Ukraine’s banking system is facing significant challenges because of the ongoing war, yet it has shown remarkable resilience and flexibility. The following analysis outlines the impact of the war on loan performance, economic growth, and the banking system in general, highlighting trends in non-performing loans (NPLs), lending activity, and reforms that are expected in Ukraine in the near future.
Impact of war on NPLs
Ukraine had experienced a consistent decline in NPLs since 2018, signaling improvements in the health of its financial sector. The war, however, disrupted this progress, introducing significant challenges. Economic losses from the destruction of assets and collateral, coupled with falling borrower incomes, have made loan servicing more difficult and negatively affected the quality of loan portfolios. Despite these challenges, the banking sector has managed to continue reducing the NPL ratio. By the third quarter of 2024, the ratio had fallen to 32.3%. Retail NPLs declined to 17.6%, and corporate NPLs dropped to 40.7%, reflecting improvements in debt settlements and the increased issuance of high-quality loans.
NPL reduction was achieved across all banking groups. Private Ukrainian banks saw their NPL share drop to 12.8% while foreign-owned banks reduced their share to 12.7%. State-owned banks, which traditionally face higher NPL levels, also improved by bringing their ratio down to 45%. This progress highlights the sector’s capacity to mitigate risks despite macroeconomic pressures.
Economic resilience and banking stability
Despite the war’s adverse effects, Ukraine’s economy displayed unexpected resilience in the third quarter of 2024 with growth exceeding the forecasts of the National Bank of Ukraine (NBU). This performance was supported by a combination of reduced electricity shortages, favorable weather conditions, and timely completion of infrastructure repairs between August and October. Additionally, stable operations in the sea corridor and a supportive fiscal policy bolstered economic activity.
The banking system has remained stable, underpinned by adequate capital levels and profitability. Banks have consistently met regulatory standards, demonstrating strong financial health. Investments in domestic government bonds increased by 8.9% quarter-on-quarter and 39% year-on-year, contributing to a 1.8% rise in net assets during the third quarter of 2024. At the same time, reliance on NBU certificates of deposit continued to decline, marking a sustained trend over the past three quarters.
Trends in lending activity
Lending activity has shown robust growth, driven by both retail and business sectors. Net loans in the Ukrainian hryvnia have grown for 18 consecutive months. Business lending increased by 6.9% quarter-on-quarter and 22.9% year-on-year with small and medium-sized enterprises (SMEs) accounting for 60% of the net hryvnia business loan portfolio. Retail lending growth remained steady, maintaining the pace observed in the previous quarter.
Sector-specific trends revealed particularly strong lending activity in wholesale trade and agriculture. Private banks led the way in corporate lending, recording the highest growth rates. Overall, lending conditions have improved, supported by lower interest rates, which have returned to levels last seen in late 2019.
According to the Bank Lending Conditions Survey, banks expect continued growth in lending to both businesses and households over the next year. Banks, however, anticipate a slight deterioration in household loan quality compared to business loans.
Reforms and policy directions
The NBU’s Lending Development Strategy has played a pivotal role in improving lending conditions, particularly through increased access to energy loans. The central bank plans to conduct resilience assessments of the banking system in 2025, including stress tests under adverse scenarios. Additionally, it will implement standardised asset quality reviews by external auditors, ensuring that banks maintain appropriate capital levels by the end of 2025.
The key policy rate, maintained at 13% since July 2024, is expected to remain steady until at least mid-2025. This decision aligns with the NBU’s macroeconomic forecast, which emphasises stability as a foundation for long-term growth.
International cooperation on financial sector development
On 25 October 2024, the NBU and the International Finance Corporation signed two agreements to advance the development of digital financial services and address the problem of distressed assets in the Ukraine’s banking system.
One agreement focuses on developing infrastructure for managing non-performing loans and creating a legal framework for establishing Asset Resolution Companies. By improving NPL management and attracting private investment, these entities will address a critical gap in Ukraine’s financial sector. The second agreement emphasises digital transformation in financial services, which is expected to enhance financial accessibility and efficiency across the banking sector. Together, these initiatives reflect a forward-looking approach to strengthening the financial system.
Conclusion
Ukraine’s banking sector has demonstrated impressive resilience during a period of profound economic disruption. Despite the challenges posed by war, progress in reducing NPLs, steady lending growth, and proactive reforms underscore the system’s stability and adaptability. As reforms continue and international cooperation deepens, the sector is positioned to support economic recovery and long-term development.
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