UPDATE 3--Russia's VTB working on plan to strengthen capital as profit plunges

Tue May 27, 2014 11:27am EDT

* Working with government on plan to boost capital, lending

* Provisions charge more than doubles in Q1

* Hit by fall in Ukrainian hryvnia

* Shares slide 3 pct in Moscow (Recasts with comments on capital strengthening)

By Megan Davies

MOSCOW, May 27 (Reuters) - Russia's No.2 lender VTB said it was working with the government on a plan to boost banks' capital and lending, as a plunge in its net profit and a rise in bad loan provisions showed the economic pain being inflicted by the Ukraine crisis.

Once grouped with Brazil, China and India in the BRIC acronym for fast-growing emerging markets, Russia is now flirting with recession, hurt by tensions with Ukraine that prompted the West to impose sanctions and led foreign investors to flee as well as its currency and stock market to slide.

Russian President Vladimir Putin promised at an investment forum on Friday the government would help systemically-important banks by allowing them to convert subordinated loans to shares. That would boost their capital positions and free them up to lend more in support of economic growth.

"We are currently working with the government in relation to a potential conversion of subordinated debt provided in 2008-2009," VTB Chief Financial Officer Herbert Moos said on Tuesday. This would be converted into preferred shares.

"We expect that this conversion would materially improve our Tier One (capital) ratio and we expect that this conversion would be completed by end 2014," he said.

State-controlled VTB's Tier One ratio - a key measure of a bank's ability to absorb losses - was 10.3 percent at the end of the first quarter, lower than the average for the 20 largest euro zone banks at the end of 2013 of 11.85 percent.

Chief executive Andrei Kostin said a volatile economy and geopolitical tensions had a significant impact on VTB's quarterly performance, leading it "to be prudent and more conservative in our lending and provisioning policies".

VTB's shares fell 3 percent in Moscow.

The bank said its provision charge for bad loans more than doubled in the first quarter to 47.6 billion roubles ($1.4 billion), hitting net profit which fell to 400 million roubles - far below analysts' forecasts of 12.9 billion.

"They charged a lot (for provisions) and the cost of risk was far above our estimates," said Gazprombank analyst Andrei Klapko.

VTB's non-performing loan ratio jumped to 5.8 percent of gross customer loans from 4.7 percent three months earlier. Its retail bank VTB 24 has "considerably reduced approval rates for the riskiest customer segments", the bank added.

Return on equity (RoE) - a measure of a bank's profitability - sank to 0.2 percent from 8.1 percent a year earlier, putting it far below European peers.

Its cost of risk - a measure of its loan losses expressed as a percentage of its total loan portfolio - rose to 2.8 percent from 1.6 percent.

Net loss from foreign currencies was 8.2 billion roubles, hit by a fall in the Ukrainian hryvnia, which is down more than 40 percent this year. VTB had previously said its exposure to Ukraine was 20 billion roubles and its operations there amounted to about 2-3 percent of its total operations.

($1 = 34.1780 Russian roubles) (Additional reporting by Oksana Kobseva and Laura Noonan,; Editing by Elizabeth Piper and Mark Potter)