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Russia’s VTB Bank Sees Profits Plunge in 2014

Russia’s state-controlled bank VTB Bank could sustain significant losses in 2015 due to the central bank’s high interest rates, VTB’s Deputy Chief Executive Herbert Moos said on Friday, as the bank reported 2014 net profit was almost wiped out.

“The main challenge in 2015 is the unpredictability of the rate(s)”, he said adding that current interest rates are “prohibitively high” for companies relying on the central bank for loans in the absence of access to international markets.

The country’s second-largest lender, battered by Western sanctions and high interest rates–imposed to stem the ruble’s plunge–said its profit for 2014 plummeted to 800 million rubles ($13.1 million) from a record 100.5 billion rubles in the previous year.

Russia’s central bank hiked its rate in mid-December by 650 points to 17% to stem a steep devaluation of the ruble and to prevent a run on banks.

The bank posted its first quarterly loss between October and November last year–its first loss since 2009.

However, the annual result is better than analysts’ expectations and comes despite a warning from Chief Executive Andrei Kostin that the bank could post its first annual loss in five years.

Once the flagship of the Kremlin’s drive to create a Western-style global banking giant, VTB has found itself cut off from world financial markets by sanctions imposed last summer by the European Union amid the crisis in Ukraine.

“Our clients were affected by an economic slowdown and tough geopolitical environment, as well as by the rapid depreciation of the ruble and subsequent spike in interest rates,” said Mr. Kostin as the bank presented its earnings.

This led to higher risk costs despite strong operational results. The cost of which more than doubled to 4.6% in 2014 from 1.6% in 2013. Mr. Moos said the bank expects the cost of risk in 2015 to remain the same as in 2014, or even decline.

The bank said its provision charge for impairments rose to 275.4 billion rubles from 99.2 billion rubles in 2013, and return on capital dropped to just 0.1% in 2014 from 11.8% in 2013.