Negative outlook for Ukraine banking

The fundamental credit outlook for Ukrainian financial institutions is negative, reflecting the likelihood that the banks' financial fundamentals will continue to be negatively affected by the uncertainty in domestic and international financial markets, funding pressures, the steep depreciation of the Ukrainian hryvnia and a slowdown in economic growth, Moody's Investors Service said in its new Banking System Outlook on Ukraine.
Moody's considers the financial strength of the Ukrainian banking sector to be weak.
"Ukrainian banks are facing a number of challenges, including a reduction in private sector inflows coupled with the global liquidity and credit crisis, a loss of domestic depositor confidence, a significantly weakening currency, a worsening macroeconomic framework and political uncertainty. A combination of these factors will lead to a further deterioration of the financial fundamentals for Ukrainian banks," said Yaroslav Sovgyra, author of the Moody’s report.
The rating agency believes that funding pressures due to customer deposits outflow, lack of access to international capital markets and a likely reduction of parental funding for foreign-owned banks will prompt banks to adopt more defensive liquidity strategies and will in turn constrain their ability to grow. Competition for deposits will further increase, boosting funding costs and contributing to margin pressure in the coming year. More stringent rules on liquidity and capital requirements, which are part of regulatory changes implemented in response to the financial crisis in autumn 2008, are likely to lead to some consolidation in the Ukrainian banking sector.
The worsening economic environment in Ukraine will translate into asset quality deterioration as Moody's expects both private households and corporates to face repayment constraints. Profitability will be adversely affected by increasing loan loss provisioning charges in 2009, driven by the expected deterioration in asset quality.
"Most Ukrainian banks are currently undercapitalised and will need to maintain a larger capital cushion to absorb an increasing level of loan losses," added Sovgyra.
The two key risks for the Ukrainian banking sector are: firstly, the probability of further hryvnia depreciation, which will contribute to worsening asset quality with knock-on effects for the capital base of Ukrainian banks; and, secondly, the possibility of further deposit outflows, which might be caused by a further loss of depositors' trust in the banking system as they seek to convert savings into more stable foreign currencies.
The expected deterioration of financial fundamentals of Ukrainian banks over the course of 2009 translates into a negative outlook currently assigned to most of these banks. Moody's recently changed to ‘negative’ from ‘stable’ the outlook on the bank financial strength ratings (BFSRs) of 15 Ukrainian banks and on the long-term global local currency or foreign currency deposit or debt ratings of 19 Ukrainian banks.