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Fitch: Ukraine's banking sector could swing to profit in 2018

The Ukrainian banking sector could become marginally profitable in 2018 thanks to falling funding costs and recovering GDP growth, although the profitability of local banks will remain weaker compared with other countries in Central and Eastern Europe and the Commonwealth of Independent States grouping of former Soviet republics, Fitch Ratings said Dec. 6.

With the exclusion of insolvent lenders, the Ukrainian banking sector posted a positive result for the first nine months of 2017, with banks seeing a small growth in lending after a period of deleveraging. The overall return on average equity of the entire sector was negative 2.7% in the first nine months, compared to negative 132% in 2016.

Loan growth is expected to be in single digits in 2018, constrained by continuously high credit costs and large provisioning needs, as well as the moderate capital buffers of local lenders, the news agency noted.

The value of unreserved nonperforming loans in the sector stood at 113 billion Ukrainian hryvnia at the end of the third quarter, equivalent to 2.8x the sector's annualized pre-impairment profit for the first nine months of 2017, which means that lenders may need further capital support if additional credit losses emerge.

Fitch also noted that Ukraine's largest lender, PAO KB Privatbank, which was nationalized at the end of 2016, is receiving additional capital support to fully reserve its problem assets, but the associated additional impairment provisions in the last quarter are likely to keep the Ukrainian banking sector in the red for the full year.

The rating agency also said that despite the cleanup and recapitalization of Ukrainian banks, there is still a significant number of small and poorly capitalized local players on the market, which makes further consolidation likely.

As of Dec. 6, US$1 was equivalent to 27.11 Ukrainian hryvnia.