Letter to Customers

Dear Valued Customers and Partners, Having presented you with our interpretation of events around the global financial crisis in October 2008, we would like to continue our communication by informing you of the situation in the banking system, sharing our opinion on the issues of the day and presenting ProCredit Bank’s position. Given the pace at which the crisis is unfolding in Ukraine’s economy and financial system, it is clear that the predictions that it would not be over quickly were correct. Despite the fact that the economic situation in the Eastern European countries is relatively stable, developments across the globe show that the global financial and economic problems, which are among the factors influencing the stabilisation of the situation in Ukraine, are far from being resolved. The UAH exchange rate has yet to stabilise. At the same time, the crisis is spreading to the real economy. Nevertheless, an analysis of our customers shows that the majority of the enterprises are maintaining stability despite the extreme additional pressure caused by the crisis. In addition, participants in economic and financial relationships, including borrowers and depositors, have remained calm and are confident as regards the longer-term future. This is doubtless the most important prerequisite for overcoming the crisis. The media are filled with numerous forecasts and discussions of today’s problems, making it almost impossible to filter reliable information out of the flow. In these circumstances, we again recommend that you critically assess everything you hear and everything you see. And we do not expect you to give our opinions the benefit of the doubt: Your most reasonable approach to taking decisions will be to carry out your own analysis and assessment. Situation in the banking system and current developments Difficulties in the banking sector emerged in October 2008. The first wave of the crisis was the outflow of customer deposits from the banking system. A number of banks, including ProCredit, got through this phase and are now maintaining stable operations. For the customers this means processing of payments in a timely manner and repayment of deposits on the agreed maturity dates, and for those wishing to continue to deposit their savings, a reliable and safe place to do so. We realise that, in light of the unfolding crisis, this may sound like an advertising slogan. Nevertheless, we are confident that only the banking system is able to provide for the safety of funds. In addition to physical security, the safety of funds implies receiving interest. In other words, non-receipt of interest on idle funds leads to loss of value due to inflation or failure to derive income.   Many of you know that the National Bank of Ukraine imposed temporary administration or appointed supervisors at several banking institutions. A bank is taken under temporary administration if it has temporary financial difficulties. Usually the difficulties in question are a liquidity gap and failure to fulfil commitments to customers and creditors in a timely manner. Imposition of temporary administration is supplemented by other measures aimed at mobilising additional resources and capital, and therefore increases the likelihood that the bank’s performance will stabilise. In the event that the National Bank of Ukraine provides funding, a supervisor is appointed to ensure that the use of the funds is monitored. It is worth noting that ProCredit Bank has not applied to the National Bank of Ukraine for funding and does not plan to do so, since the bank’s financial standing allows it to meet all liquidity requirements. What is more, other ProCredit institutions and the shareholders can provide the bank with the necessary support and ensure sufficient injections of capital. The National Bank of Ukraine also carries out a so-called “diagnostic study of banks”. Under this study, a bank enters into an agreement with an audit firm authorised by the National Bank of Ukraine on the diagnosis, among other things, of its loan portfolio quality and the adequacy of its reserves in order to determine potential demand for additional equity from shareholders. Ratings The ongoing uncertainty in many areas of economic and financial activity is forcing international rating agencies to review their country and individual ratings. Several recent revisions of ratings have heightened interest in the interpretation of ratings and the respective publications. Here we would like to furnish the most important facts about the way rating opinions are formed and the role of ratings from a professional point of view. We refer to Fitch Ratings, Moody’s, Standard & Poor’s international rating agencies, whose professional expertise ensures utmost transparency and objectivity. What is the purpose of ratings and for whom are they meant? Ratings from the international rating agencies are an important functional element of the global financial market. Rating agencies act as analysts determining the risk of a country or an individual institution. On the capital market, which is made up of financial and investment institutions and large corporations, a rating, along with other relevant information, provides the basis for creditors and investors to determine the volume of and return on funds that they are interested in committing to companies or securities in accordance with their investment policies. Thus, ratings are primarily designed for use by professional players in the capital market. However, it is important to note that ratings by no means constitute forecasts of what will happen to a given country, company or securities issue or recommendations as to what investment decisions to make. Why do ratings change and why do the information statements of rating agencies not list all banks? Only an institution that has decided to be rated and has entered into an agreement with a rating agency accordingly can obtain a rating. Therefore, ratings are available only for those institutions that have obtained them. Thus, it is impossible to draw a conclusion about the standing of a bank that has a rating compared to the standing of a bank that does not have one. In addition, it should be noted that the mere fact that the bank has obtained a rating from an international rating agency means that the bank was willing to furnish full details of its financial standing and market position and comply with the highest requirements as far as transparency of operations, accounting and financial reporting are concerned. The lowering of country and individual ratings during the crisis is both inevitable and reasonable. It should be remembered, however, that rating is a classification of risk from the financial modelling perspective rather than a forecast. The recent repeated downgrading of all banks maintaining relationships with the rating agencies is due to the fact that the country ceiling has been lowered and is therefore systemic in nature. In other words, if all of the banking institutions had been rated by international rating agencies, every single one of them would have been downgraded.   Why do ratings have different names and components? Ratings have a complex structure and each component of this structure is calculated based on different factors and has its purpose. As noted above, in general ratings are meant for use by finance professionals. That is why a rating has a variety of components of an extremely technical and nature, which make it rather difficult to interpret and apply by members of the general public who wish to make use of financial services. The most important and down-to-earth ratings are the so-called “foreign currency long-term issuer default” and “national long-term”, which generally classify the risk from the creditor’s perspective. Furthermore, the long-term issuer default rating of any given institution cannot exceed the rating of the country in which the institution operates. Unlike the long-term issuer default rating, the national long-term rating is not limited by the country ceiling. Rating definitions as well as related rating descriptions are written in the language of financial science, in which complex terms such as “default”, for example, are part of the standard terminology applied in discussing investments of any quality. Unfortunately, the ordinary understanding of this term is largely distorted, which sometimes causes misinterpretation. All complexity of the subject of ratings aside, we would like to emphasise once again the following important information: ProCredit Bank has maintained its active relationship with Fitch Ratings (London), a global rating agency, and remains transparent in its operations as ever. ProCredit Bank has the highest possible ratings awarded in Ukraine: National Long-Term ‘AAA (UKR)’, Outlook: Stable Long-Term Issuer Default ‘B’, Outlook: Negative Local Currency Long-Term Issuer Default ‘B+’ Short-Term Issuer Default ‘B’   Support ‘4’ Individual ‘D/E’ Recommendations We have to deal with experts’ comments and with forecasts, assessments and ratings at every turn. Given a high degree of uncertainty and a number of unpredictable factors (such as the public’s response to negative news, for example), there are diverse scenarios as to how the situation might develop. Therefore, the best solution possible is still for you to carry out your own analysis and assessment, identify the underlying logic and the correlation between what is going on and what is being forecasted, and form your own opinion and decide on your own position. Bank customers face many challenges. The borrowers are those that face the most difficult issues today, since many of them have been left struggling to repay loans under the existing repayment schedules after dramatic exchange rate fluctuations or drops in income. As far as depositors are concerned, the key issue is the reliability of banks and their confidence that will deposits will be paid out upon maturity. For some savers, the problem of needing to withdraw deposits prior to the agreed maturity date due to contingencies is also especially acute. Banking institutions are financial intermediaries, and their ability to meet their commitments to depositors depends on fulfilment of obligations by the borrowers. Consequently, any bank aiming at long-term, continuing operations in Ukraine and the provision of high-quality services tries to respond to clients and to make decisions that support them in difficult times and do not undermine their interests. Therefore, we call on our clients: If you need advice or have questions relating to repayment of loans or the safety of deposits, please contact our bank staff and do not hesitate to talk about any of your concerns. ProCredit Bank aims to provide quality support to its customers. We also draw your attention to the fact that any matters related to customer service are dealt with solely between the bank and the client. In these times of economic hardship, we have seen services emerging which are provided in a highly non-transparent and even criminal manner. Some entities or individuals offer to arrange for early repayment of deposits for a fee, borrowers are offered loan write-off or rescheduling options, or schemes to offset deposit funds against loans are advertised on a broad scale. We strongly recommend that you not employ such services, since the risk of losing money due to fraud is high. ProCredit Bank’s standing and position of our shareholders ProCredit Bank’s financial standing enables it to meet all of its commitments and to comply in full with both the requirements imposed by the National Bank of Ukraine and the international standards which the bank is obligated to follow as a member of the global ProCredit group. The shareholders of the bank are renowned international organisations – ProCredit Holding AG, the European Bank for Reconstruction Development and Western NIS Enterprise Fund – whose aim is to support development rather than solely to maximise profit. Thus, the shareholders’ objectives determine ProCredit’s policy of development in Ukraine, which implies moderate growth, a conservative approach to managing risks and sustainable profitability. As stated in their charters and missions, our shareholders are development-oriented institutions, which means that they provide support not only during economic upturns, but in times of crisis as well. Earlier this year ProCredit Bank registered a regulatory capital increase in the form of subordinated debt in the amount of USD 3.24 million, made available by its strategic investor ProCredit Holding AG. Our shareholders have expressed their firm commitment to invest in, support and further develop ProCredit Bank in Ukraine.   Yours sincerely, Susanne Decker                 Viktor Ponomarenko Management ProCredit Bank