OREANDA-NEWS. On 25 March 2008 MDM Bank released audited International Financial Reporting Standard (IFRS) financial results for 2007. Net attributable profit after taxation for 2007 amounted to RUB 5.5 billion, an increase of 66.1 percent over reported net profit for 2006. Excluding a one-off capital gain booked in Q4 2007, net profit was RUR 5.1 billion, a 53.7 percent y-o-y increase.

Other highlights:

Total assets rose by 32% y-o-y to RUB 321.4 billion (YE 2006: RUB 243.1 billion);

Revenue increased by 37% y-o-y to RUB 17.8 billion* from RUB 13.0 billion reported for 2006 (growth of 27% on a like-for-like basis);

Total equity grew by 42% y-o-y to RUB 38.9 billion (YE 2006: RUB 27.3 billion);

Annualized return on average equity increased to 18.3% (17.1% excluding one-off gain) compared with 13.0% in 2006;

Cost/Income ratio decreased to 48.3%** from 51.5% in 2006;

Deposits/Loans ratio increased to 67% (YE 2006: 54%);

Provision coverage of non-performing loans totalled 164% (321%, 200% and 113% for corporate, small business and retail books respectively).
The main factors influencing the Bank’s performance in 2007 were:

1. Changes in shareholder structure.

In 2007 there were a number of changes to MDM Bank’s shareholding structure, including the acquisition of a 5% direct interest in the Bank by the International Financial Corporation (IFC) following a new share issue totaling USD 184 million.

2. Emphasis on liquidity over growth in a period of increased global market volatility.

The impact of the global liquidity crisis on the Russian banking sector was that international borrowing has become more difficult and expensive. In this environment, liquidity management has become a priority over growth. From August 2007, MDM Bank moved rapidly to secure its liquidity position by intensifying deposit-taking and actively managing its corporate loan portfolio. These efforts have allowed the Bank to build a sizeable excess liquidity cushion while maintaining solid profitability. 

3. Organizational changes and changes in strategic emphasis.

Following a comprehensive business analysis, the Bank’s strategy was upgraded to incorporate all aspects of its business and operations. As a result, Corporate and Investment banking were merged together to provide a single point of access to corporate clients for all their financial needs. In the retail area, ambitious plans were formulated in the small business segment, where the Bank intends to grow more rapidly over the next 5 years in relative terms.

4. Relatively stable asset quality and margins against the backdrop of global volatility.

While net interest margin declined in the first half of the year, it recovered somewhat in the second half on faster re-pricing of assets as domestic interest rates rose.  Overall asset quality in the corporate and retail portfolios remained stable throughout the year.
Income Statement Review

Net interest income in 2007 accounted for 79.3% of total revenue, growing by 40.5% over 2007 to RUR 14,132 mln, while net interest margin decreased to 5.2% from around 6.1% in 2006. Net interest margins had come down significantly already in early 2007, predominantly reflecting a decline in asset yields across all asset classes on buoyant market liquidity combined with the growing share of term deposits in the overall structure of customer accounts.  Asset yields improved in the second half of the year as credit became scarce.

Net fees and commissions increased by 68.9% in 2007 to RUR 2,344 mln, representing the fastest-growing element of the Bank’s revenues, in line with the Bank’s strategy to increase the quality of its revenues.

Net result from trading, including trading in securities, foreign exchange and precious metals, decreased by 24.1% in 2007 to RUR 1,131 mln. Income from foreign exchange, the bulk of which consists of the bid-offer spread on corporate customer foreign exchange flow, rose by a healthy 25.9% to RUR 1,364 mln.

Operating expenses growth in 2007 was contained to 28.4%, which compares favorably both to 2006 (growth of 42.7% over 2005) and the rate of revenue growth in 2007 (36.7%). This resulted in the overall cost / income ratio declining from 51.5% to 48.3%. A ratio more indicative of efficiency levels, which relates operating costs to revenues before trading results in securities, also improved from 52.9% to 49.2%.

The Bank’s total provisioning expense in 2007 stood at RUR 2,083 mln, up 19.6% from 2006.  In general, cost of risk, or the provisioning expense over average risk exposure, remained at a level close to that of the previous year. Non-performing loans were comfortably covered by provisions at the end of 2007 across all portfolio segments.

Balance Sheet

Starting from the third quarter, the Bank moved to bolster its liquidity position to a level which would be adequate for the unprecedented deterioration in the global credit markets. This was achieved mainly through intensified deposit gathering and active management of the corporate loan portfolio. As a result of these efforts, a sizeable excess cushion of liquidity was built up, totaling approximately USD 1.6 billion at the end of 2007 (unchanged as of the date of this release).  The Bank plans to maintain its conservative stance on liquidity until more visibility on international borrowing is achieved.

The Bank’s overall gross loan portfolio reached RUR 186,505 mln at the end of 2007, up 8.8% over the previous year. While the dynamics of the corporate loan portfolio was affected by market turbulence in the second half of 2007, consumer and small business loans continued to grow strongly.

The Bank has continued to make progress with increasing the granularity and diversification of its corporate loan portfolio. Total exposures to the top 20 corporate borrowers represented 18.6% of total portfolio (excluding off-balance sheet exposures, reverse repurchase agreements and margin loans), down from 23.7% in 2006 and 34.4% in 2005.

The Bank’s exposure to trading securities decreased in 2007 by 19.1% to RUR 13,862 mln. The Bank’s securities portfolio consists predominantly of corporate fixed income instruments, with the share of equities at 14.6% at year-end 2007 (2006: 12.7%).

Customer accounts at the end of 2007 totaled RUR 124,132 mln, up by 33.8% from RUR 92,805 mln in 2006. Customer account balances grew in all business lines. The share of current account balances in total customer accounts has decreased from 41.3% to 29.2%.

In terms of international funding, the Bank remains largely opportunistic in 2008, with all plans on syndications and capital market transactions subject to market conditions.  In aggregate as of the date of this release the Bank has ca. USD 800 million of bonds and syndicated loans to repay through the end of 2008, which is comfortably covered by accumulated liquidity.

Following a capital increase completed in the third quarter of 2007 for USD 184m in favor of the International Financial Corporation (IFC), which has become 5% shareholder in the Bank, the Bank’s capital base expanded to a very comfortable level relative to its risk-weighted assets. At 2007-end, the total capital ratio on a consolidated basis rose to 17.2% from 13.7% at the end of 2006.