War and devaluation ate up the profits of Ukrainian banks

Photo: Ukrainian photo

Ten of the fifteen largest banks of Ukraine reported UAH 2.4 bn in profits in the period January-September, which is a 73% increase compared to the first three quarters of 2013. Admittedly, it is too soon to draw any encouraging conclusions. Indeed, the losses incurred by Prominvestbank, the Ukrainian affiliate of the Russian Vneshekonombank, distorted the statistics. Having spent UAH 2.9 bn in the first half of the year on additional formation of reserves under unreliable loans it lost UAH 2.6 bn according to the results of the first nine months of the year. This dealt a considerable blow to the “average temperature” of the first group of banks at the time and lowered the comparative base of financial results that year.

Unprofitable companies

Disregarding the abnormal growth of profits of Prominvestbank after last year’s losses, the trend today is quite the contrary and is totally not encouraging. The net profits of nine banks in the group of the largest ones fell by two thirds to UAH 1.3 bn. According to the half-year results in 2014, financial institutions reported net profits of UAH 1.271 bn with the overall net profits of the banking system of UAH 1.253 bn. This means that the financial results of the top 9 largest banks fully reflect the trends in the country’s banking sector overall.

The attempt to stop the outflow of deposits by raising interest rates resulted in the loss of profits. Formally, the deposit portfolio increased by 4.8% over nine months mainly due to the difference in the exchange rate from the reassessment of hard currency deposits. But NBU Governor Valeriya Hontareva said that in fact the real outflow was UAH 110 bn in the entire banking system. “The dynamics of reduction in net profits was dictated by the rise in prices of resources, particularly on deposits of physical persons (their value increased to 23% in hryvnia and 11.5% in hard currency), which lowered the net profits from interest rates,” said head of the press service of PrivatBank Oleh Serha.

Increase of interest rates did not help stop the decline of retail deposit portfolio in the national currency as it shrunk by 18% over nine months. On the contrary, the deposits of legal entities in hard currency rose by 7.5%. As banks explain since the occupation of Crimea and the military conflict in the east of Ukraine froze business activities, the companies are putting the money they are not using for business to the banks until better times.

The main factor here is whether banks can turn profit, as today not allocation of new loans ensures a benefit, but rather the repayment of loans that already been taken out by customers. “At the moment, the economic situation in the country and the ability of borrowers to service and repay their loans to banks, first and foremost, in the eastern part of the country, has the main effect on the dynamics of the financial indicators of Alfa-Bank Ukraine and the entire banking system,” Co-chair of Alfa-Bank Ukraine Dmytro Serezhin pointed out. While the risk of non-payment applies to all loans taken out in Crimea and the zone of military conflict, the problems in other regions of Ukraine are worse in terms of hard currency loans, the repayment of which has become complicated due to the 60% devaluation of the hryvnia. According to official data, the share of overdue loans grew from 7.7% at the beginning of this year to 11.2% in early September. According to the estimates of financial analysts, these figures are even higher.

Back-up copy

This situation forces banks to additionally form reserves in order to cover the loan risks. Indeed, Director of the Financial-Economic Department of the Finance & Credit bank Dmytro Balun says the losses of banks to the tune of UAH 48.6 mn over nine months are associated with expenses on replenishing reserves for the loans in hard currency. In the first half of the year the bank spent UAH 271 mn for this and another UAH 143 mn in the third quarter.

The replenishment of reserves can even drive the now profitable banks in the red based on the annual results. As such, Serezhin says the profits of Alfa-Bank Ukraine fell by 91% to UAH 1 mn. “If the rate of the hryvnia against the main hard currencies is stabilized and strengthened and the withdrawal of clients’ money from the banking system stops, it is totally realistic that banks will become profitable,” Balun presupposes.

However, many banks risk opening their wallets for replenishing of the reserves not only in the case of the further devaluation of the hryvnia. For example, PrivatBank already lost UAH 2.7 bn since the beginning of the year for this purpose, which is why its profits fell by 75%, though it may be forced to allocate additional funds for this purpose. “The occupation of Crimea and the conflicts in the Donetsk and Luhansk oblasts have had a negative impact on banks operating in those regions,” says Serha. He adds, “We still have to assess the volume of additional reserves of money required to compensate these losses.”