Net hryvnia loan volumes have been rising for a year and a half. Lending to households grew at the same pace as in the quarter before. Lending to businesses increased more slowly. This is according to the Q3 2024 Banking Sector Review.
Portfolio of loans to clients rose 22.4%
The banks’ net assets rose in volume by 1.8% qoq in Q3. The most noticeable increase was in the banks’ investments in domestic government debt securities: up 8.9% qoq and 39% yoy. In contrast, the volume of NBU certificates of deposit (CDs) has been declining for the third straight quarter.
The portfolio of net hryvnia loans to businesses rose 6.9% qoq and 22.9% yoy in Q3. The share of SMEs in the net portfolio of hryvnia loans to businesses expanded to 60%. The banks in all groups ramped up corporate loan volumes, private banks at the fastest rate. Loans in wholesale trade and the agriculture increased the most.
The further improvement in lending conditions is contributing to the expedited granting of loans. The loans made under the Affordable Loans 5–7–9% program shrank to about 34% as a share of the gross portfolio of hryvnia performing loans.
The net hryvnia retail loan portfolio is also growing: up 9.7% qoq and 40.7% yoy. Unsecured loans continue to dominate the retail lending landscape, while competition in the segment has grown slightly more intense, with the share of leading banks now smaller than before.
The growth in mortgages decelerated a bit relative to previous periods. Almost all of mortgage lending is taking place under eOselia, a state program that saw its gross portfolio rise by UAH 3.5 billion, to UAH 21.3 billion, in Q3. The share of real estate loans rose to 13.4% of the net hryvnia retail loan portfolio.
Loan portfolio quality has been improving for more than a year throughout the banking system, with the NPL ratio shrinking to 32.3% (or 20.9% excluding the debt of PrivatBank’s former owners and other legacy debts). Specifically, for loans to businesses, the indicator fell to 40.7%; for those to households, to 17.6%. Loan portfolio quality is good. Only about 5% of corporate borrowers defaulted on hryvnia loans in the 12 months to October, which is comparable to rates of default seen in times of macroeconomic stability.
Retail deposit inflows into banks resumed
Bank funding increased in Q3. However, the volume of the banks’ hryvnia corporate deposits contracted slightly as companies paid taxes and sustained higher expenses. Corporate deposit inflows rebounded in October.
The volumes of the banks’ hryvnia retail deposits rose 1.2% qoq and 15.4% yoy in Q3. Seasonal outflows of retail deposits in June were offset by their inflows in subsequent periods. Hryvnia retail term deposits increased 0.4% qoq.
Interest rates on new hryvnia loans stabilized
The decrease in interest rates on retail deposits decelerated: the rate on new hryvnia deposits (including demand ones) decreased to 9.6% per annum; for one-year retail deposits, the Ukrainian Index of Retail Deposit Rates (UIRD) showed a decrease in the rate to 12.9% per annum. Interest rates on corporate deposits returned to 8.5% per annum.
Market rates on hryvnia loans stabilized: for businesses at about 15% per annum; for households at just below 28% per annum. Rates on new loans to large enterprises remained below those on loans to SMEs.
Banks migrated to EU-compliant capital adequacy ratios
The banks made profits of UAH 38.6 billion in Q3, down 1.2% qoq and 8.6% yoy. Net interest income remained the core source of profit, although the return on assets declined. First of all, the return on CDs and their share in assets declined. As a result, income on CDs as a percentage of the banks’ total interest income shrank to 19.1%. But the banks retained their return on other assets, and the interest margin rose to 7.6% due to the faster decline in the cost of liabilities.
Profitability and a sufficient transition period enabled the banks in Q3 to smoothly migrate to new capital adequacy ratios that are aligned with EU standards. As of late Q3, none of the banks were in breach of the minimum requirements, although regulatory capital decreased by 12.9% qoq and the sector’s average regulatory capital adequacy ratio shrank to 16.2%.
Another income tax hike could pose a challenge to banks
A number of banks may have to adjust their business plans, and some could even have to update their capitalization programs drafted after the resilience assessment in 2023, if legislative changes introducing a repeat 50% hike in the income tax on 2024 profits take effect. However, profitability will ensure that these financial institutions can build up sufficient capital cushions going forward.
Lending conditions will be further improved by the step-by-step implementation of the Lending Development Strategy, which has already rendered energy loans more accessible. One of the next priorities will be measures to reduce the sector’s NPL ratio.
Next year, the NBU will resume its conventional resilience assessments of the banking system, including stress testing under an adverse scenario. The banks will be required to ensure an adequate capital level by the end of 2025. Approaches to asset quality reviews by external auditors will be approved in the near term.
The loans and deposits data published in the Banking Sector Review differs from the corresponding information posted in the Monetary Statistics section of the NBU’s official website, because the former:
- contains data on the banks that were solvent as of the reporting date unless indicated otherwise
- includes data from bank subsidiaries operating abroad
- contains data on deposits in other resident and non-resident banks
- has been adjusted for loan loss provisions unless specified otherwise
- contains data on personal certificates of deposit unless indicated otherwise
- contains information on non-resident clients.