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Ukraine: Still the rocky road

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Volodymyr Lavrenchuk, CEO, Raiffeisen Bank Aval (Ukraine)

Volodymyr Lavrenchuk, CEO, Raiffeisen Bank Aval (Ukraine)

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  • 1. “Still the rocky road…”Volodymyr Lavrenchuk,CEO, Raiffeisen Bank AvalCIS Bankers, 3 June 2013
  • 2. 2Raiffeisen Bank International. Main facts§  Raiffeisen Bank International AG (RBI) regards both Austria, where it is a leading corporateand investment bank, and Central and Eastern Europe (CEE) as its home market. In CEE, RBIoperates an extensive network of subsidiary banks, leasing companies and a range of otherspecialised financial service providers in 17 markets.§  In total, around 60,000 employees service about 14.2 million customers through in more than3,000 business outlets, the great majority of which are located in CEE.
  • 3. 3Raiffeisen Bank Aval. Main facts§  822 branches§  More than 13,700 employees§  More than 3 mln clients§  Raiffeisen Leasing Aval, Raiffeisen Aval AssetManagement, Ukrainian Processing Center,Raiffeisen Investments§  Total assets – € 4,8 bln., #4 in terms of assets§  Profit after tax in Q1 2013 – € 32 mln. (IFRS)Focus on medium-sized companies,agricultural sector and export-driven heavy industry, selectiveexpansion in retail banking
  • 4. 4Raiffeisen Bank Aval. Current developmentsCOST OPTIMIZATION§ Consolidation of regional governance: 25 regional directorates are consolidatedto 7 regional macro-hubs§ Centralization of back office activities in the city of Kherson§ Decrease of 27% of business outlets and 20% of staff since year-end 2008NEW SERVICES§ Internet-banking for PI clients 6 months after launch: 1200 transaction per day– 82,000 users§ Doubling of acquiring volumes: April 2012 – April 2013. The Bank has 11,2% ofPOS, but 15% of transactions and 24% of volumes.§ Introducing of contactless payments Visa PayWave та Mastercard PayPass.We are:§ First international bank, which launched Visa payWave§ First bank, which issued PayWave for Premium product (Visa Gold)§ First bank, which issued PayWave on Instant Issue Cards§ First bank, which issued PayWave with retailer (Watsons) and for refuelingstations (Shell)
  • 5. Source: National Bank of Ukraine, Raiffeisen RESEARCHThe price for pre-boom excesses has not yet been fully paid•  Ukraine’s banking system remains in deleveraging cycle, lagging behindeconomic recovery process.•  Loan-to-GDP ratio is sliding further, gradually realigning with country’s percapita income levels.Ukraine loan-to-GDP ratios (%) Loans and GDP per capita (as of end-2012)§ Potential ratios based on in-sample estimate§ * Adjusted for shadow economy5UA-07UA-12UA-14
  • 6. Source: National Bank of Ukraine,Anemic lending growth coupled with dedollarization of loanbooks•  Faltering economic growth, restrictive monetary policy and deterioratingbusiness climate dampened loan growth in 2012.•  Steady dedollarization of loan book continues amid near-prohibition of newFX lending to householdsLending growth (% yoy) Loans by currencies6
  • 7. Source: National Bank of UkraineThe growing role of the domestic deposits•  The role of domestic deposits is steadily increasing on the funding side,amidst a lack of non-deposit, long-term domestic funding and continuedexternal deleveraging.Deposit growth (% yoy)Banking system non-resident liabilities7
  • 8. Source: National Bank of Ukraine, Raiffeisen RESEARCHImproving structural funding profile•  Given the strong deposit build-up, coupled with feeble loan growth, thestructural funding profile of the Ukrainian banking system continues toimprove.•  Albeit, Ukraine’s loan-to-deposit ratio remains far above the desired levels of100-110% and is the highest in the region.Bank loans and deposits Loan-to-deposit ratios (as of end-2012)8
  • 9. Source: National Bank of Ukraine, IMF, Raiffeisen RESEARCHAsset quality remains the major concern•  According to some estimates, NPL ratio is around 30% on average at themoment, albeit NPL peak has been already passed thanks to economicrecovery, asset sales, loans workout and write-offs.•  Headline capital position has visibly improved in the last few years.Non-performing loans ratio, % Banking system capital9
  • 10. Source: National Bank of Ukraine, Raiffeisen RESEARCHImproving financials, squeezing margins•  The banking system returned to profitability in 2012 on the back of a sharpdrop in provisions, although shrinking interest margins put pressure onbanks’ financials.Banking system profitability Banks’ financial indicators10
  • 11. Source: National Bank of Ukraine, Raiffeisen RESEARCHNo visible changes in market concentration and consolidation•  Ukraine’s banking system remains fragmented, characterized by a vastnumber of banks and low market concentration.Market share of top 10 banks (%)Market concentration(5 top-banks in assets)§ * Market share of top 5 banks in total assetsas of end-201211
  • 12. Source: National Bank of Ukraine, Raiffeisen RESEARCHExit of foreign banks•  The deteriorating economic prospects for Ukraine and the increasinglychallenging environment in the home markets prompted an exit of foreignbanks.•  The gap is mostly being filled by few private domestic banks with aggressivegrowth strategies and valuable political connections.Market structure by ownership (in total assets) Ukraine at the top of regional trend (foreignbanks – losses in market shares – assets)§ *Foreign banks market share loss (in total assets)from Dec-08 to Dec-12, p.p.12
  • 13. Banking sector: Cautious outlook•  Given the unfavorable macroeconomic outlook, the lack of long-term domestic funding, and theweakness of the legal system, the near future does not look particularly bright for the Ukrainianbanking sector.•  Loan growth might rebound slightly in 2013, conditional on changes in monetary policy. However, weexpect slight decrease in the loan-to-GDP ratio to persist for the next few years, given vagueprospects for considerable de-shadowing of the economy. The loan-to-deposit ratio is set to slidefurther, as deposits continue to grow faster than loans.•  The market structure will continue to shift in favor of local private banks, while the share of foreign-owned banks will shrink further.2009 2010 2011 2012 2013e 2014fTotal  assets,  UAH  bn 880,3 942,1 1058,9 1127,3 1260 1415Total  loans,  UAH  bn 717,5 724,0 793,2 810,6 884,0 974,0Total  loans,  %  of  G DP 78,4 66,9 60,4 57,9 56,2 55,0Total  loans,  %  yoy -­‐2,2 0,9 9,6 2,2 9,1 10,2C orporate  loans,  %  yoy 4,8 7,9 14,8 5,1 13,0 12,1Household  loans,  %  yoy -­‐13,9 -­‐13,1 -­‐4,0 -­‐6,6 -­‐4,5 2,3Share  of  FX  loans  in  total  loans,  % 51,3 46,6 40,7 37,0 31,7 27,7Total  deposits,  UAH  bn 327,7 414,2 486,8 566,3 648,0 736,0Total  deposits,  %  of  G DP 35,8 38,3 37,0 40,4 41,2 41,5Total  deposits,  %  yoy -­‐8,4 26,4 17,5 16,3 14,4 13,6PI  deposits,  %  yoy -­‐1,9 28,5 13,1 19,1 14,1 13,4Loan-­‐to-­‐deposit  ratio,  % 219,0 174,8 162,0 143,1 136,4 132,3§ Source: National Bank of Ukraine, Raiffeisen RESEARCHUkraine’s banking system: Key balance sheet indicators andforecasts13
  • 14. Summary14Foreign banks are leaving Ukraine because:§ Assets growth in 2012 - 7%, ROE – 3%§ Absence of long-term resources§ Potential of Ukrainian market didn’t come true: big,but still poor population (US$ about 4,000 percapita)§ NPL ration even after 4 years after crisis is veryhigh (about 30%)Positive Developments§ Low inflation (-0.2% in 2012)§ Stable local currency (GFK: Ukrainians trust moreUAH (26,5%) than € (18,5%) and RUR (1%))
  • 15. Improvements in regulatory environment15Reporting:§ IFRS for all companies starting from reporting for 2013 (2012 – for banks)§ New provisions policy – unification of IFRS and Basel§ Differentiation of Financial Reporting (IFRS) and Statistics Reporting§ Consolidated Supervision on a Group level (starting from 2014)Deposit Guarantee Fund§ Since 2012 the Fund’s authorities were significantly increased: Banks Supervision(regarding banks’ payments to the Fund) and Sanitization Functions were added§ The payment calculations were improved and differentiated§ The guarantee volume was enlarged (to UAH 200,000)Taxation§ From the end of 2010 the usage of financial reporting for taxation reporting wasintroduced§ Gradual decrease of the profit tax rate of the companies from 25% to 16%§ Since 2012 a tax declaration should be submitted only once a year