The National Bank has published a new Financial Stability Report. According to Kateryna Rozhkova, the First Deputy Governor of the National Bank, the report analysis allows drawing six major conclusions.
1. The Ukrainian economy is recovering after 2020, but slower than desired
The quarantine restrictions in 2021 resulted in a decrease in GDP growth by 0.8 p.p. The further growth is hampered by: a small amount of private investment (uncertainty has been added due to the pandemic and its consequences for the global economy has been added to the old problems in the legal framework for protecting the investors’ rights), rapid growth in imports, and a slow recovery in the service sector.
The threat of the military conflict escalation by Russia has increased.
At the same time, the Ukrainian economy has a sufficient margin of safety to withstand risks: the level of debt is acceptable, the international reserves are significant, and the financial sector is stable and well capitalized.
The financial sector risks are low.
In the real sector, the recovery is uneven. The corporate income growth for the three quarters was 39%, but it was mainly due to the price increase. The real recovery is much slower, but some industries are already reaching their maximum capacity utilization.
Dynamics of the financial stress index
2. The world is experiencing record inflation
The pressure on prices is fundamental at the moment. The period of soft monetary policy is coming to an end even in the developed countries. The cost of borrowing for emerging economies will rincrease.
In 2021, Ukraine got significant assistance from the IMF. The collaboration with the IMF remains crucial. One should start thinking now about a new program, since the current one ends in the summer.
3. Ukrainian banks are sustainable
After a year's hiatus, the NBU conducted again the stress tests on banks in 2021. The results were significantly better than in 2019. According to the baseline scenario, the banks need additional capitalization by 5.3 billion UAH, and according to the negative scenario—by 41.7 billion UAH. This is, respectively, seven and two times less than in 2019.
This time the risk map of the financial sector contains practically no red color, that is, all risks are low or moderate. The macroeconomic sector is exposed to the greatest risks. These are inflation, low investment, low growth rates: Ukraine has the lowest expected growth rate of real GDP this year among its neighbors.
4. Mortgages are increasing, but they are still very far from being massive
The volume of mortgage lending in 2021 increased by 50% in annual terms. But it grows from a very low base. A number of unresolved issues at the legislative level are holding back the growth.
The state program Affordable Mortgage supported the growth. Although the volume of loans under it is significantly less compared to the usual programs of banks: for 9 months of 2021, only 20% of the annual budget of the program was used.
5. The growth rates of business lending are very high
In 2021, the highest growth rates of net loans in hryvnia were recorded since 2013—by 40% in annual terms. The main reasons for this growth are the decrease in the loann cost and the high need for working capital. This does not refer to large-scale investment projects at the expense of the credit funds at the moment.
The fastest growing loans were for small and medium-sized businesses. The state program 5-7-9% was the additional incentive, but not the decisive one. Only every fourth hryvnia loan is provided under this program.
6. Banks will strive to raise long-term deposits
The banks’ competition for term deposits is intensifying, therefore, the rates on the long-term deposits will grow.
The funds in current accounts represent 80% of the bank funding. This structure does not hinder lending yet. However, if banks are to build up the portfolios of mortgages, car loans, and business investment projects, they will need to raise longer funds from the citizens. To do this, they need to increase deposit rates.
New regulatory measures for banks
The report notes that the profitability of the banks and the capital stock allow for a number of regulatory changes that have been postponed during the fight against the pandemic.
For instance, from January 1, 2022, the following is envisaged:
- imposing the minimum requirements for the capital coverage of the operational risk in the amount of 50% of the calculated amount, with an increase to 100% from January 1, 2023;
- increasing the risk weight for the unsecured consumer loans from 125% to 150%;
- increasing the risk weight on the local government bonds in foreign currency up to 50 and up to 100% from July 1, 2022;
- increasing the share of the value of the non-core assets deducted from the fixed assets to 50%.
Other changes will be imposed during the year.