The legislation facilitating NPL sales by state banks to third-party investors was adopted in April last year, but management has been reluctant to take responsibility for the disposal of distressed assets, sources told Debtwire.

The NPL ratio of state-owned banks is “an elephant in the room”, said Ihor Olekhov, a Kyiv-based partner of law firm CMS.

“Until spring last year, managers of state banks were afraid of selling NPLs even if they were on their balance sheets for years,” he continued.

“There was and still is a criminal responsibility if a state-owned bank suffers losses as a result of the sale of such loans. And if the sale went below par value, this already could be considered as a loss to state assets.”

The Ukrainian government adopted the Resolution No 281, “On Approval of the Criteria and Conditions for Determining Measures for NPL Management by Banks in which the State Owns 75 Percent or More of the Share Capital,” on 15 April 2020.

The new legislation, drafted at the recommendation of the World Bank and the IMF, provided guidelines for the discounted sale of NPLs through a public Dutch auction, gradually lowering the price of loan portfolios until a bid is made and prohibiting the sale to any related parties (including borrowers, their ultimate beneficial owners, pledgors, and guarantors).

State banks are now waiting for the National Bank of Ukraine (NBU) to adopt a benchmark regulation that would provide formal guidance for transparent NPLs sales at low market prices, Olekhov noted.

“NPLs sales will start shortly, we will not be waiting for another year,” assured Olyana Gordiyenko, chair of the supervisory board at Ukreximbank, during a Kyiv Post webinar on bad debt last week.

She also noted “the reluctance of people working in the bank to take the risk” as one of the main difficulties in pursuing distressed assets sales, even after the new law was adopted.

Management must determine at which price to sell and how to persuade representatives of the prosecutor’s office, who will surely come to question the transaction, that the sale was a viable decision, she added.

“Start selling from the balance sheet value” and wait until the market drives the price down, advised Svitlana Rekrut, the managing director of the Deposit Guarantee Fund (DGF) during the same webinar.

Rekrut urged state-owned banks to crack on with NPL sales.

“Don’t lose the momentum, now the NPL market exists, there is capital. By the end of this year this market will vanish, and the capital will leave. Next year they [state banks’ management] will need to spend another six months to attract this capital back, […] to convince players there is supply,” she said during the webinar.

The DGF, which became a major holder of disserted assets after the 2014 economic crisis and the subsequent clean-up of the banking system, has managed to sell most of its USD 20bn distressed assets’ portfolio (roughly 90% of which consisted of NPLs), according to Rekrut.

The Fund has generated an average recovery of 6%-7% from the sale of its NPLs resulting in about USD 1.5bn of proceeds, she went on to say, adding that some real estate assets could be sold at over 100% of the book value whereas deeply destressed assets could generate less than 1% of recoveries.

The Fund has about USD 3bn of assets left and is working with borrowers on restructuring the liabilities, she noted.

NPLs market

State banks have also been filing debt collection legal claims in pursuit of recoveries on bad loans. There were more than 68,000 lawsuits filed by state-owned banks for the total amount of UAH 78bn (USD 2.8bn) as of the end of 2020, according to the ministry of finance.

Court cases, however, take years to resolve, thus NPL sales are much more effective in covering losses, even though market prices for the product remain quite low, Olekhov noted.

The value of the underlying assets under NPLs is one of the key factors driving the sale price down, Olekhov went on to say.

By the time creditors get to sell those assets, “their value might have been significantly impaired after years of inactivity, or they have been simply plundered,” he added.

Olekhov also noted the lack of demand from international investors in the Ukrainian NPL market.

“There are no legal barriers for them to participate. Any investor can buy NPLs, set up an SPV in Ukraine and get a financial services license. It takes only one hour to register a legal entity these days,” he said. “But they do not have resources to go through local courts and chase up borrowers.”

It comes down to local players to bid in NPL auctions, Alfa-Bank Ukraine and TAScombank being among the largest of them, which have experienced teams working through digressed assets recoveries, according to Olekhov.

It is very rare that an international investment fund would buy distressed assets in Ukraine, invest cash and revitalise a business through deleveraging, agreed a Kyiv-based banker.

The main buyers of NPLs so far have been either owners of debtors who wanted to get rid of their debt obligations at a significant discount or 'smart guys' with connections and a means to get back payments, he added.

The banks

Ukraine sits on the largest NPL pile in Central and Eastern Europe with the NBU reporting a 41% ratio (down 7.4% year-on-year) across the whole banking sector at the beginning of 2021. The central bank has been working on reducing NPL levels, aiming to bring them down to 10% by 2025, when the government also plans to privatise state-owned banks.

In addition to NPL sales, state banks could also restructure some of their bad loans. Oschadbank did manage to restructure some portion of its loans, but Ukreximbank was less efficient, noted Alexander Paraschiy, head of research at Concorde Capital.

Last year, state banks reduced their NPLs by 22% but it was mostly due to write-offs of distressed assets (over UAH 123bn) and only UAH 42bn of NPLs were restructured.

Together with PrivatBank, which was bailed out and nationalised by the government at the end of 2016, Oschadbank and Ukreximbank are among the top three Ukrainian banks by assets value.

Ukrainian banks by assets

The three banks also share between themselves the largest NPLs portfolio totalling UAH 302.5bn (USD 10.9bn), of which UAH 180.4bn are attributable to PrivatBank, UAH 65.4bn to Ukreximbank and UAH 56.7bn to Oschadbank.

Ukrainian banks by NPLs and NPL ratios

Ukreximbank and Oschadbank have been focusing on corporate lending and their largest NPLs are concentrated in this segment, Paraschiy noted.

A high share of NPLs is present in the retail sector, and almost all foreign currency individual loans (mortgage loans provided before 2009) have been classified as NPLs as well, according to Concorde’s information.

Ukreximbank’s loan book is provisioned by UAH 58.9bn, whereas Oschadbank has UAH 47.7bn of provisions, Paraschiy noted.

Click here to view Oschadbank’s financials

Click here to view Ukreximbank’s financials

Privatbank was part of the business structure of Ihor Kolomoisky and its current state management has been battling with the oligarch for misappropriated assets in various jurisdictions, including a USD 1.9bn fraud case against him and his partner Gennadiy Bogolyubov in the London High Court.

Oschadbank and Ukreximbank have been under state ownership from the very start, and their high NPL levels raise questions about their lending policy.

“Before 2014, those banks provided loans based on political reasons (as people close to power arranged loans from the banks). In some cases, the loans were non-performing from the very beginning, meaning that the borrowers had no intention to service them,” said Paraschiy, adding that the banks also had a significant exposure to large businesses located in Donbas and Crimea, currently occupied by paramilitary and Russian military forces.

“Those banks were always tightly connected with the people in power, and it all goes back to the Kuchma, Yanukovich and then Poroshenko times. They all thought it is a sort of reward for them and their circles to get a loan from the state bank once they were in power and they didn’t necessarily think they have to pay it back,” Olekhov noted.

Ukrainian media portal Liga.net has recently published an investigative project on Ukreximbank’s lending policies, in which the bank was called “a cash cow for politicians and a black hole for taxpayers.”

Oschadbank’s and Ukreximbank’s current NPL portfolios originate mostly in 2006-2015, with a smaller amount of NPLs also provided in 2005 and 2018-2019, according to Liga.net’s investigation.

The banks’ bad loan books have always been supported by the state and it is expected that they will continue to receive state funding should additional capital be needed.

Oschadbank and Ukreximbank currently do not require additional capital though and the banks have been repaying their Eurobonds ahead of schedule as they have a lot of foreign currency liquidity, Paraschiy noted.

Bankruptcy moratorium

In Ukraine, like in many countries under lockdowns due to the coronavirus pandemic, a bankruptcy moratorium has been introduced.

It is expected that in a matter of months the lockdown law will be lifted in full, ending the moratorium, and we will likely see a wave of new bankruptcy cases, according to Olekhov.

Ukraine has a support package for businesses, but it is very small compared to the EU and is unlikely to provide sufficient funds to avoid bankruptcy for many entities, he noted.

It is yet unclear, however, if the end of the moratorium will cause a surge in NPL levels.

Most businesses remain able to service their debt, Paraschiy noted. “There could be some exceptions like airlines and real estate developers, but they won’t create a trend.”

Some growth in NPL levels across the whole banking sector is possible after the end of the moratorium, the Kyiv-based banker said, but it is unlikely to be significant as there was no noticeable growth in new NPLs through 2020.

by Alesia Sidliarevich, Dan Anghelache and Elena Shutova