Profit and Loss Statement Analysis

GENERAL TRENDS

In 2014, the Sberbank Group’s net profit under IFRS decreased to RUB 290.3 bn, which is 19.8% less y-o-y. In 2014, the Group’s net operating profit before provisions increased by 18.8% up to RUB 1.3 trillion largely due to net interest income and net fee income from the core banking business.

In 2014, operating expenses decelerated y-o-y and increased by 12.1%, amounting to RUB 565.1 bn.

In 2014, the provision charge for loan impairment across the Group rose to RUB 361.4 bn (versus RUB 134.9 bn in 2013). The significant increase in the provision charge was mainly driven by a rise in the level of loan portfolio provisioning, which resulted from economic slowdown in Russia, the increase in provisions for loans to Ukrainian borrowers considering the deterioration of the economy in Ukraine, and the increase in Rouble provisions for foreign currency loans, regardless of signs for credit quality deterioration.

NET INTEREST INCOME

In 2014, the Group’s interest income increased 24.3% to RUB 1.84 trillion. Most of this growth came from the expansion of the Group’s loan portfolio, both corporate and retail.

FACTOR ANALYSIS OF CHANGES IN NET INTEREST INCOME
RUB bn Volume factor Interest rate factor Change in interest income / expenses
ASSETS
Loans to legal entities 230.6 (42.1) 188.5
Loans to individuals 157.3 (12.8) 144.5
Due from banks, correspondent accounts and overnight placements with banks (0.7) 8.4 7.7
Debt securities 14.0 4.6 18.6
Change in interest income 401.2 (41.9) 359.3
LIABILITIES
Due to individuals (49.8) 32.7 (17.1)
Due to corporate customers (36.5) (25.0) (61.5)
Subordinated debt (11.7) 0.9 (10.8)
Other borrowed funds (0.1) (4.0) (4.1)
Debt securities in issue (9.8) 2.3 (7.5)
Due to banks (56.0) (44.8) (100.8)
Change in interest expense (163.9) (37.9) (201.8)
CHANGE IN NET INTEREST INCOME 237.3 (79.8) 157.5
Factor Analysis of changes in interest income
2014 2013
RUB bn Average amount for the year Interest income Average yield, % Average amount for the year Interest income Average yield, %
Loans to corporate customers 11,089.9 1,031.1 9.3 8,707.1 842.6 9.7
Loans to individuals 4,214.7 637.6 15.1 3,195.5 493.1 15.4
Due from banks, correspondent accounts and overnight placements with banks 750.8 19.2 2.6 801.5 11.5 1.4
Debt securities 2,118.1 150.0 7.1 1,913.6 131.4 6.9
Working assets, totalinterest-earning assets. 18,173.5 1,837.9 10.1 14,617.7 1,478.6 10.1
Provision for loan impairment (734.9) (592.1)
Non-interest-earning assets 2,782.5 2,124.7
Total assets 20,221.1 16,150.3

Quarterly loan yields, %

In 2014, interest expenses increased 32.7% y-o-y to RUB 818.2 bn. The interest expenses on due to individuals remain the main component of the Group’s interest expenses (44.1%) being the Group’s core source of funding. In 2014, loans on the interbank market (mainly from the Bank of Russia) became the key driver for interest expense growth due to the increase in volume and cost. This factor explains nearly 50% of interest expense growth. Interest expenses on due to banks increased by 152.5%. In 2014, the increase in the Group’s interest expenses by 23.9% was driven by the increase in amounts of term deposits to corporate customers and the increase of its cost.

Factor Analysis of changes in interest expense
2014 2013
RUB bn Average amount for the year Interest and similar expense Average cost, % Average amount for the year Interest and similar expense Average cost, %
Due to individuals 8,558.2 360.7 4.2 7,474.0 343.6 4.6
Due to corporate customers 4,489.5 189.2 4.2 3,491.2 127.7 3.7
Subordinated debt 614.5 35.9 5.8 419.0 25.1 6.0
Other borrowed funds 552.5 12.8 2.3 544.8 8.7 1.6
Debt securities in issue 993.4 52.7 5.3 815.7 45.2 5.5
Due to banks 2,390.9 166.9 7.0 1,293.9 66.1 5.1
17,599.0 818.2 4.6 14,038.6 616.4 4.4
Non-interest bearing liabilities 660.6 370.2
Total liabillities 18,259.6 14,408.8

The cost of term deposits of individuals experienced a decrease in Q1-3, 2014. In Q4, 2014, cost of term deposits of individuals decreased to 4.5% (versus 5.2% in Q3, 2014) due to early termination of deposit accounts due to a change in clients investment strategy, as well as due to retail deposits in foreign currency increase. All the aforementioned events resulted in the decrease in interest expenses by more than RUB 32 bn due to decrease in cost of funds. However, there was the opposite trend in 2014 for corporate funding costs, as they were rising during the year, reaching its maximum in Q4, 2014.

Quarterly cost of interest-bearing liabilities, %

In 2014, the Group’s net interest margin decreased by 0.3 pp and amounted to 5.6%. The margin decreased mainly due to the funding cost growth for other banks’ and corporate funds in particular.

THE FOLLOWING FACTORS AFFECTED NET INTEREST MARGIN IN 2014
2013 net interest margin 5.9%
Return on loans to legal entities -0.2%
Return on loans to individuals -0.1%
Return on amounts due from banks 0.0%
Return on securities 0.0%
Structure of interest-earning assets 0.2%
Cost of amounts due to corporate customers -0.1%
Cost of amounts due to individuals 0.2%
Cost of amounts due to banks -0.2%
Cost of debt securities in issue and subordinated debt 0.0%
Structure of interest-bearing liabilities 0.0%
Ratio of interest-earning assets to interest-bearing liabilitiesInterest-earning assets are assets that generate interest income;interest-bearing liabilities are liabilities for which the Group incurs interest expenses. -0.1%
2014 net interest margin 5.6%

Quarterly interest margin, %

FEE AND COMMISSION INCOME AND EXPENSE

In 2014, the Group’s net fee and commission income increased by 27.6% to RUB 282.3 bn. Commission income received from cash and settlements transactions with individuals and legal entities were the key driver for net fee and commission income growth. During the year, it increased by 27.8% to RUB 234.1 bn. Also the significant growth — by 118.4% up to RUB 33.2 bn — showed commissions on operations with foreign currencies and precious metals. This growth was driven by high volatility of financial markets in 2014. Documentary commissions and commissions on operations on financial markets on behalf of clients and investment banking operations showed slight growth.

FEE AND COMMISSION INCOME AND EXPENSE
RUB bn 2014 2013 Change Change, %
Cash and settlements transactions with legal entities 165.2 128.1 37.1 29.0
Cash and settlements transactions with individuals 68.9 55.1 13.8 25.0
Operations with foreign currencies and precious metals 33.2 15.2 18.0 118.4
Agent commissions 27.4 27.1 0.3 1.1
Documentary commissions 18.6 14.8 3.8 25.7
Cash collection 6.5 5.6 0.9 16.1
Operations on financial markets on behalf of clients and investment banking operations 4.6 1.9 2.7 142.1
Other 5.1 5.9 (0.8) -13.6
Fee and commission expense (47.2) (32.4) (14.8) 45.7
Net fee and commission income 282.3 221.3 61.0 27.6

Provision charge for loan impairment

Quarterly Provision charge for loan impairment, RUB bn

In 2014, the provision charge for loan impairment icreased to RUB 357.0 bn (versus RUB 133.5 bn in 2013). The increase in credit risks was driven by overall loan portfolio quality impairment in a context of a reduced rate of economic growth in Russia, provisions for loans to Ukrainian borrowers due to the deterioration of the economy in Ukraine, and provisions for foreign currency loan impairment due to RUB devaluation, regardless of signs for credit quality deterioration.

The current level of provisions corresponds to the cost of risk of 233 b.p. per annum (versus 110 b.p. in 2013).

Quarterly credit risk cost, b.p.

OTHER OPERATING INCOME

In 2014, other operating losses comprising net income (losses) from securities, derivative financial instruments, and foreign currency transactions amounted to RUB 1.3 bn (versus RUB 11.3 bn in 2013). Incurred operating losses are due to other provisions (namely, provisions for loan related commitments, contingent commitments and other assets) and the decrease in income from financial market transactions.

OPERATING EXPENSES

In 2014, the Group’s operating expenses grew by 12.1%. The most substantial growth was attributed to staff costs (+11.7%) that comprises the main portion of operating expenses. At the same time, the Group’s income was increasing faster than the Group’s expenses, which resulted in a decrease in the ratio of operating expenses to operating income before provision charge for loan impairment by 2.7 pp to 43.4% based on the 2014 results.

OPERATING EXPENSES
RUB bn 2014 2013 Change Change, %
Staff costs 318.8 285.3 33.5 11.7
Depreciation of premises and equipment 58.7 54.5 4.2 7.7
Repairs and maintenance of premises and equipment 36.3 31.8 4.5 14.2
Administrative expenses 35.3 23.3 12.0 51.5
Taxes other than on income 29.7 24.6 5.1 20.7
Operating lease expenses 22.9 17.5 5.4 30.9
Telecommunication expenses 18.8 16.6 2.2 13.3
Amortisation of intangible assets 15.0 14.4 0.6 4.2
Consulting and assurance services 11.2 9.2 2.0 21.7
Advertising and marketing services 9.6 10.2 (0.6) -5.9
Other 8.8 16.8 (8.0) -47.6
Total operating expenses 565.1 504.2 60.9 12.1