Having migrated to a new capital structure, Ukraine’s banking system continues to maintain an almost double stock of capital of all tiers, while the banks’ reported capital metrics are in line with the NBU’s test calculations.
Specifically, according to 1 September data from the banks’ ratio compliance reports:
- The banks’ average regulatory capital adequacy ratio stands at 16.2%, nearly twice the required minimum of 8.5% that is adjusted for transitional provisions.
- Average capital adequacy ratios of Tier1 capital and CET1 capital are 15.7%, far above the required minimum of 7.5% and 5.625%, respectively.
In general, all of the banks are in compliance with the minimum adequacy requirements for CET1 capital, Tier 1 capital, and regulatory capital. At the same time, changes to capital structure along with the transitional period granted to banks have strongly improved their ability to further increase lending.
“The banks’ profitability continues to underpin their capital, providing for a smooth establishment of capital adequacy requirements in line with EU standards. This comes as a key factor in ensuring that the banking system fulfills its main function – supporting the economy and the country’s recovery through lending,” said NBU First Deputy Governor Kateryna Rozhkova. “To assess the banks’ capital adequacy to make sure they can cover unexpected losses in a crisis, the NBU plans to conduct a new resilience assessment of the banking system next year. Pending the results of this assessment, we’ll continue to prioritize preserving the banks’ capital in the system in order to ensure its stability and ability to increase lending.”
Be reminded that the updated provisions of the Law of Ukraine On Banks and Banking took effect on 5 August 2024, and the banks switched to a three-tier capital structure and new capital adequacy ratios.
As a result of these changes:
- Capital is now divided into three components instead of two: common equity Tier 1 (CET 1), additional Tier 1, and Tier 2.
- The highest-quality component of capital – CET 1 capital, which also is the closest equivalent of core capital under the previous structure – has been boosted by the possibility to include in it the profits of prior years and the current year (except for those that the bank plans to distribute through dividends when it becomes possible). Up until now, the banks’ profits have primarily been included in additional capital as per the previous structure. Therefore, compared to UAH 178 billion in core capital as of 1 August 2024, CET 1 capital has already risen to UAH 238 billion, according to 1 September 2024 data.
- The banks’ regulatory capital has decreased in line with expectations to almost UAH 245 billion. The main factors behind the reduction were additional deductions from capital assets (deferred tax assets, revaluations, investments, etc.) and dividends scheduled to be paid out.
Under NBU Board Resolution No. 368 dated 28 August 2001 (as amended), although the banks must comply with prudential ratios on a daily basis, the banks and the NBU publish each month the data available on the first of that month.
To ensure that European requirements are implemented in a balanced manner and to preserve the banking system’s potential to further scale up lending support for the economy, the NBU has introduced a number of transitional provisions, which include:
- applying a phased schedule for meeting the minimum regulatory capital adequacy ratio:
- from 5 August 2024 to 31 December 2024, no less than 8.5%
- from 1 January 2025 to 30 June 2025, no less than 9.25%
- from 1 July 2025, no less than 10%
- allowing banks to include in their common equity Tier 1:
- the profit for H1 2024 and the first nine months of 2024 without the NBU’s prior approval and an auditor’s review of interim financial statements. However, profit must be reduced by the amount of dividends to be paid out on this profit, and the period for including this profit in the capital is limited to the date of the annual general meeting for 2024.
- funds received by banks as payment for ordinary shares or used to increase their face value. Banks can include these funds in their capital during 2024, which will help complete the recapitalization measures the banks have already launched.
- allowing the banks to include in their additional Tier 1 and Tier 2 capital the instruments with write-off/conversion conditions, as well as subordinated debt, for the duration of the NBU’s approval procedures, in line with the documents submitted by the banks.