Banking Sector Review: Banks’s Real Profits are All-Time High and Best Banks Clean up Balance Sheets from NPLs
In 2018, the banking sector generated record profits of UAH 21 billion. For the first time the profit can be called real and not resulting from window dressing the financial reports and deliberately reducing provisioning. Conversion to the LCR, a new liquidity ratio, is successfully underway. This year the National Bank of Ukraine (NBU) will present the concept of the new structure of the regulatory capital, as well as the Net Stable Funding Ratio (NSFR).
The banks’ priorities for 2019 cover fully-fledged resumption of corporate lending and continued cleaning up of balance sheets from nonperforming loans.
According to the Banking Sector Review (February 2019) released by the NBU.
Banks mark up retail lending of quality borrowers
By the end of 2018, the banks continued active lending to households. In Q4, net hryvnia retail loans grew by 6.7%, and over the year – by 34%. The highest growth rates were reported in private (+54.2% yoy) and state-owned banks (+49.0% yoy).
Rapid development of consumer lending reduced the NPL portfolio: in Q4, the NPL share decreased by 1.7 pp, to 52.8%. In the last two years, the NPL share in five largest foreign banks reduced by 2.7 times, to 13.9%. However, state-owned banks and banks with Russian capital reported no progress in reducing nonperforming loans while accounting for 83% of the total NPLs.
The NPL coverage ratio is 95.5% and is acceptable according to the international standards. Since the beginning of 2019, the new rule has been applied for depreciation of collateral for loans remaining nonperforming for over two years. Complete depreciation of collateral for the loans during the next two years will result in complete coverage of nonperforming loans with prudential provisioning.
Net hryvnia corporate loans increased by 2.0% over Q4 2018 and by 8.1% over the year. PrivatBank and private banks accounted for the highest lending rates: 69.9% and 17.6% respectively.
The continued growth of hryvnia loans to nondefaulting borrowers is even more noticeable, i.e., by 25.8% in 2018. Reliable borrowers show special interest in FX loans. Despite additional inherent risks of such lending, the FX loan portfolio increased by 6.0% over a quarter and by 2.6% yoy. Main FX borrowers include alternative energy companies, sales and agricultural export companies.
According to the NBU forecast the banks will continue retail lending, which is expected to increase by over 30% in 2019. The corporate portfolio increase may accelerate, since the NBU Board sees the potential for loosening monetary policy during the year, thus interest rates may decrease.
In 2019, cash inflows to remain on the same level as the previous year
In 2018, the banks were active in taking deposits from households and businesses; the increase was 14.8% and 6.8% respectively. Three quarters of new deposits had up to six-month maturity.
Over the last quarter, hryvnia retail deposits increased by 3.9% mostly due to improved FX rate and inflation expectations qoq. Private and foreign banks account for the majority of deposits: the increase was 7.8% yoy and 6.7% over Q4.
In the last quarter 2018, hryvnia corporate deposits increased by 11.1% (+6.8% yoy). At the same time, in December, the growth rate was 15.7% attributed to substantial budget spending in the last days of the year. This seasonal liquidity inflow caused an additional demand among banks for the NBU’s certificates of deposit at the end of 2018.
In 2019, inflows are expected to be the same as the previous year.
During the quarter, dollarization of corporate deposits substantially decreased by 4.6 pp, to 34.9%. In Q4, dollarization of household deposits reduced by 2.0 pp, to 47.3% mostly due to strengthening of hryvnia. Thus, the dollarization trend has resumed that decelerated in Q3 on the account of a weaker hryvnia.
Last year, interest rates on deposits were increasing from Q3 in response to slower inflows to banks. In Q4, the average interest rate on 12-month hryvnia household deposits edged up by 0.6 pp, to 15.7% per annum, while that on US dollar ones grew by 0.1 pp, to 3.6% per annum. Stronger competition for corporate deposits was reflected in higher interest rates on corporate deposits (+5.3 pp yoy, +1.5 pp in Q4).
The banks successfully initiated the implementation of a new short-term liquidity ratio, the LCR. As of middle of February, all banks are compliant with the foreign-currency LCR and only two institutions have failed to comply with the all-currency LCR that account for 0.2% assets in the sector.
State-owned banks are to improve operating performance
In 2018, the banking sector generated record profits of UAH 21.7 billion, in particular UAH 10.8 billion in Q4. Last year, the banking sector’s provisioning were twice as less as in the previous year of UAH 23.7 billion, mostly on the account of banks with Russian capital.
In 2019, the sector remained profitable due to lower provisioning. Banks with Russian capital were the last to complete provisioning in the reporting year and in 2019 are not expected to accumulate provisioning that will have material impact on the sector.
However, there is still sufficient risk for the sector’s profitability due to low operating performance of the state-owned banks. Hence, it is important for the state-owned banks to appoint supervisory boards and improved corporate governance.
Data on loans and deposits published in the “Banking Sector Review” differ from the corresponding data published in the “Monetary Statistics” since 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 nonresident customers.