Banking

Slow recovery, compared to pre-crisis levels. The Ukrainian banking system reported a net loss of UAH 8.3 bln in 1H10 (compared to UAH 38.5 bln in 2009), thus providing –13.5% ROE. Net spread was reduced by 0.9 p.p. to 4.3%, which is also depicted in the lower net interest margin (down by 0.8 p.p. to 5.4%). In 2H10, the net spread will remain around 4.5% and the net interest margin will rebound to 5.6%. Loan loss reserves (LLR) continue to grow and currently are 17.6% of gross loans, which is the main cause of the net loss in 1H10. If the world economy continues to be under pressure in 2H10, LLR may reach 18.5% and the net loss will remain at current levels. Interestingly enough, banks are gradually increasing investments in securities, whose share in assets grew to 7% in 1H10, up from 4.5% (during the last 4 years). This dynamic is positive and indicates that banks have started to look for ways to diversify their income sources.

Raiffeisen Bank Aval shows recovery in financial results, strong interest margins and capital base. At the same time, the stock is traded with a 36% premium compared to its peers, which can be explained only by deferred robust growth in 2012-13. But these types of expectations are too cautious and we suggest a SELLing recommendation, expecting the stock to go lower in order to reduce its unjustified premium.

In 2010 Ukrsotsbank will show moderate financial results because of the unstable macroeconomic conditions and further economic drawdown in the second half of 2010. The stock has reached its fair value at USD 0.073, and we see no reason for it to go higher than its previous 52w high of USD 0.0945.

The end of spring and the summer have brought some respite for the Ukrainian banking system. A number of positive factors, including currency exchange rate stabilization, drying up of the deposits outflow and recovery of the banking system’s liquidity decreased our worries about the sector’s future.

On 23, June Ukrainian Parliament has passed a bill #3585 which main official aim is to “overcome the consequences of financial crisis” how it is written in the name of draft. This document regulates some issues of debt restructuring procedure, restricts foreign currency lending and preliminary external debt repayments. The law was passed by the overwhelming majority of parliament and main disputable issues were solved in compromise way, therefore we anticipate that President will sign this law soon. The final version of bill that was passed still hasn’t been officially published, therefore in our analysis we rely on information available from open sources such as news postings, newspapers, authorities’ interviews and latest available versions of draft.

The bank’s net income in the first half of 2010 reduced significantly compared to 2009 yoy because of the necessity to increase provisions. Nevertheless, actual data is in line with our expectations. We confirm our recommendation to HOLD the stock, implying that it is traded at fair levels.

Forum bank’s [FORM UZ] net loss during the first half of 2010 was USD 187 mln, compared to USD 35.8 mln in Q2 2009.