Banks are reducing their interest rates on loans in response to lower inflation and looser monetary policy. The cost of foreign currency loans in 2019 hit a historical low and will continue to decline this year. Market players are well-capitalized and comply with the capital conservation buffer requirement (0.625% on top of the common equity), which took effect at the start of 2020. The NBU has published this information in its regular Banking Sector Review.
Bank loan interest rates are responding to monetary policy easing
Cuts in the key policy rate amid the macrofinancial stability and slower inflation drove the rates on hryvnia corporate loans down by a sizeable 2.4 pp in Q4, to 15.7% per annum, and to 15% per annum as of mid-February. At the same time, the rates on foreign-currency corporate loans reached a historical low in 2019 and will continue to decline this year.
Further decreases in corporate loan rates will contribute to a recovery in the corporate lending segment despite a reduction in Q4 2019.
With lower interest rates, the cost of resources will no longer stand in the way of corporate lending resumption. At the same time, a faster growth in corporate lending will be restrained by the lack of high-quality transparent borrowers.
Interest rates on hryvnia retail loans decreased by a mere 0.5 pp over the quarter, to 33.6% per annum. The rates on consumer loans are declining slowly due to high demand for this type of loans (read more in the Q1 2020 Bank Lending Survey).
The levels of loan portfolio dollarization and the share of nonperforming loans (NPLs) decreased in Q4 and in 2019 overall.
The NPL share fell by 48.4% over the year, thanks to active consumer lending and NPL write-offs against provisions.
The dollarization of the loan portfolio dropped to 40.7% gross (portfolio including provisions) as new hryvnia retail loans were issued and the domestic currency strengthened.
Banks’ holdings of certificates of deposit (CDs) increased markedly in December. That was driven by surplus liquidity in the banking system, explained by large inflows to corporate accounts in the last month of the year (primarily, USD 2.9 billion of foreign-currency proceeds received by Naftogaz of Ukraine based on a ruling of the Stockholm arbitration court).
Deposits are growing despite lower interest rates
Along with the monetary policy easing and state-owned banks reducing their deposit interest rates, deposit rates started to decline across the system.
Interest rates on 12-month hryvnia retail deposits dropped by 0.7 pp over October–December, to 15.1% per annum. This trend continued in January 2020. Interest rates on 12-month retail deposits in US dollars decreased by 0.6 pp, to 2.6% per annum. The rates on hryvnia corporate deposits declined by 2.7 pp in Q4, to 10.3% per annum.
In the meantime, retail and corporate deposits continued to grow in 2019. Hryvnia corporate deposits grew by 16.2% qoq and 19.5% yoy. Following a decline in Q3, hryvnia retail deposits increased by 8.4% qoq and 17.5% yoy across all bank groups. Foreign-currency deposits of retail clients (in US dollar equivalent) increased by 6.4% qoq and 15.4% yoy. This developments are explained by weaker depreciation expectations and lower interest rates on foreign-currency deposits.
The banking sector has posted record profitability
Banks’ profitability reached a record high last year. The sector’s profit was almost three times the level of 2018, reaching about UAH 60 billion.
From the start of 2020, banks must maintain a capital conservation buffer (0.625% on top of the common equity adequacy ratio). All banks are sufficiently capitalized and comply with this requirement. The required capital conservation buffer will grow to 1.25% for all banks by the year end.
Moreover, by the end of the year, systemically important banks must create the systemic importance buffer (1% or 2% on top of the common equity adequacy ratio, depending on the bank’s systemic importance).
The sector’s profitability allows banks to meet the capital buffer requirements without difficulty.
In addition, banks are to approve their NPL resolution programs by the end of March.
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.