Upward trends in the banks’ profits continued in Q2, as did intensive retail lending. The dollarization of the loan portfolio declined, the quality of the loan portfolio improved, and the inflow of household and corporate deposits continued. This is according to the NBU’s Banking Sector Review for August 2019.
The growth in retail lending improved the quality of the banks' loan portfolio and reduced its dollarization
Hryvnia retail loans continued to increase most rapidly in Q2, by 6.6% qoq and 33.2% yoy. Consumer lending remains the most profitable segment for the banks due to robust demand. In the medium term, the net hryvnia retail loan portfolio will keep growing at more than 30% yoy.
Net hryvnia corporate loans were up by 3.1% qoq and 8.9% yoy, mainly driven by seasonal factors and by lending to state-owned companies. This is the highest growth rate in the past three years.
The loan portfolio is undergoing a gradual dedollarization. Thanks to new lending, the share of net FX loans in the retail loan portfolio had declined by 0.7 pp by the end of June, to a mere 5.7%. The dollarization of the net corporate loan portfolio decreased by 2.2 pp qoq to 47.5%, owing to the strengthening of the hryvnia and the revival of hryvnia lending.
The quality of the banks’ loan portfolios is also improving, primarily due to active retail lending, with the share of nonperforming loans in the sector at 50.8%, down 0.9 pp qoq.
The inflow of hryvnia retail and corporate deposits continues
Retail and corporate deposits increased by 2.7% over Q2. Hryvnia retail deposits increased by 5.9% qoq and 11.8% yoy. Hryvnia corporate deposits increased by 1.9% qoq and 8.7% yoy.
The share of foreign currency increased in corporate deposits and declined in retail deposits. At the end of Q2, the dollarization of deposits stood at 40.7%.
In April through July, the NBU cut the key policy rate twice, which was met with little to no response from interest rates on 12-month hryvnia retail deposits. These rates remained at close to 15.5% per annum. The interest rate on 12-month U.S. dollar retail deposits hit an all-time low once again, falling to 3.1% per annum. The interest rate on hryvnia corporate deposits fell to 13.4% per annum. However, this is above the average for the last four years.
Over H1 2019 alone, the banks turned higher profits than in all of 2018
Banking sector profitability continues to set records. In H1 2019, the banks generated UAH 31 billion in profits, which not only is a 3.8-fold increase from last year in year-on-year terms but also is higher than the profits the banks earned in all of 2018. PrivatBank accounted for almost 60% of the sector’s profit. Of 76 banks that were in operation, 66 were profitable.
The banks’ record-high profitability was driven by their effective operation. Operating income increased by 41.7% yoy on the back of a significant increase in interest and commission income from the rapid development of consumer lending and cashless transactions with households. Operating expenses increased by only 10.7% yoy. As a result, operating income before provisioning increased by 89.1% yoy. Provisions totaled UAH 6.4 billion, down 63.4% from Q1.
Gains from trading operations of state-owned banks, in particular the revaluation of FX instruments, were another contributor to the banking sector’s record profitability.
The profitability trend will continue as the NBU’s cycle of key policy rate cuts facilitates a decline in the cost of funding. Meanwhile, the strong demand for retail loans will keep interest rates on them high.
For more details, see the Banking Sector Review in the Publications section of the NBU’s official website.
Data on loans and deposits published in the Banking Sector Review differ from the corresponding data published in the Monetary Statistics in that the former
- contain data on banks that were solvent on the reporting date unless stated otherwise
- include data covering the banks together with their branches that operate abroad
- contain data on funds deposited in other resident and nonresident banks
- have been adjusted for loan loss provisions unless stated otherwise
- contain data on personal certificates of deposit, unless stated otherwise
contain information on nonresident customers.