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VTB announces record profits in its first year as a public company

 
10 April 2008

Strategic highlights

  • IPO in May 2007 raised almost US$ 8 billion
  • Gained market share in all core business lines
  • Opened 165 new VTB24 retail branches
  • Began integration of VTB North West
  • Continued expansion into CIS countries
  • Extended capability to support clients outside CIS in Angola, India, and China
  • Strengthened corporate governance
  • Optimised organisational structure and processes to reflect the new public company status and to deliver on strategic objectives

Financial Highlights

  • Total assets increased 76.7% to US$92,609 million
  • Net income increased 28.4% to US$1,514 million, driven by strong growth of the loan portfolio
    • Doubling of total net loans and advances to US$ 58,549 million
    • Tripling of retail gross loans to US$7,682 million reflecting success of retail roll-out
  • Core income (including net interest and fee and commission income before exceptional item) increased by 48% to US$3,056 million
  • Earnings per share increased 10.6% to the equivalent of 48.2 cents per 1 GDR or 2000 ordinary shares
  • Further improved high quality loan portfolio
    • Reduced proportion of overdue and rescheduled loans to total loans to 1.4% from 2.1%
    • Reduced total provision charge as a proportion of average gross loan portfolio to 1.3% from 1.8%
  • Cost to income ratio increased to 53.6% from 50.8% driven by investments in VTB24 retail network
  • Strengthened capital base with BIS Tier 1+2 ratio at 16%, confirming solid foundation for further asset growth, a particular advantage in current market conditions

Andrey Kostin, President and Chairman of the Management Board of VTB Group commented:

"This is our first annual results announcement as a public company and we are delighted to be able to demonstrate VTB's strong financial health.  We have delivered on our objective of growing faster than the market.  We have seen our investment in retail and corporate banking in Russia bear fruit. We have also begun building an investment banking capability to leverage our unique strengths as the bank of reference for Russia and the CIS.  VTB is well positioned in these fast-growing markets, and we are continuing to build strong foundations for longer term growth.  Our Agenda by 2010 remains unchanged."

31 December 2007 Financial Results Presentation
2007_VTB_IFRS_Presentation_en.pdf


Contacts
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Email: investorrelations@vtb.ru

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About VTB Bank:

JSC VTB Bank and its subsidiaries (the VTB Group or the Group) is a leading Russian banking group, offering a wide range of banking services and products across Russia, certain CIS countries and in selected countries of Western Europe, Asia and Africa.

As of December 31, 2007 the Group had a network of 586 branches located across Russia, comprised of 152 branches of VTB, 328 branches of VTB24 and 106 branches of VTB North-West. Outside of Russia, the Group operates through four subsidiary banks located in the CIS (Armenia, Georgia, Ukraine and Belarus), six subsidiary banks located in Europe (UK, France, Germany, Austria, Switzerland and Cyprus), one subsidiary bank and one financial company in Africa (Angola, Namibia), and an associated bank in Vietnam. VTB also has a presence in Singapore through a branch of its UK subsidiary. VTB has operated under a full banking license, № 1000, from the Central Bank of the Russian Federation since 1990.

The Group's business franchise is in the areas of corporate, retail and investment banking.  In corporate banking, the Group provides a broad range of commercial banking services and products including corporate lending, foreign trade transactions, syndicated loans, deposit and settlement services, as well as custody services, leasing and treasury services to large- and medium-sized corporations and financial institutions. In retail banking, VTB offers financial services, including deposit accounts, lending and certain ancillary services, to individuals and small-sized corporations.  In investment banking it provides debt capital markets underwriting, project financing, merger and acquisition financing, advisory services, asset management and venture funds.

The Group had 35,945 employees as of December 31, 2007.  The Government of the Russian Federation is VTB's main shareholder and owns, through the Federal Property Management Agency, 77.5 % of its registered share capital.  For more information please visit www.vtb.com


Disclaimer

Some of the information in this release may contain projections or other forward-looking statements regarding future events or the future financial performance of JSC VTB ("VTB") and its subsidiaries (together with VTB, the "Group"). Such forward-looking statements are based on numerous assumptions regarding the Group`s present and future business strategies and the environment in which the Group will operate in the future. We caution you that these statements are not guarantees of future performance and involve risks, uncertainties and other important factors that we cannot predict with certainty. Accordingly, our actual outcomes and results may differ materially from what we have expressed or forecasted in the forward-looking statements. These forward-looking statements speak only as at the date of this release and are subject to change without notice. We do not intend to update these statements to make them conform with actual results.
 
Statement of the President - Chairman of the Management Board

2007 has been a year of substantial progress for VTB.

One of the most significant developments for the Group was our IPO. Almost US$8 billion was raised in London and Moscow making it the largest IPO of 2007 worldwide. The two-year period of preparation for our life as a public company marked a start of a new era for VTB both internally and in terms of business strategy.

We embarked on the IPO for very sound reasons. In order to participate fully in the huge opportunity for the bank, we needed access to the capital markets and the commercial disciplines that come with a stock market listing.

The Russian economy is enjoying strong growth and financial services are now emerging as a major beneficiary of the economic expansion. Structural reform is now happening deep within the economy, fuelling demand for sophisticated financial services from retail customers, small and medium sized businesses, and larger corporations.

As a Russian bank to the core, with a strong tradition in Russia and the CIS, we are well placed to benefit from the transformation that is taking place. Although we are not entirely immune from what is happening in the international credit and financial markets, our optimism about our long-term prospects remains unchanged.

The placing of 22.5% of our stock with domestic and international investors was the start of a journey. Last year we outlined to investors some ambitious goals:

  • to grow our business faster than the market;
  • to develop an investment banking capability to service VTB's existing corporate franchise;
  • to develop a major retail banking presence to complement and balance our corporate banking franchise;
  • to improve our corporate governance and disclosure; and
  • to improve our technology and infrastructure.

On each of those goals we can demonstrate real progress over the past year.

Our total net loans to customers have doubled to US$58,549 million while loans to retail customers before provisions have tripled to US$7,682 million. Our share of the corporate loan market has increased to 10.7% from 9.0%.  We have managed that growth while improving asset quality.
We recently announced plans to invest US$500 million over the next two years to build a leading capability in investment banking.  While this is a substantial investment, we are confident that we can achieve our goal of a positive return on that investment within three years.  This will enhance our ability to service our clients, as well as open up the opportunity to tap into substantial new fee-based business. By opting for the "build not buy" route, we believe we can target the skills we genuinely need and manage the risk and volatility inherent in these types of businesses.

In retail banking, we pushed ahead with our branch-opening program and strengthened the management team.  In 2007, 165 branches were opened or migrated from VTB and VTB North-West.  With more than two million customers, our market share in retail loans has increased to 5.9% from 2.6%, making us the number three banking Group in Russia by share of retail loans.  We are the number two bank in Russia in terms of retail deposits with a market share of 4.8%.

Equally importantly, this has enabled VTB to become a more balanced business with retail now accounting for 12.8% of the total loan book as compared to 8.4% at the end of 2006 and with total loans now representing 63.2% of total assets, up from 55.8% in 2006.

On the corporate governance front, we strengthened our supervisory board with the addition of two independent directors, Matthias Warnig and Yves-Thibault de Silguy, both having extensive international business background. We now have an independent audit committee and a clear policy on insider trading, and are in the process of approving a policy on information disclosure.  We have adopted the code of ethics setting out clear rules of conduct at all levels of our business.  Standard & Poor's ranked VTB the number two bank in Russia for good information disclosure and transparency.

We have continued improving our IT systems to provide the Group with IT infrastructure that meets best standards in terms of responsiveness, security and functionality, with a special focus on improving the money transfer process. We expect to see benefits in terms of efficiency, customer management capability and risk control.  Specific achievements in IT in the past year were:

  • Investment in IT infrastructure including further development of telecommunications networks, data processing and storage facilities;
  • Introduction of Customer Relationship Management (CRM) software that will result in a consolidated customer registry and improved customer service and cross-selling;
  • Development of a data warehouse that will assist with mandatory regulatory and ad hoc reporting, financial analysis and accounting, risk management, etc.

Another major event in 2007 was the integration of VTB North-West and the migration of the business onto the VTB platform. This has allowed us to deliver strong growth of VTB North-West's business.  Although the merger of VTB and VTB North-West was postponed, we have fulfilled our promise to minority investors through an offer to acquire VTB North-West shares or exchange them for VTB shares. As a result, VTB's stake in VTB North-West increased to 86% by year end 2007.

VTB has also expanded its presence in the CIS region and further abroad.  We acquired a banking business in Belarus and plan to invest to grow this bank's branch network and assets in 2008.  In Ukraine we have merged two banks and integrated their businesses and opened 75 new branches extending the network to 204 branches at the year end. To serve our Russian clients better in other regions we obtained a banking licence in Angola last year and opened branches in India and China following the year end.

In short, this has been a year of restructuring, and of laying the foundations for profitable growth in the future.  There is still more to do and 2008 will be a year of further investment.

In corporate banking, our priorities are to gain further market share while focusing on increased client profitability and share of wallet, to diversify the portfolio and to maintain net interest margin.  To this end we are putting in place clear incentive schemes for sales people rewarding staff on value of products sold.  We are adopting a segmented approach to customer targeting, prioritising large corporates in the regions and mid-sized businesses in the Moscow region, backed up by improved credit procedures based on state-of-the-art internal rating methodology.

In retail banking, we have set out the following objectives for 2008:  to expand the VTB24 branch network to 500, to improve the retail banking products, services and tariff structure, as well as to utilise VTB24 experience to expand retail business in CIS countries, with primary focus on Ukraine and Belarus.

This year we plan to increase VTB's stake in VTB North-West, migrate the retail business to VTB24, and continue to integrate the processes, including unification of products, client coverage model, and IT systems.

As discussed above, this year we will significantly enhance our investment banking capacity with operations in Moscow, London and Singapore.  This capacity will allow us to leverage our existing relationships with 2,400 large corporate clients.  Last month, we recruited a number of Moscow's leading investment bankers to join the bank.

On corporate governance, we plan to add independent remuneration and nomination committees to the Board of Directors to strengthen independent decision-making and improve transparency for our investors.

The last few months have been difficult for banks generally.  The fact that we have delivered strong asset growth despite these problems is evidence of the solidity of our business.

Although some funding avenues continue to be difficult to access for all banks, the actions of the US Federal Reserve and other Central Banks indicate a willingness to stand behind the system. Here in Russia, we and others have been in discussion with the Central Bank of Russia about measures to improve short-term liquidity, and we are confident that the authorities are ready to do what is needed to keep the system functioning. The Central Bank has shown its willingness to support the banking system by releasing funds against a wide range of high-quality collateral.

VTB has a solid capital ratio, helped by the inflow of capital from the IPO last May.  Our 2007 results show that we are able to capitalise on the growth opportunities available to us.  There is a debate among economists about whether the developing world can decouple from the US.  As far as I can see, the structural changes in the Russian economy are profound and long-term in nature. The growth trajectory is unlikely to be impacted significantly from elsewhere.  Our management team will continue to ensure that VTB is positioned to win an increasing share of that growth.

Statement of the Chief Financial Officer

2007 was a successful year for VTB Group. We believe that the growth we delivered across our businesses, alongside the expansion of our business in Russia and internationally, demonstrate our strengthening position in the banking market.  We have invested approximately US$130 million in the VTB24 retail network and in infrastructure development, and still delivered profits in line with market forecasts.

We are pleased by the strong rate of asset growth, which has outpaced the market and demonstrates the power of our business to gather high-quality assets. Assets increased to US$92,609 million, up 76.7% from 2006, and net loans and advances to customers increased to US$58,549 million, up 100.1% from 2006.  The proportion of the net loan portfolio to total assets has increased to 63.2% from 55.8% in 2006.

At the same time as we increase assets, we are maintaining a firm grip on credit quality.  The share of overdue and rescheduled loans in the gross loan portfolio decreased to 1.4% by the end of 2007 from 2.1% at the end of 2006, while the provisioning rate decreased to 1.3% from 1.8%. Coverage of overdue and rescheduled loans by allowances for loan impairment stood at a comfortable level of 176.5% as of December 31, 2007.

VTB Group's consolidated net profit for 2007 amounted to US$1,514 million, up 28.4% from 2006, as a result of strong loan portfolio growth.  Core income, which includes net interest and fee and commission income before exceptional item, rose by 48.0% to US$ 3,056 million, reflecting strong growth throughout the Group's key strategic areas. Net interest income grew by US$842 million (49.2%), and net fee and commission income, adjusted for the IPO-related depositary appointment fee, grew by US$149 million (42.5%) compared to 2006. Net interest margin remained broadly stable at 4.4% with increased contribution from our retail business.

Operating costs increased by 42.2% in 2007, reflecting the investment in growing the business, particularly in retail, as we rolled out the branch opening programme for VTB24.  As a result our cost to income ratio increased to 53.6% from 50.8%, but this investment will help us achieve our long-term objectives.

With a consolidated BIS Tier 1 capital of US$15,594 million, compared to US$6,357 million at December 31, 2006, and total BIS capital of US$16,978 million, compared to US$7,646 million at December 31, 2006, the bank has been able to continue to capitalise on its advantage in the fragmented domestic financial services market to win new customers and increase volumes. By the end of December 31, 2007, our total capital adequacy ratio was at 16% up from 14% one year ago.

Given the current economic climate, VTB's strategy of diversifying its funding sources has been particularly important. With its strong brand and financial stability, VTB was able to increase customer deposits by 85.6% to US$37,098 million. Wholesale funding (which includes debt securities issued, other borrowed funds and subordinated debt) increased by 32.7% to US$ 22,836 million. In 2007, VTB successfully completed a number of planned funding transactions. Landmark fund raising deals include a Series 11 issue for EUR 1 billion, the largest Eurobond in EUR among Russian banks, and a Series 12 issue for GBP 300 million, the first ever GBP issue from Russia. Despite the uncertainty in the international financial markets in the second half of 2007, in October VTB issued a double-tranche Eurobond offering for the aggregate amount of US$2 billion within the new EMTN programme. This operation is the largest international Eurobond issuance by a Russian non-sovereign borrower. This issue received strong support from the international investment community in a number of different financial markets, demonstrating confidence among international investors in the strength of VTB's credit, and the stability of the Russian banking sector.

In early 2008, equity markets worldwide fell dramatically and investors became increasingly risk averse. In light of the uncertain market conditions, VTB expects 2008 to be a challenging year. However, we believe that our plans remain thoroughly appropriate for the markets in which we operate.  In 2008, we expect to be able to maintain the net interest margin at last year's level, and to decrease our cost-to-income ratio. We are confident that we are on the right track and well equipped to deliver the targets we have set. 

The long-term outlook for the Russian economy remains strong. The readiness of the Russian authorities to stand behind the banking system is an important factor in maintaining confidence in the economy.
As a result, our agenda by 2010 remains unchanged:

  • Grow faster than the Russian banking market in both corporate and retail;
  • Increase share of retail business in bank loan portfolio to 25-30%;
  • Maintain current level of net interest margin;
  • Accelerate commission income growth;
  • Target cost to income ratio of not higher than 50%;
  • Improve return on equity to 15-20%.
     

Consolidated Balance Sheet

 

US$, million 

2007

2006

Liabilities

 

 

Due to other banks

14,794

7,587

Customer deposits

37,098

19,988

Other borrowed funds

5,176

4,468

Debt securities issued

16,489

11,565

Deferred tax liability

149

125

Other liabilities

1,231

509

 

 

 

Total liabilities before subordinated debt

74,937

44,242

Subordinated debt

1,171

1,169

 

 

 

Total liabilities

76,108

45,411

 

 

 

 

 

 

Equity

 

 

Share capital

3,084

2,500

Share premium

8,792

1,513

Treasury stock

(21)

-

Unrealized gain on financial assets available-for-sale and cash flow hedge

109

154

Currency translation difference

663

352

Premises revaluation reserve

587

341

Retained earnings

2,993

1,744

Equity attributable to shareholders of the parent

16,207

6,604

 

 

 

Minority interest

294

388

 

 

 

Total equity

16,501

6,992

 

 

 

 

 

 

Total liabilities and equity

92,609

52,403

 


Consolidated Profit and Loss Statement

US$, million 

 

 

Profit and Loss account as at December 31, 2007

2007

2006

 

 

 

Interest income

5,387

3,606

Interest expense

(2,831)

(1,892)

 

 

 

 

 

 

Net interest income

2,556

1,714

Provision charge for impairment

(526)

(442)

 

 

 

 

 

 

Net interest income after provision for impairment

2,030

1,272

 

 

 

 

 

 

Gains less losses arising from financial instruments at fair value through profit or loss

138

218

Gains less losses from available-for-sale financial assets

116

348

Gains less losses arising from dealing in foreign currencies

547

73

Foreign exchange translation gains less losses

108

265

Fee and commission income

637

401

Fee and commission expense

(80)

(50)

Share in income of associates

18

15

Income arising from non-banking activities

95

111

Other operating income

123

157

 

 

 

 

 

 

Net non-interest income

1,702

1,538

 

 

 

 

 

 

Operating income

3,732

2,810

 

 

 

Staff costs and administrative expenses

(1,948)

(1,370)

Expenses arising from non-banking activities

(63)

(90)

Profit from disposal of subsidiaries and associates

98

54

 

 

 

 

 

 

Profit before taxation

1,819

1,404

 

 

 

Income tax expense

(305)

(232)

 

 

 

 

 

 

Profit after taxation from continuing operations

1,514

1,172

 

 

 

Profit from discontinued operations

-

7

 

 

 

 

 

 

Net profit

1,514

1,179

 

 

 

 

 

 

Net profit attributable to:

 

 

Shareholders of the parent

1,480

1,137

Minority interest

34

42

 

 

 

 

 

 

Basic and diluted earnings per share

0,000241

0,000218

(expressed in USD per share)

Basic and diluted earnings per share - continuing operations (expressed in USD per share)

0,000241

0,000217

Basic and diluted earnings per share - discontinued operations (expressed in USD per share)

0,000000

0,000001

 

 


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