Ukreximbank Chairman of the Board: "At the outbreak of the war we had to apply a cash destruction protocol in Kherson, Nova Kakhovka and Kharkiv"

Ukreximbank is one of the few banks in the Ukrainian market that continues financing domestic businesses. According to the National Bank, Ukrexim had the largest portfolio of loans to entrepreneurs and companies in 2022. As of 1 January 2023, its volume reached almost UAH 83 billion.

In addition, the bank has joint programmes with international organisations that provide borrowers with access to non-resident funds. According to the bank itself, about 55% of the funding that foreign institutions bring to Ukraine to support businesses goes through it. These include the World Bank, the International Finance Corporation (IFC), the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), and others. 

Also, in 2022, Ukreximbank accounted for 12% of the volume of transactions in the domestic foreign exchange market.

At the same time, like other players in the market, the bank is experiencing the negative impact of the war and the resulting crisis. In particular, Ukreximbank's loss in 2022 amounted to UAH 6.9 billion (primarily due to provisioning), and the share of non-performing loans in its loan portfolio, according to Mind's calculations, reached almost 49%.

Mind has spoken to Sergiy Yermakov, the bank's CEO, who has told us about the bank's work in the early days of the war, the priority sectors it lends to now, and how the banking system is fighting the accumulation of non-performing loans.

– After a year of the war, can we say that the banking market was preparing for an invasion?

– At the end of 2021, the news background was such that banks had to work out various scenarios – from the escalation in eastern Ukraine to full-scale aggression.

In early 2022, the NBU gathered the banking community several times and provided recommendations on how to respond in case of martial law. In other words, the NBU was preparing a kind of foundation to avoid panic and maintain the stability of the banking system in force majeure. Although few people believed in the worst-case scenario at the time, everyone was preparing for it. Ukreximbank was not an exception.

– What preventive measures did the bank take?

– Like other banks, we developed a business continuity plan (BCP). It spelt out what we would do with our employees and premises, under what conditions we would evacuate people, how we would ensure the stable functioning of the bank's IT systems, and so on.

By the way, we did not consider the risk of a complete blackout at that time. We believed that if such a threat arose, it would be situational and short-term.

– What were your actions as the bank's chairman and other board members on 24 February?

– On that day, at around 7 o'clock, the management and members of the Supervisory Board who were in Kyiv met to decide how to proceed. The theoretical plan was good. However, we needed to take concrete steps based on the timing and dynamics of the attack.

In a few days, we realised that Kyiv would temporarily not be able to host the bank's management core, and we needed to deploy a backup site elsewhere. For many reasons, we chose Lviv. We moved all the key services there extremely quickly, within a week or so, and they resumed full operations. Of course, the bank's management board also moved to Lviv.

– How much did the war change the bank's operating mode?

– We worked almost 24/7. Although the SEP for transactions in hryvnia was still operating non-stop. However, after 24 February, we also started processing foreign currency payments without reference to the time for some clients representing strategically important sectors of the economy.

And even if the correspondent bank was closed (for example, financial institutions located in the US or Western Europe do not carry out payment transactions on weekends), we still did everything in our power. We prepared the necessary packages of documents or searched for correspondent banks that could provide a 'route' for payments. We have made significant progress in the area of digitalisation.

According to our IT strategy, which was approved a few months before the war, we planned to transform our application architecture and modernise the hardware supporting this architecture. Besides, the National Bank gave banks permission to use cloud technologies, so we were able to move key information systems and databases to cloud storage.

I would like to note that our international partners helped us a lot in this regard by providing free access to their services during the war, as well as the necessary consulting and technical support.

– What about the regional network of Ukreximbank?

– For the branches located near the combat zone, we have deployed additional paramilitary security from the Security Police Department in case of any provocations or attempts to enter the branches. As we recall, the NBU also imposed restrictions on cash withdrawals (both foreign and domestic) during one business day.

​– When the attacks on the energy infrastructure started, how did the bank solve the issue of power supply to its branches in the conditions of complete absence of power supply?

– Ukreximbank does not have a very extensive regional network and does not actively work with retail customers. However, all our branches were equipped with diesel generators back in the pre-war era. In addition, we have purchased tanks for storing fuel.

As for the Internet network, we have several lines – the main line and backup lines from three providers. It makes the probability of a connection failure close to zero. Nevertheless, we decided to purchase additional Starlink. Now we are almost done setting up and testing satellite internet in most of the offices of the regional network.

– As of the beginning of 2023, Ukreximbank has the largest portfolio of loans to businesses. What industries do you currently finance?

– Shortly after the start of the war, the Ministry of Finance suspended the strategy of all state-owned banks without exception and approved new strategic principles for their activities during the martial law period. The point is that state-owned banks should now focus on supporting the national economy rather than on profits.

We provided leverage to fuel operators when it was necessary to establish new fuel supply routes to Ukraine during the fuel crisis in May-June 2022. At that time, the European partners expected 110% prepayment for fuel contracts.

In total, they set business financing limits of about UAH 40 billion in 2022. Of this amount, UAH 20 billion was the loan portfolio at the end of the year. It is also worth noting new credit lines with the participation of IFIs for the equivalent of $100 million.

– What is the purpose of a business raising funds in the current environment?

– First of all, there is a need to finance operating capital. However, there is a demand for investment loans, although it is rather limited. Of course, businesses that are close to the frontline do not think about any investments.

However, the further away from the fighting, the more entrepreneurs and business owners are willing to raise longer-term money. We are talking about energy modernisation and energy-saving projects, the construction of storage and transhipment facilities (elevators), and the development of logistics (container shipping in particular). In my opinion, privately owned banks have had a fairly moderate appetite for credit risk since the beginning of the war, especially when deposit certificates started to yield 23% per annum.

– But how can businesses afford loans now when interest rates sometimes exceed the borrower's profitability?

– It is a difficult question. The price of hryvnia resources depends quite strongly on the level of the NBU key policy rate. Since the NBU has to control inflation and carry out monetary transmission, the key policy rate is kept at 25%. So, yes, there is no cheap money now.

When financing on market terms, the real interest rate for a borrower on a hryvnia loan is 22.5-24.5%.

Taking into account the surcharge for credit risk for a country at war, the effective interest rate for us as a partner bank is about 7%. Accordingly, even if we do not include our margin in the interest rate when issuing a foreign currency loan to a borrower, few people can still withstand an interest rate of 7% plus.

– The question then arises. How can banks make money when income from active operations is declining and expenses are growing?

– Of course, we, like other banks, had to review interest rates on active operations. However, we did so carefully in a format of dialogue with our clients. Some of them agreed to an increase in the interest rate on their loans, while other borrowers preferred to repay the outstanding balance immediately.

We completed the rate review process around September-October 2022. Although our interest rate spread has narrowed, it remains positive.

The second emphasis was placed on commission transactions. On the one hand, we set service fees for clients from critical industries at around zero. On the other hand, we managed to increase transactional income due to transactions conducted by citizens temporarily outside Ukraine, as well as our activity in the foreign exchange market, where we are the leader.

​– Another problem for banks is the accumulation of non-performing loans (NPLs). What are the reasons for this, and what should be done with these debts?

– The deterioration in loan portfolio quality as a result of the war was quite expected. There are several reasons why borrowers (primarily corporate clients) stop servicing their loans. The most common situation is when production facilities are destroyed or damaged as a result of shelling. The business comes to a standstill and can no longer generate cash flow to repay its debts. Some businesses simply get emotionally tired and close or freeze their operations.

However, there are not many such borrowers in our portfolio. At the same time, however, Ukreximbank has written-off loans from previous years of almost UAH 100 billion, which we have been working on and are still working on. Starting with the borrower's bankruptcy and repayment of its debts at the expense of its existing property, and ending with the enforcement of loan debts in court.

State-owned banks have another tool. It is the sale of claims on loan debt in accordance with the Dutch auction model. We have already placed the first lot on Prozorro. We are exploring the possibility of using this tool more actively soon.

Generally, if the business continues functioning in some way, we are more focused on short-term restructuring. It may include lowering the interest rate, extending the loan, or repaying at least the main body of the debt without interest.

– However, NPLs put pressure on the bank's profitability. For example, Ukreximbank's net loss in 2022 was almost UAH 6.9 billion.

– Yes, we were unprofitable in 2022 due to the formation of more than UAH 10 billion in provisions. As I said, it was caused by the consequences of the war and the suspension (in particular, temporary) of operations by some of our borrowers.

However, in my opinion, the bank has passed the peak of provisioning. It is largely because we have not delayed this process and have carried out an adequate assessment of our loan portfolio.

– What are the chances that businesses will have greater access to financial support instruments in 2023? After all, the availability of capital is one of the conditions for economic recovery.

– I do not see any preconditions for fundamental changes in the banking market. State-owned banks will remain the key players in the credit market. Demand will be supported by the government's stimulus programmes and, possibly, by greater cooperation with IFIs. Banks with private shareholders, in particular those belonging to foreign groups, will finance their current clients (and not all of them) by providing short-term loans.

As for Ukreximbank, we will definitely not change our priorities in supporting the key industries I have mentioned.

The second aim is to actively cooperate with international partners in order to provide businesses and entrepreneurs with greater access to commercial and, most importantly, long-term funds. To this end, we are working on a mechanism for partial compensation of interest rates for the period of wartime. If we can develop and implement such a mechanism specifically for investment loans, even in foreign currency, and even better, hedge currency risks, such programmes will definitely be in demand and will help restore economic activity in the country.

In addition, we want to obtain the right to act as an agent of the government in grant assistance programmes, as well as to become a kind of competence centre for other financial institutions and assist them in administering these programmes.