Ukraine’s banks on the mend, tracking 2019 results

Ukraine’s banks on the mend, tracking 2019 results
Ukraine's banking sector is expanding again and following the same path it set out on in 2019, the first year of strong growth following the Revolution of Dignity in 2014.
By bne IntelliNews July 4, 2021

Ukraine’s banks managed to avoid the worst of the coronacrisis and found their business largely unaffected by the events of the last year.  

Thanks to the clean-up of the sector they went into 2020 in good health with bad debts provisioned for, and the weakest banks have already been shuttered by the NBU.  

Now that Ukraine is starting to come out the other side, at worst they have lost a year treading water; however, the recovery has clearly begun and the banks are back on the path they were already following before the pandemic hit the country.  

Profits up

Ukraine’s banks are exactly tracking the earnings record of 2019, the first year of strong growth following the Revolution of Dignity in 2014.

The bank sector earned UAH6.3bn ($230mn) of profit in May, according to the NBU, slightly down from the UAH6.6bn they earned a month earlier but ahead of first-quarter earnings.

May’s monthly profit was almost double what banks had earned in May a year previously (UAH3.8bn), which was the first month of full crisis. However, in a good sign, this May’s earnings was also ahead of the UAH5.3bn banks earned in May 2019, a strong year, and even further ahead of 2018 (UAH2bn) and 2017 (a loss of UAH2.6bn). The monthly results for May strongly suggest that the banking sector is well on the way to recovery, but it still has at least another 30% of upside ahead of it for profits.

On a cumulative basis, Ukraine’s banks did slightly less well than in 2020 over the first five months of this year compared to 2020, but were almost exactly on a par with 2019.

Banks earned UAH23.8bn ($869mn) over the first five months, less than in the same period in 2020 (UAH28.9bn) but almost the same as in 2019 (UAH23.4bn).

After a strong year in 2019, Ukraine banks were looking forward to 2020 and expected to extend their gains as the economy began to build up some economic momentum after five years of post-revolution crisis. But it was not to be, after the oil shock and coronavirus (COVID-19) double whammy hit in April.

Thanks to the clean-up of the sector and the closer supervision of the NBU in last six year the banks went into the 2020 crisis from a much stronger position and weathered the subsequent storm surprisingly well.

The prospects for banks to outperform the 2019 results is mixed. Although the economy is expected to grow by some 4% this year, the results of the second quarter already highlight problems and a slowdown in the pace of recovery that will take the edge off growth that probably mean banks will continue to track the 2019 sector results for the time being.

 

Loans recovering

Corporate lending has been declining steadily since the start of 2019 and, after a brief spike as last year’s shocks hit in April, continued to fall until March, when they seemed to plateau out.

Corporates took out UAH803bn of loans in June, on a par with the earlier months of this year, as borrowing has been running steadily at around UAH800bn a month all year. But corporate borrowing was down against every one of the last three years of UAH875bn in 2020, UAH929bn in 2019 and UAH909bn in 2018.

Lending to companies accounts for about 80% of Ukraine’s banks’ credit business, but retail remains an important business and retail credits have been rising steadily over the last two years. However, at the start of this year retail credit volumes fell again for the first time since 2019 but have started to grow again since March.

Ukraine’s banks extended a total of UAH224.5bn of retail credits in June, slightly up on the UAH208bn they extended in the first month of this year and also ahead of the UAH218bn they extended in June 2020. Compared to corporate lending and the banks’ profitability over the last four years, retail loans have been growing at a very steady and regular pace since 2017.

 

 

 

NPLs coming down

Ukraine’s banks are making good progress with retiring their non-performing loans (NLPs). The sector aggregate NPLs fell to 37.85% of the total outstanding loans, having started the year at 41% and 48% the year before that.

The fact that the regulator has closed dozens of insolvent banks has contributed, but it is the privately owned banks that have made the most progress, having brought their NPLs down just to 12.4% as of June from 14.5% at the start of this year and 19.5% in June 2020.

The foreign-owned banks have also made progress, bring their NPLs down to 25% in June from 34.3% a year earlier. And even the state-owned banks (excluding PrivatBank) have done well, although bad debt still accounts for 40% of their loan book, down from 46.6% a year earlier.

The gorilla in the room remains PrivatBank, where NPLs still make up 71.7% of its loan book, due to what the new state-appointed management following its nationalisation in 2016 call the “fraud loans” that the previous bank’s management made to related parties.

PrivatBank

The new team has put the bank back on its feet and it is now the largest and most profitable bank in Ukraine. Management have been using these profits to retire what bad debt they can, but the bulk of it is the subject of numerous legal actions in London, Cyprus and the US as the state tries to recover some of the $5.5bn that was stolen from the bank.

The case in London took a big step forward in March when the Bank of England decided to recognise the bail-in of Privatbank during the 2016 nationalisation and the UK Treasury provided its approval of this decision. The recognition gives effect to the bail-in of the Eurobonds as a matter of English law, which clears the way for the case against the former owners to proceed in London – a major victory in the state-owned Privatbank’s campaign to recover its missing funds.

Those cases have been going on for several years and are likely to continue for several more – and even then it is far from certain much of the missing money can be recovered.

In 2020, Ukrainian state-owned banks reduced their profit to UAH23.1bn ($832mn) compared with UAH34.2bn in 2019. Profit may have been down because of the epidemic, but PrivatBank accounted for almost two thirds of the entire sector’s profit (61.3%, or UAH25.3bn), according to the Ministry of Finance, while the state-owned export promotion bank, Ukreximbank, ended the last year with a loss of UAH5.6bn.

And the pressure on PrivatBank continues to increase. After Ukrainian President Volodymyr Zelenskiy gave an oligarch speech in March he has been turning the screws on the vested interests that have been working in Ukraine with impunity. The so-called anti-Kolomoisky banking law has already been passed, making it impossible for the local courts to return the bank to its former owner, and an oligarch law was submitted to the Rada at the start of June that will limit their contacts with government further.

Since the start of this year several criminal cases have been brought against the former senior management of the bank and Ukraine’s Specialised Anti-Corruption Prosecutor's Office (SAPO) put the former head of PrivatBank's board, Oleksandr Dubilet, on the wanted list in connection to a criminal investigation into embezzlement in March.

Ultimately the state would like to sell PrivatBank, governor of the National Bank of Ukraine (NBU) Kyrylo Shevchenko told bne IntelliNews in an exclusive interview in June. However, he pointed out that it would be extremely difficult to sell a bank carrying big debts, even if they have been provisioned for (which they have).

“The privatisation of PrivatBank, which owns 20% of the Ukrainian banking market, will be of interest to the most prestigious international investors, including those from the United States and the European Union,” Shevchenko said. However, with over 70% of its loans non-performing it will take years to clean up its balance sheet.  

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