Minutes of the beginning of the meeting:
Vladimir Putin: Mr Gref, it is common knowledge that Sberbank is the largest Russian financial institution, and that conditions in the financial sector, the overall economy and many social issues largely depend on its performance. This is because you provide substantial loans to small and medium-sized businesses including the defence industry. Tell me about your bank’s 2010 performance? How did your net profits and revenues grow? How did the loan portfolio change? How did it grow, and how did its structure change? And what can you say about the first part of this year?
German Gref: Thank you very much, Mr Putin. We still felt the impact of the crisis in 2010, which was a somewhat difficult period for us. However, we posted much better results last year over all previous years and throughout the entire history of Sberbank. Our revenues soared by 90% last year, with earnings before interest and taxes totalling 225 billion roubles. Net profits totalled 183.6 billion roubles after taxation (based on Russian accounting standards). Those financial statements, however, still have to be adjusted for events occurring after the reporting date. We will pay more taxes, and the final amount will total a still impressive 175 billion roubles. This is almost twice what Sberbank earned in its best years.
Last year, we made 100% more loans than in 2009. Our loan portfolio increased by 11.3%. In all, the bank provided loans worth 1.3 trillion roubles last year.
Vladimir Putin: This is an all-time high.
German Gref: We created the required base during the crisis years, and now continue to maintain it. Even though we had entered the implementation stage of the strategy, 2010 was quite active. In 2011-2012, we will invest heavily in modernising the bank’s entire physical infrastructure. We have maintained control over our spending. Last year, our expense ratio was 42.5% based on Russian accounting standards, and about 40% based on international standards. This is one of the best indicators among banks worldwide. Despite having a huge network, we’ve been able to maintain this indicator at such a high level. I can say that in our strategy we deemed this indicator a very good one for us: we were dreaming of taking it up to 50%, and now we have seriously lowered it. I think that in the coming years, despite such large investments into modernising and re-equipping banks, we will keep this indicator close to this level.
Vladimir Putin: Still, what is the structure of your loan portfolio? How much to the economy, industry and agriculture, and how much to the people? Do you provide long-term money and on what conditions?
German Gref: It is very important that this structure has recently started to change. Given such a large loan portfolio, it is of course very difficult to change substantially. However, we have made some significant modifications. First, we learned a lot from the crisis, and we have stepped up our investments into securities because the loan portfolio, as part of our assets, had been inadmissibly high. And now, we have slightly diversified it.
Second. We have increased the amount of loans to individuals. Currently, they make up about a third of our entire portfolio. Unfortunately, I cannot yet claim that we have seriously altered the portfolio structure in favour of small business. This a priority task for us. Last year we approved eight products for small business: the products are customized to cater to the needs of small businesses. We have tried to develop a line of requirements. Each requirement will have a specific product for small business. Now our products cover the whole range: from working capital financing to investment projects.
So far we do not provide loans to startups and venture projects – this requires a special competence. Unfortunately, we lack such a competence yet. We are working on it. I think that in the coming two years we will manage to develop such a competence.
Second. We have set up a so-called credit factory, or a new credit processing system where all loans to private individuals, except mortgage loans, are granted within two days and credit decisions are taken within a day. Hopefully, by the end of the year, mortgages will also be processed through our new credit processing system. This is unprecedented. It’s our goal. Mortgage loans are quite complex, but we will give it a try. We have also included small business loans of up to 1 million roubles in our credit processing system. We approve them within two days. This system is already operational in eight of the seventeen regional banks and covers half of the country’s area. It will be available throughout the country by this summer.
Vladimir Putin: Two thirds of your credit portfolio has been invested in the economy, correct?
German Gref: Yes, two thirds of our loan portfolio has been invested in the economy. We are the largest creditor in the agriculture sector. Over 600 billion roubles in our portfolio have been invested in agriculture. The percent of agriculture in our portfolio has increased over the past year. Last year was quite challenging for agriculture due to the drought. However, we have not incurred any major losses, due to the timely extensions of loans and the agreement reached with the government to subsidise interest rates.
Vladimir Putin: You are also using our guarantees, right?
German Gref: Yes, and the guarantees. Mr Putin, I would like to specifically point out that so far there are no claims against the 300 billion roubles worth of government guarantees provided during the economic downturn, not only to Sberbank, but to other banks as well (of course, we issued the bulk of the funds). This indicates that both the companies which received the guarantees (they are acting very responsibly) and the banks are trying to pay off the loans, and nobody wants to owe the government, which is very good, of course.
Vladimir Putin: This means that the mechanism is working very efficiently.
German Gref: The process works properly. And most importantly, large-scale government spending has never materialised despite the serious concern to this effect at the time the guarantees were considered.
Vladimir Putin: Thank God. What about the lending terms?
German Gref: What we did in this area is also very important. Excuse me, but I want to add one more thing regarding small business. It takes two days from the application date to the issue date to have a loan processed through the new credit processing system. We have also developed another technology called credit conveyor, which takes six days to issue a loan from the application date. This is based on the best international practices in cooperation with one of the leading consulting companies in the field. Currently, we are testing this project and planning to launch it throughout the bank by the year’s end. It will work with small business loans of up to 150 million roubles, which is a significant amount, and I think that small business will appreciate it.
During the past year we reduced, by approximately three times, the time for extending credit to corporate clients for the introduction of new technology. Today, we can issue a loan in 15 days, compared to 45 days before. Until the end of this year we have set the goal of issuing the bulk of loans, so-called simple loans in nine days, and complex loans in 15 days. If the transactions are very complicated we would like to be able to handle them within one month. This is our goal, and I hope that we will be able to reach it this year.
As for long-term loans, Mr Putin, last year we decided to grant loans for 15 years in roubles. For the time being we are the only bank to do this. Needless to say, we deal with most reliable clients. We issued the first loan to the Holding MRSK (reorganized RAO UES) for 15 years, and this is the first case in the new Russian practice. We see that such opportunities exist although inflation is still high and it has been growing since the beginning of the year. Nevertheless, we used every available mechanism to grant this loan, and we believe that our balance allows us to grant long-term loans to the economy.
And, secondly, we have built up a competent group. It took us two years to train people for the lending system. We have issued the first loan, or, to be more precise, we have decided to issue it. This move was delayed by the events on the Moscow-St. Petersburg road, and I hope that we will complete what we have to and start financing. This is an infrastructure project. These are loans for 20 and 30 years. We have a very comfortable partnership with Vnesheconombank. We are funding such projects jointly, and we certainly understand that such a long-term project can only be financed by companies that…
Vladimir Putin: French companies working here take loans from France…
German Gref: Mr Putin, we are fully funding this project -- along with Vnesheconombank. They were planning to take it. The European Bank for Reconstruction and Development…
Vladimir Putin: And the French government was ready to guarantee the deal?
German Gref: Mr Putin, for the time being the private part of the project is being financed by a consortium – a syndicated loan from Sberbank and Vnesheconombank. We have signed an agreement with the Vinci company and we are not at all against having partners from other countries, but for the time being there are none.
We are now working on syndicating a loan for the Orlovsky Tunnel in St Petersburg, the Western High-Speed Diameter, and a whole number of other infrastructure projects, such as an airport and a waste management plant… These are all long-term projects, but I think that with such partnership we will be able to invest in them step by step.
Vladimir Putin: What is the cost of mortgage loans today?
German Gref: Mr Putin, it varies. The cheapest mortgage loans are given at 9.5% interest rates and the most expensive ones are at 13.5%-14%.
Vladimir Putin: So, on average, you get…
German Gref: I think 11%-11.5%.
German Gref: But if it is a reliable borrower and if we see that apartments will be built in these buildings, we finance them. If the construction is about to be completed, we lower the rates on mortgage loans.
Vladimir Putin: Do you think more people are taking out mortgage loans?
German Gref: Yes, this was happening throughout last year. And, you know, in the past few months people felt that inflation on the housing market would be growing. Prices on flats are going up, but this growth is not yet critical. I’m afraid that people are scared by inflation now. In the last four or five months we have registered a growing demand. It is important, of course, to support this growth with supply. We are afraid there will be a gap because the construction of new housing was not funded for two years and this will result in a decline in demand.
Last year we decided to lend to all types of real estate and announced the principles on which we will do this to our borrowers. We told them what types of financing we consider more risky because of the crisis, and where regional and probably federal authorities should provide support.
Take hotels, for instance. They are very difficult to finance and it takes a very long time for them to pay back. As a rule, we deal with such projects only on highly-competitive markets or if we are given support.
Vladimir Putin: And what about consumer loans (excluding mortgage)? How do matters stand in this sphere?
German Gref: Demand is substantially recovering, Mr Putin. The demand for consumer loans in December is usually very high, but in January there is always a downfall.
This January we worked at the limit of our capabilities. There has been a decline in February but on average we had about 14,000 applications a day over the past year. In December, there were 25,000-28,000 a day and in January 30,000-31,000 a day.
Vladimir Putin: Excellent. And what if we decide to place money with you together with the guys from the government? How much annual interest will you pay us?
German Gref: This will depend on the amount and on the term of your deposit.
Vladimir Putin: Suppose, for one year. These people will place money with you for a year and those to the right of me for six months.
German Gref: The interest for six months will be much lower, I think about 5%.
Vladimir Putin: You are simply crooks. This is so little.
German Gref: This is true, yes. But the annual interest will be about 6.5%.
Vladimir Putin: How does this compare with your competitors in Western financial institutions? How much do they give?
German Gref: They give even less.
Vladimir Putin: They are even bigger crooks then…
German Gref: Mr Putin, I wouldn’t call them crooks… Why don’t you ask me about the interest we give…
Vladimir Putin: I’m just joking. How much do you give in currency? If some of our colleagues decide to give you currency?
German Gref: Annual currency loans are issued at 4.5%.
Vladimir Putin: What about Europe? 1.5% or 2%?
German Gref: I think so.
Vladimir Putin: Then Sberbank offers a better option.
German Gref: It is better and more reliable.