Profit of Retail Banks Fell Below the Level of 2008 Crisis

The past 2015 year turned out for Russian retail banks to be worse than the crisis year of 2008: their profit is two times lower than it was then. For major private and state banks this year also turned out to be difficult

Three leaders

Profit of retail banks in 2015 amounted to 4.7 billion rubles, which is 2.5 times less than in 2014, and ten times less than in 2012, when monolines showed the highest results. ‘In the past year retail banks faced a perfect storm: the crisis of over-indebtedness of the population has come out, and banks have already reached 2014 with significant problems with the assets quality. And then the economy slowed down, the Central Bank raised the rate, and funding costs increased, which significantly worsen the profitability of portfolios,’ says Analyst at Fitch rating agency, Dmitry Vasilyev.

Only three retail banks managed to show a profit: Russian Standard Bank, which received donations from the shareholder and the capitalization from the government, Sovcombank, which earned on successful investments in securities, and Tinkoff Bank, which saved on operating costs.

Russian Standard Bank, which showed the biggest profit – 16.5 billion rubles, have been in the spotlight throughout the whole year. After having in 2014 a record loss of 15.9 billion rubles and facing a reduction of capital in half – from 33 billion to 16 billion rubles, the bank was on the verge of a violation of basic capital adequacy requirements. The owner of the bank, Rustam Tariko, capitalized Russian Standard Bank twice through the shares of his own alcohol company – by 4.9 billion rubles in May and by 9.35 billion rubles in August.

‘Donations’ from the shareholder were not enough, and the financial position of the bank was fixed by the restructuring of subordinated Eurobonds, which earned it another $370 million. At the end of the year, Russian Standard Bank also received from the government federal loan bonds for 5 billion rubles in order to increase capitalization.

‘The restructuring of Eurobonds was also formalized as a grant aid from the shareholder, so the bank showed a profit. But without all these injections, Russian Standard Bank, most likely, too, would be unprofitable,’ said Moody's Analyst Alexander Proklov. According to financial statements, income from free received property amounted to 43.9 billion rubles (for comparison, income from the core business amounted to 49.2 billion rubles).

Sovcombank, which earned 9.9 billion rubles, received most of its profit due to transactions with securities, which the bank bought early last year when prices were low, Vasilyev highlightes. In addition, the bank chose a very successful business strategy, involving pensioners as customers. ‘We work in a slightly different segment than other retail banks: lending to older people, retirees, who are more disciplined in debt service, they are more responsible when making lending decisions,’ told to RBC the Chairman of Board at Sovcombank, Dmitry Gusev.

Tinkoff Bank, which showed a profit of 3 billion rubles, earned through better assets quality, Vasilyev says. ‘The quality of Tinkoff Bank's assets was slightly better than that of its main competitors, the deterioration was not as dramatic as of Vostochny Express, Home Credit and Finance Bank, and others. In addition, the bank's assets show higher profitability including due to commission income: cash withdrawals from credit cards, fines, life and health insurance of borrowers and so on,’ he explains. Moody's Analyst Peter Paklin adds that Tinkoff Bank traditionally has low operating costs due to the lighter model, where the bank operates without opening branches.

Hard year

The business model of retail banks is now in crisis: consumer demand, retail sales, real incomes are falling. There is almost no hope for recovery, so most likely, 2016 will also be very difficult for such banks, says Proklov. ‘The main positive factor will be reduction of the funding cost. This has supported the financial performance of banks at the end of last year, but only at the expense of this, banks, which show the loss, are unlikely to be able to go into profit,’ he says.

The profitability of retail banks this year will depend on changes in the assets quality, Vasilyev notes. He reminds that the rate of arrears growth slowed at the end of last year. ‘Firstly, the debt load of the population has reduced. Secondly, banks have moderated their appetite for risk and tightened lending standards. And thirdly, at the end of the year retail lending traditionally has better results than at the beginning: in November-December people take loans to buy something, and in January due to the long holidays the delay increases, so January is likely to be unprofitable for retail banks in 2016 as well,’ he says, noting he does not expect any improvement in assets quality in 2016.

‘The tightening of standards and requirements for borrowers affected the quality less than expected, it was largely smoothed by the difficult macroeconomic situation, when people's incomes are falling, the exchange rate is jumping, uncertainty is growing, etc.’ says Vasilyev. According to him, the loss of the sector in 2016, most likely, will be at the same level as in the past year.

Large private banks

Among major private banks, the best result for the 2015 showed Alfa Bank: its profit after tax amounted to 49.6 billion rubles. The bank was able to show the result at the level of 2014 (48.8 billion rubles). Alfa Bank's interest margin has decreased compared to the 2014 – 60.5 billion against 71.4 billion rubles. However, a smaller amount of formed reserves compared to the previous year has allowed them to show the same profit, says Senior Analyst at NRA, Egor Ivanov.

Promsvyazbank received profit as of 2015 almost 67 times greater than of 2014 – 10.95 billion rubles against 163.9 million rubles. In May and November 2015 the shareholders increased the bank's capital through property contribution. By the standards of Russian Accounting Standards (RAS), such assistance is shown as profit, says S&P Analyst Irina Velieva. In the 4Q, the bank received from the shareholders almost 16 billion rubles, and overall for 2015 – 29.6 billion rubles, says Ivanov.

Binbank has more than doubled its profit compared with the 2014 year, to 4.5 billion rubles. A positive impact on the Binbank's result had foreign currency transactions, says Velieva. According to financial statements, the margin of the purchase and sale of foreign currency amounted to 3.6 billion rubles. The margin of the revaluation of securities, funds in foreign currency, precious metals – 12.6 billion rubles.

Moscow Credit Bank (MCB) has lowered profit compared to the 2014 year almost in twice, to 3.9 billion rubles. The interest margin of the bank was slightly higher than in the previous year – 28.6 billion against 22.2 billion rubles. At the same time, in 2015 the bank almost doubled its reserves in comparison with the previous year, indicates Ivanov. MCB is one of Transaero's creditors; RBC previously wrote that the airline owns to the bank 7.5 billion rubles.

The most significant fall in profit showed Otkritie FC – of more than four times. In 2015, the bank received 2.3 billion rubles of profit, a year earlier – 10.6 billion rubles. The bank has significantly increased reserves and interest expenses, Velieva says. According to the bank's press service, in 2015 Otkritie FC has formed four times more reserves than in 2014 – 40 billion against 9.8 billion rubles; interest expenses at the same time increased from 57.4 billion to 146.1 billion rubles.

‘In 2015 all banks mainly earned on one-off income: currency revaluation, operations with securities, property contribution. Net interest income of most of banks has shrunk; in addition, it was necessary to form substantial reserves,’ says Velieva.

At the end of the year, the result of one major private bank – Uralsib – is unknown. On the website of the Central Bank financial statements are only available for the first three quarters of 2015. Then the loss of the bank amounted to 5.2 billion rubles.

State banks

At the end of 2015, only three state-owned banks managed to become profitable: Sberbank, VTB, and VTB24. According to financial statements, Sberbank got 236.2 billion rubles of profit, VTB – 48.5 billion, VTB24 – 461 million rubles. Rosselkhozbank loss amounted to 69.2 billion rubles, Bank of Moscow – 62.8 billion rubles, and Gazprombank – 34.3 billion rubles.

The profit of Rosselkhozbank, Gazprombank and Bank of Moscow is ‘eaten’ by reserves, says S&P Analyst Sergey Voronenko. The main drivers of losses for state-owned banks in 2015 were contributions to reserves, the analyst notes. ‘Most of the reserves on already identified problems accrued in 2015, but we do not rule out further deterioration of assets in 2016, as a result of which the banks would continue to build up reserves,’ says Voronenko.

As for VTB and VTB24, much more important results of the group in accordance with IFRS, which are purified from intra-group transactions, because, according to the expectations of S&P, in 2015 the group will have a financial result close to zero, says Voronenko.

According to Senior Analyst at Rus-Rating, Larisa Makarenko, VTB's profit is largely formed by reducing allocations to reserves. So, in 2014, a net expenditure on creation of reserves amounted to 124 billion rubles, and in 2015 – 72 billion rubles, says the analyst. Plus, an effect on VTB's profit had unstable factors, such as a positive result from non-deliverable forward transactions (42 billion rubles) and a positive revaluation of securities (12 billion rubles), says Makarenko. When calculating these indicators, the own methodology of Rus-Rating has been used. In VTB24 the influence of unstable factors on profit is not so noticeable, and the final results are mainly due to the efficiency of direct banking, emphasizes the analyst. At the same time, the press service of VTB said that given calculations are incorrect. ‘The positive revaluation of securities brought to the bank 7.6 billion rubles, and the loss from non-deliverable forward transactions decreased by 6 billion rubles, from 57.3 billion to 51.8 billion rubles,’ commented on the calculations of Rus-Rating in VTB.

The common factor negatively affecting profitability of VTB24 and VTB was a decrease in net interest margin as a result of the credit market contraction, the growth of credit risks, increase in the cost of resource base, concluded Makarenko. As commented in the press service of VTB, the improvement of financial result for 2015 (in 2014 the bank earned 20 billion rubles) is due to the growth in interest and commission incomes by 49.5%, from 439.9 billion to 657.6 billion rubles, compared to the same period a year earlier. ‘These results are related to the increase in business volume. For 2015 the return on equity amounted to 4.3% per annum,’ said the spokesman.

As for Sberbank, its large business scale allows to attract the best customers, says Promsvyazbank Analyst Dmitry Monastyrshin. ‘Because of this, and also due to the fact that Sberbank traditionally had a high reserve ratio, in 2015 the bank suffered smaller losses on loans. Also a positive impact on the financial result had the possibility to attract cheaper than the competition, funding,’ said the analyst.

RBC, 26/01/2016