Fitch: Ukrainian banks to improve

Fitch Ratings said in a report that the credit profiles of most Ukrainian banks are being undermined by rapid loan growth, tight liquidity and capitalization and modest performance.

The agency also said the sector funding is gradually diversifying and some larger banks are starting to show scale-driven improvements in profitability. Increasing foreign ownership in the sector should help to improve risk management, diversify funding and increase capital flexibility while providing support if needed.

The Ukrainian banking sector is booming because of the economy's expansion, credit demand and the low starting base, with the potential for continued growth, Fitch said.

"Asset quality has been good to date, supported by the generally favorable credit environment," Dmitri Angarov, associate director in Fitch's financial institutions group, said in a written statement. "However, rapid loan growth, in particular in the relatively new retail segment, considerable foreign currency lending and large exposures to the construction/real estate sector are all important sources of credit risk."

Potentially unstable customer funding makes the sector's liquidity vulnerable. The banking sector also is fragmented and fiercely competitive, Fitch said.

Performance has been constrained by banks' high cost bases, loan impairment charges, falling interest margins and tight capitalization.

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