Not banking on them: Russian state-owned VTB Bank posts questionable results for the 1H 2015
Too good to be true? Warren Buffett, the famous value-investor, has remarked that in business, when â€śit`s too good to be true, it usually is.â€ť
In the second quarter of 2015, contrary to expectations, VTB made a profit of RUR 1.2 bln. Analysts had however pencilled an expected loss of RUR 6.3 bln.
In particular, it was noted that despite the ongoing deterioration of the quality of VTB`s loan portfolio, the ratio of problem loans still appears to be lower than that of Sberbank. Sberbank will release its first half year`s results later in August.
A clue to VTB`s unexpectedly good Q2 might be gleaned from the IMF`s Article IV report issued in August 2015. An IMF team visited the Russian Federation in May 2015 to â€śkick the tyresâ€ť of the macroeconomic, financial and regulatory system in place and identify issues/make recommendations for follow up. The report is worth quoting to get the full flavour of the Russian financial system and the issues that afflict it.
â€śThe banking system is facing challenging times. [original bold retained] The sector reported after-tax losses in December 2014 and during the first five months of 2015. At end-April, the sectorâ€™s reported capital was comparable to a year ago, at 12.9 percent, owing to capital support from the NWF [the National Wealth Fund, one of Russia`s sovereign funds]Â and the government (RUR 236 bln) and regulatory forbearance. Non-performing loans (NPLs) have increased by only 1.5 percentage points to 8.0 percent compared to April 2014, again helped by regulatory forbearance.â€ť
A key aspect here is that the IMF believed that the damage wreaked to the economy by a combination of a 46-percent slide in the rouble, high interest rates that went as far as 17 percent, falling oil prices, capital flight, high rates of inflation and sanctions, on top of an economy that barely grew during 2014,Â would assuredly lead to non-performing loans rising Â than more than 1.5 percent â€“ a lot higher.
The key phrase is regulatory forbearance, which essentially means that the government and central bank already had more than enough to contend with, without the Russian banks being forced to recognise in their accounts the full nature of the problems that beset the Russian economy and its borrowers, whether they be oil and gas state behemoths, small and medium sized enterprises, overleveraged consumers or local authorities.
VTB`s corporate loan portfolio decreased by 4 percent in the second quarter; while its retail portfolio decreased by just 0.7 percent. While VTB has noted the continued growth of problem loansÂ – 7 percent in Q2 compared with 6.4 percent in Q1 and 5.8 percent in 2014, regulatory forbearance permitted provisions for loan losses not to increase to reflect this worsening profile.
Of real interest is the fact that while the state is not keen to see banks reflect the true extent of loan loss provisions, it is acting as if they might appear and has been taking vigorous steps to reinforce the key Russian banks.
In September 2014, VTB converted a subordinated loan of RUR 214 bln to preference shares for the Russian Ministry of Finance. Separately, there was a capital injection of RUR 100 bln.
In December 2014, the government launched a RUR 1 trln (1.2 percent of GDP)(but later scaled back to RUR 830 bln) bank capital support programme. The programme is essentially available to those banks with a minimum capital of RUR 25 bln, those affected by the EU/US sanctions i.e. Rossiya Bank â€“ viewed as linked to President Putin, –Â and the top 13 regional lenders.
In July, VTB completed the placement of RUR 307 bln (USD 5.15 bln) of preference shares with the state corporation Deposit Insurance Agency to bolster its share equity.
While VTB may have made a small profit in the Q2, it still made a net loss for the first six months of 2015 of RUR 17.1 bln. With a further decline in fortunes expected, this may have been just the lull before the storm.
Photo courtesy of Peruanec/Wikimedia Commons.