Bank viability rating'2023. The struggle for survival

Mind presents the traditional update of the reliability rating of Ukrainian banks for almost a year of the banking system's operation under martial law.

Over the past year, the number of rating participants has decreased by 6 institutions. Back in the first half of the year, the insolvent Megabank was excluded from the rating, and the russian Prominvestbank and Sberbank were liquidated. Finally, Sich Bank was excluded from the market.

Deutsche Bank DBU, Crystalbank, Investments and Savings Bank (Bisbank), Radabank and RwS Bank were also excluded from the rating due to a drop in market share. ConcordBank and Clearing House Bank returned to the rating due to the growth of assets.

Reminder: Mind evaluates only banks with a market share of more than 0.2% of total banking system assets.

The average rating of banks has obviously decreased over the past year. The NBU is increasing its requirements, and the risks of customer insolvency will only grow.

No institution received the highest rating. Only 2 institutions have 4.5 stars: the traditional leader of the rating, French Ukrsibbank, and American Citibank.

Ukrainian PrivatBank and Oschadbank have a high rating of 4 stars, as well as 5 international banks: Raiffeisen Bank, ING Bank Ukraine, Crédit Agricole, OTP Bank and KredoBank.

MTB Bank, Industrialbank, Globus Bank, Alliance Bank, and Accordbank are at risk.

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.

It is worth to be noted, however, that none of the banks assessed received a rating below 2.5 stars (low viability). Thus, there are no significant risks of a sharp decline in the solvency of these financial institutions. However, the situation may change in 2023 for those banks with large legal entity loan portfolios.

Almost a year of war has shown that Ukraine's infrastructure is capable of sustaining the country's vital functions, even though the economy in an area almost equivalent to the whole territory of Romania or two territories of Hungary is out of economic circulation, and enemy missile bombardment covers the entire territory of Ukraine. The line of contact exceeds 1,000 kilometres and is the longest since World War II.

According to preliminary data, the 2022 war has the following parameters within the main macroeconomic parameters for the real sector of Ukraine's economy: GDP decline is estimated at 30%; inflation – 29%; exchange rate devaluation – 34%.

Ukraine's budget deficits are financed by the US and EU governments and through loans from international financial organisations.

In 2022, Ukraine's financial infrastructure proved to be effective in the face of russia's military aggression, ensuring not only cash circulation in the country but even the ability of citizens to use their hryvnia savings abroad.

At the beginning of the war, banks with russian state capital were withdrawn from the market without social complications. The banking system provided a settlement function for individuals. And while the increase in hryvnia balances in the system can be attributed to an increase in salary payments, the increase in foreign currency balances in the system over the past three months indicates a return of confidence in the banking system on the part of individuals in general.

However, the share of time deposits in the total structure of households' funds is decreasing month by month. Of the total increase of more than UAH 122 billion, almost two-thirds are accounted for PrivatBank.

The increase in hryvnia balances of individuals' funds was recorded in 39 banks. The leaders were: Privat, Oschad, Raiffeisen Bank, Universal, and Ukrsibbank.

The decrease in hryvnia balances occurred in 30 banks. Pivdenny, Idea, Forward, Vostok, and Sense (Alfa) Bank had the largest outflows, except for those withdrawn from the market.

The increase in foreign currency deposits of individuals occurred in 18 banks. In terms of foreign currency, individuals trusted PrivatBank, Universal, Raiffeisen Bank, A-Bank, and OTP Bank.

The decrease in foreign currency deposits of individuals occurred in 49 banks. The most significant decrease in individuals' foreign currency deposits, except those withdrawn from the market, appeared in Oschadbank, Sense Bank, FUIB, Ukrgasbank, and Pivdenny. The total decrease in individuals' foreign currency balances amounted to almost UAH 430 million.

In the second half of 2022, businesses increased their hryvnia balances in the banking system by UAH 56 billion. It corresponds to the revival of business activity in regions far from the hostilities. It is also due to the start of cargo traffic from the Black Sea ports.

Hryvnia balances increased in 38 banks. The leaders are Ukrgasbank, PrivatBank, Crédit Agricole, Avangard, and Citibank. The hryvnia balances of legal entities decreased in 33 banks. Sense Bank, Oschadbank, Credit Dnipro, Globus, and Pivdenny had the largest outflows of hryvnia funds of legal entities, except those withdrawn from the market

The foreign currency assets of legal entities increased on the balance sheets of 23 banks, while they decreased in 46 banks. The total increase in foreign currency is $345 million. PrivatBank is the undisputed leader in terms of the increase in legal entity funds. Businesses also began to trust Ukrsibbank, Raiffeisen Bank, Universal, OTP Bank, and Citibank more.

The outflow of funds occurred in Ukrgasbank, Ukreximbank, Sense Bank, PINbank, and Oschadbank.

As we can see, the banking market has seen a significant redistribution of resources of legal entities and individuals, depending on many factors.

The retail loan portfolio in the banking system decreased by UAH 30 billion during the year. Foreign currency lending to individuals has been prohibited since 2009. Consumer activity of individuals is depressed. Therefore, there is a consistent (month-on-month) decrease in the debt of individuals on hryvnia loans, both mortgage and consumer ones.

It is the result of the gradual repayment of debts by borrowers and writing off bad debts for losses by banks through provisioning. At the same time, 7 banks increased their portfolios, including Unex, RwSbank, Concord, Vostok, CreditWest, and Sky. Most of them reduced their portfolios: FUIB, Sense, OTP Bank, Ukrsibbank, KredoBank, Crédit Agricole, and PrivatBank.

In terms of lending to legal entities, a systematic decrease in the hryvnia loan portfolio occurred during the last eight months, which reached almost UAH 15 billion over the year.

Lending is mainly provided by banks with state participation in the capital and under the 5-7-9% programme, where the state assumes part of the interest expenses of borrowers. A lending increase was observed in the spring during the sowing campaign, after which the loan portfolio in both hryvnia and foreign currency was decreasing month by month.

Banks' balance sheets showed an increase in both provisioning expenses for active operations and, accordingly, in the volume of classified loans. The total increase in the hryvnia portfolio of legal entities amounted to UAH 14.7 billion.

The growth of the loan portfolio of banks with state participation in the capital reached UAH 16.2 billion at Ukrgasbank, UAH 13.9 billion at Oschad, UAH 12.1 billion at Ukreximbank, and UAH 9.9 billion at Privat.

In other words, banks with state participation are the main drivers in the hryvnia corporate loan market. Excluding loans from state-owned banks, the total decrease in the rest of the banking system is UAH 37.5 billion. The most significant declines in hryvnia loan portfolios were seen at Ukrsibbank, Sense Bank, Crédit Agricole, Pivdenny, and OTP Bank.

The leaders in foreign currency lending to legal entities are Ukrsibbank, Crédit Agricole, SEB Corporate, Universal, and IBOX Bank. Ukrgasbank, Ukreximbank, Sense Bank, FUIB, Raiffeisen Bank, and OTP Bank reduced their foreign currency loan portfolios the most. In total, the foreign currency loan portfolio decreased by $2.3 billion.

The private sector of banking in 2022 is fighting for its existence. Each individual bank is currently developing its own survival strategy.

Banks are increasing the share of interest income from transactions with domestic government bonds, NBU certificates of deposit, and loans to public authorities. Banks with well-developed services that generate income through fee-based services have an advantage in the market. The banking system is starting to interact more with the state than with the real economy.

These trends are not helpful in overcoming the economic crisis.

Bank viability rating'2023

Rating 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.

When preparing the rating methodology, these 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.

The methodology also takes into account the economic norms of banks' activity according to NBU 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 NBU official website 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.

The "Support and risks of owners" factor also takes into account whether the bank continues to operate in russia.

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 "Bank's activity effectiveness" factor expressed by the "Return on average annual equity capital" indicator 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 is exclusively informational. 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: Anatoliy Drobiazko, member of the Ukrainian Financial Analyst Society.