Ukrainian Banks Face Heightened Uncertainty and Challenges

Following a sharp recession in 2009, the Ukrainian economy recovered in 2010 and 2011. In particular in 2011, domestic demand-led growth was accompanied by widening external imbalances. The economy’s external vulnerabilities – related to the current account deficit (2011: 5.6% of GDP) and the elevated foreign debt stock (77% of GDP) – entail risks for the banking sector, as exchange rate pressures against the hryvnia’s U.S. dollar peg have been recurrent and foreign exchange reserves declined in the second half of 2011. While the share of foreign currency loans in total loans has been steadily declining (thanks to a ban on extending new foreign currency loans to unhedged borrowers imposed by the National Bank of Ukraine in the fall of 2008), it remains sizeable (end-2011: 41%). Many of these loans are unhedged. The stabilization of nonperforming loans at a high level could be interrupted by a further deterioration of the economic situation or by a new bout of hryvnia depreciation. Moreover, the population’s confidence in the Ukrainian currency is prone to volatile swings. As deposit inflows have picked up and loan growth has remained subdued, the loan-to-deposit ratio has receded, but is still relatively high (end-2011: 163%). With the funding structure shifting to domestic deposits, the banking sector’s external position has improved (net external liabilities have fallen to 8% of total liabilities). In 2011, loan growth became positive in real terms again. Recapitalization efforts contributed to upholding capital adequacy. The banking sector’s profitability improved, but nevertheless stayed in negative territory. JEL classification: G21, G28, P34