The huge potential of the Ukrainian banking sector is evidenced by the fact that total lending in the country increased from about UAH90 million (E13.9 million) in January 2005 to UAH140 million in January 2006.

Of this total, lending to individuals enjoyed the most rapid pace of growth, rising by 126 percent in 2005, while lending to corporates rose by 49 percent.

According to the Ukrainian National Mortgage Association (UNMA), which has 26 members and represents most major bank lenders, it is the Ukrainian mortgage market which offers the greatest potential. Between January 2002 and January 2005, mortgage lending rose from only UAH317 million to UAH10.6 billion. The mortgage market experienced phenomenal growth in 2005 and the top banks added an average of UAH600 million per month to their mortgage loan portfolios.

"Last year was a very good year - the volume of mortgage lending increased three times over," says Oleg Kinyayev, head of research at the UNMA, pointing out that, at present, mortgages account for about only 2 percent of GDP in Ukraine. "There are several reasons for this improvement, including the economic situation in Ukraine; the increased purchasing power of many people; and the fact that their prospects have improved so much. People can also now take credit out for longer."

Increased purchasing power

The enhanced purchasing power of people in Ukraine is reflected in increased average wages and salaries which stood at about UAH806.18 in 2005, having risen by 23.4 percent in one year, according to the UNMA. Personal income rose by 38.4 percent between January and December 2005, while disposable income (monies available for buying goods on credit) rose by 36.4 percent. Personal disposable income per capita nearly doubled from UAH336 in January 2005 to UAH662 in December that year.

This increased purchasing power has coincided with decreasing average- weighted interest rates, which fell by 3 percent to 4 percent for mortgage loans denominated in the national currency and 2.5 percent to 3 percent for loans denominated in hard currencies. In January 2006, the average rate for mortgage loans in the national currency was 20 percent, while the average rate for loans in foreign currencies was 13.4 percent.

According to Kinyayev, the culture of homeownership in a country in which, historically, the government provided its citizens with accommodation has also meant that younger people are now looking towards mortgage loans to finance the purchase of their first homes.

"People today are buying for their own personal reasons," he says, adding that this has replaced the speculative demand for housing, which fuelled huge increases in house prices to heights of 50 percent to 55 percent in Kiev during 2005. "We expect house prices to rise by 5 to 10 percent this year."

The key mortgage providers

At the end of 2005, 94 Ukrainian banks were offering mortgages - twice the number doing so in the previous year - but, as Kinyayev points out, the market remains very concentrated.

"Only about 12 to 14 banks are really that involved in the mortgage market and, of them, the top five control more than 50 percent," he says, adding that only 14 banks can boast a mortgage portfolio that exceeds UAH100 million.

Ukrainian banks which are now owned by Western parents, including Ukrsotsbank, UkrSibbank and Bank Aval, are among the top mortgage providers in the country. Other top players in Ukraine such as Privat- bank, JSCB Raifeissen Bank Ukraine, Pravex-bank and Nadra also have a presence in mortgages and had recorded market shares of 12.76 percent, 8.68 percent, 8.34 percent and 4.12 percent, respectively, in January 2006.

However, during 2005 UkrSibbank and Ukrsotsbank, which held 15 percent and 14 percent shares in the mortgage market, respectively, as of January 2006, proved themselves as the real market heavyweights by increasing their mortgage loan portfolios by more than UAH1.2 billion each.

The importance of mortgage lending to all these banks is evidenced by the fact that it is becoming an increasing proportion of their total lending portfolios, rising from 3.6 percent at the start of 2005 to 7.4 percent at year-end. Of the banks surveyed by the UNMA, Arkada, Pravex- bank and International Mortgage Bank have allocated more than 50 percent of their loan port-folios to mortgage lending, making them mortgage banks. International Mortgage Bank recorded the highest increase in mortgage lending during 2005, growing its portfolio more than fiftyfold to UAH45 million.

At present, personal time deposits are the main source of mortgage loan funding and Ukrainian banks are benefiting from the fact that retail deposits have increased in line with mortgage loans. According to the UNMA, most banks are likely to start looking to other sources to fund their mortgage lending programmes in the future.

"All mortgages in Ukraine are retail deposit funded although we are now seeing the issue of covered bonds, where banks keep mortgages on their balance sheets and they serve as security," says Kinyayev.

Market leaders such as UkrSibbank and Ukrsotsbank have not been able to keep up with the growth in mortgage lending and are seeking funds in the capital markets, the acquisition of which has been aided by the credit ratings of their Western parents.

Terms and conditions

Kinyayev adds that to avoid exposure to adverse fluctuations in the Ukrainian currency, most mortgage loans are denominated in foreign currencies - usually dollars. About 15 percent of mortgage loans are denominated in local currency.

The majority of mortgage loans charge fixed rates, although, says Kinyayev, there are conditions allowing banks to change the rate charged. Tenures range from five to 20 years, although 30-year loans are offered by some banks. The down payments required for mortgage loans range from 5 percent to 30 percent and the loan to value ratio is usually 70 percent to 85 percent.

Given the growth potential of the mortgage market, the UNMA is introducing a prescriptive code of conduct for mortgage lenders this year, requiring them to disclose specific types of information to borrowers. It is also laying down rules on the shape and form mortgage lenders' advertising takes, among other things. "We are educating banks to improve their quality of service," says Kinyayev.

In addition, the association is working on an internet-based credit scoring techniques project, which it plans to make available to its members.

"We are also educating the Ukrainian people themselves in the cost of mortgage loans," adds Kinyayev.