Ukraine Fixed Income February 8, 2008
Issuer ratings Issuer’s ratings Issue ratings Oschadbank S&P – – Moody’s B2 Aaa.Ua State&owned Giant Meets Ukrainian positive Fitch BB– AA (Ukr) positive People’s Needs
Issue parameters
Series A Series B Oschadbank (–/B2/BB–) is to place two series of local bonds totaling Placement Feb 14, ‘08 Feb 14, ‘08 UAH500 mln ($100 mln). The first, UAH300 mln series A will mature in 2011, Maturity Feb 10, ‘11 Feb 7, ‘13 while the UAH200 mln series B will be redeemed in 2013. We regard the bank as Put Aug 13, ‘09 Aug 12, ‘10 Volume, UAH mln 300 200 one of the most reliable in Ukraine. We estimate the Oschadbank’s bonds’ base Coupon rate 10.25% 10.50% fair spread over the OVGZ curve at 150.200 bps, which translates into effective Coupon frequency 91 days 91 days an YTP of 10.2% for Series A with the 18.month put, and 10.4% for Series B with the 30.month put. The maximum effective placement YTPs set in the prospectus Key financials, IFRS, $ mln are 10.65% (corresponding to a coupon of 10.25%) for Series A and 10.92% 2005 2006 (corresponding to a coupon of 10.25%) for Series B. Thus, the placement yield BALANCE SHEET Total assets 1,846 2,202 premium is potentially 45.50 bps. Asset growth 101% 19% Oschadbank is the eighth largest Ukrainian bank, with a highly developed business Cash and balances with National Bank 665 236 Due from banks 337 482 and the country’s largest branch network that includes over 6,000 outlets. The Loans to customers 310 799 bank’s assets stood at $3.3 bln as of October 1, 2007, up 83% y&o&y and beating Government debt securities 421 371 the banking§or average. Individual lending was the main growth driver. Loan loss reserves 75 77 NPLs* 75 72 Oschadbank is the successor of the Soviet State Savings Bank of Ukraine, and is Total shareholder equity 136 285 wholly state owned. This determines its asset structure, which leans toward very Total liabilities 1,709 1,917 Due to banks and National Bank 66 181 reliable state securities. The bank offers highly attractive terms for individual deposits Customers’ accounts 1,609 1,662 (100% state guaranteed). A large amount of its business is connected with state INCOME STATEMENT social and industrial projects, as well as servicing government organizations and Net interest income 65 114 state&owned companies’ cash flows. Net commission income 63 76 Net income 29 20 We estimate Oschadbank’s local bonds’ base fair spread over the OVGZ curve at RATIOS Return on average assets 2.07% 0.97% around 175 bps – the same as that of the quasi&Sovereign Eurobonds of Return on equity 37.05% 9.38% Ukreximbank and Kyiv City over Ukraine’s Sovereign Eurobond curve – and close to NIM 7.23% 8.13% the spread over the OVGZ curve of those foreign&owned banks with local bonds. Cost/income ratio 84.90% 86.03% Cash and National bank loans, % of assets 36.03% 10.72% Ukrainian banking sector bond yield map Overdue loans/gross loans 24.03% 9.00%
Loan loss reserves/gross loans 24.03% 9.68% 15% 15% Loan loss reserves/NPLs 99.99%107.52%
Equity/assets 7.38% 12.95% 14% Imexbank A Rodovid Bank В Kreditprombank F Ukrgasbank С 14% Capital adequacy ratio VAB Bank 1&F (National Bank requirements) 25.96% 11.46% 13% Ukrgasbank A 13% Kreditprombank C Alfa Bank Ukraine C Source: Company Bank Forum B 12% 12%
Credit Dnepr A Swedebank Invest А 11% ProCreditbank F Raiffeisen bank Aval1&C 11% Ukrsotsbank Е Ukreximbank B Swedebank А Oschadbank A Oschadbank В 10% Calion Bank Ukraine A Raiffeisen bank Aval1&B 10%
Kreditprombank E Raiffeisen bank Aval D Alfa Bank Ukraine D 9% ProCreditbank E 9%
Sovereign bond yield 8% 8%
7% 7%
0 200 400600 800 1,000
Source: Cbonds, Troika Dialog
Phone: +38 (044) 207 3780 www.troika.ru FEBRUARY 8, 2008 OSCHADBANK: STATE&OWNED GIANT MEETS UKRAINIAN PEOPLE'S NEEDS
Overview Oschadbank (–/B2/BB–) is a 100% state&owned bank, headquartered in Kyiv. It is the successor of the Soviet State Savings Bank of Ukraine, and was registered on December 31, 1991. Oschadbank gained its present open joint&stock company status in 1999. At the beginning, Oschadbank operated as the state’s tool for raising individual savings, but today it is a universal bank – the eighth largest in Ukraine – providing customers with a full range of banking services.
The bank’s key advantage is that the state (through the cabinet) owns 100% of Oschadbank’s shares. This provides the bank with not only government support in times of need, but also with a unique, 100% state guarantee on individual deposits. In addition, Oschadbank acts as state agent to grant various loans, service pensions and energy sector projects, repay depreciated deposits of the former Soviet&era bank to Ukrainian citizens, and manage accounts of various state&owned companies.
The bank’s corporate governance is subject to legislative regulations, namely the “Law on Banks and the Banking System”. Oschadbank’s main governing body is the supervisory council, which is appointed by the Rada, president and cabinet for a five&year term, and consists of 15 members. The body executes control over the activities of the bank and its board, and determines priority areas, strategy and objectives for the bank, alongside protecting the state’s interest as its sole shareholder. Oschadbank’s executive authority is the BoD, which is currently headed by Anatoliy Guley.
In July 2007, Moody’s assigned the bank an ‘E+’ financial strength rating, ‘Baa2/prime&2’ global local currency deposit ratings and a ‘B2’ long&term and ‘NP’ short&term foreign currency deposit rating. In December 2007, Fitch assigned a long&term issuer default rating of ‘BB–’ (equivalent to a Sovereign rating).
SWOT analysis
Strengths Weaknesses Largest retail banking network in Ukraine, effective work Dependence on political environment due to state’s with private clients presence as a shareholder Fully state&owned, large part of the business connected to Prevalence of short&term funding state projects, state guarantees on deposits Large amount of NPLs formed in the 1990s Eighth largest bank in Ukraine, large market share Opportunities Threats Client relationships, model renovation and gaining larger High competition in the sector market share in retail market due to its outstanding network Increasing cost of funding due to subprime crisis and flight Participation in various government programs as state to quality trend in EMs payment agent Unfavorable changes in legislation and legal environment Access to cheap funding sources on international markets
Financials Between 2003 and June 2006, the bank’s asset growth suffered from a number of restrictions that were in force pursuant to a memorandum of understanding between the government, the World Bank and Oschadbank. Its asset growth has since risen from 19.00% y&o&y in 2006 to 83.25% y&o&y as ofOctober 1, 2007.
2 FEBRUARY 8, 2008 OSCHADBANK: STATE&OWNED GIANT MEETS UKRAINIAN PEOPLE'S NEEDS
Oschadbank asset growth trend, $ bln
4 4
3 3
2 2
1 1
0 0 2005 2006 2007 1H05 1H06 1H07 1Q05 1Q06 1Q07 9m05 9m06 9m07
Source: National Bank
The bank’s asset structure is strongly influenced by its ownership structure. As the state is the sole owner, Oschadbank has a large number of government securities, which accounted for 17% of assets – or $371 mln – as ofend 2006. Such investment is not very profitable (the average interest rate was 10% in 2006). Nonetheless, such an asset structure provides fairly high liquidity (state securities are accepted as a pledge by the National Bank) and low risks (government securities are the most reliable hryvnia instrument).
Loans and advances to customers comprise 40% of Oschadbank’s assets or $799 mln as of end 2006 (45% as ofOctober 1, 2007, under UAS), which is a comparatively low figure. The bank’s loan portfolio grew by 128% y&o&y in 2006 (74% in 9m07), in line with banking sector growth, due to the rapid development of retail lending (up 107% in 2006, and 57% in 9m07). Corporate lending grew by 153% in 2006 (up 98% in 9m07), in line with the general market trend. Loans and advances to the ten largest borrowers total $190 mln, or 22% of gross loans as of end 2006 (18% in 2005).
Oschadbank loan portfolio performance, $ mln
1,000 1,000
600 600
600 600
400 400
200 200
0 0
2004 2005 2006 9m07 (UAS)
Corporate loans Individual loans
Source: Company
One of Oschadbank’s main problems is the high level of overdue loans provided in the 1990s in the framework of government support for agricultural and industrial companies through a privileged lending policy. As ofend 2006, NPLs under UAS totaled $72 mln, or 9.3% of Oschadbank’s loan portfolio (it declined to only 5.0% in 2007, due to a 179% boost in lending under UAS that year). More than half of the problem loans are to be written off upon completion of the established procedures. Currently, the bank has a much more conservative approach to risk taking, being an individual savings bank that aims to have a reliable reputation.
3 FEBRUARY 8, 2008 OSCHADBANK: STATE&OWNED GIANT MEETS UKRAINIAN PEOPLE'S NEEDS
Oschadbank is a leader in individual business lending among Ukrainian banks, with a 3% market share in retail loans and 7% share in retail deposits, as well as boasting the largest branch network and the highest brand recognition. Retail loans occupy the majority of its lending at 55% (down from 60% as of end 2006), as the bank traditionally specializes in serving individuals, focusing on lower&middle to middle&income clients. These loans are predominantly consumer loans (32% as of end 2006) and mortgages (26%).
Retail loan breakdown as of end 2006
26% Mortgage loans Car loans 11%
32% Consumer loans Other 31%
Source: Company
Oschadbank’s branch network is Ukraine’s largest, with 6,145 outlets (as of January 1) of different levels of independence throughout the country. The bank is also ranked in the top ten for POS&terminals and number of ATMs, and it is a principal member of Visa International and MasterCard International, with more than 450,000 cards issued. Oschadbank has a unique competitive advantage in the retail market besides its huge branch network: all individual deposits are 100% state guaranteed, making it the most reliable bank in terms of household savings.
State ownership has left an indelible mark on its corporate business as well. A significant number of corporate loans are to state&owned companies in various branches of industry. For example, among Oschadbank’s corporate clients are Ukrposhta (the state postal service), Ukrtelecom, Energorynok, and Ukravtodor. As for industry breakdown, the bank’s corporate loan portfolio is distributed between energy (which constitutes the majority, with a weight of 24%), trade and consumer, construction and real estate, agriculture and food, manufacturing, and transport and communications.
Oschadbank’s corporate loan portfolio breakdown as of end 2006
Construction Agriculture 16% and real estate and food processing 15%
Trade and consumer Manufacturing 13% 16% goods industry Transport and communications 10%
24% Energy Mining 1% Other 5%
Source: Company
4 FEBRUARY 8, 2008 OSCHADBANK: STATE&OWNED GIANT MEETS UKRAINIAN PEOPLE'S NEEDS
Oschadbank’s funding structure is reasonably tilted toward individual accounts, which amounted to 67% of total assets – or $1.5 bln – as of end 2006 (increasing 36% to $2.0 bln in 9m07), formed mostly by current accounts, with only 34% due to term deposits. As the state provides a 100% guarantee on individual deposits held at Oschadbank, it is able to retain a large market share without increasing interest rates (the average hryvnia term deposit rate was 9% in 2006). Corporate accounts total 19% of funding, or $191 mln, 98% of which is current accounts. Thus, term deposits occupy only 25% of total customers’ (corporate plus individual) accounts, leading to a prevalence of short&term funding and the appearance of a liquidity gap.
Oschadbank funding structure, end 2006
Savings (deposit) certificates issued by the bank 2% Due to private 71% individuals Due to banks 8%
Due to corporations 19%
Source: Company
The bank is trying to become familiar with international markets: in December 2006, it attracted a $100 mln syndicated loan, due in 2017, at 9%, and plans further co&operation with overseas investors, diversifying its funding base through attracting external financial resources. With a ‘B2’ rating from Moody’s and strong state support, the bank could offer lower interest rates than its competitors, which we consider an additional advantage.
Equity accounted for 13.0% of assets at end 2006 (declining to 11.5% as of October 1, 2007), and the bank’s capitalization is still one of the highest in the Ukrainian banking system. Its regulatory capital adequacy ratio, calculated according to National Bank standards, exceeded 14.8% as of end 2007, while the minimum requirement is 10.0%. The Finance Ministry routinely increases the bank’s statutory fund; in December 2007, it totaled $182.6 mln (up 28% y&o&y).
Largest Ukrainian banks’ ratios as of October 1, 2007
20% 10%
16% 8%
12% 6%
8% 4%
4% 2%
0% 0% FUIB Alfa Bank VAB Bank VAB Privatbank UkrSibbank Bank Nadra Bank Forum Ukrsotsbank Oschadbank Ukreximbank Finance & Credit Bank & Credit Finance
Equity/assets Net Interest margin (r. h. scale)
Source: National Bank
5 FEBRUARY 8, 2008 OSCHADBANK: STATE&OWNED GIANT MEETS UKRAINIAN PEOPLE'S NEEDS
Due to the low cost of funding for state&owned banks and the large number of current accounts, Oschadbank had a very high net interest margin of 8.1% in 2006 (7.9% in 9m07 under UAS). Thus, the bank's income increased 39% in 9m07. Net commission income, comprising mainly commissions for money transfers and withdrawals (which were always high due to the broad branch network) make up around 32% of the bank's operating income, though this is falling due to the development of lending to private individuals and legal entities. Meanwhile, net income fell 32% to $20 mln in 2006 as a result of the spending/income ratio increasing to 86.0% and tax payments. Income from average assets and capital fell to a respective 1.0% and 9.4% (or 1.6% and 12.2% under UAS).
Oschadbank’s income trends, $ mln
200 5%
160 4%
120 3%
80 2%
40 1%
0 0%
2004 2005 2006 2007
Net interest and similar income ROA (r. h. scale) Net fee and commission income
Source: Company
Key financials, IFRS, $ mln 2004 2005 2006 BALANCE SHEET Total assets 917 1 846 2 202 Asset growth –7% 101% 19% Cash and balances with National Bank 157 665 236 Due from banks 43 337 482 Loans to customers 288 310 799 Ukrainian government debt securities 308 421 371 Loan loss reserves 59 75 77 NPLs* 73 75 72 Total shareholder equity 20 136 285 Total liabilities 898 1 709 1 917 Due to banks and National Bank 71 66 181 Customer accounts 800 1 609 1 662 INCOME STATEMENT Net interest income 68 65 114 Net commission income 51 63 76 Net income 37 29 20 FINANCIAL RATIOS ROAA 3.87% 2.07% 0.97% ROE – 37.05% 9.38% NIM 9.85% 7.23% 8.13% Cost/income ratio 70.42% 84.90% 86.03% Cash and National Bank loans, % of assets 17.07% 36.03% 10.72% Overdue loans/gross loans 25.36% 24.03% 9.00% Loan loss reserves/gross loans 20.32% 24.03% 9.68% Loan loss reserves/NPLs 80.14% 99.99% 107.52% Equity/assets 2.14% 7.38% 12.95% CAR (National Bank requirements) 11.68% 25.96% 11.46%
Source: Company
6 FEBRUARY 8, 2008 OSCHADBANK: STATE&OWNED GIANT MEETS UKRAINIAN PEOPLE'S NEEDS
Valuation
Issue parameters
Series A Series B Placement Feb 14, ’08 Feb 14, ’08 Maturity Feb 10, ’11 Feb 7, ’13 Put Aug 13, ’09 Aug 12, ’10 Volume, UAH mln 300 200 Coupon rate 10.25% 10.50% Coupon frequency 91 91 Fair YTP 10.20% 10.40%
Source: Company
Oschadbank is to place its debut, two&series of local bonds totaling UAH500 mln ($100 mln). The first, UAH300 mln series A, will mature in 2011, with a put in 2009, while series B will mature in 2013, with a put in 2010. Both series have an ‘Aaa.ua’ (Ukraine national scale) rating from Moody’s, and an ‘AA (Ukr)’ rating from Fitch.
That Oschadbank is a high&quality issuer leads us to believe that its bonds will be traded in the first tier of the Ukrainian banking sector bond market, alongside those of foreign&owned banks. We estimate its base fair spread over the OVGZ curve at around 175 bps, the same as that of the quasi&Sovereign Eurobonds of Ukreximbank and Kyiv City over Ukraine’s Sovereign Eurobond curve, and close to the spread over the OVGZ curve of those foreign&owned banks with local bonds. Thus, we estimate the fair yield to August 13, 2009 put at 10.20% and its fair yield to August 12, 2010 put at 10.40%.
Oschadbank peer group financial data
Assets Asset Equity/ Share of Share of Share of NII ROAA ROAE $ mln growth assets retail loans retail deposits in total income 9m07, y.o.y in portfolio in liabilities PrivatBank 9,589 64.13% 9.21% 43.35% 45.94% 55.22% 1.55% 17.27% Raiffeisen Bank Aval 8,191 64.31% 8.82% 47.57% 40.90% 67.09% 1.64% 18.81% UkrSibbank 6,484 83.59% 8.98% 58.25% 15.39% 67.43% 0.38% 4.39% Ukrsotsbank 5,388 61.77% 10.37% 54.33% 27.03% 52.84% 1.11% 11.24% Ukreximbank 5,142 61.02% 8.38% 4.02% 16.66% 64.21% 1.49% 17.91% Prominvestbank 4,789 70.14% 10.97% 10.98% 42.40% 55.36% 1.13% 10.29% Bank Nadra 3,399 72.12% 9.66% 54.84% 38.11% 43.72% 1.89% 20.35% Oschadbank 3,381 83.25% 11.51% 54.92% 66.89% 58.17% 1.30% 11.96% OTP Bank 2,968 70.51% 8.19% 48.18% 15.74% 81.63% 1.21% 14.76% FUIB 2,282 88.78% 12.46% 20.49% 15.88% 71.47% 0.58% 4.95% Finance & Credit Bank 2,278 101.20% 8.35% 39.02% 36.65% 31.54% 2.13% 20.77% Bank Forum 2,275 117.91% 11.35% 21.18% 33.08% 73.79% 0.44% 3.73% Kreditprombank 1,973 73.40% 8.95% 29.02% 26.55% 74.21% 0.32% 3.39% Ukrprombank 1,914 68.22% 11.37% 18.75% 63.26% 77.58% 0.78% 7.13% Brokbusinessbank 1,717 68.03% 13.48% 10.93% 25.50% 63.52% 0.76% 6.12% Alfa Bank Ukraine 2,635 286.45% 11.45% 19.91% 3.15% 56.01% 0.23% 1.84% Ukrgazbank 1,734 157.94% 7.25% 28.27% 32.51% 51.29% 0.97% 13.07% Rodovid Bank 1,454 117.94% 15.11% 36.53% 35.24% 41.63% 0.72% 5.33% Pivdenny Bank 1,365 105.83% 9.98% 11.84% 29.03% 54.87% 1.23% 10.23% Swedbank 1,308 104.74% 8.74% 43.17% 23.71% 60.54% 0.17% 1.84% Top 20 banks 70,268 78.96% 9.85% 36.94% 32.85% 59.31% 1.15% 11.85% Banking system100,720 76.94% 11.44% 6.71% 31.76% 57.91% 1.06% 9.23%
Source: National Bank
7 FEBRUARY 8, 2008 OSCHADBANK: STATE&OWNED GIANT MEETS UKRAINIAN PEOPLE'S NEEDS
Ukrainian banking sector bond yield map
15% 15%
14% Imexbank A Rodovid Bank В Kreditprombank F Ukrgasbank С 14%
VAB Bank 1&F 13% Ukrgasbank A 13% Kreditprombank C Alfa Bank Ukraine C Bank Forum B 12% 12%
Credit Dnepr A Swedebank Invest А 11% ProCreditbank F Raiffeisen bank Aval1&C 11% Ukrsotsbank Е Ukreximbank B Swedebank А Oschadbank A Oschadbank В 10% Calion Bank Ukraine A Raiffeisen bank Aval1&B 10%
Kreditprombank E Raiffeisen bank Aval D Alfa Bank Ukraine D 9% ProCreditbank E 9%
Sovereign bond yield 8% 8%
7% 7%
0 200 400600 800 1,000
Source: Cbonds, Troika Dialog
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