Deposits are term-based, credits are for farmers. How banks weathered the H1 of 2023

If the whole world is watching Ukraine, then the entire financial world is observing Ukrainian banks. They are operating in extremely challenging conditions of a wartime economy, which is a unique experience for most financial institutions worldwide.

Mind has received data on the banking performance in the first half of 2023. According to information from market players, the Ukrainian banking system increased the volume of funds from individuals by more than 38 billion UAH and from legal entities by almost 132 billion UAH from January to June 2023. Additionally, funds from legal entities in foreign currency increased by 1.2 billion UAH during the first half of the year.

Bankers continued to contract their credit portfolios – this indicator decreased by 25 billion UAH for corporations and by 1.8 billion UAH for individuals.

Bankers are currently summarising the results of the H1 of the year, which are generally positive – the banking system is generating income, no major player has gone bankrupt, and the amount of money held by the population and businesses is increasing. Mind has found out about the main trends characterising the Ukrainian financial system at present from the top bankers of Ukraine.

Stable international support for Ukraine is yielding results – banks are weathering the most challenging working conditions during the war. According to data provided to Mind by the National Bank, the financial sector has successfully adapted to operating in the complex conditions of a full-scale war.

"The accumulated resilience reserve contributes to financial stability, enhances banks' resilience to further challenges of prolonged war, and prepares for a full-fledged revival of lending. The liquidity of the banking system does not cause concerns – short-term liquidity ratios on average threefold exceed the minimum requirements. The amounts of money held by the population in banks remain stable," say officials at the National Bank.

They also add that due to the improvement in the term structure of population investments, the volumes of hryvnia term deposits have started to increase, along with their share. The inflow of funds from businesses continues as well. At the same time, the shares of refinancing loans and external borrowings in the banks' liabilities have decreased to minimal levels.

Now let's have a closer look at the results achieved by the system in January – June this year.

"There is no significant aspect of the banks' activities that is not related to the war. No matter what is in question – the value of money, loan demand, attracting funds to deposits, or the situation in the labour market for banking employees – everything is directly linked to the full-scale invasion," notes Sergiy Naumov, the Chairman of Oschadbank.

The digitalisation of services. The active migration of clients has prompted banks to accelerate the adoption of cutting-edge technologies. "The main trend in the development of the banking system is the digitalisation of the maximum number of processes and interactions with clients. This is done to provide access to a wide range of banking services from any country in the world. The development of mobile banking applications has significantly accelerated, and the presence of these technologies has become not just an advantage but a necessity. This has transformed Ukraine into a leading country in the world in terms of digitalisation," believes Semen Babayev, Deputy Chairman and Head of Retail at Pravex Bank.

Risk management. The banking system of Ukraine has successfully weathered the risky challenges during the period of a state of war. "Banks have invested in process continuity and network availability. The financial results have demonstrated operational efficiency, profitability, and a gradual increase in capital reserves. All of these factors create an additional safety margin that banks need to continue operating in conditions of high uncertainty and risks," says Yuriy Soroka,  Head of Controlling and Business Intelligence division at Raiffeisen Bank.

Credit portfolios. The key trend in the first half of this year is the attempt to restart lending. "Most banks are seeking ways to activate the issuance of new loans to both private individuals and business clients. The main challenge lies in optimising the risk model and finding borrowers that align with it. This has never been an easy task, but now, in the conditions of war and complete unpredictability, it becomes a very complex process that requires constant attention, adjustments, and refinements," says Ivan Svitek, CEO & Chairman of Unex Bank.

Yuriy Soroka mentions the recent assessments of the NBU, according to which there could be a potential loss of up to 20% of the credit portfolio, indicating a decrease in pressure on the financial results of the banking system due to banks forming reserves for the credit portfolio.

Directions of lending. According to Ukreximbank's data, in the conditions of war, many industries experienced changes in settlement terms between counterparties, and costs and logistics timelines significantly increased due to disruptions in established logistic routes. This necessitated the need for financing operating capital for borrowers. Therefore, in 2022 – the first half of 2023, Ukreximbank primarily focused on providing financial support to the current operations of corporate clients.

"The bank has not ceased to provide investment loans, although their relative share has significantly decreased and accounts for about 10% of all contracts concluded with corporate clients since the start of the full-scale invasion of russia in Ukraine," said representatives from Ukreximbank, emphasising the overall increase in resource costs in the market, partly caused by the rapid rise in the NBU's key policy rate and the global increase in the cost of funds in dollars and euros.

Earlier, Mind reported that lending was mainly driven by government programmes. This trend continued during the first half of 2023.

"The volume of loans to large corporations and private individuals has not been growing recently, while loans to micro, small, and medium-sized businesses have significantly increased. For instance, the corresponding portfolio of Oschadbank has grown by nearly 3 billion UAH to 20.6 billion UAH since the beginning of the year. This can be explained by the fact that Oschadbank actively participates in state, international, and regional business support programmes," says Sergiy Naumov.

"We are focusing on financing existing clients and actively participating in the Affordable Loans 5-7-9%  government programme, through which we have provided 2.8 billion UAH in loans for the agricultural sector since the start of the war. During the war, we joined the Government's programme of state guarantees and issued nearly 1.2 billion UAH in loans," says Oleksandr Kurkin, Proximity Banking and Network Director at Crédit Agricole Ukraine.

According to him, the list of targeted industries has not changed – Crédit Agricole remains a strategic partner for the agricultural sector and also supports the real sector of the economy, including manufacturing, trade, services in sectors that ensure society's functioning, production and processing of food products, essential goods, medicine, and services related to the energy industries.

The volume of lending. "Unprecedented escalation of security risks due to the war and a significant economic downturn last year significantly reduced the appetite for risks and the size of lending by banks. The credit portfolios for businesses and private individuals continue to shrink. This contraction is mainly driven by a slowdown in demand for loans, particularly as new loans do not fully offset the size of previously issued loans that are being repaid by clients," says Soroka.

He also mentions that there is a moderately optimistic expectation of a gradual recovery of the credit portfolio, which will be accompanied by a resurgence in demand for credit products due to increased consumption, gradual economic recovery, and the expansion of state programmes supporting financing.

According to Oleg Klymenko, a member of the Management Board responsible for retail business at OTP Bank, the main focus of the bank and the banking system in 2022 and the beginning of 2023 has been attracting funds from individuals and legal entities, increasing the number of clients, and working on the quality of the credit portfolio. Almost all banks report a significant increase in funds held by clients in accounts, including deposits, which will be covered in the upcoming articles by Mind.

State banks' policies. According to data by the NBU, the share of state-owned banks in the market is increasing, which is typical for crisis periods. "The privatisation of state banks will return to the agenda in the post-war period. Currently, the key question is to update their strategies in light of the prolonged conditions of security uncertainty," says the NBU.

As of May 1, 2023, state-owned banks account for over 50% of the system's net assets and over 60% of the funds attracted from the population. "The increase in the share of state-owned banks in the banking sector is a consequence, in part, of previous crises when the government rescued large systemically important banks from bankruptcy. At the same time, the significant presence of state banks will determine further trends and directions for the development of the banking system, given their defining role as market-makers, and it creates high risks for the competitive banking environment," explains Yuriy Soroka.

Currency operations. "Due to the special circumstances of last year, currency trading became one of the main sources of income for the banking system," reminds Mykhailo Demkiv, a financial analyst at ICU Group. Since a large number of Ukrainians found themselves abroad with hryvnia cards, the volume of settlements abroad increased significantly. According to ICU data, the volume of settlements through physical terminals abroad increased more than fourfold, and cash withdrawals grew more than tenfold, largely due to the difference between the cash withdrawal rates abroad and the official exchange rate within the country.

"This is so-called currency tourism," says Demkiv.

In his opinion, this situation allowed banks to generate additional income – by carrying out operations for clients abroad at the commercial exchange rate, they would then buy back the currency from reserves at a significantly lower, almost official, exchange rate. The National Bank as the regulator did not oppose this situation, as the higher commercial exchange rate made 'currency tourism' somewhat less economically beneficial and reduced the volume of non-cash expenditures in foreign currency.

According to Demkiv, banks with a large number of retail clients benefited the most from this situation. PrivatBank accounted for 14.6 billion UAH, or over 40% of the total income from currency trading. As a result, the bank transferred 24.2 billion UAH in dividends to the government over the year. Other banks that showed significant income from currency trading included Universal Bank (mono), Raiffeisen, Alfa/Sense Bank, A-Bank, Ukrsibbank, Oschadbank, and others.

"With the alignment of cash and official currency rates this spring, the volumes of cash withdrawals abroad began to decrease. For instance, while in February 2023, over 600 million euros were withdrawn from Ukrainian hryvnia cards abroad, in March, it was slightly over 200 million euros. Consequently, the banks' revenues also decreased. Whereas banks on average earned 3 billion UAH per month from currency trading in the second half of the previous year, it was only half of that amount in April of this year," says Demkiv.

Conclusions. The wartime economy does not leave banks with much room for profit. As long as the regulator continues to support the bankers, stability can be expected, at least for the systemic banks. Clearly, much of the financial sector depends on how actively external partners support the Ukrainian economy and how long the National Bank of Ukraine will deem it necessary to maintain the hryvnia exchange rate.

The most interesting trend of the half-year, namely the growth of funds in banks' accounts, will be analysed in the following text.