What Do Banks and Their Clients Should Expect In 2021?
By Space Coast Daily // March 18, 2021
2020 become at the same time as one of the most successful and disastrous for the past few years. And most importantly, what financial institutions can offer to depositors, borrowers and other clients.
Minfin.com.ua discovered how the Ukrainian banking system is going to work in 2021.
It was successful as the corona crisis did not allow banks to collapse like it was six years ago in Ukraine. And it was disastrous due to the declining profitability of the system as well as the increasing of loan debts and new issues of the future development.
Incomes are decreasing while expenses are increasing.
For the past 10 months of 2020, the total profit of 74 operating banks decreased by 23.4% and estimates UAH 39.8 billion. The NBU is sure that it happened mainly because of the increase in reserves for credit losses: from UAH 8.3 billion to UAH 23.3 billion. The general decrease of the bank’s sales impacted on the situation as well. Both business and people started to use financial services less.
The bigger part of the income goes to the state banks, that receive large revenues from government bonds (OVGZ), contributed by the Ministry of Finance in the capitals: Privatbank earned 22.85 billion UAH (56.6% of the total result), and Oschadbank – 4.8 billion UAH (12%). The rest of the banking system got only UAH 12.15 billion.
Chairman of Forward Bank Andrei Kiselev predicts that in 10 months the banking system received 11 unprofitable banks, but there will be even more by the end of the year.
He pointed out several reasons for the increasing banks’ losses:
■ The total fail of banks to implement their plans to increase lending was caused by the decline in demand for loans and growth of credit risks. It was happening not just in that corporate segment, but also in retail one. In January-November 2020, the loan portfolio of individuals in UAH decreased by 0.3%, although at the same time in 2019 it increased by 22% at once.
■ A systematic increase in provisions for troubled loans.
■ Reducing demand for banking services such as documentary operations and money transfers.
■ Increasing expenses for new developments, particularly, for remote services. For example, remote identification of clients to provide them full service outside the bank branch.
■ Unpaid debts for previously granted loans. As quarantine gets tougher and more COVID-19 restrictions are implemented, people and businesses are paying less and less, even on restructured loans.
“Payment delays for consumer loans are rapidly increasing. Even debt restructuring measures do not always help to maintain payment discipline. In some banks, at the peak of the crisis, up to 10% of the portfolio was overdue for more than 7 days. Moreover, the current uncertainty about the duration of quarantine and the existing bans for creditors to apply sanctions against debtors complicate to evaluate the actual back losses. Under such conditions, banks should have a capital reserve to cover possible losses,” commented press-service of the National Bank’s to “Minfin”.
The NBU admits that they do not know the actual size of the problems in the banking system: the last time the regulator tested banks back in the second quarter, and it has been just an express-stress test. The results showed that in June the banks that are in the risk zone accounted for only 5% of the market.
Because of the quarantine restrictions, there were no detailed stress tests and on-site inspections by the Central Bank in 2020. These inspections are going to be conducted in 2021.
National Bank explained to “Minfin” taht the National Bank is going to get a full understanding of what is happening in the banking system next year, when the quality of restructuring is going to be analyzed as part of the annual assessment of the banks’ sustainability. Based on the received results, it will be possible to make correct conclusions about the possible need of additional capital for individual banks.
It means that banks have got some additional time to tie up loose ends:
■ First of all, during the quarantine, they are allowed not to form all reserves for troubled assets.
■ Secondly, the inspectors from the NBU have not rechecked the qualifications for all the credit problems. But, they probably will. There are a lot of loans that banks do not yet officially consider as problem ones. But they will turn out to be so.
“The issue of bank’s profitability in the next year will depend on the results of banks testing. And depending on how much additional reserves will be needed after the inventory of credit portfolios “, said Alexander Kalashnikov, financial director of the rating agency IBI-Rating.
There are too many uncertainties. Financiers have no idea how many of their clients will be able to return to work and credit payments after the end of the lockdown, that the Cabinet approved from Jan. 8 to Jan. 24, 2021.
“Not all clients will be able to resume operations and start servicing their debts. Generally speaking, once the quarantine is over, banks will have to form reserves, according to international financial reporting standards. This problem is partially moved to 2021, and we will have a chance to see the reserves’ formation for portfolios, that are now in the process of restructuring,” admitted Andrey Kiselev.
The National Bank is sure that the banking system will remain its profitability by the end of 2020. Although, it is obvious that this will be on with a help of the state banks, where the biggest part of income is received. To be more specific, everything thanks to Ministry of Finance, that are continuously paying interest from the OVGZ.
What banks can be sold next year?
In 2020, there were only two Ukrainian banks that were announced as insolvent. Temporary administrations were introduced only for “Arkada” and “Misto Bank”. It was not a big surprise. The problems of these banks were known on the market, although some people were hoping they would be saved.
The deal of the year turned out to be the purchase of Kiev-based Credit Dnepr Bank, controlled by Victor Pinchuk (the owner of the Interpipe holding) by businessman Oleksandr Iaroslavskyi, who owns the DCH group. It had been expected for more than a year, but it was officially announced in spring 2020. The National Bank closed the deal fully on July 30.
There were a lot of gossips about the possible sale of Pravex Bank, that owned by Intesa Sanpaolo, an Italian group (Turin). The bank has been operating at a loss for several years and could not get out of the red, in spite of the management changes. There were a lot of talks that the Europeans wanted to sell its subsidiary and even talked about possible bidders, but the information was never confirmed.
As the National Bank clarified, during 2020 the regulator granted permissions to four banks to acquire significant stakes. Mostly it did not lead to appearing of a new co-owners (except the case with Bank Credit Dnepr), it has only led to internal re-registration of shareholdings between the shareholders. Here are all the transactions:
■ JSC “Bank Credit Dnepr”: Oleksandr Iaroslavskyi became the official owner of 100% of shares;
■ “Creditwest Bank”: Creditwest Faktoring AS received direct impact with the amount of 42%. The share of the one shareholder Altinbas Holding Anonim Sirketi (Turkey) was reduced;
■ “A-Bank JSC”: “Ivex Capital, controlled by the Surkis brothers, received 32.2% of shares;
■ AB “Kliringovyi dom”: Serada Enterprises Limited (Cyprus), managed by Yulia Lyovochkina (former shareholder), received 60.3% of shares.
■ AB “Kliringovyi dom”: Serada Enterprises Limited (Cyprus), managed by Yulia Lyovochkina (former shareholder), received 60.3% of shares.
At the beginning of the year, BTA Bank was expected to be sold to a new owner from Belarus. However, the National Bank did not approve the deal.
There is a probability of selling Sberbank (a subsidiary of the Russian structure with the same name), where the sanctions are going to be expired by next March.
More mergers and acquisitions may take place after the National Bank conducts new stress tests and puts up new plans to increase banks’ capital to shareholders.
So, where the banks are going to get the income from?
In 2021, banks will try to increase fee income. Almost every certificate for the client and every service in the mobile application or Internet banking system, which for a long time was free of charge now is going to be paid. In addition, banks are going to actively sale partners’ products such as insurance etc.
However, interest will remain the main source of income. This means that the banks are going to develop lending and more active purchases of debt securities. So, there are going to be not just the Ministry of Finance’s domestic bonds, which have always been in demand among financiers, but also municipal bonds. Kiev has already announced about its debt securities, and Kharkiv and Zaporizhzhya are also expected to do it as well.
Financiers are also expecting to make large corporate lending grow.
“The things will get better in 2021, mostly because of the good news about the vaccinations. This will entail more investment projects for entrepreneurs, that will require more long-term financing. Such projects are mainly related to production and processing, so exports will be improved in terms of quality and quantity,” Yannis Kyriakopoulos, head of the supervisory board of Piraeus Bank in Ukraine, told “Minfin”.
Financiers have big hopes for the legalization of the gambling business and opening the land market, as well as for more active lending in the agricultural sector in the second half of 2021. According to the minimal estimates, its volume should grow in 20-25%.
Bankers promise to pay more attention to mortgages in the retail section.
“Recently, banks have become more active in issuing mortgages, but the market remains very concentrated: 85% of new transactions in 2020 accounted for 5 banks,” explained Alexander Kalashnikov.
The emphasis will be put on loans for the purchases of secondary housing. New buildings are considered more risky because of the possible financial problems that constructing companies could have.
The chairman of the board Kreditwest Bank Igor Tikhonov has predicted that it is also expected cars loans are going to be issued more often. Although blank card loans will remain the leader of retail lending rating, but the competition in this market is so high that some financial institutions will actively expand the product line”.
Truth be told, the issuance of cash loans and card loans will become more complicated than it was before. Because the National Bank will require banks that operate in this market to reduce their risks or reduce the rate of lending either to increase their capital.
The National Bank specified that the new requirements will be in force from the middle of 2021. They are convinced that even after such small retail lending it will remain attractive for banks and the price will not be greatly increased for ordinary borrowers.
Bankers say that with the new conditions they will begin to implement new policies more actively. Specifically, they will set a large price difference between “good” and “doubtful” borrowers. The first ones are going to get cheaper credits rather than second ones.
Andrei Kiselev says that the bank’s credit policy will be formed based on the “quality” of the borrowers. The less “risky” clients will get the most loyal offers. Customers with a suspicious reputation or no credit history will get more expensive products, it is going to be done to cover all the possible risks of failure of the borrower.
Small loans for people
The new regulations of the National Bank do not mean that there will be less expensive and small retail loans. It’s going to be vice versa. Small retail loans may become as a mass product, although it may be more expensive.
Some banks will offer retailers bundles with already existing cards that going to have a small credit limit, and it can be enough for an average purchase in their stores. These will be some kind of instant credit cards. With such cards a person receives a portion of the purchase immediately on the spot (with a grace period), and the seller can receive a transfer of funds from the bank within 3 days.
The new cards will somewhat look like the prepaid scratch cards of mobile operators at the cash desks of Ukrainian supermarkets. But they will not be disposable, and they can be used multiple times. So, it will not be necessary to go through the loan process again.
Lending to small businesses
The banks assure us that they have seriously restructured and unified their credit programs for small and medium-sized businesses after the emergence of the state credit program (5-7-9%). Small businesses tried to shift to cheaper loans while the competition was growing.
Banks programs remained expensive (13-18% a year), so they tried to use service quality to attract new customers. In 2021 banks are going to grab the attention of entrepreneurs with comprehensive packages.
Igor Tikhonov said that in 2020, scoring systems for SME lending were launched, and all the procedures become faster. The main focus was put on online services. And in 2021, products for small and medium-sized businesses will get a new boost.
We are not just talking about loans, we are also talking about cash management services. The industry standard could become a prompt (in a matter of days) decision on a loan for SMEs. Especially, if the project on disclosure of enterprise’s financial information (that was initiated by the Ministry of Finance) is going to be approved.
Nonresidents are coming back to the Ukrainian currency market, they began buying our OVGZs again. Hryvnia exchange rate in the currency market is becoming more volatile. Due to the speculative banks become more active. As a result, arbitrage operations are going to be more common. It means that volatility will grow and businesses are going to need more exchange rate predictability. The demand for currency forwards, futures, and other derivatives will grow.
The chairman of the Management Board of Credit Dnepr Bank Sergey Panov says that currency and interest rate of hedging products are already more popular among corporate clients. Such as forward, currency and interest rate swaps. Considering that this year the banking system has made another significant step in the direction of digitalization, these instruments will soon be available to any business.
Digitization of everything
The key priority for the banks will be the mass implementation of remote customer identification, that at this moment up to 5 banks have already started. So that a client can open a bank account from scratch and be verified via video conferencing and using the state portal without visiting a bank.
Andrei Kiselev believes that banks will focus on the “digital” clients that live on the Internet. They will not be able to make a lot of money on them. But if a bank is not competitive in the product or service field, these clients will be able to change banks very quickly with a help of remote identification (in 5-10 minutes). Banks that will focus on the offline clients will lose market share.
Depositor revolution and the new rates
The deposit market is going to be restructured as well. The National Bank is going to fight more actively against the phenomenon where deposits are attracted for 3-6 months, and loans are issued for 1-3 years. Such a time gap creates serious risks, which in case of any destabilization can lead to real crises for the banks.
The press service of the National Bank has mentioned that a new challenge has arisen. People and businesses use their funds mostly for a short period of time, that increases liquidity risk. More than 55% of the total liabilities of banks in hryvnia are funds on demand. We need to encourage banks to keep most of the assets in highly liquid components, as well as to make the structure of funding bigger. For example, attract deposits for a long time.
To this purpose, the LCR standard was introduced in December 2018, that is still implementing by the banks. But starting from 2021, the regulator will launch another standard – NSFR (Net Stable Funding Ratio), which is a net stable funding ratio.
The National Bank noted that it will improve the balance between the maturity of assets and liabilities. The banks will be forced to bring together the terms of attraction and allocation of resources. This will quickly affect the interest rates for depositors.
Andrei Kiselev explained that the banks that offered high rates on short-term deposits will review their policies, and they will offer interest accordingly for the period of placement. The longer the term of placement the higher the rate.
Rates on deposits for 1-3 months will be greatly reduced, almost everyone is going to pay 0% per annum on demand deposits. The income from 12-months deposits may decrease a bit.
Igor Tikhonov said, “although, I think, the average annual income is not expected to go below 8% per year.”
However, bankers think it is possible that the National Bank discount rate can be slightly increased in the beginning of 2021 (from the current 6% to 6.5% per year).