Boston, MA -- (SBWIRE) -- 09/26/2012 -- Inconsistent Monetary Policy Creates Additional Risks For Banks BMI View: We retain our bearish outlook towards Ukraine's commercial banking sector due to high levels of FX exposure, problematic liquidity conditions and a low loan-growth environment. Furthermore, we believe that the government's inconsistent monetary policy will continue to drive hryvnia shortages, driving up borrowing costs and deposit interest rates. Ukraine's commercial banking sector continues to bear the brunt of the country's economic distress and frequently contradictory monetary policy, and we see little scope to alter our negative outlook towards the sector for the time being. While we expect some banks to make tentative returns to profitability in Q212- Q312, we underscore that our pessimistic analysis of Ukraine's macroeconomic situation, combined with liquidity problems, points to further stress ahead for the banking sector. We continue to highlight the long-standing threats we have identified within the sector, including: ???? High levels of foreign exchange (FX) exposure across most of the aggregate balance sheet (a result of high levels of dollarisation within the country), combined with our expectations for hryvnia devaluation bodes poorly for asset quality; Ukraine Commercial Banking Report Q2 2012 © Business Monitor International Ltd Page 34 ???? A low loan growth environment due to stringent lending practices and weak domestic economic activity; and ???? Problematic liquidity conditions as a result of capital outflows and local divestment of foreignowned banks and financial institutions. Government Policy Complicating Banking Risks All these risks have been discussed at length in previous analysis (see our online service, December 22 2011, 'Multiple Shock Threats To Banks Rising'). However, we also expect to see the sector struggle with an increasingly inconsistent monetary policy that is likely to drive challenging liquidity conditions over the coming quarters, ahead of the parliamentary elections in October. In particular, we believe that the government's desire to maintain a low inflation policy and a stable foreign exchange rate ahead of the elections is likely to trigger hryvnia shortages over the course of the year, driving up hryvnia borrowing and deposit interest rates. Monetary policy in Ukraine remains unorthodox by conventional standards, particularly with regards to apparent inconsistencies, for example widespread liberalisation of FX markets combined with sporadic and unpredictable implementation of capital controls. Our call for the National Bank of Ukraine (NBU) to implement monetary easing is playing out (see our online service, February 17, 'Banking Sector Stress To Drive Policy Rates'), with the NBU cutting the benchmark discount rate by 25 basis points (bps) on March 22. The NBU has simultaneously relaxed reserve requirements by March 22, allowing banks to However, we expect such moves will be largely insufficient to counter the broader prob

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