Banks Increase Retail Lending for First Time since Full-Scale War Broke Out, Retail NPL Ratio Is Down – Banking Sector Review

The net hryvnia retail loan portfolio increased in Q2, for the first time since the full-scale invasion broke out, by 4.5% qoq, primarily thanks to the revival of card-based lending. Mortgage lending also increased in volume, by 2.7%, due to the issuing of loans under the eOselia program.

The net hryvnia corporate loan portfolio continued to shrink during the first two months of Q2, but in June it edged higher for the first time in the last 12 months.

The banks’ recognition of war-related credit losses is insignificant. The NPL ratio for retail loans fell in Q2 for the first time since martial law was imposed, by 2 pp, including due to NPL write-offs. At the same time, business loans grew by 0.4 pp.

Solvent banks’ liabilities increased by 5.3% in Q2 due to the growth in client deposits. At the same time, NBU refinancing loans as a share of bank liabilities plunged by almost three-quarters during Q2, to 0.2%, which matches the level of July 2008.

Retail hryvnia deposits increased by 7.5% in Q2. That includes hryvnia retail term deposits, which were up 14.1% as the banks competed increasingly actively by offering higher rates on longer deposits.

Hryvnia corporate deposits rose by 12.9% qoq, although this growth decelerated during the quarter. FX deposits increased at a slower pace of 6.8%.

The rate of dollarization of client deposits declined by 2.1 pp in Q2, to 36%. For retail deposits, it fell more significantly, to 34.6%, as hryvnia deposits grew and the popularity of FX deposits faded.

The cost of 12-month retail deposits rose by an average of 1.3 pp, to 15.2% per annum, driven by the banks’ ability to invest in three-month NBU certificates of deposit, which pay interest that equals the central bank’s key policy rate. This encouraged the banks to continue to raise their interest rates on term deposits. 

The rates on retail loans edged lower during the quarter, to 28.5% per annum, while those on corporate loans hovered around 20% per annum.

In Q2, the sector made UAH 34 billion in profit, almost the same as a quarter ago. These earnings were driven by sustained growth in net interest income, primarily from highly liquid assets, and near-zero provisioning.

The launch of the cycle of monetary policy easing will lead to a decrease in market interest rates. However, the banks have maintained high net interest margins, meaning that risks to profitability appear moderate in the short run.

The resilience assessment of the top 20 banks has so far yielded optimistic early results: the NBU has detected no significant understatements of credit risk. The sector’s capital needs are unlikely to be significant, and most banks will probably be able to recapitalize using their current earnings.

“The banks have been stepping up lending, which is an important sign of economic recovery,” said Kateryna Rozhkova, NBU First Deputy Governor. “The shrinking of the system’s corporate loans portfolio has halted, while retail loans have actually increased in volume, thanks both to the state program eOselia and to the banks’ own credit programs. Although it is too early to talk about a steady trend, the expectations of economic agents are improving, as is consumer sentiment.”