print 30.07.2008

CREDIT-RATING: Analysis of the banking institution activities for 1Q2008

According to the results of 1Q2008 Credit-Rating has not discovered any significant negative changes in activities of the banking institutions with ratings assigned. But compared to the same period of 2007 there was a decrease in development rates of the banks and worsening of some their indicators.

In the context of quarterly monitoring Credit-Rating is publishing the analysis of the banking institution activities for 1Q2008. 70 banking institutions have been analyzed. 3 banks belong to the first banking group, 6 banks to the second banking group, 19 banks to the third banking group and 42 banks to the fourth banking group. Assets of the analyzed banks amount for 23.9% of the net assets of the banking system as of April 01, 2008. With the purpose to prepare the report Credit-Rating`s specialists have used both internal information provided in the course of the rating procedure and information from external sources (the National bank of Ukraine).

Financial institutions under analysis show lower growth rates of the assets (7.8% in 1Q2008) compared to 10.2% in 1Q2007. According to Credit-Rating such trend was caused mostly by antiinflationary policy of the regulator and government and adverse conditions in the international financial market. To a lesser extend, development of the banks was affected by general business slowdown which was typical to the beginning of year. Influence of the abovementioned factors leaded to the decrease of the banks` loan policy in the course of the analyzed period: growth of the loan portfolio was 13.5% (14.4% in 1Q2007).

Share of individuals continues to rise in the loan portfolio structure, but the share of legal entities is decreasing due to lower growth rates. Nevertheless, taking into account that only some banks are oriented to the retail segment among the analyzed bank, share of the legal entities in loan portfolios continues to be low (68.2% according to results of 1Q; growth by 11.9%).

Level of the troubled assets in the client loan portfolio continues to be low 1.31%; in 4Q2007 1.35%. Reserve level of the lending transactions decreased from 3.56% at the beginning of the year to 3.5% according to the results of 1Q. According to Credit-Rating this fact confirms that the banks continue to use different methods to improve the quality of portfolios from raising the financial classes of borrowers too high to refinancing the troubled assets by giving new loans. Credit-Rating considers that there is high possibility of the increase in the troubled assets in mid-term under further reduction of the growth rates of loan portfolios.

There were no significant changes in the structure of the banks` resource base. Share of legal entities and individuals amounts for 30-35% in the structure. Excluding the first group banks, there is an outflow of legal entities` deposits: decrease in the share of deposit portfolio was 3.5 percentage points and caused by the increase in demand for the resources by companies (in 1Q2007 there was an outflow of funds by 1 percentage point).

As usual the largest share in the liabilities structure belongs to funds of other banks. This suggests that small banks have to finance their active transactions at the expense of inter-bank borrowings. Some banks increase the balance-sheet total at the expense of inter-bank transactions.

In 1Q2008 growth of the banks` assets and growth of capital were balanced. The capital increased by 10.5% but the assets increased by 7.53%. In general, capitalization of the banking group was improved due to the increase of the banks` authorized capitals and capitalization of the last year`s revenue (build up of reserve and other funds).

According to the results of 1Q2008 Credit-Rating notes the falling efficiency of the analyzed banking institutions. The business efficiency ratio has decreased by 17 percentage points compared to the same period of 2007 mainly due to the outrunning growth of interest expenditures over the revenues (80.5% and 53% respectively). Under the increasing demand for the resources some banks were obliged to reduce the expenditures no related to the their principal activities, to adjust the plans for territorial expansion of the network and to postpone the extensive development.

In general, in 1Q2008 the monetary policy conducted by the regulator did not lead to significant changes of the banking institutions` activities. Further development of the banking institutions in the course of the year depends on general economic situation in the country and regulator`s actions. As before Credit-Rating expects the impairment of the banks` growth rates, growth of the troubled assets, worsening of the banks` liquidity and decrease in the efficiency of principal activities.

As of July 24, 2008 Credit-Rating maintains monitoring 65 ratings assigned to the banking institutions and 48 ratings assigned to debt instrument. 86% of the total amount of ratings have investment grade. During 1Q2008 Credit-Rating has upgraded 2 ratings, downgraded 2 ratings and revised outlooks of 10 ratings.

Olga Shubina, Viktor Shulik