Intriguing math. Disbanding of reserves allowed banks to show profits in the first half of the year

In June financial institutions for the first time over the past five months registered positive financial results. The profits of the banking system amounted to UAH 11.6 bn, which gave a positive financial result in the first half of the year. In May the losses of banks were UAH 10.4 bn. The reformatting of reserves allowed to refract the situation. In the beginning of the year the reserves grew, in June their volume fell by UAH 6.6 bn. But banks have no grounds for ceasing the process of forming reserves based on dubious assets. According to data of the Ukrainian Credit Banking Union, since the start of the year bad debts to financial institutions increased by 30%.

Major schemers

Early in 2014 the revenues and expenditures of banks grew UAH 17-20 bn per month. In June, revenues grew by an amazing UAH 16.3 bn, while expenditures grew by only UAH 4.6 bn. The most significant factor was the changes in the line-item «contributions to reserves». While over the period January-May 2014 contributions to banks consistently grew UAH 7.8 bn per month on average, in June they fell by 20%. «Losses due to unpaid loans is not a very precise indicator,» says Director of the Educational Center at the Baker Tilly company Ruslan Ismailov. The calculation factors in the assessment of the financial standing of borrowers, which allows for fudging this figure that affects the profit indicator, the expert pointed out.

Financial institutions adjusted their profits in order to deal with compulsory over-capitalization and avoid the risk of violating the norms of the National Bank of Ukraine. «Banks sustain serious losses, but in order to avoid the requirement to increase their capital they declare that their assets are of higher value than in reality,» says General Director of the Ukrainian Credit Rating Agency Stanislav Dubko. In truth, over the past half year banks had to deal with lower quality of servicing loans and may not earn the expected revenues from their main activity, Dubko noted.

Banks face the threat of losses of regulatory capital. On June 1 the capital adequacy ratio (H2) in the entire banking system was 15.2%. After the formation of reserves the H2 indicator in several of the most powerful banks was close to the threshold of the normative indicator of 10% set by the NBU. As a result, they were forced to increase their capitalization. For instance, in April Delta Bank increased its capital by 60% by UAH 1.4 bn to UAH 3.7 bn. Last Friday PrivatBank informed that it increased its capital by UAH 1.7 bn (10.7%). «The bank increased its statutory capital thanks to the profits it earned in 2013,» it is written in the bank’s press release.

Since the beginning of the year Ukrsotsbank also increased capitalization in the amount of UAH 650 mn (or 36%) and Imexbank — by UAH 12 mn (10%).

Reverse effect

«When banks want to reduce profits in order not to pay huge taxes, they can on the contrary show that the quality of their assets is lower thanks to which they will pay lower profit taxes,» noted Dubko.

Seeing as payment of profit taxes is done on a quarterly basis, banks keep a sharp eye on their earnings every three months. Over Q2 2014 banks showed profits of UAH 3.2 bn. In Dubko’s opinion, at the end of every quarter banks think about how to play with their reserves. It is quite possible that over the next two months banks will again show the real picture and will not conceal their losses when the results of September again may be subject to adjustment.