NPLs are 71% of loan portfolio of Ukraine state banks, NBU reports

Non-performing loans of four state-controlled
Ukrainian banks were UAH 365 bln as of Dec. 1, 2017, or 71% of their gross loan
portfolio, according to statistics released by the National Bank of Ukraine
(NBU). The nationalized Privatbank (PRBANK) is among the sector leaders with
NPLs at 87% of its loan portfolio. The share of NPLs in state Oschadbank
(OSCHAD) and Ukreximbank (EXIMUK) were 64% and 60%, respectively. The
“cleanest” state bank is Ukrgazbank with an NPL ratio of 22%.

Another troublesome group of banks in Ukraine is the
four subsidiaries of Russian state institutions (Sberbank, VTB and
Vneshekonombank), with NPLs accounting for 69% of their loan portfolio. These
two groups (state Ukrainian banks and subsidiaries of state Russian banks)
account for 81% of total NPLs in the Ukrainian banking system.

The average share of NPLs in the banking system was
56% as of Dec. 1, 2017. Excluding the state banks and subsidiaries of Russian
state banks, the NPL ratio of other banks was only 30%, on average.

Among large private banks, Rinat Akhmetov’s bank PUMB
(PUMBUZ) has a below-average NPL ratio of 25%. Those with high NPL ratios are
Ukrsotsbank (USCB UK, 82%) now controlled by Alfa Group with Russian roots (but
the Ukraine-based Alfa Bank has a 24% NPL ratio) and Victor Pinchuk’s
Kredyt-Dnipro Bank (64%).

Alexander Paraschiy: Ukraine’s
banking system, excluding the state-controlled banks of Ukraine and Russia,
looks relatively healthy. But the problem is that the “excluded” banks account
for 62% of the Ukrainian banking system’s total assets and 59% of its deposit
base.

The corporate governance system of Ukraine’s state
banks (excluding Privatbank) has not changed since the time they had
accumulated high NPLs, which does not add optimism for any improvement in the
quality of their loan portfolios. The government’s ongoing support to state
banks (in the form of regular capital contributions) only adds to moral hazard
risks and stimulates no improvements.

Admitting that changes in state banks’ governance
are needed, we remain bullish about the Eurobonds of Oschadbank and
Ukreximbank, whose risk profile is the same as Ukraine’s sovereign, in our
view. We also remain bullish on PUMB notes.