OREANDA-NEWS. March 23, 2012. Promsvyazbank (PSB) net profit was RUB 5.2 billion in 2011, double 2010 net profit of RUB 2.5 billion, reported the press-centre of Promsvyazbank.

This was driven mainly by increased lending volume and net interest income as well as an increase in fee and commission income due to customers increasing use of banking operations. PSB audited 2011 consolidated IFRS accounts were signed by PricewaterhouseCoopers and published today.

Key Balance Sheet Items:

Total assets rose 18% in 2011 to RUB 563 billion

The net loan portfolio was RUB 396 billion, up 27%. Our loans increased to 70% of total assets from 65% in 2010 as good lending opportunities existed and the improving situation in the domestic financial markets reduced the need for high levels of securities and other liquid assets.

The share of liquid assets decreased slightly to a more optimal level of 18%, compared with 21% in 2010.

The share of non-performing loans (NPLs) fell to 5.7% at December 31, 2011 from 9.2% at the end of 2010

Regulatory capital as per the Basel Accords was RUB 71.5 billion at December 31, 2011

PSB’s loan portfolio demonstrated considerable growth in all sectors while non-performing loans (NPLs) decreased. Gross loan portfolio growth of 22% considerably exceeded the 15% we expected at the beginning of the year. Our loans to corporate customers increased by 21% with margin levels remaining stable throughout the year.

Our support of small and medium sized enterprises (SME) through lending grew 22%, very strongly outperforming the market average. In addition to this organic growth, PSB also expanded its portfolio through acquisition of RUB 5.8 billion of SME loans from Trust Bank. Therefore, our total SME loan portfolio increased 43% in 2011. The organic growth in our SME business has been mainly achieved through our branch network outside of Moscow.

The total retail portfolio of loans to individuals increased by 14% on a year to year basis, however this masks several important changes. PSB sold or wrote off 10.3 billion of fully provided for non-productive loans. Excluding this the effective growth rate would have been 46%. This continued the re-launch of retail credit products initiated in July 2010. From the beginning of 2011, monthly new lending volumes accelerated through the year. Key growth drivers included a broader product offering, including the re-launch of mortgage lending programs in April 2011 and a more active marketing campaign. In 2011 PSB issued RUB 3.6 bln of mortgages to individuals.

The quality of our loan portfolio continued to improve as a result of more effective risk criteria rigorously applied. NPLs from new generated portfolio in Retail and SME segments remained low. We also significantly reduced NPL’s by disposing retail and SME non-performing loans, in most cases those fully provided for. NPLs were reduced to 5.7% of total from 9.2% at the end of 2010. PSB continues its conservative policy of maintaining provisions greater than the volume of non-performing loans; this coverage ratio was 120% at the end of 2011.

The securities portfolio (trading, held-to-maturity and available for sale) was down 16% in 2011. Maintaining a conservative approach and anticipating the negative financial market conditions of late summer 2011, PSB closed a number of its positions in trading securities and fixed profits in 1H 2011. Nonetheless our securities operations incurred losses in Q3 2011 which were substantially offset in Q4 as markets recovered. The portfolio composition remains conservative, with 61% invested in highly liquid securities included in the Central Bank of Russia’s Lombard List.

Customer deposits and other funds on their accounts remains a key strength of PSB’s funding, only slightly changed from 69% at the beginning of 2011 to 67% share at December 31.  The proportion of retail versus corporate deposits remained almost unchanged at 37% and 63% respectively compared to 36% and 64% at the end of 2010.

Our ability to access non-customer funding remains strong. A new Eurobond was issued in April 2011. Subordinated loans were received from majority shareholders in August 2011 and from EBRD in December 2011. In October 2011 PSB received a large syndicated loan from a number of foreign banks which further demonstrated PSB’s capability to raise market funding. Our strong liquidity position means that PSB does not plan to use our funding limits available from the CBR or the Ministry of Finance.

In December we issued RUB 4 billion of new equity, purchased by the majority shareholders and by EBRD who maintained their 12% share in the bank’s equity.

Key Income Statement Items:

In 2011 we earned a net profit of RUB 5.2 billion compared to RUB 2.5 in 2010

Return on equity (ROE) grew to 11% vs.  6% in 2010

Net interest income grew 15% year-on-year, to RUB 23.6 billion

Net fee and commission income rose 17% year-on-year, to RUB 7.1 billion

Income from operations with securities was RUB 382 million, compared with a loss of RUB 350 million in 2010

Total operating income grew 19% year-on-year, to RUB 33.5 billion

Non-interest expenses increased only 14% as effective cost control and expenses reduction offset much of the cost of expanding the branch network including new personnel.

The net impairment provision charge fell by 9% to RUB 9.4 billion, or 28% of operating income (37% in 2010)

The cost-to-income ratio decreased to 50.6%, compared with 52.6% in 2010

Net profit for 2011 was equal to RUB 5.2 billion resulting in an increase in ROE from 6% in 2010 to 11% for 2011.

Net interest income grew by 15%, less than the growth in loans and other assets as margins came under significant pressure in the first half of the year. Net interest margins recovered in Q4 2011 to average 5.1% for 2011 vs 4.7% in 2010. However solid growth in fees and commissions and a positive result from our securities operations compared to a loss last year, lifted total operating income to 19% above the 2010 level. Although we are still in the investment stages of branch and personnel expansion for both SME and retail initiatives, our SME business is solidly profitable and we expect retail to become profitable in 2012.

Net fee and commission income continued to show positive dynamics throughout the whole year, delivering 17% year-on-year growth. The share of net fee and commission income as a percentage of operating income remained strong. As before, commissions on documentary operations (+23%), money transfer fees (+24%) and commissions for servicing plastic cards (+34%) were key drivers of PSB’s fee and commission income.

We have seen a significant improvement in loan quality as new credit paradigms put in place 2 and 3 years ago are having a significant effect on reducing cost of credit. We have been, and will remain, conservative and do not expect to write previously made provisions into income. We will maintain the level of provisions above the level of non-performing loans for the foreseeable future.

Good control of costs and initiatives to increase effectiveness, as well as expanding revenues in the latter half of the year have reduced our cost-to-income ratio from 52.6% to just over 50%. This is not the end of the improvements we expect in cost efficiency.

Key Financial Ratios:

The total capital adequacy ratio (per Basel Accords) was 13.9%, slightly below 14.4% at the end of 2010. Tier 1 capital adequacy was unchanged at 10.0% (10.0% in 2010)

The net loans-to-deposit ratio rose to 117%, up from 105% at December 31, 2010 – still less than the 120% which we consider to ceiling of our optimal range.

NPLs fell by 24% compared to December 31, 2010, to RUB 24.2 billion or 5.7 % of the total portfolio (9.2% in 2010)

Loan impairment provisions as a percentage of the loan portfolio decreased to 7%, compared to 10.8% in 2010.

PSB’s First Vice President Alexandra Volchenko comments on the published results:

“2011 was another challenging year, but one in which we began to see not only good business results but better financial performance as a result of our early initiation of strategic initiatives and structural change. Some interesting challenges we imposed on ourselves, but some difficult ones came from the continuing volatility and uncertainty in the world economy and its impact on banking everywhere. Our Russian regulatory authorities have acted quickly and prudently to support our system, but our own careful management of our financial position and the support of our shareholders, including EBRD, have helped the bank to come through the lingering effects of the global financial crisis well.

“More importantly the results of our own changes are being felt positively, especially in the second half of the year when return on equity strengthened to 17% from 5.1% in the first half. Cost efficiency has been, and will be in the next several years, a key to improving performance. We now have consolidated most of our operations into key branches; 14 in Russia at the end of the year compared to 47 a year ago, while smaller outlets or ‘lite’ branches have brought the total of sales points to 287, 34 more than the total a year ago. We will continue with about the same increase in 2012.

“Our strong relationship with our corporate customers has allowed us to maintain margins in our corporate business in spite of significant pressure from larger banks. Even more pleasant is the increasing growth and profitability of our SME business and the growth and trend towards becoming profitable in our restructured and re-launched retail businesses. We believe the same attention to these SME and individual customers’ needs and their success, as in our corporate relationships, will lead to much higher growth, margins and profitability. We look forward with confidence to another interesting year and to even stronger financial performance.”