RTB: JSC „Rietumu Banka” audited financial statement 2015
OREANDA-NEWS. 2015 was another very successful year for the Rietumu Banka Group with profits of EUR 70 million and assets growing by 9.1%. Despite the low interest rate environment the Group continued to operate very efficiently with a cost to income ratio of 34% and operating income per employee of EUR 153 thousand.
Quality and Individual approach
The Group offers a comprehensive range of banking products to corporate customers and high net worth individuals. The Group has extensive experience in the EU and CIS countries and many of its customers operate in Latvia, the Baltic States, Western Europe, Russia and other CIS countries. The Group understands the business environments in both Western and Eastern Europe.
Given the geographical area that the Group operates in, the turbulent geopolitical and economic environment has resulted in elevated risks in these regions. Exchange rate volatility and especially the devaluation of the Russian Ruble resulted in significant challenges to the Group and our customers. However, by maintaining a close contact to our clients through our extensive network of representative offices, we continued to successfully cooperate with our customers. During 2015 the Group opened new representative office in Tel Aviv. The Group expended the range of products offered to its customers such as various improvements in payment solutions and technological advances such as Android application, Windows mobile token and an Apple watch extension. The Bank increased its product range by improving online availability of investment services.
The Group made significant changes to its customer commission structure. The strategy behind these changes is that the Group wants to focus on larger European Union based customers to which we can offer a broader range of products.
Card and E-commerce development and growth
The Bank completed the development of its own card processing center which will improve the range of e-commerce and card products available to clients while further improving the Group’s efficiency. During 2015, the processing center has been certified and the Bank is currently switching traffic from its existing provider to the processing center.
The Bank again hosted its annual e-commerce conference which is the largest e-commerce forum in the Baltic States with more than 600 participants from 40 countries. Based on demand for e-commerce services we expect that growth will continue in 2016.
The Bank follows a very conservative lending policy while offering innovative and individually tailored 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.
As a result of the uncertain environment in the region the Bank has slowed down its commercial lending in the CIS. The CIS portfolio has been stable over recent years with mature loans that have been quite robust in this challenging environment. In addition since 2011, the Group focussed on reducing concentration risks of large lending projects. This resulted in the lending portfolio being diversified over a large group of medium sized loans rather than the portfolio being concentrated in a smaller group of larger loans. As at 31 December 2015, the average outstanding amount of commercial loans to individual groups of customers was approximately EUR 1.4 m.
During 2015 the Group focussed on industries that have not been significantly affected in times of crises and need significant efforts to grow its trade finance and transport finance businesses. By focussing on 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 such as Ireland and the United Kingdom are the areas the Bank will focus on in developing its lending business.
During 2015 the Bank issued preference shares that were purchased by the Bank’s customers.
The Bank also significantly increased its bond portfolio during 2015 to reach a total of EUR 674 million (2014: EUR 193 million). The income from this portfolio in 2015 was EUR 13 million with an annualized income of the newly created portfolio of 5.4 m. The bond portfolio is invested in a widely diversified range of bonds with an average maturity of 2.17 years.
Innovations and modern technologies
In April 2015 the Bank hosted the first Rietumu Fintech Challenge in which a number of financial technology start-up companies participated. Two companies that participated in the challenge have since launched their products and one of these was supported financially by the Bank. The Bank plans to continue to promote the annual Fintech Challenge.
The major non-banking companies include leasing and consumer finance companies, repossessed real estate and other repossessed 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.
The Group fully owns an asset management company called Rietumu Asset Management that 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.
The Group’s Belorussian leasing business focuses on industrial equipment leasing which contributed to the Group’s profit in the amount of EUR 1.8 million for the year ended 31 December 2015. The Bank partly owns and finances a consumer leasing company named InCredit Group Ltd which is registered and operates in Latvia. As of 31 December 2015, the net leasing portfolio of InCredit Group Ltd was EUR 32 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 repossessed 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 2015 RB Investments had total assets of EUR 52 m, shareholders’ equity of EUR 17.6 million.
After tax profit attributable to the equity holders for the year 2015 was EUR 70 m (2014: 74.1 m). The Group generated an after tax return on equity of 17.5% (2014: 23.7%) and an after tax return on assets of 1.9% (2014: 2.3%).
Operating income reached EUR 158.7 m which represents an increase of 2.7% from 2014. Net interest income increased to EUR 83.2 m (2014: EUR 76.9 m) due to growth in the bond portfolio. Net fee and commission income was EUR 44.1 m (2014: EUR 45.7 m). Customers transacting more per card but spending less per transaction resulted in a significant increase in commission expense of 24%. The Group’s cost to income ratio was 34% for the year ended 31 December 2015 (2014: 31%). The Group’s goal is to continue to maintain a cost income ratio of less than 40%. As a result of increasing tax exempt income such as income from listed securities, the effective income tax rate for the 2015 year was 14% (2014: 15%). The cumulative result of the above is that the Group reached a profit margin of 51.1% compared to 56.3% in 2014.
As at 31 December 2015 the Group’s total assets were EUR 3,794 m. This represents an increase of 9.1% compared to 2014. The Group follows a conservative approach to asset allocation and about 50% of the Group’s assets invested in liquidity management portfolios. About 73% of the liquidity management portfolio is invested in short term money market placement with large mainly European banks. The tenure of these placements is up to 7 days. The remaining 27% of the liquidity management portfolios are invested in collateralized instruments with large and stable financial institutions and a short term bond portfolio. The Group increased its available for sale bond portfolio from EUR 99.5 m as at 31 December 2014 to EUR 456.1 m at the end of 2015. The held to maturity portfolio was EUR 221 m as at 31 December 2015 compared to 2014 balance of EUR 93 m. The bond portfolio is primarily invested in corporate investment grade securities.
Loans and receivables due from customers represent about 29% 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 1,102 m compared to the balance of 2014 of EUR 1,041 m due to a conservative approach to Russian lending exposure. The commercial loan portfolio represents about 89% of the total Bank’s loans of EUR 1,152 m and the effective average interest rate for 2015 was 6.3%. 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 8% of the total loan portfolio. The effective average interest rate for 2015 for margin loans was 3.9%.
Funding, Equity and Expand Capital Base
Current accounts and deposits due to customers reached EUR 3,204 m and increased by 4% compared to 2014. Current accounts represented EUR 2,828 m or 88.3% of total current accounts and customer deposits. Current accounts can be withdrawn at any time but they can be considered a relatively stable funding source as outlined in Note 4 d) Liquidity risk. Term deposits amounted to EUR 376 m as at 31 December 2015 and included in this are EUR 123 m of subordinated deposits. The average remaining tenor of term deposits is 2.2 years with the average effective interest rate in 2015 of 2.2%. The average effective interest rate for subordinated deposits in 2015 was 5%. During 2015, the Bank raised 35 m in issued senior bonds that are listed on the NASDAQ OMX Riga Stock Exchange. These bonds were sold to the Bank’s customers to diversify the funding base of the Bank.
In 2015 the Bank raised additional capital of EUR 8.1 m in form of preference shares to be used for the general development of the Bank. In 2016 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 457 m as of 31 December 2015 representing a 34% increase from 2014. Group Tier I and total capital adequacy capital adequacy ratios were 13.02% (2014: 12.7%) and 19.2% (2014: 19%) respectively. The Bank plans continue its dividend policy of paying a dividend equal to 50% of the annual profit.
2016 and Beyond
2015 presented many new opportunities to the Bank and we believe that 2016 will also prove to be very successful. We achieved our results while maintaining a conservative asset allocation which we believe is the basis to continue our stable development. We owe our success to our customers and business partners and the trust that they have placed in us. We are looking forward to continue developing the Bank in 2016 successfully.