The nationalization and planned recapitalization of Ukraine's largest bank is a key step in efforts to reduce vulnerabilities stemming from the country's banking sector, Fitch Ratings has said.

"In spite of the progress in improving the health of the financial system, banking sector capitalization is low (albeit improving) and non-performing loans are high. PrivatBank will be an important indicator of the authorities' ability to keep rebuilding confidence in the financial system (as seen in recent deposit stabilization), tackle vested interests, and address potential foreign exchange volatility," Fitch said in a press release.

Nationalization will help Ukraine's efforts to comply with some problems that earlier hindered the implementation of structural reforms and to increase stability of public finances.

However, failure to stabilize performance, prevent further capital erosion, and ultimately return the bank to private ownership could undermine the recovery of the economy and risk further build-up of contingent liabilities for the sovereign, Fitch said.