Repayment of profits and loans: what affects Ukrainian banks and their stability

In the first quarter, Ukraine’s banking sector made a very high profit – 34 billion UAH. PrivatBank provided about half of the industry’s profits. Key drivers of profitability include an increase in interest income, primarily from securities, and insignificant cuts in reserves. This was announced by the NBU in its Banking Sector Review for the first quarter of 2023.

“Only five small banks were unprofitable in the quarter with a total loss of UAH 0.04 billion. Interest income increased more significantly than expenses, mainly due to NBU’s investment in free liquidity in profitable certificates of deposit and government bonds. The decrease in revenue came from retail loans, offset by an increase in revenue from the lending business. The increase in deposit rates significantly increased the interest expenses of banks. Quarterly net interest income increased 41.4% year-on-year“, – says analysts of the National Bank.

According to the results of the first quarter, 57 institutions were operationally profitable. At the same timeAccording to the NBU, the net allocation to loan reserves for the quarter amounted to only UAH 1.8 billion (-90.2% per annum), and another UAH 2 billion was created in reserves for other assets.

The NBU emphasized that credit risk remains significant for banks, but their recognition of loan losses has slowed as a result of the war, and the share of non-performing loans increased by 0.7 percentage points to 38.8% in the first quarter.

“Although the Central Bank has taken active measures to reduce excess liquidity and reduce the interest margin due to the increase in deposit rates, the net interest income of banks still remains at the level of the fourth quarter of last year. However, the decrease in banks’ reserve creation expenses (about 6 times less in the first quarter compared to the previous quarter) is the main reason for the increase in the sector’s profit this year.“, – aforementioned Focus Alexander Pecheritsyn, Director of Analytical Research at Raiffeisen Bank.

The expert warned that in the near future banks may increase their reserve cuts due to the growth in non-performing loans. This, in turn, will affect the decrease in the profitability of the sector.

“We do not exclude that Estimates of the current level of NPL and the amount of additional reserves needed to cover the damage caused by war indicate the possibility of a significant increase in the cost of creating reserves in the near future. Pecheritsyn explained.

Commenting on the situation in the banking sector, the expert drew attention to the measures taken by the Central Bank last year, which contributed to the stabilization of the situation in the banking market.

“The National Bank did much in the early days of the war to stabilize the banking system and prevent it from collapsing, thereby threatening the stability of the entire economy. However, additional access to resources (including cash), some relaxation of regulations, the possibility of introducing credit holidays, and also the possibility of foreign exchange transactions. The first steps on the introduction of restrictions and full control over the financial markets saved the industry. Increasing the discount rate to 25% and saturating the banking system with additional liquidity helped the banks recover their profitability in the second half of the year, while raising the banks’ interest margins and operating income.“, – says Alexander Pecheritsyn.

Recall that PrivatBank received the highest profit in January-March 2023 — UAH 16,043 billion.

As he reported FocusIn May 2023, Ukrainian banks began to re-block the cards of Ukrainians for debts.