Loan Portfolios on the Rise due to Stronger Demand and Lower Rates. Lending Becomes More Important Source of Bank Income – Banking Sector Review

Retail and corporate deposits with banks continue to grow.
The banks will continue to meet the demand of households and businesses for hryvnia loans, and interest rates on these loans are declining.
The share of the banks’ interest income from domestic government debt securities and lending is increasing, while the share of income from certificates of deposit is decreasing.
These are the takeaways from the Q4 2023 Banking Sector Review.
Retail and corporate deposits continue to grow
Clients’ bank deposits continued to grow throughout the year, and their share in the banks’ liabilities remained record-high, at around 91%.
The share of NBU refinancing, on the other hand, fell below the lowest level observed in 2006.
The volume of hryvnia retail deposits increased by 20.5% over the year.
The growth rate accelerated during the quarter, most notably in December, due to seasonal inflows of wages and bonuses.
The annual growth rate of retail term deposits in hryvnia hit a record high for more than a decade.
The beginning of 2024 was marked by traditional seasonal outflows from retail accounts, but this does not pose a threat to the stability of the banks" funding.
Hryvnia corporate deposits increased by 50.8% over the year.
The dollarization rate of deposits declined for the sixth consecutive quarter (to 31.5%) due to a more active growth in hryvnia deposits.
Lower interest rates spurred demand for loans and made funding cheaper
Interest rates on hryvnia corporate deposits were the quickest to respond to the NBU"s key policy rate cut (minus 10 pp over the year) and the change in monetary policy design.
Corporate funding again became cheaper than retail funding.
At the same time, the decline in interest rates on retail term deposits was slow.
The UIRD for 12-month hryvnia retail deposits decreased by only 0.3 pp (to 14.2% per annum) in Q4.
Market rates on hryvnia corporate loans decreased by 2.3 pp over the year (to 17.7% per annum).
Rates on SME loans fell the most.
Similar dynamics were observed for retail loans, with the rates under new agreements dropping by 2.5 pp over the year.
Among other things, this was due to the effect of changes in the lending structure, as the share of subsidized mortgages increased.
Lending is on the rise
The net hryvnia corporate loan portfolio grew over the past two quarters, fueled by increased demand.
Hryvnia lending to small and medium-sized enterprises rose the fastest, by 12.4% yoy.
As before, hryvnia loans were mostly issued under the program Affordable Loans 5–7–9%: the total volume of loans granted under the program increased by 34% yoy, mainly on account of loans in the trade and energy sectors.
The net hryvnia retail loan portfolio grew for the third quarter in a row, mainly due to active card lending.
Lending was also vivid under the eOselia program.
Portfolio quality normalized over the year, with default rates declining across all segments.
The banks’ operational efficiency remains high
The banking sector earned UAH 86.5 billion in net profit in 2023 (according to preliminary estimates), taking into account the increase in the corporate income tax rate to 50%.
The high profit was driven by net interest income, which increased by almost a third over the year.
In Q4 2023, the role of interest income from domestic government debt securities and from lending increased, while the share of interest income from certificates of deposit decreased.
As expenses declined slower than income, the banks" interest margins narrowed.
Only nine institutions generated operating losses over the year.
Accumulated profits will enable the banks to meet new capital requirements
This year, the banks will update the calculation of operational risk, comply with updated capital structure requirements, and include market risk in their capital adequacy ratios estimations.
Also this year, the NBU plans to set a schedule for the introduction of capital conservation and systemic importance buffers.
After these requirements are met, restrictions on dividend payments may be eased.
For reference: The loans and deposits data published in the Banking Sector Review differ from the corresponding information posted in the Monetary Statistics section of the NBU’s official website, because the former:
contain data on the banks that were solvent as of the reporting date unless indicated otherwise include data from bank subsidiaries operating abroad contain data on deposits in other resident and non-resident banks have been adjusted for loan loss provisions unless indicated otherwise contain data on personal certificates of deposit unless indicated otherwise contain information on non-resident clients.