23 June 2017
The National Bank of Ukraine has submitted a proposal to the Cabinet of Ministers of Ukraine to inject additional UAH 38.5 billion into CB PRIVATBANK PJSC as part of the recapitalization. As the Ministry of Finance has informed, today at the ad-hoc meeting the Cabinet of Ministers has made a corresponding decision based on the NBU’s proposal to inject this additional amount of capital into CB PRIVATBANK PJSC.
The audit of the bank’s annual financial statements for 2016 carried out by Ernst and Young (EY) in accordance with international standards estimated that as at 31 December 2016 CB PRIVATBANK PJSC’s negative capital position stood at UAH "-882" million and its regulatory capital amounted to UAH "-2.6" billion.
In addition, EY carried out due diligence to identify additional provisioning needs faced by the CB PRIVATBANK PJSC. Based on the audit findings and the bank's negative capital position confirmed by the auditors, the NBU approached the CMU with a proposal to inject additional UAH 38.5 billion into the bank. This amount is deemed sufficient to enable the bank to meet the capital adequacy ratio of 10 percent even under a conservative scenario applied by EY when performing a due diligence of the bank’s balance sheet. Out of UAH 38.5 billion:
· UAH 22.5 billion is needed to plug a capital shortfall stemming from the former management's involvement in fraudulent operations before nationalization and set aside provisions against the financial leasing portfolio given that the quality of servicing of this portfolio by the persons related to the bank’s former owners deteriorated following the bank's takeover by the state.
· Additional UAH 16 billion will be required to cover impairment losses on fixed assets.
"The NBU believes that the capital required to cover impairment losses on fixed assets can be reduced by developing a clear collateral management and debt recovery strategy for the bank," said NBU Deputy Governor Kateryna Rozhkova.
Therefore, as a first step, the NBU has proposed and the Cabinet of Ministers has supported a consideration that it is sufficient to increase CB PRIVATBANK PJSC’s capital by UAH 22.5 billion. A final decision on the amount of equity injection and its split into phases will be taken by CMU based on the proposal made by the NBU and conclusions of the Expert and Analytical Council.
Additional capital will be injected into CB PRIVATBANK PJSC through the issuance of domestic government bonds (DGBs). It should be noted that the monetization of this capital will not be required at this stage. At present, the bank’s liquidity exceeds UAH 17 billion and the equivalent of USD 800 million. Hence, the bank has no need for fresh cash. Accordingly, Privatbank's recapitalization without the subsequent monetization of DGBs will have no impact on the exchange rate and inflation.
As part of the recovery plan for CB PRIVATBANK PJSC, in late December 2016 and early January 2017, DGBs issued by the Ministry of Finance was monetized twice by the NBU through the purchase of DGBs worth UAH 27.2 billion.
For reference: Due diligence procedure (in English due diligence means “required carefulness”) is a procedure aimed at providing a fair presentation of an investment object which includes valuation of investment risks and an independent appraisal of an investment object. Due diligence of CB PRIVATBANK PJSC was carried out in accordance with Article 41-1 of the Law of Ukraine On Households Deposit Guarantee System to assess the bank's financial standing, estimate the bank's capital position and identify its capital needs under the conservative scenario".