OREANDA-NEWS. March 31, 2014. “In the uncertain economic environment and vague macro perspective for 2014 we concentrated on limiting credit risks, supporting NIM level as well as rising internal efficiency of operations not loosening our high standards of clients service. We plan to keep the bank’s positions at the key market segments and to improve main performance indicators using our vast potential and adhering to the strategy of moderate growth amid continuous financial markets volatility and toughening regulator’s monetary policy”, commented Alexander Dolgopolov, Chairman of the Management Board.

Assets of the bank totaled RUB211 billion (USD 6.4 billion) as of the year-end, slightly up by 1% over 2012 level. The balance sheet volume grew by 3.6% during first three quarters but in the course of Q4 it declined by 2.6% on the back of cash and equivalents decrease by RUB 3.9 billion to RUB29.3 billion (USD 0.9 billion). The decline was reasoned by the clients’ funds outflow due to unstable general situation in the banking system that persisted over the last quarter of the year. Solid liquidity cushion let the bank fulfill all necessary obligations to its clients keeping the share of liquid assets in the balance at a comfortable level of 19.5%. As a result the share of interest-earning assets improved to 79.9%. Loan-to-deposit ratio grew to 104% that was consistent with the bank’s target range.

Loan portfolio before provisions added 7.6% reaching RUB168.2 billion (USD 5.1 billion) as of December 31, 2013 with the major part of growth coming in Q3 2013 (3.7%). At the end of Q4 the bank wrote off RUB6.1 billion of uncollectable loans issued in 2002-2010 from the balance. Without such writing off the loan book before provisions would have exceeded RUB174.3 billion (+11.3%), in line with the initially planned range.

Retail loan book expansion by 29.8% was the main driver of the portfolio progress and outpaced the banking sector growth (+28.7%). Corporate loan book widened by 1.7% (+6.6% without above-mentioned writing off) to RUB125.6 billion (USD 3.8 billion).

The bank maintains the balanced structure of its loan book by economic sectors with largest shares represented by industrial production (37%) and wholesale and retail trade (25%). The bank also issues loans to construction, transport, agricultural and other companies. 58.4% of total corporate loans are provided to SMEs, which are the bank’s key target segment.

Retail loans share in the total loan book reached 25.4% (24.5% without above-mentioned writing off). During the year the bank issued almost RUB10 billion of new loans to individuals widening its portfolio to RUB42.6 billion (USD 1.3 billion). The main contributor to that growth were mortgages that increased by 32.5% to RUB29.5 billion (\\$0.9 billion) over the period.

Improvement of lending terms implemented early in the year as well as the bank’s active participation in partnership programs with developers and construction companies made Bank Vozrozhdenie mortgages very popular among the clients. Consumer, car and card loans also progressed throughout the year adding 24.2% and totaled RUB13.1 billion (USD 0.4 billion).

NPL’s share in the loan book before provisions declined from 9.0% at the start of the year to 7.4% as of January 1, 2014. The following factors contributed to the contraction of NPLs amount: partial repayment of earlier impaired loans for RUB1.2 billion, write-down of uncollectable corporate debts for RUB6.1 billion using earlier formed provisions and repayment of RUB460 million technically overdue indebtedness on mortgages that was recorded as of September 30, 2013.

Over Q4 2013 provisions for possible loans impairment slipped by RUB5.7 billion and totaled RUB12.4 billion (\\$0.4 billion) as of the year-end. In particular provisions for possible impairment of retail loans was reduced by 37% to RUB808 million as a result of transition to the migration model of estimating provisions for retail loan book impairment on a portfolio basis, consistent with IFRS practices. During 2013 the bank channeled the total amount of RUB3.8 billion to provisions for loans impairment implying annualized cost-of-risk of 2.3%. Coverage ratio for non-performing loans, including all indebtedness with at least 1 installment 1day+ overdue and impaired but not past due amounts, reached 100%. Same ratio for 90days+ overdue loans stood at 108%.

Clients’ funds declined by 1.4% since the beginning of the year to RUB161.5 billion (\\$4.9 billion) as of January 1, 2014. Over the first three quarters of the year customers’ resources saw some uptick (+4.1%) but in Q4 they went down by RUB9 billion. Funds outflow was attributable to general market situation and people’s concerns about the banking system stability after toughening the regulator’s policy.

Retail clients’ funds grew since 2013 start by RUB4.2 billion reaching RUB106 billion (\\$3.2 billion) and remained the main bank’s funding source with the share of 56% of the liabilities. Notwithstanding some outflow during Q4 (-4%) individuals’ time savings advanced by 7.7% Y-o-Y totaling RUB87.2 billion (USD 2.7 billion). During December 2013 balances on cards’ accounts rose to RUB18.8 billion (USD 0.6 billion) in consistency with the usual year-end trend and exceeded September 30, 2013 level by 4.9%.

Over the second half of the year the bank did not intend to compete for corporate time deposits aggressively so it didn’t raise the rates. Nevertheless in Q4 term resources of the corporate clients remained nearly unchanged at RUB24.3 billion (RUB 0.7 billion) losing just RUB0.6 billion after some drop in Q3 (-4.4%). Balances on companies’ transaction accounts were quite stable during first three quarters of 2013 that differed from historical trends and only in Q4 finally reduced to RUB31.2 billion (USD 1.0 billion).

Equity added 7.5% during 2013 and was equal to RUB22.4 billion (USD 0.7 billion) as of January 1, 2014 with retained earnings being the main source of capital support. CAR for total capital stood at 13.8% and for Tier 1 capital — at 12.0% as of the reporting date. The bank also discloses capital adequacy ratios according to Basel III, which were introduced as mandatory by the Bank of Russia starting from January 1, 2014. As of the reporting date, total regulatory capital adequacy (N1.0 norm) was equal to 11.26% and common equity Tier1 capital adequacy (N1.1 norm) — to 9.29% that significantly exceeded minimum requirements.

Net Interest Income
Interest income for the year grew by 14.5% to RUB19 billion (\\$0.6 billion) comparing to 2012 result on the back of higher interest rates on SME lending as well as strong expansion of retail lending. Interest expenses widened by 26% over the same period as a result of deposit portfolio re-pricing that started in 2012. Thus net interest income for 2013 progressed by 5% to RUB 9.5 billion (USD 0.3 billion).

During Q4 the loan book advanced as planned but at the end of December a number of corporate loans were repaid leading to the credit portfolio decrease. That reasoned interest-earning assets yield edging up to 11.8% (+34 bps) and ensured quarterly interest income of RUB5 billion. Over the same period interest expenses declined by 5.4% to RUB2.4 billion. The change was driven by raising retail deposits starting from August 2013 at lower rates as well as by a drop in corporate deposits cost by 95 bps to 6.7% per the quarter caused by redemption of a handful of the most expensive companies’ deposits at the end of Q3. During Q4 net interest spread added 18 bps growing to 6.9% and NIM widened by 47 bps that contributed to hitting 2013 annual target of 4.5%.

Non-Interest Income
Over the year the bank received RUB5.2 billion (USD 0.2 billion) as fees & commissions, a decrease of 6% versus the previous year. Toughening of competition on some fee-generating products and recognition of several fees applying effective interest rate method when summarizing Q4 results weighted on the income earned. After introduction of such reclassification Q4 fees & commissions totaled RUB 1.15 billion. In case of consistent application of the method on a quarterly basis throughout the whole year Q4 fee income would have been higher by 3.1% versus Q3 and amounted to RUB1.38 billion.

Total non-interest income represented 35% of the bank’s 2013 operating income.

Operating expenses
Strict cost control discipline and implementation of some improvements within the operating model optimization project were supportive to preserving 2013 operating expenses very close to the level of 2012. The bank managed to keep them at RUB8.8 billion (USD 0.3 billion), that was just 1.4% higher than a year ago. Personnel expenses grew by 2.9% comparing to 2012 result contributing 59.9% to total expenses of the bank. Over Q4 operating expenses experienced seasonal uptick of 13.3% to RUB2.4 billion reflecting payment of bonuses and finalizing settlements on a row of agreements related to fixed assets maintenance and repair.

Cost-to-income ratio before provisions totaled 59.9% for the year 2013 exceeding the indicator of 2012 by 1.4 pps.

Financial results
Operating income before provisions declined by 4.4% comparing to 2012 result and equaled RUB5.9 billion (USD 0.2 billion) mainly due to the influence of weaker non-interest income. Necessity to charge elevated amounts to provisions in order to cover two significant earlier impaired credit exposures dragged on 2013 net profit causing its decrease by 36% to RUB1.5 billion (USD 46 million) that brought ROE to 7%.