NBU Governor: Ukraine’s Robust Banking Sector Is Poised for Privatizations

 In Industry, Acquisition, & Innovation, COVID-19, CIS, Ukraine
NBU Governor: Ukraine’s robust banking sector is poised for privatizations

National Bank of Ukraine Governor Kyrylo Shevchenko pic­tured inside the coun­try’s cen­tral bank on July 20, 2020. (REUTERS/Gleb Garanich)

The Ukrainian bank­ing sector has never been so resilient. In terms of cap­i­tal, liq­uid­i­ty, prof­itabil­i­ty, and tech­no­log­i­cal inno­va­tion, the country’s banks have proven more than a match in recent months for the chal­lenges pre­sent­ed by the coro­n­avirus pan­dem­ic.

While these indi­ca­tors are all indi­vid­u­al­ly impor­tant, the most strik­ing fea­ture of today’s Ukrainian bank­ing system is the return of public trust. The brief out­flow of deposits wit­nessed during the first weeks of quar­an­tine con­di­tions in March 2020 is now a dis­tant memory. Instead, we are expe­ri­enc­ing a period of rapid growth. At present, the annual growth rate for house­hold deposits in domes­tic cur­ren­cy is 27%, while the rate for for­eign cur­ren­cy accounts is 5%.

This growth is par­tic­u­lar­ly strik­ing given that it is taking place against a back­drop of declin­ing inter­est rates. The National Bank’s deci­sion to reduce the key policy rate from 11% to 6% has led to single digit rates on deposits and loans for the first time in Ukraine’s his­to­ry.

The cur­rent favor­able con­di­tions are pro­vid­ing Ukrainian busi­ness­es with access to more afford­able loans. This is allow­ing them to cover short-term needs and finance large-scale projects. The last two months of the summer 2020 period offered cause for guard­ed opti­mism in this respect, with a 2.2% rise in busi­ness loans along­side a 3% increase in house­hold loans. It is still far too early to talk about a leap in financ­ing, but we are clear­ly moving in the right direc­tion.

There is little sign that lower inter­est rates are harm­ing profit mar­gins in Ukraine’s bank­ing sector. While the fig­ures report­ed so far this year are slight­ly lower than for the same period in 2019, they remain rel­a­tive­ly high. During the first eight months of 2020, the Ukrainian bank­ing sector posted prof­its of UAH 33 bil­lion, with a slight year-on-year decline attrib­ut­able to lower public demand for bank­ing ser­vices due to the coro­n­avirus-relat­ed eco­nom­ic down­turn.

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In the cur­rent pan­dem­ic con­di­tions, the dig­i­ti­za­tion of finan­cial ser­vices has become a pri­or­i­ty for banks around the world. The Ukrainian bank­ing system is increas­ing­ly at the fore­front of this global dig­i­tal trans­for­ma­tion. An expand­ing range of pay­ments, includ­ing for every­day items such as util­i­ties, can now be made via the mobile appli­ca­tions of any Ukrainian bank.

Since August 2020, we have launched our system of elec­tron­ic pay­ments (SEP) in 247 mode. This gives banks oper­at­ing in Ukraine the oppor­tu­ni­ty to make pay­ments to the recip­i­ent around the clock.

The speed of the Ukrainian bank­ing system’s dig­i­tal trans­for­ma­tion owes much to the readi­ness with which the Ukrainian public embraces new tech­nolo­gies. Thanks to the often rapid pace of change during the post-Soviet period, the Ukrainian public has devel­oped a strong inter­na­tion­al rep­u­ta­tion as enthu­si­as­tic adopters of inno­va­tion.

This trend is evi­dent in the growth of con­tact­less pay­ments via smart­phones. According to fig­ures released by Mastercard in 2019, Ukraine ranked fourth glob­al­ly in terms of the number of con­tact­less trans­ac­tions. Meanwhile, the pop­u­lar­i­ty of con­tact­less pay­ments is fuel­ing the devel­op­ment of Ukraine’s pay­ment infra­struc­ture. Around 85% of com­mer­cial POS ter­mi­nals in the coun­try cur­rent­ly offer the option of con­tact­less pay­ment.

The same growth trends are vis­i­ble in Ukraine’s bank­ing card seg­ment, with steady increas­es in the number of non-cash trans­ac­tions. The share of non-cash trans­ac­tions in the first eight months of 2020 was 55%, which is a slight increase on the 50% figure reg­is­tered at the begin­ning of the year.

Throughout the Ukrainian bank­ing sector, we are seeing fur­ther indi­ca­tions of the finan­cial system’s switch to dig­i­tal mode. Just a few years ago, the idea of open­ing a bank account with­out vis­it­ing a phys­i­cal branch office would have seemed far-fetched. This is now some­thing anyone can do via their smart­phone and a dig­i­tal pass­port.

A com­bi­na­tion of dig­i­tal inno­va­tions and grow­ing public trust is enabling Ukrainian banks to expand their cus­tomer base and com­pete for new clients. This is bring­ing higher returns for share­hold­ers. It is also making the sector sig­nif­i­cant­ly more attrac­tive to inter­na­tion­al investors. Given the large cur­rent state pres­ence in the Ukrainian bank­ing sector and our ambi­tious pri­va­ti­za­tion plans, Ukraine’s state-owned banks are set to attract increas­ing atten­tion in the inter­na­tion­al busi­ness media over the coming few years.

At present, Ukrgasbank is work­ing with the International Finance Corporation (IFC) and is the state-owned bank that is clos­est to par­tial pri­va­ti­za­tion. An agree­ment is already in process and talks are now focused on tech­ni­cal aspects, with expec­ta­tions of a suc­cess­ful clo­sure. We also expect an inter­na­tion­al finan­cial orga­ni­za­tion to acquire a stake in Ukraine’s largest state-owned bank, Oschadbank, but there is still sig­nif­i­cant work to be done to revise the rel­e­vant leg­is­la­tion and devel­op the bank’s busi­ness model.

Despite the dif­fi­cul­ties cur­rent­ly facing the global econ­o­my, we intend to pro­ceed with pri­va­ti­za­tion and meet our tar­gets for the planned reduc­tion of the state-owned stake in Ukraine’s bank­ing market. We have already dis­cussed plans for a small­er state pres­ence in the Ukrainian bank­ing sector with rep­re­sen­ta­tives of the London Stock Exchange. Our cur­rent strat­e­gy for the par­tial pri­va­ti­za­tion of Ukraine’s state-owned banks envis­ages that steps towards sales will begin no later than by the end of 2024.

I am con­fi­dent that by then, the reform of cor­po­rate gov­er­nance at state-owned banks will have brought the desired results. This will mean improved oper­a­tional effi­cien­cy and greater trans­paren­cy, along with a reduc­tion in prob­lem loans. We will then be able to pri­va­tize the Ukrainian bank­ing sector and build on the progress that has already been achieved in recent years.

Kyrylo Shevchenko is the Governor of the National Bank of Ukraine.

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The views expressed in UkraineAlert are solely those of the authors and do not nec­es­sar­i­ly reflect the views of the Atlantic Council, its staff, or its sup­port­ers.

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UkraineAlert is a com­pre­hen­sive online pub­li­ca­tion that pro­vides reg­u­lar news and analy­sis on devel­op­ments in Ukraine’s pol­i­tics, econ­o­my, civil soci­ety, and cul­ture.

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