Client loan portfolio growth is gathering speed. It played a key role in supporting the banking sector’s assets during Q1. Meanwhile, investments in securities and certificates of deposit edged lower. The banks remain resilient thanks to having set aside capital cushions. Sustained profitability will contribute to further growth in the loan portfolio. These are takeaways from the Q1 2025 Banking Sector Review.

Growth in the net hryvnia corporate loan portfolio picked up to 9.5% qoq and to 28.4% yoy in Q1. The banks in all groups quickly scaled up loan volumes. The volume of loans to farmers, wholesale traders, construction companies, and machine-building enterprises traditionally rose.

Unsubsidized lending to businesses continued to play an increasingly important role: subsidized loans made under the Affordable Loans 5–7–9% program shrank to 31.2% as a share of the total net corporate portfolio of performing loans. The reasons included sustained favorable lending conditions outside the program and steady demand for unsubsidized loans. As interest compensation payments to the banks remain overdue, the program needs to be further improved by refocusing support on investment projects and on lending in regions with higher risk.

There is sustained demand from businesses for capital investment. Loans maturing in over three years rose 8.5% qoq in Q1. Medium-term loans with one-to-three-year maturity grew faster in Q1, by 21.6% qoq and by over 34% yoy. The volume of up-to-one-year short-term loans almost held steady.

Net hryvnia loans to households keep growing briskly: up 6.7% qoq and 35.9% yoy. As usual, unsecured loans dominate the portfolio. In contrast, mortgage portfolio growth has been slowing for the third straight quarter due to the further restructuring of and the resulting delays in eOselia, a state program that dominates mortgage lending.

Loan portfolio quality is improving. The share of corporate borrowers that defaulted on hryvnia loans in Q1 fell to about 3%, better than the pre-full-scale-war average. The revised NPL definition under an updated methodology that meets EU requirements had no material impact on the NPL ratio. This ratio shrank 1.7 pp in Q1 and 7.5 pp for the year, to 28.6% (to 17.1% excluding bad legacy debts held by state-owned banks and debts owed by former owners of CB PrivatBank JSC).

The volume of hryvnia retail deposits at the banks was up 0.5% qoq and 12.5% yoy. The slight seasonal retreat in deposits in January was offset in the following months. Hryvnia retail term deposits grew faster than demand deposits in Q1, bringing the share of term deposits to 34.3%. The dollarization rate of client deposits decreased to 31.1% as the hryvnia strengthened.

Following a key policy rate hike, the rate on new hryvnia retail deposits (including demand deposits) rose to 9.8% per annum, and that on corporate deposits, to 9.1%. Market rates on hryvnia loans to businesses currently average 15.5% per annum, comparable to May of last year. Foreign banks offered the lowest rate of 13.6% per annum.

In Q1 2025, the banking sector landed UAH 40 billion in profit, 65.7% of it made by state-owned banks, including CB PrivatBank JSC. Ten small banks were loss-making, with a combined loss of just UAH 0.4 billion. High operating efficiency and low provisioning were at the core of profitability. The interest margin, however, narrowed slightly through the quarter, to 7.4%.

The banking system’s overall profitability is normalizing, and income structure is going back to pre-war levels. Sufficient profits are bolstering the banks’ capital, allowing them not only to stay in compliance with regulatory requirements, including those based on the resilience assessment, but also to ramp up lending to the economy. Up until now, tax uncertainty has been holding back the banks’ investment plans.

The capital adequacy ratio crept lower during Q1, to about 16% as of 1 April, for all capital tiers, after the banks reflected a 2024 hike in the income tax. Only one small bank was violating the regulatory capital adequacy ratio on and off.

A stress testing of the banks will commence in June. Banks that are assigned higher capital adequacy ratios based on test results will submit their capitalization programs and implement them by the end of the year.

The NBU will continue to gradually introduce European prudential requirements. In the near future, when the test mode period is over, a requirement will be imposed on the banks to comply with a leverage ratio that is in line with EU standards.

Source: https://bank.gov.ua