PSB Publishes H1 2016 IFRS Results

Promsvyazbank (PSB) publishes 1H 2016 IFRS interim condensed consolidated financial statements and the corresponding review report by PriceWaterhouseCoopers. (download statements)

In Q2 2016, PSB completed full consolidation of Pervobank PJSC. As a result, PSB Q2 2016 retail deposits increased by 16% to RUB 350 bn. Also, in June 2016, PSB received cash in return for preferred shares issued in amount of a RUB 3.7 bn. Consequently, PSB 1H 2016 equity totaled RUB 91 bn, a 9% increase compared to the beginning of the year (2015: RUB 83 bn).

Key Profit and Loss Statement Indicators

  • Net profit for Q2 2016 amounted to RUB 1.3 bn, 5x higher q-o-q. 1H 2016 net profit totaled RUB 1.6 bn, compared to a loss of RUB 4.8 bn for 1H 2015.
  • Net interest income for 1H 2016 remained flat y-o-y at RUB 12.6 bn (1H 2015: RUB 12.5 bn).
  • Net interest margin for Q2 2016 was 2.1%, compared to 2.4% for Q1 2016. The decrease in net interest margin q-o-q was due to changes in PSB accounting policy for recognition of interest income on impaired loans with only high recovery probability, adopted since the end of 2015.
  • Net fee and commission income for Q2 2016 increased by 3% from Q1 2016 and amounted to RUB 3.9 bn. The share of net fee and commission income in net operating income, excluding revaluation of investment property acquired by the bank in June 2016, remains high at 42%. 1H 2016 net fee and commission income increased by 26% y-o-y to RUB 7.8 bn, with a 37% share in net operating income.
  • Total financial result from securities, financial instruments and FX for Q2 2016 was a loss of RUB 0.2 bn, compared with an income of RUB 0.8 bn a quarter earlier. 1H 2016 total result from these transactions was a gain of RUB 0.6 bn, compared with an income of RUB 6.8 bn for 1H 2015.
  • Operating income dynamics in Q2 2016 was largely driven by recognition of a positive mark-to-market effect in the amount of RUB 8.4 bn on investment property acquired by the bank in June this year as part of an overdue loan settlement process. Operating income for Q2 2016 increased more than 1.5 times compared to Q1 2016, to RUB 17.8 bn. 1H 2016 operating income totaled RUB 29.1 bn, up 25% y-o-y.
  • General and administrative expenses for Q2 2016 amounted to RUB 5.2 bn, up 4% from Q1 2016. 1H 2016 general and administrative expenses grew 5% y-o-y, to RUB 10.2 bn mainly due to Pervobank consolidation, while the cost-to-income ratio decreased by 6 pp to 35%.
  • Net loan impairment provision charges for Q2 2016 amounted to RUB 11.2 bn against RUB 6.6 bn for the previous quarter, which corresponds to the cost of risk of 5.3% per annum against 3.0% a quarter earlier. 1H 2016 cost of risk was 4.1%, down 8 bp y-o-y.

Key Balance Sheet Indicators

  • As at 30 June 2016, assets totaled RUB 1.185 trln, down 2.3% compared to the beginning of the year (Q1 2016: RUB 1.221 trln). Such dynamics was due to the bank's conservative approach to asset growth in a weak macroeconomic environment. Excluding the effect of the ruble recovery, PSB 1H 2016 total asset growth was 1.8%.
  • Net loans to customers was RUB 798 bn, remaining flat compared to the beginning of the year (2015: RUB 800 bn, Q1 2016: RUB 765 bn). 1H 2016 corporate loan portfolio was flat to 2015 level at RUB 686 bn; SME loan portfolio decreased by 14% to RUB 41 bn; retail portfolio, on the contrary, grew 5% to RUB 71 bn. Q2 dynamics was largely driven by growth in corporate lending.
  • The share of non-performing loans (NPLs) (overdue 90+) in PSB loan portfolio rose to 7.5% at the end of 1H 2016, compared to 4.0% at the beginning of the year (Q1 2016: 5.3%). NPL coverage ratio remained at a comfortable level of 115% (2015: 200%, Q1 2016: 168%).
  • Securities portfolio increased by 8% during 1H 2016, to RUB 66 bn, mainly driven by highly liquid corporate Eurobonds (Q1 2016: RUB 63.4 bn). The share of securities portfolio on PSB balance sheet increased to 6% compared to the beginning of the year (2015: 5%, Q1 2016: 5%).
  • Customer accounts for 1H 2016 totaled RUB 857 bn, up 8% compared to the beginning of the year (Q1 2016: RUB 810 bn). Most of the growth occurred in Q2 2016 (+6%). 1H 2016 share of current accounts was 29% (2015: 28%, Q1 2016: 32%).
  • Funding from the CBR for 1H 2016 decreased 16x to RUB 8.4 bn (Q1 2016: RUB 74 bn). The share of CBR funding in PSB total liabilities declined from 11.6% to 0.8% (Q1 2016: 6.5%).
  • Loan-to-deposit ratio for 1H 2016 decreased to 93% (2015: 101%, Q1 2016: 94%) amid replacement of CBR funding with customer accounts.
  • Shareholders’ equity for 1H 2016 was RUB 91 bn, up 9% compared to the beginning of the year (2015: RUB 83 bn, Q1 2016: RUB 84 bn). In June 2016, PSB received cash in return for preferred shares issued in amount of a RUB 3.7 bn.

Overview of Financial and Operating Indicators

Interest income for Q2 2016 was RUB 24.4 bn, down 3% from Q1 2016 (RUB 25.1 bn). 1H 2016 interest income totaled RUB 49.6 bn, compared to RUB 50.7 bn for the same period last year. The reduction in interest income was mainly due to changes in PSB accounting policy for conservative recognition of interest income with only high recovery probability, adopted at the end of 2015. Interest income dynamics was also affected by new bank’s strategy on problem loans management, which gives up, in certain cases, restructuring in favor of insolvency procedures. As a result of this strategy in 1H 2016 PSB received interest income in amount of RUB 44.9 bn in cash, 8% higher y-o-y.

Interest expense for Q2 2016 was RUB 18.7 bn, up 2% from Q1 2016, mainly driven by expansion of the retail deposit base (+24% to the beginning of 2016). 1H 2016 interest expense totaled RUB 37.0 bn, a 3% decrease y-o-y.

Net interest income for 1H 2016 totaled RUB 12.6 bn, remaining flat at the level of the previous year (RUB 12.5 bn).

Net fee and commission income for Q2 2016 was RUB 3.9 bn, up 3% from Q1 2016. The share of net fee and commission income in net operating income, excluding revaluation of investment property acquired by the bank in June 2016, remains high at 42%. 1H 2016 net fee and commission income increased by 26% y-o-y, to RUB 7.8 bn, with a 37% share in net operating income. Driven by consistent customer base growth, the SME segment was the most significant contributor to net fee and commission income growth, with a 46% share in 1H 2016 total result.

Operating income for Q2 2016 grew more than 1.5x from Q1 2016, to RUB 17.8 bn. To a significant extent, growth was driven by recognition of a positive mark-to-market effect in the amount of RUB 8.4 bn on investment property acquired by the bank in June this year as part of an overdue loan settlement process. 1H 2016 operating income totaled RUB 29.1 bn, a 25% increase y-o-y.

General and administrative expenses for Q2 2016 were RUB 5.2 bn, up 4% from Q1 2016. Cost-to-income ratio as at the end of Q2 was 29%, down 15 pp compared to Q1 2016. 1H 2016 general and administrative expenses totaled RUB 10.2 bn, a 5% increase y-o-y, mainly driven by Pervobank consolidation. 1H 2016 cost-to-income ratio decreased by 6 pp to 35%.

Provision for loan impairment for Q2 2016 were RUB 11.2 bn, compared to RUB 6.6 bn for the previous quarter, which corresponds to cost of risk of 5.3% per annum, against 3.0% a quarter earlier. Cost of risk in the corporate loan portfolio was 5.4% at the end of Q2 2016, up 2 pp from Q1 2016. Most provisions in Q2 2016 were made for loans to customers in the transport, trade and infrastructure construction. Q2 cost of risk in the SME segment rose to 7.4% amid a decline in the loan portfolio in this segment. Cost of risk for the retail portfolio in the reporting period amounted to 2.2% against 5.9% a quarter earlier, driven by partial provision recovery. Such dynamics was caused by increased efficiency of the recovery process and an overall improvement in the retail portfolio quality.

The share of non-performing loans (NPLs) (overdue 90+) in PSB loan portfolio increased to 7.5% at the end of Q1 2016, compared to 4.0% at the beginning of the year, due to expected maturation of the impaired loan portfolio amid new bank’s strategy on problem loans management, which gives up in certain cases restructuring in favor of insolvency procedures (Q1 2016: 5.3%). 1H 2016 NPL coverage ratio for 90+ overdue loans declined to 115% (2015: 200%, Q1 2016: 168%), remaining, however, within a comfortable range. During 1H 2016, PSB wrote off and sold non-performing loans for a total of RUB 14.2 bn. 1H 2016 share of non-performing loans increased to 7.4% in the corporate loan portfolio (2015: 3.0%), decreased in the SME portfolio by 2.6 pp to 12.0% (2015: 14.6%), and decreased in the retail portfolio from 6.6% to 5.9%.

PSB continues to maintain a sufficient level of liquidity. As at 30 June 2016, the share of liquid assets in total assets was 17% (2015: 19%, Q1 2016: 22%). Liquid assets to customer accounts stood at 23% (2015: 29%, Q1 2016: 33%), an adequate level under the stress scenario. As a systemically important bank, PSB meets the regulatory short-term liquidity requirement (LCR). At the end of 1H 2016, PSB LCR stood at 72%, against the minimum requirement of 70%.

Securities portfolio as at the end of Q2 2016 was RUB 66 bn, an 8% increase compared to the beginning of the year (Q1 2016: RUB 63.4 bn), while its share of balance sheet rose to 6% (2015: 5%; Q1 2016: 5%). PSB continues to maintain a conservative approach to its securities portfolio structure, with approximately 90% of securities included in the CBR Lombard List.

1H 2016 customer accounts stood at RUB 857 bn, an 8% increase compared to the beginning of the year. Excluding the effect of the ruble recovery, growth would have been 13% (Q1 2016: RUB 810 bn). 1H 2016 current accounts totaled RUB 252 bn, a 12% increase compared to the beginning of the year, while their share increased to 29% (2015: 28%; Q1 2016: 32%). Current accounts volume and share growth is a priority for the bank. Retail customer accounts increased by 16% in the reporting quarter (+21% for the 1H 2016), while their share in total customer accounts rose to 41%, an increase of 4 pp compared to the beginning of the year (Q1 2016: 37%). The key driver of the growth was Pervobank consolidation completed in the end of June 2016.

Funding from the CBR for 1H 2016 decreased 16x to RUB 8.4 bn, following full repayment by PSB of a 12-month USD loan received in Q1 2015 (Q1 2016: RUB 74 bn). The share of CBR funding in total liabilities decreased from 11.6% to 0.8% (Q1 2016: 6.5%). As at 30 June 2016, the amount of unused CBR funding available to PSB was c.a. RUB 95 bn.

Concentration of top-20 borrowers in PSB net portfolio was 33% (2015: 34%, Q1 2016: 32%). The share of top-20 depositors in total customer accounts as at 30 June 2016 decreased to 28% due to retail customer accounts growth (2015: 32%, Q1 2016: 31%). The share of loans to related parties to total IFRS capital as per Basel III accords was 22.6% at the end of 1H 2016 (2015: 21.0%, Q1 2016: 21.9%).

Capital

  • Total IFRS capital adequacy ratio as per Basel III was 13.8% as at 30 June 2016 (2015: 14.4%, Q1 2016: 14.4%), against the minimum requirement of 8.0%; tier 1 capital adequacy ratio was 8.3% (2015: 8.2%, Q1 2016: 8.3%), against the minimum requirement of 6.0%; core capital adequacy ratio was 6.8% (2015: 6.8%, Q1 2016: 7.0%), against the minimum requirement of 4.5%.
  • Total RAS Basel III capital adequacy ratio was 12.5% as at 30 June 2016 (2015: 13.8%, Q1 2016: 12.6%), against the minimum CBR requirement of 8%; core capital adequacy ratio was 6.7% (2015: 7.3%, Q1 2016: 6.9%), against the minimum requirement of 6.0%; base capital adequacy ratio was 5.3% (2015: 5.9%, Q1 2016: 5.7%), against the minimum requirement of 4.5%.
PSB Deputy Chairman of the Management Board and CFO Vladimir Mamakin comments on the results: «Q2 and 1H 2016 results were in line with our expectations. PSB in 1H 2016 continued to deliver consistent results in its transactional business, which is particularly robust in the SME segment. Also net fees and commissions remained growing: 1H 2016 result up 26% y-o-y to RUB 7.8 bn which is equal to 37% of net operating income. Net interest margin was still under stress, following adoption by the Bank of a new, more rigid stand on dealing with problem loans and recognition of interest income on such loans.

Shareholders continue to support the bank. In June 2016, PSB received RUB 3.7 bn cash for preferred shares issued in favour of majority shareholders, and investment property which mark-to-market revaluation positively affected the financial result in the amount of RUB 8.4 bn.

We fully comply with regulatory requirements of the Central Bank in terms of capital adequacy and liquidity, and uphold our reputation as a reliable borrower. In July, without resorting to external borrowing, the Bank promptly and fully redeemed a subordinated Eurobond issue in the amount of US$189 mln.

In the reporting period, PSB completed consolidation of Pervobank PJSC. As a result, PSB customer base has increased by approximately 10 thnd corporate and 100 thnd retail customers, while our regional network in the Samara region increased by 16 offices to a total of 22 offices.

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Acquisition
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