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March 14 (Reuters) - (The following statement was released by the rating agency)
Ukrainian bank capital ratios have come under more pressure than liquidity positions as a result of the country’s crisis, Fitch Ratings says. Further asset quality deterioration represents a significant risk for credit profiles, while deposit outflows have been largely manageable so far.
According to data published by the National Bank of Ukraine, the banking sector’s aggregate regulatory capital ratio decreased to 15.8% at 1 March from 18.4% on 1 February this year. We calculate that the reduction was due in equal proportion to a fall in the absolute amount of capital (by 8%) and an increase in risk-weighted assets (also by 8%).
We attribute the asset increase to the higher hryvnia value of foreign currency loans as a result of the 25% depreciation during February. The reduction in capital was probably due to a combination of greater loan impairment reserves, an increase in uncollected accrued interest (which is deducted from regulatory capital) and losses on open currency positions.
Fitch expects bank asset quality to deteriorate further as a result of economic dislocations, recession, depreciation of the hryvnia and - in some cases - potential redistribution of economic influence and assets. This in turn will hit capital ratios, although the severity and timing of the impact will depend on the evolution of the crisis and the degree of regulatory forbearance extended by the National Bank. Capital ratios at Ukrainian banks already benefit from relatively low reserve coverage of problem loan exposures.
Overall deposit outflows have been manageable, in part due to withdrawal restrictions. The National Bank imposed a limit for daily cash withdrawals from retail and corporate foreign-currency accounts at UAH15,000 (USD1,515) equivalent. In addition, many banks imposed significantly tighter caps for daily withdrawals from ATMs.
Based on available data from rated Ukrainian banks, we calculate that these institutions suffered average deposit outflows (adjusted for exchange rate effects) of 9% between 1 January and early March, with most of this outflow coming after 1 February. Withdrawals for the banking system as a whole may have been higher than at rated banks, which are mainly foreign or state-owned, and so probably somewhat less prone to deposit runs.
Withdrawals were somewhat higher from corporate than from retail accounts as businesses have tended to react rather more quickly than households to changing financial conditions. Among retail clients, outflows were higher from hryvnia accounts than from foreign-currency ones, as people converted local currency into US dollars and were restricted in access to hard currency withdrawals Liquidity positions have held up reasonably well, with highly liquid assets - comprising cash and equivalents, net short-term interbank positions and unencumbered securities eligible for repo with the central bank - at most rated banks still equal to about 20%-25% of customer deposits as of early March.
National Bank disclosures also show little change in sector liquidity ratios at 1 March compared to 1 February, with the current liquidity ratio (essentially, reported assets to one month/liabilities to one month) even rising to 85% from 82%. The regulator’s facility to fully replace deposit outflows with new liquidity provides a backstop in case of accelerated outflows, although we understand this has not been heavily used so far.
We rate all Ukrainian banks ‘CCC’, reflecting very high country risks in terms of near-term political uncertainty, weak economic prospects and the pressured sovereign credit profile.