The National Bank published a review of the banking sector of Ukraine for the third quarter of 2023. This report was probably the most positive since the beginning of 2022.
The NBU notes that banks are actively increasing their loan portfolios. Moreover, this applies to both loans to the population and loans issued by the corporate sector (business). In parallel, the banking sector continues to accumulate liquidity and attract deposits from the public.
The National Bank also mentioned that it already has preliminary results of assessing the stability of banks. Not a single bank that was subject to stress testing is in danger of falling. This can't help but please. Well, in general, banks make good money and the vast majority of them are profitable.
Withdrawal of banks from the market. The number of participants in the banking sector remains virtually unchanged for the second year in a row.. That is, despite the military risks, there was no bank collapse. At the beginning of 2022, 71 solvent banks were registered in Ukraine, and by the end of the third quarter of 2023 — 63 banks.
During this time, mostly small banks that did not make a difference in the market were sent for liquidation. In particular, in the third quarter of 2023, such banks were Concord, which systematically violated financial monitoring requirements, and Ukrstroyinvestbank, which did not comply with the requirements of the NBU.
The share of these financial institutions was 0.17% and 0.04% of the assets of solvent banks, respectively.
Bank assets and loan portfolio. The volume of net assets of solvent banks increased by 3.3% in the third quarter. First of all, this happened due to three-month certificates of deposit of the NBU and government bonds.
Nevertheless, another trend has emerged: the growth of the corporate portfolio of hryvnia loans. During the third quarter, this portfolio increased by 4.8%. However, the National Bank states that the lion’s share of such loans is issued within the framework of the “5-7-9” state program.
The total volume of loans provided under this program increased by 10% during the quarter.. The largest group of borrowers is trade and agriculture.
The volume of consumer lending is growing, mainly due to overdrafts on credit cards. In the third quarter, the portfolio of retail loans in banks increased by 9.2%. Mortgages have picked up: during the mentioned quarter, banks issued UAH 2.9 billion under the Yoselya program.
Against this background, non-performing loans are decreasing in the total volume of loans issued. Their share in the third quarter decreased by 1.1 percentage points. — up to 37.9%. As the NBU explains, the cleansing of loan portfolios occurs mainly due to the write-off of non-performing debts (NPL) of individuals. Their share decreased by 3.3 percentage points during the quarter. — up to 26.7%. But the volume of problem corporate loans decreased by only 0.3 percentage points. and as of October 1 reached almost 44.4%.
Deposits and account balances. Customer funds on deposits and accounts of solvent banks increased by 1.8% during the third quarter. This money remains the main source of funding for banks, their share exceeds 92%. About 4.1% of liabilities are external debts of banks. The share of NBU refinancing is only 0.2%.
The volume of hryvnia funds of individuals in the third quarter increased by 4.7%, and in annual terms — by 21.5%. As of October 1, 2023, household funds in banks exceeded the UAH 1 trillion mark. But Ukrainians still prefer to keep savings in demand accounts: the share of time deposits of individuals is about 35%.
According to the NBU, clients take out most of the new hryvnia time deposits for a period of three to six months.
The volume of funds of business entities in national currency for the quarter increased by 5.5% (by 51.9% year-on-year). This happened solely due to money in current accounts. The largest growth was demonstrated by state-owned banks (by 7.5%) and banks with foreign capital (by 6.1%).
Interest rates . After the National Bank began to reduce its discount rate in the summer (from July to October inclusive, the NBU rate decreased from 25% to 16%), interest rates in the banking system also crept down. Although this happens with a certain delay of 1.5–2 months.
For example, in the third quarter, the yield on 12-month hryvnia deposits of individuals (UIRD index) decreased by 0.7 percentage points. – up to 14.5% per annum. The profitability of deposits for businesses fell by 1.7 percentage points. – up to 12.4%. At the same time, in some banks it is still possible to open deposits at 17–19% per annum. But on average, large systemic banks (state banks among them) offer depositors no more than 15–16% per annum.
During the quarter, rates on hryvnia loans to business entities decreased by 1.2 percentage points. – up to 18.7% per annum. First of all, rates on short-term (up to a month) loans under credit lines to large enterprises with foreign capital decreased. Rates on hryvnia loans to individuals on average remain above 28% per annum.
Bank profits. Despite the war, banks continue to make money. And they do it pretty well. According to NBU estimates, in the third quarter, the profit of the banking sector increased by more than 25% compared to the previous quarter – to UAH 42.2 billion. Over the 10 months of 2023, banks received almost UAH 110 billion in net profit. Over the same period in 2022, bank profits were 10 times less.
The growth of profits is facilitated by the growth of interest income, which is provided by those same decertificates and government bonds, their share in interest income is 54%. In fact, this is a risk-free option for banks to earn money, unlike loans. By the way, it is quite significant that the growth rate of interest income from business lending slowed to 5.9% year on year.
In addition, in 2023, banks sharply reduced contributions to reserves, which also has a positive effect on their profits.. The volume of reservations for 10 months amounted to UAH 5.7 billion compared to UAH 109 billion in January–October 2022.
So, seven small banks turned out to be unprofitable in the third quarter, their loss was only UAH 0.1 billion. At the same time, Privatbank has earned UAH 43.4 billion since the beginning of 2023, Oschad – UAH 14.2 billion, Raiffeisen Bank – UAH 6.1 billion, FUIB – UAH 5.7 billion.
Banking sector stability and forecasts. Back in the spring, the NBU announced stress testing of 20 banks. These are mainly systemically important banks. The National Bank will publish the final results of the assessment only in the spring of 2024. But now the NBU has decided to report that stress tests are going according to plan and everything is quite optimistic: only a few financial institutions may have a moderate need for capital.
Taking into account these circumstances and the general state of the banking sector, the NBU decided to strengthen supervision over banks:
a number of requirements for assessing credit risk and improving approaches to analyzing the solvency of debtors — legal entities have been restored. Banks began using them on November 1; from 2024, banks will again draw up plans for the resumption of their activities and submit them to the NBU; from the beginning of 2024, non-core assets will be fully deducted from banks’ capital, and operational risk will be 100% taken into account in capital adequacy standards (currently only 50% is taken into account); the introduction of a new capital structure for banks is planned for 2024, and the NBU will also begin to take into account market risk when assessing capital adequacy.
Thus, we can conclude that the banking sector has stood the test of war with dignity.. According to the NBU, most banks have sufficient capital reserves to meet regulatory requirements in the future. Key players are not facing bankruptcy.
At the same time, banks’ earnings are mostly generated from passive income from certificates and bonds. This, let’s say, is not quite a market situation, because banks almost do not perform the main function of lending to the economy.
However, the NBU is persistently pushing the market to increase active operations (issuing loans). In particular, this is due to easing monetary policy, which should help lower interest rates.
This means that there is a chance that in 2024 loans will become even cheaper and there will be more new loans. At the same time, the yield on deposits will also decrease, as a result of which the growth of individuals’ funds in banks will also slow down. But maybe this is for the better, since banks literally have nowhere to put their money.