Information on different operations carried out by the lending institution in a number of geographical regions

Information on different operations carried out by the lending institution in a number of geographical regions

Sberbank of Russia is also represented in other countries' markets:

• 
  through subsidiary banks⁴³ – in the Republic of Kazakhstan, Ukraine and the Republic of Belarus which offer banking services in their respective regions by raising funds from retail clients and corporate clients, performing money transfers, lending to individual and corporate borrowers etc.
  
• 
  through its branch in India (New Delhi) – as of 1 January 2012 the branch carries out exclusively its own operations in the Indian market (see section “Branch Network of the Bank” of this Explanatory Note).
  

6. Prospects of the Bank's Development

In terms of finance, the Bank plans to become a leader in financial results in the Russian banking market which requires, in turn, effort to improve the quality of the loan portfolio, ensure repayment of unserviced loans, maintain the interest margin on all major banking products, and control operating costs.

• 
  a significant improvement in perceptions of the Bank and higher satisfaction levels of both individual and corporate clients. While handling this objective, the Bank will pursue its effort to shorten lines in its client services divisions and implement innovative services and products to make the Bank more attractive for segments with a high development potential in the future;
  
• 
  an increase in its share of the Russian banking system's assets by strengthening its positions in major segments of the financial market.
  

• 
  completing the Bank's transition to a process-and-functional model;
  
• 
  carrying out process centralization, standardization and optimization in operating and support functions;
  
• 
  continuing centralization of its IT infrastructure;
  
• 
  continuing creation of the Bank's network of divisions as a modern standardized sales and client services channel that helps to deal effectively with business development objectives and corresponds to a new brand and corporate style of the Bank.
  

• 
  developing the Bank's management model based on a holding structure. The Group's unified policies of risk management and information technologies will be developed after the Bank's international strategy is brought up to date;
  
• 
  encouraging a corporate culture typical of the entire Group of Sberbank of Russia and aimed at consistent improvement, openness to changes and innovations;
  
• 
  implementing a comprehensive HR development system that involves recruitment, adaptation, group training, assessment, and career management;
  
• 
  boosting transparency and efficiency of the performance management system in the Bank by developing a balanced scorecard system.
  

7. An Overview of Risks Related to Different Operations of the Bank

   1. Country Concentration of Assets and Liabilities of the Bank

2. Credit Risk

A credit risk means the risk of possible financial losses arising when borrowers fail to perform, in full or in part, or unduly perform their obligations to the Bank related to supply of funds or other financial assets.

Credit risk is the type of risk most significant for the Bank so it pays particular attention to its management and monitoring the quality of the loan portfolio. Sberbank applies the following main credit risk management methods:

• 
  credit risk prevention by identifying, analyzing and assessing potential risks at a stage preceding transactions exposed to the credit risk;
  
• 
  restriction of the credit risk by establishing risk limits and/or limitations;
  
• 
  monitoring and control of the degree of credit risk;
  
• 
  creation of adequate reserves and relevant structuring of transactions in order to minimize credit risk.
  

In 2011, the Bank maintained a procedure for mandatory independent expert examination of credit risks, performed before a decision was made to grant a loan to medium and large business borrowers and the largest clients.

By using the existing system of formalized assessment of the credit risk the Bank can correctly assess the expected degree of credit risk made up of the client risk (likelihood of a default) and the transaction risk (losses in the event of a default). As part of this system, the Bank approved:

• 
  a method for assessing the likelihood of a default of its contracting parties
  This method is based on tools of economic and mathematical modeling, an end-to-end approach that secures statistical and expert assessment of the probability of different outcomes and the size of potential losses based on different security. In addition, the method involves improvement of the model based on gathered statistical data on actual defaults given changing macroeconomic conditions in the productive sector of the Russian and global economies.
  
• 
  a model of assessment of losses in the event of a default
  This model is based on statistical and expert information on possible outcomes of realization of the credit risk, including events related to:
  

• 
  repayment of overdue debt with funds of the contracting party and third parties,
  
• 
  sale of collateral;
  
• 
  write-off of overdue debt,
  
• 
  reissue of credit and other contractual liabilities that were subject to a default into other financial instruments.
  

In 2011, the Bank continued improving the risk management system for loans granted to sole traders and small businesses. In order to identify risk types and assign ratings, clients are divided into two segments: micro business which involves retail tools of risk assessments and small business which requires creation of risk assessments tools fully integrated in the risk management system for medium and large corporate clients. The Bank uses two unified centralized technologies for lending to small business:

• 
  Loan Factory – a product approach is applied during risk assessment: the scoring grade is calculated, risk is assessed, the credit price and limit are calculated when the client files a loan request, and a rating is assigned to the transaction. Starting in 2011, all territorial banks have been processing two types of unsecured loans through the Credit Factory (48,900 loans totaling 32.3 bn rubles were granted during the year). There are plans to expand this list in 2012 by including secured loans such as Express Auto and Express Asset.
  
• 
  Loan Conveyor is a technology that involves assignment of a long-term rating to a client/group of related parties based on an adapted corporate model of risk assessments that takes into account specific features of this client category, builds a limit management system, and a decision-making authority system. 2011 saw the completion of the first stage of implementation of the Loan Conveyor technology in two territorial banks. Testing of this technology involved a unified approach to assessment of collateral and assessment of legal risks, optimization of the credit process, reduction of transaction review times, centralized independent expert examination of risks that included verification of client data, assessment of the credit history and the borrower's business reputation. 347 loans worth 1.3 bn rubles were granted during the first stage. In 2012 there are plans to carry out gradual automation and replication of the Loan Conveyor technology throughout Sberbank's network.
  

There is an invariable need, in the context of steady growth in the retail loan portfolio, to keep bad debt at low levels during planned growth in retail loan volumes.

For the purposes of retail loan risk control, the Bank continuously monitors the quality of its loan portfolio by divisions and main credit products. To this end, Sberbank has been using the Credit Factory lending technology since 2008. Implementation of this risk management system throughout all territorial banks facilitates control of risks at all lending stages, maintains a good quality of the portfolio and gradually reduces service times to borrowers. In 2011, 6.4 mln individual requests were processed under the Credit Factory technology, 4 mln loans worth about 690 bn rubles or 56% of all loans granted by the Bank to retail clients in 2011 were granted. The average request consideration period fell from 35 hours to 29 hours.

Starting in 2011, all territorial banks have been using the Loan Factory technology to consider requests for consumer and car loans and main types of housing loans. Starting in 2011, the Loan Factory has been using the pricing technology based on a client's individual risk levels. There are plans for 2012 to include new products in the Loan Factory – Express Loans, Car Loans Based on 2 Documents, special mortgage lending programs etc.

Overdue debt fell 30.8 bn rubles during the year as a result of a reduction in overdue debt of legal entities.

Restructured debt⁴⁶ increased over the year from 717.7 bn rubles to 1,036.4 bn rubles; claims for interest under restructured loans rose from 6.3 bn rubles to 8.6 bn rubles.

Loan restructuring means any amendments made in favor of the borrower to original material terms of a loan contract executed by him or her. Amendments to material contractual terms include a longer credit period and a larger limit, changes in the schedule of principal and/or interest repayment, changes in the procedure of calculation of interest, and lower interest rates.

In 2011 Sberbank continued pursuing a conservative reserves policy in order to make adequate allowances for possible losses under loans and allowances for possible losses required by the Bank of Russia and⁴⁷ international standards.

A case-by-case appraisal of the quality of each loan applies to allowances made under loans to legal entities and small businesses evaluated not on the portfolio basis. Special focus is invariably placed on analysis of the borrower's financial condition, existing debt burden, sources of loan repayment and their reliability, quality and liquidity of collateral, and other credit risk factors. Classification of such loans, i.e. inclusion of a loan in the respective quality category is based on the individual professional judgment on the credit risk level under the loan.

A new system of appraisal of the financial condition and a procedure for determination of possible losses for the Bank's corporate borrowers were successfully implemented throughout 2011. Based on the new method, appraisal and analysis of borrowers' financial condition takes into account the likelihood of the default of the borrowing legal entity. The Bank's expected losses are defined as the amount of the Bank's aggregate possible losses in the event of a default of such borrowers. New allowance approaches help to make a more accurate estimate of the individual reserves interest for each corporate client, in particular. Principles fundamental to the possible loss appraisal system are based on Western best practices in risk management.

Sberbank creates reserves for loans to retail clients and small businesses by following the portfolio approach. Standard loans that do not exceed limitations established by the Bank of Russia are included into similar portfolios and sub-portfolios by credit risk levels. On 1 March 2011, the Bank adopted a new regulation to create allowances for possible losses under loans⁴⁸ that stipulates a classification of the maximum number of loans within a portfolio of similar loans. The credit risk of the portfolio of similar loans is reassessed by the Bank every quarter through analysis of losses under loans to retail clients and small businesses for previous years. The Bank's plans include maximum automation of the creation of reserves in order to cut work hours of staff involved in this process and a reduction in the number of operating errors.

When making allowances for possible losses in 2011, inventory was taken of non-core assets not used by the Bank or its subsidiaries for banking activities defined in Article 5 of the Federal Law On Banks and Banking. The Bank started making allowances for possible losses in terms of such assets in 2012⁴⁹ after the effective date of the BoR Directives.

Assets with overdue repayment dates⁵⁰

In 2011, the loans receivable with overdue repayment dates⁵³ fell from 403.7 bn rubles to 356.6 bn rubles primarily because of a reduction in total loans with a delay of over 180 days. Loans receivable with overdue repayment dates of under 30 days grew in the segment of loans to retail clients. In the portfolio of legal entities, loans with overdue repayment dates went down by all delay periods. In general, the specific weight of loans with amounts overdue for over 90 days fell from 5.4% to 3.5% in the loan portfolio during the year.

Sberbank defined its goals for handling bad assets of clients for 2012-2014. Main goals include increasing repayment rates of bad assets through modernization of existing business processes and implementation of new ones for different client segments; increasing the Bank's margins by restoration of reserves for problem situations that have been dealt with; boosting performance through business process automation and implementation of specialized collection within three main models: the individual collection system, the conveyor collection system, and collection from retail clients.

As part of its efforts aimed at legal entities, the business process for an early-stage handling of new problem situations has been introduced and is in place throughout the Bank's vertical structure. This improved the figures of transition of debt overdue for 30 to 60 days to the 90 plus days category. This transition rate was 70% in 2010 and 50% in 2011.

Outcomes of the handling of bad assets⁵⁴ of legal entities in 2011:

• 
  bad assets recovered in cash amounted to 120.5 bn rubles;
  
• 
  loans worth 79.8 bn rubles transitioned from the bad category to good loans;
  
• 
  overdue interest, fines, penalties and forfeits worth 25.7 bn rubles have been repaid;
  
• 
  allowance worth 148.5 bn rubles for possible losses under loans among bad assets has been restored.
  

Special effort is made to control recovery of overdue debt on loans to retail clients at an early stage. For this purpose, the Bank implemented Tallyman, an automated system. The system follows a client approach, supports a centralized algorithm of debt collection, and includes a set of debtor treatment strategies that make allowances for client risks, likelihood of repayment, economic reasonability of debt collection measures, and criteria for forwarding the client to higher stages of collection. In addition, the system optimizes distribution of e-mail, SMS messages, letters, wires, automatic voice notices given to debtors regarding overdue liabilities. This system is integrated with the automated calling system which significantly reduces overdue loan handling times. In addition, there is a new opportunity to get relevant data on debt at the same time the call is put through to the operator.