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The war in the east of the country and the collapse of the national currency has put the national banking system of Ukraine on the brink of survival

The war in the east of the country and the collapse of the national currency has put the national banking system of Ukraine on the brink of survival
Photo: Reuters

The past eight months have been very difficult for the Ukrainian economy in general and the financial sector in particular. In addition to the military operations in the east of the country, which hamper the work of many major enterprises, Ukraine faced devaluation of its currency by more than 60%. Business activity has significantly decreased. Foreign and the majority of domestic investors are skeptical about investing in any assets in Ukraine due to annexation of Crimea and the anti-terrorists operation (ATO) in the Donbas.

Thorough inspection

All these factors have an impact on the banking system, which according to Director of the Strategic Planning Department at Ukrsotsbank (UniCredit Bank) Agshin Mirzazade is currently in a state of stagnation. This is due to the economic crisis in the country and the geopolitical crisis in the region, the expert believes. The 2% increase in bank assets in the first half of the year is nominal and is due to the 50% devaluation of the hryvnia. “Bank assets have decreased due to the outflow of funds from the system and the extremely cautious credit policy of Ukrainian financial institutions. Today, the banks are more focused on maintaining the quality of their assets, rather than lending,” confirmed Mirzazade.

In the first half of the year alone devaluation of the national currency was 47%, which made financial institutions reserve UAH 27.2 bn – nearly a third of all of their expenses. As a result, the total expenses of the sector increased by 32% compared to the same period in 2013. With the weakening of the national currency the assets of banks in the hryvnia equivalent are growing.

Subsequently, financial institutions have to reserve for them more and more money. The sharp rise in costs, in its turn, could mean that banks will sustain losses and suffer from the reduction of regulatory capital as they form their reserves based on profits and when there are no profits they build reserves through deductions from their capital.

As of July 1 the regulatory capital of all commercial banks in Ukraine amounted to UAH 187 bn, which is UAH 18 bn less than at the beginning of the year. The capital adequacy ratio (H2) in the entire banking system is 15.87%. At the beginning of the year, this rate was 18.26%. “Many banks have a low reserve of the capital adequacy ratio, which may lead to a breach of regulations. As of July 1, the lowest indices were registered at Delta Bank – 10.0%, Privat – 10.9%, UkrSotsBank – 11.1% and Finance and Credit Bank – 11.84%.

Bankers predict an increase of approximately 1.2% in allocations to reserves by the end of the year. Such a buildup is associated with the dramatic rise in the exchange rate and the situation in the east of the country. “The instability of the economy during the ATO leads to an increase of distressed assets. There are always certain circumstances that are beyond the control of borrowers due to which they cannot fulfill their obligations to lenders on time or fully. As a result, banks are forced to increase the amount of their reserves,” says Head of the Portfolio Monitoring Department at the National Credit Bank Olena Koreshkova. Moreover, solvency of an essential number of borrowers decreased due to the general deterioration of the national economy even in safe zones.

Expensive money

Other costs of financial institutions are also on the rise. In July interest expenses of banks reached a high of UAH 8.7 bn since the beginning of the year. Once again, the main reason is the devaluation of the national currency, which increased in the hryvnia equivalent of foreign currency deposits and the amount of accrued interests in the hryvnia equivalent for foreign currency deposits. For example, since the beginning of the year the hryvnia equivalent of foreign currency deposits has grown by UAH 28.6 bn – to UAH 274.7 bn (as of August 1). Bankers estimated that approximately 50% of the interest costs are simply payments for individuals’ deposits, while the interest costs for deposits of legal entities account for approximately 17–20% of all interest costs. As of August 1, Ukrainians held in banks UAH 421 bn, whereas legal entities held almost twice less at UAH 232 bn. Today, in several financial institutions rates on deposits for a few months are around 27% per annum.

Banks’ withholdings for the Deposit Guarantee Fund increased due to the growth of the equivalent of foreign currency deposits. Based on results of the year, the growth of such payments is expected to reach the rate of 20–30%. Devaluation led to an increase in the administrative costs of financial institutions. Gas, vehicles, computer equipment, office paper, cards, servers, etc. purchased by the banks are mostly imported.

In order to at least somehow maintain their financial structures and not join the ranks of those going insolvent, shareholders are increasingly making decisions to recapitalize. For example, in the first five months of this year banks have issued shares in the amount of UAH 2.2 bn. Among those financial institutions with the largest amount of emission in the first half of the year are Delta Bank, Ukrsotsbank, Ukrainian Innovation Bank, National Credit Bank, Credyt Dnipro Bank, Prime Bank, Alliance Bank, BM Bank and Platinum Bank.

Bankers believe that by the end of the year the situation in the banking system will largely depend on the further development of the military and political situation in the country and the state of the economy. Regulatory policy will also play a key role. The NBU is developing a plan of reform of the banking sector by 2020.

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