VTB Bank public joint stock : Webcast transcript

VTB Group | Q2 and 6M 2021 IFRS financial results conference call | 30 July 2021, 11:00 GMT

VTB Group

Q2 and 6M 2021 IFRS financial results

Conference call held on 30 July 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 CIB
• Mikhail Butkov, Goldman Sachs
• Mikhail Ganelin, ATON
• Ekaterina Sidorova, Sberbank CIB
• Evgeny Kipnis, Alfa-Bank
• Nida Iqbal Siddiqi, Morgan Stanley

Operator: Ladies and gentlemen, hello and welcome to VTB Group's Q2 and 6M 2021 IFRS financial results conference call. This conference is going to be recorded. Now over to Leonid Vakeyev, Head of Investor Relations at VTB. Please, go ahead.

Leonid Vakeyev: Good afternoon. Indeed we are very happy to welcome everyone who has joined our call today. Please be reminded that we are holding this call in Russian with simultaneous interpretation into English. You are welcome to ask questions in your language of preference. Our speaker today is Dmitry Pianov, Member of the Management Board and CFO. As always, we are going to start with a quick presentation with an overview of our 6M results, and then we will have a Q&A session for you. Over to Dmitry.

Dmitry Pianov: Thank you. Colleagues, I am very happy to welcome all of you at our conference call today to discuss and disclose our financial results for 6M 2021. We have disclosed our accounts today, and you see very positive numbers. I am going to take you through the slides of our presentation that is available on our website. I am going to refer to the page numbers, of course.

Page 1. The net profit as at the end of Q2 stands pretty much alongside the number of Q1, namely RUB 85.5 bn, which is record high for any Q2 throughout VTB's history. The net profit for 6M was RUB 170.6 bn and that is an 18.5% ROE. Given the fact that the 6M number is more of an interest, I would like to take you through the major elements of our P&L and demonstrate some y-o-y developments, as well as some relative movements of our key income lines.

On the left hand side of page 1 you can see the major drivers boosting our net profit, starting with net interest income and net fee and commission income. Net interest income is up by 21% for 6M y-o-y, standing at RUB 306.0 bn. In fact, the relative metric here, net interest margin, is up by 10 bp: 3.7% in Q1 vs 3.9% Q2, and 3.8% annualized for 6M. Further drivers supporting our NIM are the quick pace of growth of current and savings accounts in retail, current accounts in corporate business, and significant increase in consumer lending, which effectively changes the mix in our balance sheet towards higher margin products that we sell.

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VTB Group | Q2 and 6M 2021 IFRS financial results conference call | 30 July 2021, 11:00 GMT

Net fee and commission income is up by 38% y-o-y as at the end of 6M, standing at RUB 84.1 bn. On the right hand side of the page, you see a further breakdown with a significant contribution coming from commissions and fees received for insurance products distribution and other agency services, as well as wealth investment management commissions. And effectively we are referring here to our clients' transactions in relation to alternative savings and investment products. Other income is dominated by FX operations, securities and income from our associates and joint ventures, so that is RUB 15 bn in total, up 2.5 times. And thanks to the sustainable boost of net interest income and net fee and commission income, our net operating income is up by 39%, that is before provisions, standing at RUB 405.1 bn in total.

Now let us proceed to the cost side of the business, where the provision charge is coming down two-fold, 6M 2020 vs 6M 2021, so it is slightly in excess of RUB 54 bn, as you can see. The cost of risk stands at 0.8% as at the end of 6M. However, q-o-q dynamics demonstrate that after an abnormally low CoR of 0.7% in Q1, we are effectively back towards our normalized target of CoR of 1.0% annualized in Q2.

Staff costs and administrative expenses are there for you as well. We have explained that the digital transformation is going to account for a growth rate higher than inflation for our staff costs and administrative expenses. It is 5% up 6M 2020 vs 6M 2021, standing at RUB 135.6 bn. On the right hand side of the page, there is a further breakdown for you. For two quarters running, the company has had a cost-to-income ratio in slight excess of 33%, that is 33.5% for both quarters, hence 33.5% for 6M. And you can see that the digital transformation costs were up by 23% 6M 2020 vs 6M 2021, with a quarterly breakdown available at the bottom right hand side. That translates into RUB 170.6 bn and a more than 18% return on equity.

Page 2. We disclose a clear breakdown, given the fact that we get a lot of questions about our assets supplementary to the banking business and how much profit they generate. As you can see, the broadest definition here stands at RUB 614 bn, a 5% upward movement YTD. And within that, we see varying dynamics of long-term investments in the Corporate-Investment Business, which are up by 15%. Page 2 provides you with a list of new acquisitions, our joint ventures, in the "In" section on the left hand side. Many of these projects have been announced earlier during the St. Petersburg International Economic Forum, like the online cinema Ivi.ru, the carsharing operator Delimobil, a pharmaceutical facility, and the St. Petersburg Exchange. On the right hand side you see credit workout assets, which go into Other Business and are down by 12%, given the outward movement of land plot assets and sale of real estate projects, and renovation projects for some existing real estate. Now, the financial result line is there at the bottom of the page. It is highly positive in the Corporate-Investment Business, slightly negative in all the other components in assets supplementary to the banking business. But there is no major material effect as had been expected previously. We are going to keep disclosing these numbers in our monthly and quarterly accounts.

Let us proceed to page 3 of the presentation with a more detailed breakdown of the most important element in our provisioning, i.e. our provision charge for loan impairment. The CoR, as well as the provisions / loan portfolio ratio, and NPL ratio are all there for you on the chart. What can I say here? With the abnormally low CoR in Q1 both for retail and corporate business, we are back onto our normalized levels. The situation in Q2, however, gives us 0.6% of CoR for corporates, or legal entities, and 1.8% for individuals, with the total number standing at 0.8% as at the end of 6M. The loan portfolio quality is improving, with NPL at 4.8%, down from 5.7% earlier in the year, to 5.5% as at the end of Q1, and to 4.8% as at the end of Q2. Generally speaking, we see a very good performance of forward-looking risk indicators on the corporate side of the portfolio. These are early markers of a potential default situation, which is currently at record lows across the recent five years, I should say. Now, on the corporate side. Even though there were some risk events triggered such as

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VTB Group | Q2 and 6M 2021 IFRS financial results conference call | 30 July 2021, 11:00 GMT

sanctions introduced against the beneficiaries of certain legal entities, we do not see any strategically relevant growth of the CoR in the longer term that would potentially affect the payment discipline of corporate clients. Nonetheless, we see a recovery in certain industries that had been affected by the COVID-19 pandemic. So we see the upswing here in Q3 and Q4, so the situation may well further improve.

Page 4 explains our capital adequacy, which is our hallmark, I should say. The N20 is the most stringent for us in terms of capital adequacy that is where the buffers and adjustments apply. We have responded to that with issuing subordinated debt in the past quarters of 2021. So we have hit 12.4% of total capital adequacy ratio with the threshold standing at 11.5%. Of all eleven major banks with an 11.5% minimal threshold we had the lowest CAR earlier in the year. Now we have improved to 12.4%, which is great. We are still in the reporting period, including reporting on capital, and the cushion we have has probably allowed us to get ahead of one or two banks who are members of the same 11.5% group of systemically important banks, so we are going to lose that notorious title of the bank with the least capital adequacy of the systemically important ones. This comes thanks to subordinated debt issuing, which was very successful in 6M 2021. We registered and sold to internal and external clients nearly RUB 182 bn of subordinated debt in total. Out of that, RUB 139 bn is accounted for as a part of our capital and has been approved by the Central Bank. RUB 134 bn has been accounted for in Tier 1. And RUB 4.7 bn, which is the placement of earlier issued bonds that we sold within the Group, is a supplementary issue and accounted for in Tier 2. In the 6M that have passed this is, according to our view, the record high issue of subordinated debt by a banking institution in Russia. That effectively is a success story, one of the few options remaining available for a bank subject to industry sanctions. We still managed to issue subordinated debt, both Tier 1 and Tier 2, in various currencies with both fixed and floating rates.

Now let me take you through page 5 of the presentation to conclude my introductory words. I would like to remind you of our targets and guidance. With the 6M net profit standing at RUB 170 bn, the earlier guidance of RUB 250-270 bn is no longer on the agenda. The updated number is there for you on the right hand side of page 5. We are ready to upgrade our guidance for net profit to a number standing as high as RUB 295 bn. We are significantly upgrading our expectations of the market. You can see that loans to legal entities are going to grow at pretty much double the number of the earlier guidance, to 10-12%, whereas individuals will be delivering an 18-20% growth. Our net interest margin is upgraded as well to 3.7%, CoR remains at 1% or less. And we are targeting the popular lines of net fee and commissions income growing by 20% y-o-y. The costs side will be growing within 10% y-o-y. We also confirm the management recommendations for the amount and distribution of dividends based on the results of 2021. That recommendation of the management would be based on the same principle announced earlier, and that is 50% of our IFRS net profit with equalization of dividend yield for all the classes of shares.

To conclude my introductory presentation, I would like to say the following. We felt that concerns of the investment community early into 2021 were as follows. First and foremost, there was a concern as to whether VTB Group could recover its profitability towards the strategic targets and get back on track with its strategy. We have provided a clear response to that question with the current numbers as the fact of 6M and the guidance, which we have upgraded. We are effectively back on track with our strategic targets. The second question, or concern, was about whether VTB Group would manage to undergo a major technological transformation and get towards the targets of the market leaders. Well, effectively we are there, thanks to the team of Vadim Kulik and experts whom we have seen doing the same for the other banks previously. We have allocated significant resources towards digital transformation. The third concern was whether VTB Group would find its own response to the general development of ecosystems in the banking community and

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VTB Group | Q2 and 6M 2021 IFRS financial results conference call | 30 July 2021, 11:00 GMT

banking industry. We have provided a response in the form of an open ecosystem, with banking as a service provided to our partners. And the fourth concern was whether our capital adequacy would allow VTB Group to pay dividends as was promised. And the answer to that question is there, we have come up with an answer to capital adequacy management, so we are up from 11.8% to 12.4%. That is our total CAR, and we intend to carry on with that and put a check on that into the next year as well. We are ready to take your questions now. We have an appendix to the presentation with a clearer breakdown of our financials.

Elena Tsareva: Good afternoon. Thank you for the presentation, congratulations on your great performance. My question is exactly about your capital adequacy. Could you provide some guidance as at the end of the year? Clearly, a lot of capital is being generated right now. Your total CAR is great. But looking into the end of the year, with your great capital generation and with your dividend outlook, could you be paying two dividends for 2021 as a lump sum?

Dmitry Pianov: Thank you for your question and your congratulations. Elena, you are asking about our guidance as at the end of the year for the N20 metric, which is total CAR. That is 12%. We are expecting regulatory measures affecting loans to individuals, hence 12% is our target as of the end of the year. Responding to your other question, indeed we see a challenge next year as we are talking about bulky dividends, a three-digit figure, billions of RUB to be paid in 2022. The instruments available to the management team to pay the dividends safely are as follows. First and foremost, the amount could be broken down across two quarters, given the fact that the general meeting of shareholders might be held before

30 June 2022. We have the option of spreading the dividend payout across two quarters, Q3 and Q4. We most probably are going to use it. Then again, if we do not generate any new issues, because we have exhausted all the options available, to put an offer to investors we may carry on selling subordinated bonds. And the third lever available to us is something you probably have observed last time as we paid the dividends based on the results of 2020. We could discuss with the holders of preference shares the volume of the dividends attributable to preference shares. So, obviously, some tools are available to us, it is still 2021, the year has not finished, and it is difficult to say as to the final configuration that could be there. We definitely would be resorting to spreading the dividends across two quarters, that is for sure.

Elena Tsareva: Thank you. A quick follow-up on the regulatory side. You have mentioned that some changes could be pending on the retail loan side. I am wondering what those changes are. We are reading through the early draft from the Bank of Russia, which is going to manage the ecosystem, and maybe other non-core assets could be affected by the same tentative by-laws from the Bank of Russia.

Dmitry Pianov: I understand your question, thank you. Indeed, we see potential tightening in form of macro adjustments, serving the prudential purpose in retail loans. Since there are so many regulatory initiatives in this regard, retail clients and even analysts find it difficult to keep track of the moves by the regulator. We understand that the Bank of Russia is moving up prudential macro adjustments for retail lending as of 1 July. That would increase risk weights and require 0.16 p.p. in terms of the N20 CAR metric. At the same time, macro adjustments for earlier loan allocations issued from 1 October up until 1 April [are being scrapped]. That had already released 0.11 p.p. of total adequacy ratio by 30 June due to the change of balance in risk weights. And one more thing, which is not in the public space yet, - you see a 20% growth target for consumer lending, which we are targeting along with other market players. It is perceived as overheating the market, which needs addressing according to the regulator. The increases starting 1 July will probably be insufficient, so starting 1 October, we will most likely see another change in macro adjustments. These would apply to new originations only (given the limited period) and are going to contribute some 0.05 p.p. of the total CAR.

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VTB Group | Q2 and 6M 2021 IFRS financial results conference call | 30 July 2021, 11:00 GMT

The upgrade to Basel 3.5 could be somewhat suspended. It was supposed to have released some of the capital. I believe there will be several movements by the Bank of Russia. Two steps of raising the macro adjustment for loans to individuals (one already announced and one under development) and a slowdown in terms of capital release from macro adjustments for earlier originations. That is probably the change we are going to expect here.

On regulating the banking eco-system, the situation is very simple. Calculating the effect on capital adequacy could hardly be made based on a consultation letter by the Bank of Russia. The Central Bank uses this tool to seek public opinion from public consultations, as they call it. With that letter circulated across the major banks and the Bank of Russia having received their feedback, they are sharing their view suggesting that the banks have read the potential new regulations in a wrong way because the actual calculations will be following a different pattern. These are going to be adjusted further and along a long-term horizon. Our attitude to that is multifarious. We see certain threats from a potential change of the regulation in question. It is going to be

1. disproportionate regulation of banking-basedeco-systems and not banking-basedeco-systems. That disproportion is towards more stringent regulation of eco-systems that are based on banking institutions and effectively preferential treatment of eco-systems developed by non-banking institutions.

Another discussion here is about the composition of assets to be regulated, the perimeter of assets to be regulated according to the Central Bank. We consider fixed assets to be of a different type, with no potential risk of support, hidden loss, or inaccurate revaluation. That is why we were unpleasantly surprised to see fixed assets in that draft. And the third discussion point is about calibrating the weights, weight ratios which are defined in a too general way in the current draft document by the Bank of Russia. This could potentially be changed significantly. I suggest we wait for the early draft legislation as the discussion unfolds rather than a draft letter by the Bank of Russia, and then see the impact on our metrics based on draft by-laws rather than a consultation letter. We are going to be there pretty soon. And again, even though this discussion has resulted in a broad public interest, it is very timely to hold it. I believe that in a mutual dialogue with the market regulator we will be able to tackle all these three discussion points that I have outlined in a fairer way towards the banking community.

Elena Tsareva: Thank you. Now, another question if I may. It may be a dummy question, but nonetheless. You have raised your profit guidance to RUB 295 bn. That looks very precise. Why not round it to RUB 300 bn? That would be much brighter. Don't you think so? And a related question. Your early guidance for 2022, which is based on the RUB 310 bn strategy. Can you confirm that? Is the guidance up to date?

Dmitry Pianov: As you can understand, we are leaving some room to get a pretty number into the actual accounts, rather than in our outlook. That is one purpose of why this number stands at RUB 295 bn. As you know, there must always be some room to outperform the disclosed target. As far as your second question is concerned - indeed, our strategy prescribes RUB 310 bn in 2022. But there have been several steps of increasing the key rate by the Bank of Russia, and that is not over yet. That said, the Central Bank is clearly sending signals that the next rise will be final. We clearly see that 2022 will face a significant pressure on the profitability of the banking sector, given the interest risk. It is going to have a limited impact on us in 2021, but with the increased rates fully applicable across 2022, it is going to be different. Hence, a significant upgrade of our target as it currently stands in our strategy could hardly be expected. It would be a great challenge to operate in a more intricate macro environment and still deliver RUB 310 bn.

Elena Tsareva: Thank you very much for your answers.

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