VAB Bank ups corporate lending 1.9x in 2012, boosts capital 1.3x

VAB Bank (VABANK) reported a remarkable 46% yoy growth in total liabilities and equity in 2012, fueled by intensified activity to attract deposits (+48% yoy to UAH 8.0 bln). At the same time, the bank increased its lending activity to corporate clients 86% yoy (to UAH 6.2 bln net) while its retail loan balance fell 12% yoy in 2012.

The bank managed to keep its net interest income flat yoy in 2012 (at UAH 117 mln), as a 79% yoy growth in interest costs was offset by 66% growth in interest income. The bank’s commission business remained the key top-line driver with net commission income up 32% yoy to UAH 251 mln.

The bank did a good job in cost cutting, decreasing its operating costs 21% yoy and improving its cost /income ratio to 88% from 163% in 2011. The improvement, however, was not enough for the bank to break even: a 15% increase in loan loss provisioning led the bank to report a UAH 232 mln net loss for the year (2x smaller than in 2011). Meanwhile, its provisioning policy remained too optimistic – the bank’s LLR/gross loans decreased to 16% from 23% in 2011 last year.

The bank’s regulatory capital lagged its asset growth, with its end-year CAR having narrowed to 10.5% (much less than 12.8% a year before and 10.8% a quarter before, but better than 10.3% as of end-1Q12).

Also last week, VAB Bank shareholders approved a share capital increase of UAH 700 mln.

Alexander Paraschiy: Recall the bank is controlled by Avangard (AVGR LI) chief shareholder Oleg Bakhmatyuk. Our view is the bank’s function is mainly as a financing vehicle for the agricultural holding – that explains the enormous growth in corporate lending.

At the same time, we see Bakhmatyuk’s clear intention to keep the bank safe, as he has initiated two capital injections over the last 12 months. The recent capital increase will serve to improve the bank’s CAR to a safe level of 16%. Moreover, Bakhmatyuk is still considering tapping international capital for its Ukrlandfarming and therefore is not going to frustrate international investors.

Given that, we believe the bank’s 2014 Eurobond, yielding 40% — or a 6% spread to Agroton (AGT PW) – looks attractive now.