Thu 11/24/2022 13:15 PM
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The European Bank for Reconstruction and Development, or EBRD, is working on a restart mechanism to help Ukrainian companies, which have been ruined by Russia’s invasion, rebuild their businesses through grants once stability is restored in Ukraine, Francis Malige, managing director at the EBRD in charge of Financial Institutions told Reorg.

“Local business owners in Ukraine often have all their equity tied up in their business and if that company’s equity has been destroyed in the war, banks won’t provide loans. A grant to a company can help such a business attract bank debt,” Malige said, adding that the Ukrainian banks with their on-the-ground insights are better placed to provide credit locally. He added that the EBRD is comfortable with the corporate governance at the banks the institution already works with. He views the “risk of leakage” as lower in local businesses because the owner’s equity is aligned with the success of the SME.

EBRD is preparing to do its part of the heavy lifting when Ukraine starts its reconstruction and the bank will focus on infrastructure projects and steer clear of projects where the local banks can take the risk.

“Rebuilding has many facets and in infrastructure we can play an important role. When it comes to entrepreneurs restarting businesses, the private sector is more useful. We have this EBRD term “additionality,” which effectively means we don’t take risks that the private sector would take,” he said. Malige added that Ukraine’s small municipalities will also benefit from dealing with their regional banks, while the biggest municipalities and regions can work directly with the EBRD.

Addressing the proposed idea of a Ukrainian Development Bank to manage the reconstruction effort, Malige said such a lender is “not good or bad, but if it isn’t strictly independent from the start it will be a disaster in waiting.”

Malige said the EBRD would probably not provide guarantees to back potential future reconstruction bonds, but rather provide the equity or junior tranche in infrastructure projects to cushion debt investors from the first loss. The total cost of Ukraine’s reconstruction has previously been estimated at between $750 billion and $1 trillion, and Malige noted that providing guarantees to even a fraction of the rebuilding projects would quickly exhaust multilateral financing capacities, therefore it would be better to focus IFIs where they are truly needed. The EBRD would also steer clear of direct budget support measures.

NPLs

Ukrainian banks and partners are currently developing a mechanism to tackle an anticipated steep increase in non-performing loans caused by Russia’s military invasion of Ukraine, sources involved told Reorg.

The new tool is designed to deploy an asset quality assessment, once Ukraine’s martial law has been terminated, to differentiate between pre-war NPLs and war-caused NPLs with the latter potentially easier to bring back to normal debt service after stability has been restored and the economy recovers.

Ukrainian banks have reduced their NPL ratios in recent years by writing off and selling vast portfolios of bad debts. The country’s largest banks, all state-owned after PrivatBank was nationalized in December 2016, had an average NPL ratio of 46.4% in February before Russian tanks rolled across Ukraine’s border, down from 57.4% a year earlier. The national NPL average across all banks was 26.7% in February.

The NPL figures are dominated by a huge portfolio of bad debt held at PrivatBank, the country’s largest bank that was controlled by oligarchs Igor Kolomoisky and Gennady Bogolyubov until the government took it over and later discovered a $5.5 billion hole in the books. As of Oct. 1 PrivatBank’s NPL ratio was 70%, followed by Oschadbank’s 42% and Ukreximbank’s 32.9%.

The EBRD is not involved in this effort and the institution’s main ambition is to contribute to plugging the capital shortfalls in Ukraine’s banks to avoid any delay in the reconstruction of the country.

“It’s beyond any doubt that some of Ukraine’s banks will need support, and ultimately if there is a shortfall, no matter how it was caused, it has to be filled. We need to have meaningful talks with the bank shareholders, but we definitely need a banking sector that works,” Malige told Reorg, adding that many of the NPLs sitting in Ukrainian state-owned bank balance sheets have already been provisioned but not written off due to personal liability complications.

During the first months of the war in Ukraine, NPL levels remained stable thanks to regulatory easing on credit risk assessments, but banks started recognizing NPLs in June.

On Wednesday, Nov. 23, the IMF praised Ukraine’s authorities for maintaining financial stability during the war through emergency prudential and capital flow measures applied to banks and are now appropriately preparing to gradually unwind these measures and restore international norms. The lender said future measures will include the National Bank of Ukraine, or NBU’s, financial sector strategy to be updated and expanded to cover targeted bank diagnostics, recapitalization and non-performing asset resolution frameworks, and further development of contingency plans.

The NBU expects Russia’s war on Ukraine to result in a “significant deterioration” in borrowers’ solvency and therefore a rise in NPL ratios. The NBU recently got a new governor after Kyrylo Shevchenko stepped down for health reasons. A few days after this departure, Ukraine’s anti-corruption agency opened an investigation into Shevchenko for alleged embezzlement during his five-year stint at Ukrgasbank.

The NBU reported recently that as of Oct. 1, 44 out of Ukraine’s 67 solvent banks remained profitable and made net profits of 25.6 billion hryvnia ($690 million), and the other 23 incurred losses of UAH 18.2 billion.

-- Magnus Scherman
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