Profitable foreign exchange transactions and high interest margins – Ukrainian banks work “non-stop”

Vienna Despite bombing raids on a daily basis, energy supplies constantly collapsing and foreign investors having turned their backs on the country, Ukraine’s financial sector is doing relatively well. “I still haven’t figured out exactly what the recipe for this is,” jokes Gerhard Bösch, who heads the largest Ukrainian bank, the private bank.

The reason for the resilience of the Ukrainian financial sector is a change in mentality, as a result of which numerous previously corrupt banks have been closed since the mid-2010s. In addition, the institutes can rely on traditionally high interest margins.

However, time is working against the financial houses. And the banks must ensure that their balance sheets are healthy enough to finance reconstruction.

The 65-year-old Bösch comes from the Austrian Vorarlberg. He actually took over the management of the private bank in the summer of 2021 to prepare it for privatization. But now he is busy navigating the bank from Kyiv through the war. Privatization will have to wait – investors are staying away from the war-torn country anyway.

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The name of the private bank is misleading. The institute is neither an asset manager nor is it privately owned. In fact, the private bank is the largest retail bank in Ukraine with around 18 million customers and is state-owned after the forced nationalization in 2016.

Previously, the main owner of the private bank was oligarch Ihor Kolomoiski. However, he had misused it for his own purposes, and when the Treasury Department took the institution under its wing, there was a huge financial gap of $5.5 billion on the balance sheet.

Russian cyber attacks repelled

Macroeconomic data shows how difficult the current environment is for the private bank and other financial institutions: In December, annual inflation in Ukraine was 26.6 percent, and economic output probably shrank by a third in 2022 as a whole.

The country is economically in tatters, and the longer the war lasts, the more Ukrainians are threatened with poverty. Many people’s savings are dwindling, forcing them to cut back on consumption.

There were already cyber attacks in the week before the major attack. Gerhard Bösch, CEO private bank

Against this background, there are two aspects to assessing the state of the Ukrainian financial system. Short term: Do the services still work technically? Medium term: are the banks able to shoulder the material losses of the war?

When Russia invaded Ukraine in February 2022, many observers feared the IT infrastructure would collapse. This could also have paralyzed the banking sector. “There were already cyber attacks in the week before the major attack,” Bösch recalls. But they were repulsed.

Other banks have had the same experience. The cyber attacks in the spring were unique, says Gunter Deuber, head of research at Wiener Raiffeisenbank International (RBI), which operates a retail institute in Ukraine. You’ve never experienced anything like it.

But the financial system survived the attacks. “The experiences from the pandemic of 2020 and 2021 helped us,” says Bösch in retrospect. At that time, almost all employees were equipped with laptops.

In March, his bank also moved all data to the cloud – within two months. Such outsourcing was previously forbidden in Ukraine. It was a quick action, says Bösch. And: “In times of crisis, the Ukrainians are in top form.”

The Central Bank of Ukraine (NBU) supports Bösch’s reports. The financial sector is working non-stop, she wrote in December’s Financial Stability Report. Public confidence in the financial system is apparently unbroken. There has never been a so-called bank run, in which savers storm the counters to withdraw money, and in some cases savings deposits have recently even increased.

Banks’ net profits are rising

It was different in previous crises. Since independence from the Soviet Union in 1991, the Ukrainian financial scene has experienced turbulent times. Rumors about opaque machinations at the institutes repeatedly led to bank runs.

In 2014, however, the NBU began to clean up the financial sector. Since then she has closed countless institutes. At the beginning of the 2020s, the Ukrainian financial system was therefore faced with a kind of new beginning. “The lending practice was cautious,” recalls Deuber from RBI.

The banks are living off this today. The private bank’s net profit has recently risen steadily, by 44 percent to 35 billion hryvnia (equivalent to 870 million euros) in 2021. Operational efficiency was at a very good level with a cost/income ratio of 37 percent, no German bank even comes close.

Workers at the switchboard of a power plant

The attacks on Ukraine’s energy infrastructure are affecting all of the country’s companies. Banks increase their provisions.

(Photo: dpa)

Bösch even assumes that the profit in 2022 will be about as high as in 2021. The banks would benefit more than ever from the traditionally high interest margin.

With the war, foreign currencies have also become good business. The banks earn well when Ukrainians who have fled abroad withdraw euros, zlotys or other foreign currencies from ATMs. According to the NBU, Ukrainian financial institutions have achieved an average return on equity of over nine percent in the first eleven months of 2022.

The mode of reconstruction

Now the focus is on the medium term: How long can companies, private customers and banks endure the further war? This question is central to Ukraine’s future.

The financial system is the backbone of any economy, and when it stops functioning, it becomes difficult for companies and individuals to conduct business. Both companies and banks need to survive the war in a reasonably solid state so that they can switch to reconstruction mode once the war is over.

The biggest challenge for companies at the moment is the interruption in the power supply, reports Anna Derewjanko from the EBA business association. “A new phase began for the business world,” she says, referring to mid-October when the Russian army began systematically attacking the energy infrastructure.

By 2024 at the latest, many banks will probably need fresh capital. Gunter Deuber, head of research at Raiffeisenbank International

The NBU also sees the power cuts as a burden on the economy. The private bank has therefore invested some of its higher income in higher provisions in order to be prepared for corporate insolvencies. All recognizable risks have been accounted for, assures private bank boss Bösch.

But time is against Ukrainian banks and companies. Before the escalation of fighting in February 2022, the share of non-performing loans had been falling from high levels, but then the trend abruptly reversed. According to the NBU, 30 to 37 percent of loans to small and medium-sized businesses are now non-performing, depending on the currency.

The financial institutions have posted loan losses, but the full extent will only become clear over time, the central bank explains. “By 2024 at the latest, many banks will probably need fresh capital,” estimates Deuber from RBI.

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