Standard & Poor’s Ratings Services said today that the Ukrainian political crisis has had little impact so far on the country’s banking system, but could hurt near-term growth if the turmoil endures and undermines business activity.
“Political speculation has not targeted domestic banks and the liquidity situation is adequate, in contrast with the previous political crisis at the end of 2004 which resulted in a severe liquidity shock to Ukrainian banks,” said Standard & Poor’s credit analyst Ekaterina Trofimova.
“If the political turmoil deepens and hurts the corporate sector, however, banks could be compelled to substantially increase their liquidity cushion and decrease lending,” said Ms. Trofimova. “A protracted political crisis could also hinder foreign financing, an increasingly important funding source.”
Although the early parliament elections set for Sept. 30, 2007, is a positive step, the confrontation among political forces continues in Ukraine (foreign currency BB-/Negative/B, local currency BB/Negative/B).
Ukrainian banks experienced a surge in demand for cash foreign currency and spike in retail exchange rates in early April, but it was short lived. The interbank market has functioned normally, with no abnormal interest rate or volume volatility–aside from the usual increases in interbank interest rate and borrowings at month end. These are related to cash accumulation for monthly tax payments, which was expectedly larger than normal before a long May weekend.
During the first half of June 2007, banking system liquidity (cash and correspondent accounts) stood at a record high $4 billion, contributing to a decline in demand for interbank loans, with overnight and 30-day rates declining to 0.5% and 3%, respectively. Increased foreign bank ownership also provides additional comfort with regard to the stability of system liquidity under a stress scenario.
Stock market volatility, arising from a drop in local securities prices and volumes since April 2007, has had a limited effect on Ukrainian banks, which maintain small positions.
“The Ukrainian banking system continued to grow even as the political situation developed into a full-blown crisis in April 2007, demonstrating sustained confidence,” said Ms. Trofimova. Indeed, growth for April and May fell only slightly short of the 5% monthly average of the previous few months. Total system customer deposits increased 2.8% in April and 2.9% in May, while customer loans grew 3.7% in April and 4.1% in May. Although this illustrates a gradual recovery, we believe that growth will remain limited at least until the elections this autumn. Retail deposit growth is under the most pressure, expanding by only an average 1.9% in April and May, compared with an average 3.2% in the first three months of 2007.
“For full-year 2007, we still expect the system’s growth to exceed 50% in loans and 20% in deposits, versus 71% and 39% in 2006,” Ms. Trofimova added.
The ratings on two Ukrainian banks, Ukrsotsbank OJSC (B/Positive/B) and JSC KREDOBANK (B/Stable/B) remain unchanged amid the political crisis. We will nevertheless closely monitor the political situation in Ukraine for any threats to liquidity and asset quality at the two banks.
