Sberbank - Annual Report 2010 - Interest Income and Expenses

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# Interest Income and Expenses

## Interest income

The Group’s interest income recognised in the consolidated income statement amounted to RUB 795.6bn in 2010, down 2.4% year on year. The decline was the result of a lower return on the Group’s major interest-earning assets (the loan portfolio and securities available for sale) with a corresponding increase in the asset value. The table below presents the average annual balances of the Group’s assets by asset class, and the related interest income and average annual return.

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| 2010 | 2009
--- | --- | ---
RUB m | Average for the year | Interest income | Average return, % | Average for the year | Interest income | Average return, %
Assets |  |  |  |  |  |
Loans and advances to customers | 5,622,371 | 682010 | 12.1 | 5,466,553 | 752,647 | 13.8
Debt securities available for sale | 1,226,722 | 83,219 | 6.8 | 422,443 | 40,190 | 9.5
Due from banks, including correspondent accounts and overnight deposits with banks | 336,960 | 8,073 | 2.4 | 370,279 | 8,141 | 2.2
Debt investment securities held to maturity | 167,404 | 9,101 | 5.4 |  |  | 0.0
Other debt securities designated at fair value through profit or loss | 91,692 | 5,740 | 6.3 | 107,631 | 7,330 | 6.8
Debt trading securities | 87,299 | 7,503 | 8.6 | 83,252 | 6,654 | 8.0
Total | 7,532,447 | 795,646 | 10.6 | 6,450,157 | 814,962 | 12.6
Provision for loan impairment | (666,048) |  |  | (390,959) |  |
Non-interest-earning assets | 827,401 |  |  | 685,176 |  |
Total assets | 7,693,800 |  |  | 6,744,374 |  |

| 2010 | 2009
--- | --- | ---
RUB m | Average for the year | Interest income | Average return, % | Average for the year | Interest income | Average return, %
Assets |  |  |  |  |  |
Loans and advances to customers | 5,622,371 | 682010 | 12.1 | 5,466,553 | 752,647 | 13.8
Debt securities available for sale | 1,226,722 | 83,219 | 6.8 | 422,443 | 40,190 | 9.5
Due from banks, including correspondent accounts and overnight deposits with banks | 336,960 | 8,073 | 2.4 | 370,279 | 8,141 | 2.2
Debt investment securities held to maturity | 167,404 | 9,101 | 5.4 |  |  | 0.0
Other debt securities designated at fair value through profit or loss | 91,692 | 5,740 | 6.3 | 107,631 | 7,330 | 6.8
Debt trading securities | 87,299 | 7,503 | 8.6 | 83,252 | 6,654 | 8.0
Total | 7,532,447 | 795,646 | 10.6 | 6,450,157 | 814,962 | 12.6
Provision for loan impairment | (666,048) |  |  | (390,959) |  |
Non-interest-earning assets | 827,401 |  |  | 685,176 |  |
Total assets | 7,693,800 |  |  | 6,744,374 |  |

As shown in the table below, interest income received per the statement of cash flows in 2010 was RUB 809.6bn. This is greater than the interest income recognised in the consolidated income statement for the following reason: commissions received on loan products are recorded as interest income in the consolidated income statement using the effective interest method where these commissions are an integral part of the loan product. In the consolidated statement of cash flows, these commissions are recorded in the reporting period in which they are received.

RUB m | 2010 | 2009
--- | --- | ---
Interest income recognised in the income statement | 795,646 | 814,962
Interest income received per the statement of cash flows | 809,556 | 823,100

Interest income on loans to customers amounted to RUB 682bn in 2010. This was RUB 70.6bn lower year on year due to a general decline in corporate-loan interest rates in the Russian financial market in the reporting period. The downward impact of lower interest rates on interest income was not offset by loan book expansion.

Interest income on securities increased to RUB 105.6bn in 2010, which is almost twice the amount earned in 2009 (RUB 54.2bn). The increase was primarily due to a substantial expansion of the portfolio of securities available for sale. An analysis of securities portfolio movements is presented in Structure of Assets.

Interest income on amounts due from banks (including interbank loans, nostro accounts and overnight placements) remained largely unchanged at RUB 8.1bn in 2010.

## Interest expenses

The Group reduced its interest expenses by RUB 12.4bn to RUB 299.8bn in 2010. The reduction is largely attributable to a decline in the average cost of liabilities from 5.3% to 4.5%. The average annual value of interest-bearing liabilities rose 13.3% due to continued growth in retail deposits. The table below presents the average annual balances of the Group’s liabilities by liability class, the related interest expense and average annual cost of funds.

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| 2010 | 2009
--- | --- | ---
RUB m | Average for the year | Interest expense | Average cost, % | Average for the year | Interest expense | Average cost, %
Liabilities |  |  |  |  |  |
Due to individuals | 4,181,715 | 216012 | 5.2 | 3,345,167 | 187,769 | 5.6
Due to corporate customers | 1,710,205 | 38,836 | 2.3 | 1,586,021 | 57,638 | 3.6
Subordinated debt | 390,753 | 28,219 | 7.2 | 545,307 | 41,289 | 7.6
Other borrowed funds | 154,273 | 5,950 | 3.9 | 159,284 | 5,408 | 3.4
Debt securities in issue | 141,507 | 8,776 | 6.2 | 121,815 | 9,184 | 7.5
Due to other banks | 121,723 | 2,032 | 1.7 | 156,746 | 10,957 | 7.0
Total | 6,700,176 | 299,825 | 4.5 | 5,914,340 | 312,245 | 5.3
Non-interest-bearing liabilities | 114,484 |  |  | 73,492 |  |
Total liabilities | 6,814,660 |  |  | 5,987,832 |  |

| 2010 | 2009
--- | --- | ---
RUB m | Average for the year | Interest expense | Average cost, % | Average for the year | Interest expense | Average cost, %
Liabilities |  |  |  |  |  |
Due to individuals | 4,181,715 | 216012 | 5.2 | 3,345,167 | 187,769 | 5.6
Due to corporate customers | 1,710,205 | 38,836 | 2.3 | 1,586,021 | 57,638 | 3.6
Subordinated debt | 390,753 | 28,219 | 7.2 | 545,307 | 41,289 | 7.6
Other borrowed funds | 154,273 | 5,950 | 3.9 | 159,284 | 5,408 | 3.4
Debt securities in issue | 141,507 | 8,776 | 6.2 | 121,815 | 9,184 | 7.5
Due to other banks | 121,723 | 2,032 | 1.7 | 156,746 | 10,957 | 7.0
Total | 6,700,176 | 299,825 | 4.5 | 5,914,340 | 312,245 | 5.3
Non-interest-bearing liabilities | 114,484 |  |  | 73,492 |  |
Total liabilities | 6,814,660 |  |  | 5,987,832 |  |

Interest expenses on amounts due to customers added 3.8% to RUB 254.8bn in 2010. A portion of this increase can be ascribed to the increase in average account balances (up by 19.5% year on year) which more than offset the effect of the reduction in the cost of funds: the average cost of funds decreased by 0.7 p.p. to 4.3% in 2010.

Changes in cost of customer deposits in 2009 and 2010 are presented in the table below:

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| 2010 | 2009
--- | --- | ---
RUB m | Average liabilities amount | Interest expense | Average cost of funds, % | Average liabilities amount | Interest expense | Average cost of funds, %
Due to corporate customers |  |  |  |  |  |
Term deposits | 597,700 | 29,747 | 5.0 | 641,722 | 46,199 | 7.2
Current accounts | 1,112,505 | 9,089 | 0.8 | 944,299 | 11,439 | 1.2
Total | 1,710,205 | 38,836 | 2.3 | 1,586,021 | 57,638 | 3.6
Due to individuals |  |  |  |  |  |
Term deposits | 3,605,050 | 213,384 | 5.9 | 2,933,685 | 186,400 | 6.4
Current accounts | 576,665 | 2,628 | 0.5 | 411,482 | 1,369 | 0.3
Total | 4,181,715 | 216,012 | 5.2 | 3,345,167 | 187,769 | 5.6
TOTAL | 5,891,920 | 254,848 | 4.3 | 4,931,188 | 245,407 | 5.0

| 2010 | 2009
--- | --- | ---
RUB m | Average liabilities amount | Interest expense | Average cost of funds, % | Average liabilities amount | Interest expense | Average cost of funds, %
Due to corporate customers |  |  |  |  |  |
Term deposits | 597,700 | 29,747 | 5.0 | 641,722 | 46,199 | 7.2
Current accounts | 1,112,505 | 9,089 | 0.8 | 944,299 | 11,439 | 1.2
Total | 1,710,205 | 38,836 | 2.3 | 1,586,021 | 57,638 | 3.6
Due to individuals |  |  |  |  |  |
Term deposits | 3,605,050 | 213,384 | 5.9 | 2,933,685 | 186,400 | 6.4
Current accounts | 576,665 | 2,628 | 0.5 | 411,482 | 1,369 | 0.3
Total | 4,181,715 | 216,012 | 5.2 | 3,345,167 | 187,769 | 5.6
TOTAL | 5,891,920 | 254,848 | 4.3 | 4,931,188 | 245,407 | 5.0

In 2010, the Group saw a reduction in its interest expense on subordinated debt. This was thanks to a decrease in the liability amount and a cut in the interest rate (from 8% to 6.5% in July 2010) on its subordinated loan from the Bank of Russia.

The Interest expense on amounts due to banks decreased by more than five-fold versus 2009, primarily due to a reduction in the cost of borrowing from 7.0% in 2009 to 1.7% in 2010. The decrease came against high interest expense in 2009 because of large borrowings made by Sberbank in Q1 2009 from the interbank market at high interest rates in order to maintain liquidity of the Group.

## Net interest income

The Group earned RUB 495.8bn in net interest income in 2010, which is RUB 6.9bn less than in 2009. Return on assets, cost of funds and interest spread and margin for 2009 and 2010 are presented in the table below.

enlarge

| 2010 | 2009
--- | --- | ---
RUB m | Average for the year | Interest income/expense | Average return/cost, % | Average for the year | Interest income/expense | Average return/cost, %
Total interest-earning assets | 7,532,447 | 795,646 | 10.6 | 6,450,157 | 814,962 | 12.6
Total interest-bearing liabilities | 6,700,176 | 299,825 | 4.5 | 5,914,340 | 312,245 | 5.3
Net interest income |  | 495,821 |  |  | 502,717 |
Interest spread |  |  | 6.1 |  |  | 7.3
Net interest margin |  |  | 6.6 |  |  | 7.8

| 2010 | 2009
--- | --- | ---
RUB m | Average for the year | Interest income/expense | Average return/cost, % | Average for the year | Interest income/expense | Average return/cost, %
Total interest-earning assets | 7,532,447 | 795,646 | 10.6 | 6,450,157 | 814,962 | 12.6
Total interest-bearing liabilities | 6,700,176 | 299,825 | 4.5 | 5,914,340 | 312,245 | 5.3
Net interest income |  | 495,821 |  |  | 502,717 |
Interest spread |  |  | 6.1 |  |  | 7.3
Net interest margin |  |  | 6.6 |  |  | 7.8

Interest spread1 was 6.1% in 2010, or 1.2 p.p. lower than in 2009; with market interest rates declining, the replacement of interestearning assets occurred faster than the maturity and replacement of liabilities on which the group paid interest.

% | 2010 | 2009
--- | --- | ---
Previous year’s margin | 7.80 | 7.15
Return on corporate loans | -1.22 | 1.30
Return on retail loans | 0.00 | -0.08
Return on amounts due from banks | 0.01 | -0.10
Return on securities | -0.45 | 0.17
Structure of interest-earning assets | -0.42 | -0.38
Cost of amounts due to corporate customers | 0.33 | 0.10
Cost of amounts due to individuals | 0.26 | -0.14
Cost of amounts due to other banks | 0.04 | 0.02
Debt securities in issue and subordinated debt | 0.05 | -0.10
Structure of interest-paying liabilities | -0.02 | -0.06
Earning assets to interest-paying liabilities | 0.21 | -0.08
Reporting year margin | 6.58 | 7.80

The decline in the interest margin from 7.8% in 2009 to 6.6% in 2010 was due to the following:

- Lower returns on corporate loans;
- Lower returns on investments in securities;
- Changes in the structure of interest-earning assets: That is, a reduction in the proportion of higher-yielding loans, and a corresponding increase in the proportion of lower-yielding securities in the asset pool.

The above decrease was not fully offset by the decrease in the cost of funds raised, primarily as a result of the cost of customer deposits.

The table below presents an analysis of changes in interest income and expenses for 2010 versus 2009 by looking at the following factors:

- Changes in average annual balances of items recorded in the statement of financial position (volume factor).
- Changes in average interest rates.

RUB m | Volume factor | Interest rate factor | Change in interest income/expense
--- | --- | --- | ---
Assets |  |  |
Loans and advances to customers | 18,901 | (89,538) | (70,637)
Debt securities available for sale | 54,561 | (11,532) | 43,029
Due from banks, including correspondent accounts and overnight deposits with banks | (798) | 730 | (68)
Debt investment securities held to maturity | 9,101 | - | 9,101
Other debt securities designated at fair value through profit or loss | (998) | (592) | (1,590)
Debt trading securities | 348 | 501 | 849
Change in interest income | 81,115 | (100,431) | (19,316)
Liabilities |  |  |
Due to individuals | (43,213) | 14,970 | (28,243)
Due to corporate customers | (2,820) | 21,622 | 18,802
Subordinated debt | 11,161 | 1,909 | 13,070
Other borrowed funds | 193 | (735) | (542)
Debt securities in issue | (1,221) | 1,629 | 408
Due to other banks | 585 | 8,340 | 8,925
Change in interest expense | (35,315) | 47,735 | 12,420
Change in net interest income | 45,800 | (52,696) | (6,896)

As is evident from the table above, the net interest income dynamics were driven by three major factors:

- Lower returns on corporate loans, which was not offset by higher lending volumes.
- Substantial growth in retail deposits.
- A notable expansion of the securities portfolio resulting from an increase in customer deposits.

1 Interest spread is the difference between the return on interest-earning assets and the cost of interest-bearing liabilities.

- Statement of Comprehensive Income
- Interest Income and Expenses
- NetFee and Commission Income
- Financial Result From Operations with Securities
- Gains from Operations with Foreign Furrencies
- Operating Expenses
- Provision for Loan Impairment

## History

- Recommend Page
- Income Statement
- Statement of Comprehensive Income
- Market Position
- Address of the CEO and Chairman of the Management Board Herman Gref

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