Standard & Poor’s, a New York-based assessor of credit worthiness, thinks the Ukrainian banking sector is on shaky ground. According to its latest report on the country’s banking sector published on Sept. 5, the ratio of risky loans is expected to reach 50 percent of the sector’s $67-billion loan portfolio. Coupled with a deteriorating economy, it’s one of the reasons why the agency says is one of the weakest globally, and as fragile as its Greek and Egyptian counterparts.
Citing “geopolitical instability,” S&P analysts Annette Ess in Frankfurt and Yulia Kozlova in London implied that Russia’s undeclared war with Ukraine is at the root of the economy’s 7 percent contraction this year.
Moreover, the hryvnia’s 42-percent devaluation against the U.S. dollar is adversely affecting the savings and loan business model of banks, said Dmytro Tarabakin, managing director at Dragon Capital, a Kyiv-based investment house.
Fueled by demand for more stable currencies like the U.S. dollar and euro, hryvnia-denominated deposits fell by 10 percent since January. This is in turn has limited access to cash with which banks can issue loans.
Overall, the nation’s 170 banks generated $175 million of net profit last year while managing $101 billion worth of assets. “The Ukrainian banking system is relatively young, payment culture is seen as weak and is going through a formation stage,” reads the S&P report.
The banking sector has experienced several distinct phases of crises over last few years. In a July interview with the Kyiv Post, Citibank Ukraine managing director Steven Fisher noted the period leading up to the EuroMaidan in November as “deteriorating economic conditions and the quickly declining foreign currency reserves level.” During the popular uprising, he said, was concern for personal safety and the viability of operating one’s premises in Kyiv. Afterwards came jolts stemming from Russia’s annexation of Crimea, leaving 4 percent, or some $4 billion, of the banking sector’s total assets out of reach. Turbulence in the east has led to billion dollar losses to infrastructure.
“To be honest, I’m tired of devoting my time mostly to crisis management,” lamented Olena Popova, board director at Delta Bank, in an interview with Forbes Ukraine.
The same S&P report gave Ukraine’s banking regulation a mediocre score. It noted that although central bank governor Valeriya Gontareva has been on the job for less than three months, “with close monitoring by International Monetary Fund experts, she can implement advanced practices mostly in line with international practices.”
A former bond dealer, Gontareva in recent weeks has trumpeted the recalibration of interest rates for commercial banks during public appearances. She also admitted that her team is far from perfect, including their knowledge of English. “This one time I had to write an urgent report for the IMF in English. No one could do it, so I had to sit late at night and write up the text,” she told.
She also has her detractors. Sergiy Yaremenko, who briefly was the central bank deputy head in 2005, has criticized her policy of the letting the hryvnia fluctuate. He suggested using more foreign reserves as a solution and enacting more restrictions on currency transactions, among the tools at her disposal.
Others see the 17 percent market share of state-run banks as a monopoly. Government-run Oschadbank, the nation’s second largest, furthermore is the only financial institution that has a 100 percent recovery rate for deposits. Other banks are insured only for deposits that don’t exceed $15,500. This is why Oshchadbank’s deposit rates were substantially lower than those of its peers, allowing the bank to generate more profits. However, the bank’s new head Andriy Pyshny adjusted the interest rates to the market level.
Meanwhile, Dragon Capital’s Tarabakin thinks Oshchadbank should be sold by publicly offering its shares which would bring additional revenue to state coffers while also making the bank’s management more goal-oriented.
Russian banks occupy 12 percent of the market. The central bank’s Gontareva has praised them for sustaining effective business models and providing high-quality services. However, she indicated that should the government start imposing restrictive measures toward Russian businesses operating in Ukraine, those banks might be put on the sanctions list.
Technology might also alter the long-term horizon of banking business models. Apple, a computer and mobile devices giant, unveiled a payment system that works with its iPhones on Sep. 9.
“It’s not other banks that will be (our) key competitors on the payment market, but companies like Google, Facebook, Twitter, Amazon, Pay Pal – those information technology corporations that are already becoming banks,” foresees Delta Bank’s Popova.
Kyiv Post associate business editor Ivan Verstyuk can be reached at [email protected].
