OREANDA-NEWS. August 25, 2014. VTB Group publishes its Interim Condensed Consolidated Financial Statements as at 30 June 2014 with the Independent Auditors’ Report on Review of these Statements.

Andrey Kostin, VTB President and Chairman of the Management Board, said: “A challenging operating environment and correspondingly high cost of risk put pressure on VTB Group’s profitability in the second quarter and first half of 2014, as we maintained a conservative stance in our provisioning policies. At the same time, our six-month results reconfirm that we are positioned well to withstand both geopolitical and macroeconomic headwinds. We continued to expand our key businesses while reducing our reliance on wholesale funding, sustaining robust liquidity and securing solid capitalisation ratios. We are also committed to stringent cost management and further improvements in our efficiency ratios in accordance with the Group’s key strategic goals.”

In 1H 2014, VTB Group posted further solid growth in core income lines, primarily driven by the expansion of its balance sheet, with net interest income and net fee and commission income up by 17.9% and 12.5% year-on-year, respectively.

The Group’s net interest margin (NIM) contracted slightly year-on-year to 4.3% in 1H 2014 from 4.4% in 1H 2013. In 2Q 2014 the Group saw a moderate 30 bps quarter-on-quarter NIM contraction (resulting in a quarterly NIM of 4.2%), which was mainly driven by an increase in the CBR key refinancing rate and further growth in the Group’s liquidity cushion against higher uncertainty in the operating and geopolitical environment.

Russia’s GDP growth slowdown, combined with political tensions in Ukraine, contributed to a year-on-year increase in the Group’s annualised cost of risk (CoR) to 2.6% of the average gross loans and advances to customers in 1H 2014, versus 1.8% in 1H 2013. However, in 2Q 2014 the Group saw a quarter-on-quarter improvement in CoR to 2.5% versus 2.8% in 1Q 2014, reflecting the Group’s successful efforts to further optimise risk in its retail and corporate loan books. The provision charge for impairment of debt financial assets increased to RUB 92.8 billion in 1H 2014 versus RUB 50.7 billion in 1H 2013.

The Group posted both year-on-year and quarter-on-quarter improvements in its cost-to-income ratio, which stood at 49.5% in 1H 2014 (52.9% in 1H 2013) and at 48.7% in 2Q 2014 (versus 50.4% in 1Q 2014). Staff costs and administrative expenses amounted to RUB 109.0 billion in 1H 2014, up 12.0% from RUB 97.3 billion in 1H 2013, largely due to further growth of the Group’s retail business.

The Group’s loan book expansion, as well as an increase in cash and short-term funds in response to the tighter liquidity environment in the Russian markets, were the main factors behind the growth in total assets during 1H 2014. The share of net loans and advances to customers in total assets continued to increase, reaching 68.6% as of 30 June 2014 versus 68.1% as of 31 December 2013 and 64.2% as of 31 December 2012.

Loan book quality developed in line with macroeconomic trends in 1H 2014. The NPL ratio as of 30 June 2014 was 5.9% of gross customer loans, including financial assets classified as loans and advances to customers pledged under repurchase agreements (hereinafter the “total loan book”) versus 5.8% as of 31 March 2014 and 4.7% as of 31 December 2013. The allowance for loan impairment amounted to 5.9% of the Group’s total loan book as of 30 June 2014 and 31 March 2014, versus 5.5% at the start of the year. The Group’s NPL coverage ratio at 30 June 2014 was 100.7%, versus 101.0% as of 31 March 2014 and 115.5% as of 31 December 2013.

The Group’s customer deposits grew by 15.6% during 1H 2014, reflecting mainly a solid increase in deposits from corporate clients in 1Q 2014 as well as the Group’s strong deposit-taking capacity in both corporate and retail businesses. In 2Q 2014 the Group’s customer deposits growth was muted by the 6% revaluation of the rouble against the US dollar, as a substantial part of the Group’s customer funds are denominated in US dollars.

In 1H 2014 and 2Q 2014, the Group further decreased its reliance on wholesale funding, as the share of funds raised via issuance of debt securities in the Group’s liabilities contracted to 7.9% as of 30 June 2014 versus 8.9% as of 31 March 2014 and 9.4% at the start of the year.

VTB continues to work to further strengthen its capital base and capital adequacy ratios. On 29 August 2014, VTB’s extraordinary general meeting of shareholders will decide on the issuance of preference shares by the Bank, which will allow the conversion of subordinated loans received by the Group’s banks in 2008 (as part of the Russian Government’s anti-crisis package). The subordinated loans are expected to be converted into new preference shares that are to receive Common Equity Tier 1 treatment under Bank of Russia regulations and Basel standards.

As of 30 June 2014, the Group’s total and Tier 1 capital adequacy ratios were 12.8% and 9.4%, respectively, versus 14.7% and 10.9% as of 31 December 2013. According to the Group’s pro-forma estimate as of 30 June 2014, the conversion of the Group’s subordinated debt into preference shares is expected to boost the Tier 1 capital adequacy ratio by c. 2.4 percentage points.