Ukraine’s banking sector’s performance in August was remarkably good given the negative impact on the economy from the coronacrisis. Bank assets have been rising strongly since the end of 2019 and continued to climb throughout 2020 to reach UAH1.6 trillion ($56.4bn) as of September. And the sector remains more profitable than in the crisis years following the Revolution of Dignity in 2014 but hasn’t quiet caught up with 2019, the banking sector’s first strong year of growth under the new regime.

The average profitability of the banking sector is struggling to take off and while earnings have stabilised at around UAH4bn ($141mn) a month for the whole sector, profits are still lagging the results of 2019, with a couple of duff months where the sector as a whole lost money.

The sector had an extremely good year in 2019, its first year of strong growth, and was on course to have an even better year in 2020 until the coronavirus (COVID-19) epidemic hit. The cumulative profits of the banking sector in September were UAH32.6bn, which is UAH16bn less than the same month a year earlier, but when compared with the UAH10.9bn banks had made by this point in the year in 2018 and the mere UAH1.4bn in 2017 then the sector appears to be on a solid footing.

That is backed up by the improving capital adequacy ratio (CAR) of the banking system, which was 21.4% as of September – a comfortable level for an emerging market and double the mandatory minimum requirement.

The cumulative profits are not rising that fast as the sector has had several bad months this year, losing money in June (UAH5.1bn) and making nothing at all in August.

Loans and deposits

The outlook for profits remains uncertain, as the country was going into a second wave of the coronavirus at the end of September and another lockdown is possible.

Retail lending has continued to rise steadily, up from UAH214bn ($7.5bn) in January to UAH225bn in September. Retail borrowing is expanding on the back of recovering incomes, but those incomes took a hit between December 2019 and June 2020, which saw more Ukrainians turn to bank loans for help. However, real income growth began again as the summer came to an end and made it easier for people to repay their loans.

Corporate lending has not fared as well. After a spike in borrowing in April as the lockdown came into effect when corporate borrowing jumped to UAH226bn, borrowing fell back again to UAH218bn in May, June and July. More recently in August and September corporate borrowing crept up again to c. UAH225bn.

On a year-on-year basis, retail borrowing is ahead of the last two years and well ahead of 2017. Corporate borrowing is behind last year’s level, although in the summer months was closing the gap and may overtake the 2019 level of borrowing if the increase in activity of the last two months continues.

The situation with NPLs continues to improve, with the overall banking sector average NPLs definitely below 50%, registering an average of 48% in September. However, the picture is very mixed.

The state-owned banks barely changed their exposure to NPLs, which remain stuck at 63.7% of their loan book. PrivatBank is the worst offender and has made only the tiniest dent in its portfolio of bad debt, reducing them from 81% of its loan book last September to 79.4% this year in the same month. Foreign-owned banks shaved 1.3pp off their NPLs and privately owned banks 1.5pp to 18.5% overall for the segment.

Dividing the NPLs up into corporate and retail and it becomes clear that the bulk of the gains in NPLs have been made in the retail sector, where the share of NPLs has fallen to 35.9%, but at the same time the rate of corporate NPLs has barely moved at 53.5% as of September.

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