UPDATE 2-Weakening economy hits profit at Russian bank VTB

Tue Jul 2, 2013 9:13am EDT

* First-quarter profit falls 33 pct, misses forecasts

* Slower economy leads to higher loan-loss provisions

* Net interest margin holds up

* Shares reverse early losses (Adds analyst comments, detail, background, shares)

By Megan Davies and Oksana Kobzeva

MOSCOW, July 2 (Reuters) - VTB, Russia's second-biggest bank, missed first-quarter profit forecasts and set aside more money to cover potential bad loans, adding to signs the country's banks are suffering from a slowdown in economic growth.

Russia's $2 trillion economy has been knocked by the weakness of its main euro zone trading partners as well as softening commodities markets, with the government recently cutting its 2013 growth forecast by a third to 2.4 percent.

That has raised fears about borrowers' ability to repay debts and that banks in turn might curb lending.

Sberbank, Russia's biggest bank, reported a 4 percent drop in first-quarter profit in May and set aside $1 billion to cover potential bad loans.

VTB on Tuesday posted a larger-than-expected 33 percent fall in first-quarter net profit and made 22 billion roubles ($668 million) of provisions for possible bad loans - higher than the 20.4 billion roubles in the same period the previous year

"This year, there does appear to be a likely sector margin squeeze at the same time as a worsening of loan quality - which will make it hard to have any profit growth," said Jason Hurwitz, analyst at Alfa Bank in Moscow.

The Russian government and central bank have been implementing policies to improve liquidity - in part because they want lending rates to go down to help the economy.

But banks generally find their net interest margin falls when lending rates decline, analysts say.

VTB's net interest margin was 4.5 percent in the first quarter, little changed from 4.6 percent the same time in 2012.

PROVISIONS

VTB bolstered its capital strength through a 102.5 billion roubles ($3 billion) offering of new shares in May, which the bank said set it up for more profitable growth ahead, particularly in the retail market.

Alfa Bank's Hurwitz said investors might be concerned the bank had perhaps waited until after the capital increase to lift its provisions.

"The higher provisions could be seen as a sign that the bank is under-provisioned, implying a perceived risk that further high risk charges may lie ahead," he said

The provision charge reached 1.6 percent of the average loan portfolio in the first quarter, higher than the 1.1 percent in the fourth quarter of 2012, though lower than a year ago.

VTB said its Tier 1 capital adequacy ratio - a key measure of a bank's ability to absorb losses - stood at 10.2 percent as of end of March. It has said the offering will boost its Tier 1 ratio to over 11 percent.

Chief Financial Officer Herbert Moos said non-performing loans remained stable but an expectation of a worsening in credit quality due to the tougher economic backdrop meant VTB had raised the provisions.

First-quarter net profit fell to 15.7 billion roubles, short of the 16.3 billion average forecast in a Reuters poll of analysts.

"The main factor in the lower profits is the rise in provisions, and lower revenues from trading and non-bank business," said Gazprombank banking analyst Andrey Klapko.

He added, however, that there were some positives, such as a surprisingly resilient net interest margin. Net interest income - a measure of the difference between what a bank earns from lending and interest to depositors - rose 37 percent.

VTB's capital raising diluted the government's share in the bank to 60.9 percent from 75.5 percent. In 2015, a further stake is due to be sold.

VTB's shares were up 0.2 percent in mid afternoon, reversing an earlier fall of over one percent.

($1 = 32.9557 Russian roubles) (Editing by Mark Potter)

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