17 large banks should be recapitalized for UAH 10 bn

Large banks proved to be safer than the largest players on the market

Photo: Eugeniy Musienko

The need for capital increase of 20 large banks is estimated at UAH 10 bn, according to preliminary results of stress testing, reported First Deputy Governor of the NBU Oleksandr Pisaruk at a press conference yesterday. He said the final results of stress testing in the second group of banks would be announced by the end of October and the owners of large banks will have to make contributions to increase capital by the end of February 2015.

Small country

Today, only 17 of the 20 large banks are operating, because 3 banks – Forum, Brokbiznesbank and Pivdenkombank – were declared insolvent by the NBU. It turns out that on average each large bank requires capital increase of UAH 588 mn. This is much less than is needed for additional capitalization of the largest banks.

The NBU estimated the need for recapitalization of 9 banks of the first group at the rate of UAH 56 bn, i.e. on average UAH 6 bn per bank, according to the results of stress testing in the first group of banks (15 largest financial institutions). UAH 12.5 bn is required for capital increase of state-owned financial institutions alone, most of which will be used to support Oshchadbank.

“We will need another UAH 20.6 bn for recapitalization of the largest banks with foreign capital,” said Pisaruk. Most likely the Russian VTB Bank, Prominvestbank and the Italian Ukrsotsbank (UniCredit Bank) are at stake.

Large banks need less money for recapitalization, mainly because the total amount of assets in the second group of financial institutions is substantially smaller. “As of June 30 the total assets of the largest banks amounted to UAH 892 bn, while the total amount of assets of the banks in the second group as of the same date was UAH 197 bn. After we calculate the relative need for capital increase (56/892 = 6.2%, 10/197 = 5.0%), it becomes clear that the figures are quite comparable,” said head of the Analytical Department at the Eavex Capital Dmytro Churin.

The presence of a large number of financial institutions with foreign capital, such as OTP Bank, CreditAgricole Bank and ING Bank Ukraine in this group also reduces the total amount of money required. “These banks usually carry out recapitalization “according to schedule”, meaning their parent companies recapitalize them as needed,” emphasized Leading Analyst at the Expert Rating Agency Vitaliy Shapran.

Credit loop

Today, the main problem for the large banks is deterioration in the quality of loan portfolios servicing. “This resulted in an increase in overdue payments and reduction of liquidity. At some financial institutions such processes were aggravated by significant concentration of credit portfolios and a considerable share of foreign currency loans,” says Head of the Department of Financial Sector Rating at the IBI-Rating Agency Anna Apostolova.

The banks that were most actively engaged in unsecured retail lending are in the zone highest risk. As of today more than 30% of such loans are troubled and in the medium-term prospect this figure will continue to grow, says Advisor to the Chairman of Eurobank Vasyl Nevmerzhytskiy. The substantial growth of overdue debts and outflows of deposits erode liquidity. “And, in theory, while it is possible to solve the problem of deposits relatively quickly, one will have to work with these toxic assets for more than a year. In the meantime, they erode capital and adversely affect financial results,” added Nevmerzhytskiy. Liquidity problems were noticed at the Pivdenniy Bank quite some time ago and Zlatobank is already actively closing its offices, noted Chairman of the Ukrainian Interbank Currency Exchange Anatoliy Hulei.

The capital increase in the banks of the second group will be carried out primarily at the expense of their shareholders or outside investors. “Taking into account some unsuccessful examples of government management at the previously nationalized banks (Rodovid and Kyiv – Capital), it is most likely that authorities will try to avoid a new wave of nationalization of financial institutions,” says Banking Sector Analyst at the ICU Group Mykhailo Demkiv. Nevertheless, the NBU will refinance such financial institutions and closely monitor their activities, perhaps even by introducing supervisors to their management.