Interest Income and Expenses 

Interest income

The Group’s interest income recognised in the consolidated income statement amounted to RUB 795.6bn in 2010, down 2.4% year on year. The decline was the result of a lower return on the Group’s major interest-earning assets (the loan portfolio and securities available for sale) with a corresponding increase in the asset value. The table below presents the average annual balances of the Group’s assets by asset class, and the related interest income and average annual return.

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  2010 2009
RUB m Average for the year Interest income Average return, % Average for the year Interest income Average return, %
Assets            
Loans and advances to customers 5,622,371 682010 12.1 5,466,553 752,647 13.8
Debt securities available for sale 1,226,722 83,219 6.8 422,443 40,190 9.5
Due from banks, including correspondent accounts and overnight deposits with banks 336,960 8,073 2.4 370,279 8,141 2.2
Debt investment securities held to maturity 167,404 9,101 5.4     0.0
Other debt securities designated at fair value through profit or loss 91,692 5,740 6.3 107,631 7,330 6.8
Debt trading securities 87,299 7,503 8.6 83,252 6,654 8.0
Total 7,532,447 795,646 10.6 6,450,157 814,962 12.6
Provision for loan impairment (666,048)     (390,959)    
Non-interest-earning assets 827,401     685,176    
Total assets 7,693,800     6,744,374    
  2010 2009
RUB m Average for the year Interest income Average return, % Average for the year Interest income Average return, %
Assets            
Loans and advances to customers 5,622,371 682010 12.1 5,466,553 752,647 13.8
Debt securities available for sale 1,226,722 83,219 6.8 422,443 40,190 9.5
Due from banks, including correspondent accounts and overnight deposits with banks 336,960 8,073 2.4 370,279 8,141 2.2
Debt investment securities held to maturity 167,404 9,101 5.4     0.0
Other debt securities designated at fair value through profit or loss 91,692 5,740 6.3 107,631 7,330 6.8
Debt trading securities 87,299 7,503 8.6 83,252 6,654 8.0
Total 7,532,447 795,646 10.6 6,450,157 814,962 12.6
Provision for loan impairment (666,048)     (390,959)    
Non-interest-earning assets 827,401     685,176    
Total assets 7,693,800     6,744,374    

As shown in the table below, interest income received per the statement of cash flows in 2010 was RUB 809.6bn. This is greater than the interest income recognised in the consolidated income statement for the following reason: commissions received on loan products are recorded as interest income in the consolidated income statement using the effective interest method where these commissions are an integral part of the loan product. In the consolidated statement of cash flows, these commissions are recorded in the reporting period in which they are received.

RUB m 2010 2009
Interest income recognised in the income statement 795,646 814,962
Interest income received per the statement of cash flows 809,556 823,100

Interest income on loans to customers amounted to RUB 682bn in 2010. This was RUB 70.6bn lower year on year due to a general decline in corporate-loan interest rates in the Russian financial market in the reporting period. The downward impact of lower interest rates on interest income was not offset by loan book expansion.

Interest income on loans to customers

Loan portfolio yields

Interest income on securities increased to RUB 105.6bn in 2010, which is almost twice the amount earned in 2009 (RUB 54.2bn). The increase was primarily due to a substantial expansion of the portfolio of securities available for sale. An analysis of securities portfolio movements is presented in Structure of Assets.

Interest income on amounts due from banks (including interbank loans, nostro accounts and overnight placements) remained largely unchanged at RUB 8.1bn in 2010.

Interest expenses

The Group reduced its interest expenses by RUB 12.4bn to RUB 299.8bn in 2010. The reduction is largely attributable to a decline in the average cost of liabilities from 5.3% to 4.5%. The average annual value of interest-bearing liabilities rose 13.3% due to continued growth in retail deposits. The table below presents the average annual balances of the Group’s liabilities by liability class, the related interest expense and average annual cost of funds.

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  2010 2009
RUB m Average for the year Interest expense Average cost, % Average for the year Interest expense Average cost, %
Liabilities            
Due to individuals 4,181,715 216012 5.2 3,345,167 187,769 5.6
Due to corporate customers 1,710,205 38,836 2.3 1,586,021 57,638 3.6
Subordinated debt 390,753 28,219 7.2 545,307 41,289 7.6
Other borrowed funds 154,273 5,950 3.9 159,284 5,408 3.4
Debt securities in issue 141,507 8,776 6.2 121,815 9,184 7.5
Due to other banks 121,723 2,032 1.7 156,746 10,957 7.0
Total 6,700,176 299,825 4.5 5,914,340 312,245 5.3
Non-interest-bearing liabilities 114,484     73,492    
Total liabilities 6,814,660     5,987,832    
  2010 2009
RUB m Average for the year Interest expense Average cost, % Average for the year Interest expense Average cost, %
Liabilities            
Due to individuals 4,181,715 216012 5.2 3,345,167 187,769 5.6
Due to corporate customers 1,710,205 38,836 2.3 1,586,021 57,638 3.6
Subordinated debt 390,753 28,219 7.2 545,307 41,289 7.6
Other borrowed funds 154,273 5,950 3.9 159,284 5,408 3.4
Debt securities in issue 141,507 8,776 6.2 121,815 9,184 7.5
Due to other banks 121,723 2,032 1.7 156,746 10,957 7.0
Total 6,700,176 299,825 4.5 5,914,340 312,245 5.3
Non-interest-bearing liabilities 114,484     73,492    
Total liabilities 6,814,660     5,987,832    

Interest expenses on amounts due to customers added 3.8% to RUB 254.8bn in 2010. A portion of this increase can be ascribed to the increase in average account balances (up by 19.5% year on year) which more than offset the effect of the reduction in the cost of funds: the average cost of funds decreased by 0.7 p.p. to 4.3% in 2010.

Changes in cost of customer deposits in 2009 and 2010 are presented in the table below:

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  2010 2009
RUB m Average liabilities amount Interest expense Average cost of funds, % Average liabilities amount Interest expense Average cost of funds, %
Due to corporate customers            
Term deposits 597,700 29,747 5.0 641,722 46,199 7.2
Current accounts 1,112,505 9,089 0.8 944,299 11,439 1.2
Total 1,710,205 38,836 2.3 1,586,021 57,638 3.6
Due to individuals            
Term deposits 3,605,050 213,384 5.9 2,933,685 186,400 6.4
Current accounts 576,665 2,628 0.5 411,482 1,369 0.3
Total 4,181,715 216,012 5.2 3,345,167 187,769 5.6
TOTAL 5,891,920 254,848 4.3 4,931,188 245,407 5.0
  2010 2009
RUB m Average liabilities amount Interest expense Average cost of funds, % Average liabilities amount Interest expense Average cost of funds, %
Due to corporate customers            
Term deposits 597,700 29,747 5.0 641,722 46,199 7.2
Current accounts 1,112,505 9,089 0.8 944,299 11,439 1.2
Total 1,710,205 38,836 2.3 1,586,021 57,638 3.6
Due to individuals            
Term deposits 3,605,050 213,384 5.9 2,933,685 186,400 6.4
Current accounts 576,665 2,628 0.5 411,482 1,369 0.3
Total 4,181,715 216,012 5.2 3,345,167 187,769 5.6
TOTAL 5,891,920 254,848 4.3 4,931,188 245,407 5.0

Cost of funds

In 2010, the Group saw a reduction in its interest expense on subordinated debt. This was thanks to a decrease in the liability amount and a cut in the interest rate (from 8% to 6.5% in July 2010) on its subordinated loan from the Bank of Russia.

The Interest expense on amounts due to banks decreased by more than five-fold versus 2009, primarily due to a reduction in the cost of borrowing from 7.0% in 2009 to 1.7% in 2010. The decrease came against high interest expense in 2009 because of large borrowings made by Sberbank in Q1 2009 from the interbank market at high interest rates in order to maintain liquidity of the Group.

Net interest income

The Group earned RUB 495.8bn in net interest income in 2010, which is RUB 6.9bn less than in 2009. Return on assets, cost of funds and interest spread and margin for 2009 and 2010 are presented in the table below.

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  2010 2009
RUB m Average for the year Interest income/expense Average return/cost, % Average for the year Interest income/expense Average return/cost, %
Total interest-earning assets 7,532,447 795,646 10.6 6,450,157 814,962 12.6
Total interest-bearing liabilities 6,700,176 299,825 4.5 5,914,340 312,245 5.3
Net interest income   495,821     502,717  
Interest spread     6.1     7.3
Net interest margin     6.6     7.8
  2010 2009
RUB m Average for the year Interest income/expense Average return/cost, % Average for the year Interest income/expense Average return/cost, %
Total interest-earning assets 7,532,447 795,646 10.6 6,450,157 814,962 12.6
Total interest-bearing liabilities 6,700,176 299,825 4.5 5,914,340 312,245 5.3
Net interest income   495,821     502,717  
Interest spread     6.1     7.3
Net interest margin     6.6     7.8

Interest spread1 was 6.1% in 2010, or 1.2 p.p. lower than in 2009; with market interest rates declining, the replacement of interestearning assets occurred faster than the maturity and replacement of liabilities on which the group paid interest.

% 2010 2009
Previous year’s margin 7.80 7.15
Return on corporate loans -1.22 1.30
Return on retail loans 0.00 -0.08
Return on amounts due from banks 0.01 -0.10
Return on securities -0.45 0.17
Structure of interest-earning assets -0.42 -0.38
Cost of amounts due to corporate customers 0.33 0.10
Cost of amounts due to individuals 0.26 -0.14
Cost of amounts due to other banks 0.04 0.02
Debt securities in issue and subordinated debt 0.05 -0.10
Structure of interest-paying liabilities -0.02 -0.06
Earning assets to interest-paying liabilities 0.21 -0.08
Reporting year margin 6.58 7.80

The decline in the interest margin from 7.8% in 2009 to 6.6% in 2010 was due to the following:

  • Lower returns on corporate loans;
  • Lower returns on investments in securities;
  • Changes in the structure of interest-earning assets: That is, a reduction in the proportion of higher-yielding loans, and a corresponding increase in the proportion of lower-yielding securities in the asset pool.

The above decrease was not fully offset by the decrease in the cost of funds raised, primarily as a result of the cost of customer deposits.

Spread dynamics

The table below presents an analysis of changes in interest income and expenses for 2010 versus 2009 by looking at the following factors:

  • Changes in average annual balances of items recorded in the statement of financial position (volume factor).
  • Changes in average interest rates.
RUB m Volume factor Interest rate factor Change in interest income/expense
Assets      
Loans and advances to customers 18,901 (89,538) (70,637)
Debt securities available for sale 54,561 (11,532) 43,029
Due from banks, including correspondent accounts and overnight deposits with banks (798) 730 (68)
Debt investment securities held to maturity 9,101 - 9,101
Other debt securities designated at fair value through profit or loss (998) (592) (1,590)
Debt trading securities 348 501 849
Change in interest income 81,115 (100,431) (19,316)
Liabilities      
Due to individuals (43,213) 14,970 (28,243)
Due to corporate customers (2,820) 21,622 18,802
Subordinated debt 11,161 1,909 13,070
Other borrowed funds 193 (735) (542)
Debt securities in issue (1,221) 1,629 408
Due to other banks 585 8,340 8,925
Change in interest expense (35,315) 47,735 12,420
Change in net interest income 45,800 (52,696) (6,896)

As is evident from the table above, the net interest income dynamics were driven by three major factors:

  • Lower returns on corporate loans, which was not offset by higher lending volumes.
  • Substantial growth in retail deposits.
  • A notable expansion of the securities portfolio resulting from an increase in customer deposits.

1 Interest spread is the difference between the return on interest-earning assets and the cost of interest-bearing liabilities.

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