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DatabankNovember 3 2014

Assessing the vulnerability of Ukrainian banks

Ukraine has been forced by the conditions of its latest International Monetary Fund loan to conduct a domestic asset quality review. Ahead of this, The Banker assesses the health of the country's banks.
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When the International Monetary Fund (IMF) agreed to lend $17bn to Ukraine in April 2014, one of the conditions for the emergency support was a thorough domestic asset quality review. The banking sector has been badly hit by the total closure of branch networks in Crimea after Russia’s annexation in March 2014, and by the devastation in the eastern Ukrainian provinces of Donetsk and Luhansk after months of fighting.

Speaking in October 2014, Oleksandr Pysaruk, the first deputy governor of the National Bank of Ukraine, indicated that in-depth “diagnostic studies” of the 35 largest banks would be completed by the end of the year. Of the top 10 banks in the country by Tier 1 capital, two – UkrGasBank and Rodovid – had only just recovered from the 2008 financial crisis, when they had to be rescued by the Ukrainian government.

In both banks, total impairments were negative for 2013, as provisioned loans were written back onto the balance sheet following restructuring. UkrGasBank was able to enjoy the highest return on Tier 1 capital in the top 10 as a result, at almost 21%. However, the restructuring process at Rodovid is clearly incomplete, and the bank was still making losses in 2013, even before the political and security crisis started. On the positive side, Rodovid now has a very high capital-to-assets ratio, at almost 38%, which should protect it against even the severe downturn of 2014.

Another two banks that were making a loss in 2013 may be more vulnerable, as their capital ratios are comparatively low. Ukrsotsbank lost the equivalent of nearly 21% of its capital, and new provisions were equivalent to almost 90% of total operating income. However, the bank is owned by Italy’s UniCredit, which should provide support if needed. At greater risk is Prominvestbank, which lost money in 2013 and has the lowest capital-to-assets ratio in the top 10. It is owned by Russian state development bank Vnesheconombank. Given the poor state of Russian-Ukrainian relations, it is difficult to predict how Prominvestbank might be recapitalised if necessary.

The capitalisation of locally owned Privatbank, the country’s largest, is the second lowest in the top 10. The Russian government placed Privatbank’s Russian subsidiary in temporary administration in March 2014, and the unit was later sold to Russia’s B&N Bank, which could exacerbate any losses for Privatbank in Ukraine itself. Privatbank generated a return of 12% on capital in 2013, after cutting new provisions for the year by more than one-third compared with 2012. The inevitable rebound in provisions in 2014 will clearly present a challenge to profitability.

Top 10 banks in Ukraine

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