Ukraine
Auto and auto loan market overview
- Over the past five years, Ukraine has benefited from a growing economy, a stable local currency (hryvnia) relative to the US dollar, and rising household wealth (as measured by GDP per capita and employee compensation levels and growth). These favourable economic circumstances have resulted in strong growth in private consumption.
- Rising private consumption is as much a function of increasing Ukrainian wealth levels as it is of strong expansion in the availability of credit. Ukrainian bank lending to corporates and individuals showed a compound average growth rate (CAGR) of 51.2% (in US dollar terms) over the five years to December 31st 2005.
- The combination of rising household income and increased credit availability has led to a surge in consumption, with particularly strong demand growth for housing and autos. New car sales rose at least 25% in 2005. There is also evidence that the auto purchase preferences of individuals are slowly changing, with higher-quality foreign-brand autos gaining popularity relative to Ukrainian- and Russianmanufactured autos.
The Ukrainian auto market is growing, with demand for new, foreign-brand cars exceeding supply, which supports auto prices in the new and second-hand markets. Spending on autos is partly being driven by the availability of bank credit and the combined marketing efforts of auto dealers and suppliers of finance. Growth in Ukrainian auto lending appears robust, and quality of collateral underlying loans to be increasing.
1. Overview
This report discusses trends and participants in Ukraine’s retail lending and (specifically) auto loan markets, focusing on primary drivers of auto loan growth such as changes in the disposable incomes and consumption of individuals, enhanced bank credit availability, and positive developments in the Ukrainian auto market.
| Throughout this report, the terms "retail lending", "loans to individuals" and "household loans", are used interchangeably, as are "retail customers", "individuals" and "households". |
1.1 Credit growth — driven by retail demand
Ukraine is currently experiencing strong growth in credit extension by banks, particularly to individuals. Total private sector credit extension (excluding interbank loans) increased by 70.3% year-on-year (y/y) to December 31st 2005 (Figure 1), per the most recent aggregated statistics issued by the National Bank of Ukraine (NBU).
Figure 1: Growth in Ukrainian bank lending
Although corporate lending ($21.0m at December 31st 2005) continues to dominate banks’ credit portfolios, retail lending (in the form of mortgage, auto, consumer and other loans to individuals) has grown 132.5% y/y to $7.1m at December 31st 2005 — more than double the growth rate in loans to corporates over the same period. In addition to showing substantial absolute growth, retail lending has also increased as a proportion of the total loan portfolios of Ukrainian banks — from 6% at the end of 2000, to almost 25% at December 31st 2005.
1.2 Retail demand — supported by the economy and aspirations
In order to place the rapid growth in retail lending (and, specifically, auto loans) by banks in context, this report will focus on the drivers of auto loan growth, with specific reference to:
- Economic drivers of household wealth — including an overview of Ukraine’s economic development and the impact this has had on various macroeconomic indicators, including GDP growth, inflation, disposable income and consumption trends; and
- • Dynamics in Ukrainian auto markets — including auto supply, demand, sales growth, composition of the auto stock and sales, and distribution mechanisms.
We also discuss Ukrainian banks’ retail and auto lending, examining trends, developments and participants in the retail and auto lending markets, as well as the main risks affecting Ukrainian banks and the quality of their retail credit portfolios.
2. Economic development and its effect on household wealth
Ukraine’s economic indicators have shown significant improvement in the post-1998 period, which has seen currency stability (relative to the US dollar), and strongly rising household compensation. These factors, among others, have stimulated household consumption, particularly of imported goods.
Wealth trends and consumption patterns drive household spending, and the allocation of such spending between capital and consumable goods. In order to identify links between Ukraine’s economic fundamentals, the financial position of its populace, and their demand for goods such as housing and autos, we:
- Present an overview of Ukraine’s economic development in the post-Soviet era;
- Highlight key indicators of household wealth accumulation and spending; and
- Assess the main risks to household wealth levels and accumulation, should Ukraine’s economic
situation become less favourable.
2.1 Overview of Ukraine’s economic development
Ukraine’s economic performance since the collapse of the Soviet Union can best be described as mixed. The combination of the dislocation caused by the break-up of the Soviet Union and very poor economic policies led to sharp contractions in the economy (Figure 2) and a bout of hyperinflation, where annual consumer price inflation (CPI) exceeded 10,000% y/y at its worst.
Figure 2: Real GDP growth in the post-Soviet period
The Russian crisis in 1998 further weakened the Ukrainian economy and government finances, forcing the government to restructure external and local debts. The Russian crisis did, however, trigger a reassessment of domestic economic policies. The government engaged with the International Monetary Fund (IMF) and started to adopt more orthodox economic policies, which — with their focus on fiscal consolidation, bringing inflation down and liberalising the economy — helped to launch an economic recovery. The economy started to grow and incomes to recover. Real GDP growth rose as high as 12.1% in 2004.
Prior to the disputed presidential election and the "Orange Revolution", President Kuchma and his government (headed by Prime Minister Yanukovych) significantly relaxed fiscal policy by increasing public sector pensions and wages, which led to a resurgence of inflation (Figure 3).
The inconsistent economic policies followed by the post-"Orange Revolution" government and the dispute with Russia over gas pricing has undermined economic performance, with real GDP growth falling to an estimated 2.6% y/y in 2005.
Figure 3: Consumer price inflation
Since the hyperinflationary period of the early 1990s and the subsequent collapse and abolition of the Ukrainian currency, the karbovanets, there has been a desire in Ukraine for a stable local currency. Despite strong and growing trade and investment links with Europe, the main focus of the exchange rate policy has been stability against the US dollar.
Currently, the NBU manages the hryvnia (UAH) in a tight band against the US dollar. Over the past year, the hryvnia has been allowed to fluctuate between UAH/USD5.0 – UAH/USD5.06. The management of the hryvnia against the US dollar has resulted in quite significant volatility against the euro (Figure 4).
Figure 4: UAH exchange rates vs. USD and EUR
The de facto peg against the US dollar has meant that per capita incomes as measured in US dollars have started to rise quite sharply in recent years, with nominal GDP per capita rising from around $700 in 2000 to an estimated $1,740 at the end of 2005 (Figure 5).
One of the legacies of the hyperinflation and the sharp depreciation of the then currency, the karbovanets, which was replaced by the hryvnia in 1996, is that there is still substantial disparity between Ukraine’s GDP per capita on a cash basis and on a purchasing power parity (PPP) basis (Figure 5). This level of disparity suggests that Ukraine could experience quite rapid nominal GDP growth and real appreciation of the hryvnia for a significant period of time before domestic prices equalise with those internationally.
Figure 5: GDP per capita (on current and PPP basis)
2.2 Household wealth — recent economic indicators
The improved economic performance of Ukraine since the Russian crisis has led to sharp increases in household income and expenditure. Between Q3:02 and Q3:05, the aggregate levels of workers’ wages (as calculated using the income approach to GDP measurement) more than doubled (Figure 6).
Figure 6: Trends in compensation of employees
This strong growth in income is also reflected in real consumption growth (Figure 7), which has increased sharply in recent years. The rapid growth in consumption is a function of both strong income growth (Figure 6) and a significant pick-up in household credit growth (Figure 1).
An environment of rising incomes, consumption growth and currency stability has seen imports rise quite sharply, with import growth broadly running between 20% – 40% y/y since Q1:03 (Figure 8).
Figure 7: Real growth in private consumption
Figure 8: Growth in imports into Ukraine
Since the end of 2002, a generally improving economic environment, rising household incomes, currency stability and the increasing availability of bank credit, have driven private consumption of both locally produced and imported goods. This environment has been supportive of strong growth in Ukraine’s auto markets (refer to Section 3).
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Key risks to Ukrainian household wealth
Gas prices. Russia raising gas prices are already forcing the Ukrainian government to raise prices for households and industry. Higher gas prices hurt disposable income (and corporate revenue — which could have a negative impact on employment). Gas price rises and their negative effects on consumption and confidence are already being observed.
However, it should be noted that gas prices are estimated at around 1% – 2% of household expenditure, and total utility payments are less than 12% of household expenditure for the most disadvantaged groups, such as pensioners.
Policy inconsistency. The policy stance of the recently appointed coalition government is unclear. Questions remain as to whether this government will have a clear and sensible economic policy or whether populist fiscal expansion will be the order of the day.
Key risks to Ukrainian household wealth (continued)
Un-hedged currency mismatches. Lack of stability and clarity regarding the political and economic ways forward may ultimately be reflected in the exchange rate. Any depreciation in the hryvnia will hurt households, corporates and banks which have borrowed in foreign currency, and are un-hedged.
- If household (or corporate) balance sheets have high levels of foreign currency borrowings, and savings and/or earnings in local currency, a hryvnia depreciation could lead to defaults on foreign currency loans.
− Ukrainian household balance sheets appear to be relatively well hedged. Some 57% of bank loans to households are in foreign currency, and over 40% of household savings held in banks are also foreign currency-denominated. However, in monetary terms, household deposits are more than double household borrowings, so households are hedged from a system perspective. It is likely that a proportion of Ukrainian household savings are held in foreign currency, and outside the banking system.
− It is estimated that around 12% of Ukrainians earn foreign currency by working abroad, and approximately 40% – 50% of wages paid in Ukraine are paid outside the tax net, in foreign currency, in cash.
- If bank balance sheets have foreign currency liabilities in excess of foreign currency assets, a hryvnia devaluation could result in banks being unable to service or repay their foreign currency borrowings. On a system-wide basis, Ukrainian banks have around 35% of their deposits and close to 60% of total loans in foreign currency. Although there is some currency mismatch, in the event of hryvnia depreciation, foreign currency asset balances would easily cover foreign currency liabilities, unless a catastrophic level of loan defaults occurred simultaneously.
Based on the above, it appears that, in aggregate, Ukrainian households and banks are more vulnerable to a strong real appreciation of the hryvnia than a depreciation. Section 4.1.1 provides additional commentary on the risks inherent in high levels of foreign currency lending to households. |
3. Key considerations in Ukrainian auto markets
Auto sales in Ukraine have accelerated swiftly in the recent past. We consider trends in Ukrainian auto sale volumes and prices; the size, composition and ownership of Ukraine’s auto stock; and other factors which influence auto loan growth and the quality of collateral underlying auto loan portfolios.
In this section, we discuss:
- Supply, demand and growth specifics in the Ukrainian auto markets;
- The profile of the auto stock and sales, by region of origin of the auto, auto class and make (brand);
- Main mechanisms for auto sales and distribution; and
- The consumer profile of Ukrainian auto sales.
| Throughout this report, the terms "auto" and "autos" refer to cars and other vehicle types purchased primarily for private passenger use (i.e. excluding buses, trucks and other commercial or industrial vehicles). Auto "stock" refers to total autos registered (and therefore considered to be in use) in Ukraine. Auto "market" refers to total sales of autos during a period of time. |
3.1 Supply, demand and growth in the Ukrainian auto market
3.1.1 Historical developments in Ukraine’s auto market
During the first six to seven years following Ukraine’s independence, its auto market grew slowly. The 1998 Russian crisis negatively affected the Ukrainian economy (refer to Section 2), delaying development in auto markets (especially the importation of cars or components, the cost of which increased following the substantial depreciation of the hryvnia).
Consequently, the Ukrainian auto stock continued to age post-1998, and many Soviet-era autos are still in use. In early 2006, out of a stock of approximately 6m passenger cars, 3.5m were produced in the Soviet Union and had an average age of 18 years. The average age of all passenger cars in Ukraine is estimated at 13 years.
3.1.2 Trends in new auto sales and stock
Information on the size of the Ukrainian auto market is scarce and inconsistent. The official data provided by GAI (State Auto Inspection) of Ukraine differs significantly from that provided by the largest auto consulting and research agency, AutoConsulting (Figure 9).
Figure 9: Trends in Ukrainian new auto sales
Figure 10: Trends in Ukrainian new auto sales
A representative of AutoConsulting explained the discrepancy between the data sets as being attributable to different approaches to the registration of new auto sales:
- GAI registers only autos sold for the first time in the same year that they were produced as "new" (explaining the low number of new autos sold in January each year as mostly the previous year’s autos are available for sale in January); and
- AutoConsulting considers any autos sold for the first time within two years of manufacture as "new".
Despite the differences between the two available data sets, the trends in new auto sales evident from both GAI- and AutoConsulting-sourced databases is similar.
- According to GAI information, the new auto sales growth rate in 2005 was 26%, with a 47% Q1:06 y/y growth (Figure 10).
- According to AutoConsulting data, Ukrainian car sales have demonstrated a CAGR of 30% in terms of number of cars sold since 2001 (Figure 9). Growth in new auto sales slowed somewhat to 25% y/y in 2005, and to 23% y/y in Q1:06. Despite moderating growth, sales reached historical highs of approximately 100,000 autos in Q1:06.
According to Valery Tretyakov, Ukraine’s Deputy Industrial Policy Minister, Ukraine’s new car sales are likely to increase by approximately 30% in 2006 to almost 350,000 vehicles. He also indicated that the expected increase in sales would probably be fuelled by growing demand on the back of economic expansion, and would be led by domestically produced and assembled cars, as well as accelerated competition from Chinese manufacturers.
3.1.3 New auto price dynamics
The average price of new autos in Ukraine is increasing. Besides organic reasons (introduction of new models), there are several regulatory reasons for the price increases. In 2005, the average price of Ukrainianproduced and assembled autos increased by 10% (Chevrolet, Opel, Mercedes-Benz, Chrysler, Jeep) and 20% (Tavria, Slavuta, Sens) due to the abolition of tax benefits for Ukrainian auto factories. In addition, import duties for imported autos were increased from 15% to 20%, leading to corresponding growth in imported auto prices.
From July 1st 2006, new legislation will come into force that will ban the registration of new autos which do not comply with Euro-2 ecological standards. This means that Ukrainian producers have to equip newly produced autos with injector engines instead of carburettor ones. Consequently, some makes of Russian cars will no longer be sold in Ukraine (or will also be equipped with injector engines as Russia adopts Euro-2 standards). This will make many autos in the cheaper segment about 10% – 15% more expensive.
3.1.4 Dynamics in second-hand auto markets
The second-hand auto market in Ukraine is not very transparent, and it appears that up to 90% of transactions in used autos are concluded privately or in "auto markets" where there is often no official record of the transaction or its pricing. Leading dealers are beginning to allow "trade-ins", which should slowly increase the transparency of the second-hand auto markets.
The information provided by GAI demonstrates that the volume of second-hand auto sales is gradually decreasing as Ukraine replaces its aging fleet (Figure 11).
Figure 11: Trends in Ukrainian used auto sales
Despite that lack of official data on pricing for second-hand cars, the supply deficit in the imported and more expensive brands implies that pricing for these models in the second-hand market will probably follow that of the new auto market (i.e. be increasing). There are restrictions on importing second-hand cars from Europe which are more than eight years old and do not comply with Euro-2 standards, which assists in keeping supply low and prices higher. Pricing in the second-hand market is, to some extent, determined by manufacturer or model reputation (for example, German cars appear to hold their value better than autos produced in other countries).
3.1.5 Ukrainian auto sale volumes relative to European markets
In 2005 Ukraine was the 12th largest auto market in Europe (Figure 12), and rose to 9th position in Q1:06 due to saturation in the European markets.
Figure 12 demonstrates the volume of Ukraine’s annual sales of new autos relative to such auto sales in other European countries. Ukraine still has one of the fastest growing auto markets in Europe. However, despite having a large population (47m) relative to many Western European countries, Ukraine still lags behind in terms of auto sales. In addition, the number of autos per 1,000 (people) in Ukraine is 130 (at the beginning of 2006), compared to 167 in Russia, 323 in Eastern Europe, more than 500 on average in Western Europe and 745 in the USA. These figures illustrate the potential for continued rapid development of theUkrainian auto market.
Figure 12: European new auto sales: market size and growth
3.2 Profile of auto stock and sales
3.2.1 Composition of autos — by region of auto origination
Figure 13: Regional composition of Ukrainian auto origination
At December 31st 2004 (latest available information), the composition of the Ukrainian new auto sales market (by sales volume) by region of auto origination was dominated by imports (Figure 13).
| For the purpose of this report, "imports" include autos assembled in Ukraine from imported components, and consequently "Ukrainian autos" exclude those assembled in Ukraine from imported components. |
It also appears that the proportion of Ukrainian-manufactured autos relative to annual sales is gradually declining. A report published by International Business Strategies in 2005 indicated that in 2004, Ukrainian autos occupied 10% (in monetary terms) of the approximately $2.5bn new auto sales market. Per AutoConsulting, in Q1:06 the market share of Ukrainian cars decreased to approximately 10% and 5% in volume and monetary value terms respectively. The major reasons for this are:
- Overall growth in disposable incomes (demand for and affordability of more expensive autos);
- Development of the auto loan market (increasing range of autos available); and
- Rapid expansion of supply by foreign producers, including imports of complete automobiles and components to be assembled in existing and new Ukrainian plants.
3.2.2 Composition of autos — by class
According to the European classification of passenger cars (Table 1), 51% of vehicles sold in Ukraine in 2004 were C-class, 21% were B-class, and D-class autos accounted for 8% of total sales (Figure 14). In terms of car body, sedans occupied 55% of the market, hatchbacks – 35% and universals – 5%.
In an environment of rising household incomes and auto loan availability, purchasers of autos are starting to favour more expensive autos over cheaper ones, so we expect Class A and B autos to slowly lose ground to Class C and D autos.
Table 1: European classification of cars
| Class |
A |
B |
C |
D |
E |
| Length (m) |
Up to 3.6 |
3.6 – 3.9 |
3.9 – 4.4 |
4.4 – 4.7 |
>4.7 |
| Width (m) |
Up to 1.6 |
1.5 – 1.7 |
1.6 – 1.75 |
1.7 – 1.8 |
> 1.7 |
| Examples of autos in class |
Smart, Daewoo Matiz, Peugeot 106 |
ZAZ, Skoda Felicia, Hyundai Getz |
VAZ, Ford Focus, Daewoo Nexia |
VW Passat, Opel Vectra, Skoda Octavia |
Toyota Camry, Mercedes E-Class, Mitsubishi Galant |
|
Sources: International Business Strategies, Standard Bank Group |
Figure 14: Breakdown of vehicles sold by class
3.2.3 Composition of autos — by car make/brand:
Russian VAZ, Ukrainian ZAZ and relatively cheap Daewoo (GM-DAT, assembled at ZAZ) were the most popular auto makes in Ukraine in 2005 (Figure 15). This is largely due to the price difference between budget and more expensive types of autos. In May 2006, the average price of ZAZ cars increased by 10% to approximately $4,400 due to the company’s transition to Euro-2 engines. Nevertheless, this brand is still much less expensive than that of the major competitors: VAZ ($8,000 – $10,000) and Daewoo ($9,000 – $10,000). Autos of the next price segment — Skoda (starting from $14,000), Mitsubishi (starting from $17,000) and Toyota (starting from $23,000) are far behind in terms of market volume. Inexpensive Chinese cars are growing rapidly in popularity, but still have a small market share in the Ukrainian market.
Figure 15: Auto sales by brand
3.3 Auto sales and distribution
The Ukrainian auto market is controlled by a small number of distributors (Figure 16), with the 10 largest accounting for 96% of the total number of autos sold.
Figure 16: Major distributors in the Ukrainian market (2005)
Ukravto, with a 45.2% share of Ukrainian auto sales in 2005 and a 52.5% share of passenger vehicles sales, is the largest producer and importer of autos in Ukraine. It controls Zaporizhya Automobile Plant (ZAZ) — the only producer of Ukrainian passenger autos (Tavria, Slavuta) — and also assembles Daewoo (Nubira, Lanos, Legansa), Chevrolet (Lacetti, Tacuma, Aveo), Opel Astra and VAZ autos. In addition, Ukravto owns an assembly plant in Ilyichevsk (assembling Daewoo Sens, Mercedes-Benz), represents DaimlerChrysler, and imports and sells a number of European, Asian and American brands.
AIS owns Kremenchug Auto-Assembly Plant (which assembles Russian cars, FAW trucks and Ssang Yong Rexton SUVs). AIS is also the main distributor of most of the Russian vehicle makes in Ukraine — GAZ and PAZ buses, SUVs produced by UAZ, VAZ passenger cars and ZIL trucks.
Bogdan controls Lutsky Automobile Plant (LuAZ), which assembles Hyundai, Kia and VAZ passenger cars, as well as producing large, medium and small buses.
Atoll Holding Eurocar assembles Skoda, VW and Audi and is an exclusive importer of Skoda.
Several international producers have opened branches in Ukraine, which mainly focus on marketing, distribution, sales and servicing of their own auto brands. Among the largest are Toyota, Nissan, Kia, BMW and Renault.
3.4 Consumer profile of Ukrainian auto sales
It is estimated that at least 90% of autos are purchased by individuals for personal use. Under-development in the leasing markets and lack of popularity of allocating "company cars" as employment benefits (among other things) have led to low levels of auto sales to corporates.
3.4.1 Geographic distribution of auto sales
The geographic distribution of auto sales in Ukraine is more or less in line with the population distribution in the respective regions. Thus, in 2005, 23% of new autos were registered in the Western regions, where close to 20% of Ukraine’s population lives. At the same time, in line with the tendency of many emerging markets, the capital, Kiev, where approximately 9% of the population lives, demonstrated a relatively large portion of sales (22% for new autos) (Figure 17). The proportion of used auto sales is lower in Kiev, as higher incomes and availability of auto loans allow people to purchase more expensive new autos (Figure 18).
Figure 17: Geographic distribution of sales —new autos
Figure 18: Geographic distribution of sales —used autos
| The Ukrainian auto market has been growing rapidly since 2001, driven by an improving economic environment, rising disposable incomes and the development of the auto loans market. Recently, consumers have increasingly favoured purchasing more expensive imported autos, despite their growing average prices. Ukraine’s auto stock is still very old, which leaves room for development in the market. |
4. Ukrainian retail and auto lending — key considerations
| Strong growth in retail lending has been a key trend in Ukrainian banking over the past five years. This section sets out trends in retail lending, with a specific focus on auto financing, including the financing options available for auto purchases, their features, and the main players in these markets. |
4.1 Bank retail lending — trends and features
Historically, low levels of financial intermediation, an expanding range of products and services available to retail customers, and increasing demand by individuals for housing, autos and white goods have led to swift growth in bank lending to retail customers.
Growth in the volume of loans issued by Ukrainian banks to retail customers has been in excess of 50% y/y since early 2002, albeit off a low base. After decelerating from almost 200% in late 2003 to around 60% at the end of 2004, possibly as a result of uncertainty regarding the outcome of the 2004 elections, retail lending growth accelerated strongly during 2005, reaching 132.5% y/y to December 31st 2005.
In this section, we discuss a number of relevant trends in and features of Ukrainian retail lending, including:
- The currency structure of retail loans;
- The term structure of retail loans;
- The main players in retail lending in Ukraine, showing market shares; and
- The composition of retail lending.
4.1.1 Currency structure of retail loans
During the last five years, the issuance of foreign currency (FX) -denominated loans has increased significantlyfaster than loans denominated in local currency (hryvnia). Foreign currency loans are mainly denominated in US dollars, but also in euros and Russian roubles. At December 31st 2005, foreign currency loans as a percentage of total retail loans were 57.1%, relative to 16% five years previously (Figure 19).
Figure 19: UAH vs. foreign currency retail loan volumes
Probable reasons for borrowers’ preferences for foreign currency loans include:
- Lower interest rates on foreign currency loans than on hryvnia loans (5% lower on average);
- Real appreciation of the hryvnia, combined with expectations of future UAH/USD rate stability;
- A high proportion of foreign currency earnings in the Ukrainian economy (estimates indicate that at least 6m Ukrainians work abroad, and some 40% – 50% of Ukrainian wages are paid in the "shadow" economy), usually in US dollars, cash;
- A legacy of distrust of the hyrvnia, leading to household savings being held in foreign currency; and
- Customers’ perceptions that the currency of borrowing should match the currency in which the asset being financed is valued or priced.
The proportion of short-term foreign currency loans (relative to total short-term loans) has remained relatively constant since 2001, while there has been increasing issuance of long-term loans in foreign currency (Figure 20). Long-term loans tend to be issued to finance purchases of (mainly) housing and autos, both assets which tend to have their prices pegged in US dollars or euros, seldom in hryvnia. However, Figures 19 and 20 illustrate that the proportion of long-term and short-term retail loans issued in foreign currency has remained stable since late 2003.
Figure 20: Trend in proportion of foreign currency to total loans, by term
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Risks to Ukrainian banks associated with foreign currency-denominated retail lending:
- Greater dependence on foreign sources of funding to maintain currency matched assets and liabilities on bank balance sheets; and
- Potential for future increases in credit risk if the hryvnia, in which many individuals earn wages, suffers a significant depreciation on the back of a less favourable economic situation in Ukraine.
Risks may be partly mitigated, as follows:
- The Ukrainian banking system has a lower proportion of foreign currency liabilities than foreign currency assets (proxied by data on deposits and loans), indicating that a hryvnia depreciation would lead to a larger expansion in assets than liabilities (if measured in local currency);
- The gradual opening of the Ukrainian economy has led to an increase in the number of Ukrainians working abroad and repatriating their foreign currency earnings. The continued popularity of unofficial wage payment methods (in foreign currency, cash) points to high foreign currency earning levels; and
- Assets (such as residential property and most autos) accepted as collateral for loans are often valued/ priced in foreign currency. As such, recoveries after repossession and the sale of such assets may not be as negatively impacted as hryvnia-valued assets in the case of a hryvnia depreciation.
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4.1.2 Term structure of retail loans
The proportion of long-term to short-term retail loans has increased substantially from a five-year low of 33% at December 31st 2001, to almost 80% at December 31st 2005, and longer-term loan volumes continue to grow faster than short-term loan volumes (Figure 21).
Rapid expansion of lending terms is not uncommon in developing banking systems; in the case of Ukraine, extension of term is partly a function of market development, and of banks enhancing their product range over time to include instalment-type auto and mortgage financing, for example.
As banks develop and are able to fund themselves with longer-term money, improve their credit assessment and operational capabilities, and understand the credit risk and loss dynamics they face, lending funds for longer terms becomes more feasible.
Figure 21: Trend in term of retail lending by banks
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Risks to Ukrainian banks associated with longer-term retail lending:
- Limited ability to match the term of loans (particularly mortgages, which can have terms of 20 years) with similarly long-term funding, thus increasing exposure to liquidity and interest rate risk; and
- A lack of historical data on the impact on borrower behaviour, credit loss rates, and valuation of collateral in unfavourable economic conditions.
Risks may be partly mitigated, as follows:
- Regarding term mismatch risks, there is evidence that individuals in Ukraine are not familiar or particularly comfortable with being indebted, and tend to pre-pay their obligations as soon as they are able, meaning that loans tend to be of a shorter term than their contractual maturities imply; and
- Although little can compensate for a lack of data due to market immaturity, recent experience in the Ukrainian and Russian retail lending markets has shown that default and loss rates tend to be much higher on shorter-term general-purpose loans (so-called "consumer loans") than on debt taken out to purchase needed and valued items such as autos and housing.
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4.1.3 Retail lending — market shares of the key players
Although Ukraine’s banking system is highly fragmented (there were 136 registered banks at March 31st 2006, per data provided by the Association of Ukrainian Banks (AUB)), retail lending is dominated by a few large players. At March 31st 2006, the 10 largest players in the retail lending space were responsible for 73.6% of retail loans (by value), and 58.9% of retail loan balances were attributable to only five banks (Figure 22).
In contrast to Russia, Ukraine’s banking landscape is not dominated by one or more large state-owned banks, and privately-owned banks compete actively with state-owned banks in an open market. State-owned banks do not appear to be highly active in retail lending. The two largest state-owned banks in Ukraine — Ukreximbank and Oschadbank — together account for less than 4.4% of total market share in retail lending, but have attracted around 11.4% of retail deposits, per data at March 31st 2006, provided by the AUB.
Figure 22: Key players in the Ukrainian retail lending market (at 31-Mar-06)
4.1.4 Types of retail lending
There are no NBU or AUB statistics available which separate retail bank lending by loan type, which makes quantifying the loan type composition of Ukraine’s retail lending market difficult. In order to estimate the composition of Ukrainian bank retail lending (Figure 23), we have used a combination of NBU statistics on loan terms, available surveys, and information sourced from Ukrainian banks’ websites, financial statements and other sources.
Based on information provided on the websites of Ukraine’s top five retail lenders (Table 2), the main lending products available to retail clients are mortgage loans, auto loans, consumer loans (which appear to include credit cards, short-term finance for electronic and white goods, and general-purpose personal loans of varying terms), and student loans.
Figure 23: Estimated structure of Ukrainian retail bank lending (31-Dec-05)
At December 31st 2005, total retail lending per NBU data totalled $7.1bn. A survey conducted by the Ukrainian National Mortgage Association (UNIA), published in H1:06, estimated that mortgage lending was around $2.1bn at the end of 2005. NBU data showed that "short-term" loans of less than one year (which are most likely to be instalment loans for the purchase of consumer goods) totalled $1.4bn at December 31st 2005. Of the remaining balance of retail loans, auto loans are conservatively estimated at $1.0bn (14% of retail lending) and the remainder is probably consumer loans, credit cards and other personal loans with a term of greater than one year.
4.2 Auto loan markets — trends and features
The relevant trends in and features of Ukrainian auto lending discussed below, include:
- The methods of financing auto purchases and the proportion of auto purchases financed by banks;
- Methods of distribution of auto loans;
- Estimated growth in Ukrainian auto loan volumes;
- Main players in the Ukrainian auto loan markets; and
- Key features of Ukrainian auto loans.
4.2.1 Methods of financing auto purchases
Currently, auto purchases are primarily financed using bank loans, and individuals’ own cash resources. The leasing market remains underdeveloped, but is starting to compete with banks in the auto financing arena.
During 2005, almost 50% of new auto purchases were financed using bank loans, and Figure 24 illustrates that the proportion of auto purchases which are financed has increased substantially since January 2004.
A survey conducted by the International Finance Corporation (IFC) in H1:06 indicated that the total size of the combined operating and finance lease market in Ukraine at December 31st 2005 was $339m, with around $98m dedicated to leasing of autos. The survey further indicated that leasing companies (around 30% of which are bank-related) funded almost 85% of their leasing operations with bank credit, and that most leases had a maximum term of two to three years.
Only 19% of leasing companies were captive (i.e. manufacturer/producer owned). Although in its infancy, the leasing market is growing fast (63% in 2005) — evidence that new competitors are starting to enter the bankdominated auto finance market. For example, in April 2006, Renault Ukraine launched its captive finance company, ProstoFinance, which advertises finance for Renault auto purchases at attractive terms. |
Figure 24: Trend in proportion of auto sales financed by bank lending
Given the predominance of banks in auto lending, we will focus the remaining commentary on auto lending provided by Ukrainian banks.
Bank financing for auto purchases is dominated by fixed-rate instalment agreements. Typical features of Ukrainian auto loans are described in Section 4.2.5.
4.2.2 Auto purchase distribution methods
Ukrainian banks currently use two main distribution methods for auto loans. Loans are either issued through banks’ branch networks, which tend to be extensive, or by banks’ credit officers who are located on dealers’ floors. In certain cases, banks may provide a power of attorney to the dealer’s manager to complete the loan application and gather documentation.
Most large Ukrainian auto dealers have partnerships with one or more banks offering auto loans, and development of such strategic partnerships with banks is likely to be a priority for most dealers, as easy availability of finance enhances auto sales volumes.
4.2.3 Growth in Ukrainian bank auto loans
In terms of growth rates, total retail lending grew 132.5% y/y to December 31st 2005. Based on the UNIA mortgage data, growth in mortgages was close to 250% over this period, which implies that growth in other loan types was somewhat lower. Auto sales grew by at least 25% in 2005 (refer to Section 3.1.2) and the proportion of autos financed by auto loans increased from an average of 34% in 2004 to 49% in 2005 and exceeded 60% for Q1:06. Consequently, assuming that the average value of autos purchased and financed has remained constant during the last two years, auto loan growth during 2005 can be roughly estimated at 80%.
4.2.4 Key players in the Ukrainian auto loan market
Although official data is unavailable, commentary from various sources indicates that PrivatBank, Raiffeisen Bank Ukraine and Bank Aval, UkrSibbank and Ukrsotsbank are leaders in auto lending market share.
4.2.5 Features of auto loans
Key features of auto loans provided by the five largest players in Ukraine’s retail lending markets are illustrated in Table 2. Based on information from these banks, auto lending exhibited the following features:
- Loan size — ranges from $1,000 – $100,000, depending on the financing bank.
- Down-payments/deposits — range from 10% – 35%, depending on the type of auto being financed, and (in some cases) loan term. 0% down-payment loans are available on "special offers" which are usually a joint bank-dealer marketing initiative. Although "special offers" increase the average initial loan-to-value (LTV) ratio of a portfolio, high prepayment rates mean that loans seasoned more than six months usually have acceptable LTVs (on average, usually lower than 80%).
- Interest rates — are usually fixed, and range from 10.5% – 13% for US dollar loans, 9.4% – 12% for euro loans, and 14.5% – 18% for loans issued in hryvnia. Consequently, foreign currency loans are cheaper for the borrower.
- Term — can range from one to seven years, with longer-term loans available to finance higher quality autos. There are no prepayment penalties, and evidence suggests that as a result of high prepayment rates, the weighted average life of a typical auto loan portfolio is about 50% of its contractual term.
- Non-performing loans (NPLs) — data for auto loans is not publicly available, but NPLs as a proportion of loans outstanding are likely to be higher than on mortgage loans, and lower than on other consumer loans.
| Ukraine is experiencing a boom in retail loan growth, and banks’ clients show a strong preference for longerterm, foreign currency-denominated loans. The retail lending market is dominated by a small number of privately- owned banks, many of which provide finance for auto purchases, on similar terms and conditions. |
Table 2: Key features of auto loans per websites of top five retail lenders
|
Bank Aval |
PrivatBank |
Raiffeisen Bank Ukraine |
UkrSibbank |
Ukrsotsbank |
|
Retail lending |
| Retail loan product offering |
Auto, mortgage, consumer and student loans |
Auto, mortgages, consumer and student loans |
Auto, mortgage, housing construction and refinance loans, general purpose loans (property collateral) |
Auto, mortgage and consumer loans |
Auto, mortgage and consumer loans |
| Retail loan portfolio at 31-Mar-06 ($) |
1.03bn |
1.47bn |
428m |
696m |
704m |
| Auto loans |
Loan size 1,000 – 50,000 (in $ equivalent) |
1,000 – 100,000 (in $ equivalent) |
2,000 – 100,000 (in $ equivalent) |
n/a |
n/a |
| Deposit/down payment |
15% (new, foreign manufacture) 20% (new, Russia or Ukraine manufacture) 30% – 35% of scrap value (second-hand) |
10% (new), 20% (used) |
15% (loan size $2,000 – $50,000), 25% (loan $50,001 – $100,000) |
10% (foreign, auto value up to $30,000), 15% (foreign, auto value >$30,000) 15% (CIS) 30% (Ukrainian) |
20% (Ukrainian, Chinese), 15% (Russian), 0% – 10% (foreign < $50,000), 15 – 20% (foreign > $50,000), 30% (used) |
| Rates (for UAH, USD and EUR loans) |
12% – 12.5% (USD), 11.5% – 12% (EUR), 15.5% – 16.5% (UAH) |
10.56% (USD), 9.36% (EUR), 14.76% (UAH) |
12% (USD), 11.5% (EUR), 18% floating (UAH) |
12.5% (USD), 11.5% (EUR), 15% (UAH) |
13% (USD), 11.5% (EUR), 18% (UAH) |
|
Term |
1 – 6 years (new foreign), 1 – 4 years (new Russian), 1 – 3 year (new Ukrainian), 1 – 5 years (used) |
1 – 7 years (new foreign), 1 – 5 years (new Ukrainian, CIS, used foreign), 1 – 3 years (used Ukrainian and CIS) |
1 – 5 years (foreign), 1 – 3 years (Ukrainian and CIS) |
1 – 6 years (new foreign), 1 – 5 years (new CIS), 1 – 4 years (new Ukrainian) 1 – 5 years (used) |
1 – 6 years (foreign), 1 – 4 years (Russian), 1 – 3 years (Ukrainian) 1 – 5 years (used) |
| Special offers |
AIS — VAZ, term 1-4 years, rate 1% – 5% ($ only), deposit 15% Any dealer — term 1 – 6 years, rate 12.5% (USD), 12% (EUR), 16.5% (UAH), no deposit Avtocapital (to 31- Dec-06) — Mercedes- Benz, term 1 – 6 years, rate 9.5% (USD), 9% (EUR), 13% (UAH) Toyota — term 1 – 6 years, rate 11% (USD), 10.5% (EUR), 15% (UAH) |
Ukravto (1-Jan-06 to 31-Dec-06) — ZAZ, VAZ, Daewoo, Chevrolet, 0% down payment, rates 2% (USD), 11% (EUR), 15% (UAH) Avtoprivat (15-Dec-05 to 31-May-06), bank commission 20, rates 10.5% (USD), 9.3% (EUR), 14.7% (UAH) |
n/a |
n/a |
fficial Skoda, Mitsubishi, VW and Toyota dealers (to 22-Jul-06), rates 12% (USD), 10% (EUR), 15.5% (UAH) Intercar Ukraine, term up to 7 years, no down-payment, rate 12% (USD) Niko — Mitsubishi dealer, term up to 6 years, rates 11% (USD), 10% (EUR), down pmt 0% |
Research Strategy
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