TRATADO ENCICLOPEDICO DE IFA *OKANA ROSO
10 EL CAMINO DE EGGUN
healthcare institutions within the
framework of its charity programme
“World Without Tears”.
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Annual Report 2008
8. Management report
The management has pleasure in submitting the Annual Financial Report of VTB Group together with the audited accounts for the year ended 31 December 2008.
Key strategic highlights
Continued support from the Government on capital and funding
Increasing emphasis on supporting customers and protecting our franchise
Increased focus on efficiency and cost control
Risk management policies tightened
Financial highlights
VTB remained profitable at the net level for the full year
Net profit of US$ 212 million, down from US$ 1.5 billion in 2007
Total loans up 50.3% year-on-year to US$ 90.2 billion, reflecting strong increases in both corporate and retail lending
Total customer deposits stable at US$ 37.5 billion, with retail deposits up 12.8% to US$ 12.1 billion
Core income of US$ 5.2 billion, a 70.9% increase year-on-year
Net interest margin up to 4.8% from 4.4% in 2007
Provisioning charge, as a proportion of average gross loan portfolio, up to 3.2% from 1.3% in 2007
Total BIS ratio at 17.3%
Principal activities
VTB Group (“VTB” or “the Group”) which includes JSC VTB Bank (“VTB Bank” or “the Bank”) and its subsidiaries is a leading Russian banking group, offering a wide range of universal banking services and products across Russia, certain CIS countries and in selected countries of Western Europe, Asia and Africa. The Group’s business franchise is divided into three distinct areas of expertise: corporate, retail and investment banking.
Review of financial performance
Despite the challenging market conditions and higher provision charges, VTB posted a net profit of US$ 212 million for the year, down from US$ 1.5 billion in 2007.
The Group achieved strong asset growth of 36% to US$ 125.8 billion, up from US$ 92.6 billion in 2007. VTB’s key role in the economy and the support we have received from the Government as it seeks to sustain economic activity has enabled VTB to benefit substantially from business inflows in both corporate and retail, driving total loans up 50.3% to US$ 90.2 billion from year end 2007.
Customer deposits remained stable in 2008 at approximately US$ 37.5 billion, with retail deposits up 12.8% year-on-year to US$ 12.1 billion. This reflects the growth in the branch network and a strong retail customer preference for the security of a state-backed bank with a strong brand. Corporate deposits declined 3.6% year-on-year to US$ 25.5 billion. This was partly due to the impact of the currency devaluation – about 60% of VTB’s corporate deposits were rouble-denominated. With reduced access to other sources of funding, corporate
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8. Management report
customers also reduced cash deposits to fund expenditure.
Core income, defined as net interest income and net fee and commission income before provisions and excluding one-off items, was up 70.9% to US$ 5.2 billion year-on-year reflecting the strong top-line growth and improved underlying profitability in both corporate and retail lending, as well as the resilience of our business. Net interest income increased 78.7% from 2007 to US$ 4.6 billion. Net fee and commission income grew US$ 656 million year-on-year, or 31.2% excluding one-off items in 2007. Net interest margin before provisions increased to 4.8% in 2008 as compared with 4.4% in 2007. Income from trading and available for sale financial instruments was US$ 41 million reflecting effective trading and hedging strategies and the impact of the application of the amended IAS 39 standard. Overall, the value of VTB’s debt and equity portfolio fell 53.2% year-on-year to US$ 6 billion from US$ 12.8 billion at the year end 2007.
In the fourth quarter of 2008, provision charges grew US$ 1.1 billion compared with US$ 1.4 billion in the first nine months of the year. The increase reflected the strong growth in our loan portfolio as well as a further decline in the financial and operating environment. Given the worsening economic outlook for Russia, VTB significantly increased its provisioning charge to 3.2% of the average gross loan portfolio as compared with 1.3% in 2007. The share of overdue and rescheduled loans in the gross loan portfolio increased to 2.4% by the end of 2008 from 1.4% at the end of 2007. Coverage ratio for overdue and rescheduled loans by allowances for loan impairment stood at a comfortable level of 147.6% as of
31 December 2008.
In the face of the existing liquidity crisis and in order to limit the increase in overdue debts, VTB introduced a number of significant changes to its lending procedures, including tightening lending standards and strengthened loan monitoring practices. At the end of 2008, VTB established a Debt Centre to work with borrowers in difficulty and secure the bank’s
position in restructuring situations.
Continuing its efforts to manage its liabilities prudently, VTB initiated steps to optimise its debt obligations. The nominal value of bonds bought back during the fourth quarter of 2008 amounted to US$ 1.4 billion. A net gain from the buy-back of US$ 349 million was booked during that quarter.
Review of operating performance
Although the economy continued to grow well into 2008, a sharp deterioration in output in the fourth quarter and the devaluation of the rouble led management to focus increasingly on the following strategic priorities: seeking ways to preserve, and where possible strengthen, our capital base in anticipation of rising bad debt provisions going into 2009, supporting customers through their own difficulties and protecting our customer franchise, and maintaining, and where necessary strengthening, efforts to rein in costs and tighten risk control.
Capital position
As of the end of 2008, VTB had a total BIS capital adequacy ratio of 17.3%, up from 16.3% at the end 2007. The bank is making strenuous efforts to optimise capital allocation within the Group. It has also continued to enjoy the strong commitment from the Russian Government to provide capital and funding support. In the fourth quarter of 2008 VTB’s capital adequacy ratio was materially supported through a Government subordinated debt issue of RUB 200 billion at a rate of 8% and with a maturity of 11 years.