Team: Anastasiia Ivanova Olga Kotelnikova Alina Luchinina Tatiana Rubtsova

Transcription

1 Team: Anastasiia Ivanova Olga Kotelnikova Alina Luchinina Tatiana Rubtsova

2 Current strategy of Ryazan Capital Bank does not support the goal of maximizing return on equity Financial results Customers Revenue Market share Maximize ROE Customer Satisfaction 20% 15% 10% 5% 0% 80% 60% 40% 20% 0% Return on Equity, 2012, % 16% Top 3, average 7% Tier I, average 12% Tier II, average 1% RCB Although RCB revenue constantly grew at a higher pace comparing to market RCB s current strategy of growth led to far lower profitability in comparison with competitors customer survey has shown low customer satisfaction with bank operations RCB revenue growth Bank service revenue growth Internal Processes Operating Efficiency Financial Health Operating margin is steadily recovering RUR, mln while share of provisions for NPL has grown sharply during last 5 years RUR, mln IT excellence Employee Performance Learning & Growth Workforce Knowledge Absence of trainings and career perspectives has led to high staff turnover While because o high staff turnover, employees are unqulified Sources: Market Line database 2

3 Current strategy of Ryazan Capital Bank does not support the goal of maximizing return on equity Financial results Customers Revenue Market share Customer Satisfaction Maximize ROE Costs 20% 15% 10% 5% 0% 80% 60% 40% 20% 0% Return on Equity, 2012, % 16% Top 3, average 7% Tier I, average 12% Tier II, average 1% RCB Although RCB revenue constantly grew at a higher pace comparing to market RCB s current strategy of growth led to far lower profitability in comparison with competitors customer survey has shown low customer satisfaction with bank operations RCB revenue growth Bank service revenue growth Internal Processes Operating Efficiency Financial Health Operating margin is steadily recovering RUR, mln while share of provisions for NPL has grown sharply during last 5 years RUR, mln IT excellence Employee Performance Learning & Growth Workforce Knowledge Absence of trainings and career perspectives has led to high staff turnover While because o high staff turnover, employees are unqulified Sources: Market Line database 3

4 Optimal solution out of several strategic options is focus on low risk borrowers. Macroeconomic conditions suggest the target market is corporate business Strategic options of the bank depend on the range of products it offers and the borrowers it targets Narrow Market Broad Low Risk Quality of borrowers High Risk The selected All the trustworthy Risky special Everyone welcome Targeting high risk borrowers is unsustainable, as increase in risk leads to high provisions and NPL growth. Covering broad market is difficult, as resources are limited. RCB needs to focus on specific market segment and target borrowers with high creditworthiness. Taking into consideration macroeconomic conditions, one should target the corporate business the base for future growth USD/barrel Oil prices will fall Government (budget) income will decrease Both corporate and retail crediting will fall. We need to finance business: if it has financial resources, it will be able to grow and pay its employees more. Then population s consumption will rise. GDP growth will decrease Real income of population will decrease RUR/USD Ruble is going to weaken Costs of import will rise, increasing costs of production Political risks make situation worse. Long-term forecast is around 2%. Inflation will rise Nominal income will increase, but with slower pace Source: EIU Economic and Commodity Forecast, December 2013, RBC, Agency of Economics Forecasting 4

5 New strategy involves two steps: developing SME business and cross-selling retail products to SME employees RCB s strategy is sustainable profitable growth as a regional bank by supporting SMEs and their staff in increasing their wealth Growing together with clients! Product portfolio Corporate business Developing SME segment actively Providing individual solutions to large companies Retail business Optimizing existing loan portfolio Increasing non-interest income Going digital Growth Maintaining SME business growth Providing individual solutions to large companies Growing retail business actively by using strong links with employees of SMEs (cross-selling) Supporting growth by gradual geographical expansion to key regions Operational efficiency Financial health Investing in staff, modernization of offices & IT system Restoring financial stability Improving risk management Improving cost efficiency Increasing capital to finance active development of retail business 5

6 In corporate business, RCB should focus on small and medium enterprises, as they will develop and be the growth driver of the market SME segment is developing faster than large clients business, but RCB underperforms in both of them Loans to large companies SMEs have big potential for development in Russia bn RUR 1,0 +21% +58% Russia RCB , , Loans to SMEs Entrepreneurship climate in Russia is improving (Doing Business 2014 Rating) bn RUR 1,0 0, , % +130% Russia RCB RCB needs to focus on SME segment offering both short and long term loans on competitive conditions (see example in Appendix 1). By 2018 SME loans should account for 75% of corporate loan portfolio. These clients will form the customer base for further development in retail. RCB should continue to work with large corporate clients on individual basis. Sources: RCB, Central Bank of Russia, Sberbank, SME Bank, Opora Rossiyi 6

7 In retail portfolio, RCB should focus on perspective mortgage and credit cards market and decrease share of stagnating car loans Light commercial vehicles market stagnates that diminishes growth of car loans USD, bn -69% 50% 50% 11% Credit sales Cash sales Credit sale growth Mortgage market in Russia is unsaturated that gives high potential to develop Mortgage loans, % GDP 100% 50% 0% -50% -100% RCB possesses unbalanced retail loan portfolio, comparing to peers from Tier I and Tier II, and should rebalance it 120% 100% 80% 60% 40% 5% 93% 2% 3% 44% 63% 20% 50% 28% Credit card market has the highest potential among consumer loans RUR, bn CAGR = 32% Non-mortgage loans, % GDP 205,8 192,9 227,6 367,8 671,3 837, Credit cards Other personal loans 0% 2% 5% RCB Tier I Tier II Car loans Personal loans Mortgages Credit cards RCB s portfolio consists mostly on car loans that makes it vulnerable to shrinking of this market; RCB ignores other possibilities to attract borrowers, such as growing markets of mortgages and credit cards, that may lead to opportunities loss. Sources: Alfa Bank Annual Report 2012, EY Automotive Survey 2013, Central Bank Reports, Tinkoff Credit System Report

8 RCB needs to look for new financing opportunities to cover the gap between loans and deposits, as deposit market is projected to slow down Loans at RCB portfolio has been growing faster than deposits, resulting in unavailability to cover issued loans Moreover, RCB deposit portfolio growth is far beyond market growth RUR, mln 35 2, ,910 1,277 1,084 0, Y 2009Y 2010Y 2011Y 2012Y Loans Deposits Deposits/Loans 3,000 2,500 2,000 1,500 1,000 0,500 0,000 Because of current license revocation of several banks, extremely low trust level to commercial banks will decrease even more Do you trust Russian financial institutions? Market deposits RCB deposits % % RCB deposit rates are lower than average in the market, meaning attracting less customers Tier II RCB 4,0% 5,0% 6,0% 7,0% 8,0% 9,0% 10,0% To attract new deposits RCB should: Adjust deposit rates to those of the competitors; Sell bank warranties on the security of the deposits; Introduce new products: Investment deposits / income cards Sources: Central Bank Reports, National Agency of Financial Research survey 8 Tier I Interest rate, %

9 RCB should partner with asset management company to introduce open-end mutual funds in its product portfolio to create new income channel Growing trend in open-end mutual funds net assets value and net inflow shows their future potential NAV Net inflow Moreover, among various investment products mutual funds are crucial to retain customers in the long run Effective time period of investing, years Current accounts 0-1 Deposits 0,5-2 Mutual funds 2-10 Pension insurance > Nevertheless, few Tier 2 banks offer investment products like mutual funds to their clients % of Tier 2 banks offering investment services None 38% 63% Mutual funds 13% 25% Brokerage Depositary *Sum may not equal 100%, as some banks offer several services Acting as a mutual funds agent, RCB can create new profit sources and extend its customer base Introduction of open-end mutual funds in bank s product portfolio will lead to the following advantages: Additional income from asset management company s commission Customer attraction and retention Opportunities for cross-selling: - investment deposits - loans secured by mutual funds shares Sources: exceeding expectations analysis, investfunds.ru, Absolut bank annual report 9

10 Geographical expansion should continue to support growth, but market potential for both corporate and retail segments should be taken into account The key regions for RCB in terms of assets and income are Ryazan, Moscow and Vologda However, there are other regions with big potential for both corporate and retail segments 27% 10% 14% 4% 5% 4% 26% 2% 2% 6% Weighted assets 31% 8% 13% 4% 5% 4% 25% 3% 2% 6% Operating Income Moscow St. Petersburg Vologda Arkhangelsk Tver Rostov Ryazan Krasnodar Nizhny Novgorod Yaroslavl RCB should: Increase its operations in high potential regions Moscow and St. Petersburg Expand to high potential regions Kazan, Samara, Ufa, Perm Keep operations in low potential regions significant for RCB - Vologda Leave low potential regions that do not contribute much to the portfolio Tver and Yaroslavl Average income, th. RUR ,0 Murmansk Samara Arkhangelsk Belgorod Makhachkala Kaluga Petrozavodsk Vologda Ryazan Syktyvkar Yaroslavl Tver Perm Moscow Moscow region Kazan Nizhny Novgorod Krasnodar Ufa Rostov St. Peterburg 0,5 1,0 1,5 2,0 2,5 5,5 6,0 15,5 Investment attractiveness (Expert Rating) Sources: Expert Rating Agency, Rosstat 10

11 RCB should reconsider sales channels budgeting, as well as clients perception of dayto-day operations to implement offered strategy successfully Sales channels structure should be reconsidered in order to support new product portfolio that will lead to new budget structure split by channels Products Corporate products Product Sales share 66,09% Product Sales Channels Retail products 33,70% 10% 30% 35% 30% 5% 25% 25% 25% 10% Investment products 55% 20% 10% 15% 0,21% 5% 5% 80% 5% 10% 5% 10% Branches Cross-sell Call-center Internet DSA 120% 100% 80% 50% 40% 60% 40% 8% 25% 6% 7% 8% 20% 29% 18% 0% 8,43% Costs 2012 Costs 2018 DSA Internet Call-center Cross-sell Branches Value gap analysis of bank operations by clients has shown that the most critical area is staff performance, while other areas also require attention points* Internet banking Mobile banking Branches Staff performance User-friendliness Product portfolio available Product portfolio available Design Common Image Waiting time Staff attentiveness Staff expertise RCB Tier II *points for Tier II banks were assigned according to banki.ru survey, while points for RCB were assigned according to information given 11

12 RCB should invest and create opportunities for operations excellence Because sellers are main drivers of revenue, it is necessary to analyze ratios for sellers in different offices 60,00 50,00 40,00 30,00 20,00 10,00 0,00 Income/seller Opex/seller Total system of remuneration should be reconsidered and be balanced in all the branches Branches with high ratios should share their experience IT system as an important part of operations excellence should be analyzed Motivation system of sellers should be based both on base salary in accordance to the region and on KPI Base salary Salary in banks, rosstat 2012 Yaroslavl N.Novgorod Krasnodar Ryazan Rostov Tver Arkhangelsk Vologda St.Petersburg Moscow Employee compensation (KPI achieved- KPI planned) * $ KPI for sellers and tellers New accounts per seller New accounts per tellers Existing current accounts per operations employee Customers per employee Customer attrition rate RCB should introduce new IT system and plan its expense according to the benchmark with other banks Internet and mobile banking Database Poor system structure Absence of centralized database Investment into technology superiority Investment into advanced database OPEX IT IT share in OPEX Automated banking system Only manual process Investment into ABS

13 Provisions, bn RUR To meet capital requirements, RCB should establish proper risk management system From 2014 Central Bank introduces new capital requirements according to Basel III Capital Risk-weighted assets Common Equity Tier 1 Limit 5% Tier 1 Capital Limit 5,5%, from 2015Y 6% Total Capital Limit 10% At the same time high risk leads to an increase in NPL and high provisions +71% In RCB high borrowers risk is compensated by high interest rates in comparison with Tier 1 & 2 banks Car loans Personal loans Tier 1&2 Capital RCB Tier 1&2 RCB Interest rate, % High interest rates lead to higher credit risk capital requirements and raise risk-weighted assets, while high provisions reduce residual earnings being part of capital Risk-weighted assets RCB should install proper risk-management based on scoring system and reduce risk premium to lower interest rates in order to attract high-end customers and create sound loan portfolio 13

14 Proposed measures will be implemented during the next two years and will increase operating profit by 9 times by 2018 Most actions will be implemented within next 2 years Actions ABS introduction Centralized database Front- and back office programs Mobile banking applications (IOS, Android) Internet banking for retail and corporate clients Branch rebranding Current situation analysis New design creation and implementation Staff motivation program New motivation system Trainings & learning Risk management system Revision of current credit risk policy New policy based on new requirements Product portfolio optimization New regions expansion Q1Q2 Q3 Q4 Q1Q2 Q3 Q4Q1Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1Q2 Q3 Q4 Q1Q2 Q3 Q4 14

15 Implementation of proposed initiatives will improve key financial indicators significantly and generate 3,74 bn RUR NPV Financial ratios ROE and ROA will increase by 2018 At the same time net interest margin will rise by 26% ROE ROA 7,4% Net interest margin +26,2% 5,7% 5,3% 5,9% 6,2% 6,4% 7,2% 1,0% 0,7% 1,4% Operating profit is gradually increasing as well, while the efficiency ratio is declining Proposed initiatives will lead to positive NPV generation of 3,74 bn RUR till Operating profit, bn RUR Efficiency ratio 9X 2,9 81% 86% 87% 80% 72% 67% 55% 0, % 50% 0% Assumptions: 1. Initial investments will consist of automated banking system embedding and branch rebranding and will account for 0,078 bn RUR 2. WACC = 12% NPV 3,74 billion RUR till

16 The project was prepared by team Tatiana Rubtsova Alina Luchinina Anastasia Ivanova Olga Kotelnikova High Quality Education Graduate School of Management, SPbSU Master in Corporate Finance Exchange semester in EmLyon Business School (France) Exchange semester in Turku University of Applied Sciences (Finland) Graduate School of Management, SPbSU Master in Corporate Finance/ CEMS MIM Exchange semester in Erasmus University, Rotterdam School of Management (Netherlands) Graduate School of Management, SPbSU Master in Corporate Finance/ CEMS MIM Exchange semester in Louvain School of Management (Belgium) Graduate School of Management, SPbSU Master in Corporate Finance/ CEMS MIM Exchange semester in Copenhagen Business School (Denmark) Diverse Experience Handle Group financial analyst Internships: Colgate-Palmolive Finance Department Oodji Company Finance Department Rosno Allianz corporate clients Consulting project for Ahlers Internships: Deloitte consulting Strategy&Operations, Maersk Line - Finance Department UniCreditBank Consulting project for Sberbank of Russia EVLI Corporate Finance analyst (M&A) Internships: TransCreditBank crediting large corporate clients Consulting project for Indesit Internships: Colgate-Palmolive - Finance Department Consulting company Alt Consulting project for Indesit Multiple Victories Winner: Changellenge Cup SPb 2013 Scientific Conference State Order and Social Advertising 2nd place: Changellenge Cup Russia 2013 Winner: Changellenge Cup SPb 2013 KPMG International Case Competition 2013 Saint-Petersburg Stage 2nd place: Changellenge Cup Russia 2013 Winner: Changellenge Cup SPb 2013 KPMG International Case Competition 2013 Saint-Petersburg Stage 2nd place: Changellenge Cup Russia 2013 Winner: Changellenge Cup SPb 2013, Changellenge Cup Technical 2013, KPMG International Case Competition 2013 Saint-Petersburg Stage 2nd place: Changellenge Cup Russia

17 Appendix 1. Key products description Product Mortgage Loan amount 750,000 30,000,000 Loan duration 2 years 25 years Car loan 100,000 4,000,000 RUR 6 month 5 years Retail Consumer loan 50,000 1,000,000 RUR (10,000,000 RUR with collateral) From 3 month to five years SME Credit card Short-term Long-term 10, ,000 RUR Up to 6 month 150,000 15,000,000 RUR 300, ,000,000 RUR Up to 1 year 1 year 5 years Commission None None None None None None Application review time Initial payment Three days Two days One day One hour Two days One week 10% 15% n/a n/a n/a n/a Interest rate 10,5%- 14% 11,5%-15% 17%-22,5% 20%-30% From 12,75% From 13,25% 17

18 Appendix 2. Forecast of the loan portfolio structure Retail loans Car loans 0 3,71 12,13 18,93 19,24 18,75 17,22 14,41 10,18 4,59 % of Total 0% 85% 90% 93% 79% 65% 51% 38% 24% 10% Personal loans 1,71 0,67 1,3 1,49 2,50 3,80 5,41 7,32 9,44 11,47 % of Total 100% 15% 10% 7% 10% 13% 16% 19% 22% 25% Mortgage ,44 5,76 10,06 15,34 21,41 27,52 % of Total % 20% 30% 40% 50% 60% Credit cards ,24 0,48 0,78 1,15 1,57 2,29 % of Total % 2% 2% 3% 4% 5% Total retail 1,71 4,38 13,43 20,42 24,38 28,79 33,53 38,35 42,81 45,86 Growth 156% 207% 52% 19% 18% 16% 14% 12% 7% % Total loans 21% 30% 61% 70% 63% 57% 50% 43% 37% 30% Corporate loans SME loans 1,3 1,81 1,61 2,27 3,81 7,13 14,88 26,95 45,75 80,26 % of Total 0,20 0,18 0,19 0,26 0,32 0,40 0,48 0,56 0,65 0,75 Large loans 5,32 8,45 7,03 6,43 8,1 10,6 15,9 20,8 25,1 26,8 % of Total 0,80 0,82 0,81 0,74 0,68 0,60 0,52 0,44 0,35 0,25 Total corporate 6,63 10,26 8,64 8,7 11,92 17,76 30,81 47,74 70,82 107,01 Growth 55% -16% 1% 37% 49% 73% 55% 48% 51% % Total loans 79% 70% 39% 30% 31% 35% 46% 54% 61% 70% Total loans 8,34 14,64 22,07 29,12 38,44 50,74 66,98 88,41 116,70 152,87 Growth 76% 51% 32% 32% 32% 32% 32% 32% 31% 18

19 Appendix 3. Forecast of the funding sources Funding Deposits 15,83 18,7 23,94 24,72 33,4 45,1 60,7 81,6 109,5 146,8 % of Total 0,94 0,88 0,87 0,70 0,73 0,77 0,80 0,83 0,87 0,9 Other funding 1 2,56 3,44 10,67 12,2 13,8 15,3 16,4 16,9 16,3 % of Total 0,06 0,12 0,13 0,30 0,27 0,23 0,20 0,17 0,13 0,1 Total funding 16,83 21,26 27,38 35,39 45,7 58,9 76,0 98,0 126,4 163,1 Growth 26% 29% 29% 29% 29% 29% 29% 29% 29% 19

20 Appendix 4. Interest rates conditions for loans and deposits. Forecast for noninterest income from mutual funds Interest rates loans Car loans 13,25% Personal loans 19,75% Mortgage 12,25% Credit cards 25% SME loans 14% Large 8,3% Interest rate deposits Deposits 7,25% 7,50% 8% 8,25% 8,50% 9% Mutual funds of branches of people attracted per month per branch of people attracted per year of people left 302,4 403, ,2 806, Net amount of people Net asset value Premium (1,5%) Discount (2%) Basic Remuneration (3%) Total remuneration, bn RUB 0,0004 0,0006 0,0009 0,0014 0,0019 0,

21 Appendix 5. Forecast of interest and non-interest income and expenses Total retail 0,323 0,62 1,792 3,063 3,40 4,06 4,78 5,52 6,23 6,82 Car loans 0,00 0,53 1,62 2,84 2,55 2,49 2,28 1,91 1,35 0,61 % growth - 207% 75% -10% -3% -8% -16% -29% -55% Personal loans 0,32 0,10 0,17 0,22 0,49 0,75 1,07 1,45 1,86 2,26 % growth -70% 82% 29% 121% 52% 42% 35% 29% 21% Mortgage 0,30 0,71 1,23 1,88 2,62 3,37 % growth - 136% 75% 52% 40% 29% Credit cards 0,06 0,12 0,20 0,29 0,39 0,57 % growth - 97% 63% 47% 36% 46% Total corporate 0,764 0,99 1,054 1,103 1,20 1,88 3,40 5,49 8,47 13,44 SME loans 0,15 0,18 0,20 0,29 0,53 1,00 2,08 3,77 6,41 11,24 % growth 17% 12% 47% 85% 87% 109% 81% 70% 75% Large companies 0,61 0,82 0,86 0,82 0,67 0,88 1,31 1,72 2,07 2,21 % growth 34% 5% -5% -18% 31% 50% 31% 21% 7% Total loan income 1,09 1,62 2,85 4,17 4,61 5,94 8,18 11,01 14,70 20,26 Interest expense (bn RUR) 0,82 0,91 1,29 1,86 3,06 3,95 5,10 6,58 8,48 10,94 Deposits 0,77 0,80 1,13 1,30 2,42 3,38 4,86 6,73 9,31 12,84 % growth 4% 41% 15% 87% 40% 44% 39% 38% 38% Other funding 0,05 0,11 0,16 0,56 0,64 0,73 0,81 0,87 0,90 0,87 % growth 125% 48% 246% 14% 14% 11% 7% 3% -3% NII before provisioning 0,71 1,14 1,94 2,69 1,93 2,37 3,46 4,82 6,60 9,70 Provision expense 0,14 0,22 0,43 1,17 0,35 0,40 0,55 0,70 0,85 1,10 % growth 57% 95% 172% 43% 35% 32% 30% 28% 25% % operating income 0,52 0,31 0,33 0,68 0,19 0,18 0,20 0,19 0,19 0,17 NII 0,57 0,92 1,51 1,52 1,58 1,97 2,91 4,12 5,75 8,60 Net fee and commision income 0,095 0,117 0,019 0,034 0,036 0,039 0,043 0,046 0,051 0,057 Other non-interest income 0,087 0,181-0,053-0,118-0,086-0,039-0,033 0,004-0,011 0,043 Total non-interest income 0,182 0,3-0,034-0,08-0,05 0 0,01 0,05 0,04 0,1 21

22 Appendix 6. Forecast of operating income, operating expense and net income Operating income (bn RUR) 0,27 0,71 1,31 1,73 1,87 2,19 2,81 3,62 4,59 6,37 164% 83% 32% 8% 17% 28% 29% 27% 39% OPEX (bn RUR) 0,544 0,848 1,219 1,408 1,61 1,90 2,24 2,61 3,10 3,49 56% 44% 16% 15% 18% 18% 17% 19% 13% Employee remuneration 0,312 0,525 0,696 0,741 0,82 0,96 1,14 1,36 1,62 1,80 % growth 68% 33% 6% 10% 18% 19% 19% 19% 19% % of OPEX 57% 62% 57% 53% 50% 51% 51% 52% 52% 52% Advertising 0,018 0,014 0,025 0,049 0,05 0,10 0,12 0,15 0,20 0,25 % growth -22% 79% 96% % of OPEX 3% 2% 2% 3% 3% 5% 5% 6% 6% 7% IT 0,07 0,09 0,15 0,19 0,28 0,35 % of OPEX (based on benchmark) 4% 4,7% 6,7% 7,3% 9% 10% Other 0,214 0,309 0,498 0,618 0,68 0,75 0,82 0,90 1,00 1,09 % growth 44% 61% 24% 10% 10% 10% 10% 10% 10% % of OPEX 39% 36% 41% 44% 42% 39% 37% 35% 32% 31% Operating profit (bn RUR) -0,27-0,13 0,09 0,32 0,25 0,29 0,57 1,02 1,50 2,88 Income tax 0,20 0,20 0,20 0,20 0,20 0,20 0,20 Net income 0,26 0,20 0,24 0,46 0,81 1,20 2,30 22