Despite Russian soldiers marching around Ukraine and destroying entire cities, Ukraine’s banking system is still working and has managed to remain stable.  

Thanks to the National Bank of Ukraine's (NBU) efforts to clean up the sector over the last seven years the banking sector went into this war in the strongest shape it has been in perhaps for any time in the last twenty years. Liquidity was good; capital adequacy ratios (CAR) more than adequate, and the bad debt still in the system almost entirely provisioned for.  

“On Ukrainian territory, banks have maintained stability and liquidity,” said the chairman of the National Bank, Bohdan Danilishin, at the end of March. “As of February 1, 2022, the regulatory capital of banks amounted to UAH219bn ($6.8bn), which is the highest value in its history.”

The banks' capital adequacy ratios – the amount of cash a bank keeps on hand to meet withdrawal demands – was 1.5 times higher than the minimum regulatory values. The banks also keep exceeding the liquidity and credit risks norms. The capital adequacy ratio has fallen since then as banks have had to dig into their capital to deal with the extraordinary circumstances from an extremely comfortable 22% of total deposits in cash in the summer of 2021 to 18% as of February, the last month of reported data. But even that is an extremely comfortable level and well over the mandatory minimum of 10%.  

Ordinary Ukrainians rushed to the ATMs when Russians crossed the border on February 24 but swift action by the NBU prevented a panic and there were no runs on banks. After the initial surge of withdrawal demands things rapidly returned to normal.  

“Ukrainian banks have calmly met the outflow of deposits during the peak of war fears. Due to the deterioration of the information environment in January, there was a moderate outflow of deposits, up to 5% of the total, out of which one-third can be explained by seasonal factors,” according to the NBU in its report on the sector up to the end of February. “The outflow mainly concerned current accounts, while the volume of time deposits remained almost unchanged. The main factor in the increased demand for the currency remains psychological,” according to the NBU.

Since the start of the war, the official exchange rate has been frozen at $/UAH 29.25 and €/UAH 33.17. Exports have mostly halted, while imports were reduced to a government-specified list of critical imports, and controls on capital flows were introduced. The NBU has balanced this reduced market with its interventions. Since the start of the war, the NBU has sold a net of $424mn and purchased a net of €54mn as of the end of March.  

The NBU has not yet reported the results from March, but on the eve of the war when tensions were high, the sector was looking healthy.  

But with the country under attack the bank system has been forced to get creative. Banks are still working but many branches have closed in cities being shelled by the Russians. Even in wartime the population needs cash to buy what essentials they can still find. The NBU recommended that retail businesses offer “cashback” services to their clients paying by card as a simple way to tap the cash in circulation and support the banking system. Shopper have withdrawn some $130mn in March.  

And even as the tensions ratcheted up since the Russian Foreign Ministry issued its eight point list of demands in December, the Ukrainian banking sector continued to earn strong profits that it has been turning in for the last two years.  

Ukrainian banks earned UAH9.9bn ($330mn) in January-February, up by a third from both the month earlier and the same month a year earlier. All in all, the sector was on track for another banner year after clocking up UAH77.5bn of profits in 2021 – the sector’s best year in more than five years.  

The state-owned PrivatBank topped the ranking of the most profitable Ukrainian banks in 2021, declaring UAH35.05bn in net profit. The bank collapsed in 2016 and was nationalised by the state, needing a historically massive $5bn bailout, after its former owner oligarch Ihor Kolomoisky looted the institution of its deposits, as bne IntelliNews reported at the time in a cover feature “Privat Investigations” that contributed to the NBU’s decision to take the bank over.  

Today the PrivatBank continues to have the largest share of non-performing loans (NLPs) of any bank in the sector – what the current management call the “fraud loans” – but has been using its profits to retire debt and slowly return the balance sheet to health.  

NPLs have been the bane of Ukraine’s banking sector for years now, but as part of the clean-up the bad debts have been slowly retired. The sector-wide level of NPLs fell below half several years ago and they were only 26.6% of the total loan portfolio in February, according to the NBU. Within that, the state-owned banks, excluding PrivatBank, were still 46.4%, with PrivatBank’s NPLs at a whopping 68.5% of its loan book. But these shares have been falling steadily and the state-owned banks have reduced NPLs by 10pp in the last year, while PrivatBank’s NPLs are down from 73.8% a year earlier. The foreign and privately owned banks have now got their NPLs down below 10% as of February and were on course to return to normal levels of residual bad debt sometime next year.  

According to the NBU, the second most profitable bank was Raiffeisen Bank Aval (UAH4.858bn), the third was First Ukrainian International Bank (FUIB, UAH4.12bn).  

“The main factors in the banking sector's profitability in 2021 were a further increase in operating efficiency and a significant reduction in provisions. Thus the annual increase in net interest and commission income was 39% and 25% respectively. This was facilitated by the rise in interest income from lending, which revived significantly after the crisis,” the NBU said in its monthly report.  

Ukraine’s bank assets have been growing strongly as the economy finally started to recover from years of recession after the EuroMaidan revolution in 2014 and then another shock with the coronavirus (COVID-19) pandemic in 2020.  

The volume of hryvnia and dollar deposits increased in 2021, with the volume of individual hryvnia funds in banks rising during October-December 2021 by 8.1% (15.3% year on year). The leaders in this indicator were private and foreign banks that saw deposits up by 41.0% y/y and 22.4% y/y respectively. At the same time, household time deposits in the national currency grew more slowly, by 9.6% over the year.  

Another encouraging sign was new products like mortgages were taking off. In 2021, banks issued 10,800 mortgage loans totalling UAH8.9bn ($317mn). Almost 90% of the new agreements (UAH7.5bn) in 2021 were extended by five banks for housing purchases in the secondary real estate market that made up 90% of all new mortgages in 2021. Compared to 2020, new mortgage lending last year almost doubled in the number of contracts and increased 2.4 times in monetary terms, reported the NBU.

The Ministry of Finance expands lending under the programme "5-7-9%" and was ready to expand preferential lending to entrepreneurs under the terms of the updated state programme "Affordable Loans 5-7-9%", according to Serhiy Marchenko, the Minister of Finance.  

"The unprecedented success of the '5-7-9%' programme allows farmers to sow on time because they are the primary recipients of the programme. In principle, we are still ready to lend to domestic business on preferential terms, covering credit risks and interest rates," stated the minister.  

The start of the war at the end of the February will stop the sector in its tracks; however, given the health of the sector there is unlikely to be a financial crisis and the billions of dollars flooding into Ukraine from its international donors are likely to support the sector for the foreseeable future.