The concentration of credit

The concentration of credit

Structure of loan and equivalent accounts receivable

Funds deposited in the Bank of Russia are deposits with the major shareholder⁵⁵. As of 1 January 2012, there are no deposit balances in the Bank of Russia (as of 1 January 2011, the balance was 135 bn rubles).

77% of loans and equivalent accounts receivable of Sberbank were represented by debt of legal entities, 21% – that of retail clients, the balance – of loans to banks.

Structure of loan and equivalent accounts receivable by currency

Within the structure of the loan portfolio by currencies, the share of ruble loans went up 1.1% as these loans still account for the bulk of the loan portfolio.

Level of concentration of major credit risks

Based on its internal regulations, the Bank has implemented a procedure of daily monitoring of major credit risks and forecasting how requirements established by the Bank of Russia are met – N6⁵⁶ (maximum risk amount per one borrower or a group of related borrowers) and N7 (maximum amount of major credit risks). The level of concentration of major credit risks is estimated by the Bank as acceptable.

As of 1 January 2012, the share of loans to the ten largest borrowers (groups of related borrowers) was 16.6% of the loan portfolio⁵⁷ (15.2% the year before). The Bank's largest borrowers include representatives of different sectors of the economy. Therefore, the credit risk is sufficiently diversified.

Structure of the loan portfolio of retail clients

Sector structure of the loan portfolio of resident legal entities

Sberbank offers loans to enterprises in all major sectors of the economy, with processing facilities accounting for 24% of its portfolio.

3. Liquidity Risk

For liquidity risk management purposes, the Bank singles out the risk of liquidity requirements and the risk of physical liquidity.

The liquidity requirements risk involves possible problems related to the meeting of liquidity requirements set by the Bank of Russia (N2, N3 and N4). The Bank prepares a weekly forecast of liquidity requirements and monitors how they are met, taking into account not only regulatory limitations but also even more stringent internal limits set in the Procedure for Sberbank of Russia's Compliance with and Calculation of Requirements of the Bank of Russia.

The physical liquidity risk involves problems related to a lack of any currency for the Bank to cover its liabilities.

Tools for physical liquidity risk management in the short term include a payment flow forecasting model and control of available liquidity reserves of the Bank; direct REPO transactions with foreign banks and the Bank of Russia serve as main reserves for managing operating liquidity.

Medium and long-term liquidity is managed by Sberbank of Russia on the basis of funding plans developed every quarter. These documents offer historical analysis of the current trends of development of different balance sheet items and one or several development scenarios for the near term. Depending on the suggested development scenario, potential liquidity risks are analyzed and urgent response measures against a variety of negative internal and external shocks are described. Main tools for medium- and long-term funding include trade finance transactions, issue of bonds and syndicated loans.

Liquidity in Russian rubles in 2011:

In the second half of 2011, the loan portfolio of both retail clients and legal entities started growing much more rapidly. The reporting year's growth rate of ruble loans was 1,291 bn rubles to corporate clients and 478 bn rubles to retail clients. The Bank was actively raising clients' funds to support this growth rate of loans. As a result, ruble funds from clients added 736 bn rubles, from corporate clients – 215 bn rubles. As the loan portfolio grew faster than the influx of client funds the Bank cut its investments in low-yield liquid instruments and raised funds from the Bank of Russia through direct REPO transactions and loans secured by the surety of other lending institutions. As of 1 January 2012, funds received from the Bank of Russia amounted to 265 bn rubles⁵⁸.

Liquidity in a foreign currency in 2011:

In 2011 Sberbank continued furthering its foreign currency operations. In addition to traditionally raising funds from retail clients and legal entities (balances grew 3.1 bn US dollars and 1.8 bn US dollars, respectively), the Bank promoted its trade finance operations and raised bonded debt and syndicated loans by, in particular, placing bonded debt of 1 bn US dollars for 10 years and obtaining a syndicated loan totaling 1.2 bn US dollars for 3 years in US dollars and Euros. Foreign currency funds were primarily allocated for lending to the Bank's corporate clients.

Throughout 2011, liquidity requirements established by the Bank of Russia were met by the Bank with a significant reserve:

Compliance with liquidity requirements

4. Market Risk

• 
  The interest risk on balance sheet assets and liabilities sensitive to interest rates – the risk of a rise/fall in interest income and expenses caused by a yield curve that changes as a result of a gap in repayment (interest rate revision) dates for funds the Bank has raised and placed;
  
• 
  The market risk for positions which includes:
  

• 
  The interest risk for the debt securities portfolio – the risk caused by an adverse change in market rates;
  
• 
  The stock exchange risk – the risk caused by an adverse change in stock prices;
  
• 
  The currency risk – the risk caused by an adverse change in foreign currency rates and precious metal prices.
  

The interest risk for non-trade positions is assessed through gap analysis by redistributing assets and liabilities with fixed interest rates based on contractual repayment dates, assets and liabilities with floating interest rates – based on interest rate revision dates. The gap is calculated separately for Russian rubles and foreign currencies. This involves appraisal of the impact that a 100 basis point rise or fall of the interest rate has on net earnings.

The market risk for trade positions (the interest risk of the debt securities portfolio, stock exchange and foreign currency risks) is assessed by the Bank following the VaR method. It helps to estimate the maximum volume of expected financial losses for a specific period of time at a preset level of confidence probability. The Bank evaluates VaR by using the historical modeling method with a 99 % confidence probability in a horizon of 10 days.

As part of daily monitoring of the level of market risks assumed by the Bank on trade positions, it also analyzes positions exposed to the risk and assesses their vulnerability to changes in market indicators. Methods include measuring position sensitivity to a 1 basis point change in rates.

The stock exchange and foreign currency risk levels did not change significantly for trade positions in 2011.

The interest risk on non-trade positions grew in 2011 because of a significant increase in the gap in rubles and dollars at certain time intervals.

In order to limit the size of market risk, the following limits and restrictions are established by the Bank's Committee for Assets and Liabilities Management for operations in assets and liabilities:

• 
  Interest risk of non-trade positions: maximum interest rates for raising and placing funds of legal entities, limitations on the volume of long-term lending (the highest-risk instrument for placing funds);
  
• 
  Market risk on trade positions:
  

• 
  Interest risk for the debt securities portfolio: investment limits by issuer type and currency, limited concentration in an individual issue, limited list of instrument types that can be invested in, duration limits, loss limits (stop-loss);
  
• 
  Stock market risk: limits on the portfolio size and investments in shares by issuers, loss limits (stop-loss);
  
• 
  Market risks of transactions in the money and foreign currency market: limits on open positions by transaction type and currency during and at close of the trading day, sensitivity limits, limitations of the maximum term of transactions, loss limits (stop-loss).
  

5. Legal Risk

To follow the Bank of Russia's recommendations on bank risk assessment and the Basel Agreement, in 2011 the Bank took measures to build a system for integrated management of risks (including the legal risk) of the Group of OJSC Sberbank of Russia.

As of 1 January 2012 there were claims pending against the Bank and filed by individuals for 129.4 bn rubles. Following examination of similar claims in 2011, the Bank expects courts to make an award in favor of the Bank and the Bank will make no payments under them.

6. Strategic Risk

In October 2008, the Supervisory Board approved the Bank's 2014 Development Strategy. As the Strategy was prepared during a rapidly evolving situation in financial markets and the economy overall, there was an important objective to strike a balance of decisions required by short-term market conditions and long-term objectives pursued by the Bank.

The strategy defines main mechanisms of implementation of this objective that involve changes to the Bank's internal operating arrangements, enhancement to staff performance, modifying approaches to client services, boosting employee professionalism and interest in the outcomes of their effort.

Main elements of the 2014 Sberbank of Russia Development Strategy are published on the Bank's official website at http://www.sbrf.ru/moscow/ru/about/today/strategy/. The full version of this document is available at http://www.sbrf.ru/common/img/uploaded/ir/pics/strategy-rus.pdf.

7. Operating Risk

When building an integrated risk management system that meets Basel II requirements international standards and best practices, the Bank continued developing and implementing its operating risk management methodology.

A decision was made to move the function of maintaining the operating risk database from the Internal Controls Office to operating risk divisions of territorial banks. In this respect, there are plans to modify the organizational structure of operating risk divisions at territorial banks and create the risk manager function for operating risks at the level of Sberbank's branches, including headquarters.

An open tender was held by the Bank to select the software platform for the operating risk management system. SAS OpRisk Management, a platform used by leading global financial institutions, was announced the winner. The Bank started a strategic project for automation of the operating risk management system and commenced implementation effort.

In order to increase responsibility of divisions on issues of managing the operating risk, special focus was placed on the institute of risk coordinators – the link on issues of collaboration between risk divisions and the Bank's divisions in the course of operating risk management. A manual was developed and risk coordinators were trained at the Central Head Office and all territorial banks, which helped to improve significantly the quality of operating risk reporting.

The Bank conducts risk audit of the Bank's key processes such as deposit operations, payment of compensation, issue and maintenance of bank cards. Based on results of risk audits, new technologies are implemented throughout Sberbank's system to lower operating risk levels: the client session procedure (reduces the fraud risk coming from outside and the Bank's staff when client accounts are accessed), role models (differentiate features allowing operations in automated systems which reduced the risk of unauthorized transactions carried out by one person), and centralized granting of privileges of access to automated systems.

The Bank's top-priority processes for optimization in 2012 include those exposed to a high level of operating risk, including cash management for corporate clients, unallocated bullion accounts, broking services, bank wires, bank card accounts, execution and support of the universal bank service agreement etc.

As of 1 January 2012, the share of expenses related to realization of an operating risk to Sberbank's earnings is 1.2% or much lower than in the largest Russian banks. The average figure based on the profit and loss statement of the ten largest banks by working assets was, on 1 January 2012, 4.2%.

8. Risk of Loss of Business Reputation

Several groups of indicators of the Bank's financial condition are used to detect and assess factors affecting the risk of loss of business reputation. These include comparison against aggregate indicators for the Russian banking sector, the Bank's compliance with legislative requirements to financial monitoring, changes in the business reputation of its affiliates, subsidiaries and related organizations, the Bank's international rating and so on.

Assessment of factors affecting the risk of loss of Sberbank of Russia's business reputation made as of 1 January 2012 warrants a conclusion that the Bank's reputation risk is at an acceptable level.

9. Information on Operations/Transactions with the Bank's Related Parties

Related parties⁶¹ include legal entities or natural persons that can influence the Bank's operations or whose operations can be influenced by the Bank.

10. Off-balance-sheet liabilities, fixed-term transactions and reserves created

• 
  credit lines provided primarily to legal entities;
  
• 
  granted guarantees and sureties, including a surety to the Bank of Russia (the creditor) for performance of obligation of OAO VTB Bank (debtor) to repay a loan to a sum of no more than 100 bn rubles
  

Claims against the Bank are filed with courts during the Bank's activities. Based on its own estimates and recommendations of in-house professional consultants, the Bank's management believes that these proceedings will not cause significant losses for the Bank and, naturally, does not create reserves for possible losses under such proceedings.

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