Credit risk is the risk of losses occurring due to the failure to perform, delay in performance, or incomplete performance by a debtor of financial liabilities under a contract. These financial liabilities may include a debtor’s liabilities on obtained financing, including loans to clients and interbank loans; debt securities; other placed assets, including a request for the return of debt securities, shares, or promissory notes provided under a loan agreement; discounted bills; enforced bank guarantees that were not compensated by the principal; transactions for financing against cession of a monetary claim (factoring); rights (claims) obtained under a transaction (claim cession); instruments of pledge acquired on the secondary market; transactions of sale (purchase) of financial assets with deferred payment (delivery of financial assets); paid letters of credit (including uncovered letters of credit); return of money (assets) under a transaction for the purchase of financial assets with the obligation to return them; or claims under financial lease transactions (leasing).
The group of credit risks includes credit migration risk, concentration risk, counterparty risk on operations in the financial markets, and residual risk.
- Credit migration risk is the risk of losses associated with complete or partial loss of value:
- of a financial asset that is not subject to daily revaluation at current fair value (for example, a loan or a debt security held to maturity) due to a default or deterioration in the credit quality of the counterparty/issuer (migration);
- of a security due to the issuer’s default.
- Counterparty risk in financial market operations is a risk associated with the counterparty’s unwillingness or inability to perform obligations under a transaction completely and in a timely manner. Counterparty risk is a type of mutual exposure under futures transactions that can vary over time in response to market trends or fluctuations in the price of underlying assets. Counterparty risk has two components:
- presettlement risk, which is the risk of incurring losses in connection with the potential failure of the counterparty to perform its contractual obligations during the period of the transaction;
- settlement risk, which is a risk of losses in connection with the potential failure of the counterparty to perform its obligation after the Bank has fulfilled its obligation under the contract or agreement (by delivering funds, securities, and other assets) as of the date of mutual settlements.
- Concentration risk (as regards credit risk) is a risk related to:
- the provision of large loans to a single borrower or group of related borrowers;
- concentration of debts in certain areas of the economy, segments, portfolios or geographic regions, etc.;
- concentration of investments in securities within certain industries or geographic regions;
- other liabilities that make them vulnerable to the same economic factors.
- Residual risk is a risk arising due to the fact that the methods of risk mitigation used by the Bank can fail to produce the desired effect due to implementation in relation to the security, for example legal risk and liquidity risk.
The purpose of credit risk management is to identify and ensure the level of risk required to ensure the sustainable development of the Group, as determined by the Banking Group development strategy and the macroeconomic parameters.
The credit risk management policy implemented by the Group is aimed at increasing the Group’s competitive advantages by widening the range of counterparties and the list of provided credit products and products of the financial markets and by implementing a systematic approach to credit risk management, including one that ensures the maintenance or lowering of the level of materialized credit risks and optimization of the industry, regional, and product structure of credit portfolios.
The Group applies the following methods of credit risk management:
- Preventing credit risk by identifying, analyzing, and evaluating potential risks at the stage that precedes the operations exposed to credit risk
- Planning the credit risk level by evaluating the level of expected losses
- Implementing unified processes of risk evaluation and identification
- Limiting credit risk by establishing limits and/or restrictions for the risk
- Creating provisions for possible losses from loans issued
- Structuring of transactions
- Managing the collateral for transactions
- Using a system of authorities when making decisions
- Monitoring and controlling the risk level
Credit risk is evaluated for the Group in general and in terms of different portfolios of assets exposed to credit risk as well as in terms of individual credit risks of specific counterparties and groups of counterparties, countries, geographical regions, and types of economic activities.
The Group uses a system of internal ratings based on economic and mathematical models of evaluating the probability of default by counterparties and transactions. Assessment of credit risks of the counterparties depends on the types of counterparties:
- Corporate clients, credit institutions, financial companies, small business entities, countries, constituent entities of Russia, municipal entities, insurance and leasing companies—on the basis of the credit ratings system and by building models of predicted cash flow or other significant indicators
- private clients and microbusiness entities—on the basis of the evaluation of the paying capacity and express evaluation on the basis of a scoring model
The credit ratings system ensures a differentiated evaluation of the probability of the nonperformance/improper performance of obligations by the counterparty based on the analysis of quantitative (financial) and qualitative (market factors and factors of external influence, characteristics of management quality, assessment of business reputation, etc.) factors of credit risk and the degree of their influence on the counterparty’s ability to service and repay the assumed obligations.
In accordance with the developed macroeconomic scenarios, the Group performs an analysis of the sensitivity of the level of credit risks at the level of individual counterparties and the credit portfolio as a whole, and, based on the results, it detects the macrofactors that maximally correlate to the probability of counterparties’ default. For the purposes of stress testing, statistical information on rapid changes in macrofactors is used when modeling the ratings in stress situations.
The system for monitoring and controlling the level of the Group’s credit risks is implemented on the basis of principles that ensure preliminary, current, and subsequent control of transactions exposed to credit risks, compliance with the established risk limits, and their timely updating.
A multilevel system of limits for each line of business based on limiting credit risks for loan operations and operations on financial markets has been developed in the Group.
The Group pays close attention to monitoring the concentration of major credit risks and compliance with the prudential requirements of the regulating authority as well as analysis and forecasting of the level of credit risks.
Sberbank has implemented a procedure for daily monitoring of major credit risks. For the purposes of compliance with the requirements established by Bank of Russia with regard to the statutory ratios Bank of Russia Instruction No. 139-I dated December 3, 2012, On Banks’ Required Ratios (as amended on October 25, 2013). R6, R21 (maximum risk limit per borrower or group of related borrowers) and R7, R22 (maximum limit of large credit risks), a List of Major and Related Borrowers of the Bank is maintained and monitored.
In accordance with IFRS, the share of loans of 20 major groups of related borrowers for 2016 changed from 22.9% to 23.5% of the Group’s credit portfolio before deduction of provision for depreciation. Among the Sberbank’s major borrowers are representatives from various sectors of the economy; therefore, the default risk is adequately diversified.
To increase credit portfolio quality, credit industry strategies (CIS) are being developed in Sberbank. In 2016, CISs were approved for the main industries, and pilot monitoring of CIS performance with respect to the CIB portfolio was conducted.
The main tool for reducing credit risk is collateral. The need to accept collateral and the volume of accepted collateral depends on the risk of the borrower/transaction and is fixed in the terms of the loan products.
To hedge credit risks, the Bank has developed and implemented a collateral policy defining the basic principles and elements of dealing with collateral in lending. Collateral quality is determined by the probability of receiving cash in the amount of the expected collateral value when enforcing upon or selling the collateral. The collateral quality is indirectly characterized by the list and materiality of risks associated with the collateral and is determined by a number of factors: liquidity, accuracy of determining value, risk of depreciation, exposure to risks of loss and damage, legal risks, etc.
Evaluation of the collateral value is made based on the internal expert evaluation of the Group’s specialists or the evaluation of independent evaluators or based on the cost of the collateral in the borrower’s accounting statements with a discount. Use of sureties of solvent corporate and private clients and guarantees for adjustment of credit risk indicators requires the same assessment of the risks of the surety/guarantor as of the borrower. The Bank performs regular monitoring of pledged assets to ensure control over the quantitative, qualitative, and cost parameters of the pledged assets, their legal affiliation, and conditions of storage and upkeep.
The Group has a multidimensional system of authorities for determining the level of decision making for every loan application. A risk profile that determines the authority for decision making based on the risk category of the application is assigned to each territorial subdivision/Group bank. In turn, the application risk category depends on the aggregate limit and risk category of the borrower/group of related borrowers as well as the loan product’s category. Therefore, the existing systems of limits and authorities help optimize the credit process and properly manage credit risk.
To cover losses from assets exposed to credit risk that are expected from realization of credit risk, the Group forms provisions for possible losses from loans and other possible losses. Provisions are formed in accordance with the requirements of Bank of Russia, bank regulators, and IFRS. In 2016, the volume of loan loss provision formed by the Group increased by RUB 106.9 bln. Formed provisions are adequate to assumed risks.
Credit risk coverage level in Sberbank of Russia under RAS exceeds the indicator for the Russian bank sector as of January 1, 2017:
|Ratio of provisions to the total client credit portfolio, %||6.4||8.2|
|Coverage of overdue debt by provisions, times||2.6||1.6|
The Group performs constant monitoring of the collection of problem indebtedness at all collection stages. When triggers of a decline in the level of effectiveness of collection or of distressed portfolio growth in certain regions or client or product segments are detected, the process of recovery and lending are optimized.
The processes of recovery of overdue and troubled debts in the Group are built based on the principle of maximum automation and standardization, which eliminates human factors at different levels of processing distressed debts and makes it possible to apply a uniform approach to the recovery process.
During the settlement of distressed debts, the Group uses a set of tools that correspond to global practices: remote communications, on-site visits, debt restructuring, relations with debt collection agencies, judicial and enforcement proceedings, etc. Application of a certain tool is determined by a flexible strategy, depending on the risk level of the client and the loan.
The Group performs regular studies of the ongoing recovery process to check its conformity to market trends and best international practices. Based on the results of analysis, the necessary amendments are introduced to the process to increase the level of impaired debt collection, to optimize recovery procedures, and to increase the level of client service.
In 2016, the Group implemented a new targeted automated system for distressed debt recovery for the purpose of optimizing and improving the efficiency of distressed debt management and increased the level of process automation. New technologies for interaction with clients for the purpose of settling distressed debts are also being actively developed.
As of Desember 31, 2016, the amount of restructured corporate loans amounts to RUB 1,209 bln, and their share in the book assets is 4.8% (Desember 31, 2015: RUB 1,231 bln and 4.5%).
In 2016, several decision-making process optimization projects were implemented to reduce decision-making time. Furthermore, a project for the management of the corporate client credit portfolio was launched, within the framework of which the bank is transitioning from passive management of credit risk to active management. Active management involves hedging, purchase, and sale of credit risk and management of incoming flow subject to target portfolio metrics that will make it possible to optimize the structure and indicators of the portfolio.