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Banks Step up Lending to Businesses and Households – Financial Stability Report

Banks Step up Lending to Businesses and Households – Financial Stability Report

The banks are not just operating without interruptions, but they are increasing their lending to business and households, and are ready to contribute further to the economy’s recovery. This is according to the December Financial Stability Report.

The financial sector operated amid a generally favorable macroeconomic environment

The GDP growth rate has surpassed expectations, while inflation has decelerated remarkably. The NBU has been lowering its key policy rate since mid-2023. However, taking into account an improvement in inflation expectations, its current level ensures that hryvnia saving instruments remain sufficiently attractive. As proper macroeconomic preconditions were ensured and thorough preparations were made, the transition to managed flexibility of the hryvnia exchange rate was successful, and the related risks to the stability of the FX market and the financial sector did not materialize.

The full-scale war and security risks that it entails are the key systemic challenge for the financial sector. The risks of irregular and insufficient inflows of international assistance pose the major threat to macro-stability. However, chances that partners will successfully approve aid packages seem to be high.

The NBU’s baseline scenario for 2024 assumes ongoing economic growth, single-digit inflation, controllable situation on the FX market, and predictable interest rates. Therefore, macroeconomic conditions with remain appropriate for the stable functioning of the financial sector next year.

Clients’ funds continue to flow into bank accounts

The inflows decelerated compared to H1 2023. Regular fund inflows underpin the banks’ liquidity positions. High-quality liquid assets make just a little under a half of total bank assets. Given such a resilience margin, the financial institutions can even cope with strong liquidity shocks, although the latter are currently highly unlikely.

The banks stepped up their key activity – lending to businesses and households

Volumes of hryvnia lending to businesses have been on the rise for six months in a row. Companies’ improved financial standing and revived business activity have pushed up loan supply and demand.

As before, hryvnia corporate lending is fueled by the state program Affordable Loans 5%­–7%–9%. The program has to be fundamentally revised and refocused on support for small and medium enterprises and efficient use of budget funds. Subsidized lending will be gradually phased out for businesses that have recovered after the crisis. At the same time, not only preferential lending is in demand: the banks that are outside of the state support programs are building up their loan portfolios as well.

Unsecured retail consumer loans and mortgages are also on the rise. A couple of banks dominate unsecured consumer lending, so the sector’s concentration is rising. Mortgages are currently granted almost exclusively by state-owned banks under the eOselia state program.

The sector has passed the peak of credit losses from the large-scale war. Results of the resilience assessment by the NBU confirm that. In general, there was only a minor adjustment in prudential provisions. As of today, out of the total amount of non-performing corporate loans, around a third are those that emerged in the course of the full-scale war. For many borrowers, the default was caused by the loss of market or weaker domestic demand. So some of them have a chance to resume servicing their loans as economic conditions improve.

High credit risks are persisting for a number of industries that are slow to recover. Moreover, a number of agro producers are experiencing significant financial difficulties this year because of low domestic prices for their products.

Overall, the banks have sufficient appetite for lending and are ready to assume moderate credit risks – and to effectively manage impaired assets should those risks materialize.

Operational efficiency remains high

This year, the banks incurred almost no provisioning costs. Losses from defaults were offset as provisions for performing asset portfolios were released thanks to improved macroeconomic expectations. Going forward, the level of losses from credit risk is to normalize in all segments. However, the banks will continue to cover credit losses with current operational incomes.

A considerable cut to the NBU’s key policy rate changed returns on main groups of the banks’ interest-bearing assets. The share of income from certificates of deposits is contracting, while the weight of income from lending is growing. Although the rates on loans to businesses have decreased somewhat, the corporate loan portfolio has increased. The times of highest interest margins for the banks are likely to be over, but a narrowing of the margins does not pose a significant risk for the banks.

A permanent increase in the income tax rate to 25% starting from 2024 will have a considerable impact on the banks’ profitability. This factor will lower returns in the banking business and slow down the accumulation of capital by the banks.

The banks’ high profitability drove an increase in capital adequacy ratios. Currently, capital stock is sufficient both to cover risks and to comply with upcoming requirements. The most significant of the new requirements will be to fully cover operational and market risks with capital and to comply with a new regulatory capital structure along with new regulatory capital adequacy ratios.

This year’s resilience assessment has confirmed a strong resilience margin of the banking sector. The NBU set higher required capital adequacy ratios for only five banks.

Early next year, the NBU will consider the expediency of setting the capital conservation buffer and the systemic importance buffer. Afterwards, the NBU might ease the restrictions on capital distribution for those banks that would have built the buffers in full.

Non-banking financial sector is transforming

New laws on insurance, credit unions, financial services, and finance companies will apply from early January.

The insurance market has probably evolved the most in recent years, due to the gradual tightening of solvency and asset quality requirements. Insurers that could not or did not want to comply with the new requirements left the market. At the same time, the sector has become more resilient to challenges.

The development of the payments market has also been dynamic, promoted by opportunities offered by the new legislation. So far, transaction volumes of non-bank payment services providers are insignificant, so the segment carries no systemic risks.


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