Vozrozhdenie Bank - 2Q09 results above expectations on lower provisions

Net earnings came in at RUB 256m for 2Q09, down 33.7% q/q and 70.8% y/y, above the consensus estimate of RUB 227m (source: Interfax). Better-than-expected result was mainly achieved due to lighter provisioning. Although the initial reaction of the market to the results was positive we view results as disappointing due to lower-than-expected core revenues and rising costs. We expect results to weigh on a sentiment towards the sector as the read-through for banks that have yet to report is negative (i.e. margin pressure and more rapid deterioration of asset quality).

Net interest income came in at RUB 2,052m for 2Q09, down 12.1% q/q but up 3.1% y/y, below the consensus of RUB 2,165m. The net interest margin (over average assets) despite the re-pricing of loans and deposits came down 72bp q/q and 42bp y/y to 5.97%. The loans-to-deposits ratio decreased further to 93.8% in 2Q09 from 103.3% in 1Q09 and 104.7% in 4Q08. Bank Vozrozhdenie managed further downward its loans (-3.1% q/q and -3.5% y/y), while deposits increased (6.8% q/q but down 4.7% y/y).

Non-interest income came in at RUB 1,173m for 2Q09, down 8.5% q/q and 4.6% y/y. Net fee income (up 5.4% q/q but down 10.8% y/y) was unable to offset somewhat expected weaker net FX gains (down 58.1% q/q) and net trading income (down 14.1% q/q).

Operating costs came in at RUB 1,522m for 2Q09, up 9.5% q/q but down 13.6% y/y. The key driver of higher total costs was depreciation (up 41.4% q/q) and expanses related to taxes (up 103.3% q/q). Vozrozhdenie continued to focus on optimization of its network, closing following 4 least efficient branches.

Net provisioning came in at RUB 1,249m for 2Q09, down 24.1% q/q, below the consensus of RUB 1.6bn. This equates to net provisions of 507bp (over average gross loans) in 2Q09, versus 663bp in 1Q09. The NPL ratio peeked to 7.3% in 2Q09 from 5.9% in 1Q09 and 2.7% in 4Q08, while provisioning coverage dropped further to 106.5% from 109% in 1Q09 and 143% over the period. Sustained high level of net provisioning had been expected, given the negative macroeconomic outlook, but the rapid pace of NPL formation was a surprise.