MDM BANK : Announces Financial Results for H1 2013: Growth in operating income, robust capital and liquidity

MDM Bank (MDM) today published its interim consolidated condensed financial statements in accordance with International Financial Reporting Standards (IFRS) for the six-month period ended 30 June 2013.

The Bank considerably increased its earning capacity, generating an almost four-fold increase in net operating income (before impairment losses) in the reporting period, from RUB0.7 bln in H1 2012 to RUB2.7 bln in H1 2013. This was achieved, inter alia, through a combination of focus on higher yielding business (on a risk-adjusted basis) and ongoing funding cost optimization which resulted in a significant expansion of the Bank's net interest margin (from 3.5% in H1 2012 to 4.2% in H1 2013), despite a challenging operating environment, and a 16% increase in net interest income to RUB5.0 bln.

Operating expenses were reduced by 8.5% in H1 2013 compared to H1 2012. The key drivers of expense optimization were improvement of operational efficiency (inter alia through centralization of support functions) and a comprehensive review and renegotiation of services purchased by the Bank. These improvements on the income and expense side resulted in a 27 percentage point reduction in the Bank's cost / income ratio, which stood at 68% for H1 2013.

The Bank went from a net operating loss after loan impairments of RUB503 mln in IH 2012 to a net operating profit of RUB342 mln in 1H 2013 and from a loss of RUB688 mln after tax and before other comprehensive income in H1 2012 to "break even" (profit of RUB5 mln) in H1 2013. The small loss after other comprehensive income for H1 2013 (RUB177 mln) was primarily due to the negative effect of revaluing the Bank's securities portfolio, which largely comprises government securities and high quality corporate bonds.

MDM's improved financial performance in H1 2013 has been underpinned by Management's focus on stabilizing and strengthening the Bank's balance sheet, while prioritizing asset quality and medium-term profitability over growth.

The Bank leads its peer group in terms of Tier 1 (Basel) capital adequacy ratio, which stood at 16.9% at the end of H1 2013. Its CBR N1 capital adequacy ratio was 11.3% as at mid-year 2013, in line with the Bank's peer group, and increased to 11.8% as at 1 August 2013.

As at the end of H1 2013, the total net loan portfolio was RUB181 bln. The Bank continued its policy of recycling away from large corporate loans towards higher margin SME and retail loans, while within the retail loan portfolio the focus has been on more profitable consumer loans (cash loans and credit cards), whose share increased to 67% during the reporting period. As a result, the average yield on the loan portfolio increased from 10.9% in H1 2012 to 12.7% in H1 2013.

2012 saw a steep drop in corporate NPLs through the sale of a portfolio of corporate NPLs completed in H2 2012, which resulted in a reduction of the NPL ratio from 14.2% as at the end of H1 2012 to 7.9% as at YE 2012. However, during H1 2013 the NPL ratio increased to 9.7%, mainly as a result of three corporate loans, managed by the Bank's specialized recovery unit, becoming overdue Notwithstanding the increase in the NPL ratio during H1 2013, the NPL coverage ratio stood at a prudent 130% as at mid-year 2013.

The Bank's funding base remains strong with more than 75% of funding needs secured through customer deposits (RUB199 bln as at mid-year 2013) and reliance on wholesale funding low. Retail customer accounts have registered sustained growth (2.7% vs. YE 2012 and 11.9% vs. YE 2011).

The Bank continues to maintain a robust liquidity position, with the share of liquid assets in total assets at 32% and a loan / deposit ratio of 91% as at mid-year 2013.

De-risking the balance sheet, strengthening risk management and improving asset quality remain Management's overriding priority.