Ukrsotsbank Cost/Income surges to 64% in 2Q12

Ukrsotsbank (USCB UK) posted net income of just USD 0.2 mln in 2Q12, according to data released on Friday. The bank’s net interest income declined 10% yoy in 2Q12, mainly on contraction in net loans (-6% yoy) but the decrease was to a large extent compensated by growth in net fees and commissions (+33% yoy). Nevertheless, pre-impairment profit dropped 44% yoy on surging operating expenses (+62% yoy). In line with earlier practices, the bank allocated nearly all of its pre-impairment profit to loan loss reserve. Assets remained virtually unchanged, both in quarter-on-quarter and year-on-year terms.

Ukrsotsbank’s 2Q12 and 1H12 results, USD mln

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                                                    1H12   yoy  2Q12   qoq   yoy
—————————————————————-
Net interest income                        164   -9%    81   -1%  -10%
Net fees and commissions                37   25%    20   19%   33%
Operating expenses                        -110   34%   -67   55%   62%
Pre-impairment profit                       100  -29%    38  -38%  -44%
Impairment charge for credit losses  -97  -27%   -36  -40%  -43%
Net income                                      1  -14%   0.2  -42%  -50%
—————————————————————-
                                          1H12   qoq   yoy       
—————————————————————-
Assets                                5,004     -1%    0%       
 Gross corporate loans          2,363    -2%    0%       
 Gross retail loans                2,282     0%    -4%       
 Loan loss reserve                -1,073    3%    14%       
Liabilities                              4,199   -1%     0%       
 Corporate deposits                739      -7%    9%       
 Retail deposits                      1,378   -1%    6%       
Equity                                   805     -2%    -3%
—————————————————————-
Source: Company data

Olena Zuikova: The reported 62% yoy upsurge in operating expenses in 2Q12 was a negative surprise – it pushed the bank’s Cost/Income ratio to 64% from 38% in 2Q11. We aim to clarify what caused the sharp growth in costs, but anyway we doubt the bank will manage to normalize its Cost/Income back into the 35-40% range (which has been the norm for the bank for the last three years) any time soon. Another concern about the bank is low provisioning of bad loans – the bank’s loan loss reserve (LLR) reached 23% of gross loan book by end-1H12 while NPLs (loans past due by 90 days or more) are hovering at mid-30%. Overall, we do not expect the bank will return to a decent profitability level earlier than in 2015. We maintain our HOLD recommendation on the stock.