The Impact of Hostilities on the Banking System, the Financial Sector,
and Prospects for Recovering in a Conflict-Related Context
OLHA DZHYHORA1,*, KARPIKA SERHII2, LEONID MILMAN3, NATALIIA MASLAK4,
SERGII BRATUSHKA5
1Department of National Security, Public Management and Administration,
Faculty of National Security, Law and International Relations,
Zhytomyr Polytechnic State University,
Zhytomyr,
UKRAINE
2Department of Law Enforcement and Anti-Corruption Activities,
Interregional Academy of Personnel Management,
Kyiv,
UKRAINE
3Department of Management, Marketing and International Logistics,
Chernivtsi Institute of Trade and Economics of the State University of Trade and Economics,
Chernivtsi,
UKRAINE
4Department of Finance, Banking and Insurance, Economics and Management Faculty,
Sumy National Agrarian University,
Sumy,
UKRAINE
5Department of Cybernetics and Informatics, Faculty of Economics and Management,
Sumy National Agrarian University,
Sumy,
UKRAINE
Abstract: - Throughout the conflict in Ukraine, a multitude of adverse ramifications stemming from hostilities
were observed within the sphere of banking activities and the overarching financial system. Such consequences
encompassed disruptions in the operational continuity of banking branches, leading to closures attributable to
the destruction of infrastructure and shelling incidents. The primary objective of this article is to undertake a
comprehensive analysis of the repercussions of hostilities on the banking system, the financial sector, and the
ensuing prospects for recovery within the context of the conflict. The methodology employed in this study is
grounded in a structural analysis of key performance indicators of banks and economic standards pertinent to
the banking system. The temporal scope of the analysis encompasses the years 2016-2023. The findings
underscore the significance of systemic and sustained reforms directed towards upholding financial stability
and macroeconomic equilibrium, with a specific focus on the pivotal role played by the financial sector and
banks. The pragmatic significance of this study lies in the identification of essential tools pivotal for preserving
the financial stability of the financial sector during periods of war.
Key-Words: - Banking system, Financial sector, Financial stability, Bank liquidity, Capital adequacy,
Digitalization.
Received: September 20, 2023. Revised: April 21, 2024. Accepted: May 19, 2024. Published: June 14, 2024.
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.119
Olha Dzhyhora, Karpika Serhii,
Leonid Milman, Nataliia Maslak, Sergii Bratushka
E-ISSN: 2224-2899
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Volume 21, 2024
1 Introduction
Political instability and economic downturns within
the framework of military conflicts exert a
deleterious influence on the financial sector and the
operational dynamics of banks. The authors, [1],
note the growing systemic vulnerability of the
global financial system, as the negative impact of
sanctions has spread to other countries besides
Ukraine and Russia. Escalated uncertainty gives rise
to heightened volatility in financial markets,
diminished demand for financial services, and a
decline in both lending activities and deposits by
economic entities. The war has led to higher energy
prices and a decline in financial markets, [2], [3],
capital outflows, higher borrowing costs, and tighter
monetary policy, [4]. The linkages between
financial institutions and financial systems lead to
their vulnerability and systemic risks during
wartime, especially in Germany, the UK, Ukraine,
France, and the USA, [1]. The authors, [5], argue
that Europe has suffered the most from the
Ukrainian-Russian war, in particular due to
volatility in financial markets caused by higher
energy and commodity prices. The authors' team,
[6], found that globalized financial markets were
more vulnerable to the war in Ukraine. Therefore,
the Ukraine-Russia conflict causes an increase in
risks in the financial sector among the countries that
are active participants and partners that influence
hostilities (Germany, France, the UK, and the entire
EU).
In the backdrop of the war in Ukraine, a
constellation of adverse effects stemming from
hostilities on banking activities and the holistic
financial system became apparent. The aftermath
encompassed disruptions in branch operations,
culminating in closures attributable to infrastructure
damage and shelling, heightened cyber threats, and
a downturn in the demand for banking services,
business activity, and loan disbursements.
Concurrently, as part of the ongoing financial
system reform in Ukraine initiated at the beginning
of 2015, the NBU has implemented impactful
measures and pursued an efficacious policy to
bolster the operations of financial institutions.
Despite several empirical studies on the effects
of the war on the banking and financial sectors,
there is limited research on the state of these sectors
in the context of the ongoing conflict. In particular,
it concerns the prospects for recovery and monetary
policy measures to ensure the sustainability of the
sectors. As noted by the authors, [7], the national
financial sector faces many systemic challenges
under the influence of military aggression. It
requires an analysis of key indicators of the
financial sector during the active phase of the war.
Against this backdrop, the objective of this article is
to scrutinize the repercussions of hostilities on the
banking system, the financial sector, and the
potential pathways for recovery within the context
of the conflict.
Based on this aim, we would like to outline the
main goals of the study:
1) to analyze the impact of the NBU's monetary
policy measures to maintain the stability of the
banking system and financial sector of Ukraine in
the context of war and reduction of systemic risk;
2) to evaluate the performance of Ukrainian
banks, including income, expenses, return on assets,
and capital, to understand the impact of the war on
the country's banking system and the existing
systemic risks.
2 Literature Review
The scientific literature exhibits a scarcity of
research concerning the ramifications of the conflict
in Ukraine on the financial sector and banking
system, along with their prospective recovery
trajectories post-conflict. Scholars have, to some
extent, addressed the dynamics of various structural
components within the financial sector. Notable
examples include investigations into the foreign
exchange market, [7], and the stock market, [8], as
well as analyses of investor activity and returns, [9],
[10]. The stock market shows heightened sensitivity
to the military conflict between Ukraine and Russia,
as indicated by studies conducted by [10], [11]. [9],
have delineated several effects of military conflicts
on the financial market, including a negative
influence on stock market returns, elevated risks
associated with investing in financial assets,
detrimental effects on investments, and a
noteworthy impact on the Russian-Ukrainian war on
global financial intermediation. The World Bank,
through the research conducted by [12], delineates
several consequences of the war for European
financial markets. These include heightened
volatility, increased borrowing costs, unprofitability
of specific financial institutions, substantial losses
of bank capital in the EU, and a decline in European
bank stock prices after the imposition of sanctions
against Russia, [4]. The authors' team, [13], contend
that the war's unpredictable and initially limited
impact on the European financial system was
unforeseen. Although the financial sector
encountered losses at the war's outset due to the
initial shock, the vulnerability of European banks is
underscored by the fact that 6-7% of their assets
originate from Russia. Simultaneously, the robust
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E-ISSN: 2224-2899
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capitalization of banks is expected to alleviate issues
associated with profit loss.
The author [14], discerned the principal adverse
effects of the war on the Ukrainian banking system
amid the crisis, encompassing a substantial outflow
of funds from the banking system, a rise in non-
performing loans, an increase in the share of non-
performing loans, and a decline in banks' solvency,
liquidity, financial stability, and resilience. The
authors' team, [15], uncovered that "banks that
originated more loans in conflict zones in the period
before the war in Ukraine were eventually left with
higher levels of NPLs in non-conflict markets after
the invasion began." Amid the backdrop of the war,
banking institutions have curtailed the volume of
credit supply, with a more pronounced impact
observed in regional markets situated at a
considerable distance from their headquarters. The
magnitude of the reduction in bank lending tends to
be comparatively lesser for larger banks and those
with political connections, [15]. Author [16],
contends that the sanctions imposed on Russian
assets have inflicted a considerable setback on the
international payments system.
Amidst the war, the market principles of the
economy and the mechanisms governing price
formation are disrupted, leading to a malfunction of
monetary transmission mechanisms. Consequently,
the role of the state in guaranteeing the regular
functioning of commodity-money relations becomes
more prominent, [17]. In the context of the conflict
in Ukraine, the anticipation of escalating inflation
compelled the central bank to alter its monetary
policy, transitioning to a fixed exchange rate and
expanding the domestic borrowing market, [18].
Delineate the universally acknowledged
principles of monetary policy during wartime,
entailing the utilization of central bank instruments
to augment the money supply, including "purchase
of assets on the open market, direct acquisition of
government bonds on the primary market, and
targeted refinancing of credit institutions." In a
military economy, the attainment of macroeconomic
stability necessitates the secure operation of the
government borrowing market and meticulous
control over capital flows, [19].
As a result, there are few studies in the scientific
literature on ensuring the resilience and stability of
the banking and financial sector during wartime.
The existing literature focuses mainly on the
adverse effects of military conflicts on certain
subsectors of the financial sector. At the same time,
there are no comprehensive studies of measures to
support the resilience and stability of the banking
system as a key part of the financial sector.
3 Methodology
At the first preliminary stage of the study, the
authors analyzed the problems of financial sector
development in countries affected by military
conflicts. Based on the evaluation of the results of
existing theoretical and practical studies, the main
consequences of the impact of conflicts and growing
uncertainty on the state of the financial sector were
identified, [7].
The next step in this study was to collect
statistical data on the state of Ukraine's banking
sector for further evaluation in the context of
ensuring stability. All data were contained in the
National Bank of Ukraine database, which
facilitated a detailed assessment of the effects of the
war on the country's financial sector. The content
analysis of the National Bank of Ukraine's
information was also used to study key measures to
support the stability of the banking sector, which is
a key part of the country's financial system, [7].
This article employs a structural analysis of the
primary performance indicators of Ukrainian banks
to evaluate the influence of hostilities on the
financial sector, as indicated by [14], [18]. The key
metrics for this analysis, as outlined by Polova,
encompass the dynamics of economic standards
within the banking system from 2016 to 2023,
changes in the number of Ukrainian banks and
structural units by bank, fluctuations in assets and
liabilities, income and expenses of banking
institutions, and the return on assets and capital.
4 Results and Discussions
The efficacy of the banking system amid the conflict
was safeguarded by the timely responses and
interventions of the National Bank of Ukraine
(NBU), substantial safety margins, and systematic
efforts in reforming the sector as a whole,
commencing from the early stages of 2015.
Extraordinary financial measures were
introduced to support the economy and reduce
pressure on banking institutions, including
restrictions on the financial sector, capital controls,
and tax deferrals. These measures helped to avoid
the collapse of the financial system, [4].
Following the Russian invasion on February 24,
2022, the NBU implemented the subsequent
operational measures: ensuring liquidity within the
banking system, overseeing the foreign exchange
market, managing the electronic payment system,
initiating the liquidation or preparation for the
nationalization of banks under Russian control in
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Olha Dzhyhora, Karpika Serhii,
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Ukraine, and providing support for social payments,
[18].
Table 1. Dynamics of economic indicators of the banking system in 2016-2023
#
Standard indicators
As of January 01,
2023
2016
2017
2018
2019
2020
2021
2022
2023
01.11
No1
Regulatory capital
(UAH billion)
129,8
109,7
115,8
126,1
150,3
182,3
211,7
211,1
264,5
No2
Regulatory capital
adequacy ratio (not less
than 10%)
12,31
12,69
16,10
16,18
19,66
21,98
18,01
19,68
25,31
No3
Core capital adequacy
ratio (not less than 7%)
-
-
-
-
13,50
15,67
11,99
13,12
14,85
Source: National Bank of Ukraine, [20]
As per the National Bank of Ukraine (NBU), the
short-term liquidity ratio stood at 89% in 2021 and
88.68% in 2022 (January-February), surpassing the
stipulated standard of at least 60%. The banking
sector's resilience was further underpinned by the
adequacy of regulatory capital, which amounted to
UAH 129.8 billion in 2016 and increased to UAH
264.5 billion in 2023, corresponding to capital
adequacy ratios of 12.31% in 2016 and 25.31% in
2023. Although the bank's core capital adequacy
ratio experienced a decline from 15.67% in 2021 to
11.99% in 2022, it remained sufficient to ensure the
operational stability of the institutions, [20] (Table
1).
At the onset of the full-scale war, the National
Bank of Ukraine (NBU) took measures such as
fixing the official hryvnia exchange rate to uphold
and regulate the expectations of businesses and
households. Concurrently, the key policy rate
remained unaltered at 10%. Foreign exchange
interventions and the NBU's fixed exchange rate
emerged as primary instruments for ensuring macro-
financial stability. In June, as the economy adapted
to martial law and both businesses and citizens
reverted to economic decision-making logic, the
NBU initiated an active monetary policy, elevating
the key policy rate to 25%. This decision aimed to
safeguard the savings and hryvnia incomes of
citizens and enhance the attractiveness of assets
denominated in the national currency, [21]. As a
result of an increase in the discount rate, [7] argues
that the cost of financial resources for business
entities has significantly increased. Besides, the
level of business activity of business entities has
decreased. Consequently, found, that the growing
level of geopolitical risks leads to a reduction in
internal lending to the private sector. This happens
due to the growing uncertainty of economic policy,
which negatively affects the lending decisions of
banking institutions.
In the future, Ukraine will need additional
external financial support and financing due to the
growth of public debt. If the conflict continues
and/or is frozen, the public debt will need to be
restructured to maintain its reliability and restore
fiscal stability, [22].
In the face of Russia's cyberattacks targeting the
financial sector, banks demonstrated resilience by
ensuring uninterrupted service provision, including
remote services, and keeping the integrity of their
networks and digital infrastructure. Over the period
spanning from February to December 2022, the
financial sector experienced 120 cyberattacks,
constituting 5% of the total cyberattacks across
diverse sectors of the economy, [23].
As of November 1, 2023, the operational count
of banks for the year 2022 exhibited a reduction of 4
units, totaling 63, with 28 of them being foreign-
owned, [24]. Concurrently, the number of bank
branches experienced a significant decline from
January 1, 2022, to October 1, 2023, amounting to a
total reduction of 1,587. Notably, the banks that
closed the largest number of branches during this
period were JSC Oschadbank (420 units), JSC CB
PrivatBank (366 units), JSB Ukrgasbank (50 units),
JSC Ukrsibbank (29 units), JSC Aktsionernyi Bank
Pivdennyi (39 units), and Raiffeisen Bank JSC (63
units), [25].
Banks' assets experienced substantial growth as a
result of the National Bank of Ukraine's (NBU)
systemic reforms, escalating from UAH 1,254
billion in 2016 to UAH 2,352 billion in 2022 and
further to UAH 2,679 billion in 2023 (Table 2).
Notably, the composition of these assets
transformed over the years. In 2016, foreign
currency assets represented the largest share at 46%,
whereas by 2023, their proportion had decreased to
29%. Meanwhile, the share of cash use remained
constant at 3% both in 2016 and 2023. The
allocation of banks' assets underwent notable
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changes during the period from 2016 to 2023. The
proportion of funds due from the National Bank of
Ukraine (NBU) increased from 2% to 8%, while the
share of correspondent accounts opened with other
banks saw a modest rise from 10% to 12%.
Additionally, the share of term deposits with other
banks and loans to other banks increased from 2%
to 3% within the specified timeframe. Conversely,
the proportion of loans to customers witnessed a
substantial decline, decreasing from 80% in 2016 to
38% in 2023. This reduction is attributed to the
deceleration in lending to economic entities during
the war, with loans amounting to UAH 801 billion
in 2022 and UAH 766 billion in 2023, constituting
29% of the overall portfolio. In 2016, foreign
currency-denominated loans to business entities
accounted for a dominant share of 39% (UAH 492
billion). Conversely, by 2023, the proportion of
foreign currency lending had diminished
significantly to 10% (UAH 258 billion).
Concurrently, lending to economic entities in the
national currency surged from UAH 338 billion
(29%) in 2016 to UAH 509 billion (19%) in 2023.
Regarding loans to individuals, there was a slight
deceleration in lending activities during 2022-2023
compared to 2021. Furthermore, the overall share of
loans issued to individuals from 2016 to 2023
exhibited a substantial decrease, declining from
14% to 8%, respectively. Despite theoretical
assumptions about the reduction in lending to the
private sector, the Ukrainian experience indicates a
relatively high level of lending to business entities
during the war.
Since the commencement of 2016, there has been
a substantial escalation in the volume of investments
in securities and long-term investments, rising from
UAH 202 billion in 2016 to UAH 830 billion in
2021. Notably, in the wake of the conflict, this trend
continued, reaching UAH 1,023 billion in 2022 and
further expanding to UAH 1,249 billion in 2023.
Consequently, the share of investments in securities
and long-term investments witnessed a remarkable
increase, soaring from 16% in 2016 to 47% in 2023.
This dynamic evolution can be attributed to a surge
in the volume of domestic government bonds,
particularly pronounced in the years 2021-2023.
Table 2. Key performance indicators of Ukrainian banks (assets) in 2016-2023, UAH billion
Name of the indicator
01.01.2016
01.01.2020
01.01.2021
01.01.2022
01.01.2023
01.11.2023
Absolute
deviation,
2023-2016
Specific weight,
%
2016
2023
The number of operating
banks
117
75
73
71
67
63
-54
100
100
including foreign capital
41
35
33
33
30
28
-13
35
44
Assets
1 254
1 493
1 823
2 053
2 352
2 679
1 425
100
100
Assets in foreign currency
582
492
585
583
731
786
204
46
29
Physical cash
34
56
73
75
75
74
40
3
3
The National Bank of
Ukraine funds
27
76
38
35
82
204
177
2
8
Correspondent accounts
opened at other banks
130
118
176
173
315
325
196
10
12
Time deposits and loans
from other banks
23
35
50
60
51
73
49
2
3
Loans to clients
1 010
1 033
961
1 065
1 036
1 005
-5
80
38
Loans to public
authorities
3
5
12
27
25
19
16
0
1
Loans to business entities
831
822
749
796
801
766
-64
66
29
in foreign currency
492
381
332
292
281
258
-235
39
10
in national currency
338
441
417
504
520
509
170
27
19
Loans to individuals
176
207
200
243
210
220
44
14
8
Investments in
marketable securities and
long-term financial assets
202
539
791
830
1 023
1 249
1 048
16
47
including non-residents
2
10
14
6
28
86
83
0
3
including domestic
government bonds
176
367
588
605
533
669
492
14
25
Allowances for active
operations
321
492
388
308
370
360
39
26
13
Source: Calculated by the author based on data from the National Bank of Ukraine, [24]
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Despite the ongoing conflict, the liabilities of
banks witnessed an increase from UAH 2,053,232
million as of January 1, 2022, to UAH 2,351,678
million as of January 1, 2023, and further to UAH
2,679,459 million as of November 1, 2023 (Table
3). Concurrently, the amount of banks' capital also
experienced growth, and its proportion within the
overall structure of liabilities expanded from 2016
to 2023. The total increase in banks' liabilities
amounted to UAH 1,203,144 million, including
UAH 148,501 million in foreign currency, leading
to a decrease in the share of liabilities from 92% to
88% (from 53% to 30% in foreign currency).
The funds of business entities registered a
notable increase of UAH 796,817 million, attributed
primarily to the augmentation of term funds by
UAH 184,117 million, foreign currency funds by
UAH 229,652 million, and national currency funds
by UAH 567,165 million. Simultaneously, the
volume of funds held by individuals expanded by
UAH 607,423 million, primarily fueled by the
growth of time funds by UAH 79,276 million,
foreign currency funds by UAH 133,638 million,
and national currency funds by UAH 473,784
million. This shift in funds distribution was also
reflected in the changing composition of deposits.
The share of corporate deposits increased from 25%
to 42%, while retail deposits experienced a
moderate increase from 32% to 38% during the
period spanning from 2016 to 2023.
Table 3. Key performance indicators of Ukrainian banks (liabilities) in 2016-2023, UAH million
Indicators
01.01.2016
01.01.2020
01.01.2021
01.01.2022
01.01.2023
01.11.2023
Absolute
deviation, 2023-
2016
Specific weight,
%
2016
2023
Liabilities
1254385
1493298
1822841
2053232
2351678
2679459
1425074
100
100
Capital
103 713
199 921
209 460
255 514
215 840
325 643
221 930
8
12
Authorized
capital
222 170
470 712
479 932
481 535
407 021
404 751
182 581
18
15
Banks’
liabilities
1150672
1293377
1613381
1797718
2135838
2353816
1 203 144
92
88
Foreign
currency
667 246
568 621
648 020
613 334
799 056
815 747
148 501
53
30
Time deposits
and loans from
other banks
122 592
23 912
24 235
24 948
6 457
5 762
-116 830
10
0
non-residents
115 393
20 874
20 932
20 697
2 819
1 948
-113 445
9
0
Funds of
business
entities:
318 568
498 157
646 491
758 434
889 526
1115385
796 817
25
42
Term funds
96 679
103 191
147 871
137 417
139 196
280 796
184 117
8
10
Foreign
currency
126 651
186 208
226 721
226 594
306 944
356 303
229 652
10
13
National
currency
191 917
311 949
419 771
531 840
582 582
759 082
567 165
15
28
Funds of
individuals:
402 137
552 115
681 892
726 898
933 240
1009560
607 423
32
38
time funds
294 155
336 663
344 353
314 026
326 655
373 431
79 276
23
14
Foreign
currency
214 535
237 797
285 058
269 937
340 166
348 173
133 638
17
13
National
currency
187 602
314 319
396 834
456 961
593 074
661 386
473 784
15
25
Funds of non-
bank financial
institutions:
30 474
26 885
34 704
41 410
53 188
52 527
22 053
2
2
Foreign
currency
14 661
4 571
5 863
6 564
9 838
8 861
-5 800
1
0
National
currency
15 814
22 314
28 841
34 847
43 350
43 666
27 852
1
2
Source: Calculated by the author based on data from the National Bank of Ukraine, [24]
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Despite the economic setbacks experienced by
banks due to the war, banking institutions generated
revenues of UAH 357,539 million and UAH
365,268 million in January-October 2023 (Table 4).
The profitability of the banking sector was
underpinned by a high net interest margin. Banks'
interest income represented 71% of total income in
2016 and 68% in 2023, amounting to UAH 135,807
million and UAH 248,589 million, respectively. As
interest rates increased, credit margins expanded,
positively influencing net interest income, [13].
Income from fees and commissions totaled UAH
31,362 million in 2016 and demonstrated gradual
growth, experiencing a slight decline during the war
to UAH 85,622 million in 2022 (a decrease of 8% in
2022 and 7% in 2023). Consequently, the specific
weight of fees and commissions increased from
16% in 2016 to 22% in 2023.
In comparison to 2021, the revenues of banks in
2022 exhibited a noteworthy increase of 31%,
primarily propelled by a surge in interest income
and other operating income, highlighting the
operational efficiency of banking institutions. This
efficiency was underpinned by the effectiveness of
classical business models: universal, corporate, and
retail. Furthermore, the collaborative efforts of
banks and the policies implemented by the National
Bank of Ukraine (NBU) to uphold financial stability
and ensure cybersecurity played pivotal roles in
sustaining the stability of the banking system
throughout 2022-2023. The stability exhibited
during this period can be attributed to the
cumulative impact of financial sector reforms
initiated in 2015. These reforms enabled banks, by
the year 2022, to amass a substantial liquidity and
capital buffer while formulating strategies and
contingency plans to navigate unforeseen
conditions.
The following barriers need to be overcome to
stabilize and develop the financial sector in the face
of the consequences caused by the ongoing military
aggression in Ukraine:
strengthening confidence in the banking
sector, in particular through regulatory compliance
and digitalization;
development of telecommunications
networks;
stability of the national currency through
sound monetary policy;
structural reforms of the financial sector,
including those related to the efficiency of
management of systemically important state-owned
banks, [7].
Table 4. Revenue Dynamics of Ukrainian Banks in 2016-2023 (January-December, cumulative), UAH mln
Indicators
2016
2017
2018
2019
2020
2021
2022
2023*
Specific weight, %
Revenues
190 691
178 054
204 554
243 102
250 171
273 863
357 549
365 268
100%
100%
interest
revenue
135 807
124 009
140 803
152 954
147 743
168 746
217 053
248 589
71%
68%
commission
revenue
31 362
37 138
50 969
62 057
70 640
93 162
85 622
79 211
16%
22%
other
operational
revenues
9 605
7 264
8 589
8 147
6 813
7 488
8 126
8 432
5%
2%
other revenues
3 946
1 349
1 809
2 809
2 705
3 175
2 413
1 589
2%
0%
written-off
assets
recovery
1 728
1 070
532
909
763
1 370
853
1 736
1%
0%
Growth rate, %
Revenues
-
-7%
15%
19%
3%
9%
31%
2%
-
-
interest
revenue
-
-9%
14%
9%
-3%
14%
29%
15%
-
-
commission
revenue
-
18%
37%
22%
14%
32%
-8%
-7%
-
-
other
operational
revenues
-
-24%
18%
-5%
-16%
10%
9%
4%
-
-
other revenues
-
-66%
34%
55%
-4%
17%
-24%
-34%
-
-
written-off
assets
recovery
-
-38%
-50%
71%
-16%
80%
-38%
104%
-
-
Source: Calculated by the author based on data from the National Bank of Ukraine, [24]
* January-October (cumulative.
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.119
Olha Dzhyhora, Karpika Serhii,
Leonid Milman, Nataliia Maslak, Sergii Bratushka
E-ISSN: 2224-2899
1455
Upon the commencement of the war in 2022, the
expenses of banks witnessed a substantial rise,
reaching UAH 335,628 million. This escalation was
primarily attributed to increased interest expenses,
general administrative expenses, and significant
provisioning, amounting to UAH 121,204 million in
2022. The provisioning during this period aimed to
cover potential losses incurred by banks from active
operations and lending to economic entities. Despite
a decline in profit from UAH 77,376 million in 2021
to UAH 21,921 million in 2022, banks managed to
maintain their profitability. Notably, in 2023, profits
rebounded to UAH 122,701 million, driven by an
increase in operating income (Table 5).
Therefore, despite the range of systemic risks
that threaten the financial sector's stability during a
conflict, [26], [27], the banking system of Ukraine
managed to ensure stability primarily due to the
tightening of monetary policy measures.
Amid the war, banks encountered substantial
losses attributed to the destruction of real estate,
estimated by the National Bank of Ukraine (NBU)
at UAH 750 million by the end of 2022. As per the
national regulator's projections, these losses could
potentially escalate by 20% of the pre-war operating
portfolio. In response, banks are utilizing their
capital, which, notably, exceeded the minimum
required levels before the outbreak of the conflict.
The anticipated growth in banks' profitability in
2023 is anticipated to serve as a means to cover
potential losses arising from military operations and
real estate-related losses. The NBU anticipates a rise
in banking losses while concurrently ensuring that
they are mitigated through the deployment of
available capital and accrued profits (Figure 1).
Table 5. Dynamics of expenses of Ukrainian banks in 2016-2023 (January-December, cumulative), UAH mln
Indicators
2016
2017
2018
2019
2020
2021
2022
2023*
Specific weight,
%
Expenses
350 078
204 545
182 215
184 746
210 445
196 488
335 628
242 567
100%
100%
interest expenses
91 638
70 971
67 760
74 062
62 895
51 097
65 358
84 346
26%
35%
commission
expenses
7 182
9 650
13 159
18 096
24 132
35 186
35 449
37 850
2%
16%
other operational
expenses
10 920
11 719
16 800
11 790
16 405
18 244
17 875
13 646
3%
6%
general
administrative
expenses
39 356
44 202
53 670
62 936
69 437
78 293
82 434
73 186
11%
30%
other expenses
3 089
15 116
2 011
2 379
2 728
3 855
5 951
6 587
1%
3%
reserve
allocations
198 310
49 206
23 758
10 714
31 037
3 448
121 204
4 908
57%
2%
income tax
-418
3 681
5 057
4 769
3 811
6 364
7 356
22 046
0%
9%
Net profit
-159 388
-26 491
22 339
58 356
39 727
77 376
21 921
122 701
-
-
Growth rate, %
Expenses
-
-42%
-11%
1%
14%
-7%
71%
-28%
-
-
interest expenses
-
-23%
-5%
9%
-15%
-19%
28%
29%
-
-
commission
expenses
-
34%
36%
38%
33%
46%
1%
7%
-
-
other operational
expenses
-
7%
43%
-30%
39%
11%
-2%
-24%
-
-
general
administrative
expenses
-
12%
21%
17%
10%
13%
5%
-11%
-
-
other expenses
-
389%
-87%
18%
15%
41%
54%
11%
-
-
reserve
allocations
-
-75%
-52%
-55%
190%
-89%
3415%
-96%
-
-
income tax
-
-981%
37%
-6%
-20%
67%
16%
200%
-
-
Net profit
-
-83%
-184%
161%
-32%
95%
-72%
460%
-
-
Source: Calculated by the author based on data from the National Bank of Ukraine, [24]
* January-October (cumulative)
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.119
Olha Dzhyhora, Karpika Serhii,
Leonid Milman, Nataliia Maslak, Sergii Bratushka
E-ISSN: 2224-2899
1456
Fig. 1: Dynamics of banks' return on assets and capital in 2016-2023, %
Source: National Bank of Ukraine, [24]
Throughout the war, the significance of state-
owned banks, namely JSC Ukreximbank, JSC
Oschadbank, JSC CB Privatbank, and JSB
Ukrgasbank, escalated. Amidst the prevailing
uncertainty and heightened war risks, these
systemically important state-owned banks played a
pivotal role in maintaining lending activities and
managing and initiating new accounts for
government payments. Leveraging their extensive
branch networks and digital infrastructure, these
banks also ensured the continued accessibility of
banking services and facilitated remote banking.
Consequently, their market share experienced a
notable increase. While the dominance of state-
owned banks is crucial during a crisis, it introduces
potential risks to the fostering of competition within
the financial market during the subsequent recovery
period, [28].
The NBU's assessment of the banking system's
resilience in April 2023 shows that the assessment
of credit risks by banking institutions is adequate.
According to the results of the asset quality
assessment (AQR), it was found that the adjustment
of prudential reserves was about 1%.
Amidst the war, both businesses and individuals
exhibited weakened credit demand. The diminishing
business activity, resulting from the conflict, exerts
a negative impact on household and business
incomes, thereby reducing the demand for financial
services, [29]. The prevalent damage and
destruction of infrastructure, coupled with sluggish
economic growth, contribute to an elevated credit
risk. Notably, in 2022, businesses predominantly
accessed loans through the "Affordable Loans 5-7-
9%" program, constituting 26% of the corporate
portfolio (measured in UAH). A resurgence in the
lending market can only be anticipated after the
economy undergoes recovery. The war has
concomitantly heightened the share of non-
performing bank loans, reaching 38.1% as of the
fourth quarter of 2022. For comparison, according
to the European Bank for Reconstruction and
Development, the banking sector in the European
Union (EU) and the entire Central, Eastern, and
Southeastern Europe (CESEE) region remains stable
and resilient. There were no adverse changes in the
quality of banking assets despite the challenging
macroeconomic environment in 2022. As of
December 31, 2022, the average share of non-
performing loans in total loans in the CESEE region
was 2.3%, while in the EU, it averaged 1.8%, [30].
It is worth noting that, in 2023, due to
cooperation between the NBU and the Deposit
Guarantee Fund, UAH 938.3 million was received
to repay non-performing loans to refinance insolvent
banks. The NBU received UAH 480.7 million from
the sale of mortgaged property rights under loan
agreements.
Banks have effectively preserved and sustained
liquidity through uninterrupted payments and
transactions, thereby positively influencing the
demand for cash. The ongoing digitalization of
banks has broadened the scope and magnitude of
remote services and cashless transactions, [31].
During the period from May to December 2022, the
share of cashless transactions utilizing payment
WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.119
Olha Dzhyhora, Karpika Serhii,
Leonid Milman, Nataliia Maslak, Sergii Bratushka
E-ISSN: 2224-2899
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cards reached UAH 3,443.9 billion, with 53.3%
attributed to card-to-card transfers, 17.9% to online
payments for goods, and 26% to payments through
payment terminals. Furthermore, the volume of
cashless transactions using payment cards issued by
Ukrainian banks amounted to UAH 1,280.3 billion
in the first quarter, UAH 1,334.9 billion in the
second quarter of 2023, and UAH 1,407.1 billion in
the third quarter of 2023.
The full-scale war has presented challenging
conditions for the proper functioning of the payment
infrastructure. However, the coordinated efforts of
the National Bank of Ukraine (NBU), the Deposit
Guarantee Fund, banks, and non-bank financial
institutions have played a crucial role in maintaining
the stability of the payment infrastructure. Despite
the adversity, the payment infrastructure continues
to operate effectively, ensuring timely payments,
settlements, and unimpeded access to payment
services, as well as facilitating access to funds and
savings, [32]. A noteworthy development in the
international landscape in 2022 was the enactment
of the Law of Ukraine "On Payment Services,"
designed to modernize and innovate the payment
market. On April 1, 2023, a new generation of the
NBU's Electronic Payment System (EPS) was
launched. The transition to this new generation is
deemed a significant technological prerequisite for
the further qualitative development of Ukraine's
payment infrastructure. Moreover, in light of
Ukraine's EU candidate status, the NBU is actively
engaged in efforts towards Ukraine's accession to
the Single Euro Payments Area (SEPA).
Technological advancements play a pivotal role
in ensuring the accessibility of financial services
within both the banking and non-banking segments
of the financial market. In April 2022, the Deposit
Guarantee Fund (DGF) implemented remote
payment options for bank depositors under its
management. The NBU is strategically planning
measures to advance infrastructure development,
with a specific emphasis on digital infrastructure.
The objective is to promote more active utilization
of electronic payment instruments by customers.
Transformations in the preferences and
requirements of financial services consumers play a
vital role in driving the development of innovative
technologies, [33], [34]. Notably, during the war,
there was a notable intensification in the operations
of virtual banks and digital channels facilitating
remote banking services. The deployment of mobile
solutions, applications, customer support websites,
chatbots, open banking initiatives, and
collaborations between traditional banks and
financial technology companies have collectively
exerted a substantial influence on the provision of
financial services in the context of the conflict, [35].
Remote customer service and digitalization, beyond
safeguarding the credibility of the banking sector,
have also been instrumental in sustaining its
operational profitability.
5 Conclusions
The implementation of systematic and consistent
reforms holds paramount significance in sustaining
financial resilience and macroeconomic stability
through the financial sector and banks during
periods of conflict. In efforts to alleviate the adverse
impacts of the war on the financial sector, the
National Bank of Ukraine (NBU) adopted measures
such as fixing the official hryvnia exchange rate to
bolster and regulate business and household
expectations. Initially, at the onset of the war, the
key policy rate was maintained at 10%, later being
raised to 25% to protect household incomes. The
primary instruments employed to uphold macro-
financial stability encompassed foreign exchange
interventions, the implementation of the NBU's
fixed exchange rate, and the issuance of domestic
government bonds. Key factors pivotal in ensuring
the stability of the banking system during the war
comprised the presence of adequate regulatory
capital and safety margin, a high level of liquidity in
the pre-war period, and sustained banking sector
profitability, particularly during the critical period in
2022, driven by elevated operating profitability.
Additionally, the expansion of cashless payments
attributed to the advancement of remote banking
services and the digitalization of banks played a
crucial role. Simultaneously, adverse consequences
of the war manifested as a reduction in lending and
an escalation in the share of non-performing loans,
compelling banks to augment provisions for active
operations.
We posit that the expansion of digitalization,
advancements in the electronic payment system, the
proliferation of cashless payments, and the fostering
of competition within the banking sector constitute
promising avenues for the recovery of the financial
sector in the context of the war.
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Contribution of Individual Authors to the
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The authors equally contributed to the present
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problem to the final findings and solution.
Sources of Funding for Research Presented in a
Scientific Article or Scientific Article Itself
No funding was received for conducting this study.
Conflict of Interest
The authors have no conflict of interest to declare.
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WSEAS TRANSACTIONS on BUSINESS and ECONOMICS
DOI: 10.37394/23207.2024.21.119
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Leonid Milman, Nataliia Maslak, Sergii Bratushka
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