Deposit Ceiling: Why banks fail to offer depositors more than 18-19% per annum?
And how does the National Bank of Ukraine attempt to influence the situation with deposit interest rates?
The UIRD index virtually unchanged in the second half of May. On average, banks offer depositors 13.6% per annum for deposits with a term of 3 months and 13.7-14.5% per annum for deposits ranging from 6 to 12 months.
Based on this, it can be concluded that banks have already adapted to the new monetary policy conditions and have raised deposit rates for the public to the maximum level.
However, the NBU hopes that the banking sector will continue to increase the attractiveness of hryvnia resources in order to further grow the deposit portfolio. On the other hand, experts have doubts that depositors can expect significantly higher rates, more than 17-18% per annum. Mind investigated how the regulator's new decisions are impacting bank deposit rates and what depositors should expect going forward.
What is happening with deposit profitability? The dynamics of deposit rates should be analysed over several periods.
Firstly, over the course of a year starting from June 2, 2022, the NBU increased the policy rate by 15 percentage points, bringing it to 25%. From that date, the profitability of hryvnia deposits for the public approximately doubled, from 6-8% per annum to 13.6-14.5% per annum.
Secondly, starting from the beginning of 2023, when the NBU began taking initial steps towards 'anchoring' free liquidity in the banking sector. As of the beginning of January, the average profitability of deposits ranged from 12% to 13.4% per annum. By the end of May, compared to January, it had increased by 1-1.8 percentage points.
Thirdly, starting from April 7, 2023, changes were made to the conditions under which banks can acquire deposit certificates, which should stimulate them to increase deposit rates. However, there was no significant surge. Over the course of one and a half months, the profitability of deposits increased on average by 1 percentage point.
UIRD index changes in 2022-2023
| Yield on 3-month deposits, % | Yield on 6-month deposits, % | Yield on 12-month deposits, % | |
| As of 2.06.2022 | 6,2 | 7,2 | 7,8 |
| As of 1.07.2022 | 8,1 | 7,9 | 8,5 |
| As of 1.08.2022 | 9,6 | 9,5 | 9,9 |
| As of 1.09.2022 | 10,1 | 10 | 10,4 |
| As of 3.10.2022 | 11 | 11,3 | 11,3 |
| As of 1.11.2022 | 11,1 | 11,4 | 11,7 |
| As of 1.12.2022 | 11,1 | 11,7 | 12 |
| As of 2.01.2023 | 12 | 12,7 | 13,4 |
| As of 1.02.2023 | 11,5 | 12,5 | 12,9 |
| As of 1.03.2023 | 11,9 | 12,8 | 13,3 |
| As of 3.04.2023 | 12,4 | 13,2 | 13,9 |
| As of 26.05.2023 | 13,6 | 14,5 | 14,4 |
Source: NBU data
What effect did the change in NBU's monetary rules have? It should be noted that from April 7, the National Bank revised the profitability of overnight deposit certificates, reducing it from 23% to 20%, and introduced a new 3-month deposit certificate with profitability equal to the policy rate, which is currently 25%.
Access to the new deposit certificates was granted to banks where 70% of the portfolio of hryvnia private deposits consisted of deposits with initial maturity of three months, and those that actively increased the volume of long-term deposits. The calculation was aimed at forcing banks to increase interest rates and, accordingly, attract clients' money from demand deposits into term deposits. As of April 1, the share of demand funds in banks was nearly 62%.
Detailed statistics on funds of individuals in the banking sector have not yet been published by the NBU. However, according to preliminary data, the growth rate of deposits in the national currency indeed accelerated in April.
As seen from the table below, there was a contraction of the deposit portfolio in January. In February, it grew by 1%, in March by 0.5%, and in April, it increased by 1.5%.
Amount of hryvnia private deposits in banks, UAH bln
| 02/01/2023 | 02/02/2023 | 02/03/2023 | 02/04/2023 | 02/05/2023 | |
| Deposits in national currency | 592.7 | 580.4 | 586.1 | 589.1 | 598.1 |
Source: NBU data
How does the National Bank intend to continue tackling excess liquidity in banks? According to estimates from surveyed Mind analysts, immediately after the introduction of deposit certificates at 25%, banks 'poured' around 50 billion hryvnias into them. Then the volume of operations with such certificates dropped to 8-10 billion hryvnias per week. However, there are still around 400 billion hryvnias 'floating freely', posing a threat to the exchange rate.
Therefore, the NBU does not hide its intention to maintain monetary conditions that will ensure high real profitability of hryvnia instruments.
"Maintaining the policy rate at a high level will support the effects of the NBU's measures and leave room for further growth in attractiveness of savings in hryvnia," said the Governor of the National Bank, Andriy Pyshny, after the NBU's board left the policy rate at 25% at the end of April.
The NBU's next step was to expand the list of benchmark domestic government bonds, which banks can use to cover part of their mandatory reserves (banks have had this possibility since January 11). Banks will be able to purchase the new series of benchmark domestic government bonds, with the identification number (ISIN) UA4000227490 to cover reserves starting from June 11.
"This move will contribute to further increased activity in the auctions of the Ministry of Finance for placing domestic government bonds," summarises the NBU.
The activation of banks in the debt market allows directing excess liquidity into the necessary channel (in simpler terms, helping to finance the state budget), easing pressure on the foreign exchange market, and avoiding hryvnia emissions. Moreover, domestic government bonds are not in huge demand. The banks' bond portfolios have increased by only 62 billion hryvnias (12.7%) to 548 billion hryvnias since the beginning of 2023.
Domestic government bonds in circulation by outstanding nominal volume
Source: NBU data
It's understandable because buying short-term certificates at 20-25% is one thing, and buying bonds at 13-19% is another. Although it is worth noting that benchmark domestic government bonds have a more attractive yield at 19.8%. Therefore, banks may pay more attention to military bonds.
What will happen to the profitability of deposits in the future? Despite the NBU's confidence in rising interest rates, it is not certain that banks will react accordingly to such forecasts.
"The market is gradually increasing interest rates on deposits. However, the maximum level will depend on various factors, such as macroeconomic indicators, inflation, the situation on the front, and so on," comments Mykhailo Sergiyenko, Director of Digital Business Development at Piraeus Bank.
If we analyse the range of deposit products across banks, even the largest players have increased the profitability of deposits to 15-17% per year. This includes state banks, which have always been known for their conservative interest rate policies. Systemic banks with foreign capital are slightly more restrained, with profitability ranging from 10-12% annually. The best conditions are offered by medium and small banks (with a deposit portfolio of less than 1 billion hryvnias), taking into account various bonuses (for opening a non-redeemable deposit, for placing a large sum, etc.), where one can expect rates around 18-18.5%.
"I believe that the limit for the profitability of hryvnia deposits for individuals is 20%. Although a rate of 17% is also close to the maximum. Otherwise, the bank remains at a loss and earns nothing," believes economist Grygoriy Kukuruza from Ukraine Economic Outlook.
Indeed, there may be occasional offers from banks that need to increase their deposit base with rates at 20-21%. However, the overall limit of profitability for the market seems to have been reached. At the same time, banks will worsen the conditions for short-term deposits with maturities not exceeding 2–3 months.
By the way, it should be noted that starting from the fourth quarter of 2023, the NBU plans to lower the policy rate. This, in turn, will signal the banking to reconsider deposit rates downward. However, the NBU believes that bank deposits will still remain attractive to the population.
According to the National Bank's perspective, due to the slowdown in inflation (forecasted to be around 15% for 2023), the real profitability of hryvnia instruments will increase, even with a decrease in nominal interest rates.
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