Bank VTB PAO

LSE:VTBR

Earnings Call Transcript

[Operator]

Good day, and welcome to the VTB Group First Quarter 2019 IFRS Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Leonid Vakeyev, Head of Investor Relations. Please go ahead, sir.

[Leonid Vakeyev, Managing Director, Head of Investor Relations]

Thank you. Good afternoon, everyone, and welcome to the call. Today, we have Mr. Pianov, member of the management board and Chief Financial Officer. And we will start with a short overview of results, how we see them, and then we will be taking questions from you. Please refer to the presentation, which has been uploaded on the website. And we start with Page 1.First of all, we believe that the net profit of RUB 46.5 billion is absolutely consistent with our RUB 200 billion full year guidance given the relatively low first quarter and our expectations for the rest of the year. We continue to build a stronger franchise in retail, just in line with our strategic priorities. And in the first quarter, we outperformed the retail market, both in terms of lending and funding.Corporate growth was under certain pressure. And in fact, the balance sheet numbers contracted, although the main reason was FX moves and ruble strengthening and the organic contraction was moderate. Despite this hiccup, we expect the full year growth to be consistent with our business plan and guidance based on the existing strong corporate pipeline that we have.We continued to demonstrate exemplary results in cost management. The cost base reduced by almost 4% year-on-year. That was driven by both realized synergies and the changes in the group structure, i.e., the consolidation of Post Bank and VTB Insurance. Cost-to-assets ratio improved by 30 basis points year-on-year. Cost-to-income ratio was 44%, which was mostly driven by the lower revenue base in the first quarter.Margins remained under pressure and net interest margin was 3.2%, which was driven by both reducing yield and assets and higher cost of liabilities quarter-on-quarter. Cost of risk was below normalized level at just 0.5%, which was the result of provision releases in several large corporate loans. Otherwise, it would have been closer to the normalized level.And finally, we believe that the current capital adequacy levels, both under IFRS and under Russian standards, which will be sort of supported by lower dividend payment this year, as you know, are comfortable enough to ensure that we can grow business as planned.Now going to the next slide and looking at the decomposition of the net profit. There was a year-on-year decline of net profit and return on equity, but that is somewhat artificial because first quarter of last year was exceptionally good and above normalized level.In first quarter of this year, out of RUB 137 billion operating income, 76% was net interest income, 16% was net fee and commission income and 8% was other operating income, which includes revenues from FX, financial markets and other lines. Thus, over 90% of revenues came from core banking activities. As I said, these numbers, net profit of RUB 46.5 billion and return on equity of 12.3% make us comfortable that we will deliver on the full year guidance of net profit of around RUB 200 billion.In terms of business growth, we clearly outperformed the industry in retail, as I said. Our retail loans grew 6% versus 4% for the market. And we've further expanded our market share by 70 basis points more to 18.4%. VTB's retail deposits were 4% up while the market stagnated and overall contracted by 1%. VTB's market share in retail deposits also continued to improve and reached 14.8%, 80 basis points year-to-date up.On the corporate side, there was a different picture. A large -- a few large corporate loans matured, and the total corporate loan book contracted by 4% versus 1% decline for the market. However, adjusted for FX moves, the contraction of our corporate loan book was moderate, just 1%.Our market share and corporate loans dropped slightly to 18.5%. The similar story was for the corporate funding. Total balance declined by 7% or 4% adjusted for FX changes while the market was near flat. As a result, our market share was 1.3% down to 19.4%.At the same time, our current corporate pipeline looks pretty strong, and we are going to catch up with the corporate lending volumes in the second quarter and beyond. And we also feel comfortable about our business plan and single-digit growth, around 5% growth for the full year in the corporate loan book.On the funding side, we actually believe it is very possible that we structurally continue to gradually replace certain portion of corporate funding with retail funding, which is consistent with our long-term strategic objectives. Costs -- and the cost side continues to be a positive story. We generally don't target cost deflation for the full year as we are quite heavily investing into technology and digital franchise.However, in the first quarter, there was 4% cost reduction year-on-year and a considerable improvement of cost-to-assets ratio to 1.7%, 30 basis points down year-on-year. Cost income ratio went up, but that was mostly a function of lower revenue base, and we continue to target around 40% cost-to-income ratio for the full year.Synergies from intergroup mergers did have a positive impact. And in 2019, we are going to see full effect of VTB24 merger on the cost base because if you remember, last year, we only realized about half of annualized synergies. And this year, it's going to be around RUB 15 billion, full amount of synergies.Also, the consolidation of Post Bank and VTB Insurance reduced our normalized cost base, but that was partly offset by the consolidation of 3 acquired banks Vozrozhdenie, SarovBusinessBank and Zapsibcombank. As you see from the right chart on Page 4 of the presentation, these 3 banks collectively have 8,700, almost 9,000 employees.Of course, the important story of the first quarter was net interest margin. Net interest margin was indeed under pressure and dropped to 3.2% in the first quarter. This decline was consistent with what's been happening with the rest of the market or at least with other major banks. And while yields on interest-bearing assets were fairly stable for the third quarter in a row, as you can see from the left bottom chart, the cost of interest-bearing asset and liabilities continued to grow, as you can see from the bottom right chart.We believe that the net interest margin bottomed out in the first quarter and will be improving towards the end of the year, starting from the second quarter. This improvement will be based on repricing of more expensive deposits raised in the second half of last year, and the rates we are paying on new deposits now are lower. And it should be also supported by the expected easing of monetary policy and 1 or 2 cuts of key rate by the Central Bank of Russia during the rest of this year.Ongoing changes of business mix and growing proportion of retail loans in total loan book will also contribute to margin improvements. Still, given the first -- the low first quarter level, we have revised our net interest margin guidance. And while we've previously guided net interest margin on the level of last year, i.e., around 3.9%, we are now downgrading our guidance and expecting full year net interest margin at around 3.5%.Cost of risk in the first quarter of this year was 0.5%, which is definitely below the normalized level, as I have already said, and this was achieved because of provision releases in the CIB segment related to several large corporate loans. The total provisioning ratio was 10 basis points up to 6.5% of total loan book. NPL ratio was also 10 basis points up to 5.8%, mostly because we only had moderate amount of write-offs in the first quarter. Coverage ratio remained flat at 112%.Provision releases were largely a one-off effect, and we definitely expect high cost of risk for the rest of the year. At the same time, our view here is sort of benign, and we have dealt with major issues in the corporate loan book last year. And on the retail side, we also don't see material threats coming up. The quality of the mortgage portfolio remains excellent. So based on all these factors, we improved our cost of risk guidance for the full year to around 1.2%.Capital levels. As you know, this year, we are paying less dividend as we need to preserve regulatory capital to comply with tightening requirements. In the first quarter, both our IFRS Basel total capital ratio and Russian regulatory Basel total capital ratio also called N20 were 20 basis points up. Our model shows that with expected profitability, we will be fully compliant with regulatory ratios and able to fund our planned and guided growth targets towards the end of this year and beyond.And finally, our updated guidance. I've already touched up on that. So just to reiterate that compared to previously guided numbers, we now expect lower net interest margin at around 3.5% but also lower cost of risk at around 1.2%, same growth levels, in line with the market for corporate loan book. And we expect the market to be at around 5% and above the market for retail loan book. And we expect the market growth to be up to 17%.We also target the same efficiency ratio of around 40%, as we have done previously. And most importantly, as I've already said and I want to reiterate it once again, we remain fully confident in our net profit full year target of around RUB 200 billion and in our ability to achieve that.Now we are ready to take questions from you.

[Operator]

[Operator Instructions] We will now take our first question from Alan Webborn of Société Générale.

[Alan Ramsey Webborn, Equity Analyst]

What's the source of the other income on the new acquisition part of the divisional report incoming? You've been clear as to -- that's the new businesses coming in, and we can see the sort of net interest income. But that's quite a big, RUB 5.5 billion, of other income in that divisional split. And I'd just be interested to know what that was.There also seems to be quite a big sort of RUB 9.7 billion of other operating expense in the Retail Business, which I'd also like -- be happy if you could just tell me what that is. That was 2 questions.I was also sort of -- there still seems to be some insurance income noise in the consolidated P&L. And I just wondered why we're still seeing that. I mean obviously, my mistake, but with the deconsolidation, will that eventually disappear or is it because of when you deconsolidated? I'd just be happy to know what that is. And that's it.

[Leonid Vakeyev, Managing Director, Head of Investor Relations]

Thank you for the questions, and we will be answering them one by one. So first of all, source of our income that you see on the P&L line. And indeed, it's a hefty piece and that is basically a one-off effect. And this is related to the acquisitions of the banks that we have done, acquisitions of the 3 banks that we have done recently. And this is basically a negative goodwill, if you can call it like that.

[Dmitriy Pianov, Member of Management Board]

It's called -- Alan, it's Dmitriy. It's called bargain purchase from Zapsibcombank from one of our acquisitions in the first quarter. It's bargain purchase. We paid less than net assets from -- coming from acquired bank.

[Alan Ramsey Webborn, Equity Analyst]

Okay. Understood.

[Leonid Vakeyev, Managing Director, Head of Investor Relations]

In terms of your second question, the RUB 9.7 billion other operating income in retail, it's predominantly the costs under the various loyalty programs that we have. So this -- you can treat this as sort of price of customer loyalty and customer acquisition. And that is the amount that we expect to more or less continue at least for the foreseeable future.And in terms of insurance income, that -- we probably have to apologize for some confusion here. And probably in the next reports, we will have to make it clearer because this has nothing to do with VTB Insurance. VTB Insurance has been fully deconsolidated. What you see on this line here is basically the costs that we see on the VTB pension fund.And the reason for that is that under IFRS, it is treated under the same standard, IFRS 4, I believe, yes. And so this has nothing to do with VTB Insurance. These are the costs of the premiums that are payable under the VTB Insurance -- VTB pension fund business that we have, which is quite significant. And it is offset by the investment revenues that are reflected in other relevant business lines.

[Alan Ramsey Webborn, Equity Analyst]

Okay. That's helpful.

[Leonid Vakeyev, Managing Director, Head of Investor Relations]

Yes. But I agree, this is not fully transparent here. And I think in the next reports, we will be showing it clearer.

[Operator]

We will now take our next question from Andrzej Nowaczek of HSBC.

[Andrzej Nowaczek, Analyst]

I have a question on local capital ratios. Can you tell us what N20, N20.1 and N20.2 were as of the end of March?

[Leonid Vakeyev, Managing Director, Head of Investor Relations]

Andrzej, the reason -- we gave you the estimate of N20, but we didn't give you the numbers for N20.1 and N20.2 because officially, they have not been yet finalized and filed. The filing date for the Central Bank is somewhat later, and it will be actually tomorrow, right? And this is why -- we gave our preliminary estimate here. We don't believe the final number, which will be filed to the Central Bank, will be materially different. But we will send you the -- also, other interested parties as well, the exact numbers tomorrow.

[Andrzej Nowaczek, Analyst]

Sorry, Leonid. You didn't actually give the exact number. You gave us the change from Q4 '18, right? You said 20 bps.

[Leonid Vakeyev, Managing Director, Head of Investor Relations]

Right. But if you refer to Page 7 of the presentation, there is this estimate of N20. It is 11.6%. And like I said, the official number will be filed tomorrow. We don't believe it will be materially different from this number.

[Operator]

[Operator Instructions] We will now take our next question from Andrey Pavlov-Rusinov of Goldman Sachs.

[Andrey Pavlov-Rusinov]

I've got a couple of questions. First of all, on your disclosure of the asset quality, essentially, if I'm not mistaken, you have removed the -- some of the disclosure from the presentation regarding the stage 3 loans. And also, I can't find them in your full IFRS financial. So could you please disclose what is the share of the stage 3 loans in your overall portfolio? And what is the total coverage -- total and specific coverage of these loans?

[Leonid Vakeyev, Managing Director, Head of Investor Relations]

Andrey, indeed, that was the first quarter financials, and they are normally kind of a little bit more concise compared to 6 months and full year. This is why we don't have disclosure there. But we are happy to give these numbers to you now. Or if you like, we can also follow up with you and send you the numbers.Basically, stage 1 -- at the end of March 2019, stage 1 was 81.8%, stage 2 was 8.9%, stage 3 was 8.4% and POCI was 0.9%. In terms of allowance ratio, which was also part of your question, the allowance ratio for stage 1 was 0.9%, allowance ratio for stage 2 was 11.6%, allowance ratio for stage 3 was 55.6% and allowance ratio for POCI was 20.1%. But as I said, we can follow up with you and give you -- or to anyone who's interested, give these numbers separately.

[Andrey Pavlov-Rusinov]

Okay. Great. Also, my second question is the follow-up on your fee income and essentially on your kind of retail loyalty expenses. As far as I understand, there are several items that are impacted on your P&L with the cash-backs and other retail loyalty programs.Essentially, last -- kind of for the full year of financials last year, you have netted some of the expenses against the gross fee income. But this quarter, I see quite a bit growth on the fee expense for the settlement transactions. So is it also related to cash-backs or it's something different? And also, can you maybe just give more color how you allocate this loyalty expense between the fee income, fee expense and also other expense of the Retail Business?

[Leonid Vakeyev, Managing Director, Head of Investor Relations]

Andrey, it's quite a complex system, basically. And we -- generally, it's part of our kind of customer loyalty setup. We share the fees that we receive from various payment systems, et cetera, et cetera, with our clients. So the shared portion of this is netted against fee and commission income. If we have to pay extra loyalty bonuses, this is part of other expenses in retail. So it is a complex system, you are right.

[Andrey Pavlov-Rusinov]

And basically, just the first part of my question about the fee expenses and settlement transactions. Is it also related to cash-backs or something else?

[Leonid Vakeyev, Managing Director, Head of Investor Relations]

There is -- this is basically usual transactional activity. There is nothing specific there. And if you see growth there, that reflects basically growing number of payments, growing number of process, customer transactions, et cetera.

[Andrey Pavlov-Rusinov]

Okay. And just my final question about your guidance. Basically, it's pretty much appreciated that you keep your overall net income guidance for this year. But given you made some changes to the components like you basically downgraded your NIM guidance by around 50 basis point, also lower the -- your cost-to-risk guidance by a bit smaller amount by 30 basis points, is there anything else in your budgeting that you're also changing in order to keep the net income guidance intact?Especially, could you also maybe share some thoughts about what you factor in for the other incomes, maybe some kind of security gains or some revelation gains you expected during the year, if anything at all and if that impacts your overall guidance being unchanged in the bottom line?

[Leonid Vakeyev, Managing Director, Head of Investor Relations]

Andrey, first of all, in terms of other income, the last part of your question, we don't expect something extraordinary. And I think our current view is that if you take the first quarter and annualize that, that should be close to the full year results that we have in our budget.So basically, as I said, the other income -- or the other income other than net fee and commission, like in the net interest income, is 8% of our total operating income in the first quarter. And I think it's our target to keep it below 10%. So this is something that is part of our budget, at least.With regards to the first part of your question, indeed, what helped us to keep our full year target intact was sort of parallel move. On the one hand, yes, we acknowledge that given the weak first quarter and the recovery of net interest margin, which is not going to be rapid, but it's going to be rather gradual, we would rather have net interest margin for the full year at 3.5%, which also factors in 3.2% net interest margin for the first quarter.At the same time, we also acknowledge that when we gave guidance of cost of risk at 1.5% or up to 1.5%, that was probably overly conservative. And we now -- and our kind of lighter and more benign current guidance of around 1.2% is based on few things. On the one hand, we see generally positive picture in retail. And like I said, mortgages remain excellent, and we don't see particular negative development in the cash loans portfolio.On the other hand, on the corporate side, we did have releases in the first quarter, which will impact the full year cost of risk for CIB or the corporate loan book. But what we also did over the past few months and in the end of last year, we did -- we had a repayment of some large corporate loans, which were higher risk.This is why we feel kind of more benign now in terms of our risk profile in the corporate loan book, especially CIB corporate loan book. And this is why that also gives us grounds to guide and expect lower cost of risk for the full year. So the combination of these factors brings us to basically confirming our full year RUB 200 billion net profit guidance, and it makes us comfortable that we will be able to sustain that.

[Andrey Pavlov-Rusinov]

Okay. Very comprehensive. And maybe, if I may, just very final small question about your cost of risk in corporate segment in the first quarter. You mentioned, basically, that's driven by some releases. But what was the kind of normalized corporate cost of risk if adjusted for those releases?

[Leonid Vakeyev, Managing Director, Head of Investor Relations]

Andrey, the normalized cost of risk, if you take away these provision releases, would be up to 1%, depending on how you measure it. It varies, let's say, between 0.8% and 1%. It depends on what kind of corporate portfolio you're looking at. You can look at either kind of large CIB corporate loans or you can look at the whole universe of corporate loans, which includes mid-corporate and small businesses.

[Operator]

[Operator Instructions] We will now take our next question from Elena Tsareva of BCS Global Markets.

[Elena Tsareva, Senior Banking Analyst]

My question is a bit of like follow-up from the previous question. On other income, are there sources of income for this year? So am I right that I understand you are not budgeting for this year any kind of proceed from your noncore assets like you have like [ tier 2 marketing ] or something else? Would you still confirm that you don't expect just in your guidance any particular increase?

[Leonid Vakeyev, Managing Director, Head of Investor Relations]

Elena, thanks for the question. It's an important thing. And so I said earlier that we don't expect other income collectively to be above 10% of our total operating income. Of course, this is the estimate which is true under kind of normalized scenario. Of course, if you see some extraordinary market moves, we cannot rule out that we could have large results on the secs line or securities line. But under the kind of normalized scenario, like I said, we don't expect anything profound there.In terms of revenues from potential disposal or revaluation of other assets, noncore assets, nonbanking assets that we have on the balance sheet, we don't have significant numbers for that in our current budget for this year.

[Elena Tsareva, Senior Banking Analyst]

Understood. And just a bit of a strategic question. Finally, when you have already consolidated all the 3 banks you acquired, what is the strategy for the banks? And what -- maybe you expect any new deals where you feel comfortable?

[Leonid Vakeyev, Managing Director, Head of Investor Relations]

Yes. Well, basically, I think if you look at the track record of VTB and if you look at our strategy, it's quite clear that our purpose is to have single bank, single brand, single platform for all categories of clients in Russia. And of course, we are very cautious about not losing clients. We are very cautious about keeping clients of this bank comfortable, but we also understand that for these -- for clients of these banks, being banked by banks, which are part of larger VTB Group, it gives them additional opportunities. It gives them access to new products, to new expertise. So that would be ultimately beneficial for them. But like I said, we're also very cautious not to make them uncomfortable and nervous and to make this journey as comfortable for them as possible.So ultimately, as we have said many times before, the purpose is to consolidate the businesses of these banks into VTB, and we currently plan that for 2020, i.e., next year. How exactly it will be happening, what legal format we'll be taking, it's still yet to be decided. There is corporate procedure for that. There are due announcements for that and there could be different options. But ultimately, the purpose is to consolidate the businesses and the clients onto VTB.

[Elena Tsareva, Senior Banking Analyst]

And definitely -- and just very -- like a small question. So previously, you published like abbreviated monthly IFRS, but I think there was some -- like April numbers which you were missing also, so [indiscernible] but February. So are you going to publish your amounts, abbreviated IFRS, or no longer?

[Leonid Vakeyev, Managing Director, Head of Investor Relations]

Yes. We have not abandoned that, to be very clear. In the beginning of this year, we had few things happening. On the one hand, we had consolidation of 3 entities, which created a lot of additional workload. Although their size may be relatively small, but still, the workload was significant. And we also had a specific story on the kind of Russian accounting system when we moved the Russian accounting system to IFRS -- to IFRS 9, sorry.

[Dmitriy Pianov, Member of Management Board]

For the Russian interpretation of that.

[Leonid Vakeyev, Managing Director, Head of Investor Relations]

Yes, to the Russian Central Bank interpretation of IFRS 9. So this all created additional workload and a lot of various work streams. This is why we did indeed publish the monthly IFRS numbers recently, but we will resume that practice further on.

[Operator]

With this, we will conclude our question-and-answer session. And now I would like to turn the call back to Leonid Vakeyev for any additional or closing remarks.

[Leonid Vakeyev, Managing Director, Head of Investor Relations]

[Foreign Language] Thank you very much, everyone, for being on the call. As usual, you're very much welcome to reach out to Investor Relations team at VTB with any questions or requests you might have. With that, we wish you a lovely summer, and goodbye.

[Operator]

Thank you. This concludes today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.