Ukraine Macro Credit Profiles AlfaUA 290610

8/8/2019 Ukraine Macro Credit Profiles AlfaUA 290610

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Macro review29 June 2010

CAPITAL MARKETS ANALYTICAL DEPARTMENTAlexander Vedeneev [email protected] (+380 44) 490-46-56

Ukraine:No stoppingfor now!


2/34

Macro review

Figure 1. UKRAINE: Major annual macroeconomic parameters

Indicator 2006 2007 2008 2009 2010F 2011F 2012FGDP growth, % 7.3 7.9 2.3 -15.1 3.7 4.5 8.5

Growth in industrial production, % 6.2 10.2 -3.1 -21.9 7.5 6.7 10.0Agricultural production, UAH bn 95.7 110.0 151.0 153.8 158.0 155.0 160.0Capital investments, UAH bn 125.3 188.5 233.1 151.8 162.0 190.5 225.0

Annual net FDI, USD bn 5.7 9.2 9.7 4.4 8.0 9.0 11.0Consumer Price Index, % 11.6 16.6 22.3 12.3 11.5 9.7 9.5

Fiscal balance, % of GDP -0.7 -1.1 -1.5 -2.0 -5.4 -2.5 -3.5Export of goods and services, USD bn 50.2 64.0 85.6 54.2 66.0 77.0 85.0Import of goods and services, USD bn 53.3 72.2 100.0 56.3 65.5 75.5 83.5

FX rate, USD/UAH, e-o-p 5.05 5.05 7.70 7.99 8.00 7.70 7.50BoP balance, USD bn 2.1 10.5 -3.1 -13.7 -0.9 4.2 5.5

NBUs international reserves, USD bn 22.4 32.5 31.5 26.5 30.2 31.5 33.0

Gross external debt, USD bn 54.5 80.0 101.7 104.0 105.0 110.0 115.0Change in money supply (M3), % 261.1 396.2 515.7 487.3 559.0 626.0 720.0

Total Loans, UAH bn 269,7 485,5 792,4 747,3 759,2 835,2 986,0Total Deposits, UAH bn 183,0 275,5 357,1 325,2 379,6 417,6 480,7Sources: National Bank of Ukraine, State Statistics Committee, Ministry of Finance, Alfa Bank estimates

Alexander Vedeneev [email protected] (+380 44) 490-46-56

2

Delving into 2010

Overheated expectations about massive defaults proved to be unjustified. In spite of sharp market deterioration,none of Ukrainian Eurobond issuers (including sovereign) defaulted on the bonds principal. Heavy strain on servicingexternal liabilities resulted in a series of restructurings, easing the short-term external debt burden. Furthermore, negativeexpectations about FDI contraction turned out to be overestimated, NBU managed to gain control over FX rate even with

an interrupted IMF support while sovereign risk spread continued to narrow rapidly

Peers analysis demonstrates that existing sovereign ratings may be upgraded in the immediate future , while BBlevel is more appropriate for Ukraine now. Positive rating implications should induce the contraction of spread betweenYTM of Ukraines Eurobonds and yields of comparable LT sovereign Eurobonds. Hence, investments in Ukrainian assetsshould provide additional benefit by way of their price converging towards more reasonable intrinsic value

Ukrainian economy is undergoing a period of change. Reducing the sharp UAH depreciation, growth in GDP,industrial and agricultural production, pacification of inflation rate and easing external debts burden helps Ukraine torestore its image in the eyes of potential investors over the world. Thus, at the beginning of 2010 a number of leadingrating agencies upgraded their countrys ratings for Ukraine and changing their outlook from negative to stable or positive

The major change in Ukrainian political structure this year was the election of V.Yanukovitch as Ukrainianpresident, accompanied by a dismissal of Y.Timoshenko from her position of Prime-Minister and the appointment of pro-

presidential N.Azarov for this post. Despite the foreign experts fears of finishing the period of pro-western orientation,acting Ukrainian authorities take steps to further reformation and normalization of the economy. The major achievementsof Mr.Azarov during his previous premiership was the ordering of public finance, continuation of reforms in industry andsocial sectors together with successful negotiations with international money donors

New private external borrowings are feasible. Last year entailed the continuing de-leverage of private sector with asimultaneous increase of external public debt. But as soon as expectations about massive 2008-2009 defaults turned outto be groundless, investment sentiments towards Ukrainian risks significantly improved in 1Q10. Accompanied byrebounded economic growth, political developments and ratings upgrades, that paved the way for Ukrainian issuers totest the waters of Eurobond market. As a result, successful placements in April-May demonstrated that new privateexternal borrowings are feasible already

Authorities follow IMF recommendations. Given the adoption of 2010 state budget, Ukrainian government accountedfor the IMFs deficit margin (6% of GDP). The expected volume of deficit should be realistic under the pace of economic

recovery, anticipated CPI growth and changes of primary fiscal balance. Deficit financing is relying on diversified sourceson the domestic and Eurobond market mostly, while the international financial institutions should remain significant moneydonors and initial signal for investors to enter Ukrainian market

UAH is strong now. Significant financial inflows and improving export proceeds allowed an excessive USD supply on theUkrainian FX market, creating the conditions for slight UAH revaluation. The NBU took this occasion to replenish itscurrency reserves and to regulate the exchange rate in its own mode. As a result, the UAH appreciated merely by 1.0%during 2010 without any significant fluctuations. Thus, the NBU proved it has regained control over the situation on thecurrency market after the drastic UAH devaluation in 2008-2009


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Macro review

DEBT BURDEN

Gross external debt of Ukraine amounted to $102.8 bn as of April 1, 2010 (~90% of GDP). Annual debts change wasmarked by its moderate increase by 3.3% y-o-y. At the same time, the lions share of that increase wasaggravated by continuing IMFs credit support. That is confirmed by the increase of public external debt sharefrom 16.2% to 23.0% since April 2009, while the volume of private debt declined 5.0% to USD79.2 bn. Thus, the2008 financial crisis caused continuing de-leverage of private sector between over 2Q09-1Q10. In 2010Ukrainian borrowers have to repay about USD20-24 bn. Taking into account relatively flat foreign private debt in2009 we still suppose that 70-50% of short-term obligations may well be refinanced or restructured

Sovereign debt is still underpriced. Most part of external debt was formed by the private sector during aggressive growthperiod, while external public debt stays relatively low as against other European countries. Considering highCDS quotations sovereign debt appears to be still underpriced. As for the private sector, so far demonstratinghigh yields, we recommend a selective analysis of particular issuers with respect to their credit profiles

Fig. 2. Ukrainian debt is still underpricedFig. 3. Public debt is lower than in most European

peers (% of GDP, as of YE2009)

Colombia (BBB-)

Costa Rica (BB)

Turkey (BB)

El Salvador (BB)

Romania (BB+)

Kazakhstan

(BBB-)

Latvia (BB)

Ukraine (B)

0

100

200

300

400

500

600

700

0% 20% 40% 60% 80% 100% 120% 140% 160% 180%ExtDebt/GDP

5yrsovereignCDS

3538

0

20

40

60

80

100

120

140

Italy

Greece

Belgium

Hungary

France

Portugal

Germany

UK

Austria

Ireland

Netherlands

Cyprus

Spain

Poland

Finland

Norway

Sweden

Denmark

Latvia

Slovenia

Slovakia

Czech

Ukraine'09

Ukraine'10

Lithuania

Romania

Bulgaria

Luxembour

Estonia

Sources: central banks, Bloomberg, State Statistics Committee Sources: Eurostat, Ministry of Finance, Alfa Bank estimates

Serious cutbacks on consumers spending have markedly diminished the dependence of Ukraines economy onforeign capital flows. Deteriorating consumption, curtailed investments and unplayable external debt markethave eased the pace of private external debt growth, which has turned into a decline in 2009. This is mostlyrelated to decreasing loan stocks of credit institutions and intra-group direct investment due to depreciation ofloans and a drop in credit demand. At the same time, the volume of the government sector in external debt hasrisen from USD16.7 bn to USD24 bn over 2009 and is expected to increase in the next years because of the

expected loan program from the IMF

Fig. 4. Total external debt, USD mio Fig. 5. Term structure of external debt, USD mio

0

20 000

40 000

60 000

80 000

100 000

120 000

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%Monetary Authorities

Intercompany lending

Banks

General Government

Corporate sector

Change in total ExtDebt, y-o-y (rhs)

0

10 000

20 000

30 000

40 000

50 000

60 000

70 000

80 000

90 000

Apr-05

Jul-05

Oct-05

Jan-06

Apr-06

Jul-06

Oct-06

Jan-07

Apr-07

Jul-07

Oct-07

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

LT Debt

ST Debt + Intercompanylending

Sources: NBU, Alfa Bank estimates Sources: NBU, Alfa Bank estimates


3

Last year entailed the continuing de-leverage of private sector with a simultaneous increase of external publicdebt. But as soon as expectations about massive 2008-2009 defaults turned out to be groundless, investmentsentiments towards Ukrainian risks significantly improved in 1H10. Accompanied by rebounded economicgrowth, political developments and ratings upgrades, that paved the way for Ukrainian issuers to test thewaters of Eurobond market. As a result, successful placements in April-May 2010 demonstrated that new

private external borrowings are feasible already


4/34

Macro review

New private external borrowings are feasible. Improvement of political climate, economic recovery and moderation of riskaversion in Ukrainian assets should support an increase in portfolio investments into the country. In April-May2010 Ukreximbank, DTEK, MHP and Metinvest have successfully tapped into the Eurobond market whilePrivatbank has conducted a series of productive meetings with investors. Additionally, MinFin have uncoveredintentions to make significant sovereign placement in July 2010 (~USD1.3 bn). Given other announcements ofprimary placements from EM region, that should test investors appetite for Ukrainian risks and we are lookingforward to the opening of the new books

Fig. 6. New and upcoming issues, USD mio

0 200 400 600 800 1000 1200 14

Ukraine (sovereign)

Privatbank

Metinvest

DTEK

Ukreximbank

MHP

Already issued

Estimated issue (min)

Estimated issue (max)

Sources: company data, Bloomberg, Alfa Bank estimates

A series of restructurings and occasional technical defaults of some low-quality issuers may put investors on alert.We still see high credit risks concerning some problematic Eurobond issues in the Ukrainian notes map, givensignificant funding problems of these debtors. Companies from the high-yield segment continue to suffer eitherfrom market deterioration and lack of liquidity (Nadra Bank) or from low demand for their production (XXICentury Inv.) In view of considerable financial leverage of such companies, the only way out of current situationis to find a strategic investor or to hold an investor-biting restructuring

PEERS ANALYSIS

Rating agencies are excessively cautious concerning Ukraine at the moment:


4

Peers analysis demonstrates that existing sovereign ratings may be upgraded in the immediate future, whileBB level is more appropriate for Ukraine now. Positive rating implications should induce the contraction ofspread between YTM of Ukraines Eurobonds and yields of comparable LT sovereign Eurobonds. Hence,investments in Ukrainian assets should provide additional benefit by way of their price converging towardsmore reasonable intrinsic value

S&P (17/05/10)

A shift to a more sustainablefiscal position on the back of apermanent improvement in thefinances of Naftogaz and thesocial security system couldlead to an upgrade, as could areduction in the country'svulnerability to terms-of-tradeand other external shocks

Fitch (17/03/10)

A failure to unlock officialfinancing sources wouldintensify government fundingpressures as 2010 progresses,increase recourse to monetaryfinancing andraise the risk of afurther bout of UAH volatilityand an intensification of monetaryand financial instability, with potential negative rating

implications

Moodys (25/11/09)

Rating reflects weak macroeconomicfundamentals, a banking system thatremains under strain, and distinctlypoorcoordination between fiscal andmonetary policiesWhile some of theseproblems may well reflect political in-fightingin the run-up to the presidential election, thefiscal loosening inherent in recentlegislation - which may raise the budgetdeficit by up to 7% of GDP in 2010 - is a

serious concern. Hence, the negativeoutlook on the B2 sovereign rating remainsin place


5/34

Macro review

We suppose current sovereign ratings may be upgraded soon given recent macro and political improvement andcomparable indicators of BB peers. Weve considered key negative factors which supported existingsovereign ratings (B/stable by S&P, B-/Stable by Fitch and B2/Negative by Moodys). Main downbeat features,mentioned in agencies reports, are the fiscal instability and low ability to unlock financing sources, vulnerabilityof external trade and UAH FX rate, political unsteadiness along with poor coordination between fiscal andmonetary policies. Recognizing recent post-crisis developments, we suppose rating agencies fears areoverheated. As indicated below, major economic indicators make BB rating more appropriate for Ukraine now

Fig. 7. External public debt, YE2009 (% of GDP) Fig. 8. Total external debt, YE2009 (% of GDP)

K

azakhstanBBB-

BelarusB+

CostaRicaBB

RomaniaBB+

UkraineB

TurkeyBB

ColombiaBBB-

MoldovaNR

ArgentinaB-

ArmeniaBB-

LatviaBB

ElSalvadorBB

UruguayBB

KyrgyzRepublicNR

0%

10%

20%

30%

40%

50%

60%

ColombiaBBB-

EcuadorCCC+

CostaRicaBB

ArgentinaB-

UruguayBB

TurkeyBB

BelarusB+

ElSalvadorBB

ArmeniaBB-

RomaniaBB+

MoldovaNR

KyrgyzRepublicNR

UkraineB

KazakhstanBBB-

LatviaBB

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

Sources: central banks, Bloomberg, State Statistics Committee, S&Pratings are used (or Fitch if not rated by S&P)


External public debt is low enough while FX reserves cover significant part of total external debt. That featuresupports our view about strong governments capability to make timely debt redemptions and periodical couponpayments. Taking into account high total external debt we suppose it should not make a pressure on sovereignratings, dependent on public finance profile mostly. Moreover, pretty high coverage of external debt by FXreserves (24.9%) is the additional plus. Allowing for the increase of NBUs international reserves to USD29 bn inJune 2010, debt coverage ratio has improved to 27.5% already.

Current account deficit in 2009 was within the range of BB peers demonstrating exaggerated agencies fearsabout vulnerability of Ukrainian external trade. Even in view of significant worsening of terms-of-trade due to

contraction of world market demand for steel, current account deficit accounted for 1.7% of GDP in 2009. As aresult, that was better than in Turkey, Romania and some CIS peers. Current account improvement in 2010supports the lessening of CA deficits pressure on UAH FX rate.

Fig. 9. FX reserves / External debt, YE2009 (%) Fig. 10. Current account, YE2009 (% of GDP)

CostaRicaBB

ColombiaBBB-

ArgentinaB-

KyrgyzRepublicNR

RomaniaBB+

ArmeniaBB-

MoldovaNR

Be

larusB+

Tur

keyBB

Kaza

khstanBBB-

ElSa

lvadorBB

LatviaBB

UkraineB(current)

Ukra

ineB(YE2009

0%

10%

20%

30%

40%

50%

60%

70%

80%

-15%

-10%

-5%

0%

5%

10%

15%

LatviaB

B

KyrgyzRepublicN

R

Argentina

B-

UruguayB

B

EcuadorCCC

+

Ukraine

B

ElSalvadorB

B

ColombiaBBB-

CostaRicaB

B

TurkeyB

B

KazakhstanBBB-

RomaniaBB

+

MoldovaN

R

BelarusB

+

ArmeniaB

B-

Sources: central banks, Bloomberg, State Statistics Committee, S&P ratingsare used (or Fitch if not rated by S&P)


While all abovementioned indicators demonstrated too pessimistic outlook of rating agencies, the fiscal deficit wastoo high-colored even after publications of 2008 figures. According to the WB database, Ukraines 2008fiscal cash deficit was much better than in Turkey, Latvia and even Romania. Even if we suppose that Ukraine

have enjoyed favorable market conditions in 1H2008 (given high tax payments by metallurgical sector and highpre-crisis income of other sectors), results of 2009 proved that the fiscal fears were overestimated nevertheless.In particular, 2010 Ukraines budget deficit amounted to 2% of GDP. That was slightly better than in Kazakhstan(2.1%) and much better than in Latvia (6.7%), Armenia (7.6%) and even the whole EU region (6.8%). In ourview, all that may induce rating agencies to re-consider their attitude toward sovereign Ukrainian risks


5


6/34

Macro review

Fig. 11. Fiscal cash surplus / deficit , YE2008 (% of GDP)

-6

-5

-4

-3

-2

-1

0

1

2

3

4

5

KazakhstanBBB-

BelarusB+

ElSalvadorBB

KyrgyzRepublicNR

MoldovaNR

ArmeniaBB-

CostaRicaBB

UruguayBB

UkraineB

TurkeyBB

ColombiaBBB-

LatviaBB

RomaniaBB+

Sources: WB, S&P ratings are used (or Fitch if not rated by S&P)

Positive rating implications should induce the contraction of spread between YTM of Ukraines Eurobonds andyields of comparable LT sovereign Eurobonds. Ukraine-15 is quoted close to 8%YTM now, while most BB

peers are traded within the range of 3.5-6.5% YTM. Thus, expected upgrade of countrys ratings may stimulateYTM of Ukrainian corporate issues to decrease by 150-450 bp. Hence, investments in Ukrainian assets shouldprovide additional benefit by way of their prices converging towards more reasonable intrinsic values

Fig. 12. YTM of comparable LT sovereign Eurobonds, %Fig. 13. ExtDebt coverge vs. sovereign CDS

disparity remains

3

5

7

9

11

13

15

Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10

C olo mb -1 5 C os taR ic a-1 4 E cuad -1 5Kazakh-1 6* L atvia-1 4 R omania-1 8Turke y-1 5 Ukraine -15 Urug uay-1 5

Colombia (BBB-)

Costa Rica (BB)

Turkey (BB)

El Salvador (BB)

Romania (BB+)

Kazakhstan

(BBB-)

Latvia (BB)

Ukraine (B)

0

100

200

300

400

500

600

700

0% 10% 20% 30% 40% 50% 60% 70%FX res / Ext Debt

5yrsoverei

gnCDS

Sources: Bloomberg,* - Temir Zholys Eurobond


CRISIS TESTED

Complicated economic situation in 2008-2009 was accompanied by difficulties to enterprises in servicing theirexternal debt burden. Exceeding borrowing capacity in the rapid boom years followed by sharply shrinkingsales revenues, liquidity squeeze on external debt markets, UAH devaluation and investors run from EM regionhave bound the companies in 2008-2009. Thus, highly-leveraged enterprises moved to survival or even freezemode and started to rely more on internal funds while financing their further growth


6

In spite of a sharp market deterioration, none of the Ukrainian Eurobond issuers (including sovereign)defaulted on the bonds principal. Heavy strain on servicing external liabilities resulted in a series ofrestructurings, which significantly eased the short-term debt burden of Ukrainian issuers. Furthermore,negative expectations about FDI contraction turned out to be overestimated, NBU managed to gain controlover FX rate even with an interrupted IMF support while sovereign risk spread continued to narrow rapidly


7/34

Macro review

Despite worsening of overall market situation, none of the Ukrainian Eurobond issuers defaulted on the bondsprincipal. The years of crisis have put a heavy strain on the budgets of Eurobond issuers, which translates intothe need to deleverage their short-term position. Hence, 2009 was marked by a series of Eurobondsrestructurings by banking and corporate sectors. Part of syndicated loans and other external borrowings werealso restructured or refinanced. As a result, a rollover for banks on all their external liabilities grew to 75% (up32% on long-term liabilities), while the corporate sector demonstrated a 80-85% rollover ratio

Overheated expectations about sovereign default proved to be unjustified. We suppose that the lions share of such

fears were cultivated by re-emerged political rivalry in 2009. At the same time, MinFin has successfullyredeemed its Eurobonds due in August 2009 (USD500 mio) and continue to pay interest on outstanding debt.The next closest repayment must be made in December 2010 (JPY35.1 bn). In our view, the new pro-presidential government has sufficient means and enough willpower to fund both that payment and further onesin the next 1-2 years. We suppose that such recommence also applies to key quasi-sovereigns, Naftogaz andUkreximbank, following continuing support of their liquidity by the government

Fig. 14. 2009-2010 Eurobond events

IssuerIssue volume,

USD mioCorporate event Date of event

Timely redemptionUkreximbank 250 - 23.09.2009Forum bank 100 - 30.10.2009

Ukrsotsbank 400 - 22.02.2010

Restructurings

XXI Century Inv. 175 Sinkable, final maturity in 2014 03.07.2009

Alfa Bank 1045Upfront cash + USD840 mio of newsinkable issue, final maturity in 2012

17.07.2009

Naftogaz 500 Maturity prolonged to 2014 30.09.2009FUIB 275 Maturity prolonged to 2014 15.12.2009

Finance & Credit Bank 100 Maturity prolonged to 2014 30.12.2009VAB Bank 125 Maturity prolonged to 2014 05.03.2010

MHP 250 Maturity prolonged to 2015 12.04.2010

New and upcoming issues

MHP 330 Maturity in 2015 22.04.2010DTEK 500 Maturity in 2015 21.04.2010

Ukreximbank 500 Maturity in 2015 15.04.2010Metinvest 500 Maturity in 2015 14.05.2010

Privatbank ~500 Preliminary maturity in 2015 May 2010Ukraine (sovereign) ~1300 Preliminary maturity in 2015-2017 July 2010

Others

Nadra 175Restructuring and probable government

recapitalizationMay-June 2010

Ukrsibbank 200 Possible timely redemption 23.07.2010

Interpipe 200Possible timely redemption or restructuringwith a maturity prolongation by 3-4 years

02.08.2010

Pivdenniy Bank 100 Possible timely redemption 03.08.2010Sources: company data, Bloomberg, Alfa Bank estimates

Following sharp contraction in 2009, sovereign risk has continued to fade away in 2010. Surpassing the peak of 5360bp in March 2009, Ukrainian 5yr CDS quotations are traded at 620-650 bp now. Considering their being almost

3 times higher than Russian CDS, we still see the downward trend as quite likely. Notable to say that at the startof this year Ukrainian CDS price was as mach as double what it currently is. Smooth presidential elections,combined with the approval of new government and ratings upgrades both from Fitch and S&P have contributedtheir mite. In particular, S&P upgraded Ukraine to B- (positive) on March, 12 th, while Fitch raised sovereignoutlook to stable from negative and affirmed the countrys long-term currency rating at B- on March, 17th.


7


8/34

Macro review

Fig. 15. Sovereign 5yr CDS quotations Fig. 16. Sovereign Eurobonds yields to maturity, %

0

1000

2000

3000

4000

5000

6000

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Ukraine

Russia

Argentina

Kazakhstan

Turkey

Poland

0

5

10

15

20

25

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Ukr-11

Ukr-12

Ukr-13

Sources: Bloomberg Sources: Bloomberg

During 2009 the majority of foreign investors continued to support their Ukrainian subsidiaries in spite of thenegative expectations about tremendous capital run from Eastern Europe region. As a result, net FDIinflow in Ukraine remained in the positive territory and even showed a moderate decrease last year (-53% y-o-yto USD 4.7 bn). Future trends in FDI depend on investors long-term expectations regarding the countrys

macroeconomic development, rather than on the narrow-scoped political events in the short term. Recovery ofFDI growth in January-May 2010 (+USD 1.5 bn) is the evidence of rebounding face in Ukrainian economyspotential

In 2009, both the current and financial accounts of the balance of payments of Ukraine showed a deficit. At the sametime, in 2009, the current account deficit decreased dramatically to USD 1.9 bn (around 1.7% of GDP) versusUSD12.8 bn in 2008 (7% of GDP). It was traced back to a plunge in the red ink in the foreign trade balance (toUSD2.7 bn versus USD 14.4bn in 2008). The deficit was 100% covered by NBUs international reserves whosevolume equaled USD26.5 bn as at 1 January 2010 and were sufficient to cover goods and services importsduring 5.5 months of the future period

Fig. 17. FDI inflows continuesFig. 18. Financial account deficit vs NBU

interventions, USD mio

0

0,3

0,6

0,9

1,2

1,5

Ja

n-08

Ma

r-08

Ma

y-08

Jul-08

Se

p-08

No

v-08

Ja

n-09

Ma

r-09

Ma

y-09

Jul-09

Se

p-09

No

v-09

Ja

n-10

Ma

r-10

Ma

y-10

35

38

41

44

47

50

53

56

59

Net FDI inflows, USD bn (lhs)Cumulative FDI, USD bn (rhs)

-5000

-4000

-3000

-2000

-1000

0

1000

2000

3000

4000

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Financial account balance

NBU's interventions

Sources: NBU, Alfa Bank estimates Sources: NBU, Alfa Bank estimates

The unfolding world crisis and global liquidity contraction were primarily responsible for the financial accountdeficit of USD11.8 bn in 2009 (USD9.6 bn surplus in 2008). The negative balance under transactions withprivate sector loans and bonds equaled USD7.9 bn (versus net borrowings of USD 12.4 bn in 2008). At thesame time, growth of the foreign currency outside banks weakened by 25.5% to USD 9.6 bn against USD 12.9bn in 2008, showing improvement in populations trust in the national currency. The latter is additionallyconfirmed by a recent decrease in the pace of foreign currency deposits growth (+0.7% y-o-y in 1Q10)

Positive expectations regarding Ukrainian economic development and crisis overcoming stimulated the inflow ofFDI in 1Q10 despite the absence of financial support from the IMF. Net foreign direct investment reachedUSD1.5 bn in January-May 2010. Banking sector, development and metallurgy remain the sectors of the largest

interest on the part of foreign investors, attracting more than a half of the total volume of investments. If thestate continues pursuing stable monetary and fiscal policy and undertaking reforms in the financial sector,investors will show greater interest to other sectors, trading with low multiples as during pre-crisis period


8


9/34

Macro review

Fig. 19. Cumulative FDI structure, YE2009Fig. 20. Tranches of IMFs support under SBA loan

facility, USD mio

Others

15,6%

Chemistry

3,0%

Construction

4,7%

Metallurgy

11,9%

Wholesale

trade

7,4%

Food

3,9%

Machine-

building

2,5%

Finance

31,0%

Development

20,0%

0

500

1000

1500

2000

2500

3000

3500

4000

4500

Nov-08

May-09

Aug-09

Nov-09

Feb-10

May-10

Aug-10

Oct-10

Delayed

For State budget

expenditures

New 2-year USD20 bnloan facility program

may start up from late

July 2010

Sources: NBU Sources: IMF, Alfa Bank estimates

One of the indicators of Ukrainian economic performance for international investors is its cooperation withinternational financial organizations. Ukraine is currently close cooperates with the IMF, World Bank andEBRD. As was recently stated by government representatives, negotiations with IMF may result in new 2-yearUSD20 bn loan facility program from late July 2010. We expect Ukrainian authorities are choosing betweencontinuing the current Stand-By program and concluding a new agreement on credit cooperation. As long as2010 budget deficit is within the marginal IMFs range (6% of GDP) we see high chances of re-start ofcooperation with IMF. Meanwhile, EBRDs president T.Mirow announced in April that the Bank plans to investUSD1.1 bn in Ukraine this year.

KEY MACRO

After a sharp drop in real output during crisis period, Ukrainian economy is undergoing a period of change. A visiblerebound in economic activity was demonstrated in 2010 that is implied by a switch from real GDP decline(-6.8% y-o-y in 4Q09) to economic rise (+5.0% y-o-y in 1Q10, outpacing European peers). According to monthlyNBU estimates, y-o-y growth in quasi-GDP accelerated to 9.5% in March (from 4.1% in February and 7.7% inJanuary). Considering high reliance of Ukrainian economy on industrial production, the upturn was mostlydriven by the improving metallurgical and mining sectors under the revival of global steel markets. Thus, the

continuing resumption of external demand is of vital importance to the Ukrainian economy

Fig. 21. GDP growth vs European peers, y-o-y, % Fig. 22. Quarterly GDP growth, y-o-y

-20

-15

-10

-5

0

5

10

15

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010f

2011f

EU Bulgaria

Czech Rep. EstoniaGreece Latvia

Ukraine

6,7%7,7%

6,3% 6,2% 6,4%

-8,0%

-20,3%

-17,8%-15,9%

-6,8%

9,1% 8,8%

5,0%

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

1Q'07

2Q'07

3Q'07

4Q'07

1Q'08

2Q'08

3Q'08

4Q'08

1Q'09

2Q'09

3Q'09

4Q'09

1Q'10

Sources: State statistic committees Sources: State Statistics


9

Remarkable results of Ukrainian economy for overcoming the 2008 crisis, that is reducing the sharpdepreciation of national currency, pacification of inflation rate, growth in GDP, industrial and agriculturalproduction and easing external debts burden helps Ukraine to restore its image in the eyes of potentialinvestors over the world. Thus, at the beginning of 2010 a number of leading rating agencies upgraded theircountrys ratings for Ukraine and changing their outlook from negative to stable or even positive


10/34

Macro review

We expect growth in 2010 to reach between 3.7% and 4.0%, assuming that global growth slows during the year and thateconomic policy worldwide will be less expansionary. The main risk posed to this assessment is that the crisis inthe world's financial markets will resume, and will adversely affect the global economy and steel demand. Localfactors such as rebounding domestic investment demand and stable growth rates in agricultural productionsustain economic developments to some extent

Due to decline in the production of export-oriented sectors last year, the structure of major growing sectors in GDPwill be changed from agriculture to industry and whole-sale trade, which will dominate in GDP growth in the

medium term. The structure of growth by industrial sectors is changing with export-oriented industries re-acquiring the leading positions, while the growth rates of consumer oriented sectors are staying modest. Thussectors processing raw materials (e.g. ferrous metallurgy and chemicals) will outperform those producing finalgoods

Fig. 23. 2009 GDP breakdown by final consumption Fig. 24. 2009 GDP breakdown by sectors

65%

1%

19% 18%

-2%

-60%

-40%

-20%

0%

20%

40%

60%

80%

Household

consumption

Consumption

ofnon-profit

organizations

Government

consumption

Capital

expenditures

Netexport

2009 growth Sector's weight in GDP breakdown

30%

8%5%

18%

4% 3%

15%13%

6%4%

-45%

-35%

-25%

-15%

-5%

5%

15%

25%

35%

Agriculture

Mining

R

efinary

in

dustry

En

ergy

prod

uction

Construction

Trade

Tra

nsport

Edu

cation

Healthcare

Others

2009 growth Sector's we ight in GDP breakdown

Sources: State Statistics Sources: State Statistics

Good opening conditions for 2010 and presumed structural improvements in the economy support the assessmentthat growth will be U-shaped. The large upturn in growth during the 4Q09-1Q10 which resulted from therecovery in world trade, created favorable conditions for the rest of 2010. The economy benefited from thepositive global climate and these conditions are not expected to change at least until the middle of the year. Atthe same time, due to slow revival of household consumption the prospects for a V-shaped renewal ofeconomic performance in 2010 will be moderate, even in spite of low comparative base. The banking sector stillremains risk averse and banks do not provide a proper amount of loans to the real sector at a digestible rate. Asa result, the scale of the rebound in 2H10 will be less significant than we had expected earlier

We expect moderate growth in industrial production (7.5%) due to stabilization in the production volumes at export-oriented sectors, their gradual reorientation to domestic market and possible upturn in consumer-orientedsectors from 2H10. Additionally, better collection rates and awakening credit market should stimulate furthergrowth in production activity. However, the pre-crisis level of the industrial production is likely to be achieved notearlier than at the end of 2010 or at the beginning of 2011

Household consumption is fragile, retail sales are still behind the overall economy growth . Current monthly livingwage in Ukraine is about $105.9, minimum wage is $111.5 and minimum pension is $89.1, indicating thatsignificant part of population still has low living standards. Compounded with a slow retail sales recovery (-2.6%y-o-y in 1Q10 vs -16.6% y-o-y in 2009), that supports our view about the retention of low domestic demand in amedium term period. However the recovery in populations real income should continue this year. Thus, theaverage wage has grown by 10.1% YTD to $266 in March, significantly exceeding living wage. Furthermore,parliament have voted for an increase in social spending that should bring a 24.8% increase in living wage and23.9% increase in minimum wage


10


11/34

Macro review

Fig. 25. Household consumption is still weakFig. 26. Lag between real income growth andproductivity growth stopped widening in 2009

-20%

-10%

0%

10%

20%

30%

40%

3M'08

5M'08

7M'08

9M'08

11M'08

1M'09

3M'09

5M'09

7M'09

9M'09

11M'09

1M'10

3M'10

Real disposable income

(quarterly y-o-y)

Retail sales (p-o-p)

100

120

140

160

180

200

220

240

260

280

300

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Real disposable

income

Real GDP

Sources: State Statistics Sources: State Statistics, Alfa Bank estimates (2009 real income and real GDP = 100)

Inflation is not an issue at the moment. The factors led to pre-crisis high inflation of 22.3% in 2008 and 12.3% in 2009 areexpected to moderate this year. The consuming boom was a core cause of high inflation in the past two years.At the moment that appears to have decreased during recent year because of retail loan contraction, lowerdisposable incomes and higher prices on imported goods due to UAH devaluation in 2008. The necessity to

increase gas tariffs for the population and utilities should not be an issue after the signing of new gas deal withRussia. At the same time, business inflation expectations and recent growth in PPI (+20.2% p-o-p in January-May) may put pressure on CPI this year. Looking ahead, we expect inflation amounting to 11.5% in 2010 andpassing to one-digit area in 2011.

Fig. 27. Deflation in April-May due to food component Fig. 28. CPI component growth, y-o-y %

-1,0

-0,5

0,0

0,5

1,0

1,5

2,0

2,5

3,0

3,5

Apr-08

Jun-08

Aug-08

Oct-08

Dec-08

Feb-09

Apr-09

Jun-09

Aug-09

Oct-09

Dec-09

Feb-10

Apr-10

0

5

10

15

20

25

30

35

CPI, % m-o-m (lhs)

CPI, % y-o-y (rhs)

0

10

20

30

40

50

60

Jan-08

Mar-08

May-08

Jul-08

Sep-08

Nov-08

Jan-09

Mar-09

May-09

Jul-09

Sep-09

Nov-09

Jan-10

Mar-10

May-10

FoodClothesPublic utilitiesHousehold appliancesTransport

Sources: State Statistics Sources: State Statistics

We expect that a significant decrease in inflationary expectations will prepare the ground for further fall in creditrates, stimulating Ukrainian companies to use banking resources for their economic development. Thus,average credit rates of Ukrainian banks may fell by additional 5-7 pp during next 2-3 months. The move tonormal interest rates is expected to be gradual and dependent on banks risk aversion, consecutiveimprovement in availability of external funding, deposits return and support of money supply growth by NBU

Fig. 29. Restoring trust in banking systemFig. 30. Banks exposure to FX risks appears to be

decreasing

120

135

150

165

180

195

210

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

UAH bn

-25%-20%

-15%

-10%

-5%

0%

5%

10%

15%UAH deposits

FX deposits

Deposits y-o-y (rhs)

220

270

320

370

420

470

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

UAH bn

-5%

0%

5%

10%

15%

20%

25%

30%UAH loans

FX loans

Loans y-o-y (rhs)

Sources: NBU Sources: NBU


11


12/34

Macro review

Strict monetary policy and stabilization of domestic currency, implemented by Ukrainian government and theNational Bank, supported decline in inflation rate. The decline in monetary growth together with revival inthe growth of real economy should absorb a large portion of money supply that will be the major factors forkeeping the inflation rate at low level. In April 2010 NBU has announced that the central bank is going to cutrefinancing rates in the case of further fall of annual inflation. At the same time, NBU toughened the requirementon obligatory reserves. That demonstrates central banks intention to suppress excessive liquidity and furtherconvergence of NBUs policy towards inflation targeting

POLITICS

After a period of political turmoil, quick power transition should speed up important economic policy decisions.The Presidential elections this year have significantly changed the structure of political establishment. FollowingV.Yanukovitch's presidential election victory, the transition of power was quick and hasty, while around 52% ofdeputies in current Parliament represent pro-presidential groups. That facilitated the election of a pro-presidential governing body, based on a coalition that comprises the Party of Regions, Communist Party, LytvynBloc and several independent members of parliament

Fig. 31. Breakdown of acting Ukrainian parliament

Block

Tymoshenko

30,2%

Pro-coalition

independent deputies

0,9%

Pro-coalition "Our

Ukraine"

1,8%Pro-coalition

"Block

Tymoshenko"

4,2%

Communist

Party

4,4%

Our Ukraine

14,2%

Party of Region

38,2%

Lytvyn Bloc

6,0%

Coalition

55,6%

Sources: Verkhovna Rada

V.Yanukovych is posting a more Russia-friendly position that will bear fruits for Ukrainian economy. In April Russiaagreed to cut the price of its natural gas supplies to Ukraine in exchange for a 25-year extension of the lease ofits Black Sea fleet in Ukraines Sevastopol. According to the agreement, the discount will be stand at 30% (butno more than $100 per 1000 cubic meters). The discount will apply for 10 years to 30 bn cubic meters of gas tobe supplied to Ukraine in 2010 and 40 bn cubic meters in subsequent years. In our opinion, the agreementshould positively affect the competitiveness of Ukrainian metallurgy, chemical and sugar industries, whileimprovement in Naftogazs financials will decrease the anxiety for state budget. Additional pluses are thedecrease of rising inflation risk due to expected stability of utility tariffs and less FX pressure on Ukrainiancurrent account.


12

The major change in Ukrainian political structure this year was the election of V.Yanukovitch as Ukrainianpresident, accompanied by a further dismissal of Y.Timoshenko from her position of Prime-Minister and theappointment of pro-presidential N.Azarov for this position. Despite the foreign experts fears of finishing theperiod of pro-western orientation, acting Ukrainian authorities take steps to further reformation andnormalization of the economy. The major achievements of Mr.Azarov during his previous premiership was theordering of public finance, continuation of reforms in industry and social sectors together with successfulne otiations with IFI


13/34

Macro review

Fig. 32. Sovereign Eurobonds and Naftogaz-14dynamics, YTM %

Fig. 33. Price of natural gas imported from Russia,per 1000 cubic meters

6,0

6,5

7,0

7,5

8,0

8,5

9,0

9,5

10,0

10,5

11,0

01.0

3.1

0

03.0

3.1

0

05.0

3.1

0

09.0

3.1

0

11.0

3.1

0

15.0

3.1

0

17.0

3.1

0

19.0

3.1

0

23.0

3.1

0

25.0

3.1

0

29.0

3.1

0

31.0

3.1

0

02.0

4.1

0

06.0

4.1

0

08.0

4.1

0

12.0

4.1

0

14.0

4.1

0

16.0

4.1

0

20.0

4.1

0

22.0

4.1

0

Nafto-14 Ukr-16 Ukr-17

Despite rise of EM

spreads due to risks

associated with

Greece, Naftogas and

Ukraine' bonds traded

almost flat on 21/04

Decrease of spread

since the

announcement of gas

negotiations appeared

269 236305260

180

130

95

60

326

326296

192

262

407

0

50

100

150

200

250

300

350

400

450

2005 2006 2007 2008 2009 1Q2010 2Q2010

Ukraine Europe

208198

271360

1Q2009 2Q2009 3Q2009 4Q2009

Sources: Bloomberg Sources: Naftogaz, Gazprom (average estimated price for 2010 is shownfor European gas prices in 1Q10 and 2Q10)

We see the minimal possibility of political turmoil on the back of extension of the lease of its Black Sea fleet.Considering composed attitude of Ukrainian population towards Russian naval forces in the Black Sea, wesuppose the extension of the lease of Black Sea fleet will be accepted almost neutrally. In our opinion, thepopulation clearly sees significant pluses of flat utility tariffs and low gas prices for Ukrainian production thatshould support economic rebound in 2010

The cooperation with Russia is going to be extended in transport, gas-distribution, energy-producing andaerospace spheres. That should calm previous bilateral tensions, aggravated by strong pro-Western stance offormer president V.Yushenko. At the same time, significant inflow of Russian capital may come into collisionswith the interests of those Ukraine's business circles that bankrolled V.Yanukovych's presidential electioncampaign. Such events may provoke the resistance to the current foreign policy of Ukrainian authorities

The risk of an early parliamentary election is miserable, accounting for a recent decision of the ConstitutionalCourt that the new coalition is lawful. The latter verified the legal capacity of the new government should,preserving the country from another cycle of political disorder that have been affected Ukraine for several years.At the same time, the relations with the opposition may still be a source of tensions. The issue is the course ofV.Yanukovych towards the restoration of closer ties with Russia. Such decision has a potential to intensify thepolitical disputes between the west and the Russia-inclined followers. However, the devaluation of the OrangeRevolution ideals after 3 years of disagreements between its ambitious leaders caused the erosion ofpopulations interest in active demonstrations. Besides, the popularity of orange leaders (V. Yushchenko,Y.Timoshenko and A.Yatsenyuk) is under pressure now. Thus, the possibility of another early parliamentaryelection and mass protest is miserable in our view

Fig. 34. Current ratings of Ukrainian political parties, %

39,1

14,2

8,76,6

2,5 1,7 0,8 0,7

0

5

10

15

20

25

30

35

40

45

Partyof

Region

B

lock

Tym

oshenko

Sylna

Ukraina

Fr

ontZmin

Communist

Party

Svoboda

OurUkraine

LytvynBloc

3%-barrier to get into

Verkhovna Rada

Sources: FOM, survey from April 26, 2010


13


14/34

Macro review

Even in the case of early parliamentary election the base scenario is that the pro-presidential majority will bepreserved. According to the results of recent FOM funds poll, only Party of Regions (39.1%), BlockTymoshenko (14.2%), Tigipkos Sylna Ukraina (8.7%) and Yatsenyuks Front Zmin (6.6%) will be able tooverpass 3%-barrier in the case of early parliamentary elections. Thus, the pro-presidential group (Party ofRegions and Sylna Ukraina) will constitute almost 70% of deputes seats. Allowing for such alignment offorces, the scenario of parliaments dismissal is unlikely, as a new election will change the composition of theRada not for the oppositions benefit. Besides, that will require additional groundless spending from oppositionalpolitical blocks and the state

PUBLIC FINANCE

In the end of April Verkhovna Rada finally adopted 2010 State Budget, following protracted period of its workingout by Azarovs government. Adoption of state budget was easier than was expected, given that agreementon the new gas prices with Russia significantly accelerated the budget process. Budget revenues will be fundedby VAT payments mostly (44.5% - UAH119bn). Considering earlier statements of V.Yanukovitch about possibledecrease in VAT rate from 20% to 17%, we suppose that the government is going to toughen tax administrationprocedures. MinFin relies on extensive rise in tax revenues due to economic revival too. In our opinion,estimated increase of VAT payments may be too optimistic showing a red flag for potential budgetunderfulfillment

Fig. 35. Budget deficit/surplus in % of GDP Fig. 36. Key state budget figures, UAH bn

-16,0

-14,0

-12,0

-10,0

-8,0

-6,0

-4,0

-2,0

0,0

2,0

4,0

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

Ukraine EU

Bulgaria Czech Republic

Estonia Greece

Latvia

245

267274

324

242

225

150

180

210

240

270

300

330

360

2009 Revenues 2010 Revenues 2009

Expenditures

2010

Expenditures

Plan Actual

Sources: Eurostat, Ministry of Finance Sources: Ministry of Finance, State Budget law 2009/2010

Budget expenses are going to be enlarged for public expenditures mostly, demonstrating the sequel of socialorientation in politics. In view of expected increase of minimal pension by 37% in 2010, governement is goingto boost payments to Pension Fund by 51% to UAH67.8 bn. The pre-election promises of V.Yanukovitch to raisethe minimal wage caused increase in expected social transfers by 37%. Estimated investment expendituresstayed relatively low regardless of rise in expected Stabilization fund funding (by UAH18.8 bn). Budget deficitwill account for UAH57 bn (USD7.2 bn) or 5.4% of our nominal GDP estimations for 2010. That excludesexpenditures for bank recapitalization (~UAH20-30 bn) and financial assistance to Naftogaz


14

Given the adoption of 2010 state budget, Ukrainian government have taken account of the IMFs deficit margin(6% of GDP). The expected volume of budget deficit should be realistic under the pace of economic recoverythis year, anticipated CPI growth and changes of primary fiscal balance. Deficit financing is relying ondiversified sources on the domestic and Eurobond market mostly, while the international financial institutionsshould remain a significant money donor and initial signal for investors to enter Ukrainian market


15/34

Macro review

Fig. 37. 2010 vs 2009 Budget Revenues, UAH bn Fig. 38. 2010 vs 2009 Budget Expenses, UAH bn

0

20

40

60

80

100

120

140

VAT

Incometax

Excisetaxes

NBUpayments

Rentalincome

Importduty

Other

2010

2009

0

20

40

60

80

100

120

Pensions

Subsidiesto

localbudgets

Socialtransfers

Stabilization

fund

MinFin

expenses(incl.

statedebt

service)

Educationand

culture O

ther

2010

2009

Sources: State Budget law 2009/2010

Anticipated amounts of 2010 public borrowing will be more than enough to cover forecasted budget deficit(USD12.6 bn vs USD7.2 bn). Borrowings are going to be made from international donors (USD4.3 bn) and byOVGZ placements (USD8.3 bn). In particular, USD2 bn will be raised from the IMF, USD500 mio from the World

Bank, USD460 mio from the EBRD and USD1.3 bn by placing Eurobonds. Thus, the government will feelcomfortable to redeem its December 2009 Eurobond issue in amount of JPY35.1 bn (~USD373 mio)

Fig. 39. OVGZ ownership by banks and nonresidentsnoticeably widened since mid March (UAH mio)

Fig. 40. Daily OVGZ trade volumes

40 000

50 000

60 000

70 000

80 000

90 000

100 000

110 000

04.0

1.1

0

18.0

1.1

0

01.0

2.1

0

15.0

2.1

0

01.0

3.1

0

15.0

3.1

0

29.0

3.1

0

12.0

4.1

0

26.0

4.1

0

10.0

5.1

0

24.0

5.1

0

07.0

6.1

0

21.0

6.1

0

NBU Banks Other investors Non-residents

0

200

400

600

800

1 000

1 200

1 400

05.0

1.1

0

15.0

1.1

0

25.0

1.1

0

02.0

2.1

0

10.0

2.1

0

18.0

2.1

0

26.0

2.1

0

09.0

3.1

0

17.0

3.1

0

25.0

3.1

0

02.0

4.1

0

13.0

4.1

0

21.0

4.1

0

29.0

4.1

0

12.0

5.1

0

20.0

5.1

0

31.0

5.1

0

08.0

6.1

0

16.0

6.1

0

10 000

12 000

14 000

16 000

18 000

20 000

22 000

24 000

26 000

28 000Banks' liquidity, UAH mio (rhs)

Volume of OVGZ trading, UAH mio (lhs)

Sources: PFTS, NBU Sources: NBU

Allowing for rising demand on Ukrainian assets and promising prospects of economy revival we suppose thatMinFin will be able to raise the required amount. Ukraines public debt stays relatively low (34.6% of GDP asof YE2009, 38% of GDP as of 2010F) as compared with average leverage of European countries (74% of

GDP). Meanwhile, EBRDs president T.Mirow announced about Banks plans to invest USD1.1 bn in Ukrainethis year


15


16/34

Macro review

FX MARKET

Since the beginning of 2010, hryvnya has appreciated modestly following respectively calm presidential election.Ukrainian currency revalued by 1.0% in January-June 2010 thanks to the permanent support from the centralbank, improved economic fundamentals and political stabilization. In June UAH was traded almost flat within thebound of 7.9050-7.9250 USD/UAH. In 2009 main pressure on the FX rate was caused by the deterioration ofcapital account, excited by high demand for cash foreign currency, seasonal pre-election capital outflows andsignificant sovereign debt redemption. Though, it becomes quite evident that negative expectations ofenormous financial outflows are highly unlikely to occur in 2010 as rollovers of external debt in the banking andcorporate sectors reached 75-85%, population expectations improved and 2010 redeemable external publicdebt is moderately low

Fig. 41. UAH appreciated against USD in 2010 vsdepreciation of most European peers

Fig. 42. UAH FX rate against USD

-2,7%0,97%

-40%-35%-30%-25%-20%-15%-10%-5%0%5%

BYR

HUF

KZT

LVL

ISK

LTL

EUR

EEK

PLN

CZK

RUB

UAH

Since YE2008

Since YE2009

7,0

7,5

8,0

8,5

9,0

9,5

10,0

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

UAH/USD (official)

UAH/USD (interbank)

Sources: NBU, Bloomberg (data as of June 29, 2010) Sources: NBU, Reuters

In March BoP returned to positive territory (+$1.03 bn) for the first time since September 2008, following significantFX inflows into financial account (+$1.27 bn surplus). Capital account surplus amounted to $1.27 bn, mostlydue to FDI inflows and increase in sales of fixed income and equity instruments to non-residents. For instance,low implied yields of FX hedge in late March (8-9% for 1Y NDF) and OVGZ yielding at 12-20% during primaryplacements induced foreign investors to purchase T-bonds in amount of UAH1.43 bn then. In view of recentEurobond placements the capital account surplus was wide in April too

Fig. 43. BoP structure, 2008-2010, USD mio Fig. 44. 3M and 1Y NDF quotations, UAH/USD

-5000

-4000

-3000

-2000

-1000

0

1000

2000

3000

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Current account Financial account

BoP surplus/deficit

6,8

7,8

8,8

9,8

10,8

11,8

12,8

13,8

14,8

15,8

24.1

2.0

8

24.0

2.0

9

24.0

4.0

9

24.0

6.0

9

24.0

8.0

9

24.1

0.0

9

24.1

2.0

9

24.0

2.1

0

24.0

4.1

0

24.0

6.1

0

SPOT

NDF, 3M Ask

NDF, 1Y Ask

Sources: NBU Sources: Bloomberg


16

Significant financial inflows and improving export proceeds allowed an excessive USD supply on the UkrainianFX market, creating the conditions for slight hryvna revaluation. The NBU took this occasion to replenish itscurrency reserves and to regulate the exchange rate in its own mode. As a result, the UAH appreciated merelyby 1.0% during 2010 without any significant fluctuations. Thus, the NBU proved it has regained control overthe situation on the currenc market after the drastic hr vna devaluation in 2008-2009


17/34

Macro review

The NBU regained the successful control over the exchange rate of Ukrainian national currency since November2009. NBUs measures in 2009 stimulated the growth in consumers confidence as to UAH from the side ofeconomic entities and population (regular currency auctions for retail borrowers, restriction of consumer FXloans, limitation of daily FX purchases etc.) However the 2008 financial crisis has considerably correctedhryvnas nominal exchange rate indicated the failure of NBU in full control of the exchange rate. As a result,hryvna lost 72% of its value since mid-2008, which induced the NBU to toughen the operations at interbank FXmarket. The restoration of confidence to hryvna and obtaining control over the exchange rate cost more thanone year to central bank

Increasing FX reserves should maintain the trust in NBU and lessen long-term devaluation expectations. CurrentlyFX reserves of the NBU reach $30 bn (+12.3% m-o-m in June), which coupled with improving trade balanceand financial account will enable the NBU to attain hryvnas stability and support full repayment of gasobligations in the medium term. Considering current NBUs objectives to buy out all excessive FX supply,foreign investments inflow and rising export proceeds due to higher steel prices we see low probability of UAHdevaluation due to NBUs inability to support national currency in the case of unlikely turmoil scenario

Fig. 45. External debt coverage by FX reserves stays modestFig. 46. First non-IMF rise in FX reserves since

August 2008

25%

0%

20%

40%

60%

80%

100%

120%

140%

Egypt

India

Russia

Brazil

Jordan

Israel

Korea

Japan

CzechRep.

Indonesia

Argentina

Romania

Poland

Bulgaria

Belarus

Turkey

Ukraine

Kazakhstan

Lithuania

Latvia

Croatia

Hungary

Estonia

Denmark

Norway

Sweden

Italy

Germany

France

Finland

SlovakRep.

Portugal

Slovenia

Belgium

Austria

Netherlands

SpainUK

Greece

USA

Ireland

Luxembour

-4,5

-3,5

-2,5

-1,5

-0,5

0,5

1,5

2,5

3,5

Apr-08

May-

Jun-08

Jul-08

Aug-08

Sep-08

Oct-08

Nov-08

Dec-08

Jan-09

Feb-09

Mar-09

Apr-09

May-

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-

20

22

24

26

28

30

32

34

36

38

40FX reserves , USD bn (rhs)

Net FX interventions by NBU, USD bn (lhs)

Sources: IMF, WB Sources: NBU

Export growth appears to support FX supply. Gradual increase in exports for the last 6 months was mainly due toimprovement on the traditional markets of Ukrainian export-oriented industries. However, a further growth ofexports should be stimulated by internal factors, such as a lowering of the share of raw materials in the exportstructure with a corresponding increase in exports of intermediate and final goods. The opening of the markets,which have been inaccessible for Ukrainian exporters because of low market demand and stunned internationalinvestments projects, would give a wide scope for increase in Ukrainian exports

Fig. 47. Leading export growth supports FX supplyFig. 48. Current account deficit is narrowing

(cumulative annual, USD mio)

-60%

-40%

-20%

0%

20%

40%

60%

80%

1q07

2q07

3q07

4q07

1q08

2q08

3q08

4q08

1q09

2q09

3q09

4q09

1q10

Export, y-o-y

Import, y-o-y

14 000

12 000

10 000

8 000

6 000

4 000

2 000

1q07

2q07

3q07

4q07

1q08

2q08

3q08

4q08

1q09

2q09

3q09

4q09

1q10

Sources: NBU Sources: NBU

Decrease in devaluation expectations due to the end of political uncertainty and the expectation of a clear-cuteconomic policy from the newly elected authorities. According to recent NBUs opinion poll conducted

among top managers, Ukrainian businesses' devaluation expectations in the 1Q2010 have declined.Expectations concerning UAH stability have strengthened greatly: the share of respondents who expect that theUSD/UAH rate will remain unchanged grew to 40.9% against 33.3% in the 4Q09. The share of those polled whoforecast that the hryvnia will go down in price against USD (47.3% against 58.6%) and against EUR (46.9%against 64.2%) decreased


17


18/34

Macro review

Improved investment climate in Ukraine is altering the trend on FX market, at least in the short term. Due to thefaster inflow of hot portfolio money, we are likely to see the exchange rate fluctuate between 7.80-7.85UAH/USD in 3Q10. The performance of the exchange market in the longer term is much more difficult togauge. The long-term trend on the FX market should reflect the situation involving the state budget. On theother hand, the UAH could appreciate should global demand on steel rise or foreign capital flow into the countryin response to another investment grade decision. As we believe budget revenues are more likely to remainsqueezed while net exports will rise over the next 2 years, we expect the exchange rate to vary within the wide

range of 7.5-8.0 UAH/USD


18


19/34

Macro review

Appendix 1: Ukraines Key Macroeconomic Indicators

2005 2006 2007 2008 2009 2010F 2011F 2012F

OUTPUTGDP, UAH bn 441.5 544.2 720.7 948.1 914.7 1040.0 1200.0 1450.0

% real GDP change y-o-y 2.7 7.3 7.9 2.3 -15.1 3.7 4.5 8.5

Industrial production, UAH bn 468.6 551.7 717.1 917.0 669.0 796.0 927.0 1110.0

% industrial production y-o-y 3.1 6.2 10.2 -3.1 -21.9 7.5 6.7 10.0

Agricultural production, UAH bn 92.5 95.7 110.0 151.0 153.8 158.0 155.0 160.0

Capital investments, UAH bn 93.1 125.3 188.5 233.1 151.8 162.0 190.5 225.0

MONETARY INDICATORS

Money supply (M0), UAH bn 60.2 75.0 111.1 154.8 157.0 174.0 191 215

M0 y-o-y, % 42.2 24.5 48.2 39.3 1.5 11.0 9.5 12.5Money supply (M3), UAH bn 194.1 261.1 396.2 515.7 487.3 559.0 626.0 720

M3 y-o-y, % 54.4 34.5 51.7 30.2 -5.5 14.7 12.0 15.0

CPI Inflation, % 10.3 11.6 16.6 22.3 12.3 11.5 9.7 9.5

International reserves, USD bn 19.4 22.4 32.5 31.5 26.5 30.2 31.5 33.0

Discount rate, %, e-o-p 9.5 8.5 8.0 12.0 10.25 10.0 9.5 8.0

FISCAL BALANCES

Budget deficit / surplus, % of GDP -1.7 -0.7 -1.1 -1.5 -2.0 -5.4 -2.5 -3.5

Public debt, % of GDP 17.7 14.8 12.3 20.0 34.6 38.0 41.5 40.5

EXTERNAL SECTOR

Exports, USD bn 44.4 50.2 64.0 85.6 54.2 66.0 77.0 85.0

Imports, USD bn 43.7 53.3 72.2 100.0 56.3 65.5 75.5 83.5

CA balance, USD bn 2.5 -1.6 -5.3 -12.8 -1.8 0.6 2.2 2.5

Financial and capital account balance,USD bn

8.0 3.7 15.8 9.7 -11.9 -1.5 2.0 3.0

BoP balance, USD bn 10.5 2.1 10.5 -3.1 -13.7 -0.9 4.2 5.5

Gross external debt, USD bn 39.6 54.5 80.0 101.7 104.0 105.0 110.0 115.0

FDI, USD bn 7.5 5.7 9.2 9.7 4.4 8.0 9.0 11.0

BANKING SECTOR

Net assets, UAH bn 213,9 340,2 599,4 926,1 880,3 925,9 1044,0 1232,5

% net assets, y-o-y 59,2 59,05 76,20 54,50 -4,94 5,18 12,76 18,06

Capital, UAH bn 25,5 42,6 69,6 119,3 115,2 138,9 151,38 172,6

% capital, y-o-y 38,16 67,25 63,46 71,41 -3,43 20,58 9,00 14,00

Loans, UAH bn 156,4 269,7 485,5 792,4 747,3 759,2 835,2 986,0

% loans, y-o-y 60,89 72,45 80,03 63,21 -5,68 1,59 10,01 18,06

Deposits, UAH bn 133,8 183,0 275,5 357,1 325,2 379,6 417,6 480,7

% deposits, y-o-y 61,15 36,80 50,55 29,65 -8,94 16,73 10,01 15,1

FX rate UAH/USD, e-o-p 5.12 5.05 5.05 7.70 7.99 8.00 7.70 7.50

Sources: National Bank of Ukraine, State Statistics Committee, Ministry of Finance, Alfa Bank estimates


19


20/34

Credit Profiles

Appendix 2

Credit Profiles:

- Ukreximbank- Privatbank

- FUIB

- Finance & Credit- Alfa Bank Ukraine

- MHP- XXI Century Inv

- DTEK- OVGZ

- Kharkiv city


20


21/34

Credit Profiles

Ukreximbank

Banking sector

Ukreximbank is the state-owned bank with the Cabinet of Ministers of Ukraine owning 100% of its shares. Quasi-sovereign character of the bank and low credit risks associated with its financial leverage strongly support its

solvency. Bank services a considerable proportion of export-import activities effected by Ukrainian enterprises andenjoys distinctive experience in various areas of export-import banking, including documentary business and tradefinance

We uphold our view on Ukreximbanks low credit risks that is based on continuinggovernmental support. Thanks to states support during the crisis period, the bankscapital-to-assets ratio increased from 8% at 2008YE to 18% at 2009YE according to theIFRS. Additionally Ukreximbank was one of several Ukrainian banks which reported a netincome in 2009 that accounted for UAH21 mio. We attribute that to the high quality of itscredit portfolio (14% is constructed by loans to state and municipal entities) andconsequent relatively low reserves

In April bank has placed five-year USD 500 mio Eurobond. That was the first offering

by a Ukrainian issuer ever since the credit crisis started. It has set a benchmark for theother Ukrainian corporate borrowers from international capital markets

Bank has a well developed branch network, which embraces all main regions andindustrial centres of Ukraine. Ukreximbank has the widest amidst Ukrainian banksforeign network of correspondents and long-standing reliable partners world-wide. Thestrong demand brought the order book to a total of USD 3.7 bn allowing to finalise the dealat USD 500 mio and to launch its pricing at the tight end of the initial guidance, bringing itdown to 8.375% or 577.7bp over US Treasuries

Ukreximbank stands out among Ukrainian banks as the only bank that performsfunctions of financial agent of the government with respect to loans originated,borrowed or guaranteed by the state. Since 2005 JSC Ukreximbank has acted asattendant bank in Ukraine under Boryspil Airport reconstruction project compliant to the30-year USD 192 mio agreement between the Cabinet of Ministers and JBIC. Havingwidely diversified its commercial activity over last years, the bank keeps hold of its leadingpositions in foreign trade finance, offering wide range of export-import banking products

Broadening the possibilities to finance the customers external activityUkreximbank closely cooperates with IFI. It is a partner of the World Bank under thelargest Export Development Project in Ukraine, a partner of the EBRD under the EBRDTrade Facilitation Programme and the EBRD Energy Efficiency Programme, a partner ofKreditanstalt fur Wiederaufbau (the KfW) under SME Program

Ukreximbank is favoured with over 100 clear credit lines from global financialinstitutions for short-term uncovered documentary and trade finance transactions and isthe only Ukrainian bank recognized by over 30 primary export credit agencies as a directborrower-guarantor on medium and long term financing

Fig. 1. Ukreximbanks assets VS equity, UAH bn Fig. 2. Loan and advances portfolio breakdown, UAH bn

0

10

20

30

40

50

60

2004 2005 2006 2007 2008 2009

Total Assets

Total Equity

25

30

35

40

45

50

2008 2009

Individuals

State and municipal entities

Private entities

Sources: Company data


21

Issues summary

Redeemable in 2012:

Coupon rate 6.8%

Coupon payment Semiannual

Redemption date 04.10.2012

Redeemable in 2015:

Coupon rate 8.375%


Redemption date 27.04.2015Redeemable in 2016 (callable in 2011):

Coupon rate 8.4%



Key indicators, UAH bn

2008 2009

Assets 47.59 56.16

Loans 36.61 43.01

Equity 3.94 10.31

Liabilities 43.65 45.85

Deposits 16.60 19.95

Key ratios

Equity /Assets 0.08 0.18NPL/Loans 0.81% 5.84%

Corporate loans/Totalloans

0.95 0.97

Corporate deposits/Totaldeposits

0.51 0.45

Deposits/Liabilities 0.38 0.44

Loans/Deposits 2.20 2.16

ROE 3.80% 0.33%

ROA 0.32% 0.05%Company data, IFRS


22/34

Credit Profiles

Privatbank

Banking sector

Recently the largest Ukrainian bank Privatbank (UAH86 bn by assets) arranged a series of meetings with investors,testing their attitude towards the new Eurobond issue of the bank. Considering systemic status of Privat and its

credit profile we suppose that the bank would be able to attract required amount from the market - but its pricematters for the bank. In our opinion, in the case of dominating long-term needs of the bank the issue could be inamount of USD500-700 mio with a maturity after 2016 yielding at 12.0-12.5%. Total outstanding Eurobond debt ofPrivatbank accounts for USD720 mio and is quoted at 11.5-12.8% YTM at the moment

Privatbank is bearing the palm of Ukrainian banking system, demonstratingcontinuing assets growth in 2009. According to the UAS financial statements for 4Q2010,banks assets increased by 7.4% y-o-y to UAH86 bn in 2009, occupying 8.6% of total banksassets in the country. According to AUB, in the beginning of March bank was enjoying the 1st

place among its Ukrainian competitors by assets, loan portfolio (sharing 11.6% of the totalamount), corporate and retail deposits (13.3% and 17.7% respectively), 3rd place by equity(7.7%).

Considering "generally known" status of the bank we expect that current run ofdeposits back to banking system should support the funding base of Privat. Notable

that strong position makes it available for the bank to count on NBUs support in the case ofunlikely serious deterioration of overall market situation. According to Zerkalo nedeli fromDecember 2008, Privatbank was the 3rd largest recipient of NBUs refinancing in thebeginning of the crisis period (in amount of UAH3.4 mio)

We suppose that Privatbank has entered the market to enjoy the recent improvementof investment sentiments towards Ukraine that should make it available to attractlong-term resources. Privatbank remains free of considerable short-term external debt, butfavorable market conditions for new issue should feed banks loan capacities and support itsmedium-term refinancing needs (in particular, redemption of USD500 mio Eurobond in 2012)

Banks parental support is strong as it is a part of large and well diversified industrialgroup. In the late March Privats shareholders decided to increase the banks statutorycapital by 13% to UAH8.86 bn through the dividend reinvestment. Such actions are in linewith the recapitalization process that was started in 2009 due to overall worsening of

capitalization ratios because of economic crisis impact. As a result of shareholders supportbanks statutory capital posted a 37.4 y-o-y to UAH7.8 bn in 2009. Since banking isconsidered as one of the core business segments of Privat-Group, we suppose that the bankmay count on stockholders assistance

We expect that Privatbank is going to make a long-term issue that could be in amountof USD500-700 mio yielding at 12.0-12.5% in the case of maturity after 2016. CurrentlyPrivatbank has 3 outstanding issues, redeemable in 2012, 2013 and 2016. Totallyoutstanding Eurobond debt of Privatbank accounts for USD720 mio and is priced at 11.5-12.8% YTM at the moment. We suppose that the spread to the sovereign bonds on the long-end of Privats yield curve is fair so scheduled issue will be oriented towards the 12.0-12.5%YTM level

Fig. 1. Loan and advances portfolio breakdown, UAHbn Fig. 2. YTM of Privat-12 and Privat-16, %

-60

-40

-20

0

20

40

60

80

100

2008 2009

Provision for loan impairmentLoans to SMELoans to individualsCorporate loans

5

7

9

11

13

15

17

19

01.02.10

08.02.10

15.02.10

22.02.10

01.03.10

08.03.10

15.03.10

22.03.10

29.03.10

05.04.10

12.04.10

19.04.10

26.04.10

03.05.10

10.05.10

17.05.10

24.05.10

31.05.10

07.06.10

14.06.10

21.06.10

28.06.10

Privat-12

Privat-16

Sources: Bloomberg


22

Outstanding liquid issues summary

Redeemable in 2012:

Coupon rate 8.0%



Redeemable in 2016 (callable in 2011):

Coupon rate 8.75%



Key indicators, UAH bn

2008 2009

Assets 80.17 86.07

Loans 74.43 74.99

Equity 8.20 10.27

Liabilities 71.97 75.80

Deposits 52.84 49.84

Reserves 9.06 13.75

Key ratios

Equity /Assets 0.10 0.12

Reserves/Loans 0.12 0.18


0.64 0.73


0.36 0.31


Loans/Deposits 1.41 1.50

ROE 16% 10%Company data, IFRS


23/34

Credit Profiles

FUIB

Banking sector

Historically First Ukrainian International Bank (FUIB) is the first bank in Ukraine with the participation of foreigninvestors. Currently it has a strong support from its shareholders, associated with the wealthiest Ukrainian billionaireMr. Akhmetov. Accounting for the necessity to repay considerable amount of money on foreign loans within the short

term, in January FUIB has successfully ended up the restructuring of its Eurobonds issued in 2007. At the momentthe pressure on liquidity stays modest while improvement of overall economic situation supports banks activityrevival

In January 2010 bank has successfully ended up the restructuring of itsEurobonds issued in 2007. Accounting for the necessity to repay considerable amountof money on foreign loans within the short term FUIB offered the bondholders the bondsmaturity rollover from February 16, 2010, to December 31, 2014 plus coupon increasefrom 9.75% up to 11% plus increase of the number of coupon payments from two up tofour. Additionally there was a partial early redemption of 8% of the par value according tothe original maturity date scheduled for February 2010

Bank has successfully coped with financial crisis in 2009. Active marketing strategyand innovative retail products proposed by FUIB not only stopped the outflow of the

private clients funds but led to their increase as compared with 2008 (+3%). As a result,the Banks share at the market went up during the year from 1.64 % to 1. 79 %

Pressure on liquidity stays modest. To prevent possible instability of work at the crisispeak FUIB attracted funds from the NBU. That created a heavy reliance of banks liquidityon central banks loans which totaled about 15% (USD245 mio) of banks funding basew/o equity. The maturity of these loans is expected to be in 2012 and 2013 that makes asmall pressure on the current liquidity. Additional plus for its liquidity is the successfulextension of most banks syndicated and bilateral facilities up to 2014

FUIB is strongly supported by its shareholders. SCM finance holds 90% of the banksissued share capital. Currently, approximately 81% of the banks share capital isbeneficially owned by Mr. Akhmetov through his 90% shareholding in SCM Group. SCM($16 bn revenues in 2008) is one of the Europes leading industrial holdings. It isheadquartered in Donetsk and supported by the Party of Region and acting President

V.Yanukovitch

Bank has its network in the most economically developed and heavily populatedregions of Ukraine. It has split its head office functions between the cities of Donetsk(the industrial centre of south-eastern Ukraine) and Kyiv. The FUIB network comprised124 sub-branches. As at YE2009 the number of active corporate clients was 2316 whilethe number of active private clients accounted more than 584 thd

FUIB has a long-running strong historic cooperation with different worldwidebanks, companies and institutional investors while acting in the internationalfinancial markets. FUIB is widely known throughout the global market since 1998.Having more than 20 debt instruments (including both public and private) in historic debtportfolio FUIB is regarded as one of the leaders in Ukraine in terms of volumes andfrequency of issues. Historically FUIB has leading market position in trade finance anddocumentary business offering to his clients the full range of financing instruments

Fig. 1. Assets vs Deposits, USD mioFig. 2. Breakdown of banks loans by economic sectors

(as of YE2009)

0

500

1000

1500

2000

2500

2007 2008 2009

Assets Loans(1) Deposits

Chemical

2,2%

Mining

0,8%

Other

7,5%

Transport,

communication and

infrastructure

1,5%

Machine building

4,7%

Metallurgy

9,9%

Food industry and

agriculture

11,0%

Individuals

28,2%

Trade and agency

services

34,3%

Sources: Company data, IFRS, (1) before allowance for loan impairment


23

Issue summary

Coupon rate 11%

Coupon payment Quarterly


Key indicators, USD bn

2008 2009

Assets 2.32 1.99

Loans 1.90 1.42

Equity 0.45 0.38Liabilities 1.87 1.61

Deposits 0.86 0.73

NPL 0.105 0.444

Net interest income 0.136 0.142

Key ratios

Equity /Assets 0.19 0.19

NPL/Loans 0.06 0.31


0.71 0.72


0.47 0.35


Loans/Deposits 2.21 1.95ROE 3.33% N/M

ROA 0.65% N/MCompany data, IFRS


24/34

Credit Profiles

Finance & Credit Bank

Banking sector

Surpassing 2008-2009 financial crisis peak, economic slowdown and Eurobond restructuring, in 1Q10 Finance &Credit bank declared relatively stable work with a positive dynamics of major financial indicators. As of YE2009 itwas the countrys 12th largest bank by total assets (2.2% market share) and 13th largest retail deposit holder (2.1%).

Currently it is controlled by the Zhevago brothers, associated with Ferrexpo Group. In our view, current liquiditycushion may be insufficient to protect the bank from future payments in view of banks wholesale funding (loan-to-deposits accounts for 2.20). At the same time, bank may rely both on its shareholders and on central banks support,while the rebounding trust in banking system should support the deposits growth

The bank belongs to the largest Ukrainian banks, according to the National Bank ofUkraine. Finance & Credit served over 125 thd retail term deposit accounts of its individualcustomers, and more than 232 thd of current accounts as of beginning of May 2010. Theamount of funds on term deposit accounts of individuals made up UAH 4.59 bn as of01.05.10. In May the banks network included 16 branches and 305 outlets all over Ukraine

Broadening the possibilities to capitalize bank closely cooperates with internationalcreditors. Currently the banks capital adequacy ratios are suffering from loans impairment.

In the framework of the recapitalisation program (approved in 2009) the bank has attractedUSD12.5 mio from Bloomshine limited" (GB) on the conditions of subordinated debt in1Q2010. The funds were attracted for 7 years. The previous enhancement of the bank'sregulatory capital in the volume of USD25 mio was in March, 2010. From the beginning ofthe year the Bank attracted USD47.5 mio under subordinated debt terms. That should allowthe bank to remain in compliance with NBU capital adequacy requirements

Current liquidity cushion may be insufficient to protect the bank from futurepayments in view of banks wholesale funding . At the same time, bank may rely both onits shareholders and on central banks support (in August 2009 NBU provided UAH1.5 bn),while the rebounding trust in banking system should support the deposits growth. Moreover,Finance & Credit is in the process of negotiating the restructuring terms of syndicated loanscurrently

In 1Q10 Finance & Credit has declared relatively stable work with a positive dynamics

of major financial indicators. Net assets from the beginning of 2010 has grown almost by

UAH990 mio (made up UAH 20.5 bn as of 01.04.10), the banks authorized capital madeUAH2 bn. The operational profit of the bank following the results of 1Q10 made upUAH194.1 mio

In 2010 bank has successfully ended up the restructuring of its Eurobonds issued in2007. According to the program of re-structuring of Eurobonds for the sum of USD100 miobank paid 5 % from the sum of initial release to Eurobonds holders in 1Q 2010, thus havingcompletely satisfied re-structuring conditions approved earlier. Besides, the Bank performedthe planned payment of the coupon yield in the amount of more than USD5,2 mio inaccordance with the conditions of bond issue

Fig. 1. Liabilities structure as of YE2009 Fig. 2. Banks income structure, UAH mio

Interbank loans

46,9%

Deposits

40,1%

Subord

Ukraine Macro Credit Profiles AlfaUA 290610

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