The quarantine measures introduced to combat the pandemic have significantly affected the sector’s operation, in particular the dynamics of attracting deposits, lending, and the profitability of market participants. The NBU has substantially eased requirements for the banks and expanded their capacity to maintain liquidity, but their operating conditions will remain difficult in the coming months as portfolio quality deteriorates, risks increase, and demand for services declines. At the same time, the reform of the banking sector has significantly strengthened the banks’ resilience, so most institutions will be able to avoid the need to increase capital. And when the nationwide lockdown has been lifted, the banks’ major task will be to support the country as it recovers from the economic fallout of the coronavirus outbreak.
These are the takeaways from the latest Banking Sector Review.
Hryvnia business loans are growing, while demand for consumer loans has waned
Net hryvnia corporate loans, i.e. the corporate loan portfolio net of provisions, increased by 3.6% in Q1 and by almost 9% in March. The key underlying drivers were seasonality and the propensity of businesses to reduce their foreign currency liabilities amid prevailing devaluation expectations. Overall, FX corporate loans dropped by almost 7%, having been partially converted into hryvnia loans.
The key policy rate cut in Q1 also prompted the reduction in the cost of hryvnia corporate loans to 13.9% per annum.
Net hryvnia retail loans increased by 3.2% in January–March, or by 26.6% yoy. The growth in retail loans slowed in Q1 as demand from borrowers declined and risks for lenders rose amid quarantine measures, while interest rates remained at about 34% per annum.
The share of nonperforming loans (NPLs) rose by 0.6 pp, to 48.9%. The retail NPL ratio has grown for the first time since the beginning of 2018, which primarily reflected hryvnia devaluation effects.
In terms of individual asset components, FX balances in correspondent accounts with other banks (in the U.S. dollar equivalent) grew by a third in Q1. This is currently the largest component of the banks’ high-quality liquid assets in foreign currency, ensuring there is a sufficient LCR. In addition, the banks’ holdings of domestic government debt securities increased while investments in certificates of deposit fell.
Retail deposits rose despite outflows in the second half of March
Hryvnia retail deposits rose by 4.4% qoq or by 18.5% yoy in Q1, in spite of outflows in the second half of March. FX retail deposits grew by 14.5% yoy, having remained virtually unchanged on a quarterly basis.
Hryvnia corporate deposits fell by 6.4% qoq, while FX corporate deposits (in the U.S. dollar equivalent) increased by 2.4%. This can be explained by slowing corporate activity and hryvnia funds being converted into foreign currency.
In January–February, interest rates on corporate and retail deposits were falling sharply. As the nationwide quarantine began, however, the banks suspended rate cuts in order to retain deposits. In Q1, interest rates on 12-month hryvnia retail deposits fell to 11.9% per annum, and those on 12-month U.S. dollar deposits declined to 1.2% per annum. Interest rates on hryvnia corporate deposits dropped to 7.1% per annum.
The banks entered the crisis prepared, and most of them will be able to avoid capital increases
In Q1 2020, the banking sector’s combined profit increased by 23.8% yoy, to UAH 16.0 billion. At the same time, the sector booked a mere UAH 97 million in net income in March due to a surge in provisioning. Fourteen banks incurred UAH 2.7 billion in losses. The growth in net interest income (+6.8% yoy) and net commission income (+7.9% yoy) decelerated to four-year lows.
The past three years of high profitability will give way to a much weaker financial performance, primarily due to deteriorating loan quality and additional provisioning. At the same time, the reform of the banking sector has significantly strengthened the banks’ resilience, so most institutions will be able to avoid the need to increase capital.
The NBU substantially eased its regulatory requirements for banks in order to mitigate the impact of the pandemic on the banking sector and to support the economy. The NBU also launched a new floating-rate long-term refinancing instrument. This will enhance the positive effect of key policy rate cuts.
Demand for banking services is declining amid quarantine measures, but remains stable. Demand for working capital financing will grow, especially as the economic recovers. Therefore, banks should be ready to support businesses by providing access to credit resources for quality borrowers. Thanks to low inflation and the cuts to the key policy rate, the NBU projects that loans will become cheaper.
Data on loans and deposits published in the Banking Sector Review differs from data published in the Monetary Statistics section in that the former:
- contains data on the banks that were solvent as of the reporting date unless stated otherwise
- includes data on the banks operating abroad, and their branches
- contains data on deposits in other resident and nonresident banks
- has been adjusted for loan loss provisions unless stated otherwise
- contains data on personal certificates of deposit unless stated otherwise
- contains information on nonresident customers.