The Ukrainian financial system is tested for strength by war
This article describes the situation in the Ukrainian banking sector during the war period. The essence of the problems of bank’s functioning and their macro financial indicators is revealed. The main challenges faced by the financial system of Ukraine have been considered. The author draws conclusions about the future of the banking sector of Ukraine.
The Ukrainian financial system is undergoing the most severe test in history - a test of its strength by war. As world experience shows, it is possible to survive in the conditions of a war economy and even emerge victorious from this situation. But for this you need to cope with a number of new challenges:
- Lack of mortgage insurance. From February 24, 2022, insurance against war risks is virtually unavailable for Ukraine. It can be used by those businesses that managed to purchase appropriate insurance even before the start of a full-scale war. Today, insurance companies do not insure against force majeure in the form of military operations. This creates additional tension for the entire financial sector, including leasing and the banking market. As full-scale hostilities approached, the cost of such insurance began to rise, and on February 24 it became impossible to purchase it.
- “Fragility” of the deposit base, which was manifested in the reorientation of the population from time deposits to “demand” deposits, that is, those that can be withdrawn from the bank at any moment. Among the trends, it is possible to highlight the rising share of demand deposits in the total structure of funds of individuals , which increased to 68% at the end of June, and as of July 1, the share of demand deposits of legal entities was 83%, and that of individuals - about 66% [2].
- Risk of accumulation of overdue loans. Ukraine is still at the epicenter of loan defaults . Moreover, the main mass of them falls not on individuals , but on large and medium-sized businesses that simply stopped settling their debts. This may be not only a consequence of the war, but also the beginning of a new wave of property redistribution, as well as attempts to shift part of the debt service to the state budget, as it happened before. The war significantly worsened the quality of the banks’ credit portfolio, both corporate and retail. Bank representatives talk about losses at the level of 20%, but these are only officially recognized losses. Previously, the National Bank estimated the potential losses of the loan portfolio at the level of 30%. According to official NBU data, as of January 1, 2023, the volume of non-performing assets reached 432 billion hryvnias - this is 38% of the loan portfolio, which is eight times more than on January 1, 2022 [4].
Therefore, to overcome the challenges, it is necessary to:
- To insure collateral. Divide Ukraine into territories that are still under occupation, into those that have been de-occupied , but are in the yellow and red risk zones, and into those where financial structures operate normally (regardless of the presence of air threats).
- To expand the practice of additional pledges and involvement of additional businesses available to the client to cover current risks.
- Use mechanisms of portfolio guarantees. The Ministry of Finance becomes a guarantor for loans. It is the Ministry of Finance that determines the sectors of the economy that need support - for example, the agricultural market, and issues guarantees to them.
Based on the above, the Ukrainian banking sector is in a rather tense situation, as it is preparing for difficult challenges in the conditions of the continuation of the war. The main task of banking institutions remains the guarantee of stable work for their clients.
Despite this, Ukrainian banks ended 2022 with a profit of 24.7 billion hryvnias - 46 out of 67 financial institutions made a profit [1]. And although last year’s figure is 68% worse than the previous one, it should be taken into account that the banks made a profit despite the war and the economic downturn.
According to the NBU, the five leaders in terms of profitability are state-owned PrivatBank, which earned 30.25 billion hryvnias, Ukrsibbank - 3.53 billion hryvnias, Citibank - 2.82 billion hryvnias, Universal Bank - 2.4 billion hryvnias, and Raiffeisen Bank – 1.55 billion hryvnias [3]. The banking system not only survived without stopping payments and uninterrupted customer service, but was also able to make a profit.
References
- Report on financial stability. URL: https://bank.gov.ua/admin_uploads/article/FSR_pr_2022-H1.pdf?v=4
- How stable is the banking system of Ukraine in the sixth month of the war URL: https://thepage.ua/ua/economy/stan-bankivskoyi-sistemi-ukrayini-u-serpni-2022-roku
- Main indicators of banks’ activity URL: https://index.minfin.com.ua/ua/banks/stat/
- National Bank of Ukraine - Main performance indicators of Ukrainian banks URL: https://bank.gov.ua/ua/statistic/supervision-statist#1