Credit-Rating confirms the rating of Odesa at uaАА-, determines investment attractiveness at uaINV5 (the highest level) Credit-Rating confirms the rating of Odesa at uaАА-

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Expert Opinion

28.02.2008

Liquidation of EBDS has been prompted by management failures, yet not being initial evidence of financial crisis in Ukraine

On Feb. 22, 2008 the NBU`s decree #39 proclaimed a withdrawal of license and initiating of liquidation procedure of European Bank for Development and Savings OJSC (`Bank`). According to the decree, the major reasons for Bank`s liquidation are aggravation of the Bank`s solvency and Bank`s breaches of the banking law.

The Bank was established in 2006 as result of merger of two banking institutions, namely European Bank for Development and Savings LLC (operating since 1993) and United Commercial Bank OJSC (operating since 1991). As at 3Q 2007-end the Bank served over 47K customers, primarily individuals, with the branch network (presented mainly in Crimea) comprising 5 branches and 311 outlets.

The Bank`s mid-term development strategy has been aggressive and orientated at intensive development of retail lending (yet the Bank`s liabilities were dominated by funds of individuals, whereas the major share of loans were granted to legal entities). Further Bank`s capitalization would have been fueled by injections from strategic foreign investors.

The Bank started encountering difficulties in the fourth quarter, which turned especially crucial in December 2007, when it became evident that the management would not be able to attract foreign investors. As a result from insufficient inflow of significant investments, for which expected inflow the Bank had already conducted a number of operations, it faced liquidity crisis, which could not be solved with the own funds only.

The Bank`s management commenced active search for investors among financial groups and companies, primarily between foreign ones, and changed conditions for their entering the Bank`s management (granting of much more powers to investor, discount of initial price of Bank`s share holding offered). However, the Bank failed in reaching compromise, despite earlier settlements.

This led to intense Bank`s crisis. Initiated by NBU, but not settled agreement on the Bank`s acquisition by Private Bank, was the last step followed by NBU`s withdrawal of the Bank`s license and its liquidation.

On Feb. 25, 2008 Credit-Rating suspended Bank`s rating following NBU`s decree #39 dated Feb. 22, 2008 `On withdrawal of the banking license and initiating the liquidation procedure of European Bank for Development and Savings OJSC`. By the date of the rating`s suspension, the Bank bore a speculative grade rating of uaBB- (uaBB minus) with negative outlook. The rating will be withdrawn upon court decision on sue filed by NBU for the Bank`s liquidation.

An obligor or a debt liability with uaBB credit rating is characterized with the LOWER THAN SUFFICIENT creditworthiness as compared to other Ukrainian obligors or debt liabilities. This level of creditworthiness is strongly affected by adverse changes in commercial, financial and economic conditions. The plus (+) or minus (-) modifier denotes rating`s relative status within major categories.

Negative outlook indicates that there is a possibility to downgrade the rating in the course of the year, on condition that negative tendencies are retained and current risks are realized.

Credit-Rating believes that Bank`s liquidation will not lead to aggravations in the national banking system. Thereat, the hindered access to cheaper resources of international financial markets may have negative impact on the banks adhering to aggressive development strategy, which compulsory conditions were significant increase of the authorized stock, expansion to regions, and active retail lending. This is primarily attributable to banks in the 3rd and 4th groups, as well as to those banks in the 2nd and 3rd groups, which have recently significantly increased their assets.

Reference: As of Feb. 1, 2008 the Bank`s assets made up UAH601m, the net value UAH98.3m, the loan and investment portfolio UAH515.2m (with loans to individuals making up UAH120.9m, to legal entities UAH227.2m); the Bank`s liabilities accounted for UAH502.6m (deposits of individuals UAH303.3m, of legal entities UAH64.6m); the financial result UAH(12.2)m.

For more information, please contact:
Information and Communication Department
Sergey Rozumyak +38 044 490 25 50
SRozumyak@credit-rating.com.ua

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