VTB Surprises With $212M Profit

MTA man cleaning the front of a VTB branch Thursday. The bank announced that it had exceeded 2008 financial goals.��
State-controlled VTB said Thursday that it managed a $212 million net profit last year, outperforming expectations with hefty gains on bond buybacks in the fourth quarter even as provisions for bad loans soared.

Total earnings for 2008 fell 86 percent, from $1.5 billion the previous year, and while Russia's second-largest lender did not release separate fourth-quarter results, Citi said the year-end figures suggested a $76 million net loss.

VTB's performance beat most analysts' predictions of a modest 2008 net loss. It also surpassed UralSib's relatively optimistic forecast of $153 million in net profit by 38 percent, said the bank's analyst, Leonid Slipchenko.

But had VTB not posted a $349 million gain in the fourth quarter on the repurchase of $1.4 billion of its own bonds, the bank would have ended the year in the red, chief financial officer Nikolai Tsekhomsky told reporters Thursday.

Tsekhomsky also said the bank would post gains from bond buybacks in the first quarter and would continue buying up its own debt during the year as long as market conditions remain favorable.

"This year, we see the substantial narrowing of the spread, and so this is not going to be as profitable as it was in 2008," Tsekhomsky said.

After domestic capital markets plummeted during the liquidity crisis last fall, investors scrambled to sell off Russian debt, causing spreads to widen. VTB was then able to buy back its debt for less than it had originally sold for.

"VTB bonds were trading below par," said Mikhail Galkin, an analyst at MDM-Bank. "They could have bought the bonds for around a 20 percent discount, and this generated earnings."

But the gains on buybacks were not enough to put aside worries over ballooning growth in nonperforming loans. Loan-loss provisions jumped $1.1 billion in the fourth quarter from the $1.4 billion that was set aside in the first nine months. At the end of 2008, cash reserves made up 3.2 percent of the total loan portfolio, up from 1.3 percent in 2007 and 2.5 percent for the first three quarters of 2008.

VTB president Andrei Kostin said money set aside for bad loans would not exceed 8 percent of its portfolio by the end of the year.

Finance Minister Alexei Kudrin has said he expects the figure to be about 10 percent for Russia's banking sector.

VTB's loan portfolio rose 50 percent year on year to $90 billion, while assets totaled $126 billion, up 36 percent from 2007. The bank expects its rate of loan growth to slow to about 10 percent this year.

Sberbank, Russia's largest lender, is scheduled to release its fourth-quarter and 2008 results Monday.

The results were "nothing to be inspired about," UralSib analysts said in a note.

"Overall, the bank remains loss-making, and we expect the upcoming quarterly results to be also distorted by one-off gains from the buyback of the bonds and not truly reflecting of VTB's business picture," it said.

VTB's shares closed up XX percent on the MICEX, roughly in line with the exchange's 30-stock index.

"The results were welcomed by the market but were not a significant driver," said Tom Mundy, equity strategist at Renaissance Capital.