Ukraine’s banks back in the black but face serious challenges

Ukraine’s banks back in the black but face serious challenges
The worst is passed for Ukraine's banking sector as banks return to profit
By Ben Aris in Berlin October 3, 2019

Ukrainian banks are back in the black and just turned in their biggest profits in years after a lacklustre year in 2018 and a disastrous year in 2017 when the sector made heavy losses in June and December – the latter caused by the nationalisation of the then largest commercial bank in the sector, PrivatBank, that is the subject of controversy today.

The sector benefited from a comprehensive banking reform led by former National Bank of Ukraine (NBU) governor Valeriya Gontareva who largely cleaned up the sector and closed over 100 banks.

Ukrainian banks increased their net profit by 3.2 times year-on-year to UAH44.29bn in January-August, according to the NBU's report. More than half (58.3%) of this result was provided by PrivatBank.

However, the return to profitability is even more dramatic in terms of cumulative profits of the sector, which reached UAH44.3bn in the first eight months of this year, well over three times more than in the same period of 2018 and more than ten times the profit banks earned in the first eight months of 2017. 

The other parameters of a bank’s health have also improved. The capital adequacy ratio (CAR) has improved from 15.3% in August 2017 to a very comfortable 18% this August.

But that is not say the sector is flourishing. Lending is stagnant and if anything shrinking slowly this year as bank managers struggle to find clients they want to lend to.

The main bugbear is the heavy weight of non-performing loans (NPLs) sitting on banks' balance sheets that managers are either reluctant to unload or simply can't find a buyer for.

The NPLs no longer pose a systemic risk to the banking sector as all the bad debt has been provisioned for. However, one of the reasons the lending is falling is banks have too much capital tied up in provisions which constrains their ability to lend.

The solution would be to unload the debt or cash in the collateral on the debt, but with the economy only just starting to emerge from a deep recession managers are unwilling to sell at the current low prices. As the assets they hold don't affect the banks' profitability, but do affect their ability to grow, most bank managers are happy to bide their time until the economy improves further and asset valuations begin to rise again.

The NBU is pushing banks to sell these assets, but to little avail as managers don't want to book the associated losses, leaving the business in a partial state of limbo.

However, some progress has been made. As bne IntelliNews reported this week, sector aggregate NPLs fell below 50% for the first time in years in September, according to the NBU, as banks use their rising profits to retire bad debt. The volume of NPLs in the Ukrainian banking sector dropped to 49.3% as of September 1, the central bank reports.

The distribution of NPLs remains very uneven. The worst off is PrivatBank, which is now owned by the state, where 80.9% of the loans are non-performing. The bulk of these loans is money allegedly stolen by oligarch Ihor Kolomoisky and his partners by using fake credits to shell companies controlled by the shareholders that were never repaid, as described by a bne IntelliNews report “Privat investigations” at the time.

The bank has restructured what it calls the “fraud loans,” Anna Samarina, PrivatBank's CFO, told bne IntelliNews in an exclusive interview in June, but shedding this bad debt will be hard as most of the lending had no collateral or what collateral there was is worthless, Gontareva told bne IntelliNews.

Counting Privatbank out of the state bank tally, the other state banks have been more successful in reducing their NPLs, which have fallen from 58% in 2017 to 49% now, according to the NBU. Foreign banks have also made progress with NPLs down from 47% to 35% and the privately owned banks did best of all as NPLs dropped from 26% to just 20% over the same period.

Another major step forward made in June was the NPLs of insolvent banks that collapsed in the crisis years were also completely written off and removed from the sector aggregates, further reducing the burden on the sector.

From here the banking sector faces a long slow climb out of the after effects of the crisis before it can start really playing its role as a financial intermediatary that will accelerate growth.

One of the telltale signs of the early state of the Ukrainian banking sector’s recovery is that retail lending remains both mostly stagnant and much smaller than corporate lending. In a more developed market, like Russia, retail lending is about half the size of corporate borrowing and has started to grow rapidly in the last year as the population leverage their slowly improving incomes by taking out loans.

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