The rise of mortgage lending rise seen in Ukraine is an unprecedented phenomenon for the country, the National Bank of Ukraine reports.
"Since September, financial system fully restored its financial intermediation function and gradually increases loan portfolio, with the fastest growth in lending to SMEs. Moreover, mortgage lending is on the rise since July. This is an unprecedented phenomenon for Ukraine, given the depth of the crisis and remarkable uncertainty," the central bank's Financial Stability Report says.
The key driver of lending recovery is a substantial drop in the cost of loans. In view of their sufficient capital and liquidity as well as an ongoing decline in interest rates, the banks stand ready to further support businesses and households through loans, thus promoting economic recovery.
Ukrainian banking sector remains highly profitable thanks to resilient operating incomes and the absence of large credit losses. Net fee and commission income declined only for a while as the crisis peaked, and swiftly recovered in later months. Under maintained macroeconomic stability, rates on loans will fall further.
At the same time, there is little space for decrease in deposit rates, which are already historically lowest for Ukrainian banking sector. Therefore, narrowing margins on lending is the key risk for banks over the next years.
Banks enjoy sufficient capital, but must prepare for novel requirements to capital.
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The crisis impact on banks' capital "turned out to be milder than the NBU assessed in June based on express stress test."
"This is a result of lesser economic shock compared to assumptions under the stress test and resilience of loan portfolio," the report reads.
Over the next two years, the National Bank will introduce several new requirements to bank capital. They all aim at removing certain gaps in regulation and to harmonize Ukrainian rules with the Basel Committee recommendations. In 2021, the banks have to prepare for phasing in of requirements to capital to cover operating and market risks, thus completing the adoption of Pillar 1 Basel recommendations into Ukrainian legislation.
"Moreover, gradual introduction of increased risk weights for Ukrainian government securities denominated in foreign currency is to start next year," the report says. "This requirement will remove the discrepancy between the banks' capital and amount of credit risk they assumed on their balance sheets."