VTB Bank public joint stock : Webcast transcript

VTB Group | Q1 2021 IFRS financial results conference call | 30 April 2021

VTB Group

Q1 2021 IFRS financial results

Conference call held on 30 April 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
• Andrew Keeley, Sberbank
• Andrey Klapko, Gazprombank
• Andrey Mikhailov, SOVA Capital
• Mikhail Dmitriyev, BCS Global Markets
• Nida Iqbal Siddiqi, Morgan Stanley

Leonid Vakeyev: Good afternoon, ladies and gentlemen. Thank you so much for joining us in this conference call. Today, we have published the full version of our Q1 2021 audited report. On 19 April, we published the concise version, and we continued with that on the Investor Day. Today, we will be happy to answer your questions, but before that Dmitry Pianov, CFO and Member of the Management Board, will make a small presentation.

Dmitry Pianov: Good afternoon, ladies and gentlemen. Once again, I would like to guide you through the figures, which you already know. They did not change much vs 19 April. In Q1 2021, we demonstrated a record net profit of RUB 85.1 bn, which is more than 19% ROE. Within that, we have two components of sustainable income, NII and NFCI, which grew by 22% and 19%, respectively. The first item - to the tune of more than RUB 145 bn, and the NFCI - by more than 19% to RUB 38.6 bn. In relative terms, we have the NIM growing by

10 bps y-o-y to 3,7%, and since the regulator has been increasing the base interest rate, we are publishing our sensitivity on a quarterly basis to this particular indicator. The sensitivity of net interest income to parallel shift of the interest rate's curve by 100 bps is RUB 11.7 bn, but through our hedging strategy we are shifting this volatility into the income on financial instruments. Thus, we are displaying zero sensitivity at the net operating income level.

In terms of the NFCI, we have a 69% increase year-on-year in the fees received for insurance products distribution (primarily bank insurance) as well as a 1,8x growth in the WIM fees.

In the composition of other items, there is no volatility, as we promised, in terms of our open currency position (which we have closed in the beginning of the year). Moreover, there were no negative revaluations of our non-core assets. As a result, the NOI is increasing 19% y-o-y, providing the key basis for the increase of our net profit.

The provisions charge is relatively not high - RUB 22.6 bn, which corresponds to the COR of 0.7% per year, which is lower than the figures of 1Q 2020 by 80 bps. The staff costs and administrative expenses remained nearly unchanged at RUB 64.9 bn, up only 1%. Coupled with a significant increase in the net operating income

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VTB Group | Q1 2021 IFRS financial results conference call | 30 April 2021

before provisions, this led to one of the lowest cost-to-income ratios. Within our administrative expenses, we had over RUB 9 bn of costs for digital transformation that will drive our costs this and next year. These were the components of our PNL statement.

Slide No. 2 looks at supplementary areas to our banking business. We continue to have these at about 3% of the Group's total assets. In Q1, the credit workout assets, essentially non-core assets, generated a positive financial result to the tune of RUB 0.2 bn. The remaining assets did not change much. The profitable result was RUB 4.4 bn in terms of long-term investments within the CIB. The Group's digital assets in Q1 were broken down between RB, MSB, and Corporate Centre, as you can see in the slide under the main global business lines, which benefit from those assets and are responsible for the operations and financial results arising from the use of these digital assets. We will continue to publish that data in our monthly and quarterly results under the IRFS reporting.

Slide No. 3. As you can see, one of the rapidly improving indicators is the cost of risk of 0.7%. The normalised cost of risk for the Group in Q1 was at the level of 1%, an unusually low value, owing to the low risk associated with legal entities (0.4%). We are also observing the improving services to individuals within the Group. Our function of working with NPLs has improved back to the pre-pandemic level driving down the COR of the individuals to 1 - 1.3%. From the point of view of our NPLs, the 90+group went down 7% from the beginning of the year. The NPL ratio has improved in Q1 from 5.7% to 5.5% and the coverage is more than 126% as of 31 March 2021. Hence, the risks and components of the COR are recovering very fast after the 2020 pandemic.

Slide No. 4. Our traditional indicators in terms of regulatory capital matters. Our capital adequacy improved, and our N20 CAR is 12.1%. It was supported by two material events. First of all, we were the first bank in Russia to receive approval from the Bank of Russia in terms of implementing the standardised approach to our operational risks. We did put that into practice and improved by 25 b. p. in terms of the overall CAR, and secondly, we were successful in placing perpetual bonds denominated in foreign currency at fixed rates linked to USD and EUR FX rates registered with the Bank of Russia in the amount of RUB 57.4 bn. These are accounted for in our CAR, improving it by 39 bps. As a result, our tangible equity, which is relevant for our valuation, went up 6% over the quarter to RUB 868 bn.

Wrapping up my bit, on Slide No. 5 there is our guidance for 2021. We are not changing anything vs the late February presentation with respect to any significant items. We are just improving our dynamics in loans to individuals and legal entities, as we register active demand in both segments. It used to be 5-10%, respectively, and now it is from 5% to 7% for legal entities and from 12% to 14% for individuals. We are not changing the net profit target figures - RUB 250-270 bn. The Q1 results demonstrate that we are moving close to the cap of the range. We are not yet narrowing down that range in terms of our net profit, as going forward we would like to stabilise the COR that is currently less than our normalised value. Essentially, the dynamics of the staff and administrative costs with a 1% increase is not yet at the level of the annual target of the costs growth in between the inflation rate and 10%. Going forward, we believe that these dynamics will be up in the next quarters, primarily due to the digital transformation programme. That is all in terms of my bit, and we are ready to take questions. Thank you so much.

Operator: Thank you ladies and gentlemen. To ask a question, press *1 on your dials. Please make sure that you are not muted. If you want to exit, press *2. Our first question comes from Elena Tsareva, BCS Global Markets.

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VTB Group | Q1 2021 IFRS financial results conference call | 30 April 2021

Elena Tsareva: Good afternoon. Thank you so much for the presentation. Congratulations on your record- breaking results. I have several questions to follow up. The first one is regarding dividends for 2020. If we go back to slide 5, we have your management recommendations of 50% for the distribution of dividends. As we remember, the actual value was 44%, and I would like to find out the reason for this deviation in the dividend policy, and following up the recent increase in the Central Bank's key interest rate, will your expectations for the end of the year change in terms of the monetary policy based on that interest rate, and will it have any impact on the margin guidance? And the last little question, regarding the recent share in Saint-Petersburg Exchange. Are you planning to increase your share, and can you see any synergies from that?

Dmitry Pianov: Thank you so much for the congratulations and for the question. Let us do them one by one.

Regarding the dividends for 2020, based on the results for 2020, we do not exclude that kind of approach going forward. What we have is the following paradigm. The basis for the calculation of all dividend flows is the share of net profit. By definition, for 2020 and going forward, we will suggest 50% of the net profit to be used for dividend flows. We have to try to make sure that the equivalent sum of this 50% payout of net profit would be translated into the dividend flow without any changes for ordinary shares via the mechanism of equalising dividend payouts. There are two other types of shares - Type 1 preference shares and Type 2 preference shares. In former days, those elements of equity were not just carriers of dividends based on the equality undertaking, but also the basis for settlements with the Russian Federation. For two years in a row, if I am not mistaken, via the mechanism of using preference shares, we were transferring the capital for the purposes of Russian defence orders, and the settlement function for that purpose was also linked to preference shares. Also, in former periods, the Russian sovereign budget was paying to us based on certain state guarantees associated with certain loans, such as that to the Transaero airline, by decreasing the dividend payouts for the preference shares. Since there are no minority shareholders for those, all the packages of Type 1 preference shares and Type 2 preference shares are owned by government bodies, that is various entities of the Russian state. The sole reason behind the deviations of various years in the percentage for payouts on the preference shares from the standard 50% of net profit distributed on an equal basis is the mutual settlements between VTB Bank and the Ministry of Finance of Russia, which we tried to basically Chinese-wall from the dividend flow for ordinary shares. Everything you see as a result of 2020 and based on the recommendations of the Supervisory Cuncil is the same kind of situation where the holders of ordinary shares received non-adjustedpre-calculated flow based on 50% of net profit via an equal distribution of dividends, while the owners of preference shares in former days would receive additional dividends associated with the transfer of capital, but this year the dividend payouts to them were decreased by that calculation as I explained. We do not exclude that going forward, and we should not see it as detrimental for ordinary shareholders. We believe that it is a must for us to pay out 50% of net profit for ordinary shares based on the equal dividend principle and then adjust the flow, give or take, depending on the particularities of the settlements between us and the Russian sovereign budget, as well as any other government entities. That is as far as the dividends are concerned.

In terms of the key interest rate as set by the Bank of Russia, we did expect that prior to the actual stoppage of the dynamics of consumer prices at the target level of the Bank of Russia, the regulator will not hike its key interest rate. Our refreshed guidance is an inflation of 5.2% and a key rate of 5.5% at the end of the year, so we expect that going forward there will be a further increase in the key interest rate as a result of the upcoming meetings. Whether it will be taking place gradually or more abruptly, as we saw at the previous meeting, is yet for us to see. But, as I said, we will see an attempt to reverse the prevailing trend of growing consumer prices on the part of the regulator.

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VTB Group | Q1 2021 IFRS financial results conference call | 30 April 2021

In terms of the impact on the margin, we specifically highlighted the sensitivity. Our net interest income will be under pressure, and we will target a net interest margin (NIM) of 3.5%. We did take that into account. Earlier in the year, we saw the trend, therefore, it is still the guidance for us going forward. Q1 was quite strong, with the margin reaching 3.7%. That is some room for us to meet the annual target for NIM, even provided there are abrupt increases in the key interest rate by the end of the year. Also, let us remember that we are actively hedging our interest rate risks and any possible losses will be offset as soon as Q1 via a certain amount associated with the revaluation of our position on the FX swaps. So we will revaluate our financial tools accordingly.

In terms of our participation in the project with Saint-Petersburg Exchange, we made it there with a 5% of the equity of this entity. You might know that Saint-Petersburg Exchange is the key platform to trade foreign shares in Russia, and via this investment we see various strong linkages and synergies in terms of WIM for our clients. You saw the flow from the classic to alternative tools for making savings that we saw in the course of 2020 in the retail segment. From the point of demand from our retail customers toward purchasing foreign shares, we could not but make this step. In many ways, this is a synergetic investment for our business in terms of wealth management. Those two types of business are mutually beneficial, and we do not have any intent to change the amount of our participation in that infrastructural platform.

Elena Tsareva: Dmitry, thank you so much for the detailed answers.

Andrew Keeley: Good afternoon. Thank you for the call. I think you have covered the topic of margins a bit in the previous question. It is interesting that you are negatively disposed to higher rates before hedging in contrast to your closest larger banking peer, which seems to be positively disposed. I am just wondering if you could tell me what share of floating rate loans you now have in your loan book. In terms of your margin expectations, I understand that you did 3.7% in Q1, you are expecting 3.5% for the full year, clearly in a downward move from here. Does your guidance factor in increases in retail deposit rates? That is my first question.

The second one is on the capital structure. I am wondering, now that this plan of buying back the prefs in lieu of the dividends has been rejected by the Ministry of Finance, could you just clarify whether there are any other options being considered at the moment, or can we basically just expect that the capital structure will remain as it is for the foreseeable future? Thank you.

Dmitry Pianov: Thank you very much for your questions, let me try to answer those one by one. First of all, regarding the situation with sensitivity to interest rate risk and the hedging strategy. This is transactional hedging; essentially, we are making an entire set of transactions to buy FX swaps, which via revaluation could offset the fluctuation of interest rates in the results of transactions involving financial instruments. That is not accounting hedging; this is transaction-based hedging.

In terms of our floating rate loans, that is more than 60% of the legal entities segment on our books. As well as some of our peers, we incentivise those organisations to take floating rate loans, and therefore there is a kind of natural hedge against our interest rate risk. Yes, our annual target on the NIM side is 3.5%, looking at the results of Q1 and certain guidance on a slightly lower margin going forward. This will be covered by our sensitivity. Despite the hedging strategy, NIM is still sensitive to the negative impact from higher key interest rates, especially in some of the segments - it is not possible to issue a loan with a floating rate in the retail segment.

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VTB Group | Q1 2021 IFRS financial results conference call | 30 April 2021

Regarding the situation with preference shares, you and us should be ready for a lack of alternative solution for quite a long period of time. We believe that as at the end of 2020 and of 2021 we should rather expect that the capital figures would be more than RUB 500 bn of Type 1 and 2 preference shares. We did have a detailed discussion with the Ministry of Finance on that, and you are right in that we have not yet found any mutually acceptable option. So far, what we have been discussing are not the options that we would like to endorse because we do not want to put our ordinary shareholders in a less privileged position as opposed to the holders of preference shares. So far, there is no ready-made solution. Therefore, the flow of dividends will be distributed on the principle of equal payouts, and we believe that this situation will remain through 2021.

I hope I have answered your questions.

Andrey Klapko: Dmitry, good afternoon, thank you for the presentation. I have a question about the general regulatory landscape. First of all, how expected were those changes regarding the regulation of retail loans? What are your expectations in terms of possible further steps on the part of the regulator?

Second, to what degree your guidance of the growing portfolio of loans would account for the changes in the key interest rate and what would your strategy be like in terms of various capital figures and parameters? What would be your response to those changes I outlined.

And the last question. Perhaps, it is a bit off the regulatory track. Do you have an understanding of the strategy on deposits and loans? Are you expecting any growth on the duration of deposits and the contraction of the loan duration? Could anything help you maximise your margin in the environment of increasing rates? Thank you so much.

Dmitry Pianov: Thank you for the question. Question 1, regarding the regulatory landscape changes for retail loans. Indeed, all those macroprudential adjustments releases we saw previously on the retail side were quite expected, and hundreds of billions of roubles will be freed up according to the relevant scheme with respect to previously issued retail loans. What was a bit of an intrigue for us was the way in which the Central Bank was planning to implement the Basel 3.5 in 3Q 2021 in relation to NPLs. That was indeed a bit unclear for us because national regulators had the opportunity to deviate from the classic Basel 3.5 when implementing the changes. Recently, the Bank of Russia has offered for public discussion the draft adjustments to the actual instructions, and the classic Basel 3.5 had to do with freeing up with the ratio of 0.75, i.e. 25% from the previously done risk-weighted assessment. The central bank went on to use 0.9, so there is less capital as opposed to the classic Basel configuration. That is a smaller degree of deregulation. Since it is being now discussed with the public, our position most likely will be that decreasing the risk weighing under such loans should follow the classic Basel, i.e. to 0.75 and not to 0.9. If the central bank believes that we require a little bit more of a cooldown of this market segment, then that strategy could be put to work via additional macroprudential adjustments that have, based on the experience from 2020 and 2021, a counter-cyclical path, thus building up during good times and freeing up during bad times. If the approach is to be put to work as described in the instructions now, i.e. not making it to the full extent of the Basel regulations, then we will not see this counter cyclicality. There will be a more or less stable weight, without using the mechanism of macroprudential adjustments. We cannot guarantee that our voice will be heard or that we will be able to implement that unilaterally, but this is about how the discussion will go forward in terms of structuring the new regulation based on Basel 3.5.

What was the second question? Please, could you remind me?

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