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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
Expected development of Ukrainian banking market
Strategic options for PrivatBank
Creating platform for successful turnaround
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
SOURCE: team analysis
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
SOURCE: team analysis
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
2C. Balancedselective in corp.
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
SOURCE: PrivatBank, Team analysis
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
(+) moderatesize(-/+) limitedexposure tothe State
xx Implied P/B multiple1
New capabilitiesare feasible tobuild in 2-3 years(no largecorporate)
(+) moderatesize(-/+) limitedexposure tothe State
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
SOURCE: PrivatBank, Team analysis
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
2C. Balancedselective in corp.
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
SOURCE: PrivatBank, team analysis
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
Expected development of Ukrainian banking market
Strategic options for PrivatBank
Creating platform for successful turnaround
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
SOURCE: PrivatBank, team analysis
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.
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