On September 24, VTB released its unaudited financial results for 1H 2008, based on IFRS. The statement shows that the bank’s assets increased by 17.4% y-o-y to USD 108.8 billion. Its overall portfolio of loans expanded by 28.9% to USD 75.5 billion. At the end of the reporting period, the bank had a capital of USD 17.2 billion, a 4.1% rise y-o-y.
Table 1. VTB Bank: key financial indices for 1H 2008, USD bn
| | 1H2008 | 2007 | Change |
|---|
| Assets (at the end of the period) | 108.8 | 92.6 | 17.4% |
| Total credits (at the end of the period) | 75.5 | 58.5 | 28.9% |
| Equity capital (at the end of the period) | 17.2 | 16.5 | 4.1% |
| Return on equity (ROAE) | 8.0% | 12.3% | - 4.3% |
| Return on assets (ROAA) | 1.4% | 2.2% | - 0.8% |
| Net interest margin | 4.8% | 4.4% | + 0.4% |
| Cost/Income multiple | 57.1% | 53.6% | + 3.5% |
Source: company data
The 17.4% growth in assets fell short of the 19.5% asset growth for the sector as a whole, and the 4.1% rise in the equity capital compares with the 17.1% capital increase for the entire sector.
Table 2. VTB: the key indicators of the profit-and-loss report for 1H 2008, USD mn
| | 1H2008 | 1H2007 | Change |
|---|
| Interest income | 4 316 | 2 235 | 93.1% |
| Interest expenses | 2 183 | 1 231 | 77.3% |
| Net interest income | 2 133 | 1 004 | 112.5% |
| Net commission income | 311 | 267 | 16.5% |
| Net operating income | 2 238 | 1 477 | 51.5% |
| Profit (loss) on the securities portfolio | -177 | 87 | - |
| Payroll and administrative expenses | 1 242 | 809 | 53.5% |
| Net profit | 679 | 504 | 34.7% |
Source: company data, company data
The portfolio of loans, except for loans on the interbank money market, expanded by 28.9%, marginally exceeding the average growth in the sector of 27.2%. In our view, the trend is indicative of the bank’s intention to focus its activities on lending operations, its core business. The share of loans in the bank’s total assets rose from 63.2% at the end of 2007 to 69.4% as of June 30, 2008. We believe that the lending business will allow the bank to stabilize its cash flows. Lending operations allowed the bank to raise its net interest margin by 0.4% to 4.8
We view a decrease in the share of securities in the bank’s total assets as another positive trend. The proportion lowered from 14.6% to 10.2% during the reporting period. In 2Q 2008, the bank made a profit of USD 276 million on its securities portfolio, which allowed the bank to cut its losses on the portfolio to USD 177 million as a result of first-half performance. We expect the bank to incur heavy losses on its securities portfolio in 3Q 2008. According to our estimates, the losses may surpass USD 500 million.
On the downside, we point to a rise in the Cost/Income ratio from 53.6% to 57.1% in the period. Growth in payroll expenses was among the main reasons for the rise. In 2Q 2008, the bank saw its payroll expenses rise by 21.7% quarter-on-quarter, with growth partially attributed to the payment of annual premiums and bonuses. But the average wages also rose by 38.5% y-o-y, markedly exceeding the pace of inflation and the average pay in the banking sector.
As for its liquidity problems, VTB is capable of redeeming its obligations that become due in November and December, 2008, without resorting to refinancing. Yet, the bank may opt in favor of debt refinancing if the conditions on debt markets are favorable.
We estimate the fair value of one common share in VTB at USD 0.0050 per share, with an upside potential of 140%, which corresponds to a BUY recommendation. As before, VTB shares are traded at below their book value as of year-end 2008. We recommend that medium- and long-term investors BUY VTB shares.
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