Trading business Investor Day, Moscow, April 19, 2018
What is trading and what do we trade? 2
Trading assets and liabilities structure Funds on exchanges Securities portfolio 38% of the bank's balance Funding from the core business Due to banks Due from banks Funds received on direct repo are 78% of due to banks No due to Central Bank Includes deposits from corporate treasuries Reverse repo allocated funds (received securities off-balance) Derivatives net risk on balance sheet, transaction amount off-balance* Assets Liabilities January 1, 2018, RUB bn. * Off-balance derivatives: RUB 300 bn. Short position on securities Financial liabilities at fair value Derivatives net risk on balance sheet, transaction amount off-bala* 3
Key assets. Low risk appetite. Due from banks RUB 34,9 bn. Low risk profile: high-quality counterparty base As of January 1, 2018 borrowers are represented only by state-owned banks No losses in the interbank market since 2001 Reverse repo RUB 67,8 bn. Blue chips bonds and shares as collateral Top 50 banks and leading financial companies 60% of deals are concluded through the central counterparty on MOEX Average discount: 10-15% on bonds, 20% on shares No losses Bonds RUB 110,6 bn. BB- and above 65,9 44,6 The share of bonds in the securities portfolio is 98% The average duration of the portfolio is 2.7 years No credit losses on bonds since 2008 (in 2008 losses were <1% of the portfolio) unrated high quality issuers (Toyota Bank, Volkswagen Bank) domestic eurobonds 4
How we make money? Securities market Derivatives Carry-trade (long-term portfolio is funded by shortterm liabilities, the difference between the portfolio yield and the money market rates, margin of 1-2%) Revaluation Hedging strategies for customers (currency, interest and commodity risks) Proprietary speculative and arbitrage strategies (options, synthetic swaps) MM (Money market) FX (Forex) Bid/Offer rates arbitrage (repo and interbank lending) Interest rate risk and liquidity gaps management (long-term asset funded by short-term liabilities) Customer FX trades Speculative operations in foreign exchange markets 5
Trading revenues structure Securities market Derivatives 61% 7% MM (Money market) FX (Forex) 11% 21% * Source: 2017 management accounts 6
How we are different from others? 7
Specificity of business Healthy conservatism We do not accept excessively high risks We do not chase extra profits We do not risk the financial stability of the Bank High expertise / Wide opportunities Limited number of teams in the market with a similar level of expertise Top 3 in the Russian repo and interbank lending market Developed infrastructure for access to world markets Effective organization structure Small and easy-to-handle structure: MM 4 people, FX 5 people, FI 4 people, Sales 7 people, Algo 11 people Single window to enter the financial market 8
A unique combination of the scale of the Bank and the scale of the market The Bank is in the Russian Top 3 Scale of business Team Case Study: repo/interbank lending market With a portfolio volume of RUB 100 bn the Bank s annual revenues is RUB 500 mln. The scale of business is too small for large banks without due management focus and focus of risk management Moderate risk appetite Market opportunities Case Study: Securities The share of securities in the Bank's assets is higher than that of large players and the banking system The market for us is much more efficient - the volume of transactions is significant for the Bank, but not significant for the market 9
What are the specifics of repo transactions and operations with derivatives? 10
Repo operations is an arbitrage flow Repo deals advantages Low-risk arbitrage with a margin of 0.3-0.5% (ROAE of 15-25%) Liquidity of the market: daily turnover of RUB 350-450 bn. (interbank lending market is RUB 100-150 bn) Mutual limits are higher, better rates No losses Example of direct repo deal 1. Lukoil's bonds were sold to a central counterparty at MOEX for rubles with settlements today 2. Reverse transaction with settlements tomorrow The essence of the operation: we attract short-term financing (an analogue of overnight) Example of reverse repo deal 1. We bought Rosneft's bonds from a financial company for rubles with settlements today 2. Reverse transaction with settlements tomorrow The essence of the transaction: we place funds (an analogue of a securities loan) 11
Example. Derivatives Derivatives advantages High liquidity of the market The possibility of forming a position with a large leverage A wide range of basic assets (currency, securities, goods) for the implementation of strategies and arbitrage operations Spot-futures example CME We bought futures on CME USDRUB in 5 months. and simultaneously sold USDRUB spot on MOEX The essence of the transaction: an analogue of interest rate swap (earnings at interest rate risk) MOEX Features Margin of transactions 0,1-0,2% (ROAE 30%+) Position is closed 12
How does trading business affect the financial performance of the Bank? 13
Dynamics of trading by volume and currency Assets of trading, RUB bn. Liabilities of trading, RUB bn. Funds on stock exchanges Funding from the core business Securities portfolio Due from banks Amounts under reverse repo Derivatives RUB bn Due to banks Short position on securities Derivatives RUB bn RUB RUB USD EUR. USD EUR. 14
Effect of trading business on net interest income Trading liabilities, RUB bn Trading net interest income, RUB mln RUB USD EUR. Comments Core Banking Margin Dynamics The structure of trading revenues strongly depends on prevailing transactions in different reporting periods The decrease in FX-nominated funding (increased funding in rubles) in 1Q and 2Q 2017 resulted in an increase of trading net interest expenses, which were fully offset by extra trading income 15
Core Banking vs Trading Core Banking Results, RUB mln Core Banking Margin 6,2% 5,8% 6,0% 6,2% 6,1% Aggregate trading results, RUB mln Trading Margin 1,0% -0,9% -2,0% -0,6% 1,3% 5 RUB bn. Aggregate trading result FY2017 * Source: management accounts 16
How stable are the results of trading business? 17
Trading revenue structure High quality bonds In any case, we will get a yield to maturity Securities market Derivatives 61% 7% MM (Money market) FX (Forex) 11% 21% Arbitrage flow income * Source: 2017 management accounts 18
Points of growth Sustainable growth strategy Customer Sales Algorithmic trading Asset Management 19
BSPB Capital BSPB Capital Asset management within the banking group 100% subsidiary of the Bank Acquired in 2017 1 205 Providing customers with alternative sources of income on the backdrop of lower deposit rates 669 555 1 051 910 Key tasks Increasing the loyalty of the existing customer base and attracting new customers 10 48 71 411 337 282 191 115 Increase in the share of fee and commission income 01.02.17 01.05.17 01.08.17 01.11.17 01.02.18 Dynamics of the volume of attracted funds, RUB mln. AUM (plan), RUB mln. 20
Strategic value of trading business Share of trading in revenues 10.9% Comments Average ROE for 10 years 48%* Countercyclical: trading performs best in crisis years * Source: management accounts 21
Key Results Protection from the negative influence on the balance sheet A stable source of income Strong team Trading Synergy with the other businesses of the Bank Cutting-edge technology Balanced business model 22