Aging and conflict. What threatens banks in Ukraine

The risks associated with political conflicts, an aging population and the dominance of state-owned banks will put pressure on banks.

Significant risks for Ukrainian banks are exacerbation of internal and regional conflicts, an aging population and the dominance of state-owned banks, according to the report of the international rating agency Moody’s. tells the details.

Significant risks for Ukrainian banks

The potential escalation of internal and regional conflicts, an aging population, the dominance of state-owned banks and the intensification of cyber fraud pose significant risks for banks in the former CIS countries, according to a study by the authoritative agency Moody’s.

These factors pose a greater threat to banks in former Soviet countries than to the global banking sector as a whole, analysts say.

The risk of escalation of internal and external conflicts materialized in 2014-2015 in Ukraine and in 2020 in Belarus, Kyrgyzstan, Armenia and Azerbaijan.

In 2014-2015, the business of Ukrainian banks suffered greatly. The share of problem loans in their portfolios increased from 16 percent in 2013 to 55 percent in 2017; by the end of 2020, it dropped to only 41 percent. Banks in other CIS countries may also be vulnerable in terms of these risks, analysts emphasize.

Ukrainian banks, as well as Belarusian and Russian ones, will experience problems with increasing income due to a decrease in the number of working-age citizens.

Moody’s cites UN forecast data, according to which in 2021-2030 the working population in the post-Soviet countries will decrease by one percent. The situation is worse only in the European Union, in which the decline will reach four percent.

In North America, over the next decade, people of working age will grow by one percent, in Asia by five percent, in Latin America by six percent, and in Africa by 28 percent.

The most significant losses will be incurred by Ukraine and Belarus, whose working population will decline by eight percent, according to the Moody’s report. Analysts put the Russian Federation in third place with a reduction of six percent.

Such demographic changes also mean a decrease in the number of major consumers of credit products, which bring banks the most profit, the authors of the report emphasize.

Due to the fall in demand for borrowed funds, banks will have to compete harder with each other, sacrificing commission income. The aging of the population will also contribute to the reduction of the deposit base of banks, since pensioners do not save, but spend it.

In April, the IMF calculated that by 2026, Ukraine’s population will decline by almost a million people. For a decade, the birth rate in Ukraine fell by 40 percent and now the death rate is twice as high as the birth rate.

The banking market of post-Soviet countries is dominated by state players, Moody’s said, citing its own data and statistics from central banks.

In Uzbekistan, the share of state-owned banks in the assets of the entire sector is 85 percent, in the Russian Federation – 73 percent, in Belarus – 65 percent, in Ukraine – 53 percent, in Azerbaijan – 29 percent.

State banks often issue loans, guided not by business interests, but by the target indicators of state programs, so they are highly dependent on government support, which can take various forms – capital injection, exemption from bad loans, subsidies.

Recall that Ukrainian banks from January to October 2020 made a profit of 43 billion hryvnia before tax. The most profitable were the state-owned PrivatBank (22.8 billion) and Oschadbank (4.8 billion). The three leaders are closed by the bank with foreign capital Raiffeisen Bank Aval – 4.2 billion hryvnia.

At the same time, the profit of Ukrainian banks for 2020 decreased by 29.2 percent, according to the National Bank of Ukraine.

“In general, the formation of reserves for expected losses was the main reason for the deterioration of the financial result in 2020. A number of banks have recognized the deterioration in asset quality due to financial difficulties of borrowers,” the NBU said in a statement.

In addition, the general decline in business activity during the quarantine and the fall in demand for loans and banking services negatively affected the interest and commission income of banks, especially in the second quarter, the Ukrainian central bank emphasized.

In 2021, the profit of Ukrainian banks fell sharply – in the first two months compared to the same period last year, the profit of Ukrainian banks fell by almost 2.5 times. Also, in the first month of the year, expenses (minus nine percent) and income (minus 18 percent) of banks decreased.

Savings of Ukrainians during 2020 decreased by 17 billion hryvnia, according to the State Statistics Service.

Incomes of the population of Ukraine in 2020 reached UAH 3,972.4 billion. The main part was wages – 45.9 percent, profit and mixed income – another 17.9 percent. At the same time, a significant part accounted for social benefits and other received transfers – 33.6 percent.

At the same time, the expenses of Ukrainians amounted to UAH 3,989.4 billion, while savings decreased by UAH 17 billion.

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