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Edited Transcript of SBER.MZ earnings conference call or presentation 30-Apr-20 2:00pm GMT

Q1 2020 Sberbank Rossii PAO Earnings Call (IFRS)

Moscow May 18, 2020 (Thomson StreetEvents) -- Edited Transcript of Sberbank Rossii PAO earnings conference call or presentation Thursday, April 30, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Alexander Vladimirovich Morozov

Sberbank of Russia - Deputy Chairman of the Executive Board & CFO

* Alexandra Buriko

Sberbank of Russia - Senior VP & Head of the Finance Unit

* Anastasia E. Belyanina

Sberbank of Russia - Head of IR

* Dzhangir Dzhangirov

Sberbank of Russia - Senior VP & Head of Risk Management Service

* Oleg Zamulin

Sberbank of Russia - Head & Senior MD of Macroeconomic Research Centre

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Conference Call Participants

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* Andrew Keeley

Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst

* Andrey Pavlov-Rusinov

Goldman Sachs Group Inc., Research Division - Research Analyst

* Elena Tsareva

BCS Financial Group, Research Division - Senior Banking Analyst

* Gabor Zoltan Kemeny

Autonomous Research LLP - Research Analyst

* Linda Sun-Mattison

* Mikhail Shlemov

VTB Capital, Research Division - Equities Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Sberbank Group First Quarter 2020 IFRS results call hosted by Sberbank management team. (Operator Instructions) I must advise that -- you that this conference is being recorded today, April 30, 2020.

I would now like to hand the call over to Mrs. Anastasia Belyanina, Head of Investor Relations. Please go ahead.

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Anastasia E. Belyanina, Sberbank of Russia - Head of IR [2]

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Thank you so much. Good afternoon, everybody. Thank you for joining us for this regular call, which is dedicated to our first Q 2020 results.

I hope you all are safe. We are trying (inaudible) interesting call for you with a set of speakers represented by our Deputy Chairman, Alexander Morozov; by our Chief Risk Officer, Dzhangir Dzhangirov. We have Director of Center of Macroeconomic Research, Oleg Zamulin with us. And we have our Senior Vice President, Head of Finance, Alexandra Buriko.

With -- before I turn to our speaker, please forgive me, I will briefly walk you through the housekeeping stuff, which -- during which I have to draw your attention that some information on the call may contain forward-looking statements regarding future events and performance, and actual results may differ materially from those

expressed or implied in the statements made during the call due to known and unknown risks and uncertainties. For more information, please refer to the second page of our presentation, where you may find a lot of interesting stuff.

Thank you for that. And I'll turn it to Alexander Morozov.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [3]

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Good afternoon, everybody. Good time today. And thank you very much for joining us. We are more than happy to present our first quarter results to you. I have to say that we had big internal discussion whether we should postpone a little bit this release of our numbers because of turmoil in markets and say, this virus in the world or just go according to our initial schedule.

After some reflection, we decided to go with our initial schedule. No matter, what's going on around us, we continue to do our best. We continue to run our business as usual. But nevertheless, coronavirus is very important, one of the worst to some extent, something absolutely unexpected for all of us. And before I go to numbers, I'd like to briefly give you a very short update on where we are with regard to our battle with the coronavirus.

I'm pretty sure you know that we have more than 106,000 cases -- confirmed cases of COVID-19 in Russia, with more than 1,000 deaths. And from the last day, we have more than 5,840 cases. In fact the first question which I would expect you to ask me and I'd like to anticipate is how many cases do we have within Sberbank.

We have 372 cases now and within the group of Sberbank that's including 294 cases in Russia. And the remaining parts in our daughter banks including foreign banks, including Europe, including Belarus and so on.

Fortunately, we have no deaths in Russia at all. And one death case in the group outside of Russia. Also very important to know that we have only 10 cases when the virus was transmitted from one employee to another employee, all other cases are naturally not connected to our work and to work of our employees in their offices.

So you see that overall number is relatively small. And proportionate number is much smaller than that in Russia. And it's a very good situation and confirmation of the fact that we did our best to prevent the expansion of the virus within the bank. We created our anticoronavirus headquarter on 5th of March. We were one of the first companies in Russia which did it and 24/7 our dedicated team worked with all of our employees.

In a very short time frame, we have managed to migrate practically 87% of our employees in the headquarters in office buildings for the work with remote access, 90% of all our developers and product developers and IT developers are working long-distance, and overall, 75,000 employees now work from home.

We have ensured a technical and very safe support for more than 100,000 employees simultaneously. And as I have already mentioned, we were one of the very few companies, first companies who created anti-COVID office, which coordinates 24/7 support for all our employees.

At the start of the quarantine, we had to reduce a little bit number of our open branches, state branches. But very soon, we gradually opened many of them and now practically all our branches work as usual and work with our customers following all the very strong recommendations set with regard to COVID-19 virus. Once again, we have only 10 cases of transmission of virus in our offices up to now, hence was suggested to start this.

Now, I'd like to return back to numbers. By the way it is a presentation of our financial results of the first quarter. And before I give the floor to my colleagues to discuss in more details, macro environments and risk management, and after that I'll return back with discussion on net interest income, fees, commission, OpEx and so on and so forth. I'd like to give you just a very few numbers, but very important.

In the first quarter 2020, we earned more than RUB 120 billion, despite the fact that following very conservative but typical for us approach against risk management, we created very substantial risk provisions. In more details, it will be addressed by Dzhangir Dzhangirov, Chief Risk Officer and by me later on. This number we posted return on equity more than 10%, to be precise, 10.6%. We believe that in the current environment it is quite a big achievement, and return on assets 1.5%. And it represents earnings per share RUB 5.6.

Reduction of profit, as I clearly mentioned, was driven practically in full by high credit costs and macro accounts equating to IFRS 9 standards to reflect macro shocks we're faced with now.

Having said that, I'd like to turn to our market fixed and cash. Oleg Zamulin. And today, we prepared quite extended presentation with a lot of new numbers, a lot of new charts and a lot of discussion topics. And I think you'll enjoy it, and Oleg can give you more information on more numbers. We -- Oleg, please go ahead.

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Oleg Zamulin, Sberbank of Russia - Head & Senior MD of Macroeconomic Research Centre [4]

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Yes. Good afternoon, ladies and gentleman. So yes, I want to brief you on what's going on in the Russian economy. Obviously, the Russian economy as any other economy right now is going through difficult times. It's inevitable that the economy will contract this year. But I want to give you some numbers on what exactly to expect and what the risks and uncertainties are.

So here on the first slide, I show three factors of uncertainties. First is the collapse in the oil price, obviously, Russia as an oil exporting country will be hurt by this fall in the oil prices. The second, the more common reasons for economic contraction is the lockdown deliberately imposed by the government to save lives, but that has economic costs. And third factor of uncertainty is the pace of recovery. There is an optimistic view that recovery will be quick, that following the easing of the lockdown, the firms will restart their business and there will be a V-shaped recovery. The last optimistic view is that lockdown will lead to bankruptcies, job losses, and that will create drop in demand and the recovery will take a long time.

So next slide. I want to argue that in regards to at least to the oil price, Russia has built up a lot of resilience with respect to any external shock. Our international reserves actually exceed 1/3 of Russian GDP and exceed the whole foreign debt of Russia, private plus public. The public debt is actually very low. It's only 13% of GDP. And that is thanks to a fiscal rule that we have been following for the last several years. So effectively, our government has been living with the price of oil of $42 per barrel. When oil prices were higher, we accumulated foreign reserves. When they dropped we're spending the accumulated money, so the government budget will not be affected at all by the drop in the oil prices.

Moreover, the Russian private sector also has very small debt. You see that net debt-to-equity ratio is below 20% and has been falling in the last few years. Unemployment is also low, thanks to our very flexible labor market. Even at the time of crisis, our firms prefer frequently to reduce compensation of workers rather than lay them off. That is obviously bad when compensation is reduced, but it is still good that companies retain their workers. And after the lockdown, the hope is that people will immediately be able to restart their economic activity.

Next slide. Moreover, the inflation rate has come down quite substantially after its peak in 2015 and now is below the target of 4%. And the Central Bank has been reducing the interest rate. There was fear that after the drop in the price -- in the exchange rate of the ruble, following the collapse on the oil price, the Central Bank would hike the interest rate. That did not materialize, the depreciation was not that great, and the Central Bank managed to counter it with its international reserves. So the Central Bank actually went back to a reduction of the interest rate by cutting it by 50 basis points last week and has sent a very clear signal that there will be more reductions of the interest rate in the near future.

The banking system also has very good numbers in terms of capital adequacy ratios. You see it's above 14%, which is well above the required number, which also means that there is very little risk of this crisis turning into a banking and financial crisis, which obviously is something that has to be monitored closely.

Next slide, please. Turning back to the oil market. What we've observed is a perfect storm, consistent with a big drop in demand because of the global recession and the collapse of the OPEC+ deal, which led to a price war and big increase in the supply of oil. There was a second OPEC++ deal in April and the supply of oil has been reduced somewhat, but still not enough to match the drop in demand.

The big drop in demand will be in the second quarter. But after that, we expect the demand to -- and not only us, most experts expect the demand for oil to recover. And moreover, it's inevitable that some oilfields, notably in the United States, will have to close at this oil price, and therefore, the supply of oil will also be reduced somewhat. So we expect the oil prices to recover into 30s by the end of the year.

Next slide. Now as I said in the beginning, one of the primary uncertainties is the length and severity of lockdown. So lockdown is a necessary event to save lives, but it does have its economic costs. We don't have numbers yet because the lockdown is an April thing, but service suggests that about half of the firms cut employee hours, 30% of companies sent their employees on unpaid leave. And some companies lay people off. But as you see most companies are still retaining workers and basically allow them to continue working at reduced compensation, which again gives hope for a somewhat swift recovery.

Next slide. Moreover, our estimation suggests that the lockdown is actually not as severe as in many other countries. We follow closely the consumption of electricity. And we observed that electricity is down only by 2.5% in comparison to historic norm. Overall, in April, it was about 4%. This is much lower number than for most European countries where reduction in electricity consumption was from 10% to 30%. And historical evidence suggests that such a reduction in electricity consumption indicates a reduction in economic activity of about 5%. So we are currently about 5% below the norm.

Next slide, please. We also monitor our own clients at Sberbank, watch their activity. And we see that at the beginning of the lockdown, the first week of April, household spending on goods and services was down by about 21%, and then there was a slow gradual recovery. Mostly, of course, the reduction was in the service sector, where the spending went down by more than 50%. You see the sectors where the reduction was more severe, expectedly, airline tickets, jewelry, sports, services, hotels, education and restaurants.

Next slide, please. So now coming back to the phase of recovery, which hopefully will start within the next month. This very much depends on government support. And government has introduced a fiscal package of about 2% of GDP to help the economy reignite. Almost half of that is direct support, meaning an increase in government expenditure or decrease in taxes, whereas the other half is either payment deferrals or loan guarantees. The Minister of Finance, Anton Siluanov, actually estimates the total fiscal value package at about 6.5% of GDP if we include the compensation of lost fiscal revenues. As I said in the previous years, we had fiscal surplus. This year, we'll have fiscal deficit. If you add all of that up, all this amounts to around more than 6% of GDP.

Next slide. And the Bank of Russia also announced a number and introduced a number of measures to support the banking sector. So this is a very dense slide with a lot of information. So let me give you the key takeaways. And if you have more questions then my colleagues and I will be happy to answer them. But most importantly, the Central Bank loosened certain regulatory requirements, reducing the rate of deposit insurance, softening prudential provisions for clients affected by the crisis and decreased risk weights for mortgages. So that allows banking sector to continue its loan and activity.

And next slide, please. So the final slide is the macro forecast, what we expect at the end of the year. So we expect the economy to contract by about 4% in 2020, which is somewhat smaller number than in some other countries. We expect inflation to remain below the target of the Central Bank, although there has been a short lived spike in inflation caused by depreciation of the ruble, it's pretty clear that this spike will not increase the inflation rate by much. And therefore, we expect the Central Bank to continue cutting their interest rate. So we expect it to cut it to at least 5%, quite possibly, the key rate will go even below that. And we expect a certain ruble appreciation as oil prices recover from the second quarter. Thank you. That's my presentation. And if there are any questions, I will be happy to take them at the end.

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Anastasia E. Belyanina, Sberbank of Russia - Head of IR [5]

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Thank you, Oleg, and we turn it to our CRO, Dzhangir Dzhangirov.

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk Management Service [6]

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Good afternoon dear host. Cost of risk is probably a great interest for everyone today. And on the slide, you see the numbers. So lockdown period has started only in late March, impacting last [few days] of the quarter. However, due to the forward-looking nature of IFRS 9, we have shown significant rise in provisioning level with risk provisions reaching as high as RUB 164 billion and with cost of risk being at 2.9%. This is 3x higher than first quarter last year. This provision spike comes from macro adjustments, and I will talk about this later.

Next slide, please. So we have stable nonperforming loans and Stage 3 with coverage rising due to significant interest and provisions.

Next slide, please. Already in the first quarter, several corporate customers were impacted by macroeconomic factors, and therefore, we reclassified them to the Stage 2. And share of Stage 2 increased from 6.5% to 7.9%. Coverage of Stage 1 grew from 0.9% to 1%, mostly due to macro adjustments. And Stage 3 coverage has increased from 70% to 75% due to the new adjusted IRB default definition approved by Central Bank. So this reduced unnecessary conservatives in our model.

Next slide, please. So what's strong is here you see the factors that we included in our PD and LGD models. So what we did, we adjusted our probability of default model for the macro, which was announced by Oleg Zamulin. And we accounted not only for the short-term changes, but also for the middle term forecast. This, therefore, we assumed potential recovery, and this was also reflected in PD.

Another important driver has been LGD downturn for Stage 3. And we also adjusted our models for the early repayments. As you know, we have significant amount of early repayments in the portfolio. But we assume for the next 6 months, given the uncertainty in the market that these early repayments will not come.

Next slide, please. So speaking about the corporate portfolio in more details. Government defined the industries that were impacted mostly by the current situation, and here, you see those industries, and this is RUB 1.1 trillion which is 7.8% of our corporate portfolio and approximately 5% of our total portfolio. However, we see a negative effect in other industries, too, mainly in the oil and gas, office and trade, real estate, water and rail transport.

Next slide, please. It's important to speak about restructuring because this is -- it's an important activity, both for corporate and retail clients. We now propose four support programs for our corporate clients, our own and also three government programs. Our own program is valid for every customer segment, and we are ready to postpone interest and debt repayment for 6 months with respect to maturity shifts. State-driven credit holidays are for SME customers only and under holidays Bank is to postpone interest and/or principal repayment for up to 6 months with monthly payment being unchanged.

There is another program, which is called 1/3. It's also for SME customers. And here, interest and principal are shifted for 6 months with respect to maturity extension. So what happens with the interest rate, 1/3 of the interest rate is written off, 1/3 is paid by the state, and 1/3 is forgiven -- I'm sorry, 1/3 is paid by the customer, 1/3 is paid by the state and 1/3 is written off. And the last one is 0% salary loan. It's guaranteed by Vnesheconombank by 75%. And the loan funded by the Central Bank of Russia with 4% subsidized by Ministry Of Economic Development.

Next slide, please. So here, we see the numbers for those four programs. As you can see, our own program is the most popular one, both in terms of number of applications and in terms of the number of approved loans. So it's also important to say that the new support programs were also announced for the corporate clients, most notably the state subsidy for systemically important companies. It's also important to say that construction, hospitality are expected to get interest subsidies.

Next slide, please. So this is not about create risk but I think it's important to say that we also support our clients in terms of the products and services, which are very relevant for them given the quarantine.

So next slide, we'll start here with -- next slide, please. So here, we see the restructuring information for the retail client. Today, we see significant demand for restructuring. We see seven-fold growth from 25th of March. 1 month demand is higher than the demand for the whole 2019, where we got 250,000 applications. Here again, Sberbank programs are much more popular with only 10% applying for credit holidays. Approval rate is 25% -- 21%, with holiday's approval rate standing at 87%, mostly due to missing document check at the inception. It's allowed to provide documents with the delays.

Next slide. Here just to outline currently available restructuring options for private individuals, I will not describe all the details. I will just say that state program is limited by loan amount and by the entry criteria. So the customer will have to prove that he or she had 30% decrease in the income. We also launched state-supported mortgage program with 6.4% interest rate.

So in the next several slides, you see the way those restructurings works. And the first one is for the consumer loans. State program for consumer loans is designed in such a fashion that one had to shift and literally shift 6 months of the repayment schedule with interest repayment at the end of the schedule. So the customer has to pay for those 6 months, 2/3 of the average market rate. And today, the average market rate for consumer loans is 15%. So the customers will have to pay approximately 10%.

Our own program, on the other hand, for the same product, uniform with split interest accrued during shifted period through the whole loan schedule. Maturity is being shifted to allow same monthly payment.

Next slide. So this slide describes the same for mortgages. So here, the interest rate was -- it works in the same way. So 6 months payments are shifted just to the end of the loan. But here the interest is 0 for those 6 months.

And the last slide here shows the way the government restructuring work for the credit card. So again, we have 6 months' delay with, again, 2/3 of the average market rate paid. And the repayment of interest and principal should be done in 24 equal payments in the future.

So next slide, please. Okay. Basically, on this slide, you see the way how those restructurings will affect our income. Thank you very much. That's all.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [7]

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Thank you very much, Dzhangir. Thank you very much Oleg. I'm pretty sure you'll get a lot of questions at the end of our session that we'll address in Q&A part.

But now let's move back to our revenue drivers which support now and will support in the future the bank in this very challenging time. First of all, traditionally, net interest income. It increased by 10.2% year-to-year to practically RUB 372 billion, and it was supported primarily by the growth of the lending book in the fourth quarter last year and first quarter this year as well, both nominal and real terms. Our retail lending grew by 3.9%, including mortgages, 2.5% growth, consumer lending 6.6%. Corporate brought us practically 8% quarter-on-quarter basis in nominal terms. As was defined, our retail deposits increased by 3.2% in the first quarter. Corporate deposits and accounts grew strongly by practically 14% in the first quarter.

What is very important for me, important is that our net interest margin shows very good resilience up to now, up-to-date. I do not want to mention specific number of our net interest margin, but I can only say that it is slightly better than our initial business plan.

And we expect it was taking into account all the complications on the road. Nevertheless, we have a good chance to manage the margin this year and be in line with our plus or minus initial expectations. During the period, an interest rate shock should not materialize, and this is a big difference versus year 2014 and '15 crisis. First of all, it's because the Danish CBR policy supporting real economy. Central Bank has restarted reduction of the key rate, and so we expect that more will be continued.

Secondly, long-term market rates, we expect to stabilize by the beginning of the second half of the year and adjust our product pricing accordingly.

At the same time, we are facing now a lot of challenges from here and there. But as I have already mentioned, we are facing new challenges, being in much more resilient position versus the previous crisis. I'd like to restate the following facts. Net interest income sensitivity to the interest rate shocks is down by 50% from RUB 42 billion in the fourth quarter 2014 to RUB 21 billion now. The share of floating credit loans in Russian rubles increased from 4% to 20%, 25%.

Loan-to-deposit ratio decreased from 114% to 93.5%. The share of Central Bank funding is down from 10% to 2%. Liquidity position now is much more comfortable with the amount of liquid assets over RUB 3 trillion.

And finally, our foreign exchange cash reserves now exceed $5 billion, just in case coronavirus prevents some of our activities. So we have all the necessary ammunition in our pocket. So we are prepared for practically everything. We feel ourselves much better with that.

What I'd like to discuss a little bit drivers of our net interest margin. So the margin will be supported by all (inaudible) funding causes already mentioned, following the recent and expected key rate decline. Very important to mention that decrease of deposit insurance fees from 0.15 per quarter to 0.10 per quarter, which was announced, means for us RUB 30 billion of saved expense for the year. We have really seen some great recovery of mortgage demand over the last couple of weeks, which will also contribute to net interest income and support our net interest margin.

And finally, I have to mention about expanded foreign exchange portfolio. Expanded already second half year 2019 and first half year 2020. So this foreign exchange denominated credit portfolio should also bring more interest income denominating in Russian rubles. Hence, I'd like to say that at the same time, some headwinds we expect from, first of all, reduction of yield on asset side. The loan yield will inevitably go down following the market rates. Secondly, loan restructuring may have some negative effect definitely, but now it's little bit too early to define the exact impact. We'll return back to the topic when we present our second quarter results.

And also we have to keep in mind that interest recognition on Stage 3 loans gas reserves, not for net interest income. So as of now, we have pros and cons. And so low visibility of loan growth is pretty low. But -- and we should not exclude some compression, some squeezing of our net interest income. But nevertheless, we are well prepared and overall, net interest I expect definitely a manageable situation. And as of now, we are better than we expected. We return back to the discussion of net interest income and net margin when we present second quarter results and maybe some more details I'll give you in the Q&A session provided if you have some questions.

Fees and commissions. Our net fees and commissions grew in first quarter plus 22.8% on annual basis to roughly RUB 126 billion on the back of our regular drivers like operations with bank cards, cash and settlement transactions and rapidly growing brokering business. Brokering business is very important to underline. It developed and exceeds our expectations and very supportive for the overall development of the margin.

Decrease on client transaction activity due to the lockdown will bring some pressure on our fees and commission income. First of all, inquiry callers go down a little bit. Fees on interest on -- sorry, Internet inquiry have been limited to 1% by the regulator recently. And in all we should expect some decrease of insurance business, which will affect our life insurance, first of all. Foreign exchange conversion decreased from cross-border transactions which reduced substantially as a result of coronavirus.

But even in such an environment, the positive effect also in place and is driven by the increase of cashless payments and transfers, some savings on our loyalty program, which we launched, increase of brokerage as very much and foreign exchange income and some progress in digital services, which allow us to cross sell our services. On top of that, I have to mention, that we see very substantial progress on generation of revenues on our ecosystem. And we added very specific parts to our presentation today, which will be addressed by Alexandra Buriko with regard to our ecosystem development. And we expect this ecosystem will bring us more and more gradually quarter-to-quarter. In that respect, very important to understand that coronavirus substantially accelerated the development. And once again confirmed the rightness of our approach, rightness of our strategy. We are becoming more and more digital bank. We provide our customers with more and more digital services. We have more and more customers who use only digital channels and products and a wide range of our ecosystem products. In more details, it will be addressed by Alexandra Buriko later on just in a few minutes.

But before, I'd like to say a few words about OpEx. In the first quarter, OpEx grew by 12.3% compared to the first quarter year 2019, and the growth was largely driven by the development of digital services in Sberbank core business.

So development of our platform, development of tools, integration of our -- and expansion of our platform of subsidiaries and so on and so forth. The development and integration of ecosystem services into the sales network plus, definitely, you should keep in mind, effect of the annual payroll indexation, which happened in the second quarter 2019.

Having said that, I'd like to say that now already in the second quarter, we undertook very serious steps. We took very serious decisions with regard to the optimization of our costs and the effect you'll be seeing starting from this quarter and thereafter.

Practically all items of our OpEx and CapEx will be considered through the zero-based budget approach. I do not want to go too much into details. It will be reflected in our profit and loss. But practically, all items of our OpEx and CapEx were assessed.

Just one detail. Total compensation of the management of the bank this year will be affected more than 2x. And by the way, today, Board of the Bank took a decision to transfer the payroll for April to the funds to fight with coronavirus, to support medicine, to support -- this fight versus the virus. And you'll find more details about that in our press release, which is already published on our website or will be published in a few minutes.

I don't want to go too much into more details on the OpEx because it's important to say, that the fight with the coronavirus also costed us some money and we equipped all our employees with necessary protection, including masks, including everything what we need in that respect. And recreated additional funds following fund of tools and (inaudible) following recommendation of the specialists, how to protect our employees. And I stated results, we have very limited cases of the transmission of virus from one employee to another.

On capital side. Our capital adequacy ratio is 13.79% in the first quarter, including Tier 1 capital 13.31%. Our leverage ratio is 13.1%. As you know, on April 10, transfer of Central Bank raised stake in Sberbank to the Ministry of Finance took place. All the details will be addressed in due time. And so if you have some additional questions, I will be more than happy to address them in Q&A session.

And with that, I'd like to pass once again word to Dzhangir Dzhangirov and he'll give you more details about variety of measures, which were taken for risk-weighted assets optimization, which will be now highlighted in detail by Dzhangirov.

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk Management Service [8]

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Thank you, Alexander. So we have several very good news here. But first of all, in the first quarter, we got improvement of RWA density by 3.8% due to the fact that we got final approval of Central Bank of Russia for our adjusted IRB models for mortgages and consumer loans as well as for specialized lending and corporate. So this change gave us approximately RUB 1.4 trillion RWA release and this is equivalent of 63 basis points in capital adequacy.

Yesterday, we also received great news from Central Bank, the so-called Basel 3.5 for IRB was finally approved. And its implementation as early as May 1 reporting date will give us additional RUB 1.8 trillion RWA release, boosting our capital adequacy by another 68 basis points in the second quarter.

And finally, Central Bank canceled the macroeconomic add-on for the mortgages before 1st of April 2020, and this give us another RUB 0.3 trillion, equivalent of 12 basis points in terms of capital adequacy.

However, I have to make clear that the current pandemic would have higher impact on IRB banks than for the banks on the standardized approach due to its procyclical nature. And we discussed with Central Bank potential measures to reduce procyclicality. That's all. I pass word back to Alexandra.

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Alexandra Buriko, Sberbank of Russia - Senior VP & Head of the Finance Unit [9]

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Thank you very much, Dzhangir, and good afternoon, everybody. As Alexander already mentioned, I would like to highlight some recent achievements of our ecosystem. Generally speaking, e-commerce and video streaming is booming following the result of quarantine measures and lockdown.

We're now on Slide 46. We see very strong demand for e-grocery delivery services. Our company's SberMarket, a part of our joint venture with Mail. Ru Group posted 6x growth in revenues quarter-on-quarter. And you can see the developments in the recent 2-week period of April in comparison to the prior 2 weeks of March, where they grew in number of orders 2x.

Revenue of our food delivery platform, Delivery Club more than doubled in Q1 and also posted significant growth in the first couple of weeks of April. The video streaming online cinema, Okko recorded 4.6x growth year-on-year in monthly paying subscribers. And especially, we see some strong demand in recent weeks following the lockdown.

Based on our eHealth platform, DocDoc, we launched a national COVID-19 call center to provide medical advice. On top of that, it now offers virus testing. Our job classified Rabota.ru launched a free service for quick job search, Beremnarabotu.ru. This service allows a temporary exchange of employees for companies that freezed their businesses due to lockdown.

DomClick, our digital housing platform is getting much traction and half of our applications for mortgage loans have submitted now online. 69% of that in Moscow and 20% growth of digital share across the country in recent years. Over 2 million listings were placed through DomClick at the end of Q1 and MAU increased by more than 25% in the quarter to 5.4 million largely due to expansion of services, including those that are not related to lending. For 10 mortgage deals, every 2 do not involve lending. However, of course, there are some companies in our ecosystem that are suffering from the current environment. Those corporates in ride-hailing, ticketing and online restaurant reservation services.

On Slide 46, you see that Citymobil was 30% down in the month of April, Rambler was 99% down, similar to the food restaurant booking service. Current crisis has just proved once again that our digital transformation is a key component of our long-term success and we move really at accelerated pace. Every two out of our five clients now choose only digital channels. 139 banking services already are available online. Almost 50% of sales, 15 percentage points up year-on-year are executed digitally. Over 9 million clients use Sberbank ID, a unified login that gives access to services of more than 45 ecosystem partners, including Delivery Club, Okko, Citymobil and some other companies of our ecosystems. And before I turn back to Alexander, I just would like to mention that we believe that staying responsible and being a good citizen for our clients, our people and our countries will help us go through challenging times.

This is why we launched a variety of social programs, including, we joined the campaign [MbIBMECTE] to provide voluntary assistance to Russian citizens in isolation, including elderly people. We launched Remote Work Marathon for our team that helps them get into proper rhythm and adjust to a new format of working remotely. Our employees now can use a virtual training platform as the majority of programs are available online. And as Alexander already said, today, we announced an over RUB 3 billion contribution from the bank and our employees, including our senior management to fight against coronavirus.

And for the final remark, I give the word back to Alexander.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [10]

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Thank you very much, Alexandra. We don't quite know what this crisis will look like going forward. But we'd like to hope that we will be able to understand the depth and timing of the lockdown depending how we can go for the next few weeks. And we will understand it best, at least.

We have decided to take -- as of now, taking into accounts very high level of uncertainty, to take a very conservative risk approach. And this has already affected our first quarter results. Moreover, it's very important to mention that we will remain, as usual, very conservative in our provisioning policy during the second quarter.

In our traditional approach, we followed that approach in year 2008, '09, '14, '15. So it's not for the first time for us. We prefer to create provisions fast, quickly and to be on the conservative side. And when we see more clarity, more visibility and more certainty about the future, we take appropriate decisions. But as of now, uncertainty around us and we are on a conservative side.

Our annual forecast, taking that into account, we put on review. And we believe it's too premature to quantify the impact of this market shock, as I'd like to hope, that once we will be able to share our thoughts with you once we have more visible scenario for the future. And since it will happen -- as soon as it happens, we will come back to you.

Nevertheless, we have approached the crisis, as I already mentioned, much better prepared in terms of our financial conditions, in terms of variety and preparedness of our digital services and level of adaptation of the services by our customers.

Also very important to mention that our team is much more experienced now. And so well prepared for the challenges. And taking that all into account, I'd like to reassure you that we are continually making lots of stress tests. And even on the very serious, very severe pressures, we see that we'll be able to remain self-sufficient in terms of capital and in terms of profitability. We -- at least, it's my opinion, we are going to be as usual, as in previous crises, to be profitable in each and every reporting period this year.

So to wrap up and before we go to Q&A session, I'd like to thank all of you for being with us during this challenging, difficult time. And also, I'd like to use this opportunity to say thank you to all of our employees who continue to operate and serve our customers in the front offices and continue to do business as usual.

Thank you very much and we are ready to open the line for Q&A session.

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Questions and Answers

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Anastasia E. Belyanina, Sberbank of Russia - Head of IR [1]

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Thank you, Alexander. We are ready to take the first question.

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Operator [2]

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(Operator Instructions) We will now take our first question.

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Unidentified Analyst, [3]

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I have two questions. My first question is about cost of risk dynamics in the next quarters. To what extent do you think cost of risk can go up in the second quarter versus the first quarter, if this is possible to measure at all? Maybe any indicators you can give us.

And also, maybe more importantly, how do you think your cost of risk will behave when the environment starts to normalize? Do you think it can normalize quite quickly given that the bank takes a conservative approach and charges provisions before you really see significant deterioration of asset quality? Or vice versa, you think that cost of risk normalization will take a long time given that the indebtedness level of your borrowers will go up? So this is my first question.

And my second question is about your costs. You mentioned this big plan starting from the second quarter. Do you think it's possible to measure your cost initiatives? How much cost you could save with the help of this initiative? And also, the second part of this question, shall we view this as a postponement of projects, so this cost will reappear in future periods? Or this is really genuine optimization and this cost will not reappear in the next periods?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk Management Service [4]

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Okay. Speaking about the cost of risk, we expect that the second quarter will be quite difficult in terms of provisions and cost of risk might be even higher than for the first quarter. And it will all depend on the lockdown period and the shape of the crisis. So V-shaped crisis will lead us to quick improvement. And I don't think that we will have to create large provisions in third or fourth quarter if we have V-shape. However, if it's U-shaped and the lockdown period is long, then we might see a difficult year in total.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [5]

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Okay. Thank you, Dzhangir. I'll try to take the second question. Yes. Definitely, we have a very much detailed plan how to optimize our cost structure this year, including both OpEx and CapEx. But what I can see now -- what I'm ready to see now, is that we -- practically, every line of course will be considered, starting from compensation benefits and any CapEx amortization -- and fee amortization and capital expenditure.

But I do not want to give you more details. It all depends now on foreign exchange rates. We have a number of contracts with providers of telecommunication services, of information services and IT providers. Our contracts are denominated in American dollars. We have a lot of -- a number of other uncertainties and variables. And the total effect will -- on our overall OpEx will be a few percentage points, very much noticeable in our end results when it is implemented, but not earlier than the presentation on the second quarter results. You'll see that and we will discuss it in more details.

What is important for us is to find measures which will be sustainable for us. So not only to assure temporary reduction of cost, but to change our processes. And in retrospect, we put enough of this on process redesign. And we actually use machine learning and say to possible extent, reduce manual work where it's possible. We reconsider our needs in office spaces taking into account experience -- positive experience because during the crisis of coronavirus and [elimination of] this before, we eliminate all unnecessary bureaucracy and eliminate paper. So we are trying to use the momentum, to use this opportunity to become a really full digital bank. This is important. Definitely, it's -- it costs some money, the transformation. But first of all, we are smart on transformation. And plus on top of that, we launched a specific dedicated program, which [relates in part] with each managers and every employees to save every single $0.01 in the program or a complicated-type program aiming just in finding additional sales in this economy on every work in place. So it's about efficiency cost. So as I mentioned a number of times in the conference calls, the aim for us is not to reduce costs, but aim for us is to increase efficiency. And the crisis, first, we follow, but you have possibility when you need to reduce your cost, which you can just leave and increase the efficiency. We think that from that perspective, it's very good boost for further increase -- further improvement of our cost-to-income ratio.

And as a result, our cost-to-income ratio this year should improve versus the previous year. I think it's a very important message. And if you take it into account and look at numbers, it's quite a serious guidance for you. I do not want to go more -- to more details.

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Operator [6]

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We will go to our next question.

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Linda Sun-Mattison, [7]

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My name is Linda Sun-Mattison from Invesco. I have a question regarding the credit cost booked in the first quarter. I read this annual report -- in your report that they have -- you have adjusted macro input and the PD ratio for different segment has gone up a lot. But I'm just a bit puzzled by the PD ratio of mortgage going up to more than 20% while the unsecured consumer book is much less. So I'm trying to understand the rationale behind that.

And the second question is related to that is I think you said the macro adjustment accounted for RUB 44 billion of impairment cost. And if I look at the ratio of PD, the jump -- the RUB 44 billion basically, it looks a little bit too low. So I'm trying to understand what's the rationale behind that.

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Anastasia E. Belyanina, Sberbank of Russia - Head of IR [8]

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Thank you.

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk Management Service [9]

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Thank you. So in macroeconomic adjustments, in macroeconomic add-on, we accounted for the new macroeconomic scenario. And indeed, it impacted all segments and all products. In the same time, as I said also during my speech, the -- we changed the definition of defaults for the mortgages and for the consumer loans. So before, it was unnecessary conservative. And now it reflects much more the substance of defaults than we had before. And it was all approved by Central Bank. So this effect of the new default definition outnumbered the effect of the macroeconomic add-on for mortgages. Thank you.

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Operator [10]

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And we go to our next question.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [11]

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It's Andrey Pavlov-Rusinov from Goldman Sachs. I've got several questions. First of all, could you please give us a bit more clarity on impacts from the loan holidays, especially in the government mandated? Do you expect any NPV impact on your loan book, maybe especially in mortgages given that there is a extension of the maturity and you're kind of basically -- and given the maturity of the mortgage book is quite long, so there might be some NPV impact?

And also on their provisioning side, how do you treat the restructurings both on your own program and also on the government-mandated loan holidays? What is the model there? And how much the provisioning coverage need to increase in case the share of this restructuring will go up?

My second question is, actually, as a follow-up to the previous speaker also on the PD models. Could you maybe give us some sensitivity to your GDP assumptions? For example, if you find that the GDP growth this year and, I would say, GDP contraction and growth this year and next year will kind of move in parallel by 1 percentage point, what would be the impact on your macro adjustments in the -- under the IFRS 9? And hence, what could be the impact on the cost of risk?

And finally, if you could give some -- a couple of numbers on your cost sensitivities. First of all, what is the share of FX in the moment in your OpEx base? And also, what is the share of quarterly are -- or annual bonuses in your staff costs?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk Management Service [12]

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Thank you very much, Andrey, for your questions. So with regard to the impact on the NPV of loan holiday, so there will be a day-1 loss recognition due to the restructuring for the mortgages. So this will impact our P&L this year.

For the restructurings, if I understood your question correctly, we will define -- for each case, we'll define whether the impact of the current crisis are temporary for the client or whether it's long term. And if we assume -- if we consider that the client will quickly recover after the crisis, then we will account for small PD increase. Otherwise, if we think that after the crisis, the client will not recover and there is a gap in the cash flow which will not cover the debt, then in this case, we'll of course create higher provisions.

With regard to your third question on the cost of risk, there is no direct correlation between GDP growth and cost of risk. Of course, there is positive correlation in GDP -- sorry, negative of course correlation in GDP growth, then cost of risk will be smaller. However, what we do, we do much more detailed analysis of the impact of GDP and other factors. We do not only link it to GDP, we also link it to the inflation, to the Central Bank rate, to the consumer activities, to the income of the private individuals, et cetera, et cetera. So there is of course negative correlation here, but there is no direct link.

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Anastasia E. Belyanina, Sberbank of Russia - Head of IR [13]

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The next question on cost.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [14]

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Yes. On cost side. It's important to say that the proportion of fixed and variable pay depends on the level of our employees. When it's about our frontline staff, it's about 80% are fixed; and 20% less varied. When it's about our Management Board, the situation is quite the opposite, 20%, 25%, fixed and the remaining 80% --75%, 80%, 85% less varied. So from that perspective, the expenses, compensation and total compensation for the top planners this year will be affected not less than 2x.

And we have different sorts of expenses. However, we have different level of freedom of -- to manage it. We negotiate our contracts with -- also with providers. We look at our needs for this year in -- with regards to additional equipments and at the same time, reducing or suboptimizing some needs, which we have in issue in our business plan. We invest even more in our digitalization. And again, for us, it's now a little bit too easy to give you more details, and I do not want to give you exact number despite the fact that we shall discuss that.

Let's wait a little bit and look at how we implement it. As you well understand, the structure of every service company on banking service structure costs, the biggest part relates to compensation benefits. That's very sensitive part as some other parts are also quite sensitive for the market. So I hope you understands me in the right way why I do not want to go too much into details now.

We -- I hope that we earned some (inaudible) last many years. And now I ask your patience. Just we will see results in numbers in our reporting. It's very difficult to sustain already achieved flow of cost-to-income ratio achieved through the last few years. Where we are today, it's very difficult to sustain in a -- such trouble waters where we are today, facing these lot of challenges on income side. But we are going to do that, to sustain, achieve now, and provide a little bit of luck, so we can improve a little bit. So I have already mentioned that.

It's difficult task. But that's our challenge and our priority for this year. Once again, sorry for repeating it a number of times. For us, it's important to change the structure of our costs in favor of more costs related to IT, more costs related to the development, more permanent cost savings and to accelerate development of our ecosystem and development organization as a technological company.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [15]

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Alexander, that's -- it's very much appreciated, your aim on the cost-to-income ratio. But if it's possible, maybe just a rough estimate of what's your share of the foreign currency cost and total cost base so that we could have an idea of your sensitivities there.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [16]

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We'll return to that topic after the call. To the back of my -- off the back of my memory, it's a few percentage points out of our total OpEx line. So less than 5% of our total OpEx. If we put aside some of this, our -- I'm not really sure, but it's less than 5%.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [17]

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It's much appreciated. And just if I may, just a follow-up to Dzhangir's answer. Basically, do I understand correctly that given that your outlook generally, not only on GDP growth, but overall on economic activity, hasn't traded quite significantly and that led to RUB 44 billion of the macro factors, additional provisions, then a parallel shift of the GDP activity by 1 percentage point should lead in a much lower additional provisioning on their -- on the macro factor side. Is that -- will that be a correct understanding?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk Management Service [18]

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Yes. Andrey, if I understood your question correctly, we took into account all factors, including GDP -- GDP growth. If in your scenario -- in your potential scenario, only GDP changes by 1 percentage point and the other things are the same, consumer income, et cetera, pricing yields, income, et cetera, then the impact will be quite low, the impact of improvement in GDP.

So we -- but we consider that those factors are all connected. I mean if GDP improves, then there will be also changes in other factors as well. So it's all linked.

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Andrey Pavlov-Rusinov, Goldman Sachs Group Inc., Research Division - Research Analyst [19]

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That's clear.

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Operator [20]

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Our next question comes from Gabor Kemeny of Autonomous Research.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [21]

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I have a few questions. The first one is on capital. I understand you mentioned a few tailwinds from adopting Basel 3.5 and canceling the macro add-ons for mortgages altogether up to 80 basis points on capital, but you mentioned the headwind from the rate in migration. My question is on a net basis, based on your current knowledge, shall we expect a capital uplift, a CET1 ratio uplift in the second quarter with all these factors considered?

And then moving to dividends. It seems that you are in a quite comfortable position from a capital perspective. Can you talk a bit about what could potentially drive a lower than 50% dividend payout when you come to making a decision in July?

And then moving back to asset quality sensitivities, I understand that many factors are interlinked here, but I realize that you expect a quite sharp recovery in the oil prices from $30 to around $50 in the next couple of years. Can you give us a sense what sort of additional provisioning would it require under your IFRS 9 expected loss model, if the oil price were to stay at the current level, please?

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [22]

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Okay. Thank you very much for your very detailed question or questions, better to say. I'd like to remind you that just a few months from now, none of us expected the effect of (inaudible) from around the corner in the form of coronavirus-19. None of us knows what will be the trajectory of the -- we are having from this coronavirus, whether it will be V-shaped, U-shaped, L-shaped or something else. So we are now in a position when nobody -- I assume nobody in the world understands the complications on the road on the way back.

So from my side, it will be a little bit unsafe and, say, not responsible to give -- to project now our capital equity ratio next quarter or end of the year. What I can give you as there is some sensitivity, risk-weighted assets increased by RUB 100 billion, [that's a] minus 4 basis points implication, change of foreign exchange rate, devaluation of Russian ruble by RUB 10, it's minus [0.31] basis points. The interest rate increased by 100 basis points, but the implication for capital equity ratio is 24 basis points. We -- our market forecast and guidance was presented by Oleg Zamulin, our Chief Economist. And so based upon that, we see that we do not forecast a serious devaluation of Russian ruble. And if or by the end of the year or beginning of the next year it improves, increasing price, we may see some small appreciation of Russian ruble. So whether there's some positive effect, whether it will be -- so you may calculate basically your own assumptions here and what we -- you may calculate the net effect on our capital.

And again, with regard to -- as of now, we have enough capital. I stress to your question on that. We have capital operation structure, and we have management structured capital as well. Capital size when we had the many previous -- any of previous crisis. So we are prepared for this storm.

But taking into account a lot of uncertainty, we have to keep using profits and say, all the decisions are related to dividends. If so, will be reconfirmed or reconsidered by our next investor meetings, which is scheduled for 19th of May. On 19th of May, our Board of Directors will consider all the topics related to our Annual Shareholders Meeting. As you well know, it was postponed because of coronavirus. So more to that as we have to set a new date for the Annual Shareholders Meeting. And once again approve or reconsider other topics of responsibility of the AGM meeting taking into account real situation and, best to our knowledge, all information we have on that date. That's as much as I can say just now.

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Gabor Zoltan Kemeny, Autonomous Research LLP - Research Analyst [23]

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Just a small follow-up. From all the regulatory changes in capital requirements, do you expect a net positive impact in the second quarter or no?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk Management Service [24]

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Yes. We got -- just yesterday, we got approval of Central -- from Central Bank on the Basel 3.5 for our IRB banks. And the impact of this new regulation is approximately RUB 1.8 trillion RWE improvement, which is equivalent of 60-something basis points in terms of the capital adequacy ratio. The Central Bank also considers cancellation of the macro add-ons for -- not only for the mortgages, which has been already down, but also for other segments to my best knowledge.

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [25]

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So that regulation changes practically every second day or at least every week. And from that perspective, we are hearing a lot of -- all sort of recommendations from the regulators here and there as the situation is changing fast. We share with you our best understanding as of now, as of today. You know all the numbers, you know our sensitivity tables. And let's say, if we get some piece of information, we will immediately share it with you.

And again, as of now, what's best we can say, we refrain from any sort of guidance with regard to the financials before we get more clarity on the further developments and potential recovery from this coronavirus.

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Operator [26]

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Our next question comes from Mikhail Shlemov of VTB Capital.

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Mikhail Shlemov, VTB Capital, Research Division - Equities Analyst [27]

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I've got a set of questions. The first one which I want to start with is actually the mechanics, how the low repayment holidays and the potential change of the interest rate is actually impacting the P&L. The thing which is -- I wanted to clarify, when you restructure low, whatever you think your program or a state-owned one, what is -- whatever you are seeing an impact on the NII over structuring growth have actually happened through the other operating income. That's the first question.

The second question is that -- is to Dzhangir, actually. If you would look at the structure of your loan book, especially different -- given different risk categories, and excluding the COVID-19 impact, what percentage of the loan book would be potentially in vulnerable zone that said if even the restructuring measures would be applied to them, there would be still most likely return out of NPLs as a result of economic downturn?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk Management Service [28]

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Thank you very much for your questions. With regard to the holidays, there will be a day-1 P&L effect mainly from the mortgages because there, the interest rate for the -- for those 6 months is to 0. And therefore, day-1 P&L effect will be more significant than for consumer loans. Our best estimate today is that for each RUB 100 billion of restructuring, the impact should be less than RUB 4 billion in terms of the day-1 P&L.

With regard to the interest income, there won't be a significant effect because the impact is immaterial, so we will do a materiality check. And -- but our best expectation today, there won't be any significant effect.

So with regard to the industries which are vulnerable to the crisis, there is a definition of the -- the definition of the industries by government. And out of that, the most significant industries for us are transportation and tourism, and also the whole SME segment will of course in difficult times today. As I mentioned before, there are also three other industries that are also vulnerable which is oil and gas, office and trade, real estate and also rail and water transportation.

So with regards to the oil and gas, actually, there is -- that leverage in this segment is quite low historically in Russian companies. So most of them have capacity for the decrease in EBITDA and revenues. In the same time, there are some clients with higher leverage where we'll see deterioration. So I do not expect that oil and gas will suffer as a whole sector, but there will be some names which will be impacted, of course.

With regard to the office and trade, real estate, it depends on the period of lockdown. If the lockdown is short, then the recovery will be also quick. Otherwise, if the lockdown is longer and longer, then the impact will be more because -- especially for the trade, real estate, they will not get rental payments and they will suffer. So that's all.

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Mikhail Shlemov, VTB Capital, Research Division - Equities Analyst [29]

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If I may follow up, just like on the impact which you said from restructuring. So basically, for RUB 1 billion of restructured loans, the P&L effect is RUB 4 million, right?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk Management Service [30]

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For -- it's less than 4%. So for RUB 1 billion, it's less than RUB 40 million.

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Mikhail Shlemov, VTB Capital, Research Division - Equities Analyst [31]

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RUB 40 million. Yes.

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Operator [32]

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Our next question comes from Andrew Keeley of Sberbank.

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Anastasia E. Belyanina, Sberbank of Russia - Head of IR [33]

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Before we take -- Andrew, sorry to interrupt you. Before we move to your question, just we want to have a quick follow-up on the previous one.

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk Management Service [34]

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Yes. Yes. I think it's also important to say that if the loan is repaid, then the repayment comes to the last payment. So as you know, the portion of the loan repayments, especially on the mortgages, is very high, and we expect that day 1 -- this day-1 P&L effect will be a little bit vanishing over time with people repaying their mortgages in advance. So they are prepaying and therefore, the impact will be lower. So what I've said is up to 4% is actually the maximum effect that we expect in the worst case.

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Anastasia E. Belyanina, Sberbank of Russia - Head of IR [35]

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Thank you. And we are ready to take the question from Andrew Keeley.

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Andrew Keeley, Sberbank CIB Investment Research - Head of Financial Institutions Research & Senior Analyst [36]

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I have a few quick questions. First of all, on asset quality, there was a pretty big charge in terms of the cost of risk on consumer loans in the first quarter. I think, Dzhangir, you mentioned that there were positive changes in PD models for mortgages, which basically outweighed the changes in the macro and led to a release. Was that also the case in -- for the consumer loans? And if not, I mean just generally, are you seeing much worsening there? How have things changed in April? Was the high charge basically more kind of a cautionary thing than actually seeing kind of material deterioration on the consumer lending side? That's my first question.

My second question is on your loans at fair value. There was quite a high cost of risk in the first quarter. And if I look at the details of the kind of -- the big ticket loans there, it looks like there was an increase from the end of 2019 from four companies to five companies and quite a big jump in the kind of size of those exposures. If you could add any color here on those loans, that would be good. And is the jump in the cost of risk on these loans basically due to kind of oil and commodity price inputs? And would you say that probably kind of fully incorporated now at the kind of current price levels?

And then my third question is on your insurance and pensions income. The revenue -- the net revenue was very strong in the first quarter. I mean RUB 23 billion, I think, compared to around RUB 10 billion for the whole of last year. So I'm just wondering whether you can add any color on that and maybe whether there's been any accounting changes or anything like that?

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Dzhangir Dzhangirov, Sberbank of Russia - Senior VP & Head of Risk Management Service [37]

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With regard to the consumer loans and the effect of the macro, of course, we accounted for this product as well. And indeed, there was positive effects from the new PD definition. However, the total impact on the -- the total impact of the macro and improvement in the default definition for consumer loans and mortgages is negative. So -- and this is reflected in the growth of the provisioning level for consumer loans.

So with regard to the restructuring that we see in April, actually, all numbers are presented as of April 26, and we see significant amount of the applications. As I said, the number of applications as of now is -- just for 1 month, it's 400,000, which is more than we saw for the whole 2019. However, the total number of restructurings is moderate. It's RUB 64 billion, which is less than 1% of our total retail loan portfolio.

And finally, with regard to the fair value, fair value of course is affected by the market parameters, by the oil price, by the change in FX. So therefore, fair value had more significant deterioration. So that's -- in that respect, you are fully right.

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Operator [38]

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We have another question from Elena Tsareva of BCS Global Markets.

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Elena Tsareva, BCS Financial Group, Research Division - Senior Banking Analyst [39]

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Mostly, my questions were answered. I just have a follow-up question on cost of risk in retail. Maybe you can share what kind of like unemployment rate assumption, given we don't have it disclosed in the presentation, is for cost of risk for IFRS model and maybe just the peak level this year you assume for unemployment in Russia?

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Anastasia E. Belyanina, Sberbank of Russia - Head of IR [40]

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We'll start, Elena, answering your question on unemployment with some thoughts from Oleg Zamulin.

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Oleg Zamulin, Sberbank of Russia - Head & Senior MD of Macroeconomic Research Centre [41]

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Right. So in our baseline scenario, we put 7.5% unemployment at the peak of this crisis. However, as I mentioned in my presentation, historically, Russian unemployment reacted very mildly to crisis situations because our legal market is quite flexible. There's usually more reduction in the compensation rather than firing of employees. It's not clear whether this crisis will be similar to the previous ones. So we put in somewhat strong direction of unemployment this time. But again, it's not clear when it will happen.

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Elena Tsareva, BCS Financial Group, Research Division - Senior Banking Analyst [42]

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And the peak level is expected like third quarter of the -- this year or...

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Oleg Zamulin, Sberbank of Russia - Head & Senior MD of Macroeconomic Research Centre [43]

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So the peak is factored in the second quarter of this year. So basically, in the next couple of months.

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Operator [44]

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There are currently no more questions in the English side of the queue. We will move to the Russian side.

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Anastasia E. Belyanina, Sberbank of Russia - Head of IR [45]

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Thank you.

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Operator [46]

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[Interpreted] (Operator Instructions) So we have a question. You're welcome to ask. Yes. Hello? Can you hear me? (Operator Instructions)

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Unidentified Analyst, [47]

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(inaudible) from Interfax. I have the following question to Sberbank. Now you plan to present an updated strategy, but now there is such an uncertainty that you cannot really give a forecast for this year. The reason is understandable. What will be -- with the strategy, will it be kind of put on hold? What is actually happening in terms of the strategy? Can you give us some color on that?

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Alexander Vladimirovich Morozov, Sberbank of Russia - Deputy Chairman of the Executive Board & CFO [48]

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As soon as we get more certainty about the outcome of this coronavirus, we return back with updates of our guidance for this year and with updated timetable with regard to the presentation of our new strategy. But I can assure you that we will continue to do all the same, but better and faster, okay? And the development of the coronavirus, what we see now in the world what -- is a very good confirmation of rightness of our approach.

Online banking, digitalization, ecosystem and a good variety of products offered to our customers through our channels, off-line and online. So from that perspective, I think that you could expect now further elaboration of how we can proceed, but better, faster and in more efficient way when -- with that.

But with regard to the timetable of -- exact timetable representation of strategy, we'll update you no later than presentation of our second quarter results.

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Operator [49]

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[Interpreted] (Operator Instructions) Currently, there are no more questions. So I would like to give the floor to our speakers for the conclusion remarks.

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Anastasia E. Belyanina, Sberbank of Russia - Head of IR [50]

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[Interpreted] I would like to thank everyone again. Thank you very much for being with us in these challenging times. Thank you for trusting us. I would like to thank again our employees who are still operating, who are still functioning and providing service into our -- the customers and support them all the way.

I hope that the development of our bank that you have seen in the recent years that helped to drive the bank, to push the bank to one of the leading online services company and it helped to push the country to one of the online service leaders. It was very important, especially for this crisis, we see your support. Everything that we can do from our part, we do that to make sure that we weather the storm, heads up, and with minimal losses for our customers, for our shareholders. And of course, we make sure that everyone is healthy.

Thank you very much. Stay healthy, stay safe and see you again. Goodbye.

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Operator [51]

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[Interpreted] Thank you. This adjourns the -- today's conference. You can now disconnect.

[Portions of this transcript that are marked Interpreted were spoken by an interpreter present on the live call.]