Banks Build Up Corporate Lending for Three Straight Quarters with Lending Outside State Programs Picking Up – Banking Sector Review

The banks have been increasing corporate lending for three quarters in a row, while the share of loans subsidized under the state program Affordable Loans 5–7–9% has fallen to one third of the gross performing portfolio. These are the takeaways from the Q1 2024 Banking Sector Review.

Demand for corporate loans outside of state programs has increased, in particular due to lower interest rates

Corporate lending has been reviving for the third consecutive quarter: the net portfolio of hryvnia corporate loans grew by 2.9% qoq and by 7.2% yoy. The annual growth of hryvnia SME loans accelerated to 15.9%.

Lending outside of state support programs continues to grow. In Q1, the share of loans under the Affordable Loans 5–7–9% program decreased to one third of the gross portfolio of hryvnia performing loans.

The volume of net retail hryvnia loans is growing rapidly, driven by card lending by two leading banks. Mortgage lending is reviving thanks to the eOselia program. The share of mortgages increased to 12.4% of the net hryvnia retail loan portfolio.

The quality of the loan portfolio is improving: the annualized default rate in March decreased by 0.3 pp compared to December 2023, and the share of non-performing loans slightly declined across all groups of banks, primarily due to the resolution of retail borrowers' debts.

In response to the key policy rate cut, interest rates on new corporate deposits decreased in Q1 by 0.7 pp, to 9.5% per annum. At the same time, the Ukrainian Index of Retail Deposit Rates (UIRD) remained almost unchanged. In Q1, interest rates on hryvnia corporate loans dropped by 1 pp, to 16.7% per annum, while interest rates on new retail loans hovered around 27.5% per annum.

Deposit inflows into banks recovered after a seasonal drop

The share of client deposits in the structure of the banks’ liabilities increased to 92.2%.

In Q1, the volume of client deposits in hryvnia recovered after a traditional seasonal decline at the start of the year. Hryvnia retail term deposits grew almost evenly across all groups of banks.

Corporate deposits in the national currency rose by 1.1% qoq in Q1 and by 41.8% yoy, primarily at foreign and state-owned banks. FX corporate deposits grew more rapidly, but only at private and foreign banks.

The sector is ready to lend and meet requirements in line with EU standards 

Sustained high operational efficiency helped the banks to earn UAH 40.5 billion in profit in Q1. Only eight small banks made losses. The sector's return on equity was around 50%, including the effect of the last year’s tax rate increase to 25%.

Net interest income remained the main source of profit and continued to grow.

The return on assets increased to 11.6% compared to Q1 2023, primarily due to income from domestic government debt securities as their share increased to 26.4% over the year. In contrast, the yield on NBU certificates of deposit decreased, as did their share in interest income. Larger loan portfolios contributed to a rise in lending income, while lending profitability declined due to the downward trend in interest rates.

The further economic recovery was accompanied by an increase in cashless payments and net fee and commission income of the banks.

Given the available capital cushion and profitability, the banking sector is ready to lend and meet regulatory requirements in line with EU standards. New requirements for capital structure and capital adequacy ratios will come into effect in August, and the banks will be given a transition period to comply with them.

The April amendments to the Affordable Loans 5–7–9% program will bring interest rates offered under the program closer to market rates and make it more focused on SME lending. The program will continue to be improved.