around 80% of all deposit agreements are now term deposits, which cannot be prematurely ended even if [the client] panics," Gorokhovsky said on November 10.

Nationalisation likely?

Others are less optimistic about the bank's future. "PrivatBank will be nationalised," the former long-serving head of a top five Ukrainian bank tells bne IntelliNews. "They [the NBU] are demanding that Kolomoisky returns to the bank the $1bn in refinancing loans [allegedly] moved offshore in 2014."

The bank acknowledged in August that it was cooperating with police investigators over the allegations first raised by journalists working from open sources. The journalists analysed a paper trail suggesting Privat-linked Dnipropetrovsk firms received around $1bn in loans from the bank in 2014, after the bank received NBU refinancing, in turn paid out of IMF loans. The firms then allegedly transferred the money abroad as advance payments for fuel deliveries that never transpired.

"There are two scenarios for the bank now," says the former bank CEO. "One is that Martians fly down with a spaceship full of cash for the bank. The second is that Kolomoisky returns the [allegedly] diverted refinancing loans. Of the two scenarios, the first is the most probable," he said sardonically. "The NBU already has a team appointed to run the bank in temporary administration," he claimed.

"Unfortunately many 'experts' call the bank's forex operations via its Cyprus subsidiary 'illicit export of capital to offshores'. This is a question of the financial literacy of some colleagues," PrivatBank spokesperson Oleh Serga told bne IntelliNews. According to Serga, PrivatBank has covered 58% of total deposit outflow of UAH 56.8bn since the start of 2014 with its own funds, by reducing its loan portfolio and ending interbank operations, with UAH23.6bn in refinancing funds received from the NBU used exclusively to pay out deposits.

Despite PrivatBank's show of bravado at the start to the week, the market is still awash with rumours over pending nationalisation. "A few days ago information started coming from a number of independent sources that the NBU will introduce temporary administration to PrivatBank, and that [state savings bank] Oschadbank already has the PrivatBank client database, so that temporary administration can be introduced quickly and smoothly," a lawyer representing insolvent banks on behalf of the State Deposit Fund told bne IntelliNews. PrivatBank denies there are any such moves afoot.

Enemies and creditors

Adding to the bank's problems are running political battles between the Kolomoisky clan and sections of the administration of President Petro Poroshenko, in particular Odesa governor Mikheil Saakashvili, who is rapidly becoming a 'shadow prime minister' in Ukraine, and possibly likely to become real prime minister.

Saakashvili's former subordinates from Georgia have now taken a series of top positions in Ukrainian law enforcement, including the posts of deputy prosecutor general, first deputy interior minister, head of newly-created national police, deputy justice minister, and deputy head of the newly created anti-corruption bureau.

From this position of strength, Saakashvili has effectively declared Kolomoisky Ukraine's public enemy number one in frequent emotional tirades. Prosecutors detained top Kolomoisky lieutenant Gennady Korban on October 31 on charges of embezzlement and illegal abduction.

Kolomoisky reportedly no longer resides in Ukraine due to the political turbulence, but his partner Boholyubov, second largest shareholder in PrivatBank, was said to have flown into Kyiv in September for talks with the Poroshenko administration over the bank's fate.

Kolomoisky has one other major enemy closer to home: rival oligarch Viktor Pinchuk, son-in-law of former Ukrainian president Leonid Kuchma, who is suing Kolomoisky in London for a reported $2bn in lost earnings due to Kolomoisky's control over a swathe of metallurgy plants disputed by Pinchuk.

And one last hurdle PrivatBank faces: $350mn in Eurobond redemptions in January and February 2016. Restructuring talks to date have been inconclusive but are continuing. Without restructuring, PrivatBank "has not [got] sufficient dollar liquidity to smoothly repay its $350mn in total Eurobonds, which may come due in the next three months in the worst-case scenario", according to Concorde analyst Paraschiy.