VTB Manages Profit Amid Russia Recession on Lower Provisions

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VTB Group, Russia’s second-biggest bank, managed its first profit in three quarters after reducing loan-loss provisions and clamping down on costs as the country slid into recession.

Net income attributable to shareholders rose 32 percent to 2.5 billion rubles ($38 million) in the second quarter from a year earlier, the bank said in a statement Tuesday. VTB set aside 31 billion rubles to cover problem loans, down from 48.7 billion rubles a year earlier.

The numbers are “better than expected, but mainly due to lower provisions,” Olga Naydenova, a banking analyst at BCS Financial Group in Moscow, said by e-mail. “I don’t think it’s a sustainable number,” she said, citing the weakening economy.

The shares fell 0.5 percent to trade at 7 kopeks at 4:43 p.m. in Moscow. VTB stock has gained 4.4 percent this year, while Russia’s benchmark Micex Index is up 21.3 percent.

VTB is the first of the big Russian banks to publish second-quarter results. The largest, OAO Sberbank, which also saw profit plunge earlier in the year, reports next week, as does TCS Group Holding Plc.

Break Even

Russian banks are struggling with a toxic mix of high funding costs, falling demand for credit and mounting losses on existing loans. The central bank has lowered its key interest rate five times this year to spur lending needed for growth as the country fell into its first recession since 2009. For the first half of the year, VTB still showed a net attributable loss of 11.8 billion rubles.

VTB will try to erase the loss in the second half of the year, expecting the central bank to continue easing monetary policy, Chief Financial Officer Herbert Moos said on a conference call.

“We welcome the central bank’s cutting of the key rate and see a possibility to break even if the current trend remains,” Moos said.

Lower Provisions

VTB’s bottom line was supported by a “recovery in interest margins, lower cost of risk” and “stringent cost discipline, as we are delivering on the various cost-cutting initiatives,” Andrey Kostin, chairman of the management board, said in the statement. He said income from fees also helped put the bank back in black.

VTB’s loan book shrank 5.9 percent in the first six months, with non-performing loans accounting for 7 percent of the total compared with 6.4 percent three months ago. Net interest income, the difference between what the bank makes on lending and what it pays to customers with deposits, fell 23 percent to 67.1 billion rubles from a year earlier. That was still an improvement over the 46.1 billion rubles recorded in the first quarter when the economy was already contracting.

At the same time, VTB managed to keep staff costs at 56.2 billion rubles in the second quarter, unchanged from a year ago. Net income from fees and commissions increased 19 percent to 17.2 billion rubles.

Challenging Times

VTB’s capital buffers were eroded by a combined loss of 22.3 billion rubles during the two previous quarters. The bank raised 307 billion rubles in new equity in July as part of the state-sponsored recapitalization program.

The central bank more than doubled its policy rate last year after U.S. and European sanctions over the Ukraine crisis and falling oil prices sent the ruble into freefall. That prompted banks to raise their own rates, making loans too expensive for many businesses.

The Bank of Russia’s most recent rate cut, to 11 percent from 11.50 percent at the end of July, was the smallest this year. It said it would continue to seek a balance between a cooling economy and soaring inflation.

Following an “extraordinarily challenging” first quarter VTB saw “early signs of improvement in the operating environment,” Kostin said.

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