End of consumer lending boom

In early 2004 total retail loans outstanding were barely reaching an
equivalent $1 bln. During 4 years their amount was rising dramatically
to make $40 bln, or $920 per person in early Oct 2008. Their
contribution to the households’ spending peaked at 15% in 2007 but
began to subside throughout 2008 as banks tightened their lending
standards and faced the shortage of foreign funding (bank raised 10%
less funds from abroad in 1H08 compared to the same period a year
ago). Rising interest burden for households was another impediment
for retail loans growth as effective rate for consumer loans in certain
cases exceeded 60%. Finally, real disposable income grew at a
slower pace in 5 years and is expected to show 8.8% rise in 2008 as
real wage growth is decelerating.

The above factors led to a notable slowdown in retail lending growth
dynamics. They are set to rise by some 45% y-o-y in 2008 compared
to 134% and 98% annual growth in 2006 and 2007 respectively. It is
not likely to grow by more than 25% in 2009 as banks will face higher
borrowing costs, will not be able to refinance all of the previously
raised debts from foreign lenders ($38 bln for the moment) and further
deceleration in real disposable income growth will expose the current
interest payments to more risks.

We regard this brisk reversal in retail lending as positive based on the
following:
• As much as 32% of all retail loans fall on mortgage loans. The
other 68% are the loans are mainly those linked to imports.
Imports of passenger cars made $7 bln in 2007 and an
estimated $11 bln in 2008. As more than 60% of all passenger
cars are purchased on credit, and as the proportion of
passenger cars in merchandise imports makes some 17%,
these car loans contributed directly to the total trade deficit in
2007 and 2008. They have thus subtracted some 0.5% of the
real GDP growth.
• The juicy interest margins of retail lending business (above
20% in hryvnya) have to a certain extent distracted domestic
banks from their traditional corporate lending. In fact,
deceleration in corporate loans growth was much slower
compared to that in retail loans and their proportion in the total
loan portfolio has been below 37% in 2007. Yet, when costs of
funding affected banks severely in 1H08 and they were forced
to raise rates by 4-5% on average, it made lending for
enterprises rather expensive additionally stimulating the
inflation. Lending rates increase would, otherwise, have been
less notable if the competition for retail customers was not as
strong as in 2008.