2015 Annual Report

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General trends

Sberbank (hereafter “the Group”) net profit for 2015 under IFRS financial statements decreased by 23.2% compared to FY2014 and came at RUB 222.9 bln. The Group net operating income before provision for loan impairment for the year increased by 9.9% and reached RUB 1,429.8 bln mainly driven by net fee and commission income from banking business and net gains arising from financial markets operations.

Operating expenses growth slowed down in 2015 compared to previous year and increased by 10.3% to RUB 623.4 bln, whereas inflation for the same period amounted to 12.9%. The Group’s net provision charge for debt instruments impairment for 2015 totalled RUB 475.2 bln compared to RUB 361.4 bln in 2014. The main drivers of the higher risk charge in 2015 were attributable to the FX effect of provisions for foreign currency loans, additional provisions for Ukrainian borrowers due to deterioration of the Ukrainian economy and general deterioration of the Group loan book due to recession in the Russian economy.

Factor analysis of changes in net interest income
Year Change, %
2014 2015
Net profit, RUB bln 290.3 222.9 –23.2
Operating income before provisions, RUB bln 1,300.7 1,429.8 9.9
Operating expenses, RUB bln –565.1 –623.4 10.3
Net provision charge for debt instruments impairment, RUB bln –361.4 –475.2 31.5
Provision charge for loan impairment, RUB bln –357.0 –473.1 32.5

Net interest income

The Group’s interest income increased in 2015 by 24% to RUB 2,279.6 bln. The main driver for interest income growth was increase of corporate loan book.

The Group’s interest income in 2014-2015
Year Change, %
2014 2015
Interest income, RUB bln 1,837.9 2,279.6 24.0
Factor analysis of changes in interest income, RUB bln
Changes in volume Changes in rates Change in interest income/expenses
Assets
Loans to corporate customers 250.70 89.50 340.20
Loans to individuals 93.00 (16.90) 76.10
Due from other banks 21.30 (14.70) 6.60
Debt securities 12.90 5.90 18.80
Change in interest income 377.90 63.80 441.70
Due to individuals (72.10) (140.50) (212.60)
Due to corporate customers (90.60) (63.50) (154.10)
Subordinated debt (10.30) (0.80) (11.10)
Other borrowed funds 2.80 (2.80)
Debt securities in issue (17.90) (20.90) (38.80)
Due to banks 20.40 (77.20) (56.80)
Change in interest expenses (167.70) (305.70) (473.40)
Change in net interest income/expense 210.20 (241.90) (31.70)
Factor analysis of changes in interest income
2014 2015
Average amount for the period Interest income Average yield, % Average amount for the period Interest income Average yield, %
Loans to corporate customers 11,089.90 1,031.10 9.3 13,786.30 1,371.30 9.9
Loans to individuals 4,214.70 637.60 15.1 4,829.30 713.70 14.8
Due from other banks 750.80 19.20 2.6 1,583.50 25.80 1.6
Debt securities 2,118.10 150.00 7.1 2,300.00 168.80 7.3
Total 18,173.50 1,837.90 10.1 22,499.10 2,279.60 10.1
–736.10 –1,042.90
Provision for loan impairment of debt financial assets 2,783.70 3,570.90
Other assets 20,221.10 25,027.10
Total assets
Quarterly loan yields, %
Quarterly loan yields
The Group’s interest expenses in 2014-2015
Year Change, %
2014 2015
Interest expenses (including expenses related to insurance), RUB bln –818.2 –1,291.6 57.9

Interest expenses increased in 2015 by 57.9% relative to 2014 and totalled RUB 1,291.6 bln. Retail deposits remain key source of funding for the Group and comprise 44.4% of total interest expenses. Retail and corporate deposits were the main drivers for interest expenses growth. Increase of retail and corporate deposits volume and cost contributed to 44.9% and 32.6% growth of interest expenses respectively in 2015. Substantial increase of interest expenses on retail deposits was driven by significant growth of cost of funding in 2015 where interest rates increase stood for 66.1% of total retail funding interest expenses growth.

Factor analysis of changes in interest expense
2014 2015
Average amount for the year Interest expenses Average cost, % Average amount for the year Interest expenses Average cost, %
Due to individuals 8,558.20 (360.70) –4.2 10,268.70 (573.30) –5.6
Due to corporate customers 4,489.50 (189.20) –4.2 6,639.60 (343.30) –5.2
Subordinated debt 614.50 (35.90) –5.8 791.50 (47.00) –5.9
Other borrowed funds 552.50 (12.80) –2.3 431.80 (12.80) –3.0
Debt securities in issue 993.40 (52.70) –5.3 1,330.00 (91.50) –6.9
Due to banks 2,390.90 (166.90) –7.0 2,098.70 (223.70) –10.7
Total 17,599.00 (818.20) –4.6 21,560.30 (1 291.60) –6.0
Other liabilities 660.6 1,291.1
Total liabilities 18,259.6 22,851.4

Cost of retail term deposits was growing for three consequent quarters starting from 1Q 2015. Rate decrease was demonstrated only in 4Q 2015 relative to 3Q 2015. As a result cost of retail term deposits increased from 4.5% in 4Q 2014 to 6.7% in 4Q 2015. As for cost of corporate deposit sharp increase in cost of corporate funding in 1Q 2015 was followed by strong decrease in 2Q 2015 with the downward trend persisting until the end of 2015. As a result cost of corporate deposits fell to 5.0% in 4Q 2015 from 6.2% in 4Q 2014 and 8.5% in 1Q 2015. Compound effect from these factors led to increase of interest expenses on corporate deposits by RUB 63.5 bln on the back of interest rate increase.

Quarterly cost of interest-bearing liabilities, %
Quarterly cost of interest-bearing liabilities

The Group’s net interest margin decreased by 1.2 p.p. in 2015 and reached 4.4%. Net interest margin decrease was driven by accelerated growth of cost of funding in the first half of 2015 that was not offset by corresponding increase of interest income. The biggest drop in net interest margin took place in 1Q 2015. In the consequent quarters net interest margin was recovering on the back of gradual decrease of cost of funding relative to the beginning of the year.

The following factors affected net interest margin in 2015
2014 net interest margin 5.6%
Return on corporate loans 0.4%
Return on retail loans –0.1%
Return on amounts due from other banks –0.1%
Return on securities 0.0%
Structure of interest earning assets –0.3%
Cost of amounts due to corporate customers –0.3%
Cost of amounts due to individuals –0.6%
Cost of amounts due to other banks –0.3%
Cost of issued securities and subordinated debt –0.1%
Structure of interest-bearing liabilities 0.1%
Ratio of interest-earning assets to interest-bearing liabilities 0.1%
2015 net interest margin 4.4%
Quarterly interest margin, %
Quarterly interest margin

Fee and commission income and expense

In 2015 net fee and commission income of the Group increased by 23.1% and reached RUB 319.0 bln. Main contributors to net fee and commission income growth were fees for cash and settlement transactions with individuals and legal entities that amounted to RUB 294.8 bln growing by 25.9% in a year. Fees from operations with foreign currencies and precious metals as well as documentary and agent commissions demonstrated marginal growth in 2015.

Fee and commission income and expense
Year
RUB bln 2014 2015 Change Change, %
Cash and settlements transactions with legal entities 165.2 205.0 39.8 24.1
Cash and settlements transactions with individuals 68.9 89.8 20.9 30.3
Operations with foreign currencies and precious metals 33.2 40.1 6.9 20.8
Documentary commissions 18.6 23.1 4.5 24.2
Agent commissions 4.3 8.4 4.1 95.3
Cash collection 6.5 7.1 0.6 9.2
Operations on financial markets on behalf of clients and investment banking operations 4.6 5.0 0.4 8.7
Other 5.1 5.6 0.5 9.8
Fee and commission expense on settlement transactions (43.3) (60.2) (16.9) 39.0
Other and commission expense (3.9) (4.9) (1.0) 25.6
Net fee and commission income 259.2 319.0 59.8 23.1
Quarterly provision charge for loan impairment
Quarterly provision charge for loan impairment

The Group’s net provision charge for loan impairment for 2015 totalled RUB 473.1 bln compared to RUB 357.0 bln in 2014. The main drivers of the higher risk charge in 2015 were attributable to the FX effect of provisions for foreign currency loans, additional provisions for Ukrainian borrowers due to deterioration of the Ukrainian economy and general deterioration of the Group loan book due to recession in the Russian economy.

This level of provision charge corresponds to 250 basis points of annualised cost of risk (230 bp in 2014). Cost of risk for corporate portfolio increased by 40 basis points versus previous year reaching 270 basis points. Cost of risk for retail portfolio increased by 30 basis points relative to previous year reaching 210 basis points in 2015. In 4Q 2015 deterioration of retail portfolio started to slow down with cost of risk for retail loans decreasing by 162 basis points relative to the previous quarter of 2015 to 50 basis points.

Quarterly credit risk cost
Quarterly credit risk cost

Other operating income

Other operating income that includes net gains / (losses) arising from trading securities, derivatives, foreign currencies as well as revenues from insurance and pension fund operations totalled RUB 122.8 bln in 2015 relative to RUB 21.8 bln in 2014. Increase of other operating income was driven by growth of revenues from trading securities, foreign currencies and foreign currency derivatives.

Operating expenses

In 2015 the growth of operating expenses was 10.3%. The most significant increase in absolute numbers was in staff costs (RUB 27.2 bln) which are the main component of the operating expenses. However the cost to income ratio remained almost flat and grew only by 0.2 pp to 43.6% as of 31 December, 2015.

Operating expenses
RUB bln Year
2014 2015 Change Change, %
Staff costs 318.8 346.0 27.2 8.5
Depreciation of premises and equipment 58.7 60.2 1.5 2.6
Repairs and maintenance of premises and equipment 36.3 39.9 3.6 9.9
Administrative expenses 35.3 38.3 3.0 8.5
Taxes other than on income 29.7 36.0 6.3 21.2
Operating lease expenses 22.9 28.1 5.2 22.7
Telecommunication expenses 18.8 27.1 8.3 44.1
Amortisation of intangible assets 15.0 20.6 5.6 37.3
Consulting and assurance services 11.2 10.5 (0.7) –6.2
Advertising and marketing services 9.6 7.3 (2.3) –24.0
Other 8.8 9.4 0.6 6.8
Total operating expenses 565.1 623.4 58.3 10.3