OREANDA-NEWS. On April 23, 2009 VTB Group announced its unaudited IFRS results for the twelve months ended 31 December 2008, reported the press-centre of VTB Group.

Key strategic highlights

Continued support from the Government on capital and funding

Increasing emphasis on supporting customers and protecting our franchise

Increased focus on efficiency and cost control

Risk management policies tightened

Financial highlights

VTB remained profitable at a net level for the full year

Net profit of US212 million, down from US1.5 billion in 2007

Total loans up 50.3% year-on-year to US90.2 billion, reflecting strong increases in both corporate and retail lending

Total customer deposits stable at US37.5 billion, with retail deposits up 12.8% to US12.1 billion

Core income of US5.2 billion, a 71% increase year-on-year

Net interest margin up to 4.8% from 4.4% in 2007

Provisioning charge, as a proportion of average gross loan portfolio, up to 3.2% from 1.3% in 2007

Total BIS ratio at 17%

VTB President and Chairman of the Management Board Andrei Kostin said: “VTB has demonstrated its ability to manage the business through difficult market conditions, while successfully delivering its key strategic objectives in retail and investment banking. We continue to benefit from the ongoing commitment of the Government to provide funding and capital to support the growth of our business. This, coupled with the measures that VTB has taken to focus on cost and risk control means we are well placed to continue supporting our customers, protect our franchise and consolidate our position as the bank of reference for Russia and the CIS.”

Financial performance
Despite the challenging market conditions and higher provision charges, VTB remained profitable and posted a net profit of US212 million for the year, down from US1.5 billion in 2007.

The Group achieved strong asset growth of 36% to US126 billion, up from US92.6 billion in 2007. VTB’s key role in the economy and the support we have received from the Government as it seeks to sustain economic activity has enabled VTB to benefit substantially from business inflows in both corporate and retail, driving total loans up by 50.3% to US90.2 billion from year end 2007.

Customer deposits remained stable in 2008 at approximately US37.5 billion, with retail deposits up 12.8% year-on-year to US12.1 billion. This reflects the growth in the branch network and a strong retail customer preference for the security of a state-backed bank with a strong brand. Corporate deposits declined by 3.6% year-on-year to US25.5 billion. This was partly due to the impact of the currency devaluation - about 60% of VTB’s corporate deposits were rouble denominated. With reduced access to other sources of funding, corporate customers also reduced cash deposits to fund expenditure.

Core income, defined as net interest income and net fee and commission income before provisions and excluding one-off items, was up 70.9% to US5.2 billion year-on-year reflecting both strong top-line growth and improved underlying profitability in both corporate and retail lending as well as the resilience of our business.

Net interest income increased 78.7% to US4.6 billion from 2007. Net fee and commission income grew US656 million year-on-year, or 31.2% excluding one-off items in 2007. Net interest margin before provisions increased to 4.8% in 2008 as compared to 4.4% in 2007. Income from trading and available for sale financial instruments was US 41 million reflecting effective trading and hedging strategies and the impact of the application of the amended IAS 39 standard. Overall, the value of VTB’s debt and equity portfolio fell by 53.2% year-on-year to US6 billion from US12.8 billion at the year end 2007.

In the fourth quarter of 2008, provision charges grew by US1.1 billion compared to US1.4 billion in the first nine months of the year. The increase reflected strong growth in our loan portfolio as well as a further decline in the financial and operating environment. Given the worsening economic outlook for Russia, VTB significantly increased its provisioning charge to 3.2% of average gloss loan portfolio as compared to 1.3% in 2007. The share of overdue and rescheduled loans in the gross loan portfolio increased to 2.4% by the end of 2008 from 1.4% at the end of 2007. Coverage ratio for overdue and rescheduled loans by allowances for loan impairment stood at a comfortable level of 147.6% as of December 31, 2008.

In the face of the existing liquidity crisis and in order to limit the increase in overdue debts, VTB introduced a number of significant changes to its lending procedures, including tightening lending standards and strengthened loan monitoring practices. At the end of 2008, VTB established a Debt Centre to work with borrowers in difficulty and secure the bank’s position in restructuring situations.

Continuing its efforts to manage its liabilities prudently, VTB initiated steps to optimize its debt obligations. The nominal value of bonds bought back during the fourth quarter of 2008 amounted to US\\$ 1.4 billion. A net gain from the buy-back of US349 million was booked during that quarter.

Operating performance
Although the economy continued to grow well into 2008, a sharp deterioration in output in the fourth quarter and the devaluation of the rouble, led management to focus increasingly on the following strategic priorities: seeking ways to preserve and where possible strengthen our capital base in anticipation of rising bad debt provisions going into 2009, supporting customers through their own difficulties and protecting our customer franchise, and maintaining and where necessary strengthening efforts to rein in costs and tighten risk control.

Capital position
As of the end of 2008, VTB had a total BIS capital adequacy ratio of 17%, up from 16.3% at the end 2007. The bank is making strenuous efforts to optimize capital allocation within the Group. It has also continued to enjoy the strong commitment from the Russian Government to provide capital and funding support. In the fourth quarter of 2008 VTB’s capital adequacy ratio was materially supported through a Government subordinated debt issue of RUR200 billion at a rate of 8% and with a maturity of 11 years.

As part of the Government’s plans to recapitalize the banking sector and ensure it is adequately capitalized to absorb an expected rise in bad debt provisions, the Government has indicated that it intends to underwrite an injection of up to RUR200 billion in Tier 1 Capital into VTB. This capital increase which will take the form of an issue of new ordinary shares, will enable VTB to continue to grow its lending book and support the Russian economy in 2009. Shareholders will vote on the proposed capital increase at the Annual General Meeting in June. The capital increase is expected to be completed by October, 2009.

Supporting customers and protecting the franchise
All our businesses reported strong growth in 2008, consolidating VTB’s position as the second largest financial group in both corporate and retail banking in Russia

Corporate banking:
In the course of 2008, VTB was able to consolidate its strategic position as lender of choice to the Russian corporate sector, thanks to its strong relationship with the Government which ensured access to reliable funding. With the capital markets closed to Russian issuers, and foreign banks seeking to reduce exposure to Russian borrowers, VTB was one of the few sources of reliable credit for corporate borrowers in Russia.

We were thus able to increase our share of the lending market to 12.7% from 10.7% at the end of 2007. In the face of deteriorating market conditions, we expect to focus increasingly on supporting viable customers through the downturn while maintaining our tight risk criteria. We believe that by taking a long-term, supportive view, we can protect and consolidate our franchise while continuing to benefit from the support of our largest shareholder, the Government, which at present is the only source of long-term capital and funding.

In the autumn of 2008, VTB significantly expanded its volume of lending to strategically important companies. From September to the end of December 2008, VTB issued over US27 billion of new loans to Russian customers across key sectors. As a result of this lending activity, our gross corporate loan portfolio increased 47.2% to US77.0 billion at the end of 2008 from US\\$52.3 billion at the end of 2007.

Retail banking:
During 2008, we completed our three-year branch-opening programme in Russia. In the course of the year, we opened 176 new branches, bringing the total number of branches to 504. VTB24’s retail branch network is now one of the largest in Russia. In 2008, VTB24 served more than 4.7 million individual and around 90,000 small business customers in Russia. Early action was taken to mitigate risk in the portfolio by shifting away from long to short-term lending products, such as consumer loans and credit cards, tightening requirements on borrowers and increasing emphasis on improving collection of arrears.

In the fourth quarter of 2008, thanks to its stronger market presence and trusted brand, VTB was one of a few banks that saw net deposit inflow with a substantial increase in the number of new current and savings accounts being opened. In 2008, retail loans were up by 71.5% to US\\$ 13.2 billion. Overall, our market share of loans increased to 8.8% (from 5.9% in 2007) while the share of deposits grew to 5.7% (from 4.8% in 2007.)

Investment banking:
The Group launched VTB Capital, its new investment banking business in April last year. By the end of 2008, we had established a full service investment bank, staffed with 500 employees, including both external hires and transfers from elsewhere in VTB. We are in the process of establishing ourselves as one of the leading Russian investment banking business. The objective is to provide a full suite of investment banking products to our extensive corporate client base and provide multiple opportunities to grow revenue.

Efficiency and cost control
VTB’s cost to core income ratio improved to 51.9% in 2008 from 63.7% in 2007 despite the continued investment in retail branch expansion and the build-out of the investment banking business. As previously announced, at the end of 2008 VTB implemented a number of cost-cutting measures including the postponement of the move to new headquarters, cuts in administrative expenses, a hiring freeze across the Group and headcount reductions in some VTB Group businesses. Given the current challenging market environment, VTB Bank has resolved not to pay annual bonuses to the members of the Management Board in respect of the past financial year.

Corporate governance
On the corporate governance front, we intend to strengthen VTB’s Supervisory Board with the appointment of two new independent directors, bringing the total number of independent directors to four. We have approved a policy on information disclosure and dividend policy, and have adopted a code of ethics setting out clear procedures and rules of conduct across the business.

2009 outlook
The key variable is the state of the economy. Our current working assumption is that the percentage growth in our loan portfolio in dollar terms this year will be in the mid-teens.
We are also working on the basis that there will be additional funding from the Government to support that growth. Cost control remains a key priority and we expect costs to remain broadly at the same level as in the fourth quarter of 2008 on an annualized basis. We do not expect to see the allowance for loan impairment to rise beyond 8% of our total gross loan portfolio. Nevertheless, given current CBR interest rate policies and the likelihood of continued tough macroeconomic conditions, we expect interest margins to come under pressure. Our focus for the year ahead will be on supporting customers through these difficult times.