<strong>VTB</strong> <strong>Annual</strong> Report <strong>2011</strong>4. Management <strong>report</strong>60The setting of consolidated limits related toborrowers and groups of borrowers that are clientsof several companies within <strong>VTB</strong> Group, as well asappointing global client managers to manage mutualclients, which will further enhance the efficiency ofthis process.Consideration and approval of Group-wide standardsfor lending procedures and credit risk management;Centralised regulation and control of strategic andother important matters related to lending proceduresand credit risk management, both within subsidiariesand in the Group as a whole.<strong>VTB</strong> subsidiary banks that operate in the retaillending sector are guided by the corporate plan andthe Basic Rules for Managing Retail Credit Riskswithin <strong>VTB</strong> Group, which were approved by theGroup’s Management Committee and which establishthe standards for managing retail risks at the level ofeach subsidiary bank and at Group level.portfolio, individual customers, transactions andcollaterals (including the ranking of borrowers);Prevention at the loan application review stage, andby taking prompt measures as soon as credit riskfactors have been identified during the course ofmonitoring.61Credit riskCredit risk is the risk of financial loss should acounterparty fail to meet its contractual obligations.<strong>VTB</strong> Group and <strong>VTB</strong> Bank are primarily exposed tocredit risk through their loan portfolios, securitiesportfolios, guarantees, commitments and derivativesportfolios.<strong>VTB</strong> Group-level credit risk managementThe key approaches and procedures are defined bythe Basic Principles and Provisions of <strong>VTB</strong> Group’sCredit Policy for <strong>2011</strong>-2012, approved by the Group’sManagement Committee.The management of credit risk within the Group isbased on a combination of the following approaches:Local credit risk management at Group company level;Consolidated credit risk management at the <strong>VTB</strong>Group level.Consolidated risk management covers the most essentialassets, items and off-balance sheet operations of Groupcompanies, that bear credit risk and require control overtheir concentration within <strong>VTB</strong> Group as a whole. Withinthe context of consolidated control and <strong>report</strong>ing, thescope and range of such operations is defined by thecoordinating bodies of the Group.The key elements of consolidated credit riskmanagement within the Group are as follows:Development of a unified lending policy for <strong>VTB</strong>Group, and ensuring that the lending policies ofsubsidiaries are harmonised and streamlined withthe Group’s lending policy;Development and application of unified principlesand methods within the Group for borrowerassessment (rating systems for large corporate clientsand credit institutions; scoring systems for retailclients), setting the fees for lending transactions,security, monitoring, provisioning, etc.;<strong>VTB</strong> Bank-level credit risk management<strong>VTB</strong> Bank manages credit risk by:Setting limits on the basis of the Bank’s existingsystem of consolidated limits in relation to decisionsregarding the concentration of credit risk forindividual borrowers; regular reviews of credit limitsby the <strong>VTB</strong> Risk Management Department, which areapproved by the Credit Committee and comply withthe regulations, set by the Bank of Russia;Coverage of credit risk by taking collateral andinsurance, charging adequate fees for the risk, andestablishing reserves to compensate for potentiallosses on loans;Assessment of the credit risk assumed by theBank for individual borrowers, as well as withinthe framework of regular monitoring of the creditThe Group continued to undertake measures toimprove the credit risk management system in <strong>2011</strong>:New lending procedures were approved;The methodology used to rank the Bank’s customerswas significantly revised on the basis of statistics oncustomer defaults and financial status;Basic approaches to stress-testing the Bank’s creditportfolio were developed;The pricing system was further refined in terms ofcalculating the value of credit risks;Improvements were made to the centralised systemfor identifying and monitoring credit risk factors inrespect of credit transactions and borrowers.An analysis of the credit quality of loans and advancesto customers and financial assets classified as loansWithin the framework of the local credit riskmanagement system, the Group’s companiesassume and manage credit risks independently(including insurance and hedging risks), withinthe scope of their authority and limits with regardto risk indicators, and in accordance with nationalregulations and the standards of <strong>VTB</strong> Group. TheGroup’s companies are responsible for the resultsof their lending activity, for the quality of their loanportfolios, and for the monitoring and control ofcredit risks associated with their portfolios.Consolidated credit risk management includes thefollowing functions:Control over the Group’s combined credit portfolioand the level of risk taken by the Group with regard tocounterparties and/or groups of related counterparties,as well as countries and industry sectors, through theestablishment of consolidated limits and other types oflimits (restrictions) within the Group;Assessment of the “economic capital” (Capital-at-Risk) necessary to cover the Group’s credit risks;Preparation of consolidated <strong>report</strong>s on the Group’scredit risks and their submission to the managementbodies for review.Credit quality by class of loans and advances to customers and financial assets classified as loans and advancesto customers pledged under repurchase agreements as at 31 December <strong>2011</strong>(in RUB, billion) Not impaired Impaired TotalPass Watch SubstandardDoubtful LossLoans to legal entities 2,617.8 541.4 362.7 30.7 213.4 3,766.0Financial assets classified as loans and advances tocustomers pledged under repurchase agreements188.3 – – – – 188.3Loans to individuals 746.2 4.2 14.1 18.0 41.6 824.1Total loans and advances to customers and financialassets classified as loans and advances to customerspledged under repurchase agreements 3,552.3 545.6 376.8 48.7 255.0 4,778.4Source: <strong>VTB</strong> Group’s IFRS consolidated financial statements.
<strong>VTB</strong> <strong>Annual</strong> Report <strong>2011</strong>4. Management <strong>report</strong>62<strong>VTB</strong> Group loan portfolio quality under IFRS as at 31 December <strong>2011</strong>Total gross loans and advances to customers (in RUB, billion) 4,590.1NPL ratio 1 (%) 5.4Allowance for loan impairment (in RUB, billion) 288.5Allowance for loan impairment / Total gross loans (%) 6.3Allowance for loan impairment / NPLs (%) 111.3and advances to customers pledged under repurchaseagreements (gross) is presented in the table above,on both an individual and collective basis.The credit quality of loans and advances to customersand financial assets classified as loans and advancesto customers pledged under repurchase agreementsis presented according to five categories:Pass – provision rate from 0% to 2%;Watch – provision rate from 2% to 5%;Substandard – provision rate from 5% to 20%;Doubtful – provision rate from 20% to 50%;Loss – provision rate from 50% to 100%.The provision rate represents the weighted ratio ofallowance for impairment to the gross loan portfolio(before provisions) under each pool of loans withsimilar credit risk, or an individually impaired loan.<strong>VTB</strong> Group-level liquidity risk management<strong>VTB</strong>’s liquidity management policy was applied in <strong>2011</strong>not only within <strong>VTB</strong> Bank, but across the Group as awhole, based on internal regulations approved by theGroup’s Management Committee. Liquidity managementwithin the Group is carried out at three basic levels:Each bank/company of the Group manages its ownliquidity on a separate basis in order to meet itsobligations and to comply with the requirements ofthe national regulator and the recommendations of<strong>VTB</strong> Bank;<strong>VTB</strong> manages Group liquidity on the basis ofcentralised control and management of the keymeasures taken by the Group;The Group’s medium-term and long-term financingprogramme is developed and implemented under thesupervision of <strong>VTB</strong> Bank.<strong>VTB</strong> Bank-level liquidity risk managementway, the Bank ensures that it meets its obligations,completes settlements on behalf of customers andfunds active operations.Current liquidity management is carried out by theTreasury Finance Department based on real-time(intraday) determination of the Bank’s currentpayment position and forecasted future paymentposition, taking into account the payments scheduleand other scenarios.The main task in forecasted liquidity management isto develop and implement a number of instrumentsfor managing assets and liabilities, aimed atsupporting the Bank’s instant funding capability, andto plan increases in its asset portfolio by optimisingthe ratio of liquid assets and profitability.The Bank achieves this by making long-term liquidityforecasts and by adhering to internal liquiditystandards (standards for liquid and highly-liquidassets and a standard for the Treasury securitiesportfolio), as formulated by the Assets and LiabilitiesManagement Committee. The liquidity accountingstandards of the Bank of Russia are also appliedwhen carrying out forecasted liquidity management.Liquidity risk and contractual maturity analysis as at 31 December <strong>2011</strong> (in RUB, billion)Time band Inflow Outflow Gap GapcumulativeRUB positionsFX SwapcumulativeDynamicgap (total)cumulativeOpening balance – – 285.9 285.9 – 285.9Up to 1 month 358.8 (879.9) (521.1) (235.2) 105.5 (129.7)From 1 to 3 months 228.3 (717.5) (489.2) (724.4) 98.5 (625.9)From 3 months to 1 year 1,009.4 (678.0) 331.4 (393.0) 101.4 (291.6)From 1 to 3 years 1,396.8 (486.9) 909.9 516.9 40.5 557.4More than 3 years 1,852.6 (891.0) 961.6 1,478.5 10.1 1,488.6Other currency positionsOpening balance – – 150.8 150.8 – 150.8Up to 1 month 609.8 (745.4) (135.6) 15.2 (108.1) (92.9)From 1 to 3 months 213.8 (227.7) (13.9) 1.3 (101.3) (100.0)From 3 months to 1 year 888.7 (951.2) (62.5) (61.2) (106.7) (167.9)From 1 to 3 years 1,278.0 (1,178.1) 99.9 38.7 (46.6) (7.9)63Liquidity riskLiquidity risk is the risk of a mismatch between thematurity dates of assets and liabilities, which mayresult in the inability to liquidate a position in atimely manner at a reasonable price to meet fundingobligations (including the non-utilisation of funds atan above-average market rate).The Bank separates current and forecasted liquidityrisk management.Management of current liquidity is one of theessential tasks handled by the Bank as part of itsoperational management of assets and liabilities,and entails short-term forecasting and control offund flows in terms of currencies and timings. In thisMore than 3 years 811.5 (639.1) 172.4 211.1 (8.8) 202.3TotalOpening balance – – 436,7 436.7 – 436.7Up to 1 month 968.6 (1,625.3) (656.7) (220.0) (2.6) (222.6)From 1 to 3 months 442.1 (945.2) (503.1) (723.1) (2.8) (725.9)From 3 months to 1 year 1,898.1 (1,629.2) 268.9 (454.2) (5.3) (459.5)From 1 to 3 years 2,674.8 (1,665.0) 1,009.8 555.6 (6.1) 549.5More than 3 years 2,664.1 (1,530.1) 1,134.0 1,689.6 1.3 1,690.91 NPL ratio is calculated to total gross loans including financial assets classified as loans and advances to customers pledged under repurchaseagreements.Source: <strong>VTB</strong> Group’s IFRS consolidated financial statements.