<strong>VTB</strong> <strong>Annual</strong> Report <strong>2011</strong>3. The economy and banking sector16Russian macroeconomic indicators, % year-on-yearIndustrial productionCapital investments22.79.98.26.84.70.6–9.3–15.72007200820092010<strong>2011</strong>Source: Rosstat.6.08.3Retail turnover16.113.6–5.16.37.2In <strong>2011</strong>, trading of Russian Eurobonds was drivenby investor sentiment rather than by marketfundamentals. However, this investor sentimentdeteriorated in the second half of <strong>2011</strong> following theworsening debt and banking crisis in the Eurozone.At the same time, the fundamental macroeconomicfactors for Russia as a sovereign borrower, suchas a flexible exchange rate, moderate inflationrates, favourable oil prices, surplus budget andan increase in international reserves, were mostlypositive or neutral. The level of activity of Russianbanks on the international debt market was low,mainly due to lower funding costs in the country.It became even more profitable to place bonds inthe domestic market in <strong>2011</strong>, as the difference inspreads between rouble and US dollar instrumentsincreased by approximately 50-70 basis points.Overall, according to the Bank of Russia, Russia’sgross foreign debt increased by USD 56.3 billion in<strong>2011</strong> to a total of USD 545.2 billion. Banking sectordebt rose by USD 18.7 billion to USD 162.9 billion,while corporate borrowers increased their foreigndebt by USD 39.7 billion to USD 337.9 billion.loan portfolio in 2010. The key drivers for the growthof the lending sector were economic growth and theexpectation of a lending rate increase in the secondhalf of the year – they had reached a record low inthe summer of <strong>2011</strong>. The state-owned banks werethe leading players in the lending sector.At the same time, acceleration in loan portfoliogrowth rates occurred mainly in the second half ofthe year due to the depreciation of the rouble (theRUB/USD exchange rate decreased by 16.5% fromAugust to December <strong>2011</strong>), as foreign currency loansaccounted for 18% of the total loan portfolio.In <strong>2011</strong> there was further significant improvementin asset quality as, by the end of the <strong>report</strong>ingperiod, the proportion of non-performing loans in thebanking sector as a whole had decreased to 4.8%,compared to 5.7% at the end of 2010, supported bythe growth in Russian banks’ loan portfolios.The proportion of non-performing corporate loanswas down to 4.6% (5.3% at end 2010), with a nonperformingretail loans figure of 5.2% (6.9% at end2010).17The rate of inflation in Russia decreased to 6.1% perannum by the end of the <strong>report</strong>ing period, mainlydue to the Bank of Russia’s transition from a fixedexchange rate policy to a more flexible one, as wellas a good harvest in <strong>2011</strong>. In December <strong>2011</strong>, thefood price inflation rate reached 3.9%.The Bank of Russia shifted from tightening monetarypolicy in the first half of the year to easing it later inthe year. Taking into account excess rouble liquidityand the high inflation rate at the beginning of <strong>2011</strong>,it raised key interest rates and increased reserverequirements. In the first six months of the year,the Bank of Russia base rate increased to 8.25%,50 basis points higher than in December 2010. Withdecreased inflationary pressure, the Bank of Russiakept the base rate unchanged until December,when it decided to lower the base rate by 25 basispoints to 8.00%. During the year the Bank of Russianarrowed the interest rate corridor by graduallyincreasing deposit rates, which reached 4% at theend of <strong>2011</strong>, a 1.25 percentage point increase fromthe previous year.The RUB/USD exchange rate was 32.20 at the end of<strong>2011</strong>, representing a depreciation of 5.6% comparedto the end of 2010. The exchange rate fluctuatedsubstantially over the year, reaching a high of27.28 roubles per US dollar on 2 May, and a low of32.72 roubles per US dollar on 4 October. The exchangerate was significantly affected by high oil prices arisingfrom the tense geopolitical situation in the MiddleEast, the escalation of the sovereign debt crisis in theEurozone, and capital outflows from Russia, whichintensified at the end of the fourth quarter. In <strong>2011</strong>,the net capital outflow from the Russian private sectoramounted to USD 84.2 billion, which greatly exceededthe 2010 figure of USD 33.6 billion.The Russian banking sectorThe Russian banking sector grew strongly in <strong>2011</strong>on the back of the robust economic recovery, whichfuelled an increased demand for loan products fromcorporate and retail clients. The Russian bankingsector’s assets increased by 23% year-on-year,compared to a 15% increase in 2010. At the sametime, the penetration of the banking sector, which isdefined as the ratio between the banks’ total assetsand GDP, rose from 75% in 2010 to 77% in <strong>2011</strong>.The penetration of the lending sector relative toGDP also increased to 43% in the <strong>report</strong>ing year,compared to 40% in 2010. This increase wasunderpinned by strong loan portfolio growthof 28% year-on-year in <strong>2011</strong>, including a 26%year-on-year increase in the corporate loan portfolioand a 36% year-on-year increase in the retail loanportfolio, compared to a 13% increase in the totalThe improvement in asset quality allowed banks toreduce their allowances for loan loss provisions bythe end of <strong>2011</strong>, as well as to restore a proportion ofreserves. This in turn resulted in a lower proportionof reserves in the total portfolio – 8.5%, as opposedto 10.5% in December 2010. At the same time,the credit risk coverage ratio amounted to 179% atthe end of <strong>2011</strong>, which was a suitable level for thebanking sector.Lower allowances for loan loss provisions and thestronger reserves position positively impacted manybanks’ financial results. The sector’s total profitreached a record level of RUB 848 billion, comparedto RUB 573 billion in 2010. In <strong>2011</strong>, the growth intotal profit was accompanied by a decrease in thenumber of unprofitable banks in the sector to 50,compared to 81 in 2010.
<strong>VTB</strong> <strong>Annual</strong> Report <strong>2011</strong>3. The economy and banking sector18Banking system indicators (in RUB, billion)200720,1252,672508200828,0223,109409200929,4303,766205201033,8054,339573Growth in deposits remained at a consistent levelin <strong>2011</strong>, amounting to 24% compared to 23% in2010. Retail banking deposits grew at 21% in <strong>2011</strong>,which was slower than the 31% figure of the previousyear. However, corporate banking deposits growthaccelerated to 26%, up from 16% in 2010. At thesame time, the proportion of customer funds in grossliabilities remained at the 2010 figure of 70%.Despite the strong growth in deposits, the evengreater increase in loans resulted in a higher loan todeposit ratio of 83% in <strong>2011</strong>, compared to 78% in2010. This increase creates a strong foundation forfurther potential growth in the lending segment.A total capital adequacy ratio of 14.7% at the end of<strong>2011</strong> is evidence that the banking sector is able tomitigate negative factors and can further develop itslending operations in 2012.However, the deterioration in liquidity at the end ofthe year resulted in an increase in interest rates ondeposits as banks tried to increase their fundingbase for active operations. This led to an increase inlending rates, which indicates a potential decline inthe demand for loans. At the same time, a possibleslowdown in economic growth and lower GDP growthworldwide also suggests a potential reduction inlending in 2012.Due to the state-owned banks’ market-leadingpositions, they were the most active in <strong>2011</strong>.The four largest state-owned banks – Sberbank,<strong>VTB</strong> Group, Gazprombank and Russian AgriculturalBank – accounted for 51.0% of all banking assetsin the country as at the end of <strong>2011</strong>, compared to46.3% in the previous year. Against this background,and also due to growing pressure from the developingbanking crisis in Europe, some subsidiaries of foreignfinancial institutions were forced either to reduce thescale of their operations or to close down completely.The concentration of assets in the Russian bankingsector increased in the <strong>report</strong>ing year. At the endof December <strong>2011</strong>, the 20 largest banks (includingconsolidation) held 69.0% of assets compared to66.5% in 2010. Additionally, the share of the fivelargest banks in the sector increased to 53.4%,compared to 48.9% a year earlier.Russian banking sector loan portfolio and customerdeposits (in RUB, billion)2007200820092,9714,0173,5745,1595,9076,7537,4859,3168,4969,35812,51012,542192010<strong>2011</strong>14,06341,6284,0854,96310,8938489,818<strong>2011</strong>AssetsCorporate loans17,715EquityNet profitRetail loansCorporate deposits5,551Retail deposits13,701Source: the Bank of Russia.Source: the Bank of Russia.11,871
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