Ukrainian banks reported higher profits for the first three months of 2023 than for all of 2022 on the back of lower loan loss provisions and gains from investments in government debt instruments.

Banks operating in Ukraine posted an aggregate net profit of 34.1 billion hryvnia for the first quarter of 2023, compared to a net loss of 152 million hryvnia one year ago and a profit of 22.8 billion hryvnia for all of 2022, Ukrainian central bank data shows. Banks in April added another 9.9 billion hryvnia to this year's net profit.

Government debt securities and central bank deposit certificates, in which local lenders are investing their free funds, along with high liquidity are the primary factors driving bank profitability, a spokesperson for the National Bank of Ukraine (NBU) told S&P Global Market Intelligence. "Such a model allows the banks to earn profits with minimal risk, gradually cover war-related losses and restore capital," the spokesperson said.

First-quarter net interest income (NII) increased to 46.2 billion from the year-ago 32.7 billion hryvnia. NII amounted to 15.2 billion hryvnia in April alone. First-quarter provisions totaled 3.8 billion hryvnia, the lowest level since Russia's invasion of Ukraine started in February 2022, and fell further in April.

With demand for loans subdued due to the war, banks have generated an increasing proportion of their income from securities transactions, including investments into government bonds and the central bank's deposit certificates. This has been particularly evident since the key interest rate rose to 25% in June 2022. The trend could change as a rate cut is anticipated for the fourth quarter of 2023, the central bank said.

"The banks are already preparing for a revival of traditional areas of activity that generate income, such as lending to businesses and households," the spokesperson said. The central bank's recent lending survey showed an improvement in expectations, with 65% of responding banks expecting growth in the corporate portfolio and 38% in the retail portfolio in the next 12 months.

Resilience assessment

Credit quality remains the most significant risk for Ukrainian banks, but they have become slower to recognize losses caused by the war, the central bank noted in its latest Banking Sector Review.

In December 2022, combined actual and potential losses to the banking sector's loan portfolio reached about 20% of the pre-war operating portfolio. This could increase to 30% depending on the scale of energy infrastructure problems caused by Russia's attacks, the central bank told Market Intelligence. The central bank in April launched a resilience assessment to probe the quality of the loan portfolio and adequacy of provisioning. The assessment will will cover the country's 20 largest banks.

The share of nonperforming loans in the Ukrainian banking sector grew by 1.17 percentage points since the start of the year to 39.3% in April and by 12.7 percentage points since the end of February 2022.

The value of nonperforming loans and nonperforming loan ratios surged in Ukraine's largest foreign-owned lenders, including the units of Raiffeisen Bank International AG and OTP Bank Nyrt. The NPL ratio at state-owned JSC Commercial Bank PrivatBank, which is the country's largest lender, declined due to new loans issued to retail clients, the central bank noted in the Banking Sector Review.

In addition to assessing loan quality, the resilience exercise will evaluate the potential capital needs of local banks, the NBU said. Banks that need additional capital will, at the beginning of 2024, draw up action plans to improve their positions.

"The NBU is expecting that the majority of financial institutions will be able to restore their capital using their future profits, but some banks will probably need support from shareholders," the central bank said.

Regulatory capital in the Ukrainian banking sector amounted to 220.8 billion hryvnia as of the end of April, according to the central bank data, with the sector's regulatory capital adequacy ratio at 20.95%, significantly above the required minimum of 10%.

Among the country's 10 largest banks, BNP Paribas SA's local unit, JSC Ukrsibbank, had the highest regulatory capital adequacy ratio as of May 1, amounting to almost 50%. The ratio of JSC The State Export-Import Bank of Ukraine, or Ukreximbank, was below the minimum required level of 10%.

The central bank said after the war broke out that banks would keep operating even if their capital adequacy ratios fell below the required threshold, and they will be given enough time to replenish their capital buffers once the war ends.

Highly liquid

The banking sector's liquidity remains high thanks to the increase in corporate and retail deposits, while the share of the NBU's refinancing loans in banks' liabilities has fallen, the central bank noted.

In response to tightened reserve requirements for certain deposits and revised rates on the NBU's deposit certificates, Ukrainian banks increased the weighted average interest rates on new deposits, and the growth of hryvnia retail term deposits accelerated to 9.6% in the first quarter, the central bank said.

"To maintain the sector's resilience in the longer term, the maturity of the funding base needs to increase further," the central bank said.

Corporate deposits from nonfinancial companies in the Ukrainian banking sector exceeded 1 trillion hryvnia at the end of April, growing by more than 50% since February 2022. Total retail deposits increased about 23% since February, reaching almost 948 billion hryvnia.

As of June 12, US$1 was equivalent to 36.94 Ukrainian hryvnia.