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VTB Announces IFRS Results for 1Q’2011

 
18 July 2011

Moscow – VTB Group today publishes its Interim Condensed Consolidated Financial Statements as at 31 March 2011 with Independent Auditors’ Report on Review of these Statements.


FINANCIAL AND OPERATING HIGHLIGHTS

  • Record quarterly net profit of RUB 26.1 billion in 1Q 2011, up 70.6% year-on-year; ROE reached 17.7% versus 11.9% in 1Q 2010;
  • Strong contribution from both Corporate and Investment Banking and Retail Banking with a 1Q 2011 profit before tax of RUB 23.2 billion and RUB 8.2 billion, respectively;
  • Net interest income amounted to RUB 46.0 billion, up 9.5% year-on-year;
  • Strong net fee and commission income of RUB 8.0 billion for 1Q 2011, up 56.9% year-on-year;
  • Stable net interest margin at 4.8% in 1Q 2011;
  • Operating income before provisions of RUB 72.9 billion, up 25.5% year-on-year;
  • Cost of risk improved to 1.1% of average gross loans, versus 1.4% in 4Q 2010;
  • Capital adequacy remains strong with total CAR and Tier 1 ratio at 15.5% and 13.2%, respectively.

Andrey Kostin, VTB President and Chairman of the Management Board, comments: “We continue to deliver on the Group’s strategy and to increase profitability across our core businesses. At the same time, we are committed to deriving value from strategic acquisitions that will support VTB’s profitable growth in the future.”


FINANCIAL AND OPERATING REVIEW

VTB Group posted a record quarterly net profit of RUB 26.1 billion in the first quarter of 2011, up 70.6% versus RUB 15.3 billion in the same period last year. The Group’s return on equity (ROE) was a strong 17.7% and earnings per share reached RUB 0.0025, versus an ROE of 11.9% and earnings of RUB 0.0015 per share for the first three months of 2010.

Operating income before provisions amounted to RUB 72.9 billion for the first quarter of 2011, an increase of 25.5% from RUB 58.1 billion in the first quarter of 2010. Net interest income before provisions reached RUB 46.0 billion, up 9.5% from RUB 42.0 billion in the first three months of 2010. Net interest margin remained flat on a quarter-on-quarter basis at 4.8%. The Group’s net fee and commission income increased to RUB 8.0 billion in the first quarter of 2011, up 56.9% from RUB 5.1 billion in the first quarter of 2010.

The Group’s net gains from financial instruments amounted to RUB 9.7 billion in the first three months of 2011, up 15.5% versus RUB 8.4 billion in the same period in 2010.

Staff costs and administrative expenses amounted to RUB 33.0 billion in the first quarter of 2011, an increase of 21.8% quarter-on-quarter from RUB 27.1 billion in the fourth quarter of 2010. This increase was primarily due to growth in the Group’s Corporate and Investment Banking operations and revenues as well as due to the consolidation of TransCreditBank (TCB) starting from 31 December 2010.

Due to a relatively high share of customer loans denominated in US dollars (approximately one third of loans and advances to customers as of 31 March 2011), the Group’s loan portfolio growth in rouble terms was partially constrained by the US dollar depreciation against the Russian rouble of c. 7% during the first quarter of 2011. Total gross loans reached RUB 3,063.5 billion at 31 March 2011 versus RUB 3,059.6 billion at 31 December 2010. Corporate loans at the end of the first quarter of 2011 amounted to RUB 2,508.2 billion compared to RUB 2,518.1 billion at the beginning of the year. Retail loans at 31 March 2011 equalled RUB 555.3 billion versus RUB 541.5 billion at year end 2010.

Loan portfolio quality continued to improve with a significantly lower provision charge for impairment of debt financial assets of RUB 7.7 billion, as compared to RUB 11.3 billion in the fourth quarter of 2010 and RUB 15.5 billion in the first quarter of 2010. The provision charge for impairment of loans and advances to customers decreased to 1.1% of the average loan portfolio, down from 1.4% in the fourth quarter of 2010 and 2.5% for the first quarter of 2010. The allowance for loan impairment declined to 8.9% of total gross loans as of 31 March 2011, compared to 9.0% at the end of 2010.

The Group’s non-performing loan (NPL) ratio decreased to 8.2% of total gross loans, down 40 bp from 8.6% at the end of 2010, while the NPL coverage ratio at 31 March 2011 was a comfortable 109.2%.

Funding from customer deposits continued to grow, reaching RUB 2,373.2 billion at 31 March 2011, up 7.2% from RUB 2,212.9 billion at year end 2010. Corporate deposits amounted to RUB 1,592.0 billion at the end of the first quarter of 2011, an 8.7% increase versus RUB 1,465.0 billion at the end of 2010. Retail deposits reached RUB 781.2 billion, up 4.5% from RUB 747.9 billion as of 31 December 2010. The share of customer deposits in the Group’s total liabilities rose to 61.7% at the end of the first quarter of 2011, up from 59.6% at 31 December 2010. At the same time, the Group’s loans to deposits ratio improved to 117.6%, down from 125.9% as of 31 December 2010.

The Group’s investments in associates and joint ventures increased to RUB 119.9 billion versus RUB 15.7 billion as of 31 December 2010 mainly driven by the acquisition of a 46.48% share in the Bank of Moscow.

In the first quarter of 2011, the Group further improved its capital efficiency through the acquisition of 46.48% in the Bank of Moscow, while maintaining a sound Tier 1 capital adequacy ratio (CAR) of 13.2% and a total CAR of 15.5% as of 31 March 2011.


CORPORATE AND INVESTMENT BANKING

In 2011, the Group continued the integration of its corporate and investment businesses by appointing Yuri Soloviev as First Deputy President and Chairman of VTB Bank Management Board and Head of Corporate and Investment Banking (CIB). Starting from the first quarter of 2011, CIB represents a separate segment in the Group’s IFRS statements, and includes three subsegments: ‘InvestmentBanking’, ‘Loans and Deposits’, and ‘Transaction Banking’.

During the first quarter of 2011, the Group’s CIB segment benefited from improving loan portfolio quality, lower provisions and recovery in the financial markets, posting a solid profit before tax of RUB 23.2 billion, up 95.0% versus RUB 11.9 billion in the same period last year. The Loans and Deposits subsegment was the largest contributor to the CIB results with a profit before tax of RUB 11.5 billion in the first quarter of 2011, as compared to RUB 2.0 billion in the same period last year. Investment Banking and Transaction Banking delivered a profit before tax of RUB 8.9 billion and RUB 2.8 billion respectively versus RUB 7.0 billion and RUB 3.1 billion in the first quarter of 2010.

VTB also continued to reform further its corporate lending process by introducing new lending procedures (which took effect in the second quarter of 2011) resulting in a reduction of the Bank’s standard loan approval period by 30-40% for mid-sized customers, and by 50-70% for large customers, without compromising on risk management in loan decision-making.

In line with its 2010-2013 strategy, VTB continued to roll out a strong transaction banking capability, as the Group seeks to increase its share in Russia-related treasury and settlement services. The Group hired Gurinder Nihal from Global Transaction Services at the Royal Bank of Scotland. Mr. Nihal joined VTB as Senior Vice President and Head of Corporate Products Department, and his responsibilities include the development of an efficient and high quality product management practice in the Group’s transaction banking business.

The recovery in debt capital markets (DCM) in the first three months of 2011 led some of the largest Russian companies to replace partially corporate borrowings with lower priced, long-term wholesale financing which resulted in an increase in demand for DCM arrangements from the Group’s CIB clients. In this environment, the Group’s investment banking business, VTB Capital, maintained its #1 position in debt capital markets, with a market share of 19.1% in domestic DCM, and 11.9% in CIS international DCM, according to Cbonds rankings.

VTB Capital equity capital markets (ECM) team also maintained its leading position in Russia and the CIS during the first quarter of 2011, with a 24.5% market share, according to Dealogic. Its largest transactions included the successful placement of approximately 10% of VTB shares worth US$ 3.3 billion in February 2011 (with VTB Capital acting as a Joint Global Coordinator). Several other initial and secondary public offerings, including Nomos Bank, Armada, Etalon and Mechel, were also launched in the first quarter of 2011.

Yuri Soloviev, First Deputy President and Chairman of the VTB Management Board, said: “By integrating our corporate and investment banking businesses we have created a unique business model in the Russian financial market. During the first quarter of 2011, we took important steps to strengthen major business lines within CIB, and we are extremely well positioned to capitalise on further economic recovery.”


RETAIL BANKING

The performance of the Retail Banking segment was driven by solid margins, larger lending volumes, improving asset quality, as well as by much stronger fees and commissions. The segment’s profit before taxation amounted to RUB 8.2 billion in the first quarter of 2011, up 22.4% versus RUB 6.7 billion in the same period last year, while its net fee and commission income reached RUB 3.2 billion, up 45.5% from RUB 2.2 billion in the first quarter of 2010.

The Group’s overall retail loan portfolio including loans of TransCreditBank and other segments, amounted to RUB 555.3 billion as of 31 March 2011, a 2.5% increase from the start of the year. As VTB maintained its focus on higher-margin retail lending products, the growth was mainly driven by consumer loans which reached RUB 285.1 billion, up 6.2% since the start of the year. The Group’s auto loans amounted to RUB 53.6 billion at the end of the first quarter of 2011, up 1.5% since the start of the year, while its mortgage loans declined by 2.0% to RUB 212.9 billion. TCB’s contribution to the Group’s retail loans was RUB 31.1 billion of mortgage loans and RUB 32.7 billion of consumer loans.

The share of consumer and auto loans in the Group’s retail loan portfolio increased to 61.0% at 31 March 2011 from 59.3% at the start of the year, while the share of mortgage loans in the same period declined to 38.3% from 40.1%.

Retail deposits increased 4.5% during the first quarter to RUB 781.2 billion, including RUB 67.7 billion of deposits in TCB. The deposits from VTB24’s private banking customers continue to be an important and stable funding source for the Group. During the first quarter of 2011, the bank’s VIP client deposits increased by 9.1% to RUB 99.6 billion, which comprises 12.7% of total retail deposits.

The Group continued to expand its retail branch network, which is substantially comprised of VTB24 and TCB outlets in Russia. As of 31 March 2011, the number of VTB24 offices amounted to 547 versus 531 at the start of the year, while the number of TCB offices was 290. The combined number of VTB24 and TCB ATMs increased over the same period to 7,582 from 7,334.

The Group expects significant further expansion of its retail franchise and network after the consolidation of the Bank of Moscow. To support this objective, VTB24, TransCreditBank, and the Bank of Moscow have signed an agreement to combine their ATM networks starting from 1 July 2011. The combined retail network of these three banks will include c. 10,000 ATMs. The total number of banking outlets will amount to c. 1,200 offices.

Mikhail Zadornov, VTB24 President and Chairman of the Management Board, said: “VTB24 continues its rapid organic growth in terms of lending volumes, branch network and profitability, while the integration of TransCreditBank’s retail operations will create considerable synergies to support future growth. Also, we look forward to adding the Bank of Moscow’s retail franchise to our operations, which will allow us to further penetrate the highly lucrative Moscow region.”


STATUS OF ACQUISITIONS

The Bank of Moscow

In February 2011, VTB purchased 46.48% of the Bank of Moscow (“BoM”) for RUB 92.8 billion and 25% plus 1 share of Metropolitan Insurance Group for RUB 10.2 billion and announced it would pursue an acquisition of up to 100% in BoM.

VTB believes this acquisition will allow the Group to strengthen significantly its franchise in Russia, and in particular in the most demographically attractive Moscow region, by providing access to c. 6.5 million retail customers and 100,000 corporate customers, including above all the Moscow City Government. At the same time, the consolidation of BoM is expected to add more than 380 outlets to the Group’s branch network, including c. 140 branches in Moscow and the Moscow region.

In June 2011, it was revealed that lending activities of the previous management of BoM in 2010 and earlier have resulted in a significant amount of loans provided to related parties, creating the need for significant additional provisioning for the impairment of this loan book.

The extent of the required provisioning implied BoM would not be able to maintain prudential ratios as set out by the regulators. This caused the Central Bank of the Russian Federation to recommend a set of measures to support BoM, in accordance with the Federal Law # 175-FZ ‘On Additional Measures to Strengthen the Stability of the Banking System Through December 31, 2011’, which was approved by the Deposit Insurance Agency (DIA).

The plan provided for the DIA to issue a 10-year loan of up to RUB 295 billion to BoM at an annual rate of 0.51% as soon as VTB consolidates at least a 75% stake in BoM. This will allow BoM to book a positive P&L effect equal to c. RUB 150 billion, in accordance with IFRS.The proceeds from the loan will be invested in Russian Federation bonds (OFZs). At the same time, VTB Group is expected to provide BoM with additional capital of up to RUB 100 billion by the end of 2012. VTB maintains BoM’s brand upon the bank’s possible consolidation and will further develop the BoM franchise with a focus on Moscow and the Moscow region.

VTB believes these actions will effectively address all the issues related to the stabilisation of BoM as a sound and competitive financial institution. The Group does not expect any negative impact on its financial performance to result from this acquisition.

TransCreditBank

On 31 December 2010, the Group acquired a 43.2% stake in TransCreditBank (TCB), a former subsidiary bank of Russian Railways from minority shareholders and on the same day it obtained control over TCB based on the existence of potential voting rights. As of 31 March 2011, TCB is reported as a separate segment in the Group’s IFRS financial statements with total assets of RUB 426.2 billion.

VTB believes this ROE accretive acquisition fits the Group’s strategy of profitable growth and supports its operations across all key business lines by expanding the Group’s customer base and creating significant synergies in terms of funding costs and operating expenses. TCB’s key competitive advantages are derived from its strong relationship with Russian Railways and its affiliates.

TCB’s client base includes c. 38,000 corporate customers and over 2 million retail customers, the majority of which are employees of Russian Railways and its affiliates. At the same time, TCB consolidation allows the Group to expand its regional footprint in terms of branches, ATMs and POS terminals.

On 15 July 2011, VTB Bank and Russian Railways signed a purchase agreement on the remaining shares of JSC TransCreditBank (TCB) owned by Russian Railways. According to the agreement, a stake of 29.4% in TCB is to be bought by VTB upon signing of the agreement. The purchase of the remaining 25% + 1 TCB shares will be concluded between 1 July 2012 and 31 December 2013.

VTB Bank and Russian Railways also entered into a shareholder agreement with respect to TCB. The agreement sets forth the obligations and liabilities of both shareholders to TCB and will remain valid until the second stage of the above mentioned transaction. In particular, the document provides for the parties to jointly manage TCB and facilitate its development as well as asset and profitability growth while following VTB Group management principles and standards.

VTB expects that TCB will be integrated into the Group by the end of 2013 with functional integration of TCB’s corporate and retail banking into relevant segment managements. The key success factor of the integration process will be to retain within the Group TCB’s corporate and retail business related to Russian Railways.

Contacts:

Investor Relations:

Tel.: +7 495 775 71 39

Email: investorrelations@vtb.ru

About VTB:

JSC VTB Bank and its subsidiaries (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.

The Group conducts its banking business in Russia through VTB Bank as a parent and 2 subsidiary banks - VTB24 and TransCreditBank. The Group operates outside Russia through 12 bank subsidiaries, located in the Commonwealth of Independent States (“CIS”) (Armenia, Ukraine, Belarus, Kazakhstan and Azerbaijan), Europe (Austria, Cyprus, Germany, France and Great Britain), Georgia, Africa (Angola) and through 2 representative offices located in Italy and China and through 2 VTB branches in China and India and 2 branches of “VTB Capital”, Plc in Singapore and Dubai. VTB Bank has operated under a full banking license, №1,000, from the Central Bank of the Russian Federation since 1990.

The Group’s business franchise spans Corporate and Investment banking (CIB) and Retail Banking. In CIB, the Group provides a broad range of services and products including corporate lending, foreign trade transactions, syndicated loans, deposit and settlement services, equity and debt capital markets underwriting, project financing, merger and acquisition financing, advisory services, custody services, asset management and venture funds. In Retail Banking, VTB offers financial services, including deposit accounts, lending, debit and credit cards and transaction services to individuals and small-sized corporations.

The number of employees of the Group as of 31 March 2011 was 53,311.

In February 2011, the Russian Federation state reduced its share from 85.5% to 75.5% of VTB Bank’s shares as a result of offering in the form of shares and global depositary receipts.
VTB Bank

Interim Condensed Consolidated Statement of Financial Position as at 31 March 2011

(in billions of Russian Roubles)

31 March
2011

(unaudited)

31 December
2010

Assets

Cash and short-term funds

248.2

275.5

Mandatory cash balances with central banks

32.3

26.4

Financial assets at fair value through profit or loss

367.7

344.6

Financial assets pledged under repurchase agreements and loaned financial assets

16.0

16.9

Due from other banks

398.7

349.9

Loans and advances to customers

2,789.7

2,785.4

Financial assets available-for-sale

46.7

55.9

Investments in associates and joint ventures

119.9

15.7

Investment securities held-to-maturity

34.3

34.2

Premises and equipment

116.0

113.2

Investment property

103.4

102.2

Intangible assets and goodwill

30.0

30.5

Deferred tax asset

38.1

37.9

Other assets

107.4

102.6

Total assets

4,448.4

4,290.9

Liabilities

Due to other banks

396.1

397.3

Customer deposits

2,373.2

2,212.9

Other borrowed funds

159.8

185.7

Debt securities issued

587.9

593.1

Deferred tax liability

7.3

7.3

Other liabilities

117.7

110.9

Total liabilities before subordinated debt

3,642.0

3,507.2

Subordinated debt

205.7

205.5

Total liabilities

3,847.7

3,712.7

Equity

Share capital

113.1

113.1

Share premium

358.5

358.5

Treasury shares

(0.2)

(0.3)

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

4.1

4.0

Premises revaluation reserve

11.3

11.4

Currency translation difference

5.5

11.0

Retained earnings

86.3

56.6

Equity attributable to shareholders of the parent

578.6

554.3

Non-controlling interests

22.1

23.9

Total equity

600.7

578.2

Total liabilities and equity

4,448.4

4,290.9


VTB Bank

Interim Condensed Consolidated Income Statement for the Three Months
Ended 31 March 2011 (unaudited)

(in billions of Russian Roubles)

For the three-month

period ended

31 March

2011

2010

Interest income

86.2

83.6

Interest expense

(40.2)

(41.6)

Net interest income

46.0

42.0

Provision charge for impairment of debt financial assets

(7.7)

(15.5)

Net interest income after provision for impairment

38.3

26.5

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

9.7

8.4

Losses on initial recognition of financial instruments and on loans restructuring

(0.4)

Gains less losses / (losses net of gains) arising from dealing in foreign currencies

11.7

(12.0)

Foreign exchange translation (losses net of gains) / gains less losses

(5.8)

13.5

Fee and commission income

9.1

6.2

Fee and commission expense

(1.1)

(1.1)

Share in income of associates and joint ventures

1.3

0.1

Provision charge for impairment of other assets and credit related commitments

(0.1)

(1.9)

Income arising from non-banking activities

3.3

1.3

Expenses arising from non-banking activities

(1.7)

(0.8)

Other operating income

0.8

0.5

Net non-interest income

26.8

14.2

Operating income

65.1

40.7

Staff costs and administrative expenses

(33.0)

(22.2)

Profit from disposal of associates

0.9

Profit before taxation

33.0

18.5

Income tax expense

(6.9)

(3.2)

Net profit

26.1

15.3

Net profit attributable to:

Shareholders of the parent

26.0

15.3

Non-controlling interests

0.1

Basic and diluted earnings per share
(expressed in Russian Roubles per share)

0.0025

0.0015


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