Banking sector overview of Ukraine for the second quarter of this year
The National Bank has reported on the work of banking institutions in the second quarter of 2022. The main positive news was the resumption of banks’ work in the regions free of occupation, an increase of deposits in hryvnia among the population, and growth of foreign currency deposits of business. It should also be noted that during this period, there was an increase in rates on deposits in national currency, and net assets reached the pre-war level. The National Bank of Ukraine also decided not to penalize banks for non-compliance with liquidity and capital requirements during the war. In this blog, let’s see other noticeable trends from the NBU report and possible risks and prospects.
Since the beginning of the war, the banking system became profitable for the first time in the second quarter, if we consider the hryvnia equivalent. During this period, banks received 189.082 billion hryvnias, with expenses of 185.675 billion hryvnias. They also managed to accumulate reserves that were 12 times higher than in the same period last year. Despite certain positive factors, it is worth mentioning that the banking system incurred UAH 4.5 billion in losses due to deductions to reserves against the background of expected credit losses. Twenty-four banking institutions were found to be loss-making, which collectively received more than 10 billion hryvnias of losses. Some institutions that have retained operating profitability were forced to reduce spending on salaries.
In the second quarter, banks increased their activity in the vacated territories by restoring the network of branches.
Infographics from the NBU: Share of working branches of systemically important banks
The second half of May was marked by a slowdown in the rate of funds inflows from the population on bank deposits. To fight inflation, the NBU raised the discount rate to 25% per annum, which improved the attractiveness of deposits in state currency compared to foreign currency. Such actions managed to reverse the trend and improve the rate of deposit inflows. Deposits for three months in UAH were the most interesting for depositors. At the same time, hryvnia loans to business entities rose to an average of nearly 18%, an indicator associated with an increase in credit risk.
During the second quarter, there was a decrease in the use of active payment cards after the war began.
Infographics from NBU: Number of active payment cards by bank groups, million units
According to the Deposit Guarantee Fund, including individual entrepreneurs, the total amount of deposits in banks participating in the fund amounted to 935.5 billion UAH on August 1. Deposits in foreign currency amounted to 355.1 billion UAH, and the remaining 580.4 billion UAH was in local currency. The total number of bank deposits was less than 10% of the total number of deposits or 90.0 billion hryvnias.
The main risks to the banking system are military action, its spread, and its duration. The number of Ukrainian territories under control affects the number of Ukrainian bank branches that can operate. At the same time, one of the most significant risks is credit risk because the war directly affects the cost of loans and the ability of customers to repay loan obligations to banks. However, banking institutions can restructure certain debts, which will positively affect the entire system’s stability. It should also be noted that with the unpredictable developments in the country, the demand for loans will also decrease. According to these aspects, we can expect a certain level of stabilization of the banking system after peace or a partial ceasefire on the frontline.