Banks Report Record Profits and Cut Deposit Rates – Banking Sector Review
The banking sector saw record-high profits in Q1 as banks continued to ramp up retail lending and actively draw in deposits from the public. Q1 saw a noticeable increase in the operating performance of banks, state-owned banks in particular, according to the NBU’s May 2019 Banking Sector Review.
Banks improve loan portfolio quality and scale up retail lending
Retail lending continued in rise in Q1, gaining 5.8% in quarterly terms and 34.4% in annual terms. As before, private banks were the most active in lending to households. At the same time, the dollarization of retail loans declined to 29.2%.
In January–March, net hryvnia corporate loans (i.e. loans excluding provisions) were down by 4.6% compared to the beginning of the year. This was driven by the seasonal reduction in the portfolio of loans to state-owned companies and subsidiaries of international corporations, most of which were repaying loans they had taken out previously. In year-on-year terms, however, the hryvnia corporate loan portfolio gained 4.5%.
The NPL ratio edged down 1.1 pp to 51.7% as the retail loan portfolio expanded and Ukreximbank conducted a large-scale financial restructuring. The loan portfolio improved in quality last quarter for all types of banks, apart from banks with Russian capital.
The NBU leaves unchanged its projection of 30% yoy growth in net hryvnia retail lending in 2019. The NBU will assess the risks arising from such a sharp increase in the loan portfolio. Based on the results of the risk assessment, the NBU will decide on whether to tighten the loan quality assessment standards for banks.
Rates on hryvnia deposits begin to decline
In January–March, hryvnia retail deposits grew at the same rate as last year (+3.5%), with private banks reporting the highest growth (+7.6%). In annual terms, hryvnia retail deposits were up 15%, following similar increases in the past two years. Meanwhile, the dollarization of retail deposits fell to 46.3%.
Ukrainians continued to choose short-term demand deposits over other deposit types: new hryvnia deposits with maturities of up to three months accounted for 52.4% of all deposits in Q1. Retail term deposits were up by 4%.
The trend for retail deposits to increase in value reversed in February. In late Q1, the average value of 12-month hryvnia retail deposits declined to 15.5% per annum, down by 0.8 pp from its peak value, and by 0.1 pp since the start of the year.
Hryvnia corporate deposits declined by 4% due to seasonal factors and the payment of taxes by companies. Foreign-currency corporate deposits increased by 1.1%. State-owned banks were the only group that reported an increase in corporate deposits in Q1, with hryvnia deposits rising in all state-owned banks except PrivatBank (+10.5%). Foreign-currency deposits increased in PrivatBank (+5.5%).
Hryvnia corporate deposits declined, on average, by 0.8 pp, to 13.7% per annum, but remained higher than the average over the past three-and-a-half years.
Deposits will keep flowing into the banking sector at the current pace until the end of the year, the NBU predicts.
State-owned banks improve operating performance
In Q1, the banking sector’s net earnings increased by 1.5 times yoy to reach UAH 12.9 billion. Unlike last year, state-owned banks posted an operating profit in January–March as their operating performance increased.
In Q1, banks reported UAH 4.7 billion in provisions, most of which was made by two banks. The provisions made by the banking sector in Q1 accounted for 2% of the loan portfolio.
The banking sector will maintain high profitability on the back of rising demand for banking products, the NBU believes.
NBU launches stress testing of 29 banks
The NBU launched the second stage of its bank resilience assessment – processing the Asset Quality Review findings confirmed by an external auditor. In addition, the NBU commenced the stress-testing of 29 banks. Early findings are showing that the number of banks that will need capital injections under the baseline and adverse stress-test scenarios will decline compared to last year.
Banks are required to form capital conservation buffers of 0.625% by the end of 2019. Every bank will be required to form a capital conservation buffer starting in early 2020, when the first stage of the implementation of capital conservation buffers is scheduled to commence. Going forward, the capital conservation buffer will be raised every year until it reaches 2.5% on 1 January 2023. This buffer will ensure that banks have surplus capital in excess of the minimum amount required to absorb any possible losses. The buffer will act as a cushion against potential losses that may arise in a general economic recession. Banks will be able to form capital conservation buffers while at the same time meeting their capital adequacy ratios.
During Q2, the NBU will change the methodology for identifying systemically important banks and publish a new list of these financial institutions. In future, the NBU will require systemically important banks to form systemic importance buffers. The NBU will inform banks in advance about the parameters of such buffers.
Data on loans and deposits published in the Banking Sector Review differ from the corresponding data published in the Monetary Statistics in that the former:
· contain data on banks that were solvent on the reporting date, unless stated otherwise
· include data covering banks together with their branches that operate abroad
· contain data on funds deposited in other resident and nonresident banks
· have been adjusted for loan loss provisions, unless stated otherwise
· contain data on personal certificates of deposit, unless stated otherwise
· contain information on nonresident customers.