The years 2020 and 2021 will become crucial for most Ukrainian banks. They will be forced to learn how to obtain money in conditions of pandemic and economic crisis. You can also learn more about this on Minfin.com.ua.
Decreasing income will become the main issue for the Ukrainian banking system in 2020-2021. Or it could take even longer. Most things depend on how we will stand against the Covid-19 and economic downturn, which has begun in our country since the beginning of the epidemic.
In the first quarter of 2020, in other words, before the lockdown, the GDP of Ukraine decreased by 1,5%. When in the next six months, it went down to 6.5%. The politicians say it is not the worst case. However, they usually compare us to the United States of America, where the GDP had fallen to 32%.
Even though everyone knows Ukraine has to pay debts that are approximately one-third of the whole year’s country income, and surely it cannot be compared because the USA has bigger financial potential. It is important to mention that Ukrainian manufacturers and the banking sector have never had such financial support as the USA or European Union.
The Federal Reserve System and The European Central Bank have already saved their economics by performing the assets’ redemption. In other words, dollar and euro emission. With such actions, business and creditor banks can survive in the worst times, so there will not be many bankruptcies while they have consumer support.
On the other hand, the Ukrainian National Bank is still ignoring similar ways to sustain the economy. That is why businesses and banks realize that they are on their own against the Corona crisis.
It is obvious that not all the countries would get out of it. Based on different prognoses, a dozen banks may lose their licenses by the end of the next year.
Mykola Voitkiv, the director of the risk management department in Public Company “Akordbank,” stated, “I assume by the end of 2020 the number of banks can decrease in 2-3 financial organizations. Next year, additional five banks can leave the market”.
How Is Money Disappearing?
In the first half of 2020, the profitability of 75 Ukrainian banks decreased by 23%, which equals 23,8 billion hryvnias. Sixteen different banks reported losses. At first sight, it is not the worst decline. Especially considering the condition of the quarantine.
However, it is crucial to understand that 59% of all incomes were from one national bank, Privatbank (14 billion hryvnias). And it is a known fact the bank receives a significant amount of revenue from internal government bonds and different deposit certificates of the National Bank (NBU).
The rest 74 banks earned the leftovers – 9.8 billion hryvnias. In most banks, these numbers represent how the management tries to push the number above the zero points to prove banks’ stability. So, the owners would not be upset and shut down the organizations, as the situation keeps getting more complicated.
In seven months, the financial situation of the banks gets worse. You can see that even from partial reports that gradually appear from different organizations. For instance, in the gap between January and July, the income of Rayffayzen Bank Avalʹ decreased by 14%. UkrsibBank, in turn, witnessed a 50% drop in its revenue (up to 785 billion hryvnias). There is no doubt other banks have worse cases.
What is the problem?
The main reason for the decrease is the Corona crisis. The banks were forbidden to give any fines to the creditors. As a result, the customers cut down all the necessary payments. It left banks in the worst financial situation. People were paying less, and businesses started to ask for postponing of the required fees.
Two processes were happening at the same time. All the incoming payments were shut down, and banks almost stopped giving any new credits. So far, these numbers do not look really bad but experts believe it may only be the beginning.
A financial analytic Mykhailo Demkiv has mentioned the following comments: “In seven months of 2019 bank losses were estimated totally 6,3 billion hryvnias comparing to 19,9 billion of the same period in the previous year. As a result, the credit services’ quality got worse, and banks were forced to accept it. It feels like it is not the end. So, banks are expecting to get new losses in the upcoming months.”
At the same time, the National Bank lowers the discount rate, reducing the side incomes of the financial organizations.
To sum up, all the reasons why banking incomes have fallen, we can highlight five main points:
- The increase in the credit’s payment delays. It has been estimated as 48,1 % (NLP). Most delays belong to state banks, and some of them belong to banks with Russian sponsorships (that were almost cut down).
- Forming reserves with non-returns. The National Bank assures that this number estimates at 96.6% at the beginning of August.
- The reduction of the annual discount rate from 13,5% to 6%. As a result, the income from government bonds has decreased significantly while banks funded in it 412 billion hryvnias. Important to mention the incomes from deposit certificates have also decreased, where banks were keeping approximately 100 billion hryvnias. Mykola Voitkiv calculated the sum based on these two aspects. It is around 1 billion hryvnias, and it may keep increasing.
- An obvious decrease in demand regarding credits. People and businesses started taking fewer loans as everyone has lots of doubts about their financial situations because of the pandemic. They almost unwillingly take any loans or credits for projects or some mass purchases.
- The reduction of a crediting activity. The National Bank statistic says that during the gap between January and August 2020, the sum of all credits for corporate business cut down in 1.5% (up to 433,5% billion hryvnias), the credits in dollars went down by 4.2% (up to $13 billion). However, crediting for Ukrainians got higher only for 2.1% (up to 172,6% billion hryvnias). In other words, it hasn’t covered the lack of income from the business side.
The member of the supervisor department from “Ukreximbank” Victor Strahov has commented on the situation this way: “Similar issues appeared even before Covid-19, and it keeps appearing now as well. The insufficient protection level of creditors’ interests has led to such problems”.
What do we need to do?
Crediting in the situation of such a huge crisis indeed has a big risk. No one knows how the world and Ukraine are going to stand against the Covid-19, and when the pandemic will be over. No one even has a clue which companies will survive and will be closed because of bankruptcy. How people and businesses are going to pay back all the loans depends on these two factors.
Nevertheless, financiers believe that sooner or later, everyone will get back to the crediting system. The longer banks stay without it, the bigger losses they are going to have.
Country Manager Yannis Kyriakopulos, a chairman of the Supervisory Board of Piraeus Bank, has stated that increasing income is supposed to come only from the rise of crediting activity. Low-interest rates should help businesses and people to take loans with sufficient cost. But it is important to understand that everything depends on the economic situation in the country.
So far, it seems that 2021 is going to be a year of economic rise for Ukraine. Perhaps, it is going to be around 4%. That is why the level of crediting should also get higher. However, we should consider that the cost of the credits may get more expensive in case of inflation.
Therefore, experts do not expect a crediting breakthrough in 2020. But they know that there are no other ways for the banking system in 2021. While everyone is talking about the lack of financial possibilities of those who take credits, the crediting system is expected to develop more actively.
Financiers hope that the National Bank of Ukraine is going to simplify its requirements. That should reduce provisions and make crediting ways easier.
Viktor Shulyk, Director of the Project Management Department of the IBI-Rating Agency, stated the following “On the global level we can observe simplified requirements to take credits (to sustain different banks), and it can impact the provision regarding the reserves.
It is also expecting the implementation of new mechanisms and rules at the legislative level.
The first breakthrough was enacting bill №3659 (the bill about giving state guarantees to finance the support to provide housing for people). If the bill is going to be approved, it may eventually provide opportunities to give state guarantees for small and medium-sized enterprises.
We are talking about 5 billion hryvnias as a maximum. The government agrees that the credit level should go up annually for 400 billion hryvnias to sustain the increase of the country’s GDP by 8-10%.
However, even 5 billion could not be enough to make it happen.
New rates for depositors
Activation of lending is the only chance for depositors to have the deposit rates increased. At the moment, banks have more than enough liquidity, so they keep interest rates low. In January-July 2020, the total amount of investments of the population (in UAH and foreign currency) on bank accounts increased by 16.7% to 633.1 billion UAH. Businesses increased their assets by 12% to 569.6 billion UAH.
In other words, a total of 1.2 trillion UAH is concentrated in banks. As of the beginning of August, only 1 trillion UAH was invested in lending. Banks have more funds than they need in the current reality. Until they start lending more actively, they will not be able to fight for depositors’ funds and increase the rates as a result.
However, according to experts, this should happen soon.
“The drop in interest rates on deposits has almost stopped. In July, many banks witnessed the outflow of term deposits of populations both in hryvnia and foreign currencies. The trend is likely to continue in August. Many depositors are not ready to keep deposits in hryvnias with a rate of less than 10% and currency with only a 0.5-1.5% interest rate. Taking bank liquidity into account, such outflows are not a problem. I assume that separate financial institutions will start raising their rates, primarily in hryvnia, as the lending gain increases,” predicted Mykola Voitkiv.
Although not all banks believe in deposit outflows, a massive increase in depositors’ rates should not be expected.
“I do not expect an active outflow of funds from deposits due to lower interest rates — as there is no superior alternative. Bonds of internal domestic loans are not so widespread and clear, real estate investment is clearly suffering due to the coronavirus and the decline in business activity,” said Victoria Strakhova.
4 Main Compromises for Banks
To lend or shut down, this alternative can become a reality in 2021. But there will be another dilemma: negotiate with borrowers or stay without credit defaults.
Banks will have to make daily compromises:
On the restructuring of distressed borrowers.
In any case, in a crisis economy, loan defaults will grow. Therefore, financiers will have to, on the one hand, be flexible and make concessions, and on the other — not to allow businesses to hide behind economic shocks in order to receive an infinite delay.
Regarding financial monitoring and risk-based approach.
Both for large depositors and borrowers, whose assets will need to be correctly evaluated.
Regarding agreements with shareholders, who will have to be convinced that the banks need to be preserved. The banking business’s profitability will again be at a minimum, and banks may need additional capitalization. That is, the owners of banks may be required to make further investments that are unknown when they will pay off, and whether they will pay off at all.
Regarding the new requirements of the National Bank, which it will put forward to the commercial banks. And the implementation of which may cause problems for As “Minfin” has confirmed in the National Bank press service, currently, nine banks need additional financing. Seven of them are organizations with private Ukrainian capital and two more with governmental funding. Officially, the bank’s names were not given, but we are most likely talking about Oschadbank and Ukreximbank.
The overall financial lack in the banking system is estimated at 10.3 billion hryvnias.
Previously that number had already been mentioned, but a week later, “Minfin” confirmed it. To say the truth, the National bank agreed that banks were not tested for stress-resistance during the current year. But we can assume it is required even less the “real money” in case:
- banks decrease their expenses even more;
- restructuring financial balance;
- changing their business models.
By the way, the National Bank chairman has no idea what the best business model can work ideally with the “Corona-crisis.” Such statements usually provoke some arguments and misunderstandings between bank’s financiers and their controllers.
At the “Instytutskys,” new ways of controlling the banks are considered continuously. They are making up new “recipes.” Recently, the National Bank has made up a new type of bank testing. They called it “reversible.” It has already started to implement.
Reversible stress testing is part of a process where banks get recovered.
It differs from the stress resistance test that banks had in 2018-19; it was a part of the annual evaluation of the banks’ stability. The results of that test were not opened to the public.
To explain reversible stress testing in a simple way, we can highlight three main stages:
- At the first stage, banks make an exhaustive list of macroeconomic factors and risks affecting their operations and financial results. Each bank will have its list, depending on its business orientation.
- At the second stage, each bank considers the economic changes that will put its activities in the maximum risk zone.
- In the third stage, it will calculate a clear action plan for the NBU to resume its activities if everything goes according to the worst scenario.
“In fact, banks should reveal all their weaknesses and then formulate a personal anti-crisis plan. Such that the regulator agrees with its realism after everything is considered. This is not an easy task. Especially in the current conditions, when the situation is affected not only by classical economic risks but also by the risks of the spread of the coronavirus epidemic in our country and around the world,” Vasily Nevmerzhitsky, a financial analyst, commented on the situation to the Ministry of Finance.
The process is set off.
According to the National Bank, all banks have begun to form a plan for their recovery. However, none has yet provided it to the regulator. So, it is too early to talk about anything else. The first conclusions will be made only in December, and the final ones — only in 2021.
“The National Bank plans to postpone the deadline for submitting plans to resume operations for systemically important banks from October 1 to December 1, 2020. For banks that have not received systemically important status, the deadline for submitting plans is December 20, 2020,” the National Bank press service reported to the Ministry of Finance.
This is most likely when it will be possible to draw the first conclusions about how our banking system tolerates the COVID-2019 pandemic and quarantine. And also, keep a count for banks that require additional capitalization and the volume of injections from shareholders.
In the end, it will be transparent which financial institutions can and are willing to battle the Corona-crisis. And how many of them will have to curtail their work in the banking market. Independently or forcibly — at the request of the regulator.
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