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Financial Stability Report: Banking Sector is Stable and Profitable, but Should Focus on Margin of Safety

17 December 2018

Press Release


In H2 2018, both the internal and external environments were favorable for Ukraine’s banking sector. The performance of financial institutions continued to improve as they actively attracted deposits and continued to expand lending. The International Monetary Fund’s (IMF) approval of a new cooperation arrangement has eliminated significant systemic risks to Ukraine’s economy and the financial sector. The consistent implementation of the program will provide Ukraine with sufficient financial recourses to repay external debt, which will ensure macroeconomic and financial stability.


In addition, legal risk in the banking sector decreased in the second half of the year for the first time since the NBU began publishing the Financial Stability Report. The decrease came after the parliament adopted several draft laws that are important for banks. Risks to profits have also abated and in 2018, the sector will generate a profit for the first time since the start of the recent crisis. These are the key themes of the current Financial Stability Report.


Banking sector to generate record profit in 2018


After four years in the red, the banking sector generated an aggregate profit of UAH 14.8 billion over the first 10 months of 2018. This trend will continue through the end of the year, meaning the banking sector will generate a profit for the first time in 2018 since the start of the recent economic crisis. The main drivers of the improvement have been an increase in operating profits and lower provisioning.


In 2019, the banking sector will remain profitable, however, the interest margin will come under pressure owing to an increase in interest rates and tight competition for deposits, which will boost funding costs.


The poor operating performance of some state-owned banks is now the main risk to banking sector profitability.


Banks lend to households and quality corporate borrowers


Lending continues to gradually resume, mostly driven by consumer loans. As of the end of October, net household loans increased 37% yoy*, with consumer loans accounting for more than 90% of the growth in the retail loan portfolio.


Consumer lending remains the most profitable segment for banks, and demand for these loans is continuing to grow. As a result, the NBU expects consumer lending to grow by more than 35% yoy in 2019.


Currently, risks to the stability of the financial system from the growth in the consumer loan portfolio are insignificant because households still have a low debt burden. Therefore, for now, the NBU sees no need to introduce macroprudential instruments to restrict growth in consumer lending. At the same time, if banks underestimate credit risks and ease lending standards, risks could build and make banks vulnerable to shocks. For this reason, banks need to adopt a more prudent approach to assessing the credit risk of borrowers that apply for consumer loans.


Outside the consumer lending segment, lending to corporates is gradually recovering. Loans to quality companies that have no record of default since the start of the crisis have grown by more than 25% yoy. Overall, the hryvnia loan portfolio has doubled since the crisis, while foreign currency loans are expected to return to their pre-crisis levels over the course of 2019. Corporate lending will continue to focus on reliable borrowers, and the NBU sees loans to these companies growing by more than 15% next year.


Banks should focus on funding maturity, reducing balance sheet dollarization, and more proactively resolving non-performing loans


To reduce risks to financial stability and improve performance, banks need to focus on several issues.


First, loan portfolio dollarization remains elevated and needs to be reduced. If the hryvnia were to depreciate, credit risk would significantly increase.


Second, banks have a material issue with maturity gap. That problem poses a systemic risk for the banking sector.  Banks should increase the share of term deposits and the maturity of retail and corporate deposits.


Third, several banks have insufficient cushions of capital to rely on in the event of a crisis. The NBU has required from those banks to increase capital or restructure their balance sheets and operations to improve their resilience.


In addition, the recommendations released in the NBU’s previous Financial Stability Report remain relevant. The most important of those include the recommendation to address non-performing loans and to improve the management or sell-off of non-core assets that were acquired during the crisis.


In 2019, the NBU will conduct the second assessment of the resilience of banks and will finalize a new requirement for banks


In 2019, the NBU intends to introduce several regulatory amendments that will affect banks. The NBU will release a draft regulation outlining the methodology for calculating the net stable funding ratio (NSFR), a new liquidity ratio. The NBU expects to introduce the NSFR in test mode at the beginning of 2020. The NBU will also release a draft regulation outlining the methodology for evaluating the structure and adequacy of regulatory capital.


The regulator will also change the method for assessing loans to small and medium-sized enterprises (SMEs). The NBU plans to increase the limit on corporate loans for which credit risk (prudential provisions) can be measured at the group level from UAH 2 million to UAH 5 million. Loan servicing costs and credit risks related to those loans are thus expected to decrease. Ultimately, this is expected to positively impact the capacity of banks to lend to SMEs.


In 2019, the NBU will also conduct the second annual assessment of bank resilience  and complete an SREP assessment of banks.




*According to supervisory statistics. The data may differ from the corresponding data published in the Monetary Statistics section because the former:

-         contain data from banks that were solvent as of the reporting date, unless otherwise stated

-         include data from banks and their branches that operate abroad

-         contain funds deposited in other resident and non-resident banks

-         are adjusted for loan loss provisions, unless otherwise stated

-         contain data on registered certificates of deposit, unless otherwise stated

-        contain information on non-resident customers.



Last modification   17.12.2018