The country's commercial banking system, which suffered after the 1998 financial crisis, has shown strong signs of recovery during recent years. Bankers say that the most remarkable achievement within the sector is the significant increase in lending over the last year.
The country`s commercial banking system ,which suffered after the 1998 financial crisis,has shown strong signs of recovery during recent years.
Bankers say that the most remarkable achievement within the sector is the significant increase in lending over the last year. During the first three quarters of this year, Ukrainian banks loaned Hr 66 billion, 60 percent more than they did during the same period last year.
While lending to corporations is still much more common than lending to individuals, individual loans have increased this year compared to 2002.
During the first nine months of 2003, Ukrainian banks loaned Hr 6.8 billion, or 10 percent of their total credit portfolios, to individuals.
According to the National Bank of Ukraine’s data, individual deposits grew by 65 percent to Hr 27.3 billion within the first nine months of this year, compared to the same period last year. Deposits from corporate clients rose by 37 percent, to Hr 26.2 billion.
“Commercial banks have succeeded during the past few years in encouraging the population to come back to banks,” said Jacques Mounier, president of Credit Lyonnais Bank Ukraine’s board.
“It’s a good sign, and gives banks an opportunity to lend to individuals and the economy,” he added.
Trust in banks
Yury Prozorov, a senior advisor at the analytical center of the National Bank of Ukraine Council, said the trend became visible last year, and this year it stabilized.
“Despite a slight drop in interest rates on deposits, people keep bringing their savings to the banks,” he said. “Trust in banks is a result of the stable monetary policy that Ukraine has implemented, as well as a rebound in people’s trust in the national banking system.”
The growth in individual deposits also arose from the general improvement in the country’s economy, as well as from the banks’ introduction of marketing strategies to attract more clients, experts say.
Prozorov said that more people now prefer to keep their savings in hryvna, a sign of their confidence in the national currency’s stability.
“Although interest rates for national currency deposits are higher than those for deposits in hard currency, a few years ago people preferred to keep savings in dollars. That is not the case today,” Prozorov said.
Another factor that has helped commercial banks is that many employers demand that their employees open bank accounts, to facilitate salary payments.
Experts say that commercial banks performed well in all their activities this year.
Banks’ assets increased by 52 percent to almost Hr 90 billion in the January to September period, compared with the same period last year. Their capital grew by 27 percent, to 11.3 Hr billion.
“Our assets amount to only 36 percent of GDP, but that’s a huge difference compared to what we had a few years ago, when this ratio didn’t exceed 12 percent to 13 percent,” Prozorov said.
Among the positive changes, experts emphasize a decrease in interest rates for loans. Rates fell from 19.5 percent last year to 17.2 percent this year.
A maturing industry
Experts say that despite the national financial system’s remaining flaws, it has already outgrown its most dangerous period.
“This year was stable; I have only positive expectations about future development,” said Andry Onistrat, deputy director of Ukrsotsbank.
According to Prozorov, it’s a coup that the banking system was not affected by the recent closure of Bank Ukraina, which accounted for almost 10 percent of 2001’s total bank assets. In his opinion, that’s evidence that the national bank sector has stiffened its immunity against internal risks.
“Many feared that a number of Ukrainian banks would go bankrupt after Bank Ukraina closed, but it didn’t happen. Ukraine’s banking system grew up, becoming strong, stable and capable of counteracting internal upheavals,” he said.
“An individual bank going bankrupt is possible, but a systemic crisis is excluded.”
Today bankers face the future with confidence, he said, adding that there’s no difference between the biggest Ukrainian banks and those of Eastern Europe, Russia, or the Baltic countries in terms of the professionalism of their management.
“Few foreign banks develop as quickly as Ukrainian banks do. That’s the reason many foreign banks are considering buying Ukrainian banks.”
Foreign capital
Prozorov said that amendments to the law on banks will pave the way for foreign capital, allowing foreign banks to open branches in the country. But that won’t happen before 2005, he predicts.
Today, 10 banks with 100 percent foreign capital operate in Ukraine as representative offices and subsidiaries.
Prozorov said that Ukraine’s low international rating forces foreign financial institutions to create almost 100 percent reserves for their operations in Ukraine. That’s a huge barrier that prevents their immediate arrival.
“Ukrainian banks will be able to use this delay to increase their ability to compete with foreign rivals,” Prozorov said. He downplayed the “danger of monopolization of the market” by foreign institutions.
Capital extension
If national banks fear foreign financial institutions, a more present danger is foreign capital’s flight from Ukraine.
Recently, Polish Kredit Bank S.A. announced that it would sell its share in Kredit Bank Ukraina because Ukraine’s financial market is too small to be of interest, Prozorov said.
“Even if the market is not as bad as it was a few years ago, it is still fragile and small,” said Mounier, president of Credit Lyonnais Bank Ukraine’s board.
Melville Brown, the U.S. Department of the Treasury’s resident banking advisor for the NBU, wrote in his market analysis for 2001-2002 that the most disturbing weakness in the structure of the banking sector is that the rate of loan and deposit growth far outstrips the expansion in new capital.
“This is particularly noticeable during the last three years, when the average growth rate for loans was 50 percent, deposits 47 percent, but capital only grew by an average 27 percent. This illustrates that the system as a whole demonstrates an overall negative capacity for self-capitalization, is not self-sustaining in the creation of new capital and remains undercapitalized for its size,” wrote Brown.
Between January and September, assets increased by 40 percent, but capital increased by 13 percent, Prozorov said.
This year, commercial banks have been increasing their capital fast, trying to meet the NBU’s new requirement, which mandates that capital shouldn’t be less than 10 percent of a bank’s assets. The requirement will go into effect during the second quarter next year. Today, the minimum stands at 8 percent.
Onistrat, deputy director of Ukrsotsbank, said that if banks do not solve the problem of capital extension, it could slow the lowering of interest rates on lending.
According to the NBU’s rating, which measures the size of a bank by assets, out of 154 banks currently operating in the country, only eleven of the country’s major banks have assets that exceed Hr 1 billion.
“There is a great disparity in the relative size of the banks operating in Ukraine,” Brown wrote. “[O]nly 10 major banks dominate the market. The ranking clearly identifies one of the primary structural weaknesses in the sector. The top 10 banks represent over 50 percent of the total market, with the majority of the loans booked in Kyiv region. In fact, their average asset size is less than $750 million, which would rank even the largest Ukrainian bank quite low internationally,” Brown said.
Prozorov predicted that by the end of the year, the number of top banks would rise to 15 or 16. Furthermore, within five years, he said, the total number of banks in Ukraine will decrease to between 30 and 50.
“Those banks which operate as the accounting centers of big financial-industrial groups will disappear or merge,” he said.
Susceptible to shocks
In his analysis, Brown enumerates other factors that make Ukraine’s financial sector vulnerable.
“The trends in macroeconomic performance over the past two and half years have been generally positive. Nonetheless, the financial sector, which is totally dominated by the commercial banks, remains susceptible to a wide range of external shocks for such reasons as continued economic dependence on Russia and the high concentration of export in cyclical sectors, which can be negatively impacted by global recession,” he wrote.
The sector is also plagued with flaws of a political nature.
Mounier said that the replacement of the leadership of the National Bank of Ukraine in 2002 could influence the industry in the future. The leadership, he said, “was replaced by people who are much younger but, unfortunately, politically tainted. Therefore, they have less enforcement power than their predecessors. It’s probably better to have, as we had, a team of old civic servants, a bit slow, not very communicative, that sometimes had the courage to say ‘no.’”
Another problem for the banking sector is the money-laundering endemic to Ukraine. In December of last year, Ukraine was blacklisted by the Financial Action Task Force, an international anti-money laundering authority, for not doing enough to fight financial deception.
Some banks are known to be involved in laundering, Mounier said. “And those that are involved are perfectly known by the West. These banks have to stop it, or disappear.”
He added that “Ukraine’s banks continue to scare the West.”
But local experts offer a different assessment of the situation.
“Ukraine’s laws on money laundering are much tougher than, for instance, Russia’s laws, yet it was Ukraine that was blacklisted,” Onistrat said. He called that a “political decision without any economic ground,” and added: “The main problem in relations with the West is that the West knows little about us, and about the numerous progressive steps we’ve taken.”
