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CEE Credit Monitor Red hot banking sectors in Kazakhstan & Ukraine

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CEE Credit Monitor  Red hot banking sectors in Kazakhstan & Ukraine Powered By Docstoc
					                                                                                                                                                                             July 12, 2007
                                                               Red hot banking sectors in Kazakhstan & Ukraine                                                 For internal use only!

                                                               Key views
                                                                                                                                                                                         !
                                                                                                                                           Real private sector credit growth,
                                                                     Real credit to the private sector continues to expand rapidly         % yoy, April 2007
                                                                     in Eastern Europe. While the Baltic countries and Romania
                                                                     saw a mild slowdown in real credit growth over the last few           Kazakhstan                                    81.3
                                                                     months, the pace of credit growth in Kazakhstan and                      Ukraine                      56.7
                                                                     Ukraine intensified even further.                                       Lithuania                    51.6
                                                                                                                                                 Latvia                  49.7
                                                                     In Kazakhstan, banks have financed loan expansion by                    Romania                     48.0
                                                                     further increasing external borrowing. But most of this debt is           Estonia                  47.5
                                                                     of long maturities, mitigating short-term roll-over risk. FX
                                                                                                                                                Russia                39.7
                                                                     lending to unhedged corporates and households has,
                                                                                                                                              Bulgaria              33.7
                                                                     however, increased banks’ indirect exposure to FX risk.
                                                                                                                                             Slovenia             27.6
                                                                     Further risks stem from banks’ growing exposure to the
                                                                                                                                              Poland*           23.3
                                                                     cyclical construction sector, unsecured consumer lending
                                                                                                              1                                Croatia         19.7
                                                                     and the bubble prone real estate sector.
                                                                                                                                           Czech Rep.          17.4
                                                                     In Ukraine, the credit boom is almost equally driven by                 Slovakia          17.0
                                                                     corporate and retail lending, but the latter is expected to              Hungary          2.4
                                                                     become the main growth driver. On the one hand this new
                                                                     lending focus dilutes high loan concentration, but on the                                0 10 20 30 40 50 60 70 80 90
                                                                     other hand it increases credit and operational risks. While                *November 2006. Sources: IMF, National Central
                                                                                                                                                                          Banks, DB Research
                                                                     Ukraine’s banking sector remains highly fragmented and
                                                                     capital adequacy ratios are declining, the ongoing rise in
                                                                     foreign ownership is expected to enhance efficiency and
                                                                     capitalisation levels. The overall quality of banking
                                                                                                                                           Private credit, % of GDP
                                                                     supervision still has to be improved especially in terms of
                                                                     political independence.                                                                                                        60
                                                                                                                                                                                                    50
                                                                                                                                                                                                    40
                                                               Credit boom increases operational and credit risks
+49 69 910-31815




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                                                               With 57% real credit growth in April, Ukraine now comes second                                                                       20
                                                               in our ranking of credit boomers. Using an IMF model, we have                                                                        10
                                                               estimated Ukraine’s equilibrium credit penetration level, which is                                                                   0
                                                               57% of GDP. Current levels are still below equilibrium (see                 95       97        99       01    03     05      07
                                                               chart). As such the rapid extension of credit still seems rather to
                                                               be part of the general catch-up process than an indication of a                         Ukraine                    Russia
                                                               lending bubble. Corporate lending is still the main driver of credit                    Kazakhstan
Contact: Marion Muehlberger /Thorsten Nestmann/ Julian Povse




                                                                                                                                                       Sources: IFS, National Statistical Offices
                                                               growth, accounting for 65% of total outstanding credits and 56%
                                                               of Q1 credit growth. But banks have already started to shift their
                                                               lending focus from large corporations to the retail segment (esp.
                                                                                                                                                          "
                                                               mortgages). Thus, the retail sector is set to become the main                                  #
                                                               growth driver this year (see chart). On the one hand, a greater             UAH bn
                                                               focus on retail dilutes high loan concentration from corporate                                                                   300
                                                               portfolios, but on the other hand credit and operational risks (e.g.                                                             250
                                                               fast expansion of branch networks) rise. Borrower screening and
                                                                                                                                                                                                200
                                                               collateral foreclosures have not been tested in an economic
                                                               downturn yet. Although the official level of impaired loans is still                                                             150
                                                               low at 1.7% of total loans in May 2007, it is expected to increase                                                               100
                                                               over the coming months in light of the banks’ aggressive retail
                                                                                                                                                                                                50
                                                               lending. Local sources already foresee NPL ratios of around
                                                               10%.                                                                                                                        0
                                                                                                                                           00     01     02       03    04   05   06 March
                                                                                                                                                                                        2007
                                                               1
                                                                   For a detailed analysis of Kazakhstan’s banking sector see CEE Credit        Corporate, FX                Corporate, lc
                                                                   Monitor No 2 in http://dbresearch.db.com                                     Retail, FX                   Retail, lc
                                                                                                                                                               Source: National Bank of Ukraine
Risk Special



Foreign currency lending heightens indirect FX risk
Another potential risky feature is that more than 65% of total
retail loans are denominated in foreign currency. Ukrainian              '                                  (
banks thus pass on their FX risk to households. Although the
                                                                         % of total banking sector assets
peg of the UAH to the USD is expected to remain stable in the
                                                                                                                                                                         20
near term, a marked UAH depreciation could seriously threaten                    Deposits of
the loan servicing capacity of households. Unlike corporates,                    households                                                                              15
households do not have income streams in foreign currency,                       Loans to
although the household sector as a whole might be hedged by                      households
                                                                                                                                                                         10
FX deposits to a certain extent (see chart). A new regulation by
the Central Bank, which will become effective on October 1,                                                                                                              5
2007, aims at reducing FX lending by penalising foreign currency
lending with higher marginal reserve requirements.                                                                                                                       0




                                                                                 Hungary


                                                                                                   Poland




                                                                                                                                       Bulgaria


                                                                                                                                                            Ukraine
                                                                                                                    Romania
Diversification of funding base has started
Ukrainian banks still rely heavily on customer deposits as                                                                    Source: National banks
funding source. Deposits represent 60% of banks’ liabilities. The
short-term (and at times fugitive) nature of deposits increases
funding/liquidity risks for banks. But increasing appetite of                $                                                                    # %
                                                                             #
international investors for Ukraine risk as well as improved             UAH bn
ratings have enabled Ukrainian banks to increasingly tap                                                                                                                 90
international capital markets (see chart). Due to the still relatively           External liabilities*
                                                                                                                                                                         80
low level of external liabilities (20% of total assets and 35% of                External assets*
                                                                                                                                                                         70
external assets) banks’ vulnerability to a tightening of                                                                                                                 60
international financial conditions remains low. But the                                                                                                                  50
dependence on external funding is expected to grow over the                                                                                                              40
coming years, as sufficient long-term domestic funding is not                                                                                                            30
available.                                                                                                                                                               20
                                                                                                                                                                         10
                                                                                                                                                                         0
Consolidation and increased foreign ownership crucial to
                                                                         01/06


                                                                                           04/06


                                                                                                            07/06


                                                                                                                              10/06


                                                                                                                                                  01/07


                                                                                                                                                                 04/07
enhance efficiency and capitalisation levels
Rapid asset growth and low internal capital generation have led                                                      *By residency. Source: IFS
to a declining capital adequacy ratio. By end-May it had come
down to 14%, still above the minimum threshold of 10%. In light
of the ongoing credit boom stronger foreign ownership would be                                                       #
helpful to increase capitalisation and diversify the funding base.                                   "              & #
                                                                         % of total banking sector assets, H1 07
After the recent acquisition of Ukrotsbank by Unicredit, foreign
ownership stands at around 35% of total banking sector assets                                      12%                                9%
(see chart) and is expected to increase further over the coming                      3%
years. Stronger foreign ownership would also help to consolidate
                                                                                  5%
the highly fragmented banking system. Currently an incredibly
high 147 banks account for 40% of total banking sector assets.                   7%


Quality of banking sector supervision still rather weak                           8%

Ukraine’s Central Bank (NBU), which is the banks’ regulator, is                                                                                           56%
not immune to political pressure. Additionally, there are
situations of conflict of interests, given the fact that some banks               State owned
(e.g. the second largest bank Ukrsibbank) are owned by former                     Domestic private owned
parliament deputies. Also, the vast number of banks makes                         Raiffeisenbank
                                                                                  BNP Paribas
efficient supervision impossible.                                                 UniCredit
                                                                                  OTP
                                                                                  Other majority foreign owned
                                                                                                                                 Source: Fitch Ratings




July 12, 2007                                                                                                                                                                 2

				
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