Moody's improved the outlook for Ukraine's banking system

Moody's Investors Service changed the outlook for Ukraine's banking system from “negative” to “stable,” according to the agency’s press release. The change in outlook reflects their view that the country’s economy has started to emerge from a deep recession and will continue to do so in the next 12 to 18 months, which will help contain further asset quality deterioration.

In turn, improved funding conditions will support core lending and the local currency's recent stabilization will help slow the decline in bank solvency, according to Moody's. The stable outlook reflects limited refinancing risks for banks as upcoming scheduled debt payments are now manageable.

Moody's experts say that although economic output is not on par with previous years, increased stability will support a gradual recovery in internal consumption and will help reduce currency volatility, thereby easing debt servicing burdens for local corporations that have dollar-denominated obligations.

Out of Ukrainian banks' ten 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 May 1, 2016, about 57% of the banks' aggregate loan book has been denominated in foreign currency, a large portion of which has been lent to companies that depend solely on local-currency revenues.

However, Moody's experts note that 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.

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.

As previously reported, Ukraine may receive an IMF credit tranche in the middle of 2016.

  Ukraine, Economy of Ukraine, IMF