strategy of jsc cb “privatbank” until 2022 strategy_short version... · • to recover debts...

Strategy ofJSC CB “PRIVATBANK” until 2022

2

According to the Order of the Ministry of Finance of Ukraine 316dated 23.02.2018 “On the resolution by the shareholder of the joint-stockcompany commercial bank “PRIVATBANK”, Main directions for the JSC CB“PRIVATBANK" operation for 2018-2022 were approved.

According to the p. 10.3., part 1 of the bank’s Articles of Association,the Management Board is responsible for negotiation and arrangement ofpreparation of the Bank’s draft development strategy (strategic plan) and businessplan for approval by the Supervisory Board, as well as approval of operation plansand control over their fulfillment.

3

PrivatBank’s strategy is based on5 key components

The Bank’s Strategy Key Components of the Strategy

To maximizeshareholder value byway oftransformation into asuccessful bankand recovering ofthe non-performing-loans(reimbursement ofinjections providedby the State)

Transformation intothe bank focusedon the retailsegment withsignificant marketshares in SME andminor presence inthe corporatesegment

To prepare for theexit from thebank’s controlstock by 2022

To continue growth in the retail segment:• To keep its current market shares in the retail segment• To continue reduction of funding costs• To keep franchise positions of payment systems and actively use them

1

To activate SME:• To improve sale and value proposition function• To further increase potential of the departments

engaged in SME business

2

To initiate development of the corporate segment:• To expand potential in the sphere of crediting

medium-sized corporate clients3

Risk management system and handlingnon-performing loans:• To improve management and organisation systems to

ensure complex risk management• To introduce KPI system considering risk factor• To recover debts under the inherited portfolio of non-performing loans

4

Management of operating expenses and organisation:• To launch program for optimisation of the operating expenses• To develop targets for scale and configuration of the network• To clearly divide business into segments and separate spheres of control• To add missing functional divisions and introduce missing positions of support

team heads

5

SOURCE: PrivatBank’s Strategy

Key metrics for 2022

8.4Net profit,UAH bln.

Cost / Income%

Return on Equity,%

TSR 1,UAH bln.

48

25

81

1 Total Shareholder Return is calculated as an aggregate amount of dividends paid during the period from 2018 to 2022 plus gains from sale of shares and share price of the state-ownedstock in 2022 without discount.

The Ministry of Finance of Ukraine dated 23.02.2018Main directions of implementation of the strategic reform principles of the state banking sector

4

The Strategy in details

Expected development of Ukrainian banking market

Strategic options for PrivatBank

Creating platform for successful turnaround

5

We expect sustainable, yet moderate recovery of the Ukrainian economy

SOURCE : EIU, IMF, Panorama, team analysis

2017-22

Real GDP growth,CAGR, %

Nominaldisposableincome growth,CAGR, %

NominalinvestmentsgrowthCAGR, %

InflationEoP, %

Nominal GDPgrowth,CAGR, %

2014-16

Key macroeconomic indicatorsKey observations and expectations

Since 2016 macroeconomic situation hasconsiderably improved, leading to financialstabilization and return to conservativeeconomic growthGovernment of Ukraine, as well as key IFIs,expect real GDP growth at 4% p.a., whichcan be further boosted by successfulimplementation of reformsCPI has considerably decreased sinceNBU had introduced inflation targetingregime; market players’ confidence ininflation forecast has significantlystrengthenedRecent success with an issue of $3 blnsovereign bonds with a record-long 15-yearmaturity, alongside with Moody’s upgrade ofUkraine’s rating to Caa2, further reinforcepositive macroeconomic outlookReforms remain on the agenda ofCabinet of Ministers and Verkhovna Rada,while their current implementation progressis moderate, which is fairly reflected in lowiMoRe index (from 0 to 1.2 in 2017)

-3,9 3,8

1613

5518

514

23 11

6

Economic recovery and regulatory reforms should lead to growth both indeposits and loans in 2017-2022

SOURCE : EIU, IMF, Panorama, team analysis

2017-22

Key policy rateEoP, %

Net retail loansgrowthCAGR, %

Net corporateloans growthCAGR, %

Net loans/depositsratioEoP, %

Deposits growthAverage ratio, %

2014-16

Key banking sector indicatorsKey observations and expectations

Deposits will keep growing in thesystem, accelerating in 2020-2022, drivenby the disposable income growth (>GDP),steady decrease of the interest rates andrenewal of trust in the banking systemCorporate lending is expected to recoverin more sustainable way (slightly abovenominal GDP growth)Retail lending is expected to accelerateafter lowering of the key policy rate below10%Secured retail lending still to representsmall share of lending portfolio, despite itshigher growth as compared to unsecuredlendingSignificant reduction of NPLs in thesystem till 2022 due to massive write-offsas well as more responsible lending to newclientsBanking sector to become more efficientand healthy, driven by the reforms within2020 NBU strategy

14 6

139

-22

32

65 72

-19

14

7

Banking sector growth will pick up, especially in retaillending, after 2019

SOURCE : Panorama, team analysis

595 474 609912

321

-5% p.a.

+19% p.a.

+15% p.a.

736

1,233

557731

12713683

460 577 811369490

615901

259

+13% p.a.

2012 1917e

9501,192

1,712+9% p.a.+12% p.a.

2022

628

Net loans, UAH bln

Deposits, UAH bln

25 36

13 14

12 14

12 12

CAGR , %

2017-19 2020-22

1 Central Europe countries – Poland, Czech Republic, Hungary in 2005-09

Key assumptions

2017-19Moderate lending growth dueto high interest rates andsignificant legacy NPLNPLs on new loans: in line withthe Ukraine’s historical dataand Central Europebenchmarks:Retail: 5.2%, Corporates: 2.4%Significant reduction in NPLsafter 2019

2020-22Accelerated retail lendinggrowth in line with thehistorical trends in benchmarkcountries1, driven by:– Stable macroeconomic

conditions– Decrease of the money

market rate– Improved health of the

banking sector

Corporate

Retail (Individuals)

8

16

19

47

44

49

4

3

10

Ukrainian banking sector in 2022 is expected to generate a UAH38 bln profitpool, driven by a lending volume boost, CoF decrease, and the CI growth

SOURCE : NBU, team analysis

P&L of Ukrainian banking sector, UAH bln

2017-2022

Growth of interest income is driven by morethan 2.2x increased lending volumesalongside with more than 2x lowering rates

2017 Comments2022

Interest income

Interest expense

Interest revenue onsecurities

Net commission income

Net trading income

Cost of Risk

OPEX

Profit before tax

153

-61

31

47

7

-42

-97

38

110

-76

21

28

3

-46

-50

-11

Operation expense will grow slower thanincome before Cost of Risk resulting inC/I decrease by 4%

Expense on liabilities will follow keypolicy rate, that’s expected todecrease > 2x

Net commission income will be increasingdriven by (i) overall lending and depositsgrowth and (ii) further growth of paymentsvolumes

Despite normalization, cost of risk will risedue to increase of lending volumes,unsecured retail loans and SME

9SOURCE: McKinsey Global Banking pools, NBU, team analysis

604256464659555946

585143292621261537

614620 27

7546 59

2257

41 29353563 60

375649

10 14 10 13 139

18

<0

18

While failing to increase penetration of banking services, banking sector willimprove its profitability by 2022 given realization of conservative scenario

‘16 ‘16‘22‘17‘08

98817611989637258183

Cost/IncomePercent

Share of retailloansPercent

ROE before taxPercent

Net loans/GDPPercent

Deposits/GDPPercent

Loans / DepositsPercent

Policy ratePercent

13,06,0 7,9 10,5 7,3

1,0 0,3 1,7

13,7

‘16‘16 ‘16

Conserva-tivescenario

‘22

Basescenario

10

Key insights for PrivatBank from the market development scenarios

We developed two scenarios for the Ukrainian banking sector growth, out of which basecase scenario is perceived as anticipated. This includes following:

– Macroeconomic recovery and return of trust to the banking system drives stabledeposits growth from UAH 1 to 1.7 tln in 2022 (in line with GDP growth)

– Reduction in interest rates and lower inflation supports accelerated growth in netloans from UAH 0.6 to 1.2 tln in 2022 (faster than GDP)

– Retail and SME lending will grow fast although its structure is not expected tochange significantly in the next 3-4 years; secured lending will start growing faster in2-3 years

– Retail to remain the largest profit pool with ~50% share in total income of UAH 136bln, mainly due to high commission income

– Cost of risk to decline to ~5% for Retail and ~2% for Corporate

– Overall, Ukrainian banking sector to generate UAH 38 bln profit pool with healthyROE level of 18%

Conservative scenario, which results in UAH 25 bln profit of Ukrainian banking sectorwith ROE at 14%, will be used to perform contingency check of the PrivatBank’s strategicchoice

11

Contents




12

Several strategic options for the development of PrivatBank till 2022were considered, one of which formed the basis of the strategy

SOURCE: team analysis

OptionMarket share lending 2022, %

35 5 1Current market share

SMEKey assumptions Retail Corporate

Balanced growth withcherry pickingCorporate

2A 35 15 5

Privat can defend existing deposits and payments franchise and continuegrowing with the market in retail lending with stable and attractive marginsTargeted presence in good quality risks in corporate (mid- and SME) helpsto further improve its position and absorb excess liquidity

Balanced growth withhighly selectivepresence in corporate

35 11 2

Privat defends existing deposits and payments franchise with strongemphasis on liabilities price reduction, continuing to grow with the market inretail lendingTarget presence in goods quality risks in SME and highly selective presencein mid corporate helps to absorb excess liquidity

Balanced growthavoiding corporatesegment

2B 35 15 0

Privat defends existing deposits and payments franchise with strongemphasis on liabilities price reduction, continuing to grow with the market inretail lendingTargeted presence in SME and avoidance of corporate to limit downsiderisks;Avoidance of corporate has no impact on ability to grow retail

Broad universal bank1 35 20 10Corporate segment represents significant growth opportunity to Privat who didnot serve this segment properly for long timePrivat has capabilities in place to build a corporate franchise from scratch

Restructure aroundcore payment andliquidity franchise

3 19 5 0

Market is intrinsically unattractive - high risk, poor margins and high volatilityof resultsPrivat de-risks balance sheet – concentrating on payments and retail liquidityfranchisePrivat should divest high risk lending because it has limited capabilities tobuild lending in currently unserved segmentThere is a significant opportunity to reduce costs without affecting paymentsfranchise

Suggested option1

1 According to the Supervisory Board request as of November 2017

13

The development strategy of PrivatBank should meet a set of boundaryconditions

PrivatBank should receive no additional state capital starting from the beginning of2018

PrivatBank should maintain a strong capital position (CAR at 14%) and build areasonable lending portfolio with adequate cost of risk

Strategic option should lead to a successful privatization in 2021-2022

Any growth that will come from the strategy should be done within current operationalconstraints (i.e., no significant enlargement of infrastructure, size of network, headcount)

PrivatBank should capitalize on its strengths and advance on key development areas:

– Strengthen control of IT decreasing the share of in house development, and fixing theorganization challenges

– Enhance the risk function to enable lending for currently unserved segments

– Retrain and refocus FTEs on lending

– Conduct right sizing of the organization with possible reduction of FTEs andbranches

– Rationalize organizational structure of the bank


14

To select a strategic option, all options were evaluated according to thethree criteria

1 Evaluation of financial attractiveness and TSR does not include possible proceeds from legacy NPL and collaterals2 Corporate lending, retail and SME secured lending as a percentage of total lending

Evaluation criteria

Financialattractive-ness1

1

Risks andfeasibility2

Exit consi-derations

Key questions Key metrics

Lending portfolio,UAH blnPAT 2022, UAH blnROE, 2022, %

What are the key metrics (lending, netincome)?What is the level of risk and capitaladequacy (CoR, CAR)?What level of profitability and operationalefficiency will the banks achieve (RoE, C/I)?

Lending Marketshare, p.p. vs. 2017Share lending tosegments withcapability gaps, %2

How aggressive is the lending portfolioexpected to grow?What is the share of business coming frombusiness lines, where PrivatBank hasconstrained capabilities)?

TSR 2018-20221

UAH blnExit timingExit feasibility

What is the total return to shareholdersachieved in case of exit?What is exit timing and feasibility given thesize and nature of the business?

3


15

From financial perspective, options 1 and 2A are the most attractive1

SOURCE: PrivatBank, Team analysis

% Least desired % Close to desired % Most desired

Profitability

Balancesheet andrisk

Options

Operatingmodel

2017 F3. Paymentsand liquidity

1. BroadUniversal

2A. BalancedgrowthUnit

2B. Balancedavoiding corp.

Lending portfolio 33.8 70243 172UAH MM 135 143

Share of corporate in lending portfolio 7% ~0%38% 22%% ~0% 11%

%Market share increase in Retail lending N.a. -13%+4% +4% +4% +4%

Market share increase in SME lending N.a. 0%17% 10%% 10% 6%

Market share increase in Corporate lending N.a. 0%10% 5%% 0% 2%

Cost of Risk (CoR) 461/3,3% 5.1%5.3% 4.5%% 5.3% 4.9%

Bonds 136 74122 122UAH MM 122 122

Deposits and Current accounts 193 180390 319UAH MM 292 298

CAR 15% 14%14% 14%% 14% 14%

2C. Balancedselective in corp.

245.7 213447 367UAH MM 334 342Total Assets

Equity 24 2246 36UAH MM 31 32

NCM 4.6% 5.7%4.4% 4.5%% 4.8% 4.7%

Gross income before risk 15 1940 33UAH MM 30 30

OPEX 7.9 10.516.6 15.8UAH MM 15.2 15.5

Net income -28.6 4.410.0 8.3UAH MM 6.7 6.8

1.8% 4.8%5.6% 5.7%% 5.5% 5.5%NIM

RoE N.m. 20.3%23.8% 24.6%% 23.2% 22.6%

Cost to income N.m. 54%41% 48%% 51% 51%

Suggested option

1 Includes provisions on toxic portfolio

16

410 00 01

3753002 15

8 55 4 20

32 2020 152 8

19 19 19 19 144

SOURCE: Team analysis, NBU

PrivatBank,2017 F

Cor

pora

teSM

ER

etai

lSOEs

Large> 500 mln1

Medium80-500 mln1

1 Annual revenues; 2 In other segments Privat has knowledge of clients from doing transactional and liability-side business

Upper40-80 mln1

Lower &Micro< 40 mln1

Secured

Unsecured

00000 0

91 91 91 914626

Key capability gaps

However, risk profile of Option 2A is significantly lower

0 0 00

7.5 0 00

20 14 01

20 15 151

20 15 154

20 20 2018

40 40 4042

Conclusions

2022 Market share

%

%%

%

>15p.p. vs. now

>10p.p. vs. now>0-10p.p. vs. market

< than now2B. Balancedavoiding corp.

1. BroadUniversal

2A. Balancedgrowth

2

0

0

8

11

11

20

40

3. Paymentsand liquidity

UAH Bln, 2022

Option 1 has the highestrisk:

50% of lending are insegments with no salesand underwritingcapabilitiesHigher risks due toaggressive growth inlarge corporate (Privathas limited knowledge ofthe market2)

Options 2A, 2B, and 2Care significantly less riskythan Option 1:

35% of lending in Option2A and 18% in 2B are insegments with capabilitygapsNo corporate lending inOption 2B may impactretail business via salaryprojects

Option 3 is the least risky(but would require significantrestructuring):

Only 23% of lending is insegments where Privathas significant capabilitygapsOnly moderate growth,on par with market

0

0

0

5

5

15

20


17

Key considerations

Valuation in 20222

(UAH Bln)

Dividends in 2018-20222

(UAH Bln)

TSR in 2018-20222

(UAH Bln)

Implication onexit timing

Implication onexit feasibility

1 Multiple is calculated based on historic trading multiples of retail focused vs. universal banks2 Not discounted


4055536265

232119 209

74 81 74 6375

New capabilitiesare feasible tobuild in 2-3 years(no largecorporate)

Most of thecapabilitiesare already inplace

Significantnewcapabilitiesshould be builtbefore exit

(-) significantsize(+) lowest shareof exposure tothe State

(+) moderatesize(-/+) limitedexposure tothe State

(++) smallsize(-) highexposure tothe State

1.4 1.7 1.8

3. Payments andliquidity1. Broad Universal

2A. Balancedgrowth

Option 2A also provides better value to shareholder and shorter exithorizon for the state

3

1.7

Additionalcapabilities inSME are feasibleto build in 2-3years


xx Implied P/B multiple1

New capabilitiesare feasible tobuild in 2-3 years(no largecorporate)


1.7

2B. Balanced growthavoiding corporate

2C. Balanced growthselective in corporate

18

To summarize, option 2A provides the best balance between financialattractiveness and feasibility/risk

Evaluation criteria

Risks andfeasibility

Financialattractiveness

Exitconsiderations

1 Corporate lending, retail and SME secured lending as a percent in total lending


Least attractive Most attractive Suggested option

1. BroadUniversal

2A. Balancedgrowth

2B. Balancedavoiding corp.

3. Paymentsand liquidity

TotalAssessment

10 8 7 47NI, 2022, UAH bn

24 25 23 2023ROE, 2022, %

Assessment

50 35 18 2326Share of lending tosegments withcapability gaps, %1

FastSlow Fast /Medium Fast /Medium Fast /MediumExit timing

HighHighMedium High HighExit feasibility

74 81 74 6375TSR 2018-2022 UAH bn

+12 +7 +4 -0.4+5Lending market sharep.p. vs. 2017

Assessment


19

PrivatBank will reach ~170 bn of lending portfolio by 2022 with moderatelending growth in 2018-2019

Other

101

40

20

Retail

Derivatives

51

Bonds1

+8% p.a.

25

110

57

300

38

101

331

Corporate

42

367

SME3732

80

61

6216

271

60

47

57

109

38

21

102

38

253

104

126 10637

2

246

36

230

56

121

24

133

60

28Other

+8% p.a.

Capital

Deposits

Currentaccounts

2022

367

18

1125 28 36

11

181

20

300

167

95

1111 32

121

199

21

331

19

271

151

10784

253

2316

140

2017

74

246

64

76

-4

30

4

-2

Liabilities and capital, UAH bln

CAGR, %

15

8

-18

8

Retail volume is largely driven by themarket growth (30% vs. ~32%)SME volume is growing ahead of themarket (64% vs. 22%) driven by lowbaseline and access to ~50% of SMEcustomersCorporate volume is growing strong in2020-22, 2018-19 is a “learning period”~10 bn of existing government bonds aremonetized at NBU in 20182

Derivative position is adjusted based onprojected UAH-USD exchange rate~15 bln write-off of other assets in 2017

Current accounts are growing at 15% inline with the market, with UAH CA growingfaster than FX CADeposits are growing at 8% vs. ~10%market growth, while UAH deposits aregrowing at ~12% (vs. ~15% for the market)and FX deposits are growing at ~3-4% (vs.5% for the market)No additional debt borrowing: lendinggrowth is financed with liabilitiesDividends payout after 2018 when thecapital adequacy ratio (CAR) exceeds 14%0% risk-weight on government bonds;other risk-weight in line with bank practicesand NBU guidance

1 Bonds include OVDP - 136 bn, discounts - (17.5) bln UAH and revaluation 1.9 bn on 31.12.20172 No financial losses are recognized at the moment of monetization of 10 bn bonds; monetization go on lending, not reduction of deposits

SOURCE: PrivatBank statements; McKinsey Global Banking Pools; National Bank of Ukraine; Team analysis

34 49 17270 99 132

xx Lending portfolio, UAH Bln

Assets, UAH bln Assumptions

FOR OPTION 2A

20

PrivatBank could return to profitability in 2018 and generate ~8 bn profit after2020

Net profit after tax

2022

1,8

7,95,4

8,3

21

1,71,5

1,8

18 192017

8,2

0,9

20

1,2

1,2-23,0

CoR1

Gross income before risk

2017

221533

21

15

18 19

28

202220

30

OPEX

Net commission income

Net interest income

Other income

N.m. 6% 9% 10% 10% 9%

16% 2% 2% 2% 2% 2%

N.m. 57% 45% 44% 46% 48%

6

2022

7

21

6

2019

6

182017

33

5

1612

2017 19 202221

14

20

10

18

88

125

186

16

18 2022

20

2120192017

12 13 14

20

11

19182017

16

21 2022

11

-1

2022

-2 -3

18

1

19

-2

2017

-1

2120

Non-recurring FX losses Taxes Net income after tax

N.m. 5% 23% 30% 28% 25%

A

BC

D

1 ~22 bn UAH assets write-off is reclassified from other income to Cost of Risk. Revenues and expenses are not lower than the planned amounts.

PrivatBank returns to profitability as of2018Gross income before risk is doubling in 3-4years to ~UAH 30 blnCoR remains ~10% during 2018-19 andstabilizes at 5% after 2021OPEX is growing at 15% p.a. during 2017-22 in line with disposable income growth

UAH bln

SOURCE: PrivatBank statements; Team analysis

% ROE

% C/I

% % of assets

% % of assets

% % of assets

% % of assets

% % of assets

2% 2% 4% 6% 6% 6%

5% 4% 4% 4% 4% 4%

1% (1%) (1%) (1%) (1%) (1%)

0.30

FOR OPTION 2A

21

Net interest income

NII grows in line with market growth and continues tostabilize within the trend of interest rate reduction

20

6

18

5

19

20+38% p.a.

202221

18

12

16

2017

25% 21% 20% 17% 14% 12%

(2%) 1% 3% 4% 4% 4%

Interest income

3

3

32

3

2022

9

131

18

7% p.a.

17

21

29

15

3

20

9

19

23

12

2

26

2

9

29

2023

9

1 1

2017

10

10110

1

Corporate SMEOther Retail

12

-8% p.a.

2022

11110 1

0 101

9

19

1

18

0

21

11

111

1

14

10

20

11

911

2017

3

1

1

1

13 12

18

Interest expense

Assumptions

Retail market share remains flat at~33-35%; share is falling inunsecured from 45% to 40% andgrowing in secured from 8% to 20%SME market share is growing from5% to ~15%Corporate market share is growingfrom <1% to 5%No interest income from toxicportfolio (4.9 bn UAH in 2017)during 2018-2022

Retail liabilities market share isfalling moderately from 34% to 28%SME and Corporate liabilitiesmarket share remains flatShare of current accounts inliabilities is growing (from ~30% to38%)Interest rates are falling in line withthe market trend: e.g. UAH Retaildeposits decrease from 12% to 8%

xx

xx

NIM on lending portfolio (vs. avg. cost of funds)

NIM on NBU bonds portfolio (vs. avg. cost of funds)

SOURCE: PrivatBank statements; McKinsey Global Banking Pools; National Bank of Ukraine; Team analysis

UAH

AFOR OPTION 2A

Income and expenses not below planned figures

22

Fee and commission income will grow, however, below the market, dueto high competition and high current level of fees in PrivatBank

SOURCE: PrivatBank statements; McKinsey Global Banking Pools; National Bank of Ukraine

Metric AssumptionsItem

~20 thousand new POS terminals areadded every year

SME and corporate commission income isdriven by deposits and loansCommission fee is falling due tocompetition growth, relatively high SMEcommission fees, and above the marketcommission fee

Slower commission income growth due tomore stringent compliance checks (~1.2bn lost income cumulatively in 2018-2020)Encashment income is driven by Retaildeposits and current accounts growthCommission expense has a fixed share ofcommission income (~20%)

201920182017 CAGR2016 202220212020

% of RetailLiabilities andLoans (%)

1.2%1.2%1.2%N.a. 1.0%1.1%1.1% Cash withdrawals and other retailcommission income is driven by depositsand loans growthCommission fee is slightly falling due tohigher competition and above the marketcommission fees

190170150130 12%250230210# of POS terminals(Thousand units)

% of SME liabilitiesand loans (%)

3.2%3.2%3.9%N.a. 2.9%3.0%3.1%SME

% of CorporateLoans andLiabilities (%)

1.1%1.2%1.2%N.a. 1.0%1.0%1.1%Corporate

% of RetailLiabilities (%)

2.0%2.1%2.0%N.a. 1.7%1.8%1.9%

Expense as % ofpayments income(%)

21,4%21,4%21,4%18,0% 21,4%21,4%21,4%

Payments growth(y-o-y) (%)

5,0%4,5%20,8%N.a. 20,0%15,0%5,6%Payments

NCI

Retail

Intrabank

BFOR OPTION 2A

23

Cost of risk is projected to be at 4.5% by 2022

SOURCE: PrivatBank statements; McKinsey Global Banking Pools; National Bank of Ukraine

Cost of Risk

21 2022

6,15,8

33,01

5,65,07,0

18

+9% p.a.

31,21

2017 20

1,8

19

4,30,6

5,44,64,54,5

Cost of Risk SME

Cost of Risk Retail

Cost of Risk Corporate

1,7% 13,0% 10,7% 8,2% 6,5% 5,7%

3,8% 11,4% 9,2% 6,7% 4,9% 4,2%

21,4% 4,7% 3,7% 3,0% 2,4% 2,0%

0,9 0,90,50,2

0,90,8

21 2022

0,3

2017

0,70,6

2018 19

0,20,5

1,0

AssumptionsRetail cost of risk is in linewith the market CoR: overallrisk is falling from 13+% in2018 to ~6% in 2022:– Unsecured retail cost

of risk is falling from13.2% in 2018 to 6.2%in 2022

– Mortgage cost of risk isfalling from 9.3% in2018 to 2.3% in 2022

– Auto cost of risk isfalling from 11.2% in2018 to 4.3% in 2022

SME cost of risk is in linewith the market CoR as SMEmarket share is growingmoderately 1-2 p.p. / year

Corporate cost of risk is inline with the market CoR ascorporate market sharegrows moderately from 1%to 4% in 2022

461/3,3% 12% 9,5% 6,9% 5,3% 4,5%

UAH blnC

1 Including reserves on toxic portfolio

X% Cost of risk as % of respective segmentlending portfolio

FOR OPTION 2A

24

OPEX growth is driven by the increase in salaries; however, a slow increase in revenuethrough improved operational efficiency

Number of branches

Number of FTEs, ths

2 061 2 106 2 146 2 173 2 2042 213

14.8

22.3 23.1

15.2

22.7

7.9

21

7.8

202220

14.713.5

7.37.9

22.2

2017 19

22.6

7.6

14.5

18

22.6budget 23.9

14.1

7.5

Field FTEs HQ FTEs

228 256 309 367 425 482

OPEX, UAH bn

20

4.2

9.6

12.1

2017

3.0

6.6

10.17.8

18

8.2

3.5 3.9

5.45,0

8.3

19

2.7

21 22

13.9+15% p.a. 15.8

4.6

11.2

Other OPEXPersonnel OPEX

>100 57 45 44 46 48

Cost per FTE, UAH k xxxx C/I. %

Key assumptions:Cost optimization program in 2018Number of branches in 2019-2022 based on:– Share of volumes vs share of branches analysis– Benchmarks of revenue per FTE/branchNon-branch FTEs – in line with the operationalbenchmarks in CEE peer groupCost per FTE – growth in line with the disposableincomeOther costs – growth linked to FTEs growth and inflation

D

SOURCE: PrivatBank, team analysis

FOR OPTION 2A

Expenses not below planned figures

25

Lending growth, lowering cost of funds and cost of risk normalization aremajor drivers of profitability in 2022


PrivatBank’s profit growth over 2017-22, UAH bln

2017-2022

Change in interest income is driven bylending volumes boost

2017 Comments2022

Profit before tax2017

Write-offs of legacy loans

Profit 2017 less toxic portfolio

Interest income growth 3223

7

5

9

8

7

4

8

-29

9

2

-7

22

2

Profit after Tax 2022

Decrease of interest expense 1218

Net commission income growth 1611

Current OPEX growth

Efficiency improvement

OPEX with efficiencyimprovement 168

Cost of risk normalization 714

Other income -31

Tax 2-

Decrease of interest expense by 40% due tolowered interest on deposits and repaymentof the NBU refinancing loanIncrease of net commission margin resultsfrom growing cost of transactions alongsidewith lowering market prices

Optimization of branch network and staff willbring extra UAH 1,6 bln to the bankCost of Risk lowering from 46% to 4,6% willcompensate growth in volumes

FOR OPTION 2A

26

Contents




27

First 6-12 months will be critical for the success of the transformationprogram

Keep the momentum andprepare for exit(2-3 years)

Implementation of theinitiatives identified by theplansAccelerating growth in corebusiness areas afteraddressing key operationalgapsRecovering provisions fromlegacy NPL bookStabilizing reporting andcommunication

Delivering first results(creating the track record)(~18 months)

Detailing of business andoperational models to addresskey gaps in the following spheres:– Retail lending and payments– SME and midcorp franchise– Risk management framework– IT plan– Operational effectiveness– Organization (i.e. org. structure,

span of control)Creating the execution teamsand oversight transformationoffice

Setting up the executionplatform for the turnaround(6 months)

End 2018 End 2019 2022

Continue growth in keybusiness segments adjustingstrategic plans according tochanges in context andcompetitive positionPreparation for theprivatization plan

Focus of next section

28SOURCE: PrivatBank, Team analysis

2017 F 2018 F 2019 F

P&L

Balancesheet

2017 vs.2019

2 7 10 4.8xSME loans

2 6 12 5.4xCorporate loans

194 214 235 1.2xDeposits and CurrentAccounts

11 11 12 1.1xNet commission income

15 15 22 1.5xGross income before risk

8 8 10 1.3xOPEX

5 6 12 2.9xNet interest income

14 5 6 0.4xCoR1

30 37 47 1.6xRetail loans

During transformational period, PrivatBank should achieve radical changesin its profitability

Net retail loans grow by 17 bndriven mainly by unsecuredlending

PrivatBank activates SME andCorporate to grow portfolio by 8and 10 bn respectively

Deposits and CA moderatelyincrease (~21% in 2 years) toaccount for reduction in rates

Gross income is expected togrow by 50% mainly driven byincrease in NII by UAH 8 bln

– NCI grows by 12% in 2years to account for bettercompliance in payments

CoR stabilizes at 5-6 bln withimproved risk management

OPEX grows by 27% in 2 years

Overall bottom-line improves to5 bn in 2019-7 1 5 +13 BnNet income after tax1

1 Excluding extraordinary depreciation of assetsRatios not below the planned figures

29

Based on our assessment, several areas require specialattention to enable successful transformation

Retail

SME

Banking products

Lending (limited secured lendingcapabilities)

Pricing

Major gaps

Banking products

Lending

Pricing

Credit risk

Operating and compliance risks

Market, IRBB and liquidity risks

Org. structure

Not assessed

Some gapsHealthy

Payments

Detailed next

Risk organization and governance

Operating model (risk appetite,enterprise risk management)

Remuneration system

Back-offices (to many support staff)

Operating centers

Call center

Organization and governance

Corporate governance

2

3

IT

HR (capabilities to close key gaps inother areas)

Finance

Other (Legal, Security, Admin, etc.)

Business support functions

6

Risk management7

Operational health (OPEX)

Overall performance

Financial, risk and liquidity health(ROE, C/I, CAR, Concentration, etc.)

5

Branch network

ATM / Self-service kiosks network

Digital channels

Distribution

7

Payments


1

8

Corporate

Banking products

Lending

Pricing

4

30

Transformation program relies on a clear set of initiatives that will increase2018-2019 profit of PrivatBank by ~UAH11-13 bln (1/2)Focus area

Continue cost of liabilities reduction – define and rangereduction targets for products, repay expensive NBUrefinancingDevelop segment based offering for liabilities products inRetail – define customer segments, identify price sensitivityper segment and update value proposition for each segment

7.0-8.0High cost of liabilities, due to high price oflegacy deposits and expensive NBU refinancingLowering inflation, that provides bank withopportunity to further decrease deposit pricingNo segmented / individual offering ondeposits

Decrease costof liabilities2

Define overall bank’s use value – develop USP, identify keygaps and update marketing strategyRevamp secured lending business – update salesorganization, improve frontline capabilities and credit processStrengthen settlements franchise – increase further marketshare and check adherence to compliance

2.0-2.5No clear value proposition at the bank level(“umbrella” VP for Privat brand)Limited secured lending capabilitiesStrong competitive advantage and highmarket share in settlements

Capture retailgrowth1

Develop value proposition – develop customer segmentationand segment based use valueRevamp credit process – streamline underwriting process,develop risk strategy and close gaps in corp. collection andworkoutRebuild sales function and frontline service – developfrontline service model based on segmentation, update org.and remuneration systems, review and update sales tools andmechanisms

0.3-0.4No customer segmentationUnclear differentiation in product offering vscompetitorsImmature credit, collection and workoutprocessesLimited frontline capabilitiesInefficient organization (high share of supportstaff, low revenue per FTE)

Start buildingcorporatesegment

4

Update value proposition - develop customer segmentationand develop segment-specific value propositionRevamp credit process – streamline underwriting processand introduce credit monitoring systemUpgrade sales function and frontline service model -change frontline service model based on segmentation, updateorg., remuneration systems, sales processes, improve frontlinestaff capabilities

0.4-0.5Limited customer segmentation (2 segments,based on size only)Not efficient credit process (high time-to-yesand time-to-cash)Gaps in frontline capabilities, remunerationsystem and sales processes

Activate SME3

Key priorities for the next 18 monthsImpact on 2018-2019profit , UAH blnKey observations

31

Focus area Key priorities for the next 18 monthsKey observations

Transformation program relies on a clear set of initiatives that will increase2018-2019 profit of PrivatBank by ~11-13 bn UAH (2/2)

11-13Total

Implement costoptimizationprogram

5

Potential to reduce 100-300 branches(unprofitable or with low profit)Potential to reduce 1-2k employees (based onoperational benchmarks)

1.6-1.7

Develop target network size – define top down target, developbottom up target number / type of branches per each market cellRun costs optimization program - run top-down and bottom-up diagnostics, define potential for optimization

Improve riskmanagement7

Update governance and organization –, CRO, Risk Committeeand hiring / training programIntroduce an Integrated Risk Management – join all risks in onefunction, create new RM unit and develop Risk Appetite StatementClose gaps in the credit risk function – introduce monitoring andEWS, update existing and develop missing models (i.e. LGD) anddevelop strategy decisions toolsClose gaps in other risks – develop operational risk assessmentsystem, update market risks, enhance monitoring of liquidity andIRRBB

No Risk Committee at the Management Board levelNo centralized Risk Management Unit, coveringall risk typesNo credit monitoring and EWSNo strategy-decision support toolsNo operational risk framework beyond FraudLack of a 2nd line of defense on market risksFocus on regulatory metrics only in IRRBB andliquidity

Secure IT

Close gaps in existing solutions – continue re-writing allMiddleware-based processes, upgrade processing and improverisk-management solutionsDevelop IT strategy of the Bank – defining role of IT for everybusiness segment and implementation of certain initiativesDevelop new IT architecture – to conduct complex diagnosticsand create target IT-architectureUpdate operating model and organization - hire 10-15 crucialspecialists, develop back-log and prioritization system, rundiagnostics and define target org and operating model, switch tothe unified MFO

Ownership of key platforms by MiddlewareSome gaps in internal solutions – processing,risk management, fin. consolidationNo long-term vision of the IT developmentMostly in-house solutions in the architectureNot sustainable operating model – no systematicmiddle management, no log and prioritizationprocess, no proper documentation

Upgradeorganization8

No head of support functions (CRO)Group businesses into customer segmentsAdd missing functions at CEO-2 level (e.g. procurement)Reduce the span of control to 5-10 subordinates

Gaps in org. structure vs best practice:– Missing heads of support functions– Suboptimal division of business units– Missing functions at CEO-2 levelHigh span of control (up to 50 subordinates)

Key enablersof profitable

growth

6

Legacy NPL9 Achieve recovery across the whole legacy portfolioLarge portfolio of NPL for recovery

PMO10Create team to support management and oversight of thetransformation program

N.a.

Impact on 2018-2019profit , UAH bln

32

Direct connection of Operational Plan to KPIs for monitoring by the BoardInitiatives 2017 2018 2019

Capture retailgrowth1 NII (as % of liabilities), % 26.8 23.1 22.9

Lending volume, UAH Bln 29.5 36.7 47.4

NCI, UAH Bln 5.4 6.1 6.9

Decrease cost ofliabilities2

Continue cost of liabilities reductionDevelop segment based offering forliabilities products

Deposit and CA volume, UAH Bln 194 214 235

Interest expense as % of avg. liabilities, % 9.0 7.5 6.0

Activate SME3Update value propositionRevamp credit processUpgrade sales function and coveragemodel

NII (over avg. cost of liabilities), % 17.4 14.4 13.9

Lending volume, UAH Bln 2.1 6.5 10.1

NCI, UAH Bln 0.5 0.5 0.6

Secure IT5

Close gaps in existing solutionsDevelop IT strategy of the bankDevelop new IT architectureUpdate operating model and organization

Achievement of milestones according to transformation roadmap

Improve riskmanagement6

Update governance and organizationIntroduce an Integrated Risk ManagementClose gaps in the credit and other risksIntroduce risk-adjusted performance

Capital adequacy, % of RWA - 14 14

CoR, % of avg. lending book 461/3,3 12 9.5

Share of NPL (excl. legacy, %) of lending 40 <31 <20

Upgradeorganization7

Introduce missing heads of support functionsDevelop best practice org. structureReduce the span of control to 5-10 subordinates

Implementoptimizationprogram

8

Develop target network size and configurationRun costs optimization programIntroduce ZBB approach

# of FTEs, thousand 22.6 22.6 22.2

# of branches, thousand 2.2 2.1 2.1

Total OPEX, UAH Bln 7.9 8.3 10.1

Bottom line

Based on transformation plan, turnPrivatBank into profitability by 2018

Net income, UAH Bln -23.0 1.2 5.4

CIR, % 60 57 45

RoE, % N.m. 5 23

Start buildingcorporate segment

Develop value propositionRevamp credit processRebuild sales function and coverage model

NII (over avg. cost of liabilities), % 8.9 7.0 6.9Lending volume, UAH Bln 2.2 5.6 12.2

NCI, UAH Bln 0.1 0.2 0.34

Define overall bank’s value propositionRevamp secured lending businessStrengthen settlements franchise

Achievement of milestones according to transformation roadmap

KPIs to monitor

1 Includes reserves for toxic portfolio2 All ratios not below the planned figures

budget 23.9

33

From Strategic Plan to results: creating a strong execution platform

1. Operational Plans for each of the business priorities definedin the Strategic Plan:

• Growth in retail lending and settlements

• Decrease in cost of liabilities

• Activation of SMEs business

• Building of corporate business

• Implementing cost reduction program

2. Three special efforts to de-risk the strategy – IT Plan, RiskManagement Plan and Organization

3. Executive team (first 2 levels in the organization) fullyengaged, with total ownership of the plans

4. Clear accountability built around an execution platform withdedicated resources and oversight by a project office

5. Direct connection of the Operational Plan with a set of KPIsand milestones for monitoring by the executive committee

Key success factors for the implementation

34

Mission and Slogan of the Bank

Mission:

By provision of the best quality financial services, we drive economy for development,business – for growth and individual clients – for making dreams come true.

Slogan:

Bank for those who moves forward

35

Proposed decision

1. To approve The Bank’s development strategy until 2022 (attached) and submit itfor approval by the Supervisory Board with the following wording of the proposeddecision:

1) To approve the Bank’s development strategy until 2022;2) The Management Board shall:• by May 11, 2018 create «focus-groups», which will focus on the detailed

development and preparation of the action plan and implementation of the pilotinitiatives by priorities (local strategies - policies);

• by May 31, 2018 develop the detailed action plan including timeframe, finalproducts, KPI, responsible officers, incentive levers and internalcommunication;

• by June 29, 2018 conduct testing of the plan, arrange monitoring of the planrealization.

2. After approval of the Bank’s development strategy by the Supervisory Board, topublish it on the official web-site of the Bank within a week.

strategy of jsc cb “privatbank” until 2022 strategy_short version... · • to recover debts...

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