Ensuring the Effectiveness of Passive Operations of Commercial Banks

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Popenko Iryna Tarasivna

Scientific adviser: Ivanchuk Nataliia Volodymyrivna

                                                               National University of Ostroh Academy

Ensuring the Effectiveness of Passive Operations of Commercial Banks

   The article deals with the theoretical foundations of the effectiveness of passive operations of commercial banks. There  have been conducted the financial analysis of passive operations of Public Joint Stock Company  State Savings Bank of Ukraine” and provided recommendations to ensure the effectiveness of passive operations of commercial banks.

                   Key words: passive operation, financial stability, liquidity, financial resources, profitability.

                  Formulation of the problem. Resources, accumulated within the state, play a vital role in ensuring the development and effective functioning of the economic system of each country. In modern terms, the successful functioning of the banking system is an  important element for the formation of management decisions which will determine the further development of our country. The formation of the resource base of commercial banks provide fund formation by means of passive operations. The effective implementation of passive operations will spur the growth of financial stability of the banking system, the confidence of depositors and creditors, increase of investments, which, in turn, will help overcome the crisis of the national economy.

                  Analysis of recent research and publications. The theoretical analysis of the concept of passive operations and the research of the effectiveness of its application have been done both by domestic and foreign scientists such as V.Lahutin, A.Moroz, M.Savluk, R.Kotsovska, V.Rychakivska and others.

                  The purpose and aim of the research. The purpose of the research is to develop the ways to improve passive operations of commercial banks on the basis of theoretical study and evaluation of the practical aspects of the chosen subject.

                  Summary of the basic material. Commercial banks in Ukraine, regardless of their ownership, specialization or the size of capital carry out the operations of attracting free funds of economic entities in the form of deposits, settlement and cash transactions of their customers and credit operations. Typically, the bank performs many more operations, but these operations are essential. According to the Law of Ukraine on banks and banking activity such operations may have only entities licensed by the National Bank [1].

                   Bank transactions are recorded in the balance sheet for individual articles. Accordingly, there is a difference between active and passive operations of commercial banks.

                   The NBU defines passive operations as the operation by which the bank creates its own funds to carry out active operations. In other words, it is an operation  connected with the mobilization of resources required for the bank with the exception of equities for supporting its normal functioning, providing the necessary liquidity and obtaining income.

                   There are four forms of passive operations of commercial banks:

– primary emission of securities of commercial banks;

– deductions from income on bank formation or increase of the funds;

– obtaining loans from other entities;

– deposit operations.

         While implementing the first two forms of passive operations, the large group of bank resources is created under the name of own resources. The other two forms of passive operations create a second group of resources – borrowed and attracted bank resources [1, p. 367].

         Own resources are created by means of authorized capital and special funds, which are formed by deposits of bank owners. These resources encompass the basis of financial stability of commercial banks.

         Another component of bank resources is borrowed funds. Borrowed resources comprise funds given by other banks and the NBU, the funds from the sale of bank bonds and emission.

         The last part of the bank resources are formed my means of borrowed funds, which constitute the largest share. Attracted bank resources are formed through a deposit operations that is considered to be the main function of all commercial banks since these resources cover most of the fund needs of the bank for carrying out active operations, that is, for the possibility of granting loans [3, p.174].

The analysis of the efficiency of any bank should be commenced with the assessment of liability balance as long as it will allow to create a picture of the state of the resource base required for the performing active operations and generating profits.

         For detailed analysis of passive operations to be conducted there is a need to pay attention to the following key aspects:

  • structure and dynamics of the articles of liability balance of the bank;
  • economic performance standards of the monetary authorities that assess capital adequacy and liquidity of institutions;
  • indicators of the overall performance and the financial stability of the bank.

This analysis will help to adequately assess the effectiveness of forming the resource base of the bank and establish possible ways to ensure its financial stability [4, p. 98].

         There have been elected of Public Joint Stock Company ” State Savings Bank of Ukraine” for studying the effectiveness of passive operations. It is a banking institution that focuses its efforts on creating profitable and favorable terms for customer service, expanding the range of banking products and services and increasing market presence.

         We consider the data of its performance in order to analyze the main trends in the passive balance of Public Joint Stock Company ” State Savings Bank of Ukraine” during the studied period, Table 1.

         In 2015 the total value of liabilities amounted to UAH 159,13 billion. During the studied period in the structure of bank liabilities customer accounts exceed, namely, their share was 56,12%, 53,42% and 62,11% respectively. In absolute terms, customer accounts have increased during the studied from UAH 46,48 billion to UAH 94,27 billion. The structure also has a tendency to increase the share of loans received from international and other financial institutions. In particular, in 2013 their share was 11,83% (UAH 9,80 bln.), and in 2015 it has increased to 19,43% (UAH 29,50 bln.). In contrast, the structure also has a tendency to reduce the proportion of fund banks from 29,08% (UAH 24,08 bln.), in 2013 to 10,91% (UAH 16,56 bln.) іn 2015 (Fig. 1). This situation occurred due to the suspension of loans from other banks and repurchase agreements of the NBU.

Table 1

Dynamics Liability Balance of JSC “Oshadbank” during 2013-2015

Indices, bln. UAH Period The absolute increase, bln. USD. Growth rate,%
2013 2014 2015 2014-2013 2015-2014 2014-2013 2015-2014
Liability
Funds of banks 24,08 22,18 16,56 -1,9 -5,62 -7,89 -25,34
Customer accounts 46,48 56,27 94,27 9,79 38 21,06 67,53
Loans from international and other financial institutions 9,80 19,34 29,50 9,54 10,16 97,35 52,53
Other borrowed funds 1,09 5,45 7,20 4,36 1,75 400,00 32,11
Other liabilities 0,53 0,44 1,73 -0,09 1,29 -16,98 293,18
Subordinated debt 0,84 1,66 2,54 0,82 0,88 97,62 53,01
Total liabilities 82,82 105,33 151,79 22,51 46,46 27,18 44,11
Equities
Stock capital 17,48 30,15 30,15 12,67 0 72,48 0,00
The revaluation reserve for buildings 1,33 1,23 1,19 -0,1 -0,04 -7,52 -3,25
Revaluation reserve for investments available for sale -0,59 -1,24 -0,80 -0,65 0,44 110,17 -35,48
Retained earnings / Uncovered loss 0,97 -10,94 -23,21 -11,91 -12,27 -1227,84 112,16
Total equities 19,19 19,21 7,34 0,02 -11,87 0,10 -61,79
Total liabilities (all funds) 102,01 124,54 159,13 22,53 34,59 22,09 27,77

Source: [5]
During 2013-2015 the total value of the bank liabilities has increased from UAH 82,82 billion to UAH 151,79 billion, it is UAH 68,97 billion. Moreover,  there have been increased the share of liabilities in the structure of all funds from 81,19% to 95,39%.

At the end of 2015 the total value of the bank equity has amounted to UAH 7,34 million and in the dynamics  the amount of equity has decreased by UAH 11,85 billion. The reduction of  the value of equity has been made mainly due to an increase in outstanding losses, which at the end of 2015 has amounted to UAH  23,21 billion. However, in 2014 there was an increase in stock capital to UAH 12,67 billion (72,48%) compared to 2013. The decision to increase the stock capital by means of  emission of  shares was taken by the Government in August, November and December of 2014.

Fig. 1. Structure of the Liabilities of the Fund Balance of JSC “Oshadbank” during 2013-2015,%

Source: [5]

During the recent years the results of Sberbank were unprofitable. In particular, in 2015 the total loss has amounted to UAH 11,87 billion. A key factor in the bank loss was the need of forming the significant amounts of insurance reserves for troubled assets.

During the study period indices of performance in Public Joint Stock Company ” State Savings Bank of Ukraine”met the standards set by the NBU (Table. 2). During 2015 regulatory capital has amounted to UAH 30,8 billion this size in comparison to 2014 has increased by UAH 11,10 billion or 56,3%, and by UAH 12,4 billion in comparison to 2013. The indicator of capital adequacy has increased during 2014 to 6,82% and at the beginning of the current reporting period amounted to 31,4%, it indicates the increase in the risk that the holders of bank take, not creditors and depositors. The ratio of regulatory capital was in the normal range in comparison to the total assets, it indicates that regulatory capital is adequate to carry out active operations. During 2013 the instant liquidity indicator of  Public Joint Stock Company ” State Savings Bank of Ukraine” has amounted to 78%, it means that about 80% of all bank liabilities of current customer accounts were provided with highly liquid assets. Over the next year the test value index has decreased by 42,49% to 35,51%, but at the beginning of 2015 its value has increased by 25,02% and the liabilities of the bank of current customer accounts were provided with highly liquid assets by 60%.

Table 2

Dynamics of the Economic Requirements of the JSC “Oshadbank” during 2013-2015

Economic standards Normative values Years Absolute growth
2013 2014 2015 2014-2013 2015-2014
Bank regulatory capital  – Н1 (bln. UAH.) Not less than 120 bln. UAH 18,40 19,70 30,80 1,30 11,10
The adequacy of regulatory capital – Н2, % Not less than 10 % 27,92 24,58 31,40 -3,34 6,82
The ratio of regulatory capital to total assets ‒ Н3, % Not less than 9% 18,04 15,82 19,36 -2,22 3,54
Immediate liquidity ratio – Н4, % Not less than 20 % 78,00 35,51 60,53 -42,49 25,02
Current liquidity ratio – Н5, % Not less than 40 % 60,20 77,67 104,70 17,47 27,03
Short-term liquidity ratio– Н6, % Not less than 60 % 62,50 68,31 95,29 5,81 26,98

Source: [5]

The evaluation of independence and thus resistance on short-term market movements has been carried out by analyzing the ratio of equity to liabilities. Analyzing the studied period, we can see that only during the 2013-2014 biennium most indicators of financial stability were within normal limits.

         Table 3

Dynamics of Financial Stability of JSC “Oshadbank” during 2013-2015

Indices Normative values The coefficients Absolute growth
2013 2014 2015 2014-2013 2015-2014
Reliability factor,% Not less than 5 % 23,16 18,24 4,84 1,16 15,2
Financial leverage ratio <20 4,32 5,48 20,68 -3,38 -10,82
Factor participation in the forming of equity assets,% Not less than 10 % 18,81 15,43 4,61 -0,44 36,27
Protection factor of equity,% Х 17,98 17,54 53,81 -1,71 1,15

Source: [5]

During 2013-2015 biennium the safety factor has gradually decreased and in 2015 it reached a critical value and amounted to 4,84% (Table. 3). This situation indicates that since 2015 the bank has a high level of dependence on borrowed funds, which reduces the financial stability of the bank. In contrast, the financial leverage ratio tended to increase. In recent years, it has increased by 16,36 points and in 2015 it has reached to 20,68, which also shows a decline in the financial stability of the bank. The data in the table depict an increase in security of equity by means of growing investment in capitalized assets – fixed assets and intangible assets. It finds its confirmation in the appropriate growth factor from 17,54% to 53,81%.

One of the key performance indicators of the bank is return on equity, the value of which during the studied period did not meet the normative value and pointed to the loss-making activities of the bank (tab. 4).

Table 4

Dynamics of Profitability of JSC “Oshadbank” during 2013-2015

Indices Normative values The coefficients Absolute growth
2013 2014 2015 2014-2013 2015-2014
Return (loss) of bank assets, % Not less than 1 % 0,77 -9,50 -8,37 -10,27 1,13
Return (loss) bank capital, % Not less than 15 % 3,84 -56,04 -89,45 -59,88 -33,41

Source: [5]

In particular, during 2014 and 2015 the value of the indicator was 56,04% and 89,45%  respectively, or on 1 USD of capital accounted for 56.04 kop. and 89,45 kop. of net loss. So, in 2014 1 USD of bank assets was 9,50 kop. of  net loss, and in 2015 the value of the analyzed indicator has decreased by 1,13 kop. and reached 8,37 kop. This situation indicates that bank resources were used in an inefficient way.

In order to overcome these problems there is a need to increase equity by reinvesting profits. The profits of the bank are formed by means of credit and cash transactions and  it is the main source of payment of dividends to shareholders of the bank and the creation of reserve funds [31].

To ensure the profitability of  Public Joint Stock Company ” State Savings Bank of Ukraine” there is a need to minimize the costs of the bank authorities and maximize income from banking activities have offered by such directions:

  • Increase in assets from which the bank receives interest income. It can be achieved by increasing the number of borrowers who have a satisfactory financial position, as well as by increasing the mobilized resources, which is possible with well-formed deposit policy.
  • Increase in the share of earning assets in total assets by means of minimizing non-performing assets  with leaving the required quantities for supporting bank liquidity.
  • Restructuring of the portfolio of earning assets. There is a rule that state the higher the income is, the greater the risk in banking is. Therefore, the main task of the bank is to define  the degree of acceptability and justification of a risk in order to get the necessary level of income [6].

Conclusions. Passive operations mobilize the resources of a commercial bank for ensuring the activities to maintain liquidity at an appropriate level and receive the planned income. Today Public Joint Stock Company ” State Savings Bank of Ukraine” requires a capital increase at the expense of profits. It is possible to realize my means of increasing  the number of borrowers who have a satisfactory financial position, as well as increasing deposits. In addition, it is nessesary to minimize non-performing assets taking into account the degree of risk acceptability and justification for the required level of income.

References:

  1. Law of Ukraine “On banks and banking activity” from 07.12.2000 number 2121-III – [Electronic resource]. – Retrieved from: http: // zakon2. rada.gov.ua/laws/.
  2. Lupus. O Credit and Banking: [textbook] / O. Lupus, N. Rushchyshyn, T. Andreikiv. – K: Knowledge, 2008. – 564p.
  3. Stojko. O Banking – O. Stojko – Kyiv: Kyiv National Economic University, 2014. – 226 p.
  4. Perasia-Verhunenko. I Strategic analysis of the banks: the theory, methodology, practice: [Monograph] / I. Persia-Verhunenko – Kyiv: Kyiv National Economic University, 2007. – 360p.
  5. The annual financial report of JSC “Oshadbank” for 2015. – [Electronic resource]. – Retrieved from: http://www.oschadbank.ua/upload/iblock/ d9f / FS% 20SSBU% 202015% 20separate% 20ukr% 20ISA.pdf
  6. Annual financial report of JSC “Oshadbank” for 2014. – [Electronic resource]. – Retrieved from: http://www.oschadbank.ua/upload/iblock/ d9f / FS% 20SSBU% 202015% 20separate% 20ukr% 20ISA.pdf
  7. The annual financial report of JSC “Oshadbank” for 2013. – [Electronic resource]. – Retrieved from: http://www.oschadbank.ua/upload/iblock/ d9f / FS% 20SSBU% 202015% 20separate% 20ukr% 20ISA.pdf
  8. Filippov. A Problems of improving the profitability of banks in modern conditions [Electronic resource] / A. Filippov – Retrieved from: http://www.rusnauka.com/12_ENXXI_2010/Economics/65217.doc.htm
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