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July 10 (The following statement was released by the rating agency)
The introduction of deferred tax accounting for Russian banks boosted profits, Fitch Ratings says. But there is no credit impact because the change was largely a one-off and does not affect underlying profitability.
The extent to which the change in local accounting standards affected net income varied considerably. Most banks had a boost to net income, while few reported dampened returns.
We estimate that the introduction of deferred tax accounting accounted for 21% of the sector's RUB311bn net income in the first five months of the year (5M14), largely as deferred tax decreased income tax for the period. Underlying profitability without the one-off boost was RUB244bn, generating a moderate 10.5% return on average equity.
For some of the large state-owned banks the boost from the accounting change was significantly higher. The deferred tax gain accounted for 55% of net income at VTB group's local banks and 29% at Gazprombank. The greatest distortion was at Russian Agricultural Bank, which made a large underlying loss without the accounting benefit.
Sberbank, in contrast, showed a deferred tax loss that lowered net income by 7%, meaning that the underlying profitability was stronger than reported. Among private banks, accounting gains had a significant effect on the bottom lines of Nomos group (80%) and Bank Saint Petersburg (50%). Promsvyaz, Uralsib, MDM and Zenit would have made a moderate loss without this one-off benefit. Alfa and Credit Bank of Moscow were outperformers, demonstrating strong core profitability that benefitted from below-average deferred tax boosts.
In the specialised retail sector, Sovcombank and Tinkoff had decent profitability and deferred tax accounting had virtually no impact. Home Credit's positive results were solely due to accounting gains. Underlying performance at Russian Standard and OTP remained positive, despite a material share of profit relating to the one-off accounting gain. Rencredit, Orient Express and Svyaznoy continued to underperform with underlying returns deep in negative territory.
The Central Bank of Russia introduced the deferred tax concept into accounts prepared under Russian Accounting Standards in March, aligning the treatment closer to IFRS financial statements. The majority of banks reported them in regulatory accounts in May. The impact was significant as previously the banks did not report deferred tax assets or liabilities and had to reflect the whole amount as either a gain or loss through the income statement, while future changes are likely to be more moderate.
For detailed breakdown of the impact of introducing deferred tax accounting on individual banks, please see the attached tables, which are only available to subscribers.
Link to Fitch Ratings' Report: Russian Bank Profits Get One-Off Boost From Deferred Tax - Data File