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Corporate and Mortgage Lending Recovered in Late 2020, Interest Rates Remain at All-Time Lows – Banking Sector Review

Corporate and Mortgage Lending Recovered in Late 2020, Interest Rates Remain at All-Time Lows – Banking Sector Review

In October–December, the banking sector kept positive momentum in corporate and retail deposits. The resumption of lending was stable in most segments. The volume of new mortgage loans more than doubled compared to H1 2020.

Banks reduced loan rates moderately, while interest rates on deposits remained unchanged at single-digit levels.

The recovery in demand for banking services boosted the sector’s operating income.

Provisioning almost doubled during the year, but remained modest relative to the loan portfolio.

The focus remains on the proper assessment of credit risks and improvement of operating performance by banks amid a gradual reduction in interest margins. The NBU published this information in its latest Banking Sector Review.

Demand for Loans is Recovering

The economic recovery and further reduction in loan rates in October–December contributed to the strengthening of demand for corporate and retail loans.

The net hryvnia corporate loan portfolio continued to grow in Q4. Housing lending also recovered significantly: the average monthly volume of new loans more than doubled from both H1 2020 and the whole of 2019, and its growth outpaced the growth in consumer lending.

The NPL ratio in the banking system fell during the year to 41.0% from 48.4% due to NPL write-offs, most of which were made by state-owned banks in Q4.

Single-Digit Interest Rates are not Restraining the Growth in the Deposit Base

In Q4, retail and corporate deposits, primarily hryvnia ones, continued to grow. Hryvnia corporate deposits grew by 34.5% for the year, while FX corporate deposits increased by only 2.2%.

The growth in hryvnia retail deposits amid uncertainty and declining interest rates was driven by demand deposits. Their share grew by 55.2% over the year.

The dollarization rate declined by 3.1 pp, to 38.0% in Q4, due to significant hryvnia deposit inflows.

All Eyes on Loan Portfolio Quality

In 2020, banks reported UAH 41.3 billion in profits. The main reason that financial performance fell by almost one-third was loan loss provisioning.

At the same time, the rates of growth in net interest and fee and commission income were at four-year lows.

The main challenge the banking sector continues to face is credit risk and the need for more provisioning.

In order to assess loan portfolio quality and make the sector more resilient, the NBU will conduct an assets quality review and stress testing of 30 banks.  The NBU will also continue to introduce a number of changes in banking regulation in line with Basel recommendations and EU rules.

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:

  • contains data on the banks that were solvent as of the reporting date unless stated otherwise
  • includes data on the banks operating abroad, and their branches
  • contains data on deposits in other resident and nonresident banks
  • has been adjusted for loan loss provisions unless stated otherwise
  • contains data on personal certificates of deposit unless stated otherwise
  • contains information on nonresident customers.

 

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