1. Global Credit Research
22 OCT 2008
Credit Opinion: Alfa Bank Ukraine
Alfa Bank Ukraine
Category Moody's Rating
Bank Deposits -Fgn Curr B2/NP
Bank Deposits -Dom Curr Ba3/NP
NSR Bank Deposits -Dom Curr Aa1.ua/--
Bank Financial Strength E+
Senior Unsecured Ba3
NSR Senior Unsecured -Dom Curr Aa1.ua
Other Short Term -Dom Curr NP
Bank Deposits Ba1/NP
Bank Financial Strength D+
Armen L. Dallakyan/London 44.20.7772.5454
Yaroslav Sovgyra/Moscow 7.495.641.1881
Reynold R. Leegerstee/London
Alfa Bank Ukraine
2008 2007 2006 2005 2004 Avg.
Total assets (US$ million) 3737.22 2598.31 1237.30 421.58 194.24 910.67
Shareholders' Equity (US$ million) 543.72 412.64 98.26 43.94 40.86 123.67
Return on average assets 0.44 0.62 0.19 -0.61 1.96 0.62
Recurring earnings power  2.14 2.78 2.86 0.91 2.89 2.24
Net interest margin 8.66 6.31 5.72 3.06 4.48 4.99
Cost/income ratio (%)  53.34 63.34 58.00 79.34 60.33 67.13
Problem loans % gross loans -- 0.52 0.35 0.04 0.64 0.35
Tier 1 Ratio (%) -- -- -- -- -- --
 As of June 30.  Preprovision income % average assets  Non-Interest Expense % Operating Income
SUMMARY RATING RATIONALE
Moody's assigns a bank financial strength rating (BFSR) of E+ to Alfa Bank Ukraine (ABU), which translates into a
B2 Baseline Credit Assessment. The BFSR is underpinned by the bank's narrow, albeit rapidly evolving,
independent franchise in the Ukrainian market steered by a team of experienced managers that is implementing a
strategy of rapid expansion in retail and SME business lines whilst maintaining strong positions in corporate
banking. However, the bank's BFSR is constrained by still high borrower concentration and weak, although
improving financial fundamentals.
2. ABU's immediate parent is a holding company - ABH Ukraine Limited, which is controlled by six individuals.
Theses individuals together own the enlarged Alfa Group - parent of one of the largest private banks in Russia -
Alfa Bank (Ba1/NP/D+/stable).
Moody's assigns a global local currency (GLC) deposit rating of Ba3 to ABU. This rating factors in a moderate
probability of support from the bank's affiliated companies, giving a two-notch uplift for ABU's ratings from its
Baseline Credit Assessment of B2. Alfa Bank Russia's Ba1 Baseline Credit Assessment was used as a proxy for
assessing the strength of the potential support provider.
- Wide-ranging support from affiliated companies, in particular from financially stronger Alfa Bank (Russia)
- Good corporate franchise supported by a relatively sophisticated product offering (for a local market)
- Ongoing expansion to SME and retail businesses and improving customer reach offers potential for strengthening
market positions, as well as diversifying ABU's balance sheet and earnings
- A team of experienced managers in place somewhat reduces implementation risks associated with the bank's
- Increasing competition in the Ukrainian banking sector could limit the bank's ability to further strengthen its
franchise, especially in retail and SME businesses
- Hefty concentrations on both sides of the balance sheet make the bank's capitalisation and liquidity vulnerable to
- The high level of related-party business held on the bank's books leaves much room for improvement and
undermines economic capitalisation
- Rapidly growing retail loan book is unseasoned and untested
- Weak, albeit improving, profitability and cost efficiency
All of the bank's ratings carry a stable outlook.
What Could Change the Rating - Up
The BFSR has limited upside potential at present. Future upgrades would be highly dependent on ABU's success
in implementing the new strategy and strengthening its market positions without compromising key financial
indicators, potentially leading to a material reduction in single-name and sector concentrations as well as related-
party business on both sides of the balance sheet.
The GLC deposit ratings of the bank may be upgraded as a result of (i) an upgrade of the bank's B2 Baseline
Credit Assessment or (ii) an increased probability of support from affiliated companies. While we will continue
using ABR's rating as a proxy for evaluating the level of parental support for ABU, the link between their ratings is
not rigid and any impact on ABU's ratings as a result of future movements in ABR's deposit ratings will be
examined on a case-by-case basis.
What Could Change the Rating - Down
Any material deterioration in asset quality or significant reduction in liquidity and capitalisation levels due to
mismanaged growth could warrant a BFSR downgrade.
The GLC deposit ratings of ABU could be downgraded in the event that (i) Moody's concludes that parental
support would not be forthcoming in case of need or (ii) ownership is transferred to a shareholder whose credit
quality was difficult to assess or an entity with a lower credit standing than Ba1.
Recent Results and Developments
With a head office in Kiev, ABU reported total assets of US$3.01 billion and net income of US$8.7 million at year-
end 2007, according to the financial statements prepared under the local accounting standards. Under IFRS ABU
3. reported total assets of US$1.24 billion and net income of US$1.6 million at year-end 2006 (6m 2007: total assets
US$1.9 billion and net income of US$1.7 million).
DETAILED RATING CONSIDERATIONS
Detailed considerations for ABU's currently assigned ratings are as follows:
Bank Financial Strength Rating
Moody's assigns an E+ BFSR to ABU, which Moody's believes is an appropriate measure of the bank's financial
strength given its very short track record of operating under its new strategy, the still high level of related-party
lending and a potentially volatile performance that is susceptible to a limited number of key customers (although of
a better-than-average credit quality) that still dominate both sides of the balance sheet.
As a point of reference, the assigned rating is one notch lower than the D- outcome of Moody's bank financial
strength scorecard. We think that the scorecard outcome does not fully capture the risk of high borrower
concentration and still weak, although improving financial fundamentals of the bank.
Qualitative Factors (70%)
Factor 1: Franchise Value
ABU is the 10th largest bank in Ukraine in terms of total assets (excluding loans funded by Alfa Bank Russia) with
a market share of 2.5% as at year-end 2007 and an increasingly wide but also well thought-out regional coverage.
As of December 31, 2007 the bank had 233 branches (of which 41 standard branches, the rest are mini-offices or
information & consulting centers) and 1033 POS (points of sale) across Ukraine.
ABU was initially focused on large corporate clients - a business segment in which it has been reasonably
successful - but, by leveraging Alfa Group's franchise, the bank has more recently managed to attract several of
Ukraine's leading companies and is now penetrating this market deeper by providing more sophisticated products
(in the context of the local markets) and competitive pricing. So far corporate business has been the major
contributor to the bank's bottom-line performance.
Since 2005 the bank has embarked on a strategy through which it hopes to become one of the top five players in
the local market by 2010 - an ambitious plan given the present gap between ABU and the market leaders - by
supplementing its business with rapid penetration in the Ukrainian retail and SME financing markets. Following this
strategic move, the bank's team has been supplemented by a number of local and foreign professionals in the
areas of risk management, IT, retail and SMEs. As a result at year-end 2007 ABU had 2.9% market share (#8 in
ranking) in loans to legal entities and 2.3% market share (#9 in ranking) in loans to individuals - a significant
increase from the beginning of the year.
The bank scores D- for franchise value.
Factor 2: Risk Positioning
Until August 2006, ABU was majority-owned by one of the largest private banks in Russia - Alfa Bank
(Ba1/NP/D+/stable). However, ownership was subsequently transferred to a company controlled by six individuals
that together own the enlarged Alfa Group, which - in addition to investment and commercial banking activities
(carried out by Alfa Bank Russia, Amsterdam Trade Bank, Alfa Bank Kazakhstan and some other smaller entities
consolidated into a single Alfa Banking Group) - also has investments in the oil industry, retail (supermarket chains
in Russia and Ukraine), telecommunications, insurance and other areas.
ABU's Supervisory Board has seven members, only one of which is independent, while the level of related-party
lending remains quite high (accounting for almost half of the bank's Tier 1 equity as at end-1H2007), and we
therefore see considerable room for further improvement in the bank's corporate governance.
ABU's risk management standards are very much in line with those of Alfa Bank Russia and are superior to those
of many of its local privately owned peers. Although the bank lacks risk-adjusted performance measures, which
limits the Supervisory Board's ability to establish the bank's risk appetite, we consider the presence of the Group's
Chief Risk Manager on the Board as a mitigating factor. We also note that the bank's systems remain untested in
the Ukrainian environment and a longer track record of the bank operating without major unexpected losses will be
required to attain a higher score for this factor.
4. The bank's loan portfolio is quite heavily concentrated, with the top 20 exposures exceeding the bank's Tier 1
equity by more than 4 times. However, at the same time we note the above-average quality of the bank's largest
borrowers (in the Ukrainian context), together with its reasonable approach to collateralisation and the fact that the
largest exposure of US$140 million (at end-1H2007) is fully covered by a cash deposit and thus decreasing the
actual risk carried by ABU. Sector concentrations are moderately blended, with the largest sector exposure
standing in excess of 100% of Tier 1 capital (although we note that this is partly attributable to a significant capital
injection effected by the shareholders in late 2006, and sector concentrations may slightly deteriorate going
forward as the bank continues to grow its loan book).
The bank's liquidity has been historically well managed, but its high, although declining reliance on its parent for
funding makes it difficult to assess ABU's standalone capacity to manage its liquidity gaps, and only a greater
independence in terms of funding would enable us to raise our assessment of this group of factors.
The bank's market risk appetite, as measured by the potential loss of its trading and non-trading books due to
major market movements, is relatively modest.
ABU releases financial statements in accordance with IFRS and reviewed by auditors on a semi-annual basis and
full audited reports on an annual basis, but we are of the opinion that, although the level of public disclosures is
adequate, it could still be improved to include more relevant information in the areas of risk management and asset
Moody's assigns an E score for risk positioning with a neutral view going forward. Only a solid track record of
considerably lower exposures to the bank's related parties and a much greater granularity of the loan portfolio
could warrant a higher score for this group of factors.
Factor 3: Regulatory Environment
For a discussion of the regulatory environment, see Moody's latest Banking System Outlook on Ukraine, published
in November 2007.
Factor 4: Operating Environment
This factor is also common to all Ukrainian banks. Moody's assigns an E+ score for the overall operating
environment. For a discussion of the operating environment, see Moody's latest Banking System Outlook on
Ukraine, published in November 2007.
Quantitative Factors (30%)
Factor 5: Profitability
ABU's profitability remains quite modest, although improving significantly over the past two years as the bank's
investments in branch network development, IT infrastructure start to make returns. At year-end 2007 the bank
reported ROA of 0.29%, according to reports under local accounting standards. The main constraints to ABU's
profitability are high operating expenses and loan loss provisioning expenses. We assign a C score for the bank's
profitability and see an improving trend as the bank's earning generation capacity could improve as the retail and
SME loan portfolios should bring much higher returns.
Factor 6: Liquidity
With a ratio of net loans to customer deposits of 267% at end-1H2007, ABU is heavily reliant on market sources for
funding. The bank intends to significantly increase the share of retail deposits in its funding structure, however we
think that in the medium term ABU would be resorting to corporate deposits and, to some extent, market
borrowings to support its aggressive growth plans. Although we consider the funds provided by the bank's related
parties as a relatively sticky source of funding, we understand that going forward its share will be gradually
decreasing. Having said this, we also note that the bank's liquidity position is also vulnerable to chunky deposit
withdrawals (the 20 largest term deposits accounted for about 90% of the total category as of 31 June 2007).
Given the above, we consider a D- score as a good reflection of the bank's liquidity position and assign a
weakening trend as the bank's access to retail deposit market is limited, whereas the ongoing credit crunch makes
market borrowings more difficult to obtain.
Factor 7: Capital Adequacy
5. Trend: Neutral
ABU's regulatory capital adequacy remains ample, despite the bank's recent business growth as a result of the
bank's shareholders making timely and sufficient capital injections. In Moody's view, the bank's regulatory
capitalisation levels are comfortable, but this does not indicate any immediate positive rating implications, as
economic capitalisation is expected to decline in the medium term given the bank's rapid expansion. ABU remains
reliant on its shareholders for capital injections, as its internal capital generation ability remains weak and is
lagging behind its rapid pace of growth.
The scorecard output of A has been adjusted to a lower score to reflect the bank's weak internal capital generation
and constant need of capital injections to sustain its high pace of growth.
Factor 8: Efficiency
The bank's cost-efficiency decreased significantly in 2005 and showed some signs of improvement in 2006. We
believe that the bank is well positioned within a D score for cost efficiency and assign a neutral trend as its plans
for further regional expansion are unlikely to allow the cost-to-income ratio to improve considerably in the medium
Factor 9: Asset Quality
The quality of ABU's loan portfolio has been strong to date, but we note that the bank's fast growth in the new
business lines (i.e. retail and SME), together with the high, albeit declining level of borrower concentration may
distort its asset quality numbers going forward. Although these concerns are partly mitigated by the bank's good
underwriting techniques and adequate collateral requirements, we will be using a lower score than the A scorecard
outcome to reflect the untested nature of the bank's retail and SME loans. For the same reason we assign a
weakening trend to this group of factors.
Global Local Currency Deposit Rating (Joint Default Analysis)
ABU's Ba3/Not-Prime global local currency deposit ratings incorporate a moderate probability of support from the
bank's affiliated companies, giving a three-notch uplift for ABU's ratings from its Baseline Credit Assessment of B2.
(Alfa Bank Russia's Ba1 deposit rating was used as a proxy for assessing the strength of the potential support
provider, although it may not necessarily be the actual provide of support.)
We believe that, if ABU were to face financial difficulties, its beneficial owners might opt to (i) provide direct
support, and/or (ii) use one of Alfa Banking Holding's entities to support ABU. Incentives for Alfa Bank Russia
(ABR) to support its sister bank include the common brand name and the fact that ABR is strongly represented on
ABU's supervisory board; hence its default would have negative repercussions for ABR.
We do not factor any probability of systemic support into ABU's ratings given the bank's relatively low systemic
National Scale Rating
Moody's assigns a Aa1.ua National Scale Rating to ABU. National Scale Ratings (NSRs) are intended as relative
measures of creditworthiness among debt issues and issuers within a country, enabling market participants to
better differentiate relative risks.
Foreign Currency Deposit Rating
ABU's foreign currency deposit rating of B2 is constrained by Ukraine's ceiling for such instruments.
Foreign Currency Debt Rating
ABU's foreign currency long-term debt rating of Ba3 is at the same level as the bank's GLC rating.
ABOUT MOODY'S BANK RATINGS
Bank Financial Strength Rating
Moody's Bank Financial Strength Ratings (BFSRs) represent Moody's opinion of a bank's intrinsic safety and
6. soundness and, as such, exclude certain external credit risks and credit support elements that are addressed by
Moody's Bank Deposit Ratings. BFSRs do not take into account the probability that the bank will receive such
external support, nor do they address risks arising from sovereign actions that may interfere with a bank's ability to
honor its domestic or foreign currency obligations. Factors considered in the assignment of BFSRs include bank-
specific elements such as financial fundamentals, franchise value, and business and asset diversification. Although
BFSRs exclude the external factors specified above, they do take into account other risk factors in the bank's
operating environment, including the strength and prospective performance of the economy, as well as the
structure and relative fragility of the financial system, and the quality of banking regulation and supervision.
Global Local Currency Deposit Rating
A deposit rating, as an opinion of relative credit risk, incorporates the BFSR as well as Moody's opinion of any
external support. Specifically, Moody's Bank Deposit Ratings are opinions of a bank's ability to repay punctually its
deposit obligations. As such, they are intended to incorporate those aspects of credit risk relevant to the
prospective payment performance of rated banks with respect to deposit obligations, which includes: intrinsic
financial strength, sovereign transfer risk (in the case of foreign currency deposit ratings), and both implicit and
explicit external support elements. Moody's Bank Deposit Ratings do not take into account the benefit of deposit
insurance schemes which make payments to depositors, but they do recognize the potential support from schemes
that may provide assistance to banks directly.
According to Moody's joint default analysis (JDA) methodology, the global local currency deposit rating of a bank is
determined by the incorporation of external elements of support into the bank's Baseline Credit Assessment. In
calculating the Global Local Currency Deposit rating for a bank, the JDA methodology also factors in the rating of
the support provider, in the form of the local currency deposit ceiling for a country, Moody's assessment of the
probability of systemic support for the bank in the event of a stress situation and the degree of dependence
between the issuer rating and the Local Currency Deposit Ceiling.
National Scale Rating
National scale ratings are intended primarily for use by domestic investors and are not comparable to Moody's
globally applicable ratings; rather they address relative credit risk within a given country. An Aaa rating on Moody's
National Scale indicates an issuer or issue with the strongest creditworthiness and the lowest likelihood of credit
loss relative to other domestic issuers. National Scale Ratings, therefore, rank domestic issuers relative to each
other and not relative to absolute default risks. National ratings isolate systemic risks; they do not address loss
expectation associated with systemic events that could affect all issuers, even those that receive the highest
ratings on the National Scale.
Foreign Currency Deposit Rating
Moody's ratings on foreign currency bank obligations derive from the bank's local currency rating for the same
class of obligation. The implementation of JDA for banks can lead to high local currency ratings for certain banks,
which could also produce high foreign currency ratings. Nevertheless, it should be noted that foreign currency
deposit ratings are in all cases constrained by the country ceiling for foreign currency bank deposits. This may
result in the assignment of a different, and typically lower, rating for the foreign currency deposits relative to the
bank's rating for local currency obligations.
Foreign Currency Debt Rating
Foreign currency debt ratings are derived from the bank's local currency debt rating. In a similar way to foreign
currency deposit ratings, foreign currency debt ratings may also be constrained by the country ceiling for foreign
currency bonds and notes; however, in some cases the ratings on foreign currency debt obligations may be
allowed to pierce the foreign currency ceiling. A particular mix of rating factors are taken into consideration in order
to assess whether a foreign currency bond rating pierces the country ceiling. They include the issuer's global local
currency rating, the foreign currency government bond rating, the country ceiling for bonds and the debt's eligibility
to pierce that ceiling.
About Moody's Bank Financial Strength Scorecard
Moody's bank financial strength model (see scorecard below) is a strategic input in the assessment of the financial
strength of a bank, used as a key tool by Moody's analysts to ensure consistency of approach across banks and
regions. The model output and the individual scores are discussed in rating committees and may be adjusted up or
down to reflect conditions specific to each rated entity.
Alfa Bank Ukraine
7. Rating Factors  A B C D E Total Score Trend
Qualitative Factors (70%) E
Factor: Franchise Value D- Improving
Market Share and Sustainability x
Geographical Diversification x
Earnings Stability x
Earnings Diversification 
Factor: Risk Positioning E Neutral
Corporate Governance  x
- Ownership and Organizational Complexity -- -- -- -- --
- Key Man Risk -- -- -- -- --
- Insider and Related-Party Risks -- -- -- -- --
Controls and Risk Management x
- Risk Management x
- Controls x
Financial Reporting Transparency x
- Global Comparability x
- Frequency and Timeliness x
- Quality of Financial Information x
Credit Risk Concentration -- -- -- -- --
- Borrower Concentration -- -- -- -- --
- Industry Concentration -- -- -- -- --
Liquidity Management x
Market Risk Appetite x
Factor: Operating Environment E+ Neutral
Economic Stability x
Integrity and Corruption x
Legal System x
Financial Factors (30%) C
Factor: Profitability C Improving
PPP % Avg RWA 2.52%
Net Income % Avg RWA 0.55%
Factor: Liquidity D- Weakening
(Mkt funds-Liquid Assets) % Total Assets 23.63%
Liquidity Management x
Factor: Capital Adequacy A Neutral
Tier 1 ratio (%) 14.50%
Tangible Common Equity % RWA 14.50%
Factor: Efficiency D Neutral
Cost/income ratio 67.43%
Factor: Asset Quality A Weakening
Problem Loans % Gross Loans 0.61%
Problem Loans % (Equity + LLR) 3.91%
Lowest Combined Score (9%) D-
Economic Insolvency Override Neutral
Aggregate Score D-
Assigned BFSR E+
 - Where dashes are shown for a particular factor (or sub-factor), the score is based on non public information
 - A blank score under Earnings diversification or Corporate Governance indicates the risk is neutral
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