So far, Ukraine’s banking profits have not been badly affected by the coronacrisis, although the first signs of a slowdown appeared in May. Ukraine’s banks' profits are still running ahead of those of last year, which was the first year of strong growth since the economic meltdown in 2015.

Thanks to the skill of the central bank, the March currency crisis broke with tradition and did not create a big devaluation and a run on the banks, Olena Bilan, Dragon Capital’s chief economist, said at a recent conference.

“For the first time in all crises we had almost no outflow of deposits from the banking system. It was very unexpected.” Noting that about 100 banks were closed during the 2014-2015 crisis, she said: “We now have a crisis of the real sector of the economy. But there is no crisis of the currency, banking, financial system. And this is to the great credit of the central bank.”

Banks earned UAH28,964 ($1.1bn) over the first five months of this year, surpassing the UAH23,428mn they made in the same period last year.

However, the first signs of the crisis biting into profits appeared in May, when profits for that month fell to UAH3,765mn, down from UAH5,313mn in May a year earlier.

What held the profits up this year against a year earlier was the very strong April results, when banks earned UAH9,234mn, which was almost double the UAH5,213mn they earned in April 2019. And in February, before the crises started, banks earned UAH9,285mn, which was triple what they earned a year earlier. 2020 would have been a banner year for Ukraine’s banks, had it not been for the coronacrisis.

Going forward, analysts expect that banking profitability will erode as the year wears on, as the crisis' effect on banks is slower to become visible than in other sectors like industry or manufacturing. However, the sector should start to recover in 2021 depending on how strong the economic bounce back is.

 

Loans

The crisis started to have an impact on bank loans as companies took credit in April as the coronacrisis broke to shore up their books, reversing a trend of falling commercial credit by corporates that has been in place since the start of 2019. Corporates took out UAH913,221mn worth of loans in April, but by May the volume of credits was falling again.

In retail the opposite happened, when the slowly rising volume of retail credits fell in May, although the growth of retail credits is likely to resume over the summer as the population turns to bank loans to make up for falls in real income caused by the crisis. Retail loan volume was UAH218,189mn in June.

As the charts show, the corporate borrowing on a month-by-month basis remains down on the last two years, whereas retail borrowing has been the highest of any year in the last four since the start of 2020.

The small business stimulus programme, Affordable Loans 5-7-9%, has distributed 639 loans for a total of $15mn since February, the Finance Ministry reports. The average loan size of $23,500 reflects the loan cap of $55,000. Although 16 private and state banks now participate in the programme, it is far short of its announced goal of extending 50,000 loans by next February.

 

 

 

NPLs

The situation with non-performing loans (NPLs) deteriorated over the first five months of this year. The sector remains burdened, as about half of all loans on sectors books as an average are bad.

However, under the leadership of the recently departed governor of the National Bank of Ukraine (NBU) Yakiv Smolii, the share of NPLs had been falling throughout 2018 and 2019 as part of the banking sector clean-up he led.

But since the start of this year, before the coronacrisis began, the level of NPLs for the sector as a whole started to creep up again, rising from 48.36% in January, its lowest point since the 2015 meltdown, to 49.62% as of June.

But NPLs are not evenly distributed amongst the banks, with the bulk being concentrated in the state-owned banks, with the state-owned PrivatBank having the most, what the management called the “fraud loans” created by the bank’s former owner oligarch Ihor Kolomoisky, who used various fake loan schemes to drain $5.5bn out of the bank, which was eventually nationalised in 2016.

As the table shows, the privately owned banks are in the best shape, with only 18.57% of loans being NPLs, followed by foreign-owned banks with 34.25% NPLs in June. And after falling briefly below 50% in January-March, the NPLs at the state-owned banks have risen again over the halfway mark to 51.05% as of June.

The deterioration in the quality of the loan books of all Ukraine’s banks is not dramatic, but it is a worrying sign, and as the economy crisis drags on the NPLs will rise over the rest of the year. However, with more than 90% of the already bad loans provisioned for, they do not represent a danger to the sector, but they are an enormous drag on lending growth and profitability. The strong profits that the banking sector should have earned in 2020 would have gone a long way to alleviating the NPL problem but the repair work will now have to be put off until at least 2021.

 

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