Five big banks emerged as Ukraine gained independence in August 1991. They provided separate services for government, foreign trade, agriculture, industry, social services and savings.
By March 1992, the newly formed central bank – the National Bank of Ukraine – had re-registered 82 commercial banks. During this period, the first Ukrainian bank with foreign interest was registered in Donetsk Oblast, according to official statistics from this period.
Most were institutions that served the government, state-owned companies or related-party companies and cooperatives belonging to an emerging class of oligarchs. By the end of 1993, their number swelled to 211.
They largely profited from the hyperinflation that took place in 1992-1994. During the last two years of this period, hyper-inflation reached 10,256 percent in 1993 before “slowing” to 501 percent the next year. Having already seen their ruble deposits evaporate after the fall of the Soviet Union, retail customers began to develop a deep-seated distrust toward savings and loans institutions during 1994 as 11 banks were liquidated, and an additional 45 banks in 1996.
Additional regulations installed in 1996 led to gradual stabilization with the introduction of the hryvnia currency, a licensing system for commercial banks, formation of statutory capital rules and a system of mandatory reserves being applied.
After the ruble crisis struck in 1998, the next year money supply in circulation increased by 40.5 percent and inflation by 19.2 percent, far exceeding wage growth at 3.4 percent for the year.
By 2003, the economy had started improving enough so that by 2010, the share of foreign capital in banks rose from 13.3 to 40.4 percent.
Starting with Austrian bank Raiffeisen’s purchase of Aval Bank for a reported $1 billion in 2005, this period witnessed the entry of large foreign-licensed banks, mostly through the purchase of homegrown lenders.
Many would soon regret the purchase after a few boom years.
Before the 2008 global financial meltdown reached Ukraine, pre-crisis growth of loans had increased annually by about 50 percent, or by 10-15 percent of gross domestic product, according to Finland’s central bank.
Today, foreign entities own 31.1 percent of Ukrainian banking shares, according to Mykhaylo Demkiv, banking sector analyst at Investment Capital Ukraine.
Fifteen foreign banks left the Ukrainian market in 2009-2014, according to the Bank of Finland’s Institute for Economies in Transition.
Currently, 147 licensed banks remain as of April 1 with a total of Hr 1.44 trillion in assets, of which 126 are solvent. Meanwhile, 51 have foreign capital, 19 of which have 100 percent foreign ownership.
That’s still too many banks for the market, according to the central bank’s acting deputy governor Dmytro Sologub. “We could live with 100…the optimal number should be lower, but let the market decide,” he said.
The suspicion is that many on the market are so-called pocket banks that function as the extended financial departments of owner firms and often engage in connected or related-party lending, which has caused staggering amounts of losses and corruption.
“Approximately half of the existing banks barely qualify to be a bank as they serve very limited functions to financial companies,” ICU’s Demkiv said.
To illustrate, he said that 38 of the largest banks account for 90 percent of the sector’s total assets, while 34 of the biggest banks account for 90 percent of total retail deposits.
That’s why the central bank has mandated that all banks reduce exposure to related parties to no more than 25 percent of charter capital in three years, Vitalii Vavryshchuk, director of the central bank’s financial stability department, said during an April 15 conference call.
In the first three months of 2015, Ukraine’s banks lost 39 percent of their regulatory capital due mostly to the official exchange rate contracting 48.7 percent on the quarter.
Credit and exchange rate risks persist in the industry, according to the Institute for Economies in Transition. Depending on the definition, 19-32 percent of the industry’s loan portfolios consist of non-performing loans. At the end of January, foreign currency loans accounted for 47 percent of total loans and 48 percent of household loans.
Customers are still withdrawing their money. Deposits in the national currency sunk by 5.7 percent in March since the beginning of the year. Foreign currency deposits fell by 14.4 percent since Jan. 1.
The balance of loans in the industry since Jan. 1 fell by 4.9 percent in local currency and 6.1 percent in foreign currency.
“The large amount of banks declared to be insolvent (49 in 2014 and 13 in 2015) have shaken the population’s confidence in banks, which effectively resulted in a massive withdrawal of deposits, limited only by the NBU’s strict regulations,” Kyiv-based Empire State Capital wrote earlier in May in a note to investors.
“The reform process is complicated but irreversible,” central bank governess, Valeria Gontareva, said on April 30 at a conference in Kyiv. Since the banking system accounts for 85 percent of the financial market, the NBU is actually changing the whole financial system.
The industry, after going through a round of stress tests last year, is going through another round this year. The 35 largest banks that passed stress tests should complete recapitalization by July 1. Banks now are required to have at least Hr 500,000 of capital.
For this and other reform-minded purposes the central bank has drafted legislation to strengthen financial monitoring, as well as introduce “permanent supervision” of the overall banking system, wrote Empire State Capital.
Over the course of the year, the central bank hopes to phase out limitations imposed on individual deposits – the daily limit is Hr 150,000 for hryvnia deposits and hr 15,000 on foreign currency deposits.
Companies must convert 75 percent of their foreign currency earnings into hryvnia and there’s a 90-day time limit for export and import transactions, according to a central bank order that extended some of the restrictive measures until June 3.
“We would like to stress that…these innovations helped to curb speculation on the currency market, stabilize the hryvna and lower the U.S. dollar exchange rate,” wrote Ukraine Consulting. “But at the same time, they also brought inconveniences connected with delays in bank transactions to all – to the banks as well as their clients.”
Targeting inflation is a priority for central bank governess Gontareva, which is expected to exceed 30 percent by year-end after peaking in the first six months, before being tamed by low consumer demand and a decline in global commodity prices. Ultimately, the central bank would like to achieve 5 percent annual inflation in the medium-term, according to Gontareva who didn’t provide a time period.
Escalation of the military conflict with Russia in eastern Ukraine is the major risk that affects the central bank’s forecasts, however, Gontareva noted.
