Banks will need twice the amount of money than that calculated according to the NBU stress test

There will be enough room for all players in the Deposit Guarantee Fund

Photo: Alexey Solodunov

The banking system needs UAH 170 bn for recapitalization, according to the annual banking report published by the ICU Group. Notably, UAH 135 bn of additional infusions are required by banks on the Top 35 list. This is double the amount of the UAH 66 bn needed for capitalization specified by the NBU. Noteworthy is that the ICU Group of Companies was established by incumbent NBU Governor Valeria Hontareva. After she was appointed to office, the company bought her shares.

Lending a helping hand

Back in September, the NBU reported that based on the results of the stress test banks in the group of the largest financial institutions needed UAH 56 bn for recapitalization. The regulator estimated the need for additional capitalization of 20 banks from the group of the large banks at UAH 10 bn. The conditions of the “worst-case scenario” included in the stress test proved to be too optimistic, says Banking Sector Analyst at the ICU Group Mykhailo Demkiv. At that time, the status of financial institutions was analyzed on the basis of two forecasts – basic and the worst. The basic scenario assumed an average exchange rate of the hryvnia this year at UAH 10.80/USD and UAH 11/USD at the end of the year. The worst case scenario was based on the average annual rate of UAH 12.10/USD and UAH 12.50/USD at the end of the year. At present, the banks would be happy to operate on conditions of the worst case scenario.

Among the largest financial institutions which are in more desperate need of capitalization than others are PrivatBank, Ukreximbank, Oschadbank, Delta Bank, VTB Bank, Ukrsotsbank (TM UniCredit), Prominvestbank and Nadra Bank, says Demkiv. The majority of them have already increased their capital or approved corresponding decisions. For example, representatives of PrivatBank said that in 2014–2015 approximately UAH 4 bn would go towards capitalization. So far, the shareholders increased the authorized capital by only UAH 1.75 bn. The amount of UAH 4 bn was estimated based on the results of the NBU’s stress test. So, after another round of devaluation and deterioration of the quality of the loan portfolio the financial institution may require twice as much just as all the rest of the players on the banking market.

Tears for fears of rich banks

Even those banks that successfully passed the stress test have to consider recapitalization due to the devaluation of the hryvnia to UAH 16/USD. “Based on the results of the next stress test in 2015 the amount of required capitalization will increase, including for those banks that did not need to recapitalize based on results of the tests in 2014,” said Demkiv.

One of those banks that passed the stress test of the NBU was the First Ukrainian International Bank (PUMB). Nevertheless, the other day the bank's Chairman Serhiy Chernenko said that although the institution did not require additional capitalization, it would still have to increase capital by more than UAH 730 mn. For this PUMB agreed to extend its subordinated debt to the amount of UAH 482.3 mn by seven years. Another option that allows the financial institution to increase its regulatory capital is the merger with the Renaissance Credit Bank. In this way PUMB intends to increase its capital by UAH 255 mn.

Alfa-Bank Ukraine, where the NBU did not discover any problems either, attracted US $50 mn (approximately UAH 775 mn) from its shareholders on terms of a subordinated debt. First Advisor to the bank’s Chairman of the Board Roman Shpek explained that the money is needed to develop loan services.

Today, the ICU is least concerned about foreign banks and those backed by Russian capital. Such financial institutions get enough money from their parent structures. The Cabinet of Ministers has announced its readiness to give UAH 11 bn to the state-owned Oschadbank. Some commercial institutions may also count on the government’s support. But salvation of the financial institutions at the expense of the budget will depend on the role they play in the banking system, said Chief of the Department of Finance Ratings at IBI-Rating Anna Apostolova.

“If such support is needed, it will be given only to those banks supporting the banking system, because their collapse will lead to a meltdown. The most ideal and probable option would be to put the government on the list of owners of banks through recapitalization via the exchange of additional issue of shares for T-bills,” she says.

At the same time, even now it is clear that the 2015 budget will be very limited. The latest version of the Stand-by Arrangement with the IMF envisages that this year the Cabinet of Ministers will be able to allocate UAH 23.5 bn for the recapitalization of banks and next year only UAH 22.5 bn. Clearly, these amounts will be insufficient.