The Deposit Guarantee Fund once again needs the support of the NBU

All toxic financial institutions should be eliminated in order to build a robust banking system in Ukraine

Photo: Konstantin Melnitsky

As of December 1, the Deposit Guarantee Fund (DGF) had UAH 15.9 bn at its disposal, the official report of the DGF reads. At the same time, the total amount the fund needs to compensate to depositors of insolvent banks (the guaranteed limit for individuals is UAH 200,000) is close to UAH 15.8 bn, not including the Ukrainian Development Bank and the Cambio Bank, for which the fund has not calculated any specific amounts of required payments. The total amount of private deposits in those banks is UAH 2.2 bn.

Subject to reimbursement

Typically, the guaranteed amount of deposits is equal to approximately half of the total deposit portfolio of individuals. Therefore, another UAH 1.1 bn is subject to payment for the abovementioned two financial institutions. Thus, as of today the DGF still needs UAH 1 bn. By the end of the year this amount will increase by at least several times. In early December, Deputy Managing Director of the DGF Andriy Olenchyk said that by 2015 another 10 financial institutions could be added to the list of insolvent Ukrainian banks.

Since then provisional administration has been introduced only to the Cambio Bank. «Is this the final figure? The NBU has a certain list of candidates — up to ten — which by the end of the year may join the fund. We still do not know what decision the NBU will make,» said Olenchyk.

«We have statistics from the NBU, which announced that by the end of the year another 12 banks will be added to the list of troubled financial institutions. This means that by the end of the year there will be 112 conventionally operating banks,» said Chairman of the Supervisory Board of the National Credit Bank Andriy Onistrat. According to the banker, today only 124 banks of 166 operating institutions in the country are conventionally solvent: 13 banks have already been qualified as troubled (for delayed payments), another 12 banks are insolvent (they are not fulfilling their obligations at all) and 17 banks are operating under provisional administration.

Given the fact that only two Fridays are left to the end of the year (the DGF prefers to introduce provisional administrations on Fridays), the beginning of 2015 will be no less dynamic in terms of removal of financial institutions from the market. «Today, Delta Bank, Nadra Bank and ImexBank are facing problems. Noteworthy, introduction of provisional administration at the Delta Bank will automatically trigger a similar decision for Nadra Bank, because its shares are pledged in Delta Bank,» said Director of Amond Invest Company Serhiy Kreimer. In early summer, the mass media reported that Dmytro Firtash, a beneficiary of Nadra Bank, did not return US $200 mn, which he took out as a loan from Delta Bank. The debt was issued against Firtash’ personal guarantee of US $30 mn and guarantees of his company Centragas AG. At the same time, the bankers say that all shares of Nadra Bank belonging to Centragas AG (89.96%) were also pledged to the main owner of Delta Bank Mykola Lahun.

In addition, according to Kreimer potential candidates for the introduction of provisional administrations in connection with various violations are Kyiv Bank, Financial Initiative Bank, Globus Bank, FinBank, Ukrainian Business Bank, Energobank, DV bank, Unicombank and the Ukrainian Communal Bank. Yet, according to Managing Partner at the Capital Times Investment Company Eric Naiman, it is unlikely that some of the largest financial institutions will be among those that will soon be declared insolvent. «Even the International Monetary Fund advises the NBU not to drive the largest banks into bankruptcy, but save them through nationalization,» the expert added.

Senior Analyst at the Expert Rating Agency Vitaliy Shapran made more optimistic predictions. He believes that by the end of the year only one or two small banks will be declared insolvent, while Chairman of the Ukrainian Interbank Currency Exchange Anatoliy Hulei is convinced that by the end of the year the DGF will not introduce any provisional administrations in financial institutions. Among other things, this, according to the expert, is confirmed by the fact that the IMF mission has already positively commended the work of the NBU. «In addition to that, last week the NBU issued nearly UAH 10 bn to banks for refinancing. It will support liquidity of the banking system until January 6. But next year, after analysis of the banks’ balance sheets as of January 1, insolvent financial institutions will be withdrawn from the market in groups,» said Hulei.

The money issue

Supposing the mass introduction of provisional administrations continues in the near future, the DGF may need additional UAH 20–40 bn, believes Kreimer. «This is assuming that the fund will also continue to throw the banks out of the market and there will be no one willing to take on the obligations to depositors,» he said.

To support the DGF the NBU will have to resort to the next emission of the hryvnia. «It is hard to fill the DGF with money, but it will fulfill all its obligations. The NBU will resort to additional emission. Then the fund will have to return the money,» explains Naiman.

In turn, representatives of the DGF assure that all depositors will receive the guaranteed amounts of their funds. In early December NBU Governor Valeria Hontareva reported that this month the state would allocate the fund approximately UAH 10 bn. «The government is committed to fully sponsor the fund and allocates financing as needed. This is possible at the expense of the government and through loans from the NBU. To date, the fund has received from the NBU a loan of UAH 10.2 bn. During December the NBU will finance the fund in the amount of UAH 9.95 bn for settlement of accounts with depositors of banks that were declared insolvent, among them VAB Bank and CityCommerceBank,» she said earlier. Hontareva added that the regulator has been actively cooperating with the World Bank, which this year has already allocated US $500 mn specifically for the DGF — this financing can only be spent on the fund’s needs.