PJSC Sberbank : RAS Report

Information on Risks Accepted, Risk Assessment Procedures, Risk and Capital Management Procedures at the Sberbank Banking Group in 2020

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Introduction

The information is disclosed in accordance with the requirements of the Bank of Russia Ordinance No. 4482-U(4482-У) dated 07/08/2017 "On Form and Procedure for Disclosure by a Credit Institution (Parent Credit Institution of a Banking Group) of Information on Risks Accepted, Risk Assessment Procedures, and Risk and Capital Management Procedures".

This Report is issued in addition to the consolidated statements in accordance with the Russian Accounting Standards (RAS) for 2020 (01/01/2021 to 31/12/2020), which is disclosed on the Sberbank corporate website. An approved electronic version of this Report is published on the Sberbank corporate website.

Reporting currency. The report is presented in Russian rubles. All figures are presented in thousands of rubles, unless otherwise specified.

Sberbank decided not to carry out audit of risk information on a consolidated basis in respect of 2020.

The parent credit institution of the Sberbank Banking Group ("the Group") is Sberbank of Russia ("Sberbank"), established in 1841.

This report takes into account events after the reporting date.

Sberbank of Russia's abbreviated business name is: Sberbank. Sberbank is registered at the following address: 19 Vavilova St., Moscow, the Russian Federation.

At 31/12/2020 Sberbank has 11 (at 31/12/2019: 11) regional banks, 77 (at 31/12/2019: 77) branches of regional banks, and

14,085 (at 31/12/2019: 14,167) banking service offices in the Russian Federation.

Currently the Bank's principal shareholder is the National Welfare Fund which owns 52.3% of ordinary shares or 50.0% plus 1 share of the issued and outstanding ordinary and preference shares of the Bank. The ultimate controlling shareholder of the Bank is the Government of the Russian Federation represented by the Ministry of Finance of the Russian Federation (the "Ministry of Finance"). As at 31 December 2019 the Bank's principal and ultimate controlling shareholder was the Central Bank of the Russian Federation (the "Bank of Russia") which owned 52.3% of ordinary shares or 50.0% plus 1 share of the issued and outstanding ordinary and preference shares of the Bank. In February 2020 the Bank of Russia and the Ministry of Finance announced that they reached an agreement on the sale of 50.0% plus 1 share in Sberbank's share capital from the Bank of Russia to the National Welfare Fund, in April - May 2020 the transaction was closed. The management of the Group does not expect any changes in the Group's strategy following the change of its principal shareholder.

The Bank operates under a general banking license issued by the Bank of Russia since 1991. In addition, the Bank holds licenses required for trading and holding securities and engaging in other securities-related activities, including acting as a broker, a dealer, a custodian. The Bank is regulated and supervised by the Bank of Russia as a united regulator for banking, insurance and financial markets activities in the Russian Federation. The Group's banks / companies operate under the banking / companies regulatory regimes of their respective countries.

Members of the Group

For the purposes of consolidation under RAS, the Group includes the entities being controlled or substantially influenced by Sberbank and other members of the Group.

In accordance with the Accounting Policy of the Sberbank Banking Group, the consolidated statements of the Group at 01/01/2021 comprise statements of 39 entities. The remaining 354 entities either do not substantially influence the Group's financial performance, or are not subject to the requirements of Clause 1.2 of the Bank of Russia Regulation No. 509-P dated 3 December 2015 'On Calculating the Equity (Capital), Required Ratios and Open Currency Position Limits of Banking Groups'.

The list of the Group members that are subject to consolidation, including the reporting companies of subgroups (in aggregate, subgroups comprise 19 companies, including parent companies), and data consolidation methods for the purposes of the Group RAS statements at 01/01/20211 are provided in Table 1 of Part 1 hereof.

1 Detailed information on all members of the Group is part of Sberbank's regulatory statements at 01/01/2021, filed with the Bank of Russia.

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Relationship between the Group's business model and risks

The Group's principal business activity is corporate and retail banking. This includes, but is not limited to, deposit taking and commercial lending in freely convertible currencies, local currencies of countries where the subsidiary banks operate and in Russian Roubles, support of clients' export / import transactions, foreign exchange, securities trading, and trading in derivative financial instruments.

In its pursuit of the said operations, the Group is exposed to various types of risks. The detailed list of risks is provided in the "Risk identification and materiality assessment" Subsection, Section 1, Part 2 hereof.

The Group's risk and capital management system encompasses all risks inherent in the Group's activity and includes regulatory capital management, liquidity management and the internal capital adequacy assessment process ("ICAAP"). More details are provided in Section 1 "Risk and capital management" and Section 7 "Liquidity risk" of Part 2 hereof.

Other Information

The Statement of Capital Adequacy to Cover Risks, Provisions for Possible Losses from Loans and Other Assets (Form 0409808) and the information on Statutory Ratios, Financial Leverage Ratio, and Liquidity Coverage Ratio (Form 0409813) in respect of Sberbank are published on the Sberbank corporate website in the "Disclosure for Regulatory Purposes" Section, together with this Report.

This Report is disclosed on two languages. In case of any discrepancies, the Russian version of the Report shall prevail.

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Factors Affecting the Bank's Financial Results in 2020

The introduction of restrictive measures imposed in response to the COVID-19 pandemic starting from the end of the first quarter of 2020, led to a reduction in industrial production and activity in many sectors of the economy.

At the end of 2020, GDP fell by 3.1%2, compared to a 2.0%2 growth in 2019. Personal consumption suffered mostly from the restrictions. High uncertainty concerning the further development of the economy also held back investment activity. The effect of reduction in consumption and investment activity was partly mitigated by the weakening of the Russian Rouble and, as a result, a faster decline in import. The implementation of budgetary support measures for households and businesses as well as soft monetary policy mitigated the negative impact of the imposed restrictions.

The OPEC+ agreement to limit oil production has put additional pressure on the industry. At the end of 2020, industrial production decreased by 2.9%2 compared to 2019, when industrial production growth was 3.4%2.

Retail trade turnover fell by 4.1%2 after 1.9%2 increase in 2019. The volume of paid services to the individuals decreased by 17.3%2 compared to 2019 when the increase comprised 0.5%2. The recovery of consumer demand was limited by reduction in household income despite government support measures. The real disposable household income decreased by 3.5%2 after 1.0%2 increase in 2019.

The labor market situation has worsened in 2020. By the end of 2020, the unemployment rate reached 5.9%2 versus 4.6%2 in December 2019. Real accrued wages increased by 2.2%2, while in 2019 the growth was 4.8%2.

The public's propensity to accumulate savings has grown. The share of cash income spent on savings in 2020 reached 8.4%2, up from 3.9%2 in 2019. The consumer confidence index, which reflects the aggregate consumer expectations, in the fourth quarter of 2020 decreased by half and amounted to -26.0%2 compared to the fourth quarter of 2019.

Annualized inflation accelerated to 4.9%2 by the end of December 2020 from 3.0%2 in December 2019. Upward pressure on prices in spring and at the end of 2020 was exerted by weakening of the Russian Rouble and high demand for essential goods. Also, at the end of 2020 rise in prices for certain categories of food products was observed. Nevertheless, the imposed restrictive measures put significant disinflationary pressure on price dynamics from aggregate demand. This situation allowed the Bank of Russia to reduce its key rate by the end of 2020 to 4.25%23 from 6.25%3 at the end of 2019.

The average price for Urals oil at the end of 2020 decreased to 41.8 US dollars per barrel versus 64.3 US dollars per barrel in 2019. At the same time, in the second quarter of 2020, the average price dropped to 30.4 US dollars per barrel and gradually recovered to 44.6 US dollars per barrel in the fourth quarter of 2020.

The volatility of the Russian Rouble exchange rate increased given high level of uncertainty about the consequences of the COVID-19 pandemic, the deterioration of the situation in the oil market and the growth of geopolitical risks. The average Russian Rouble exchange rate weakened in the fourth quarter of 2020 to 76.2 rubles per US dollar, compared to 66.1 Russian Roubles per US dollar in the first quarter of 2020. On average, in 2020, the exchange rate was 71.9 Russian Roubles per US dollar against 64.7 Russian Roubles per US dollar in 2019.

The current account surplus of the Russian Federation payments balance in 2020 decreased to 32.53 billion US dollars (64.83 billion US dollars in 2019). The decrease in the surplus is explained by the compression of trade exports due to reduction of world commodity prices and lower physical supplies. The decline in trade exports was partially offset by a decline in imports amid subdued domestic demand and a weaker Russian Rouble. The current account balance was also supported by a reduction in the deficit of the balance of services and investment income. Private sector capital outflows totalled to US dollars 47.83 billion, compared to US dollars 22.13 billion in 2019. The main channel of outflow was the reduction of external liabilities by

1. Rosstat data
2. Bank of Russia data, Russian Accounting Standards data

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both banking and other sectors. Since the beginning of 2020, the external debt of the Russian Federation has decreased by 21.33 billion US dollars to 470.13 billion US dollars.

The Russian banking sector net profit in 2020 totaled RR 1,608.03 billion compared to RR 1,715.03 billion a year earlier. The assets of the banking system in 2020 increased by 12.5%3 (adjusted for currency revaluation) compared to 2019. The corporate loan portfolio increased by 9.9%3 (adjusted for currency revaluation) backed by increased demand for working capital by companies as a result of a sharp reduction in incoming cash flows in March-April and government support programs. The retail loan portfolio increased by 13.5%3 (adjusted for currency revaluation) led by active mortgage lending. This was facilitated by a general reduction in bank rates and the implementation of preferential programs. The share of overdue debt in the corporate portfolio in December 2020 was 7.1%3, unchanged from December 2019. The share of overdue debt in the retail portfolio increased to 4.7%3 in December 2020 from 4.3%3 in December 2019. Individual deposits rose by 4.2%3 at the end of 2020 (excluding escrow accounts and adjusted for currency revaluation), corporate accounts increased by 15.9%3 (adjusted for currency revaluation).

The situation on the Russian stock markets was highly volatile. By the end of 2020, the RTS index fell by 10.0% compared to 2019. At the same time, the Moscow Exchange index grew by 8.0%. Multidirectional changes in indices were caused by weakening of the Russian Rouble to US dollar.

The changes in the economic environment, described above, have an impact on the Group's operations.

The following main activities are performed by the Group to support its clients in the COVID-19 environment:

• offering loan restructuring under the state support programs;
• development and offering loan restructuring programs for customers that are not subject to the state support programs;
• expansion of products and services offering through digital channels.

According to IFRS 9 "Financial Instruments", the Group uses forecast information in the expected credit loss models, including forecasts of macroeconomic indicators. For the purpose of calculating credit loss allowances as at 31 December 2020, the Group took into account expectations regarding:

• decrease in income of individuals and business caused by a limited economic activity;
• the GDP reduction;
• updated forecasts for prices of major commodities and exchange rates of the Russian Rouble to major foreign currencies;
• measures of state support to individuals and business;
• impact of changes in economic environment on different sectors of economy.

In addition, in 2020 the Group applied the following international practices consistent with the recommendations of the International Accounting Standards Board ("IASB") and the European Banking Authority to reflect appropriately the uncertainty associated with the COVID-19 pandemic:

• refinement of macro-adjustment calculation approach;
• application of downturn loss given default coefficients;
• adjustment to approach for forecasting early repayments for the purposes of estimation of exposure at default (EAD);
• and other measures.

As at 1 January 2021 the Group ceased to apply all the specific measures mentioned above except for the application of downturn loss given default coefficients.

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