Banking Sector Remains Profitable and Continues Active Retail Lending: Banking Sector Review
In H1, the banking system was profitable, banks mostly focused on servicing individuals, while retail deposits and retail lending continued to grow at a high rate. In Q3, these trends will remain and the seasonal uptake of corporate lending is expected. Delaying resumption of cooperation with the IMF poses the main risk to the sector and could adversely affect banks’ and customers’ sentiment and decelerate the inflow of deposits and the uptake in lending, according to the August quarterly Banking Sector Review released by the National Bank of Ukraine (NBU).
Banks mark up retail lending
In Q2, 2018, the banks continued active lending to households. Primarily, they issued consumer loans to meet current needs. During this period, net hryvnia retail loans increased by 7.4% or 39.2% yoy. Active issue of new loans contributed to a dollarization decrease of the retail portfolio and a reduction of non-performing loans in banks’ portfolios in the system as whole (the share of non-performing loans by the end of June accounted for 55.7% vs. 56.4% at the beginning of April). High rate of retail lending will remain and in Q3.
Hryvnia corporate loans issued by state-owned banks somewhat decreased and increased in foreign-owned and private banks instead. After a number of companies redeemed their corporate loans, the banks’ credit portfolio experienced a seasonal contraction, however in Q3 it is expected to expand.
Accelerated lending to both households and business
In April–June, hryvnia inflows from households to the banking system continued to accelerate (+8.7% qoq and +21.4% yoy). State-owned bank continued to increase foreign currency deposits, while, generally in the system the share of foreign currency deposits was decreasing. In Q2, household deposits in banks grew by UAH 17.2 billion.
As before, these are mostly short-term deposits that is about a half account for deposits up to 3 months and demand deposits.
After the seasonal outflow at the beginning of the year, in Q2 corporate deposits in banks grew by UAH 6.4 billion. Generally in April–June, corporate deposits in banks rose by 0.9% in hryvnia and 4.2% in foreign currency in US dollar equivalent. Mostly state monopolies are accountable for increasing foreign currency deposits of businesses.
Share of the NBU in banks’ funding reached an all-time low of 0.9%.
Interest rates on household deposits and loans remained unchanged
In Q2, interest rates on hryvnia retail deposits and retail loans hardly experienced any change. The banks tend to not differentiate much deposit interest rate based on the term, i.e. interest rates on deposits in hryvnia for 6, 9 and 12 month amounted to about 14.1% per annum at the end of the quarter.
Interest rates on 12-month US dollar deposits was still all-time low of 3.3% per annum. Interest rates on new corporate loans rose by 0.6 pp, to 16.1% per annum.
In Q1, banks made net profit of UAH 8.3 billion
The banking sector remained profitable, since in H1, banks made net profit of UAH 8.3 billion. In Q2, the banking sector reported a moderate loss of UAH 0.4 billion due to raising additional provisioning by one large bank. Aside from this bank, the financial result of solvent banks in Q2 accounted for UAH 6.8 billion.
Besides, as a result of conversion to IFRS 9 in Q2, one large bank increased losses of the prior years by UAH 16.7 billion mostly associated with additional provisioning for depreciated loans. This changed the bank capital, however did not impact its regulatory capital and capital adequacy indicators.
Retail lending and fee and commission income continued to drive operating income. No sufficient provisioning is expected in H2, and the sector will be profitable as of the year-end.
Data on loans and deposits published in the “Banking Sector Review” differ from the corresponding data published in the “Monetary Statistics” since the former details:
- data on banks solvent as at the reporting date, unless otherwise specified
- data covering banks together with their branches operating abroad
- funds deposited with other resident and non-resident banks
- exposures adjusted for loan loss provisions, unless otherwise specified
- data on personal certificates of deposit, unless otherwise specified and
- information on non-resident customers.