The Banking Sector Is Returning to Health – New NBU Report
Over the first eight months of 2016, the banking system's liquidity has improved significantly, driven by an increase in household and corporate deposits, reads the Banking Sector Review, a new regular report that the National Bank of Ukraine starts publishing in October 2016.
The first report covers the period running from 1 January 2016 through 31 August 2016. Going forward, it will be based on quarterly data. In particular, the next report will be prepared based on data covering four quarters of 2016.
Over the first eight months of 2016, household deposits in domestic currency placed with solvent banks rose by 4.8%, while those in foreign currency increased by 1.9%. Interest rates on hryvnia deposits continued to decline, moving in line with changes in the NBU’s key policy rate, which was reduced from 22% at the beginning of 2016 to 15% as of 16 September 2016. Interest rates on household deposits in foreign currency dropped to historic lows during the reporting period. Removing restrictions on cash withdrawals from hryvnia deposits and increasing limits on FX cash withdrawals had no adverse impact on deposit dynamics.
The growth of household and corporate deposits enabled solvent banks to repay debt on stabilization loans owed to the NBU. A total of UAH 22 billion (principal amount, excluding accrued interest) was paid back by solvent banks during January-August 2016.
Although the banking system’s liquidity was high, lending remained subdued, with a UAH 6 billion increase in the corporate loan portfolio recorded during the first eight months of 2016 being offset by a decline in loans to households. Faced with persistent high credit risks and poor creditworthiness of borrowers, banks channeled excess liquidity into purchasing government securities.
During the reporting period, banks were replacing NBU Certificates of Deposit (CDs) held in their portfolios with government securities, primarily with domestic sovereign bonds. The amount of CDs has contracted by 63%, or by UAH 56 billion, while domestic sovereign bond holdings have increased by UAH 68.8 billion since the beginning of 2016.
Lower provisioning against asset-related operations enabled banks to significantly improve their financial results. Beginning in May 2016, the banking system has reported net profits in three out of four months. However, the banks’ operating profit before tax decreased compared with the previous year due to a reduction in net interest income.
The NBU expects hryvnia deposit growth to accelerate over the next quarters due to a gradual recovery of confidence in the banking sector on the part of households and businesses. At the same time, interest rates on deposits will continue to decline.
The recovery of bank lending across all segments, except for the public corporations sector, is expected to be slow due to high credit risks. However, the NBU expects price and non-price lending conditions to ease. Over Q4 2016, the next top twenty banks that have undergone diagnostic studies during 2016 will focus their efforts on implementing recapitalization measures through equity injections.
For greater detail, see The Banking Sector Review posted in the “Publications" section on the NBU’s website.
* Data on deposits published in the “Banking Sector Review” differ from the corresponding data published in the “Monetary Statistics” subsection as:
- they cover data provided by banks excluding their branches operating abroad;
- they cover the principal amount without accrued interest;
- personal savings (deposit) certificates are not reflected in these data;
- they comprise information about non-resident clients, while monetary statistics data comprise information only about resident clients.
* Data on loans published in the “Banking Sector Review” differ from the corresponding data published in the “Monetary Statistics” subsection as they:
- cover data provided by banks excluding their branches operating abroad;
- cover the principal amount without accrued interest;
- comprise amounts placed with other resident and non-resident banks;
- comprise information about non-resident clients, while monetary statistics data comprise information only about resident clients.