30 Apr 2010 16:25
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MANAGEMENT REPORT
Key events in 2009
1st Quarter
·; EBRD recognised VTB Bank as the most active bank in export finance in 2008 within the EBRD Trade Facilitation Programme.
·; VTB Bank launched a specialised Financial Services Centre in order to provide services to state corporations.
·; A specialised Debt Centre began operating within VTB Group.
·; VTB's management team held a meeting with the Bank's minority shareholders.
·; Global Finance Magazine recognised VTB Bank as the best Russian bank in Central and Eastern Europe operating in emerging markets.
·; The Bank of New York Mellon named VTB Bank one of the world's best clearing correspondent banks.
2nd Quarter
·; VTB announced the launch of its factoring business within a new subsidiary called VTB Factoring.
·; VTB Group enhanced its penetration into the Kazakhstan market by obtaining a banking licence for SJSC VTB Bank (Kazakhstan).
·; VTB Group placed three issues of mortgage-backed securities worth RUB 14.48 billion.
·; Thomson Reuters recognised VTB Bank as the best public company within the financial sector for its Investor Relations performance, according to the Thomson Reuters Extel Survey - Focus Russia 2009.
3rd Quarter
·; VTB's management team held the first meeting with the VTB Shareholders Consultative Council.
·; VTB Bank successfully placed its first Eurobond issue in Swiss franks.
·; VTB Bank completed the placement of an additional share issuance at RUB 0.0482 per ordinary share, resulting in a gain of RUB 180.1 billion.
·; VTB Bank became the first Russian bank to attain the status of a "Strategic Partner of the city of St. Petersburg".
4th Quarter
·; VTB published its inaugural Sustainability Report in accordance with the international reporting standards of GRI G3.
·; VTB launched its operations in Azerbaijan through its subsidiary, OJSC VTB Bank (Azerbaijan).
·; VTB Bank exercised a call option to acquire a controlling stake in OJSC Sistema-Hals.
VTB GROUP STRATEGY
VTB Group's strategy for 2010-2013
The Group is currently finalising the details of its new strategy. The focus of the new strategy will be on increasing returns to VTB shareholders. To achieve this objective, the Group intends to leverage its unique market positions and capitalise on the synergies between its corporate, retail and investment businesses.
The Group also intends to transform its corporate business, with the ambition of becoming a leading transactional bank. The Group will also concentrate its efforts on growing the share of revenues that it generates from high-margin businesses, such as retail and investment banking. VTB will continue to focus on growing its market share in retail lending and deposits to individuals, while improving its service quality, expanding the retail chain network, utilising an advanced operational platform and competitive VTB24 product offering. At the same time, the Group intends to become the clear leader in the Russian market for investment banking services.
Under the new strategy, VTB intends to more closely align management objectives with the interests of shareholders by setting clear profitability and return targets for each business area to drive operational and cost efficiencies throughout the Group's businesses.
REVIEW OF OPERATING PERFORMANCE
CORPORATE BANKING
Historically, the provision of services to corporate customers forms the core of VTB Group's business. Despite the active growth of the Group's retail and investment businesses in recent years, corporate banking continues to generate the bulk of the Group's revenue, reaching 64% in 2009. Taking a longer-term perspective, VTB is on course for steady growth in the corporate segment by establishing itself as a full-service provider and the only settlement bank for its customers.
Despite the challenging external environment, the Group's corporate business fulfilled the majority of its objectives in 2009, preserving its long-term relationship with key customers, attracting new customers in the form of major regional companies, and providing an attractive offering of banking products for its clients. In addition, as one of the few banks whose business continued to expand during the recession, VTB was successful in attracting new large customers in key sectors of the Russian economy. Thus, VTB increased the number of customers in the retail and service sectors, thereby diversifying away from manufacturing and heavy industry sectors which have historically been the dominant business areas. Diversification of the customer base will enable VTB to increase business profitability and to control the level of risk more effectively, which is why the Group places such importance on strengthening relations with new customers as market conditions return to normal, and to increasing its reach in segments where there is significant growth potential (the lower tier of large businesses and medium-sized businesses).
A key priority during the reporting period was the continued support for strategically important companies for the Russian economy. Against the backdrop of reduced demand for loans from Russian companies, the Group's corporate loan portfolio decreased by 6.8% to RUB 2.1 trillion, although the Group's market share in the Russian corporate lending segment increased by 0.3% to 13.0% by the end of 2009. At the same time, the contraction of the corporate lending portfolio was more than offset by the increase in the volume of customer financing through public debt instruments. As a result, in the reporting period, the overall level of corporate debt financing provided by the Group rose by 2% to RUB 2.4 trillion.
VTB Bank's active lending activity required constant efforts to strengthen the resource base. Against the backdrop of limited access to funding sources and their relatively high cost, VTB placed particular emphasis on attracting customers' funds. To reflect the new market conditions, existing deposit products were revamped and new products launched, including deposits with early redemption and withdrawal facilities. Also, for the first time the Bank offered its corporate customers interest on minimum and average monthly current account balances. In addition to updating its line of deposit products, VTB also made major strides in the price positioning of these products to ensure that they maintain a high level of competitiveness in the market. VTB's reputation as a reliable bank, supported by the State, in combination with an accessible and affordable product offering, enabled the Group to substantially increase its volume of corporate deposits by 46.1% to RUB 1.1 trillion in 2009. At the end of the year, VTB's market share in this segment rose to 12.7%, compared with 10.2% in 2008. In 2009, VTB Group was the unrivalled leader in terms of growth in the deposit market.
The macroeconomic downturn, which was particularly acute in the first six months of 2009, affected the ability of many corporate customers to meet their obligations in a timely manner. Within this context, one of VTB's priorities in the area of corporate lending was to help customers manage their working capital and liquidity while reducing leverage.
In order to realise the goal of increasing lending to the corporate segment, it was necessary for VTB Group to pay particular attention to maintaining the quality of its loan portfolio. During the reporting period, VTB was one of the first in the market to utilise the state guarantee scheme for strategically significant enterprises to reduce risk when lending to large companies. Additionally, VTB reacted quickly to fine-tune its lending terms and the valuation of collateral assets in order to adapt to market conditions. The VTB Debt Centre was also established in order to manage bad debt on a Group-wide basis. In working with problem loans, the approach taken was to ensure that as much of the loan as possible was repaid in cash without recourse to legal action.
A great deal of attention was given to the effective management of non-core assets brought onto the VTB balance sheet, for which purpose a specialised division was created within VTB Bank.
In 2009, VTB placed particular emphasis on working closely with other Group divisions in the development of a cross-selling system and full-service approach to customer service. For example, during the reporting period, a model for interaction between the Group's corporate and investment businesses was developed to ensure maximum coordination in the servicing of major accounts. Also, a line of structured investment products was developed.
In 2009, VTB Bank continued the implementation of its programme to improve the quality of customer service. To support its work with large corporate customers, the Bank has launched a new segment-oriented sales model conforming to the relevant business process standards in each sector. In 2010, the Bank plans to roll out this model to branch operations and to create reference points for the development of retail business in the Russian regions.
2009 saw the continued implementation of the cross-selling programme, with VTB24 payroll projects being offered through VTB Bank's corporate channel. This programme now encompasses the entire regional network of both banks in around 60 regions across Russia. Alongside this programme, and with the participation of VTB customer accounts managers, the companies VTB Insurance, VTB Factoring and VTB Pension Fund are now able to offer their products and services to the Bank's customers. VTB adjusted its remuneration package for customer accounts managers in 2009 to encourage more active development of the cross-selling system.
Services for large clients
At the end of 2009, VTB Bank had approximately 3,900 large corporate clients, including financial institutions.
During the reporting period, the Bank substantially expanded its lending to the Russian economy. Priority was given to companies in the defence sector, car manufacturing, aviation and power industries, metals, as well as to the coal, oil and gas sectors. The Bank conducted lending operations both with and without the protection of the government guarantee scheme, and committed substantial funding to its own programmes to develop cooperation with major Russian companies.
Some of the strategically important companies which benefited from VTB financing in 2009 included: Gazprom JSC, VO Technopromexport JSC, Atomstroyexport JSC, NPK JSC, Polymetal JSC, Mikhailovsky GOK JSC, TMK JSC and SUEK JSC. In addition, during the reporting period, the Bank introduced an effective mechanism to provide services to some of the most resource-intensive multi-industry State corporations. Inaugurated in January 2009, the Financial Services Centre is a specialised subdivision of the Bank responsible for managing the fund flows of State corporations on a centralised basis and maintaining the highest standards of banking services for these customers across the board. During the year, 43 major Russian State corporations and their subsidiaries took advantage of the services offered by the Centre. These included the Russian Technologies State Corporation, ALROSA JSC and Atomenergoprom JSC, amongst others.
In 2009, the Bank continued to finance the day-to-day operations of some of the country's biggest retail networks, such as X5 Retail Group N.V., Seventh Continent, Linia, Dixy and Holiday. Moreover, despite the difficult economic environment which prevailed during the reporting year, VTB Bank not only developed previously established relationships but also sought to foster cooperation with other retail leaders. For example, the Bank set credit risk limits for the companies Kopeika, MVideo, Detsky Mir and Sportmaster.
A broad spectrum of products was also made available in 2009 for key players in the food industry and agriculture. In 2009, financing was provided to such industry leaders as State corporations Synergy, Efko and Russian Sea.
During the reporting period, VTB continued to be involved in a number of major State investment projects, including the SSJ-100 Russian regional aircraft construction, the project to build 14 federal state-of-the-art medical technology centres as part of the national "Healthcare" programme, and infrastructure projects in Sochi for the 2014 Olympics Games.
Services for medium-sized clients
2009 was a very challenging year for medium-sized businesses in Russia. Companies had to cope with declining sales, increasing accounts receivable, and a consequent worsening of their financial position. At the same time, credit institutions raised their qualifying criteria for potential borrowers and for loan collateral, which led to a squeeze on credit in this customer segment.
It was within this climate that VTB Bank set itself the task of maximising support for viable medium-sized businesses (companies with annual earnings of between RUB 90 million and RUB 3 billion), largely through the financing of their day-to-day operations and restructuring of their existing debt. In parallel with this, the Bank tackled the issue of reducing risk in the medium-sized business segment: loan decision procedures were tightened, preventive monitoring systems were established in order to track the financial situation of companies, and standard response mechanisms were introduced to guard against unforeseen credit risk factors.
In addition, in 2009, the Bank's activity in the medium-sized client segment was directed towards expanding the customer base, improving clearing operations, and building up the resource base. In particular, a new customer service model was deployed to support these initiatives, including the assignment of a customer account manager to businesses and the provision of access to "complex" banking products.
Services for financial institutions
The Group's flagship bank, VTB, has traditionally offered a full range of products and services to financial institutions, including liquidity management, trade and structured finance, depositary and investment banking services. At the end of 2009, the Bank's network of correspondent banks comprised more than 2 thousand credit institutions in 110 countries.
During the reporting period, VTB Bank raised over USD 450 million in the international capital markets for trade finance transactions. The total value of trade finance transactions arranged by the Bank for its counterparty banks exceeded USD 355 million. In 2009, Global Finance magazine named VTB Bank as the "Best Russian bank in Trade Finance".
By the end of 2009, VTB Bank established 36 agreements with foreign counterparties, including Export Credit Agencies from the United Kingdom, Germany, Italy, the USA, China, India and other countries, to provide medium- and long-term financing for the Bank's customers. In total, these credit lines are worth approximately USD 6 billion, which considerably boosts the Bank's resource base for lending to VTB customers.
During the reporting period, the Bank arranged a club credit facility for Belagroprombank JSC (Belarus) totalling USD 43.5 million. At the end of the year, the Bank was also commissioned to arrange a syndicated loan for ASB Belarusbank (Belarus) in the first quarter of 2010 for a total value of USD 60 million.
The Bank has put considerable effort into developing cooperation with Chinese partners. In October 2009, an additional agreement to the existing merchant acquiring agreement between VTB Bank and the Chinese payments system China UnionPay was signed, establishing the Bank's authority and right to make the services of China UnionPay available to third-party banks. Under this arrangement, VTB Bank can contract with partner banks to service China UnionPay cardholders through their ATM networks and Point of Sale terminals.
Key priorities in 2010
At the new stage of VTB Group development key priorities of the Corporate Banking are the transition from the bank of unique deals to the main bank for customers and the development of strong transactional banking and the concept of customer-oriented approach.
To further grow its corporate business in the post-recession environment, the Bank is concentrating its efforts on introducing targeted product offerings for large customers tailored to their economic profile, on developing online banking products, and attracting free cash. In the area of customer service, VTB Bank intends to streamline the decision-making process for customer applications, to improve pricing flexibility, and to introduce a system for the effective delivery of personalised banking services. VTB Bank will continue to focus on developing integrated cross-selling strategies for banking, investments, leasing, insurance, pensions and other products and services through personal customer account managers with the participation of the various VTB Group companies.
RETAIL BANKING
Despite a difficult economic environment in Russia, 2009 was a year in which great opportunities were successfully realised within VTB Group's retail business. Bucking the main trends in the banking sector, the Group managed to increase lending volumes and substantially increase the base of deposits. Furthermore, VTB grew its share within key business segments and also increased customer loyalty. During the reporting period, VTB's retail division became one of the core business lines in the Group despite the challenging market conditions.
The core of VTB Group's retail business is VTB24, which is the second-largest bank in Russia serving individuals and small businesses. At the end of 2009, VTB24's active customer base totalled 4.7 million people, in comparison with 3.5 million at the end of 2008. In total, the number of active retail customers of VTB Group in Russia at the end of the reporting period was 5.8 million.
VTB24's experience and technologies are successfully utilised in order to develop its retail business outside of Russia. VTB Group's banks in CIS countries (Ukraine, Georgia, Armenia, Azerbaijan, Kazakhstan and Belarus) served nearly 395 thousand individuals at the end of the year.
The key areas of focus for the VTB Group within retail banking in 2009 were driven by external market factors and the ongoing implementation of the general strategy to develop the retail business and increase its share in the Group's total business portfolio. The division's core efforts concentrated on realising the concept of a customer-oriented approach, the outcome being an improved product line and service quality and increased efficiency of the division's sales channels.
The most significant market factors influencing the performance of VTB Group's retail business during the reporting period were the growth in the number of non-performing loans and a reduction in demand for long-term loan products. These developments meant that it was necessary to focus on maintaining the volumes of business within the loan portfolio, introducing additional programmes for the restructuring of loans, while managing the non-performing debts within the business.
The crisis did not prevent VTB Group from continuing to successfully implement its targeted marketing strategy, which is aimed at increasing the volume of sales through targeted product offers, and also continuing to work on retaining customers by increasing loyalty levels. Furthermore, it is precisely the unstable situation in the market that has illustrated so well the effectiveness of this strategy. As part of this new approach, in 2009, VBT24 developed and implemented targeted campaigns to promote loan products, devising distribution mechanisms that integrate SMS channels, email and customer calling. A loyalty module was also launched and was aimed at replicating business in all existing and future bank programmes. All of this made a significant contribution to the improvement of the Group's market positions in the key business segments.
In spite of the contraction in demand for individual loan products and increased risks during 2009, the Group did not cease lending. This resulted in VTB becoming one of the few players in the retail market to materially increase its volumes towards the end of the year. The retail loan portfolio of VTB Group rose 12.4% to RUB 435.3 billion by the end of the year, in comparison with RUB 387.1 billion in 2008.
Such high growth rates in personal lending allowed VTB Group to increase its share of the Russian retail lending segment to 10.2% of the total market (versus 8.8% in 2008). By the end of the year, VTB was the second largest player in this segment of the Russian market.
Despite a difficult external environment, the Group managed to maintain high growth rates in retail deposits, far outstripping the market average. At the end of the reporting period, VTB retail deposits totalled RUB 476.5 billion, which was 34.6% ahead of the 2008 figure (by way of comparison, the annual growth in the Russian market was 26.7%). In a financially unstable market, VTB Group managed to fully utilise its brand advantage to secure an additional inflow of customer funds. At the end of the year, VTB increased its share of the retail deposit market in Russia from 5.7% in 2008 to 6.0%.
Loan products
Despite the negative trends in the individual loan market - particularly in the long-term high-value loan segment - in 2009, VTB Group set itself the goal of not only safeguarding its loan portfolio, but also increasing it. The banks within the Group, including above all VTB24, played an active role in the lending market, engaging in targeted sales activities and the promotion of loan products, effectively managing loan rates to attract new customers. Particular attention was paid to effective non-performing loans management.
Consumer loans
Consumer lending has become a key driver of growth in VTB Group's retail loan portfolio. In 2009, VTB24 offered approximately 370 thousand consumer loans totalling RUB 74.7 billion. As a result, during the reporting period, VTB Group's consumer loans increased by 18% to RUB 182.9 billion, compared with RUB 155.3 billion at the end of 2008.
During the reporting period, the key tasks for VTB24 in the consumer lending segment were ensuring profitability and reducing the level of non-performing loans. To support the required rate of return, interest rates were increased on all loan products. To reduce risks and to see a reduction in the level of non-performing debt in 2009, VTB24 offered customers the option of restructuring their debt and also converting foreign currency liabilities into Russian roubles. Furthermore, the Group offered the option of reducing annuity payments, by means of increasing the loan term, and additionally, receiving a number of preferential payments.
Car loans
In 2009, VTB Group continued to strengthen its position in the car loan market. The car loan portfolio of VTB Group increased by 12% to RUB 45.5 billion, compared with RUB 40.6 billion at the end of 2008.
In 2009, VTB24 executed more than 53 thousand car loan agreements, as a result of which VTB Group's market share in Russia within this segment rose from 7.1% to 10.5%.
In 2009, VTB24 actively developed joint programmes with car manufacturers. Thus, special loan offers were launched, allowing customers to use loans on the most favourable terms to buy vehicles manufactured by Suzuki, Subaru, Jaguar, Land Rover, KIA, Mazda, Daewoo, Mitsubishi and Lada. In April 2009, the Bank joined in the implementation of a government subsidised loan programme for the car sector, as part of which 11,500 loans were provided.
In 2010, VTB24 is planning to increase its share of the car loan market by expanding programmes with manufacturers, improving the existing product line, and launching sales of car loans through new sales channels.
Mortgage lending
In the mortgage lending segment, which was most impacted by the challenging economic environment, VTB24's attention was focused on reducing risks in the mortgage portfolio and increasing its quality and return. Therefore, from the end of 2008 to the autumn of 2009, a number of mortgage products were suspended. Furthermore, the lending requirements imposed on borrowers were increasingly tightened.
During the reporting period, VTB24 actively worked on mortgage loan restructurings where this was needed. A programme was devised in-house and launched externally to restructure the loans of borrowers who were experiencing temporary financial difficulties. An important supplement to this programme was the implementation of a scheme for the Bank to participate in the State restructuring programme of the Agency for Restructuring of Housing Mortgage Loans (ARHML). As part of this programme, 1,500 of VTB24's mortgage borrowers were able to receive State support through ARHML and, during the most difficult period, make timely and full payment of their mortgage obligations.
Throughout 2009, VTB24 actively worked to devise special mortgage offers in accordance with the new market requirements. As a result, by 1 January 2010, the mortgage loans portfolio of VTB Group comprised approximately 100 thousand loans with a total value exceeding RUB 180 billion.
By the end of the year, VTB24's mortgage products were available from the Bank's 107 sales points in 98 Russian cities. Today, more than 60% of the mortgage portfolio is attributable to regional branches of the bank.
The high level of trust in VTB24 and the quality of the loan portfolio is evidenced by the bank's successful completion of transactions to securitise mortgage assets. In March 2009, VTB24 successfully refinanced part of its mortgage portfolio and, in November and December, was one of the first players in the Russian market to realise a balance sheet securitisation transaction. The volume of capital placed was RUB 15 billion, for a term of 5 years and a coupon rate of 9.7%, denominated in Russian roubles. This transaction was the first market placement of mortgage-based securities in the Russian market in 2009.
Non-performing debt management
In order to increase the effectiveness of the management of non-performing debt and to ensure the necessary quality of the loan portfolio within all the VTB Group banks, organisational, technological, and product changes have been carried out. In 2009, within the structure of VTB24, a specialised subdivision was created to work on non-performing assets, which became the nucleus of a system for managing non-performing debt. The bank also launched a programme to restructure loans, which enabled many customers to resolve problems servicing their debt.
Particular attention was paid by VTB Group's banks to increase the effectiveness with which non-performing debt is collected. To this end, VTB24 introduced and implemented a modern IT platform to support work executed with customers at various stages of the collection process. This system enabled increased volumes of non-performing loans to be effectively processed and managed. In 2009, the role of internal subdivisions of all of the banks in the Group involved in collecting non-performing debt was greatly strengthened, and the services of external debt-collection agencies were engaged to a greater extent.
Deposit products
VTB Group's increased share in the market for retail deposits was chiefly attributable to positive trends in the deposit base of VTB24. The greatest focus for the largest retail bank in the Group in the area of attracting customer funds was to increase efforts to optimise and further develop term deposit product lines.
In 2009, VTB24 launched special deposit products for future mortgage borrowers ("VTB24 Mortgage Accumulator" and "VTB Mortgage Index"), which are not simply instruments for accumulating funds for a down-payment on mortgaged residential property, but also represent an opportunity to receive benefits when the mortgage is actually taken up.
At the same time, in response to the changing market conditions, VTB24 modified its deposit products. During the course of the reporting period, within the deposit product "VTB24 Income", special offers were regularly made available that allowed customer funds to be placed with a maximum return for specially-set periods. Furthermore, beneficial terms were introduced for the premature calling in of funds on deposit in nearly all basic deposit products.
In 2010, VTB24 plans to further modify the terms of existing deposit product lines so that their terms best match the services demanded by customers.
Commission-based products
One of the key tasks for the retail business of the Group in 2009 was the development of its commission-based product business. A significant contribution to the growth of the Group's commission income was made by VTB24 as a result of growth in commissions on card transactions, customer sale/purchase transactions for foreign currency, small business customer transactions as part of the settlements and cash services, and also commissions on customer investment transactions.
Bank cards
The bank card business is one of the most promising areas of growth in non-interest income for VTB Group. Taking into account the relatively low level of penetration of cards in Russian regions of the Group's banking operations and effective marketing opportunities for cross-selling and increasing loyalty presented by this type of product, this area of growth in banking services was a constant focus, even during the crisis period.
Most of the Group's cards are issued by VTB24. On 1 January 2010, the bank's plastic cards (credit and debit) in circulation totalled more than 5.8 million, of which almost 2 million were credit cards (including salary-payment cards).
VTB24 bank cards in circulation
| Million | 2007 | 2008 | 2009 | ||||
| Credit | 0.6 | 1.3 | 1.9 |
| |||
| Debit | 1.3 | 2.6 | 3.9 |
| |||
| Total | 1.9 | 3.9 | 5.8 |
| |||
| Including salary-payment cards | 1.1 | 2.2 | 3.2 |
| |||
Thus, VTB24's proactive policy to promote credit cards in conjunction with a sensible policy on rates resulted in a significant increase in the bank's market share in this segment in Russia for the year, increasing from 7.5% to 11% during the reporting period.
In 2009, the quantity of salary-payment cards in circulation increased by 46% and, as of 1 January 2010, exceeded 3.2 million.
The total number of companies that are customers of VTB24 as part of salary-related projects has now reached 27 thousand. In 2009, VTB24 realised 10.5 thousand new salary-related projects.
To increase the competitiveness of its products during the course of the reporting period, VTB24 introduced new programmes and services, including an indirect method for income verification when issuing credit cards, the technology of issuing credit cards with zero limits for salary-related projects, and a reduction in the fixed element of the minimum payment on cards.
In 2010, VTB24 is planning to launch new loyalty programmes, including co-branded bank cards with leading air travel firms, offering cash-back, and also programmes to reward customers for using the bank's products and services.
Investment services for retail customers
VTB Group, through VTB24, is one of the leaders in the segment of investment services for private investors, occupying fourth place in the ranking of the largest brokers in Russia and leading positions in terms of serving customers on the international foreign exchange market Forex.
At the end of 2009, VTB24 had more than 153 thousand customer broker accounts registered on the Moscow Interbank Currency Exchange (MICEX) and 4,682 customers using its Forex services. Within the reporting period, VTB24 increased its share of the brokerage service market from 10.8% to 16.2%.
Despite the difficult economic environment, which also affected the securities market, the volume of VTB24 customer transactions involving shares on MICEX was RUB 2.2 trillion, compared with RUB 1.27 trillion in 2008. The volume of VTB24 customers' transactions in the trading platform for futures and options (FORTS) on the Russian Trading System (RTS) exceeded RUB 770 billion. The volume of customer operations on the international currency market was approximately USD 150 billion, including SWAP transactions.
In 2009, VTB24's brokerage services' market penetration grew significantly. Further development and active use of remote customer service technology in the bank's branch network and sales offices enabled the number of customers using VTB brokerage services in 2009 to increase by more than 9 thousand, up from 144 thousand to approximately 153 thousand.
Customer-oriented service and growth in the quality of investment services offered by VTB24 were key factors in the increase in investment activity by customers during the reporting period. By December 2009, the number of active customers grew by more than 40% in comparison with the same period in 2008 (from 7,230 to 10,200 people). The average number of transactions concluded in the course of a day by VTB24 customers on the Russian stock exchanges grew more than two-fold, reaching 80 thousand transactions, with the maximum number of transactions reaching 155 thousand. The value of the transactions conducted by VTB24 customers as part of basic share trading on MICEX in 2009 was RUB 2.24 trillion, which was 1.7 times more than in 2008 (RUB 1.27 trillion).
As part of the development of the product line, in 2009 VTB24 introduced a series of new investment solutions. The most important of these are the opportunities to access the Eurobond market and to conclude transactions in the currency pairs of USD/RUB and EUR/RUB on the Forex market.
In 2010, the investment business of VTB24 is focusing its efforts on increasing the quality of customer service and broadening the range of services and investment products offered.
Remote services
A significant factor in the growth in fee and commission income and, indeed, one of the overall trends in the retail banking market in the reporting period, was the active growth in the popularity of remote banking technology, above all Internet banking. In 2009, the number of remote banking customers of the VTB24 Telebank system grew more than two-fold, exceeding 500 thousand people. The number of orders (transactions carried out by customers using the Telebank system) also doubled, reaching 4.6 million. The volume of balances left on term-deposit accounts in the Telebank system had grown by 80% by the end of 2009, while the volume of current accounts increased by 20%.
With an eye towards further growth in the demand for remote banking services, during the course of 2009, VTB24 continued working intensively on improving its Telebank system. Key efforts concentrated on developing and promoting the Internet platform. In August 2009, a new website for the system was launched, which formed the basis for the further development of Telebank in terms of new functionalities. Furthermore, VTB24 substantially increased accessibility to the system in its regional office network. As of 1 January 2010, Telebank customers were being served in 460 offices of VTB24, compared with 380 as at the end of 2008.
In 2010, VTB24 intends to continue developing remote banking for individuals, specifically focusing on increasing ease of use, broadening functionality and expanding the means of accessing the Telebank system.
High-net-worth customer services
During the reporting period, VTB24 continued to realise its segmented approach to working with customers and designing tailored offerings of banking products. In 2009, the bank worked most actively on this approach with high-net-worth customers.
Today, in this segment, VTB24 offers two products: the Prime package, and the Privilege programme. Prime is a composite offer for VIP customers who are planning to place more than USD 500 thousand with the bank. The Privilege programme is designed for middle-class customers and includes a range of premium services, high-quality customer service, and special offers from partners of the bank. Both products have shown robust growth in demand during the reporting period.
The Privilege programme
Towards the end of 2009, sales of the Privilege programme totalled more than 6,500 customers. Over the course of the entire year, VTB24 actively improved the quality of service and launched new products as part of the Privilege programme. Thus, regional clients were offered their own loyalty programme, involving more than 200 partners in major Russian cities. Furthermore, during the course of 2009, the package was supplemented with new banking products: the VTB24 Privilege (Income) and VTB24 Privilege (Multi-Currency) accounts, as well as a supplementary platinum card.
In 2010, VTB24 plans a to further evolve the services within the programme, including supplementing the programme with new options, further improving the quality of customer service, and offering discounts to Privilege holders on services within the framework of other VTB24 products.
Prime package
In 2009, the Prime package was supplemented by the VTB24 Prime (Multi-Currency) and VTB24 Prime (Income) accounts, special loan offers, and also structured investment products. Furthermore, the number of VIP customers increased by 16%, and the funds placed by them grew by 46%. As at the end of the year, VTB24 was servicing more than 3 thousand VIP customers, who have placed more than RUB 142 billion with the bank. The average credit balance per customer grew by 25% and reached RUB 45 million at the end of the reporting period.
VTB24 Private Banking
In 2009, as part of the realisation of a client-oriented approach, VTB24 launched a separate sub-brand, VTB24 Private Banking, aimed at strengthening the position of the bank in the highest-net-worth customer segment. The customers of VTB24 Private Banking were offered exclusive partner programmes and consulting services in various lines of business. Further, combined products were devised with other companies in VTB Group, including VTB Asset Management and VTB Insurance, amongst others.
In the reporting period, the development of the bank's premium network continued. The VIP office in Moscow was turned into a VIP branch, the opening of which enabled the confidentiality of VIP account-servicing and customer transactions to be ensured. Furthermore, a new VIP office was opened in Krasnodar, and the provision of Private Banking services in the regional network was launched.
In 2010, VTB24 plans to open three new VIP offices and to further broaden the geographical reach of Prime and Privilege sales, which will enable VTB24 and VTB Group overall to continue strengthening their positions in the Russian Private Banking market.
Services for small businesses
VTB24 provides services to small businesses with annual revenues of up to RUB 90 million. At the end of 2009, the bank's small business client base consisted of over 50 thousand Russian companies.
During the reporting period, VTB24 continued to provide loans to small businesses with a total value of RUB 22.7 billion. At the end of the year, the bank's loan portfolio for this segment totalled RUB 71.6 billion under IFRS, and the total number of loans was 20 thousand. An updated and optimised assessment technique of customers' financial situations and new product launches enabled VTB24 to significantly reduce the risk of deterioration in the quality of its small business loan portfolio in 2009. These innovations included: the "Collateral showcase" project, a new product "Credit for business recovery", and also restructuring programmes. In 2009, VTB24 joined a State programme to support small and medium-sized businesses, and began extending loans to small businesses, also taking advantage of funds provided by the Russian Bank for Development.
One of the most significant events in 2009 was the launch of a programme to provide leasing services to small businesses through VTB Group's own lease operator, Leasing System 24. According to Expert RA rating agency, the company was ranked among the five largest lessors based on its volume of new small business-oriented services.
Network and ATMs
As part of the programme to increase the effectiveness of the sales network, in 2009 VTB24 completed work to transform the network, setting up base branches in each federal district and organising regional operational offices in the regions in which it operates. These measures enabled a number of functions to be centralised and the cost of the sales network to be reduced.
During the reporting period, work was continued to optimise the network, with 33 of the least effective sites being closed and 5 new sales points being opened. As a result, at the beginning of 2010, the network of VTB24 offices comprised 476 units. Today, VTB24 has sales offices in 69 regions and 194 cities, ensuring that 70% of the urban population of Russia is covered.
| VTB24 retail network |
| |||
|
| 2007 | 2008 | 2009 | |
| Number of sales points | 328 | 504 | 476 | |
| Including |
|
|
| |
| Branches | 48 | 28 | 9 | |
| Regional operational offices | 10 | 39 | 59 | |
| Additional offices/operational offices | 258 | 429 | 401 | |
| Lending and cash offices | 6 | 1 | 0 | |
| Cashier points | 6 | 7 | 7 | |
| VTB24 ATM network | 1,347 | 2,577 | 4,046 | |
| VTB Group ATM network | 3,036 | 3,316 | 4,564 | |
|
|
| |||
In 2010, VTB24 will continue to extend its regional network by intensifying its presence in the largest markets. Furthermore, VTB24 plans to make important qualitative changes to the network, including increasing the productivity of offices and the speed with which customers are serviced, and also introducing a mobile format for sales points in business and shopping centres.
Key priorities for 2010
In 2010, VTB Group intends to maintain the pace at which it is developing retail products and services, as well as continuing to increase its market share in terms of the volume of lending to individuals and attracting savings from individuals. To maintain productivity figures, the programme to control operating expenses will remain in place. The Group will continue implementing its programme to manage risk and non-performing debt to ensure that the figures which reflect the quality of the portfolio remain at a high level. Also, in 2010, work will continue to restructure borrowers' debt and ensure the repayment of non-performing loans.
A key focus for VTB24 in 2010 will be the modernisation of its product offering, and also of the infrastructure that supports business processes. The Group is proposing measures to continue improving the quality of customer service, to modernise and broaden the range of services provided by the telephone service centre, to develop a network of self-service machines, and to continue modernising the IT infrastructure. As part of the programme to broaden its regional presence, VTB24 is planning to open an additional fifty sales points.
INVESTMENT BANKING
VTB Capital, the investment business of VTB Group, was established in April 2008 and is one of the Group's three strategic business areas, alongside retail and corporate. Over a short period of time, VTB Capital has become one of the leading Russian investment companies, giving Russian clients access to global capital markets and offering international investors an array of opportunities to invest in Russia-based assets.
VTB Capital offers a full range of investment banking services in the Russian and international markets, with an emphasis on arranging operations in debt and equity markets, developing private investment, as well as operations in the global commodities markets and asset management and advising clients on ECM and M&A deals in Russia and abroad.
VTB Capital has offices in Moscow, London, Singapore and Dubai and is headquartered in Moscow. VTB Capital is actively expanding into the Russian, European and Asian markets where there are many countries of considerable interest from the standpoint of raising capital and investment opportunities.
VTB Capital's business model is based on three core investment strategies: global markets trading, global banking services and investment management. It is these businesses that constitute VTB Capital's principal revenue streams and which have enabled it to gain leading positions in strategic markets. The Research department is the intellectual hub for the development of investment business. Risk management also plays a significant role in developing the company's business.
VTB Capital's presence in the international arena, its profound knowledge of the Russian market, and its ability to offer customers the most effective investment solutions, are the driving forces behind the company's dynamic development.
VTB Capital reported an overall pre-tax profit of RUB 16.4 billion. In a climate of instability within the global financial markets, VTB Capital managed to achieve outstanding results in terms of attracting investment into the Russian economy and providing Russian companies with the resources needed to sustain their development.
Research
VTB Capital's research products provide full coverage of the capital markets and most sectors of the economy, offering customers a comprehensive and in-depth analysis service. VTB Capital's research team includes analysts from different countries with a wealth of experience in international markets.
The company's analysts are regularly awarded the highest ratings by Institutional Investor, the Thomson Reuters Extel Survey and RBC. According to the Thomson Reuters Extel Survey 2009, VTB Capital analysts were included in the top-three research teams in nine different categories. In 2009, Elena Sakhnova was rated second amongst Russian industrial sector analysts in the "All-Russia" rating published by Institutional Investor magazine. In 2009, VTB Capital's Research department was awarded second place for "Best FI Research" in the Cbonds Awards. In March 2010, the Industrials, Transportation, Materials team headed by Elena Sakhnova and the Power and Utilities team headed by Dmitry Skryabin were each awarded second place in the Institutional Investor 2010 Emerging EMEA Research Team rating for the EMEA Chemicals and EMEA Utilities categories respectively.
VTB Capital's research unit significantly expanded the scope of its activities in 2009. Customers were offered new products, including monthly energy sector reports and daily analytical digests on the commodity markets. VTB Capital also substantially increased its analytical coverage of the Russian economy. For example, at the end of 2009, the VTB Capital team submitted analyst reports on 80 companies and 15 sectors.
Global banking
VTB Capital offers its customers a broad spectrum of services in the area of investment banking, including M&A services, loan financing and equity capital, and corporate and infrastructure financing, amongst others. Based on the 2009 financial results, VTB Capital is the undisputed leader in bond and Eurobond issues in the CIS and Eastern European markets. During the reporting period, a total of 31 local and international deals with a total value of approximately USD 10.5 billion were successfully closed. This brought VTB Capital's market share to over 20% in the CIS and 10% in Eastern Europe.
In January 2010, the mortgage-backed bond issue by VTB24 (worth USD 470 million) was rated as the best deal by EMEA Finance in the structured finance category.
During the reporting period, VTB Capital was rated first amongst Russia and CIS issuers in the Eurobond provider segment for the international market. During the year, VTB Capital arranged nine Eurobond issues with total value of USD 2.8 billion, equating to a market share of 14.7%.
According to Dealogic, VTB Capital was one of the three main issuers in the debt securities market in the region covering Central and Eastern Europe, the Middle East and Africa (CEEMEA) in 2009. The company's market share in this segment was 7.1%. VTB Capital was the only Russian investment company to be included in the CEEMEA rating of bond loan providers.
VTB Capital is also a leader in the domestic public debt market. VTB Capital was awarded first place in the rating of investment banks providing local bond loans, having closed a total of 39 deals worth approximately RUB 277 billion in 2009. This gave VTB Capital a market share of 24.1% in Russia. The largest transactions included 10 bond issues for the Russian Railways Company JSC totalling RUB 145 billion, two bond issues for Mobile TeleSystems JSC with a total value of RUB 30 billion, and a bond issue for Mechel JSC worth RUB 5 billion.
| VTB Capital | Market position | Value | Number of deals | Market share (%) |
| Eurobonds, Russia and CIS | 1 | USD 2.8 billion | 9 | 14.7 |
| Bonds and international bonds, Russia and CIS, Eastern Europe | 1 | USD 10.5 billion | 31 | 20.8 |
| Bonds, Russia | 1 | RUB 277 billion | 39 | 24.1 |
| Bonds and international bonds, Russia CIS and Eastern Europe | 1 | USD 10.5 billion | 31 | 11.2 |
| Bonds and international bonds, Eastern Europe | 1 | USD 10.5 billion | 31 | 11.2 |
Source: Dealogic, Bloomberg, Cbonds, 2009
Based on the 2009 results, VTB Capital placed second in bookrunner deals in the Russian equity capital market. The value of transactions arranged by VTB Capital during the reporting period was USD 460.82 million. VTB Capital took part in four issues, including a secondary stock offering for Globaltrans Investment plc (USD 175 million) and Synergy JSC (USD 80 million). VTB Capital's market share in this segment was 18.2%.
One of Russia's largest equity placements in 2009 involving VTB Capital was the SPO for Magnit JSC (total value: USD 526 million), which was rated "Deal of the Year" by Business New Europe magazine.
The most significant event in infrastructure capital for VTB Capital in 2009 was the successful negotiation by the Northern Capital Gateway Consortium of a public-private partnership agreement with the Government of St. Petersburg for the redevelopment, expansion and operation of Pulkovo airport. The duration of the agreement is 30 years. As one of the investors in, and financial consultants to, the Consortium, VTB Capital will take an active role in arranging an optimum financing package for the project, which has a total investment requirement of approximately EUR 1.2 billion.
In 2009, VTB Capital also began active operations in the M&A market, acting as a financial consultant in a number of successful deals.
Major VTB Capital deals in 2009
Global markets
VTB Capital offers its customers the opportunity to take advantage of a full spectrum of foreign exchange transactions, shares, bonds and other security trades in major Russian and foreign stock exchanges and over-the-counter platforms. Alongside conventional trading services, VTB Capital offers a wide range of derivative instruments and structured products, providing for the effective implementation of various asset management and risk management strategies.
In 2009, VTB Capital strengthened its positions in the share trading market. The company's client base has steadily expanded, including new major foreign investors. VTB Capital is one of the top three repo market operators in the MICEX share trading segment.
VTB Capital was the best performer in the fixed-income instruments market. In the reporting period, the Fixed Income Trading sales team was rated as best in the market by Cbonds. VTB Capital has expanded its line of derivative financial instruments offered to customers in the Forex, commodity and interest rate markets, enabling customers to put their financial strategies into effect.
As part of its strategy to develop the investment banking in international markets, VTB Capital actively serves the interests of Russian and international business through its offices in London, Singapore and Dubai. In 2010, the company plans to extend its reach in international markets both through existing VTB Group offices and new VTB Capital offices, which will be opened in Hong Kong and New York, in particular.
Investment management
VTB Capital provides a wide range of investment and financial solutions and other asset management services for private, corporate and institutional customers. In this business area, VTB Capital manages unit funds, direct investment, venture and property investment funds, as well as undertaking trust management of assets for private, corporate and institutional customers.
Assets under management, in RUB million
|
| 2009 | 2008 |
| Total assets under management | 16,315 | 11,887 |
| Open unit funds | 1,734 | 845 |
| Closed unit funds | 8,150 | 7,621 |
| Trust management | 6,247 | 3,330 |
| Pension funds | 183 | 90 |
During the reporting period, VTB Capital achieved tangible results in the management of direct and venture investments. In 2009, the company established the first direct investment fund, VTBC-DB Real Estate Partners I L.P., specialising in the Russian property market. The focus of the fund's activity will be on development projects in Moscow, St. Petersburg and other major Russian cities. VTB Capital's partners in this venture are the global Commercial Real Estate Group of Deutsche Bank AG and the Finnish construction company SRV, which will be in charge of project management for construction of the new facilities.
In the autumn of 2009, ROSNANO and VTB Group announced the establishment of the DFJ-VTB Aurora family of nanotechnology and innovation funds with the participation of the international venture market leader Draper Fisher Jurvetson (DFJ). The first tranche of this funding will be worth USD 100 million, of which USD 50 million will be invested by ROSNANO and USD 50 million by VTB. VTB Capital and DFJ are the managing partners. VTB Capital's remit in this venture will include the initiation, basic evaluation and agreement of investment projects in Russia and strategic project management.
Marketing and development
In October 2009, VTB Capital organised the first "RUSSIA CALLING! Investment Forum" in Moscow. The forum hosted over 1,500 guests and delegates from 24 countries. The programme of events included over 1,000 face-to-face meetings between representatives of Russian companies and investors. Over 50 highly-placed speakers, including federal-level government representatives, Russian and international business people, key international investors and leading economists contributed to the plenary session and panel discussions. The discussion topics covered a wide spectrum of current issues ranging from lessons learned from, and ways of tackling, the financial crisis, corporate governance in Russia, international investments, diversification of the economy, and more. The forum was one of the most notable events in the 2009 business calendar and enabled VTB Capital to strengthen its position as a leading investment institution in Russia. The inaugural "RUSSIA CALLING! Investment Forum" organised by VTB Capital made a significant contribution to raising the profile of Russia, the country's investment climate and the Russian economy as a whole.
In 2009, following the launch of the VTB Capital brand in Moscow, VTB Capital's transition to a single brand was completed in all regions of presence, marking an important milestone in the development and progress of VTB Group's investment business. VTB Bank Europe plc - the foundation on which the Group's investment business in London and Singapore is built - was re-registered as VTB Capital plc.
Meanwhile, business development in strategic regions and the expansion of geographical presence in global markets has continued apace. In June 2009, with the opening of an office in Dubai, VTB Capital entered the promising Persian Gulf market. This presence in a new region will make it possible to meet the growing demands of investors from the countries of the Middle East and North Africa (MENA) for investment in the Russian economy, as well as the interests of Russian customers in opportunities offered by the local capital market, including Islamic financing services.
Key priorities in 2010
In 2010, VTB Capital intends to build on its success by maintaining leading positions in the Russian and international markets, strengthening its relations with both Russian and international customers, and bringing new products to market.
OTHER BUSINESSES
In addition to banking services, VTB Group offers its clients a number of other financial services, including leasing, insurance, factoring and non-state pension provision.
Leasing
VTB Leasing, a company established in 2002, is one of the leading Russian leasing companies. VTB Leasing offers a broad spectrum of leasing services and operates both within Russia and abroad. During the reporting period, the company maintained its leading positions in the market. As at the end of 2009, the company's leasing portfolio amounted to more than USD 5.1 billion and the volume of new contracts totaled over USD 885 million. In 2009, commercial relationships with railway and airline transport companies remained one of the company's top priorities.
The key concern for Russian leasing companies in 2009 was being able to access the necessary funding for leasing transactions. For this reason, VTB Leasing was active in the domestic bond market, successfully issuing several bonded loans totalling RUB 15 billion during the year. These resources have enabled the company to expand the funding of its leasing projects and programmes.
At the end of 2009, VTB Leasing issued additional shares with a value of RUB 12.6 billion. The growth of the share capital will allow the company to maintain the necessary level of the capital, in line with international standards, and also to increase the volume of leasing transactions in 2010.
In 2009, the company was rated as one of the top players in the industry. For example, the Expert RA agency acknowledged VTB Leasing as the best Russian leasing company in three categories: 'Leader in the aerotechnics segment - 2009', "Leader in the railway technics segment - 2009", "The largest leasing company in Russia - 2009". This is a testament to the company's sensible market strategy and efficient implementation, even during the conditions of economic instability.
Insurance
VTB Insurance has been operating in the insurance market and providing individuals and institutions with a full and high-quality service offering for the underwriting of property, civil, professional and personal risks (excluding life insurance) since 2000. The company is a member of the All-Russian Insurance Union, the Russian Union of Auto Insurers, the National Union of Insurers of Liability and other industrial associations.
The registered capital of VTB Insurance was RUB 540 million as at the end of 2009. In 2009, the amount of premiums accrued for all direct insurance businesses increased to RUB 3.5 billion, up by 67%, in comparison with 2008. These results were attained despite the overall decrease in voluntary insurance and compulsory civil liability motor-vehicle insurance payments by 7.1% in the Russian market. As a result, the company was rated amongst the top-25 Russian insurers by the volume of premiums income in 2009.
Despite the complicated economic situation, especially within the insurance sector, VTB Insurance remained one of the most reliable insurance companies in Russia during 2009. The company was assigned a rating of "BB" (forecast: "Stable") for financial stability by Fitch Ratings and an "A+" (with a "Very high level of stability") by the Expert RA agency.
Factoring
VTB Factoring was launched at the end of 2008 and began actively operating in the second half of 2009. The registered capital of the company was RUB 470 million as at the end of 2009. The main product is traditional factoring with recourse.
During the reporting period, VTB Factoring increased its business capacity. As of 1 January 2010, VTB Factoring's turnover amounted to nearly RUB 7 billion. Meanwhile, the portfolio of assigned receivables totalled RUB 2.8 billion.
In 2009, VTB Factoring signed more than 120 agreements to provide factoring services. Among its clients are companies operating in the wholesale and manufacturing sectors.
In 2009, VTB Factoring also became a member of International Factors Group, an international association of factoring companies, which will facilitate the company's entry into international markets in the longer-term.
Key priorities in 2010
In 2010, VTB Group is determined to continue the active development of its financial services division. In the leasing segment, the Group is aiming to maintain a leading position in the Russian market, while increasing the diversification of its portfolio and lending terms. VTB Insurance will continue to develop its business organically by focusing on growing its market customer base through the existing Group network and by cross-selling its insurance products. The key goal of the factoring division will be the extension of its product line utilising the development of non-recourse and international factoring.
REVIEW OF FINANCIAL PERFORMANCE
VTB Group key financial indicators
Financial highlights
§ Core income increased by 33.3% to RUB 173.2 billion year-on-year. Net interest income up by 34.0% to RUB 152.2 billion.
§ Net interest margin up to 5.3% in the fourth quarter of 2009, the highest level in VTB's public history, compared with 4.4% in the third quarter of 2009 and 4.6% in the fourth quarter of 2008.
§ Net fee and commission income up by 28.8% to RUB 21.0 billion.
§ Cost-to-core income ratio down to 44.1%, compared with 51.9% in 2008.
§ Net loss for the year totalled RUB 59.6 billion as a result of provision charges of RUB 154.7 billion.
§ Provisions for non-performing loans impairment stood at a comfortable level of 95%.
§ BIS capital ratio increased to 20.7% following the placement of an additional share issue.
Profit & Loss Statement Analysis
Core income
At the end of 2009, core income, defined as net interest income before provisions and net fee and commission income, grew substantially by 33.3% to RUB 173.2 billion compared with RUB 129.9 billion in 2008. In the reporting period, net interest income before provisions was 87.9% of core income, including 12.1% for net fee and commission income.
Net interest income before provisions
Historically, net interest income has formed the bulk of VTB Group's revenue. In 2009, net interest income stood at RUB 152.2 billion, up 34.0% year-on-year (RUB 113.6 billion for the full-year in 2008).
| (in RUB, billion) | 2009 | 2008 | Change |
| Interest income |
|
|
|
| Financial assets at fair value through profit or loss | 16.1 | 11.6 | 38.8% |
| Loans and advances to customers | 343.9 | 216.8 | 58.6% |
| Due from other banks | 11.1 | 14.2 | -21.8% |
| Securities | 2.6 | 2.6 | - |
| Financial assets not at fair value through profit or loss | 357.6 | 233.6 | 53.1% |
| Total interest income | 373.7 | 245.2 | 52.4% |
|
|
|
|
|
| Interest expense |
|
|
|
| Customers deposits | -89.9 | -65.2 | 37.9% |
| Debt securities issued | -38.1 | -32.6 | 16.9% |
| Due to other banks and other borrowed funds | -74.8 | -29.1 | 157.0% |
| Subordinated debt | -18.7 | -4.7 | 297.9% |
| Total interest expenses | -221.5 | -131.6 | 68.3% |
| Net interest income | 152.2 | 113.6 | 40.0% |
Source: VTB Group IFRS consolidated financial statements for 2009
Interest income growth during the reporting period was primarily due to the increase in interest income on loans and advances to customers. In 2009, this indicator rose by 58.6% to RUB 343.9 billion, compared with RUB 216.8 billion in 2008, due mainly to the increase in average annual lending volumes and the rise in interest rates. In 2009, the average annual interest rate on loans and advances to customers increased to 12.7%, compared with 11.3% for the full-year in 2008. At the same time, 2009 was notable for substantial growth in interest income from security investments, which were up by 31.7% to RUB 18.7 billion, compared with RUB 14.2 billion in 2008. This trend was the consequence of an increase in customer funding through public debt instruments - during the reporting year, the size of VTB's debt securities portfolio increased to RUB 311.3 billion, compared with RUB 110.9 billion at the start of the year.
The Group's interest expenses rose by 68.3% in 2009, which is mainly attributable to the increase in interest expenses on funds from credit institutions by 157% to RUB 74.8 billion. This category of expenses includes, in particular, the costs for servicing loans from the Bank of Russia, which to a large extent determined VTB's funding costs in the first half of 2009. In the third and fourth quarters 2009, the Group fully quelled its costliest Bank of Russia unsecured loans, which had a positive impact on interest expenses trends.
The rise in interest costs on customer deposits by 37.9% to RUB 89.8 billion was due to the increase in average annual customer liabilities and their increase in value in 2009. In 2009, the average annual value of customer deposits increased to 6.4%, compared with 6.1% in 2008.
Net interest spread and margin
| (in RUB, billion) | 2009 | 2008 | Change |
| Average interest rate on interest earning assets | 11.2% | 10.2% | 100 b.p. |
| Average interest rate on interest bearing liabilities | 7.1% | 5.9% | 120 b.p. |
| Net interest margin | 4.6% | 4.8% | -20 b.p. |
The Group's net interest margin in 2009 fell by 20 b.p. to 4.6% as a result of the increased cost of interest bearing liabilities. Following a sharp decline in the first quarter of the reporting period, the margin rate gradually recovered as the year progressed as a result of the reduced cost of funding which was possible due to the repayment of a substantial part of the Bank's liabilities to the Bank of Russia and the Ministry of Finance in the second half of the year. In the fourth quarter of 2009, the net interest margin rose to 5.3%, its highest level in VTB's history as a public Group, compared with 4.4% in the third quarter and 4.2% in the first half of 2009.
Net fee and commission income
One of the Group's strategic objectives is to increase fee and commission income. During the reporting period, VTB achieved notable success in this regard with a 28.8% increase in fee and commission income to RUB 21.0 billion. This positive trend was supported by an increase in the client base in the corporate and retail business divisions, expansion of the investment banking business, and increased operations generating commission income.
| (in RUB, billion) | 2009 | 2008 | Change |
| Commission on settlement transactions | 14.0 | 10.5 | 33.3% |
| Commission on guarantees issued and trade finance | 4.7 | 3.7 | 27.0% |
| Commission on cash transactions | 2.1 | 2.3 | -8.7% |
| Commission on operations with securities | 2.2 | 1.6 | 37.5% |
| Other | 2.5 | 1.3 | 92.3% |
| Total fee and commission income | 25.5 | 19.4 | 31.4% |
| Commission on settlement transactions | -1.8 | -1.6 | 12.5% |
| Commission on cash transactions | -1.0 | -0.7 | 42.9% |
| Other | -1.7 | -0.8 | 112.5% |
| Total commission expense | -4.5 | -3.1 | 45.2% |
| Net fee and commission income | 21.0 | 16.3 | 28.8% |
Source: VTB Group IFRS consolidated financial statements for 2009
Gross fee and commission income in 2009 increased by 31.4% to RUB 25.5 billion, compared with RUB 19.4 billion in 2008. The bulk of fee and commission income (63.1%) was generated by settlements and cash transactions. Aggregate fee and commission income received by VTB Group from settlements and cash transactions in the reporting period was RUB 16.1 billion, up 25.8% up year-on-year.
A substantial increase in fee and commission income was generated from the provision of customer services associated with trade financing and guarantees issued. Revenues for this item was up by 27% to RUB 4.7 billion in 2009 from RUB 3.7 billion in 2008, and was attributable to VTB's drive to expand its documentary and guarantee business. Also, during the reporting period the Group increased the commission generated from securities transactions by 37.5% to RUB 2.2 billion from RUB 1.6 billion in 2008. The main factor behind this increase was the increased volume of customer securities transactions in the investment and retail business segments of the Group.
In 2009, VTB's fee and commission expense increased by 45.2% to RUB 4.5 billion, compared with RUB 3.1 billion in 2008. Fees and commissions paid by the Group on settlement and cash transactions stood at RUB 2.8 billion. The increase in fee and commission expense resulted from the overall growth of the Group's operations.
Provision charge for loan impairment
During the reporting period, VTB Group made substantial provisions for loan impairment following the weakened economic position of corporate customers during the financial crisis.
The provisioning charge increased to RUB 154.7 billion, or 5.7% of the average gross loan portfolio, compared with RUB 63.2 billion, or 3.2% of the portfolio, in 2008. At the same time, due to the improving economic situation, the growth rate of the provision charge decelerated progressively during the reporting period from 7.1% on an annualised basis in the first quarter of 2009, to 6.6% in the second quarter and 4.3% in the third and fourth quarters.
As a result of the increase in loan impairment provision charges, the allowance for loan impairment to the gross loan portfolio increased to 9.2%, compared with 3.6% at the end of 2008. The largest proportion of provision for impairment was accounted for provisions on corporate loans. During 2009, these provisions increased from 3.6% of the gross corporate loan portfolio to 9.7%. The highest level of provisioning is assigned to companies operating in agriculture, retail trade, and the commercial and residential construction sectors.
The ratio of the impairment provision for loans to individuals to the Group's gross retail loan portfolio increased during the reporting period to 6.8%, compared with 3.7% in 2008.
Staff costs and administrative expenses
Given the challenging economic situation in Russia, VTB concentrated its efforts on managing costs. As a result of headcount reductions and the optimisation of business processes, the Group's costs grew at a slower rate than its income, and the ratio of costs to core income fell to 44.1% in the reporting period, compared with 51.9% in 2008.
VTB Group's staff and administrative costs increased by 13.2% in 2009 to RUB 76.4 billion. Active development of the investment and retail banking was the main reason for this increase.
Net profit/loss
A financial loss for VTB in the amount of RUB 59.6 billion in 2009 was attributable to the Group's substantial provisioning charges.
Analysis of VTB Group's financial position
Assets
| (in RUB, billion) | 31.12.2009 | 31.12.2008 | Change |
| |||
| Cash and short-term funds | 260.2 | 416.1 | -37.5% |
| |||
| Mandatory cash balances with central banks | 23.9 | 7.6 | 214.5% |
| |||
| Financial assets at fair value through profit or loss | 267.9 | 170.8 |
56.9% |
| |||
| Financial assets pledged under repurchase agreements and loaned financial assets | 96.2 | 44.5 | 116.2% |
| |||
| Due from other banks | 345.6 | 308.0 | 12.2% |
| |||
| Loans and advances to customers | 2,309.9 | 2,555.6 | -9.6% |
| |||
| Financial assets available-for-sale | 24.9 | 23.9 | 4.2% |
| |||
| Investments in associates | 13.9 | 4.5 | 208.9% |
| |||
| Investment securities held-to-maturity | 11.7 | 20.7 | -43.5% |
| |||
| Premises and equipment | 65.9 | 60.8 | 8.4% |
| |||
| Investment property | 79.8 | 4.3 | NR* |
| |||
| Intangible assets and goodwill | 11.9 | 11.3 | 5.3% |
| |||
| Deferred tax assets | 31.4 | 9.3 | 237.6% |
| |||
| Other assets | 67.6 | 60.0 | 12.7% |
| |||
| Total assets | 3,610.8 | 3,697.4 | -2.3% |
| |||
| * Non-representative |
|
|
| ||||
Source: VTB Group IFRS consolidated financial statements for 2009
VTB Group's total assets in 2009 stood at RUB 3,610.8 billion, compared with RUB 3,697.4 billion at the end of 2008. The Group's gross loan portfolio (loans and advances to customers before provisions) decreased by 4.0% to RUB 2,544.8 billion.
VTB's corporate loan portfolio decreased by 6.8% to RUB 2,109.5 billion due to reduced demand for credit from Russian companies. The contraction of the corporate loan portfolio was successfully offset by an increase in the volume of customer funding through public debt instruments. In 2009, the Group's debt securities portfolio increased to RUB 311.3 billion, compared with RUB 110.9 billion at the start of the year, and the Group's total corporate debt financing increased by 2% to RUB 2,420.8 billion. VTB's retail loan portfolio expanded by 12.5% to RUB 435.3 billion, substantially outperforming the market average, mainly due to the increase in consumer lending (including card credit) by 17.8% to RUB 182.9 billion.
Liabilities
| (in RUB, billion) | 31.12.2009 | 31.12.2008 | Change |
| Due to other banks | 287.0 | 388.7 | -26.2% |
| Customer deposits | 1,568.8 | 1,101.9 | 42.4% |
| Other borrowed funds | 470.9 | 848.7 | -44.5% |
| Debt securities issued | 485.7 | 560.1 | -13.3% |
| Deferred tax liability | 7.0 | 5.5 | 27.3% |
| Other liabilities | 91.2 | 174.1 | -47.6% |
| Total liabilities before subordinated debt | 2,910.6 | 3,079.0 | -5.5% |
| Subordinated debt | 195.3 | 226.3 | -13.7% |
| Total liabilities | 3,105.9 | 3,305.3 | -6.0% |
Source: VTB Group IFRS consolidated financial statements for 2009
The Group's total liabilities in 2009 decreased by 6.0% to RUB 3,105.9 billion, mainly as a result of a 44.5% reduction in the volume of other borrowed funds to RUB 470.9 billion. This decrease was attributable to reduced borrowing from the Bank of Russia. In order to optimise costs and structure funding, the Group fully repaid its unsecured loans with the Bank of Russia in the second half of 2009, thereby reducing the proportion of government and Bank of Russia short-term funds on the liabilities side of its balance sheet to 2%.
Due to the high level of trust in the VTB brand, total customer deposits increased by 42.4% to RUB 1,568.8 billion, compared with RUB 1,101.9 billion in 2008. Retail deposits increased by 34.6% to RUB 476.5 billion, compared with RUB 354.1 billion at the end of 2008. Corporate deposits, including government bodies, also demonstrated substantial growth, increasing by 46.1% to RUB 1,092.3 billion, compared with RUB 747.8 billion as at the end of 2008. As a result, the share of customer deposits in the Group's overall liabilities exceeded 50% at the year-end, which reflects the improvement in VTB's liabilities structure in the post-crisis period.
Total capital and capital adequacy
In 2009, VTB's BIS capital adequacy ratio increased to 20.7%, compared with 17.3% at the end of 2008. At the same time, the Tier 1 capital ratio increased from 10.5% to 14.8%. This trend was driven by VTB's additional share issue worth RUB 180.1 billion in the third quarter of 2009, and also by the reduction in risk-weighted assets during the reporting period.
Capital and capital adequacy
|
| 31.12.2009 | 31.12.2008 | Change |
| Tier 1 capital | 485.2 | 367.9 | 31.8% |
| Tier 2 capital | 207.1 | 243.0 | -14.7% |
| Deductions | -12.2 | -4.5 | 171% |
| Total capital | 680.1 | 606.4 | 12.1% |
| Risk-weighted assets | 3,284.0 | 3,511.9 | -6.4% |
| Tier 1 capital ratio | 14.8% | 10.5% | 430 b.p. |
| Capital adequacy ratio | 20.7% | 17.3% | 340 b.p. |
Analysis by segment
Corporate Banking
| (in RUB, billion) | 2009 | 2008 | Change |
| Revenues | 287.5 | 173.8 | 65.4% |
| Operating income before provisions | 95.3 | 89.3 | 6.7% |
| (Loss)/Pre-tax profit | -66.5 | 12.5 | - |
Source: VTB Group IFRS consolidated financial statements for 2009
In 2009, VTB Group's corporate banking revenues grew by 65.4% to RUB 287.5 billion, or 63.5% of total Group revenues. Net interest income increased by 37.0% to RUB 102.2 billion, equivalent to 67.1% of the Group's net interest income. VTB retained leading positions in the corporate business segment, increasing its market share for lending to 13.0% from 12.7% at the end of 2008. The Group's market share in the corporate deposits market increased by 10.2% to 12.7%.
A financial loss reported for this segment in 2009 in the amount of RUB 66.5 billion was attributable to substantial provisioning charges.
Retail Banking
| (in RUB, billion) | 2009 | 2008 | Change |
| Revenues | 88.4 | 61.9 | 42.8% |
| Operating income before provisions | 51.5 | 36.6 | 40.7% |
| Pre-tax profit | 7.2 | 5.5 | 30.9% |
Source: VTB Group IFRS consolidated financial statements for 2009
In 2009, VTB Group's retail banking revenues were up by 42.8% to RUB 88.4 billion, or 19.5% of total Group revenues. Net interest income in this segment increased by 43.0% to 43.6 billion, equivalent to 28.6% of the Group's net interest income. The Group is the second-biggest player in the Russian retail banking market. VTB's market share in the retail deposits market stood at 6% at the end of the reporting period. Despite substantial provisioning charges during the reporting period, the Group's retail business reported a positive financial result, with a pre-tax profit of RUB 7.2 billion, up 30.9% year-on-year.
Investment Banking
| (in RUB, billion) | 2009 | 2008 | Change |
| Revenues | 50.3 | 23.0 | 118.7% |
| Operating income before provisions | 30.7 | -19.8 | - |
| Pre-tax profit | 16.4 | -30.6 | - |
Source: VTB Group IFRS consolidated financial statements for 2009
VTB Capital continued to consolidate its positions as one of leading Russian investment banks. The company's revenues increased by 118.7% to RUB 50.3 billion, and its share in the Group's revenues increased to 11.1%. VTB Capital more than achieved its 2009 objectives and reported RUB 16.4 billion in pre-tax profits.
RISK MANAGEMENT
Risk management policy, organisation and structure
VTB Group risk management
The principal risks facing the Group's business are credit risk, liquidity risk, market risk (including securities portfolio risk, interest rate risk and currency risk), and operational risk. The Group's risk management includes risk evaluation and monitoring, risk size and concentration control, finding efficient solutions for risk optimisation and minimisation (including maintaining the optimal balance between the risks and benefits of operations).
The main risk management principles adopted in VTB Group are:
·; The consideration of all risk types inherent to banking activity;
·; A systematic and multifaceted approach to analysing the various types of risk;
·; The clear allocation of responsibilities between management bodies and employees in the decision-making process;
·; The independence of functions carrying out risk assessment and control, from banking operations functions;
·; The application of state-of-the-art risk assessment methods;
·; A rigorous reporting system at each management level.
In 2009, the Group continued the process of integrating risk management systems. To support this process, to coordinate timely information exchange and analysis, and to ensure systematic and timely implementation of risk management procedures, a number of commissions under VTB Group's Management Committee have been established, in particular:
·; The Risk Management Commission;
·; The Assets and Liabilities Committee;
·; The VTB Group's Credit Committee, which began to function in early 2009 as a result of the implementation of a credit risk consolidated management system within the Group.
VTB Bank risk management
VTB Bank's risk management policy is aimed at creating an integrated risk management system adequate for the nature and scale of the Bank's activities and risk profile, and complying with the Bank's needs for further development. The development and improvement of risk management in the Bank is carried out in accordance with banking best practices, the Bank of Russia regulations and recommendations, generally recognised international standards and the recommendations of the Basel Committee on Banking Supervision.
In terms of organisation, the risk management system of VTB Bank comprises various collective bodies (the Management Board, the Credit Committee, the Small Credit Committee, the Moscow Branch Credit Committee, the Branch Credit Committees, and the Assets and Liabilities Committee) and the Bank's structural units.
VTB Bank Risk Department
The division that is responsible for the development of the risk management system and control of risks taken by VTB Group and VTB Bank is the VTB Bank Risk Department. It comprises the following structural units:
1. Operating units for principal risks and/or credit procedure functions:
·; Credit Risk Division;
·; Market and Operational Risk Division;
·; Credit Applications Examining Service;
·; Credit and Pledge Operations Division;
·; Group for Monitoring Loans Funded by State Programmes
2. Consolidated Risk Analysis Division, which is responsible for VTB's Group-wide risk management, as well as the implementation of Basel II standards and the concept of economic capital in VTB Bank and VTB Group.
In 2009, the Risk Department at VTB Bank introduced measures to further raise the effectiveness of the Group's risk management system. In all of the Group's companies, a unified system for industry and country risks control was launched. Furthermore, basic elements of the consolidated credit risk control system for corporate clients were implemented. Databases of interconnected counterparties and non-performing debtors in the VTB Group are created and updated, as integral parts of a process to coordinate risk management throughout the Group. The development of a standardised reporting system and VTB Group's consolidated risk reporting are crucial elements of this process.
The successful and timely implementation of the risk management system effectively ensured the provision of the necessary liquidity for VTB Group and VTB Bank against the background of the global financial crisis. The timely assessment of risks, associated with the crisis developments in Russia, helped the Bank to minimise its losses in the context of declining profitability and growth in non-performing debts.
Credit risk
Credit risk is the risk that a counterparty will not be able to meet its obligations in full when they are due. VTB Group and VTB Bank are primarily exposed to credit risk through their loan portfolios, securities portfolios, guarantees, commitments and other on- and off-balance sheet credit exposures.
VTB Group credit risk management
Management of lending activities and credit risk within the Group is based on a combination of the following approaches:
·; Local credit risk management at Group company level;
·; Consolidated credit risk management at VTB Group level.
Within the framework of the local credit risk management system, Group companies assume and manage credit risks independently (including, for instance, insurance and hedging risks) within the scope of their authority and limits with regard to risk indicators, in accordance with the national regulations and the standards of the VTB Group. Group companies are responsible for the results of their lending activity, for the quality of their loan portfolios and for the monitoring and control of credit risks associated with their portfolios.
Consolidated credit risk management performs the following functions:
·; Consideration and approval of Group-wide standards for lending and credit risk management;
·; Centralised regulation and control of strategic and other important issues associated with the organisation, and the functioning of lending procedures and credit risk management of the Group and its subsidiaries.
Consolidated risk management covers the most essential assets items and off-balance sheet operations of Group companies, which bear credit risk and require the control of their concentration within the Group as a whole. In the context of consolidated control and reporting, the scope of such operations is defined by the coordinating bodies of the Group.
The key elements of consolidated risk management within the Group are as follows:
·; Development of a unified lending policy for the VTB Group and harmonising and streamlining lending policies of the subsidiaries with the Group's lending policy;
·; Development of unified principles for borrower assessment (rating systems - for large corporate clients and credit institutions; scoring systems - for retail clients);
·; Assessment of the economic capital (capital-at-risk) necessary to cover credit risks;
·; Consolidated reporting on credit risks.
VTB Bank credit risk management
The main elements of credit risk management in the Bank are established limits in relation to single borrowers, groups of borrowers, industries, regions and foreign countries. These limits are set and regularly reviewed by the VTB Bank Risk Department, approved by the Credit Committee and comply with regulations established by the Bank of Russia. In the face of the existing liquidity crisis and in order to limit the increase in overdue debts, VTB Bank introduced a number of significant changes to its lending procedures.
During 2009, VTB Bank undertook the following additional measures to manage credit risk:
·; Requirements for financial stability, cash flow forecast assessment, credit quality and liquidity were strengthened;
·; A centralised system to identify and monitor the risk of credit deals was implemented;
·; The evaluation of collateral value was updated;
·; The institution of regional risk managers, responsible for improving the quality of credit analysis and compliance with credit procedures in Bank's branches, was introduced.
During the crisis, the Bank implemented measures to enhance managers' responsiveness to changing situations of specific borrowers and increase their responsibility for monitoring clients assigned to them. When the 'acute phase' of the crisis had passed, limits which were set to restrict lending activity were abolished, providing easier access to loans for medium-sized businesses.
VTB Bank's policy in dealing with borrowers includes assessment of their financial viability in changed economic conditions and their influence on other actors in the business environment (by causing a recovery of / an increase in their activities), and is also guided by principles of corporate social responsibility.
During the reporting period, VTB Bank's priority borrowers included companies and organisations supported by State programmes.
An analysis of the credit quality of loans and advances to customers, individually and collectively assessed, is presented in the table below.
The credit quality of loans and advances to customers is presented according to five categories:
·; Pass - provision rate from 0% to 2%;
·; Watch - provision rate from 2% to 5%;
·; Substandard - provision rate from 5% to 20%;
·; Doubtful - provision rate from 20% to 50%;
·; Loss - provision rate from 50% to 100%.
Provision rate represents the weighted ratio of allowance for impairment to gross loan portfolio (before provisions) under each pool of loans with similar credit risk or individually impaired loan.
| (in RUB, billion) | Not impaired | Impaired | ||||
| Pass | Watch | Sub-standard | Doubtful | Loss | Total | |
| Loans to legal entities | 1,221.4 | 331.5
| 290.2 | 61.8 | 204.6 | 2,109.5 |
| Loans to individuals | 377.3 | 2.1 | 6.5 | 26.3 | 23.1 | 435.3 |
| Total loans and advances to customers | 1,598.7 | 333.6
| 296.7 | 88.1 | 227.7 | 2,544.8 |
Source: VTB Group IFRS consolidated financial statements for 2009
VTB Group loan portfolio quality under IFRS as at 31 December 2009
|
|
|
| Total gross loans and advances to customers (in RUB, billion) | 2,544.8 |
| NPL ratio (%) | 9.8% |
| Allowance for loan impairment / NPLs(%) | 94.5% |
| Renegotiated loans / Total gross loans (%) | 11.8% |
| Allowance for loan impairment (in RUB, billion) | 234.9 |
| Allowance for impairment / Total gross loans (%) | 9.2% |
Liquidity risk
Liquidity risk is the risk of a mismatch between the maturities of assets and liabilities, which may result in the inability to liquidate a position in a timely manner at a reasonable price to meet funding obligations (including non-utilisation of funds at an above-average market rate).
VTB Group liquidity risk management
During 2009, the liquidity management policy was applied not only within VTB Bank, but across the Group as a whole.
Liquidity management within the Group is carried out at three basic levels:
§ each bank of the Group manages its own liquidity on an individual basis in order to meet its obligations and to comply with the requirements of the national regulator and the recommendations of VTB Bank;
§ VTB manages Group liquidity by coordinating the redistribution of funds within the Group through borrowing from, and lending to the banks of the Group;
§ the Group's medium-term and long-term financing programmes are developed and implemented under the supervision of VTB Bank.
VTB Bank liquidity risk management
The Bank separates current and instant liquidity risk management.
Management of current liquidity is one of the essential tasks handled by the Bank as part of its asset and liability operational management and entails short-term forecasting and control of fund flows in terms of currencies and timings to ensure that the Bank meets its obligations, completing settlements on behalf of customers and funding the Bank's active operations.
Current liquidity management is carried out by the Treasury Finance Department based on real-time (intraday) determination of the Bank's current payment position and forecasted future payment position, taking into account the payments schedule and other scenarios.
The main task in instant liquidity management is to develop and implement a number of instruments for managing assets and liabilities, aimed at supporting the Bank's instant funding ability, as well as to plan increases in its asset portfolio by optimising the ratio of liquid assets and profitability.
The Bank achieves this by making long-term liquidity forecasts and by adhering to internal liquidity standards based on currencies and timings formulated by the Assets and Liabilities Management Committee. Forecasted liquidity management is also conducted according to the liquidity accounting standards of the Bank of Russia.
Long-term liquidity forecasts and risk analysis across VTB Group, and within VTB Bank, are prepared by the Market and Operational Risk Division, which presents the results in a consolidated report to the Bank's Assets and Liabilities Committee, the VTB Management Committee and the Assets and Liabilities Commission operating under the Management Committee.
Each forecast includes receivables and payments according to the contractual terms for these transactions, while also taking into account planned operations. In so doing, consideration is given to the possible outflow of unstable "on-demand" capital.
In addition, the Market and Operational Risk Division conducts contingency modelling (stress-testing) with allowance for risk factors liable to influence the Bank's forecast liquidity, and taking into consideration its ability to mobilise liquid assets in order to alleviate a lack of liquidity.
The table below illustrates VTB Group cash flows as at 31 December 2009 on contractual terms to maturity/payment on assets and liabilities.
| Time Band | Inflow | Outflow | Gap | Gap cumulative
| FX swap cumulative
| Dynamic gap (total) Cumulative
|
| Position in roubles |
|
|
|
|
|
|
| Opening balance | - | - | 152.5 | 152.5 | - | 152.5 |
| Up to 1 month | 119.8 | -440.6 | -320.8 | -168.3 | -13.9 | -182.2 |
| From 1 to 3 months | 110.7 | -305.0 | -194.3 | -362.6 | -4.0 | -366.6 |
| From 3 months to 1 year | 517.1 | -435.0 | 82.1 | -280.5 | -0.7 | -281.2 |
| From 1 to 3 years | 665.0 | -241.4 | 423.6 | 143.1 | 4.8 | 147.9 |
| More than 3 years | 1,254.3 | -324.3 | 930.0 | 1,073.1 | 4.8 | 1,077.9 |
|
|
|
|
|
|
|
|
| Positions in other currencies |
|
|
|
|
|
|
| Opening balance | - | - | 59.6 | 59.6 | - | 59.6 |
| Up to 1 month | 284.0 | -213.8 | 70.2 | 129.8 | 9.7 | 139.5 |
| From 1 to 3 months | 92.9 | -140.3 | (47.4) | 82.4 | -3.7 | 78.7 |
| From 3 months to 1 year | 380.9 | -316.4 | 64.5 | 146.9 | -6.8 | 140.1 |
| From 1 to 3 years | 367.8 | -431.8 | (64.0) | 82.9 | -10.5 | 72.4 |
| More than 3 years | 361.0 | -196.8 | 164.2 | 247.1 | -10.5 | 236.6 |
|
|
|
|
|
|
|
|
| Total |
|
|
|
|
|
|
| Opening balance | - | - | 212.1 | 212.1 | - | 212.1 |
| Up to 1 month | 403.8 | -654.4 | -250.6 | -38.5 | -4.2 | -42.7 |
| From 1 to 3 months | 203.6 | -445.3 | -241.7 | -280.2 | -7.7 | -287.9 |
| From 3 months to 1 year | 898.0 | -751.4 | 146.6 | -133.6 | -7.5 | -141.1 |
| From 1 to 3 years | 1,032.8 | -673.2 | 359.6 | 226.0 | -5.7 | 220.3 |
| More than 3 years | 1,615.3 | -521.1 | 1,094.2 | 1,320.2 | -5.7 | 1,314.5 |
Source: VTB Group IFRS consolidated financial statements for 2009
A significant portion of VTB Group's liabilities is represented by customer deposits, promissory notes, bonds, current accounts of corporate and retail customers, Eurobonds and syndicated loans.
Despite the fact that a considerable portion of customer liabilities are mature in less than one month and "on-demand" deposits, diversification of these deposits and VTB's past experience indicate that these liabilities are consistently refinanced by customers and for the most part they are a stable source of funding. The stable element of resources on demand is determined for separate currencies on the basis of statistical trend analysis of the dynamics of cumulative balances on these accounts.
Money market instruments (interbank loans and deposits, repurchase agreements) are used to control short-term liquidity and are not considered as a source of funding for long-term assets.
During 2009, VTB Group took an active role in the Russian Government's anti-crisis programme to support the real economy. While loans to corporate clients predominantly exceeded one year, the funding instruments offered by the Bank of Russia to carry this programme forward were issued for terms not longer than one year, which accounts for the lack of liquidity in one-year term pools on the contractual terms of assets and liabilities.
At the same time, the Group has additional funding facilities enabling it to comfortably control any negative liquidity gaps. The unused portion of the Bank of Russia's collateral-free borrowing limit set for the Group's Russian banks (VTB, VTB24 and VTB North-West) exceeded RUB 1,050 billion as at 31 December 2009. This limit is calculated on the basis of the banks' regulatory capital multiplied by 1.5. Repo and collateralised borrowing capacity is limited by eligible collateral in the form of debt, securities and discount rates, and its utilised limit amounted to approximately RUB 150 billion as at 31 December 2009. VTB Group also has additional borrowing facilities in the interbank market, estimated at approximately RUB 90 billion as at the end of 2009.
Market risk
Market risk is the risk of downward pressure on the Group's financial results in response to the revaluation of balance-sheet assets and liabilities, off-balance-sheet demands and liabilities, and derivative financial instruments due to unfavourable changes in market parameters, such as interest rates (interest rate risk), exchange rates (currency risk) and securities prices (price risk).
Interest rate risk
The general principles for managing interest rate risk are as follows:
§ setting standard interest rates for deposits and basis point rates for borrowing that take the current state of the market into consideration;
§ calculating interest rate risk indicators and setting limits/reference points of interest rate risk for VTB Group and individual banks by currencies and temporary pools.
The basic parameters used to assess interest rate risk are:
§ the susceptibility of the Group's interest rate gap to a change in Basis Point Value and the degree of sensitivity to interest rates, determined in relation to (1) the reduction in the net present value of the interest position and (2) net interest income under an unfavourable parallel movement of the yield curves by one basis point;
§ the economic capital for covering interest rate risk, evaluated using the IRRC indicator (Interest Rate Risk Charge) and assessment of a reduction in the net present value of the Bank's position under a potential unfavourable parallel movement of the yield curves by an amount determined using the Value-at-Risk indicator.
The table below shows the sensitivity of the Group's annual net interest income to a parallel shift of the yield curves by currencies as at 31 December 2009.
VTB Group interest rate sensitivity
| Currency
| Interest rate increase, b.p. | Effect on net interest income (in RUB, billion) | Interest rate decrease, b.p. | Effect on net interest income (in RUB, billion) | ||||
| RUB | 300 | -11.0 | -200 | 7.3 |
| |||
| USD | 100 | 1.0 | -25 | -0.2 |
| |||
| EUR | 100 | 0.9 | -25 | -0.2 |
| |||
| GBP | 100 | 0.1 | -25 | - |
| |||
| Other | 100 | -0.1 | -25 | - |
| |||
| Total |
| -9.1 |
| 6.9 |
| |||
Source: VTB Group IFRS consolidated financial statements for 2009
Currency risk
The Group manages its currency risk by matching the currency of its assets with that of its liabilities and maintaining an open currency position (OCP) in each of the Group's banks within the established limits, including internal OCP limits and regulatory OCP limits set by the Bank of Russia.
A quantitative risk assessment is carried out using the VaR (Value-at-Risk) method, which estimates the largest potential negative effect (within a specified confidence interval) of changes in the value of foreign exchange positions on the financial result. The VaR assessment is based on a historical stimulation approach over a historical period of two years with a 10-trading day holding period and a confidence interval of 99%. As at 31 December 2009, this indicator stood at RUB 3.4 billion for the Group.
Price risk
The general principles for managing price risk are as follows:
§ restricting the size of price risk taken on by setting limits across instruments, portfolios and types of transactions;
§ control over adherence to the established limits and restrictions (for example, a minimum discount size on "reverse repo" operations and margin call conditions) for taking on price risk;
§ organisation of ongoing monitoring, analysis and reporting of price risk.
A quantitative risk assessment is carried out using the VaR method with the parameters described above for currency risk. Original historical data was used for instruments with a quote history of at least 100 trading days in the previous year, and not more than ten successive trading days without quotes and the issue date as early as the beginning of the reporting period. The vast majority of such instruments in the Group's portfolio had a history of 250 trading days in the reporting year.
For instruments not satisfying these criteria (but nevertheless circulating in the market and carrying market risk), the price history used was that of equivalent (proxy) instruments, selected using the following criteria:
§ the proxy-instrument should be the same type of financial instruments as the original instrument (bonds/Eurobonds);
§ the issuer of the proxy-instrument is in the same sector and the same country as the original instrument, and the issuers have comparable credit ratings;
§ the proxy-instrument and original instrument are denominated in the same currency;
§ the proxy-instrument and original instrument have comparable durations.
Proxy instruments are used to make the VaR calculation for approximately half of the portfolio by volume and 28% of the total number of instruments. As at 31 December 2009, this indicator calculated for the Group's securities portfolio, when taking diversification effect into consideration, was worth approximately RUB 5.7 billion.
Operational risk
Operational risk is the risk of loss resulting from the inadequacy or failure internal processes, employees and IT systems, inconsistencies with legislative requirements or external events not controlled by the Bank's (primarily, natural disasters).
VTB Bank's operational risk management system is designed to prevent possible losses and reduce the possibility of business process failures and the inability to provide high-quality services to the Bank's clients caused by staff errors, system breakdowns, internal or external fraud, and violation of the law.
In its operational risk management practices, the Bank follows the principles set by the Bank of Russia regulations as well as the recommendations of the Basel Committee on Banking Supervision (including Basel II). To implement the Bank's operational risk management strategy, VTB carries out regular procedures to identify, assess, control and limit risk. All significant deficiencies from a risk perspective, identified within the internal control system, are subjected to rigorous analysis. Based on the analysis, measures are developed and implemented to eliminate the cause and source of the risk. To facilitate a consolidated assessment of operational risk within the Bank, a mechanism for collecting information on operational losses and key risk indicators, compliant with Basel II and the Bank of Russia requirements, was introduced at the beginning of 2007. A similar system is currently being introduced in VTB Group banks.
The key operational risk limitation instruments are:
§ a complex system of internal control that is common to all business units and operations throughout the Bank;
§ the regulation of key operations by internal standards and codes of practice;
§ the registration and documentation of banking operations and transactions and the regular control of primary documents and operating accounts;
§ the application of the principles of: division and limitation of the functions, authorities and responsibilities of employees; implementation of dual controls; collective decision-making and limit-setting for the terms and scale of operations;
§ the automation of banking operations, the use of high-performance information systems and their constant monitoring and immediate repair;
§ the provision of physical and information security, control over access to the Bank's facilities;
§ a careful HR policy, staff training and education.
These risk limitation strategies are supported by appropriate insurance programmes. In 2009, the Bank's operational risk insurance amounted to approximately RUB 10 billion, and included complex crime insurance under the Financial Institution's Blanket Bond scheme (including electronic and computer crime), insurance of valuables during transit and while in storage and the insurance of the "card business", including cash dispensers and cover against bank card fraud.
To implement unified mechanisms for the identification, monitoring and control of operational risk both at the level of Group companies, and at a consolidated level across VTB Group, a new procedure for information gathering on VTB Group's operational risk indicators and the preparation of operational risk reporting within the Group was introduced at the end of 2009. These regulations, which were approved by the Risk Commission under VTB Group's Management Committee, set out general requirements for the methodological and procedural aspects of the information gathering on operating losses and operational risk events in the Group's subsidiaries, and outline the procedure for regular reporting to the head bank. Following the approval of this document by VTB's Management Committee, the risk management teams of the Group's subsidiaries will draft and present their local regulations for approval in 2010.
Programme for implementing Basel II standards
In 2009, a comprehensive analysis was undertaken to assess the readiness of VTB Group banks to implement the Basel II standards. Following the results of this analysis, each of the Group's banks began preparing a plan of further actions in this regard.
At the same time, VTB Bank and VTB24 took part in the Banking Regulation and Supervision (Basel II) programme, organised by the Bank of Russia in conjunction with leading EU experts in banking regulation. This programme included seminars and meetings with representatives from the Central Bank of Russia and European regulators for the purpose of developing optimum approaches to ensure the smooth transition of Russian banks to the Basel II standards. In particular, a survey was carried out as part of this programme, which enabled VTB Bank to self-assess its compliance with Basel II in the following areas:
§ self-assessment of the Bank's internal policies on credit risk management for compliance with the content and minimum requirements of IRB policy;
§ self-assessment of the organisation of risk management, internal control and equity (capital) planning systems for compliance with the recommendations for the organisation of these systems as specified in Component 2 of the Basel II standard.
Also, in the context of the phased implementation of requirements of Basel II Component 2, a procedure for calculating economic capital was introduced in the Bank and Group-wide. This procedure is regarded as a component of ICAAP. The Bank's internal methodology is also based on the application of the state-of-the-art principles embodied in Basel II.
Once the timeframe for incorporation of the Basel II recommendations into Russian banking legislation becomes clear, the Bank intends to formulate a strategy for the transition of risk management systems to the new standards with the necessary procedural documents, with simultaneous preparation of the corresponding budget and close coordination of the Bank's subdivisions to carry this project forward.
The VTB Group banks based in Western Europe have been working under the Basel II standards since 1 January 2008.
Key Priorities in 2010
In 2010, VTB Bank plans to improve its risk management system in three key areas:
·; Further implementation of best global banking practices and Basel II standards, along with increasing the efficiency and conservatism in the assessment of the risk taken by the Bank;
·; Development of existing risk control procedures at a VTB Group level based on the consolidated risk management concept developed and approved by the Group;
·; Completion of the development of a mature risk management system within the Group's investment business, which is the key factor for its active development.
In order to achieve these improvements, it is necessary to expand the practice of establishing consolidated limits of credit risk for general VTB contractors amongst corporate clients and banks. The Bank also intends to adhere to the provisions and principles for the control of credit operations and risks associated with them, provided by the 'JSC VTB Bank Credit Policy 2009-2010', taking into account the current global financial situation.
Within the framework of the new policy, adopted in 2009, the Bank will continue to improve its ranking system for borrowers and its procedures for issuing credits to different categories of clients. In particular, the delegation of credit issuing responsibilities will be improved.
It will be especially important to develop an information and technical infrastructure specialised in risk management, in order to meet stringent requirements (quality, accuracy and timeliness) concerning the quantitative evaluation of risk. In order to improve the availability of data and to utilise sophisticated mathematical models, the Bank is spearheading several high technology projects. In particular, it is expected to complete the first stage of the project of an automated risk management system for VTB Group. The first stage of the project is based on the software by Kamakura Risk Manager and includes an automated assessment of market risks, as well as asset and liability management (ALM).
MANAGEMENT RESPONSIBILITY STATEMENT
Management is responsible for preparing the Annual Report and the Group's consolidated financial statements in accordance with applicable law and regulations. The management responsibility statement forms an integral part of the Annual Report and is prepared in accordance with the requirements of the UK Financial Services Authority (FAS).
VTB Group's internal regulations require management to prepare the consolidated financial statements in accordance with International Financial Reporting Standards (IFRS) and applicable laws and regulations.
The consolidated financial statements, as required by law and IFRS, present a true and fair view of the Group's state of affairs and profit.
In preparing the consolidated financial statements, management is required to:
·; select suitable accounting policies and then apply them consistently;
·; make judgements and estimates that are reasonable and prudent;
·; state whether applicable accounting standards have been followed, with any material deviations from the standards being disclosed and explained in the statements;
·; prepare consolidated financial statements on a going concern basis, unless it is inappropriate to presume that the Group will continue in business in the near future.
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 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.
VTB Bank President and Chairman of the Management Board
Andrei L. Kostin