Monthly Digest «Review of Banking Sector of Ukraine» for ... · «Review of Banking Sector of Ukraine» for May, 20111 Contents: 1. General macroeconomic trends, new legislation

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Monthly Digest «Review of Banking Sector of Ukraine» for May, 20111

Contents:

1. General macroeconomic trends, new legislation

1.1. Macroeconomic trends 1.2. New legislation 1.3. Estimate of consumer attitude

2. Analysis of situation in banking sector 2.1. Key indicators of banking system of Ukraine 2.2. News of financial activities of the banks 2.3. Financial experts and bank top management on market trends

1. General macroeconomic trends, new legislation 1.1. Macroeconomic results and forecasts

GDP and basic sectors production index, change in %

Source: State Statistics Committee, NBU

Growth of Ukrainian GDP in IQ of 2011 made 5.2% in comparison with IQ of 2010 and 2.9% in comparison with IVQ of 2010 (Source: State Statistics Committee). According to preliminary estimates of NBU the GDP growth for 4 months made 5%. At the background of large comparison base of 2010 the growth of basic sector production index has slowed down to 6.7% year-on-year. The increase of industrial production decelerated from 8% in March, 2011 to 4.9% in April, including: in metallurgy – from 5.7% to 3.1%, machine-building – from 22.8% to 13.6%, agriculture – from 5.9% to 1.6% respectively. High investment activity has promoted to further increase of volumes of construction works (over 20% in April, 2011, year-on-year). The turnover of retail trade continued to grow – from 14.9% to 18.6%.

Consumer inflation in April made 1.3% in comparison with March and 9.4% on year-on-year basis. The increase of world prices on energy carriers caused the appreciation of fuel by 4.9% that increases the inflationary pressure on other constituents of consumer basket due to growth of transportation costs. The growth of prices on industrial primary products in external markets caused the dynamics of producer prices index growing that in April increased by 3.4%, for year – by 20.8%.

The retail turnover in January-April, 2011

1 Statistical data on macroeconomics and financial sector are given as of 01.05.11 due to delay in publishing by the State Statistics Committee and NBU.

2

Price indices, annual change, %

Source: NBU

increased in comparable prices by 13.8% in comparison with January-April, 2010, in nominal terms having made UAH 95.882 BIL. The maximum growth has been shown in the following oblasts of Ukraine: Vinnytsia (+21.7%), Cherkassy (+19.5%), Zhytomyr (+17.4%), Volyn (+17.3%), Rivne (+17.2%), Zakarpattia (+16.4%), Mykolaiv (+16.3%).

Dynamics of inflation rate,% Dynamics of industrial production, %

Dynamics of grain crops, % Dynamics of net FDI, %

Source: State Statistics Committee, NBU, «Kontrakty»

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Прогноз развития экономики МВФ на 2011-2012 г.г.

9.4% 9.2%8.3%

-1.9%

-3.6% -3.8%

2.8% 2.5%

4.9%4.5%

4.2%

7.8% 7.2%8.1%

5.8%

2010* 2011** 2012**

рост ВВП, % инфляция, % к концу пред.года

безработица, % сальдо платежного баланса, %

дефицит госбюджета, % ВВП

IMF put forward the mandatory conditions for Ukraine for receipt of next tranche under stand-by programme:

· Pension reform (pension payments in Ukraine make 18% of GDP, it is the highest index in the world);

· Rise in prices for gas for population; · Retention of state budget deficit within target

indicator in 3.5%; · Legislation related to purchase by NBU of

liabilities issued for recapitalization of banks.

*- estimated, **-projected Source: IMF, World Economic Outlook

Foreign direct investment into Ukraine amounted to USD 925.7 MIL in ІQ of 2011 that is

29.1% more than in January-March, 2010. USD 713.8 MIL (77.1% of total amount) were invested from EU countries, USD 27.3 MIL (3.0%) – from CIS countries and USD 184.6 MIL (19.9%) from the other countries of the world. The increase of foreign equity into the country’s economy in ІQ of 2011 amounted to USD 829.3 MIL.

Mykola Azarov, Prime minister of Ukraine: «Gold and foreign currency reserves of Ukraine reached the historic maximum and amount to about USD 37 BIL. It is related to the fact that the export has considerably activated, the transfers of people working abroad Ukraine revived. We have positive balance of balance of payments in goods and services. We have some negative dynamics in goods but in general the country receives more foreign currency than transfers abroad, that is why the foreign currency reserves increase».

1.2. New legislation

NBU by its Resolution No. 111 dated 06.05.2011 permitted the banks since 30 May, 2011 to perform swap operations among themselves for the term up to 365 calendar days as well as act in the interbank market both as the foreign currency seller and buyer. All restrictions on volumes of sale of foreign currency to natural persons were canceled as well.

NBU introduced new for the Ukrainian market indicator – index of rates on deposits to natural persons that will be used as basic one for floating loan rates in UAH.

Ukrainian index of annual rates on deposits of natural persons as of 20.05.2011 Deposit term UAH USD EUR

3 months 10.11% 5.23% 3.61% 6 months 11.80% 6.09% 4.30% 9 months 12.40% 6.30% 4.63% 1 year 13.01% 6.64% 4.93%

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The Cabinet of Ministers of Ukraine canceled quotas fixing for grain export that was introduced in October, 2010. Verkhovna Rada adopted the law on introduction of customs duty on wheat export for the period till 1 January, 2012 (9% but not less than EUR 17 per ton), corn (12% but not less than EUR 20 per ton) and barley (14% but not less than EUR 23 per ton). Since the start of the marketing year (1 July, 2010) and till 1 May, 2011 the grain export from Ukraine amounted to 13.787 MIL t, including: wheat – 5.312 MIL t, barley – 2.471 MIL t, corn – 5.83 MIL t. The balance provides for the export in May-June, 2011 of 1.909 MIL t of wheat and 2.356 MIL t of corn. Under these conditions as of 1 July of this year the reserves of wheat will make 3.661 MIL t, barley – 0.722 MIL t, corn – 0.936 MIL t. According to estimations of the Ukrainian Grain Association the real grain export from Ukraine in May-June, 2011 will amount to about 2 MIL t.

Estimate of consumer attitude Index of consumer attitude in Ukraine

Source: GfK Ukraine

In April, 2011 the index of consumer attitude (ICA) improved by 6 p.p. up to 67.8 both due to improvement of estimate of current status (+5.9 p.p.) and expectations as for the country’s economy development (+6 p.p.). The reduction of price boom has somewhat calmed the population but trust in the economic policy still remains low. The expectations of the Ukrainians as for the unemployment and inflation have not changed substantially in comparison with March.

Attitude of the Ukrainians for recession, % Estimate by the Ukrainians of own perspectives comparing with 2010, %

только начинается

14%

близок к завершению

10%

не было и не будет 2%

продолжается 71%

значительно лучше 4%

значительно хуже 13.5%

не знаю 12%

скорее лучше 25.5%

скорее хуже 45%

Source: Ukrainian Institute of Social Researches, Institute of Economy and Forecasting to National Academy of Sciences of Ukraine

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Структура финансовых инвестиций населения, %

евро 14%

золото 8%

депозиты 33%

недвижимость 13%ЦБ 5%

ПИФы 2%

валютные торги 1%

под матрац 46% доллар 28%

гривна 50%

The most popular way of keeping savings of the population is «stuffing money in a mattress» – 46% of responders.

Reasons: · Low level of trust in banks; · Absence of promoted alternative

investment tools; · Wish to avoid publicity and

taxation of «shadow» income.

Source: X-Trade Brokers Ukraine, interviewing of 1592 responders, margin of error - 5%.

2. Analysis of situation in banking sector

2.1. Key indicators of banking system of Ukraine

Foundation and liquidation of banks as of 01.05.2011 units % Quantity of banks having NBU license 177 100 including Joint stock companies, among them 176 99,4 open 2 1.1 public 173 97.7 closed 1 0,6 Limited liability companies 1 0,6 Banks under liquidation 18 Banks with temporary administrations 5*

* - as of 20.05.11

Structure of banking sector

Indicators 01.01.10 01.01.11 01.05.11 Quantity of registered banks 197 194 195 Quantity of working banks 182 176 177 Among them: with foreign capital 51 55 54 Including with 100% foreign capital 18 20 20 Share of foreign capital in authorized capital of banks, % 35,8 40,6 39,9

Capital: the equity of the banks for 4 months increased by 5.9% and as of 01.05.2011 amounted to UAH 143.7 BIL (14.1% of the banks’ liabilities). The paid registered capital increased by 4.9% (up to UAH 153 BIL).

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Депозитный портфель БС Украины, млрд. грн.

144 174

270290

01.01 01.05

юр.лица физ.лица

Структура средств населения по срочности, %

74% 76%

26% 24%

01.01 01.05

срочные до востребования

Liabilities of the banks for 4 months of 2011 increased by 8.8% (up to UAH 875 BIL).

Basic constituent parts of liabilities:

· Funds of retail customers – UAH 290.1 BIL (33.2% of liabilities); including term funds that make UAH 219.3 BIL (75.6% of funds of individuals), demand funds – UAH 70.8 BIL (24.4%).

· Funds of legal entities – UAH 174.3 BIL (19.9%); · Interbank loans and deposits – UAH 171.5 BIL

(19.6%).

Cost of term deposits reduced from 7.1% to 6.1%. The average weighted cost of UAH loans amounted in April, 2011 to 13%.

Валютная структура кредитных и депозитных портфелей корпоративных и частных клиентов

на 01.05.11, млрд. грн.

65

151

339

112137 140210

47

кредиты физлиц депо физлиц кредиты юрлиц депо юрлиц

гривна валюта

In April, 2011 the population deposit portfolio in foreign currency amounted to UAH 139.8 BIL and for the first time since 2006 exceeded the credit exposure of individuals in foreign currency that amounted to UAH 137.3 BIL.

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Структура банковских активов, %

69.2% 66%

11.1%19.7% 22%

12%

01.01.11 01.05.11

кредитные операции высоколиквидные другие

Source: NBU

Assets of the banks since the beginning of the year have increased by 8.1% and as of 01.05.2011 amounted to UAH 1018.7 BIL, total assets – UAH 1 176 BIL.

Structure of total assets: · cash, bank metals and funds with NBU – 4.7%; · balance of funds on correspondent accounts with

the other banks – 7.3%; · credit operations – 66.3%; · investment into securities – 8.7%; · accounts receivables – 3.3%; · fixed assets and intangible assets –4.4%; · accrued income – 4.4%; · other assets – 0.9%.

The share of overdue loan exposure in April increased by UAH 688 MIL and since the beginning of the year – by UAH 1.4 BIL (up to UAH 86.3 BIL) and amounted to 11.1% of aggregated loan portfolio (according to the official data of NBU). However, according to the estimations of Fitch and Moody’s international rating agencies the share of problem assets in the banking system of Ukraine makes 56.5% and 40% respectively.

Динамика и качество кредитного портфеля БСУ

755780

11.2% 11.1%

740

760

780

800

01.01.11 01.05.1110%

11%

12%

КП, млрд.грн. доля проблемных кредитов,%

ТОП банков по доле просроченных кредитов в портфелях на 01.04.2011, % (Источник: НБУ)

15%

67%

56%50% 46%

42% 39% 37% 36% 35% 33%

БСУ

Киев

Родо

вид

Влад

имир

ский

Фор

ум

Укрг

азба

нк

Пет

роко

мм

ерц

Над

ра

Захи

динк

омба

нк

Све

дбан

к

Фам

ильн

ый

8

Регулирование НБУ банковской ликвидности, оборот за период, млн.грн.

0.070 0 0.02

9.7

16 14.5

37.8

0

0.5

1

янв фев мар апр

млрд. грн.

0

10

20

30

40

млрд. грн.

рефинансирование мобилизация

Рентабельность банковского сектора, %

-0.01

-1.45

0.13 -0.09 -0.14

-0.04

-10.19

0.92 -0.62 -1.02

-5

0

5

01.01 01.02 01.03 01.04 01.05

ROA

-40

-30

-20

-10

0

10ROE

Profitability of bank assets as of 01.05.11 amounted to (-0.14), return on equity – (-1.2).

Total volume of NBU’s operations on mobility of banks’ funds in April made UAH 37.8 billion. Altogether UAH 78.6 billion were mobilized since the beginning of the year. Average weighed interest rate on mobilization operations in April made 1.6%, since the beginning of the year – 2.2%.

In April NBU supported liquidity of the banks in volume of UAH 19.5 million (overnight loan to 1 bank).

Volume of debt return on previously granted refinancing loans in April amounted to UAH 0.9 billion (since the beginning of the year – UAH 4.7 billion). UAH 67 billion of refunding is still not paid back by the banks.

Source: NBU, “Business”

10 top banks on volumes of non-returned NBU refunding as of 01.04.11, UAH billion

Revenues of banks for January-April, 2011 comparing to the relevant period of 2010 increased by 5.9% and amounted to UAH 45.9 billion.

Expenses reduced by 4.4% (to UAH 46.6 billion). Financial result of banking system is negative (- UAH 464.6 MIL).

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Структура банковских доходов за 4 месяца 2011 г., %

другие4%

процентные83%

комиссионные11%

торговые2%

Структура банковских расходов за 4 месяца 2011 г., %

другие 13%

резервы 22%

процентные 41%

комиссионные

2%админ.

21%

2.2. News of bank financial activity

Change of owners, mergers and acquisitions, liquidation

Dialogbank goes into liquidation according to the Resolution of NBU No. 143 dated 10.05.2011.

Swedish Bank “Skandinaviska Enskilda Banken” (SEB) obtained a permit of Anti-Monopoly Committee on purchase of "Aktsept Bank". SEB already possesses the SEB Bank in Ukraine.

Capitalization, funding

Bank «Forum» registered the increase of charter capital by 34% or by UAH 1.5 billion – up to UAH 5.93 billion by means of private placing of ordinary registered shares in nominal amount in UAH 10. Share of Commerzbank in charter capital of the Bank amounted to 95.91%.

Expansion of Russian capital presence

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Отраслевая структура российских инвестиций в Украину в 2010 г.,%

здравоохранение 1%

недвижимость 4%

транспорт и связь 8%

торговля 4%

строительство 6%

отели и рестораны 1%

продукты питания 2%

другие 11%

финансы 56%

перерабатывающая 7%

Source: Ministry of Economics, «Investgazeta»

Directions of expansion of Russian banks in Ukraine:

- Lending expansion (interest dumping);

- Expansion of networks (Capture of market);

- Change of USD with RUR in loans;

- Readiness to buy problem Western banks.

Source: AUB

Vadym Pushkariov, VTB Bank: «The share of Russian capital in general structure of Ukrainian banks with foreign capital makes 24.5%, and in the coming years it will increase up to significant figures. Risks that frighten Western investors does not absolutely embarrass Russian banks accustomed to work under similar terms».

Eric Naiman, IC “Capital Times”: “The banks with Russian capital are ready to undertake high risks,

using not so much the best practices of management and lending as general understanding of their interests in Ukraine”.

2.3. Financial experts and bank top management on market trends Funding Vitaliy Vavryshchuk, BG Capital

If at the end of 2008 the external borrowings made about one third of funding base, then at the end of 1Q of 2011 the loans of foreign lenders provided less than one fourth of total volume of resources of Ukrainian banks.

Ihor Sorokin, NBU Today almost UAH 70 billion of NBU’s refunding “hang” in banking system.

Some banks refuse from this instrument and early redeem, because of certain limitation set on them.

Anastasia Tuiukova, Dragon Capital It can be expected that in terms of post-crisis exacerbation of competitiveness the

small banks that did not managed to occupy their niche would like to step out from the business as soon as they find strategic investor or making a junction with other institution.

Bank strategies Dmytro Anufriiev, Deloitte Ukraine

In Ukraine excessive liquidity of banking system and unacceptably high rate on loans are observed simultaneously. Loan portfolio of BSU in 2010 practically did not increase in spite of significant spread between deposit and loan rates. High level of loan rates reflects situation with actual solvency of real economy sector and to some extent – level of the investment risk.

Borys Tymonkyn, Substantial revaluation of all assets took place. Today the liquidity is quite high

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Ukrsotsbank and it is important. During recession no one is interested neither in capital nor in any risks of second and third level, but interested in amount of money available today, tomorrow and how much should be given back. It is like in peacetime at the parade, when cockade on cap should be cleaned. What is the meaning of cap during the war? It has no meaning at all; moreover it is easier to be killed because of it. Likewise the theory of risks in peacetime and during crisis.

Viacheslav Yutkyn, Prominvestbank Till the end of 2011 we expect mergers and acquisitions in group of small banks

due to necessity of repayment by them of the NBU’s refunding and increase in capitalization. And not many of them will be able to solve the problems with the help of shareholders. Thus the banks will have poor choice: either to merge, or to be liquidated. Merger will be in place minimum for 10 banks, maximum – for 20.

Dmytro Hrydzhuk, bank "Khreshchatyk"

The banks will have to change actively their business models and start to work actively on development of present and new products and services that could expand their income base and relieve from "loan" dependence. Now earnings from lending of the most banks make about 80% of gross return, while fee revenues and profit from associate lending services — no more than 20%. European banks do not meet with such a problem, as far as revenues from loan activity do not exceed 25% of gross return.

Rate forecasts

Volodymyr Oleksiuk, X-Trade Brokers Ukraine

Till the end of the year UAH can get stronger against EUR up to UAH 10/EUR. In this case small kickbacks can be in place at the level of UAH/EUR 11.5-11.6, at the end of summer EUR will fall till the indicator UAH 11/EUR.

Development of alternative sale channels and client service Anton Romanchuk, Ukrainian processing centre

In the near future the volumes of cashless settlements using cards will increase due to holders of credit plastic cards, because when discarding loan funds in ATMs you have to pay fees equal to 2.4%.

Ihor Ashmanov, «Ashmanov and Partners»

Ukrainian market of online advertising is on the eve of breakthrough. In Russia its annual turnover makes more than USD 0.5 billion, and in Ukraine – a little bit more than UAH 100 million, at the same time the number of Ukrainian users is only 2-3 times less.

Andriy Tryfonov, Microsoft

Directions for optimization of Internet banking service: statement grouped by types of revenues-expenses, comparison with aggregative figure of revenues and expenses of client’s social group; geo-location – information on location of the nearest open outlet/operating ATM.

Serhiy Mednov, Alpha Bank

Telephone will dominate as tool of communication, including in banking. In 2013 smartphone will outrun PC by quantity of web browsing, usage of applications. Their usage as main device for remote communication with bank does not raise any doubts.

Trend of corporate clients and SME lending market EBRD Bank intends to allocate USD 300 million in 2011 for investments into agricultural

sector of Ukraine. Investments are supposed in 10 projects of agricultural production: eco-friendly, energy-efficient and high-technology.

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Dmytro Anufriiev, Deloitte Ukraine

Situation with attraction of capital into Ukraine remains quite sharp due to very low level of development of internal stock market. Possibility of capital raising have only small number of large companies which have access to relatively cheap resources of foreign banks and companies having a chance to make initial public offering in world exchanges.

Victor Horbachev, RB Aval

High competition of banks for good borrowers will promote to reduction of interest margin.

Vadym Pushkariov, VTB

Ukrainian state banks, Pryvatbank, subsidiaries of Russian banks are lending in large scales the real sector. But we “hover on one field” round the same borrowers, knock down prices, pamper the customers.

Andriy Martynov, Ukreximbank

When we grant a loan, the condition regarding transition to full package of services in our bank is obligatory.

Larysa Bondariova, Credit Agricole

AIC is our traditional main driver of the Ukrainian economy, one of few industries that managed to show the growth at the background of 15% falling dawn of GDP. Enterprises of AIC are diligent borrowers. We implemented partner programs according to which the partners compensate partially the rate on agricultural loans (in average 5-10% per annum in UAH). Except for AIC and related sectors, we are ready to lend polygraphy, production of consumer goods, auto industry and pharmaceutics. We show minimal activity in lending of metallurgy, building, chemical and coal industry.

Nataliia Lebedieva, Kyivska Rus

We are lending AIC, starting from the large producers and farm enterprises and up to exporting companies.

Taras Kyiak, BM Bank We work actively with trading, machine building companies, gas traders. In the

context of the last world trends all of us are more oriented at cooperation with agricultural enterprises.

Viktor Bratko, Kyivska Rus

The goal for 2011 in SME segment is to increase loan portfolio up to UAH 150 million. According to the results of 1Q, the bank issued to SME loans in amount of UAH 38 million.

Olena Vovk, Swedbank

Statistics shows that in a few years from 10 starting up companies only one will remain afloat. Therefore the loans for business starting up are as a rule issued only under substantial collateral with high cost recovery.

Roman Melnyk, bank "Khreschatyk"

Personal investment of entrepreneur is important condition to get funding for the new project start. Ratio of borrower’s private funds in lended project should make at least 20% of total value.

Ivan Feskiv, «Kredobank»

Only 10% of entrepreneurs meet the criteria of Western standards. The rest do this at somewhat amateur level. They often can not show how their business looks like in fact due to different circumstances. In situation of large share of grey segment in Ukrainian entrepreneurship the bank has to take into account all risks.

Lending to private customers Vadym Pushkariov, VTB

In retail segment the small specialized Ukrainian banks who promote auto lending and consumer loans and, in less extent – mortgage, hold the most active positions.

Mortgage

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Tetiana Nadtochyi, Erste Bank

Banks do not hurry up to enter the mortgage market with radically new offers, as far as the situation in the property market is still not entirely clear. The banks will change their attitude to mortgage programs not earlier than in September or even in 2012.

Svitlana Spitsyna, OTP Bank In 1Q of 2011, the banks made stake on lending of property mortgaged under

problem loans that was adjudged from non-payer, and financing of new constructions being built by their shareholders and partners. Only separate deals on certain projects are possible.

Auto lending

Anton Shapernikov, VAB Bank

This year we will observe significant growth of auto lending volumes. If in 2010 the share of autos by loan in automobile market made about 10-12%, then during the year it will grow up to 15-20% (for the current year the total volume of auto sales in Ukraine is forecasted at the level of 200 thousand autos).

Volodymyr Radko, Bank of Cyprus

According to results of 2011, the banks can increase the number of issued auto loans by 30-35% comparing with 2010.

Valeriy Patsui, PUMB

During 2011 the slight reduction of rates on auto loans is foreseen within 2-3% (from 18-19% till 15-16%).

Vladyslav Kravets, Prominvestbank

Rate in 14-16% per annum in UAH is a ceiling for auto loans, the value of banks’ liabilities doesl not allow to reduce the rate more.

Valeria Maiorova, Delta Bank

The growth of consumer lending market in 2011-2012 will make 30% annually. The banks jointly with retail chains will use new interesting tools for demand stimulation by extending the terms of «zero» loans, by modifying products, etc.

Maryna Dutlova, Alpha Bank

The market of consumer lending in 2011 will raise 1.5 times as minimum up to USD 1.5 billion, and in nearest future it will be possible to observe the expansion of banks’ presence in places of customers’ presence. Till the end of 2011 it is planned to open about 1 thousand lending points, and the points will be opened not only in household appliances chains, but in footwear, construction materials chains as well.

Serhiy Ponomarenko, Universal Bank

Issue of long term loans with fixed rates contains substantial risk for banks, as far as terms of attracted by them deposits are much shorter and in case of crisis of liquidity and growth of interest rates, they can suffer losses. Floating rate based on general accepted index will make it possible to reduce risks that provides advantage both for banks and customers. Due to absence of interest risk in this case the banks are ready to issue loans with much less margin.

Quality of loan portfolio

Standard&Poor’s

BS of Ukraine is still under threat of exceptionally high loan risks due to continuing problems with assets quality that leads to low profitability of banks. Share of bad loans including restructured ones makes about 50%. The banks will need 2-3 years to return the assets quality to pre-crisis level.

Statistics of NBU Almost fifth part of loans issued to building companies (about UAH 8.45 billion) is overdue.

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Marius Vismantas, World Bank

We find sense in foundation of "bad" bank, which will work with bad assets. For me personally it makes sense to separate good from bad one... These two directions require quite different approaches, and we find sense in separation of bad assets from good banking structures".

Financial result

Dmytro Zinkov, OTP Bank

Some banks managed to align work with overdue indebtedness and started to develop business, others still solve old problems. The banks that activated corporate lending has become the most successful.

Cross selling

Viktor Bratko, Kyivska Rus

When granting loan to corporate customer we put indispensable condition: opening of accounts and realization of payroll program with the bank. This allows us to develop further the lending to employees through payroll program cards.