Bond Market Insight-FUIB: UAS 3Q11 consolidated financials: strong capital base and a loans-to-deposits ratio trends to 1x

First Ukrainian International Bank, the thirteenth largest bank according to NBU data as of 2Q11, announced completion on 16 July 2011 of its merger with Dongorbank (ranked 27th). After the lengthy process which began in 3Q10, FUIB published its first consolidated UAS quarterly financials, which we consider to be positive and will briefly analyse further.

Our analysis of the bank\'s results is based on the quarterly UAS financials, available on the bank\'s official website, from which we further highlight the following key points:

Total assets increased 50.1%QoQ to UAH29.3bn (9.3% consolidated growth). While growth and the merger with Dongorbank allowed FUIB to reach the ninth largest bank (as classified by the NBU) by total assets, further upside movement in ranking would be complicated due to such giants as Prominvestbank and VTB Bank (UAH35.7bn and UAH37.1bn of total assets, respectively, Association of Ukrainian Banks data as of end-August 2011), with their own ambitious plans.

Cash rose a significant 142.5% to UAH6bn (19.9% consolidated growth). FUIB\'s 3Q11 financials present a sizable 20.5% cash-to-assets ratio and a 23.3% liquid assets ratio, according to the wide definition (which includes cash and cash equivalents, net due from banks, and net investments available for sale less due to banks). Historical results showed even greater amounts of cash in the combined banks\' balances, as high as UAH8bn at the end of 2010. While such an amount could have been accumulated for the SCM Group, the bank still has enough cash on the balance sheet to increase its margin of safety, allowing it to more confidently weather the currently unstable financial environment.

3Q11 growth of 28.9% in the gross credit portfolio to UAH18.7bn. Under the consolidated financials, the increase during past quarter was about 1.4%, showing moderate but stable growth, from the start of its consolidation in 3Q10. Most of the 3Q11 credit growth was due to business loans, up 2.6%, while household loans fell 2.1% (with a decline in FX loans but an increase in local currency loans), according to consolidated numbers. Accumulated loan loss reserves stood at UAH4bn, or 21.6%, of the gross loans, a level we consider as rather conservative for FUIB.

Adequate capitalisation of 16.6% RCAR (R2 or regulatory capital adequacy ratio by the NBU). The process of the merger had no material impact on the bank\'s capitalisation, decreasing the regulatory capital adequacy ratio by only 0.1ppt. As of today, compared to its peers, FUIB\'s capitalization is quite sufficient (see Table 1).

Although FUIB\'s funding is sufficiently diversified, we detect a notable bias to client\'s deposits (see the chart below). With SCM as a key shareholder, we assume sufficient amounts of related parties\' accounts in the bank\'s deposit base, but as of today we cannot attribute this as uniquely negative in FUIB\'s case, due to the absence of any materially negative factors within the SCM Group. The loans-to-deposits ratio of a healthy 1.1x as of 3Q11, significantly better than its peers, definitely remains a positive factor.

Although FUIB\'s share of FX loans stood at 47.7% as of 3Q11, this figure is slightly lower than the 50.7% average of the first group of banks (as of 2Q11 NBU data) and was11ppt higher prior to consolidation. Considering the material amounts of loans to exporters, the bank\'s negative FX position at UAH1.5bn is also lower than the first grouppeer average, and we believe that FUIB\'s FX risks below that of its peers\'.

The bank\'s 3Q11 income statements rather positive at UAH160.8m YTD of net income. The net interest margin stood at a competitive 6.2%, and we expect this ratio to improve further. The 3Q11 cost-to-income ratio was 40.5%, showing efficient use of financial resources. According to its official website, the bank finished 3Q11 with ROA of 0.7% and ROE of 6.5%.