The remarkable resilience of the Ukrainian banking sector

While Ukraine’s economy has been hit by the Russian invasion of the country, it is showing incredible resilience across most sectors, with the stability of the banking system being a key factor.

Ukraine’s economy will shrink by around 35% in 2022 following the Russian invasion of the country, according to the latest estimates from the International Monetary Fund (IMF). The IMF says it made its forecasts using a preliminary casualty calculation methodology based on similar military conflicts.

The estimate, however, according to the IMF’s alternate executive director for Ukraine, Vladislav Rashkovan, is based on “the current situation and the dynamics of recent days” and is therefore subject to constant revision.

The previous conflict between Ukraine and Russia, which involved Moscow’s annexation of Crimea, led to a contraction of the Ukrainian economy by 6.6% in 2014 and another 10% in 2015. the more likely that Ukraine will suffer the kind of losses experienced in other conflict-affected countries.

High quality assets

Nevertheless, Ukraine’s banking system has so far coped well with the unprecedented crisis caused by what is now a full-scale war, according to Investment Capital Ukraine (ICU), an asset management, private equity firm. and investment firm specializing in emerging markets, and frontier markets around the world.

It says the majority of banking services remain available to customers and the liquidity issues banks face have been minimal due to the large stock of high-quality liquid assets and limited deposit outflows.

It’s a view backed by senior Ukrainian banking officials, including Misha Rogalskiy, co-founder of Monobank, Ukraine’s first mobile-only bank, launched in 2017.

“It’s remarkable how the banking industry is doing,” he said. Emerging Europe.

Much of the credit goes to the National Bank of Ukraine (NBU), which has introduced limits on cash withdrawals, which are currently 100,000 hryvnia (about US$3,090) per day for local currency accounts and foreign.

NBU Deputy Governor Oleskii Shaban said banks ensure that all their branches are functioning properly unless it endangers the life and health of the public.

“Where possible, banks also take care of the maintenance and replenishment of ATMs. More than 90% of major bank branches in central and western Ukraine are operational,” he said. Emerging Europe.

“The NBU’s Electronic Payments (EPS) system is also working very well. Banks based in Ukraine are connected to the SEP and make customer payments on a regular and uninterrupted basis. The national payment system (PROSTIR) and the NBU BankID system are operating as if nothing had happened,” he says, adding that the preparation has paid off: “Pre-designed business continuity plans have allowed banks to continue to perform basic transactions. ”

A liquid system

Fears of large capital outflows have not materialized, with Shaban saying the banking system “remains liquid”.

“Banks’ funding base remains relatively stable and the amount of customer funds has increased,” he said. “Retail hryvnia deposits have increased by around 16% since the start of the war, although term and currency deposits have declined. Business deposits have decreased significantly in volume, by around 5%.

If needed, banks have access to the NBU’s many liquidity-boosting tools, and Shaban says the NBU backed Ukrainian President Volodymyr Zelensky’s call for the introduction of a 100% state guarantee for deposits. retail while martial law is in effect.

“Additional state support for depositors is an important and necessary step for Ukrainians to have confidence in the safety of their savings in full,” he said. “Depositor confidence will in turn help strengthen bank liquidity.”

Monobank’s Misha Rogalskiy confirms that the NBU’s response has been fundamental to the resilience of the banking sector: “The restrictions introduced by the NBU are certainly one of the main reasons why there are no liquidity problems”, he said.

The NBU’s response to the Russian invasion was guided by three key principles: safeguarding the interests of bank customers; maintaining the functioning and liquidity of banks; maintain the real financial situation of banks, without bias.

“Whatever the fallout from the war, the losses should not be covered up by ‘preparing the books’. It is essential that everyone sees the real picture,” says Shabal. “Without grasping the full extent of the damage, we will not be able to implement an effective rehabilitation of the banking system in the post-war years.

Tools available

To ensure Ukraine’s financial defense, the NBU supported banks’ liquidity through several refinancing instruments.

Overnight refinancing loans are available to banks that can pledge highly liquid assets, including government securities, of which banks hold a massive stock.

Since the outbreak of the assault on Ukraine, the NBU has also started providing unsecured (blank) refinancing loans with a maturity of up to one year. The volume of such loans is limited to 30% of a bank’s retail deposits as of February 23 (the day before the large-scale invasion of Russia).

“Banks need this resource to replace the funds they will return to depositors if they start making withdrawals,” Shabal says.

The NBU has also simplified the requirements for the operation of banks as much as possible, abolishing regular assessments of resilience and refraining from imposing new regulatory requirements in 2022 (it postponed the introduction of capital requirements capital for market risk and the activation of capital buffers) .

“We will not apply corrective measures to banks for violation of the required ratios, and we will allow them to operate if they comply with the rules by correctly reflecting their financial situation, respecting the AML / CFT requirements,” adds Shabal. “Banks will have enough time after the end of martial law to bring their operations into compliance with regulatory requirements.”

In terms of profit and loss, Investment Capital Ukraine says banks will face significant challenges. The volume of fees and commissions fell due to lower business activity, while interest income is expected to fall as banks temporarily cut interest rates on outstanding loans to near zero.

Shaban is aware of the risks, but is confident that the sector’s resilience will continue.

“The reduction in loans, the loss of income and the loss of part of the loan portfolio will reduce the capital of banks. However, banks will continue to operate even if their capital ratios are below required standards. Once Ukraine wins the war, financial institutions will have enough time to resume business as usual and restore their capital reserves,” he says.

Yet these are problems for the future.

Misha Rogalskiy says that right now everyone in the banking sector – as in the country as a whole – is focused on the war effort, maintaining infrastructure and supporting the armed forces. He says Monobank put in place a number of initiatives to support the war effort, including creating a quick and easy way for Europeans to make a donation to a special purpose NBU account.

More pressure on Russia

While Oleksii Shaban tells us he appreciates the international support Ukraine has received as it struggles on the financial front, support that has put Russia under pressure and deprived it of additional sources of funding she needs to fuel her assault, more could be done.

“As the offensive continues, we anticipate that our stakeholders around the world will freeze the assets of all Russian banks, suspend their access to financial resources in the US and European markets, and issue instructions to banks in the United States, in the EU, Canada, Japan and the UK, and Switzerland to sever correspondent relationships with all Russian-based banks,” he says.

“We expect the central banks of Armenia, Kazakhstan, Tajikistan, Vietnam, Turkey and Kyrgyzstan to cease servicing the MIR payment system, and we look forward to China UnionPay and UnionPay International suspending transactions with cards issued by banks based in Russia. ”

Shaban also wants to see the Financial Crimes Enforcement Network launch preventive investigations of tax residents and companies controlled by Russian residents around the world to prevent the spread of international terrorism.

And, ultimately, he wants international banking groups to review their need to work in Russia.

“They should re-evaluate the value of keeping subsidiary banks and representative offices there,” he concludes.

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