State support plays a key role in providing ongoing liquidity support to the banking system, although Standard&Poor's (S&P) expresses doubt that it will last for a long period of time, S&P said in its survey of the Ukrainian banking sector issued on May 13.
“Under our base-case scenario, the NBU would continue to provide liquidity support to Ukrainian banks that comply with regulatory norms, but we believe its ability to provide such support is under stress,” S&P said.
“Potential government support to Ukrainian banks to honor their foreign debt is highly unlikely, in our view, given the government’s limited foreign exchange reserves and expected restructuring of foreign currency commercial debt (eurobonds),” reads the report.
S&P said that as of March 31, 2015, foreign debt of Ukrainian banks, including subordinated debt, totaled $3.7 billion.
“In our view, a sovereign default could have severe consequences for the already weak Ukrainian banking sector by further straining the system’s tight foreign currency liquidity, exacerbating deposit withdrawals, and triggering bank defaults,” reads the report.
“The NBU’s currency controls and restrictions on retail local and foreign currency deposit withdrawals, which have been in place in Ukraine for over a year, do not, in our view, currently warrant the placement of our Ukrainian bank ratings in selective default (‘SD’) because depositors retain full access to local currency deposits through non-cash withdrawals and can access foreign currency deposits by converting them into Ukrainian hryvnia at market rates, and losses have not been imposed on depositors,” S&P said.
“Moreover, we can’t exclude the possibility that the Ukrainian government might introduce tighter currency controls if foreign currency deposit outflows worsen and foreign currency reserves diminish further. This could have negative implications for Ukrainian bank ratings, including selective default placements,” S&P said.
