Vozrozhdenie Bank : reached sustainable profitability

• Vozrozhdenie Bank earned net profit of Rub 1.2 billion for 9M 2016
• ROE was 13% for Q3 2016
• Operating expenses decreased by 10% YoY to Rub 6.3 billion
• Cost-to-income ratio for 9M 2016 declined to 54%
• Customer funds grew by 11% to Rub 188 billion YtD

'Our efforts to strengthen control over credit risk have brought positive results and the bank has reached sustainable profitability. Since the beginning of the year we successfully increased our fees & commissions stream using a new line of settlement products tailored for each of our client segments. Due to tight control over expenses we were able to cut costs by 10% compared to the previous year and to improve the cost-to-income ratio to 54%. We believe the bank will manage to keep moderate provisioning till the end of the year,' commented Andrey Shalimov, Deputy Chairman of the Management Board at V.Bank.

The bank earned Rub 1.2 billion of net profit for 9M'16 versus a net loss of Rub 2.5 billion for the same period of the previous year. Cost-of-risk normalisation and non-interest income growth enabled the bank to achieve positive financial results.

The bank's ROE returned to double-digits for the second quarter in a row. For Q3'16 it was 13% with ROA of 1.3%.

Operating profit before provisions for 9M'16 reached Rub 5.4 billion exceeding the result for 9M'15 (Rub 4.6 billion) by 18.1%.

Net interest income (NII) of the bank declined by 6% to Rub 7.3 billion for 9M'16 compared to the result of 9M'15. While interest income remained almost the same, interest expenses grew significantly at the beginning of the year due to additional interbank funding and quite high interest rates on retail deposits early in the year. Both factors led to a NII decrease YoY. However, in Q3'16 interest expenses contracted significantly, by 8% QoQ to Rub 3.4 billion, allowing NII to grow and reach Rub 2.6 billion for Q3'16, an increase of 7% QoQ.

Yields on average earning assets decreased to 13.3% for 9M'16 versus 14.2% for 9M'15 in line with the general trend of interest rate declines. This resulted in net interest spread and NIM on average assets contracting to 6.2% and 4.3% for 9M'16 compared to 7.1% and 4.8% for the same period of 2015. Nevertheless, during the last quarter cost of funds declined faster than yields on assets (-75 b.p. versus −53 b.p.) causing interest spread to widen by 21 b.p. to 6.4% and NIM to improve by 21 b.p. to 4.6% for Q3'16.

Net fees & commissions for 9M'16 were Rub 3.1 billion and exceeded the result of the same period of 2015 by 10%. In Q3'16 the bank was especially successful in earning fees & commissions. We managed to increase transaction fees by 8% resulting in net fees & commissions' growth by 3% QoQ to Rub 1.1 billion.

For 9M'16 we reduced operating expenses by 10% compared to the same period of the previous year. Personnel costs contracted by 13% to Rub 3.7 billion for 9M'16 as a result of staff reductions causing operating expenses to drop. Average headcount for Q3'16 was 4,886 people compared to 5,506 for Q3'15.

Our cost-to-income ratio for 9M'16 decreased to 54%, 6.8 p.p less than the previous year, approaching the bank's mid-term target of 50%.

Assets of the bank grew by 4% since the beginning of the year and totalled Rub 233 billion as of September 30, 2016. The proportion of interest-earning assets improved during the period: 80.4% compared to 79.5% as of December 31, 2016.

The share of liquid assets was 21% of the total assets. Cash & cash equivalents represented 63% of liquid assets. Securities accounted for 36% and due from banks share was less than 1% of the total liquid assets.

The loan-to-deposit ratio decreased to 98% compared to 102% as of the beginning of the year due to an inflow of customer funds.

During 9M'16 gross loans grew by 6% to Rub 183 billion. Loans to large corporates increased by 16% and totalled Rub 56 billion as of September 30, 2016. The bank issued more loans to its existing clients from different sectors of the economy and provided loans to several new clients. SME loan portfolio remained at Rub 62 billion. Loans to administrations declined by Rub 4 billion to Rub 7 billion YtD.

Retail loans grew by 12% during 9 months and totalled Rub 59 billion as of the end of the reporting period. The retail segment share improved by 2 p.p. to 32.0% of the total loan book. Mortgages are the key product in retail lending. In 9M'16 the mortgage portfolio increased by 17% to Rub 42 billion. People were keen to use the opportunity to improve their living conditions in anticipation of the approaching end of the state-subsidy program. The bank almost doubled the issuance of new mortgages (an increase of 88%) in 9M'16 compared to the similar period of 2015. Consumer loans' growth was muted; the portfolio added just 4% YtD and totalled Rub 15 billion as of September 30, 2016.

During 9M'16 NPLs' share grew by 0.9 p.p. to 9.0% primarily due to SME loans impairment. SME NPLs increased to 14.2%. As a result of the portfolio growth, the share of large corporate NPLs declined to 9.4%. During the 9-months period the bank wrote off Rub 0.4 billion of SME NPLs and sold Rub 1.6 billion of SME NPLs under assignment agreements as a part of our problem loans recovery process. Retail NPLs increased by 0.2 p.p. since the beginning of the year to 2.7%. In Q3'16 the bank sold Rub 0.2 billion of consumer and credit card loans overdue for more than 2 years.

As of the end of 9M'16 NPL coverage by provisions was 108% compared to 113% as of December 31, 2015.

Cost-of-risk for 9M'16 was 2.5%. For the reporting period charges to provisions for loan impairment fell by half compared to 9M'15 to Rub 3.3 billion. New provisions were primarily in the SME sector.

During 9M'16 customer funds grew by 11% and reached Rub 188 billion as of the end of the reporting period as a result of the increase in both corporate and retail clients' deposits.

Balances on corporate transaction accounts rose by 23.0% YtD to Rub 32 billion. Term deposits of companies increased even more rapidly: 41.2% YtD to Rub 23 billion. In addition the bank issued significantly more promissory notes, an alternative instrument for raising funds from corporations. The value of promissory notes issued by the bank grew more than four times YtD from Rub 1.4 billion to Rub 6.3 billion.

During 9M'16 retail funds added Rub 5 billion, 4%, to reach Rub 133 billion as of the reporting date. At mid-July the bank cut interest rates paid on retail deposits in order to decrease funding costs. This led to a pause in individuals' savings growth and in Q3'16 retail term deposits decreased slightly, by 0.4%. Card accounts' balances also decreased by 10% QoQ to Rub 14 billion as people spent their money for vacations.

The bank's equity under IFRS grew by 3% YtD to Rub 22.8 billion due to retained earnings.

As of the reporting date, common equity Tier 1 capital adequacy (N1.1 norm per the Bank of Russia requirements) was 8.2% while the minimum acceptable level is set at 4.5%. Total regulatory capital adequacy ratio (N1.0 norm) was 12.6%, compared to the minimum acceptable level of 8%.