The National Bank of Ukraine (NBU) conducted a stability assessment for the 20 largest banks, which collectively have more than 90% of the country sector’s net assets, and identified the need for additional capitalization of five banks, but two of them have already managed to increase capital adequacy to targeted standards following the audit.

“Based on the results of the sustainability assessment, only five banks have a higher than minimum level of capital adequacy standards and only three of them have risks of completely losing capital over a three-year horizon. These five banks will prepare capitalization and restructuring programs to achieve capital adequacy or maintain it at the established level. Some of them already have capital adequacy above those established by the results of the sustainability assessment of the increased standards,” the NBU said in its report on financial stability, published on Friday.

“Two of these five banks today, in fact, have fulfilled these requirements, and the remaining (three) banks will need to formulate plans for additional capitalization, with which they will work over the next years,” added First Deputy Head of the National Bank Kateryna Rozhkova during the presentation of the report.

In turn, the director of the financial stability department of the NBU, Pervin Dadashova, indicated that among the three banks that have the risk of completely losing capital, there is a state-owned one, however, they can meet the requirements of the National Bank without an additional injection of new capital.

“We are not talking about increasing capital through additional capitalization exclusively. In order to get closer to the required capital adequacy standards, banks will have a deadline until April 2026,” Dadashova noted.

According to her, this is a long period during which banks can take a number of measures, including, traditionally, risk reduction and capitalization of dividends.

Dadashova summed up that the National Bank does not expect direct capitalization of banks, including state-owned ones, based on the results of the sustainability assessment.

It is clarified that this year the sustainability assessment was carried out only according to the basic macroeconomic, but conservative scenario: it was assumed that credit risk would materialize and the interest margin would decrease.

“Taking into account the results of the sustainability assessment at the beginning of next year, the NBU will analyze the feasibility and possible timing of establishing a capital conservation buffer and a buffer of systemic importance. After this, restrictions on the distribution of capital and the payment of dividends by banks that form these buffers in full may be weakened,” indicated in the report.

The memorandum with the IMF updated in December noted that in accordance with the terms of reference adopted by the NBU in January 2023, an independent asset quality review (AQR) of banks will be carried out immediately after the situation has stabilized, after which a further assessment of the viability of banks will be carried out. Until the end of June 2024, they will prepare a priority interdepartmental action plan to address the issue of non-performing loans (NPL).

It states that the current ban on bank capital distribution will remain in effect until AQR findings are fully reflected in banks' regulatory ratios and financial statements.

The National Bank also committed to closing the identified gaps in the regulatory capital structure by the end of December 2023 and eliminating other gaps by the end of December 2024 based on the results of a gap analysis in comparison with the Directive and the EU Regulation on capital requirements.

In addition, by the end of December 2023, the NBU intends to improve the regulatory framework for remuneration policy in banks by introducing requirements to limit the variable component of remuneration and payment mechanisms for senior management of banks, bringing it closer to EU standards.