Owners of Ukrainian banks will be forced to dig into their pockets

Photo: Reuters

One after another the largest financial institutions in Ukraine are announcing plans to increase their capital. At the general meeting on September 29 shareholders of Delta Bank, businessman Mykola Lahun being the majority owner, decided to increase the authorized capital of the financial institution by 31% (UAH 1.17 bn) – up to UAH 4.9 bn. The bank’s shareholders have to inject this amount by January 23, 2015. As it was previously reported by Capital, the adequacy of Delta Bank’s regulatory capital is 10%, which is the minimum acceptable level.

Game of survival

Delta Bank has already increased its authorized capital this year. On July 3 it completed the process of recapitalization by UAH 1.4 bn to UAH 3.727 bn through the issuing of additional shares. Shareholders of Finance and Credit Bank controlled by Kostyantyn Zhevaho also plan to increase its authorized capital by UAH 700 mn or 25% to UAH 3.5 bn. The bank’s shareholders already have injected a certain amount of money into the bank’s capital this year. In February, the bank's capital was increased by 21.7% or UAH 500 mn to UAH 2.8 bn.

In July, the general shareholder meeting of VTB Bank decided to capitalize its Ukrainian subsidiary by injecting UAH 1.2 bn through private placement of shares. Capital increase was required in connection with the stress test initiated by the NBU for 15 major banks within the framework of cooperation with the International Monetary Fund (IMF). As a result, the regulator said that only 5 institutions managed to pass the test. The local mass media published some information according to which a capital increase is not a requirement for PrivatBank, Raiffeisen Bank Aval, Alfa Bank Ukraine, Sberbank of Russia and the PUMB (FUIB). Regarding the latter four banks, there are practically no doubts about their stability. However, it is unclear how PrivatBank managed to pass the rigorous stress test, given that the adequacy of its capital is only 10.91%. Devaluation is calculated at the level of UAH 16 /US $1, the past due rate is 40%. Due to the rise in the price of the U.S. dollar and the euro, the hryvnia equivalent of assets increases and capital is formed in local currency, meaning that its share in the balance in terms of devaluation is automatically reduced.

“We do not need recapitalization,” said Chairman of the Board of Alfa-Bank Viktoria Mikhaile in a conversation with Capital. “Our capital adequacy and all standards exceed the permissible levels set by the NBU and the IMF in the TOR. Therefore, until 2016 we are quite comfortable”. Also, there is no need to increase the authorized capital of Raiffeisen Bank Aval, the bankэs Chairman Volodymyr Lavrenchuk said in an interview for Capital back in late July. “Raiffeisen Bank Aval does not need a capital increase. Its capital adequacy is 16%, while the standard level is 10%,” said Lavrenchuk. The capital adequacy of Sberbank of Russia is 11.35% and that of PUMB (FUIB) is 11.28%.

At the same time, 10 major financial institutions did not pass the test and potentially fall into the group of troubled banks. Director of the Central Department of Banking Supervision at the NBU Alla Shulha said nine of the largest banks required additional capitalization of UAH 56 bn. “By the end of September all nine banks are required to submit to the NBU their capitalization programs. Most of the banks will be able to recapitalize by the end of the year,” noted Shulha.

In addition to that, First Deputy Governor of the NBU Oleksandr Pisaruk reported that such public financial institutions as Oschadny and Ukreximbank, as well as the nationalized UGB, will definitely be refinanced. “Under the agreement with the IMF, in the fourth quarter of this year officials may spend UAH 15 bn to increase the capitalization of banks using domestic government bonds. I presume that the entire amount will be allocated to the aforementioned banks,” says Banking Sector Analyst at the ICU Investment Group Mykhailo Demkiv. Chairman of the Board of Ukrgazbank Serhiy Mamedov refused to disclose the amount money required for his institution, though he noted that the amount was quite insignificant.

Sugar-coating the bitter truth

The stated amount of UAH 50 bn may not be enough for all unstable banks, given the negative trends on the market, the poor quality of assets of financial institutions and potential further devaluation of the hryvnia, says Head of the Department of Financial Sector Ratings at IBI-Rating Anna Apostolova. In this case, the NBU promises to soften the terms of refinancing as a bonus for banks that increased their capital. For this purpose, financial institutions should increase their regulatory capital by at least 20% by the end of 2015 and adopt a program of financial recovery until 2018, according to the decree of the NBU of September 25.