Vozrozhdenie Bank earned RUB 40 million of net profit in Q1 2015

27 May 2015

Vozrozhdenie Bank has summarised its IFRS results for Q1 2015.

  • Assets totalled RUB216.3 billion ($3.7 billion) as of April 1, 2015 versus RUB227.9 billion ($4.1 billion) as of December 31, 2014
  • Retail funds grew by 0.5% over the reporting period to RUB123.5 billion ($2.1 billion)
  • Operating profit before provisions rose by 86.1% QoQ to RUB1.5 billion ($25.3 million)
  • Net profit for Q1 2015 was RUB40 million ($0.7 million) compared to RUB26 million ($0.5 million) of loss for Q4 2014
  • Net interest margin for Q1 2015 improved by 15 bps QoQ to 4.6%

“Sharp shift of foreign exchange and interest rates policy in H2 2014 led to a temporary surge in funding costs, which we have managed to offset by repricing corporate loans — net interest margin improved by 15 bps over the quarter. By the end of the reporting period the turbulence on financial markets went down, easing tensions on the retail deposits market, that allowed the bank to revert to a normal liquidity level and to repay the funds raised from the Bank of Russia ahead of the New Year holidays.

In the context of drastic changes at the market and deepened macroeconomic recession, the key objective for us is the control over the credit quality. We focused on the existing client base, selectively attracting new customers without expansion of the loan portfolio. That, in turn, restrained the growth of cross-sales and fee income”, commented Andrey Shalimov, Deputy Chairman of the Management Board of Vozrozhdenie Bank.

In Q1 2015 the bank’s assets edged down by 5.1% to RUB216.3 billion ($3.7 billion). With the stabilization of financial markets, the bank reverted to a normal liquidity level that resulted in cash and equivalents decline by RUB2.3 billion to RUB33.3 billion ($569.3 million) and securities — by RUB6 billion to RUB16.1 billion ($275.7 million) YtD. The share of liquid assets stayed at a comfortable level of 22.4%, moderating by 2.5 pps over the quarter. Considering a decrease of RUB2.7 billion in the net loan book, the share of interest-earning assets remained intact since January 1, 2015 at the level of 78.6%. Loan-to-Deposit ratio rose by 1.6 pps over the quarter to 99.3% on the back of deposit base declining at a faster pace versus the loan book.

The bank’s securities portfolio diminished by 27% QoQ to RUB16.1 billion ($275.7 million) largely due to trading securities contraction by RUB6.3 billion. During Q1 the bank sold a part of the bonds acquired in December 2014 amid the market’s steepest decline over the past few years that caused the share of securities in the assets to come down by 2.2 pps to 7.5%. The bank‘s portfolio contains low-risk liquid instruments: 89.8% of it is formed by the quasi-sovereign bonds and 4.4% — by the sovereign bonds.

By the end of Q1 financial markets started to normalise after a turbulent turn of the year. However, interest rates remained high. In addition, deepening economic recession and a decline in manufacturing adversely impacted borrowers’ financial position. As a consequence, the bank preferred to avoid additional risks and focused on the existing clientele, which resulted in the lower gross loan portfolio that came in at RUB168.4 billion ($2.9 billion), 1.1% down QoQ.

Corporate loan book was almost flat at the level of the year-start, amounting to RUB123.1 billion ($2.1 billion), meanwhile the share of loans to the existing large borrowers grew by 1.9 pps to 45.9%. Loans to SMEs, the segment most vulnerable to economic downturns, went down by RUB2.8 billion QoQ to RUB65.2 billion ($1.1 billion). The loans to this segment represented 52.9% of the total corporate loan portfolio.

Amid record high rates on consumer and mortgage loans, demand from the reliable individual borrowers was close to zero that resulted in the retail loan book contraction by 2.1% to RUB45.2 billion ($773.7 million). Consumer loans declined by 4% to RUB11.6 billion ($198.9 million) and mortgages — by 1.6% to RUB31.4 billion ($536.6 million).

Volatile FX market, mounting interest rates and accelerated inflation of the year 2014 provoked a more serious economic downturn at the beginning of 2015, as well as a slump of investments and manufacturing accompanied by dissipating real income, hurting many market participants. In Q1 2015 the share of non-performing loans (NPLs) (including indebtedness past-due for more than one day either on principal or interest as well as not past-due but impaired loans) surged 2 pps to 12% owing to an impaired but not past-due large corporate loan of RUB2.1 billion ($35.4 million) and growth of SMEs’ NPLs by RUB0.6 billion caused by deterioration of the borrowers’ financial position.

The bank actively provisioned on revealed NPLs, charging another RUB1.4 billion ($24.2 million) in Q1 2015. As a result, cost of risk for the reporting period reached 3.3% versus 2.1% for the same prior-year period. Total provisions came in at RUB15.4 billion ($262.9 million), though NPL coverage ratio was slightly down to 76% versus 84.6% at the year-start. At the same time, 90+ days overdue loans were provisioned for 107.7%.

Client funds were equal to RUB169.5 billion ($2.9 billion) as of April 1, 2015, 2.7% down from the year-start as a result of a decrease in corporate deposits and current accounts by RUB5.3 billion to RUB46.1 billion ($787.9 million). Amid limited borrowing activity, the bank embraced the opportunity to choose less expensive retail funding.

Retail deposits rose by 3.7% YtD to RUB108.6 billion ($1.9 billion) remaining the key funding source with a share in the bank’s liabilities of 56.5%. Following the Bank of Russia’s decision to hike the key rate in December 2014, the bank also heightened its deposit rates offering the most attractive terms on short 3M deposits, which were especially popular among the clients and expired in Q1 2015. At the same time, FX rates fluctuations in Q4 2014 boosted the growth of the share of deposits denominated in foreign currencies to 34% as of the year-start. So starting from February the bank has changed the terms of deposits several times pursuing the goal to raise longer-term Ruble funding at adequate rates. As a result, the share of Ruble-denominated deposits progressed by 2.9 pps QoQ to 68.8%.

Bank cards’ balances declined over the period by RUB3.3 billion to RUB14.9 billion ($254.7 million) after a seasonal outflow early in the year. As a result, the share of current accounts in the total client funds diminished from 26.8% as of January 1 to 24.1% as of April 1, 2015.

In Q1, having stable position in terms of liquidity and a comfortable level of customer funding, the bank has repaid the Bank of Russia’s funds raised under REPO transactions. Consequently, due to other banks went down by RUB8.2 billion YtD to RUB10.9 billion ($186 million) as of April 1, 2015.

The bank’s capital calculated as per Basel III standards remained flat at the level of the year-start and equaled to RUB26.1 billion ($447.1 million). The capital adequacy ratios improved as risk-weighted assets decreased on the back of diminishing loan portfolio and investments in securities. The total regulatory capital adequacy ratio (N1.0 norm) improved by 0.2 pps QoQ to 12.2% as of April 1, 2015, while the minimum acceptable level is set at 10%. The common equity Tier1 capital adequacy ratio (N1.1 norm) was up 1.2 pps over the same period and reached 10.5%, considerably exceeding the minimum requirement of 5%. The outpacing growth of the common equity Tier1 capital adequacy ratio resulted from the inclusion of retained earnings for the year 2014 into the capital calculation. It’s noteworthy that the bank did not use the options suggested by the Bank of Russia on calculating risk-weighted assets denominated in foreign currencies on the basis of the exchange rates as of October 1, 2014.

The raise of the Bank of Russia’s key rate in December 2014 triggered repricing of assets and liabilities across the banking system. To mitigate soared funding costs, the bank increased the rates on new loans and changed the interest level on existing corporate loans with such option stipulated in the agreements. Therefore, interest income grew by 14% over the quarter to RUB5.9 billion ($101.2 million) and offset interest expenses increase of 23.6% to RUB3.4 billion ($57.4 million), reasoned by higher rates on retail and corporate deposits. Thus, net interest income for the quarter improved by 3.4% to RUB2.6 billion ($43.8 million).

These efforts resulted in the enhancement of net interest margin, which reached 4.6% (+15 bps), and of net interest spread, that amounted to 6.7% (+39 bps) supported by the outpacing growth of yields on interest-earning assets.

In Q1 the bank earned RUB887 million ($15.2 million) as net fees and commissions, 17.4% down from the level of the previous quarter and 3.2% down from the similar prior-year period. Traditionally anemic business activity at the year-start and focus on the existing client base amid adverse macro developments led to a downturn in cross-sales of fee-generating products. Quarterly dynamics of all components of the fee income were negative, though fees on settlement transactions were 7.5% up comparing to Q1 2014 thanks to the new sets of products release in H2 2014, and commissions on FX transactions advanced by 17.6% on Ruble rate fluctuations.

Meanwhile, in Q1 2015 the bank earned RUB364 million ($6.2 million) of income on transactions with FX and securities snatching opportunities on high volatile financial markets that drove non-interest income up by 16% QoQ to RUB1.3 billion ($22.8 million). The share of non-interest income in total operating income before provisions grew to 34.2% versus 31.8% in Q4 2014.

Operating expenses for the reporting period amounted to RUB2.4 billion ($41.3 million), 14.4% down comparing to the previous quarter, largely owing to a seasonal growth of staff costs and premises and equipment-related expenses at the year-end. Comparing to the similar prior-year period, OPEX widened by 10.4% on the back of higher personnel expenses and a spike in IT-related costs caused by FX rates fluctuations.

Cost-to-income ratio before provisions for the reporting period was 62%, 16 pps down QoQ.

Operating profit before provisions for Q1 2015 advanced by 86.1% versus the previous quarter to RUB1.5 billion ($25.3 million) due to lower operating costs, though that was partially offset by heavy provisioning. Comparing to the similar prior-year period, operating profit before provisions expanded by 1.6% thanks to the growth of non-interest income.

The bank improved its quarterly financial result, gaining RUB40 million ($0.7 million) of net profit versus a loss of RUB26 million ($0.5 million) a quarter ago. Though, its yearly dynamics were −90.7%.

Vozrozhdenie Bank Board of Directors has held a regular meeting
Vozrozhdenie Bank holds the annual General Meeting of Shareholders