NBU puts small banks under pressure, yet experts stay positive
Just three years ago there were 178 banks in Ukraine, with assets ranging from Hr 203 billion ($8.12 billion) to Hr 120 million ($4.8 million).
Then came revolution, war, economic crisis… and banking collapse.
Today, only 103 banks remain, a 42 percent reduction, with six of those under temporary administration or receivership. As the article was being prepared, another small bank, Investbank, was placed under temporary administration by the National Bank of Ukraine.
After such bloodletting, which the central bank refers to as “cleansing” of the market, the problem of low liquidity in the bank sector is less urgent than it was even six months ago, according to financial expert Vasyl Nevmerzhitskiy.
The issues for today are, instead, capitalization and the quality of loan portfolios at the remaining banks, he said.
The NBU currently sets the minimum share capital for a bank at Hr 120 million ($4.8 million), but from July it will increase this to Hr 200 million ($8 million). As the regulator gradually raised its share capital requirements, banks have been closing, or have merged with, or been bought out by the stronger banks.
“Strategically, by the end of 2017, we may only have around 50-60 banks left,” Nevmerzhitskiy told the Kyiv Post.
And with a new resolution from the central bank (No. 351, setting stricter requirements on reserves to cover loan portfolios) coming into force on Jan. 1, Ukrainian banks, especially the smaller ones, will have to find additional capitalization, making conditions for their survival even tougher.
Small banks "need to create a strategy of
survival, to decide how they will compete with systemic banks,” Nevmerzhitskiy said.
However, the new rules are not designed to sweep all small banks from the market, said Ihor Olekhov, the head of Baker & Mckenzie's regulatory and financial institutions groups in Kyiv. Small but strong banks should be able to keep going.
“Ukraine is in the process of an asset quality review, and there is an intention to set up clear rules in general, under which only banks with sufficient capitalization and high level of reliability can operate,” Olekhov said.
“If banks can satisfy these requirements, nobody will stand in their way,” he added.
But with the Ukrainian banking system undergoing possibly the greatest changes in the history of the country, what is the outlook for the sector? And more specifically, is there a future for the 60 smallest banks, which make up less than 5 percent of the whole banking system in terms of assets? like loan giving, loan buying, factoring and guarantee provision,” Nevmerzhitskiy said.
According to him, many of the new financial companies could be offshoots from banks that have closed, with former bank workers setting up shop to provide niche financial services by themselves.
“If (former) managers of systemic banks carried out factoring in their banks, they might think ‘We’ve already written the procedures, we know the methodology and understand the risks. We can take our old clients, find some money, and set up a financial company to carry out factoring operations.'" Ways to survive Olekhov thinks the smaller banks can survive, but to do so they need to take advantage of their strong points.
“They can make decisions quickly and effectively, unlike big banks, where non-standard decisions may take 3-6 months, and sometimes even up to a year,” he said.
“Thanks to their quickness and agility, small banks can offer new and non-standard services.”
And there is a lot of potential in the Ukrainian market for such banks, and if they go about this task creatively, they will do well in Ukrainian environment, Olekhov believes.
A high quality of customer services is another selling point of small banks.
“In a small bank nobody will tell you that the cash register is closing, or that it’s lunch time, or that a computer has broken down. It’s this level of (customer service) that’s very much treasured by clients,” Nevmerzhitskiy said.
“A manager and a client almost become friends: you help him, he helps you. You just don’t get this in the systemic banks,” he added.
So it is vital for bank managers in the small banks to understand the value of their relationships with clients, that these clients are important to them, if they hope to survive, Nevmerzhitskiy said.
Expanding a branch network is not as good a way for the smaller banks to develop as it once was, Nevmerzhitskiy said.
Those that do decide to expand their branch networks can do so by picking up the best staff from smaller banks that have foundered, he said.
“Those banks that are able to (survive) will form a strong team of top managers from people who are working, or have already quit their jobs at other banks, in order to build the most effective sales team, and create innovative services to develop their business.”