traditionally sums up the past year. 2023 was the second year to take place under the conditions of a full-scale Russian invasion. The economy as a whole has adapted, although there is no talk of a full-fledged transition to a “war footing”. Different industries reoriented in their own way to meet the challenges that arose, including the destruction of production capacity, the outflow of personnel abroad and to the front, problems with financing and logistics, as well as power outages.
However, many areas managed to withstand these tests and survive. Therefore, in the current reviews I focused on those decisions and events that can be considered the most breakthrough for the industry in the current conditions. We did not ignore the most disastrous cases, in the opinion of the editors.. Separately (where possible), we tried to highlight solutions that work for Victory. Even if they may not always look obvious, they help strengthen the economy, which means they bring the long-awaited turning point at the front closer.
We begin the pre-New Year analysis of the achievements and failures of the year with the financial market — as the most indicative of the state of the Ukrainian economy.
The full-scale invasion of Ukraine became a test for banks, insurance companies and other representatives of the financial market. Almost two years later, we can say that the financial industry has passed the test of war and has grown stronger.
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Banks demonstrate the best health, although in 2022-2023 the number of solvent banks decreased by eight — now there are 63 active players in the market.
The NBU sent for liquidation mainly small financial institutions that did not make a difference in the market. In particular, Forward Bank, Ibox Bank, Ukrstroyinvestbank, and Kontrakt Bank were declared insolvent in 2023. In this respect, the current situation is fundamentally different from the crisis of 2014–2015, when a wave of bankruptcies affected large banks, where billions of hryvnias of public funds were concentrated. Delta Bank, VAB Bank, Brokbusinessbank, Nadra Bank — this is not the entire list of high-profile bankruptcies of those years.
In 2022, the banking market turned out to be much better prepared for force majeure events. Therefore, institutions recovered quite quickly from the first shock of the war, and 2023 became a successful year for them.
According to the NBU, in January-October 2023, assets of the banking system increased by 12% — to UAH 3.03 trillion, equity capital increased by 51% — to UAH 326 billion, customer funds in bank accounts increased by 14.4% — to UAH 2.21 trillion (half of which is money from individuals). True, the loan portfolio decreased by 2.5%. But this is not a disaster, given the almost complete stop in commercial lending, except for preferential government programs.
However, the most significant thing is the profit of banks, which as of November 1, 2023 amounted to almost UAH 123 billion. This is 11 times more than in the same period in 2022.
In other segments of the financial market the situation is not so optimistic. The number of participants in the non-banking sector is gradually declining. From January 2022 to September 2023, the number of insurance companies decreased by 44, to 111, financial companies — by 166, to 594, pawnshops — by 25, to 158, credit unions — by 19, to 143. The largest segments remain financial companies (these are mainly microfinance organizations issuing unsecured loans) with assets of about UAH 251 billion and insurers with assets of UAH 73 billion (data as of October 1, 2023). The market for pawnshops and credit unions is tens of times smaller.
At the same time, because of the war, it was microfinance organizations and pawnshops that suffered the most, whose lending volumes fell to almost zero in the first months after the invasion. But in 2023, the non-banking sector also shows recovery.
According to the National Bank, in the third quarter the insurance market significantly increased the volume of accumulated insurance payments. For risk insurers, gross premiums increased by 14% quarter-on-quarter and by 18% year-on-year; for life insurance companies, premiums increased by 16% and 7%, respectively.. The most popular types of insurance among clients are automobile insurance (CASCO, OSAGO) and voluntary medical insurance.
The services of financial companies are mainly used by legal entities who are interested in leasing services. The population is not very willing to take out microloans: the volume of such loans issued by financial companies over three quarters is 40% less than in January–September 2021. But pawnshops’ business is growing rapidly. Since the beginning of 2023, the loan portfolio of pawnshops has grown by more than 20%, and they were able to make a profit. It amounted to about UAH 84 million in the third quarter of 2023 against the UAH 124 million loss that pawnshops received in the second quarter of 2022.
Credit unions remain outsiders: their loan portfolio has almost halved compared to 2021 and is no longer growing. At the same time, the share of problem loans during the war soared from 16% to 32% and remains around this level.
Now let’s take a closer look at the most significant events and trends in the financial market in 2023, which will have both a positive impact on the financial sector and the economy as a whole, and may lead to negative consequences.
Most breakthrough event: record profits in the banking sector
It would seem that it is impossible to make money during a war, or at least very difficult. But the realities of war did not prevent banks from making their biggest profits since 2001.
In 2022, bank earnings fell sharply and for the year net profit amounted to UAH 22 billion. At the same time, more than 20 banks were unprofitable. The largest losses were suffered by the state-owned Ukrkesimbank and Oschadbank, as well as Sense Bank, which at that time was still privately owned.
In 2023, the picture has changed dramatically. Already in January–February, the banking sector earned the same amount as in the entire 2022, and by November the cumulative profit of banks reached almost UAH 123 billion.
What's the secret? Everything is very simple: banks invested funds raised from clients for deposits and current accounts in certificates of deposit and government bonds. And since the NBU kept the discount rate at 25% until July 2023, the profitability of such investments was high, up to 23–25%.
Even now, when the discount rate is 15%, the yield on certificates of deposit reaches 19%, and the yield on bonds is 16.5–18.6%.
On the one hand, such profit cannot be considered “market”, because the main task of banks is to lend to the economy. But due to the high cost of resources and the threat of non-repayment of debts (NPL for the corporate loan portfolio exceeds 40%), banks prefer to earn money without risk.
On the other hand, accumulated profits will enable the market to increase its strength and support the economy. On November 21, Law No. 3474-IX came into force, which provides for an increase in profit tax rates for banks. For 2023, banks will pay income tax at a rate of 50%, and from January 1, 2024, they will pay tax at a rate of 25%. In total, the state budget in 2023–2024 will additionally receive over 30 billion UAH from banks.
Read also: It will be easier to become bankrupt, but it will be more difficult to get a new loan: banks will begin to take into account the impact of the war on borrowers
So a record profit is still better than a record loss. True, the updated tax policy calls into question further achievements of the banking sector, as well as the attractiveness of a number of state-owned banks for potential private buyers.
The most disastrous event: the protracted nationalization of Sense Bank
For more than a year, neither the Cabinet of Ministers, nor the Verkhovna Rada, nor the National Bank could decide what to do with Sense Bank (formerly Alfa-Bank), which belonged to Russian citizens. The majority shareholders of the bank at the beginning of the invasion were Mikhail Fridman and Petr Aven. Until the last minute, they tried to come to an agreement with the Ukrainian authorities on how to save the bank, promising in return to support the Ukrainian economy in the amount of about $1 billion.
In order to transfer Sense Bank into state ownership, the National Bank had to declare it insolvent. But the NBU had no reason to do so, since the financial institution worked properly and fulfilled its obligations to clients.
To resolve this issue, the Verkhovna Rada adopted Law No. 2643-IX in the fall of 2022, which spelled out a mechanism for the nationalization of system banks under martial law. The main idea was as follows: if a systemic bank cannot fulfill its obligations to depositors and other creditors, the NBU recognizes it as insolvent and turns to the Cabinet of Ministers, which buys the bank for 1 hryvnia.
Read also: Sense Bank is one step away from nationalization. Deputies adopted a new law that will allow the bank to be transferred to the state
But in practice, it was impossible to implement the mechanism prescribed in the law for the same reason: Sense Bank did not fall into the problem category.
As a result, in the spring of 2023, parliament adopted Law No. 3111-IX and expanded the powers of the NBU to withdraw banks from the market. This document gave the National Bank the right to send even solvent banks for nationalization if blocking sanctions were applied to the financial institution or the owner of a significant participation in it (10% or more shares).. After this, the NBU was still able to withdraw Sense Bank from the market, and the Cabinet of Ministers was able to nationalize it. This happened in July 2023.
Read also: Sense Bank goes under the wing of the state: the NBU finally decided to withdraw the former Alfa from the market
Being in state ownership, the bank from August to October inclusive increased its assets by 21% to UAH 116 billion, its equity capital increased by 4.4% to UAH 12 billion, and the bank’s net profit for 10 months amounted to UAH 5.7 billion.
So formally, the story of the nationalization of Sense Bank can be considered a success. But the scheme by which this process took place, and the fact that in order to nationalize one bank the legislation had to be changed twice, is a failure.
The most unconventional solution: currency liberalization and abandonment of the fixed exchange rate
From the very beginning of the war, the NBU took control of the foreign exchange market. Firstly, the National Bank established a fixed official rate, to which transactions on the interbank market were tied. Secondly, the regulator introduced various restrictions that prevented the weakening of the exchange rate within the country (for example, it prohibited the population from buying non-cash currency) and blocked the outflow of capital outside Ukraine.
This strategy worked — and panic devaluation was avoided. The exchange rate has been in the range of 36–38 UAH/$ for about a year and a half.
However, since the spring of 2023, the NBU leadership has been talking about the fact that currency restrictions have ceased to fulfill their “saving” function, but are only slowing down economic recovery.
Read also: Currency is again on free sale: the NBU allowed the purchase of non-cash dollars and euros without opening a deposit
A simple example: exporters can sell proceeds only at a rate that is as close as possible to the official one. And if this rate is, say, 37 UAH/$, the exporter cannot sell the currency at 40 UAH/$, even if such a rate is more fair and realistic. That is, businesses are forced to operate under conditions of an artificially formed exchange rate, which impacts their income and, as a result, harms the economy.
The National Bank began to move towards currency liberalization and more flexible exchange rate setting. Since the summer, the NBU has introduced many relaxations. The main ones are the resumption of certain types of cross-border payments, the gradual expansion of currency transactions for individuals (purchase of non-cash currency subject to a deposit, and from August — without such a deposit in the equivalent of up to 50,000 UAH per month), abandonment of the fixed official exchange rate and the removal of all restrictions on the sale of cash currency to the public.
Read also: Dollar at 40 hryvnia – by the end of the year? How will the foreign exchange market react to the abandonment of the fixed exchange rate?
In simple terms, the NBU gave the foreign exchange market more room for maneuver and freed up (albeit not completely) the movement of capital abroad. At the same time, there is no complete exchange rate flexibility yet: the National Bank is active on the interbank market and sells from $500 million to $800 million weekly to prevent the exchange rate from swinging.
But the very fact that in the conditions of a protracted war the NBU made a large number of mitigations is a bold step. And, most likely, liberalization will continue (especially in the context of a looming shortage of international funding), but without any particular risks to the stability of the hryvnia. The market has already proven that it could not be destabilized by emotions and panic. And the most pessimistic forecasts predict a weakening of the exchange rate to a maximum of 40–41 UAH/$.
In general, lifting restrictions should really bring benefits. In the end, it is difficult to say when the war will end, but the economy needs to be “warmed up”, as well as the state budget needs to be filled.
Forecasts and prospects for 2024
War remains the main factor that affects the economic situation in general and the “well-being” of the financial market in particular. Nevertheless, today we can say that the weakest players have left this market, and those who remain will with a certain degree of confidence withstand the upcoming tests.
The NBU, for example, is completing stress testing of the 20 largest banks. And, as the regulator assures, everything is in order with the stability of the subjects, forced additional capitalization does not threaten any of them. In 2024, the National Bank will return to the pre-war conditions for regulating banks and tighten them (in terms of requirements for asset quality, capital and liquidity). In the future, this will strengthen the reliability of the banking sector.
Read also: Survived and survived. The NBU has completed the first stage of stress testing of the banking system and is preparing some regulatory tightening
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Changes are also coming to the non-banking market. From January 1, 2024, new laws “On Insurance”, “On Credit Unions”, “On Financial Services and Financial Companies” come into force.. They provide (according to the sectors covered by these laws):
strengthening requirements for corporate governance and solvency of insurers, changing approaches to licensing insurance companies, introducing registration of insurance intermediaries; expanding the list of persons who can become members of credit unions and expanding sources of capital replenishment, changing requirements for risk assessment and solvency of credit unions; assigning the status of financial companies to lessors, which will help increase their capitalization and transparency.
Read also: Strict capital requirements and a complete ban on ties with the Russian Federation: how the NBU is changing the rules for licensing insurers and financial companies
The NBU is also updating its regulatory framework, which concerns the authorization of non-banking structures upon their admission to the market and subsequent control of their activities.
The year 2024 will most likely pass under the conditions of a reboot of supervision in the financial market. Therefore, obviously some of the banks, insurers and financial companies will lose their licenses. But the backbone of the market will remain in place and will continue to fight for customers.