If Ukraine’s banking system of $108 billion in assets didn’t have enough problems with non-performing loans and deposit outflows, it has had to adjust to shocks that started after the EuroMaidan Revolution ushered in a change of government on Feb. 22.
By the time the popular uprising succeeded in toppling Victor Yanukovych as president, foreign direct investment had dwindled to less than $3 billion, government revenues had fallen and capital flight increased. Meanwhile, withdrawal of savings from Ukrainian banks intensified in February.
The new government, in turn, realized it would have to free the hryvnia from its artificial perch of Hr 8 to the U.S. dollar.
“We could delineate the events of the last few years into several distinct phases of crises,” said Steven Fisher, managing director of Citibank in Ukraine. “Phase one was basically a ‘train wreck’ that was sooner or later going to happen due to the rapidly deteriorating economic conditions and the quickly declining…foreign currency reserves level…that was pre-Maidan. Then Maidan was the second phase…where in Kyiv personal safety and the viability of operating your premises was the key concern.”
For the first six months of this year, some Hr 150 billion in bank deposits – a significant source of bank funding – were withdrawn, according to Investment Capital Ukraine’s Alexander Valchyshen, citing central bank data. Representing nearly 20 percent of total deposits, in dollar terms that’s more than $1 billion more than what was taken out in October 2008-April 2009 amid the global financial meltdown.
Third came jolts stemming from Russia’s annexation of Crimea, leaving 3-4 percent, or some $4 billion, of the banking sector’s total assets out of reach and in legal limbo.
The peninsula’s occupation hit quite a few banks with operations there and left them and their customers as well in uncomfortable situations, both legally and security-wise, including their business prospects, added Fisher.
Exacerbating the situation is Russia’s war against Ukraine in the east, where infrastructure is being destroyed and companies face serious disruption.
Currently, non-performing loans in the sector is high at 30-40 percent, according to various estimates.
And since the political situation remains shaky – the parliamentary coalition recently collapsed – external markets, where the government and many companies raise money – remain cautious.
Thus, Ukraine’s banking system is “challenged…it is fragile,” said Fisher, urging the need to “create stability in the banking system given all these challenges.”
A starker message came from a July 31 Investment Capital Ukraine note to investors: “Banks are in crisis. Our estimate of capital shortage is $3-$4 billion. Moreover, there is risk that withdrawal of deposits may last into the second half of 2014.”
Some respite has come from the central bank to buttress the banking system’s relatively high loan-to-deposit ratio of 1.5. Amid a shortage of deposits, several banks have received external liquidity support in the form of collateral for securities or private-sector loans, for example.
To assess the sector’s ability to withstand adverse developments, stress tests were completed on July 25 of the 35 largest banks. Conducted under the $17 billion International Monetary Fund bailout program, they will determine which ones are weakly capitalized. The remaining 140 banks are next to be reviewed.
Preliminary assessments given by central bank governor Valeriia Gontareva indicate that there are too many banks on the market. Of the 174 licensed banks, only 30-40 account for 90 percent of banking activity.
Although the American banker is confident that Citibank – the third largest bank in the U.S. – will “look fairly good” after its stress test, “some banks will have to address more effectively their non-performing loans. They’ll need help from the government. Full tax relief for recognizing and writing off non-performing loans is one example. It might be 80-100 banks that don’t belong in the banking system based on the central bank.”
Vitaliy Vavryshchuk, a banking sector analyst with SP Advisors, said that captive banks comprise the majority of those in trouble because they don’t conduct traditional commercial banking. Instead, “they channel money from deposits to their related companies for liquidity needs – that is at the core of the problem,” the analyst said.
Thus, gradual consolidation is inevitable.
Should the economy get restored, according to Fisher, the banking system will similarly revive itself “in the attraction of deposits and lending to copporate and retail sectors,” but Ukraine most importantly needs to make “solid progress and address its many problems of budget, trade deficit, corruption, prioritization of investment, and get international capital investors coming back.”
Otherwise, Ukraine will not be able to raise the up to $30 billion needed for infrastructure projects.
Kyiv Post staff writer Mark Rachkevych can be reached at [email protected].
