There’s cash in our ATMs: The remarkable resilience of Ukraine’s banking sector

While Ukraine’s economy has been hit by the Russian invasion of the country, it is showing incredible resilience across most sectors, with the stability of the banking system a key factor.

Ukraine’s economy will contract around 35 per cent in 2022 as a result of the Russian invasion of the country, according to the latest International Monetary Fund (IMF) estimations. The IMF says that it made its forecast using a methodology for calculating preliminary losses based on similar military conflicts.

The estimate, however, according to the IMF’s Alternate Executive Director for Ukraine Vladislav Rashkovan, is based on “the current situation and the dynamics of the last few days” and is therefore subject to constant revision.

The previous conflict between Ukraine and Russia, which involved Moscow’s annexation of Crimea, led to Ukraine’s economy shrinking by 6.6 per cent in 2014 and a further 10 per cent in 2015. The IMF believes downside risks are “exceedingly” high and the longer the war goes on the more likely it is that Ukraine will suffer the sort of losses experienced in other conflict-affected countries.

High quality assets

Nevertheless, Ukraine’s banking system is so far coping well with the unprecedented crisis caused by what is now a full-scale war, according to Investment Capital Ukraine (ICU), an asset management, private equity, and investment firm that specialises in the emerging, and frontier markets worldwide.

It says that the majority of banking services remain available to customers, and liquidity challenges that banks face have been minimal due to the hefty stock of high-quality liquid assets and limited deposit outflows.

It’s an opinion that is backed up by senior Ukrainian banking figures, including Misha Rogalskiy, co-founder of Monobank, Ukraine’s first mobile-only bank, which launched in 2017.

“It is remarkable how the banking sector is coping,” he tells Emerging Europe.

Much of the credit goes to the National Bank of Ukraine (NBU), which has introduced limits on cash withdrawals, which are currently 100,000 hryvnia (around 3,090 Us dollars) per day for both local and foreign currency accounts.

The NBU’s deputy governor, Oleskii Shaban, says that banks are making sure all of their branches operate smoothly, unless it puts at risk the lives and health of the public.

“Where possible, banks are also doing ATM maintenance and replenishment. More than 90 per cent of large bank branches in the centre and the west of Ukraine are operational,” he tells Emerging Europe.

“The NBU’s System of Electronic Payments (SEP) is also working fine. Ukrainian-based banks are connected to the SEP and are making customer payments on a regular basis and without interruption. The nationwide payment system (PROSTIR) and the NBU BankID System are operating in business-as-usual mode,” he says, adding that preparation has paid off: “Pre-designed business continuity plans have enabled banks to continue to make core transactions.”

A liquid system

Fears of significant capital outflows have not materialised, with Shaban saying that the banking system “remains liquid”.

“The banks’ funding base remains relatively stable, and the amount of customer funds has increased,” he points out. “Hryvnia retail deposits have increased by about 16 per cent since the war broke out, although term and foreign currency deposits have been declining. Corporate deposits have significantly decreased in volume, by about five per cent.”

If necessary, banks have access to the NBU’s numerous liquidity-boosting tools, and Shaban says that the NBU has upheld the Ukrainian President Volodymyr Zelensky’s call for the introduction of a 100 per cent public guarantee for retail deposits while martial law is in effect.

“Additional state support for depositors is a necessary important measure to keep Ukrainians confident that their savings are safe in their entirety,” he says. “Depositor confidence will in turn help shore up bank liquidity.”

Monobank’s Misha Rogalskiy confirms that the NBU’s response has been fundamental to the banking sector’s resilience: “The restrictions introduced by the NBU are certainly one of the main reasons for the fact that there are no liquidity issues,” he says.

The NBU’s response to the Russian invasion has been guided by three key principles: safeguarding the interests of bank customers; maintaining the operation and liquidity of banks; upholding the real financial condition of banks, without bias.

“Whatever the fallout from the war, losses must not be concealed by ‘cooking the books’. It is vital that everyone sees the real picture,” says Shaban. “Without grasping the full scale of the damage, we will not be able to implement an effective rehabilitation of the banking system in post-war years.”

Available tools

To ensure Ukraine’s financial defence, the NBU has supported the liquidity of banks through several refinancing instruments.

Overnight refinancing loans are available to banks that can pledge highly liquid assets as collateral, and these include government securities, of which banks hold a massive stock.

Since the assault on Ukraine was unleashed, the NBU has also started making unsecured (blank) refinancing loans of up to one year in maturity. The volume of such loans is limited to 30 per cent of a bank’s retail deposits as of February 23 (the day before Russia began its full-scale invasion).

“Banks need this resource to replace the funds they will repay to depositors should they start making withdrawals,” says Shaban.

The NBU has also simplified the requirements for the operation of banks as much as possible, abolishing regular resilience assessments, and refraining from imposing new regulatory requirements in 2022 (it has postponed the introduction of capital requirements for market risk and the activation of capital buffers).

“We will not apply corrective measures to banks for violating required ratios, and will allow them to operate if they follow the rules by properly reflecting their financial standing, meeting AML/CFT requirements,” adds Shaban. “Banks will be given sufficient time, after the end of martial law, to bring their activities in line with regulatory requirements.”

Profit and loss wise, Investment Capital Ukraine says that banks will be facing significant challenges. The volume of fees and commissions plummeted due to declining business activity, while interest income is set to plunge as banks temporarily reset interest rates on outstanding loans to nearly zero.

Shaban is aware of the risks, but is confident that the sector resilience will continue.

“The reduction in lending, the loss of income, and the loss of part of the loan portfolio will reduce banks’ capital. However, banks will go on working even if their capital adequacy ratios fall below the required standards. After Ukraine wins the war, financial institutions will have enough time to bring their activities back to business as usual and reestablish their capital buffers,” he says.

These, however, are problems for the future.

Misha Rogalskiy says that right now everyone in the banking sector – as in the country as a whole – is concentrated on the war effort, maintaining infrastructure and supporting the armed forces. He says that Monobank has set up a number of initiatives to support the war effort, including the creating of a fast and easy way for people in Europe to donate to a special purpose NBU account.

More pressure on Russia

While Oleksii Shaban tells us that he appreciates the international support Ukraine has received as it fights on the financial front, support which has put pressure on Russia and deprived it of the additional sources of funding it needs to fuel its assault, more could be done.

“As the offensive continues, we anticipate that our stakeholders around the globe will freeze the assets of all Russian banks, suspend their access to financial resources in the US and EU markets, and instruct banks in the US, EU, Canada, Japan, UK, and Switzerland to sever correspondent relations with all banks based in Russia,” he says.

“We expect that the central banks of Armenia, Kazakhstan, Tajikistan, Vietnam, Turkey, and the Kyrgyzstan will stop servicing the MIR payment system, and we look forward to China UnionPay and UnionPay International suspending transactions with cards issued by Russian-based banks.”

Shaban also wants to see the Financial Crimes Enforcement Network launch preventive investigations into tax residents and businesses controlled by Russian residents around the world in order to prevent the spread of international terrorism.

And, ultimately, he wants international banking groups to review their need to work in Russia.

“They should reassess the worth of maintaining subsidiary banks and representative offices there,” he concludes.

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