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
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.
operating performance of some state-owned banks is now the main risk to
banking sector profitability.
Banks lend to households and quality corporate borrowers
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
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.
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
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.
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.
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
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.
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.
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:
from banks that were solvent as of the reporting date, unless otherwise
data from banks and their branches that operate abroad
funds deposited in other resident and non-resident banks
are adjusted for loan loss provisions, unless otherwise
data on registered certificates of deposit, unless otherwise stated
contain information on non-resident customers.