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NPL Ratio in Ukraine was 30% at Beginning of 2022

Russia's full-scale military invasion of Ukraine reversed the gradual decline in the non-performing loan (NPL) ratio that had been ongoing since 2018. In January-February 2022, the NPL ratios in the banking system decreased from 27.2% to 26.7%. In March-May 2022, the NPL ratio remained almost unchanged, in particular due to regulatory easing in the area of credit risk assessment. However, a deep economic crisis will result in the deterioration of the quality of the banks' loan portfolio. Starting from June 2022, banks started to gradually recognize NPLs.

In 2021, as a result of banks' write-off of  provisioned NPLs and scaling up of lending, the NPL ratio decreased most significantly in recent years and the loan portfolio quality improved across all groups of banks. In particular, in banks belonging to foreign banking group and banks with private capital, the NPL ratio has already fallen below 10%.

In 2021 and January-February 2022, state-owned banks achieved the most significant reduction in the volume of NPL: almost two-thirds of the total reduction in the banking sector. As a result, NPL ratio in state-owned banks decreased from 57.4% to 46.4% during this period. However, the NPL ratio remains a burden for state-owned banks, which still hold about 80% of the sector's NPLs (about 60% are accounted by PrivatBank).

The high NPL ratio before the beginning of the war is primarily the result of the credit expansion of the past years, when the standards for assessing the solvency of borrowers were low and the rights of creditors were not sufficiently protected. Another major reason was the practice of related-party lending. Related parties stopped servicing their loans during the crisis.

A full-scale war is expected to lead to a significant deterioration in the solvency of borrowers, and therefore to an increase in credit risk losses and NPL ratios. Timely assessment of credit risk by the bank and restructurings, if necessary, is a guarantee of further sustainability of banks.

Work on NPLs arising during the current crisis will continue after the end of its deep phase. In particular, banks will have to update their NPL reduction strategies after the termination or lifting of martial law. This also applies to the updating of plans to reduce NPLs of state-owned banks, adopted by the Financial Stability Council. This is a necessary prerequisite for increasing their investment attractiveness in the future.

Top 25 banks, million UAH
 
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NPL ratio of the top 25 banks in terms of loan portfolio, %

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NPLs ratio of the top 25 banks in terms of loan portfolio, %
The surge in the NPLs ratio during 2015-2017 emerged mainly due to three factors:
  1. An Asset Quality Review (AQR) of banks held by the NBU, which prompted banks to recognize significant volumes of loans as non-performing.
  2. Introduction of a more stringent definition of "non-performing loan (NPLs)" term in accordance with best international practices (NBU Board Resolution No. 351).
  3. Recognition of NPLs by PrivatBank after its nationalization.

 

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Details on NPLs definition in different years:
  • Starting from 1 February 2017, NPLs are determined in accordance with the NBU Board Resolution No. 351 of 30 June 2016. NPLs are the defaulted loans. The default is determined by the fact of payments on the asset past due 90+ days, or the inability of the borrower to repay the debt without repossession of collateral.
  • From 1 January 2013 NPLs are determined in accordance with the NBU Board Resolution No. 23 of 25 January 2012. Non-performing exposures (previously defined as negatively classified assets) were determined as exposures with payments past due 90+ days; individual exposures past due 30+ days with low counterparty financial class (the last two of the five quality categories).
  • Starting from 1 January 2001, NPLs are determined in accordance with the NBU Board Resolution No 279 of 6 July 2000. Loans classified as "doubtful" or "bad" are determined as negatively classified loans. Negatively classified loans are loans for which debt service is at high risk (taking into account the borrower’s financial condition and the quality of the collateral), and the likelihood of full repayment of the outstanding debt is low or practically negligible.
Details regarding the disclosure of NPLs

The NPLs data has been published on the website of the National Bank of Ukraine since September 2017. Prior to that, disclosure of NPLs data accompanied the banksʼ quarterly financial statements.

1. Monthly from 1 September 2017 on the official website of the National Bank of Ukraine according to:

  • On establishing a list of information subject to mandatory disclosure by banks of Ukraine (NBU Board Resolution No 11, of 15 February 2018);
  • On publication of certain information on the activities of Ukrainian banks (NBU Board Resolution No 85 dated 31 August 2017).

2. On a quarterly basis, from 1 January 2012, banks are required to publish interim financial statements (including the Note "Certain Bank Performance Indicators" with data on loans by quality categories) by posting on the Bank’s website according to:

  • Guidelines on the procedure of preparation and disclosure of the financial statements of Ukrainian banks (NBU Board Resolution No 373 of 24 October 2011).

3. On a quarterly basis, since 1 April  2005, banks are required to publish quarterly financial statements (including the Note "Certain Bank Performance Indicators" with indication of loans by risk categories) in the newspaper of Cabinet of Ministers of Ukraine, "Government Courier", or the parliament’s (Verkhovna Rada of Ukraine) "Voice of Ukraine" according to:

  • Guidelines on the procedure of preparation and disclosure of financial statements of Ukrainian banks (NBU Board Resolution No 480 of 27 December 2007);
  • Guidelines on the procedure for preparation and disclosure of financial statements of Ukrainian banks (NBU Board Resolution No 598 of 7 December 2004).