Russian economy and financial sector: beyond crisis but under sanctions. What to expect? Analytical Credit Rating Agency (ACRA) - Natalia ...

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Russian economy and financial sector: beyond crisis but under sanctions. What to expect? Analytical Credit Rating Agency (ACRA) - Natalia ...
9 April 2018, Berlin

Russian economy and financial sector: beyond crisis but under
               sanctions. What to expect?
          Analytical Credit Rating Agency (ACRA)

                                                   Natalia Porokhova
                                                      Kirill Lukashuk

                                            http://www.acra-ratings.com/
Russian economy and financial sector: beyond crisis but under sanctions. What to expect? Analytical Credit Rating Agency (ACRA) - Natalia ...
ACRA at a Glance

     The Analytical Credit Rating Agency (Joint-Stock Company) was founded on November 20, 2015

     Authorized capital of more than RUB 3 billion (more than USD 50mln)

     27 shareholders – Russia’s largest companies and financial institutions – holding a 3.7% stake each

     ACRA’s activities fully comply with the requirements of Federal Law N 222-FZ

     August 25, 2016 ACRA became the first CRA included in the register of the Central Bank of Russia

     ACRA’s clients are:

            1. Financial institutions (banks, non-bank financial institutions, insurance companies)

            2. Corporate entities

            3. Regional and municipal authorities of the Russian Federation

     National credit ratings scale includes ratings from AAA (RU) to D (RU)

     Regular macroeconomic analysis and coverage of 20 sectors by designated analytical teams

1                                                                                               http://www.acra-ratings.com/
Russian economy and financial sector: beyond crisis but under sanctions. What to expect? Analytical Credit Rating Agency (ACRA) - Natalia ...
Share of banks with ACRA ratings is more than 80%

         Share of issuers with ACRA ratings on Russian bond market as at February 2, 2018*

                                   80%
                                                           72%

            49%

                                                                                          31%

    Financial institutions         Banks                  Regions                    Corporates

                                                                        *By volume of issues      Source: ACRA

2
                                                                           http://www.acra-ratings.com/
Russian economy and financial sector: beyond crisis but under sanctions. What to expect? Analytical Credit Rating Agency (ACRA) - Natalia ...
ACRA Shareholders

3                       http://www.acra-ratings.com/
Russian economy and financial sector: beyond crisis but under sanctions. What to expect? Analytical Credit Rating Agency (ACRA) - Natalia ...
Board of Directors (1)

                       ACRA’s Board of Directors and top management have
                        extensive global experience in the rating industry

          KARL JOHANSSON – CHAIRMAN OF THE BOARD OF DIRECTORS (USA)

          From 1995 to 2000, Mr. Johansson was a Managing Partner of Ernst & Young CIS, after that he was a Regional Partner for Eastern
          Europe countries, including CIS (Vienna, Austria). From 2006 to 2014, he worked as Managing partner of Ernst & Young CIS in
          Moscow. While in Russia, he was a coordinator of the Foreign Investment Advisory Council (FIAC) under the Government of the
          Russian Federation.

          THOMAS MISSONG – MEMBER OF THE BOARD OF DIRECTORS (AUSTRIA)

          Has more than 16 years of experience in the field of financial markets, 10 of which in rating advisory activities. Since 2010, he
          serves as the President of the European Association of Credit Rating Agencies EACRA (Paris, France). He is a Managing Director at
          RATINGPLATFORM, a company providing research on rating agencies.

4                                                                                                     http://www.acra-ratings.com/
Russian economy and financial sector: beyond crisis but under sanctions. What to expect? Analytical Credit Rating Agency (ACRA) - Natalia ...
Board of Directors (2)

         ANOUAR HASSOUNE – MEMBER OF THE BOARD OF DIRECTORS (LUXEMBURG)

         Has more than 15 years of experience in the field of financial markets, including 12 years in international rating agencies, namely,
         Moody's and Standard and Poor’s. From 2012 to 2015, he worked for The Bank of Tokyo-Mitsubishi UFJ as the head of research
         and strategy for the Middle East and Africa. At present, he is a co-founder, co-owner and a Managing Director of West Africa
         Rating Agency, as well as a Managing Partner of Euris Group.

         EKATERINA TROFIMOVA – MEMBER OF THE BOARD OF DIRECTORS,
         CHIEF EXECUTIVE OFFICER (RUSSIA)

         From 2000 to 2011, Ms. Trofimova worked as a financial analyst, Director and Head of Russia and CIS Financial Institutions Rating
         Group at Standard & Poor’s (Paris, France). In 2011 she joined Gazprombank and from 2012 to 2015 was a member of the Bank’s
         Management Board and supervised the Rating Advisory Center.

         VINCENT TRUGLIA – MEMBER OF THE BOARD OF DIRECTORS (USA)

         Has more than 40 years of experience in the field of financial markets, including 15 years at Moody’s, 11 of which as a Managing
         Director of the sovereign risk analytical team. As an independent consultant, he participated in strategy development for the non-
         profit rating agency INCRA.

5                                                                                                      http://www.acra-ratings.com/
Russian economy and financial sector: beyond crisis but under sanctions. What to expect? Analytical Credit Rating Agency (ACRA) - Natalia ...
ACRA Key Principles

    Good faith and high standards of rating   • Qualified personnel with professional experience in the rating industry

                   activities                 • Code of Ethics and Professional Conduct is strictly adhered

Independence and prevention of conflicts      • Transparent and diversified ownership structure

              of interest                     • Internal controls identifying and eliminating any conflicts of interest

Timely disclosure of information on ACRA’s    • Mandatory release of draft rating methodologies on ACRA’s website

                 activities                   • Annual publication of the transparency report of ACRA’s activities

                                              • Strict compliance monitoring at all stages of rating process
     Protection of confidential information
                                              • Modern IT systems, data protection and rating process support

                                              • All ACRA’s policies are publicly available on the official website
Transparency of rating methodologies and
           the rating process                 • Market participants involvement in rating methodologies discussion.

6                                                                                                               http://www.acra-ratings.com/
Russian economy and financial sector: beyond crisis but under sanctions. What to expect? Analytical Credit Rating Agency (ACRA) - Natalia ...
ACRA Methodology Key Advantages

• Ensuring comparability of all assessments

• Accounting for Russian sectoral and regional specifics, as well as corporate governance peculiarities

• Ensuring transparency of assessment algorithms while retaining the ability to account for expert opinions

• Multiple-stage validation of all methodologies and rating models

• Accounting for forecast data in the course of creditworthiness assessment

• Employment of risk accumulation technology, i.e. pinpointing ‘anchor’ rating assessment factors

• Synergy between research departments and accounting for relevant expertise of contiguous business units in the course
    of rating assessment (banking, regional and macroeconomics groups)

7                                                                                           http://www.acra-ratings.com/
Russian economy and financial sector: beyond crisis but under sanctions. What to expect? Analytical Credit Rating Agency (ACRA) - Natalia ...
International and National Scales

        International       National
            scale            scale      • The international rating scale compares creditworthiness of all
                                          borrowers around the world
              AAA            AAA(RU)       • The country ceiling caps an issuer’s rating at the sovereign level,
              AA+            AA+(RU)
              AA             AA(RU)          which results in strong rating compression in countries where the
              AA-            AA-(RU)         sovereign rating is not the highest, i.e. borrowers of different
                             A+(RU)
                A+
                             A(RU)           quality are assigned the same ratings
                A
                             A-(RU)
                A-           BBB+(RU)   • The national rating scale compares creditworthiness of individual
                BBB+         BBB(RU)
                BBB          BBB-(RU)
                                          borrowers in a country with that of the national government
Country ceiling
                BBB-         BB+(RU)
                BB+          BB(RU)        • Regulators around the globe are switching to national scale
                BB           BB-(RU)         ratings
                BB-          B+(RU)
                B+           B(RU)
                B            B-(RU)
                B-           CCC(RU)
                             CC(RU)
                CCC
                             C(RU)
                CC           SD(RU)
                C            D(RU)
                SD                                                 http://www.acra-
                D
                                                                          ratings.ru/

    8                                                                              http://www.acra-ratings.com/
ACRA Methodological Toolbox: Design and Contents
Methodologies                            Principles

General approaches:                      Each and every ACRA methodology…
   Key concepts of ACRA
   Bonds ratings                         ….is developed by the methodology team in close cooperation with the analytical
   General principles of forecasting      team
   ACRA Financial Stress Index           …undergoes multiple validation and testing procedures
Financial institutions:
   Banks and bank groups                Testing samples:
   Leasing companies
                                          FI: 110 banks / 30 defaults / 3 years
   Insurance companies
   Microfinance organizations            Corporates: 135 companies / 11 defaults / 4 years
   Asset management companies            Public finance: 85 regional governments / 5 years
Support assessment:
   Government-related entities          Validation and testing:
   Group support and relationships
   Foreign shareholder support           G-spread and duration test

Public finance:                           Coefficient correlations test
   Regional and municipal authorities
                                          Prediction power assessment
Non-financial institutions:                                 ACRA is fully equipped with methodologies for assigning ratings to a
   Corporate rated entities                                   wide range of rated entities and instruments within the financial,
Structured finance                                                                                   corporate or public sectors.

9                                                                                                  http://www.acra-ratings.com/
Commercial research
  ACRA’s team comprises well-known economists and industry analysts who communicate with financial and real economy sector
   companies as well as federal and regional authorities in practical contexts on a daily basis

  Proprietary models and databases covering economies of countries and regions, budgets, and corporate finance

  ACRA regularly publishes Russian economic outlook and industry forecasts as well as relevant topical research. These publications can
   be found at: https://www.acra-ratings.ru/research

  Macroeconomic and industry indicators forecast are in compliance with the proprietary methodology published on ACRA’s website

            Fundamental research                           Industry forecasts                            Economic models
     Assessing and forecasting effects on       Forecasting industry indicators for:           Excel models achieving client’s goals
     the economy, regions, industries and       • Issues                                       to automate and visualize various
     companies from changes in:                 • Credit quality                               economic scenarios
     • Public policy (including fiscal and      • Investment activities
       tax, monetary, foreign economic
       policy, etc.)                                                                    For more details regarding this service
     • Commodity and financial markets                                                  please contact Natalia Porokhova, Head of
     • Ruble FX rate, prices, and interest                                                   Research and Forecasting Group,
       rates                                                                                natalia.porokhova@acra-ratings.ru
                                                                                                     +7 495 139 04 90

10                                                                                                        http://www.acra-ratings.ru/
Rating Model Validation

What we offer:
    Calculation of quantitative efficiency metrics with respect to PD, LGD, EAD models of corporate borrowers, ALM models, IFRS9
     provisioning models as well as marketing and collection models
                                                                                           For more information, please contact
    Qualitative validation of models                                                       Olesya Shekholtseva, Project Manager
                                                                                             olesya.shekholtseva@acra-ratings.ru
    Preparation of validation reports for potential submission to the Bank of Russia
                                                                                                 +7 495 139 04 80 , ext. 127
    Readiness assessment when preparing IRB models for submission to the Bank of Russia

Benefits for the client:
    There would be no need for the client to create a separate division with highly-paid specialists who are underemployed most of the time

    The client could avoid a conflict of interests that arises when validation and development are performed by the same division

    Professional approach based on global best practices and experience in validating ACRA’s internal models and methodologies

    ACRA’s specialists of Analytical Services Development Group are highly competent in validation of various model types (IRB, ICAAP,
     IFRS9, ALM, etc.)

    A opportunity to identify any bottlenecks in client’s models and determine areas for development

11                                                                                                        http://www.acra-ratings.ru/
ACRA Trainings on Credit Analysis
Forthcoming trainings                                                                                   ACRA sees its mission in developing best practices
                                                                                                         that provide the Russian financial market with basis
 Fundamentals of credit analysis of regional and municipal authorities
                                                                                                         for sustainable performance
  (April 12-13)
 Rating modelling fundamentals                                                                         ACRA’s expertise is unique in terms of its
  (April 23-24)                                                                                          competences and profound understanding of credit
                                                                                                         risk
 NEW! Forecasting in credit analysis. Course 1: macroeconomic and industry forecasting
  fundamentals                                                                                          ACRA     trainings   are   aimed    at   enhancing
   (May 14-15)                                                                                           qualifications of financial market participants and
                                                                                                         building up efficiency of managerial and investment
 NEW! Change management hosted and presented by Ekaterina Trofimova, ACRA CEO
                                                                                                         decision making
  (May 21)
 Fundamentals of credit analysis of insurance companies
  (May 24-25)
 Corporate credit analysis fundamentals
  (May 29-30)
 NEW! Advanced analysis of structured finance deals
  (May 31 – June 1)
 The art of presentation in credit analysis hosted and presented by Ekaterina Trofimova, ACRA CEO
  (June 21-22)
 Fundamentals of structured finance deals analysis                                                      For more information and enrollment,
   (July 2-3)                                                                                                        please contact
 Fundamentals of asset management companies reliability analysis and credit analysis of non-
  state pension funds
                                                                                                                Artem Mayorov, Manager
   (September 6-7)                                                                                           artem.mayorov@acra-ratings.ru
 NEW! Forecasting in credit analysis. Course 2: practical aspects of economic modeling                         +7 495 139 04 80, ext. 147
  (September 10-11)
 Fundamentals of sovereign risk credit analysis
   (Autumn, 2018)
12                                                                                                                     http://www.acra-ratings.com/
ACRA’s International activities

                                             Cross-border projects:
                                           Supranational methodology
                                         Trade counterparties assessment

                                                      ACRA
                                                  International

     International investors outreach:                                      EAEU presence:
               Insider’s view                                              Central Banks dialog
               Media events                                                Analytical coverage

13                                                                          http://www.acra-ratings.com/
Cooperation with a Chinese rating agency Golden Credit

 On November 2 2017 ACRA signed the Memorandum of Understanding with a Chinese rating agency

 Golden Credit Rating International (http://www.dfratings.com/)

                                                             Golden Credit rating agency
                                                              is among top five credit rating agencies in China
                                                              possesses a complete range of licenses required to
                                                               provide rating services
                                                              key shareholder is the state managing company China
                                                               Orient Asset Management established by the
                                                               Ministry of Finance of the PRC
     Prospects for cooperation of ACRA and Golden Credit
     o conduct joint analytical work                              For more information, please contact
     o develop technological and informational cooperation         Maria Mukhina, Operational director
     o pursue mutual acknowledgement by Chinese and                   maria.mukhina@acra-ratings.ru
        Russian investors and regulators                               +7 495 139 04 80, доб. 107

14                                                                                    http://www.acra-ratings.ru/
New economic environment: prospects for
development and key risks of Russian economy
          Analytical Credit Rating Agency (ACRA)

                                                   http://www.acra-ratings.com/
Russia: Absence of Usual Growth Conditions Offset by Impetus For Change

Key trends in Russian economy that can contribute to future economic growth and development:
 1. Population ageing – constrains economic growth but gives additional stimuli for some industries.
 2. Switching to low inflation mode – higher predictability for business and cheaper loans, but government and
    businesses should seek new forms of flexibility.
 3. Government expenditures decline – government role squeeze and inequality growth, more space for private activities
 4. Turn to East – increase in share of Asian countries in exports, imports, FDI and external debt.
 5. Sanctions – financial sanctions are absorbed, but sanctions against oil & gas companies will limit crude oil production
    growth in 2020s.

Indicator                               2015            2016   2017   2018        2019         2020      2021       2022
Real GDP (%, y-o-y)                      -2.5           -0.2   1.5     1.6         1.5          1.5       1.5        1.7
Inflation (%, Dec/Dec)                   13.2            5.4   2.5     4.1         4.1          4         3.9        3.8
Urals oil price, USD/bbl                 51.3           42.3   53.5    58          59.2        60.3       61.6       62.8
USD/RUB (12-month average)               61.3           67.2   58.3    58.3        58.8        59.7       60.5       60.2
Unemployment, %                           5.6            5.5   5.2     5.2         5.3          5.4       5.4        5.4

     References: ACRA macroeconomic forecast, Federal State
16                                                                                             http://www.acra-ratings.com/
     Statistics Service, Federal Treasury, Bank of Russia
Limitations for Further Extensive Growth of Russian Economy
                         Labor force                            Imports of goods
78                                                    1,6
                                                            Imports of goods value index (2008=1)
77                                                    1,4
                                                            Investment-oriented imports
76
                                                      1,2
75
                                                      1,0
74
                                                      0,8
73
                                                      0,6
72
                                                      0,4
71
                                                      0,2
70

69                                                    0,0
     2019
     2000
     2001
     2002
     2003
     2004
     2005
     2006
     2007
     2008
     2009
     2010
     2011
     2012
     2013
     2014
     2015
     2016
     2017
     2018

     2020

17   Source: Federal State Statistics Service, ACRA                      http://www.acra-ratings.com/
Russia’s Potential Economic Growth is close to +1.5%
                                            Total factor
                                            productivity                 Working time
                                                                          (a one-off)
                                                              -0.4
                                                                             +0.3
                                               +0.9        Labor force

                      Fixed capital

                                                                                            +1.5    +1.8
                           +0.8

      Natural
     resources

       +0.2

18                 Source: ACRA estimates                                    http://www.acra-ratings.com/
Economy is Close to it’s Potential GDP Growth Rate
     12                                                                          11

                                            Capacity underutilization (%, lhs)
     10                                                                          10   Modest prospects of cyclical growth
                                            Unemployment rate (%, rhs)
                                                                                       A relatively high level of labor, resources and
     8                                                                           9      capacity utilization.

     6                                                                           8    Low possibility of extensive expansion

                                                                                       Adverse demography: the employed
     4                                                                           7      numbers to decline by 2-4% in 5 years
                                                                                        (accounting for offsetting effects of elderly
                                                                                        employment and expected migration).
     2                                                                           6
                                                                                       Expensive investment-oriented imports
     0                                                                           5      (due to RUB depreciation) is a source of
                                                                                        difficulties for capital-intensive industries.

     -2                                                                          4

19        Source: Federal State Statistics Service, ACRA                                              http://www.acra-ratings.com/
Monetary policy approaching “neutral state” …

18

16

14

12                                                Bank of Russia deposit
                                                  rate (1 day) %
10

8                                                                                                X
                                                                   Projected level for SR rates ‘in equilibrium’
6                                                                                               ?

4
                               Inflation target
2                                                           Inflation, % Y-o-Y

0
     2012   2013    2014      2015       2016     2017      2018         2019           2020           2021

20                 Source: ACRA, Bank of Russia                                                               http://www.acra-ratings.com/
… but the neutral rate itself could fall
                                      CBR’s public method of neutral interest rate estimation
     14                                                                                                                      14

     12                                                                                                                      12

                                                                        transition
     10                                                                                                                      10
            Russia’s country risk

     8                                                                                                                       8

     6                                                                                                                       6

            Global neutral rate
     4                                                                                                                       4
                                                                                     Target inflation (after monetary
     2
                                                                                     policy transition)                      2

     0                                                                                                                       0
           2001-2003      2004-2006          2007-2009    2010-2014              2015-2017          2018        2019-2022*

21            Source: ACRA, Bank of Russia                                                                 http://www.acra-ratings.ru/
Inflation fell to historic lows, but its volatility may still be high
 Inflation decomposition by factors and forecast for 2018-2021
                                         Tariffs and
16%                                      regulated prices
                                         Monetary inflation
14%                                      and expectations
                                         Food market
                                         conditions
12%                                      Ruble Exchange rate

10%                                      Inflation target

8%

6%
                                                                                                                        Inflation target is 4%. Monetary
                                                                                                                         policy has been tough since 2015.
4%
                                                                                                                         The CBR key rate is above inflation by
2%                                                                                                                       5%.
                                                                                                                        Inflation rate is still vulnerable to
0%                                                                                                                       potentials shocks. 2/3 of consumer
                                                                                                                         basket is subject to FX and food
-2%                                                                                                                      prices volatility, tax and tariff.
      2006

             2007

                    2008

                           2009

                                  2010

                                          2011

                                                 2012

                                                        2013

                                                               2014

                                                                      2015

                                                                             2016

                                                                                    2017

                                                                                           2018

                                                                                                  2019

                                                                                                         2020

                                                                                                                2021
22              Source: ACRA estimates                                                                                         http://www.acra-ratings.com/
Low Inflation Makes Costs rigid and State and Business Less Flexible during Crisis

                                                                         Unemployment during the 2008-2009 crisis was lower in countries
                                                                                            with higher inflation
                                                                                                                                                                                Fixing nominal wage under high
                                                             20%                                                                                                                 inflation means decrease in labor
                                                                                                                         Greece
                                                                                                                                                                                 costs. Russian business and state
                                                             18%                                                                      Average inflation for 2003-2007 > 7,5%     used to freeze nominal contracts in
The difference between the maximum unemployment levels for

                                                                                                                                     Average inflation for 2003-2007 < 7,5%
                                                             16%
                                                                                                                                                                                 adverse environment.
                                                                                                                                     Circle diameters are proportional to
                                                                                                   Spain                             inflation
                                                             14%
                                                                                                                                                                                The lower the inflation, the smaller
                                                                                                                                                                                 the benefit in real terms. The most
                                                             12%                                                                                                                 sensitive to low inflation mode will
                                                                                                                                     Latvia
                    2009-2013 and 2008

                                                                                                                                                                                 be those industries focused on the
                                                             10%

                                                                                                Portugal
                                                                                                                                                                                 domestic market where the overall
                                                             8%                                                                                                                  inflation context affects prices the
                                                                                                                                                                                 most. Those industries are
                                                             6%
                                                                                                 Italy                                Slovenia                                   infrastructure monopolies (by virtue
                                                             4%                                                                                                Ukraine           of regulation) and the services
                                                                                     United States
                                                                                                  Canada            Iran, Islamic Rep.       Russian Federation                  sector.
                                                             2%                                    South Africa                  Belarus
                                                                                  Australia
                                                                        Indonesia Norway      Chile
                                                             0%                                               Germany                                Qatar
                                                                                  Kazakhstan
                                                                                                                                  Azerbaijan
                                                             -2%
                                                                   0%          2%          4%            6%      8%         10%        12%         14%        16%        18%
                                                                                                                                                                                                 Source: ACRA estimates
                                                                                          Real GDP growth slowdown in 2009-2013 versus 2008
                                      23                                                                                                                                               http://www.acra-ratings.com/
Russian financial system has absorbed oil price volatility and sanctions

140                                                                                                                       6
                                                                                   URALS
                                                                                   ACRA FSI monthly average, rhs
120                                                                                                                       5

100
                                                                                                                          4
 80
                                                                                                                          3
 60
                                                                                                                          2
 40

 20                                                                                                                       1

                                                                                           sanctions
     0                                                                                                                    0
         2008     2009        2010        2011   2012    2013       2014       2015        2016        2017        2018

  ACRA FSI measures stress in the financial system of Russia (more about methodology - on the website)

24               Source: ACRA estimates                                                    http://www.acra-ratings.com/
Federal budget consolidation effectively started in 2017 …

     25%

     20%

                                                                                                                                             non oil & gas deficit
     15%

     10%

     5%

     0%
           2000   2001   2002    2003   2004   2005   2006   2007   2008   2009   2010   2011   2012   2013   2014    2015   2016     2017

                         Non oil & gas revenues, % of GDP      Oil & gas revenues, % of GDP       Federal budget expenses, % of GDP

25     Source: Ministry of finance, ACRA estimates                                                                   http://www.acra-ratings.com/
… but it still has way to go, bringing more space to private activities

     10%

     5%

                                                                                                                               Aim: -0.7% GDP in 2020

     0%
                                                                                                                                                -1.5%

                                                                                                                                                   -8.0%
     -5%

                    Non oil & gas federal budget balance, % of GDP

 -10%

                    Federal budget balance, % of GDP

 -15%
           2000

                    2001

                           2002

                                  2003

                                         2004

                                                 2005

                                                        2006

                                                               2007

                                                                      2008

                                                                             2009

                                                                                    2010

                                                                                           2011

                                                                                                  2012

                                                                                                         2013

                                                                                                                2014

                                                                                                                        2015

                                                                                                                                  2016

                                                                                                                                         2017
26     Source: Ministry of finance, ACRA estimates                                                                     http://www.acra-ratings.com/
Brief history of Russian fiscal rules

                      2004-2007                         2008                   2013-2014                      2017-…

                                               Non-oil&gas deficit ≤     Structural deficit ≤         Primary structural
Main feature    Structural deficit ≤ 0
                                               4.7% of GDP               1% of GDP                    deficit ≤ 0

                Non-oil&gas + oil&gas                                    Non-oil&gas + oil&gas
Structural                                                                                          Non-oil&gas + oil&gas
                (oil price ≤ arbitrary                                   (oil price ≤ average since
part of                                                   -                                         (≤ 40 $/barr., 2%-
                fixed level, starting with                               2008 or 3y moving
revenues                                                                                            indexed every year)
                20$/barr.)                                               average if it is lower)

                 Arbitrary chosen
                                               Lack of expenditure
                  parameter (base oil
                                               counter-cyclicality       Abnormal period used
                  price) is too easy to
                                               during recession may      too determine “normal”
What we           change procyclically
                                               lead to the fiscal rule   long-run features leads                  ?
have learned     Lack of coordination
                                               easing. It could become   to unsustainability of the
                  with exchange rate
                                               permanent instead of      rule
                  policy may lead to
                                               temporary
                  the Dutch disease

27                              Source: ACRA                                                    http://www.acra-ratings.com/
Fiscal rule’s hard connection to FX market interventions makes RUB more stable

                               Balancing interventions
                                                                                 85

            Oil market                         Internal FX market                80                                              2018   2017

                                                                                 75

                                                                                 70

                                                                        USDRUB
                                                                                 65

                                                 Other internal                  60
       Other global markets
                                                   markets

                                                                                 55
 Ministry of finance buys amount of currency, which equals OG tax
  revenues exceeding those at 40 $/barr. (assuming USDRUB is the
                                                                                 50
  same as at the current oil price).
                                                                                      20   30   40         50          60          70          80
 Elasticity of FX to oil price is not 0, because there are other external
                                                                                                 Urals, $/barr. yearly average
  factors of USDRUB having non-zero correlation with oil price.

28                                    Source: ACRA                                                           http://www.acra-ratings.com/
Sector-Specific Investment Stimuli

Stimuli                                                      2015-2016                   2017-2018                      2019-2021

Domestic market growth                                             —                         Healthcare, Education, Insurance, IT

Export market growth                                  Gas production and transportation, chemical industry, transport infrastructure

                                                    Agriculture, Food,             + Textiles, Electrical appliances and electronics,
Import substitution                                 Household chemicals,           Tradable services, Construction materials,
                                                    Tourism                        Pharmaceuticals

Cost cutting (price competition)                                              Retail, Logistics, Financial sector, IT

Maintenance CAPEX                                              Infrastructure (electric power, heat power, roads), repair services

                                                                                                                        Data storage,
Liabilities to the government                              Power generation, Oil refining, Railcar industry
                                                                                                                         oil refining
29   Source: ACRA macroeconomic forecast, Bank of Russia
                                                                                                              http://www.acra-ratings.com/
Russian Government to Transfer Pension, Health Insurance to Business

         European Union                            Mutual debts “from who-to-whom”
                                                                                                                             Russia
                                                            as at 1 July 2017

•    Debt relations in the form of loan, borrowing, deposit or debt security (stock, not flow).
•    Arrows go from lenders to borrowers (from who-to-whom). Arrow thickness is proportionate to the share
                                                                                                                               Source: ACRA
     of a sector’s debt in the aggregate debt of the economy.
    30                                                                                                       http://www.acra-ratings.com/
Top 7 Integrated O&G Players*: Debt is Not a CAPEX Limiting Factor
                         Russian Integrated O&G Leverage**                                    CAPEX is peaking, EBITDA margin depressed by elevated taxes

     2,5                                                                                      80%                                            72,7%            73,8%
                                                                                                                               70,2%
                                                                        2,08       2,08               67,1%
                                                                                              70%                 63,0%
                                                       1,94
     2,0
                                 1,76                                                         60%
                                                                                   1,60
                                                                                              50%
     1,5
                  1,27                                                  1,27
                                 1,13                                                         40%
                                                       1,09
                                                                                                      26,6%
     1,0          0,88                                                                        30%                 24,2%        24,4%
                                                                                                                                             22,0%            21,1%
                                                                                              20%
                                                                                                                  10,6%        12,1%
     0,5                                                                                              7,4%
                                                                                              10%                                             2,4%
                                                                                                                                                              -3,0%
                                                                                               0%
     0,0                                                                                              2013         2014         2015          2016         9M 2017 TTM
                  2013           2014                  2015             2016    9M 2017 TTM   -10%

                                   Total Debt/EBITDA          Net Debt/EBITDA                                  CAPEX/EBITDA    FCF/Sales    EBITDA/Sales

 •         O&G players’ leverage remains at a comfortable level and does not affect their CAPEX programs.
 •         The 2014 debt increase in RUB terms was purely a result of the RUB devaluation.
 •         Sanctions had not caused changes in investment schedules.

           * Gazprom, Rosneft, LUKOIL, Surgutneftegaz, Tatneft, Russneft, NOVATEK
           ** Leverage calculated without data for Surgutneftegaz
                                                                                                                                           Source: ACRA estimates
31                                                                                                                            http://www.acra-ratings.com/
Sanctions Threaten to Constraint Russian Oil Production in 2020s
                   New large field commissioning,                                 Russia’s oil production forecast, mln tons / year
             aggregated peak production, mln tons / year
      47                                                                         Bownfiels      2014-2015 Greenfields     New Greenfields
                                        44,6                                                                                                576,5
                                                                                                                                 570,6
                                                                          570                                           561,7

                                                                                        547,5       547,6    547,0
                            32,65                                                        4,7                                     51,4       61,7
                                                                          540   534,1               14,8                40,2
                                                                                                              24,3
                                                                                 9,4     21,8
                                                     24
                                                                                                    29,2
                                                                          510
                                                                                                              31,5      31,5     31,2
                                                                                                                                            29,8
                                                                13,25
                                                                                525      521
                                                                          480
                                                                                                    504
                                                                                                              491       490      488        485
                  0
                                                                          450
 2009-2010    2011-2013   2014-2015   2016-2017   2018-2019   2020-2021         2015     2016       2017     2018       2019     2020       2021

 After the 2011–2013 hiatus, commissioning of new greenfields ensures growth potential through 2019-2020.
 However, these greenfields are the last large conventional oil deposits in the Russian mainland. New incentives will be
  required after 2020 for boosting production in both mature and new high production cost fields.

 32                           Source: ACRA estimates                                                        http://www.acra-ratings.com/
New Greenfields: Rosneft and Gazpromneft to lead
New large fields commissioning timetable
                                                                                                     Bashneft        NOVATEK
Field                         Company            Launch year   Peak production, mt/y
                                                                                                       3%              3%
Northern Chaivo                Rosneft            2014-2015             1,6
Labaganskoye                   Rosneft            2014-2015             1,3            Surgutneftegaz
Srednebotuobinskoye            Rosneft            2014-2015             5,0                 4%
Imilor                          LUKOIL            2014-2015             5,0
Prirazlomnoye                Gazprom neft         2014-2015             5,0
Novoport                     Gazprom neft         2014-2015             6,5
Trebs and Titov           Bashneft & LUKOIL       2014-2015             4,8                 LUKOIL
Yarudeyskoye                  NOVATEK             2014-2015             3,5                  14%
Suzun                          Rosneft              2016                6,0
Naulskoye                      Rosneft              2016                2,5
Filanovskoye                    LUKOIL              2016                6,0
Pyakyakhinskoye                 LUKOIL              2016                3,5
South Talakan               Surgutneftegaz          2016                1,5
Spielman                    Surgutneftegaz          2016                3,0
East Messoyakha                                                                                                                Rosneft
                        Gazprom neft & Rosneft      2016                5,6
Yurubcheno-Tokhomskoye         Rosneft              2017                5,0               Gazprom                               58%
Russkoye                       Rosneft              2017                6,5                 neft
Kondinskoe                     Rosneft              2017                5,0                 18%
Taas-Yuriakh (phase 2)         Rosneft              2018                5,5
Kuyumba                 Gazprom neft & Rosneft      2018                6,5
Tagul                          Rosneft              2018                5,0
Lodochnoye                     Rosneft              2019                2,0
Erginskoe                      Rosneft              2019                5,0
Sevostyanova, Sanarsky,
                               Rosneft              2021               10,0
Lisovsky
Chonsky                      Gazprom neft           2021               3,25                                       Source: ACRA estimates
33                                                                                                        http://www.acra-ratings.com/
Russian Gas Exports turns to Asia
          Russia’s natural gas production forecast, bcm / year                                                            Russia’s natural gas exports forecast, bcm / year
600                                                                                                     75%   310

                                                                                                              290
500 476                                             471         470         464     457                                                                                               13,8
                                                                                            451         70%
                432         419         419                                                                   270                                                             6,9
400                                                                                                                                                                                    37
                                                                                                              250                                                              30
                                                                                                        65%                                                           22
                                                                                                                                                                22
300                                                                                               284         230                                       15
                                                                              245         261                       15
                                              221         220         235                                                                       15
                      210         217                                                                   60%
          194                                                                                                 210
200                                                                                                                                   15
                                                                                                                              15
                                                                                                              190                                                     233     236      239
                                                                                                                                                        225    230
                                                                                                        55%         218                        210
100
                                                                                                              170            192      196

  0                                                                                                     50%   150
       2013     2014        2015        2016        2017        2018        2019    2020        2021                2013     2014    2015     2016      2017   2018   2019    2020    2021
                            Gazprom
                                                                                                                    Pipeline exports (excl. China)      LNG Exports     Exports to China
                            Independent producers
                            Gazprom share in Russian gas production

 After a record increase in gas production in 2017, the growth rate will slow down and the share growth of independent
  producers will resume. Gas production in Russia will grow by 15% (+96 bcm) in 2021 compared to 2016.
 The growth in exports after 2017 will mainly be ensured by the launch of LNG projects (Yamal LNG and Third Phase
  Sakhalin-2), as well as the beginning of exports to China starting in 2020 via the Power of Siberia.
  34                                          Source: ACRA estimates                                                                                 http://www.acra-ratings.com/
Russian Power Industry: Incentives for Modernization

                       Power plants capacity in Russia
                                Renewables                  1/2 of thermal power plants should
                                    0%                      be phased out or modernized in
             Nuclear                                        the next decade
              12%

                                                          Russian power market is among the
                                                           world largest liberalized electricity
     Hydro                                                 market in the world.
      20%
                                                          Russian government is designing new
                                                           incentives to raise $17 bln of
                                  Thermal
                                                           investments in TPP modernization.
                                    68%
                                                          Renewable energy support may not be
                                                           extended in 2020s. Renewables lose
                                                           competition to cheap conventional
                                                           resources (gas).
                                                                                  Source: ACRA estimates
35                                                                       http://www.acra-ratings.com/
Share of Debt Vulnerable to Sanctions Dropped to 13%
                              Estimated maximum share of debt assets and liabilities
                              susceptible to stricter financial sanctions                            The estimated maximum share of debts
                        25%                                                                           due from residents and susceptible to
                                                                                                      forced repayment is 13.2%. In the
                                                     NFCs                        Government +         worst-case scenario, the liquidity
                                                                                 Bank of Russia       constraints may affect 22.4% of debt
                        20%
                                                                                                      assets.
 Share of liabilities

                        15%                               Sector                                     For non-financial companies (NFCs), the
                                                          average                                     role of the rest of the world is
                                                                                                      important in terms of both share (46%
                        10%                                                                           for assets and 35% for liabilities) and
                                                                                                      amount
                                       Financial companies
                        5%                                                                           But non-financials are more resilient to
                                                                                 01.01.2014
                                                                                                      stricter refinancing conditions, as about
                                                                                 01.07.2017
                                                                                                      40% of scheduled repayments fall on
                        0%
                                                                                                      the intragroup debt, which is easy to
                              0%       10%        20%         30%          40%    50%         60%     refinance.
                                                         Share of assets

36                              Source: ACRA estimates                                                          http://www.acra-ratings.com/
Internal loans are more than a half of foreign currency debt
                                                   Mutual debts “from who-to-whom”
         RUB                                                as at 1 July 2017
                                                                                                                        Other currencies

•    Debt relations in the form of loan, borrowing, deposit or debt security (stock, not flow).
•    Arrows go from lenders to borrowers (from who-to-whom). Arrow thickness is proportionate to the share
                                                                                                                               Source: ACRA
     of a sector’s debt in the aggregate debt of the economy.
    37                                                                                                       http://www.acra-ratings.com/
Credit quality has persistent sectoral component
                                                                                                                               Share of foreign
                  Bank credit overdue, all currencies                                                                          currency loans
                                                                                                                               is higher than        Credit risk                  Industries
                                                                                                                                                                                                         Historic NPL
                                                                                                                               the economy                                                                  levels
                                                                                                                               average

                       Overdue                                                                                                                     1. Credit risk is •     Utilities
        14%
                       level up                                 Construction materials
                                                                                                                                                     way below       •     Transport infrastructure        < 1,9%
                                                                                                                         Trade                         average       •     Telecommunications

        12%
                                                                                                  Agriculture                                                        •     Oil & Gas and Chemicals
                                                                                                                                                   2. Credit risk is
                                                                                                                                                                     •     Metals                        1,9% - 4,6%
                                                                                                                                                   below average
        10%                                                                                                                                                          •     Power generation
                                                                                         Food

                                                     Services                                                                                                          •   Defense sector
01.03.2018

             8%                                                                                                 Construction                                           •   Machinery
                                                                        Wood                                    (1.03.2018 - 19.6% !)                                  •   Mining
                                                                                                                                                                       •   Transportation
                                                                                                   Machinery                                      3. Credit risk level •   Retail trade
                                                 Mining (non-energy)                                                                                                                                     4,6% - 5,7%
             6%                                                                                                                                        is neutral      •   Agribusiness
                                                                                                Private loans                                                          •   Packaged food and
                                        Metals                                                                                                                             beverages
                                                                                Paper
                                                                                                                                                                       •   Healthcare
             4%                                                                                                                                                        •   IT & Media
                                                                                Transport and
                            Chemistry
                                                                Other          communication
                    Transport                                                                                                                                        •     Real estate
                                        Energy                                                                                                     4. Credit risk is
             2% machinery
             Processing of raw
                                                                                                                 Overdue                           above average
                                                                                                                                                                     •
                                                                                                                                                                     •
                                                                                                                                                                           Paper and forest products
                                                                                                                                                                           Oilfield services
                                                                                                                                                                                                         5,7% – 6,2%

                 materials                 Mining (energy)                                                       level down
             0%                                                                                                                                    5. Credit risk is •     Infrastructure construction
                  0%               2%                  4%               6%               8%          10%                  12%                        way above       •     Residential construction         >6,2%
                                                                                                                                                       average       •     Wholesale trade
                                                                         01.03.2017

        38                                       Source: ACRA, Bank of Russia                                                                                       http://www.acra-ratings.com/
Credit quality pricing in Russia

     %   16
                                                                                                                                                                                           Effective YTM of corporate bonds
         14

         12

         10

         8

         6

         4

         2
                                                                 higher than AA-(RU)                                            higher than BBB(RU)                                               higher than B-(RU)
         0
              01.2016

                                  03.2016

                                            04.2016

                                                      05.2016

                                                                06.2016

                                                                          07.2016

                                                                                    08.2016

                                                                                              09.2016

                                                                                                                  11.2016

                                                                                                                            12.2016

                                                                                                                                      01.2017

                                                                                                                                                02.2017

                                                                                                                                                          03.2017

                                                                                                                                                                    04.2017

                                                                                                                                                                              05.2017

                                                                                                                                                                                        06.2017

                                                                                                                                                                                                   07.2017

                                                                                                                                                                                                             08.2017

                                                                                                                                                                                                                       09.2017

                                                                                                                                                                                                                                 10.2017

                                                                                                                                                                                                                                           11.2017

                                                                                                                                                                                                                                                     12.2017

                                                                                                                                                                                                                                                               01.2018
                        02.2016

                                                                                                        10.2016

39                                                         Source: Cbonds                                                                                                                                      http://www.acra-ratings.ru/
Russia’s specific economic risks for 2018

                                Growth lower than      Inflation lower than
            Sanctions
                                    expected                   aimed

                                                         Sharp growth of
          Banking assets
         quality, low NIM               ?                 protectionist
                                                        measures in global
                                                              trade

                                                         Non-obvious links
                                                        between traditional
        OPEC+ agreement         US financial markets
                                                           markets and
                                                       cryptocurrencies etc.

40               Source: ACRA                                      http://www.acra-ratings.com/
Russian Financials At A Crossroads
Analytical Credit Rating Agency (ACRA)

                                                         Kirill Lukashuk
                    Senior Director, Head of financial institutions ratings

                                             http://www.acra-ratings.com/
Ratings & analytical coverage

       Banks & Leasing

       Insurers

     Funds & AMs

42                               http://www.acra-ratings.com/
ACRA’s ratings cover 80% of Russian banking system
          State-owned banks and FI                                          Private banks                                Foreign-owned banks
 Sberbank                   AAA(RU) / Stable            JSC “ALFA-BANK”                 AA(RU) / Stable       AO Toyota Bank              AAA(RU) / Stable
                                                        Bank GPB (JSC)                  AA(RU) / Positive
 Vnesheconombank            AAA(RU) / Stable            Bank RRDB (JSC)                 AA-(RU) / Stable      COMMERZBANK (EURASIJA)
                                                                                                                                          AAA(RU) / Stable
                                                                                                              AO
 JSC "AHML"                 AAA(RU) / Stable            BANK "ROSSIYA"                  A+(RU) / Stable       Natixis Bank JSC            AAA(RU) / Stable
                                                        PJSC Sovcombank                 A(RU) / Stable        Credit Agricole CIB AO      AAA(RU) / Stable
 Bank “National Clearing    AAA(RU) / Stable            Tinkoff Bank                    A(RU) / Stable
                                                                                                              ING BANK (EURASIA) JSC      AAA(RU) / Stable
 Centre” (JSC)
 JSC Russian Agricultural   AA(RU) / Stable             CREDIT BANK OF MOSCOW           A(RU) / Stable
                                                                                                              AO Citibank                 AAA(RU) / Stable
 Bank
 RNCB                       A(RU) / Stable              The joint-stock Bank            A-(RU) / Stable
                                                                                                              JSC Nordea Bank             AAA(RU) / Stable
                                                        «ROSEVROBANK»
 «Bank Otkritie Financial   BBB-(RU) / Under revision   «Bank «Saint-Petersburg» PJSC   A-(RU) / Stable
                                                                                                              AO UniCredit Bank           AAA(RU) / Stable
 Corporation» (PJSC)        (positive)
 BANK “ROSSIYSKY CAPITAL”   BBB+(RU) / Positive         Sviaz-Bank                      BBB+(RU) / Negative
                                                                                                              AO Raiffeisenbank           AAA(RU) / Stable
 (PJSC)
                                                        LOCKO-Bank                      BBB+(RU) / Stable     DeltaCredit Bank JSC        AAA(RU) / Stable
                                                        SDM-Bank PJSC                   BBB+(RU) / Stable
                                                                                                              PJSC ROSBANK                AAA(RU) / Stable
                                                        Expobank LLC                    BBB+(RU) / Stable     Limited Liability Company
                                                                                                                                          AAA(RU) / Stable
                                                                                                              Rusfinance Bank
                                                        MCIB Bank LLC                   BBB(RU) / Stable
                                                                                                              JSC «RN Bank»               AA(RU) / Stable
                                                        CB "Renaissance Credit" (LLC)   BBB-(RU) / Stable
                                                                                                              Credit Europe Bank Ltd.     BBB(RU) / Stable
                                                        «AVANGARD» JSB                  BB+(RU) / Stable

                                                        CB "Kuban Credit" Ltd           BB+(RU) / Stable

                                                        LLC CBED «THE BANK OF KAZAN»    BB-(RU) / Stable

43                                                                                                                      http://www.acra-ratings.com/
Ratings & analytical coverage

       Banks & Leasing

       Insurers

     Funds & AMs

44                               http://www.acra-ratings.com/
Fragile inputs….

Post-recessionary economic environment suggests growth opportunities to Russian banks…
 GDP growth, albeit sluggish (1.5%-2%), will likely continue in 2018

 Rebounding private sector consumption will support mortgage/auto/unsecured retail lending

 Trade, housing construction and infrastructure sectors will also require new lending

 Therefore, banking assets will gradually grow

…But significant problem loans, increasing regulatory pressures and “new normal” in interest rates
prevail
 Problem loan levels are at highest levels since 2010 and underprovisioned

 ACRA views inflation at around 4% beyond 2017 meaning lower interest rates, shrinking NIM and contained net
      income levels in the long term

 The CBR insists on higher provisioning charges, introduces additional regulation and continues “to heal” the banking
      system

 45                                                                                        http://www.acra-ratings.com/
…..major strategic threats

            NIM pressure                     Asset quality               Competition

     • We expect interest rates       • Slowly recovering         • Constantly increasing
       and inflation to be              operational environment     power of state-owned and
       historically low in next 18-     with limited growth         state-related banks
       36 months                        potential                 • Low demand from
     • On the back of rates trend     • Significant share of        corporates due to poor
       and ALM structure, we            problem loans (15%)         performing economy and
       assume NIM to drop up to       • Low provision coverage      strategic uncertainties
       100bp                            (55% system-wide)         • Tangible risks of troubled
     • Only small number of           • Material shift in CBR’s     banks privatization
       banks are well prepared          tolerance towards           delaying (5-7 years vs 3 as
       and started to actively          impairment recognition      publicly stated)
       invest in fee-related
       strategy/products 2-3
       years ago

46                                                                      http://www.acra-ratings.com/
Overall Banking Assets Will Increase
                                                                 Dynamics of Russian Bank Assets

                         100%                103%                                                                                                       99%
                                                                     96%                 93%                    93%                 95%
      81%

                                                    41%                                                               40%                 42%                 44%
                                38%                                        36%                 38%
            32%

                   14%                 15%                 13%                    13%                  14%                    14%                 15%                 16%

            2013                2014                2015                   2016                2017F                  2018F               2019F               2020F

                                             Bank assets / GDP             Corporate lending / GDP           Retail lending / GDP

 Despite some recovery in 2017, growth in the banking system assets will be subdued – at around 5%
 In 2018–2020, growth in assets will be 5-6% on average, which will support anticipated nominal GDP growth (around 5%
     on average)
 Nevertheless, the CBR’s tight monetary policy and low-inflationary environment will constrain growth in the banking
     assets

47                                                                                                                                  http://www.acra-ratings.com/
Competition dynamics

              State-owned banks, market share                      State-owned banks in TOP-10 banks
     75%                                                 95%

                                                  70%                                                    90%
     70%                                                 90%

     65%                                 63%             85%
                                                                82%             82%
                          61%                                                                   81%
            60%
     60%                                                 80%

     55%                                                 75%
            2014          2015           2016     2017          2014            2015            2016     2017

                   2014    2015   2016     2017                          2014     2015   2016     2017

 The government’s stake in the entire banking system has risen. The above figure has become the highest
     among all industries in the Russian market (the government owns 66% of the oil&gas sector).
 Competition between government-owned banks for funding sources and borrowers would intensify ever
     more, and the reliability factor would become secondary for the competition.
48                                                                                        http://www.acra-ratings.ru/
Competition: State plays the Game

 The government’s stake in the entire banking system has risen to 70% by early 2018 vs 63% as at early
     2017.
 In the TOP 5 there are no private banks, in the TOP 10 there are three (including one foreign sub)
 Risks of delaying privatization of failed players and coming of new ones
 Active development of the industry-linked state owned banks (Rosselkhozbank, Roskap, PSB, RNCB)
 Risks:
     •   Imperfect management of investments
     •   Regulatory forbearance
     •   “directed lending” practices, development of politically important sectors
     •   State-to-state market model (state corporates - state banks)
     •   Increased amount of contingent liabilities of the budget and the Bank of Russia in terms of
         banking sector support

49                                                                                    http://www.acra-ratings.ru/
Problem Loans Are at a Highest Level Since 2010

                                                                                                 12-15%
12

                      9,5                                                                                      9,8          Problem loans (ACRA)
10                                                                                                    9,5
                                 8,2                                                     8,3
 8                                                                                                                          NPL90+ (ACRA)
                                             6,6                              6,7        6,7           6,7     6,9
                      6,2                                6          6
                                 5,7
 6                                                                                                                          Impaired loans (CBR)
                                             4,8        4,5                   4,7
                                                                   4,2
          3,8                                                                                         5,7
 4                                                                                                                          1+ overdue loans (CBR)
         2,5
 2
         01.01.2009 01.01.2010 01.01.2011 01.01.2012 01.01.2013 01.01.2014 01.01.2015 01.01.2016 01.01.2017 01.07.2017

        Problem loan levels in Russian banking system are at around 12–15%
        The share of problem loans at the banks’ balance sheets has been growing since 2013
        Officially recognized problem loans are highest for the last ten years
        Major risks are related to restructured loans and borrowers with weak creditworthiness

50                                                                                                                       http://www.acra-ratings.ru/
Rated Banks Snapshot

50%
                                                        Problem loans vs NPL90+
    44%
45%
       39%
40%
35%        30%
    30%
30%
                  24%
25%                    22%
                           20%
20%             18%              17%
            15%                      15% 14%
15%                                           13%
                                                    11%                10%       9%
10%                        15%                                                        8%
                                             13%   11%                                     4%4%
 5%                                                                    10%                        3%   2%1%
                  8% 8%        8%    8%                                   7%
 0%    5%                                   6% 6%                            4%    4%
             2%                                   2%                 4% 4%     2%1%                 3% 1%
         1%                      2%     2%                                                        0%

 There are banks (still with a license from CBR), more than a quarter of the assets of which are problem/impaired
 The gap between NPLs and problem loans increases with growth problem loans share
 Information about the real impairment level in most cases, do not exist in the audited IFRS (Otkritie, B&N – EY)

51                                                                                          http://www.acra-ratings.ru/
Problem loans coverage is not sufficient

         Coverage of bad loans by provisions    Poor provision coverage of bad loans is
                                                 the key risk of creditworthiness decline

                                                A little over half of the bad loans are
                                                 provisioned (51.7%)

                                                An one-off recognition of all problem
                                                 loans full impairment will lead to a
                                                 decrease of capital adequacy levels to
                                                 regulatory thresholds

                                                More conservative position of the Bank of
                                                 Russia regarding bad loans provisioning
                                                 ratio will represent a challenge for credit
                                                 institutions in the next 12-18 months

                                                In specific cases it might have an adverse
                                                 effect on credit ratings and their outlook

52                                                               http://www.acra-ratings.com/
Asset quality indicators: state and private on par

                                         State-owned   Privately-owned       Subsidiaries of
                                            banks           banks            foreign banks

     Problem loans                          11,1%          15,6%                  9,5%
     NPL90+                                 5,5%             6%                   6,2%
     High-risk industries lending
                                           107,3%          102,8%                 30,5%
     (% of Tier-1 capital)
     Related-party lending
                                           30,7%            27%                   1,1%
     (% of Tier-1 capital)
     Non-core assets
                                           17,8%            10%                    0%
     (% of Tier-1 capital)
     Top-10 borrowers concentration
                                           148,3%          158,6%                174,4%
     (% of capital)

53                                                                       http://www.acra-ratings.ru/
Increasing Risk Appetite Will Contain Capital Adequacy Growth
15%                                                                                6,5

                                                                        13,9%
                                                            13,7%
14%
                                       13,3%
                                                                                   6
                                                                                          Problem loan levels will stabilize over the
13%
                   12,4%                                                           5,5     next 12-18 months, largely thanks to
                                       11,8%                   11,7%    11,6%
                                                                                           increasing new lending and improving
12%    11,5%                                                                       5
                        11,6%
                                       11,0%
                                                                                           credit quality of corporate borrowers in
11%                                                           11,4%                4,5     some sectors of economy
                   10,1%

                                                                                          In case of more aggressive approach to
10%                                                                                4
       9,20%
 9%                                                                                3,5     risk appetite, capital adequacy will
                                                                                           stagnate vs. its current level of 11.5%
 8%                                                                                3

 7%
      3,2   3,2   3,8    3,6          4,6   4,2         5,3    4,8     6,0   5,3
                                                                                   2,5    Under more “aggressive” scenario, loss
        2016        2017                2018                2019         2020
                                                                                           absorption buffer will advance to RUB 5.3
                   Absorbtion capacity, trln                                               trillion in nominal terms; however, it will
                   Absorbtion capacity - aggressive scenario, trln
                                                                                           still sustain impairment of assets by 5.9%
                   Tier-1 (IFRS), %
                   Tier-1 (IFRS) - aggressive scenario, %
                                                                                           maximum
                   Н1.2 (CBR), %

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NIM Is Recovering, But Will Not Exceed Pre-Crisis Levels

6%
              5,6%
     5,4%
                                                                       Significant market volatility in 2014 with further
6%              5,3%                                                    decline in loans interest rates outpacing deposits
       4,9%
                       5,0%                                             resulted in weak NIM in 2015
5%
                         4,6%
                                         4,5%     4,5%                 NIM growth in 2016 reflected both stabilization of
5%
                                                           4,2%         loan/deposit interest rates and rebalancing of
                                                                        interest-earning assets towards higher-income
4%                              3,8%                                    instruments
                                           3,6%
4%                                                  3,4%
                                  3,3%                         3,3%    NIM stabilization (4.5%) is expected in 2017.
3%
                                                                        Sberbank will continue to outstrip other banks

                                                                       In 2018, NIM will likely decline to levels posted in
3%
                                                                        2016
     2012     2013     2014     2015     2016     2017     2018 (F)
        NIM (IFRS)        NIM (IFRS, without Sberbank)

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New Normal: Low Inflation, Low Interest Rates, Subdued NIM
20%                     17%
                                                                                             Inflation is at historically lowest levels
15%                                 12,9%
                                                    10%
                                                                                              (around 2.5% in October 2017). ACRA
10%                                                           8%           7,25%              long-term scenario envisages around 4%,
                       11,4%        11%
           5,5%                                                                               which is the CBR’s target
5%
           6,5%
                                                 5,4%
                                                             3,2%
                                                                           4,6%              Key rate will be heading towards 7% over
0%
                                                                                              next 12-18 months
           2013        2014          2015        2016       2017 (F)      2018 (F)

                                Inflation    CBR Key Rate

 20%         18,3%

                                                            Retail Deposit Rate (
Net Income Will Not Return To The Past

2,0%                                                                             Following financial crisis, Russian banking
        1,7%                                                                      system net income declined to almost zero
                  1,5%                                                            in 2014-15
1,5%
           1,3%      1,2%
                                                                                 Recovery in 2016 was achieved largely
                                                1,0%       1,0%      1,0%
1,0%                                                                              thanks to Sberbank, while the rest of the
                                                                                  banking system was only marginally
                                       0,5%                   0,5%       0,5%     profitable
0,5%                                                0,4%
                            0,2%                                                 Net income will not return to the past. We
                                         0,0%                                     expect rather low profitability metrics with
0,0%
                                                                                  ROA of around 1% in total and around
         2012      2013        2014     2015     2016       2017     2018 (F)
                                                                                  0.5% excluding Sberbank
-0,5%                          -0,4%
                                                                                 Going forward, Russian banks will face
                                                                                  increasing competition for non-interest
-1,0%                                                                             income sources. Adjustments in operating
                         ROA       ROA without Sberbank                           expenses will also matter

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Regulatory Innovations

Proportional regulatory regime to be introduced since 2018. Small banks are heavily impacted.

The Central Bank will introduce two types of banking licenses:

 General license (minimum capital requirement is RUB1 bln). Such banks will have to comply with heightened capital
      requirements, Basel III implementation and full-fledged CBR’s supervision.

 Basic license (minimum capital requirement is RUB300 mln). Banks with a basic licenses are largely for SME lending in
      regions; banned from operations with foreign counterparties (excepting nostro accounts). The CBR exercises simplified
      supervision approach.

New legislation on financial rehabilitation of failed banks. The CBR introduces two important financial tools:

 “Bail-in” mechanism

 The CBR’s Banking Sector Consolidation Fund being responsible for support of troubled banks. The Fund will absorb
      toxic assets and recapitalize failed banks (transformation from lending mechanism to equity financing)

 ACRA views both instruments positively, albeit their effectiveness to be tested

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New mechanism of financial rehabilitation in Russia
 Two important financial tools of the CBR
                                                                          Appropriation     Buyout of receivables,
                                                         Decision of                           shares and other
                                                                           of funds (₽)      assets, issuing loans,
                                                         BD of CBR
                                                                             to FBSC          allocating deposits
                           Fund of Banking
      “Bail-in”
                         Sector Consolidation
     mechanism                  (FBSC)

      ACRA views both instruments
                                                               Shares, loan receivables, other assets
                                                Bank
         positively, albeit their                 of
       effectiveness to be tested                                                            BSCF Asset               Bank
                                                Russia
                                                (CBR)         Shares, loan
                                                                                            management
                  main risks                               receivables, other                 company
     higher                                                      assets                   (100% subsidiary
                                further
 motivation of
                            increasing of                                                      of CBR)
  depositors to
                           statutory share
allocate funds in
                              in Russian
  state-owned
                           banking sector
      banks                                              After financial rehabilitation shares and assets can be
                                                                      sold by CBR at public auction

 Decrease of competition at the sector                                                                                            New
                                                                                                                                 owner

59                                                                                                     Source: ACRA, Bank of Russia
Otkritie & B&N Bank cases

Key implications for investors:
 size does not matter
 junior creditors face material risks
 audited statements is only a well-drawn picture
 bank goes to default when regulator wants
 it is not enough to be overliquid to survive

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Russian leasing market could break the record of 2012-2013

                                      New business volume* dynamics
 900          65%                                                                                                     850          70%

                               770           783                                                                                   60%
 800          741                                                                                 742
                                                                680                                                                50%
 700
                                                                                                 36%                               40%
 600                                                                            545
                                                                                                                                   30%
 500
                                                                                                                     15%           20%
 400
                               4%            2%                                                                                    10%
 300
                                                                                                                                   0%
 200                                                            -13%
                                                                                                                                   -10%
                                                                               -20%
 100                                                                                                                               -20%

      0                                                                                                                            -30%
              2011             2012         2013                2014           2015              2016                2017

                                             New leasing volume, RUB bln   Growth rate, %

     Key market drivers
      vehicle lease (+30% of growth in new leasing volume)
      aircraft lease (+40%)
      rolling stock lease (+70%)                                                                               Source: ACRA estimates
                                                                                            *volume of new equipment granted by lessors

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Leasing market reform (2018-2021)

What’s new for leasing companies:
 new status for leasing companies – non-credit financial institutions
 leasing could not be combined with other financial activities
 capital requirements (min 20 and 50 mln RUB since 2021, depends
  on lessor’s assets volume)
 move to IFRS
 market regulation through self-regulatory organizations
 new industry standards

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Ratings & analytical coverage

       Banks & Leasing

       Insurers

     Funds & AMs

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Insurance market growth rates to outpace GDP in the medium term

                                                                                  Low penetration of insurance services in Russia will provide
               GDP, Insurance market growth rates                                   for high growth rates in the sector
25%

       22%
         21%                                                                      Annual market growth expected at 11% within the 2017-
20%
                                                                                    2021 horizon
                                                          15%
15%                                                                               Population aging and monetary policy to support rapid
                     11%                                             12%
                                                                                    growth of life insurance. In 2016, the segment posted a
10%
                           8%
                                   9%
                                                                8%                  phenomenal growth of 66% y-o-y, with the main contributor
                                         7%                                7%
                                                                                    being investment life insurance fostered in turn by banks’
5%                                              4%
                                                                                    active involvement in insurance policy sales and by lower
                                                     2%
                                                                                    deposit interest rates
0%
        2012           2013         2014         2015      2016      2017-2021

               Insurance market, total        Non Life     GDP nominal            Car sales growth to push motor premiums up

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OMTPL and investment insurance risks threaten growth stability

 At the same time, the insurance market is facing                                    Life Segment
     increasing systemic risks that may undermine expected      250

                                                                                                                          216
     growth rates
                                                                200

 In the short term, the most pronounced risks are
                                                                150
     connected with the OMTPL crisis. This segment has so far                                                      130

                                                                                                109
     failed to curb the loss-making trend for insurers.         100          85

 In the next two to three years, the sector might confront           53
                                                                50

     the risk of policyholders growing disappointed by
     investment life insurance. This may well run the booming    0
                                                                      2012   2013               2014               2015   2016
     life insurance segment into a real shock, should                               Life total premium, RUR bln.

     investment insurance policies bring about weak returns.

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Insurance sector’s RoE is among the highest in the Russian economy

                                                                              Insurers’ return on equity (RoE) before tax was 24% in 2016
                                             27,7
                                                                                and 28% in 2015, while the economy average was 13% and
                                                               24,1
                                                                                11%.

            19,8
                                                                              High sector returns are supported by growth in life insurance
                             15,9                                               and high effective interest rates that generate income from
                                                                      14,4
                                                                                investments. Net loss ratio in the non-life segment declined
     11,2                           10,9
                                                                                down to 53% from 61% in 2014–2015

                                                                              On average, major insurers are more profitable than minor
                                                    3,3
                                                                                companies. This boosts M&A transactions, as companies
                                                                                strive to increase business efficiency by way of consolidation
      2013                     2014            2015              2016

                   Insurance sector ROE, %   Banking sector ROE, %            ACRA expects insurers’ RoE to decline in the upcoming years,
                                                                                but RoE is expected to be high enough, for the sector to
                                                                                remain appealing to investors.
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Ratings & analytical coverage

       Banks & Leasing

       Insurers

     Funds & AMs

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Asset management companies

                                                   The Russian market of collective investments
6                                                                                                                                          5,71
                                                                                                5,09
5
                                                   4,28
4         3,49

3
                                                                                                                                                  2,41
                                                                                                        2,10
2                                                         1,49
                 1,05             0,92                                      0,98                                  0,89   0,92                            0,92   1,04
1                          0,76                                      0,77

0
                    2014                                      2015                                         2016                                    2017, 2q

                                    Total market   NSPF' pension savings       NSPF' pension reserves      Closed-end mutual investment funds

      General trend is the market growth. The growth basis – NSPF’ pension savings
      The market volume of closed-end mutual investments funds and NSPF’ pension reserves – stagnation at 1 trillion and
       800-900 billion rubles respectively
      ACRA sees some potential in open-ended mutual investment funds and individual asset management because of
       lower interest rates on banks deposits
      Other assets of Russian collective investments market have barely changed in 2 years

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Non-state pension funds (1)

 40
                                                                             Private pension provision participants overall decrease in
                                                                34,4
                                                                             the number
                                             29,8
 30                                                                           Distrust in Russian Federation’ pension system due to
                            26,3
                                                                                frequent legislative changes and weak financial literacy
        22,1
                                                                              Often the low quality of private pension provision assets
 20
                                                                              The use of “administrative leverage”, forcing a person to
                                                                                engage in private pension provision
 10                                                                          The insured persons has a trend to increase the number
               6,4                 5,8              5,3                5,6
                                                                              The transfer of insured persons funds from Pension Fund of
                                                                                Russia to NSPF because of the transition from accumulative
  0
          2014                2015              2016             2017, 2q       pension component to individual pension capital
          Insured persons number (pens. savings)
          Private pension provision participants number (pens. reserves)

Units: millions of people

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Non-state pension funds (2)

 The overall growth of the Russian pension system: from 3.9            6

     trillion rubles in 2014 to 5.4 trillion rubles in second quarter
                                                                        5
                                                                                                                                           1,2
     of 2017                                                                                                             1,1
                                                                                                         1,0
                                                                        4

 The NSPF’ pension savings growth rate is ahead of the same                         0,9

     of Pension fund of Russia (PFR): an average of 8.6% in NSPF        3
                                                                                                         1,7
                                                                                                                         2,1               2,4

     revised -0.6% in PFR                                                            1,1

                                                                        2

 In 2016 there was a significant moment for entire Russian
                                                                        1            1,9                 2,1             2,0               1,8
     pension industry – the total volume of NSPF’ pension savings
     ahead the PFR’ pensions savings                                    0
                                                                                    2014                 2015           2016             2017, 2q

 The NSPF’ pension reserves grow steadily by an average of                                   NSPF' pension reserves
                                                                                              NSPF' pension savings
     2.3% in the quarter                                                                      Pension Fund of Russia's pension savings

                                                                            Units: trillions of rubles

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Contact Details

Russian website: www.acra-ratings.ru
English website: www.acra-ratings.com

     АКРА Рейтинговое агентство

General Contacts:                       On Cooperation Issues:
info@acra-ratings.ru                    Managing Director for Business Development
+7 495 139 04 80                        Alexey Bogomolov
75, Sadovnicheskaya emb.,               alexey.bogomolov@acra-ratings.ru
Moscow, 115035, Russia                  +7 495 139 04 99

Regulatory Affairs & Compliance:        Credit Ratings Methodology:
Manager                                 Senior Director
Anastasia Morgunova                     Kirill Lukashuk
anastasia.morgunova@acra-ratings.ru     kirill.lukashuk@acra-ratings.ru
+7 495 139 04 80, ext. 151              +7 495 139 04 82

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