National bank of Ukraine notes solid liquidity in banking system, improves estimate of NPL to 20% in portfolio

MOSCOW. June 28 (Interfax) - The pessimistic scenario of credit losses of 30% in the overall loan portfolio, which had been envisaged in the event of long-term negative effects from a shortage in electricity, has not materialized, Ukrainian media reported, citing the National Bank of Ukraine (NBU).

"The stability assessment will reveal the quality of the portfolio, and the anticipated losses in the portfolio should be close to last year's estimates of the National Bank at around 20%," the NBU published on Wednesday in its Financial Stability Report.

"Loan migration rates to NPL continue to be high," according to the report.

The retail loan portfolio has halted its decline. "The peak of losses has passed, though some of the restructured loans could end up as non-performing going forward," the NBU specifies. Some of the business loans under restructuring, and for which the terms and conditions of service have been eased, could also end up as non-performing.

The regulator notes that banks this year have sharply reduced the formation of reserves after reflecting significant losses, which have reached nearly 15% in the portfolio since February 2022, though "less for corporate and more for retail".

According to the NBU, macroeconomic risk has reduced on the back of stability in the energy system and rapid growth in domestic demand. Profitability risk has decreased owing to growth in interest income from investments in securities and low levels of provisioning. Forex risk has also declined, exchange rate expectations have improved, and the cash exchange rate has approached the non-cash rate. International reserves have grown because of significant international financial support.

The banking system maintains solid liquidity, and liquidity risks remain moderate despite a slight decrease in the volume of highly liquid assets under pressure from NBU measures. Growth in hryvnia deposits on the part of households has slowed, though term deposits are growing on the back of higher interest rates on deposits. "Banks are receiving significant inflows from businesses," according to the report.

Growth in interest income from risk-free assets and continued profitability from business lending have generated a high net interest margin for banks, thereby ensuring high operating efficiency and profitability.

Banks maintain capital reserves that exceed the minimum requirement, which is growing mainly owing to high returns. The NBU's priority is to introduce new capital adequacy requirements, return to implementing deferred measures, and resume requirements for forming capital buffers.