The IHS Banking Risk Service has downgraded the risk rating on Ukraine’s banking sector to 75 from 65 on the back of increasing multiple risks amid a weakening economic environment, political turmoil, and fear of civil war or war with Russia.
“The downgrade to our risk rating of Ukraine’s banking sector is driven by increasing solvency risk for the industry as a whole, with the capital buffer expected to fall sharply in the coming quarters as a result of credit risk materialisation, sharp currency devaluation, and losses related to disruptions to banks’ operations, especially in the regions that are the most exposed to political turmoil,” Ruta Cereskeviciute, Senior Economist, IHS Banking Risk Service, said.
“The sector’s very high risk of capital depletion, in combination with lingering liquidity concerns, mounting credit risk pressure, and numerous qualitative risk indicators, puts Ukraine’s banking-sector risk rating in the bottom of the emerging-market banking sectors under our coverage.”
“Given expected significant weakening of the economic environment, continuation of political turmoil, and fear of civil war or war with Russia, the likelihood of further adverse pressures building up in the banking sector is elevated, which would lead to a further increase in the final risk rating score in the next 12 months, as reflected by the Negative outlook on the rating.”
The Banking Risk Service has downgraded Ukraine’s risk rating to 75, Extreme Risk category, equivalent to CC+ to D on the generic ratings scale.
Ukraine’s banking sector, which already had very fragile financial fundamentals, came under new, severe stress in early 2014, driven to a large extent by political and economic hurdles. Although the IMF financial facility mitigates the risk of a full-blown banking crisis in the very near term, we assess extremely likely that the severity of distress in the country’s banking sector over the next three years will be systemic in nature. In fact, some of the conditions needed for the banking crisis to be considered systemic are already partly met, including significant bank runs, losses in the banking system, and policy interventions such as deposit withdrawal limits.
According to the NBU’s estimates, during the first four months of this year, the deposit balance shrank by 41 per cent in Crimea and by about 20 per cent in the Eastern provinces of Donetsk and Luhansk. By comparison, other regions saw deposit flight of 10−13 per cent in the same period of time, although the risk of renewed fund outflows remains present. In the environment of expected protracted political instability, along with violent protest in some regions, there is a heightened likelihood for disruptions and delays in much-needed banking-sector reforms. Policy lapses with regards to timely intervention in the banking sector’s activities, which could trigger a full-blown crisis, also cannot be ruled out until at least some level of stability is assured on the political and economic fronts.