Ukraine's weak foreign exchange reserves and deteriorating relations with Russia may increase credit risks to the Ukrainian banking sector, local media said Thursday citing the data by the rating agency Moody's Investors Service.

"We expect that the bad loans in Ukrainian banks will reach 35 percent of the total loan amount at the end of 2013, putting downward pressure on the overall capital adequacy ratio of the banking system," the rating agency said in a latest report.

Moody's said Ukraine's deteriorating ties with Russia, its largest trading partner, over its planned agreement on free trade with the European Union may exert a negative effect on the capitalization, asset quality and liquidity of Ukrainian banks.

The nation's high requirement for the ratio of money that lenders are obliged to keep in reserve may also decrease banks liquidity, the report said.

Ukraine's foreign exchanges reserves stood at 19.7 billion US dollars at the end of August.

On Sept. 20, Moody's downgraded Ukrainian sovereign debt rating by one notch to Caa1 level, citing growing political and economic risks. Five days later, Moody's downgraded the ratings of 11 Ukrainian banks.