The Ukrainian market

Economic situation

In 2017, the dynamics of the Ukrainian GDP slowed down slightly (from 2.5% y/y in the first quarter through 2.3% y/y in the second quarter and 2.1% y/y in the third quarter to 1.8% y/y). This was due to an escalation of the tension in Donbas as a result of introducing an embargo on imports from territories occupied by the pro-Russian separatists. Throughout the year, the GDP most probably increased by 2.1-2.2% y/y, slowing down from 2.3% in 2016.

A nearly 40% increase in salaries after raising the minimum salary from UAH 1,500 to UAH 3,200 from January 2017 translated into an accelerated increase in retail sales (and strengthening of consumption growth), whereas industrial production and investments remained limited due to geopolitical tensions.

The improved situation in the economy, increase in salaries, improved collectability of taxes and transfers of subordinated companies resulted in a drop in the deficit of the public finance sector to UAH 40 billion from UAH 53 billion in 2016 (approx. -1.4% and -2.2% of the GDP respectively). The public debt (including guarantees) dropped to 73.4% (as at the end of September) of the GDP from 81.0% as at the end of 2016. At the same time, the share of the central bank in the structure of securities held continued to drop to the benefit of commercial banks (for the first time since June 2011, as at the end of the year, commercial banks held more securities than the central bank).

The CPI inflation level remained within the range of 12–16% y/y (13.7% in December 2017), and the increased volatility of prices resulted from regulatory measures and growing demand and cost pressure (a high increase in salaries, an increase in prices of raw materials and weakening of the UAH rate). The basic inflation, following the stabilization in the first half of the year, accelerated to 9.5% y/y in December. After weakening in January 2017, the hryvnia strengthened against the American dollar until September, after which the exchange rate began to weaken (most strongly in December), closing the year 2017 at 28.07 compared with 27.10 a year before. As a result of the weakening of the hryvnia and a growth in the basic inflation, following two interest rate reductions in the first half of 2017 (by 150 b.p.), the NBU began to increase the interest rates again in autumn (in aggregate by 200 b.p. to 14.50%).

The Ukrainian banking sector

According to data from the NBU, the number of banks conducting operating activities in Ukraine dropped in November 2017 to 86 (compared with 96 in December 2016).

The value of total assets in the Ukrainian banking system in 2017 increased to UAH 1.28 trillion from UAH 1.26 trillion. Equity increased to UAH 170.4 from 123.8 billion, representing 13.3% of total equity and liabilities as at the end of November 2017, compared with 9.9% as at the end of December 2016.

In the period from January to November 2017, the volume of loans increased (by UAH 8.4 billion UAH 1034.4 billion). During this period, the volume of loans denominated in foreign currencies dropped strongly (by UAH 40.3 billion), despite the weakening of the hryvnia. The increase in the volume of loans was brought about by non-residents; loans to households remained relatively stable and the volume of corporate loans went down. In 2017, the value of deposits increased by UAH 35.1 billion (to UAH 888.2 billion), which was accompanied by a decrease in the volume of foreign currency deposits of UAH 8.6 billion. The households sector was the main driver of the increase in deposits. The LtD (loans to deposits) ratio dropped to 116.5% as at the end of November 2017 from 120.3% in December 2016.

After the change in classification of non-performing loans, their share in total loans is 54.9% (an increase of about 22% compared with previously published values is the result of, among other things, a sharp increase in allowances for non-performing loans in the nationalized Privatbank). In the same period, ROA and ROE improved (ROA: 0.16% compared with –12.6%; and ROE: 1.31% compared with –116.7%). The capital adequacy ratio of the sector amounted to 15.4% as at the end of November 2017 (in 2017, 7% was required) compared with 12.7% as at the end of December 2016.