Following the rapidly unfolding crisis in the spring, in Q3 the banks’ main performance indicators started to turn positive again. The net corporate and retail loan portfolio increased. For the first time in many years, mortgages grew faster than consumer loans. The growth in retail deposits with banks decelerated compared to the previous quarter, dragged down by increased consumer spending. Deposit growth was mainly generated by demand deposits. A noticeable increase in the banks’ investments in government securities indicated that the sector had sufficient liquidity. Although this year the banks’ profit, as expected, was lower compared to last year, interest income and fee and commission income returned to growth. Provisioning for expected credit losses was mainly responsible for the lower profit. The banking sector is expected to end the current year with a profit.

Sector Structure those loans which were fully provisioned, and which the In Q3, one bank was declared insolvent and liquidated. As of banks do not expect to generate any cash flows. The state- late September, there were 74 solvent banks. In Q3, the owned banks were the most active in writing NPLs off. state-owned banks, including Privatbank, decreased their Funding share of net assets and retail deposits by 0.7 pp and 0.5 pp In Q3, the banks’ total liabilities increased by 7.7%1, to UAH respectively, to 53.5% and 60.6%. The largest 20 banks 1.50 trillion. As of the end of the quarter, deposits accounted increased their share of net assets by 0.1 pp, to 92.1%. for 85.0% of total liabilities. Corporate deposits grew at a Assets faster pace than retail deposits. As a result, the share of The sector’s net assets grew by 7.6% in Q3, to UAH 1.71 corporate deposits rose by 1.3 pp, while that of retail deposits trillion1. However, when recalculated using the exchange rate contracted by 1.7 pp. The banks’ liabilities to the NBU also at the start of Q3, net assets were up by only 5.4%. A rise in increased, by 0.7 pp, to 1.3%. interbank assets, including correspondent accounts held at Hryvnia corporate deposits expanded by 12.6% qoq or by the NBU and investments in government securities, 33.6% yoy, while FX deposits rose by 2.8% qoq or by 23.8% generated two-thirds of the growth. FX interbank assets yoy in the dollar equivalent. This growth resulted, among increased most of all (by 11.7% qoq in the dollar equivalent). other things, from energy companies’ receipts. Hryvnia Domestic government debt securities were up by 4.8%2, deposits grew the most at state-owned banks, including while NBU certificates of deposit rose by 17.0%. The share Privatbank (+17.6% qoq). Only the state-owned banks of customer loans in assets dropped by 0.9 pp, to 33.7%. reported FX deposit outflows, mainly due to Naftogaz paying The loan portfolio grew gradually in Q3. Net hryvnia corporate taxes and dividends in Q3. loans increased by 3.0%1 in Q3, but were still 6.0% short of Hryvnia retail deposits rose by only 1.2% in Q3 (+27.1% yoy), the level seen in September 2019. The largest increases compared to the growth of 10.9% qoq seen in Q2. The private were reported by foreign-owned and privately owned banks banks and Privatbank led the way in this segment of deposits, (+10.4% qoq and +9.5% qoq respectively). FX loans in the with growth of 4.7% and 3.2% respectively. FX retail deposits dollar equivalent rose by 1.1% qoq, while falling by 8.1% yoy. grew by 1.3% qoq or by 5.3% yoy. The growth in net hryvnia retail loans declined further, to The dollarization rate of deposits increased by 0.3 pp in Q3, 8.8%1 yoy as of late September, compared to +26.9%1 yoy in to 41.0%, driven by a weaker hryvnia. When recalculated March and +13.1%1 yoy in June. In Q3, for the first time in using the exchange rate at the start of Q3, the share of FX recent years, the growth in net hryvnia loans for the purchase, deposits dropped by 2.0 pp. construction, and renovation of real estate (+6.9% qoq) outpaced that of the entire portfolio (+3.9% qoq). Interest rates Q3 saw a slower fall in deposit and loan rates. The interest The nonperforming loans ratio shrank by 2.9 pp in Q3, to rate on 12-month hryvnia retail deposits moved down by 0.9 45.6%3 of the loan portfolio. The main reason for this was the pp in Q3, to 8.7% per annum4, while that on US dollar ones writing-off, in accordance with the rules set by the NBU, of

1 At banks that were solvent as of end-September 2020. 3 All banks, including insolvent ones; excluding off-balance sheet 2 Including revaluation. liabilities. 4 Based on the Ukrainian Index of Retail Deposit Rates.

Banking Sector Review | November 2020 1

National Bank of hovered at around 1.3% per annum. Although the spread in Q2, to cover legal risks. Additional provisions against loans between interest rates on three-month and 12-month hryvnia to customers halved in Q3 compared to the previous quarter. deposits widened slightly, from 0.2 pp to 0.5 pp, this Prospects and Risks difference did not encourage depositors to opt for longer So far, the crisis has had a moderately adverse impact on the terms. Interest rates on hryvnia corporate deposits fell by 1.4 banking sector’s operations. That said, provisioning pp, to 3.8% per annum. increased as the quality of the loan portfolio deteriorated. In Q3, average interest rates on hryvnia corporate loans Although it is difficult to estimate precisely the banking dropped by 1.0 pp, to 9.6% per annum, while those on retail sector’s potential loan losses from the current crisis, the NBU loans decreased by 1.9 pp, to 30.9% per annum. Interest expects that provisions will continue to rise. Accurate rates on FX corporate loans ranged at around 5% per annum. estimates will probably be made by the end of the current year, and in some cases only during the first half of 2021. The Financial Results and Capital uncertainty of the macroeconomic forecast has decreased While increasing by 1.8 times qoq in Q3, to UAH 13.8 billion, significantly, with the banks already being able to assess the the banking sector’s profit dropped by 20.2% yoy. In the first prospects for the operation of individual sectors and nine months of 2020, the banking sector’s profit shrank by companies. By the end of November, the banks could 22.2% yoy, to UAH 37.6 billion. The number of loss-making perform the required short- and long-term restructurings banks was 12 (compared to 16 in H1), with 10 banks reporting without having to recognize additional credit risk, provided operating losses. Privatbank earned 56.6% of the banking that such restructurings are viable and do not conceal sector’s profit. underlying problems with borrowers’ solvency. In 2021, the In the first nine months of 2020, the banks’ operating income NBU plans to hold its annual bank resilience assessment, rose by 7.8% yoy, while operating expenses grew by 14.1% including an asset quality review, to find out whether or not yoy. Net operating profit before provisions edged up by 1.9% the banks accurately report the credit risk of their assets. yoy. Operating efficiency worsened – the CIR moved up to Although the NBU is keeping its key policy rate flat, loan rates 54.7% in Q3, from 47.4% in Q3 2019. are expected to descend further, as there is still room for Despite a rise in net interest and fee and commission income, further interest rate cuts. Net interest income and fee and operating income fell by 6.0% qoq, dragged down by the commission income are expected to recover, among other state-owned banks’ lower profit from the revaluation of things due to resumed lending. indexed domestic government debt securities. The growth in Since August, the banks have been calculating their net net interest and fee and commission income remained at a stable funding ratios (NSFR) in test mode. Based on these four-year low. Following a 1.5% yoy drop in H1, net fee and calculations, the NBU will set the initial minimum required commission income rebounded, hitting the level seen in the NSFR in the coming weeks, which the banks will have to meet same period last year (+0.01% yoy). In the first nine months, starting from 2021. The current liquidity ratio (R6), which will net interest income rose by 4.2% yoy, compared to growth of initially apply along with the NSFR, will be eventually 3.9% yoy in H1 2020. cancelled. Provisioning increased by 2.5 times compared to the first nine months of 2019, of which one third was made by Privatbank

Banking Sector Review | November 2020 2

National Bank of Ukraine

Sector Structure

In Q3, the banks’ total assets increased by 4.0%, to UAH 2.17 trillion. One bank was declared insolvent and liquidated. Figure 1. The banks’ total assets, UAH billions* Table 1. Number of banks*

2 500 2016 2017 2018 2019 09.20

96 82 77 75 74 2 000 Solvent - change -21 -14 -4 -2 -1 1 500 State-owned 6 5 5 5 5

1 000 - change -1 -1 0 0 0

Foreign 25 23 21 20 20 500 - change 0 -2 -2 -1 0 0 12.16 12.17 12.18 12.19 03.20 06.20 09.20 Private 65 54 51 50 49 State-owned Privatbank Foreign Private - change -20 -11 -2 -1 -1 * Solvent banks were grouped in accordance with their classification in * As of end of period. the respective reporting period. ** Including Privatbank.

In Q3, the state-owned banks, including Privatbank, decreased their share of net assets and retail deposits by 0.7 pp and 0.5 pp respectively, to 53.5% and 60.6%. Figure 2. Distribution of net assets across groups of banks Figure 3. Distribution of retail deposits across groups of banks 100% 100% 13.8% 14.0% 14.8% 15.0% 15.2% 15.5% 16.2% 14.0% 13.3% 14.3% 15.4% 16.1% 16.0% 16.3% 80% 80% 26.4% 24.2% 22.2% 23.0% 23.1% 22.9% 23.1% 34.9% 31.1% 30.4% 29.8% 30.6% 30.2% 30.2% 60% 60%

19.4% 20.7% 21.0% 20.7% 20.7% 35.5% 35.3% 33.2% 32.3% 32.5% 32.7% 40% 17.6% 20.6% 40% 34.4%

20% 20% 33.8% 35.5% 34.0% 34.2% 33.4% 33.6% 32.9% 25.1% 27.0% 28.2% 28.4% 28.5% 28.5% 27.9% 0% 0% 12.16 12.17 12.18 12.19 03.20 06.20 09.20 12.16 12.17 12.18 12.19 03.20 06.20 09.20 State-owned Privatbank Foreign Private State-owned Privatbank Foreign Private

The share of the largest 20 banks, which changed little year-on-year, stood at 92.1% in late September. The concentration ratio of retail deposits is falling gradually, due to greater activity by the private banks compared to the largest, state-owned, banks. Figure 4. The largest banks’ share of the sector’s net assets Figure 5. Concentration as defined by the HHI indicator* 100% 2 000 92.1% 1 800 80% 78.9% 1 587 1 600 59.7% 60% 1 400 1 188 1 200 40% 1 000 931

20.6% 800 20% 600 0% 400 12.16 06.17 12.17 06.18 12.18 06.19 12.19 09.20 12.16 06.17 12.17 06.18 12.18 06.19 12.19 09.20 The largest bank 5 top banks Total assets Net assets Retail deposits Top 10 banks Top 20 banks * The Herfindahl-Hirschman Index (HHI) is an indicator of banking sector concentration. It is calculated by summing the squared market shares of

individual banks. The index ranges from 0 to 10,000, with values below 1,000 indicating low market concentration.

Banking Sector Review | November 2020 3

National Bank of Ukraine

Banking Infrastructure

In Q3, the banks shut down a total of 293 branches – with Oschadbank and Privatbank closing the largest number of branches – 166 and 83 respectively. Meanwhile, other banks opened 42 new branches. Banks in and Odesa oblasts, which shut down 23 and 24 branches respectively, accounted for the largest relative decreases. Figure 6. Number of bank structural units*, thousands Figure 7. Operating bank structural units in selected regions as of 1 October 2020, structural units per 100,000 individuals 12 10.3 Rivne Chernihiv 9.5 Volyn 10 159/14 City of 190/19 Sumy 8.5 142/14 Kyiv 1.9 8.0 7.9 Zhytomyr 179/17 1.7 7.6 7.3 186/15 1054/36 8 Lviv 1.8 Kyiv Poltava Kharkiv 2.2 497/20 Khmeln. 304/17 1.8 1.8 Ternopil 327/24 556/21 Luhansk 2.0 1.8 174/14 Cherkasy 1.8 130/13 109/5 6 1.8 Iv.-Frank. Vinnytsya 196/17 2.2 1.6 1.6 Zakarpat. 199/15 234/15 1.6 1.5 165/13 Chern. Kirovohrad Dnipropetrovsk 2.2 156/17 Donetsk 4 108/12 677/21 2.0 1.9 347/8 1.9 1.8 Zaporizhzhya 1.8 Mykolayiv 324/19 192/17 Odesa 2 4.0 Low 14 3.5 2.9 546/23 Kherson 2.6 2.6 2.4 2.3 Moderate 17 178/17 0 Significant 19 Highest 36 12.16 12.17 12.18 12.19 03.20 06.20 09.20 Ukraine 7329/18 FEZ: Crimea ... State-owned Privatbank Foreign Private

* Standalone structural units and head offices.

The coronavirus crisis continues to negatively impact employment in The banks saw an increase in the number of active payment cards the banking sector. In Q3, the banks made a total of 1,700 employees for the first time since the crisis began. Privatbank and the private redundant, with the foreign-owned banks leading the way by laying banks were in the lead (+952,000 and +622,000 cards respectively). off 900 employees. Figure 8. Bank staffing numbers, thousands of employees Figure 9. Number of active payment cards by bank groups, millions of units 160 45 42.2 140 135 38.4 140 133 133 133 131 129 40 36.9 4.7 36.6 34.9 36.4 29.7 3.0 5.0 120 28.4 35 32.4 2.4 5.8 4.1 4.4 30.5 31.7 32.0 31.7 31.7

Thousands 2.1 4.9 30 6.4 6.6 4.7 4.7 100 6.2 46.6 42.4 25 80 39.9 38.6 38.3 36.9 35.9 20 24.0 60 20.4 21.4 21.0 22.0 17.5 19.6 25.4 26.1 26.0 26.1 26.4 26.3 25.9 15 40 10 20 38.4 38.4 36.7 36.5 36.4 35.9 35.6 5 6.5 6.5 6.9 7.7 6.4 6.3 6.5 0 0 12.16 12.17 12.18 12.19 03.20 06.20 09.20 12.16 12.17 12.18 12.19 03.20 06.20 09.20 State-owned Privatbank Foreign Private State-owned Privatbank Foreign Private

The POS terminal network returned to growth – in Q3 some 20,000 new terminals were installed. Privatbank and other state-owned banks generated the largest increases (+11,400 and +4,100 respectively). Ukrposhta had 5,000 terminals as of the end of September. For the first time since the start of 2019, the banks increased the number of their ATMs, with Privatbank and private banks leading the way. Figure 10. Number of ATMs*, thousands of units Figure 11. Number of POS terminals, thousands of units 40 400 37.0 372 36.6 35.9 35.6 34.8 349 352 5.0 33.8 2.5 2.5 34.7 5.5 3445.0 5.0 18.1 35 2.5 2.5 350 16.6 2.3 2.4 2.4 16.9 16.9 6.8 6.5 297 59.6 30 5.7 5.5 5.1 5.1 300 4.9 55.9 56.6 56.9 7.2 252 15.4 25 250 219 13.4 47.2 12.0 45.5 20 200 41.9 20.6 19.9 19.9 19.8 19.3 19.7 205 217 205 200 15 20.5 150 174 145 10 100 127 5 50 7.2 7.7 7.8 7.8 7.8 7.6 65.3 66.5 68.6 72.7 3.8 38.6 47.7 55.7 0 0 12.16 12.17 12.18 12.19 03.20 06.20 09.20 12.16 12.17 12.18 12.19 03.20 06.20 09.20 State-owned Privatbank Foreign Private State-owned Privatbank Foreign Private Ukrposhta

* Number of self-service bank machines (ATMs, deposit ATMs, and self- service kiosks).

Banking Sector Review | November 2020 4

National Bank of Ukraine

Assets

The sector’s net assets grew by 7.6% in Q3. However, calculated on the basis of the exchange rate at the start of Q3, net assets were up by only 5.4%. FX interbank assets increased most of all – by 11.7% in the dollar equivalent. Figure 12. Net assets* by groups of banks, UAH billions Figure 13. Change in net assets by component in Q3 2020, UAH billions 1 800 1 750 1708 1564 1590 5 1708 1493 277 5 1 500 21 1336 1360 238 247 1 700 1256 224 18 -2 1 200 187 201 23 173 516 45 445 479 480 1 650 416 413 900 438 3 352 1 600 1590 314 324 329 600 259 282 221 1 550 300 562 424 475 463 511 523 534 0 1 500 12.16 12.17 12.18 12.19 03.20 06.20 09.20

State-owned Privatbank Foreign Private Cash

Others loans

T-bonds

NBU and NBU

interbank

Corporate

Derivatives

Retail loans Retail

deposit

as of 1 Oct 20 Oct 1 of as

as of 1 July 20 July 1 of as

Insolvent banks Insolvent NBU certificates of certificates NBU

* Adjusted for loan loss provisions.

The share of net corporate loans contracted by 0.6 pp in Q3, to 25.3%. The decrease seen in gross corporate loans resulted largely from the state-owned banks writing off fully provisioned loans. Figure 14. Sector net assets by component Figure 15. Gross corporate and retail loans, 2018=100%* 100% 140% 7.5% 7.3% 14.0% 12.7% 8.7% 8.4% 8.0% 8.4% 9.4% 8.8% 8.4% 130% 6.9% 9.6% 80% 6.1% 129% 120% 25.3% 34.7% 27.8% 28.3% 25.8% 60% 38.0% 34.2% 110% 7.2% 7.4% 6.6% 4.6% 10.2% 100% 93% 5.0% 40% 5.4% 24.9% 29.8% 29.0% 90% 29.9% 24.6% 19.4% 26.1% 80% 20% 81% 18.6% 14.2% 15.4% 16.7% 18.2% 70% 11.7% 11.4% 67% 0% 2.9% 3.4% 3.5% 3.8% 4.1% 3.9% 3.8% 60% 12.16 12.17 12.18 12.19 03.20 06.20 09.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 Others Retail loans Hryvnia corporate loans Corporate loans NBU certific. of deposits FX corporate loans (USD equivalent) T-bonds Funds at NBU and other banks Hryvnia retail loans Cash FX retail loans (USD equivalent) * Issued by banks that were solvent as of 1 October 2020.

In Q3, the dollarization rate of net corporate loans moved up by 1 pp, Net hryvnia loans to state-owned companies fell due to several to 48.3%, while that of retail loans edged down by 0.3%, to 3.1%. companies changing the currency of their loans. Figure 16. Share of FX loans Figure 17. Net hryvnia loans to nonfinancial corporations, 2018 = 100%* 60% 110% 105% 50% 48.3% 100% 47.0% 90% 89.1% 40% 80% 30% 70% 19.3% 20% 60%

10% 50% 3.1% 48.9% 0% 40% 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 in corporate gross loans in retail gross loans State NFC Private NFC Foreign NFC in corporate net loans in retail net loans

* Issued by banks that were solvent as of 1 October 2020.

Banking Sector Review | November 2020 5

National Bank of Ukraine

In Q3, net hryvnia corporate loans grew by 3.0% qoq, while declining by 6.0% yoy. The foreign-owned and private banks led the way with the largest increases of 10.4% qoq and 9.5% qoq respectively. Net hryvnia retail loans rose by 3.9% qoq or by 8.8% yoy. Figure 18. Net hryvnia corporate loans, 2018 = 100%* Figure 19. Net hryvnia retail loans, 2018 = 100%* 130% 200% 190% 120% 120% 180% 112% 110% 160% 100% 96% 142% 90% 94% 140% 133% 80% 123% 70% 120% 70% 112%

60% 100% 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 State-owned Privatbank Foreign State-owned Privatbank Foreign Private All banks Private All banks * Issued by banks that were solvent as of 1 October 2020. * Issued by banks that were solvent as of 1 October 2020.

The composition of retail loans was little changed over the quarter, The NPL ratio shrank by 2.9 pp in Q3, to 45.6%. with consumer loans having maturities of up to one year accounting for 53.9%. Figure 20. Gross hryvnia retail loans by purpose Figure 21. NPL ratios for bank portfolios* 100% 60% 3.9% 7.1% 6.9% 5.2% 4.6% 4.2% 4.1% 6.3% 6.1% 6.2% 6.1% 13.1% 9.3% 7.4% 3.3% 3.5% 3.6% 4.2% 3.9% 55% 80% 10.6% 6.4% 16.4% 16.6% 16.7% 14.3% 16.6% 13.6% 50% 14.9% 8.8% 8.8% 8.2% 8.1% 50.9% 60% 9.5% 17.2% 8.8% 45% 45.6% 40% 50.2% 51.7% 53.2% 53.9% 53.9% 40% 41.7% 39.4% 20% 35% 34.8% 7.1% 7.4% 7.5% 7.5% 7.4% 7.4% 0% 7.0% 30% 12.16 12.17 12.18 12.19 03.20 06.20 09.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 Сar loans Other, < 1 year Other, 1-2 years Other, 2-5 years Other, > 5 years House purchase* Corporate loans Retail loans All loans Home appliances * For the purchase, construction, and renovation of real estate (including * All banks, including insolvent ones; excluding off-balance sheet land plots). liabilities. Individuals, including sole proprietors.

The NPL ratio declined, driven mainly by the state-owned banks writing off fully provisioned NPLs. This pushed up the NPL coverage ratio by 0.7 pp qoq, to 97.6% – a high not seen since 2014. Figure 22. NPL ratio across groups of banks* Figure 23. Nonperforming exposures (NPEs), in UAH billions, and provisioning 100% 800 100% 89.0% 97.6% 80% 90.6% 79.2% 600 80%

60% 45.6% 400 60% 40% 43.5%

200 40% 20% 16.7% 15.9% 0% 0 20% 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 Private All banks Privatbank State-owned Foreign Privatbank Russian Other Top-5 Foreign State-owned NPE coverage ratio (NPL-specific provisions) (r.h.s) NPE coverage ratio (all loan loss provisions) (r.h.s.) * Including interbank loans; all banks, including insolvent ones; excluding * Including interbank loans; all banks, including insolvent ones; excluding off-balance sheet liabilities. off-balance sheet liabilities.

** Top-5 foreign banks by net assets as of 1 October 2020 (excluding Russian-owned banks).

Banking Sector Review | November 2020 6

National Bank of Ukraine

Funding

In Q3, the banks’ liabilities rose by 7.7%. Corporate funding increased noticeably, driven by significant receipts to gas transportation and energy companies. The banks’ liabilities to the NBU more than doubled. Figure 24. Liabilities across groups of banks, UAH billions Figure 25. Change in liabilities by component in Q3 2020, UAH billions

1 600 1500 1 570 1358 1393 1 400 1293 302 1205 1 520 7 1 1173 264 285 24 1 2 1 500 1 200 1133 260 149 159 251 63 0.9 1 000 442 1 470 404 402 357 372 800 376 353 240 1 420 600 188 202 211 11 208 234 172 1 393 400 1 370 515 200 399 423 430 474 489 494 0 1 320 12.16 12.17 12.18 12.19 03.20 06.20 09.20

State-owned Privatbank Foreign Private NBU Others

Budget

Payables

IFI Loans IFI

as of 1 Oct 20 Oct 1 of as

as of 1 July 20 July 1 of as

Retail deposits Retail

Insolvent banks Insolvent

Interbank and IFIs and Interbank Subordinated debt Subordinated Corporate deposits Corporate

In Q3, customer funding as a share of total liabilities fell by 0.4 pp, to The banks’ total gross external debt grew by 4.1% in Q2, propelled by 85.0%, with that of retail funding dropping by 1.7 pp, to 43.3%. rising debt on long-term loans. Figure 26. Breakdown of liabilities Figure 27. The banks’ gross external debt, USD billions

100% 3.6% 5.8% 6.3% 6.8% 5.5% 5.4% 5.6% 25 2.2% 1.3% 1.2% 0.9% 0.8% 0.7% 0.7% 8.1% 7.8% 7.4% 17.1% 14.2% 13.4% 8.4% 80% 20

44.9% 43.3% 60% 42.7% 44.9% 15 38.6% 40.8% 42.2% 17.1 13.5 40% 10 8.7 5.3 20% 36.4% 36.4% 40.6% 40.1% 40.5% 41.7% 5 35.7% 4.2 5.4 4.6 4.1 3.6 3.6 3.6 5.2 4.1 3.7 3.0 3.1 2.0 0% 2.0% 1.6% 1.2% 0.6% 0.6% 0.7% 1.3% 0 1.2 1.1 1.3 1.2 1.2 1.0 1.1 12.16 12.17 12.18 12.19 03.20 06.20 09.20 2014 2016 2018 Q2.19 Q4.19 Q2.20 NBU Corporate deposits Retail deposits Short-term Long-term

Interbank and IFIs Subordinated debt Others

The NBU increased its share of banks’ liabilities to 1.3% in Q3, by Following a slight dip in August, the dollarization rate of deposits had issuing refinancing loans to banks, including Ukreximbank. risen to 41.0% by the end of the quarter as the hryvnia weakened. Figure 28. Share of NBU funds in bank liabilities Figure 29. Percentage of FX deposits 2.5% 60%

55% 2.0%

50% 1.5% 1.3% 45% 43.3% 1.0% 40% 41.0% 0.5% 35% 38.7%

0.0% 30% 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.16 06.17 12.17 06.18 12.18 06.19 12.19 09.20 In corporate deposits In retail deposits All Clients

Banking Sector Review | November 2020 7

National Bank of Ukraine

In Q3, hryvnia retail deposits grew at a slower pace (1.2%) compared In Q3, new hryvnia deposits with maturities of up to six months as a to Q2 (10.9%). Hryvnia deposits increased by 27.1% yoy, while FX share of total new time deposits declined by 0.8 pp qoq, to 54.5%. deposits rose by 5.3% yoy. Figure 30. Retail deposits, 2018=100%* Figure 31. New hryvnia retail deposits by maturity 200% 100%

180% 80%

160% 60% 140% 40% 120%

20% 100%

80% 0% 12.18 08.19 03.20 11.20 06.18 12.18 06.19 11.19 04.20 09.20 Demand deposits in hryvnia Demand deposits in FX Demand up to 1 month 1-3 months 3-6 months over 6 months Time deposits in hryvnia Time deposits in FX

* With banks that were solvent as of 1 October 2020.

Hryvnia corporate deposits grew by 12.6% qoq or by 33.6% yoy, with all bank groups reporting similar growth. The state-owned banks and Privatbank registered the most robust growth (+17.7% qoq or +56.9% yoy and +17.4% qoq or +53.1% yoy respectively). All banks reported an increase in FX deposits (by 2.8% qoq or by 23.8% yoy) in the dollar equivalent, apart from the state-owned ones, due to Naftogaz making compulsory payments to the budget. Figure 32. Hryvnia corporate deposits by groups of banks, 2018 = Figure 33. FX corporate deposits (in the dollar equivalent) by groups of 100%* banks, 2018 = 100%* 170% 240% 163% 160% 220% 150% 142% 200% 140% 137% 172% 130% 180% 134% 120% 160% 165% 110% 122% 158% 140% 144% 100% 120% 90% 124% 80% 100% 70% 80% 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 State-owned Foreign Private State-owned Foreign Private Privatbank All banks Privatbank All banks

* With banks that were solvent as of 1 October 2020. * With banks that were solvent as of 1 October 2020.

The private banks reported the largest growth in hryvnia retail deposits (by 4.7% qoq or by 45.0% yoy), while the foreign-owned ones reported the most robust growth in FX deposits (by 3.7% qoq or by 14.4% yoy in the dollar equivalent). Figure 34. Hryvnia retail deposits by groups of banks, 2018 = 100%* Figure 35. FX retail deposits (in the dollar equivalent) by groups of banks, 2018 = 100%* 175% 140% 174% 165% 130% 134% 155% 119% 120% 145% 138% 137% 135% 110% 114% 132% 125% 127% 100% 115% 91% 90% 105% 95% 80% 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 State-owned Foreign Private State-owned Foreign Private Privatbank All banks Privatbank All banks

* With banks that were solvent as of 1 October 2020. * With banks that were solvent as of 1 October 2020.

Banking Sector Review | November 2020 8

National Bank of Ukraine

Interest Rates

Following the rapid fall in interest rates seen in Q2 in response to previous key policy rates cuts, in Q3 interest rates on 12-month hryvnia deposits fell by only 0.9 pp, to 8.7% per annum. Interest rates on dollar deposits were at a historic low, at about 1.3% per annum. Figure 36. Ukrainian Index of Hryvnia Retail Deposit Rates, % per Figure 37. Ukrainian Index of USD Retail Deposit Rates, % per annum* annum* 18% 5%

16% 4%

14% 3%

12% 2%

10% 1%

8% 0% 12.18 04.19 07.19 10.19 01.20 04.20 07.20 10.20 12.18 04.19 07.19 10.19 01.20 04.20 07.20 10.20 3 month 6 month 9 month 12 month 3 month 6 month 12 month 12 month

* Thomson Reuters data, 5-day moving average. * Thomson Reuters data, 5-day moving average.

In Q3, interest rates on hryvnia loans continued to decline more quickly than those on deposits. Interest rates on corporate loans dropped by 1.0 pp qoq, to 9.6% per annum, while those on retail loans decreased by 1.9 pp qoq, to 30.9% per annum. Figure 38. Interest rates on new hryvnia loans*, % per annum Figure 39. NBU key policy rate and interest rates on new hryvnia deposits and loans*, % per annum 35% 22% 20% 30% 30.9% 18% 25% 16% 20% 14% 12% 15% 12.5% 10% 10% 9.6% 8% 5% 6% 0% 4% 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 To corporates To households Composite Key policy rate Time retail deposits Corporate loans

* Without loan extension or any other change in lending terms. * Daily rates, 5-day moving average.

The spread between retail loan and deposit rates narrowed, but still remained above 20 pp. The spread in the corporate segment was little changed. Figure 40. Spread between new** loan and deposit rates, pp* Figure 41. Spread between rates on outstanding loans and deposits, pp* 30 35 24.4 30 25 25.6 25 20 20 15 15

10 10 5.4 7.1 5 5

0 0 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 NFCs** Households NFCs** Households

* Including insolvent banks. * Including insolvent banks. ** New loans and deposits include amounts under primary agreements ** Non-financial corporations. that were entered into during the reporting period, as well as those under addendum agreements that changed either the amount or interest rate.

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National Bank of Ukraine

Financial Results and Capital

In the first nine months, the banks’ combined profit dropped by Operating efficiency worsened in Q3 – the CIR* was 54.7%, up from 22.2% yoy. Privatbank earned 56.6% of the banking sector’s profit. 47.4% in Q3 2019. Figure 42. Profit/loss* and return on equity Figure 43. Operating income and operating efficiency 20 40% 42 90%

15 30% 35 75%

10 3.7 10.7 9.1 20% 28 60% 6.6 7.6 7.2 5.2 10.4 4.5 3.6 5 3.3 10% 21 41 41 45% 39 39 38 39 35 35 0 0% 14 31 30% 5.0 3.7 5.3 7.5 8.2 5.7 4.1 6.6 25 27 -1.8 4.8 -5 -3.7 -10% 7 15%

-10 -20% 0 0% Q1.18 Q3.18 Q1.19 Q3.19 Q1.20 Q3.20 Q1.18 Q3.18 Q1.19 Q3.19 Q1.20 Q3.20 of Privatbank, UAH bn of other solvent banks, UAH bn Operating income, UAH bn CIR (r.h.s.) Total sector ROE (r.h.s.) * Quarterly data, including adjusted entries. * The CIR (cost-to-income ratio) measures the ratio of operating expenses to operating income.

Operating income increased by 7.8% yoy, while dropping by 6.0% Provisioning increased by 2.5 times compared to the first nine qoq. Higher net interest and fee and commission income in Q3 failed months of 2019, of which one third was made in Q2 by Privatbank to to offset lower profit from the revaluation of domestic government cover legal risks. debt securities. Figure 44. Operating income components for the quarter*, UAH billions Figure 45. Quarterly provisions** 50 15 12%

40 12 4 7 4 8 10 4 9% 30 4 1 10 12 11 12 9 11 10 11 12 10 20 8 9 6% 6 10 22 21 21 17 16 18 20 20 20 19 20 3% 0 3 -2 -10 0 0% Q1.18 Q3.18 Q1.19 Q3.19 Q1.20 Q3.20 Q1.18 Q3.18 Q1.19 Q3.19 Q1.20 Q3.20 Net interest income Net commission income Privatbank, UAH bn Other banks, UAH bn Result of trading operations Other operating incomes Provisions (annualized)/Loan portfolio (r.h.s.) * Including adjusted entries. * Annualized. * Including adjusted entries.

The sector’s regulatory capital adequacy remained significantly above the required minimum. Regulatory capital increased by 4.9% qoq or by 19.2% yoy in Q3, while share capital grew by 1.5% qoq or by 2.1% yoy. Figure 46. Regulatory capital and the regulatory capital adequacy ratio Figure 47. Composition of regulatory capital, UAH billions 200 25% 600 450 160 20% 300

120 15% 150

80 10% 0

-150 40 5% -300

0 0% -450 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 Regulatory capital, UAH bn Other items Losses from current year Losses from previous years Subordinated debt Regulatory capital adequacy (sufficiency) ratio (r.h.s.) Reserves and funds Share capital* Regulatory capital * Registered and unregistered share capital.

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National Bank of Ukraine

Table 2. Key indicators of Ukraine’s banking sector1

Q1 Q2 Q3 2013 2014 2015 2016 2017 2018 2019 2020 2020 2020 Number of operating banks 180 145 117 96 82 77 75 75 75 74 General balance sheet indicators (UAH billion)2 Total assets 1 409 1 477 1 571 1 737 1 840 1 911 1 982 2 095 2 090 2 172 of which in foreign currency 513 667 800 788 755 779 718 855 787 818 Net assets 1 278 1 290 1 254 1 256 1 334 1 360 1 493 1 564 1 590 1 708 of which in foreign currency 470 565 582 519 507 495 492 585 551 605 Gross corporate loans3 727 820 831 847 864 919 822 885 821 806 of which in foreign currency 252 400 492 437 423 460 381 439 389 379 Net corporate loans3 648 710 614 477 451 472 415 443 411 431 Gross retail loans 189 208 176 157 171 197 207 218 212 215 of which in foreign currency 67 101 97 83 68 61 38 44 41 42 Net retail loans 145 144 96 76 92 114 143 147 140 144 Corporate deposits3 258 283 349 413 427 430 525 544 564 626 of which in foreign currency 81 114 141 177 163 150 191 232 222 242 Retail deposits4 443 403 402 437 478 508 552 610 626 649 of which in foreign currency 189 214 215 239 244 241 238 282 262 281 Change (yoy, %) Total assets 11.4% 4.8% 6.4% 10.6% 5.9% 3.8% 3.7% 11.0% 10.5% 15.8% Net assets 13.7% 1.0% -2.8% 0.2% 6.2% 1.9% 9.8% 16.6% 17.1% 24.3% Gross corporate loans3 14.7% 12.8% 1.3% 2.0% 2.0% 6.3% -10.6% -1.1% -7.1% -4.2% Gross retail loans 3.0% 10.3% -15.7% -10.4% 8.5% 15.3% 5.0% 8.2% 4.5% 4.0% Corporate deposits3 16.8% 9.5% 23.5% 18.2% 3.4% 0.8% 22.1% 31.2% 31.7% 37.8% Retail deposits4 20.2% -8.9% -0.3% 8.7% 9.4% 6.3% 8.6% 18.3% 18.6% 25.5% Penetration5 (%) Gross corporate loans3 / GDP 47.7% 51.7% 41.8% 35.5% 29.0% 25.8% 20.7% 22.1% 20.8% 20.5% Net corporate loans3 / GDP 42.6% 44.7% 30.9% 20.0% 15.1% 13.3% 10.4% 11.1% 10.4% 11.0% Gross retail loans/ GDP 12.4% 13.1% 8.8% 6.6% 5.7% 5.5% 5.2% 5.5% 5.4% 5.5% Net retail loans/ GDP 9.5% 9.1% 4.8% 3.2% 3.1% 3.2% 3.6% 3.7% 3.5% 3.7% Corporate deposits3 / GDP 17.0% 17.8% 17.6% 17.3% 14.3% 12.1% 13.2% 13.6% 14.3% 16.0% Retail deposits/ GDP 29.1% 25.4% 20.2% 18.3% 16.0% 14.3% 13.9% 15.2% 15.9% 16.6% Profit or Loss6 (UAH billion) Net interest income 49.1 52.2 39.1 44.2 53.0 73.0 78.9 20.9 20.1 21.1 Net commission income 21.0 23.1 22.6 24.2 27.5 37.8 44.0 10.8 9.7 11.8 Provisions 28.0 84.4 114.5 198.3 49.2 23.8 10.7 4.7 13.1 3.0 Net profit/loss 1.4 -33.1 -66.6 -159.4 -26.5 22.3 58.4 16.1 7.7 13.8 Memo items: UAH/USD (period average) 7.99 11.89 21.84 25.55 26.60 27.20 25.85 25.04 26.92 27.60 UAH/USD (end-of-period) 7.99 15.77 24.00 27.19 28.07 27.69 23.69 28.06 26.69 28.30 UAH/EUR (period average) 10.61 15.72 24.23 28.29 30.00 32.14 28.95 27.60 29.61 32.25 UAH/EUR (end-of-period) 11.04 19.23 26.22 28.42 33.50 31.71 26.42 30.96 29.95 33.13

1 Data for solvent banks for each reporting date. 2 Including accrued income/expenses. 3 Including non-banking financial institutions. 4 Including certificates of deposits. 5 GDP is calculated as defined in the 2008 national accounts system methodology. From 2008 through 2013 it includes data for the temporarily occupied and City of Sevastopol; from 2014 through 2019 it excludes data for the temporarily occupied Autonomous Republic of Crimea and City of Sevastopol and a part of the ATO zone. Data for Q3 2020 – readings for the last 12 month based on NBU forecast as published in Inflation Report. 6 Taking into consideration adjustment entries.

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National Bank of Ukraine

Notes:

Source: NBU (unless otherwise stated). The sample of banks consists of banks solvent at each reporting date, unless otherwise stated. The sample of banks that were solvent as of the last reporting date includes banks that merged with other banks under simplified procedure. Data on groups of banks as of 2017 were prepared pursuant to NBU Board Decision No. 76-D, dated 10 February 2017. In 2018, data were prepared pursuant to Decision No. 444 by the Committee on Banking Regulation and Supervision, dated 29 December 2017. “State-owned banks” refers to all state-owned banks except PrivatBank, unless otherwise specified. The data include accrued interest as of the end of the period (month, quarter, year), unless otherwise specified. “Gross loans” refers to loans not adjusted for provisions against asset-side banking transactions. Data on corporate loans and deposits include data from nonbank financial institutions.

Retail deposits include certificates of deposit, unless stated otherwise. Rounding may cause discrepancies between the sum of components and the total. Terms and Abbreviations: ATM Automated teller machine / cash dispenser CIR Cost-to-Income Ratio FX Foreign currency GDP Gross domestic product IFO International financial organization NBU National Bank of Ukraine NFC Non-financial corporation NPL / NPE Non-performing loan / non-performing exposures POS Point of sale SSK Self-service kiosk T-bond Domestic government debt securities and debt securities refinanced by the NBU, which are carried at (1) fair value through profit or loss, (2) fair value through other comprehensive income, and (3) amortized cost. CIR Cost-to-Income Ratio HHI Herfindahl-Hirschman Index ROE Return on equity UIRD Ukrainian Index of Retail Deposit Rates pp percentage point EUR euro

UAH USD United States dollar Q Quarter bn Billion r.h.s. right-hand scale yoy year-on-year qoq quarter-on-quarter

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