Moody’s outlook on the Ukrainian banking system reflects the combination of two key factors: its improving financial fundamentals and its significant structural weaknesses.
Although the banking sector has achieved substantial progress in the past few years and opportunities for further development are quite favourable, systemic risks for privately-owned Ukrainian banks – particularly deriving from rapid loan growth, low economic capitalisation, developing banking regulation and inadequate information disclosure – remain high.
“
“The retail segment has been demonstrating extraordinarily rapid growth. The degree of banking system penetration has been steadily rising over the past few years but remains lower than in the majority of CEE countries, leaving room for further expansion of retail and corporate lending.”
The profitability indicators of Ukrainian banks remain relatively high, but are under pressure from shrinking margins and a continuing rise in costs related to aggressive development of the retail business. While the banking system’s overall asset quality remains satisfactory, the quality of the loan portfolio will be likely to decline due to rapid loan book growth, the unseasoned nature of loans and untested risk management tools, according to the report.
Furthermore, the rapid pace of growth, which in most case exceeds the internal capital generation capacity needed to support it, and the inability of current shareholders to make new contributions will weigh on the banks’ capital adequacy. Foreign-owned banks are better positioned to attract capital injections from their financially stronger parents while other privately owned banks will continue to display rather low economic capitalisation, Moody’s noted.
The Ukrainian banks’ financial strength ratings (BFSRs) are currently in the E+ to D range, remaining low when compared to those of peers in other CEE countries. Most Ukrainian banks’ deposit ratings are constrained by
“Although the banking sector has achieved substantial progress in the past few years and opportunities for further development are quite favourable, systemic risks — particularly deriving from rapid loan growth, low economic capitalisation, developing banking regulation and inadequate information disclosure — remain high,” said Roman Piven, a Moody’s Assistant Vice-President-Analyst and co-author of the report.
