July 2, 2013 5:04 pm

VTB: Growing pains

Russian bank is expanding its loan book, but bad loan provisions are also on the rise

Growing pains, or something more serious? VTB, Russia’s second-largest bank by assets, is preparing itself for difficulties somewhere. Tuesday’s first-quarter numbers showed net income down by a third on the same period last year, with the blame falling firmly at the door of an 8 per cent increase in bad loan provisions.

Part of the increase is a natural consequence of a growing loan book. VTB, traditionally focused on international trade, is making a big push into Russian retail banking, taking on larger rival Sberbank. By the end of March VTB’s loan book was Rbs5tn ($150bn), 4 per cent higher than it was at the end of December. Interest income in the first quarter was more than a third higher than in the same period last year. But the rise in provisions also suggests the possibility of tougher times ahead. Non-performing loans were stable, but there are signs of deterioration in some areas, especially consumer lending.

So it is a good job VTB has been taking action to improve its capital base. Last month it raised Rbs100bn by selling shares to a trio of sovereign wealth funds (Norway, Qatar and Azerbaijan). That has left it with a tier one capital ratio under existing rules of 12 per cent. Comfortable enough for the moment, but Basel III is looming and although the bank is confident it can meet the new requirements without new capital, a deterioration in the loan book might make that more tricky. As it is, there is a big chunk of VTB shares coming to the market. The Russian government owns 61 per cent of the bank and is likely to sell some of that in the next few years.

VTB’s shares have not been stellar performers. They have halved over the past two years, while Sberbank is down 9 per cent. Yes, 6 times forecast earnings is not pricey. But while the benefits of a growing loan book are eaten up by provisions, there is little reason to get excited.

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