Ph.d. Shkura I.

Alfred Nobel University, Dniepropetrovsk, Ukraine

Sustainability of Ukrainian Banks after the Crisis

Ukrainian banking sector weaknesses is mentioned as one of basic factor of harder crisis affection on Ukraine than on the other emerging markets.

In spite of the economic contraction in Ukraine since September 2008, the main indicators of banking activity had been improving from 2003-2008. For example, bank equity grew by 71.4%, liabilities by 52.3%, and assets by 57.2%, Profits increased by 7.3 billion UAH. However, in the 1^st quarter of 2009, the banking sector began to decline. Profitability shrank for the first time in more than a decade.

Analyses of Ukrainian bank assets demonstrated an increasing in net assets by 16 times (2003-2001). Bank credit policy appears to have changed after the crisis. The share of credit to enterprises as a percentage of the total loan portfolio expanded to 2007 levels. The most characteristic feature of crises is that non-performing loans as a percentage of total loan portfolios exploded from 1.31% at the beginning of 2008 to 11.24% by the end of 2010. As a result, reserves for active bank operations grew 2.4-2.5 times in 2009-2010 before slowing down. The fact that reserves grew more quickly then credit issued confirms that there were problems with credit quality. Further evidence that credit policy changed after the crisis is that bank lending to enterprises outpaced loans to individuals. Long-term loans were only available to enterprises after the crisis.

During the following period (2009- 3d quarter 2011) the banking system was recapitalized in order to resist the financial crises: the growth rate of the paid-in statutory fund was as high as 144% in 2009 before dropping off. It should be noted that subordinated debt became a key tool used by some foreign banks to increase capitalization. It was also used as a source of long-term capital. The amount of subordinated debt reached 30.92 billion UAH (4% of all banking system liabilities) in 2010. Such large amounts allow banks to hedge country and currency risk. Liabilities fell in 2009 by 6% and then almost reached the level of 2008 in 2010. In the 3d quarter of 2011 liabilities were the highest of the analyzed period.

According to the structure of the deposit portfolio, the share of capital of individuals exceeds share of enterprise capital in total volume of liabilities and equity from 2004 to the present time. However fixed term deposits, which are more desired by banks because they are a more stable source of funding, decreased from 2009, and only the data from the 3d quartet of 2011 suggests that long-term loans funded by fixed term deposits are beginning to grow again.

One of the most important measures of bank health is profitability and improved effectiveness of money lent. From the beginning of 2009 started a decline in profitability and in the case of some banks, even losses. Maximum total losses of the banking system were 38.45 bill UAH in 2009. According to bank top management and overviews of credit agency “Credit Rating”, this was due to additional debt provisions, which are recorded as bank expenses. So this is “losses on paper”, but not yet in fact. Because net operational income exceeds total administrative expenditures in 2.2 times.

Government regulation of problem banks conducted through the implementation of temporary administration, purchase the commercial problem banks’ stocks by government (on the sum near 25.8 bill UAH) and refinancing credits to the banks (more than 120 bill UAH). However the effectiveness from the last two measures is not satisfied. To the beginning of 2010 commercial banks debt to the National Bank was 86.3 bill UAH with opportunity of extension and refinancing to support liquidity.

. One distinctive feature of the Ukrainian banking system is undoubtedly the high level of foreign investment in the sector – the share of foreign capital in the statutory funds of banks was 40.6% on 01.01.2011, compared to only 13.7% on 01.01.2003. Currently, foreign investment in Ukrainian banks originates from 26 countries. The largest portion comes from Russia (24.5%), Cyprus and France (11.1% each), Sweden (10.4%), Austria (10.0%), Germany (8.0%), and the Netherlands (5.9%).

Government regulation of these processes is important in order to take full advantage of foreign investment in the banking system, and to protect against potential risks. It should be noted that after the crisis expert’s evaluation of the impact of foreign investment on the Ukrainian banking system became more negative. The main threats named are the following:

- Insecure concentration of speculative capital as short- and medium-term loans on real estate, land, automobile and consumer markets (growing basic assets prices on these markets and distortion of the country’s trade balance as a result);

- Dollarization of lending (and following problems with debt service because of the devaluation of the UAH).

- Rapid growth of bank external debt (39 bill USD on 01.01.2009)

Thus, the first impact of the financial crisis on the banking system began from the 3d quarter of 2008. Due to the deficit of liquidity and the National Bank requirements’ tightening a lot of banks had been limited increasing of credit portfolios, as a result reducing of profitability and changing in the development plans of some banks was happened.

Current evaluations of banks performance by international institutions (S&P, World Bank) are negative. However, the tendency of overdue credits reducing will give the chance for assets recovery and growing of probability of further release of debt provisions.

References:

1. Main indicators of Ukrainian bank activities. http://bank.gov.ua/control/uk/publish/category?cat_id=64097

2. Segura, En (2010). Ukraine After the Crisis: the Road to Recovery. SigmaBleyzer.http://newtbf.sigmableyzer.com/wp-content/uploads/2011/02/Ukraine-after-the-Crisis-Ap-2010-v2.pdf

3. The Global Competitiveness Report 2010–2011. World Bank http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2010-11.pdf