Hostages of circumstances. The banks cannot meet the requirements of the NBU due to the insufficiency of capital

Photo: PHL

The largest Ukrainian banks are close to violating capital adequacy standard. This is evidenced by the financial statements released by eight of fifteen banks from the first group in terms of assets.

Guilty, violated

The indices of the capital adequacy standards reached the threshold value in almost all commercial banks which published their statements for Q2 2014. In terms of value of capital adequacy ratio (H2) set by the National Bank of Ukraine at the minimum level of 10%, Delta Bank recorded its value at 10.0% and VTB Bank — at the level of 10.2%. Only two state-owned banks — Oschadny and Ukreximbank were able to show high scores. «The state-owned banks have been previously re-capitalized: their authorized capital was replenished with government bonds for further monetization and lending, mostly to Naftogaz of Ukraine,» ex-member of the NBU Council Vasyl Horbal commented on the situation with the state banks.

There is a similar situation with another standard — capital-to-asset ratio (regulatory capital to aggregate assets (H3). The NBU requires maintaining it at the minimum level of 9%. At the same time, large commercial financial institutions record it within the limits of 9.2 — 12.5%. At Ukrsotsbank (UniCredit Bank) the H3 standard has dropped below the acceptable level — to 8.6%. Answering Capital’s question about consequences of violation of the regulation, the bank mentioned NBU’s loyal attitude to such deviations. «This is a „passive“ violation caused by currency fluctuations,» said CFO of Ukrsotsbank Giacomo Volpi. «On our balance sheet there is a share of loans in US dollars and Euros, so in case of devaluation of the hryvnia some indicators go down. The NBU is sympathetic to reasons for such violations and at the moment no sanctions have been applied,» said the banker.

In a situation when there is a violation explanations of the financial institution play an important role for bank supervision of the NBU, added Horbal. «Violation of regulations can take place in one period and in the other the overall situation will change and everything will be fixed,» he says.

Capital deficit

The fact that banks are on the verge of violation of capital requirements shows the need for their additional capitalization. The latter, in turn, is caused by strong devaluation. Since the beginning of the year the hryvnia has devaluated against the dollar by more than 40%. Fluctuations of the exchange rate led to a rise in the cost of foreign currency assets of banks and forced them to increase reserves, while hryvnya-denominated capital remained at the previous level. Certain financial institutions have already announced their intentions to balance the situation. VTB Bank will consider the issue of recapitalization through private placement of additional shares at the general meeting of shareholders on July 25. Ukrsotsbank has already injected funds into its authorized capital increasing it by UAH 0.65 bn, or 36% at the beginning of the year. The banks have not mentioned the prospect of new recapitalization yet.

Roll the dice

A number of banks, which published their reports, have recorded a decline in reserves for impairment of loans to legal entities with a simultaneous increase of the loan portfolio. Among them are Ukrsotsbank, VTB Bank and Prominvestbank. «In UniCredit Bank the cut of reserves for loans in the second quarter of 2014 is related to the write-offs of fully reserved bad loans,» explained Volpi. The other two financial institutions were unable to specify reasons for the discrepancy in the dynamics of such indicators. As it was previously reported, banks often manipulate the amount of reserves in order to influence earnings. With an increase in the loan portfolio the increase in formed reserves is natural. They serve as airbags, the volume of which should allow the bank to write-off bad loans. But when the bank needs to cut spending and demonstrate a positive financial result, it can do it by reducing the reserves.