OREANDA-NEWS. 2014 marked another successful year for the Latvian economy.  Latvia joined the EUR zone on 1 January 2014 and GDP grew by an estimated 2.4 % during the year.  Similarly 2014 was a record year for the Rietumu Bank Group with a record profit of EUR 74.1 m for the year ended 31 December 2014.  The Bank also continued to be one of the most efficient banks in the Baltic States and much has been done to further improve the Bank’s efficiency.  These efforts have resulted in the Bank achieving a cost to income ratio in 2014 of 31%.  This has been achieved in the current low interest rate environment and with revenues well diversified over interest and commission income.

Quality and Individual approach

The Group has a strategy to offer a comprehensive range of banking products of the highest level for corporate customers and high net worth individuals.  Our commitment to our customers was witnessed again not only by our customers’ success but the Bank was also rewarded for the third consecutive year the award from SPEAR`S Russia Wealth Management Awards as the Best bank in the CIS and Baltic countries that provides the services of private banking and high money management for Russian clients.  The Group has widespread experience in the EU and CIS countries and the Group sees itself as a bridge between East and West as many of its customers operate in Latvia, the Baltic States, Western Europe, Russia and other CIS countries.  The Group comprehends the business environments in both Western and Eastern Europe. 

The Group operates in the EU and CIS countries and the current turbulent geopolitical environment made it more complicated to operate in.  However, maintaining a close contact to our clients through our extensive network of representative offices, we have continued to cooperate with our customer successfully.  We believe strongly that all customers have access to the Bank remotely through internet banking, phone banking, private bankers and regional managers and 24 h customer support service.  The Bank improved the range of banking products for our customer base which is focused on corporate customers and high net worth individuals. 

The size of net fee and commission income is a significant contributor to the Group’s income and represents 30% of total income for the year ended 31 December 2014.  The Bank focussed on increasing this type of income and to achieve this increase the Bank believes that customers require an individual approach.  A private banking manager is allocated to each client that has an in depth knowledge of each customer business.  This enables an understanding of each customer’s unique requirements allowing the Bank to continue servicing each customer with the highest quality of services.  In addition, the Bank believes in always using the most recent technologies to further improve the banking experience that customers expect.

E-commerce development and growth

The Bank is a leader in the Baltic States in e-commerce and revenue from e-commerce has continued to its impressive growth.  The Bank improved the list of e-commerce type of products offered to customers as well as improving existing products and services.  In the last quarter of 2014 the Bank hosted its annual e-commerce conference which is the largest e-commerce forum in the Baltic States with more than 450 participants from 30 countries.  Demand for e-Commerce services shows that growth will continue in 2015.  In addition, the Bank’s payment card and e-Commerce volumes have reached a volume that justifies operating its own processing centre.  This processing centre was operational in the last quarter of 2014 and will improve the Group’s efficiency even more.

Lending

The Bank’s approach to lending is to offer innovative and individually created products that suit the requirements of each individual customer the best.  This includes not only lending services but other services such as legal assistance, consulting and corporate support.  The tailor made approach to lending enabled the Group to record interest income from lending to customers of EUR 87.5 m for the year ended 31 December 2014 compared to EUR 80.6 m for 2013.

However, as a result of the uncertain regional environment the Bank has slowed down its commercial lending significantly in 2014.  Lending growth commenced from 2009 and the portfolio is mature with good loan to value ratios.  This maturity has shown that the portfolio is quite robust in this challenging environment.  In addition since 2011, the Group focussed on reducing concentration risks to large lending projects.   This resulted in the lending portfolio is diversified over a large group of medium sized loans rather than concentrating the portfolio in a smaller group of larger loans.  As at 31 December 2014, the average outstanding amount of commercial loans to individual groups of customers was approximately EUR 1.3 m.  This size diversification further increases the resilience of the portfolio to withstand stress and economic turbulence. 

The Group believes that there will be industries that will continue to do well even in times of crises.  In 2014 the Bank made significant efforts to grow its trade finance and transport finance businesses.  By focussing the trade finance business the Bank also offered its customers new opportunities to develop their international expansion.  Trade finance as well as developing new lending markets will be areas the Bank will focus on in developing its lending business.

Innovations and modern technologies

The Bank continued to improve its internet and mobile banking applications and in 2014 we successfully launched an updated mobile banking application.  The Group views Information Technology as one of the primary tool to amplify the effect form the business and ensure business continuity.  The Group is striving to make the technology be as invisible as possible to every end user, whether it is an employee or a customer.  In achieving this goal, our employees servicing customers remain focused on providing the best personalized service utilizing all necessary tools to make informed decisions fast and thus, keep the Group growing successfully. 

The Group demonstrates significant growth from year to year and IT supports its growth.  The systems that we build are built for change.  In Bank IT we develop in-house everything that represents our business know-how and thus captures our business logic, customer profiling, data mining and discovery, risk management, CRM, internet and mobile banking.  At the same time, we outsource systems that already became an "IT commodity", GL, credit cards, infrastructure, brokerage, clearing.

Group Companies

The major non-banking companies represent leasing and consumer finance companies, reposed real estate and other reposed collateral maintenance companies and asset management and financial companies. It is the Bank’s strategy as much as possible to fully integrate its subsidiaries into the Bank’s management and control systems.  The activities of Group companies are financed by the Bank via capital investments and loans.  In most cases the Bank owns 100% of the shares of its subsidiaries. 

During 2014 the Group developed a fully owned asset management company called Rietumu Asset Management. Rietumu Asset Management is fully integrated into the Bank’s structures and provides asset management services to the Bank’s customers.  The asset management company provides individual portfolios for customers as well as investment into four Latvian registered funds.  These funds have a global investor universe.  The fund specializations are cash management, investment grade fixed income, high yield fixed income and equity markets.

The Group’s Belorussian leasing business focuses on industrial equipment leasing and as at 31 December 2014 the company has a stable leasing portfolio of EUR 28 m and which contributed to the Group’s profit in the amount of EUR 1.6 m for the year ended 31 December 2014.  The Bank partly owns and finances a consumer leasing company named InCredit Group SIA which is registered and operates in Latvia.  As of 31 December 2014, the net leasing portfolio of InCredit Group SIA was EUR 28 m and it contributed to the net profit after tax of the Group in the amount of EUR 1 m.

RB Investments Group, owns most of the significant real estate that the Bank repossessed as well as other assets that the Bank took over on defaulted loans.  Most of the reposed assets are located in Riga and the Riga region. RB Investments Group is renting out a portion of these assets and plans to sell most of its portfolio of assets in the coming years. As of 31 December 2014 RB Investments had total assets of EUR 48.7 m, shareholders’ equity of EUR 19.5 m.

Profitability

After tax profit attributable to the equity holders for the year 2014 was EUR 74.1 m which represents an increase of 19.03% compared to 2013.  The Group generated an after tax return on equity of 23.7% (2013: 24.3%) and an after tax return on assets of 2.3% (2013: 2.4%).

Operating income reached EUR 154.6 m which represents an increase of 10.3% from 2013.  Net interest income was EUR 76.9 m (2013: EUR 66.5 m) primarily due to growth in interest income on commercial loans.  Net fee and commission EUR 45.7 m (2013: EUR 37.5 m) due to a significant increase in e-commerce income and payment card income. Other types of commission income increased as well due to changes in the Bank’s tariff structure. The Group’s cost to income ratio was 31% for the year ended 31 December 2014 (2013: 37%).  The Group’s goal is to continue to maintain a cost income ratio of less than 40%. The result of the above is that the Group reached a profit margin of 56.3% compared to 51.1% in 2013.

Assets

As at 31 December 2014 the Group’s total assets were EUR 3,478 m. This represents an increase of 18.8% compared to 2013.  The Group follows a conservative approach to asset allocation and about 57% of the Group’s assets invested in liquidity management portfolios. About 58% of the liquidity management portfolio is invested in short term money market placement with large mainly European banks.  The tenor of these placements is up to 7 days.  The remaining 42% of the liquidity management portfolios are invested in collateralized instruments with large and stable financial institutions and a short term bond portfolio.  Collateralized instruments represent reverse repos or similar instruments and have a tenor of between up to 3 months.  The Group increased its available for sale bond portfolio from EUR 45 m as at 31 December 2013 to EUR 99.5 m at the end of 2014.  The held to maturity portfolio was EUR 93m as at 31 December 2014 compared to 2013 balance of EUR 29m. The bond portfolio is primarily invested in corporate investment grade securities.

Loans and receivables due from customers represent about 30% of total assets.  Since 2010 this ratio has not exceeded 45% and the Bank does not plan that this ratio exceeds 45% in the nearest future.  Loans and receivable to customers were EUR 1,041 m compared to the balance of 2013 of EUR 1,125 m.  This stagnation of lending growth occurred due to a reduction of Russian lending exposure.  The commercial loan portfolio represents about 85% of the total Bank’s loans of EUR 1,089 m and the effective average interest rate for 2014 was 6.9%.  Latvia, Russia and Belarus represent the largest commercial lending markets with real estate management, financial services and transport representing the largest industries in the commercial loan portfolio.  The second largest category of lending is margin lending to customers against liquid securities as collateral and this represents about 15% of the total loan portfolio.  The effective average interest rate for 2014 for margin loans was 4.7%.

Funding, Equity and Expand Capital Base

During 2014, the funding sources of the Group remained unchanged in that the Group finances its activity through current accounts and deposits due to customers and shareholders’ equity.  Current accounts and deposits due to customers reached EUR 3,083 m and increased by 20% compared to 2013.  Current accounts represented EUR 2,661 m or 86.3% of total current accounts and customer deposits.  Despite the fact that current accounts can be withdrawn at any time, they have proven to be a stable funding source as has been witnessed again in the Latvian and world financial crises as well as the analyses performed by the Group explained in Note 4 d) Liquidity risk.  Term deposits amounted to EUR 422 m as at 31 December 2014 and included in this are EUR 127 m of subordinated deposits.  The average remaining tenor of term deposits is 2 years with the average effective interest rate in 2014 of 2.9%.  The average effective interest rate for subordinated deposits in 2014 was 5.1%.  During 2015, the Bank plans to issue senior bonds to its customers that will be listed on the NASDAQ OMX Riga Stock Exchange to diversify the funding base further.

In order to diversify the Bank’s capital base and secure longer term funding the Bank raised additional capital in form of preference shares in the first quarter of 2014.  The Bank raised EUR 18.6 m in new preference shares which were allocated for the general growth of the Bank.  In 2015 the Bank plans to continue to issue additional tranches of preference shares to support the general activities of the Bank.

Group total shareholders’ equity reached EUR 342 m as of 31 December 2014 representing a 21% increase from 2013.  Group Tier I and total capital adequacy capital adequacy ratios were 12.7% (2013: 13.6%) and 19% (2013: 17.8%) respectively.  In 2014 the Bank paid an interim dividend of EUR 0.15 per share amounting to EUR 18.3 m. The Bank plans continue its dividend policy of paying a dividend equal to 50% of the annual profit resulting in a final dividend per share of EUR 0.15 or EUR 17.7 m.

2015 and Beyond

The economical and geopolitical environment during 2014 presented many new opportunities to the Bank and we believe that using our customer oriented approach we were very successful in maximising these opportunities.   We achieved our results while maintaining a conservative asset allocation which we believe is the basis to continue our stable development.  We are looking forward to continue developing the Bank in 2015 successfully together with our customers.