Weekly Digest UKRAINE FIXED INCOME RESEARCH. August 10 16

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1 UKRAINE FIXED INCOME RESEARCH August Weekly Digest Real GDP in 2Q16 grew by 1.3% YoY Fitch has affirmed its IDRs for Oschadbank and Ukreximbank and upgraded the IDR for Ferrexpo to CCC Ukreximbank broke even on the bottom line in 2Q16 FUIB reported 2Q16 net income at $9mln, up by $19mln QoQ Real GDP in 2Q16 grew by 1.3% YoY, according to preliminary SSSU estimates. Our view: We find the figure to be overall unsurprising, despite the fact that it stands 0.3pps and 0.4pps below the NBU forecast and the Bloomberg consensus respectively and 0.3pps above our guidance. Our COI indicator growth over the period of 2.3% (includes industrial production, trade, agriculture, construction, and transport) suggests that the result is equivalent to a 10% QoQ growth in financial services along with roughly seasonal QoQ changes to the rest of the GDP components (those that are not included in our index). Ukraine quarterly real GDP growth over 4 years 3% -1% -4% -8% -11% -15% -18% 0.7 2Q12 2Q13 2Q14 2Q15 2Q16 Quarterly real GDP growth Quarterly real GDP index (rebased to 1) Source: SSSU, Adamant Capital estimates Fitch has affirmed its IDRs for Oschadbank and Ukreximbank and upgraded the IDR for Ferrexpo to CCC. According to the press release the bank rating confirmation reflects credit profile weakness (NPLs stand at 40-50% for both), dependence on the authorities ability to support macroeconomic stability and public sector corporates, and an overall difficult albeit stabilizing operating environment in the financial sector. Ferrexpo s upgrade came on the back of the company s improved liquidity position following the repayment of its $420mln FXP loan that was, in part, made possible by higher than expected iron ore prices and pellet premiums in 1H16. Our view: Ferrexpo s rating upgrade does not come to us as a surprise, given the company s strong 1H16 results and improving credit metrics. The affirmation of Oschadbank and Ukreximbank IDRs follows from the recent affirmation of the sovereign one (also at CCC ). Konstantin Fastovets fks@adamant-capital.com

2 Ukreximbank broke even on the bottom line in 2Q16. Net interest income remained largely flat QoQ at $32mln, while the NIM decreased by 0.3ppts to 2.6%. Net commission income slipped by 4% QoQ to $7mln. Just like in the previous quarter, Ukreximbank recognized c. $50mln worth of additional LLRs, bringing the LLR to NPL ratio to 102%. In contrast, the LLR to impaired loans ratio decreased by 64%, as the latter went up by 13% QoQ to stand at 69% of the total portfolio. Deposits increased by 3% QoQ, standing moderately above the system average of 1%. Ukreximbank s Basel I CAR grew by 0.8pps to 9.0%, reflecting a $370mln capital injection by the state in January (recognized in April). Our view: Excluding the increase in impaired loans (which forebodes additional LLR charges going forward), Ukreximbank s financials remain largely in line with the previous quarter. Over the next few reporting periods we expect the bottom line stay near breakeven, as the bank reverts operating profits towards formation of additional reserves, which are likely to grow following the new credit risk recognition standards that will come into full effect as of beginning of As noted previously, we view the risk level of the issuer s Eurobonds slightly above that of the state. Ukreximbank 2Q16 IFRS results, $mln 2Q16 2Q15 YoY 1Q16 QoQ Interest income % 32-2% Comission income % 7-4% LLR charge nm -49 nm Net income 1-33 nm -53 nm Total assets 6,155 6,883-11% 6,027 2% Equity % 180 9% Gross loans 4,033 4,184-4% 3,914 3% LLR 1,786 1,558 15% 1,733 3% % RP loans 1 28% 28% 0pps 30% -1pps Deposits 3,296 3,416-4% 3,191 3% NIM 2 2.6% 2.2% 0.4pps 2.9% -0.3pps Cost/Income ratio nm nm nm 13% nm CAR (Basel I) 9.0% 11.3% -2.3pps 8.2% 0.8pps NPLs 3 1,752 1,560 12% 1,788-2% NPLs/Gross 43% 37% 6.2pps 46% -2pps Impaired loans 4 2,798 2,102 33% 2,473 13% Impaired/Gross 69% 50% 19pps 63% 6pps LLR/Impaired 64% 74% -10pps 70% -6pps LLR/NPL 102% 100% 2pps 97% 5pps (1) % of related party loans (2) Net interest margin in USD terms. Computed based on LTM net interest. (3) Loans that are 90+ days overdue (4) Impaired loans in the IFRS accounts Source: Company data, Adamant Capital estimates FUIB reported 2Q16 net income at $9mln, up by $19mln QoQ. Net interest income increased by an impressive 42% QoQ to $21mln with the NIM jumping by 1.5pps to 6.0%. Commissions grew by 8% to $9mln. The bank s LLR charge for the quarter stood at $10mln, roughly half the 1Q16 amount. NPLs increased by 1% QoQ to $408mln or 28% of the total portfolio. The LLR/NPL coverage ratio increased by 2pps to 101%. The bank s deposits surged by 8% QoQ to $1.1bln (largely in FX). PUMB s CAR (Basel I) stood at 12.9%. Our view: The bank s QoQ surge in net interest income likely came on the back of a stronger hryvnia (up vs the USD by 2.3%) and repayment of the $20mln loan to the NBU in May (interest at 21.5% p.a.). We think that FUIB s liquidity risks are increasing, as the bank will need to conduct quarterly payments of roughly $25mln starting September on its Eurobonds (out of which $19.8mln are amortizations) and its liquid assets to deposits ratio already stands at 36%. Capital adequacy may also come under pressure as the NBU s recent changes to risk assessment rules (that are likely to substantially increase reserves for bad debts) will come into full force at the beginning of FUIB 2Q16 IFRS results, $mln 2Q16 2Q15 YoY 1Q16 QoQ Net interest income % 15 42% Net comissions % 8 8% LLR charge nm -23 nm Net income 9-14 nm -10 nm Total assets 1,619 1,675-3% 1,502 8% Equity % % Gross loans 1,436 1,697-15% 1,409 2% LLR % 399 3% % RP loans 1 4% 4% 0.2pps 4% 0.1pps Deposits 1,191 1,162 2% 1,108 8% % RP deposits 2 18% 20% -4pps 22% -4pps NIM 3 6.0% 6.4% -0.4pps 4.5% 1.5pps Cost/Income ratio 43% 42% 1pps 57% -14pps CAR (Basel I) 12.9% 13.2% -0.3pps na nm NPLs % 403 1% NPLs/Gross 28% 23% 5pps 29% 0pps LLR/NPL 101% 98% 3pps 99% 2pps (1) % of related party loans (2) % of related party deposits (3) Net interest margin in USD terms. Computed based on LTM net interest. (4) Loans that are 90+ days overdue. Source: Company data, Adamant Capital estimates 2

3 Appendix Banking system 6m liquidity (lhs, UAHmln) vs NBU CD rates (%) 120, , , , ,000 70, , ,000 40, , ,000 10, Feb 16-Mar 15-Apr 15-May 14-Jun 14-Jul 13-Aug Accounts at NBU Reserve requirements NBU 14d CD rate, Adamant Capital estimates NBU CDs + Intraday NBU o/n rate Local market yield curve: yield (lhs, %) and maturity (rhs, days) NBU CDs Minfin UAH bonds UIRD KievPrime, Bloomberg, Adamant Capital estimates Local market liquidity (as measured by the aggregate amount of NBU correspondent accounts, investment CDs, and other intraday changes) has increased by UAH4.2bln to UAH98.4 bln over the last week. On August 16 the Ministry of Finance conducted placements of local hryvnia and USD denominated bonds maturing in Hryvnia bond proceeds totaled UAH0.8bln with yields of p.a. USD bond proceeds amounted to $368mln and were placed at a yield of 6.69%. The UAH/USD interbank rate was volatile this week, starting out with 24.8 and ended at (a 1.0% devaluation) Government 12m FX debt (1) repayment schedule, $bln Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Government 12m local debt repayment schedule Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 IMF Local FX bonds Quasi-Sovereign bonds Foreign FX Bonds Local UAH bonds, UAHbln Local FX bonds, UAHbln (1) Quasi-sovereign debt includes body and interest of state banks, Ukrzalizynytsya, and municipal bonds Source: Bloomberg, Adamant Capital estimates Note: UAH/$ exchange rate set at 25; EUR/USD exchange rate set at 1.5 Source: Ministry of Finance 3

4 FX interbank trade volume (lhs) and FX rate (rhs), past 12 months Eurobonds: yield (lhs, %) vs duration (years) PRBANK FIUB 18 OSCHAD 25 EXIMUK Ukraine 2019 Ukraine 2023 Ukraine Aug-15 Nov-15 Feb-16 May-16 Aug-16 Trade volumes, $mln Note: Exchange rate figures are from official interbank data UAH/USD exchange rate Corporate Eurobonds Government Eurobonds Source: Bloomberg, Adamant Capital estimates Global commodity price indices, past 12 months Oct-15 Dec-15 Feb-16 Apr-16 Jun-16 Aug-16 Steel Iron Ore Coal WTI Brent Corn Source: Bloomberg, Adamant Capital estimates Ukraine 24m trailing trade (lhs) and CA balance (rhs) Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Current account, $bln Exports, $bln Imports, $bln Ukraine 12m trailing monthly export breakdown, $mln 3,500 3,000 2,500 2,000 1,500 1, Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Consumer goods Machinery Energy Metals Other Ukraine 12m trailing monthly import breakdown, $mln 3,500 3,000 2,500 2,000 1,500 1, Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Consumer goods Machinery Energy Chemicals Other 4

5 Key macroeconomic indicators Q15 2Q15 3Q15 4Q Q E Real GDP growth, YoY -1.6% -17.0% -14.7% -7.2% -1.4% -9.9% 0.1% 1.0% Nominal GDP, UAHbln 1, , ,273 Nominal GDP, $bln GDP deflator growth YoY 1, % 14.8% 44.3% 42.0% 4% 33.9% 40.2% 20.5% 13.7% Period average CPI YoY, % 12.1% 36.3% 58.9% 53.3% 45.4% 48.5% 38.8% 13.7% End of period CPI YoY,% 24.9% 45.8% 57.5% 51.9% 43.3% 43.3% 32.7% 8.9% Budget deficit, % of nominal GDP 1,2-4.6% 3.7% -0.4% 3.6% -10.8% -1.6% -0.1% -2.9% Public sector broad deficit, % of GDP % -0.9% -10.3% 1.7% -10.8% -5.8% -0.1% -3.7% Public debt as % of nominal GDP, UAH 52% 94% 84.2% 82.8% 79.4% 79.4% 76.4% 78.0% Public external debt as % of nominal GDP, $ 4 31% 37% 42.2% 49.2% 47.8% 47.8% 5% 52.3% Total external debt, $bln Export of goods and services, $bln Import of goods and services, $bln Trade balance, $bln Current account, $bln Capital and Financial accounts, $bln End of period NBU reserves, $bln Average interbank exchange rate, UAH/$ (1) Quarterly figures use 12m trailing data (2) Excludes any deficit not included in the official figure, but includes net budget loans given to state enterprises (3) Estimated figures. Includes such below the line budget expenditures as recapitalization of Naftogaz and state banks, state guarantees given, etc (4) GDP calculated in $ according to the average UAH/$ exchange rate for the year (5) Based on official NBU data of average monthly interbank rates. Not weighted by volume traded., SSSU, Minfin, IMF, Adamant Capital estimates Indicative Eurobond prices and yields Bond name Coupon Maturity Bid Yield Bid Price 1 week Dur. yrs Out. $mln Currency Ukraine Sep ,743 USD Ukraine Sep ,355 USD Ukraine Sep ,307 USD MHP Apr USD DTEK 2018 (7.875) 7.9 Apr-18 nm nm 793 USD DTEK 2018 (10.375) 10.4 Mar-18 nm nm 156 USD Ferrexpo Apr USD Metinvest May-16 nm nm 89 USD Metinvest Nov-17 nm nm 304 USD Metinvest Feb-18 nm nm 795 USD Ukrlandfarming Mar USD Avangard Oct USD FIUB Dec USD Privatbank 2018 (10.250) 10.3 Jan USD Privatbank 2018 (10.875) 10.9 Feb USD Privatbank Feb USD Oschadbank Mar USD Oschadbank Mar USD Ukreximbank Apr USD Ukreximbank Jan USD Ukrzaliznytsia Sep USD Note: data as of August 16, 2016 Source: Bloomberg Fixed Income 2 week event calendar Event Type Date SSSU - Transportation monthly data Exact 19-Aug SSSU - Wholesale and retail trade turnover monthly data Exact 19-Aug SSSU Industrial production monthly data Exact 22-Aug NBU Balance of payments monthly data Indicative 27-Aug Avangard 1H 2016 financial results Exact 28-Aug DTEK 6M 2016 operational results Exact 28-Aug MHP - Q2 & H financial results Exact 30-Aug, SSSU, Adamant Capital estimates 5

6 Contacts Adamant Capital 5-B Volodymyrska Street, 2nd floor Kyiv, Ukraine Portfolio Management Konstantin Viushynskyi Yuriy Sozinov Research Konstantin Fastovets PR Inna Zvyagintseva Disclaimer This report has been prepared solely for information purposes and is not intended to be an offer, or a solicitation of an offer, to buy or sell any securities. Descriptions of any company or companies or/and their securities, or markets, or developments mentioned herein are not represented to be complete. There is no responsibility on our part to revise or update any information or correct any inaccuracies contained in this report on an on-going basis. Although the information in this material has been obtained from sources that Adamant Capital believes to be reliable, we do not guarantee its completeness or accuracy. In making their investment decisions investors are expected to rely on their own analysis of all risks associated with investing in securities. Adamant Capital, its top executives, representatives and employees accept no liability whatsoever for any direct or consequential loss arising from the use of the material or its contents. Adamant Capital, third parties related to it, its directors and/or employees, and/or any persons connected with them, may have interests in the companies or provide services to one or more companies discussed herein and/or intend to acquire such interests and/or to provide any such services in the future. All estimates and opinions expressed in this report reflect the judgment of each research analyst, who is fully or partially responsible for the contents of the document, and may differ from the opinions of Adamant Capital. This document, or any part hereof, may not be reproduced or copies circulated without the prior express consent of Adamant Capital. 6