Corporate and Retail Loans Grow Rapidly for Over a Year as Rates Decline Further— Banking Sector Review

According to Q2 2024 Banking Sector Review, net hryvnia corporate and retail loans have been increasing for over a year and loan interest rates continue to decrease.

The Review reports that net assets of solvent banks have increased by 4.7% in Q2. In particular, net loans grew by 6.8% in Q2, while banks' investments in NBU certificates of deposit declined for the second consecutive quarter.

Net hryvnia loan portfolio increased by 20.5% yoy

Lending to businesses continued to accelerate in all groups of banks, most significantly for SME loans. Net hryvnia SME loans grew by more than a quarter yoy, and their share in the net hryvnia corporate loan portfolio rose to 60%.

Improved lending conditions, in particular lower interest rates facilitate the growth of the loan portfolio. Interest rates on new hryvnia corporate loans dropped to 15.2% per annum, down to the end of the pre-war level in 2019.

The weight of unsubsidized loans grew further, as banks provided most business financing outside of state support programs. On the on the other hand, the share of loans granted under Affordable Loans 5–7–9% program in the gross portfolio of hryvnia performing loans decreased to 36% vs 41% at the beginning of the year.

The growth rate of net retail loans in hryvnias was 40.1% yoy in Q2. Card lending by the top two retail banks remains the main driver. The government's eOselya program continues to dominate mortgage lending. The program helped increase the share of mortgages in the net hryvnia retail loan portfolio to 13.2%.

The quality of the loan portfolio continued to improve in Q2. The share of non-performing loans (NPL) decreased in all bank groups due to active growth of new loans and write-off of old NPLs. The NPL ratio at private and foreign banks fell to 13–15%, and at state-owned banks (excluding loans to PrivatBank's former owners and legacy loans) — to 23%. 

The inflow of hryvnia retail and corporate bank deposits continued in Q2

Retail hryvnia deposits increased by 19.3% yoy in Q2 continuing the trend of recent years. The share of hryvnia term deposits decreased to 34.6% due to faster growth of current account balances, by 9% over the quarter.

The growth rate of hryvnia corporate deposits at 28.6% yoy is higher than that of households.

The share of funding from customers in banks’ liabilities rose to 92.4% and banks raised almost no funding from other sources. Only four banks have outstanding NBU refinancing loans. The downward trend of banks’ external debt has resumed.

The interest rates on new hryvnia retail deposits (including demand deposits) decreased to 10.2% per annum, and on corporate deposits — to 8.5% per annum.

High returns enabled banks to smoothly transition to the new European capital requirements

On the account of high performance and low loss allowances, the sector generated profit of UAH 39 billion in Q2 (UAH 79 billion in the first half of the year). Return on asset declined due to lower market rates (especially on NBU certificates of deposit, their returns in the sector’s income declined for the first time since Q1 2021). However, the increase in transaction volumes contributed to the growth of bank revenues and allowed them to maintain their net interest margin. The margin has narrowed somewhat, returning to last year's value of 7.5%, however it provides banks with a comfortable margin of safety for further profitable operations.

The profit contributed to the increase in regulatory capital, which grew by 10.6% qoq. The accumulated capital cushion, current profitability, and transitional provisions ensured a seamless transition of banks to the new capital structure and improved their ability to step up lending.

The NBU's focus for the near future is maintaining resilience of the banking sector, including resuming regular stress testing under an adverse scenario as of 2025, and further implementation of the Lending Development Strategy.