Ukraine’s banks are back in profit, provisions made bad debt non-toxic

Ukraine’s banks are back in profit, provisions made bad debt non-toxic
Ukraine's banks are back in profit which will allow them to deal with 50%-plus NPLs
By Ben Aris in Berlin May 9, 2019

Most of Ukraine’s leading banks are back in profit as of the end of the first quarter of this year, the National Bank of Ukraine (NBU) reports. 

The NBU said that 69 out of 77 solvent banks posted profit in January-March 2019, while eight financial institutions completed the first quarter with a loss, as cited by UNIAN.

The most profitable included PrivatBank (UAH7.6bn, or $288.5mn), Raiffeisen Bank Aval (UAH1.1bn, or $41.8mn), OTP Bank (UAH793mn, or $30.1mn), PJSC First Ukrainian International Bank/FUIB (UAH757mn, or $28.7mn), and Prominvestbank (UAH633mn, or $24mn).

The loss-leaders were the Urkainian branch of the Russian giant Sberbank (UAH1bn/$38mn), Bank Credit Dnipro (UAH488mn/$18.5mn), Ukrsotsbank (UAH168mn/$6.4mn), Pravex Bank (UAH25mn/$949,127), and Misto Bank (UAH9mn/$341,686), the NBU said, as cited by UNIAN. 

Ukraine's operating banks posted a sector aggregate of UAH12.9bn, or $489.7mn, in net profit in January-March 2019, which was 1.5 times up year-over-year.

PrivatBank was nationalised by the state in December 2016, but since its bailout it has become one of the most profitable banks in the country. Net profit of PrivatBank, the largest lender by assets, jumped by 3.4 times year-on-year to UAH5.2bn ($190) in January and February, the bank said on March 21.

However, the bank is causing concern after its former owner, oligarch Ihor Kolomoisky, won several court rulings that declared the nationalisation of the bank illegal. Another ruling ordered the state to pay Kolomoisky $2bn in compensation for taking over his bank.

The fear is that the courts may rule that the bank be returned to its former owners, despite the government’s $5bn injection of capital into the bank. If that happens then it would be a “deal-breaker” for the International Monetary Fund (IMF) and could result in the Stand-By Arrangement (SBA) signed in December being suspended once again.

“The IMF et al will simply not tolerate any scenario where PrivatBank ends up back in the hands of former owners, unless they stump up the $5bn+ which the state used to recapitalize the bank. I cannot see any future IMF lending to Ukraine if the court does eventually rule for the bank to be handed back to former owners,” Tim Ash, senior sovereign strategist at BlueBay Asset Management, said in an emailed message to clients at the time of the court ruling.

Ukraine's outgoing President Petro Poroshenko warned last month that changing the position of the state on the issue of PrivatBank will cause a “deep economic crisis” both in the country and in relations with international financial organisations that are partners of Ukraine.

"I was shocked by the requirement of two billion dollars compensation for PrivatBank. This question is already on the table. This is what is ahead," the head of state noted.

Ukraine has a debt mountain to climb this year and will not be able to meet its obligations without the donor money.

Apart from the fate of PrivatBank, the other big issue for Ukraine’s banking sector is what to do about the bad debt. As bne IntelliNews recently reported, NPLs in the system were a worrying 51.7% as of April. NPLs have fallen somewhat in the last two years, but the absolute change in the overall level has been marginal.

However, according to experts what has changed is the profits banks have been earning have allowed them to provision for the bad debt, which improves the stability of the sector. Going forward the banks can start paying the profits into their capital, which allows them to retire bad debt, increase lending and earn their way out of the hole the sector fell into in recent years.

Corporate lending still dominates the loan portfolio of banks. The retail lending boom that drove growth in most of the other CIS countries in the last decade has yet to happen in Ukraine. Moreover while there was a mild increase in lending over the first quarter of this year, the overall trend in both corporate and retail lending remains more or less flat. Corporate loans amounted to UAH936bn ($35bn) in April and retail loans to UAH207bn ($7.8bn). With a low loans/deposit ratio of 88.1% in March the banks have a lot of room to grow their lending business. 

At the same time the NBU has won kudos for its independent and tough stance on reforming the banking sector. The central bank has continued to close wobbly and dodgy banks and the health of the sector as a whole has been improving as a result.

The number of banks continues to fall and dropped to 77 in total, including 36 with foreign capital (and 23 with 100% foreign capital) from 82, 39 and 18 respectively a year earlier.

NPLs % of loan book

 

Apr 2017

Apr 2018

Apr 2019

ratio of non-performing loans, %

55.11

56.45

51.68

incl. banks:

 

 

 

with state participation, of which:

69.96

72.29

65.21

PrivatBank

80.61

85.66

82.36

state banks ex-PrivatBank

60.13

60.59

50.59

Foreign owned

47.57

43.45

39.18

Privately owned

23.31

24.8

21.75

Insolvent

39.11

55.58

53.12

Source: NBU

 

This article is from bne IntelliNews Ukraine monthly country report. Sign up to receive the report to your inbox each month, covering the slow moving macro- and micro-economic trends, the major political news and a roundup of the main sectors and corporate news. The first month is free and you can unsubscribe at any time.

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