Most Banks Remain Operationally Efficient during War despite Large Credit Losses – Banking Sector Review

In Q3, the banking sector continued to adapt to crisis conditions. The banks maintained the operation of their networks and rapidly reopened branches in liberated regions.

The system’s liquidity grew thanks to continued inflows of client deposits. Hryvnia term deposits have started to increase for the first time since the start of the full-scale war, while FX term deposits returned to growth, which has not been seen since the coronavirus crisis.

Net loan portfolio declined overall. Corporate loan portfolios grew only at state-owned banks on the back of state support programs. The ratio of nonperforming loans (NPL) rose as expected, with the fastest growth seen in the retail segment.

Despite heavy provisioning, the sector posted a profit as of the end of the quarter, following a loss recorded in H1. This was facilitated by sustained operational efficiency.

The banks’ assets exceeded pre-war levels, while the loan portfolio decreased

In Q3, the banks posted a 7.5% qoq increase in net assets, which exceeded pre-war levels. The largest growth was observed in NBU certificates of deposit.

At the same time, the net loan portfolio declined: the hryvnia portfolio decreased due to an increase in provisions, and the FX portfolio shrank mostly on loan repayments. Net hryvnia corporate loans dropped by 2.2% qoq, while net FX corporate loans decreased by 10.0% qoq in U.S. dollar terms. Hryvnia corporate loans grew at state-owned banks only, by 4.3% qoq.

The net retail loan portfolio shrank by 13.8% qoq in Q3 due to both a decrease in lending volumes and an increase in provisioning.

The banks have been gradually recognizing their credit losses caused by the war. The share of NPLs grew by 3.9 pp over the quarter and by 7.0 pp since the start of the full-scale invasion, to 33.6%. The NPL ratio rose the most in the retail sector. Loans have been recognized as nonperforming mainly due to payments falling past due.

Retail term deposits have grown for the first time since the start of the war

The NBU raising the key policy rate in June prompted banks to increase their rates on both retail and corporate deposits in Q3. Interest rates on loans went up along with deposit rates.

Volumes of hryvnia retail deposits increased by 2.7%, mainly due to larger account balances with state-owned banks. Volumes of FX retail deposits remained almost unchanged. Thanks to higher deposit rates, retail term deposits returned to growth, increasing by 2.2% for the first time since the start of the war. As the NBU allowed buying foreign currency to open FX term deposits, these deposits grew by 5.9% in the U.S. dollar equivalent.

Hryvnia corporate deposits increased by 3.7% qoq, whereas FX corporate loans decreased by almost 2% in U.S. dollar terms.

Client deposits dominated liabilities of the banks, accounting for 86.8%.

The sector is profitable thanks to operational efficiency

The banking sector generated UAH 12 billion in profits in Q3. The earned profits offset losses of H1, leading to a positive financial result in the first nine months of the year (UAH 7.4 billion).

The profitability was due to high operational efficiency. The banks’ interest income continued to grow, and their fee and commission income was recovering gradually. Gains from FX and securities revaluation boosted the total financial result. The cost-to-income ratio (CIR) in Q3 was 36.5%, compared to 44.6% in the same period last year.

At the same time, the financial institutions had to set aside large provisions for losses caused by the war. In Q3, UAH 33.5 billion was allocated for loan loss provisions and UAH 7.1 billion for securities provisions. The recognition of actual asset quality will continue, leading to further growth in provisions.

The NBU encourages the banks to apply a prudent approach to assessing credit risk, hold rational restructuring, and evaluate collaterals properly. Next year, the central bank will hold an asset quality review to make sure the banks use correct approaches to credit risk assessment.