Promsvyazbank announces financial results under IFRS for H1 2009

Today Promsvyazbank (PSB) has released its consolidated financial statements for the first six months of 2009, prepared in accordance with the International Financial Reporting Standards (IFRS) and reviewed by the external auditors - KPMG.

The key financial highlights are as follows:

• Total assets declined by 10% to RUB 414 billion, total shareholders’ equity remained at RUB 40 billion.
• Tier 1 ratio as calculated under the Basel Accord improved to 10.36% from 9.70% at YE 2008, total capital adequacy ratio rose by about 1 p.p. to 14.04%.
• Net loans shrank by 5%, customer deposits rose by 4%, net loans to deposits ratio decreased by 12 p.p. to 119%.
• Net interest income rose by 36% YoY, net fee and commission income grew even stronger by 63% YoY, with its share in operating income increasing by 2 p.p. to 17%.
• Operating income increased by 43% YoY to RUB 17.2 billion surpassing the 21% growth in general and administrative expenses.
• Cost-to-income ratio dropped to 39.0%, a notable improvement from 46.1% for H1 2008 and 43.8% for the full-year 2008.
• Profit before tax and provisions increased by 62% YoY and totaled RUB 10.5 billion.
• Non-performing loans amounted to RUB 27.3 billion or 8.7% of gross loans, and were more than 100% covered by the total impairment allowance.
• Provision charge for loan impairment and other losses totaled RUB 10.9 billion or 63% of operating income, up from 25% in H1 2008 and 49% for the full-year 2008.
• Total comprehensive loss for the first six months of 2009 amounted to RUB 318 million.

The contraction in total assets in H1 2009 was, on the one hand, attributable to the repayment of anti-crisis funding from the Central Bank of Russia (CBR) and, on the other hand, resulted from PSB’s conservative approach to lending in times of persistent economic weakness and borrowers’ deteriorating financial standing. Net loans to customers amounted to RUB 284 billion, down from RUB 300 billion at year-end 2008, due to the weakening markets for international trade finance as well as decreased volumes of retail lending at PSB (driven by a much more conservative stance towards the retail credit risk). At the same time, loans to corporate clients not involved in international business and loans to small and medium sized enterprises (SME) displayed a moderate growth (by 7% and 10%, respectively).

Customer deposits remained the backbone on the funding side, with their share in total liabilities increasing by 9 p.p. to 63% as the decrease in international wholesale funding (notably trade finance facilities from foreign banks, a business that was hard hit by the global economic crisis) was compensated for by the increase in domestic customer deposits. Retail deposits were the fastest-growing component, which increased by 36% to RUB 73 billion. A major change on the funding side was a drastic reduction of deposits from the CBR (by RUB 48 billion to less than RUB 4 billion), which reflected PSB’s policy of reducing the dependence on anti-crisis funding from the state. The improvement in the capital adequacy ratios was backed by an 8% reduction in risk-weighted assets.

As one of the few private-sector Russian banks that continued to extend loans to customers throughout the crisis, PSB benefited from the tightening supply in the credit markets: the net interest margin increased, enabling the Bank to achieve a solid 36% YoY growth of net interest income, despite a 5% reduction in net loans and the increased cost of funding. Fees and commissions also displayed a healthy growth, driven largely by the documentary transactions (i.e. guarantees and letters of credit) and foreign currency operations. Although PSB avoided large-scale layoffs, cost-cutting measures taken by the management led to a significant improvement of the cost-to-income ratio to a commendable level for a bank with a nationwide branch network and a substantial customer base in retail and SME segments.

“H1 2009 was one of the most difficult periods for PSB and the Russian banking sector as a whole”, comments Ms. Alexandra Volchenko, Senior Vice-President and Head of “Finance & Risks” block at PSB. “Borrowers’ worsening financial standing, combined with tight credit and the severe economic downturn, resulted in rapidly increasing levels of NPL both in retail and corporate lending, and associated provisioning charges that consumed the bulk of PSB’s operating income. Although we anticipate a further growth in NPL and provisioning in H2 2009, we nevertheless believe that PSB’s inherently efficient banking operations backed by strengthened credit risk management and financial controlling will allow us to weather the crisis with minimal losses, maintain leadership in the areas of our strategic focus and solidify our client base”.