Russia's VEB tale of woe writ large in its 2015 IFRS accounts

By Ben Aris in Moscow April 26, 2016

Russia's state-owned de facto development bank Vnesheconombank (VEB) released its 2015 IFRS results on April 25, painting a clear picture of the lender's pain and woe in recent years.

Russia's entire banking sector is suffering, but the state-owned banks are causing the most problems as most of them are rotten to the core, as bne IntelliNews reported in its cover story of June 2015.

Russia's banking sector generated RUB26bn in pre-tax earnings in March and RUB109bn ($1.65bn) for the first quarter overall. However, the only functioning state-owned bank, retail giant Sberbank, generated RUB112bn of that alone, meaning the rest of the sector is losing money. VEB reported net income of only RUB15bn, which is an improvement of the massive RUB250bn of losses it reported in 2014, but the only reason its income was in the black was thanks to a huge RUB330bn government bail-out loan – three times the income Sberbank made.

Burdened by toxic assets from giant infrastructure projects in Russia and exposure in Ukraine, VEB is mired in up to RUB1.2 trillion ($17.8bn) in debt – ten times the income of the entire sector – and its previous boss was unceremoniously sacked earlier this year. A new management team was installed in February to "secure control over project realisation, carry out a thorough audit, sort out and restructure bad debt, and get rid of the burden of non-core assets", Interfax news agency reported on March 29.

If that wasn't enough, VEB is also under international sanctions, which has cut it off from cheap long-term financing via the international capital markets, and has been branded a major fiscal risk as Russia fights to balance its budget. Standard & Poor's forecasts the government will spend up to 0.3% of GDP on recapitalising the bank, assets of which reportedly equal around 9% of GDP.

But not straight away as the state doesn't have the kind of money VEB needs spare. The bank will get a RUB150bn ($2.2bn) injection from the government this year, Prime Minister Dmitry Medvedev said in March, while the government tries to find a fudge to offload its bad debt and rescue the good assets.

In the meantime, VEB has to soldier on as best it can. It added RUB220bn of new provisions in the fourth quarter of last year, increasing its bad loans provision ratio to "a rather concerning 23%", VTB bank said in a note. For comparison, the other struggling state-owned banks VTB and Gazprombank have bad loan provisions in the 7-8% range and neither of these banks are healthy.

VEB's ability to make money is also seriously impinged. The net interest income remained very low, while in 2015 its net interest margin (NIM) – spread between what it pays to borrow money and what it charges to lend money – was just 1.6% versus 2.5% and 2.0% for VTB and Gazprombank, VTB reports.

"Both fee and trading income were close to zero. The bottom line was supported only by the restructuring of deposits from the National Wealth Fund, which contributed RUB330bn to P&L and capital. The year-end total capital ratio was 11.7%," reports VTB.

The liquidity position of the bank remains decent and since it is still above the mandatory minimum capital adequacy level of 10%, the bank is not about to collapse. As of end December, VEB reported RUB975bn ($13.4bn) of capital, split almost evenly between cash and mostly equities, which have been doing well recently.

The bank's debt is also a problem, but a manageable one. Debt maturing within one year consists of $6.3bn of interbank loans and $3bn of bonds, which will somehow have to be refinanced. But the bank reported that in the first quarter of this year it has already received another RUB74bn ($1.1bn) of subsidies from the Russian budget for foreign debt redemptions; VEB is expected to receive a total of RUB150bn for this purpose in 2016. The bank also received RUB100bn of short-term budget deposits that have to be repaid by the year end to give it an extra cushion.

However, the government increasing exposure to the bank is simply concentrating more money in struggling state-owned banks at a time when the Central Bank of Russia (CBR) is successfully scaling back its support for the sector as a whole. CBR funding for the sector has been decreasing, with its share in liabilities dropping to 5.6% as of end of March from 7.2% as of end 2015 and a peak last year of about 15% of total assets. To put that into context at the height of the 2008 crisis the bank sector's exposure to CBR emergency funds reached a maximum of 3% of liabilities.

All this help is at best a stop-gap measure. The bank is earning next to nothing from its loan portfolio, which is already heavily provisioned because of all the bad loans in the portfolio that don't earn anything. However, the new management is expected to come with a plan to fix the problems by the middle of the year. This will almost certainly end up with a scaled-down bank with many of its best businesses taken away.

The state has already said it will remove from VEB management the Russian Direct Investment Fund (RDIF), Russia's de facto investment agency and state-owned private equity investment vehicle. Other businesses like the management of the state pension fund will probably follow. 

VEB financial statements summary, 2014-15, IFRS, R bln
  2014 2015 y-o-y 9m15 4Q15
Income statement        
Net interest income 100 67 -33 50 18
Provisions -314 -293 21 -72 (221
Fee income 8 9 1 6 3
Other operating income 43 3 -40 2 0
State subsidies -18 330 Ð 0 330
Operating costs -83 -101 -18 -64 (37
Net income -250 15 265 -133 148
Balance sheet        
Assets 3597 4382 785 3987 4382
Cash and securities 991 975 -16 1026 975
Net loans 2251 2580 329 2503 2580
Retail loans (gross) 78 87 9 82 87
Corporate loans (gross) 2806 3257 451 3066 3257
Retail deposits 132 162 30 Ð 162
Corporate accounts 509 642 133 603 642
Equity 378 480 102 325 530
ROAE -66.00% 3.50% 69.5 pp -50.50% 138.30%
NIM 2.60% 1.60% (1.0 pp) 1.60% 1.60%
Cost/income 54.80% 128.40% 73.6 pp 110.60% 177.50%
LLPs/gross loans 21.90% 22.80% 0.9 pp 20.50% 22.80%
Cost of risk 10.90% 8.80% (2.1 pp) 3.00% 26.40%
Total capital ratio* 14.30% 11.70% (2.6 pp) Ð 11.70%
Loans/deposits 450% 416% (34.0 pp) 522% 416%
Source: Company, Sberbank CIB Investment Research      

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