The amount of bad loans in state banks has surged

Photo: Konstantin Melnitskiy

The share of problem loans of Ukraine’s three largest state-owned banks – Oschadbank, Ukreximbank and Ukrgazbank – has increased since the beginning of the year, according to their financial reports for Q3 2014.

As of October 1, the total sum of unpaid loans owed to these banks was UAH 40.4 bn, which is more than 20% of the size of their loan portfolios. This is more than in the country’s banking system in general. According to data of the National Bank of Ukraine, as of October 1 the share of overdue loans issued by Ukrainian banks was 11.5%, though at the start of this year this figure was 7.7%.

Put the money in reserve

Ukreximbank registered the highest increase in bad loans from 21.17% to 30.59%. The share of bad loans in Ukrgazbank increased from 24.92% to 27.85% and Oschadbank – from 8.48% to 10.7%. “On the one hand, bad loans are a legacy from previous years that only today have come to the surface. On the other hand, state banks do not operate on economic principles, rather on principles of political expediency, which does not always correspond to a correct assessment of risks and realistic capabilities,” member of the Supervisory Council of the Ukrainian Credit and Banking Union Yaroslav Kolesnyk pointed out.

The problems in state banks arise when they buy long-term and low-profit state bonds, which quickly lose their value. For example, over three quarters of this year Oschadbank re-evaluated the value of securities in its portfolio from which it incurred a loss of nearly UAH 679 mn. The issue here is about reducing the fair value of securities in the bank’s portfolio, the press service of the bank earlier told Capital.

Due to the growth in the volume of overdue loans the banks are forced to increase their reserves. In particular, since the beginning of the year Ukreximbank deducted more than UAH 9 bn to its reserves under depreciation of loans and funds in other banks. For comparison, over nine months of last year the bank transferred to its reserves slightly more than UAH 2 bn. Ukrgazbank is in a similar situation – the volume of deductions to its reserve grew from UAH 489 bn to UAH 1.338 bn. Only Oschadbank reduced its deductions to the reserves from UAH 2.2 bn to UAH 1.9 bn as its share of bad loans grew less intensively than in other state banks. So far, it can afford this as the coverage of the loan portfolio with reserves at Oschadbank is higher than the volume of bad loans. At the same time, the reserves of Ukreximbank and Ukrgazbank are not sufficient to even cover bad loans.

The fact is that the situation in state banks could be even worse than indicated in their reports. Banks often use the ploy of refinancing bad loans. This allows them to not attribute bad loans to the problematic category and not to increase their reserves. As First Deputy Governor of the NBU Oleksandr Pisaruk stated, all three of these state banks must be additionally capitalized by UAH 12.5 bn. All the more, Oschadbank needs the lion’s share of this sum.

Inflow of consciousness

The fact that the banks so far do not have major liquidity problems is a saving grace. For example, the indicator of the current liquidity of Ukreximbank on October 1 was 103%. Over nine months this financial institution managed to nearly double its volume of deposits to UAH 74.02 bn. The main proceeds were from legal entities, the sum of deposits from which more than doubled to UAH 54.17 bn since the start of the year. Over nine months Ukrgazbank also saw an increase in its deposit portfolio from UAH 8.6 bn to 11.05 bn. Oschadbank is the only bank among the three from which its depositors withdrew nearly UAH 2 bn.