MOSCOW, Dec. 8 - The negative outlook for Ukraine's banking system principally reflects the very high level of non-performing loans (NPLs) that are unlikely to decline substantially in the near term, and the banks' subdued profitability, Moody's Investors Service said in its new Banking System Outlook on Ukraine.

The outlook expresses Moody's expectations for the fundamental credit conditions in this banking system over the next 12-18 months. "Asset quality has continued to deteriorate in 2010 and is Moody's principal concern for Ukrainian banks. We expect problem loans (overdue loans plus restructured loans) to be a very high 40% of total loans at the end of 2010. This is then likely to gradually decrease in 2011," said Katrin Robeck, a Moody's Analyst and co-author of the report.