The capitalisation of the Ukrainian banking sector has been improving steadily. At the beginning of January, the capital adequacy ratio R2 decreased to 21.1%, compared to 25.4% at the beginning of December, which was due, among other factors, to the tightening of the capital requirements methodology. Disregarding these effects, the ratio improved significantly from 19.7% at the beginning of 2023 and 18% at the beginning of 2022 (10% requirement). The loan-to-deposit ratio among residents stood at 44.8% in November 2023, falling to its lowest level since the Russian aggression (72.2% in January 2022). The banking sector remains highly liquid, with LCR ratios exceeding requirements several times.
Economic conditions
In the third quarter of 2023, economic growth decelerated to 9.3% y/y from 19.5% y/y in the second quarter of 2023. The high growth rate is due to a low reference base, which was dragged down by the effect of the war a year ago. The economy has been gradually recovering. In the third quarter of 2023, GDP, adjusted for seasonal factors, was up 0.7% q/q, following an increase by 0.8% q/q in the second quarter of 2023. The National Bank of Ukraine (NBU) expects GDP growth for the full year 2023 to have been stronger than expected at 5.7%. In contrast, GDP growth in 2024 is expected to decelerate to 3.6% due to weaker output in agriculture and increased labour market imbalances as a consequence of the ongoing war. The importance of the public sector, including military, social and infrastructure reconstruction spending, has increased in the structure of GDP. The share of investment in GDP has also increased, while private consumption has declined, which is typical of economies operating in war mode. Output in the agricultural sector was higher in 2023 than in the previous year. The labour market situation is gradually improving, and real incomes have returned to increases since the second quarter of 2023, also due to increases in funds paid by the state (salaries in the military sector, pensions, social transfers). According to UNHCR, the number of Ukrainian refugees outside Ukraine was 6.3 million in December 2023, and the number of internal migrants was 3.7 million. Inflation is declining rapidly, falling to 5.1% y/y in December 2023 from 26.6% y/y in December 2022. Inflationary processes have slowed significantly due to, among other factors, easing cost pressures (including on the agricultural goods part due to high yields), the disinflationary impact of the strengthening of the hryvnia (UAH) and the normalisation of expectations regarding inflation. Growing concerns about an increase in inflation in 2024 as the economic recovery continues may decelerate the scale of the ongoing NBU interest rate cut cycle (15% as at the end of January 2024 versus 25% in June 2023). The UAH exchange rate has been released, but the NBU reserves the option to intervene. Currency restrictions are being systematically eased (e.g. limits on foreign currency withdrawals for households have been lifted since December 2023). Foreign exchange reserves in December 2023 increased by 42% y/y to 40.5 billion US dollars (USD). The fiscal sphere remains a critical risk to Ukraine’s macroeconomic stability. The fiscal deficit in 2023 exceeded UAH 1.3 trillion (about 20% of GDP) or, excluding foreign grants, UAH 1.7 trillion (about 26% of GDP). According to the Budget Act, the deficit in 2024 is expected to be around UAH 1.6 trillion (over 20% of GDP), and its funding depends on further inflows of external financing (so far mainly from the EU, the US and through IMF loans).
Ukrainian banking sector
According to data from the NBU, the number of banks which engaged in operations in Ukraine dropped to 63 at the end of November 2023 from 67 at the end of November 2022, due to the bankruptcy of four banks. At the end of November 2023, the value of the banking sector’s assets increased by 22.5% y/y to 2.75 trillion Ukrainian hryvnias (UAH) and equity by 54.1% y/y to UAH 337.4 billion. The equity-to-assets ratio had been rising continuously for four quarters, and stood at 12.3% at the end of November 2023, approaching 12.8%, the level recorded at the end of January 2022 (before the Russian invasion of Ukraine). The main reason for the growth in equity was the high profits recorded in the second half of 2023. The banking sector will have to pay a 50% tax on „excess profits” in 2023, and as of 2024 the tax rate will be 25% (previously 18%). The NBU estimates that the one-off levy will not have a significant impact on the stability of the banking sector.
Total deposits increased by 24.2% y/y to UAH 2.26 trillion in November 2023, with resident deposits accounting for 98.6% of the total. Residents’ foreign currency deposits grew at a slower rate than total residents’ deposits in the second half of 2023 (8.9% y/y and 24.7% y/y respectively in November 2023), contrary to what happened in the first half of the year. The dynamics of total loans was negative in November (down 3.9% y/y to UAH 1.03 trillion), but the rate of decline has been steadily declining since August compared to the minimum level of -11.2% y/y recorded in July 2023. The volume of total loans has been continuously increasing on a month-on-month basis since July 2023, following an earlier period of strong declines. In November 2023, the dynamics of loans to households was positive for the first time since September 2022, at 1.3% y/y, with a further significant decline in loans to businesses (-6.5% y/y). The recovery in loans to households originates in the consumer segment, reflecting the rebound in consumption and rising real incomes of the population. The volume of mortgage lending has been growing steadily, while lending is practically limited to the state-subsidised eOselia programme. The state-subsidised “Affordable 5-7-9% Loan” programme remains the main driver of business lending, although the agreement with the IMF implies a revision of the programme and a focus of assistance on the SME sector. The outlook for lending growth is improving, mainly due to the improving business climate.
At the end of November 2023, the return on assets (ROA) in the Ukrainian banking sector stood at 5.57% and the return on equity (ROE) reached 52.77%.