OREANDA-NEWS. April 28, 2012. VTB Group publishes its Consolidated Financial Statements and Auditors’ Report for the year ended 31 December 2011, reported the press-centre of VTB Bank.

FINANCIAL AND OPERATING HIGHLIGHTS

Record net profit of RUB 90.5 billion in 2011, up 65.1% year-on-year, with ROE of 15.0%, versus 10.3% for 2010;

Corporate-Investment Banking and Retail Banking segments delivered record profits before tax of RUB 84.4 billion and RUB 38.8 billion, respectively;

Operating income before provisions reached RUB 286.6 billion for 2011, up 29.6% year-on-year;

Net interest income including net recovery of losses on initial recognition of financial instruments, restructuring and other gains on customer loans for 2011 amounted to RUB 247.2 billion, up 44.6% from 2010;

Net fee and commission income in 2011 amounted to RUB 39.2 billion, up 58.7% year-on-year;

Net interest margin remained stable year-on-year at 5.0%;

Total gross loans grew by 50.0% in 2011 to RUB 4,590.1 billion; corporate loans increased by 49.6%, loans to individuals were up 52.2%;

Customer deposits reached RUB 3,596.7 billion, up 62.5% for 2011; share of customer deposits in liabilities and loans-to-deposit ratio were at 58.3% and 119.6%, respectively;

Cost of risk was at 0.9% of average gross loans in 2011, versus 1.9% in 2010;

Staff and administrative costs for 2011 amounted to RUB 141.5 billion, up 48.8% year-on-year mainly driven by acquisitions and business expansion;

Total CAR and Tier 1 ratios were 13.0% and 9.0%, respectively.

Andrey Kostin, VTB President and Chairman of the Management Board, said: “We achieved a great deal in 2011, with a record net profit despite challenging conditions in the global capital markets. We successfully consolidated our Corporate-Investment Banking business (CIB), which now includes a leading investment banking and a rapidly growing transaction banking franchise. Our CIB and Retail Banking results and market share grew organically and were enhanced by successful acquisitions of Bank of Moscow and TransCreditBank. While global economic uncertainty remains, we are well positioned to improve further our performance as the recovery takes hold in Russia and confidence returns to the markets worldwide.”

FINANCIAL AND OPERATING REVIEW

Market overview

The global macro environment in 2011 was determined significantly by the Eurozone sovereign debt crisis as well as ongoing concerns over the sustainability of economic growth in China and the US. The Russian economy demonstrated resilience to adverse external factors with healthy GDP growth of 4.3%, making the country one of the best-performing economies in the world. This growth was supported by strong commodity prices, higher retail consumption (retail trade increased by 7.2%), record low inflation of 6.1% and intense lending activity.

However, European financial turmoil had a negative impact on the banking sector both globally and in Russia. The second half of 2011 was marked by tighter liquidity conditions and interest rate hikes on both sides of the balance sheet. Securities markets also remained volatile, which subdued the sector’s performance overall during the year.

Review of financial performance and financial position
VTB Group delivered a record net profit of RUB 90.5 billion for 2011, up 65.1% year-on-year. The Group’s 2011 return on equity (ROE) was 15.0% and earnings per share reached RUB 0.00855, versus an ROE of 10.3% and earnings per share of RUB 0.00557 for 2010.

Operating income before provisions amounted to RUB 286.6 billion for 2011, an increase of 29.6% from RUB 221.1 billion in 2010. Net interest income before provisions including net recovery of losses on initial recognition of financial instruments, restructuring and other gains on customer loans amounted to RUB 247.2 billion for 2011, up 44.6% from RUB 170.9 billion in 2010. Net interest margin (NIM) for the year was stable at 5.0% versus 5.1% in 2010.

The Group’s annual net fee and commission income (NFCI) increased to RUB 39.2 billion in 2011, up 58.7% from RUB 24.7 billion in 2010. The main drivers of the Group’s fee and commission flows are its Retail Banking (c. 47% of the Group’s total NFCI in 2011) and Transaction Banking (c. 36% of the Group’s total NFCI in 2011) business lines. In 2011, these businesses increased net fee income generation versus 2010 by 61.9% and 50.5%, respectively.

In 2011, the Group’s net loss from financial instruments was RUB 26.7 billion versus a gain of RUB 14.7 billion in 2010.

Staff costs and administrative expenses amounted to RUB 141.5 billion in 2011, an increase of 48.8% year-on-year from RUB 95.1 billion in 2010. This increase was mainly due to the consolidation of TransCreditBank (TCB) from 31 December 2010, the consolidation of Bank of Moscow (BoM) from 30 September 2011 and the organic expansion of VTB’s core business segments throughout the year.

The Group’s total gross loans grew by 50.0% in 2011, reaching RUB 4,590.1 billion at 31 December 2011, versus RUB 3,059.6 billion at 31 December 2010.

The corporate loan portfolio amounted to RUB 3,766.0 billion at 31 December 2011, up 49.6% from RUB 2,518.1 billion at the beginning of the year. As a result, the Group’s market share in Russian corporate loans reached 18.7% at 31 December 2011, up from 12.0% at 31 December 2010. This solid growth was due both to the consolidation of Bank of Moscow as well as strong organic growth. Organic growth was driven by a mix of increased lending activity by the Group’s CIB business and rouble depreciation against the dollar of c. 6%, which inflated the carrying amount of dollar-denominated loans.

Retail loans at 31 December 2011 amounted to RUB 824.1 billion, up 52.2% from RUB 541.5 billion at year-end 2010, supported both by organic growth and the acquisition of Bank of Moscow. During the year, the Group’s market share in retail loans in Russia increased to 13.7% from 12.2%.

The Group saw a decrease in cost of risk on the back of improving asset quality in 2011. The provision charge for impairment of debt financial assets equaled RUB 31.6 billion for 2011, compared to RUB 51.6 billion for 2010. The provision charge for impairment of loans and advances to customers was 0.9% of the average loan portfolio in 2011, compared to 1.9% in 2010. The allowance for loan impairment was 6.3% of total gross loans as of 31 December 2011, compared to 9.0% at the end of 2010.

The Group’s non-performing loan (NPL) ratio was 5.4% of total gross loans at 31 December 2011, compared to 8.6% at 31 December 2010. Improvement in the 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 31 December 2011 was 111.3%.

Funding from customer deposits reached RUB 3,596.7 billion at 31 December 2011, up 62.5% from RUB 2,212.9 billion at year-end 2010. Corporate deposits amounted to RUB 2,435.3 billion at the end of 2011, a 66.2% increase from RUB 1,465.0 billion at the end of 2010. The Group retained its leading position in the corporate deposits market, increasing its total share to 21.1% at 31 December 2011 from 15.0% as at the start of the year. Retail deposits reached RUB 1,161.4 billion, up 55.3% from RUB 747.9 billion as at 31 December 2010. The Group’s market share in retail deposits grew to 9.0% from 7.2% during the year.

In the course of 2011, the Group considerably enhanced capital utilisation efficiency through acquisitions and organic growth of operations. As of 31 December 2011, the Group’s Tier 1 capital adequacy ratio (CAR) was 9.0% and total CAR equaled 13.0%. At the same time the Group has been increasing its focus on reducing risk and on effective balance sheet management, which should support capitalisation ratios going forward.

CORPORATE-INVESTMENT BANKING (CIB)
2011 was a year of consolidation of the Group’s CIB business, which provides its clients with a full array of banking and investment products including sophisticated structured solutions.

The key initiatives implemented by the CIB management during the year include:

transformation of the Group’s client coverage and product management model under new management teams;

enhancement of the global transaction banking product line in order to increase commission fees and to improve the Group’s funding structure;

transformation of VTB Bank’s corporate branch network with a focus on efficiency and cost optimisation;

introduction of new lending procedures resulting in a reduction in VTB’s standard loan approval period by 30-40% for mid-sized customers, and by 50-70% for large customers.

The CIB segment’s full year 2011 profit before tax was RUB 84.4 billion, up 43.8% versus RUB 58.7 billion in 2010.

The Loans and Deposits subsegment was the largest contributor to CIB’s performance, with a profit before tax (before inter-CIB eliminations) of RUB 64.0 billion for the year, up 4.7 times from RUB 13.5 billion in 2010. This result was supported by the subsegment’s strong net interest income including net recovery of losses on initial recognition of financial instruments, restructuring and other gains on customer loans which amounted to RUB 145.4 billion, up 42.7% year-on-year. In 2011, CIB management successfully fine-tuned its loan-pricing and issuance policies with a shift to floating interest rates which helped to protect the Group’s net interest margin in an environment of higher rates and stretched liquidity in 2H 2011.

In response to increased uncertainty in the market, the Group tightened its corporate lending procedures in 2H 2011. In particular, VTB established a monitoring group comprised of members of its senior management that assumed responsibility for reviewing new loan issuance at the Group level.

The Investment Banking subsegment posted a profit before tax of RUB 1.0 billion for 2011 compared to RUB 30.8 billion in 2010, and remained profitable despite extremely challenging conditions in the global capital markets throughout the year.

VTB Capital, the Group’s investment business, strengthened its client base and retained its leading positions in the Russian debt, equity and M&A markets.

VTB Capital took the top spot in Russian Debt Capital Markets and Russian Eurobonds rankings in 2011, according to Dealogic, carrying out 48 deals worth c. USD 7.3 billion in domestic debt and 13 Eurobond issues of c. USD 2.6 billion (apportioned values). This constitutes market share of 26.1% and 11.3%, respectively.

In equity capital markets (ECM), VTB Capital was the highest-ranking bookrunner for Russia and CIS in 2011, performing nine transactions worth c. USD 2.6 billion, according to Dealogic. This represents 22.6% of the Russian market and 21.6% of the CIS market. According to Bloomberg, VTB Capital was also the leader among Eastern Europe ECM bookrunners with nine deals totalling c. USD 2.8 billion.

VTB Capital is also ranked number one in Russian and CIS M&A deal volume by Dealogic, with a 14.6% market share in Russia and 12.7% in the CIS. During the year, VTB Capital took part in 20 deals totalling c. USD 14.0 billion.

VTB Capital continued the rapid expansion of its investment management arm, including its strong private equity business. In 2011, the investment management business’ assets under management increased by c. 277% to RUB 77.2 billion. In December 2011, VTB Capital’s private equity team exercised its first complete exit with the profitable sale of the “Lesnaya Plaza” office centre to O1 Properties.

As part of its international business development strategy, VTB Capital continued to expand across strategic regions. In November 2011, VTB Capital officially opened the office of VTB Capital Hong Kong Ltd, licensed to execute investment banking services by the Hong Kong Securities and Futures Commission. In September 2011, the U.S. Financial Industry Regulatory Authority granted VTB Capital Inc. a U.S. broker-dealer license, and in 2012 VTB Capital announced the launch of business operations in the United States.

The Transaction Banking subsegment delivered a profit before tax of RUB 19.2 billion for 2011, up 34.3% versus RUB 14.3 billion in 2010. Increasing fee generation remains one of the key strategic targets of the Group’s Global Transaction Banking business line. In 2011, the subsegment’s net fee and commission income was RUB 14.0 billion, up 50.5% versus RUB 9.3 billion in 2010.

In 2011, VTB’s global transaction banking team sold customised solutions to 28 large holdings (more than 670 legal entities) and successfully closed 10 complex offerings (payments, acquiring, cash collection and currency control) for key clients including some of the largest state-owned and private companies. During the year, the Group significantly enhanced the cross-selling of transaction banking products to the CIB client base after hiring a new product sales team that works out of VTB Bank’s head office.

In 2012, VTB’s transaction banking business will continue to expand in line with its three-year strategy for 2012-2014, making further advances in client coverage and launching innovative products.

Yuri Soloviev, First Deputy President and Chairman of the VTB Management Board, said:

“2011 was a milestone year for the CIB business. We have successfully transformed the Group’s core operations and demonstrated that our unique CIB model can offer unrivalled client coverage and product capabilities, which generate profits even in the challenging environment we experienced throughout the year. The CIB team that we have brought together can serve the most demanding clients and continues to be one of the Group’s key competitive strengths.”

RETAIL BANKING

The Retail Banking segment continued its rapid expansion combined with steady growth in profitability. In 2011, VTB24’s nation-wide coverage and strong franchise were enhanced by the acquisitions of TransCreditBank and Bank of Moscow, both of which provided the Group with access to a new and extensive customer base. Providing these customers with VTB Group’s high-quality and diverse product offering is expected to increase the value of the Group’s Retail Banking business going forward.

The Retail Banking segment’s profit before tax amounted to RUB 38.8 billion in 2011, up 83.0% from RUB 21.2 billion in 2010. The segment’s net interest income was RUB 79.2 billion in 2011, an increase of 46.1% year-on-year, while its net fee and commission income reached RUB 18.3 billion, up 61.9% year-on-year.

The Group’s loans to individuals grew by 52.2% in 2011 to RUB 824.1 billion through a combination of organic growth and consolidation of the BoM portfolio. At the end of the year, the retail loan portfolio continued to consist primarily of higher-margin consumer loans, which totaled RUB 436.2 billion, up 62.5% since 31 December 2010. Car loans reached RUB 75.5 billion at the end of 2011, an increase of 43.0% since the start of the year, while mortgage loans increased by 42.3% to RUB 309.0 billion during the same period.

The share of consumer and car loans in the Group’s retail loan portfolio increased to 62.1% at 31 December 2011 from 59.3% at the start of the year. The share of mortgage loans in the same period declined from 40.1% to 37.5%, despite an absolute increase in mortgage lending overall.

The Group’s retail deposits rose 55.3% during 2011 to RUB 1,161.4 billion. VTB24’s private banking customers continue to be an important and stable funding source for the Group. The deposits of the bank’s private banking clients increased in 2011 by 56.3% to RUB 143.3 billion, representing a 12.3% share of the Group’s total retail deposits.

VTB Group continued to expand its retail branch network, which is primarily comprised of VTB24, TCB and BoM outlets in Russia. Branch network expansion continues to be an important component of VTB24’s new development strategy. As of 31 December 2011, the number of VTB24 offices amounted to 606, versus 531 at the start of the year. The number of TCB and BoM offices as of 31 December 2011 amounted to 287 and 349, respectively. The combined number of VTB24, TCB and BoM ATMs exceeded 10,160 at the end of the reporting period.

VTB24 continues to maintain its focus on the development of its IT platform as well as online and remote retail banking products for its customers. During the year, the number of registered VTB24’s internet and mobile banking users increased by c. 47% to 1.43 million. During the year, VTB24 also released updated new versions of its mobile banking applications for mobile devices.

Mikhail Zadornov, VTB24 President and Chairman of the Management Board, said: “2011 was a very profitable year for Retail Banking, and we have entered 2012 with continued strong momentum, having achieved solid organic growth enhanced by key acquisitions. VTB24 and TCB outpaced the Russian market both in loans and deposits. Our CIS retail operations also delivered very strong growth, expanding further the Group’s retail business outside of Russia. Looking ahead we expect to unlock additional value from the unique franchises of BoM and TCB, with the integration of their retail operations well on track.”