Aval worsens top line, improves bottom line in 9M12

Raiffeisen Bank Aval (BAVL UK) reported a 10x qoq (and 6x yoy) increase in its Ukrainian Accounting Standards-based net income to UAH 53 mln in 3Q12, mainly on decreased loan loss provisioning, while its top line and balance sheet continued to decline. Net interest income for the quarter decreased 18% yoy (as interest income fell 8% yoy and expenses advanced 16% yoy), while the metrics showed a 3% advance on qoq basis. The 9M12 net interest income declined 9% yoy to UAH 3.1 bln – a visible deterioration compared to -5% yoy in 1H12. The bank continued to decrease its loan portfolio, which stood at UAH 26.7 bln (net) as of end-3Q: -12% YTD and -3% qoq, while client accounts/deposits remained stable on both a qoq and YTD basis at UAH 27.6 bln. Aval also demonstrated its efficiency in cost cutting: operating costs decreased 6% qoq and 1% yoy in 3Q12, which brought its cost/income ratio to 57% for the quarter (vs. 65% in 2Q12). The 9M12 cost/income ratio amounted to 58%, up 7 pp yoy. Cost cutting did not prevent deterioration in pre-provisioning profit (-26% yoy in 3Q12), but a slight decline in loan loss provisions allowed the bank to show improved net income. Income in 9M12 advanced 2.8x yoy to UAH 69 mln, but remained tiny with implied annualized ROE equal to 2.2%.

Alexander Paraschiy: The continuing decrease in Aval’s loan book, which has led to increasing deterioration in revenues, remains the key concern, and it clearly implies the bank will underperform our FY12 forecast of just a 5% decline in net interest income. We remain neutral on Aval stock despite it trading at just 0.3x P/B (UAS-based).