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Ukrainian banks: NBU stress test – Oschadbank and Ukreximbank in focus

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    17 December 2019
    Published byTellimer Research


    • Oschadbank (OSCHAD) and Ukreximbank (EXIMUK) may require more capital. This should not lead to concerns about subordinated securities – the recently issued EXIMUK subordinated bond complies with Basel 2 regulations, not Basel 3; ie there is no loss-absorption language in the documentation. 
    • The regulator's comments today suggest that if a Ukrainian court does rule that the Privatbank (PRBANK) nationalisation was unlawful, this will not impact work with the IMF. 
    • New capital and liquidity requirements are only to be introduced gradually, which should limit the impact on the banks.
    • Greater clarity on how banks will bring still-high non-performing loan (NPL) ratios down will be welcomed, but the devil will likely be in the detail. 
    • The planned introduction of higher risk weights on unsecured consumer lending introduces uncertainty, but is in line with what we have seen in some other markets, including Russia.

    More details

    • The National Bank of Ukraine (NBU) has published its latest Financial Stability Report (FSR). We only have headlines and a press release in English at the moment. The full FSR is available in Ukrainian, at this link.
    • Stress-test results show that lenders including Oschadbank and Ukreximbank "potentially faced material problems" and may require additional capital. In an adverse scenario, the estimated total capital requirement is UAH73.8bn, across 18 banks. Oschadbank and Ukreximbank account for UAH45.8bn of this. In the baseline scenario, 11 banks need capital of UAH35.3bn, and Oschadbank and Ukreximbank account for UAH23.3bn of that figure.
    • At Oschadbank and Ukreximbank, a number of problems are flagged, including weak profitability and the impact of historical credit decisions, which were sometimes driven by political alliances. The NBU disclosed that 60% of loans at these state-owned banks were extended to 20 well-known private business groups, and these loans account for 81% of total NPLs at Oschadbank and Ukreximbank.
    • Litigation related to Privatbank is seen as a challenge. As the regulator has stated before, the interests of the state will be protected in the courts, to ensure financial stability. If the courts confirm that the nationalisation of Privatbank was unlawful, the First Deputy Head of the NBU believes it will "complicate" the work of the regulator but "certainly will not destroy our stability and our cooperation with the IMF". This statement is important, and suggests a change in stance by a key funding provider. However, we think it is worth stressing that the regulator has again said that if the court does rule that the nationalisation was unlawful, other actions related to that process (such as the recapitalisation) will also be reversed. A Ukrainian appeals court is due to consider the case regarding Privatbank's nationalisation on 19 December. 
    • Risk weights assigned to consumer lending will rise from early 2021. This is to reflect the "rapid increase" in these loans. The NBU is concerned that banks are "not conservative enough in assessment of risks". These higher risk weights are to be disclosed at a later date.
    • Non-bank financial institutions will be regulated by the NBU from July next year. 
    • The regulator is introducing additional liquidity and capital requirements. On liquidity, the NBU will approve the calculation of the Net Stable Funding Ratio (NSFR). On capital, requirements are to be harmonised with EU directives, and the NBU will introduce minimum requirements that also cover operational risk. The additional capital requirements include a 0.625% capital conservation buffer (CCB) that is to apply from early next year, and which will rise to 2.5% in three years. In general, there will be a "few-year-long" transition period, so banks will be given time to make the changes necessary to meet the new requirements. Besides the CCB, capital requirements that result from taking operational risk into account will only apply from 2022.
    • As had been previously disclosed, reserve requirements will change, to discourage dollarisation. For foreign currency deposits, the reserve requirement will be 10%. For UAH deposits, it will be zero. 
    • Banks have been asked to develop a three-year strategy for managing legacy distressed assets by end-March 2020. This strategy will need to incorporate "realistic" targets. By end-February 2020, banks with significant problem assets are to have created a separate operating unit to manage these assets.

    For more on our views, see CEEMEA banks in 2020: A whistlestop tour.