VTB Bank public joint stock : Call transcript

VTB Group

FY 2020 IFRS financial results Conference call held on 25 February 2021

Edited transcript

Speakers:

• ● Leonid Vakeyev, Head of Investor Relations

• ● Dmitry Pianov, Member of the Management Board, CFO

Participants asking questions:

• ● Elena Tsareva, BCS Global Markets

• ● Andrey Pavlov-Rusinov, Goldman Sachs

• ● Andrey Klapko, Gazprombank

• ● Ivan Kachkovski, Morgan Stanley

Leonid Vakeyev: Good day, everyone. We are happy to welcome all of you at our conference call. Today we start with a new season of Russian banks' reporting calls. Dmitry Pianov, Member of the Management Board, CFO at VTB Group, is happy to be with you. As usual, we will start with a quick overview of our results and then take your questions. Please be reminded that this call is going to be conducted in Russian with simultaneous translation into English and you can ask questions in any language. Over to Mr. Pianov now.

Dmitry Pianov: Ladies and gentlemen, colleagues, good day to all of you. I am pleased to welcome everyone at this disclosure call of VTB to deliver the financial results of 2020 under IFRS. We have prepared a presentation, which I am going to take you through with a specific emphasis on two priorities, two focus points.

Understandably, 2020 was the year of the COVID-19 pandemic and, hence, the year of distorted profits in the banking industry globally as well as in Russia and specifically for VTB Group. For now, my focus is going to be on showcasing twists in profits, which we demonstrated for FY 2020, and also on explaining the normalised net profit numbers for 2020 so you could be prepared for VTB Group to get back on track with its profit-generating strategy to provide dividend yield for its shareholders. The second message I would like to convey is that given the fact that one of the distortion factors relates to the revaluation of our non-core assets, we have decided to make our accounts even more transparent with further disclosure of the so-called group that we decided to name assets supplementary to the banking business. I am going to dedicate the second focus of my presentation to this particular subject and to take you all through the forward-looking outlook regarding maturity timeline, contribution and holding duration of these assets supplementary to the banking business.

So, please take a look at page 1 of the presentation. VTB Group delivered RUB 75.3 bn of net profit in 2020, 63% down y-o-y, if you compare it to RUB 200+ bn the year before. As we expected in Q4, we saw [net] profit generated in the amount of RUB 16.2 bn. Now, considering the breakdown of this amount, it is easy to note that the key income side for the banking business is developing quite well. Net interest income is up by 21% y-o-y to exceed RUB 531 bn, while net fee and commission income is up by 13% y-o-y to nearly RUB 137 bn. I would like to draw your attention to the following fact. For the first time in 2020, we reclassified part of the income earlier recognized in FX transactions into net fee and commission income (this includes risk-free client transactions, FX client transactions on which VTB Group does not underwrite any FX risk since it is alreadyunderwritten effectively by the market). So, after our auditor had tested our processes and systems, we were able to reclassify this particular line in 2020 and all reference periods. This translates into about RUB 11 bn of additional net fee and commission income falling into this line rather than the FX line. So, from now on, net fee and commission income will include FX revenues from risk-free client transactions. Another distortion is in the aggregated line of other income, which you can see on page 1. It is negative, minus RUB 59 bn in 2020. This line includes revaluation of so-called non-financial assets in the negative amount of RUB 126 bn across the year. We continued it in Q4 too, when the negative contribution from the revaluation exercise came in the amount of RUB 32.6 bn. This mostly relates to the revaluation of land plots in the Moscow region, closer to the city and further beyond, received as settlement of bad loans to legal entities in earlier periods. Another distortion is the provision charge that is up 2.4 times at nearly RUB 250 bn. We, hence, saw an increase in the cost of risk by 110 bp y-o-y amounting to 1.9% for FY 2020. More details on the cost of risk will follow on the pages to come. On the cost side, we saw an inflation growth of 6% for costs at nearly RUB 270 bn, which takes us to the net profit number of RUB 75.3 bn you can see in front of you.

Let's move to the normalised net profit (we have introduced such definition as you can see on page 1), If we count (and we have every reason to) RUB 126 bn of non-financial assets revaluation [before tax], increased cost of risk 1.9% which is above the strategic cost of risk of VTB Group 1.2% in the amount of net profit influence which is RUB 65 bn as well as structural revaluation of open currency position (OCP) given the devaluation of the ruble, which affects our net profit by RUB 18 bn, if such events wouldn't happen again (positive as well as negative) it would translate into RUB 223.2 bn of normalised net profit. We suggest considering it as the normalised net profit level for FY 2020.

Why do we believe three events outlined at the bottom left-hand side are not going to repeat? These are mostly negative, of course, while revaluation of structural OCP is something positive, but we believe they will be excluded looking forward. We have revaluated our non-financial assets by 37% in total throughout FY 2020, which you can see on the following slides. With some of the assets, the degree of conservatism is several times higher and the scale of 37% negative revaluation exceeds the revaluation level of the crisis back in 2008, for example. That would mean a very serious stress test for real estate and non-financial asset revaluation. We proceed from the idea that all our assets are being revaluated on the conservative scenario. For some of the assets, the maturities in terms of holding term have been extended by several decades. So, neither in our business plan nor beyond the strategic horizon, would we expect another revaluation of the non-financial assets of this scale or to any other material extent.

In terms of the provision charge, we faced very special situations and behavior of legal entities as well as individual clients. Comparing the behavioral patterns in the late months of 2020 following the restructuring exercises and earlier non-performance indicators for individuals and legal entities getting back into their payment schedules, we saw their behavioral patterns pretty much getting back to the normal levels of 2019. In terms of the revaluation of structural OCP, throughout many years, it has been either procyclical or countercyclical following the devaluation of the ruble. I am happy to update you now and announce that we have managed to come to a transaction-based approach early in the year, which would enable us to hedge the revaluation of structural OCP under IFRS without going beyond the limits. That is not an accounting-based but rather transaction-based hedging strategy successfully implemented in the early business days in January. In fact, 2020 would be the last year of any positive or negative effect of volatility in terms of revaluation of structural OCP with subordinated loans and special bonds underlying it. Moreover, we are going to hedge new bond issuances in the very same fashion so that it would not enable any new OCP to be created. Hence, we believe that the three factors, namely revaluation of non-financial assets, provision charge exceeding 1.2%per annum and revaluation of structural OCP, are the distortions that need to be excluded when considering normalised net profit and looking forward to the post-COVID-19 situation in 2021.

Let us continue to page 2 of the presentation. Across our financial accounts, we have implemented an additional disclosure by segment. We are typically proud of our approach when we break down the results not by region but by global business line, namely Corporate-Investment Business (CIB), Medium and Small Business (MSB), Retail Business (RB), Treasury, Corporate centre and Other business. In earlier disclosures, we implemented additional sub-segments for the first time in 2020. We call this group Assets Supplementary to Banking Business and I would like to emphasize that these are not non-core assets at all. We have carved out all the assets regardless of who manages them within VTB Group. They were carved out by size, topline segment, and contribution to profit. These are three segments which were additionally detailed: CIB, Corporate centre and Other business. Within CIB, we have a subsegment called Long-term Investments. These are effectively assets supplementary to the classical business of CIB as investments in listed shares such as shares in Yandex, Magnit or Rostelecom. Here we also have our grain holding company assets, which are complementary to our Commodities Business within the CIB segment. The scale of Long-term Investments stands at RUB 302 bn, which is 4% of the total assets of CIB business, and it is profit-generating. Back in 2020, these investments generated more than RUB 18.4 bn of net profit.

Another subsegment we disclose lies within the Corporate centre segment, it includes digital assets. This represents a rather modest size of RUB 39 bn worth (accounting for about 50% of the Corporate centre segment assets). Its contribution to net profit is slightly negative, standing at minus RUB 0.7 bn. Here we are talking about the start-up businesses created by VTB Group from scratch such as VTB Housing Ecosystem or VTB Mobile. These are non-banking digital assets created with a pure intention of developing them to create synergies with other assets, mainly RB or CIB assets, in order to retain the customer, expand the customer lifecycle or acquire new clients. So, these are non-banking digital assets created with a purpose of being complementary to the banking business.

Yet another segment we disclose has most of the losses in 2020. I am talking about the Other business segment with a subsegment called Assets Credit Workout. These are collaterals in the form of industrial facilities or land plots, shares of companies earlier pledged with our corporate borrowers who faced issues in paying off their debt. The subsegment is down by 37% y-o-y standing at RUB 243 bn and representing 75% of the Other business assets. The profit is negative at almost RUB 100 bn. Here is where we have the most revaluation of our non-financial assets from Q2, Q3 and Q4. It is important to underline that this more granular disclosure is not a one-off. This is a step forward towards more transparency to respond to the questions of how many such assets VTB Group has, how much P&L will be generated. Given the interest in this subject or as long as this interest remains, we are going to keep disclosing these subsegments on a quarterly and monthly basis in 2021 to stand with our point suggesting that all Assets Credit Workout items and revaluations of 2020 have been covered.

Page 3 represents another distortion of 2020: higher cost of risk and its QoQ evolution, evolution of our quality. You may recall us talking about the wave theory as a manifestation of the COVID-19 pandemic. We explained that the first wave would be an additional cost of risk in retail and you did see that at 3% higher for loans to individuals. It increased mid-year and stabilized at 2.1% and 2.2% in Q3 and Q4 respectively. 2.3% is the total for the full year, up from 1.5% in 2019. The second credit-risk wave was related to legal entities. It was postponed in time compared to the first wave for the additional cost of risk, manifested in Q3 and stabilized in Q4, with 2.4% in Q3, 1.6% in Q4 and 1.7% for the full year, up from 0.5% in 2019 to 1.7% in 2020. Our expectations of credit-risk waves incoming have been fully matched in terms of both timing and scale.

On the NPL side, credit-risk waves cannot go through without some additional NPL generation. The number is up from 4.7% to 5.7% across the year. However, some significant provisions and write-offs in Q4 allow us to report a comfortable coverage ratio of more than 120% as at the end of the year.

Page 3 also explains restructured loans that comprise all restructured loans, both as required statutorily and initiated internally, with a breakdown by segment (Retail Business, Medium and Small Business and Large Corporate Business). While corporates will be an additional focus in 2021, the trend observed in restructured loans in terms of early-stage defaults of individuals suggests that the end of 2020 saw a full recovery, with the early default indicators for individuals across all products being back to, and even better than, the levels seen in pre-COVID-19 periods, i.e. as at the end of 2019.

Another positive factor is that debt collection for corporates recovered to the pre-COVID-19 level across all products. This means all metrics reached the level of late 2019 for retail collection. Speaking about the combination of the cost of risk in 2021, we see a major upside in terms of retail business stabilization with targeted focus on certain industries with regards to the previously restructured loans to large corporate, medium and small businesses. Now a major comment regarding provisioning. In 2020, we did not abandon the macroprudential buffer under IFRS 9. It is still there in our provisions as at the end of 2020. This represents an upside for our cost of risk looking forward. This macroprudential element represents RUB 16 bn under IFRS 9 across all of the segments in 2020 financial accounts.

Now page 4. Regulatory capital represents another area of focus for VTB. This has to prove that the Group is steadily moving towards a more comfortable capital adequacy ratio, and we would like to explain our systemic understanding of the potential leverages that we may have or the one we are working on now to improve the capital adequacy situation.

We would like to start the discussion of page 4 by saying that it is not a secret that considering all banks, including systemic banks as well as VTB Group, the Russian Federation has excessive RWA density as compared to other economies with similar country ratings. I am talking about developing economies not at all the developed markets. This is actually about BRICS countries, Eastern Europe, Turkey and Mexico. Page 4 represents all RWA density numbers for these countries for 2019-2020, demonstrating the place of Russia. We started with 100% for all banks with the exception of systemic or backbone banks with 105% being the number for them. Together with the regulator, we managed to develop a set of measures to push the ratio of RWAs to total assets down. If you consider the Basel Committee's recommendation in terms of the implementation timeline for new or revised standards releasing RWA (the so-called Basel 3.5), you will see that since 2020 Russia has been the leader in terms of the implementation pace compared to the formal recommendations by the Basel Committee. I am talking about some serious measures that helped significantly release capital for VTB Group and the banking system as a whole. First of all, this is about the investment category transition which took place two years ahead of the Basel Committee recommendation, and the reduction of mortgage risk weights adjusted for LTV and PTI. That was done 18 months earlier than the recommended timeline. In 2021, we see further serious changes coming, which would enter into force about a year ahead of the recommended timeline. This is about risk weights on consumer loans and a standardized measurement approach for operational risk in accordance with Basel 3.5. We made the expected reduction for these two components on our balance sheets. Effectively the pressure to push down on RWA to total assets or RWA density is effected through a faster

Basel 3.5 implementation in Russia. We cannot have a direct impact on that process, we can only approach the regulator indirectly. We do approach them and they do hear us, as does the banking community. Now let us consider what VTB can do on its own, and a very strong move here is to issue subordinated debt,