Ukrainian Banks in 2016
OCTOBER 2016YAROSLAV SOVGYRA,ASSOCIATEMANAGINGDIRECTOR
Ukrainian Banking Forum 2016
2Ukrainian Banks in 2016
Agenda
1. Macroeconomic Environment
2. Asset Quality
3. Capital Adequacy
4. Liquidity and Funding
5. Profitability
6. Conclusion
3Ukrainian Banks in 2016
Macroeconomic Environment1
4Ukrainian Banks in 2016
BaselineCredit Assessment
Ukraine – Building Blocks of Sovereign Rating
EconomicStrength*
Very Low (+)
InstitutionalStrength
Very Low (-)
Fiscal StrengthVery Low
Susceptibility toEvent RiskVery High
Economic Resilience
Very Low (-)
Government Fiscal Strength
Very Low (-)
Government Bond Rating Range
Macro Profile builds on three components from our sovereign scorecard, and threeCaa2-C
2016F
2017F
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
5Ukrainian Banks in 2016
Economic Strength – GDP
» GDPcontraction has stopped but meaningful rebound is not yet in sight
» Loss of purchasing power by population will hamper recovery
Real GDP Dynamics
10
5
0
-5
-10
-15
Source: Haver Analytics, State Statistics Service of Ukraine, Moody’s Investor's Service
GDP per capita (PPP basis, US$)
GDP per capita
GDP per capita (US$)10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
6Ukrainian Banks in 2016
Economic Strength – Real Disposable Income
» Real disposable income is beginning to rebound, but still remains very low
110%
100%
90%
80%
70%
60%
50%
6,000
5,000
4,000
3,000
2,000
1,000
-
Source: National Bank of Ukraine
Average Nominal Salary, UAH Nominal Salary, US$ Real Salary, cumulative change y-o-y
7Ukrainian Banks in 2016
Source: World Bank, World Economic Forum, Moody’s Investors Services
Economic Strength - Competitiveness
» Ukraine is ranked very low in competitiveness
Ease of doing business and competitiveness in CIS countries
Kazakhstan
Azerbaijan
Russia
Georgia
Armenia
Moldova
Belarus
Ukraine
Rating
Baa3
Ba1
Ba1
Ba3
B1
B3
Caa1
Caa3
WB (2016) Rank out of189 countries
41
63
51
24
35
52
44
83
WEF (2016-2017) Rank outof 140 countries
53
37
43
59
79
100
--
85
8Ukrainian Banks in 2016
Economic Strength – Competitiveness (cont.)
» Key drivers for low ranking: (1) macroeconomic environment, (2) technologicalreadiness, (3) financial markets
Source: World Bank, World Economic Forum, Moody’s Investors Services
9Ukrainian Banks in 2016
Economic Strength – Supply of Credit to the Economy
» High interest rates hamper availability of credit
» Rates will become affordable only once they move into a single-digit territory
Source: National Bank of Ukraine
18%
16%
14%
12%
10%
8%2012 2013 2014 2015 H1 2016
Interest Rates on Outstanding Corporate LoansInterest Rates on New Corporate Loans
35%
30%
25%
20%
15%
10%2012 2013 2014 2015 H1 2016
Interest Rates on Outstanding Retail LoansInterest Rates on New Retail Loans
10Ukrainian Banks in 2016
Source: National Bank of Ukraine
Fiscal Strength – Budget Deficit and Current Account
» Fiscal situation is gradually improving
» Current account balance improvements are driven by sharply contracted imports
» Exports are affected by stand-off with Russia
Cumulative Consolidated Budget Deficit/Surplus
4.6
3.1
1.6
0.1
-1.4
-2.9
-4.4
-5.9
60,000
45,000
30,000
15,000
0
-15,000
-30,000
-45,000
-60,000
-75,000January February March April May June July August September October November December
2013 (RHS) 2014 (RHS) 2015 (RHS) 2013 (LHS) 2014 (LHS) 2015 (LHS) 2016 (LHS)
11Ukrainian Banks in 2016
Fiscal Strength
» FX reserves have grown but remain low
» Recently disbursed IMF trance have unlock other sources of aid
FX Reserves Dynamics
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
Source: National Bank of Ukraine
12Ukrainian Banks in 2016
Fiscal Strength – Debt Burden / Repayments
Source: Final Consolidated Exchange Offer Memorandum, Moody’s Investors Service
» Repayments have been pushed post-2018
» Possible re-negotiation in 2019?
Principal and Interest Payments
6,000
5,000
4,000
3,000
2,000
1,000
02015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027
Interest payments Principal payments Former interest payments Former principal payments
13Ukrainian Banks in 2016
Asset Quality2
14Ukrainian Banks in 2016
ProblemLoans
» Problem loans have likely peaked in 2016
» Remain very high by any standards
» Hamper future revenue generation
Source: National Bank of Ukraine, Moody’s Investors Service
40%
35%
30%
25%
20%
15%
10%
5%
0%
70%
60%
50%
40%
30%
20%
10%
0%2010 2011 2012 2013 2014 2015 2016F
Problem loans % loans, Moody's est. (LHS) LLR% Loans, Local GAAP (RHS)
15Ukrainian Banks in 2016
Source: National Bank of Ukraine, Moody’s Investors Service
Exposureas of 1 March2016, UAH % total corporate
Foreigncurrency Asset quality
denominated 1 day + overdue % trend for 2016-
1
2
3
Wholesale and retail trading
Construction and real estate
Metals and mining
thousand228,504
127,724
70,799
loan book27%
15%
8%
loans % total55%
60%
80%
total loans*17%
20%
35%
17↔
↓
↓
RationaleStabilizing internal consumption
Weak investment appetite
Low production and export,production in military conflict areas
5 Food production 63,745 7% 65% 32% ↔ Stabilizing internal consumption and localcurrency
6
4
7
8
9
Retail trading
Agriculture
Professional services
Machinery
Transportations and logistics
54,353
50,469
50,449
45,994
36,736
6%
6%
6%
5%
4%
20%
43%
53%
82%
82%
7%
13%
7%
49%
23%
↔
↔
↓
↓
↔
Stabilizing internal consumption
Stable export and production
Weak internal consumption
Weak external demand
Weak internal consumption,low foreign trade activities
10 Energy and public utilities 36,700 4% 66% 9% ↔ Stabilizing production volumes
TOTAL 765,473 89% 21%
Loan Book Performance – Industries
» Most industries are doing better than in 2015
» Still, many remain problematic due to (1) low commodity prices and (2) continuous trade wars withRussia
Loan Performance of the Core Market Segments
16Ukrainian Banks in 2016
Capital3
17Ukrainian Banks in 2016
Capital – ProjectedWaterfall
Source: Moody’s Investors Service
2.3%
-6.7%
-0.01%-0.1%
-0.7%
8.0% 2.3%
3.1%
-3.4%-0.1%
0.0%
2%
0%
6%
4%
8%
10%
TCE 2015 (e) Capitalinjection
Loan Losses Deductible LLR SecurityLosses
PPI Change inimpact on capof DTA
Taxes paid Dividends Change inRWA
TCE 2017
» Ukrainian banking system is still insolvent, owing to (1) under-provisioning and (2) weak revenuegeneration
» Large recapitalisation is still needed.. although improvements compared to 2015
Regulatory Capital Ratio Under Moody’s Stress-Test Analysis
18%
16%
14%
12%
18Ukrainian Banks in 2016
Profitability3
19Ukrainian Banks in 2016
Profitability – Banks Will Remain Loss-Making
Source: Moody’s Investor’s Service
» Key drivers for loss-making performance– High provisioning charges due to under-provisioning
– Fall in revenue-generating assets
– NIM contraction
Banks Remain LossMaking as Provisions to ConsumeEarnings
6.0%
4.0%
2.0%
0.0%
-2.0%
-4.0%
-6.0%
120100
80
60
40
20
-
(20)
(40)
(60)
(80)2011 2012 2013 2014 2015
Operating income PPI Net profit RoAA (RHS) Nеt interest margin (RHS)
20Ukrainian Banks in 2016
Funding & Liquidity3
21Ukrainian Banks in 2016
Depositor confidence is gradually restored
» Deposit base is gradually growing..
» But saving rate remains low as disposable income of population has fallen
Deposits Dynamics
-2.0%
-4.0%
-6.0%
-8.0%
-10.0%
-12.0%
-14.0%
-16.0%
-18.0%
0.0%
250
200
150
100
50
-
Source: National Bank of Ukraine
300UAH corporate deposits UAH retail deposits Total UAH deposits % change to January 2014
22Ukrainian Banks in 2016
Decreasing Reliance on Wholesale Funding
Source: National Bank of Ukraine
» Wholesale funding is now manly from parent banks
» Access to debt markets by Ukrainian banks is unlikely in the near term
» No meaningful way of hedging FX risk if borrowing cross-border» Still – hopes for long-term funding from abroad in the medium term
Dependence on Wholesale Funding Remains high Despite Whole Debt Repayments
30%
25%
20%
15%
10%
5%
0%
30
25
20
15
10
5
02011 2012 2013 2014 2015
International wholesale debt, US$ bln % total non-equty funding
23
Questions &Answers
Ukrainian Banks in 2016
24Ukrainian Banks in 2016
Thank You
25Ukrainian Banks in 2016
Yaroslav SovgyraAssociate Managing Director+7 (495) 228 60 [email protected]
26Ukrainian Banks in 2016
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