Liquidity and asset quality issues have already resulted in negative rating actions on two banks - Rodovid and Nadra - in recent days, and further negative actions are possible as Fitch reviews the impact of current developments on rated institutions. Sustained or worsened financial instability could also further damage the credit fundamentals of the Ukrainian sovereign (rated Long-term IDR 'BB-' (BB minus) with a Negative Outlook).
In common with many economies globally, both developed and emerging, Ukraine currently faces a combination of tight interbank market liquidity (with UAH overnight rates hitting 15%-20%), sharply reduced asset prices, a credit squeeze and slowing economic growth. However, in Ukraine the risks for the banking sector are compounded by the rapid loan growth of recent years; political uncertainty and the absence of a credible government in the run-up to the December parliamentary elections; volatility in the UAH/USD exchange rate (which climbed above 5.6 in intraday trading on Wednesday of last week before falling back to the 5.2-5.3 range by the end of the week on the back of NBU intervention); and the high proportion of foreign currency lending (51% as of August 2008). Retail deposit outflows have reportedly increased in the last two weeks following the failure of the country's sixth-largest bank, Prominvest, and as a result of exchange rate volatility.
A credit strength for the banking sector compared to CIS peers is the relatively high foreign ownership (36%); however, Fitch notes that combined foreign and state ownership is higher in Russia (approximately 64%) than in Ukraine (44%), leaving a larger proportion of institutions in the latter market where shareholder support is less certain. In Ukraine, in Fitch's view, near-term risks are highest among medium-sized and small (mostly domestically owned) banks, many of which have grown faster than the sector in recent years, often with weak risk management infrastructure and a high reliance on short-term funding.
Fitch views as positive for Ukrainian banks the additional liquidity support measures put in place by the NBU, including those announced today. In particular, banks can receive secured one-year loans from the NBU in an amount up to 60% of regulatory capital, and were instructed not to repay retail term deposits or other funding before maturity. Reserve requirements on short-term foreign borrowings were reduced to 0% from 20%. Previously, the NBU had also stepped in to manage the failure of Prominvest. However, Fitch notes that these measures may not be sufficient to protect the liquidity of individual institutions which have been highly dependent on the domestic interbank market, in particular should customer funding continue to contract. There is also a high degree of uncertainty as to whether the authorities would recapitalise banks in case of significant credit losses, in particular in respect to smaller institutions.
