Lending growth coming, says Ukraine’s CB deputy governor

Banking sector clean-up to continue; UniCredit heads for the exit.

The confidence crisis in Ukraine’s banking system is over and lending growth should resume this year, according to central bank deputy governor Vladyslav Rashkovan. 

Speaking at Euromoney’s Central and Eastern Europe Forum in Vienna, Rashkovan said the resumption of household deposit growth in Ukraine in the second half of 2015 was evidence of the central bank’s success in stabilizing the financial system and restoring public trust in the banking sector.

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Vladyslav Rashkovan

Planned cuts in interest rates this year should boost demand for credit, he added. "We expect to decrease the discount rate to around 14% by the end of the year, which will make lending more affordable," he said. 

The benchmark rate has already come down from a high of 30%, set by the National Bank of Ukraine (NBU) last March in the wake of its move to a free-floating currency regime, but still stands at 22%. 

Also on the agenda for this year is another round of bank stress tests by the NBU. 

Initial tests in 2014 of Ukraine’s top 34 banks revealed a capital shortfall of Hrn61 billion ($2.4 billion). This was mostly made up by shareholders – however, a further dramatic increase in non-performing loans caused by the loss of Crimea, the war in eastern Ukraine and a sharp economic contraction, prompted the central bank to start a second assessment of the country’s 20 largest lenders last April. 

According to the NBU, four of the banks surveyed did not require additional capital, while a further five had met the new regulatory requirements by the time the results were announced in January. Details of the banks involved were not released. 

Rashkovan confirms that a further 40 banks will be assessed this year, with the process due to be completed by November. 

Analysts note, however, that asset quality in Ukraine has continued to decline since the start of the stress tests. According to Fitch Ratings, NPLs accounted for as much as 44% of total loans outstanding in November, while at certain individual top-10 banks the figure is reported to be well over 50%. 

NBU statistics also show a sharp deterioration in asset quality last year but put the current level of NPLs at just 21.2%. Rashkovan says the difference in estimates was partly due to the central bank’s treatment of related party lending. "It is important to distinguish between types of assets when calculating NPLs," he says. "If a bank owner is not servicing loans to himself, should that really be classed as a bad debt?"

He acknowledges, however, that related party lending remains a big problem for Ukraine. Many of the 65 banks shut down by the NBU over the past two years as part of its clean-up of the sector were effectively pocket banks for local oligarchs.

They included Dmytro Firtash’s Nadra Bank, Nikolay Lagun’s Delta Bank – at the time of its closure the fourth-largest bank in Ukraine – and two lenders owned by agribusiness tycoon Oleg Bakhmatyuk. In one of the latter, loans to related parties accounted for 96% of the total, according to the NBU.

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So far, however, the central bank has been unable to rein in Ukraine’s largest oligarch-owned lender. At Privatbank, which holds around 34% of the country’s retail deposits, lending to parties related to owners Ihor Kolomoisky and Henadiy Boholyubov equated to nearly 45% of total regulatory capital at end-October, well above the new limit of 25% set by the NBU. 

Rashkovan also admits that, while the majority of depositors in the failed banks have been reimbursed via the restructured and recapitalized Deposit Guarantee Fund, to date no prosecutions have been brought against the bank owners and none of the Hrn335 billion of defaulted assets has been recovered. 

"The next step is to get those assets back and put the people responsible for bringing banks to bankruptcy in jail," he says. 

Meanwhile, losses in the sector continue to mount. According to the NBU, Ukraine’s banks lost Hrn53.0 billion in 2014 and a further Hrn57.3 billion in the first 11 months of last year, excluding results from insolvent banks. 

Deputy governor Kateryna Rozhkova is confident, however, that the system can return a positive operating result within two years. "We hope that the series of measures we are conducting now will allow banks to enter the operating break-even by the end of 2017," she says.

That will be too late for one of Ukraine’s leading foreign lenders. UniCredit has sold its local subsidiary, Ukrsotsbank, to Russia’s Alfa Group in a share swap deal. 

Carlo Vivaldi, head of CEE at the Italian group, praised the NBU’s progress in modernizing and cleaning up the Ukrainian banking system, and noted that recovery was already underway in the economy. 

"GDP growth resumed in the second half of last year and that trend is expected to continue in 2016," he said. 

He added, however, that full recovery was still a long way off. "It will likely take a long time for Ukraine to get back to where it was before the financial crisis," he said. "We considered all the options for Ukrsotsbank and we felt that the current solution was the best we could achieve at present."