RISK MANAGEMENT

The strategic objective of risk management is to ensure the Bank’s financial stability. The existing risk management framework comprises a set of measures and solutions designed to identify, monitor and assess all material risk types, to determine their acceptable level, and to mitigate/limit each type of risk.

Pursuant to current legislation and the Bank’s Charter, the Supervisory Board approves the Risk and Capital Management Policy, which covers the coordination of actions taken to enhance the risk management framework, to improve methodology consistently, as well as to standardize and automate risk management processes. The Supervisory Board has a dedicated Risk Management Committee that assists the Supervisory Board in overseeing the Bank’s risk management system, and the efficient identification, quantification, and control of risk.

For each type of banking risk, a management system has been established that ensures an adequate risk assessment and includes measures to mitigate and limit it. The Bank measures its assumed risks against its equity, supporting the capital adequacy ratio required by the Bank of Russia, which allows the Bank to meet its obligations (including contractor covenants), and to maintain its efficient utilization of capital.


Risk
Description Key Mitigating Actions
Credit Risk The risk of losses if a borrower or counterparty fails to meet its contractual obligations. The year 2019 saw rising concerns about risks from a long-term trend, when loans to individuals were growing faster than income. Since October 2019, the Bank of Russia has toughened requirements to the bank capital attributed to unsecured loans and is planning to extend them to other types of loans to individuals in 2020. Against this backdrop the Bank has introduced a policy of gradual tightening of requirements to individual borrowers since July 2019, which reduced the number of approved loan applications, but is expected to ensure good quality of retail portfolio amongst growing risks.

In the corporate segment, housing sales with placement of investors’ funds on escrow accounts until commissioning have started since July 2019. This scheme protects the rights of investors, but significantly changes construction funding schemes applied by development companies. Amendments to regulation will result in a civilized market in the long run, but will create additional risks in construction industry on a mid-term horizon. In this environment the Bank has launched and is developing project funding for developing companies that raise investor funds to escrow accounts with the Bank, while generally adhering to a strategy of assuming limited credit risk for the construction sector.

In SME lending, the Bank develops internal statistic risk assessment models based on analysis of characteristics of borrowers’ cash flow on settlement accounts as opposed to official financial reports. Products, based on such models and offered to the Bank’s customers in 2019, showed positive results both in terms of demand among customers and in terms of quality of loans issued.

Below are the most notable changes in the credit risk management system throughout 2019:
  • Development of internal statistic risk assessment models for individual and corporate borrowers based on the analysis of transactions on settlement accounts;
  • Increase of the share of automated decisions based on internal statistic models and data from external systems that assess customer reliability.
Liquidity Risk The risk of losses if the maturities of assets and liabilities do not match. The approach to managing liquidity is based on ensuring a level of liquidity provisions that will allow the Bank to sustain a certain period of sudden outflow of customer deposits and a reduction in the Bank’s ability to attract resources from the financial market caused by macroeconomic events or any occurrences directly related to the Bank.

The Bank has established a multi-level liquidity management system that provides a comprehensive approach to monitoring, forecasting and decision-making in this sphere, as well as uses a scenario approach to determine current and projected liquidity.

Throughout 2018, the Bank’s total cash and liquidity reserves were adequate enough not only to support its day-to-day operations and cover unplanned liability outflow, but also to support growth in active banking operations, where necessary.
Interest Rate Risk The risk of losses due to adverse fluctuations of market interest rates. Analysis of the Bank's exposure to interest rate risk is based on the forecast of unfavorable changes in the current value of the Bank's assets and liabilities. The key criterion for measuring this risk is the sensitivity of capital to the general interest rate level. Another criterion is the sensitivity of annual net interest income to changes in the general level of interest rates.

Given the available forecast, if interest rate movements appear unfavorable to the Bank's interest rate risk exposure, the decision is made to regulate the level of risk by undertaking any of the following actions:
  • Modification of transfer prices, basic interest rates and banking product rates aimed at changing the structure of the incoming customer operations flow to manage the asset/liability ratio;
  • Operations on the financial market to change the Bank’s interest rate risk position, including the adjustment of the debt securities portfolio duration, medium- and long-term fixed-rate interbank borrowing and lending, interest rate swaps, etc.

In 2019, RUB interest rates were decreasing. Such dynamics resulted from lowering interest rate of the Bank of Russia and market expectations about further easing of monetary policy. Reduced hedging quotations in 2019 negatively impacted the financial results of the Bank under existing contracts. The Bank expects IRS quotations to grow and is not intended to strengthen its positions or close hedging positions on current market quotations.

The Bank’s USD interest rate risk management efforts are determined by the relevant exposure to Russia and the basis interest rate level in the global markets. USD interest rates in the global market and with regard to Russia-related risk margin were going down throughout 2019. Decrease of the risk component allows for favorable projections with regard to the Bank’s financial results. The share of USD-denominated loans with floating interest rates in the loan portfolio structure is negligible, which will not lead to a significant deterioration of financial results in the view of reducing interest rates in global markets. EUR interest rates in global markets remained flat throughout 2019.
Stock Market Risk The risk of losses due to adverse changes in the market quotations of trading securities and derivatives. To manage the stock market risk, the Bank uses:
  • Open and total position limits for investments in the securities of various issuers, and on groups of securities;
  • Limits on maximum daily transaction valuations;
  • Option position limits;
  • Stop-Loss limits for groups of securities;
  • VaR limits;
  • Daily monitoring of the stock market risk and compliance with the fixed limits.

In building its securities portfolio, the Bank continues to maintain a conservative approach. The volume of limits on equity securities remains small relative to the total limits on securities. REPO transactions represent a significant proportion of securities transactions. As of January 1, 2020, the share of bonds amounts to 97% of the Bank’s securities portfolio (total volume of trading and investment securities). In forming its bond portfolio, the Bank gives preference to first-class credit quality securities. The share of bonds included in the Lombard List of the Bank of Russia amounts to 83%.
Currency Risk The risk of losses due to adverse exchange rate fluctuations. Currently, management of the currency risk is carried out on a daily basis. The Bank monitors compliance with open currency position limits, as regulated by the Bank of Russia, and calculates the value of currency risk in accordance with procedures established by the Bank of Russia.
To manage the currency risk, the Bank uses:
  • Open foreign exchange position limits;
  • Forward foreign exchange position limits;
  • Option position limits;
  • VaR limits;
  • Stop-Loss limit

The principal volume of limits is set on hard currencies. Limits on other currencies are negligible.
Commodity Risk The risk of losses due to adverse fluctuations of the commodity market instruments prices. The following measures are applied to limit this risk:
  • Open and aggregate position limits on investments in certain types of underlying assets and on investments in underlying assets with certain specifications;
  • Option position limits;
  • Stop-Loss limits on commodity market instruments;
  • VaR limits;
  • Daily commodity risk and limit compliance monitoring.

The majority of the limits were established for oil-related instruments.
Operational Risk The risk of losses due to inadequate or erroneous internal processes, actions of employees and systems or external events. The Bank’s approach to operational risk management is aimed at reducing the risk to an acceptable level by carrying out measures to prevent situations that could be a source of the risk, as well as by insuring against operational risks that are beyond its control.

In order to minimize the operational risk, the Bank establishes limits of loss from operational risk incidents for its major activities.

A number of measures has been developed to ensure continuity of the bank’s operations and/or recovery of the Bank's operations in case of critical and emergency situations. The Bank established backup sites, where backup workstations are set up and equipped to ensure continuity of the critical business processes.
Strategic Risk The risk of losses due to errors in strategic decision-making. In order to mitigate the strategic risk, the Bank has adopted a system of strategic planning and analysis which comprises drafting and approval of the development strategy, ongoing implementation monitoring and, if applicable, adjustment/revision of the strategy.

The Bank’s strategy is drafted in accordance with its strategic development priorities in general and by particular business area, defining specific efforts required to successfully attain the strategic goals. In accordance with the Bank’s Charter, the strategy and business priorities must be approved by the Supervisory Board. To ensure greater efficiency and transparency of strategic decisions, the Supervisory Board has established the Strategy Committee.

Continuous monitoring of the strategy implementation progress includes various feedback tools designed to adjust and revise the strategic goals and priorities, as well as macroeconomic and competitive analysis. To successfully implement the strategy, the Bank has introduced a key performance indicator (KPI) management system designed to support the link between the strategic and operative levels of planning, as well as a strategic projects system channelling major qualitative changes.

WORKING WITH FOREIGN TAXPAYING CUSTOMERS

In full compliance with the current legislation, Bank Saint Petersburg makes all reasonable efforts available under present circumstances among its customers to identify legal entities and individuals that are subject to foreign laws on foreign account taxation (for foreign taxpayer accounts), including Chapter 4 of the US Internal Revenue Code of March 18, 2010 (Foreign Account Tax Compliance Act, or FATCA).

Bank Saint Petersburg is registered with the US Internal Revenue Service as a Participating Foreign Financial Institution under the Global Intermediary Identification Number (GIIN) TQQXV5.99999.SL.643.

The Bank has internal regulations in place, including criteria for classifying customers as foreign taxpayers, and methods for obtaining relevant information from them. The Bank conducts its customer identification procedures within the time limits stipulated by the FATCA.

The Bank systematically briefs its employees on various issues related to identifying foreign taxpayers among its customers.

ANTI MONEY LAUNDERING PROCEDURES

The Bank’s policies and procedures for counteracting money laundering are based on the applicable legislation of the Russian Federation. The Bank has developed the necessary internal regulations and procedures to prevent money laundering and financing of terrorism. These procedures are aimed at, among other things, minimizing the risk of the Bank, being used as a money laundering tool, protecting the Bank from financial and reputational risks and increasing the confidence that its banking services are available only to bona fide customers.

The Bank’s procedures for preventing money laundering and financing of terrorism include the Know Your Customer (KYC) procedures, detection of suspicious transactions and information storage. All the information obtained in the process of counteracting money laundering is confidential, except for the cases when it is supplied to the Federal Service for Financial Monitoring, in accordance with the applicable legislation. The Bank’s employees receive training on counteracting money laundering at least once a year.

The Bank’s Financial Monitoring Department monitors customer transactions and the activities of all units with regard to compliance with the applicable Russian legislation on counteracting money laundering and financing terrorism.