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KIEV, June 21 (Reuters) - Ukraine's largest lender PrivatBank, which was nationalised last December, needs a further capital injection of nearly 38.5 billion hryvnias ($1.5 billion) to stay afloat, according to two sources familiar with the bank's financial position.
PrivatBank was taken under state control with the backing of Ukraine's top creditor, the International Monetary Fund, after risky lending practices left it with a capital shortfall of more than $5.5 billion.
The nationalisation has so far cost taxpayers $4.3 billion, but an Ernst and Young audit of the lender's 2016 annual report shows that, as forecast by the central bank, additional funds are needed to meet capital adequacy requirements, the sources said.
This recapitalisation will be carried out in two steps: 22.5 billion hyrvnias will be injected soon after the audit is officially published and 16 billion hryvnias at a later stage, the source said.
This will be a further burden on Ukraine's already strained public finances and will mean more has been spent on recapitalising PrivatBank since December than the annual defence budget amid a long-running conflict with Russia-backed rebels.
The government will have to officially approve any additional capitalisation.
The finance ministry, which is responsible for managing PrivatBank, could not immediately be reached for comment.
Earlier this year the central bank said almost all PrivatBank's corporate loans had gone to insider companies and former shareholders, who include powerful tycoon Ihor Kolomoisky, Ukraine's fifth richest man.
Kolomoisky has rejected the central bank's assessment of the health of PrivatBank's loan portfolio and accused the regulator of unfairly targeting the bank.
Reducing PrivatBank's lending to shareholders was one of the tasks mandated by the IMF under a $17.5 billion aid-for-reforms bailout programme.
PrivatBank failed to meet the deadline and its nationalisation became the culmination of a broader banking sector cleanup, which closed dozens of lenders that were seen as little more than personal piggy banks for their owners.
Kolomoisky's control of strategic industries, including energy and media holdings, has put him at the centre of ongoing power battles among the political elite since street protests ousted Moscow-backed Viktor Yanukovich and the pro-Russian rebellion erupted in the east. ($1 = 26.0150 hryvnias) (Writing by Alessandra Prentice, editing by Pritha Sarkar)