Ukraine government again recapitalizes core state banks

Ukraine’s Cabinet ruled on March 6 to increase the share capital of state Oschadbank (OSCHAD) and Ukreximbank (EXIMUK) by UAH 5.40 bln and UAH 4.70 bln, respectively. The government will contribute to Oschadbank’s equity 15-year local bonds with a par value linked to USD and a coupon rate of 5%, and to Ukreximbank’s equity 15-year local currency bonds with a coupon rate of 9%.

This is the second capital increase for the two banks in 2017 after a total of UAH 6.5 bln was contributed in early February. With this Cabinet resolution, the total share capital increase of Oschadbank and Ukreximbank since the beginning of 2014 has amounted to UAH 26.5 bln and UAH 22.2 bln, respectively.

Alexander Paraschiy: Most likely, the latest capital increase was conducted to ensure that the banks’ capital adequacy ratio — based on the results of their diagnostics implemented by the central bank — is at least 5%, as the central bank and the IMF had demanded.

We don’t think this is the end of the two banks’ recapitalization story. On the one hand, this illustrates very poor quality of the two bank’s loan portfolios, which were already provisioned by 43%-44% as of end-2016, and most likely will be provisioned more. On the other hand, it’s an indicator of the government’s commitment to keep the banks safe at any cost.

In other words, this action supports our view that the banks’ Eurobonds are as safe as the sovereign paper, meaning that a 70-120 bps spread of OSCHAD and EXIMUK bonds to the sovereign curve is not justified. That said, we are keeping notes of both banks among our top picks in the Ukrainian fixed income universe.