VTB surprised markets to the downside with its 1Q 2009 IFRS result, while underlining the risk to the financial sector from NPL’s.

VTB, Russia’s second largest bank, lost $670 million in 1Q 2009, with Non performing loans doubling. The bank boosted its provisions to more than 7% of its total loan portfolio – a 10-fold increase on the previous year.

VTB CFO, Nikolay Tsekhomsky, says the provisioning and a one off hit on revaluing interest rate swaps explained the larger than expected Net Result for the quarter.

“The size of our net loss at the end of the quarter is for two reasons. The first is loan impairment provisions. And the second is a one time loss due to reclassifying interest rate swaps.”

These rate swaps involved exchanging dollar-denominated loans for rouble-denominated loans, helping borrowers survive the rouble devaluation from November to February this year. The moved helped fend off the possibility of major corporate collapses at a time when they were a real risk, but Mark Rubenshtein, Deputy Head of analysis at Metropol Investment says it combined with the structure of VTB’s loan portfolio to leave the bank more exposed to risk.

“VTB's loan book quality is in a poorer shape than of its main rival, Sberbank. It's mostly related to the fact that VTB has large exposure to lending to construction and development sector, and that's where we see the majority of corporate defaults are happening, and that continues affect VTB's loan book.”

Analysts expect VTB’s proportion of bad loans could top 11%, is within the overall parameters in the sector. VTB's stock closed down just under three percent after releasing its results on Tuesday.