Banks and Banking Regulations
Ukraine has a two-tiered banking system. The National Bank of Ukraine (NBU) is the country’s central bank. Commercial banks, including Ukreximbank, the state export-import bank of Ukraine, and Oschadny Bank, the state savings bank of Ukraine, operate under the authorization and supervision of the NBU.
The strategic aims of the NBU laid out in its strategy for 2011–2013 are:
- Gradually reducing inflation to 5 % by 2013 and maintaining a low level;
- Renewing trust in the domestic banking system and supporting its proper functioning;
- Organizing an effective and reliable payment system;
- Exposing and reducing threats to the financial system;
- Strengthening the NBU’s potential to provide better support to Ukrainian society.
The Banking Sector
The Ukrainian banking sector has historically suffered from a number of significant weaknesses, including undercapitalization, weak corporate governance and management, poor asset quality, and even excessive political intervention in some instances. The situation is improving and reforms are continuing. Today, Ukraine’s banks are required to prepare accounts based on International Financial Reporting Standards (IFRS).
Most banking services are available in Ukraine, and consumer credit facilities are expanding rapidly. Intermediation costs remain fairly high, although the presence of Western banks, particularly in retail banking, should force the sector to become more efficient over time. In November 2006, the Parliament passed a law that permit foreign banks to operate branch offices in Ukraine since the country joined the WTO.
As of January 1, 2011, 195 commercial banks were registered in Ukraine, of which 176 have licenses from the NBU to perform banking transactions, and 18 are in the process of liquidation.
Ukraine’s banking sector has a high level of concentration. According to NBU data, over 50% of the sector’s total assets are held by the 10 largest banks.
Commercial banks require a license from the NBU to operate. The NBU has established requirements for capital adequacy, minimum statutory capital requirements and minimum regulatory capital requirements. For banks registering after 26 June 2009, the minimum statutory capital requirement is UAH 75 million (USD 9,375 million).
Much of the inflow of investment in this sector can be attributed to a handful of M&As, in which Ukrainian tycoons sold their banking operations to European financial groups for top dollar.
In the beginning of the year 2011 Fitch’s ratings of Ukrainian banks were capped at ‘B-’ in line with the sovereign ratings, and the agency believes the banking sector will require substantial further capital support going forward. Fitch expects only moderate capital injections at most foreign-owned banks during 2010, as parent institutions are likely to wait for an improvement in the operating environment and a clearer picture of eventual losses before embarking on more full scale recapitalization. On the other hand, greater political stability, economic policy discipline and financial stability following the recent election could result in sovereign and bank Outlooks, all of which are currently Negative, being revised back to Stable.
The financial and capital positions of the banking system visibly strengthened in 2010. Total losses were cut by nearly three times compared to 2009, down to UAH 13.0 billion in 2010, from UAH 38.4 billion in 2009, despite a sharp reduction in the volume of new loan coverage, sustained operating earnings and reduced administrative costs. Despite an overall negative financial result, more and more banks returned to profitability in 2010. According to the NBU, the number of unprofitable banks fell from 64 at end-2009 to 41 by end-September 2010. In 2010, banks also managed to strengthen their capital positions, thanks to massive capital injections by the shareholders and lower loss rates. The capital adequacy ratio for the sector stood at a solid 20.8% by end-2010, rising from 14% at end-2008 and 18.1% at end-2009. The volume of regulatory capital increased by UAH 25 billion during 2010.
Continued economic recovery, growing confidence in the banking system and the lack of other investment options lured depositors back to banks. Consequently, in 2010 the banking system fully regained and surpassed its deposit base from the pre-crisis level: at the peak of outflows in early 2009, banks lost nearly 25% of their personal deposit base. Personal deposits grew 28.5% last year, compared to a decline of 1.9% in 2009. Deposits in the local currency grew at much faster pace than FX deposits—41.6% and 17.4% y-o-y increases—amidst expectations of a stable exchange rate and a wide interest rate differential. Currently, hryvnia deposits are earning 5%-6% more than dollar deposits. The term structure of personal deposits has visibly improved last year, with the share of long-term deposits in total personal deposits rising from 27% at end-2009 to 39% as of end-November 2010.
At the same time, it would be premature to say that Ukraine’s banking system has successfully exited the crisis phase and embarked on a path of sustainable growth. A high level of non-performing loans has been the major drag on profitability in the domestic banking system and on its ability to extend credit. According to NBU data, the NPL ratio reached 11.2% at end-2010, with volumes growing 21%, to UAH 85 billion, over the last year. According to other calculations, such as Fitch and the IMF, the ‘true’ NPL levels could be much higher.