14 8 OTP Brokbusinessbank bank 17 Ukrgasbank 14 Brokbusinessbank 9 Vabank Nadra 15 FUIB 18 10 16 Alfa bank 15Forum FUIB 19 TAS-kommertsbank 11 Finance and Credit 17 Ukrgasbank 20 16Pivdennyi Alfa bank 12 18 Kreditprombank Vabank 17Ukrprombank Ukrgasbank 13 19 TAS-kommertsbank 14 20 Pivdennyi 18Brokbusinessbank Vabank 15 FUIB 19 TAS-kommertsbank 16 Alfa bank 20Ukrgasbank Pivdennyi 17 18 Vabank 19 TAS-kommertsbank 20 Pivdennyi
2.21 1.29 0.88 2.04 1.20 0.87 1.46 1.24 0.82 1.45 0.88 0.80 1.41 0.87 1.30 0.82 1.29 0.80 1.20 1.24 0.88 0.87 0.82 0.80
3.3% 1.9%
1.3% 1.29 3.0% 1.8% 1.3% 2.2% 1.8% 1.20 1.2% 2.2% 1.3% 1.2% 1.24 2.1% 1.3% 0.88 1.9% 1.2% 1.9% 1.2% 0.87 1.8% 0.82 1.8% 0.80 1.3% 1.3% 1.2% 1.2%
24 23 13 1.9% 9 10 5 8 25 1.8% 3 16 13 121.8% 11 5 17 31.3% 23 12 1.3% 10 1.2% 25 131.2% 5 3 12
N NN YN N YN N N NN NN NN NN N N N N N N
not notB2 rated rated 23 B-/B2 BB-/B2 B-/B2 B1 10 B2 B2 B2 B25 B2 B-/B2 not13 rated B2 not 5 rated BB3 B1 12 B2 B-/B2 B2 B-
N N N N N N N
not rated BB1 B2 B-/B2 B2 B-
Ukraine’s Banking Sector
The Ukrainian banking sector has shown robust growth over the past three years, with a large number of M&A deals reflecting a high level of interest coming principally from foreign investors. Furthermore, a number of segments in the sector still have considerable potential for growth going forward. However, the recent rapid expansion of loan portfolios has resulted in an increase in credit risks. The significant share of loans denominated in foreign currencies has meant that the level of the currency risk remains high, as the majority of private borrowers receive revenues in hryvna. Intense competition within the Ukrainian banking sector has recently placed some pressure on profit margins.
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31 January 2008 For further research contact: London Chris Green Phone +44 (0) 20 7815 9228 Moscow Svetlana Aslanova Dmitri Fedotkin Phone: +7 495 543 9910
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Ukrainian Banking Sector – VTB Bank Europe Research
Table of contents Key Points
3
Credit Ratings
4
Macroeconomic review
7
Sector overview
11
Sector’s Structure
11
Business Development
12
Currency Risk
12
Non-Cash Payments
13
Control System
13
Foreign Investments in the Sector
14
The Operations of Ukrainian Banks in International Markets
14
Corporate Business
15
Retail Business
15
Mortgage Lending and MBS
16
Credit Bureaux
17
Development Organisations
of
Non-banking
Financial
17
Complications with Liquidity
18
Further Developments with the Ukrainian System
18
Financial Performance
18
Banks’ Information
22
Rating by Assets
22
Privatbank
23
Raiffesen Bank Aval
28
UkrSibbank
33
Ukrsotsbank
38
UkrEximbank
40
Proinvestbank
42
Nadra Bank
44
Oschadbank
46
OTP Bank
48
First Ukrainian International Bank
50
Other Commercial Banks in the Top-20
52
2
KEY POINTS Ukrainian Banking Sector – VTB Bank Europe Research
KEY POINTS
The Ukrainian banking sector has exhibited robust growth over the last three years.
Over 2006 and 2007, retail and small or medium-sized enterprise (SME) banking segments showed the most rapid expansion.
Accelerating growth of the total loan portfolio has led to a rise in the credit risk of the sector.
The continuing low penetration rate in various segments of the banking sector, the strong performance of Ukrainian economy and increasing disposable incomes are all likely to give impetus for further development of the sector and the attraction of additional foreign investment.
The increased involvement of foreign capital in the banking sector may bring higher operating standards to the sector.
In 2006-07, a number of large M&A deals have taken place and further acquisitions are likely to occur over coming years. However, no major purchases are expected unless the State decides to undertake the privatisations of UkrEximbank and Oschadbank.
The increasing share of loans denominated in foreign currencies to borrowers receiving revenues in hryvna has raised the level of currency risk.
Credit risk management is an area in need of further improvement and support from existing credit bureaux.
The risk management strategies of the Ukrainian banks remain largely untested by a major financial crisis.
The recent stability of the UAH/US$ exchange rate has been a supportive factor for both borrower and lenders, with the potential underestimation of the risks of future currency volatility.
The projected growth of the Ukrainian economy supports further development of the banking sector. However, the rate of growth is expected to ease over coming years.
3
Major
risks Ukrainian Banking Sector – VTB Bank Europe Research
CREDIT RATINGS Ukraine has been granted sovereign ratings by all three major international credit agencies. Unlike its major peers among CIS countries, Russia and Kazakhstan, the current level of Ukraine’s rating is below the investment level. Table 1
S&P Sovereign Rating History
Date
BB-/ Negative*
May 2005
BB-/ Stable
July 2004
B+/ Stable
October 2003
B/ Positive
May 2003
B/ Stable
November 2002
B/ Negative
December 2001
B/ Stable
-
-
Fitch Sovereign Rating History
Date
Rating
October 2006
BB-/ Positive
January 2005
BB-/ Stable
June 2003
B+/ Positive
March 2002
B
June 2001
B-
Nevertheless, the economy’s expansion does not appear to have been significantly affected by ongoing political volatility. However, the failure of the government and Verkhovna Rada (local one-chamber parliament) to ensure the implementation of a number of important structural changes, together with an inability to deliver a stable strategy of development, is likely to have impacted Ukraine’s future growth prospects. Additionally, the prospect of politicallydriven increases in social spending may lead to an upturn in inflationary pressures.
Moody’s Sovereign Rating History
Date
Rating
May 2006
Ba3/Positive
February 2005
B1/ Stable
December 2004
B1/ Developing
September 2004
B1/ Positive
November 2003
B1/ Stable
January 2002
B2/ Stable
November 2001
Caa1/ Positive
January 2000
Caa1/ Negative
September 1998
B3/ Negative
July 1998
B2/ Negative
February 1998
B2/ Stable
The dependence on imported gas supplies, The reliance of national exports on global metal prices, The growth in the merchandise trade and current account deficits, The potential negative effect of high social spending on the state budget and inflation, Increasing credit risk in the banking system caused by rapid growth of banks’ loan portfolio, and Political turbulence that also may delay the efficient functioning of government and the passage of legislation.
The turbulent political situation over the last three years, the high level of inflation, the relative dependence of exports on global metal prices, together with the significant share of mineral products in the country’s imports have impacted negatively on the credit rating.
*confirmed in August 2007
Table 3
-
Rating
April 2007
Table 2
The major risks to Ukraine’s sovereign credit rating are assessed to include:
With regards to Ukraine’s debt levels, the size of the sovereign debt is relatively small and its growth continues to remain slower than the rate of increase in corporate liabilities. However, higher borrowing to fund state programmes and rise in the government’s budget deficit can be expected going forward. In 2007, the government attracted a total of US$1.2bn in two Eurobond issues on international markets. In particular, in June 2007 Ukraine successfully placed a US$500mn 5 year issue, while in November 2007 it placed a US$700mn 10-year issue.
4
Ukrainian Banking Sector – VTB Bank Europe Research
Table 4 Foreign debt, US$bn 2003
2004
2005
2006
9M 2007
Government
8.9
11.2
12.2
12.9
13.2
Other sectors
10.8
14.5
19.2
24.7
32.2
1.7
2.7
6.1
14.1
25.7
Short-term debt
1.1
1.7
3.1
6.5
10.4
Incl. Loans
0.7
0.9
1.9
5.4
8.7
Long-term debt
0.7
1.0
3.0
7.6
15.3
Incl. Loans
0.4
0.6
1.2
3.5
7.9
Bonds and notes
0.1
0.4
1.2
3.3
6.4
Banks Incl.
Source: NBU
The rapid expansion of the national economy, robust growth of disposable incomes, together with relative economic stability have provided a supportive backdrop for banking sector development. The high growth rate of banking operations has resulted in greater funding requirements, including the increase in banks’ market capitalisation. In 2006, clients’ accounts (including term deposits) remained the major source for funds. However, the increasing transparency of the banking sector, its high growth rate, together with the positive outlook for the economy have allowed local banks to borrow on international markets at a lower cost. The assignment of individual credit ratings has been an
5
important part of the process, with many Ukrainian banks having at least one credit rating from an international credit rating agency. In 2007–2008, Fitch rated seven banks equal to the sovereign credit rating. These banks (UkrEximbank, Oschadbank, UkrSibbank, VTB Bank (Ukraine), TASCommertzbank, Ukrsotsbank and Procredit Bank) have not only developed successful businesses, but also have substantial support from their major shareholders - the State for UkrEximbank and Oschadbank and foreign institutions for other banks. Moody’s and S&P assigned these banks more conservative ratings which are below the sovereign rating.
Ukrainian Banking Sector – VTB Bank Europe Research
Table 5 Banks’ International LT Credit Ratings Corporate
Rating (Fitch/Moody’s/S&P)
Active Bank
-/B3/-
Alfa Bank (Ukraine)
-/B2/-
Bank Finance and Credit
-/B2/-
Bank NRB
-/B2/-
Calyon Bank (Ukraine)
-/B2/-
Credit Dnepr Bank
B-/B3/-
DonGorBank
-/B2/-
First Ukrainian International Bank
B/B2/-
Forum Bank
B-/B2/-
Imexbank
-/B3/-
Index-Bank
-/B2/-
Industrial Bank ING Bank (Ukraine)
B-/B3/-/B2/-
Khreschatyk Bank
B-/B2/-
Kreditprombank
B-/B2/-
Kredobank
-/-/B
Nadra Bank
B-/B2/B-
Oschadbank
BB-/B2/-
Pivdennyi Bank
B-/B2/-
Pravex Bank
B-/B2/-
PrivatBank
B/B2/-
Procredit Bank
BB-/-/-
Prominvestbank
-/B2/-
Raiffeisen Bank Aval
-/B2/-
Rodovid Bank TAS-Investbank
B-/B3/-/B2/-
TAS-Commerzbank
BB-/B2/-
UkrEximbank
BB-/B2/-
UkrgasBank
B-/B2/-
Ukrgazprombank
-/B3/-
Ukrprombank
-/B2/-
UkrSibbbank
BB-/B2/-
Ukrsotsbank
BB-/B2/BB-
VABank
B-/B2/-
VTB Bank (Ukraine)
BB-/-/-
6
Ukrainian Banking Sector – VTB Bank Europe Research
MACROECONOMIC REVIEW Ukraine is an emerging economy which has shown robust growth over the past seven years and has continued to perform well despite the political turbulence of recent years. Its major industries are metallurgy, machine building and chemical production, with these sectors accounting for the majority of exports. These industries have experienced supportive prices for their products on international markets over recent years which has lead to both a rise in the market capitalisation of firms and facilitated the process of modernising production facilities. In 2006, extensive investment in production facilities and technologies has been triggered by increasing energy prices and mineral products.
gas US$130 per cu.m.in 1H 2008 and US$150 per cu.m. in 2H 2008. However, the opaque structure of gas purchases – undertaken through an intermediary company – raises some questions regarding the transparency and efficiency of these negotiations in the future.
NBU's FX Reserves, US$ bn 35 30 25 20 15 10 5
2003
2004 GDP, US$ bn
2005
2006
Jan-08
Jul-07
Source: NBU, VTB Bank Europe Research
0% 2002
Jan-07
2%
0.0
Jul-06
20.0
Jan-06
4%
Jul-05
6%
40.0
Jan-05
8%
60.0
Jul-04
80.0
Jan-04
10%
Jul-03
12%
100.0
Jan-03
14%
120.0
Jan-02
140.0
Jul-02
0
GDP Performance
2007E
GDP growth, %
Source: NBU, VTB Bank Europe Research
Ukraine has its own mineral natural resource base, including coal, crude oil and natural gas. However, local production is unable to fully meet the demand, with the majority of crude oil and natural gas being provided to Ukraine from Turkmenistan and Russia, including Gazprom – the Russian state-owned gas company. The inability of Ukraine to avoid Russia as a partner in the provision of its gas requirements the Black Sea pipeline project remains far from completion - makes the country’s economy vulnerable to the reigning state of political and economic relations between two countries. At the end of 2005, Gazprom decided to phase out the subsidies given to its counterparts in CIS countries and over a number of years to raise gas prices to their internationally traded level. As a result of this change to the structure of gas prices, Ukraine agreed to purchase gas from Gazprom for 2006 at a price of US$95 per cu.m. and for this price to then increase to US$130 per cu.m. for 2007– this compared with Ukraine’s previous price of US$50 per cu.m. in 2005. In 2008 the price was increased to US$179.50 per cu.m. as Gazprom agreed to pay for Turkmenistan’s
7
The already-undertaken increases in gas prices over the past two years have had a negative effect on the Ukrainian economy. In particular, even though many consumers and companies still enjoy subsidised and regulated prices for energy, the increase in tariffs has placed an additional burden on both the economy and households. Additional rises in energy tariffs are likely to further reduce disposable incomes and consumption and can be expected to dampen the rate of economic growth. Moreover, reflecting higher imported gas prices, the merchandise trade balance showed deterioration over 2005 and in 2006. Looking ahead, the trade deficit is likely to deteriorate further over the next few years, particularly if metal prices were to decline sharply or the pace of global growth slowed significantly. Soaring imports kept the current account in deficit in 2006-07, while elevated levels of social spending resulted in the budget deficits over the past four years. Foreign direct investments (FDI) remained at comparatively high levels, following an extensive privatisation programme in 2005-06 and significant M&A deals in the banking sector in 2006-07. Recent political instability delayed the process of privatisation over 2007. However, this process may be accelerated once the new coalition government has settled into the role of governing the country. Significant capital inflows could be expected following the acceptance of Ukraine as a member of WTO, although no specific timeframe for this event is currently available.
Ukrainian Banking Sector – VTB Bank Europe Research
of commercial banks to the new policies in order to maximise the prospect of its successful introduction.
Accumulated Foreign Direct Investments, US$ bn 27.0 24.0 21.0
Forex Data
18.0 15.0
8.0
12.0
7.0
9.0
6.0
6.0 3.0
5.0
0.0 2002
2003
2004
2005
2006
4.0
2007E
3.0 Source: Ukrstat, VTB Bank Europe Research
2.0 1.0
The impact of higher gas prices’ on the CPI has been relatively limited, although the rise in production costs has forced companies to become more efficient in their energy usage. Nevertheless, the high level of inflation is currently one of the major macroeconomic issues in Ukraine. While higher gas prices were the major reason for the rise in inflation over 2006, over the past year an acceleration in food prices, in part reflecting lower production in agricultural sector due to smaller harvests, were the major drivers of inflation.
Inflation and Real Income 35% 30% 25% 20% 15% 10% 5% 0% -5%
2002
2003
2004 Real Income growth
2005 CPI
2006
2007
PPI
Source: NBU, VTB Bank Europe Research
The National Bank of Ukraine (NBU) has attempted to keep the UAH/US$ exchange rate at a stable level of around 5.05 since April 2005. Currently, there are extensive discussions regarding moving towards floating exchange rate for the national currency and for the central bank to introduce inflation targeting as the major monetary policy objective. Looking ahead, the NBU may widen the foreign exchange rate bands to UAH/US$ 4.95-5.25 from the current UAH/US$ 5.00-5.20 level. This would leave the central bank room for a nominal appreciation in the national currency. However, NBU officials have commented that there should not be any sharp changes in the exchange rate in the future. It is also important that the central bank secures the support
8
2000
2001
2002
2003
US$/UAH
2004
Euro/UAH
2005
2006
2007
RUB/UAH*
Source: NBU, VTB Bank Europe Research
Over recent years the Ukrainian economy has continued to develop despite the backdrop of ongoing political turbulence and uncertainty. However, this situation may not be sustainable in the future, with a number of reforms becoming increasingly important to ensure the continued growth of the Ukrainian economy. In particular, the economy’s efficiency is likely to be improved by an increase in market transparency and improvement in corporate governance. Moreover, growth in a number of sectors - including the banking sector – is likely to be enhanced by the introduction of modern legislation, regulation and monitoring. Furthermore, a stable political situation, together with the application of progressive government policy is likely to further enhance the development of the economy and help raise Ukraine’s profile in international markets.
Ukrainian Banking Sector – VTB Bank Europe Research
Table 6
Eurobond Issues
Issuer
Bloomberg Ticker
Volume
Bond
Maturity
Alfa Bank (Ukraine)
ALFAUA
US$345 million
LPN
22.12.2009
US$200 million
LPN
26.07.2010
Finance and Credit Bank
FICBUA
US$100 million
LPN
25.01.2010
First Ukrainian International Bank
FIUKR
US$275 million
LPN
16.02.2010
Forum Bank
FORUMZ
US$100 million
LPN
30.10.2009
Nadra Bank
NADRA
US$100 million
LPN
07.11.2008
US$175 million
LPN
28.06.2010
Pivdennyi Bank
PIVDE
US$100 million
LPN
03.08.2010
Privatbank
PRBANK
US$500 million
LPN
06.02.2012
US$150 million
LPN
09.02.2016
US$134.1 million
RMBS
15.12.2031
US$45.9 million
RMBS
15.12.2031
US$125 million
LPN
14.07.2008
US$200 million
LPN
23.07.2010
US$500 million
LPN
21.12.2011
US$100 million
LPN
06.06.2008
US$400 million
LPN
22.02.2010
US$250 million
LPN
23.09.2009
US$500 million
LPN
07.09.2011
US$250 million
LPN
04.10.2012
US$125 million
LPN
09.02.2016
US$125 million
LPN
14.06.2010
UkrSibbank
Ukrsotsbank
UkrEximBank
VAB Bank
UKRSIB
USCBUZ
EXIMUK
VABANK
Source: Bloomberg
9
Ukrainian Banking Sector – VTB Bank Europe Research
Table 7 The most significant recent acquisitions by foreign investors Bank
Acquired by
Share
Date
Kredobank Ukraine
PKO Bank Poslki (Poland)
66.65%
August 2004
Aval Bank
Raiffeisen Group (Austria)
93.50%
October 2005
UkrSibbank
BNP Paribas (France)
51.00%
2005-2006
VAB Bank
TBIF (Netherlands)
48.65%
2005-2006
VTB Bank Ukraine
VTB Bank (Russia)
97.99%
January 2006
Index Bank
Credit Agricole (France)
99.98%
March 2006
Raiffeisenbank Ukraine
OTP Bank (Hungary)
Bank Prikarpatya
Getin Holding (Poland)
Agro Bank
100.00%
November 2006
81.88%
December 2006
PPF Group (Czech Republic)
100.00%
December 2006
HVB Ukraine
Pekao Bank (Poland)
100.00%
2007
Pekao Ukraine Bank
Unicredit Group
97.57%
2007
Prestige Bank
Erste Bank (Austria)
Universal Bank
100.00%
January 2007
EFG Eurobank (Greece)
99.34%
February 2007
Electron Bank
VBI AG (Austria)
98.00%
April 2007
TAS-Commertzbank
Swedbank (Sweden)
100.00%
July 2007
Forum Bank
Commerzbank
International Commercial Bank
60.00%+1 share
September 2007
Piraeus Bank (Greece)
78.00%
September 2007
Ukrinbank
Bank Hapoalim (Israel)
75.80%
December 2007
Factorial Bank
SEB (Sweden)
97.25%
December 2007
Ukrsotsbank
Unicredit Group
85.42%
Not closed
10
Ukrainian Banking Sector – VTB Bank Europe Research
SECTOR OVERVIEW The Ukrainian banking sector was established in 1991-93 after the country declared its independence and has gone through the long process of development to improve both its transparency and efficiency. As at the 1st of January 2008, there were 175 commercial banks operating. Most of the banks are privately-owned institutions and only two banks are controlled by the State – UkrEximbank and Oschadbank. The privatisation of the two Stateowned banks is not planned over the near term.
Top-10 Banks in Retail Lending Privatbank, 14% Others, 33% Raiffeisen Bank Aval, 12%
TASCommertzbank, 2%
UkrSibbank, 12%
Pravex Bank, 2% Finance and Credit Bank, 3% Oschadbank, 3% OTP Bank, 5%
Ukrsotsbank, 9% Nadra Bank, 5%
Source: NBU, VTB Bank Europe Research
Sector’s Structure A significant proportion of Ukrainian banks are owned by international investors, while local industrial groups and politicians also hold considerable segments of assets of the banking sector. The sector has a high level of concentration, with the top-10 banks as at October 2007 accounting for 51% of total assets and 43% of total equity.
Top-10 Banks in Corporate Lending Privatbank, 9% UkrExImbank, 8% Raiffeisen Bank Aval, 7% Others, 48% Prominvestbank, 7% UkrSibbank, 5%
While the main competition for market share is between the major banks, smaller regional banks focus their operations towards local industrial groups and medium and small size enterprises. However, the operation of smaller banks is somewhat challenging as opportunities to gain leading positions in niche markets are limited. Looking ahead, it is expected that further market consolidation in the banking sector is likely to take place over the next few years. Moreover, reflecting the smaller size of the majority of banking institutions, it is expected that the merger of regional banks is the most likely method by which the industry will consolidate. The current fast expansion of the sector requires banks to increase their capitalisation in order to operate effectively on the market. The National Bank of Ukraine (NBU) manages the situation through the establishment of regulatory requirements. In 2006, it established the minimum shareholder capital requirement of Euro10mn for banks registering after 4th October 2006. Foreign-owned banks and institutions that have support from large industrial groups should not have any difficulties increasing their capitalisation, particularly if the political and economic situation in the country remains stable. In contrast, the necessity to increase capitalisation may require some smaller banks either to seek strategic partnerships or merge.
Ukrsotsbank, 4% Alfa-bank, 4% Ukrprombank, 3% Source: NBU, VTB Bank Europe Research
11
Forum Bank, 3%
Top-10 Banks in Private Customer Accounts Privatbank, 14%
Raiffeisen Bank Aval, 11%
Others, 40%
Oschadbank, 7% Prominvestbank, 6%
Finance and Credit Bank, 3%
Ukrsotsbank, 5% Nadra Bank, 4%
UkrExImbank, 3% UkrSibbank, 3%
Ukrprombank, 4%
Source: NBU, VTB Bank Europe Research
Top-10 Banks in Corporate Client Accounts Privatbank, 14%
Prominvestbank, 10%
Others, 35%
Ukrsotsbank, 8%
Brokbusinessbank, 3% Forum Bank, 3% Finance and Credit Bank, 4%
Most of the Ukrainian banks have developed branches. Some experts consider that the growth of
OTP Bank, 3%
UkrExImbank, 7% Raiffeisen Bank Aval, 6% Alfa-bank, 5% UkrSibbank, 5%
Source: NBU, VTB Bank Europe Research
All data as at the 1st of October 2007
Ukrainian Banking Sector – VTB Bank Europe Research
the number of branches is close to saturation. Going forward, it is most likely that the process of improving the efficiency of banking operations, together with cost reduction programmes will lead the market towards the most cost-effective structure.
Business Development The Ukrainian banking sector remains highly fragmented. All of the largest banks actively participate in all areas of the banking business and are represented across the country. However, no single bank dominates across all segments. The relatively intense competition helps focus banks on attempting to improve efficiency in their operations. Nevertheless, the willingness to gain market share tends to make banks use reasonably aggressive strategies that could raise operational risks. In the last few years, banks’ total assets have increased substantially from US$12bn in 2002 to US$100.7bn in 3Q 2007. The rapid expansion of the banks’ operations was supported by significant growth in equity that increased from US$2bn in 2002 to US$11.5bn in 3Q 2007. The robust growth of the sector made the average capital adequacy ratio decline during this period from 18% to 14%, although this indicator remains well above the minimum requirement of 10%. In the coming years, the rate of growth in assets and equity is likely to decline, reflecting more limited local and international funding and an already high level of market penetration.
charged for banking services remain high with banks still able to enjoy relatively wide margins, although increased competition going forward is likely to put pressure on them. Customer accounts - including deposits – remain the main source of funding for banks. However, over the last two years Ukrainian banks have increasingly become active in borrowing abroad through syndicated loans, Eurobonds and subordinated debt. Currently, most of the loans are granted to customers using fixed rather than variable rates. This primarily reflects the preferences of clients and the absence of local interest rate benchmarks. The increasing length of lending terms at fixed rates has recently raised the issue of the potential interest rate mismatch, as often banks borrow at floating rates. While the terms of lending contracts can be reviewed during the period of the contract, interest rate risks remain if benchmarks move substantially.
Currency Risk Another major risk for the Ukrainian banking sector centres on its foreign currency exposure. In particular, an increasing share of retail loans that have been denominated in foreign currencies, while many borrowers have their revenues nominated in hryvna. As at the 1st of October 2007, the share of loans denominated in foreign currencies is estimated at around 52% of the total loan portfolio.
Share of Foreign Currency Loans in Total Loans, 2006
Business Growth
80%
100.0
60%
80.0
40% 20%
60.0
Estonia
Latvia
Romania
Hungary
Ukraine
Bulgaria
Slovenia
Poland
Russia
Czech Rep.
20.0
Slovak Rep.
0%
40.0
Source: IMF, VTB Bank Europe Research
0.0 2002
2003
2004
Total Loans to clients, US$ bn
2005
2006
2007E
Total Deposits from Clients, US$ bn
Source: NBU, VTB Bank Europe Research
Ukrainian banks offer clients a wide variety of services both in domestic and international markets. In addition to traditional services, such products as project financing, leasing and factoring (mostly for automobiles and freight transport) are also developing. The level of penetration of these services in large cities is close to saturation, with banks starting to provide a wider range of services in smaller cities around the country. Commissions 12
The currency management by the NBU to fix the hryvna exchange rate against US dollar over the past two years provided a favourable backdrop for many borrowers too ready to accept currency risk. As a result of the extensive growth of the loan portfolio with exposure to currency risk increases, the prospect of defaults under a sharp decline in the hryvna has correspondingly increased. Moreover, currency risks in 2008 may increase due to ongoing inflationary pressures and the possibility of the NBU moving towards more flexible hryvna exchange rate policy. While foreign-owned banks could look to their shareholders to provide funding in case of a sharp
Ukrainian Banking Sector – VTB Bank Europe Research
depreciation in the hryvna, other banks under such a scenario are likely to face comparatively higher risks - especially reflecting the relatively low availability of currency-based hedging mechanisms. In 2007, the NBU raised provisioning requirements for unhedged borrowing in foreign currencies in order to help manage the increase in potential exposure currency risks. The change in these requirements negatively affected banks’ RoA indicator. While Ukrainian banks have acknowledged the necessity to increase the sophistication of their risk management operations, it may be the recent development of declining interest rates for loans in hryvna set against an increase in the cost of funding denominated in US dollars and Euros that may be the major factor persuading clients to borrow in the local currency.
Non-cash Payments The penetration rate of electronic payments and credit cards remains relatively low in the Ukraine. As at the 1st of July 2007 more than 36mn credit cards have been issued, the majority of these are debit cards (28mn). The Ukrainian market for credit cards has only recently started to expand, with this type of business assessed to have considerable upside potential. VISA and MasterCard are commonly used together with the local system the Ukrainian National Card (Ukrcard). As at the 1st of July 2007, the number of ATMs was 17,464, while the number of payment terminals is estimated at around 77,500. Over the first half of 2007 when compared to the same period of the previous year, the value of transactions undertaken with payment cards issued by Ukrainian banks increased by +47% to UAH93.6bn (US$18.5bn), with cash withdrawals accounting for 97% of this total.
Control System The control system of Ukrainian banks’ is assessed to work well and allows the regulators to monitor their performance on a consistent basis. Banks report to the government’s tax office and the NBU using National Accounting Standards (NAS). While Ukrainian banks are not legally required to provide any forms under IFRS, some do provide annual and interim financial reports under international standards. The introduction of Basel II principles to the Ukrainian banking system is expected to occur by 2016, although there is no official programme providing a detailed schedule of the transition. In 2002-2003, Ukraine was blacklisted by FATF (Financial Action Task Force) amid a failure to comply with international standards and enact AML legislation. In later years, the country was removed from the list, after local officials ensured that the national control systems met all requirements. In Ukraine there are several procedures for crossborder money transfers. The capital market operations, non-resident investments and divestments, cross-border loans and currencies’ purchases are subject to Currency Control. Capital operations are required to have NBU licenses and direct investments from abroad should be registered.
The National Bank of Ukraine – Its Role and Position in the Sector The NBU regulates and supervises the banking activity based on the Constitution of Ukraine and the law governing the operation of the NBU. Its main objectives are stability of the banking system and national currency, together with control over inflation. The NBU is legally and financially independent from the government, which formally allows it independently operate monetary policy. The NBU is governed by a Council that formulates monetary policy and attempts to control inflation. The council comprises 15 members:
Quality of Loan Portfolio 9.0% 7.5%
6.0%
4.5% 3.0%
1.5% 0.0% 2002
2003
2004 Overdue Loans
2005
2006
The Head of NBU (appointed by the President of Ukraine), Seven members appointed by the President, and Seven members nominated by Rada.
The appointment of members of the NBU Council from opposition political parties raises the potential for increased instability to the decision making process of this important institution.
2007E
LLP
Source: NBU, VTB Bank Europe Research
The involvement of the NBU in the regulation of the 13
Ukrainian Banking Sector – VTB Bank Europe Research
Foreign Investments in the Sector The level of involvement of foreign capital in the country’s banking system continues to grow. In 2002, the share of foreign investment (FI) in total shareholder capital was estimated at 13.7%, while by 3Q 2007 it had grown to around 35%. The sharp rise in foreign involvement in the Ukrainian market largely reflects the high growth potential and increasing transparency of the banking system. The first wave of FI came to the country’s banking sector in the 1990s. More recently, there was a significant increase in M&A deals involving international investors over 2004-05. Following the ‘Orange Revolution’ the prospects for the Ukrainian economy improved and despite the continued political volatility, the banking sector enjoyed strong support from the expansion in GDP and growing retail business opportunities. Some investors consider the acquisition of smaller banks as a means of entering the Ukrainian banking market. Moreover, a number of large transactions – including some of the market’s leaders – have been undertaken over the past two years (see Table 7). Looking ahead, it is expected that in the future, the size of M&A deals in the banking sector will decline, but the number of transactions is likely to remain robust. Foreign investors have entered the banking sector not only through the acquisitions of existing Ukrainian banks but also by opening subsidiary banks. For example, internationally-recognised financial groups
14
Asset Share of Foreign Owned Banks, %, 2005
Estonia
Slovak Rep.
Czech Rep.
Hungary
Poland
Bulgaria
Latvia
Ukraine
100 90 80 70 60 50 40 30 20 10 0 Slovenia
In 2006, a law was introduced which prescribed that banks should be organised either as a public corporation (Open Joint Stock Company) or a cooperative. All banks under other organisational forms must be reorganised by September 2009. In 2007, the banking regulator also introduced instructions requesting banks to disclose to private clients the effective credit interest rate to be expected on their borrowings. Some banks do not meet this requirement in full, but greater discipline is expected to be brought to the sector. In addition, the NBU tries to offset the recent rise in credit and currency risks somewhat through a process of strict monitoring of banks’ operations.
such as ING and Citigroup have subsidiaries in the Ukraine with full banking licenses. The EBRD is also reasonably active in the market, lending to local banks for SME servicing programmes and also owns a share in Procredit Bank which specialises in micro lending.
Russia
banking sector is relatively limited. However, the NBU constantly monitors the banking sector and stands ready to make adjustments to its regulatory requirements as may be required. The NBU also aims to achieve greater transparency with regards to any operations which it undertakes.
Source: IMF, VTB Bank Europe Research
In November 2006, the Rada passed a law allowing foreign banks to open branches in Ukraine after the country formally joins the WTO. When this occurs, the NBU will control their banking operations and they will be liable to meet all local requirements. One of the positive impacts of the greater involvement of foreign capital to the sector is the raising of banking standards, together with an increase in competition within the sector.
The Operations of Ukrainian Banks in International Markets With greater involvement of foreign capital in the banking sector, together with the expansion of the national economy, the degree of the local banks’ operations on international markets has increased. Moreover, the growing number of banks from the Top-20 has been able to attract syndicated loans and issue Eurobonds over past two years (See Table 6). For example, in 2006, Ukrainian banks issued Eurobonds worth US$1.6bn, attracted syndicated loans with a total value of US$1.1bn and obtained investments from their foreign shareholders estimated at US$5bn. The recent turmoil in global credit markets has raised the cost of borrowing for many banks and led to the postponement of a number of financing plans until the second half of this year. However, the Ukrainian banking system is still likely to need to attract foreign borrowing, as domestic alternatives on capital market are limited. While the demand for UAH-based products remains high, volumes in the local market are lower and the maturity of the products is shorter.
Ukrainian Banking Sector – VTB Bank Europe Research
While foreign investors have entered the Ukrainian market, local banks have also extended their operations globally. In 2007, Delta Bank purchased Belarusian Atom-bank, Privatbank acquired a majority stake in Taobank (Georgia) and Bank Pivdennyi increased its investments in Regional Investment Bank (Latvia). Major domestic banks also open their representative offices abroad. Traditionally, Ukrainian banks have focused their attention on neighbouring countries and Baltic States. If global credit conditions improved in 2008, then the banks might grow more active in other European countries and in South East Asia (mainly China). However, the size of potential acquisitions by Ukrainian banks is restricted by the limited availability of long-term funding.
of services they provide to SMEs. Privatbank, Raiffeisen Bank Aval, UkrSibbank, Ukrsotsbank, OTP Bank and Procredit Bank are considered to be leaders in this sector. Starting in 1996 there were several programmes for SME funding, including micro lending, express lending, small lending and agricultural and related businesses lending. One of these lending programmes has been sponsored by the EBRD and German-Ukrainian Fund. Six banks participated in this programme and by the end of 2006 it had a portfolio of approximately US$900mn. The EBRD, German-Ukrainian Fund and IFC are also involved in many other programmes that aim to develop the Ukrainian banking system.
Retail Business
Most Ukrainian banks have historically been involved in corporate business, as many of them are linked to industrial groups. In this function, they primarily provide clients with current accounts and lending services. The major banking clients work in trade, manufacturing, leasing and real estate sectors. The recent growth in the Ukrainian economy over recent years has seen a rise in the requirement for funding to finance an expansion in working capital. However, the sharp rise in energy prices can be expected to raise their cost base and is likely to impact negatively on Ukrainian corporates and potentially the banking sector over the longer term.
Oschadbank as a former Soviet Savings bank of Ukraine has the longest history of retail banking services in the country. Nevertheless, many other banks have developed retail business operations assuming a big upside potential in this segment. In 2005, the rate of retail banking growth accelerated. Retail deposits are still a significant part of the banks’ funding. In particular, as at the 1st of October 2007, retail deposits accounted for 31% of total liabilities. As Ukrainian markets tend to offer limited investment products for private clients, bank deposits remain a popular investment vehicle. Almost all banks - 175 institutions - are members of a retail deposit guarantee fund that secures the payment of up to UAH50,000 (US$9,900) to a deposit holder per account in case of the bank’s default.
Corporate Clients
Retail Clients
Corporate Business
16.0
25.0
14.0 12.0
15.0
US$ bn
US$ bn
20.0
10.0
10.0 8.0 6.0 4.0
5.0
2.0 0.0
0.0 2002
2003 Deposits in UAH
2004 Deposits in For. Curr.
2005
2006
Loans in UAH
Loans in For. Curr.
2002
6M 2007
2003 Deposits in UAH
2004 Deposits in For. Curr.
2005
2006
Loans in UAH
Loans in For. Curr.
6M 2007
Source: NBU, VTB Bank Europe Research
Source: NBU, VTB Bank Europe Research
Banking services to SMEs in the Ukraine have only recently started to develop. Changing the legislation and opaque taxation of small and medium enterprises had a detrimental effect on development of this part of Ukraine’s economy. However, over the last two years many banks have significantly increased their portfolios and volumes of operations in this segment. They have also extended the range 15
Mortgage and car loans make up the majority of the Ukrainian retail loan portfolio. The relatively high ratio of loans denominated in foreign currencies made by borrowers who receive the majority of their incomes in hryvna increases the Ukrainian banking sectors’ exposure to currency risk. The recent stability of the hryvna exchange rate against US dollar, together with lower interest rates on offer in loans denominated in foreign currencies has increased the relative
Ukrainian Banking Sector – VTB Bank Europe Research
attractiveness of undertaking this currency risk. The most significant part of these loans is estimated to be long-term mortgage loans. These loans would be liable to an increased risk of defaults in the face of a sharp weakening in economic activity or a significant decline in the real estate market. These risks can be mitigated to some extent by improvements in personal credit rating agencies, although these companies have only started operating relatively recently and have limited experience in this market. Banks can be expected to improve their risk management systems in 2008 and are expected to deploy more resources to this business area. The robust rate of expansion in the retail banking business shown in the last two years is likely to slow as penetration rates are restrained by a softening growth in per capita incomes. Increased competition may also put a pressure on margins in the business. Moreover, it is more likely that consumer lending and credit card lending could receive a boost if the political situation stabilises and the economic situation remains supportive.
Mortgage lending and MBS Mortgage lending in Ukraine over the past two years has been extremely robust. The growth of this lending has allowed banks to diversify their businesses and increase market share in the retail sector. More than 90 banks are involved in mortgage lending, although the Top-10 banks account for more than 80% of the total mortgage portfolio. UkrSibbank, Ukrsotsbank and Raiffeisen Bank Aval are the leaders in this banking segment.
investments is anticipated. However, any softening in the rate of increase of disposable incomes will slow growth in this sector. On the whole, the term of Ukrainian mortgages undertaken is relatively long - 15-30 years. Moreover, the credit risk is relatively high, with some banks having mortgage loan-to-value ratios in excess of 90%. Many mortgage loans are signed under fixed interest rate agreements, although banks are generally given the opportunity to alter these rates at a future date. The vast majority of loans – estimated at around 90% - are currently undertaken in foreign currency borrowings. Looking ahead, any decline in domestic interest rates can be expected to result in a rise in clients borrowing in the local currency. In terms of risks to the Ukrainian banking sector, it should be noted that banks have limited experience dealing with overdue loans and current legislation does not appear to give them total security with regards to loan collateral in the event of loan repayment difficulties. Moreover, the current absence of a centralised registrar for land and property also imposes additional risks. In addition, more effective credit bureaux would also help improve the ability of banks to offer loans and credit more securely. Nevertheless, despite these issues, the share of nonperforming loans (NPL) remains relatively low – estimated at around 1.5%.
Mortgage Loans Share 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% 01.01.06
Mortgage Loans, US$ bn
01.07.06
01.01.07
01.07.07
Share of Mortgage Loans in the Retail Loan Portfolio Share of Mortgage Loans in the Total Loan Portfolio
9.0 8.0
Source: UNMA, VTB Bank Europe Research
7.0 6.0
Going forward, the Ukrainian mortgage lending services will require an increase in the volume of funding. While major banks are likely to be able to attract long-term financing from their shareholders or international markets, smaller banks may find it more difficult to expand their lending programmes significantly.
5.0 4.0 3.0 2.0 1.0 0.0 01.01.06
01.07.06
01.01.07
01.07.07
Source: UNMA, NBU, VTB Bank Europe Research
The vast majority of mortgage lending has been granted for the purchase of residential property. In future, the further development of lending for land purchase and purchase/construction of residential 16
The establishment of the State Mortgage Institution (SMI) gave banks an opportunity to refinance their mortgage portfolios denominated in hryvna. The SMI was established in 2004 and refinanced approximately 16% of hryvna-denominated mortgage
Ukrainian Banking Sector – VTB Bank Europe Research
loans for total of UAH777mn (US$154mn). However, the institution does not have a strict set of guidelines regarding the quality of the credit products it buys. There is another institution which offers banks the opportunity to sell their mortgage loan portfolios denominated in foreign currencies. The International Mortgage Bank (IMB) is a foreign-owned private institution which buys out mortgages based on a standard loan agreement. In 2007, the SMI issued a debut 5-year bond for UAH1bn (US$198mn) with 9.5% coupon rate. The securities are guaranteed by the state and are included in the NBU’s Lombard list. The placement of this issue on to the primary market was successful, although the secondary market continues to remain undeveloped.
and began their work at the start of 2007. The two largest firms in the industry are First Ukrainian Credit History Bureau and International Credit History Bureau. They unite a number of financial institutions as well as the European credit history bureau Creditinfo Group (Iceland). The two other credit institutions (one of them belongs to the Ukraine’s largest bank Privatbank) use their own sources of information. The information used by these bureaux is usually fragmented, with the technologies and databases currently not that well developed. At this point, it is too early to tell whether the credit bureaux have significantly influenced banking operations. However, going forward, the growth in membership and increasing scope of the credit databases should help lenders improve their assessment of credit risks.
Development of non-banking financial organisations
Mortgages as Percent of GDP, 2006 90% 80% 70%
The further development of banking services is likely to require banks to offer a wider variety of products. Currently the cooperation between banks and insurance companies is in its infancy. However, it can be assumed that with the development of retail business and growth of competition, banks will tend to cooperate more with insurance companies.
60% 50% 40% 30% 20% 10% 0% Ukraine
Poland
Hungary
France
Estonia
Germany
Spain
United Kingdom
Source: IMF, VTB Bank Europe Research
In addition to the issuance of the SMI bond, there were two issues of RMBS - one local and another international. In particular, in February 2007 Privatbank closed its debut cross-border securitisation deal (which also became a debut issue for Ukraine) by placing an international RMBS for a total of US$180mn through an offshore SPV. Furthermore, in March 2007, Ukrgasbank issued a 3year hryvna-denominated debut RMBS for US$9.9mn. Both issues have been placed successfully. Even though the outlook for these issues remains positive, the low level of standardisation, narrow domestic market and recent turbulence in international debt markets, suggests relatively limited prospects for Ukrainian banks to issue similar securities in the near term.
Credit Bureaux There are four institutions licensed to act as credit bureaux, undertaking the collection and dissemination of information on borrowers. Credit bureaux are a relatively recent creation in Ukraine
17
Various banks set up private pension funds to serve their employees and to offer their clients additional services. The further development of the pension reform may give an impetus for expansion of these institutions in Ukraine. Meanwhile insurance companies and private pension funds are likely to become significant investors on Ukrainian capital markets. The growth of their businesses can also further improve the performance of the banking sector. Credit Unions (CUs) have become relatively more popular in the Ukrainian market. The popularity of these organisations largely reflects that high commissions, fees and more onerous lending requirements for borrowers at established banks can be avoided by using the services of these institutions. CUs operate as cooperatives where their members can both place deposits and/or borrow money. However, the state guarantee for deposits does not apply for CUs. Furthermore, they are usually nonprofit organisations in which members do not receive dividends. CUs in Ukraine only operate with the hryvna currency and do not undertake foreign currency borrowing. Deposits are usually short-term and serve as the major source of lending, which is usually limited to short- and medium-term products.
Ukrainian Banking Sector – VTB Bank Europe Research
In addition, there are also other non-banking financial institutions that provide their customers with a range of consumer, car and mortgage lending. The major advantages of these institutions are more timely consideration of loan applications, lower commissions and greater flexibility in terms of borrower requirements.
Complications with liquidity in 2007 While clients’ deposits and current accounts are still a significant source of funding for Ukrainian banks, they have started to borrow actively on the international markets relatively recently. The increased use of this source of funding reflects the country’s relatively high credit rating, the recent rapid expansion of the economy and the relative attractiveness of the local banking sector. Taken together, these factors have helped Ukrainian financial institutions attract cheaper long-term financing from abroad. In addition, a certain amount of support from foreign shareholders has also played a role in the growth of this source of funding. However, the still relatively low integration of the Ukrainian banking sector into global financial markets has helped it to avoid any significant negative fallout from the recent global financial market turmoil surrounding the crisis in the US sub-prime market. Moreover, while local banks are likely to face a higher cost of borrowing as global credit conditions have tightened, foreign shareholders of Ukrainian banks can be expected to provide some support to their affiliated banks, if they were to get into funding difficulties.
Further developments with the Ukrainian system The recent substantial rate of growth in Ukrainian banks’ activities is likely to slow, but the sector is expected to show a robust performance in 2008. However, the recent tightening in global credit conditions has raise the cost of attracting additional
18
funding in foreign currencies and is likely to result in banks looking to extend their offering of hryvna denominated products. The expectation of further increases in the capitalisation of Ukrainian banks is likely to remain a major theme within the industry, with banks having access to the resources of foreign owners likely to have retained some advantages over their domestically-based competitors. Moreover, the Ukrainian banking sector is expected to witness further consolidation and specialisation over the next few years. On the whole, based on recent experience we assess that the potential negative impact of additional political instability on the banking sector is likely to be limited. Nevertheless, more advanced banking legislation is needed in order to improve the transparency and effectiveness of the sector.
FINANCIAL PERFORMANCE In 2006-2007, the successful performance of the Ukrainian banking sector was primarily reflected in positive developments in the economy, together with the continuous growth of corporate clients’ wealth and private clients’ disposable incomes. However, high levels of competition reflecting market fragmentation, the aggressive strategies of many banks and increasing impairment charges have put some pressure on banks’ performance. For the first nine months of 2007, the banks’ net profit reached UAH4.9bn (US$970mn). Interest revenues totalled UAH34.7bn (US$6.9bn) - or 74.8 % of total revenues - commission revenues – UAH8.5bn (US$1.7) and other operational revenues – UAH2.9bn (US$581mn). Meanwhile, interest expenditures were UAH19.7bn (US$3.9bn) - or 47.4% of total expenditures - commission expenditures UAH864.6mn (US$171mn) and general administrative expenditures UAH12.8bn (US$2.5bn). Allocations to reserves totalled UAH5.1bn (US$1bn).
Ukrainian Banking Sector – VTB Bank Europe Research
Table 8
Financial Performance 2002
Net Income, mn US$
2003
2004
2005
2006
9M 2007
128.5
155.1
238.1
429.7
820.6
836.0
RoA, %
1.3
1.0
1.1
1.3
1.6
1.4
RoE, %
8.0
7.6
8.4
10.4
13.5
11.6
Net Interest Margin, %
6.0
5.8
4.9
4.9
5.3
4.9
18.0
15.1
16.8
15.0
14.2
13.9
Cost/Income Ratio, %
na
na
57.3
53.7
47.2
47.2
Personnel costs/ Operating Income, %
na
na
25.1
24.8
23.5
25.2
4.4
5.3
4.3
4.2
CAR, %
Customer Accounts/ Equity, times
3.9
4.7
Source: NBU
19
Ukrainian Banking Sector – VTB Bank Europe Research
Table 9 Sector’s Statistics 2002 Number of banks
2003
2004
2005
2006
3Q 2007
157
158
160
165
170
174
20
19
19
23
35
44
The share of FI in total charter capital, %
13.7
11.3
9.6
19.5
27.6
35.0
Assets, US$ bn
12.0
18.8
25.3
41.7
67.4
100.7
Equity, US$ bn
1.9
2.4
3.5
5.0
8.4
11.5
Total Loans to Clients, US$ bn
8.8
13.8
18.3
30.5
53.4
81.3
46.9
57.0
32.7
67.0
75.0
52.2
Total Client Accounts, US$ bn
7.3
11.3
15.3
26.5
36.2
48.6
Total Client Accounts Growth, %
45.7
54.9
36.0
72.8
36.8
34.0
Number of banks with FI
Total Loan Portfolio Growth, %
Source: NBU
Table 10
Loan Portfolio, % of GDP 2002
2003
2004
2005
2006
Belarus
16.0
18.4
21.7
22.6
27.4
Bulgaria
21.4
28.5
41.4
50.1
62.1
Croatia
63.6
66.7
70.1
83.5
96.6
Czech Republic
31.1
33.2
34.5
38.5
45.0
Estonia
33.0
37.6
48.1
67.4
95.4
Hungary
36.3
42.9
45.6
50.8
55.6
Kazakhstan
17.8
21.2
25.3
34.2
46.4
Latvia
31.8
40.6
51.1
70.8
93.1
Poland
26.5
28.2
26.9
28.8
34.7
Romania
15.3
18.6
21.5
25.9
34.6
Russia
20.9
24.8
27.4
30.6
33.6
Slovak Republic
-
32.3
29.7
35.3
40.1
Slovenia
49.0
51.7
54.9
67.4
76.9
Ukraine
19.5
27.4
28.9
37.1
51.7
Turkey
25.0
24.9
27.8
34.4
43.2
Source: IMF, VTB Bank Europe Research
20
Ukrainian Banking Sector – VTB Bank Europe Research
Table 11
Top-10 Banks Statistics, NAS (as at 01 October 2007) ROA
ROE
Interest Margin
Net Income Growth
Cost/ Income Ratio
LLP
Overdue loans
CAR
Privatbank
1.5%
15.6%
5.5%
19.3%
43.3%
10.1%
na
2.5%1
Raiffeisen Bank Aval
1.6%
15.9%
5.5%
61.5%
43.4%
3.4%
17.3%1
na
UkrSibbank
0.4%
3.9%
4.0%
41.2%
51.7%
3.7%
na
0.5%1
Ukrsotsbank
1.1%
10.3%
3.6%
-14.9%
43.0%
2.2%
17.4%2
1.6%2
UkrEximbank
1.4%
15.7%
3.6%
-14.6%
26.5%
3.0%
14.1%2
na
3
2.4%3
Prominvestbank
1.0%
10.2%
4.2%
-3.0%
50.6%
5.8%
10.3%
Nadra Bank
1.9%
17.2%
4.4%
37.2%
40.6%
4.1%
13.4%3
na
3
1.0%3
Oschadbank
1.2%
9.1%
7.3%
17.9%
62.1%
4.7%
11.3%
OTB Bank
1.1%
13.2%
4.7%
-55.1%
33.6%
4.0%
14.0%1
na
First Ukrainian International Bank
0.6%
4.3%
4.1%
-37.1%
39.2%
3.2%
21.0%1
1.3%1
1.
As at 01.01.07, IFRS
2.
As at 01.07.07, IFRS
3.
As at 01.01.07, NAS
Source: NBU, Banks
21
Ukrainian Banking Sector – VTB Bank Europe Research
Banks’ Information Top-20 NBU Rating, as at 01.10.07 bn US$ 1
Privatbank
9.6
2
Raiffeisen Bank Aval
8.2
3
UkrSibbank
6.5
4
Ukrsotsbank
5.4
5
UkrEximbank
5.1
6
Prominvestbank
4.8
7
Nadra Bank
3.4
8
Oschadbank
3.4
9
OTP Bank
3.0
10
First Ukrainian International Bank
2.3
11
Finance and Credit Bank
2.3
12
Forum Bank
2.3
13
Kreditprombank
2.0
14
Ukrprombank
1.9
15
Brokbusinessbank
1.7
16
Alfa-Bank (Ukraine)*
2.6
17
Ukrgasbank*
1.7
18
Rodovid Bank*
1.5
19
Pivdenny Bank*
1.4
20
TAS-Kommerzbank*
1.3
* Group 2, classification by NBU
22
Ukrainian Banking Sector – VTB Bank Europe Research
Privatbank International credit ratings assigned Agency
Rating
Last changed
Fitch
“B“/Positive
Nov-2006*
Moody’s
“B2”/Stable
Nov-2006
Strengths
Leadership in all major segments of the market.
Likely support from the major shareholders.
Established reputation on international markets.
Large network of branches that allows greater regional penetration and expansion of operations.
*Confirmed in October 2007
Challenges
Headline financials as at end-2006
Rapid expansion of business requires additional funding and maintaining of required capitalisation level.
US$ 170mn
Asset/liability mismatch.
Net Profit
US$ 122mn
Aggressive growth of the loan portfolio may increase credit risk.
Equity
US$ 643mn
Capital Adequacy Ratio
NA
Tightening of competition leads to a decrease in profit margins.
Total Assets
US$ 6,738mn
Operating Profit
Source: IFRS Financial Statements of Privatbank for 2006 audited by PricewaterhouseCoopers
Background Information
23
Privatbank is the largest bank in Ukraine’s banking sector by assets (9.5% of total assets as at 01.10.07) and equity (5.6% of total equity).
It is the leading bank in Ukraine by volume of lending (14% of retail lending and 9% of corporate lending markets) and clients’ accounts (controls 14% of both private and corporate clients’ accounts).
The Bank has the second largest network of branches and outlets (more than 2,400), a branch on Cyprus, daughter banks in Russia and Latvia and representative offices in Kiev (Ukraine), London (UK) and Almaty (Kazakhstan).
Privatbank operates under the NBU’s full banking license since 1992. Originally it was registered as a limited liability company and in 2000 re-organised into a closed joint stock company.
It is a privately owned bank with reportedly close connection through shareholders with a Ukrainian industrial group.
Ukrainian Banking Sector – VTB Bank Europe Research
Background Information (cont.)
Shareholder Structure (as at 01.01.07)
The Bank operates in Corporate, Retail and Investment banking and Treasury businesses.
Stockholder
Privatbank serves more than 247,000 corporate clients, 218,000 small enterprises and 13mn private clients’ accounts (including deposits).
Mr I.V. Kolomoyski
41.5
Mr G.B. Bogolyubov
41.5
The Bank provides SME’s lending under the EBRD and Ukrainian-German Fund programmes.
The Bank has a conservative approach in establishment of provisions for loan impairment. Yet according to the IFRS in 2006 Privatbank’s LLP was 7.4%, down from 10.3% in 2005.
The share of overdue loans decreased to 2.4% in 2006 from 2.7% in 2005 (IFRS).
As at the end of November 2007 Privatbank issued a total of 14mn of plastic cards (approximately 30% of the market). It is the member of VISA International and MasterCard.
In 2007 Global Finance magazine granted the Bank the title “The Best Bank in Ukraine” the fourth year in a row. In 2000 and 2002 The Banker magazine named Privatbank “The Bank of The Year”. In 19992002 and in 2005 Euromoney named the Bank “The Best Bank in Ukraine”.
The majority of the Bank’s business is concentrated in Ukraine. However, Privatbank also holds operations on international markets.
Privatbank tends to increase the share of long-term financing as customers accounts can be mainly considered as a short-term financing.
In February 2007, the Bank successfully placed a debut issue of RMBS for the total of US$180mn that will mature in December 2031.
In February 2007 Privatbank sold its second issue of 5-year LPNs worth US$500mn.
In 2007 Privatbank extended its operations in the CIS countries by acquiring the controlling stake in a Georgian bank Taobank.
As at 01 January 2007 the Bank’s subordinated debt was valued at US$183mn (IFRS).
In 2007 the Bank increased its share capital by 30% to US$573mn in order to maintain the requested level of capitalisation and support the development of its operations. The shareholders may further increase the capital in 1Q 2008 by approximately US$300mn.
Privatbank established a proprietary credit history bureau which is aimed to decrease the credit risk.
24
Management Others Total
Share, %
4.7 12.3 100.0
Management Structure The Bank’s headquarters are in Dnipropetrovsk, one of the major industrial cities in the country. The established decision making system allows the Bank to centralise databases and optimise business processes. As at 01 January 2007, Privatbank employed more than 31,000 people with most of the staff having a higher education. Strategic Development Privatbank aims to maintain its leading position in the industry. The development of retail and SME (including micro lending) businesses remain its major targets. The Bank will expand its operations in regions through increase of its network of branches. It intends to increase or maintain the market share through aggressive market strategies or introduction of new products. The Bank also aims to change the structure of funding and extend the length of its resources through intensive borrowings on international markets. However, the recent complications on global debt markets may force lenders to tighten requirements and increase the cost of borrowing. Corporate Business Servicing corporate clients always was the core business of the Bank but in 2006 operations with SMEs started to develop actively. The entry of large international investors into Ukraine’s banking sector tightened the competition and made banks intensify their efforts in new areas. Privatbank aims to focus on micro lending and SME services as the most rapidly growing segments of the market. The possible relation to an industrial group does not give Privatbank any clear advantages on the market.
Ukrainian Banking Sector – VTB Bank Europe Research
Retail Operations
Financial Performance
Being the leader in the segment of retail banking operations Privatbank is likely to keep this business as a top priority. However, in future the Bank may need to concentrate more on effectiveness of the business and risk management.
Booming SME and retail operations markets helped the Bank to show a strong performance in 2006. The increased interest revenues from operations with retail clients helped net profit to grow. The rising requirements for impairment charges and conservative policy of the Bank had a negative effect on financial performance.
As at 01 January 2007 retail loans accounted for 43% of the total loan portfolio and private clients’ accounts – for 66% of the total amount (IFRS). Consumer loans account for the largest share in retail portfolio (59%) while such secured loans as mortgage (20%) and car loans (15%) take a smaller part. Interest, fee and commissions-based revenues from retail banking operations accounted for the near majority of the Bank’s revenues. Risk Management Rapid expansion of the loan portfolio increases operational and credit risk. Currently Privatbank uses scoring systems to evaluate its retail clients. The input of a proprietary credit history bureau helps in decision making process. The Bank has a relatively well managed currency risk: 41% of loans are granted in foreign currencies, which is below the average. Besides, the share of customers’ accounts in foreign currencies is 49% providing a good coverage of assets. However, in 2006 comparing to 2005 the share of loans in foreign currencies increased and the share of accounts foreign currencies decreased. Liquidity risk is high as 52% of loans granted by the bank are due over 1 year. In the same time 93% of the major resources (clients’ accounts and funds due to other banks) are due up to 1 year. The Bank considers these accounts to be a stable source of funding as their owners are likely to keep the funds with the Bank but the current equilibrium may worsen if tested by a strong economic crisis.
25
PricewaterhouseCoopers is the Bank’s auditor of its Annual IFRS financial statements. The following is an extract from the Bank’s 2006 IFRS Financial Statements. In mn US$
FY 2005
FY 2006
%
Net Interest Income
119.4
371.7
211%
Net Non-Interest Income
323.2
226.8
-30%
Operating Expenses
289.8
428.8
48%
Net Profit
52.5
122.0
132%
Assets
4,618.0
6,738.4
46%
Equity
373.6
643.2
72%
Loans to Customers
3,104.0
5,339.9
72%
Customer Accounts
3,613.7
4,695.3
30%
Ukrainian Banking Sector – VTB Bank Europe Research
Equity, US$ mn
Assets, US$ mn 700
8
600
6
500 400
4
300 200
2
100 0
0 2003
2004
2005
2003
2006
Customers' Accounts, US$ bn
2004
2005
2006
Loans to Customers, US$ bn
5
6
4
5 4
3
3 2
2
1
1
0
0 2003
2004
2005
2006
2003
Source: Privatbank’s IRFS Financial Statements
FY 2006 Liquidity Risk Analysis, US$ mn 12 months
Other
Assets
1,147
2,361
2,784
446
Liabilities
1,846
3,370
763
117
-699
-1,009
2,021
329
Difference
FY 2006 Currency Risk Analysis, US$ mn UAH
US$
Euro
Other
Assets
3,472
2,004
467
321
Liabilities
2,801
2,576
559
159
Open position*
662
-572
-92
162
*excluding currency derivatives Source: Privatbank’s IFRS Financial Statements
26
2004
2005
2006
Ukrainian Banking Sector – VTB Bank Europe Research
Privatbank RoA
RoE
3.0%
30.0%
2.0%
20.0%
1.0%
10.0%
0.0%
0.0% 2003
2004
2005
Privatbank
2006
3Q 2007
2003
Median
2005
Privatbank
2006
3Q 2007
Median
Net Interest Margin
Cost/Income Ratio 60.0%
15.0%
50.0%
10.0%
40.0%
5.0%
30.0%
0.0% 2004
2005
2006
Privatbank
3Q 2007
2004
Median
15.0%
200.0%
10.0%
100.0%
5.0%
0.0% 2004
2005
Privatbank
2006
2006
3Q 2007
Median
LLP
300.0%
2003
2005 Privatbank
Net Income Growth
-100.0%
2004
0.0%
3Q 2007
2004
Median
2005 Privatbank
Source: NBU, VTB Bank Europe Research
27
2006 Median
3Q 2007
Ukrainian Banking Sector – VTB Bank Europe Research
Raiffeisen Bank Aval Strengths
International credit ratings assigned Agency
Rating
Last changed
Moody’s
“B2“/Stable
May-2007
Headline financials as at end 2006 Total Assets
US$ 5,384mn
Operating Profit
US$ 109mn
Net Profit
US$ 80mn
Equity
US$ 574mn
Capital Adequacy Ratio
17.3%
Likely support from the major shareholder.
Leading positions in all major market segments.
Expertise and high standards of RZB Group that can help the Bank to improve its work.
Successful expansion of business concentration on effectiveness of operations.
Good reputation and high recognition on global markets that applies to the major shareholder may reduce the Bank’s cost of borrowing.
and
Challenges
Source: IFRS Financial Statements of Raiffeisen Bank Aval for 2006 audited by E&Y
Increasing competition forces the Bank implement more aggressive market strategies.
to
Despite effective credit risk management the loan portfolio quality may deteriorate along with the rapid growth.
The Bank could apply a more diversified line of products to better manage risks.
Background Information
28
The second largest commercial bank in Ukraine in terms of assets, equity and retail lending. One of the largest retail banks in the country.
Its major shareholder is Raiffeisen International Bank-Holding AG, the holding company of the subsidiaries of Raiffeisen Zentralbank Österreich AG (RZB) in Central and Eastern Europe.
The predecessor of Raiffeisen Bank Aval was established in 1992 and in October 2005 Raiffeisen Group purchased the controlling stake in the Bank.
The Bank is the authorized bank of the Pension Fund of Ukraine for payment of pensions and social benefits in all regions of Ukraine to more than 915,000 people.
Raiffeisen Bank Aval operates the network of more than 1,300 branches and outlets being presented in all regions of Ukraine.
In 2006 the Bank’s assets grew by 45% to US$5.4bn. Its equity increased by 112% to US$574mn.
Ukrainian Banking Sector – VTB Bank Europe Research
Background Information (cont.)
Shareholder Structure (as at 01.07.07)
The booming operations were supported by increase in paid-in capital by 40% in 2006 to US$416mn. In 2007, the shareholders increased capital by a further US$36mn.
Stockholder
At the beginning of 2007 Raiffeisen Bank Aval served more than 240,000 corporate and 3.9mn private clients.
Others
Corporate business accounts for a significant part of the Bank’s operations. According to the Bank, it serves around 19% of Ukraine’s large-scale businesses.
While large and multinational enterprises account for a significant share of the Bank’s corporate business, operations for middle size corporate clients still prevail.
Raiffeisen Bank Aval participates in lending programmes for corporate clients organised by EBRD, IFC and German-Ukrainian Fund.
In order to increase the quality of risk management the Bank works actively with credit history bureaux.
In 2006 following the market trend and having the expertise of the RZB Group the Bank started to develop retail banking.
By the end of 2006 the Bank issued 3.7mn plastic cards and 300,000 credit cards of which 260,000 cards were issued in 2006.
In 2007 Raiffeisen Bank Aval was given the special awards "Mortgage Program of the Year" and "Deposit Program of the Year for Private Individuals" as a winner of the Ukrainian contest "The Choice of the Year 2007".
In 2003 and 2006 Euromoney named Raiffeisen Bank Aval "The Best Bank in Ukraine". In 2007 the Banker Magazine named it “The Best Bank of the Year in Ukraine”.
Raiffeisen AG
International
Total
Share, % Bank-Holding
95.5 4.5 100.0
Management Structure The Bank has an efficient organisational structure with all branches of business having a clear strategy. Frontoffice and back office functions are segregated increasing the quality of services to clients. The Bank’s Supervisory Board includes representatives of the RZB Group. Raiffesen Bank Aval employs more than 18,000 people.
Strategic Development The Bank aims to become the leader in all market segments. Raiffeisen Bank Aval has a clear focus on retail and SME banking. However, the importance of the development of business with large corporates is high. The Bank plans to increase its operations by increasing the product line and also through extension of network of branches and outlets. The increase of effectiveness of operations should become the top priority for the near future as fast expansion and aggressive marketing strategy may put pressure on the Bank’s profitability. Corporate Business
In 2006 Raiffeisen Bank Aval issued hryvna nominated bonds for US$79mn, with the issue reportedly being oversubscribed two times.
In January-April 2007 the Bank attracted US$178mn in a private placement of local bonds with 1-5 years maturity.
In April 2007 the Bank attracted US$500mn in a 2 year syndicated loan (raising the subscription volume by more than 3 times from US$150mn) and in October-November borrowed another US$300mn in two 1 year syndicated loans.
The Bank established Raiffeisen Leasing Aval company and two non-state pension funds to serve its clients. 29
Raiffeisen Bank Aval offers its clients a wide variety of banking products. Granting additional credit limits to regional branches and delegation of the decision making process on various subjects to regions made the system more efficient and flexible. Servicing SMEs is the Bank’s priority. In 2006 it introduced a number of products, including commercial mortgage lending. As at the end of 2006 middle corporate clients accounted for 56% of total number of corporate clients. Agro industrial and trade companies are the leaders in the Bank’s loan portfolio.
Ukrainian Banking Sector – VTB Bank Europe Research
Retail Operations
Financial Performance
Raiffeisen Bank Aval significantly expanded its retail banking operations in 2006. The share of retail loans in the total loan portfolio increased from 34% in 2005 to 49% in 2006 and 48% in 3Q 2007. Within this segment the mortgage lending was growing at the fastest rate in 2006. By the end of the year mortgage loans accounted for 47% of retail portfolio. According to the Bank it increased the market share in mortgage lending to 15.8% in 2006 from 13% in 2005. Car loans also expanded accounting for 22% of the portfolio.
The Bank’s Annual IFRS financial statements have been audited by Ernst & Young. The following is an extract from the Bank’s 2006 IFRS Financial Statements. In mn US$
FY 2005 Net Interest Income
The extension of the product line, including internet banking, and an increasing number of self-service terminals can give an additional impetus for development of these operations.
FY 2006
%
96.3
226.4
135%
Net Non-Interest Income
148.3
177.9
20%
Operating Expenses
214.9
295.3
37%
Net Profit
14.2
79.9
464%
Assets
3,706.0
5,384.0
45%
Equity
270.5
573.6
112%
Loans to Customers
2,354.1
4,094.4
74%
Customer Accounts
2,827.4
3,321.5
17%
Risk Management Raiffeisen Bank Aval has a well established risk management system. The predominant part of its operations is in hryvna and US dollar. Therefore, the significant change in the exchange rate between both currencies can affect the Bank’s operations. The liquidity gap is under constant monitoring of the Bank. However, the lack of market instruments makes it difficult for banks to hedge risks.
30
Ukrainian Banking Sector – VTB Bank Europe Research
Assets, US$ bn
Equity, US$ mn
6
700
5
600 500
4
400
3
300
2
200
1
100 0
0 2003
2004
2005
2003
2006
Customers' Accounts, US$ bn
2004
2005
2006
Loans to Customers, US$ bn
4
5 4
3
3 2
2 1
1
0 2003
2004
2005
0
2006
2003
Source: NBU, VTB Bank Europe Research
FY 2006 Liquidity Risk Analysis, US$ mn 12 months
Other
Assets
1,074
1,554
2,421
0
Liabilities
1,836
2,088
887
0
-762
-642
1,534
0
Difference
FY 2006 Currency Risk Analysis, US$ mn UAH
US$
Euro
Other
Assets
2,441
2,335
250
22
Liabilities
2,237
2,251
310
13
Open position
205
84
-60
9
Source: Raiffeisen Bank Aval’s IFRS Financial Statements
31
2004
2005
2006
Ukrainian Banking Sector – VTB Bank Europe Research
Raiffeisen Bank Aval RoE
RoA 2.0%
20.0%
1.5%
15.0%
1.0%
10.0%
0.5%
5.0% 0.0%
0.0% 2003
2004
2005
2006
Raiffesen Bank Aval
2003
3Q 2007
2004
2005
2006
Raiffesen Bank Aval
Median
Cost/Income Ratio
3Q 2007
Median
Net Interest Margin
100.0%
15.0%
75.0%
10.0%
50.0%
5.0%
25.0%
0.0% 2004
2005
2006
Raiffesen Bank Aval
3Q 2007
2004
Median
2005
2006
Raiffesen Bank Aval
3Q 2007 Median
LLP
Net Income Growth 2000.0%
6.0% 5.0%
1500.0% 1000.0%
4.0% 3.0%
500.0% 0.0% 2003
2004
2005
2006
Raiffesen Bank Aval
2.0%
3Q 2007
2004
Median
2005
2006
Raiffesen Bank Aval
Source: NBU, VTB Bank Europe Research
32
3Q 2007 Median
Ukrainian Banking Sector – VTB Bank Europe Research
UkrSibbank Strengths
International credit ratings assigned Agency
Rating
Last changed
Fitch
“BB-“/Positive
Apr-2006*
Moody’s
“B2“/Positive
May-2007
The likely support from the Bank’s major shareholder helps it gain and maintain its leading position.
Comparatively well diversified funding base.
Focus on the fast developing segments of the market together with a large variety of banking and non-banking services.
*Confirmed in July 2007
Challenges
Headline financials as at end 2006 Total Assets
US$ 4,360mn
Operating Profit
US$ 16mn
Net Profit
US$ 8mn
Equity
US$ 395mn
Capital Adequacy Ratio
NA
Aggressive marketing strategy results in poor financial performance of the Bank.
UkrSibbank needs substantial increase in capitalisation and extensive borrowing to finance expansion of its active operations.
Robust growth of operations may continue to negatively affect the credit risk.
Background Information
Source: IFRS Consolidated Financial Statements of UkrSibbank for 2006 audited by PricewaterhouseCoopers
33
UkrSibbank is the third largest bank in Ukraine by assets, equity and retail lending. It is the second largest bank by shareholder capital.
The Bank was established in 1990. In April 2006 BNP Paribas (France) one of the major global financial groups became a controlling shareholder of the institution.
UkrSibbank operates through a network of approximately 1,000 branches and outlets presented in 24 regions of Ukraine. It also has a subsidiary bank in Russia.
The Bank offers its clients a variety of banking, investment banking, asset management, leasing and insurance services using its subsidiaries.
It operates in five major segments: corporate, retail, SME, private and investment banking.
UkrSibbank serves more than 170,000 SME clients and 3,000 large corporate clients. Major revenues are generated from services to these clients.
The Bank is currently developing its consulting services and expands its operations on international capital markets.
Ukrainian Banking Sector – VTB Bank Europe Research
Background Information (cont.)
As at 01 July 2007 retail loans accounted for 56% of the Bank’s total loan portfolio (40% at the end of 2005).
According to UkrSibbank, it is one of the leaders in Ukraine’s mortgage lending segment.
As at 01 November 2007 the trade finance portfolio consisting mainly of guarantees and letters of credit amounted to US$220mn.
In 2006 LLP was 2.8% down from 3.4% in 2005. The share of overdue loans was 0.4% (4.7% with overdue loan instalments) down from 0.8% in 2005 (2.5% with overdue loan instalments). In 1H 2007, according to unaudited IFRS reports the Bank’s assets increased by 23% to US$5.4bn, equity by 49% to US$590mn, loan portfolio by 29% to US$4.6bn, loans from other banks by 19% to US$1.6bn and customer accounts by 20% to US$1.6bn.
The funds borrowed from other banks, attracted through syndicated loans or issuing of Eurobonds and bonds are the major sources of funding of Uksibbank’s operations.
The parent bank has lent UkrSibbank more than US$1bn.
In December 2006 the Bank issued 5 year LPNs for a total of US$500mn. In July 2007 the Bank successfully placed another 3 year Eurobond issue valued at US$200mn.
In October 2007 UkrSibbank attracted a US$110mn syndicated loan.
In 2007 Euromoney Magazine and Global Finance Magazine named UkrSibbank “The Best Bank 2007 in Ukraine”.
The Bank is an active participant in domestic equity and bond markets.
Cbonds agency (Russia) named UkrSibbank “The Best Lead Manager on the Bond Market in Ukraine in 2006”.
In 2006-07 shareholders increased the amount of paid-in capital several times. The last additional issue in the amount of UAH450mn (US$89mn) was registered in July 2007. A further increase by US$99mn is expected to be registered by the end of 2007.
34
In 2005 the United States Department of Agriculture established a credit limit for UkrSibbank in the form of credit guarantees to finance exports of agricultural goods from USA to Ukraine.
Shareholder Structure (as at 01.07.07) Stockholder
Share, %
BNP Paribas SA (France)
51.0
CJSC Ukrainian Metallurgical Company
39.5
Others Total
9.5 100.0
Management Structure The Bank’s Supervisory Board of nine includes four representatives of BNP Paribas. The Board decides the development strategy for the Bank and monitors the adaptation of UkrSibbank to the new challenges. The Management Board of UkrSibbank is responsible for the day-to-day management. In 2006 the management structure of the Bank was transformed by the major shareholder. BNP Paribas focuses on increase of effectiveness of operations and introduction of higher standards of client servicing. That would also include the unification of certain processes with the standards established at the parent bank and hiring high profile top managers that will implement a new development strategy. Strategic Development With UkrSibbank becoming part of the BNP Paribas global financial group the Bank faces new targets. The major shareholder introduced the Transformation programme “Challenge” that aims to convert the Bank into a leading universal bank in Ukraine. UkrSibbank should develop all sides of its business with a special focus on retail banking. The programme has three stages of implementation: Identification and resolution of problems in such areas as Human Resources, IT, Marketing and Retail distribution, Further development of areas where the Bank has competitive advantage (started in the beginning of 2007), Establishment of UkrSibbank’s leadership in Ukraine’s banking sector (2007-2008).
Ukrainian Banking Sector – VTB Bank Europe Research
Corporate Business
Risk Management
UkrSibbank has a number of large corporate clients which operate in the auto building, metallurgy and construction industries. In 2006 the Bank modified its internal system that now allows it to evaluate more efficiently credit risk and reduce time in decision making. In 2006, UkrSibbank opened the first Trade centre which is a part of BNP Paribas’ Global Trade Service Team. The involvement of the parent bank in operations can bring international expertise and higher financing levels.
BNP Paribas brings higher standards of risk management to the Bank. It introduced centralized management process of all types of risks and efficient support of business units. The current procedure also includes the use of scorecards, credit administration and monitoring of all types of risks.
The Bank is also actively involved in SME banking by offering its clients a large product range. That includes mortgages, working capital financing, deposit taking and card products. In November 2007 the SME loan portfolio exceeded US$2bn.
Financial Performance
UkrSibbank is actively involved in FX trading and pays a close attention to currency risk management.
Aggressive marketing strategies and high expenses have so far resulted in a poor financial performance of the Bank. Retail and SME services segments remain loss making. In 1H 2007 net interest income did not change comparing to the end of 2006 and net fee and commission income declined. However, the Bank’s net profit increased to US$23mn due to a significant decrease of operating expenses (unaudited IFRS statements).
Retail Operations According to the Bank in 2006 it implemented a new client oriented approach that helped significantly increase its operations. The work of the seven mortgage centres allowed UkrSibbank to maintain a leading position in the mortgage lending segment. In 2006 mortgage loans accounted for 70% of retail loan portfolio, while car loans – for 26%.
The Bank’s IFRS financial statements are audited by PricewaterhouseCoopers. Below is an extract from the Bank’s 2006 IFRS Financial Statements. In mn US$
Being a Principal Member of Visa International and MasterCard International the Bank issues debit and credit cards.
FY 2005
The increase of the population’s welfare made private banking a fast growing segment on the market. UkrSibbank has Private Banking Offices in all major cities of Ukraine offering its clients individual lending programs, capital management, Family Office services, insurance products and other.
35
FY 2006
%
Net Interest Income
57.0
89.1
56%
Net Non-Interest Income
62.4
95.7
54%
Operating Expenses
105.2
168.4
60%
Net Profit
9.5
8.0
-15%
Assets
2,163.5
4,360.1
102%
Equity
188.7
395.3
109%
Loans to Customers
1,536.4
3,576.3
133%
Customer Accounts
1,055.8
1,296.7
23%
Ukrainian Banking Sector – VTB Bank Europe Research
Equity, US$ mn
Assets, US$ bn 5
400
4
300
3 200
2 100
1
0
0 2003
2004
2005
2003
2006
Customers' Accounts, US$ bn
2004
2005
2006
Loans to Customers, US$ bn 4
1.4 1.2
3
1.0 0.8
2
0.6 0.4
1
0.2 0.0
0 2003
2004
2005
2006
2003
2004
Source: UkrSibbank’s IFRS Financial Statements
FY 2006 Liquidity Risk Analysis, US$ mn 12 months
Other
Assets
594
680
2,847
240
Liabilities
642
1,896
1,417
10
Difference
-48
-1,216
1,430
230
FY 2006 Currency Risk Analysis, US$ mn UAH
US$
Euro
Other
Assets
1,184
2,361
175
399
Liabilities
1,035
2,364
174
392
Open position*
149
-3
1
7
*excluding currency derivatives Source: UkrSibbanks IFRS Financial Statements
36
2005
2006
Ukrainian Banking Sector – VTB Bank Europe Research
UkrSibbank RoE
RoA 2.0%
20.0%
1.5%
15.0%
1.0%
10.0%
0.5%
5.0% 0.0%
0.0% 2003
2004
2005
UkrSibbank
2006
2003
3Q 2007
2004
2005
UkrSibbank
Median
Cost/Income Ratio
2006
3Q 2007
Median
Net Interest Margin
80.0%
15.0%
70.0%
10.0%
60.0%
5.0%
50.0%
0.0%
40.0% 2004
2005
2006
UkrSibbank
2004
3Q 2007
UkrSibbank
Median
Net Income Growth
2004
2005
UkrSibbank
2006
2006
3Q 2007
Median
LLP
200.0% 150.0% 100.0% 50.0% 0.0% 2003
2005
10.0% 8.0% 6.0% 4.0% 2.0%
3Q 2007
2004
Median
2005 UkrSibbank
Source: NBU, VTB Bank Europe Research
37
2006 Median
3Q 2007
Ukrainian Banking Sector – VTB Bank Europe Research
Ukrsotsbank Headline financials as at end 2006
Financial Performance
Total Assets
US$ 3,438mn
The following is an extract from the Bank’s 2006 IFRS Financial Statements audited by KPMG.
Operating Profit
US$ 64mn
In mn US$
Net Profit
US$ 46mn
Equity
US$ 360mn
Capital Adequacy Ratio
16.0%
Source: IFRS Financial Statements of Ukrsotsbank for 2006 audited by KPMG
Background Information
The fourth largest bank in Ukraine by assets, Ukrsotsbank operates on the market since 1991 being transformed from the soviet Zhylsotsbank of the USSR.
FY 2005
FY 2006
%
Net Interest Income
69.8
119.8
72%
Net Non-Interest Income
90.0
103.7
15%
Operating Expenses
119.7
160.0
34%
Net Profit
29.0
46.2
59%
Assets
2,112.5
3,437.8
63%
Equity
190.5
360.1
89%
The Bank is the third largest by the volume of corporate client accounts and the fourth largest by equity and retail lending.
Loans to Customers
1,368.2
2,441.5
78%
Ukrsotsbank serves 2,700 large corporates, 1.3mn private clients and 140,000 SMEs through the network of almost 500 branches and outlets.
Customer Accounts
1,024.4
1,503.9
47%
In June 2007 the shareholder of the Bank concluded the agreement to sell 95% of his shares to UniCredit Group.
Assets, US$ bn 4 3
In January 2008 Fitch upgraded the Bank’s LT credit rating in foreign currency to “BB-“ from “B“ (outlook Positive) on the coming acquisition by UniCredit. Ukrsotsbank also has LT ratings from Moody’s (“B2”/Positive) and S&P (“BB”/Negative).
2 1 0 2003
The bank focuses on retail (mortgages and car loans) and SME banking. According to the Bank it controls approximately 30% of Ukraine’s factoring services market. It is one of the leaders in issuance of banking cards (2.7mn plastic cards issued in 9M 2007) and member of VISA International and MasterCard. In 2007 the extensive borrowing on the market (issue of 3 and 5 year hryvna denominated bonds for US$195mn and 3 year LPNs for US$400mn) reduced Bank’s reliance on customers’ accounts. 38
2004
2005
2006
Equity, US$ mn 400 300 200 100 0 2003
2004
2005
2006
Ukrainian Banking Sector – VTB Bank Europe Research
Ukrsotsbank RoA
RoE
2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
20.0% 15.0% 10.0% 5.0% 0.0% 2003
2004
2005
Ukrsotsbank
2006
2003
3Q 2007
2005
Ukrsotsbank
Median
Cost/Income Ratio
2006
3Q 2007
Median
Net Interest Margin
60.0%
15.0%
55.0%
10.0%
50.0%
5.0%
45.0% 40.0% 2004
2005
2006
Ukrsotsbank
0.0%
3Q 2007
2004
Median
2005 Ukrsotsbank
Net Income Growth 200.0% 150.0% 100.0% 50.0% 0.0% -50.0%
2004
2006
3Q 2007
Median
LLP 8.0% 6.0% 4.0% 2.0%
2003
2004
2005
Ukrsotsbank
2006
0.0%
3Q 2007
2004
Median
2005 Ukrsotsbank
Source: NBU, VTB Bank Europe Research
39
2006 Median
3Q 2007
Ukrainian Banking Sector – VTB Bank Europe Research
UkrEximbank Headline financials as at end 2006
Financial Performance
Total Assets
US$ 3,653mn
The following is an extract from the Bank’s 2006 IFRS Financial Statements audited by Ernst & Young.
Operating Profit
US$ 92mn
In mn US$
Net Profit
US$ 66mn 123.9
78%
US$ 344mn
Net Interest Income
69.5
Equity Capital Adequacy Ratio
15.9%
Net Non-Interest Income
46.3
65.3
41%
Operating Expenses
65.1
97.2
49%
Net Profit
36.6
66.3
81%
Assets
2,018.5
3,653.3
81%
Equity
187.4
343.9
84%
1,384.7
2,665.9
93%
942.8
1,324.7
41%
FY 2005
Source: IFRS Financial Statements of UkrEximbank for 2006 audited by E&Y
Background Information
UkrEximbank is majority-owned by the State and is the fifth largest bank by assets and shareholder capital. It acts as a Financial Agent of the Government with respect to the loans originated, borrowed or guaranteed by the State.
Assets, US$ bn 4
It accounts for majority of the banking sector’s export/import operations financing. The Bank is a partner of the World Bank in the Second Export Development Project in Ukraine and a member of the EBRD Trade Facilitation programme. The Bank works with KfW under SME Program.
UkrEximbank holds credit ratings from international rating agencies Moody’s (“B2”/Stable) and Fitch (“BB-“/Positive). The latter has been affirmed in December 2007.
Customer Accounts
The Bank serves mainly corporate clients and is the second largest in Ukraine by corporate lending volumes.
Loans to Customers
FY 2006
3 2 1 0 2003
2004
2005
2006
Equity, US$ mn 400
UkrEximbank acts as a clearing bank for the Mastercard International payment system in Ukraine.
300 200
In 2006 the share of customers’ accounts in total liabilities decreased due to extensive borrowings of the Bank on the local and international markets. In 2007 UkrEximbank received syndicated loan term facilities for US$615mn.
100 0 2003
40
2004
2005
2006
%
Ukrainian Banking Sector – VTB Bank Europe Research
UkrEximbank
RoE
RoA 3.0%
30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
2.0% 1.0% 0.0% 2003
2004
2005
UkrEximbank
2006
2003
3Q 2007
2005
UkrExim bank
Median
Cost/Income Ratio
2006
3Q 2007
Median
Net Interest Margin
60.0%
15.0%
50.0%
10.0%
40.0%
5.0%
30.0%
0.0%
20.0% 2004
2005
2006
UkrEximbank
2004
3Q 2007
2003
2004
2005
UkrEximbank
2006
2005 UkrEximbank
Median
2006
3Q 2007
Median
LLP
Net Income Growth 250.0% 200.0% 150.0% 100.0% 50.0% 0.0% -50.0%
2004
12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%
3Q 2007
2004
Median
2005 UkrEximbank
Source: NBU, VTB Bank Europe Research
41
2006 Median
3Q 2007
Ukrainian Banking Sector – VTB Bank Europe Research
Prominvestbank Headline financials as at end 2006
Financial Performance
Total Assets
US$ 3,484mn
The following is an extract from the Bank’s 2006 NAS Financial Statements.
Operating Profit
US$ 62mn
In mn US$
Net Profit
US$ 44mn
FY 2005
FY 2006
%
Equity
US$ 312mn
Net Interest Income
Capital Adequacy Ratio
NA
Net Non-Interest Income
116.1
130.7
13%
Operating Expenses
208.6
238.1
14%
Net Profit
43.8
44.1
1%
Assets
2,889.2
3,484.3
21%
Equity
270.9
311.5
15%
Loans to Customers
2,114.8
2,685.8
27%
Customer Accounts
2,559.8
3,045.9
19%
Source: NAS Financial Statements of Prominvestbank for 2006
Background Information
Prominvestbank was incorporated in 1992 following reconstruction of the previous operated bank.
In November 2007 Moody’s assigned the Bank credit rating “B2”, Positive outlook.
The Bank mainly works with large corporate clients and is the fourth largest in Ukraine by corporate lending and the second largest by corporate accounts. In 2006 Prominvestbank successfully increased its operations (mainly deposit taking) for a total of 3.9mn private clients.
3 2 1 0 2003
By the end of 2006 Prominvestbank issued 3.4mn plastic cards, including 2.1mn of VISA and Mastercard cards.
In 2003, 2004 and 2006 The Banker Magazine named Prominvestbank “The bank of the year in Ukraine”.
10%
Assets, US$ bn
Approximately 60% of loans are granted by the Bank in hryvna.
The Bank develops money transfer systems.
169.5
4
Corporate loans make-up a predominant part of the total portfolio, of which the majority are the loans granted for a period over 1 year to support innovation programmes.
153.8
2004
2005
2006
Equity, US$ mn 350 300 250 200 150 100 50 0 2003
42
2004
2005
2006
Ukrainian Banking Sector – VTB Bank Europe Research
Prominvestbank RoA
RoE
3.0%
20.0%
2.0%
15.0%
1.0%
10.0%
0.0%
5.0% 2003
2004
2005
2006
Prominvestbank
3Q 2007
2003
Median
2004
2005
2006
Prominvestbank
Cost/Income Ratio
3Q 2007
Median
Net Interest Margin
65.0% 60.0% 55.0%
15.0% 10.0%
50.0% 45.0% 40.0%
5.0% 0.0% 2004
2005
2006
Prominvestbank
3Q 2007
2004
Median
2005
2006
Prominvestbank
Net Income Growth
3Q 2007 Median
LLP
150.0%
8.0%
100.0%
6.0%
50.0%
4.0%
0.0% -50.0%
2003
2004
2005
Prominvestbank
2006
2.0%
3Q 2007
2004
Median
2005 Prominvestbank
Source: NBU, VTB Bank Europe Research
43
2006
3Q 2007
Median
Ukrainian Banking Sector – VTB Bank Europe Research
Nadra Bank Headline financials as at end-2006
Financial Performance
Total Assets
US$ 3,407mn
The following is an extract from the Bank’s NAS Financial Statements.
Operating Profit
US$ 40mn
In mn US$
Net Profit
US$ 37mn
Equity
US$ 262mn
Capital Adequacy Ratio
NA
FY 2005
Source: NAS Financial Statements of Nadra bank
Background Information
Nadra Bank is a privately owned universal bank offering a wide product line to corporate and private clients.
The Bank is more focused on retail banking and is the fifth largest bank by retail loans and the sixth by private clients’ accounts volume.
Nadra bank develops mainly mortgage and car lending to its private clients as well as plastic card services and consumer lending.
The Bank also actively works with corporate and SME clients. It offers its corporate clients a number of services including trade and project finance.
FY 2006
Net Interest Income
41.7
81.5
95%
Net Non-Interest Income
29.9
99.4
232%
Operating Expenses
64.7
141.4
119%
Net Profit
5.2
37.0
612%
Assets
2,068.1
3,406.9
65%
Equity
126.9
262.3
107%
Loans to Customers
812.5
1,364.7
68%
Customer Accounts
654.4
1,068.8
63%
Assets, US$ bn 4
In 2005-06 the Bank actively reorganised its network of branches that helped it to increase the efficiency of operations.
3 2
Fitch assigned Nadra Bank a “B-“ credit rating, Positive outlook (raised from Stable in December 2007). Moody’s assigned a “B2” rating, Positive outlook.
Nadra bank is a clearing bank for more than 50 client banks in Ukraine, CIS and Baltic states.
At the end of 2006 the Bank attracted US$114mn in a syndication loan.
1 0 2003
2004
2005
2006
Equity, US$ mn 300 250
In June 2007 Nadra Bank placed a US$175mn worth 3 year LPN issue.
200 150 100 50 0 2003
44
%
2004
2005
2006
Ukrainian Banking Sector – VTB Bank Europe Research
Nadra Bank RoA
RoE 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2003
2004
2005
2006
Nadra Bank
2003
3Q 2007
Median
15.0%
60.0%
10.0%
45.0%
5.0%
30.0%
0.0% 2006
Nadra Bank
2004
3Q 2007
Median
2005 Nadra Bank
Net Income Growth
3Q 2007
Median
2006
3Q 2007
Median
LLP 6.0%
600.0%
5.0%
400.0% 200.0% 0.0% -200.0%
2006
Net Interest Margin
75.0%
2005
2005
Nadra Bank
Cost/Income Ratio
2004
2004
4.0% 2003
2004
2005
Nadra Bank
2006
3.0%
3Q 2007
2004
Median
2005 Nadra Bank
Source: NBU, VTB Bank Europe Research
45
2006 Median
3Q 2007
Ukrainian Banking Sector – VTB Bank Europe Research
Oschadbank Headline financials as at end 2006
Financial Performance
Total Assets
US$ 2,295mn
The following is an extract from the Bank’s NAS Financial Statements.
Operating Profit
US$ 41mn
In mn US$
Net Profit
US$ 29mn 117.3
82%
US$ 355mn
Net Interest Income
64.3
Equity Capital Adequacy Ratio
11.32%
Net Non-Interest Income
77.0
87.3
13%
Operating Expenses
133.1
163.4
23%
Net Profit
4.0
28.8
621%
Assets
1,884.2
2,295.1
22%
Equity
153.6
354.7
131%
Loans to Customers
319.7
814.2
155%
1,640.2
1,671.5
2%
FY 2005
Source: NAS Financial Statements of Oschadbank
Background Information
Oschadbank is a successor of the soviet Savings Bank of Ukraine. It’s a fully State owned financial institution that has a “B2” rating from Moody’s. In December 2007 Fitch assigned Oschadbank a “BB-“ credit rating. The Bank works mainly with private clients (#3 bank by private clients’ accounts) and enjoys a unique 100% State guarantee on private deposits.
Customer Accounts
Oschadbank has the largest branch network in Ukraine with more than 6,000 branches and outlets that helps it to be presented around the country.
FY 2006
Assets, US$ bn 2.5 2.0
The Bank serves the State’s social programmes, including pensions payments to military pensioners or commission free wire transfers, though it does not receive direct compensation from the State.
1.5 1.0 0.5 0.0
The Bank has an approved development strategy for 2006-2010 and aims to maintain a leading position on retail market as well as advance in corporate banking.
2003
2004
2005
2006
Equity, US$ mn 400 350
Oschadbank is involved in an unsettled issue of repayment of private clients’ deposits placed with the Soviet predecessor of the Bank. The government included in the budget for 2008 US$3.9bn for the settlement though the total amount for compensation is yet to be determined.
300 250 200 150 100 50 0
2003
The Bank is also an agent for trading in Soviet Tbonds and Savings Bank of Ukraine bonds issued before Ukraine declared independence. 46
2004
2005
2006
%
Ukrainian Banking Sector – VTB Bank Europe Research
Oschadbank RoA
RoE
2.0%
20.0%
1.5%
15.0%
1.0%
10.0%
0.5%
5.0%
0.0%
0.0% 2003
2004
2005
2006
Oschadbank
3Q 2007
2003
Median
2005
Oschadbank
Cost/Income Ratio
2006
3Q 2007
Median
Net Interest Margin 40.0%
90.0%
30.0%
70.0%
20.0%
50.0%
10.0%
30.0%
0.0% 2004
2005
2006
Oschadbank
2004
3Q 2007
Median
2005 Oschadbank
Net Income Growth
2006
3Q 2007
Median
LLP
1500.0%
20.0%
1000.0%
15.0%
500.0%
10.0%
0.0% -500.0%
2004
5.0% 2003
2004
2005
Oschadbank
2006
3Q 2007
0.0% 2004
Median
2005 Oschadbank
Source: NBU, VTB Bank Europe Research
47
2006 Median
3Q 2007
Ukrainian Banking Sector – VTB Bank Europe Research
OTP Bank Headline financials as at end 2006
Financial Performance
Total Assets
US$ 2,260mn
The following is an extract from the Bank’s 2006 IFRS Financial Statements audited by Deloitte.
Operating Profit
US$ 84mn
Net Profit
US$ 63mn
Equity
US$ 227mn
Capital Adequacy Ratio
14%
In mn US$
FY 2005
Source: IFRS Financial Statements of OTP Bank for 2006 audited by Deloitte
Background Information
The predecessor of OTP Bank Ukraine was established in 1998 as a bank with 100% shares owned by Raiffeisen International. In June 2006 the largest bank in Hungary OTP Bank plc acquired the Bank.
It offers corporate, SME and retail clients a wide range of services.
In corporate business OTP Bank is traditionally focused on structured trade finance and working capital finance products.
70.0
109.1
56%
Net Non-Interest Income
14.7
30.2
106%
Operating Expenses
33.8
55.0
63%
Net Profit
37.5
62.8
67%
Assets
1,454.9
2,259.6
55%
Equity
164.6
227.3
38%
1,174.9
1,918.0
63%
669.5
785.3
17%
Customer Accounts
Assets, US$ bn 2.5 2.0 1.5
Meanwhile the retail business is also important for the Bank, especially the mortgage lending. It is the 6th largest bank in Ukraine by retail lending.
1.0 0.5
Historically OTP Bank has rather small network of branches and outlets. However, this does not reduce its ability to continually develop the client base.
0.0 2003
2004
2005
2006
Equity, US$ mn
In November 2005 the Bank launched an insurance programme.
250
In 2007 OTP Bank increased its shareholder capital to US$179mn through additional share issue.
150
200
100 50 0 2003
48
%
Net Interest Income
Loans to Customers
With the change of the major shareholder the Bank received a new impetus for development of its operations.
FY 2006
2004
2005
2006
Ukrainian Banking Sector – VTB Bank Europe Research
OTP Bank RoA
RoE
4.0%
50.0% 40.0% 30.0% 20.0% 10.0% 0.0%
3.0% 2.0% 1.0% 0.0% 2003
2004
2005
2006
OTP Bank
3Q 2007
2003
Median
2005
OTP Bank
Cost/Income Ratio
2006 Median
3Q 2007
Net Interest Margin
60.0%
15.0%
40.0%
10.0%
20.0%
5.0%
0.0%
0.0% 2004
2005
2006
OTP Bank
3Q 2007
2004
Median
2005 OTP Bank
Net Income Growth 400.0% 300.0% 200.0% 100.0% 0.0% -100.0%
2004
2006
3Q 2007
Median
LLP 6.0% 5.0% 4.0%
2003
2004
2005
OTP Bank
2006
3.0%
3Q 2007
2004
Median
2005 OTP Bank
Source: NBU, VTB Bank Europe Research
49
2006 Median
3Q 2007
Ukrainian Banking Sector – VTB Bank Europe Research
First Ukrainian International Bank Headline financials as at end 2006
Financial Performance
Total Assets
US$ 1,045mn
The following is an extract from the Bank’s 2006 IFRS Financial Statements audited by PricewaterhouseCoopers.
Operating Profit
US$ 17mn
Net Profit
US$ 11mn
Equity
US$ 183mn
Net Interest Income
18.3
29.8
63%
Capital Adequacy Ratio
21%
Net Non-Interest Income
17.1
19.9
16%
Operating Expenses
25.0
32.9
32%
Net Profit
6.9
11.3
64%
In mn US$
FY 2005
Source: IFRS Financial Statements of FUIB for 2006 audited by PricewaterhouseCoopers
Background Information
FY 2006
%
FUIB is one of the leading Ukrainian banks that started its operations in 1991 by servicing foreign trade operations of large enterprises.
Assets
647.1
1,044.8
61%
It is an institution privately owned by an industrial group SCM. The group is the Bank’s shareholder since 2002 but gained the control over FUIB only in February 2005.
Equity
94.9
182.6
92%
Loans to Customers
360.2
676.1
88%
Customer Accounts
380.5
501.1
32%
The Bank focuses on corporate business, including large corporate and SME clients. By October 2007 the corporate loan portfolio increased to US$1bn.
Assets, US$ mn
In 2006 FUIB started to develop actively retail banking services, including mortgage and consumer lending, and services for upper and middle class clients.
1,200
In September 2007 Fitch upgraded the Bank to “B” from “B-“ with outlook Stable. Moody’s assigned FUIB a “B2” rating, Positive outlook.
400
1,000 800 600
200 0 2003
Fast growth of operations and control over expenses allow FUIB to show good performance.
In 2007 the Bank refinanced two 1 year syndicated loans raising the borrowed amounts to US$150mn from US$55mn and to US$90mn from US$55mn respectively. It also refinanced a 3 year Eurobond issue increasing its size to US$275mn from US$150mn.
2004
2005
2006
Equity, US$ mn 200 160 120 80 40
By the end of 2007 FUIB increased the shareholder capital to US$500mn through additional share issues.
0 2003
50
2004
2005
2006
Ukrainian Banking Sector – VTB Bank Europe Research
First Ukrainian International Bank RoA
RoE
2.5% 2.0% 1.5% 1.0% 0.5% 0.0%
20.0% 15.0% 10.0% 5.0% 0.0% 2003
2004
2005 FUIB
2006
2003
3Q 2007
Median
2005 FUIB
Cost/Income Ratio
2006
3Q 2007
Median
Net Interest Margin
60.0%
15.0%
50.0%
10.0%
40.0%
5.0% 0.0%
30.0% 2004
2005
2006
2004
3Q 2007
2005
Median
FUIB
Net Income Growth
LLP
FUIB
300.0% 100.0% 0.0% 2003
2004
2005 FUIB
2006
2006
3Q 2007
Median
8.0% 6.0% 4.0% 2.0% 0.0%
200.0%
-100.0%
2004
3Q 2007
2004
Median
2005 FUIB
Source: NBU, VTB Bank Europe Research
51
2006 Median
3Q 2007
Ukrainian Banking Sector – VTB Bank Europe Research
Other Commercial Banks in the Top-20 The Top-10 banks consolidate the significant part of the banking sector assets. However, the role of the following ten banks is also significant and the difference in performance between the two groups is not dramatic.
sector average. Rodovid Bank doubled its assets both in 2006 and in 9M 2007 owing to successful development of lending and deposit taking. Likewise, TAS-Kommerzbank’s assets grew by 100% in 2006 and by 60% in 9M 2007.
Among these institutions are Alfa Bank, Ukrprombank and Forum bank which also are in the Top-10 banks by corporate lending volumes. The two banks Finance and Credit and TASKommerzbank are among leaders in lending to private clients.
Most of the banks raise funding on both local and international markets through the issue of domestic bonds and Eurobonds as well as attracting syndicated loans. They are backed up by strong shareholders but some of them also placed their shares on open markets. In 2006 approximately 19% of Rodovid Bank shares have been sold at the local exchange. In the same year Forum Bank sold 10% of shares in form of GDRs in a private placement. Nadra Bank, Finance and Credit Bank and Pivdenny Bank may also consider an IPO in the future.
According to classification adopted by NBU AlfaBank Ukraine is the largest bank in Group 2 but it can be also compared with the banks from Group 1 by size of assets and business. Alfa-Bank is a member of the Russian Alfa Group. It is very active in work with corporate clients. Alfa-Bank Ukraine’s largest corporate customers are among the Top 100 companies in the country. The Bank accounts
for 4.8% of total corporate deposits. It is also the 9th largest bank in Ukraine by equity and 16th by assets. Such banks as Forum, Kreditprombank, Ukrprombank and Ukrgasbank traditionally have a strong focus on corporate banking. Pivdenny Bank concentrates its efforts on work with SME clients and TAS-Kommerzbank mainly serves private customers. All banks from the Top-20 showed a strong performance in 2006-07. However, some of them built up their business at a higher rate than the
These banks are also the most likely targets for acquisition by strategic investors. In 2007 Commerzbank acquired the majority stake in Forum Bank and Swedbank purchased TAS-Kommerzbank. The forecast for development of the sector remains strong keeping the interest to M&A deals at a high level. Due to that experts do not exclude that Kreditprombank and Ukrgasbank can be sold to strategic investors.
Svetlana Aslanova Senior Corporate Analyst
[email protected]
DISCLAIMER The analysis presented in this report accurately represents the personal assessment of the analyst(s) about the securities or entities or markets or economic outlook and no part of the compensation of the analyst(s) was, or will be directly or indirectly related to the inclusion of specific views in this report. Further information is available on request. The information contained, and any views expressed, herein are based upon data within the public domain. Any views expressed do not constitute a representation by VTB Bank Europe plc (“VTB Europe”) as to their completeness or accuracy and VTB Europe shall not be liable or responsible for any action taken or as the case may be, not taken on the basis of the views expressed. Any investments referred to herein may involve significant risk, are not necessarily available in all jurisdictions, may be illiquid and may not be suitable for all investors. The value of, or income from, any investments referred to herein may fluctuate and/or be affected by changes in exchange rates. Historic performance is not indicative of future results. Investors should make their own investment decisions without relying on this publication. Only investors with adequate comprehension and experience in financial matters to assess the risks and rewards should contemplate an investment in any issuer or market discussed herein and other persons should not take action on the basis of this report. This report is not sufficient advice or an offer or solicitation for the purpose of a sale of any financial instrument. Moreover, the information contained herein is subject to change without notice. VTB Europe may hold a position (if applicable ) may undertake or have already undertaken an own account transaction or act as market maker in the financial instrument of any issuer discussed herein. This publication is issued in the UK only to persons described in the FSMA 2000 ( Financial Promotion) Order 2001 as investment professionals and is not intended to be distributed directly or indirectly to any other class of person. In other countries the report has been issued to persons regarded as professional investors ( or equivalent ) in their own jurisdiction. VTB Bank Europe plc is a Bank incorporated in England (registration no. 159752). Authorised and Regulated in the UK by the FSA and in Singapore by the MAS.
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