Daily analyst comments

Vozrozhdenie Bank publishes neutral 9M 2009 IFRS financials


	Vozrozhdenie Bank

Capitalization: 718 835 878,94 $

Common shares
Rating	Buy
Price	33,93 $
Target price	43,40 $

Price changing
week	month	year
6,2%	25,3%	59,4%

Preferred shares
Price	11,42 $

Price changing
week	month	year
7,0%	13,1%	15,7%

26.11.09 10:31

The financials released reveal the bank’s ability to exercise stringent controls over expenses and to maintain profitability amid business contraction. Nevertheless, we expect pressure on the bank’s interest margins to intensify in upcoming quarters. We are also discouraged by NPL growth in the third quarter, which was higher than in the previous quarter.

On November 25, Vozrozhdenie Bank disclosed consolidated financials for the first nine months of 2009, based on IFRS. In the reporting period, the bank saw assets decline 4.4% to RUB 135.0 billion and loan portfolio dwindle 5.8% to RUB 93.6 billion. Equity capital equaled RUB 15. 9 billion towards the end of 3Q, a 5.7% gain YTD.

Table 1. Vozrozhdenie Bank: key balance sheet indices and financial ratios, mn RUB

Indicator	3Q 2009	4Q 2008	Change	2Q 2009	Change
Assets (at the end of the period)	134 958	141 211	-4.40%	137 014	-1.50%
Loan portfolio (at the end of the period)	93 604	99 332	-5.80%	97 765	-4.30%
Equity (at the end of the period)	15 919	15 065	5.70%	15 705	1.40%
Share of NPLs	9.40%	3.40%	+ 6.0 pp	7.3%	+ 2.1 pp
Cost/Income	47.70%	50.00%	-2.3 pp	47.5%	+ 0.2 pp
Net interest margin	6.00%	7.50%	-1.5 pp	6.0%	0.0 pp
Capital adequacy	18.60%	16.50%	+ 2.1 pp	18.4%	+ 0.2 pp

Source: Vozrozhdenie data

On the positive side, we note that:

The bank has managed to maintain its interest margin at the previous quarter’s level through the gradual rejection of expensive funding sources, which we view as a very positive point in the report. However, the bank saw interest income shrink further in 3Q amid declining interest on loans and NPL growth. We believe that the potential to make gains from changing funding sources will soon be exhausted, and that the interest margin will thus remain under pressure.
The bank exercises effective controls over expenses, which decreased 3.6% in 3Q over the previous quarter. A cost/income ratio rose by just 0.2%. Management looks set to keep this ratio in the range of 40-50%.
The bank continues to stick to a conservative lending policy, as a result of which its loan portfolio, before provision for impairment, shrank by a modest 4.3% in 3Q, and its assets decreased by 1.5%. Management is considering expanding the loan portfolio further while interest rates are still attractive, but this involves keeping credit risks at acceptable levels.

Table 2. Vozrozhdenie Bank: main income statement indicators, mn RUB

Indicator	9M. 2009	9M 2008	Change	3Q 2009	2Q 2009	Change
Interest income	12 988	10 133	28.20%	4 173	4 250	-1.80%
Interest expenses	6 562	4 232	55.10%	2 134	2 198	-2.90%
Net interest income	6 426	5 901	8.9%	2 039	2 052	-0.6%
NPL provisions	4 165	981	324.60%	1 270	1 249	1.70%
Fee and commission income	2 950	3 133	-5.80%	1 014	996	1.80%
Operating income	5 751	8 306	-30.8%	1 804	1 976	-8.7%
Administrative and operating expenses	4 379	5 007	-12.50%	1 467	1 522	-3.60%
Net profit	842	2 525	-66.7%	200	256	-21.9%

Source: Vozrozhdenie data

We are discouraged by the NPL growth in 3Q of 2.1%, from 7.3% to 9.4%, against NPL growth of 1.4% in 2Q and fear that the share of NPLs may exceed our year-end expectations of 10%. For all that, we believe that the share may be one of the lowest in the financial sector, if estimated under the most stringent criteria, owing to the bank’s traditionally conservative lending policy.

Net income of RUB 842 million has met market expectations.

We view Vozrozhdenie Bank common shares as the best investment opportunity in the financial sector. Our target price for one common share in the bank is USD 47.50 as of year-end 2010, with a BUY rating.

Konstantin Romanov

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