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Banks’ NPL Ratio Rose to 38% in 2022 Due to War

Banks’ NPL Ratio Rose to 38% in 2022 Due to War

In the banking sector, the NLP ratio increased to 38% as of 1 January 2023 from 30% as of 1 January 2022. Over the year, hryvnia NPLs rose by UAH 87 billion to UAH 432 billion.

Russia’s military onslaught on Ukraine reversed the stable trend for a gradual reduction in Ukrainian banks’ NLP ratio that had lasted since 2018 and resulted in the volume of NPLs declining by almost UAH 300 billion and their share in the loan portfolio decreasing from 55% to 27% (as of 1 March 2022).

russia’s war brought about damage to assets and collateral property, loss of income, and deterioration of borrowers’ solvency, all of which in turn reduces their ability to service loans, aggravates the banks’ loan portfolio quality, and leads to an increase in provisioning.

The banks have already recognized large credit losses: since the start of the full-scale war, provisioning has exceeded UAH 100 billion and reached around 12% of the performing loan portfolio the banks had at the end of February 2022. Because of the war, the economic crisis, and russian energy terror, the potential losses of the credit portfolio can reach 30%.

The NPL coverage ratio (total loan loss provisions to NPLs) stood at 95% as of the end of 2022.

“The recognition of actual asset quality will continue, leading to further growth in the volume of NPLs. The NBU expects the banks to take a prudent approach to assessing credit risk, especially for borrowers that have lost their income and are not able to resume servicing their loans. It is also important that the banks carry out flexible restructurings for borrowers that have the potential to resume doing business, and that they assess the value of collateral property, recognizing in a timely manner the loss of access to the property, its damage or destruction,” said Kateryna Rozhkova, First Deputy Governor of the National Bank of Ukraine.

In order to make sure that the banks use correct approaches to credit risk assessment, the NBU will conduct an asset quality review in 2023.

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