30th Apr 2009 16:28
VTB Group
Annual
Financial Report
31 December 2008
Contents
1.Management Report
2.Responsibility statement by management
3.Consolidated Financial Statements and Auditors' report for the years ended 31 December 2008 and 2007
Management Report
The management has pleasure in submitting the Annual Financial Report of VTB Group together with the audited accounts for the year ended 31 December 2008.
Key strategic highlights
Continued support from the Government on capital and funding
Increasing emphasis on supporting customers and protecting our franchise
Increased focus on efficiency and cost control
Risk management policies tightened
Financial highlights
VTB remained profitable at a net level for the full year
Net profit of US$212 million, down from US$1.5 billion in 2007
Total loans up 50.3% year-on-year to US$90.2 billion, reflecting strong increases in both corporate and retail lending
Total customer deposits stable at US$37.5 billion, with retail deposits up 12.8% to US$12.1 billion
Core income of US$5.2 billion, a 70.9% increase year-on-year
Net interest margin up to 4.8% from 4.4% in 2007
Provisioning charge, as a proportion of average gross loan portfolio, up to 3.2% from 1.3% in 2007
Total BIS ratio at 17.3%
Principal activities
VTB Group ("VTB" or the "Group") which includes JSC VTB Bank ("VTB Bank" or "VTB") and its subsidiaries is a leading Russian banking group, offering a wide range of universal banking services and products across Russia, certain CIS countries and in selected countries of Western Europe, Asia and Africa. The Group's business franchise is divided into three distinct areas of expertise: corporate, retail and investment banking.
Review of financial performance
Despite the challenging market conditions and higher provision charges, VTB remained profitable and posted a net profit of US$212 million for the year, down from US$1.5 billion in 2007.
The Group achieved strong asset growth of 36% to US$126 billion, up from US$92.6 billion in 2007. VTB's key role in the economy and the support we have received from the Government as it seeks to sustain economic activity has enabled VTB to benefit substantially from business inflows in both corporate and retail, driving total loans up by 50.3% to US$90.2 billion from year end 2007.
Customer deposits remained stable in 2008 at approximately US$37.5 billion, with retail deposits up 12.8% year-on-year to US$12.1 billion. This reflects the growth in the branch network and a strong retail customer preference for the security of a state-backed bank with a strong brand. Corporate deposits declined by 3.6% year-on-year to US$25.5 billion. This was partly due to the impact of the currency devaluation - about 60% of VTB's corporate deposits were rouble denominated. With reduced access to other sources of funding, corporate customers also reduced cash deposits to fund expenditure.
Core income, defined as net interest income and net fee and commission income before provisions and excluding one-off items, was up 70.9% to US$5.2 billion year-on-year reflecting both strong top-line growth and improved underlying profitability in both corporate and retail lending as well as the resilience of our business. Net interest income increased 78.7% to US$4.6 billion from 2007. Net fee and commission income grew US$656 million year-on-year, or 31.2% excluding one-off items in 2007. Net interest margin before provisions increased to 4.8% in 2008 as compared to 4.4% in 2007. Income from trading and available for sale financial instruments was US$ 41 million reflecting effective trading and hedging strategies and the impact of the application of the amended IAS 39 standard. Overall, the value of VTB's debt and equity portfolio fell by 53.2% year-on-year to US$6 billion from US$12.8 billion at the year end 2007.
In the fourth quarter of 2008, provision charges grew by US$1.1 billion compared to US$1.4 billion in the first nine months of the year. The increase reflected strong growth in our loan portfolio as well as a further decline in the financial and operating environment. Given the worsening economic outlook for Russia, VTB significantly increased its provisioning charge to 3.2% of average gross loan portfolio as compared to 1.3% in 2007. The share of overdue and rescheduled loans in the gross loan portfolio increased to 2.4% by the end of 2008 from 1.4% at the end of 2007. Coverage ratio for overdue and rescheduled loans by allowances for loan impairment stood at a comfortable level of 147.6% as of December 31, 2008.
In the face of the existing liquidity crisis and in order to limit the increase in overdue debts, VTB introduced a number of significant changes to its lending procedures, including tightening lending standards and strengthened loan monitoring practices. At the end of 2008, VTB established a Debt Centre to work with borrowers in difficulty and secure the bank's position in restructuring situations.
Continuing its efforts to manage its liabilities prudently, VTB initiated steps to optimize its debt obligations. The nominal value of bonds bought back during the fourth quarter of 2008 amounted to US$ 1.4 billion. A net gain from the buy-back of US$349 million was booked during that quarter.
Review of operating performance
Although the economy continued to grow well into 2008, a sharp deterioration in output in the fourth quarter and the devaluation of the rouble, led management to focus increasingly on the following strategic priorities: seeking ways to preserve and where possible strengthen our capital base in anticipation of rising bad debt provisions going into 2009, supporting customers through their own difficulties and protecting our customer franchise, and maintaining and where necessary strengthening efforts to rein in costs and tighten risk control.
Capital position
As of the end of 2008, VTB had a total BIS capital adequacy ratio of 17.3%, up from 16.3% at the end 2007. The bank is making strenuous efforts to optimize capital allocation within the Group. It has also continued to enjoy the strong commitment from the Russian Government to provide capital and funding support. In the fourth quarter of 2008 VTB's capital adequacy ratio was materially supported through a Government subordinated debt issue of RUR200 billion at a rate of 8% and with a maturity of 11 years.
As part of the Government's plans to recapitalize the banking sector and ensure it is adequately capitalized to absorb an expected rise in bad debt provisions, the Government has indicated that it intends to underwrite an injection of up to RUR 200 billion in Tier 1 Capital into VTB. This capital increase which will take the form of an issue of new ordinary shares, will enable VTB to continue to grow its lending book and support the Russian economy in 2009. Shareholders will vote on the proposed capital increase at the Annual General Meeting in June. The capital increase is expected to be completed by October, 2009.
Supporting customers and protecting the franchise
All our businesses reported strong growth in 2008, consolidating VTB's position as the second largest financial group in both corporate and retail banking in Russia
Corporate banking:
In the course of 2008, VTB was able to consolidate its strategic position as lender of choice to the Russian corporate sector, thanks to its strong relationship with the Government which ensured access to reliable funding. With the capital markets closed to Russian issuers, and foreign banks seeking to reduce exposure to Russian borrowers, VTB was one of the few sources of reliable credit for corporate borrowers in Russia. We were thus able to increase our share of the lending market to 12.7% from 10.7% at the end of 2007. In the face of deteriorating market conditions, we expect to focus increasingly on supporting viable customers through the downturn while maintaining our tight risk criteria. We believe that by taking a long-term, supportive view, we can protect and consolidate our franchise while continuing to benefit from the support of our largest shareholder, the Government, which at present is the only source of long-term capital and funding. In the autumn of 2008, VTB significantly expanded its volume of lending to strategically important companies. From September to the end of December 2008, VTB issued over US$27 billion of new loans to Russian customers across key sectors. As a result of this lending activity, our gross corporate loan portfolio increased 47.2% to US$77.0 billion at the end of 2008 from US$52.3 billion at the end of 2007.
Retail banking:
During 2008, we completed our three-year branch-opening programme in Russia. In the course of the year, we opened 176 new branches, bringing the total number of branches to 504. VTB24's retail branch network is now one of the largest in Russia. In 2008, VTB24 served more than 4.7 million individual and around 90,000 small business customers in Russia. Early action was taken to mitigate risk in the portfolio by shifting away from long to short-term lending products, such as consumer loans and credit cards, tightening requirements on borrowers and increasing emphasis on improving collection of arrears.
In the fourth quarter of 2008, thanks to its stronger market presence and trusted brand, VTB was one of a few banks that saw net deposit inflow with a substantial increase in the number of new current and savings accounts being opened. In 2008, retail loans were up by 71.5% to US$ 13.2 billion. Overall, our market share of loans increased to 8.8% (from 5.9% in 2007) while the share of deposits grew to 5.7% (from 4.8% in 2007.)
Investment banking:
The Group launched VTB Capital, its new investment banking business in April last year. By the end of 2008, we had established a full service investment bank, staffed with 500 employees, including both external hires and transfers from elsewhere in VTB. We are in the process of establishing ourselves as one of the leading Russian investment banking business. The objective is to provide a full suite of investment banking products to our extensive corporate client base and provide multiple opportunities to grow revenue.
Efficiency and cost control
VTB's cost to core income ratio improved to 51.9% in 2008 from 63.7% in 2007 despite the continued investment in retail branch expansion and the build-out of the investment banking business. As previously announced, at the end of 2008 VTB implemented a number of cost-cutting measures including the postponement of the move to new headquarters, cuts in administrative expenses, a hiring freeze across the Group and headcount reductions in some VTB Group businesses. Given the current challenging market environment, VTB Bank has resolved not to pay annual bonuses to the members of the Management Board in respect of the past financial year.
Corporate governance
On the corporate governance front, we intend to strengthen VTB's Supervisory Board with the appointment of two new independent directors, bringing the total number of independent directors to four. We have approved a policy on information disclosure and dividend policy, and have adopted a code of ethics setting out clear procedures and rules of conduct across the business.
2009 Outlook
The key variable is the state of the economy. Our current working assumption is that the percentage growth in our loan portfolio in dollar terms this year will be in the mid-teens.
We are also working on the basis that there will be additional funding from the Government to support that growth. Cost control remains a key priority and we expect costs to remain broadly at the same level as in the fourth quarter of 2008 on an annualized basis. We do not expect to see the allowance for loan impairment to rise beyond 8% of our total gross loan portfolio. Nevertheless, given current CBR interest rate policies and the likelihood of continued tough macroeconomic conditions, we expect interest margins to come under pressure. Our focus for the year ahead will be on supporting customers through these difficult times.
Dividend policy
In July 2008, the Supervisory Committee approved the Regulation on VTB Bank's Dividend Policy. This Regulation establishes basic principles of the Bank's dividend policy, the decision-making procedure for dividend payment (declaration), rules of dividend calculation and payout aimed at informing shareholders and other interested parties. The recommended dividend payment is determined by the Supervisory Council based on the Bank's financial performance as of the year-end, amounting to at least 10 per cent of the Bank's net profit. Dividends on all categories of shares should be paid within the period set by the General Shareholders' Meeting. If the Payout Period is not specified in the resolution of the General Shareholders' Meeting, it shall not exceed 60 days after the date of such resolution.
On 26 June 2008, VTB's annual shareholders' meeting declared dividends of RUR 9 billion (USD 381,6 million at an exchange rate of RUR 23.6113 per USD 1.00) for 2007 (RUR 0.00134 per share or USD 0.000057 per share). Dividends were paid within 60 days of the dividend declaration.
Employees
The Group's human resources management policy is aimed at developing a skilled and highly productive staff that is successful in conducting its business. The Group has developed a number of comprehensive training programmes which provide for both internal and external professional training of employees at all levels. The Group also operates a corporate university, which offers professional development training to its junior and mid-level managers.
The Group believes that its current compensation package is generally comparable to that offered by other major Russian banks.
The Group contributes to the State and Group pension schemes, social insurance, and obligatory medical insurance funds in respect of its employees. (See note #29 to the accounts for details of staff costs)
The Group strongly believes that creating a corporate culture is important for its business development. VTB also has a trade union to which a number of its employees currently belong. The Group has not, to date, experienced any strikes, work stoppages, labour disputes or actions that have had a material effect on the operation of its business.
The number of employees in the Group as at 31 December 2008 was 41,992 (31 December 2007: 35,945).
Donations
VTB Group made charitable donations in 2008 amounting to US$ 28 mln.
Annual General Meeting
VTB Bank's AGM is expected to take place on 29th June 2009. The Notice of AGM and agenda will be sent to shareholders no less than 30 days prior to the date of the meeting.
Auditors
CJSC Ernst & Young Vneshaudit was appointed as VTB Bank's external auditor for 2008 at the Annual General Meeting of Shareholders held on June 26, 2008.
The Annual Financial Statements for the years ended December 31, 2008, 2007, 2006, 2005 and 2004 have been audited by Ernst & Young, independent auditors, of Sadovnicheskaya Naberezhnaya, 77, Building 1, Moscow 115035, Russian Federation. Ernst & Young is a member of the Institute of Professional Accountants and Auditors of Russia (''IPAR''). IPAR is a full member of the International Federation of Accountants.
2 Responsibility statement by management
The management is responsible for preparing the Annual Report and the Group's financial statements in accordance with applicable law and regulations.
As VTB is listed on the London Stock Exchange, we adhere to the requirement of UK company law which requires the directors to prepare the Group's financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (''IFRS'') and applicable law.
The Group financial statements are required by law and IFRS as adopted by the EU to present a true and fair view of the state of affairs of the Group and of the profit for that year. In preparing the accounts the management is required:
to select suitable accounting policies and then apply them consistently;
to make judgements and estimates that are reasonable and prudent;
to state whether applicable accounting standards have been followed, subject to any material departures disclosed and explained in the accounts; and
to prepare the accounts on the going concern basis unless it is inappropriate to presume that the Group will continue in business.
The management is responsible for keeping proper accounting records which disclose with reasonable accuracy at any time the financial position of the Group and to enable them to ensure that the accounts comply with the UK Companies Act 1985. They are also responsible for safeguarding the assets of the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
Andrey Kostin
President and Chairman of the Management Board
3 Consolidated Financial Statements and Auditors' report for the years ended 31 December 2008 and 2007
See Part 2 - continued...
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