General NPL situation in Ukraine


A high level of Non-performing loans (NPLs) in the Ukrainian banking system creates a burden for both – private and state-owned banks. Resolving NPL issue could be a vital step towards releasing banks’ capital and organizational forces for new lending. After the 2008 crisis, the level of NPLs remained at 10-20% corridor and international banks were the main holders of NPLs with 24-30% of NPLs on their balances. The main reason for an increase in NPL levels was UAH devaluation from 5 to 8 UAH per USD in 2008 and USD denomination of major part of corporate loans and mortgages. After 2013-2014 the situation intensified as due to political reasons UAH devaluated to 25-30 UAH/USD range, many corporates lost their assets in ORDLO (certain areas of Donetsk and Luhansk oblasts) and in Crimea. These regions were created a significant consumer base for many Ukrainian companies. Furthermore, as the Russian market was closed for imports from Ukraine, many Ukrainian companies were unable to replace their export markets and consequently – repay their loan on time.

Another reason of increase in NPL levels in Ukrainian banking system over 2015–2017 was that the National Bank of Ukraine made considerable regulatory efforts to clean up the banking sector: as a result, the number of banks in Ukraine halved, while the biggest bank (Privatbank) was nationalized due to high level of related-party lending and inability to strengthen capital level.

All of these factors led to dramatic increase in NPL level to 60% in state-owned banks and 40% in international banks in 2015-2017.

Most international and privately owned banks reduced their NPL levels to single-digit figures right after the regulatory tightening and, as a result, the total NPL ratio in baking system decreased to a 30-40% corridor over 2018–2021. Currently, the NPL ratio in the private sector of the banking system in Ukraine (excluding Russian banks) stands at ~10%. Most NPLs sit on the balance sheets of state-owned (Privatbank, Oschadbank, Ukreximbank, and Ukrgasbank; ~US10 bln nominal value) and Russian (Sberbank and Prominvestbank; ~US2 bln) banks, which in total cover 89% of NPLs in the banking system.

The largest NPL holder is Privatbank (accounting for almost a quarter of assets in the Ukrainian banking system). However, ~85% of Privatbank NPLs (~US5.5 bln) relate to transactions of ex-shareholders, and if these are excluded the total level of NPLs in state-owned banks is estimated to be ~US4.5 bln. The management of state-owned banks are currently considering selling most of these NPLs over 2022–2023. Major part of NPLs in state-owned banks are corporate NPLs rather than consumer.

Why are state-owned banks planning to sell most of their NPLs over 2022–2023?

In April 2020 the Cabinet of Ministers of Ukraine gave the green light for state-owned banks to sell NPLs below their nominal value. Before this no specific legal grounds existed for such banks to do this, so state-owned banks resorted to other methods (restructuring, foreclosures) instead of selling rights of claim.

In the past 18 months, state-owned banks have been elaborating and approving internal procedures to make NPL sales possible on Dutch auctions. The current situation is that the bulk of state-owned banks have finalised these procedures, and pretty much the same approach will be adopted by all banks.

As a first step, English auctions will be held, with the nominal price of relevant NPLs as a starting point. Most likely we will not see any demand from investors on such auctions. The first English auctions were announced in November-December 2021 by Ukreximbank and Oschadbank, but there was no demand from investors.

As a second step, Dutch auctions will be held – probably two-to-three for each NPL. During the first Dutch auction a minimum price will likely be set, with only a minor discount on the nominal price. Significant discounts can be expected during the second and/or third auctions. Each bank will adopt its own approach to determining the number of Dutch auctions and minimum prices, but in general the approach should be similar to that used by the Deposit Guarantee Fund in Ukraine when selling the NPLs of bankrupt banks over 2017–-2021 (two-to-three stages of discounts on the nominal value of the NPL executed via Dutch auctions). We expect corporate NPLs with a nominal value above ~US5-10 million to be sold on an individual basis, and smaller corporate and consumer NPLs to be pooled.

Over 2017–2021 the Deposit Guarantee Fund was the most active NPL seller in Ukraine. As the NPL market was nascent during this time, there were few professional NPL investors. A lack of international investors was another adverse factor on the demand side of the market, and the reason why final prices for NPLs sold by the Deposit Guarantee Fund sometimes reached 0.8% of the nominal value. The absence of international investors, combined with a substantial NPL supply from state-owned banks over 2022–2023, suggests that deal prices will remain low. We believe that the first international investors that take the risk of entering the market could benefit from a price range poisoned in the lower bound and that, as an increasing number of informed international investors enter the market a higher price range will be reached. A rise in the number of international investors will also incentivise local investors to conduct proper due diligence procedures when setting offer prices.

Pitfalls and market entry strategies

In 2019 a new Bankruptcy Code was enacted in Ukraine. The code was deemed by experts to be “pro-creditor” and beneficial in terms of boosting interest from international investors towards entering the local NPL market. However, a number of pitfalls need to be considered by international investors when entering the market and formulating their strategies.

Based on recent legal practice and the current tax environment, state-owned banks will most likely require potential buyers to be a financial institution (which means that the buyer will need to hold a special license from the National Bank of Ukraine). Hence any potential international investor will have to work with local legal NPL-specialised firms, or create an affiliate with ~US0.2 mln in statutory capital.

Although the new Bankruptcy Code has been enacted, the Ukrainian judicial system has many pitfalls that are not obvious. So, ideally, international investors should enter the market with a strong Ukrainian partner (legal firm) that has experience in working with NPLs.

In relation to large (>US10m of nominal value) stakes, it is essential that a proper due diligence process be conducted prior to any loan purchase. Some NPL borrowers have a multi-lender loan portfolio and the most valuable component of pledges may already have been purchased by other investors. Other large stakes may require scrupulous technical reviews. State-owned banks are being pressured by the government to conduct the majority of NPL sales by the end of 2022, thus the time between the English and subsequent two-to-three Dutch auctions may be limited (one-to-two months). Hence we recommend beginning due diligence procedures as soon as a bank publishes information about NPL sales on English auctions in the SETAM system ( – this will likely be the main electronic platform for NPL sales by state-owned banks). For example, Ukreximbank (the largest corporate NPL holder) already conducted and/or announced English auctions for its biggest NPLs in November-December 2021; Dutch auctions in relation to these can be expected by mid-spring 2022, as none of the conducted English auctions were successful.

In a nutshell, 2022 will likely be a year of large state-owned NPL sales in Ukraine. Despite the numerous challenges presented by entering the Ukrainian NPL market, we see a huge potential opportunity for those willing to take the plunge. However, we strongly advise that international investors do their homework properly before entering the market. It is necessary to investigate all applicable legal specifics (setting up an entity, obtaining a license, collection and enforcement issues, transferring cash abroad, etc.). Collaborating with a reliable local partner may be beneficial even despite additional cost for investor. Proper analysis of target individual or pooled NPLs is an integral part of investing in corporate NPLs.

We recommend following market developments closely and considering individual cases as soon as an announcement about any relevant English auction is made.

Adrian Kozlovskyy, Associate Director, Deal Advisory, KPMG in Ukraine