Oschadbank will consume the lion's share of monetary support for financial institutions

Atm Oschadbank will join the taxpayers

Photo: Konstantin Melnitskiy

The Cabinet of Ministers intends to increase the share capital of the state-owned Oshchadbank, one of the largest banks in Ukraine, by UAH 11 bn, Premier Minister Arseniy Yatsenyuk announced yesterday at the government meeting. “In cooperation with the NBU and the IMF we will increase the capital of Oschadbank by UAH 11 bn,” he said.

The amount of capitalization was determined based on stress testing of the largest Ukrainian financial institutions requested by the IMF. Its size is approximately a quarter of the total amount which the government of Ukraine may allocate for capitalization of banks in coordination with the IMF, says Director of the Ukrainian Credit-Rating Agency Stanislav Dubko.

At the same time, First Deputy Governor of the NBU Oleksandr Pisaruk previously reported that in total the government planned to spend UAH 12.5 bn on the support of the three largest banks with state shares in their capital. Consequently, the other two financial institutions – the Ukrgazbank and the Ukreksimbank – will receive only UAH 1.5 bn.

Leaky pocket

This year the government has already increased the authorized capital of Oschadbank. In early August the Cabinet of Ministers decided to increase it by 6.2% (UAH 1.073 bn) up to UAH 18.302 bn. Moreover, the bank also received at least UAH 15 bn of refinancing from the regulator.

Oschadbank is indeed in dire need of financial support, as its management openly declared. The top management of the bank believes that the main causes for the lack of funds are the annexation of Crimea, military operations in the ATO zine and losses incurred due to such a state of affairs.

For example, earlier Chairman of Oschadbank Andriy Pyshniy reported that the total amount of recapitalization would be “quite tangible”, albeit totally adequate in terms of stress testing of expected losses incurred by the bank in connection with the aforementioned events. “Crimean assets are not available today and we will compensate them. Also, the government, as a responsible shareholder will undertake capitalization,” he says. Nonetheless, Yatsenyuk said the money should be used to finance and support the key sectors of the Ukrainian economy.

Bankers say it was quite predictable that most of the state support would be allocated to Oschadbank. “Everything is quite logical, since Oschadbank is almost always involved by authorities for implementation of a number of government programs. Accordingly, the capitalization of Oshchadbank is top priority,” said Director of the Finex Capital investment company Ihor Kohut.

It is important that the financial institution is often lending at below-the-market rates, including loans to troubled state-owned enterprises. According to the financial reports of the bank, in 2012–2013 it lent more than UAH 35 bn to Naftogaz of Ukraine at an average annual interest rate of approximately 12% and repayment in 2015. At the same time, the rate on bank loans for the real sector of the economy is much higher – approximately 30% per annum, says Director of the Institute for Development of the Economy of Ukraine Oleksandr Honcharov.

On average, the loans to Naftogaz make up approximately a quarter of the loan portfolio of the bank. As a reminder, the index of the concentration risk of assets of this counterparty in the past year reached 17% at the maximum allowable indicator of 20%. Based on the results of the third quarter the credit risk indicator per counterparty at Oschadbank was 18.36% and most of this risk consists of loans to Naftogaz. In addition, last year Oschadbank bought the company’s shares with state guarantees in the amount of UAH 4.4 bn, which is approximately 13% of its portfolio of debt securities.

Also, in early October, the state enterprise Energoatom – the operator of all nuclear power plants operating in Ukraine – based on results of public tenders chose Oschadbank to raise UAH 300 mn and UAH 200 mn in credits for one year. Oschadbank offered the company these funds at an interest rate of 22% per annum, but was forced to buy bonds of Ukravtodor, which has been in debt for a number of years.

Risky business

The fact is that Oshchadbank assumes risks of counterparty state enterprises. “If the audit shows their poor financial status, the bank will have to make provisions for 100% of such loans,” said Chairman of the Ukrainian Interbank Currency Exchange Anatoliy Hulei.

After receiving the funds for capitalization Oschadbank will continue to participate in system financing of the state budget, says Financial Expert Pavlo Mishustin. “The NBU cannot finance the budget directly by law, though it can finance state-owned banks. Lending troubled state enterprises worsens the bank’s portfolio,” says the expert.

At the same time, Director of the IBI-Rating Agency Hryhoriy Pererva said that besides Oschadbank a number of major banks operating in Ukraine would be happy to provide loans to state-owned enterprises, in particular, VTB and Sberbank of Russia. The expert says that financial institutions are attracted with the guarantee that the government will pay them if state companies run into financial difficulties.