Energy and Defense Key Drivers for New Loans, as Banks Keep Lending Despite Wartime

Key indicators of the banking system’s resilience were at historically high levels, but the ongoing war remains the main risk for the financial sector and continues to hold back economic recovery, the National Bank of Ukraine (NBU) wrote in its latest Financial Stability Report.

“Economic growth continues thanks to robust consumer demand, but is being held back by labor shortages. There is a growing sense of production capacity being limited by security risks. Investments are primarily being made to strengthen Ukraine’s defense capabilities and energy efficiency,” First Deputy Governor of the NBU Kateryna Rozhkova said during the briefing presenting the report. 

Banks continued to increase lending to businesses and households, with strong competition for reliable borrowers, which makes credit more accessible for the economy despite high key interest rate. 

Ukraine’s central bank, the National Bank of Ukraine (NBU), decided to keep the key rate at 15.5% while warning that risks for inflation might reverse.

Despite subdued production volumes, business revenues have grown due to higher prices. Companies have maintained sound financial performance. 

In April, the annual growth rates of the net hryvnia loan portfolio for households and businesses reached 34% and 29%, respectively – indicating that companies have enough resources to borrow more. 

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Banks finance defense industry and energy projects – they comprised one fifth of the general growth in loans, Director of the NBU Financial Stability Department Pervin Dadashova replied, answering the question from a Kyiv Post reporter.

Over the past year, loans have financed the construction of around 700 MW of energy capacity, the Financial Stability Report says. 

Ukraine’s central bank is in the process of regulations screenings as Ukraine is accessing the EU, and the NBU is waiting for the green light from the European Commission to get regulatory equivalence status, Rozhkova said. 

“Efforts to align the regulation of the banks and NBFIs with EU standards are underway. The next steps in this process are the introduction of leverage ratio requirements, new requirements for credit risk coverage, components of settlement risk, and credit valuation adjustments. The planned acquisition of regulatory equivalence status from the European Commission will facilitate more active lending by Ukrainian subsidiaries of European banks. The NBU expects to move closer to commencing the formal equivalence assessment process within a year,” she said.