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NBU Annual Report 2021: Key Indicators of Changes That Took Place in the Economy and Financial System Over the Year

NBU Annual Report 2021: Key Indicators of Changes That Took Place in the Economy and Financial System Over the Year

The National Bank of Ukraine has published its Annual Report 2021 (UKR), reporting about its operations and summarizing changes that took place in the Ukrainian financial system and economy over the year. 

The year 2021 was the time that prepared Ukraine’s financial system for the unprecedented challenges of a full-scale military aggression from russia. The effective, well-coordinated, and professional work of the NBU’s team and the bank and nonbank sectors has been essential for the stable and uninterrupted functioning of the financial system during the war and has become the strong foundation for reliable financial defense of Ukraine.

Annual Report 2021 reflects the first results of implementing the new institutional NBU Strategy 2025, which was approved in August 2021, and the twelve goals it sets for the central bank.

Economic Environment

The Ukrainian economy returned to growth in 2021, despite the difficult conditions caused by the consequences of the coronavirus crisis: real GDP grew by 3.4% as of the year-end, after a 4% drop in 2020.

Using the flexibility of the inflation targeting regime to the greatest possible extent, the NBU stuck to an accommodative monetary policy throughout most the year, with a view to putting the economy back on the path to growth.

In 2021, as expected, inflation in Ukraine was above its 5% ± 1 pp target range, driven by both external and internal factors. The materialization of pro-inflationary risks and the increase in these risks over the policy horizon forced the NBU to produce a flexible monetary response. In 2021, the key policy rate was increased by a total of 3 pp, from 6% in January to 9% in December. With a view to strengthening monetary transmission and insuring that all of the used monetary instruments are in line with the monetary policy stance, the central bank gradually phased out stimulating anti-crisis measures – long-term refinancing and interest rate swaps, which had lost their relevance as the economy returned to steady growth. Also, the NBU normalized the operational design of its monetary policy to increase the effectiveness of monetary transmission.

The NBU’s consistent proactive, transparent, and predictable monetary policy has reversed the trend of accelerated growth in consumer prices in Ukraine – in contrast to the situation in many other countries. Inflation in Ukraine had been slowing gradually since October, reaching 10% per annum as of the end of 2021. The NBU was also able to keep inflation expectations under control, support the trust in hryvnia, and maintain the de-dollarization tendency.

The NBU remained committed to the flexible exchange rate regime and eased a number of FX restrictions as part of the phased implementation of the currency liberalization program, which took into account the macroeconomic situation, the priority needs of businesses and consumers, and assessments of the potential impact of currency liberalization measures on demand for foreign currencies.

Despite there being large payments of external liabilities, international reserves as of year-end 2021 hit a nine-year high of USD 30.9 billion. International reserves were mainly managed with a view to ensuring an optimum ratio between security, liquidity, and profitability, which enabled the NBU to perform its functions in line with the current legislation of Ukraine.

Banking Sector

In 2021, the banking system remained stable, well-capitalized, liquid, and profitable.

Over the year, the banks’ net assets rose by 12.8%, driven mainly by accelerated growth in retail and corporate lending. On the other hand, the growth in the banks’ holdings of domestic government debt securities slowed significantly. In particular, the holdings of state-owned banks decreased markedly. Banks used their excess liquidity to buy NBU certificates of deposit.

The share of state-owned banks in net assets decreased by 5.8 pp, to 46.7%, while the share of private banks grew. The sector’s concentration declined gradually: the 20 largest banks accounted for almost 90% of the sector’s total net assets.

Loose monetary conditions helped revive bank lending: in 2021 corporate and retail loan portfolios of banks grew by around 40% yoy, which was the highest growth since 2013.

Mortgage lending rose more rapidly: the growth in net hryvnia loans for buying and reconstructing real estate exceeded 60% yoy at the end of 2021.  The growth in mortgage lending was driven mainly by low rates and state support.

Over the year, the NPL ratio was reduced by 11.0 pp, to 30%. State-owned banks made the largest contribution to this reduction.

The inflow of funds into the banking system continued in 2021. Hryvnia retail deposits rose by 15.3% yoy, whereas foreign currency deposits dropped by 1.8% yoy in U.S. dollar equivalent due to outflows of term deposits. The share of retail clients’ current hryvnia accounts increased rapidly over the last two years, reaching a record high of 57% at the end of 2021 as a result of large payments to households. Hryvnia corporate deposits increased by 26.4% yoy, and foreign currency corporate deposits grew by 3.9% yoy in the U.S. dollar equivalent. The natural de-dollarization of the banks’ balance sheets continued thanks to low interest rates on foreign currency deposits.

Throughout the whole of 2021, the banks had sufficient liquidity to absorb shocks. The majority of the banks met the Liquidity Coverage Ratio (LCR) exceeding it by a comfortable margin. The Net Stable Funding Ratio (NSFR) of 80% was implemented on 1 April 2021, and it will be raised gradually, by 10 pp, every six months. As of the end of 2021, the NSFR was already more than 100% at all banks.

In 2021, the banks generated record-high profits of UAH 77.5 billion. The sector’s average return on equity rose to 35%. Proper provisioning in previous years and conservative lending standards led to a decrease in credit risks.

Considering the economic recovery and maintained stability of the banking system, and in order to further harmonize its requirements with European and global (Basel) standards, in 2021 the NBU phased out its macroprudential policy easing measures, which were adopted at the start of the coronavirus crisis. At the same time, the central bank wound down its long-term liquidity support to banks in H2.

The banks’ large profits enabled them to build capital buffers, while also actively lending to the economy. The NBU supported the public’s confidence in the banking system and helped ensure financial stability.

Nonbank Services Market

The nonbank financial services market developed rapidly in 2021. The laws On Financial Services and Finance Companies and On Insurance – which are essential for the nonbank financial sector – were adopted. They are the basis for further modernization and development of the market.

The NBU improved the regulatory environment and was active in its supervisory activities, which made the market more transparent and healthy. Despite the decrease in the total number of institutions, assets grew in almost all segments of the nonbank financial services market.

In 2021, the NBU became the regulator of the debt collection market and started working actively on the disclosure of ownership structures of financial service providers.

In general, the financial sector remained bank-centered: the share of the nonbank segment in assets of NBU-regulated financial institutions was 12%.

Payment Market

The digital transformation of the financial system continued in 2021. The number and volume of payment card transactions continued to grow steadily. The share of cashless payment card transactions increased in Ukraine from 56% at the start of 2021 to almost 61% at the end of the year.

The NBU continued to update the regulatory framework for the payment market: in particular, the regulator simplified the requirements for opening accounts for bank clients, modernized the procedure for issuing payment cards and performing card transactions, resolved issues related to interbank money transfers inside Ukraine, updated the procedure to issue licenses for transferring domestic currency without opening an account, and more.

The adoption of the Law of Ukraine On Payment Services in 2021 will help transform the payment market and widen the circle of its participants.

Read more in the NBU’s Annual Report 2021 (UKR).

For reference

Compiling and disseminating annual reports is common practice for all central banks. The NBU has been publishing its Annual Report since 1994.

Annual reports for 1994 through 2021 are available on the NBU’s official website. The central bank has digitized all of the paper versions of its annual reports, starting from 1994. The electronic versions of these reports are available on the NBU’s official website.

It should be noted that the NBU’s Consolidated Financial Statements and the Consolidated Management Report for 2021, which are the integral part of the Annual Report, will be published soon, after the international audit company finishes the external audit of the said reports and the NBU Council approves them. This meets the deadlines envisaged in Law of Ukraine No. 2115 On Protecting the Interests of Entities Submitting Reports and Other Documents under Martial Law or in Wartime.

In addition, pursuant to Law of Ukraine No. 2102-IX On Approval of the Presidential Decree On Introducing Martial Law in Ukraine dated 24 February 2022 and in order to finance the functioning of the state under the martial law, the NBU on 24 February 2022 transferred a portion of its distributable profit (UAH 19 billion) to the State Budget of Ukraine as defined by the NBU Board in accordance with the draft annual financial statements submitted for audit.

 

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