Today, the banking sector of Ukraine is stable and has a significant growth potential. To arrive at this point, it had to travel a long way from being controlled by greedy shareholders looking for fast profits to being managed by dedicated professionals committed to transparency and efficiency.
Ukrainian banking system has experienced more than one crisis and is now on the rise. Currently it is a vibrant market positioned for significant new investments and new mergers which are about to strengthen both the banking sector and the country’s finances.
National Bank of Ukraine actions in recent years assured proper functioning of the banking system so as to best support the country’s economy. As a result, the “circulatory system” can properly feed the entire “organism”.
But it was not always so. During the first independence decade, Ukraine’s banking was virtually autonomous. The sector underwent the first boom in the early 2000s, after the Orange Revolution, when international financial institutions acquired local banks for 5-7 times statutory capital.
This gold rush fed the shareholders and banks owners thirst for profits which prompted them to inflate balance sheets by pumping up the banks’ statutory capital with non-liquid assets and insider loans. As a result, the government had to interfere and recapitalize the most problematic banks, namely Kiev, Ukrprombank and Rodovid Bank in 2009.
Extremely disappointed with the quality of assets and financial institutions they acquired, about two dozen banks with foreign capital have left Ukraine since 2009.
Then started a period of wealth accumulation by NBU management, when new banks went off the “assembly line” for sale, and only those close to the “ruling” Donetsk clan could become owners and managers.
National Bank of Ukraine’s efforts to clear the market from financial bubbles during the 2014 – 2018 period had a positive impact on the banking system of Ukraine and restored the level of confidence. This affected the growth of the deposit portfolio of commercial banks. However, the withdrawal from the market of about 100 commercial banks, which in addition to bankrupt institutions included a number of solvent entities undesirable to the powers that be, negatively affected a large number of small and medium businesses, which constituted the majority these banks clients.
Market clearing, actually initiated by the external advisors from IMF and the World Bank, fully showed the glaring imperfections of Ukraine’s banking system, namely, weak liberal supervision, legislation violation, corruption, opaque ownership structure, as well as a virtual absence of financial monitoring.
Total corruption in the sector was supported by corrupt courts which, among other things, decided to revoke the NBU decision to introduce temporary administrations for some problematic banks.
Current situation in the industry is encouraging, although there are still isolated cases of money laundering and toxic “invisible” shareholders in a number of banks, which probably simply have not yet been got round to.
Present Ukrainian banking sector state
Today, Ukraine’s banking industry is demonstrating positive trends. Total banking assets in EUR increased by 15.2% during the period of 2018 to 2019, although this was mainly due to the appreciation of Ukrainian UAH.
In 2020, this indicator decreased by 4.3% in EUR, at the same time, in UAH equivalent total assets increased by 11.4%.
Net assets in EUR increased both in 2019 (by 21.9%) and in 2020 (by 4.9%).
In terms of asset quality, despite significant progress over the past three years, there is still much room for further improvement. The share of non-performing loans (NPL) is high in comparison with the other Central and Eastern Europe countries, amounting to 27.9% in 2020 in retail and 46.7% in corporate segments.
The largest NPL share is held by banks with Russian capital amounting to 89.2%, the nationalized PrivatBank holds 74%, state-owned banks (excluding Privat) hold 43.7%. The lowest NPL level was held by the TOP-5 foreign banks amounting to 12.9%, private banks hold the NPL level at 14.5%.
In 2020, the number of banks in Ukraine decreased by two and reached 73. Despite the large-scale consolidation of the sector in previous years, the market remained one of the least concentrated, while the largest shareholder of the domestic banking sector is still the Ukrainian government with a share of about 56%.
The Ukrainian banking sector concentration is still the lowest in the Central and Eastern Europe region.
Among 73 banks only 13 had total assets of more than EUR 1 bln. as of 01.02.2021. They also own 84.7% of the market in terms of total assets.
As the Ukrainian banking market is still highly fragmented, consisting of a number of small financial institutions, the years ahead are about to witness significant market consolidation.
Outlooks and risks
Despite significant economic situation improvement in the second half of 2020, some bank borrowers are still facing financial difficulties. The main difficulty for banks in 2021 is credit risk. This may negatively affect the quality of loan servicing, which means that banks may need to create additional reserves. To make sure the quality of loan portfolios declared by banks is true, the NBU will assess the quality of assets, and 30 banks will additionally undergo stress testing.
Since spring last year, the NBU has been using new instruments to maintain banks’ long-term liquidity and reduce interest rate risks: it provides long-term refinancing for up to five years at a floating rate.
The main goal of the NBU’s new monetary policy for 2021 is to ensure more active lending and affordable loans for businesses. Therefore, the market expects an increase in the corporate lending segment and a revival of mortgage lending this year due to the implementation of government programs and lower interest rates.
In 2020, the “5-7-9” SME lending program, based on partial compensation of interest from the budge was launched. After the introduction of quarantine, some enterprises got an opportunity to restructure loans at 0% until 31.03.2021.
As of September 2020, loans in the amount of UAH 7.8 billion were provided and refinanced under the program. Banks with foreign capital are the most active participants in the program. The Cabinet of Ministers of Ukraine plans for this year to launch a program to stimulate mortgage lending at 7%, also with partial compensation of interest from the budget.
The level of success reached by the Ukrainian banking system
To understand the level of Ukraine’s success, it is necessary to compare the country’s indicators with those of its closest neighbours from Central and Eastern Europe, including the RF and Belarus (CEE).
Recently, the CEE region has seen significant economic progress with an average growth rate of real GDP exceeding 3% per annum for the past five years.
The highest growth rates were achieved in Hungary (4.9%), Estonia (4.3%) and Serbia (4.2%) in 2019 due to increased domestic demand, caused by improved labour market conditions and favourable consumer prices throughout Europe. However, this period of impressive growth ended in 2020 due to the COVID-19 pandemic.
Forecasts for 2021 indicate that Ukraine will enter the TOP-4 of the region’s fastest growing economies, reaching 4.6%. In terms of absolute size, the economy itself is one of the largest in the region, with the GDP for 2020 reaching Euro 136 bln.
At the same time, among the analysed markets, Ukraine exhibits the lowest level of banking system penetration. The GDP ratio to loans is 26%, and the rate of the loans granted per capita is only EUR 862. The total assets of the banking system in 2019 amounted to EUR 1,654 per capita. This is the lowest rate among all analysed markets. But the lower the penetration rate, the higher the potential for future growth.
Average profitability indicators in the region in 2020: return on equity (ROE) amounted to 7.9% and return on assets (ROA) amounted to 0.9%. The highest profitability in the region for the second year in a row is observed in Ukraine where in 2019 ROE amounted to 34.9%, ROA amounted to 4.2%. In 2020, due to the COVID-19 impact, this figure has decreased, but still remains the highest in the region by far.
2019 witnessed a continuation of high M&A activity in the CEE banking markets with 14 deals made. This number for 2020 reached 15.
In terms of the number of deals, the most active markets for banking M&A deals in the CEE were Ukraine, the Baltic states, Serbia, Poland and Romania.
The Ukrainian banking sector has an active M&A market with two new deals in 2020, two deals in 2021 and a total of 20 acquisitions during past five years. As mentioned above, the highest multipliers were recorded in the period from 2005 to 2007, when they reached 7.0x when Ukrainian banks were sold.
New acquisitions and deals in Ukraine this year will be predicted based on the following factors:
1. The country’s economy is one of the biggest in the region.
Ukrainian economy size reached EUR 136 bln. at the end of 2020. This placed Ukraine’s in the fifth position behind the RF, Poland, Czech Republic and Romania.
2. The economy is one of the the most rapid-growing in the region.
The forecasts for 2021 place Ukrainian economy in TOP-4 with the growth rate of 4.6%
3. Ukraine succeeded in reaching macroeconomic stability.
Inflation in Ukraine remained within NBU targeting (5.3%) in 2020.
The state debt in 2020 was within 60.8% against GDP, while IMF predicts that in 2021 this figure will decrease to 58.1%.
4. Ukraine’s banking sector is the most profitable in the region.
ROE in Ukrainian banking sector is 3.3 times higher than in average in the region, in 2019 it amounted to 34.9%, and in the crisis 2020 to 26.4%.
ROA amounted to 4.2% in 2019 and to 3.1% in 2020, while the average indicator in the region in 2020 was 0.94%.
5. High growth potential caused by low banking sector penetration.
Total banks assets per capita in Ukraine in 2019 of EUR 1,654 and loans per capita of EUR 862 are by far the lowest in the region.