Ukrainian Banking Sector Outlook by Yaroslav Sovgyra, Associate Managing Director, Moody’s

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


Macroeconomic Environment1


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


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


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


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


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


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


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



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)


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



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


Asset Quality2


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)


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


Capital3


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%


Profitability3


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)


Funding & Liquidity3


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

-


300UAH corporate deposits UAH retail deposits Total UAH deposits % change to January 2014


Decreasing Reliance on Wholesale Funding


» 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


Thank You


Yaroslav SovgyraAssociate Managing Director+7 (495) 228 60 [email protected]


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Economy & Finance

Ukrainian Banking Sector Outlook by Yaroslav Sovgyra, Associate Managing Director, Moody’s