How banks are surviving the second year of the great war
Interview
Despite the war, business lending is gradually recovering. The driver of development is MSMEs.
The NBU's cut of the discount rate from 25% to 15% was one of the key factors that contributed to the stability of the banking system last year.
The positive effects of this step include stimulating economic growth by increasing the availability of loans for businesses and individuals, slowing inflation and improving inflation expectations, which helps to maintain the attractiveness of hryvnia instruments for savings.
Another important factor is the ongoing currency liberalization, namely the easing of currency restrictions and a return to flexible exchange rate formation.
This strengthens the NBU's ability to ensure price and financial stability and economic growth in the long term. The success of this policy helps to reduce pressure on the exchange rate and avoid new issuance.
The regulator's prudent and professional policy was an important factor in maintaining financial stability in 2023. The NBU was clear and predictable, which helped to avoid panic that could have arisen amid the mental "swings" that often occur during a war.
The regulator maintained an ongoing dialog with the banking sector, business, and citizens, which allowed it to circumvent all obstacles that could have shaken the stability of the financial situation in the country.
The government also made a positive contribution. I consider the implementation of the state program "Affordable Loans 5-7-9%", which remains the main driver of business lending, the grant program "eRobota" and lending under state portfolio guarantees, to be a big plus last year.
Equally important was cooperation with international financial organizations under guarantee mechanisms (EIF, EIB, EBRD) and grant programs (Sparkasse and GIZ). Oschad and some other banks participated in these programs.
The key achievement of the banking sector is its stable operation, profitability and continued lending to individuals and businesses during the war. The cornerstone of these positive results is the employees of the banks: contact center operators, collectors, branch employees and all others who ensured the uninterrupted provision of banking services, each in their own place.
The joint POWER BANKING network, established at the initiative of the NBU, played an important role in providing offline services in banking institutions, even in blackout conditions. We tried to restore the operation of our branches in the frontline areas as quickly as possible and will continue to do so in the future.
According to the NBU, the good financial performance of the banking system is due to the high operational efficiency of financial institutions, as well as a reduction in provisioning expenses. For example, in 11 months of 2023, Oschadbank did not form reserves, but rather disbanded them by UAH 1.7 billion.
The high profitability of the banking system allowed Ukrainian banks to successfully pass the NBU's stress test, which is a very good signal for both the financial sector and the economy as a whole.
The gradual recovery of lending can be seen in our bank. Despite the market stagnation, Oschad maintained its leadership in car loans and mortgages in 2023.
As for micro, small and medium-sized businesses (MSMEs), the loan portfolio of Oschadbank's MSME clients increased by UAH 4.5 billion in 2023 to almost UAH 22 billion due to the use of guarantee instruments from international financial organizations and government support programs in terms of interest compensation.
We have improved the dynamics of lending to the corporate segment. Last year alone, the bank opened credit limits to large corporate businesses in critical industries for over UAH 17.9 billion, which is 45% more than in 2021 and 29% more than in 2022.
Another priority for the banking sector is inclusiveness. For example, Oschadbank has developed and is implementing the "My Barrier-Free" program, which provides for improved physical accessibility of branches, increasing their number in the frontline areas and, hopefully, in the areas that will be liberated this year.
It is planned to develop a separate service model for people with disabilities and veterans, as well as to improve the IT sector to further develop remote services.
Forecast for 2024
If the discount rate is further cut in 2024, the funds that banks will raise to develop their own lending products will become cheaper. Accordingly, interest rates on both loan and deposit products will decline. This may help increase the volume of banks' loan portfolios.
At a time of military and geopolitical uncertainty, we should not expect any significant development of "breakthrough" banking products, as the main task of each bank is to weather this storm with preserved solvency and loyalty of depositors.
We will focus on developing digital services in all areas. We plan to deepen the digitalization of business processes by expanding remote communication systems.
In the retail business, in addition to developing the Mobile Oschad mobile application, we will try to increase the pace and volume of mortgage lending in the primary market.
As for the MSME business, we plan to focus on products for starting/developing veteran businesses, as well as on partnerships with local authorities to improve the availability of financing.
In addition, we will increase the number of business financing programs with the support of international partners, and assist in the implementation of government grant programs. We will continue our partnership lending programs, which allow the bank to offer favorable loans for the purchase of equipment, vehicles, crop protection products, etc.
The priorities of the corporate business, based on the bank's high expertise and capabilities, include financing of major infrastructure projects at the state and municipal levels, as well as investment projects.
Another priority is to provide financial support to private business projects aimed at strengthening the country's defense capabilities.
We will support export-oriented businesses and processing enterprises, primarily in the agricultural and food industries. The bank will invest in the development of decentralized green generation.
We also intend to maximize the use of capabilities of international financial institutions in financing business (including co-financing, risk-sharing programs, grant support, etc.).
I believe that the main obstacle and the main risk of 2024 is the personnel issue, or rather the personnel shortage due to migration, relocation and mobilization of bank employees. And, of course, the situation at the frontline may become a barrier to the implementation of any plans and ideas.
Main conclusions of two years of the great war
The war is not a reason to curtail or freeze lending; this is the most important conclusion we have drawn from the results of the last two years. Indeed, the risks have increased, but effective risk-oriented policies of most banks allowed us to continue lending to businesses and individuals on the one hand, and avoid losses on the other.
Our clients are grateful for this step, and as a result, borrowers have become much more disciplined. For example, as of the end of the third quarter, the delinquency rate on loans issued to customers of all business lines did not exceed 4% and amounted to 1.6% in the total portfolio.
At the same time, restructuring loans to customers affected by the military aggression of the Russian Federation should be one of the priorities for banks in 2024.
In addition, we have finally realized that in order to maintain a sufficiently high level of lending to businesses, banks need to engage various partners. We are talking about international financial organizations that provide financial support in the form of guarantees, as well as the use of grant mechanisms (both state and international).
We are ready to work with the regions to jointly develop priority economic sectors, so we need to engage local authorities more actively. To this end, we create joint loan products that become more affordable thanks to the financial participation of the respective budgets. We currently have 11 programs involving regional administrations and municipalities.
There is an urgent need to introduce additional areas of financing or expand loan programs through the use of preferential interest rates, compensation instruments, guarantee resources to support veterans, relocation, land demining, energy efficiency, exports, and the processing industry.
Another important observation is that banks must now seek a new balance between efficiency and social responsibility. During wartime, it should be shifted towards supporting customers: individuals and companies. We will continue to follow this vector in the future. Nevertheless, we are not going to forget about profitability.
Interview
Oschadbank Press Center