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31 May 2016
London, 31 May 2016 -- Moody's Investors Service has today changed the outlook for Ukraine's
banking system to stable from negative. The change in outlook reflects
our view that the economy will begin to emerge from a deep recession in
the coming 12-18 months , which will help contain further
asset quality deterioration. Improved funding conditions will support
core lending, and the local currency's recent stabilisation
will help slow the decline in banks' solvency.
Moody's report, entitled "Banks -- Ukraine:
Steadying Economy and Improving Funding Conditions Support Stable Outlook,"
is available on www.moodys.com. The rating agency's
report is an update to the market and does not constitute a rating action.
Moody's considers that rising local currency deposits and limited
refinancing needs will improve banks' funding over the next 12-18
months, supporting the stable outlook. Improving confidence
in the hyrvnia and falling inflation expectations led to an 12%
rise in local currency deposits between March 2015 and March 2016,
marking a turnaround from the past two years, when local currency
deposits declined sharply. The hyrvnia's stabilisation will
help slow the decline in banks' solvency.
"Local currency deposits accounted for 81% to total customer
accounts of Ukrainian banks, and 50% of total non-equity
funding last year, which is an important strength because it gives
banks access to a relatively price-stable source of funds,"
says Elena Redko, an Assistant Vice President and Analyst at Moody's.
Moody's stable outlook reflects the limited refinancing risks for
banks, as upcoming scheduled debt payments are now manageable.
Ukranian banks have accumulated liquidity cushions which, as of
year-end 2015, were large enough to cover 84% of cross-border
debt service payments coming due in 2016 and a series of distressed debt
exchanges that took place in 2015 shifted major wholesale debt repayments
As previously noted this month, economic activity in Ukraine is
beginning to level off following two years of steep declines, with
GDP shrinking just 1.4% in Q4 2015 from the previous quarter,
which is significantly less than the 17.2% drop in Q1 2015
(see "Government of Ukraine -- Caa3 Stable").
Moody's says that although economic output is not on a par with
previous years, increased stability will support a gradual recovery
in internal consumption, and will help reduce currency volatility,
easing debt servicing burdens for local corporates that have dollar-denominated
obligations. Out of Ukrainian banks' 10 largest industry exposures,
Moody's expects the asset quality outlook will be stable in six
industries, which together account for 55% of all corporate
loans. As of 1 May 2016, some 57% of banks'
aggregate loan book is denominated in foreign currency, a large
portion of which has been lent to companies that depend solely on local-currency
revenues. However, Moody's notes that However,
expected economic recovery will not likely be strong enough to reduce
the stock of problem loans, which amount to 45% of rated
banks' gross credit exposures in 2016. As a result,
credit losses will remain high, especially when including losses
that have been deferred in previous years to help slow the decline in
As such, banks will have to set aside increased provisions at a
time when they are also facing lower interest margins and are struggling
to reduce operating expenses amid high inflation. The rating agency
estimates that banks will need to create additional loan-loss provisions
equal to about 10% of gross loans. Without external capital
support, Moody's projects that credit losses will lead to
a decline in rated banks' ratio of tangible common equity to risk
weighted assets to 2.3% by the end of 2017, from the
current 8%. Current provisions cover only 50% of
existing problem loans.
While state-controlled lenders and foreign-owned banks will
likely benefit from parental capital support, capitalization at
domestic privately owned banks, which have especially large provisioning
deficits, will remain weaker. The government's capacity to
provide support to banks will remain very limited over the outlook horizon.
While easing fiscal pressure has allowed it to inject new capital into
state-owned banks, the government will have limited resources
to support private banks, in our view.
Subscribers can access the report at: https://www.moodys.com/research/--PBC_1024836
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Moody's: Ukraine's banking system outlook changed to stable from negative
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