Ukrainian banks saw their net profits drop sharply in early 2026 after the government reintroduced a 50% income tax rate for the sector, offsetting strong revenue growth and underlining the financial strain of wartime economic policy, reported Ukraine Business News.

Net profit in the banking sector fell by 36.4% year-on-year to UAH17.78bn ($450mn) in the first two months of 2026, marking one of the steepest declines in nearly a decade, according to official data. The drop came despite a surge in income, which rose 20.5% to a record UAH105.8bn.

The main driver behind the decline was a sharp increase in expenses, which climbed 47.1% to UAH88bn, also a historic high. Analysts say the widening gap between income and costs reflects mounting fiscal pressure as Ukraine seeks to fund its war effort and stabilise its economy.

Tax payments were the single largest factor. Banks paid UAH17.3bn in taxes during the period, up 161% compared with the same period last year. The increase follows a law adopted in late 2025 that doubled the sector’s income tax rate to 50% for 2026, from 25% previously, while also limiting the ability of lenders to offset past losses against current taxable income.

The government expects the measure to generate between UAH15bn and UAH23bn in additional budget revenues this year, providing a critical source of funding as Ukraine continues to rely heavily on domestic financial institutions.

At the same time, banks sharply increased provisions for potential loan losses. Reserve deductions jumped by 468% to UAH5.7bn, as lenders sought to build buffers against rising credit risks linked to the war and economic uncertainty. Although still below the peaks seen during the 2023 banking stress, the increase signals growing caution across the sector.

Despite the profit decline, the rise in revenues suggests that banking activity remains robust, supported by strong demand for lending and financial services. Lending growth has continued at a rapid pace, reflecting both corporate financing needs and a rebound in household borrowing.

However, industry participants warn that sustained pressure from taxation and rising costs could weigh on the sector’s ability to support economic recovery in the longer term. Higher tax burdens may constrain capital accumulation and limit banks’ capacity to expand lending, particularly if economic conditions deteriorate.

The government has indicated that the elevated tax rate may not be temporary. Danylo Hetmantsev, head of the parliamentary tax committee, has suggested that authorities could extend the 50% rate into 2027, raising concerns among bankers about policy predictability.