important notice - Irish Stock Exchange

IMPORTANT NOTICE
NOT FOR DISTRIBUTION TO ANY U.S. PERSON OR TO ANY PERSON OR ADDRESS IN THE
U.S.
IMPORTANT: You must read the following before continuing. The following applies to the prospectus
following this page and you are therefore advised to read this carefully before reading, accessing or making
any other use of the prospectus. In accessing the prospectus, you agree to be bound by the following terms
and conditions, including any modifications to them any time you receive any information from us as a
result of such access.
NOTHING IN THIS ELECTRONIC TRANSMISSION CONSTITUTES AN OFFER TO SELL
OR THE SOLICITATION OF AN OFFER TO BUY THE SECURITIES OF THE ISSUER IN
THE UNITED STATES OR ANY OTHER JURISDICTION WHERE IT IS UNLAWFUL TO DO
SO. THE SECURITIES HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE
U.S. SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT), OR THE
SECURITIES LAWS OF ANY STATE OF THE U.S. OR OTHER JURISDICTION AND THE
SECURITIES MAY NOT BE OFFERED OR SOLD WITHIN THE U.S. OR TO, OR FOR THE
ACCOUNT OR BENEFIT OF, U.S. PERSONS (AS DEFINED IN REGULATION S UNDER
THE SECURITIES ACT), EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A
TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT AND APPLICABLE STATE OR LOCAL SECURITIES LAWS.
THE FOLLOWING PROSPECTUS MAY NOT BE FORWARDED OR DISTRIBUTED TO ANY
OTHER PERSON AND MAY NOT BE REPRODUCED IN ANY MANNER WHATSOEVER,
AND IN PARTICULAR, MAY NOT BE FORWARDED TO ANY U.S. PERSON OR TO ANY
U.S. ADDRESS. ANY FORWARDING, DISTRIBUTION OR REPRODUCTION OF THIS
DOCUMENT IN WHOLE OR IN PART IS UNAUTHORISED. FAILURE TO COMPLY WITH
THIS DIRECTIVE MAY RESULT IN A VIOLATION OF THE SECURITIES ACT OR THE
APPLICABLE LAWS OF OTHER JURISDICTIONS.
This prospectus has been delivered to you on the basis that you are a person into whose possession
this offering circular may be lawfully delivered in accordance with the laws of the jurisdiction in
which you are located. By accessing the prospectus, you shall be deemed to have confirmed and
represented to us that (a) you have understood and agree to the terms set out herein, (b) you consent
to delivery of the prospectus by electronic transmission, (c) you are not a U.S. person (within the
meaning of Regulation S under the Securities Act) or acting for the account or benefit of a U.S.
person and the electronic mail address that you have given to us and to which this e-mail has been
delivered is not located in the United States, its territories and possessions (including Puerto Rico, the
U.S. Virgin Islands, Guam, American Samoa, Wake Island and the Northern Mariana Islands) or the
District of Columbia and (d) if you are a person in the United Kingdom, then you are a person who
(i) has professional experience in matters relating to investments or (ii) is a high net worth entity
falling within Article 49(2)(a) to (d) of the Financial Services and Markets Act (Financial Promotion)
Order 2005.
This prospectus has been sent to you in an electronic form. You are reminded that documents
transmitted via this medium may be altered or changed during the process of electronic transmission
and consequently neither SSB No. 1 PLC, Joint Stock Company ‘‘State Savings Bank of Ukraine’’,
Credit Suisse Securities (Europe) Limited (Credit Suisse), Morgan Stanley & Co. International plc
(together with Credit Suisse, the Lead Managers) nor any person who controls any of them nor any
director, officer, employee nor agent of any of them or affiliate of any such person accepts any
liability or responsibility whatsoever in respect of any difference between the prospectus distributed to
you in electronic format and the hard copy version available to you on request from the Lead
Managers.
Proof7:3.3.11
U.S.$500,000,000 8.25 per cent. loan participation notes due 2016
issued by, but without recourse to,
SSB No.1 PLC
(incorporated under the laws of England and Wales)
on a limited recourse basis for the sole purpose of financing a U.S.$500,000,000 loan to
JOINT STOCK COMPANY
‘‘STATE SAVINGS BANK OF UKRAINE’’
(incorporated under the laws of Ukraine)
Issue Price: 100 per cent.
SSB No. 1 Plc., incorporated under the laws of England and Wales (the Issuer or the Lender), is issuing an aggregate principal amount
of U.S.$500,000,000 8.25 per cent. loan participation notes due 2016 (the Notes) for the sole purpose of financing a five year loan (the
Loan) to Joint Stock Company ‘‘State Savings Bank of Ukraine’’ (the Borrower or the Bank) pursuant to a loan agreement dated 4
March 2011 (the Loan Agreement) between the Issuer and the Borrower. The Notes will be constituted by, and have the benefit of, a
trust deed dated 4 March 2011 (the Trust Deed) between the Issuer and BNY Corporate Trustee Services Limited as trustee (the
Trustee). Pursuant to the Trust Deed, the Issuer will charge in favour of the Trustee, for the benefit of the holders of the Notes (the
Noteholders) as security for its payment obligations in respect of the Notes, (a) its right as lender to all payments under the Loan
Agreement and (b) amounts received pursuant to the Loan in an account of the Issuer, in each case other than in respect of the
Reserved Rights (as defined in ‘‘Terms and Conditions of the Notes’’). See ‘‘Description of the Transaction’’. The Issuer will also assign
certain of its administrative rights under the Loan Agreement to the Trustee. The Notes are limited recourse obligations of the Issuer.
In each case where amounts are stated to be payable in respect of the Notes, the obligation of the Issuer to make any such payment
shall constitute an obligation only to account to the Noteholders, on each date upon which such amounts are due in respect of the
Notes, for all amounts, if any, actually received and retained by or for the account of the Issuer pursuant to the Loan Agreement less
amounts in respect of the Reserved Rights: any shortfall will remain due but will be deferred and (unless sufficient additional amounts
are received under the Loan) ultimately written off. The Issuer will have no other financial obligation under the Notes. Noteholders will
be deemed to have accepted and agreed that they will be relying solely and exclusively on the credit and financial standing of the Borrower
in respect of the financial servicing of the Notes.
Interest on the Notes will be payable semi-annually in arrear in equal instalments on 10 September and 10 March in each year
commencing on 10 September 2011 as described under ‘‘Terms and Conditions of the Notes – Interest’’. The Issuer shall account to
Noteholders for an amount equivalent to amounts of interest actually received by or for the account of the Issuer pursuant to the Loan
Agreement, which interest under the Loan is equal to 8.25 per cent. per annum.
Except as set forth herein, payments in respect of the Notes will be made without any deduction or withholding for or on account of
taxes of the Ukraine or the United Kingdom (save as required by law). See ‘‘Taxation’’.
This Prospectus has been approved by the Central Bank of Ireland (the Central Bank) as competent authority under the Directive 2003/
71/EC (the Prospectus Directive). The Central Bank only approves this Prospectus as meeting the requirements imposed under Irish and
EU law pursuant to the Prospectus Directive. Application has been made to the Irish Stock Exchange (the Irish Stock Exchange) for
the Notes to be admitted to the Official List (the Official List) and trading on its regulated market. This Prospectus constitutes a
‘‘prospectus’’ for the purpose of the Prospectus (Directive 2003/71/EC) Regulations 2005 (the Prospectus Regulations) (which implement
the Prospectus Directive in Ireland). Reference in this Prospectus to being ‘‘listed’’ (and all date references) shall mean that such Notes
have been admitted to trading on the regulated market of the Irish Stock Exchange.
AN INVESTMENT IN THE NOTES INVOLVES A HIGH DEGREE OF RISK. INVESTORS SHOULD CAREFULLY CONSIDER
THE RISK FACTORS BEGINNING ON PAGE 11 OF THIS PROSPECTUS BEFORE INVESTING IN THE NOTES.
THE NOTES AND THE LOAN HAVE NOT BEEN, AND WILL NOT BE, REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE SECURITIES ACT), OR WITH ANY SECURITIES REGULATORY
AUTHORITY OF ANY STATE OF OTHER JURISDICTION OF THE UNITED STATES. THE NOTES MAY NOT BE
OFFERED OR SOLD WITHIN THE UNITED STATES OR TO, OR FOR THE ACCOUNT OR BENEFIT OF, U.S. PERSONS
EXCEPT PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT. THE NOTES ARE BEING OFFERED AND SOLD OUTSIDE THE UNITED
STATES TO NON U.S. PERSONS IN RELIANCE ON REGULATION S UNDER THE SECURITIES ACT (REGULATION S)).
FOR A DESCRIPTION OF THE RESTRICTIONS ON OFFERS, SALES AND TRANSFERS OF THE NOTES AND THE
DISTRIBUTION OF THE PROSPECTUS, SEE ‘‘SUBSCRIPTION AND SALE’’.
The Notes are expected on issue to be rated B by Fitch Deutschland GmbH and B2 by Moody’s Investors Service, Inc. (Moody’s).
Moody’s and Fitch Deutschland GmbH have also issued ratings in respect of the Bank as set out in this Prospectus. Moody’s, Fitch
Ratings Ltd. and Standard & Poor’s Credit Market Services Europe Limited (S&P) have also issued ratings in respect of Ukraine. A
rating is not a recommendation to buy, sell or hold securities and may be subject to revision, suspension or withdrawal at any time by
the assigning rating organisation.
The Notes will be issued in registered form in denominations of U.S.$200,000 and integral multiples of U.S.$1,000 in excess thereof.
The Notes will be represented by a global registered note certificate (the Global Note Certificate) registered in the name of The Bank of
New York Depository (Nominees) Limited as nominee for and deposited with a common depositary for Euroclear Bank S.A./N.V.
(Euroclear) and Clearstream Banking, société anonyme (Clearstream, Luxembourg) on or about 10 March 2011 (the Issue Date).
Individual note certificates (Individual Note Certificates) evidencing holdings of Notes will be available only in certain limited
circumstances described under ‘‘Summary of Provisions Relating to the Notes in Global Form’’.
Lead Managers
Credit Suisse
Morgan Stanley
The date of this Prospectus is 4 March 2011
This Prospectus constitutes a prospectus for the purpose of Article 5 of the Prospectus Directive and
for the purpose of giving information with regard to the Issuer, the Borrower and its unconsolidated
subsidiaries taken as a whole (the Group) and the Notes which, according to the particular nature of
the Issuer, the Borrower and the Notes, is necessary to enable prospective investors to make an
informed assessment of the assets and liabilities, financial position, profit and losses and prospects of
the Issuer and the Borrower and of the rights attaching to the Notes. None of the Lead Managers,
the Trustee nor any of their directors, affiliates, advisers or agents has made an independent
verification of the information contained in this Prospectus in connection with the issue or offering of
the Notes and no representation or warranty, express or implied, is made by the Lead Managers, the
Trustee or any of their directors, affiliates, advisers or agents with respect to the accuracy or
completeness of such information. Nothing contained in this Prospectus is, is to be construed as, or
shall be relied upon as, a promise, warranty or representation, whether to the past or the future, by
the Lead Managers, the Trustee or any of their respective directors, affiliates, advisers or agents in
any respect. The contents of this Prospectus are not, are not to be construed as, and should not be
relied on as, legal, business or tax advice and each prospective investor should consult its own legal
and other advisers for any such advice relevant to it.
The Borrower accepts responsibility for the information contained in this Prospectus. To the best of
the knowledge of the Borrower (which have taken all reasonable care to ensure that such is the case),
the information contained in this Prospectus is in accordance with the facts and contains no omission
likely to affect the import of such information. The Issuer accepts responsibility in respect of the
information contained in the section entitled ‘‘The Issuer’’ only. To the best of the knowledge of the
Issuer (which has taken all reasonable care to ensure that such is the case), the information contained
in the section entitled ‘‘The Issuer’’ is in accordance with the facts and contains no omission likely to
affect the import of such information.
No person is authorised to give any information or make any representation not contained in this
Prospectus in connection with the issue and offering of the Notes and, if given or made, such
information or representation must not be relied upon as having been authorised by any of the
Issuer, the Borrower, the Trustee or the Lead Managers or any of their directors, affiliates, advisers
or agents. The delivery of this Prospectus does not imply that there has been no change in the
business and affairs of the Issuer or the Borrower since the date hereof or that the information herein
is correct as of any time subsequent to its date.
This Prospectus does not constitute an offer to sell or a solicitation of an offer to buy the Notes by
any person in any jurisdiction where it is unlawful to make such an offer or solicitation. The
distribution of this Prospectus and the offering or sale of the Notes in certain jurisdictions is
restricted by law. This Prospectus may not be used for, or in connection with, and does not
constitute, any offer to, or solicitation by, anyone in any jurisdiction or under any circumstance in
which such offer or solicitation is not authorised or is unlawful. In particular, this Prospectus is only
being distributed to and is only directed at (i) persons who are outside the United Kingdom or (ii) to
investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2005 (the Order) or (iii) high net worth entities, and other persons to
whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such
persons together being referred to as ‘‘relevant persons’’). The Notes are only available to, and any
invitation, offer or agreement to subscribe, purchase or otherwise acquire such Notes will be engaged
in only with, relevant persons. Any person who is not a relevant person should not act or rely on
this document or any of its contents.
Persons into whose possession this Prospectus may come are required by the Issuer, the Borrower, the
Trustee and the Lead Managers to inform themselves about and to observe such restrictions. Further
information with regard to restrictions on offers, sales and deliveries of the Notes and the distribution
of this Prospectus and other offering material relating to the Notes is set out under ‘‘Subscription and
Sale’’ and ‘‘Summary of Provisions Relating to the Notes in Global Form’’.
This Prospectus has been filed with and approved by the Central Bank as required by the Prospectus
Regulations. The Prospectus, as approved by the Central Bank, will be filed with the Irish Companies
Registration Office in accordance with Regulation 38(l)(b) of the Prospectus Regulations.
THE NOTES ARE NOT GUARANTEED BY, AND DO NOT CONSTITUTE THE OBLIGATION
OF, UKRAINE (UKRAINE OR THE STATE), EITHER DIRECTLY OR ACTING THROUGH
ANY STATE AUTHORITY, NOR DOES UKRAINE HAVE ANY RESPONSIBILITY TO
FACILITATE ENFORCEMENT IN THE EVENT OF A DEFAULT ON THE NOTES.
c104221pu010Proof7:3.3.11B/LRevision:0OperatorChoD
2
Any investment in the Notes does not have the status of a bank deposit and is not within the scope
of the deposit protection scheme operated by the Central Bank. The Issuer is not now and will not in
the future be regulated by the Central Bank as a result of issuing the Notes.
IN CONNECTION WITH THE ISSUE OF THE NOTES, CREDIT SUISSE SECURITIES
(EUROPE) LIMITED AS THE STABILISING MANAGER (THE STABILISING MANAGER),
FOR ITS OWN ACCOUNT (OR PERSONS ACTING ON BEHALF OF THE STABILISING
MANAGER) MAY OVER ALLOT NOTES OR EFFECT TRANSACTIONS WITH A VIEW TO
SUPPORTING THE MARKET PRICE OF THE NOTES AT A LEVEL HIGHER THAN THAT
WHICH MIGHT OTHERWISE PREVAIL. HOWEVER, THERE IS NO ASSURANCE THAT
THE STABILISING MANAGER (OR PERSONS ACTING ON BEHALF OF THE STABILISING
MANAGER) WILL UNDERTAKE STABILISING ACTION. ANY STABILISING ACTION MAY
BEGIN ON OR AFTER THE DATE ON WHICH ADEQUATE PUBLIC DISCLOSURE OF THE
TERMS OF THE OFFERING OF THE NOTES IS MADE AND, IF BEGUN, MAY BE ENDED
AT ANY TIME, BUT IT MUST END NO LATER THAN THE EARLIER OF 30 DAYS AFTER
THE DATE OF THE ISSUE OF THE NOTES OR 60 DAYS AFTER THE DATE OF THE
ALLOTMENT OF THE NOTES. ANY STABILISATION ACTION OR OVER ALLOTMENT
SHALL BE CONDUCTED IN ACCORDANCE WITH ALL APPLICABLE LAWS AND RULES.
The language of the Prospectus is English. Certain legislative references and technical terms have been
cited in their original language in order that the correct technical meaning may be ascribed to them
under applicable law.
c104221pu010Proof7:3.3.11B/LRevision:0OperatorChoD
3
TABLE OF CONTENTS
Page
FORWARD-LOOKING STATEMENTS................................................................................
ENFORCEABILITY OF JUDGMENTS.................................................................................
5
6
RESPONSIBILITY STATEMENT ..........................................................................................
PRESENTATION OF FINANCIAL AND OTHER INFORMATION ................................
7
8
OVERVIEW ..............................................................................................................................
9
RISK FACTORS.......................................................................................................................
THE OFFERING......................................................................................................................
11
46
DESCRIPTION OF THE TRANSACTION ...........................................................................
USE OF PROCEEDS ...............................................................................................................
50
51
CAPITALISATION AND INDEBTEDNESS .........................................................................
52
SELECTED FINANCIAL AND OPERATING INFORMATION .......................................
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...................................................................................
53
BUSINESS.................................................................................................................................
MANAGEMENT STRUCTURE.............................................................................................
74
97
ASSET, LIABILITY AND RISK MANAGEMENT ..............................................................
SELECTED STATISTICAL INFORMATION .......................................................................
101
114
RELATED PARTY AND GOVERNMENT RELATED TRANSACTIONS .......................
126
THE ISSUER ............................................................................................................................
THE LOAN AGREEMENT ....................................................................................................
127
129
TERMS AND CONDITIONS OF THE NOTES ....................................................................
SUMMARY OF PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM........
158
173
SUBSCRIPTION AND SALE..................................................................................................
175
TAXATION...............................................................................................................................
GENERAL INFORMATION ..................................................................................................
178
182
56
APPENDIX
1.
THE BANKING SECTOR AND BANKING REGULATIONS IN UKRAINE...........
A1-A6
FINANCIAL STATEMENTS
AUDITED CONDENSED INTERIM FINANCIAL INFORMATION FOR THE NINE
MONTHS ENDED 30 SEPTEMBER 2010.........................................................................
AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDED 31 DECEMBER
2009 AND 2008.....................................................................................................................
4
F1-F64
F65-F128
FORWARD-LOOKING STATEMENTS
Some statements in this Prospectus may be deemed to be ‘‘forward-looking statements’’. Forwardlooking statements include statements concerning the Bank’s plans, objectives, goals, strategies, future
operations and performance and the assumptions underlying these forward-looking statements. The
Bank uses the words ‘‘anticipates’’, ‘‘estimates’’, ‘‘expects’’, ‘‘believes’’, ‘‘intends’’, ‘‘plans’’, ‘‘may’’,
‘‘will’’, ‘‘should’’ and any similar expressions to identify forward-looking statements. These forwardlooking statements are contained in ‘‘Summary’’, ‘‘Risk Factors’’, ‘‘Financial Review’’, ‘‘Business’,
‘‘Asset, Liability and Risk Management’’ and other sections of this Prospectus. The Bank has based
these forward-looking statements on the current views of its management with respect to future events
and financial performance. These views reflect the best judgement of the Bank’s management but
involve uncertainties and are subject to certain risks the occurrence of which could cause actual
results to differ materially from those predicted in the Bank’s forward-looking statements and from
past results, performance or achievements. Although the Bank believes that the expectations, estimates
and projections reflected in its forward-looking statements are reasonable, if one or more of the risks
or uncertainties materialise or occur, including those which the Bank has identified in this Prospectus,
or if any of the Bank’s underlying assumptions prove to be incomplete or incorrect, the Bank’s actual
results of operations may vary from those expected, estimated or projected.
These forward-looking statements speak only as of the date of this Prospectus. Except to the extent
required by law, the Bank is not obliged to and does not intend to update or revise any forwardlooking statements made in this Prospectus whether as a result of new information, future events or
otherwise. All subsequent written or oral forward-looking statements attributable to the Bank, or
persons acting on the Bank’s behalf, are expressly qualified in their entirety by the cautionary
statements contained throughout this Prospectus. As a result of these risks, uncertainties and
assumptions, a prospective purchaser of the Notes should not place undue reliance on these forwardlooking statements.
c104221pu010Proof7:3.3.11B/LRevision:0OperatorChoD
5
ENFORCEABILITY OF JUDGMENTS
Courts in Ukraine will not recognise and/or enforce any judgment obtained in a court established in
a country other than Ukraine unless such enforcement is provided for in an international treaty to
which Ukraine is a party, and then only in accordance with the terms of such treaty. There is no
such treaty or arrangement in effect between Ukraine and the United Kingdom.
In the absence of such treaty, the courts of Ukraine may only recognise or enforce a foreign court
judgment on the basis of the principle of reciprocity. Under Article 390 of the Civil Procedure Code,
unless proven otherwise the reciprocity is deemed to exist in relations between Ukraine and the
country where the judgment was rendered. The Civil Procedure Code does not provide for any clear
rules on the application of the principle of reciprocity and there is no official interpretation or court
practice of these provisions of the Civil Procedure Code. Accordingly, there can be no assurance that
the courts of Ukraine will recognise or enforce a judgment rendered by the courts of the United
Kingdom on the basis of the principle of reciprocity. Furthermore, the courts of Ukraine might refuse
to recognise or enforce a foreign court judgement on the basis of the principle of reciprocity on the
grounds provided in the Civil Procedure Code.
Ukraine is a party to the 1958 New York Convention on the Recognition and Enforcement of
Foreign Arbitral Awards (the New York Convention) with a reservation to the effect that, in respect
of the awards made in a state which is not a party to the New York Convention. Ukraine will only
apply the New York Convention on a reciprocal basis. Consequently, a foreign arbitral award
obtained in a state which is party to the New York Convention should be recognised and enforced
by a Ukrainian court (under the terms of the New York Convention). The Loan Agreement contains
a provision allowing for arbitration of disputes with London, United Kingdom, designated as the seat
of arbitration. Since the United Kingdom is a party to the New York Convention, arbitral awards in
relation to those disputes may be enforced in Ukraine under the provisions of the New York
Convention.
c104221pu010Proof7:3.3.11B/LRevision:0OperatorChoD
6
RESPONSIBILITY STATEMENT
The Borrower accepts responsibility for the information contained in this Prospectus. To the best of
the knowledge of the Borrower (which has taken all reasonable care to ensure that such is the case),
the information contained in this Prospectus is in accordance with the facts and contains no omission
likely to affect the import of such information.
In addition, the Borrower, having made all reasonable enquiries, confirms that (i) this Prospectus
contains all information with respect to the Borrower, the Loan and the Notes that is material in the
context of the issue and offering of the Notes (including all information which, according to the
particular nature of the Borrower and of the Notes, is necessary to enable investors to make an
informed assessment of the assets and liabilities, financial position, profits and losses and prospects of
the Borrower and of the rights attaching to the Notes); (ii) the statements of fact contained in this
Prospectus are in every material particular true and accurate and not misleading and there are no
other facts the omission of which would, in the context of the issue and offering of the Notes, make
any statement in this Prospectus misleading in any material respect; (iii) the opinions, expectations
and intentions expressed in this Prospectus with regard to the Borrower are honestly held, have been
reached after considering all relevant circumstances and are based on reasonable assumptions; and (iv)
all reasonable enquiries have been made by the Borrower to ascertain such facts and to verify the
accuracy of all such information and statements. Accordingly, save as set out in the immediately
preceding sentence and below, the Borrower accepts responsibility for the information contained in
this Prospectus.
The Issuer accepts responsibility in respect of the information contained in the section entitled ‘‘The
Issuer’’ only. To the best of the knowledge of the Issuer (which has taken all reasonable care to
ensure that such is the case), the information contained in the section entitled ‘‘The Issuer’’ is in
accordance with the facts and contains no omission likely to affect the import of such information.
The statistical information and other data contained in Appendix 1 to this Prospectus entitled ‘‘The
Banking Sector and Banking Regulations in Ukraine’’ has been extracted from publicly available data
(such as information contained on official websites and in publications of governmental agencies of
Ukraine, including the National Bank of Ukraine (the NBU), and from the Ukrainian Government or
mass media sources). The Borrower accepts responsibility for accurately extracting and reproducing
such data published by third parties and no facts have been omitted which would render the
reproduced information inaccurate or misleading. The Borrower accepts no further responsibility in
respect of such data.
c104221pu010Proof7:3.3.11B/LRevision:0OperatorChoD
7
PRESENTATION OF FINANCIAL AND OTHER INFORMATION
Financial Information
The financial information of the Bank set forth herein, has unless otherwise indicated, been derived
from its statements of financial position and statements of comprehensive income, cash flows and
changes in equity for the years ended 31 December 2009 and 2008 (the Financial Statements) and
from its condensed interim financial information for the nine months ended 30 September 2010 and
2009 (the Condensed Interim Financial Information). The Financial Statements have been prepared in
accordance with International Financial Reporting Standards (IFRS). The Condensed Interim
Financial Information has been prepared in accordance with International Accounting Standard (IAS)
34 ‘‘Interim Financial Reporting".
The Financial Statements have been audited by the Bank’s independent auditors, PJSC ‘‘Deloitte &
Touche USC’’, in accordance with International Standards on Auditing. The Financial Statements,
together with the auditor’s reports of PJSC ‘‘Deloitte & Touche USC’’ are set forth elsewhere in this
Prospectus. The Interim Condensed Financial Information has been audited by PJSC ‘‘Deloitte &
Touche USC’’ in accordance with International Standards on Auditing.
Currency
In this Prospectus all references to ‘‘hryvnia’’ and ‘‘UAH’’ are to the currency of Ukraine, all
references to ‘‘dollars’’, ‘‘U.S. dollars’’, ‘‘USD’’ and ‘‘U.S.$’’ are to the currency of the United States
of America and all references to ‘‘euro’’, ‘‘EUR’’ or ‘‘c’’ are to the currency introduced at the start
of the third stage of European economic and monetary union, and as defined in Article 2 of Council
Regulation (EC) No 974/98 of 3 May 1998 on the introduction of the euro as amended.
Translations of amounts from hryvnia to dollars are solely for the convenience of the reader and are
made at exchange rates established by the NBU and effective as at the dates of the respective
financial information presented elsewhere in this Prospectus in respect of statements of financial
position items. Comprehensive income statement items are translated at average exchange rates for
reporting periods. No representation is made that the hryvnia or dollar amounts referred to herein
could have been converted into dollars or hryvnia as the case may be, at any particular exchange rate
or at all. The NBU’s hryvnia/dollar exchange rate as reported on 31 December 2008 was UAH
7.70 per U.S. dollar, on 31 December 2009 it was UAH 7.985 per U.S. dollar and on 30 September
2010 it was UAH 7.9135 per U.S. dollar. The average exchanges rates were UAH 5.2693 per U.S.
dollar for the year ended 31 December 2008, UAH 7.7916 per U.S. dollar for the year ended
31 December 2009 and UAH 7.9366 per U.S. dollar for the nine months ended 30 September 2010.
These are rates used for the respective conversions in ‘‘Selected Financial Information and Operating
Information’’. The NBU’s hryvnia/dollar exchange rate as reported on 10 February 2011 was UAH
7.94 per U.S. dollar.
Rounding
Some numerical figures included in this Prospectus have been subject to rounding adjustments.
Accordingly, numerical figures shown as totals in certain tables may not be arithmetic aggregation of
the figures that preceded them. Unless otherwise specified, all percentages have been rounded to the
nearest one-tenth of one per cent.
c104221pu010Proof7:3.3.11B/LRevision:0OperatorChoD
8
OVERVIEW
This overview may not contain all the information that may be important to prospective purchasers of
the Notes. Prospective purchasers of the Notes should read this entire Prospectus, including the more
detailed information regarding the Borrower’ business and the Financial Statements included elsewhere in
this Prospectus. Investing in the Notes involves risks. The information set forth under ‘‘Risk Factors’’
should be carefully considered. Certain statements in this Prospectus include forward-looking statements
that also involve risks and uncertainties as described under ‘‘Forward-Looking Statements’’.
The Bank
The Bank is a State-owned Ukrainian bank headquartered in Kyiv. According to information
published by the NBU, as at 30 September 2010, the Bank was the second largest bank in Ukraine in
terms of equity capital (UAH 16.6 billion), authorised share capital (UAH 13.9 billion), retail deposits
(UAH 18.2 billion) and profit after tax (UAH 431.3 million), and the third largest bank in terms of
total assets (UAH 59.5 billion), all as calculated under accounting standards generally acceptable in
Ukraine (Ukrainian Accounting Standards, unaudited). As at 30 September 2010, the Bank held 7.0 per
cent. of all retail deposits and provided 2.4 per cent. of all retail loans in Ukraine, according to NBU
statistics.
The Bank’s principal businesses are:
*
Corporate Banking (including corporate lending and project finance) and the provision of loans
made available to State-owned entities in Ukraine and services for corporate clients;
*
Retail Banking; and
*
Treasury operations.
Overview
As at 31 December 2009, the Bank had total assets of UAH 57,390,511 thousand, total customer
accounts of UAH 24,672,908 thousand and total net customer loans of UAH 45,716,277 thousand,
compared to total assets of UAH 56,365,000 thousand, total customer accounts of UAH 17,492,921
thousand and total net customer loans of UAH 33,891,518 thousand as at 31 December 2008. For
the year ended 31 December 2009, the Bank had net profit of UAH 109,041 thousand, compared to
UAH 39,293 thousand for the year ended 31 December 2008.
As at 30 September 2010, the Bank had total assets of UAH 55,872,606 thousand, total customer
accounts of UAH 23,002,137 thousand and total net customer loans of UAH 39,272,676 thousand.
For the nine month period ended 30 September 2010, the Bank had income before tax of UAH
665,625 thousand and net profit of UAH 255,465 thousand, compared to income before tax of UAH
305,588 thousand and net profit of UAH 83,576 thousand for the same period of 2009.
During the second half of 2008 and 2009, disruptions in the global financial markets had a severe
impact on the economy of Ukraine and significantly affected the financial markets, including the
availability of credit and the terms and cost of funding in Ukraine, which adversely affected the
liquidity of Ukrainian banks and other financial institutions. Ukrainian banks, including the Bank,
experienced a reduction in both demand from customers and in available financing in both the
interbank and short-term funding markets, as well as in longer-term capital markets. The Bank
believes that the political and economic situation in Ukraine has begun to stabilise since the
Presidential elections earlier in 2010.
Strategy
The Bank’s strategic goal is to strengthen its market position as a provider of comprehensive banking
products and services to retail and corporate customers through its extensive network of branches and
outlets, to provide support to domestic producers (primarily small and medium business enterprises),
to promote economic development and structural transformation of the Ukrainian economy, to
support domestic manufacturing and trade sectors and to develop a savings network for individual
customers.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
9
Credit Ratings
Currently, the Bank is rated by two rating agencies, Fitch Deutschland GmbH and Moody’s
Investors Service, Inc., which have issued the following credit ratings:
Fitch
Moody’s
Long-term issuer rating Foreign
currency .......................................
B
Foreign currency long-term deposit
rating ................................................
B3/NP
Domestic currency ...........................
B
Outlook ................................................
stable
Outlook ...........................................
stable
Foreign currency short-term deposit
rating ................................................
NP
Foreign currency short-term issuer
Default Rating .............................
B
Bank financial strength rating..............
E+
Individual Rating ............................
D/E
Support Rating................................
4
As of the date of this Prospectus, each of Fitch Deutschland GmbH, Fitch Ratings Ltd. and S&P is
established in the European Union and has applied for registration under Regulation (EU) No 1060/
2009 (the CRA Regulation), although notification of the corresponding registration decision has not
yet been provided by the relevant competent authority. Moody’s is not established in the European
Union and has not applied for registration under Regulation (EC) No. 1060/2009. However, the
application for registration under Regulation (EC) No. 1060/2009 of Moody’s Investors Service, which
is established in the European Union, disclosed the intention to endorse credit ratings of Moody’s
Investors Service, Inc. In general, European regulated investors are restricted under the CRA
Regulation from using credit ratings for regulatory purposes unless such ratings are issued by a credit
rating agency established in the European Union and registered under the CRA Regulation (and such
registration has not been withdrawn or suspended) subject to transitional provisions that apply in
certain circumstances whilst the registration application is pending. Such general restriction will also
apply in the case of credit ratings issued by non-EU credit rating agencies, unless the relevant credit
ratings are endorsed by an EU-registered credit rating agency or the relevant non-EU rating agency is
certified in accordance with the CRA Regulation (and such endorsement action or certification, as the
case may be, has not been withdrawn or suspended).
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
10
RISK FACTORS
Investment in the Notes involves a high degree of risk. Potential investors should carefully review this
entire Prospectus and in particular should consider all the risks inherent in making such an investment,
including the risk factors set forth below, before making a decision to invest. The materialisation of the
risks highlighted below, individually or together, could have a material adverse effect on the Bank’s
business, results of operations, financial condition and prospects which, in turn, could have a material
adverse effect on its ability to service payment obligations under the Loan Agreement and, as a result,
the Issuer’s ability to pay amounts due on the Notes. In addition, the value of the Notes could decline
due to any of these risks, and the Noteholders may lose some or all of their investment.
Risks Relating to Ukraine
General
Since obtaining independence in 1991, Ukraine has undergone a substantial political transformation
from a constituent republic of the former Union of Soviet Socialist Republics to an independent
sovereign state. Concurrently with this transformation, Ukraine has transitioned from a centrallyplanned, command economy to a market-based economy. Its achievements in this respect have been
recognised by the European Union (the EU), which gave Ukraine market economy status at the end
of 2005, followed by the United States, which granted Ukraine such status in February 2006. In May
2008, Ukraine joined the World Trade Organisation (the WTO). Although some progress has been
made since independence towards reforming Ukraine’s economic, political and judicial systems, to
some extent Ukraine still lacks the necessary legal and regulatory framework that are essential to
supporting market institutions, the effective transition to a market economy and broad-based social
and economic reforms. The pace of economic, political and judicial reforms has been adversely
affected by political instability caused by continuing disagreement among the Government, the
Parliament and the President of Ukraine. Furthermore, the Ukrainian economy has been negatively
affected by the recent global financial downturn, a slowdown in the real economy, lack of liquidity in
the financial sector and an increase in energy prices.
Ukraine’s economy is vulnerable to fluctuations in the global economy
Ukraine’s economy is vulnerable to market downturns and economic slowdowns elsewhere in the
world. The impact of the global financial crisis that began in the second half of 2008 on Ukraine’s
economy was particularly severe. Since Ukraine is a major producer and exporter of metal and
agricultural products, the Ukrainian economy is especially vulnerable to decreases in world
commodity prices and the imposition of import tariffs by the United States, the EU or by other
countries that are major export markets for Ukrainian producers. Principally as a result of the impact
of the global financial and economic crisis, Ukraine’s industrial output has decreased dramatically
starting from the fourth quarter of 2008: the full-year decline in industrial output in 2008 amounted
to 5.2 per cent., compared to growth of 7.6 per cent. in 2007. Throughout 2009, industrial output
further declined by 21.9 per cent., although in 2010, industrial output increased by 11.0 per cent.
Ukraine’s relatively strong reliance on exports of ferrous and non-ferrous metals and their products
(32.3 per cent. and 34.2 per cent. of total goods exports value in 2009 and the eleven months ended
30 November 2010, respectively) makes the country’s export revenues and, by extension, its broader
macroeconomic performance, vulnerable to declines or fluctuations in global metal demand or prices.
In line with a decline in industrial output, real gross domestic product (GDP) declined by 15.1 per
cent. in 2009. However, a recovery of industrial production in 2010 led to an increase in Ukraine’s
real GDP of 4.9 per cent. during the first quarter of 2010, compared to a 20.2 per cent. decline for
the first quarter of 2009. In the second quarter of 2010 real GDP increased by 5.9 per cent.,
compared to 17.8 per cent. decline for the second quarter of 2009. In the third quarter of 2010, the
real GDP increased by 3.4 per cent. compared to a 16.0 per cent. decline for the third quarter of
2009.
The economic crisis has also contributed to an increase in Ukraine’s State Budget deficit as a
percentage of its GDP. Although this percentage remains relatively low in absolute terms, it increased
significantly from 1.3 per cent. at year-end 2008 to 3.9 per cent. at year-end 2009. The 2010 State
Budget Law initially contemplated a State Budget deficit of approximately 5.3 per cent. of GDP for
2010. However, in the second half of 2010, the Parliament passed a number of amendments to the
2010 State Budget Law providing for a decrease of the 2010 State Budget deficit to 4.99 per cent. of
GDP. The 2011 State Budget Law provides for a budget deficit of 3.1 per cent. of GDP.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
11
Consumer price inflation in Ukraine was 16.6 per cent. in 2007, 22.3 per cent. in 2008 and 12.3 per
cent. in 2009, in each case as compared to the previous year-end. Consumer price inflation for 2010
was 9.1 per cent. as compared to the year end 2009. Wholesale prices are also vulnerable to the
increases in world prices for metal products and grain, as well as natural gas and oil. Wholesale price
inflation (WPI) has a direct bearing on consumer price, and WPI levels have also been high (at yearends 2008, 2009 and 2010, Ukraine had WPI of 23.0 per cent., 14.3 per cent. and 18.7 per cent.
respectively compared with the end of the previous year).
The external funding sources that supported the growth of Ukraine’s economy in previous years were
significantly affected by the global liquidity crisis that began in 2007 and which then evolved into a
full-scale financial and economic crisis, as a result of which international capital markets became
largely inaccessible to Ukrainian borrowers until the first quarter of 2010. Prior to the global liquidity
crisis, relatively easy access to liquidity, both from within Ukraine and internationally, was a
significant factor facilitating growth in Ukraine’s GDP. The reduced external financing available to
Ukrainian companies prior to the onset of the global financial crisis contributed to a decline in
industrial production and reduction of investment projects and capital expenditure generally. Although
the Ukrainian economy showed some positive trends in 2010 (in particular, GDP growth rates in the
first, second and third quarters of 2010 were 4.9 per cent., 5.9 per cent. and 3.4 per cent.,
respectively, industrial output increased by 11.0 per cent. for 2010, and high quality Ukrainian
borrowers have been able to access the international financial markets), renewed weakness and a
deterioration of global or regional economic conditions including a so-called ‘‘double dip’’ recession
may stall any current recovery or lead to a return of the financial crisis in Ukraine. Any such
developments, including continued unavailability of external funding and increases in world prices for
goods imported to Ukraine or decreases in world prices for goods exported from Ukraine, may have
or continue to have a material adverse effect on the economy and thus may adversely affect the
Bank’s business, results of operations, financial condition and prospects.
Investments in emerging market countries such as Ukraine carry risks not typically associated with risks in
more mature markets
Investors in emerging markets such as Ukraine should be aware that these markets are subject to
greater risk than more developed markets, including in some cases significant legal, economic and
political risks. Although some progress has been made since independence in 1991 in reforming
Ukraine’s economy and political and judicial systems, to a large extent Ukraine still lacks the
necessary legal and regulatory framework that are essential to support market institutions, the
effective transition to a market economy and broad-based social and economic reforms. In addition,
Ukraine may be subject to heightened volatility due to regional economic, political or military
conflicts. As a consequence, an investment in Ukraine carries risks that are not typically associated
with investing in more mature markets.
Investors should also note that emerging economies such as Ukraine are subject to rapid change and
that the information set out in this Prospectus may become outdated relatively quickly. Accordingly,
investors should exercise particular care in evaluating the risks involved and must decide for
themselves whether, in light of those risks, their investment is appropriate. Generally, investment in
emerging markets is suitable only for sophisticated investors who fully appreciate the significance of
the risks involved in, and are familiar and able to bear the potential losses associated with, investing
in emerging markets. Investors are urged to consult with their own legal and financial advisers before
making an investment in the Notes.
The disruptions experienced since 2008 in the international capital markets have led to reduced
liquidity, an increased level of non-performing loans and increased credit risk premiums for certain
market participants, and a reduction of available financing. Companies located in emerging market
countries may be particularly susceptible to these disruptions and reductions in the availability of
credit or increases in financing costs, which could result in them experiencing financial difficulty.
In addition, the availability of credit to entities operating within emerging markets is significantly
influenced by levels of investor confidence in such markets as a whole and so any factors that impact
market confidence (for example, a decrease in credit ratings or state or central bank intervention in
one market) could affect the price or availability of funding for entities within any of these markets.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
12
Ukraine’s Government potentially faces the deterioration of political consensus, which may result in political
instability
Since achieving independence in 1991, Ukraine has undergone a substantial political transformation
from a constituent republic in a federal socialist state, the former Soviet Union, to an independent
sovereign democracy. In parallel with this transformation, Ukraine has been transitioning from a
centrally planned economy to a market economy. However, this process is far from complete.
Historically, Ukraine was divided along political, historical, linguistic and ideological lines, all of
which have prevented political consensus in the Parliament and made it consistently difficult for the
Government to sustain a stable coalition of parliamentarians to secure the necessary support to
implement a variety of policies intended to foster economic reform and financial stability.
The first round of the recent presidential elections was held on 17 January 2010. However, no
candidate won 50 per cent. or more of the popular vote and the two highest polling candidates,
Viktor Yanukovych, leader of Partiya Regioniv (the Party of Regions), and Yuliya Tymoshenko,
leader of Yuliya Tymoshenko’s Bloc, took part in the second round of elections. According to the
results of the second round held on 7 February 2010, Viktor Yanukovych won the presidential race.
Although Yuliya Tymoshenko contested the results of the election, Viktor Yanukovych was
inaugurated as the President of Ukraine on 25 February 2010. The close results of the presidential
election and the significantly different ideological platforms on which the candidates based their
campaigns are indicative of a significant split in popular opinion amongst the general public over the
best path forward for Ukraine. For example, Yuliya Tymoshenko won popular support mainly from
the central and western parts of Ukraine, which are generally considered to be pro-Western, while
Viktor Yanukovych won the popular support mainly from the more densely populated eastern and
southern parts of Ukraine, which are generally considered to be pro-Russian.
On 11 March 2010, the Parliament appointed Mykola Azarov, a member of the Party of Regions, as
the new Prime Minister of Ukraine and endorsed the new members of the Government. Currently,
the Government consists mainly of members of the President’s Party of Regions with a few positions
being occupied by representatives of other political forces.
On 13 July 2010, 252 members of the Parliament submitted an application to the Constitutional
Court of Ukraine (CCU) questioning the constitutionality of the adoption of the Law of Ukraine
‘‘On Amendments to the Constitution of Ukraine’’ dated 8 December 2004 (the Constitution
Amendment Law), which was the basis for the constitutional reform of 2006 limiting the powers of
the President and transferring certain powers of the President to the Parliament and the Cabinet of
Ministers. On 30 September 2010, the CCU issued a ruling against the constitutionality of the
Constitution Amendment Law, on the basis of non-compliance with the constitutional procedure for
its adoption. Pursuant to this ruling, the Constitution Amendment Law ceased to be effective from
30 September 2010. The CCU also noted in its decision that the Constitution that was in effect
before the enactment of the Constitution Amendment Law would resume legal force from 30
September 2010. Accordingly, following the decision of the CCU, certain current Ukrainian legislation
may contradict the Constitution of Ukraine and require amendment to be constitutionally valid. This
may result in uncertainty in the distribution of powers among State authorities and may lead to
further political instability in Ukraine. In particular, the term of powers of the current Parliament has
become unclear. On 4 February 2011, the newly-enacted law aimed at amending the Constitution to
unify the terms of powers of the President, the Parliament and local councils came into effect (the
2011 Constitution Amendment Law). The 2011 Constitution Amendment Law provides, inter alia, for
reinstating the five-year term of powers of the Parliament which was reduced to four years as a result
of the CCU ruling against the constitutionality of the Constitution Amendment Law. Following these
amendments to the Constitution, the next parliamentary elections will take place in October 2012 (as
opposed to March 2011, as was provided in the Constitution prior to the amendments). However, on
9 February 2011, 53 members of Parliament requested the Constitutional Court to opine on the
constitutionality of the 2011 Constitution Amendment Law. As at 9 February 2011, this request was
before the Secretariat of the Constitutional Court.
The majority in the Parliament and the new Government headed by Prime Minister Azarov are
closely aligned with President Yanukovych. Therefore the Government currently has a stronger
political base and is better able to focus on improving the economic and social conditions in Ukraine.
During 2010 and since the appointment of the new Cabinet of Ministers of Ukraine, substantial
progress has been achieved in various areas including macroeconomic stability, fiscal policy, cooperation with the International Monetary Fund (the IMF), banking system stability and social
stability.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
13
There is no certainty that good relations between the President, the Government and the majority in
the Parliament will continue in the future. Such relations are subject to change through the normal
process of political alliance-building or, if the required action is taken, through constitutional
amendments and decisions of the CCU.
Recent political developments have also highlighted potential inconsistencies between the Constitution
of Ukraine and various laws and presidential decrees. Whilst the long-term consequences of the recent
judgment of the CCU in respect of the Constitution Amendment Law are not yet clear, the decision
may result in political instability in Ukraine which, in turn, could impair efforts to implement all the
necessary reforms as described in this Prospectus. Furthermore, such developments have raised
questions regarding the judicial system’s independence from economic and political influences.
A number of additional factors could adversely affect political stability in Ukraine, including:
*
lack of agreement within the factions and amongst individual deputies that form a majority of
the deputies in Parliament;
*
disputes between factions that form a majority and opposition factions on major policy issues,
including Ukraine’s foreign and energy policy;
*
court action taken by opposition parliamentarians against decrees and other actions of the
President or Government or the majority factions; and
*
court action by the President against Parliamentary or Governmental resolutions or actions.
No assurances can be given that the political initiatives necessary to achieve reforms described in this
Prospectus will continue, will not be reversed or will achieve their intended aims. Any significant
changes in the political climate in Ukraine may have negative effects on the economy as a whole and,
as a result, a material adverse effect on the Bank’s business, results of operations, financial condition
and prospects.
Positive developments in the economy may not be achieved if certain important economic and financial
structural reforms are not made
In recent years, the Ukrainian economy has been characterised by a number of features that
contribute to economic instability, including a relatively weak banking system providing limited
liquidity to Ukrainian enterprises, tax evasion, significant capital flight and low wages for a large
portion of the Ukrainian population.
Although the Ukrainian economy grew at an average rate of approximately 7.0 per cent. each year
between 2000 and 2007, this growth was driven mainly by a rapid increase in foreign demand for
Ukrainian products, rising commodity prices on external markets and the availability of foreign
financing. While positively affecting the pace of Ukrainian economic growth in those years, these
factors made the Ukrainian economy particularly vulnerable to adverse external shocks. Thus, as the
global economic and financial situation started to deteriorate, Ukraine’s economy was one of the
most heavily affected by the downturn. The negative impact of the global financial crisis has been
compounded by weaknesses in the Ukrainian economy, which is sensitive to external and internal
events. In particular, the implementation of reform has been impeded by lack of political consensus,
controversies over privatisation (including privatisation of land in the agricultural sector and
privatisation of large industrial enterprises), restructuring of the energy sector and removal of
exemptions and privileges for certain state-owned enterprises or for certain industry sectors.
According to the State Statistics Service of Ukraine, the rate of consumer price inflation was 12.3 per
cent. in 2009, 22.3 per cent. in 2008 and 16.6 per cent. in 2007. The rate of consumer price inflation
for 2010 amounted to 9.1 per cent. According to the Ministry of Finance of Ukraine, the Ukrainian
Government incurred a State budget deficit of UAH 35.5 billion in 2009 and a State budget deficit
incurred for the eleven months ended 30 November 2010 was UAH 52.2 billion.
In 2009, GDP, as calculated in hryvnia, decreased by 20.2 per cent. in the first quarter of the year,
17.8 per cent. in the second quarter of the year, 16.0 per cent. in the third quarter of the year and
6.8 per cent. in the fourth quarter of the year, each as compared to the corresponding period in 2008.
GDP for 2009 decreased by 15.1 per cent. compared with 2008. In the first and second quarters of
2010, Ukraine’s GDP, calculated in hryvnia, increased by 4.9 per cent. and 5.9 per cent., respectively,
compared to the corresponding periods in 2009. In the third quarter of 2010, the real GDP,
calculated in hryvnia, increased by 3.4 per cent. compared to the corresponding period in 2009.
However, it should be noted that the international investment markets generally evaluate Ukrainian
GDP in U.S. dollar terms. Pursuant to an estimate made by the IMF in October 2010, Ukraine’s
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
14
GDP amounted to U.S.$117.4 billion in 2009 as compared to U.S.$180.1 billion in 2008, a decrease
of 34.8 per cent. year-on-year. The IMF’s estimate for Ukraine’s GDP for 2010 is U.S.$136.6 billion,
an increase of 16.4 per cent. compared to 2009.
The negative trends in the Ukrainian economy may continue while commodity prices in the external
markets remain low and access to external funding remains limited, unless Ukraine undertakes certain
important economic and financial structural reforms. The most critical structural reforms that need to
be implemented or continued include: (i) comprehensive reforms of Ukrainian tax legislation with a
view to broadening the tax base by bringing a substantial portion of the shadow economy into the
reporting economy; (ii) reform of the energy sector through the introduction of uniform market-based
energy prices and improvement in collection rates (and, consequently, the elimination of the persistent
deficits in that sector); and (iii) reform of social benefits and pensions.
Failure to achieve the political consensus necessary to support and implement such reforms could
adversely affect the country’s economy. Furthermore, future potential political instability in the
executive or legislative branches could hamper efforts to implement necessary reforms. The political
initiatives necessary to achieve these or any other reforms described elsewhere in this Prospectus may
not continue, may be reversed or may not achieve their intended aims. Rejection or reversal of
reform policies favouring privatisation, industrial restructuring and administrative reform may have
negative effects on the economy and, as a result, on the Bank’s business, results of operations,
financial condition and prospects.
In addition, the current global financial crisis has led to the collapse or bailout of several Ukrainian
banks and to significant liquidity constraints for others. The crisis has prompted the Government to
inject substantial funds into the banking system amid reports of difficulties among Ukrainian banks
and other financial institutions. A significant worsening situation in global financial markets, further
insolvencies of Ukrainian banks or the failure to maintain a robust system of banking regulation that
achieves an increased degree of soundness and stability in the nation’s banking system could have a
material adverse effect on the economy of Ukraine and thus may adversely affect the Bank’s business,
results of operations, financial condition and prospects.
The Ukrainian currency is subject to volatility and depreciation
In view of the high dollarisation of the Ukrainian economy and increased activity of Ukrainian
borrowers in external markets in 2005-2007, Ukraine has become increasingly exposed to the risk of
hryvnia exchange rate fluctuations. Since September 2008, the interbank U.S. dollar/hryvnia exchange
rate has fluctuated significantly. The official U.S. dollar/hryvnia exchange rate increased from UAH
4.86 per U.S. dollar as at 24 September 2008 to UAH 7.88 per U.S. dollar as at 19 December 2008.
In total, in 2008, the hryvnia depreciated against the U.S. dollar by 52.5 per cent. and against the
euro by 46.4 per cent. as compared to year-end 2007, and further depreciated against these currencies
in 2009 by 3.8 per cent. and 5.4 per cent., respectively, as compared to year-end 2008. The official
exchange rate was UAH 7.99 to U.S.$1.00 as at 31 December 2009. The fluctuations in the U.S.
dollar/hryvnia exchange rate have negatively affected the ability of Ukrainian borrowers to repay their
indebtedness to Ukrainian banks (approximately 50 per cent. of domestic loans are denominated in
foreign currency) as well as to external lenders.
Although the value of the hryvnia against the U.S. dollar stabilised since the beginning of 2010 due
to the growing export demand for Ukrainian products, high rollover rates of external corporate debt
and increased foreign currency revenues amongst Ukrainian exporters, the hryvnia may depreciate
further against the U.S. dollar in the near future if significant currency inflow from exports and
foreign investment do not continue, as well as due to the need for borrowers to repay a substantial
amount of short-term external private debt (estimated by the NBU to be approximately U.S.$22.0
billion as at 30 September 2010). The NBU sought to address the hryvnia exchange rate instability by
taking administrative measures (including certain foreign exchange market restrictions), and used
approximately U.S.$3.9 billion and U.S.$10.4 billion of its foreign exchange reserves to support the
Ukrainian currency in 2008 and 2009, respectively. In 2010, due to increased supply, and resulting
surplus, of foreign currency in the market, the hryvnia appreciated against the U.S. dollar by 0.29 per
cent. and against the euro by 7.65 per cent. The official exchange rate was UAH 7.94 to U.S.$1.00 as
at 10 February 2011.
Gradual exchange rate liberalisation is one of the key elements in the IMF 2010 SBA (as defined
below). The liberalisation process could result in a period of greater currency volatility. Any further
currency fluctuations may negatively affect the Ukrainian economy in general and, as a result, have a
material adverse effect on the Bank’s business, results of operations, financial condition and prospects.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
15
Any adverse changes in Ukraine’s relationships with western governments and institutions may adversely affect
the Ukrainian economy and thus the Bank’s business
With effect from 16 May 2008, Ukraine became a member of the WTO. In addition, prior to
President Yanukovych’s inauguration in February 2010, Ukraine pursued membership in the North
Atlantic Treaty Organisation (NATO). According to the Law of Ukraine ‘‘On Principles of Internal
and External Policy’’ which became effective on 20 July 2010, whilst Ukraine will continue to cooperate with NATO and other military and political alliances in various matters of mutual interest, it
is not pursuing membership. This law prevents Ukraine from becoming dependent on any state,
group of states or international organisations.
With effect from 30 December 2005, Ukraine was given market economy status by the EU, although
without any immediate prospect of EU membership for Ukraine. On 1 March 2010, the newly-elected
President of Ukraine held a meeting with the President of the European Commission, where the
parties agreed the priorities for the EU-Ukraine relationship for the near future. Such priorities
include finalisation of negotiations on the EU-Ukraine association agreement (including the
establishment of a free trade area) and introduction of visa-free regime between Ukraine and the EU
member-states. These priorities were reconfirmed at the 14th EU-Ukraine Summit held by the
President of the European Council, President of the European Commission and President of Ukraine
in Brussels on 22 November 2010. At the same time, there can be no assurance that the present
policy with respect to seeking closer relationship between Ukraine and the EU will continue in the
future.
While Ukraine’s relationships with international and European institutions, organisations and western
governments have generally improved in recent years, any major changes in Ukraine’s relationship
with western governments and institutions introduced by President Yanukovych or otherwise, in
particular any such changes adversely affecting the ability of Ukrainian manufacturers to access or to
fully compete in world export markets, may have a material adverse effect on the Bank’s business,
results of operations, financial condition and prospects.
Any unfavourable changes in Ukraine’s regional relationships, especially with Russia, may adversely affect the
Ukrainian economy
Ukraine’s economy relies heavily on its trade with Russia and the other members of the
Commonwealth of Independent States (the CIS), largely because Ukraine imports a large proportion
of its energy requirements, primarily from Russia (or from countries that transport energy-related
exports through Russia). In addition, a large share of Ukraine’s services receipts comprise transit
charges for oil, gas and ammonia from Russia.
As a result, Ukraine’s relations with Russia are of strategic importance to Ukraine. However,
relations between Ukraine and Russia cooled to a certain extent in recent years due to disagreements:
*
over the prices and methods of payment for gas delivered by the Russian gas supplier OJSC
Gazprom (Gazprom) to, or for transportation through, Ukraine;
*
as well as to unresolved issues relating to the temporary stationing of the Russian Black Sea
Fleet (Chernomorskyi Flot) (the Black Sea Fleet) in the territory of Ukraine.
Russia has in the past threatened to cut off the supply of oil and gas to Ukraine in order to apply
pressure on Ukraine to settle outstanding gas debts and maintain low transit fees for Russian oil and
gas through Ukrainian pipelines to European consumers. The most recent large-scale conflict occurred
in early January 2009, when Gazprom substantially decreased natural gas supplies to Ukraine,
reportedly due to a failure by the National Joint-Stock Company ‘‘Naftogaz’’ (Naftogaz) to timely
repay all outstanding debt owed to Gazprom for natural gas supplied to Ukraine for domestic
consumption in 2008. Following negotiations between the governments of Russia and Ukraine and
the signing on 19 January 2009 of agreements between Naftogaz and Gazprom setting out the terms
of further natural gas supplies and transit through the territory of Ukraine (the Agreements on Gas),
Gazprom resumed natural gas supplies to Ukraine and other European countries on 20 January 2009.
Since that date, there have been no further disruptions in the supply of Russian gas to Ukraine and
other European countries through the territory of Ukraine.
Prices for natural gas supplied by Gazprom for domestic consumption in Ukraine increased during
the 2005 to 2008 period from U.S.$50 per 1,000 cubic metres as at 1 January 2005 to U.S.$179.5 per
1,000 cubic metres as at 1 January 2008. The price for natural gas supplied to Ukraine for domestic
consumption and the tariff for transit of natural gas through the territory of Ukraine is to be
determined pursuant to formulas set out in the Agreements on Gas. The price of natural gas supplied
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
16
for domestic consumption in Ukraine increased further in 2009. Reportedly, Ukraine paid U.S.$305.68
per 1,000 cubic metres for Russian gas in the first quarter of 2010, compared with U.S.$208.12 in the
fourth quarter of 2009 and U.S.$198.34 in the third quarter of 2009. On 21 April 2010, the Presidents
of Ukraine and Russia reached agreement in relation to the price of natural gas imported into
Ukraine from Russia and the term for which the Black Sea Fleet will remain stationed in Ukrainian
territory. Based on this agreement amendments to the contracts for natural gas supplies were signed,
under which Gazprom agreed to give Naftogaz certain discounts on the otherwise applicable price for
the natural gas supplied for domestic consumption in Ukraine. In particular, the discount will amount
to U.S.$100 if the price for natural gas is equal to or greater than U.S.$333 per 1,000 cubic metres,
or 30 per cent. of the price if the price is below U.S.$333 per 1,000 cubic metres. Under the
agreement, the price of gas reportedly fell to U.S.$232.86 per 1,000 cubic meters in the second
quarter of 2010, U.S.$248.72 in the third quarter and U.S.$252.11 in the fourth quarter. Ukrainian
Government officials have repeatedly stated that further revision of the gas supply agreements
between Naftogaz and Gazprom with the aim of reducing the price for natural gas supplied by
Gazprom is a priority task for the Ukrainian Government.
Also on 21 April 2010, Ukraine and Russia signed a new agreement on the stationing of the Black
Sea Fleet in Ukrainian waters. Under the agreement, the term for the stationing of the Black Sea
Fleet was extended for a further 25-year period (starting upon expiration of the previous term in
2017) with an additional 5 year extension option, and the amount of the lease charges payable for the
Black Sea Fleet stationing was increased. The agreement also provides that a portion of the lease
charges payable for the stationing of the Black Sea Fleet will be set off against the discounts to the
price of natural gas supplied by Gazprom for domestic consumption in Ukraine referred to above. As
at 31 December 2010, over 25 per cent. of Ukrainian exports go to Russia, while much of Russia’s
exports of energy resources are delivered to the EU via Ukraine. The increase in the price of natural
gas by Russia has adversely affected the pace of economic growth of Ukraine due to the considerable
dependence of the Ukrainian economy on Russian exports of energy resources.
Although the election of President Yanukovych has generally improved relations with Russia, if
bilateral trade relations were to deteriorate, if Russia were to stop transiting a large portion of its oil
and gas through Ukraine or if Russia halted supplies of natural gas to Ukraine, Ukraine’s balance of
payments and foreign currency reserves could be materially and adversely affected. Any further
adverse changes in Ukraine’s relations with Russia, in particular any such changes adversely affecting
supplies of energy resources from Russia to Ukraine or Ukraine’s revenues derived from transit
charges for Russian oil and gas, may have negative effects on the Ukrainian economy as a whole and
thus on the Bank’s business, results of operations, financial condition and prospects.
Official statistics and other data published by Ukrainian State authorities may not be reliable
Official statistics and other data published by Ukrainian State authorities (including the NBU and the
State Statistics Service of Ukraine) may not be as complete or reliable as those of more developed
countries. Official statistics and other data may also be produced on a different basis than those
criteria used in more developed countries. The Bank has not independently verified such official
statistics and other data, and prospective investors should be aware that any discussion of matters
relating to Ukraine in this Prospectus is, therefore, subject to uncertainty due to questions regarding
the completeness or reliability of such information and may not be fully in accordance with
international standards. Furthermore, standards of accuracy of statistical data may vary from agency
to agency and from period to period due to application of different methodologies. Since the first
quarter of 2003, Ukraine has produced data in accordance with the IMF Special Data Dissemination
Standard. It is possible, however, that this IMF standard has not been fully implemented or correctly
applied. The existence of a sizeable unofficial or shadow economy may also affect the accuracy and
reliability of statistical information. In addition, Ukraine has experienced variable rates of inflation,
including periods of hyperinflation. Unless indicated otherwise, the macroeconomic data presented in
this Prospectus has not been restated to reflect such inflation and, as a result, period-to-period
comparisons may not be meaningful. Prospective investors should be aware that certain statistical
information and other data contained in this Prospectus have been extracted from official
governmental sources in Ukraine and were not prepared or independently verified by any person in
connection with the preparation of this Prospectus. The Bank only accepts responsibility for the
correct extraction and reproduction of such information.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
17
Restricted access to international capital markets may adversely affect the Ukrainian economy
Ukraine’s internal debt market remains relatively illiquid and underdeveloped as compared to markets
in most Western countries. In the wake of the emerging market crisis in the autumn of 1998 and
until the second half of 2002, loans from multinational organisations such as the European Bank for
Reconstruction and Development (the EBRD), the World Bank, the EU and the IMF comprised
Ukraine’s only significant sources of external financing.
Prior to the global financial crisis in the autumn of 2008, Ukraine was able to access the international
capital markets, raising new financing in each year between 2003 and 2008. However, since the second
half of 2008, prospects for raising new financing on international capital markets have worsened
substantially. Following downgrades of Ukrainian credit ratings in 2008, in February 2009, Fitch
Ratings Ltd. (Fitch) and S&P revised their long-term foreign currency sovereign credit ratings on
Ukraine to B (negative) and CCC+ (negative), respectively, and, in May 2009, Moody’s downgraded
Ukraine’s credit rating from B1 to B2 (negative). In November 2009, Fitch further revised its longterm foreign currency credit rating on Ukraine to B- (negative). In March 2010, however, following
recent presidential elections and appointment of the new Government, S&P and Fitch have upgraded
their long-term foreign currency sovereign credit ratings on Ukraine to B- (positive) and B- (stable),
respectively. Following approval of the 2010 SBA (as defined below) by the IMF in July 2010, S&P
and Fitch further upgraded Ukraine’s long-term foreign currency credit rating to B+ (stable) and B
(stable), respectively. In October 2010, Moody’s upgraded Ukraine’s long-term credit rating to B2
(stable).
As a result of the global financial crisis and the resulting absence of liquidity in the Ukrainian credit
markets, Ukraine sought IMF financing. In November 2008, the IMF approved a two-year Stand-By
Arrangement (the 2008 SBA) with Ukraine for approximately U.S.$16.4 billion to assist the
Ukrainian Government in restoring financial and economic stability. In 2008 and 2009, total
disbursements under the 2008 SBA amounted to approximately U.S.$10.6 billion. In accordance with
the terms of the 2008 SBA, Ukraine had received three tranches of the IMF financing with the fourth
suspended due to an increased level of political instability and controversies between the President,
the Government and Parliament on the eve of the presidential elections. Following inauguration of
the new President Yanukovych in late February 2010, the newly-formed Government has resumed
negotiations with the IMF. From March to July 2010, the IMF missions visited Ukraine to review
the macroeconomic situation and budgetary, fiscal and monetary policy of the Government and the
NBU, and to consider possible resumption of IMF support. On 28 July 2010, the IMF Executive
Board noted the cancellation of the 2008 SBA, and on the same date approved a new U.S.$15.15
billion Stand-By Arrangement for Ukraine (the 2010 SBA) to be drawn in ten tranches in 2010-2012,
with two tranches expected to be received in 2010 and four tranches expected to be received in each
of 2011 and 2012, subject to Ukraine’s compliance with the 2010 SBA terms. On 2 August 2010,
Ukraine received the first tranche of approximately U.S.$1.89 billion with U.S.$1.0 billion earmarked
for the financing of the State Budget deficit. The goal of the Ukrainian economic programme
supported by the 2010 SBA is to entrench fiscal and financial stability, advance structural reforms
and put Ukraine on a path of sustainable and balanced growth. To achieve these aims, the 2010 SBA
established a number of requirements for the Ukrainian Government in fiscal policy, monetary and
exchange rate policy, and financial sector policy. In addition, the 2010 SBA sets out quantitative and
continuous performance criteria that are to be met by Ukraine as of each of 30 September and
31 December 2010. Such criteria include, among other things, a ceiling on the cash deficit of the
Government, a floor on net international reserves of the NBU, a ceiling on the net domestic assets
and a ceiling on the state-guaranteed debt. The first review of Ukraine’s compliance with the 2010
SBA terms commenced in November 2010 and was completed in mid December of 2010.
On 22 December 2010, following the first review, the IMF Executive Board approved the second
tranche to be provided to Ukraine in the amount of approximately U.S.$1.5 billion with about
U.S.$1.0 billion earmarked for the financing of the State Budget deficit. The second review is
proposed for March 2011 using year-end 2010 targets.
If, despite the new IMF financing arrangements and attendant economic reforms, Ukraine’s access to
international debt markets became limited, the Government would have to rely to a significant extent
on official or multilateral borrowings to finance part of the budget deficit, fund its payment
obligations under domestic and international borrowings and maintain foreign exchange reserves.
Additionally, Ukraine has indicated that, as part of its debt management policy, it plans to develop
the internal debt market and to reduce its reliance on external debt financing. However, reliance on
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
18
internal debt and unavailability of external financing may place additional pressure on Ukraine’s
ability to meet its payment obligations.
Borrowings from multinational organisations such as the IMF, the EBRD, the World Bank or the
EU may be conditioned on Ukraine’s satisfaction of certain requirements, which may include, among
other things;
*
implementation of strategic, institutional and structural reforms;
*
reduction of overdue tax arrears;
*
absence of increase of budgetary arrears;
*
improvement of sovereign debt credit ratings; and
*
reduction of overdue indebtedness for electricity and gas.
If Ukraine is unable to access international capital markets or syndicated loan markets, a failure by
official creditors and of multilateral organisations to grant adequate financing including the refusal by
the IMF to make available the remaining funds under the 2010 SBA, could adversely affect Ukraine’s
financing of its budget deficit, the level of inflation and/or the value of the hryvnia, which, in turn,
could have a material adverse effect on the Bank’s business, financial condition, results of operations
and prospects.
Ukraine’s business environment is adversely affected by weak financial infrastructure and the lack of liquidity
Ukrainian enterprises have limited experience of operating in globalised, free-market conditions. When
compared to businesses operating in more developed jurisdictions, Ukrainian enterprises have limited
capital resources with which to develop operations and are often characterised by management that
lacks experience in responding to changing market conditions and, in particular, economic
disruptions. In addition, Ukraine has a limited infrastructure to support a market system, and
communications, banks and other financial infrastructure are less well developed and less well
regulated than their counterparts in more developed jurisdictions. Ukrainian enterprises, most of
which were adversely affected by the global financial crisis, face significant liquidity problems due to,
inter alia, a limited supply of domestic savings, few foreign funding sources, high taxes and limited
lending by the banking sector to the industrial sector. Many Ukrainian enterprises cannot make
timely payments for goods or services and owe large amounts in taxes, as well as wages to employees.
Any further deterioration in the business environment in Ukraine could have a material adverse effect
on the Bank’s business, results of operations, financial condition and prospects.
Adverse changes in global or Ukrainian economic conditions have resulted in several restructurings of
Ukrainian commercial debt and a significant liquidity risk
In 2007 and 2008, Ukraine’s total debt as a percentage of GDP, including both State debt (direct
debt) and State-guaranteed debt (contingent liabilities), was at a relatively moderate level, amounting
to 12.3 per cent. at the end of 2007 and 20.0 per cent. at the end of 2008. Ukraine’s total debt as a
percentage of GDP increased to 34.8 per cent. as at 31 December 2009 and increased further to 38.9
per cent. as at 30 September 2010. Pursuant to the 2011 State Budget Law, the total State direct debt
threshold is set at the level of UAH 375.64 billion (being 30 per cent. of GDP) and current
authorisations permit issuance of new State-guaranteed debt up to an aggregate of UAH 15.0 billion.
The substantial payment obligations of Ukraine and many state-owned companies that fell due in
2009 and 2010 (including debt repayments, payments for natural gas supplied for domestic
consumption to Ukraine) have exerted additional pressure on Ukraine’s liquidity. In particular, during
2009, Naftogaz began negotiations with its lenders to restructure its debts to foreign banks by
extending payment terms and amending other substantial terms of its loan undertakings. On 5
November 2009, Naftogaz completed the restructuring of its term loan facilities from foreign banks of
approximately U.S.$1.6 billion. Further, the State Railway Administration of Ukraine
(Ukrzaliznytsya) began negotiations with its lenders to reschedule certain of its debts to foreign banks
amounting to approximately U.S.$440 million with the aim of extending payment terms of its loan
undertakings.
In addition, it should be noted that many enterprises in the Ukrainian private sector have significant
levels of indebtedness, and as a result of the ongoing financial crisis may experience difficulty
accessing new financing. Although private-sector debt, unlike State debt, does not have a direct
negative effect on the State’s foreign currency reserves or liquidity, high levels of indebtedness of, and
limited availability of new credit to, the private sector may complicate economic recovery and pose a
significant risk in an already challenging economic environment. Any further deterioration in the
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
19
economic environment in Ukraine could have a material adverse effect on the Bank’s business, results
of operations, financial condition and prospects.
Failure to fulfil privatisation plans will adversely affect the achievement of financing levels anticipated in the
State Budget
The State Budget is dependent to a significant extent on proceeds from privatisations. For 2008,
actual privatisation proceeds were UAH 482.0 million, or 79.4 per cent. of the revised annual target.
For 2009, target privatisation proceeds were set at approximately UAH 8.5 billion but actual
privatisation proceeds were only UAH 814.9 million, or 9.6 per cent. of the annual target. For 2010,
target privatisation proceeds were initially set at UAH 10.0 billion, but were subsequently decreased
in July 2010 to UAH 6.35 billion. In the nine months ended 30 September 2010, actual privatisation
proceeds were UAH 517.9 million, or approximately 8.2 per cent. of the annual target.
For 2011, target privatisation proceeds are set at UAH 10.0 billion. In light of the failure to fulfil
privatisation plans in 2008-2010, no assurance can be made that budgeted privatisation proceeds will
be met in 2011. A significant shortfall in actual privatisation proceeds compared to budgeted
privatisation proceeds may have negative effects on the performance of the State Budget and
adversely affect Ukraine’s economy.
The success of future privatisations will depend on the implementation of structural and other
reforms. Meeting future privatisation proceeds targets may also require the Government (with
approval from the Parliament of Ukraine) to allow privatisation of additional state-owned enterprises
that are currently excluded from privatisation, as these enterprises may prove more attractive to
investors as compared to those currently subject to privatisation. In the absence of a clear
privatisation programme, not all of the budgeted privatisation proceeds may be realised, which may
create or contribute to future budget deficits. Litigation and court proceedings may also delay the
successful completion of certain privatisations, as has occurred in the past, or prevent them
altogether. In addition, the failure to privatise key state-owned assets may prejudice the willingness of
multilateral organisations to provide financial support to Ukraine. All of this may have a negative
effect on the Ukrainian economy as a whole and thus on the Bank’s business, results of operations,
financial condition and prospects.
The Ukrainian banking system may be vulnerable to stress due to fragmentation, undercapitalisation and a
potential increase in non-performing loans, all of which could have a material adverse effect on the real
economy
The recent global financial crisis has led to the collapse or bailout of some Ukrainian banks and
significant liquidity constraints for others. The crisis has prompted the Government to inject
substantial funds into the banking system amid reports of difficulties among Ukrainian banks and
other financial institutions. The Government’s policy has been to intervene in support only of certain
banks whose size is such that their failure would create systemic risk for the Ukrainian economy.
Despite progress with the restructuring and recapitalisation of Ukrainian banks, problems with asset
quality and indebtedness persist. Asset quality was affected significantly by the devaluation in the
hryvnia in 2008 (52.5 per cent. against the dollar and 46.3 per cent. against the Euro) and was
further exacerbated by the 15.1 per cent. contraction of the economy in 2009. Despite Government
and NBU intervention and progress in stabilising the foreign exchange market by the end of 2009
and during the first half of 2010, the high dollarisation in the Ukrainian financial system increased
exchange rate risks and could contribute to a worsening of banks’ asset quality. Overdue loans also
affect the asset quality of Ukrainian banks. The proportion of loans represented by overdue loans
was 2.3 per cent. and 9.4 per cent. as at 31 December 2008 and 2009, respectively, and 11.9 per cent.
as at 30 November 2010. Although the rate of growth of the share of overdue loans in banks’ credit
portfolios has slowed, a future increase in this rate could place additional strain on the banking
system. Furthermore, the IMF, in connection with the approval in July 2010 of the 2010 SBA (see
‘‘Risks relating to Ukraine – Restricted access to international capital markets may adversely affect the
Ukrainian economy’’ above) provided two estimates for loans which could be categorised as nonperforming. Under a broad definition of non-performing loans that includes loans classified as
substandard, doubtful and loss, the IMF estimated that 41.6 per cent. of loans held by Ukrainian
banks were non-performing as at 31 March 2010. Under a narrower definition that does not count as
non-performing those substandard loans that are serviced in a timely manner, the IMF estimated that
15 per cent. of loans were non-performing as at 31 March 2010.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
20
The continuation or worsening of the financial crisis, further insolvencies of Ukrainian banks, growth
in the share of overdue loans, the need for the Ukrainian Government to inject more capital into the
banking system and the failure to adopt and implement a system of banking regulation that achieves
an increased degree of soundness and stability in the nation’s banks could each have a material
adverse effect on the Ukrainian economy and thus may adversely affect the Bank’s business, results
of operations, financial condition and prospects.
Ukraine may not be able to increase or maintain access to foreign investment
Notwithstanding improvements in the Ukrainian economy in recent years, cumulative foreign direct
investment remains low for a country of Ukraine’s size. An increase in the perceived risks associated
with investing in Ukraine could reduce foreign direct investment in Ukraine and adversely affect the
Ukrainian economy. No assurance can be given that Ukraine will be able to increase or maintain
access to foreign investment. Furthermore, any future attempts to re-nationalise previously privatised
enterprises could adversely affect the climate for foreign direct investment and have an adverse effect
on the economy of Ukraine which, in turn, may adversely affect the Bank’s business, results of
operations, financial condition and prospects.
Corruption and money laundering may have an adverse effect on the Ukrainian economy
External analysts have identified corruption and money laundering as problems in Ukraine. In
accordance with the Ukrainian anti-money laundering legislation that came into force in Ukraine in
June 2003, the NBU and other State authorities as well as various entities carrying out financial
services are now required to monitor certain financial transactions more closely for evidence of money
laundering. As a result of the adoption of this legislation, in February 2004, Ukraine was removed
from the list of non-cooperative countries and territories by the Financial Action Task Force on
Money Laundering (the FATF) and, in January 2006, the FATF discontinued its formal monitoring
of Ukraine.
To address the remaining deficiencies in the Ukrainian anti-money laundering legislation, Ukraine has
made a high-level political commitment to work with FATF and the Committee of Experts on the
Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MONEYVAL) and
developed an action plan to address these deficiencies. The FATF closely monitors progress of
Ukraine and the implementation of its action plan.
On 21 August 2010, a new law entered into force significantly amending the Ukrainian anti-money
laundering legislation and implementing 40 revised recommendations and nine special
recommendations of the FATF, as well as the directive of the European Parliament on the prevention
of the use of the financial system for the purpose of money laundering and terrorist financing. In
particular, the law extends the list of entities that are required to monitor financial transactions at the
primary level, extends the list of State agencies authorised to conduct State financial monitoring, and
broadens the list of grounds on the basis of which a financial transaction may be subject to
monitoring.
In June 2009, the Parliament adopted several laws setting forth a general framework
prevention and counteraction of corruption in Ukraine, which were to become effective
January 2011. However, in December 2010 the Parliament abolished the package of earlier
anti-corruption laws with effect from 5 January 2011, while at the same time adopting in
reading a new draft anti-corruption law.
for the
from 1
adopted
the first
Although this new legislation, if adopted, is expected to facilitate anti-corruption efforts in Ukraine
upon its entry into force, there can be no assurance that the law will be effectively applied and
implemented by the relevant supervising authorities in Ukraine. Any future allegations of corruption
in Ukraine or evidence of money laundering could have a negative effect on the ability of Ukraine to
attract foreign investment and on the economy of Ukraine in general which, in turn, may adversely
affect the Bank’s business, results of operations, financial condition and prospects.
Weaknesses relating to the legal system and legislation may create an uncertain environment for investment
and business activity
The Ukrainian legal system remains subject to greater risks and uncertainties than more mature legal
systems. In particular, risks associated with the Ukrainian legal system include:
*
inconsistencies between and among the Constitution of Ukraine and various laws, presidential
decrees, governmental, ministerial and local orders, decisions and resolutions and other acts;
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
21
*
provisions in laws and regulations that are ambiguously worded or lack specificity and thereby
raise difficulties when implemented or interpreted;
*
lack of judicial and administrative guidance on the interpretation of Ukrainian legislation,
including the complicated mechanism of exercising constitutional jurisdiction by the
Constitutional Court of Ukraine;
*
general inconsistency in the judicial interpretation of Ukrainian legislation in the same or similar
cases; and
*
corruption within the judiciary.
Furthermore, several fundamental Ukrainian laws either have only relatively recently become effective
or are still pending hearing or adoption by the Parliament. For example, with effect from 2004 and
2005, Ukraine adopted a new civil code, a new civil procedural code, a new economic code, a new
code on administrative procedure, new mortgage finance laws, a new law on State registration of
proprietary rights to immovable property and a new law on international private law. In June 2005,
Ukraine adopted a new law on credit histories and credit bureaus which entered into force in January
2006. With effect from 2006, a new law on securities and stock markets, a new law on holding
companies and a new law on mortgage bonds were adopted and the laws on mortgage and real estate
construction financing schemes were significantly amended. In January 2006, Ukraine ratified the
UNIDROIT Convention on International Financial Leasing and the UNIDROIT Convention on
International Factoring. In addition, a new law on joint stock companies that significantly revamps
Ukrainian corporate law became effective in 2009. In 2010, the new law on court system and status
of judges entered into force, and a new Budget Code was adopted by the Parliament which entered
into force on 1 January 2011. On 2 December 2010, the Parliament adopted the Tax Code which,
subject to certain exceptions, became effective on 1 January 2011. The relative immaturity of
Ukrainian legislation, the lack of consensus about the scope, content and pace of economic and
political reform and the rapid evolution of the Ukrainian legal system in ways that may not always
coincide with market developments place the enforceability and underlying constitutionality of laws in
doubt, and result in ambiguities, inconsistencies and anomalies.
In addition, Ukrainian legislation often contemplates implementing regulations. Often such
implementing regulations have either not yet been promulgated, leaving substantial gaps in the
regulatory infrastructure, or have been promulgated with substantial deviation from the principal rules
and conditions imposed by the respective legislation, which results in a lack of clarity and growing
conflicts between companies and regulatory authorities.
These weaknesses in the Ukrainian legal system could make it difficult for the Bank to implement its
policies or could lead to conflicts between the NBU and the Bank, which may have a negative effect
on the Bank’s business, results of operations, financial condition and prospects. Additionally, those
and other factors that have an impact on Ukraine’s legal system make an investment in the Notes
subject to greater risks and uncertainties than an investment in a country with a more mature legal
system.
The judiciary’s lack of independence and overall inexperience, difficulty in enforcing court decisions and
governmental discretion in enforcing claims could prevent the Bank or the Bank’s investors from obtaining
effective redress in a court proceeding
The independence of the judicial system and its immunity from economic and political influences in
Ukraine remain questionable. Although the Constitutional Court of Ukraine is the only body
authorised to exercise constitutional jurisdiction and has mostly been impartial, the system of
constitutional jurisdiction itself remains too complicated to ensure smooth and effective removal of
discrepancies between the Constitution of Ukraine and various laws of Ukraine.
The court system is understaffed and underfunded. Judges and courts are generally inexperienced in
the area of business and corporate law and judicial precedents generally have no binding effect on
subsequent decisions. Moreover, courts themselves are not bound by earlier decisions taken under the
same or similar circumstances, which results in the inconsistent application of Ukrainian legislation to
resolve the same or similar disputes. Not all Ukrainian legislation is readily available to the public or
organised in a manner that facilitates understanding. For each particular law made by different
government authorities, there are many sub-laws, regulations and resolutions, which can make the
laws difficult to understand. Furthermore, a limited number of judicial decisions are publicly
available, and therefore, the role of judicial decisions as guidelines in interpreting applicable
Ukrainian legislation to the public at large is limited. However, according to the Law of Ukraine
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
22
‘‘On Access to Court Decisions’’ that became effective on 1 June 2006, decisions of courts of general
jurisdiction in civil, economic, administrative and criminal matters issued from 1 June 2006 and, in
the case of local courts of general jurisdiction, from 1 January 2007 are becoming available to the
public.
On 30 July 2010, a new Law of Ukraine ‘‘On Court System and Status of Judges’’ entered into effect
(with the effectiveness of certain provisions postponed). The new law provides for the establishment
of a High Specialised Court of Ukraine on Civil and Criminal Matters, which will have the status of
the cassation court together with the High Administrative Court of Ukraine and High Commercial
Court of Ukraine, and limits the powers of the Supreme Court of Ukraine. The law also establishes
new procedures for the appointment of judges and introduces a clear list of grounds for imposing
disciplinary liabilities on judges. No assurance can be given however, that the new law will positively
affect the Ukrainian judicial system and cure currently existing deficiencies.
Enforcement of court orders and judgments can in practice be difficult in Ukraine. The State
Execution Service, a body independent of the Ukrainian courts, is responsible for the enforcement of
court orders and judgments in Ukraine. Often, enforcement procedures are very time-consuming and
may fail for a variety of reasons, including the defendant lacking sufficient funds, the complexity of
auction procedures for the sale of the defendant’s property or the defendant undergoing bankruptcy
proceedings. In addition, the State Execution Service has limited authority to enforce court orders
and judgments quickly and effectively. The State Execution Service is bound by the method of
execution provided for by the relevant court order or judgment and may not independently change
such method even if it proves to be inefficient or unrealisable. Furthermore, notwithstanding
successful execution of a court order or a judgment, a higher court can reverse a court order or
judgment and require that the relevant funds or property be restored to the defendant. Moreover, in
practice the procedures employed by the State Execution Service do not always comply with
applicable legal requirements, resulting in delays or failures in enforcement of court orders and
judgments. These uncertainties also extend to certain rights, including investor rights. In Ukraine,
there is no established history of investor rights or responsibility to investors and in certain cases the
courts may not enforce such rights. In the event courts do seek to protect rights of investors granted
under applicable Ukrainian legislation, there nevertheless remains the risk that the government and/or
the legislature of Ukraine may attempt legislatively to overrule any such court decisions by
implementing legislation changes which have retroactive effect.
These and other factors that impact Ukraine’s judicial system make an investment in the Notes
subject to greater risk and uncertainty than an investment in a country with a more developed
judicial system.
The Ukrainian tax system is undeveloped and subject to frequent change, which may create an uncertain
environment for investment and business activity
Historically, Ukraine had a number of laws related to various taxes imposed by both central and
regional governmental authorities. These taxes include value added tax, corporate income tax (profits
tax), customs duties and payroll (social) taxes. The tax legislation in Ukraine is not always clearly
written or explained and is subject to the interpretation of the tax authorities and other government
bodies. Unlike the tax laws of more developed market economies, Ukraine’s tax laws have not been
in force for a significant period of time, often resulting in unclear or non-existent implementing
regulations.
On 21 September 2010, a draft of the new tax code (the Tax Code) was submitted to the Parliament
by the Cabinet of Ministers of Ukraine. The Tax Code was passed into law by the Parliament on 18
November 2010 but vetoed by the President on 30 November 2010. On 2 December 2010, the
Parliament passed a revised version of the Tax Code taking into account the President’s proposals.
The Tax Code was signed by the President on 3 December 2010 and officially promulgated on 4
December 2010. The majority of the Tax Code provisions took effect from 1 January 2011. The Tax
Code aims to create a comprehensive legal framework for tax reform and provides for a wide range
of changes to the existing tax system in the areas of tax collection and administration. Among other
things, the Tax Code provides for a gradual decrease in the rate of the corporate income tax from
the current 25 per cent. to 16 per cent. in the period 2011 to 2014. Under the Tax Code, the value
added tax rate will decrease from 20 per cent. to 17 per cent. from 1 January 2014. The Tax Code
also introduces a form of taxation of interest accrued on bank deposits, which will take effect from 1
January 2015. The Tax Code has attracted wide public criticism and protests from private
entrepreneurs throughout Ukraine. These and other factors that impact on the Ukrainian tax system
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
23
make an investment in the Notes subject to greater risk and uncertainty than an investment in a
country with a more developed tax system.
Differing opinions regarding legal interpretations often exist both among and within governmental
ministries and organisations, including tax authorities, creating uncertainties and areas of conflict in
relation to taxation. Tax declarations or returns, together with other matters of legal compliance (for
example, customs and currency control matters), are subject to review and investigation by a number
of authorities, which may impose fines, penalties and interest charges for non-compliance. These
circumstances generally create tax risks in Ukraine that are more significant than those typically
found in countries with more developed tax systems. Generally, the Ukrainian tax authorities may reassess tax liabilities of taxpayers only within three years after the filing of the relevant tax
declarations. However, this statutory limitation period may not be observed or may be extended in
certain circumstances. Moreover, the fact that a period has been reviewed does not exempt this
period, or any tax declaration/return applicable to that period, from further review.
While the Bank believes that it is currently in compliance in all material respects with the tax laws
affecting its operations, it is possible that the relevant tax authorities could, in the future, take
differing positions with regard to issues of interpretation, which may result in a material adverse
effect on the Bank’s business, results of operations, financial condition and prospects.
Disclosure and reporting requirements and fiduciary duties remain less developed than in more developed
markets
Disclosure and reporting requirements have only recently been enacted in Ukraine. Anti-fraud
legislation has only recently been adapted to the requirements of a free market economy and remains
largely untested. Most Ukrainian companies do not have corporate governance procedures that are in
line with Western European standards. Ukrainian banking laws introduced the concept of fiduciary
duties owed by a bank’s management to the bank and its clients, which was further elaborated in the
‘‘Guidelines for the Improvement of Corporate Governance in Ukrainian Banks’’ approved by the
NBU in March 2007. However, the concept of fiduciary duties of management or members of the
management board to their companies or shareholders remains underdeveloped in Ukraine. Violations
of disclosure and reporting requirements or breaches of fiduciary duties by the Bank’s directors could
significantly affect the receipt of material information or result in inappropriate management
decisions, which may have a material adverse effect on the Bank’s business, financial condition,
results of operations and prospects.
Risks Relating to the Bank
The Bank’s exposure to credit risk
The Bank’s net loan portfolio demonstrated high growth rates in the period preceding the onset of
the global financial crisis in the second half of 2008. In the first nine months of 2010, the Bank’s net
loan portfolio decreased from UAH 45,716 million as at 31 December 2009 to UAH 39,273 million
as at 30 September 2010, after a substantial growth in 2009 from UAH 33,892 million as at 31
December 2008. The growth of the Bank’s loan portfolio in 2009 was principally due to a substantial
increase in the amount of loans provided to the related State-owned companies Naftogaz, Ukraine’s
largest company in the fuel and energy sector involved in the production, importation and
distribution of natural gas and oil, and its subsidiary OJSC ‘‘Ukrtransnafta’’ (Ukrtransnafta), operator
of Ukraine’s oil pipeline and transportation system. In addition, there was a moderate increase of
new loans issued to existing customers, as well as certain new customers which satisfied the Bank’s
stringent assessment criteria, in energy, construction, real estate, trade, agriculture and transport
sectors. As at 30 September 2010, loans issued to Naftogaz and Ukrtransnafta amounted to UAH
21,385 million, compared to UAH 29,090 million as at 31 December 2009 and UAH 18,767 million
as at 31 December 2008. See ‘‘Exposure to Naftogaz’’ below for discussion of the risks related to the
Bank’s high exposure to Naftogaz.
The concentration in the Bank’s lending portfolio remains high. As at 30 September 2010, the
aggregate gross amount of loans provided to the ten largest borrowers or group of borrowers was
UAH 32,704 million, or 73 per cent. of the Bank’s total gross loan portfolio, compared to UAH
37,225 million, or 75 per cent. of the Bank’s total gross loan portfolio as at 31 December 2009 and
UAH 23,089 million, or 66 per cent. of total loans to customers as at 31 December 2008. These
amounts included loans to Naftogaz and Ukrtransnafta in an aggregate gross amount of UAH 21,385
million, or 47 per cent. of total loans to customers as at 30 September 2010, compared to UAH
29,090 million, or 58 per cent. of total loans to customers as at 31 December 2009 and UAH 18,767
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
24
million, or 54 per cent. of total loans to customers as at 31 December 2008. This represents a
significant concentration. See ‘‘Risk Factors – Risks Relating to the Bank – Substantial levels of
concentration in the Bank’s customer accounts and loan portfolio’’ below.
As at 30 September 2010, allowance for loan impairment as a percentage of total gross loans
increased to 12.8 per cent. from 8.3 per cent. as at 31 December 2009 and 3.1 per cent. as at 31
December 2008. The growth in allowance for loan impairment reflected the impact of the significant
depreciation of the hryvnia vis-à-vis the U.S. dollar in the second half of 2008 and deterioration of
the financial position of corporate and individual borrowers as a result of the economic crisis in
Ukraine. As a result of the Bank’s application of conservative credit risk policies, as well as enhanced
loan performance monitoring functions and implementation of active management aimed at
preventing the deterioration of the credit portfolio, the Bank managed to keep the level of nonperforming loans relatively low, with the impairment allowance covering about 100 per cent. of such
loans. The increased level of impairment for the nine months ended 30 September 2010 reflects the
increase in the allowance for impairment of loans and advances to customers. The Bank’s allowance
for loan impairment is estimated by the Bank’s management based on the analysis of individual
exposures for individually significant loans and collectively for those loans that are not individually
significant or those individually significant loans for which no objective evidence of impairment was
identified. Factors taken into consideration include borrower-related factors based on qualitative
analysis of particular borrowers’ risk profiles and performance described in more detail in ‘‘Asset,
Liability and Risk Management – Lending Policies and Procedures – Loan Classification and
Allowances’’, as well as historical data on default probabilities and ultimate recoveries and current
economic conditions. The limited range of data for the period from the onset of the global financial
crisis in the second half of 2008 to the present results in a limited back-testing capability of the
models that are currently being used and, therefore, the ability of such models to accurately predict
losses remains largely untested.
If a further downturn in the Ukrainian economy materialises, the Bank is likely to become subject to
increasing risks in respect of the credit quality of, and the recovery on, loans to customers, which are
negatively affected by deterioration in general economic conditions. Increased unemployment, rising
inflation, reduced corporate liquidity and profitability and increased number of corporate insolvencies
and inability of individuals to service personal debt, all of which are likely to result from any further
deterioration in the Ukrainian economy, can reduce the Bank’s customers’ ability to repay loans. In
addition, there can be no assurance that the Bank will be able to accurately assess default risk on
loans provided to its customers due to the unpredictability of economic conditions in Ukraine and
abroad. While the Bank requires periodic disclosure of its customers’ financial statements, such
financial statements may not always present a meaningful indication of each customer’s financial
condition. Failure by the Bank to manage its existing loan portfolio would have a material adverse
effect on the Bank’s business, results of operations, financial condition and prospects.
Relations with its shareholder and related party transactions
The entire issued share capital of the Bank is currently owned by the State and controlled by the
Ukrainian Government. Moreover, the Bank’s Charter lists among its objectives, in addition to the
Bank’s purely commercial aims, the furtherance of certain wider, macroeconomic goals. Such goals
include facilitating economic development and supporting domestic producers, in particular SME
businesses, financing structural transformation of the economy, increasing production and trading
potential of the various sectors of Ukraine’s economy, and developing the Ukrainian savings system.
According to the Bank’s Charter and relevant Ukrainian legislation, the Bank is constituted as an
autonomous entity, and is fully independent from the State in day-to-day decision-making and the
performance of its normal business activities. The Ukrainian Government exercises its rights as sole
shareholder through the Bank’s management bodies, including the Bank’s Supervisory Board (which
supervises the activity of the Management Board of the Bank with the aim to safeguard deposits,
protect interests of the State as the Bank’s shareholder and determine guidelines for the Bank’s
business) and the Management Board (which is responsible for the Bank’s operational management
and efficiency). Accordingly, while the State has respected the Bank’s operational independence, the
Bank’s strategic goals are set by the State and are closely aligned with the State’s priorities.
All State-owned (where the State owns at least 50 per cent. + 1 share) are considered as related
parties of the Bank. The Bank has many State-owned entities among its customers and provides
banking services and loan financing for such clients on the same commercial terms and conditions
applicable to its private company clients. As at 30 September 2010, gross loans to State-owned
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
25
entities comprised 69.2 per cent. of the Bank’s gross loan portfolio (equivalent to UAH 31,163,921
thousand) compared to 72.2 per cent. as at 31 December 2009 (equivalent to UAH 35,978,497
thousand). For a more detailed description of the Bank’s related party transactions see ‘‘Related
Party and Government Related Transactions’’.
From time to time, certain transactions have been entered into by the Bank taking into account
priorities of the Ukrainian Government or its agencies. For this reason, the Bank may have extended
financing to financially fragile borrowers (including, as the case may be, certain State and municipal
enterprises) which it would not have done had decision-making been based on purely commercial
criteria, including the Bank’s own consideration of the relevant business risks and benefits. Such
transactions may be entered into in the future. For example, when the liquidity position of Naftogaz
was severely affected by rising gas import prices and reduced revenues following the onset of the
global financial crisis, the Bank implemented an extensive financing programme for Naftogaz in
December 2008 due to the fact that no other sources of funding were available for Naftogaz at that
time and taking into account the strategic importance of Naftogaz to Ukraine’s economy. Naftogaz
and other State-owned entities are among the main customers of the Bank’s Corporate Banking. In
particular, as at 30 September 2010, the loan financing provided to the related state-owned companies
Naftogaz and Ukrtransnafta amounted to UAH 21,385 million, or 47 per cent. of the Bank’s gross
loan portfolio. The Bank’s second largest exposure to a State-owned entity represents 7.4 per cent. of
the Bank’s gross loan portfolio, and the Bank’s third largest exposure represents 4.7 per cent. of the
Bank’s gross loan portfolio. Each of the loans to the 90 remaining related parties which are Stateowned entities comprises 2.2 per cent. or less, of the Bank’s gross loan portfolio. See ‘‘Substantial
levels of concentration in the Bank’s customer accounts and loan portfolio’’ and ‘‘Exposure to Naftogaz’’
below for further discussion of the risks related to the Bank’s high exposure to large State-owned
entities, including Naftogaz.
Under Ukrainian law, State authorities are forbidden from intervening in the commercial operations
of banks. Ukrainian law also provides that banks which suffer from unlawful State intervention must
be compensated for any resulting losses, however to date no procedure for such compensation has
been adopted in Ukraine and no practice of claiming such compensation exists. In addition, under
Ukrainian law and the Bank’s Charter, the Bank’s Supervisory Board is prohibited from interfering
with the Bank’s day-to-day operations. Despite such prohibitions, the State may seek to rely on the
Bank to support State or municipal enterprises experiencing liquidity problems in the future. While
the Bank has negotiated competitive commercial terms in respect of the existing Naftogaz loans, there
is no guarantee that it will be able to do so in the future.
Given the comparatively strong historical performance of the State-related lending compared to other
non-State sector lending, the Bank’s management believes that it is able to combine the role of a
State-owned bank with that of a profitable commercial enterprise. However, with the Bank’s
substantial exposure to State-owned entities (and therefore the economic condition of the State), it
may be more sensitive to any slowdown or downturn in Ukraine’s economy than some of its
competitors which have a lower exposure to the State sector. Such risks are described in more detail
under ‘‘Risks Relating to Ukraine’’ above.
The foregoing may impact the profitability of the Bank and have an adverse effect on the Bank’s
business, results of operations, financial condition and prospects.
Changes to the State ownership of the Bank and the State guarantee of retail deposits in the Bank
The Bank is currently the only financial institution in Ukraine which provides a State-backed, 100 per
cent. guarantee to individual customers of their deposits. This State-guarantee makes the Bank
attractive to individual customers. Should the State cease to be a 100 per cent. shareholder in the
Bank, the Bank may lose the benefit of the State guarantee which applies to its retail deposits. Such
withdrawal of the State guarantee may have a negative impact on the way in which retail customers
regard the Bank, leading to a possible decrease in retail deposits or making it difficult to attract new
retail deposits, factors which may in turn have a negative impact on the Bank’s liquidity and funding
position.
In addition, Terms and Conditions of the Notes provide that the Bank may be required to prepay
the Loan following a Change of Control (as defined in the Loan Agreement). See Condition 5(c) of
the ‘‘Terms and Conditions of the Notes’’ and Clause 7.3 of the Loan Agreement.
Although no relevant announcements have been made by the State authorities since the Bank’s
establishment, there can be no assurance that the State will not cease to be a 100 per cent.
shareholder in the Bank during the term of the Notes.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
26
Substantial levels of concentration in the Bank’s customer accounts and loan portfolio
The level of concentration in the Bank’s customer accounts has decreased since 2009. As at 30
September 2010, the aggregate amount of customer accounts from the Bank’s ten largest customers
was UAH 1,855 million, or 8 per cent. of the Bank’s total customer accounts, compared to UAH
7,501 million, or 30 per cent. of total customer accounts as at 31 December 2009 and UAH 2,143
million, or 12 per cent. of total customer accounts as at 31 December 2008. At the same time, the
level of concentration in the Bank’s lending portfolio remains high. As at 30 September 2010, the
aggregate amount of loans provided to the ten largest borrowers or groups of borrowers was UAH
32,704 million, or 73 per cent. of the Bank’s total gross loan portfolio, compared to UAH 37,225
million, or 75 per cent. of the Bank’s total gross loan portfolio as at 31 December 2009 and UAH
23,089 million, or 66 per cent. of total gross loan portfolio as at 31 December 2008. The above stated
amounts include loans to Naftogaz and Ukrtransnafta in the aggregate gross amount of UAH 21,385
million, or 47 per cent. of total gross loan portfolio as at 30 September 2010, compared to UAH
29,090 million, or 58 per cent. of total gross loan portfolio as at 31 December 2009 and UAH 18,767
million, or 54 per cent. of total gross loan portfolio as at 31 December 2008.
In view of anticipated significant lending to Naftogaz as part of the State financing programme, the
NBU, by special decision, raised the Bank’s permitted maximum single customer concentration
exposure threshold in respect of Naftogaz to a level in excess of that which is generally applicable to
all Ukrainian banks (25 per cent. of the regulatory capital of a bank) and exempted the Bank from
the requirement to make provisions with respect to lending to Naftogaz as required by Ukrainian
Accounting Standards (UAS). The Bank chose not to rely on such exemption and set up provisions
for Naftogaz in order to bring the level of its statutory impairment reserves close to the level of
IFRS reserves. The Bank’s compliance with the above individual ratio is monitored by the NBU on a
daily basis.
The fact of such higher than average concentration, if combined with a deterioration in Naftogaz’s
ability to service its loans, may have a material adverse effect on the Bank’s business, results of
operations, financial condition and prospects.
Exposure to Naftogaz
In 2008, the liquidity position of Naftogaz, one of Ukraine’s largest and most strategically important
companies, was severely diminished by an increase in gas supply prices and a reduction in revenues.
As a result, Naftogaz required substantial further financing in order to secure sufficient gas supplies
from Russia during the winter of 2008-2009, until the State was in a position to assist Naftogaz
directly. Most of such financing was provided by the Bank through direct loans or under reverse
repurchase transactions between the Bank and Naftogaz in respect of the Ukrainian Government debt
securities (treasury bills) held by Naftogaz. See ‘‘Risk Factors – Relations with its shareholder and
related party transactions’’. As at 30 September 2010, the Bank’s aggregate credit exposure to
Naftogaz was UAH 21,243 million, comprising 47.2 per cent. of the Bank’ gross loan portfolio. This
makes Naftogaz the largest borrower of the Bank. See ‘‘Business – Exposure to Naftogaz’’ below for
discussion of the Bank’s Naftogaz financing programme. In parallel to the financing programme
implemented by the Bank, the Ukrainian Government provided financial support to Naftogaz,
including through equity injections. In 2009-2010, the Ukrainian Government passed Resolutions to
approve contributions into the authorised share capital of Naftogaz in the total aggregate amount of
UAH 36,776,191 thousand, although some of these contributions were not completed as at 31
December 2010. In view of such financial support by the State, the liquidity position of Naftogaz has
improved and it complied with all of its payment obligations towards the Bank. However, there can
be no assurance that, to the extent Naftogaz remains among the Bank’s largest borrowers, any
deterioration of its financial situation will not adversely affect the Bank’s business, results of
operations and financial condition.
In addition, the Bank’s transactions with Naftogaz generated a substantial part of the Bank’s total
interest income in 2009 and 2010, which had a material impact on the overall profitability of the
Bank. The interest income attributable to the Bank’s financing of Naftogaz amounted to UAH
2,276,452 thousand for the nine months ended 30 September 2010 (being 40 per cent. of the Bank’s
total interest income as at that date), UAH 3,393,211 thousand for the year ended 31 December 2009
(being 44 per cent. of the Bank’s total interest income as at that date) and UAH 98,601 thousand for
the year ended 31 December 2008 (being 4 per cent. of the Bank’s total interest income as at that
date). In order to mitigate the liquidity risks of repayment of these loans and in order to enhance the
marketability of the exposure to Naftogaz, on 15 December 2010, the Cabinet of Ministers of
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
27
Ukraine passed Resolution No. 1207 authorising Naftogaz to issue bonds in the nominal amount of
UAH 20,416,000 thousand, with the proceeds of such issue to be used to repay the existing loan
facilities with the Bank. The Bank envisages that it will purchase the majority of the new Naftogaz
bonds so that its exposure to Naftogaz is restructured into more liquid instruments with diversified
maturities. If any proceeds of the repayment of Naftogaz loans are not invested in the new Naftogaz
bonds, the Bank intends to apply such proceeds towards repayment of the existing NBU refinancing
provided to the Bank in order to implement the Naftogaz financing programme. However, any
reduced exposure to Naftogaz under the loan agreements may result in the reduction of the Bank’s
interest income. Furthermore, the Bank may be unable to reinvest any proceeds that are not applied
towards the purchase of new Naftogaz bonds or the repayment of NBU financing on the commercial
terms which are as attractive as the terms of the existing Naftogaz loans, which may have an adverse
effect on the Bank’s business, financial condition and results of operation. In addition, while the
existing Naftogaz loans are secured any new Naftogaz bonds may be unsecured.
Significant levels of NBU funding
As at 30 September 2010, the total indebtedness of the Bank under the NBU refinancing loans, which
includes loans received by the Bank from the NBU for the purpose of financing Naftogaz, is UAH
15,532 million. The Bank’s NBU refinancing loans bear an average weighted interest rate of 9.9 per
cent. per annum and are to be repaid from 2011 to 2015. In accordance with Ukrainian legislation,
all such loans are secured on a first ranking basis by the Bank’s rights under loans extended to its
customers, securities held by the Bank in its portfolio and cash in the correspondent account with the
NBU.
If the Bank were to default under the NBU refinancing loans, under Ukrainian law and in
accordance with the terms of the relevant loan agreements, the NBU may exercise its statutory right
to debit funds from the Bank’s accounts with the NBU on an irrevocable basis. In such event, the
NBU would also be entitled to enforce the security related to such loans. On the liquidation of the
Bank, the NBU’s claims arising as a result of depreciation of the value of any pledge to secure NBU
refinancing loans would rank senior to the claims of any unsecured creditors of the Bank, including
claims under the Loan Agreement. Accordingly, there is a risk that, in case of the Bank’s liquidation
prior to the repayment of the NBU refinancing loans, the satisfaction of the Lender’s or Trustee’s
claims under the Loan Agreement may be limited.
Furthermore, any withdrawal of the funding support by the NBU may have a material adverse effect
on the Bank’s business, financial condition or results of operations.
Complex information technology systems
The Bank’s information technology (IT) systems are critical to its business operations and are
essential to achieving the Bank’s strategic objectives, maintaining operational efficiencies, enhancing its
risk management systems and meeting the needs of the Bank’s customer base.
The Bank currently does not operate a single, integrated operating system which allows for real-time
reporting of the Bank’s financial position. The Bank has started the implementation of its new unified
automatic banking system (ABS) across the entire network. As at 30 September 2010, the new ABS
was implemented in nine out of 25 regional branches. In addition, the Bank continues to implement
its data transmission network across the majority of its locations, allowing for the timely transfer of
information within the Bank’s network. This network currently connects 1,090 locations, with a
further 2,000 locations expected to join the network in 2011-2012. However, if the Bank is unable to
further strengthen and centralise its IT systems, implement the new ABS and roll out the data
transmission network across the Bank, it may be unable to achieve its strategic objectives and its
ability to compete successfully with other Ukrainian banks may be adversely affected.
With five existing core accounting systems and 252 separate balance sheets (as at 31 December 2010)
being collated throughout the Group, the Bank experiences a reporting delay between closing of
individual balance sheets and their consolidation into a single Bank-wide balance sheet. This delay
can be up to 24 hours. The Bank is reorganising its financial reporting to reduce the number of
balance sheets across the Bank. Once the reorganisation is complete, only regional branches of the
Bank and its head office will have their own balance sheets consolidated into the Bank’s central
balance sheet for financial reporting purposes. However, the failure by the Bank to centralise its
reporting, standardise accounting operations and streamline information processing may result in a
failure to improve operational efficiencies and affect the Bank’s ability to analyse financial
information in order to identify potential problems. Furthermore, the failure to implement the Bank’s
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
28
IT strategy, or its implementation on a partial or defective basis, may cause its IT systems to fall
behind the IT systems used by its competitors.
In addition, the Bank does not have a centralised IT security policy. Currently, the Bank’s office for
the protection of electronic information (the IT Security Office) is responsible for the information
security at the Bank’s head office and regional branches as well as monitoring compliance with
information security requirements throughout the Bank. However similar functions are performed by
the relevant information security administrators in the sub-branches and outlets who are subordinated
to the management of the relevant Bank branch and not the IT Security Office. Such lack of direct
subordination may negatively affect the level of co-ordination between the IT Security Office and
local information security administrators. This lack of co-ordination may result in security issues
being overlooked, with potential implications for the Bank’s operations. In addition, certain functions
related to the management of information security processes are performed by the Information
Technology Department (the IT Department) rather than the IT Security Office. Such functions
include granting access to the Bank’s information systems, managing systemic software updates,
monitoring integrity of the Bank’s information systems, monitoring internet access, information
technology procurement, managing security breaches and protecting information in local and
corporate networks. The Bank’s Management Board approved a merger of the IT Security Office and
the IT Department, to take effect on 11 February 2011. However, until such integration is complete,
limited involvement of the IT Security Office in information security process may affect the level of
information security at the Bank, which may impact on the results of operation, financial condition
and prospects of the Bank.
In common with other financial institutions, data integrity and disaster recovery are of key
importance to the Bank’s ability to operate efficiently and maintain its reputation. Currently, all of
the Bank’s daily transactions are backed up both at its head office level and at all of the Bank’s
branches. However, the Bank’s main back-up facility is located in the same building as the Bank’s
main servers, which presents a risk to the Bank should its main facility be compromised. To minimise
this risk, and prevent data loss, the Bank periodically creates copies of its data on removable storage
media which are stored off-site. The Bank’s IT budget for 2011 provides for the acquisition of
hardware and lease of offsite premises for the Bank’s main back up facility. However, until such
plans are implemented, a force majeure event affecting both the main servers and the back-up servers
would result in a substantial disruption of the Bank’s normal operations, which may in turn have a
material adverse effect on the future financial condition, results of operations and prospects of the
Bank.
In addition, the Bank experiences occasional disruption of communication lines within Ukraine. The
Bank is currently setting up independent back-up communication lines between its head office,
regional offices and sub-branches. However, until this project is implemented in full in 2011-2012, the
Bank remains exposed to any interruptions due to the failure of local communication lines provided
by current suppliers. Such interruptions may prevent the Bank from functioning as required, leading
to a reduction in operational efficiency, and potential loss of revenue or customer goodwill, all of
which may impact on the results of operations, financial condition and prospects of the Bank.
The Bank’s Financial Statements for the years ended 31 December 2009 and 31 December 2008 and
Condensed Interim Financial Information for the nine months ended 30 September 2010 include qualifications
relating to the adequacy of disclosure relating to liquidity risk, the revaluation of buildings, hyper-inflationary
accounting and segment reporting
The Bank’s Financial Statements for each of the years ended 31 December 2009 and 31 December
2008 include a qualification relating to the adequacy of disclosure on liquidity risk. IFRS 7
‘‘Financial Instruments: Disclosures’’ requires the Bank to determine the contractual remaining
maturities of customer accounts and contractual remaining maturities of undiscounted cash flows of
customer accounts as of each year end. The Bank’s IT systems do not currently allow for an accurate
determination of such maturities and the failure to make such determination marks a departure from
IFRS 7. The Bank is therefore only able to estimate core current accounts, with statistical methods
applied to historic information on fluctuations of customer accounts balances. The Bank applies a
going concern assumption which results in maturities of customer accounts being undefined. As a
result, the Bank’s auditors, PJSC ‘‘Deloitte & Touche USC’’, have not been able to measure the
overall effect of the Bank’s non-compliance with IFRS 7 on the Bank’s financial statements. If IFRS
7 was to be fully applied by the Bank, with the determination of contractual maturities other than by
way of estimation this may have an effect on the position as stated in the Financial Statements for
each of the years ended 31 December 2009 and 31 December 2008.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
29
In accordance with its internal accounting policy, the Bank revalues buildings included in the line
item ‘‘Property, equipment and intangible assets’’. In accordance with the requirements of IAS 16
‘‘Property, Plant and Equipment’’, these revaluations should be made with sufficient regularity to
ensure that the carrying amount does not differ materially from that which would be determined
using fair value as at the reporting date. No revaluations were made as at 31 December 2009 and
2008. The Bank performed the most recent revaluations of its buildings as at 1 November 2008.
However, the revaluations do not take into account changes in market values of buildings that
occurred after 1 November 2008. It is possible that such infrequent revaluation may lead to variance,
possibly significant, between the values of buildings as shown in the historic financial statements and
actual current value. PJSC ‘‘Deloitte & Touche USC’’ were unable to determine the effect of this
departure from the requirement of IFRS on the carrying amount of buildings, property revaluation
reserve, and retained earnings as at 31 December 2009 and 2008, and the depreciation charge,
changes in property revaluation reserve and taxation for the years then ended. The Bank intends to
carry out revaluation of its buildings in 2011.
In accordance with IAS 29 ‘‘Financial Reporting in Hyperinflationary Economies’’, the economy of
Ukraine prior to and including the year 2000 was considered to be hyper-inflationary. The Bank did
not apply the requirements of IAS 29, which requires restatement of non-monetary assets and equity
to account for the effects of inflation up to 31 December 2000, in preparing its financial results. Such
failure to apply IAS 29 means that the inflationary effects on some non-monetary assets may not be
accurately reflected in the Bank’s financial statements. The Bank’s auditors were unable to determine
the exact effect of this departure from IAS 29 on share capital, revaluation surplus and retained
earnings as at 31 December 2009 and 2008, although they have stated that this is a technical
qualification only as the total equity balance will not be changed after application of IAS 29.
In accordance with IFRS 8 ‘‘Operating Segments’’ information about the Bank’s operating segments,
products and services, the geographical areas in which it operates, and its major customers is required
to be disclosed if an entity files, or is in the process of filing, its financial statements with a securities
commission or other regulatory organisation for the purpose of issuing any class of instruments in a
public market. In the past the Bank did not apply provisions of IFRS 8 as the management
considered it was not relevant for the Bank. As discussed in Note 2 to the Condensed Interim
Financial Information, the Bank did not disclose information about the Bank’s operating segments.
The Bank intends to apply IFRS 8 for the annual financial statements as at 31 December 2010.
If the Bank fails to continue further development of its system of internal control over financial reporting, it
might not be able to accurately report its financial results
In common with other banks in Ukraine and other CIS countries, the Bank’s current system of
internal control over financial reporting was not originally designed for the preparation of complete
monthly IFRS-based financial statements and IFRS-based management accounts. These shortcomings
could adversely impact the quality of decision making by Bank’s senior management due to delays in
producing complete management accounts on the basis consistent with IFRS. Historically, the Bank’s
senior management has largely based its decisions on management accounts and financial statements
based on UAS rather than complete IFRS monthly financial statements.
The main weakness of the Bank’s current system is that the preparation of the Bank’s IFRS-based
financial statements is a partially manual process which involves the transformation and
reclassification of the Bank’s statutory financial statements into IFRS through accounting adjustments,
and requires an ongoing review and update of applicable IFRS and related pronouncements that
should be applied to the underlying Ukrainian accounting principles transactions. This process is
complicated, time-consuming and requires significant attention and time of the Bank’s senior
accounting personnel.
In addition to that, in Ukraine there is a limited pool of accounting personnel with IFRS expertise,
which make it difficult for the Bank to hire and retain such personnel. There is a risk that any
inability to hire or to retain qualified accounting staff could have a material adverse effect on the
Bank’s ability to prepare accurate financial information in a timely manner.
However, following the receipt of management letters from the Bank’s external auditors highlighting
such deficiencies, management is taking steps to improve the internal procedures. These steps include,
but are not limited to, hiring additional qualified personnel, increasing training for current personnel,
implementing additional information system capabilities to support the IFRS reporting requirements
and attempting to better harmonise the sometimes conflicting requirements of statutory reporting,
Ukraine regulatory reporting, tax reporting and financial reporting under IFRS.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
30
A failure by the Bank to adequately address any such deficiencies or to strengthen its internal
controls could increase the risks associated with the Bank’s operations, which in turn could have a
material adverse effect on the Bank’s business, results of operations, financial condition and prospects.
Lack of information for credit risk assessments
The often insufficient statistical, corporate and financial information, including audited financial
statements, available to the Bank relating to its prospective corporate borrowers or other clients
makes the assessment of their credit risk and the evaluation of collateral more difficult. The legislative
framework for establishment and operation of credit bureaus, which deliver information to Ukrainian
banks to assist them in evaluating and minimising the credit risk of prospective borrowers, only came
into effect in January 2006. Several credit bureaus have obtained licences required by the legislation
for collecting, processing, storing and utilising of credit information and have commenced operations.
Although they are gradually expanding their coverage, the amount of data available from such credit
bureaus is not as comprehensive as in developed economies. In addition, credit rating agencies that
provide information regarding participants in the Ukrainian securities market operate in Ukraine. The
information provided by the credit rating agencies is publicly available. However, Ukraine’s system
for gathering and publishing statistical information relating to the Ukrainian economy in general or
specific sectors of the Ukrainian or corporate or financial information relating to companies, is not as
comprehensive as those of developed economies. Although the Bank believes that it has adequate risk
evaluation procedures in place and, in particular, ordinarily estimates the net realisable value of
collateral in determining applicable provisioning and collateralisation requirements, the absence of
additional statistical, corporate and financial information may decrease the accuracy of the Bank’s
assessments of credit risk, thereby increasing the risk of borrower default and decreasing the
likelihood that the Bank would be able to enforce any security in respect of the corresponding loan
or that the relevant collateral will have a value commensurate to the loan secured by such collateral.
See ‘‘Asset , Liability and Risk Management – Credit Risk’’.
The Bank may face liquidity risks
Adverse economic conditions in Ukraine resulted in a partial withdrawal of deposits with the Bank
by Ukrainian retail customers, especially in the fourth quarter of 2008. In addition, due to the
generally low liquidity of the Ukrainian market, there are limited opportunities to sell or factor some
of the Bank’s assets other than highly-liquid assets. The decreases in corporate client deposits and/or
significant levels of withdrawals of retail deposits may result in liquidity gaps that the Bank will need
to cover.
The Bank may also be exposed to maturity mismatches between its assets and liabilities, which may
lead to a lack of liquidity at certain times. See ‘‘Asset , Liability and Risk Management – Liquidity
Risk’’. Deterioration of Ukrainian companies’ liquidity, or of conditions in the Ukrainian and
international capital, syndicated loan and interbank markets, significant withdrawals of corporate and
retail deposits and maturity mismatches between the Bank’s assets and liabilities may, together or
separately, have a material adverse effect on the Bank’s business, results of operations, financial
condition and prospects. See ‘‘Asset, Liability and Risk Management – Liquidity Risk’’.
The Bank’s exposure to exchange rate risk
The Bank’s open currency position is constituted of such currencies and bank metals as US dollars,
euros, pounds sterling, Russian roubles and gold. The open currency position is generally based on
the mismatch between the Bank’s claims to debtors and the Bank’s liabilities. This includes the
adequacy of the currency position in order to make provisions in respect of lending transactions and
non-trading activities with foreign currencies. As the Bank maintains limited open currency positions,
this may give rise to exposure to currency risk. Currently, due to various Ukrainian law restrictions
there is no active market for foreign currency hedging in Ukraine.
In late 2008, there has been significant downward pressure on the hryvnia against both the U.S.
dollar and the euro. In October-December 2008, the NBU official UAH/USD exchange rate weakened
by approximately 60 per cent. as a result of, among other things, capital outflows. During 2009 and
2010, the UAH/USD exchange rate remained relatively stable and was UAH 7.985 per U.S. dollar as
at 31 December 2009 and UAH 7.9617 per U.S. dollar as at 31 December 2010. As at 10 February
2011, the NBU official UAH/USD exchange rate was UAH 7.94 per U.S. dollar. Future changes in
the hryvnia exchange rate depend on the level of further capital outflows, the current account deficit
and inflation, all of which are conditional on domestic monetary and fiscal policies, as well as on
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
31
global financial situation. See ‘‘Risk Factors – Risks Relating to Ukraine – The Ukrainian currency is
subject to volatility and depreciation’’.
The Bank has established and implemented internal policies and procedures to measure and manage
its currency risk exposure. Under these policies and procedures, the Management Board of the Bank
empowered the Assets and Liabilities Management Committee (ALMC) to manage general currency
risks. The ALMC determines limits and restrictions on currency positions and on certain currency
operations. The Main Operations Department and the Treasury Department, in each case under the
supervision of the Risk Management Department (RMD), monitor the Bank’s currency position on a
daily basis with the aim to match requirements set by the NBU as well as internal limits and
restrictions. In general, changes in foreign exchange rates do not significantly influence the net
operating income and net profit of the Bank; this can be seen from the amount of the Bank’s open
currency positions.
The Bank has limits in place aimed at reducing currency risk and adheres to the NBU limits on open
currency positions, exchange rates and the volatility of the hryvnia or any major international
currency to which the Bank is exposed (mainly U.S. dollar and euro). The Bank assesses its foreign
exchange risk as not significant and as a risk which will not have a material adverse effect on the
Bank’s business, results of operations, financial condition and prospects, however no assurances can
be given that this will not change in the future or that the management of such risks in the future
will be sufficient to neutralise foreign exchange risks.
Regulation of the banking industry
The NBU’s Board Resolution No. 368, dated 28 August 2001, which authorised the Instruction on
Ukrainian Banking Activity Regulation (the Banking Regulation Instruction), sets forth capital
adequacy ratios and other ratios and various limits, including credit risk limits, investment limits,
liquidity ratios and rules upon which the calculations of such ratios and limits are based. The
Banking Regulation Instruction also provides general rules regarding the submission by banks of
statistical information to the NBU. In addition the NBU has established and revises from time to
time mandatory levels of provisioning for different groups of assets classified according to the NBU
regulations.
The NBU has adopted a number of regulations aimed at countering the effects of the global financial
crisis, supporting the national currency and limiting deposit outflow. Such recent changes include rules
requiring that currency purchases by bank-borrowers with the purpose of redemption of the principal
of its cross-border loans may only be made in an amount that does not exceed the amount of
borrowed foreign currency funds that were previously exchanged to Ukrainian hryvnia in the
interbank market. There are also other rules restricting the Bank’s ability to purchase foreign
currency on the interbank market. These and other changes in currency regulation may affect the
Bank’s ability to deal with its liquidity and currency risks.
In addition, the NBU currently restricts Ukrainian banks from entering into forward foreign exchange
contracts with international counterparties. This limits the Bank’s ability to conduct foreign exchange
hedging operations, and as a result the Bank manages its foreign exchange exposures by matching
assets and liabilities in each currency.
Failure of the Bank to comply with the requirements of the laws and regulations governing banking
activity may lead to application by the NBU of sanctions provided for in the Law of Ukraine ‘‘On
Banks and Banking Activity’’ and other NBU regulations which will depend on the nature and the
extent of the violation.
Generally, regulatory standards applicable to banks in Ukraine and the oversight and enforcement
thereof by Ukrainian regulators may differ from those applicable to banking operations in more
developed regulatory regimes. It is unclear how numerous legal and regulatory developments may
affect the competitive banking landscape in Ukraine and whether they will improve certain banking
activities. There can be no assurance that the NBU will not implement regulations or policies,
including policies or regulations or legal interpretations of existing banking or other regulations,
relating to or affecting taxation, interest rates, inflation, exchange controls, or otherwise take action
that could have a material adverse effect on the Bank’s business, result of operations, financial
condition or prospects.
In addition, Ukrainian banks are exposed to the general risks connected with the Ukrainian judicial
system. Regulatory rules for banking activities may be interpreted by Ukrainian courts in a way that
differs from the existing practice of their application supported by the NBU and/or other relevant
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
32
regulators. In particular, there are recent conflicting court rulings with respect to extension of foreign
currency loans by Ukrainian banks, some of which establish that an individual payment license is
required for each separate loan in a foreign currency. While judicial precedents in Ukraine generally
have no binding effect on subsequent decisions, as at the date of this Prospectus, it is difficult to
predict what implications, if any, such court practice could have for the Bank and other Ukrainian
banks that are directly involved in respective litigations or for the Ukrainian banking system in
general. See ‘‘Risks relating to Ukraine – The judiciary’s lack of independence and overall inexperience,
difficulty in enforcing court decisions and governmental discretion in enforcing claims could prevent the
Bank or the Bank’s investors from obtaining effective redress in a court proceeding’’.
Capital adequacy
The Basel Committee on Banking Supervision (the Basel Committee) has set international standards
for capital adequacy for banks. The NBU has also established minimum capital adequacy ratios that
are mandatory for Ukrainian banks, based on a methodology which is generally consistent with the
applicable standards of the Basel Committee (although the NBU has assigned higher risk to certain
assets in comparison with the standards of the Basel Committee). With effect from 1 March 2004, the
NBU’s mandatory minimum capital adequacy ratio was increased from 8 per cent. to 10 per cent. of
a bank’s risk weighted assets.
Further, the Basel Committee has issued a new capital adequacy framework (the Basel Accord) to
replace the previous capital accord issued in 1988. With regard to the risk measurement requirements
relating to credit risk ratings applied to exposures to sovereign states, the Basel Committee proposes
replacing the existing approach with a system that would use both external and internal credit ratings
for determining risk weightings or the amount of credit exposures. Such an approach will also apply,
either directly or indirectly and to varying degrees, to the risk measurement for exposures to banks,
securities firms and corporate entities. The new framework could require financial institutions lending
to Ukrainian banks to be subject to higher capital requirements as a result of the credit risk rating of
Ukraine, possibly resulting in a higher cost of borrowing for Ukrainian banks.
Following the period of sustained growth in the period of 2005-2007, capital adequacy ratios were
relatively low in the beginning of 2008, and in the light of the global financial crisis it was evident
that capital increases would be required in the future. State support in the form of several capital
contributions was of critical importance for the Bank in 2008 as it allowed the Bank to continue
growing its loan book and simultaneously significantly increased its capital adequacy ratios. In 2008,
the Bank’s share capital was increased by the aggregate amount of UAH 13.0 billion through three
additional contributions of cash and Ukrainian Government debt securities in accordance with the
Resolutions of the Cabinet of Ministers of Ukraine dated 9 July 2008, 26 November 2008 and 29
December 2008. As a result of the capital contributions from the State in 2008, the Bank’s total
regulatory capital expressed as a percentage of total risk-weighted assets and calculated in accordance
with the Basel Capital Accord 1988 increased from 22.03 per cent. as at 31 December 2007 to 41.47
per cent. as at 31 December 2008 and the Bank’s Tier 1 capital expressed as a percentage of total
risk-weighted assets increased from 11.01 per cent. as at 31 December 2007 to 36.81 per cent. as at 31
December 2008.
The growth of the Bank’s loan book continued in 2009. The Bank’s net loans to customers increased
from UAH 33,892 million as at 31 December 2008 to UAH 45,716 million as at 31 December 2009,
the growth mainly driven by the financing provided to Naftogaz and Ukrtransnafta and a number of
new corporate customers. Due to the growth of the Bank’s loan book, the Bank’s total regulatory
capital expressed as a percentage of total risk-weighted assets and calculated in accordance with the
Basel Capital Accord 1988 decreased from 41.47 per cent. as at 31 December 2008 to 32.26 per cent.
as at 31 December 2009 and the Bank’s Tier 1 capital expressed as a percentage of total riskweighted assets decreased from 36.81 per cent. as at 31 December 2008 to 28.41 per cent. as at 31
December 2009. The Bank expects its capital adequacy ratios to gradually decline as it expands its
lending activities in line with its stated business strategy, provided that the favourable developments
in the Ukrainian economy continue.
Although the Bank’s capital adequacy ratios are, as at 30 September 2010, significantly above the
minimum capital adequacy ratio set by the Basel Committee and the NBU requirements, if the Bank
fails to maintain the sufficient level of capital adequacy ratios, in particular as required by the NBU,
in future, it may be subject to sanctions by the NBU (including the revocation of its banking licence),
which may have a material adverse effect on the Bank’s business, results of operations, financial
condition and prospects.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
33
Increasing competition
Despite the adverse impact of the global financial crisis on the Ukrainian banking system, the
Ukrainian market for financial services remains highly competitive in respect of standard commercial
banking activities. The Bank principally competes with a number of other national and regional
banks. According to the official statistics of the NBU, as at 31 December 2010, there were a total of
194 commercial banks registered in Ukraine, of which 176 have been granted licences by the NBU to
perform banking transactions. The Bank’s most significant competitors include PrivatBank, Raiffeisen
Bank Aval, Ukrsibbank, Ukreximbank, Ukrsotsbank and OTP Bank. Currently, the competition
among Ukrainian banks is principally focused on attracting corporate and retail deposits. The Bank
believes that it is well-positioned in the banking market and its competitive strengths include stateowned status, strong reputation in the market, the largest branch network in Ukraine and its ability
to offer competitive products to its customers.
The Bank expects the Ukrainian banking market to remain competitive in the future due to the
impact of the financial crisis and the absence of restrictions on the opening of branch offices by
foreign banks, which were abolished from the date of Ukraine’s accession to the WTO on 16 May
2008. As at 31 December 2010, out of 176 banks, 55 banks had foreign ownership, of which 20 were
100 per cent. -owned by foreign entities. Acquisitions of Ukrainian banks or controlling stakes therein
by foreign banks and financial groups that occurred in recent years may further increase competition
among Ukrainian banks in both deposit taking and lending activities. If the Bank is unable to
continue to compete successfully in the Ukrainian banking sector or to execute its strategy, this could
have a material adverse effect on the Bank’s business, results of operations, financial condition and
prospects. See ‘‘Business – Competition’’.
Dependence on key management, many of whom have only recently joined the Bank, and retaining qualified
personnel
The Bank is dependent on members of its Management Board and other key members of the
management teams, many of whom have only recently joined the Bank, for the development and
implementation of its strategy. Should members of the current management team opt to leave the
Bank or, in the case of recently appointed members of the management, not prove able to quickly
integrate in the organisation, then the operational efficiency of the management team may be
compromised, which in turn may have an adverse effect on the Bank’s efficiency.
The Bank’s continued success will depend, in part, on its ability to continue to retain, motivate and
attract, in cases where needed, qualified and experienced personnel. Competition in the Ukrainian
banking sector for personnel is considerable.
While the Bank believes it has a strong management team and effective staff recruitment, training and
incentive programmes in place, a failure to recruit, train and/or retain necessary personnel could have
a material adverse effect on the Bank’s business, results of operations, financial condition and
prospects. See ‘‘Employees’’.
Interest rate volatility
Net interest income (after allowances for impairment of interest earning assets) represents a significant
portion of the Bank’s operating profit. The Bank’s dependence on net interest income may challenge
the stability of its earnings during periods of high interest rate volatility.
Fluctuations in interest rates could adversely affect the Bank’s net interest income in a number of
different ways. An increase in interest rates generally may decrease the value of the Bank’s fixed rate
loans and increase the Bank’s funding costs. Such an increase could also generally decrease the value
of fixed rate debt securities in the Bank’s securities portfolio. In addition, an increase in interest rates
may increase the risk of customer default, while general volatility in interest rates may result in a gap
between the Bank’s interest-rate sensitive assets and liabilities. As a result, the Bank may incur
additional costs and expose itself to other risks by adjusting such asset and liability positions. Interest
rates are highly sensitive to many factors beyond the Bank’s control, including the reserve policies of
the NBU, domestic and international economic and political conditions and other factors.
There can be no assurance that the Bank will be able to protect itself from the negative effects of
future interest rate fluctuations. Further changes in market interest rates could affect the interest rates
earned on interest-earning assets differently, leading to a reduction in the Bank’s net interest income
and having a material adverse effect on its business, results of operations, financial condition and
prospects.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
34
The Bank’s exposure to prices of investment securities
The Bank’s financial condition and operating results are also affected by changes in market values in
the Bank’s securities portfolio. As at 30 September 2010, the carrying value of the Bank’s investments
available for sale (mainly comprised of the Ukrainian Government debt securities) was UAH 7,513
million, which represented 13.4 per cent. of the Bank’s total assets, compared to UAH 4,012 million,
or 7.0 per cent. of the Bank’s total assets, as at 31 December 2009 and UAH 15,712 million, or 27.9
per cent. of the Bank’s total assets, as at 31 December 2008. The Bank’s income from securities
operations depends on numerous factors, some of which are beyond its control, including overall
market trading activity, interest rate levels, fluctuations in currency exchange rates and general market
volatility. Although the Bank has put in place limits for its securities portfolio, securities transactions,
including specific limits on transactions with or by certain individual issuers, market price fluctuations,
particularly affecting the Bank’s Ukrainian Government debt securities, may adversely affect the value
of the Bank’s securities portfolio.
Investment in the Ukrainian Government securities
As at 30 September 2010, the Bank held Ukrainian Government debt securities, issued by the
Ministry of Finance of Ukraine, with an aggregate carrying value of UAH 5,831,907 thousand,
compared to holdings of UAH 2,348,360 thousand as at 31 December 2009 and holdings of UAH
13,619,196 thousand as at 31 December 2008. Any circumstances adversely affecting the discharge of
Ukraine’s sovereign debt obligations may adversely affect on the Bank’s business, results of
operations, financial condition and prospects. See ‘‘Risks – Risks relating to Ukraine’’.
Instability of the Ukrainian and international banking sector, including a deterioration of the soundness or the
perceived soundness of other financial institutions
Since the second half of 2007, against the backdrop of the limited liquidity and high cost of funds in
the international and Ukrainian domestic interbank lending markets, the Bank has been and remains
subject to the risk of deterioration of the soundness and/or perceived soundness of other financial
institutions within and outside Ukraine. Financial institutions that transact with each other are
interrelated as a result of trading, investment, clearing, counterparty and other relationships. This
risk, sometimes referred to as ‘‘systemic risk’’, may adversely affect financial intermediaries, such as
clearing agencies, clearing houses, banks, securities firms and exchanges with which the Bank interacts
on a daily basis. A failure of such entities to interact efficiently with Bank may adversely affect the
Bank’s operations.
The Bank routinely executes a high volume of transactions with counterparties in the financial
services industry, including brokers and dealers, commercial banks, investment banks and other
financial institutions. As a result, the Bank is exposed to counterparty risk, and this counterparty risk
is exacerbated due to the impact of the global financial crisis, notwithstanding the anti-crisis measures
taken by the Bank in this regard. A default by, or concerns about the stability of, one or more
financial institutions (whether or not a counterparty of the Bank) could lead to further significant
systemic liquidity problems, or losses or defaults by other financial institutions, which could have a
material adverse effect on the Bank’s business, result of operations, financial condition and prospects.
A decline in the value or liquidity of the collateral securing the Bank’s loans may adversely affect its loan
portfolio
A substantial portion of the Bank’s loans to corporate customers and individuals is secured by
collateral such as property, production equipment, vehicles and inventory. Downturns in the relevant
markets or a general deterioration of economic conditions, both of which have recently occurred in
the Ukrainian markets and economy, have resulted and may continue to result in declines in the
value of collateral securing a number of loans to levels below the amounts of the outstanding
principal and accrued interest on those loans. As the bulk of the Bank’s collateral portfolio is in land
and property, downturn in the real estate and construction sectors will have an adverse effect on the
value of the Bank’s collateral portfolio. While the Bank requires that the amount of collateral
provided in respect of each loan should be sufficient to cover both the loan principal and interest
even in the event that the value of such collateral falls, this declining collateral values may not be
sufficient to cover uncollectible amounts on the Bank’s secured loans. This may require the Bank to
downgrade the relevant loans, and establish additional allowances. A failure to recover the expected
value of collateral may expose the Bank to losses, which may materially adversely affect the Bank’s
business, results of operations, financial condition and prospects.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
35
The Bank’s business entails operational risk
The Bank is exposed to many types of operational risk, including the risk of fraud by employees or
outsiders, unauthorised transactions by employees or operational errors, including clerical or record
keeping errors or errors resulting from faulty computer or telecommunications systems.
The Bank maintains a system of controls designed to keep operational risk at appropriate levels.
However, there can be no assurance that it will not suffer a material adverse impact on its business,
results of operations, financial condition or prospects if these controls fail to detect or contain
operational risk in the future.
Change of the Bank’s organisational form
According to recent amendments in Ukrainian legislation regulating joint stock companies, the Bank
is required to change its organisational form from that of the current ‘‘open joint stock company’’ to
‘‘public joint stock company’’ (PJSC) by 29 April 2011. Failure by the Bank to comply with this
requirement may result in the imposition of sanctions by the State Commission on Securities and the
Stock Market of Ukraine (the Commission) and, including such sanctions as a maximum one year
suspension of issuance or circulation of the Bank’s domestic securities and/or licences issued to the
Bank. The Bank is undertaking actions required to implement such change and believes that its
transformation into a PJSC will be completed by the above specified statutory deadline. However,
failure to complete the change to the PJSC form and any resulting sanctions imposed by the
Commission may have an adverse effect on the operations of the Bank, its financial condition and
prospects.
Risks Related to the Notes and the Trading Market
The Notes may not be a suitable investment for all investors
In addition to the risks associated with investing in emerging markets such as Ukraine, each potential
investor in the Notes must determine the suitability of that investment in light of its own
circumstances. In particular, each potential investor should:
*
have sufficient knowledge and experience to make a meaningful evaluation of the Notes, the
merits and risks of investing in the Notes and the information contained in this Prospectus;
*
have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its
particular financial situation, an investment in the Notes and the impact the Notes will have on
its overall investment portfolio;
*
have sufficient financial resources and liquidity to bear all of the risks of an investment in the
Notes;
*
understand thoroughly the terms of the Notes and be familiar with the behaviour of financial
markets; and
*
be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for
economic, interest rate and other factors that may affect its investment and its ability to bear
the applicable risks.
The Notes may be considered complex financial instruments. Sophisticated institutional investors
generally do not purchase complex financial instruments as stand alone investments. They purchase
complex financial instruments as a way to reduce risk or enhance yield with an understood, measured,
appropriate addition of risk to their overall portfolios. A potential investor should not invest in the
Notes unless it has the expertise (either alone or with a financial adviser) to evaluate how the Notes
will perform under changing conditions, the resulting effects on the value of the Notes and the
impact this investment will have on the potential investor’s overall investment portfolio.
Noteholders’ rights to receive payment on the Notes will be limited to payments received from the Borrower
under the Loan Agreement
The Issuer is obliged to make payments under the Notes to Noteholders only to (the extent of the
amount of principal, interest, Additional Amounts (as defined in the Loan Agreement), if any, and
Indemnity Amounts (as defined in the Loan Agreement), if any, actually received by or for the
account of the Issuer under the Loan Agreement, less any amount in respect of the Reserved Rights.
Consequently, if the Borrower fails to fully meet its obligations under the Loan Agreement,
Noteholders will, on the relevant due date, receive less than the scheduled amount of principal,
interest and/or additional amounts (if any) due and payable under the Notes.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
36
The Borrower may be unable to repay the Loan at maturity
At maturity, the Borrower may not have the funds to fulfil its obligations under the Loan Agreement
and it may not be able to arrange for additional financing. If the maturity date of the Loan occurs at
a time when other arrangements prohibit the Bank from repaying the Loan, the Borrower would try
to obtain waivers of such prohibitions from the lenders under those other arrangements, or it could
attempt to refinance the borrowings that contain the restrictions. If the Borrower cannot obtain the
waivers or refinance these borrowings it may be unable to repay the Loan.
The Notes may be redeemed prior to maturity
In certain circumstances the Borrower may require or be required to prepay the Loan prior to
maturity (see Clause 7.1 (Repayment for Tax Reasons and Change in Circumstances) of the Loan
Agreement and Clause 7.2 (Repayment for Illegality) of the Loan Agreement), and in such
circumstances the outstanding Notes would be redeemed early (see Condition 5(b) (Redemption by the
Issuer:) of the ‘‘Terms and Conditions of the Notes’’). Such circumstances include the Borrower being
required to increase the amounts payable under the Loan Agreement (by way of Additional Amounts
and/or Indemnity Amounts (each as defined in the Loan Agreement)), including as a result of the
application of or any amendment to or change in the Double Tax Treaty (as defined herein) or the
laws or regulations of Ukraine or the United Kingdom. It may not be possible to reinvest the
proceeds from the redemption of the Notes at an effective interest rate as high as the interest rate on
the Notes and this may only be possible at a significantly lower rate.
Any Notes acquired by the Borrower or any of its subsidiaries may be surrendered through the Issuer
to the Principal Paying Agent for cancellation, and the Loan shall be deemed to have been prepaid in
an amount corresponding to the aggregate principal amount of the Notes surrendered for
cancellation.
The Borrower may not have the ability to raise the funds necessary to finance the repayment of the loan under
a Change of Control Offer
Pursuant to the ‘‘Terms and Conditions of the Notes’’, upon the occurrence of a Change of Control
(as defined in the Loan Agreement), Noteholders shall have the option to give notice or procure that
notice is given for the prepayment of the applicable amount of the Loan and the redemption of the
relevant Notes thereafter. However, it is possible that the Borrower will not have sufficient funds at
the time of a Change of Control to make the required prepayment of the Loan to enable the Issuer
to redeem the Notes. In summary, a Change of Control will occur if Ukraine, whether through the
Cabinet of Ministers of Ukraine or any other agency of Ukraine (as defined in the Loan Agreement)
ceases to own at least 51 per cent. of the share capital, or otherwise to control, the Borrower or if
there is an official public announcement made by the Cabinet of Ministers or the State Property
Fund of Ukraine of an intention that Ukraine would cease to so own or control the Borrower and
within a certain period of time thereafter, there is a Rating Decline (as defined in the Loan
Agreement) and, in the announcement of the Rating Decline, the relevant rating agency specifies that
the proposed change in ownership or control of the Borrower is a factor in its decision to decrease or
downgrade the Borrower rating. See the ‘‘Loan Agreement’’.
Noteholders have no direct recourse to the Borrower
Except as otherwise expressly provided in the Terms and Conditions of the Notes and in the Trust
Deed no proprietary or other direct interest in the Issuer’s rights under or in respect of the Loan
Agreement or the Loan exists for the benefit of the Noteholders. Subject to the terms of the Trust
Deed, no Noteholder will have any entitlement to enforce any of the provisions of the Loan
Agreement or have direct recourse to the Borrower, except through action by the Trustee to enforce
the Security Interests. Neither the Issuer nor the Trustee pursuant to the assignment of the
Transferred Rights (as defined in the ‘‘Terms and Conditions of the Notes’’) shall be required to enter
into proceedings to enforce payment under the Loan Agreement, unless it has been indemnified and/
or prefunded and/or secured by the Noteholders to its satisfaction against all liabilities, proceedings,
claims and demands to which it may thereby become liable and all costs, charges and expenses which
may be incurred by it in connection therewith.
In addition, the Noteholders should be aware that neither the Issuer nor the Trustee accepts any
responsibility for the performance by the Borrower of its obligations under the Loan Agreement. See
Condition 1 (Form, Denomination and Status) of the ‘‘Terms and Conditions of the Notes’’.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
37
The claims of Noteholders may be limited in the event that the Borrower is declared bankrupt
Ukrainian bankruptcy law differs from the bankruptcy laws of England and the United States and is
subject to varying interpretations. There is no sufficient precedent under Ukrainian bankruptcy law to
predict how claims of the Issuer, the Trustee or the Noteholders against the Borrower would be
resolved in the event of the Borrower’s bankruptcy. In the event of the Borrower’s bankruptcy, its
obligations to the Issuer, the Trustee or the Noteholders would be subordinated to the following
obligations:
*
obligations secured by pledges of the Borrower’s assets;
*
expenditures associated with the conduct of the bankruptcy proceedings, including severance
pay;
*
obligations arising as a result of inflicting harm to the life or health of individuals;
*
payment of wages to the Borrower’s employees due as of the commencement of the liquidation
procedure;
*
obligations to individual depositors;
*
obligations to the NBU arising as a result of depreciation of the value of a pledge to secure a
refinancing loan;
*
obligations to the Ministry of Finance arising as a result of the provision of repayable financial
aid save for contributions to share capital; and
*
obligations to individuals (with the exception of registered entrepreneurs) with blocked accounts.
In the event of the Borrower’s bankruptcy, Ukrainian bankruptcy law may materially adversely affect its
ability to make payments to the Issuer or the Trustee
Claims against the Borrower may be incapable of enforcement upon the introduction by the NBU of
temporary administration for the financial rehabilitation of the Borrower. If the NBU determines that
a significant threat exists of the Borrower becoming insolvent, the NBU is obliged to impose
temporary administration of the Borrower to improve its financial situation. The NBU may also
impose temporary administration of the Borrower in certain other circumstances. The temporary
administrator appointed by the NBU would replace all of the Borrower’s governing bodies for the
entire term of the temporary administration (being a period of up to one year with a possible
extension for a further year if the Borrower’s liabilities are equal to or exceed 10 per cent. of the
aggregate liabilities of the Ukrainian banking system at that time) and would be authorised to carry
out any acts aimed at the Borrower’s financial rehabilitation, including but not limited to (i)
terminating any ongoing operation of the Borrower (without terminating or invalidating the relevant
agreement itself), and (ii) terminating, in accordance with Ukrainian legislation, any agreement to
which the Borrower is a party and which, in the opinion of the temporary administrator, is either
loss-making or ‘‘unnecessary’’ for the Borrower. This may apply only to an agreement which contains
outstanding obligations of any party. The temporary administrator would have a broad discretion in
determining whether a particular agreement is loss-making or ‘‘unnecessary’’, given that Ukrainian
legislation provides no criteria for making such determination. During the term of temporary
administration of the Borrower, the temporary administrator may assign claims, transfer debts or
reorganise the Borrower without notification to or consent of the Borrower’s shareholders, debtors
and creditors. Shareholders, debtors and creditors of the Borrower are not entitled to accelerate the
Borrower’s obligations or to claim damages against the Borrower resulting from such actions,
provided that the latter are set out in a programme of financial rehabilitation of the Borrower, which
is approved by the NBU.
During the term of operation of the temporary administration, but not longer than for a three-month
period during such term, the NBU may, in its discretion, order a moratorium on the satisfaction of
claims of the Borrower’s creditors. During the term of such moratorium, the Borrower may be unable
to make payments to the Issuer and/or the Trustee and the Issuer’s and/or the Trustee’s claims
against the Borrower would not be enforceable. The Borrower may not be held liable for the nonperformance of its obligations to the Issuer and/or the Trustee resulting from the imposition of the
moratorium. Upon the termination of the moratorium (other than as a result of the Borrower
entering bankruptcy proceedings) the Issuer and/or the Trustee would be entitled to make, and to
enforce, claims against the Borrower in the amounts existing as of the date when the moratorium was
imposed.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
38
In addition, applicable Ukrainian legislation permits a temporary administrator of a bank appointed
pursuant to any such temporary administration to request a Ukrainian court to declare invalid,
among other agreements to which such bank may be party, an agreement between the bank and a
third party, if there has been under such agreement, ‘‘any operation’’ (meaning a payment or other
transaction): (i) within a six month period before the appointment of such temporary administrator, if
the purpose of the operation was to grant a preference to such third party compared to the bank’s
other creditors; (ii) within one year before the appointment of such temporary administrator between
the bank and a related party, if the operation contravened the requirements of Ukrainian legislation
or ‘‘threatened the interests of depositors and creditors’’ of the bank: (iii) within three years before
the appointment of such temporary administrator, if the operation involved any of the bank’s assets
and was conducted on a free-of-charge basis or the operation was conducted for the purpose of the
purchase by the bank of assets or services at a price significantly higher than the value of those assets
or services; (iv) within three years before the appointment of such temporary administrator, if the
operation was conducted with the purpose of concealing assets from the bank’s creditors or otherwise
violating the rights of such creditors; or (v) at any time, if the operation was based on forged
documents or if it was of a fraudulent nature. If the Loan Agreement was to be declared invalid on
such a basis, the Borrower would be required to repay to the Issuer all funds received from the Issuer
pursuant to the Loan Agreement, and the Issuer would be required to repay to the Borrower all
funds received from the Borrower pursuant to the Loan Agreement. There is also a lack of certainty
as to whether, in such event, the court might apply any other consequences of the invalidation of the
Loan Agreement (this would depend on the facts of the relevant case).
Ukrainian counsel have advised the Borrower that they believe there is no basis for challenging the
validity of the Loan Agreement or any transaction contemplated thereunder as contravening the
requirements of Ukrainian legislation. However, in view of the risks associated with the Ukrainian
legal system as disclosed under ‘‘Risks Relating to Ukraine – Weaknesses relating to the legal system
and legislation may create an uncertain environment for investment and business activity’’) no assurance
can be given that the courts in Ukraine would interpret this in the same manner.
Ukrainian currency control regulations could impact the Borrower’s ability to make payments to the Issuer or
Trustee under the Loan Agreement
The NBU is empowered to define policies for, and regulate, currency operations in Ukraine, as well
as to establish restrictions on currency operations, cross-border payments and repatriation of profits
denominated in foreign currency.
Ukrainian currency control regulations and practice are subject to continuing change, with the NBU
exercising considerable autonomy in their interpretation and application. While at present the Loan
Agreement is subject only to registration with the NBU and no licence is required to be obtained
from the NBU in order to make payments of principal, interest and fees under the Loan Agreement,
there can be no guarantee that such law and practice will remain unchanged during the term of the
Loan.
While the Loan Agreement will be registered with the NBU, payments under the Loan Agreement to
any entity other than the Issuer (e.g. after enforcement of the security by the Trustee) may require
registration with the NBU of the resulting change in the loan transaction and such change would
become effective only upon the NBU registration. The Borrower believes that the NBU would be
inclined to view enforcement of the Security Interests by the Trustee as an assignment of the Issuer’s
claims against the Borrower to the Trustee and would register the relevant change in the loan
transaction, thus enabling the Borrower’s payments to the Trustee instead of the Lender.
The NBU would have a broad discretion in approving the registration of such a change in the loan
transaction and could refuse to perform such registration as a result of, for example, misleading or
contradictory information being provided to the NBU for such registration. Should the NBU refuse
to register such a change, the Borrower would not be permitted to make payments of principal and
interest under the Loan Agreement to any entity other than the Issuer unless it were to obtain an
individual licence of the NBU permitting such payments.
In addition, the Board of the NBU has passed a resolution prohibiting Ukrainian borrowers from
making, in connection with loans granted by foreign lenders, any payments (other than of principal,
but including interest, fees, default interest, penalties, additional amounts and other charges payable
in connection with the loan) which, in aggregate per annum, exceed an amount determined by
applying the applicable maximum interest rate established by the NBU (the MIR) as at the date of
submission of documents to the NBU for the registration of the relevant loan agreement to the
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
39
principal amount of such loan. As at the date of this Prospectus, the MIR applicable to fixed interest
rate loans in major foreign convertible currencies (including U.S. dollars) the maturities of which are
less than one year is 9.8 per cent. per annum; the MIR applicable to loans the maturities of which
are from one year to three years is 10.0 per cent. per annum: and the MIR applicable to loans the
maturities of which are in excess of three years is 11.0 per cent. per annum.
At the current MIR, Noteholders should receive payment of the full amount of accrued interest in
respect of the Notes since the interest rate on the Loan, and the interest rate applicable to the Notes,
are lower than the currently effective MIR. However, any additional amounts, penalties or other
charges, if any, payable to the Lender in connection with the Loan could be limited by the MIR.
The NBU has the authority to review and modify the MIR from time to time and may refuse to
register a change in the loan transaction (for example, due to assignment to the Trustee) if the
amount of payments (excluding principal), in aggregate per annum, under the Loan Agreement would
exceed the amount calculated by reference to the then applicable MIR at that time.
In the event of any prepayment of the Loan or late disbursement of the Loan, the NBU would
require the application of the MIR based on the period for which the Loan has actually been
outstanding which might result in the application of a lower MIR (for example, the MIR applicable
to fixed interest rate loans the maturities of which are less than one year instead of the MIR
applicable to fixed interest rate loans the maturities of which are in excess of three years). Further,
since the NBU has the authority to review and modify the MIR from time to time, a reduction in
the MIR could further limit the ability of the Issuer to collect interest, fees, default interest, penalties,
additional amounts and other charges payable in connection with a prepayment or repayment of the
Loan, or in case of late disbursement of the Loan.
In addition, there is an NBU regulation pursuant to which the State Information and Analytical
Centre for Monitoring External Commodity Markets (the SIAC) is required to review the fees for
services rendered by a non-resident to a resident under an agreement for services (or a series of
agreements for similar services purchased within one calendar year from the same counterparty) with
a value in excess of EUR 100,000 (or an equivalent value in another currency), excluding payments
made by banks in favour of non-residents for rendering financial services, and excluding payments
made pursuant to a registration certificate issued for registration of a loan from a non-resident.
Unless a cross-border transaction relating to the non-resident’s services is licensed by the NBU or is
otherwise subject to an exemption, any such payment can only be made if the SIAC determines that
the value of the services set forth in the agreement (or in the series of agreements) is in line with
international market conditions. If the SIAC for any reason refuses to make that determination, any
such payment can be made only on the basis of a specific authorisation from the NBU. If the SIAC
determines that the fees are excessive, or refuses to determine that the fees are in line with
international market conditions and the NBU does not grant the authorisation, the payment of fees
cannot be made (unless such decision of the SIAC or the NBU has been overruled by a court order).
The Borrower’s payments of fees under the Loan Agreement are exempt from this requirement to the
extent they constitute fees for financial services, which the Borrower believes to be the case. However,
a risk exists that such exemption would not apply if the Borrower were required to make any
payment of such fees to a non-resident that is not authorised to render financial services under the
laws of its jurisdiction, or if such services were not regarded as financial services for purposes of the
applicable regulations of the NBU.
Nevertheless, if the amount of fees is in compliance with the value of such services in the global
market, there is a minimal risk that the SIAC would refuse to make a positive determination.
If the NBU changes its regulations, including to require the Borrower to obtain licence in order to make certain
payments under the Loan Agreement, the Borrower will need to apply for such a licence, and if it fails to obtain
such a licence, it may be restricted in its ability to make certain payments to the Issuer or the Trustee under the
Loan Agreement
NBU regulations are subject to occasional changes and varying interpretations which may impede the
Borrower’s ability to make payments to non-residents, including payments to the Issuer under the
Loan Agreement. These may include changes to the circumstances in which a licence for payment to
a non-resident is required as well as the process of obtaining such licence. Currently, no such
individual licence is generally required for making payments of principal and interest by a resident
borrower to a non-resident lender under a loan agreement registered with the NBU (such as the Loan
Agreement) as well as for payment for services. (see also ‘‘Ukrainian currency control regulations could
impact the Borrower’s ability to make payments to the Issuer or the Trustee under the Loan
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
40
Agreement’’). If the NBU determines in the future that a licence is required for payments by the
Borrower under the Loan Agreement, the Borrower would need to apply for a licence, but there can
be no assurance that the Borrower would receive such a licence. If the Borrower does not receive
such a licence (if one were to be required), no assurance can be given that it would be able to
continue to make payments under the Loan Agreement.
Availability of treaty relief could impact the Borrower ability to make payments of interest to the Issuer or the
Trustee under the Loan Agreement
In general, payments of interest on borrowed funds by a Ukrainian resident to a non-resident entity
are subject to withholding tax in Ukraine at the rate of 15 per cent., subject to any reduction or
exemption under an applicable double tax treaty, and provided that the interest is not derived
through the non-resident’s permanent establishment in Ukraine.
Based on professional advice it has received, the Borrower believes that, under the terms of the
Convention between the Government of the United Kingdom of Great Britain and Northern Ireland
and the Government of Ukraine for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income and Capital Gains signed on 10 February 1993 and
effective from 11 August 1993 (the Double Tax Treaty), as it is currently applied, payments of interest
on the Loan will not be subject to withholding tax in Ukraine, provided that certain conditions set
forth in the Double Tax Treaty and under applicable Ukrainian law are satisfied. However, there can
be no assurance that the exemption from withholding tax is, or will continue to be, available.
Payments of interest under the Loan Agreement shall be exempt from Ukrainian withholding tax
under the Double Tax Treaty provided that the Issuer is a resident of the United Kingdom for the
purposes of the Double Tax Treaty, is the ‘‘beneficial owner’’ of the interest and is ‘‘subject to tax’’
in respect of the interest in the United Kingdom. Under applicable Ukrainian law, the Issuer’s
residence in the United Kingdom for purposes of the Double Tax Treaty will be evidenced by a
certificate issued by the taxing authority in the United Kingdom or by the Issuer’s being listed in the
S.W.I.F.T. International Bank Identifier Code. The exemption of interest from Ukrainian withholding
tax will not be available under the Double Tax Treaty if the Issuer carries on business in Ukraine
through a permanent establishment situated therein, and the debt-claim in respect of which the
interest is paid is effectively connected with such permanent establishment.
Ukraine does not have an established practice of utilizing the concept of ‘‘beneficial ownership’’ of
interest. For tax law purposes, this concept was introduced in Ukraine by the new Tax Code of
Ukraine, the main part of which became effective on 1 January 2011. Under the Tax Code, a person
that acts as agent, nominal holder (owner) or intermediary in respect of Ukrainian source income
would not qualify as the ‘‘beneficial owner’’ of the income. Although the Ukrainian tax authorities
did not apply the ‘‘beneficial ownership’’ concept to deny tax treaty benefits to foreign lenders in the
past, and there is yet no practice of interpretation or application of such concept in Ukraine, there is
a risk that, based on the above specified provisions of the new Tax Code, the Issuer may be viewed
by the Ukrainian tax authorities as failing to satisfy the ‘‘beneficial ownership’’ test in respect of
interest under the Loan Agreement. In such event, the payment of interest to the Issuer would not be
exempt from the Ukrainian withholding tax, and the Borrower would be required to pay the
Additional Amounts under the tax gross-up provisions of the Loan Agreement to compensate the
Issuer for such tax withholding. In such situation, and under the terms of the Loan Agreement, the
Borrower would be entitled to prepay the Loan together with all interest and other amounts payable
under the Loan Agreement. (See ‘‘Consequences of Ukrainian withholding tax on payments under the
Loan Agreement’’)
In addition, Article 11(7) of the Double Tax Treaty contains a ‘‘main purpose’’ anti-avoidance
provision. While there is no established practice of the Ukrainian tax authorities with respect to the
application of this provision, if the Ukrainian tax authorities take the position that the main or. one
of the main purposes of using the United Kingdom as the Issuer’s jurisdiction of residence for this
financing transaction was to take advantage of the tax benefits (i.e. exemption of interest payments
from withholding taxation in Ukraine) under the Double Tax Treaty, the tax authorities may
potentially invoke the anti-avoidance provision of Article 11(7) of the Double Tax Treaty. In such
circumstances, there is a risk that payments of interest by the Borrower under the Loan Agreement
would cease to have the benefit of the Double Tax Treaty.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
41
If the Trustee were to enforce the security under the Trust Deed, payments under the Loan Agreement could
lose the benefit of the Double Tax Treaty and could become subject to Ukrainian withholding tax
If the Trustee were to enforce the security under the Trust Deed, following a Relevant Event, the
Trustee will be entitled to payments of principal and interest under the Loan Agreement. As a result,
payments under the Loan Agreement may cease to have the benefit of the Double Tax Treaty and
may consequently become subject to Ukrainian withholding tax unless the Trustee meets all the
criteria for the exemption under the Double Tax Treaty. If this were to occur, the Borrower would
not be obliged to pay additional amounts on account of Ukrainian taxes withheld and the Trustee
(on behalf of Noteholders) would only be entitled to receive payments net of such taxes.
If the Issuer were to cease to be resident in a Qualifying Jurisdiction for purposes of the Loan Agreement, or
the Double Tax Treaty is otherwise rendered inapplicable, payments of interest under the Loan Agreement
would be subject to Ukrainian withholding tax
If the Issuer or any successor or assignee of the Issuer were to cease to be resident in a jurisdiction
that has an effective double tax treaty with Ukraine that is similar to the Double Tax Treaty, or if
the Issuer or any successor or assignee of the Issuer takes any action that would render the Double
Tax Treaty inapplicable, then payments of interest under the Loan Agreement would be subject to
Ukrainian withholding tax at the rate of 15 per cent. If this were to occur, the Borrower would be
obliged to pay additional amounts on account of Ukrainian taxes withheld and would become
entitled to prepay the Loan at its principal amount, together with accrued interest as set forth in the
Loan Agreement. In the event of such a prepayment (subject to receipt of sufficient funds from the
Borrower) the Issuer would prepay all outstanding Notes.
Consequences of Ukrainian withholding tax on payments under the Loan Agreement
If any payments (including payments of interest) under the Loan Agreement are subject to any
withholding tax in Ukraine (as a result of which payments under the Notes may be reduced), the
Borrower may, in certain circumstances specified in the Loan Agreement, become obliged to pay such
additional amounts as may be necessary so that the net payments received by the Issuer or the
Trustee will not be less than the amount the Issuer or the Trustee would have received in the absence
of such withholding.
Ukrainian tax law contains restrictions that, if construed broadly, may affect the validity and
enforceability of the gross-up provisions in the Loan Agreement. A recent official interpretation of the
Ukrainian tax authorities indicates that tax gross-up provisions and obligations of the Borrower to
pay additional amounts under the Loan Agreement like those contained in Clause 8.1 of the Loan
Agreement (Additional Amounts) may be seen as contravening the Ukrainian tax law and as a result
unenforceable. If such interpretation is applied, the failure by the Borrower to pay additional
amounts due under the Loan Agreement would constitute a default under the Loan Agreement and
the Issuer would be entitled to accelerate the Borrower’s payments in accordance with the terms of
the Loan Agreement. Also, in the event that the Borrower becomes obliged to pay additional
amounts as a result of a change in relevant law or the Double Tax Treaty (including a change in the
interpretation thereof), the Borrower would become entitled to prepay the Loan at its principal
amount, together with accrued interest, and in the event of such a prepayment (subject to receipt of
the relevant funds from the Borrower) all outstanding Notes would be prepaid by the Issuer. It may
not be possible to reinvest the proceeds from the redemption of the Notes at an effective interest rate
as high as the interest rate on the Notes and this may only be possible at a significantly lower rate.
Foreign judgments may not be enforceable against the Borrower
Courts in Ukraine will not recognise and/or enforce any judgment obtained in a court established in
a country other than Ukraine unless such recognition and/or enforcement is envisaged by an
international treaty to which Ukraine is a party, and then only in accordance with the terms of such
treaty. There is no such treaty in effect between Ukraine and the United Kingdom.
In the absence of such treaty, the courts of Ukraine may only recognise or enforce a foreign court
judgment on the basis of the principle of reciprocity. Under Article 390 of the Civil Procedure Code,
unless proven otherwise the reciprocity is deemed to exist in relations between Ukraine and the
country where the judgment was rendered. The Civil Procedure Code does not provide for any clear
rules on the application of the principle of reciprocity and there is no official interpretation or court
practice of these provisions of the Civil Procedure Code. Accordingly, there can be no assurance that
the courts of Ukraine will recognise or enforce a judgment rendered by the courts of the United
Kingdom on the basis of the principle of reciprocity. Furthermore, the courts of Ukraine might refuse
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
42
to recognise or enforce a foreign court judgment on the basis of the principle of reciprocity on the
grounds provided in the Civil Procedure Code.
Since Ukraine is a party to the New York Convention, an arbitration award obtained in a state
which is also a party to the New York Convention, such as the United Kingdom, would be
enforceable in Ukraine, subject to the terms of the New York Convention. See ‘‘Enforceability of
Judgments’’.
In addition, by virtue of being wholly owned by the State and in common with other state-owned
enterprises, the Borrower’s fixed assets in Ukraine are immune from execution pursuant to a
temporary moratorium imposed in 2001. By virtue of the moratorium, enforcement against the fixed
assets of the Borrower arising in connection with, inter alia, court judgments and arbitration awards
or bankruptcy proceedings is currently prohibited. As a result, a creditor of the Borrower may not be
able to enforce a judgement against the Borrower’s fixed assets.
Furthermore, the Bank is included on the list of state-owned companies which cannot be subject to
privatisation. For this reason, although the law generally permits the Bank’s financial rehabilitation
(temporary administration), liquidation by the shareholder’s decision or otherwise upon the revocation
of the banking license, and the institution of the Bank’s bankruptcy proceedings at a competent
Ukrainian court, neither of such processes may involve any sale or other disposal of the Bank or its
assets to a private acquirer until and unless the Bank has been removed from such list. In addition, a
Ukrainian court seized with an application for the institution of bankruptcy proceedings of the Bank
may refuse the application or terminate the bankruptcy proceedings until and unless the Bank has
been removed from such list. The Bank’s removal from the list requires the adoption of a law by
Verkhovna Rada (Parliament) of Ukraine.
Any negative change in Ukraine’s or the Borrower’s own credit rating could adversely affect the market price
of the Notes
The Borrower has received credit ratings from Fitch Deutschland GmbH and from Moody’s as set
out in ‘‘Overview -Credit Ratings’’. The Borrower’s credit ratings at any time may not reflect the
potential impact of all risks related to structure, market, additional factors discussed above, and other
factors that may affect the value of the Notes.
Ukraine has been assigned long-term sovereign foreign currency credit ratings of ‘‘B+ (stable
outlook)’’ by S&P, ‘‘B2 (stable outlook)’’ by Moody’s and ‘‘B (stable outlook)’’ by Fitch. A security
rating is not a recommendation to buy, sell or hold securities and may be subject to revision or
withdrawal at any time by the assigning rating organisation.
Any negative change in the Borrower’s credit ratings or the credit ratings of Ukraine could materially
adversely affect the market price of the Notes.
The Issuer is not required to pay additional amounts on account of withholding pursuant to the EU Savings
Tax Directive
If an Agent or any other person by or through whom a payment on the Notes is made or received is
required to withhold any amount from any such payment as a consequence of or pursuant to EC
Directive 2003/48/EC on the taxation of savings income (the EU Savings Tax Directive) or any law
implementing or complying with, or introduced in order to conform to, such Directive, there is no
requirement for the Issuer to pay any additional amounts on account of that withholding. In this
regard, prospective Noteholders should read the information about the EU Savings Tax Directive in
the section entitled ‘‘Taxation’’ and consult their advisors.
There is no active trading market for the Notes
The Notes are new securities which may not be widely distributed and for which there is currently no
active trading market. If the Notes are traded after their initial issuance, they may trade at a discount
to their initial offering price, depending upon prevailing interest rates, the market for similar
securities, general economic conditions and the financial condition of the Borrower. Although
application has been made to list the Notes on the Official List of the Irish Stock Exchange, there
can be no assurance that a liquid market will develop for the Notes, that holders of the Notes will be
able to sell their Notes, or that such holders will be able to sell their Notes for a price that reflects
their value.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
43
Exchange rate risks and exchange controls
The Issuer will pay principal and interest on the Notes in U.S. dollars. This presents certain risks
relating to currency conversions if an investor’s financial activities are denominated principally in a
currency or currency unit (the Investor’s Currency) other than U.S. dollars. These include the risk that
exchange rates may significantly change (including changes due to devaluation of U.S. dollars or
revaluation of the Investor’s Currency) and the risk that authorities with jurisdiction over the
Investor’s Currency may impose or modify exchange controls. An appreciation in the value of the
Investor’s Currency relative to U.S. dollars would decrease (1) the Investor’s Currency-equivalent yield
on the Notes, (2) the Investor’s Currency-equivalent value of the principal payable on the Notes and
(3) the Investor’s Currency-equivalent market value of the Notes.
Government and monetary authorities may impose (as some have done in the past) exchange controls
that could adversely affect an applicable exchange rate. As a result, investors may receive less interest
or principal than expected or no interest or principal.
Trading in the clearing systems is subject to minimum denomination requirements
The Notes will initially only be issued in global certificated form, and held through the clearing
systems. Interests in the Global Note Certificate will trade in book-entry form only, and notes in
definitive registered form, or Individual Note Certificates, will be issued in exchange for book-entry
interests only in very limited circumstances. Owners of book-entry interests will not be considered
owners or holders of Notes. The common depository, or its nominee, for the clearing systems will be
the sole registered holder of the Global Note Certificates representing the Notes. Payments of
principal, interest and other amounts owing on or in respect of the Global Note Certificate
representing the Notes will be made to the Principal Paying Agent, who will make payments to the
clearing systems. Thereafter, these payments will be credited to accounts of participants who hold
book-entry interests in the Global Note Certificates representing the Notes and credited by such
participants to indirect participants. After payment to the common depository for the clearing
systems, none of the Borrower, the Issuer, the Lead Managers, the Trustee or the Agents will have
any responsibility or liability for the payment of interest, principal or other amounts to the owners of
the book-entry interests. Accordingly, if you own a book-entry interest, you must rely on the
procedures of the clearing systems, and if you are not a participant in the clearing systems, on the
procedures of the participant through which you hold your interest, to transfer your interest or to
exercise any rights and obligations of a holder of Notes under Trust Deed.
Unlike the holders of the Notes themselves, owners of book-entry interests will not have the direct
right to act upon the Issuer’s solicitations for consents, requests for waivers or other actions from
holders of the Notes. Instead, if you own a book-entry interest, you will be permitted to act only to
the extent you have received appropriate proxies to do so from the relevant clearing system. The
procedures implemented for the granting of such proxies may not be sufficient to enable you to vote
on a timely basis.
Similarly, upon the occurrence of an Event of Default under Trust Deed, unless and until Individual
Note Certificates are issued in respect of all book-entry interests, if you own a book-entry interest,
you will be restricted to acting through Euroclear and Clearstream, Luxembourg. The procedures to
be implemented through Euroclear and Clearstream, Luxembourg may not be adequate to ensure the
timely exercise of rights under the Notes. See ‘‘Summary of Provisions Relating to the Notes in Global
Form’’.
The claims of Noteholders may be limited in the event that the Issuer is declared bankrupt
The Issuer is organised under the laws of the United Kingdom. Although it is impossible to predict
with certainty in which jurisdiction or jurisdictions insolvency or similar proceedings would be
commenced or how these proceedings would be resolved, insolvency proceedings over the assets of the
Issuer may be initiated in England and be governed by English law. The insolvency laws of England
may not be as favourable to your interests as creditors as the bankruptcy laws of the United States,
including in respect of priority of creditors, the ability to obtain post-petition interest and the
duration of the insolvency proceedings.
The market price of the Notes may be volatile
The market price of the Notes could be subject to significant fluctuations in response to actual or
anticipated variations in the Borrower’s own and the Borrower’s competitors’ operating results,
adverse business developments, changes in the regulatory environment in which the Borrower
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
44
operates, changes in financial estimates by securities analysts and the actual or expected sale of a
large number of Notes, as well as other factors, including the trading market for securities issued by
or on behalf of Ukraine as a sovereign borrower. In addition, in recent years the global financial
markets have experienced significant price and volume fluctuations which, if repeated in the future,
could adversely affect the market price of the Notes without regard to the Borrower’s results of
operations, prospects or financial condition.
Financial turmoil in emerging markets could cause the price of the Notes to suffer
The market price of the Notes will be influenced by economic and market conditions in Ukraine and
to a varying degree, economic and market conditions in other CIS, Eastern European and emerging
markets generally. Financial turmoil in Ukraine and other emerging markets in 1997-1998 as well as
in 2008-2009 adversely affected market prices in the world’s securities markets for companies that
operate in those developing economies. Even if the Ukrainian economy remains relatively stable,
financial turmoil in these countries could materially adversely affect the market price of the Notes.
Modification, waivers and substitution
The Terms and Conditions of the Notes contain provisions for calling meetings of Noteholders to
consider matters affecting their interests generally. These provisions permit defined majorities to bind
all Noteholders including Noteholders who did not attend and vote at the relevant meeting and
Noteholders who voted in a manner contrary to the majority.
The Terms and Conditions of the Notes also provide that the Trustee may, without the consent of
Noteholders, agree to (i) any modification of, or to the waiver or authorisation of any breach or
proposed breach of, any of the provisions of the Notes, the Trust Deed or, pursuant to the
Transferred Rights, the Loan Agreement or (ii) determine without the consent of the Noteholders that
any event which would or might otherwise give rise to a right of acceleration under the Loan
Agreement or constitute a Relevant Event shall not be treated as such or (iii) the substitution of
another company as principal debtor under the Notes in place of the Issuer, all as more fully
described in Condition 1 (Form, Denomination and Status) of the ‘‘Terms and Conditions of the
Notes’’.
Legal investment considerations may restrict certain investments
The investment activities of certain investors are subject to legal investment laws and regulations, or
review or regulation by certain authorities. Each potential investor should consult its legal advisers to
determine whether and to what extent (1) the Notes are legal investments for it, (2) the Notes can be
used as collateral for various types of borrowing and (3) other restrictions apply to its purchase or
pledge of the Notes. Financial institutions should consult their legal advisors or the appropriate
regulators to determine the appropriate treatment of the Notes under any applicable risk-based capital
or similar rules. See ‘‘The transfer of the Notes will be restricted, which may adversely affect the value
of the Notes’’.
c104221pu020Proof7:3.3.11B/LRevision:0OperatorChoD
45
THE OFFERING
Offering:
U.S.$500,000,000 8.25 per cent. loan participation notes due 2016.
Issuer:
SSB No. 1 Plc.
Borrower:
Joint Stock Company ‘‘State Savings Bank of Ukraine’’.
Trustee:
BNY Corporate Trustee Services Limited.
Principal Paying Agent and
Transfer Agent:
The Bank of New York Mellon, London Branch.
Registrar:
The Bank of New York Mellon (Luxembourg) S.A.
Irish Paying Agent:
The Bank of New York Mellon (Ireland) Limited.
Listing Agent:
The Bank of New York Mellon (Ireland) Limited.
Issue Price:
100 per cent. of the principal amount of the Notes.
Use of Proceeds:
The Issuer will use the proceeds of the issue of the Notes for the sole
purpose of financing a loan (the Loan) to the Borrower. The
proceeds from the Loan will be used by the Borrower primarily to
provide loans to its customers and for general corporate purposes.
See ‘‘Use of Proceeds’’.
Interest:
As described under ‘‘Terms and Conditions of the Notes – Interest’’,
interest on the Notes will be payable semi-annually in arrear in
equal instalments on 10 September and 10 March in each year,
commencing on 10 September 2011, but the Issuer shall account to
Noteholders only for an amount equivalent to amounts of interest
actually received and retained by or for the account of the Issuer
pursuant to the Loan Agreement, which interest under the Loan is
equal to 8.25 per cent. per annum.
Status of the Notes:
The Notes constitute limited recourse, secured and unsubordinated
obligations of the Issuer and shall at all times rank pari passu and
without preference among themselves.
Status of the Loan:
The Loan will constitute a direct, unconditional and unsecured
obligation of the Bank. In case of liquidation (bankruptcy) of the
Bank, the repayment of the principal amount of the Loan will rank
at least pari passu with other unsecured and unsubordinated
creditors of the Bank, save those whose claims are preferred by any
bankruptcy, insolvency, liquidation, moratorium or similar laws of
general application.
Limited Recourse:
The Notes are secured limited recourse obligations of the Issuer.
The Notes will constitute the obligation of the Issuer to apply an
amount equal to the proceeds from the issue of the Notes solely for
the purpose of financing the Loan to the Borrower pursuant to the
terms of the Loan Agreement. The Issuer will only account to the
Noteholders for all amounts equivalent to those (if any) received
and retained (net of tax) from the Borrower under the Loan
Agreement excluding amounts in respect of the Reserved Rights (as
defined in ‘‘Terms and Conditions of the Notes’’) and no other assets
of the Issuer will be available to Noteholders.
Security:
The Notes are secured by a first fixed charge in favour of the
Trustee of the Issuer’s rights, interests and benefits, both present
and future, to payments under the Loan Agreement (other than the
Reserved Rights (as defined in ‘‘Terms and Conditions of the
Notes’’)) and a first fixed charge to the Trustee of sums held on
deposit in the Account (as defined in ‘‘Terms and Conditions of the
Notes’’). The Issuer will also assign certain rights under the Loan
Agreement to the Trustee, each as more fully described in ‘‘Terms
and Conditions of the Notes’’.
c104221pu030Proof7:3.3.11B/LRevision:0OperatorChoD
46
Form:
The Notes will be issued in registered form. The Notes will be in
denominations of U.S.$200,000 each and integral multiples of
U.S.$1,000 in excess thereof and will be represented by a Global
Note Certificate which will be exchangeable for Notes in definitive
form in the limited circumstances described under ‘‘Summary of the
Provisions relating to the Notes in Global Form’’.
Early Redemption:
The Notes may be redeemed at the option of the Issuer in whole,
but not in part, at any time, upon giving notice to the Noteholders,
at the principal amount thereof together with accrued and unpaid
interest to the date of redemption and any additional amounts in
respect thereof upon receiving notice that the Borrower wishes to
prepay the Loan for tax reasons or in the event that it becomes
unlawful for the Issuer to fund the advance or allow to remain
outstanding the Loan under the Loan Agreement as more fully
described in Clause 7 (Taxation) of the Loan Agreement and
Condition 5 (Redemption and Purchase) of the ‘‘Terms and
Conditions of the Notes’’.
Any Notes acquired by the Borrower or any of its subsidiaries may
be surrendered through the Issuer to the Principal Paying Agent for
cancellation, and the Loan shall be deemed to have been prepaid in
an amount corresponding to the aggregate principal amount of the
Notes surrendered for cancellation.
Optional Redemption:
Upon a Change of Control (as defined in the Loan Agreement),
each Noteholder shall have the option to give notice or procure that
notice is given for the prepayment of the applicable amount of the
Loan. To the extent such amount is actually received by the Issuer
from the Borrower, each Note held by the relevant Noteholders
shall be redeemed on the Change of Control Payment Date (as
defined in the ‘‘Terms and Conditions of the Notes’’) at its principal
amount together with accrued and unpaid interest (if any) plus
Additional Amounts (as defined in the ‘‘Terms and Conditions of the
Notes’’), if any. See Condition 5 (Redemption and Purchase) of the
‘‘Terms and Conditions of the Notes’’.
Issuer’s Covenant:
As long as any of the Notes remains outstanding, the Issuer will
not, without the prior written consent of the Trustee, agree to any
amendments to, or any modification or waiver of, or authorise any
breach or proposed breach of, the terms of the Loan Agreement,
except as otherwise expressly provided in the Trust Deed or the
Loan Agreement.
Negative Pledge and Other
Covenants:
The Loan Agreement contains a negative pledge in relation to the
creation of Security Interests (other than Permitted Security
Interests) (each as defined in the Loan Agreement) to secure the
Indebtedness of the Borrower and its Material Subsidiaries (each as
defined in the Loan Agreement) as set out in the Loan Agreement.
The Loan Agreement also contains covenants restricting mergers
and disposals by the Borrower, transactions between the Borrower
and its Affiliates (as defined in the Loan Agreement) and a
covenant restricting the making of certain payments and
distributions by the Borrower. The Loan Agreement also
contains a covenant by the Borrower to comply with the capital
adequacy requirements of the National Bank of Ukraine.
Events of Default/Relevant Events:
In the case of the occurrence and continuance of a Potential Event
of Default, an Event of Default or a Relevant Event (as defined in
the ‘‘Terms and Conditions of the Notes’’), the Trustee may subject
as provided in the Trust Deed (1) require the Issuer to declare all
amounts payable under the Loan Agreement by the Borrower to be
immediately due and payable (in the case of an Event of Default) or
c104221pu030Proof7:3.3.11B/LRevision:0OperatorChoD
47
(2) enforce the Security Interests (as defined in the ‘‘Terms and
Conditions of the Notes’’) (in the case of a Relevant Event). Upon
repayment of the Loan following an Event of Default, the Notes
will be redeemed or repaid at the principal amount thereof, together
with interest accrued to the date fixed for redemption and any
additional amounts due and thereupon shall cease to be
outstanding.
Rating:
The Notes are expected on issue to be rated B by Fitch Deutschland
GmbH and B2 by Moody’s Investors Service. Inc.
Credit ratings assigned to the Notes do not necessarily mean that
they are a suitable investment. A rating is not a recommendation to
buy, sell or hold securities and may be subject to revision,
suspension or withdrawal at any time by the assigning rating
organisation. Similar ratings on different types of notes do not
necessarily mean the same thing. The ratings do not address the
likelihood that the principal on the Notes will be prepaid, paid on
an expected final payment date or paid on any particular date
before the legal final maturity date of the Notes. The ratings do not
address the marketability of the Notes or any market price. Any
change in the credit ratings of the Notes or the Borrower could
adversely affect the price that a subsequent purchaser will be willing
to pay for the Notes. The significance of each rating should be
analysed independently from any other rating.
Withholding Tax:
All payments of principal and interest in respect of the Notes will be
made free and clear of and without deduction or withholding for or
on account of any taxes, duties, assessments, fees or other
governmental charges of the United Kingdom or Ukraine, as the
case may be, save as required by law. If any such withholding or
deduction is so required, the Issuer shall (subject to certain
exceptions as set out in Condition 7 (Taxation)) pay such
additional amounts as will result in the receipt by the
Noteholders after the withholding or deduction of such amounts
as would have been received by them had no such withholding or
deduction been required. The sum payable by the Borrower under
the Loan Agreement will be required (subject to certain exceptions)
to be increased to the extent necessary to ensure that the Issuer
receives a net sum sufficient to enable it to pay such additional
amounts. The sole obligation of the Issuer in this respect will be to
pay to the Noteholders sums equivalent to the sums received from
the Borrower. See Condition 7 (Taxation) of the ‘‘Terms and
Conditions of the Notes’’.
Listing:
This Prospectus has been approved by the Central Bank of Ireland
as competent authority under the Prospectus Directive. The Central
Bank of Ireland only approves this Prospectus as meeting the
requirements imposed under Irish and EU law pursuant to the
Prospectus Directive.
Application has been made to the Irish Stock Exchange for the
Notes to be admitted to the Official List and trading on its
regulated market.
Selling Restrictions:
The Notes have not been and will not be registered under the
Securities Act and, subject to certain exceptions, may not be offered
or sold within the United States. The Notes may be sold in other
jurisdictions (including the United Kingdom, The Russian
Federation, Hong Kong, Singapore and Ukraine) only in
compliance with applicable laws and regulations. See
‘‘Subscription and Sale’’.
c104221pu030Proof7:3.3.11B/LRevision:0OperatorChoD
48
Governing Law:
The Notes, the Loan Agreement and the Trust Deed, including any
non-contractual obligations arising out of or in connection
therewith, will be governed by English law.
Risk Factors:
An investment in the Notes involves a high degree of risk. See ‘‘Risk
Factors’’.
Security Codes:
ISIN: XS0594294695
Common Code: 059429469
c104221pu030Proof7:3.3.11B/LRevision:0OperatorChoD
49
DESCRIPTION OF THE TRANSACTION
The following summary contains basic information about the Notes and the Loan and should be read in
conjunction with, and is qualified in its entirety by, the information set forth under ‘‘Terms and
Conditions of the Notes’’ and ‘‘The Loan Agreement’’ appearing elsewhere in this Prospectus.
The transaction will be structured as a loan to the Borrower by the Issuer.
The Notes are limited recourse loan participation notes to be issued by the Issuer for the sole
purpose of funding the Loan to the Borrower. The Notes will have the benefit of, and be constituted
by, the Trust Deed. As provided in the Trust Deed, the Issuer will (a) charge by way of security to
the Trustee all its rights to principal, interest and other amounts under the Loan Agreement (other
than certain Reserved Rights) (as defined in ‘‘Terms and Conditions of the Notes’’) and (b) charge by
way of security to the Trustee all its rights, title and interest in and to all sums of money now or in
the future deposited in an account with the Principal Paying Agent in the name of the Issuer together
with the debt represented thereby (including interest from time to time earned thereon) (the Account).
The Issuer will also assign certain administrative rights under the Loan Agreement to the Trustee.
The Borrower will be obliged to make payments under the Loan to the Issuer in accordance with the
terms of the Loan Agreement to the Account. The Issuer will agree in the Trust Deed not to make
any amendment or any modification or waiver of or authorise any breach, or proposed breach of, the
terms of the Loan Agreement unless the Trustee has given its prior written consent or except as
otherwise expressly provided in the Trust Deed and the Loan Agreement. The Issuer will further
agree to act at all times in accordance with any instruction of the Trustee from time to time with
respect to the Loan Agreement, save as otherwise provided in the Trust Deed. Any amendments,
modifications, waivers or authorisations made with the Trustee’s consent shall be notified to the
Noteholders in accordance with Condition 14 (Notices) and shall be binding on the Noteholders.
Formal notice of the security interests created by the Trust Deed will be given to the Borrower and
the Principal Paying Agent who will each be required to acknowledge the same.
In the event that the Trustee enforces the security interests granted to it, the Trustee will assume
certain rights and obligations towards the Noteholders as more fully set out in the Trust Deed.
The Notes are limited recourse obligations and the Issuer will not have any obligation to the
Noteholders other than the obligation to account to the Noteholders for payment of principal,
interest and additional amounts (if any) actually received and retained (net of tax) by it under the
Loan excluding any amounts in respect of the Reserved Rights which the Issuer is entitled to retain
from any amounts actually received. The Issuer will have no other financial obligations under the
Notes and no other assets of the Issuer will be available to the Noteholders. In the event that the
amount due and payable by the Issuer under the Notes exceeds the sums so received, recovered or
retained (net of tax) the right of any person to claim payment of any amount exceeding such sums
shall be extinguished, and Noteholders may take no further action to recover such amounts.
Set out below is a diagrammatic representation of the structure:
Repayment of Principal and Interest
on the Note
Noteholder
Principal and Interest
in respect of the Loan
The Issuer
Proceeds of the Notes
50
c104221pu030Proof7:3.3.11B/LRevision:0OperatorChoD
The Borrower
Loan
USE OF PROCEEDS
The Issuer will use the proceeds of the issue of the Notes for the sole purpose of financing the Loan
to the Borrower. The proceeds of the Loan (expected to be U.S.$500,000,000) will be used by the
Borrower primarily to provide loans to its customers and for general corporate purposes. The
commissions, costs and expenses in connection with the issuance and offering of the Notes and
admission to trading thereof will not be paid from the proceeds of the issue of the Notes and will be
paid by the Borrower on or in advance of the issue date.
c104221pu030Proof7:3.3.11B/LRevision:0OperatorChoD
51
CAPITALISATION AND INDEBTEDNESS
The following table sets forth the Bank’s capitalisation and indebtedness as at 30 September 2010.
This information was extracted from the Condensed Interim Financial Information and should be
read in conjunction with ‘‘Use of Proceeds’’, ‘‘Financial Review’’ and the Condensed Interim Financial
Information included elsewhere in this Prospectus.
30 September 2010
Actual
(USD
thousand)(1)
Liabilities:
Due to banks
Customer accounts
Debt securities issued
Deferred income tax liability
Other liabilities
Subordinated debt
Loan agreement
(UAH
thousand)
30 September 2010
As adjusted
(USD
thousand)(1)
(UAH
thousand)
1,995,895
2,906,696
58,714
34,889
14,032
101,045
—
15,794,517
23,002,137
464,633
276,091
111,041
799,616
—
1,995,895
2,906,696
58,714
34,889
14,032
101,045
500,000
15,794,517
23,002,137
464,633
276,091
111,041
799,616
3,956,750
Total liabilities
Equity:
Share capital
Property revaluation reserve
Investments available for sale fair value reserve
Retained earnings
5,111,271
40,448,035
5,611,271
44,404,785
1,755,481
144,943
1,940
46,783
13,892,000
1,147,005
15,349
370,217
1,755,481
144,943
1,940
46,783
13,892,000
1,147,005
15,349
370,217
Total equity
1,949,147
15,424,571
1,949,147
15,424,571
Total Capitalisation
7,060,418
55,872,606
7,560,418
59,829,356
(1) The U.S. dollar amounts presented in the table above have been translated solely for convenience of the reader using the rate
published by the NBU on the reporting date. No representation is made that the hryvnia or dollar amounts referred herein could
have been or could be converted into hryvnias or dollars, as the case may be, at these rates, or any other particular rate at all.
c104221pu030Proof7:3.3.11B/LRevision:0OperatorChoD
52
SELECTED FINANCIAL AND OPERATING INFORMATION
The selected financial and operating information for the Bank set forth below should be read in
conjunction with, and is qualified in its entirety by reference to the Financial Statements included
elsewhere in this Prospectus. The summary financial information set forth below as at and for the years
ended 31 December 2009 and 2008 has been extracted from the audited Financial Statements, which are
included elsewhere in this Prospectus. The summary financial information below for the nine month
periods ended 30 September 2010 and 2009 and as at 30 September 2010 has been extracted from
audited Condensed Interim Financial Information also included elsewhere in this Prospectus. The
Ukrainian hryvnia is the functional currency for the Financial Statements.
Nine months ended 30 September
Year ended 31 December
2010
2010
2009
2009
2009
2008
(USD
thousand)1
(UAH
thousand)
(UAH
thousand)
(USD
thousand)1
(UAH
thousand)
(UAH
thousand)
721,248
(337,428)
5,724,257
(2,678,035)
5,716,495
(2,714,912)
998,139
(467,336)
7,777,099
(3,641,294)
2,524,529
(1,051,131)
383,820
3,046,222
3,001,583
530,803
4,135,805
1,473,398
(214,686)
(1,703,878)
(2,148,681)
(406,113)
(3,164,272)
Net Interest Income
169,134
1,342,344
Fee and commission income
Fee and commission expense
Net gain on foreign exchange
operations
Net realised gain/(loss) on
investments available for sale
(Provision)/recovery of provision
for impairment losses on other
operations
Net other income
99,723
(17,127)
Interest income
Interest expense
Net Interest Income Before
Provision For Impairment
Losses On Interest Bearing
Assets
Provision for impairment losses
on interest bearing assets
Net Non-Interest Income
Operating Income
Operating Expenses
Profit Before Income Tax
Income tax expense
Net Profit
(645,212)
852,902
124,690
971,533
828,186
791,458
(135,929)
754,934
(120,833)
131,088
(21,757)
1,021,387
(169,519)
855,801
(141,231)
10,950
86,908
115,670
18,438
143,665
188,305
4,253
33,757
(6,474)
(458)
(3,568)
(3,202)
(3,167)
2,523
(25,136)
20,023
1,056
13,260
(124)
2,763
(963)
21,532
(8,034)
73,008
97,155
771,081
757,613
129,950
1,012,534
964,647
266,289
(182,421)
2,113,425
(1,447,800)
1,610,515
(1,304,927)
254,640
(230,608)
1,984,067
(1,796,806)
1,792,833
(1,706,699)
83,868
(51,680)
665,625
(410,160)
305,588
(222,012)
24,032
(10,039)
187,261
(78,220)
86,134
(46,841)
32,188
255,465
83,576
13,993
109,041
39,293
(1) Reporting day exchange rates set by the NBU were used for conversion of balance sheet items. Average exchange rates for
reporting periods set by the NBU used for conversion of the income statement items.
c104221pu030Proof7:3.3.11B/LRevision:0OperatorChoD
53
30 September
2010
30 September
2010
31 December
2009
31 December
2009
31 December
2008
(USD
thousand)1
(UAH
thousand)
(USD
thousand)1
(UAH
thousand)
(UAH
thousand)
396,855
441,395
4,962,744
949,333
3,140,511
3,492,979
39,272,676
7,512,545
285,329
370,237
5,725,270
502,496
2,278,352
2,956,340
45,716,277
4,012,431
2,569,226
2,185,211
33,891,518
15,712,489
261,281
48,809
2,067,644
386,251
249,074
54,885
1,988,852
438,259
1,940,295
66,261
TOTAL ASSETS
7,060,417
55,872,606
7,187,291
57,390,511
56,365,000
LIABILITIES AND EQUITY
LIABILITIES:
Due to banks
Customer accounts
Debt securities issued
Deferred income tax liability
Other liabilities
Subordinated debt
1,995,895
2,906,696
58,714
34,889
14,032
101,045
15,794,517
23,002,137
464,633
276,091
111,041
799,616
2,006,605
3,089,907
55,866
1,979
8,196
103,266
16,022,744
24,672,908
446,093
15,803
65,445
824,578
22,239,283
17,492,921
501,541
134,207
83,043
793,276
5,111,271
40,448,035
5,265,819
42,047,571
41,244,271
1,755,481
144,943
13,892,000
1,147,005
1,739,762
143,676
13,892,000
1,147,251
13,892,000
1,147,679
1,940
46,783
15,349
370,217
1,949,147
15,424,571
1,921,470
15,342,940
15,120,729
7,060,418
55,872,606
7,187,289
57,390,511
56,365,000
ASSETS:
Cash and balances with the
National Bank of Ukraine
Due from banks
Loans to customers
Investments available for sale
Property, equipment and intangible
assets
Other assets
Total liabilities
EQUITY:
Share capital
Property revaluation reserve
Investments available for sale fair
value reserve
Retained earnings
Total equity
TOTAL LIABILITIES AND EQUITY
(2,333)
40,365
(18,626)
322,315
(131,796)
212,846
(1) Reporting day exchange rates set by the NBU were used for conversion of balance sheet items. Average exchange rates for
reporting periods set by the NBU used for conversion of the income statement items.
c104221pu030Proof7:3.3.11B/LRevision:0OperatorChoD
54
30 Sept
2010
(%)
BANK PERFORMANCE RATIOS:
Net interest margin(1)
Net non-interest income to income before operating expenses
Cost to income ratio(2)
Return on average assets(3)
Return of average equity(4)
FINANCIAL POSITION RATIOS:
Customer loans to customer accounts(5)
Customer loans to total assets
Equity to total assets
Tier 1 capital adequacy ratio
Regulatory capital adequacy ratio
Asset Quality Ratios:
Allowance for impairment of loan portfolio to total loans to
customers
Provision charge to total customer loans(6)
As at
31 Dec
2009
(%)
31 Dec
2008
(%)
7.90
36.48
37.93
0.60
2.21
7.92
51.03
34.90
0.19
0.72
4.51
53.81
70.00
0.11
0.46
195.82
70.29
27.61
32.43
36.88
201.98
79.66
26.73
28.41
32.26
199.87
60.13
26.83
36.81
41.47
12.81
4.79
8.26
7.46
3.06
2.94
(1) Net interest margin was calculated as net interest income before provision for impairment losses on interest bearing assets divided
by the simple average of interest bearing assets. The ratio was annualised if necessary.
(2) Cost to income ratio was calculated as operating expenses divided by operating income before provision for impairment losses on
interest bearing assets.
(3) Return on average assets was calculated as net profit for the period divided by the simple average of total assets. The ratio was
annualised if necessary.
(4) Return of average equity was calculated as net profit for the period divided by the simple average of total equity. The ratio was
annualised if necessary.
(5) Customer loans to customer accounts was calculated as total loans to customers before allowance for impairment losses divided by
customer accounts at the end of the period.
(6) Provision charge to total customer loans was calculated as provision charge for the period divided by the simple average of total
loans to customers before allowance for impairment losses. The ratio was annualised if necessary.
c104221pu030Proof7:3.3.11B/LRevision:0OperatorChoD
55
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Bank’s financial condition and results of operations should be read in
conjunction with the Bank’s audited financial statements for each of the years ended 31 December 2008
and 2009 and our audited condensed interim financial information for each of the nine month periods
ended 30 September 2009 and 2010 (the Financial Statements) and the related notes and other financial
information included elsewhere in this Prospectus. This discussion and analysis should also be read in
conjunction with the information contained in ‘‘Selected Statistical Information’’.
Some of the information in the discussion and analysis set forth below and elsewhere in this Prospectus
includes forward-looking statements that involve risks and uncertainties. See ‘‘Forward Looking
Statements’’ and ‘‘Risk Factors’’ for a discussion of important factors that could cause actual results to
differ materially from the results described in this Prospectus.
Overview
The Bank’s business is organised into the following three principal business segments:
*
Retail Banking, which provides banking products and services, including deposit and current
accounts, loans, including mortgages, credit and debit card services, cash and settlement services,
money transfer services and services under the State-run programmes (such as the State
compensation scheme for Sberbank accountholders), to individuals.
*
Corporate Banking, which provides banking products and services, including deposit accounts,
loans, cash settlement transactions, foreign exchange transactions, consultation services, securities
transaction services, overdraft facilities, revolving lines of credit, guarantees, promissory notes
and various programmes introduced by the State to corporate customers, including SMEs, as
well as to individual entrepreneurs.
*
Treasury, which comprises the Bank’s proprietary activities, including capital market
transactions, including those involving Ukraine government securities, NBU re-financed
securities, repurchase transactions (repos), inter-bank lending and foreign exchange transactions,
as well as precious metals trading.
As at 30 September 2010, the Bank had total assets of UAH 55,872,606 thousand, total customer
accounts of UAH 23,002,137 thousand and total net customer loans of UAH 39,272,676 thousand.
For the nine month period ended 30 September 2010, the Bank had income before tax of
UAH 665,625 thousand and net profit of UAH 255,465 thousand, compared to income before tax of
UAH 305,588 thousand and net profit of UAH 83,576 thousand for the same period of 2009.
Recent Developments and Operating Environment
The Tax Code
On 4 December 2010, the revised Tax Code of Ukraine was officially published. The Tax Code
became effective on 1 January 2011. Section III of the Code, which deals with corporate income tax
(CIT), will become effective from 1 April 2011. The Tax Code provides for a gradual reduction of the
CIT rate from 25 per cent. as follows:
*
23 per cent. – from 1 April 2011 to 31 December 2011;
*
21 per cent. – from 1 January 2012 to 31 December 2012;
*
19 per cent. – from 1 January 2013 to 31 December 2013; and
*
16 per cent. – from 1 January 2014.
Due to the fact that the new CIT rules were not enacted or were not substantially enacted as at 30
September 2010, any changes in deferred tax assets/liabilities as a result of the above reduced tax
rates will be recognised in subsequent reporting periods.
Naftogaz bonds
As at 30 September 2010, the total amount of the outstanding indebtedness of Bank’s largest
borrower, Naftogaz, under loan agreements between the Bank and Naftogaz was UAH 21,243,486
thousand, comprising 47 per cent. of the Bank’s gross loan portfolio. In order to mitigate the
liquidity risks relating to repayment of these loans and to enhance the marketability of the exposure
to Naftogaz, on 15 December 2010, the Ukrainian Government passed Resolution No. 1207
authorising Naftogaz to issue bonds (the Naftogaz Bonds) in the nominal amount of UAH 20,416,000
c104221pu040Proof7:3.3.11B/LRevision:0OperatorChoD
56
thousand. The proceeds of the Naftogaz Bonds will be used to repay the existing loan facilities with
the Bank. It is expected that the Bank will purchase the majority of the Naftogaz Bonds which will
have the effect of restructuring the current Naftogaz financing into a more liquid form with varying
maturities, which can be used more flexibly by the Bank for refinancing purposes or sold to local or
foreign investors so that the Bank’s exposure to Naftogaz would decrease.
The Naftogaz Bonds will be issued in twenty-nine series each worth between UAH 413,800 thousand
and UAH 995,000 thousand with maturities between 16 September 2011 and 16 September 2016.
Interest rates on the Naftogaz Bonds will range from 11.25 per cent. to 13.75 per cent. As of the date
of this Prospectus, no further information on the Naftogaz Bonds, including the terms and conditions
and security arrangements, is available. The Bank believes that the maximum individual borrower
concentration threshold, specially established by the NBU in relation to the Bank’s loans to Naftogaz,
will remain in place after the issue of the Naftogaz Bonds.
Average Net Interest Margin and Spread
The following table shows the Bank’s average interest-earning assets, average interest-bearing liabilities
and net interest income and illustrates the comparative net interest margin and net interest spread for
each of 2008 and 2009. The averages are based on the opening and closing balances for the respective
years.
2008
2009
(UAH thousand, except
percentages)
Total average interest-earning assets(1)
Total average interest-bearing liabilities(2)
Net interest income
Average yield on average interest-bearing liabilities
Net interest margin(3)
Net interest spread(4)
35,718,004
27,822,379
1,473,398
3.8
4.1
3.3
57,629,319
41,496,673
4,135,805
8.8
7.2
4.7
(1) Interest earning assets were calculated as a sum of all categories in the statement of financial position, which include interestearning instruments; thus the non-interest earning part may also be included (e.g. within Cash and balances with the NBU
category).
(2) Interest-bearing liabilities were calculated as a sum of all categories in the statement of financial position, which include interest
bearing instruments; thus non-interest bearing part may also be included.
(3) Net interest margin is defined as net interest income (interest income less interest expenses) divided by average interest earning
assets.
(4) Net interest spread is defined as interest income before provision for impairment (divided by average interest earning assets) less
interest expense (divided by average interest bearing liabilities).
Factors Affecting Financial Condition and Results of Operations
Naftogaz lending
In 2008, the Bank entered into a series of loan transactions to assist with the re-financing of the
troubled gas supplier Naftogaz. The financing for these transactions was a combination of own funds,
re-capitalisation of the Bank by the State and use of the Bank’s credit lines with the NBU. The
transactions had a significant impact on the financial condition of the Bank in the 2008-2010 period.
In the period 2008-2009, loans to customers grew from UAH 33,891,518 thousand as at 31 December
2008 to UAH 45,716,277 thousand as at 31 December 2009 as a result of new lending to Naftogaz.
In the same period the Bank’s securities portfolio recorded a fall as a repo agreement with the NBU,
also entered into in connection with NBU financing, was settled. In line with the increased lending to
Naftogaz, provision for impairment losses on interest bearing assets also increased. Provisions made
for impairment losses on interest bearing assets increased from a provision of UAH 645,212 thousand
in the year ended 31 December 2008 to a provision of UAH 3,164,272 thousand in the year ended 31
December 2009, an increase of UAH 2,519,060 thousand, of which UAH 1,531,153 thousand or 60.8
per cent. was accounted for by provisions in relations to loans to Naftogaz, and also a Naftogaz
subsidiary, Ukrtransnafta. In the same period, interest income increased (by UAH 5,252,570 thousand
from UAH 2,524,529 thousand in the year ended 31 December 2008 to UAH 7,777,099 thousand in
the year ended 31 December 2009) as a result of interest received from loans to Naftogaz. Interest
expense on the amounts due to banks also increased from UAH 198,404 thousand for the year ended
c104221pu040Proof7:3.3.11B/LRevision:0OperatorChoD
57
31 December 2008 to UAH 2,280,264 thousand for the year ended 31 December 2009 as a result of
interest paid on the Bank’s credit lines to the NBU which were utilised to re-finance Naftogaz.
In the first nine months of 2010, loans to customers decreased from UAH 45,716,277 thousand as at
31 December 2009 to UAH 39,272,676 thousand as at 30 September 2010, reflecting a reduction of
the Bank’s aggregate exposure to Naftogaz and its subsidiary, Ukrtransnafta, from UAH 29,089,711
thousand as at 31 December 2009 to UAH 21,384,536 thousand as at 30 September 2010 following a
repayment by Naftogaz of a portion of its loans to the Bank. Provisioning made for Naftogaz and
Ukrtransnafta in the nine months ended 30 September 2010 in respect of the Bank’s exposure to
Naftogaz and Ukrtransnafta decreased from UAH 1,660,957 thousand for the year ended
31 December 2009 to UAH 509,866 thousand for the nine months ended 30 September 2010 as the
Bank’s exposure to Naftogaz also decreased. Interest paid on loans from the NBU and used to
refinance Naftogaz fell in the nine months ended 30 September 2010 (compared to the nine months
ended 30 September 2009), which contributed to a fall in interest expense on the amounts due to
banks from UAH 1,768,929 for the nine months ended 30 September 2009 to UAH 1,436,941 for the
nine months ended 30 September 2010.
Ukraine’s economic conditions
The majority of the Bank’s assets and customers are located in, or have businesses related to,
Ukraine. Accordingly, the Bank is substantially affected by the general state of, and changes in, the
Ukrainian economy and changes in the level of business activity, the levels of Ukrainian consumer
spending and the real estate market in Ukraine. From 2005 until June 2008, the Ukrainian economy
experienced significant growth, influenced in part by significant capital inflows from outside of
Ukraine. However, from October 2008 onwards, Ukraine’s economy suffered a significant period of
instability. Although the Ukrainian economy has shown positive growth trends in 2010, including an
increase in GDP and industrial production any, renewed weakness and a deterioration of global or
regional economic conditions, including a so-called ‘‘double dip’’ recession, may stall any current
recovery or lead to a return of the economic and financial crisis in Ukraine.
Global Economic Conditions
Since mid-2008, the global banking industry has been severely impacted by the global financial crisis,
which has contributed to significant decreases in the values of assets held by financial institutions,
including government-financed entities and major commercial and investment banks.
The global financial crisis has led to the collapse or bailout of some Ukrainian banks and to
significant liquidity constraints for others. The crisis has prompted the Ukrainian Government to
inject significant liquidity into the banking system amid reports of difficulties among Ukrainian banks
and other financial institutions. The Ukrainian Government’s policy has been to intervene in support
only of these banks whose size is such that their failure would create systemic risk for the Ukrainian
economy. Despite progress in the restructuring and recapitalisation of Ukrainian banks, problems
with the quality of assets held by Ukrainian banks and indebtedness persist. Asset quality was
affected significantly by the devaluation in the hryvnia in 2008 (52.5 per cent. against the dollar and
46.3 per cent. against the Euro) and further exacerbated by the 15.1 per cent. contraction of the
economy in 2009. Despite government and NBU intervention and progress in stabilising the foreign
exchange market by the end of 2009 and during the first half of 2010, the high dollarisation in the
Ukrainian financial system increases exchange rate risks and could contribute to a worsening of
banks’ asset quality. See ‘‘Risk Factors – Risks relating to Ukraine – The Ukrainian currency is subject
to volatility and depreciation’’. Overdue loans are another factor affecting the asset quality of
Ukrainian banks. The proportion of loans represented by overdue loans was 2.3 per cent. and 9.4 per
cent. as at 31 December 2008 and 2009, respectively, and 11.9 per cent. as at 30 November 2010.
Although the rate of growth of the share of overdue loans in banks’ credit portfolios has slowed, a
future increase in this rate could place additional strain on the banking system.
Operating History
During the period from 2007-2009, the Bank enhanced its risk management systems, including
centralising and tightening credit decisioning. Despite this, during the period of 2007-2009 the Bank
was able to increase its lending operations due to an increase its customer accounts, which grew to
UAH 24,672,908 thousand as at 31 December 2009, an increase of 41.0 per cent. compared with
UAH 17,492,921 thousand as at 31 December 2008. The continued growth in customer deposits was
helped by the Government guarantee offered by the Bank to its customers. This deposit scheme,
unique amongst Ukrainian financial institutions, led to inflows of customer deposits. Similarly
c104221pu040Proof7:3.3.11B/LRevision:0OperatorChoD
58
provisions for impairment losses increased from UAH 645,212 thousand for the year ended 31
December 2008 to UAH 3,164,272 thousand for the year ended 31 December 2009.
Operating income also increased during the crisis: fee income grew at a year-on-year rate of 19.0 per
cent., from UAH 855,801 thousand for the year ended 31 December 2008 to UAH 1,021,387
thousand for the year ended 31 December 2009, whilst interest income increased from UAH 2,524,529
thousand to UAH 7,777,099 thousand as at 31 December 2009.
In addition, the Bank took active steps to control costs during 2009 and as a result there was only a
marginal increase in operating costs in 2009 as compared to 2008 (UAH 1,796,806 thousand in 2009
compared with UAH 1,706,699 thousand in 2008).
Relationship with the State of Ukraine
The Bank is wholly-owned by the State of Ukraine and a substantial part of its business is connected
with the service of various State-sponsored programmes and the funding of companies categorised as
State monopolies. As at 30 September 2010, the funds of State-owned enterprises comprised
approximately 6.2 per cent. of the Bank’s total customer accounts. In addition, the Bank’s
supervisory board, which is not directly involved in its day-to-day operations, but which is its
supreme management body, is currently comprised of five members appointed by the President of
Ukraine, five members appointed by the Ukrainian Parliament and five members appointed by the
Cabinet of Ministers of Ukraine. Actions taken by the State of Ukraine may have considerable
influence on its management and operations. See ‘‘Risk Factors – Risks Relating to the Bank –
Relations with its shareholder and related party transactions’’.
Consolidation
In recent years, the Ukrainian banking sector has experienced consolidation as a result of larger
banks, including international banks, merging with and/or acquiring smaller banks. As the Ukrainian
economy gradually recovers from the financial crisis, the liquidity of Ukraine’s Banking sector is
improving, resulting in the lower loan and deposit interest rates.
Inflation Accounting
With effect from 1 January 2001, the economy of Ukraine was no longer considered to be
hyperinflationary. Previously, Ukraine was considered to be a hyperinflationary economy and in order
to comply with IAS 29 ‘‘Financial Reporting in Hyperinflationary Economies’’, financial statements are
required to be expressed in terms of the measuring unit current at the balance sheet date. The Bank
has not adjusted its share capital, non-monetary assets and equity for the effects of hyperinflationary
conditions that existed in Ukraine until 31 December 2000. Management has not determined the
effects of this departure from IAS 29 on the Financial Statements.
Tax Contingency
The Bank performs the majority of its operations in Ukraine and therefore within the jurisdiction of
the Ukrainian tax authorities. The Ukrainian tax system is characterised by a wide variety of taxes
and frequently changing legislation which may be applied retroactively, open to wide interpretation
and which is in some cases conflicting. Instances of inconsistent opinions between local, regional, and
national tax authorities and between the NBU and the Ministry of Finance are not unusual. Tax
declarations are subject to review and investigation by a number of authorities that are enacted by
law to impose severe fines, penalties and interest charges. A tax year remains open for review by the
tax authorities during the three subsequent calendar years, however, under certain circumstances a tax
year may remain open longer. These facts create tax risks substantially more significant than typically
found in countries with more developed systems. See ‘‘Risk Factors – Risks relating to Ukraine – The
Ukrainian tax system is undeveloped and subject to frequent change, which may create an uncertain
environment for investment and business activity’’.
Management believes that it has adequately provided for tax liabilities based on its interpretation of
tax legislation, official pronouncements and court decisions. However, the interpretations of the
relevant authorities could differ and the effect on these financial statements, if the authorities were
successful in enforcing their interpretations, could be significant.
c104221pu040Proof7:3.3.11B/LRevision:0OperatorChoD
59
Significant Accounting Policies
Information on the Bank’s significant accounting policies is included in Part 3 of the Notes to the
audited Financial Statements and Condensed Interim Financial Information, which are included
elsewhere in this Prospectus.
Recent Accounting Pronouncements
Recently Adopted Changes
Certain recent changes have been made to IFRS.
Adoption of new and revised standards – In the Interim Financial Information, the Bank has adopted
all of the new and revised Standards and Interpretations issued by the Informational Accounting
Standards Board (IASB) and the IFRS Interpretations Committee (IFRIC) of the IASB that are
relevant to its operations and effective for annual reporting periods beginning on or after 1 January
2010.
The adoption of these new and revised Standards and Interpretations has not resulted in significant
changes to the amounts reported for the current or prior periods except where, if applicable, referred
to in the notes or statements described in the Interim Financial Information.
Improvements to IFRS 2009 – In April 2009, the IASB issued amendments to IFRS, which resulted
from the IASB’s annual improvement project. They comprise amendments that result in accounting
changes for presentation, recognition or measurement purposes as well as terminology or editorial
amendments related to a variety of individual IFRS standards. Most of the amendments are effective
for annual periods beginning on or after 1 January 2010, with earlier application permitted. The
adoption of the amendments did not have a material impact on the Bank’s financial statements.
Standards and interpretations issued and not yet adopted – At the date of authorisation of the
condensed interim financial information for the nine month period ending 30 September 2010, other
than the Standards and Interpretations (related to the Bank’s activities) adopted by the Bank in
advance of their effective dates, the following Interpretations were in issue but not yet effective:
Improvements to IFRS 2010 – In May 2010, the IASB issued amendments to IFRS, which resulted
from the IASB’s annual improvement project. They comprise amendments that result in accounting
changes for presentation, recognition or measurement purposes as well as terminology or editorial
amendments related to a variety of individual IFRS standards. Most of the amendments are effective
for annual periods beginning on or after 1 January 2011, with earlier application permitted. The Bank
is currently evaluating the potential impact that the adoption of the amendments will have on its
financial statements.
IAS 24 – In November 2009, the IASB issued a revised version of IAS 24, ‘‘Related Party
Disclosures’’ (IAS 24 R). IAS 24 provides a partial exemption from the disclosure requirements for
government-related entities and clarifies the definition of a related party. The revised standard is
effective for annual periods beginning on or after 1 January 2011, with earlier application permitted.
The Bank is currently evaluating the potential impact that the adoption of IAS 24 R will have on its
financial statements.
IFRS 9 – In November 2009, the IASB issued IFRS 9, ‘‘Financial Instruments’’, as a first step in its
project to replace IAS 39, ‘‘Financial Instruments: Recognition and Measurement’’. IFRS 9 introduces
new requirements for how an entity should classify and measure financial assets that are in the scope
of IAS 39. The standard requires all financial assets to be classified on the basis of the entity’s
business model for managing the financial assets, and the contractual cash flow characteristics of the
financial asset. A financial asset is measured at amortized cost if two criteria are met: (a) the
objective of the business model is to hold the financial asset for the collection of the contractual cash
flows, and (b) the contractual cash flows under the instrument solely represent payments of principal
and interest. If a financial asset meets the criteria to be measured at amortised cost, it can be
designated at fair value through profit or loss under the fair value option, if doing so would
significantly reduce or eliminate an accounting mismatch. If a financial asset does not meet the
business model and contractual terms criteria to be measured at amortised cost, then it is
subsequently measured at fair value. IFRS 9 also removes the requirement to separate embedded
derivatives from financial asset hosts. It requires a hybrid contract with a financial asset host to be
classified in its entirety at either amortised cost or fair value. IFRS 9 requires reclassifications when
the entity’s business model changes, which is expected to be an infrequent occurrence; in this case, the
entity is required to reclassify affected financial assets prospectively.
c104221pu040Proof7:3.3.11B/LRevision:0OperatorChoD
60
There is specific guidance for contractually linked instruments that create concentrations of credit
risk, which is often the case with investment tranches in a securitisation. In addition to assessing the
instrument itself against the IFRS 9 classification criteria, management should also ‘look through’ to
the underlying pool of instruments that generate cash flows to assess their characteristics. To qualify
for amortised cost, the investment must have equal or lower credit risk than the weighted-average
credit risk in the underlying pool of instruments, and those instruments must meet certain criteria.
If a ‘look through’ is impracticable, the tranche must be classified at fair value through profit or loss.
Under IFRS 9, all equity investments should be measured at fair value. However, management has an
option to present directly in gains (losses) not recognised in the income statement unrealised and
realised fair value gains and losses on equity investments that are not held for trading. Such
designation is available on initial recognition on an instrument-by-instrument basis and is irrevocable.
There is no subsequent recycling of fair value gains and losses to profit or loss; however, dividends
from such investments will continue to be recognised in profit or loss. IFRS 9 is effective for annual
periods beginning on or after 1 January 2013, with earlier application permitted. IFRS 9 should be
applied retrospectively; however, if adopted before 1 January 2012, comparative periods do not need
to be restated.
The Bank is currently evaluating the potential impact that the adoption of IFRS 9 will have on its
financial statements.
Comparison of the Nine Months Ended 30 September 2009 and 2010
Results of Operations
The table below sets out the Bank’s results of operations for the nine months ended 30 September
2010 and 30 September 2009.
Nine months ended 30 September
2010
(UAH thousand)
5,724,257
5,716,495
(2,678,035) (2,714,912)
Interest income
Interest expense
Net interest income before provision for impairment losses on
interest bearing assets
Provision for impairment losses on interest bearing assets
Net interest income
(Provision)/recovery of provision for impairment losses on other
operations
Net other income
Net non-interest income
Operating income
Operating expenses
Profit before income tax
Income tax expense
Net profit
61
Change
(%)
0.1
(1.4)
3,046,222
3,001,583
1.5
(1,703,878)
(2,148,681)
(20.7)
1,342,344
Fee and commission income
Fee and commission expense
Net gain on foreign exchange operations
Net realised gain/(loss) on investments available for sale
c104221pu040Proof7:3.3.11B/LRevision:0OperatorChoD
2009
791,458
(135,929)
86,908
33,757
852,902
57.4
754,934
(120,833)
115,670
(6,474)
4.8
12.5
(24.9)
—
(25,136)
1,056
—
20,023
13,260
51.0
771,081
757,613
1.8
2,113,425
1,610,515
31.2
(1,447,800)
(1,304,927)
10.9
665,625
305,588
117.8
(410,160)
(222,012)
84.7
255,465
83,576
205.7
Interest and similar income
The table below sets out details of the Bank’s interest and similar income for the nine months ended
30 September 2010 and 30 September 2009.
Nine months ended
30 September
2010
2009
(UAH thousand)
Interest income comprises:
Interest income on financial assets recorded at amortised cost:
Interest on loans to customers
Interest on due from banks
Other interest income
Interest income on financial assets at fair value:
Interest on investment available for sale
Total interest income
4,921,296
88,697
116
4,811,147
161,304
2
5,010,109
4,972,453
714,148
744,042
5,724,257
5,716,495
Interest income increased by UAH 7,762 thousand or 0.1 per cent. from UAH 5,716,495 thousand in
the nine months ended 30 September 2009 compared to UAH 5,724,257 thousand in the nine months
ended 30 September 2010. The increase in interest income was primarily due to an increase in interest
received on loans to customers, which was positively influenced by an increase in the average interest
rate on loans and advances and improved margin on loans and advances.
Interest expense and similar charges
The table below sets forth details of the Bank’s interest expense and similar charges for the nine
months ended 30 September 2010 and 30 September 2009.
Nine months ended
30 September
2010
2009
(UAH thousand)
Interest expense:
Interest on due to banks
Interest on customer accounts
Interest on subordinated debt
Interest on debt securities issued
(1,436,941)
(1,137,920)
(56,019)
(47,155)
(1,768,929)
(846,191)
(54,693)
(45,099)
Total interest expense
(2,678,035)
(2,714,912)
Interest expense and similar charges decreased by UAH 36,877 thousand or 1.4 per cent., from
UAH 2,714,912 thousand in the nine months ended 30 September 2009 to UAH 2,678,035 thousand
in the nine months ended 30 September 2010. The decrease in interest expense and similar charges
was driven principally by a decrease in the amount of interest due to banks because of a decrease in
the NBU refinancing rate between 2009 and 2010, and a decrease in the volume of deposits accepted
by the Bank.
Provision for impairment losses on interest bearing assets
Provisions made for impairment losses on interest bearing assets decreased from a provision of
UAH 2,148,681 thousand made in the nine months ended 30 September 2009 to a provision of
UAH 1,703,878 thousand made in the nine months ended 30 September 2010. The decrease in
provisioning for the nine month period was primarily on account of the fact that the required
allowances for impairment had already been accrued in 2009.
c104221pu040Proof7:3.3.11B/LRevision:0OperatorChoD
62
Fee and commission income
The table below sets forth details of our fee and commission income for the nine months ended
30 September 2010 and 30 September 2009.
Nine months ended
30 September
2010
2009
(UAH thousand)
Fee and commission income:
Settlements and cash operations
Foreign exchange operations
Off-balance sheet operations
Securities operations
Other
Total fee and commission income
754,785
29,034
1,453
583
699,144
48,593
1,983
898
5,603
4,316
791,458
754,934
Fee and commission income increased by UAH 36,524 thousand or 4.8 per cent., from UAH 754,934
thousand in the nine months ended 30 September 2009 to UAH 791,458 thousand in the nine months
ended 30 September 2010. The increase in fee and commission income was largely due to an increased
volume of settlement and cash operations between 2009 and 2010.
Fee and commission expense
The table below sets forth details of our fee and commission expense for the nine months ended
30 September 2010 and 30 September 2009.
Nine months ended
30 September
2010
2009
(UAH thousand)
Fee and commission expense:
Settlements and cash operations
Foreign exchange operations
Securities operations
Other
Total fee and commission expense
(118,060)
(7,794)
(935)
(97,233)
(12,333)
(1,682)
(9,140)
(9,585)
(135,929)
(120,833)
Fee and commission expense increased by UAH 15,096 thousand or 12.5 per cent., from UAH 120,833
thousand in the nine months ended 30 September 2009 to UAH 135,929 thousand in the nine months
ended 30 September 2010. The increase in fee and commission expense was due to an increase in the
volume of settlement and cash operations.
Net gains on foreign exchange operations
Net gains on foreign exchange operations relate to the valuation of currency positions and spreads
earned on foreign currency exchange activities. Net gains on foreign exchange operations decreased by
UAH 28,762 thousand or 24.9 per cent., from UAH 115,670 thousand in the nine months ended 30
September 2009 to UAH 86,908 thousand in the nine months ended 30 September 2010. The decrease
was primarily due to movements in exchange rates, which resulted in a loss in translation differences
due to one-time spot calculations, despite increased gains from trading operations.
Net realised gain /(loss) on investments available for sale
Net realised gain/(loss) on investments available for sale moved from a loss of UAH 6,474 thousand
for the nine months ended 30 September 2009 to a gain of UAH 33,757 thousand for the nine
months ended 30 September 2010. The gain for the nine months ended 30 September 2010 was
c104221pu040Proof7:3.3.11B/LRevision:0OperatorChoD
63
mainly due to increased volumes of trading in Ukrainian Government debt securities, whilst the loss
in the previous period was a result of repurchase transactions with other credit institutions when the
Bank provided funding at a rate below the coupon rate on the underlying Ukrainian Government
debt securities received from borrowers.
Provisions for impairment losses on other operations
Provisions for impairment losses on other operations changed from a recovery of a provision of
UAH 1,056 thousand for the nine months ended 30 September 2009 to a provision of UAH 25,136
thousand for the nine months ended 30 September 2010. This change was primarily due to an
increase in provisioning associated with the failed repayment of matured corporate bonds.
Operating expenses
The table below sets forth details of operating expenses for the nine months ended 30 September 2010
and 30 September 2009.
Nine months ended
30 September
2010
2009
(UAH thousand)
Operating expenses:
Staff costs
Depreciation and amortisation
Property and equipment maintenance
Operating leases
Utilities
Office maintenance
Communications
Taxes, other than income tax
Security expenses
Professional services
Business trip expenses
Insurance expense
Advertising costs
Other expenses
1,051,400
84,304
72,437
71,621
47,875
31,262
22,090
18,733
14,597
6,359
6,143
4,191
1,446
15,342
946,872
73,340
59,133
63,401
39,088
25,509
21,854
30,707
12,710
6,603
4,966
5,451
968
14,325
Total operating expenses
1,447,800
1,304,927
Operating expenses increased by UAH 142,873 thousand or 10.9 per cent., from UAH 1,304,927
thousand in the nine months ended 30 September 2009 to UAH 1,447,800 thousand in the nine
months ended 30 September 2010. This increase in general administrative expenses was due largely to
staff costs, property and equipment maintenance, depreciation and amortisation and operating leases.
Staff costs
Staff costs increased from UAH 946,872 thousand for the nine months ended 30 September 2009 to
UAH 1,051,400 thousand for the nine months ended 30 September 2010 due to an increase in wages
paid despite a fall in employee numbers.
Depreciation and amortisation
Depreciation and amortisation increased by UAH 10,964 thousand or 14.9 per cent., from
UAH 73,340 thousand in the nine months ended 30 September 2009 to UAH 84,304 thousand in the
nine months ended 30 September 2010. This increase in depreciation and amortisation was primarily
due to the change in property and equipment as a result of the purchase of armoured cash-delivery
vehicles by the Bank.
c104221pu040Proof7:3.3.11B/LRevision:0OperatorChoD
64
Statement of Financial Position Analysis
30 September 31 December
2010
2009
(UAH thousand)
ASSETS:
Cash and balances with the National Bank of Ukraine
Due from banks
Loans to customers
Investments available for sale
Property, equipment and intangible assets
Other assets
3,140,511
3,492,979
39,272,676
7,512,545
2,067,644
386,251
2,278,352
2,956,340
45,716,277
4,012,431
1,988,852
438,259
Total assets
55,872,606
57,390,511
LIABILITIES:
Due to banks
Customer accounts
Debt securities issued
Deferred income tax liability
Other liabilities
Subordinated debt
15,794,517
23,002,137
464,633
276,091
111,041
799,616
16,022,744
24,672,908
446,093
15,803
65,445
824,578
Total liabilities
40,448,035
42,047,571
Total Assets
Total assets decreased from UAH 57,390,511 thousand as at 31 December 2009 to UAH 55,872,606
thousand as at 30 September 2010. The decrease was primarily due to a decrease in loans to
customers from UAH 45,716,277 thousand as at 31 December 2009 to UAH 39,272,676 thousand as
at 30 September 2010, despite an increase in investments available for sale from UAH 4,012,431
thousand as at 31 December 2009 to UAH 7,512,545 thousand as at 30 September 2010.
Loans to customers
Loans to customers decreased from UAH 45,716,277 thousand as at 31 December 2009 to
UAH 39,272,676 thousand as at 30 September 2010. This decrease was due primarily to a repayment
by Naftogaz of a portion of its borrowings to the Bank under reverse repo agreements as well as
some of its borrowings under the loan agreements.
In addition, in the first nine months, the Bank increased its allowances for impairment losses from
UAH 4,118,127 thousand as at 31 December 2009 to UAH 5,769,523 thousand as at 30 September
2010 due an increase in allowances for impairment losses in relation to the Bank’s corporate and
retail loans, with increase in allowances for impairment losses in relation to Naftogaz loans
accounting for approximately 30 per cent. of the total increase in allowances for impairment losses in
that period.
Investments available for sale
Investments available for sale increased from UAH 4,012,431 thousand as at 31 December 2009 to
UAH 7,512,545 thousand as at 30 September 2010. This increase was due to the Bank investing
surplus liquidity (received from Naftogaz on the settlement of its repo positions) in Ukrainian
Government debt securities.
Total Liabilities
Total liabilities decreased from UAH 42,047,571 thousand as at 31 December 2009 to UAH 40,448,035
thousand as at 30 September 2010. This decrease was primarily due to a decrease amounts due to
banks and a decrease in customers’ term deposits.
Due to banks
Amounts due to banks decreased from UAH 16,022,744 thousand as at 31 December 2009 to
UAH 15,794,517 thousand as at 30 September 2010. This decrease was due primarily to the partial
c104221pu040Proof7:3.3.11B/LRevision:0OperatorChoD
65
repayment of loans from the NBU. Such repayments were made with proceeds from the repayments
of loans disbursed by the Bank to Naftogaz.
Customer accounts
Customer accounts decreased from UAH 24,672,908 thousand as at 31 December 2009 to
UAH 23,002,137 thousand as at 30 September 2010. This decrease was primarily due to the
repayment by the Bank of deposits made with the Bank by the State authorities, despite a rise in
customer deposits across all classes of depositors between 31 December 2009 and 30 September 2010.
Comparison of the Years Ended 31 December 2009 and 2008
Results of Operations
The table below sets out the Bank’s results of operations for each of the years ended 31 December
2009 and 2008.
Year ended 31 December
2009
Interest income
Interest expense
Net interest income before provision for impairment losses on interest bearing
assets
Provision for impairment losses on interest bearing assets
Net interest income
2008
(UAH thousand)
7,777,099
2,524,529
(3,641,294) (1,051,131)
4,135,805
(3,164,272)
1,473,398
(645,212)
971,533
828,186
Fee and commission income
Fee and commission expense
Net gain on foreign exchange operations
Net realised loss on investment available for sale
Provision for impairment losses on other operations
Net other income
1,021,387
(169,519)
143,665
(3,568)
(963)
21,532
855,801
(141,231)
188,305
(3,202)
(8,034)
73,008
Net non-interest income
1,012,534
964,647
1,984,067
(1,796,806)
1,792,833
(1,706,699)
Profit before income tax
Income tax expense
187,261
(78,220)
86,134
(46,841)
Net profit
109,041
39,293
Operating income
Operating expenses
c104221pu040Proof7:3.3.11B/LRevision:0OperatorChoD
66
Interest income
The table below sets out details of the Bank’s interest income for each of the years ended
31 December 2009 and 2008.
Year ended 31 December
2009
2008
(UAH thousand)
Interest income comprises:
Interest income on financial assets recorded at amortised cost:
Interest on loans to customers
Interest on due from banks
Other interest income
Interest income on financial assets at fair value:
Interest on investment available for sale
Total interest income
6,675,055
202,713
—
2,036,511
193,663
11
6,877,768
2,230,185
899,331
294,344
7,777,099
2,524,529
Interest income increased by UAH 5,252,570 thousand or 208.1 per cent. from UAH 2,524,529
thousand in the year ended 31 December 2008 to UAH 7,777,099 thousand in 2009. The increase in
interest and similar income was primarily due to an increase in interest on loans to customers. This
increase resulted from an increase in volumes of loans disbursed to Naftogaz.
Interest expense
The table below sets out details of the Bank’s interest expense and similar charges for each of the
years ended 31 December 2009 and 2008.
Year ended 31 December
2009
2008
(UAH thousand)
Interest expense comprises:
Interest expenses on financial liabilities recorded at amortised cost:
Interest on due to banks
Interest on customer accounts
Interest on subordinated debt
Interest on debt securities issued
(2,280,264)
(1,227,340)
(73,699)
(59,991)
(198,404)
(770,181)
(50,089)
(32,457)
Total interest expense
(3,641,294)
(1,051,131)
Interest expense and similar charges increased by UAH 2,590,163 thousand or 246.4 per cent., from
UAH 1,051,131 thousand in the year ended 31 December 2008 to UAH 3,641,294 thousand in 2009.
The increase in interest expense and similar charges was driven principally by the significantly
increased volume of operations since the fourth quarter of 2008. In particular, the Bank received
NBU refinancing in the amount of UAH 21,977,740 thousand at the end of 2008. This was
accompanied by an increase in retail accounts as well a higher cost of funding during 2009.
Provision for impairment losses on interest bearing assets
Provisions made for impairment losses on interest bearing assets increased from a provision of
UAH 645,212 thousand made in the year ended 31 December 2008 to a provision of UAH 3,164,272
thousand made in the year ended 31 December 2009. The increase in provisioning was made
primarily on account of the deterioration of the credit portfolio quality, in particular in relation to
the loans to State-owned companies Naftogaz and Ukrtransnafta which accounted for UAH 1,531,153
thousand or 60.8 per cent. of the total increase in the Bank’s provision for impairment.
c104221pu040Proof7:3.3.11B/LRevision:0OperatorChoD
67
Fee and commission income
The table below sets out details of the Bank’s fee and commission income for each of the years ended
31 December 2009 and 2008.
Year ended 31 December
2009
2008
(UAH thousand)
Fee and commission income:
Settlements and cash operations
Foreign exchange operations
Off-balance sheet operations
Securities operations
Other
948,872
61,932
2,530
1,908
6,145
828,609
15,636
5,360
114
6,082
Total fee and commission income
1,021,387
855,801
Fee and commission income increased by UAH 165,586 thousand or 19.3 per cent., from
UAH 855,801 thousand in the year ended 31 December 2008 to UAH 1,021,387 thousand in 2009.
This increase in fee and commission income was largely due to an increase in the volume and number
of payment transactions and foreign exchange operations.
Foreign exchange operations
Net gain from foreign exchange operations decreased by UAH 44,640 thousand or 23.7 per cent.,
from UAH 188,305 thousand in the year ended 31 December 2008 to UAH 143,665 thousand in
2009. The decrease resulted from the presence of a non-recurring translation gain in 2008 due to
significant UAH depreciation.
Fee and commission expense
The table below sets out details of the Bank’s fee and commission expense for each of the years
ended 31 December 2009 and 2008.
Year ended 31 December
2009
2008
(UAH thousand)
Fee and commission expense:
Settlements and cash operations
Foreign exchange operations
Securities operations
Other
(134,649)
(19,584)
(2,439)
(12,847)
(124,111)
(6,361)
(532)
(10,227)
Total fee and commission expense
(169,519)
(141,231)
Fee and commission expense increased by UAH 28,288 thousand or 20 per cent., from UAH 141,231
thousand in the year ended 31 December 2008 to UAH 169,519 thousand in 2009. This increase in
fee and commission expense was due to an increase in fees and commissions payable by the Bank to
its counterparties in foreign exchange transactions. Such increase in fees and commissions under
foreign exchange operations was due to Ukrainian banks’ following the NBU’s recommendations to
perform their foreign exchange operations at a rate which is not higher than the average interbank
market exchange rate. As a result, Ukrainian banks (including the Bank) were limited in establishing
a commercially acceptable exchange rate for their foreign exchange operations and sought to recover
the difference between the average interbank market exchange rate and commercial rate by applying
increased fees and commissions.
Net other income
Other income decreased by UAH 51,476 thousand or 70.5 per cent., from UAH 73,008 thousand in
the year ended 31 December 2008 to UAH 21,532 thousand in 2009. This decrease in other income
was primarily due to the fact that in 2008 the Bank obtained compensation from the Ukrainian
c104221pu040Proof7:3.3.11B/LRevision:0OperatorChoD
68
Government in the amount of UAH 60,000 thousand for distribution of State budget funds used to
compensate customer deposits of Sberbank.
Operating expenses
The table below sets out details of the Bank’s general operating expenses for each of the years ended
31 December 2009 and 2008.
Year ended 31 December
2009
2008
Staff costs
Depreciation and amortization
Property and equipment maintenance
Operating leases
Utilities
Office maintenance
Taxes, other than income tax
Communications
Security expenses
Professional services
Insurance expense
Business trip expenses
Advertising costs
Other expenses
(UAH thousand)
1,292,528
1,242,616
101,096
102,548
87,874
75,605
86,664
69,267
55,841
40,312
41,126
40,364
38,171
22,938
29,514
28,448
17,459
13,429
8,170
5,850
7,220
7,418
7,058
6,105
2,558
3,973
21,527
47,826
Total operating expenses
1,796,806
1,706,699
Operating expenses
Operating expenses increased by UAH 90,107 thousand or 5.3 per cent., from UAH 1,706,699
thousand in the year ended 31 December 2008 to UAH 1,796,806 thousand in 2009. This increase in
general administrative expenses was due to increased staff costs, increased property and equipment
maintenance costs, operating leases and utilities. Wages paid increased between 31 December 2008
and 31 December 2009 as the staff numbers also increased in that period.
Depreciation and amortisation
Depreciation and amortisation decreased by UAH 1,452 thousand or 1.4 per cent., from UAH 102,548
thousand in the year ended 31 December 2008 to UAH 101,096 thousand in 2009.
Income tax expense
The table below sets out details of the Bank’s income tax expense for each of the years ended
31 December 2009 and 2008.
Year ended 31 December
2009
2008
(UAH thousand)
Income tax expense:
Current income tax expense
Recovery of deferred tax expenses
Income tax expense
234,347
(156,127)
142,599
(95,758)
78,220
46,841
Income tax expense increased by UAH 31,379 thousand or 67.0 per cent., from UAH 46,841
thousand in the year ended 31 December 2008 to UAH 78,220 thousand in 2009. The statutory rate
of taxation for the Bank’s banking activities was 25 per cent. in 2008 and 2009. This increase in
income tax expense was primarily due to an increase in operating income resulting from significantly
increased volumes of operation since the fourth quarter of 2008, mainly as a result of financing of
state-owned enterprises, including Naftogaz.
c104221pu040Proof7:3.3.11B/LRevision:0OperatorChoD
69
Statement of Financial Position as at 31 December 2009 and 2008
Year ended 31 December
2009
2008
(UAH thousand)
ASSETS:
Cash and balances with the National Bank of Ukraine
Due from banks
Loans to customers
Investments available for sale
Property, equipment and intangible assets
Other assets
2,278,352
2,956,340
45,716,277
4,012,431
1,988,852
438,259
2,569,226
2,185,211
33,891,518
15,712,489
1,940,295
66,261
TOTAL ASSETS
57,390,511
56,365,000
LIABILITIES AND EQUITY
LIABILITIES:
Due to banks
Customer accounts
Debt securities issued
Deferred income tax liability
Other liabilities
Subordinated debt
16,022,744
24,672,908
446,093
15,803
65,445
824,578
22,239,283
17,492,921
501,541
134,207
83,043
793,276
Total liabilities
42,047,571
41,244,271
EQUITY:
Share capital
Property revaluation reserve
Investment available for sale fair value reserve
Retained earnings
13,892,000
1,147,251
(18,626)
322,315
13,892,000
1,147,679
(131,796)
212,846
Total equity
15,342,940
15,120,729
TOTAL LIABILITIES AND EQUITY
57,390,511
56,365,000
Assets
Total assets as at 31 December 2009 were UAH 57,390,511 thousand, compared with UAH 56,365,000
thousand as at 31 December 2008, an increase of UAH 1,025,511 thousand or 1.8 per cent. The
increase in total assets in 2009 was driven by an increase in loans to customers despite a decrease in
investments available for sale which resulted from the settlement of a repo with the NBU to
repurchase Ukrainian Government debt securities, entered into as part of the funding arrangements in
relation to loans to Naftogaz.
Loans and Advances
In addition to the interest rates that the Bank charges, interest income is impacted by the overall
volume and product mix of its loan portfolio. During the period covered by this discussion and
analysis, gross loans and advances have consistently increased across all categories of lending activity,
other than lending to individuals.
Loans and advances amounted to UAH 39,272,676 thousand as at 30 September 2010, compared
with UAH 45,716,277 thousand as at 31 December 2009 and UAH 33,891,518 thousand as at 31
December 2008, reflecting a decrease of 14.1 per cent. in the first nine months of 2010 and an
increase of 34.9 per cent. in 2009. In the first nine months of 2010, the provision for impairment also
increased, reflecting the deteriorating quality of the loan portfolio, while the Bank’s loans and
advances decreased in the same period. The increase in loans and advances in 2009 was primarily
driven by the growth in corporate lending, including loans to Naftogaz, as well as loans to other
corporate banking customers. During the same period, the provision for impairment also increased,
but at a higher rate than gross loans and advances have increased, reflecting concerns about the
quality of the growing loan portfolio.
c104221pu040Proof7:3.3.11B/LRevision:0OperatorChoD
70
Due from Banks
Balances due from banks were UAH 3,492,979 thousand at 30 September 2010, compared with
UAH 2,956,340 thousand as at 31 December 2009 and UAH 2,185,211 thousand at 31 December
2008, reflecting an increase of 18.2 per cent. in the first nine months of 2010 and 35.3 per cent. in
2009.
The increase in due from banks in the first nine months of 2010 was primarily due to increased
liquidity driven by the suspension of active lending and the stability of the Bank’s customer accounts
base. The increase in due from banks in 2009 was principally due to the accumulation of funds in
correspondent accounts driven by the growth of term deposits and sale by the Bank of long-term
Ukrainian Government debt securities. At 31 December 2009, loans and advances to the ten largest
customer banks amounted to 94 per cent. of the gross loans and advances to banks. In addition, at
31 December 2009, loans and advances to Ukrainian banks amounting to UAH 29,271 thousand were
secured by Ukrainian Government debt securities under reverse repos.
Liabilities
The Bank’s total liabilities as of 30 September 2010 were UAH 40,448,035 thousand, compared with
UAH 42,047,571 thousand in the year ended 31 December 2009 and UAH 41,244,271 thousand in
the year ended 31 December 2008, reflecting a decrease of 3.8 per cent. in the first nine months of
2010 and an increase of 1.9 per cent. in 2009.
Customer accounts
Along with the interest rates that the Bank offers, interest expense is influenced by the size of the
Bank’s deposit base and its composition. Total deposits have grown consistently during the period
2008 – 30 September 2010. Deposits were UAH 10,808,389 thousand at 30 September 2010, compared
with UAH 13,889,183 thousand as at 31 December 2009 and UAH 7,070,791 thousand as at 31
December 2008, reflecting a decrease of 22.2 per cent. in the first nine months of 2010 and an
increase of 96.4 per cent. in 2009. The increase in deposits in 2009 was due to significant increases in
both commercial and retail deposits. As at 31 December 2009, balances of the ten largest customers
(or groups of customers) totalled UAH 7,500,691 thousand or 30 per cent. of total customer
accounts. The increase in deposits in 2009 resulted from an increase in individual customer accounts
amounting to UAH 1,098,604 thousand and an increase in deposits from state authorities of
UAH 5,726,375 thousand. The decrease in deposits in the first nine months of 2010 was due to the
full repayment by the Bank of deposits received from the State Treasury.
Due to Banks
Due to banks was UAH 15,794,517 thousand as at 30 September 2010, compared with
UAH 16,022,744 thousand as at 31 December 2009 and UAH 22,239,283 thousand as at 31
December 2008, reflecting a decrease of 1.4 per cent. in the first nine months of 2010 and a decrease
of 28.0 per cent. in 2009. Balances due to banks almost fully consisted of the loans from the NBU,
including UAH 15,531,633 thousand (98 per cent.) as at 30 September 2010. UAH 15,931,171
thousand (99 per cent.) as at 31 December 2009 and UAH 21,977,740 thousand (99 per cent.) as at
31 December 2008, which represents a significant concentration. The decrease in due to banks in the
first nine months of 2010 was primarily due to the partial repayment by the Bank of loans received
from the NBU. The decrease in due to banks in 2009 was mainly due to the maturity in June 2009
of a repurchase agreement in the amount of UAH 11,777,740 thousand which was reflected in the
Bank’s financial statements as a loan under a repurchase agreement from the NBU.
Liquidity, Capital and Funding
Liquidity is an important component of the Bank’s business. Impairment of the Bank’s liquidity may
be caused by external factors beyond its control such as financial market downturn, systemic crisis or
negative views about the prospects for the industries to which it provides a large proportion of its
loans, or internal factors, such as an excessive concentration of maturing liabilities. In order to
maintain a sufficient level of liquidity, the Bank monitors changes in its liquid asset position and aims
to hold a diversified portfolio of assets. The Bank also prepares liquidity risk reports, liquidity
analysis, cash flows, assets and liabilities concentration, scenario analysis, limits establishment and
revision, monitoring of set limits and possible changes assessment.
The Bank’s principal sources of liquidity are the Bank’s deposit base and authorised capital. To
manage the Bank’s short-term liquidity needs, it enters into repurchase transactions and buys and
sells foreign currency, securities and precious metals. To manage the Bank’s long-term liquidity needs,
c104221pu040Proof7:3.3.11B/LRevision:0OperatorChoD
71
the Bank takes medium- and long-term deposits, sells assets such as securities, regulates its interest
rate policy and attempts to reduce expenses. For additional information on the Bank’s liquidity
management, see ‘‘Risk Factors – The Bank May Face Liquidity Risk’’. In the opinion of its
management, the Bank’s cash flow from operations and other sources of liquidity described below will
be sufficient for it to meet its working capital and debt service requirements for the next 12 months.
Equity
Total equity of the Bank increased to UAH 15,424,571 thousand as at 30 September 2010, and was
UAH 15,342,940 thousand as at December 2009 and UAH 15,120,729 thousand as at 31 December
2008. The increase of 222,211 thousand between 2008 and 2009 was due to a decrease in the
investments available for sale fair value reserve and an increase in retained earnings. The increase of
UAH 81,631 thousand in the first nine months of 2010 was due to an increase in retained earnings,
which overlapped with declared and paid dividends.
Indebtedness
The Bank has historically financed its operations through a combination of customer deposits and
stable core current accounts of corporate and retail customers, issues of domestic debt securities, bank
borrowing (including the NBU lending) and long-term interbank loans.
The following table summarises the Bank’s net indebtedness for the years ended 31 December 2009
and 2008 and the nine months ended 30 September 2010.
Nine months
ended
30 September
2010
Current financial investments (A)(1), including:
Cash and balances with the National Bank of Ukraine(2)
Due from banks, current portion(2)
Total financial liabilities (B), including:
Current portion (C)(2)
Non-current portion (D)(3)
Total current net indebtedness (A-C)
Total non-current net indebtedness (A-D)
Total net indebtedness (A-B)
6,207,186
2,715,511
3,491,675
40,129,661
21,410,856
18,718,805
(15,203,670)
(12,511,619)
(33,922,475)
Year ended
31 December
2009
(UAH thousand)
5,057,162
2,100,822
2,956,340
42,005,708
37,335,649
4,670,059
(32,278,487)
387,103
(36,948,546)
2008
4,672,958
2,487,747
2,185,211
41,069,737
35,982,310
5,087,427
(31,309,352)
(414,469)
(36,396,779)
(1) Current financial instruments represent a sum the two lines below, ‘‘Cash and balances with the National Bank of Ukraine’’ and
‘‘Due from banks, current portion’’.
(2) Only balances with maturity of up to 1 year.
(3) Balances with maturity over 1 year, including undefined maturity.
Capital Expenditures
Total capital expenditure for the years ended 31 December 2008 and 2009 amounted to UAH 197,044
thousand and UAH 150,610 thousand, respectively. These charges mainly reflect capital expenditure
incurred for the purchase of property, equipment and intangible assets financed from operating
income.
c104221pu040Proof7:3.3.11B/LRevision:0OperatorChoD
72
Off-Balance Sheet Arrangements
The Bank offers its customers products such as guarantees and letters of credit to meet its customers’
needs for commercial banking services, frequently in connection with their customers’ export and
import activities. These products do not appear on the Bank’s balance sheet.
31 December 31 December
2009
2008
Nominal
Nominal
amount
amount
Contingent liabilities and credit commitments
Letters of credit and other transaction related contingent obligations
Guarantees issued and similar commitments
Irrevocable commitments on loans and unused credit lines
—
197
113,023
169,400
32
354,198
Total contingent liabilities and credit commitments
113,220
523,630
c104221pu040Proof7:3.3.11B/LRevision:0OperatorChoD
73
BUSINESS
Overview
The Bank is a State-owned Ukrainian bank headquartered in Kyiv. According to information
published by the NBU, as at 30 September 2010, the Bank was the second largest bank in Ukraine in
terms of equity capital (UAH 16.6 billion), authorised share capital (UAH 13.9 billion), retail deposits
(UAH 18.2 billion) and profit after tax (UAH 431.3 million), and the third largest bank in terms of
total assets (UAH 59.5 billion), all as calculated under UAS. As at 30 September 2010, the Bank held
7.0 per cent. of all retail deposits and provided 2.4 per cent. of all retail loans in Ukraine, according
to NBU statistics.
The Bank offers a wide range of financial products and services throughout Ukraine, including retail
and corporate banking services, domestic and foreign currency transfers and currency exchange. The
Bank is wholly-owned by, and its retail deposits are guaranteed in full by, the State.
As at 30 September 2010, the Bank had total assets of UAH 55,872,606 thousand, total customer
accounts of UAH 23,002,137 thousand and total net customer loans of UAH 39,272,676 thousand.
For the nine months ended 30 September 2010, the Bank had income before tax of UAH 665,625
thousand and net profit of UAH 255,465 thousand, compared to income before tax of UAH 305,588
thousand and net profit of UAH 83,576 thousand for the same period of 2009.
The Bank provides services to its customers in Ukraine through a variety of distribution channels,
including, as at 31 December 2010, the head office and 251 branches, comprising of 25 regional
branches (including a regional branch covering Kyiv and Kyiv Region and a regional branch covering
the Autonomous Republic of Crimea) and 226 sub-branches, as well as 5,745 outlets. Under its
Charter, the Bank can also open representative offices, however none exist as of the date of this
Prospectus.
As at 31 December 2010, the Bank’s customers had access to the Bank’s own ATM network
comprising 1,197 ATMs, and the ATM networks of other banks on the basis of co-operation
agreements, comprising in total a further 5,124 ATMs.
As at 30 September 2010, the Bank had 39,236 employees (inclusive of part-time employees) as
compared to 40,315 employees as at 31 December 2009 and 39,568 employees as at 31 December
2008. The Bank’s employee costs amounted to UAH 1,292,528 thousand for the year ended
31 December 2009 and to UAH 1,242,616 thousand for the year ended 31 December 2008.
Business Segments
The Bank’s business is organised into the following three principal business segments:
*
Retail Banking, which provides banking products and services to individuals. Products include
deposit and current accounts, loans, mortgages, credit and debit card services, cash and
settlement services, money transfer services and services under the State-run programmes.
*
Corporate Banking, which provides banking products and services to corporate customers,
including small and medium enterprises (SMEs), as well as to individual entrepreneurs. Products
include deposit accounts, loans, cash settlement transactions, foreign exchange transactions,
consultation services, securities transaction services, overdraft facilities, revolving lines of credit,
guarantees, promissory notes and various programmes introduced by the State.
*
Treasury, which comprises the Bank’s proprietary activities, including capital market
transactions, including those involving the Ukrainian Government securities, NBU re-financed
securities, repurchase transactions (repos), interbank lending and foreign exchange transactions,
as well as precious metals trading.
Pursuant to the development concept of the Bank, the Bank has focused on maintaining close cooperation with State-owned entities, including entities of a strategic importance for the Ukrainian
economy (including the Bank’s largest corporate business client, Naftogaz). The Bank is also
administering a variety of State-mandated compensation and payment programmes. For example, the
Bank acts as a financial agent for the State in cash settlement operations for the Pension Fund of
Ukraine and maintains regulated accounts used by participants of the wholesale electrical energy
market, natural gas suppliers and heat energy entities for processing of payments for supplied
products and services. See ‘‘Naftogaz financing programme’’ below for a description of the financing
programme set up by the Bank for its largest State-owned customer, Naftogaz, and ‘‘Provision of
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
74
lending and other banking services to State-owned entities’’ below for a description of the Bank’s
cooperation with other State-owned customers.
The Bank’s principal business segments and other departments are supported by its services, including
customer services, accounting, finance, IT, risk management and legal.
Competitive Strengths
The Bank believes that the following strengths differentiate it from other banks in Ukraine:
State-owned status and strong reputation in the market
During the Soviet era, the predecessor entity to the Bank (a part of the Soviet State Savings Bank
(the Sberbank) was the only retail bank in Ukraine and served all regions of Ukraine. Because of its
history as the dominant retail bank, the Bank has retained many customers from the Soviet era, who
now form a large part of the Bank’s deposit base. In addition, it remains the primary distributor of
funds for various State compensation programmes, including UAH 8,859,387 thousand disbursed to
Ukrainian citizens by the State for loss of value of their savings in the Sberbank – see ‘‘Relationship
with the State of Ukraine’’ and ‘‘State-related compensation programme’’ below.
Deposits of individuals are guaranteed by the State of Ukraine
Pursuant to the Law of Ukraine ‘‘On Banks and Banking Activity’’ dated 7 December 2000 (the
Banking Law), the Bank is the only bank in Ukraine in which all retail deposits are fully-guaranteed
by the State. Due to the State guarantee, the Bank is not a member of the Fund for the
Guaranteeing of Deposits of Individuals. The Bank believes that such State guarantee of all retail
deposits placed with it makes the Bank a favourable choice for retail customers that will assist its
growth in the retail banking market.
Wide network of branches and outlets throughout Ukraine
Because the Bank was the only retail bank in Ukraine during the Soviet period, it inherited an
extensive network of branches and outlets. Although the Bank has closed a significant number of
inefficient and uncompetitive locations since 1997 (approximately 55 per cent. of its other total
locations), as at 31 December 2010, the Bank still has branches and outlets in 3,192 cities and 2,553
villages across the country, the largest bank network in Ukraine. As at 31 December 2010, it had 25
regional branches (including a regional branch in Kyiv and Kyiv Region and a regional branch in the
Autonomous Republic of Crimea), 226 sub-branches and 5,745 outlets covering all geographic regions
of Ukraine. In addition, because of the Bank’s presence throughout Ukraine and its relationship with
the State, the Bank has been chosen to administer various Government social programmes, including
the disbursement of compensations for savings that were devalued during the Soviet period, pension
and other social payments, as well as salary payments to employees of a number of budgetary
institutions – see ‘‘Relationship with the State of Ukraine’’ below. Administering such programmes
provides additional income streams for the Bank and contributes to its customer base.
Competitive mix of products and services
The Bank believes that it offers a competitive mix of products and services in order to meet the
requirements of various groups within its customer base. Customers can open a variety of deposit
accounts, including specialised deposit accounts for pensioners. In addition, it offers mortgages to
individuals, including loans for the purchase of land and the maintenance of existing buildings,
consumer loans and car loans. The Bank also issues VISA and MasterCard credit and debit cards
which are used for the disbursement of salaries, government and corporate pensions and payments to
students. The Bank aims to consistently increase the number of products and services and improve
existing products and services in order to react to market conditions and the requirements of its
customers.
Strong Corporate Banking business
The Bank’s competitive domestic funding costs, strong capital base and extensive national network
enable the Bank to provide competitive loan products and banking services to its corporate clients.
The Bank’s Corporate Banking segment has strong relationships with some of the largest State-owned
entities, including entities of a strategic importance for the Ukrainian economy such as Naftogaz, as
well as with some larger multi-branch privately-owned entities which benefit from the Bank’s national
network. It also acts as a financial agent and exclusive service provider for the State in a number of
nationwide governmental programmes, including, among others, cash settlement operations for the
Pension Fund of Ukraine and its agencies and divisions, providing banking services to the wholesale
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
75
electricity market participants, natural gas suppliers and heat energy entities. The Bank’s participation
in such programmes provides significant sources of revenue.
Key player in the domestic market of Government securities
The Bank acts as a primary dealer in the domestic market of Ukrainian Government securities. In
addition, the Bank remains one of the key investors in Ukrainian Government securities, which are
used by the Bank as a source of interest income as well as a liquidity instrument which can be
refinanced with the NBU at any time.
Key player in the interbank market
The Bank is active in the Ukrainian interbank market and remains one of the major market-makers
contributing to the stable development of the interbank market. Historically, the Bank’s involvement
has been through providing liquidity to interbank market participants by way of interbank loans,
repos, swap transactions and the borrowing and placing of funds. As at 30 September 2010, the Bank
accounted for 7.1 per cent. of the interbank credit portfolio in the total interbank credit portfolio of
commercial banks on the Ukrainian inter-bank money market, according to the Association of
Ukrainian Banks (the AUB).
Strategy
The Bank’s overall strategic goal is to pursue the objectives set out in its Charter, including
strengthening its position and increasing profitability as a provider of comprehensive banking
products and services to retail and corporate customers through its expansive network of branches
and outlets, providing support to domestic producers (primarily small and medium business
enterprises), promoting economic development and structural transformation of the Ukrainian
economy, supporting domestic manufacturing and trade sectors and developing a savings network for
individual customers. The Supervisory Board has approved, and the Bank has implemented, its Bank
Development Programme 2006-2010. In the first half of 2011, the Bank intends to approve a new
development programme for 2011-2015. In order to improve the quality of customer service, enhance
its stability and financial standing and to increase the efficiency in its operations, it is focusing on the
following strategic objectives:
To retain its position as one of the leading Ukrainian retail banks
The Bank’s Retail Banking department targets the mass market, as well as the existing and growing
middle and upper-middle class. Because of this focus, it intends to provide simple, widely distributed
products and services, including current accounts, savings accounts, mortgages and other consumer
lending and payment transactions.
To maintain an active position in the corporate banking market by extending more corporate loans
The Bank intends to increase its lending activity to corporate customers operating in Ukraine, while
maintaining prudent assessment and lending criteria. It intends to expand the number of banking
products and services offered to corporate customers, including SMEs, State enterprises and
companies, construction companies engaged in residential real estate construction, agricultural
enterprises, enterprises in the fuel and energy section, and those involved in the transport industry. In
addition, it plans to provide further funding to corporate customers that are active in Ukraine in the
distribution of electricity, aircraft construction, residential development projects and international
trading transactions. The Bank currently intends to retain its exposure to Naftogaz, its largest
corporate customer. However, the Bank intends to convert its existing Naftogaz loans into new bonds
to be issued by Naftogaz so that the Bank’s exposure to Naftogaz is restructured into more liquid
instruments with diversified maturities (see ‘‘Naftogaz financing programme’’ below).
To enhance the Bank’s internal performance and efficiency by improving business procedures through the use
of information technology
Throughout 2011, the Bank plans to strengthen and centralise its IT systems, reducing manual
processing of information within the Bank’s operations. In particular, in order to improve its
managerial processes the Bank intends to implement its ABS within the Bank’s entire branch network
to replace the existing five automatic banking systems. See ‘‘Information Technology’’ below. In
addition, in 2011-2015 the Bank will also be implementing a management accounting system in order
to allow it to determine expenses, revenues and profits of its major lines of business. The Bank is
currently implementing its own processing centre based on the payment processing system developed
by Openway. In customer services, the Bank expects that its improved IT system will enable it to
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
76
expand substantially the range of services provided in real time, expand the Bank’s range of products
and services and implement the Finportal facility. Finportal will provide a single platform for
customers to access the Bank’s information resources and financial services. The Bank also intends to
introduce a centralised credit system and a centralised reporting system. The Bank expects that the
centralised reporting system will allow it to improve its loan interest rate policies based on up-to-date
market and customer information. Over the same period, the Bank plans to harmonise its IT systems
with the requirements of the worldwide Control Objectives for Information and related Technology
(COBIT) standard created by the Information Systems Audit and Control Association (ISACA) and
the IT Governance Institute (ITGI). COBIT provides a set of best practices for the use of
information technology and developing appropriate IT governance and control in a company.
History
During the Soviet era, the Bank was part of the Sberbank, formed on the basis of ‘‘saving offices’’
which have existed in Ukraine since 1923. In 1991, following the dissolution of the Soviet Union, the
Bank was renamed as the ‘‘State Specialised Commercial Savings Bank of Ukraine’’ and registered
with the NBU on 31 December 1991 (registration certificate No. 4). At that time, the Bank operated
pursuant to State programmes. During the early 1990s, there were a series of market reforms in
Ukraine which resulted in increased competition from commercial banks. The Bank focused on
retaining its position in the retail market, as well as increasing its capacity to provide services for
customers.
In May 1999, pursuant to the Presidential Decree and Ukrainian Government Resolution, the State
Specialised Commercial Savings Bank of Ukraine was re-organised into the Joint Stock Company
‘‘State Savings Bank of Ukraine’’. The charter of the Bank as joint stock company (the Charter) was
registered by the NBU on 26 May 1999. The Bank’s sole shareholder is the State acting through the
Cabinet of Ministers of Ukraine.
The Bank’s banking licence was issued by the NBU on 16 January 2002 with No. 148. The Charter
was approved by the Ukrainian Government Resolution No. 261 of 25 February 2003 and registered
with the NBU on 28 February 2003. Subsequent amendments to the Charter were approved by
further Ukrainian Government Resolutions.
The Bank became a member of the MasterCard payment system in 1998 and of the VISA payment
system in 1999. In January 2009, the Bank obtained a licence from the VISA payment system for the
provision of merchant acquiring services which enable the Bank’s trading clients to accept payments
from their customers securely via the VISA payment system.
On 30 April 2009, the Law of Ukraine ‘‘On Joint Stock Companies’’ entered into force. This law
provided that joint stock companies in Ukraine should be established exclusively in the form of
private or public joint stock companies. Companies previously established in the form of open or
closed joint stock companies are required to be re-organised into public or private joint stock
companies by 29 April 2011. Taking into account the amendments to the Banking Law which became
effective on 5 August 2009, banks may be established only in the form of a public joint stock
company or a co-operative bank. The Bank has prepared draft amendments to its Charter relating to
its reorganisation into a public joint stock company (including the change of its name to Public JointStock Company ‘‘State Savings Bank of Ukraine’’). As of the date of this Prospectus, these
amendments are being considered by the Ukrainian Government. The Bank expects that the reorganisation will be completed prior to 29 April 2011, as required by Ukrainian law.
Relationship with the State of Ukraine
The Bank’s Charter reflects the fact that it is wholly-owned by the State of Ukraine represented by
the Ukrainian Government. According to its Charter, the Bank’s objectives include the promotion of
Ukrainian economic development, supporting domestic producers (primarily small and medium
business enterprises), supporting structural transformation of the Ukrainian economy, supporting
domestic manufacturing and trade sectors, development of a savings network for individual customers
and the provision of comprehensive banking products and services to companies and individuals.
Whilst part of the Soviet Sberbank, the Bank operated in accordance with government programmes
and on direct instructions from the State. During the years immediately following Ukraine’s
independence from the USSR, certain transactions were entered into on direct instructions from the
State. However, in 2001 the NBU adopted the Banking Regulation Instruction in order to ensure the
stable operation of banks and the timely performance of banks’ obligations, as well as to prevent the
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
77
inappropriate allocation of resources and reduce risks. The Banking Regulation Instruction introduced
a number of economic ratios and limits, as well as other requirements with which the Bank is
required to comply. As a result, the focus of the Bank shifted from political considerations to
commercial considerations.
According to its Charter and existing Ukrainian legislation, the Bank is not liable under obligations
of the State. While the State has respected the Bank’s operational independence, the Bank’s strategic
objectives set out above are set by the State and are closely aligned with the State’s priorities. From
time to time, certain transactions have been entered into by the Bank taking into account priorities of
the Government of Ukraine or its agencies. For this reason, the Bank may have extended financing
to financially fragile borrowers (including, as the case may be, certain State and municipal enterprises)
which it would not have done had decision-making been based on purely commercial criteria,
including the Bank’s own consideration of the relevant business risks and benefits. For example, when
the liquidity position of Naftogaz was severely affected by rising gas import prices and reduced
revenues following the onset of the global financial crisis, the Bank implemented an extensive
financing programme for Naftogaz in December 2008 due to the fact that no other sources of
funding were available for Naftogaz at that time and taking into account the strategic importance of
the company to Ukraine’s economy (see ‘‘Naftogaz financing programme’’ below).
In addition, given the Bank’s substantial exposure to State-owned entities (and consequently the
economic condition of the State), the Bank may be more sensitive to any slowdown or downturn in
Ukraine’s economy than some of its competitors which have a lower exposure to the State sector.
Such risks are described in more detail under ‘‘Risk Factors – Risks Relating to Ukraine’’ above.
However, given the historically strong performance of State-related lending, compared to other nonState sector lending, management believes that it is able to combine the role of a State-owned bank
with that of a profitable commercial enterprise.
The State exercises its rights as sole shareholder through the Bank’s management bodies, including its
supervisory board (the Supervisory Board) and its management board (the Management Board). The
Supervisory Board is comprised of 15 members, including five members appointed by the Parliament
of Ukraine, five members appointed by the President and five members appointed by the Ukrainian
Government. Each member is appointed for a five-year term. The Supervisory Board acts in
compliance with the requirements laid down in, inter alia, Article 7 of the Banking Law, the Bank’s
Charter, applicable legislation and recommendations of the NBU as to the improvement of corporate
management in banks approved by the NBU Resolution No. 98 dated 28 March 2007, as well as the
Organisation for Economic Co-operation and Development (the OECD) corporate governance
principles. The Supervisory Board oversees and supervises the Management Board’s activity with the
aim to safeguard deposits, guarantee their return to depositors and protect the State’s interests as
shareholder, and performs other functions stipulated by applicable legislation.
Pursuant to the development concept of the Bank, the Bank has focused on maintaining close cooperation with State-owned entities, including entities of a strategic importance for the Ukrainian
economy, and participating in a number of nationwide State programmes. In particular, the Bank
acts as a financial agent for the State in a number of governmental programmes, including, among
others, cash settlement operations for the Pension Fund of Ukraine and its agencies and divisions,
maintenance of, and performing operations with, regulated accounts used by participants of the
wholesale electrical energy market, natural gas suppliers and heat energy entities for processing of
payments for supplied products and services. See ‘‘Provision of lending and other banking services to
State-owned entities’’ below for a description of the Bank’s co-operation with its largest State-owned
customers.
Naftogaz financing programme
Background
Naftogaz is one of Ukraine’s largest and most strategically important companies and the largest
customer of the Bank’s Corporate Banking division. As a leading company in the fuel and energy
sector of Ukraine, Naftogaz is involved in the transportation of oil and natural gas via oil and gas
main pipelines systems (including the transit of Russian natural gas and Russian and Kazakh oil to
third countries), gas metering, processing of gas and gas condensate, gas supply to Ukrainian
customers, sales of compressed and liquefied gas and oil products via networks of refuelling stations
and automotive gas filling compressor stations. Naftogaz is also involved in the exploration of oil and
gas, drilling of production wells, development of fields and scientific support of the oil and gas
industry development.
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
78
Following the onset of the global financial crisis, the liquidity position of Naftogaz was severely
diminished by an increase in gas supply prices and a reduction in revenues. For example, prices for
natural gas supplied by Gazprom for domestic consumption in Ukraine increased through the 2005 to
2008 period from U.S.$50 per 1,000 cubic metres as at 1 January 2005 to U.S.$179.5 per 1,000 cubic
metres as at 1 January 2008. At the same time, the State continued to regulate domestic prices by
providing direct subsidies from the State budget to cover differences between the purchase price of
imported gas and the price charged to municipal heating enterprises. In 2008, UAH 7.4 billion
(including UAH 4.0 billion of compensation due for 2008 and UAH 3.4 billion of compensation due
for 2006 and 2007) were extended from the State budget to Naftogaz to cover these differences.
Despite these subsidies from the State budget, Naftogaz required substantial further financing to
secure sufficient gas supplies from Russia during the winter of 2008-2009.
Due to the budget limitations at the end of 2008, the State could not provide such further financing.
On account of the global financial crisis, the international capital markets had effectively shut for
Naftogaz and the deterioration in the financial position of many Ukrainian banks made the option of
bank financing impossible. By contrast however, at the end of 2008, the Bank was among one of the
financial institutions in Ukraine least affected by the global and Ukrainian financial crises and had
managed to maintain a stable liquidity position. Given the State ownership of the Bank and its
historical experience of supporting large-scale State projects and infrastructure, the management of
Naftogaz approached the Bank with a proposal to establish an extensive financing programme for
Naftogaz until the State was in a position to assist Naftogaz. This request was fully endorsed by the
Ukrainian Government on account of the strategic importance of Naftogaz to the Ukrainian
economy. The Bank entered into rounds of negotiations with Naftogaz and the NBU which resulted
in the development of competitive commercial terms which were acceptable to the Bank.
State assistance and sources of funding
The Ukrainian Government acknowledged that the financing Naftogaz could not be undertaken by
the Bank without State assistance. Accordingly, the Government put in place a set of measures to
enable the Bank to implement the Naftogaz financing programme. It was envisioned that the Bank
would fund the Naftogaz financing from a combination of its own funds, by way of an increase in
the Bank’s share capital and through use of its credit lines with the NBU.
At the end of 2008 the Bank was recapitalised through contributions of Ukrainian Government debt
securities into the authorised share capital of the Bank, as well as additional refinancing provided by
the NBU. In particular, pursuant to the Ukrainian Government resolutions dated 26 November 2008
and 29 December 2008, the share capital of the Bank was increased through contribution of
Ukrainian Government debt securities with the total nominal value of UAH 1,000,000 thousand and
UAH 11,770,000 thousand, respectively. The Bank requested repayment of the debt securities with a
total nominal value of UAH 1,000,000 thousand prior to the end of 2008. On 30 December 2008, the
Bank also entered into a repurchase agreement in respect of Ukrainian Government debt securities in
the amount of UAH 11,770,000 thousand with the NBU. The repurchase agreement was settled by
June 2009 and debt securities with a total nominal amount of UAH 11,770,000 thousand were bought
by the NBU. In addition to the financing received under this repurchase agreement, as at 31 December
2008 the Bank had loans from the NBU totalling UAH 17,977,740 thousand which were secured by
the loans to Naftogaz with a carrying value of UAH 6,478,650 thousand and securities available for
sale with a carrying value of UAH 11,945,897 thousand.
Initially, the Bank entered into loan agreements with Naftogaz, with the first disbursements under
such loan agreements being made by the Bank in December 2008. As a result, by 31 December 2008,
the Bank’s total exposure to Naftogaz under such loan agreements amounted to UAH 18,625,560
thousand, comprising 53.3 per cent. of the Bank’s gross loan portfolio. This made Naftogaz the
largest borrower of the Bank.
Throughout 2009, the NBU extended additional loan financing to the Bank. As at 31 December 2009,
the Bank had loans from the NBU in the total amount of UAH 15,931,171 thousand which were
secured by debt securities available for sale with a carrying value of UAH 463,211 thousand, loans to
Naftogaz with carrying value of UAH 20,365,112 thousand and loans to other borrowers with a
carrying value of UAH 2,450,341 thousand.
In order to permit the significant lending to Naftogaz, the NBU passed a special decision allowing
the Bank an increased individual borrower concentration risk ratio in relation to Naftogaz, which is
higher than the typical single borrower exposure limit established by the NBU for all Ukrainian
banks at the level of 25 per cent. of the regulatory capital of a bank. The Bank’s compliance with the
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
79
above individual ratio is monitored by the NBU on a daily basis. The NBU also permitted the Bank
not to create provisions with respect to its lending to Naftogaz. However, the Bank chose not to use
this waiver and set up provisions for Naftogaz in order to bring the level of its statutory impairment
reserves close to the level of IFRS reserves.
Restructuring of Naftogaz loans
As at 31 December 2009, the Bank’s loans to Naftogaz had contractual maturities between
26 February 2010 and 29 December 2010 to match maturities of the corresponding NBU financing
facilities. Once the extension of NBU funding was approved in the first half of 2010, the Bank’s loan
exposure to Naftogaz was restructured accordingly for one year and five years and will now mature
between 30 March 2011 and 31 March 2015.
Reverse repurchase transactions with Naftogaz
In parallel to the financing programme implemented by the Bank, the Ukrainian Government
provided further financial support to Naftogaz, including through equity injections in the form of
Ukrainian Government debt securities contributed into the authorised share capital of Naftogaz. In
2009-2010, the Ukrainian Government passed resolutions to approve contributions into the authorised
share capital of Naftogaz in the total aggregate amount of UAH 36,776,191 thousand. Some of these
contributions had not been completed as at 31 December 2010.
Naftogaz used such debt securities contributed by the State to increase its share capital as part of the
recapitalisation programme to obtain further funding from the Bank through reverse repurchase
repos. In August 2009, the Bank entered into repos with Naftogaz in respect of Ukrainian
Government debt securities in the total nominal amount of UAH 5,226,885 thousand. At the same
time, the Bank obtained further financing from the State in the form of U.S. dollar and Euro
deposits from the State Treasury equivalent to UAH 5,726,375 thousand as at 31 December 2009. As
a result of further loan financing and the repurchase transactions, the Bank’s total exposure to
Naftogaz increased to UAH 28,948,661 thousand as at 31 December 2009.
In February and March 2010, the repos were settled as Naftogaz repurchased the Ukrainian
Government debt securities from the Bank. Subsequently, the Bank repaid the deposit to the State
Treasury equivalent to UAH 5,726,375 thousand.
Impact of Naftogaz financing programme on the Bank’s loan book and results
In view of further financial support provided to Naftogaz by the State through equity injections, the
liquidity position of Naftogaz has improved and it has so far complied with all of its payment
obligations towards the Bank. At the same time, the Naftogaz financing programme has resulted in
increased levels of concentration in the Bank’s gross loan portfolio. As at 30 September 2010, the
total amount of outstanding indebtedness of Naftogaz under the loan agreements was UAH 21,243,486
thousand, comprising 47.2 per cent. of the Bank’ gross loan portfolio. See ‘‘Risk Factors – Substantial
levels of concentration in the Bank’s customer accounts and loan portfolio’’ and ‘‘Risk Factors –
Exposure to Naftogaz’’ above for discussion of the risks related to the Bank’s high exposure to
Naftogaz.
The following table illustrates the impact of Naftogaz on the structure of the Bank’s gross loan
portfolio as at 30 September 2010, 31 December 2009 and 31 December 2008:
30 September
2010
31 December
2009
31 December
2008
Naftogaz loans
Non-Naftogaz loans,
including:
Corporate
Retail
UAH
thousand
21,243,486
%
47.2
UAH
thousand
28,948,661
%
58.1
UAH
thousand
18,625,560
%
53.3
23,798,713
18,593,026
5,205,687
52.8
41.3
11.6
20,885,743
14,979,864
5,905,879
41.9
30.1
11.9
16,337,217
9,225,365
7,111,852
46.7
26.4
20.3
Total
45,042,199
100
49,834,404
100
34,962,777
100
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
80
The Bank’s financing transactions with Naftogaz were executed on competitive commercial terms and
contributed significantly towards the overall profitability of the Bank by generating a substantial part
of the Bank’s total interest income in 2009 and 2010. The interest income attributable to the Bank’s
financing of Naftogaz amounted to UAH 2,276,452 thousand as at 30 September 2010 (being 40 per
cent. of the Bank’s total interest income as at that date), UAH 3,393,211 thousand as at 31 December
2009 (44 per cent. of the Bank’s total interest income as at that date) and UAH 98,601 thousand as
at 31 December 2008 (4 per cent. of the Bank’s total interest income as at that date).
At the same time, the Bank’s exposure to Naftogaz under the loan agreements affected the Bank’s
impairment reserves. The Bank’s allowance for impairment losses amounted to UAH 1,071,259
thousand as at 31 December 2008 (or 3.1 per cent. of the Bank’s gross loan portfolio, with
approximately 11.9 per cent. of total impairment reserves attributable to Naftogaz loans). As at
31 December 2009, it increased to UAH 4,118,127 thousand (or 8.3 per cent. of the Bank’s gross
loan portfolio, with approximately 42.9 per cent. of total impairment reserves attributable to
Naftogaz). As at 30 September 2010, it increased further to UAH 5,769,523 thousand (or 12.8 per
cent. of the Bank’s gross loan portfolio, with approximately 39.6 per cent. of total impairment
reserves attributable to Naftogaz). Without the impact of Naftogaz, the Bank’s impairment reserves
amounted to 5.8 per cent. of its non-Naftogaz gross loan portfolio as at 31 December 2008, but
increased to 11.3 per cent. as at 31 December 2009 and 14.6 per cent. as at 30 September 2010.
Proposed issue of Naftogaz Bonds
In order to mitigate the liquidity risks of repayment of the loans to Naftogaz and in order to
enhance the marketability of the exposure to Naftogaz, on 15 December 2010, the Cabinet of
Ministers of Ukraine passed Resolution No. 1207 authorising Naftogaz to issue bonds in the nominal
amount of UAH 20,416,000 thousand. The bonds will be issued in 29 series with nominal amounts
ranging between UAH 413,800 thousand and UAH 995,000 thousand each and will mature between
16 September 2011 and 16 September 2016. The bond issue is undergoing registration with the State
authorities. The proceeds of the bond issue will be used to repay the existing loan facilities with the
Bank.
It is expected that the Bank will purchase the majority of the new Naftogaz bonds. This will enable
the Bank to restructure its exposure to Naftogaz into more liquid instruments with diversified
maturities. Naftogaz Bonds can be used more flexibly by the Bank for refinancing purposes or sold to
local or foreign investors so that the Bank’s exposure to Naftogaz would decrease. The Bank believes
that the individual ratio established by the NBU in respect of the Bank’s exposure to Naftogaz will
continue to apply following the proposed bond issue and repayment of the loan facilities.
Description of Business
The Bank’s operations are conducted through three principal business segments comprising Retail
Banking, Corporate Banking and Treasury.
Retail Banking
The Retail Banking segment serves individuals, with a focus on lower-middle to middle income
individuals. The Retail Banking segment offers products and services that are tailored to fully service
the banking needs of customers in this segment, including term deposits, current accounts, loans,
credit and debit card services, cash and settlement services and money transfer services. The Bank has
begun to attract a greater number of middle-income individuals and it is the Bank’s aim that it
should provide a product line which will service all levels of customers to accommodate this trend.
While the Bank cannot determine the precise number of its retail customers, according to its current
estimates the Bank has over 4 million individual customers.
The global financial crisis has affected the financial position of the Bank’s retail customers. In
addition, the devaluation of the hryvnia further contributed to the deterioration of the financial
position of the Bank’s retail customers and affected their ability to service the existing indebtedness.
As a result, the Bank has cut back its retail lending programme and increased its provisions in
respect of existing retail loans. In particular, the Bank stopped providing loans in foreign currencies,
short-term (under twelve months) higher-risk loans to finance purchases of household goods, as well
as loans for the acquisition of land. The Bank increased the amount of required downpayment in
respect of other loans from 15 per cent. to 50 per cent., as well as increased interest rates in respect
of its loan products. As a result, the total amount of loans provided to retail customers decreased
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
81
from UAH 7,111,852 thousand as at 31 December 2008 to UAH 5,905,879 thousand as at
31 December 2009, and decreased further to UAH 5,205,687 thousand as at 30 September 2010.
At the same time, the Bank has maintained stable and timely handling of all customer transactions,
in particular in respect of the repayment of deposits to retail customers on their first demand. The
Bank’s policy of continuing repayment of retail deposits on first demand without restrictions during
the financial crisis has resulted in the increase in the number of its retail clients and of its customer
accounts, albeit at a slower rate. Despite the overall increase in retail customer accounts, from
UAH 11,161,493 thousand as at 31 December 2007 to UAH 13,697,105 thousand as at 31 December
2008, the Bank estimates that its retail customers withdrew UAH 731,090 thousand in the last three
months of that year. At the same time, the Bank’s customers have retained their confidence in the
Bank as it remained open for business throughout the financial crisis in 2009, and retail customer
accounts increased from UAH 13,697,105 thousand as at 31 December 2008 to UAH 15,043,792
thousand as at 31 December 2009. Retail customer accounts increased further in the first nine months
of 2010 to UAH 18,448,603 thousand as at 30 September 2010.
Despite higher provisioning in respect of retail loans and reduced retail lending volumes, the Bank’s
retail operations remained profitable in 2008 and 2009 and in the first nine months of 2010.
The Bank has not sought to pursue any aggressive growth strategies since the onset of the financial
crisis and, given the current economic climate, it does not expect its retail lending to grow
significantly in the near term. However, the Bank intends, through its IT development policy, to
increase the efficiency of the services it provides and in this way to maximise revenue. Once the
economic situation in Ukraine improves, the Bank also hopes to expand its customer base by
attracting a greater number of middle and higher income individuals.
Retail Lending
The Bank offers various types of loans to individual customers including: (i) loans for the acquisition
of real estate objects where the real estate is used as security (Real Estate Mortgages); (ii) consumer
lending, usually secured with collateral (Personal Loans); and (iii) loans for the acquisition of vehicles
(Auto Loans). These three products represented 21 per cent., 60 per cent. and 19 per cent.
respectively, of the Bank’s total retail loan portfolio as at 30 September 2010. As at 30 September
2010, loans to Retail Banking customers amounted to UAH 5,205,687 thousand, representing 12 per
cent. of the Bank’s total consolidated loans and advances.
Real Estate Mortgages
The Bank offers a variety of Real Estate Mortgages, including mortgages on new-build houses and
land for the construction of houses. Mortgage products are offered mainly through the Bank’s
network of branches and outlets and are usually up to ten years in tenor. The Bank also has
partnerships with real estate construction companies through which it offers mortgages to buyers of
new-build houses.
In addition, the Bank participates in the State Special-Purpose Social and Economic Affordable
Housing Building Programme for 2010-2017 under which it provides loans to individuals entitled to
housing under governmental assistance programmes. The Programme is implemented by the Bank in
co-operation with the State Fund for the Promotion of Housing Construction for Young People. The
Programme is aimed at providing housing to those who qualify in accordance with the Ukrainian
legislation through State support and development of affordable housing. The Programme participants
are entitled to a loan of up to 70 per cent. of the value of the acquired property. To qualify for a
loan, the Programme participants must be officially certified as being in need of improvement of their
housing conditions. They also must be able to contribute the balance of the purchase price from their
own funds. Mortgages provided under the Programme are up to 20 years in tenor and have an
interest rate of 16 per cent. per annum, with payment of an arrangement fee of 1 per cent. and
relevant insurance payments. Such mortgages are secured on property other than the property that is
being acquired. The State support is capped at 30 per cent. of the value of the acquired property.
As at 30 September 2010, Real Estate Mortgages provided to Retail Banking customers amounted to
UAH 1,084,547 thousand, represented 21 per cent. of the Bank’s retail loan portfolio.
Personal Loans
The Bank offers consumer loans to Retail Banking customers for general purpose use or to finance
the purchase of household equipment subject, in all cases, to acceptable security arrangements (surety,
pledge/mortgage). As at 30 September 2010, consumer loans to Retail Banking customers, including
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
82
credit card loans, amounted to UAH 3,153,487 thousand, representing 60 per cent. of the Bank’s
retail loan portfolio. Consumer loans are generally up to three years in tenor in respect of loans
secured by way of a surety of two individuals and up to two years in tenor in respect of loans
secured on moveable property (e.g. durable goods).
The Bank also participates in the municipal Energy Efficiency Programme for Population in Lviv
Region for 2009-2012. Pursuant to this Programme, the Bank grants standard loans to individuals in
return for them purchasing energy-efficient goods and implementing energy-saving measures, such as
insulating their homes, installing or reconstructing energy-efficient heating systems and utilising
alternative energy sources. The loans provided under the Programme are up to two years in tenor
and are for amounts of up to UAH 20,000. The loans envisage partial compensation of interest
payments by local authorities which is payable into the borrower’s account opened with the Bank’s
local branch.
Auto Loans
Auto Loans are loans made to Retail Banking customers for the purchase of new and used motor
vehicles. Auto Loans are typically up to five to seven years in tenor and secured with the vehicles
purchased with the loans. As at 31 December 2009, the Bank had a total of 30,200 Auto Loans
outstanding with a total outstanding Auto Loans balance of UAH 1,238,158 thousand. As at 30
September 2010, Auto Loans to Retail Banking customers amounted to UAH 967,653 thousand,
representing 19 per cent. of the Bank’s retail loan portfolio.
Retail Deposits
Deposit and current accounts
The Bank offers a variety of current accounts and term and demand savings accounts to Retail
Banking customers. Currently the Bank offers six types of deposit accounts, including accounts with
monthly, quarterly or annual interest payments, interest payments that are capitalised, interest payable
at maturity, cash replenishment options, automatic extension of term deposits and early repayment
options without loss of accrued interest. The Bank also offers specialised deposit accounts for
pensioners which enables them to receive pension payments from the State social security institutions
free of charge. Pensioners can withdraw cash from such accounts, transfer funds into another account
or use their accounts to service utility payments. Customers have 24-hour access to the Bank’s ATM
network and benefit from optional SMS notifications of transactions. Current account balances from
Retail Banking customers amounted to UAH 8,455,999 thousand, or 20.9 per cent., as at 30
September 2010, compared to UAH 7,415,638 thousand, or 17.6 per cent., as at 31 December 2009
and UAH 7,167,555 thousand, or 17.4 per cent. of total liabilities, as at 31 December 2008. Demand
savings accounts provide flexible access to funds in an interest bearing account, while term savings
accounts provide for higher rates on fixed-term deposits. Term deposits from Retail Banking
customers amounted to UAH 9,992,604 thousand, or 24.7 per cent. of the Bank’s total liabilities, as
at 30 September 2010, compared to UAH 7,628,154 thousand, or 18.1 per cent. of the Bank’s total
liabilities, as at 31 December 2009 and UAH 6,529,550 thousand, or 15.8 per cent. of the Bank’s
total liabilities, as at 31 December 2008. The Bank also offers bank metal deposits.
Debit and credit card services
To assist customers in the Retail Banking segment to manage their cash, the Bank offers a variety of
card services. Currently it offers debit and credit cards to its Retail Banking customers with respective
card accounts denominated in hryvnia or U.S. dollars. The Bank is a member of the Visa
International payment system and MasterCard International payment system and offers customers
such cards as VISA Electron, VISA Classic, VISA Gold, VISA Domestic, MasterCard Standard,
MasterCard Gold, MasterCard Platinum, MasterCard Mass, MasterCard Electronic and Maestro.
According to the NBU, as at 30 September 2010, the Bank ranked third among payment card issuers
in Ukraine in terms of total cards issued. Customers are able to withdraw money and perform certain
account management services at any of the Bank’s 1,197 ATMs. (See ‘‘Distribution Channels – ATM
and POS Network’’ below). Among other payment card products, the Bank offers salary payment
cards issued to employees of its corporate customers for which the Bank provides payroll services as
well as corporate cards for corporate clients. Such salary payment cards are limited by a credit limit,
on average, equivalent to the monthly salary of the holder. As at 30 November 2010, the Bank issued
4,896,013 payment cards, including 2,396,466 VISA cards and 2,499,547 MasterCard cards.
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
83
Cash and settlement services
The Bank offers a wide range of cash settlement services, including the opening and closing of
accounts, cash servicing, maintenance of accounts, providing information on account status and
transfers into hryvnia and foreign currencies. The Bank also offers household payment services to its
Retail Banking customers. It intends to develop such services by establishing direct debit payments
from customers’ current accounts through the Bank’s ATM network. In conjunction with the current
IT systems development policy, the Bank also aims to develop its telephone and internet banking
services to allow household payments.
Money transfer services
The Bank provides money transfer services to its customers through Western Union, Migom,
Unistream, Vigo, Blizko, Coinstar (Travelex Money Transfer), Interexpress, Xpressmoney and
Shvydka Kopiyka (a domestic money transfer service). Retail Banking customers are able to transfer
hryvnia and foreign currency funds (with or without opening a current account) to individuals and
legal entities within Ukraine and abroad. Competition for express money transfer in the Ukrainian
market has intensified over the past few years, as customers switch to more cost effective money
transfer systems. As at 30 September 2010, the Bank operated 2,003 Western Union transfer receipt
and disbursement stations, 1,564 Migom transfer stations and 1,342 Unistream transfer stations. In
the nine months ended 30 September 2010, transfers totalled UAH 1,795,000 thousand in the
domestic currency equivalent, an increase of 20 per cent. compared to the same period of 2009. In
order to improve money transfer services, the Bank intends to implement new software which will
simplify the provision of such services and increase efficiency of money transfer operations.
State-related compensation programme
The Bank is the principal bank administering various State compensation programmes, including the
disbursement of compensation to Ukrainian citizens for the loss of value of their monetary savings
held with Sberbank. This savings compensation programme was implemented in accordance with the
Law of Ukraine ‘‘On State Guarantees for the Compensation of Savings of Citizens of Ukraine’’ (the
Compensation Law). The Compensation Law provides for the payment of compensation from the
State budget in lieu of lost savings, commencing from 1997. Since the Compensation Law came into
force, the Bank has disbursed compensation totalling UAH 8,859,387 thousand. The amounts payable
under the savings compensation programme are classified as the indebtedness of the State in
accordance with the Compensation Law and are not attributed to the Bank’s liabilities.
Due to difficult economic conditions following the onset of the financial crisis, no payments were
made by the State in respect of the savings compensation programme in 2010 and no such payments
are budgeted in the 2011 State Budget Law.
Corporate Banking
Corporate Banking provides banking services, including deposit accounts, loans, overdraft facilities,
revolving lines of credit, guarantees, promissory notes, foreign exchange, letters of credit, securities
trading cash settlement and collection services and consultation services which are ancillary to the
Bank’s lending. The Bank’s targeted Corporate Banking customers include companies in the following
sectors: fuel and energy (including the Bank’s largest borrower, Naftogaz, and its subsidiary
Ukrtransnafta), construction and real estate, road maintenance, trade, agriculture and food
processing, machinery construction and transport. It also aims to assist SMEs and implement various
banking and credit programmes introduced by the State. Corporate Banking represented 88.4 per
cent. of the Bank’s gross loan portfolio, 30.7 per cent. of the Bank’s customers’ current accounts and
7.5 per cent. of the Bank’s deposit base as at 30 September 2010.
Deposits and current accounts
The Bank offers a variety of current accounts and term deposit accounts to its Corporate Banking
customers. Currently the Bank offers more than seven types of deposit products, including accounts
with monthly interest payments, quarterly interest payments, interest payments that are capitalised,
interest payable at maturity and cash replenishment options. The Bank’s head office also provides
bank metal deposits to certain types of customers. The Bank’s cardholders have 24-hour access to its
ATM network and also access to its Internet banking services. The Bank’s current account balances
from Corporate Banking customers amounted to UAH 3,737,749 thousand as at 30 September 2010,
compared to UAH 3,368,087 thousand as at 31 December 2009 and UAH 3,254,575 thousand as at
31 December 2008. Corporate current account balances comprised approximately 9.2 per cent. of the
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
84
Bank’s total liabilities as at 30 September 2010. The Bank’s term deposits from Corporate Banking
customers increased from approximately UAH 541,241 thousand or 1.3 per cent. of the Bank’s total
liabilities as at 31 December 2008, to UAH 6,261,029 thousand or 14.9 per cent. of the Bank’s total
liabilities as at 31 December 2009 but decreased to UAH 815,785 thousand or 2.0 per cent. of the
Bank’s total liabilities as at 30 September 2010.
The table below represents the Corporate Business customer accounts’ sector structure as at
30 September 2010, 31 December 2009 and 2008:
30 September
2010
31 December
2009
31 December
2008
Analysis by Sector:
Energy
Services
Agriculture and food processing
Trade
Media and communications
Construction and real estate
Transport
Mining and metallurgy
Manufacturing
Machinery construction
Hotel and restaurant business
Press and publishing
Oil, gas and chemical production
State authorities
Other
1,318,789
1,122,329
400,979
358,906
319,717
224,493
91,804
38,204
34,644
26,227
14,738
8,120
6,167
—
588,417
926,924
492,058
280,585
299,421
860,196
226,075
203,004
31,709
18,377
25,048
8,242
8,899
51,483
5,726,375
470,720
573,964
302,454
366,377
327,258
1,119,490
194,412
27,360
67,827
22,293
13,383
8,929
7,628
499,501
—
264,940
Total customer accounts
4,553,534
9,629,116
3,795,816
Lending
The Bank offers loans to its Corporate Banking customers, including loan and other credit-related
products, denominated in both hryvnia and foreign currencies, principally U.S. dollars and Euro. In
addition, it offers loans to finance investment projects and programmes, the purchase of vehicles and
machinery, real estate objects, working capital loans, overdraft facilities, revolving credit facilities,
guarantees and letters of credit to its Corporate Banking customers. The Bank is works constantly to
improve its product line and to develop new credit products, including syndicated loans. While the
Bank offers loans to all Corporate Banking customers, it focuses on industries which are of a
strategic importance to the Ukrainian economy, and also on SMEs. The Bank has strong
relationships with large corporate customers. To comply with NBU reporting requirements, the Bank
classifies corporate customers with sales in excess of UAH 50 million as ‘‘large’’, corporate customers
with sales in excess of UAH 30 million but less than UAH 50 million as ‘‘medium’’, and corporate
customers with sales of less than UAH 30 million as ‘‘small’’ or ‘‘SMEs’’.
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
85
The table below represents the Corporate Business borrowers’ sector structure as at 30 September
2010, 31 December 2009 and 2008:
Analysis by Sector:
Oil, gas and chemical production
Energy
Construction and real estate
Construction and road maintenance
Trade
Agriculture and food processing
Municipal authority
Machinery construction
Transport
Mining and metallurgy
Manufacturing
Services
Financial services
Hotel and restaurant business
Press and publishing
Media and communications
Other
30 September
2010
31 December
2009
31 December
2008
21,545,967
5,157,563
3,886,164
3,333,131
1,567,522
1,499,493
1,010,893
625,558
436,063
317,416
204,800
148,914
64,903
8,956
8,094
313
20,762
29,146,558
4,546,440
3,237,962
2,396,753
1,548,330
1,531,503
—
579,382
336,450
271,935
132,569
86,458
60,191
10,475
8,277
13,971
21,271
18,779,508
3,761,595
1,679,918
—
1,153,102
1,159,591
—
509,746
288,492
184,559
135,360
90,555
—
38,458
8,535
34,182
27,324
39,836,512
43,928,525
27,850,925
Corporate lending is a significant part of the Bank’s business, with loans to Corporate Banking
customers amounting to UAH 39,836,512 thousand at 30 September 2010, representing 88.4 per cent.
of the Bank’s total consolidated loans and advances. Since the vast majority of the Bank’s Corporate
Banking customers carry out their activities in the Ukrainian domestic market and are not engaged in
export and import activities, a substantial part of the Bank’s loan portfolio comprises hryvniadenominated loans.
As at 30 September 2010, 31 December 2009 and 31 December 2008, loans to customers of
UAH 32,704,045 thousand (73 per cent.), UAH 37,225,435 thousand (75 per cent.) and
UAH 23,089,180 thousand (66 per cent.), respectively, were granted to ten borrowers or group of
borrowers, which represents a significant concentration.
Large State-owned entities are among the main customers of the Bank’s Corporate Banking
operations. As at 30 September 2010, 31 December 2009 and 31 December 2008, the above stated
amounts include loans issued to Naftogaz Ukrtransnafta in the total gross amount of UAH 21,384,536
thousand (47 per cent.), UAH 29,089,711 thousand (58 per cent.) and UAH 18,766,610 thousand (54
per cent.), respectively. See ‘‘Provision of lending and other banking services to State-owned entities’’
below for a description of the Bank’s co-operation with its largest State-owned customers, including
Naftogaz, Ukrtransnafta and others.
SME lending has decreased substantially since the onset of the financial crisis. As the economic
situation in Ukraine improves, the Bank intends to resume development of its SME business in line
with the objective set forth in its charter and in order to diversify its client base.
Project Finance
As part of its Corporate Business, the Bank provides financing for development and infrastructure
projects implemented by private investors. Recent projects include a new office complex and an
entertainment centre in Kyiv.
Cash settlement transactions
The Bank offers its Corporate Banking customers a wide range of cash settlement services including
the opening and closing of accounts, cash servicing, maintenance of accounts, providing information
on account status, providing consolidated statements of customers’ accounts and transfers into
hryvnia and foreign currencies. The Bank also offers its customers (including Corporate Banking
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
86
customers and other Ukrainian banks) cash collection services, including sales revenues collection and
delivery of cash funds. In order to further develop the Bank’s cash collection services and increase the
level of protection of the Bank’s valuables and employees while in transit, the Bank plans to upgrade
its existing vehicles into armoured specialised vehicles and implement a corporate satellite surveillance
system.
Securities transactions and investments
The Bank’s Corporate Banking Department, together with the Treasury Department, is responsible
for managing securities transactions (including proprietary investment and transaction with its
available for sale portfolio). The Bank is involved in all segments of the Ukrainian stock market.
As at 30 September 2010, the carrying value of the Bank’s corporate securities portfolio was
UAH 1,680,638 thousand (comprising UAH 1,672,858 thousand in corporate bonds and UAH 7,780
thousand in other corporate securities).
The following table shows the breakdown of the Bank’s investments (carrying values) in corporate
securities as at 30 September 2010 and 31 December 2009 and 2008:
Shares and
similar
securities
Total
corporate
securities
portfolio
Corporate
debt
securities
(UAH thousand)
30 September 2010
31 December 2009
31 December 2008
7,780
7,780
23,635
1,672,858
1,656,291
1,069,658
1,680,638
1,664,071
1,093,293
The following table shows a breakdown of the Bank’s corporate securities portfolio as at
30 September 2010 (gross carrying values):
30 September
2010
(UAH
thousand)
Shares of enterprises available for sale, gross
Corporate bonds available for sale
Municipal bonds available for sale
23,063
1,773,004
25,395
Provision of lending and other banking services to State-owned entities
Given the Bank’s status of a wholly State-owned bank, its track record, financial position and
extensive national network, large State-owned entities remain the Bank’s largest Corporate Banking
customers in Ukraine. The financing programme set up by the Bank for its largest State-owned
customer, Naftogaz, is described above (see ‘‘Naftogaz financing programme’’). In addition to
Naftogaz, the Bank provided financing to a subsidiary of Naftogaz, Ukrtransnafta, as well as a
number of other State entities. The Bank also performs settlement functions for the participants of
Ukraine’s electricity and gas markets.
Ukrtransnafta
As at 30 September 2010, the total amount of outstanding indebtedness of Ukrtransnafta was
UAH 141,050 thousand. The loan facilities were provided to Ukrtransnafta in accordance with the
loan agreements concluded in May 2008. The refinancing was used for working capital purposes as
well as capital investment and maintenance of oil pipelines. Each tranche provided under the loan
agreements with Ukrtransnafta is repayable within 365 days. These loan facilities mature in March
2011. Given the total size of the Bank’s loan portfolio, the Bank does not classify the loans provided
to Ukrtransnafta as significant.
Pension Fund of Ukraine
Pursuant to the Resolution of the Cabinet of Ministers of Ukraine No. 1349 of 12 September 2002
‘‘On Measures to Improve the Pension Finance Management Efficiency’’ and the Instruction of the
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
87
Cabinet of Ministers of Ukraine No. 25-p of 21 January 2004 ‘‘On Nominating the Authorised Bank
to Carry out Settlement and Cash Transactions with Monies of the Pension Fund of Ukraine’’, as of
30 September 2010 the Bank provided its services to 755 regional and local units of the Pension Fund
of Ukraine (PFU). These institutions together held 3,955 accounts with the Bank as at 30 September
2010. The payment services in respect of these accounts have been provided via Internet banking
facilities installed in the PFU offices. The Bank performs the day-to-day management of accounts
(consolidating information about account balances turnovers in regional PFU branches, numbers of
accounts and other financial information) of the PFU, and provides consolidated reporting files to the
PFU and the Ministry of Finance of Ukraine. The average daily balance of funds in the PFU
accounts decreased in the nine months ended 30 September 2010 to UAH 183,400 thousand (by
UAH 267,100 thousand or 59.3 per cent.) compared with UAH 450,500 thousand in the nine months
ended 30 September 2009.
Ukrposhta
The Bank also co-operates with UDPPZ Ukrposhta (Ukrposhta), the Ukrainian State-owned Postal
Communication Enterprise. Pursuant to the co-operation agreement between the Bank and
Ukrposhta, the accounts of post offices have been moved to the Bank for the provision of cash and
payment services. As at 30 September 2010, the Bank held 2,195 such accounts, including 591
accounts used for the handling of the PFU funds distributed as State pension payments through
Ukrposhta, and provided services to 245 operating units of Ukrposhta.
In the nine months ended 30 September 2010, the average daily balance of funds in Ukrposhta
accounts amounted to UAH 632,000 thousand, including UAH 279,800 thousand in the PFU
accounts. Over the same period, the average monthly receipts of funds from Ukrposhta amounted to
UAH 11,598,500 thousand, including UAH 7,664,900 thousand in the PFU accounts, and the average
monthly volume of transactions was UAH 401.4 thousand, including UAH 36.9 thousand in respect
of the PFU accounts.
Electricity Suppliers
As at 30 September 2010, the Bank opened 1,249 current accounts for the participants of the
wholesale electrical energy market, including 708 regulated current accounts for the processing of
payments for supplied electricity pursuant to the Resolution of the Cabinet of Ministers of Ukraine
No. 1004 of 24 July 2006 ‘‘On Nomination of the Authorised Bank to Service Current Accounts of
Members of the Wholesale Electrical Energy Market with the Special Utilisation Arrangements’’. The
wholesale electrical energy market participants include SE Energorynok (Energorynok), a State-owned
company responsible for the operation and regulation of Ukraine’s wholesale energy market, as well
as electricity supply companies and their operating units. In the nine months ended 30 September
2010, the average monthly receipts of funds on accounts of Energorynok and electricity supplying
companies amounted to almost UAH 6.3 billion; the average daily balance of funds in these accounts
was UAH 627,300 thousand, including UAH 367,100 thousand in the regulated current accounts for
the processing of payments for supplied electricity. The Bank performed an average of approximately
882 transactions per month in respect of these accounts.
Gas Suppliers
As at 30 September 2010, the Bank opened 864 current accounts for gas supply companies and their
operating units, as well as entities that sell gas to gas suppliers, including 617 regulated current
accounts for the processing of payments for ongoing gas consumption pursuant to the Resolution of
the Cabinet of Ministers No. 247 of 26 March 2008 ‘‘On Improvement of the Procedure of
Settlement for the Natural Gas Consumed’’, as amended. In the nine months ended 30 September
2010, the average monthly receipts of funds in these accounts were UAH 11.0 billion, including
UAH 1.4 billion in respect of the regulated current accounts for processing of payments for supplied
gas, with an average of over 230 transactions being carried out monthly in respect of these accounts.
Municipal heating suppliers
The Bank opened and services 928 current accounts for municipal heating enterprises, heating power
plants, central heating and power plants and other entities conducting business in connection with the
supply of heat and related operating units, including 490 regulated current accounts for payments for
ongoing gas consumption pursuant to the Resolution of the Cabinet of Ministers No. 1082 of 3
December 2008 ‘‘On the Issue of Improvement of Settlement Schemes for Electrical Energy and
Natural Gas’’. In the nine months ended 30 September 2010, the average monthly receipts of funds in
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
88
these accounts were UAH 720,500 thousand, including UAH 476,900 thousand in the regulated
current accounts for payments for the ongoing gas consumption, with an average of approximately 83
transactions being carried out monthly.
Ukrtelecom
The Bank has entered into a co-operation agreement with OJSC Ukrtelecom (Ukrtelecom). As at 30
September 2010, the Bank provided services to 29 branches of Ukrtelecom which held 55 accounts
with the Bank. For the nine months ended 30 September 2010, the average daily balances of funds in
Ukrtelecom accounts amounted to UAH 9,500 thousand, and the average monthly receipts of funds
in Ukrtelecom accounts amounted to UAH 149,300 thousand.
Treasury
The Treasury department is responsible for managing the Bank’s available for sale portfolio. In
particular, it carries out the Bank’s securities transactions and investments (See ‘‘Securities transactions
and investments’’ below), including those involving Ukraine government securities, NBU re-financed
securities, corporate bonds and repos. The Bank’s Treasury department is also responsible for its
money market transactions, including interbank lending and foreign exchange transactions, as well as
precious metals trading. The Bank is currently expanding the range of treasury products that it offers
to its customers and increasing operational profit in this segment.
Securities transactions and investments
The Bank is involved in all segments of the Ukrainian stock market and is an active participant in
the market for Ukrainian Government debt securities. In the nine months ended 30 September 2010,
the Bank purchased Ukrainian Government debt securities with the nominal value of UAH 17,514,846
thousand and sold Ukrainian Government debt securities with the nominal value of UAH 14,200,442
thousand, both in the primary and secondary securities markets. As at 30 September 2010, the
carrying value of Ukrainian Government debt securities was UAH 5,831,907 thousand.
Placement of funds on the interbank market through repo transactions substantially mitigates the
Bank’s credit exposure (as compared with interbank lending transactions), so it actively seeks these
types of transactions. Funds placed through repo transactions have covered the significant part of the
total short-term funds it holds with other banks.
The following table shows a breakdown of the Bank’s treasury securities portfolio as at 30 September
2010 (nominal carrying values):
30 September
2010
31 December
2009
31 December
2008
(UAH thousand)
Ukrainian Government debt securities:
Medium-term Ukrainian Government debt securities
Long-term Ukrainian Government debt securities,
including securities with early redemption features
Ukrainian Government debt securities for settlement of
budget indebtedness on value added tax
3,033,068
1,750,080
1,827,133
2,798,480
598,280
11,779,755
359
—
12,308
5,831,907
2,348,360
13,619,196
Money market transactions
On the interbank lending market, the Bank’s Treasury department is primarily involved in selling
resources for local currency dealings. As at 30 September 2010, the Bank accounted for 7.1 per cent.
of the interbank credit portfolio in the total interbank credit portfolio of commercial banks on the
Ukrainian interbank market, according to the AUB. Interest rates charged by the Bank on interbank
loans correspond to applicable market interest rates.
Transactions with other banks
The Bank is active in the Ukrainian interbank market and remains one of the major market-makers.
The Bank’s involvement has been historically through interbank loans, repos, swap transactions and
the borrowing and placing of funds, but it is able to use a wide range of available money market
instruments, though some of the instruments may be unavailable due to restrictions imposed from
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
89
time to time by the NBU. The Bank carries out interbank money market lending and borrowing
transactions in order to optimise its liquidity and in accordance with its risk management policies.
The Bank has traditionally been more active in lending to, rather than borrowing from, the interbank
market.
Co-operation with counterparty banks is based on the general agreements in the interbank market
and as at 30 September 2010, the Bank had entered into general agreements with 138 domestic and
30 foreign banks. The operations performed under these agreements are limited by counterparty
restrictions set by the Bank’s Credit Committee.
As at 30 September 2010, funds borrowed from other banks (excluding the NBU funding) totalled
(net of LORO accounts) UAH 42,462 thousand (comprising UAH 13,177 thousand in overnight loans
and UAH 29,285 thousand in short-term loans from other banks), compared to zero as at
31 December 2009. As at 30 September 2010, funds lent to other banks (net of NOSTRO accounts)
totalled UAH 411,546 thousand (comprising UAH 59,244 thousand in repo transactions and
UAH 352,302 thousand in funds lent to other banks), compared to UAH 301,820 thousand
(comprising UAH 29,271 thousand in repo transactions and UAH 272,549 thousand in funds lent to
other banks) as at 31 December 2009.
The Bank’s income from transactions on the interbank markets in the nine months ended
30 September 2010 amounted to UAH 88,697 thousand (comprising UAH 731 thousand from repo
transactions, UAH 38,795 from loans to other banks and UAH 49,171 thousand from NOSTRO
account transactions); its expenses totalled UAH 1,436,941 thousand (including UAH 4,109 thousand
in respect of LORO account transactions, UAH 1,432,276 thousand in respect of loans from the
NBU and UAH 556 thousand in respect of other loans).
The Bank remained an active member of the interbank foreign exchange market of Ukraine during
the reporting year. The Bank’s total dealing (net) in the nine months ended 30 September 2010 from
foreign exchange transactions amounted to UAH 99,288 thousand.
Additional products and services
In an effort to increase profitability, the Bank focused on increasing its rating on the banking services
market, attracting more customers and implementing innovative banking products.
In 2010, the Bank carried out non-trading transactions such as money transfers via international
payment systems, bank transfers, compensatory payments, bureau de change transactions, transactions
with cheques and bank metals. It also exercised foreign exchange control agent functions in the
course of settlements under export/import contracts of customers and own foreign trade contracts.
The Bank continued to make bank transfers in foreign currencies via its network of correspondent
banks by involving the Bank’s network and using production and labour resources efficiently, as well
as transfers via international payment systems.
The Bank carried out exchange rate transactions in U.S. dollars, Euro, Canadian dollars, Swiss
Francs, UK Sterling, Russian Roubles, Hungarian Forints, Moldovan Leu, Polish Złoty and
Belarusian Rubles.
Funding
The Bank funds its operations from a combination of customer deposits and stable core current
accounts of corporate and retail customers, issues of debt securities, bank borrowing and long-term
interbank loans.
In order to manage its liquidity position in an efficient manner, it attracts short-term interbank loans
in hryvnia and uses refinancing facilities provided by the NBU. As at 30 September 2010, the total
indebtedness of the Bank under the NBU refinancing facilities was UAH 15,531,633 thousand. The
Bank’s NBU refinancing facilities bear an average interest rate of 9.9 per cent. per annum and are to
be repaid between 2010 and 2015. In accordance with Ukrainian legislation, all such loans are secured
by a pledge in respect of the rights under loans provided by the Bank or debt securities held by the
Bank, and such security is first ranking. See ‘‘Risk Factors – Risk Relating to the Bank – Significant
Levels of NBU funding’’.
Customer term deposits increased by 96.4 per cent. from UAH 7,071 million as at 31 December 2008
to UAH 13,889 million as at 31 December 2009 and decreased by 22.2 per cent. to UAH 10,808
million as at 30 September 2010. Customers’ current accounts and term deposits accounted for 56.9
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
90
per cent. of the Bank’s total liabilities as at 30 September 2010, compared to 58.7 per cent. as at
31 December 2009 and 42.4 per cent. as at 31 December 2008.
The Bank’s liquidity management policy is designed to ensure timely and full performance of the
Bank’s obligations. To this end, the Bank maintains a primary liquidity reserve (providing for the
Bank’s current needs in highly liquid assets) and a secondary liquidity reserve which consists primarily
of highly liquid Ukrainian Government debt securities (to provide liquidity in a stress scenario). In
addition, the Bank monitors liquidity gaps and determines the amount of funding which can be
allocated to financing longer-term projects. The adequacy of the Bank’s approach to liquidity
management was demonstrated by its ability to ensure performance of its obligations through the
crisis periods in 1998, 2004 and 2008.
The Bank also relies on the support from the State as its sole shareholder in terms of additional
contributions to the Bank’s statutory share capital to ensure compliance with Ukrainian and
international economic ratios and maintain stable operations. Prior to 2000, all capital increases were
financed out of the Bank’s net profits. From 2000, share capital increases were largely financed
through capital contributions by the State. As at 30 September 2010, the Bank’s registered and paidup share capital amounted to UAH 13,892,000 thousand, an increase of 1,824 per cent. compared to
UAH 722,000 thousand as at 31 December 2006, including one increase of the Bank’s share capital of
UAH 200,000 thousand in 2007 and three increases of the Bank’s share capital in 2008 in the
aggregate amount of UAH 12,970,000 thousand following the onset of the financial crisis and as part
of the Government’s measures to recapitalise the Ukrainian banking system. All ordinary shares have
a nominal value of UAH 1 million per share, rank equally and carry one vote.
In December 2006, the Bank attracted a U.S.$ 100 million subordinated loan from ABN AMRO.
The funds were disbursed in January 2007 and fall due in 2017 with possible early repayment in
January 2012 or on any interest payment date falling after January 2012.
In February 2008, the Bank issued two Series of domestic bonds with the aggregate nominal value of
UAH 500,000 thousand. The bonds bear interest at the rates of 16.0 per cent. (for Series A bonds)
and 14.0 per cent. (for Series B bonds). As at 30 September 2010, the main part of these domestic
bonds remained outstanding, including Series A bonds with the total nominal value of UAH 300
million) and Series B bonds with the total nominal value of UAH 155 million. As at 31 January
2011, the remaining Series B bonds with the total nominal value of UAH 45 million were placed on
the secondary market and remained outstanding. On 10 February 2011, all of the outstanding Series
A bonds were redeemed by the Bank. Series B bonds mature in February 2013.
Competition
As at 1 January 2011, 194 commercial banks were registered in Ukraine, of which 176 banks have
been granted licences by the NBU to perform banking transactions. As at 1 January 2011, assets of
all commercial banks in Ukraine amounted to UAH 942.1 billion (approximately U.S.$118.4 billion),
their credit portfolio (including interbank loans) amounted to UAH 755.0 billion (approximately
U.S.$94.9 billion), their equity capital amounted to UAH 137.7 billion (approximately U.S.$17.3
billion), corporate deposits and current accounts amounted to UAH 144.0 billion (approximately
U.S.$18.1 billion) and retail deposits and current accounts amounted to UAH 270.7 billion
(approximately U.S.$34.0 billion) (all figures in this paragraph have been converted using the
exchange rate U.S.$1= UAH 7.96).
According to the NBU, in 2010, the share capital of Ukrainian banks having licences to perform
banking operations increased by 22.4 per cent., amounting to UAH 145.9 billion as at 1 January
2011, while the equity capital of such banks increased by 19.6 per cent. to UAH 137.7 billion as at
1 January 2011. During 2010, the assets and total liabilities of Ukrainian banks having licences to
perform banking operations increased by 7.0 per cent. and 5.1 per cent. respectively, and amounted to
UAH 942.1 billion and UAH 804.4 billion, respectively. The regulatory capital of Ukrainian banks
increased by 18.5 per cent. during 2010, amounting to UAH 160.9 billion as at 1 January 2011.
For 2011, commercial banks operating in Ukraine are divided by the NBU into four groups
according to size of assets. In particular, 17 major banks with total assets of more than UAH 14.0
billion were classified in the first group. 22 banks with total assets of more than UAH 4.5 billion
were classified in the second group, 21 banks with total assets of more than UAH 2.0 billion were
classified in the third group and 115 banks with total assets of less than UAH 2.0 billion were
classified in the fourth group. As at 1 January 2011, 55 banks in Ukraine had foreign capital, of
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
91
which 20 banks were wholly foreign-owned. Banks with foreign capital comprise over 40.6 per cent.
of the total share capital of banks in Ukraine. In addition, as of the date of this Prospectus only the
Bank and Ukreximbank were wholly State-owned. Three commercial banks (Rodovid Bank,
Ukrgasbank and Bank Kyiv) were recapitalised in 2009, as a result of which the State became the
majority shareholder in such banks, with stakes ranging from 87.7 per cent. to almost 99.99 per cent.
according to the NBU. See ‘‘Appendix 1 – The Banking Sector and Banking Regulations in Ukraine’’.
Due to the large number of banks operating in Ukraine, the Bank faces competition in substantially
all of the banking services and locations in which it operates. Additionally, international banks have
increased their presence in Ukraine, and compete with the Bank for provision of banking services to
retail and corporate customers. The Bank considers its principal competitors for the provision of a
full range of banking services to be:
*
with regards to the number of branches and outlets, PrivatBank (over 3,000 branches),
Raiffeisen Bank Aval (over 900 branches) and Ukrsotsbank (over 400 branches);
*
with regard to the amount of term deposits of retail and corporate clients, PrivatBank and
Raiffeisen Bank Aval; and
*
with regard to the size of its loan portfolio, PrivatBank and Ukreximbank.
The Bank’s competitors also include Ukrsibbank, OTP Bank, First Ukrainian International Bank,
Bank Forum, and Bank ‘‘Finance and Credit’’. Ukreximbank, the only other Ukrainian bank that is
wholly-owned by the State, is a competitor in respect of lending to corporate and retail customers as
well as with regard to the attraction of term deposits from local authorities. In addition, Ukrposhta is
the Bank’s competitor with regard to handling utility payments, money transfer services, payment of
pensions and distribution of lotteries.
Distribution Channels
Branches and Outlets
The Bank offers its services through its vertically-integrated branch network which consists of: (i) the
head office; (ii) regional branches; (iii) sub-branches; and (iv) outlets.
As at 31 December 2010, the Bank had the largest branch network among the Ukrainian banks,
consisting of 25 regional branches in each region of Ukraine (including the regional branch in Kyiv
and Kyiv oblast and the regional branch in the Autonomous Republic of Crimea), as well as 226
sub-branches and 5,745 outlets. Regional branches and sub-branches are directly subordinated to the
head office of the Bank.
Regional branches are separate structural units of the Bank responsible for the Bank’s activities in
their respective regions. Regional branches are also responsible for the management of sub-branches
located within their respective region. Each sub-branch is run by its management, which includes a
sub-branch head, deputy heads and a chief accountant. Each sub-branch is divided into further
structural units. The Bank’s outlets are supervised and managed by a branch responsible for the
respective territory where the outlets are located. Each branch has its own balance sheet which is
consolidated into the Bank’s central balance sheet for financial reporting purposes. Each branch
provides a full range of banking services to the Bank’s retail and corporate clients, with the exception
of the following transactions which are conducted by the head office: opening accounts for other
banks and opening accounts with other banks, including relations with correspondent banks.
Outlets, on the other hand, do not have separate balance sheets. The scope of services provided by
outlets is determined by their internal classification. Outlets of categories I, I-A, II and III-A (268 as
at 31 December 2010) provide a wide range of banking services to retail and corporate clients,
including lending and customer account services, with the exception of category III-A outlets which
only provide lending services to individuals. Outlets of category III (376 as at 31 December 2010)
provide a full range of services to retail clients and service accounts of corporate clients. Outlets of
categories III-B, IV and V (5,101 as at 31 December 2010) provide a traditional range of services to
retail clients (including, among others, customer account services, processing of payments and foreign
exchange).
Currently, the Bank is implementing structural reforms in its branch network. This will allow the
Bank to simplify and optimise the management and control over its branch network, implement
unified corporate standards and processes in all the branches and outlets and improve cost efficiency
of the Bank’s branch network, eliminating excessive managerial functions at the level of sub-branches.
The Bank will move to a two-tier structure whereby sub-branches will be re-organised into outlets.
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
92
Once a sub-branch is converted into an outlet, its activities will be reflected on the balance sheet of
the relevant regional branch. In 2010, 103 sub-branches were re-organised into outlets. Throughout
2011, it is envisaged that all remaining 226 sub-branches will be re-organised into outlets. As a result,
only regional branches will have their own balance sheets and produce financial reports for the
supervising State authorities.
ATM and POS Network
The Bank offers its customers the ability to withdraw cash from their accounts with the Bank
through its own ATM network comprising 1,197 ATMs and through 2,960 POS terminals. These
transactions can also be undertaken through the ATM networks of other Ukrainian banks on the
basis of co-operation agreements, comprising in total a further 5,124 ATMs as at 31 December 2010.
The Bank’s ATMs provide services such as cash withdrawals, balance enquiries, mini-statements, fund
transfers between customer accounts with the Bank and mobile phone account top-ups. The Bank
offers SMS notifications in respect of transactions on customer accounts. The Bank will continue to
expand the range of services provided through its ATMs, including the support of money transfers to
and from accounts with other banks, handling of utility payments and paying-in services. The Bank
also intends to implement telephone and internet banking. In 2010, the Bank plans to expand its
network to 1,270 ATMs through an additional investment of UAH 25 million.
Other Distribution Channels
The Bank offers its corporate customers Internet banking facilities, and SMS banking facilities to its
retail clients. As part of its IT development programme, the Bank is aiming to roll-out Internet and
telephone banking services to all retail clients.
Information Technology
The Bank’s IT systems are an integral part of its system of internal controls and are critical to its
business operations and essential to effectively support business operations, maintain operational
efficiencies, coordinate and enhance risk management systems, and meet the needs of the Bank’s
customer base. Primarily, IT systems operate to establish a payment infrastructure (involving clearing
and settlement), provide payment services (involving debit card and ATM transactions), facilitate
participation of the Bank in financial markets (through trading and custody operations) and support
the Bank’s customer service function.
The Bank currently does not operate a single, integrated operating system which allows for real-time
reporting of the Bank’s financial position. With five separate core accounting systems and 252
separate balance sheets being collated throughout the Bank, it suffers from a reporting delay between
closing of individual balance sheets and their consolidation into a single Bank-wide balance sheet.
This delay can be up to 24 hours.
The current medium-to-long term IT systems development strategy of the Bank is focused on the
implementation of an ABS within the Bank’s entire branch network instead of the existing five
automatic banking systems. As at 30 September 2010, the new ABS was implemented in 9 out of 25
regional branches. In addition, the Bank’s current IT systems development policy provides for the
implementation of the unified internal accounting and reporting systems; establishment of Openway,
the Bank’s own processing centre; implementation of a centralised credit system and centralised
deposit system for the Bank’s Retail and Corporate businesses; introduction of a centralised record
system for deposit transactions; improvement of the money transfer system; establishment of the call
centre; development of a centralised storage facility for management accounting and financial analysis
data; implementation of the data protection system, including further development of the Bank’s
server network to ensure high quality data transmission. The Bank’s network currently connects 1,090
locations of the Bank, with a further 2,000 locations expected to join the network in 2011-2012. The
Bank also continues to implement its multiservice network, allowing for the timely transfer of
information within the Bank’s branch network.
The Bank estimates its total capital expenditure for the development of IT systems at UAH 104,556
thousand in 2010 compared to UAH 62,238 thousand in 2009 and UAH 91,873 thousand in 2008. It
is expected that capital expenditure for the IT systems development will total approximately
UAH 215,000 thousand in 2011.
The stability and reliability of the Bank’s automatic banking system is ensured through a back-up
server, which keeps back-up records of all our banking operations. As of the date of this Prospectus,
the Bank has not experienced any material interruptions to its back-up system.
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
93
The Bank’s Financial Statements for each of the years ended 31 December 2009 and 31 December
2008 include a qualification relating to the adequacy of disclosure on liquidity risk due to present
insufficient IT systems. See ‘‘Risk Factors – Risk Relating to the Bank – The Bank’s Financial
Statements for the years ended 31 December 2009 and 31 December 2008 and Condensed Interim
Financial Information for the nine months ended 30 September 2010 include qualifications relating to the
adequacy of disclosure relating to liquidity risk, the re-valuation of buildings, hyper-inflationary
accounting and segment reporting’’.
See also ‘‘To enhance the Bank’s internal performance and efficiency by improving business procedures
through the use of information technology’’ above.
Insurance
The Bank maintains the types of insurance that are envisaged by applicable Ukrainian legislation and
for businesses in Ukraine in the sectors in which it operates, including civil liability insurance for
certain of the Bank’s employees, coverage for leased and owned real estate property and coverage for
loans. The Bank considers its insurance coverage to be adequate both as to risk and as to amounts
for the operations conducted by it.
Subsidiaries and Associates
The Bank has one subsidiary, ‘‘The Militia of Ukraine’’ magazine, in which it held 88.65 per cent. of
the authorised share capital as at 30 September 2010. The magazine was co-founded by the Bank and
the Ministry of the Interior of Ukraine in January 1997 in order to publicise the activities of
Ukrainian law-enforcement bodies and organisations. The Bank estimates that the subsidiary’s assets
comprise 0.0007 per cent. of the Bank’s total assets.
In addition, the Bank had four associates, in which it owns less than 50.00 per cent. of the
authorised share capital: JSC Ukrspetsimpex Bank, CJSC Kagarlykmlyn (which have both been
liquidated), JSC Starovyzhivska SPMK-14 and Joint Small Enterprise ‘‘Karbid’’ (which are currently
being liquidated). The shares in JSC Starovyzhivska SPMK-14 and some of the shares in JSC
Ukrspetsimpex Bank were acquired by the Bank as part of the repayment of indebtedness by the
Bank’s borrowers.
The Bank does not consider any of its subsidiaries or associates to be material to its operations.
Property
As at 30 September 2010, the total net book value of the Bank’s property (including leasehold land
and buildings which the Bank holds) was UAH 2,067.6 million, including UAH 1,766.2 million of
owned buildings and UAH 178.4 million of furniture, office equipment and motor vehicles. The last
revaluation of the Bank’s buildings and office premises to market prices was carried out by
independent appraisers as at 1 November 2008. The fair value of buildings and office premises was
estimated using the sales comparison method. No update of revaluations was performed for the
period from November 2008 to 30 September 2010. See ‘‘Risk Factors – The Bank’s Financial
Statements for the years ended 31 December 2009 and 31 December 2008 and Condensed Interim
Financial Information for the nine months ended 30 September 2010 include qualifications relating to the
adequacy of disclosure relating to liquidity risk, the re-valuation of buildings, hyper-inflationary
accounting and segment reporting’’. The Bank intends to revalue its real estate property during 2011.
Intellectual Property
The Bank holds the following certificates issued by the State Department for Intellectual Property in
respect of the Bank’s Intellectual Property rights:
*
‘‘Zavzhdy Poruch’’ (‘‘Always near you’’) trademark (trademark registration certificate No. 48450
dated 15 March 2005);
*
‘‘Oschad’’ trademark (trademark registration certificate No. 32694 dated 16 June 2003);
*
‘‘Oschadbank’’ trademark (trademark registration certificate No. 37083 dated 15 August 2003);
*
‘‘Oschadhy Bank of Ukraine’’ trademark (trademark registration certificate No. 29002 dated
15 January 2003);
*
the Bank’s logo (trademark registration certificate No. 25899 dated 15 June 2002);
*
‘‘Shvydka Kopiyka’’ trademark (trademark registration certificate No. 107598 dated 25 May
2009); and
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
94
*
‘‘Shvydka Kopiyka’’ logo (trademark registration certificate No. 109509 dated 10 July 2009).
Correspondent Banks
The Bank has one of the most extensive networks of foreign correspondent banks among Ukrainian
banks and has established correspondent relationships with more than 70 banking institutions
globally. The Bank’s main correspondent banks include Deutsche Bank AG, Commerzbank AG,
WestLB AG, Standard Chartered Bank, HSBC Bank plc, Citi, Unicredit SA, JPMorgan Chase Bank
and Deutsche Bank Trust Company Americas. As at 31 December 2010, the Bank conducted
international settlements via 75 NOSTRO accounts in different currencies opened with major foreign
banks. In addition to the Bank’s global network of correspondent banks, 30 Ukrainian banks and 10
banks from the CIS and the Baltic States maintain their accounts with the Bank.
The Bank’s continuous development of its correspondent network has allowed it to expand its
relationships with counterparts throughout the world, including in Western, Central and Eastern
Europe and North America and to co-operate with them in such areas as the inter-bank market,
foreign exchange, money market, trade finance operations and other areas.
Licences
The Bank holds a certificate on the State registration of a legal entity confirming the registration
made on 31 December 1991.
As a Ukrainian bank, the Bank is regulated and supervised by the NBU. The Bank has a NBU
registration certificate confirming the registration made on 31 December 1991.
The Bank is registered with the NBU and its current banking licence and the NBU permit were
issued on 16 January 2002 and the Annex to the NBU permit was updated in 2009. The Bank is
entitled to conduct all types of banking operations specified in applicable Ukrainian law and, in
particular, the Bank may:
*
attract and provide loans;
*
accept deposits from both legal entities and individuals;
*
open and operate current accounts for clients and correspondent banks;
*
conduct foreign exchange and money market operations;
*
sell and purchase securities both for its own account and on behalf of clients;
*
provide guarantees;
*
carry out factoring and leasing operations;
*
issue and endorse cheques, bills of exchange and other payment instruments;
*
issue bank cards;
*
provide asset management services; and
*
provide custodial services.
The Bank holds five licences issued in 2010 by the State Commission on Securities and the Stock
Market of Ukraine authorising it to perform the following professional activities in the stock market:
*
investment management in respect of securities;
*
brokerage;
*
dealership;
*
underwriting; and
*
depository activity as securities custodian.
The Bank holds a licence issued in 2004 by the Ministry of Finance of Ukraine for the issue and
marketing of lotteries (instant State lotteries).
Memberships
The Bank is a member of the VISA and the MasterCard payment systems. In January 2009, the
Bank obtained a licence for the provision of merchant acquiring services within the VISA payment
system. In addition, the Bank is a member of the Ukrainian Interbank Payment Systems Member
Association (EMA), the AUB, the First Credit Bureau of Ukraine (FCBU), OJSC UkrCard, the
Ukrainian Credit-Bank Union, the Ukrainian Interbank Currency Exchange (UICE), PrJSC PFTS
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
95
Stock Exchange, OJSC Ukrainian Exchange, CLSC Ukrainian Stock Exchange the SWIFT system,
the Association ‘‘Ukrainian Stocks Traders’’ (AUST), the Professional Association of Registrars and
Depositaries (PARD) and the World Institute of Savings Banks (WISB).
Legal Proceedings
From time to time and in the ordinary course of business, the Bank is subject to governmental, legal
and arbitration proceedings. There are no governmental, legal or arbitration proceedings (including
any such proceedings which are pending or threatened of which the Bank is aware) during the
previous 12 months that may have, or have had in the recent past, a material effect on its financial
position or profitability.
c104221pu050Proof7:3.3.11B/LRevision:0OperatorChoD
96
MANAGEMENT STRUCTURE
Overview
The managerial structure of the Bank comprises management and control bodies. The Bank’s
management bodies are the Supervisory Board and the Management Board. The Management Board
is responsible for the day-to-day operational management of the Bank. The Supervisory Board is the
supreme managerial body which supervises the activities of the Management Board of the Bank but it
has no direct involvement in the day-to-day operational activity of the Bank. The control body of the
Bank is the Audit Commission, which controls the financial and economic activity of the Bank.
The following chart shows the corporate organisational structure of the Bank (as of 31 January
2011):
Internal Audit Department
Assets and Liabilities Management
Committee
Supervisory Board
Financial Committee
Management Board
Audit Commission
Tender Committee
Credit Committee
Tariff Committee
A brief overview of the full members, functions and corporate powers of the Management Board, the
Supervisory Board and the Audit Commission is set out below.
Supervisory Board
The Supervisory Board is not directly involved in the day-to-day operational management of the
Bank, but it plays a significant role in supervising the activities of the Management Board. The
responsibilities of the Supervisory Board include the following:
*
supervising the activities of the Management Board in order to protect the interests of the State
a sole shareholder of the Bank;
*
setting guidelines and targets relating to the Bank’s activities and approving reports relating to
such guidelines and attainment of targets;
*
handling the appointment and resignation of the Chairman and other members of the
Management Board and approving the terms of remuneration of the Chairman and the other
members of the Management Board;
*
approving the Bank’s annual results, including those of any subsidiaries;
*
approving the distribution of profits and the term and procedures for the payment of dividends;
*
taking decisions on covering losses and the management of the general reserve fund;
*
supervising the Bank’s Audit Commission including approving its regulations, appointing and
removing personnel of the Audit Commission and reviewing and approving reports and
conclusions of the Audit Commission and external auditors;
*
taking decisions with respect to the establishment, reorganisation and liquidation of the Bank’s
branches, representative offices and subsidiaries and approving regulations thereon and their
statutes;
*
approval of the Bank entering into agreements in respect of significant disposals of the Bank’s
property in accordance with the legislation and the Charter of the Bank, if the amount of such
agreements exceeds 10 per cent. of the Bank’s authorised share capital; and
*
carrying out other functions prescribed by applicable Ukrainian legislation and the Bank’s
Charter.
The Supervisory Board consists of 15 members an equal number of whom are appointed by the
Verkhovna Rada of Ukraine (the Parliament), the Cabinet of Ministers of Ukraine and the President
of Ukraine for a period of five years. The Supervisory Board of Ukreximbank, the other bank wholly
owned by the State, is appointed according to the same principle. Ten out of 15 members of the
Bank’s Supervisory Board are also members of the Supervisory Board of Ukreximbank.
c104221pu060Proof7:3.3.11B/LRevision:0OperatorChoD
97
The Chairman of the Supervisory Board is elected from the members, while the Deputy Chairman is
elected from the members on the recommendation of the Chairman. The members of the Supervisory
Board fulfil their functions without receiving any monetary remuneration. The name, positions and a
short biography of each current member of the Supervisory Board as at 1 December 2010 are set out
below:
Appointed by the Cabinet of Ministers of Ukraine:
Mr. Oleksandr Mykolaiovych Kushnirenko (born on 13 September 1965) – Member of the Supervisory
Board; currently holds a position of Head of Executive Office of the Prime Minister of Ukraine;
previously held various positions in the Executive Office of the First Vice Prime Minister of Ukraine
and the Secretariat of the Finance and Banking Activities Committee of the Parliament of Ukraine;
Mr. Kostiantyn Valeriiovych Liubchenko (born on 6 October 1968) – Member of the Supervisory
Board; currently holds a position of First Deputy Minister of the Cabinet of Ministers of Ukraine;
previously held positions of the First Deputy Minister of Economy of Ukraine and Deputy Chairman
of the Council of Directors of CJSC ‘‘Gruppa Rozvytok’’;
Mr. Sergii Oleksandrovych Rybak (born on 10 August 1970) – Chairman of the Supervisory Board;
currently holds a position of Deputy Minister of Finance of Ukraine; previously held positions of
Deputy Minister of Finance of Ukraine and consultant in the Global Economy and International
Relations Institute of the Academy of Sciences of Ukraine;
Mr. Igor Mykolayovych Sotulenko (born on 30 April 1959) – Member of the Supervisory Board;
currently holds a position of member of the Supervisory Board of JSC ‘‘State Export-Import Bank of
Ukraine’’; previously held various positions in ‘‘Minolta Trading Ukraine’’ and ‘‘Autointernational’’;
and
Mr. Sergii Ivanovych Kharchenko (born on 17 May 1956) – Member of the Supervisory Board;
currently holds a position of Head of the State Treasury of Ukraine; previously held a position of
Head of the State Treasury of Ukraine and was retired.
Appointed by the Verkhovna Rada of Ukraine:
Mr. Yury Vasyliovych Bordiuhov (born on 27 April 1957) – Member of the Supervisory Board;
currently holds a position of Head of the Section on Management of Legal Departments of Regional
Branches of the State Property Fund of Ukraine; previously held various positions in the State
Property Fund of Ukraine;
Mr. Danylo Mefodiyovych Volynets (born on 10 November 1958) – Member of the Supervisory
Board; currently holds a position of Economic Advisor to the Director General of LLC ‘‘KUA ITTManagement’’; previously held various positions in LLC ‘‘KUA ITT-Management’’;
Mr. Oleh Fedorovych Koshelenko (born on 28 October 1940) – Member of the Supervisory Board;
currently holds a position of Chief Efficiency Consultant of CJSC ‘‘Smart-Holding’’; previously held
various positions in LLC ‘‘Smart Group’’;
Mr. Anatoliy Ivanovych Lytiuk (born on 2 August 1949) – Deputy Chairman of the Supervisory
Board; currently retired; previously held a position of the member of the Management Board of
OJSC ‘‘Azovstal Metal Works’’ and was a member of the Parliament of Ukraine; and
Mr. Sergii Viktorovych Chekashkin (born on 3 October 1973) – Member of the Supervisory Board;
previously held a position of the Director of Tax Policy Department of the Ministry of Finance of
Ukraine and Deputy Head of the State Tax Administration of Ukraine.
Appointed by the President of Ukraine:
Mrs. Iryna Mykhailivna Akimova (born on 26 April 1960) – Member of the Supervisory Board;
currently holds a position of First Deputy Chief of the Presidential Administration; previously held a
position of General Director of LLC ‘‘Informational-Analytical Center ‘‘Vector’’ and was a member
of the Parliament of Ukraine;
Mr. Pavlo Ivanovych Gaidutskyi (born on 6 August 1950) – Member of the Supervisory Board;
currently holds a position of Deputy Executive Director – Director on Science of the Institute of
Strategic Estimates; previously held positions of advisor to the Prime Minister of Ukraine and Deputy
Chairman of the Management Board of Bank ‘‘Arkada’’;
c104221pu060Proof7:3.3.11B/LRevision:0OperatorChoD
98
Mr. Andrii Volodymyrovych Portnov (born on 27 October 1973) - Member of the Supervisory Board;
currently holds a position of Deputy Chief – Chairman of the Judicial Reform Department of the
Presidential Administration; previously worked as an attorney and was a member of the Parliament
of Ukraine;
Mr. Viktor Mykhailovych Fedosov (born on 21 September 1939) – Member of the Supervisory Board;
currently holds a position of Head of the Finance Department of Vadym Hetman Kyiv National
Economic University; previously held various positions in Vadym Hetman Kyiv National Economic
University; and
Mr. Valerii Ivanovych Khoroshkovskyi (born on 1 January 1969) – Member of the Supervisory Board;
currently holds a position of Head of the Security Service of Ukraine; previously held positions of the
Head of the State Customs Service of Ukraine and First Deputy Head of the Security Service of
Ukraine.
The business address of each member of the Supervisory Board is 12-G Hospitalna Street, Kyiv
01001.
Management Board
The Management Board, responsible for the daily management of the Bank, is the permanent
executive body of the Bank and manages its operational activities. The Management Board is
responsible for ensuring that the Bank operates within the framework established by the Bank’s
Charter and is accountable to the Supervisory Board.
The powers of the Management Board, inter alia, include:
*
implementation of decisions taken by the Supervisory Board;
*
submission of issues to be considered by the Supervisory Board;
*
review and approval of the Bank’s business plans, financial plans and budget estimates;
*
review of the Bank’s annual financial report and balance sheet and submission thereof to the
Supervisory Board for approval;
*
setting the Bank’s accounting and reporting standards, regulations, procedures and internal
controls;
*
taking decisions on the Bank entering into agreements in respect of significant disposals of the
Bank’s property in accordance with the legislation and the Charter of the Bank, if the amount
of such agreements does not exceed 10 per cent. of the Bank’s authorised share capital;
*
taking decision on any issues concerning the management of branches, representative offices,
associated enterprises and other structural subdivisions of the Bank, including remuneration and
welfare of the workforce;
*
approval of internal control and supervision systems to prevent money laundering; and
*
carrying out other functions prescribed by applicable Ukrainian legislation and the Bank’s
Charter.
The Chairman and other members of the Management Board are appointed by the Supervisory
Board. Each member of the Management Board is a full-time employee of the Bank. The name,
position and a short biography of each current member of the Management Board and a short
biography as at 1 December 2010 are outlined below:
Mr. Vyacheslav Ivanovych Kozak (born on 24 August 1971) – Chairman of the Management Board;
appointed by the Supervisory Board in April 2010; previously held positions of Advisor to the Vice
Prime Minister of Ukraine on Economy; Deputy Chairman of the Management Board on Corporate
Business of PrivatBank; Head of CIS Debt and Loan Products Department of Dresdner Kleinwort
Wasserstein and Head of the Representative Office of Credit Suisse in Ukraine;
Mr. Denys Borysovych Kiryeyev (born on 1 January 1977) – First Deputy Chairman of the
Management Board; appointed by the Supervisory Board in October 2010; previously held various
positions in Credit Lyonnais Ukraine, Citi Bank Ukraine, ING Bank Ukraine, LLC ‘‘SCM Finance’’
and ‘‘SLAV Management’’ also is a member of the Supervisory Board of Ukreximbank;
Mr. Roman Mykolayovych Mahuta (born on 30 August 1958) – First Deputy Chairman of the
Management Board; appointed by the Supervisory Board in March 2007; previously held various
positions in PrivatBank and Ukrainian Bank for Reconstruction and Development;
c104221pu060Proof7:3.3.11B/LRevision:0OperatorChoD
99
Mr. Oleksandr Viktorovych Gluschenko (born on 20 June 1965) – Deputy Chairman of the
Management Board; appointed by the Supervisory Board in October 2010; previously held various
positions in Bank ‘‘Finance and Credit’’;
Mr. Oleksandr Dmytrovych Hryshko (born on 4 September 1969) – Deputy Chairman of the
Management Board; appointed by the Supervisory Board in October 2010; since 2005 held a position
of Deputy Chairman of the Management Board – Director of the Retail Business Department of the
Bank;
Mr. Evhen Volodymyrovych Drachko-Yermolenko (born on 28 September 1974) – Deputy Chairman of
the Management Board; appointed by the Supervisory Board in October 2010; previously held various
positions in PrivatBank;
Mr. Sergii Yakovych Lyashenko (born on 12 September 1964) – Deputy Chairman of the
Management Board; appointed by the Supervisory Board in October 2010; previously held positions
of Head of the State Tax Administration and Minister of Finance of the Autonomous Republic of
Crimea and Head of Crimean Republican Branch of the Bank;
Mr. Sergii Oleksandrovych Podrezov (born on 16 September 1970) – Deputy Chairman of the
Management Board; appointed by the Supervisory Board in April 2003; previously held various
positions in the Bank, including a position of Deputy Chairman of the Management Board – Head of
Corporate Business Department of the Bank;
Mr. Anton Oleksandrovych Tyutyun (born on 14 March 1977) – Deputy Chairman of the
Management Board and Director of the Retail Business Department; appointed by the Supervisory
Board in October 2010; previously held various positions in Ukrsotsbank and BTA-Bank;
Mr. Hryhoriy Vasyliovych Borodin (born on 10 March 1946) – Deputy Chairman of the Management
Board and Head of Luhansk Oblast Branch; appointed by the Supervisory Board in October 2005;
previously held a position of Head of Luhansk Oblast Branch.
The business address of each member of the Management Board is 12-G Hospitalna Street, Kyiv
01001.
Audit Commission
The Audit Commission has control over the financial and economic activities of the Bank. It
supervises the Bank’s compliance with legislation and regulations of the NBU, reviews the reports of
external and internal auditors and prepares the relevant proposals for the Supervisory Board. It also
submits proposals relating to issues of financial security and stability of the Bank as well as the
protection of customers’ interests, to the Supervisory Board for consideration.
The Audit Commission inspects the financial and business activity of the Bank on the instruction of
the Supervisory Board, on the request of the Management Board or on its own initiative. It may
engage internal as well as independent external experts and auditors to assist it in exercising its
powers. The Audit Commission prepares opinions to the reports and balance sheets of the Bank and
the Supervisory Board may not approve an annual financial report of the Bank unless the Audit
Commission has provided an opinion on such report.
Pursuant to the Bank’s charter, the Audit Commission shall have three members appointed by the
Supervisory Board of the Bank for a term of three years. Members of the Bank’s Management
Board, the Supervisory Board or other employees of the Bank may not be appointed as members of
the Audit Commission.
The members of the Audit Commission at the date of this Prospectus are as follows:
Mr. Vadym Valentynovych Linnyk – Head of the Audit Commission, currently holds a position of
Deputy Director of the Division of Inspections in Production and Financial Services Sphere of the
Chief Control and Revision Department;
Mr. Yaroslav Vasylyovych Matuzka – Member of the Audit Commission, currently holds a position of
Director of the Legal Department of the Ministry of Finance of Ukraine.
Mr. Volodymyr Oleksandrovych Kotsyuba – Member of the Audit Commission, currently holds a
position of Director of the Financial Services Markets Development Department of the Ministry of
Finance of Ukraine.
c104221pu060Proof7:3.3.11B/LRevision:0OperatorChoD
100
ASSET, LIABILITY AND RISK MANAGEMENT
Overview
The Bank has a comprehensive risk management strategy in respect of financial risk and operational
risk. Financial risk management comprises the management of market risk which includes credit risk,
liquidity risk, interest rate risk and foreign exchange risk, while operational risk management involves
ensuring that the Bank’s internal procedures and policies operate so as to minimise exposure to
operational and legal risks. The risk management process is critically important for maintaining the
Bank’s profitability and ensuring compliance with regulatory requirements.
Although Ukrainian legislation does not require compliance with the standards of risk management
set by the Basel Committee on Banking Supervision (the Basel Committee), the Bank has been
implementing the Basel Committee’s recommendations for several years and intends to continue to do
so in the future. Additionally, the NBU has established minimum capital adequacy ratios that are
mandatory for Ukrainian banks. The current NBU ratio is 10 per cent. Such ratios are based on
methodology that is generally consistent with applicable standards of the Basel Committee. The
Bank’s risk management systems have been developed according to this methodology.
The Bank aims to implement the Basel II recommendations and take into account its international
standards in further developing its risk management strategy. The Bank views this as an ongoing
priority.
In 2004, the Bank’s Management Board and Supervisory Board approved the Risk Management
Concept (the RMC). The RMC is an overarching approach across the Bank, including all of its
organisational departments, and its headquarters, local and regional outlets and branches, towards
risk management. It defines the main risk categories which the Bank faces, and specifies the major
organisational and functional levels of risk management within these categories. From a functional
perspective, the RMC focuses on:
*
risk-generating departments;
*
risk supervision of the Bank as a whole;
*
risk monitoring of isolated structural units; and
*
risk monitoring by the Bank’s Management Board.
The RMC does not regulate internal corporate risks arising from transactions between structural units
of the Bank, unless such transactions potentially enhance the Bank’s risks on the whole. Additionally,
the RMC does not outline the Bank’s policies on trends or types of a transaction, rather it deals only
with the management of risks generated as a result of any such transaction.
The Bank’s risk management policies aim to identify, analyse and manage the risks faced by the
Bank, to set appropriate risk limits and controls and to continuously monitor risk levels and
adherence to those levels. The basic principles of the Bank’s risk management policy are:
*
centralisation of liquidity, interest rate and currency risk management at the head office level;
*
unification of analyses and monitoring procedures for credit risk management, creditworthiness
or each borrower and establishment of a credit rating scale;
*
definition of limits/restrictions on certain balance sheet items;
*
unifying pricing of transactions and services;
*
ensuring that risks are continually monitored;
*
establishing risk limits for transaction amounts, including limits for: the various risk committees
of the Bank and its individual officers, limits on exposure to single borrowers, limits on
exposure to related parties, credit portfolio concentration limits (by industry, counterparty
groups, separate transactions/balance sheet items etc);
*
avoidance of conflicts of interest; and
*
ensuring internal control over compliance with policies and procedures.
This policy is structured over three levels: general, medium and operational.
The Bank’s strategy for asset and liability management is based on diversification of its assets and
liabilities in terms of counterparty, region and sector, the matching of assets and liabilities in terms of
maturity, sensitivity to interest rate movements and foreign exchange risk and the maintenance of
capital adequacy levels.
c104221pu060Proof7:3.3.11B/LRevision:0OperatorChoD
101
The independent risk control process does not include business risks such as changes in the
environment, technology and industry. These risks are monitored through the Bank’s strategic
planning process.
Risk management structure
Risk management policy, monitoring and control is conducted by the two executive arms of the
Bank, the Assets and Liabilities Management Committee (the ALMC) and the Credit Committee,
which are overseen by the Supervisory and Management Boards of the Bank. At an operational level,
the Risk Management Department (the RMD) is also a key component of the Bank’s risk
management strategy.
Supervisory Board
The Supervisory Board is responsible for the overall risk management process at the Bank and for
approving the risk management objectives, strategies and principles. The Supervisory Board develops
risk management concepts, allocates responsibility for risk management functions throughout the
Bank and sets limits for lending approvals of the different risk management functions.
Management Board
The Management Board has the overall responsibility for the development of the risk management
objectives and strategies and implementing risk management policies and procedures within the Bank.
The Management Board updates the Bank’s risk management policies when required and monitors
the functioning of the Bank’s risk management policies on an ongoing basis.
Assets and Liabilities Management Committee
The ALMC is a collegial operational body established by the Bank’s Management Board. It consists
of fifteen of the Bank’s senior managers and is chaired by the Chairman of the Management Board.
The ALMC meets not less than once a month and outlines the Bank’s policy for management of
assets, liabilities, and market risks. The major functions of the ALMC are to identify, monitor and
implement the following policies within the Bank:
*
bank capital allocation and support of adequate payment capacity based on balance-sheet risk,
market risk and other exposure;
*
internal cash flow and funds management;
*
risk identification and management, including interest rate risks, exchange rate risks, currency
risks and securities risk;
*
assets and liabilities management policy and reporting policy (short, medium and long-term);
*
control over operations handled by the Treasury; and
*
other tasks and functions.
Credit Committee
The Credit Committee functions on a permanent basis, consists of ten members and is chaired by the
First Deputy Chairman of the Management Board. The Credit Committee meets not less than twice a
week.
The Credit Committee provides additional support to the overall risk management of the Bank, and
also specifically determines the Bank’s policy in the lending and investment area, in line with both
current business areas and strategic plans. The main targets of the Credit Committee are:
*
consideration of lending and investment transaction-related issues;
*
setting of limits and restrictions on credit risks in terms of separate lending products, foreign
currencies, organisational departments, specific branches, borrowers and borrower groups; and
*
monitoring of the Bank’s activities, including asset management and lending.
Risk Management Department
The RMD seeks to promote the implementation of an efficient financial risk management system in
compliance with the Risk Management Concept. The RMD is a separate structural unit of the Bank,
assisting the ALMC, the Credit Committee and the Management Board of the Bank in implementing
the Bank’s risk management policy.
c104221pu060Proof7:3.3.11B/LRevision:0OperatorChoD
102
The RMD’s functions include monitoring and controlling financial risks by:
*
evaluating and analysing financial risks;
*
making proposals for the management of financial risks;
*
calculating limits (limits evaluation) and benchmarks to be approved by the ALMC and Credit
Committee in accordance with internal guidelines;
*
informing the various sectors of the Bank and their respective committees of approved limits
and benchmarks;
*
evaluating and analysing financial risks associated with the introduction of new or modified
Bank products;
*
evaluating and analysing the portfolio risks of the Bank;
*
continual monitoring of compliance with limits and guidelines; and
*
preparing monthly liquidity forecasts and suggesting limits of liquidity ratios.
The RMD also:
*
develops the Bank’s methodology for the evaluation and management of financial risks;
*
supervises activity of ALMC’s regional risk-management officers in implementing the Bank’s
financial risk management policy; and
*
calculates limits on lending and investment operations and submits them to the ALMC, Credit
Committee and the Management Board as appropriate for approval.
Risk categorisation
Credit risk
Credit risk is the risk of a financial loss if a customer or counterparty fails to meet its contractual
obligations, and arises principally from loans and advances and investment securities. For risk
management reporting purposes, the Bank considers and consolidates all elements of credit risk
exposure (such as individual customer and counterparty default risk, country and industry risk).
Credit risk arises principally in the context of the Bank’s lending and investment activities.
The Bank manages its credit risk by establishing internal policies and procedures. The overarching
principle of credit risk management involves the Bank determining these parameters of key credit risk
exposure, a constant monitoring process of the internal regulations to adhere to these limits and
adequate corrective measures if actual levels of credit risk exposure reach undesirable levels. This is
achieved by:
*
setting, monitoring and reviewing credit ratings of customers and counterparties;
*
setting, monitoring and controlling individual and portfolio lending limits and restrictions;
*
setting and monitoring internal exposure limits;
*
establishing risks-based loan pricing;
*
establishing allowances for impairment of assets. Allowances for impairment of assets are
established on the basis of real credit risk evaluations that accord with the stringent
requirements of the NBU and the requirements under the IFRS;
*
establishing collateral requirements in respect of lending transactions; and
*
supervision and monitoring of the loan portfolio quality.
All stages of the credit granting process, starting from initial project analysis to implementation, are
regulated by the Bank, using unified credit procedures. The Bank uses advanced credit risk
measurement techniques, developed in accordance with the recommendations of specialists from the
programme for Technical Aid to the Commonwealth of Independent States.
A system of internal credit ratings (ICR), established by the NBU has also been adopted to ensure
proper evaluation of individual credit risk. These ICRs are assessed in relation to specified
parameters, defined in terms of both the nature of the business and of the specific transaction. The
parameters are based on the general characteristics of the business (cash flows, seasonality of the
company’s operations, its management, shareholders, etc.) and its commercial activities (its market
position, prospects for the industry sector, a valuation of its production capacity, etc.), a review of its
quality and credit history and an analysis of its financial performance and prospective trends in
expansion of asset transactions. In addition, other factors which are taken into account include the
c104221pu060Proof7:3.3.11B/LRevision:0OperatorChoD
103
potential borrower’s fulfilment of its existing credit agreements, its business plan, its ability to provide
collateral, and its track record with the Bank. This assessment of counterparty credit risk is
specifically assessed by the Bank at the time of the loan application and the loan-making decision,
and also occurs on an ongoing basis through client monitoring.
Credit Risk Related to Retail and Corporate Lending
The Bank manages its credit risk by establishing limits in relation to each borrower and in relation to
sectoral or geographical concentration, which are recommended by the relevant Credit Department
and Risk Management Department and approved by the relevant Credit Committee or the
Management Board. In cases where the amount of a potential loan exceeds the approval authority of
the Management Board, the loan must be approved by the Supervisory Board. The Bank also
mitigates its credit risk through the use of collateral. Such risks are monitored and reviewed regularly.
Loan Approval
Dependent on the type and size of loan, the Bank’s products are subject to the credit approval of
any of, or a combination of, the branch level local Credit Committees, the oblast level Regional
Credit Committee, the head office based Credit Committee or the Management Board.
As a result of the global financial crisis, loan approval decisioning became increasingly centralised,
with powers of local and regional decisioning now being reviewed on a quarterly basis.
Individual credit risk is managed through: loan and customer (or counterparty) classification, using
the system of ICR, on the basis of the customer’s (or counterparty’s) creditworthiness and an
evaluation of the quality of such customer’s loan and repayment history; evaluation and monitoring
of collateral value and liquidity; setting credit risk limits and monitoring compliance with such limits;
and creation of adequate allowance for potential impairment of assets.
For consumer loans, the process comprises a standardised approval procedure and loans are subject
to maximum limits depending on the applicant’s income, stability of future earnings, liquidity and
quality of collateral. The Regional Credit Committee (or, if the branch approval limit is exceeded, the
Credit Committee) reviews a credit application and decides as to whether to grant the loan.
When considering the risks associated with a particular corporate borrower, the Bank takes into
account the borrower’s business and factors such as the quality of its management, its main business
activities, its geographical location, suppliers, customers, other indebtedness, financial stability,
turnover, likely return on the loan, the liquidity of the proposed collateral and whether it is sufficient
in view of the credit risk. The Bank also considers risks associated with the industry in which the
borrower operates and any current or potential changes in the political and economic situation.
Concentration
The Bank seeks to mitigate the risk of concentration within its loan portfolio by setting limits on its
sectoral and geographic exposures. Concentrations of industry sector and customer sector (i.e. retail/
corporate) are reviewed on a monthly basis. The results of concentration analysis are used by the
Management Board for the purposes of adjustment of risk management policies and procedures. This
is achieved, for example, by setting limits on the maximum size of credit exposure with a single
counterparty (including other banks), including restrictions by sub-limits covering on and off balance
sheet exposures, which are set by the Credit Committee and the Management Board. Such limits have
been established by the Bank in accordance with its lending policies in order to achieve this
diversification.
Collateral
The Bank considers collateral an essential means of credit risk minimisation. The Bank accepts
various types of collateral, including real estate, movables, securities, property rights and guarantees.
The Bank also accepts property belonging to third parties (guarantors) and rights to property,
securities and secured guarantees issued by other banks as collateral. Collateral eligibility is
determined by taking into account its value and liquidity, the form of ownership of the borrower, its
credit history, financial performance, rating and the term of the loan being considered. The Bank
ensures that collateral is not pledged with other entities.
Preferred types of collateral for the Bank are cash, guarantees of banks rated at or above the
investment grade, state securities, merchandise in storage, mortgages and fixed assets. Non-government
securities and property rights are generally accepted as additional security only. The Bank seeks to
obtain a combination of different types of collateral in respect of each loan, taking into account the
c104221pu060Proof7:3.3.11B/LRevision:0OperatorChoD
104
market conditions and financial prospects of the borrower, as well as accept collateral which is of a
particularly high value for an individual borrower or guarantor.
Monitoring
The Bank monitors borrowers’ performance of their obligations under their loan agreements,
primarily repayment of principal and interest. It also monitors the financial condition of borrowers on
the basis of information provided by borrowers on a monthly and quarterly basis to determine
whether loans are being used for the purposes prescribed, whether a corporate borrower is meeting
targets set in its business plans, collateral values, and certain non-financial information, such as
information on actual or pending legal proceedings.
Constant monitoring of the Bank’s loan portfolio enables the Bank to react to changes in the quality
of particular loans and determine whether changes to the Bank’s terms of lending are necessary. The
Credit Committee and the Management Board are notified of the results of this monitoring on a
regular basis and of the occurrence of any warning signs.
In addition, the Bank has developed an internal reporting system which accumulates information on
each loan and borrower enabling the Bank to assess the level of both individual and portfolio risks.
Based on its analysis, the Bank either confirms the terms and conditions of outstanding loans or,
where necessary, negotiates amendments with the borrower. This type of analysis is undertaken on a
quarterly basis for corporate customers and on an annual basis for retail customers.
The Bank has also implemented procedures in respect of its borrowers that experience temporary
financial difficulties, as well as procedures for the borrowers that are unlikely to recover from
financial difficulties.
Market Risk
The principal categories of market risk to which the Bank is exposed are described below. The
corresponding risk management strategies adopted by the Bank are also outlined.
Liquidity Risk
Liquidity risk arises from mismatches between the maturities of assets and liabilities, which may result
in the Bank being unable to meet its obligations in a timely manner. The matching and/or controlled
mismatching of the maturities and interest rates of assets and liabilities is fundamental to the
management of the Bank. An unmatched position potentially enhances profitability, but can also
increase the risk of losses. The maturities of assets and liabilities and the ability to replace, at an
acceptable cost, interest-bearing liabilities as they mature are important factors in assessing the
liquidity of the Bank and its exposure to changes in interest and exchange rates.
The main purpose of liquidity management is to ensure the unconditional ability of the Bank to fulfil
its obligations when they fall due by maintaining acceptable (manageable) liquidity gaps. In order to
manage liquidity risks, the Bank performs constant monitoring of future expected cash flow from
client and banking operations, which is part of its asset/liability management process.
The Bank’s policy in relation to liquidity risk during and in the immediate aftermath of the global
financial crisis is guided by the belief that that stable liquidity is more important than absolute
profitability. This is because appropriate liquidity became particularly important with the onset of the
global financial and economic crisis during the second half of 2008. The Bank has developed a
comprehensive set of policies and procedures to implement its liquidity risk management strategy.
These policies and procedures define the structure of relations between the different committees,
divisions and other units within the Bank for the purposes of risk management and liquidity
monitoring and allocate responsibility for monitoring and actions in case of non-compliance within
the established limits.
Management’s approach to managing liquidity is to ensure, as far as possible, that it will always have
sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without
incurring unacceptable losses or risking damage to the Bank’s reputation.
The Bank’s strategy for asset and liability management is based on diversification of its assets and
liabilities in terms of counterparty, region and sector, the matching of assets and liabilities in terms of
maturity, sensitivity to interest rate movements and foreign exchange risk, and the maintenance of
capital adequacy levels. Consequently, liquidity risk management provides for:
*
availability within the Bank of liquid funds sufficient to cover current and planned needs;
*
establishing an efficient system of identification and assessment of liquidity risk;
c104221pu060Proof7:3.3.11B/LRevision:0OperatorChoD
105
*
establishing an efficient system of support and decision-making with regard to liquidity risk
management;
*
establishing an efficient system of monitoring of and control of liquidity risk;
*
establishing an efficient system for identifying and anticipating future risks and having preemptive measures in place to deal with such risks;
*
determining the Bank’s acceptable levels of liquidity risk by setting up of limits, implementation
of procedures, regulations, guidelines and methodologies related to liquidity risk management;
*
distributing limits among profit centres of the Bank and arranging business process in the
manner to provide the most favourable impact on the Bank’s income and capital;
*
ensuring banking operations are carried out in compliance with the Bank’s established limits
(restrictions), procedures, regulations, guidelines and methodologies;
*
ensuring a comprehensive package of primary responses to stabilise liquidity risk (see
‘‘Contingency Plan’’ below);
*
providing for efficient interaction between the Bank’s departments on all organisational levels in
the liquidity risk management process;
*
building the Bank’s capacity to cover cash outflow in a crisis scenario (be it systemic or close to
systemic) during a period established by the ALMC; and
*
meeting the requirements of the NBU as to, among others, liquidity standards and standards of
mandatory provisioning of attracted funds. The Bank adopts a conservative but positive
approach to NBU requirements maintaining liquidity levels beyond NBU requirements.
The Bank’s liquidity risk management policy also includes estimations of core current accounts (funds
associated with stable customer relationships, with statistical methods applied to historic information
on fluctuations of customer accounts balances).
From an operational perspective, the Bank’s Management Board is responsible for outlining a
liquidity risk management policy. The implementation of this policy is permanently delegated to the
ALMC, which is also responsible for analysing funding sources on a monthly basis, taking into
account changes in interest rates for the previous month and making decisions on the basis of those
figures for asset and liability management.
The Bank seeks to maintain appropriate liquidity by stress-testing the fundamentals of its risk
management policy on a quarterly basis. Management believes that stress-testing has led to the
maintenance of an adequate liquidity cushion. In addition, the Bank monitors early warning signs of
systemic risk within the Ukrainian banking system in order to ensure that it might act to pre-empt or
mitigate effects of market turbulence.
Contingency Plan
The Bank also has a set of internal guidelines entitled the ‘‘Contingency Plan’’ for maintaining
liquidity in the event of an emergency. The relevant actions to be taken by the Bank in order to
prevent or overcome a liquidity crisis are set out in this document. Matters covered include a list of
pre-emptive measures to be taken to avoid a liquidity crisis, the methods used for the detection and
analysis of a potential crisis, a comprehensive package of primary actions to stabilise liquidity risk,
ways of managing the return of the Bank to normal operations and an analysis of the actions
undertaken.
Market Conditions Risk
The Bank is exposed to market conditions risk because values such as interest rates, equity prices,
foreign exchange rates and credit spreads (not relating to changes in an obligor’s or issuer’s credit
standing) are subject to market volatility. The risk is that such changes will affect income or the
value of financial instruments.
The objective of market conditions risk management is to manage and control market conditions risk
exposures to within acceptable parameters, while optimising the return on risk. Market conditions risk
management is carried out by:
*
determining target threshold levels of key market indicators;
*
daily monitoring of key market indicators; and
c104221pu060Proof7:3.3.11B/LRevision:0OperatorChoD
106
*
supervising thresholds and using adequate corrective measures if key market risk indicators
approach their threshold levels.
Target threshold levels of key market risk indicators are updated regularly and approved by the
Management Board.
The Bank separates its exposure to market condition risk between trading and non-trading portfolios.
The Bank’s trading portfolios are all held within the Treasury function. The Bank operates a
conservative trading policy for risk management purposes, and open positions are not permitted.
Decisions relating to the types of securities to be purchased by the Bank, trading in securities and
setting limits for counterparties are made by the ALMC and Credit Committee. The Bank’s dealers
operate within these limits. The back-office and RMD control and monitor the amount of open
positions and adherence to established limits. The RMD is responsible for monitoring compliance
with market risk limits and restrictions reports on such monitoring to the ALMC, the Credit
Committee and the Bank’s management.
The Treasury Department performs operations with securities in compliance with internal limits,
restrictions and regulations, by-laws and procedures on price risk, decisions of responsible committees
and the Management Board of the Bank based on its authorities.
Approximately 90 per cent. of the Bank’s investment portfolio is made up of securities issued by
State-owned entities.
Any exposures to securities other than those of State-owned entities, are closely regulated, especially
in respect of securities issued by large banking groups, approval for which needs to be given by the
Credit Committee.
The Supervisory Board of the Bank takes all decisions relating to direct investments in equities. Such
investments are strictly limited and under the Bank’s Charter, only the Supervisory Board may decide
to invest in shares of other companies. Under applicable Ukrainian banking law, a bank’s total
exposure relating to equity investments may not exceed 60 per cent. of its capital and direct or
indirect equity investment in a single company may not exceed 15 per cent. of its capital.
Interest Rate Risk
The Bank is exposed to interest rate risk principally as a result of mismatches in the maturity of its
interest-bearing assets and liabilities. The Bank may incur losses in the event of unfavourable
movements in interest rates. Accordingly, interest rate risk management requires the creation and
function of a system of internal control of interest rate risks, involving departments of the Bank that
deal with banking operations, the RMD, regional risk analysts and internal audit departments. This
monitoring and control of interest rate risks includes analysis and supervision of: the processes of
identifying, assessing, monitoring and controlling interest rate risks; efficacy of information systems
and their maintenance; and compliance with the Bank’s limits (restrictions), methodologies,
procedures, regulations and guidelines.
From an operational perspective, the Management Board is responsible for outlining an interest rate
risk management policy. The implementation of this policy is delegated to the ALMC. This accords
with the Bank’s centralised liquidity risk management model, whereby the ALMC carries out
management of the Bank’s interest rate risk. The ALMC also delegates authority in relation to the
ongoing monitoring of interest rate risks to the RMD, which performs several interest rate risk
management functions including monitoring compliance of the Bank’s head office and regional
branches, reporting to the ALMC and the Bank’s Management Board on how limits are being
adhered to and reporting to the ALMC on interest rate risk management.
Additionally, the Credit Committee regulates the Bank’s lending and investment activity by taking
into account limits, restrictions and procedures related to interest rate risk management as established
by the Management Board and the ALMC.
Outcomes of the monitoring of and control over interest rate risks are submitted to the ALMC and
the Bank’s Management Board for review. Levels of tolerance to interest rate risks on specific
transactions and portfolios of financial instruments are established by the relevant decision making
power of either the ALMC and/or the Bank’s Management Board. Levels of tolerance to interest rate
risks are then communicated to departments that incur this risk on the Bank’s behalf in the form of
limits (restrictions), methodologies, procedures, regulations and guidelines.
To manage interest rate risk, the Bank continually assesses market interest rates for different types of
interest bearing assets and liabilities. The Bank also measures interest rate risk in each of the main
c104221pu060Proof7:3.3.11B/LRevision:0OperatorChoD
107
international currencies separately. The Bank’s interest rate risk management procedures are the same
for all currencies.
The ALMC monitors the cumulative interest gap to total assets ratio (defined as the interest gap in
each category divided by total assets). The level of mismatch of interest rate is monitored by the
RMD. In the absence of any hedging instruments available on the Ukrainian market, the Bank seeks
to match its interest rate positions. The evaluation and analysis of interest rate risk is performed each
month. The results of such evaluation and analysis are discussed at ALMC meetings.
The analysis of interest rate gap includes setting periodic forecasts. Assets and liabilities are then
broken down by sensitivity to interest rate movements and these are further broken down by
reference to their contractual repricing or maturity date. Calculations of gap, cumulative gap and gap
ratios are carried out for each period and are compared to approved gap ratios and cumulative gap.
Static and dynamic models can also be used for this analysis.
Occasionally, supervision of the interest rate risk management process requires essential changes in the
risk management instruments applied by the Bank.
Interest rate risk management provides for:
*
maintaining net interest income (interest spread) on the level as established by the Bank’s
business plan taking into account an optimal correlation of net interest income and interest risk;
*
establishing an efficient system of identification (detection) and assessment (measurement) of
interest rate risks;
*
establishing an efficient system of support and decision-making with regard to interest rate risk
management;
*
establishing an efficient system of monitoring of and control over interest rate risks;
*
determining the Bank’s tolerance levels to interest rate risks by setting up of limits (restrictions),
implementation of procedures, regulations, guidelines and methodologies related to interest rate
risks; and
*
providing an efficient interaction of the Bank’s departments at all organisational levels in the
interest rate risk management process.
For information on the sensitivity of the net interest income for the years ended 31 December 2009
and 31 December 2008 to changes in interest rates see Note 31 to the Audited Financial Statements.
Foreign Exchange Risk
Foreign exchange risk is the risk of losses resulting from adverse movements in different foreign
currency exchange rates which affect the Bank’s income or the value of its portfolios. Foreign
exchange risk arises when the actual or forecasted assets in a foreign currency are either greater or
less than its liabilities in that currency. The Bank is exposed to the effects of unpredictable
fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows.
The Bank evaluates, monitors and sets limits for open positions using the hryvnia as its base
currency. The NBU sets regulatory requirements for open currency positions, expressed as a
percentage of the Bank’s regulatory capital.
The Bank’s approach to foreign exchange risk management is based on principles of consolidated
currency risk management and provides for:
*
meeting requirements of the NBU currency position ratios and other foreign exchange
restrictions;
*
establishing an efficient system of identification (detection) and assessment (measurement) of
foreign exchange risks;
*
establishing an efficient system of support and decision-making with regard to foreign exchange
risk management;
*
establishing an efficient system of monitoring of and control over foreign exchange risks;
*
determining the Bank’s tolerance levels to foreign exchange risk by setting up of limits
(restrictions), implementation of procedures, regulations, guidelines and methodologies related to
particular operations and on the portfolio level;
*
ensuring execution of banking operations in compliance with the established limits (restrictions),
procedures, regulations, guidelines and methodologies; and
c104221pu060Proof7:3.3.11B/LRevision:0OperatorChoD
108
*
providing for efficient interaction of the Bank’s departments on all organisational levels in the
foreign exchange risk management process.
The Bank has numerous key internal documents which regulate the Bank’s foreign exchange risk
management process and determine tolerance levels of the Bank to foreign exchange risk.
From this detailed currency sensitivity analysis, the Bank’s management are able to assess the possible
impact of changes in foreign currency. The sensitivity analysis includes external loans within the Bank
where the denomination of the loan is in a currency other than the currency of the lender of the
borrower.
From an operational perspective, the Bank’s Management Board is responsible for outlining a foreign
exchange risk management policy. The implementation of this policy is delegated to the ALMC,
which carries out management of the Bank’s foreign exchange risk.
The ALMC delegates authority in relation to the ongoing management of the Bank’s currency
position to the Main Operational Department. The Main Operational Department performs this role
within ALMC-established limits and restrictions, and undertakes the foreign exchange risk
management functions. In addition, the ALMC delegates the functions of ongoing monitoring of the
Bank’s currency position to the RMD, which monitors compliance of the Bank’s structural divisions
and regional branches with the NBU requirements and the Bank’s internal foreign currency risk limits
and restrictions and reports to the ALMC and the Bank’s management on such compliance and
foreign exchange risk management.
Operational Risk
Operational risk is the risk of direct or indirect loss, or damage to the Bank’s reputation, resulting
from inadequate or failed internal processes or systems, or from human error or external events that
affect its image or operations or that can have an adverse effect on its share price. Operational risk is
inherent in all activities within the Bank and the Bank cannot expect to eliminate all operational
risks. By developing a set of policies and procedures for controlling operational risks and (including
those in connection with the high level of automation in the data transfer), processing and storing
systems, by monitoring and responding to potential risks, the Bank is able to better manage such
risks.
It is the Bank’s policy to reduce the frequency and impact of operational risks in a cost-effective
manner. The Bank seeks to achieve this by fostering a strong culture surrounding operational risk,
based upon internal controls, quality management, leadership skills and well educated, qualified staff.
The main process for identifying and monitoring operational risk is through the self-assessment of
risk and control and through the recording of loss events, near misses and operational incidents. Each
business unit regularly assesses its own risk and relevant controls and evaluates the possible impacts.
If risk exceeds acceptable limits, then the Bank’s internal controls and the quality and efficiency of
the internal processes are re-evaluated to lower future risk within acceptable risk limits. The
comprehensive framework for managing operational risks also includes internal audit processes,
money laundering compliance procedures and IT systems risk management.
Lending Policies and Procedures
The Bank’s credit approval bodies comprise the Supervisory Board, the Management Board and the
Credit Committee. They are responsible for implementing the Bank’s lending strategy and forming a
balanced and diversified loan portfolio. The Supervisory Board and the Management Board are
authorised to approve loans limited only by the NBU restrictions as to the maximum limit for a
single borrower, for a group of related borrowers or the maximum limit for larger borrowers.
The Credit Committee is authorised to take decisions on loans up to a maximum limit of EUR 5
million for a single borrower or a group of related borrowers. Loans above this limit have to be
approved by the Management Board or, if necessary, the Supervisory Board. The Credit Committee
is also authorised to set limits for branches’ loans to corporate and retail customers.
Additionally, the Bank’s Credit Committee authorises the Small Credit Committee of the head office,
the Credit Committee of Regional Branch of the Bank in Kyiv and Kyiv Oblast, the Crimean
Republican Committee and Regional Committees of the Bank (together, the Regional Committees)
with the competence to make decisions and perform lending operations within set limits.
Any decisions on extension of the loan or on any other changes in conditions of the loan contract
shall be communicated to the Credit Committee, and on the basis thereof the lending transaction is
performed, with the Bank’s head office exercising the monitoring of the transaction.
c104221pu060Proof7:3.3.11B/LRevision:0OperatorChoD
109
The Bank considers collateral an essential means of risk minimisation. See ‘‘Risk categorisation –
Credit risk – Collateral’’ above.
Preferred types of collateral for the Bank are cash, guarantees of first class banks, state securities,
merchandise in storage, mortgages and fixed assets. Non-government securities and property rights are
generally accepted as additional security only. The Bank accepts combinations of different types of
collateral depending on market conditions and prospects of the borrower.
Credit review process: corporate loans
The Supervisory Board, Management Board, Credit Committee, Small Credit Committee and
Regional Committees, as appropriate, approve loans in accordance with the lending policy. The
Bank’s business plan sets limits for bad and overdue loans in the loan portfolio and the ALMC
determines the Bank’s loan pricing strategy.
The limits applicable to credit decisions that Regional Committees may take without having to refer
to the Supervisory Board, Management Board or Credit Committee, as appropriate, are determined
according to the following criteria of the relevant Regional Committees: the quality of credit
portfolio, the amount of non-performing loans in the credit portfolio, the qualifications of the staff
involved in lending activities, the quality of documentation submitted to the Supervisory Board,
Management Board or Credit Committee, as appropriate, for consideration, the due diligence
procedures of the staff, its adherence to the Bank’s requirements for conducting credit operations and
the average amounts of individual loans in the credit portfolio of that Regional Committees. Further,
the Bank’s internal regulations and lending policy impose restrictions on loans (non-standard and
standard banking products) in relation to maximum lending periods, lending and clearance
procedures, interest rates, maximum amount of a loan depending on a provision value and minimal
lending amounts.
As discussed above, the Regional Committees can take decisions on loan applications up to a set
level without reference back to the head office. If the Regional Committees gives a preliminary
approval, the credit proposal is sent to the Credit Committee together with the minutes of the
relevant Regional Committees meeting. The officers of the Credit Committee check each loan
application to ensure that it conforms with internal regulations and the Bank’s credit policy and then
approve or deny the disbursement of funds.
Certain decisions, including relating to guarantees and securities, are taken only at Credit Committee
level or higher. The Bank is continuously working on the improvement of its lending procedures and
the improvement of the skills of its staff working in this field, with a special emphasis on perfecting
the procedures for reducing credit risks.
The loan approval procedure includes (for example, in head office):
*
Preliminary analysis.
*
Comprehensive analysis.
*
Visits to the borrower’s (and guarantor’s) premises.
*
Drafting the credit proposal.
*
Submission to the Credit Committee.
*
Creating and monitoring the Loan approval.
*
Preparation of legal documents.
*
Funds transfer.
*
Loan file.
When a region credit proposal exceeds established limits, the regional credit officers evaluate credits
and the local Regional Committee gives a preliminary approval or rejection. If approved by the
Regional Committee, the proposal is sent to the Bank’s Corporate Business Department, together
with supporting documentation. The officers at the Corporate Business Department perform an
additional analysis of the proposal, check the terms of the loan and its conditions with the Legal
Department, the Security Department, the Collateral Monitoring Division and the RMD (if
necessary), and prepare their credit proposals for approval by the Bank’s Credit Committee as
appropriate.
c104221pu060Proof7:3.3.11B/LRevision:0OperatorChoD
110
Credit review process: retail loans
The procedure of credit approval process for commercial and retail loans is substantially the same,
except for the fact that the branches in regional offices may have their own limits and they may take
decisions on granting loans to individuals on standard conditions.
Security Department
The Bank has established its own in-house Security Department, which is responsible for verifying the
authenticity of the credit history and reputation (management, founders, etc.) of each client,
researching information on the financial performance of customers which are not available in their
statements, both at the time of credit approval and during the life of the loan.
In the event that a loan is not repaid when due, the Security Department investigates other means of
repayment of the debt, assists the Legal Department in handling legal enforcement proceedings and
the claims process, co-operates with state authorities on enforcement proceedings and assists with
recovery of monies and sales of property.
Loan Classification and Allowances
Under the Bank’s internal scoring system for its loan portfolio, loans are assessed based on a number
of factors, the most important of which include:
*
borrower’s financial performance and creditworthiness (taking into account the performance of
the sector of the economy in which the borrower operates);
*
quality of the borrower’s servicing of the current loan (timely repayment of interest and
principal) and its credit history (including its record with other banks);
*
loan security (collateral) available;
*
quality of borrower’s management reputation; and
*
borrowers’ business growth prospects.
In order to establish adequate allowances under UAS, loans are classified using a scoring
methodology which includes an analysis of a borrower’s specific risks, industry risks and
macroeconomic factors. The allowances are established in the relevant percentage (established by the
NBU) of the amount of the loan adjusted for the amount of collateral. When determining reserves,
the quality of collateral is also taken into account as well as the quantity.
Allowance for impairment losses
The Bank accounts for impairment of financial assets that are not carried at fair value when there is
objective evidence that a financial asset or group of financial assets is impaired. The impairment losses are
measured as the difference between carrying value and the present value of expected future cash flows,
including amounts recoverable from guarantees and collateral, discounted at the financial asset’s original
effective interest rate, for financial assets which are carried at amortised cost. If in a subsequent period the
amount of the impairment loss decreases and the decrease can be related objectively to an event occurring
after the impairment was recognised, the previously recognized impairment loss is reversed with an
adjustment of the provision account.
For financial assets carried at cost the impairment losses are measured as the difference between the
carrying amount of the financial asset and the present value of estimated future cash flows discounted
at the current market rate of return for a similar financial asset. Such impairment losses are not
reversed.
The change in the impairment is included into profits using the provision account. Assets recorded in
the statement of financial position are reduced by the amount of the impairment. Factors that the
Bank considers in determining whether it has objective evidence that an impairment loss has been
incurred include information about the debtors’ or issuers’ liquidity, solvency and business and
financial risk exposures, levels of and trends in delinquencies for similar financial assets, national and
local economic trends and conditions, and the fair value of collateral and guarantees. These and other
factors may, either individually or taken together, provide sufficient objective evidence that an
impairment loss has been incurred in a financial asset or group of financial assets.
Impairment losses are recognised in profit or loss when incurred as a result of one or more events
(loss events) that occurred after the initial recognition of the financial asset and which have an impact
on the amount or timing of the estimated future cash flows of the financial asset or group of
financial assets that can be reliably estimated.
c104221pu060Proof7:3.3.11B/LRevision:0OperatorChoD
111
If the Bank determines that no objective evidence exists that impairment was incurred for an
individually assessed financial asset, whether significant or not, it includes the asset in a group of
financial assets with similar credit risk characteristics and collectively assesses them for impairment.
The primary factors that the Bank considers whether a financial asset is impaired is its overdue status
and realisability of related collateral, if any. The following other principal criteria are also used to
determine that there is objective evidence that an impairment loss has occurred:
*
any installment is overdue and the late payment cannot be attributed to a delay caused by the
settlement systems;
*
the borrower experiences a significant financial difficulty as evidenced by borrower’s financial
information that the Bank obtains;
*
the borrower considers bankruptcy or a financial reorganisation;
*
there is an adverse change in the payment status of the borrower as a result of changes in the
national or local economic conditions that impact the borrower; and
*
the value of collateral significantly decreases as a result of deteriorating market conditions.
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of
similar credit risk characteristics. These characteristics are relevant to the estimation of future cash
flows for groups of such assets by being indicative on the debtors’ ability to pay all amounts due,
according to the contractual terms of the assets being evaluated.
Future cash flows in a group of financial assets that are collectively evaluated for impairment are
estimated on the basis of contractual cash flows of assets, and experience of management in respect
of the extent to which amounts will become overdue, as a result of past loss events and the success
of recovery of overdue amounts. Past experience is adjusted on the basis of current observable data
to reflect the effects of current conditions that do not affect past periods and to remove the effects of
past conditions that do not exist currently.
It should be understood that evaluation of losses involves an exercise of judgment. While it is
possible that in particular periods the Bank may sustain losses which are substantial relative for
impairment losses, it is the judgment of management that the impairment losses are adequate to
absorb losses incurred on risk assets, at the reporting date.
The Bank has also defined appropriate credit risk measures for assessing each loan, which are based
on its expert assessment of the expected level of losses that the Bank may incur based on its
evaluation of risks and its historical loss experience. Such credit risk factors form the basis of the
calculation of the provision for loan impairment.
Credit risk assessment focuses on whether the borrower has the ability to repay the debt on the
agreed terms. The assessment is not entirely dependent upon the adequacy of the collateral. Collateral
is considered to be the Bank’s recourse should the borrower default on the loan. Although collateral
adequacy is a key component in determining the necessary loan loss provision, the Bank realises that
in the current economic environment, the valuation, existence (control) and ability to realise collateral
is subject to significant doubt in many instances. Accordingly, the eligible value of collateral is
reviewed and analysed on a case-by-case basis.
Problem Loan Recovery
The internal procedures relating to problem loan recovery are described in the Bank’s internal
provisions regarding problematic loans, which detail a systematic approach involving comprehensive
procedures intended to enable the Bank to obtain the highest likelihood of repayment on nonperforming loans. Where problem loan recovery raises issues beyond the scope of internal documents
of the Bank, they are dealt with in compliance with current legislation. Nevertheless, all internal
documents of the Bank take into account current legislation requirements and relevant best practices,
and aim to encompass all types of loan operations performed by the Bank.
The Bank has developed and implemented a range of internal documents aimed at formalising the
loan issue and bad loan recovery processes. These documents are developed in compliance with NBU
requirements and the operational specifics of the Bank, and cover lending to corporate clients,
individuals and banking institutions throughout all phases of the lending cycle.
The Bank also undertakes specific assessment of loan risk based on group and type of counterparty.
The Bank has developed internal documents that regulate the assessment of the financial condition of
counterparties:
c104221pu060Proof7:3.3.11B/LRevision:0OperatorChoD
112
*
Procedure of Loan Operations Classification at OJSC Oschadbank institutions;
*
Methodology for the Determination of Loan Rating and Class of a Counterparty Insurance
Company; and
*
Methodology for the Determination of Loan Rating and Class of a Counterparty Bank.
The Procedure of Loan Operations Classification includes provisions regulating the assessment of the
financial condition of corporate clients, individuals, State institutions and the Ukrainian Government
bodies. In compliance with the classification procedure, corporate clients are assessed according to
eight fields of activity and individuals according to six fields of lending.
The Methodology for the Determination of Loan Rating and Class of a Counterparty Insurance
Company, includes provisions regulating the assessment of the financial condition of life and non-life
insurance company’s.
Additionally, repo transactions on the inter-bank market are carried out in compliance with a special
regulation. Approaches contained in this regulation are co-ordinated with requirements of other
regulatory documents referring to inter-bank transactions. Similarly, transactions with property are
carried out in compliance with regulations as to the kinds and types of property that may be
accepted as pledge for loans provided by the Bank, and how frequently those property pledges will be
monitored.
From an operational perspective, when a problem with a loan arises, it is (either at head office or
branch level) referred to the relevant structural unit. If payment is not made within 45 days of the
due date in respect of a loan to an individual and 30 days in respect of a loan to a corporate client,
the loan is passed to the Credit Committee for decisioning as to whether it should be considered a
problem loan. If it is not a problem loan, the Bank’s Credit Services Unit continues to work with the
borrower to identify the reason for delay and to agree upon actions to be taken. If the loan is
classified as a problem loan, it is referred onward to the Legal Department and Department of
Problem Assets. These departments work together to agree on the source of settlement of
indebtedness and to arrange sale of the collateral if necessary. They also develop annual and
quarterly plans for recovery of impaired assets and communicate these to regional branches, which
base their own schedules and plans for asset recovery on such.
The major steps that are taken by the Bank to enforce loan repayment are defined by Ukrainian
legislation and regulated by both the NBU and internal Bank procedures. They include:
*
irrevocable set-off of indebtedness against funds in the current account of the borrower, if it is
authorised by the loan agreement;
*
concluding agreement of transfer of the loan to another borrower or claiming from a guarantor
under a guarantee agreement;
*
communication with borrower to reschedule the loan or conclude amicable agreement;
*
enforcement against funds of the borrower or guarantor;
*
enforcement against pledged assets and sale of collateral; and/or
*
appeal to the relevant Court to declare a borrower bankrupt.
Before such actions are taken for loan repayment, they must first be considered and approved by the
Credit Committee of the Bank.
c104221pu060Proof7:3.3.11B/LRevision:0OperatorChoD
113
SELECTED STATISTICAL INFORMATION
The following information is included for analytical purposes and should be read in connection with
the Financial Statements contained elsewhere in this Prospectus, as well as ‘‘Management’s Discussion
and Analysis of Financial Condition and Results of Operations’’ and the financial statements appearing
in the F pages of this Prospectus.
Average Balance Sheets and Interest Rate Data
The tables below set forth average period-end balances of interest-earning assets and interest-bearing
liabilities of the Bank as at 30 September 2010 and as at 31 December 2008 and 2009 under the
IFRS together with the amount of interest earned or paid and the average rate of interest for such
asset or liability.
Nine months ended 30 September 2010
Average
Balance(1)
Interest
earned /
paid
Average
Annualised
Rate %
(UAH thousand, except percentages)
Assets
Cash and balances with the National Bank of Ukraine
Due from banks
Loan to customers
Investments available for sale
Other assets
2,709,432
3,291,049
47,438,302
5,877,954
438,861
2,521
86,176
4,921,296
714,148
116
0.1
3.5
13.8
16.2
—
Total interest earning assets
59,755,598
5,724,257
12.8
Provisions for losses
Total non-interest earning assets(4)
(5,152,286)
2,028,248
—
—
—
—
Total average assets
56,631,560
5,724,257
13.5
Liabilities
Due to banks
Customer accounts
Debt Securities issued
Subordinated debt
15,908,631
23,837,523
455,363
812,097
1,436,941
1,137,920
47,155
56,019
12.0
6.4
13.8
9.2
Total average interest bearing liabilities
41,013,614
2,678,035
8.7
234,190
—
—
Total liabilities
Total equity
41,247,804
15,383,756
2,678,035
—
8.7
—
Total average liabilities and equity
56,631,560
2,678,035
6.3
n/a
n/a
n/a
3,046,222
4.1
6.8
Total non-interest bearing liabilities(5)
Net interest spread(2)
Net interest income and net interest margin(3)
(1) Average balance is calculated by adding the opening and closing balances as at the reporting date and dividing by 2, based on
balances in the statement of financial position.
(2) Average rate on total interest earning assets minus average cost of total interest bearing liabilities.
(3) Net interest margin is net interest income divided by average total interest earning assets.
(4) Total non-interest earning assets comprises property, equipment and intangible assets.
(5) Total non-interest bearing liabilities comprises deferred income tax liability and other liabilities.
c104221pu070Proof7:3.3.11B/LRevision:0OperatorChoD
114
Year ended 31 December
2008
Average
Balance(1)
2009
Interest
Average
Rate %
Average
Balance(1)
Interest
Average
Rate %
Assets
Cash and balances with the
National Bank of Ukraine
Due from banks
Loans to customers
Investments available for sale
Other assets
2,086,749
2,428,497
21,934,518
9,204,341
63,899
—
193,663
2,036,511
294,344
11
—
8.0
9.3
3.2
—
2,423,789
2,632,927
42,398,591
9,910,109
263,903
940
201,773
6,675,055
899,331
—
—
7.7
15.7
9.1
—
Total interest earning assets
Provisions for losses
Total non-interest earning assets(4)
35,718,004
(841,905)
1,619,784
2,524,529
—
—
7.1
—
—
57,629,319
(2,716,136)
1,964,574
7,777,099
—
—
13.5
—
—
Total average assets
36,495,883
2,524,529
6.9
56,877,757
7,777,099
13.7
11,122,371
15,792,864
250,771
656,373
198,404
770,181
32,457
50,089
1.8
4.9
12.9
7.6
19,131,014
21,082,915
473,817
808,927
2,280,264
1,227,340
59,991
73,699
11.9
5.8
12.7
9.1
27,822,379
1,051,131
3.8
41,496,673
3,641,294
8.8
192.474
—
—
149,249
—
—
Total liabilities
Total equity
28,014,853
8,481,030
1,051,131
—
3.8
—
41,645,922
15,231,835
3,641,294
—
8.7
—
Total average liabilities and equity
36,495,883
1,051,131
2.9
56,877,757
3,641,294
6.4
n/a
n/a
3.3
n/a
n/a
4.7
n/a
1,473,398
4.1
n/a
4,135,805
7.2
Liabilities
Due to banks
Customer accounts
Debt securities issued
Subordinated debt
Total average interest bearing
liabilities
Total non-interest bearing
liabilities(5)
Net interest spread(2)
Net interest income and net interest
margin(3)
(1) Average balance is calculated by adding the opening and closing balances as at the reporting date and dividing by 2, based on
balances in the statement of financial position.
(2) Average rate on total interest earning assets minus average cost of total interest bearing liabilities.
(3) Net interest margin is net interest income divided by average total interest earning assets.
(4) Total non-interest earning assets comprises property, equipment and intangible assets.
(5) Total non-interest bearing liabilities comprises deferred income tax liability and other liabilities.
c104221pu070Proof7:3.3.11B/LRevision:0OperatorChoD
115
Average Net Interest Margin and Spread
The following table shows the Bank’s average interest-earning assets, average interest-bearing liabilities
and net interest income and illustrates the comparative net interest margin and net interest spread for
each of 2008 and 2009. The averages are based on the opening and closing balances for the respective
years.
2008
2009
(UAH thousand, except
percentages)
35,718,004 57,629,319
27,822,379 41,496,673
1,473,398
4,135,805
3.8
8.8
4.1
7.2
3.3
4.7
Total average interest-earning assets(1)
Total average interest-bearing liabilities(2)
Net interest income
Average yield on average interest-bearing liabilities
Net interest margin(3)
Net interest spread(4)
(1) Interest earning assets were calculated as a sum of all categories in the statement of financial position, which include interestearning instruments; thus the non-interest earning part may also be included (e.g. within cash and balances with the NBU
category).
(2) Interest-bearing liabilities were calculated as a sum of all categories in the statement of financial position, which include interest
bearing instruments; thus non-interest bearing part may also be included.
(3) Net interest margin is defined as net interest income (interest income less interest expenses) divided by average interest earning
assets.
(4) Net interest spread is defined as interest income before provision for impairment (divided by average interest earning assets) less
interest expense (divided by average interest bearing liabilities).
Analysis of Changes in Net Interest Income and Interest Expense-Volume and Rate Analysis
The following tables analyse changes in the Bank’s net interest income attributable to changes in
average volume of interest-earning assets and interest-bearing liabilities and changes in their respective
interest rates for the periods presented from continuing operations. The net change attributable to
changes in both volume and rate has been allocated proportionately to the change due to average
volume and the change due to average rate. The changes are calculated on the basis of the simple
average of the opening and closing balances for the respective periods, as provided in balance sheets
set forth in the preceding tables.
Nine months ended 30 September 2010 (ann.)
compared to Year ended 31 December 2009
Total net
interest
change
Volume
Rate
Volume/
Rate
(UAH thousand)
Interest income
Balances with the National Bank of Ukraine
Due from banks
Loans and advances
Investments available-for-sale
Other assets
2,421
(86,872)
(113,327)
52,866
155
221
50,435
793,430
(365,914)
—
1,781
(109,849)
(810,426)
706,054
93
419
(27,458)
(96,331)
(287,274)
62
Total interest income
(144,757)
478,172
(212,347)
(410,582)
Interest expense
Due to banks
Current accounts
Deposits
Debt securities issued
Subordinated debt
(364,343)
(38,259)
328,146
2,882
993
(384,083)
25,629
164,157
(2,337)
289
23,738
(58,962)
139,172
5,430
701
(3,998)
(4,926)
24,817
(211)
3
Total interest expense
(70,581)
(196,345)
110,079
15,685
Net interest income
(74,176)
674,517
(322,426)
(426,267)
c104221pu070Proof7:3.3.11B/LRevision:0OperatorChoD
116
Year ended 31 December 2009/2008
Total net
interest
change
Due to
change in
volume
Due to
change in
rate
Volume/
Rate
(UAH thousand)
Interest income
Balances with the National Bank of Ukraine
Due from banks
Loans and advances
Investments available-for-sale
Other assets
940
8,110
4,638,544
604,987
(11)
—
16,302
1,899,987
22,570
34
745
(7,556)
1,416,767
540,939
(11)
195
(636)
1,321,790
41,478
(34)
Total interest income
5,252,570
1,938,893
1,950,884
1,362,793
Interest expense
Due to banks
Current accounts
Deposits
Debt securities issued
Subordinated debt
2,081,860
110,548
346,611
27,534
23,610
142,860
10,217
478,605
28,868
11,642
1,127,294
95,365
(71,976)
(706)
9,711
811,706
4,966
(60,018)
(628)
2,257
Total interest expense
2,590,163
672,192
1,159,688
758,283
Net interest income
2,662,407
1,266,701
791,196
604,510
c104221pu070Proof7:3.3.11B/LRevision:0OperatorChoD
117
Investment Portfolio
The following tables set forth the financial assets measured at fair value for each type of the Bank’s
investments in bonds and other fixed income securities and shares and other variable yield securities
under IFRS.
Nine months
ended
Year ended
30 September 31 December
2010
2009
(UAH thousand)
Ukrainian Government debt securities:
Medium-term Ukrainian Government debt securities
Long-term Ukrainian Government debt securities, including securities with
early redemption feature
Ukrainian Government debt securities for settlement of budget
indebtedness on value added tax
3,033,068
1,750,080
2,798,480
598,280
359
—
5,831,907
2,348,360
736,684
647,526
388,794
25,395
737,604
519,239
448,877
25,395
Less allowance for impairment losses
1,798,399
(125,541)
1,731,115
(74,824)
Total debt securities available for sale
7,504,765
4,004,651
Other:
Bonds issued
Bonds issued
Bonds issued
Bonds issued
by
by
by
by
State Mortgage Institution
corporate entities
banks
local Ukrainian authorities
Equity securities:
Corporate shares
Less allowance for impairment losses
Total equity securities available for sale
Total investments available for sale
23,063
(15,283)
23,063
(15,283)
7,780
7,780
7,512,545
4,012,431
Loan Portfolio
The Bank’s loan portfolio comprises fixed rate loans of short-term and long-term duration. The
Bank’s total loans, including amounts due from credit institutions and net of allowance for
impairment, were UAH 48,672,617 thousand as at 31 December 2009 and UAH 36,076,729 thousand
as at 31 December 2008, which accounted for 84.8 per cent. and 64.0 per cent. of total assets,
respectively.
Loans to customer net of allowance for loan impairment were UAH 45,716,277 thousand and UAH
33,891,518 thousand or 79.7 per cent. and 60.1 per cent. of total assets as at 31 December 2009 and
31 December 2008, respectively. The size of the Bank’s total (gross) loan portfolio, excluding amounts
due from credit institutions, grew during the period by 42.5 per cent., from UAH 34,962,777
thousand as at 31 December 2008 to UAH 49,834,404 thousand as at 31 December 2009.
The Bank’s allowance for loan impairment for loans to customers totalled UAH 4,118,127 thousand
and UAH 1,071,259 thousand as at 31 December 2009 and 31 December 2008, respectively.
c104221pu070Proof7:3.3.11B/LRevision:0OperatorChoD
118
The following table shows the maturity profile of the Bank’s loans as at 31 December 2008 and
31 December 2009:
2008
% of total
portfolio
2009
% of total
portfolio
Less than 1 month
From 1 to 3 months
From 3 to 12 months
1-5 years
Over 5 years and undefined
(UAH
thousand)
731,162
2,564,656
13,747,378
12,000,646
4,847,676
(%)
2.2
7.6
40.6
35.3
14.3
(UAH
thousand)
407,681
15,821,794
18,948,834
6,082,080
4,455,888
(%)
0.9
34.6
41.5
13.3
9.7
Total
33,891,518
100.0
45,716,277
100.0
The following tables provide details of loans to customers by type of loan at the dates indicated.
The following table shows the composition of the Bank’s loans to customers (net of allowance for
impairment) by currency exposure as at 31 December 2008 and 2009.
At 31 December
2008
2009
(UAH thousand)
Currency
Hryvnia
Euro
U.S. Dollars
Other
31,109,571
365,924
2,398,391
17,632
37,773,755
1,223,805
6,718,717
—
Total
33,891,518
45,716,277
The following table provides details of concentrations by industry sector of loans to customers made
by the Bank, as at 31 December 2008 and 2009.
31 December
2009
% of total 31 December
portfolio
2008
% of total
portfolio
Analysis by sector:
Oil, gas and chemical production
Individuals
Energy
Constructions and real estate
Construction and road maintenance
Trade
Agriculture and food processing
Machinery construction
Transport
Mining and metallurgy
Manufacturing
Services
Financial services
Media and communications
Hotel and restaurant business
Press and publishing
Other
29,146,558
5,905,879
4,546,440
3,237,962
2,396,753
1,548,330
1,531,503
579,382
336,450
271,935
132,569
86,458
60,191
13,971
10,475
8,277
21,271
58.49
11.85
9.12
6.50
4.81
3.11
3.07
1.16
0.68
0.55
0.27
0.17
0.12
0.03
0.02
0.02
0.04
18,779,508
7,111,852
3,761,595
1,679,918
—
1,153,102
1,159,591
509,746
288,492
184,559
135,360
90,555
—
34,182
38,458
8,535
27,324
53.71
20.34
10.76
4.80
—
3.30
3.32
1.46
0.83
0.53
0.39
0.26
—
0.10
0.11
0.02
0.08
Total Gross Loans
49,834,404
100.0
34,962,777
100.0
c104221pu070Proof7:3.3.11B/LRevision:0OperatorChoD
119
Characteristics of our ten Largest Borrowers
At 30 September 2010, the Bank’s ten largest borrowers amounted to UAH 32,704,045 thousand, or
73 per cent. of customer loans, the largest borrower represented 47 per cent. of its customer loan
portfolio (in each case excluding loans to banks and off-balance sheet credit commitments). The
Bank’s ten largest borrowers include loans across a range of industries, including oil, gas and
chemical production, construction and road maintenance and energy. The Bank’s largest exposure to
a single sector (oil, gas and chemical production) as at 30 September 2010 was UAH 21,384,536
thousand, or approximately, 65 per cent. of these ten borrowers.
At 31 December 2009, the Bank’s ten largest borrowers amounted to UAH 37,225,435 thousand, or
75 per cent. of customer loans and the largest borrower represented 58 per cent. of its customer loan
portfolio (in each case excluding loans to banks and off-balance sheet credit commitments). The
Bank’s ten largest borrowers include loans across a range of industries, including oil, gas and
chemical production, construction and road maintenance and energy. The Bank’s largest exposure to
a single sector (oil, gas and chemical production) as at 31 December 2009 was UAH 29,089,711
thousand, or approximately, 78 per cent. of these ten borrowers.
Loan Loss Allowances
Under IFRS, we recognise losses in respect of impaired loans promptly where there is objective
evidence that impairment of a loan or portfolio of loans has occurred. This is done on a consistent
basis in accordance with our internal guidelines. There are two basic methods of calculating
impairment losses: one for calculation of impairments on individual loans and another for calculation
of losses assessed on a collective basis. Losses expected as a result of future events, no matter how
likely, are not recognised.
The following table sets forth the impairments or loan loss allowances and changes in loans, writeoffs and recoveries at the dates and for the periods indicated as well as change to income and period
end allowances for loan losses.
31 December
2008
Provision
Due from Banks
Loans to customers
Investments available
for sale
57,652
1,071,259
43,945
2,001,329
5,190
103,407
Total
1,134,101
2,148,681
Write off 30 September
of assets
2009
—
(8,852)
(Recovery of
provision)/
Provision
101,597
3,063,736
66,651
4,118,127
108,597
90,107
50,717
3,273,930
4,274,885
1,703,878
—
(8,852)
31 December
2009
Write off 30 September
of assets
2010
(523)
1,653,684
—
(2,288)
66,128
5,769,523
—
140,824
(2,288)
5,976,475
Status of loans and advances for each of the two years ended 31 December 2008 and 2009 are
summarised as follows:
31 December 2008
31 December 2009
Loans and
advances to
Customers
Total loans
and
advances
(Banks &
Customers)
2,839,182
183,809
5,287,075.0
44,547,329
8,126,257
44,731,138
37,205,640
(1,128,911)
3,022,991
(66,651)
49,834,404
(4,118,127)
52,857,395
(4,184,778)
36,076,729
2,956,340
45,716,277
48,672,617
Loans and
advances to
Banks
Loans and
advances to
Customers
Total loans
and
advances
(Banks &
Customers)
Neither past due nor impaired
Impaired
1,872,336
370,527
—
34,962,777
1,872,336
35,333,304
Gross
Less: allowance for impairment
2,242,863
(57,652)
34,962,777
(1,071,259)
Net
2,185,211
33,891,518
Loans and
advances to
Banks
(UAH thousand)
c104221pu070Proof7:3.3.11B/LRevision:0OperatorChoD
120
Liabilities
Due to banks and customer accounts by maturity
The following tables show the maturity of the Bank interest bearing balances of due to banks and
customer accounts at the dates indicated.
At 30 September 2010
Up to
1 month
Up to
3 months
3-12
months
1-5 years
Over
5 years
Total
(UAH thousand)
Deposits due to banks
Due to customers
133,462
13,015,851
60,000
3,565,269
1,030,000
2,544,889
14,411,633
3,278,979
—
88,495
15,635,095
22,493,483
Total deposits
13,149,313
3,625,269
3,574,889
17,690,612
88,495
38,128,578
Over
5 years
Total
At 31 December 2008
Up to
1 month
Up to
3 months
3-12
months
1-5 years
(UAH thousand)
Deposits due to banks
Due to customers
259,838
10,807,614
—
336,710
21,977,740
1,819,312
—
4,068,222
—
62,871
22,237,578
17,094,729
Total deposits
11,067,452
336,710
23,797,052
4,068,222
62,871
39,332,307
Over
5 years
Total
At 31 December 2009
Up to
1 month
Up to
3 months
3-12
months
1-5 years
(UAH thousand)
Deposits due to banks
Due to customers
86,953
11,849,952
6,467,202
7,927,866
8,791,757
1,556,815
672,212
2,708,611
—
60,202
16,018,124
24,103,446
Total deposits
11,936,905
14,395,068
10,348,572
3,380,823
60,202
40,121,570
Characteristics of 10 Largest Customer Accounts
At 30 September 2010, the balances of the Bank’s ten largest customers amounted to UAH 1,854,580
thousand, or 8.1 per cent. of customer accounts and the balance of the largest customer represented
2.1 per cent. of its customer accounts.
At 31 December 2009, the balances of the Bank’s ten largest customers amounted to UAH 7,500,691
thousand, or 30.4 per cent. of customer accounts and the balance of the largest customer represented
23.2 per cent. of its customer accounts.
c104221pu070Proof7:3.3.11B/LRevision:0OperatorChoD
121
Borrowings
The following table shows details of the types and maturities of the Bank’s borrowings at
31 December 2008 and 2009 and at 30 September 2010.
At 30 September 2010
At 31 December 2009
(UAH
thousand)
(%)
(UAH
thousand)
(%)
Borrowings
Debt securities issued
Due to banks
Customer accounts
Subordinated debt
Other financial liabilities
464,633
15,794,517
23,002,137
799,616
68,758
1.2
39.3
57.3
2.0
0.1
446,093
16,022,744
24,672,908
824,578
39,385
1.1
38.1
58.7
2.0
0.1
Total borrowings
40,129,661
100.0
42,005,708
100.0
Borrowings mature
Up to 1 month
1 month to 3 months
Over 3 months and up to a year
13,873,753
3,634,851
3,902,252
34.6
9.1
9.7
12,555,602
14,405,775
10,374,272
29.9
34.3
24.7
Total short-term borrowings
Over 1 year and up to 5 years
Over 5 years
21,410,856
18,630,221
88,584
53.4
46.4
0.2
37,335,649
3,818,860
851,199
88.9
9.1
2.0
Total borrowings
40,129,661
100.0
42,005,708
100.0
At 31 December 2008
(UAH
thousand)
(%)
Borrowings
Debt securities issued
Due to banks
Customer accounts
Subordinated debt
Other financial liabilities
501,541
22,239,283
17,492,921
793,276
42,716
1.2
54.2
42.6
1.9
0.1
Total borrowings
41,069,737
100.0
Borrowings mature
Up to 1 month
1 month to 3 months
Over 3 months and up to a year
11,512,095
344,914
24,125,301
28.1
0.8
58.7
Total short-term borrowings
Over 1 year and up to 5 years
Over 5 years
35,982,310
4,262,821
824,606
87.6
10.4
2.0
Total borrowings
41,069,737
100.0
c104221pu070Proof7:3.3.11B/LRevision:0OperatorChoD
122
Capital
The following table sets forth the Bank’s risk-weighted assets and capital ratios at the dates indicated.
The CAD ratio, calculated in accordance with Basel Capital Accord 1988, was 36.88 per cent. at
30 September 2010 and 32.26 per cent. at 31 December 2009. Under applicable law, Bank is required
to maintain a total CAD ratio of at least 10 per cent.
The ratio is calculated as follows:
At
30 September
At 31 December
2008
2009
2010
(UAH thousand, except percentages)
On-balance sheet
Off-balance sheet
37,849,401
468,358
49,833,373
199,565
43,514,489
457,932
Total Risk-weighted assets
38,317,759
50,032,938
43,972,421
13,892,000
13,892,000
13,892,000
212,846
322,315
370,217
14,104,846
14,214,315
14,262,217
Tier I capital
Share capital
Statutory reserves
Retained earnings
Total Tier I capital
Tier II capital
Property revaluation reserve
Investments available for sale fair value reserve
Subordinated loan
1,147,679
(131,796)
770,000
1,147,251
(18,626)
798,500
1,147,005
15,349
791,350
Total Tier II capital
1,785,883
1,927,125
1,953,704
15,890,729
16,141,440
16,215,921
Total regulatory capital
36.81%
41.47%
Tier 1 capital adequacy ratio
Regulatory capital adequacy ratio
28.41%
32.26%
32.43%
36.88%
The following table shows the Bank’s return on average assets and return on average equity for the
periods presented.
Year ended 31 December
Financial ratios
Return on average assets(1)
Return on average equity(1)
(1) Average on yearly balances.
c104221pu070Proof7:3.3.11B/LRevision:0OperatorChoD
123
Nine months
ended
30 September
2008
2009
2010
0.1
0.5
0.2
0.7
0.6
2.2
Financial Assets and Liabilities
The following tables categorise, by contractual re-pricing or maturity, the Bank’s financial assets and
liabilities at 31 December 2008 and 2009.
As at 31 December 2009
Up to
1 month
1 month to
3 months
3 months
to 1 year
1 year
to 5 years
Over 5
years
Maturity
undefined
Total
(UAH thousand)
FINANCIAL ASSETS
Due from banks
Loans to customers
Investments available for sale
Total interest bearing assets
Cash and balances with the
National bank of Ukraine
Due from banks
Investments available for sale
Other financial assets
2,934,717
407,681
170,184
3,512,582
—
15,821,794
28,715
15,850,509
—
18,948,834
817,386
19,766,220
—
6,082,080
2,787,912
8,869,992
—
3,945,059
200,454
4,145,513
—
510,829
—
510,829
2,934,717
45,716,277
4,004,651
52,655,645
2,100,822
535
—
8,829
—
995
—
83
—
20,093
—
1,093
—
—
—
621
—
—
—
840
177,530
—
7,780
—
2,278,352
21,623
7,780
11,466
TOTAL FINANCIAL ASSETS
5,622,768
15,851,587
19,787,406
8,870,613
4,146,353
696,139
54,974,866
Due to banks
Customer accounts
Debt securities issued
Subordinated debt
Total interest bearing liabilities
Due to banks
Customer accounts
Other financial liabilities
86,953
11,849,952
—
33,610
11,970,515
4,620
569,462
11,005
6,467,202
7,927,866
8,093
—
14,403,161
—
—
2,614
8,791,757
1,556,815
—
—
10,348,572
—
—
25,700
672,212
2,708,611
438,000
—
3,818,823
—
—
37
—
60,202
—
790,968
851,170
—
—
29
—
—
—
—
—
—
—
—
16,018,124
24,103,446
446,093
824,578
41,392,241
4,620
569,462
39,385
TOTAL FINANCIAL
LIABILITIES
12,555,602
14,405,775
10,374,272
3,818,860
851,199
—
42,005,708
Liquidity gap
Interest sensitivity gap
(6,932,834)
(8,457,933)
1,445,812
1,447,348
9,413,134
9,417,648
5,051,753
5,051,169
3,295,154
3,294,343
696,139
Cumulative interest sensitivity gap
(8,457,933)
(7,010,585)
2,407,063
7,458,232
10,752,575
4%
13%
19%
FINANCIAL LIABILITIES
Cumulative interest sensitivity gap
as a percentage of total assets
-15%
-12%
c104221pu070Proof7:3.3.11B/LRevision:0OperatorChoD
124
As at 31 December 2008
Up to 1
month
1 month to
3 months
3 months to
1 year
1 year to 5
years
Over 5
years
Maturity
undefined
Total
(UAH thousand)
FINANCIAL ASSETS
Due from banks
Loans to customers
Investments available for sale
Total interest bearing assets
Cash and balances with the
National Bank of Ukraine
Due from banks
Investments available for sale
Other financial assets
1,970,376
731,162
1,001,785
3,703,323
79,920
2,564,656
179,791
2,824,367
100,000
13,747,378
13,439,615
27,286,993
—
12,000,646
1,067,663
13,068,309
—
4,586,515
—
4,586,515
—
261,161
—
261,161
2,150,296
33,891,518
15,688,854
51,730,668
2,487,747
34,915
—
13,224
—
—
—
465
—
—
23,635
4,725
—
—
—
886
—
—
—
142
81,479
—
—
—
2,569,226
34,915
23,635
19,442
TOTAL FINANCIAL ASSETS
6,239,209
2,824,832
27,315,353
13,069,195
4,586,657
342,640
54,377,886
FINANCIAL LIABILITIES
Due to banks
Customer accounts
Debt securities issued
Subordinated debt
Total interest bearing liabilities
Due to banks
Customer accounts
Other financial liabilities
259,838
10,807,614
—
31,570
11,099,022
1,705
398,192
13,176
—
336,710
6,946
—
343,656
—
—
1,258
21,977,740
1,819,312
300,000
—
24,097,052
—
—
28,249
—
4,068,222
194,595
—
4,262,817
—
—
4
—
62,871
—
761,706
824,577
—
—
29
—
—
—
—
—
—
—
—
22,237,578
17,094,729
501,541
793,276
40,627,124
1,705
398,192
42,716
TOTAL FINANCIAL
LIABILITIES
11,512,095
344,914
24,125,301
4,262,821
824,606
—
41,069,737
Liquidity gap
Interest sensitivity gap
(5,272,886)
(7,395,699)
2,479,918
2,480,711
3,190,052
3,189,941
8,806,374
8,805,492
3,762,051
3,761,938
342,640
Cumulative interest sensitivity gap
(7,395,699)
(4,914,988)
(1,725,047)
7,080,445
10,842,383
13%
19%
Cumulative interest sensitivity gap
as a percentage of total assets
-13%
-9%
-3%
c104221pu070Proof7:3.3.11B/LRevision:0OperatorChoD
125
RELATED PARTY AND GOVERNMENT RELATED TRANSACTIONS
Related Party Transactions
The Bank applies similar procedures for the approval of loans and the setting of limits on loans to
related parties as it does for non-related parties. All transactions with related parties (both individuals
and corporations) are conducted on terms which fully comply with the internal regulations of the
bank, including in respect of collateral.
During the course of 2009 and 2010, the Bank provided various consumer loans to individuals,
including employees, on standard terms. All loans provided to employees are subject to the same
procedures and collateral requirements as those applicable to loans granted to non-related individuals.
For the purposes of the Bank’s Financial Statements, parties are considered to be related if one party
has the ability to control the other party or exercise significant influence over the other party in
making financial or operational decisions as defined by IAS 24 ‘‘Related Party Disclosures’’. In
considering each possible related party relationship, attention is directed to the substance of the
relationship, not merely the legal form.
All State-owned entities are considered as related parties of the Bank. The Bank has many Stateowned (where the State owns at least 50 per cent. + 1 share) entities among its customers and
provides banking services and loan financing for such clients on the same commercial terms and
conditions applicable to its private company clients. As at 30 September 2010, the Bank had 93
clients who were related parties of the Bank in accordance with IAS 24. Gross loans to these entities
comprised UAH 31,182,120 thousand, or 69.2 per cent. of the Bank’s gross loan portfolio, compared
to UAH 35,997,467 thousand, or 72.2 per cent., as at 31 December 2009 and UAH 22,674,510
thousand, or 64.9 per cent., at 31 December 2008.
Naftogaz accounts for the majority of the Bank’s exposure to State-owned entities. As at 30
September 2010 the total amount of outstanding indebtedness under the loans agreement with
Naftogaz and its subsidiary Ukrtransnafta was UAH 21,384,536 thousand, comprising 47 per cent. of
the Bank’s gross loan portfolio, compared to UAH 29,089,711 thousand (58.0 per cent.) as at 31
December 2009 and UAH 18,766,610 thousand (54.0 per cent.) as at 31 December 2008. The Bank’s
second largest exposure to a State-owned entity represents 7.4 per cent. of the Bank’s gross loan
portfolio, and the Bank’s third largest exposure represents 4.7 per cent. of the Bank’s gross loan
portfolio. Each of the loans to the 90 remaining related parties which are State-owned entities
comprises 2.2 per cent. or less, of the Bank’s gross loan portfolio. For a more detailed description of
the loans to the State-owned entity, Naftogaz, see ‘‘Business – Naftogaz financing programme’’.
Additionally, the Bank had, as at 30 September 2010, three clients (legal entities) who were related
parties but who were not State-owned entities. Total balance sheet indebtedness to these three clients
as at 30 September 2010 was UAH 18,199 thousand, representing 0.04 per cent. of the Bank’s gross
loan portfolio.
The Bank has not entered into any other transactions with affiliates, non-consolidated subsidiaries,
officers or directors of the Bank.
Government Related Transactions
Balance due to the NBU
In 2008 the Bank received hryvnia-denominated loans from the NBU in aggregate amount of UAH
21,977,740 thousand. The loans were provided as part of a recapitalisation programme for the Bank
and enabled the Bank’s funding of loans to Naftogaz. As at 30 September 2010, UAH 15,531,633
thousand remained outstanding under the NBU loans. As at 30 September 2010, the loans from the
NBU were secured with a combination of pledged rights under the Naftogaz loans with carrying
value of UAH 18,544,161 thousand, loans to other borrowers with carrying value of UAH 3,191,342
thousand, balances with the NBU with carrying value of UAH 425,000 thousand and debt securities
available for sale with carrying value of UAH 240,915 thousand.
c104221pu080Proof7:3.3.11B/LRevision:0OperatorChoD
126
THE ISSUER
SSB No.1 PLC was incorporated in England and Wales on 8 December 2010 (registered number
07464396), as a public company with limited liability under the Companies Act 2006. The registered
office of the Issuer is at 7th Floor, Phoenix House, 18 King William Street, London EC4N 7HE. The
telephone number for the Issuer is +44 (0) 207 800 4100. The Issuer has no subsidiaries. The Issuer
has been established as a special purpose vehicle or entity for the purpose of issuing the Notes. Since
the date of its incorporation, the Issuer has not commenced operations and no financial statements
have been made up as at the date of this Prospectus.
Principal Activities
The principal objects of the Issuer are set out in its Memorandum of Association and are, among
other things, to acquire, hold and manage financial assets, to lend or advance money and to give
credit to any persons (whether individuals or legal entities) for any purpose whatsoever within the
United Kingdom or elsewhere, and whether secured (on any such property or otherwise) or
unsecured, to carry on business as a financial institution, money lenders, bankers, capitalists,
financiers and investors and to undertake all kinds of loans, debt instrument issuance, financial
commitments and other operations and to provide any type of financial services including without
limitation lending and participation in securities issues and the provision of services related to such
issues.
The Issuer will covenant to observe certain restrictions on its activities, which are detailed in
Condition 3 (Issuer’s Covenant) of the ‘‘Terms and Conditions of the Notes’’ and Clause 15 of the
Trust Deed.
The issued share capital in the Issuer is legally and beneficially owned and controlled directly by
Capita Trust Nominees No. 1 Limited, a limited liability company incorporated in England and
Wales with registered number 05322518.
Directors and Secretary
The directors of the Issuer and their respective business addresses and other principal activities are:
Name
Business Address
Principal Activity
Capita Trust Corporate Services Limited
7th Floor, Phoenix House,
18 King William Street,
London EC4N 7HE
Corporate Director
Capita Trust Corporate Limited
7th Floor, Phoenix House,
18 King William Street,
London EC4N 7HE
Corporate Director
Susan Lawrence
7th Floor, Phoenix House,
18 King William Street,
London EC4N 7HE
Director
The company secretary of the Issuer is Capita Trust Secretaries Limited, a company incorporated in
England and Wales (registered number 05322656), whose business address is 7th Floor, Phoenix
House, 18 King William Street, London EC4N 7HE.
Capitalisation and Indebtedness
The capitalisation and indebtedness of the Issuer as at the date of this Prospectus is as follows:
50,000 £1 shares issued to Capita Trust Nominees No. 1 Limited.
Litigation
There is no governmental, legal or arbitration proceedings (including any such proceedings which are
pending or threatened of which the Issuer is aware) which may have, or has had since the date of its
incorporation, significant effects on the Issuer’s financial position.
c104221pu080Proof7:3.3.11B/LRevision:0OperatorChoD
127
Auditors
Deloitte LLP are the Issuer’s independent auditors. The address of Deloitte LLP is Hill House, 1
Little New Street, London EC4A 3TR. Deloitte LLP are Chartered Accountants and Registered
Auditors in England and Wales.
c104221pu080Proof7:3.3.11B/LRevision:0OperatorChoD
128
THE LOAN AGREEMENT
THIS AGREEMENT is made on 4 March 2011
BETWEEN:
(1)
JOINT STOCK COMPANY ‘‘STATE SAVINGS BANK OF UKRAINE’’, a bank in the form
of a joint stock company incorporated under the laws of Ukraine whose registered office is at
12-G Hospitalna Street, Kyiv, 01001, Ukraine, identification code 00032129, as borrower (the
Borrower) represented by Denys Kiryeyev, acting on the basis of the Resolution of the
Management Board of the Borrower dated 2 February 2011 No. 31; and
(2)
SSB No.1 PLC, as lender (the Lender), a public limited company incorporated under the laws
of England and Wales, whose registered office is at 7th Floor, Phoenix House, 18 King
Williams Street, London EC4N 7HE, United Kingdom.
WHEREAS:
(A)
The Lender has at the request of the Borrower agreed to make available to the Borrower a
credit facility in the amount of U.S.$500,000,000 on the terms and subject to the conditions of
this Agreement.
(B)
This Agreement will become effective on the date of registration of this Agreement with the
National Bank of Ukraine (the NBU).
It is agreed as follows:
1.
DEFINITIONS AND INTERPRETATION
1.1
Definitions
In this Agreement the following terms have the meanings given to them in this Clause 1.1:
ABN AMRO Loan means U.S.$100 million loan agreement for the borrowing of funds on
subordinated terms as a subordinated loan between the Borrower and ABN AMRO Bank
N.V., London Branch, dated 29 December 2006, as supplemented, amended and restated from
time to time;
Account means the account with the account number 2367008400 and the account name ‘SSB
No 1 $ SECURED CASH’ in the name of the Lender with the Principal Paying Agent;
Additional Amounts has the meaning set forth in Clause 8.1 (Additional Amounts);
Affiliate of any specified Person means (a) any other Person, directly or indirectly, controlling
or controlled by or under direct or indirect common control with such specified Person, (b) any
other Person who is a director or officer of such specified Person, of any Subsidiary of such
specified Person or of any Person described in (a) above;
Agency means any agency, authority, central bank, department, committee, government,
legislature, minister, ministry, official or public or statutory person (whether autonomous or
not) of, or of the government of, any state or supra-national body;
Auditors means PJSC ‘‘Deloitte & Touche USC’’ or any internationally recognised firm of
accountants approved by the Lender, such approval not to be unreasonably withheld; it being
understood that it shall be reasonable for the Lender to withhold such approval if the Trustee
does not approve of such firm in accordance with the relevant provisions of the Funding
Documents;
Authorised Signatory means, in the case of the Borrower, any of the persons referred to in the
certificate listed as item 3 in Schedule 1 (Conditions Precedent Documents) hereto and, in the
case of the Lender, a Person who is a duly authorised officer of the Lender at the relevant
time;
Banking Business means, in relation to the Borrower or any of its Subsidiaries, any type of
banking business (including, without limitation, any inter-bank operations with maturities of 18
months or less, factoring, consumer credit and lending, commercial and residential property
finance and mortgage lending, issuance of bank guarantees, letters of credit (and related cash
cover provision), bills of exchange and promissory notes and making payments under such
guarantees, letters of credit, bills and promissory notes, trading of securities, fund management
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
129
and professional securities market participation) which it conducts or may conduct pursuant to
its licence issued by the appropriate authorities, accepted market practice and any applicable
law;
Borrowing Date means 10 March 2011 or such later date as may be agreed by the parties to
this Agreement;
Capital Stock means, with respect to any Person, any and all shares, interests, participations,
rights to purchase, warrants, options or any other equivalent of any of the foregoing (however
designated) in relation to the share capital of a company and any and all equivalent ownership
interests in a Person other than a company, in each case whether now outstanding or hereafter
issued;
Change of Control shall be deemed to have occurred if:
(a)
Ukraine, whether through the Cabinet of Ministers of Ukraine or any other Agency of
Ukraine, ceases to own, legally and beneficially, at least 51 per cent. of the Capital Stock
of, or otherwise to control, the Borrower; or
(b)
an official public announcement is made by the Cabinet of Ministers of Ukraine or the
State Property Fund of Ukraine of an intention that Ukraine would cease so to own or
control the Borrower and (i) within the Relevant Period (see the definition of ‘‘Rating
Decline’’ below) following such announcement there is a Rating Decline and (ii) in the
announcement of the Rating Decline the relevant Rating Agency specifies that the
proposed change in ownership or control of the Borrower is a factor in its decision to
decrease or downgrade the Borrower’s rating;
Change of Control Payment Date means the date specified as such in the notice from the
Lender to the Borrower pursuant to Clause 7.3 (Repayment in the event of a Change of
Control);
Change of Law means, following the Borrowing Date, any of the enactment or introduction of
any new law; the variation, amendment or repeal of an existing or new law; any ruling on or
interpretation or application by a competent authority of any existing or new law; and the
decision or ruling on, the interpretation or application of, or a change in the interpretation or
application of, any law by any court of law, tribunal, central bank, monetary authority or
agency or any Taxing Authority or fiscal or other competent authority or agency; which, in
each case, occurs after the date hereof. For this purpose the term ‘‘law’’ means all or any of
the following whether in existence at the date hereof or introduced hereafter and with which it
is obligatory or customary for banks, other financial institutions or, as the case may be,
companies in the relevant jurisdiction to comply:
(a)
any statute, treaty, order, decree, instruction, letter, directive, instrument, regulation,
ordinance or similar legislative or executive action by any national or international or
local government or authority or by any ministry or department thereof and other
agencies of state power and administration (including, but not limited to, taxation
departments and authorities); and
(b)
any letter, regulation, decree, instruction, request, notice, guideline, directive, statement of
policy or practice statement given by, or required of, any central bank or other monetary
authority, or by or of any Taxing Authority or fiscal or other authority or agency
(whether or not having the force of law);
Double Tax Treaty means the Convention of 10 February 1993 between the Government of the
United Kingdom of Great Britain and Northern Ireland and the Government of Ukraine for
the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes
on Income and Capital Gains;
Event of Default means any circumstances described as such in Clause 14 (Events of Default);
Fees Letter means any letter agreement between, inter alios, the Borrower and the Lender
setting out certain amounts payable by the Borrower in connection with this Agreement;
Funding Documents means the Fees Letter, the subscription agreement dated 4 March 2011, the
trust deed to be dated on or about 10 March 2011 and the agency agreement to be dated on
or about 10 March 2011 entered into in connection with the issue of the Funding Instruments
and the Funding Instruments themselves;
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
130
Funding Instruments means the U.S.$500,000,000 8.25 per cent. Loan Participation Notes due
2016 proposed to be issued by the Lender pursuant to the Funding Documents on or about 10
March 2011 for the purpose of funding the Loan;
Group means the Borrower and its Subsidiaries from time to time taken as a whole;
Guarantee means, in relation to any Indebtedness of any Person, any obligation of another
Person to pay such Indebtedness including (without limitation):
(a)
any obligation to purchase such Indebtedness;
(b)
any obligation to lend money, to purchase or subscribe shares or other securities or to
purchase assets or services in order to provide funds for the payment of such
Indebtedness;
(c)
any indemnity against the consequences of a default in the payment of such Indebtedness;
and
(d)
any other agreement to be responsible for such Indebtedness;
IFRS means International Financial Reporting Standards, including International Accounting
Standards and Interpretations, issued by the International Accounting Standards Board, as
amended, supplemented or re-issued from time to time;
IFRS Fiscal Period means any fiscal period for which the Borrower has produced financial
statements in accordance with IFRS which have either been audited or reviewed by the
Auditors;
incur means issue, assume, guarantee, incur or otherwise become liable for; provided that, any
Indebtedness or Capital Stock of a Person existing at the time such Person becomes a
Subsidiary of another Person (whether by merger, consolidation, acquisition or otherwise) or is
merged into a Subsidiary of another Person will be deemed to be incurred or issued by the
other Person or such Subsidiary (as the case may be) at the time such Person becomes a
Subsidiary of such other Person or is so merged into such Subsidiary;
Indebtedness means any indebtedness for, or in respect of, moneys borrowed or raised
including, without limitation, any amount raised by acceptance under any acceptance credit
facility; any amount raised pursuant to any note purchase facility or the issue of bonds, notes,
debentures, loan stock or any similar instrument; any amount raised pursuant to any issue of
Capital Stock which is expressed to be redeemable; any amount raised under any other
transaction having the economic effect of a borrowing (including any forward sale or purchase
agreement) provided that, for the avoidance of doubt, such term shall not include any
indebtedness owed to the State budget, any local budget or any non-budgetary fund of or in
Ukraine for or on account of Taxes which are not overdue;
Indemnity Amounts has the meaning set out in Clause 8.3 (Indemnity Amounts);
Independent Appraiser means an investment banking firm or third party appraiser of
international standing selected by the Borrower; provided that such firm or third party appraiser
is not an Affiliate of the Borrower;
Interest Payment Date means 10 September and 10 March in each year in which the Loan
remains outstanding or if any such day is not a Business Day, the next succeeding Business
Day, commencing on 10 September 2011, with the last Interest Payment Date falling on the
Repayment Date;
Interest Period means any of those periods mentioned in Clause 4 (Interest Periods);
Lead Managers means Credit Suisse Securities (Europe) Limited and Morgan Stanley & Co.
International plc;
Loan shall have the meaning given to such term in Clause 2.1 (Grant of the Credit Facility);
Material Adverse Effect means a material adverse change in, or material adverse effect on, the
business, operations or financial condition of the Borrower or of the Group taken as a whole;
Material Subsidiary means, at any given time, any Subsidiary of the Borrower (a) whose total
assets or gross revenues (or, where the Subsidiary in question prepares consolidated accounts,
whose total consolidated assets or gross consolidated revenues, as the case may be) represent at
least 10 per cent. of the total assets or, as the case may be, total revenues of the Borrower and
its Subsidiaries and for these purposes (i) the total assets and gross revenues of such Subsidiary
131
shall be determined by reference to its then most recent audited financial statements (or, if
none, its then most recent management accounts) and (ii) the total assets and gross revenues of
the Borrower shall be determined by reference to the Borrower’s then most recent audited
financial statements (or, if none, its then most recent management accounts), in each case
prepared in accordance with IFRS, or (b) to which is transferred the whole or substantially the
whole of the undertaking and assets of a Subsidiary of the Borrower which immediately before
the transfer is a Material Subsidiary of the Borrower. A certificate by any two members of the
board of the Borrower that, in their opinion, a Subsidiary of the Borrower is or is not a
Material Subsidiary, accompanied by a report by the Auditors addressed to the board of the
Borrower as to proper extraction of the figures used by the members of the board of the
Borrower in determining the Material Subsidiaries of the Borrower and mathematical accuracy
of the calculations shall, in the absence of manifest error, be conclusive and binding on all
parties;
Officers’ Certificate means a certificate signed on behalf of the Borrower by two members of
the board of the Borrower at least one of whom shall be the principal executive officer,
principal accounting officer or principal financial officer of the Borrower and in the form set
out in Schedule 2 (Form of Officers’ Certificate) hereto;
Permitted Security Interests means:
(a)
Security Interests arising in the ordinary course of Banking Business including, without
limitation:
(i)
Security Interests arising pursuant to any agreement (or other applicable terms and
conditions) which are standard or customary in the relevant market in connection
with (x) contracts entered into substantially simultaneously for sales and purchases
at market prices of precious metals and/or securities and (y) the establishment of
margin deposits and similar securities in connection with interest rate and foreign
currency hedging operations and trading in securities; and
(ii)
Security Interests upon, or with respect to, any present or future assets or revenues
or any part thereof which is created pursuant to any Repo;
(b)
Security Interests granted by third parties in favour of the Borrower or any of its
Subsidiaries;
(c)
Security Interests on property acquired (or deemed to be acquired) under a financial lease,
or claims arising from the use or loss of or damage to such property; provided that any
such Security Interest secures only Indebtedness under such lease;
(d)
Security Interests securing Indebtedness of a Person existing at the time that such Person
is merged into or consolidated with the Borrower or becomes a Subsidiary of the
Borrower; provided that such Security Interests were not created in contemplation of such
merger or consolidation or event and do not extend to any assets or property of the
Borrower already existing or any Subsidiary of the Borrower other than those of the
surviving Person and its Subsidiaries or the Person acquired and its Subsidiaries;
(e)
Security Interests already existing on assets or property acquired or to be acquired by the
Borrower or a Subsidiary of the Borrower; provided that such Security Interests were not
created in contemplation of such acquisition and do not extend to any other assets or
property (other than proceeds of such acquired assets or property);
(f)
Security Interests granted upon or with regard to any property hereafter acquired by any
member of the Group to secure the purchase price of such property or to secure
Indebtedness incurred solely for the purpose of financing the acquisition of such property
and transactional expenses related to such acquisition (other than a Security Interest
created in contemplation of such acquisition); provided that the maximum amount of
Indebtedness thereafter secured by such Security Interest does not exceed the purchase
price of such property (including transactional expenses) or the Indebtedness incurred
solely for the purpose of financing the acquisition of such property;
(g)
any Security Interest upon, or with respect to, any present or future assets or revenues or
any part thereof which is created pursuant to any securitisation, asset-backed financing or
similar financing structure whereby all payment obligations secured by such Security
Interest or having the benefit of such Security Interest are to be discharged primarily from
such assets or revenues; provided that the Indebtedness or Guarantee so secured pursuant
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
132
to this paragraph (g) at any one time shall not exceed an amount in any currency or
currencies equivalent to 20 per cent. of the Borrower’s loans to customers before
allowances for impairment (calculated by reference to the Borrower’s balance sheet as at
the end of its most recent IFRS Fiscal Period) and subject as provided in Clause 13.6
(Disposals);
(h)
any Security Interests arising by operation of law;
(i)
any Security Interests not otherwise permitted by
(h), provided that the aggregate principal amount
Security Interests does not at any time exceed
determined by reference to the Borrower’s balance
IFRS Fiscal Period; and
(j)
any Security Interest arising out of the refinancing, extension, renewal or refunding of any
Indebtedness secured by a Security Interest permitted by any of the above exceptions,
provided that the Indebtedness thereafter secured by such Security Interest does not exceed
the amount of the original Indebtedness and such Security Interest is not extended to
cover any property not previously subject to such Security Interest;
the preceding paragraphs (a) through
of the Indebtedness secured by such
10 per cent. of the Group’s assets,
sheet as at the end of its most recent
Person means any individual, company, corporation, firm, partnership, joint venture,
association, trust, institution, organisation, state or Agency or any other entity, whether or not
having separate legal personality;
Potential Event of Default means any event which may become (with the passage of time, the
giving of notice and/or the making of a determination and/or the fulfilment of any other
requirement) under this Agreement, an Event of Default;
Principal Paying Agent means the party designated from time to time as principal paying agent
under the Funding Documents;
Prospectus means the prospectus, dated on or about the date of this Agreement, relating to the
issuance of the Funding Instruments by the Lender;
Qualifying Jurisdiction means any jurisdiction which has a double taxation treaty with Ukraine
under which the payment of interest by Ukrainian borrowers to lenders established in such
jurisdiction is generally able to be made (upon completion of any necessary formalities required
in relation thereto) without deduction or withholding of Ukrainian income tax;
Rate of Interest means 8.25 per cent. per annum;
Rating Agency means Standard & Poor’s Rating Services, a division of The McGraw-Hill
Companies, Inc. (S&P), Moody’s Investors Service Limited (Moody’s), Fitch Ratings Limited
(Fitch) or any of their affiliates, successors or any rating agency substituted for any of them (or
any permitted substitute of them) by the Borrower, from time to time with the prior written
approval of the Lender and the Trustee;
Rating Categories means (i) with respect to S&P, any of the following categories (any of which
may or may not include a ‘‘+’’ or ‘‘-’’): AAA, AA, A, BBB, BB, B, CCC, CC, C and D (or
equivalent successor categories); (ii) with respect to Moody’s, any of the following categories
(any of which may or may not include a ‘‘1’’, ‘‘2’’ or ‘‘3’’): Aaa, Aa, A, Baa, Ba, B, Caa, Ca,
C and D (or equivalent successor categories); and (iii) the equivalent of any such categories of
S&P or Moody’s used by another rating agency (including, without limitation, Fitch), if
applicable, and each such category is referred to herein as a ‘‘full’’ Rating Category;
Rating Decline means that at any time within 90 days (which period shall be extended so long
as the long term foreign currency debt or deposit rating of the Borrower is under publicly
announced consideration for possible downgrade by any Rating Agency and is referred to
herein as the Relevant Period) after an announcement by the Cabinet of Ministers or the State
Property Fund of Ukraine as is referred to in the definition of Change of Control the long
term foreign currency debt or deposit rating of the Borrower is decreased or downgraded by a
Rating Agency by one or more full Rating Categories below such rating of the Borrower as of
the date hereof (or if a Rating Agency has not assigned any such rating as of the date hereof,
below the first such rating assigned to the Borrower by that Rating Agency after the date
hereof);
Relevant Event has the meaning given thereto in the Funding Documents;
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
133
Repayment Date means (i) 10 March 2016 or (ii) in case of Clauses 7.1 (Repayment for Tax
Reasons and Change in Circumstances), 7.2 (Repayment for Illegality), 7.3 (Repayment in the
event of a Change of Control) and 14.10 (Acceleration), the date specified in such Clauses, or, if
such day is not a Business Day in each case above, the next succeeding Business Day;
Repo means a securities repurchase or resale agreement or reverse repurchase or resale
agreement, a securities borrowing agreement or any agreement relating to securities which is
similar in effect to any of the foregoing and, for purposes of this definition, the term
‘‘securities’’ means any Capital Stock, debenture or other debt or equity instrument, or any
derivative thereof, whether issued by any private or public company, any Agency or any
supranational, international or multilateral organisation;
Reserved Rights has the meaning given thereto in the Funding Documents;
Same-Day Funds means U.S. dollar funds settled through the New York Clearing House
Interbank Payments System or such other funds for payment in U.S. dollars as the Lender may
at any time reasonably determine to be customary for the settlement of international
transactions in New York City of the type contemplated hereby;
Security Interest means any mortgage, pledge, encumbrance, lien, charge or other security
interest (including, without limitation, anything analogous to any of the foregoing under the
laws of any jurisdiction);
Subsidiary of a Person means another Person, being a corporation or other business or entity:
(a)
which is controlled, directly or indirectly, by that first-named Person; or
(b)
more than half the issued share capital of which is beneficially owned, directly or
indirectly, by that first-named Person;
Taxes means any taxes, levies, duties, imposts or other charges or withholding of a similar
nature no matter where arising (including interest and penalties thereon and additions thereto);
Taxing Authority has the meaning set out in Clause 8.1 (Additional Amounts);
Trustee means the party designated from time to time as trustee under the Funding Documents;
Ukraine means Ukraine and any province or political sub-division thereof or therein;
Ukrainian GAAP means generally accepted accounting principles, standards and practices in
Ukraine; and
United Kingdom means the United Kingdom of Great Britain and Northern Ireland and any
political sub-division or agency thereof or therein.
1.2
Interpretation
Any reference in this Agreement to:
the Borrower or the Lender includes its and any subsequent successors, assignees and chargees
in accordance with their respective interests including, without limitation, in case of the latter,
any entity substituted in place of the Lender as issuer of the Funding Instruments pursuant to
the Funding Documents;
a Business Day means any day (other than a Saturday, Sunday or public holiday) on which
commercial banks and foreign exchange markets settle payments (including dealings in foreign
currencies) in the principal financial centre for such currency and Kyiv;
control when used with respect to any Person means the power to direct the management and
policies of such Person or to control the composition of such Person’s board or board of
directors, directly or indirectly, whether through the ownership of voting securities, by contract
or otherwise and the terms ‘‘controlling’’ and ‘‘controlled’’ have meanings correlative to the
foregoing;
the equivalent on any given date in one currency (the first currency) of an amount denominated
in another currency (the second currency) is a reference to the amount of the first currency
which could be purchased with the amount of the second currency at the spot rate of exchange
quoted on the relevant Reuters page or, where the first currency is hryvnia and the second
currency is U.S. dollars (or vice versa), at the official exchange rate of the NBU, at or about
10.00 a.m. (New York City time) or, as the case may be, between 1.00 p.m. and 4.00 p.m.
(Kyiv time) on such date for the purchase of the first currency with the second currency;
134
a month means a period starting on one day in a calendar month and ending on the
numerically corresponding day in the next succeeding calendar month; provided that, where any
such period would otherwise end on a day which is not a business day, it shall end on the next
succeeding Business Day, unless that day falls in the next calendar month, in which case it
shall end on the immediately preceding Business Day and if a period starts on the last Business
Day in a calendar month or if there is no numerically corresponding day in the month in
which that period ends, that period shall end on the last Business Day in that later month (and
references to months shall be construed accordingly);
the rights of the Lender in this Agreement shall be read as references to rights of the Trustee
pursuant to the charge and assignment referred to in Clause 19.3 (Assignments by the Lender)
except as in relation to the Reserved Rights as specified in the Funding Documents; and
VAT means value added tax, including any similar tax which may be imposed in place thereof
from time to time.
1.3
Currency References
U.S.$ and U.S. dollars denote the lawful currency of the United States of America and hryvnia
denotes the lawful currency of Ukraine.
1.4
Statutes
Any reference in this Agreement to a statute shall be construed as a reference to such statute
as the same may have been, or may from time to time be, amended or re-enacted.
1.5
Headings
Clause and Schedule headings are for ease of reference only.
1.6
Amended Documents
Save where the contrary is indicated, any reference in this Agreement to any Funding
Document or any other agreement or document shall be construed as a reference to such
Funding Document or, as the case may be, such other agreement or document as the same
may have been, or may from time to time be, amended, varied, novated or supplemented.
2.
THE LOAN
2.1
Grant of the Credit Facility
The Lender grants to the Borrower, upon the terms and subject to the conditions hereof, a
single disbursement term credit facility in the amount of U.S.$500,000,000 (the Loan) and the
Borrower hereby agrees to borrow such amount from the Lender on the Borrowing Date,
subject as provided herein.
2.2
Purpose and Application
The Loan is intended to be used by the Borrower primarily to provide loans to its customers
and for general corporate purposes and, without affecting the obligations of the Borrower in
any way, the Lender shall not be obliged to concern itself with such application.
3.
AVAILABILITY OF THE LOAN
3.1
Draw-down
Subject to the terms and conditions set out herein, the Loan will be available by way of a
single draw-down which will be made by the Lender to the Borrower on the Borrowing Date
by payment of the proceeds of the Loan to the Borrower’s U.S. dollar account with
JP Morgan Chase Bank, New York, swift code CHASUS33, for the account of Joint Stock
Company ‘‘State Savings Bank of Ukraine’’ account number 001-1-194057 with swift code
COSBUAUK, provided that the Loan will only be advanced if:
(a)
the Lender has confirmed to the Borrower that it has received all of the documents listed
in Schedule 1 (Conditions Precedent Documents) hereto and that each is in form and
substance satisfactory to the Lender, save as the Lender may otherwise agree;
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
135
3.2
(b)
the Lender has received (i) the full amount of the proceeds in accordance with the
Funding Instruments and (ii) in full the amount referred to in Clause 3.2 (Fees) below;
and
(c)
as of the Borrowing Date (i) no event has occurred or circumstance has arisen which
would constitute an Event of Default or a Potential Event of Default, (ii) the
representations and warranties set out in Clause 11 (Representations and Warranties of the
Borrower) are true and accurate with respect to the facts and circumstances then
subsisting and (iii) the fees owed by the Borrower to the Lender pursuant to Clause 3.2
(Fees) below shall have been paid.
Fees
The Borrower hereby agrees that it shall pay to the Lender, in Same-Day Funds, all
required to be paid by the Borrower to the Lender pursuant to and in accordance
Fees Letter between the Borrower and the Lender dated 4 March 2011 by 4:30 p.m.
time) on the Business Day preceding the Borrowing Date or as otherwise provided in
Letter.
amounts
with the
(London
the Fees
4.
INTEREST PERIODS
The Borrower will pay interest semi-annually in U.S. dollars to the Lender on the outstanding
principal amount of the Loan from time to time at the Rate of Interest, calculated in
accordance with the provisions of this Agreement (including, without limitation, Clause 5.2
(Calculation of Interest)). Interest shall accrue on the outstanding principal amount of the Loan
from and including the Borrowing Date. Each period beginning on (and including) the
Borrowing Date or any Interest Payment Date and ending on (but excluding) the next Interest
Payment Date or the Repayment Date is herein called an Interest Period. Subject as provided
in Clause 5.2 (Calculation of Interest), interest on the Loan will cease to accrue on the
Repayment Date unless payment of principal is improperly withheld or refused, in which event
interest will continue to accrue (before and after any judgment) on the outstanding principal
amount of the Loan at the Rate of Interest to but excluding the date on which payment in full
of the outstanding principal amount of the Loan is made.
5.
PAYMENT AND CALCULATION OF INTEREST
5.1
Payments of Interest
The Borrower shall pay to the Account in same day funds accrued interest on the outstanding
principal amount of the Loan semi-annually in arrear in respect of each Interest Period
calculated in accordance with Clause 5.2 (Calculation of Interest) not later than 11.00 a.m.
(New York City time) on the Business Day falling two Business Days prior to the Interest
Payment Date on which such Interest Period ends.
5.2
Calculation of Interest
The Borrower shall compute the amount of interest accrued on the outstanding principal
amount of the Loan on a monthly basis, subject to Clause 20.1 (Evidence of Debt). The
amount of interest payable in respect of the Loan for any Interest Period shall be calculated by
applying the Rate of Interest to the Loan, dividing the product by two and rounding the
resulting figure to the nearest cent (half a cent being rounded upwards). The amount of interest
payable in respect of the Loan for any period other than an Interest Period shall be calculated
on the basis of a year of 360 days consisting of 12 months of 30 days each and, in the case of
an incomplete month, the actual number of days elapsed.
5.3
Assumption when Calculating Interest
Whenever under this Agreement interest is to be calculated to the last day of an Interest Period
and the calculation is required to be made before such last day, the parties shall assume that
the amount of the Loan outstanding on the last day of the relevant Interest Period is the same
as the amount of the Loan outstanding on the day of the calculation.
6.
REPAYMENT
Except as otherwise provided herein, the Borrower shall, not later than 11.00 a.m. (New York
City time) two Business Days prior to the Repayment Date falling on 10 March 2016, repay in
full in same day funds the outstanding principal amount of the Loan together with, to the
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
136
extent not already paid in accordance with Clause 5.1 (Payment of Interest), all interest payable
in respect of the last Interest Period (calculated to the Repayment Date) and all other amounts
payable hereunder (calculated as aforesaid).
7.
REPAYMENT UPON THE OCCURRENCE OF CERTAIN EVENTS
7.1
Repayment for Tax Reasons and Change in Circumstances
If,
(a)
as a result of the application of, or any amendment to, or a change in or official
interpretation of (i) the Double Tax Treaty (or in the double taxation treaty between
Ukraine and any Qualifying Jurisdiction in which the Lender or any successor thereto is
resident for tax purposes) or (ii) the laws or regulations of the United Kingdom or
Ukraine (or any Qualifying Jurisdiction where the Lender is resident for tax purposes) or
of any political sub-division thereof or any authority therein having power to tax or any
Agency therein, the Borrower would thereby be required to pay Additional Amounts in
respect of Taxes as provided in Clause 8.1 (Additional Amounts) or Indemnity Amounts as
provided in Clause 8.3 (Indemnity Amounts); or
(b)
the Lender ceases to be resident for tax purposes in a Qualifying Jurisdiction, or has a
permanent establishment in Ukraine for the purposes of the Double Tax Treaty, and as a
result the Borrower would be required to withhold or deduct an amount on account of
tax from any payment to be made under this Agreement; or
(c)
(for whatever reason) the Borrower would have to or has been required to pay additional
amounts pursuant to Clause 10 (Changes in Circumstances),
and, in any such case, such obligation cannot be avoided by the Borrower taking reasonable
measures available to it, then the Borrower may (unless such repayment would be prohibited
by Ukrainian legislation effective as at the proposed date of such repayment), upon not less
than 30 days’ written notice to the Lender and to the Trustee specifying the date of payment
and including an Officers’ Certificate to the effect that the Borrower would be required in the
case of (a), (b) and (c) above to pay such Additional Amounts, Indemnity Amounts or
additional amounts (including additional amounts payable pursuant to Clause 10 (Changes in
Circumstances)), and in the case of (b) above to withhold or deduct such amounts and such
obligation cannot be avoided by the Borrower taking reasonable measures, supported (where
the certification relates to tax matters) by an opinion of an independent tax adviser of
recognised standing in the relevant tax jurisdiction, repay the Loan in whole (but not in part)
together with any Additional Amounts then payable under Clause 8.1 (Additional Amounts),
Indemnity Amounts payable under Clause 8.3 (Indemnity Amounts), additional amounts and
accrued interest. Any such notice of repayment given by the Borrower shall be irrevocable and
shall oblige the Borrower to make such repayment on such date. No such notice shall be given
earlier than 90 calendar days prior to the earliest date on which the Borrower would be obliged
to pay such Additional Amounts, Indemnity Amounts or additional amounts, or deduct or
withhold such amounts, as the case may be.
7.2
Repayment for Illegality
If, at any time, it is or would be unlawful or contrary to any applicable law or regulation or
regulatory requirement or directive of any agency of any state or otherwise for the Lender to
make, fund or allow all or part of the Funding Instruments or the Loan to remain outstanding
or for the Lender to maintain or give effect to any of its obligations or rights in connection
with this Agreement and/or to charge or receive or to be paid interest at the rate applicable in
relation to the Loan (an Illegality), then the Lender shall deliver to the Borrower a written
notice (with a copy to the Trustee) (setting out in reasonable detail the nature and extent of
the relevant circumstances) to that effect and:
(a)
if the Loan has not been made, the Lender shall not thereafter be obliged to make the
Loan; and
(b)
if the Loan is then outstanding and the Lender so requires, the Borrower shall, on the
latest date permitted by the relevant law or on such earlier day as the Borrower elects (as
notified to the Lender not less than 30 days prior to the date of repayment), repay the
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
137
whole (but not part only) of the outstanding principal amount of the Loan together with
accrued interest (up to but excluding the date of such payment) thereon and all other
amounts owing to the Lender hereunder.
7.3
Repayment in the event of a Change of Control
The Borrower shall notify the Lender and the Trustee promptly upon the occurrence of a
Change of Control. In the event of a Change of Control, the Lender (or the Trustee, as the
case may be) may require the Borrower to repay the Loan together with all accrued and
unpaid interest and any other amounts outstanding hereunder on the Change of Control
Payment Date, to the extent and in the amount that the Lender is required to pay the holders
of the Funding Instruments as a result thereof as set forth in a written notice from the Lender
to the Borrower (with a copy to the Trustee), including computation of such amount and
specifying the Change of Control Payment Date, given at least five Business Days prior to the
Change of Control Payment Date. Taking into account the terms of the Funding Instruments,
the Lender shall, where reasonably practicable, specify a Change of Control Payment Date
which falls before the date on which the actual Change of Control (as provided in paragraph
(a) of the definition of that term) takes place.
7.4
Costs of Repayment
The Borrower shall, not later than 11.00 a.m. (New York City time) two Business Days prior
to the date of a repayment made in accordance with this Clause 7 (Repayment upon the
Occurrence of Certain Events), pay all accrued interest (calculated to (but excluding) the date of
repayment) and all other amounts owing or payable to the Lender hereunder. The Borrower
shall indemnify the Lender on written demand against any administrative costs and legal
expenses reasonably incurred and (if and to the extent required by applicable law) properly
documented by the Lender on account of any repayment made in accordance with this Clause
7 (Repayment upon the Occurrence of Certain Events).
7.5
No Other Repayments and No Reborrowing
The Borrower shall not repay the whole or any part of the outstanding principal amount of the
Loan except at the times and in the manner expressly provided for in this Agreement. No
amount prepaid under this Agreement may be reborrowed.
7.6
Purchase of Funding Instruments and Reduction of Loan Upon Cancellation of Funding Instruments
The Borrower or any member of the Group may from time to time deliver or cause to be
delivered to the Lender Funding Instruments, together with a request for the Lender to present
such Funding Instruments to the Principal Paying Agent for cancellation, and may from time
to time procure the delivery to the Principal Paying Agent of a Global Note Certificate (as
such term is defined in the Funding Documents) with instructions to cancel a specified
aggregate principal amount of Funding Instruments represented thereby, whereupon the Lender,
as issuer of the Funding Instruments, shall request the cancellation of such Funding
Instruments (or specified aggregate principal amount of Funding Instruments represented by
such Global Note Certificate) as provided in the Funding Documents. Upon any such
cancellation a principal amount of the Loan equal to the principal amount of such Funding
Instruments shall be deemed to have been repaid as of the date of such cancellation and no
further payment shall be made or required to be made by the Borrower in respect of such
amounts. The Borrower shall, upon the request of the Lender or the Trustee from time to time,
advise the person making the request of the aggregate principal amount of Funding
Instruments then held by or on behalf of the Borrower.
8.
TAXES
8.1
(a)
Additional Amounts
All payments to be made by the Borrower under this Agreement shall be made in full without
set-off or counterclaim, free and clear of and without deduction for or on account of any
present or future Taxes imposed by any taxing authority of or in, or having authority to tax
in, Ukraine, the United Kingdom or any Qualifying Jurisdiction in which the Lender or any
successor thereto is resident for tax purposes (each a Taxing Authority), unless the Borrower is
required by applicable law to make such payment subject to the deduction or withholding of
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
138
such Taxes. In the event that the Borrower is required to make any such payment subject to
deduction or withholding of any such Tax the Borrower shall, on the due date for such
payment, pay such additional amounts (Additional Amounts) as may be necessary to ensure that
the Lender or the Trustee, as the case may be, receives a net amount in U.S. dollars which,
following any such deduction or withholding on account of Taxes, shall be not less than the
full amount which it would have received had the payment been made without such deduction
or withholding and shall deliver to the Lender (or the Trustee, as the case may be) without
undue delay, evidence satisfactory to the Lender (or the Trustee, as the case may be) of such
deduction or withholding and of the accounting therefor to the relevant authority.
Notwithstanding the foregoing, the Borrower shall not be obliged to pay any Additional
Amounts if and to the extent that the relevant withholding or deduction is required following
and on account of the occurrence of a Relevant Event.
(b)
The Borrower shall not be required to pay to the Lender any Additional Amount under
paragraph (a) which is greater than the amount which would have been payable by it to the
Lender if the Lender was a tax resident of the United Kingdom or a Qualifying Jurisdiction at
the time of such payment but on that date the Lender is not or ceased to be a tax resident of
the United Kingdom or a Qualifying Jurisdiction other than as a result of any change after the
date it became a Lender under this Agreement in (or in the interpretation, administration or
application of) any law or Double Tax Treaty or any published practice or concession of any
relevant taxing authority or to the extent that the Borrower is able to demonstrate that the
requirement to make the tax deduction would not have arisen had the Lender complied with its
obligations under Clause 8.2 (Double Tax Treaty Relief) below.
(c)
At least 30 calendar days prior to each date on which any payment under or with respect to
the Loan is due and payable, if the Borrower will be obliged to pay Additional Amounts with
respect to such payment (upon and subject to written notice by the Lender or by the Trustee),
the Borrower will deliver to the Lender (and to the Trustee) an Officers’ Certificate stating the
fact that such Additional Amounts will be payable and the amounts so payable. Whenever this
Agreement mentions, in any context, the payment of amounts based upon the principal or
premium, if any, interest or of any other amount payable under or with respect to the Loan,
this includes, without duplication, payment of any Additional Amounts and Indemnity
Amounts that may be applicable.
The foregoing provisions shall apply, modified as necessary, to any Taxes imposed or levied by any
Taxing Authority in any jurisdiction in which any successor obligor to the Borrower is organised.
8.2
(a)
Double Tax Treaty Relief
The Lender will use its reasonable endeavours to furnish the Borrower, as soon as practicable
after the start of each calendar year or, in any event, not later than 14 days prior to the first
Interest Payment Date in each calendar year (or as frequently as required under Ukrainian law
and requested by the Borrower to enable the Borrower to claim relief as provided below) with
a duly signed and completed tax certificate issued by the competent taxing authority in the
United Kingdom in respect of that year confirming that the Lender is a tax resident in the
United Kingdom within the meaning of the Double Tax Treaty (each, a Tax Certificate). The
Borrower shall claim relief from deducting withholding tax or a reduction in the withholding
tax rate to the maximum extent possible in accordance with the Double Tax Treaty in respect
of payments to be made by the Borrower under this Agreement.
(b)
Each of the Lender and the Borrower shall make reasonable and timely efforts to co-operate
and assist each other in obtaining relief from withholding of Ukrainian income tax pursuant to
the Double Tax Treaty which shall, for the avoidance of doubt, include (but not be limited to)
the Lender making reasonable and timely efforts to:
(i)
furnish the Borrower with such information or forms (including a power of attorney in
form and substance acceptable to the Borrower authorising it to file each Tax Certificate
on behalf of the Lender with the relevant taxing authority) as required under Ukrainian
law to enable the Borrower to apply to obtain relief from deduction or withholding of
Ukrainian tax or, as the case may be, to apply to obtain a tax refund if a relief from
deduction or withholding of Ukrainian tax has not been obtained on the basis of the
relevant provisions of the Double Tax Treaty, and
139
(ii)
obtain any available tax refund if a relief from deduction or withholding of Ukrainian tax
has not been obtained on the basis of the relevant provisions of the Double Tax Treaty;
and
(iii) procure that each Tax Certificate is stamped or otherwise approved by the competent Tax
Authority, and apostilled or otherwise legalised.
(c)
If a relief from deduction or withholding of Ukrainian tax or a tax refund under this Clause
8.2 has not been obtained and further to an application of the Borrower to the relevant
Ukrainian tax authorities the latter request the Lender’s hryvnia bank account details for the
purposes of payment of such tax refund directly to the Lender, the Lender shall at the request
of the Borrower (i) use reasonable efforts to procure that such hryvnia bank account of the
Lender is duly opened and maintained, and (ii) thereafter furnish the Borrower with the details
of such hryvnia bank account. This paragraph (c) is without prejudice to the Borrower’s
obligations to pay Additional Amounts pursuant to Clause 8.1 (Additional Amounts).
(d)
Nothing contained in this Clause 8.2 shall interfere with the right of the Lender to arrange its
affairs generally in whatever manner it thinks fit nor oblige the Lender to disclose confidential
information or any information relating to its affairs generally. The Borrower and the Lender
will inform each other, in a reasonable and timely manner, on the status of the procedures and
the steps necessary to be taken in pursuance of this Clause 8.2. The Lender makes no
representation as to the application or interpretation of the Double Tax Treaty.
(e)
If the Lender becomes resident for tax purposes in another Qualifying Jurisdiction, references in
paragraphs (a) and (b) to taxing authority of the United Kingdom, Tax Certificate and Double
Tax Treaty shall be read, respectively, as including references to the taxing authority of the
Qualifying Jurisdiction, a Qualifying Jurisdiction Tax Certificate and the double tax treaty
between Ukraine and the Qualifying Jurisdiction.
8.3
Indemnity Amounts
Without prejudice to or duplication of the provisions of Clause 8.1 (Additional Amounts), if the
Lender notifies the Borrower that:
(a)
it is obliged to make any deduction or withholding for or on account of any Taxes from
any payment which the Lender (as issuer of the Funding Instruments) is obliged to make
under or in respect of the Funding Instruments or any Funding Documents and the
Lender (as issuer of the Funding Instruments) is required under the terms and conditions
of the Funding Instruments or such Funding Documents to pay additional amounts to
the holders of the Funding Instruments in connection therewith, the Borrower shall pay to
the Lender within 30 days of such notice (and otherwise in accordance with the terms of
this Agreement) such additional amounts as are equal to the additional payments which
the Lender (as issuer of the Funding Instruments) would be required to make under the
terms and conditions of the Funding Instruments or such Funding Documents, assuming
in each case that an equivalent amount had been received from the Borrower, in order
that the net amount received by each holder of Funding Instruments or other party to the
relevant Funding Documents is equal to the amount which such holder or party would
have received had no such withholding or deduction been required to be made; and/or
(b)
it is obliged to pay any Taxes imposed by a Taxing Authority (other than Taxes assessed
on the Lender by reference to its overall net income) in relation to any payments received
by it under this Agreement, the Funding Instruments or any Funding Documents, the
Borrower shall, as soon as reasonably practicable following, and in any event within 60
calendar days of, a written demand made by the Lender, indemnify the Lender in relation
to such payment or liability provided that (if and to the extent required by applicable law)
such payment or liability is properly documented.
Any payments required to be made by the Borrower under this Clause 8.3 are collectively
referred to as Indemnity Amounts. For the avoidance of doubt, the provisions of this Clause 8.3
shall not apply to any withholding or deductions of Taxes with respect to the Loan which are
subject to payment of Additional Amounts under Clause 8.1 (Additional Amounts).
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
140
8.4
Tax Claims
If the Lender intends to make a claim pursuant to Clause 8.3 (Indemnity Amounts), it shall
notify the Borrower thereof as soon as reasonably practicable after the Lender becomes aware
of any obligation to make the relevant withholding, deduction or payment; provided that
nothing herein shall require the Lender to disclose any confidential information relating to the
organisation of its affairs.
8.5
(a)
Tax Credits and Tax Refunds
If a payment is made under Clause 8.1 (Additional Amounts) or 8.3 (Indemnity Amounts) by the
Borrower for the benefit of the Lender and the Lender determines in its absolute discretion
(acting in good faith) that it has received or been granted a credit against, a relief or remission
for or a repayment of, any Taxes, then, if and to the extent that the Lender, in its absolute
discretion (acting in good faith), determines that such credit, relief, remission or repayment is in
respect of or calculated by reference to the corresponding deduction, withholding, liability,
expense, loss or payment giving rise to such payment by the Borrower, the Lender shall, to the
extent that it can do so without prejudice to the retention of the amount of such credit, relief,
remission or repayment, pay to the Borrower such amount as the Lender shall, in its absolute
discretion (acting in good faith), have concluded to be attributable to such deduction,
withholding, liability, expense, loss or payment; provided that the Lender shall not be obliged to
make any payment under this Clause 8.5 in respect of any such credit, relief, remission or
repayment until the Lender is, in its absolute discretion (acting in good faith), satisfied that its
Tax affairs for its Tax year in respect of which such credit, relief, remission or repayment was
obtained have been finally settled and further provided that the Lender shall not be obliged to
make any such payment if and to the extent that the Lender determines in its absolute
discretion (acting in good faith) that to do so would leave it (after the payment) in a worse
after-Tax position than it would have been in had the payment not been required under Clause
8.1 (Additional Amounts) or 8.3 (Indemnity Amounts). Without prejudice to the Lender’s
obligations under Clause 8.2 (Double Tax Treaty Relief), nothing contained in this Clause 8.5
shall interfere with the right of the Lender to arrange its Tax affairs in whatever manner it
thinks fit nor oblige the Lender to disclose confidential information or any information relating
to its Tax affairs generally or any computations in respect thereof.
(b)
If as a result of a failure to obtain relief from deduction or withholding of any Tax imposed
by any Taxing Authority, in particular in accordance with the Double Tax Treaty, such Tax is
deducted or withheld by the Borrower pursuant to Clause 8.1 (Additional Amounts) and an
Additional Amount is paid by the Borrower to the Lender in respect of such deduction or
withholding, the Borrower may apply, under the supervision and on behalf of the Lender, to
the relevant Taxing Authority for a Tax refund. If and to the extent that any Tax refund is
credited by such Taxing Authority to a bank account of the Lender, the Lender shall as soon
as reasonably possible notify the Borrower of the receipt of such Tax refund and promptly
transfer the entire amount of the Tax refund to an account specified by the Borrower if and to
the extent that the Lender determines in its absolute discretion (acting in good faith) that to do
so will leave it (after the payment and after deduction of costs and expenses incurred in
relation to such Tax refund for which the Borrower is liable) in no worse an after-Tax position
than it would have been in had there been no failure to obtain relief from such withholding or
deduction.
8.6
Tax Position of the Lender
The Lender represents that it (i) is a resident in the United Kingdom for United Kingdom tax
purposes as a result of being a United Kingdom incorporated company and is subject to
taxation in the United Kingdom and has applied for a Tax Certificate for 2011, (ii) does not
have a permanent establishment in Ukraine, and (iii) does not have any current intentions to
effect, during the term of the Loan, any corporate action or reorganisation or change of taxing
jurisdiction that would result in the Lender ceasing to be a resident in the United Kingdom.
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
141
9.
9.1
TAX RECEIPTS
Notification of Requirement to Deduct Tax
If, at any time, the Borrower is required by law to make any deduction or withholding from
any sum payable by it hereunder (or if thereafter there is any change in the rates at which or
the manner in which such deductions or withholdings are calculated), the Borrower shall
promptly notify the Lender.
9.2
(a)
Evidence of Payment of Tax
The Borrower shall provide the Lender with Tax receipts evidencing the payment of any Taxes
deducted or withheld by it from each Tax Authority imposing such Taxes or, if such receipts
are not obtainable, other evidence of such payments by the Borrower reasonably acceptable to
the Lender. The Borrower will also provide English translations of such receipts.
(b)
The Lender will use its reasonable endeavours to provide the Borrower with Tax receipts
evidencing the payment of any Taxes deducted or withheld by it from each Tax Authority
imposing such Taxes or, if such receipts are not obtainable, other evidence of such payments
by the Lender reasonably acceptable to the Borrower.
10.
10.1
CHANGES IN CIRCUMSTANCES
Increased Costs
If, by reason of any Change of Law, other than a Change of Law which relates to the basis of
computation of, or rate of, Tax on, the net income of the Lender:
(a)
the Lender incurs an additional cost as a result of the Lender entering into or performing
its obligations (including its obligation to make the Loan) under this Agreement
(excluding Taxes payable by the Lender on its overall net income); or
(b)
the Lender becomes liable to make any additional payment on account of Taxes or
otherwise (not being Taxes imposed on its net income or the amounts due pursuant to the
Fees Letter) on or calculated by reference to the amount of the Loan and/or to any sum
received or receivable by it hereunder except where compensated under Clause 8.1
(Additional Amounts) or under Clause 8.3 (Indemnity Amounts),
then the Borrower shall, from time to time within 30 days of written demand of the Lender,
pay to the Lender amounts sufficient to hold harmless and indemnify it from and against, as
the case may be, such cost or liability, provided that (if and to the extent required by applicable
law) the cost or liability is properly documented and that the Lender will not be entitled to
indemnification where such additional cost or liability arises as a result of the gross negligence,
fraud or wilful default of the Lender and provided, further, that the amount of such increased
cost or liability shall be deemed not to exceed an amount equal to the proportion of any cost
or liability which is directly attributable to this Agreement.
10.2
Increased Costs Claims
If the Lender intends to make a claim pursuant to Clause 10.1 (Increased Costs), it shall
promptly notify the Borrower thereof and provide a description in writing in reasonable detail
of the relevant reason (as described in Clause 10.1 (Increased Costs) above) including a
description of the relevant affected jurisdiction or country and the date on which the change in
circumstances took effect. This written description shall demonstrate the connection between the
change in circumstance and the increased costs and shall be accompanied by relevant
supporting documents evidencing the matters described therein, provided that nothing herein
shall require the Lender to disclose any confidential information relating to the organisation of
its or any other Person’s affairs.
10.3
Mitigation
If circumstances arise which would result in any payment being required to be made by the
Borrower pursuant to Clauses 8.1 (Additional Amounts) or 8.3 (Indemnity Amounts) or this
Clause 10, then, without in any way limiting, reducing or otherwise qualifying the rights of the
Lender or the Borrower’s obligations under any of the above mentioned provisions, the Lender
shall as soon as reasonably practicable upon becoming aware of the same notify the Borrower
thereof and, in consultation with the Borrower and to the extent it can lawfully do so and
without material prejudice to its own position, take reasonable steps to avoid or mitigate the
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
142
effects of such circumstances including (without limitation) by the change of its lending office .
Provided that the Lender shall be under no obligation to take any such action if, in its
reasonable opinion, to do so might have any adverse effect upon its business, operations or
financial condition or might be in breach of any provisions of, or any arrangements which it
may have made in connection with the Funding Documents.
11.
REPRESENTATIONS AND WARRANTIES OF THE BORROWER
The Borrower makes the representations and warranties set out in Clause 11.1 (Status; Material
Subsidiaries) to Clause 11.14 (Compliance with Laws) (inclusive) on the date hereof and
acknowledges that the Lender has entered into this Agreement in reliance on those
representations and warranties.
11.1
Status; Material Subsidiaries
It is duly established and validly existing under Ukrainian law as a bank in the form of a joint
stock company, has full power and authority to own, lease and operate its assets and
properties and conduct its business as it is currently conducted and is able lawfully to execute
and perform its obligations and the transactions contemplated under this Agreement. At the
date of this Agreement the Borrower has no Material Subsidiaries.
11.2
Governmental Approvals
Save as provided in Clause 13.1 (Maintenance of Legal Validity), all actions or things required
to be taken, fulfilled or done by the applicable laws and regulations of Ukraine (including,
without limitation the obtaining of any authorisation, order, licence or qualification of or with
any court or governmental agency) and all registrations, filings or notarisations required by the
laws and regulations of Ukraine in order to ensure (i) that the Borrower and each of its
Subsidiaries is able to own its assets and carry on its business as currently conducted and, if
not, the absence of which could not reasonably be expected to have a Material Adverse Effect
and (ii) the due execution, delivery, validity and performance by the Borrower of this
Agreement has been obtained, fulfilled or done and is in full force and effect (provided that the
registration of this Agreement with the NBU will be obtained upon execution of this
Agreement but not later than the Borrowing Date).
11.3
Pari Passu Obligations
Under the laws of Ukraine in force at the date of this Agreement, the claims of the Lender
against the Borrower under this Agreement will rank at least pari passu in right of payment
with the claims of all its other unsecured and unsubordinated creditors, save those whose
claims are mandatorily preferred by any bankruptcy, insolvency, liquidation, moratorium or
similar laws of general application.
11.4
No Deduction
Without prejudice to the provisions of Clause 8.1 (Additional Amounts), under the laws of
Ukraine in force at the date of this Agreement, in accordance with the terms of the Double
Tax Treaty and subject to the due satisfaction by the payee of certain conditions set forth
therein and of certain requirements of applicable Ukrainian legislation, in particular as
provided in Clause 8.2 (Double Tax Treaty Relief), payments of interest by the Borrower to the
payee under this Agreement may be made without deduction on account of the generally
applicable withholding tax (at a rate of 15 per cent.) established by applicable Ukrainian
legislation.
11.5
Governing Law
Under the laws of Ukraine in force at the date of this Agreement, in any proceedings taken in
Ukraine in relation to this Agreement, the choice of English law as the governing law of this
Agreement and any arbitral award with respect to this Agreement obtained in the United
Kingdom will be recognised and enforced in Ukraine after compliance with the applicable
procedural rules in Ukraine.
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
143
11.6
Admissibility in Evidence
All acts, conditions and things required to be done, fulfilled and performed (other than by the
Lender) to make this Agreement admissible in evidence in Ukraine (whether in arbitration
proceedings or otherwise) have been done, fulfilled and performed.
11.7
Valid and Binding Obligations
Upon registration of this Agreement with the NBU, the obligations expressed to be assumed by
the Borrower in this Agreement will be legal, valid and binding, subject to applicable
bankruptcy, insolvency, fraudulent conveyance, reorganisation, moratorium and similar laws
relating to or affecting creditors’ rights generally and to general principles of equity, enforceable
against it.
11.8
No Stamp Taxes
Under the laws of Ukraine in force at the date of this Agreement, the execution and delivery
of any Funding Document is not subject to any registration tax, stamp duty or similar levy
imposed by any Taxing Authority of or in, or having authority to tax in, Ukraine.
11.9
No Default
No event has occurred or circumstance has arisen which would constitute an Event of Default
or a Potential Event of Default.
11.10 No Material Proceedings
There are no legal or administrative or arbitration proceedings current or pending or, to the
best of the knowledge and belief of the Borrower, threatened before any court, tribunal,
arbitration panel or Agency which might have a Material Adverse Effect.
11.11 No Material Adverse Change
Save as disclosed in the Prospectus, since 30 September 2010 there has been no material
adverse change, or any development involving a prospective material adverse change of which
the Borrower is or might reasonably be expected to be aware, in the business, financial
condition or results of operations of the Group.
11.12 Financial Statements
The Borrower’s audited financial statements for the two financial years ended 31 December
2009 and 2008, together with the related notes appearing in the Prospectus, were prepared in
accordance with International Financial Reporting Standards (IFRS) and its audited condensed
interim financial information for the nine months ended 30 September 2010 and 30 September
2009 was prepared in accordance with International Accounting Standard 34 ‘‘Interim Financial
Reporting’’, consistently applied and present (in conjunction with the notes thereto) fairly in all
material respects (in accordance with IFRS in the case of audited financial statements) the
financial condition of the Group as at the dates as of which they were prepared and the results
of the operations of the Group during the periods then ended.
11.13 Execution of Agreements
Its execution and delivery of this Agreement and its exercise of its rights and performance of
its obligations hereunder do not and will not:
(a)
conflict with or result in a breach of any of the terms of, or constitute a default under,
any material instrument, agreement or order to which the Borrower or any of its Material
Subsidiaries is a party or by which it or its properties is bound;
(b)
conflict with the provisions of the constitutional documents of the Borrower or any
resolution of its shareholders; or
(c)
give rise to any event of default or moratorium in respect of any of the obligations of the
Borrower or any of its Material Subsidiaries or the creation of any lien, encumbrance or
other security interest (howsoever described) in respect of any of the assets of the
Borrower or any of its Material Subsidiaries, which, in any case, could reasonably be
expected to have a Material Adverse Effect on the Borrower’s ability to perform its
obligations under this Agreement.
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
144
11.14 Compliance with Laws
The Borrower and each of its Subsidiaries is in compliance with, in all material respects, all
applicable laws and regulations.
11.15 Repetition
Each of the representations and warranties contained in this Clause 11 shall be deemed to be
repeated by the Borrower on the Borrowing Date.
12.
REPRESENTATIONS AND WARRANTIES OF THE LENDER
The Lender makes the representations and warranties set out in Clause 8.6 (Tax Position of the
Lender) and this Clause 12 and acknowledges that the Borrower has entered into this
Agreement in reliance on those representations and warranties.
12.1
Status
The Lender is a public limited company duly incorporated under the laws of the United
Kingdom and is resident for United Kingdom taxation purposes in the United Kingdom and
has full corporate power and authority to enter into this Agreement and each Funding
Document and to undertake and perform the obligations expressed to be assumed by it herein
and therein.
12.2
Authorisation
Each of this Agreement and each Funding Document has been duly authorised, executed and
delivered by the Lender and is a legal, valid and binding obligation of the Lender, enforceable
against the Lender in accordance with its terms, except that the enforcement thereof may be
subject to bankruptcy, insolvency, fraudulent conveyance, reorganisation, moratorium and other
similar laws relating to or affecting creditors’ rights generally and to general principles of
equity.
12.3
Consents and Approvals
All authorisations, consents and approvals required by the Lender for or in connection with the
execution of this Agreement and each Funding Document and the performance by the Lender
of the obligations expressed to be undertaken in such agreements have been obtained and are
in full force and effect.
12.4
No Conflicts
The execution of this Agreement and each Funding Document and the undertaking and
performance by the Lender of the obligations expressed to be assumed by it herein and therein
will not conflict with, or result in a breach of or default under, the laws of the United
Kingdom.
13.
COVENANTS
The covenants in this Clause 13 remain in force from the effective date of this Agreement for
so long as the Loan or any part of it is or may be outstanding.
13.1
Maintenance of Legal Validity
The Borrower shall obtain, comply with the terms of and do all that is necessary to maintain
in full force and effect all authorisations, approvals, licences and consents and make or cause
to be made all registrations, recordings and filings required in or by the applicable laws and
regulations of Ukraine to enable it lawfully to enter into and perform its obligations under this
Agreement (including in respect of any payments due hereunder) to which it is a party and to
ensure the legality, validity, enforceability or admissibility in evidence in Ukraine of this
Agreement.
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
145
13.2
Notification of Default
The Borrower shall promptly inform the Lender and the Trustee in writing on becoming aware
of the occurrence of any Event of Default or Potential Event of Default and, upon receipt of a
written request to that effect from the Lender or the Trustee, confirm to the Lender and the
Trustee that, save as previously notified to the Lender and the Trustee or as notified in such
confirmation, no Event of Default or Potential Event of Default has occurred.
13.3
Claims Pari Passu
The Borrower shall ensure that at all times the claims of the Lender and the Trustee against it
under this Agreement rank at least pari passu in right of payment with the claims of all other
unsecured and unsubordinated creditors of the Borrower, save for those claims that are
mandatorily preferred by any bankruptcy, insolvency, liquidation or similar laws of general
application.
13.4
Negative Pledge
The Borrower shall not and shall not permit any of its Material Subsidiaries, directly or
indirectly, to create, incur or suffer to exist any Security Interests, other than Permitted
Security Interests, on any of its or their assets, now owned or hereafter acquired, securing any
Indebtedness or any Guarantee of any Indebtedness, unless the Loan is secured equally and
rateably with such other Indebtedness or Guarantee or otherwise as approved by the Lender
and the Trustee.
13.5
Mergers
The Borrower shall not, and shall ensure that none of its Material Subsidiaries will, without
the prior written consent of the Lender and the Trustee, enter into any reorganisation (whether
by way of a merger, accession, division, separation or transformation, as these terms are
construed under applicable Ukrainian legislation), or participate in any other type of corporate
reconstruction, if any such reorganisation or other type of corporate reconstruction would
result in a Material Adverse Effect, provided that, the Borrower may in a single transaction or
a series of related transactions, directly or indirectly, consolidate or merge with or into, or
convey, transfer, lease, or otherwise dispose of, all or substantially all of the Borrower’s
properties or assets (determined on a consolidated basis), to any Subsidiary of the Borrower,
where the resulting, surviving or transferee Person (the Successor Entity), shall be the Borrower
or, if not the Borrower, shall be a Person organised and validly existing under the laws of
Ukraine and such Successor Entity, if not the Borrower, shall expressly assume, by an
agreement supplemental to this Agreement in form and substance satisfactory to the Lender
and the Trustee, executed and delivered to the Lender and the Trustee, the due and punctual
payment of the principal and interest under this Agreement and the performance and
observance of every covenant of the Borrower under this Agreement.
13.6
(a)
Disposals
Without prejudice to the provisions of Clause 13.7 (Transactions with Affiliates), the Borrower
shall not, and shall ensure that none of its Material Subsidiaries will, within a 12 month
period, sell, lease, transfer or otherwise dispose of, to a Person other than the Borrower or a
Subsidiary of the Borrower, as the case may be, by one or more transactions or series of
transactions (whether related or not), the whole or any part of its revenues or its assets which
together constitute more than 10 per cent. of the gross assets of the Group unless such
transaction(s) is/are on an arm’s-length basis and has/have been approved by a decision
adopted by the competent governing body of the Borrower or the relevant Material Subsidiary
(as the case may be).
(b)
This Clause 13.6 shall not apply to (i) any sale, lease, transfer or other disposition of any
assets of the Borrower or property pledged as collateral by or to the Borrower or any of its
Subsidiaries in the ordinary course of the Borrower’s or, as the case may be, the relevant
Subsidiary’s business, (ii) any revenues or assets (or any part thereof) the subject of any
securitisation of receivables, asset-backed financing or similar financing structure whereby all
payment obligations are to be discharged primarily from such assets or revenues provided that
principal amount raised pursuant to any financing referred to in this sub-Clause (ii) when
aggregated with the principal amount of any previous and then outstanding such financing and
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
146
the then outstanding principal amount of any Indebtedness or Guarantee referred to in the
proviso to paragraph (g) of the definition of Permitted Security Interest does not exceed an
amount equal to 20 per cent. of the Borrower’s loans to customers before allowances for
impairment (calculated by reference to the Borrower’s balance sheet as at the end of its most
recent IFRS Fiscal Period) or (iii) any compensation or employee benefit arrangements with
any officer or director of the Borrower or any of its Subsidiaries arising as a result of their
employment contract.
13.7
(a)
Transactions with Affiliates
The Borrower shall not, and shall ensure that none of its Subsidiaries, directly or indirectly,
conduct any business, enter into or permit to exist any transaction or series of related
transactions (including the purchase, sale, transfer, assignment, lease, conveyance or exchange
of any property or the rendering of any service) with, or for the benefit of, any Affiliate (an
Affiliate Transaction), including intercompany loans, unless the terms of such Affiliate
Transaction are (taking into account the standing and credit rating of the relevant Affiliate) no
less favourable to the Borrower or such Subsidiary, as the case may be, than those that could
be obtained in a comparable arm’s-length transaction with a Person that is not an Affiliate of
the Borrower or any of its Subsidiaries.
(b)
With respect to an Affiliate Transaction involving aggregate payments or value in excess of
U.S.$15,000,000, the Borrower shall deliver to the Lender and the Trustee a written opinion
from an Independent Appraiser to the effect that such Affiliate Transaction is fair, from a
financial point of view, to the Borrower, provided that in no event shall the aggregate amount
of all Affiliate Transactions exceed 35 per cent. of the Group’s assets, determined by reference
to the Borrower’s balance sheet as at the end of its most recent IFRS Fiscal Period.
(c)
This Clause 13.7 shall not apply to (i) any Affiliate Transaction made pursuant to a contract
existing on the date hereof and advised in writing to the Lender (excluding any amendments or
modifications thereof made after the date hereof) or (ii) transactions between or among all or
any of the Borrower and/or its Subsidiaries and paragraph (b) of this Clause 13.7 shall not
apply to any Affiliate Transaction where the Affiliate in question is an Agency of Ukraine or a
Person which is a Subsidiary of an Agency of Ukraine.
13.8
Payment of Taxes and Other Claims
The Borrower shall, and shall ensure that its Material Subsidiaries pay or discharge or cause to
be paid or discharged, before the same shall become overdue, all Taxes, assessments and
governmental charges levied or imposed upon, or upon the income, profits or property of, the
Borrower and its Material Subsidiaries; provided that, none of the Borrower nor any Material
Subsidiary shall be required to pay or discharge or cause to be paid or discharged any such
tax, assessment, charge or claim (i) whose amount, applicability or validity is being contested in
good faith by appropriate proceedings and for which adequate reserves in accordance with
IFRS or other appropriate provision has been made or (ii) whose amount, together with all
such other unpaid or undischarged Taxes, assessments, charges and claims, does not in the
aggregate exceed U.S.$1,000,000 (or its equivalent in other currencies).
13.9
(a)
Financial Information
The Borrower hereby undertakes that it will deliver to the Lender and the Trustee within 180
days after the end of each of its financial years, copies of the Borrower’s audited financial
statements for such financial year, prepared in accordance with IFRS and together with the
report of the Auditors thereon.
(b)
The Borrower hereby undertakes that it will deliver to the Lender and the Trustee within 120
days after the end of the second quarter of each of its financial years, copies of the Borrower’s
unaudited financial statements for six months, prepared in accordance with IFRS. To the extent
that the Borrower produces quarterly unaudited financial statements (Quarterly Statements),
prepared in accordance with IFRS, the Borrower further undertakes to provide copies of
Quarterly Statements within four months after the end of each quarter.
(c)
The Borrower hereby undertakes that it will deliver to the Lender and the Trustee, without
undue delay, such additional information regarding the financial position or the business of the
Borrower as the Lender or the Trustee may reasonably request.
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
147
(d)
The Borrower hereby undertakes that it will supply or procure to be supplied to the Lender (in
sufficient copies as may reasonably be required by the Lender) with a copy to the Trustee all
such information as the Irish Stock Exchange (or any other or further stock exchange or stock
exchanges or any other relevant authority or authorities on which the Funding Instruments
may, from time to time, be listed or admitted to trading) may require in connection with the
listing or admittance to trading of the Funding Instruments.
13.10 Maintenance of Capital Adequacy
The Borrower shall not, and shall ensure that each Subsidiary which carries on a Banking
Business shall not, permit its total capital adequacy ratio to fall below the minimum total
capital adequacy ratio required by the NBU and, in the case of a Subsidiary which carries on a
Banking Business outside Ukraine, the relevant banking authority responsible for setting and/or
supervising capital adequacy for financial institutions in the relevant jurisdiction in which such
Subsidiary carries on its Banking Business.
13.11 Limitation on restrictions on distributions from Material Subsidiaries
The Borrower shall not, and shall not permit any of its Material Subsidiaries to, create or
otherwise cause or permit to exist or become effective any consensual encumbrance or
consensual restriction on the ability of any Subsidiary:
(a)
to pay dividends or make any other distributions on its share capital;
(b)
to make any loans or advances or pay any Indebtedness owed to the Borrower; or
(c)
to transfer any of its property or assets to the Borrower
other than encumbrances or restrictions existing under applicable law, any Funding Document
or any other agreement in effect prior to the date hereof and advised in writing to the Lender.
13.12 Compliance Certificates
On each Interest Payment Date, the Borrower shall deliver to the Lender and the Trustee
written notice in the form of an Officers’ Certificate stating whether any Event of Default or
Potential Event of Default has occurred and, if it has occurred and shall be continuing, the
action the Borrower is taking or proposes to take with respect thereto.
13.13 Amendments to this Agreement
The Borrower shall not without the prior written consent of the Lender make any amendments
to (i) this Agreement or (ii) the notification submitted to the NBU in respect of this Agreement
and registered by the NBU (as evidenced by the respective registration notation) (the
Registration Notification) that would, by virtue of their execution and subsequent registration by
the NBU, in the case of amendments to this Agreement, or by virtue of their being made, in
the case of amendments to the Registration Notification, in either case result in a lower
maximum interest rate being applied to the amounts payable by the Borrower under this
Agreement (including, but not limited to, interest payments, fees and indemnity amounts) than
as set by the NBU as at the date hereof.
13.14 Restricted Payments
The Borrower shall not, directly or indirectly:
(a)
declare or pay any dividend, in cash or otherwise, or make any other distribution
(whether by way of redemption, acquisition or otherwise) in respect of its share capital; or
(b)
voluntarily purchase, redeem or otherwise retire for value any Capital Stock or
subordinated debt,
(any such action being referred to herein as a Restricted Payment) if at the time (i) an Event of
Default has occurred or results therefrom or (ii) such Restricted Payment when aggregated with
all other Restricted Payments previously made in respect of the relevant fiscal year exceeds 30
per cent. of the Group’s net profit (calculated in accordance with Ukrainian GAAP) for such
fiscal year PROVIDED THAT so long as at the time no Event of Default has occurred or
results therefrom, the Borrower may make any prepayment permitted or required under the
ABN AMRO Loan and any such prepayment shall not constitute a Restricted Payment.
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
148
14.
EVENTS OF DEFAULT
Each of Clause 14.1 (Failure to Pay) to Clause 14.9 (Analogous Events) describes the
circumstances which constitute an Event of Default for the purposes of this Agreement. If one
or more Events of Default shall occur and be continuing, the Lender (or the Trustee, as
applicable) shall be entitled to the remedies set forth in Clause 14.10 (Acceleration).
14.1
Failure to Pay
The Borrower fails to pay any sum due from it hereunder at the time, in the currency and in
the manner specified herein, and such failure is not remedied within five Business Days of the
due date for payment.
14.2
Obligations
The Borrower fails duly to perform or comply with, or is otherwise in breach of any other of
its obligations (other than set out in Clause 14.1 (Failure to Pay)) expressed to be assumed by
it in this Agreement and such failure or breach is not remedied within 15 days after the Lender
(and, following a Relevant Event, the Trustee) has given notice of it to the Borrower requiring
the same to be remedied.
14.3
Cross Default
Any Indebtedness of the Borrower or any of its Subsidiaries becomes due and payable prior to
the stated maturity thereof (other than at the option of the debtor) or the Borrower or any of
its Subsidiaries shall fail to make any payment of principal in respect of any Indebtedness of
the Borrower or any of its Subsidiaries or to make any payment under any Guarantee of any
Indebtedness on the date on which such payment is due and payable or by the expiration of
any grace period originally applicable thereto, unless the aggregate amount of Indebtedness
relating to all the above events is less than U.S.$10,000,000 (or its equivalent in any other
currency).
14.4
Validity and Illegality
The validity of this Agreement is contested by the Borrower or the Borrower shall deny any of
its obligations under this Agreement or (save as provided in Clause 13.1 (Maintenance of Legal
Validity)) it is, or will become, unlawful for the Borrower to perform or comply with any of its
obligations under this Agreement or any of such obligations shall become unenforceable or
cease to be legal, valid and binding in a manner which has a material adverse effect on the
rights or claims of the Lender or, following a Relevant Event, the Trustee under this
Agreement.
14.5
Authorisations
Any regulation, decree, consent, approval, licence or other authority necessary to enable the
Borrower to enter into or (save as provided in Clause 13.1 (Maintenance of Legal Validity))
perform its obligations under this Agreement or for the validity or enforceability thereof shall
expire or be withheld, revoked or terminated or otherwise cease to remain in full force and
effect or shall be modified in a manner which adversely affects any rights or claims of the
Lender or, following a Relevant Event, the Trustee under this Agreement.
14.6
(a)
Revocation of Licence; Insolvency
The occurrence of any of the following events: (i) revocation of the general banking licence of
the Borrower or, if applicable, of any of its Subsidiaries; (ii) any of the Borrower or any of its
Material Subsidiaries seeking, consenting or acquiescing in the introduction of proceedings for
its liquidation or bankruptcy or the appointment of a liquidation commission or a similar
officer of any of the Borrower or any of its Material Subsidiaries, as the case may be; (iii) the
presentation or filing of a petition in respect of any of the Borrower or any of its Material
Subsidiaries in any court, arbitration court or before any agency alleging or for the bankruptcy,
insolvency, dissolution, liquidation (or any analogous proceeding) of any of the Borrower or
any of its Material Subsidiaries; (iv) the institution of the temporary administration,
supervision, external management, bankruptcy management or analogous regime with respect to
any of the Borrower or any of its Material Subsidiaries; (v) the convening or announcement of
an intention to convene a meeting of creditors of any of the Borrower or any of its Material
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
149
Subsidiaries for the purposes of considering an amicable settlement and/or (vi) any extra
judicial liquidation or analogous act in respect of any of the Borrower or any of its Material
Subsidiaries by any Agency in or of Ukraine.
(b)
The Borrower or any of its Material Subsidiaries (i) fails or is unable to pay its debts generally
as they become due, or (ii) consents by answer or otherwise to the commencement against it of
an involuntary case in bankruptcy or any other such action or proceeding or to the
appointment of a custodian of it or for any substantial part of its property or (iii) a court of
competent jurisdiction enters an order for relief or a decree in an involuntary case in
bankruptcy or any other such action or proceeding or for the appointment of a custodian in
respect of the Borrower or any of its Material Subsidiaries or any part of their property and
such order or decree remains unstayed and in effect for 60 days.
(c)
The shareholders of the Borrower shall have approved any plan of liquidation or dissolution of
the Borrower.
14.7
Judgments
The aggregate amount of unsatisfied judgments, decrees or orders of courts or other
appropriate law-enforcement bodies (from which no further appeal or judicial review is
permissible under applicable law) for the payment of money against the Borrower and/or any
Subsidiaries of the Borrower exceeds U.S.$10,000,000 or the equivalent thereof in any other
currency or currencies and there is a period of 60 days following the entry thereof (or, if later,
the date therein specified for payment) during which all such judgments, decrees or orders are
not discharged, waived or the execution thereof stayed and such default continues for five days.
14.8
Business
The Borrower ceases to carry on the principal business it carried on at the date hereof.
14.9
Analogous Events
Any event occurs which under the laws of any relevant jurisdiction has an analogous effect to
any of the events referred to in Clauses 14.4 (Validity and Illegality) to 14.7 (Judgments).
14.10 Acceleration
If an Event of Default has occurred and is continuing, the Lender and/or the Trustee may by
written notice to the Borrower declare the outstanding principal amount of the Loan to be
immediately due and payable (whereupon the same shall become immediately due and payable
together with accrued interest thereon and any other sums then owed by the Borrower
hereunder) or declare the outstanding principal amount of the Loan to be due and payable on
demand of the Lender and/or the Trustee.
14.11 Amounts Due on Demand
If, pursuant to Clause 14.10 (Acceleration), the Lender or the Trustee declares the outstanding
principal amount of the Loan to be due and payable on demand of the Lender or the Trustee,
then, and at any time thereafter, the Lender or the Trustee may by written notice to the
Borrower require repayment of the outstanding principal amount of the Loan on such date as
it may specify in such notice (whereupon the same shall become due and payable on such date
together with accrued interest thereon and any other sums then owed by the Borrower
hereunder) or withdraw its declaration with effect from such date as it may specify in such
notice.
14.12 No calculation by Trustee
For the avoidance of doubt, for the purpose of Clauses 14.10 and 14.11 above, the Trustee
shall have no liability or responsibility to any Party or any other Person for any calculations
hereunder including (but not limited to) the calculation of the outstanding principal amount of
the Loan, any interest accrued thereon or any other sums owed by the Borrower.
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
150
15.
INDEMNITY
15.1
(a)
The Borrower’s Indemnity
The Borrower undertakes to the Lender, that if the Lender and/or the Trustee (each an
indemnified party) properly incurs any loss, liability, cost, claim, charge or expense, together
with in each case any VAT thereon) (a Loss) (i) as a result of or in connection with any Event
of Default or Potential Event of Default or (ii) as a result of or in connection with the Lender
exercising its powers and performing its obligations under this Agreement and the Funding
Documents (including, but not limited to, legal fees and expenses), the Borrower shall pay to
the Lender and/or the Trustee, as the case may be, subject to the presentation of properly
documented evidence thereof (such evidence only to be presented if and to the extent required
by applicable law), an amount equal to such Loss and all costs, charges and expenses which it
or any indemnified party may pay or incur in connection with investigating, disputing or
defending any such action or claim as such costs, charges and expenses are incurred.
(b)
The indemnity in paragraph (a) above shall not apply to a Loss:
(i)
which is caused by an indemnified party’s own gross negligence or wilful default,
misconduct or fraud;
(ii)
which is recovered under Clause 8.1 (Additional Amounts); or
(iii) where an indemnity is sought already under Clause 8.3 (Indemnity Amounts), 10 (Changes
in Circumstances) or 18 (Costs and Expenses).
15.2
Independent Obligation
Clause 15.1 (The Borrower’s Indemnity) constitutes a separate and independent obligation of the
Borrower from its other obligations under or in connection with this Agreement or any other
obligations of the Borrower in connection with the issue of the Funding Instruments and shall
not affect, or be construed to affect, any other provisions of this Agreement or any such other
obligations.
15.3
Survival
The obligations of the Borrower pursuant to Clauses 8.1 (Additional Amounts), 8.2 (Double Tax
Treaty Relief), 8.3 (Indemnity Amounts), 10 (Changes in Circumstances), 15.1 (The Borrower’s
Indemnity), 15.2 (Independent Obligation) and 17.3 (No Set-off) shall survive the borrowing and
the repayment of the Loan, in each case by the Borrower, and the termination of this
Agreement.
16.
CURRENCY OF ACCOUNT AND PAYMENT
16.1
Currency of Account
The U.S. dollar is the currency of account and payment for each and every sum at any time
due from the Borrower hereunder.
16.2
Currency Indemnity
If any sum due from the Borrower under this Agreement or any order or judgment given or
made in relation hereto has to be converted from the currency (the first currency) in which the
same is payable hereunder or under such order or judgment into another currency (the second
currency) for the purpose of (a) making or filing a claim or proof against the Borrower, (b)
obtaining an order or judgment in any court or other tribunal or (c) enforcing any order or
judgment given or made in relation hereto, the Borrower shall indemnify and hold harmless the
Lender and the Trustee from and against any loss suffered or properly incurred as a result of
any discrepancy between (i) the rate of exchange used for such purpose to convert the sum in
question from the first currency into the second currency and (ii) the rate or rates of exchange
at which the Lender (or, as the case may be, the Trustee) may in the ordinary course of
business purchase the first currency with the second currency upon receipt of a sum paid to it
in satisfaction, in whole or in part, of any such order, judgment, claim or proof.
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
151
17.
PAYMENTS
17.1
Payments to the Lender
On each date on which this Agreement requires an amount denominated in U.S. dollars to be
paid by the Borrower, the Borrower shall make the same available to the Lender by payment
in U.S. dollars and in Same-Day Funds (or in such other funds as may for the time being be
customary for the settlement of international banking transactions in U.S. dollars) not later
than 11.00 a.m. (New York City time) on the Business Day falling two Business Days prior to
the Interest Payment Date to the Account other than amounts payable (i) in respect of
Reserved Rights (as such term is defined in the Trust Deed), (ii) under the Fees Letter or (iii)
in relation to Clause 15.1 (The Borrower’s Indemnity) which the Borrower shall pay to such
account or accounts as the Lender and/or the Trustee shall notify to the Borrower; provided
that if at any time the Trustee notifies the Borrower that a Relevant Event has occurred, the
Borrower shall make all subsequent payments, which would otherwise be made to the Account,
to such other account as shall be notified by the Trustee to the Borrower. Without prejudice to
its obligations under Clause 5.1 (Payment of Interest), the Borrower shall procure that, before
10.00 a.m. (London time) on two Banking Days before the due date of each payment made by
it under this Clause 17.1, the bank effecting payment on its behalf confirms to the Lender or
the Trustee (as the case may be) or to such person as the Lender or the Trustee may direct by
tested telex or authenticated SWIFT message the payment instructions relating to such
payment. The Lender and/or the Trustee shall use their reasonable endeavours to provide the
Borrower with information and documents as may be required by the applicable Ukrainian
legislation for the purposes of making payments by the Borrower to any account other than
the Account.
17.2
Alternative Payment Arrangements
If, at any time, it shall become impracticable (by reason of any action of any governmental
authority or any change of law, exchange control regulations or any similar event) for the
Borrower to make any payments under this Agreement in the manner specified in Clause 17.1
(Payments to the Lender), then the Borrower may agree with the Lender (or, as the case may
be, the Trustee) alternative arrangements for the payment to the Lender (or, as the case may
be, the Trustee) of amounts due (prior to the delivery of any notice referred to in Clause 17.1
(Payments to the Lender)) under this Agreement provided that, in the absence of any such
agreement with the Lender (or, as the case may be, the Trustee), the Borrower shall be obliged
to make all payments due to the Lender (or, as the case may be, the Trustee) in the manner
specified above.
17.3
No Set-off
All payments required to be made by the Borrower hereunder shall be calculated without
reference to any set-off or counterclaim and shall be made free and clear of and without any
deduction for or on account of any set-off or counterclaim.
18.
COSTS AND EXPENSES
18.1
Transaction Expenses and Fees
The Borrower agrees that it shall make the payments to the Lender as specified in the Fees
Letter.
18.2
Preservation and Enforcement of Rights
The Borrower shall, from time to time on written demand of the Lender (or, as the case may
be, the Trustee) reimburse the Lender (or, as the case may be, the Trustee) for all properly
incurred costs and expenses (including legal fees and expenses) provided that (if and to the
extent required by applicable law) such costs and expenses are properly documented together
with any VAT thereon properly incurred in or in connection with the preservation and/or
enforcement of any of its rights under this Agreement (except where the relevant claim is
successfully defended by the Borrower).
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
152
18.3
Stamp Taxes
The Borrower shall pay all stamp, registration and other similar duties or Taxes (including any
interest or penalties thereon or in connection therewith) to which the Funding Documents or
any judgment given against the Borrower in connection therewith is or at any time may be
subject and shall, from time to time on written demand of the Lender (or the Trustee),
indemnify the Lender (or, as the case may be, the Trustee) against any liabilities, losses, costs,
expenses (including, without limitation, legal fees and any applicable value added tax) and
claims, actions or demand (such liabilities, losses, costs, expenses, claims, actions, or demand to
be properly documented if and to the extent required by applicable law) resulting from any
failure to pay or any delay in paying any such duty or tax.
18.4
Costs Relating to Amendments and Waivers
The Borrower shall, from time to time on written demand of the Lender (or the Trustee) (and
without prejudice to the provisions of Clause 15.1 (The Borrower’s Indemnity) and Clause 18.2
(Preservation and Enforcement of Rights)) pay to the Lender (and, as the case may be, the
Trustee) at such daily and/or hourly rates as the Lender (or, as the case may be, the Trustee)
shall from time to time reasonably determine for all time expended by the Lender (or, as the
case may be, the Trustee), their respective directors, officers and employees, and for all costs
and expenses (including telephone, fax, copying and travel costs) they may properly incur (such
costs and expenses to be properly documented if and to the extent required by applicable law),
in connection with the Lender (and, as the case may be, the Trustee) taking such action as it
may consider appropriate in connection with:
(a)
any meeting of holders of the Funding Instruments or the granting or proposed granting
of any waiver or consent requested under this Agreement by the Borrower;
(b)
any actual or potential breach by the Borrower of any of its obligations under this
Agreement;
(c)
the occurrence of any event which is an Event of Default or a Potential Event of Default;
or
(d)
any amendment or proposed amendment to this Agreement or any Funding Document
requested by the Borrower.
In that regard, the Lender shall, promptly upon request by the Borrower, convene a meeting of
the holders of the Funding Instruments in accordance with the terms and conditions of the
Funding Instruments and the provisions of the Funding Documents.
19.
ASSIGNMENTS AND TRANSFERS
19.1
Binding Agreement
This Agreement shall be binding upon and enure to the benefit of each party hereto and its or
any subsequent successors and assigns.
19.2
No Assignments and Transfers by the Borrower
The Borrower shall not be entitled to assign or transfer all or any of its rights, benefits and
obligations hereunder.
19.3
Assignments by the Lender
Subject to the Funding Documents and applicable law, the Lender may not assign or transfer,
in whole or in part, any of its rights and benefits or obligations under this Agreement except
for the charge by way of first fixed charge granted by the Lender in favour of the Trustee of
the Lender’s rights and benefits under this Agreement and the absolute assignment by way of
security by the Lender to the Trustee of certain rights, interest and benefits under this
Agreement and to the Account, in each case pursuant to the Funding Documents. If and to
the extent required by applicable law or regulation of Ukraine, assignment or transfer by the
Lender of its rights and benefits or obligations under this Agreement shall become effective
upon registration with the NBU of an assignee or a transferee as the Lender under this
Agreement.
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
153
20.
CALCULATIONS AND EVIDENCE OF DEBT
20.1
Evidence of Debt
The Lender shall maintain accounts evidencing the amounts from time to time lent by and
owing to it hereunder and in any legal action or proceeding arising out of or in connection
with this Agreement, in the absence of manifest error and subject to the provision by the
Lender to the Borrower of written information describing in reasonable detail the calculation or
computation of such amounts together with the relevant supporting documents evidencing the
matters described therein, the entries made in such accounts shall be conclusive evidence of the
existence and amounts of the obligations of the Borrower therein recorded.
20.2
Change of Circumstance Certificates
A certificate signed by two Authorised Signatories of the Lender (or, as the case may be, the
Trustee) describing in reasonable detail the amount by which a sum payable to it hereunder is
to be increased under Clause 8.1 (Additional Amounts) or the amount for the time being
required to indemnify it against any such cost, payment or liability as is mentioned in Clause
8.3 (Indemnity Amounts) or Clause 10.1 (Increased Costs) or Clause 15.1 (The Borrower’s
Indemnity) shall, in the absence of manifest error, be conclusive evidence of the existence and
amounts of the specified obligations of the Borrower.
21.
REMEDIES AND WAIVERS, PARTIAL INVALIDITY
21.1
Remedies and Waivers
No failure by the Lender or the Trustee to exercise, nor any delay by the Lender or the
Trustee in exercising, any right or remedy hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any right or remedy prevent any further or other exercise
thereof or the exercise of any other right or remedy. The rights and remedies herein provided
are cumulative and not exclusive of any rights or remedies provided by law.
21.2
Partial Invalidity
If, at any time, any provision hereof is or becomes illegal, invalid or unenforceable in any
respect under the law of any jurisdiction, neither the legality, validity or enforceability of the
remaining provisions hereof nor the legality, validity or enforceability of such provision under
the law of any other jurisdiction shall in any way be affected or impaired thereby.
22.
NOTICES; LANGUAGE
22.1
Written Notice
All notices, requests, demands or other communication to be made under this Agreement shall
be in writing and, unless otherwise stated, shall be delivered by fax or post.
22.2
(a)
Giving of Notice
Any communication or document to be delivered by one person to another pursuant to this
Agreement shall (unless that other person has by 15 days’ written notice specified another
address) be made or delivered to that other person, addressed as follows:
(i)
If to the Borrower:
Joint Stock Company State Savings Bank of Ukraine
12-G Hospitalna Street
Kyiv, 01001
Ukraine
Attention: Chairman of the Management Board and External Borrowings Department
(ii)
Tel:
+ 380 44 247 85 40
Fax:
+ 380 44 247 85 37
If to the Lender:
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
154
SSB No.1 PLC
7th Floor, Phoenix House
18 King William Street
London EC4N 7HE
United Kingdom
Tel:
+44 (0) 207 800 4100
Fax:
+44 (0) 207 800 4180
Email:
spvservices@capitafiduciary.co.uk
Attention: SPV Services
(iii) If to the Trustee:
BNY Corporate Trustee Services Limited
One Canada Square
London E14 5AL
United Kingdom
Attention: Corporate Trust Administration
Fax: +44 (0)207 964 2536
(b)
Each communication and document to be made or delivered by one party to another pursuant
to this Agreement shall, unless that other party has by 15 calendar days’ written notice to the
same specified another address or fax number, be made or delivered to that other party at the
address or fax number specified in this Clause 22.2 and shall be effective upon receipt by the
addressee on a business day in the city of the recipient; provided that, (i) any such
communication or document which would otherwise take effect after 4:00 p.m. on any
particular business day in the city of the addressee shall not take effect until 10:00 a.m. on the
immediately succeeding business day in the city of the addressee and (ii) any communication or
document to be made or delivered by one party to the other party shall be effective only when
received by such other party and then only if the same is expressly marked for the attention of
the department or officer identified with such other party’s signature below, or such other
department or officer as such other party shall from time to time specify for this purpose.
22.3
English Language
Each communication and document delivered by one party to another pursuant to this
Agreement shall be in the English language or accompanied by a translation into English
certified (by an officer of the person delivering the same) as being a true and accurate
translation. In the event of any discrepancies between the English and Ukrainian versions of
such communication or document, or any dispute regarding the interpretation of any provision
in the English or Ukrainian versions of such communication or document, the English version
of such communication or document shall prevail, unless the document is a statutory or other
official document.
22.4
Language of Agreement
This Agreement has been executed in both the English language and the Ukrainian language.
In the event of any discrepancies between the English and Ukrainian versions of this
Agreement, or any dispute regarding the interpretation of any provision in the English or
Ukrainian versions of this Agreement, the English version of this Agreement shall prevail and
any question of interpretation shall be addressed solely in the English language.
23.
LAW AND JURISDICTION
23.1
English Law
This Agreement, including any non-contractual obligations arising out of or in connection with
this Agreement, is governed by, and shall be construed in accordance with, English law.
23.2
Arbitration
Subject to Clause 23.3 (English Courts), the parties to this Agreement agree that any claim,
dispute or difference of whatever nature arising under, out of or in connection with this
Agreement (including a claim, dispute or difference regarding its existence, termination or
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
155
validity) (a Dispute), shall be referred to and finally settled by arbitration in accordance with
the Rules of the London Court of International Arbitration (LCIA) (the Rules) as at present in
force and as modified by this Clause 23.2, which Rules shall be deemed incorporated into this
Clause 23.2. The number of arbitrators shall be three, one of whom shall be nominated by the
claimant(s), one by the respondent(s) and the third of whom, who shall act as chairman, shall
be nominated by the two party-nominated arbitrators. The parties may nominate and the LCIA
Court may appoint arbitrators from among the nationals of any country, whether or not a
party is a national of that country. The seat of arbitration shall be London, England and the
language of arbitration shall be English. Sections 45 and 69 of the Arbitration Act 1996 shall
not apply.
23.3
English Courts
At any time before the Lender has nominated an arbitrator to resolve any Dispute or Disputes
pursuant to Clause 23.2 (Arbitration), the Lender may elect by notice in writing to the
Borrower that such Dispute(s) shall instead be heard by the courts of England or by any other
court of competent jurisdiction. Following any such election, no arbitral tribunal shall have
jurisdiction in respect of such Dispute(s).
23.4
Appropriate Forum
The Borrower irrevocably waives any objection which it might now or hereafter have to the
courts of England being nominated as the forum to hear and determine any proceedings and to
settle any Disputes, and agrees not to claim that any such court is not a convenient or
appropriate forum.
23.5
Service of Process
The Borrower agrees that the service of process relating to any Dispute in England or Wales
may be by delivery to Law Debenture Corporate Services Limited, Fifth Floor, 100 Wood
Street, London EC2V 7EX. If such person is not or ceases to be effectively appointed to accept
service of process, the Borrower shall immediately appoint a further person in England or
Wales to accept service of process on its behalf and, failing such appointment within 15 days,
the Lender shall be entitled to appoint such a person by written notice to the Borrower.
Nothing in this Clause 23.5 shall affect the right of the Lender to serve process in any other
manner permitted by law.
23.6
Non-exclusivity
The submission by the Borrower to the jurisdiction of the English courts shall not (and shall
not be construed so as to) limit the right of the Lender and the Trustee to bring proceedings in
any other court of competent jurisdiction.
23.7
Waiver of Immunity
To the extent that the Borrower may in any jurisdiction claim for itself, its assets or revenue,
immunity from suit, execution, attachment (whether in aid of execution, before making a
judgment, aware or otherwise) or other legal proceedings, including in relation to an
enforcement of an arbitral award, and to the extent that such immunity (whether or not
claimed) may be attributed in any such jurisdiction to the Borrower, its assets or revenue, the
Borrower agrees not to claim and irrevocably waives such immunity to the fullest extent
permitted by the law of such jurisdiction.
24.
CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
A person who is not a party to this Agreement has no rights under the Contracts (Rights of
Third Parties) Act 1999 to enforce any term of this Agreement, other than the Trustee in
relation to Clause 8.1 (Additional Amounts), Clause 13 (Covenants), Clause 14 (Events of
Default), Clause 15 (Indemnity), Clause 16.2 (Currency Indemnity), Clause 17.1 (Payments to the
Lender), Clause 18.2 (Preservation and Enforcement of Rights), Clause 18.3 (Stamp Taxes) and
Clause 18.4 (Costs Relating to Amendments and Waivers) and Clause 23 (Law and Jurisdiction),
but this does not affect any right or remedy of a third party which exists or is available apart
from that Act.
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
156
25.
25.1
NBU REQUIREMENTS
Registration
This Agreement shall become effective on the date of its registration with the NBU which shall
be evidenced by the registration notation of the NBU issued to the Borrower by the NBU in
relation to the Loan Agreement.
25.2
Maximum Interest Rate
Notwithstanding any other provisions hereof to the contrary, if and to the extent required by
any law or regulations of Ukraine, the amount of payments payable by the Borrower under
this Agreement throughout the term of the Agreement (including, but not limited to, interest
payments, fees and indemnity amounts and other amounts under the Agreement, other than
payment of principal) shall not exceed, in aggregate per annum, the amount calculated by
reference to the maximum interest rate established by the NBU for foreign currency loans from
non-residents effective as at the date of the filing for registration of this Agreement or any
amendments thereto with the NBU. For the avoidance of doubt, any application of this
requirement shall not limit the rights of the Lender (and/or the Trustee, as relevant) under
Clause 14.1 (Failure to Pay) or Clause 14.10 (Acceleration) of this Agreement.
25.3
Amendments and Supplements
If and to the extent required by any law or regulation of Ukraine applicable at the time of
making any amendment or supplement to this Agreement, such amendment or supplement shall
become effective only upon registration thereof with the NBU.
c104221pu090Proof7:3.3.11B/LRevision:0OperatorChoD
157
TERMS AND CONDITIONS OF THE NOTES
The following is the text of the Terms and Conditions of the Notes, which will be endorsed on each
Note in definitive form. The terms and conditions applicable to any Note in global form will differ from
those terms and conditions which would apply to the Note were it in definitive form to the extent
described under ‘‘Summary of Provisions Relating to the Notes while in Global form’’ below.
The US$500,000,000 8.25 per cent. Loan Participation Notes due 2016 (the Notes, which expression
includes any Further Notes (as defined in the Trust Deed) issued pursuant to Condition 13 (Further
Issues) and forming a single series therewith) of SSB No.1 PLC (the Issuer) are constituted by, are
subject to, and have the benefit of, a trust deed dated 10 March 2011 (as amended or supplemented
from time to time, the Trust Deed) between the Issuer and BNY Corporate Trustee Services Limited
as trustee (the Trustee, which expression includes all persons for the time being trustee or trustees
appointed under the Trust Deed) and are the subject of an agency agreement dated 10 March 2011
(as amended or supplemented from time to time, the Agency Agreement) between the Issuer, The
Bank of New York Mellon (Luxembourg) S.A., as registrar (the Registrar, which expression includes
any successor registrar appointed from time to time in connection with the Notes), The Bank of New
York Mellon, London Branch as principal paying agent (the Principal Paying Agent, which expression
includes any successor principal paying agent appointed from time to time in connection with the
Notes), The Bank of New York, Mellon (Ireland) Limited as the Irish paying agent (the Irish Paying
Agent, which expression includes any successor Irish paying agent appointed from time to time in
connection with the Notes), the transfer agent named therein (the Transfer Agent, which expression
includes any successor or additional transfer agents appointed from time to time in connection with
the Notes), the paying agents named therein (together with the Principal Paying Agent, the Paying
Agents, which expression includes any successor or additional paying agents appointed from time to
time in connection with the Notes) and the Trustee. References herein to the Agents are to the
Registrar, the Transfer Agent, the Irish Paying Agent and the Paying Agents and any reference to an
Agent is to any one of them. Certain provisions of these Conditions are summaries of the Trust Deed
and the Agency Agreement and subject to their detailed provisions. The Noteholders (as defined
below) are entitled to the benefit of, bound by, and are deemed to have notice of, all the provisions
of the Trust Deed and are deemed to have notice of those provisions of the Agency Agreement
applicable to them. Copies of the Trust Deed and the Agency Agreement are available for inspection
during normal business hours at the registered office for the time being of the Trustee, being at the
date hereof One Canada Square, London E14 5AL, United Kingdom and at the Specified Offices (as
defined in the Agency Agreement) of each of the Agents, the initial Specified Offices of which are set
out below.
The Issuer has authorised the creation, issue and sale of the Notes for the sole purpose of financing
the US$500,000,000 loan (the Loan) to Joint Stock Company ‘‘State Savings Bank of Ukraine’’ (the
Borrower). The Issuer and the Borrower have recorded the terms of the Loan in an agreement
between the Borrower and the Issuer, as lender, dated 4 March 2011 (as amended and supplemented
from time to time, the Loan Agreement).
In each case where amounts of principal, interest and Additional Amounts (as defined in the Loan
Agreement), if any, due pursuant to Condition 6 (Payments) and Condition 7 (Taxation) are stated
herein or in the Trust Deed to be payable in respect of the Notes, the obligation of the Issuer to make
any such payment shall constitute an obligation only to pay to the Noteholders (as defined in Condition
2(a)), on each date upon which such amounts of principal, interest and Additional Amounts (as defined in
the Loan Agreement), if any, are due in respect of the Notes, to the extent of the sums of principal,
interest, Additional Amounts and Indemnity Amounts (each as defined in the Loan Agreement), if any,
actually received by or for the account of the Issuer pursuant to the Loan Agreement, less any amounts
in respect of the Reserved Rights (as defined below). Noteholders must therefore rely solely and
exclusively upon the covenant to pay under the Loan Agreement and the credit and financial standing of
the Borrower. Noteholders shall have no recourse (direct or indirect) to any other assets of the Issuer.
As security for the Issuer’s payment obligations under the Trust Deed and in respect of the Notes,
the Issuer as lender under the Loan Agreement has:
(A) charged by way of security to the Trustee all of the Issuer’s rights, interests and benefits in and
to (i) principal, interest and other amounts now or hereafter paid and payable by the Borrower
to the Issuer as lender under the Loan Agreement and (ii) all amounts now or hereafter paid or
payable by the Borrower to the Issuer under or in respect of any claim, award or judgment
relating to the Loan Agreement (in each case other than its right to amounts in respect of any
c104221pu100Proof7:3.3.11B/LRevision:0OperatorChoD
158
rights, interests and benefits of the Issuer under the following Clauses of the Loan Agreement:
Clause 3.2 (Fees), the second sentence of Clause 7.4 (Costs of Repayment); Clause 8.2 (Double
Tax Treaty Relief); Clause 8.3(b) (Indemnity Amounts); Clause 10 (Changes in Circumstances);
Clause 11 (Representations and Warranties of the Borrower); Clause 15 (Indemnity); Clause 16.2
(Currency Indemnity); Clause 17.3 (No Set off); and Clause 18 (Costs and Expenses) (to the
extent that the Issuer’s claim is in respect of one of the aforementioned clauses of the Loan
Agreement) (such rights are referred to herein as the Reserved Rights));
(B)
charged by way of security to the Trustee all of the Issuer’s rights, interests and benefits in and
to all sums held on deposit from time to time, in the Account (as defined in the Trust Deed)
with the Principal Paying Agent, together with the debt represented thereby (except to the extent
such debt relates to Reserved Rights) pursuant to the Trust Deed (this sub clause (B), together
with sub clause (A) other than the Reserved Rights, the Charged Property); and
(C)
assigned absolutely by way of security to the Trustee all of the Issuer’s rights, interests and
benefits whatsoever, both present and future, whether proprietary, contractual or otherwise
under or arising out of or evidenced by the Loan Agreement (including, without limitation, the
right to declare the Loan immediately due and payable and to take proceedings to enforce the
obligations of the Borrower thereunder) other than the Charged Property and the Reserved
Rights and amounts payable by the Borrower in relation to the Charged Property and the
Reserved Rights (the Transferred Rights),
together, the Security Interests.
In certain circumstances, the Trustee can (subject to it being indemnified and/or secured and/or
prefunded to its satisfaction) be required by Noteholders holding at least 25 per cent. of the principal
amount of the Notes then outstanding or by an Extraordinary Resolution (as defined in the Trust
Deed) of the Noteholders to exercise certain of its powers under the Trust Deed (including those
arising in connection with the Security Interests). However, it may not be possible for the Trustee to
take certain actions in relation to the Notes and, accordingly, in such circumstances the Trustee will
be unable to take such actions, notwithstanding the provision of an indemnity or security or
prefunding to it, and it will thus be for the Noteholders to take such actions directly.
1.
(a)
Form, Denomination and Status
Form and denomination: The Notes are in registered form, without interest coupons attached, in
the denominations of US$200,000 and integral multiples of US$1,000 in excess thereof (each, an
Authorised Holding).
(b)
Status: The sole purpose of the issue of the Notes is to provide the funds for the Issuer to
finance the Loan. The Notes constitute the obligation of the Issuer to apply an amount equal to
the principal amount of the Notes solely for financing the Loan and to account to the
Noteholders for principal and interest and Additional Amounts (as defined in the Loan
Agreement), if any, due pursuant to Condition 6 (Payments) and Condition 7 (Taxation) in
respect of the Notes in an amount equivalent to sums of principal, interest, Additional Amounts
and Indemnity Amounts (as defined in the Loan Agreement), if any, actually received by or for
the account of the Issuer pursuant to the Loan Agreement (less any amounts in respect of
Reserved Rights), the right to receive which is, inter alia, being charged by way of security to
the Trustee by virtue of the Security Interests as security for the Issuer’s payment obligations
under the Trust Deed and in respect of the Notes.
Payments in respect of the Notes to the extent of the sums actually received by or for the
account of the Issuer by way of principal, interest, Additional Amounts or Indemnity Amounts
(each as defined in the Loan Agreement), if any, pursuant to the Loan Agreement (less any
amounts in respect of the Reserved Rights) will be made pro rata among all Noteholders
(subject to Condition 7 (Taxation)), on the dates on which such payments are due in respect of
the Notes subject to the conditions attaching to, and in the currency of, such payments under
the Loan Agreement. The Issuer shall not be liable to make any payment in respect of the
Notes other than as expressly provided herein and in the Trust Deed. The Issuer shall be under
no obligation to exercise in favour of the Noteholders any rights of set off or of banker’s lien
or to combine accounts or counterclaim that may arise out of other transactions between the
Issuer and the Borrower.
c104221pu100Proof7:3.3.11B/LRevision:0OperatorChoD
159
Noteholders are deemed to have accepted that:
(i) neither the Issuer nor the Trustee makes any representation or warranty in respect of, and
shall at no time have any responsibility for, or (save as otherwise expressly provided in the
Trust Deed and paragraph (vi) below) liability, or obligation in respect of the performance
and observance by the Borrower of its obligations under the Loan Agreement or the
recoverability of any sum of principal, interest, Additional Amounts or Indemnity
Amounts (each as defined in the Loan Agreement) or other amounts, if any, due or to
become due from the Borrower under the Loan Agreement;
(ii)
neither the Issuer nor the Trustee shall at any time have any responsibility for, or
obligation or liability in respect of, the condition (financial, operational or otherwise),
creditworthiness, affairs, status, nature or prospects of the Borrower;
(iii) neither the Issuer nor the Trustee shall at any time have any responsibility for, or
obligation or liability in respect of, any misrepresentation or breach of warranty or any
act, default or omission of the Borrower under or in respect of the Loan Agreement;
(iv) neither the Issuer nor the Trustee shall at any time have any responsibility for, or liability
or obligation in respect of, the performance and observance by the Registrar, any Transfer
Agent or any Paying Agent of their respective obligations under the Agency Agreement;
(v)
the financial servicing and performance of the terms of the Notes depend solely and
exclusively upon performance by the Borrower of its obligations under the Loan
Agreement, its covenant to pay under the Loan Agreement and its credit and financial
standing. The Borrower has represented and warranted to the Issuer in the Loan
Agreement that the Loan Agreement constitutes legal, valid and binding obligations of the
Borrower. The representations and warranties given by the Borrower in Clause 11
(Representations and Warranties of the Borrower) of the Loan Agreement are given by the
Borrower to the Issuer for the sole benefit of the Issuer and neither the Trustee nor any
Noteholder shall have any remedies or rights against the Borrower that the Issuer may
have with respect to such representations or warranties, other than any right the Trustee
may have pursuant to the assignment of the Transferred Rights;
(vi) the Issuer (and, pursuant to the assignment of the Transferred Rights, the Trustee) will
rely on self certification by the Borrower and certification by third parties as a means of
monitoring whether the Borrower is complying with its obligations under the Loan
Agreement and shall not otherwise be responsible for investigating any aspect of the
Borrower’s performance in relation thereto (other than, with respect to the Issuer only, the
Borrower’s obligation to make payments of principal and interest under the Loan
Agreement) and, subject as further provided in the Trust Deed, the Trustee will not be
liable for any failure to make the usual or any investigations which might be made by a
security holder in relation to the property which is the subject of the Security Interests and
held by way of security for the Notes, and shall not be bound to enquire into or be liable
for any defect or failure in the right or title of the Issuer to the secured property
represented by the Security Interests whether such defect or failure was known to the
Trustee or might have been discovered upon examination or enquiry or whether capable of
remedy or not, nor will it have any liability for the enforceability of the security created
by the Security Interests whether as a result of any failure, omission or defect in registering
or filing or otherwise protecting or perfecting such security and the Trustee will have no
responsibility for the value of such security; and
(vii) if the Borrower is required by law to make any withholding or deduction for or on
account of tax from any payment under the Loan Agreement or if the Issuer is required
by law to make any withholding or deduction for or on account of tax from any payment
in respect of the Notes, the sole obligation of the Issuer will be to pay the Noteholders
sums equivalent to the sums actually received from the Borrower pursuant to the Loan
Agreement in respect of such payment, including, if applicable, Additional Amounts or
Indemnity Amounts (each as defined in the Loan Agreement) in respect of the tax required
to be so withheld or deducted; the Issuer shall not be obliged to take any actions or
measures as regards such deductions or withholdings other than those set in Clause 8
(Taxes) and Clause 10.3 (Mitigation) of the Loan Agreement.
c104221pu100Proof7:3.3.11B/LRevision:0OperatorChoD
160
Save as otherwise expressly provided herein and in the Trust Deed, no proprietary or other
direct interest in the Issuer’s rights under or in respect of the Loan Agreement or the Loan
exists for the benefit of the Noteholders. No Noteholder will have any entitlement to enforce
any of the provisions in the Loan Agreement or have direct recourse to the Borrower except
through action by the Trustee under the Security Interests. The Trustee shall not be required to
take proceedings to enforce payment under the Trust Deed or, pursuant to the Transferred
Rights, the Loan Agreement unless it has been indemnified and/or secured and/or prefunded by
the Noteholders to its satisfaction against all liabilities, proceedings, claims and demands to
which it may thereby become liable and all costs, charges and expenses which may be incurred
by it in connection therewith.
As provided in the Trust Deed, the obligations of the Issuer are solely to make payments of
amounts in aggregate equal to principal, interest, Additional Amounts, Indemnity Amounts
(each as defined in the Loan Agreement) or other amounts, if any, actually received by or for
the account of the Issuer pursuant to the Loan Agreement (less any amounts in respect of
Reserved Rights), the right to which is being charged by way of security to the Trustee as
aforesaid. Noteholders must therefore rely solely and exclusively upon the covenant to pay
under the Loan Agreement and the credit and financial standing of the Borrower. Noteholders
shall have no recourse (direct or indirect) to any other assets of the Issuer.
The obligations of the Issuer to make payments as stated in the previous paragraph constitute
direct and general obligations of the Issuer which will at all times rank pari passu among
themselves and at least pari passu with all other present and future unsecured obligations of the
Issuer, save for such obligations as may be preferred by provisions of law that are both
mandatory and of general application.
Payments made by the Borrower under the Loan Agreement to, or to the order of, the Trustee
or (before such time that the Issuer has been required by the Trustee, pursuant to the terms of
the Trust Deed, to pay to or to the order of the Trustee) the Principal Paying Agent will satisfy
pro tanto the obligations of the Issuer in respect of the Notes.
2.
(a)
Register, Title and Transfers
Register: The Registrar will maintain outside the United Kingdom a register (the Register) in
respect of the Notes in accordance with the provisions of the Agency Agreement. In these
Conditions, the Holder of a Note means the person in whose name such Note is for the time
being registered in the Register (or, in the case of a joint holding, the first named thereof) and
Noteholder shall be construed accordingly. A certificate (each, a Note Certificate) will be issued
to each Noteholder in respect of its registered holding. Each Note Certificate will be numbered
serially with an identifying number which will be recorded in the Register.
The Global Note Certificate will be deposited with The Bank of New York Mellon, as common
depositary for Euroclear and Clearstream, Luxembourg and registered in the name of The Bank of
New York Depository (Nominees) Limited, as nominee for the Common Depositary.
(b)
Title: The Holder of each Note shall (except as otherwise required by law) be treated as the
absolute owner of such Note for all purposes (whether or not it is overdue and regardless of
any notice of ownership, trust or any other interest therein, any writing on the Note Certificate
relating thereto (other than the endorsed form of transfer) or any notice of any previous loss or
theft of such Note Certificate) and no person shall be liable for so treating such Holder. No
person shall have any right to enforce any term or condition of the Notes or the Trust Deed
under the Contracts (Rights of Third Parties) Act 1999.
(c)
Transfers: Subject to Condition 2(f) (Closed periods) and Condition 2(g) (Regulations concerning
transfers and registration) below, a Note may be transferred upon surrender of the relevant Note
Certificate, with the endorsed form of transfer duly completed (including any certificates as to
compliance with restrictions on transfer included therein), at the Specified Office of the Registrar
or such relevant Transfer Agent, together with such evidence as the Registrar or (as the case
may be) the Transfer Agent may reasonably require to prove the title of the transferor and the
authority of the individuals who have executed the form of transfer; provided, however, that a
Note may not be transferred unless the principal amount of Notes transferred and (where not
all of the Notes held by a Holder are being transferred) the principal amount of the balance of
c104221pu100Proof7:3.3.11B/LRevision:0OperatorChoD
161
Notes not transferred are Authorised Holdings. Where not all the Notes represented by the
surrendered Note Certificate are the subject of the transfer, a new Note Certificate in respect of
the balance of the Notes will be issued to the transferor.
(d)
Registration and delivery of Note Certificates: Within five business days of the surrender of a
Note Certificate in accordance with Condition 2(c) (Transfers) above, the Registrar will register
the transfer in question and deliver a new Note Certificate of a like principal amount to the
Notes transferred to each relevant Holder at its address (as specified by such Holder to the
Registrar) or (as the case may be) the Specified Office of any Transfer Agent or (at the request
and risk of any such relevant Holder) by uninsured first class mail (airmail if overseas) to the
address specified for the purpose by such relevant Holder. In this paragraph, business day means
a day on which commercial banks are open for general business (including dealings in foreign
currencies) in the city where the Registrar or (as the case may be) the relevant Transfer Agent
has its Specified Office and Kyiv.
(e)
No charge: The transfer of a Note will be effected without charge by or on behalf of the Issuer,
the Registrar or any Transfer Agent but against such indemnity as the Registrar or (as the case
may be) such Transfer Agent may require in respect of any tax or other duty of whatsoever
nature which may be levied or imposed in connection with such transfer.
(f)
Closed periods: Noteholders may not require transfers to be registered during the period of 15
days ending on the due date for any payment of principal or interest in respect of the Notes.
(g)
Regulations concerning transfers and registration: All transfers of Notes and entries on the
Register are subject to the detailed regulations concerning the transfer of Notes scheduled to the
Agency Agreement. The regulations may be changed by the Issuer with the prior written
approval of the Trustee, the Registrar and the Borrower. A copy of the current regulations will
be mailed (free of charge) by the Registrar and/or any Transfer Agent to any Noteholder who
requests in writing a copy of such regulations.
3.
Issuer’s Covenant
As provided in the Trust Deed, so long as any of the Notes remain outstanding (as defined in
the Trust Deed), the Issuer will not, without the prior written consent of the Trustee or an
Extraordinary Resolution or Written Resolution (as defined in the Trust Deed), agree to any
amendments to or any modification or waiver of, or authorise any breach or proposed breach
of, the terms of the Loan Agreement and will act at all times in accordance with any
instructions of the Trustee from time to time with respect to the Loan Agreement, except as
otherwise expressly provided in the Trust Deed and the Loan Agreement. Any such amendment,
modification, waiver or authorisation made with the consent of the Trustee shall be binding on
the Noteholders and any such amendment or modification shall be notified by the Issuer to the
Noteholders in accordance with Condition 14 (Notices).
4.
(a)
Interest
Interest on the Notes is equal to 8.25 per cent. per annum (the Rate of Interest) (the ‘‘Due
Interest’’), provided that, subject to and in accordance with Condition 6 (Payments), on each
Interest Payment Date the Issuer shall pay to the Noteholders only an amount of interest equal
to and in the same currency as the amount of interest actually received by or for the account of
the Issuer pursuant to the Loan Agreement (the Current Paid Interest). The amount equal to the
difference between the Due Interest and the Current Paid Interest (if any) shall remain due by
the Issuer, but shall be deferred (the Deferred Interest). Interest shall accrue on the Loan from
day to day from (and including) the Issue Date to (but excluding) the due date for repayment
thereof unless payment of principal is improperly withheld or refused, in which event interest
will continue to accrue (before or after any judgment) at the Rate of Interest to but excluding
the date on which payment in full of the outstanding principal amount of the Loan is made.
(b)
The amount of interest payable in respect of the Loan for any Interest Period shall be
calculated by applying the Rate of Interest to the principal amount of the Loan, dividing the
product by two and rounding the resulting figure to the nearest cent (half a cent being rounded
upwards). If interest on the Loan is required to be calculated for any period other than an
Interest Period, it will be calculated on the basis of a year of 360 days consisting of 12 months
of 30 days each and, in the case of an incomplete month, the actual number of days elapsed.
c104221pu100Proof7:3.3.11B/LRevision:0OperatorChoD
162
(c)
As used in this Condition, Interest Payment Date and Interest Period shall have the meanings
given to them in the Loan Agreement and Issue Date shall have the meaning given to the term
Borrowing Date in the Loan Agreement. In the Loan Agreement, Interest Payment Date is
defined as 10 September and 10 March in each year commencing 10 September 2011 in which
the Loan remains outstanding. The final Interest Payment Date shall be 10 March 2016. Under
the Loan Agreement, the Borrower is required, two Business Days prior to each Interest
Payment Date, to pay to the Issuer an amount equal to and in the same currency as the full
amount of interest accruing during the Interest Period ending on such Interest Payment Date.
5.
(a)
Redemption and Purchase
Scheduled redemption: Unless previously repaid pursuant to Clause 7 (Repayment upon the
occurrence of certain events) of the Loan Agreement, the Borrower will be required to repay the
Loan on its due date as provided in the Loan Agreement and, unless previously redeemed
pursuant to this Condition 5 or Condition 12 (Enforcement), all the Notes will be redeemed at
their outstanding principal amount on 10 March 2016, subject as provided in Condition 6
(Payments).
(b)
Redemption by the Issuer:
The Notes shall be redeemed by the Issuer in whole, but not in part, at any time, on giving not
less than 30 days’ nor more than 90 days’ notice to the Noteholders (which notice shall be
irrevocable and shall specify a date for redemption, being the same date as that set forth in the
notice of repayment referred to in Condition 5(b)(i) or (ii) below) in accordance with Condition
14 (Notices) at the principal amount thereof, together with interest accrued and unpaid to the
date fixed for redemption and any Additional Amounts and Indemnity Amounts (each as
defined in the Loan Agreement) in respect thereof, if, immediately before giving such notice, the
Issuer satisfies the Trustee that:
(i)
the Issuer has received a notice of repayment from the Borrower pursuant to Clause 7.1
(Repayment for Tax Reasons and Change in Circumstances) of the Loan Agreement, which
includes, inter alia, the Borrower’s right to give notice that it has decided to repay the
Loan in the event that the Issuer is, subject to receipt of corresponding amounts from the
Borrower, required to pay Additional Amounts (as defined in the Loan Agreement) in
respect of United Kingdom Taxes as provided in Condition 7 (Taxation); or
(ii)
the Issuer has delivered a notice to the Borrower, the contents of which require the
Borrower to repay the Loan, in accordance with the provisions of Clause 7.2 (Repayment
for Illegality) of the Loan Agreement.
The Issuer shall deliver to the Trustee a certificate signed by two officers of the Issuer stating
that the Issuer is entitled to effect such redemption in accordance with this Condition 5(b). A
copy of the Borrower’s notice of repayment contemplated by Clause 7.1 (Repayment for Tax
Reasons and Change in Circumstances) of the Loan Agreement or details of the circumstances
contemplated by Clause 7.2 (Repayment for Illegality) of the Loan Agreement and the date fixed
for redemption shall be set forth in the notice.
The Trustee shall be entitled to accept any notice or certificate delivered by the Issuer in
accordance with this Condition 5(b) as sufficient evidence of the satisfaction of the applicable
circumstances in which event they shall be conclusive and binding on the Noteholders.
Upon the expiry of any such notice given by the Issuer to the Noteholders as is referred to in
this Condition 5(b), the Issuer shall be bound to redeem the Notes in accordance with this
Condition 5, subject as provided in Condition 6 (Payments).
(c)
Redemption at the option of the Noteholders upon a Change of Control:
(i) Upon the occurrence of a Change of Control (as defined in the Loan Agreement), in
accordance with Condition 14 (Notices) the Issuer will make an offer to purchase all or
any part of the Notes pursuant to the offer described below (the Change of Control Offer)
at a price per Note in cash (the Change of Control Payment) equal to the principal amount
thereof plus accrued and unpaid interest thereon to the date of repurchase, plus Additional
Amounts (as defined in the Loan Agreement), if any, to the date of repurchase. Pursuant
to Clause 7.3 (Repayment in the event of a Change of Control) of the Loan Agreement, the
Issuer is required to give notice to the Borrower (with a copy to the Trustee), including
computation of such amount and specifying the Change of Control Payment Date, setting
c104221pu100Proof7:3.3.11B/LRevision:0OperatorChoD
163
out the Change of Control Payment required to be made by the Issuer for such Notes on
the Change of Control Payment Date (the Change of Control Notice) and thereafter the
Borrower will repay the Loan to the extent corresponding to the aggregate principal
amount plus accrued and unpaid interest and Additional Amounts (as defined in the Loan
Agreement), if any, on the Notes to be repurchased in accordance with this Condition 5(c)
and will pay accrued and unpaid interest and Additional Amounts (as defined in the Loan
Agreement), if any, on the Notes to be repurchased. The Issuer, upon distribution of the
Change of Control Notice, shall also give notice thereof to the Noteholders in accordance
with Condition 14 (Notices) with a copy to the Agents and the Trustee, with the following
information: (A) that a Change of Control Offer is being made pursuant to this Condition
5(c) and all Notes properly tendered pursuant to such Change of Control Offer will be
accepted for payment; (B) the purchase price and the purchase date, which will be a
Business Day (as defined in the Loan Agreement) falling not less than 30 calendar days
nor more than 60 calendar days after the date of delivery by the Issuer of the Change of
Control Notice (the Change of Control Payment Date), provided that the Issuer shall,
where reasonably practicable, specify a Change of Control Payment Date which falls
before the date on which Ukraine, whether through the Cabinet of Ministers of Ukraine or
any other Agency of Ukraine (as defined in the Loan Agreement), ceases to own, legally
and beneficially, at least 51 per cent. of the Capital Stock (as defined in the Loan
Agreement) of, or otherwise to control the Borrower; (C) that any Note not properly
tendered or not tendered at all will remain outstanding and continue to accrue interest and
Additional Amounts (as defined in the Loan Agreement), if any; (D) that unless the Issuer
defaults in the payment of the Change of Control Payment, all Notes accepted for
payment pursuant to the Change of Control Offer will cease to accrue interest and
Additional Amounts (as defined in the Loan Agreement), if any, on the Change of Control
Payment Date; (E) that Noteholders electing to have any Notes repurchased pursuant to a
Change of Control Offer will be required to surrender the Notes, with the form entitled
Option to Purchase Notice set out in a schedule to the Agency Agreement completed, to
the Paying Agent and at the address specified in the notice prior to the close of business
on the fourth Business Day preceding the Change of Control Payment Date; and (F) that
Noteholders will be entitled to withdraw their tendered Notes and their election to require
the Issuer to repurchase such Notes provided that the Paying Agent receives prior to the
close of business on the third Business Day preceding the Change of Control Payment
Date, a facsimile transmission or letter setting out the name of the Noteholder, the
principal amount of Notes tendered for repurchase, and a statement that such Noteholder
is withdrawing his tendered Notes and his election to have such Notes repurchased.
(ii)
(d)
No later than the second Business Day (as defined in the Loan Agreement) prior to the
Change of Control Payment Date, the Borrower will, pursuant to Clause 7.4 (Costs of
Repayment) of the Loan Agreement, repay the loan (together with all accrued interest
(calculated to (but excluding) the date of repayment) and all other amounts owing and
payable thereunder) in an amount corresponding to the aggregate principal amount in
respect of all Notes properly tendered and not properly withdrawn as set out in the
Change of Control Notice plus accrued and unpaid interest and Additional Amounts (as
defined in the Loan Agreement) (if any) thereon. On the Change of Control Payment
Date, the Issuer will, to the extent permitted by law and subject to such repayment, (i)
accept for payment all Notes properly tendered and not properly withdrawn pursuant to
the Change of Control Offer and (ii) deliver, or cause to be delivered, to the Principal
Paying Agent for cancellation on behalf of the Issuer the Notes so accepted together with
a certificate of two authorised officers of the Issuer stating that such Notes have been
tendered to and purchased by the Issuer. In accordance with the instructions of the
Noteholder set out in the Option to Purchase Notice, the Paying Agent will promptly pay
to the Noteholder the Change of Control Payment for such Notes. The Issuer will publicly
announce, and will provide notice to Noteholders in accordance with Condition 14
(Notices), the results of the Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
No other redemption: Except where the Loan is accelerated pursuant to Clause 14.6(c)
(Revocation of Licence; Insolvency) of the Loan Agreement, the Issuer shall not be entitled to
redeem the Notes prior to that due date otherwise than as provided in this Condition 5
(Redemption and Purchase) and Condition 12 (Enforcement).
c104221pu100Proof7:3.3.11B/LRevision:0OperatorChoD
164
(e)
Purchase: The Issuer or the Borrower may at any time purchase Notes in the open market or
otherwise and at any price. Such Notes may be held or resold (provided that any such resale is
outside the United States as defined in Regulation S under the U.S. Securities Act of 1933, as
amended (the Securities Act)) or surrendered by the purchaser through the Issuer to the
Registrar for cancellation.
(f)
Cancellation: All Notes so redeemed or purchased and surrendered for cancellation by the Issuer
shall be cancelled and all Notes purchased by the Borrower and surrendered to the Issuer
pursuant to Clause 7.6 (Purchase of Funding Instruments and Reduction of Loan Upon
Cancellation of Funding Instruments) of the Loan Agreement, together with an authorisation
addressed to the Registrar by the Borrower, shall be cancelled.
6.
(a)
Payments
Principal: Payments of principal shall be made by U.S. dollar cheque drawn on, or, upon
application by a Holder of a Note to the Specified Office of the Principal Paying Agent not
later than the fifteenth day before the due date for any such payment, by transfer to a U.S.
dollar account maintained by the payee with, a bank in New York City or London, as the case
may be, and shall only be made upon surrender (or, in the case of part payment only,
endorsement) of the relevant Note Certificates at the Specified Office of any Paying Agent.
(b)
Interest: Payments of interest shall be made by U.S. dollar cheque drawn on, or upon
application by a Holder of a Note to the Specified Office of the Principal Paying Agent not
later than the fifteenth day before the due date for any such payment, by transfer to a U.S.
dollar account maintained by the payee with, a bank in New York City or London as the case
may be, and (in the case of interest payable on redemption), and shall only be made upon
surrender (or, in the case of part payment only, endorsement) of the relevant Note Certificates
at the Specified Office of any Paying Agent.
(c)
Payments subject to fiscal laws: All payments in respect of the Notes are subject in all cases to
any applicable fiscal or other laws and regulations in the place of payment, but without
prejudice to the provisions of Condition 7 (Taxation). No commissions or expenses shall be
charged to the Noteholders in respect of such payments.
(d)
Payments on business days: Where payment is to be made by transfer to a U.S. dollar account,
payment instructions (for value the due date, or, if the due date is not a business day, for value
the next succeeding business day) will be initiated and, where payment is to be made by U.S.
dollar cheque, the cheque will be mailed (i) (in the case of payments of principal and interest
payable on redemption) on the later of the due date for payment and the day on which the
relevant Note Certificate is surrendered (or, in the case of part payment only, endorsed) at the
Specified Office of a Paying Agent and (ii) (in the case of payments of interest payable other
than on redemption) on the due date for payment. A Holder of a Note shall not be entitled to
any interest or other payment in respect of any delay in payment resulting from (A) the due
date for a payment not being a business day or (B) a cheque mailed in accordance with this
Condition 6 (Payments) arriving after the due date for payment or being lost in the mail. In this
paragraph, business day means any day (other than a Saturday, Sunday or public holiday) on
which commercial banks and foreign exchange markets settle payments (including dealings in
foreign currencies) in the principal financial centre for such currency and, in the case of
surrender (or, in the case of part payment only, endorsement) of a Note Certificate, in the place
in which the Note Certificate is surrendered (or, as the case may be, endorsed).
(e)
Partial payments: If a Paying Agent makes a partial payment in respect of any Note, the Issuer
shall procure that the amount and date of such payment are noted on the Register and, in the
case of partial payment upon presentation of a Note Certificate, that a statement indicating the
amount and the date of such payment is endorsed on the relevant Note Certificate.
(f)
Record date: Each payment in respect of a Note will be made to the person shown as the
Holder in the Register at the opening of business in the place of the Registrar’s Specified Office
on the fifteenth day before the due date for such payment (the Record Date). Where payment in
respect of a Note is to be made by cheque, the cheque will be mailed to the address shown as
the address of the Holder in the Register at the opening of business on the relevant Record
Date.
c104221pu100Proof7:3.3.11B/LRevision:0OperatorChoD
165
(g)
Payment to the Account: Save as the Trustee may otherwise direct at any time after the security
created pursuant to the Trust Deed becomes enforceable, the Issuer will pursuant to the
provisions of Clause 7.1 (Issuer to pay Principal Paying Agent) of the Agency Agreement require
the Borrower to make all payments of principal, interest, Additional Amounts (as defined in the
Loan Agreement), Indemnity Amounts (as defined in the Loan Agreement) or other amounts, if
any, to be made pursuant to the Loan Agreement, less any amounts in respect of the Reserved
Rights, to the Account.
(h)
Payment obligations limited: Notwithstanding any other provisions to the contrary, the
obligations of the Issuer to make payments under Condition 5 (Redemption and Purchase) and
this Condition 6 shall constitute an obligation only to pay to the Noteholders on such date
upon which a payment is due in respect of the Notes, to the extent of sums of principal,
interest, Additional Amounts (as defined in the Loan Agreement), Indemnity Amounts (as
defined in the Loan Agreement) or other amounts, if any, actually received by or for the
account of the Issuer pursuant to the Loan Agreement, less any amount in respect of the
Reserved Rights. The Issuer will have no other financial obligation under the Notes.
7.
Taxation
All payments by or on behalf of the Issuer in respect of the Notes shall be made in full without
set off or counterclaim, free and clear of and without deduction or withholding for or on
account of any present or future taxes, levies, duties, assessments, fees or other governmental
charges or withholding of a similar nature no matter where arising (including interest and
penalties thereon and additions thereto) no matter how they are levied or determined (Taxes)
imposed by any taxing authority of or in, or having authority to tax in the United Kingdom,
unless such deduction or withholding of Taxes is required by law. In that event, the Issuer shall,
subject as provided below, pay such additional amounts as will result in the receipt by the
Noteholders after such withholding or deduction of such amounts as would have been received
by them if no such withholding or deduction had been made or required to be made. The
foregoing obligation to pay additional amounts, however, will not apply to any:
(a)
Taxes that would not have been imposed but for the existence of any present or former
connection between such Noteholder and the United Kingdom or Ukraine other than the
mere receipt of such payment or the ownership or holding of such Note;
(b)
Taxes that would not have been imposed but for the presentation of the Note by the
Noteholder for payment (of principal or interest) on a date more than 30 days after the
Relevant Date (as defined below);
(c)
Taxes required to be deducted or withheld by any Paying Agent from a payment on a
Note, if such payment could have been made without deduction or withholding by any
other Paying Agent in a Member State of the European Union; and
(d)
Taxes imposed on a payment to an individual which are required to be made pursuant to
European Council Directive 2003/48/EC on the taxation of savings income in the form of
interest payments or any law implementing or complying with, or introduced in order to
conform to, such Directive.
Notwithstanding the foregoing provisions, the Issuer shall only make payments of additional
amounts to the Noteholders pursuant to this Condition 7 to the extent and at such time as it shall
have actually received an equivalent amount for such purposes from the Borrower under the Loan
Agreement by way of Additional Amounts or Indemnity Amounts (each as defined in the Loan
Agreement) or otherwise.
To the extent that the Issuer receives a lesser sum from the Borrower under the Loan
Agreement, the Issuer shall account to each Noteholder entitled to receive such additional
amount pursuant to this Condition 7 for an additional amount equivalent to a pro rata portion
of such sum (if any) as is actually received by, or for the account of, the Issuer pursuant to the
provisions of the Loan Agreement on the date of, in the currency of, and subject to any
conditions attaching to such payment to the Issuer.
In these Conditions, Relevant Date means whichever is the later of (a) the date on which the
payment in question first becomes due and (b) if the full amount payable has not been received
by the Principal Paying Agent or the Trustee on or prior to such due date, the date on which
(the full amount having been so received) notice to that effect has been given to the Noteholders
by the Issuer in accordance with Condition 14 (Notices).
c104221pu100Proof7:3.3.11B/LRevision:0OperatorChoD
166
Any reference in these Conditions to principal or interest shall be deemed to include, without
duplication, any additional amounts in respect of principal or interest (as the case may be)
which may be payable under this Condition 7 or any undertaking given in addition to or in
substitution of this Condition 7 pursuant to the Trust Deed or the Loan Agreement.
8.
Prescription
Claims for principal and interest on redemption shall become void unless the relevant Note
Certificates are surrendered for payment within ten years, and claims for interest due other than
on redemption shall become void unless made within five years, of the appropriate Relevant
Date.
9.
Replacement of Note Certificates
If any Note Certificate is lost, stolen, mutilated, defaced or destroyed, it may be replaced at the
Specified Office of the Registrar or Transfer Agent, subject to all applicable laws and stock
exchange requirements, upon payment by the claimant of the expenses incurred in connection
with such replacement and on such terms as to evidence, security, indemnity and otherwise as
the Issuer, Registrar and Transfer Agent may reasonably require. Mutilated or defaced Note
Certificates must be surrendered before replacements will be issued.
10.
(a)
Trustee and Agents
Appointment, Removal and Retirement of Trustee: The power of appointing new trustees is be
vested in the Issuer pursuant to the Trust Deed but no person shall be appointed who shall not
previously have been approved by an Extraordinary Resolution. A trust corporation may be
appointed sole trustee hereof but subject thereto there shall be at least two trustees hereof one
at least of which shall be a trust corporation. The Noteholders shall together have the power,
exercisable by Extraordinary Resolution, to remove any trustee or trustees for the time being
hereof. The removal of any trustee shall not become effective unless there remains a trustee
hereof (being a trust corporation) in office after such removal.
Subject to the conditions set out in the Trust Deed, the Issuer may appoint a new trustee if the
United Kingdom ceases to be the jurisdiction in which the Trustee is resident and acting
through for taxation purposes.
Subject to the conditions set out in the Trust Deed, the Trustee may retire at any time upon
giving not less than three calendar months’ notice in writing to the Issuer without assigning any
reason therefor and without being responsible for any costs occasioned by such retirement.
(b)
Indemnification of the Trustee: Under separate agreement between the Borrower and the Trustee,
the Trustee is entitled to be indemnified and relieved from responsibility in certain circumstances
and, under the Trust Deed, to be paid its costs and expenses in priority to the claims of the
Noteholders. The Trust Deed, the fees distribution letter to be dated on or about 10 March
2011 and the fees indemnity letter to be dated on or about 10 March 2011 contain provisions
for the indemnification of the Trustee, provisions for its relief from responsibility, including
relieving it from taking action unless indemnified and/or secured and/or prefunded to its
satisfaction, and provisions entitling it to be paid its costs and expenses in priority to the claims
of the Noteholders.
(c)
Trustee contracting with the Issuer and the Borrower: The Trust Deed also contains provisions
pursuant to which the Trustee is entitled, inter alia, (i) to enter into business transactions with
the Issuer and/or the Borrower and/or any subsidiary of the Issuer and/or the Borrower and to
act as trustee for the holders of any other securities issued or guaranteed by, or relating to, the
Issuer and/or the Borrower and/or any subsidiary of the Issuer and/or the Borrower, (ii) to
exercise and enforce its rights, comply with its obligations and perform its duties under or in
relation to any such transactions or, as the case may be, any such trusteeship without regard to
the interests of, or consequences for, the Noteholders and (iii) to retain and not be liable to
account for any profit made or any other amount or benefit received thereby or in connection
therewith.
(d)
Trustee to have regard to Interests of Noteholders as one Class: In connection with the exercise
by it of any of its trusts, powers, authorities and discretions (including, without limitation, any
modification, waiver, authorisation, determination or substitution), the Trustee shall have regard
to the general interests of the Noteholders as a class but shall not have regard to any interests
c104221pu100Proof7:3.3.11B/LRevision:0OperatorChoD
167
arising from circumstances particular to individual Noteholders (whatever their number) and, in
particular but without limitation, shall not have regard to the consequences of any such exercise
for individual Noteholders (whatever their number) resulting from their being for any purpose
domiciled or resident in, or otherwise connected with, or subject to the jurisdiction of, any
particular territory or any political sub division thereof and the Trustee shall not be entitled to
require, nor shall any Noteholder be entitled to claim, from the Issuer, the Trustee or any other
person any indemnification or payment in respect of any tax consequence of any such exercise
upon individual Noteholders except to the extent already provided for in Condition 7 (Taxation)
and/or any undertaking given in addition to, or in substitution for, Condition 7 (Taxation)
pursuant to the Trust Deed.
(e)
In acting under the Agency Agreement and in connection with the Notes, the Agents act solely
as agents of the Issuer and (to the extent provided therein) the Trustee and do not assume any
obligations towards or relationship of agency or trust for or with any of the Noteholders. Under
separate agreement between the Borrower and the Agents, the Agents are entitled to be
indemnified and relieved from certain responsibilities in certain circumstances.
(f)
Initial Paying Agents: The initial Agents and their initial Specified Offices are listed below. The
Issuer reserves the right (with the prior approval of the Trustee) at any time to vary or
terminate the appointment of any Agent and to appoint a successor principal paying agent or
registrar and additional or successor paying agents and transfer agents; provided, however, that
the Issuer shall at all times maintain (a) a principal paying agent and a registrar, (b) a paying
agent and a transfer agent in Ireland, and (c) a paying agent with a specified office in a member
state of the European Union that will not be obliged to withhold or deduct tax pursuant to any
European Union Directive on the taxation of savings implementing the conclusions of the
ECOFIN Council meeting of 26 to 27 November 2000 or any law implementing or complying
with, or introduced to conform to, such Directive.
Notice of any change in any of the Agents or in their Specified Offices shall promptly be given
to the Noteholders in accordance with Condition 14 (Notices).
11.
(a)
Meetings of Noteholders; Modification and Waiver; Substitution
Meetings of Noteholders: The Trust Deed contains provisions for convening meetings of
Noteholders to consider matters relating to the Notes, including the modification of any
provision of the Loan Agreement or any provision of these Conditions or the Trust Deed. Such
a meeting may be convened on no less than 14 days’ notice by the Trustee or the Issuer or by
the Trustee upon the request in writing of Noteholders holding not less than one tenth of the
aggregate principal amount of the outstanding Notes. The quorum at any meeting convened to
vote on an Extraordinary Resolution will be one or more persons holding or representing more
than half of the aggregate principal amount of the outstanding Notes or, at any adjourned
meeting, one or more persons holding or representing whatever the principal amount of the
outstanding Notes held or represented, unless the business of such meeting includes
consideration of proposals, inter alia, (i) to change any date fixed for payment of principal or
interest in respect of the Notes, (ii) to reduce the amount of principal or interest payable on any
date in respect of the Notes, (iii) to alter the method of calculating the amount of any payment
in respect of the Notes or the date for any such payment, (iv) to change the currency of
payments under the Notes, (v) to change the quorum requirements relating to meetings or the
majority required to pass an Extraordinary Resolution, (vi) to alter the governing law of the
Conditions, the Trust Deed or the Loan Agreement, (vii) to change any date fixed for payment
of principal or interest under the Loan Agreement, (viii) to alter the method of calculating the
amount of any payment under the Loan Agreement or (ix) to change the currency of payment
or, without prejudice to the rights under Condition 11(b) (Modification) below, change the
definition of ‘‘Event of Default’’ under the Loan Agreement (each, a Reserved Matter), in which
case the necessary quorum will be one or more persons holding or representing not less than
two thirds, or at any adjourned meeting not less than one third, in principal amount of the
Notes for the time being outstanding. Any Extraordinary Resolution duly passed at any such
meeting shall be binding on all the Noteholders, whether present or not.
Extraordinary Resolution means a resolution passed at a Meeting duly convened and held in
accordance with schedule 4 (Provisions for Meetings of Noteholders) of the Trust Deed by a
majority of not less than three quarters of the votes cast.
c104221pu100Proof7:3.3.11B/LRevision:0OperatorChoD
168
In addition, a resolution in writing signed by or on behalf of the holders of not less than 90 per
cent. of the Notes then outstanding (a Written Resolution) will take effect as if it were an
Extraordinary Resolution. Such a resolution in writing may be contained in one document or
several documents in the same form, each signed by or on behalf of one or more Noteholders.
(b)
Modification: The Trustee may from time to time and at any time without the consent or
sanction of the Noteholders concur with the Issuer (and, if applicable, the Borrower) in making
(a) any modification to these Conditions or the Trust Deed (other than in respect of Reserved
Matters as specified and defined in schedule 4 (Provisions for Meetings of Noteholders) of the
Trust Deed or any provision of the Trust Deed referred to in that specification), the Notes, the
Agency Agreement or, pursuant to the Transferred Rights, the Loan Agreement, which in the
opinion of the Trustee, it may be proper to make if, in the opinion of the Trustee, such
modification will not be materially prejudicial to the interests of Noteholders or (b) any
modification to the Notes, these Conditions, the Agency Agreement, the Loan Agreement or the
Trust Deed if in the opinion of the Trustee such modification is of a formal, minor or technical
nature or is to correct a manifest error. Any such modification shall be binding on the
Noteholders and, unless the Trustee otherwise agrees, the Issuer shall cause such modification to
be Noteholders as soon as practicable thereafter in accordance with Condition 14 (Notices).
(c)
Authorisation, Waiver and Determination: In addition, the Trustee may, without the consent or
sanction of the Noteholders, authorise or waive any proposed breach or breach of the Notes,
these Conditions or the Trust Deed by the Issuer, the Agency Agreement or, pursuant to the
Transferred Rights, the Loan Agreement by the Borrower, or determine that any event which
would or might otherwise give rise to a right of acceleration under the Loan Agreement or
constitute a Relevant Event (as defined in Condition 12 (Enforcement)) shall not be treated as
such (other than a proposed breach or breach relating to the subject of a Reserved Matter) if,
in the opinion of the Trustee, the interests of the Noteholders will not be materially prejudiced
thereby.
(d)
Notification to Noteholders: Unless the Trustee agrees otherwise, any such modification,
authorisation or waiver shall be notified to the Noteholders as soon as practicable thereafter and
in accordance with Condition 14 (Notices).
(e)
Substitution: The Trust Deed and the Loan Agreement contain provisions under which the
Issuer may, without the consent of the Noteholders, transfer the obligations of the Issuer as
principal debtor under the Trust Deed and the Notes and its rights as Lender under the Loan
Agreement to a third party provided that certain conditions specified in the Trust Deed are
fulfilled.
12.
Enforcement
At any time after an Event of Default (as defined in the Loan Agreement) or Relevant Event
(as defined below) shall have occurred and be continuing, the Trustee may, at its discretion and
without notice, institute such proceedings as it thinks fit to enforce its rights under the Trust
Deed in respect of the Notes, but it shall not be bound to do so unless:
(a)
it has been so requested in writing by the Holders of at least 25 per cent. in principal
amount of the outstanding Notes or has been so directed by an Extraordinary Resolution;
and
(b)
it has been indemnified and/or provided with security and/or prefunded to its satisfaction
against all liabilities, proceedings, claims and demands to which it may thereby become
liable and all costs, charges and expenses which may be incurred by it in connection
therewith.
The Trust Deed also provides that, in the case of an Event of Default or a Relevant Event, the
Trustee may, and shall if requested to do so by Noteholders of at least 25 per cent. in principal
amount of the Notes outstanding or if directed to do so by an Extraordinary Resolution and, in
either case, subject to it being secured and/or prefunded and/or indemnified to its satisfaction,
(1) require the Issuer to declare all amounts payable under the Loan Agreement by the
Borrower to be due and payable (where an Event of Default has occurred and is continuing), or
(2) enforce the security created in the Trust Deed (in the case of a Relevant Event). Upon
repayment of the Loan following an Event of Default, the Notes will be redeemed or repaid at
c104221pu100Proof7:3.3.11B/LRevision:0OperatorChoD
169
the principal amount thereof together with interest accrued to the date fixed for redemption
together with any Additional Amounts (as defined in the Loan Agreement) due in respect
thereof pursuant to Condition 7 (Taxation) and thereupon shall cease to be outstanding.
For the purposes of these Conditions, Relevant Event means the earlier of (i) the failure by the
Issuer to make any payment of principal or interest on the Notes when due to the extent it is
obligated to do so pursuant to these Conditions; (ii) the filing of an application for the
institution for bankruptcy, insolvency or composition proceedings over the assets of the Issuer in
the United Kingdom; and (iii) the taking of any action in furtherance of the dissolution of the
Issuer. For the avoidance of doubt, no Additional Amounts (as defined in the Loan Agreement)
shall be payable if and to the extent that such withholding or deduction is required following
and on account of a Relevant Event.
No Noteholder may proceed directly against the Issuer unless the Trustee, having become bound
to do so, fails to do so within a reasonable time and such failure is continuing.
13.
Further Issues
The Issuer may from time to time, with the consent of the Borrower but without the consent of
the Noteholders, in accordance with the Trust Deed, create and issue Further Notes (as defined
in the Trust Deed) having the same terms and conditions as the Notes in all respects (or in all
respects except for the issue date and/or the first payment of interest) so as to form a single
series with the Notes. Such Further Notes shall be issued under a deed supplemental to the
Trust Deed. In relation to such further issue, the Issuer will enter into a loan agreement
supplemental to the Loan Agreement with the Borrower on the same terms as the original Loan
Agreement (or on the same terms except for the borrowing date and/or the first payment of
interest and/or the rate of interest) subject to any modifications which, in the sole opinion of the
Trustee, would not materially prejudice the interests of the Noteholders. The Issuer will provide
a further fixed charge and absolute assignment by way of security in favour of the Trustee of its
rights under such supplemental loan agreement equivalent to the rights charged and assigned as
Security Interests in relation to the Issuer’s rights under the original Loan Agreement which will,
together with the Security Interests referred to in these Conditions, secure both the Notes and
such Further Notes.
14.
Notices
All notices to the Noteholders will be valid if, so long as the Notes are listed on the Irish Stock
Exchange and the guidelines of that exchange so require, they are filed with the Companies
Announcements Office of the Irish Stock Exchange. The Issuer shall also ensure that notices are
duly published in a manner which complies with the rules and regulations of any stock exchange
or the relevant authority on which the Notes are for the time being listed. Any such notice will
be deemed to have been given on the date of the first publication or, where required to be
published in more than one newspaper, on the date of the first publication in all required
newspapers. If publication as provided above is not practicable, notice will be given in such
other manner, and shall be deemed to have been given on such date, as the Trustee may
approve.
15.
Limited Recourse
If at any time following:
(a) the occurrence of the scheduled redemption date set out in Condition 5(a) (Scheduled
redemption) or any earlier date upon which all of the Notes are due and payable; and
(b)
Realisation of the Loan Agreement and application in full of any amounts available to pay
amounts due and payable under the Notes in accordance with the Trust Deed and the
Conditions,
the proceeds of such Realisation are insufficient, after payment of all other claims ranking in
priority in accordance with the applicable priority (or priorities) of payments, to pay in full any
Deferred Interest and any other amounts then due and payable under the Notes then the
amount remaining to be paid, including but not limited to Deferred Interest, (after such
application in full of the amounts first referred to in (b) above) under the Notes shall, on the
day following such application in full of the amounts referred to in (b) above, cease to be due
and payable by the Issuer.
c104221pu100Proof7:3.3.11B/LRevision:0OperatorChoD
170
For the purposes of this Condition 15:
Realisation means, in relation to the Loan Agreement, the deriving, to the fullest extent
practicable, (in accordance with the provisions of the Trust Deed and other transaction
documentation) of proceeds from or in respect of the Loan Agreement including (without
limitation) through sale or through performance by the Borrower.
Notwithstanding any other Clause or provision in the Conditions or any transaction document,
no provision other than this Condition 15 shall limit or in any way reduce the amount of
interest that would otherwise be payable by the Issuer under any Note, if and to the extent that
such limitation or reduction falls to any extent to be determined by reference to the results of
any business or part of a business or the value of any property. For the avoidance of doubt,
the Notes are therefore limited recourse obligations of the Issuer only. In each case where
amounts are stated to be payable in respect of the Notes, the obligation of the Issuer to make
any such payment shall constitute an obligation only to account to the Noteholders, on each
date upon which such amounts are due in respect of the Notes, for all amounts (if any) actually
received by or for the account of the Issuer pursuant to the Loan Agreement (disregarding any
amounts in respect of Reserved Rights). The Issuer will have no other financial obligation under
the Notes. Accordingly, Noteholders are deemed to have agreed that they will rely solely and
exclusively on the Borrower’s covenants to pay and perform its obligations under the Loan
Agreement and the credit and financial standing of the Borrower. Noteholders shall have no
recourse (direct or indirect) to any other assets of the Issuer.
None of the Noteholders (nor any other person acting on behalf of any of them) shall be
entitled at any time to institute against the Issuer, or join in any institution against the Issuer
of, any bankruptcy, administration, moratorium, reorganisation, controlled management,
arrangement, insolvency, examinership, winding-up or liquidation proceedings or similar
insolvency proceedings under any applicable bankruptcy or similar law in connection with any
obligation of the Issuer relating to the Notes or otherwise owed to the creditors, save for
lodging a claim in the liquidation of the Issuer which is initiated by another party or taking
proceedings to obtain a declaration or judgment as to the obligations of the Issuer.
No Noteholder shall have any recourse against any director, shareholder, or officer of the Issuer
in respect of any obligations, covenants or agreement entered into or made by the Issuer in
respect of the Notes.
16.
(a)
Governing Law and Jurisdiction
Governing law: The Notes, the Loan Agreement and the Trust Deed and all matters arising from
or connected with the Notes, the Loan Agreement and the Trust Deed, including any non
contractual obligations arising out of or in connection therefrom, are governed by, and shall be
construed in accordance with, English law.
(b)
Jurisdiction: The Issuer has in the Trust Deed (i) irrevocably agreed for the benefit of the
Trustee and the Noteholders that the courts of England shall have exclusive jurisdiction to settle
any dispute (a Dispute) arising from or connected with the Notes; (ii) agreed that those courts
are the most appropriate and convenient courts to settle any Dispute and, accordingly, that it
will not argue that any other courts are more appropriate or convenient; (iii) designated a
person in England to accept service of any process on its behalf; (iv) consented to the
enforcement of any judgment; and (v) to the extent that it may in any jurisdiction claim for
itself or its assets immunity from suit, execution, attachment (whether in aid of execution, before
judgment or otherwise) or other legal process, and to the extent that in any such jurisdiction
there may be attributed to itself or its assets or revenues such immunity (whether or not
claimed), agreed not to claim and irrevocably waived such immunity to the full extent permitted
by the laws of such jurisdiction. The Trust Deed also states that nothing contained in the Trust
Deed prevents the Trustee or any of the Noteholders from taking proceedings relating to a
Dispute (Proceedings) in any other courts with jurisdiction and that, to the extent allowed by
law, the Trustee or any of the Noteholders may take concurrent Proceedings in any number of
jurisdictions.
17.
Contracts (Rights of Third Parties) Act 1999
No person shall have any right to enforce any term or condition of the Notes under the
Contracts (Rights of Third Parties) Act 1999, but this does not affect any right or remedy of
any person which exists or is available apart from that Act.
c104221pu100Proof7:3.3.11B/LRevision:0OperatorChoD
171
There will appear at the foot of the Conditions endorsed on or (as the case may be) attached to each
Individual Note Certificate the names and Specified Offices of the Registrar, the Paying Agents and the
Transfer Agent as set out at the end of this Prospectus.
c104221pu100Proof7:3.3.11B/LRevision:0OperatorChoD
172
SUMMARY OF PROVISIONS RELATING TO THE NOTES IN GLOBAL FORM
Global Note Certificate
The Notes will be represented by a Global Note Certificate which will be registered in the name of
The Bank of New York Depository (Nominees) Limited as nominee for, and deposited with, a
common depositary for Euroclear and Clearstream, Luxembourg.
For so long as all of the Notes are represented by a Global Note Certificate and such Global Note
Certificate is held on behalf of Euroclear and/or Clearstream, Luxembourg, the Trustee, Paying
Agent, Transfer Agent and Registrar shall, for the purposes of performing the functions under the
Trust Deed be entitled to deem, treat and have regard to the interests of each person (other than
Euroclear or Clearstream, Luxembourg) who is for the time being shown in the records of Euroclear
or Clearstream, Luxembourg as the holder of a particular principal amount of such Notes (each an
Accountholder) (in which regard any certificate or other document issued by Euroclear or Clearstream,
Luxembourg as to the principal amount of such Notes standing to the account of such person shall
be conclusive and binding for all purposes) as the holder of such principal amount of such Notes for
all purposes in place of the holder of the Global Note Certificate to the extent of the principal
amount of Notes in respect of which such person is an Accountholder. Neither the Trustee, the
Paying Agent, the Transfer Agent nor the Registrar shall have any responsibility to or be liable for
any aspect of the records relating to ownership of interests in the Global Note certificate.
Exchange
The Global Note Certificate will become exchangeable in whole, but not in part, for individual note
certificates (Individual Note Certificates) if (a) Euroclear or Clearstream, Luxembourg is closed for
business for a continuous period of 14 days (other than by reason of legal holidays) or announces an
intention permanently to cease business or (b) the Issuer has failed to pay an amount in respect of
the Notes within five days of the date on which such amount became due and payable under the
Conditions; or (c) the Issuer would suffer a material disadvantage in respect of the Notes as a result
of a change in the laws or regulations (taxation or otherwise) which would not be suffered were the
Notes evidenced by Individual Note Certificates and a certificate to such effect signed by two
authorised signatories of the Issuer is delivered to the Trustee. Thereupon (in the case of (a) and (b)
above) the Holder may give notice to the Issuer, and (in the case of (c) above) the Issuer may give
notice to the Trustee and the Noteholders of its intention to exchange the Global Note Certificate for
Individual Note Certificates.
Whenever the Global Note Certificate is to be exchanged for Individual Note Certificates, such
Individual Note Certificates will be issued in an aggregate principal amount equal to the principal
amount of the Global Note Certificate within five business days of the delivery, by or on behalf of
the registered Holder of the Global Note Certificate, Euroclear and/or Clearstream, Luxembourg, to
the Registrar of such information as is required to complete and deliver such Individual Note
Certificates (including, without limitation, the names and addresses of the persons in whose names the
Individual Note Certificates are to be registered and the principal amount of each such person’s
holding) against the surrender of the Global Note Certificate at the Specified Office of the Registrar.
Such exchange will be effected in accordance with the provisions of the Agency Agreement and the
regulations concerning the transfer and registration of Notes scheduled thereto and, in particular,
shall be effected without charge to any Holder or the Trustee, but against such indemnity as the
Registrar may require in respect of any tax or other duty of whatsoever nature which may be levied
or imposed in connection with such exchange.
Amendments to Conditions
In addition, the Global Note Certificate will contain provisions which modify the Terms and
Conditions of the Notes as they apply to the Notes evidenced by the Global Note Certificate. The
following is a summary of certain of those provisions:
Notices
Notwithstanding Condition 14 (Notices), so long as the Global Note Certificate is held on behalf of
Euroclear, Clearstream, Luxembourg or any other clearing system provided such other clearing system
is regarded as a recognised clearing system by the Irish Revenue Commissioners (an Alternative
Clearing System), notices to Holders of Notes represented by the Global Note Certificate may be
given by delivery of the relevant notice to Euroclear, Clearstream, Luxembourg or (as the case may
be) such Alternative Clearing System for communication to the relative Accountholders rather than
c104221pu100Proof7:3.3.11B/LRevision:0OperatorChoD
173
by publication as required by Condition 14 (Notices), provided that, for so long as the Notes are
listed on the Irish Stock Exchange Limited and the guidelines of the Irish Stock Exchange Limited so
require, notice will also be given by filing in the Companies Announcements Office of the Irish Stock
Exchange. Any such notice shall be deemed to have been given to the Noteholders on the second day
after the day on which such notice is delivered to Euroclear and/or Clearstream, Luxembourg or (as
the case may be) such Alternative Clearing System as aforesaid.
Payment
To the extent that the Issuer has actually received and retained the relevant funds from the Borrower,
payments in respect of Notes represented by a Global Note Certificate will be made against
presentation for endorsement and, if no further payment of principal or interest is to be made in
respect of the Notes, against presentation and surrender of such Global Note Certificate to or to the
order of the Registrar. Upon payment of any principal, the amount so paid shall be endorsed by or
on behalf of the Registrar on behalf of the Issuer on the schedule to the Global Note Certificate.
Payment while Notes are represented by a Global Note Certificate will be made in accordance with
the procedures of Euroclear and Clearstream, Luxembourg or any alternative clearing system as
appropriate.
Meetings
The Holder of the Global Note Certificate will be treated as being two persons for the purposes of
any quorum requirements of, or the right to demand a poll at, a meeting of Noteholders.
Trustee Powers
In considering the interests of Noteholders while the Global Note Certificate is held on behalf of a
clearing system, the Trustee may have regard to any information provided to it by such clearing
system or its operator as to the identity (either individually or by category) of its Accountholders
with entitlements to the Global Note Certificate and may consider such interests as if such
Accountholders were the holders of the Global Note Certificate.
Prescription
Claims against the Issuer in respect of principal and interest on the Notes while the Notes are
represented by the Global Note Certificate will become void unless it is presented for payment within
a period of 10 years (in the case of principal) and five years (in the case of interest) from the
appropriate Relevant Date (as defined in Condition 8 (Prescription)).
Euroclear and Clearstream, Luxembourg
References in the Global Note Certificate and this summary to Euroclear and/or Clearstream,
Luxembourg shall be deemed to include references to any other clearing system approved by the
Trustee. The address of Euroclear is 1 Boulevard du Roi Albert 11, B 1210 Brussels, Belgium. The
address of Clearstream, Luxembourg is L 2967 Luxembourg.
c104221pu100Proof7:3.3.11B/LRevision:0OperatorChoD
174
SUBSCRIPTION AND SALE
The Lead Managers have, pursuant to the terms and conditions set forth in a subscription agreement,
dated 4 March 2011 (the Subscription Agreement), agreed with the Issuer and the Borrower, subject to
the satisfaction of certain conditions set forth therein, to subscribe and pay for the Notes at the issue
price of 100 per cent. of the principal amount of the Notes. The Borrower has agreed to pay certain
commissions, fees, costs and expenses in connection with the Loan and the offering of the Notes and
to reimburse certain of the Lead Managers, the Issuer and the Trustee for certain of their expenses in
connection with the offering of the Notes. The Lead Managers are entitled to be released and
discharged from their obligations under the Subscription Agreement in certain circumstances prior to
payment being made to the Issuer. The yield of the Notes is 8.25 per cent. per annum. The yield is
calculated as at the Issue Date on the basis of the issue price. It is not an indication of future yield.
An entity affiliated to a Lead Manager has agreed to purchase up to U.S.$25,000,000 in principal
amount of the Notes from the Lead Managers in their capacity as the initial purchasers of the Notes.
United States
The Notes have not been and will not be registered under the Securities Act and may not be offered
or sold within the United States or to, or for the account or benefit of, U.S. persons (as defined in
Regulation S) except in accordance with Regulation S or pursuant to an exception from, or in a
transaction not subject to, the registration requirements of the Securities Act.
Each Joint Lead Manager has severally represented, warranted and agreed that it has not offered or
sold, and will not offer or sell, any Notes constituting part of its allotment except in accordance with
Rule 903 of Regulation S under the Securities Act. Each Lead Managers also represents, warrants
and agrees that it has offered and sold the Notes, and will offer and sell the Notes (i) as part of their
distribution at any time and (ii) otherwise until 40 days after the later of the commencement of the
offering and the Closing Date (the distribution compliance period) only in accordance with Rule 903 of
Regulation S of the Securities Act. Each Lead Managers agrees that, at or prior to confirmation of
sale of Notes, it will have sent to each distributor, dealer or person receiving a selling concession, fee
or other remuneration that purchases Notes from it during the distribution compliance period a
confirmation or notice to substantially the following effect:
‘‘The Securities covered hereby have not been registered under the U.S. Securities Act of 1933, as
amended (the Securities Act), and may not be offered and sold within the United States or to, or for
the account or benefit of, U.S. persons (i) as part of their distribution at any time or (ii) otherwise
until 40 days after the later of the commencement of the offering and the closing date, except in
either case in accordance with Regulation S under the Securities Act. Terms used above have the
meaning given to them by Regulation S.’’
Each Lead Managers has represented and agreed that neither it, its affiliates nor any persons acting
on its or their behalf have engaged or will engage in any directed selling efforts with respect to the
Notes, and it and they have complied and will comply with the offering restrictions requirement of
Regulation S. Terms used in the paragraph above and this paragraph have the meaning given to
them by Regulation S.
United Kingdom
Each Joint Lead Manager has represented, warranted and agreed that:
(a)
it has only communicated or caused to be communicated and will only communicate or cause to
be communicated an invitation or inducement to engage in investment activity (within the
meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of any
Notes in circumstances in which Section 21(1) of the FSMA does not apply to the Issuer; and
(b)
it has complied and will comply with all applicable provisions of the FSMA with respect to
anything done by it in relation to the Notes in, from, or otherwise involving the United
Kingdom.
Russian Federation
Each Joint Lead Manager has represented and agreed that the Notes have not been and will not be
offered, transferred or sold as part of their initial distribution or at any time thereafter to or for the
benefit of any persons (including legal entities) resident, incorporated, established or having their
c104221pu110Proof7:3.3.11B/LRevision:0OperatorChoD
175
usual residence in the Russian Federation or to any person located within the territory of the Russian
Federation unless and to the extent otherwise permitted under Russian Law; it being understood and
agreed that this Prospectus may be distributed to persons in the Russian Federation in a manner that
does not constitute an advertisement or offering of the Notes in Russia (each as defined under
Russian law).
Ukraine
Each Joint Lead Manager represents, warrants and undertakes that the Notes shall not be offered by
any of them for circulation, distribution, placement, sale, purchase or other transfer in the territory of
Ukraine. Accordingly, nothing in the Prospectus or any other documents, information or
communications related to the Notes shall be interpreted as containing any offer or invitation to, or
solicitation of, any such circulation, distribution, placement, sale, purchase or other transfer in the
territory of Ukraine.
Hong Kong
Each Joint Lead Manager has represented, warranted and undertaken that:
(a)
it has not offered or sold and will not offer or sell in Hong Kong, by means of any document,
any Notes other than (i) to persons whose ordinary business is to buy or sell shares or
debentures (whether as principal or agent); (ii) to ‘‘professional investors’’ as defined in the
Securities and Futures Ordinance (Cap. 571) of Hong Kong and any rules made under that
Ordinance; or (iii) in other circumstances which do not result in the document being a
‘‘prospectus’’ as defined in the Companies Ordinance (Cap. 32) of Hong Kong or which do not
constitute an offer to the public within the meaning of that Ordinance; and
(b)
it has not issued or had in its possession for the purposes of issue, and will not issue or have in
its possession for the purposes of issue, whether in Hong Kong or elsewhere, any advertisement,
invitation or document relating to the Notes, which is directed at, or the contents of which are
likely to be accessed or read by, the public of Hong Kong (except if permitted to do so under
the securities laws of Hong Kong) other than with respect to Notes which are or are intended
to be disposed of only to persons outside Hong Kong or only to ‘‘professional investors’’ as
defined in the Securities and Futures Ordinance and any rules made under that Ordinance.
Singapore
The Prospectus has not been registered as a prospectus with the Monetary Authority of Singapore
(the MAS) under the Securities and Futures Act, Chapter 289 of Singapore (the Securities and Futures
Act). Accordingly, the Notes may not be offered or sold or made the subject of an invitation for
subscription or purchase nor may the Prospectus or any other document or material in connection
with the offer or sale or invitation for subscription or purchase of such Notes be circulated or
distributed, whether directly or indirectly, to any person in Singapore other than (a) to an
institutional investor pursuant to Section 274 of the Securities and Futures Act, (b) to a relevant
person, or any person pursuant to Section 275(1A) of the Securities and Futures Act, and in
accordance with the conditions specified in Section 275 of the Securities and Futures Act, or (c)
pursuant to, and in accordance with the conditions of, any other applicable provision of the Securities
and Futures Act.
Each of the following relevant persons specified in Section 275 of the Securities and Futures Act
which has subscribed or purchased Notes, namely a person who is:
(c)
a corporation (which is not an accredited investor) the sole business of which is to hold
investments and the entire share capital of which is owned by one or more individuals, each of
whom is an accredited investor; or
(d)
a trust (where the trustee is not an accredited investor) whose sole purpose is to hold
investments and each beneficiary is an accredited investor,
should note that shares, debentures and units of shares and debentures of that corporation or
the beneficiaries’ rights and interest in that trust shall not be transferable for six months after
that corporation or that trust has acquired the Notes under Section 275 of the Securities and
Futures Act except:
c104221pu110Proof7:3.3.11B/LRevision:0OperatorChoD
176
(i)
to an institutional investor under Section 274 of the Securities and Futures Act or to a
relevant person, or any person pursuant to Section 275(1A) of the Securities and Futures
Act, and in accordance with the conditions, specified in Section 275 of the Securities and
Futures Act;
(ii)
where no consideration is given for the transfer; or
(iii) by operation of law.
Republic of Italy
Each Lead Manager has represented and agreed that it has not made and will not make an offer of
the Notes which are the subject of the offering, contemplated by the Prospectus to the public in the
Republic of Italy (Italy) other than:
(a)
to professional investors (investitori qualificati) as defined pursuant to Article 100, paragraph 1
(a), of Legislative Decree No 58, 24 February 1998 (the Financial Services Act) and Article 34ter, paragraph 1(b), of CONSOB Regulation 11971, 14 May 1999 (the Issuers Regulation), all as
amended and restated from time to time; or
(b)
in any other circumstances provided under Article 100, paragraph 1, of the Financial Services
Act and under Article 34-ter, paragraph 1, of the Issuers Regulation, where exemptions from the
requirement to publish a prospectus are provided.
For the purposes of this provision, the expression ‘‘offer of Notes to the public’’ in Italy means the
communication in any form and by any means of sufficient information on the terms of the offer and
the Notes to be offered so as to enable an investor to decide to purchase or subscribe the Notes,
including the placement through authorised intermediaries.
Any investor purchasing the Notes is solely responsible for ensuring that any offer or resale of the
Notes by such investor occurs in compliance with applicable Italian laws and regulations. The Notes
and the information contained in the Prospectus are intended only for the use of its recipient. No
person resident or located in Italy other than the original recipients of the Prospectus may rely on it
or its content.
Moreover, and subject to the foregoing, each Lead Manager has acknowledged that any offer, sale or
delivery of the Notes or distribution of copies of this document or any other document relating to
the Notes in Italy under (a) or (b) above will be:
(a)
made by an investment firm, bank or financial intermediary permitted to conduct such activities
in Italy in accordance with the Financial Services Act, Legislative Decree No. 385 of 1
September 1993 (the Banking Act) and CONSOB regulation No. 11522, 1 July 1998, all as
amended;
(b)
in compliance with the so-called subsequent notification to the Bank of Italy, pursuant to
Article 129 of the Banking Act, if applicable; and
(c)
in compliance with any other applicable laws and regulations including any relevant limitations
which may be imposed by CONSOB.
General
Other than the approval of this Prospectus by the Central Bank, no action has been or will be taken
in any jurisdiction by the Issuer, the Borrower or the Lead Managers that would, or is intended to,
permit a public offer of the Notes, or possession or distribution of any offering material in relation
thereto, in any country or jurisdiction where action for that purpose is required.
Each Joint Lead Manager has severally undertaken to the Issuer and the Borrower that it will not,
directly or indirectly, offer or sell any Notes or distribute or publish any prospectus, form of
application, advertisement or other document or information in any country or jurisdiction except
under circumstances that will, to the best of its knowledge and belief upon due enquiry, result in
compliance with any applicable laws and regulations and all offers and sales of Notes by it will be
made on the same terms.
No Joint Lead Manager is authorised to make any representation or use any information in
connection with the issue, offering and sale of the Notes other than as contained in this Prospectus
or any amendment or supplement to it.
c104221pu110Proof7:3.3.11B/LRevision:0OperatorChoD
177
TAXATION
The following is a general summary of certain Ukrainian and United Kingdom tax considerations
relevant to the purchase, ownership and disposition of the Notes as well as taxation of interest payments
on the Loan subject to terms and conditions of the Notes. It does not purport to be a complete analysis
of all tax considerations relating to the Notes and the Loan, whether in those countries or elsewhere.
Prospective purchasers of the Notes should consult their own tax advisers as to which countries’ tax laws
could be relevant to acquiring, holding and disposing of Notes and receiving payments of interest,
principal and/or other amounts under the Notes and the consequences of such actions under the tax laws
of such countries.
The summary is based upon the law as in effect as of the date of this Prospectus and is subject to any
change in law that may take effect after such date.
Ukrainian Tax Considerations
General
The following summary is included for general information only. Potential investors in and holders of
the Notes should consult their own tax advisers as to the tax consequences under the laws of Ukraine
of the acquisition, ownership and disposition of the Notes. This summary is based upon the
Ukrainian tax laws and regulations as in effect on the date of this Prospectus. Such laws and
regulations are subject to change or varying interpretations. As with other areas of Ukrainian
legislation, tax law and practice in Ukraine is not as clearly established as that of more developed
jurisdictions. It is possible, therefore, that the current interpretation of the law or practice of its
application may change or that the laws may be amended. Accordingly, it is possible that payments
to be made to the Issuer under the Loan Agreement and/or to the holders of the Notes could become
subject to taxation in Ukraine or that rates currently in effect with respect to such payments could be
increased in ways that cannot be anticipated as of the dale of this Prospectus.
Tax on Interest Payments Under the Loan
Under Ukrainian tax legislation, income received by non -resident entities from Ukrainian sources in
the form of interest shall be subject to withholding tax in Ukraine at the rate of 15 per cent.
At the same time, if an applicable double tax treaty, ratified by Ukraine, provides for reduction in or
relief of income from taxation in Ukraine, the treaty provisions shall prevail over provisions of the
Ukrainian tax laws. The United Kingdom and Ukraine have entered into the Double Tax Treaty.
Under provisions of the Double Tax Treaty, interest arising in Ukraine and paid to a resident of the
United Kingdom shall be taxable only in the United Kingdom if such resident is the beneficial owner
of the interest and is subject to tax in respect of the interest in the United Kingdom, and except
when the interest is derived through the resident’s permanent establishment in Ukraine.
Based on professional advice it has received, the Bank believes that, under the Double Tax Treaty, as
currently applied, payments of interest on the Loan will not be subject to withholding taxation in
Ukraine, provided that the above specified conditions under the Double Tax Treaty are met and, in
addition, that certain Ukrainian law requirements are satisfied.
Under applicable Ukrainian law, the Issuer’s residence in the United Kingdom for purposes of the
Double Tax Treaty will be evidenced by a certificate issued by the taxing authority in the United
Kingdom or by the Issuer’s being listed in the S.W.I.F.T. International Bank Identifier Code. A new
tax residency certificate must be obtained by the Issuer for each calendar year.
Ukraine does not have an established practice of utilizing the concept of ‘‘beneficial ownership’’ of
interest. For tax law purposes, this concept was introduced in Ukraine by the new Tax Code of
Ukraine, the main part of which became effective on 1 January 2011. Under the Tax Code, a person
that acts as agent, nominal holder (owner) or intermediary in respect of Ukrainian source income
would not qualify as the ‘‘beneficial owner’’ of the income. Although the Ukrainian tax authorities
did not apply the ‘‘beneficial ownership’’ concept to deny tax treaty benefits to foreign lenders in the
past, and there is yet no practice of interpretation or application of such concept in Ukraine, there is
a risk that, based on the above specified provisions of the new Tax Code, the Issuer may be viewed
by the Ukrainian tax authorities as failing to satisfy the ‘‘beneficial ownership’’ test in respect of
interest under the Loan Agreement. In such event, the payment of interest to the Issuer would not be
exempt from the Ukrainian withholding tax, and the Borrower would be required to pay the
Additional Amounts under the tax gross-up provisions of the Loan Agreement to compensate the
Issuer for such tax withholding (see ‘‘Gross-up Provision’’ below).
c104221pu110Proof7:3.3.11B/LRevision:0OperatorChoD
178
In addition, Article 11 (7) of the Double Tax Treaty contains a ‘‘main purpose’’ anti avoidance
provision. If it were the main purpose or one of the main purposes of any person concerned with the
creation or assignment of the debt claim under the Loan Agreement to avail the Issuer of the treaty
benefits (i.e., exemption of interest income received under the Loan Agreement from withholding
taxation in Ukraine) by means of that creation or assignment, the Issuer would not be entitled to the
benefits under Article 11 of the Double Tax Treaty. The tax authorities of Ukraine may potentially
use Article 11(7) of the Double Tax Treaty to deny treaty benefits.
Tax on Issue and Interest Payments under the Notes
No Ukrainian withholding tax should apply to the issue of the Notes or interest payments under the
Notes because the Notes will not be issued and interest payments on the Notes will not be made by
the Borrower or from Ukraine.
Tax on Payment of Instalments of Principal and On Redemption of the Notes
The amount received by the Issuer as repayment or prepayment of principal amount of any loan is
not treated as income. Therefore, it shall not be subject to any income taxation in Ukraine either by
withholding or otherwise.
The amounts received by non-resident Noteholders on redemption of the Notes should not be subject
to taxation in Ukraine as the payment on redemption of the Notes will not be made by the Borrower
or from Ukraine.
Gross Up Provision
If payments under the Loan Agreement are subject to any withholding (as a result of which the
Issuer would reduce payments under the Notes in the amount of such withholding), then, subject to
certain exceptions relating to maintenance by the Issuer of its incorporation in a Qualifying
Jurisdiction, the Borrower would be obliged to pay such additional amounts as may be necessary so
that the net payments received by the Issuer were not less than the amount it would have received in
the absence of such withholding. In such circumstances, the Borrower would have the right to prepay
the Loan as fully set out in the Loan Agreement. Notwithstanding the foregoing, Ukrainian tax law
prohibits contractual provisions with non-residents where a resident entity takes responsibility for
covering foreign party’s tax liability. According to a clarification issued by Ukraine’s tax authorities,
payment of additional amounts to a non-resident entity in order to compensate for tax deducted in
Ukraine contradicts the above requirement of Ukrainian tax law. Although the position of the tax
authorities expressed in the clarification is not legally binding, if interpreted broadly, the restriction
would apply to the gross up provisions of the Loan Agreement and obligations of the Borrower to
pay additional amounts thereunder. As a result, the gross up provision could be found null and void
and therefore, unenforceable in Ukraine.
If the Trustee were to enforce the security under the Trust Deed following an Event of Default or
Relevant Event, the Trustee would receive payments of principal and interest under the Loan
Agreement in the name of the Issuer or in its own name. As a result, the benefits of the Double Tax
Treaty may cease to be applicable to payments under the Loan Agreement and such payments may
become subject to withholding taxation in Ukraine. If this were to occur, the Bank is not obliged to
pay additional amounts on account of Ukrainian taxes withheld and the Trustee (on behalf of the
Noteholders) would only be entitled to receive an amount net of such taxes.
The Issuer is obliged to make payments under the Notes to Noteholders only to the extent of the
amount of principal, interest and Additional Amounts or Indemnity Amounts (both as defined in the
Conditions), if any, actually received by or for the account of the Issuer under the Loan Agreement,
less any amount in respect of Reserved Rights (as defined in the Conditions). See also ‘‘Risk Factors
– Risks Relating to the Offering, the Notes and the Trading Market’’.
Transfer of Notes to Ukrainian Investors
If Notes are held by a non-resident entity, any gains derived by the non-resident entity from the sale
or other disposition of Notes in favour of a Ukrainian resident entity will be subject to withholding
taxation in Ukraine at a rate of 15 per cent. If Notes are held by a non-resident individual, any gains
derived by the individual from the sale or other disposition of Notes to a Ukrainian legal entity are
generally subject to Ukrainian personal income tax at the marginal rate of 17 per cent. The gains
derived by the non-resident entity or individual from the sale or other disposition of Notes, otherwise
c104221pu110Proof7:3.3.11B/LRevision:0OperatorChoD
179
subject to income taxation in Ukraine, may be exempt from taxation in Ukraine under provisions of
applicable double tax treaties.
Tax Implications for Residents of Ukraine
A Noteholder who is an individual or legal entity resident in Ukraine for tax purposes (including a
permanent establishment of a non-resident legal entity) is subject to taxation in Ukraine on net basis
on its worldwide income (income attributable to permanent establishments in Ukraine). Interest from
holding debt securities is included into the taxable income of a resident taxpayer, while the principal
amount generally is not treated as income.
United Kingdom Taxation
The following is a summary of the United Kingdom withholding taxation treatment at the date hereof in
relation to payments of principal and interest in respect of the Notes. It is based on current law and the
practice of Her Majesty’s Revenue and Customs (HMRC), which may be subject to change, sometimes
with retrospective effect. The comments do not deal with other United Kingdom tax aspects of acquiring,
holding or disposing of Notes. The comments relate only to the position of persons who are absolute
beneficial owners of the Notes. The following is a general guide for information purposes and should be
treated with appropriate caution. It is not intended as tax advice and it does not purport to describe all
of the fax considerations that may be relevant to a prospective purchaser. Noteholders who are in any
doubt as to their tax position should consult their professional advisers. Noteholders who may be liable
to taxation in jurisdictions other than the United Kingdom in respect of their acquisition, holding or
disposal of the Notes are particularly advised to consult their professional advisers as to whether they
are so liable (and if so under the laws of which jurisdictions), since the following comments relate only
to certain United Kingdom taxation aspects of payments in respect of the Notes. In particular,
Noteholders should be aware that they may be liable to taxation under the laws of other jurisdictions in
relation to payments in respect of the Notes even if such payments may be made without withholding or
deduction for or on account of taxation under the laws of the United Kingdom.
UK Withholding Tax on UK Source Interest
The Notes will constitute ‘‘quoted Eurobonds’’ provided they are and continue to be listed on a
recognised stock exchange. Whilst the Notes are and continue to be quoted Eurobonds, payments of
interest on the Notes may be made without withholding or deduction for or on account of United
Kingdom income tax.
Securities will be ‘‘listed on a recognised stock exchange’’ for this purpose if they are admitted to
trading on an exchange designated as a recognised stock exchange by an order made by the
Commissioners for HMRC and either they are included in the United Kingdom official list (within
the meaning of Part 6 of the Financial Services and Markets Act 2000) or they are officially listed, in
accordance with provisions corresponding to those generally applicable in European Economic Area
States, in a country outside the United Kingdom in which there is a recognised stock exchange.
The Irish Stock Exchange is a recognised stock exchange. The Issuer’s understanding of current
HMRC practice is that securities which are listed on the Main Standard of that Exchange may be
regarded as ‘‘listed on a recognised stock exchange’’ for these purposes.
In all cases falling outside the exemption described above, interest
under deduction of United Kingdom income tax at the basic rate
such relief as may be available following a direction from HMRC
applicable double taxation treaty, or to any other exemption which
on the Notes may fall to be paid
(currently 20 per cent.) subject to
pursuant to the provisions of any
may apply.
Provision of information
Holders should note that where any interest on Notes is paid to them (or to any person acting on
their behalf) by the Issuer or any person in the United Kingdom acting on behalf of the Issuer (a
paying agent), or is received by any person in the United Kingdom acting on behalf of the relevant
Holder (other than solely by clearing or arranging the clearing of a cheque) (a collecting agent), then
the Issuer, the paying agent or the collecting agent (as the case may be) may in certain cases, be
required to supply to HMRC details of the payment and certain details relating to the Holder
(including the Holder’s name and address). These provisions will apply whether or not the interest
has been paid subject to withholding or deduction for or on account of United Kingdom income tax.
In certain circumstances, the details provided to HMRC may be passed by HMRC to the tax
authorities of certain other jurisdictions.
c104221pu110Proof7:3.3.11B/LRevision:0OperatorChoD
180
Information may also be required to be reported in accordance with regulations made pursuant to the
EU Savings Directive (see below).
Other Rules Relating to United Kingdom Withholding Tax
Where interest has been paid under deduction of United Kingdom income tax, Holders who are not
resident in the United Kingdom may be able to recover all or part of the tax deducted if there is an
appropriate provision in any applicable double taxation treaty.
The references to ‘‘interest’’ in this ‘‘United Kingdom Taxation’’ section above mean ‘‘interest’’ as
understood in United Kingdom tax law. The statements above do not take any account of any
different definitions of ‘‘interest’’ or principal’’ which may prevail under any other law or which may
be created by the Terms and Conditions of the Notes or any related documentation.
The above description of the United Kingdom withholding tax position assumes that there will be no
substitution of the Issuer and does not consider the tax consequences of any such substitution.
EU Savings Tax Directive
Under the EU Savings Tax Directive, each Member State is required to provide to the tax authorities
of another Member State details of payments of interest or other similar income paid by a person
within its jurisdiction to, or collected by such a person for, an individual resident or certain limited
types of entity established in that other Member State. However, for a transitional period, Austria
and Luxembourg are instead required (unless during that period they elect otherwise) to apply a
withholding system in relation to such payments, deducting tax at rates rising over time to 35 per
cent. The transitional period is to terminate at the end of the first full fiscal year following agreement
by certain non EU countries to the exchange of information relating to such payments.
A number of non EU countries including Switzerland have adopted similar measures (either provision
of information or transitional withholding).
The European Commission has proposed certain amendments to the EU Savings Tax Directive, which
may, if implemented, amend or broaden the scope of the requirements described above.
For the avoidance of doubt, should the Issuer, the Principal Paying Agent or any institution where
the Notes are deposited be required to withhold any amount as a direct or indirect consequence of
the EU Savings Tax Directive, then, there is no requirement for the Issuer to pay any additional
amounts relating to such withholding.
c104221pu110Proof7:3.3.11B/LRevision:0OperatorChoD
181
GENERAL INFORMATION
1.
Application has been made to list the Notes on the Irish Stock Exchange by the Issuer, through
the Listing Agent, The Bank of New York Mellon (Ireland) Limited. The Bank of New York
Mellon (Ireland) Limited is acting solely in its capacity as listing agent for the Issuer in
connection with the Notes and is not itself seeking admission of the Notes to the Official List of
the Irish Stock Exchange or to trading on its regulated market for the purposes of the
Prospectus Directive.
2.
The Notes have been accepted for clearance through Euroclear and Clearstream, Luxembourg
with a Common Code of 059429469. The International Securities Identification Number (ISIN)
for the Notes is XS0594294695.
3.
For so long as any of the Notes are outstanding, copies of the following documents may be
inspected in physical form at the specified offices of the Principal Paying Agent and the Irish
Paying Agent during normal business hours:
(a)
the charter of the Borrower (with an English translation);
(b)
the constitutional documents of the Issuer;
(c)
a copy of this Prospectus, together with any supplement to this Prospectus;
(d)
the Paying Agency Agreement;
(e)
the Trust Deed, which includes the forms of the Global Note Certificate and the Individual
Note Certificates;
(f)
the annual reports and the audited unconsolidated financial statements of the Borrower in
respect of the financial years ended 31 December 2009 and 2008;
(g)
copies of the audited condensed interim unconsolidated financial information for the nine
months ended 30 September 2010 and 30 September 2009 of the Borrower;
(h)
copies (with an English translation) of the authorisations listed below; and
(i)
the Loan Agreement.
4.
The Borrower has obtained or will obtain all necessary consents, approvals and authorisations
in Ukraine in connection with its entry into, and the performance of its obligations under, the
Loan Agreement. No consents, approvals, authorisations or orders of any regulatory authorities
are required by the Issuer under the laws of the United Kingdom for its entry into, and the
performance of its obligations under, the Loan Agreement or for the issue and performance of
the Notes.
5.
The Borrower and the Issuer have obtained all necessary corporate consents, approvals and
authorisations required in connection with the Loan and the issue and performance of the
Notes. The issuance of the Notes and the granting of the Loan were authorised by the Issuer by
a resolution of the board of directors of the Issuer passed on 2 March 2011. The Loan was
authorised by the Borrower by a resolution of the Management Board passed on 2 February
2011.
6.
The auditors of the Borrower are PJSC ‘‘Deloitte & Touche USC’’ whose business address is
located at 48-50A Zhylianska St., Kyiv, 01033, Ukraine. The Borrower’s IFRS financial
statements as at and for the years ended 31 December 2009 and 2008 included in this document
have been audited by PJSC ‘‘Deloitte & Touche USC’’ which reports expressed qualified opinion
on those statements. The Borrower’s condensed interim financial information for the nine
months ended 30 September 2010 and 30 September 2009 prepared in accordance with IAS 34
‘‘Interim Financial Reporting’’ included in this document have been audited by PJSC ‘‘Deloitte
& Touche USC’’. PJSC ‘‘Deloitte & Touche USC’’ is regulated by the Audit Chamber of
Ukraine.
7.
The Borrower is incorporated under the laws of Ukraine as a joint stock company and was
registered with the NBU on 31 December 1991 (registration number 4) and has been established
for an indefinite period of time. The Borrower’s business address is 12-G Hospitalna Street,
Kyiv, 01001, Ukraine and the telephone number of the Borrower is +380 44 247 8540.
8.
None of the Borrower, its subsidiaries or the Issuer are, or have been involved in any
governmental, legal or arbitration proceedings (including any such proceedings which are
pending or threatened of which any of the Borrower, its subsidiaries or the Issuer are aware)
c104221pu110Proof7:3.3.11B/LRevision:0OperatorChoD
182
during the 12 months before the date of this Prospectus which may have, or have had in the
recent past, significant effects on any of the Borrower’s, its subsidiaries’ or the Issuer’s financial
position or profitability.
9.
There has been no material adverse change in the prospects of the Borrower and its subsidiaries
since 31 December 2009 or in the case of the Issuer, since its incorporation, nor has there been
any significant change in the financial or trading position of the Borrower and its subsidiaries,
taken as a whole, which has occurred since 31 December 2009 or in the case of the Issuer, since
its incorporation.
10.
Neither the Borrower nor the Issuer has entered into any material contracts outside the ordinary
course of its business which could result in the Borrower, its subsidiaries or the Issuer being
under an obligation or entitlement that is material to the Borrowers’ ability to meet its
obligations under the Loan Agreement or the Issuer’s ability to make payments under the
Notes, as the case may be.
11.
There are no potential conflicts of interest between any duties of the members of the
administrative, management or supervisory bodies of the Borrower towards the Borrower and
their private interests and/or other duties.
12.
The Trust Deed provides, inter alia, that the Trustee may act and/or rely on the opinion or
advice of or a certificate of any information obtained from any lawyer, banker, valuer, surveyor,
broker, auctioneer, accountant, auditor or other expert (whether or not addressed to the
Trustee), notwithstanding that such opinion, advice, certificate or information contains a
monetary or other limit on the liability of any of the above mentioned persons in respect
thereof.
13.
The Issuer does not intend to provide any post issuance transaction information regarding the
Notes or the underlying collateral.
14.
The total fees and expenses in connection with the admission of the Notes to trading on the
Irish Stock Exchange are expected to be approximately EUR 5,000.
c104221pu110Proof7:3.3.11B/LRevision:0OperatorChoD
183
APPENDIX 1
THE BANKING SECTOR AND BANKING REGULATIONS IN UKRAINE
The following information has been extracted from publicly available sources (such as information
contained on official websites and in publications of governmental agencies of Ukraine, including the
NBU and other governmental or mass media sources). It has not been independently verified by the
Borrower, the Issuer or the Lead Managers. Neither the Borrower, the Issuer nor the Lead Managers
accept any responsibility for the accuracy or completeness of this information. See ‘‘Risk Factors – Risks
Relating to Ukraine – Official statistics and other data published by State authorities may not be
reliable’’.
The Ukrainian Banking Sector
The Ukrainian banking sector is a two-tier structure made up of the NBU and commercial banks of
various types and forms of ownership including the State-owned Joint Stock Company ‘‘The State
Export-Import Bank of Ukraine’’ (Ukreximbank) and the Bank. Three commercial banks (‘‘Rodovid
Bank’’, ‘‘Ukrgasbank’’ and ‘‘Kyiv’’) were recapitalised in 2009 by the Government. As a result of
such recapitalisation, the State became the majority shareholder in those banks (with the State-owned
stake ranging from 87.7 per cent. up to almost 100 per cent.). In addition, the State Finance
Institution for Innovations owns 99.99 per cent. of the share capital of the Ukrainian Bank for
Reconstruction and Development. The banks act in accordance with, among other laws, the Law of
Ukraine ‘‘On the National Bank of Ukraine’’ of 20 May 1999 (the National Bank Law), the Law of
Ukraine ‘‘On Banks and Banking Activity’’ of 7 December 2000 (the Banking Law), the Ukrainian
legislation on joint stock companies and other business entities, as well as various NBU regulations
and their respective Charters.
Role of the NBU
The NBU is the central bank of Ukraine. Established in 1991 and governed by the Constitution of
Ukraine and the National Bank Law, the NBU is a specialised state institution with the principal
objective of ensuring the external and internal stability of the national currency and has broad
regulatory and supervisory functions in the banking sector. The NBU is empowered to develop and
conduct monetary policy, organise banking settlements and the foreign exchange system, ensure
stability of the monetary, financial and banking systems of Ukraine and protect the interests of
commercial bank depositors. The NBU sets the official exchange rate of the national currency with
respect to foreign currencies, the discount rate and other interest rates. The NBU is also responsible
for the accumulation and custody of the State’s gold and currency reserves. In addition, it registers
commercial banks, issues licences, supervises the operations of Ukrainian banks and determines the
procedures for providing emergency funds to commercial banks.
The principal governing bodies of the NBU are the Council and the Board. The Council, the highest
governing body of the NBU, consists of 15 members, seven of whom are appointed by Parliament
and seven of whom are appointed by the President. The Governor of the NBU (nominated by the
President and appointed by Parliament for a seven year term) acts ex officio as the fifteenth member
of the Council. The Council is charged, in particular, with formulating the principles of Ukraine’s
monetary policy and has the right to veto the Board’s decisions if they contravene such principles.
The Board, which is comprised of the Governor, his or her deputies and other members of the
Board, is responsible for implementing Ukraine’s monetary policy, the development and
implementation of other NBU policies and generally managing the activities of the NBU.
On 9 July 2010, the Parliament approved a law which entered into force on 20 October 2010, subject
to certain provisions coming into effect from 1 January 2012. The law significantly amended the
legislative framework that governs the activities of the NBU in order to comply with the
arrangements reached by Ukraine with the IMF and the World Bank. The primary purpose of this
law is to strengthen the independence of the NBU. Among other things, from 20 October 2010, the
law tightens qualification requirements for members of the NBU Council and the Board, and
increases the term of office of the NBU Governor from five years to seven years.
Monetary Policy
The NBU implements monetary policy. Currently, the NBU uses instruments such as mandatory
reserve requirements for banks, interest rates, refinancing of commercial banks, deposit operations,
REPO-operations and stabilising loans for banks with temporary problems. The main channel for the
c104221pu115Proof7:3.3.11B/LRevision:0OperatorChoD
A-1
release of funds into circulation is the foreign currency market. With signs of the economy beginning
to stabilise after the financial crisis in 1998 and the ensuing economic instability in the region, the
NBU reduced the discount rate from 45 per cent. at the beginning of 2000 to 12.5 per cent. by the
end of 2001, and to 7.0 per cent. in December 2002. Since then, the discount rate has been subject to
periodic changes by the NBU and ranged from 7.5 per cent. to 9.5 per cent. during 2004-2007. In
2008 the discount rate rose to 10 per cent. as of 1 January 2008 and up to 12 per cent. as of 30
April 2008. In 2009 the discount rate decreased to 11 per cent. as at 15 June 2009 and to 10.25 as at
12 August 2009. In 2010, the NBU further decreased the discount rate to 9.5 per cent. on 8 June
2010, 8.5 per cent. on 8 July 2010 and 7.75 per cent. on 10 August 2010. Since 1 March 2004, the
NBU has been determining separate interest rates for overnight unsecured loans (11.25 per cent. for
example as at 9 February 2011) and overnight loans secured by the Ukrainian Government debt
securities (9.25 per cent. as at 9 February 2011). From 17 November 2006, the NBU has been setting
separate interest rates for deposit certificates issued by the NBU for different terms.
The NBU declared that its main goal in respect of monetary policy in 2010 was to maintain the
stability of the hryvnia as a basis for sustainable social and economic development. In order to
achieve this goal the NBU intended to manage the growth of money supply in line with the growth
of real GDP, to further manage the level of monetisation in the economy (i.e. ratio of money supply
to national income) and to ensure the stability of the financial system of Ukraine by way of, among
other things, taking measures for financial rehabilitation of banks. As at 9 February 2011, the main
goals of the NBU’s monetary policy for 2011 have not yet been published.
Regulation
Banking activities in Ukraine are regulated by several laws and numerous regulations issued by the
NBU. The principal legislation in the area is the Banking Law. The NBU oversees compliance with
the Banking Law, regulations and other legislation and imposes appropriate sanctions for violations
of those laws and regulations. The NBU adopted the ‘‘Banking Regulation Instruction’’ (which
establishes capital adequacy, liquidity and other ratios), pursuant to the authority granted under the
Banking Law and the National Bank Law. The NBU also sets accounting, reporting, auditing and
other requirements for commercial banks. A Ukrainian commercial bank may carry out so-called
‘‘exclusive banking activities’’ (i.e., taking deposits, opening and maintaining of bank accounts and
investment of raised funds) only with a banking licence issued by the NBU. Banks are permitted to
carry out additional banking transactions subject to obtaining a special written permit from the NBU.
Reporting Requirements
Banks are required to submit an annual report that contains audited financial statements and
consolidated financial statements if a bank has affiliates under its control, as well as a general
description of the bank’s business. Financial statements include a balance sheet, income statement,
statement of changes in equity and cash flow statements, a summary of significant accounting policies
(as may be relevant) and other explanatory notes. The general description section describes the basic
features of a bank’s activities and its organisation and management. Interim financial statements are
submitted by banks on a quarterly basis and consist of a balance sheet, income statement, off-balance
sheet liabilities statement, trust management accounts and a cover letter. The purpose of the cover
letter is to describe and explain events and operations, which are material and important for a fair
presentation of the financial position of a bank. Banks are also required to submit to the NBU
statistical data on a daily, weekly and monthly basis that ensures permanent review by the NBU of a
bank’s performance and financial position.
Securing Deposits of Individuals
The Law of Ukraine ‘‘On the Fund for the Guaranteeing of Deposits of Individuals’’ of 20
September 2001 No. 2740III (the Deposits Securing Law) introduced a system of securing deposits
held by individuals with Ukrainian banks modifying the system established in 1998 by the Presidential
Decree ‘‘On Measures for the Protection of the Rights of Individual Depositors of Commercial Banks
of Ukraine’’ of 10 September 1998 No. 996/98 (the Decree). Pursuant to the Deposits Securing Law,
commercial banks in Ukraine are obliged to pay into the Fund for the Guaranteeing of Deposits of
Individuals (the Fund) established by the Decree and functioning pursuant to the Deposits Securing
Law, an initial contribution in the amount of 1 per cent. of their registered share capital (payable
once after obtaining a banking licence) and a regular contribution of 0.25 per cent. of the aggregate
amount of deposits placed with them, including interest accrued (payable twice a year). Banks may
also be required to pay a special contribution into the Fund if the income of the Fund is not
c104221pu115Proof7:3.3.11B/LRevision:0OperatorChoD
A-2
sufficient to repay and service loans borrowed by the Fund in order to meet compensation claims
following the collapse of a bank in the banking system. From 1 January 2011, under the Deposits
Securing Law, the guaranteed deposit amount with a commercial bank, including interest, was
decreased from a maximum of UAH 150,000 per depositor back to UAH 1,200 per depositor, the
level in place prior to October 2008. Nevertheless, the Fund decided to retain the maximum
guaranteed amount for deposits opened by individuals in one bank at the level of UAH 150,000 per
depositor. Deposits are recognised as ‘‘unavailable’’ (i.e. eligible for compensation from the Fund) on
the date of appointment of a bank’s liquidator. The Deposits Securing Law does not apply to the
Borrower. As of 1 February 2011, the Fund had 170 member banks and five temporary member
banks. As of 1 February 2011, the total amount of funds accumulated by the Fund amounted to
UAH 3,656 million.
Reserve and Liquidity Requirements
In 2001, the NBU adopted regulations relating to the mandatory reserves of commercial banks which
provide for the NBU to impose sanctions for failure to maintain prescribed amounts of mandatory
reserves. Such sanctions are payable from a bank’s profits. Currently, a commercial bank is required
to annually transfer no less than 5 per cent. of its profits to its reserve fund, unless such reserve fund
is equal to 25 per cent. of the bank’s regulatory capital. The NBU may require commercial banks to
increase their mandatory reserve amounts.
The NBU has established mandatory reserve requirements to maintain the liquidity of the banking
system and the stability of the Ukrainian hryvnia. Banks are required to maintain certain reserves in
current accounts with the NBU. There are no restrictions on withdrawal of funds from the NBU.
However, if minimum average requirements are not met, a bank could be subject to certain penalties
imposed by the NBU in accordance with applicable regulations. Reserve requirements are computed
as a percentage of certain of the bank’s liabilities.
In particular, with effect from 1 February 2009, the reserves may not be less than the aggregate of:
(i) 7 per cent. of call deposits and current accounts of customers in foreign currency, (ii) 4 per cent.
of customers’ term deposits in foreign currency and (iii) 2 per cent. of funds borrowed from nonresident banks and financial organisations. Currently, call deposits, term deposits and current
accounts of customers in national currency are not subject to such mandatory reserve requirements.
In addition, since 1 August 2008, Ukrainian banks have been required to maintain reserves for shortterm (less than 183 days) funds (e.g., loans and deposits) received from non-residents at a level of 20
per cent. of the aggregate amount of such funds. Overnight loans and deposits, as well as loans and
deposits guaranteed by the Government or received from international financial organisations, to
which Ukraine is a member, are exempt from the above reserve requirements. The NBU temporarily
suspended this requirement on 13 October 2008 but reinstated it with effect from 1 October 2010. In
addition, with effect from 1 May 2010, a bank is required to maintain 100 per cent. of the amount of
the mandatory reserves formed during its previous reporting period in a separate account with the
NBU.
The NBU has also established three separate liquidity ratios. A bank must have an instant liquidity
ratio of at least 20 per cent. (i.e., the ratio of certain bank’s funds on its correspondent accounts and
cash to its current liabilities), a current liquidity ratio of at least 40 per cent. (i.e., the ratio of bank’s
assets with maturities of up to (and including) 31 days to liabilities with maturities of up to (and
including) 31 days) and a short-term liquidity ratio of at least 60 per cent. (i.e., the ratio of liquid
assets with maturities of up to one year to liabilities with maturities of up to one year). For the
purposes of compliance with the liquidity ratios, liquid assets with maturities of up to one year
include cash funds, bank metals, funds placed with correspondent accounts opened with the NBU
(excluding the funds placed as reserves), term deposits placed with the NBU, certain funds placed
with correspondent accounts with commercial banks, debt securities in the bank’s trade portfolio,
available-for-sale portfolio and held-to-maturity portfolio, certain interbank deposits and loans and
loans and advances to customers. Liabilities with maturities of up to one year include funds on the
NBU correspondent account opened with the bank, demand liabilities, budget funds, loans (including
overdue indebtedness under short-term and long-term loans) and term deposits from the NBU, certain
interbank loans and deposits, customer deposits, debt instruments issued by the bank, subordinated
debt, past due indebtedness under interbank loans and term deposits, accounts payable in relation to
assets acquisition and liabilities under all types of guarantees and committed credit lines to banks and
customers.
c104221pu115Proof7:3.3.11B/LRevision:0OperatorChoD
A-3
Capital Requirements
The NBU has established requirements for capital adequacy, minimum share capital requirements and
minimum regulatory capital requirements. According to the NBU requirements, the regulatory capital
adequacy ratio of a bank set by the NBU should be at least 10 per cent. of its risk-weighted assets,
and should be at least 9 per cent. of its total assets. For banks that have been operating for less than
12 months, regulatory capital ratio is required to be no less than 15 per cent. of its risk-weighted
assets and for banks that have been operating for between 12 and 24 months, the regulatory capital
ratio is required to be no less than 12 per cent. of its risk-weighted assets. Risk-weighted assets, or
credit risk profile of a bank, are calculated by applying various risk weights to bank’s assets and offbalance-sheet commitments according to the terms set by NBU.
The minimum share capital requirements are established as of the date of a bank’s registration. The
minimum share capital requirements for a national, regional and cooperative bank established prior
to 4 October 2006 were c5 million, c3 million and c1 million, respectively. From 4 October 2006
until November 2009, the minimum share capital requirement for all banks at the time of their
registration was c10 million. With effect from 24 November 2009, the minimum share capital
requirement for all banks at the time of their registration is UAH 75 million (approximately U.S.$9.4
million as at 10 February 2011).
Regulatory capital (i.e. the sum of principal (core) capital and additional capital) of a bank cannot be
less than its share capital and minimum regulatory capital requirements established by the NBU.
From 1 May 2004, the NBU calculated the minimum regulatory capital requirement in UAH in an
amount equivalent to the euro amount set forth by the Banking Regulation Instruction. With effect
from 10 October 2008, the NBU revised the minimum regulatory capital requirement for banks,
establishing a c10 million (UAH 74.2 million as determined by the NBU for 2009) minimum amount
of regulatory capital for all Ukrainian banks (as opposed to previously effective differentiated
requirements based on the length of a bank’s operating activity). From 17 July 2010, the new
minimum regulatory capital requirement for the banks was established at the level of UAH 120
million for all banks. Banks with regulatory capital below the minimum required amount have to
increase the capital to comply with the newly established requirements by 1 January 2012. Although
this minimum regulatory capital requirement is currently being challenged in court, the NBU
continues applying this requirement and monitors banks’ compliance with it.
Loan Provisioning
Banks must meet mandatory requirements to cover net loan risks and must review those provisions
on a monthly basis.
Some loans and securities transactions do not require any provision. These include ‘‘budget loans’’,
intercompany credit transactions between entities within one banking group (for banks 100 per cent.
owned by foreign entities, credit transactions with the parent company if such company is assigned an
investment-grade credit rating), real-estate backed leasing transactions, subordinated loans,
uncommitted off balance sheet credit lines (other than commitments extended to banks), funds in
foreign currency transferred to the NBU, securities issued by central State executive authorities and
the NBU as well as shares in stock exchanges, securities depositaries, payment systems and credit
bureaus.
Other loans are classified into five major categories to which the following provisioning requirements
are applied: standard loans (1 per cent. provisioning requirement for loans in hryvnia, 2 per cent. for
loans in foreign currency to borrowers who have foreign currency earnings and 50 per cent. for loans
in foreign currency to borrowers who have no foreign currency earnings), loans on watch (5 per cent.
for loans in hryvnia, 7 per cent. for loans in foreign currency to borrowers who have foreign currency
earnings and 100 per cent. for loans in foreign currency to borrowers who have no foreign currency
earnings), substandard loans (20 per cent. for loans in hryvnia, 25 per cent. for loans in foreign
currency to borrowers who have foreign currency earnings and 100 per cent. for loans in foreign
currency to borrowers who have no foreign currency earnings), doubtful loans (50 per cent. for loans
in hryvnia, 60 per cent. for loans in foreign currency to borrowers who have foreign currency
earnings and 100 per cent. for loans in foreign currency to borrowers who have no foreign currency
earnings) and bad loans (100 per cent.).
Recent Developments in the Banking Sector
The Ukrainian banking sector has suffered from a number of significant weaknesses, which have
included, among others, undercapitalisation, weak corporate governance and management, poor asset
c104221pu115Proof7:3.3.11B/LRevision:0OperatorChoD
A-4
quality and excessive political intervention in some banks. Since 1997, Ukraine has been implementing
a series of banking sector reforms under the IMF reform programme with the aim of supporting
commercial banks that undertake structural reforms and demonstrate long-term stability of their
activities. Since the beginning of 1998, the NBU has required banks to prepare accounts that are
based in many aspects on the International Financial Reporting Standards. As part of the IMF
programme on banking sector reform, Parliament adopted the Banking Law on 7 December 2000.
The Banking Law provides a legal basis for strengthening the regulation of the banking system. In
addition, in line with the IMF’s recommendations, the Banking Law aims to reform second tier banks
and modify the deposit securing scheme to include provisions that would allow the exclusion of
problem banks (including, in particular, any of the large banks if they should fail to comply with
restructuring agreements), so that any costs of the scheme will first be funded by the scheme itself
and then by the Government, but not the NBU. Under the terms of the IMF programme on banking
sector reform, the NBU undertakes to monitor and audit the seven largest banks in Ukraine,
including the two State-owned banks. The NBU oversees the activities of commercial banks using
both off-site and on-site inspections and through a system of audits.
On 1 January 2004, the Laws of Ukraine ‘‘On Mortgage’’ and ‘‘On Mortgage Lending, Transactions
with Consolidated Mortgage Debt and Mortgage-Backed Certificates’’ came into force, which were
further supplemented by the Law of Ukraine ‘‘On Mortgage Bonds’’ with effect from 24 January
2006. These laws permit, amongst other things, the issuance of mortgage-backed financial instruments
and their trading on securities markets. In March 2004, the regulations came into force that
introduced new methods of refinancing (including ‘‘swap’’ operations) and allowed commercial banks
to pledge mortgage-backed certificates and Eurobonds issued by the State for refinancing purposes.
Since June 2006, commercial banks have been allowed to pledge, for refinancing purposes, proprietary
rights on deposits placed by them with the NBU. Further, other regulations that became effective in
May 2004 set forth minimum regulatory capital requirements in hryvnia rather than euro, allow
banks to issue subordinated debt securities (including notes, bonds and deposit certificates) and grant
the NBU the powers to set the maximum interest rates that banks may pay on their subordinated
debt.
In June 2005, Ukraine adopted a new law on credit histories and credit bureaus allowing the
establishment of so called credit bureaus which would collect information on borrowers (both
individuals and legal entities) and would keep credit histories of each borrower. The information
gathered by such credit bureaus has assisted Ukrainian banks in evaluating and minimising the credit
risk associated with prospective borrowers.
Between October 2004 and 5 August 2009 Ukrainian banks were only permitted to be established in
the form of an open joint stock company or a cooperative bank. Banks existing in the form of a
closed joint stock company or a limited liability company had three years to change their form into
an open joint stock company or a cooperative bank. Further, on 30 April 2009, the Law of Ukraine
‘‘On Joint Stock Companies’’ entered into force providing that joint stock companies in Ukraine are
to be established in the form of a private or public joint stock company. Companies established
previously in the form of open or closed joint stock companies are required to reorganise into public
or private joint stock companies by 30 April 2011. Since 5 August 2009, banks may be established
only in the form of a public joint stock company or a cooperative bank.
The Ukrainian banking market is expected to become more competitive as a result of enactment of
laws permitting foreign banks to operate branch offices in Ukraine and Ukraine’s accession to the
WTO. Since 16 May 2008, foreign banks have been allowed to operate branch offices in Ukraine
subject to certain access criteria established by the Banking Law. One of the pre-requisites to be
satisfied before general permission is granted to open and operate a branch is that the NBU and a
bank supervisory authority of the foreign state where the relevant parent is head quartered execute an
agreement about their co-operation in the bank supervision field and the harmonisation of principles
and terms of such supervision. To date, only a few such agreements have been signed by the NBU,
including with banking regulators of countries such as Armenia, Belarus, China, Cyprus, Hungary,
Kyrgyzstan, Latvia, Lithuania, Luxembourg, Poland, Russia and Turkey.
The global economic downturn and financial turmoil in developed economies in the second half of
2008 revealed the significant weaknesses in the Ukrainian banking system resulting in considerable
withdrawals of deposits and lending freezes which contributed to liquidity problems faced by many
Ukrainian banks. The NBU has taken a number of measures to address the instability in Ukrainian
sector, including measures aimed at preventing funds outflows and ensuring due liquidity levels of
banks. On 31 October 2008, Parliament passed the Law of Ukraine ‘‘On Immediate Measures to
c104221pu115Proof7:3.3.11B/LRevision:0OperatorChoD
A-5
Avoid Negative Consequences of the Financial Crisis and Amendments to Certain Legislative Acts of
Ukraine’’ which, together with the relevant regulation of the Cabinet of Ministers of Ukraine and
resolutions of the NBU, established the regulatory framework for recapitalisation of Ukrainian banks
by the government through the purchase of shares of such banks. The decision on recapitalisation of
particular banks is made by the Cabinet of Ministers of Ukraine upon the NBU’s proposal. Three
Ukrainian banks (‘‘Rodovid Bank’’, ‘‘Ukrgasbank’’ and ‘‘Kyiv’’) were recapitalised under such
procedure as a result of which the State became the majority shareholder in these banks.
Recapitalisation of another large bank, Nadra Bank, with participation of the State is being
considered by the Government and the NBU.
On 24 November 2009 the law ‘‘On Amendments to Certain Legislative Acts of Ukraine Aimed at
Overcoming the Adverse Effects of the Financial Crisis’’ became effective containing, among other
things, a number of provisions relating to Ukrainian banks and banking services. In particular, the
law introduced a temporary (until 1 January 2011) prohibition on physical cash pay-outs on foreign
currency loans and the grant of foreign currency loans to individuals other than for certain limited
purposes, and established new rules for the restructuring by banks of problem loans as well as a
prohibition on enforcement against mortgaged residential real estate other than in specified
circumstances.
The NBU is responsible for the reorganisation or closure and liquidation of insolvent banks to
strengthen confidence in the banking sector. In 2001, one of Ukraine’s largest banks, Bank Ukraina,
was declared insolvent by the NBU and its liquidation was finalised in April 2009. As at 21 January
2011, 18 banks were in liquidation.
Competition
As at 1 January 2011, 194 commercial banks were registered in Ukraine, from which 176 banks have
been granted licenses by the NBU to perform banking transactions. As at 1 January 2011, assets of
all commercial banks in Ukraine amounted to UAH 942.1 billion (over U.S.$ 118.4 billion), their
credit portfolio (including interbank loans) amounted to UAH 755.0 billion (approximately U.S.$ 94.9
billion), their equity capital amounted to UAH 137.7 billion (over U.S.$ 17.3 billion), corporate
deposits and current accounts amounted to UAH 144.0 billion (over U.S.$ 18.1 billion) and retail
deposits and current accounts amounted to UAH 270.7 billion (approximately U.S.$ 34.0 billion) (all
figures in this paragraph have been converted using the exchange rate U.S.$1= UAH 7.96).
According to the NBU, in 2010, the share capital of Ukrainian banks having licences to perform
banking operations increased by 22.4 per cent., amounting to UAH 145.9 billion as at 1 January
2011, while the equity capital of such banks increased by 19.6 per cent. to UAH 137.7 billion as at 1
January 2011. During 2010, the assets and total liabilities of Ukrainian banks having licenses to
perform banking operations increased by 7.0 per cent. and 5.1 per cent. and amounted to UAH 942.1
billion and UAH 804.4 billion, respectively. The regulatory capital of Ukrainian banks increased by
18.5 per cent. during 2010, amounting to UAH 160.9 billion as at 1 January 2011.
For 2011, commercial banks operating in Ukraine are divided by the NBU into four groups
according to size of assets. In particular, 17 major banks with total assets of more than UAH 14.0
billion were classified in the first group. 22 banks with total assets of more than UAH 4.5 billion
were classified in the second group, 21 banks with total assets of more than UAH 2.0 billion were
classified in the third group and 115 banks with total assets of less than UAH 2.0 billion were
classified in the fourth group. As of 1 January 2011, 55 banks in Ukraine had some foreign capital,
of which 20 were fully foreign owned. Banks with foreign capital comprise over 40.6 per cent. of the
total share capital of banks in Ukraine.
c104221pu115Proof7:3.3.11B/LRevision:0OperatorChoD
A-6
JOINT STOCK COMPANY
“STATE SAVINGS BANK
OF UKRAINE”
Condensed Interim Financial Information
For the nine months ended 30 September 2010
F-1
JOINT STOCK COMPANY “STATE SAVINGS BANK OF UKRAINE”
TABLE OF CONTENTS
Page
STATEMENT OF MANAGEMENT‟S RESPONSIBILITIES FOR THE PREPARATION
AND APPROVAL OF THE CONDENSED INTERIM FINANCIAL INFORMATION FOR
THE NINE MONTHS ENDED 30 SEPTEMBER 2010
INDEPENDENT AUDITORS‟ REPORT
1
2-3
CONDENSED INTERIM FINANCIAL INFORMATION
FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2010:
Condensed interim statement of comprehensive income
4-5
Condensed interim statement of financial position
6
Condensed interim statement of changes in equity
7
Condensed interim statement of cash flows
8-9
Selected explanatory notes to the condensed interim financial information
F-2
10-62
JOINT STOCK COMPANY “STATE SAVINGS BANK OF UKRAINE”
STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE
PREPARATION AND APPROVAL OF THE CONDENSED INTERIM FINANCIAL INFORMATION
FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2010
Management is responsible for the preparation of the condensed interim financial information that
presents fairly the financial position of the Joint Stock Company “State Savings Bank of Ukraine”
(the “Bank”) as at 30 September 2010, the results of its operations, cash flows and changes in equity
for the nine-month period then ended and a summary of significant accounting policies and other
explanatory notes, in accordance with International Accounting Standard 34 (“IAS 34”).
In preparing the condensed interim financial information, management is responsible for:





Properly selecting and applying accounting policies;
Presenting information, including accounting policies, in a manner that provides relevant,
reliable, comparable and understandable information;
Providing additional disclosures when compliance with the specific requirements of IAS 34 is
insufficient to enable users to understand the impact of particular transactions, other events and
conditions on the Bank‟s financial position and financial performance;
Stating whether IAS 34 has been followed, subject to any material departures disclosed and
explained in the condensed interim financial information; and
Making an assessment of the Bank‟s ability to continue as a going concern for the foreseeable
future.
Management is also responsible for:





Designing, implementing and maintaining an effective and sound system of internal controls,
throughout the Bank;
Maintaining adequate accounting records that are sufficient to show and explain the Bank‟s
transactions and disclose with reasonable accuracy at any time the financial position of the Bank,
and which enable them to ensure that the condensed interim financial information of the Bank
complies with IAS 34;
Maintaining statutory accounting records in compliance with legislation and accounting
standards of Ukraine;
Taking such steps as are reasonably available to them to safeguard the assets of the Bank; and
Detecting and preventing fraud and other irregularities.
The condensed interim financial information for the nine months ended 30 September 2010 was
authorized for issue on 24 January 2011 by the Management Board.
24 January 2011
24 January 2011
1
F-3
PJSC “Deloitte & Touche USC”
48-50A, Zhylyanska St.
Kyiv 01033
Ukraine
Tel.: +38 (044) 490 9000
Fax: +38 (044) 490 9001
www.deloitte.com.ua
INDEPENDENT AUDITOR’S REPORT
To the Shareholders and the Management Board of Joint Stock Company “State Savings Bank of
Ukraine”:
We have audited the accompanying condensed interim financial information of Joint Stock Company
“State Savings Bank of Ukraine” (the “Bank”) as at 30 September 2010, which comprise the
condensed interim statement of financial position as at 30 September 2010, and the condensed interim
statement of comprehensive income, the condensed interim statement of changes in equity and the
condensed interim statement of cash flows for the nine months then ended, and a summary of
significant accounting policies and other explanatory information.
Management’s responsibility for the condensed interim financial information
Management is responsible for the preparation and fair presentation of this condensed interim
financial information in accordance with International Accounting Standard (“IAS”) 34 “Interim
Financial Reporting” and for such internal control as management determines is necessary to enable
the preparation of financial statements that are free from material misstatement, whether due to fraud
or error.
Auditor’s responsibility
Our responsibility is to express an opinion on this condensed interim financial information based on
our audit. We conducted our audit in accordance with International Standards on Auditing. Those
standards require that we comply with ethical requirements and plan and perform the audit to obtain
reasonable assurance whether this condensed interim financial information is free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the condensed interim financial information. The procedures selected depend on the auditor‟s
judgment, including the assessment of the risks of material misstatement of the condensed interim
financial information, whether due to fraud or error. In making those risk assessments, the auditor
considers internal control relevant to the entity‟s preparation and fair presentation of the condensed
interim financial information in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity‟s
internal control. An audit also includes evaluating the appropriateness of accounting policies used
and the reasonableness of accounting estimates made by management, as well as evaluating the overall
presentation of the condensed interim financial information.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our qualified audit opinion.
Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member
firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about
for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its Member Firms.
© 2011 PJSC "Deloitte & Touche USC". All rights reserved.
F-4
Basis for qualified opinion
We were unable to obtain sufficient audit evidence to satisfy ourselves as to the correctness of
the disclosures of liquidity risk calculated using discounted and undiscounted cash flows as at
30 September 2010 and 31 December 2009, which are disclosed in Note 30 to the interim condensed
financial information.
As discussed in Note 2, the Bank has adopted the revaluation model for the subsequent measurement
of its buildings which requires it to conduct revaluations with sufficient regularity such that the
carrying amounts as at the date of statement of financial position do not differ materially from those
using fair values. Buildings in the statement of financial position were revalued as at 1 November
2008 and the Bank has not carried out a valuation since that date. In view of the deterioration of
property values in Ukraine as a result of the global economic crisis and in the absence of valuations to
support the carrying value of buildings as at 30 September 2010 and 31 December 2009, we are unable
to determine whether the carrying amount of buildings is fairly stated.
As discussed in Note 2, the Bank did not apply the requirement of IAS 29 “Financial Reporting in
Hyperinflationary Economies”, which requires restatement of non-monetary assets and equity to
account for the effects of inflation up to 31 December 2000. We were unable to determine the effect
of this departure from IAS 29 “Financial Reporting in Hyperinflationary Economies” on share capital,
property revaluation reserve and retained earnings as at 30 September 2010 and 31 December 2009.
As discussed in Note 2, the Bank has not disclosed segment information as required by IFRS 8
“Operating Segments”.
Qualified opinion
In our opinion, except for the effects of such adjustments, if any, as might have been determined to be
necessary had we been able to satisfy ourselves as to the matters described in the first and second
paragraphs of the Basis for qualified opinion above and except for the effect on the condensed interim
financial information of the matters referred to in the preceding two paragraphs, the condensed interim
financial information presents fairly, in all material respects, the financial position of the Bank as at
30 September 2010, and its financial performance and its cash flows for the nine months then ended in
accordance with IAS 34 “Interim Financial Reporting”.
Emphasis of matter
Without further qualifying our opinion we draw attention to Notes 25 and 30 to this condensed interim
financial information, which disclose a significant concentration of operations with related parties and
concentration risk management policy of the Bank.
24 January 2011
3
F-5
JOINT STOCK COMPANY “STATE SAVINGS BANK OF UKRAINE”
CONDENSED INTERIM STATEMENT OF COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2010
(in Ukrainian Hryvnias and in thousands, except for earnings per share which are in Ukrainian Hryvnias )
Notes
Interest income
Interest expense
4, 25
4, 25
NET INTEREST INCOME BEFORE PROVISION
FOR IMPAIRMENT LOSSES ON INTEREST
BEARING ASSETS
Provision for impairment losses on interest bearing assets
5, 25
NET INTEREST INCOME
Nine months
ended
30 September
2010
5,724,257
(2,678,035)
5,716,495
(2,714,912)
3,046,222
3,001,583
(1,703,878)
(2,148,681)
1,342,344
Fee and commission income
Fee and commission expense
Net gain on foreign exchange operations
Net realised gain/(loss) on investments available for sale
(Provision)/recovery of provision for impairment losses
on other operations
Net other income
791,458
(135,929)
86,908
33,757
754,934
(120,833)
115,670
(6,474)
5
(25,136)
20,023
1,056
13,260
771,081
757,613
2,113,425
1,610,515
(1,447,800)
(1,304,927)
OPERATING INCOME
8, 25
PROFIT BEFORE INCOME TAX
Income tax expense
9
NET PROFIT
4
F-6
852,902
6, 25
6, 25
7
NET NON-INTEREST INCOME
OPERATING EXPENSES
Nine months
ended
30 September
2009
665,625
305,588
(410,160)
(222,012)
255,465
83,576
JOINT STOCK COMPANY “STATE SAVINGS BANK OF UKRAINE”
CONDENSED INTERIM STATEMENT OF COMPREHENSIVE INCOME (CONTINUED)
FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2010
(in Ukrainian Hryvnias and in thousands, except for earnings per share which are in Ukrainian Hryvnias)
Notes
OTHER COMPREHENSIVE INCOME
Nine months
ended
30 September
2010
Nine months
ended
30 September
2009
Net change in fair value of investments available for sale,
net of deferred income tax effect
15,349
(23,027)
Reclassification adjustments for gains included in profit or loss
from comprehensive income on disposal of investments available
for sale, net of deferred income tax effect
18,626
131,796
OTHER COMPREHENSIVE INCOME AFTER INCOME TAX
33,975
108,769
289,440
192,345
18,389
6,016
TOTAL COMPREHENSIVE INCOME
EARNINGS PER SHARE
Basic and diluted (Ukrainian Hryvnias)
10
24 January 2011
24 January 2011
The notes on pages 10-62 form an integral part of this condensed interim financial information.
5
F-7
JOINT STOCK COMPANY “STATE SAVINGS BANK OF UKRAINE”
CONDENSED INTERIM STATEMENT OF FINANCIAL POSITION
AS AT 30 SEPTEMBER 2010
(in Ukrainian Hryvnias and in thousands)
ASSETS:
Cash and balances with the National Bank of Ukraine
Due from banks
Loans to customers
Investments available for sale
Property, equipment and intangible assets
Other assets
Notes
30 September
2010
31 December
2009
11, 25
12, 25
13, 25
14, 25
15
16
3,140,511
3,492,979
39,272,676
7,512,545
2,067,644
386,251
2,278,352
2,956,340
45,716,277
4,012,431
1,988,852
438,259
55,872,606
57,390,511
15,794,517
23,002,137
464,633
276,091
111,041
799,616
16,022,744
24,672,908
446,093
15,803
65,445
824,578
40,448,035
42,047,571
13,892,000
1,147,005
15,349
370,217
13,892,000
1,147,251
(18,626)
322,315
15,424,571
15,342,940
55,872,606
57,390,511
TOTAL ASSETS
LIABILITIES AND EQUITY
LIABILITIES:
Due to banks
Customer accounts
Debt securities issued
Deferred income tax liability
Other liabilities
Subordinated debt
17, 25
18, 25
19
9
20
21
Total liabilities
EQUITY:
Share capital
Property revaluation reserve
Investments available for sale fair value reserve
Retained earnings
22
Total equity
TOTAL LIABILITIES AND EQUITY
24 January 2011
24 January 2011
The notes on pages 10-62 form an integral part of this condensed interim financial information.
6
F-8
JOINT STOCK COMPANY “STATE SAVINGS BANK OF UKRAINE”
CONDENSED INTERIM STATEMENT OF CHANGES IN EQUITY
FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2010
(in Ukrainian Hryvnias and in thousands)
Notes
Property
revaluation
reserve
Investments
available for
sale fair
value
reserve
13,892,000
1,147,679
(131,796)
212,846
15,120,729
-
(263)
108,769
83,839
192,345
30 September 2009
13,892,000
1,147,416
(23,027)
296,685
15,313,074
31 December 2009
13,892,000
1,147,251
(18,626)
322,315
15,342,940
-
-
-
(207,809)
(207,809)
-
(246)
33,975
255,711
289,440
13,892,000
1,147,005
15,349
370,217
15,424,571
31 December 2008
Total comprehensive income
for the period
Dividends declared and paid
Total comprehensive income
for the period
30 September 2010
22
Share
capital
24 January 2011
Retained
earnings
24 January 2011
The notes on pages 10-62 form an integral part of this condensed interim financial information.
7
F-9
Total
equity
JOINT STOCK COMPANY “STATE SAVINGS BANK OF UKRAINE”
CONDENSED INTERIM STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2010
(in Ukrainian Hryvnias and in thousands)
Notes
CASH FLOWS FROM OPERATING ACTIVITIES:
Interest received
Interest paid
Fees and commissions received
Fees and commissions paid
Operations with foreign currency
Other operating income received
Staff costs paid
Operating expenses paid
Cash flows from operating activities before changes in
operating assets and liabilities
Changes in operating assets and liabilities
(Increase)/decrease in operating assets:
Restricted balances with the National Bank of Ukraine
Due from banks
Loans to customers
Other assets
Increase/(decrease) in operating liabilities:
Due to banks
Customer accounts
Other liabilities
11
Net cash inflow/(outflow) from operating activities
before taxation
Income tax paid
Nine months
ended
30 September
2010
5,602,209
(2,707,480)
791,458
(135,929)
99,288
23,489
(1,017,652)
(312,023)
5,153,209
(2,637,474)
754,934
(120,833)
87,823
15,909
(912,133)
(284,646)
2,343,360
2,056,789
(247,470)
135,900
4,667,794
(18,528)
(87,048)
883,593
(12,655,434)
(59,377)
(140,919)
(1,542,424)
9,335
(6,945,744)
7,136,300
768
5,207,048
(9,670,153)
(115)
Net cash inflow/(outflow) from operating activities
Nine months
ended
30 September
2009
(430,162)
5,206,933
(10,100,315)
(19,349,624)
15,982,003
(252,029)
519
(14,406,859)
26,433,059
(61,762)
579
(3,619,131)
11,965,017
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments available for sale
Proceeds on sale of investments available for sale
Purchase of property, equipment and intangible assets
Proceeds on sale of property and equipment
Net cash (outflow)/inflow from investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid
Proceeds from debt securities issued
Repayment of debt securities issued
22
Net cash outflow from financing activities
8
F-10
(207,809)
62,000
(45,113)
(62,006)
(190,922)
(62,006)
JOINT STOCK COMPANY “STATE SAVINGS BANK OF UKRAINE”
CONDENSED INTERIM STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2010
(in Ukrainian Hryvnias and in thousands)
Notes
Nine months
ended
30 September
2010
Effect of change in foreign exchange rate fluctuations on cash
and cash equivalents
(14,821)
NET INCREASE IN CASH AND CASH EQUIVALENTS
Nine months
ended
30 September
2009
19,464
1,382,059
1,822,160
CASH AND CASH EQUIVALENTS at the beginning
of the period
11
4,184,264
2,976,344
CASH AND CASH EQUIVALENTS at the end
of the period
11
5,566,323
4,798,504
24 January 2011
24 January 2011
The notes on pages 10-62 form an integral part of this condensed interim financial information.
9
F-11
JOINT STOCK COMPANY “STATE SAVINGS BANK OF UKRAINE”
NOTES TO THE CONDENSED INTERIM FINANCIAL INFORMATION
FOR THE NINE MONTHS ENDED 30 SEPTEMBER 2010
1.
ORGANISATION
The Bank was established in accordance with the Decree of the President of Ukraine No. 106
dated 20 May 1999 and the Resolution of the Government of Ukraine No. 876 dated 21 May
1999, by converting the State Specialized Commercial Savings Bank of Ukraine into the Joint
Stock Company “State Savings Bank of Ukraine” in the form of an open joint stock company.
The Joint Stock Company “State Savings Bank of Ukraine” was registered by the National Bank
of Ukraine (the “NBU”) on 26 May 1999, registration number 4 and change of its name into
Joint Stock Company “State Savings Bank of Ukraine” was registered by the NBU on
28 December 1999.
The Bank has operated under a full banking license, issued by the National Bank of Ukraine,
starting from 16 January 2002. The Bank is licensed by the State Commission for securities and
stock market for trading with securities.
The Bank‟s primary business consists of processing banking accounts and attracting deposits
from legal entities and individuals, originating loans, transferring payments, trading with
securities and foreign currencies.
As at 30 September 2010 and 31 December 2009 the Bank was a 100% state-owned bank.
The registered office of the Bank is located at St. Hospitalna 12G, Kyiv, Ukraine.
As at 30 September 2010 and 31 December 2009 the Bank had 23 regional branches, Main
branch in Kyiv and Kyiv region, Crimea republican branch; 255 and 329 sub-branches,
5,743 and 5,730 operational outlets within Ukraine, respectively.
The number of employees of the Bank as at 30 September 2010 and 31 December 2009 was
39,236 and 40,315, respectively.
This condensed interim financial information was authorized for issue by the Management Board
of the Bank on 20 December 2010.
2.
BASIS OF PRESENTATION
Accounting basis – The condensed interim financial information has been prepared in
accordance with International Accounting Standard 34 “Interim Financial Reporting”
(“IAS 34”), except as discussed below, accordingly, it does not include all of the information
required by International Financial Reporting Standards (“IFRS”) issued by the International
Accounting Standards Board (“IASB”). This condensed interim financial information should be
read in conjunction with the Bank‟s annual financial statements.
In accordance with International Accounting Standard (“IAS”) 29 “Financial Reporting in
Hyperinflationary Economies” the economy of Ukraine was considered to be hyperinflationary
during year 2000 and prior years. The Bank did not apply provisions of IAS 29 to restate its
share capital and non-monetary assets. The effect of this departure from IAS 29 on share capital,
property revaluation reserve and retained earnings as at and for the periods ended 30 September
2010 and 31 December 2009 has not been determined.
10
F-12
In accordance with International Financial Reporting Standard (“IFRS”) 8 “Operating Segments”
information about the Bank‟s operating segments, products and services, the geographical areas
in which it operates, and its major customers is required to be disclosed if an entity files, or is in
the process of filing, its financial statements with a securities commission or other regulatory
organisation for the purpose of issuing any class of instruments in a public market. In the past
the Bank did not apply the provisions of IFRS 8 as management considered it was not relevant
for the Bank. The Bank will apply IFRS 8 for its annual financial statements as at 31 December
2010.
Since the results of the Bank‟s operations closely relate to and depend on changing market
conditions, the results of the Bank‟s operations for the interim period are not necessarily
indicative of the results for the year.
This condensed interim financial information has been prepared on the assumption that the Bank
is a going concern and will continue in operation for the foreseeable future. Management and
the shareholder have the intention to further develop the business of the Bank in
Ukraine. Management believes that the going concern assumption is appropriate for the Bank
due to its sufficient capital adequacy ratio, the commitment of the shareholder to support the
Bank, and, based on historical experience, that short-term obligations will be refinanced in
the normal course of business.
This condensed interim financial information is presented in thousands of Ukrainian Hryvnias,
unless otherwise indicated. The condensed interim financial information has been prepared
under the historical cost convention, except for the revaluation of property in accordance with
IAS 16 “Property, Plant and Equipment”, which is recorded at revalued amounts and
measurement of certain financial instruments in accordance with IAS 39 “Financial Instruments:
Recognition and Measurement”, which are recorded at fair value.
The Bank maintains its accounting records in accordance with Ukrainian law. This condensed
interim financial information has been prepared from Ukrainian statutory accounting records and
have been adjusted to conform with IFRS. Entered adjustments include certain reclassifications
to reflect the economic substance of underlying transactions including reclassifications of certain
assets and liabilities, income and expenses to appropriate financial statement captions.
Functional currency – Items included in the condensed interim financial information of the Bank
are measured using the currency that best reflects the economic substance of the underlying events
and circumstances relevant to the Bank (the “functional currency”). The functional currency of
this condensed interim financial information is the Ukrainian Hryvnia (“UAH”).
3.
SIGNIFICANT ACCOUNTING POLICIES
Recognition and measurement of financial instruments – The Bank recognizes financial assets
and liabilities on its statement of financial position when it becomes a party to the contractual
obligation of the instrument. Regular way purchase and sale of the financial assets and liabilities
are recognized using settlement date accounting. Regular way purchases of financial instruments
that will be subsequently measured at fair value between trade date and settlement date are
accounted for in the same way as for acquired instruments.
Financial assets and liabilities are initially recognized at fair value plus, in the case of a financial
asset or financial liability not at fair value through profit or loss, transaction costs that are
directly attributable to acquisition or issue of the financial asset or financial liability.
The accounting policies for subsequent re-measurement of these items are disclosed in
the respective accounting policies set out below.
11
F-13
Derecognition of financial assets and liabilities
Financial assets – A financial asset (or, where applicable a part of a financial asset or part
of a group of similar financial assets) is derecognized where:



The rights to receive cash flows from the asset have expired;
The Bank has transferred its rights to receive cash flows from the asset, or retained the right
to receive cash flows from the asset, but has assumed an obligation to pay them in full
without material delay to a third party under a „pass-through‟ arrangement; and
The Bank either (a) has transferred substantially all the risks and rewards of the asset, or
(b) has neither transferred nor retained substantially all the risks and rewards of the asset, but
has transferred control of the asset.
A financial asset is derecognized when it has been transferred and the transfer qualifies for
derecognition. A transfer requires that the Bank either: (a) transfers the contractual rights to
receive the asset‟s cash flows; or (b) retains the right to the asset‟s cash flows but assumes
a contractual obligation to pay those cash flows to a third party. After a transfer, the Bank
reassesses the extent to which it has retained the risks and rewards of ownership of the
transferred asset. If substantially all the risks and rewards have been retained, the asset remains
on the statement of financial position. If substantially all of the risks and rewards have been
transferred, the asset is derecognized. If substantially all the risks and rewards have been neither
retained nor transferred, the Bank assesses whether or not is has retained control of the asset.
If it has not retained control, the asset is derecognized. Where the Bank has retained control of
the asset, it continues to recognize the asset to the extent of its continuing involvement.
Financial liabilities – A financial liability is derecognized when the obligation is discharged,
cancelled, or expires.
Where an existing financial liability is replaced by another from the same lender on substantially
different terms, or the terms of an existing liability are substantially modified, such an exchange
or modification is treated as a de-recognition of the original liability and the recognition of a new
liability, and the difference in the respective carrying amounts is recognized in the statement of
comprehensive income.
Cash and cash equivalents – Cash and cash equivalents include cash on hand, unrestricted
balances on correspondent accounts with the National Bank of Ukraine, advances to banks in
countries included in the Organization for Economic Co-operation and Development (“OECD”),
except for margin deposits for operations with plastic cards, which may be converted to cash
within a short period of time. For purposes of determining cash flows, the minimum reserve
deposit required by the National Bank of Ukraine is not included as a cash equivalent due to
restrictions on its availability.
Precious metals – Assets and liabilities in precious metals are translated at the official rate set by
National Bank of Ukraine computed based on the first fixing of the London Metal Exchange
rates using the UAH/USD exchange rate effective on the date. Changes in the bid prices are
recorded in net gain/(loss) on foreign exchange operations.
Due from banks – In the normal course of business the Bank maintains advances and deposits
for various periods of time with other banks. Due from banks with a fixed maturity term are
subsequently measured at amortized cost using the effective interest method. Those that do not
have fixed maturities are carried at amortized cost based on maturities estimated by the
management. Amounts due from banks are carried net of any allowance for impairment losses.
12
F-14
Repurchase and reverse repurchase agreements – In the normal course of business the Bank
enters into sale and purchase back agreements (“repos”) and purchase and sale back agreements
of financial assets (“reverse repos”). Repos and reverse repos are utilized by the Bank as
an element of its treasury management and trading business.
A repo is an agreement to transfer a financial asset to another party in exchange for cash or
other consideration and a concurrent obligation to reacquire the financial assets at a future date
for an amount equal to the cash or other consideration exchanged plus interest. These
agreements are accounted for as financing transactions. Financial assets sold under repo are
retained in the financial statements and consideration received under these agreements is
recorded as collateralized deposit received within balances due to banks.
Assets purchased under reverse repos are recorded in the financial statements as cash placed on
deposit which is collateralized by securities and other assets and are classified within balances
due from banks/loans to customers.
In the event that assets purchased under reverse repo are sold to third parties, the results are
recorded with the gain or loss included in net gains/(losses) on respective assets. Any related
income or expense arising from the pricing difference between purchase and sale of the
underlying assets is recognized as interest income or expense in the statement of comprehensive
income.
Derivative financial instruments – In the normal course of business, the Bank enters into various
derivative financial instruments including foreign exchange contracts concluded by the Bank
with other banks to purchase/sale and exchange of foreign currency and currency rate swaps to
manage currency and liquidity risks. Derivative financial instruments are initially recognized at
fair value at the date a derivative contract is entered into, and are subsequently re-measured to
their fair value at each reporting date. The fair values are estimated based on quoted market
prices or pricing models that take into account the current market and contractual prices of the
underlying instruments and other factors. Derivatives are carried as assets when their fair value
is positive and as liabilities when it is negative. Derivatives are included in financial assets and
liabilities at fair value through profit or loss in the statement of financial position, or if their
amounts are immaterial they are included in other assets or liabilities. Gains and losses resulting
from these instruments are included in net gain/(loss) from financial assets and liabilities at fair
value through profit or loss in the statement of comprehensive income, or if their amounts are
immaterial they are included in net gain/(loss) on foreign exchange operations. Derivative
financial instruments entered into by the Bank are not designated as hedges and do not qualify
for hedge accounting.
Loans to customers – Loans to customers are non-derivative assets with fixed or determinable
payments that are not quoted in an active market, other than those classified in other categories
of financial assets.
Loans to customers granted by the Bank are initially recognized at fair value plus related
transaction costs that directly relate to the acquisition or the creation of such financial assets.
Where the fair value of consideration given does not equal the fair value of the loan, for example
where the loan is issued at lower than market rates, the difference between the fair value of
consideration given and the fair value of the loan is recognized as a loss on initial recognition of
the loan and included in the statement of comprehensive income according to nature of the
losses. Subsequently, loans are carried at amortized cost using the effective interest method.
Loans to customers are carried net of any allowance for impairment losses.
The effective interest rate is the rate that exactly discounts estimated future cash payments or
receipts through the expected life of the financial instrument or, when appropriate, a shorter
period to the net carrying amount of the financial asset or financial liability.
13
F-15
Write off of loans – Loans are written off against allowance for impairment losses based on
the decision of the Management Board. Such decisions are taken when all available possibilities
to collect the amounts due have been exercised and available collateral has been sold. Subsequent
recoveries of amounts previously written off are reflected as an offset to the charge for impairment
of financial assets in the statement of comprehensive income in the period of recovery.
Allowance for impairment losses – The Bank accounts for impairment of financial assets that are
not carried at fair value when there is objective evidence that a financial asset or group of
financial assets is impaired. The impairment losses are measured as the difference between
carrying value and the present value of expected future cash flows, including amounts
recoverable from guarantees and collateral, discounted at the financial asset‟s original effective
interest rate, for financial assets which are carried at amortized cost. If in a subsequent period
the amount of the impairment loss decreases and the decrease can be related objectively to
an event occurring after the impairment was recognized, the previously recognized impairment
loss is reversed with an adjustment of the provision account.
For financial assets carried at cost the impairment losses are measured as the difference between
the carrying amount of the financial asset and the present value of estimated future cash flows
discounted at the current market rate of return for a similar financial asset. Such impairment
losses are not reversed.
The change in the impairment is included into profits using the provision account. Assets
recorded in the statement of financial position are reduced by the amount of the impairment.
Factors that the Bank considers in determining whether it has objective evidence that
an impairment loss has been incurred include information about the debtors‟ or issuers‟ liquidity,
solvency and business and financial risk exposures, levels of and trends in delinquencies for
similar financial assets, national and local economic trends and conditions, and the fair value
of collateral and guarantees. These and other factors may, either individually or taken together,
provide sufficient objective evidence that an impairment loss has been incurred in a financial
asset or group of financial assets.
Impairment losses are recognized in profit or loss when incurred as a result of one or more events
(“loss events”) that occurred after the initial recognition of the financial asset and which have
an impact on the amount or timing of the estimated future cash flows of the financial asset or
group of financial assets that can be reliably estimated.
If the Bank determines that no objective evidence exists that impairment was incurred for
an individually assessed financial asset, whether significant or not, it includes the asset in
a group of financial assets with similar credit risk characteristics and collectively assesses them
for impairment. The primary factors that the Bank considers whether a financial asset is
impaired is its overdue status and realisability of related collateral, if any. The following other
principal criteria are also used to determine that there is objective evidence that an impairment
loss has occurred:





Any instalment is overdue and the late payment cannot be attributed to a delay caused by
the settlement systems;
The borrower experiences a significant financial difficulty as evidenced by borrower‟s
financial information that the Bank obtains;
The borrower considers bankruptcy or a financial reorganisation;
There is an adverse change in the payment status of the borrower as a result of changes in
the national or local economic conditions that impact the borrower;
The value of collateral significantly decreases as a result of deteriorating market conditions.
14
F-16
For the purposes of a collective evaluation of impairment, financial assets are grouped on
the basis of similar credit risk characteristics. These characteristics are relevant to the estimation
of future cash flows for groups of such assets by being indicative on the debtors‟ ability to pay all
amounts due, according to the contractual terms of the assets being evaluated.
Future cash flows in a group of financial assets that are collectively evaluated for impairment are
estimated on the basis of contractual cash flows of assets, and experience of management in
respect of the extent to which amounts will become overdue, as a result of past loss events and
the success of recovery of overdue amounts. Past experience is adjusted on the basis of current
observable data to reflect the effects of current conditions that do not affect past periods and to
remove the effects of past conditions that do not exist currently.
It should be understood that evaluation of losses involves an exercise of judgment. While it is
possible that in particular periods the Bank may sustain losses which are substantial relative for
impairment losses, it is the judgment of management that the impairment losses are adequate to
absorb losses incurred on risk assets, at the reporting date.
Investments available for sale – Investments available for sale represent debt and equity
investments that are intended to be held for an indefinite period of time. Such securities are
initially recorded at fair value. Subsequently the securities are measured at fair value, with such
re-measurement recognized directly in equity, except for impairment losses, foreign exchange
gains or losses and interest income accrued using the effective interest method, which are
recognized directly in the statement of comprehensive income. When sold, gain/(loss)
previously recorded in equity is recycled through the statement of comprehensive income.
The Bank uses quoted market prices to determine the fair value for the investments available
for sale. If the market for investments is not active, the Bank establishes fair value by using
valuation techniques. Valuation techniques include using recent arm‟s length market transactions
between knowledgeable, willing parties, reference to the current fair value of another instrument
that is substantially the same, discounted cash flow analysis and other methods. If there is
a valuation technique commonly used by market participants to price the instrument and that
technique has been demonstrated to provide reliable estimates of prices obtained in actual market
transactions, the Bank uses that technique.
Interest income earned on investments available for sale is reflected in the statement of
comprehensive income as interest income on investment available for sale.
Non-marketable debt and equity securities are stated at amortized cost and cost, respectively,
less impairment losses, if any, unless fair value can be reliably measured.
When there is objective evidence that investments available for sale have been impaired,
the cumulative loss previously recognized in equity is removed from equity and recognized in
the statement of comprehensive income for the period. Reversals of such impairment losses
on debt instruments, which are objectively related to events occurring after the impairment, are
recognized in the statement of comprehensive income for the period. Reversals of such
impairment losses on equity instruments are not recognized in the statement of comprehensive
income.
Property, equipment and intangible assets – Property, equipment and intangible assets other
than buildings are carried at historical cost less accumulated depreciation and amortization and
any recognized impairment loss, if any.
Depreciation on assets under construction and those not placed in service commences from
the date the assets are ready for their intended use.
15
F-17
Depreciation of property and equipment and amortization of intangible assets is charged on
the historical (revalued) cost of property, equipment and intangible assets and is designed to
write off assets over their useful economic lives. It is calculated on a straight line basis at
the following annual rates:
Buildings
Furniture, office equipment and motor vehicles
Intangible assets
2% - 3%
10% - 33%
25%
Leasehold improvements are amortized over the life of the related leased asset. Expenses related
to repairs and renewals are charged when incurred and included in operating expenses unless
they qualify for capitalization.
The Bank has adopted a revaluation model for the subsequent measurement of its buildings.
Buildings are stated in the statement of financial position at their revalued amounts, being the fair
value at the date of revaluation, less any subsequent accumulated depreciation and subsequent
accumulated impairment losses. Revaluations are performed with sufficient regularity such that
the carrying amounts do not differ materially from those that would be determined using fair
values at the date of statement of financial position.
Any revaluation increase arising on the revaluation of such buildings is credited to the property
revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset
previously recognized as an expense, in which case the increase is credited to the statement of
comprehensive income to the extent of the decrease previously charged. A decrease in carrying
amount arising on the revaluation of such buildings is charged as an expense to the extent that it
exceeds the balance, if any, held in the property revaluation reserve relating to a previous
revaluation of that asset. The decrease is debited directly in equity to the property revaluation
reserve to the extent of any credit balance existing in the property revaluation reserve in respect
of that asset.
Depreciation on revalued buildings is charged to the statement of comprehensive income. On
the subsequent sale or retirement of a revalued property, the attributable revaluation surplus
remaining in the property revaluation reserve is transferred directly to retained earnings.
Impairment is recognized in the respective period and is included in net other income.
After the recognition of an impairment loss the depreciation charge for property and equipment
and intangible assets is adjusted in future periods to allocate the assets‟ revised value, less its
residual value (if any), on a systematic basis over its remaining useful life.
Operating leases – Leases of assets under which the risks and rewards of ownership are
effectively retained with the lessor are classified as operating leases. Lease payments under
operating lease are recognized as expenses on a straight-line basis over the lease term and
included into operating expenses.
Taxation – Income tax expense represents the sum of the current and deferred tax expense.
The current tax expense is based on taxable profit for the year. Taxable profit differs from profit
before income tax as reported in the statement of comprehensive income because it excludes
items of income or expense that are taxable or deductible in other years and it further excludes
items that are never taxable or deductible. The Bank‟s current tax expense is calculated using tax
rates that have been enacted during the reporting period.
16
F-18
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying
amounts of assets and liabilities in the financial statements and the corresponding tax bases used
in the computation of taxable profit, and is accounted for using the balance sheet liability
method. Deferred tax liabilities are generally recognized for all taxable temporary differences
and deferred tax assets are recognized to the extent that it is probable that taxable profits will be
available against which deductible temporary differences can be utilized. Such assets and
liabilities are not recognized if the temporary difference arises from goodwill or from the initial
recognition (other than in a business combination) of other assets and liabilities in a transaction
that affects neither the tax profit nor the accounting profit.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to
the extent that it is no longer probable that sufficient taxable profits will be available to allow
all or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when
the liability is settled or the asset is realized. Deferred tax is charged or credited in the statement
of comprehensive income, except when it relates to items charged or credited directly to equity,
in which case the deferred tax is also dealt with in equity.
Deferred income tax assets and deferred income tax liabilities are offset and reported net on
the statement of financial position if:


The Bank has a legally enforceable right to set off current income tax assets against current
income tax liabilities; and
Deferred income tax assets and the deferred income tax liabilities relate to income taxes
levied by the same taxation authority on the same taxable entity.
Ukraine also has various other taxes, which are assessed on the Bank‟s activities. These taxes
are included as a component of operating expenses in the statement of comprehensive income.
Due to banks, customer accounts, debt securities issued and subordinated debt – Due to banks,
customer accounts, debt securities issued and subordinated debt are initially recognized at fair
value. Subsequently amounts due are stated at amortized cost and any difference between net
proceeds and the redemption value is recognized in the statement of comprehensive income over
the period of the borrowings using the effective interest method. Those that do not have fixed
maturities are carried at amortized cost based on expected maturities.
Provisions – Provisions are recognized when the Bank has a present legal or constructive
obligation as a result of past events, and it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation and a reliable estimate of the
obligation can be made.
Contingencies – Contingent liabilities are not recognized in the statement of financial position
but are disclosed unless the possibility of any outflow in settlement is remote. A contingent asset
is not recognized in the statement of financial position but disclosed when an inflow of economic
benefits is probable.
Financial guarantee contracts issued and letters of credit – Financial guarantee contracts and
letters of credit issued by the Bank are credit insurance that provides for specified payments to be
made to reimburse the holder for a loss it incurs because a specified debtor fails to make payment
when due under the original or modified terms of a debt instrument. Such financial guarantee
contracts and letters of credit issued are initially recognized at fair value.
17
F-19
Subsequently they are measured at the higher of (a) the amount recognized as a provision in
accordance with IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”; and
(b) the amount initially recognized less, where appropriate, cumulative amortization of initial
premium revenue received over the financial guarantee contracts or letter of credit issued.
Share capital – Contributions to share capital are recognized at cost.
Costs directly attributable to the issue of new shares are deducted from equity net of any related
income taxes.
Dividends on ordinary shares are recognized in equity as a reduction in the period in which they
are declared. Dividends that are declared after the reporting date are treated as a subsequent
event under IAS 10 “Events after the Reporting Period” (“IAS 10”) and disclosed accordingly.
Retirement and other benefit obligations – In accordance with the requirements of the Ukrainian
legislation, the Bank withholds amounts of pension contributions from employee salaries and
pays them to the Pension Fund of Ukraine. In addition, such pension system provides for
calculation of current payments by the employer as a percentage of current total disbursements
to staff. Such expense is charged in the period the related salaries are earned. Upon retirement
an employee receives retirement benefit payments made by the Pension Fund of Ukraine.
The Bank does not have any pension arrangements separate from the state pension system of
Ukraine, which requires current contributions by an employer calculated as a percentage of
current gross salary payments. In addition, the Bank has no post-retirement benefits or other
significant compensated benefits requiring accrual.
Recognition of income and expense
Recognition of interest income and expense – Interest income and expense are recognized on
an accrual basis using the effective interest rate method. The effective interest rate method is
a method of calculating the amortized cost of a financial asset or a financial liability (or group
of financial assets or financial liabilities) and allocating the interest income or interest expense
over the relevant period.
Once a financial asset or a group of similar financial assets has been written down (partly written
down) as a result of an impairment loss, interest income is thereafter recognized using the
interest rate used to discount the future cash flows for the purpose of measuring the impairment
loss.
Interest income also includes income earned on investments in securities. Other income is
credited to the statement of comprehensive income when the related transactions are completed.
Recognition of fee and commission income and expense – Loan origination fees are deferred,
together with the related direct costs, and recognized as an adjustment to the effective interest rate
of the loan. Where it is probable that a loan commitment will lead to a specific lending
arrangement, the loan commitment fees are deferred, together with the related direct costs, and
recognized as an adjustment to the effective interest rate of the resulting loan. Where it is unlikely
that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are
recognized in the statement of comprehensive income over the remaining period of the loan
commitment. Where a loan commitment expires without resulting in a loan, the loan commitment
fee is recognized in the statement of comprehensive income on expiry. Loan servicing fees are
recognized as revenue as the services are provided. Loan syndication fees are recognized in
the statement of comprehensive income when the syndication has been completed. All other
commissions are recognized when services are provided.
18
F-20
Foreign currency translation – Monetary assets and liabilities denominated in foreign
currencies are translated into Ukrainian Hryvnia at the appropriate spot rates of exchange ruling
at the reporting date. Foreign currency transactions are accounted for at the exchange rates
prevailing at the date of the transaction. Profits and losses arising from these translations are
included in net gain/(loss) on foreign exchange operations.
Rates of exchange – The official exchange rates at period-end used by the Bank in
the preparation of the financial information are as follows:
30 September
2010
31 December
2009
30 September
2009
7.91350
10.77107
7.98500
11.44889
8.01000
11.65375
UAH/1 US Dollar
UAH/1 Euro
Offset of financial assets and liabilities – Financial assets and liabilities are offset and reported
net on the statement of financial position when the Bank has a legally enforceable right to set off
the recognized amounts and the Bank intends either to settle on a net basis or to realize the asset
and settle the liability simultaneously. In accounting for a transfer of a financial asset that does not
qualify for derecognition, the Bank does not offset the transferred asset and the associated liability.
Areas of significant management judgment and sources of estimation uncertainty –
The preparation of this condensed interim financial information in accordance with IAS 34
requires management to make estimates and assumptions that affect the reported amounts.
Management evaluates its estimates and judgments on an ongoing basis. Such estimates and
assumptions are based on the information available to the Bank‟s management as at the date
of this condensed interim financial information. Therefore, actual results could differ from those
estimates and assumptions. Estimates that are particularly susceptible to change relate to
the provisions for impairment losses and the fair value of financial instruments.
Key assumptions concerning the future and other key sources of uncertainty estimation at
the reporting date, that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial period include:
Loans to customers
Property, equipment and intangible assets
Investments available for sale
30 September
2010
31 December
2009
39,272,676
2,067,644
7,512,545
45,716,277
1,988,852
4,012,431
Loans to customers – Loans to customers are measured at amortized cost less allowance for
impairment losses. The estimation of allowances for impairments involves the exercise of
significant judgment. The Bank regularly reviews its loans to assess for impairment. The Bank
estimates allowances for impairment with the objective of maintaining balance sheet provisions
at a level believed by management to be sufficient to absorb losses incurred in the Bank‟s loan
portfolio. The calculation of provisions on impaired loans is based on the likelihood of the asset
being written off and the estimated loss on such a write-off.
These assessments are made using statistical techniques based on historic experience. These
determinations are supplemented by the application of management judgment.
19
F-21
The Bank considers accounting estimates related to provisions for loans key sources of
estimation uncertainty because: (i) they are highly susceptible to change from period to period as
the assumptions about future default rates and valuation of losses relating to impaired loans and
advances are based on recent performance experience, and (ii) any significant difference between
the Bank‟s estimated losses (as reflected in the provisions) and actual losses will require
the Bank to make provisions which, if significantly different, could have a material impact on its
future statement of comprehensive income and its statement of financial position.
The Bank uses management‟s judgment to estimate the amount of any impairment loss in cases
where a borrower has financial difficulties and there are few available sources of historical data
relating to similar borrowers. Similarly, the Bank estimates changes in future cash flows based
on past performance, past customer behaviour, observable data indicating an adverse change in
the payment status of borrowers in a group, and national or local economic conditions that
correlate with defaults on assets in the group. Management uses estimates based on historical
loss experience for assets with credit risk characteristics and objective evidence of impairment
similar to those in the group of loans. The Bank uses management‟s judgment to adjust
observable data for a group of loans to reflect current circumstances not reflected in historical
data.
The allowances for impairment of financial assets in the financial statements have been
determined on the basis of existing economic and political conditions. The Bank is not in
a position to predict what changes in conditions will take place in Ukraine and what effect such
changes might have on the adequacy of the allowances for impairment of financial assets in
future periods.
Valuation of Financial Instruments – Financial instruments that are as available for sale and all
derivatives are stated at fair value. The fair value of such financial instruments is the estimated
amount at which the instrument could be exchanged between willing parties, other than in
a forced or liquidation sale. If a quoted market price is available for an instrument, the fair value
is calculated based on the market price. When valuation parameters are not observable in the
market or cannot be derived from observable market prices, the fair value is derived through
analysis of other observable market data appropriate for each product and pricing models which
use a mathematical methodology based on accepted financial theories. Pricing models take into
account the contract terms of the securities as well as market-based valuation parameters, such as
interest rates, volatility, exchange rates and the credit rating of the counterparty. Where marketbased valuation parameters are missed, management will make a judgment as to its best estimate
of that parameter in order to determine a reasonable reflection of how the market would be
expected to price the instrument. In exercising this judgment, a variety of tools are used
including proxy observable data, historical data, and extrapolation techniques. The best evidence
of fair value of a financial instrument at initial recognition is the transaction price unless the
instrument is evidenced by comparison with data from observable markets.
Any difference between the transaction price and the value based on a valuation technique is not
recognized in the statement of comprehensive income on initial recognition. Subsequent gains or
losses are only recognized to the extent that it arises from a change in a factor that market
participants would consider in setting a price.
The Bank considers that the accounting estimate related to valuation of financial instruments
where quoted markets prices are not available is a key source of estimation uncertainty because:
(i) it is highly susceptible to change from period to period because it requires management to
make assumptions about interest rates, volatility, exchange rates, the credit rating of the
counterparty, valuation adjustments and specific feature of the transactions and (ii) the impact
that recognizing a change in the valuations would have on the assets reported on its statement
of financial position as well as its profit/(loss) could be material.
20
F-22
Had management used different assumptions regarding the interest rates, volatility, exchange
rates, the credit rating of the counterparty and valuation adjustments, a larger or smaller change
in the valuation of financial instruments where quoted market prices are not available would have
resulted that could have had a material impact on the Bank‟s reported net income.
Property, equipment and intangible assets – Certain property (buildings) is measured at fair
value. The date of the latest appraisal was 1 November 2008. The sales comparison method was
used for estimation of fair value of buildings and office premises. No revaluation was made as at
30 September 2010 and 31 December 2009. Previous appraisal was performed as at 1 November
2006. The following methods were used: sales comparison, income capitalization, and
construction costs for new buildings. Until 1 November 2006 revalued cost of buildings includes
effects of indexation and revaluation as described below.
The indexation of buildings until 31 December 1997 was deemed necessary by the Ukrainian
Government to reflect the effects of inflation and currency devaluation that occurred in both
the Soviet Union and Ukraine. Buildings were adjusted by inflation as stipulated by the
Ukrainian Government regulations several times until 31 December 1997.
In 1998 the Bank performed a revaluation of buildings according to the instructions of the NBU,
without involvement of independent and professionally qualified appraisers. The revaluation
was intended to bring the carrying value of buildings in line with the estimated market value as
at 1 January 1998. The results of revaluation were recorded in the property revaluation reserve.
No appraisal was performed from 1998 until 1 November 2006.
Taxation – Interim period income tax expense is accrued using the tax rate that would be
applicable to expected total annual earnings, that is, the estimated average annual effective
income tax rate applied to the pre-tax income of the interim period.
Deferred income tax assets – Deferred income tax assets are recognized for all deductible
temporary differences to the extent that is that it is probable that taxable profit will be available
against which the deductable temporary differences can be utilized. Estimation of probability
is based on management forecast of future taxable profit and is supplemented with subjective
judgments by the management of the Bank.
Provision for other off-balance sheet commitments – The accounting estimates and judgments
related to the provision for off-balance sheet commitments is an area of significant management
judgment because the underlying assumptions used for both the individually and collectively
assessed impairment can change from period to period and may significantly affect the Bank‟s
results of operations.
Related parties identification – Identification of related parties requires exercise of significant
management judgment in determining related party relationships.
The same accounting policies, presentations and methods of computations have been followed
in this interim financial information as were applied in the preparation of the Bank‟s financial
statements for the years ended 31 December 2009 and 2008.
Adoption of new and revised standards – In the current period, the Bank has adopted all
of the new and revised Standards and Interpretations issued by the IASB and IFRIC of the IASB
that are relevant to its operations and effective for annual reporting periods beginning on or after
1 January 2010.
The adoption of these new and revised Standards and Interpretations has not resulted in
significant changes to the amounts reported for the current or prior periods except where,
if applicable, referred to in the notes or statements described above.
21
F-23
Improvements to IFRS 2009 – In April 2009, the IASB issued amendments to IFRS, which
resulted from the IASB‟s annual improvement project. They comprise amendments that result in
accounting changes for presentation, recognition or measurement purposes as well as terminology
or editorial amendments related to a variety of individual IFRS standards. Most of the
amendments are effective for annual periods beginning on or after 1 January 2010, with earlier
application permitted. The adoption of the amendments did not have a material impact on
the Bank‟s financial statements.
Standards and interpretations issued and not yet adopted – At the date of authorization of these
condensed interim financial information, other than the Standards and Interpretations (related to
the Bank‟s activities) adopted by the Bank in advance of their effective dates, the following
Interpretations were in issue but not yet effective.
Improvements to IFRS 2010 – In May 2010, the IASB issued amendments to IFRS, which resulted
from the IASB‟s annual improvement project. They comprise amendments that result in
accounting changes for presentation, recognition or measurement purposes as well as terminology
or editorial amendments related to a variety of individual IFRS standards. Most of the
amendments are effective for annual periods beginning on or after 1 January 2011, with earlier
application permitted. The Bank is currently evaluating the potential impact that the adoption of
the amendments will have on its financial statements.
IAS 24 – In November 2009, the IASB issued a revised version of IAS 24, “Related Party
Disclosures” (“IAS 24”). IAS 24 provides a partial exemption from the disclosure requirements for
government-related entities and clarifies the definition of a related party. The revised standard is
effective for annual periods beginning on or after 1 January 2011, with earlier application
permitted. The Bank is currently evaluating the potential impact that the adoption of IAS 24 will
have on its financial statements.
IFRS 9 – In November 2009, the IASB issued IFRS 9, “Financial Instruments”, as a first step in
its project to replace IAS 39, “Financial Instruments: Recognition and Measurement”. IFRS 9
introduces new requirements for how an entity should classify and measure financial assets that are
in the scope of IAS 39. The standard requires all financial assets to be classified on the basis of
the entity‟s business model for managing the financial assets, and the contractual cash flow
characteristics of the financial asset. A financial asset is measured at amortized cost if two criteria
are met: (a) the objective of the business model is to hold the financial asset for the collection of
the contractual cash flows, and (b) the contractual cash flows under the instrument solely represent
payments of principal and interest. If a financial asset meets the criteria to be measured at
amortized cost, it can be designated at fair value through profit or loss under the fair value option,
if doing so would significantly reduce or eliminate an accounting mismatch. If a financial asset
does not meet the business model and contractual terms criteria to be measured at amortized cost,
then it is subsequently measured at fair value. IFRS 9 also removes the requirement to separate
embedded derivatives from financial asset hosts. It requires a hybrid contract with a financial asset
host to be classified in its entirety at either amortized cost or fair value. IFRS 9 requires
reclassifications when the entity‟s business model changes, which is expected to be an infrequent
occurrence; in this case, the entity is required to reclassify affected financial assets prospectively.
There is specific guidance for contractually linked instruments that create concentrations of
credit risk, which is often the case with investment tranches in a securitization. In addition to
assessing the instrument itself against the IFRS 9 classification criteria, management should also
„look through‟ to the underlying pool of instruments that generate cash flows to assess their
characteristics. To qualify for amortized cost, the investment must have equal or lower credit risk
than the weighted-average credit risk in the underlying pool of instruments, and those
instruments must meet certain criteria.
22
F-24
If a „look through‟ is impracticable, the tranche must be classified at fair value through profit or
loss. Under IFRS 9, all equity investments should be measured at fair value. However,
management has an option to present directly in gains (losses) not recognized in the income
statement unrealized and realized fair value gains and losses on equity investments that are not held
for trading. Such designation is available on initial recognition on an instrument-by-instrument
basis and is irrevocable. There is no subsequent recycling of fair value gains and losses to profit
or loss; however, dividends from such investments will continue to be recognized in profit or
loss. IFRS 9 is effective for annual periods beginning on or after 1 January 2013, with earlier
application permitted. IFRS 9 should be applied retrospectively; however, if adopted before
1 January 2012, comparative periods do not need to be restated.
The Bank is currently evaluating the potential impact that the adoption of IFRS 9 will have on its
financial statements.
4.
NET INTEREST INCOME
Net interest income comprises:
Nine months
ended
30 September
2010
Nine months
ended
30 September
2009
4,944,488
65,621
714,148
4,806,798
165,655
744,042
Total interest income
5,724,257
5,716,495
Interest income comprises:
Interest income on financial assets recorded at amortized cost:
Interest on loans to customers
Interest on due from banks
Other interest income
4,921,296
88,697
116
4,811,147
161,304
2
5,010,109
4,972,453
714,148
744,042
Total interest income
5,724,257
5,716,495
Interest expense comprises:
Interest expenses on financial liabilities recorded at amortized cost:
Interest on due to banks
Interest on customer accounts
Interest on subordinated debt
Interest on debt securities issued
(1,436,941)
(1,137,920)
(56,019)
(47,155)
(1,768,929)
(846,191)
(54,693)
(45,099)
Total interest expense
(2,678,035)
(2,714,912)
Net interest income before provision for impairment losses
on interest bearing assets
3,046,222
3,001,583
Interest income comprises:
Interest income on financial assets recorded at amortized cost:
- interest income on impaired financial assets, including assets
assessed on portfolio basis
- interest income on unimpaired financial assets
Interest income on financial assets at fair value
Interest income on financial assets at fair value:
Interest on investments available for sale
23
F-25
5.
ALLOWANCE FOR IMPAIRMENT LOSSES AND OTHER PROVISIONS
The movements in allowance for impairment losses on interest earning assets were as follows:
Due
from banks
Loans to
customers
Investments
available for sale
31 December 2008
57,652
1,071,259
Provision
Write-off of assets
43,945
-
2,001,329
(8,852)
103,407
-
2,148,681
(8,852)
30 September 2009
101,597
3,063,736
108,597
3,273,930
31 December 2009
66,651
4,118,127
90,107
4,274,885
1,653,684
(2,288)
50,717
-
1,703,878
(2,288)
5,769,523
140,824
5,976,475
(Recovery of
provision)/provision
Write-off of assets
30 September 2010
(523)
66,128
5,190
Total
1,134,101
The movements in allowances for impairment losses on other operations were as follows:
Other
assets
31 December 2008
10,291
Provision/(recovery of provision)
Write-off of assets
6.
2,210
(758)
Guarantees
and other
commitments
Total
6,622
16,913
(3,266)
-
(1,056)
(758)
30 September 2009
11,743
3,356
15,099
31 December 2009
12,995
4,123
17,118
Provision/(recovery of provision)
27,221
(2,085)
25,136
30 September 2010
40,216
2,038
42,254
Nine months
ended
30 September
2010
Nine months
ended
30 September
2009
754,785
29,034
1,453
583
5,603
699,144
48,593
1,983
898
4,316
791,458
754,934
Fee and commission expense:
Settlements and cash operations
Foreign exchange operations
Securities operations
Other
(118,060)
(7,794)
(935)
(9,140)
(97,233)
(12,333)
(1,682)
(9,585)
Total fee and commission expense
(135,929)
(120,833)
FEE AND COMMISSION INCOME AND EXPENSE
Fee and commission income and expense comprise:
Fee and commission income:
Settlements and cash operations
Foreign exchange operations
Off-balance sheet operations
Securities operations
Other
Total fee and commission income
24
F-26
7.
NET GAIN ON FOREIGN EXCHANGE OPERATIONS
Net gain on foreign exchange operations comprises:
Nine months
ended
30 September
2010
8.
Nine months
ended
30 September
2009
Dealing, net
Translation differences, net
99,288
(12,380)
87,823
27,847
Total net gain on foreign exchange operations
86,908
115,670
Nine months
ended
30 September
2010
Nine months
ended
30 September
2009
Staff costs
Depreciation and amortization
Property and equipment maintenance
Operating leases
Utilities
Office maintenance
Communications
Taxes, other than income tax
Security expenses
Professional services
Business trip expenses
Insurance expense
Advertising costs
Other expenses
1,051,400
84,304
72,437
71,621
47,875
31,262
22,090
18,733
14,597
6,359
6,143
4,191
1,446
15,342
946,872
73,340
59,133
63,401
39,088
25,509
21,854
30,707
12,710
6,603
4,966
5,451
968
14,325
Total operating expenses
1,447,800
1,304,927
OPERATING EXPENSES
Operating expenses comprise:
9.
INCOME TAXES
The Bank provides for taxes based on the tax accounts maintained and prepared in accordance
with the tax regulations of Ukraine and which may differ from International Financial Reporting
Standards.
The Bank is subject to certain permanent tax differences due to non-tax deductibility of certain
expenses and a tax free regime for certain income.
25
F-27
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used for tax purposes.
Temporary differences as at 30 September 2010 and 31 December 2009 relate mostly to different
methods of income and expense recognition as well as to recorded values of certain assets.
Temporary differences as at 30 September 2010 and 31 December 2009 comprise:
30 September
2010
31 December
2009
1,518,164
111,688
42,017
23,857
14,711
4,256
1,348,146
101,615
48,860
14,146
11,481
2,587
1,714,693
1,526,835
428,673
381,709
(259,541)
(23,941)
169,132
357,768
Taxable temporary differences:
Property, equipment and intangible assets
Investments available for sale
Subordinated debt
(1,389,253)
(388,058)
(3,581)
(1,370,061)
(123,972)
(252)
Total taxable temporary differences
(1,780,892)
(1,494,285)
Deferred tax liability at the statutory tax rate (25%)
(445,223)
(373,571)
Net deferred tax liabilities
(276,091)
(15,803)
Deductible temporary differences:
Loans to customers
Customer accounts
Other liabilities
Debt securities issued
Other assets
Due from banks
Total deductible temporary differences
Deferred tax assets at the statutory tax rate (25%)
Deferred tax asset not recognised
Deferred tax assets
Relationships between tax expenses and accounting profit for the periods ended 30 September
2010 and 2009 are explained as follows:
Nine months
ended
30 September
2010
Nine months
ended
30 September
2009
Profit before income tax
665,625
305,588
Statutory tax rate
Tax at the statutory tax rate
Effect of non-deductible expenses and non-taxable income
Change of deferred tax asset not recognised
25%
166,406
8,154
235,600
25%
76,397
2,562
143,053
Income tax expense
410,160
222,012
Current income tax expense
Deferred income tax expenses/(recovery) of deferred income
tax expenses
161,197
372,252
248,963
(150,240)
Income tax expense
410,160
222,012
26
F-28
Movement in deferred tax liability for the periods ended 30 September 2010 and 31 December
2009 was as follows:
Nine months
ended
30 September
2010
At the beginning of the period
Year ended
31 December
2009
(15,803)
(134,207)
Change in deferred income tax balances recognized in profit or loss
Changes in deferred income tax balances recognized in other
comprehensive income
(248,963)
156,127
(11,325)
(37,723)
At the end of the period
(276,091)
(15,803)
Nine months
ended
30 September
2010
Nine months
ended
30 September
2009
255,465
83,576
Weighted average number of ordinary shares for purposes of basic
and diluted earnings per share (in units)
13,892
13,892
Earnings per share – basic and diluted (UAH)
18,389
6,016
10. EARNINGS PER SHARE
Profit:
Net profit for the period attributable to ordinary shareholders
11.
CASH AND BALANCES WITH THE NATIONAL BANK OF UKRAINE
30 September
2010
31 December
2009
Cash
Balances with the National Bank of Ukraine
1,209,342
1,931,169
1,195,221
1,083,131
Total cash and balances with the National Bank of Ukraine
3,140,511
2,278,352
The balances with the National Bank of Ukraine as at 30 September 2010 and 31 December 2009
include UAH nil and UAH 177,530 thousand, respectively, which represent the obligatory
minimum reserve deposits with the NBU.
According to updated regulation of the NBU in 2010 the obligatory minimum reserve with
the NBU is a subject to decrease on amount of certain types of securities issued by the Ukrainian
Government or by state-owned entities under specified projects that the Bank holds in its
portfolio.
27
F-29
Cash and cash equivalents for the purposes of the statement of cash flows comprise
the following:
Cash and balances with the National Bank of Ukraine
Due from banks in OECD countries
Less guarantee deposits in OECD countries (Note 12)
Less minimum reserve deposits with the National Bank of Ukraine
Less balances with the National Bank of Ukraine pledged
as security
Total cash and cash equivalents
30 September
2010
31 December
2009
3,140,511
2,866,910
2,278,352
2,097,835
6,007,421
4,376,187
(16,098)
-
(14,393)
(177,530)
(425,000)
-
5,566,323
4,184,264
As at 30 September 2010 and 31 December 2009 balances with the National Bank of Ukraine,
with carrying value of UAH 425,000 thousand and UAH nil, respectively, were pledged as
security for loans received from the National Bank of Ukraine (Note 17).
12. DUE FROM BANKS
Due from banks comprise:
Correspondent accounts with other banks
Time deposits with other banks
Loans under reverse repurchase agreements
Less allowance for impairment losses
Total due from banks
30 September
2010
31 December
2009
3,147,561
352,302
59,244
2,721,171
272,549
29,271
3,559,107
3,022,991
(66,128)
(66,651)
3,492,979
2,956,340
Movements in allowance for impairment losses on balances due from banks for the periods
ended 30 September 2010 and 2009 are disclosed in Note 5.
As at 30 September 2010 and 31 December 2009, due from banks included accrued interest
income in the amount of UAH 3,416 thousand and UAH 119 thousand, respectively.
As at 30 September 2010 and 31 December 2009 due from other banks at total amount of
UAH 59,244 thousand and UAH 29,271 thousand were effectively collateralized by securities –
Ukrainian Government debt securities purchased under reverse repurchase agreements, with fair
value amounted to UAH 59,948 thousand and UAH 30,120 thousand, respectively.
As at 30 September 2010 and 31 December 2009 loans under reverse repurchase
agreements have contractual maturities in November 2010 and January 2010, respectively.
As at 30 September 2010 and 31 December 2009 the maximum credit risk exposure on due from
banks amounted to UAH 3,492,979 thousand and UAH 2,956,340 thousand, respectively.
28
F-30
As at 30 September 2010 and 31 December 2009 due from banks included guarantee deposits
placed by the Bank for its operations with plastic cards and letters of credit in the amount of
UAH 16,098 thousand and UAH 14,393 thousand, respectively.
As at 30 September 2010 and 31 December 2009 the Bank had placements with ten banks,
totalling UAH 3,351,921 thousand (94%) and UAH 2,854,179 thousand (94%), respectively,
which represents a significant concentration.
13. LOANS TO CUSTOMERS
Loans to customers comprise:
30 September
2010
31 December
2009
44,977,296
64,903
44,547,329
5,287,075
45,042,199
49,834,404
Less allowance for impairment losses
(5,769,523)
(4,118,127)
Total loans to customers
39,272,676
45,716,277
Loans to customers
Loans under reverse repurchase agreements
Movements in allowances for impairment losses for the year ended 30 September 2010 and 2009
are disclosed in Note 5.
As at 30 September 2010 and 31 December 2009 loans to customers included accrued interest
income in the amount of UAH 1,073,386 thousand and UAH 1,063,799 thousand, respectively.
The table below summarizes the amount of loans secured by respective collateral, rather than
the fair value of the collateral itself:
30 September
2010
31 December
2009
33,339,834
9,837,295
1,815,665
49,405
40,518,184
8,986,073
320,154
9,993
45,042,199
49,834,404
Less allowance for impairment losses
(5,769,523)
(4,118,127)
Total loans to customers
39,272,676
45,716,277
Loans collateralized by equipment, other movables and rights
thereon
Loans collateralized by pledge of real estate and rights thereon
Unsecured loans
Loans collateralized by cash deposits
29
F-31
The table below represents the borrowers‟ sector structure as at 30 September 2010 and
31 December 2009:
30 September
2010
31 December
2009
21,545,967
5,205,687
5,157,563
3,886,164
3,333,131
1,567,522
1,499,493
1,010,893
625,558
436,063
317,416
204,800
148,914
64,903
8,956
8,094
313
20,762
29,146,558
5,905,879
4,546,440
3,237,962
2,396,753
1,548,330
1,531,503
579,382
336,450
271,935
132,569
86,458
60,191
10,475
8,277
13,971
21,271
45,042,199
49,834,404
Less allowance for impairment losses
(5,769,523)
(4,118,127)
Total loans to customers
39,272,676
45,716,277
Analysis by sector:
Oil, gas and chemical production
Individuals
Energy
Construction and real estate
Construction and road maintenance
Trade
Agriculture and food processing
Municipal authority
Machinery construction
Transport
Mining and metallurgy
Manufacturing
Services
Financial services
Hotel and restaurant business
Press and publishing
Media and communications
Other
The Bank received real estate property and other assets by taking possession of collateral it held
as security. As at 30 September 2010 and 31 December 2009 such assets in amount of
UAH 111,191 thousand and UAH 111,005 thousand, respectively, are included in other assets
(Note 16).
Loans to individuals comprise the following products:
Consumer loans, collateralized by real estate and guarantees
Mortgage loans
Car loans
Consumer loans
Other
Less allowance for impairment losses
Total loans to individuals
30 September
2010
31 December
2009
2,275,746
1,084,547
967,653
656,810
220,931
2,411,974
1,110,723
1,238,158
936,557
208,467
5,205,687
5,905,879
(1,488,918)
(1,009,372)
3,716,769
4,896,507
As at 30 September 2010 and 31 December 2009 a maximum credit risk exposure on loans to
customers amounted to UAH 39,272,676 thousand and UAH 45,716,277 thousand, respectively.
As at 30 September 2010 and 31 December 2009 a maximum credit risk exposure on contingent
liabilities and loan commitments extended by the Bank to its customers amounted to
UAH 270,372 thousand and UAH 113,220 thousand, respectively (Note 23).
30
F-32
As at 30 September 2010 and 31 December 2009 loans to customers of UAH 32,704,045
thousand (73%) and UAH 37,225,435 thousand (75%), respectively, were granted to ten
borrowers or group of borrowers, which represents a significant concentration.
As at 30 September 2010 and 31 December 2009 the above stated amounts include loans issued to
the related state-owned companies PJSC “NJSC “Naftogaz of Ukraine” and OJSC “Ukrtransnafta”
in the total gross amount of UAH 21,384,536 thousand (47%) and UAH 29,089,711 thousand
(58%), which represents a significant concentration (Note 30).
As at 30 September 2010 and 31 December 2009 the following loans were provided to the related
state-owned companies PJSC “NJSC “Naftogaz of Ukraine” and OJSC “Ukrtransnafta”:
Name
PJSC “NJSC “Naftogaz
of Ukraine”
PJSC “NJSC “Naftogaz
of Ukraine”
PJSC “NJSC “Naftogaz
of Ukraine”
PJSC “NJSC “Naftogaz
of Ukraine”
PJSC “NJSC “Naftogaz
of Ukraine”
Interest
rate,
%
Maturity
30 September
2010
Maturity
Interest 31 December
rate,
2009
%
13.75 31 March 2015
11,933,967
29 December
2010
14.50
12,009,704
11.25 31 March 2015
5,513,390
30 June 2010
14.00
6,345,063
11.25 31 March 2015
3,332,362
4 June 2010
13.50
3,774,267
21 June 2011
304,068
21 June 2010
16.50
307,388
16.50 30 March 2011
159,699
30 March 2010
16.50
345,981
OJSC “Ukrtransnafta”
19.00 25 March 2011
49,000
25 March 2011
19.00
49,000
OJSC “Ukrtransnafta”
19.00 25 March 2011
49,000
25 March 2011
19.00
49,000
OJSC “Ukrtransnafta”
PJSC “NJSC “Naftogaz
of Ukraine”
PJSC “NJSC “Naftogaz
of Ukraine”
PJSC “NJSC “Naftogaz
of Ukraine”
PJSC “NJSC “Naftogaz
of Ukraine”
19.00 25 March 2011
43,050
25 March 2011
19.00
43,050
10.10
3,354,878
16.50
-
-
- 26 February 2010
-
-
-
2 March 2010
9.50
1,600,329
-
-
- 26 February 2010
7.92
939,373
-
-
-
6.40
271,678
30 March 2010
21,384,536
29,089,711
Less allowance for impairment losses
(2,300,627)
(1,790,761)
Total
19,083,909
27,298,950
As at 31 December 2009 loans to PJSC “NJSC “Naftogaz of Ukraine” included loans under
reverse repurchase agreements in the amount of UAH 5,226,885 thousand. Reverse repurchase
agreements were concluded on Ukrainian Government debt securities of special issue. In 2010
mutual obligations between the Bank and the NBU regarding sale of bonds and repayment of
loans under reverse repurchase agreements were settled.
Subsequent to 31 December 2009 the Bank restructured loans outstanding as at the end of 2009
to state-owned company PJSC “NJSC “Naftogaz of Ukraine” in the amount UAH 22,782,403
thousand. Maturity of loans was changed from 2010 till 2011 - 2015, interest rates were changed
as presented in the table above.
31
F-33
Carrying value of loans under reverse repurchase agreements and fair value of assets pledged as
at 30 September 2010 comprise:
30 September 2010
Carrying
Fair value of
value of loans
collateral
64,903
59,507
64,903
59,507
Bonds issued by State Mortgage Institution
Total
Carrying value of loans under reverse repurchase agreements and fair value of assets pledged as
at 31 December 2009 comprise:
31 December 2009
Carrying
Fair value of
value of loans
collateral
5,226,885
5,035,805
60,190
60,353
5,287,075
5,096,158
Ukrainian Government debt securities
Bonds issued by State Mortgage Institution
Total
As at 30 September 2010 and 31 December 2009 loans under reverse repurchase
agreements have contractual maturities from October 2010 and from February 2010 to May 2010,
respectively.
As at 30 September 2010 and 31 December 2009 loans to PJSC “NJSC “Naftogaz of Ukraine”
with carrying value of UAH 18,544,161 thousand and UAH 20,365,112 thousand, respectively,
were pledged as security for loans received from the National Bank of Ukraine (Note 17).
As at 30 September 2010 and 31 December 2009 loans to other borrowers with carrying value of
UAH 3,191,342 thousand and UAH 2,450,341 thousand, respectively, were pledged as security
for loans received from the National Bank of Ukraine (Note 17).
The table below summarizes an analysis of loans to customers by impairment:
Loans to customers
individually
determined to be
impaired
Loans to customers
collectively
determined to be
impaired
Unimpaired loans to
customers (REPO)
Total
Carrying
value
before
allowance
30 September 2010
Allowance
Carrying
for
value
impairment
losses
Carrying
value
before
allowance
31 December 2009
Allowance
Carrying
for
value
impairment
losses
27,995,721
3,505,527
24,490,194
26,317,299
2,524,687
23,792,612
16,981,575
2,263,996
14,717,579
18,230,030
1,593,440
16,636,590
64,903
-
64,903
5,287,075
-
5,287,075
45,042,199
5,769,523
39,272,676
49,834,404
4,118,127
45,716,277
32
F-34
14. INVESTMENTS AVAILABLE FOR SALE
Investments available for sale comprise:
Ukrainian Government debt securities:
Medium-term Ukrainian Government debt securities
Long-term Ukrainian Government debt securities, including
securities with early redemption feature
Ukrainian Government debt securities for settlement of budget
indebtedness on value added tax
Other:
Bonds issued by State Mortgage Institution
Bonds issued by corporate entities
Bonds issued by banks
Bonds issued by local Ukrainian authorities
Less allowance for impairment losses
30 September
2010
31 December
2009
3,033,068
1,750,080
2,798,480
598,280
359
-
5,831,907
2,348,360
736,684
647,526
388,794
25,395
737,604
519,239
448,877
25,395
1,798,399
1,731,115
(125,541)
Total debt securities available for sale
(74,824)
7,504,765
4,004,651
23,063
23,063
(15,283)
(15,283)
7,780
7,780
7,512,545
4,012,431
Equity securities:
Corporate shares
Less allowance for impairment losses
Total equity securities available for sale
Total investments available for sale
Movements in allowances for impairment losses for the periods ended 30 September 2010 and
2009 are disclosed in Note 5.
As at 30 September 2010 and 31 December 2009, debt securities available for sale included
accrued interest income in the amount of UAH 184,567 thousand and UAH 92,196 thousand,
respectively.
As at 30 September 2010 and 31 December 2009 debt securities with carrying value of
UAH 240,915 thousand and UAH 463,211 thousand, respectively, were pledged as security for
loans received from the National Bank of Ukraine (Note 17).
33
F-35
15. PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS
Property, equipment and intangible assets comprise:
Buildings
Leasehold
improvements
At historical/revalued cost
31 December 2009
Additions
Transfers
Disposals
Other
30 September 2010
1,793,221
61,077
474
14,341
(65)
3,829
7,202
(3,765)
-
Furniture,
office equipment
and
motor vehicles
645,090
91,833
(8,707)
-
Construction in
progress
59,912
58,298
(14,341)
(37)
-
Intangible
assets
24,194
1,635
(133)
-
Total
2,583,494
159,442
(12,707)
3,829
1,811,800
64,514
728,216
103,832
25,696
2,734,058
29,707
44,041
500,258
-
20,636
594,642
15,897
(2)
8,034
(3,765)
45,602
48,310
549,796
-
22,706
666,414
30 September 2010
1,766,198
16,204
178,420
103,832
2,990
2,067,644
31 December 2009
1,763,514
17,036
144,832
59,912
3,558
1,988,852
Accumulated depreciation
31 December 2009
Charge for the period
Eliminated on disposals
30 September 2010
58,170
(8,632)
-
2,203
(133)
84,304
(12,532)
Net book value
34
F-36
Buildings
Leasehold
improvements
At historical/revalued cost
31 December 2008
Construction in
progress
Intangible
assets
558,419
62,104
20,156
(2,064)
98,951
(12,280)
24,400
(26,413)
(179)
1,793,221
61,077
645,090
59,912
24,194
2,583,494
8,933
30,179
450,654
-
18,076
507,842
20,774
-
15,924
(2,062)
61,761
(12,157)
-
29,707
44,041
500,258
-
20,636
594,642
31 December 2009
1,763,514
17,036
144,832
59,912
3,558
1,988,852
31 December 2008
1,755,151
12,806
107,765
62,104
2,469
1,940,295
31 December 2009
3,375
26,413
(651)
20,545
Total
42,985
Additions
Transfers
Disposals
1,764,084
Furniture,
office equipment
and
motor vehicles
3,728
(79)
2,448,137
150,610
(15,253)
Accumulated depreciation
31 December 2008
Charge for the year
Eliminated on disposals
31 December 2009
2,637
(77)
101,096
(14,296)
Net book value
35
F-37
As at 1 November 2008 the buildings and office premises owned by the Bank were revalued
to market prices by independent appraisers. Sales comparison method was used for estimation
of fair value of buildings and office premises. No update of revaluations was performed for
the period from November 2008 to 30 September 2010.
If buildings would have been accounted at historical cost less accumulated depreciation and
impairment losses, their carrying value would be UAH 293,951 thousand and UAH 283,421
thousand as at 30 September 2010 and 31 December 2009, respectively.
Certain buildings not yet put into operations are shown within the construction in progress
category. The carrying amount of buildings held within construction in progress as at
30 September 2010 and 31 December 2009 comprises UAH 43,724 thousand and UAH 5,494
thousand, respectively.
16. OTHER ASSETS
Other assets comprise:
Other financial assets:
Other accounts receivable
Accrued income
Fair value of currency swap and spot agreements
Accounts receivable from other banks on operations with securities
Less allowance for impairment losses
Other non-financial assets:
Collateral received by the Bank
Prepayments for purchase of assets
Current income tax assets
Precious metals
Prepayment for precious metals
Inventory
Prepaid expenses
Receivables on taxes and obligatory payments
Other
Total other assets
30 September
2010
31 December
2009
40,151
12,748
3,936
585
11,133
12,618
381
329
57,420
24,461
(40,216)
(12,995)
17,204
11,466
111,191
93,411
80,222
33,223
14,724
13,757
12,952
3,264
6,303
111,005
824
241,304
41,577
13,683
11,416
2,900
4,084
369,047
426,793
386,251
438,259
Movements in allowances for impairment losses for the periods ended 30 September 2010 and
2009 are disclosed in Note 5.
Precious metals represent gold and silver in vault.
36
F-38
17. DUE TO BANKS
Due to banks comprise:
30 September
2010
31 December
2009
Loans from the National Bank of Ukraine
Correspondent accounts of other banks
Loans from other banks
15,531,633
220,422
42,462
15,931,171
91,573
-
Total due to banks
15,794,517
16,022,744
As at 30 September 2010 and 31 December 2009 due to banks included accrued interest expenses
in the amount of UAH 2,056 thousand and UAH 1,276 thousand, respectively.
As at 30 September 2010 and 31 December 2009 due to banks included loans from the NBU in
the amount of UAH 15,531,633 thousand (98%) and UAH 15,931,171 thousand (99%),
respectively, which represents a significant concentration.
As at 30 September 2010 loans received from the National Bank of Ukraine in the amount of
UAH 15,531,633 thousand bear interest weighted average 9.9 % per annum, with maturity in
the years from 2010 till 2015.
As at 31 December 2009 loans received from the National Bank of Ukraine in the amount of
UAH 15,931,171 thousand bear interest weighted average 13.1 % per annum, with maturity in
the years from in 2010 and 2012.
Subsequent to as at 31 December 2009 the Bank renegotiated terms of loans from NBU
outstanding as at the year in the amount UAH 15,931,171 thousand to support its liquidity position
and in connection with restructuring of loans issued to PJSC “NJSC “Naftogaz of Ukraine”
(Note 13). Maturity of loans was changed from 2010 - 2012 till 2010 - 2015, weighted average
interest rates were changed from 13.1% till 9.9%.
As at 30 September 2010 loans from the NBU in the amount of UAH 15,531,633 thousand were
secured by debt securities available for sale with carrying value of UAH 240,915 thousand, loans
to PJSC “NJSC “Naftogaz of Ukraine” with carrying value UAH 18,544,161 thousand, loans to
other borrowers with carrying value UAH 3,191,342 thousand and balances with the National
Bank of Ukraine, with carrying value of UAH 425,000 thousand (Notes 14, 13, 11).
As at 31 December 2009 loans from the NBU in the amount of UAH 15,931,171 thousand were
secured by debt securities available for sale with carrying value of UAH 463,211 thousand, loans
to PJSC “NJSC “Naftogaz of Ukraine” with carrying value UAH 20,365,112 thousand and loans to
other borrowers with carrying value UAH 2,450,341 thousand (Notes 14 and 13).
18. CUSTOMER ACCOUNTS
Customer accounts comprise:
30 September
2010
31 December
2009
Repayable on demand
Term deposits
12,193,748
10,808,389
10,783,725
13,889,183
Total customer accounts
23,002,137
24,672,908
As at 30 September 2010 and 31 December 2009 customer accounts included accrued interest
expenses in the amount of UAH 508,654 thousand and UAH 521,861 thousand, respectively.
37
F-39
As at 30 September 2010 and 31 December 2009 the aggregate balances of top ten customers
amounted to UAH 1,854,580 thousand and UAH 7,500,691 thousand, which comprise 8% and
30%, respectively.
The table below represents customer accounts‟ sector structure as at 30 September 2010 and
31 December 2009:
30 September
2010
31 December
2009
Individuals
Energy
Services
Agriculture and food processing
Trade
Media and communications
Construction and real estate
Transport
Mining and metallurgy
Manufacturing
Machinery construction
Hotel and restaurant business
Press and publishing
Oil, gas and chemical production
State authorities
Other
18,448,603
1,318,789
1,122,329
400,979
358,906
319,717
224,493
91,804
38,204
34,644
26,227
14,738
8,120
6,167
588,417
15,043,792
926,924
492,058
280,585
299,421
860,196
226,075
203,004
31,709
18,377
25,048
8,242
8,899
51,483
5,726,375
470,720
Total customer accounts
23,002,137
24,672,908
Analysis by sector:
Subsequent to 31 December 2009 the Bank repaid deposits to the State Treasury in the amounts of
USD 600,000 thousand (UAH 4,791,000 thousand) and EUR 81,700 thousand (UAH 935,375
thousand), according to terms of deposit agreements.
19. DEBT SECURITIES ISSUED
In 2008 the Bank issued the following debt securities, outstanding as at reporting date:
A series
B series
Maturity of
principal
Annual
coupon rate,
%
10 February 2011
7 February 2013
16.00%
14.00%
Total debt securities
issued
Carrying
value,
30 September
2010
306,776
157,857
Annual
coupon rate,
%
Carrying
value,
31 December
2009
16.00%
10.50%
464,633
As at 30 September 2010 and 31 December 2009 domestic debt securities issued included accrued
interest expense in the amount of UAH 9,545 thousand and UAH 8,100 thousand, respectively.
The bond-holders had the right to demand repayment of the A series bonds by the Bank at their
nominal value after the end of the sixth coupon period – 13 August 2009.
38
F-40
243,216
202,877
446,093
The bond-holders had the right to demand repayment of the B series bonds by the Bank at their
nominal value after the end of the tenth coupon period – 12 August 2010.
Annual coupon rate for A series from first till sixth coupon period was set in the Prospectus.
Annual coupon rate for A series from seventh till twelfth coupon period was set by the
Management Board of the Bank according to present market conditions.
Annual coupon rate for B series from first till tenth coupon period was set in the Prospectus.
Annual coupon rate for B series from eleventh till twelfth coupon period was set by the
Management Board of the Bank according to present market conditions.
20. OTHER LIABILITIES
Other liabilities comprise:
Other financial liabilities:
Accrued bonuses and salary
Expenses accrued
Fair value of currency swap and spot agreements
Other payables
Other
Other non-financial liabilities:
Taxes payable, other than income tax
Unused vacation reserve
Provision for guarantees and other commitments
Total other liabilities
30 September
2010
31 December
2009
47,315
2,015
1,870
1,395
16,163
25,377
1,472
2,002
5,630
4,904
68,758
39,385
24,109
16,136
2,038
5,277
16,660
4,123
42,283
26,060
111,041
65,445
Movements in provision for guarantees and other commitments for the periods ended
30 September 2010 and 2009 are disclosed in Note 5.
21. SUBORDINATED DEBT
Subordinated debt comprises:
ABN AMRO Bank N.V.
Currency
Maturity of
principal
Interest
rate, %
USD
19 January 2017
9%
Total subordinated debt
30 September
2010
31 December
2009
799,616
824,578
799,616
824,578
As at 30 September 2010 and 31 December 2009 subordinated debt included accrued interest
expense in the amount of UAH 14,939 thousand and UAH 33,610 thousand, respectively.
In the event of bankruptcy or liquidation of the Bank, repayment of this debt is subordinate to
the repayments of the Bank‟s liabilities to all other creditors.
39
F-41
In accordance with terms of loan agreement, the Bank should comply, among others, with
the following covenants:


The Bank is required to submit its audited annual financial statements prepared in accordance
with IFRS within 180 days from the reporting date;
The Bank is required to submit its unaudited interim financial statements for the six months
ending 30 June prepared in accordance with IFRS within 90 days from the reporting date.
ABN AMRO Bank N.V. has the right to enforce obligations of the Bank regarding compliance
with the covenants. No specific action is prescribed by the agreement in case of the Bank‟s noncompliance with the covenants.
22. SHARE CAPITAL
Share capital comprises:
Total shares authorized,
issued and fully paid
Total share capital
30 September 2010
Number
Amount,
of shares,
thousand
in units
UAH
31 December 2009
Number
Amount,
of shares,
thousand
in units
UAH
13,892
13,892,000
13,892
13,892,000
13,892
13,892,000
13,892
13,892,000
All ordinary shares have a nominal value of UAH 1,000 thousand per share, rank equally and
carry one vote.
On 17 March 2009 the State Commission for securities and stock market issued the certificate on
13,892 shares of the Bank to register total amount of shares of the Bank including new shares in
the amount of 12,970 issued in 2008.
In 2010 the Bank paid share of profit based on the financial results of year 2009, to the general
fund of State budget of Ukraine as in the accordance with the requirements of art. 59 Law of
Ukraine “On State Budget of Ukraine of 2010” in the amount UAH 207,809 thousand.
23. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank is a party to financial instruments with off-balance
sheet risk in order to meet the needs of its customers. These instruments, involving varying
degrees of credit risk, are not reflected in the statement of financial position.
The Bank‟s maximum exposure to credit loss under contingent liabilities and commitments to
extend credit, in the event of non-performance by the other party where all counterclaims,
collateral or security prove valueless, is represented by the contractual amounts of those
instruments.
The Bank uses the same credit control and management policies in undertaking off-balance sheet
commitments as it does for on-balance operations.
40
F-42
As at 30 September 2010 and 31 December 2009 the nominal or contract amounts were:
Contingent liabilities and credit commitments
Guarantees issued and similar commitments
Irrevocable commitments on loans and unused credit lines
Total contingent liabilities and credit commitments
30 September
2010
Nominal
amount
31 December
2009
Nominal
amount
643
269,729
197
113,023
270,372
113,220
As at 30 September 2010 and 31 December 2009 provision for impairment losses on guaranties
and other commitments amounted to UAH 2,038 thousand and UAH 4,123 thousand, respectively
(Notes 5, 20).
Extension of loans to customers within loans and credit line limits is approved by the Bank on
a case-by-case basis and depends on borrowers‟ financial performance, debt service and other
conditions. As at 30 September 2010 and 31 December 2009 total amount of such commitments
come to UAH 2,120,514 thousand and UAH 1,724,352 thousand, respectively.
Capital commitments – As at 30 September 2010 and 31 December 2009 the Bank had no capital
commitments.
Operating lease commitments – Where the Bank is the lessee, the future minimum lease payments
under non cancellable operating leases are as follows:
Less than 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Total operating lease commitments
30 September
2010
31 December
2009
62,949
79,042
50,064
63,907
76,335
70,653
192,055
210,895
Legal proceedings – From time to time and in the normal course of business, claims against
the Bank are received from customers and counterparties. Management is of the opinion that
no material unaccrued losses will be incurred and accordingly no provision has been made in this
condensed interim financial information.
Taxation – Due to presence in the Ukrainian commercial legislation, and tax legislation in
particular, of provisions allowing more than one interpretation, and also due to the practice
developed in a generally unstable environment by the tax authorities of making arbitrary judgment
of business activities, if a particular treatment based on management‟s judgment of the Bank‟s
business activities was to be challenged by the tax authorities, the Bank may be assessed additional
taxes, penalties and interest. Such uncertainty may relate to the valuation of financial instruments,
loss and impairment provisions and the market level for the pricing of deals. The Bank believes
that it has already made all tax payments, and therefore no allowance has been made in the
condensed interim financial information. Tax records remain open to review by the tax authorities
for three years.
41
F-43
During the tax review conducted in 2006, additional tax liabilities and financial sanctions totalling
UAH 11,070 thousand were assessed. The tax authorities challenged the tax deductibility of
the provision for doubtful receivables. The Bank did not agree with the tax authorities and on
9 June 2006 filed a court case. On 20 September 2006 the court requested an external expert to
assess the appropriateness of deductibility of the provision. On 12 March 2007 the Kyiv Research
Institute of Legal Expertise agreed with the Bank‟s approach. On 31 October 2007 the court found
in favour of the Bank. The tax authorities appealed the decision under appeal procedure. This
decision was confirmed by the Kyiv Administrative Court of Appeal, thus it has come into effect.
Tax authorities appealed court decisions to the Higher Administrative Court of Ukraine; the court
confirmed the decision in 2010. The tax authorities referred with cassation to the Higher
Administrative Court of Ukraine, it accepted cassation and transferred to Regional Administrative
Court of Kyiv, however as at the date of issue of this condensed interim financial information
the date of court session was not yet appointed. No provisions for this additional tax assessment
are made in this condensed interim financial information.
Pensions and retirement plans – Employees receive pension benefits in accordance with the laws
and regulations of Ukraine, which requires current contributions by the employer calculated as
a percentage of current gross salary payments; such expense is charged in the period the related
salaries are earned. Employees have the right to receive pension in the amount of such
accumulated payments from state pension fund. As at 30 September 2010 and 31 December 2009
the Bank was not liable for any supplementary pensions, post-retirement health care, insurance
benefits, or retirement indemnities to its current or former employees.
Operating environment – The principal business activities of the Bank are within Ukraine.
Emerging markets such as Ukraine are subject to different risks than more developed markets,
including economic, political and social, and legal and legislative risks. As has happened in
the past, actual or perceived financial problems or an increase in the perceived risks associated
with investing in emerging economies could adversely affect the investment climate in Ukraine
and the Ukraine‟s economy in general.
Laws and regulations affecting businesses in Ukraine continue to change rapidly. Tax, currency
and customs legislation within Ukraine is subject to varying interpretations, and other legal and
fiscal impediments contribute to the challenges faced by entities currently operating in Ukraine.
The future economic direction of Ukraine is largely dependent upon economic, fiscal and
monetary measures undertaken by the government, together with legal, regulatory, and political
developments.
The global financial turmoil that has negatively affected Ukraine‟s financial and capital markets in
2008 and 2009 has receded and Ukraine‟s economy returned to growth in 2010. However
significant economic uncertainties remain. Adverse changes arising from systemic risks in global
financial systems, including any tightening of the credit environment could slow or disrupt the
Ukraine‟s economy, adversely affect the Bank‟s access to capital and cost of capital for the Bank
and, more generally, its business, results of operations, financial condition and prospects.
42
F-44
24. SUBSEQUENT EVENTS
On 4 December 2010, the Tax Code of Ukraine (the “Code”) was officially published. In its
entirety, the Code will become effective on 1 January 2011. Section III of the Code that deals with
corporate income tax (“CIT”) will become effective from 1 April 2011. Therefore, the Tax Code
is inactive as at reporting date – 30 September 2010. It should be stated that The Tax Code
provides for a gradual reduction of the CIT rate from 25% to:




23% – from 1 April 2011 to 31 December 2011;
21% – from 1 January 2012 to 31 December 2012;
19% – from 1 January 2013 to 31 December 2013;
16% – from 1 January 2014.
Due to the fact that the new CIT rules were not enacted or substantially enacted as at 30 September
2010, any changes in deferred tax assets/liabilities on above mentioned reduction of tax rates are to
be recognized in subsequent reporting periods.
Subsequent to 30 September 2010 PJSC “NJSC “Naftogaz of Ukraine” decided to issue bonds,
with the proceeds of such issue to be used to repay the existing loan facilities with the Bank.
The Bank envisages that it will purchase the majority of the new PJSC “NJSC “Naftogaz of
Ukraine” bonds so that its exposure to PJSC “NJSC “Naftogaz of Ukraine” is restructured into
more liquid instruments with more diversified maturity.
25. TRANSACTIONS WITH RELATED PARTIES
Related parties or transactions with related parties, as defined by IAS 24 “Related Party
Disclosures”, represent:
(a)
Parties that directly, or indirectly through one or more intermediaries: control, or are
controlled by, or are under common control with, the Bank (this includes parents, subsidiaries
and fellow subsidiaries); have an interest in the Bank that gives then significant influence
over the Bank; and that have joint control over the Bank;
(b) Associates – enterprises on which the Bank has significant influence and which is neither
a subsidiary nor a joint venture of the investor;
(c) Joint ventures in which the Bank is a venturer;
(d) Members of key management personnel of the Bank or its parent;
(e) Close members of the family of any individuals referred to in (a) or (d);
(f) Parties that are entities controlled, jointly controlled or significantly influenced by, or for
which significant voting power in such entity resides with, directly or indirectly, any
individual referred to in (d) or (e); or
(g) Post-employment benefit plans for the benefit of employees of the Bank, or of any entity that
is a related party of the Bank.
Other related parties are represented by state-owned entities, where ownership of the State is more
than 50%, state-owned banks and state authorities.
43
F-45
In considering each possible related party relationship, attention is directed to the substance of
the relationship, and not merely the legal form. The Bank had the following transactions
outstanding as at 30 September 2010 and 31 December 2009 with related parties:
30 September 2010
Related party Total category
balances
as per financial
statements
caption
Balances with the NBU
- other related parties
Due from banks, net:
- other related parties
Loans to customers, gross:
- key management personnel
of the Bank
- other related parties
\
Allowance for impairment of
loans to customers:
- other related parties
Investments available for sale, net:
- other related parties
Due to banks:
- other related parties
Customer accounts:
- key management personnel
of the Bank
- other related parties
Contingent liabilities and credit
commitments:
- key management personnel
of the Bank
- other related parties
31 December 2009
Related party Total category
balances
as per financial
statements
caption
1,931,169
1,931,169
1,931,169
1,083,131
1,083,131
1,083,131
81,874
81,874
3,492,979
145,368
145,368
2,956,340
31,182,453
45,042,199
36,001,156
49,834,404
333
31,182,120
3,689
35,997,467
(3,086,664)
(3,086,664)
(5,769,523)
(2,066,245)
(2,066,245)
(4,118,127)
7,068,675
7,068,675
7,512,545
3,423,243
3,423,243
4,012,431
15,618,681
15,618,681
15,794,517
15,992,437
15,992,437
16,022,744
2,224,117
23,002,137
7,627,342
24,672,908
13,158
2,210,959
15,008
7,612,334
904,783
2,390,886
112
904,671
602,076
202
601,874
44
F-46
1,837,572
Included in the statement of comprehensive income for the periods ended 30 September 2010 and
2009 are the following amounts which arose due to transactions with related parties:
Nine months ended
30 September 2010
Related party
Total category
transactions
as per financial
statements
caption
Interest income
- key management
personnel of the Bank
- other related parties
3,967,416
Interest expense
- key management
personnel of the Bank
- other related parties
(1,522,437)
Provision for impairment losses
on interest bearing assets
- other related parties
5,724,257
47
3,967,369
Nine months ended
30 September 2009
Related party
Total category
transactions
as per financial
statements
caption
3,961,800
5,716,495
335
3,961,465
(2,678,035)
(1,040)
(1,521,397)
(1,892,278)
(2,714,912)
(981)
(1,891,297)
(1,062,391)
(1,062,391)
(1,703,878)
(1,014,468)
(1,014,468)
(2,148,681)
Fee and commission income
- other related parties
151,797
151,797
791,458
120,835
120,835
754,934
Fee and commission expense
- other related parties
(63,150)
(63,150)
(135,929)
(56,617)
(56,617)
(120,833)
Operating expenses
- key management
personnel of the Bank
- other related parties
(60,217)
(1,447,800)
(65,737)
(1,304,927)
Key management personnel
compensation:
- short-term employee
benefits
- social taxes
(20,408)
(39,809)
(20,923)
(44,814)
(20,408)
(1,051,400)
(18,987)
(1,421)
(20,923)
(946,872)
(19,874)
(1,049)
26. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value disclosures of financial instruments are made in accordance with
the requirements of IFRS 7 “Financial Instruments: Disclosures” and IAS 39 “Financial
Instruments: Recognition and Measurement”. Fair value is defined as the amount at which
the instrument could be exchanged in a current transaction between knowledgeable willing parties
in an arm‟s length transaction, other than in forced or liquidation sale. The estimates presented
herein are not necessarily indicative of the amounts the Bank could realize in a market exchange
from the sale of its full holdings of a particular instrument.
The estimated fair values of financial instruments have been determined by the Bank using
available market information, where it exists, and appropriate valuation methodologies. However,
judgement is necessarily required to interpret market data to determine the estimated fair value.
Ukraine continues to display some characteristics of an emerging market and economic conditions
continue to limit the volume of activity in the financial markets. Market quotations may be
outdated or reflect distress sale transactions and therefore not represent fair values of financial
instruments. Management has used all available market information in estimating the fair value
of financial instruments.
45
F-47
Financial instruments carried at fair value – Investment securities available for sale and
derivatives are carried on the statement of financial position at their fair value that was estimated
using available market information or appropriate valuation technique.
Cash and cash equivalents – Cash and cash equivalents are carried at amortized cost which
approximates their current fair value.
Loans and receivables carried at amortized cost – The estimated fair value of fixed interest rate
instruments is based on estimated future cash flows expected to be received discounted at current
interest rates of new instruments with similar credit risk and remaining maturity. Discount rates
depend on currency, maturity of the instrument and credit risk of the counterparty.
Liabilities carried at amortized cost – The estimated fair value of fixed interest rate instruments
with stated maturity, for which quoted market price is not available, was estimated based on
expected future cash flows discounted at current interest rates for new instruments with similar
credit risk and remaining maturity. The fair value of liabilities repayable on demand or after
a notice period is estimated as the amount payable on demand discounted from the first date that
the amount could be required to be paid. Discounted rates used were consistent with the Bank‟s
credit risk and also depend on currency and maturity of the instrument.
The fair value of financial assets and liabilities compared with the corresponding carrying amount
in the statement of financial position of the Bank is presented below:
Financial assets:
Cash and balances with
the National Bank of
Ukraine
Due from banks
Loans to customers
Investments available for sale
Other financial assets
Derivative financial
instruments
Total financial assets
Financial liabilities:
Due to banks
Customer accounts
Debt securities issued
Other financial liabilities
Derivative financial
instruments
Subordinated debt
Total financial liabilities
30 September 2010
Carrying
Fair
value
value
31 December 2009
Carrying
Fair
value
value
3,140,511
3,492,979
39,272,676
7,512,545
13,268
3,140,511
3,492,979
39,363,867
7,512,545
13,268
2,278,352
2,956,340
45,716,277
4,012,431
11,085
2,278,352
2,956,340
45,442,767
4,012,431
11,085
3,936
3,936
381
381
53,435,915
53,527,106
54,974,866
54,701,356
30 September 2010
Carrying
Fair
value
value
31 December 2009
Carrying
Fair
value
value
15,794,517
23,002,137
464,633
66,888
15,794,517
23,264,133
464,633
66,888
16,022,744
24,672,908
446,093
37,383
16,022,744
24,276,349
446,093
37,383
1,870
799,616
1,870
799,616
2,002
824,578
2,002
824,578
40,129,661
40,391,657
42,005,708
41,609,149
46
F-48
Financial instruments recognised at fair value are broken down for disclosure purposes into a three
level fair value hierarchy based on the observability of inputs as follows:



Quoted prices in an active market (Level 1) – Valuations based on quoted prices in active
markets that the Bank has the ability to access for identical assets or liabilities. Valuation
adjustments and block discounts are not applied to these financial instruments. Since
valuations are based on quoted prices that are readily and regularly available in an active
market, valuations of these products does not entail a significant amount of judgment.
Valuation techniques based on observable market data (Level 2) – Valuations based on inputs
for which all significant inputs are observable, either directly or indirectly and valuations
based on one or more observable quoted prices for orderly transactions in markets that are not
considered active.
Valuation techniques incorporating information other than observable market data
(Level 3) – Valuations based on inputs that are unobservable and significant to the overall fair
value measurement.
The Bank‟s valuation approach and fair value hierarchy categorisation for certain significant
classes of financial instruments recognised at fair value is as follows:
Quoted prices in
an active
market
(Level 1)
Valuation
techniques
based on
observable
market data
(Level 2)
Valuation
techniques
incorporating
information
other than
observable
market data
(Level 3)
30 September 2010
Investments available for sale
1,246,256
5,703,702
562,587
31 December 2009
Investments available for sale
1,769,985
1,694,077
548,369
27. DERIVATIVE FINANCIAL INSTRUMENTS AND SPOT CONTRACTS
Foreign exchange derivative financial instruments entered into by the Bank are generally traded in
an over-the-counter market with professional market counterparties on standardized contractual
terms and conditions. Derivatives have potentially favourable (assets) or unfavourable (liabilities)
conditions as a result of fluctuations in market interest rates, foreign exchange rates or other
variables relative to their terms. The aggregate fair values of derivative financial assets and
liabilities can fluctuate significantly from time to time.
The table below sets out fair values, at the reporting date, of currencies receivable or payable under
currency swap and spot agreements entered into by the Bank. The table reflects gross positions
before the netting of any counterparty positions (and payments) and covers the contracts with
settlement dates after the respective reporting date. The contracts are short term in nature.
47
F-49
Not
es
Currency swap and spot
agreements: fair values, at
the reporting date, of:
- USD receivable on settlement (+)
- USD payable on settlement (-)
- EUR receivable on settlement (+)
- EUR payable on settlement (-)
- UAH receivable on settlement (+)
- UAH payable on settlement (-)
- RUR receivable on settlement (+)
- RUR payable on settlement (-)
- CHF receivable on settlement (+)
- CHF payable on settlement (-)
Net fair value of currency swap
and spot agreements
30 September 2010
Contracts
Contracts
with
with
positive fair
negative
value
fair value
464,799
(177,049)
190,408
(43,538)
19,772
(13,015)
(437,441)
26
3,936
361,589
(866,654)
21,974
(551,561)
1,183,064
(129,927)
(20,355)
(1,870)
31 December 2009
Contracts
Contracts
with
with
positive fair
negative
value
fair value
(43,918)
(70,411)
141,112
(26,402)
-
(887,314)
(17,173)
902,485
-
381
(2,002)
As at 30 September 2010 and 31 December 2009 fair value of currency swap and spot agreements
is included in other assets (Note 16) and other liabilities (Note 20).
28. CAPITAL MANAGEMENT
The Bank manages its capital to ensure that the Bank will be able to continue as a going concern
while maximizing the return to stakeholders through the optimization of the debt and equity
balance.
The capital structure of the Bank consists of debt, which includes subordinated debt disclosed in
Note 21, and equity, comprising issued capital, reserves and retained earnings as disclosed in
statement of changes in equity.
The Management Board reviews the capital structure on a regular basis. As part of this review,
the Board considers the cost of capital and the risks associated with each class of capital. Based
on recommendations of the Management Board, the Bank balances its overall capital structure
through new share issues as well as the issue of new debt or the redemption of existing debt.
29. REGULATORY MATTERS
The adequacy of the Bank‟s capital is monitored using, among other measures, the ratios
established by the Basel Capital Accord 1988 and the ratios established by the NBU in supervising
the Bank.
During the period ended 30 September 2010, the Bank had complied in full with all its externally
imposed capital requirements.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets.
48
F-50
The following table analyzes the Bank‟s regulatory capital resources for capital adequacy purposes in
accordance with the principles employed above:
30 September
2010
31 December
2009
Share capital
Retained earnings
13,892,000
370,217
13,892,000
322,315
Total Tier 1 qualified capital
14,262,217
14,214,315
Property revaluation reserve
Investments available for sale fair value reserve
Subordinated debt
1,147,005
15,349
791,350
1,147,251
(18,626)
798,500
Total Tier 2 qualified capital up to a limit 100% of total
Tier 1 capital
1,953,704
1,927,125
16,215,921
16,141,440
Regulatory capital:
Tier 1 capital
Tier 2 capital
Total regulatory capital
Capital ratios:
Total regulatory capital expressed as a percentage of total riskweighted assets
36.88%
32.26%
Total Tier 1 capital expressed as a percentage of total riskweighted assets
32.43%
28.41%
Quantitative measures established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios of total (8%) and Tier 1 capital (4%) to risk-weighted assets.
As at 30 September 2010 the Bank included in the computation of Total capital for Capital adequacy
purposes the subordinated debt received, limited to 50% of Tier 1 capital. In the event of
bankruptcy or liquidation of the Bank, repayment of this debt is subordinate to the repayments of
the Bank‟s liabilities to all other creditors.
30. RISK MANAGEMENT POLICIES
Management of risk is fundamental to the Bank‟s business and is an essential element of
the Bank‟s operations. The main risks inherent to the Bank‟s operations are those related to credit
exposures, liquidity and market movements in interest rates and foreign exchange rates.
A description of the Bank‟s risk management policies in relation to those risks follows.
Risk management framework – The risk management policies aim to identify, analyze and manage
the risks faced by the Bank, to set appropriate risk limits and controls and to continuously monitor
risk levels and adherence to limits.
Risk management in the Bank is performed in accordance with the Risk Management Concept
(the RMC), which was approved by both the Management Board and the Supervisory Board in
2004. The RMC is an overarching approach across the Bank, including all of its organizational
departments, its headquarters, local and regional outlets and branches. It defines main risk
categories that the Bank faces, and specifies the major organizational and functional levels of risk
management.
49
F-51
The risk management functions are divided among the Supervisory Board, the Management Board,
the Assets and Liabilities Management Committee (the “ALMC”), Treasury Department, Legal
Department, the Credit Committee of the Bank, the Regional Branch Assets and Liabilities
Management Committee and Regional Branch Credit Committees according to their functional
responsibilities and approved limits. The Risk Management Department is independent of other
business lines and acts under supervision of the Deputy of Chairman of the Management Board
responsible for the department.
The Bank manages the following risks:
Market risk – Market risk is the risk that changes in the market prices, such as interest rates, equity
prices, foreign exchange rates and credit spreads (not relating to changes in the obligor‟s/issuer‟s
credit standing) will affect income or the value of financial instruments. The objective of market
risk management is to manage and control market risk exposures within acceptable parameters,
while optimizing the return on risk.
The Bank separates its exposure to market risk between trading and non-trading portfolios.
Trading portfolios are mainly held by the Treasury Department.
Overall authority for market risk is vested in the ALMC. The Risk Management Department is
responsible for the development of detailed risk management policies (subject to review and
approval by the ALMC) and for monitoring of compliance with market risk limits and restrictions.
Credit risk – Credit risk is the risk of a financial loss if a customer or counterparty fails to meet its
contractual obligations, and arises principally from loans and advances and investment securities.
For risk management reporting purposes, the Bank considers and consolidates all elements of credit
risk exposure (such as individual customer and counterparty default risk, country and industry risk).
Management uses the same procedures and methodologies, as defined in the policy for approving
and procedures of consideration, approval and accompaniment of credit related commitments
(unused loan commitments, letter of credit and guarantees) as it does for on statement of financial
position credit obligations (loans). The maximum exposure to off balance sheet credit risk is
reflected in Note 23.
The Bank‟s exposure to any single counterparty (including other banks) is further restricted by sublimits covering on and off balance sheet exposures, which are set by the Credit Committee
and Management Board.
Management monitors concentration of credit risk by industry/sector and by geographic location.
The Bank manages its credit risk by establishing limits in relation to single borrowers and groups
of borrowers, which are recommended by the relevant Credit Department and Risk Management
Department, and approved by the relevant Credit Committee or the Management Board. In case
the amount of loan exceeds the authority of the Management Board, the loan is approved by
the Supervisory Board. The Bank also mitigates its credit risk by obtaining collateral and using
other security arrangements.
The Bank decentralized the loan approval process and delegated credit risk responsibility from
the Head Office Credit Committee to regional branches, by increasing the credit limit approval
authorization of the Regional Credit Committees and providing regional offices with the authority
to undertake certain transactions without the approval of other more senior credit committees.
50
F-52
In making its corporate lending decisions, the Bank evaluates potential borrowers on the basis of
their financial condition as reflected in their financial statements, their credit history with the Bank
and other financial institutions and the amount of risk involved in lending to a particular borrower,
using a rating scale.
In evaluating the risks associated with a particular borrower, the Bank takes into account
the borrower‟s business and factors such as the quality of its management, its main business
activities, its geographic location, suppliers, customers, other indebtedness, financial stability,
turnover, likely return on the loan, the liquidity of the proposed collateral and whether it is
sufficient in view of the credit risk. The Bank also considers risks associated with the industry in
which the borrower operates.
Consumer loans are subject to a standardized approval procedure. Loans are subject to maximum
limits depending on the applicant‟s income, stability of future earnings, liquidity and quality of
collateral. The Regional Credit Committee (or, if the branch limit is exceeded, the Head Office
Credit Committee) reviews a credit application and makes the relevant decision as to whether to
grant a loan.
Financial assets are graded as follows: amounts due from banks are graded according to the current
credit rating they have been issued by an internationally regarded agency. The highest possible
rating is AAA. Investment grade financial assets have ratings from AAA to BBB. Financial assets
which have ratings lower than BBB are classed as speculative grade.
As at 30 September 2010 and 31 December 2009 the balances with the NBU amounted to
UAH 1,931,169 thousand and UAH 1,083,131 thousand, respectively. The credit rating of
Ukraine according to the international rating agencies as at 30 September 2010 corresponded to
speculative level B.
Investments available for sale, in particular, OVDP of special issue, bonds issued by State
Mortgage Institution, which were not rated, were included by the Bank in the range from BBB to
B- based on sovereign credit rating of Ukraine.
The following table details the credit ratings of financial assets held by the Bank:
AAA – A–
Due from banks
Loans to customers
Investments available for sale
2,871,351
AAA – A–
Due from banks
Loans to customers
Investments available for sale
2,117,927
-
BBB – B–
148,855
3,946,007
7,228,057
BBB – B–
52,288
2,455,444
3,739,148
Below B–
65,280
19,083,923
4,378
Below B–
62,628
27,299,842
3,547
Not
rated
407,493
16,242,746
280,110
Not
rated
723,497
15,960,991
269,736
30 September
2010
Total
3,492,979
39,272,676
7,512,545
31 December
2009
Total
2,956,340
45,716,277
4,012,431
The banking industry is generally exposed to credit risk through its financial assets and contingent
liabilities. Credit risk exposure of the Bank is concentrated within Ukraine. The exposure is
monitored on a regular basis to ensure that the credit limits and credit worthiness guidelines
established by the Bank‟s risk management policy are not breached.
Concentration risk – Concentration risk is determined by the Bank as the risk of possible losses
due to concentration of risk in specific instruments, operations and industries.
51
F-53
Joint Stock Company “State Savings Bank of Ukraine” is the largest state-owned bank of Ukraine
and specific character of its activities is related to significant scale of operations with state-owned
companies, including according to state programs, resulting in significant concentration of credit
and investment risks in relation to certain counterparties and groups of related counterparties and
industries.
As at 30 September 2010 67% of the assets and 44% of the liabilities were concentrated in
operations with state-owned companies, the NBU, state banks and state authorities. The Bank
obtains loans from the NBU to finance lending to the state-owned companies, which comprise
38% of the liabilities. The Bank obtained 70% of its operating income from operations with stateowned companies, the NBU, state banks and state authorities for the nine months ended
30 September 2010.
As at 31 December 2009 67% of the assets and 56% of the liabilities were concentrated in
operations with state-owned companies, the NBU, state banks and state authorities. The Bank
obtains loans from the NBU to finance lending to the state-owned companies, which comprise
38% of the liabilities. The Bank obtained 69% of its operating income from operations with stateowned companies, the NBU, state banks and state authorities for the nine months ended
30 September 2009.
The Bank manages concentration risk in the loan and investment portfolios by setting limits for
certain counterparties and group of counterparties. Detailed description of this process is stated
above, in the section about the credit risk. The Bank also uses limits based on the NBU
requirements to manage the risk.
To manage the credit risk the NBU sets the following limits: – limit of maximum exposure to
credit risk per individual counterparty (N7), which is determined as ratio of amount of all claims
of the Bank to this counterparty and all off-balance sheet claims, issued by the Bank to this
counterparty (or group of counterparties) to regulatory capital of the Bank, the ratio should not
exceed 20%; and – limit of large credit risks (N8), which is determined as credit risk for the
counterparty (or group of counterparties) that comprises 10% or more of the regulatory capital of
the Bank.
The Management Board of the NBU set individual limit of maximum exposure to credit risk (N7)
for operations with PJSC “NJSC “Naftogaz of Ukraine” by individual regulation. Concentration
for this counterparty is disclosed in Note 13.
The Bank did not violate limits on management of credit risk set by the NBU as at 30 September
2010 and 31 December 2009.
An analysis of concentration of the assets and the liabilities by currencies, maturity and geography
is disclosed in respective sections of the risk management policy.
Liquidity risk – Liquidity risk refers to the availability of sufficient funds to meet deposit
withdrawals and other financial commitments associated with financial instruments as they
actually fall due.
In order to manage liquidity risk, the Bank performs constant monitoring of future expected cash
flows on clients‟ and banking operations, which is a part of assets/liabilities management process.
On a monthly basis the Assets and Liability Committee analyzes funding sources taking into
account changes in interest rates for the previous month and makes respective decisions for assets
and liability management.
52
F-54
The analysis of interest rate change and liquidity risk based on carrying value of financial assets
and liabilities is presented in the following table:
Up to
1 month
1 month
to
3 months
3 months
to
1 year
1 year
to
5 years
Over
5 years
Maturity
undefined
30 September
2010
Total
FINANCIAL ASSETS
Due from banks
Loans to customers
Investments available for sale
3,289,434
1,236,999
3,117,231
58,174
1,935,782
11,758
6,107,793
834,016
1,304
24,909,823
3,341,306
5,082,279
200,454
-
3,348,912
39,272,676
7,504,765
Total interest bearing assets
7,643,664
2,005,714
6,941,809
28,252,433
5,282,733
-
50,126,353
Cash and balances with
the National Bank of
Ukraine
Due from banks
Investments available for sale
Other financial assets
2,715,511
144,067
15,659
233
275
354
683
425,000
7,780
-
3,140,511
144,067
7,780
17,204
TOTAL FINANCIAL
ASSETS
10,518,901
2,005,947
6,942,084
28,252,787
5,283,416
432,780
53,435,915
FINANCIAL LIABILITIES
Due to banks
Customer accounts
Debt securities issued
Subordinated debt
133,462
13,015,851
14,939
60,000
3,565,269
9,545
-
1,030,000
2,544,889
300,200
-
14,411,633
3,278,979
154,888
784,677
88,495
-
-
15,635,095
22,493,483
464,633
799,616
Total interest bearing
liabilities
13,164,252
3,634,814
3,875,089
18,630,177
88,495
-
39,392,827
159,422
508,654
41,425
37
27,163
44
89
-
159,422
508,654
68,758
TOTAL FINANCIAL
LIABILITIES
13,873,753
3,634,851
3,902,252
18,630,221
88,584
-
40,129,661
Liquidity gap
(3,354,852)
(1,628,904)
3,039,832
9,622,566
5,194,832
432,780
Interest sensitivity gap
(5,520,588)
(1,629,100)
3,066,720
9,622,256
5,194,238
(5,520,588)
(7,149,688)
(4,082,968)
5,539,288
10,733,526
(10%)
(13%)
(7%)
10%
19%
Due to banks
Customer accounts
Other financial liabilities
Cumulative interest
sensitivity gap
Cumulative interest
sensitivity gap as
a percentage of total
assets
53
F-55
Up to
1 month
1 month
to
3 months
3 months
to
1 year
1 year
to
5 years
Over
5 years
FINANCIAL ASSETS
Due from banks
Loans to customers
Investments available for sale
2,934,717
407,681
170,184
15,821,794
28,715
18,948,834
817,386
6,082,080
2,787,912
3,945,059
200,454
510,829
-
2,934,717
45,716,277
4,004,651
Total interest bearing assets
3,512,582
15,850,509
19,766,220
8,869,992
4,145,513
510,829
52,655,645
Cash and balances with
the National Bank of
Ukraine
Due from banks
Investments available for sale
Other financial assets
2,100,822
535
8,829
995
83
20,093
1,093
621
840
177,530
7,780
-
2,278,352
21,623
7,780
11,466
TOTAL FINANCIAL
ASSETS
5,622,768
15,851,587
19,787,406
8,870,613
4,146,353
696,139
54,974,866
FINANCIAL
LIABILITIES
Due
to banks
Customer accounts
Debt securities issued
Subordinated debt
86,953
11,849,952
33,610
6,467,202
7,927,866
8,093
-
8,791,757
1,556,815
-
672,212
2,708,611
438,000
-
60,202
790,968
-
16,018,124
24,103,446
446,093
824,578
Total interest bearing
liabilities
11,970,515
14,403,161
10,348,572
3,818,823
851,170
-
41,392,241
4,620
569,462
11,005
2,614
25,700
37
29
-
4,620
569,462
39,385
TOTAL FINANCIAL
LIABILITIES
12,555,602
14,405,775
10,374,272
3,818,860
851,199
-
42,005,708
Liquidity gap
(6,932,834)
1,445,812
9,413,134
5,051,753
3,295,154
696,139
Interest sensitivity gap
(8,457,933)
1,447,348
9,417,648
5,051,169
3,294,343
(8,457,933)
(7,010,585)
2,407,063
7,458,232
10,752,575
(15%)
(12%)
4%
13%
19%
Due to banks
Customer accounts
Other financial liabilities
Cumulative interest
sensitivity gap
Cumulative interest
sensitivity gap as
a percentage of total
assets
54
F-56
Maturity
undefined
31 December
2009
Total
The Bank‟s liquidity risk management includes estimation of core current accounts, i.e. funds
associated with stable customer relationships, with statistical methods applied to historic
information on fluctuations of customer accounts balances. As at 30 September 2010 and
31 December 2009 core current accounts amounted to UAH 6,177,269 thousand and
UAH 8,389,464 thousand, respectively. Based on going concern assumption effective maturity of
core current accounts is considered to be undefined. Information as to the expected periods of
repayment of customer accounts and effective liquidity gaps as at 30 September 2010 and 2009 is
as follows:
Up to
1 month
1 month
to
3 months
3 months
to
1 year
1 year
to
5 years
Over
5 years
Maturity 30 September
undefined
2010
Total
TOTAL
FINANCIAL
ASSETS
10,518,901
2,005,947
6,942,084
28,252,787
5,283,416
432,780
53,435,915
TOTAL
FINANCIAL
LIABILITIES
13,873,753
3,634,851
3,902,252
18,630,221
88,584
-
40,129,661
Liquidity gap
(3,354,852)
(1,628,904)
3,039,832
9,622,566
5,194,832
432,780
Corrected for:
Current customer
accounts analyzed
based on expected
withdrawal dates
(6,177,269)
-
-
-
-
6,177,269
TOTAL
FINANCIAL
LIABILITIES
based on expected
withdrawal dates
for current
customer accounts
7,696,484
3,634,851
3,902,252
18,630,221
88,584
6,177,269
Liquidity gap based
on expected
withdrawal dates
for current
customer accounts
2,822,417
(1,628,904)
3,039,832
9,622,566
5,194,832
(5,744,489)
55
F-57
Up to
1 month
1 month
to
3 months
3 months
to
1 year
1 year
to
5 years
Over
5 years
Maturity 31 December
undefined
2009
Total
TOTAL
FINANCIAL
ASSETS
5,622,768
15,851,587
19,787,406
8,870,613
4,146,353
696,139
54,974,866
TOTAL
FINANCIAL
LIABILITIES
12,555,602
14,405,775
10,374,272
3,818,860
851,199
-
42,005,708
Liquidity gap
(6,932,834)
1,445,812
9,413,134
5,051,753
3,295,154
696,139
Corrected for:
Current customer
accounts analyzed
based on expected
withdrawal dates
(8,389,464)
-
-
-
-
8,389,464
TOTAL
FINANCIAL
LIABILITIES
based on expected
withdrawal dates
for current
customer accounts
4,166,138
14,405,775
10,374,272
3,818,860
851,199
8,389,464
Liquidity gap based
on expected
withdrawal dates
for current
customer accounts
1,456,630
1,445,812
9,413,134
5,051,753
3,295,154
(7,693,325)
A further analysis of the liquidity and interest rate risks is presented in the following tables in
accordance with IFRS 7. The amounts disclosed in these tables do not correspond to the amounts
recorded on the statement of financial position as the presentation below includes a maturity
analysis for financial liabilities that indicates the total remaining undiscounted contractual
payments (including future interest payments), which are not recognized in the statement of
financial position under the effective interest rate method.
56
F-58
Up to
1 month
1 month
to
3 months
3 months
to
1 year
1 year
to
5 years
Over
5 years
30 September
2010
Total
FINANCIAL
LIABILITIES
Due to banks
Customer accounts
Debt securities issued
Subordinated debt
262,126
13,718,065
5,935
14,939
61,213
3,648,561
11,295
-
1,064,892
2,819,952
322,053
71,697
17,473,663
5,292,845
184,435
287,458
156,394
899,567
18,861,894
25,635,817
523,718
1,273,661
Total interest bearing
financial liabilities
14,001,065
3,721,069
4,278,594
23,238,401
1,055,961
46,295,090
41,425
37
27,163
44
89
68,758
178,460
832
90,925
155
-
270,372
14,220,950
3,721,938
4,396,682
23,238,600
1,056,050
46,634,220
1,405,517
-
-
-
-
1,405,517
15,626,467
3,721,938
4,396,682
23,238,600
1,056,050
48,039,737
Other financial
liabilities
Contingent liabilities
and irrevocable loan
commitments
Non-derivative
financial liabilities
Gross settled currency
swap and spot
agreements
TOTAL
FINANCIAL
LIABILITIES
Up to
1 month
1 month
to
3 months
3 months
to
1 year
1 year
to
5 years
Over
5 years
31 December
2009
Total
FINANCIAL
LIABILITIES
Due to banks
Customer accounts
Debt securities issued
Subordinated debt
93,088
12,449,395
3,866
33,610
992,780
8,096,406
7,358
-
14,997,663
1,772,663
34,296
35,933
870,749
4,563,813
485,113
362,519
111,381
907,695
16,954,280
26,993,658
530,633
1,339,757
Total interest bearing
financial liabilities
12,579,959
9,096,544
16,840,555
6,282,194
1,019,076
45,818,328
11,005
2,614
25,700
37
29
39,385
808
68,854
43,141
417
-
113,220
12,591,772
9,168,012
16,909,396
6,282,648
1,019,105
45,970,933
1,045,393
-
-
-
-
1,045,393
13,637,165
9,168,012
16,909,396
6,282,648
1,019,105
47,016,326
Other financial
liabilities
Contingent liabilities
and irrevocable loan
commitments
Non-derivative
financial liabilities
Gross settled currency
swap and spot
agreements
TOTAL
FINANCIAL
LIABILITIES
57
F-59
Interest rate risk – The Bank manages fair value interest rate risk through periodic estimation of
potential losses that could arise from adverse changes in market conditions.
The Assets and Liabilities Management Committee manages interest rate and market risks by
matching its interest rate position, which provides the Bank with a positive interest margin.
The Assets and Liabilities Management Committee conducts monitoring of the Bank‟s current
financial performance, estimates the Bank‟s sensitivity to changes in interest rates and its influence
on the Bank‟s profitability.
The following table presents an analysis of interest rate risk and thus the potential of the Bank for
gain or loss. Effective interest rates are presented by categories of financial assets and liabilities to
determine interest rate exposure and effectiveness of the interest rate policy used by the Bank.
ASSETS
Due from banks
Loans to customers
Investments available
for sale:
Ukrainian Government
debt securities
Other securities
LIABILITIES
Due to banks
Customer accounts:
Current accounts
Deposits
Debt securities issued
Subordinated debt
UAH
%
30 September 2010
USD
EUR
%
%
Other
%
UAH
%
31 December 2009
USD
EUR
%
%
Other
%
3%
15%
0.1%
12%
0.1%
13%
1%
-
13%
16%
1%
13%
0.2%
14%
2%
-
15%
14%
-
-
-
19%
16%
-
-
-
10%
2%
-
5%
13%
1%
1%
2%
2%
15%
15%
-
1%
9%
9%
1%
5%
-
0.2%
2%
-
2%
16%
13%
-
5%
10%
9%
6%
7%
-
-
The majority of the Bank‟s loan contracts and other financial assets and liabilities contain clauses
enabling the interest rate to be changed at the option of the lender. The Bank monitors its interest
rate margin and consequently does not consider itself exposed to significant interest rate risk or
consequential cash flow risk.
The following table presents a sensitivity analysis of interest rate risk, which has been determined
based on “reasonably possible changes in the risk variable”. The level of these changes is
determined by management and is contained within the risk reports provided to key management
personnel.
Impact on profit before tax:
Assets:
Due from banks
Loans to customers
Investments available for sale
Liabilities:
Due to banks
Customer accounts
Debt securities issued
Subordinated debt
Net impact on profit before tax
As at 30 September 2010
Interest rate
Interest rate
+1%
-1%
As at 31 December 2009
Interest rate
Interest rate
+1%
-1%
33,489
392,727
75,048
(33,489)
(392,727)
(75,048)
29,347
457,163
40,047
(29,347)
(457,163)
(40,047)
(156,351)
(224,935)
(4,646)
(7,996)
156,351
224,935
4,646
7,996
(160,181)
(241,034)
(4,461)
(8,246)
160,181
241,034
4,461
8,246
107,336
(107,336)
112,635
(112,635)
58
F-60
Price risk – Price risk is the risk that the value of a financial instrument will fluctuate as a result
of unfavourable fluctuation in securities prices in the trading portfolio of the Bank, in the prices of
derivative or other instruments and commodities, other than those caused by the changes in foreign
exchange rates or interest rates.
The Treasury Department of the Bank performs operations with securities in compliance with
internal limits, restrictions and regulations, by-laws and procedures on price risk, decisions of
responsible committees and the Management Board of the Bank based on its authorities.
Currency risk – Currency risk is defined as the risk that the value of a financial instrument will
fluctuate due to changes in foreign exchange rates. The Bank is exposed to the effects of
fluctuations in the prevailing foreign currency exchange rates on its financial position and cash
flows.
The Department of Foreign Exchange Transactions and Operations with Precious Metals,
the Treasury Department and the Risk Management Department monitor Bank‟s open currency
position on a daily basis with the aim to match requirements set by the NBU.
Based on the information prepared by the Department of Foreign Exchange Transactions and
Operations with Precious Metals, the Treasury Department and the Risk Management Department,
the Assets and Liabilities Management Committee control currency risk by management of
the open currency position on the estimated basis of UAH devaluation and other macroeconomic
indicators, which gives the Bank an opportunity to optimize risks of significant currency rates
fluctuations towards its national currency.
Foreign currency exchange rate risk – The Bank‟s exposure to foreign currency exchange rate
risk is presented in the table below:
UAH
FINANCIAL ASSETS
Cash and balances with
the National Bank of
Ukraine
Due from banks
Loans to customers
Investments available for
sale
Other financial assets
USD
USD 1 =
UAH 7.91350
EUR
EUR 1 =
UAH
10.77107
Other
currencies
30 September
2010
Total
2,804,537
582,351
37,898,786
73,963
1,902,797
1,287,249
216,537
942,182
86,641
45,474
65,649
-
3,140,511
3,492,979
39,272,676
7,512,545
12,543
3,818
802
41
7,512,545
17,204
TOTAL FINANCIAL
ASSETS
48,810,762
3,267,827
1,246,162
111,164
53,435,915
FINANCIAL
LIABILITIES
Due to banks
Customer accounts
Debt securities issued
Other financial liabilities
Subordinated debt
15,747,777
19,978,432
464,633
67,681
-
10,375
2,262,894
832
799,616
2,265
720,733
63
-
34,100
40,078
182
-
15,794,517
23,002,137
464,633
68,758
799,616
TOTAL FINANCIAL
LIABILITIES
36,258,523
3,073,717
723,061
74,360
40,129,661
OPEN BALANCE SHEET
POSITION
12,552,239
194,110
523,101
36,804
59
F-61
Derivative financial instruments and spot contracts – The Bank performs transactions with
derivative financial instruments, which include cross currency swap and spots. Derivatives are
contracts or agreements whose value is derived from one or more underlying indices or asset
values inherent in the contract or agreement, which require no or little initial net investment and
are settled at a future date.
Fair value of derivative financial instruments and spot contracts are included in the currency analysis
presented above and the following table presents further analysis of currency risk by types of
derivative financial instruments and spot contracts:
UAH
Accounts receivable on spot
and derivative contracts
Accounts payable on spot
and derivative contracts
OPEN POSITION
EUR
EUR 1 =
UAH
10.77107
Other
currencies
30 September
2010
Total
1,202,836
826,388
212,382
-
2,241,606
(129,927)
(1,043,703)
(595,099)
(470,811)
(2,239,540)
13,625,148
(23,205)
140,384
(434,007)
UAH
FINANCIAL ASSETS
Cash and balances with
the National Bank of
Ukraine
Due from banks
Loans to customers
Investments available for
sale
Other financial assets
USD
USD 1 =
UAH
7.91350
USD
USD 1 =
UAH
7.98500
EUR
EUR 1 =
UAH
11.44889
Other
currencies
31 December
2009
Total
1,982,178
745,816
37,773,755
190,501
1,708,840
6,718,717
83,795
424,412
1,223,805
21,878
77,272
-
2,278,352
2,956,340
45,716,277
4,012,431
10,279
544
635
8
4,012,431
11,466
TOTAL FINANCIAL
ASSETS
44,524,459
8,618,602
1,732,647
99,158
54,974,866
FINANCIAL
LIABILITIES
Due to banks
Customer accounts
Debt securities issued
Other financial liabilities
Subordinated debt
15,994,309
16,315,178
446,093
38,655
-
23,340
6,670,999
271
824,578
2,809
1,647,334
364
-
2,286
39,397
95
-
16,022,744
24,672,908
446,093
39,385
824,578
TOTAL FINANCIAL
LIABILITIES
32,794,235
7,519,188
1,650,507
41,778
42,005,708
OPEN BALANCE SHEET
POSITION
11,730,224
1,099,414
82,140
57,380
60
F-62
UAH
Accounts receivable on spot
and derivative contracts
Accounts payable on spot
and derivative contracts
OPEN POSITION
USD
USD 1 =
UAH 7.985
1,043,597
EUR
EUR 1 =
UAH
11.44889
-
12,773,821
Other
currencies
-
31 December
2009
Total
-
(931,232)
(87,584)
(26,402)
168,182
(5,444)
30,978
1,043,597
(1,045,218)
Currency risk sensitivity – The following table details the Bank‟s sensitivity to an increase and
decrease in the USD and EURO against the UAH, in result of possible changes in currency rates.
Sensitivity rate used when reporting foreign currency risk internally to key management personnel
and represents management‟s assessment of the possible change in foreign currency exchange
rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary
items and adjusts their translation at the end of the period for the appropriate change in foreign
currency rates. The sensitivity analysis includes external loans within the Bank where
the denomination of the loan is in a currency other than the currency of the lender or the borrower.
As at 30 September 2010
UAH/USD
UAH/USD
+10%
-10%
Impact on profit before
tax
(2,321)
2,321
As at 30 September 2010
UAH/EUR
UAH/EUR
+10%
-10%
Impact on profit before
tax
14,038
(14,038)
As at 31 December 2009
UAH/USD
UAH/USD
+10%
-10%
16,818
(16,818)
As at 31 December 2009
UAH/EUR
UAH/EUR
+10%
-10%
(544)
544
Limitations of sensitivity analysis – The above tables demonstrate the effect of a change in a key
assumption while other assumptions remain unchanged. In reality there is a correlation between
the assumptions and other factors. It should also be noted that these sensitivities are non-linear,
and larger or smaller impacts should not be interpolated or extrapolated from these results.
The sensitivity analyses do not take into consideration that the Bank‟s assets and liabilities are
actively managed. Additionally, the financial position of the Bank may vary at the time that any
actual market movement occurs. For example, the Bank‟s financial risk management strategy
aims to optimize the exposure to market fluctuations on the Bank activities. As investment
markets move past various trigger levels, management actions could include selling investments,
changing investment portfolio allocation and taking other protective action. Consequently,
the actual impact of a change in the assumptions may not have any impact on the liabilities,
whereas assets are held at market value on the statement of financial position. In these
circumstances, the different measurement bases for liabilities and assets may lead to volatility in
shareholder equity.
Other limitations in the above sensitivity analyses include the use of hypothetical market
movements to demonstrate potential risk that only represent the Bank‟s view of possible near-term
market changes that cannot be predicted with any certainty; and the assumption that all interest
rates move in an identical fashion.
61
F-63
Geographical concentration – The geographical concentration of assets and liabilities is set out
below:
Ukraine
Other
non-OECD
countries
OECD
countries
30 September
2010
Total
FINANCIAL ASSETS
Cash and balances with the National
Bank of Ukraine
Due from banks
Loans to customers
Investments available for sale
Other financial assets
3,140,511
582,561
39,272,676
7,512,545
17,135
43,508
1
2,866,910
68
3,140,511
3,492,979
39,272,676
7,512,545
17,204
TOTAL FINANCIAL ASSETS
50,525,428
43,509
2,866,978
53,435,915
FINANCIAL LIABILITIES
Due to banks
Customer accounts
Debt securities issued
Other financial liabilities
Subordinated debt
15,638,731
22,969,761
464,633
68,725
-
155,786
30,429
28
-
1,947
5
799,616
15,794,517
23,002,137
464,633
68,758
799,616
TOTAL FINANCIAL
LIABILITIES
39,141,850
186,243
801,568
40,129,661
NET POSITION
11,383,578
(142,734)
2,065,410
Ukraine
Other
non-OECD
countries
OECD
countries
31 December
2009
Total
FINANCIAL ASSETS
Cash and balances with the National
Bank of Ukraine
Due from banks
Loans to customers
Investments available for sale
Other financial assets
2,278,352
783,906
45,716,277
4,012,431
11,466
54,507
-
2,117,927
-
2,278,352
2,956,340
45,716,277
4,012,431
11,466
TOTAL FINANCIAL ASSETS
52,802,432
54,507
2,117,927
54,974,866
FINANCIAL LIABILITIES
Due to banks
Customer accounts
Debt securities issued
Other financial liabilities
Subordinated debt
16,012,958
24,672,908
446,093
39,380
-
9,786
1
-
4
824,578
16,022,744
24,672,908
446,093
39,385
824,578
TOTAL FINANCIAL
LIABILITIES
41,171,339
9,787
824,582
42,005,708
NET POSITION
11,631,093
44,720
1,293,345
62
F-64
JOINT STOCK COMPANY
“STATE SAVINGS BANK
OF UKRAINE”
Financial Statements
For the Years Ended
31 December 2009 and 2008
F-65
JOINT STOCK COMPANY “STATE SAVINGS BANK OF UKRAINE”
TABLE OF CONTENTS
Page
STATEMENT OF MANAGEMENT‟S RESPONSIBILITIES
FOR THE PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008
INDEPENDENT AUDITOR‟S REPORT
1
2-3
FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008:
Statements of comprehensive income
4-5
Statements of financial position
6
Statements of changes in equity
7
Statements of cash flows
8-9
Notes to the financial statements
10-62
F-66
JOINT STOCK COMPANY “STATE SAVINGS BANK OF UKRAINE”
STATEMENT OF MANAGEMENT’S RESPONSIBILITIES FOR THE
PREPARATION AND APPROVAL OF THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008
Management is responsible for the preparation of the financial statements that present fairly
the financial position of the Joint Stock Company “State Savings Bank of Ukraine” (the “Bank”) as
at 31 December 2009 and 2008, the results of its operations, cash flows and changes in equity for
the year then ended, in accordance with International Financial Reporting Standards (“IFRS”).
In preparing the financial statements, management is responsible for:




Properly selecting and applying accounting policies;
Presenting information, including accounting policies, in a manner that provides relevant,
reliable, comparable and understandable information;
Providing additional disclosures when compliance with the specific requirements of IFRS is
insufficient to enable users to understand the impact of particular transactions, other events and
conditions on the Bank‟s financial position and financial performance; and
Making an assessment of the Bank‟s ability to continue as a going concern for the foreseeable
future.
Management is also responsible for:





Designing, implementing and maintaining an effective and sound system of internal controls,
throughout the Bank;
Maintaining adequate accounting records that are sufficient to show and explain the Bank‟s
transactions and disclose with reasonable accuracy at any time the financial position of the Bank,
and which enable them to ensure that the financial statements of the Bank comply with IFRS;
Maintaining statutory accounting records in compliance with legislation and accounting
standards of Ukraine;
Taking such steps as are reasonably available to them to safeguard the assets of the Bank; and
Detecting and preventing fraud and other irregularities.
The financial statements for the years ended 31 December 2009 and 2008 were authorized for issue
on 12 January 2011 by the Management Board.
12 January 2011
12 January 2011
1
F-67
PJSC “Deloitte & Touche USC”
48-50A, Zhylyanska St.
Kyiv 01033
Ukraine
Tel.: +38 (044) 490 9000
Fax: +38 (044) 490 9001
www.deloitte.com.ua
INDEPENDENT AUDITOR’S REPORT
To the Shareholders and the Management Board of Joint Stock Company “State Savings Bank of
Ukraine”:
We have audited the accompanying financial statements of Joint Stock Company “State Savings Bank
of Ukraine” (the “Bank”) as at 31 December 2009 and 2008, which comprise the statements of
financial position as at 31 December 2009 and 2008, and the statements of comprehensive income,
statements of changes in equity and statements of cash flows for the years then ended, and a summary
of significant accounting policies and other explanatory information.
Management’s responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these financial statements in
accordance with International Financial Reporting Standards and for such internal control as
management determines is necessary to enable the preparation of financial statements that are free
from material misstatement, whether due to fraud or error.
Auditor’s responsibility
Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with International Standards on Auditing. Those standards
require that we comply with ethical requirements and plan and perform the audit to obtain reasonable
assurance whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on the auditor‟s judgment, including
the assessment of the risks of material misstatement of the financial statements, whether due to fraud
or error. In making those risk assessments, the auditor considers internal control relevant to the
entity‟s preparation and fair presentation of the financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the entity‟s internal control. An audit also includes evaluating the appropriateness
of accounting policies used and the reasonableness of accounting estimates made by management, as
well as evaluating the overall presentation of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis
for our qualified audit opinion.
Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, and its network of member
firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/about
for a detailed description of the legal structure of Deloitte Touche Tohmatsu and its Member Firms.
© 2011 PJSC "Deloitte & Touche USC". All rights reserved.
F-68
Basis for qualified opinion
We were unable to obtain sufficient audit evidence to satisfy ourselves as to the correctness of
the disclosures of liquidity risk calculated using discounted and undiscounted cash flows as at
31 December 2009 and 2008, which are disclosed in Note 31 to the financial statements, in accordance
with IFRS 7 “Financial Instruments: Disclosures”.
As discussed in Note 2, the Bank has adopted the revaluation model for the subsequent measurement
of its buildings which requires it to conduct revaluations with sufficient regularity such that the
carrying amounts as at the date of statement of financial position do not differ materially from those
using fair values. Buildings in the statement of financial position were revalued as at 1 November
2008 and the Bank has not carried out a valuation since that date. In view of the deterioration of
property values in Ukraine as a result of the global economic crisis and in the absence of valuations
to support the carrying value of buildings as at 31 December 2009 and 2008, we are unable to
determine whether the carrying amount of buildings is fairly stated.
As discussed in Note 2, the Bank did not apply the requirement of IAS 29 “Financial Reporting in
Hyperinflationary Economies”, which requires restatement of non-monetary assets and equity to
account for the effects of inflation up to 31 December 2000. We were unable to determine the effect
of this departure from IAS 29 “Financial Reporting in Hyperinflationary Economies” on share capital,
property revaluation reserve and retained earnings as at 31 December 2009 and 2008.
As discussed in Note 2, the Bank has not disclosed segment information as required by IFRS 8
“Operating Segments”.
Qualified opinion
In our opinion, except for the effects of such adjustments, if any, as might have been determined to be
necessary had we been able to satisfy ourselves as to the matters described in the first and second
paragraphs of the Basis for qualified opinion above and except for the effect on the financial statements
of the matters referred to in the preceding two paragraphs, the financial statements present fairly, in all
material respects, the financial position of the Bank as at 31 December 2009 and 2008, and its financial
performance and its cash flows for the years then ended in accordance with International Financial
Reporting Standards.
Emphasis of matter
Without further qualifying our opinion we draw attention to Notes 26 and 31 to these financial
statements, which disclose a significant concentration of operations with related parties and
concentration risk management policy of the Bank.
12 January 2011
3
F-69
JOINT STOCK COMPANY “STATE SAVINGS BANK OF UKRAINE”
STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008
(in Ukrainian Hryvnias and in thousands, except for earnings per share which are in Ukrainian Hryvnias)
Notes
Year ended
31 December
2009
Year ended
31 December
2008
7,777,099
(3,641,294)
2,524,529
(1,051,131)
4,135,805
1,473,398
(3,164,272)
(645,212)
971,533
828,186
1,021,387
(169,519)
143,665
(3,568)
(963)
21,532
855,801
(141,231)
188,305
(3,202)
(8,034)
73,008
NET NON-INTEREST INCOME
1,012,534
964,647
OPERATING INCOME
1,984,067
1,792,833
(1,796,806)
(1,706,699)
187,261
86,134
(78,220)
(46,841)
109,041
39,293
Interest income
Interest expense
4, 26
4, 26
NET INTEREST INCOME BEFORE PROVISION
FOR IMPAIRMENT LOSSES ON INTEREST
BEARING ASSETS
Provision for impairment losses on interest bearing assets
5
NET INTEREST INCOME
Fee and commission income
Fee and commission expense
Net gain on foreign exchange operations
Net realised loss on investments available for sale
Provision for impairment losses on other operations
Net other income
6, 26
6, 26
7
5
8
OPERATING EXPENSES
9, 26
PROFIT BEFORE INCOME TAX
Income tax expense
10
NET PROFIT
4
F-70
JOINT STOCK COMPANY “STATE SAVINGS BANK OF UKRAINE”
STATEMENTS OF COMPREHENSIVE INCOME (CONTINUED)
FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008
(in Ukrainian Hryvnias and in thousands, except for earnings per share which are in Ukrainian Hryvnias)
Notes
OTHER COMPREHENSIVE INCOME
Year ended
31 December
2009
Year ended
31 December
2008
-
409,417
Revaluation of property, net of deferred income tax effect
Net change in fair value of investments available for sale, net of
deferred income tax effect
(18,626)
Reclassification adjustments for gains/(losses) included in profit
or loss from comprehensive income on disposal of investments
available for sale, net of deferred income tax effect
131,796
OTHER COMPREHENSIVE INCOME AFTER INCOME TAX
113,170
270,105
TOTAL COMPREHENSIVE INCOME
222,211
309,398
7,849
35,114
(131,796)
(7,516)
EARNINGS PER SHARE
Basic and diluted (UAH)
11
12 January 2011
12 January 2011
The notes on pages 10-62 form an integral part of these financial statements.
5
F-71
JOINT STOCK COMPANY “STATE SAVINGS BANK OF UKRAINE”
STATEMENTS OF FINANCIAL POSITION
AS AT 31 DECEMBER 2009 AND 2008
(in Ukrainian Hryvnias and in thousands)
ASSETS:
Cash and balances with the National Bank of Ukraine
Due from banks
Loans to customers
Investments available for sale
Property, equipment and intangible assets
Other assets
Notes
31 December
2009
31 December
2008
12
13, 26
14, 26
15, 26
16
17
2,278,352
2,956,340
45,716,277
4,012,431
1,988,852
438,259
2,569,226
2,185,211
33,891,518
15,712,489
1,940,295
66,261
57,390,511
56,365,000
16,022,744
24,672,908
446,093
15,803
65,445
824,578
22,239,283
17,492,921
501,541
134,207
83,043
793,276
42,047,571
41,244,271
13,892,000
1,147,251
(18,626)
322,315
13,892,000
1,147,679
(131,796)
212,846
15,342,940
15,120,729
57,390,511
56,365,000
TOTAL ASSETS
LIABILITIES AND EQUITY
LIABILITIES:
Due to banks
Customer accounts
Debt securities issued
Deferred income tax liability
Other liabilities
Subordinated debt
18, 26
19, 26
20
10
21
22
Total liabilities
EQUITY:
Share capital
Property revaluation reserve
Investments available for sale fair value reserve
Retained earnings
23
Total equity
TOTAL LIABILITIES AND EQUITY
12 January 2011
12 January 2011
The notes on pages 10-62 form an integral part of these financial statements.
6
F-72
JOINT STOCK COMPANY “STATE SAVINGS BANK OF UKRAINE”
STATEMENTS OF CHANGES IN EQUITY
FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008
(in Ukrainian Hryvnias and in thousands)
Notes
31 December 2007
Share capital increase
Total comprehensive income
for the year
31 December 2008
Total comprehensive income
for the year
31 December 2009
23
Share
capital
Property
revaluation
reserve
Investments
available for
sale fair
value
reserve
922,000
738,262
7,516
173,553
1,841,331
12,970,000
-
-
-
12,970,000
-
409,417
(139,312)
39,293
309,398
13,892,000
1,147,679
(131,796)
212,846
15,120,729
-
(428)
113,170
109,469
222,211
13,892,000
1,147,251
(18,626)
322,315
15,342,940
12 January 2011
12 January 2011
The notes on pages 10-62 form an integral part of these financial statements.
7
F-73
Retained
earnings
Total
equity
JOINT STOCK COMPANY “STATE SAVINGS BANK OF UKRAINE”
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008
(in Ukrainian Hryvnias and in thousands)
Notes
CASH FLOWS FROM OPERATING ACTIVITIES:
Year ended
31 December
2009
Interest received
Interest paid
Fees and commissions received
Fees and commissions paid
Operations with foreign currency
Other operating income received
Staff costs paid
Operating expenses paid
6,716,786
(3,515,494)
1,021,387
(169,519)
108,068
20,713
(1,284,181)
(403,076)
Cash flows from operating activities before changes in operating
assets and liabilities
2,494,684
Changes in operating assets and liabilities
(Increase)/decrease in operating assets:
Minimum reserve deposit with the National Bank of Ukraine
Due from banks
Loans to customers
Other assets
Increase/(decrease) in operating liabilities:
Due to banks
Customer accounts
Other liabilities
Net cash (outflow)/inflow from operating activities before taxation
Income tax paid
2,459,572
(914,539)
855,801
(141,231)
(34,889)
61,467
(1,183,378)
(361,355)
741,448
(96,051)
943,890
(13,751,550)
(23,192)
72,847
194,908
(24,980,516)
(3,792)
(6,256,066)
6,684,238
(8,991)
21,736,636
2,697,125
(31,861)
(10,013,038)
(484,637)
(10,497,675)
Net cash (outflow)/inflow from operating activities
Year ended
31 December
2008
426,795
(139,481)
287,314
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments available for sale
Proceeds on sale of investments available for sale
Purchase of property, equipment and intangible assets
Proceeds on sale of property and equipment
(17,349,917)
29,249,392
(150,610)
1,258
Net cash inflow/(outflow) from investing activities
11,750,123
(13,106,576)
12,664,964
(197,044)
873
(637,783)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issue of share capital
Proceeds from debt securities issued
Repayment of debt securities issued
(62,006)
200,000
494,594
-
Net cash (outflow)/inflow from financing activities
(62,006)
694,594
8
F-74
JOINT STOCK COMPANY “STATE SAVINGS BANK OF UKRAINE”
STATEMENT OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008
(in Ukrainian Hryvnias and in thousands)
Notes
Year ended
31 December
2009
Year ended
31 December
2008
17,478
87,170
1,207,920
431,295
Effect of change in foreign exchange rate fluctuations on cash and
cash equivalents
NET INCREASE IN CASH AND CASH EQUIVALENTS
CASH AND CASH EQUIVALENTS at the beginning of the period
12
2,976,344
2,545,049
CASH AND CASH EQUIVALENTS at the end of the period
12
4,184,264
2,976,344
The increase of share capital totalling UAH 12,770,000 thousand was made as non-cash transaction by means of
Ukrainian Government debt securities (“OVDP”) contribution (Note 23).
12 January 2011
12 January 2011
The notes on pages 10-62 form an integral part of these financial statements.
9
F-75
JOINT STOCK COMPANY “STATE SAVINGS BANK OF UKRAINE”
NOTES TO THE FINANCIAL STATEMENTS
FOR THE YEARS ENDED 31 DECEMBER 2009 AND 2008
1.
ORGANISATION
The Bank was established in accordance with the Decree of the President of Ukraine No. 106
dated 20 May 1999 and the Resolution of the Government of Ukraine No. 876 dated
21 May1999, by converting the State Specialized Commercial Savings Bank of Ukraine into
the Joint Stock Company “State Savings Bank of Ukraine” in the form of an open joint stock
company. The Joint Stock Company “State Savings Bank of Ukraine” was registered by the
National Bank of Ukraine (the “NBU”) on 26 May 1999, registration number 4 and change of its
name into Joint Stock Company “State Savings Bank of Ukraine” was registered by the NBU on
28 December 1999.
The Bank has operated under a full banking license, issued by the National Bank of Ukraine,
starting from 16 January 2002. The Bank is licensed by the State Commission for securities and
stock market for trading with securities.
The Bank‟s primary business consists of processing banking accounts and attracting deposits
from legal entities and individuals, originating loans, transferring payments, trading with
securities and foreign currencies.
As at 31 December 2009 and 2008 the Bank was a 100% state-owned bank.
The registered office of the Bank is located at St. Hospitalna 12G, Kyiv, Ukraine.
As at 31 December 2009 and 2008 the Bank had 23 regional branches, Main branch in Kyiv and
Kyiv region, Crimea republican branch; 329 and 364 sub-branches, 5,730 and 5,768 operational
outlets within Ukraine, respectively.
The number of employees of the Bank as at 31 December 2009 and 2008 was 40,315 and 39,568,
respectively.
These financial statements were authorized for issue by the Management Board of the Bank
on 12 January 2011.
2.
BASIS OF PRESENTATION
Accounting basis – These financial statements of the Bank have been prepared in accordance
with International Financial Reporting Standards (“IFRS”) issued by the International
Accounting Standards Board (“IASB”) and Interpretations issued by the International Financial
Reporting Interpretations Committee (“IFRIC”), except as discussed below.
In accordance with International Accounting Standard (“IAS”) 29 “Financial Reporting in
Hyperinflationary Economies” the economy of Ukraine was considered to be hyperinflationary
during year 2000 and prior years. The Bank did not apply provisions of IAS 29 to restate its
share capital and non-monetary assets. The effect of this departure from International Financial
Reporting Standards on share capital, property revaluation reserve and retained earnings as at and
for the years ended 31 December 2009 and 2008 has not been determined.
10
F-76
In accordance with International Financial Reporting Standard (“IFRS”) 8 “Operating Segments”
information about the Bank‟s operating segments, products and services, the geographical areas
in which it operates, and its major customers is required to be disclosed if an entity files, or is in
the process of filing, its financial statements with a securities commission or other regulatory
organisation for the purpose of issuing any class of instruments in a public market. In the past
the Bank did not apply the provisions of IFRS 8 as management considered it was not relevant
for the Bank. The Bank will apply IFRS 8 for its annual financial statements as at 31 December
2010.
These financial statements have been prepared on the assumption that the Bank is a going
concern and will continue in operation for the foreseeable future. The management and the
shareholder have the intention to further develop the business of the Bank in Ukraine.
The management believes that the going concern assumption is appropriate for the Bank due to
its sufficient capital adequacy ratio, the commitment of the shareholder to support the Bank, and,
based on historical experience, that short-term obligations will be refinanced in the normal
course of business.
These financial statements are presented in thousands of Ukrainian Hryvnias, unless otherwise
indicated. The financial statements have been prepared under the historical cost convention,
except for the revaluation of property in accordance with IAS 16 “Property, Plant and
Equipment”, which is recorded at revalued amounts and measurement of certain financial
instruments in accordance with IAS 39 “Financial Instruments: Recognition and Measurement”,
which are recorded at fair value.
The Bank maintains its accounting records in accordance with Ukrainian law. These financial
statements have been prepared from Ukrainian statutory accounting records and have been
adjusted to conform with IFRS. Entered adjustments include certain reclassifications to reflect
the economic substance of underlying transactions including reclassifications of certain assets
and liabilities, income and expenses to appropriate financial statement captions.
Functional currency – Items included in the financial statements of the Bank are measured using
the currency that best reflects the economic substance of the underlying events and circumstances
relevant to the Bank (the “functional currency”). The functional currency of these financial
statements is the Ukrainian Hryvnia (“UAH”).
3.
SIGNIFICANT ACCOUNTING POLICIES
Recognition and measurement of financial instruments – The Bank recognizes financial assets
and liabilities on its statement of financial position when it becomes a party to the contractual
obligation of the instrument. Regular way purchase and sale of the financial assets and liabilities
are recognized using settlement date accounting. Regular way purchases of financial instruments
that will be subsequently measured at fair value between trade date and settlement date are
accounted for in the same way as for acquired instruments.
Financial assets and liabilities are initially recognized at fair value plus, in the case of a financial
asset or financial liability not at fair value through profit or loss, transaction costs that are
directly attributable to acquisition or issue of the financial asset or financial liability.
The accounting policies for subsequent re-measurement of these items are disclosed in
the respective accounting policies set out below.
11
F-77
Derecognition of financial assets and liabilities
Financial assets – A financial asset (or, where applicable a part of a financial asset or part
of a group of similar financial assets) is derecognized where:



The rights to receive cash flows from the asset have expired;
The Bank has transferred its rights to receive cash flows from the asset, or retained the right
to receive cash flows from the asset, but has assumed an obligation to pay them in full
without material delay to a third party under a „pass-through‟ arrangement; and
The Bank either (a) has transferred substantially all the risks and rewards of the asset, or
(b) has neither transferred nor retained substantially all the risks and rewards of the asset,
but has transferred control of the asset.
A financial asset is derecognized when it has been transferred and the transfer qualifies for
derecognition. A transfer requires that the Bank either: (a) transfers the contractual rights to
receive the asset‟s cash flows; or (b) retains the right to the asset‟s cash flows but assumes
a contractual obligation to pay those cash flows to a third party. After a transfer, the Bank
reassesses the extent to which it has retained the risks and rewards of ownership of the
transferred asset. If substantially all the risks and rewards have been retained, the asset remains
on the statement of financial position. If substantially all of the risks and rewards have been
transferred, the asset is derecognized. If substantially all the risks and rewards have been neither
retained nor transferred, the Bank assesses whether or not is has retained control of the asset.
If it has not retained control, the asset is derecognized. Where the Bank has retained control of
the asset, it continues to recognize the asset to the extent of its continuing involvement.
Financial liabilities – A financial liability is derecognized when the obligation is discharged,
cancelled, or expires.
Where an existing financial liability is replaced by another from the same lender on substantially
different terms, or the terms of an existing liability are substantially modified, such an exchange
or modification is treated as a de-recognition of the original liability and the recognition of a new
liability, and the difference in the respective carrying amounts is recognized in the statement of
comprehensive income.
Cash and cash equivalents – Cash and cash equivalents include cash on hand, unrestricted
balances on correspondent accounts with the National Bank of Ukraine, advances to banks in
countries included in the Organization for Economic Co-operation and Development (“OECD”),
except for margin deposits for operations with plastic cards, which may be converted to cash
within a short period of time. For purposes of determining cash flows, the minimum reserve
deposit required by the National Bank of Ukraine is not included as a cash equivalent due to
restrictions on its availability.
Precious metals – Assets and liabilities denominated in precious metals are translated at the
current rate computed based on the first fixing of the London Metal Exchange rates using the
UAH/USD exchange rate effective on the date. Changes in the bid prices are recorded in net
gain/(loss) on foreign exchange operations.
Due from banks – In the normal course of business the Bank maintains advances and deposits
for various periods of time with other banks. Due from banks with a fixed maturity term are
subsequently measured at amortized cost using the effective interest method. Those that do not
have fixed maturities are carried at amortized cost based on maturities estimated by the
management. Amounts due from banks are carried net of any allowance for impairment losses.
12
F-78
Repurchase and reverse repurchase agreements – In the normal course of business the Bank
enters into sale and purchase back agreements (“repos”) and purchase and sale back agreements
of financial assets (“reverse repos”). Repos and reverse repos are utilized by the Bank as
an element of its treasury management and trading business.
A repo is an agreement to transfer a financial asset to another party in exchange for cash or other
consideration and a concurrent obligation to reacquire the financial assets at a future date for
an amount equal to the cash or other consideration exchanged plus interest. These agreements
are accounted for as financing transactions. Financial assets sold under repo are retained in
the financial statements and consideration received under these agreements is recorded as
collateralized deposit received within balances due to banks.
Assets purchased under reverse repos are recorded in the financial statements as cash placed on
deposit which is collateralized by securities and other assets and are classified within balances
due from banks/loans to customers.
In the event that assets purchased under reverse repo are sold to third parties, the results are
recorded in net gains/(losses) on respective assets. Any related income or expense arising from
the pricing difference between purchase and sale of the underlying assets is recognized as interest
income or expense in the statement of comprehensive income.
Derivative financial instruments – In the normal course of business, the Bank enters into various
derivative financial instruments including foreign exchange contracts concluded by the Bank
with other banks to purchase/sale and exchange of foreign currency and currency rate swaps to
manage currency and liquidity risks. Derivative financial instruments are initially recognized at
fair value at the date a derivative contract is entered into, and are subsequently re-measured to
their fair value at each reporting date. The fair values are estimated based on quoted market
prices or pricing models that take into account the current market and contractual prices of the
underlying instruments and other factors. Derivatives are carried as assets when their fair value
is positive and as liabilities when it is negative. Derivatives are included in financial assets and
liabilities at fair value through profit or loss in the statement of financial position, or if their
amounts are immaterial they are included in other assets or liabilities. Gains and losses resulting
from these instruments are included in net gain/(loss) from financial assets and liabilities at fair
value through profit or loss in the statement of comprehensive income, or if their amounts are
immaterial they are included in net gain/(loss) on foreign exchange operations. Derivative
financial instruments entered into by the Bank are not designated as hedges and do not qualify
for hedge accounting.
Loans to customers – Loans to customers are non-derivative assets with fixed or determinable
payments that are not quoted in an active market, other than those classified in other categories
of financial assets.
Loans to customers granted by the Bank are initially recognized at fair value plus related
transaction costs that directly relate to the acquisition or the creation of such financial assets.
Where the fair value of consideration given does not equal the fair value of the loan, for example
where the loan is issued at lower than market rates, the difference between the fair value of
consideration given and the fair value of the loan is recognized as a loss on initial recognition of
the loan and included in the statement of comprehensive income according to nature of the
losses. Subsequently, loans are carried at amortized cost using the effective interest method.
Loans to customers are carried net of any allowance for impairment losses.
The effective interest rate is the rate that exactly discounts estimated future cash payments or
receipts through the expected life of the financial instrument or, when appropriate, a shorter
period to the net carrying amount of the financial asset or financial liability.
13
F-79
Write off of loans – Loans are written off against allowance for impairment losses based on
the decision of the Management Board. Such decisions are taken when all available possibilities
to collect the amounts due have been exercised and available collateral has been sold.
Subsequent recoveries of amounts previously written off are reflected as an offset to the charge
for impairment of financial assets in the statement of comprehensive income in the period of
recovery.
Allowance for impairment losses – The Bank accounts for impairment of financial assets that are
not carried at fair value when there is objective evidence that a financial asset or group of
financial assets is impaired. The impairment losses are measured as the difference between
carrying value and the present value of expected future cash flows, including amounts
recoverable from guarantees and collateral, discounted at the financial asset‟s original effective
interest rate, for financial assets which are carried at amortized cost. If in a subsequent period
the amount of the impairment loss decreases and the decrease can be related objectively to
an event occurring after the impairment was recognized, the previously recognized impairment
loss is reversed with an adjustment of the provision account.
For financial assets carried at cost the impairment losses are measured as the difference between
the carrying amount of the financial asset and the present value of estimated future cash flows
discounted at the current market rate of return for a similar financial asset. Such impairment
losses are not reversed.
The change in the impairment is included into profits using the provision account. Assets
recorded in the statement of financial position are reduced by the amount of the impairment.
Factors that the Bank considers in determining whether it has objective evidence that an
impairment loss has been incurred include information about the debtors‟ or issuers‟ liquidity,
solvency and business and financial risk exposures, levels of and trends in delinquencies for
similar financial assets, national and local economic trends and conditions, and the fair value of
collateral and guarantees. These and other factors may, either individually or taken together,
provide sufficient objective evidence that an impairment loss has been incurred in a financial
asset or group of financial assets.
Impairment losses are recognized in profit or loss when incurred as a result of one or more events
(“loss events”) that occurred after the initial recognition of the financial asset and which have
an impact on the amount or timing of the estimated future cash flows of the financial asset or
group of financial assets that can be reliably estimated.
If the Bank determines that no objective evidence exists that impairment was incurred for
an individually assessed financial asset, whether significant or not, it includes the asset in
a group of financial assets with similar credit risk characteristics and collectively assesses them
for impairment. The primary factors that the Bank considers whether a financial asset is
impaired is its overdue status and realisability of related collateral, if any. The following other
principal criteria are also used to determine that there is objective evidence that an impairment
loss has occurred:





Any instalment is overdue and the late payment cannot be attributed to a delay caused by
the settlement systems;
The borrower experiences a significant financial difficulty as evidenced by borrower‟s
financial information that the Bank obtains;
The borrower considers bankruptcy or a financial reorganisation;
There is an adverse change in the payment status of the borrower as a result of changes in
the national or local economic conditions that impact the borrower;
The value of collateral significantly decreases as a result of deteriorating market conditions.
14
F-80
For the purposes of a collective evaluation of impairment, financial assets are grouped on
the basis of similar credit risk characteristics. These characteristics are relevant to the estimation
of future cash flows for groups of such assets by being indicative on the debtors‟ ability to pay all
amounts due, according to the contractual terms of the assets being evaluated.
Future cash flows in a group of financial assets that are collectively evaluated for impairment are
estimated on the basis of contractual cash flows of assets, and experience of management in
respect of the extent to which amounts will become overdue, as a result of past loss events and
the success of recovery of overdue amounts. Past experience is adjusted on the basis of current
observable data to reflect the effects of current conditions that do not affect past periods and to
remove the effects of past conditions that do not exist currently.
It should be understood that evaluation of losses involves an exercise of judgment. While it is
possible that in particular periods the Bank may sustain losses which are substantial relative for
impairment losses, it is the judgment of management that the impairment losses are adequate to
absorb losses incurred on risk assets, at the reporting date.
Investments available for sale – Investments available for sale represent debt and equity
investments that are intended to be held for an indefinite period of time. Such securities are
initially recorded at fair value. Subsequently the securities are measured at fair value, with such
re-measurement recognized directly in equity, except for impairment losses, foreign exchange
gains or losses and interest income accrued using the effective interest method, which are
recognized directly in the statement of comprehensive income. When sold, gain/(loss)
previously recorded in equity is recycled through the statement of comprehensive income.
The Bank uses quoted market prices to determine the fair value for the investments available for
sale. If the market for investments is not active, the Bank establishes fair value by using
valuation techniques. Valuation techniques include using recent arm‟s length market
transactions between knowledgeable, willing parties, reference to the current fair value of
another instrument that is substantially the same, discounted cash flow analysis and other
methods. If there is a valuation technique commonly used by market participants to price
the instrument and that technique has been demonstrated to provide reliable estimates of prices
obtained in actual market transactions, the Bank uses that technique.
Interest income earned on investments available for sale is reflected in the statement of
comprehensive income as interest income on investment available for sale.
Non-marketable debt and equity securities are stated at amortized cost and cost, respectively, less
impairment losses, if any, unless fair value can be reliably measured.
When there is objective evidence that investments available for sale have been impaired,
the cumulative loss previously recognized in equity is removed from equity and recognized in
the statement of comprehensive income for the period. Reversals of such impairment losses on
debt instruments, which are objectively related to events occurring after the impairment, are
recognized in the statement of comprehensive income for the period. Reversals of such
impairment losses on equity instruments are not recognized in the statement of comprehensive
income.
Property, equipment and intangible assets – Property, equipment and intangible assets other
than buildings are carried at historical cost less accumulated depreciation and amortization and
any recognized impairment loss, if any.
Depreciation on assets under construction and those not placed in service commences from
the date the assets are ready for their intended use.
15
F-81
Depreciation of property and equipment and amortization of intangible assets is charged on
the historical (revalued) cost of property, equipment and intangible assets and is designed to
write off assets over their useful economic lives. It is calculated on a straight line basis at
the following annual rates:
Buildings
Furniture, office equipment and motor vehicles
Intangible assets
2% - 3%
10% - 33%
25%
The Bank has adopted a revaluation model for the subsequent measurement of its buildings.
Buildings are stated in the statement of financial position at their revalued amounts, being the fair
value at the date of revaluation, less any subsequent accumulated depreciation and subsequent
accumulated impairment losses. Revaluations are performed with sufficient regularity such that
the carrying amounts do not differ materially from those that would be determined using fair
values at the date of statement of financial position.
Any revaluation increase arising on the revaluation of such buildings is credited to the property
revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset
previously recognized as an expense, in which case the increase is credited to the statement of
comprehensive income to the extent of the decrease previously charged. A decrease in carrying
amount arising on the revaluation of such buildings is charged as an expense to the extent that it
exceeds the balance, if any, held in the property revaluation reserve relating to a previous
revaluation of that asset. The decrease is debited directly in equity to the property revaluation
reserve to the extent of any credit balance existing in the property revaluation reserve in respect
of that asset.
Depreciation on revalued buildings is charged to the statement of comprehensive income.
On the subsequent sale or retirement of a revalued property, the attributable revaluation surplus
remaining in the property revaluation reserve is transferred directly to retained earnings.
Leasehold improvements are amortized over the life of the related leased asset. Expenses related
to repairs and renewals are charged when incurred and included in operating expenses unless
they qualify for capitalization.
Impairment is recognized in the respective period and is included in net other income.
After the recognition of an impairment loss the depreciation charge for property and equipment
and intangible assets is adjusted in future periods to allocate the assets‟ revised value, less its
residual value (if any), on a systematic basis over its remaining useful life.
Operating leases – Leases of assets under which the risks and rewards of ownership are
effectively retained with the lessor are classified as operating leases. Lease payments under
operating lease are recognized as expenses on a straight-line basis over the lease term and
included into operating expenses.
Taxation – Income tax expense represents the sum of the current and deferred tax expense.
The current tax expense is based on taxable profit for the year. Taxable profit differs from profit
before income tax as reported in the statement of comprehensive income because it excludes
items of income or expense that are taxable or deductible in other years and it further excludes
items that are never taxable or deductible. The Bank‟s current tax expense is calculated using tax
rates that have been enacted during the reporting period.
16
F-82
Deferred tax is the tax expected to be payable or recoverable on differences between the carrying
amounts of assets and liabilities in the financial statements and the corresponding tax bases used
in the computation of taxable profit, and is accounted for using the balance sheet liability
method. Deferred tax liabilities are generally recognized for all taxable temporary differences
and deferred tax assets are recognized to the extent that it is probable that taxable profits will be
available against which deductible temporary differences can be utilized. Such assets and
liabilities are not recognized if the temporary difference arises from goodwill or from the initial
recognition (other than in a business combination) of other assets and liabilities in a transaction
that affects neither the tax profit nor the accounting profit.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to
the extent that it is no longer probable that sufficient taxable profits will be available to allow all
or part of the asset to be recovered.
Deferred tax is calculated at the tax rates that are expected to apply in the period when
the liability is settled or the asset is realized. Deferred tax is charged or credited in the statement
of comprehensive income, except when it relates to items charged or credited directly to equity,
in which case the deferred tax is also dealt with in equity.
Deferred income tax assets and deferred income tax liabilities are offset and reported net on
the statement of financial position if:


The Bank has a legally enforceable right to set off current income tax assets against current
income tax liabilities; and
Deferred income tax assets and the deferred income tax liabilities relate to income taxes
levied by the same taxation authority on the same taxable entity.
Ukraine also has various other taxes, which are assessed on the Bank‟s activities. These taxes
are included as a component of operating expenses in the statement of comprehensive income.
Due to banks, customer accounts, debt securities issued and subordinated debt – Due to banks,
customer accounts, debt securities issued and subordinated debt are initially recognized at fair
value. Subsequently amounts due are stated at amortized cost and any difference between net
proceeds and the redemption value is recognized in the statement of comprehensive income over
the period of the borrowings using the effective interest method. Those that do not have fixed
maturities are carried at amortized cost based on expected maturities.
Provisions – Provisions are recognized when the Bank has a present legal or constructive
obligation as a result of past events, and it is probable that an outflow of resources embodying
economic benefits will be required to settle the obligation and a reliable estimate of the
obligation can be made.
Contingencies – Contingent liabilities are not recognized in the statement of financial position
but are disclosed unless the possibility of any outflow in settlement is remote. A contingent asset
is not recognized in the statement of financial position but disclosed when an inflow of economic
benefits is probable.
Financial guarantee contracts issued and letters of credit – Financial guarantee contracts and
letters of credit issued by the Bank are credit insurance that provides for specified payments to be
made to reimburse the holder for a loss it incurs because a specified debtor fails to make payment
when due under the original or modified terms of a debt instrument. Such financial guarantee
contracts and letters of credit issued are initially recognized at fair value.
17
F-83
Subsequently they are measured at the higher of (a) the amount recognized as a provision in
accordance with IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”; and
(b) the amount initially recognized less, where appropriate, cumulative amortization of initial
premium revenue received over the financial guarantee contracts or letter of credit issued.
Share capital – Contributions to share capital are recognized at cost.
Costs directly attributable to the issue of new shares are deducted from equity net of any related
income taxes.
Dividends on ordinary shares are recognized in equity as a reduction in the period in which they
are declared. Dividends that are declared after the reporting date are treated as a subsequent event
under IAS 10 “Events after the Reporting Date” (“IAS 10”) and disclosed accordingly.
Retirement and other benefit obligations – In accordance with the requirements of the Ukrainian
legislation, the Bank withholds amounts of pension contributions from employee salaries and
pays them to the Pension Fund of Ukraine. In addition, such pension system provides for
calculation of current payments by the employer as a percentage of current total disbursements to
staff. Such expense is charged in the period the related salaries are earned. Upon retirement an
employee receives retirement benefit payments made by the Pension Fund of Ukraine. The Bank
does not have any pension arrangements separate from the state pension system of Ukraine,
which requires current contributions by an employer calculated as a percentage of current gross
salary payments. In addition, the Bank has no post-retirement benefits or other significant
compensated benefits requiring accrual.
Recognition of income and expense
Recognition of interest income and expense – Interest income and expense are recognized on
an accrual basis using the effective interest rate method. The effective interest rate method is
a method of calculating the amortized cost of a financial asset or a financial liability (or group
of financial assets or financial liabilities) and allocating the interest income or interest expense
over the relevant period.
Once a financial asset or a group of similar financial assets has been written down (partly written
down) as a result of an impairment loss, interest income is thereafter recognized using the
interest rate used to discount the future cash flows for the purpose of measuring the impairment
loss.
Interest income also includes income earned on investments in securities. Other income is
credited to the statement of comprehensive income when the related transactions are completed.
Recognition of fee and commission income and expense – Loan origination fees are deferred,
together with the related direct costs, and recognized as an adjustment to the effective interest
rate of the loan. Where it is probable that a loan commitment will lead to a specific lending
arrangement, the loan commitment fees are deferred, together with the related direct costs, and
recognized as an adjustment to the effective interest rate of the resulting loan. Where it is
unlikely that a loan commitment will lead to a specific lending arrangement, the loan
commitment fees are recognized in the statement of comprehensive income over the remaining
period of the loan commitment. Where a loan commitment expires without resulting in a loan,
the loan commitment fee is recognized in the statement of comprehensive income on expiry.
Loan servicing fees are recognized as revenue as the services are provided. Loan syndication
fees are recognized in the statement of comprehensive income when the syndication has been
completed. All other commissions are recognized when services are provided.
18
F-84
Foreign currency translation – Monetary assets and liabilities denominated in foreign
currencies are translated into Ukrainian Hryvnia (“UAH”) at the appropriate spot rates of
exchange ruling at the reporting date. Foreign currency transactions are accounted for at
the exchange rates prevailing at the date of the transaction. Profits and losses arising from these
translations are included in net gain/(loss) on foreign exchange operations.
Rates of exchange – The official exchange rates at year-end used by the Bank in the preparation
of the financial information are as follows:
UAH/1 US Dollar
UAH/1 Euro
31 December
2009
31 December
2008
7.98500
11.44889
7.70000
10.85546
Offset of financial assets and liabilities – Financial assets and liabilities are offset and reported
net on the statement of financial position when the Bank has a legally enforceable right to set off
the recognized amounts and the Bank intends either to settle on a net basis or to realize the asset
and settle the liability simultaneously. In accounting for a transfer of a financial asset that does
not qualify for derecognition, the Bank does not offset the transferred asset and the associated
liability.
Areas of significant management judgment and sources of estimation uncertainty –
The preparation of financial statements in accordance with IFRS requires management to make
estimates and assumptions that affect the reported amounts. Management evaluates its estimates
and judgments on an ongoing basis. Such estimates and assumptions are based on
the information available to the Bank‟s management as at the date of these financial statements.
Therefore, actual results could differ from those estimates and assumptions. Estimates that are
particularly susceptible to change relate to the provisions for impairment losses and the fair value
of financial instruments.
Key assumptions concerning the future and other key sources of uncertainty estimation at
the reporting date, that have a significant risk of causing a material adjustment to the carrying
amounts of assets and liabilities within the next financial period include:
Loans to customers
Property, equipment and intangible assets
Investments available for sale
31 December
2009
31 December
2008
45,716,277
1,988,852
4,012,431
33,891,518
1,940,295
15,712,489
Loans to customers – Loans to customers are measured at amortized cost less allowance for
impairment losses. The estimation of allowances for impairments involves the exercise of
significant judgment. The Bank regularly reviews its loans to assess for impairment. The Bank
estimates allowances for impairment with the objective of maintaining balance sheet provisions
at a level believed by management to be sufficient to absorb losses incurred in the Bank‟s loan
portfolio. The calculation of provisions on impaired loans is based on the likelihood of the asset
being written off and the estimated loss on such a write-off.
These assessments are made using statistical techniques based on historic experience. These
determinations are supplemented by the application of management judgment.
19
F-85
The Bank considers accounting estimates related to provisions for loans key sources of
estimation uncertainty because: (i) they are highly susceptible to change from period to period as
the assumptions about future default rates and valuation of losses relating to impaired loans and
advances are based on recent performance experience, and (ii) any significant difference between
the Bank‟s estimated losses (as reflected in the provisions) and actual losses will require
the Bank to make provisions which, if significantly different, could have a material impact on its
future statement of comprehensive income and its statement of financial position.
The Bank uses management‟s judgment to estimate the amount of any impairment loss in cases
where a borrower has financial difficulties and there are few available sources of historical data
relating to similar borrowers. Similarly, the Bank estimates changes in future cash flows based
on past performance, past customer behaviour, observable data indicating an adverse change in
the payment status of borrowers in a group, and national or local economic conditions that
correlate with defaults on assets in the group. Management uses estimates based on historical
loss experience for assets with credit risk characteristics and objective evidence of impairment
similar to those in the group of loans. The Bank uses management‟s judgment to adjust
observable data for a group of loans to reflect current circumstances not reflected in historical
data.
The allowances for impairment of financial assets in the financial statements have been
determined on the basis of existing economic and political conditions. The Bank is not in
a position to predict what changes in conditions will take place in Ukraine and what effect such
changes might have on the adequacy of the allowances for impairment of financial assets in
future periods.
Valuation of financial instruments – Financial instruments that are as available for sale and all
derivatives are stated at fair value. The fair value of such financial instruments is the estimated
amount at which the instrument could be exchanged between willing parties, other than in
a forced or liquidation sale. If a quoted market price is available for an instrument, the fair value
is calculated based on the market price. When valuation parameters are not observable in the
market or cannot be derived from observable market prices, the fair value is derived through
analysis of other observable market data appropriate for each product and pricing models which
use a mathematical methodology based on accepted financial theories. Pricing models take into
account the contract terms of the securities as well as market-based valuation parameters, such as
interest rates, volatility, exchange rates and the credit rating of the counterparty. Where marketbased valuation parameters are missed, management will make a judgment as to its best estimate
of that parameter in order to determine a reasonable reflection of how the market would be
expected to price the instrument. In exercising this judgment, a variety of tools are used
including proxy observable data, historical data, and extrapolation techniques. The best evidence
of fair value of a financial instrument at initial recognition is the transaction price unless
the instrument is evidenced by comparison with data from observable markets.
Any difference between the transaction price and the value based on a valuation technique is not
recognized in the statement of comprehensive income on initial recognition. Subsequent gains or
losses are only recognized to the extent that it arises from a change in a factor that market
participants would consider in setting a price.
The Bank considers that the accounting estimate related to valuation of financial instruments
where quoted markets prices are not available is a key source of estimation uncertainty because:
(i) it is highly susceptible to change from period to period because it requires management to
make assumptions about interest rates, volatility, exchange rates, the credit rating of the
counterparty, valuation adjustments and specific feature of the transactions and (ii) the impact
that recognizing a change in the valuations would have on the assets reported on its statement of
financial position as well as its profit/(loss) could be material.
20
F-86
Had management used different assumptions regarding the interest rates, volatility, exchange
rates, the credit rating of the counterparty and valuation adjustments, a larger or smaller change
in the valuation of financial instruments where quoted market prices are not available would have
resulted that could have had a material impact on the Bank‟s reported net income.
Property, equipment and intangible assets – Certain property (buildings) is measured at fair
value. The date of the latest appraisal was 1 November 2008. The sales comparison method was
used for estimation of fair value of buildings and office premises. No revaluation was made as at
31 December 2009 and 2008. Previous appraisal was performed as at 1 November 2006.
The following methods were used: sales comparison, income capitalization, and construction
costs for new buildings. Until 1 November 2006 revalued cost of buildings includes effects of
indexation and revaluation as described below.
The indexation of buildings until 31 December 1997 was deemed necessary by the Ukrainian
Government to reflect the effects of inflation and currency devaluation that occurred in both
the Soviet Union and Ukraine. Buildings were adjusted by inflation as stipulated by the
Ukrainian Government regulations several times until 31 December 1997.
In 1998 the Bank performed a revaluation of buildings according to the instructions of the NBU,
without involvement of independent and professionally qualified appraisers. The revaluation
was intended to bring the carrying value of buildings in line with the estimated market value as
at 1 January 1998. The results of revaluation were recorded in the property revaluation reserve.
No appraisal was performed from 1998 until 1 November 2006.
Deferred income tax assets – Deferred income tax assets are recognized for all deductible
temporary differences to the extent that is that it is probable that taxable profit will be available
against which the deductable temporary differences can be utilized. Estimation of probability is
based on management forecast of future taxable profit and is supplemented with subjective
judgments by the management of the Bank.
Provision for other off-balance sheet commitments – The accounting estimates and judgments
related to the provision for off-balance sheet commitments is an area of significant management
judgment because the underlying assumptions used for both the individually and collectively
assessed impairment can change from period to period and may significantly affect the Bank‟s
results of operations.
Related parties identification – Identification of related parties requires exercise of significant
management judgment in determining related party relationships.
Adoption of new and revised standards – In the current year, the Bank has adopted all of the
new and revised Standards and Interpretations issued by the IASB and IFRIC of the IASB that
are relevant to its operations and effective for annual reporting periods ending on 31 December
2009.
The adoption of these new and revised Standards and Interpretations has not resulted in significant
changes to the Bank‟s accounting policies that have affected the amounts reported for the current
or prior years.
Amendment to IAS 1 “Presentation of Financial Statements” – On 6 September 2007, the IASB
issued an amendment to IAS 1 which changes the way in which non-owner changes in equity are
required to be presented. It also changes the titles of primary financial statements as they will be
referred to in IFRS but does not require that these be renamed in an entity‟s financial statements.
The amendment to IAS 1 is effective for periods beginning on or after 1 January 2009.
21
F-87
Standards and interpretations issued and not yet adopted – At the date of authorization of these
financial statements, other than the Standards and Interpretations (related to the Bank‟s activities)
adopted by the Bank in advance of their effective dates, the following Interpretations were in
issue but not yet effective.
IFRIC 9 – “Reassessment of Embedded Derivatives” which requires that there should be no
reassessment of whether an embedded derivative should be separated from the host contract after
initial recognition, unless there have been changes to the contract. The adoption of IFRIC 9 had
no impact on the Bank‟s profit or loss or financial position.
IAS 17 “Lease” – Amendments to IAS 17 “Lease” were issued in 2009. The amendments delete
specific guidance regarding classification of leases of land, so as to eliminate inconsistency with
the general guidance on lease classification. They are effective for accounting periods beginning
on or after 1 January 2010.
Financial instruments  Classification and Measurement (Exposure draft) – In July 2009 IASB
issued an exposure draft (ED) that is a part of IASB‟s project to replace IAS 39 “Financial
Instruments: Recognition and Measurement”. The ED proposes a new classification and
measurement model for financial assets and financial liabilities. All recognized financial assets
and financial liabilities that are currently in the scope of IAS 39 will be measured either at
amortized cost or fair value. A financial instrument that has only basic loan features and is
managed on a contractual yield basis is measured at amortized cost, unless designated as at fair
value through profit or loss (FVTPL). Those financial instruments measured at fair value will
either be classified as FVTPL or in the case of investment in equity instruments that are not held
for trading, designated irrevocably as at fair value through other comprehensive income
(FVTOCI). All investments in equity instruments and derivatives linked to equity instruments in
the scope of IAS 39 must be measured at fair value, i.e. an unquoted equity investment cannot be
measured at cost less impairment when fair value cannot be reliably measured as currently
required by IAS 39.
The ED does not permit reclassifications out of or into amortized cost, FVTPL or FVTOCI after
initial recognition. The effective date of these changes is not yet determined but the IASB expects
to finalize the new classification and management model in time to allow entities to voluntary
adopt the new model for 2009 year-end financial statements.
22
F-88
4.
NET INTEREST INCOME
Net interest income comprises:
Year ended
31 December
2009
Year ended
31 December
2008
6,549,773
327,995
899,331
2,042,254
187,931
294,344
Total interest income
7,777,099
2,524,529
Interest income comprises:
Interest income on financial assets recorded at amortized cost:
Interest on loans to customers
Interest on due from banks
Other interest income
6,675,055
202,713
-
2,036,511
193,663
11
6,877,768
2,230,185
899,331
294,344
Total interest income
7,777,099
2,524,529
Interest expense comprises:
Interest expenses on financial liabilities recorded at amortized cost:
Interest on due to banks
Interest on customer accounts
Interest on subordinated debt
Interest on debt securities issued
(2,280,264)
(1,227,340)
(73,699)
(59,991)
(198,404)
(770,181)
(50,089)
(32,457)
Total interest expense
(3,641,294)
(1,051,131)
4,135,805
1,473,398
Interest income comprises:
Interest income on financial assets recorded at amortized cost:
- interest income on impaired financial assets, including assets
assessed on portfolio basis
- interest income on unimpaired financial assets
Interest income on financial assets at fair value
Interest income on financial assets at fair value:
Interest on investments available for sale
Net interest income before provision for impairment losses
on interest bearing assets
5.
ALLOWANCE FOR IMPAIRMENT LOSSES AND OTHER PROVISIONS
The movements in allowance for impairment losses on interest earning assets were as follows:
Due
from banks
Loans to
customers
Investments
available for
sale
31 December 2007
27,840
502,698
Provision
Write-off of assets
53,663
(23,851)
581,378
(12,817)
31 December 2008
57,652
1,071,259
Provision
Write-off of assets
11,101
(2,102)
3,061,725
(14,857)
91,446
(6,529)
3,164,272
(23,488)
31 December 2009
66,651
4,118,127
90,107
4,274,885
23
F-89
-
Total
10,171
(4,981)
5,190
530,538
645,212
(41,649)
1,134,101
The movements in allowances for impairment losses on other operations were as follows:
Other
assets
Total
31 December 2007
8,879
-
8,879
Provision
1,412
6,622
8,034
10,291
6,622
16,913
31 December 2008
Provision/(recovery of provision)
Write-off of assets
3,462
(758)
31 December 2009
6.
Guarantees
and other
commitments
12,995
(2,499)
-
963
(758)
4,123
17,118
Year ended
31 December
2009
Year ended
31 December
2008
948,872
61,932
2,530
1,908
6,145
828,609
15,636
5,360
114
6,082
1,021,387
855,801
FEE AND COMMISSION INCOME AND EXPENSE
Fee and commission income and expense comprise:
Fee and commission income:
Settlements and cash operations
Foreign exchange operations
Off-balance sheet operations
Securities operations
Other
Total fee and commission income
7.
Fee and commission expense:
Settlements and cash operations
Foreign exchange operations
Securities operations
Other
(134,649)
(19,584)
(2,439)
(12,847)
(124,111)
(6,361)
(532)
(10,227)
Total fee and commission expense
(169,519)
(141,231)
NET GAIN ON FOREIGN EXCHANGE OPERATIONS
Net gain on foreign exchange operations comprises:
Year ended
31 December
2009
Year ended
31 December
2008
Translation differences, net
Dealing, net
35,597
108,068
223,194
(34,889)
Total net gain on foreign exchange operations
143,665
188,305
24
F-90
8.
NET OTHER INCOME
For the years ended 31 December 2009 and 2008 net other income amounted to
UAH 21,532 thousand and UAH 73,008 thousand, respectively.
For the year ended 31 December 2008 net other income includes compensation from Ukrainian
Government in the amount of UAH 60,000 thousand for distribution of State Budget funds to
compensate customer deposits of former USSR State Saving Bank, which was performed by
the Bank in 2008.
9.
OPERATING EXPENSES
Operating expenses comprise:
Year ended
31 December
2009
Year ended
31 December
2008
Staff costs
Depreciation and amortization
Property and equipment maintenance
Operating leases
Utilities
Office maintenance
Taxes, other than income tax
Communications
Security expenses
Professional services
Insurance expense
Business trip expenses
Advertising costs
Other expenses
1,292,528
101,096
87,874
86,664
55,841
41,126
38,171
29,514
17,459
8,170
7,220
7,058
2,558
21,527
1,242,616
102,548
75,605
69,267
40,312
40,364
22,938
28,448
13,429
5,850
7,418
6,105
3,973
47,826
Total operating expenses
1,796,806
1,706,699
10. INCOME TAXES
The Bank provides for taxes based on the tax accounts maintained and prepared in accordance
with the tax regulations of Ukraine and which may differ from International Financial Reporting
Standards.
The Bank is subject to certain permanent tax differences due to non-tax deductibility of certain
expenses and a tax free regime for certain income.
Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used for tax purposes.
Temporary differences as at 31 December 2009 and 2008 relate mostly to different methods of
income and expense recognition as well as to recorded values of certain assets.
25
F-91
Temporary differences as at 31 December 2009 and 2008 comprise:
Deductible temporary differences:
Loans to customers
Customer accounts
Other liabilities
Debt securities issued
Other assets
Due from banks
Investments available for sale
Total deductible temporary differences
Deferred tax assets at the statutory tax rate (25%)
Deferred tax asset not recognised
31 December
2009
31 December
2008
1,348,146
101,615
48,860
14,146
11,481
2,587
-
465,226
90,821
25,356
7,594
15,224
1,123
218,126
1,526,835
823,470
381,709
205,868
(23,941)
Deferred tax assets
357,768
205,868
Taxable temporary differences:
Property, equipment and intangible assets
Investments available for sale
Subordinated debt
(1,370,061)
(123,972)
(252)
(1,354,882)
(5,419)
Total taxable temporary differences
(1,494,285)
(1,360,301)
(373,571)
(340,075)
(15,803)
(134,207)
Deferred tax liability at the statutory tax rate (25%)
Net deferred tax liabilities
Relationships between tax expenses and accounting profit for the year ended 31 December 2009
and 2008 are explained as follows:
Year ended
31 December
2009
Year ended
31 December
2008
187,261
86,134
Statutory tax rate
Tax at the statutory tax rate
Effect of non-deductible expenses and non-taxable income
Change of deferred tax asset not recognised
25%
46,815
7,464
23,941
25%
21,534
25,307
-
Income tax expense
78,220
46,841
234,347
(156,127)
142,599
(95,758)
78,220
46,841
Profit before income tax
Current income tax expense
Recovery of deferred income tax expenses
Income tax expense
26
F-92
Movement in deferred tax liability for the years ended 31 December 2009 and 2008 was as
follows:
Year ended
31 December
2009
Year ended
31 December
2008
At the beginning of the period
(134,207)
(137,424)
Recovery of deferred tax expenses
Tax effect of property revaluation reserve increase
Tax effect of investments available for sale fair value reserve
change
156,127
-
95,758
(136,473)
(37,723)
43,932
At the end of the period
(15,803)
(134,207)
11. EARNINGS PER SHARE
Profit:
Net profit for the period attributable to ordinary share holders
Weighted average number of ordinary shares for purposes of basic
and diluted earnings per share (in units)
Earnings per share – basic and diluted (UAH)
12.
Year ended
31 December
2009
Year ended
31 December
2008
109,041
39,293
13,892
1,119
7,849
35,114
CASH AND BALANCES WITH THE NATIONAL BANK OF UKRAINE
31 December
2009
31 December
2008
Cash
Balances with the National Bank of Ukraine (Note 26)
1,195,221
1,083,131
1,212,171
1,357,055
Total cash and balances with the National Bank of Ukraine
2,278,352
2,569,226
The balances with the National Bank of Ukraine as at 31 December 2009 and 2008 include
UAH 177,530 thousand and UAH 81,479 thousand, respectively, which represent the obligatory
minimum reserve deposits with the NBU. The Bank is required to maintain the reserve balance
at the NBU at all times.
Cash and cash equivalents for the purposes of the statement of cash flows comprise
the following:
Cash and balances with the National Bank of Ukraine
Due from banks in OECD countries
Less guarantee deposits in OECD countries (Note 13)
Less minimum reserve deposits with the National Bank of Ukraine
Total cash and cash equivalents
27
F-93
31 December
2009
31 December
2008
2,278,352
2,097,835
2,569,226
498,630
4,376,187
3,067,856
(14,393)
(177,530)
(10,033)
(81,479)
4,184,264
2,976,344
13. DUE FROM BANKS
Due from banks comprise:
Correspondent accounts with other banks
Time deposits with other banks
Loans under reverse repurchase agreements
Less allowance for impairment losses
31 December
2009
31 December
2008
2,721,171
272,549
29,271
1,642,082
600,781
-
3,022,991
2,242,863
(66,651)
Total due from banks
(57,652)
2,956,340
2,185,211
Movements in allowance for impairment losses on balances due from banks for the year ended
31 December 2009 and 2008 are disclosed in Note 5.
As at 31 December 2009 and 2008, due from banks included accrued interest income in
the amount of UAH 119 thousand and UAH 97 thousand, respectively.
As at 31 December 2009 due from other banks at total amount of UAH 29,271 thousand was
effectively collateralized by securities – Ukrainian Government debt securities purchased under
reverse repurchase agreements, with fair value in the amount of UAH 30,120 thousand.
As at 31 December 2009 loans under reverse repurchase agreements have contractual
maturities in January 2010.
As at 31 December 2009 and 2008 the maximum credit risk exposure on due from banks
amounted to UAH 2,956,340 thousand and UAH 2,185,211 thousand, respectively.
As at 31 December 2009 and 2008 due from banks included guarantee deposits placed by
the Bank for its operations with plastic cards and letters of credit in the amount of
UAH 14,393 thousand and UAH 10,033 thousand, respectively.
As at 31 December 2009 and 2008 the Bank had placements with ten banks, totalling
UAH 2,854,179 thousand (94%) and UAH 2,114,301 thousand (94%), respectively, which
represents a significant concentration.
14. LOANS TO CUSTOMERS
Loans to customers comprise:
31 December
2009
31 December
2008
44,547,329
5,287,075
34,962,777
-
49,834,404
34,962,777
Less allowance for impairment losses
(4,118,127)
(1,071,259)
Total loans to customers
45,716,277
33,891,518
Loans to customers
Loans under reverse repurchase agreements
28
F-94
Movements in allowances for impairment losses for the year ended 31 December 2009 and 2008
are disclosed in Note 5.
As at 31 December 2009 and 2008 loans to customers included accrued interest income in
the amount of UAH 1,063,799 thousand and UAH 133,396 thousand, respectively.
The table below summarizes the amount of loans secured by respective collateral, rather than
the fair value of the collateral itself:
31 December
2009
31 December
2008
40,518,184
8,986,073
320,154
9,993
27,450,017
7,180,348
323,748
8,664
49,834,404
34,962,777
Less allowance for impairment losses
(4,118,127)
(1,071,259)
Total loans to customers
45,716,277
33,891,518
Loans collateralized by equipment, other movables and rights
thereon
Loans collateralized by pledge of real estate and rights thereon
Unsecured loans
Loans collateralized by cash deposits
The table below represents the borrowers‟ sector structure as at 31 December 2009 and 2008:
31 December
2009
31 December
2008
29,146,558
5,905,879
4,546,440
3,237,962
2,396,753
1,548,330
1,531,503
579,382
336,450
271,935
132,569
86,458
60,191
13,971
10,475
8,277
21,271
18,779,508
7,111,852
3,761,595
1,679,918
1,153,102
1,159,591
509,746
288,492
184,559
135,360
90,555
34,182
38,458
8,535
27,324
49,834,404
34,962,777
Less allowance for impairment losses
(4,118,127)
(1,071,259)
Total loans to customers
45,716,277
33,891,518
Analysis by sector:
Oil, gas and chemical production
Individuals
Energy
Construction and real estate
Construction and road maintenance
Trade
Agriculture and food processing
Machinery construction
Transport
Mining and metallurgy
Manufacturing
Services
Financial services
Media and communications
Hotel and restaurant business
Press and publishing
Other
During the years ended 31 December 2009 and 2008 the Bank received real estate property and
other assets by taking possession of collateral it held as security. As at 31 December 2009 and
2008 such assets in amount of UAH 111,005 thousand and UAH 5,149 thousand, respectively,
are included in other assets (Note 17).
29
F-95
Loans to individuals comprise the following products:
Consumer loans, collateralized by real estate and guarantees
Car loans
Mortgage loans
Consumer loans
Other
31 December
2009
31 December
2008
2,411,974
1,238,158
1,110,723
936,557
208,467
2,527,892
1,654,486
1,140,688
1,064,531
724,255
5,905,879
7,111,852
Less allowance for impairment losses
(1,009,372)
Total loans to individuals
4,896,507
(355,473)
6,756,379
As at 31 December 2009 and 2008 a maximum credit risk exposure on loans to customers
amounted to UAH 45,716,277 thousand and UAH 33,891,518 thousand, respectively.
As at 31 December 2009 and 2008 a maximum credit risk exposure on contingent liabilities and
loan commitments extended by the Bank to its customers amounted to UAH 113,220 thousand
and UAH 523,630 thousand, respectively (Note 24).
As at 31 December 2009 and 2008 loans to customers of UAH 37,225,435 thousand (75%) and
UAH 23,089,180 thousand (66%), respectively, were granted to ten borrowers or group of
borrowers, which represents a significant concentration.
As at 31 December 2009 and 2008 the above stated amounts include loans issued to the related
state-owned companies PJSC “NJSC “Naftogaz of Ukraine” and OJSC “Ukrtransnafta” in
the total gross amount of UAH 29,089,711 thousand (58%) and UAH 18,766,610 thousand
(54%), which represents a significant concentration (Note 31).
As at 31 December 2009 and 2008 the following loans were provided to the related state-owned
companies PJSC “NJSC “Naftogaz of Ukraine” and OJSC “Ukrtransnafta”:
Name
PJSC “NJSC “Naftogaz of Ukraine”
PJSC “NJSC “Naftogaz of Ukraine”
PJSC “NJSC “Naftogaz of Ukraine”
PJSC “NJSC “Naftogaz of Ukraine”
PJSC “NJSC “Naftogaz of Ukraine”
PJSC “NJSC “Naftogaz of Ukraine”
PJSC “NJSC “Naftogaz of Ukraine”
PJSC “NJSC “Naftogaz of Ukraine”
PJSC “NJSC “Naftogaz of Ukraine”
OJSC “Ukrtransnafta”
OJSC “Ukrtransnafta”
OJSC “Ukrtransnafta”
Interest
rate,
%
14.5
14.0
13.5
10.1
9.5
7.92
16.5
16.5
6.4
19.0
19.0
19.0
Maturity
29 December 2010
30 June 2010
4 June 2010
26 February 2010
2 March 2010
26 February 2010
30 March 2010
21 June 2010
30 March 2010
25 March 2011
25 March 2011
25 March 2011
31 December
2009
Interest
rate,
%
31 December
2008
12,009,704
6,345,063
3,774,267
3,354,878
1,600,329
939,373
345,981
307,388
271,678
49,000
49,000
43,050
16.5
14.0
19.0
17.0
18.0
18.0
18.0
11,725,560
6,200,000
400,000
300,000
49,000
49,000
43,050
29,089,711
Less allowance for impairment losses
(1,790,761)
Total
27,298,950
18,766,610
(129,804)
18,636,806
As at 31 December 2009 loans to PJSC “NJSC “Naftogaz of Ukraine” include loans under reverse
repurchase agreements in the amount of UAH 5,226,885 thousand. Reverse repurchase
agreements were concluded on Ukrainian Government debt securities of special issue. After
31 December 2009 mutual obligations between the Bank and the NBU regarding sale of bonds
and repayment of loans under reverse repurchase agreements were settled (Note 25).
30
F-96
Carrying value of loans under reverse repurchase agreements and fair value of assets pledged as
at 31 December 2009 and 2008 comprise:
31 December 2009
Carrying
Fair value of
value of loans
collateral
Ukrainian Government debt securities
Bonds issued by State Mortgage Institution
5,226,885
60,190
5,035,805
60,353
Total
5,287,075
5,096,158
As at 31 December 2009 and 2008 loans to PJSC “NJSC “Naftogaz of Ukraine” with carrying value
of UAH 20,365,112 thousand and UAH 6,478,650 thousand, respectively, were pledged as
security for loans received from the National Bank of Ukraine (Note 18).
As at 31 December 2009 loans to other borrowers with carrying value of UAH 2,450,341 thousand
were pledged as security for loans received from the National Bank of Ukraine (Note 18).
The table below summarizes an analysis of loans to customers by impairment:
Loans to customers
individually
determined to be
impaired
Loans to customers
collectively
determined to be
impaired
Unimpaired loans to
customers (REPO)
Total
Carrying
value
before
allowance
31 December 2009
Allowance
Carrying
for
value
impairment
losses
Carrying
value
before
allowance
31 December 2008
Allowance
Carrying
for
value
impairment
losses
26,317,299
2,524,687
23,792,612
1,984,609
218,217
1,766,392
18,230,030
1,593,440
16,636,590
32,978,168
853,042
32,125,126
5,287,075
-
5,287,075
-
-
-
49,834,404
4,118,127
45,716,277
34,962,777
1,071,259
33,891,518
31
F-97
15. INVESTMENTS AVAILABLE FOR SALE
Investments available for sale comprise:
Ukrainian Government debt securities:
Medium-term Ukrainian Government debt securities
Long-term Ukrainian Government debt securities, including securities
with early redemption feature
Ukrainian Government debt securities for settlement of budget
indebtedness on value added tax
Other:
Bonds issued by State Mortgage Institution
Bonds issued by corporate entities
Bonds issued by banks
Bonds issued by local Ukrainian authorities
Deposit certificates of the National Bank of Ukraine
Less allowance for impairment losses
31 December
2009
31 December
2008
1,750,080
1,827,133
598,280
11,779,755
-
12,308
2,348,360
13,619,196
737,604
519,239
448,877
25,395
-
181,372
479,683
398,415
15,378
1,000,000
1,731,115
2,074,848
(74,824)
Total debt securities available for sale
(5,190)
4,004,651
15,688,854
23,063
23,635
Equity securities:
Corporate shares
Less allowance for impairment losses
(15,283)
Total equity securities available for sale
Total investments available for sale
-
7,780
23,635
4,012,431
15,712,489
Movements in allowances for impairment losses for the year ended 31 December 2009 and 2008
are disclosed in Note 5.
As at 31 December 2009 and 2008, debt securities available for sale included accrued interest
income in the amount of UAH 92,196 thousand and UAH 39,084 thousand, respectively.
On 26 October 2008 and 30 December 2008, as discussed in Note 23, Ukrainian Government
debt securities at total nominal value of UAH 1,000,000 thousand and UAH 11,700,000
thousand, respectively, were received as a contribution to the Bank‟s share capital.
Prior to the year-end 2008 the Bank requested repayment of OVDP with total nominal value of
UAH 1,000,000 thousand, and bonds were bought out by the NBU as at 31 December 2008.
As at 31 December 2009 OVDP with total nominal amount UAH 11,770,000 thousand were also
bought out by the NBU.
As at 31 December 2008 interest rate for OVDP with total nominal amount UAH 11,770,000
thousand comprised 9.5%.
On 30 December 2008, when share capital increase had taken place, the Bank concluded with
the NBU a repurchase agreement for the above stated bonds, which was presented in these
financial statements as a loan from the NBU (Note 18). The amount of the repurchase agreement
is UAH 11,770,000 thousand, with nominal interest rate of 12.002% and final maturity in June
2009. Mutual obligations between the Bank and the NBU regarding purchase of bonds and
repayment of the loan under repurchase agreement were settled simultaneously as at
31 December 2009.
As at 31 December 2009 and 2008 debt securities with carrying value of UAH 463,211 thousand
and UAH 11,945,897 thousand, respectively, were pledged as security for loans received from
the National Bank of Ukraine (Note 18).
32
F-98
16. PROPERTY, EQUIPMENT AND INTANGIBLE ASSETS
Property, equipment and intangible assets comprise:
Buildings
Leasehold
improvements
At historical/revalued cost
31 December 2008
Construction in
progress
Intangible
assets
558,419
62,104
20,156
(2,064)
98,951
(12,280)
24,400
(26,413)
(179)
1,793,221
61,077
645,090
59,912
24,194
2,583,494
8,933
30,179
450,654
-
18,076
507,842
20,774
-
15,924
(2,062)
61,761
(12,157)
-
29,707
44,041
500,258
-
20,636
594,642
31 December 2009
1,763,514
17,036
144,832
59,912
3,558
1,988,852
31 December 2008
1,755,151
12,806
107,765
62,104
2,469
1,940,295
31 December 2009
3,375
26,413
(651)
20,545
Total
42,985
Additions
Transfers
Disposals
1,764,084
Furniture,
office equipment
and
motor vehicles
3,728
(79)
2,448,137
150,610
(15,253)
Accumulated depreciation
31 December 2008
Charge for the year
Eliminated on disposals
31 December 2009
2,637
(77)
101,096
(14,296)
Net book value
33
F-99
Buildings
Leasehold
improvements
At historical/revalued cost
31 December 2007
Additions
Transfers
Disposals
Revaluation
Impairment
Eliminated with accumulated depreciation
on revaluation
1,228,464
Furniture,
office equipment
and
motor vehicles
Construction in
progress
46,257
420,969
63,192
1,397
(4,669)
-
147,318
(9,868)
-
42,517
(43,498)
(107)
-
123
43,498
(251)
549,264
(2,337)
Total
15,337
5,689
(481)
-
1,774,219
197,044
(15,376)
549,264
(2,337)
-
-
-
-
1,764,084
42,985
558,419
62,104
20,545
2,448,137
33,439
28,184
398,191
-
15,133
474,947
30,343
(172)
(54,677)
6,591
(4,596)
-
8,933
30,179
450,654
-
18,076
507,842
31 December 2008
1,755,151
12,806
107,765
62,104
2,469
1,940,295
31 December 2007
1,195,025
18,073
22,778
63,192
204
1,299,272
31 December 2008
(54,677)
Intangible
assets
(54,677)
Accumulated depreciation
31 December 2007
Charge for the year
Eliminated on disposals
Eliminated with cost on revaluation
31 December 2008
62,191
(9,728)
-
-
3,423
(480)
-
102,548
(14,976)
(54,677)
Net book value
34
F-100
As at 1 November 2008 the buildings and office premises owned by the Bank were revalued to
market prices by independent appraisers. Sales comparison method was used for estimation of
fair value of buildings and office premises. No update of revaluations was performed for
the period from November 2008 to 31 December 2009.
If buildings would have been accounted at historical cost less accumulated depreciation and
impairment losses, their carrying value would be UAH 283,421 thousand and
UAH 263,641 thousand as at 31 December 2009 and 2008, respectively.
Certain buildings not yet put into operations are shown within the construction in progress
category. The carrying amount of buildings held within construction in progress as at
31 December 2009 and 2008 comprises UAH 5,494 thousand and UAH 8,970 thousand,
respectively.
17. OTHER ASSETS
Other assets comprise:
Other financial assets:
Accrued income
Other accounts receivable
Fair value of currency swap and spot agreements
Accounts receivable from other banks on operations with securities
Less allowance for impairment losses
Other non-financial assets:
Current income tax assets
Collateral received by the Bank
Precious metals
Inventory
Prepaid expenses
Receivables on taxes and obligatory payments
Prepayments for purchase of assets
Other
Total other assets
31 December
2009
31 December
2008
12,618
11,133
381
329
15,329
12,128
2,276
-
24,461
29,733
(12,995)
(10,291)
11,466
19,442
241,304
111,005
41,577
13,683
11,416
2,900
824
4,084
249
5,149
19,614
6,196
9,665
596
3,519
1,831
426,793
46,819
438,259
66,261
Movements in allowances for impairment losses for the years ended 31 December 2009 and 2008
are disclosed in Note 5.
Precious metals represent gold and silver in vault.
35
F-101
18. DUE TO BANKS
Due to banks comprise:
31 December
2009
31 December
2008
Loans from the National Bank of Ukraine
Correspondent accounts of other banks
Loans from other banks
Loan under repurchase agreement from the National Bank of
Ukraine
15,931,171
91,573
-
10,200,000
3,868
257,675
-
11,777,740
Total due to banks
16,022,744
22,239,283
As at 31 December 2009 and 2008 due to banks included accrued interest expenses in the amount
of UAH 1,276 thousand and UAH 7,743 thousand, respectively.
As at 31 December 2009 and 2008 due to banks included loans from the NBU in the amount of
UAH 15,931,171 thousand (99%) and UAH 21,977,740 thousand (99%), respectively, which
represents a significant concentration.
Loan under repurchase agreement from the NBU in the amount of UAH 11,770,000 thousand
was received on 30 December 2008. This repurchase agreement was concluded in respect of
the Ukrainian Government debt securities of special issue (Note 15). Annual interest rate on this
loan is 12.002% and final maturity in June 2009. As at 31 December 2009 mutual obligations
between the Bank and the NBU regarding purchase of bonds and repayment of the loan under
repurchase agreement were effectively settled.
As at 31 December 2009 loans received from the National Bank of Ukraine in the amount of
UAH 15,931,171 thousand bear interest 13.1% per annum, with maturity in 2010 and 2012
(Note 25).
As at 31 December 2008 loans received from the National Bank of Ukraine in the amount of
UAH 10,200,000 thousand bear interest 15.0% and 12.5% per annum, with maturity in 2009,
which was subsequently prolonged as stated above.
As at 31 December 2009 loans from the NBU in the amount of UAH 15,931,171 thousand were
secured by debt securities available for sale with carrying value of UAH 463,211 thousand, loans
to PJSC “NJSC “Naftogaz of Ukraine” with carrying value UAH 20,365,112 thousand and loans
to other borrowers with carrying value UAH 2,450,341 thousand (Notes 14 and 15).
As at 31 December 2008 two loans from the NBU in the total amount of UAH 17,977,740
thousand were secured by debt securities available for sale with carrying value of
UAH 11,945,897 thousand and loans to PJSC “NJSC “Naftogaz of Ukraine” with carrying value
UAH 6,478,650 thousand (Notes 14 and 15).
36
F-102
19. CUSTOMER ACCOUNTS
Customer accounts comprise:
31 December
2009
31 December
2008
Term deposits
Repayable on demand
13,889,183
10,783,725
7,070,791
10,422,130
Total customer accounts
24,672,908
17,492,921
As at 31 December 2009 and 2008 customer accounts included accrued interest expenses in
the amount of UAH 521,861 thousand and UAH 398,192 thousand, respectively.
As at 31 December 2009 and 2008 the aggregate balances of top ten customers amounted to
UAH 7,500,691 thousand and UAH 2,142,935 thousand, which comprise 30% and 12%,
respectively.
The table below represents customer accounts‟ sector structure as at 31 December 2009 and 2008:
31 December
2009
31 December
2008
Individuals
State authorities
Energy
Media and communications
Services
Trade
Agriculture and food processing
Construction and real estate
Transport
Oil, gas and chemical production
Mining and metallurgy
Machinery construction
Manufacturing
Press and publishing
Hotel and restaurant business
Other
15,043,792
5,726,375
926,924
860,196
492,058
299,421
280,585
226,075
203,004
51,483
31,709
25,048
18,377
8,899
8,242
470,720
13,697,105
573,964
1,119,490
302,454
327,258
366,377
194,412
27,360
499,501
67,827
13,383
22,293
7,628
8,929
264,940
Total customer accounts
24,672,908
17,492,921
Analysis by sector:
20. DEBT SECURITIES ISSUED
In 2008 the Bank issued the following debt securities, outstanding as at reporting date:
A series
B series
Maturity of
principal
Annual
coupon rate
%
10 February 2011
7 February 2013
16.00%
10.50%
Total debt securities
issued
Carrying
value,
31 December
2009
243,216
202,877
446,093
37
F-103
Annual
coupon rate
%
10.25%
10.50%
Carrying
value,
31 December
2008
304,127
197,414
501,541
As at 31 December 2009 and 2008 domestic debt securities issued included accrued interest
expense in the amount of UAH 8,100 thousand and UAH 6,947 thousand, respectively.
The bond-holders had the right to demand repayment of the A series bonds by the Bank at their
nominal value after the end of the sixth coupon period – 13 August 2009.
The bond-holders have the right to demand repayment of the B series bonds by the Bank at their
nominal value after the end of the tenth coupon period – 12 August 2010.
Annual coupon rate for A series from first till sixth coupon period was set in the Prospectus.
Annual coupon rate for A series from seventh till twelfth coupon period was set by the
Management Board of the Bank according to present market conditions.
Annual coupon rate for B series from first till tenth coupon period was set in the Prospectus.
Annual coupon rate for B series from eleventh till twelfth coupon period will be set by the
Management Board of the Bank according to market conditions.
21. OTHER LIABILITIES
Other liabilities comprise:
Other financial liabilities:
Accrued bonuses and salary
Other payables
Fair value of currency swap and spot agreements
Expenses accrued
Other
Other non-financial liabilities:
Unused vacation reserve
Provision for guarantees and other commitments
Taxes payable, other than income tax
Current income tax liabilities
Total other liabilities
31 December
2009
31 December
2008
25,377
5,630
2,002
1,472
4,904
29,224
2,312
6,290
1,084
3,806
39,385
42,716
16,660
4,123
5,277
-
18,753
6,622
5,717
9,235
26,060
40,327
65,445
83,043
Movements in provision for guarantees and other commitments for the years ended 31 December
2009 and 2008 are disclosed in Note 5.
22. SUBORDINATED DEBT
Subordinated debt comprises:
ABN AMRO Bank N.V.
Currency
Maturity of
principal
Interest
rate,%
USD
19 January 2017
9%
Total subordinated debt
31 December
2009
31 December
2008
824,578
793,276
824,578
793,276
As at 31 December 2009 and 2008 subordinated debt included accrued interest expense in
the amount of UAH 33,610 thousand and UAH 31,570 thousand, respectively.
38
F-104
In the event of bankruptcy or liquidation of the Bank, repayment of this debt is subordinate to
the repayments of the Bank‟s liabilities to all other creditors.
In accordance with terms of loan agreement, the Bank should comply, among others, with
the following covenants:


The Bank is required to submit its audited annual financial statements prepared in
accordance with IFRS within 180 days from the reporting date;
The Bank is required to submit its unaudited interim financial statements for the six months
ending 30 June prepared in accordance with IFRS within 90 days from the reporting date.
ABN AMRO Bank N.V. has the right to enforce obligations of the Bank regarding compliance
with the covenants. No specific action is prescribed by the agreement in case of the Bank‟s noncompliance with the covenants.
23. SHARE CAPITAL
Share capital comprises:
Total shares authorized,
issued and fully paid
Total shares issued and
fully paid, but not
authorized
Total share capital
31 December 2009
Number
Amount,
of shares,
in UAH
in units
thousand
31 December 2008
Number
Amount,
of shares,
in UAH
in units
thousand
13,892
13,892,000
2,122
2,122,000
-
-
11,770
11,770,000
13,892
13,892,000
13,892
13,892,000
All ordinary shares have a nominal value of UAH 1,000 thousand per share, rank equally and
carry one vote.
On 9 July 2008 the Government of Ukraine decided to increase the share capital of the Bank by
issue of 200 new shares with the nominal value of UAH 1,000 thousand that was financed by
a contribution from the state budget of Ukraine in the amount of UAH 200,000 thousand.
As at 31 December 2008 the contribution was received and the increase was registered by
the State Commission for securities and stock market.
On 26 October 2008 the Government of Ukraine decided to increase the share capital of the Bank
by issue of 1,000 new shares with the nominal value of UAH 1,000 thousand. The financing was
performed by contribution of a special issue of Ukrainian Government debt securities (OVDP) in
the amount of UAH 1,000,000 thousand.
On 30 December 2008 the Government of Ukraine decided to increase the share capital of
the Bank by issue of 11,770 new shares with the nominal value of UAH 1,000 thousand.
The financing was performed by contribution of a special issue of Ukrainian Government debt
securities (OVDP) in the amount of 11,770,000 thousand.
On 17 March 2009 the State Commission for securities and stock market issued the certificate on
the registration of issue of 13,892 shares of the Bank.
39
F-105
24. COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Bank is a party to financial instruments with off-balance
sheet risk in order to meet the needs of its customers. These instruments, involving varying
degrees of credit risk, are not reflected in the statement of financial position.
The Bank‟s maximum exposure to credit loss under contingent liabilities and commitments to
extend credit, in the event of non-performance by the other party where all counterclaims,
collateral or security prove valueless, is represented by the contractual amounts of those
instruments.
The Bank uses the same credit control and management policies in undertaking off-balance sheet
commitments as it does for on-balance operations.
As at 31 December 2009 and 2008 provision for impairment losses on guaranties and other
commitments amounted to UAH 4,123 thousand and UAH 6,622 thousand, respectively
(Notes 5, 21).
As at 31 December 2009 and 2008 the nominal or contract amounts were:
Contingent liabilities and credit commitments
Letters of credit and other transaction related contingent obligations
Guarantees issued and similar commitments
Irrevocable commitments on loans and unused credit lines
Total contingent liabilities and credit commitments
31 December
2009
Nominal
amount
31 December
2008
Nominal
amount
197
113,023
169,400
32
354,198
113,220
523,630
Extension of loans to customers within loans and credit line limits is approved by the Bank on
a case-by-case basis and depends on borrowers‟ financial performance, debt service and other
conditions. As at 31 December 2009 and 2008 total amount of such revocable commitments
come to UAH 1,724,352 thousand and UAH 1,207,684 thousand, respectively.
Capital commitments – As at 31 December 2009and 2008 the Bank had no capital commitments.
Operating lease commitments – Where the Bank is the lessee, the future minimum lease
payments under non cancellable operating leases are as follows:
Less 1 year
Later than 1 year and not later than 5 years
Later than 5 years
Total operating lease commitments
31 December
2009
31 December
2008
63,907
76,335
70,653
56,491
72,191
77,727
210,895
206,409
Legal proceedings – From time to time and in the normal course of business, claims against
the Bank are received from customers and counterparties. Management is of the opinion that no
material unaccrued losses will be incurred and accordingly no provision has been made in these
financial statements.
The NBU issued an instruction requiring the Bank to disclose effective interest rates on loans
granted to individuals. In the judgment of the management there is no strict format of such
disclosure required by the NBU. So, management is of the opinion that the Bank follows
the NBU instructions.
40
F-106
Taxation – Due to presence in the Ukrainian commercial legislation, and tax legislation in
particular, of provisions allowing more than one interpretation, and also due to the practice
developed in a generally unstable environment by the tax authorities of making arbitrary
judgment of business activities, if a particular treatment based on management‟s judgment of
the Bank‟s business activities was to be challenged by the tax authorities, the Bank may be
assessed additional taxes, penalties and interest. Such uncertainty may relate to the valuation
of financial instruments, loss and impairment provisions and the market level for the pricing
of deals. The Bank believes that it has already made all tax payments, and therefore no
allowance has been made in the financial statements. Tax records remain open to review by
the tax authorities for three years.
During the tax review conducted in 2006, additional tax liabilities and financial sanctions
totalling UAH 11,070 thousand were assessed. The tax authorities challenged the tax
deductibility of the provision for doubtful receivables. The Bank did not agree with the tax
authorities and on 9 June 2006 filed a court case. On 20 September 2006 the court requested
an external expert to assess the appropriateness of deductibility of the provision.
On 12 March 2007 the Kyiv Research Institute of Legal Expertise agreed with the Bank‟s
approach. On 31 October 2007 the court found in favour of the Bank. The tax authorities
appealed the decision under appeal procedure. This decision was confirmed by the Kyiv
Administrative Court of Appeal, thus it has come into effect. Tax authorities appealed court
decisions to the Higher Administrative Court of Ukraine; however as at the date of issue of these
financial statements the date of court session was not yet appointed. No provisions for this
additional tax assessment are made in these financial statements.
Pensions and retirement plans – Employees receive pension benefits in accordance with the
laws and regulations of Ukraine, which requires current contributions by the employer calculated
as a percentage of current gross salary payments; such expense is charged in the period the
related salaries are earned. Employees have the right to receive pension in the amount of such
accumulated payments from state pension fund. As at 31 December 2009 and 2008 the Bank
was not liable for any supplementary pensions, post-retirement health care, insurance benefits, or
retirement indemnities to its current or former employees.
Ongoing global liquidity crisis – The financial markets, both globally and in Ukraine, have faced
significant volatility and liquidity constraints since the onset of the global financial crisis, which
began to unfold in the autumn of 2007 and worsened since August 2008. A side effect of those
events was an increased concern about the stability of the financial markets generally and the
strength of counterparties, and many lenders and institutional investors have reduced funding to
borrowers, which has significantly reduced the liquidity in the global financial system.
The global financial turmoil has significantly affected Ukrainian economy. It has resulted in
a decrease of Ukrainian GDP, significant declines in debt and equity prices and a substantial
outflow of capital.
While many countries, including Ukraine, have recently reported improvement of the situation in
the financial markets, a further downturn can still occur, and further state support measures might
be required. Adverse changes arising from systemic risks in global financial systems, including
any tightening of the credit environment could slow or disrupt Ukrainian economy, adversely
affect the Bank‟s access to capital and cost of capital for the Bank and, more generally, its
business, results of operations, financial condition and prospects.
While Ukrainian government has introduced a range of stabilization measures aimed at providing
liquidity to Ukrainian banks and companies, there continues to be uncertainty regarding the
access to capital and cost of capital for the Bank and its counterparties, which could affect the
Bank‟s financial position, results of operations and business prospects.
41
F-107
Factors including increased unemployment in Ukraine, reduced corporate liquidity and
profitability, and increased corporate and personal insolvencies, have affected the Bank‟s
borrowers‟ ability to repay the amounts due to the Bank. In addition, changes in economic
conditions have resulted in deterioration in the value of collateral held against loans and other
obligations. To the extent that information is available, the Bank has reflected revised estimates
of expected future cash flows in its impairment assessment.
Management is unable to reliably estimate the effects on the Bank‟s financial position of any
further deterioration in the liquidity of the financial markets and the increased volatility in the
currency and equity markets. Management believes it is taking all the necessary measures to
support the sustainability and growth of the Bank‟s business in the current circumstances.
Operating environment – The principal business activities of the Bank are within Ukraine.
Although in recent years there has been a general improvement in economic conditions in
Ukraine, Ukraine continues to display certain characteristics of an emerging market.
These include, but are not limited to, currency controls and convertibility restrictions, relatively
high level of inflation and continuing efforts by the government to implement structural reforms.
As a result, laws and regulations affecting businesses in Ukraine continue to change rapidly.
Tax, currency and customs legislation within Ukraine is subject to varying interpretations, and
other legal and fiscal impediments contribute to the challenges faced by entities currently
operating in Ukraine. The future economic direction of Ukraine is largely dependent upon the
effectiveness of economic, fiscal and monetary measures undertaken by the government, together
with legal, regulatory, and political developments.
25. SUBSEQUENT EVENTS
Subsequently to 31 December 2009 the Bank has applied to PJSC “NJSC “Naftogaz of Ukraine”
with the request to purchase Ukrainian Government debt securities (Note 14). Mutual
obligations between the Bank and PJSC “NJSC “Naftogaz of Ukraine” regarding sale of bonds
and repayment of the loan under reverse repurchase agreement (Note 14) were effectively settled
until 31 March 2010.
Subsequently to 31 December 2009 the Bank repaid deposits to the State Treasury in the amount
of UAH 5,726,375 thousand, according to terms of deposit agreements.
Subsequently to 31 December 2009 state-owned company PJSC “NJSC “Naftogaz of Ukraine”
repaid loans in the amount of UAH 2,107,085 thousand.
Subsequently to 31 December 2009 state-owned company PJSC “NJSC “Naftogaz of Ukraine”
restructured part of obtained loans:
No. of loan
agreement
244/31/2
274/31/2
280/31/2
218/31/2
220/31/2
Maturity
Interest
rate,
%
Maturity after
restructuring
Interest rate
after
restructuring,
%
30 March 2010
4 June 2010
21 June 2010
30 June 2010
29 December 2010
16.50
13.50
16.50
14.00
14.50
30 March 2011
31 March 2015
21 June 2011
31 March 2015
31 March 2015
16.50
13.50
16.50
13.00
13.75
Carrying
value,
31 December
2009
345,981
3,774,267
307,388
6,345,063
12,009,704
22,782,403
42
F-108
Subsequently to 31 December 2009 the Bank has purchased Ukrainian Government debt
securities in the amount of UAH 4,530,375 thousand and deposit certificates of the National
Bank of Ukraine in the amount of UAH 300,016 thousand.
Subsequently to 31 December 2009 the Bank prolonged outstanding loans received from the
National Bank of Ukraine in the total amount of UAH 14,368,959 thousand (Note 18) until year
2015. Also, the Bank received new loans from the NBU in the total amount of UAH 2,124,722
thousand and maturity in year 2012.
Subsequently to 31 December 2009 the Bank paid share of profit based on the financial results
of year 2009, to the general fund of State budget of Ukraine as in the accordance with the
requirements of art. 59 Law of Ukraine “On State Budget of Ukraine of 2010” in the amount
UAH 207,809 thousand.
26. TRANSACTIONS WITH RELATED PARTIES
Related parties or transactions with related parties, as defined by IAS 24 “Related Party
Disclosures”, represent:
(a)
Parties that directly, or indirectly through one or more intermediaries: control, or are
controlled by, or are under common control with, the Bank (this includes parents,
subsidiaries and fellow subsidiaries); have an interest in the Bank that gives then significant
influence over the Bank; and that have joint control over the Bank;
(b) Associates – enterprises on which the Bank has significant influence and which is neither
a subsidiary nor a joint venture of the investor;
(c) Joint ventures in which the Bank is a venturer;
(d) Members of key management personnel of the Bank or its parent;
(e) Close members of the family of any individuals referred to in (a) or (d);
(f) Parties that are entities controlled, jointly controlled or significantly influenced by, or for
which significant voting power in such entity resides with, directly or indirectly, any
individual referred to in (d) or (e); or
(g) Post-employment benefit plans for the benefit of employees of the Bank, or of any entity
that is a related party of the Bank.
Other related parties are represented by state-owned entities, where ownership of the State is
more than 50%, state-owned banks and state authorities.
In considering each possible related party relationship, attention is directed to the substance of
the relationship, and not merely the legal form. The Bank had the following transactions
outstanding as at 31 December 2009 and 2008 with related parties:
31 December 2009
Related party Total category
balances
as per financial
statements
caption
Balances with the NBU
Due from banks, net:
- other related parties
Loans to customers, gross:
- key management personnel
of the Bank
- other related parties
31 December 2008
Related party Total category
balances
as per financial
statements
caption
1,083,131
1,083,131
1,357,055
1,357,055
145,368
145,368
2,956,340
1,358,280
1,358,280
2,185,211
36,001,156
49,834,404
22,677,870
34,962,777
3,689
35,997,467
43
F-109
3,360
22,674,510
Allowance for impairment of
loans to customers:
- key management personnel of
the Bank
- other related parties
Investments available for sale,
net:
- other related parties
Due to banks:
- other related parties
Customer accounts:
- key management personnel
of the Bank
- other related parties
Contingent liabilities and credit
commitments:
- key management personnel
of the Bank
- other related parties
31 December 2009
Related party
Total category
balances
as per financial
statements
caption
(2,066,245)
(4,118,127)
(2,066,245)
31 December 2008
Related party
Total category
balances
as per financial
statements
caption
(367,964)
(1,071,259)
(863)
(367,101)
3,423,243
3,423,243
4,012,431
15,219,097
15,219,097
15,712,489
15,992,437
15,992,437
16,022,744
21,977,745
21,977,745
22,239,283
7,627,342
24,672,908
2,219,284
17,492,921
15,008
7,612,334
602,076
5,317
2,213,967
1,837,572
202
601,874
356,191
1,731,314
5,317
350,874
Included in the statement of comprehensive income for the years ended 31 December 2009 and
2008 are the following amounts which arose due to transactions with related parties:
Year ended
31 December 2009
Related party
Total category
transactions
as per financial
statements
caption
Interest income
- key management personnel
of the Bank
- other related parties
5,393,635
Interest expense
- key management personnel
of the Bank
- other related parties
(2,499,270)
437
5,393,198
178,253
178,253
Fee and commission expense
- other related parties
(126,469)
(126,469)
(50,308)
(25,288)
(25,020)
44
F-110
611,783
2,524,529
360
611,423
(3,641,294)
(1,337)
(2,497,933)
Fee and commission income
- other related parties
Operating expenses
- key management personnel
of the Bank
- other related parties
7,777,099
Year ended
31 December 2008
Related party Total category
transactions as per financial
statements
caption
(308,713)
(1,051,131)
(230)
(308,483)
1,021,387
119,388
119,388
855,801
(169,519)
(36,565)
(36,565)
(141,231)
(1,796,806)
(37,901)
(1,706,699)
(14,395)
(23,506)
31 December 2009
Related party
Total category
transactions
as per financial
information
caption
Key management personnel
compensation:
- short-term employee benefits
- social taxes
(25,288)
(23,852)
(1,436)
(1,292,528)
31 December 2008
Related party Total category
transactions as per financial
statements
caption
(14,395)
(12,942)
(1,453)
(1,242,616)
27. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair value disclosures of financial instruments are made in accordance with
the requirements of IFRS 7 “Financial Instruments: Disclosures” and IAS 39 “Financial
Instruments: Recognition and Measurement”. Fair value is defined as the amount at which
the instrument could be exchanged in a current transaction between knowledgeable willing
parties in an arm‟s length transaction, other than in forced or liquidation sale. The estimates
presented herein are not necessarily indicative of the amounts the Bank could realize in a market
exchange from the sale of its full holdings of a particular instrument.
The estimated fair values of financial instruments have been determined by the Bank using
available market information, where it exists, and appropriate valuation methodologies.
However, judgement is necessarily required to interpret market data to determine the estimated
fair value. Ukraine continues to display some characteristics of an emerging market and
economic conditions continue to limit the volume of activity in the financial markets. Market
quotations may be outdated or reflect distress sale transactions and therefore not represent fair
values of financial instruments. Management has used all available market information in
estimating the fair value of financial instruments.
Financial instruments carried at fair value – Investment securities available for sale and
derivatives are carried on the statement of financial position at their fair value that was estimated
using available market information or appropriate valuation technique.
Cash and cash equivalents – Cash and cash equivalents are carried at amortized cost which
approximates their current fair value.
Loans and receivables carried at amortized cost – The estimated fair value of fixed interest rate
instruments is based on estimated future cash flows expected to be received discounted at current
interest rates of new instruments with similar credit risk and remaining maturity. Discount rates
depend on currency, maturity of the instrument and credit risk of the counterparty.
Liabilities carried at amortized cost – The estimated fair value of fixed interest rate instruments
with stated maturity, for which quoted market price is not available, was estimated based on
expected future cash flows discounted at current interest rates for new instruments with similar
credit risk and remaining maturity. The fair value of liabilities repayable on demand or after
a notice period is estimated as the amount payable on demand discounted from the first date that
the amount could be required to be paid. Discounted rates used were consistent with the Bank‟s
credit risk and also depend on currency and maturity of the instrument.
45
F-111
The fair value of financial assets and liabilities compared with the corresponding carrying amount
in the statement of financial position of the Bank is presented below:
Financial assets:
Cash and balances with
the National Bank of
Ukraine
Due from banks
Loans to customers
Investments available for sale
Other financial assets
Derivative financial
instruments
Total financial assets
Financial liabilities:
Due to banks
Customer accounts
Debt securities issued
Other financial liabilities
Derivative financial
instruments
Subordinated debt
Total financial liabilities
31 December 2009
Carrying
Fair
value
value
31 December 2008
Carrying
Fair
value
Value
2,278,352
2,956,340
45,716,277
4,012,431
11,085
2,278,352
2,956,340
45,442,767
4,012,431
11,085
2,569,226
2,185,211
33,891,518
15,712,489
17,166
2,569,226
2,185,211
33,745,092
15,712,489
17,166
381
381
2,276
2,276
54,974,866
54,701,356
54,377,886
54,231,460
16,022,744
24,672,908
446,093
37,383
16,022,744
24,276,349
446,093
37,383
22,239,283
17,492,921
501,541
36,426
22,239,283
17,444,912
316,415
36,426
2,002
824,578
2,002
824,578
6,290
793,276
6,290
793,276
42,005,708
41,609,149
41,069,737
40,836,602
Financial instruments recognised at fair value are broken down for disclosure purposes into
a three level fair value hierarchy based on the observability of inputs as follows:
 Quoted prices in an active market (Level 1) – Valuations based on quoted prices in active
markets that the Bank has the ability to access for identical assets or liabilities. Valuation
adjustments and block discounts are not applied to these financial instruments. Since
valuations are based on quoted prices that are readily and regularly available in an active
market, valuations of these products does not entail a significant amount of judgment.
 Valuation techniques based on observable market data (Level 2) – Valuations based on inputs
for which all significant inputs are observable, either directly or indirectly and valuations
based on one or more observable quoted prices for orderly transactions in markets that are not
considered active.
 Valuation techniques incorporating information other than observable market data (Level 3) –
Valuations based on inputs that are unobservable and significant to the overall fair value
measurement.
46
F-112
The Bank‟s valuation approach and fair value hierarchy categorisation for certain significant
classes of financial instruments recognised at fair value is as follows:
Quoted prices in
an active market
(Level 1)
Valuation
techniques based
on observable
market data
(Level 2)
Valuation
techniques
incorporating
information
other than
observable
market data
(Level 3)
31 December 2009
Investments available for sale
1,769,985
1,694,077
548,369
31 December 2008
Investments available for sale
716,068
1,912,394
13,084,027
28. DERIVATIVE FINANCIAL INSTRUMENTS
Foreign exchange derivative financial instruments entered into by the Bank are generally traded
in an over-the-counter market with professional market counterparties on standardized
contractual terms and conditions. Derivatives have potentially favourable (assets) or
unfavourable (liabilities) conditions as a result of fluctuations in market interest rates, foreign
exchange rates or other variables relative to their terms. The aggregate fair values of derivative
financial assets and liabilities can fluctuate significantly from time to time.
The table below sets out fair values, at the reporting date, of currencies receivable or payable
under currency swap and spot agreements entered into by the Bank. The table reflects gross
positions before the netting of any counterparty positions (and payments) and covers
the contracts with settlement dates after the respective reporting date. The contracts are short
term in nature.
Notes
Currency swap and spot
agreements: fair values, at
the reporting date, of:
- USD receivable on settlement (+)
- USD payable on settlement (-)
- EUR receivable on settlement (+)
- EUR payable on settlement (-)
- UAH receivable on settlement (+)
- UAH payable on settlement (-)
- RUR receivable on settlement (+)
- RUR payable on settlement (-)
- CHF receivable on settlement (+)
- CHF payable on settlement (-)
Net fair value of currency swap
and spot agreements
31 December 2009
Contracts
Contracts
with
with
positive
negative
fair value
fair value
31 December 2008
Contracts
Contracts
with
with
positive
negative
fair value
fair value
(43,918)
(70,411)
141,112
(26,402)
-
(887,314)
(17,173)
902,485
-
88,176
(423,896)
(22,797)
676,518
(300,000)
(15,725)
87,058
(87,058)
14,284
(146,300)
(105,389)
231,115
-
381
(2,002)
2,276
(6,290)
27
As at 31 December 2009 and 2008 fair value of currency swap and spot agreements is included
in other assets (Note 17) and other liabilities (Note 21).
47
F-113
29. CAPITAL MANAGEMENT
The Bank manages its capital to ensure that the Bank will be able to continue as a going concern
while maximizing the return to stakeholders through the optimization of the debt and equity
balance.
The capital structure of the Bank consists of debt, which includes subordinated debt disclosed in
Note 22, and equity, comprising issued capital, reserves and retained earnings as disclosed in
statement of changes in equity.
The Management Board reviews the capital structure on a regular basis. As part of this review,
the Board considers the cost of capital and the risks associated with each class of capital. Based
on recommendations of the Management Board, the Bank balances its overall capital structure
through new share issues as well as the issue of new debt or the redemption of existing debt.
30. REGULATORY MATTERS
The adequacy of the Bank‟s capital is monitored using, among other measures, the ratios
established by the Basel Capital Accord 1988 and the ratios established by the NBU in
supervising the Bank.
During the year ended 31 December 2009, the Bank had complied in full with all its externally
imposed capital requirements.
Quantitative measures established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets.
The following table analyzes the Bank‟s regulatory capital resources for capital adequacy purposes
in accordance with the principles employed by the Basle Committee:
31 December
2009
31 December
2008
Share capital
Retained earnings
13,892,000
322,315
13,892,000
212,846
Total Tier 1 qualified capital
14,214,315
14,104,846
Property revaluation reserve
Investments available for sale fair value reserve
Subordinated debt
1,147,251
(18,626)
798,500
1,147,679
(131,796)
770,000
Total Tier 2 qualified capital up to a limit 100% of total
Tier 1 capital
1,927,125
1,785,883
16,141,440
15,890,729
Total regulatory capital expressed as a percentage of total riskweighted assets
32.26%
41.47%
Total Tier 1 capital expressed as a percentage of total riskweighted assets
28.41%
36.81%
Regulatory capital:
Tier 1 capital
Tier 2 capital
Total regulatory capital
Capital ratios:
Quantitative measures established by regulation to ensure capital adequacy require the Bank to
maintain minimum amounts and ratios of total (8%) and Tier 1 capital (4%) to risk-weighted assets.
48
F-114
As at 31 December 2009 the Bank included in the computation of Total capital for Capital
adequacy purposes the subordinated debt received, limited to 50% of Tier 1 capital. In the event
of bankruptcy or liquidation of the Bank, repayment of this debt is subordinate to the repayments
of the Bank‟s liabilities to all other creditors.
31. RISK MANAGEMENT POLICIES
Management of risk is fundamental to the Bank‟s business and is an essential element of
the Bank‟s operations. The main risks inherent to the Bank‟s operations are those related to
credit exposures, liquidity and market movements in interest rates and foreign exchange rates.
A description of the Bank‟s risk management policies in relation to those risks follows.
Risk management framework – The risk management policies aim to identify, analyze and
manage the risks faced by the Bank, to set appropriate risk limits and controls and to
continuously monitor risk levels and adherence to limits.
Risk management in the Bank is performed in accordance with the Risk Management Concept
(the RMC), which was approved by both the Management Board and the Supervisory Board in
2004. The RMC is an overarching approach across the Bank, including all of its organizational
departments, its headquarters, local and regional outlets and branches. It defines main risk
categories that the Bank faces, and specifies the major organizational and functional levels of
risk management.
The risk management functions are divided among the Supervisory Board, the Management
Board, the Assets and Liabilities Management Committee (the “ALMC”), the Credit Committee
of the Bank, the Regional Branch Assets and Liabilities Management Committee and Regional
Branch Credit Committees according to their functional responsibilities and approved limits.
The Risk Management Department is independent of other business lines and acts under
supervision of the Chairman of the Management Board.
The Bank manages the following risks:
Market risk – Market risk is the risk that changes in the market prices, such as interest rates,
equity prices, foreign exchange rates and credit spreads (not relating to changes in the
obligor‟s/issuer‟s credit standing) will affect income or the value of financial instruments.
The objective of market risk management is to manage and control market risk exposures within
acceptable parameters, while optimizing the return on risk.
The Bank separates its exposure to market risk between trading and non-trading portfolios.
Trading portfolios are mainly held by the Treasury Department.
Overall authority for market risk is vested in the ALMC. The Risk Management Department is
responsible for the development of detailed risk management policies (subject to review and
approval by the ALMC) and for monitoring of compliance with market risk limits and
restrictions.
Credit risk – Credit risk is the risk of a financial loss if a customer or counterparty fails to meet
its contractual obligations, and arises principally from loans and advances and investment
securities. For risk management reporting purposes, the Bank considers and consolidates all
elements of credit risk exposure (such as individual customer and counterparty default risk,
country and industry risk).
49
F-115
Management uses the same procedures and methodologies, as defined in the policy for approving
and procedures of consideration, approval and accompaniment of credit related commitments
(unused loan commitments, letter of credit and guarantees) as it does for on statement of
financial position credit obligations (loans). The maximum exposure to off balance sheet credit
risk is reflected in Note 24.
The Bank‟s exposure to any single counterparty (including other banks) is further restricted by
sub-limits covering on and off balance sheet exposures, which are set by the Credit Committee
and the Management Board.
Management monitors concentration of credit risk by industry/sector and by geographic location.
The Bank manages its credit risk by establishing limits in relation to single borrowers and groups
of borrowers, which are recommended by the relevant Credit Department and Risk Management
Department, and approved by the relevant Credit Committee or the Management Board. In case
the amount of loan exceeds the authority of the Management Board, the loan is approved by
the Supervisory Board. The Bank also mitigates its credit risk by obtaining collateral and using
other security arrangements.
The Bank decentralized the loan approval process and delegated credit risk responsibility from
the Head Office Credit Committee to regional branches, by increasing the credit limit approval
authorization of the Regional Credit Committees and providing regional offices with
the authority to undertake certain transactions without the approval of other more senior credit
committees.
In making its corporate lending decisions, the Bank evaluates potential borrowers on the basis
of their financial condition as reflected in their financial statements, their credit history with
the Bank and other financial institutions and the amount of risk involved in lending to
a particular borrower, using a rating scale.
In evaluating the risks associated with a particular borrower, the Bank takes into account
the borrower‟s business and factors such as the quality of its management, its main business
activities, its geographic location, suppliers, customers, other indebtedness, financial stability,
turnover, likely return on the loan, the liquidity of the proposed collateral and whether it is
sufficient in view of the credit risk. The Bank also considers risks associated with the industry
in which the borrower operates.
Consumer loans are subject to a standardized approval procedure. Loans are subject to
maximum limits depending on the applicant‟s income, stability of future earnings, liquidity and
quality of collateral. The Regional Credit Committee (or, if the branch limit is exceeded,
the Head Office Credit Committee) reviews a credit application and makes the relevant decision
as to whether to grant a loan.
Financial assets are graded as follows: amounts due from banks are graded according to
the current credit rating they have been issued by an internationally regarded agency.
The highest possible rating is AAA. Investment grade financial assets have ratings from AAA
to BBB. Financial assets which have ratings lower than BBB are classed as speculative grade.
As at 31 December 2009 and 2008 the balances with the NBU amounted to UAH 1,083,131
thousand and UAH 1,357,055 thousand, respectively. The credit rating of Ukraine according to
the international rating agencies in 2009 corresponded to speculative level B-.
Investments available for sale, in particular, OVDP of special issue, bonds issued by State
Mortgage Institution and the NBU deposit certificates, which were not rated, were included by
the Bank in the range from BBB to B- based on sovereign credit rating of Ukraine.
50
F-116
The following table details the credit ratings of financial assets held by the Bank:
AAA - A-
Due from banks
Loans to customers
Investments available for sale
2,117,927
AAA - A-
Due from banks
Loans to customers
Investments available for sale
492,431
-
BBB - B-
Below B-
Not
rated
62,628
27,299,842
3,547
723,497
15,960,991
269,736
BBB - B-
Below B-
Not
rated
1,021,430
15,072,755
54,164
18,636,806
-
617,186
15,254,712
639,734
52,288
2,455,444
3,739,148
31 December
2009
Total
2,956,340
45,716,277
4,012,431
31 December
2008
Total
2,185,211
33,891,518
15,712,489
The banking industry is generally exposed to credit risk through its financial assets and
contingent liabilities. Credit risk exposure of the Bank is concentrated within Ukraine.
The exposure is monitored on a regular basis to ensure that the credit limits and credit worthiness
guidelines established by the Bank‟s risk management policy are not breached.
Concentration risk – Concentration risk is determined by the Bank as the risk of losses due to
concentration of risk in specific instruments, operations and industries.
Joint Stock Company “State Savings Bank of Ukraine” is the largest state-owned bank of
Ukraine and specific character of its activities is related to significant scale of operations with
state-owned companies, including according to state programs, resulting in significant
concentration of credit and investment risks in relation to certain counterparties and groups of
related counterparties and industries.
As at 31 December 2009 67% of the assets and 56% of the liabilities were concentrated in
operations with state-owned companies, the NBU, state banks and state authorities. The Bank
obtains loans from the NBU to finance lending to the state-owned companies, which comprise
38% of the liabilities.
The Bank manages concentration risk in the loan and investment portfolios by setting limits for
certain counterparties and group of counterparties. Detailed description of this process is stated
above, in the section about the credit risk. The Bank also uses limits based on the NBU
requirements to manage the risk.
To manage the credit risk the NBU sets the following limits: – limit of maximum exposure to
credit risk per individual counterparty (N7), which is determined as ratio of amount of all claims
of the Bank to this counterparty and all off-balance sheet claims, issued by the Bank to this
counterparty (or group of counterparties) to regulatory capital of the Bank, the ratio should not
exceed 20%; and – limit of large credit risks (N8), which is determined as credit risk for the
counterparty (or group of counterparties) that comprises 10% or more of the regulatory capital of
the Bank.
The Management Board of the NBU set individual limit of maximum exposure to credit risk
(N7) for operations with PJSC “NJSC “Naftogaz of Ukraine” by individual regulation.
Concentration for this counterparty is disclosed in Note 14.
The Bank did not violate breach limits on management of credit risk set by the NBU as at
31 December 2009 and 2008.
An analysis of concentration of the assets and the liabilities by currencies, maturity and
geography is disclosed in respective sections of the risk management policy.
51
F-117
Liquidity risk – Liquidity risk refers to the availability of sufficient funds to meet deposit
withdrawals and other financial commitments associated with financial instruments as they
actually fall due.
In order to manage liquidity risk, the Bank performs constant monitoring of future expected cash
flows on clients‟ and banking operations, which is a part of assets/liabilities management
process.
On a monthly basis the Assets and Liability Committee analyzes funding sources taking into
account changes in interest rates for the previous month and makes respective decisions for
assets and liability management.
The analysis of interest rate change and liquidity risk based on carrying value of financial assets
and liabilities is presented in the following table:
Up to
1 month
1 month
to
3 months
3 months
to
1 year
1 year
to
5 years
Over
5 years
FINANCIAL ASSETS
Due from banks
Loans to customers
Investments available for sale
2,934,717
407,681
170,184
15,821,794
28,715
18,948,834
817,386
6,082,080
2,787,912
3,945,059
200,454
510,829
-
2,934,717
45,716,277
4,004,651
Total interest bearing assets
3,512,582
15,850,509
19,766,220
8,869,992
4,145,513
510,829
52,655,645
Cash and balances with
the National Bank of
Ukraine
Due from banks
Investments available for sale
Other financial assets
2,100,822
535
8,829
995
83
20,093
1,093
621
840
177,530
7,780
-
2,278,352
21,623
7,780
11,466
TOTAL FINANCIAL
ASSETS
5,622,768
15,851,587
19,787,406
8,870,613
4,146,353
696,139
54,974,866
FINANCIAL LIABILITIES
Due to banks
Customer accounts
Debt securities issued
Subordinated debt
86,953
11,849,952
33,610
6,467,202
7,927,866
8,093
-
8,791,757
1,556,815
-
672,212
2,708,611
438,000
-
60,202
790,968
-
16,018,124
24,103,446
446,093
824,578
Total interest bearing
liabilities
11,970,515
14,403,161
10,348,572
3,818,823
851,170
-
41,392,241
4,620
569,462
11,005
2,614
25,700
37
29
-
4,620
569,462
39,385
TOTAL FINANCIAL
LIABILITIES
12,555,602
14,405,775
10,374,272
3,818,860
851,199
-
42,005,708
Liquidity gap
(6,932,834)
1,445,812
9,413,134
5,051,753
3,295,154
696,139
Interest sensitivity gap
(8,457,933)
1,447,348
9,417,648
5,051,169
3,294,343
(8,457,933)
(7,010,585)
2,407,063
7,458,232
10,752,575
(15%)
(12%)
4%
13%
19%
Due to banks
Customer accounts
Other financial liabilities
Cumulative interest
sensitivity gap
Cumulative interest
sensitivity gap as
a percentage of total assets
52
F-118
Maturity
undefined
31 December
2009
Total
Up to
1 month
1 month
to
3 months
3 months
to
1 year
1 year
to
5 years
Over
5 years
Maturity
undefined
31 December
2008
Total
FINANCIAL ASSETS
Due from banks
Loans to customers
Investments available for sale
1,970,376
731,162
1,001,785
79,920
2,564,656
179,791
100,000
13,747,378
13,439,615
12,000,646
1,067,663
4,586,515
-
261,161
-
2,150,296
33,891,518
15,688,854
Total interest bearing assets
3,703,323
2,824,367
27,286,993
13,068,309
4,586,515
261,161
51,730,668
Cash and balances with
the National Bank of
Ukraine
Due from banks
Investments available for sale
Other financial assets
2,487,747
34,915
13,224
465
23,635
4,725
886
142
81,479
-
2,569,226
34,915
23,635
19,442
TOTAL FINANCIAL
ASSETS
6,239,209
2,824,832
27,315,353
13,069,195
4,586,657
342,640
54,377,886
FINANCIAL LIABILITIES
Due to banks
Customer accounts
Debt securities issued
Subordinated debt
259,838
10,807,614
31,570
336,710
6,946
-
21,977,740
1,819,312
300,000
-
4,068,222
194,595
-
62,871
761,706
-
22,237,578
17,094,729
501,541
793,276
Total interest bearing
liabilities
11,099,022
343,656
24,097,052
4,262,817
824,577
-
40,627,124
Due to banks
Customer accounts
Other financial liabilities
1,705
398,192
13,176
1,258
28,249
4
29
-
1,705
398,192
42,716
TOTAL FINANCIAL
LIABILITIES
11,512,095 -
344,914
24,125,301
4,262,821
824,606
-
41,069,737
Liquidity gap
(5,272,886)
2,479,918
3,190,052
8,806,374
3,762,051
342,640
Interest sensitivity gap
(7,395,699)
2,480,711
3,189,941
8,805,492
3,761,938
(7,395,699)
(4,914,988)
(1,725,047)
7,080,445
10,842,383
(13%)
(9%)
(3%)
13%
19%
Cumulative interest
sensitivity gap
Cumulative interest
sensitivity gap as
a percentage of total assets
53
F-119
The Bank‟s liquidity risk management includes estimation of core current accounts, i.e. funds
associated with stable customer relationships, with statistical methods applied to historic
information on fluctuations of customer accounts balances. As at 31 December 2009 and 2008
core current accounts amounted to UAH 8,389,464 thousand and UAH 8,165,480 thousand,
respectively. Based on going concern assumption effective maturity of core current accounts is
considered to be undefined. Information as to the expected periods of repayment of customer
accounts and effective liquidity gaps as at 31 December 2009 and 2008 is as follows:
Up to 1 month
1 month
to
3 months
3 months
to
1 year
1 year
to
5 years
Over
5 years
Maturity
undefined
31 December
2009
Total
TOTAL
FINANCIAL
ASSETS
5,622,768
15,851,587
19,787,406
8,870,613
4,146,353
696,139
54,974,866
TOTAL
FINANCIAL
LIABILITIES
12,555,602
14,405,775
10,374,272
3,818,860
851,199
-
42,005,708
Liquidity gap
(6,932,834)
1,445,812
9,413,134
5,051,753
3,295,154
696,139
Corrected for:
Current customer
accounts analyzed
based on expected
withdrawal dates
(8,389,464)
-
-
-
-
8,389,464
TOTAL FINANCIAL
LIABILITIES
based on expected
withdrawal dates for
current customer
accounts
4,166,138
14,405,775
10,374,272
3,818,860
851,199
8,389,464
Liquidity gap based
on expected
withdrawal dates
for current
customer accounts
1,456,630
1,445,812
9,413,134
5,051,753
3,295,154
54
F-120
(7,693,325)
Up to
1 month
1 month
to
3 months
3 months
to
1 year
1 year
to
5 years
Over
5 years
Maturity
undefined
31 December
2008
Total
TOTAL
FINANCIAL
ASSETS
6,239,209
2,824,832
27,315,353
13,069,195
4,586,657
342,640
54,377,886
TOTAL
FINANCIAL
LIABILITIES
11,512,095
344,914
24,125,301
4,262,821
824,606
-
41,069,737
Liquidity gap
(5,272,886)
2,479,918
3,190,052
8,806,374
3,762,051
342,640
Corrected for:
Current customer
accounts analyzed
based on expected
withdrawal dates
(8,165,480)
-
-
-
-
8,165,480
TOTAL
FINANCIAL
LIABILITIES
based on expected
withdrawal dates
for current
customer
3,346,615
344,914
24,125,301
4,262,821
824,606
8,165,480
Liquidity gap based
on expected
withdrawal dates
for current
customer accounts
2,892,594
2,479,918
3,190,052
8,806,374
3,762,051
(7,822,840)
A further analysis of the liquidity and interest rate risks is presented in the following tables in
accordance with IFRS 7. The amounts disclosed in these tables do not correspond to
the amounts recorded on the statement of financial position as the presentation below includes
a maturity analysis for financial liabilities that indicates the total remaining undiscounted
contractual payments (including future interest payments), which are not recognized in
the statement of financial position under the effective interest rate method.
55
F-121
Up to
1 month
1 month
to
3 months
3 months
to
1 year
1 year
to
5 years
Over
5 years
31 December
2009
Total
FINANCIAL
LIABILITIES
Due to banks
Customer accounts
Debt securities issued
Subordinated debt
93,088
12,449,395
3,866
33,610
992,780
8,096,406
7,358
-
14,997,663
1,772,663
34,296
35,933
870,749
4,563,813
485,113
362,519
111,381
907,695
16,954,280
26,993,658
530,633
1,339,757
Total interest bearing
financial liabilities
12,579,959
9,096,544
16,840,555
6,282,194
1,019,076
45,818,328
11,005
2,614
25,700
37
29
39,385
808
68,854
43,141
417
-
113,220
12,591,772
9,168,012
16,909,396
6,282,648
1,019,105
45,970,933
1,045,393
-
-
-
-
1,045,393
13,637,165
9,168,012
16,909,396
6,282,648
1,019,105
47,016,326
3 months
to
1 year
1 year
to
5 years
Over
5 years
Other financial
liabilities
Contingent liabilities
and irrevocable loan
commitments
Non-derivative
financial liabilities
Gross settled currency
swap and spot
agreements
TOTAL