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Aug. 4, 2009, 3:48 p.m. EDT

VTB Bank reports net loss as Russian recession takes toll

Russia's second biggest lender doesn't expect to return to profit this year

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By Polya Lesova, MarketWatch

NEW YORK (MarketWatch) -- VTB, Russia's second biggest bank, reported Tuesday a much bigger-than-expected loss for the first quarter, saying it doesn't expect to return to profitability this year as the deep Russian recession takes a toll.

State-controlled VTB Bank reported a net loss of 20.5 billion rubles for the three months ended March 31, compared with a net profit of 2.9 billion rubles in the year-ago period.

Most analysts were looking for a net loss of 12 billion rubles.

VTB also reported a net loss attributable to shareholders of 21.4 billion rubles for the first quarter compared with a profit of 2.7 billion rubles in the year-earlier period.

Andrei Kostin, VTB president, said his bank is working hard, together with the government, to support its customers "in the face of extremely tough economic conditions."

"The level of provisions is to remain high in 2009 and we would not expect to return to profit this year."

VTB President Andrei Kostin

"The level of provisions is to remain high in 2009 and we would not expect to return to profit this year," Kostin said in a statement. "We are confident that we will be able to weather the storm and emerge successfully with a strong franchise when the economy recovers."

Russia's economy contracted by 9.8% year-on-year in the first quarter and unemployment rose to 10.4%. The ministry for economic development expects the economy will shrink by 8.5% overall in 2009.

The Russian government controls 77.5% of VTB. The bank's shares are traded on the Micex and RTS exchanges in Moscow as well as on the London Stock Exchange as global depositary receipts.

Sharp rise in provisions

The first-quarter loss resulted from increased provisions for bad loans and a one-off charge tied to the reclassification of interest rate swaps, the bank said.

VTB raised its provision charge to 49.2 billion rubles in the first quarter, which represents an annualized 7.1% of its average gross loan portfolio. That is a substantial increase from the year-ago period when its provision for bad loans was 4.7 billion rubles.

The share of overdue and rescheduled loans in the gross loan portfolio increased to 4.3% by the end of the first quarter from 2.4% at the end of 2008.

The bank also had a one-off charge of 10.3 billion rubles related to foreign currency loans which were restructured into ruble loans. It further booked a loss of 1 billion rubles from trading securities in the first quarter.

VTB said that Russian companies continue to face serious difficulties refinancing their operations despite the anti-crisis measures of the government.

"With foreign credit markets remaining mostly shut for Russian corporates, VTB has been working actively to provide alternative sources of finance in the domestic market," the bank said.

Simon Nellis, analyst at Citigroup, said that VTB's "top-line results were weak, with net interest income and fee income well below expectations."

"The bright spot in the results was tight cost control," Nellis wrote in a note to clients. The analyst maintained his "sell/high risk" rating on the stock.

Analysts at UBS said in a research note that provisions continue to cloud the investment case for VTB. They kept their "sell" rating on the stock unchanged.

Polya Lesova is a New York-based reporter for MarketWatch.

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