Ukraine's banking system survives coronacrisis, taking course for online services

The year 2020, due to the coronavirus pandemic and the ensuing economic crisis, has become a real test of strength for Ukrainian banks. The system drew the right conclusions from previous crises and withstood the blow, while banks set a course toward expanding digital services.

The coronavirus pandemic that broke out in 2020 and the quarantine imposed in this regard triggered a deep economic crisis that changed the daily life of Ukrainians and hit many sectors of the national economy. Many businesses were forced to close down and suffer losses, as well as to adapt to the new online mode realities, which, at the end of a difficult year, has already become common and familiar to most.

The banking sector has become one of the areas that didn't cease operations during lockdown. However, banks saw a drop in citizens' solvency and problems facing businesses: the net profit of Ukrainian banks, according to the NBU, over the 10 months of 2020 decreased by almost 25% on year, amounting to nearly UAH 40 billion.

At the same time, banks' income grew by only 4%, while expenses increased by 14%.

The past year was also remembered for the high-profile reshuffles that influenced the development of the Ukrainian banking system. In the summer, in the midst of the pandemic, NBNU Governor Yakiv Smolii, claimed "political pressure" and unexpectedly resigned. The initiator of the top reshuffle, President Volodymyr Zelensky, nominated head of the board of the state-owned Ukrgasbank, Kyrylo Shevchenko, to replace Smolii, and the parliament promptly supported the move.

"I will do everything that depends on me to increase the influence of the central bank in supporting the national economy of Ukraine and improve the quality of life of Ukrainians," the newly-appointed NBU governor vowed.

Despite the acute economic crisis (in the second quarter, Ukraine's GDP shrank by 11.4%) and the replacement of the country's first banker, destabilization of the banking system, massive bankruptcy of Ukrainian banks, as often happened in Ukraine's recent history, was avoided.

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Tackling crisis

In the spring, when the Cabinet introduced a strict quarantine, the National Bank adopted a number of anti-crisis measures to support the banking system and the economy as a whole.

First, the National Bank has expanded opportunities for banks to obtain refinancing loans. A significant decrease in the key rate, which was facilitated by the fall in inflation, made refinancing more affordable for banks. Thanks to this, it was possible to ensure high liquidity of the banking sector.

Secondly, the central bank temporarily relaxed requirements for assessing credit risk and announced credit holidays for the households so that certain sectors of the economy did not die out, while most of those who lost their income would avoid problems with servicing their loans.

Third, the central bank postponed the introduction of additional regulatory requirements for the quarantine period, including on-site inspections of banks and much more.

"There were so many measures that recently we joked among ourselves: something had to be left for the next lockdown. Most of these measures are still in force today, while we also extended some," notes Kateryna Rozhkova, NBU First Deputy Governor.

For the first time, the economic crisis in Ukraine was not accompanied by the one in the national banking system. However, banks were forced to incur additional costs, especially in the early stages of quarantine, in order to ensure both online operations and the work of their branches from a safety perspective.

Declining profitability "lesser of evils"

According to the National Bank's outlook, the sector will report profit for the entire 2020, although it will be significantly lower than in 2019.

Over the ten months of last year, the sector's profit amounted to UAH 39.8 billion, which is 23% down on year.

"The main factor behind the decline in profit is the formation of reserves for expected credit losses. The National Bank will receive a complete picture of the issues in the banking system in 2021, once it analyzes the quality of restructuring carried out as part of the annual assessment of banks' stability. Now the deterioration in the quality of loan servicing remains the main banking challenge for 2021," the NBU said.

At the same time, the impact of the pandemic on the economic performance of Ukrainian banks was critical. However, it was for the banking sector that the coronavirus crisis became the impetus for further innovative development.

Many banks have previously made significant efforts to digitize their services, so the quarantine has only accelerated the process.

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Changing consumer preferences

Financial consumers' behavior patterns have changed significantly due to the coronacrisis and the need to maintain social distancing, which in turn has its influence on banks and competition between them.

Many banking customers, who would previously routinely visit branches and mostly ignore new technology-driven opportunities, were now forced to go online.

"The services and functionality offered by their banking application are not enough for clients today. They are already waiting for something new. And we will focus on making these expectations come true," noted Tamara Savoschenko, Deputy Chair of the Board at Ukrgasbank.

Crisis seen in the economy and public set the vector for dynamic changes in technology and intensified progress in the banking sector.

According to bankers, going digital in this business will not stop even after lockdowns, quarantines and social distancing requirements are abolished, as the demand for penetration of online banking solutions has increased among customers.

"New opportunities are provided by remote identification and verification. And integration with the Diia platform generally provides crazy opportunities, since we are able to receive more information online. In particular, identify customers using a digital passport. Thanks to this, we are already able to pitch to potential clients the offers that are more focused on them," said Mykhailo Vlasenko, Chairman of the Board of Idea Bank.

Banks have prepared new products for clients

Ukrainians are in fact not so much interested in which bank they will get financial services. It's rather about the final product as such. And in making the choice, the key factors clients take into account include prices, speed, and time.

Chairman of the Board of Bank Globus Serhiy Mammadov believes that at the moment when banks in 2021 begin to massively launch remote registration, customers will be looking for optimal conditions for themselves among different banks in order to be able to purchase the necessary product or service. In this regard, banks will change the very philosophy of services in the financial sector.

"And we want to launch and pass decisions in 2021 on online mortgages and online lending for car purchases. We will create products for small and medium businesses – also online. Convenience and simplicity are the main competitive advantages banks are now offering," Mammadov said.

Of course, the National Bank, together with commercial banks, will also keep searching for new modern online solutions aimed at making banking services accessible and convenient for everyone.

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Plans for 2021

The National Bank in the beginning of 2021 plans to focus on retaining assistance to the banking sector and the national economy amid the pandemic, as well as measures to make the sector more resilient and ready to withstand the crisis.

NBU Governor Kyrylo Shevchenko announced several innovations that could help restore lending.

"In early December, we expanded the possibilities for lending to local governments: we revised certain requirements for assessing the financial condition of debtor municipalities. We also plan to expand the list of clients who can be assessed on a group basis. We suggest that loans in the amount of under 0.1% of the bank's equity capital should be assessed under a simplified procedure," Shevchenko said.

The National Bank wants to improve the assessment of the investment projects' credit risk by introducing three different approaches to specialized lending: project financing, object financing, and real estate financing, which generates income. This is expected to allow for a more sensitive assessment of credit risk depending on the type of specialized lending.

The central bank also announced changes in the mortgage market to stimulate development. For mortgage loans, they will allow taking into account the income of debtors' family members - when assessing the financial condition, and may also cancel the requirements for banks regarding the examination of a residential mortgage in the event of its insurance.

It is obvious that the pandemic has become a powerful catalyst for the development of online services in the national banking system. Ukrainians these days visit bank branches more rarely, while the number of users of digital services increased significantly.

Banking services will continue sifting to digital into 2021. The future lies in the expanded use of artificial intelligence, as well as in the transformation of business models of banks into digital ecosystems.

Bohdan Slutsky

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