NBU launches stress testing for 20 banks. Who is to be tested: The full list

NBU launches stress testing for 20 banks. Who is to be tested: The full list

And what awaits those who fail to meet the NBU's standards

NBU launches stress testing for 20 banks. Who is to be tested: The full list
Photo: NBU Press Service

The National Bank of Ukraine (NBU) has indeed decided to conduct stress testing of the banking system. Representatives of the NBU warned about the upcoming resilience tests at the end of 2022. In early 2023, the First Deputy Chairman of the NBU, Kateryna Rozhkova, announced that the start of the stress tests was scheduled for spring.

True to their word, at the end of April, the NBU announced that it was commencing the assessment of the banking system's stability under wartime conditions. The NBU will base its evaluation on the banks' indicators as of April 1, 2023, and will disclose the results of the stress tests by March 31, 2024. In total, the examination of the banking sector will span a year.

Not all banks will undergo stress testing. As of April 1, 2023, Ukraine had 65 registered financial institutions. The NBU will evaluate the 20 largest banks, whose combined volume of net assets exceeds 90% of the banking system's assets.

Mind investigated the purpose of these stress tests and attempted to independently identify which banks are in the risk group.

How will stress testing be conducted? The NBU explained that the assessment of banks' resilience will be carried out in three stages:

  • first – the assessment of asset quality and eligibility of collateral for lending transactions, verification of the value of property received by the bank as collateral, and calculation of capital adequacy ratios;
  • second – extrapolation of the results of the assessment of asset quality and eligibility of collateral for lending operations of banks that were not included in the selection at the first stage;
  • third – assessing the banks' performance under the baseline macroeconomic scenario and determining the required levels of capital adequacy ratios.

The entire stress testing procedure is set out in more detail in NBU Resolution No. 56 of 25 April 2023.

Full list of banks to be assessed by the NBU

Name of the bank Place in the market (by assets)* Systemic
Importance
Assets, UAH billion* Deposits from individuals, UAH billion* Loans issued, UAH billion*
PrivatBank 1 Yes 747.8 336.8 71.3
Oschadbank 2 Yes 305.8 169.5 80.7
Raiffeisen Bank 4 Yes 271.1 32.5 78.8
Sense Bank 10 Yes 184.3 57 58.2
Universal Bank 9 Yes 161.1 30.9 61.9
FUIB 6 Yes 125.3 40.4 42.9
Ukreximbank 3 Yes 119.5 34.8 15.1
Ukrgasbank 5 Yes 104 24.8 26.9
OTP Bank 8 Yes 98 52.7 21.9
Ukrsibbank 7 Yes 97.7 43.6 39.4
Crédit Agricole Bank 11 Yes 92.9 15.1 23.9
Kredobank  14 Yes 50.7 12 14.4
A-Bank 17 Yes 43.9 12.4 11.6
Tascombank 16 Yes 37.8 9.7 18.7
ProCredit Bank 15 No 33.7 11 13.6
Pivdenny 13 Yes 23.9 13.5 6.1
Credit Dnipro Bank 18 No 21.6 3.7 4.1
Vostok Bank 19 No 21 5 7.8
MTB Bank 21 No 13 3.1 4.8
Pravex Bank 24 No 11 2.9 3.4

Source: bank reporting data as of 1 April 2023

As of 1 April 2023, the total assets of the banks amounted to UAH 2.6 billion, or 92% of the assets of the entire system; the amount of individuals' funds placed with these banks was UAH 911 billion, or 97%, respectively; and the loan portfolio was UAH 605 billion, or 93%. In addition, 15 of the 20 banks are systemically important.

Why are stress tests necessary? Mind approached the National Bank with a request to comment on the main objective set by the NBU within the framework of future stress testing. Based on the responses from the central bank, the following conclusions can be drawn:

  • evaluating banks allows the identification of systemic risks that could pose a threat to the stability of the entire banking system;
  • the primary goal is to determine the impact of military aggression on the quality of banking assets, assess capital losses, and evaluate banks' ability to independently recover these losses through income from current activities;
  • the NBU will not categorise banks as reliable or unreliable based on the results of stress tests. The objective is to identify weak points within financial institutions and assist them in maintaining stability;
  • after the assessment is completed, the NBU will inform banks about the need to develop capitalisation or restructuring programmes. It means that individual banks may require capital injections and systemic work with toxic (problematic) assets, i.e., non-performing loans (NPLs);
  • the NBU does not rule out taking measures regarding specific banks. Such actions may be taken if a bank fails to provide the NBU with a capitalisation or restructuring programme within the specified timeframe, fails to achieve the planned indicators outlined in this programme, or fails to address the deficiencies identified during stress testing.

The NBU clarified in its comments that banks have sufficient time to restore capital if necessary. The final deadline is April 1, 2026. However, after the completion of stress tests, banks must approve capitalisation or restructuring plans by April 15, 2024.

By the end of July 2024, the capital of banks that are found to be negative as a result of the assessment must reach zero. And by the end of March 2026, banks are obliged to bring their capital in line with the NBU's requirements, specifically a regulatory capital adequacy ratio of not less than 10% for H2 and not less than 7% for H3.

By the way, on May 16, the NBU adopted the technical specifications for the evaluation of banks, which outline the sequence of stress testing. Until October 1, 2023, the NBU will conduct inspection checks of financial institutions. The next stage involves assessing the quality of assets and how banks comply with the H2 and H3 standards. The final stage will be the direct testing of banks based on a macro-scenario, and the NBU will provide a verdict on which standards need to be adjusted and for whom.

How is the banking sector doing overall? As of the first quarter of 2023, the net assets of solvent banks amounted to 2.4 trillion UAH, which is a 3.2% increase compared to January 1, 2023. The banks' own capital grew by 15.4% during this period, reaching 251.5 billion UAH.

During the first quarter, the banking sector achieved a net profit of 34.1 billion UAH. For comparison, during the same period in 2022, the banking sector incurred a net loss of 150 million UAH.

As of April 1, 2023, five banks recorded losses: Motor-Bank (-25.4 million UAH), BTA Bank (-8.1 million UAH), Pravex Bank (-4.8 million UAH), Ukrainian Bank for Reconstruction and Development (-0.9 million UAH), and Alpari Bank (-0.6 million UAH). The highest profits were earned by PrivatBank (16 billion UAH), Oschadbank (2.1 billion UAH), Raiffeisen Bank (2.1 billion UAH), Ukrsibbank (1.8 billion UAH), and FUIB (1.6 billion UAH).

The amount of funds held by individuals in banks increased by 1.2% in the first quarter, reaching 945 billion UAH, while the credit portfolio decreased by 5% to 654 billion UAH.

Interest income continues to dominate the earnings of banks, accounting for approximately 66% of their total income. The share of commission income is about 23%. Within the structure of expenses in the banking sector, interest expenses are increasing. This refers to the payments banks make for loans, deposits, securities, and other sources of funding. The share of interest expenses increased by more than 1.6 times from March 2022 to March 2023, reaching 31%. It is partially due to the increase in deposit interest rates, as banks started paying higher interest to depositors.

On the downside, the accumulation of non-performing loans (NPLs) in banks' portfolios continues. As of April 1, 2023, their share exceeded 44%, which is 13 percentage points higher than a year ago. The accumulation of toxic debts poses a significant challenge to the banking sector and could negatively impact the results of stress tests for certain financial institutions.

Problematic debt not only reduces banks' profits but also has a negative impact on their capital. Banks are required to create reserves for potential losses due to loan defaults, leading to a decrease in their capital.

What possible outcomes may stress testing bring? Since the results of the assessment done by the NBU will only be known in a year, Mind has decided to independently assess the condition of 20 banks. Let's clarify from the outset that we do not have a complete market picture like the one seen from within the National Bank. However, banking reporting and data on how banks comply with the necessary standards (the calculations of which are available to Mind) allow us to forecast the chances of banks successfully passing stress tests.

How the banks under testing comply with regulations and accumulate NPLs

Bank H2 norm as of 1.05.2023, % (not less than 10%) H3 norm as of 1.05.2023, % (not less than 7%) H7 norm as of 1.05.2023, % (not more than 25%)* Share of NPL as at 1.04.2023

Place in the Mind reliability rating
PrivatBank 22,93 11,47 6,37 67,5 4
Oschadbank 13,97 10,05 9,66 48,5 4
Raiffeisen Bank  22,91 16,33 13,32 13,7 4
Sense Bank 11,54 8,94 26,89 39,5 3
Universal Bank 24,91 15,55 14,18 15,1 3.5
FUIB 20,99 11,82 15,69 20,6 3.5
Ukreximbank 8,5 4,43 32,7 42,1 3
Ukrgasbank 13,63 12,78 18,42 27,3 3
OTP Bank 35,38 19,77 7,15 20,3 4
Ukrsibbank 49,84 29,20 12,39 15,6 4.5
Crédit Agricole Bank 19,86 16,93 21,56 14,6 4
Kredobank  26,52 22,64 14,81 25,6 4
A-Bank 23,10 16,43 14,14 37,9 3
Tascombank 18,63 12,89 13,56 22,3 3
ProCredit Bank 19,21 14,57 6,64 14,1 3.5
Pivdenny 22,33 13,12 14,58 12,1 3
Credit Dnipro Bank 27,84 21,37 17,71 27,7 3
Vostok Bank 21,49 13,03 17,66 11,1 3
MTB Bank 14,06 10,99 24,56 17,8 2.5
Pravex Bank 15,93 14,67 28,74 9,8 3

Source: NBU data, Mind calculations

We have analysed how banks comply with Norms H2 and H3, which the NBU pays particular attention to in the framework of stress tests, as well as Norm H7. The third norm is also important as it reflects the maximum size of credit risk for one counterparty. Additionally, the situation with NPL has been taken into account. It is logical to assume that the higher the share of problem loans in a particular bank, the more challenging it will be for the bank to meet NBU requirements and the more it will affect the bank's capital.

Therefore, violations of Norms H2 and H3 have been identified only in Ukreximbank. Their values are significantly lower than required. Ukreximbank also does not comply with Norm H7. Additionally, this bank ranks third in terms of NPL share in the loan portfolio (42.1%). The situation with this is only worse in Oschadbank and PrivatBank.

In other banks, Norms H2 and H3 are within the necessary values. However, it should be noted that Norm H2 in Sense Bank, Oschadbank, and Ukrgasbank is close to the lower limit. And Norm H3 approaches the lower limit in Sense Bank, MTB Bank, Oschadbank, and FUIB.

Sense Bank and Pravex Bank violate Norm H7, while MTB Bank has practically reached the limit of credit risk per counterparty.

Regarding NPL, in addition to PrivatBank, Oschadbank, and Ukreximbank mentioned above, Sense Bank (39.5%) and A-Bank (37.9%) are also among the top five in terms of the share of toxic debts.

Therefore, it can be concluded that about a third of the tested banks may come under scrutiny. It does not mean that they will not pass the stress tests. However, failure to meet the norms along with a high share of NPL may ultimately require shareholders of specific banks to take a more serious approach to resolving problem assets and carry out their recapitalisation.

Although, state banks probably shouldn't be too worried. They are guaranteed to receive injections from the state budget if there is an acute need for it.

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