The Ukrainian banking system consists of the central
bank (the National Bank of Ukraine, abbreviated as NBU)
and 175 commercial banks with Top-20 players accumulating
70% of total assets (USD 91 bn).
Compared to other countries of Central and Eastern Europe, the share of state and international capital in the sector is relatively moderate. International banking groups account for 42% of total assets. During the crisis of 2008 the government nationalized 3 banks which together with 2 other state owned banks account for 17% of total assets. The government announced its plans to dispose of 2 nationalized banks in 2012-2013.
The economic crisis during 2008-2011 has adversely influenced sector’s performance. The post-crisis period is characterized by the following:
• Growth of corporate lending (13% in 2011 vs 8% in 2010) due to steady economic recovery (GDP enjoyed 5.2% growth in 2011 vs 4.2% in 2010);
• Shrinkage in retail lending as a result of more conservative credit risk management and low disposable income;
• The main source of funding is still customer deposits (55% of total liabilities as of 1 January 2012) due to limited liquidity of international capital markets and Eurozone debt crisis;
• The banking system is well-capitalized (15% equity to assets, 19% Tier 1 vs the NBU required minium of 10%) after significant injections of capital in the banking system were made;
• Net interest margin remained above 5% in 2011, more than in most CEE countries;
• Profitability of Ukrainian banks is gradually recovering due to on-going cost optimization programs and decline in loan loss provision charges;
• The level of non-performing loans is substantial and equels c. 42% of gross loan portfolio as of 1 January 2011 according to the World Bank estimates;
• NBU takes important role in the sector’s development, concentrating on stability of national currency, decreasing foreign cash turnover in the economy and encouraging banks’ lending activity. The overall sector regulation is considered transparent and consistent;
• Since 2012, all commercial banks are obliged to implement International Financial Reporting Standards (IFRS).
Ukrainian banking sector demonstrated reasonable recovery since 2009 and still has a large room for potential growth.
There are 442 companies on Ukrainian insurance market,
operating largely in non-life segment, which accumulated
94% of gross written premiums (GWP) in 2011.
The key sector regulator is National Commission for Regulation of Financial Services Markets of Ukraine (NCRFSM) responsible for licensing and supervising activities of the insurance companies.
Unike other CEE markets, none of the players has a dominant market share neither in non-life nor life insurance segments. Life insurance is underdeveloped with Top-10 out of 64 operating companies accounting for 87% of total segment’s GWP in 2011. The risk insurance is driven by motor and property insurance with Top-10 out of 378 players accounting for 34% of GWP.
Subsidiaries of international insurance companies concentrated c. 22% of total GWP during 2011 in both life and non-life segments. There are no state owned insurance companies in Ukraine.
The post-crisis period is characterized by the following:
• Ukrainian insurance market is gradually recovering from the crisis with total assets growing in 2010- 2011. Total assets reached USD 6 bn as of 31 December 2011;
• Insurance companies are focused on growth of agents network to reduce their dependence on bancassurance, which had been the key sales channel before the crisis;
• Agricultural, medical and life insurance may enjoy reasonable growth as important legislative incentives are being currently considered (e. g. health care system reform aimed at transition to personal medical insurance, introduction of life and agricultural risk insurance guaranty pool);
• Since 2012 all insurance companies are obliged to implement IFRS reporting;
• From 2013 insurance companies will be subject to general taxation regime, which is expected to bring more transparency to the market.
Ukrainian banking sector is a successor of the Soviet banking system, which consisted of several state owned banks. Since Ukraine’s independence in 1991, the number of banks increased dramatically peaking at 230 in 1995, driven by low entry barriers, particularly, low capital requirements.
The banking system is two-tiered, comprising of the central
bank (NBU) and commercial banks. The NBU operates
through 31 regional office focusing on stability of the
national currency (hryvnia, UAH) and supervision of the
banking system via licensing, issuance of the regulations
and continuous monitoring of compliance with the regulatory
Unlike other countries in transition, the share of state capital in the banking market is moderate. Before the crisis, during which the government nationalized three distressed private banks, there were only two state owned banks (Ukreximbank and Oshchadbank).
The share of international capital in Ukrainian banking system comprises 41.9%, which is rather moderate compared to other countries in the CEE region.
The majority of banks has no particular specialization delivering both corporate and retail services.
Historically short-term customer deposits were the major source of funding, but in 2005-2008 top banks pioneered in Ukraine usage of international capital markets, largely via private placements and syndicated loan facilities.
The banks’ assets are invested primarily into the real sector due to high demand from both corporate and retail clients and to some extent due to underdeveloped security market where a limited number of financial instruments is available.
Penetration of banking services is considered rather low. A recent statistics confirms that Ukrainian banking sector is still immature and has a large room for potential growth, demonstrating reasonable recovery since 2009.
After expanding rapidly during the pre-crisis years (2005 - 2008), Ukrainian economy dropped by 14.8% in 2009, however in 2010 recovery started, showing 4.2% and 5.2% real GDP growth in 2010 and 2011, respectively. This drove recovery of demand for lending from the corporate sector.
Assets growth is driven by corporate lending
Simultaneously the banking sector has been coming back to life along with assets growth trend since 2009, both in quantitative and in qualitative terms. This, however, could mainly be attributed to increase in corporate lending.
Retail lending is declining
Retail lending has been shrinking between 2009 and 2011. This is related to a high portion of loans denominated in foreign currency (car loans and mortgages mostly) in total number of retail loans issued before the crisis. The sharp devaluation of national currency (hryvnia, UAH) in 2008-2009 led to revaluation of the exposure and corresponding growth of periodic debt servicing costs. Based on lessons learnt the banks have adopted more scrutinous selection of the retail borrowers.
Deposits are still the major source of funding
Ukrainian banks still rely on short-term customer deposits as the major source of funding (47% of total liabilities and equity) with retail customers accounting for 62% of total customer deposits. Due to the Eurozone debt crisis other funding sources, such as international capital market, were not available during 2009 – 2011.
Attractive net interest margin
Net interest margin is relatively stable (5.3% in 2011, which is close to five years medium) and is historically above regional peers’ average.
On-going cost optimization
In order to withstand debt crisis and global economic downturn, the majority of Ukrainian banks has launched cost optimization initiatives. The key initiatives are focused on:
• branch network right sizing with the view to close less efficient POS, minimize rent payments or gain additional profit from premises realization;
• suspension of rendering low yield services;
• general and administrative expenses cuts.
Weak financial results in 2009-2010 could be largely attributed to loan loss provision charges. In 2011, many banks recovered and showed profitable performance, however, due to massive losses of some large banks Ukrainian banking system in general didn’t show remarkable profitability. It is considered that dominant portion of the non-performing loans has been adequately provisioned for, thus positive financial performance is expected in 2012 backed by gradual economic recovery.
After the crisis, USD 6.5 bn of the banking system capital was “consumed” by losses. To address this USD 4.3 bn of new capital was injected mainly by the State of Ukraine and international groups. Currently the system is well capitalized with Tier 1 capital ratio based on the NBU requirements of 19% versus 10% being the minimum required.
State capital in the sector
During the crisis some distressed banks, namely Bank Kyiv, Ukrgazbank, Rodovid bank and Nadra bank were nationalized. In 2011 the government sold the latter to private local investor. Recently the government confirmed its intention to sell two other nationalized banks (Bank Kyiv and Ukrgazbank) with the third one (Rodovid bank) being transformed to a Bad bank.
Regulation by the NBU
The NBU promotes open dialogue with market players; its decisions are relatively predictable and primarily announced in advance to allow banks to get prepared. Banking legislation is considered reasonably transparent and consistent with good international practices.
Similar to the central banks in other countries, NBU plays a major role in the sector’s development. After timely support during the crisis NBU is now primarily focused on maintaining pegged UAH to USD exchange rate, which stayed relatively stable since 2009 (c. 8 UAH/USD). To decrease pressure on hryvnia the NBU actively pursues “de-dollarization” of the economy aimed at decreasing foreign cash turnover on the market. This is achieved largely through increase in reserve requirements for foreign currency deposits and restrictions on foreign currency lending.
Moreover, in 2012 the NBU commenced monetary easing programme, gradually decreasing discount rate and softening its reserve requirements for banks (except for foreign currency accounts), thus encouraging banks’ lending activity.
Mandatory IFRS reporting
Starting from 2012 all banks are required to implement IFRS reporting system. This should support reporting transparency, ease comparison of market players, their access to foreign markets and improve overall supervision.
Ukrainian banking sector is fairly concentrated, with
Top -20 banks accounting for 70% of total assets. In terms
of specialization 18 out of Top-20 banks pursue model of
universal banking offering services to both corporate and
retail customers. Ukreximbank and ING Bank are the only
banks from Top-20 group, which are predominantly focused
on corporate clients.
Please refer to the chart ‘Ukrainian banking sector – Top-20 players’ on the next page for key KPIs.
Majority of international players has entered the market
within the last decade, mainly via acquisitions of local
banks. They are largely represented by banking groups
from Western Europe (Austria, Italy, France, Greece) and
In terms of segment focus, only few banks are focusing on corporate clients only. The rest pursue the universal banking model.
As of 1 January 2012 foreign owned banks, not included in Top-20, accumulated 7% of total banks’ assets, contributing to healthy competition on the market.
NBU payment system
Intrabank settlements in hryvnia are made via a clearing system (the System of Electronic Payments) which is managed by the NBU.
Additionally, the NBU actively promotes retail payment system (the National System of Mass Electronic Payments). This system is a domestic electronic mass payment system, in which all payments for goods and services, receiving cash and other transactions are carried out by means of chip cards, using technology developed by the NBU. Development of this system is aimed to develop and introduce a relatively cheap but well-secured automatic system of cashless settlements in Ukraine, which is mostly designed for “off-line” operation.
With a goal to enhance banking operations and general business climate, a number of associations has been established in Ukraine since the beginning of the 90th.
Ukraine has several licensing requirements for the banking and finance industry.
Banks have to be registered with the NBU to obtain the banking license. Banks can perform banking and finance activities (except insurance) based on the banking license. Bank has to obtain general currency license of the NBU for the execution of foreign currency transactions.
Currency control provisions
All foreign currency transactions in Ukraine, including transactions performed by the financial institutions, are subject to currency control by the NBU and the authorized banks (or other licensed financial institutions).
Specific measures of currency control are as follows:
• Foreign currency transactions require obtaining NBU’s individual currency license except of the following cases (the list is not exhaustive):
- Payments for goods or services to non-resident in foreign currency;
- Repayment of the loan (principal and interest) in favor of non-resident;
- Return of foreign currency investment;
• Obtainement of approval from special state body (Ukrainian National Research and Information Center for Monitoring of External Commodity Markets (“DZI”)) should the total agreement value exceed EUR 100 thsd. DZI seeks to ensure that the fees payable under the contracts with non-residents are at arm’s length basis. This approval is required in order for a bank to be able to proceed with the payment;
• The “180-day rule” which prescribes that export proceeds shall be charged to the bank accounts of the exporter within 180 days as of the date of signing of export declaration. The same applies to import transactions with delay in delivery. The respective goods shall be imported in Ukraine no later than 180 days as of the day of advance payment in favor of non-resident supplier;
• Loans originated by non-residents (or in favor of nonresidents) are subject to registration with the NBU. The interest rate should be limited according to the appropriate cap level set by the NBU.
Controlling authority for the banking services market is the NBU. All banks, their subdivisions, affiliated and related parties of the banks on the territory of Ukraine and abroad, offices of foreign banks in Ukraine, as well as other legal entities and individuals in their compliance with the requirements of the Law of Ukraine ”On Banks and Banking Activities” are accountable to the NBU.
There are several core industry-specific laws and regulations, namely:
• For banking activities:
- the Law “On Banks and Banking Activities”;
- the Law “On the National Bank of Ukraine”.
Please, note that requirements set forth by Basel II are not mandatory for Ukrainian banks. However, NBU intends to approximate capital requirements and other standards for Ukrainian banks to the international standards of Basel Accords.
• For currency control:
- the Decree of the Cabinet of Ministers of Ukraine “On Currency Regulation and Currency Control”;
- There is also a number of NBU’s regulations.
NBU sets minimal regulatory capital requirements (the “H1” standard) at UAH 120 m (c. USD 15 m).
Capital adequacy ratio (the “H2” standard) is required to stay above 10%.
Core capital adequacy ratio (the “H3” standard) is required to stay above 9%.
The core banking activities are exempt from VAT.
Concerning corporate income tax (hereinafter referred to as the “CIT”), there is no special treatment of the activities connected with banking. CIT is currently calculated at a flat rate of 19% until 31 December 2013 and will become 16% from 1 January 2014 onwards.
Ukrainian insurance market emerged at the beginning of
90s, when the first private insurance companies appeared
on the market trying to compete with the State Insurance
Company (Gosstrah), the only insurance company in the
The current state of insurance sector is characterized by a large number of insurance companies (442 as of 31 December 2011), operating predominantly in the non-life segment. Unlike many other markets of Central and Eastern Europe, no player has a dominant market share which is true for both non-life and life insurance markets.
Life insurance is still developing. There are 64 companies operating in this sector, comprised of multi-national companies, wich are committed to building regional business network across Central and Eastern Europe, and local players. Many companies follow multi-level marketing model.
The risk insurance segment is much more developed
than life segment driven by motor and property insurance
(mostly fire insurance). There are 378 players in the segment.
Insurance reserves are mainly deposited with banks, which is largely due to immature security market. The other popular assets for placing reserves are the government bonds and real estate.
In 2011 the insurance companies signed 618 m contracts, largely represented by compulsory transport accidents insurance.
The National Commission for Regulation of Financial Services Markets of Ukraine (NCRFSM) is the key regulator, which is licensing and supervising activities of the insurance companies.
Ukrainian insurance market is significantly behind other European markets in terms of size and share in GDP. Premiums per capita were comparatively low due to minor personal disposable income and high inflation. This trend may be reversed in the medium term as disposable income is gradually rising ¬backed by reduction of inflation. This contributes to a potential of substantial growth of the Ukrainian insurance market in the long run.
Insurance sector recovery
The insurance market has considerable space for further development from a low base over the medium to long term. The economic downturn curtailed demand for insurance products, although the market began to recover in 2010.
Assets of insurance sector are on an upward trend for the last two years. However, their share in the economy is insignificant (assets to GDP ratio is c. 4%).
Motor insurance is the key insurance product
Motor insurance has historically produced the dominant portion of the market in terms of collected premiums. From another hand, it accounts for the highest loss ratio on the market, followed by voluntary health insurance and financial risks insurance.
Non-life segment outlook
Non-life insurance market is much less concentrated as compared to life insurance, with Top-10 companies accounting for 34.4% of total gross written premiums (GWP). Insurance for agricultural risks is expected to grow driven by the recently enacted Law of Ukraine № 4391-VI “On Peculiarities of Agricultural Products Insurance with the State Support”. Government has committed to compensate a share of premiums for agri insurance since 2013.
In addition, it is expected healthcare system reform to commence, introducing medical insurance as an important initiative.
Life insurance premiums are still low
Life insurance market is highly concentrated with Top-10 companies accounting for 87.1% of total GWP for 2011. Despite rising premiums, the concentration is increasing as a number of players left the market.
At the moment endowment and retirement insurance face challenges due to reduced average disposable income influenced by 2008 crisis effects. However, these segments have a high potential in the medium term as the Government is implementing comprehensive pension reform. It is expected to unlock pension resources reserved now in the State Pension Fund via implementation of individual pension accounts and investment programs, development of non-state pension funds.
Life insurance guaranty pool is planned to be established by the state in the near future, adding to customer confidence in the life insurance companies.
On-going cost optimization
To address new market challenges the insurance companies have started cost cutting programs, focusing on POS and personnel optimization processes.
Agents network development
Since retail bank lending has experienced downturn, insurance companies concentrated more on developing their own network of agents while improving marketing, optimizing their dependence on bancassurance.
Harmonisation of sector regulations
Main regulative body of the sector (the NCRFSM) is currently in the process of reorganization with the purpose to optimize, increase transparency of its work and implement modern standards of insurance supervision according to standards of the International Association of Insurance Supervisors. Moreover, the regulator plans to introduce the Solvency II Directive (2009/138/EC) requirements in respect of solvency, reporting standards, transparency and overall system of insurance company’s management.
Unlike most CEE countries, Ukraine is still in the process of developing national Export Сredit Agency, with anticipatory name Ukrainian Company of Export Insurance, aimed at supporting local exporting firms via export credit insurance.
Starting from 2012 all insurance companies are required to implement IFRS reporting system. This should support reporting transparency and ease comparison among market players.
In terms of segment focus, there are companies focusing
on corporate or individual clients only, however the majority
of companies offer a wide range of products in both
Top-10 insurance companies (all representing the non-life segment) collected c. 27% of GWP in 2011.
The leading insurance companies are often part of the large banking groups, therefore their premiums are mainly driven by lending products (e.g. motor insurance for car loans, property and accident insurance for mortgages).
Russian insurance companies were the first international players entering Ukrainian market in mid 90s, while business groups from Western Europe have started exploring national market mainly during last decade. They operate in both life and non-life segment. A number of international players have agency agreements with local banks to boost sales via their branch network.
There are severe self-regulatory organizations on national insurance market, contributing to its development and growth. They improve communication among market players, lobby legislative initiatives and collaborate with foreign institutions.
In order to render insurance services in Ukraine companies have to be duly registered and obtain a relevant license from the NCRFSM.
The insurance services market is supervised by the NCRFSM which is responsible for the formation and implementation of the state policy regarding financial services market except for the market of banking services and securities market.
There are several core industry-specific laws:
• the Law “On Insurance”;
• the Law “On Financial Services and State Regulation of Financial Services Market”.
There is also a number of the NCRFSM regulations.
Minimum capital requirement for insurance companies depends on the segment of operation:
• Non-life segment – EUR 1.0 m equivalent in national currency;
• Life segment – EUR 1.5 m equivalent in national currency.
The core insurance activities are exempt from VAT.
Concerning corporate income tax (hereinafter referred to as the “CIT”), special taxation regime is envisaged for the life insurers and non-life insurers. At the present moment, the general regime to insurance companies’ profits (profit, as difference between income and expenses will be taxed with the general CIT rate). Income received from long-term life insurance contracts is taxed with 0% CIT rate and it will remain unchanged from 2013.
CIT is currently calculated at a flat rate of 19% untill 31 December 2013 and will become 16% from 1 January 2014 onwards.