Bank Liquidity and Operating Profitability Grew Even under Martial Law in Q2 – Banking Sector Review

In Q2, the banking sector was adapting to working under martial law, in particular thanks to support from the NBU.

The hryvnia loan portfolio expanded, driven by corporate lending by state-owned banks, primarily with the support of state programs. Loan demand from households declined in wartime conditions.

The level of liquidity remained high despite the war. The volume of client deposits in the banks increased primarily due to hryvnia retail deposits and FX corporate deposits.

Provisioning fueled the growth in banking sector losses. However, the sector remained operationally profitable, based on Q2 data.

Banks’ assets increased in general, with mixed loan portfolio dynamics

The banks posted a 3.3% qoq increase in net assets in Q2. Thus, they came close to the pre-war level. Loan portfolio dynamics, however, came out uneven. Net hryvnia corporate loans rose by 5.3% qoq, while net FX corporate loans decreased by 7.2% qoq in dollar terms. The growth in corporate hryvnia lending – by about 30% qoq – was solely driven by state-owned banks.

The net retail loan portfolio shrank by 11.1% qoq in Q2 due to both a decrease in lending volumes and an increase in provisioning. After martial law was imposed, loans were made only to finance the current needs of customers, while mortgage and car lending virtually came to a halt.

The banks started recognizing corporate NPLs. At the same time, the financial institutions ramped up provisioning for the performing retail loan portfolio. This rekindled the growth in NPLs for the first time in a long while: the NPL ratio rose by 2.6 pp in Q2, to 29.7%.

Client deposits remain the main source of stable funding for banks

Hryvnia retail deposits rose by 6.4% qoq due to increases in demand deposits, while FX retail deposits fell by 3.5% qoq in dollar terms. Hryvnia corporate deposits rose by 4.3% qoq, while FX corporate deposits grew by 14.4% qoq. As a share of bank funding, client deposits increased to more than 88% in Q2.

The interest rates on hryvnia retail and corporate deposits started growing in June. The rates on three-month retail deposits rose the fastest. A major increase in credit risk also drove up the rates on hryvnia corporate loans.

Although more provisioning caused banks higher losses, sector remains operationally efficient

The banking sector retained operational profitability, thanks in particular to cost-cutting efforts, even as hostilities dragged on. Operating income components are slowly recovering. However, significant provisions against expected wartime losses led to an operating loss of UAH 4.5 billion in Q2 alone and UAH 4.6 billion since the beginning of the year. In Q2, 24 banks came in as loss-making.

Losses from the materialization of credit risk will continue to grow. The financial institutions are gradually recognizing their credit losses and reflecting the fallout from adverse events – the loss of income, the destruction of assets and collateral, the deterioration of borrower solvency – in the quality of their portfolio.

The NBU encourages banks to assess credit losses in a timely manner, to fully reflect the impact of adverse events on asset quality, and, if possible, to carry out balanced restructurings that will help normalize borrowers’ debt burden and make the banking sector more stable.

After macroeconomic conditions stabilize, the NBU will assess the quality of assets, set the required capital adequacy ratio for the financial institutions, and identify a sufficient period for recapitalization.