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Banking Sector Review: Banks Continue Active Retail Lending and Generate Record Profits

Banking Sector Review: Banks Continue Active Retail Lending and Generate Record Profits

The banking sector remains profitable on the account of a high margin in retail lending, high fee and commission income, and much less loan loss allowances. At the same time, banks need to create a capital buffer in order to meet tighter requirements gradually introduced by the NBU. This is according to the NBU’s regular Banking Sector Review issued today.

Banks continue active retail lending

In July-September, retail loan portfolio grew rapidly: the growth rate remained at almost 30% yoy. In retail lending, the NPL ratio shrank by 2.9 pp to 38.1% owing to the high rates of new loans being issued in Q3.

At the same time, increase in corporate lending slowed down due to borrowing from abroad. In general, the net hryvnia corporate loan portfolio increased by 1.9% yoy in Q3. Due to successful restructuring by a range of banks, the NPL ratio in this segment also reduced.

In Q3, interest rates on hryvnia corporate loans declined by 0.5 pp to 18.1%, and on FX corporate loans - by 0.6 pp to 4.5%.

Strengthening of hryvnia fostered a decrease in dollarization of both corporate and retail loan portfolios by 2.7 pp and 1.3 pp, to 44.8% and 4.4% respectively over the quarter.

Tight competition for customers keeps the retail deposit rate from dropping

At the end of Q3, bank deposits in hryvnia of both households and businesses grew by 12.7% and 14.3% yoy respectively (however retail deposits in hryvnia reduced by 1.1% qoq). At the same time, retail FX deposits has increased at the highest pace since 2014.

Despite gradual reduction of the key policy rate by the NBU to 15.5% in October, tight competition among banks for customers pushed interest rates for 12-month retail deposits by 0.3 pp up to 15.8% p.a. The interest rate of 3.2% for 12-month U.S. dollar retail deposits remained unchanged. It has stood at this level for several months now as state-owned banks have been keeping interest rates at some of the market’s highest levels.

At the same time, interest rates on corporate deposits decreased to 13% per annum, returning to the level of September 2018.

Banks should allocate record profits to a capital buffer

In January–September, profits of the banking sector exceeded the previous year’s figure 4.4 times and reached UAH 48.4 billion, with 66 banks of 76 operating ones being profitable. The banking sector’s returns are driven by high margins in the retail segment and high commission income. The banking sector’s ROE is 38%. Favorable macroeconomic conditions show that the sector will continue the high-profits trend.

Considering NBU plans to tighten capital adequacy requirements, banks should utilize the highly beneficial period to create a margin of safety to meet such requirements. Please be reminded, that the capital conservation buffer is to be activated at the beginning of 2020. Its value is to increase by 0.625% every year until it reaches the level of 2.5% on 1 January 2023. Additionally, systemically important banks will be required to maintain systemically important buffers (1%-2%) from early 2021 onward. Also before the year is over, the NBU plans to adopt rules for calculating capital needs to cover operational risks. The rules are expected to take effect in early 2022.

As of December, the minimum value of the liquidity coverage ratio will increase to 100% (from today’s 90%). The NBU expects that all banks will meet the minimum LCR requirement. The NSFR methodology is to be approved by the year end, with NSFR to become a mandatory prudential requirement starting in early 2021.

For reference:

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.
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