Fitch: PrivatBank nationalisation tests Ukraine reform progress

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," the Fitch report said. "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." According to Fitch Ratings, the 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.