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Fitch: PrivatBank Nationalisation Tests Ukraine Reform Progress
December 21, 2016 / 12:33 PM / a year ago

Fitch: PrivatBank Nationalisation Tests Ukraine Reform Progress

(The following statement was released by the rating agency) LONDON/MOSCOW, December 21 (Fitch) The nationalisation and planned recapitalisation of Ukraine's largest bank is a key step in efforts to reduce vulnerabilities stemming from the country's banking sector, Fitch Ratings says. It also highlights some of the challenges that the authorities face in enacting structural reforms and improving the sustainability of public finances. The National Bank of Ukraine (NBU) said on Monday that the government would nationalise PrivatBank to "prevent it from sinking into a deeper crisis" and protect depositors. Given PrivatBank's systemic importance, the NBU said it "could not wait any longer" for a viable private recapitalisation plan. It estimates PrivatBank's current total capital needs at UAH148bn (USD5.6bn). It is not clear if bondholders will be bailed in. In spite of the progress in improving the health of the financial system, banking sector capitalisation is low (albeit improving) and non-performing loans are high. PrivatBank will be an important indicator of the authorities' ability to keep rebuilding confidence in the financial system (as seen in recent deposit stabilisation), tackle vested interests, and address potential foreign exchange volatility. We think the recent rise in international reserves (up by around USD2bn to USD15.4bn this year), a more flexible exchange rate, and remaining currency controls support their capacity to do so. The NBU is providing UAH15bn of local-currency liquidity, but PrivatBank's foreign-currency obligations (USD4.8bn at end-3Q16) highlight the need to stabilise its foreign-currency funding profile. Nationalisation will help Ukraine's efforts to comply with its IMF programme, which mandates measures to improve the health of the banking system. The IMF said that the nationalisation was "an important step... to safeguard financial stability". The reactivation of the programme this year has unlocked external sources of financing, supported confidence and provided reform momentum. Easing external financing pressure was an important driver of our upgrade of Ukraine's sovereign rating to 'B-' from 'CCC' in November. However, failure to stabilise performance, prevent further capital erosion, and ultimately return the bank to private ownership could undermine the recovery of the economy and risk further build-up of contingent liabilities for the sovereign. We estimate that PrivatBank's nationalisation means that around 52% of Ukraine's banking sector is now state-owned, based on end-3Q16 data. The total cost to the government will depend on the outcome of a fresh audit and what form the recapitalisation takes. The final fiscal impact is therefore unclear. The NBU's estimate of PrivatBank's capital needs is equivalent to 5.7% of forecast 2017 GDP. An initial UAH43bn (or 1.6% of GDP) in domestic bonds will be transferred to PrivatBank to be swapped for equity, thus increasing Ukraine's public debt which Fitch estimated at 74% of GDP (89% including guarantees) for 2016 prior to the bank's nationalisation. The Ukraine parliament on Wednesday approved the 2017 budget with a 3% deficit target, in line with the IMF programme's target. PrivatBank's nationalisation highlights the importance of fiscal consolidation to expand fiscal headroom to absorb shocks and stabilise government debt, and the challenge of anchoring the fiscal gains of the last two years. The weak banking sector has constrained Ukraine's economic recovery. Credit to the private sector has stabilised, but recovery in 2017 is likely to be muted. Domestic politics, reform fatigue and intensification of the conflict in eastern Ukraine remain risks for the Ukrainian economy and performance under the IMF programme. Contact: Erich Arispe Director, Sovereigns +44 20 3530 1753 Fitch Ratings Limited 30 North Colonnade London E14 5GN Charles Seville Senior Director, Sovereigns +1 212 908 0277 Olga Ignatieva Senior Director, Banks +7 495 956 6906 Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Related Research Ukraine here Ukrainian Banks Dashboard 3Q16 here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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