OREANDA-NEWS. April 27, 2010. Promsvyazbank (PSB) has released its consolidated financial statements for the year ended 31 December 2009, prepared in accordance with the International Financial Reporting Standards (IFRS) and audited by KPMG, reported the press-centre of PSB.

The key income statement highlights are as follows:

Net interest income rose by 16.5% to RUB 25,6 bn

Net fee and commission income grew by 18.6% to RUB 5.6 bn

Operating income increased by 20.6% and exceeded RUB 34 bn

Net impairment charge totaled RUB 20.9 bn or 61% of operating income, up from 47% in 2008

Net loss for the year amounted to RUB 626 mln

Cost-to-income ratio dropped to 39%, an improvement from 43.8% in 2008

Net interest income strengthened in spite of the loan book contraction, as lending rates grew faster than funding costs in H1/beginning of H2 2009. Lending rates were driven by supply shrinkage in the loan market and increased risk premium at a time of economic turmoil.

A fair cost-to-income improvement was driven by a strong growth in operating income against the backdrop of strict controls over administrative expenses under PSB’s cost optimization program. A strengthening in interest income and fees & commissions led to an increase in operating income, while efficient administrative expenses controls drove a 32% increase in profit before tax and impairment charges. Besides, Promsvyazbank has shown a stronger operating income per employee (increase from RUB 3 mln to RUB 3.7 mln per employee or 24%) reflects improved labor efficiency management at the Bank.

A significant overall increase in non-performing loans (NPL) amid a deep economic crisis in Russia drove additional provisioning for loan impairment (impairment allowance more than doubled in 2009 to RUB 38.8 bn).

Besides a pressure on the net interest margin started in Q4 2009 and continued into Q1 2010, PSB managed to maintain its net interest margin at the 2008 level (6.5% in 2009 against 6.6% in 2008). This tendency was driven by falling interest rates against the backdrop of limited lending opportunities and high interest expenses related to maintaining a sizeable liquidity cushion in times of economic turmoil.

Key balance sheet items:

Total assets grew by 2% to RUB 471 bn

 Liquid assets rose by 21% in 2009 to almost RUB 154 bn and became 33% of total assets (2008: 28%)

Securities portfolio (trading securities and investments held to maturity) more than doubled to RUB 48.9 bn

Loans to customers less impairment allowance decreased by 11% to RUB 266 bn which is 57% of total assets (8 p.p. down comparing to YE 2008)

Current accounts and deposits from customers rose by 26% and almost reached the level of RUB 290 bn, which is 67% of total liabilities (13 p.p. up comparing to YE 2008)

Total capital (calculated in accordance with Basel Accord) increased by 4% to RUB 51.8 bn

During the first 9M of 2009 total assets decreased following (i) repayments in Q1 2009 of CBR anti-crisis funding obtained amid the system-wide liquidity crunch in Q4 2008, (ii) cautious approach to lending and (iii) PSB’s policy targeted at reducing concentration levels in funding. In Q4 2009 a large influx of customer deposits at PSB resulted in a YoY increase in total assets. It was caused by excess liquidity in the Russian economy and limited number of banks, incl. PSB, perceived as safe enough to place that money with.

In 2009, the Bank operated amid, on the one hand, persisting higher credit risks across the economy and, on the other, a weakening demand for loans due to the economic crisis. Both factors negatively affected PSB’s loan book dynamics. Gross loans to customers contraction by 4% to RUB 305 bn (before impairment allowance) was mainly driven by

(a) suspension of most retail lending programs (retail loans decreased by 18% to RUB 40.7 bn at YE 2009);

(b) tighter credit underwriting criteria as part of a revamped credit policy, and

(c) declining volumes of international trade finance amid the global economic crisis (loans to corporate clients involved in international business decreased by 36% to RUB 32 bn at YE 2009).

Nevertheless, PSB continued active credit underwriting in the areas of factoring and SME lending, and strengthened its market positions in these segments. 2009 volumes of factoring financing and SME loans were over RUB 85 bn and nearly RUB 22 bn, respectively. Gross factoring loans and loans to SME increased by 20% and 19% in 2009 and reached RUB 27 bn and RUB 23 bn, respectively.

NPL more than quadrupled in absolute numbers from YE 2008, and their level reached approx.12.3% of gross loans. However, NPL growth decelerated in H2 2009 when their increase (in absolute terms) was 45% lower than in H1 2009. Retail loans display the highest level of NPL (28%); this is due to the portfolio shrinkage against the backdrop of very limited volumes of new retail lending. The share of NPL in the SME portfolio is also relatively high (13%), mainly comprised of loans issued before the tightening of the SME credit underwriting criteria in Q4 2008, while the level of NPL in SME loans issued in 2009 is about 3%. NPL level in corporate loan portfolio is 9.6% at YE 2009. PSB adheres to its policy of maintaining NPL coverage by provisions of no less than 100%.

Retail deposits grew strongly throughout 2009 (80% growth in 2009, RUB 96 bn at YE 2009), outpacing the respective average growth rate for the Russian banking sector. This was driven by the efficiency of PSB deposit products, reorientation of branch network to deposits taking, and also better brand recognition due to competent marketing policy. Thanks to significant increase in retail deposits, its share in total liabilities grew from 13% to 22% at YE 2009. And because of a large influx of corporate deposits (incl. deposits of state and local authorities, housing and communal services companies) in Q4 2009 they show a 10% increase and became RUB 194 bn at YE 2009.

In 2009, PSB securities portfolio (trading securities and investments held to maturity) more than doubled to RUB 48.9 bn, driven by: (1) purchases of new bonds issued by major Russian corporates since Q2 2009, when the domestic market began to recover after its collapse in October 2008; and (2) placement of a part of the liquidity cushion created by PSB in Russian state and municipal bonds. Highly liquid fixed income instruments included in the CBR Lombard list (i.e. eligible for repo with the CBR) account for over 70% of PSB trading and hekd to maturity securities.

Key financial ratios:
Total capital adequacy ratio was 14.3%, 1.2 p.p. more than at YE 2008

Tier 1 capital ratio was 9.9%, up from 9.7% at YE 2008

PSB managed to maintain its net interest margin at the 2008 level (6.5%)

Net loans to customer deposits ratio declined to 92%, from 131% at YE 2008

NPL totaled RUB 37.6 bn, or 12.3% of gross loans (up from 2.8% at YE 2008)

Impairment allowance to gross loans increased to 12.7% (YE 2008: 5.8%)

The aggregate amount of large loans (i.e. those exceeding 10% of equity) accounted for 16.2% of gross loans, up from 15.2% at YE 2008

The aggregate amount of ten largest customer deposits and current accounts accounted for 31.9% of total customer deposits and current accounts, down from 38.3% at YE 2008.

Commenting on 2009 results, PSB Senior Vice-President and Head of Finance and Risks Alexandra Volchenko said: “2009 was both challenging and exciting for our Bank. Our key objectives set a year ago included improvement of our risk management system, bad debt control, funding base diversification and adequate liquidity. 2009 results show that we were broadly in line with our targets. PSB tightened its borrower requirements and loan security qualitative and quantitative criteria, optimized lending procedures, enhanced credit monitoring and centralized its loan limit-setting function. In 2009, we reduced our dependence on foreign funding sources. In 2010, we will pursue a moderate growth strategy, targeting an expansion of our loan portfolio through new quality clients across all key businesses. Our loan portfolio is expected to grow mainly through a reduction in liquidity, as liquidity adequacy requirements introduced amid the crisis have been reviewed. A key priority will be strong operating efficiency against the backdrop of declining interest rates in the overall economy”.