SUMMARY: VTB to turn losses into profit in 2010
MOSCOW. March 30 (Interfax) - VTB closed 2009 with net losses of 59.6 billion rubles to International Financial Reporting Standards (IFRS) due to higher loan provision charges, compared with profit of 4.6 billion rubles in 2008, however Russia's second biggest bank said it expected to be back in the black as early as this quarter and to close the year with earnings of 50 billion rubles as the economy improves.
Loss and profit
Analysts from 12 investment banks and companies told Interfax in a consensus forecast that they thought VTB would close the year with losses of 59 billion rubles. However the consensus forecast that VTB itself used as guidance estimated losses at 60.5 billion rubles in 2009.
VTB said in its earnings report to IFRS that provision charges grew to 154.7 billion rubles in 2009 or to 5.7% of the average loan portfolio compared to 63.2 billion rubles or 3.2% of the average loan portfolio in 2008.
VTB closed the nine months ended September 30, 2009 with net losses of 45.5 billion rubles, so it must have made losses of 14.1 billion rubles in Q4 2009.
VTB expects to post net profit to IFRS in the first quarter of 2010 and 50 billion rubles profit for the year as a whole, the bank's deputy chairman, Herbert Moos, told reporters.
"We had a good start to the year and I expect we'll see profit for the first quarter," Moos said, adding that VTB still stood by its forecast of 50 billion rubles profit for the year.
Moos said the 50 billion rubles did "not factor in a significant dissolution of provisions," but that the bank in general planned to continue to scale provisioning down. VTB adhered to that policy in the latter quarters of 2009. Spending on loan provisions totaled 154 billion rubles in 2009, but fell 5% in Q4 compared with Q3 to 28.3 billion rubles.
Moos said the 50 billion rubles net profit could be generated by "a combination of investment business with retain and corporate." VTB already started to offset the reduction in the loan portfolio at the end of last year by stepping up securities trading, which has become much more liquid, he said.
"VTB bought securities from issuers that VTB helped with placements. We arranged placements and bought their securities. We think this is the right way to work with clients, trading and investing our funds in the securities of issuers like these, and speeding up the turnover or funds," Moos said.
The bank increased its traded securities portfolio 56.7% in 2009 to 268 billion rubles, Moos said. VTB Capital arranged nine Eurobond placements worth $2.8 billion, and 39 domestic bond placements worth 277 billion rubles. Capital market transactions generated an additional 16.4 billion rubles in pretax profit for the bank, he said.
"VTB has made significant progress over the past year on its strategic objective of creating a leading retail operation and a top tier investment bank, both of which are already contributing significantly to revenue and operating profits. We have also been able to take advantage of our secure funding base to widen and deepen our corporate franchise. While this year has been difficult for us and the industry generally, these achievements will stand us in good stead as the economy recovers in 2010," the earnings report quoted VTB's chairman, Andrei Kostin, as saying.
Provisions and margins
The rate of growth of provision charges started to slow down during the course of the year from a 7.1% annualized rate in the first quarter of 2009 to 4.3% in the fourth quarter, as a result of the improving economic conditions, VTB said. The allowance for loan impairment increased to 9.2% of total gross loans in 2009 from 3.6% at the end of last year. Non-performing loans were at 9.8% of total loans at the end of 2009 as compared to 1.9% at the end of 2008. The Group maintains a conservative provisioning policy with a coverage rate of 95% of non-performing loans.
The cost/core income ratio fell to 44.1% in 2009 from 51.9% in 2008. Core income, defined as net interest income before provisions and net fee and commission income, was up 33.3% to 173.2 billion rubles in 2009, compared to 129.9 billion rubles in 2008. Net interest income before provisions increased 34% year-on-year to 152.2 billion rubles, while net fee and commission income grew 28.8% year-on-year to 21 billion rubles.
"The Group's focus on the development of its three businesses - corporate banking, investment banking and retail banking - is reflected in the bank's solid underlying performance in 2009," VTB said.
The net interest margin before provisions stood at 4.6% in 2009 compared to 4.8% in 2008. Net interest margin continued to gradually recover during the course of 2009. In the fourth quarter of 2009 alone, net interest margin increased by 90 basis points to 5.3%, the highest level in VTB's public history, from 4.4% in the third quarter and 4.2% in the first half of the year.
VTB's Moos said VTB figures its interest margin will be above 4.6% this year.
"We calculate that we can show a margin higher than the 4.6% average for the bank for 2009," Moos said.
VTB's net interest margin for Q4 2009 was up to 5.3% compared to the year's 4.6% average. It was 4.8% in 2008.
The bank predicts the Central Bank refinancing rate will go down 100 basis points this year. "We expect pressure on the interest margin indicator in 2010, but generally we expect the rate will fall by a hundred basis points during 2010," Moos said.
The refinancing rate might actually be hiked, Moos allowed. "We consider the possibility the rate might grow, but think that is generally a 2011 trend," he said.
Loan quality and restructuring
Loan quality deterioration slowed down - the NPL ratio was 9.8% at the end of 2009, and prudent coverage was 95%.
Restructured loans amounted to 300.5 billion rubles or 11.8% of the loan portfolio at the end of 2009, VTB said in a presentation. The loan portfolio before reserves fell 4% to 2.545 trillion rubles during 2009.
Restructured loans came to 16.3 billion rubles or 0.6% of the loan book in 2008, so they rose 18-fold in 2009.
Restructured corporate loans totaled 283.7 billion rubles or 13.4% of the loan book at the end of 2009, and restructured retail loans totaled 16.8 billion rubles or 9.3%.
Losses from loan restructuring were 19.7 billion rubles in 2009, compared with zero in 2008.
The bank restructured 74.8 billion rubles in loans during Q4 2009 and 146.9 billion rubles in Q3, 2009, when it restructured almost all loans issued to the corporate sector.
VTB's Moos told reporters the bank expects the volume of restructured loans to decrease. Restructuring peaked in Q3 2009. We'll continue to restructure, but to a lesser extent," Moos said.
He said VTB expects the share of overdue loans to increase to 10-12% of its portfolio by mid-2010.
"We will raise provisions in line with the increase of the share of overdue loans. We expect that the overall trend will be for provisions to decrease," he said.
Assets and deposits
VTB said in the earnings report that the capital increase completed in the third quarter of 2009 significantly strengthened VTB's capital base, raising 180.1 billion rubles of additional Tier 1 capital. As a result, VTB Group now has a total BIS ratio of 20.7% and a Tier 1 ratio of 14.8%.
Group assets decreased by 2.3% in 2009 to 3.611 trillion rubles from 3.697 trillion rubles.
Total customer deposits increased 42.4% to 1.6 trillion rubles at the end of 2009 from 1.1 trillion rubles at the end of 2008. Retail deposits increased 34.6% to 476.5 million at the end of 2009 compared to 354.1 million rubles at the end of 2008. Corporate and government bodies' deposits also grew significantly to 1.1 trillion rubles or 46.1% compared to 747.8 billion rubles at the end of 2008. The bank increased its market share in the Russian deposit market both in retail (from 5.7% to 6%) and corporate (from 10.2% to 12.7%) compared with the end of last year.
Client funds exceeded liabilities by 50% for the first time in 2009, VTB's Moos told Interfax. Many clients to whom the bank lent during the crisis period later deposited their funds with VTB, which improved the bank's liabilities structure, he said.
Corporate debt financing rose 2% in 2009 to 2.4 trillion rubles, Moos said.
Moos said VTB expects to optimize its liabilities structure by diversifying domestic and external sources of funding and the range of investors, instruments and currencies. "We still plan to borrow $5 billion, of which approximately $2.5 billion in the external markets and $2.5 billion in the domestic markets," Moos said.
The bank has already placed $1.25 billion in Eurobonds in February and 20 billion rubles in local-currency bonds in March.
Moos also said the results for Q4 2009, when the bank had net losses of 14.1 billion rubles, were also affected by the consolidation of developer Sistema-Hals , which lowered the group's result by 3.7 billion rubles. But Moos said he did not expect restructuring the debt of Donstroy would incur losses.
Moos told Interfax said the same Sistema-Hals had been responsible for VTB increasing its headcount slightly in Q4 2009.
VTB said in the IFRS presentation that Group employees had risen in number in Q4 for the first time since the crisis began, to 40,440 from 40,140. The headcount peaked at 42,020 just before the crisis in the third quarter of 2008.
"The bank did not hire new people [in Q4 2009] and continued to optimize its personnel structure," Moos said.
The overall headcount decreased by 4% in 2009 after rising 17% in 2008.
VTB agreed to the acquisition of a controlling stake in Sistema-Hals from AFK Sistema for a token 60 rubles on debt-restructuring terms. VTB first acquired 19.5% of Sistema-Hals shares for 30 rubles and got a call option for another 31.5% of shares for 30 rubles more. VTB took possession of 51.24% of Sistema-Hals shares in early December using the option.
VTB said in the IFRS report that AFK Sistema, which still owns 27.6% of Sistema-Hals, had not taken up an offer to buy it out. Sistema said from the beginning that VTB would not be taken up on its offer. The offer was made in December and expired March 9. "Minority Sistema-Hals shareholders did not offer shares for buyout," VTB's report says.