In Q4, the banks continued to increase their retail and corporate loan portfolios in the hryvnia: statistics show that many segments were recovering steadily. Mortgage lending continued to grow the fastest, with the issuance of new loans almost doubling compared to crisis-hit H1. Deposit interest rates remained unchanged, while loan rates declined moderately. This trend is likely to last throughout 2021, gradually reducing the banks’ interest margins. The sector’s operating income will continue to grow rapidly, indicating a recovery in demand for banking services and thus in economic activity. The banks increased their loan loss provisioning substantially at the end of the year. Over the whole year, provisioning for loans almost doubled in monetary terms, while remaining moderate compared to the loan portfolio. Credit risk remains the key risk for banks: pandemic-related threats to the solvency of some sectors and companies stay high.

Sector Structure Funding In 2020, two banks were declared insolvent after they failed This year the banks’ liabilities increased on account of to meet capital requirements. Thus, 73 solvent banks were customer deposits and the NBU’s liquidity assistance. operating at the end of the year. Although the share of state- Refinancing loans tripled in volume in Q4, with their share in owned banks in the sector’s net assets shrank throughout liabilities growing by 2.5 pp. At the same time, corporate and the year and the share of private banks grew, state-owned retail deposits remained the main funding source for banks, banks still accounted for more than half of the sector’s accounting for 84.6% of liabilities. assets. At the end of the year, the 20 largest banks held Hryvnia deposits grew rapidly in 2020. Deposit outflows at more than 90% of the sector’s assets. the start of the coronavirus crisis lasted for less than two Assets weeks. However, in conditions of pandemic-induced An increase in holdings of government securities made the uncertainty, growth was driven by demand deposits: their largest contribution to the growth in banks’ net assets. volumes increased by 49% yoy. PrivatBank and the private Growth in domestic government debt securities accounted banks showed the largest growth in deposits. As a result, in for two thirds of the nominal growth in net assets for the full terms of maturity composition, demand deposits accounted year, and for almost 80% in Q4. The government incurred for 55.2% of hryvnia deposits at the end of the year. large budget expenditures during the last days of Although foreign currency retail deposits, which were much December, which increased banks’ liquidity and holdings of cheaper, grew in Q4, they remained almost unchanged at NBU certificates of deposit. the end of the year. Net hryvnia corporate loans grew markedly in Q3–Q4, after Hryvnia corporate deposits surged by 34.5% yoy. The having dropped in H1 due to the crisis. The fastest growth largest growth in hryvnia deposits by businesses was seen was seen in private and foreign-owned banks. Volumes of in private banks and PrivatBank. On the other hand, foreign net foreign currency loans decreased in annual and currency deposits in US dollar equivalent increased by only quarterly terms. 2.2% over the year, and declined in Q4. The level of dollarization of customer deposits decreased to 38.0%. Growth in the net hryvnia retail loan portfolio slowed abruptly in 2020 due to the quarantine restrictions imposed Interest Rates in H1. Lending for housing purchases picked up markedly in The NBU cut its key policy rate four times in H1 2020, by a H2, outpacing consumer lending. Monthly average volumes total of 7.5 pp, to the all-time low level of 6% per annum. of new loans more than doubled compared to both H1 2020 Rates on both retail deposits and hryvnia corporate loans and to the whole of 2019. declined by more than 6 pp throughout the year and entered the single-digit range. In 2020 banks actively wrote off non-performing loans (NPLs), with state-owned banks making the largest write- The cost of deposits remained almost unchanged in Q4. offs in Q4. As a result, the system’s total NPL ratio declined The spread between interest rates on 3-month and 12- to 41.0% at year-end 2020, down from 48.4% at the end of month retail deposits remained less than 1 pp. At the same 2019. time, rates on corporate loans continued to decline moderately, which narrowed the spread.

Banking Sector Review | February 2021 1

National Bank of

Financial Results and Capital legal risk accounted for a quarter of the provisions made in In 2020, the banking sector’s profit amounted to the sector. At the same time, loan loss provisioning UAH 41.3 billion, which was almost one third less than in increased by 91% yoy. 2019. PrivatBank accounted for more than a half of the total Prospects and Risks profit generated by the profitable banks. As in 2019, eight Credit risk remains the main risk for banks in 2021. Although financial institutions were loss-making. the economic situation improved markedly in H2, some bank Cumulatively, the sector (excluding PrivatBank) made borrowers are still facing financial difficulties. This may losses in Q4, primarily due to heavy provisioning by several affect the quality of servicing of loans, thus forcing banks to banks. Compared to the previous quarter, the banks’ make additional provisions. In order to make sure that banks operating income decreased (mainly driven by the negative report the loan portfolio quality accurately, the NBU will result of a revaluation of domestic government debt review the quality of the banking sector’s assets and securities), and operating expenses rose. Operating income additionally stress test 30 banks. and operating profit increased in 2020, although the year- The NBU required banks to deduct the value of noncore end Cost-to-Income ratio (CIR) declined moderately to assets from their core capital, which they have to do in 53.6% (versus 50.8% in 2019). As a result, operational stages starting from January 2021. This rule will encourage efficiency slightly deteriorated. banks to get rid of noncore assets in a timely manner, which The annual growth in net interest income and fee and will increase the banks’ financial resilience and make their commission income were at a four-year low. At the same financial reporting data more reliable. In addition, risk time, interest income and fee and commission income weights for foreign currency securities issued by the started to recover from the shock experienced at the start of Ukrainian government and for unsecured consumer loans the pandemic, which affected performance in Q2. Despite will start to be raised gradually from this year onward. The the weekend quarantine, fee and commission income grew Net Stable Funding Ratio (NSFR) will apply as a by 20% yoy in Q4, partially thanks to growth in the internet requirement from April, which will prompt banks to decrease trading segment. the maturity mismatch between assets and liabilities. The NSFR will be first set at the minimum of 80% and will then Provisions the sector made in 2020 were three times larger gradually be increased to 100% by April 2022. than in the previous year. PrivatBank’s provisions against

Banking Sector Review | February 2021 2

National Bank of Ukraine

Sector Structure

The banks’ total assets increased by 1.8% in Q4, to UAH 2.2 trillion. One bank was declared insolvent in December 2020 and liquidated in January 2021. As of the end of 2020, 73 banks were solvent. Figure 1. Banks’ total assets, UAH billion* Table 1. Number of banks*

2 500 2016 2017 2018 2019 2020

Solvent 96 82 77 75 73 2 000 Change -21 -14 -5 -2 -2 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 Private 65 54 51 50 48 12.17 12.18 12.19 03.20 06.20 09.20 12.20 State-owned Privatbank Foreign Private Change -20 -11 -3 -1 -2

* Solvent banks were grouped in accordance with their classification in * As of end of period. the respective reporting period. ** Including PrivatBank.

In Q4, state-owned banks, including Privatbank, decreased further their share of net assets (by 1.0 pp, to 52.6%) and retail deposits (by 0.3 pp, to 60.3%). Figure 2. Distribution of net assets across groups of banks Figure 3. Distribution of retail deposits across groups of banks 100% 100% 14.0% 14.8% 15.0% 15.2% 15.5% 16.2% 17.3% 13.3% 14.3% 15.4% 16.1% 16.0% 16.3% 16.4% 80% 80% 24.2% 22.2% 23.0% 23.1% 22.9% 23.1% 23.3% 31.1% 30.4% 29.8% 30.6% 30.2% 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% 33.1% 40% 20.6% 21.2% 40%

20% 20% 35.5% 34.0% 34.2% 33.4% 33.6% 32.9% 31.3% 27.0% 28.2% 28.4% 28.5% 28.5% 27.9% 27.1%

0% 0% 12.17 12.18 12.19 03.20 06.20 09.20 12.20 12.17 12.18 12.19 03.20 06.20 09.20 12.20 State-owned Privatbank Foreign Private State-owned Privatbank Foreign Private

In October–December, the largest 20 banks decreased their share of net assets by 0.6 pp, to 91.6%. Total assets concentration declined as large banks wrote off large amounts of nonperforming loans. Figure 4. The largest banks’ share of the sector’s net assets Figure 5. Concentration as defined by the HHI indicator* 100% 2 000 91.6% 1 800 78.1% 80% 1 602 1 600 58.7% 60% 1 400 1 200 1 097 40% 1 000 21.2% 800 930 20% 600 0% 400 12.17 06.18 12.18 06.19 12.19 06.20 12.20 12.17 06.18 12.18 06.19 12.19 06.20 12.20 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 | February 2021 3

National Bank of Ukraine

Banking Infrastructure

In Q4, state-owned and foreign banks closed 205 subsidiaries (Oschadbank closed the largest number of subsidiaries – 94). UKRGASBANK opened the largest number of branches (7). In 2020, banks closed a total of 868 branches, with the largest number, 71, shut down in Dnipropetrovsk oblast. Figure 6. Number of bank structural units*, thousands Figure 7. Operating bank structural units in selected regions as of 1 January 2021, structural units per 100,000 individuals 10 9.5 8.5 Rivne Chernihiv 1.7 8.0 7.9 Volyn 7.6 139/12 City of 183/19 Sumy 8 137/13 Kyiv 1.8 7.3 7.1 Zhytomyr 175/17 1.8 1.8 175/15 1040/35 2.0 1.8 1.8 1.8 Kyiv Poltava Kharkiv 6 488/20 Khmeln. 295/16 1.8 Ternopil 318/23 546/21 Luhansk 1.6 1.6 170/14 Cherkasy 1.6 125/12 108/5 2.2 1.5 1.5 Iv.-Frank. Vinnytsya 189/16 Zakarpat. 192/14 229/15 4 2.0 164/13 Chern. Kirovohrad Dnipropetrovsk 1.9 161/17 Donetsk 1.9 1.8 105/12 644/20 1.8 1.7 335/8 Zaporizhzhya Mykolayiv 322/19 2 187/17 3.5 Odesa 2.9 Low 13 2.6 2.6 2.4 2.3 2.2 535/23 Kherson Moderate 16 172/17 0 Significant 19 12.17 12.18 12.19 03.20 06.20 09.20 12.20 Highest 35 Ukraine 7134/17 FEZ: Crimea State-owned Privatbank Foreign Private ...

* Standalone structural units and head offices

In Q4, banks other than private continued to dismiss their The number of active payment cards has been growing rapidly over employees, with the largest number of employees fired by foreign the past two quarters. Private banks were the leaders in October– banks. The staff headcount decreased by 5,000 people in 2020. December, recording larger growth in the number of cards than PrivatBank did. Figure 8. Bank staff headcount, thousands of employees Figure 9. Number of active payment cards by groups of banks, millions of units 160 45 42.2 40.5 40 38.4 140 135 133 133 133 129 128 36.9 4.7 36.4 131 34.9 36.6 5.8 3.0 5.0 Тисячні 120 28.4 35 2.4 5.8 4.1 4.4 30.5 31.7 32.0 31.7 31.7 5.3 31.9 30 6.6 4.7 4.9 100 6.4 4.7 42.4 25 80 39.9 38.6 38.3 36.9 35.9 35.2 20 24.0 60 20.4 21.4 21.0 22.0 22.6 15 19.6 26.1 26.0 26.1 26.4 26.3 25.9 25.5 40 10 20 38.4 36.7 36.5 36.4 35.9 35.6 35.4 5 6.5 6.9 7.7 6.4 6.3 6.5 6.8 0 0 12.17 12.18 12.19 03.20 06.20 09.20 12.20 12.17 12.18 12.19 03.20 06.20 09.20 12.20 State-owned Privatbank Foreign Private State-owned Privatbank Foreign Private

The growth in the number of POS terminals in Q4 was produced by PrivatBank (+7,400 terminals) and other state-owned banks (+3,600). The number of ATMs is decreasing: banks removed 1,175 ATMs in 2020. Figure 10. Number of ATMs*, thousands of units Figure 11. Number of POS terminals, thousands of units 40 450 37.0 36.6 35.9 35.6 2.5 34.7 34.8 34.8 400 386 35 2.5 2.5 2.5 372 5.0 2.4 2.4 2.4 349 344 352 5.0 19.3 6.8 350 5.5 5.0 5.0 18.1 30 6.5 5.7 5.5 5.1 5.1 5.0 16.9 16.6 297 16.9 59.6 61.4 300 4.9 55.9 56.6 56.9 25 252 15.4 250 13.4 47.2 20 45.5 20.6 19.9 19.9 19.8 19.3 19.7 19.7 200 217 224 15 205 200 205 150 174 145 10 100 5 7.2 7.7 7.8 7.8 7.8 7.6 7.6 50 47.7 55.7 65.3 66.5 68.6 72.7 76.3 0 0 12.17 12.18 12.19 03.20 06.20 09.20 12.20 12.17 12.18 12.19 03.20 06.20 09.20 12.20 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 | February 2021 4

National Bank of Ukraine

Assets

The sector’s net assets grew by 6.8% in Q4. Holdings of domestic government debt securities made the largest contribution to the growth in net assets (18.6%). The growth in banks’ holdings of NBU certificates of deposit was short-term, as they declined in January. Figure 12. Net assets* by groups of banks, UAH billions Figure 13. Change in net assets by component in Q4 2020*, UAH billions 2 100 1 850 1823 4 0 12 1823 1 800 1708 41 5 1564 1590 314 1 800 1493 277 1 500 1336 1360 247 92 224 238 187 201 1 750 1 200 516 550 445 479 480 1708 9 416 413 900 1 700 387 324 329 352 600 259 282 314

1 650 -47 300 475 463 511 523 534 562 571 0 1 600

12.17 12.18 12.19 03.20 06.20 09.20 12.20 Cash

State-owned Privatbank Foreign Private others loans

T-bonds

NBU and NBU

interbank

Corporate

Derivatives

deposit

Retail loans Retail

as of 1 Oct 20 Oct 1 of as

Certificates of Certificates

as of 1 Jan 21 Jan 1 of as Insolvent banks Insolvent

* Adjusted for loan loss provisions of banks.

The share of net corporate and retail loans contracted by 1.6 pp in Q4, to 32.1% of net assets. Banks wrote off large volumes of NPLs in Q4. This led to a sizeable reduction in gross loans. Figure 14. Sector net assets by component Figure 15. Gross corporate and retail loans, 2018 = 100% 100% 12.7% 7.5% 8.7% 7.3% 8.4% 8.0% 8.2% 125% 8.4% 9.4% 8.2% 9.6% 8.8% 8.4% 120% 80% 6.9% 25.3% 23.9% 34.7% 27.8% 28.3% 25.8% 60% 34.2% 100% 92% 6.6% 7.2% 9.0% 10.2% 7.4% 5.0% 4.6% 40% 80% 24.9% 29.8% 29.0% 32.3% 24.6% 26.1% 29.9% 71% 20% 60% 15.4% 18.6% 16.7% 18.2% 14.5% 11.7% 11.4% 50% 0% 3.4% 3.5% 3.8% 4.1% 3.9% 3.8% 4.1% 40% 12.17 12.18 12.19 03.20 06.20 09.20 12.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 Others Retail loans Hryvnia corporate loans Corporate loans Certificates of deposit 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 January 2021.

The dollarization rate of net loans remained practically unchanged, Volumes of net hryvnia loans to private corporations and while the dollarization of gross loans was related to large write-offs subsidiaries of international corporations grew in Q4. of fully provisioned foreign currency NPLs. Figure 16. Share of FX loans Figure 17. Net hryvnia loans to nonfinancial corporations (NFCs), 2018 = 100%* 60% 120% 110% 106.7% 50% 46.7% 102.3% 100% 40% 44.1% 90% 30% 80% 70% 20% 60% 15.6% 10% 50% 2.7% 48.4% 0% 40% 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 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 January 2021.

Banking Sector Review | February 2021 5

National Bank of Ukraine

In Q4, net hryvnia retail loans grew by 3.4% qoq and by 5.5% yoy. Real estate lending picked up markedly: volumes of net hryvnia loans in this segment grew by 7.5% qoq and 11.5% yoy. Net hryvnia corporate loans grew by 4.2% qoq (+4.3% yoy). Foreign banks showed the highest quarterly growth rates (+8.2%). Figure 18. Net hryvnia corporate loans, 2018 = 100%* Figure 19. Net hryvnia retail loans, 2018 = 100%* 130% 220% 123% 207% 120% 200% 110% 110% 104% 180% 100% 98% 160% 90% 147%

140% 137% 80% 128% 70% 120% 69% 110% 60% 100% 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 State-owned Privatbank Foreign State-owned Privatbank All banks Private All banks Foreign Private * Issued by banks that were solvent as of 1 January 2021. * Issued by banks that were solvent as of 1 January 2021.

The share of loans to purchase real estate increased by 0.4 pp over The NPL ratio shrank by 4.6 pp in Q4 (to 41.0%) as a result of NPL the quarter, reaching 6.4% of the gross hryvnia portfolio. write-offs. Figure 20. Gross hryvnia retail loans by purpose Figure 21. Banks’ NPL ratios* 100% 60% 7.1% 6.9% 5.2% 4.6% 4.2% 4.1% 4.8% 6.3% 6.1% 6.2% 6.1% 6.4% 9.3% 7.4% 3.3% 3.5% 3.6% 3.8% 4.2% 3.9% 55% 80% 6.4% 16.4% 16.6% 16.7% 14.3% 16.6% 17.3% 13.6% 50% 9.5% 8.8% 8.8% 8.2% 8.1% 8.5% 60% 46.7% 17.2% 45%

40% 40% 41.0% 50.2% 51.7% 53.2% 53.9% 53.9% 51.5% 39.4% 35% 20% 30% 7.4% 7.5% 7.5% 7.4% 7.4% 7.8% 27.9% 0% 7.0% 25% 12.17 12.18 12.19 03.20 06.20 09.20 12.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 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 * At all banks, including insolvent ones; excluding off-balance sheet land plots). liabilities. Individuals, including sole proprietors. In Q4, the NPL ratio shrank the most at PrivatBank – by 5.3 pp. The NPL coverage ratio was 97.7% as of the end of 2020. Figure 22. NPL ratio across groups of banks* Figure 23. Nonperforming exposures (UAH billions) and provisioning 100% 800 100% 89.2% 97.7%

80% 89.3% 600 80% 74.0% 60% 43.7% 400 60% 40% 41.0% 200 40% 20% 14.5% 12.9% 0% 0 20% 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 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; at all banks, including insolvent ones; * Including interbank loans; at all banks, including insolvent ones; excluding off-balance sheet liabilities. excluding off-balance sheet liabilities.

** Top-5 foreign banks by net assets as of 1 January 2021 (excluding Russian-owned banks).

Banking Sector Review | February 2021 6

National Bank of Ukraine

Funding

Banks’ total liabilities increased by 7.9% in Q4. Corporate and retail deposits grew by 7.0%. Banks' liabilities to the NBU more than tripled. Figure 24. Liabilities across groups of banks, UAH billions Figure 25. Changes in liabilities in Q4 2020 by factor, UAH billions 1 800 1 670 1500 1612 1 600 33 1358 1393 1293 1 620 6 1 612 1 400 333 55 8.6 1173 1205 302 1.0 10.7 264 285 0.3 2.3 1.2 1 200 260 159 251 472 1 570 1 000 442 42.1 404 402 800 357 372 353 1 520 276 600 202 211 240 1 500 234 172 188 400 1 470 530 200 423 430 474 489 494 515 0 1 420 12.17 12.18 12.19 03.20 06.20 09.20 12.20

State-owned Privatbank Foreign Private NBU Others

Budget

Payables

IFO Loans IFO

Retail deposits Retail

Insolvent banks Insolvent

as of 1 Oct 2020 Oct 1 of as

as of 1 Jan 2021 Jan 1 of as

Interbank and IFO and Interbank Subordinated debt Subordinated Corporate deposits Corporate

The share of customer deposits declined by 0.5 pp to 84.6% as of the Banks’ total gross external debt fell by 4.1% in Q3, primarily the debt end of the quarter. Due to a significant growth in corporate deposits, on long-term loans and Eurobonds. their share rose by 0.5 pp, to 42.3%. Figure 26. Breakdown of liabilities Figure 27. The banks’ gross external debt, USD billions 100% 5.8% 6.3% 6.8% 5.5% 5.4% 5.6% 4.8% 25 0.6% 1.3% 1.2% 0.9% 0.8% 0.7% 0.7% 8.1% 7.8% 7.4% 6.1% 14.2% 13.4% 8.4% 80% 20

42.3% 44.9% 43.3% 60% 42.7% 44.9% 15 40.8% 42.2% 17.1 13.5 40% 10 8.7 42.3% 5.3 20% 40.6% 40.1% 40.5% 41.7% 5 36.4% 35.7% 4.2 5.4 4.6 3.6 5.2 4.1 3.7 3.0 3.1 2.9 2.0 0% 1.6% 1.2% 0.6% 0.6% 0.7% 1.3% 3.8% 0 1.2 1.2 1.0 1.1 1.1 12.17 12.18 12.19 03.20 06.20 09.20 12.20 2013 2014 2015 2016 2017 2018 2019 Q1.20Q2.20Q3.20 NBU Corporate deposits Retail deposits Short-term Long-term Interbank and IFIs Subordinated debt Others

In Q4, the share of NBU funds in liabilities grew considerably, by Due to large inflows of customer deposits in hryvnia, the 2.5 pp, to 3.8%. dollarization rate fell by 3.1 pp (to 38.0%) in Q4. Figure 28. Share of NBU funds in bank liabilities Figure 29. Percentage of FX deposits 5.0% 60%

55% 4.0% 3.8%

50% 3.0% 45% 41.8% 2.0%

40% 38.0% 1.0% 35% 34.1% 0.0% 30% 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 06.18 12.18 06.19 12.19 06.20 12.20 In corporate deposits In retail deposits All Clients

Banking Sector Review | February 2021 7

National Bank of Ukraine

The growth in hryvnia retail deposits accelerated to 7.9% in Q4 In Q4, new hryvnia deposits with maturities of up to three months as (versus +1.2% in Q3). Over the year, hryvnia retail deposits have a share of total new time deposits declined by 3.9 pp qoq, to 31.5%. grown by 26.5%, with foreign currency deposits rising by 0.6%. Figure 30. Retail deposits, 2018 = 100%* Figure 31. New hryvnia retail deposits by maturity 220% 100%

200% 80% 180%

160% 60%

140% 40%

120% 20% 100%

80% 0% 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 Amounts on demand in hryvna Up to 1 month 1–3 months 3–6 months Over 6 months Amounts on demand, FX Time deposits in hryvna Time deposits, FX * Issued by banks that were solvent as of 1 January 2021.

In Q4, hryvnia corporate deposits grew by 17.0% (+34.5% yoy). Private banks and PrivatBank showed the highest growth rates: +28.9% and +27.9%, respectively. Foreign currency corporate deposits dropped by 4.0% qoq. Figure 32. Hryvnia corporate deposits by groups of banks, Figure 33. FX corporate deposits (in US dollar equivalent) by groups of 2018 = 100%* banks, 2018 = 100%* 195% 240% 182% 171% 220% 175% 161% 200% 155% 180% 168% 164% 135% 136% 160% 140% 151% 115% 120% 95% 100% 109%

75% 80% 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 State-owned Foreign Private State-owned Foreign Private Privatbank All banks Privatbank All banks

* Issued by banks that were solvent as of 1 January 2021. * Issued by banks that were solvent as of 1 January 2021.

Hryvnia retail deposits grew across all groups of banks except state-owned banks. The fastest growth was registered at PrivatBank: + 9.2% qoq and +29.2% yoy. Foreign currency retail deposits in private and foreign banks grew by 3.8% and 3.0% qoq, respectively. Figure 34. Hryvnia retail deposits by groups of banks, 2018 = 100%* Figure 35. FX retail deposits (in US dollar equivalent) by groups of banks, 2018 = 100%* 195% 140% 188% 138% 130% 175% 123% 120% 119% 155% 149% 116% 110% 138% 135% 100% 92% 115% 90%

95% 80% 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 State-owned Foreign Private State-owned Foreign Private Privatbank All banks Privatbank All banks * Issued by banks that were solvent as of 1 January 2021. * Issued by banks that were solvent as of 1 January 2021.

Banking Sector Review | February 2021 8

National Bank of Ukraine

Interest Rates

Deposit interest rates were practically unchanged in Q4. In January 2021, interest rates on 12-month hryvnia deposits fell by 0.3 pp (to 8.4% per annum), and those on 12-month US dollar deposits declined by 0.2 pp (to 1.2% per annum). Figure 36. Ukrainian Index of Retail Deposit Rates for hryvnia deposits, Figure 37. Ukrainian Index of Retail Deposit Rates for US dollar % per annum* deposits, % per annum* 17% 5%

15% 4%

13% 3%

11% 2%

9% 1%

7% 0% 12.18 04.19 07.19 11.19 02.20 06.20 09.20 01.21 12.18 04.19 07.19 11.19 02.20 06.20 09.20 01.21 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.

Interest rates on hryvnia corporate loans dropped by 0.4 pp qoq (to 9.2% per annum), reducing their spread with retail deposits. Retail loan rates were around 30% 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% 30.5% 30% 20% 18% 25% 16% 20% 14% 15% 12% 12.5% 10% 10% 9.2% 8% 5% 6% 0% 4% 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 To corporates To households Composite Key policy rate Time retail deposits Corporate loans

* Without loan extension or any other changes in lending terms. * Daily rates, 5-day moving average. Spreads between interest rates on loans and deposits remained almost unchanged in both the corporate and retail segments. Consumer loans remained the most profitable lending product. Figure 40. Spread between rates on new** loans and deposits, pp* Figure 41. Spread between rates on outstanding loans and deposits, pp* 30 35 24.6 25 30 25.5 25 20 20 15 15 10 10 5.2 6.9 5 5

0 0 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20

NFCs Households NFCs Households

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

Banking Sector Review | February 2021 9

National Bank of Ukraine

Financial Results and Capital

In 2020, the sector’s total profit dropped by 29.2% yoy, primarily due Banks' operational efficiency deteriorated in Q4: the CIR* was 64.6% to provisioning. PrivatBank was the most profitable, having earned (versus 61.7% in Q4 2019). 61.3% of the banking sector’s profit. Figure 42. Profit/loss* and return on equity of banks Figure 43. Operating income and operational efficiency of banks 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 38 4.0 35 35 31 0 0% 14 27 30% 5.0 3.7 5.3 7.5 8.2 5.7 4.1 6.6 -0.3 25 -1.8 4.8 -5 -3.7 -10% 7 15%

-10 -20% 0 0% Q2.18 Q4.18 Q2.19 Q4.19 Q2.20 Q4.20 Q2.18 Q4.18 Q2.19 Q4.19 Q2.20 Q4.20 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, except for the Q4 2020 data. * The CIR (cost-to-income ratio) measures the ratio of operating

expenses to operating income.

Operating income declined by 1.2% qoq, driven by revaluation losses In 2020, provisioning in the sector increased by 2.8 times compared on domestic government debt securities. Over the full year 2020, to 2019. Loan loss provisions reached +91.2% yoy, with the heaviest however, operating income grew by 8.2% yoy. provisioning taking place in Q4 (38% of the annual volume). Figure 44. Banks’ operating income components for the period*, UAH Figure 45. Quarterly provisions** billions 50 15 15%

40 12 12% 4 7 4 8 10 4 1 30 4 14 10 12 11 12 9 9% 11 10 11 12 10 20 8 9 6 6% 22 21 21 22 10 17 16 18 20 20 20 19 20 0 3 3% -2 -0.4 -10 0 0% Q2.18 Q4.18 Q2.19 Q4.19 Q2.20 Q4.20 Q2.18 Q4.18 Q2.19 Q4.19 Q2.20 Q4.20 Privatbank, UAH bn Net interest income Net commission income Other banks, UAH bn Result of trading operations Other operating incomes Provisions (annualized)/Loan portfolio (r.h.s.) *Including adjusted entries, except for the Q4 2020 data. * Annualized. * Including adjusted entries, except for the Q4 2020 data. The sector’s regulatory capital adequacy remained significantly higher than the required minimum. The regulatory capital increased by 21.1% YTD (by 1.7% in Q4), while the authorized capital rose by 2.0%. Figure 46. Regulatory capital and the regulatory capital adequacy ratio Figure 47. Composition of banks’ regulatory capital, UAH billions 200 25% 600 450 160 20% 300

120 15% 150

0 80 10%

-150 40 5% -300

0 0% -450 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 12.20 12.18 03.19 06.19 09.19 12.19 03.20 06.20 09.20 Other items Losses from current year Regulatory capital, UAH bn Tier2 capital ratio (r.h.s.) Losses from previous years Subordinated debt 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 Q4 2013 2014 2015 2016 2017 2018 2019 2020 2020 2020 2020 Number of operating banks 180 145 117 96 82 77 75 75 75 74 73 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 2 209 of which in foreign currency 513 667 800 788 755 779 718 855 787 818 746

Net assets 1 278 1 290 1 254 1 256 1 334 1 360 1 493 1 564 1 590 1 708 1 823 of which in foreign currency 470 565 582 519 507 495 492 585 551 605 585

Gross corporate loans3 727 820 831 847 864 919 822 885 821 806 753 of which in foreign currency 252 400 492 437 423 460 381 439 389 379 332

Net corporate loans3 648 710 614 477 451 472 415 443 411 431 436 Gross retail loans 189 208 176 157 171 197 207 218 212 216 200

of which in foreign currency 67 101 97 83 68 61 38 44 41 42 31 Net retail loans 145 144 96 76 92 114 143 147 140 144 149

Corporate deposits3 258 283 349 413 427 430 525 544 564 626 681 of which in foreign currency 81 114 141 177 163 150 191 232 222 243 233

Retail deposits4 443 403 402 437 478 508 552 610 626 649 682 of which in foreign currency 189 214 215 239 244 241 238 282 262 281 285 Change (yoy, %) Total assets 11.4% 4.8% 6.4% 10.6% 5.9% 3.8% 3.7% 11.0% 10.5% 15.8% 11.4% Net assets 13.7% 1.0% -2.8% 0.2% 6.2% 1.9% 9.8% 16.6% 17.1% 24.3% 22.0%

Gross corporate loans3 14.7% 12.8% 1.3% 2.0% 2.0% 6.3% -10.6% -1.1% -7.1% -4.2% -8.5% Gross retail loans 3.0% 10.3% -15.7% -10.4% 8.5% 15.3% 5.0% 8.2% 4.5% 4.0% -3.5%

Corporate deposits3 16.8% 9.5% 23.5% 18.2% 3.4% 0.8% 22.1% 31.2% 31.7% 37.8% 29.7% Retail deposits4 20.2% -8.9% -0.3% 8.7% 9.4% 6.3% 8.6% 18.3% 18.6% 25.5% 23.4% Penetration5 (%) Gross corporate loans3 / GDP 47.7% 51.7% 41.8% 35.5% 29.0% 25.8% 20.7% 22.1% 20.8% 20.2% 18.4% Net corporate loans3 / GDP 42.6% 44.7% 30.9% 20.0% 15.1% 13.3% 10.4% 11.1% 10.4% 10.8% 10.7%

Gross retail loans/ GDP 12.4% 13.1% 8.8% 6.6% 5.7% 5.5% 5.2% 5.5% 5.4% 5.4% 4.9% Net retail loans/ GDP 9.5% 9.1% 4.8% 3.2% 3.1% 3.2% 3.6% 3.7% 3.5% 3.6% 3.6%

Corporate deposits3 / GDP 17.0% 17.8% 17.6% 17.3% 14.3% 12.1% 13.2% 13.6% 14.3% 15.7% 16.7% Retail deposits/ GDP 29.1% 25.4% 20.2% 18.3% 16.0% 14.3% 13.9% 15.2% 15.9% 16.3% 16.7% 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 22.4 Net commission income 21.0 23.1 22.6 24.2 27.5 37.8 44.0 10.8 9.7 11.8 14.2

Provisions 28.0 84.4 114.5 198.3 49.2 23.8 10.7 4.7 13.1 3.0 9.0 Net profit/loss 1.4 -33.1 -66.6 -159.4 -26.5 22.3 58.4 16.1 7.7 13.8 3.7 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 28.27 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 28.28

UAH/EUR (period average) 10.61 15.72 24.23 28.29 30.00 32.14 28.95 27.60 29.61 32.25 33.69 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 34.74

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 Q4 2020 – readings for the last 12 month based on NBU forecast as published in Inflation Report. 6 Taking into consideration adjustment entries, except for the Q4 2020 data.

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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 H First / second half of the year bn Billion r.h.s. right-hand scale yoy year-on-year qoq quarter-on-quarter YTD year-to-date

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