November 20, 2014 / 9:43 AM / 3 years ago

UPDATE 2-Russia's VTB expects tough final quarter as profit slides

* VTB's Q3 net profit falls 98 pct y/y

* Loan-loss provisions surge to 65 bln rbls

* Ukraine losses in Q3 at 14.4 bln rbls

* State aid boosts capital ratio (Writes through with CFO, analyst comment)

By Alexander Winning and Oksana Kobzeva

MOSCOW, Nov 20 (Reuters) - Russia's second-largest bank VTB expects a tough end to the year after posting a 98 percent slide in third-quarter profit because of higher provisions for bad loans, an economic slowdown and losses over Ukraine.

The state-controlled bank, which was sanctioned by the United States and European Union over Moscow's role in the Ukraine conflict, is a key lender to Russia's economy, which has slowed sharply this year and is on the verge of recession.

"We don't expect a significant profit (for the full year)," Herbert Moos, VTB's chief financial officer, told journalists. "All that profit will go on forming additional provisions."

VTB's third-quarter net profit was 0.4 billion roubles ($8.58 million), compared to 18.4 billion roubles a year earlier, short of analysts' expectations of 3 billion roubles.

The bank said loan-loss provisions in the third quarter rose to 65 billion roubles from 22 billion a year earlier, while its cost of risk rose to 2.9 percent in the first nine months from 1.7 percent a year earlier.

"We see a continuing deterioration of the situation in Ukraine, we see additional provisions for our retail portfolio, and we see provisions linked with construction firms," Moos said.

VTB lost 14.4 billion roubles due to Ukraine in the third quarter, he added.

Analysts said VTB's performance would continue to suffer from higher provisions but welcomed an improvement in other operating metrics.

"There is clear progress linked to the bank's operating results - the rise in its main earnings outweighs the rise in its costs," said Mikhail Shlemov, an analyst at UBS in Moscow. "But I think a significant portion of provisions will be created next year as well."

VTB said its third-quarter results would have been worse without strong demand for credit from large borrowers, as international debt capital markets remained largely closed for Russian borrowers due to sanctions.

VTB's Tier 1 capital ratio - a measure of its ability to absorb losses - rose to 11 percent after the Finance Ministry bought 214 billion roubles of its preferred shares in September.

Russia's finance minister said VTB had asked for a further 250 billion roubles in state aid, but Moos declined to comment.

The bank's shares were little changed, underperforming the broader MICEX index slightly to trade around 0.1 percent higher by mid-afternoon. (1 US dollar = 46.6450 Russian rouble) (Editing by Elizabeth Piper and Elaine Hardcastle)

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