The financial sector adjusted to work under harsh conditions of the full-scale war. The banks continuously provide services, support their networks, maintain operational efficiency and profitability, and build up capital. The accumulated margin of safety supports financial stability, underpins the banks’ resilience in the face of further challenges of the protracted war, and paves the way to a full-fledged lending recovery.
russian energy terror turned out less destructive than expected
The energy system stood strong, thus promoting the revival of economic activity. This year, the economy will moderately grow, inflation will decelerate further, and the FX market will remain stable. Therefore, the NBU will be in position to start cutting its policy rate sooner than previously expected. Financial performance indicators of businesses are improving despite still-low production volumes. However, enterprises’ demand for loans is moderate. The labor market and households’ incomes are gradually recovering. As a result, the propensity to consume also increases. This enhances households’ demand for bank loans, primarily credit card loans.
International assistance remains vital for Ukraine. The program launched with the International Monetary Fund will help Ukraine receive USD 115 billion from partners over the next four years. It also makes international financial assistance more systemic. Funds from international partners support the balance of payments. They also made it possible to achieve the highest volume of NBU’s international reserves in over a decade.
Banking sector liquidity does not give reasons for concern
Short-term liquidity coverage is, on average, three times the minimum requirements. Household bank deposits are stable. The NBU’s efforts to improve the term structure of household deposits are yielding results: the banks increased the attractiveness of hryvnia term deposits by raising rates on deposits with longer maturities and revising their product lines. As a result, both the volume and share of hryvnia term deposits started to grow.
Business deposits continue to flow in. Due to their market bargaining power, enterprises get better rates on their deposits. The higher rates and larger deposit amounts led to higher banks’ costs of funding from corporates. The share of refinancing and external loans in the banks’ liabilities shrank to historical lows.
The adverse scenario of credit losses did not materialize
The business loan portfolio continues to shrink because of weak demand: total new loans are less than repayments of loans issued earlier. Nevertheless, the banks are optimistic and expecting the hryvnia loan portfolio to grow by around 10% over the year, thanks to lending under government support programs. The banks and enterprises should retain access to these programs, and compensation to the banks under these programs should be repaid in time.
Driven by higher demand for card loans to meet current needs, the retail loan portfolio has stabilized after a deep dive. An aspiration to recover the portfolio should not distract the financial institutions from maintaining loan quality. The state program eOselia is behind the episodes of spikes in mortgage lending. However, there are interruptions in financing of the program. Uncertainty will hold back real estate market development and mortgage lending for quite a long time.
Having had reflected significant losses from credit risk, the banks were provisioning less. Since the onset of the full-scale war, the banks recognized the loss of almost 15% of their portfolio that was performing on the eve of the invasion. A proportion of restructured corporate loans may become nonperforming in future. Taking into account potential losses, total portfolio war-related losses will approach 20%. The adverse scenario of credit losses that assumed a lasting adverse impact from electricity shortages has not materialized.
The banks will use capital to comply with previously postponed requirements and to build up buffers
In spite of war-related losses, the banks generated profits last year. These profits grew even further in 2023. The profits were driven by high interest income from investment into high-liquid assets. Shifting towards less risky instruments is the banks’ usual response to crisis episodes. The high interest margin provides the banks with breathing space before an eventual decline of interest rates, so profitability risks are low. Operational efficiency is typical of all classical business models: corporate, retail, and universal ones.
The market share of state-owned banks is rising, which is typical for crisis episodes. Privatization of state-owned banks will be back on the agenda in the post-war period. Currently, the major issue is updating their strategies in view of protracted uncertainty over the security situation.
High profitability promoted a rise in the sector’s capital adequacy. Currently, it is twice the required minimum ratio. The bank resilience assessment aims to estimate the real capital need of the banks. The banks’ profits are expected to be the major source for capital recovery. The banks should be able to meet the postponed and new capital requirements in line with European regulations, Moreover, based on the resilience assessment, the NBU may reimpose the requirement to build up capital buffers. Until these priority objectives are met, restrictions on capital distribution will remain in place.