Ukraine’s banking system too small to drive post-war recovery alone – Raiffeisen Bank head

Ukraine's banking system is stable today, unlike during Russia's initial aggression in 2014, but it remains too small and undercapitalized to support the large-scale recovery of the country after the war, said Oleksandr Pysaruk, Board Chairman of Raiffeisen Bank Ukraine (Kyiv), in an interview with Interfax-Ukraine.

"Total assets of Ukraine's banking system amount to about 60% of GDP, one of the lowest levels in the world. The working loan portfolio represents roughly 15% of GDP, which is an exceptionally low figure globally," Pysaruk said.

He explained that the 60% asset-to-GDP ratio is primarily sustained by substantial international aid and liquidity inflows into the country and the banking system. Without these, the ratio would be even lower.

"The banking system is very small. In the medium term, it cannot support significant economic growth or large-scale recovery," the Board Chairman of Ukraine's fourth-largest and largest privately-owned bank said.

Pysaruk suggested that if the war ends or a truce is reached next year, large-scale recovery efforts could begin in 2025 or, more realistically, by 2026-2027.

"The banking system won't have sufficient capital to support significant growth in lending or recovery financing, especially if retrospective taxation of bank profits at a 50% rate persists," he argued.

Currently, banks have surplus capital generated by high profitability and the prohibition on dividend payouts. However, Pysaruk warned that this surplus could be quickly exhausted within a year or two in a recovery scenario.

The banking system in Ukraine is fundamentally too small to handle the lion's share of the country's recovery needs, Pysaruk stated, highlighting that while the World Bank estimates Ukraine's recovery costs at $486 billion, the total assets of the banking system are approximately $85 billion.

"The only viable solution for Ukraine to secure such significant financial resources is to attract creditors, investors, and donors from multiple countries. A mix of foreign direct investments and loans from various sources – including foreign commercial banks, export credit agencies, and development banks – will likely form the foundation of Ukraine's recovery financing," Pysaruk suggested. He has previously held senior positions at the National Bank of Ukraine, the IMF, and ING Group.

He emphasized the critical role of international financial institutions such as the European Bank for Reconstruction and Development (EBRD), the European Investment Bank (EIB), the International Finance Corporation (IFC), and the U.S. Development Finance Corporation (DFC) in mobilizing resources within their mandates for Ukraine's recovery.

Pysaruk added that maintaining the corporate income tax rate for banks at 25% would help preserve capital to fund the economy on a much larger scale.