War Continues but Banks Are in the Black
Russian aggression did not cause the collapse of Ukraine’s financial system
Despite wartime conditions, it seems that Ukrainian banks are doing quite well. According to the National Bank of Ukraine (NBU), they booked a profit of UAH 24.7 billion in 2022 (1 UAH or hryvnia equals USD 0.027 or PLN 0.12 – ed.). This is less than a year earlier, when the profit was UAH 77.4 billion, but the industry still turned a profit. “As of 1 January 2023, 46 of the 67 solvent banks were profitable and reported a net profit of UAH 45.6 billion, which covered the losses of 21 banks for a total of UAH 20.8 billion. The industry’s profits are concentrated: the top five most profitable banks generated 89 percent of all profits”, the NBU reported on 10 February.
The NBU report did not tell the whole story. Each of the banks in the top five earned more than a billion hryvnias last year. However, while the Austrian Raiffeisen subsidiary made UAH 1.5 billion, Universal Bank UAH 2.4 billion, local Citibank UAH 2.8 billion, and Ukrsibbank UAH 3.5 billion, PrivatBank’s profit was UAH 30.3 billion. In other words, even if PrivatBank had had to cover the losses of all institutions which were in the red, it would still have been almost three times more profitable than the next best performer. PrivatBank is the largest player in the Ukrainian market, having been taken over by the state from the oligarchs a few years ago.
The figures for the industry cover all operating solvent banks. Their return on equity was almost 11 percent in 2022, much lower than in the previous three years, when it was above 30 percent. However, only a few years earlier, the Ukrainian banks had gone through a serious crisis. Between 2009 and 2018, there were only two years when the industry recorded a profit. In 2016 (when PrivatBank was nationalised), the industry’s return on equity was an extraordinary -117 percent. As such, the loss more than “consumed” the industry’s existing capital (it was quickly rebuilt thanks to recapitalisation).
There were as many as 180 banks in 2013, compared to 71 at the beginning of 2022, four of which disappeared by the year’s end, including three with predominantly foreign capital.
High-Risk Loans
Official NBU data shows that the war has not curbed the banks’ operations. The banking industry’s assets amounted to UAH 2.03 trillion at the beginning of 2022. After 12 months, they stood at 2.35 trillion. Loans decreased by just over 5 percent to UAH 1.04 trillion. A more noticeable decline affected loans to individuals, down by 16 percent to UAH 209.9 billion. In contrast, Ukrainian banks’ exposure to securities increased by almost 36 percent to UAH 1.02 trillion. This is hardly surprising given that, on the one hand, risks have increased while customers have other things on their minds than taking out loans and shopping, and the official rates are around 25 percent (according to the latest data, inflation is 26 percent per annum). On the other hand, there is the need to finance the gigantic public deficit in order to buy armaments.
Although the data shows that the sector is profitable, the solvent Ukrainian banks’ equity decreased by almost 16 percent in 2022 to UAH 218.5 billion. Corporate deposits grew by 19 percent to UAH 889.5 billion, and retail deposits increased by almost 31 percent to UAH 933.6 billion.
Financial performance is mainly affected by non-performing loans (NPLs). “The share of NPLs in the banking sector was 38 percent as at 1 January 2023, compared to 30 percent as at 1 January 2022. The NPL volume increased by UAH 87 billion to UAH 432 billion during the year”, reported the NBU.
The NBU went on to add: “The consequences of the war: destruction of assets and collateral, loss of income, and deterioration of borrowers’ solvency, impair the borrowers’ ability to repay loans, hinder the quality of the banks’ loan portfolios, and lead to an increase in provisions. The banks have posted significant loan losses: since the start of the full-scale war, the LLPs have exceeded UAH 100 billion, accounting for more than 12 percent of the banks’ loan portfolio as of 28 February 2022. Potential loan book losses due to the war, economic crisis and the aggressor’s energy terror could reach 30 percent”.
It is clear that the situation will get worse, but the central bank is discouraging private lenders from being too restrictive with their customers. “We expect banks to take a balanced approach to risk rating, especially with regard to borrowers who have lost their income and are unable to repay their debt. Banks should restructure borrowers’ debt in a flexible way, taking into account the prospects of economic recovery”, said Kateryna Rozhkova, First Deputy Governor of the NBU.
Just weeks after the outbreak of the war, the central bank issued guidelines to banks, lenders and debt collectors, recommending debt restructuring and credit holidays for retail customers instead of “hard” debt enforcement.
Super Network
Since the beginning of the Russian aggression, the Ukrainian banking industry has been faced with an existential challenge. It is all about preserving the ability to function in the most practical sense: availability of branches, cash deposits, withdrawals and clearing.
Shortly after the outbreak of the war, the NBU supplied commercial banks with almost unlimited liquidity. Banks did not close branches or ATMs. Only branches located in areas occupied by the Russians or in combat zones were affected. Customers could withdraw money from their accounts without interruptions but with some restrictions. Depositors initially rushed to withdraw cash, but trust was restored over time. However, the situation had been complicated by Russian attacks on the energy infrastructure. The Ukrainians are managing those, as well.
“Right now, the most critical project is power banking. This includes the creation of one network of branches of systematically important banks in Ukraine. We are talking about over 1,000 branches in 200 cities and villages. We are developing operational solutions to support this network, even under blackout conditions, with backup electricity, connectivity, and cash. Nothing comparable has ever been implemented anywhere in the world”, said NBU Governor Andriy Pyshny, quoted on the International Monetary Fund website.
According to the websites of the banks participating in the initiative, 1,800 branches belong to the single banking network.
“Ukraine has created special stations where Ukrainians can come when there is no electricity, to charge their phones, get warm and receive hot meals. We will provide banking systems, including ATMs, in these stations organised in government buildings and special shelters. We are working with a big network of stores and gas stations to make sure that the citizens of Ukraine have access to cash when they need it”, said Pyshny.
The outbreak of war brought about an almost total freezing of business contacts with Russia and Belarus. The practical outcome for clients is that they cannot pay with a card issued in either of these two countries. Even more important was what happened to the banks controlled by Russian capital. The day after the outbreak of war, the NBU decided to liquidate MR Bank, controlled by Sberbank, the largest player in the Russian market, as well as Prominvestbank.
“While our army selflessly and bravely defends every bit of our land from Russian aggressors, we cannot allow the ‘daughters’ of the aggressor’s state-owned banks to continue to operate in Ukraine, with Ukrainian money”, said the then head of the NBU, Kyrylo Shevchenko (he left the post in early October 2022; shortly afterwards, he was charged with financial crime allegedly committed while heading one of the state-owned banks. Shevchenko, who has left the country, rejects the charges and insists he is abroad for health reasons).
However, this did not resolve the matter entirely. There were still banks controlled by Russian oligarchs, including the largest one: Alfa-Bank owned by Mikhail Fridman, a Ukrainian-born citizen of Russia and Israel (owner of the largest private bank in Russia). At the beginning of March 2022, shortly after the war broke out, it was reported that Ukraine’s Alfa-Bank would pass into the hands of local capital. This did not happen. Ownership rights were handed over to a “curator”, former Bulgarian Finance Minister Simeon Djankov. “On the part of the National Bank ... it was agreed that I work for the benefit of the bank, and not for the benefit of the shareholders. So, if there are decisions that they (the shareholders) did not agree to, I do not care. I need to coordinate each big step with the National Bank”, said Djankov, quoted by Interfax Ukraine. Djankov was given a mandate for six months with the possibility of extension.
Alfa-Bank, which has since changed its name to Sense Bank, cannot be nationalised just like that. An almost 10 percent stake is indirectly held by the Italian group UniCredit (from which the Polish Development Fund and Powszechny Zakład Ubezpieczeń bought over 30 percent of Bank Pekao a few years ago).
In November 2022, the NBU banking supervisory commission suspended the ownership rights of Vyacheslav Boguslayev, owner of Motor-Bank. “The NBU has made the decision on the basis of information about Mr Boguslayev’s Russian citizenship obtained in 2000”, said the press release.
The fate of Forward Bank, owned by Rustam Tariko (known in Poland mainly as the Russian vodka king and owner of CEDC, which Maspex bought from him in February 2022), was a different story. “On 24 February 2022, the NBU Board adopted the decision to declare Forward Bank a problem bank. The decision was made after establishing the fact that Forward Bank is engaged in risky activities lacking sufficient income, which may potentially create a risk of significant reduction in the regulatory capital of the bank and violate the economic ratios established by the NBU,” it was reported in early February 2023 as the bank was declared insolvent.
According to a law passed late in 2022, an insolvent bank can be nationalised for one hryvnia. Previously, nationalisation involved a capital increase, but now there is no such requirement. Instead, the bank’s liabilities towards the existing owners can be converted into capital (thus taking away more from them than the bank itself). The owners can hope to be compensated for losses. Bur if it turns out that the bank was worth more than one hryvnia, they will only receive compensation when Russia pays war reparations to Ukraine. ©℗
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