The Ukrainian banking sector lost UAH5.174bn ($186mn) in June as the full impact of the economic slowdown hit home.
After a strong start to the year the sector has been struggling since March, when the multiple crises broke. In that month the sector made no money at all, but didn't lose anything as businesses pulled in their horns.
April was a strong month, with the sector making UAH9.285bn, which was on a par with the non-crisis month of February. But from that point on income began to fall. Banks earned UAH3.756bn in May before going into loss in June. The outlook for the rest of the year is poor too.
On a cumulative basis the Ukrainian banking sector was still ahead of last year’s results until June, and 2020 should have been the second year of recovery. The strength of the start of the year was carrying the sector and cumulative profits were still ahead of 2019 right up until June, when the large losses of the sector pulled income down to below last year’s level.
However, there is a season factor at play too, as June has always been a slow month for banks, with the sector losing money in that month in three of the last four years. September is also a poor month, with the sector losing money in that month in both 2017 and 2018, both crisis years.
Despite losses in June the banking sector remains healthy thanks to the bank sector clean up conducted by the National Bank of Ukraine (NBU) over the last few years and it is able to weather the storm for the meantime.
The capital adequacy ratio (CAR) – the share of cash banks keep on deposit to meet demand – has actually improved in the last two months, rising above 20% in June and July. While the mandatory minimum is 10%, typically emerging market banks tend to keep twice as much cash available to deal with the regular shocks to the system. It seems that as the crisis approached, banks were shoring up their reserves in anticipation of a big shock and have maintained very prudent lending policies since.
Banks were still extending loans and retail lending continued in May and June. Incomes are still rising and consumers are still taking out loans at a steady but not excessive pace.
Loans to individuals were up at UAH219,234mn ($7.8bn) in July, up from UAH214,252mn in January. Retail lending remains one of the banks’ most profitable businesses.
Corporate lending saw a spike in May as the crisis hit and companies reached out to banks for funds. However, corporate borrowing has been falling steadily since March last year and by May the trend had returned, with corporate borrowing resuming its downward trend. Corporates had borrowed UAH849.960bn ($30.6bn) in July, on a par with the UAH847.259bn borrowed in January.
Bank sector assets continue to climb, rising from UAH1.49 trillion ($53.95bn) in January to UAH1.59 trillion in July.
The banking sector’s non-performing loans (NLPs) continue to decline, despite the economic slowdown and the crisis.
NPLs remain the sector’s main problem. But as 90% of the bad loans have been provisioned, they do not represent a danger to the stability of the sector. However, that has tied up an enormous amount of capital, which is a drag both on the growth of the banking sector and the economy as a whole.
NPLs for the whole sector fell below 50% of the total loans in the middle of last year, but despite progress in reducing the figure progress has been slow. The incoming governor of the National Bank of Ukraine (NBU) Kyrylo Shevchenko has promised to take action to pick up the pace. However, the crisis means profits that could have been used to pay down bad debt have disappeared and the depressed business climate means clients behind on repayments will also struggle to pay off their debts.
The distribution of bad debt remains unchanged with the state banks in the worst shape (NPLs are 63%) and the privately owned in the best shape (18%).
NPLs amongst corporates remain flat at around 60%, but more worryingly, the NPLs at the retail level have started to tick up, albeit from a much lower base, and were 35% of total retail loans in July.
This article is from bne IntelliNews Ukraine monthly country report. Sign up to receive the report to your inbox each month, which covers the slow moving macro- and micro-economic trends, the major political news and a round up of the main sectors and corporate news. First month is free and you can unsubscribe at anytime.
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