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Despite being hit by a severe liquidity shock prompted by the political crisis in November and December 2004, the Ukrainian banking market has recovered quickly, Standard & Poor’s Rating Services says in a commentary entitled Stability of Ukrainian Banking System Restored, But Risks Linger.

Political instability precipitated an acute outflow of deposits that put many Ukrainian banks on the verge of default.

“The National Bank of Ukraine (NBU) stepped in, undertaking timely and proactive measures to help constrain runs on banks and supported banking system liquidity, and in doing so prevented massive bank failures,” says Standard & Poor’s credit analyst Irina Penkina. Nevertheless, it is likely that many banks in Ukraine were in fact in a technical default position at the depths of this difficult period in the past couple of months of 2004.

When market liquidity was plunging in late November through to early December, Standard & Poor’s put the ratings on PrivatBank (B-/Stable/C), currently the only rated Ukrainian bank, on CreditWatch with negative implications. As the bank was able to fulfill its payments due on time during this turbulent period, its ratings were not lowered. The stabilisation of the general market sentiment, and improvement in liquidity of the whole banking system as well as that of PrivatBank led to the removal of the ratings on PrivatBank from CreditWatch, where they had been placed in late January 2005. The outlook for PrivatBank’s long-term credit rating was revised back to stable.

The resolution at year-end of the prolonged presidential election campaign boosted consumer confidence, and a net inflow of customer deposits resumed in January 2005.

Temporary restrictions on bank operations and foreign currency transactions, which had been imposed by the NBU in the turbulent environment, were removed. The restoration of banking system liquidity allowed the early redemption of the NBU’s stabilisation loans, which had been granted to a number of banks at the height of the crisis in December 2004.

“Backed by strong economic growth forecasts in the medium term, Ukrainian banks are now set for another year of fast expansion and sharpened competition,” adds Standard & Poor’s credit analyst Alwin Greder. Good macroeconomic prospects are the major factor driving the potential improvement in banks’ creditworthiness.

“Nevertheless, a number of important factors driving the future financial stability of individual banks and of the industry as a whole still remain uncertain,” says Penkina. “These include, primarily, the effect of the re-privatisation process and economic reforms on Ukrainian corporates and financial-industrial groups, and secondarily, the evolution of the banks’ regulatory regime.”