Ukraine’s banks are growing again and reported their most profitable start to a year in over five years, but the decaying quality of credit portfolios could cause problems later this year.

Ukraine’s banks reported UAH14.6bn ($397mn) of profits in January, twice the profits of the month a year earlier, before the war started, and UAH6.7bn in February, three times more than a year earlier. (chart)

That puts the second month on course to handsomely outperform the results of 2021 (chart), the first year of strong growth since the 2014 Maidan revolution, when the results for those two months were UAH3.2bn in both months.

However, the good results are concentrated in only ten banks that have accounted 95% of the banking industry’s profits so far this year, according to Opendatabot. 

The total bank profit last year was UAH24.7bn, which was a third (32%) of the 2021 result. Bank profits collapsed in March shortly after the Russian invasion but the sector managed to stabilise in the second half of the year.

The war has also caused bank closures, but surprisingly few given the scale of destruction: the number of banks in Ukraine decreased from 71 to 67 in the last year.

The best performing bank in Ukraine remains PrivatBank, which was nationalised in 2016 after over 95% of its loan book was found to comprise fake loans, leaving a $5.5bn hole in its balance sheet.

Those bad loans remain on PrivatBank’s balance sheet, but they have mostly been provisioned for and so don’t threaten the stability of the bank. Moreover, the new state managers have been slowly retiring debt, so the proportion of non-performing loans (NPLs) has fallen to two thirds (67.5%), which is still by far the highest proportion in the industry.

Bank monthly profit UAH mn
	jan	feb	mar	apr	may	june	july	aug	sept	oct	nov	dec
2017	338	3,395	1,353	4,332	-2,567	-8,504	1,430	3,652	-2,023	748	-328	-28,317
2018	1,691	2,307	4,674	2,052	2,088	-4,544	1,501	3,978	-2,810	3,890	5,165	2,347
2019	5,426	3,265	4,211	5,213	5,313	7,609	5,690	7,567	4,057	3,641	7,009	633
2020	6,592	9,285	97	9,234	3,756	-5,174	4,599	0	4,252	4,963	2,224	3,537
2021	3,246	3,246	4,444	6,603	6,303	6,236	9,688	5,827	5,819	6,943	7,374	11,802
2022	7,145	2,764	-10,069	-7,266	6,116	-3,337	8,036	5,045	-1,064	3,608	8,451
2023	14,694	6,784
Source: NBU

 

Bank cumulative profit UAH mn
	jan	feb	mar	apr	may	june	july	aug	sept	oct	nov	dec
2017	338	3,733	5,086	9,418	6,851	-1,653	-223	3,429	1,406	2,154	1,826	-26,491
2018	1,691	3,998	8,672	10,724	12,812	8,268	9,769	13,747	10,937	14,827	19,992	22,339
2019	5,426	8,691	12,902	18,115	23,428	31,037	36,727	44,294	48,351	51,992	59,001	59,634
2020	6,592	15,877	15,974	25,208	28,964	23,790	28,389	28,389	32,641	37,604	39,828	43,365
2021	3245.5	6491	10,935	17,538	23,841	30,077	39,765	45,592	51,411	58,354	65,728	77,530
2022	7,145	9,909	-160	-7,426	-1,310	-4,647	3,389	8,434	7,370	10,978	19,429	24,716
2023	14,694	21,478
Source: NBU

The assets of banks have been increasing steadily despite the war, and the National Bank of Ukraine (NBU) has been encouraging banks to raise interest rates on household deposits in order to attract more resources. (chart)

To encourage this, starting in May the NBU will equate the standards for the formation of mandatory reserves by banks with individual deposits for up to three months to the criteria for mandatory reserves for the funds of individuals in current accounts. The norm for forming reserves for funds in hryvnia is currently 20%, and for funds in foreign currency, 30%. Instead, the required reserve ratio for deposits with a maturity of 93 calendar days will not change and will be 0% for hryvnia funds and 10% for foreign currency. As the Central Bank explained, the move aims to preserve the mechanism's effectiveness of mandatory reserves and strengthen market incentives for banks to attract private deposits in hryvnia.

Loans

The NBU has kept the prime rate high at 25% in an effort to tackle inflation, but the commercial banks have been forced to offer negative real interest rates on deposits of around 10%, and high rates on loans of over 30%. Loans to both corporates and retail customers have fallen sharply in the last year due to the high interest rates and a 30% economic contraction. (chart). Corporate borrowing is more or less on par with previous years, but retail borrowing has halved year on year.

In February 2023, the average bank interest rate on new hryvnia deposits climbed to 10.8% per annum from 10.6% a month earlier. Rates on new deposits in foreign currency for Ukrainians did not change but were only 0.6%.

The interest rate on hryvnia deposits for enterprises rose from 10.8% to 12.1% per annum, but the rate for foreign currency fell from 0.9% to 0.6% per annum in line with retail currency deposits. Bank deposit portfolios expanded by 2% to UAH1,952bn in February.

As for loans, the interest rates charged remain significantly higher than the NBU’s prime rate. The average interest rate on new private loans in hryvnias amounted to 36% per annum, 0.3% more than in January. The interest rate on new private loans in foreign currency fell from 7.2% to 5.1% per annum. The interest rate on corporate hryvnia loans increased from 19.5% to 20.5% per annum, and in foreign currency rose from 5.9% to 5.5%. Banks' loan portfolios decreased by 1.3% to UAH987bn, which can be entirely funded from the deposit resources.

Taking a leaf out of the Central Bank of Russia (CBR) playbook, the government has been offering subsidised mortgages, which not only provide income for the banks but also support the economy by encouraging construction.

Just under a thousand Ukrainians have received UAH1.2bn worth of preferential mortgages already, and another 45,000 Ukrainians have submitted applications to participate in the affordable 3% mortgage lending programme through the state company Ukrfinzhitlo. The government plans to expand the programme in the near future. The basic mortgage package in Ukraine is for a 20-year loan with a 20% down payment and a fixed rate of 7%.

The main headache for the banking sector is the legacy NPLs on bank balance sheets.

Following the Maidan revolution a string of central bank governors carried out a comprehensive and highly successful clean-up of the sector. One of the reasons Ukraine didn’t suffer from a bank crisis after the war started is this clean-up was largely complete and most of the NLPs had been provisioned for.

At the same time, the capital adequacy ratio (CAR) – the amount of cash a bank keeps on deposit to meet withdrawal demands – has recovered to a healthy circa 20%, about double 10% mandatory minimum. (chart)

NPLs have been falling steadily in the last years; however, the start of the war has seen the level of bad debt rise again, although such growth has slowed in recent months.

Today, almost a third of loans in Ukraine are overdue, but banks are in no hurry to go to court. Due to the war, in 2022 the share of NPLs climbed from 34% to 39%, according to the NBU. (chart)

To resolve an overdue loan situation, banks have two options: sue the debtor in court or sell this debt to external collectors. 

Last year, Ukrainian banks acted as parties in 56,670 court cases, 37% less than before the start of the war. A dozen banks most often involved in lawsuits reduced their activity in 2022. 

Last year the state-owned PrivatBank and Oschadbank filed half as many cases as in 2021. The most significant drop, by 200%, in lawsuit procedures was observed at A-Bank. Analysts believe that given the low activity in courts, banks are preparing to sell loan portfolios to collectors, leading to higher losses and greater corruption risks.

NPLs % of loan book
	Mar 21	Mar 22	Mar 23
ratio of non-performing loans, %	40.37	27.06	38.48
incl. banks:
with state participation, of which:	56.65	46.12	52.26
PrivatBank	73.54	69.28	67.52
state banks ex-PrivatBank	42.94	27.01	40.85
Foreign owned	27.45	6.45	20.51
Privately owned	13.88	11.27	23.72
Insolvent	0	0	0
Source: NBU

If the level of NLPs in the system remains at current levels then they pose little threat to the banking sector; however, further economic contraction could put debtors under more pressure and increase the NPLs. In that case the NBU will have to consider recapitalising the weaker banks or start closing them down.

The NBU is keeping a close eye on the health of the sector and will begin diagnostics of banks in April. This year there will be two stages: an asset quality assessment and sustainability of business model analysis, Deputy Head of the NBU Kateryna Rozhkova said on April 3. She clarified that the procedure's primary purpose is to assess the real impact of the war on capital.

The NBU expects most banks to restore their capital with income from core activities and credit restructuring. But the final conclusions will be made only at the end of the year, explained Rozhkova.

In addition, the following steps are planned by the NBU: strategy development for the settlement of wartime non-performing loans, a map for the return to "peaceful" regulations as many prudential limits were suspended as a result of the war, risk-oriented supervision, and the continuation of work to implement the requirements of European banking legislation in Ukraine.