Ukrain: Banks remain the weakest link
Ukrainian financial institutions have not fully recovered after the previous wave of the global credit crunch.
This year the Ukrainian banking system started showing feeble signs of recovery. The reported earnings of Ukrainian banks in January – May was US $236 mn (over the first five months in 2011 they posted a loss of US $125 mn), according to the NBU. It would seem like the peak of building up of bad loans is also a thing in the past, as the total amount of overdue debt for the five months in 2012 was reduced by 1.2% to UAH 78.315 bn. The share of troubled loans dwindled 0.06% down to 9.55%. Thanks to inflows of stock capital, financial institutions formed reserves for troubled loans and started working steadily.
However, international analysts say that the banking sector remains in the red zone. Standard & Poor’s raised country and branch risks for the Ukrainian banking system, downgrading Ukraine from group 10 to group 9, where it joined Azerbaijan, Venezuela, Jamaica, Paraguay and Cambodia. «Ukraine runs a very high risk of infringement of its economic stability, extremely high risk of emersion of economic imbalances and exceptionally high credit risk in economy,» S&P said. Moody’s Investors Service also refused to improve negative forecast for our banking system. Among the reasons is the complicated situation in business sector, inert restoration of economy and absence of prospects for loan growth.
Devaluation of hryvnya remains one of the worse risks for financial institutions. Pessimists say that even moderate sinking of the exchange rate may cause repetition of the 2008 scenario, provoking collapse of financial system. «Owing to necessity to provide regulatory capital, in case of devaluation of hryvnya, liquidity of the banking system will drop US $8 bn. In case hryvnya devaluates by at least 1% banks will suffer US $80 mn commercial losses. Devaluation of hryvnya by 60%, like it was in 2008, will instantly devalue ј of the total regulatory capital in the banking system,» say analysts at the Erste Bank.
In general, analysts see an insufficient safety margin of Ukrainian banks. «We doubt the government is able to assist and support financial institutions in difficult financial situations,» notes S&P. The second wave of crisis may trigger new bankruptcies. In short-term prospect it will result in a large-scale loss of people’s means in case the money in the deposit insurance fund is not sufficient for all payments. Such scenario will keep undermining people’s trust in the banking system, which in its turn will not let the banks renew provision of loan services.