OREANDA-NEWS. December 12, 2011. VTB Group publishes its Interim Condensed Consolidated Financial Statements as at 30 September 2011 with the Independent Auditors’ Report on Review of these Statements, reported the press-centre of VTB.

FINANCIAL AND OPERATING HIGHLIGHTS
Net profit of RUB 72.6 billion in 9M 2011, up 87.1% year-on-year, with annualised ROE of 16.2%, versus 9.9% in 9M 2010;

Net interest income including net recovery of losses on initial recognition of financial instruments and loans restructuring for 9M 2011 amounted to RUB 159.2 billion, up 23.0% year-on-year;

Net fee and commission income of RUB 27.1 billion for 9M 2011, up 52.2% year-on-year;

Organic net interest margin stable in 9M 2011 and 3Q 2011 at 4.8% and 4.9%, respectively;

Operating income before provisions reached RUB 209.9 billion in 9M 2011, up 30.6% year-on-year;

Strong balance sheet growth supported by Bank of Moscow consolidation from 3Q 2011:

Total gross loans amounted to RUB 4,429.0 billion, up 35.2% in 3Q 2011; corporate loans increased by 37.4%, retail loans were up 25.4% in 3Q 2011;

Customer deposits reached RUB 3,550.9 billion, up 34.8% in 3Q 2011;

Cost of risk was 1.0% of average gross loans (excluding the Bank of Moscow loan book) in 9M 2011, versus 2.0% in 9M 2010;

Staff and administrative costs for 9M 2011 amounted to RUB 90.8 billion, up 33.5% year-on-year; while in 3Q 2011 staff costs were RUB 23.5 billion, down 31.5% quarter-on-quarter;

Total CAR and Tier 1 ratios were 13.2% and 9.2%, respectively.

Andrey Kostin, VTB President and Chairman of the Management Board, said: “Despite a challenging global macroeconomic environment VTB has continued to demonstrate strong performance, improving efficiency and achieving healthy lending growth. From September 30th we now consolidate Bank of Moscow, which we believe is a good long-term strategic fit for VTB, helping to strengthen our retail and corporate banking franchise in Russia’s most lucrative region. We are well-prepared for any stress scenario, and we are well-positioned for strong growth when the market environment stabilises.”

FINANCIAL AND OPERATING REVIEW
On 30 September 2011, VTB Group obtained control over Bank of Moscow (BoM) after increasing its share in BoM to 80.57% and began consolidating BoM in the Group’s IFRS financial statements starting from this date. All information on assets and liabilities discussed below includes BoM data. Metrics excluding BoM are also provided in a table format to indicate the organic changes in the Group’s assets and liabilities during the period.

VTB Group delivered a net profit of RUB 72.6 billion for 9M 2011, up 87.1% year-on-year, and quarterly net profit of RUB 19.0 billion for 3Q 2011, a 30.9% quarter-on-quarter decline. The Group’s 9M 2011 organic return on equity (ROE) was 16.2% and earnings per share reached RUB 0.0071, versus an ROE of 9.9% and earnings per share of RUB 0.0040 for 9M 2010.

Operating income before provisions amounted to RUB 209.9 billion for 9M 2011, an increase of 30.6% from RUB 160.7 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 159.2 billion in 9M 2011, up 23.0% from RUB 129.4 billion in the same period last year. Organic net interest margin (NIM) for the nine-month period and 3Q 2011 was stable at 4.8% and 4.9%, respectively. The Group’s net fee and commission income increased to RUB 27.1 billion in 9M 2011, up 52.2% from RUB 17.8 billion in 9M 2010.

During 3Q 2011 most developed and emerging markets declined on the back of Europe’s ongoing sovereign debt problems. The Russian MICEX Index declined by 18% during the three-month period ended 30 September 2011. This turbulence affected the results of the Group’s market-related business in 3Q 2011, although its equity investments outperformed Russia-related indexes.

The Group’s net loss from financial instruments was RUB 10.5 billion in 3Q 2011 and RUB 1.0 billion in 9M 2011.

Staff costs and administrative expenses amounted to RUB 90.8 billion in 9M 2011, an increase of 33.5% year-on-year from RUB 68.0 billion in 9M 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 key operating segments in the first two quarters of 2011. In 3Q 2011 staff and administrative costs were significantly lower quarter-on-quarter at RUB 23.5 billion, representing a 31.5% decrease from 2Q 2011. This underscores variability in the Group’s staff costs and their positive correlation with the Group’s performance in key segments.

The Group’s share in income of associates amounted to RUB 7.7 billion in 9M 2011 and 6.2 billion in 3Q 2011. This result was mainly driven by Bank of Moscow’s financial performance, which was supported by a one-off provision recovery in 3Q 2011.

The Group’s total gross loans demonstrated growth of 44.8% in the first nine months of 2011, reaching RUB 4,429.0 billion at 30 September 2011, versus RUB 3,059.6 billion at 31 December 2010. Corporate loans at 30 September 2011 equalled RUB 3,665.7 billion, up 45.6% from RUB 2,518.1 billion at the beginning of the year. Retail loans at 30 September 2011 amounted to RUB 763.3 billion, up 41.0% from RUB 541.5 billion at year-end 2010.

The consolidation of BoM contributed RUB 587.0 billion of corporate loans and RUB 66.4 billion of retail loans to the Group’s loan portfolio in 3Q 2011. Strong organic growth in VTB Group gross loans in 3Q 2011 (+15.2%) was mainly due to strong customer demand combined with rouble depreciation of 13.5% against the dollar during 3Q 2011.

The provision charge for impairment of debt financial assets declined to RUB 25.3 billion for 9M 2011 from RUB 40.3 billion in 9M 2010. The provision charge for impairment of loans and advances to customers was 1.0% of the average loan portfolio in 9M 2011, compared to 2.0% for 9M 2010. The allowance for loan impairment was 6.5% of total gross loans as of 30 September 2011, compared to 9.0% at the end of 2010.

The Group’s non-performing loan (NPL) ratio was 5.9% of total gross loans at 30 September 2011, compared to 7.7% at the end of the second quarter of 2011 and 8.6% at 31 December 2011. The improvement in NPL ratio was mainly due to an increase in the Group’s loan book driven by both organic growth and the consolidation of BoM assets. The NPL coverage ratio at 30 September 2011 was 110.7%.

Funding from customer deposits reached RUB 3,550.9 billion, up 60.5% from RUB 2,212.9 billion at year-end 2010. Corporate deposits amounted to RUB 2,471.9 billion at the end of the third quarter of 2011, a 68.7% increase from RUB 1,465.0 billion at the end of 2010. Retail deposits reached RUB 1,079.0 billion, up 44.3% from RUB 747.9 billion as of 31 December 2010. The BoM contribution to the Group’s customer deposits was RUB 360.4 billion of corporate deposits and RUB 152.7 billion of retail deposits.

The Group’s Tier 1 capital adequacy ratio (CAR) was 9.2% and total CAR equalled 13.2% as of 30 September 2011.

CORPORATE AND INVESTMENT BANKING
Since 1Q 2011, the Group has improved its segment disclosure by redefining its key operating segments and introducing sub-segments into the Corporate and Investment Banking (CIB) segment. In the 9M 2011 financial statements, the Group has presented Bank of Moscow’s data within the relevant segments.

The CIB segment’s 9M 2011 profit before tax was RUB 69.9 billion, up 77.0% versus RUB 39.5 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 40.3 billion in 9M 2011, up 266.4% as compared to RUB 11.0 billion in the same period last year.

VTB Capital’s strong client business supported the Investment Banking sub-segment’s performance in 3Q 2011, helping it remain profitable in 3Q2011 and 9M 2011 despite challenging capital market conditions, tighter liquidity and a steep decline in equity markets. Investment Banking posted a profit before tax of RUB 15.5 billion in 9M 2011 compared to RUB 17.7 billion in 9M 2010.

VTB Group continues to expand its transaction banking coverage with new innovative products. In 9M 2011, the Transaction Banking sub-segment delivered a profit before tax of RUB 13.8 billion, up 29.0% versus RUB 10.7 billion in the first nine months of 2010. In 3Q 2011, the VTB Transaction Banking team focused on developing individualised cash management solutions for two large industrial groups and two major state holding companies. Such individually tailored cash management products continue to contribute significantly to attracting corporate current accounts deposits.

Despite strong competition for the highest-quality Russian borrowers, the Group posted organic corporate loan portfolio growth of 15.4% in 3Q 2011. The Group’s corporate loans excluding BoM reached 3,078.7 billion as of 30 September 2011, as compared to RUB 2,668.4 billion as of 30 June 2011 and RUB 2,518.1 billion as of 31 December 2010. VTB Group organic loan portfolio growth in 3Q 2011 was due to a mix of increased lending activity and rouble depreciation against the dollar, which inflated the carrying amount of dollar-denominated loans.

As international and domestic liquidity was stretched in 3Q 2011 and remains so in 4Q 2011, VTB Group tightened its policies and procedures in corporate lending. In particular, VTB has established a monitoring group comprised of members of its senior management that is responsible for reviewing the new loan issuance pipeline at the Group level.

In 3Q 2011, VTB Capital maintained its #1 position in Russia-related debt capital markets (DCM), with a market share of 30.7% in domestic DCM, and 15.4% in CIS international DCM, according to Dealogic and Cbonds rankings, respectively. According to the league-tables, in the 9M 2011, VTB Capital performed 40 domestic bond placements and 18 Eurobond placements totaling USD 11 billion.

VTB Capital’s equity capital markets (ECM) team also maintained its leading position in Russia and the CIS. According to Dealogic, in the first nine months of 2011, the company carried out seven deals, resulting in a 21.1% market share in Russia and a 20.1% market share in the CIS, corresponding to USD 2.123 billion.

VTB Capital ranked #2 in completed M&A deals, according to the Dealogic 9M 2011 league tables. The bank took part in seven deals totalling USD 5.6 billion during the period resulting in 8.8% market share. The company also ranked #2 by total M&A deal volume.

Yuri Soloviev, First Deputy President and Chairman of the VTB Management Board, said: “We maintain our focus on implementing the Group’s key strategic objective to build an efficient CIB model that offers unrivalled client coverage. While volatility in global markets affected trading results in the third quarter, our strong client business and increased focus on risk-management were important stabilising factors for the segment. With the help of our solid portfolio of high quality CIB products, we continue to develop a business that can serve the growing needs of Russia’s leading corporations.”

RETAIL BANKING
The Retail Banking segment continued its profitable growth, driven by VTB24’s nation-wide coverage, strong franchise, and advanced product range, as well as by the integration of TransCreditBank (TCB) and Bank of Moscow (BoM) retail operations into the Group’s business.
The Retail Banking segment’s profit before tax amounted to RUB 28.1 billion in 9M 2011, up 88.6% from RUB 14.9 billion in the same period last year. The segment’s net interest income was RUB 54.2 billion, an increase of 37.9% year-on-year, while its net fee and commission income reached RUB 12.4 billion, up 59.0% year-on-year.

Excluding the Bank of Moscow retail loan portfolio, the Group’s loans to individuals grew by 28.7% in 9M 2011 to RUB 696.9 billion. This growth was primarily driven by higher-margin consumer loans, which reached RUB 370.0 billion, up 37.9% since 31 December 2010. Car loans reached RUB 67.0 billion at the end of the first half of 2011, an increase of 26.9% since the start of the year, while mortgage loans increased by 18.3% to RUB 256.9 billion during the same period.

Bank of Moscow’s contribution to the Group’s retail loan book was RUB 38.7 billion of consumer loans, RUB 24.4 billion of mortgage loans and RUB 3.2 billion of car loans. As a result, the Group’s total loans to individuals, including loans in Retail Banking and other segments, grew by 41.0% during 9M 2011 to RUB 763.3 billion as of 30 September 2011.

The share of consumer and car loans in the Group’s retail loan portfolio increased to 62.7% at 30 September 2011 from 59.3% at the start of the year, while the share of mortgage loans in the same period declined to 36.9% from 40.1%.

The Group’s retail deposits rose 44.3% during 9M 2011 to RUB 1,079.0 billion, supported by a contribution from BoM of RUB 152.7 billion. Organic growth in retail deposits in 9M 2011 was 23.9% (to RUB 926.3 billion). VTB24’s private banking customers continue to be an important and stable funding source for the Group. During the first nine months of 2011, the Bank’s VIP client deposits increased by more than 44.8% to RUB 132.8 billion, representing a 12.3% share of total retail deposits.

VTB Group continued to expand its retail branch network, which is primarily comprised of VTB24, TCB and BoM outlets in Russia. As of 30 September 2011, the number of VTB24 offices amounted to 589, versus 531 at the start of the year. VTB24 remains on track to increase its branch network by a planned 70 offices in 2011. The number of TCB and BoM offices as of 30 September 2011 amounted to 289 and 381, respectively. The combined number of VTB24, TCB and BoM ATMs was 9,978 at the end of the reporting period.

Mikhail Zadornov, VTB24 President and Chairman of the Management Board, said: “VTB24 has achieved strong organic growth this year, with corresponding solid market share increases in retail loans and retail deposits. We successfully strengthened the Group’s funding base and franchise, while the integration of TCB and Bank of Moscow has made significant contributions to the scale and breadth of VTB Group’s retail banking segment.”

UPDATE ON BANK OF MOSCOW
In February 2011, VTB purchased 46.48% of Bank of Moscow for RUB 92.8 billion. On 30 September 2011, the Group obtained control in BoM increasing its stake to 80.57% after purchasing additional shares from BoM minority shareholders for a consideration of RUB 50.2 billion. As a result of the consolidation of Bank of Moscow, the Group recognised total goodwill related to BoM in the amount of RUB 81.4 billion.

The acquisition of control in BoM was performed in full accordance with the General Agreement on measures for financial support of Bank of Moscow, which was signed in July 2011 by Bank of Moscow, the Deposit Insurance Agency (DIA) and VTB Group companies. As part of the support measures stipulated by the Agreement, the DIA granted a 10-year loan of c. RUB 295 billion to BoM, at a contractual rate of 0.51% p.a. These funds were invested by Bank of Moscow into 10-year Russian Federal loan bonds (OFZs).

The support measures enabled BoM to book a positive P&L effect, in accordance with IFRS, equal to c. RUB 150 billion, and to create additional required provisions for the impairment of the loan portfolio. As a further step in the implementation of the General Agreement, VTB Bank is expected to provide additional capital to BoM in the amount of c. RUB 100 billion.

In 3Q 2011, VTB Group continued to successfully integrate BoM through implementation of a new governance model, as well as centralisation of treasury, risk-management and other functions.

On 08 November 2011, the Group’s Managing committee approved Bank of Moscow’s new development strategy for 2011-2014. According to the strategy, BoM will continue to operate as a universal bank focused on its home markets of Moscow and the Moscow Region. Key points of the strategy include:

Aim to achieve 4-6% market share in all business segments in Moscow and Moscow Region, grow presence in 10 additional priority regions of Russia;

Build on existing partnership with Moscow city government;

Cover corporate clients in coordination with VTB, cover retail clients in coordination with VTB24;

Integrate investment banking business into VTB Capital;

Develop small- and medium-sized business banking;

Key 2014 performance targets for Bank of Moscow include a net profit of c. RUB 35 billion, which implies a ROE of c. 20%.

VTB Group believes the BoM acquisition is a good strategic fit for the Group, and expects this transaction to support the Group’s shareholder value going forward.