Sberbank - Annual Report 2010 - Credit Risk

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# Credit Risk

The Group’s major exposure relates to credit risk, that is, the risk that a counterparty will be unable to pay outstanding amounts in whole or in part when they become due. Credit risk management and the control of loan-portfolio quality receive special focus. During the reporting period, the Bank’s critical objectives were to stabilise its loan-portfolio quality and secure the recovery of nonperforming loans and the specific techniques and procedures employed manifested themselves in Sberbank maintaining a good quality loan portfolio in the current economic environment.

## Credit risk exposure to corporate customers

In order to limit and monitor credit risk exposure to corporate customers, the Bank operates an internal counterparty rating system. It sets limits and caps for various counterparty groups, regions and countries, as well as individual loan products and transactions subject to credit risk.

During the reporting year, the Bank implemented a new credit risk assessment system for corporate customers, based on borrower default statistics. It was integrated into the process of making decisions to grant loans to medium and large corporate customers, as well as its largest customers.

In 2010, the Bank implemented new tools for managing credit risk exposure to small businesses, resulting in a standardised and simplified risk analysis procedure. The Bank performs comprehensive analysis of micro businesses within the small business segment by means of the Credit Factory. The process uses the business/owner credit-scoring model and combines this with rating the borrower’s financial performance. The Bank also launched a standardised credit process to analyse and assign credit ratings to borrowers from small businesses requiring more complex lending transactions — small businesses being defined as those with annual revenue below RUB 60m per year.

In order to assess exposure to borrowers with annual revenue of over RUB 150m, the Bank has implemented new approaches based on Probability of Default analysis and a uniform rating system.

With the new risk management approaches in place, the Bank will be able to build a high quality portfolio of corporate loans.

## Credit risk exposure to retail customers

Vigorous retail-loan book growth has necessitated new requirements for managing credit risk exposure to retail customers. The key objective is to secure planned growth in retail lending while maintaining a low level of non-performing loans.

The Bank monitors the quality of its retail loan book on an ongoing basis on the basis of business units and the main loan products. Where a higher concentration of risk level is identified in any segment, the Bank proactively makes changes to bring the existing problems in that segment under control, reduce the risk level and develop recommendations so as to prevent or decrease the possibility of similar problems in the future.

## Concentration of credit risk

The Group’s loan portfolio is quite well diversified by economic sector. The trade and services sectors account for the largest portions of the loan portfolio structure at 16.3% and 16.2%, respectively. Retail loans made up to 21.3% of the loan portfolio at 31 December 2010, 0.4 p.p. down from 2009. The most significant increases were seen in the transport, services and energy sectors. At the same time there was a slump in lending to machine building and a slight decrease in lending to the construction sector. The Group’s corporate loan portfolio has a structure largely similar to that of Russian GDP.

| As of 31 December 2010 | As of 31 December 2009 | Change, %
--- | --- | --- | ---
RUB m | Amount | % of loan portfolio | Amount | % of loan portfolio |
Individuals | 1,319,732 | 21.3 | 1,177,539 | 21.7 | 12.1
Trade | 1,008,025 | 16.3 | 960,385 | 17.7 | 5.0
Services | 1,001,330 | 16.2 | 748,240 | 13.7 | 33.8
Agriculture | 585,394 | 9.5 | 511,658 | 9.4 | 14.4
Construction | 404,601 | 6.5 | 408,307 | 7.5 | (0.9)
Machine building | 317,588 | 5.1 | 347,222 | 6.4 | (8.5)
Metallurgy | 300,806 | 4.9 | 273,814 | 5.0 | 9.9
Chemical industry | 216,833 | 3.5 | 186,790 | 3.4 | 16.1
Energy | 208,797 | 3.4 | 172,623 | 3.2 | 21.0
Oil and gas | 177,495 | 2.9 | 157,078 | 2.9 | 13.0
Telecommunications | 168,042 | 2.7 | 164,934 | 3.0 | 1.9
Transport | 147,540 | 2.4 | 109,211 | 2.0 | 35.1
Other | 335,727 | 5.3 | 226,044 | 4.1 | 48.5
Total loans to customers | 6,191,910 | 100.0 | 5,443,845 | 100.0 | 13.7

The Group closely monitors the concentration of large credit risk exposure. The credit risk exposure to the largest borrower and ten largest borrowers as seen in the table below indicates that its credit risk concentration has not changed significantly over the past three years and remains acceptable.

### The group’s credit risk concentration

| As of 31 December 2010 | As of 31 December 2009 | As of 31 December 2008
--- | --- | --- | ---
Concentration of loans in the gross loan portfolio due from the largest borrower before provision for loan impairment | 3.7% | 4.4% | 3.5%
Concentration of loans in the gross loan portfolio due from ten largest borrowers before provision for loan impairment | 16.0% | 16.9% | 15.8%

The Group’s largest borrowers (groups of related borrowers), provided below, demonstrates their high diversification by economic sector.

RUB m |  | Amount | % of total loans
--- | --- | --- | ---
Customer 1 | Machine building, trade, construction, metallurgy | 231,263 | 3.7
Customer 2 | Services | 138,057 | 2.2
Customer 3 | Oil and gas | 128,041 | 2.1
Customer 4 | Energy, Telecommunications, Chemical industry | 100,349 | 1.6
Customer 5 | Construction | 100,329 | 1.6
Customer 6 | Telecommunications | 83,074 | 1.3
Customer 7 | Aviation industry | 54,669 | 0.9
Customer 8 | Metallurgy | 53,915 | 0.9
Customer 9 | Metallurgy | 52,747 | 0.9
Customer 10 | Trade, oil and gas | 51,515 | 0.8
Total |  | 993,959 | 16.0

A currency analysis of the loan portfolio indicates that the bulk of loans (78.7%) are denominated in Russian roubles. In 2010, there was stronger growth in foreign-currency-denominated loans driven by the strengthening rouble and investors’ negative inflation expectations. Some customers raised long-term foreign currency loans to refinance their foreign debt which contributed to the share of foreign currency loans in Sberbank’s portfolio increasing from 16.3% to 19.7% by the end of the year. The increase in loans denominated in other foreign currencies is indicative of higher lending volumes to customers in the CIS.

## Loan portfolio quality

The Group’s existing policies and procedures helped to avoid uncontrolled deterioration in loan-portfolio quality during the financial crisis. Provided below is the analysis of overdue loans to borrowers by age, with their share in the loan portfolio. As can be seen in this data, the volume of overdue loans declined in 2010, both in relative and in absolute terms. The contraction in the overdue loan portfolio was thanks to the Group’s ongoing efforts to ensure repayment of overdue/problem loans, the disposal of a certain portion of problem loans and writing off uncollectible loans.

| As of 31 December 2010 | As of 31 December 2009
--- | --- | ---
RUB m | Amount | % of loan portfolio | Amount | % of loan portfolio
Loans to customers with overdue principal or interest |  |  |  |
Loans up to 1 month overdue | 41,494 | 0.7 | 41,529 | 0.8
Loans 1 to 3 months overdue | 30,814 | 0.5 | 52,309 | 1.0
Loans over 3 months overdue | 452,292 | 7.3 | 458,732 | 8.4
Total | 524,600 | 8.5 | 552,570 | 10.2

## Non-performing loans and provisions for loan impairment

Loan portfolio quality, provisions for loan impairment and non-performing loans (where payments of principal or interest are overdue by more than 90 days) are analysed below.

| As of 31 December 2010 | As of 31 December 2009 | Change, %
--- | --- | --- | ---
RUB m | Amount | % of loan portfolio | Amount | % of loan portfolio |
Current loans collectively assessed for impairment | 5,540,865 | 89.5 | 4,805,677 | 88.3 | 15.3
Past due loans collectively assessed for impairment | 316,739 | 5.1 | 328,597 | 6.0 | (3.6)
Individually impaired corporate loans | 334,306 | 5.4 | 309,571 | 5.7 | 8.0
Total loans to customers, gross | 6,191,910 |  | 5,443,845 |  | 13.7
Provisions for impairment: | (702,523) |  | (579,814) |  |
Provisioning ratio, % |  | 11.3 |  | 10.7 |
Total loans to customers, net | 5,489,387 |  | 4,864,031 |  | 12.9
Non-performing loans | 452,292 |  | 458,732 |  | (2.6)
Share of non-performing loans, % |  | 7.3 |  | 8.4 |

The Group has maintained a sustainable loan-portfolio structure as far as the share of overdue/problem loans is concerned, which is reflected in lower provisioning rates; nonetheless it still continues to pursue a conservative approach towards credit risk. The provisioning policy involves a careful analysis of borrowers, their current liquidity position and debt burden, with consideration given to the availability of reliable repayment sources, and the quality and liquidity of provided collateral. The volume of non-performing loans at year-end 2010 is almost the same as in the previous year, while the share of non-performing loans has declined against the overall growth of the loan portfolio.

At 31 December 2010, the Group’s provisioning ratio (provision for loan impairment to total gross loan portfolio) was 11.3%. In the total portfolio, loans overdue by more than 30 days account for 7.8%, with the share of loans overdue by more than 90 days comprising 7.3%. The Bank’s impairment provision exceeds non-performing loans by 1.6 times.

| As of 31 December 2010 | As of 31 December 2009 | Change,%
--- | --- | --- | ---
RUB m | Amount | % of amount | Amount | % of amount |
Loans to corporate customers |  |  |  |  |
Current loans collectively assessed for impairment | 574,490 | 76.9 | 532,704 | 82.4 | 7.8
Individually impaired current loans | 43,636 | 5.8 | 19,888 | 3.1 | 119.4
Loans 1 to 90 days overdue | 28,689 | 3.8 | 20,346 | 3.1 | 41.0
Loans over 90 days overdue | 78,406 | 10.5 | 64,086 | 9.9 | 22.3
Total restructured loans to corporate customers | 725,221 | 97.0 | 637,024 | 98.5 | 13.8
Loans to individuals |  |  |  |  |
Current loans collectively assessed for impairment | 8,820 | 1.2 | 1,753 | 0.3 | 403.1
Loans 1 to 90 days overdue | 252 | 0.0 | 67 | 0.0 | 276.1
Loans over 90 days overdue | 13,428 | 1.8 | 7,938 | 1.2 | 69.2
Total restructured loans to individuals | 22,500 | 3.0 | 9,758 | 1.5 | 130.6
Total | 747,721 | 100.0 | 646,782 | 100.0 | 15.6

Presented above are the loans that have been restructured. Restructuring entails renegotiation of the original loan agreement to formulate terms and conditions more favourable for the borrower.

Throughout 2010, the volume of restructured loans expanded 15.6%, totalling RUB 747.7bn at year-end. There was no significant change in the share of restructured loans in the gross loan portfolio at year-end (12.1% against 11.9% in 2009). At 31 December 2010, non-overdue loans accounted for 78.1% of restructured loans (2009: 82.7%). Given that volumes of overdue restructured loans and individually impaired loans have risen more quickly relative to the total restructured loan portfolio, this has pushed their share in the latter to 12.9%. Nonetheless the overall quality of the restructured loans is deemed satisfactory.

It is the Group’s policy to renegotiate problem loans only when there is objective evidence that the loan restructuring will assist in improving the borrower’s economic position and ensure that the borrower is able to meet its debt service obligations in full when due.

## Loan loss provisioning methodology

Estimation of the impairment provision for corporate loans involves the following steps:

- Loans that are individually significant are identified.
- It is determined whether an individually significant loan shows objective evidence of impairment (the loan is considered impaired when its carrying amount materially exceeds its estimated recoverable amount).
- A separate impairment loss is recorded on each individually significant impaired loan.
- All the remaining loans that have not been identified as individually significant are collectively assessed for impairment.

Overdue loans and advances are collectively assessed for impairment based on their ageing analysis.

For impairment assessment purposes, loans to individuals are grouped by credit product type into homogeneous sub-portfolios with similar risk characteristics. Each sub-portfolio is then assessed for impairment based on the ageing analysis. Retail loans are deemed fully impaired when the principal and/or interest payment becomes more than 180 days overdue.

- Credit Risk
- Liquidity Risk
- Market Risk
- Operational Risk

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