Russia’s banks operating in Ukraine are under extreme pressure and may have to close or sell their businesses as non-performing loans (NLPs) soar and customers close their accounts because of the low-watt war with Russia.
The amount of NLPs at Ukrainian branches of the Russian banks have soared to well above the sector averages. They suffer not only from the generic problem of more debtors being unable to pay thanks to the economic miasma, but on top of that, if any client can avoid paying, they do for political reasons.
“The Russian banks may not leave but they are deleveraging and they are losing their deposit base; Ukrainians are avoiding them as they don’t want to do business with an aggressor or an occupier,” says Mykhaylo Demkiv, a financial analyst at Investment Capital Ukraine (ICU) LLC in Kyiv.
According to third quarter 2016 banking statistics of the National Bank of Ukraine (NBU) – the most recent figures available – banks operating in Ukraine are divided into three types, on the basis of their NPLs. The NBU divides loans into five levels of distress and the fourth and fifth categories are used to define NPLs.
Sberbank’s NPL ratio is already at 55% compared with the sector average of just under 30%, and its sister state-owned VTB bank has NPLs just short of 90% – one of the worst ratios in the sector – thanks its extensive exposure to loans in the industry-rich Donbas region that is now at the heart of the separatist conflict zone.
As can be expected, the health of some of the Western-owned banks in Ukraine is a mirror image of the Russian banks. Citibank, SEB and Deutsche Bank have no loans in the fourth and fifth categories at all. But being foreign is not an assurance of prudence, as Raiffeisen and ING both have worse than sector averages, probably because their businesses are much larger.
And the NPLs amongst the leading Ukrainian banks is also a mixed bag where good risk management has easily trumped nationality. Ukrsibbank has one of the lowest NPL ratios from the domestic banks at 20%, but the other leaders are worse than the sector average, which has clearly been dragged upwards by foreign banks’ low levels of bad debt.
The quirk in the data is that PrivatBank, which was nationalised in December, has with 20% one of the lowest NPL ratios in the sector as of the end of the third quarter of 2016, according to official data. This result highlights the failure of the NBU to adequately monitor the sector, or the bank’s ability to cook its books.
“The story of PrivatBank is not an easy one. I believe they hired smart people that found some loopholes in regulatory requirements,” says ICU’s Demkiv.
A couple of months after the end of the reporting period the NBU changed its mind on the solidity of the bank’s loans and declared that 97% of them were made to related parties.
Ukrainian’s post-Yanukovych government has been struggling to push through an extensive reform programme and progress in the banking sector has been rightly hailed as one of its few shining successes. But the size of the NPLs in the banking sector highlights there is still a massive amount of work still to be done.