﻿Banking Sector Insight-Leaking out (eng), ICU - вся аналитика по фондовым рынкам Украины, России и мира

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Banking Sector Insight-Leaking out (eng)

20.08.2014 | Источник: ICU

Leaking out
Our banking sector quarterly update focuses on the most recent financial data on banks - in this case, for 1Q14 - and discusses the latest developments in the sector as well as in the economy. In a nutshell, it contains the following viewpoints:

Tackling the deposits outflow. The Ukrainian banking system has suffered a severe shock in 2014: the total amount of deposits (net of currency devaluation effect) declined by 16.1% during the first six months of the year. In order to prevent the system from collapsing, the National Bank of Ukraine (NBU) has provided the market with significant refinancing. The total amount of NBU loans to commercial banks increased by UAH35.4bn during 1H14, while the outflow of deposits denominated in local currency totalled UAH49.1bn. We believe that panic among depositors has now abated: deposits grew, albeit marginally, in July and overall liquidity increased to an acceptable level.

Nevertheless, the ongoing military insurgency in eastern Ukraine remains a key threat to the banking sector: not least, a full-scale invasion or a major bank failure could trigger further instability.

Assets deterioration. The current political crisis will have a negative impact on the quality of the loan portfolio. Owing to unreliable reported data, it is clear that the real level of problematic assets is higher than official figures suggest. As previously estimated, the real share of NPLs (90+ days overdue) in the overall loan portfolio was around 17-19% before the current crisis. Since then, a quarter of the loan portfolio has been deeply restructured.

Ukrainian banks can expect a very low recoverability rate for their Crimean loan portfolios; indeed, we estimate that losses could amount to UAH20bn or about 2% of the total loan portfolio. The most vulnerable, in our view, are loans issued to companies exposed to the region held by pro-Kremlin militants and FX-denominated loans. If such loans turn bad, the real share of NPLs could reach 46-52% by the end of the year.

Capital injection needed. The average capitalisation of Ukraine's banks was 15.9% in June 2014. However, we believe that some banks have significantly overstated their reported level of capitalisation. According to our estimates, the Ukrainian banking system is undercapitalised and requires an additional capital inflow of at least UAH40-50bn. A major concern is whether banks with Ukrainian capital can provide such funds in the current economic conditions. We expect the NBU to encourage banks' major shareholders to participate in their capitalisation, but the authorities may still consider providing capital for systemically important banks that cannot rely on private capital. We expect the largest recapitalisation efforts to focus on the top 35 banks, which combined account for 84.4% of the sector's total assets.

Potential problems paying out deposits. Fourteen banks were recognised as insolvent in 2014, including two banks from among the top 20. Combined, those failed financial institutions account for 3.6% of the sector's total assets. At the time of being declared insolvent, the 14 banks had insured accounts exceeding the assets of the Deposit Guarantee Fund (DGF) alone (UAH13.2bn and UAH8.1bn, respectively). We expect the number of failed banks to increase in 2014, in which case the authorities will have to provide loans to the fund in order to ensure it can meet its liabilities.

We believe that the authorities may take the following measures to help banks meet depositor demands:

1. Introduce legislation increasing major shareholders' responsibility, including financial, as regards problematic banks. The regulator is likely to tighten supervision of the banks in order to root out inappropriate and felonious management.

2. Provide the DGF with credit resources and help it obtain funds from international financial institutions. Recently, the World Bank announced it will issue a US$0.5bn loan to support the Ukrainian banking sector, including the fund.

3. Improve the effectiveness of the fund's operations, including by providing it with a broader set of instruments to impose temporary administration of insolvent banks.

Changes at the NBU. The new management team recently installed at the NBU has reaffirmed its aim to introduce inflation-targeting and a flexible USD/UAH exchange rate. We expect the regulator to strive to increase operational efficiency by optimising its organisational structure and improving compliance enforcement.

The regulator has introduced a more transparent refinancing mechanism based on market terms. This will strengthen its position within the overall system and boost the role of the official interest rate. Meanwhile, the parliament has passed a bill increasing the minimum amount of regulatory share capital for a new bank from UAH120m to UAH500m and for existing banks by UAH0.5bn over 10 years. We expect sector consolidation in the medium term, as a result of which the number of potentially shaky financial institutions will decline.

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