Ukraine’s banks have maintained their financial resilience, retained their clients’ trust, scaled up lending to businesses and households, and been taking increasingly active part in financing the budget deficit. This is according to the Financial Stability Report.

The key risks inherent in banking remain subdued, while the capital and liquidity cushion guarantees the banking system’s continuity even as the protracted war wears on. The banks continue to name the war as a key systemic risk to their current operations and long-term development strategies.

International support fortifies the groundwork for macroeconomic stability in the next few years

The G7 countries have in principle agreed to finance Ukraine with a package of around USD 50 billion in assistance backed by the profits on the russian assets frozen. Meanwhile, progress on planned reforms is contributing to the timely disbursement of financial aid packages from the EU, the IMF, and other lenders.

Substantial international financial support continues to ensure that macroeconomic risks are under control. Thanks to fund inflows from partners and by pursuing a consistent policy, the NBU has been able to maintain sustainable conditions in the FX market and to control inflationary processes. That has facilitated a reduction of interest rates in the economy.

The economy as a whole remains resilient to war shocks

It has also been reinforced by the government’s measures to gradually reduce the budget deficit. Risks have increased nonetheless: the higher intensity of hostilities, the destruction of energy infrastructure, the shortage of electricity, and the lack of qualified personnel have depressed businesses’ expectations.

Businesses are holding off on plans to ramp up investment and production. Demand for business loans has remained moderate. However, household income growth has overall been fueling consumer sentiment and setting the stage for the growth in retail loan demand. The slowdown in inflation has contributed to the further decline in the economy’s interest rates.

The drive to lock in an attractive yield spurs demand for government debt securities

Fueled by rising household and corporate incomes, clients’ hryvnia deposits in the banks have been on the rise. These deposits primarily flow into high-quality liquid assets, which make up almost half of the net assets held by the financial institutions. The banks have thus maintained high liquidity indicators: on average, the LCR in all currencies is already almost four times its minimum required level.

The notable decrease in the yield on risk-free instruments in recent months has prompted the banks to scale up the share of domestic government debt securities in high-quality liquid assets. The desire to lock in attractive yields for as long as possible is contributing to high demand for government debt securities, meaning the banks are heavily involved in financing the budget deficit.

The banks continue to scale up hryvnia lending volumes to finance businesses and households

The annual pace of growth in net hryvnia business loans is 12%, matching the banks’ plans. The portfolio of loans to SMEs is growing faster. However, demand from businesses is restrained by a slow economic recovery, power outages, and persistently high war risks.

The banks’ loan portfolio quality is still good, and the borrowers’ debt burden is acceptable. Lending conditions continue to improve: the interest rate on new business loans has edged lower by 4 pp yoy, to about 16%. Loans are being made more accessible by the banks’ use of credit risk sharing instruments, primarily from the government and IFIs. In the meantime, the role of market-based non-subsidized lending outside the state-funded support program Affordable Loans 5–7–9% is gradually rising.

The banks have yet to fully adjust their lending practices to the wartime economy’s conditions. To help this effort, the NBU has jointly with the government worked out a Lending Development Strategy. It identifies the primary steps to activate lending amid war and develop credit market infrastructure going forward.

Households are spending borrowed money increasingly actively: the loan-to-consumption ratio is approaching its historical highs. The mortgage portfolio is growing at the quickest pace: it has almost redoubled over the past year, although from a low base, thanks to eOselia, a state program. Its terms have changed the mortgage profile compared to the pre-war one: the household’s down payment has shrunk, and loan maturity has risen. It will take time for the new portfolio to show its quality. The banks that do unsecured lending continue to search for new customers and are boosting the average loan check.

The retreat of market rates will be more gradual, meaning the banks face declining risks to their profit margins

The expansion of the loan portfolio underpins the banks’ interest income, although interest payments on risk-free instruments continue to form its core. The decline in asset yields has been restrained by a shift in asset structure in favor of longer-maturity instruments with higher yields, while the cost of funding has held relatively steady. As a result, the net interest margin has barely retreated from last year’s record highs.

Loan portfolio quality is improving. Provisioning is low. The growth in administrative expenses is restrained, enabling the banks to retain high profitability. Although there is still wiggle room for market rates to go down, such movements will be more gradual going forward, and so risks to the banks’ margins are easing off. A sharp shift in profitability in coming years is unlikely.

Sustained profitability is driving the steady increase in the banks’ capital. This enables the NBU to further implement its regulatory requirements in line with EU standards. For the banks to comfortably meet the updated requirements, transitional provisions have been put in place that actually enhance the banks’ capability to build up their loan portfolios.

Prioritization of uses for the banks’ accumulated profits