Annual Report 2011
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Risk Management

Banking activity involves various specific risks. As the success of the Banks business depends on them being identified and mitigated promptly, effective risk management is of paramount importance.

Bank Vozrozhdenies risk management strategy focuses on achieving an optimal balance between profitability and the risks assumed. It has been devised taking into account recommendations of the Central Bank and the Basel Committee on Banking Supervision.

As part of the strategy, work is being conducted to evaluate potential losses, including:

  • A system of internal credit ratings for corporate clients
  • A database of historical information for calculating capital at risk
  • A methodological base for calculating capital at risk
  • An updated method for calculating risks associated with the corporate and retail loan portfolios

The Banks risk management system takes account of threats both when making management decisions and during day-to-day banking activity. The system is designed to detect, identify and classify potential risks quickly, as well as analyze, measure and assess risk exposure and apply specific methods for managing banking risks. Procedures for assessing and managing risk are integrated into day-to-day business processes.

Bank Vozrozhdenies main risk management objectives are to mitigate the overall threats to its operations using the resources available, reduce the number of unforeseeable events/losses, evaluate the effectiveness of the business given the risks assumed, and streamline the risk management system.

To evaluate risks, the Bank uses the following key indicators:

  • Capital at risk the maximum possible losses associated with the main types of risk
  • Economic capital the capital necessary to cover overall risk, including potential and materialized

In 2011, work to develop the risk management system was conducted in the following key areas:

  • Maintain the current level of risk across portfolios in line with the development strategy and resources available for covering risks
  • Develop measures to reduce the number of unpredictable events/losses
  • Evaluate the effectiveness of the business given the risks assumed
  • Meet regulatory requirements for minimizing credit risk

Last year, the Bank adhered to a conservative strategy when evaluating the economic situation and risk management. The main reason for this was the high level of economic uncertainty and instability on financial markets, which substantially hampered efforts to identify trends and make long-term forecasts.

Bank Vozrozhdenies business is exposed to several risks, the most significant ones being: credit, market, liquidity and operating risk.

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Credit risk

Credit risk

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One priority in the Banks business is effective management of credit risk. Bank Vozrozhdenie defines credit risk as the risk of losses due to non-fulfillment, delayed or incomplete fulfillment by a debtor of his financial obligations, as stipulated by a credit agreement. The Bank assumes credit risks in lending operations with all types of counterparties (corporate clients, financial organizations and individuals).

To manage credit risk, Bank Vozrozhdenie has a system of limits and authorizations to restrict risk and optimize decision-making. The system envisages establishing the maximum size of credit risk per borrower and the overall volume of loan products per body or employee. The authorizations, individual limits and lending conditions are subject to quarterly review and approval by the Management Board.

The Bank has established a Credit and Investment Committee (CIC), which is responsible for managing credit risk efficiently and consists of various bodies and subcommittees:

  • The CIC main body is responsible for general issues relating to managing credit risk and defining and implementing credit policy as part of the Banks approved development strategy
  • The CIC small membership deals with issues relating to implementing credit policy when offering products that carry credit risk to clients and when making investments
  • The subcommittee on corporate clients is responsible for managing credit risk and implementing credit policy in the corporate segment
  • The subcommittee on retail lending is responsible for managing credit risk and implementing credit policy in the retail segment
  • The subcommittee on bank cards is responsible for managing credit risk and implementing credit policy when offering bank cards that carry credit risk

Subcommittees, the CIC small membership and branches are authorized to make decisions about accepting credit risk restricting the maximum amount that a debtor can borrow. Subcommittee members include employees of business divisions (Credit, Retail and Bank Cards), depending on the decisions under consideration, as well as employees of the Credit Risk Control, Legal and Economic Security Departments.

Alongside the system of authorization and decisions, Bank Vozrozhdenies methods for managing credit risk include a centralized system for setting and regulating interest rates and tariffs, as well as a system for limiting credit risk. In addition to the overall limits, the Banks credit policy sets planned qualitative and quantitative targets that determine the structure of the corporate loan portfolio by segment, sector and region and the structure of the loan portfolio in terms of currency and duration.

In 2011, as part of the work to streamline the methodological base, a new version of the Regulation on Determining the Independent Credit Limits of Branches was approved. The authorities for branches were established based on set criteria related to compliance with credit risk and profitability of financial and economic activities.

Bank Vozrozhdenie has developed and implemented policies and procedures to avert and minimize losses arising from credit risk. They include:

  • Mandatory regular assessment of the financial standing of borrowers and the economic effectiveness of events and projects
  • Assessment of the adequacy and liquidity of collateral, objective evaluation of collateral and its insurance by appraisal and insurance companies accredited by the Bank
  • Ongoing monitoring of the borrowers fulfillment of his obligations to the Bank and the actual existence of the collateral
  • Assessment of credit quality and the level of risk associated with loans
  • Procedure for forming provisions against losses on loans and other operations
  • Procedure for transferring NPLs to the Department for Legal Enforcement of Payments and completing follow-up work with them
  • Procedure for determining and controlling the authority for issuing loans by branches and management bodies within the Bank according to loan size

Last year, to prevent and minimize credit risk, the Bank devised and approved a Procedure for Determining Groups of Related Clients and Borrowers. The main aims of the document are to evaluate and mitigate potential credit risks when offering products bearing such risks to individuals and legal entities, as well as streamline the processes of fulfilling Central Bank requirements regarding calculating normal limits and providing mandatory financial reports.

Bank Vozrozhdenies policy on providing credit to individuals and legal entities changed little last year. As regards legal entities and individual businesspeople, preference was given to SMEs. The criteria involved are:

  • The importance, profitability and creditworthiness of a client for the Bank
  • The clients business sector
  • The Banks regional policy
  • The amount, type, form and purpose of the loan requested

Throughout 2011, branches and internal divisions of Head Office constantly monitored the activities of borrowers, particularly their financial standing and repayments.

In the case of consumer lending, the Bank analyzes a borrowers financial standing, sources of income and credit history. Preference is given to the following types of clients:

  • Staff and managers of large corporate clients of the Bank
  • Cardholders and depositors of the Bank
  • People with warranted high incomes, a high social status and a decent reputation
  • Clients who regularly use Bank services to make payments
  • Clients with a good credit history at the Bank

In 2011, products bearing credit risk were provided to borrowers with adequate and sufficiently liquid collateral, taking into account the Banks system of discounts depending on type of real estate. Branches conducted regular reviews for adequacy and liquidity. The business activity of a client who has received a loan is constantly monitored by a branch of Bank Vozrozhdenie and, where necessary, by internal divisions of Head Office: the Economic Security Service and Legal Department.

Last year, as part of its risk management strategy, the Bank also considered proposals for automating the collection of primary information and for creating a system of credit ratings. After tests, the decision was made to introduce the Risk Calc software by Moodys Analytics to evaluate the creditworthiness of corporate borrowers.

In addition, as part of the process to streamline the process for allocating loans to individuals, the Bank introduced the Deductor software to analyze applications.

Elsewhere, Bank Vozrozhdenie introduced amendments to stress testing for credit risk. The model for calculating capital exposed to credit risk was changed, moving from a method of maximum losses to scenario analysis based on changes in macroeconomic indicators. The Bank analyzed changes in the default probability indicator for borrowers in relation the Russian GDP during the crisis. The results formed the basis for a model of calculating capital at risk in the retail and corporate loan portfolio. Stress testing is conducted according to three crisis development scenarios: minor, average and serious. For each of them, a drop in GDP and the amount of capital at risk are determined.

Bank Vozrozhdenie makes provisions against losses on loans, equivalent debt and other operations, in accordance with internal documents.

Control over creating provisions on products bearing credit risk is carried out at the branch level and by the relevant internal divisions of Head Office: the Credit, Retail, and Bank Card departments. Overall supervision is provided by the Department for Credit Risk Control, and subsequent control is the responsibility of the Internal Control and Audit Service.

Throughout last year, the Bank implemented measures to increase the size of its loan portfolio while ensuring an adequate balance between maintaining and enhancing its quality, profitability and credit risks. Thanks to a conservative approach to risk management and improvements in key sectors of the economy, the share of NPLs in the Banks portfolio fell. The ratio of loan-loss provisions to the credit portfolio also decreased due to a rise in the latter, despite an increase in provisions in absolute terms.

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Market risk

Assets and liabilities by currency

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The Bank is exposed to market risk through open positions in foreigncurrency, interest-rate and debt instruments, which are subject to the risk of general and specific changes on the market. It distinguishes the following types of market risk: currency risk (operations on the FOREX market), interest-rate risk (bonds) and equity risk (quoted shares). Each of these is treated separately by the Bank.

Limits are set for each issuer of financial instruments based on the volatility and liquidity of its securities. The volume and structure of the securities portfolio is considered not only as an income source, but also as a tool of current liquidity management. Limits on the interbank market are set according to the financial standing of a counterparty. Limits regarding the risks assumed are monitored on a daily basis.

Foreign-currency, interest-rate and equity risks are monitored by the Management Board, the Assets and Liabilities Management Committee, and the Internal Control and Audit Service, which has constant access to all information at all stages of the management process.

Decisions on managing market risk are made by the Assets and Liabilities Management Committee. It defines the volume and structure of the securities portfolio by assessing the quality of the securities based on capacity to generate income and maintenance of the necessary liquidity. The Banks market risk is subject to regular stress tests.

Based on the results of stress tests, where necessary, amendments are made to measures to reduce banking risks, including:

  • The creation of additional provisions
  • Changes in the structure of assets and liabilities
  • Changes in the business process to reduce risks

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Interest-rate risk

Interest-rate risk management of is aimed at minimizing the negative impact of fluctuations in interest rates on Bank margins. The main objective of interestrate risk management is to ensure that the Bank achieves an interest margin (the difference between interest obtained from interest-earning assets and interest costs on interest-bearing liabilities) that is sufficient to cover operating costs and ensure profitable operations.

The Bank does not consider interest-rate risk as a source of additional income and does not increase it in response to market expectations. Nonetheless, Bank Vozrozhdenie reacts quickly to any changes in the overall level of interest rates and adjusts current base rates on funds received and allocated to meet its targets for interest income.

The Bank has a transfer mechanism for making internal prices for resources. Prices for cash resources within the Bank (purchase and sale of cash between internal divisions) are regulated in accordance with the situation on the shortterm capital market. This encourages internal divisions to structure their assets and liabilities in a way that ensures that interest-rate risk is liquid and profitable.

Issues relating to interest-rate risk management are regulated by the quarterly Regulation On the Main Principles for Managing the Resources of Bank Vozrozhdenie in Rubles and Foreign Currency, as well as the Regulation On the Procedure for Calculating Interest-Rate Risk at Bank Vozrozhdenie, while the general parameters are defined in the financial plan for the year.

Mortgage loans and the possibility of their early repayment are the main sources of interest-rate risk. The Bank constantly monitors early repayments in its longterm loan portfolio. The volume of early repayments remains immaterial.

The main ways of reducing interest-rate risk are balancing assets and liabilities according to dates of interest-rate adjustment and maturity, as well as reviewing current rates at least once a quarter. Rates may be adjusted during a quarter depending on changes in the Central Bank refinancing rate and rates on financial markets.

Interest-rate risks on loan and deposit operations are assessed using gap analysis on the securities trading portfolio based on the methodology in the Central Bank Regulation 313-P of 14 November 2007 On the Procedure for Credit Organizations Calculating the Size of Market Risk. Interest-rate risk is analyzed by the Treasury at least once a month.

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Currency risk

The main method for assessing and controlling currency risk is calculating open currency positions. The Bank uses Central Bank methodology to estimate the risks from maintaining open positions in foreign currencies.

Bank Vozrozhdenie adheres to a conservative currency policy that strives to restrict currency risk by minimizing open positions. The quality of assets denominated in foreign currency is monitored carefully, particularly the quality of the loan portfolio. The Banks policy for managing open positions in foreign currency includes establishing external and internal limits on currency positions as well as controlling compliance with these limits on a daily basis.

Internal management of currency risks includes a procedure for daily revaluation of positions and a system of control over volumes and stop-limits for positions that carry currency risk. The Bank sets limits on cash and term transactions by types of transactions and currencies. All currency operations are within the limits that the Bank sets for counterparties. The Bank sets a stoploss limit for dealer transactions that restricts losses over a particular period: intraday, five days in a row, and a month.

The Bank periodically carries out a revaluation of assets and liabilities and uses a stress test, which includes calculating potential losses from drastic changes in currency exchange rates. The frequency of such tests depends on the speed at which market conditions are changing and the level of currency risk. Bank Vozrozhdenie regularly analyzes the potential consequences of changes on the market. When evaluating potential profits and losses, it carefully determines possible future foreign-exchange rates and evaluates various situations, including the worst-case scenario.

To limit losses from anticipated changes in currency exchange rates, the Bank uses currency baskets (combinations of currencies in specific proportions). A basket consists of currencies with negatively correlated fluctuations, making the aggregate value of a basket more stable. The most obvious example is a basket consisting of US dollars and euros on the basis of the dual-currency basket of the Central Bank.

Open positions in foreign currency on the spot market are regulated in today, tomorrow, and spot transactions within the limits for correspondent banks and the National Clearing Center.

The effect of currency risk on capital is evaluated using the methodology stipulated in Central Bank Regulation No. 313-P of 14 November 2007, On the Procedure of Calculating the Size of Market Risk for Credit Organizations and the internal Regulation On the Procedure for Bank Vozrozhdenie Calculating the Size of Market Risks.

Stock risk

The Bank conducts transactions involving stocks (local shares, ADRs and GDRs), although this is not a priority area. The volume of its transactions involving debt instruments is also small, so overall stock risk is not significant.

Management of stock risk is regulated by the Regulation On Managing Stock Risk at Bank Vozrozhdenie (OAO). Bank Vozrozhdenie manages its stock risk mainly by establishing and monitoring limits on investments in financial instruments.

The Banks system for limiting stock risk includes limits on the securities portfolio (including REPO operations) and separate sub-portfolios of it, as well as resulting limits on the trading portfolio. Given the limited investments and absence of transactions with derivatives, the Bank considers the methods set out in Central Bank Resolution No. 313-P of 14 November 2007, On the Procedure for Credit Organizations Calculating the Size of Market Risk, as sufficient for calculating trading portfolio risk.

Liquidity risk

Bank Vozrozhdenie has a centralized procedure for managing liquidity. A unified system operates at both internal divisions of the Head Office and branches. Most client operations (cash and settlement service, lending, deposits, etc) are carried out through the branch network. The Head Office carries out operations on financial markets, including international markets.

The liquidity-risk management system complies with both external requirements (standards set by the Central Bank) and with internal limits and operating procedures. These ensure that Bank Vozrozhdenie always has sufficient funds to meet the cash demands of its clients and counterparties in a full and timely fashion, as well as ensuring that the Banks business systems run smoothly.

General management and control over Bank liquidity is the responsibility of the Management Board, and is carried out on a permanent basis by the Committee for Asset and Liability Management, which is a working committee of, and subordinate to, the Management Board. Day-to-day liquidity management is carried out by the Treasury, which also regularly conducts liquidity stress tests using various scenarios.

The procedure for interactions between subdivisions and the control mechanism are regulated by the Policy for Managing and Evaluating the Banks Liquidity and the Regulation on the Main Principles for Managing the Resources of Bank Vozrozhdenie in Rubles and Foreign Currency, as well as the financial plan for the year. The documents are approved by the Management Board.

Liquidity risk is managed by matching time limits for returning assets placed and liabilities attracted, as well as maintaining the necessary volume of high-liquidity funds (cash, balances on correspondent accounts at the Central Bank, interbank lending, REPOs).

Bank Vozrozhdenie adheres to the following basic principles in liquidity management:

  • Liquidity management is a constant, day-to-day process
  • When making decisions, the Bank always gives priority to liquidity rather than profitability in case of a conflict
  • Every transaction that has implications for liquidity must be taken into account when liquidity risk is calculated

Bank Vozrozhdenie takes strict account of the maturity and size of its investments in various financial instruments. Monitoring of actual and estimated short-term liquidity is carried out daily on the basis of a payment calendar and using projections of short-term cash needs. Calculation of liquidity needs is based on:

  • Ongoing compilation and revision of the current payment calendar (the calendar is compiled to reflect needs for one day, one week, one month and three months)
  • Periodic (monthly) analysis of gaps regarding the maturity of demands and liabilities

Capital adequacy

Assets and liabilities by redemption term, RUB million

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Bank Vozrozhdenie maintains sufficient liquidity to comply with Central Bank requirements, primarily the standards for instant, current and long-term liquidity detailed in Directive 110-I of 16 January 2004, On Mandatory Bank Norms. Monitoring of compliance with Central Bank liquidity standards is carried out daily.

Risk of liquidity loss is analyzed by considering the Banks dependence on the interbank market, operations by large clients, and concentration of credit risks. To minimize the risk, Bank Vozrozhdenie strives to maintain a stable resource base consisting mainly of corporate and individual deposits and funds from other banks. Particular attention is paid to quality and diversification of assets. To ensure access to refinancing, the Bank is guided by the Central Banks Lombard List (a list of securities that can be used for REPO operations) when choosing instruments for its securities portfolio.

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Operating risk

The Bank manages operating risk by implementing measures to mitigate it without having to reduce operations. These include:

  • Carefully regulating procedures for conducting all main operations
  • Applying principles for separating and restricting functions and responsibilities of employees
  • Making collegiate decisions
  • Establishing limits for various operations
  • Applying internal control procedures to organizing business processes and complying with legislative requirements and internal normative acts
  • Ensuring information security

All divisions of Bank Vozrozhdenie monitor operating risk on a regular basis. Each month, based on an analysis of operating losses borne, a report on uncovered causes of operating risk is submitted. As part of the monitoring, instances of operating risk that do not lead to losses are identified, analyzed and documented.

To minimize operating risk, the Bank has implemented the following measures:

  • A banking security system has been devised
  • Cash counters have been equipped with alarms and meet all technical requirements
  • Work areas of cash and operational employees have alarm buttons, equipment to check watermarks, and books containing examples of signatures
  • Premises are equipped with security and fire systems and emergency alarms, including those that go through to the centralized security service or police call center
  • All employees have been briefed about evacuation plans in case of an emergency
  • Guards and 24-hour CCTV systems have been placed in Bank premises
  • All employees involved in the storage and movement of valuables have signed agreements accepting full material responsibility
  • Access to IT, electronic payment and data centers is restricted
  • A substitution system for IT employees has been established by distributing responsibilities
  • A backup of the information database is kept on a reserve server and maintained
  • In case of disruption to the power supply, an independent source of electricity has been organized
  • The software for the banking operating system is supported by a firm of developers
  • In case of emergencies, a plan has been developed to avoid disruption to the Banks financial and economic activities

To minimize operating risk, the Bank has implemented a budgeting system that even at the planning stage identifies the most costly and inefficient operations and determines priority areas of client policy.

Bank Vozrozhdenie pays particular attention to establishing and observing procedures for monitoring its business, preparing accurate financial reports and providing all of the necessary information about its activities in a timely manner.

As regards information security, particular attention is paid to meeting Russian legislation regarding the protection of banking information, commercial secrets and clients personal details. As part of this, the Bank has all of the necessary licenses, which cover all branches.

The Bank plays an active role in the work of the Association for Banking Information Security Standards (ABISS) and is also one of the first in the banking sector to have received a license from the Russian Federal Service for Technical and Export Control (FSTEK) to protect confidential information. The Banks specialists have devised special methodologies for auditing information security and certifying in-house IT infrastructure. The FSTEK license applies to all branches.

In addition, an information security audit is conducted on an ongoing basis. This reduces operating risks and ensures a level of information security that is in line with the requirements of state regulatory bodies.

To hedge operating losses, Bank Vozrozhdenie uses a broad range of insurance instruments. It has taken out a Bankers Blanket Bond, Directors and Officers Liability Insurance, and special cover for transporting valuables. Its property (including IT, furniture and other items) is covered by the largest insurance companies in Russia.

In 2011, the Banks external operating risk increased, and there were cases of vandalism and equipment being damaged, including third-party ATMs. In addition, there were situations linked to systems and technological factors, including disruptions to software systems and modules and telecommunications system.

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Country risk

The Banks main activities involve providing services to residents in Russia. Country risk arises primarily when carrying out transactions involving foreign currency: settlement, credit, guarantee and trading transactions in securities.

Management of country risk is regulated by the Regulation On Organizing the Management of Country Risk at Bank Vozrozhdenie. The Treasury is responsible for monitoring country risk.

To evaluate country risk, the Bank uses ratings from S&P and Moodys and classifications from Central Bank documents. The level of country risk that is acceptable for the Bank is 0 and 1, according to the classification of the export credit agencies that are signatories to the agreement with OECD member states, On the Main Principles of Providing and Using Export Credits With Official Support; and a rating of at least BBB according to S&Ps system or the equivalent Moodys rating; while countries in the first group of offshore territories in Central Bank Regulation No. 1317-U, dated 7 August 2003, are also acceptable.

All other risks are subject to individual examination and evaluation until a transaction is completed, while adequate provisioning must be made. As a rule, country risk is analyzed when reviewing applications for loans and bank guarantees and when implementing currency control.

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IR contacts

Tel.:  +7 (495) 620 9071
Fax: +7 (495) 620 1953
Web-site: http://www.vbank.ru
Email:  investor@voz.ru

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