Those who stand. Bank Ranking – 2022

Mind presents the traditional update of the Ukrainian banks’ reliability rating based on the results of the first half of 2022 and the common analysis of the banking industry.

The full-scale russian invasion of Ukraine in February 2022 paralyzed the Ukrainian economy for a long time.

But the Ukrainian banking sector was able to reorganize and survive. We didn't see massive bank failures, non-payment spikes (that's still to come), and the biggest banks were able to reshape their business models for new realities.

Bank viability rating is an informational project for assessing the reliability of the largest financial institutions of Ukraine. It includes institutions with market share higher than 0.2% of all solvent banks.

This time, Mind didn’t make adjustments to the calculation methodology in order to be able to compare how the banks managed to survive these six months.

During the half a year, the number of participants decreased by 7 banks – to 31. The insolvent Megabank and the liquidated Russian Prominvestbank and Sberbank were excluded from the rating.

Deutsche Bank DBU, Crystalbank, Investments and Savings Bank (Bisbank), Radabank and RwS Bank were also excluded from the rating due to a drop in their market share.

Large institutions that are parts of foreign banking groups or that are supported by Western countries traditionally receive the highest ratings: Raiffeisen Bank, Ukrsibbank and Citibank. State-owned PrivatBank also retained almost the highest rating.

Two more Ukrainian banks received high 4 stars: Ukreximbank and PUMB, as well as foreign ING Bank Ukraine, Credit Agricole and OTP Bank.

MTB Bank, Industrialbank, MIB, Сominbank and Sich are at risk.

Reminder: we do not evaluate small banks, because the smaller the bank is, the harder to analyze and compare its risks based on public financial indicators.

Mind recommends cooperating with such institutions (as well as with small banking institutions that are not included in the rating) only in exceptional cases: when it is justified by the specifics of the industry, the presence of business connections, or for attracting funds to the business.

Ukrainian banks are losing profits. That’s the brief conclusion that can be made by analyzing the results of the banking sector for the first half of 2022 (H1 2022). According to the National Bank of Ukraine, the net loss of solvent banks as of July 1 reached 4.6 billion UAH, and the number of unprofitable banks exceeded two dozen.

Three state banks became the most unprofitable: Oschadbank, Ukrgazbank and Ukreximbank. To compare, in the first half of 2021 banks received 30 billion UAH in net profit, and the number of unprofitable banks was less than 10.

The most successful as always remains PrivatBank: in the H1 2022 bank earned more than UAH 6.2 billion, which is 63% of the net profit of all the profitable banks.

At the same time, most banks still have operating profit – earnings from main activities. In particular, the number of banks that experienced an operating loss by July 1 decreased to 12 – compared to 22 financial institutions as of April 1, 2022.

In addition, the combined ratio of operating expenses to operating income (CIR) in the Q2 2022 was 37.8%, compared to 49.9% in April-June 2021.

The return on assets and capital of all solvent banks by July 1 remained in the negative zone and amounted to -0.46% and -4.09%, respectively. These indicators demonstrate how effectively the bank uses the resources at its disposal.

How are the banks making money now? First, it’s the net interest income that the banks receive by investing in NBU certificates of deposit. Second, the restoration of the volume of daily (cash, card, etc.) transactions. Third, the profit from operations on the currency exchange increased sixfold and allowed banks to increase their operating income.

If we look at the numbers, the total profit of banks for the first half of 2022 reached UAH 148 billion. 63% of this amount is interest income and 25%, commissions.

The resource base of the banking sector continues to grow due to funds raised from the population and businesses, as well as from budget structures. The share of these resources in the banks’ liabilities according to the results of the H1 2022 was about 88%. The share of refinancing loans given to banks by the NBU fell to an annual minimum of 4.8% by July, 1.

Most of the deposit base of banks are demand funds. That’s the money that clients can withdraw at any moment – that makes it harder for banks to plan their active (credit) operations. And it creates additional risks of resource outflow if panic among clients occurs. As of July, 1 the percentage of demand funds of legal entities was about 83%, of individuals – about 66%.

On the other hand, the behavior of depositors is understandable. In terms of war and crisis, they are not ready to freeze funds for a long time. Moreover, this applies not only to the population, but also to businesses that need them to support current activities. In addition, deposit rates remain at a low level (taking into account exchange and inflationary realities).

According to the UIRD index, the yield on UAH private deposits in the third decade of August averaged 9.5–10%. This is many times less than the projected inflation rate. Only some banks offer rates up to 18-20% per annum. But only if the funds are placed for a period of 1 year+.

There is stagnation in lending. During January-June 2022, the gross volume of loans given to individuals decreased by 3%, the loan portfolio of legal entities decreased by 0.2%.

The net retail credit portfolio decreased by 11.1% in the Q2 due to the drop in lending volumes and the formation of reserves to cover problem loans. According to the NBU, individuals now use loans mainly for current needs. Loans for the purchase of cars and housing are very rare.

Pure UAH business loans increased by 5.3% in April–June, while foreign currency loans decreased by 7.2%. At the same time, state banks dominate the corporate lending market. They increased their loan portfolios to legal entities by 30% in the second quarter. Other financial institutions, on the contrary, are curtailing the business loans activities.

The volume of problem loans in the banking system does not cause any particular concern so far. As of July 1, the share of non-performing loans (NPL) reached about 35.5%. This is even slightly less than on January 1, 2022.

However, credit risk remains the main threat to the banking sector in 2022. Experts fear the accumulation of problem debt in the H2 2022 and a sharp increase in loan defaults. First of all, this is about corporate borrowers, whose share in the total loan portfolio of banks reaches 74%.

Businesses are running out of their financial security. At some point, many companies may stop servicing their loans, which will have a very negative effect on the banks. That’s why financial institutions are quickly forming reserves for NPLs, which has already led to a decrease in the profits of the banking sector.

Given the fall of credit activity, many banks will be focused on increasing commission income in the next 6-12 months. Therefore, in the coming months, an increase in commissions for cash operations, transfers between cards and accounts, and withdrawals is expected.

Otherwise, a sharp loss of operating profitability can lead some banks to a significant drop in liquidity and the risk of bankruptcy.

After the material was released, the editors received a comment from the Alliance Bank. The bank notes that the institution "was extremely prompt in optimizing both individual business processes and the business model of activity as a whole". But since the rating takes into account data until July 1, the improvement in financial condition is not reflected.

The bank increased regulatory capital by 3.7% – that led to an increase in the actual values of H2 capital adequacy and H3 basic capital adequacy ratios (15.5% and 7.7%, respectively, as of today, against 13.4% and 7.0%, respectively, as of the end of Q1 2022).

"Positive dynamics is also observed in other economic standards and currency position limits set by the NBU. In particular, while two of them were violated as of July 1, 2022 (L13-1 long currency position limit and all-currency LCR liquidity coverage ratio), then by August 25, 2022, the actual value of the indicators had already been brought to the normative level (L13-1: 4.89% against 5.00% of the normative / all-currency LCR as of date is 143.73% against 100.00% of the normative)", added the Alliance Bank.

Editorial: bringing standards to the desired level really has a positive effect, but in this case, the very fact of the bank's shareholders working on crisis phenomena and searching for new business models in the realities of wartime is more important.

Ukrainian banks viability rating-2022

Methodology

The Mind rating takes into account the most important factors of financial stability, which can be calculated on the basis of public information for solvent banks. The methodology also takes into account the economic norms of banks' activity according to calculations.

Thus, in the calculation of the capital adequacy factor, the value of the standard H2 is taken into account. When calculating the level of problematic loans, standards H7–H9 are taken into account. The calculation of liquidity also takes into account the newly introduced indicators of the NBU LCR (liquidity coverage ratio) and H6 standards, and the largest weight is given to the factor with the lowest value. The risk ratio of the net foreign exchange position is also used in the calculation.

The bank's ability to survive periods of systemic imbalances is defined as the total score of stability factors – 1 to 4, weighted by the importance of each factor – 0 to 1. Depending on the total score, the bank receives a certain number of stars – 0.5 to 5.

Data sources: financial reporting indicators published on the official website of the NBU and on the corporate websites of the banks taking part in the rating. To determine the "Support and risks of owners" factor, official NBU information about the owners of a significant share of the bank is used, as well as data from news agencies and information by Mind.

When preparing the rating methodology, factors determining the viability of banks are taken into account:

1. Capital adequacy.
2. The quality of the loan portfolio.
3. Bank's profitability.
4. Liquidity.
5. Owners' support and risks.
6. Continuity of payments.
7. The systemic importance of the bank.
8. The risk of a net foreign exchange position.

Using analysis and research of the historical importance of each of the factors, as well as by interviewing banking experts, Mind determined the level of importance of each of the factors by assigning weight multipliers, the sum of which is equal to 1.

Today, given the current level of transparency of the banking system and financial reporting of banks, the Mind methodology for calculating factors most adequately reflects the ability of financial institutions to survive in conditions of economic turbulence.

Calculation factors and formulas

№	Factor	Indicator	Formula*	Scoring ranges	Weight
1	Capital to assets correspondence	Equity adequacy ratio	(EQ/NetA) *100%	>18% – 4 points 12–18% – 3 points 8–12% – 2 points 0–8% – 1 points	0,1
		H2 (Regulatory capital adequacy)	NBU standard	>25% – 4 points 15–25% – 3 points 10–15% – 2 points <10% – 1 points
2	Problematic loans	Ratio of non-performing loans to loan portfolio	NPL/L	<10% – 4 points 10%-20% – 3 points 20%-40% – 2 points >40% – 1 points	0,15
		H7 (credit risk of one counterparty)	NBU standard	<10% – 4 points 10–15% – 3 points 15–25% – 2 points >25% – 1 points
		H8 (high credit risks)	NBU standard	<100 – 4 points 100–200 – 3 points 200–800 – 2 points >800 – 1 points
		H9 (insider loans)	NBU standard	<5% – 4 points 5–10% – 3 points 10–20% – 2 points >20% – 1 points
3	Owners' risks and support	Owners: the state, a foreign corporate structure, a non-resident natural person, residents of Ukraine; ratings of foreign parent structures; risks of origin of shareholders	–	– Beneficial owners of the bank are governments or public companies of countries with sovereign ratings of "A" and above – 4 p  – Beneficial (real) foreign owners own a controlling stake or they are a part of joint-stock financial groups from countries with a rating below "A" – 3.6 p – The final beneficiary is the government of Ukraine. Foreign owners who have a core business in the country of origin with a rating below "A" – 3.2 p – Recapitalized Ukrainian banks – 2.8 p – Foreign owners have less than 50% of the capital, or they are non-resident individuals, or bank belongs to non-public companies from a country with a rating below A. Ukrainian owners with powerful financial-industrial groups (FIGs), and the bank has a low percentage of captivity – 2.4 p – The bank does not belong to the state, but has real Ukrainian owners (including a member of a FIG) – 2 p – The bank has no real (not nominal) foreign owner or the bank is owned by residents of a country with high risks – 1.6 p – Unknown Ukrainian owner or bank is a non-core asset – 1.2 p – Banks with russian state capital (under sanctions) – 0.8 p – Wanted bank owners – 0.4 p	0,2
4	Bank's performance efficiency	Average annual equity capital profitability	(PROF_yoy/EQ_avg) *100%	>30% – 4 p 15–30% – 3 p 0–15% – 2 p <0% –1 p	0,15
		Capital operating profitability	(PROF_yoy + Taxes + LoanLossProvisions)/ EQ_avg *100%	>40% – 4 p 20–40% – 3 p 0–20% – 2 p <0% –1 p
		Net interest margin	(%Income – %Costs)/InterestBearingAssets *100%	>12% – 4 p 8–12% – 3 p 2–8% – 2 p 0–2% – 1 p <0% – 0 p
5	Bank's liquidity	Ratio of highly liquid assets to liabilities; ratio of funds on bank accounts to liabilities	LiqA / LIAB;	>15% – 4 p 10–15% – 3 p 5–10% – 2 p <5% – 1 p	0,2
		LCR (нliquidity coverage ratio, general)	NBU standard	200–400% – 4 p 150–200%, >400% – 3 p 120–150% – 2 p 100–120% – 1 p <100% – 0 p
		LCR (liquidity coverage ratio, foreign currency)	NBU standard	200–400% – 4 p 150–200%, >400% – 3 p 120–150% – 2 p 100–120% – 1 p <100% – 0 p
6	Continuity of payments	Mass cases of non-repayment, ultra-low limits or delayed deposits during the last six years	–	– No cases recorded – 4 p – Some cases of non-return or delay of deposits in the past (last six years) – 3 p – Bank limits for withdrawing funds from accounts are significantly lower than the regulator's limits, partial problems with the payment of deposits – 2 p  – Current numerous delays and non-returning of deposits, including mass protests by depositors and interruptions in the operation of the payment system – 1 p	0,05
7	Systemic importance	Determination of systemic importance by the NBU, volume of assets	–	– State banks, which are among the five largest – 4 p – For other banks, points from 1 to 3 are assigned by approximating the bank's place in the ranking by the volume of assets.	0,1
8	Risk of a net foreign exchange position	L13-1 (the risk of the overall long position)	NBU standard	>10% – 1 p 5–10% – 2 p 2–5% – 3 p <2% – 4 p	0,05
		L13-2 (the risk of the overall short position)	NBU standard	>10% – 1 p 5–10% – 2 p 2–5% – 3 p <2% – 4 p
	General score	The sum of the factor scores weighted by the respective weights	GS = sum of factors * weight of a factor		1,00

*Conventional notations used in the formulas:
EQ ─ equity;
EQ avg ─ average equity over the past 12 months;
L ─ loans (with reserves for credit risks);
LIAB ─ net liabilities;
LiqA ─ cash and their equivalents;
NetA ─ net assets (total assets adjusted for formed reserves);
NPL ─ non-performing loans (the amount of credit operations of IV and V quality categories);
PROF_yoy ─ financial result (profit or loss) for the last 12 months.

Each factor is assigned a score from 1 to 4 before considering its importance. The scores depend on the range in which the value of the indicator, reflecting the quantitative content of the factor, falls.

For example, if the factor "Bank's activity effectiveness" expressed by the indicator "Return on average annual equity capital" exceeds 5%, such a bank is assigned the highest amount of points – 4. If it’s less than 5%, but greater than 0% – 3 points. If the value of the indicator is in the range from -50% to 0% – 2 points. If the liquidity ratio was less than -50%, the bank receives the lowest score – 1. Then, the points are multiplied by the weight of the factor.

The total score for the bank is calculated by adding the numbers obtained from multiplying the points by the weight of each factor. The greater the value of the total balance, the higher the chances of the bank to survive in times of crisis.

Definition of rating category

The rating table is built by ranking the banks that participate in the rating, in decreasing order of the amount of their General Score – GS. Then, depending on the range in which each bank falls, 10 rating groups of banks are distinguished. Groups are assigned a number of stars from 0.5 to 5 in 0.5-star increments.

Criteria for assigning rating categories

Amount of the General Score – GS	Stars by Mind	Rating Category
3,70 and more	*****	High level of vitality
3,10 to 3,69	****	Stable level of vitality
2,50 to 3,09	***	Satisfactory level of vitality
1,90 to 2,49	**	Low level of vitality
1,30 to 1,89	*	Disastrous level of vitality

Changes and additions

In the future, the bank rating methodology may partially change in the calculation part or be widened by new factors, taking into account the dynamics of the banking system's activity indicators, as well as due to the increase in the level of disclosure of financial information by banks.

Editorial:

The main issue is the rating category of the bank – from 0.5 to 5 stars, and not its serial number in the table. The editors and authors of the rating are not responsible for the decisions of third parties made solely on the basis of this rating. The rating has an exclusively informational nature. It expresses the opinion of the editors regarding the level of viability and sustainability of banks based on financial statements. The rating cannot be considered as the only recommendation for choosing banking products.

Methodology: Roman Kornyliuk, Yevgen Shpytko. Text: Pavlo Kharlamov