Ukraine’s banking sector: still very weak, but some signs of improvement

Ukraine has been undergoing a reform process, and the banking sector is certainly among the areas that have seen remarkable progress. The authorities started to tackle related-party lending (a long-standing structural impediment), resolved many undercapitalized banks and managed to restore a degree of confidence in the sector, as witnessed by the stabilization of deposits. As part of the banking sector clean-up, the country’s largest credit institution was nationalized. This step contributed to considerable changes in the ownership structure, with the share of the state in total assets rising to about 50%. After the severe recession of 2014– 2015, macroeconomic stabilization achieved with international support in 2016, if sustained, could pave the way for a resumption of lending. Yet, nonperforming loans (NPLs) have skyrocketed, credit risk is still very high, related-party lending is still a problem, resistance to reform remains stubborn, and economic recovery fragile, subject to political uncertainty. Further sound economic policies, progress with structural reforms (in particular with regard to the rule of law and corruption) and efforts to reduce NPLs appear essential to make a sustained banking recovery possible.