War-linked loan loss provisions pummel Ukraine banks' 2022 profits

Ukraine's banks suffered a 68% profit drop in 2022 as loan loss provisions spiked amid Russia's ongoing war, with fears that asset quality may worsen.

The country's lenders jointly earned 24.7 billion hryvnia ($666 million), down from the 77.4 billion hryvnia reported a year earlier. Provisions for incurred and expected losses, driven by the conflict, reached almost 119 billion hryvnia, up from just 3.4 billion in 2021, according to National Bank of Ukraine data released in February.

The war has caused damage to property and other assets, as well as a loss of income and a worsening of borrowers' liquidity, making it harder to service loans, the central bank said. Ukrainian banks started recognizing war-related nonperforming loans, or NPLs, in the second half of 2022, and provisioning has reached about 12% of the performing loans that banks held at the end of February 2022. Amid the conflict, which began a year ago on Feb. 24, potential losses could reach 30% of the credit portfolio, the bank said.

"The recognition of actual asset quality will continue, leading to further growth in the volume of nonperforming loans," the regulator said. The banking sector's NPL ratio increased to 38.1% at year-end from 26.6% at the end of February 2022. The NPL coverage ratio was 95% at the end of 2022.

Before provisions, the sector's 2022 net operating profit increased 75% year on year. In the fourth quarter, it totaled 41.9 billion hryvnia, up from 25.0 billion hryvnia a year ago. Operating profit was bolstered by net interest income, which grew thanks to an increase in interest-bearing assets and higher rates on investment instruments. It was also supported by a recovery in net fee and commission income in the second half of 2022. Additional income came from revaluations of exchange-rate-linked securities and proceeds from foreign exchange trading.

"Operational efficiency provides banks with the first line of defense and allows [them] to absorb credit losses," the central bank said.

State-owned JOINT-STOCK COMPANY COMMERCIAL BANK PRIVATBANK, Ukraine's largest lender, posted the highest profit for 2022, but it also set aside the most provisions, from a sample of the country's 10 largest banks by assets, according to analysis by S&P Global Market Intelligence. Raiffeisen Bank JSC and Joint-Stock Company OTP Bank, the local units of Raiffeisen Bank International AG and OTP Bank Nyrt., saw a year-on-year drop in profits and much higher provisions. BNP Paribas SA unit Joint Stock Company Ukrsibbank was the only bank in the sample that saw its net profit grow year over year, according to central bank data.

Credit risk remains the largest threat to the financial sector amid Russia's ongoing invasion, the Ukrainian central bank noted in its December Financial Stability Report. Despite decreasing somewhat compared with the first half of 2022, the credit risk of households remains at a medium level, while credit risk of corporate borrowers remains high, and the share of corporate defaults is rising, the regulator noted.

Capital adequacy risk is at a medium level, with banks maintaining or even building capital cushions amid the war. Profitability risk has decreased amid banks' improved financial performance in the second half of 2022, but provisioning costs will grow further, affecting their results.

Liquidity risk is moderate, although certain banks face some liquidity problems, the central bank said. Foreign currency risk decreased in the second half, while macroeconomic risk remains high amid the ongoing war, the regulator said.

* Read more about how the war has affected different markets and sectors: Russia's War: 1 Year In. * Access aggregate financial highlights for Ukraine banks on CapIQ Pro. * Access Peer Analysis Excel template on CapIQ Pro.

As of Feb. 22, US$1 was equivalent to 36.69 Ukrainian hryvnia.