Turnaround Strategy for Ryazan Capital Bank · Acierto team Specially for Oliver Wyman Impact 14.03.2014 Source: Acierto analysis, case materials, In recent years branches are not

Specially for Oliver Wyman Impact

Alexey Semakov [email protected]

Ilya Larchenko [email protected]

Stanislav Fedyakov [email protected]

Vasiliy Patyk [email protected]

Turnaround Strategy

for Ryazan Capital Bank

Acierto team

Final round presentation

Moscow, March 14, 2014

Acierto team


14.03.2014

Ryazan Capital Bank: As-Is

Potential Options

Strategy

Implementation

Results

1.

2.

3.

4.

5.

Agenda


Potential Options

Strategy

Implementation

Results

1.

2.

3.

4.

5.

Acierto team


14.03.2014

8,3%

12,8%

7,9%

0,8%0,8% 1,4% 0,8%

0,1%

2009 2010 2011 2012

ROE ROA

55,4%

71,4% 68,9%82,6%

98,0%

23,3% 18,4% 17,9%29,1%

81,5%

2008 2009 2010 2011 2012

C/I

Cost of risk*

1 000 540

110 123 262

52 159

Interestincome

Interestexpense

Provisionexpenses

Otherincome /expense

OPEX Tax Net income

4 550 1 860

1 170

84 1 407

6 23

Interestincome

Interestexpense

Provisionexpenses

Otherincome /expense

OPEX Tax Net income

RCB has stable net interest income but profitability has sharply declined during last 3

years because of the rise in OPEX and decline in loans quality

Expansion to the retail market helped RCB to reach impressive return

on equity, but then it declined. The main reason of decline lies …

Average peers

ROE = 11,7%

Average peers

ROA = 1,5%

… not in the interest policy sphere …

… but in the area of cost control and risk management

2008

2012

Return decline factors

• Increase in provision expenses was predictable due to the shift of

the loan portfolio toward more risky retail and auto loans

• Other income/expense changes are highly random. It depends on

the economical situation and security price movements thus

cannot be totally controlled

• High OPEX is a result of non optimal operational strategy and its

implementation. Main drivers of OPEX are employees (CAGR

54%) and rents & repairmen (CAGR 53%)

* Cost of risk does not include write-offs (this information is not available)

Sources: case data, Acierto analysis, banki.ru

10,1%12,2%

15,4%16,8%

9,8% 10,4% 11,0% 11,1%

4,4% 4,7% 5,3% 5,9%

2009 2010 2011 2012

Income rate

NIM

Cost of funds

OPEX growth is the main challenge for bank’s management

2

3

41

4

Acierto team


14.03.2014

71%

17%

8%

2% 1% 1%Loans to customers

Cash

P&L securities

Property, equipment, intangibleassets

Required reserves

Other

70%

18%

7%4%

1%

Accounts and deposits fromcustomers

Debt securities issued

Money from CB

Subordinated loans

Deposits and balances frombanks

RCB has strong funding problems despite its relatively large size (106 by assets).

Current funding structure is poor and not enough to cover bank’s needs especially in

case of aggressive expansion

Average peers accounts and

deposits share – 80%

Share of deposits is large but not enough to meet bank’s objectives.

Cost of funds rises because of increase in “expensive” funds share

35,4

RUB bn

38,0% 50,3%75,1%

88,1%110,2%

2008 2009 2010 2011 2012

Loans to deposits ratio

9,0%11,7% 10,7%

9,0%7,0%

2008 2009 2010 2011 2012

Capital / Assets

Deposits (one of the cheapest funding source)

are not attracted enough for growing loans portfolio,..

… this leads to slow growth of capital

and can lead to failing capital adequacy requirements

38,1

RUB bn

Large amount of unprofitable assets (cash)

is very disadvantageous in current situation of lack of cheap funding

Average

peers cash

share – 8,7%


4

1 3

2

5

RCB current situation summary

• RCB is a relatively large Russian bank (106 by assets) specializing on car

loans

• Uncontrolled growth during 2008-2012 resulted in significant drop of profitability

(ROE drop from 8,3% to 0,8%, stagnation of capital)

• The core problems are fast OPEX growth and decreasing loans quality

• RCB has funding problems – funded by expensive bonds, unable to attract

enough deposits in time, lack of resources for expansion

Acierto team


14.03.2014

Source: Acierto analysis, case materials, www.rosrealt.ru

In recent years branches are not effective enough and this may be due to unqualified

employees and irrational use of working space

1230

449

311

119 114

-2-44

48 44 51

-40

22 738 50

-70

22 738 50

-63

20 7 38 51

209

12686 57 67

-200

0

200

400

600

800

1000

1200

1400

2008 2009 2010 2011 2012

(Revenue - costs) per customer RUR th /customer

Branches

Cross-sell

Call-center

Internet

DSA

average

Last years all channels of interactions with customers except branches have shown increasing efficiency…

…and if this decreasing

can be explained by the crisis…x4

…this is a clear signal to start work

on branch restructuring and optimization

x2,6

1213

2 35

4

17

4 4

12

02468

1012141618

# of sales/ branch

Some regions have a lot more sales

people per each branch than other..

126

50

15 1710 7

16 16

5

0

10

20

30

40

50

60Income, rub MM/ # of sales

…but they obviously

lose in efficiency compared to them

• The average square of the branch is close

to 500 square meters, that looks like too

large for a typical office

• Each employee has an average about 15

square meters of branches’ space (min

law norm – 4,5 meters of personal space),

that looks excessive even considering

halls for customers

Also there is excess working space

(in terms of sq m per branch) 1 2 3


Potential Options

Strategy

Implementation

Results

1.

2.

3.

4.

5.

Acierto team


14.03.2014

Source: open sources, team analysis

Competition is growing, margins are falling, technology and cheap funding is the key,

RCB should focus only on highly marginal niches where it has competitive advantages

Traditional banking niches are highly competitive today,

margins are falling and capital requirements are rising…

…technology platforms and access to retail clients becomes crucial,

consumer lending is the key priority for Russian 2nd tier banks

Key banking niches

Competitiveness

Net pro

fita

bili

ty

Potentially interesting

niches for RCB

Niches without any

interest for RCB

Car

loans

SME

loans

Consumer

loans

HighMediumLow

Hig

hM

ediu

mLow

Circle area = capital

requirements

Private

banking

Processi

ng etc.

Access

services

• Decline in margins within all classes of products, including consumer loans

• Overall trend of risk increase on active bank operations

• Ruble funding rates increase and overall deficit of ruble funding in the

banking sector

• Consumer lending niche – the only niche where 2nd tier banks can

successfully evolve without significant competitive advantages

• Rapid and costly development of technology platforms (from online

banking to credit factories)

• Large banks become more universal: gradual inclusion of non-banking

services (VIP services, real estate etc.) and investment banking services

(asset management, M&A advisory and execution, brokerage etc.),

developing of leasing and factoring businesses

• Growing importance of network and direct access to retail clients,

increase of regional expansion

• Accelerated growth of the market leaders in terms of capital and

assets, accompanied by the spread increase between the cost of borrowing

for the leaders and for other banks

• Banking business becomes more dependent on the state and funds

provided by the CB

Key banking trends

Significant increase in competitiveness: to survive RCB should focus

only on highly marginal niches where it has competitive advantages

Technology is the key: one should focus on technology platform

improvement and access to retail clients

Cheap money is the key: RCB should focus on finding and

leveraging cheap funding sources

Best practice: focus on package sales and cross-sales

Consumer lending is the key priority for 2nd tier banks

8

Mortgages

Corporate

lending

Acierto team


14.03.2014

9

Situation in RCB can be improved by implementation of strategic (selection of niches,

funding sources, sales channels and expansion options) and operational (branch and

ATM optimization) initiatives

Base strategy

Niches options

Retail

Car loans

SME loans

Large

corporate loans

Expansion

options Aggressive

expansion

Moderate / point

expansion

No expansion

Branch optionsShut down of

ineffective branch

Branch

optimization

Sales channels

options

DSA

Branch

Internet

Funding options

Central bank

Deposits

Bonds

Securitized loans

ATM options

Own ATMs

Third party ATMs

New capital

issuanceExpensive. Current

stockholders dilution

Cheap but not controlled

by RCB

Main funding source.

Relatively cheap

Expensive. May be used

only in single option case

Subordinated debtExpensive. May be used

only in single option case

Cheap. Large amount of

similar loans is needed

Additional capital needed.

Risk of fall in marginality

Loosing of opportunities

Expansion to the most

attractive regions –

optimal strategy

High liquidity needs.

Sustention expenses

Less cash needed. No

additional costs

The most profitable fast

growing sector

MortgageLow profitable but growing

sector.

Moderate profitability and

growth. RCB’s main market

SME leasing

High profitable market with

current RCB’s presence

Stagnating low profitable

market

Non-banking market.

Complimentary to car loans

Essential channel for car

loans

Currently most profitable

sales channel

Fast growing cheap sales

channel (primary retail)

Shrinking of most profitable

sales channel

Effective cost cutting without

dramatic changes

Source: open sources, team analysis


Potential Options

Strategy

Implementation

Results

1.

2.

3.

4.

5.

Acierto team


14.03.2014

Car

loans

Source: team analysis, case materials

(1) RCB potentially should focus on consumer loans as the most desirable loan niche

(2) stay in car loans for individuals segment and

(3) dive into SME loans and collateralized SME leasing backed by vehicles

Consumer loans

will be the most desirable segment for Russian 2nd tier banks…

• Market saturation and strict regulation

• Margins will fall

• Banks with developed infrastructure

and IT, which will be able to select the

best part of borrowers, will be the

winners

• The niche will grow, margins will fall

• Business will go into commission area

• There will be total asset securitization

• Overall economic situation for SME in

Russia is getting worse

• Banks with cheap money and strict

risk management will be the winners

• SME financial leasing and SME credit

factories – are the main growth points

…however, car loans for individuals and SME loans niche

should also be considered as core segments for RCB to operate in

Long-term dynamic forecast of key loan niches for Russian 2nd tier banks

Net cost

Net pro

fita

bili

ty

Focus on consumer loans

Continue developing car loans for individuals business

Exit big corporate lending niche

RCB should consider diving into collateralized SME leasing

backed by vehicles

RCB should consider expansion in SME loans niche

RCB should continue

operating in this niche

Niche with new

opportunities for RCB

RCB should exit this

niche

Corporate

lending

SME

loans

Consumer

loans

HighMediumLow

Hig

hM

ediu

mLow

Circle area = niche

volume in Rub

Niche’s futureNiche RCB position in the niche

• Borrowers will show increase of

sensitivity to the rate

• Large banks with cheap money will

be the winners

• Average quality of borrowers in

medium banks will fall

• No new customers since 2011

• Need more capital to back up

corporate loan book and even

more capital to grow into a

healthier portfolio with new and

stable customers

• Currently car loans = 2/3 of

overall loan portfolio

• Well-known brand and

successful product

• Successful product “Luxury today”

• Developed distribution channel

through network of branches

• Increased NPL pool

• No cross-sales, etc.

• SME portfolio is growing at

CAGR 20% over 3 years

• SME portfolio is really diverse

• Deep expertise in car loans to

dive into SME leasing

• Large cross-sales opportunities

Strategy for existing RCB businesses: Potential new businesses for RCB to enter in:

11

Acierto team


14.03.2014

*Financial results of cross-selling are in attached financial model

Source: Bain “Loyalty in retail banking” 2013 work, team analysis

Cross-selling is the one of the key worldwide best practices in banking,

It should be one of the main aspects of RCB’s long-term strategy

96 9285 85 80 77 77 76 75 71 71

63 61 59 55 51 49 46 43 43 41 40 39 38 36 36

0

20

40

60

80

100

Belg

ium

US

Fin

land

Denm

ark

Sw

eden

Austr

alia

Chile

Pola

nd

South

Kore

a

Arg

entin

a

Mexic

o

Sin

gapore

UK

Spain

Fra

nce

Italy

Norw

ay

Germ

any

Canada

Japan

Th

aila

nd

Hong K

ong

India

Indonesia

Chin

a

Russia

Percentage of respondents who purchased at least one new product in the last year

%

81 78 76 75 75 71 71 70 70 70 69 68 68 66 65 62 61 60 58 58 57 57 53 52 50 4640

0

20

40

60

80

100

Italy

Fin

land

Denm

ark

Sw

eden

Mexic

o

US

Norw

ay

Germ

any

Hong K

ong

Fra

nce

Austr

alia

Th

aila

nd

Canada

Russia

Sin

gapore

Chile

Pola

nd

Neth

erla

nds

Chin

a

UK

India

Indonesia

Arg

entin

a

Belg

ium

Japan

South

Kore

a

Spain

Percentage of new products purchased at primary banks

%

A huge share of customers

in most countries are buying new banking products

Roughly 65% of new product sales, are won by customers’ primary

banks, but the share is lower in some of the more competitive countries

It broadens your profit base.

Only 1-2 percent of a bank’s customers

usually account for almost all its

profitability. Clearly, a lot of customers

add very little to your bottom line. Cross-

selling can bring diversity and strength to

the group you rely on the most

It increases wallet share.

Community banks typically hold 35-50

percent of a customer’s wallet share.

That’s how much of the customer’s

assets – including checking, savings,

money-market accounts, and such – are

held at the same institution. Cross-selling

helps in increasing this share

It improves retention.

On average, a customer with just one

product at a bank will stay with the

institution for about 18 months. By adding

just one more product, you extend that

relationship (and income) to four years.

At three products, that relationship will

last an average of 6.8 years.

It’s cheaper than acquisition.

It’s 8-10 times more costly to acquire new

customers than to sell additional products

to ones you already have. Plus, cross-

selling is also a safe and stable way to

generate core deposits, compared to

more expensive liquidity options.

Cross-selling examples

• Cooperation with insurance

companies for auto options

• Plastic cards in cooperation

with retail food shops, etc.

• Package products for SMEs

(salary projects, depository

service, etc.)

• Complex proposal for one

client, release a credit card

and remote maintenance

when opening deposit, for

example*

12

1 2

Key points of cross-selling initiatives


Potential Options

Strategy

3.1 Consumer Finance

3.2 Car Loans

3.3 SME lending

3.4 SME leasing

Implementation

Results

1.

2.

3.

4.

5.

Acierto team


14.03.2014

Russian retail banking demonstrates impressive growth and essential quantitative

and qualitative potential

Sources: Central Bank, Acierto analysis, Expert RA

0%

50%

100%

1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12

Payments Cash withdrawal

… and this is not only quantitative but also qualitative growth:

people become confident in banking

Banking cards operations structure

Number of

payments made

by credit/debit

card surpassed

number of cash

withdrawal in the

end of 2012 year

7,7

15,3

4,5

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0% 10% 20% 30% 40% 50%

Square of bubble represents loans volume 2012, RUB tr Growth rate, 2012

Pro

jecte

d g

row

th r

ate

, 2013

7,7

15,3

4,5

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0% 10% 20% 30% 40% 50%

Retail Large corporates SME Growth rate, 2012

Gro

wth

rate

, 2011

In the near future retail banking

will be the main driver of Russian banking industry growth

3,2

7,7

0

1

2

3

4

5

6

7

8

9

10

1Q08 3Q08 1Q09 3Q09 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12

Retail banking grows extremely fast…

Retail loans volume, RUB tr

1 2

3

25% CAGR

14

Loan portfolios growth rate, %

Acierto team


14.03.2014

*For more information about CRM systems look Appendix 1

Source: bank marketing strategy magazine, Bain “Loyality in retail banking”

2013 work, group analysis

RCB should focus on retail banking segment as the most attractive for 2nd tier banks,

Strategic initiatives should be realized based on key retail banking trends and predictions

Drive to digital

Impacting delivery, marketing

and service usage

• Mobile app as the necessary

channel of interaction with

customers

• Popularity of online payments

shows explosive growth and

it’s key driver of developing

mobile banking

Improving CX

Advanced customer

experience with activity based

marketing

• Russian retail banking is in the

top on the variability of

customer preferences

• Using analytics to assess

customer interactions across

channels

Branch optimization

Maybe not branchless, but

certainly less branches

• Decreasing the value of

branches to retail

• Transforming the branch into

more collaborative and

relevant sales and information

centers using potential of

digital advantages

Differentiating brands

Avoiding commoditization in a

digital world

• Focusing on key customer

segments with innovative

products and exceptional

customer experience

• Using new technologies for

better product targeting and

segmentation

55

45

3733 31

22

49

40

19

26

13

21

6

0

10

20

30

40

50

60

Japan

Arg

entin

a

UK

Russia

US

India

Chin

a

Payments in the last quarter

Using in the last quarter

Banking on the smartphones/tablets,

respondents using in percentage

%

Top 4 retail banking trends and predictions

88 8271 69 66 64

39

7 7

6

5

4 4

2

0

1

2

3

4

5

6

7

8

0

20

40

60

80

100

Japan

UK

Russia

US

Arg

entin

a

India

Chin

a

using branch at least once,%

# of branch interactions per resp.

Decreasing branches value in retail

%Sale of package products

(credit and debit cards,

cross-selling)

Using best IT practices to

attract clients with their

products preferences

(CRM systems*)

Customer-oriented

marketing campaign

(focus on the target

segments, reasonable

tool selection)

0

1

2

3

4

5

6

7

8

1,0

Neth

erla

nds

2,42,6

3,43,6

India

US

Spain

Fin

land

Mexic

o

7,36,7

Russia

6,4

Fra

nce

4,6

UK

Switchers

First-time joins

%60

Percentage of respondents

forming new primary relationships

with banks in the last year

15

1 2 3 4

Acierto team


14.03.2014

Not considered

Region /

Indicator1

RCB

Branc

hes

now

Market

size 2011

RUR mln

Market

growth

2009-11

RUR mln

Consumer

loan per

capita

divided by

average

income

Attraction

rating

1 Moscow 4 478 725 129 454 85% 3

2 Moscow Region 270 359 101 817 126% 3

3 Krasnodar 1 128 899 22 676 116% 3

4 Tatarstan 107 129 9 970 117% 3

5 Bashkortostan 104 860 12 279 121% 3

6 St.-Petersburg 2 207 900 51 489 151% 2

7 Sverdlovsk 158 520 17 334 133% 2

8 Chelyabinsk 120 978 11 124 176% 2

9 Dagestan 16 631 10 138 27% 2

10 Samara 111 936 6 799 141% 1

11 Nizhny Novgorod 1 94 093 8 829 133% 1

12 Stavropol 62 497 13 450 133% 1

13 Voronezh 49 600 8 746 113% 1

14 Leningrad 46 239 17 010 149% 1

15 Tula 40 340 8 234 135% 1

16 Belgorod 37 138 7 643 112% 1

17 Bryansk 23 530 4 020 107% 1

18 Ivanovo 18 817 2 609 112% 1

19 Tambov 18 085 4 959 96% 1

20 Oryol 15 044 2 453 115% 1

21 Ryazan 7 28 290 4 190 139% 0

22 Volgograd 58 161 5 191 140% 0

23 Orenburg 56 640 8 808 169% 0

24 Saratov 55 268 7 281 155% 0

25 Vologda 2 38 428 5 326 177% 0

26 Ulianovsk 33 109 9 311 158% 0

Russia 4 395 182 867 117 133%

Source: Rosstat, CB of Russia

1 If economically reasonable in that time16

RCB should focus on 20 favorable regions and be ready to enter 16 of them while

positioning branches as minor-role entities responsible for local support

Top-sized Regions of Central Part of Russia in terms of

Consumer Loans market

1

2

3

4

5

7

9

10

6

8

11

12

13

14

15

16

17 18

19

2021

22

23

24

25

26

Low rating

Medium rating

High rating

Highest rating – entering

Not in top-sized list

• Decreasing of branch space

• Automated Teller Machines access via

other banks - no own ATMs

• Paying clients’ ATM commission

• Branches as local centers responsible for

traditional procedures and local

marketing, support and loan approval for

SME’s and special clauses

• DSA, POS and internet services focus

• Cross-selling and co-branding actions

• Massive marketing to attract customers

Branches #drop indicates decline in its

value… (while market growth)

# all branches in

Russia, thousand

…So braches play minor role

(major - internet) in global growth strategy

3,12,9

2,82,3

3,23,7

4,4

0,0

1,0

2,0

3,0

4,0

5,0

0

0,5

1

1,5

2

2,5

3

3,5

2010 2011 2012 2013

Consumer loan

market, RUR tr.

Entering

2013

Entering

2014-15

Entering1

2016+


Potential Options

Strategy


3.2 Car Loans

3.3 SME lending

3.4 SME leasing

Implementation

Results

1.

2.

3.

4.

5.

Acierto team


14.03.2014

Source: analytics agency “AutoStat”, RBK, Ernst&Young open research,

PWC open research, team analysis

Car loan market has a huge upside for RCB, one should continue actively evolve in

that field with focus on commission revenue and cross-selling

63,1

29,542,0

65,074,9

0

20

40

60

80

x3,3

+49,6% CAGR

20122011201020092008

Car loans and new cars market volume in Russia, bn USD

Car loans market volumeNew cars market volume

83,4 74 6434,8

0

50

100

GERGBUSA

+84,1%

RUS

Share of car sales with usage of

car loans in 2012, %

bn USD

641 532 499260

0

1.000

500

+85,8%

GER GB RUSUSA

Ø 64

Number of cars per 1000 citizens

in 2012

Ø 483

In the Long-term, Russia is one of the most attractive car loan markets… …RCB should continue actively develop its car loan business

with focus on commission revenue, product quality and cross-selling

• Car loans are one of the most demanded retail banking products in Russia

• For retail banks, car loan business will drift more and more into commission

field

• There are premises for resumption of preferential car loan program in 2013, as

a measure to support the market. Great news for car loan market players

• Increase of market players number and rising threat from automakers’ captive

banks shows that the market becomes more and more competitive

Demand for car loans is actively growing after the crisis at 49,6% CAGR

The market is far from saturation and has a huge potential for growth

Key RCB’s car loan products and its key features

Existing New

“Easy Drive” “Family 2nd car”“Express”

• No down payment

• Application review

time – 1 day

• Up to 3 mln rub

• Key RCB’s product

• Online application

• Fast application

review time – 10 min

• Up to 1 mln rub

• Only 2 documents

• 15%< down payment

• Fast application review time, product quality and minimum number of

necessary documents are the key differentiators for clients after loan rate

• RCB should focus on making its business commission-driven

Further expansion into regions via DSAs

Implementation of online application for clients, scoring models

improvement and strong call-center

RCB should focus on cross-sales (for example, KASKO insurance)

New products: (1)express-loans through DSAs and online sales. Key

feature – super fast application review time and only 2 required

documents. (2)“Family 2nd car” – for capturing the most reliable clients

Brand recognition: active marketing via internet, social networks, DSAs

Partnerships with car dealers to implement factoring service for clients

Potential strategy for RCB in car loans field:

18

• Lower rates for

reliable borrowers

• Application review

time – 1 day

• Up to 3 mln rub

1 2


Potential Options

Strategy


3.2 Car Loans

3.3 SME lending

3.4 SME leasing

Implementation

Results

1.

2.

3.

4.

5.

Acierto team


14.03.2014

Source: case materials, CB, Expert RA, team analysis

RCB is doing well in SME lending field; one should focus on becoming “one-stop-

shop” for SMEs, increase of commission revenue and package sales

• RCB already has experience of working with SME: its SME segment

portfolio grew at 20,4% CAGR over the last 3 years, moreover the

portfolio is really diverse

• RCB already has a network of branches necessary for interaction with

SMEs, 1 branch per city in couple with strong internet service, call

center and smart marketing is enough for successful business growth

0,51,0

1,7 2,5

2,63,2

3,8

4,5

5,2

6,190,0

83,0

46,0

3,7

21,9 19,1 16,9 16,0 18,0

0

20

40

60

80

100

0

1

2

3

4

5

6

7

201220112010200820072006 2009

+14,6% CAGR

2015E2014E2013E

SME loans outstanding, bln rubGrowth rate, %

Overall industry SME loans outstanding 2006 - 2015, bln rub

RCB’s SME loans outstanding 2008 - 2012, mln rub

N/A

Russian SME lending grew at 14,6% CAGR after the crisis and is

expected to grow further at 16-18% per annum in the next 3 years

RCB’s SME loan portfolio actively grew over

2009 – 2012 at 20,4% CAGR and outperformed the market by 5,8%

0,75

1,3

1,811,61

2,273

2

1

0

2013E2012201120102009200820072006

+20,4% CAGR

x3.03

2015E2014E

SME loans outstanding, mln rub

1

2

RU

B trln

%

RU

B b

ln

RCB is doing well in SME lending business

and has an opportunity to leverage existing facilities

Potential strategy for RCB in SME lending field:

3

RCB should become “one-stop-shop” for SMEs

Focus on increase of commission revenue from operations with

SMEs

Key trend: focus on package sales for SMEs. One package for SME

may include the following services/products:

• lending

• depository services (deposit accounts)

• salary projects

• conversion operations

• documentary operations

• encashment

• internet-banking through RCB’s web-site and sms-banking

• higher interest rates on accounts with minimum balance

• financial consulting

Focus on technological, conveyor-like products (without complex

structuring, etc.)

Decrease average loan term to decrease and stabilize NPL

20


Potential Options

Strategy


3.2 Car Loans

3.3 SME lending

3.4 SME leasing

Implementation

Results

1.

2.

3.

4.

5.

Acierto team


14.03.2014

Source: Expert RA, team analysis

Development of financial leasing subsidiary for SMEs with focus on collateralized

lending backed by vehicles has a huge potential upside for RCB

Most under-banked sector of the economy

SMEs tend to be well capitalized (virtually with no leverage

considering their lack of access to funding)

SMEs are willing and able to take on financing at higher IRRs

due to their high ROIIRR

Low competition in comparison with large companies and

consumer lending sectors

Huge potential for cross selling, package selling and

leveraging additional revenue streams (i.e. insurance)

RCB already has experience of working with SME: its SME

segment portfolio is growing at CAGR 20% over 3 years and the

portfolio is really diverse.

RCB already has deep expertise in car loans for individuals:

car loans represent 2/3 of loan portfolio

RCB already has developed network of DSAs and branches –

excellent selling points for SME leasing

RCB already has a quite strong and well-known brand in car

loan business

Russian SME segment has a variety of advantages to operate in…moreover, RCB already has relevant experience and

competitive advantages to dive into collateralized SME leasing

SME leasing niche

is one of the most attractive and fastest growing segments…

SME leasing – market leader in terms of growth rates within

all operations with SME: increase in new deals volume in 2012 =

+41% for small business and +3,5% for medium

Key SME leasing segments in terms of volume (Rub) are

freight transport (28,4% of the leasing deals with SME), railroad

equipment (24,5%) and vehicles (20,4%)

A huge catch up to come: Russian SME contribute to only 21%

of GDP while in USA and Europe – 60% and 58% respectively

1

2

3

Vehicles niche will be the main growth driver of SME

leasing for the near future in Central Russia

Enter SME leasing market via development of financial leasing

subsidiary

Focus on collateralized SME leasing backed by vehicles

Partnership with a set of insurance companies to gain from

commissions on insurance sales

Total securitization of assets

Potential strategy for RCB in SME leasing field:

22

Acierto team


14.03.2014

Source: team analysis of Europlan, VEB Leasing, Leasing Standard and

Rotor Leasing companies, interview with industry expert

New SME leasing business for RCB: 4 clearly unbundled key activities of

collateralized lending is the key of successful strategy

Collateral

Decentralized

distribution

Centralized loan

approval, risk

management and

loan recovery

RCB will be the prime source of funding, plus :

• Other bank borrowings

• Development funding

• Bond issuances

• Joint financing and channeling

agreements with banks

• Bond issuance

Decentralized, but systemized distribution

RCB already have its network of branches

and DSAs as a primary sales points

Decentralized distribution will be build

gradually through time, however, current

network of RCB’s branches and DSAs

already enough for the benefit of scale to

kick in

Loan approval only after centralized

assessment

Risk management, NPL management and

loan recovery management should be

centralized

Strong scoring models is the key

Financial lease is an ideal tool for collateralized leasing

The presence of collateral in any loan is supposed to mitigate credit risk

The funding obtained should be

collateralized as much as possible by the

existing lease pool

2

3 4

Funding

1

Ideally the collateral is structured so that the

‘residual value’ of the sale of the

repossessed asset would be equal or

superior to the outstanding loan amount

A collateral is insured ideally with the lease

company as beneficiary

Vehicles are the most “convenient” collateral:

simple insurance schemes, simple loan

recovery process, large secondary market

Key sales channels: DSAs, branches, direct sales, online application

Simple products: average loan amount - $100k, loan term – 12-24

months, downpayment – 25%, loan type – differentiated payments

(preferably since it allows higher IRRs for lessor) or annuities

Due diligence process will include site visit

to verify presence of claimed assets

At first, focus will be on large tickets. Then, after automated scoring

model implementation, retail lending will begin

There will be no in-house collector service: all NPL 90+ will be joined in

pools and sold to collector agencies

23


Potential Options

Strategy

Implementation

Results

1.

2.

3.

4.

5.

Acierto team


14.03.2014

Source: team analysis

Prioritization is the key. First of all, RCB should gain from quick wins available;

consumer finance and car loans are the main priority, moreover, SME lending and

collateralized SME leasing also have a great potential upside for RCB

25

Criticality

Attra

ctiveness

HighMediumLow

Hig

hM

ediu

mLow

Circle area = potential

value for RCB

Prioritization matrix for RCB

Consumer

finance

Car loans

SME lending

SME

leasing

Quick

wins

…firstly, there are a set of quick wins for RCB, one should focus on consumer

finance and car loans, secondly SME sector also has potential upside for RCB

Key initiativesPriority Segment

1.

2.

3.

4.

5.

• Branch optimization: close down inefficient branches, optimize stuff

allocation

• ATMs: allow clients to use any ATM without any commission (like TCS)

• NPL decrease: require 2nd document for clients without good credit

history (for product “Luxury today”), decrease average loan term

• Internet sales: make online loan applications available, implement full-

scale internet banking service platform and CRM system

• Cross sales: capture existing client base in car loans segment as much

as possible, implement package products for individuals (credit cards etc.)

• Marketing: active marketing through internet and social networks

• Partnerships: with large retail shops with the aim to acquire new clients

• Expansion into regions via DSAs and partnerships with car dealers

• Cross sales: partnerships with insurance companies, package sales, etc.

• New products: super fast “Express” and family-friendly “Family 2nd car”

• Automation increase: implement strong scoring models, call-center and

online application

• Factoring: partnerships with car dealers to make this service available

• “One-stop-shop”: focus on providing 360 service for SMEs

• Package sales and cross sales is the key (lending, salary projects,

encashment, conversion operations, depository services etc.)

• Focus on increase of commission revenue from operations with SMEs

• Focus on technological, simple, conveyor-like products

• Enter into SME leasing market via financial leasing subsidiary

• Focus on collateralized SME leasing backed by vehicles

• Cross-sales: partnerships with insurance companies (KASKO sales, etc.)

• Synergy potential: capturing clients into regular SME service business

• Strong scoring model is the key

• Key channels: existing network of DSAs and branches + direct sales

RCB should prioritize all available actions in accordance with its

capabilities, competitive advantages and potential risk/reward ratios…

• Overall business digitalization: focus on internet, technology platform improve-

ment (implementation of a new internet banking, mobile banking and CRM systems)

• Assets securitization as the new funding component

• Overall focus on cross sales and package sales

Common strategy components for all RCB’s business segments:

Acierto team


14.03.2014

Source: Acierto analysis26

Core strategy initiatives will be implemented within 3 years, followed by entrance into

SME leasing - new business segment for RCB

Key initiativesI II

2013

1.1 Branch optimization

1.2 No ATM commission for clients

2.1 Full-scale internet banking and CRM

platform implementation

2.2 Implementation of new package

products for individuals

2.3 Establishing partnerships with large

retail shops/networks

2.4 Active marketing campaigns

through internet and social networks3.1 Partnerships with insurance

companies to implement cross-sales

1.3 Decrease average retail loan term

1.4 Require 2nd document for clients

without good credit history

4.2 Implementation of “one-stop-shop”

service for SMEs

3.2 Implementation of 2 new developed

products

3.3 Partnerships with car dealers to

implement factoring service

4.1 Package sales products and cross-

sales implementation

5.1 Establishing SME leasing

subsidiary

Qu

ick W

ins

1.1

1.2

1.3

1.4

2.1

5.2 Partnerships with insurance

companies to implement cross-sales

3.4 Scoring models, call center and

online application implementation

Phase complete Phase volume Phase timeframeAppendix 14-18 – detailed phase description

III IV I II III IV I II III IV I II III IV I II III IV

2014 2015 2016 2017 2017+

Co

nsu

mer

fin

an

ce

Car

loan

sS

ME

len

din

g

SM

E

leasin

g

5.3 Implementation of scoring models

and direct sales

2.2

2.3

2.4

3.1

3.2

3.3

3.4

4.2

4.1

5.1

5.2

5.3

2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4 2.4


Potential Options

Strategy

Implementation

Results

1.

2.

3.

4.

5.

Acierto team


14.03.2014

RCB could resolve its problems, increase its efficiency higher than industry average

and more than double the capital in 5 years via following the strategy

57,4%

74,4%

0%

20%

40%

60%

80%

100%

120%

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

C/I Cost of risk*

10,6%

17,3%

7,3%

0%

5%

10%

15%

20%

2009 2010 2011 2012 2013 2014 2015 2016 2017

NIM Income rate Cost of funds

Implementation of the new strategy

will be funded with the cheapest sources1

• Current funding from Central Bank is the cheapest (~4%) source and it

should be used until CB provides it

• Another cheap (~7%) source for bank will become securitized car loans

(least risky 20%) which will also become the second large source of

funding in 5 years

• Classic source of funding – deposits (~5,5-7,5%), will remain the main one

• Bonds are less attractive because of high interest rates (~8-9%) and

should be issued only in case of lack of funding. Bond rates may be

lowered if parent company act as surety. In 3 year RCB will not need

common bonds

* Cost of risk does not include write-offs (this information is not available)

** On the assumption of Russian banking growth rate of 10%


RCB rating positions improvement by 2017**

75 (6 up) by loans portfolio (from 27 to 62 RUB bn)

96 (10 up) by net assets (from 38 to 79 RUB bn)

124 (51 up) by capital (from 2,7 to 6,5 RUB bn)

Right interest rates policy and cost control

will make RCB one of the most profitable Russian banks in its segment2

70%81%

18%7% 3%

4%

1%

15%

2012 2017F

Securitized loans

Deposits and balancesfrom banks

Subordinated loans

Money from CB

Debt securities issued

Accounts and depositsfrom customers

59,8

RUB bn

35,4

RUB bn

28

2012 2017RBC’s profitability ratios and capital forecast, bln RUB

RBC’s interest income/expense forecast, %

RBC’s cost ratios forecast, %

2,7

6,5

20,4%

1,6%

0

2

4

6

8

0%

5%

10%

15%

20%

25%

2009 2010 2011 2012 2013 2014 2015 2016 2017

Capital ROE ROA

Average peers

ROA = 1,5%

Average peers

ROE = 11,7%

That’s it!

Thank you.

Questions?

Acierto team


14.03.2014

30

Appendix

Appendix title Page

Projected RCB’s P&L 2013-2017 31

Projected RCB’s BS 2013-2017 32

Sensitivity and conservative scenario 33

Key CRM system advantages necessary for RCB 34

Choice of the right CRM system for RCB’s needs 35

Regions to enter (as attractive SME debt markets) 36

Comparable Russian Banks 37

RCB’s leasing subsidiary: key information 38

Projected RCB’s leasing subsidiary P&L 39

Projected RCB’s leasing subsidiary P&L 40

Projected RCB’s leasing subsidiary KPI’s 41

Risk management structure 42

Risk mitigation strategy 43

Detailed project implementation plan (1/5) – Phase 1: Quick Wins 44

Detailed project implementation plan (2/5) – Phase 2: Consumer Finance 45

Detailed project implementation plan (3/5) – Phase 3: Car Loans 46

Detailed project implementation plan (4/5) – Phase 4: SME lending 47

Detailed project implementation plan (5/5) – Phase 5: SME leasing 48

“Acierto” team presentation 49

Acierto team


14.03.2014

Appendix 1. Projected RCB’s P&L 2013-2017

Sources: Acierto analysis, banki.ru31

P&L 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Interest income RUB Mm 1 000 1 540 2 050 3 230 4 550 5 978 6 916 8 097 9 507 11 132Loans to customer RUB Mm 600 1 090 1 620 2 850 4 170 5 068 6 008 7 192 8 607 10 240P&L securities RUB Mm 190 230 230 240 310 910 908 905 900 893Placement with banks RUB Mm 210 200 130 120 70 0 0 0 0 0AFS securities RUB Mm 0 20 70 20 0 0 0 0 0 0

Interest expense RUB Mm 540 820 900 1 290 1 860 2 573 2 982 3 603 4 269 4 991Current account and deposits RUB Mm 500 700 820 1 010 1 260 1 453 1 764 2 278 3 034 3 965Debt securities issued RUB Mm 40 100 40 240 400 509 550 611 468 173Subordinated loans RUB Mm 0 0 20 40 110 176 145 85 28 0Deposits from banks RUB Mm 0 20 20 0 0 0 0 0 0 0Money from CB RUB Mm 0 0 0 0 90 90 90 90 90 90Securitized loans RUB Mm 0 0 0 0 0 345 433 539 649 762

NII before provisioning RUB Mm 460 720 1 150 1 940 2 690 3 405 3 934 4 494 5 238 6 141

Provision expense RUB Mm 110 140 220 430 1 170 1 397 1 665 1 979 2 306 2 648

Net interest income RUB Mm 350 580 930 1 510 1 520 2 008 2 269 2 515 2 932 3 493

Net fee and commission income RUB Mm 84 95 117 19 34 35 35 35 35 35Net gain (loss) from operations with P&L securities RUB Mm -15 51 142 -77 -26 2 2 3 3 4Realized gain on AFS securities RUB Mm 25 3 10 4 0 0 0 0 0 0Net FX income RUB Mm 27 29 24 13 -94 23 23 23 23 23Provisioning charge for other assets devaluation RUB Mm 0 0 0 0 0 0 0 0 0 0Other operating income RUB Mm 2 4 5 7 2 4 4 4 4 4

Operating income 473 762 1 228 1 476 1 436 2 072 2 334 2 580 2 998 3 559

OPEX RUB Mm 262 544 846 1 219 1 407 1 591 1 677 1 657 1 777 2 041Employee remuneration RUB Mm 142 312 525 696 741 530 564 657 765 891Payroll related taxes RUB Mm 22 52 72 133 172 93 99 116 135 157Repairs and maintenance RUB Mm 20 52 82 121 138 115 83 99 115 130Rent RUB Mm 28 42 55 92 123 101 73 87 101 114D&A RUB Mm 3 8 19 0 0 12 9 10 12 13Taxes (excl. profit tax) RUB Mm 12 10 14 36 46 35 26 30 35 40Advertising RUB Mm 29 18 26 25 49 244 284 332 381 430Insurance RUB Mm 0 0 0 0 0 0 0 0 0 0Security RUB Mm 0 7 10 17 19 17 19 23 26 29Other RUB Mm 6 43 43 99 119 446 520 304 209 236

Profit before tax RUB Mm 211 218 382 257 29 481 657 922 1 220 1 518

Income tax expense RUB Mm 52 43 77 49 6 101 137 193 255 318Effective income tax rate % 24,6% 19,8% 20,1% 19,1% 21,1% 20,9% 20,9% 20,9% 20,9% 20,9%

Net income RUB Mm 159 175 305 208 23 381 519 729 965 1 200

Acierto team


14.03.2014

Appendix 2. Projected RCB’s Balance Sheet 2013-2017

Sources: Acierto analysis, banki.ru32

BS 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Assets RUB Mm 22 180 19 050 23 820 30 090 38 070 44 583 51 966 60 793 69 709 78 800

Cash RUB Mm 7 290 2 310 4 270 5 110 6 490 7 099 7 679 8 206 8 484 8 509

Required reserves RUB Mm 50 158 187 239 247 270 312 388 486 588

Placements with banks RUB Mm 7 380 4 710 1 340 460 0 0 0 0 0 0

Loans to customers RUB Mm 6 780 7 970 14 050 21 090 27 240 32 534 38 753 46 073 53 677 61 660Loans to legal entities RUB Mm 6 590 6 620 10 260 8 640 8 700 8 675 8 656 8 622 8 562 8 474Large corporates RUB Mm 5 840 5 320 8 450 7 030 6 430 5 881 5 379 4 920 4 500 4 116SME RUB Mm 750 1 300 1 810 1 610 2 270 2 793 3 277 3 701 4 062 4 358Loans to individuals RUB Mm 410 1 710 4 380 13 430 20 420 26 353 33 068 41 339 50 066 59 363Car loans RUB Mm 0 0 3 710 12 130 18 930 24 615 30 937 38 504 46 322 54 445

Corporate individuals RUB Mm 190 170 120 340 400 461 539 644 757 879Other retail RUB Mm 220 1 540 550 960 1 090 1 277 1 591 2 192 2 987 4 038Impairment allowance RUB Mm 220 360 590 980 1 880 2 493 2 970 3 888 4 950 6 178

P&L securities RUB Mm 550 2 970 2 680 2 420 3 070 3 667 4 368 5 193 6 049 6 949

Property, equipment, intangible assets RUB Mm 130 280 400 550 670 590 430 510 590 670

Other assets RUB Mm 0 652 893 221 353 424 424 424 424 424

Deferred tax assets RUB Mm 0 0 0 0 0 0 0 0 0 0

Liabilities RUB Mm 20 190 16 830 21 260 27 380 35 390 41 522 48 386 56 484 64 435 72 326

Money from CB RUB Mm 0 0 0 0 2 300 2 300 2 300 2 300 2 300 2 300

Deposits and balances from banks RUB Mm 330 300 370 50 330 276 265 258 236 273

Accounts and deposits from customers RUB Mm 17 820 15 830 18 700 23 940 24 720 26 987 31 227 38 836 48 555 58 816

Debt securities issued RUB Mm 1 670 310 1 770 2 900 6 400 5 438 7 358 6 841 4 032 0

Subordinated loans RUB Mm 360 380 390 390 1 550 1 550 1 000 500 0 0

Other liabilities RUB Mm 10 10 30 100 90 48 48 48 48 48

Deferred tax liabilities RUB Mm 0 0 0 0 0 0 0 0 0 0

Securitized loans RUB Mm 0 0 0 0 0 4 923 6 187 7 701 9 264 10 889

Capital RUB Mm 1 990 2 220 2 560 2 710 2 680 3 061 3 580 4 309 5 274 6 474

Acierto team


14.03.2014

Source: Acierto analysis 33

Appendix 3. In conservative scenario RCB will stay profitable but will not rich

desirable level of marginality

Base case 2017Conservative case

2017

Net income, RUR bn 1,2 0,3

ROE, % 20,4% 8,7%

ROA, % 1,6% 0,5%

Capital, RUR bn 6,5 3,6

Assets, RUR bn 79 64

C/I, % 57,4% 75,5%

Assumptions of conservative scenario

• Expansion effect 2 times lower

• No cross-selling

• No more than 15% of car loans are securitized with 8% interest rate

• Advertising expenses 2 times higher

Scenario analysis shows that strategy is rather robust 1

Total financial results largely depend on interest policy2

Loans interest rates change

-0,4% -0,2% 0,0% 0,2% 0,4%

Ave

rage

inte

rest

ex

pen

se c

han

ge

-0,4% 6,5 7,8 9,1 10,4 11,7

-0,2% 5,3 6,6 7,8 9,1 10,4

0,0% 4,0 5,2 6,5 7,7 9,0

0,2% 2,7 3,9 5,2 6,5 7,8

0,4% 1,4 2,7 3,9 5,2 6,5

Sensitivity of capital in 2015, bn RUB

Loans interest rates change

-0,4% -0,2% 0,0% 0,2% 0,4%

Ave

rage

inte

rest

ex

pen

se c

han

ge

-0,4% 1 276 1 823 2 371 2 918 3 465

-0,2% 730 1 281 1 831 2 381 2 931

0,0% 163 681 1 200 1 718 2 237

0,2% -363 163 687 1 212 1 736

0,4% -895 -367 162 693 1 223

Sensitivity of Net Income in 2015, mln RUB

Acierto team


14.03.2014

Source: Terrasoft company, work group analysis

Appendix 4. Interaction of 5 key points in the bank CRM system allows to develop

existing clients and to attract the new ones

Strengths

Collaboration

Performance Management

Improving the efficiency of employees

• All bank employees work in

accordance with automated business

processes

• Automated preparation of documents

package

• Simplified post distribution

CRM bank

system

Document Flow

Organization of customer information and

document elements management

• All necessary information to attract and

develop customer is available in the

common information field

• Relationship between customers, their

financial statement, history of

transactions and negotiations.

Analysis

Planning and sales analysis

• Obtaining information about the main

events for bank customers in one click

• Analysis of the number of potential

customers, the probability of relevant

transactions, negotiation stages

Optimization of interaction between

departments of the bank

• According to the results of

communication with the call center task

will be automatically generated for the

manager.

• High speed of interactions between

departments in information field

Sales Force Management

Sales management

• Increasing of customer profitability

• Offering new product portfolio for the

particular group of customers

• Increasing the number of used

products

• Expanding the customer base and

others

34

Acierto team


14.03.2014

Source: crm-practice.ru, work group analysis

Appendix 5. Terrasoft CRM is the best option among domestic suppliers, and

Microsoft Dynamics CRM - among foreign ones, taking into account popularity, price

and scalability of the proposed CRM solutions

0

2

4

6

8

10

12

14

16

18

20

22

24

Oracle Siebel CRM

Salesforce.com

Sugar CRM SAP CRM

Oracle CRM on Demand

Microsoft Dynamics CRM

# of integrators companies

License price for work place, $

BPMonline CRM

1C: CRM КОРП 2.0

Terrasoft XRM

Terrasoft CRM

XThe maximum number of

users of the system

Not required 250-500 500-1000 >1000<250

250-1000

>1000

>1000

>1000

>1000

>1000

>1000

>1000

>1000

>1000

The best banking CRM systems on the Russian IT market

35

Acierto team


14.03.2014

Source: Rosstat, CBR

Appendix 6. Regions suggested to enter are also attractive as corporate debt markets

RegionTotal debt

2012

Total

corporate

debt

Total

consumer

debt

Total debt

growth 09-11

Consumer

debt growth

Corporate

debt growth

09-12

Advised to

enter

Russia 16 324 287 11 929 105 4 395 182 30% 25% 32%

Moscow 4 513 581 4 034 856 478 725 36% 37% 36% yes

St.-Petersburg 1 041 231 833 331 207 900 44% 33% 47% yes

Moscow Region 904 106 633 747 270 359 32% 60% 22% yes

Krasnodar 544 549 415 650 128 899 64% 21% 84% yes

Tatarstan 460 947 353 818 107 129 21% 10% 25% yes

Rostov 378 090 267 831 110 259 39% 22% 47%

Nizhniy Novgorod 353 314 259 221 94 093 30% 10% 39% yes

Samara 332 341 220 405 111 936 -1% 6% -5% yes

Bashkortostan 260 816 155 956 104 860 28% 13% 41% yes

Belgorod 246 949 209 811 37 138 25% 26% 24% yes

Kemerov 230 639 141 270 89 369 -4% 3% -7%

Voronesh 198 416 148 816 49 600 54% 21% 68% yes

Leningrad 166 885 120 646 46 239 76% 58% 83% yes

Stavropol 160 590 98 093 62 497 24% 27% 21% yes

Volgograd 156 282 98 121 58 161 12% 10% 14% yes

Saratov 139 407 84 139 55 268 16% 15% 16% yes

Orenburg 135 201 78 561 56 640 14% 18% 10% yes

Yaroslavl 130 340 99 616 30 724 29% 20% 32% yes

Chuvashia 123 515 94 589 28 926 55% 6% 81% yes

Kursk 117 461 91 485 25 976 45% 16% 55%

Lipetsk 114 422 88 259 26 163 39% 27% 42% yes

in RUB mln

Acierto team


14.03.2014

Appendix 7. Comparable Russian banks*

* Some of these banks was closed during 2013 year

Sources: Acierto analysis, banki.ru

Bank Net assets 2012 Capital 2012 Loans 2012 Net income 2012 Roe ROA

Mezhtopenergobank 37 670 059 4 432 372 26 816 830 594 212 15,2% 1,8%

Dalnevostochny Bank 37 625 908 3 937 637 18 252 327 663 576 18,3% 1,8%

Primsotsbank 35 803 131 3 510 155 25 322 219 823 277 26,0% 2,7%

Chelyabinvestbank 34 975 801 5 628 067 17 211 013 717 737 13,1% 2,1%

Chelindbank 33 959 957 5 999 266 20 915 080 545 604 9,4% 1,7%

Koltso Urala Bank 33 944 479 3 592 036 22 781 437 311 795 10,3% 1,1%

Rossiyskiy Kredit Bank 33 708 405 8 552 669 15 655 270 628 172 7,4% 2,7%

Metallurgical Commercial Bank 33 650 306 3 262 854 24 007 367 100 180 3,6% 0,3%

Fora-Bank 33 533 818 3 384 928 24 643 730 223 112 7,6% 0,7%

SDM-Bank 33 150 606 3 438 617 15 933 923 614 139 19,3% 1,9%

RIB 32 835 242 4 552 204 23 861 095 147 744 3,7% 0,5%

Krayinvestbank 32 590 132 4 630 947 15 798 308 76 096 2,0% 0,3%

Кеdr 32 501 996 3 308 848 21 073 336 248 823 7,9% 0,8%

Smolensky Bank 32 140 623 3 245 280 20 391 675 69 949 2,7% 0,2%

Levoberezhny 31 718 714 3 207 820 22 008 663 865 704 32,0% 3,3%

REB (ZAO) 31 213 655 3 633 619 18 099 099 105 379 3,3% 0,4%

FRB 30 835 634 3 162 489 19 268 140 691 821 25,5% 2,4%

Severgazbank 30 741 231 3 090 583 18 486 849 239 865 7,9% 0,8%

GE Money Bank 30 654 097 8 434 645 27 229 135 884 860 10,8% 2,9%

Gasbank 29 641 660 4 233 525 23 195 373 133 795 3,2% 0,5%

Interprombank 29 253 543 5 215 110 19 010 523 418 272 8,2% 1,5%

Pushkino 28 874 841 3 022 102 21 661 208 356 280 13,3% 1,4%

AVB 28 487 685 3 170 680 22 537 040 69 779 2,3% 0,3%

The Bank «IBA-Moscow» 26 984 069 2 444 519 20 724 047 281 418 12,3% 1,1%

Lipetsskkombank 26 402 539 2 630 994 17 750 097 366 503 14,8% 1,4%

Rost 25 715 281 3 444 809 19 404 043 819 505 29,9% 4,3%

BFG-Credit 25 207 031 3 089 136 18 740 090 161 283 6,0% 0,7%

Average 11,7% 1,5%

37

Acierto team


14.03.2014

Source: developed financial model for the new RCB’s leasing

subsidiary 38

Appendix 8. New RCB’s leasing subsidiary: key info

• RCB has a huge upside in collateralized SME leasing backed by vehicles

(see page 11)

• We have developed comprehensive financial model of RCB’s leasing

subsidiary

• All results provided by the leasing subsidiary model are NOT INCLUDED

into the main financial model for RCB. All projected financial results

provided in the presentation are given WITHOUT results of leasing

subsidiary performance.

• Collateralized SME leasing backed by vehicles is one of potential options

for RCB, so the financial model for leasing subsidiary assumes that it will

be separate investment project for RCB.

• Any potential gains from synergy effects of cross-selling between leasing

subsidiary and RCB are not considered in the model.

• Initial investments = $15 mln USD

• Income tax = 20%

• Allowance for impairment losses = 1,5%

• Modeling horizon = 5 years

:

(1) RCB’s leasing subsidiary business was modeled as a separate

investment project

(2) Leasing subsidiary financial results are not included into the main

financial model and any financial results for RCB provided in the

presentation Key leasing subsidiary model assumptions

Big loans Medium loans Small loans Parameter

Loan type

Loan term

Interest rate

Down payment

Annuity

36 months

20%

10%

Annuity

36 months

20%

10%

Annuity

24 months

20%

10%

Avg loan size $200k USD $70k USD $50k USD

There are 3 leasing products

Acierto team


14.03.2014


subsidiary 39

Appendix 9. RCB’s leasing subsidiary projected P&L

PNL 2014-2018

Go to table of contents

2014 2015 2016 2017 2018

Revenues

Finance lease income 1 213 189,81$ 5 125 733,65$ 10 287 496,16$ 15 986 689,74$ 20 109 135,81$

Total revenue 1 213 189,81$ 5 125 733,65$ 10 287 496,16$ 15 986 689,74$ 20 109 135,81$

Expenses

Financing costs -$ 354 916,05$ 3 767 934,93$ 5 601 901,02$ 2 257 845,34$

Accrued interest -$ 1 051 141,67$ 1 124 177,08$ 2 109 135,42$ 7 667 916,67$

Team & administraitve expenses 461 600,00$ 747 200,00$ 1 336 000,00$ 2 104 000,00$ 2 796 000,00$

Provision for impairment losses 309 580,10$ 695 353,36$ 1 256 014,68$ 1 694 720,17$ 1 979 752,83$

Total expenses 771 180,10$ 2 848 611,07$ 7 484 126,69$ 11 509 756,60$ 14 701 514,83$

Profit before tax (expense) benefit 442 009,70$ 2 277 122,58$ 2 803 369,48$ 4 476 933,14$ 5 407 620,97$

Tax (expense) benefit 88 401,94$ 455 424,52$ 560 673,90$ 895 386,63$ 1 081 524,19$

Net profit for the year 353 607,76$ 1 821 698,06$ 2 242 695,58$ 3 581 546,51$ 4 326 096,78$

Acierto team


14.03.2014


subsidiary 40

Appendix 10. RCB’s leasing subsidiary projected BS

Balance sheet 2014-2018Go to table of contents

2013 2014 2015 2016 2017 2018

Assets

Cash on hand 15 000 000$ 53 554$ 906 760$ 768 633$ 472 524$ 687 607$

Lease receivables -$ 20 638 673$ 46 356 890$ 83 734 312$ 112 981 344$ 131 983 522$

Unearned lease income -$ 4 479 038$ 9 029 225$ 15 720 578$ 20 263 579$ 23 070 290$

Net investment in finance leases -$ 16 159 636$ 37 327 666$ 68 013 734$ 92 717 766$ 108 913 232$

Total assets $ - 16 213 190$ 38 234 425$ 68 782 367$ 93 190 290$ 109 600 838$

Liabilities and equity

Liabilities

Loans from fin institutions and banks -$ -$ 18 110 000$ 45 087 500$ 63 387 500$ 68 750 000$

Accrued interest payable -$ -$ 1 051 142$ 1 124 177$ 2 109 135$ 7 667 917$

Taxes -$ 88 402$ 455 425$ 560 674$ 895 387$ 1 081 524$

Allowance for impairment losses -$ 309 580$ 695 353$ 1 256 015$ 1 694 720$ 1 979 753$

Short-term employee benefits liabilities -$ 321 600$ 547 200$ 936 000$ 1 404 000$ 1 596 000$

Administrative expenses 140 000$ 200 000$ 400 000$ 700 000$ 1 200 000$

Equity

Share capital 15 000 000$ 15 353 608$ 17 175 306$ 19 418 001$ 22 999 548$ 27 325 645$

Total liabilities and equity 15 000 000$ 16 213 190$ 38 234 425$ 68 782 367$ 93 190 290$ 109 600 838$

Acierto team


14.03.2014

41

Appendix 11. RCB’s leasing subsidiary projected KPI’s

KPIsGo to table of contents

Growth 2014 2015 2016 2017 2018

ROE 2,36% 11,86% 13,06% 18,44% 18,81%

Growth of net investment in finance leases 130,99% 82,21% 36,32% 17,47%

Growth of finance lease income 322,50% 100,70% 55,40% 25,79%

Growth of expenses 269,38% 162,73% 53,79% 27,73%

Growth of net profit 23,11% 59,70% 20,79%

Growth of cost-to-income ratio 156,37% 333,71% 321,36% 339,83%

2014-2017 2014-2018

IRR (exit estimate 1x equity) 11,28% 12,74%

IRR (exit estimate 1,5x equity) 23,15% 22,27%

Acierto team


14.03.2014

Source: “The ultimate guide for banking industry” by Oliver Wyman,

work group analysis

Appendix 12. Structuring of the risks, associated with the implementation of the

proposed strategy, will help to build an effective risk management system

42

Loss of revenue or profit due to operational causes (fraud, personnel

mistakes etc.)

Announcing default or requiring additional liquidity injection from the

shareholders/regulators

Critical risks

Moderate risks

Serious risks

Minor risks

2

3

5

6 The complexity of implementing and supporting information systems

7

Potential risk management structure

An essential condition for the successful implementation of the

strategy is the availability of the required top level professionals,

as well as high-performance organizational structure

1

Risk of huge losses on trading book of the bank, due to adverse market

movements

The risk of having large losses, due to interest rates on liabilities exceeding

interest rates on assets or unfavorable changes of exchange rate

8 Impossibility of re-qualification of part of the staff

4

Low Medium High

Low

Mediu

mH

igh

Probability of emergence

Ma

teri

ality

of

co

nse

qu

en

ce

s

1

32

5

76

8

4

The risk is primarily that of the lender and includes lost principal (amount

extended in a loan) and interest, disruption to cash flows, and increased

collection costs

Rejection of the new strategy the bank staff

Acierto team


14.03.2014

Source: “The ultimate guide for banking industry” by Oliver Wyman,

work group analysis

Appendix 13. Set of mitigation actions will reduce the probability of risks and

materiality of their impact to a minimum

43

RiskCriticality levelMitigating action

The risk of having large losses, due to interest rates on liabilities

exceeding interest rates on assets or unfavorable changes of

exchange rate

Match maturity and currency of assets and liabilities, accurate

following to the financial strategy

low

low

low

low

low

Risk of huge losses on trading book of the bank, due to adverse

market movements

Analyze market changes and fluctuations, hedging using

derivatives, diversification of trading portfolio, use of less

volatile assets (e.g. blue chips)

The risk is primarily that of the lender and includes lost principal

(amount extended in a loan) and interest, disruption to cash

flows, and increased collection costs

It shows the quality of the bank portfolio giving information

about the share of “bad” loans

Loss of revenue or profit due to operational causes (fraud,

personnel mistakes etc.)

Introduce better internal controls, upgrade IT infrastructure,

incorporate advanced processes including anti-fraud measures,

insurance

Announcing default or requiring additional liquidity injection from

the shareholders/regulators

Decreasing average maturity of assets (loans), increasing

average maturity of liabilities (deposits), holding a larger

liquidity buffer (cash and other high-liquid assets), liquidity

planning monitoring gap management

The complexity of implementing and supporting information

systems

Using the best deal on the market (modern systems, high-

qualified integrators), following the agreed business processes

in IT, personal work with staff

Rejection of the new strategy the bank staffSpecial trainings, meetings and assessments. Accent on the

motivating of top level managers

Impossibility of re-qualification of part of the staffSpecialized training courses with a high practical component.

Possible replacement of the staff.

medium

high

medium

Acierto team


14.03.2014


Appendix 14. Detailed project implementation plan (1/5)

Phase 1: Quick Wins

1.1

Branch

optimization

Su

b-p

ha

ses

Branches’ area decrease from 15 sq m/person to 10 sq m/person

1.1.1

1.1.2

1.1.3

Re

sou

rce

s in

vo

lve

d

• COO

• Formed project team

• Cost optimization

• Staff allocation optimization

Re

sults

1.2

No ATM

commission for

clients 1.3

Decreasing of

average retail loan

term 1.4

1.2.1

1.2.2

1.3.1

1.3.2

Require 2nd document for

clients without good

credit history

1.4.1

1.4.2

Staff reallocation and training (partial dismissal)

• RCB’s technology group staff (to implement this service)

• CTO

• Marketing department

• Significant improvement of Customer Experience

Start paying all ATM commission for clients at the expense of RCB in case withdrawal amount is equal or more than 3000 RUB



• NPL decrease

Decrease average retail loan term


• NPL decrease

Start requiring 2nd document for this client segment

Emphasize this information in marketing campaigns

Change this information in marketing materials and web-site

Add this point into scoring models

Med-term: redesign and renovate branches in similar style

Acierto team


14.03.2014



Phase 2: Consumer Finance

2.1

Full-scale internet banking

and CRM platform

implementation

Su

b-p

ha

ses

Involve consultants (i.e. Accenture) for optimal system choice and integration

2.1.1

2.1.2

2.1.3

Re

sou

rce

s in

vo

lve

d

• CTO, COO

• $1,5-3M for consultants (system integration and launch) and licenses needed

• Technology department

• All internet banking services available for clients

• Efficient CRM system enabling Customer Experience improvement

• Business processes automation and optimization

• Increased cost-efficiency

Re

sults

2.2

New package

products for

individuals 2.3

Establishing partnerships

with large retail shops/

networks 2.4

2.2.1

2.2.2

2.3.1

2.3.2

Active marketing campaigns

through internet/

social networks

2.4.1

2.4.2Closed test-launch of integrated systems



• Launch of the most popular and profitable products

• Increased revenue from package sales

• Increased revenue from cross-sales

Market research to find out the most desirable, popular and profitable products


• Customer base expansion

Focus on acquiring new clients through credit-card offerings in partnership with popular retail shops/network



Cyclical (autumn and spring) marketing campaigns emphasizing RCB’s competitive advantagesFocus on package sales (credit

cards, etc.)

Active marketing campaign in partnership with retail shops/networks

Target marketing through internet (SEO, etc.)

System debugging, calibration and full-scale launch

Development and implementation of new business processes

2.1.4

2.2.3Focus on capturing existing client base in car loans segment as much as possible

Cross sales implementation2.2.4

Acierto team


14.03.2014



Phase 3: Car Loans

3.1

Establishing

partnerships with

insurance companies

Su

b-p

ha

ses

Establishing partnerships with a diverse set of insurance companies

3.1.1

3.1.2

Re

sou

rce

s in

vo

lve

d

• Business development people


• Gains on commission from insurance products cross-sales

Re

sults

3.2

Implementation of

new developed

products 3.3

Partnerships with car

dealers to implement

factoring 3.4

3.2.1

3.2.2

3.3.1

3.3.2

Business automation

and expansion

3.4.1

3.4.2






Test launch of new car loans: “Express” and “Family 2nd car”




• Factoring service for RCB’s clients

Establishing partnerships with popular car dealers (according to RCB’s target audience)

• CTO




• Business automation

• Cost-efficiency increase


Strong scoring model implementation

Receiving customer feedback and estimation of market demand for these products Implement factoring service in

partnerships with car dealers and insurance companies

Implementation of online loan application for clients

3.2.3 Products’ optimization and full-scalr launch

Active marketing campaign3.2.4

Implementation of insurance products cross-sales (KASKO etc.) 3.4.3 Call-center optimization

3.4.3Further expansion into region through DSAs and partnerships with car dealers

Acierto team


14.03.2014



Phase 4: SME Lending

4.1

Package sales products

and cross-sales

implementation

Su

b-p

ha

ses

New package offerings for SMEs (lending, salary projects, encashment, conversion operations, depository services etc.)

4.1.1

4.1.2

Re

sou

rce

s in

vo

lve

d

• COO


• Gains on commission from cross-sales

• Gains on package sales

Re

sults

4.2

Implementation of

“One-Stop-Shop”

service for SMEs

4.2.1

4.2.2



• COO

• Providing 360 service for SMEs

• Increased revenue from package sales and cross-sales

Product line and services extension with the aim of providing 360 service for SMEs

Increase of commission revenue from operations with SMEs

Focus on increase of

commission revenue from

operations with SMEs

4.1.2 Focus on technological,

conveyor-like products

4.2.3Active marketing of 360service and package products for SMEs

Acierto team


14.03.2014



Phase 5: SME Leasing

5.1

Establishing SME

leasing subsidiary

Su

b-p

ha

ses

Establishing new legal entity –RCB’s SME leasing subsidiary

5.1.1

5.1.2

Re

sou

rce

s in

vo

lve

d


• CEO, COO

• Launching new business: collateralized SME leasing backed by vehicles

• Using of synergy potential: capturing clients into regular SME service business

Re

sults

5.2

Partnerships with

insurance companies 5.3

Implementation of

scoring models and

direct sales

5.2.1 5.3.1

5.3.2







Implementation of cross-sales (KASKO, etc.)



• Business automation: centralized loan approval and risk management

• Decentralized distribution

Business automation: implementation of strong scoring models

Hiring new staff and starting direct sales

Establishing business processes of collateralized SME leasing backed by vehicles

5.1.4 Sales points: existing DSA network + starting direct sales

5.1.3 Hiring new staff

Acierto team


14.03.2014

1 Changellenge Cup Technical - All-Russian business-case championship

2 Moscow Institute of Physics and Technology

2 MS final year, major in Control and Applied Mathematics

Our team members have vast experience in business and finance which allows us to

efficiently resolve problems of Ryazan Capital Bank and improve its market position

Alexey Semakov

• Former financial analyst at

Third Rome Investment Solutions

• Internships with Accenture,

Deloitte

• Winner of CLT 2012

[email protected]

• Engagements in projects on

market entry, organization

structure, business optimization

• Organized International

Conference ENES’13 at Ministry

of Energy of Russian federation

• Winner of 2 case competitions

[email protected]

• Analyst in PFL Advisors

• Former consultant in Althaus

Consulting

• CFA Level 3 candidate

[email protected]

• Internship with Unilever,

Supply Chain group

• Internship with L’Oreal,

Operations, Stock Group

• Final section winner of

FutureToday Case Cup

(2012, 2013)

[email protected]

Ilya Larchenko Stanislav Fedyakov Vasiliy Patyk

• We successfully worked together in similar projects – 1st place in «CLT 2012»1…

• …where developed the reorganization strategy of Deutsche Bank Moscow Technology Office

• …and perfectly know each other’s strong sides and effectively communicate – all are studying together at MIPT2

49

Documents

Turnaround Strategy for Ryazan Capital Bank · Acierto team Specially for Oliver Wyman Impact 14.03.2014 Source: Acierto analysis, case materials, In recent years branches are not