On July 16 VTB released unaudited consolidated financials for 1Q 2008, based on IFRS. The statement says assets rose by 7.2% to USD 99.3 bn. The loan portfolio expanded by 15.6% to USD 67.7 bn. The equity capital increased by 4.7% to USD 17.3 bn over the quarter.
Table 1. VTB: Basic financials for 1Q 2008, USD mn .
| | 1Q2008 | 2007 | Change |
|---|
| Assets (the end of the quarter) | 99 293 | 92 609 | 7.2% |
| Total credits (the end of the quarter) | 67 693 | 58 549 | 15.6% |
| Equity capita (the end of the quarter) | 17 274 | 16 501 | 4.7% |
| ROAE | 2.9% | 12.3% | - 9.4% |
| ROAA | 0.5% | 2.2% | - 1.7% |
| Net interest margin | 5.1% | 4.4% | + 0.7% |
| Cost/Income multiple | 74.9% | 53.6% | + 21.3% |
Source: company data
Starting in 2008, VTB switched to the calculation of all its operations in rubles, in compliance with IFRS requirements, which has negatively affected net profit. However, the bank continues to release basic financials in US dollars.
Table 2. VTB: Profit and loss statement for 1Q 2008, USD mn
| | 1Q2008 | 1Q2007 | Change |
|---|
| Interest income | 2 105 | 1 059 | 98.8% |
| Interest expenses | -1 026 | -580 | 76.9% |
| Net interest income | 1 079 | 479 | 125.3% |
| Net commission income | 145 | 92 | 57.6% |
| Profit (loss) on securities portfolio | -453 | 42 | - |
| Expenses on personnel | -292 | -183 | 59.6% |
| Administrative expenses | -250 | -182 | 37.4% |
| Net profit | 121 | 232 | -47.8% |
Source: company data
We are moderately positive about the financial statement. The 7.2% growth in the bank's assets fell short of the market average, at 9.8%. The 26.2% surge in personal loans is attributed to the effect of a low base. Personal loans now make up about 14% of the bank's total loan portfolio.
The positive news is the robust development of the company's core crediting business, which enabled it to boost its interest income and net interest margin. The margin rose to 5.1%, from 4.4% a year earlier, with growth attributed to a decrease in the share of securities in the bank's total assets. Interest income soared by 98.8% y-o-y. The bank's total loan portfolio grew in line with the total issue of loans in Russia.
The nearly 2x drop in net profit was caused by losses in the securities portfolio, which amounted to USD 453 mn for 1Q 2008. However, the net profit figure outpaced market expectations. The downturn in ROAE and ROAA resulted from the fall in net profit.
We are negative about substantial growth in payroll expenses. VTB is actively developing business, opening new branches. In 1Q 2008, the bank's branch network expanded by 48 branches, and now has 980 branches in all. The number of employees has increased from 29, 550 in 1Q 2007 to 38,151 in 1Q 2008. The workforce has expanded by 29.1% in the period, while the payroll expenses have mounted by 59.6%, meaning the average salary has risen by 23.2%, which is markedly higher than the pace of inflation.
A surge in the Cost/Income multiple from 53.6% to 74.9% is put down to losses in the securities portfolio and growth in payroll expenses.
On the bright side, we point to an increase in the bank's current accounts by 35.5% to USD 13.0 bn, despite the low interest rates on the accounts. We also underscore the high share of time deposits, at 27.7% of the total. As interest rates on banking deposits grow, the bank may see its profit margins affected.
As before, VTB ranks as Russia's second largest issuer of corporate credits and is the second largest holder of corporate and household deposits, being second only to Sberbank in this regard. As a results of performance in 1Q 2008, the bank moved up from 3rd to 2nd spot as the issuer of personal loans.
According to our estimates, the fair price of VTB is USD 0.0054 per share, with an upside of 54%, which corresponds to BUY recommendation. At the same time, we believe that, in the mid term, unfavorable conditions in world financial markets will continue to exert downward pressure on VTB stock valuations.
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