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Banking sector primer: Repairs still ongoing (ENG)

21.10.2013 | Источник: ICU
Тема: Обзоры по компаниям и отраслям, ICU, Инвестиционный Капитал Украина

Our banking sector update for the second quarter of 2013 focuses on the following viewpoints.

Ukrainian-style QE. From a macroeconomic perspective, the current state of the economy, which has been stagnating since late 2011, and the banking sector - which is witnessing a scaling down of operations mainly among banks with European capital, while other banks (Russian state-owned and partly domestically owned) appear to be at a standstill - demands that the state take action. In fact, this has been happening since early 2013. The National Bank of Ukraine (NBU) accelerated the growth rate of the monetary base in price-adjusted terms from 6.6% YoY in December 2012 to 15.4% YoY in September 2013. Meanwhile, price-adjusted money supply (M3) growth was up an impressive 19.3% YoY in September 2013. In both cases, this year's monetary expansion has been the fastest in the post 2008-crisis period when adjusted for inflation. It has flowed mainly through state-owned and state-friendly banks for the purpose of public debt financing and funding investment projects of government-selected businesses under the 2013-14 state programmes to revive economic activity.

Hence banks stockpile government bonds and other assets eligible for NBU refinancing. Securities accounted for 11.3% of the banks' total assets in 2Q13, while government bonds and securities issued by municipal authorities and government entities constituted 84.9% of that share. The largest state banks - Oschadbank and Ukreximbank - are among those that have been most actively purchasing such securities at auctions. This, combined with a significant loan exposure to state entities, makes for a very high concentration of these banks' assets.

In September 2013 Ukraine's banks added a total of UAH11.6bn of government bonds to their books - an increase of 17.5% since the beginning of this year. During the same period, the NBU's portfolio of government bonds increased by UAH35.2bn or 33.4%. Besides purchasing government bonds, state-owned and state-friendly banks are extending loans to state-guaranteed projects, which since 3Q13 are in effect eligible for NBU refinancing. Such liquidity creation by the NBU is likely to be exploited until GDP registers sustainable growth of at least 2-3%.

Low capitalisation is a problem for some banks. Owing to the very high regulatory capital adequacy ratio (RCAR) reported by state-owned banks and banks with European capital, the sector's average capitalisation ratio remained strong at 18.0% in 2Q13 - 8ppt above the minimum required level of 10%. At the same time, five out of the top 15 banks have RCARs that are equal to or less than 12.0% of regulatory capital, suggesting they have only a fragile buffer against future potential losses.

In 2Q13 the ratio of total regulatory capital to share capital calculated for the banking system as a whole was 104.2% - just 4.2ppt above the acceptable level. While the capitalisation of top state-controlled banks and various banks with European capital is strong, the regulatory capital of many local banks is lower than their share capital owing to the large amount of previously incurred losses. The median RCAR ratio for the largest state-owned banks is 29.6%, while for the top four European banks it is 18.9%. At the same time, the four biggest banks belonging to large business groups (the so-called "Big Guy" banks) have a median RCAR ratio of only 11.4%.

Most banks with European capital have cleaned up their books quite aggressively and are currently issuing very few loans, hence their capitalisation levels are under low risk of erosion. However, even state-owned banks with very high reported capitalisation levels (alongside other private sector banks, whose capitalisation levels are much lower) have loans that are likely to make significant further provisioning necessary as the slowdown in the Ukrainian economy persists. Hence capitalisation is a key issue for the sector.

A rapid currency devaluation would have a major impact. The net cumulative FX position of Ukrainian banks is short and amounted to UAH33.2bn in 2Q13. Thus a sharp decline in the UAH/USD exchange rate would have an immediate and material negative effect on the profitability of most banks as USD is the primary foreign currency with which the banks operate. At the same time, the banks are rushing to close the gap between FX assets and liabilities, which amounted to 3.6% of total assets in 1Q13 and decreased to 2.8% in 2Q13. A decline in the official (NBU) UAH/USD rate of, say, 5% would imply UAH1.5bn in revaluation losses for the banking sector as a whole.

Exodus of European banks continues. The share of European bank subsidiaries shrank from 26.9% in 2Q12 to just 20% in 2Q13 owing to the cessation of lending activities and the continued sale of existing businesses to local owners. During the last 12 months several banks have changed their owners, including Swedbank, Erste Bank and Astra Bank, while Marfin Bank and Platinum Bank are currently in the process of being sold. Moreover, it was recently announced that Intesa Sanpaolo (Pravex Bank) and Unicreditbank (Ukrsotsbank and Unicreditbank Ukraine) are seriously considering withdrawing from the Ukrainian market. We expect this trend to continue in the coming quarters as European banks face dwindling revenues and tougher regulatory capital requirements.

Russian banks' plans may be disrupted by politics. Ukrainian exports have slowed significantly this year owing to the prolonged weakness of the global economy. The working capital cycle will eventually increase, which may leave some companies unable, at least temporarily, to pay back loans on schedule. Those banks that finance export-oriented companies working with Russia may have to prolong existing loans or witness an increase in the amount of overdue debt. Banks with Russian capital that are focused on financing entities doing business with Russian counterparties - in particular, Prominvestbank - may feel the biggest impact of the customs tensions between Russia and Ukraine. Despite statements by Russian banks that their operations are determined solely by market conditions, we expect some actions to be taken in response to the ongoing political tensions between Ukraine and Russia over a range of issues. For example, banks that are controlled by the Russian government (Sberbank, VTB and Prominvestbank) are likely to withdraw or significantly reduce their credit supply to Ukrainian companies.

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