Credit risk

The Group is exposed to credit risk, which is defined as the risk that a counterparty may be unable to meet its credit obligations in whole or in part when due. The Group’s risk management policy aims to improve the Group’s competitive position by expanding the list of counterparties and the range of loan products on offer, implementing a systemic approach to credit risk to maintain or bring down the level of credit risk losses and through optimisation of the Group’s credit portfolio structure by industry, region and product.

The Group’s credit risk level control and monitoring system is based on principles set down in its internal regulatory documents. These principles provide for initial, ongoing and follow-up control of transactions creating exposure to credit risk, as well as seeing that risks remain within the established limits and updating them on a timely basis.

Credit risk management - corporate

The Group has an internal rating system in place based on economic and mathematical models used to assess the likelihood of borrower or transaction default. The credit rating system ensures a differentiated approach to evaluating the likelihood that borrowers may default or not fulfill their obligations based on an analysis of quantitative (financial) and qualitative credit risk factors and their impact on a borrower’s ability to repay interest and principal.

The Group has developed a multi-level limit system in order to limit credit risk involved in lending operations and transactions on the financial markets. Additionally, the Group has a multi-dimensional system of authority limits, which is used to determine a decisionmaking level for each loan request. In 2011, the Bank also carried out obligatory independent reviews of credit risk before making lending decisions for medium-sized and large businesses and major corporate customers. Although the existing limit systems ensure proper management of credit risk, the Group is working to further improve its limit methodology.

In 2011, the Bank completed implementation of the Loan Factory, a new individual lending process, for mortgage lending, the most recent in our key offerings for individuals

The Group has launched a project to implement a comprehensive automated risk management system for corporate credit risks that will make it possible to evaluate the current status of movements in and the outlook for credit risks, also based on the requirements of the Basel Committee on Banking Supervision.

Based on macroeconomic scenarios, the Group performs credit risk sensitivity analyses for individual corporate borrowers and the whole corporate loan portfolio. As a result of such analyses, it identifies macro factors that to a maximum extent correlate with the likelihood of borrower default. In order to conduct stress testing, statistical information on sharp movements in macro factors is used to model credit ratings in stress scenarios.

Credit risk management — small and micro businesses

In 2011, the Group continued to improve risk management in small business lending. In order to identify risk types and assign ratings, customers are classified as either micro businesses, for which retail risk measurement tools are used, or small businesses, for which the Bank has developed risk measurement tools that are fully integrated with risk management for medium-sized and large corporate customers. The Group uses two consistent centralised processes in small business lending:

  • The Loan Factory. The Loan Factory applies a product approach to measuring risk. This means that the loan applicant’s credit score and risk level are calculated at the time the loan is requested and the loan price and lending limit are also determined. The transaction is assigned a credit rating.
  • The Loan Conveyor. The Loan Conveyor is a technology whereby a long-term rating is assigned to a customer or group of related persons using the corporate risk measurement model applicable to the corresponding customer category. The conveyor also includes limit management and decision-making authority systems. In 2011, the first phase of implementation of the Loan Conveyor was completed at two regional offices. When testing the process, the Bank implemented a consistent approach to evaluating collateral and measuring legal risks, improved the loan process, reduced request processing time and conducted a centralised independent risk review, including verification of customer data and an assessment of the customer’s credit history and business reputation. Phased automation and widespread rollout of the Loan Conveyor are planned for 2012.

Credit risk management — retail

In 2011, the Bank completed implementation of the Loan Factory, a new individual lending process, for mortgage lending, the most recent in our key offerings for individuals. The process involves a comprehensive analysis of information on transaction parties from various sources, centralisation of the analysis and decision-making roles, and a high degree of pre-lending workflow automation. Having this risk management system in place across regional offices helps the Bank to control risks at each lending stage, maintain the quality of its loan portfolio and gradually reduce customer service time.

Distressed loans

The Group exercises ongoing control over the collection of distressed loans at each collection stage. The Group optimises lending and debt collection processes in incidents where any distressed areas or stages are identified in debt collection, or in cases when collection efficiency declines or distressed loan portfolios grow in particular regions or customer and product segments.

To this end, the Bank completed implementation of Tallyman in 2011. Tallyman is an automated system for early collection of overdue retail loans.

Industry analysis, currency analysis and concentration

The Group’s loan portfolio is well diversified across sectors. Trade and services account for the largest parts of loan portfolio — 19.8% and 13.5% respectively. Retail loans accounted for 21.5% of loan portfolio as of 31 December 2011, 0.2 p.p. up from 2010. Lending to telecommunications, transport and energy companies grew most significantly in 2011, while lending to oil and gas and metals companies declined.

Loan portfolio structure by industry

RUB million 2011 2010 Change, %
  Amount % of loan portfolio Amount % of loan portfolio  
Individuals 1,805,527 21.5 1,319,732 21.3 36.8
Services 1,658,527 19.8 1,001,330 16.2 65.6
Trade 1,134,763 13.5 1,008,025 16.3 12.6
Food and agriculture 703,863 8.4 585,394 9.5 20.2
Construction 451,261 5.4 404,601 6.5 11.5
Energy 379,891 4.5 208,797 3.4 81.9
Machine building 355,574 4.2 317,588 5.1 12.0
Chemical industry 340,211 4.1 216,833 3.5 56.9
Telecommunications 331,954 4.0 168,042 2.7 97.5
Metals 299,424 3.6 300,806 4.9 (0.5)
Transport, aviation and space industries 285,364 3.4 147,540 2.4 93.4
State and municipal entities 268,087 3.2 153,280 2.5 74.9
Oil and gas 164,663 2.0 177,495 2.9 (7.2)
Timber industry 50,388 0.6 49,609 0.8 1.6
Other 152,610 1.8 132,838 2.0 14.9
Total loans to customers 8,382,107 100.0 6,191,910 100.0 35.4

The Group closely monitors major credit risk concentrations. Major exposures to our largest borrower and ten largest borrowers shown below indicate that concentration risk did not change significantly over the last three years and remains at an acceptable level.

Credit risk concentration

% 2011 2010 2009
Concentration of loans in the gross loan portfolio due from the largest borrower before provision for loan impairment 3.1% 3.7% 4.4%
Concentration of loans in the gross loan portfolio due from the ten largest borrowers before provision for loan impairment 16.5% 16.0% 16.9%

The list of the Group’s largest borrowers (groups of related borrowers) provided below demonstrates the high level of industry diversification.

RUB million   Amount % of total loans
Customer 1 Machine building, trade, construction, metals 255,545 3.1
Customer 2 Services 216,548 2.6
Customer 3 Oil and gas 170,261 2.0
Customer 4 Telecommunications 143,966 1.7
Customer 5 Telecommunications 123,122 1.5
Customer 6 Construction 104,718 1.3
Customer 7 Oil and gas 97,955 1.2
Customer 8 Telecommunications 93,401 1.1
Customer 9 Energy 87,415 1.0
Customer 10 Energy 79,252 1.0
Total   1,372,185 16.5

A currency analysis of the structure of the Group’s loan portfolio indicates that the bulk of loans (78.8%) are denominated in Russian Rubles. The percentage of loans denominated in foreign currency (US Dollars, Euros) remained almost unchanged compared with 2010. The graph below shows that such loans accounted for 19.7% of the loan portfolio at the end of 2010 and grew to 19.9% in 2011.

Loan portfolio quality

The existing policies and procedures applied by the Group helped to avoid an uncontrolled deterioration in loan portfolio quality during the financial crisis. The table below contains an analysis of overdue loans to borrowers by period overdue and details the share of overdue loans in the loan portfolio. As evident from the table below, the volume of overdue loans declined in 2011, both in relative and absolute terms. The decline in overdue loans was driven by the Group’s ongoing efforts to ensure repayment of overdue and distressed loans, the disposal of certain portion of distressed loans and writing off of uncollectable loans.

RUB million 2011 2010
  Amount % of loan portfolio Amount % of loan portfolio
Loans to customers with overdue principal or interest
Loans up to 1 month overdue 49,290 0.6 41,494 0.7
Loans 1 to 3 months overdue 27,844 0.3 30,814 0.5
Loans over 3 months overdue 407,399 4.9 452,292 7.3
Total 484,533 5.8 524,600 8.5

Non-performing loans and loan impairment provisions

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

RUB million 31 December 2011 31 December 2010 Change, %
  Amount % of amount Amount % of amount  
Loans collectively assessed for impairment 7,792,528 93.0 5,540,865 89.5 40.6
Overdue loans collectively assessed for impairment 298,621 3.6 316,739 5.1 (5.7)
Individually impaired corporate loans 290,958 3.4 334,306 5.4 (13.0)
Total loans to customers, gross 8,382,107   6,191,910   35.4
Provisions for impairment: (662,407)   (702,523)    
Provisioning ratio, %   7.9   11.3  
Total loans to customers, net 7,719,700   5,489,387   40.6
Including:
Non-performing loans 407,399   452,292   (9.9)
Provisions for impairment of nonperforming loan (358,118)   (397,262)   (9.9)
Share of non-performing loans, %   4.9   7.3  

While the Group has maintained a sustainable loan portfolio structure in terms of the share of overdue and distressed loans, a fact resulted in lower provisioning rates, it still continues to pursue a conservative approach towards credit risk. Our 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 collateral. The change in the volume of non-performing loans at 2011 year-end was insignificant compared with the previous year, while the share of nonperforming loans declined against overall loan portfolio growth.

As of 31 December 2011, the Bank’s provisioning ratio (loan impairment provision to total gross loan portfolio) was 7.9%. In the total portfolio, loans overdue by more than 30 days accounted for 5.2%, with the share of loans overdue by more than 90 days (non-performing loans) comprising 4.9%. The Bank’s impairment provisions exceeded non-performing loans by 1.6 times.

The graph below shows movements in overdue loans.

Restructured loans

RUB million 2011 2010 Change, %
  Amount Structure, % Amount Structure, %  
Loans to corporate customers
Non-overdue loans collectively assessed for impairment 881,451 85.4 574,490 76.9 53.4
Non-overdue loans individually assessed for impairment 32,678 3.2 43,636 5.8 (25.1)
Loans 1 to 90 days overdue 25,545 2.5 28,689 3.8 (11.0)
Loans over 90 days overdue 68,973 6.7 78,406 10.5 (12.0)
Total restructured loans to corporate customers 1,008,647 97.8 725,221 97.0 39.1
Loans to individuals
Non-overdue loans collectively assessed for impairment 12,859 1.2 8,820 1.2 45.8
Loans 1 to 90 days overdue 2,913 0.3 252 0.0 1,056.0
Loans over 90 days overdue 7,158 0.7 13,428 1.8 (46.7)
Total restructured loans to individuals 22,931 2.2 22,500 3.0 1.9
Total 1,031,578 100.0 747,721 100.0 38.0

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

In 2011, restructured loans grew by 38.0%, totalling RUB 1,031.6 billion at year-end. The share of restructured loans in the overall loan portfolio did not change significantly in 2011 — 12.3% compared to 12.1% as of the end of 2010. As of 31 December 2011, non-overdue loans collectively assessed for impairment accounted for 86.6% of restructured loans (78.1% in 2010).

Most restructurings in 2011 were the result of an ongoing decline in market interest rates and changes in lending periods requested by customers.

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

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