10:51 14.12.2016

Ukrainian banks inadequately reflect real quality of credit portfolios - NBU

3 min read
Ukrainian banks inadequately reflect real quality of credit portfolios - NBU

Stress tests of Ukrainian banks again revealed inadequate reflection of the real quality of their credit portfolios, according to a December report on financial stability published by the National Bank of Ukraine (NBU).

"After stress tests of 40 banks, the share of non-performing loans (NPL) grew from 19% declared by banks to 43%," the NBU said.

The central bank recalled that after stress tests of 20 largest banks, in 2016 stress tests for next 40 banks was finished: the share of total assets of these banks was 9.5% of the banking system. In general, banks having over 98% of the sector assets passed stress tests in 2015 and 2016.

The NBU said that the NPL in 40 banks is less than in 20 largest banks (53%). The largest discrepancy between declared NPL and assessed NPL after stress tests was for the loans issued to companies in the national currency – the share grew by 31 percentage points.

The central bank said that the situation with the quality of the loan portfolio has stabilized – in 2017 the NBU expects that NPL share will gradually fall.

According to the report, the NBU will introduce new rules for assessing credit risk (resolution No. 351) starting early 2017 to remove the flaws of the current regulation and make banks to publish realistic figures.

The NBU said that the introduction of the new rule would not require attracting additional capital almost for all banks that expanded their capital after stress tests.

Small banks that have not passed stress tests and do not have the approved capitalization programs would have a transition period to finish additional capitalization if it is required.

According to preliminary assessments of the NBU, the credit risk of 60 largest banks calculated under the new resolution (No. 351) is UAH 497 billion, and this is UAH 23 billion or 5% more than the credit risk set after stress tests and UAH 172 billion or 53% more than the banks' reserves under international financial reporting standards (IFRS) and their uncovered credit risk under the current rules.

Credit risks of largest banks with Ukrainian capital assessed using the new rules totaled UAH 176 billion (reserves under IFRS and uncovered credit risk is UAH 44 billion), banks with foreign capital – UAH 197 billion (UAH 171 billion of reserves), state-run banks – UAH 11 billion (UAH 103 billion of reserves) and banks of the second group – UAH 13 billion (UAH 7 billion of reserves).

The NBU believes that the peak figures for the NPL share in the banks' portfolios have been passed: macroeconomic stabilization and gradual restoration of revenue and profit of companies give preconditions for gradual restoration of the quality of banks' credit portfolios.

It is likely that the major part of NPL would not be returned to the category of quality credits and the level of their return in the future would be symbolic.