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. Last Updated: 07/27/2016

Bank of Moscow Sees Profit Drop by 61%

Bank of Moscow, the country's fifth-largest lender by asset size, saw its profits drop 61 percent last year after it increased its loan-loss provisions and reported trading losses.

Net income in 2008, according to Russian accounting standards, was 3.6 billion rubles ($99.4 million), down from 9.2 billion rubles in 2007, CEO Andrei Borodin said at a news conference Wednesday.

"Considering the dramatic third and fourth quarters, these results are pretty decent," said Borodin, referring to a liquidity squeeze and stock market slide that commenced in September.

The bank's loan portfolio grew by 54 percent to 507.9 billion rubles, and loans to individuals totaled 99 billion rubles, up 43 percent from 2007. Despite outflows in the fall months, deposits were up 52 percent to 698.6 billion rubles, Borodin said.

"In 2009, the bank's loan portfolio will grow at a more tempered pace, going up between 10 and 15 percent from its existing level," he said.

The fall in profits can be attributed both to its large reserve building and exposure to equity markets, said Mark Rubenstein, senior banking analyst at IFC Metropol

"Equity makes up 15 percent of the Bank of Moscow's securities portfolio. It's a significant portion," said Rubenstein, who compared the lender with the more conservative Sberbank, where equity makes up 2 percent of its securities portfolio.

Despite the setback, the bank expects to continue to see profits in 2009, Borodin said -- a forecast echoed by analysts.

"The main shareholder, the city of Moscow, will offset potential losses the bank faces. It has the bank covered," said Natalya Orlova, chief economist at Alpha Bank. "The fact that the bank was still able to show profits in 2008 -- this is key."

But an increasing number of non-performing loans -- now at 1 percent of its portfolio -- may cut into this year's profits as well. Borodin estimated that loan-loss provisions could make up as much as 5 percent of the bank's portfolio this year, up from 3 percent in 2008.

"That is going eat into their profits," Rubenstein said. "Right now, delinquent loans at 1 percent looks pretty good, but if they want to increase their loan-loss provisions to 5 percent, they're expecting their number of nonperforming loans to rise up fivefold in 2009."

Bank of Moscow is also planning to raise about 20 billion rubles ($553 million) this year through an additional share issue. "The main shareholders, including the government of Moscow, will participate in the issue," said Borodin.

The share issue will add about 26 percent to the bank's 76.7 billion ruble capital and dilute minority shares proportionally.