Along with much of the Ukrainian economy, the country’s crowded banking sector has been feeling the chill of the financial crisis, with a number of lenders being forced to close their doors and others taken under state control.
At the beginning of 2009, there were some 180 banks operating in Ukraine, though 12 months down the track, six had stopped trading, three more were nationalised and 14 had been placed in temporary receivership.
This tally changed slightly on January 21 when the National Bank of Ukraine (NBU) decided to liquidate two banks – Ukrprombank and Hypobank – which had been put into temporary administration last year. While Hypobank had been only a minor player in the country’s financial sector, being listed as the 64th largest institution out of the 180 banks trading, Ukrprombank was much bigger, being ranked 18th and by far the most prominent lender to fall victim to the economic crisis.
The economic downturn has cut deep. Though final figures have yet to be tabulated, NBU officials have said the country’s GDP contracted somewhere between 14 and 15% last year, while industrial output fell by 21.9% in 2009, following on from a 3.1% decline in 2008.
The retreat of the economy has affected the banking sector over the past year, as has the devaluation of the local currency, the hryvnia, which lost more than 60% of its value against the dollar. This has made it increasingly difficult for those who took out dollar-denominated loans to repay them.
According to some estimates, up to half of all mortgage financing in Ukraine was conducted using the US currency, along with a fair percentage of business loans, with the devaluation of the hryvnia adding to repayment costs and piling up pressure on exposed lenders. Going into the last months of 2009, local banks had a combined credit portfolio of $90.8bn, while the amount of provisions stood at $11.2bn, with some predictions suggesting that non-performing loans could soon reach 20% of the total portfolio.
According to a report by Ukrsibbank, cited by Business News Europe at the end of December, the majority of top-tier Ukrainian banks had excessive liquidity as of the end of 2009 as deposit runs stopped in the summer, though it said the willingness of domestic banks to generate new loans was limited.
Going into the new year, few banks were actively promoting their lending services, and those that were offering credit were doing so at high rates of interest, just under 20% for loans denominated in the local currency and 10.2% for credits in foreign currency, the NBU said on January 13.
Officials are hoping that banks will start opening the taps soon, and are planning to take some steps to encourage them to do so. On January 19, Valeriy Lytvytsky, the head of the group of advisors to the governor of the NBU, said it would be appropriate for the reserve to accelerate the adoption of a resolution intended to boost the credit activity of commercial banks.
Though details of how the NBU is to prompt banks to return to the loan market are lacking, predictions that the economy should move out of recession in the coming months and post modest growth by the end of 2010 may spark some interest amongst Ukraine’s banks to resume lending.
At the same time, the Ukrainian parliament is also in the process of providing some relief to those holding bank loans, in mid-January passing the second reading of a bill that would restrict financial institutions from unilaterally raising interest rates and other payments on issued loans. If ratified, the bill would prevent banks and other financial institutions from increasing interest rates or other payments stipulated in a loan agreement or a debt repayment schedule, apart from in those specific cases set out under existing regulations.
The bill also sets out a ban on banks calling in a loan early or the unilateral cancellation of a loan agreement if the borrower does not agree to a proposal by a financial institution to raise interest rates or other payment foreseen in a loan agreement or a debt repayment schedule.
While it will take time for Ukraine’s banks to regain the confidence to re-enter the loan market, the worst appears to be over for the sector, with some underperformers winnowed out and the remaining players potentially made stronger by the experience.