Ukraine's banking system had $3.8 billion in losses in the first half of the year, the central bank reported this month. The second half of the year hasn't been any kinder so far.
In July, the central bank liquidated Kyivska Rus bank, and Kapital Bank was declared insolvent, while temporary administration ended at Astra Bank as its shares were sold to U.S. investment fund NCH Capital.
That brought the number of operating banks to 127 as of July 30, down from 180 at the start of 2014. Forty-two have been liquidated, while 11 are under temporary administration.
As a result, some Hr 51 billion ($2.3 billion) in debt has been transferred to the Ukrainian state’s shoulders by the insolvent banks, the central bank reported on July 23.
“Over the past 20 years there have been about 500 banks… This is a really huge number considering Ukraine’s population (of 42 million),” says Vasyl Porovoznyk, senior economist at International Center for Policy Studies, a think tank.
The troubles in the banking sector have prompted massive outflows of deposits since last year, especially in foreign currency. One way to restore trust and reverse the trend is to “get rid of weak banks,” Porovoznyk added. There’s some evidence that trust might be returning – in May total bank deposits in Ukraine were Hr 683 billion ($31 billion), according to the central bank. By June, the figure had risen to Hr 693 billion ($31.5 billion).
Meanwhile other banks are struggling with losses. Alfa bank declared Hr 630 million in losses during January-June, whereas Universal Bank’s loss stood at Hr 187 million, according to the banks’ quarterly reports.
Many of the problems that took root years before are now hitting the country hard.
“Over many years, bankers, due to some corruption schemes or some political influence, managed to survive, to keep their banks alive and avoid liquidation, notwithstanding the very bad situation at their banks,” says Yevhen Porada, a partner at Asters law firm. “The situation might be much worse than it seems.”
Many banks have bad assets and loans that were issued a long time ago to specific individuals and legal entities. Some loans were issued in foreign currency, and these are now three times more expensive to service than 20 months ago, Porada says.
The abuses, including the use of financial institutions to issue related-party loans, were not as noticeable when the economy was in better condition. But now poor market conditions are squeezing the degrading banks out.
“Many owners of the banks were agriculture holdings or industrial holdings, and the banks were used as pocket financial institutions (for internal management),” says Gabriel Aslanian, a lawyer at Asters.
The practice thus was not beyond arm’s length. “For a market economy such a situation is unhealthy,” Povoroznyk says.
Years of abuse yielded an unjustified number of bad loans. “It was clear from the very beginning that these loans were not necessarily going to be repaid,” Aslanian says.
Trimming away small banks is an expected outcome that will have to happen sooner or later if Ukraine wants to integrate further with the European Union. “Ukraine will be obliged to open its financial banking market to the big players from the EU,” Aslanian says.
For this to happen, the central bank should do and will do more as a regulator, according to Regis Lefevre, financial director of Credit Agricole, a French-owned bank.
To ensure durability, Ukraine must have fewer yet bigger banks on the market. They should meet all the capital and liquidity requirements and not simply be in a race for assets that are often “toxic,” Povoroznyk says.
Less than Hr 1.25 trillion ($57 billion) in assets are currently on the books of Ukrainian banks, with more than Hr 50 billion ($2.3 billion) belonging to insolvent banks, according to the central bank.
If Russia’s war against Ukraine continues, and investments don’t come in, Porada sees around 20 banks that will survive given their economic standing and financial health.
“If the situation is going to be like it is right now…I believe that only a few banks will survive,” he says.
Regionally, Poland whose economy is more than four times bigger than Ukraine’s, has 66 banks in operation. Turkey only has 47 banks with an economy that is eight times as big.
But comparing numbers regionally won’t necessarily do the trick for finding the optimal number, since every country is different, experts say. It is quality and not the quantity of banks that the banking system should be working on.
The trimming process requires that each insolvency case be analyzed on an individual basis. That’s why the NBU initiates temporary management for those banks that they see as being near or at insolvency.
“Most of the banks that are on temporary management will be liquidated,” Aslanian says.
Theoretically, there are other options as well: the bank’s debts could be paid back, or certain assets put into a temporary bank while the rest will be liquidated.
So far experts mostly approve of the central bank’s actions.
“I like what they declare… (but) I hope that there is no abuse in these policies,” Aslanian says.
Kyiv Post staff writer Ilya Timtchenko can be reached at [email protected].
