From the data published in the focus of Intesa Sanpaolo, it can be seen how the share of Ukrainian banks' activity in GDP, after rising rapidly between 2005 and 2008 from 48% to 97,5%, fell to 86% in 2011, while loans represent about 58% of GDP and deposits only 36%. The credit system is relatively fragmented: the seven largest banks cover approximately 45% of total assets and many small credit institutions are part of industrial groups which condition their operations, efficiency and growth, with considerable supervision problems. Banks are concentrated in the more developed areas of the country, especially in Kiev, home to 65% of credit institutions at the end of 2011, with 23% located in four other regions. In 11 regions, however, there are no credit institutes. There is greater homogeneity among the branches, which numbered 2011 at the end of 455: 10,3% are present in the Donetsk region and another 12,3% in Kiev. The remaining branches are spread over the rest of the country. And despite the Banking Law, which came into force in 1991, regulation and supervision are still weak, as evidenced by the rating agencies. In particular, the transparency of the information is lacking governance.
The weight of banks in the Ukrainian economy increased significantly up to 2008, with total assets reaching about 98% of GDP, driven by the substantial increase in credit which exceeded 72% of GDP. However, the financial crisis led to a clear reduction, causing both indicators to fall at the end of 2011 to 86% and 58% respectively. Thanks to the effective intervention of the central authorities, the feared capital flight did not occur during the financial crisis. The deposit/GDP ratio decreased slightly in 2009, before recovering to 36% at the end of 2011. In many bankruptcy or extraordinary administration cases, the funds have been transferred to publicly owned lenders, also due to the insufficient capacity of the deposit guarantee fund, managing to maintain the confidence of depositors. The weight of loans on total assets has returned to pre-crisis levels, just over 60% in recent years, but the dispersion between individual institutions is nevertheless very high. The prolongation of economic difficulties in the country, with GDP growth slowing down to 0,9% last year (from 5,2% in 2011) and 0,5% in 2013, the political and energy uncertainties that could undermine the stability of the exchange rate, combined weak quality of the portfolio on the supply side, lead to great caution on the trend of the main banking variables in the next few years.
The National Bank of Ukraine (NBU) has adopted a policy of openness towards foreign banks, present in the capital of 55 Ukrainian banks, in 23 of which 100%. They represent approximately 40% of total assets. The countries that hold the highest shares of capital are Russia (9,2%), Cyprus (7,2%), Austria (5%) and France (4,5%), while the main foreign banks include CreditAnstalt (Unicredit Group), ING Barings, Raiffeisenbank, Citybank and Credit Lyonnais; the same EBRD established the First Ukrainian International Bank, thirteenth by total assets. In recent years however several foreign banks have reduced or ceased their activities in Ukraine both due to the need to improve the consolidated capital ratios and due to the weak growth prospects in the coming years. The exposure of Austrian banks is the most consistent, close to 30% of the overall exposure of European banks and slightly down on 2011, followed by Italian banks which cover over 22% of the total exposure of European banks.
Total loans show slowing growth rates since December 2011, which went from +8,7% in December to +0,2% from December to October 2012. Loans to the private sector (+8.3% in 2011, +2% between December 2011 and October 2012) represent almost the entire portfolio (85% last October), of which loans to businesses account for 63%, while those to households cover a more modest 22%. The share of loans to banks (3,5%) and to the Government and local entities (1% of the total) is very limited. Loans to businesses went from growth rates of 13,9% in 2011, supported by the improvement in their financial situation, to 5,1% last October, thus always maintaining positive changes, despite the slowdown. The further breakdown of loans to businesses by economic sector highlights the significant weight of the construction sector (approximately 24%, up from 12% at the end of 2005) which is associated with a higher degree of risk and which continues to be affected by the country's difficult economic conditions. Conversely, the decline in loans to households continued: -4% in 2011 and -8,2% at the end of October. This trend was determined by component in foreign currency, which covers about half of total loans to the sector and which recorded substantial declines: from -21% in 2011 to -27% in October, as a consequence of the limits imposed by the central authorities on foreign currency investments, in order to reduce the risks associated with the depreciation of the currency.
In fact, the quality of the portfolio is still affected by the significant exposure to the exchange rate, also due to the modest diffusion of adequate techniques for hedging this risk. In Ukraine, banks may find it difficult to finance local currency disbursements as depositor expectations of currency depreciation limit deposits. Furthermore, the domestic capital market remains subdued. In 2011, domestically issued bonds accounted for less than half of total foreign currency funds. 31% (33% in 2010) of loans to companies and 46% (over 67% in 2010) of loans to households are expressed in dollars, while the other currencies, including the euro, assume a marginal weight especially in families. With the reduction of foreign currency loans, the share of local currency loans in households increased from 29% in 2010 to 52% in 2012.
Expectations for 2013 remain modest on total loans to the private sector, due to the continued deceleration of the national GDP, which went from 5,2% in 2011 to 0,9% in 2012 due to the weakness of domestic demand for consumption and investments. The profitability of Ukrainian banks was still negative in 2011, but slightly improving compared to 2010, due to a slight increase in revenues and the stability of cost components. The main source of income continues to be the interest income, although its share of total revenues fell slightly to 79,4% in 2011. Compared to the previous year, fees and costs have increased21% and 0,4%, respectively. Provisions have decreased by 21% compared to 2010 and, likewise, their share of total costs increased from 30,8% to 24,3%. The operating cost to revenue ratio was 68,26% at the end of 2011, down to 67,14% in September 2012. Bank interest rates began a downward trend from 2009 to 2011, subsequently slowing down with respect to loans, whose average rate has been stable at around 16% in the last 3 years, but with very large monthly fluctuations. Deposit rates, on the other hand, recorded a sharp drop in the average annual value in 2011 (7,9%), despite a clear increase in the last few months of the year, where the 2012 average annual rate was estimated at around 10%. The highlighted results are reflected in the synthetic indicators: ROA and ROE remained negative until 2011, albeit gradually recovering. ROA returned to positive levels in 2012, to 0,4% in September, against an increase in total assets of around 6%. Similarly, ROE rose to 2,9% last September, if we consider that the capital remained substantially unchanged compared to 2011. At an aggregate level, the capitalization ratios are adequate, according to the rating agencies, but weakness in economic performance and portfolio quality lead to a prudent assessment. In fact, it weighs decline in the capital ratio, which went from 20,8% in 2010 to 18,24% last September. Here then is that further capital strengthening remains a priority to relaunch investments and consumption in the domestic market, fueling the share of foreign currency reserves to thus favor a new and more efficient commercial strategy, capable of reducing exposure to fluctuations in hydrocarbon prices and to export market trends and thus relaunching the share of loans to businesses and the growth of the country.
