Efficiency and accountability: Risk management

In 2013, in terms of credit risk management, the emphasis was placed on further centralisation of decision-making regarding credit products. With respect to operational risk mitigation, we have paid considerable attention to maintaining the stability and the functioning of IT systems and communication channels.

Sergey Malinin
Member of the Management Board

Risk management

Within the framework of implementation of the above Strategy, work on the following aspects was conducted during the reporting period:

  • Creation of a system of internal credit ratings for legal entities
  • Formation of an analytical database of historic information with view to calculating capital at risk
  • Development of a methodological foundation for calculation of capital at risk
  • Development of an IT solution of early warning indicators for identifying risk factors in the activity of corporate borrowers

Furthermore, in 2013 Bank Vozrozhdenie approved and put into practice documents regulating the work of the Bank in terms of decision making on the provision of products bearing credit risks, as well as for work with bad debts and problem loans.

The first step in the risk management process is to acknowledge the reality of risk. Denial is a common tactic that substitutes deliberate ignorance for thoughtful planning.

Charles Tremper

Credit Risks

Bank Vozrozhdenie uses a system of limits and powers when managing credit risk, the key aims of that system being the limitation of the level of risk in different areas of the Bank’s activity and the optimisation of the decision-making processes. The powers and select types of limits, as well as the terms and conditions for lending are reviewed each quarter for approval by the Management Board.

The credit policy of the Bank contains certain key limits on selling of credit products to borrowers that are legal entities, namely:

  • Maximum level of risk per one borrower
  • Maximum level of risk per group of related borrowers
  • Maximum combined risk of large credit exposures of the Bank
  • The concentration level of the credit portfolio of the Bank, calculated as the relationship between the total amount of loans to 20 of the largest borrowers to the total assets of the Bank

Controlling the formation of provisions for products bearing credit risks is managed at branch level and at the level of responsible internal divisions of the Head Office: Corporate Lending Department, Retail Business Department, Bank Cards and Remote Channels Department. General risk control is managed by the Risk Control Department, while the following stages of risk control are managed by the Internal Control and Audit Service.

Diversification of the credit portfolio across a variety of sectors of the economy (industry, trade, construction, agriculture, transportation and telecommunications, finance etc.) is another pillar of the credit policy of the Bank.

The level of concentration of the credit portfolio can be assessed as moderate.

The branches and internal divisions of the Head Office of the Bank continuously monitor the activity of the borrowers, in particular their financial position and turnover of their current accounts.

In 2013, active measures were taken for the preservation of balance between the quality of the credit portfolio, profitability and credit risks. The share of non-performing loans (loans overdue more than 1 day, and impaired but not overdue) for 2013 decreased due to partial repayment of loans previously overdue and partial writing-off of unrecoverable corporate loans. In the 1st quarter of the reporting period, the debt of one of the largest corporate borrowers included in the list of strategic organizations, approved by the Russian Government, was impaired. All of the outstanding debts of the borrower are fully secured with hard collateral (real estate and equipment).

In 2013, Bank Vozrozhdenie maintained a balanced provisioning policy, creating provisions for loans impairment, appropriate to the level of credit risk. Due to the tightening of state policy relating to the retail loans provisioning, the minimal levels of provisions were increased for potential impairment of unsecured loans given to individuals not receiving their salary on the accounts of the bank. These changes played no significant effect on our performance, since a large proportion of client segments of retail lending used payroll services of the Bank (individuals receiving their salary to debit cards issued by the Bank).

Credit quality development

Cost of risk
Charges to provisions /
to avg gross loans

2013 achievements in credit risk management

  • A division for work with collateral was formed. The new division was created with the aim of reducing credit risks through conducting centralised works on valuation and monitoring of property, accepted as collateral for granted loans.
  • A department for large business lending was formed to enhance control and monitoring of credit risks associated with large borrowers. Throughout 2014, part of the credit procedures relating to large borrowers will be conducted in a centralised manner though this department, which will allow more effective monitoring of potential changes of the levels of credit risk in response to worsening macroeconomic environment.
  • The “Regulation for work with overdue and non-performing loans of borrowers – individuals (products of retail lending)” was developed and approved for the purpose of unification and centralisation of activities relating to collection of overdue debt and non-performing loans on all retail loans provided to individuals, including credit cards. This will significantly improve the efficiency of debt collection, while reducing the workload of branch employees, eliminating labour-intensive functions.
  • “Road construction” and “Vehicle sales” were separated into different industry segments, with appropriate limits being imposed on both, in order to improve the level of diversification within existing industry segments.
  • The project for integration of Microsoft Dynamics CRM for corporate business was launched. This will result in the ability to centralise a range of business operations, reducing employee work-load, while increasing the efficiency of attracting clients and the speed of processing of credit and other product applications.
  • A plan for the phased transition of Bank Vozrozhdenie to the calculation of credit risk based on internal ratings was developed and its implementation started through the collection of the necessary data. This approach was recommended in the framework of Basel II and the letter of the Bank of Russia #192-T from December 29, 2012. The approach is based on using the information about the impact of a variety of financial and non-financial factors of economic activity on the creditworthiness of the counterparty.

Operational Risks

Controlling the operations of individuals and legal entities remains the key priority of the Bank in the field of operational risk.

2013 maintained the growing trend in the number of cases of illegal activity by third parties against the clients of the Bank, associated primarily with the use of e-banking systems and remote services. In particular, cases of fraudulent operations during the provision of services to legal entities have become more frequent. This risk is inherent in the whole banking system and the Bank, with its extensive client base, is inevitably faced with it.

To protect clients from fraudulent operations in 2013, Bank Vozrozhdenie undertook to modernise the hardware-software complex of the remote banking service system through introduction of a mechanism of preventive detection of fraudulent payments and the addition of a real-time system informing clients using channels of SMS messaging about payments being made.

A further key risk of the Bank is associated with the risk of theft of cash from ATM machines. However, due to the installation of alarms and video-surveillance systems on the ATMs, all attempts of cash theft in 2013 were prevented.

To reduce losses from bank card fraud, a system of rules and limits on transactions with cards was developed. All our bank cards are equipped with a micro-chip, which significantly reduces losses. The Bank is regularly audited for compliance with the requirements of the international Standard for data protection of the PCI DSS bank card holders and takes measures to reduce risks when using ATMs.

To minimize the financial impact of the consequences of operational risk and for re-compensation of possible losses caused by illegal actions of either staff or third parties, the Bank has comprehensive insurance agreements, liability insurance agreements, as well as individual/private insurance agreements, agreements for the insurance of property, both movable and immovable, electronic devices and of motor vehicles with major insurance companies.

In the second half of 2012, during the reorganisation of the structure around the Risk Control Department, a new Operational Risk Division was established, the responsibilities of which include:

  • Organisation and supervision of the operational risk control system, development of normative documents
  • Collection and compilation of information about the Bank in general in a database of operational risk events
  • Preparation and provision to the Management Board and the Board of Directors of consolidated reports
  • Conduction of investigations relating to the most significant operational risk events

The Operational Risk Division in 2013 significantly improved the process of data collection associated with operational risk events. Investigations of the more significant events were regularly conducted. The outcomes of these investigations resulted in changes being made to internal processes of the Bank, which allowed to reduce the probability of operational risk events taking place.

With the aim of improving the processes of management of operational risks, the Bank in 2013 approved the “Regulations on the organisation of operational risk management in Bank Vozrozhdenie” and the “Regulations for the collection of information on operational risk events in Bank Vozrozhdenie”, which collectively define the fundamental elements of the system of operational risk management as well as the order, format and timeline for collection and provision of information about operational risk events to branches and the internal divisions of the Head Office. These documents further provide the foundations for the manner of conducting investigations of significant operational risk events, as well as the procedure of organisation, compilation and maintenance of data and information relating to operational risk events.

To enable the timely information flow to company leadership and facilitate timely decision making in emergency situations, the “Order of information flow in the event of detection of emergency risks” was enhanced and enacted.

Liquidity Risk

The Management Board of the Bank is responsible for the liquidity situation and overall governance of the Bank. The current questions of liquidity management are reviewed by the Assets and Liability Management Committee (ALMC), a working unit of the Management Board of the Bank controlled directly by the latter. Operational liquidity management is carried out by the Treasury.

The management of liquidity risk is managed by matching the maturities of assets and liabilities, as well as maintaining the required level of highly liquid assets (cash, balances on correspondent accounts with the Bank of Russia, interbank loans and deposits, government securities, REPO). In the process of managing liquidity, the latter is considered not only with view to current requirements, but primarily, with view to certain time intervals in the future.

The Bank maintains sufficient liquidity to meet all the requirements of the Bank of Russia, first of all norms of instant, current and long-term liquidity established via the Instruction of the Bank of Russia dated # 139-I December 03, 2012 “On mandatory norms of banks”. Control over the implementation of these liquidity requirements is carried out on a daily basis.

The Treasury controls the daily liquidity position and performs stress-testing of liquidity under various scenarios on a regular basis.

For the purpose of analysing the risk of reduced liquidity, the assessment of the Bank’s dependence on interbank market, operations of large clients, and concentration of credit risks is conducted. We strive to maintain a stable resource base, consisting mainly of deposits of legal entities, retail deposits, and balances of other banks. Special attention is paid to the quality and diversification of assets. Our portfolio of securities, formulated with consideration for the Lombard list of the Bank of Russia, provides the Bank with access to refinancing instruments.

At the end of 2013, key influence on the Bank’s activities in the area of liquidity risk management came through external factors related to the withdrawal of licenses from a number of credit institutions, as well as dissemination of negative information about the Bank, which entailed a certain outflow of customer funds attracted. In the situation that developed, the Bank demonstrated its stability and reliability, securing a comfortable level of liquidity, whilst fulfilling its obligations to creditors and depositors fully and in a timely manner, which is to a large degree due to the efficient system of liquidity risk management, the development and improvement of which has throughout the history of the Bank been a priority. Liquidity was regulated through an existing system of buffer liquidity (reserve) maintenance, transactions on the interbank money markets, including direct REPO operations with the Bank of Russia.

Thus, at the end of 2013, the share of liquid assets on the balance sheet of the Bank amounted to 19.5%.

With the background of the current macroeconomic situation (lack of liquidity in the economy, the unfolding crisis events in the financial markets) and strengthening of banking supervision and regulation in the field of risk management, work on perfecting the existing system of liquidity risk management gains particular significance. The key areas of development in this sphere include the formulation of new parameters for stress-testing and testing of the adequacy of the formed liquidity buffer to maintaining solvency during certain time intervals and the creation of a work-plan for non-standard working conditions.

Term structure of the balance,
RUB billion

Capital Adequacy (in accordance with Basel I)

Capital Adequacy

In order to increase core capital and grow the volume of active operations, at the beginning of 2013 the Bank attracted a subordinated deposit of 1bn roubles for the period ending July 10, 2020.

Total capital and Tier 1 capital ratios as at January 1, 2014 were 13.8% and 12.0% respectively, figures corresponding to the requirements of Basel I. The Bank also calculates its capital adequacy in accordance with the requirements of Basel III, which are to be implemented by the Bank of Russia as compulsory norms from January 1, 2014.

At the reporting date, total regulatory capital adequacy (norm N 1.0.) was of 11.26%, and Common equity Tier1 capital adequacy (the norm N 1.1.) was 9.29%, which significantly exceeds the minimum acceptable values.

Throughout 2014, the Bank plans to increase the volume of core capital, primarily though the capitalization of earnings, as well as through the possible attraction of subordinated deposits in foreign currency.

Currency Risk

The main method of assessing and controlling currency risk is the calculation of the open currency positions. To assess the risk associated with maintaining open positions in foreign currencies, we use the methodology of the Bank of Russia.

The Bank adheres to a conservative currency policy, seeking to limit currency risk by minimizing open positions. Special attention is paid to the quality of assets denominated in foreign currency, and, above all, the quality of the loan portfolio.

In order to effectively manage foreign currency risk, the Bank uses a procedure of daily revaluation of positions and a system of volume control and stop-limits for positions that carry currency risk. All foreign exchange transactions are performed within the limits set for the counterparties. The Bank sets a limit of maximal losses on dealer operations (stop-loss limit), after reaching which, all open positions must be closed out at a loss. These controls limit the losses over a defined period: intraday, over 5 working days, over a month.

For the purposes of internal risk management, a revaluation of assets and liabilities on the balance sheet of the Bank is periodically carried out using stress-testing, which estimates the potential losses of the Bank that could result from a sudden change in foreign exchange rates.

The regularity of these tests depends largely on the volatility of the foreign exchange markets and the level of currency risk.

The assessment of the impact of currency risk on the Bank’s capital is based on the methodology set forth in the Regulations of the Bank of Russia # 387-P dated September 28, 2012 “On the calculation of the market value of risk procedure of credit institutions”, and on the internal Regulations “On the procedure of calculating the size of market risks of Bank Vozrozhdenie”.

We estimate the Bank’s exposure to currency risk in 2013 as low, since the total value of open currency positions in selected foreign currencies, as well as selected precious metals, did not exceed 2% of core capital, which is significantly below the limits set by the Bank of Russia (20%).

In the conditions of increased exchange rate volatility, the Bank continues to explore and develop foreign exchange rate hedging strategies for our internal purposes, and within the course of the year will be able to offer these solutions to our clients.

Assets

Liabilities

Market Risk

The exposure of the Bank to market risk is related to open positions in currency, rates and debt instruments that are sensitive to unfavourable changes in market prices. The market risk management system includes the establishment of limits on the level of exposure to such risks and daily control over compliance with the same.

The Management Board and the Assets and Liabilities Management Committee (ALMC) are responsible for the management of risks on a regular basis. The Treasury calculates, controls and manages market risks on a daily basis. The limits of individual risk per issuer are established by the Credit and Investment Committee, based on the proposal of the Treasury and on approval of the Management Board. The activities of the Treasury on risk management are also controlled by the Internal Control and Audit Service.

There are several levels in the securities risk management system:

  • Definition of a requirements list for securities included in the portfolio, including issuer requirements, limits on portfolio size, liquidity and maturity of included securities
  • System of limits
  • Running management, calculation and control of risk
  • Management of risk on a regular basis
  • Control of risk on a regular basis

Regular stress-testing of market risk is conducted, which allows assessment of the sustainability of the portfolio of the Bank’s assets to extreme events that could lead to abnormally large losses. The Bank uses the methodology of the Bank of Russia #387-P dated September 28, 2012 “On the calculation of the market value of risk procedure of credit institutions” for the purpose of market risk calculations.

Interest Rate Risk

The Bank’s Financial Plan for the year defines the general parameters of interest rate risk management. The Management Board and ALMC are responsible directly for the management of interest rate risk. The key methods for reducing interest rate risk include balancing assets and liabilities according to interest re-pricing dates, maturities, as well as regular (no less frequent than quarterly) review of rates. The Management Board of the Bank makes decisions on the revisions of interest rates.

Regular stress-testing is conducted to assess interest rate risks, which allows the estimation of potential losses in the case of unfavourable changes in the conditions of the key risk factors.

Gap analysis is used to assess the potential interest rate risk on client operations relating to loans and deposits; for the trading portfolio of securities, the methodology of the Bank of Russia #387-P dated September 28, 2012 “On the calculation of the market value of risk procedure of credit institutions” is used.

Securities Risk

While the Bank is involved in operations with securities (including Russian issued shares and their ADRs and GDRs), this activity is not a priority. The applied system of restricting securities related risk includes limits on the security portfolio (including REPO operations) as well as individual sub-portfolios, as well as active limits on the trading portfolio. Given the limited size of exposure to securities risk, we believe that the methodology of the Bank of Russia #387-P dated September 28, 2012 “On the calculation of the market value of risk procedure of credit institutions” is a sufficient one for assessment of the Bank’s securities related risk.

Structure of the securities portfolio