The banking sector capitalization is sufficient and the sector itself is financially sound with the banks mostly presenting accurate quality of their assets. This is proven by the findings of the first annual banks’ resilience assessment conducted by the National Bank of Ukraine (NBU) since April 2018. However, the banks should continue restructuring their balance sheets and improving their business models to be ready to face hypothetical deep crises.
In 2018, while assessing the banks’ quality of assets and eligibility of collateral, 5 of 56 banks appeared to require additional capital as of the reporting date (the beginning of 2018), but three of them managed to reach sufficient capitalization by the end of the exercise. Another two banks submitted their capitalization programs to be implemented by the end of this year.
In addition to the assessment of quality of assets and eligibility of collateral, 24 banks underwent stress testing. These are the biggest banks according to the average of two indicators: risk-weighted assets and retail deposits. They account for a total of 90% of the banking sector assets. Stress testing was conducted based on two scenarios: basic and adverse.
According to the findings of the 2018 asset quality assessment and stress testing based on the basic macroeconomic scenario, eight banks appeared to require additional capital for a total of UAH 6.1 billion. These banks are expected to be additionally capitalized by the end of this year. Under the adverse scenario, five banks required additional capitalization, and in total 13 banks required additional capital of UAH 42.1 billion. To cover the need for capital increase under the adverse scenario, the banks should draft and implement their restructuring plans by the end of 2019.
Among possible and acceptable measures that allow to perform restructuring plans are improvement of credit portfolio quality, conduct of viable credit restructuring (requirement of the Law on Financial Restructuring), increase of collateral, foreclosure of collateral pledged under NPLs, sale of non-core assets, optimization of operational expenditures, etc.
“Asset quality assessment and stress testing is a common practice of regulators. It helps prevent excessive accumulation of systemic risks and enables banks to prepare for possible crises in the future. As the result, this exercise facilitates stability of the banking sector of Ukraine as well as financial stability in general”, said Kateryna Rozhkova, the NBU’s First Deputy Governor presenting the findings of the first resilience assessment..
All the banks have already submitted their capitalization programs and restructuring plans to be approved by the end of October. The banks’ capital increase programs are expected to be completed by the end of 2018 and the restructuring plans by the end of 2019.
The NBU will continue assessing the banks’ asset quality and conducting stress testing on an annual basis. The macro scenarios for stress testing will be amended to identify vulnerabilities of the banking sector and particular banks.
“Considering the significant progress in restructuring the balance sheets achieved since the 2015 diagnostics, next year we expect less banks to require additional capital after the basic and adverse scenarios diagnostics”, Kateryna Rozhkova said.