Banking

The Austria-based Slav AG Company and Russia's Vnesheconombank were expected to transfer UAH 1.1 bln to PromInvestBank by the end of December 30, according to Interfax-Ukraine. In a statement made by Denys Kireyev, a Board Member of the Slav AG Company, Russia's Vnesheconombank would essentially become a majority stockholder of the bank. In all, Vnesheconombank and Slav AG are planning to invest over USD 2 bln in the bank.

PromInvestBank received the first tranche of a payment of around USD 190 mln from the Russian investor on December 28. The stockholders of PromInvestBank, Slav AG and Vnesheconombank earlier agreed on their joint participation in the bank's financial recovery.

On October 7, the NBU took PromInvestBank under temporary administration. The initial reason for the bank’s deteriorating financial situation was rooted in the population’s rush to make early withdrawals of bank deposits, which triggered difficulties in making such payments.

Our view: Probably the three-month saga with PromInvestBanks’ issues has drawn to a close. The Kliuevs, who bought a controlling stock in PromInvestBank after the bank was taken under temporary administration, finally found a serious and powerful investor. We believe that the financial resources that will be provided by Vnesheconombank as part of the bank’s financial recovery plan will recover PromInvestBank’s liquidity and will allow Prominvestbank to return to its day-to-day operations, and, in particular, repaying deposits.

We anticipate that the National Bank of Ukraine (NBU) will support Vnesheconombank’s plan concerning the acquisition of PromInvestBank. As well, we believe that the successful completion of this deal will have a POSITIVE impact on the Ukrainian banking system in general, taking into account the large part that PromInvestBank plays therein.

According to Interfax, at a meeting on Saturday, the Ukrainian Cabinet of Ministers took a decision barring banks from confiscating the apartments of citizens that were bought under loan agreements with banks if, at least, the amount covering the interest on those loans is repaid.

The decision also bars commercial banks from increasing interest rates on those loans that have already been issued.

Our view: The Ukrainian parliament recently approved a similar bill in the first reading. In contrast to that bill, which entirely disallows the confiscation of apartment for a half-year period, the Cabinet of Ministers’ decision says that at least the interest should be repaid, which should be an acceptable compromise between banks and debtors. This scheme was widely discussed in banking interests, and was approved by some of the largest Ukrainian bank authorities.

We anticipate that this decision, in conjunction with Parliament’s intention to approve the corresponding bill, will make an impact on banks to provide additional possibilities to their debtors concerning the restructuring of their loans. As well, we believe that Parliament will amend its bill to make it accord with the government’s decision.

The National Bank of Ukraine (NBU) has increased the reserve requirements for foreign currency deposits as of January,5, with this change being outlined in resolution #442. The norm of the reserve has increased from 3% to 4% for deposits with a fixed period and from 4% to 7% for callable deposits. The norm of the reserve for UAH deposits was not changed.

As previously reported by Sokrat, in early December, the NBU lowered the requirement for reserve money collected in foreign currency from 4% and 5% to 3% and 4%, respectively, as well as lowering the UAH requirements to 0%.

Our view: We believe that this is a logical action after practically prohibiting foreign currency consumer and mortgage loans (see our daily news from December 23 on this theme). Since banks won’t be able to provide the same amount of foreign currency lending as they did earlier, their liabilities should be also rebalanced towards a decrease of the foreign currency part. As well, we see a tendency that clients are converting their UAH deposits into foreign currency deposits (mainly USD), if they have such an opportunity, because of the low confidence in hryvnia.

Naturally, the increase in the reserve requirements, as well as banks’ objectives to counterbalance their FX assets and liabilities, is going to decrease the interest rates on FX deposits, and consequently decrease their attractiveness for individuals and business. In spite of this, we believe that the UAH’s stability or instability is going to be the main factor bearing on the demand for foreign currency deposits in the near future.

We believe that the NBU has realized the risks of the high ‘dollarization’ of the Ukrainian banking system and tends to promote policy aimed at decreasing this ‘dollarization’ level. As well, we emphasize that the decision to provide such policy is late-coming and, today, the Ukrainian banking system is studying its own mistakes as it encounters an increase in the level of non-performing loans, since banks’ credit portfolios generally contain 55% in FX loans as of November 1.

The NBU is restricting currency loans for borrowers who don’t have an income set in foreign currency, which mainly applies to consumer and mortgage loans, according to the National Bank order No. 406 issued on December 1 and registered by the Justice Ministry on December 17, which comes into effect on December 28.

The document supposes a higher reserve ratio for currency credits for debtors who don’t have foreign currency revenues. Particularly for the standard category of loans, which means that there is no delinquency, the provision rate is set at 50%. For all other categories of loans, with a delinquency of more than 1 day, the provision rate is set at 100%. This document takes effect with respect to loans that are to be issued after December 28.

The previous reservation on consumer and mortgage loans in foreign currency was 2% (“standard”), 10% (less than 30 days of delinquency), 40% (31-60 days), 80% (61-90 days), and 100% (over 91 days) respectively. For loans to debtors with foreign exchange revenues, the provision rates are not changed and remain 2%, 7%, 25%, 60% and 100% respectively.

Our view: In fact, the NBU is prohibiting foreign currency consumer and mortgage loans, since interest rates should essentially be increased in order to retain the profitability of such loans. This increase will make this type of loans unattractive for clients in comparison to UAH loans and only exporters will be still able to obtain FX funds with lower interest rates for their needs.

We believe that this restriction won’t have any significant impact today, since banks are not providing consumer and mortgage loans in hard currency these days. Anyway, we believe that this restriction will gradually reduce the level of FX loans and, in future, help to avoid repeating the current problems with an illogically big amount of foreign currency loans and the consequent inability of debtors to pay them, since their UAH revenues will have become insufficient to pay back their loans.

The European Bank for Reconstruction and Development (EBRD) has granted USD 75 mln to Raiffeisen Bank Aval [BAVL UZ, U/R] on the conditions of subordinated debt. A fund provision contract was signed on December 22. No information about the interest rate was disclosed.

As of October 1, the net assets of the bank were UAH 52,559.2 mln, its credit portfolio amounted to UAH 42,660.4 mln, and equity capital equaled UAH 5,724.7 mln. Austria`s Raiffeisen International Bank Holding AG owns a 95.68% stake in Raiffeisen Bank Aval, which is registered as an open joint-stock company.

Our view: As we reported earlier, top Ukrainian banks might soon have a necessity to increase their capital due to the testing of banks’ credit portfolio under IMF procedures and a consequent increase in the provisions’ level.

As well, we anticipate a dramatic increase in the level of non-performing loans at the beginning of 2009. The main reasons for this will be the UAH’s devaluation, considering the high level of USD loans in banks’ credit portfolios, and a decrease in wage rates. In such a case, we believe that receiving a long-term subordinated loan from the EBRD that increases the capital of the bank is definitely POSITIVE news for BAVL.