Full steam ahead at National Bank of Ukraine

by Kyrylo Shevchenko*

Coronavirus has posed an unprecedented crisis for Ukraine’s economy and the global economy as a whole. When I took over as Governor of National Bank of Ukraine in July of this year, support of the banking sector was my top priority, not just to regain confidence in our country’s central bank, but to also help Ukraine through the Coronavirus storm. I am proud of the work we have achieved to date. But there is much more to be done, and 2021 will be a year in which our decisions will continue to power on.

No bank has been left unaffected by the crisis. Between January-October 2020, NBU’s profits sat at UAH39.8 billion (€1.17 billion), down 23% from last year’s levels. This is primarily due to banks, understandably, increasing their provisions from circa UAH8.36 billion (€246 million) to UAH20.9 billion (€216 million). Nonetheless, net interest income has risen by 5.1% year-on-year to UAH69.6 billion, despite lower interest rates. In addition, net commission income is up 1.8% year-on-year to UAH36.5 billion (€1.07 billion), although demand for banking services temporarily fell in the spring. As a result of this growth, banks in Ukraine have retained their ability to cover losses and continue to lend to households, SMEs and large businesses despite the adverse effects of Coronavirus.

In Q3 of last year, restrictions began to ease across Ukraine. Consequently, the lending market returned too, allowing the banking sector to set our country’s economy on the road to recovery. The loan portfolios of electricity suppliers, carriers and trading companies saw significant growth, alongside increases in loan demand from SMEs, who have prioritized restructuring their debts as well as meeting working capital and investment needs. The retail and real estate markets in Ukraine have also witnessed positive growth since July, with the former up almost 4% in Q3. Real estate, meanwhile, has experienced an even faster growth, up 6.9% for the quarter. This was driven, primarily and unsurprisingly, by pent-up demand for real estate, coupled with added incentive programmes from the government and the steps we have taken at NBU to cut interest rates.

The positive growth we have seen in the lending market has been matched with the efforts we have made regarding interest rates. At present, interest rates are still trending lower as a result of subdued inflation and key cuts to NBU’s policy rate. Our actions have brought interest rates to an all-time low of 6%, meaning responsible borrowers can take out affordable, less than 8.5% per annum hryvnia loans to finance short-term needs – of particular importance in the wake of the pandemic.

These changes that have been made at NBU bring an added personal sense of achievement, since loans came with an interest rate above 18% just under a year ago. Yet, this is by no means a valid excuse to take our foot off of the gas; there is ample room to lower these rates further. Since the beginning of 2020, banks have cut their rates on hryvnia deposits from over 15% per annum to 8.6% per annum, whilst rates on FX deposits are at an all-time low.

Perhaps one of the most important trends we have seen is the decline in NPLs. In 2017, Ukraine led the world in NPLs, accounting for 58% of all loans made by Ukrainian banks. Since the beginning of my role as Governor in July, NBU’s efforts to reduce this unwanted accolade have been nothing short of remarkable. Praise must also be given to state-owned banks, who did a tremendous amount of work between June and November by writing off UAH111 (€3.26 billion) billion in fully provisioned loans. This enabled those banks to bring their NPL ratios below 60% for the first time in several years. Additionally, improvements have been reported in bank deposits. Hryvnia retail deposits have risen by 29% year-on-year in 2020, while FX retail deposits are up 5.5%. Year-on-year, hryvnia corporate deposits have increased 38% and FX corporate deposits have increased 24%.

2020 has indeed been a difficult year for the world. But the work that has been undertaken at NBU since July indicates that confidence in Ukraine’s banking system is high and continues to grow. As Governor, my priority for 2021 will be an ensuring that reform and recovery will continue to be at the heart of NBU’s activities.

*Governor of the National Bank of Ukraine