* 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 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
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.
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
"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
"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)