OREANDA-NEWS. September 02, 2011. VTB Group publishes its Interim Condensed Consolidated Financial Statements as at 30 June 2011 with the Independent Auditors’ Report on Review of these Statements, reported the press-centre of VTB.

FINANCIAL AND OPERATING HIGHLIGHTS

Record net profit of RUB 53.6 billion in 6M 2011, up 113.5% year-on-year, with an ROE of 18.1%, versus 9.7% in 6M 2010;

Strong profit contribution from key businesses: Corporate and Investment Banking profit before tax at RUB 51.2 billion, up 100.0% year-on-year, Retail Banking profit before tax at RUB 20.2 billion, up 80.4% year-on year;

Net interest income including net recovery of losses on initial recognition of financial instruments and loans restructuring for 6M 2011 amounted to RUB 105.0 billion, up 21.4% year-on-year;

Strong net fee and commission income of RUB 17.9 billion for 6M 2011, up 51.7% year-on-year;

Net interest margin stable at 4.8% for 6M 2011; in 2Q 2011 NIM rose to 4.9%, up 10 bps quarter-on-quarter;

Operating income before provisions reached RUB 153.0 billion in 6M 2011, up 45.2% year-on-year;

Total gross loans grew by 7.0% in 2Q 2011 to RUB 3,277.0 billion; corporate loans increased by 6.4%, retail loans – up 9.6% in 2Q 2011;

Customer deposits reached RUB 2,634.7 billion, up 11.0% in 2Q 2011 and 19.1% in 6M 2011; the share of customer deposits in liabilities and the loans-to-deposit ratio improved to 63.9% and 113.7%, respectively;

Cost of risk stabilised at a low 1.1% of average gross loans in 6M 2011, versus 2.1% in 6M 2010;

Solid capital base reflected in total CAR and Tier 1 ratios of 14.1% and 12.0%, respectively.

Andrey Kostin, VTB President and Chairman of the Management Board, said: “On the backdrop of the continued successful implementation of our strategy, the Group has delivered another strong set of results, with robust contribution from every key business line, resulting in healthy margins and commission income. Simultaneously, we have taken important steps towards the integration of the Group’s new businesses, and we believe these will provide strong support to the Group’s franchise and deliver further value to shareholders.”

FINANCIAL AND OPERATING REVIEW
VTB Group delivered a record six-month net profit of RUB 53.6 billion for 6M 2011, up 113.5% year-on-year, and record quarterly net profit of RUB 27.5 billion for 2Q 2011, up 5.4% quarter-on-quarter. The Group’s 6M 2011 return on equity (ROE) was a strong 18.1% and earnings per share reached RUB 0.0051, versus an ROE of 9.7% and earnings per share of RUB 0.0026 for 6M 2010.

Operating income before provisions amounted to RUB 153.0 billion for 6M 2011, an increase of 45.2% from RUB 105.4 billion for the same period last year. Net interest income before provisions including net recovery of losses on initial recognition of financial instruments and loans restructuring reached RUB 105.0 billion in 6M 2011, up 21.4% from RUB 86.5 billion in the same period last year. Net interest margin (NIM) for the six-month period was stable at 4.8%. In 2Q 2011 NIM improved by 10 bps quarter-on-quarter to 4.9%, mainly due to a decrease in the cost of customer deposits. The Group’s net fee and commission income increased to RUB 17.9 billion in 6M 2011, up 51.7% from RUB 11.8 billion in 6M 2010.

Staff costs and administrative expenses amounted to RUB 67.3 billion in 6M 2011, an increase of 53.3% year-on-year from RUB 43.9 billion in 6M 2010. This increase was mainly due to the consolidation of TransCreditBank (TCB) starting from 31 December 2010, the expansion of the VTB24 retail branch network, as well as higher revenues in the key operating segments.

The Group’s total gross loans demonstrated growth of 7.1% in the first six months of 2011, reaching RUB 3,277.0 billion at 30 June 2011, versus RUB 3,059.6 billion at 31 December 2010. Corporate loans at 30 June 2011 equalled RUB 2,668.4 billion, up 6.0% from RUB 2,518.1 billion at the beginning of the year. Retail loans at 30 June 2011 amounted to RUB 608.6 billion, up 12.4% from RUB 541.5 billion at year-end 2010.

Loan portfolio quality continued to improve, with the provision charge for impairment of debt financial assets down to RUB 17.3 billion for 6M 2011 from RUB 27.2 billion in 6M 2010. The provision charge for impairment of loans and advances to customers was 1.1% of the average loan portfolio in 6M 2011, down from 2.1% for 6M 2010. The allowance for loan impairment declined to 8.6% of total gross loans as of 30 June 2011, compared to 9.0% at the end of 2010.

The Group’s non-performing loan (NPL) ratio decreased to 7.7% of total gross loans, down 90 bps from 8.6% at the end of 2010, while the NPL coverage ratio at 30 June 2011 was a comfortable 111.8%.

Funding from customer deposits continued to grow at a faster pace than loans, up 19.1% to RUB 2,634.7 billion at 30 June 2011, from RUB 2,212.9 billion at year end 2010. Corporate deposits amounted to RUB 1,772.4 billion at the end of the second quarter of 2011, a 21.0% increase from RUB 1,465.0 billion at the end of 2010. Retail deposits reached RUB 862.3 billion, up 15.3% from RUB 747.9 billion as of 31 December 2010.

The share of customer deposits in the Group’s total liabilities rose to 63.9% at the end of the second quarter of 2011, up from 59.6% at 31 December 2010. At the same time, the Group’s loans to deposits ratio improved to 113.7%, down from 125.9% as of 31 December 2010.

The Group continues to optimise its liabilities costs by executing an effective borrowing strategy. In July 2011, VTB Bank closed a US\\$ 3,130 million syndicated term loan facility, an unprecedented transaction for Russia-related borrowers in terms of both the size and the geographical breadth of participation by banks. Nearly 30 international financial institutions from 16 countries participated in the deal. The facility has a margin of 130 bps per annum over LIBOR.

The Group’s Tier 1 capital adequacy ratio (CAR) was 12.0% and the total CAR was 14.1% as of 30 June 2011.

CORPORATE AND INVESTMENT BANKING
Since 1Q 2011, the Group has improved its segment disclosure by redefining its key operating segments and introducing subsegments into the Corporate and Investment Banking (CIB) segment. In the 6M 2011 financial statements, the Group has presented TCB’s data within the relevant segments (CIB, Retail Banking, and Other) and discontinued reporting on TCB as a separate segment.

The CIB segment’s 6M 2011 profit before tax was RUB 51.2 billion, up 100.0% versus RUB 25.6 billion in the same period last year. The Loans and Deposits sub-segment was the largest contributor to the CIB result, with a profit before tax of RUB 27.9 billion in 6M 2011, up 142.6% as compared to RUB 11.5 billion in the same period last year. Investment Banking posted a profit before tax of RUB 15.1 billion, up 109.7% versus RUB 7.2 billion in 6M 2010. Transaction Banking delivered a profit before tax of RUB 8.5 billion, up 25.0% versus RUB 6.8 billion in the first six months of 2010.

Despite strong competition in the Russian corporate lending market, the Group posted corporate loan portfolio growth of 6.4% in 2Q 2011. The Group’s corporate loans reached RUB 2,668.4 billion as of 30 June 2011, as compared to RUB 2,508.2 billion as of 31 March 2011 and RUB 2,518.1 billion as of 31 December 2010. In the reporting period, the CIB business benefitted from strong demand for complex corporate products, including hedging of currency and interest rate risks (options, forwards, synthetic financing with cross currency and interest rate swaps), structured deposits and notes.

In line with its strategy, the Group successfully continued the expansion of its transaction banking coverage. VTB introduced new settlement products and pricing plans, widened its offering of cash management products aimed at major corporations and holdings, and continued development of new, innovative products to increase transaction efficiency for the bank and its clients. In 2Q 2011, VTB signed on seven large industrial holdings with more than 40 sub-divisions to its comprehensive Client Settlement Centre product. Three new holdings began using the cash sweeping product during the same period. These individually-tailored cash management products have contributed significantly to increasing the Group’s corporate current accounts and deposits.

VTB Capital maintained its #1 position in Russia-related debt capital markets (DCM) in 2Q 2011, with a market share of 24.5% in domestic DCM, and 14.9% in CIS international DCM, according to Cbonds rankings. In the 6M 2011, VTB Capital organised a record 31 domestic bond placements and 17 Eurobond placements totalling c. RUB 138 billion and c. US\\$ 4.1 billion, respectively.

VTB Capital’s equity capital markets (ECM) team also maintained its leading position in Russia and the CIS. According to Dealogic, in 6M 2011 the company carried out seven deals worth US\\$ 6.2 billion, resulting in a 22% market share in the CIS and a 24% market share in Russia. ECM deals successfully completed by VTB Capital in 2Q 2011 include primary and secondary placements by Nomos Bank, Etalon Group, Mechel and Mail.ru.

VTB Capital also ranked #1 in M&A deals completed, according to Mergermarket’s 6M 2011 league tables. VTB Capital took part in five deals totalling USD 6.2 billion during the period. The company also ranked #2 by total deal volume.

Yuri Soloviev, First Deputy President and Chairman of the VTB Management Board, said: “We are well on track to implementing the Group’s key strategic projects aimed at building an efficient CIB model, as well as developing our transaction banking and product management capability. The transformation of the corporate business and integration with our leading investment banking franchise will enable the Group to expand operations profitably, and to further strengthen its customer funding base.”

RETAIL BANKING
The performance of the Retail Banking segment was driven by growing retail loan demand on the back of continued economic recovery in Russia, as well as by improving margins and lower cost of risk at VTB24.

TransCreditBank, acquired in December 2010, has continued successfully to service its existing retail client base, comprised substantially of employees of Russian Railways (TCB’s former main shareholder), while it simultaneously develops and upgrades its retail product offering in coordination with VTB24.

The Retail Banking segment’s profit before taxation amounted to RUB 20.2 billion in the first half of 2011, up 80.4% from RUB 11.2 billion in the 6M 2010 period. The segment’s net interest income was RUB 34.2 billion, an increase of 34.1% year-on-year, while its net fee and commission income reached RUB 8.1 billion, up 68.8% year-on-year.

The Group’s retail loan portfolio, including loans in Retail Banking and other segments, grew 12.4% during 6M 2011 to RUB 608.6 billion as of 30 June 2011. With a sustained focus on higher-margin retail lending products, this growth was mainly driven by consumer loans, which reached RUB 325.4 billion, up 21.2% since 31 December 2010. Car loans reached RUB 60.0 billion at the end of the first half of 2011, an increase of 13.6% since the start of the year, while mortgage loans increased by 1.1% to RUB 219.5 billion during the same period.

The share of consumer and car loans in the Group’s retail loan portfolio increased to 63.3% at 30 June 2011 from 59.3% at the start of the year, while the share of mortgage loans in the same period declined to 36.1% from 40.1%.

Retail deposits rose 15.3% during 6M 2011 to RUB 862.3 billion. Deposits from VTB24’s private banking customers continue to be an important and stable funding source for the Group. During the first half of 2011, the Bank’s VIP client deposits increased by 31.1% to RUB 119.7 billion, which represents a 13.9% share of total retail deposits.

The Group continued to expand its retail branch network, which is primarily comprised of VTB24 and TCB outlets in Russia. As of 30 June 2011, the number of VTB24 offices amounted to 567, versus 531 at the start of the year. This puts VTB24 on track to increase its branch network by a planned 70 offices in 2011. During the first six months of 2011, the number of TCB offices remained substantially unchanged, at 290 outlets as of 30 June 2011. The combined number of VTB24 and TCB ATMs increased over the same period to 7,790 from 7,330.

Developing remote sales channels also continues to be a priority for VTB24. During the first six months of 2011 the bank increased the number of clients with access to the VTB24 internet banking platform by c. 24% to 1.21 million from 0.97 million.

Mikhail Zadornov, VTB24 President and Chairman of the Management Board, said: “We continue to combine solid balance sheet growth with overall improvement in profitability for our retail operations. With the integration of TCB and Bank of Moscow, we are poised to make a significant leap forward in our nationwide retail banking distribution, supplemented by an increasingly sophisticated internet and telephone banking offering.”

UPDATE ON KEY ACQUISITIONS
Bank of Moscow
The Group continues to move forward with the strategic acquisition of Bank of Moscow (BoM) in accordance with the general agreement on measures for financial support of BoM, signed by Bank of Moscow, the Deposit Insurance Agency (DIA) and VTB Group companies - VTB Debt Centre and VTB Pension Administrator.

It is expected that at the first stage VTB Debt Centre will acquire at least 75% in BoM from VTB Bank and BoM minority shareholders. Upon the acquisition, the DIA will issue a 10-year loan of up to RUB 295 billion to BoM at an annual rate of 0.51%, which will allow BoM to book a positive P&L effect, in accordance with IFRS, equal to c. RUB 150 billion and to create the additional provisions for impairment of the loan portfolio that are required.

At the second stage VTB Pension Administrator is expected to provide additional capital to BoM in the amount of c. RUB 100 billion by the end of 2012.

In line with the procedure set out above, VTB Bank Supervisory Council on 31 August 2011 approved the sale of the 46.48% stake in BoM owned by VTB Bank to VTB Debt Centre for a total consideration of RUB 92.8 billion, and the provision of additional capital to VTB Pension Administrator in the amount of RUB 102 billion (the funds intended to be used to increase BoM’s capital).

VTB Group believes it is well on track to implement the BoM support plan and expects to increase the Group’s stake in BoM to at least 75% during 3Q 2011. The Group believes the BoM acquisition and integration will allow it to strengthen significantly VTB’s franchise in Russia, and increase the Group’s shareholder value going forward.

On the date of publication of this release, the Group owns a 46.48% stake in Bank of Moscow.

TransCreditBank
VTB Group continues to successfully integrate TransCreditBank (TCB), the 11th Russian bank by assets, which it acquired from the Russian Railways in December 2010.

In July – August 2011, the Group increased its ownership in TCB from 43.18% to 74.48% by purchasing 715,694,742 shares from Russian Railways and other TCB minority shareholders for a total consideration of RUB 17.4 billion. In August 2011, the Group’s Management Committee approved a TCB integration plan, developed in accordance with a shareholder agreement signed by VTB Bank and Russian Railways in respect to TCB.

The approved plan provides that TCB will be completely integrated into the Group’s key business lines by the end of 2013. In Corporate and Investment Banking, TCB will specialise on servicing Russian Railways and its affiliates while unifying its transaction platform, product range and pricing with VTB Bank. In Retail Banking, TCB will continue to service its existing client base while it will upgrade its retail product offering and back office procedures in coordination with VTB24. Also, in the second half of 2011, the Group will conduct a branch network audit at TCB to make relevant decisions regarding effective optimisation.

In the 6M 2011 financial statements, the Group has presented TCB’s data within the relevant segments - CIB, Retail Banking, and Other.