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Financial Sector Risks Are Moderate and under Control, State-Owned Banks Continue to Pursue NPL Resolution Strategies – Takeaways from Financial Stability Council Meeting

Financial Sector Risks Are Moderate and under Control, State-Owned Banks Continue to Pursue NPL Resolution Strategies – Takeaways from Financial Stability Council Meeting

The Financial Stability Council (FSC) held a scheduled meeting on 12 October. The participants discussed several issues: systemic risks in the financial sector; the stress-testing performance of state-owned banks and their progress implementing NPL resolution strategies; the status of implementation by the Deposit Guarantee Fund (DGF) of measures to recover damages from former owners and heads of banks.

Financial sector risks remain moderate

In H1 2021, the economic recovery was weaker than expected, but economic activity revived in Q3, driven by investment and consumer demand, favorable terms of trade, and a bumper harvest.

Inflation remains well above its target and is anticipated to slow in Q4 and return to the target in H2 2022.

Ukraine successfully came through the peak in external debt repayments in September after receiving funds from the IMF as part of an SDR allocation. Pressure on the hryvnia to appreciate is currently dominating the FX market.

The majority of systemic risks in the financial sector at this time are moderate and in check.

The deposit base of banks continues to grow, with hryvnia corporate deposits up 28% yoy and hryvnia retail deposits up 15% yoy as of end-September. Banks are actively lending to businesses and households: the pace of growth in net hryvnia corporate loans has exceeded 40%, and the increase in net hryvnia retail loans is about 30% yoy, which also includes a boom in mortgage lending.

Banks are largely resilient and adequately capitalized, stress testing shows

The FSC members also reviewed banks’ stress test results, including those of state-owned banks. Most banks are well capitalized despite last year’s crisis, stress tests have shown. Banks for which the required capital adequacy ratios have been set above the minimum requirement have already filed their recapitalization/restructuring programs with the NBU. These outline a number of measures through which banks will be able to significantly mitigate the identified risks to their activities. The measures include optimization of administrative costs, resolution of NPLs, further replacement of NPLs in the loan portfolio with quality new loans, reduction of the cost of funding, and earning more net commission income by commercializing banking services.

State-owned banks made the largest contribution to reducing the banking sector’s NPL ratio

Since 1 January 2020, the banking system has significantly scaled back its NPL ratio, to 35% as of 1 September 2021. Almost 80% of this decrease came from state-owned banks as they slashed their NPL portfolios by UAH 108 billion. The main tool for loan portfolio recovery remains the write-offs of previously provisioned NPLs while the banks make further efforts to recover funds owed to them.

State-owned banks are not seeing any regulatory obstacles, from either the NBU or the government, that might prevent them from efficiently resolving their NPLs. However, these banks wish that their interests were better protected in court.

The focus is on the DGF’s efforts to get owners and heads of failed banks to reimburse its losses

The FSC members reviewed a DGF report on steps it has taken to recover the assets of insolvent banks and sue top managers and former owners of banks for damages in Ukrainian and foreign jurisdictions.

The FSC recommended that the DGF press forward with efforts to recover damages (losses) incurred by banks and their creditors. 

Further plans to meet IMF commitments

The FSC members agreed on further steps to improve the efficiency of measures to curtail public spending on failed banks and recover the assets of insolvent banks, given the risk of adverse court decisions.

The set of relevant measures will be specified in full in the strategy developed by the interdepartmental working group designated by the Cabinet of Ministers of Ukraine to recover the assets of failed banks.

For reference

The following FSC members participated in the meeting: Serhii Marchenko, Minister of Finance of Ukraine, Kyrylo Shevchenko, NBU Governor, Svitlana Rekrut, Managing Director of the DGF, Ruslan Mahomedov, Head of the National Commission for State Regulation of Financial Services Markets, Yuriy Heletiy and Yaroslav Matuzka, NBU Deputy Governors, Yurii Drahanchuk, Deputy Minister of Finance of Ukraine for European Integration, and Yuliia Svyrydenko, Deputy Head of the Office of the President of Ukraine.

The FSC was established by a presidential decree in March 2015. The FSC provides a forum for professional discussion of systemic risks to domestic financial stability

 

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