In Q1 2021, almost all segments of the non-bank financial market scaled up transactions compared to Q1 2020. A year-on-year decrease occurred only in factoring transactions. Most market segments remained highly lucrative.
The nonbank financial services market continued to undergo a transformation, primarily through the voluntary exit of a number of dormant finance companies. Based on the updated regulatory framework, the NBU applied corrective measures to those in violation of regulatory requirements.
The expected overhaul of non-bank financial market regulation will promote the sector’s development, increase its transparency and solvency, and improve its risk management and consumer protection practices.
These are takeaways from the May Non-bank Financial Sector Review.
In Q1, insurers’ assets declined by 1% compared to the previous quarter. Gross insurance premiums decreased slightly, mainly due to the seasonal decline in revenues from corporate insurance and life insurance. At the same time, the volume of premiums in nonlife and life insurance rose by 6% yoy.
The profitability of life insurance in Q1 remained unchanged from a quarter earlier, but declined compared to Q1 2020 due to higher administrative costs. Nonlife insurers reported near-zero profits and profitability. The operating performance of nonlife insurers was negatively affected by an excessive share of operating expenses, which made up about 70% of net insurance premiums. Annualized loss ratios remained almost unchanged in Q1, at 47% for compulsory and 41% for voluntary insurance.
The number of insurance companies that are in breach of the regulator’s solvency requirements remains significant. As of 1 April 2021, 44 licensed insurers failed to comply with solvency and capital adequacy or asset risk requirements. Insurers that are in breach of regulations are required to submit to the NBU their plans to restore performance or remedy violations in short order.
Credit union assets have been growing very slowly, as has their lending activity. The NPL ratio surpassed its pre-quarantine 2020 level by 2–4 pp in Q1.
Despite their weak operating performance, credit unions turned a profit in Q1 by cutting back on loan loss provisioning and reducing the cost-to-income ratio. Operating income grew as the interest rate spread widened.
Higher profits drove a slight gain in equity. The volume of deposits remained almost unchanged. Meanwhile, additional share contributions as a percentage of total funding declined further.
The substandard financial performance of credit unions resulted in a significant number of them failing to meet required ratios. Specifically, nine credit unions broke capital adequacy requirements in Q1.
Finance companies and pawnshops
Finance companies’ assets decreased sizably in Q1, mainly because the largest company by assets, which worked with legal entities, exited the market. In contrast, loans made by finance companies to households have been growing for three quarters running after declining at the outbreak of the Covid-19 crisis.
Factoring transactions decreased the most, primarily due to a seasonal decline in finance companies’ activities in the NPL purchasing segment. The volume of financial leasing transactions also decreased due to the seasonal cooling of business activity. At the same time, finance companies saw their profits hit three-year highs in Q1.
New lending by pawnshops declined in volume by almost 8% qoq in Q1, but it increased slightly in annual terms. Pawnshops continued to make profits.
The Non-bank Financial Sector Review is a quarterly report that was first published by the NBU in Ukraine in October of 2020.
It focuses on the activities of NBU-regulated non-bank financial institutions (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.
Consolidated performance of NBFIs by segment: