The Ukrainian banking sector appears to be surging. At least that’s what Ukraine’s central bank claims.
Ukrainian banks earned a record Hr 60 billion ($2.5 billion) in profits in 2019, almost three times higher than in 2018, Kateryna Rozhkova, deputy head of the National Bank of Ukraine (NBU), reported on Feb. 13.
According to her, the banking sector is in excellent condition. “A new historic record,” she wrote on Facebook.
Ukraine’s largest state-owned bank, PrivatBank, was the most profitable in 2019, generating $1.3 billion. That’s a major win for the Ukrainian state, as PrivatBank pays 90% of its income into the state budget.
The number of unprofitable banks has also decreased by half: from 13 in 2018 to just six in 2019.
Cause of growth
According to Rozhkova, the main reason for such positive results is “the high efficiency of the banks.”
The vast majority of their profits came from working with clients, rather than trading government bonds, she said. In 2019, the interest income of state-owned banks from trading government bonds was only 12% of their income.
Another factor that helped was the reduction of the banks’ contribution to reserves, which decreased from Hr 24 billion to Hr 12 billion over the year.
Meanwhile, the continuing rapid development of online banking services and more transparent consumer disclosure standards will foster competition and require banks to take a more prudent approach to pricing products, which might impact their profit, she said.
The lowering of the discount rate, the percentage at which the NBU provides loans to banks, also helped.
The discount rate is one of the main economic indicators and a key tool for managing inflation. Reducing it lowers the value of loans and deposits and encourages people to spend more money at a particular time, which drives up prices.
In December 2019, the National Bank reduced the discount rate to 13.5% as an incentive to consume more. It then stated that banks should reduce their income, decreasing the margin between interest rates on loans and clients’ deposits. It also reportedly criticized state-owned banks for cutting interest rates too slowly and making profits off them.
Low inflation
Despite the positive news, Ukrainian banks’ record earnings won’t last, Rozhkova says.
The current low inflation will lead to a fall in credit rates and bank margins. This, in turn, will hamper these earnings.
Inflation is expected to fall below 5% in 2020, the NBU reported on Feb. 11. That may be bad for bank profits, but it will help stabilize the hryvnia and may bring cautious optimism about Ukraine’s economy.
Ukraine’s hryvnia started showing steady growth at the beginning of 2019. Since the beginning of 2020, it has been the world’s best-performing currency, leading the Bloomberg ranking with 19% growth against the dollar and leaving Russia’s ruble — which strengthened by 12% — in the dust.
Inflation dropped to 5% in 2019, reaching the lowest level in six years. In 2018, inflation in Ukraine was estimated at 9.8%, while in 2017 it stood at 13.7%.
Good economy
Ukraine’s record bank earnings come amid general economic improvements.
Local experts say that Ukraine’s long-struggling economy is performing better than it has in years, and it is poised to be strong in 2020.
Economic growth continues apace and will gradually accelerate up to 3.5% in 2020 and 4% in 2021-2022, according to an NBU report published on Feb. 6. The growth comes thanks to the easing of monetary policy, structural reforms, and an improved investment climate, the report said.
NBU’s cautious policy led to this recovery. It refrained from easing monetary policy too rapidly because of significant risks to the economy amid presidential and parliamentary elections in 2019. Too rapid a shift would also have delayed Ukraine’s cooperation with the International Monetary Fund and could potentially have threatened financial stability.
