Banking Sector Review: Bank Loan Portfolio and Profits Decline Due to COVID-19 and Quarantine

In April-June, the banking market experienced a reduction in loan portfolios and profits due to the pandemic and quarantine measures. At the same time, in contrast to previous crisis episodes, retail and corporate deposits increased. The National Bank of Ukraine (NBU) continues to assist banks and households as they go through this crisis, but still requires that market players assess risks properly. As soon as next year, the central bank will analyze the quality of completed restructurings.

According to the Banking Sector Review released in August.      

Banks’ loan portfolio declined due to the COVID-19 pandemic and quarantine measures

Although loans became cheaper amid the COVID-19 pandemic,  banks’ loan portfolios shrank as a result of decreased loan demand from both businesses and households.

Over the quarter, the net corporate loan portfolio (i.e. the gross loan portfolio less the loan loss allowances) decreased by 6.3% in hryvnia and 3.6% in USD equivalent. For the first time since 2017, the net retail loan portfolio decreased by 5% qoq (down 4.4% in April). The key factor responsible for this reduction was provisioning by banks, which was accompanied by lower demand for loans amid deteriorating consumer confidence. In particular, loans for home appliances and car loans declined in in Q2.

The nonperforming loan ratio declined in Q2, in particular in state-owned banks, as a consequence of write-offs. The NPL coverage ratio increased by 1.2 pp in Q4, to 96.8%, reaching a new historical high.

At the same time, it’s too early to draw any conclusions on the overall impact of the pandemic and quarantine measures on the quality of the loan portfolio, since the recovery rates of individual economic sectors and the duration of loan holidays are still uncertain.

Interest rates on deposits continue to decline as their volume increases

In Q2, retail and corporate deposits continued to grow. In particular, hryvnia corporate deposits in banks increased by 9% in Q2 (+24.6% yoy). In Q2, hryvnia retail deposits increased by 10.9% (+24.1% yoy), primarily driven by demand deposits. This growth comes in positive contrast with the crisis episodes of previous years, when depositors eagerly withdrew their money from banks.

Thanks to key policy rate cuts and a stable deposit base, interest rates on hryvnia retail deposits have continued to decrease (to 9.6% per annum as of the end of June and less than 9% as of the end of July), prompting interest rates on hryvnia loans to decline. Interest rates on FX deposits and loans remain low.

As the hryvnia strengthened, the dollarization rate of deposits in Q2 decreased by 3.8 pp, to 40.7%.

Till the end of the year, banks will remain in the black despite an expected rise in provisioning

In April-June, the profitability of banks declined to UAH 7.7 billion, while in H1 2020, it was down 23.4% yoy, at UAH 23.8 billion. The lower profit is associated with provisioning, as well as weaker demand for bank services, which caused fee and commission income to decrease.

The losses incurred from the deterioration of loan portfolio quality will remain a major challenge for bank profitability, leading to an increase in provisioning in the following two quarters. At the same time, fee and commission income will continue to rise and, untill the end of the year, the sector will remain profitable.

To foster an efficient restructuring of debtors suffering from the consequences of quarantine measures, the NBU extended till the end of November the simplified rules for credit risk assessment. In this way, the NBU intends to create favorable conditions to assist banks and borrowers in overcoming the crisis.

Simultaneously, proper risk assessment by banks remains the center of attention. The NBU will review the quality of restructurings performed by banks at the beginning of next year as part of its annual resilience assessment.