Russian strikes over the winter triggered the first decline in Ukrainian businesses’ operating efficiency since the start of the full-scale invasion, even as banks recorded their longest period of credit growth in 15 years, according to the National Bank of Ukraine’s (NBU) semi-annual Financial Stability Report presented on Tuesday.
The central bank said macroeconomic conditions for Ukraine’s financial sector and businesses worsened over the past six months, largely due to intensified Russian attacks on production facilities, transport infrastructure, and energy assets.
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“As a result, a number of industries saw a slowdown in production during the first quarter, with prices being the main driver of corporate revenue growth. … Furthermore, the consequences of these attacks, combined with the additional effects of the war in the Middle East, made the National Bank maintain relatively tight monetary conditions,” NBU First Deputy Governor Serhiy Nikolaichuk said during the briefing.
Pervin Dadashova, director of the Financial Stability Department, said the conflict in the Middle East also drove up production costs, particularly for sectors that are heavily dependent on imports. These include the agricultural sector, which relies on imported fertilizers, and sectors that depend on the prices of imported energy resources.
While the central bank’s assessment is currently based on first-quarter data, Dadashova said a clearer picture will emerge as companies file their second-quarter financial statements.
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“Assuming that the main shocks are already behind us, we will likely still see some negative impact in the second quarter … We have seen a decline in this operating margin. To a large extent, this is precisely the result of the performance over the very last few months,” Dadashova said, replying to a Kyiv Post question.
Corporate financial health remains solid despite profitability squeeze
At the same time, the central bank said the overall financial health of Ukrainian companies remains solid.
Around one-third of surveyed firms were rated financially “satisfactory,” while roughly half, by asset value, fell into the “strong” or “excellent” categories, supported by moderate debt levels and ample liquidity.
Profitability, however, remains the main area of concern, particularly for companies operating closer to the front line, where revenue growth has lagged behind the rest of the country.
Despite these pressures, net hryvnia lending has grown more than 30% year-on-year. Banks are increasingly directing credit toward long-term investment projects with maturities exceeding three years, as well as machine-building – including defense-related manufacturing – and the energy sector.
According to the NBU, the number of active corporate borrowers has roughly doubled over the past decade to about 17,000, indicating broader access to financing across the economy, even though only around one-third of Ukrainian companies currently use bank financing.
Rising labor costs, driven by competition for workers, have also weighed on profitability, Dadashova said.
Corporate margins were already weaker in 2025 than in 2024, and the outlook for 2026 suggests further deterioration. Nevertheless, she emphasized that the situation is not critical.
Overall, companies maintain moderate debt burdens, and most borrowers currently have sufficient resources to service their loans. When businesses face financial difficulties, banks tend to act preemptively, offering restructuring tools to help companies get through the difficult period.
Windfall tax already shapes bank behavior ahead of 2027 extension
That lending expansion, however, may face growing constraints from government policy.
A windfall tax on bank profits is set to be extended into 2027, and the NBU said the mere prospect of that extension is already shaping banks’ behavior in the second half of this year and into 2026, not just in some distant future.
Capital adequacy across the banking sector stood at 17.6% under the latest data, supported largely by the retention of last year’s profits. However, the ratio declined from 17.3% to 16.4% during 2025 as banks reinvested earnings into expanding their loan growth rather than strengthening capital buffers.
Rapid credit growth has placed additional pressure on capital adequacy. Although bank profits remain at record levels, the profits retained and added to capital in 2025 were not sufficient to fully offset the impact of loan growth.
Looking ahead, Nikolaichuk said the NBU does not believe banks can sustain their current level of profitability, while simultaneously meeting capital adequacy requirements, paying a 50% profit tax, and continuing to expand lending to the economy at more than 30% a year.
Average capital requirements are expected to rise toward 14% by the end of 2027 as the NBU phases in EU-aligned standards. Even then, they would remain below the roughly 16% regional average for Central and Eastern Europe, the NBU noted.
According to Nikolaychuk, return on equity for non-state banks has already slipped to 15% – which is less than in some Central and Eastern European banking systems – and is no longer adequate compensation for the risks of operating in a wartime economy.
If the windfall tax persists, the NBU estimated credit growth could slow to a 15-20% annual pace, as banks would lack the capacity to generate enough capital to simultaneously sustain higher buffers and 30%-plus lending growth.
Loan portfolios strengthen across the board while state subsidy arrears mount
Asset quality substantially improved as the share of non-performing loans (NPLs) fell below 13% – the lowest level in 15 years. The decline was driven by strong new lending, which diluted legacy portfolio, and by efforts from banks, including state-owned Privatbank, to write off or resolve older bad debts.
Default rates across corporate and retail portfolios remain low by historical standards. However, the NBU said it has not yet seen evidence of credit quality deteriorating in response to the first-quarter slowdown.
Retail lending grew roughly 35% across segments, supported by resilient consumer demand and a household debt-service burden that the NBU described as low, by both domestic and international comparisons. Most borrowers tend to spend less than a quarter of their income on loan servicing.
However, mortgage lending remains the exception.
Mortgage lending remains concentrated almost entirely within the state-backed Oselia program, with banks finding it “almost impossible” to compete with its concessional terms, Nikolaichuk said.
Meanwhile, the share of loans issued under the subsidized 5-7-9% lending program is rising again after a prolonged decline.
The National Bank now expects the government’s outstanding debt to banks under the program to reach roughly Hr.10 billion ($223 million) by the end of the year, up from about Hr.8 billion ($178 million) in 2025.
Dadashova said the growth was driven by continued refinancing of working capital in sectors with limited immediate financing needs and by an expanded list of “resilience territories” eligible for softer terms, including newly added areas in the Odesa region.
On defense-sector financing, the NBU said a small-producer lending program launched in 2024 has provided Hr.9 billion ($201 million) in credit. Tens of billions of hryvnias have also been extended to larger defense-related companies outside the program, although the central bank declined to provide detailed figures, citing their sensitive nature.
A high-profile consortium loan worth more than Hr.20 billion ($446 million) to a single company collapsed late last year. However, Nikolaichuk rejected the notion that the failure reflected broader problems with consortium lending, noting that several smaller deals – including some involving dual-use manufacturers – have since been completed and are being serviced.
War-risk insurance generated nearly Hr.1 billion ($22.3 million) in premiums in the first quarter, largely from comprehensive cover. The NBU also signaled interest in deeper cooperation with international reinsurers and institutions, including the EBRD, MIGA, and the World Bank.
The central bank’s bottom line was one of cautious resilience rather than alarm. While capital and liquidity buffers remain sufficient, officials warned that a tax designed to increase budget revenues from bank profits could ultimately reduce banks’ capacity to lend. The NBU argued that when financing for reconstruction and defense production needs, banks need to operate at full capacity rather than half of it.
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