Analysis of financial results

Annual report 2010

# Analysis of financial results

#### Assets, RUB million

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- Net income was RUB581 million
- Assets grew by 14% to RUB166 billion
- Operating income was RUB8.0 billion
- Return on equity was 3.5%

## Assets

Assets grew by 14% during 2010 to RUB166 billion (US$5.5 billion) thanks to an inflow of client funds (up RUB17.2 billion). The Bank placed the funds raised in the loan portfolio, which increased by 22% (RUB19 billion) to RUB104 billion. The loan portfolio accounted for 63% of total assets at the end of 2010, up from 59% a year earlier. Most of the loan portfolio growth was in the fourth quarter (up 10% quarter-on-quarter), as the additional liquidity in the economy, stemming from a seasonal increase in federal budget spending, stimulated clients’ credit activity.

Customer accounts remained the core source of funding, accounting for 87% of total liabilities, or RUB130 billion, up 15% year-on-year. Current accounts (an almost cost-free source of funding) accounted for 35% of total customer funds. Due to rapid loan growth over 2010, the loan-to-deposit ratio rose by 4.76 percentage points to 88.4%. The structure of liquid assets changed in favor of profit-earning assets: trading securities increased by 25% (RUB2.4 billion) to RUB12.2 billion, while cash and equivalents decreased by 6% (RUB-2.0 billion) to RUB32 billion. Overall, the Bank managed to fulfill its financial plan for 2010, despite the instability of the economic recovery.

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## Equity

Equity increased by 3.5% to RUB16.9 billion (US$553 million). The Tier-1 capital adequacy ratio was 12.8%, while the total capital adequacy ratio was 15.2%, exceeding the regulatory guidelines for a credit institution. The decline from the previous year (CAR fell by 3.8 percentage points and Tier-1 by 2.7 percentage points) was a result of risk-weighted asset growth due to expansion of the loan book and securities portfolio.

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## Loan portfolio

The loan portfolio before provisions grew by 22% year-on-year (RUB20.6 billion). Although loan book growth was uneven over 2010, the Bank managed to expand its loan portfolio before provisions in the fourth quarter by 10% quarter-on-quarter on the back of greater liquidity in the economy. Net loan growth of 22% year- on-year was substantially stronger than the 12.6% for the overall banking sector. Also noteworthy is that the bank managed to boost its market share in lending to clients in Moscow Region, its key area, where the loan portfolio swelled by 43% year-on-year, double the 20% sector growth for lending to entities and individuals there. This was mainly driven by corporate loans, which grew by 22% year-on-year, compared with 12.1% for the sector, according to the Central Bank. Corporate lending accounted for 85.6% of the total loan portfolio, with 52% of total loans being issued to small and medium-sized enterprises. The loan book remained diversified by economic sectors: the largest share of loans was granted to the trade and manufacturing sectors (24% each). The retail loan book grew by 18% year-on-year due to greater mortgage (24%) and consumer (26%) lending. By the year-end, mortgages accounted for 59% of total retail loans.

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## Securities

The securities portfolio amounted to RUB14.2 billion (US$467 million), up 29% year-on-year. As a result of the market drop at the beginning of the second quarter, the Bank boosted its securities portfolio of the most reliable issuers with insignificant credit risk, having increased total securities to RUB18.4 billion. Over the following quarters, the Bank steadily reduced the securities investments partly selling securities acquired in the second quarter. By the year-end, the trade securities portfolio mainly consisted of investment-grade securities with a short duration. Most of them were fixed-income securities of Russian federal and regional government bodies and companies with quasi-sovereign risk. The breakdown of the securities portfolio at the year-end was as follows: 46.3% — federal and regional government bonds and Eurobonds, 32.3% — Central Bank bonds, and 18.3% — corporate bonds and Eurobonds.

#### Loan portfolio, RUB million

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#### Loan growth of Bank Vozrozhdenie and the Russian banking system

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## NPLs

The NPL ratio increased by 0.6 percentage points over the year to 10.5% (RUB12.1 billion). However, the Bank’s NPL ratio was 11.1% in the first quarter. Under IFRS, the Bank applies a very conservative approach to the definition of NPLs, recording them as the whole principal of a loan more than one day overdue either on principal or interest. Impaired loans, on which some losses are possible, accounted for 9.8% of the total loan portfolio. Total NPLs are almost totally covered by provisions for loan losses, which amounted to RUB11.2 billion by the year-end. The total coverage ratio was 93%, while for loans overdue by more than 30 days it was 130% and for those overdue by more than 90 days it was 132%. Total charges to provisions over the year (cost of risk) accounted for 1.8% of the average loan book, or RUB1.9 billion.

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#### Operating costs, RUB million

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## Net interest income

Net interest income declined by 34% year-on-year and amounted to RUB5.5 billion. Interest income was affected by a drop in yields for loans coupled with greater competition on the back of lending stagnation for most of 2010. Amid a sharp plunge in lending rates, the Bank’s efforts were focused on reducing funding cost, which was trimmed by 1 percentage point to 6.1% by the year-end, in comparison with 7.1% a year earlier. Thus, due to a steady expiration of the most expensive deposits during the fourth quarter, the cost of funding came down by 0.8 percentage points, from 6% in the third quarter to 5.2% at the end of the fourth quarter. As a result, the net effect on the NIM was positive. It rose from 3.3% in the third quarter to 3.5% in the fourth quarter and accounted for 3.6% of total average assets by the year-end. The interest spread also expanded, from 5.6% in the third quarter to 5.8% in the fourth quarter, and stood at 6.3% for the full year.

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## Non-interest income

Net commission income grew steadily in 2010 and totaled RUB3.9 billion, up 5.5% year-on-year, thanks to an increase in fees and commissions from settlements of 13.6% and transactions with bank cards of 17.8%. Net fee income accounted for 89% of total non-interest income. The share of non-interest income was 45% of total operating income, remaining one of the highest among Russian banks, as in previous years.

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## Operating costs

Operating costs grew by 14% year-on-year to RUB7.2 billion. A seasonal increase in personnel expenses in the fourth quarter, due to payment of annual bonuses, caused payroll expenses to rise by 15.2%, and the share of personnel expenses in total costs was 56%, up from 54% in 2009. The Bank took steps to prevent administrative expenses rising, as a result of which they fell by 1.3%. The total cost-to-income ratio (before provisions) was 72.5%.

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## Income

Net income grew consistently in each successive quarter of 2010, and the Bank finished the year with net income of RUB581 million. The effective tax rate in 2010 was 20%.

#### Net income, RUB million

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#### Commission income, RUB million

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#### Client funds, RUB million

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#### Cost-to-income ratio, %

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© 2011 Bank «Vozrozhdenie»