Strictly Confidential
Information Memorandum
PIVDENNYI BANK
US$ 25 000 000
SYNDICATED TERM LOAN FACILITY
MANDATED LEAD ARRANGERS
September, 2006
PIVDENNYI BANK
CONTENT
DISCLAIMER......................................................................................................................................... 4
AUTORISATION LETTER .................................................................................................................. 5
CONTACT LIST..................................................................................................................................... 6
TRANSACTION TIMETABLE............................................................................................................ 7
1. EXECUTIVE SUMMARY................................................................................................................. 8
1.1. TRANSACTION OVERVIEW .............................................................................................................. 8
1.2. BANK DESCRIPTION ........................................................................................................................ 8
Background ..................................................................................................................................... 8
Ownership........................................................................................................................................ 9
Financial Highlights ...................................................................................................................... 10
Rating Agencies............................................................................................................................ 10
1.3 KEY INVESTMENT CONSIDERATIONS .............................................................................................. 11
1.4 TRADE FINANCE TRANSACTIONS ................................................................................................... 12
2. TERM SHEET .................................................................................................................................. 13
3. PIVDENNYI BANK ......................................................................................................................... 17
3.1. HISTORY AND OVERVIEW ............................................................................................................. 17
Key Features of Pivdennyi Bank................................................................................................ 17
Milestones of the Bank's development since its foundation: ................................................. 18
Ownership...................................................................................................................................... 21
Pivdennyi Bank’s beneficial owners .......................................................................................... 22
Affiliates.......................................................................................................................................... 23
Subsidiaries................................................................................................................................... 24
3.2. STRATEGY..................................................................................................................................... 24
Mission and strategic objectives ................................................................................................ 24
Reorganization.............................................................................................................................. 24
Financial Targets .......................................................................................................................... 25
Market Positions ........................................................................................................................... 26
Regional activity............................................................................................................................ 26
Comparative analysis – performance ....................................................................................... 27
Client base..................................................................................................................................... 28
Corporate Banking ....................................................................................................................... 28
International Banking ................................................................................................................... 28
Retail Banking............................................................................................................................... 29
Mortgage lending.......................................................................................................................... 29
Securities Investment Policy....................................................................................................... 29
Liquidity and asset/liability management .................................................................................. 29
Pivdennyi Bank’s Organisational Structure .............................................................................. 30
Information Technology – Management Information System ............................................... 31
3.3. MANAGEMENT AND EMPLOYEES .................................................................................................. 31
3.3. MANAGEMENT AND EMPLOYEES .................................................................................................. 32
Management Bodies .................................................................................................................... 32
Members of the Board ................................................................................................................. 33
2
PIVDENNYI BANK
Employees..................................................................................................................................... 34
3.4. RISK CONSIDERATIONS ................................................................................................................. 35
Exposure to credit risk ................................................................................................................. 35
Exposure to market risk............................................................................................................... 35
Liquidity Risk ................................................................................................................................. 36
Loan and deposits concentrations............................................................................................. 37
3.5. RISK MANAGEMENT ..................................................................................................................... 38
Liquidity risk................................................................................................................................... 38
Credit Risk ..................................................................................................................................... 39
Operational risk............................................................................................................................. 40
Market Risk.................................................................................................................................... 41
Legal risk........................................................................................................................................ 42
Anti Money-Laundering Measures............................................................................................. 42
4. FINANCIAL ANALYSIS................................................................................................................ 44
4.1. BASIC FINANCIAL INFORMATION .................................................................................................. 44
IFRS Balance Sheet Analysis .................................................................................................... 44
IFRS Income Statement Analysis.............................................................................................. 45
IFRS Ratio Analysis ..................................................................................................................... 45
4.2. ASSET QUALITY ............................................................................................................................ 46
Securities ....................................................................................................................................... 46
4.3. LOANS........................................................................................................................................... 47
Loans and advances to customers............................................................................................ 47
Economic sector concentrations ................................................................................................ 47
Individual Customer Concentrations ......................................................................................... 48
Loan portfolio quality.................................................................................................................... 48
Collateral........................................................................................................................................ 49
Related Party Lending ................................................................................................................. 49
Capital Resources and Adequacy ............................................................................................. 50
5. UKRAINE AND ITS BANKING ENVIRONMENT..................................................................... 51
5.1. GENERAL OVERVIEW .................................................................................................................... 51
Government and Politics ............................................................................................................. 51
Historical development ................................................................................................................ 52
Macroeconomic Overview........................................................................................................... 53
Inflation and exchange rates ...................................................................................................... 54
Foreign Direct investments ......................................................................................................... 54
BANKING SECTOR OVERVIEW .............................................................................................................. 55
Market structure............................................................................................................................ 56
Assets structure ............................................................................................................................ 56
Loans.............................................................................................................................................. 57
Deposits ......................................................................................................................................... 58
Capital adequacy.......................................................................................................................... 59
Profitability ..................................................................................................................................... 59
Banking sector regulations.......................................................................................................... 60
3
PIVDENNYI BANK
DISCLAIMER
This Information Memorandum (the “Memorandum”) is provided to selected banks in connection with
an invitation to participate in a [US$25000000] Term Loan Facility (the “Facility”), on condition that
each recipient and its officers, employees, agents and advisors shall keep confidential the information
contained in this Memorandum.
Pivdennyi Bank has mandated Bank Austria Creditanstalt AG and Landesbank Berlin AG (hereafter
the “Mandated Lead Arrangers”) to arrange on its behalf the Facility herein described and have
authorised the issue of this Memorandum to potential participants in the Facility. Information in this
Memorandum has been provided by Pivdennyi Bank and has not been independently verified by the
Mandated Lead Arrangers Furthermore, the Memorandum contains information based on general
market intelligence. Pivdennyi bank has warranted (i) the accuracy and completeness of the
information and (ii) the reasonableness and fairness of the information contained in the Information
Memorandum as at the date of issue.
This Memorandum is not intended by the Mandated Lead Arrangers to provide the basis of any credit
or other evaluation and should not be regarded as a recommendation by the Mandated Lead
Arrangers that any recipient of this Memorandum participate in the Facility. Each potential participant
should determine its interest in participating in the Facility based upon such investigations as it deems
necessary for the purpose. Nothing contained in this Memorandum is, or shall be relied upon as, a
representation of fact or a promise as to the future.
The Mandated Lead Arrangers, except as provided otherwise in the Facility documentation, make no
representation or warranty, express or implied, as to the accuracy or completeness of the information
and statements set out in this Memorandum or that these remain unchanged after the date of its issue.
The Mandated Lead Arrangers accordingly have no liability for such information and statements. The
Mandated Lead Arrangers are and will be entitled to enter into other and new business with Pivdennyi
Bank next to their involvement as Mandated Lead Arrangers for the Facility described in this
Memorandum. The Mandated Lead Arrangers shall not be under any obligation and do not undertake
(nor shall the Mandated Lead Arrangers be liable in any way as a result of not doing so) to review the
financial condition or affairs of Pivdennyi Bank at any time nor to advise any participant in the Facility
of any information coming to their attention except as specifically provided in the Facility
documentation.
The Facility documentation for the Facility has not been finalised at the date of this Memorandum and
the Summary of Terms and Conditions of the Facility is qualified by reference to the final Facility
documentation. The distribution of this Memorandum in certain jurisdictions may be restricted by law.
Persons into whose possession this Memorandum comes are required by Pivdennyi Bank and the
Mandated Lead Arrangers to inform themselves about and to observe and comply with any such
restrictions.
Without limitation, the contents of this Memorandum and the proposals envisaged thereby are
confidential and are being submitted to selected banks in connection with the Facility. This
Memorandum is intended only for the person to whom it is supplied by the Mandated Lead Arrangers
and may not be reproduced or used, in whole or in part, for any purpose other than that contemplated
by it.
4
PIVDENNYI BANK
AUTORISATION LETTER
5
PIVDENNYI BANK
CONTACT LIST
Pivdennyi Bank
2 Sabanskyi lane, Odessa 65014, Ukraine
Vadym Mokin
Head of Treasury and International Business
Dmitriy Likhota
Head of correspondent banking
Andrew Dobriy
Head of financial markets analysis and
international co-operation
Tel:
+ 38 0482 372775
Fax:
+ 38 0482 307015
Email: [email protected]
Tel:
+ 38 0482 344272
Fax:
+ 38 0482 307015
Email: [email protected]
Tel:
+ 38 0482 307037
Fax:
+ 38 0482 307082
Email: [email protected]
Bank Austria Creditanstalt AG
Member of UniCredit Group
8067/Syndication and Loan Markets
Schottengasse 6
A – 1010 Vienna, Austria
Monika Alram
Thomas Sommer
Tel:
Fax:
Email:
Tel:
Fax:
Email:
+43 50505-43122
+43 50505 43139
[email protected]
+ 43 50505-43130
+43 50505 43139
[email protected]
Landesbank Berlin AG
Alexanderplatz 2
10178 Berlin
Germany
Lutz Reimann
Ralf Schuster
Michael Süßelbeck
Tel:
+ 49 30 245 62856
Fax:
+ 49 30 245 66567
Email: [email protected]
Tel:
+ 49 30 245 62855
Fax:
+ 49 30 245 66567
Email: ralf.schuster@lbbde
Tel:
+ 49 30 245 66538
Fax:
+ 49 30 245 66567
Email: [email protected]
Landesbank Berlin AG, London
1 Crown Court,
Cheapside, London,
EC2V 6LR
Fax: + 44 20 7572 6796
Edith Pasternak-Albert
+ 44 20 7572 6490
Tel:
edith.pasternakEmail:
[email protected]
6
PIVDENNYI BANK
TRANSACTION TIMETABLE
September 2006
M
T
W
T
7
14
21
28
F
1
8
15
22
29
S
2
9
16
23
30
S
3
10
17
24
1
4
11
18
25
5
12
19
26
6
13
20
27
T
5
12
19
26
F
6
13
20
27
S
7
14
21
28
S
8
15
22
29
October 2006
M
2
9
16
23
30
T
3
10
17
24
31
W
4
11
18
25
Date:
Event
September 11, 2006
Launch of Syndication
September 28, 2006
Commitments subject to documentation due from potential
lenders
September 29, 2006
Draft documentation circulated to all potential lenders
October 6, 2006
Deadline for comments on draft documentation
October 10, 2006
Signing date
October 16, 2006
Drawdown
7
PIVDENNYI BANK
1. EXECUTIVE SUMMARY
1.1. Transaction Overview
Bank Austria Creditanstalt AG and Landesbank Berlin AG have been mandated to arrange
US$25 000 000 Syndicated Term Loan Facility (the “Facility”) for Pivdennyi Bank.
The main terms and conditions of the Facility are:
Facility Amount:
US$25million
Purpose:
To fund Trade Finance facilities made available by the Borrower to its
clients
Margin:
285 bps
Final Maturity:
6 months with 6months extension option
For more detailed terms and conditions of the Facility please refer to the Term Sheet
section of the present Information Memorandum.
1.2. Bank Description
Background
Pivdennyi Bank was initially formed as an universal commercial bank in 1993. It operates
under General License No.65 of the National Bank of Ukraine for all types of banking
operations and is regulated by Ukrainian Banking Legislation and supervised by National
Bank of Ukraine.
Pivdennyi Bank has 15 branches and 73 outlets in all centers of Ukrainian business activity
and headquartered in Odessa, South-West of Ukraine.
Pivdennyi Bank has foreign currency ratings from Moody’s, Fitch and local currency rating
from Credit Ratings by the National scale.
Memberships, relationships
WesternUnion Holdings, Inc.
Visa International Service Association
Master Card International Incorporated
8
PIVDENNYI BANK
Reuters
S.W.I.F.T.
FSTS – First stock trade system of Ukraine
UICE – Ukrainian interbank currency exchange
PARD – Professional association of registrars and depositaries of Ukraine
ISU – Interregional Stock Union of Ukraine
Ukrainian non-state fund to guarantee individuals’ deposits
Client Base
• over 500 largest companies of Ukraine have VIP servicing with personal accountmanagers
• over 16200 corporate customers
• over 94800 private customers
Ownership
As of April 1, 2006, Pivdennyi’s major nominal shareholders were six Ukrainian companies
and eleven individuals owning over 61% and 37% of the outstanding shares respectively.
Names of major shareholders
Enterprise “
” LLC
German-Ukrainian JV “Vivien GMBH” LLC
“Strong- ” LLC
CJSC Insurance Company “
”
CJSC Insurance Company “
-Life”
Yuriy A. Rodin
Alla Yu. Vanetsyants
Mark Is. Bekker
Vadim V. Morokhovskiy
Alexander G. Rodin
Tamara M. Rodina
Liya S. Morokhovskaya
Other (less then 3%) holders subtotal
Total
(%)
9,1434
7,3667
6,4299
5,2223
3,2249
16,4077
11,1287
9,7602
6,7418
5,0614
3,3910
3,0830
13,0390
100,0000
Residence
Basic activities
Commerce
Ukraine, Odessa
Commerce
Ukraine, Odessa
Commerce
Ukraine, Odessa
Insurance
Ukraine, Odessa
Life Insurance
Ukraine, Odessa
Ukraine, Odessa
Commerce
Ukraine, Odessa
Banking
Ukraine, Odessa
Commerce
Ukraine, Odessa
Banking
Ukraine, Odessa
Equity holding
Ukraine, Odessa
Equity holding
Ukraine, Odessa
Banking
Ukraine, Odessa
Ownership
Private
Private
Private
Private
Private
For further ownership details please refer to § 3.1.
9
PIVDENNYI BANK
Financial Highlights
Pivdennyi Bank produces its consolidated audited financial statements in accordance with
International Accounting Standards. Since 1997 PriceWaterhouseCoopers is the Bank’s
auditor.
All amounts in USDm
Year to 31 December
Total assets
Share capital
Total shareholders’equity
Net profit
2005
2004
435,346
49,769
41,365
5,679
2003
298,896
30,044
28,065
4,335
218,930
22,286
20,425
4,273
Estimates for 2006 year-end figures of the Pivdennyi Bank are based upon conservative
expectations.
For the Year ended 31 December
Net Interest Income
Net Non-Interest Income
Operating Income
Operating Expenses
Operating Profit
Profit before Income Tax and
Minority Interest
Income tax (expense)/credit
Profit before Minority Interest
NET PROFIT
Historic Audited
2005
2004
2003
19,891
16,317
13,896
8,441
4,639
2,226
28,333
20,957
16,123
20,879
14,643
9,819
7,453
6,313
6,304
Estimates
2006
21,584
20,990
42,772
33,465
9,307
7,453
6,313
6,304
9,307
1,774
5,679
5,679
1,978
4,335
4,335
2,030
4,273
4,273
1,980
7,327
7,327
Rating Agencies
Name
Fitch Ratings
Moody’s Investors Service
Credit Rating (national scale)
2005
CCC+ /Stable
-
2006
B- / Stable
B2 / Stable
uaBBB+ / Stable
10
PIVDENNYI BANK
1.3 Key investment Considerations
Ukraine
•
•
•
•
•
•
•
•
•
•
•
•
•
•
Key advantages of today’s economic development of Ukraine which positively impact on
foreign investments:
Solid track record of prudent macroeconomic and financial policies
Benefits from high level of foreign direct investment
Enhancement of the economy and its efficiency on the basis of the introduction of new
technologies
Normalisation of money circulation and formation of mechanisms for the financing of the real
sector of economy
Strengthening of the government role in the formation of the investment demand and
transfer to the innovative-investment model of the economy development
Cessation of the re-privatisation process
High potential capacity of the internal market
Stability of the national currency Hryvnia
Potentially attractive investment projects, including in the area of high technologies
Wide network of the social and economic, scientific and technical, transport infrastructure
High-quality staff and scientific potential, cheap labour forcer
Significant natural resources
Satisfactory resolution of the recent dispute with Russia concerning the purchase price and
transit of gas
Pivdennyi Bank
•
•
•
•
•
•
Rated B- / B2
Strong base of corporate customers
Strong shareholder support
Well positioned for growth and expansion
Continuity of the Management Team
Conservative Provisioning, satisfactory profitability, limited trading risks
The benefits of the Facility
•
•
•
•
•
Trade related
Aimed at trade finance funding of the most reliable customers of Bank Pivdennyi
Short-term: 6 months
Attractive all-in pricing
Option to renew the participation in the Facility for another 6 months at sole Lender’s
discretion
11
PIVDENNYI BANK
1.4 Trade Finance Transactions
Transactions to be financed by the Facility
Pivdennyi Bank is actively involved in the financing of export and import activities of its
corporate customers. The proceeds of the Facility will go among other towards the
financing of export-import contracts concluded between the main following parties:
Export contracts:
Exporter
OOO “Transinvestservice”
OAO “Stalkanat”
Importer
Cargotrans International
ltd,
United Kingdom
Stork Handelgeselshaft
m.b.h., Austria
Mesel Trading ltd, Cyprus
OAO “Silur”
Mesel Trading ltd, Cyprus
OOO “Harrison Trans
Service”
TOV VP “Sphere”
ZAO “ Moldova steel
works”
American Technologies
Network Corporation, USA
Danaher Linear GmbH,
Germany
Danaher Linear GmbH,
Germany
Ameropa AG,
Switzerland
Transammonia AG,
Switzerland
OOO “Admiral Plus”,
Russia
OOO “Transinvestservice”
OOO NPP “Complex”
DP “Gradient” OAO
“Mikron”
JSC “Azot”
JSC “Azot”
OOO “Aqua world
Ukraine”
Value of contract
USD
28 000 000
Nature of contract
Stevedoring services
USD
3 000 000
EUR
60 000 000
EUR
25 000 000
USD
3 000 000
USD
1 800 000
EUR
3 000 000
EUR
1 000 000
USD
2 310 000
USD
2 000 000
USD
1 000 000
Stevedoring services
Metalwire products
Metalwire products
Metal scrap
Optical products
Metal-working machine
Metal-working machine
Carbamide
Carbamide
Fish products
Import contracts:
Importer
ZAO “Medfarkom-centre”
OOO “ Chernigov chemical
fiber”
OOO “Consumtrade”
Exporter
Chinoin Pharmaceutical &
Chemical Works Co. ltd,
Hungary
PolimerEngineering
GMBH,
Germany
ZAO “Indesit International”,
Russia
Value of contract
USD
10 000 000
Nature of contract
Medical products
USD
22 195 000
Chemical fiber producing
equipment
EUR
8 015 000
Consumer electronics
12
PIVDENNYI BANK
2. TERM SHEET
1. THE FACILITY
Borrower:
Joint- Stock Bank “Pivdennyi” (the “Borrower”).
Type of Facility:
Purpose of the Facility:
6 months Extendable Trade related Syndicated Term Loan
Facility
for financing and refinancing of the Borrowers liabilities as
evidenced by trade financing contracts in an amount at least
equal to the total Facility Amount
Facility Currency:
United States Dollars (“USD”)
Facility Amount:
USD 25 mio
Mandated Lead
Arrangers:
Bank Austria Creditanstalt AG (“BACA”) and Landesbank Berlin
AG (“LBB”) ( the „MLAs“)
Lenders:
The MLAs together with a syndicate of financial institutions
assembled in consultation with the Borrower
Facility Agent:
LBB AG, London Branch, based in the United Kingdom (the
“Agent”)
Availability Period:
30 days after signing of the Facility Agreement
Drawdown:
The Facility shall be drawn during the Availability Period subject
to a minimum amount of USD 5 mn and integral multiples thereof
and subject to the fulfilment of all conditions precedent. No more
than one request may be given. Any undrawn portion under the
Facility during the Availability Period will be cancelled
automatically and may not be re-instated
Initial Maturity Date:
6 months from the signing of the facility agreement (the “Signing
Date”) unless extended under Extension Option.
Final Maturity Date:
The day which is 6 months from the Initial Maturity Date
Extension Option
6 months at the Lender’s full discretion.
By giving the Agent not more than 60 days and not less than 45
days prior to the Initial Maturity Date, the Borrower may request
the Initial Maturity Date to be extended by 6 months at the sole
discretion of each Lender. The participation of those Lenders who
have not agreed to the extension request shall be repaid and
cancelled in full on the Initial Maturity Date.
The MLAs and the Borrower would discuss the applicable pricing
and possibility of attracting new Lenders closer to the Initial
Maturity Date. The Facility Documentation for the extension will
be based where applicable on the Facility agreement for the
Initial Facility.
Repayment:
Bullet repayment on the Initial Maturity Date or on the Final
Maturity Date if extended
13
PIVDENNYI BANK
Prepayment:
2.
The Borrower may elect to prepay an Advance in whole or in part
in minimum amount of USD 5 mn and in integral multiples of
USD 5 mn at the end of any Interest Period without any fee or
penalty subject to not less than 15 days’ written notice to the
Facility Agent. Any amount prepaid may not be redrawn.
INTEREST, MARGIN AND FEES
Interest Payment:
Interest will be payable in arrears on the last day of each Interest
Period. Interest will be calculated on the basis of the actual number
of days elapsed in a year of 360 days (in case of market practice
departing from this formula 365 days)
Interest Period:
1 or 3 or 6 months at the Borrower's discretion. No interest period
shall end after the Final Maturity Date.
Interest Rate:
The rate of interest payable on each Advance for an Interest Period
will be the rate per annum determined by the Facility Agent to be
the aggregate of:
(i)
The Margin;
(ii)
LIBOR as determined by the Facility Agent by reference to
the relevant Telerate Pages for the relevant period in USD as
determined by the Facility Agent by reference to the relevant
Telerate Pages at or about 11.00 am. London time, or, if not
available, as determined by the Facility Agent on the basis of rates
provided by the Reference Banks, ; and
(iii) Associated Costs (if applicable).
Margin:
285 bps
Mandatory Costs:
The Borrower shall indemnify the Lenders for any mandatory
costs, if applicable, in respect of compliance with the requirements
of the Bank of England, the U.K. Financial Services Authority and
the European Central Bank, calculated in accordance with a
formula to be set out in the Facility Agreement.
Taxation:
All payments by the Borrower in relation to this Facility shall be
made free and clear of and without deduction for or on account of
all present and future taxes, duties, withholdings, levies, imposts or
deductions of whatever nature. In the event the Borrower is obliged
to make any deductions or withholdings, the Borrower will pay a
gross-up fee to cause the Lenders to receive, net, the amounts
they would otherwise have received but for such deduction or
withholding.
14
PIVDENNYI BANK
3. OTHER TERMS
Conditions Precedent:
On-going conditions:
Documentation:
Material Adverse
Change:
The Facility Amount will be available for Drawdown subject to
the fulfilment of certain conditions precedent, including, but not be
limited to:
•
signed Facility Agreement and related documentation
satisfactory to the lenders
•
payment of fees and expenses
•
receipt by the Facility Agent of all documentation proving
the corporate authority of the Borrower, and the incumbency and
specimen signatures of the officers of the Borrower executing the
Facility Agreement and related documentation
•
receipt by the Facility Agent of a copy of all required or
desirable regulatory and other governmental approvals, if any,
which shall be in full force and effect
•
receipt by the Facility Agent of satisfactory evidence of the
appointment by the Borrower of an agent for service of process in
London
•
receipt of legal opinions satisfactory to the Facility Agent in
its sole discretion from the respective legal counsel to the
Lenders
•
receipt by the Facility Agent of an original executed Facility
Agreement.
The making of the advances will be conditional upon
•
the accuracy of all representations and warranties in the
Facility Documents and
•
there being no default in existence at the time of, or after
making such advance.
The Facility will be evidenced by a Facility Agreement acceptable
to all parties incorporating clauses customary for this Type of
Facility, including, but not limited to:
•
Conditions Precedent including satisfactory legal opinions;
•
Usual representations and warranties from the Borrower
(to be repeated)
•
pari passu ranking of the Borrower’s obligation under the
Facility with all other payment obligations of the Borrower;
•
negative pledge and other covenants (including limitation
on disposal of assets, maintenance of business),
•
financial covenants and undertakings by the Borrower
•
delivery of financial information;
events of default (including, but not limited to, cross default,
minimum rating requirement, representations and warranties
being incorrect, breach of covenants and undertakings, change of
ownership, insolvency of the Borrower, attachment of or
execution against the assets of the Borrower and moratorium on
the indebtedness of the Borrower);
There shall occur no material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or
business prospects of the Borrower or its Subsidiaries.
15
PIVDENNYI BANK
Increased Costs:
The Borrower will pay to the Lenders any increased cost incurred
by the Lenders as a result of the introduction of or any change in
(or in the interpretation or application of) any law or regulation after
the date of the Facility Agreement.
Illegality:
If it is or becomes illegal for any Lenders to provide or continue to
make the Facility available, the commitment of the relevant
Lenders shall be cancelled and the Borrower will prepay all
outstanding amounts owing to that Lenders under the Facility on
the next Repayment Date or, such earlier date as the relevant
lender shall certify as necessary to comply with the relevant law.
Legal Counsel:
A Ukrainian Legal Counsel on behalf of the Borrower, a Ukrainian
Legal Counsel on behalf of the MLAs and an English Legal
Counsel on behalf of the MLAs shall be requested to opine on the
Facility Agreement. The expenses relating to the legal opinion will
be for the account of the Borrower, irrespective of whether the
Facility is signed.
Transferability:
Lenders may transfer all or part of their rights and obligations (in
the latter case, in minimum amounts of USD 1 mn) to other banks
and financial institutions or securitisation vehicles upon notification
to the Agent and the Borrower.
Governing Law and
Jurisdiction:
The Facility Agreement shall be governed by and construed in
accordance with the laws of England and Wales.
Any dispute, controversy or claim arising out of or in connection
with the Facility Agreement or any other related Finance
Document, shall be referred to, and finally settled by, arbitration
under the LCIA (London Court of International Arbitration) rules, as
in force at the date at which the proceedings are referred to
arbitration, in each case in London, England.
16
PIVDENNYI BANK
3. Pivdennyi Bank
3.1. History and Overview
Pivdennyi was established in 1993 and a controlling stake was purchased by its current
shareholders at the end of 1994. Since then, the bank has grown its business, often
participating in joint projects with its shareholders. After 1998, the bank started to grow into
a nationwide bank by developing a branch network covering a number of regions outside of
Odessa, initially to serve its major customers. At end-August 2006 it had 15 branches and
73 outlets, including branches in 11 regions outside Odessa. In 2006, the bank plans to
open two new branches in Chernigov and Kirovograd.
Pivdennyi is a midsize Ukrainian bank with a solid regional market position, headquartered
in the city of Odessa (IDR ‘B+’), located in south-western Ukraine, on the Black Sea. The
city of Odessa accounted for 5% of Ukraine’s gross domestic product and 2% of its
population (over 1 million people) in 2005. The gross city product is divided between
industry (20%) and services (80%), with transport, trade, tourist and recreational business
dominating the services sector. In the absence of a large industrial sector, the local
economy is less vulnerable to higher gas prices.
Pivdennyi has a focused strategy and primarily targets corporate customers in low volatile
industries such as trade, food and beverages. Strong relationships with its clients help the
bank to maintain a solid market presence in Odessa and the Odessa region and drive its
expansion in other regions as well. The bank has built strong expertise in corporate and
SME lending and will likely maintain its corporate orientation in the future. In 2002 the bank
began to diversify into retail banking, but contrary to many Ukrainian banks rapidly growing
their retail books, Pivdennyi is carefully expanding into this segment. The bank maintains
strong market positions in Odessa and Odessa region. It had a c.25% market share in
terms of loans and 26% in terms of deposits in this region at end-H106. On a country wide
scale, market shares are more modest, 1.2% in both loans and deposits. In Ukraine,
Pivdennyi was ranked number 17 by assets and number 16 by capital as of June 30, 2006.
Key Features of Pivdennyi Bank
The Bank offers both its corporate and private customers a comprehensive range of
banking services. In preserving the existing client base and attracting new quality
customers, the Bank builds on the following strategic advantages:
· dedicated and well-trained staff;
· experienced and committed management;
· strong regional presence as sound base for further expansion;
· leading position in the most progressive and dynamically developing spheres of banking
activities in Ukraine;
· easy accessibility through multi-channel banking (branch network, e-banking, telephone
banking);
· increased brand awareness in targeted customer segments;
· sound asset quality (in particular a strong-quality loan portfolio);
· highly effective risk management system.
17
PIVDENNYI BANK
Milestones of the Bank's development since its foundation:
Year
events
•
NBU has officially registered the Joint-stock bank PIVDENNYI. The
creative team of professionals had been formed. This ensured the
precise office work organization since first weeks.
•
•
The Bank develops noticeably; lending became its main activity.
At the end of the year Yuriy A. Rodin became the head of the
Supervisory Council.
•
The assets increased by more than 6 times, and the profit - by more
than 11 times. The bank ranked 6th among commercial banks of
Ukraine in terms of the assets growth.
established direct correspondent relationship with A-class foreign banks
1993
1994
1995
•
•
Became one of the leading operator of state bonds' market and actively
participated in the market of corporate securities, acted as a broker for
ist customers.
•
Came out on the top in the project of TACIS and
"PricewaterhouseCoopers" on implementation of international
accountancy's standards in Ukrainian banks.
Entered to the 1st position within Ukraine in terms of the dynamics of
capital growth
Became a member of:
- S.W.I.F.T.
- Interbank Currency Stock Exchange
- Professional Association of Registers and Custodians
- became an associate member of international payment system
EUROPAY INTERNATIONAL
- became an official dealer of the "THOMAS COOK" company
- became the participant of "Interregional Stock Union"
1996
•
1997
•
•
1998
•
•
•
1999
•
The thorough market analysis allows to take measures opportunely and
to avoid the sharpest financial crisis which overtook the country and put
many banks out of survival. PIVDENNYI Bank provided the customers
with safe protection from troubles by means of stopping to handle the
state bonds and changing the assets structure in favour of bills of
exchange and credit transactions.
The interest from loans constituted up to 50% of total income.
First "PricewaterhouseCoopers" audited
The Bank became the support for many customers which suffered from
crisis in economy and furthermore strengthened its position in the
financial market. In compliance with the National Bank's of Ukraine
criteria JSB "Pivdennyi" was listed among the first group of financialstable banks without troubles and held a firm position
among the top 20 banks of Ukraine.
The total volume of the funds attracted within the year increased by 5
times: turnover of corporate deposits increased by 4 times, retail
18
PIVDENNYI BANK
•
•
•
2000
•
•
•
•
•
2001
•
•
•
2002
•
deposits - by 3 times, customers accounts' turnover - by 6 times.
The Bank's portfolio increased by 3 times, turnover on bills of exchange
transactions - by 30 times.
Reuters-Dealing system was put into operation in order to increase the
efficiency of transactions.
The Shareholders' Meeting elected a new Chairman of the Board Vadim V. Morokhovskiy
The loan portfolio of Pivdennyi Bank increases by more than 3,5 times.
The monthly volume of the loans amounted to UAH 300 MIO.
JSB "Pivdennyi" is the first commercial bank of Ukraine to issue own
bonds.
The individuals' accounts balances increases by 8 times over the year
According to the rating of the Association of the Ukrainian Banks,
PIVDENNYI Bank ranked 14th with respect to assets volume.
The JSB "Pivdenhnyi" is one of the first banks acting as an underwriter
for a number of its customers in securities transactions.
The bank became an associated member of "VISA International Service
Assotiation".
According to the rating of the Association of the Ukrainian banks, the
JSB "Pivdennyi" ranked:
- 7th with respect to the number of corporate deposits
- 11th with respect to credit-investment portfolio
- 12th with respect to net assets
The Bank's loan-investment portfolio increased by more than 2 times
and exceeds UAH 680 MIO.
•
•
Total net assets of the bank exceeded UAH one billion.
For the personal contribution to Ukrainian economy development and
integration process supporting JSB "Pivdennyi" was:
- acknowledged the laureate of international contest "Gold Mercury",
- created by an International corporation of social interaction "European
Business Assembly",
- became a winner of International contest " Gold Trade Marks - 2003".
•
The Financial Action Task Force on Money Laundering from criminal
activity (FATF) has chosen PIVDENNYI Bank for Ukrainian financial
system examination. The result of Financial Action Task Force visit was
exclusion of Ukraine from FATF "dirty list" at the end of February.
In 2004 PIVDENNYI Bank was awarded the nominations:
- Brand of the Year,
- Gold Trade Mark,
- European quality
- Best enterprise – 2004
The Chairman of the Board, Vadim V. Morokhovskiy was acknowledged
Best employer of the year.
More than 70 000 customers use the services of the bank (12 356 legal
entities and 57 806 individuals).
2003
•
2004
•
•
19
PIVDENNYI BANK
•
•
2005
•
•
•
•
•
•
•
2006
•
•
•
The Chairman of the Board, Vadim V. Morokhovskiy was:
- acknowledged Best top-manager of the year and recipient of an
award by a diploma "Professional confession 2005"
- granted of an award by the diploma of Parliament of Ukraine.
- acknowledged one of the most influential people of Ukraine on the
annual rating «TOP-100» of magazine «Korrespondent»
The JSB "Pivdennyi":
- ranked 8th with respect to the volume of acquiring operations
- entered in the number of rating leaders «TOP-100. The best
companies of financial sector».
- granted of an award by a diploma about confession one of the most
effective brands of Ukraine.
The bank's loan-investment portfolio exceeds UAH 2 billion
The bank's deposits portfolio exceeds UAH 1 billion.
By the decision of december shareholders' meeting the share capital of
bank is multiplied to UAH 200 MIO
First time international rating was obtained from Fitch Ratings
The February General shareholders’ meeting has made a decision to
increase in shareholders equity up to UAH 250 000 000, and general
meeting of shareholders in April, 2006 has made a decision to increase
in the equity capital up to UAH 273 000 000.
In April bank obtained local currency rating “uaBBB+” from “CreditRating” Agency by National scale
In May, 2006 General shareholders meeting decided to perform
reorganization of bank in the Open Joint-stock company. As a date of
change of ownership pattern will be considered the date of registration
in the Uniform State Register for enterprises and organizations which
should occur by September 25th.
In July, 2006 the International rating agency Moody's Investors Service
assigned B2/NP foreign currency deposit rating to bank.
In August the bank has won the tender of World Bank for service of
funds for social programs in Ukraine with participation of the
International Bank for Reconstruction and Development
In August Fitch Ratings updated Issue Default Rating to “B-“, shortterm rating to “B”.
20
PIVDENNYI BANK
Ownership
The following table lists Pivdennyi Bank’s nominal shareholders as of December 31, 2005.
German-Ukrainian
JV “Vivien GMBH” LLC
Enterprise “
” LLC
“Strong- ” LLC
Enterprise “Techno-inform” LLC
CJSC Insurance Company “ ”
CJSC Insurance Company “
-Life”
JSC “Vtormet”
Odessa Maritime agency “Interbroker” LLC
Production-commercial firm “Kometex” LLC
Firm “Mial” LLC
CJSC “BG Realty”
JSC Odessa Cable Plant ”Odescabel”
Private Enterprise Trade House “Nachalo”
CJSC “Odessa Barandy Factory”
CJSC “Odessavinprom”
Subtotal for legal entities
Mark Is. Bekker
Yuriy A. Rodin
Alla Yu. Vanetsyants
Alexander M. Groysman
Liubov S. Bekker
Anna Yu. Rodina
Vadim V. Morokhovskiy
Liya S. Morokhovskaya
Alexander G. Rodin
Alexander F. Kuperman
Velya Ab. Rodina
Levon S. Vanetsyants
Betya Is. Bekker
Vladimir P. Vugelman
Ilona V. Chornenkaya
Ekaterina A. Morozenko
Igor G. Zhabokritskiy
Maria S. Svoboda
Anatoliy Ph. Tapor
Musiy G. Khazankin
Tamara M. Rodina
Eduard P. Stas
Subtotal for private shareholders
Nominal value
of shares held
18416734,00
22858580,00
16074607,00
6329030,00
13055748,00
8062306,00
427040,00
337466,00
128084,00
85579,00
83012,00
64184,00
21395,00
17258,00
15262,00
85976285,00
17300487,00
31619358,00
18721760,00
5781669,00
7771340,00
2876457,00
8854439,00
5707582,00
5953449,00
1745183,00
2525377,00
813601,00
320209,00
85579,00
64184,00
21395,00
10840,00
10840,00
6275,00
10149,00
3177552,00
645990,00
114023715,00
Number of
shares held
18416734
22858580
16074607
6329030
13055748
8062306
427040
337466
128084
85579
83012
64184
21395
17258
15262
85976285
17300487
31619358
18721760
5781669
7771340
2876457
8854439
5707582
5953449,00
1745183,00
2525377
813601
320209,00
85579
64184
21395
10840
10840
6275
10149
3177552
645990
114023715
% of
total shares
9,2084
11,4293
8,0373
3,1645
6,5279
4,0312
0,2135
0,1687
0,0640
0,0428
0,0415
0,0321
0,0107
0,0086
0,0076
42,9881
8,6502
15,8097
9,3609
2,8908
3,8857
1,4382
4,4272
2,8538
2,9767
0,8726
1,0102
0,4068
0,1601
0,0428
0,0321
0,0107
0,0054
0,0084
0,0031
0,0051
1,5888
0,3230
57,0119
Total
200000000,00
200000000
100,0000
The bank is ultimately controlled by two families originally from Odessa, who own c.67%
and c.22% stakes in the bank. Another 10% belongs to the family of the bank’s president,
and the remainder belongs to the original shareholders. The controlling shareholders of the
bank also own industrial, other financial, agricultural, real estate and retail trade assets. The
industrial segment is the largest of all and represented by hardware plants Silur and
Stalkanat, Apostelevsky feed mill, and Krivorozhsky minium production plant. The financial
segment consists of Pivdennyi, RIB, and two insurance and asset management companies.
Pivdennyi’s supervisory council, exercising control over the bank’s activities, is comprised
of the shareholders and members of their families.
21
PIVDENNYI BANK
Pivdennyi Bank’s beneficial owners
Yuriy A. Rodin, 67%
Was born on January 21st, 1950, in Odessa.
Resident of Ukraine, domiciled in Odessa.
Higher education – master of mathematics, certified in assets
management by State securities and fund market commission
Recent activities:
1990 – Small Enterprise «Kompanjony», Director and owner
1992 - « » Ltd., General director and owner
1995- Chairman of Supervisory Council and major shareholder of JSB
“Pivdennyi”
2006- Chairman of Supervisory Council and major shareholder of A/S
Regionala Investiciju Banka, owns major stakes in a number of
affiliated companies
Mark Is. Bekker, 22%
Was born on May 11th, 1945 in Vladivostok, Russia
Resident of Ukraine, domiciled in Odessa
Higher education, degree in refrigeration technologies engineering
Recent activities:
1997-2006 - «Vivien» Ltd., Director and owner
2003-2006 – Vice-chairman of Supervisory Council and major
shareholder of JSB «Pivdennyi», owns major stakes in a number of
affiliated companies
Vadim V. Morokhovskiy, 10%
Was born on June 22nd, 1971 in Odessa
Resident of Ukraine, domiciled in Odessa
Higher education – master of Banking, chess grand master
Recent activities:
Since 1995 - First Vice-chairman of the Board of JSB «Pivdennyi»,
Since 1999 - Chairman of the Board of JSB «Pivdennyi»,
Since 1999 – shareholder of JSB “Pivdennyi”, owns stakes in a number
of affiliated companies
22
PIVDENNYI BANK
Affiliates
The beneficial owners hold major stakes in following affiliated companies:
Industrial sector
JSC "Apostolevskyy
mixed fodder factory"
JSC "Krivorozhskyi
minium factory"
JSC "Stal'kanat"
Real estate sector
JSC "Kholodmash"
"Domostroy“ Ltd.
“Central Hotel” Ltd.
JSC “Silur"
Agricultural sector
Gambrinus Ltd.
JSC "Kotovskoe corn
processing enterprise"
FIC "Yug-agrotek"
“Jasnye Zory” Ltd.
“Flora” Ltd.
“AgroInvest” Ltd.
JSC "Chubovskyy grainproducing complex"
“Chubovskoe zerno” Ltd.
“Kotovskoe zerno” Ltd.
“Invest-project“ Ltd.
“Ingsystema” Ltd.
“Ledder” Ltd.
“Gryvlad” Ltd.
“Odis-group” Ltd.
“Sanplan” Ltd.
“Energosystema” Ltd.
“Yurtal” Ltd.
“Fayn” Ltd.
“Tekhnotsentr” Ltd.
“Black sea corn company” Ltd.
Others
JSC “Pyschepromavtomatyka”
“Investment South
Company” Ltd.
JSC “Farmatsyya”
“Fynfarm” Ltd.
Financial sector
"South registration company“ Ltd.
JSB “Pivdennyi"
Assets Management Company
"TEKOM ASS
S
MANAGEMENT“ Ltd.
“Portfolio investor” Ltd
Fund “S. I."
Insurance Company
" -Life"
Fund “F.I."
Insurance Company " "
JSB “Regional Investment Bank”
The assessed value of Industrial, Real estate and Agricultural sectors approximately makes
USDm 125 (Yuriy A. Rodin 75%, Mark Is. Bekker 24%, Vadim V. Morokhovskiy 1%)
23
PIVDENNYI BANK
Subsidiaries
The bank currently holds a 49% stake in Regional Investment Bank (“RIB”), which is
situated in Latvia; in total, Pivdennyi’s shareholders control a 100% stake in RIB. Its assets
and equity were USD97m and USD10m, respectively as of July 1, 2006. Presently,
Pivdennyi receives funding from RIB, as RIB enjoys cheap (in Ukrainian terms) funding,
mainly from former Ukrainian citizens. Pivdenny plans to increase its holding in RIB to 51%
and consolidate the bank by January 1, 2007. Pivdennyi also plans to acquire a small bank
in the US (in the state of Pennsylvania) and form a holding company which will unite the
three banks under its umbrella. The new bank is expected to serve the Ukrainian
community living locally in the US and business between the two countries. The acquisition
is pending US regulatory approval.
3.2. Strategy
Mission and strategic objectives
The mission of the Bank is to retain its sound customer base and at the same time conquer
an additional share of the banking services market. To guarantee this, Pivdennyi Bank
behaves like a partner with regard to its customers by helping them to achieve goals in
business and in private life.
Thereby it relies on the following key elements:
-
a committed and entrepreneurial management with a proven track record;
highly skilled and well-trained staff;
a customer-oriented strategy and business setup;
a high level of hard-earned recognition which allows customers of the Bank to benefit
from it.
Pivdennyi Bank's main objective is profitable growth through its strategies in the key
customer segments: corporate, SMEs and retail. The main benchmark used by the Bank to
measure its success is its return on assets. The Bank's goal is to outperform the majority of
domestic competitors through this indicator. Over the next 3 years, Pivdennyi bank intends
to continue its expansion in the Ukrainian banking sector and aims for an average asset
growth of 1.5 - 2 times higher than the average asset growth in the banking sector.
Pivdennyi Bank aims to achieve this through a combination of organic growth in its above
named key customer segments in the geographic regions where it is already present and in
targeted Ukraine’s regions with formed potential customer base in targeted segments.
Reorganization
Since May 2006, taking into consideration recommendations of the National Bank of
Ukraine to the ukrainian banks and to improve informational transparency of the bank,
Pivdennyi is being under reorganization from a Closed-type JSC to a JSC. Date of
registration of JSC "Pivdennyi" in the Uniform state register of the enterprises and the
organizations which will occur before September 26, 2006 will be considered as date of
change of a pattern of ownership of the bank.
24
PIVDENNYI BANK
Financial Targets
Forecast of general indicators of the Pivdennyi Bank is based upon conservative
expectations.
As at 31 December (USDm):
2006
2007
2008
NET INTEREST INCOME BEFORE
PROVISION FOR LOAN LOSSES
27,525
46,535
54,653
NET INTEREST INCOME
21,584
36,832
43,762
NET NON-INTEREST INCOME
20,990
25,149
35,446
OPERATING INCOME
42,772
61,782
78,020
OPERATING EXPENSES
33,465
43,960
53,069
9,307
17,822
24,950
Loans and advances to customers, less
allowance for loan losses
516,832
778,218
1083,168
ASSETS
625,743
950,495
1386,139
Liabilities
571,584
819,208
1202,574
Shareholders’ equity
54,158
131,287
183,564
ROA
1,17%
1,52%
1,46%
ROE
13,53%
11,01%
11,00%
ROAA
1,35%
1,83%
1,73%
ROEA
15,63%
15,59%
12,83%
8,66%
13,81%
13,24%
OPERATING PROFIT
Equity / assets
25
PIVDENNYI BANK
Market Positions
Pivdennyi has a focused strategy and primarily targets corporate customers in low volatile
industries such as trade, food and beverages. Strong relationships with its clients help the
bank to maintain a solid market presence in Odessa and the Odessa region and drive its
expansion in other regions as well. The bank has built strong expertise in corporate and
SME lending and will likely maintain its corporate orientation in the future. In 2002 the bank
began to diversify into retail banking, but contrary to many Ukrainian banks rapidly growing
their retail books, Pivdennyi is carefully expanding into this segment. The bank maintains
strong market positions in Odessa and Odessa region. It had a c.25% market share in
terms of loans and 26% in terms of deposits in this region at end-H106. On a country wide
scale, market shares are more modest, 1.2% in both loans and deposits. In Ukraine,
Pivdennyi is being ranked number 17-18 by assets and number 16-17 by capital.
Regional activity
After 1998, the bank started to grow into a nationwide bank by developing a branch network
covering a number of regions outside of Odessa, initially to serve its major customers. At
end-August 2006 it had 15 branches and 73 outlets, including branches in 11 regions
outside Odessa. In 2006, the bank plans to open two new branches in Chernigov and
Kirovograd.
26
PIVDENNYI BANK
Comparative analysis – performance
Table shows the comparative analysis of Pivdennyi’s profitability ratios with TASKommertzbank, Ukrprombank, and Forum. Pivdennyi’s earnings performance compared
favourably to the peers. At end-2005, its operating ROAA stood at 2.2% and lagged behind
only TAS-Kommertzbank’s ROAA.
Due to higher leverage Pivdennyi reportes a stronger operating ROAE (19.9% vs. 15.2% of
TAS-Kommertzbank’s ROAE). Pivdennyi enjoyes strong net interest margin (the second
highest in the peer group). Overall, despite the competitive market environment Pivdennyi
demonstrates satisfactory profitability.
As at 31
December:
PIVDENNYI BANK
Forum
Ukrprombank
TAS-Kommerzbank
2005
2004
2003
2005
2004
2003
2005
2004
2003
2005
2004
2003
Net Interest
Margin
6,55
7,52
8,46
5,82
7,52
6,64
9,21
12,52
7,10
6,43
10,64
9,00
Cost/Income
Ratio
63,42
57,94
47,94
57,15
41,92
48,82
44,77
43,71
79,06
68,79
47,09
55,88
Operating
ROAA
2,16
2,77
3,13
1,53
1,86
1,75
0,85
0,53
-0,05
2,24
4,06
1,98
PreImpairment
ROAA
3,21
4,10
5,56
2,85
4,97
3,89
4,92
6,41
1,50
2,49
6,91
5,23
Operating
ROAE
19,87
27,39
34,30
13,40
14,66
15,26
4,51
2,52
-0,44
15,18
22,57
14,01
Core
Capital/Total
Assets
10,23
9,90
10,18
10,01
13,11
11,04
15,05
25,15
10,75
16,82
38,44
37,03
(%)
Source: Adapted from banks’ IFRS financial statements
27
PIVDENNYI BANK
Client base
Customers are segmented by two groups: corporate customers consisting of mid and smallsize companies and private customers. At present, the bank serves over 17000 corporate
customers and over 95,000 private customers. The client base is constantly growing.
Customers growth
120000
16241
100000
15236
80000
12356
60000
11406
40000
82927
94861
8476
57806
20000
41354
29714
0
2002
2003
2004
2005
2006/1H
Corporate Banking
The Bank’s corporate customers represent the following cash-rich industry sectors:
commodity trading (oil, metal, grain), retail & wholesale trade, wine & beverages,
pharmaceuticals, insurance companies. Historically, Pivdennyi Bank’s corporate division is
the core business and competence of the Bank. Key products include cash management
and treasury services, deposits, working capital and capital expenditure loans, trade
finance, receivables finance and factoring, leasing.
International Banking
International banking activities are mainly represented by trade finance off-balance
operations and at the moment are being the subject of priority development.
International Payments
Pivdennyi Bank maintains a broad correspondent network in all major currencies with
leading financial institutions worldwide. The Bank's correspondent network includes 29
accounts held with domestic and foreign credit institutions.
The Bank has established solid partnerships with a number of major foreign banks,
including:
The Bank of New York, New York (SWIFT IRVTUS3N)
Commerzbank AG, Frankfurt (SWIFT COBADEFF)
Hypovereinsbank AG, Munich (SWIFT HYVEDEMM)
28
PIVDENNYI BANK
Bank of America NA, New York (SWIFT BOFAUS3N)
ING Bank, Amsterdam (SWIFT ABNANL2A)
Retail Banking
Services offered by the Retail Banking Division, which are currently provided under the
brand of the bank. Main target groups are the upper end of the retail market, with
disposable incomes in excess of US$ 2,000 per month, and the middle retail market, with
disposable monthly incomes between US$ 300 and US$ 2,000. The Bank’s retail offerings
include a portfolio of customized loans, deposits and credit card products. These services
are offered through the Bank’s branch network, a centralized telephone banking centre and
an advanced internet banking system. In addition to general marketing, Pivdennyi acquires
customers by partnering with specialized retailers.
Mortgage lending
Mortgage is currently developing business for bank – first mortgage programs were
presented in 2004. These programs are offered through the Bank’s branch network,
construction companies and real estate agencies. Despite the rapid growth gross
mortgages were USD25 million at end-H206 and constituted 5% of the loan portfolio. The
retail loan portfolio is composed of 51% consumer loans and 49% mortgages. The growth
in retail loans will likely continue as a result of the strategic focus on retail banking and in
conjunction with the geographical penetration into other regions of Ukraine. Up to the end of
2008 mortgages are expected to make up to 10% of the gross loan portfolio of the Bank.
Securities Investment Policy
In recent future Bank’s will likely continue holding of the small securities portfolio (up to 12% of assets) mainly comprised of bonds and corporate shares.
Liquidity and asset/liability management
The liquidity management department within treasury and international business supervises
payment position daily, an automated reporting system, including a calendar of payments
and gap-tables for each division, is in place.
In addition to classic gap method new statistical approaches applied for customer accounts
balances’ analysis. Thus, daily-based stable balances’ research allowed bank to hold low
level of liquid assets up to the current moment
However, the management of the bank has approved changes in liquidity management
policy from aggressive to conservative up to 2H07. Thus, obtaining of attractive ratings from
international rating agencies and entrance to international money and capital markets (CLN
and Eurobonds issue planned for 4Q06 and 2Q07) will bring the ability to attract long-term
funds and form the basis for new conservative policy application
29
PIVDENNYI BANK
Pivdennyi Bank’s Organisational Structure
Current organisational structure is historically based on processes and operational activities
of the bank during initial growth stage – as the bank was growing and new types of banking
products and services were implemented in addition to initial bank’s operations.
However, the decision was approved by Supervisory Council and the Board concerning
implementation of new customer- focused organisational structure up to the end of 2008.
Thus, there should be formed front-, middle- and back-office allowing to optimize businessprocesses of the bank and strengthen the effectiveness.
30
PIVDENNYI BANK
Information Technology – Management Information System
Transaction system
„ODB”
Corporate business
Transaction system
«Metacard»
Retail business
Analytical system
«Vicont»
Consolidation of
balance
Reuters Dealing
3000
Dealing terminal
Dealing Manager
Dealing analytical system
Management Information System
Reuters Xtra 3000
Information system
Mathematical and
statistical analysis
subsystem Mathlab
Data
warehouse
Management reports
system Crystal Reports
Emission and
processing system
“IS –Card”
Payment cards
Processing system
of acquiring
Sub-system
Intranet portal for
additional information
Management
reports for market
risks
Authorization and firewall
system for remote access
Remote access consoles
for branches, outlets and
departments.
Management reports for
instant and current liquidity,
for funding structure, for
structure of assets and
liabilities, for structure of
markets positions and flows’
prognosis
31
PIVDENNYI BANK
3.3. Management and Employees
Management Bodies
Management bodies of Pivdennyi Bank are the General Meeting of Shareholders, the
Supervisory Council and the Management Board (the Board includes the Chairman of the
Board).
The General Meeting of Shareholders (GMS) is the senior governing body of the Bank.
Within its exclusive competence are determination of main directions of Bank’s activity and
execution reports approval, approval of the articles of bank, corrective actions and
additions, approval of annual results of the bank’s activity (including subsidiaries),
distribution of profit, approval of the terms and the order of dividends’ distribution, increase
or reduction of an shareholders’ equity, appointment and exemption of Chairmen and
members of the Supervisory Council, Revision Commission, approval of reports and
conclusions of the Revision Commission and the external auditor, decisions on
reorganization of the bank and decisions on the termination of the bank’s activity.
The SC is responsible for decisions relating to the determination of development targets
and strategies, overall supervision and control, determination of foremost business issues
and making decisions on the composition of executive bodies. SC also appoints the
external auditors, approves the Board member’s wages and bonuses.
The Board is the executive body of the Bank and oversees its operations and day-to-day
management. Its powers are delegated by the Bank’s Supervisory Council. Chairman of the
Board is Mr. Vadim V. Morokhovskiy. The decisions of the Board are taken by majority vote
of the members in attendance at a meeting.
Controlling bodies
The controlling bodies are Revision Comission and Internal audit. Revision Commission
is represented by 3 shareholders and performs independent control over the bank’s
financial and economical activity. Internal audit is represented by Internal Audit and Control
Division which is subordinated to the SC.
Internal collective bodies
Internal collective bodies are represented by Assets and Liabilities Management
Committee (ALCO), Tariff Committee (TC), Level 1 and Level 2 Credit Committees
(CC1 and CC2), branches’ credit commissions (BCCs). The decisions of the ALCO, TC,
CC1, CC2 and BCCs are taken by majority vote of the members in attendance at a
meeting.
Risk management is represented by Risk Management Department (RMD) subordinated
to the Board and to the Supervisory Council. Risk managers of the branches (BRMs) are
subordinated to RMD. Head of RMD is a member of ALCO, TC, CC1 and CC2. BRMs are
members of BCCs. Head of RMD and BRMs have the Veto for decisions of the above
bodies.
32
PIVDENNYI BANK
Members of the Board
Vadim V. Morokhovskiy
Chairman of the Board
General Management, supervises Corporate Business
Master of banking, Chess Grand Master
With Pivdennyi Bank since 1995
Liudmila I. Khudiyash
Vice-Chairman of the Board
General management, supervises cash-desk operations, financial monitoring
Master of Banking
With Pivdennyi Bank since 1999
Liudmila I. Oliferchuk
Vice-Chairman of the Board
Supervises internal book-keeping, HR and staff-training, IT
Master of banking
With Pivdennyi since 1993
Liya S. Morokhovskaya
Vice-Chairman of the Board
Supervises all operational activities, retail business, payment cards, marketing
Master of banking
With Pivdennyi since 1996
Liudmila V. Kovalenok
Chief Accountant – member of the Board
Supervices book-keeping, operational activity and taxation
Master of Banking
With Pivdennyi since 1998
Valentina D. Grechko
Head of Legal Devision – member of the Board
As a member of the Board also supervises operations with securities
Master of Law, Master of Banking
With Pivdennyi Since 1996
Elena G. Tsvetkova
Head of Division for co-ordination and Methodology – member of the Board
Supervises distribution network activities
Master of Finance
With Pivdennyi since 1998
33
PIVDENNYI BANK
Employees
The key factor of PIVDENNYI Bank's success and development is well-considered staff
policy. The Bank has created a team of professionals but due to an effective development,
introduction of up-to-date technologies, enhancement of banking products’ range,
penetration into new markets and branch network development, Pivdennyi Bank increases
each year the number of its professionals, as of 1 January 2006 Pivdennyi Bank numbers
1514 employees.
The Bank created all conditions for fruitful work of its employees. A special attention is
devoted to work places of employees to make them feel at ease. Functional furniture and
office equipment, microclimate systems and convenient lighting – are necessary attributes
of any department of the Bank, they create the atmosphere of comfort and support, and at
the same time demonstrate a considerable increase in labour productivity and decrease in
stress situations and, as a consequence, the efficiency and enthusiasm of the employees
increase.
34
PIVDENNYI BANK
3.4. Risk Considerations
Exposure to credit risk
Driven by strong growth in the local credit market, the loan portfolio grew by 37% and
reached UAH1.6 billion (USD325 million) at end-2005. The growth has continued into 2006,
at end-H206, the loan portfolio reached UAH2.2 billion. It comprised 89% corporate loans
and 11% retail loans. As margins continue to come under pressure in the corporate sector
the bank plans to direct an increased amount of funds into the retail segment. By the end of
2008, the retail loan portfolio is planned to represent about 30% of the loan portfolio. The
growth of retail banking is expected to be gradual and not compromise credit quality.
Credit risk stemming from interbank lending is average. The bank has established limits on
a large number of Ukrainian banks and, although most of these limits are not utilized, a
more prudent approach to counterparty risk could be taken. Furthermore, monitoring of the
counterparties requires additional costs.
Corporate Clients
The corporate loan portfolio (gross) totalled UAH2.1 billion at end-H0206. 52% of loans
were extended to large corporates and 48% - to SMEs. The largest sector exposures were
to retail and wholesale trade (46.3%), real estate and construction (9.7%), and the food
industry (6.0%). Lending to the trade sector included investment loans to retail stores for
construction purposes, hence, the exposure to the volatile real estate sector is higher than
stated. Although the bank places a strong emphasis on the borrowers’ ability to repay their
loans it may not know a level of experience and expertise of the builders contracted to
construct the retail stores. The concentration levels in the loan portfolio have trended down
but remained significant reflecting the corporate orientation of the bank. The top 20
borrowers represented 31% of the loan book or 2.0x of equity at July 1, 2006. The top 20
loans are predominantly in the trade, shipping, real estate and alcoholic beverages sectors.
Regional concentration exists as c.50% of the loan book is issued to companies in Odessa
and the Odessa region. The loan portfolio tenor has lengthened, with 44% of the portfolio
having a maturity of over one year at end-2005 compared to 35% at end-2004. As of July
1, 2006, about 57% of the loan portfolio was issued in foreign currencies (mostly in USD)
compared to 49% as of January 1, 2005. While some of the bank’s borrowers may have
access to FX income streams, this is not always the case, ultimately exposing Pivdennyi to
the risk of the borrowers’ inability to service debt if a substantial devaluation of the local
currency occurs.
Individuals
Despite the rapid growth gross retail loans were UAH252 million at end-H206 and
constituted 11% of the loan portfolio. The portfolio was composed of 51% consumer loans
and 49% mortgages. The growth in retail loans will likely continue as a result of the
strategic focus on retail banking and in conjunction with the geographical penetration into
other regions of Ukraine.
Exposure to market risk
Interest Rate Sensitivity
The bank’s exposure to interest rate risk is increasing. To take advantage of the existing
declining interest rate environment the bank is exploiting the positive yield curve and
35
PIVDENNYI BANK
mismatching long-term assets and short-term liabilities. At end-H205, the negative funding
gap within a one year timeframe widened to 18.2% of total assets from 13.6% of total
assets at end-2004. In July 2006, the bank estimates that a 1% decline in interest rate
should contribute about UAH7 million to its revenues.
Foreign currency rate risk
FX risk is mainly structural as the majority of FX transactions are customer-driven. The
bank anticipates a small (about 2-3%) depreciation of the national currency against the US
dollar during 2006, thus, it holds a long aggregate FX position close to USD5 million, or 8%
of regulatory capital, i.e. within the bank’s internally established limit of 15% of regulatory
capital. Although FX proprietary transactions represent only 10% of total transactions, VAR
is calculated for trading book, based on a 99% confidence level and 30-day holding periods.
FX risk is moderate and adequately managed.
Market risk inherent in securities trading is low. The securities portfolio represented 0.8% of
assets at end-2005 and was comprised of 54% bonds and 46% corporate shares. Most
securities holdings have speculative ratings but are liquid and can be easily sold in the
Ukrainian market.
Liquidity Risk
The low level of liquid assets reflect the bank’s aggressive policy used in liquidity
management concerning the behaviour of instruments. For example, 95% of current
account funding is being stable in the amount of the minimum balance during the last three
months, and can be assumed to be a one-year funding, with zero gaps targeted after this
adjustment. However, in the past, the bank has had no serious liquidity problems. Between
September 2004 and January 2005, during the general market turbulence in the Ukraine,
the bank lost c.15% of its corporate balances and c.10% of its retail deposits, but was able
to withstand the crisis. The bank has a liquidity contingency plan, according to which
alternative funding in case a liquidity crisis arises would be attracted in the form of loan
repayments, deposits from RIB and the insurance companies which are part of the holding
group. The loan-to-deposit ratio has improved to 102.7% at end-2005 from 112.7%.
The following table sets forth liquidity ratios of the Pivdennyi Bank as of December 31,
2003, 2004 and 2005.
As of
December 31, 2003
As of
December 31, 2004
As of
December 31, 2005
Loans to clients(1) as % of total
assets
89.87%
82,86%
80.26%
Loans to clients(1) as % of client
Accounts
116,88%
123,80%
110,28%
Loans to clients(1) as % of total
equity
882,89%
824,30%
702,06%
(1) Net of allowance for loan impairment
36
PIVDENNYI BANK
Loan and deposits concentrations
Loans portfolio concentrations 2004
Other 10%
Individuals 4%
Transport and
communication 3%
Trade and
commerce 64%
Manufacturing 9%
Agriculture and food
industry 10%
Loans portfolio concentrations 2005
Other 7%
Individuals 7%
Transport and
communication 9%
Trade and
commerce 54%
Manufacturing 11%
Agriculture and food
industry 12%
Deposit portfolio concentrations 2004
Finance and
insurance 2%
Manufacturing 5%
Individuals 50%
Trade and commerce
28%
Other 8%
Transport and
communications 7%
Deposit portfolio concentrations 2005
Finance and
insurance 10%
Individuals 43%
Manufacturing 7%
Trade and commerce
24%
Other 7%
Transport and
communications 9%
37
PIVDENNYI BANK
3.5. Risk Management
The purpose of risk management is to control and monitor the size and concentration of
risks arising from Pivdennyi’s activities. The principal categories of risk inherent in the
Bank’s business are liquidity risk, credit risks (risks of possible losses on commercial and
consumer loans), risks arising from inter-bank business, foreign currency rate risk, interest
rate risk, operational risk, market risk and litigation risk.
Pivdennyi Bank manages risk in an integrated manner, evaluating it in terms of the
correlation of the overall risk level and Pivdennyi’s capital. Pivdennyi’s risk management
and control systems are based on the requirements of the National Bank of Ukraine and the
recommendations of the Basle Committee on Banking Supervision.
Pivdennyi’s Asset and Liability Management Committee (“ALCO”) sets Pivdennyi’s asset,
liability and risk management policy in line with its business strategy and makes necessary
corrections in light of Pivdennyi’s financial and market position and in accordance with the
growth and diversification of its business. The ALCO also sets targets for asset and liability
allocations and exposure limits for various banking operations, determines the optimal
allocation of Pivdennyi’s funds, and establishes lending and funding policies, including base
and target interest rates for various types of loans, based on their maturity and purpose.
The Credit Committee coordinates Pivdennyi’s credit policy, establishes lending policies
and procedures and criteria for problem loans, approves loans and guarantees for most
legal entity clients, sets lending limits within the exposure limit parameters set by the ALCO
and approves new credit products.
Liquidity risk
Liquidity risk arises from the timing of cash flows generated from the bank’s assets,
liabilities and off-balance sheet instruments. The Bank’s liquidity management policies are
reviewed and monitored by ALCO.
The liquidity management policy of the Bank is based on classic requirements which
enforce the ratios applied in respect of various groups of liquid assets and liabilities. The
estimation of such internal ratios was carried out based on the facts of the 1998 banking
crisis, that is, a maximum possible fluctuation of the resource base was taken into account.
The level of liquidity is monitored on a daily basis and is examined monthly by the RMD. In
this context, it is to be noted that the Bank is not dependant on large depositors.
The liquidity management department within treasury and international business supervises
payment position daily, an automated reporting system, including a calendar of payments
and gap-tables for each division, is in place.
In addition to classic gap method new statistical approaches applied for customer accounts
balances’ analysis. Thus, daily-based stable balances’ research and Cash flow at Risk
(CFaR) estimation allowed bank to hold low level of liquid assets up to the current moment.
Stress-testing is undertaken at weekly intervals to ensure that planed liquidity positions are
maintained under all scenarios. Detailed multilevel contingency plans were proven in times
of market turbulences and allowed bank feeling comfortable even without excessive liquidity
reserves.
38
PIVDENNYI BANK
However, the management of the bank has approved changes in liquidity management
policy from aggressive to conservative up to 2H07. Thus, obtaining of attractive ratings from
international rating agencies and entrance to international money and capital markets (CLN
and Eurobonds issue planned for 4Q06 and 2Q07) will bring the ability to attract long-term
funds and form the basis for new conservative policy application.
Credit Risk
The Credit Risk is one of the principal risks the Bank takes. As loans constitute a significant
portion of its assets, credit risk management is therefore a priority for Pivdennyi Bank. The
identification and adequate measurement of credit risk is one of the key factors contributing
to increased efficiency of the Bank's operation. Pivdennyi Bank manages its credit risk
through establishing exposure limits for single borrowers, groups of borrowers and
industries, which are set by the Credit Committee, as well as by complying with exposure
limits established by the National Bank of Ukraine. Pivdennyi Bank also mitigates its credit
risk by conducting thorough reviews of prospective borrowers, obtaining collateral,
corporate and personal guarantees and ongoing credit monitoring. The Credit risk is also
reduced by setting appropriate allowances for loan impairment and loan losses.
Credit risk of off-balance sheet financial instruments such as guarantees is defined as a
possibility of sustaining a loss as a result of another party to a financial instrument failing to
perform in accordance with the terms of the contract. The ALCO sets exposure limits for offbalance sheet exposures and counter party limits for off-balance sheet transactions with
banks and other financial institutions, including foreign currency position limits and
documentary transaction limits, reviews transactions that would exceed these limits and, if
necessary, adjusts the limits. The RMD monitors Pivdennyi Bank’s off-balance sheet
commitments on a weekly basis. The Bank’s back office departments monitor the
compliance with limits for off-balance sheet transactions with corporate clients and banks
on a daily basis.
Corporate / SME credit risk
Pivdennyi Bank’s Corporate / SME sector policy is to maintain a broad sector spread of
exposures which reflect the Bank’s areas of expertise. Credit exposures to businesses are
assessed individually. The quality of the overall portfolio is monitored using a credit grading
system calibrated to the probability of incurring losses. All aspects of credit management
are controlled centrally for the Bank and Branches Network. The Board receives regular
reports on new facilities and changes in facilities, sector exposures, bad debt provisions
and problem loans.
Retail credit risk
Retail lending is tightly controlled through advanced credit and behavioral scoring
techniques. The Board receives regular reports on the performance of the portfolio. On the
basis of expert appraisals and using mathematical models, the Bank has developed certain
methods for different products, which allow to determine the acceptable extent of credit risk
and to set the credit limit.
The Bank’s approach to the analysis of borrowers provides that the examination of a
borrower (corporate and SME) must be carried out by two independent experts, working in
two different departments of the Bank: Lending Division and Risk Management Department.
The evaluation of a potential corporate borrower includes the analysis of certain risks
39
PIVDENNYI BANK
related, in particular, to financial standing, industry, market, management, operational risks,
etc. To properly assess SME and retail customers’ risk, the credit decision is supported by
a highly effective scoring model. On the basis of the complex analysis of the customer and
in conformity with the Bank’s procedures, experts set credit limits and define the borrower’s
risk category.
Lending Division is responsible for structuring the credit transaction on the basis of its own
analysis of the customer and opinion of the Risk Management Department. Assessment of
collateral is performed by another member of staff from independent Department of
Estimation and Mortgage operations who carries out the assessment of loan security and
executes collateral repossession if the situation so requires.
The Bank has developed a set of credit products, which made it possible to facilitate the
credit risk management system and unify the fundamental approaches to assessment of a
borrower, security requirements, and structure of credit operations. On top of this, the Bank
offers a number of credit products which require specific approaches to credit risk
management; structured and trade finance, as well as project finance, are the most
complex of these.
Control over loan quality is a relevant element of the Bank’s credit risk management. The
control function is assigned to the Credit and Collateral Monitoring Department. The Bank
has developed a mechanism of control which ensures the highest possible protection of the
Bank’s interests in the process of loan issuing. It includes the monitoring of documentation
in the credit file to make sure that it remains complete and valid until maturity.
The credit risk management system is complemented by
-
constant monitoring of borrowers and collateral for issued loans;
management of problematic assets
the creation of adequate loan loss provisions.
Pivdennyi Bank’s risk management policies are of utmost concern to the Bank’s
management. The general approach follows a rather conservative pattern. A number of
general ratios related to risk evaluation are enforced in conformity with the regulations of
the National Bank of Ukraine, and the Bank fully complies with these requirements.
Risks from inter-bank business
The Asset and Liability Management Committee approves credit risk limits for loans issued
to banks. Pivdennyi Bank uses its own methods for assessment of banks’ solvency and an
automated system designed for monitoring financial statements of credit institutions. The
fixed inter-bank limits can be exceeded when exposure is secured by certain assets, such
as bank promissory notes, government securities and cash.
Operational risk
Operational risk arises from the potential for key systems failures, breaches in internal
controls or from external events resulting in financial loss or reputation damage. Key
operational risks include outsourced contracts, payment systems and information systems.
Operational risk is controlled and mitigated through comprehensive, ongoing risk
management practices which include formal internal control procedures, training,
segregation of duties and responsibilities, delegated authorities and contingency planning.
40
PIVDENNYI BANK
The Internal Audit and Control Division performs a programme of operational reviews and
reports regularly to the Management Board. The division managers are responsible for
controlling operating risks within their areas of accountability and for compliance with bank’s
policies which are extensively documented. Following is a listing of key elements of the
Bank’s internal control system.
Elements of Internal Control System
Management Control - The Board regularly conducts meetings with the management of
the bank in which estimates of interior control prepared by the external auditors are
considered
Monitoring of Interior controls - Analysis and estimation of various risks taken by the
Bank, implementation of bank products
Distribution of responsibilities - Distribution and management of the professional
responsibilities of employees of the Bank in order to avoid conflicts of interests
Management of information channels and information security - Control of physical
access; backup equipment and systems for storing all banking operations and procedures;
use of continuous sources of electricity for maintenance of servers; different access rights
for different categories of users; anti-virus software; monitoring employees’ use of the
Internet, computers, telecommunication channels, etc.
Market Risk
Market risk arises from the effect of changes in market prices of financial instruments, on
income derived from the structure of the balance sheet, execution of customer and internal
bank business and proprietary trading. Due to its functions, a prominent role in the control
and day-to-day management of market risk is played by Treasury and Interbank Business
Department. There are no direct interactions between Treasury’s analytical section and the
Bank’s clients.
Primary functions of the Treasury include
-
risk management and control
assets and liabilities management
foreign exchange and capital markets
organization and support of resources within the bank
The analytical section of Treasury provides services out of head office for all the bank’s
branches. It does not generate any interest income from intra-bank funds transfers. The
Analytical Section is completely independent from the Bank’s other divisions.
Interest Risk
For Pivdennyi Bank, market risk manifests itself primarily in the form of interest risk. Interest
risk policy statements, approved by the Bank’s Board, specify the scope of the Bank’s
market activity, market risk limits and delegated authorities. The policy is executed by the
Asset and Liabilities Management Committee (ALCO), which meets at monthly intervals. Its
prime task is to assess the interest risk inherent in the maturity and re-pricing
characteristics of the bank’s assets and liabilities. It sets limits within which the Bank’s
41
PIVDENNYI BANK
Treasury manages the effect of interest rate changes on the bank’s overall net interest
income. The principal analytical techniques involve assessing the impact of different
interest rate scenarios and changes in balances over various time periods.
The following are key elements of the Bank’s interest rate risk management policy:
-
An established system of strict gap limits for interest rate changes of assets and
liabilities
Duration analysis undertaken on regular basis for different terms
Permanent monitoring of interest rate market
Monthly data collection and research analysis pertaining to interest rate movements
System ensures isolation of risk from individual business-managers
Level of possible negative influence on budgeted income - less than 7% of equity
Currency Risk
Currency risk is significantly limited by the regulations enforced by the National Bank of
Ukraine according to which the open position in any currency should not exceed 10% of a
bank’s capital. The Bank’s activity on FX markets is focused on customer related FX
operations on covered spot basis. The Bank does not hold open positions on the ‘hard
forex’ market. In addition to the open position limits, the bank has established stoploss
limits which are being reconsidered on 1, 10 and 30 day Value at Risk calculation basis.
The following are key elements of the Bank’s currency risk management policy:
-
-
The system in place sets limits for amount of open currency position, monitors and
controls all types of exchanges rate risk
Trading limits are applicable to transactions of Dealing Operations Division
Investment limits restrict the amount of open currency position of the entire bank
(The amount of open currency position in any one currency can never exceed 10%
of equity amount and total position in all currencies cannot exceed 20% of total
equity amount, Include limits of assets and liabilities gaps, and off-balance liabilities
in one currency)
There are two types of limits employed that restrict losses: stop-call and stop-loss
All open positions supervision is conducted on-line in real-time system
The level of stated limits confines the amount of probable one-time losses to below
1% of equity
Legal risk
From time to time and in the normal course of business, claims against Pivdennyi Bank are
received. On the basis of its own estimates and internal professional legal advice the
Management is of the opinion that no material losses will be incurred in respect of claims.
Accordingly, as at 31 December 2005, and before at year-end 2004, no respective
provisions were made.
Anti Money-Laundering Measures
Pivdennyi Bank’s anti-money laundering measures are based on and are in compliance
with relevant Ukrainian legislation. Pivdennyi Bank has procedures and operative
documents aimed at preventing money laundering and terrorist financing, including a
general anti-money laundering policy and internal control procedures and rules on
42
PIVDENNYI BANK
counteracting money laundering and financing of individuals and legal entities engaged in
terrorist activities, as well as procedures for reporting to the State Financial Monitoring
Department. These procedures aim to, among other things, minimise the risk of Pivdennyi
Bank being used as a vehicle for money laundering or terrorist financing, protect Pivdennyi
Bank from financial and reputational risk of being associated with money laundering or
terrorist financing activities and ensure that banking services are provided only to bona fide
clients.
Pivdennyi Bank’s procedures relating to the prevention of money laundering and terrorist
financing include, but are not limited to:
•
•
•
•
•
“Know-your-customer” procedures. These procedures require clear identification
of clients, verification of their identity and appraisal of risk of their engaging in
prohibited transactions. Pivdennyi maintains a database containing information on
all clients and transactions in which they engage, which facilitates identification of
unusual transactions. In addition, Pivdennyi Bank verifies each client’s identity, legal
status and authority to engage in particular transactions. Pivdennyi Bank does not
enter into business relationships with clients that refuse to provide sufficient identity
and authority information. Pivdennyi Bank pays particular attention to obtaining
information about its bank counter parties and does not enter into banking
relationships (including inter bank lending and deposit taking and operating
correspondent bank accounts) with shell banks.
Detection. Pivdennyi Bank identifies transactions that must be monitored and
reported pursuant to the Ukrainian anti-money laundering legislation.
Such
legislation requires Pivdennyi Bank to monitor and report such transactions to the
State Financial Monitoring Department.
Record Keeping. Pivdennyi Bank keeps records of all of its banking and financial
transactions. It also maintains a database of all of its clients and their transactions,
facilitating identification of unusual activities.
Confidentiality. Pivdennyi Bank keeps all information obtained as a result of
applying its anti-money laundering procedures confidential, except where it is
required to report it to State Financial Monitoring Department.
Education. Pivdennyi Bank provides education and training of personnel with
respect to anti-money laundering procedures at least once a year.
Pivdennyi Bank’s Financial Monitoring Department monitors client transactions and the
activities of all of Pivdennyi Bank’s departments for compliance with the relevant Ukrainian
anti-money laundering legislation. Monitoring is conducted via Pivdennyi Bank’s IT systems
as well as manually. Pivdennyi Bank’s other departments notify the FMD of suspicious
transactions, using the criteria set out in Pivdennyi Bank’s internal anti-money laundering
regulations. The FMD pays particular attention to transactions involving large sums of
money, counter parties located in off-shore jurisdictions, or significant amounts of cash. If
monitoring indicates that a client may be engaging in money-laundering or terrorist
financing, the level of monitoring of such client is increased. Activities are analysed on a
regular, as well as long-term basis, which allows detection of money-laundering schemes. If
necessary, the FMD obtains additional information about a particular transaction’s purpose
and/or suspends suspicious transactions.
43
PIVDENNYI BANK
4. FINANCIAL ANALYSIS
4.1. Basic Financial Information
The Pivdennyi Bank has produced financial statements under IFRS since 1997.
IFRS Balance Sheet Analysis
31 Dec
2003
A. LOANS
1. Private
2. Corporate
3.Loan Impairment
Total A
B. Other earning assets
1. Loans and advances to customers
2. Government Securities
3. Trading Assets
4. Other Securities and Investments
TOTAL B
C. TOTAL EARNING ASSETS (A+B)
D. TANGIBLE FIXED ASSETS
E. NON-EARNING ASSETS
1. Cash and Due from Banks
2. Other
F. TOTAL ASSETS
G. DEPOSITS & MONEY MARKET
FUNDING
1. Due to customers – current
2. Due to customers –Term
3. Deposits with banks
4. Other deposits and short-term borrowings
TOTAL G
H. OTHER FUNDING
1. Long-term funding
2. Subordinated debt
TOTAL H
I. NON-INTEREST BEARING
J. TOTAL LIABILITIES
K. EQUITY
1. Common Equity
2. Revaluation reserves
TOTAL K
CORE CAPITAL
ELIGIBLE CAPITAL
L. TOTAL LIABILITIES & EQUITY
31 Dec
2004
(USDm)
31 Dec
2005
n.a.
n.a.
n.a.
177,6
10,4
237,2
22,2
225,4
26,2
323,2
24,1
325,3
4,8
0,0
0,0
5,2
10,0
187,6
7,8
15,5
2,6
n.a.
2,1
20,3
245,7
10,1
7,7
0,0
1,7
14,4
23,8
349,0
33,1
22,8
0,7
218,9
36,1
6,9
298,9
52,2
0,9
435,3
56,4
111,9
21,5
n.a.
189,8
69,0
131,0
54,9
7,78
262,7
106,3
210,6
59,4
n.a
376,3
3,2
2,1
5,3
8,2
196,6
4,4
0,0
4,4
1,7
268,9
5,4
1,5
6,9
2,4
385,6
22,3
n.a
22,3
22,3
22,3
218,9
30,0
n.a.
30,0
29,6
29,6
298,9
44,6
5,2
49,8
44,6
44,6
435,3
44
PIVDENNYI BANK
IFRS Income Statement Analysis
31 Dec
2004
37,4
21,1
16,3
6,6
2,4
6,7
7,9
10,6
3,1
0,4
7,2
-0,9
6,3
2,0
n.a.
4,3
(USDm)
31 Dec
2005
47,1
27,2
19,9
9,0
4,0
9,9
10,9
12,0
4,3
-0,3
8,1
-0,6
7,5
1,8
5,2
5,7
8,46
n.a.
10,25
5,12
47,94
5,56
3,13
60,69
34,13
31 Dec
2004
7,52
16,16
9,09
5,64
57,94
4,10
2,77
40,55
27,39
(%)
31 Dec
2005
6,55
14,74
8,19
5,57
63,42
3,21
2,16
29,61
19,87
31 Dec
2003
24,32
10,18
31 Dec
2004
16,53
9,90
31 Dec
2005
26,78
10,23
11,55
12,59
11,95
11,60
11,60
65,07
12,80
12,80
66,31
11,95
13,76
33,39
31 Dec
2004
31 Dec
2005
11,9
20,48
19,07
105,53
112,70
102,66
31 Dec
2003
1. Interest income
2. Interest Expense
3. NET INTEREST REVENUE
4. Net Fees & Commisions
5. Other operating Income
6. Personnel Expenses
7. Other Operating Expenses
8. PRE-IMPAIRMENT OPERATING PROFIT
9. Loan Impairment Charge
10. Other Credit Impairment and Provisions
11. OPERATING PROFIT
12. Other Income and Expenses
13. PUBLISHED PRE-TAX PROFIT
14. Taxes
15. Other gains not in Published Net Income
16. PUBLISHED NET INCOME
31,5
17,6
13,9
5,9
0,8
3,7
6,1
10,7
5,4
-0,7
6,0
0,3
6,3
2,02
n.a.
4,2
IFRS Ratio Analysis
I. Performance ratios
1. Net Interest Margin
2. Loan Yield
3. Cost of funds
4. Costs/Average Assets
5. Costs/Income
6. Pre-Impairment Operating ROAA
7. Operating ROAA
8. Pre-Impairment Operating ROAE
9. Operating ROAE
II. Capital Adequacy ratios
1. Internal Capital Generation
2. Core capital / Total assets
3. Eligible Capital + Eligible Revaluation
Reserves / Regulatory Weighted Risks
4. Tier 1 Regulatory Capital Ratio
5. Total Regulatory Capital Ratio
6. Free Capital / Equity
III. Liquidity (year end) ratios
1. Liquid Assets / Deposits & Money Market
Funding
2. Loans / Deposits
31 Dec
2003
31 Dec
2003
45
PIVDENNYI BANK
4.2. Asset Quality
Securities
The securities portfolio represented 0.8% of assets at end-2005 and was comprised of 54%
bonds and 46% corporate shares. Most securities holdings have speculative ratings but are
liquid and can be easily sold in the Ukrainian market.
Trading Securities
(USDm)
As at 31 December :
Corporate shares
Total trading securities
2004
-
2005
1,6
1,6
2004
2,6
0,9
2005
1,0
0,9
0,2
3,5
2,1
Other securities at fair value through profit or loss
(USDm)
As at 31 December :
Ukrainian Treasury Bonds (OVDP)
Municipal bonds
Corporate bonds
Corporate shares
Total other securities at fair value
through profit or loss
Municipal bonds represent bonds of local authorities of Odessa city, traded on Ukrainian
over-the-counter market (PFTS). The bonds mature in December 2007, have coupon rate
of 12% and yield to maturity of 12%.
Corporate bonds represent bonds of Ukrainian enterprises, traded on PFTS. The bonds
mature from December 2008 to October 2010, have coupon rates of 16,5%-18%, and yield
to maturity of 16,5% -18%
The above securities are not part of bank’s trading book, as at fair value through profit or
loss.
Investment securities available for sale
(USDm)
As at 31 December :
Corporate bonds
Corporate shares
Promissory notes
Less provision for impairment of investment
securities available for sale
Total investment securities available for sale
2004
0,8
0,8
0,2
2005
12,0
0,9
-
-0,6
-0,6
1,2
12,3
46
PIVDENNYI BANK
4.3. Loans
Loans and advances to customers
As at 31 December :
(USDm)
2005
346,2
3,2
-24,1
325,28
2004
240,5
5,7
0,2
-22,1
224,35
Current loans
Overdue loans
Reverse sale and repurchase agreements
Less provision for loan impairment
Total loans and advances to customers
Pivdennyi’s asset quality is strong and reflects its prudent credit policies and procedures
and high collaterization values. At end-2005, overdue loans (overdue more than 1 day)
were UAH16.3 million (or 0.9% of the loan portfolio) compared to UAH30.7 million (2.4% of
the loan portfolio) at end-2004. The improved asset quality reflected the bank’s effective
work-out strategies, relatively conservative approach to retail lending and the benign
economic conditions. To buffer potential cyclical swings, the bank maintains relatively high
reserve levels. At end-2005, the LLR/gross loans coverage stood at 7.0% (2004: 9.2%).
High provisioning levels should help the bank to withstand asset quality pressure in the
event of an economic downturn.
Quality Ratios
1.Loan Impairment Charge / Gross loans
(av.)
2.Total Credit Impairment / Pre-impairment
Operating Profit
3.Loan Impairment / Gross Impaired Loans
4.Impaired Gross Loans / Loans Gross
5.Impaired Loans Net / Eligeble Capital
6.Net Charge-offs/Gross Loans (av.)
31 Dec
2003
31 Dec
2004
31 Dec
2005
3,13
1,37
1,41
43,76
32,45
32,89
435,76
2,23
-66,08
0,08
383,71
2,34
-55,55
0,03
747,24
0,92
-46,89
1,14
Economic sector concentrations
(%)
As at 31 December :
Trade and commerce
Agriculture and food industry
Manufacturing
Transport and communication
Individuals
Other
Total loans and advances to customers
2004
64,0
10,0
9,0
3,0
4,0
10,0
100,0
2005
54,0
12,0
11,0
9,0
7,0
7,0
100,0
47
PIVDENNYI BANK
Individual Customer Concentrations
The portfolio is composed of 51% consumer loans and 49% mortgages. The growth in retail
loans will likely continue as a result of the strategic focus on retail banking and in
conjunction with the geographical penetration into other regions of Ukraine.
Loan portfolio quality
Pivdennyi’s asset quality is strong and reflects its prudent credit policies and procedures
and high collaterization values. At end-2005, overdue loans (overdue more than 1 day)
were UAH16.3 million (or 0.9% of the loan portfolio) compared to UAH30.7 million (2.4% of
the loan portfolio) at end-2004. The improved asset quality reflected the bank’s effective
work-out strategies, relatively conservative approach to retail lending and the benign
economic conditions. To buffer potential cyclical swings, the bank maintains relatively high
reserve levels. At end-2005, the LLR/gross loans coverage stood at 7.0% (2004: 9.2%).
High provisioning levels should help the bank to withstand asset quality pressure in the
event of an economic downturn.
As at 31 December :
Pass
Watch
Substandard
Doubtful
Losses
Total tested Loans
Untested Loans
Total Net Loans
2003
USDm
%
104,6
0,0
81,9
2,6
5,8
194,9
0,0
194,9
53,7
0,0
42,0
1,3
3,0
100,0
0,0
100,0
2004
USDm
%
120,6
0,3
117,7
2,6
6,2
247,3
0,0
247,3
48,8
0,1
47,6
1,1
2,5
100,0
0,0
100,0
2005
USD
m
33,7
234,2
64,9
13,2
2,8
348,8
0,0
348,8
%
9,7
67,2
18,6
3,8
0,8
100,0
0,0
100,0
In March 2005 National Bank of Ukraine issued new guideline for loan classification
recommending Ukrainian banks to toughen internal scoring models for loans classification.
Pivdennyi Bank applied a new, more conservative, scoring, which resulted in a high
percentage of loans move from “pass” to “watch” as of April 1, 2006 – see the following
table:
01.04.2005
USDm
%
Pass
Watch
Substandard
Doubtful
Losses
Total tested Loans
Untested Loans
Total Net Loans
15,5
153,0
55,5
11,2
5,5
240,7
0,0
240,7
6,5
63,6
23,1
4,7
2,3
100,0
0,0
100,0
01.07.2005
USDm
%
18,3
187,2
50,7
10,4
7,1
273,7
0,0
273,7
6,5
63,6
23,1
4,7
2,3
100,0
0,0
100,0
01.10.2005
USD
%
m
17,8
5,6
224,9
71,2
56,9
18,0
12,2
3,9
4,0
1,3
315,9
100,0
0,0
0,0
315,9
100,0
48
PIVDENNYI BANK
Collateral
Pivdennyi bank generally requires collateral, personal or corporate guarantees and/or an
assurance arrangements as security for each loan. Acceptable collateral includes real
property, land leasing rights, securities, industrial equipment, vehicles, airplanes, ships,
precious metals, raw materials and inventory.
In most cases, collateral, guarantees and assurance arrangements, separately or together,
cover at least 1,5 times the principal of the loan, accrued interest and commissions.
Collateral portfolio structure
Other property rights
and types of collateral
10,88%
Real estate 40,31%
Non-govermental
securities 0,65%
Other movables 17,02%
Goods in turnover
25,85%
Property rights to the
cash deposits and
nominal certificates
4,29%
Related Party Lending
The volume of related party lending has increased. However, due to the stronger
capitalization it comprised only 34% of end-2005 equity compared to 54% of end-2004
equity. Credit risk is viewed as above average. The inherent risks of concentrations make
the bank vulnerable in the event of economic downturn. The main risk mitigant is collateral.
Some large exposures are secured by cash deposits and haircuts applied to other types of
collateral are very conservative.
49
PIVDENNYI BANK
Capital Resources and Adequacy
Outlined below are capital ratios calculated in accordance with the international framework
for capital measurement and capital standards of banking institutions set by the Basle
Committee on Banking Regulations and Supervisory Practices. The capital ratios in the
table below outline core (“Tier 1”) and supplementary (“Tier 2”) capital requirements relative
to a bank’s assets and certain off-balance sheet items, weighted according to risks (“RiskWeighted Assets”).
all amounts in USDm
Tier 1 capital
Share Capital
Share Premium
Retained earnings
Total Tier 1 capital
Tier 2 capital
Total qualifying capital
Total Risk-Weighted Assets
Tier 1 Risk Adjusted Capital Ratio
As of
Dec 31, 2003
20,5
1,9
22,4
22,4
192,9
11,61%
As of
Dec 31, 2004
28,1
2,0
30,1
30,1
234,6
12,83%
As of
Dec 31, 2005
41,4
3,2
44,6
6,7
51,3
372,9
13,76%
50
PIVDENNYI BANK
5. UKRAINE AND ITS BANKING ENVIRONMENT
5.1. General Overview
In terms of land area, Ukraine is the largest country within continental Europe (603,700 sq.
km or 233,100 sq. miles). Its population is the fifth largest in Europe (after Germany, Italy,
Great Britain, and France). Its population is approximately 48 million, of which over 52% are
of working age. Kiev, the capital, has a population of over 3 million. Ukraine borders on
Russia, Belarus, Moldova, Romania, Poland, Slovakia and Hungary with the Black Sea
serving as its southern-most flank.
Map of Ukraine
Government and Politics
Ukraine gained independence from the Union of Soviet Socialist Republics (USSR) in 1991.
It adopted its own constitution in June 1996, creating three branches of power: Legislative
(Parliament), Executive (President, Cabinet of Ministers), and Judicial (Supreme Court)
branches. The President, elected for a five-year term, is the head of state, while the Prime
Minister is the head of government. Viktor Yushchenko, elected following an unprecedent
mass protest in late 2004, which has been termed the ‘Orange Revolution’, is the current
President with the next presidential elections scheduled for October 2009. The constitution
adopted in 1996 left the division of power between the three groups relatively unclear as the
President has the power to appoint and dismiss the Prime Minister with Parliamentary
approval.
The Parliament has the primary legislative power so that it can override both presidential
and governmental decrees. It is a unicameral body with 450 representatives elected under
51
PIVDENNYI BANK
a mixed system, with half the members elected in single mandate districts and half elected
via a proportional representational system. The term of office for parliamentary
representatives is four years. Parliamentary elections were held on March 26th, 2006.
On July 6th 2006 the Socialist Party of Ukraine (SPU) suddenly defected from the propresidential "orange" coalition and entered into an alliance with the opposition. This
produced a governing majority centred on the Party of Regions.
Parliament's new majority coalition, which unites the Party of Regions, the pro-presidential
Our Ukraine and the parliamentary left, has secured Viktor Yanukovych's return to the post
of prime minister. He brought with him many figures from the former administration headed
by Leonid Kuchma, as well as priorities that differ from those of the current president, Viktor
Yushchenko. Combined with disputes over recent constitutional changes to reduce
presidential powers, this will ensure tense inter-institutional relations.
In December 2004, the Parliament passed legislation amending the Constitution with a view
to redistribute power between the legislative and executive branches of government. These
amendments were approved by the President and became effective on January 1st, 2006.
Under the new rules, the Parliament is to be elected via a proportional system for a fiveyear term and shall be entitled to appoint key Cabinet members, in addition to the Prime
Minister. Moreover, following the recent parliamentary election, the office of the Prime
Minister is expected to act as a powerful new counterweight to the President, and the
cabinet will be more accountable to Parliament than in the past. In particular, Parliament will
have the right to approve the Prime Minister and ministers individually (previously it could
only approve the Prime Minister, who then submitted ministerial candidates to the President
for approval). At the same time it gives additional rights to the President to dissolve the
Parliament if it fails to form a government.
The highest court in the general jurisdiction is the Supreme Court of Ukraine, and all
justices are elected by the Parliament with life tenure. An 18-member Constitutional Court
adjudicates constitutional matters. The President, Parliament, and a board of judges
appoint six constitutional justices each for a limited term of nine years.
Historical development
After the disintegration of the Soviet Union, Ukraine suffered significant economic
difficulties, resulting in a period of hyperinflation during the early to mid nineties. The
difficulties were compounded by Ukraine’s relative tardiness in embarking on market
reforms.
Following the implementation of a strict monetary policy with the issuance of a new
currency in 1996, inflation was brought under control and the local currency, the Hryvnya,
has since remained relatively stable. Economic progress was adversely impacted by the
Russian debt crisis of 1998. However since the second half of 1999, the Ukrainian economy
has demonstrated positive growth due to a recovery in the Russian economy and strong
global commodity prices. Successive governments have exercised fiscal prudence limiting
budget deficits, while strengthening government finances and the international reserves
position. Still, Ukraine is a fast growing transitional economy with a number of ongoing
problems, including pace of structural reforms, independence of judiciary, or cross party
commitment to a transparent market economy. Yet the disposable income of individuals is
increasing, resulting in increasing purchasing power and domestic consumption in the
country. Ukraine has received market economy status from the European Union and is
making progress toward WTO accession which is expected to be granted before the end of
2006.
52
PIVDENNYI BANK
Macroeconomic Overview
Ukraine has been classified as a country in a transitional stage by the EBRD. Ukraine’s
recent economic history has been marked by periods of active reform followed by interim
periods of slow privatization and delayed restructuring. Despite various hurdles on
Ukraine’s path to a market economy, enterprises responsible for over 70% of the nation’s
output have been privatized by 2006. A small number of very significant enterprises were
privatized in 2005, generating revenues of over EUR 4 billion. The informal sector is
estimated to be one of the highest in Europe and constitutes between 40-50% of GDP
based on Ministry of Finance and IMF estimates.
Table 1 Selected macroeconomic data
!
"
!
!
#
$
&
(
"
*
!
- /
%
'
&
& ! )
"
)
& ! +
,
#
%
%
'
$
$
'
'
%
'
'
. "
!
$
%
!
0
$
'
%
%
#
#
$
" 1
! !
%
. ! +
%
,
#
$
$
# $
#
#
$
After ten years of steady decline, the first cumulative year-on-year GDP growth of 5.9% was
registered in 2000 and continued ever since. GDP in real terms grew by 12% in 2004 to
reach UAH 345 billion (EUR 52.1 billion), while GDP per capita was approximately EUR
1,109. Strong GDP growth was due to increasing commodity prices, the recovery of the
Russian economy, and strong harvests recently. In the first half of 2005, in the aftermath of
the Orange revolution, economic growth slowed down with GDP growing 2.6% year-onyear. GDP growth is estimated to remain in single digits in 2005-2010.
The structure of Ukraine’s GDP is well-diversified with the largest contributors to GDP being
the metallurgy, chemical and agricultural sectors. Over 50% of GDP is generated by export
oriented industries. The main trading partners of Ukraine are Russia and the EU.
Ukraine’s GDP and real GDP growth rate
Ukrainian GDP by industry, 2005
5
12.3%
&
"!
- / !
2 !
& !
#
9.6%
&
2 !
&
%
6.0%
4.0%
2.6%
!
& !
4
#
#
-
0
3
$ 0
&
!
+ -
. " ,
"
1 !
!
&
"
"
!
!
"
!
!
#
53
PIVDENNYI BANK
Inflation and exchange rates
Ukraine’s inflation rate is higher than the inflation rate generally observed in Central and
Eastern European economies. Following a period of relatively low inflation between 20002003, inflation has picked up in recent years primarily due to loosening of monetary policy
during the pre-election period in 2005 and also subsequently by the impact of dramatically
higher energy prices. This resulted in year-on-year CPI and PPI (in real terms) of 12% and
24% in 2004, respectively, while year-on-year CPI for 2005 slightly exceeded 10%. Inflation
is expected to stay at the same level in 2006 and decrease to 5-10% during 2007-2009.
CPI and PPI statistics
UAH exchange rates
24.1%
$
%
$ $
#
12.3%
11.1%
10.3%
8.2%
6.1%
0.9%
$
9.5%
5.7%
-0.6%
#
#
'
6 5 ( ) 6 7
6 5 ( ) - 6 8
In spite of high inflation rates, the remarkable stability of the Hryvnia against the USD
throughout the last five years has been achieved as a result of the successful stabilization
policy pursued by the National Bank of Ukraine. A substantial increase of the NBU’s hard
currency reserves allowed for the further liberalization of the NBU’s policies on the currency
markets and helped maintain exchange rate stability in recent years. In 2005 exchange rate
fluctuations were in the range of UAH 5.3-5.05 per USD, while in 2005-07 the currency is
forecasted to be stable against the USD at UAH 5.2–5.6.
Foreign Direct investments
In the beginning of 2005, aggregate FDI stock accumulated by Ukraine since independence
reached EUR 7.2 billion, which corresponds to EUR 151 per capita, one of the lowest levels
in the region. Inefficient privatization, an absence of structural reform, and high levels of
corruption had to date deterred Western investors from Ukraine. By the end of 2005,
however, total foreign direct investments into Ukraine exceeded EUR 13.2 billion. Nearly
45% of the total was invested in 2005, following the political and economic changes
inspired by the Orange Revolution. FDI revenues were primarily generated by the sale of
the largest metallurgy enterprise “Kryvorizhstal” for USD 4.8 billion to Mittal Steel and the
second largest bank “Aval” for USD 1 billion to Raiffeisen International. In addition, the
banking sector is expected to attract an additional USD 1.5 billion in FDI in 2006 related to
the investments by BNP Paribas in Ukrsibbank and BCI Intesa in Ukrsotsbank.
Further FDI is expected in the financial services, consumer retail, and real estate sectors.
Another potential driver for FDI is privatization in the energy and telecommunications
sector, however, the prospect for such investments are predicated on the policies of the
new government.
54
PIVDENNYI BANK
Figure 1 Accumulated FDI,
EUR million*
Figure 2 Origin of FDI by
country, 2005
#
#
$
%
$
%
%
$
#
#
9
#
$
#
2
"
!
"
!
!
!
6
'
*
!
;
6
:
!
!
5
8
#
!
"
Banking Sector Overview
The Ukrainian banking sector is one of the fastest growing within Central Europe albeit from
a low base. Its assets to GDP ratio has shown rapid growth over the past year as it grew
from 39% to 53% from 2004 to 2005. Total banking industry assets and capitalization grew
by 59% and 41%, respectively over the same period, and reached EUR 33.6 billion and
EUR 4.3 billion, respectively as of December 31st, 2005. Relatively low penetration rates as
compared to its major peers indicate significant growth opportunities and that the high
growth rates are likely to be sustained over the foreseeable future.
Banking assets to GDP
$
#
>
7
8
(
*
&
6
"
8
<
=
"
8
"
!
<
# %
$
Source: NBU, CBR, ECB, EIU
55
PIVDENNYI BANK
Market structure
The Ukrainian banking sector shows rather low concentration with the share of the top five
banks at around 36% in terms of assets as of January 1st, 2006. The official number of
active banks stood at 165 by the end of 2005. Most of the banks, however represent small
captive banks serving the needs of industrial conglomerates owned by the banks’
shareholders.
Prior to 2005, the banking sector was heavily dominated by local banks with a number of
international institutions such as ING, Citibank, HVB, and Raiffeisen as well as subsidiaries
of major Russian banks serving mostly their multinational client base. By the end of 2005,
the number of banks with foreign capital increased from 19 to 23. Two of the top five banks
– “Aval” and “Ukrsib” were sold and shareholders of the 4th largest bank “Ukrsots” recently
agreed to sell 85% of the bank to Banca Intesa for USD 1.2 billion. As a result of these and
other M&A activity in the sector, the share of foreign owned banks in the industry is
expected to exceed 35% in 2006 as compared to a mere 7% in the beginning of 2005. The
NBU has indicated that certain limitations might be put on foreign entry into the industry
once the share of foreign banks reaches 50%. Simultaneously certain steps have been
taken to support the two remaining state-owned banks (Ukrexim and Oschadbank)
Key banking industry indicators
:
.
3 ! " .
7
& !
<
! !
7
5
.
<
! +. " ,
. < +
3 ! "
. < +
3 ! "
%
! ,
$ $
! ,
%
=
! !
!
#
!
$
$
& &
! !
#
$
Assets structure
Over the period 2001 to 2005, the Ukrainian banking sector maintained the highest growth
rates in the CEE region, with CAGR exceeding 46%. Total banking assets have reached
EUR 33.6 billion which represents a 66% growth in EUR terms and 37% in UAH terms over
2004. Interest income on loans remains the largest source of revenues for banks, as loans
dominate the banks’ balance sheet. The structure of banking assets remained virtually
unchanged in 2005.
56
PIVDENNYI BANK
Banking asset structure
Loan portfolio by industry
8
7
.
&
!
1
!
"
"
"
!
!
&
<
=
&
!
& !
#
!
2 !
.
1
!
"
&
: * 6
5
2 !
&
"!
0 /
!
8
!
!
"
Loans
Total customer loans currently account for around 65% of total banking assets. In 2005, the
volume of customer loans increased to over UAH 142 billion (EUR 23.8 billion) and total
loans to GDP reached 35%.
Total customer loans (UAH bn)
Lending penetration
142
#
$
# #
87
#
67
%
41
28
8
"
!
<
#
#
>
8
7
(
*
&
6
"
8
<
=
"
'
Retail lending accelerated by an impressive 127% in 2005 reaching UAH 33 billion (EUR
5.5 billion), rising to 23% of the total loan portfolio from 17% in 2004. Local banks are
expected to maintain strong lending growth in 2006-07 supported by the continuing
economic expansion and growing disposable income. Foreign entrants have indicated retail
lending as their primary area of focus. As a result, due to the intensifying competition, it is
expected that interest rates will decrease and loan requirements will ease, especially for
mortgages and car loans. As of the end of 2005, consumer loans made up 44% of the total
retail loan portfolio, with mortgages accounting for 32%, and auto loans for 24%.
57
PIVDENNYI BANK
Retail loans and their share in total loans
Composition of retail loans
?
!
2 !
&
# #
'
#
8
!
" "
+ 6 5 (
. " ,
5
7
!
!
#
! "
Deposits
Total deposit balances in the system also expanded in 2005 to over UAH 134 billion (EUR
22.4 billion), representing 63% of total liabilities, with the most dramatic increase coming
from new retail deposits, primarily in the form of short-term time deposits and savings
accounts. Total deposits grew almost 64% during 2005 with deposits from individuals
increasing at a remarkable 76% and the corporate deposit base rising by 53%. With this
substantial increase in retail deposits, the structure of bank deposits in the system is now
balanced between retail and corporate deposits. The increased confidence in the banking
sector and the lack of income tax on interest income has fuelled deposit growth. By the end
of 2005, the share of term deposits exceeded 60% of total deposits, however the average
term to maturity remains comparatively low at around 18 months. As a result, the banking
system has a systemic tenor mismatch as the average tenor of the deposit base is shorter
than that of the loan exposure.
Deposit growth dynamics (UAH, bln)
Deposit structure by currency and type (UAH bln)
#
#
#
#
#
#
%
%
#
$
'
=
'
#
=
&
"
"
"
0
The share of foreign currency deposits has been declining steadily since 2000 and fell to
34% of total customer accounts by the end of 2005. Over 90% of the foreign currency
accounts are denominated in USD, with the balance denominated principally in EUR and in
Russian rouble.
58
PIVDENNYI BANK
Capital adequacy
The equity to assets ratio for the Ukrainian banking system stood at 12% as of December
31st, 2005. Banks are required to maintain minimum capital adequacy ratio of 10%
calculated according to Basel I principles in accordance with NBU regulations. Current
capital adequacy ratios indicate that while the banks generally comply with NBU
requirements, they are likely to require additional equity injections before the second half of
2006 in order to maintain historical growth rates.
Profitability
The revenue dynamics of the banking sector have improved substantially with total
revenues reaching UAH 27.5 billion (EUR 4.3 billion) during 2005 up by 37% from 2004.
Banking sector profitability has been also improving over the past five years. The mismatch
between change in ROAA and ROAE is largely caused by a lag in equity growth rates as
compared to asset growth rates. The largest portion of revenue is derived from interest and
commission income, which accounted for 69% and 21% of total revenue earned over 2005,
respectively. Industry profitability is projected to improve substantially in the next 2-3 years
due to increasing share of higher margin retail loans, better access to cheaper funds on
international capital markets, and completion of branch network rollout programs being
undertaken by most banks, requiring large investments in infrastructure and human
resource development.
Interest margin
ROAA and ROAE of the banking sector
$
#
#
$
#
$
$
%
$
$
#
#
%
% #
$ #
$
%
#
8 2 5 5 + "
!,
#
8 2 5 - +
!,
=
!
& &
!
:
!
Since 2000, there has been an overall decline in interest rates for bank loans. In addition,
the spread between interest rates on loans granted and deposits attracted from customers
has also been declining to an average of 6.2% by the end of 2005, though remaining high in
comparison to average Central and Eastern European lending spreads. This results in
attractive net interest margins enjoyed by Ukrainian banks.
59
PIVDENNYI BANK
Banking sector regulations
According to the Ukrainian constitution, the NBU’s primary function is to maintain the
stability of the national currency via regulation and supervision of the banking sector. The
key regulatory framework for the banking industry is Law on the NBU, adopted in 1999 and
the Banking Law adopted in 1991. The major regulations regarding Ukrainian banks is as
follows:
•
The NBU prescribes the minimum amount of capital for the establishment of a bank
to be EUR 5 million;
•
In 2004, the Bank has set minimum regulatory capital ratio (Tier 1) at 4% and
minimum capital adequacy ratio at 10%;
•
Maximum size of credits, guarantees and sureties granted to single related parties
must not exceed 5% of regulatory capital, while the similar ratio for the group of
related parties must not exceed 40% of a bank’s regulatory capital;
•
The investment in securities ratio to one entity should not exceed 15% and total
investment in securities should not exceed 60% of a bank’s regulatory capital;
•
The Banking Law also requires the NBU’s approval prior to direct or indirect
acquisition of 10% or more of a bank’s capital or voting rights.
60