PROMSVYAZ : PSB Publishes Q1 2016 IFRS Results

Promsvyazbank (PSB) publishes consolidated condensed financial statements in accordance with International Financial Reporting Standards (IFRS) for the three months ended March 31, 2016, reviewed by PricewaterhouseCoopers.

According to Q1 2016 results, PSB delivered yoy improvements across a number of indicators. Indeed, net profit for Q1 2016 was RUB 0.3 bn, compared to a loss of RUB 2.0 bn for the same period last year. The result reflects not only a progressive recovery of the banking sector, but also bank's efforts to improve business efficiency and reduce risks.

PSB remains focused on high-quality borrowers, maintaining a reasonable balance between business growth and a justified conservative approach to risk assessment. PSB currently targets industrial customers that purchase foreign-made equipment for the production process upgrade purposes. In addition, PSB is expanding cooperation with customers from the agricultural, high-tech and IT industries.

Amid the trend towards saving, which characterizes the current market, PSB throughout Q1 2016 continued its policy of substituting expensive funding from the Central Bank and the interbank market, with customer account balances, which in the reporting period grew 2% despite the ruble recovery.

PSB continues to develop with a focus on transactional business growth and risk-free income, which led to an increase in net fee and commission income by 23% yoy. The growth was supported by a steady inflow of new customers in both the retail and SME segments.

Key Profit and Loss Statement Indicators

• Net profit for Q1 2016 totaled RUB 0.3 bn, compared to a loss of RUB 2.0 bn for the same period last year.

• Net interest income was RUB 6.8 bn, up 26% from RUB 5.4 bn for the same period last year.

• Net interest margin for Q1 2016 was 2.4%, up 0.3 pp from the last year result, but decreased compared to Q4 2015 (2.5%). Such dynamics was due to changes in PSB accounting policy, with conservative recognition of interest income on impaired loans, using the cash method, adopted since the beginning of 2016.

• Net fee and commission income increased by 23% yoy, to RUB 3.8 bn. The share of net fee and commission income in operating income was 34%, up from 27% for Q1 2015.

• Trading gain from securities and financial instruments amounted to RUB 1.4 bn, compared to RUB 3.6 bn for the same period last year.

• Net FX loss for Q1 2016 was RUB 0.5 bn, against a loss of RUB 0.1 bn for Q1 2015.

• Operating income for Q1 2016 remained flat yoy and amounted to RUB 11.3 bn.

• General and administrative expenses fell 2% yoy to RUB 5.0 bn, while the cost-to-income ratio decreased by 0.8 pp to 44%.

• Net loan impairment provision charges totaled RUB 6.6 bn, which corresponds to a cost of risk of 3.0% per annum, compared to RUB 8.6 bn, or 4.2% per annum in terms of cost of risk, for the same period last year.

Key Balance Sheet Indicators

• As at 31 March 2016, total assets increased slightly by 1%, compared to the beginning of the year, to RUB 1.2 trln. Net of the ruble recovery effect, PSB Q1 2016 total assets would have increased by 3%. At the same time, Q1 2016 saw a slight change in the asset structure as compared to the beginning of the year: the share of the loan portfolio decreased by 3 pp to 63%, while the share of liquid assets increased from 19% to 22%.

• Net loans to customers decreased by 4% compared to the beginning of the year, to RUB 765 bn. The reduction was due in equal parts to organic decline in lending volumes and the ruble recovery early this year. Total corporate loan portfolio contracted by 4% compared to the beginning of the year, to RUB 656 bn. SME loan portfolio decreased by 11% to RUB 42 bn, while the retail portfolio fell by 2% to RUB 66 bn.

• The share of non-performing loans (NPLs) (overdue 90+) in PSB loan portfolio increased to 5.3%, compared to 4.0% at the beginning of the year. NPL coverage ratio was 168%, down from 200% for 2015.

• Securities portfolio totaled RUB 63 bn, up 4% compared to the beginning of the year. The share of securities portfolio in PSB balance sheet remained flat at 5% compared to the beginning of the year.

• Customer accounts increased by 2% compared to the beginning of the year, to RUB 810 bn. The share of current accounts in customer accounts for the reporting period increased by 4 pp to 32%.

• Funding from the CBR decreased by 44% to RUB 74 bn. The share of CBR funding in PSB total liabilities declined from 11.6% to 6.5%.

• The loan-to-deposit ratio decreased to 94% as at the end of Q1 2016 (2015: 101%), driven by a contraction of the loan portfolio, as well as the deliberate policy of the bank aiming to reduce expensive market funding. Should attractive market funding rates return, PSB may tap capital markets. In addition, considering limited planned loan portfolio growth, the loan to deposit ratio may return to an optimal 100-120% range by the end of 2016.

• At RUB 84 bn, shareholders' equity remained virtually unchanged compared to the beginning of the year.

Overview of Financial and Operating Results

Interest income for Q1 2016 was RUB 25.1 bn, up 1% yoy (Q1 2015: RUB 24.9 bn). Insignificant improvement of interest income in Q1 2016 vs. Q1 2015 was mainly due to changes in PSB accounting policy, with conservative recognition of interest income on impaired loans, using the cash method.

Interest expense was RUB 18.3 bn, a 6% decrease yoy. The reduction in interest expense was driven by early repayment of subordinated debt in 2015, as well as a reduction in interest rates on customer deposits, following the CBR key rate cuts.

Net interest income totaled RUB 6.8 bn, up 26% yoy (Q1 2015: RUB 5.4 bn), mainly driven by a reduction in the cost of funding following the CBR key rate cuts in 2015.

Net fee and commission income increased significantly by 23% yoy, to RUB 3.8 bn. The share of net fee and commission income in total operating income was 34%, compared to 27% for Q1 2015. The reporting period saw a positive trend in net fee and commission income on customer settlement transactions, as well as commissions on plastic cards. Driven by a consistently growing customer base, the SME segment remained the biggest contributor of net fee and commission income, with more than a 40% share in PSB total net fee and commission income. The retail segment also delivered strong results in Q1 2016, with a 46% increase in net fee and commission income yoy, to RUB 1.4 bn rubles, mainly driven by a higher turnover and, as a result, the volume of commissions on plastic cards.

Amid less volatile financial market conditions as compared to Q1 2015, trading gain on securities and financial instruments for the reporting period amounted to RUB 1.4 bn, against RUB 3.6 bn a year earlier. This had a significant impact on Q1 2016 operating income, which remained unchanged yoy despite core income growth and amounted to RUB 11.3 bn.

General and administrative expenses decreased by 2% to RUB 5.0 bn. Cost-to-income ratio fell by 0.8 pp yoy to 44%. Maintaining general and administrative expenses at the 2015 level is one of our priority targets for 2016.

Provision for loan impairment totaled RUB 6.6 bn, which corresponds to a cost of risk of 3.0% per annum, down from RUB 8.6 bn, or 4.2% per annum in terms of cost of risk, for the same period last year. Q1 2016 cost of risk in the corporate loan portfolio was 3.1%, significantly below the 2015 full-year level of 5.8%. Reduction in the cost of risk occurred against the backdrop of expected maturity of impaired loans that PSB previously made provisions for. Provisions in Q1 2016 were mainly made for loans to the real estate, food and construction materials industries. In the SME segment, in Q1 2016 there was a recovery of provisions in the amount of RUB 0.3 bn, mainly from medium-sized business customers. Cost of risk in the retail portfolio has been declining since Q3 2015, and was 5.9% for Q1 2016, against 6.6% for Q1 2015 and 7.1% for 2015. The reduction was mainly driven by improved efficiency of the collecting process and a contraction of the retail portfolio.

The share of non-performing loans (NPLs) (overdue more than 90 days) increased to 5.3% as at the end of Q1 2016, compared to 4.0% at the beginning of the year. Due to expected maturity of non-performing loans, Q1 2016 NPL coverage ratio for 90+ overdue loans decreased to 168%, compared to 200% for 2015. In Q1 2016, PSB wrote-off and sold non-performing loans for a total of RUB 3.1 bn. Q1 2016 share of non-performing loans increased to 4.8% in the corporate loan portfolio (2015: 3.0%), decreased by 3.1 pp to 11.5% (2015: 14.6%) in the SME portfolio, and also decreased in the retail portfolio from 6.6% to 6.3%.

PSB continues to maintain a sufficient level of liquidity. As of 31 March 2016, the share of liquid assets in total assets was 22%, up 3 pp compared to the beginning of the year. The share of liquid assets of customer accounts also grew during the period by 4 pp to 33%, which is an adequate level under a stress scenario. As a systemically important bank PSB, complies with a new mandatory liquidity coverage ratio (LCR) without a dedicated CBR credit line, which entered into force on 1 January 2016. As at the end of Q1 2016, PSB LCR stood at 78%, against the minimum CBR requirement of 70%.

Q1 2016 securities portfolio was RUB 63 bn, up 4% compared to the beginning of the year. The share of securities portfolio in PSB balance sheet remained unchanged at 5% level compared to the beginning of the year. PSB maintained a conservative approach to its securities portfolio, with nearly 90% of securities included in the CBR Lombard list.

Customer accounts increased by 2% compared to the beginning of the year and amounted to RUB 810 bn. Excluding the effect of the ruble recovery, growth would have been 5%. Current accounts increased by 17% compared to the beginning of the year, to RUB 263 bn, while their share in total customer accounts grew to 32% (2015: 28%), which resulted in a significant reduction in the cost of customer funding (Q1 2016: 5.9%, Q4 2015: 6.5%, Q1 2015: 7.1%). Current accounts volume and share growth is one of the bank's priority. Q1 2016 retail deposits grew 4%. At 37%, the share of retail deposits in total customer accounts remained flat compared to the beginning of the year.

Funding from the CBR in the reporting period decreased by 44% to RUB 74 bn, after PSB fully repaid a 12-month foreign exchange CBR loan received in Q1 2015. The share of CBR funding in total liabilities decreased by 5.1 pp to 6.5%. As at 31 March 2016, the amount of unused CBR funding available to PSB was c.a. RUB 100 bn.

Concentration of top-20 borrowers in PSB net portfolio decreased to 32% following repayment of a big loan granted to a blue-chip customer (2015: 34%). At 31%, the share of top-20 depositors in total customer accounts as at the end of Q1 2016 remained virtually unchanged compared to the beginning of the year (2015: 32%). Significant concentration on both the asset and liability sides is due to the Bank's strategy aiming to attract large high-quality borrowers, adopted in 2014, as well as an attraction of deposits from large corporate customers. As at the end of Q1 2016, the share of loans to related parties to total IFRS capital as per Basel III accords was 21.9% (2015: 21.0%).

Capital

• As at 31 March 2016, Total IFRS capital adequacy ratio as per Basel III was 14.4% (2015: 14.4%), against the minimum requirement of 8.0%; tier 1 capital adequacy was 8.3% (2014: 8.2%), against the minimum requirement of 6.0%; core capital adequacy ratio was 7.0% (2015: 6.8%), against the minimum requirement of 4.5%.

• As at 31 March 2016, Total RAS Basel III capital adequacy ratio was 12.6% (20151: 13.8%), against the CBR minimum requirement of 8%; core capital adequacy ratio was 6.9% (2015: 7.3%), against the minimum requirement of 6.0%; base capital adequacy ratio was 5.7% (2015: 5.9%), against the minimum requirement of 4.5%.

PSB Deputy Chairman of the Management Board and CFO Vladimir Mamakin comments on the results: «Q1 2016 results reflect successful ongoing development by PSB of its transactional business and once again confirm our ability to generate risk-free income. Indeed, net fee and commission income was up 23% yoy, while its share in PSB operating income increased to 34%. This business remains a priority for us in 2016. We are also seeing a reduction in the cost of risk: after a peak at 5.8% in 2015, cost of risk fell to 3.0% in Q1, as non-performing loans, PSB had previously made provisions for in accordance with its conservative policy on provisioning, matured».