Vnesheconombank Deputy Chairman – Member of the Board Sergei Lykov’s Interview to Prime News Agency

Vnesheconombank Deputy Chairman Sergei Lykov told in his interview to Prime Agency how the dynamic growth of the Bank’s loan portfolio influenced Vnesheconombank Group’s indicators in the first half of 2013, as well as in which sectors companies received the largest volume of credits and if VEB’s main borrowers are state corporations.

-How would you assess VEB’s performance for the 1st half of 2013?

-As a whole, I should say that despite the extremely negative situation abroad and known problems in the Russian economy Vnesheconombank Group was able to maintain stable development rates. Its consolidated financial statements, that is, statements with due regard to its subsidiary and affiliated institutions including foreign ones show that assets increased by 204 billion rubles from the start of 2013 or almost by 7%. This is higher than the growth in assets of the entire Russian banking sector that amounted to 6.5% for the same period of time. In our capacity of development institution we’re very happy that our loan portfolio increased by 230 billion rubles or by 15.4% (including in project financing where the growth amounted to 148 billion rubles, almost 24%) while in the banking sector as a whole these indicators in non-finance enterprises and institutions amounted to 5.3% and 13.7% - for natural entities. The proportion of credits to customers in Vnesheconombank Group’s assets increased from 51% to 55% for the first half of 2013.

-What economic sectors does Vnesheconombank regard as the most important in terms of extending credits?

-It’s well-known that the Bank’s main principles and lines of activity are set forth in the federal law “On the Bank for Development” and the Memorandum on its Financial Policies. Vnesheconombank’s subsidiaries are commercial institutions but their activities are closely related to addressing tasks that are set before Vnesheconombank. These tasks include overcoming infrastructure constraints, modernizing and developing non-raw materials economy, stimulating innovations, exports and implementing other projects.

In the first half of this year the Bank for Development played a major role in Vnesheconombank Group’s loan portfolio growth. Its proportion in the total volume of growth was almost 76% but I’d also like to underline excellent performance of such members of the Group as OJSC VEB-Leasing, its portfolio increased by almost 21.53% to 214 billion rubles as well as OJSC Belvnesheconombank, its portfolio increased by 23.3% to 47 billion rubles.

As far as economic sectors are concerned most credits were extended to construction and production sectors including mechanical engineering and defense industrial complex – 846.4 billion rubles (taking into account formed reserves) an increase of more than 23% for the first half of the year. Next in terms of growth rates are transport (18.1%), raw materials industry (19.3%), telecommunications (8%) science and education (almost 41.15%) but unfortunately the volume is still small).

Somehow it is believed that Vnesheconombank’s main borrowers are state-controlled companies. Vnesheconombank Group’s financial statements show that this is not the case. Almost 1552.2 billion rubles (taking reserves into account) were extended to private companies, that is, almost 80% of the whole loan portfolio.

-You’ve mentioned reserves formed against extended credits. What are their volumes and dynamics?

-As a whole in the first half of 2013, credit depreciation reserves increased by 21.1 billion rubles from 193.4 billion rubles to 214.5 billion rubles or by 10.9%. We view this increase as more than normal keeping in mind the dynamic growth rate of our loan portfolio as well as the fact that investment projects account for the greater part of this portfolio. Here I mean projects that are not attractive for commercial and financial sectors. During the first half of the year reserves ratio changed insignificantly from 11.4% to 11.1%.

-How did Vnesheconombank Group manage to ensure such a high growth rate of assets and loan portfolio?

-Vnesheconombank Group is making strenuous efforts to diversify its sources of financial resources. There’s no doubt that the state provides a great deal of support. Owing to subsidies received from the Russian Finance Ministry in the total amount of 77 billion rubles (62 billion rubles - for forming the Russian Direct Investment Fund and 15 billion rubles - for implementing top-priority projects in the Far East and in the Baikal region) the Group’s capital was increased to 599.5 billion rubles. I’d like to say that at the start of the 3d quarter the state made another financial contribution to Vnesheconombank’s capital in the amount of 4.068 billion rubles with Rostelecom’s shares.

VEB raised more funds from the Bank of Russia through using REPO transactions with securities in Vnesheconombank’s portfolio. As a result the debt to the Russian Government and the Bank of Russia increased by 33.1 billion rubles (+3.4%) to 1.015 trillion rubles. The Bank made strenuous efforts to expand volumes of financial resources raised on foreign and domestic capital markets. The amount of Vnesheconombank’s and its subsidiary banks’ and companies’ debt securities increased by 100.1 billion rubles (+25.7% from the start of the year) to 489.1 billion rubles. During this period the amount of funds raised from OECD credit institutions increased by 75.02 billion rubles (+28.0%) to 341.5 billion rubles. As a result the total amount of raised financial resources in the 1st half of 2013 increased by 192 billion rubles (+8.4%) and was 2.469 trillion rubles.

Thus, Vnesheconombank managed to raise 3.2 rubles for each ruble invested in its capital. The raised funds were used for modernizing the economy.

-As Vnesheconombank is a state corporation, that is, a nonprofit institution, generating profits is not an end in itself for it. Does Vnesheconombank continue to operate on a break-even principle?

-If we perform an analysis through comparing data for the first half of 2013 and the first half of 2012 on the basis of average chronological balance indicators we can see that profits went down from 21.6 billion rubles to 0.8 billion rubles. The main reasons are pretty objective: this is additional formation of reserves (and the reason for it is quite obvious – a sharp increase in the amount of investment projects in the Bank’s loan portfolio) and negative dynamics in foreign currency revaluation of balance sheets, the amount of balance decreased by 7 billion rubles for a comparable period of the last year.

And I’d like note that net interest income amounted to 46.7 billion rubles - an increase of 8 billion rubles (+20.8%) from the same period in the last year. Net interest margin remained stable at a level of 3.4%. The main reason for it was the growth of interest incomes to117.6 billion rubles due to the increased volume of the loan portfolio. Expenses also increased by 11.6 billion rubles (+19.5%) to 71 billion rubles. The growth in expenses was influenced by increased volume of raised funds and a certain increase in fund-raising rate from 6% in the first half of 2012 to 6.1% in the first half of 2013. In this respecrt it should be noted that Vnesheconombank’s capacity to raise financial resources is limited compared to major commercial banks as they can raise deposits from legal and natural entities and use balances of these accounts to conduct active transactions.