Stepan Kubiv: “The Ukrainian financial system is going through very challenging times due to recent and ongoing events in the country, and the NBU’s immediate priority is to restore the confidence of private customers in order to stop deposit outflows”

Conference Notes: Highlights from the speech delivered by Stepan Kubiv, Governor, National Bank of Ukraine, the special guest speaker of the conference

Dragon Capital held its 10th Annual Ukraine Investor Conference on April 2-3 in Kyiv. More than 120 international investors from the EU, U.S. and Russia, as well as more than 100 local investors and Ukrainian companies attended the anniversary event to learn more about the economic and political situation in Ukraine and the newly appointed government’s reform agenda.

Below please find highlights from the special guest speaker — Stepan Kubiv, Governor, National Bank of Ukraine

Assessment of current situation

  • Key principles of the new NBU leadership are transparency, clear rules of the game, and openness to dialog with private foreign and domestic investors.

The Ukrainian financial system is going through very challenging times due to recent and ongoing events in the country, and the NBU’s immediate priority is to restore the confidence of private customers in order to stop deposit outflows. The ultimate goal is to ensure long-term confidence in the banking system. External assistance is an absolute necessity currently and the NBU, together with the government, has completed three weeks of hard but successful work with an IMF mission. An NBU and government delegation will travel to Washington within 10 days (for the IMF and World Bank Annual Spring Meetings), after which key macro parameters for 2014 will be fine-tuned and announced (the NBU is currently penciling in negative GDP growth and inflation of 12-16%). Discussions with other IFIs including the World Bank, IFC and the EBRD are ongoing.

Further reforms post-stabilization

  • Private investment is a special focus and the NBU welcomes dialog with private investors willing to present their proposals on the regulatory environment and other reforms. The goal is to encourage long-term rather than speculative foreign investment.

Keeping the hryvnia pegged to the U.S. dollar has proved too costly and nonmarket an exercise over years. The NBU is not interfering in F/X rate setting on the market and plans to shift its policy to inflation targeting.

Current loan rates of 24-26% p.a. are unsustainable as very few businesses can demonstrate such profit margins. The NBU has discussed tools to normalize the interest rate environment and will present them shortly.

A long-term strategy for the banking system (until 2020) is being developed, intended to reflect a new NBU approach to regulating the market and ensuring banking system stability based on the principles of openness, transparency and independence.

The NBU has adopted a clear and transparent policy as far as liquidity support for banks is concerned. Funding will no longer be provided to banks simply because they claim they urgently need it. Before deciding on liquidity support, the NBU will examine the applying bank’s compliance with relevant performance ratios, require shareholders’ participation through either subordinated debt or a capital injection, and analyze the feasibility of the bank’s strategy.

System health check

  • Banks are undergoing stress tests, this work being done with the help of IFIs, to determine their real recapitalization needs. A total of 37 banks have been selected for stress testing thus far, with 15 to be diagnosed in the first stage and 22 in the second.

For troubled banks facing capital shortages and non-compliance with ratios, the NBU will demand that either bank owners or the bank itself develop a resolution program. The problem here is that many ultimate bank owners are not known and in such cases it is difficult to understand what assistance these shareholders are willing to provide or are capable of providing. In such cases NBU will work to ensure that if the bank wants to remain on the market in the long term it must undergo a thorough audit and its ownership and capital sources must become transparent.

  • Preliminary diagnostics of state-owned Ukreximbank, Oschadbank and Ukrgazbank yielded a positive assessment of their prospects. Their immediate capital needs (given the recent UAH devaluation) are being assessed and will be known by the time they hold AGMs in May. But the banks are absolutely solvent and are working, jointly with the NBU, on their long-term strategy.

However, the situation at three other state-owned banks, Rodovid Bank, Kyiv Bank and Land Bank, is far less rosy, as the UAH 25bn provided to them did not improve their state whatsoever and these banks remain on life support. The government and the NBU will announce a decision on these banks’ future by the end of the month.

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