In spite of the challenging economic environment in 2009, Sberbank generated robust operating income with simultaneous containment of operating costs. Operating income before provisions grew 30.2% y-o-y to RUB647.2 bn. Net interest income, which increased by 36.4% y-o-y to RUB456.8 bn, was the driver of this growth.

Interest income rose 33.5% y-o-y to RUB768.4 bn, outpacing growth in interest expense. The increase in interest income was largely due to income earned from corporate lending (+42.1% y-o-y), while contribution from interest income in the retail segment was less pronounced (+4.4% y-o-y) on the back of overall retail lending contraction.

The Bank earned a meaningful interest income (1.7 times higher) on a more-than 2-fold growth of its securities’ portfolio. Hence, the Bank diversified income sources, with income from the securities’ portfolio increasing from 5.6% to 7.2% of total.

Interest expense grew 29.5% y-o-y to RUB311.6 bn, driven by funding costs in the inter-bank and retail segments. Interest paid on funds from other banks increased 3.9-fold y-o-y which was largely due to the subordinated loan worth RUB500 bn raised from the Central Bank of Russia (CBR) in late 2008. Growth in interest paid on retail deposits (+20.6% y-o-y) resulted from both increased volumes and higher funding costs in response to the crisis. In the meantime, interest expense related to corporate funds decreased (-4.4% y-o-y).

Net fee and commission income grew 10.0% y-o-y to RUB143.1 bn, which was primarily due to commissions generated on settlement transactions, lending to corporate clients, current account transactions, operations with banking cards, operations with foreign currencies and precious metals, transactions with securities, banking guarantees. Subdued consumer demand for retail loans reduced fee and commission income on lending to individuals. Furthermore, fee and commission income declined on cash transactions with individuals. The volume of commissions charged on documentary operations with legal entities, budget accounts’ services, currency control operations, depositary and agent services remained virtually unchanged from 2008.

Net trading income increased by 66.9% y-o-y to RUB42.2 bn on the back of gains on trading transactions with securities and operations with precious metals.

With strict cost control in focus in 2009 the Bank reduced operating expenses by 2.8% y-o-y to RUB220.0 bn. Cost-cutting was led by reduction of staff-related costs within optimization of organizational structure and restrained growth in general and administrative expenses. Cost to income ratio stood at 34.0% vs. 45.5% in 2008.

The Bank adheres to conservative credit risk management. In 2009, the Bank allocated RUB383.9 bn in provisions, including provisions for loan impairment of RUB361.5 bn, which is 3 times the level of 2008. The Bank’s operating income was the only source for provision creation and the regulatory capital was unaffected.

Provision formation reduced the Bank’s profits:

• Profit before tax for 2009(without events occurring after the balance sheet date) amounted to RUB43.3 bn (vs. RUB143.5 bn and RUB136.9 bn - without and with events occurring after the balance sheet date, respectively);
• Net profit for 2009 (without events occurring after the balance sheet date) totaled RUB36.2 bn (vs. RUB108.2 bn and RUB109.9 bn - without and with events occurring after the balance sheet date, respectively).

The Bank's assets increased by 5.8% y-o-y to RUB7,110 bn primarily due to expansion of the corporate loan portfolio and growing investments in the securities portfolio. However, provision accumulation constrained growth of the net loan book and consequently the Bank’s assets.

Sberbank extended lending to the "real economy" – granting up to RUB4.0 trln worth of loans to Russian companies in 2009, including about RUB420 bn in December. The corporate loan book increased by 6.7% y-o-y to RUB4,249 bn (starting from 1 August 2009, Sberbank records assignment agreements with deferred payments (hereinafter referred to as "assignments") as a part of its corporate loan portfolio according to the Bank's internal accounting methodology).

To encourage lending activity, the Bank has been lowering rates on loans in all currencies since 2Q 2009. However, credit demand remains weak on the back of subdued business activity which affects loan portfolio growth.

Furthermore, given that Russian blue-chip companies regained access to foreign capital markets, the Bank has been facing significant loan prepayments. In November-December 2009, loan prepayments exceeded new loan intakes, leading to the loan book reduction of about RUB100 bn.

However, comparable data on the Russian banking sector for 11M 2009 suggest that Sberbank outpaced the sector in terms of corporate loan book growth ytd (6.9% vs. 1.3%). Hence, Sberbank’s share in aggregate corporate loans increased from 30.5% to 32.2%.

Given sluggish consumer demand for loans on the back of falling disposable income, the Bank’s retail loan portfolio shrank by 6.9% y-o-y to RUB1,170 bn. To expand consumer credit, the Bank has been reversing the restrictions introduced in response to the crisis in the fall of 2008, including lending in foreign currencies, lowering initial payments on mortgages and car loans, extending credit limits and tenures on some loans, etc. In December 2009, the Bank reduced interest rates in foreign currency on a number of consumer lending programs, introduced new credit products for mortgage loan restructuring and amended terms of agreement for “Trust” loans.

As a result, signs of improvement emerged in the retail segment, with portfolio q-o-q contraction slowing from 3.8% and 2.9% in 1Q 2009 and 2Q 2009, respectively, to 0.3% in 3Q 2009, and to 0.03% in 4Q 2009. December saw a 1% m-o-m growth of retail portfolio in most of the regions.

The Bank plans to render consumer loans more affordable by easing credit requirements and new product offerings. With this purpose in view, the Bank has already resumed mortgage lending in foreign currency and cut rates on a number of loans for participants of payroll programs at the beginning of 2010.

Source: Sberbank
Date: 30.01.2010