Moody's expects Ukraine's economy to grow by about 3.5% annually

Moody's expects Ukraine's economy to grow by about 3.5% annually this year and next after expanding by 2.5% last year, as the ongoing recovery in investments continues, bolstering the operating environment for banks.

Stronger economic growth should then lead to a prolonged period of credit growth, Moody's said in its report, "Banking System Outlook – Ukraine – Improving asset quality and profitability drive positive outlook" on July 9.

The research is an update to the markets and does not constitute a rating action.

"Ukraine's economy will continue to recover gradually, stimulating credit demand and improving borrowers' capacity to repay their loans," said Lev Dorf, an AVP and analyst at Moody's Investors Service. "Now that banks have recognized most of their non-performing loans, provisioning charges should also decline, bolstering profits."

Moody's Investors Service also raised its outlook for Ukraine's banking system to positive from stable, reflecting the rating agency's expectation that the creditworthiness of the country's banks will improve over the next 12 to 18 months, driven by improving asset quality and a return to profitability.

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Moody's forecasts that the banking system will return to overall profitability in 2018 after four years of losses. Although almost three quarters of Ukrainian banks were profitable last year, the sector as a whole made a net loss last year. This was driven by the high provisioning charges at PrivatBank, which accounted for 90% of the bank system's losses at the end of 2017.

Moody's projects that loan growth will strengthen to a nominal 10% over the next two years, from around 7% in 2017.

According to Moody's, asset quality will improve and problem loans will fall from very high levels over the next two years, mainly driven by a combination of loan restructuring and write-offs. At the same time, the quality of new loans will be supported by the improving economic conditions.