Modern economic POTENTIAL OF UKRAINE

Back to "Finance"

Banking sector

Given the innovation and investment development model that Ukraine has adopted, the banking system will need to be transformed into an efficient system for wealth creation and credit usage. For this purpose, the banking system should be strengthened and be made more efficient, reliable, and stable.

The banking system has taken great strides since the 1997-1998' financial crisis. This was facilitated by economic stability and growth.

Drawing 1. The banking system's assets dynamics in respect to GDP

As of the end of 1998, the share of net assets adjusted for the banking system's asset operations reserves totaled 19.5% of the GDP, whereas at the end of 2005, it reached 55.5% of the GDP, according to preliminary estimations (Drawing 1).

In 2002-2005, the banking system's development sped up substantially, and was ahead of growth rates in other sectors of the national economy. This tendency can be explained by a gradual restoration of the banking system's trustworthiness among the population and business entities.

Intermediary banking services play an increasingly important role in the redistribution of resources in the national economy. In particular, the share of enterprises' investments from credit resources has increased. Consumer crediting to the population is developing at a high rate too.

The number of banks that hold licenses for banking operations has increased from 152 banks as of 1 January 2002 to 164 banks as of 1 January 2006, whereas the number of bank branches has gone from 1,350 up to 1,445 (Drawing 2). At the present stage, Ukrainian banks are aiming at intensive development of their branch networks, because banking institutions are situated unevenly throughout the country. This increases the level of competition on the market for banking services and urges banks to introduce the newest up-to-date products and technologies.

According to corporate structure, Ukrainian banks are classified into joint-stock companies (133 banks, including 92 open joint-stock companies (2 of which are state-owned) and 41 closed joint-stock companies) and limited-liability companies (31 banks).

Drawing 2. Number of banks and their branches in 2001-2005

Capitalization degree is the key factor in the system influencing the banks' financial state and outlook for their development. As requirements regarding bank capital became more strict over 2001-2005, the banks' degree of capitalization has been increased. Over this period, the banks' total capital balance jumped 2.8 times (UAH 14.2 bn up), which has been a positive development for the Ukrainian banking sector in general.

Banks' regulative capital over the past 5 years has almost tripled - from UAH 8 bn to UAH 23 bn (EUR 3.8 bn), which is equal to 5.7% of GDP.

Bank liabilities went up steadily during 2001-2005. Retail client deposits have been going up rapidly - 5.5 times (from UAH 11 bn to UAH 61 bn) This means that retail client deposits have become the main source for the accumulation of the banks' resources, and have come ahead of the business entities' funds. Business entities' funds are now up 3.5 times reaching, UAH 55 bn.

Individuals are the banks' most attractive potential customers. The growth of the citizenry’s deposits leads to an increased supply on the credit market. This has affected interest rated and the reduction of credit-related costs for borrowers. This factor also leads to the expansion of production, growth of the employment rate, augmented tax deductions to the budget, the state's social expenditures, which, in turn, is a factor contributing to the increase in the growth of the population's bank deposits.

The banks' activities are exhibiting a substantial quantitative growth. Total banking assets jumped 3.8 times in 2001-2005 or up UAH 141.3 bn, reaching UAH 192 bn as of 1 October 2005. Bank credits account for a major part of the banking sector's assets - 73%. Drawing 3 illustrates the structure of the banking sector's assets. Over the past 5 years, bank credits have risen 4.4 times, to UAH 139 bn.

Drawing 3. The structure of the banking sector's assets in 2001 and 2005, %

The growth of the share of credits issued in the national currency is also supported by a decline of credit interest rates (Drawing 4 exhibits the decrease dynamics).

Drawing 4. Credit interest rate dynamics

Bank credits have the following structure: Credits granted to business entities account for 69.2% of the total credit portfolio; fixed deposits in other banks and the NBU and credits issued to other banks - 10.8%; credits issued to individuals - 19.9%; credits issued to state authorities - 0.1%.

The tendency towards a growth of long-term credits and credits in investment activities continued to be prominent in 2005. Since the year's beginning, long-term credits have added 77.6%, coming to UAH 80,849.5 bn or 53.0% of the granted credits. Credits in investment activities have doubled, coming to 12,346.9 bn (11.7% of the credits issued to business entities).

Analysis of banking activities indicates their improved efficiency. The banking sector's profit totaled UAH 1,508 bn in the first 9 months of 2005, which was 2.8 times more than the figure registered in 2001 (UAH 532 mn) Drawing 5 displays a comparative analysis of the banks' profit structure in 2001 and 2005.

Drawing 5. Banks' profit structure in 2001 and 2005

The banking sector's profitability parameters kept high over the past five years, whereas the return on equities (ROE) now exceeds similar parameters in other businesses. Banks' return on assets (ROA) has increased from 1.27% in 2001 to 1.29% in 2005, whereas ROE has come from 7.5% up to 10% respectively. It must be pointed out that Ukrainian banks reached the highest profitability rate over the past few years on 1 October 2005 - 1.36%.

Participation of foreign capital in the Ukrainian banking system

As of 1 January 2006, 23 banks fully or partially owned by foreign entities operated in Ukraine. One-third of them were fully owned by non-residents (Drawing 6). The total foreign capital in the banks' aggregate authorized capital exceeded UAH 2 bn as of 1 January 2006. Foreign investors who have invested their capital in the Ukrainian banking system include 2 international financial organizations, 33 companies, firms, associations; 13 banks, and 3 individuals.

Banks with foreign capital are expanding their activities very rapidly. From 2001 until 2005, their assets jumped 3.5 times. The regulative capital of the banks with foreign investments has gone only 2.2 times up.

Claims of banks with foreign capital on the issued credits reached UAH 19.8 bn as of the beginning of October 2005. In comparison with 2001, this figure rose 3.7 times. In 2001-2005, liabilities of banks with foreign capital in respect to the funds payable to business entities and individuals jumped 4.2 times.

Corporate clients were the primary orientation of the banks with foreign capital. The growth rates of retail bank deposits were substantially slower. However, after foreign entities purchased banks such as Aval and Agio, these banks have also re-oriented themselves to a fuller range of banking services.

Interbank credits and deposits account for a substantial part of banks' liabilities - 23.9% (13.1% generally for the system). The main reason for this tendency is the fact that most of them are daughter structures of international banks and form their resource base via funds received from their mother companies.

Drawing 6. Share of banks with foreign capital in the total number of Ukrainian banks, 2001-2005

Notwithstanding the fact that the aggregate balance capital of banks with foreign investments accounts for 13.5% in the Ukrainian banks' total balance capital (as of 1 October 2005), banks with foreign investments act as the main channels for the inflow of foreign investments to Ukraine's national economy. The funds attracted from nonresidents through banks with foreign investments account for almost 30% of the total amount of the funds coming from nonresidents through the banking system.

Drawing 7. Banks' rates of return on assets and return on equities in 2001-2005, %

Back to "Finance"