Non-bank financial institutions (NBFIs) scaled up their operations despite the coronavirus crisis. Almost all segments reported significant, and some record-high, profitability. Only credit unions took losses, which were due to loan loss provisioning.
The expected adoption in 2021 of new laws regulating the non-bank financial market will ensure that the sector continues to develop in harmony with the rest of the economy. Specifically, new legislation will address the issues of transparent ownership structure, solvency, proper risk management, and consumer protection.
These are takeaways from the April Non-bank Financial Sector Review.
In Q4, insurers’ assets returned to growth after declining in Q2 and Q3. Gross insurance premiums also rose during the quarter. Insurance claims payouts to premiums ratio was 35% for non-life insurance and 13% for life insurance, almost flat from a year ago.
Insurers posted a record UAH 2.2 billion in profits in 2020. The segment’s ROA is 3.4%, outperforming other NBFIs.
The number of insurance companies that are in breach of the regulator’s solvency requirements remains significant. At the same time, several insurers were able to correct their violations. As of 1 January 2021, 46 licensed insurers failed to fully meet the solvency and capital adequacy or assets risk requirements.
The smallest segment – credit unions – was also the most vulnerable to the fallout from the crisis. Diminished solvency of borrowers and a legislative ban on penalties for late repayments on loans eroded loan portfolio quality. The share of loans that were over 90 days past due more than doubled over the year, with loan loss provisions increasing significantly as the year drew to a close. In Q4, the segment’s assets declined by 11%.
Because of heavy provisioning, low operational efficiency, high interest rates on deposits, and lowered rates on loans, equity fell significantly. As a result, nine institutions failed to meet the minimum solvency requirements.
Additional share contributions as a share of credit union balance sheets are gradually shrinking, while the share of deposits yielding more predictable income to credit union members is expanding in proportion to this decline.
The loan portfolio of credit unions is growing slowly, as they find themselves increasingly hard-pressed to compete with lenders that offer a greater range of supplementary services and do more transactions online.
Finance companies and pawnshops
Finance companies saw their assets grow by 12% in 2020, despite a drop in Q4. Lending increased in the last quarter of 2020. Factoring transactions, mainly those involving the purchase of bad debt, also grew rapidly and almost caught up with lending. The volume of financial leasing transactions surged by 44% in Q4 compared to the previous quarter. Finance companies recorded higher profits in 2020 than a year ago.
In Q4 2020, the amount of new loans made by pawnshops was unchanged from Q4 2019. The breakdown of outstanding loans by type of collateral remained unchanged during the year, as did the collateral coverage ratio. In 2020, this segment posted the same profit as in 2019.
The Non-bank Financial Sector Review is a quarterly report that was first published by the NBU in October of 2020.
It focuses on the activities of NBU-regulated NBFIs, such as insurers, credit unions, finance companies, and pawnshops. The review highlights key trends in the non-bank financial market and provides comprehensive insights into its performance.