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.
Kommersant “Leasing”. Annex
The aircraft-leasing market is one of the most capital-intensive and dynamically developing markets. In 2012, the amount of new business in this segment was about 107 billion rubles. It increased by about 22% from a year ago. A specific feature of aviation leasing in Russia is a high concentration of the market. We can name five companies that are systematically involved in aviation leasing: VEB-Leasing, VTB-Leasing, Sberbank Leasing, the State Transport Leasing Company (STLC) and Ilyushin Finance Co. (IFC), with other companies conducting only individual transactions. Competition is developing between the first three companies. As far as STLC and IFC are concerned they occupy more specific niches working with regional aviation. Limitedness of the market is caused by the fact that companies can raise cheap long-term money. For objective reasons a small company can’t raise money more cheaply than a large one, it loses price competition, so, competition is bound to increase between the largest companies. It’s not a secret that now many major banks have excessive liquidity and it’s profitable for them to fund aviation business. Nevertheless, a new major player is unlikely to appear in this market.
A strong tendency in the development of the aviation leasing is the introduction of operating leasing. Even three years ago it was not possible to talk with Russian leasing companies about this sort of leasing. And now leading players are already ready to form a certain share of their portfolio in this segment. Operating leasing as opposed to financial leasing provides for an airline to return aircraft to a leasing company upon expiry of a leasing agreement. The accumulated experience and market realities make it possible for the largest leasing companies to operate using this scheme , the more so, this scheme is in demand by airlines and is suited for selling products of Russia’s aviation industry, the secondary market of which has not been so far established
Changes introduced in Regulation №1212 regulate the practice of extending subsidies for Russian aviation companies to compensate some of their expenses on leasing payments for aircraft leased out to them for domestic regional and local airborne transportation. Due to introduced changes, since early August of 2013, the Regulation has been applicable to domestic aircraft An-148 and Sukhoi SuperJet 100. They received a quota of 30% of funds under the subsidizing program. These changes are expected to increase demand for Russian-made aircraft by Russian airlines and this in its turn will stimulate aircraft makers. Another important change is that unitary state enterprises can also become participants in the leasing subsidizing program and this will increase the number of potential operators of Russian-made aircraft.
But if we assess the changes from a position of a leasing company we can say that not everything is so rosy. First, leasing transactions on aircraft are substantially extended in time that is why financial indicators of a potential lessee and its capacity to fulfill its obligations under a leasing agreement within a whole period of this agreement’s validity period play a key role in taking a decision on leasing out an aircraft. Unfortunately, nowadays there are very few Russian airlines with acceptable indicators. An airline’s readiness to make an advance payment in the amount of 10-20% is sure to have a positive impact on terms and conditions of a leasing transaction but at the same time will not be a decisive factor in making a decision on conducting a transaction with an individual lessee.
As far as foreign-made aircraft are concerned the situation is better because a leasing company can place risk on a leasing subject due to its sufficient liquidity on the secondary market and a possibility to determine its residual value. As far as such new Russian-made aircraft as Sukhoi SuperJet 100 are concerned we can’t apply these mechanisms as they have never been sold on the secondary market due to the small number of manufactured aircraft and the recent launch of their production as this makes it impossible to make projections with regard to their residual value.
Second, subsidies are made available provided that a financial leasing agreement has been concluded and this limits significantly the number of potential customers of SSJ100. As the practice shows airlines prefer to close operating leasing transactions with regard to new Russian-made aircraft. Under operating leasing transactions upon expiry of a leasing period a leasing company retains title to an aircraft and the aircraft is to be returned. In such cases an aircraft manufacturer acts as a guarantor of residual value and can repurchase it upon expiry of a leasing period. This is a negative factor for a manufacturer but as it has to promote its products the manufacturer is ready to take an additional burden. Naturally, in time a secondary market will be put in place and these problems will be resolved but in the current market conditions it would be quite appropriate to make the Regulation applicable to operating leasing too.
Third, both leasing companies and airlines call into question a provision of the Regulation that obliges a company that lays claim to a subsidy to start operating an aircraft no later than six months from the date of leasing agreement. Maybe these terms are acceptable for aircraft that are not new and were in operation before but as far as new aircraft are concerned we should increase this period to at least two years – a period needed to manufacture an aircraft.
Vyacheslav Solovjev, OJSC VEB-Leasing Director General