Top 30 banks in Russia 2009 to 2014 retrospective: Before ......retrospective view of some of the key financial dynamics in the banking sector from 2009 to 2014. Our analysis was based

Top 30 banks in Russia2009 to 2014 retrospective: Before the storm?Based on publicly available IFRS financial statements

Deloitte FSI CIS Analytical CenterFebruary 2016

2Top 30 banks in Russia 2009 to 2014 retrospective: Before the storm?

Table of Contents

Introduction 3

Key observations 4

2009-2014 restrospective 5

Significant growth since 2009 6

Fragile profitability 10

Questionable sustainability 14

Conclusion 21

Methodology 22

Appendices 24

Disclaimer

This publication presents an observation of some financial indicators of the Top 30 banks in Russian from 2009 until 2014, based on publicly available IFRS financial statements.

This material is not intended to be comprehensive and does not constitute investment, legal or tax advice, nor does it constitute an offer or solicitation for any purchase or sale of any financial instrument or a recommendation for any investment product or strategy.

Information contained in this material has been obtained from sources believed to be reliable but no representation or warranty is made by Deloitte as to the quality, completeness, accuracy, fitness for a particular purpose or noninfringement of such information. In no event shall Deloitte be liable (whether in contract, tort, equity or otherwise) for any use by any party of, for any decision made or action taken by any party in reliance upon, or for any inaccuracies or errors in, or omissions from, the information contained herein and such information may not be relied upon by you in evaluating the merits of participating in any transaction. All information contained herein is as of the date referenced and is subject to change without notice. Numbers in various tables may not sum due to rounding.


Introduction

Based on their financial statements prepared in accordance with the International Financial Reporting Standards (hereinafter “IFRS”) as of 30 June 2015, sixteen of the Top 30 banks we selected for this publication collectively reported RUB 183 billion of net losses, while the remaining banks (*) had a combined RUB 145 billion of net profits, a figure falling to RUB 60 billion when excluding Sberbank. Most of them suffered sharp decreases in their loan production and net interest income during the period, as well as declines in loan portfolio credit quality.

Six months have passed since then and a large majority of the banks are now preparing their 2015 year-end financial statements, in a macroeconomic environment still severely affected by international sanctions and strong volatility on the currency and energy markets. These factors are thought to have had a significant impact on the Russian economy; however, a closer analysis of the financial dynamics since 2009 indicates that these factors affected a banking industry that was already showing clear signs of deterioration prior to 2014.

In this publication we consider various performance indicators for a sample including 30 leading banks operating in the Russian Federation (or “Top 30”, see Appendix 1) in order to provide a retrospective view of some of the key financial dynamics in the banking sector from 2009 to 2014. Our analysis was based exclusively on publicly available IFRS financial statements.

(*) 27 of the Top 30 banks selected for this publication disclosed their IFRS financial statements as of 30 June 2015.


Key observations

While the 2008-2009 crisis hit a fast-paced economy, the 2014 crisis hit a Russian banking sector that seemed to be still looking for a second wind since the previous crisis. Looking beyond the significant increase of assets since 2009 (page 6) or the amount of profits generated between 2010 and 2013 (page 10), the Top 30 banks’ financial performances indicated some signs of vulnerability, such as an increasing dependence on ever-higher lending volumes to compensate for the deterioration of interest margins (page 13) and of loan portfolio quality.

Significant growth post-2008crisis veiled the fragility

of the market.

Racing for more and more lending volumes under much stronger market competition, the Top 30 banks observed clear signs of deterioration in their credit portfolios in recent years, in particular in loans to individuals starting 2012. This deterioration was particularly reflected in the growth of the corresponding effective provision rates (page 17), but also in the rising ratios of non-performing loans and an acceleration of the level of cessions and write-offs of loans over the last three years (page 18). The deterioration trend on retail lending markets therefore existed prior to the 2014 events, and which did not seem to significantly affect corporate lending portfolios up to 2014.

The lending market was showing signs of overheating long before the 2014 events.

With risk-weighted assets rising since 2009, the Common Equity Tier 1 ratios of the Top 30 banks significantly dropped over the six year period (pages 19-20), providing them with less and less potential buffer to absorb any further market deterioration. From a capitalisation perspective, the selected banks consequently appear to be in much weaker shape in 2014 than they were at the peak of the previous financial crisis in 2009.

Capital adequacy: weaker in 2014 than in 2009.


2009-2014 restrospective

Before the storm?


Significant growth since 2009Assets and lending

Six years have passed since the previous major global financial crisis in 2008-2009. During this period, the Top 30 banks operating in the Russian Federation increased their asset sizes and loan portfolios by more than three times, with assets rising from RUB 19 trillion as of 31 December 2009 to RUB 60 trillion as of 31 December 2014, and with loan portfolios growing from RUB 13 trillion to RUB 43 trillion (Figure 1.1). Temporarily slowing in 2009 due to the impact of the imported financial turmoil, the Top 30 rapidly returned to their previous cruising pace, expanding and accelerating lending production and capacities almost exclusively through organic growth rather than through acquisitions and consolidations.

Figure 1.1. Top 30 banks: Total asset and loan growth (Index 100: 2009)

(Source: Selected banks' publicly available IFRS financial statements/Deloitte FSI CIS Analytical Center)

90

80

70

60

50

40

30

20

10

0

350

300

250

200

150

100

50

0

2009 2010 2011 20132012 2014

Total assets

Total loan portfolio

Index total assets (gross)

Index total assets, excl. 2014 currency effects

Index total loan portfolio (gross)

13 15 21 26 3143

60

4437

19 2230

118

118

162

157

194

198 231

242317

331

100

100

RUB

tr

Index 100: 2009

276


With the total loan portfolios representing 70 percent (weighted average) of their combined balance sheets, the Top 30 banks primarily focused on the lending activity over anything else, with a strong preference for corporate lending over retail lending. The corporate loans ranged between 76 and 80 percent of the loan portfolios from 2009 to 2014 (Figure 1.2).

However, a closer look at the six-year dynamic indicates that starting in 2011 retail lending grew faster than corporate lending (2014 Index: retail at 399 and corporate at 314). This gap in the growth rate would look even greater as of 31 December 2014 if the corporate loan growth is not adjusted at year-end for loans denominated in foreign currency.

Figure 1.2. Top 30 banks: corporate and retail loan portfolios

450

400

350

300

250

200

150

100

50

0

40

35

30

25

20

15

10

5

0

2009 2010 2011 20132012 2014

Corporate loan portfolio

Retail loan portfolio (gross)

Index corporate loan portfolio (gross)

Index retail loan portfolio (gross)

10

119

167

246

328

399

100

3

12

3

17

4

19

6

23

8

33

10100

116160

186221

314

RUB

tr

Index 100: 2009

(Source: Selected banks' publicly available IFRS financial statements / Deloitte FSI CIS Analytical Center)

Figure 1.3. Top 30 banks: Share of retail lending, changes between 2009 and 2014 (in number of banks and loan portfolio shares)

18

16

14

12

10

8

6

4

2

0

-30 to -15 percentage points

-15 to -5 percentage

points

-5 to +5 percentage

points

+15 to +30 percentage

points

+5 to +15 percentage

points

Corporate banks (banks whose loan portfolio is mostly oriented toward legal entities)

Retail banks (banks whose loan portfolio is mostly oriented to individuals)

19

1 1

15

52

2

2

2

Num

ber

of b

anks

Only two banks decreased the share of their retail loan portfolio

between 2009 and 2014.

Eleven banks increased the share of their retail loan portfolio between

2009 and 2014.

* Bank A

(Source: Selected banks' publicly available IFRS financial statements/Deloitte FSI CIS Analytical Center) The faster pace of retail growth is observable at the aggregate and at the individual level of each bank. Out of three banks that reversed their core lending allocation between corporate and retail since 2009, two shifted towards retail lending and almost all other structural moves observed

during this period were oriented toward more loans to individuals rather than to legal entities (Figure 1.3). This remains true independently of each bank’s core lending orientation.

This focus on retail can have multiple interpretations, depending on each bank’s profile, such as a strategy to better diversify credit risk, a strategy to keep capturing new market share from a still promising market, or a way to better compensate shrinking corporate margins with more profitable retail margins (Figure 2.5).

(* As an example, Bank A's share of retail lending represented 12 percent of its loan portfolio in 2009. In 2014, this share of retail portfolio rose to 25 percent of its total loan portfolio (i.e. increased between +5 and +15 percentage points of the total loan portfolio))


Funding balances

On the liabilities side, the Top 30 banks significantly grew their overall funding from customer accounts over the six-year period, from RUB 11 trillion in 2009 to RUB 33 trillion in 2014 (Figure 1.4). However, this growth of 2.9 times was slightly slower in comparison to the loan portfolios (3.2 times higher between 2009 and 2014), consequently increasing the weighted average loan-to-deposit ratio (LTD) from 114 to 131 percent over the period (Figure 1.5). The LTD ratio is much higher when excluding Sberbank from the calculation, rising from 128 to 141 percent for the same period.

From a segmentation point of view, the structure of the customer accounts between corporate and retail segments showed a steady balance, with corporate accounting for 53 percent versus 47 percent for retail on average since 2009 (Figure 1.6). This differs significantly from the structure of the lending portfolios where the aggregate share of corporate loans prevailed more significantly over retail since 2009 (78 percent on average, see Figure 1.2). This illustrates the importance for the Top 30 banks of capturing more retail funding to sustain their corporate lending objectives.

Looking at the intermediate dynamics, one may note that the Top 30 banks’ weighted average LTD ratio returned to the 2009 level already in 2011, but it took five years to regain the simple average LTD ratio. This illustrates a great disparity in the lending/funding balance within the Top 30 banks.

Figure 1.4. Top 30 banks: Cumulative liabilities and customer accounts

90

80

70

60

50

40

30

20

10

0

350

300

250

200

150

100

50

0

2009 2010 2011 2013 2014

Total liabilities

Total customer accounts

Index total liabilities

Index customer accounts

11 14 18 22 2633

604437

19 2230

126

118

163

157191

194 228

231290

317

100100

2012

RUB

tr

Index 100: 2009


Figure 1.5. Top 30 banks: Loan-to-deposit (LTD) ratios

Weighted average LTD

Weighted average LTD (excl. Sberbank)

Simple average LTD

145%

135%

125%

115%

105%

95%

85%

2009 2010 2011 20132012 2014

114%

107%

114%118%

121%

131%

140%

118%117%112%

126%

137%

128%

119%

120%

127%129%

141%



Both corporate and retail customer account segments experienced a similar growth rate until 2013 (Indexes: 245) before significantly diverging in 2014 (index 343 and 279, respectively, partly due to the currency conversion effect of USD and EUR corporate deposits as of 31 December 2014.

From the perspective of the split between term and demand deposits (figure 1.7), one may note that the share of term deposits consistently counted for circa 70% of the total customers’ port-folios on average since 2009. Both term and demand deposits showed a growth pace relatively similar until 2013 (respective Index: 231 and 223), before largely fastening for term deposits in 2014 (respective Index: 310 and 245), the latest being here again affected by foreign currency effects as of December 31, 2014.

Figure 1.6. Top 30 banks: Growth of corporate and retail customer accounts

400

350

300

250

200

150

100

50

0

40

35

30

25

20

15

10

5

0

2009 2010 2011 20132012 2014

Corporate customers accounts

Retail customers accounts

Index corporate customers accounts

Index retail customers accounts

5

135

184206

245

343

100

6 7 8 9 9 10 11 12 14 17 16100133

164200

245279

RUB

tr

Index 100: 2009


Figure 1.7. Top 30 banks: Term deposits versus current accounts (Index 100: 2009)

55

50

45

40

35

30

25

20

15

10

5

0

350

300

250

200

150

100

50

0

2009 2010 2011 20132012 2014

Total term deposits

Total current accounts

Index term deposits

Index current accounts

8 10 13 1418

24

9

88

35

6

133

124

164

161178

221

223

231245

310

100

100

RUB

tr

Index 100: 2009



Profitable between 2010 and 2013, the Top 30 banks’ performance suffered significantly from the 2008 and 2014 crises. While the imported 2008 credit crunch hit a fast-paced domestic economy, 2014 brought along Western sanctions, a slump in energy prices and a sharp fall of the rouble, all of which had a negative impact on the Russian banking sector, which was still looking to catch a second wind after 2009, despite appearing to be in good shape.

Figure 2.0. Top 30 banks: Aggregate profits before tax versus aggregate losses before tax

1,000

800

600

400

200

0

(200)

(400)

2009 2010 2011 20132012 2014

Aggregate losses before tax

Aggregate profits before tax

(163)

493

(165) (0) (18) (7) (27)

826795

151

458719

RUB

bn


Fragile profitability


Figure 2.2. Top 30 banks: Number of profitable banks versus loss-making (before tax)

Figure 2.1. Top 30 banks: Profit before tax — Sberbank versus others

(45)

374

800

700

600

500

400

300

200

100

0

(100)

2009 2010 2011 20132012 2014

Sberbank — PBT

Others — Aggregated PBT

(44)

456448

230

306344340

396

227

30

RUB

bn


Profits and losses (before taxation)

The aggregate results (before taxation) of the Top 30 in 2009 reached RUB 14 billion in losses (Figure 2.0), and RUB 44 billion after excluding Sberbank (Figure 2.1). From a pure volume perspective, it took only one year for the Top 30 Russian banks to recover from their previous crisis-related losses. The Top 30 then showed strong profitability until 2013, before brutally crashing in 2014. As of 31 December 2014, ten out of the Top 30 banks went back to the red zone (versus seven during the 2009 crisis (Figure 2.2)), posting losses (before taxation) equalling the total peak level six years earlier. These events help shed some light on the fragile nature of the Russian banking sector’s profitability.

30

25

20

15

10

5

0

2009 2010 2011 20132012 2014

Loss-making

Profitable

20

272823

27 27

10

327

3 3

Num

ber

of b

anks


ROE, ROA, NIM and Costs-to-Assets ratios

The weighted average return on equity (ROE) of the Top 30 banks plunged dramatically in 2014 to 3.7 percent, down from a 12.7-16.8 percent corridor between 2010 and 2013 (Figure 2.3). The 2014 ROE ratio is 700 basis points (bp) lower after excluding Sberbank, illustrating the predominance of the market leader on the Russian banking market. A very similar dynamic is observed for the weighted return on assets (ROA), which also plunged in 2014 (Figure 2.4). One may note that the simple average curves for both ROE and ROA show much lower figures than the weighted average, reflecting disparities in the financial performance within the Top 30.


Figure 2.3. Top 30 banks: Return on equity (ROE)

30%

25%

20%

15%

10%

5%

0%

(5%)

(10%)

(15%)

2009 2010 2011 20132012 2014

(8.9%)

ROE — Weighted average

ROE — Weighted average (excl. Sberbank)

ROE — Simple average

10.1%9.7% 10.1%

6.5%

(0.2%)

16.8%14.9% 13.2%

3.7%

(4.0%)

9.6%

(3.2%)

9.3%10.6%11.7%

(1.6%)

12.7%


Figure 2.4. Top 30 banks: Return on assets (ROA)

ROA — Weighted average

ROA — Weighted average (excl. Sberbank)

ROA — Simple average

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

0.5%

0%

(0.5%)

(1.0%)

(1.5%)

(2.0%)

2010 2011 201320122009 2014

(1.5%)

1.5% 1.2% 1.2%(0.8%)

(0.9%)

(0.2%)

1.6%

(0.3%)

1.4%1.7%

1.9%

1.3%

(0.5%)

1.3% 1.2% 1.0%

(0.3%)



The Top 30 banks’ weighted average net interest margin (NIM) (*) showed a 120 bp decline since 2010 (from 6.1 to 4.9 percent, see Figure 2.5). This illustrates the increasing price competition in the Russian banking markets over the past few years, which put downward pressure on interest margins in both the retail and corporate lending markets.

On the operating expenses side, the weighted average costs-to-assets ratios for the Top 30 banks (Figure 2.6) showed an overall decline since 2009, from 2.8 to 2.2 percent. While the sharp decrease in 2014 was mostly due to the impact of foreign currency volatility on assets at year’s end, the general dynamic over the six-year period nevertheless indicates that the banks started to pay more attention to cost controls and operational efficiencies since 2010.

(*) from 2010-2014 only, due to the absence and/or insufficiency of publicly available information

Figure 2.5. Top 30 banks: Net interest margin

NIM — Weighted average

NIM — Weighted average (excl. Sberbank)

NIM — Simple average

7.5%

7.0%

6.5%

6.0%

5.5%

5.0%

4.5%

4.0%

2011 201320122010 2014

6.2%5.9%

5.3%5.6%

5.1%

6.1%

5.7%

4.9%

5.5%5.3%

5.2%5.3%

4.6%

5.0%

4.5%


Figure 2.6. Top 30 banks: Costs to assets

Costs to assets — Weighted average

Costs to assets — Weighted average (excl. Sberbank)

Costs to assets — Simple average

3.75%

3.50%

3.25%

3.00%

2.75%

2.50%

2.25%

2.00%

1.75%

2010 2011 201320122009 2014

3.2%3.4% 3.3%

3.1% 3.1%

2.8%2.8%2.8%

2.2%

2.7%2.8%2.8%

2.7%2.6% 2.6%

2.7%2.5%

2.1%



The substantial profitability observed between 2010 and 2013 might have suggested that the Top 30 banks were in better shape to absorb another downturn in early 2014 than they were six years earlier. However, a closer analysis of the past years’ dynamics indicates the opposite. There is no question that the unfavourable events in 2014 significantly affected the banks. However, the impact and speed at which the Top 30 banks’ performance plunged in 2015 raise legitimate questions about the real representativeness of past years’ performances, and more importantly, the sustainability of the industry in its current form, considering the breadth of the sample.

A closer look at the Top 30 banks’ core and non-core performance, loan portfolio quality and capital adequacy may provide answers to the questions above.

Core banking performance

Figure 2.7 illustrates the structure of core banking income, composed of the net interest income, net commission income, operating expenses and impairment. Non-core banking income, consisting of all other gains/losses, mostly related to financial and currency instruments, is illustrated in Figure 3.0.

Figure 2.7: Top 30 Banks — Structure of Core Banking Income

2,500

2,000

1,500

1,000

500

0

2009 2010 2011 20132012 2014

1,024

Net interest income

Net commission income

Operating expenses

Impairment allowances

1,023

1,2481,466

1,846

2,137

1,3031,162

1,027835

638

934

383170

53743735289

296292228

535

192

722

RUB

tr


Questionable sustainability


A few observations can be drawn from Figure 2.7. On the one hand, one may note the weight of the credit risk losses compared to the revenues generated. If the credit risk represents one of, if not the most significant burdens on banks’ profitability during the crisis, its comparative weight appears massive in 2009 and 2014 (78 and 49 percent of net interest income respectively, see Figure 2.8). This means very little room for the Top 30 banks to absorb any further deterioration of net margins or a decline in lending volumes without seeing their results reach negative figures. Conversely, low credit loss years corresponded to very profitable years, illustrating the significant influence of credit risks on the banks’ profitability (Figure 2.9).

On the other hand, one may also note the suddenness and magnitude at which credit losses increased in 2014: accumulated allowances for loan loss provisions multiplied by 8.4 times com-pared to their 2011 levels, while net interest income multiplied by only 1.7 and net commissions by 2 for the same period.

Figure 2.8. Top 30 banks: Share of annual allowances for impairment versus annual net interest income

100%

80%

60%

40%

20%

0%

2009 2010 2011 20132012 2014

Net interest income

Impairment allowances

78%

30%

10% 14%25%

49%


Figure 2.9. Top 30 banks: Profits before tax and annual allowances for impairment

Profits before tax (PBT)

Annual allowances for loan impairment (absolute values)

1,200

1,000

800

600

400

200

0

(200)

2010 2011 201320122009 2014

RUB

bn(Source: Selected banks' publicly available IFRS financial statements/Deloitte FSI CIS Analytical Center)


Non-core banking

Analysis of non-core banking performance since 2009 (Figures 3.0 and 3.1) is another way to illustrate the disparity and fragility of the Top 30 banks’ profits. Although moderate in comparison to net interest income, the net contributions of non-core banking activities remained largely positive over the four-year period (only RUB 34 billion of cumulative losses against RUB 661 billion of cumulative gains between 2010 and 2013), before plunging to zero in 2014 (only a RUB 17 billion gain). The volatility on financial markets in 2014 explains this dynamic; however, some of the selected banks still managed to generate significant gains (RUB 151 billion), while others recorded significant losses that doubled their 2009 peak-level losses (RUB 135 billion of cumulative losses in 2014 versus RUB 63 billion in 2009).

Figure 3.0. Top 30 banks: Non-core banking: cumulative gains versus cumulative losses

250

200

150

100

50

0

(50)

(100)

(150)

(200)

2009 2010 2011 20132012 2014

Non-core banking: cumulated Losses

Non-core banking: cumulated Gains

Net non-core banking Income

(135)

151

(64)(4) (13) (7) (11)

158219184 158 127

154114

212

147

17

120

RUB

bn


Figure 3.1. Top 30 banks: Net non-core banking results versus net interest income results

2,500

2,000

1,500

1,000

500

0

2009 2010 2011 20132012 2014

Net interest income

Net non-core banking income

2,137 1,846 1,466

1,024 1,023 1,248

147212120 154 114 R

UB

bn



Credit quality and provisioning

The analysis of the credit quality dynamics and provisioning during the six-year period provides an additional perspective on the sharp decline in banks’ profitability in 2014 and another view on the disparities in credit risk appetites in recent years.

In the context of a recovering macroeconomic environment after 2009, the effective loan provision rate expectedly decreased, shrinking from 9.8 percent (weighted average) in the midst of the previous financial crisis down to 5.5 percent at the end of 2014 (Figure 3.2). The provisioning dynamic reached the trough in 2013 at 5.2 percent, before slightly returning to a rising mode in 2014, giving some indication of a new wave of credit deterioration.

This last dynamic mirrors the provision rate dynamics for retail and for corporate loan portfolios (Figure 3.3). Apart from their common decrease after 2009 (220 bp spread in 2009 narrowing to 50 bp at the end of 2014), retail provision rates rose again in 2012, from 4.2 to 5.9 percent in 2014, while corporate provision rates, interestingly, did not deviate from their declining trend during that period. Such divergence of curves indicates two things. First, the retail lending market started to deteriorate before 2014 (actually since early 2012), despite the significant volume of new loans that were originated during the period. Second, this dynamic did not seem to have affect the corporate loan portfolios to the extent that it affected retail portfolios.

Figure 3.2. Top 30 banks: Effective loan provision rates

Effective loan provision rate — Weighted average

Effective loan provision rate — Weighted average (excl. Sberbank)

Effective loan provision rate — Simple average

12%

11%

10%

9%

8%

7%

6%

5%

4%

2011 201320122009 2014

10.4%

7.9%

6.4%

5.7%

6.9%

9.9%9.4%

5.5%

5.6%

7.0%8.0%

9.3%

6.3%

5.9% 6.2%

2010

6.4%

5.2%

5.8%


Figure 3.3. Top 30 banks: Effective loan provision rates for retail and corporate portfolios separately

Effective loan provision rate — Weighted average

Retail loan provision rate — Weighted average

Corporate loan provision rate — Weighted average

11%

10%

9%

8%

7%

6%

5%

4%

3%

2011 201320122009 2014

10.3%9.9%

7.4%

6.0%

5.4%

9.9%9.4%

5.2%

4.2%

5.9%5.5%

5.6%

7.0%

8.1%

7.1%

2010

5.4%

4.7%5.2%



The dynamics of non-performing loans (NPL) as well as bad loan cessions and write-offs since 2009 also indicate economic deterioration.

The NPL ratio (>90 days overdue) to the loan portfolio expectedly decreased after the crisis of 2008-2009, but reversed trend from 2013 (Figure 3.4). This reversed trend is more apparent when considering only retail lending, with its upward dynamic starting in 2012, rising from 2.4 to 4.0 percent during the two-year period. This points to economic deterioration prior to the 2014 crisis. Interestingly, it also illustrates the time lag of credit deterioration between retail and corporate loan portfolios, which was also observed during the previous financial crisis.

Figure 3.5. Top 30 Banks: Cessions and write-offs of bad loans

750

600

450

300

150

0

2,500

2,000

1,500

1,000

500

0

2009 2010 2011 20132012 2014

Stock of loan-loss provisions

Sales of loans and write-offs

Index sales of loans and write-offs

Index Stock of Loan Loss Provisions

1,281

207 187

311 394

627

100

1,438

151

1,460

131

1,431

221

1,642

277

2,372

451 100

112 114 112 128 185

RU

B bn

Index 100: 2009


Figure 3.4. Top 30 banks: Non-performing loans ratio (>90 days overdue) versus loan portfolios

NPL ratio — Weighted average

NPL ratio — Retail lending, weighted average

NPL ratio — Corporate lending, weighted average

6.5%

6.0%

5.5%

5.0%

4.5%

4.0%

3.5%

3.0%

2.5%

2.0%

1.5%

1.0%

2011 201320122009 2014

6.3%

5.2%

3.4%

2.7%2.5%

6.1%

5.1%

2.7%2.4%

4.0%

2.9%

2.6%

5.4%

4.9%

2010

2.4%

3.1%

2.5%


Bad loan cessions and write-offs accelerated significantly over the six-year period. Their volumes multiplied by 6.3 from 2009 to 2014 while the stock of provisions collectively increased by only 1.9 times during the same period (Figure 3.5). This trend, visible between 2012 and 2014, illustrates the deterioration of credit portfolios since 2012 but also the increasing need for the Top 30 banks to relieve their balance sheets of bad assets in order to meet capital obligations.

3.2%


Capital adequacy

Substantially growing their asset and loan portfolios every year since 2009, the Top 30 banks are naturally facing increasing challenges regarding risk management and capital adequacy. As illus-trated in Figure 4.0, the Top 30 banks’ risk-weighted assets (RWA) increased threefold since 2009, mimicking the loan portfolio trend (Index 332 and 324, respectively), with RWA reaching RUB 48 trillion in 2014 versus RUB 14 trillion in 2009 (Figure 4.1).

Figure 4.0. Top 30 banks: Risk-weighted assets and total assets

400

350

300

250

200

150

100

50

0

95%

90%

85%

80%

75%

70%

65%

60%

55%

50%

2009 2010 2011 20132012 2014

RWA/assets ratio — Weighted average

Index cumulative RWA

Index cumulative assets

87% 90% 90% 91% 91% 89%

119

123159

163197

205235

246325

332

100

100

% RW

A / A

ssets

Inde

x 10

0: 2

009


RU

B tr

Figure 4.1. Top 30 banks: CET1 versus risk-weighted assets (RWA)

50

40

30

20

10

0

2009 2010 2011 20132012 2014

Cumulative RWA

Cumulative CET1

CET1 Ratio — Weighted average

CET1 Ratio — Weighted average (excl. Sberbank)

15.5%

14.5%

13.5%

12.5%

11.5%

10.5%

9.5%

8.5%

7.5%

14

12.7% 11.4%

11.4% 11.2%

9.3%

12.8%

2

18

2

24

3

30

3

36

4

48

4

13.8%13.2%

11.2%

12.1%11.8%

9.9%

% C

ET1 vs RWA


The Common Equity Tier 1 (CET1) capital, which best measures banks’ capital adequacy and financial strength, did not observe the same increase as the risk-weighted assets. Remaining within the RUB 1.8-4.5 trillion corridor since 2009, it mechanically drove CET1 ratios from 12.8 percent in 2009 down to only 9.3 percent in 2014, and from 13.8 percent down to 9.9 percent when excluding Sberbank from the analysis. This decline illustrated the increasing pressure on the banks’ capitalisation year after year since 2009, despite the profitable period that lasted until 2013. It also points to their fragility ahead of 2015 in comparison to 2009 when the same Top 30 banks showed better levels of core capitalisation during the last financial crisis.


The increasing share of retained earnings in the composition of core capital (CET1) is another indicator of instability. While retained earnings comprised 36 percent of the CET1 during the peak of the 2008-2009 crisis, this item comprised more than 56 percent as of 31 December 2014 (Figure 4.2), when Tier 1 adds-in do not represent a sufficient alternative buffer to absorb any economic downturn (2 percent in 2014, down from 9 percent in 2009, Figure 4.3). The Top 30 banks face serious concerns regarding their profitability and limited capital buffers; such a high level of retained earnings may represent a significant risk in the event of further degradation of the macroeconomic environment.

Figure 4.3: Top 30 Banks — Tier 1 Adds-in versus CET1

6

5

4

3

2

1

0

2009 2010 2011 20132012 2014

Cumulative Tier 1 adds-in

Cumulative CET1

0.21.9 0.2

2.30.2

2.7

0.2

3.4

0.2

4.0

0.1

4.5

RUB

bn


Figure 4.2. Top 30 banks: Retained earnings versus CET1

400

350

300

250

200

150

100

50

0

10

8

6

4

2

0

2009 2010 2011 20132012 2014

Cumulative retained earnings

Cumulative CET1

Index cumulative retained earnings

Index cumulative CET1

0.7

213 216 290

360

370

100

1.9 1.42.3

1.52.7

1.93.4

2.44.0

2.5

4.5100

122 146

183216

241

RUB

bn

Index 100: 2009



Conclusion

Engaged for years in a race for ever-higher lending volumes, the Top 30 banks demonstrated significant growth in size and profitability after the 2008-2009 crisis. However, these banks also observed stronger market competition, which directly affected their revenues, as well as a deterioration of their credit portfolios starting 2012, particularly in the retail segment.

Compensating for the declining margins by continuously increasing their loan production until last year, the banking sector entered into a new paradigm in 2015. With no immediate prospects for sufficient lending growth, capitalisation constraints and an expectation that credit portfolios will further deteriorate (in both the retail and corporate segments), some banks’ resistance might be seriously challenged in the coming years. How many of them will pass the test? Their financial performance as of 31 December 2015 will probably give a first indication.


Methodology (1/2)

indicators for the selected banks for a specific year divided by the sum of the respective indicators for the selected banks in 2009).

Except where otherwise specified, all weighted average ratios shown, used or referredto in this publication are calculated on an aggregate basis (i.e. the sum of the respective numerators for the selected banks divided by the sum of the respective denominators for the selected banks).

Except where specifically notified, all simple average ratios shown, used or referred to in this publication are based on the simple average ratio for all banks in the sample.

As the quality and quantity of the disclosures may vary from bank to bank, and/or from year to year, it is possible that some information necessary to calculate certain financial indicators, indexes or ratios is not fully available or disclosed. Only in those cases, the corresponding bank(s) was (were) excluded from the analysis in the respective chart. To uphold the relevance of the respective chart(s), however, at least 91 percent of the sampled banks were covered (i.e. the chart(s) reflect(s) more than 90 percent of the Top 30 banks in our sample).

This publication is based exclusively on the publicly available financial statements prepared in accordance with International Financial Reporting Standards (“IFRS”) for 2009 to 2014, inclusively, for the 30 leading banks by assets operating in the Russian Federation (“the Top 30 banks”), the list of which is presented in Appendix 1.

The term “Top 30 banks” does not refer to nor represent any official, formal or public rating whatsoever, and is only used to designate a sample of the leading banks (“the sample” or “the population”) for the sole purpose of preparing this publication.

Some of the selected banks are also subsidiaries of a parent banking group already represented in our sample. To avoid double counting, only the contribution of that parent banking group was considered. This rule was consistently applied for all type of indicators in this publication, with the exception of simple average ratios.

Except where otherwise specified, all aggregated figures shown, used or referred to in this publication are based on the sum of the respective figures for the selected banks.

Except where otherwise specified, all index ratios shown, used or referred to in this publication are calculated on an aggregate basis using the year 2009 as Index 100 (i.e. the sum of the respective


Methodology (2/2)

Acronym/term Description General formula

PBT Profit before tax —

ROE Return-on-equity Net profit(loss)/shareholder’s equity

ROA Return-on-assets Net profit(loss)/total assets

NIM Net interest margin Net interest income/average interest bearing assets (year 0; year -1)

Costs-to-assets Costs-to-assets Operating expenses/total assets

EPR Effective provision rate Total loan-loss provisions/total loan portfolio (gross)

Retail provision rate Retail loan portfolio provision rate Total loan-loss provisions on retail loan portfolio/total retail loan portfolio (gross)

Corp. provision rate Corporate loan portfolio provision rate Total loan loss provisions on corporate loan portfolio/total corporate loan portfolio (gross)

NPL ratio Non-performing loans ratio Total loans overdue more than 90 days/total loan portfolio (gross)

LTD Loans-to-deposits Total loans (gross)/total customer accounts

RWA Risk-weighted assets —

CET1 Common Equity Tier 1 —

CET1 ratio Common Equity Tier 1 ratio CET1 versus RWA


Appendices

Appendix 1: The sample 25

Appendix 2: Loan portfolio structures 26


Appendix 1: The sample

SberbankVTB

GazprombankVTB 24

Financial Corporation OtkritieAlfa Bank

Bank of MoscowRussian Agricultural Bank

UniCredit Rosbank

PromsvyazbankRaiffeisen

Bank of Khanty-Mansiysk Credit Bank of Moscow

Bank Saint-PetersburgAK BARSBinbank

Russian Standard Nordea Bank

Uralsib Citibank

Svyaz-BankHome Credit Bank

Zenit MDM

ING Bank Globex

SMP BankPetrocommerce Bank

UBRiR

Assets in 2014 (RUB bn)

0 2 500 5 000 7 500 10 000 12 500 15 000 17 500 20 000 22 500 25 000


Appendix 2: Loan portfolio structures (1/2)

Bank

Is the bank a subsidiary of another bank included in the Top 30 banks sample?

Share of the corporate loan portfolio (gross) in the total loan portfolio (gross) as of 31 December 2009.






Sberbank - 78% 79% 78% 74% 72% 74%

VTB - 83% 82% 82% 78% 76% 79%

Gazprombank - 90% 91% 90% 88% 88% 90%

VTB 24 yes, VTB 22% 13% 11% 13% 12% 13%

FC Otkritie - 91% 89% 87% 85% 80% 89%

Alfa-Bank - 86% 87% 88% 85% 82% 84%

Bank of Moscow yes, VTB 85% 88% 91% 89% 85% 82%

Russian Agricultural Bank - 89% 89% 85% 83% 82% 82%

UniCredit Bank - 82% 83% 82% 77% 73% 81%

Rosbank - 56% 52% 41% 36% 33% 34%

Promsvyazbank - 87% 91% 91% 89% 88% 90%

Raiffeisen - 71% 75% 72% 68% 60% 65%

Bank of Khanty-Mansiysk yes, FC Otkritie 77% 76% 67% 65% 63% 50%

Credit Bank of Moscow - 83% 83% 82% 76% 69% 67%

Bank Saint Petersburg - 92% 93% 93% 91% 86% 85%


Appendix 2: Loan portfolio structures (2/2)

Bank

Is the bank a subsidiary of another bank included in the Top 30 banks sample?







AK BARS - 87% 87% 84% 80% 76% 77%

Binbank - 78% 86% 88% 88% 85% 78%

Russian Standard - 12% 10% 8% 5% 4% 5%

Nordea Bank - 93% 93% 92% 91% 89% 92%

Uralsib - 72% 72% 71% 64% 51% 48%

Citibank - 43% 50% 64% 65% 61% 67%

Svyaz-Bank - 96% 93% 89% 81% 74% 74%

Home Credit Bank - 1% 0% 0% 0% 0% 0%

Zenit - 90% 93% 92% 89% 87% 86%

MDM - 67% 76% 75% 73% 73% 76%

ING Bank - 100% 100% 100% 100% 100% 100%

Globex - 97% 98% 98% 98% 98% 98%

SMP Bank - 89% 91% 95% 95% 92% 89%

Petrocommerz Bank - 90% 92% 91% 88% 82% 80%

UBRiR - 53% 56% 59% 54% 44% 55%

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