Cold Season

Economic News

22 Jul 2010
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Ukraine's banking industry has had a chilly start to the year, though the cold winds blowing though the financial sector have little to do with the sharp winter weather or the recent cutting of gas supplies by Russia.

Until the second half of last year, the banking sector was one of the strongest performers in the Ukrainian economy and in Eastern Europe, recording solid increases in assets and capital profitability, loan distribution and capital adequacy levels. With the onset of the global economic crisis and the 36% depreciation of the local currency since the middle of last year, the situation has been reversed.

According to figures released in late December by the National Bank of Ukraine (NBU), the country's central bank, assets and capital profitability have fallen to their lowest levels since early 2005, having last year recorded their sharpest drop in at least eight years. Capital adequacy levels were also down to their lowest levels this decade, while the value of overdue and doubtful loans more than doubled in 2008.

As of the beginning of December, there were 197 registered banks in Ukraine, of which 184 were listed by the NBU as being operational, the remaining 13 being subject to liquidation, a figure well down on the record high of 38 in 2001.

Of the operating banks, 50 have at least some overseas ownership component, while 18 are fully foreign owned. According to the NBU, the overall share of foreign capital in the statutory capital of Ukraine's banks stands at 35.9% of the total, a 350% increase since the beginning of 2005.

This reflects the strong international interest in the country's banking system, and the economy as a whole, over the past few years. In 2005, there were just 19 Ukrainian banks in which there was partial foreign ownership, and only seven fully foreign owned banks out of the 160 operating in the marketplace.

This interest in the country's banks saw a full 42% of foreign direct investment inflow to the country last year, which totalled $9.9bn directed to the banking sector, according to a report by the NBU issued at the end of January. However, this capital inflow slowed to a relative trickle in the last quarter of 2008, just $1.2bn, 63% down on the average for the three previous quarters.

Though the flow of overseas capital has dropped, the existing high levels of foreign participation are expected to help see the sector through its current steep downturn, with overseas partners unlikely to be keen on seeing their investments collapse. Such was the view of international ratings agency Fitch, which in late January downgraded its assessments of a number of Ukrainian lenders.

Though Fitch downgraded its ratings on many locally owned banks, the agency affirmed its position on Bank Forum, despite the depreciation of the hryvnia and what the agency described as the weaker outlook for the Ukrainian economy. What preserved Bank Forum's issuer default and support ratings was "the potential support available from its majority owner, Germany's Commerzbank group in case of need", Fitch said in its statement released on January 26.

The outlook could be less positive for those Ukrainian banks that do not have overseas backing, or whose foreign parent groups are themselves hard hit by the global credit crisis.

At least one local banker believes the global economic crisis will lead to a shake up of the country's banking sector, with many closing their doors.

Oleksandr Yaroslavsky, one of the owners of UkrSibbank, told the local press in early February that as a result of devaluation of the local currency and high levels of bad loans held by banks, which he put at almost 10% of total portfolios, there had been a significant decline of the sector's capital.

In a complicated crisis situation, only the strongest banks will be able to survive, Yaroslavsky said. This was a view shared in a January 21 report from Moody's Investors Service, which also tipped shrinkage in the industry.

"More stringent rules on liquidity and capital requirements, which are part of regulatory changes implemented in response to the financial crisis in autumn 2008, are likely to lead to some consolidation in the Ukrainian banking sector," the report said.

This process may have already begun, with the NBU announcing on January 21 that it had placed Ukrprombank, the country's 15th largest bank, in receivership to protect it from its creditors.

The industry's situation will only become more complicated, as the economy looks set to contract this year. The European Bank for Reconstruction and Development (EBRD) reassessed its growth expectations for Ukraine in late January, predicting the economy would contract by 5% in 2009, instead of the 1% expansion it had projected as recently as November. Indeed, the long, hard winter is not likely to to end soon for many of the country's banks.

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