Sense Bank is coming under the state’s wing: The National Bank of Ukraine finally decided to drive former Alfa-Bank from the market

On July 20th, the Board of the NBU (National Bank of Ukraine) made a decision to withdraw Sense Bank (formerly known as Alfa-Bank) from the market. The National Bank also proposed to the Cabinet of Ministers the involvement of the state in this process, meaning the bank's nationalisation.

Based on the NBU's decision, the executive board of the Deposit Guarantee Fund (DGF) has already initiated the process of introducing temporary administration in Sense Bank and appointing a temporary administrator.

Today, on July 21st, the Cabinet of Ministers approved the state's participation in the withdrawal of Sense Bank PJSC through the purchase of the institution for 1 hryvnia. The sale is expected to take place within two days.

The temporary administration will begin its work in the bank on Friday, July 21st, and will retain its powers for two days. After that, the bank will return to normal operation, but under state ownership.

Mind investigated what the future fate of Sense Bank may be.

How the process of withdrawing the bank from the market was developed? In the spring of 2022, Sense Bank turned into a kind of 'white elephant'. On the one hand, it was a systemically important and financially viable bank that was operating steadily. Even after the full-scale invasion by russia, it still remained profitable. In the first five months of 2022, the bank's net profit amounted to 413 million UAH. On the other hand, the ownership of Sense Bank by russian citizens was a problem; as of January 1, 2022, over 45% of its shares were held by russians Mikhail Fridman and Petr Aven, both of whom were subjected to personal sanctions by the European Union after February 24, 2022.

To resolve this issue, the Verkhovna Rada adopted the Law No. 2643-IX in the autumn of 2022, outlining the mechanism for nationalising systemic banks during a state of war. Although Sense Bank was not directly mentioned in this document, Roksolana Pidlasa, an MP from the Servant of the People party, stated that the bill was intended for the nationalisation of this very bank.

The main idea behind Law No. 2643-IX was as follows: if a systemic bank cannot fulfil its obligations to depositors and other creditors due to a lack of funds, the National Bank of Ukraine would declare it insolvent. The NBU would then approach the Cabinet of Ministers with a proposal to acquire the bank for 1 hryvnia. Subsequently, the Deposit Guarantee Fund, the Ministry of Finance, and the NBU would appoint and approve new management, transforming the bank from private to state-owned.

Finally, in April–May 2023, the Verkhovna Rada considered and adopted a new law, No. 3111-IX. Essentially, it builds upon the idea of law №2643-IX but expands the powers of the NBU regarding the withdrawal of a bank from the market. Specifically, the NBU was given the authority to initiate the nationalisation process using the same scheme described earlier, even if a systemically important bank does not show signs of insolvency but is subject to blocking sanctions against the financial institution or its significant owner (holding 10% or more of the shares). These sanctions could be applied by Ukraine or other countries.

The enactment of the second law provided the NBU with more room for manoeuvre. It took advantage of these provisions to proceed accordingly.

How does the NBU explain its decision? In commenting on the withdrawal of Sense Bank from the market, the National Bank provides several arguments that motivated its decision.

1. The key beneficiaries of Sense Bank are Mikhail Fridman, Petr Aven, and Andrey Kosogov, who hold russian citizenship.
2. Due to their ties with the aggressor state, Fridman and Aven have been subject to blocking sanctions imposed by the EU, the United Kingdom, Canada, Switzerland, Australia, and New Zealand. Moreover, all three beneficiaries have been under sanctions by Ukraine since October 2022, following the decisions of the National Security and Defence Council (NSDC).
3. Andrey Kosogov, who acquired a 40.96% stake in the bank in March 2022, obtained this capital share without the approval of the NBU, which is a violation of Ukrainian legislation.
4. The NBU views the connection of Fridman and Aven with russia as a significant reputational risk for the bank, which has a highly negative impact on its operations. This reputational risk was mentioned in the report of the independent auditor, RSM Ukraine LLC, which analysed Sense Bank's activities for 2022.
5. Additionally, in 2023, the NBU learned about the intentions of the Luxembourg company ABH Holdings, through which the beneficiaries control the bank, to transfer control over Sense Bank to the Cypriot company Karswell Limited. According to the NBU, such a move contradicts the NSDC sanctions imposed against the bank's shareholders.

What is happening with the financial condition of the bank? As the NBU noted, the deterioration in the payment discipline of borrowers at Sense Bank has affected its regulatory capital, which decreased by 50% during the period from 1st March 2022 to 1st July 2023. In contrast, the regulatory capital of other systemically important banks grew by 29% overall.

Sense Bank is also experiencing regression in other financial indicators. According to the bank's reports, its total assets decreased by 23% from 1st January 2022 to 1st July 2023, amounting to 96.6 billion UAH. The volume of funds held by individuals decreased by 12% to 43 billion UAH, and the credit portfolio reduced by 38% to 37.6 billion UAH. The bank's equity capital also declined by 7 billion UAH.

Sense Bank is among the top five banks with the largest portfolio of problem loans, According to NBU data. It ranks fourth after PrivatBank, Oschadbank, and Ukreximbank. The amount of non-performing loans (NPL) at Sense Bank as of 1st June 2023 was 25.2 million UAH, and the NPL ratio on the same date was 38.6%.

It's worth noting that Sense Bank is among the 20 banks subject to stress testing carried out by the NBU in 2023. As part of this testing, the National Bank primarily assesses compliance with the regulatory capital adequacy ratio H2 (which should be at least 10%) and the core capital adequacy ratio H3 (which should be at least 7%). As of 1st May 2023, Sense Bank had an H2 ratio at 11.54% and an H3 ratio at 8.94%. However, the bank exceeded the H7 ratio, which reflects the maximum credit risk exposure to a single counterparty. While the required value is just over 25%, Sense Bank's H7 ratio was only at 26.9%.

In Mind's bank viability rating for the year 2022, Sense Bank ranked 28th with a three-star rating. This means that at the time of the rating, the bank had a moderate level of resilience.

What the future holds for Sense Bank after nationalisation? Mind spoke with banking actors, who shared their vision of how the story of Sense Bank will unfold. The main prospects for the bank are as follows:

1. The bank will continue to operate, and liquidation is not on the table. In fact, the National Bank also stated that Sense Bank is "important for the functioning of the economy and providing livelihoods to the population in a special period". The scale of the bank's problems is not significant enough to bankrupt it. Mostly, these are reputation-related issues.
2. The temporary administration will strive to restore the bank's operations as quickly as possible. This is precisely why the temporary administration was introduced before the weekend, to allow time for analysing the financial institution's condition, the efficiency of all its systems, conducting at least a superficial audit of assets (especially the portfolio of problem loans), and obligations.
3. Sense Bank will not remain in state ownership for long. Its nationalisation is necessary only to legalise the procedure of withdrawing it from the market and minimise the likelihood of counterclaims from former shareholders. After all, the parliament has passed not one but two laws for this purpose. It is possible that by autumn, the bank will find new owners. There are candidates for it, both domestic and foreign investors.
4. Sense Bank will continue to develop as a major systemic financial institution. Like before, the bank will serve both the general population and the real sector of the economy (businesses). At the same time, there will be a focus on digitalisation and remote services to create competition for leaders in this niche, such as PrivatBank and monobank.