A brief analysis of the problem debt market for the 1st half of 2021: UAH 405 billion of overdue loans in the system and 73% of NPL accumulated in state banks

Over the past five years, the banking sector has become more stable. According to the data published by the National Bank, 75 banks have been liquidated or are in the process of liquidation in Ukraine. This is more than 50% of the number of financial institutions that were registered on January 1, 2014.

At the same time, a high proportion of non-performing loans (NPL) remains in the system. The total amount of overdue debts of individuals, including individual entrepreneurs, as well as legal entities, is UAH 404.7 billion, i.e. the share of non-performing loans is 39-40% of the total amount of all loans.

“A significant share of NPL is a consequence of the credit expansion of previous years, when the standards for assessing the solvency of borrowers were low, and the rights of creditors were insufficiently protected, fraud in banks, including on the part of management, lending to banks associated with the owners of companies, as well as the economic downturn caused by the crises of 2008 and 2014, the military conflict in the Donbas, etc.,” explains Andriy Volkov, managing partner of Investohills Partners. It is the largest operator in the market of distressed assets with a debt portfolio of over UAH 100 billion, the beneficiaries of which are Volkov and his partner Mykhailo Bakunenko.

The current rate of decline in the share of NPL is quite slow due to a new wave of crisis phenomena in the Ukrainian economy, one of the reasons for which was the COVID-19 pandemic.

In 2021, the following trends are observed in the credit market:

1) The lack of growth in lending to the corporate sector. Moreover, there is even a decrease in the volume of loans issued to legal entities. As of July 1, 2021, the loan portfolio of the business amounted to UAH 809.3 billion. This is strange, since it is less than it was at the end of 2016. In other words, statistical data on the size of lending to the corporate sector contradict the government’s program for the development of the country’s industrial potential, which is simply impossible without credit “injections”. One of the reasons for this situation is the opportunity to invest in an almost risk-free instrument that has a comparable yield and a lower level of risk. This is the Domestic government loan bonds of Ukraine.

2) The volume of problem loans to legal entities has decreased by 25% over the past 5 years, to UAH 355 billion. As a result, the share of problem loans to corporate clients remains quite high, more than 44%.

3) For loans to individuals and individual entrepreneurs, the picture is somewhat different. First, we see a 40% increase in the volume of lending to the population. As of July 1, 2021, the amount of loans issued exceeded UAH 229 billion. Secondly, we are seeing a twofold decrease in the size of the NPL of individuals: their share in this segment has decreased to 23%. The reasons for this decline are the borrowers’ restructuring programs and the active sale of problem portfolios to collectors. At the same time, almost the entire NPL of individuals is formed due to debt in foreign currency (96% of loans in foreign currency issued to citizens are problematic).

As for the banks in which the main pool of problem assets is concentrated, 91% of NPL (UAH 448 billion) are located in 7 banks.

The first group consists of 4 state-owned banks: PrivatBank, Ukreximbank, Oschadbank and Ukrgasbank. 73% of problem debts are collected here, or UAH 178 billion, UAH 57 billion, UAH 52 billion and UAH 9 billion, respectively.

The second group consists of large commercial banks, two of which – Sberbank and Prominvestbank – remain under the “control of the Russian Federation” for the time being, as well as Alfa-Bank.

In these banks, the share of NPL reaches 19%, and in absolute figures – UAH 35 billion, UAH 24 billion and UAH 16 billion, respectively.

It is worth mentioning that a significant part of problem debts is transformed into assets on the balance sheet of banks for sale. Banks recover collateral assets under a mortgage clause or as part of an enforcement procedure. At the same time, the problem debt is reduced by the value of the recovered property. Often, in order to maintain capital standards, such property gets on the balance sheets of banks at inflated prices and remains unsold for many years. This is a hidden form of problem debt, which is also characteristic of Ukrainian private and state-owned banks.