Annual Report and Accounts

Transcription

1 Annual Report and Accounts

2 Оглавление Annual Report and Accounts Contents The Group s General Information 4 Integration results 6 Financial Performance Rewiew Assets Liabilities Profitability Capital 67 Risk Management Review Risk Management System Key Risk Areas and Risk Management Techniques Credit Risk Liquidity Risk Market Risks Operational Risks Anti-money laundering and counter-terrorist financing procedures Legal and Reputational Risks Management Strategic Risks Priorities Corporate Governance Efficient Corporate Governance Framework Share Capital General Shareholders Meeting Supervisory Board Structure and Proceedings Supervisory Board Resolutions in Management Board Risks Committee Audit Committee Nomination and Remuneration Committee Chairman s Statement 8 President s Statement 10 Market Review Market Review Russian Banking Overview 15 Abbreviations 96 Appendix Consolidated financial statements 98 6 Operation review Corporate Banking 17 Overview 17 Financial Highlights 20 Clients 21 Remote banking 21 Global transaction banking 22 Precious metals 22 Improvement and automation of existing business processes 22 Strategic objectives of Corporate Banking Segment for Retail Banking 23 Overview 23 Financial Highlights 27 Clients 28 Lending 29 Cards and ATMs 30 Branch network 31 Other distribution channels and internet banking 31 Strategic objectives of the Retail Banking Segment for Small Business 32 Overview 32 Financial Highlights 35 Clients and regional distribution 36 Loan portfolio structure by industry 36 Product line and sales channels 36 Strategic objectives of Small Business Banking Segment for Рrivate banking 38 Overview 38 Business structure and open product architecture principle 40 Banking products 40 Legal advice 40 Lifestyle 40 Investments 41 Customer service 41 Staff development 41 Professional awards Investment Banking 42 Overview 42 Financial Highlights 45 Clients 45 Repurchase transactions 46 Debt capital markets 46 Sales in financial markets 46 Client conversions 47 Brokerage services Strategic Goals Otkritie Bank 48 Overview 48 IFRS Highlights 49 Key Results Objectives Information Technology Corporate Social Responsibility Human Resources 58 NOMOS-BANK integration into Otkritie FC 60 Priority segments and projects in Strategy and Priorities

3 Annual Report and Accounts For further details please go to the website: investor-relations/ The Group s General information 7 key regions: UNIVERSAL BANK: four key segments corporate banking, retail banking, small business and investment business St. Petersburg and Leningrad region 105 branches are 13 NOMOS 92 Otkritie Bank 809 branches and other point of sales Khabarovsk and Khabarovsk region 6 branches are 5 NOMOS 1 Otkritie Bank NOMOS-BANK ratings: BB- (S&P) BB- (Fitch) BA3 (Moodys) CLIENTS in corporate segment largest privately-owned Bank * 16,800 around 3.2 million in retail segment by total assets among largest Russian banks * 141,500 in small business segment Moscow and Moscow region 88 branches are 31 NOMOS 57 Otkritie Bank FINANCIAL HIGHLIGHTS ** RUB1379.1bilion The Group s total assets at the end of % RUB879.3 bilion The Group s loan portfolio, net of provisions, at the end of % * According to Interfax 100 rating based on financial statements under Russian Accounting Standards as of December 31,. ** Financial information presented in the report is confirmed by consolidated financial statements approved by the independent auditor and prepared in accordance with International Financial Reporting Standards if other is not stated. *** Including subsidiary companies which hold 5.4% of common shares. **** Including non-government pension funds which hold 16,9% of common shares, Deutsche Bank Aktiengesellschaft 7.5% and others 0.7% RUB17.3 bilion Net profit for. A record for the Group s 20 year history % The Bank s Shareholders is one word as of April 7, 2014: *** 74.9% Otkritie FC **** 25.1% free float Saratov and Saratov region 16 branches are 1 NOMOS 15 Otkritie Bank Ekaterinburg and Sverdlovsk region 51 branches are 8 NOMOS 43 Otkritie Bank Tyumen (incl. Khanty-Mansiysk and Yamalo-Nenets) 137 branches are 132 NOMOS 5 Otkritie Bank Novosibirsk and Novosibirsk region 48 branches are 31 NOMOS 17 Otkritie Bank 57 economically developed regions of Russia During the year, further to its business expansion and customer service improvement strategy, NOMOS-BANK launched 255 mini-offices in 175 Russian cities. 4 5

4 Annual Report and Accounts The integration project is running successfully the Group managed to retain all its retail and small business clients who were transferred from NOMOS-BANK to Otkritie Bank a key indicator of efficiency 2 Integration results In April the integration strategy was confirmed. According to the integration strategy, Otkritie Bank focuses on retail and small businesses, and NOMOS-BANK focuses on corporate business and Investment Banking ( IB ). The integration process started in June. Main activities in the Retail business include: Alignment of product mix Sale of loan portfolio (cession) to Otkritie Bank Transfer of infrastructure & staff to Otkritie Bank Transfer of ATM network to Otkritie Bank Main activities for SME business: Sale of SME loan portfolio to Otkritie Bank Transfer of cash & settlement services to Otkritie Bank Main activities in the Corporate business include: Sale of loan portfolio to NOMOS-BANK Transfer of corporate client base to NOMOS-BANK Infrastructure integration results for : Otkritie Bank and NOMOS-BANK have developed a unique model of a shared use of bank office space, allowing retail and SME clients of NOMOS-BANK and Otkritie Bank to receive full services in one office during the transition period Methodology of NOMOS-BANK retail / SME network transfer to Otkritie Bank has been approved by CBR Project started in June Retail infrastructure transfer to Otkritie Bank follows the plan below: 131sales offices in NOMOS-BANK MAIN INTEGRATION RESULTS FOR : 1. Product mix alignment: Alignment of pricing and product-related parameters for deposits, loans, and fee-based products was completed in ; Starting from April 2014, all new business (sales) will be done from Otkritie Bank. 2. Loan portfolio sale results Retail portfolio sale: 3 tranches totaling RUB bn (); SME portfolio sale: 2 tranches totaling RUB 2.6 bn (); Sale of retail & SME loans to be completed by January 1, Infrastructure Results: As of today, 51 offices out of 69 have been transferred to Otkritie Bank; Plans: transfer 14 offices in 2014 and 4 offices in Staff transfer: sales teams Retail sales team move from NOMOS-BANK to Otkritie Bank to be completed by April 15, 2014; SME sales team move from NOMOS-BANK to Otkritie Bank is largely completed; remaining employees in NOMOS-BANK will be focusing on servicing the existing portfolio in the next 3-6 months. 5. ATM networks ATM networks of Otkritie Bank, NOMOS-BANK and BKM were combined in April, allowing clients to withdraw and deposit cash, pay for services, etc. without any fees. Quantity of ATMs As at YE, the network numbered 1,825 ATMs (not taking into account Otkritie Bank); As at YE, the network numbered 2,670 ATMs. 69 transfer to Otkritie Bank 41 Corporate offices 90 Retail offices Shared use* by NOMOS-BANK 11and Otkritie Bank 10 closed * Methodology of NOMOS-BANK retail / SME network transfer to Otkritie Bank has been approved by CBR. 6 7

5 Annual Report and Accounts NOMOS-BANK, one of the oldest Russian private banks that celebrated its 20th anniversary in, remains one of the most dynamic and successful banks in Russia Our strategy for long-term expansion is aimed at growing both organically, by effectively managing the relations with our clients, as well as through mergers and acquisitions 3 Chairman s Statement In, Otkritie Financial Corporation ( Otkritie FC ) obtained a controlling stake in NOMOS-BANK as it became the holding bank of Russia s largest private banking group. NOMOS-BANK, one of the oldest Russian Private Banks that celebrated its 20th anniversary in, remains one of the most dynamic and successful banks in Russia. According to The Banker, NOMOS- BANK ranked in among the world s TOP-40 largest banks and the TOP-15 banks in Central and Eastern Europe by Tier 1 Capital. During the integration into Otkritie Financial Corporation NOMOS- BANK gained control over Otkritie Bank. Both the consolidated financial statements of NOMOS and the data in this report illustrate our success in the implementation of this significant project to form Russia s largest full-service banking group within Otkritie Financial Corporation. We, the shareholders of the Bank, are delighted to have seen the Bank consistently improve its performance over recent years. was no exception: NOMOS increased its assets by 53.2% to RUB 1.4 billion, generating RUB 17.3 billion in net profit a record unmatched in 20 years of the Group s history. Return on equity (ROE) reached 17.5%* in (: 18.3%) and medium-term assets yielded a 1.7% return over the year (: 2.0%). The Group s loan portfolio, net of provisions, rose to RUB billion (an increase of 48.9%), with corporate and retail loans up 30.6% to RUB billion and 92.0% to RUB billion, respectively. Customer accounts rose by 65.7% to RUB billion in, comprised 63.0% of the Group s total liabilities. The key driver behind the Group s unparalleled growth has been the simultaneous deployment of a conservative risk management policy across all areas of the business. True to its tradition for prudence, the Group continues to ensure the sustainable quality and a high degree of diversification of its assets. The cost of risk was 1.2% in, decreasing in line with targets. Over, we achieved notable progress in the Bank s development thanks to the highly professional team and the correct choice of strategy for long-term expansion which is aimed at growing organically, by capitalising on our advances in customer relationship management in the corporate, small business and retail segments, as well as through mergers and acquisitions. We believe that this strategy will enable us to create added value for the Bank, its shareholders and clients for years to come. Ruben Aganbegyan Chairman of Supervisory Board Ruben Aganbegyan Chairman of Supervisory Board * 18% ROE according to management information, net of the capital increase from the October SPO intended for subsequent consolidation of a controlling stake in Otkritie Bank. 8 9

6 Annual Report and Accounts We remain confident and optimistic about our future and NOMOS will continue to take steps to develop its business in all areas In NOMOS demonstrated an impressive business growth rate, generating RUB 17.3 billion in net profit a record for the Group 4 President s Statement was one of the most momentous years in the history of the Group: we celebrated NOMOS-BANK s 20th anniversary, Otkritie Financial Corporation took control of almost 75% of NOMOS- BANK s stock, and over the year we used all our efforts to integrate NOMOS into the Corporation s structure. This project, creating the national largest full-service Private Banking group with an entirely new format based on convenient and prompt customer service, an extended range of products and services, and reliability, is crucial for the future development of not only NOMOS-BANK but also of Russia s financial market as a whole. The integration is handled by managers from both Otkritie Financial Corporation and NOMOS-BANK brought together to form a united team with a solid track record of successful bank mergers in Russia. This was key to the success of the exercise and the first positive results of the integration were already visible in. The number of corporate and retail clients of the Group grew by 0.25x and 2.2x, respectively, while the Small Business Banking Segment almost doubled its client base. The Group expanded its geographic reach to encompass the 57 economically developed regions of Russia and a significant market share in Moscow and the Moscow Region, Saint Petersburg and the Leningrad Region, Tyumen and the Khanty-Mansi Autonomous District, Yekaterinburg, Saratov, Novosibirsk and Khabarovsk. In NOMOS demonstrated an impressive business growth rate generated RUB 17.3 billion in net profit a record for the Group. Our assets and total loans net of provisions grew by 53.2% and 48.9%, respectively. ROE reached 17.5% in *. In October, NOMOS-BANK successfully completed an additional share issue on the Moscow Exchange and raised RUB 19.1 billion, taking the Group s equity to RUB billion as at the end of. We remain confident and optimistic about our future and NOMOS will continue to take steps to develop its business in all areas. Our priority objectives include: To grow our business at a rate above the market average by making the most of all opportunities offered by the expanded banking Group. To improve efficiency and profitability in each business area, including through synergies between the Corporate, Retail and Investment Banking segments. To enhance our risk management system further. To foster long-term customer relations in each business segment on the basis of fair pricing, a high quality of service and the introduction of innovative products. We also improved the quality and updated the range of products and services offered to our clients in our all business segments crucial to the Bank s new format. Dmitry Romaev President, Chairman of the Management Board, member of Supervisory Board Dmitry Romaev President, Chairman of the Management Board, member of Supervisory Board * 18% ROE according to management information, net of the capital increase from the October SPO intended for subsequent consolidation of a controlling stake in Otkritie Bank

7 Annual Report and Accounts Russia has good prospects of encouraging new investment inflow and resuming its economic growth 5.1. MARKET REVIEW OVERVIEW In, Russian GDP reached RUB 66,755 billion. GDP volume in comparable prices grew by 1.3% (: 3.4%) with industrial production up 0.4% (: 3.4%)*. 5 The key factor behind the slower GDP growth in Russia was a decline in investment activity due to the completion of several major governmental infrastructure projects. Private investments were also on hold against the backdrop of deteriorating global markets and capital outflow from emerging markets. As a result, fixed capital investments shrank by 0.2% as at the end of the year for the first time since Domestic consumer, after demand which has been the driver of the Russian economy over recent years, continued its upward trend throughout ; however, at the end of the year a slowdown became apparent. The weakening of consumer demand is primarily due to Inflation rate (as at year-end) slower growth in real household disposable income (3.3% against 4.6% a year earlier) resulting from a slow-down in salaries increase and a stabilisation of the inflation rate at 6.5%. Another factor was the stricter consumer lending conditions in light of deteriorating bank loan portfolios. These trends are likely to continue in 2014 meaning that shrinking consumer demand may become more apparent as the year progresses and play a key role in negatively impacting economy growth rates. The GDP growth rate forecast made by the government is within the 1% level and 1.1% in the most optimistic scenario. Unemployment rate (as at year-end) Market Review 2009 According to the ministry of Economic Development of Russia According to the Ministry of Economic Development of Russia and Rosstat 5.1 Market Review 5.2 Russian Banking Overview In, the government of Russia employed different forms of budgetary and credit support to businesses. It prolonged reduced insurance contributions for small enterprises and widened SME s access to public sector tenders. A resolution was adopted to restrict a further increase in natural monopolies prices for 2014 which is expected in turn to restrain inflation. The government stepped up its efforts to pull Russian businesses back from offshore jurisdictions with the expected outcome being a lower capital outflow from Russia. The government also continued with its privatisation programme, selling shareholdings in 150 companies. In, total revenues of the federal budget from the privatisation/ sale and use of state-owned assets reached RUB 209 billion, higher (in absolute terms) than in the early 2000 s (although revenues were even higher in 2011 and ). Major infrastructure projects are an absolute priority for Russia s overall economy and for major Russian companies, most notably for ferrous and non-ferrous metal producers struggling with the prolonged global downturn. At the same time, the expected creation of the federal Loan Guarantee Agency (LGA) with capital of between RUB billion will reduce risks associated with loans to small and medium enterprises, including long-term ones, thus empowering SMEs to contribute to a new wave of economic growth. * According to the Ministry of Economic Development of Russia and Rosstat

8 Market Review Annual Report and Accounts New mechanisms to finance major investment projects and control natural monopolies price growth are expected to help in restraining inflation and bringing liquidity to the economy given a smooth controllable decline in the real exchange rate of the Russian rouble, which is also necessary for the banking industry. The budget rule* introduced in will sustain a 3% 4% increase in the federal budget s expenditure, which will bring down inflation pressure in the future. According to Roskomstat s provisional data, the inflation rate was 6.5% in, in line with the government s 6% target. The Russian budget remains resilient. The federal budget deficiency in was RUB 323 billion, which is only 0.5% of GDP. Fiscal syrplus/deficit and Government debt as % of GDP Fiscal syrplus / deficit as % of GDP Government debt / GDP, % According to the Ministry of Economic Development of Russia Government debt as % of GDP, the debt burden remains significantly low at 10.7% of GDP Rate of inflation for the year ended 6.5% As at January 1, 2014, Russia s domestic public debt in the form of rouble-denominated securities reached RUB 4.4 trillion, a 9.1% growth year-on-year, while its foreign debt was estimated by the Russian Central Bank to be USD 732 billion. This debt was used to cover the federal budget deficit and allocate more than RUB 200 billion to the Reserve Fund. As at the beginning of 2014, the aggregate of the Reserve Fund and the National Welfare Fund was USD 176 billion or 8.6% of GDP. At the same time, the debt burden remains significantly low at 10.7% of GDP, which gives Russia an advantage compared to other emerging markets and will also have a favourable impact on Russia s credit ratings. A further increase in capital outflow from Russia may adversely affect the national economy. According to the preliminary balance of payments published by the Russian Central Bank, in net capital withdrawals from Russia by private companies were up 14.8% (USD 62.7 billion against USD 54.6 billion in ); in 2014 it may go up as high as USD 85 billion to USD 100 billion. In the meantime, given the relatively flat oil prices (USD per barrel of Urals oil as compared to USD in, and no material increase is expected in 2014 and 2015), Russia has good prospects to encourage new investment inflow and resume its economic growth RUSSIAN BANKING OVERVIEW Banking has been one of the fastest growing sectors of the Russian economy, although the general economic slowdown of and has had a negative effect on banking dynamics as a whole. In, banking assets growth slowed to 16.0%* (compared to 18.9% in ). Russian banks aggregated loan portfolio net of provisions was up 17.2% (: 21.5%) to reach RUB 30.2 trillion at the end of ; corporate loans grew by 12.9% (: 13.8%) and totalled RUB 20.5 trillion. Retail loans posted notably weaker dynamics; although in general this segment performed well with 27.8% growth in the loan portfolio net of provisions (compared to 39.5% in ). This slowdown was due to the stricter regulation of non-secured consumer lending by the Russian Central Bank, in particular, higher statutory provisions for losses and a higher risk weight of consumer loans for the purpose of statutory capital requirement calculation. In, liabilities growth slowed down to 13.6% (compared to 18.9% in ). This increase was mostly fuelled by retail deposits which were approximately RUB 17 trillion by the end of (up 19.0%); growth was recorded both in term and call deposits. Corporate deposits rose 12.7% (compared to 15.0% in ). Due to this liabilities growth slowdown and an environment of tight liquidity, credit institutions became more dependent on the Central Bank s funds, made available, in the first instance, via repurchase transactions. The percentage of banking liabilities attributable to the Central Bank is yet another indicator of the general liquidity crunch growing from 5.4% in early to 7.7% at the beginning of License revocations made the liquidity situation even worse for the smaller private banks. Over the last year, the Central Bank revoked the licenses of 33 credit institutions; another 11 were reorganised making clients flock to larger banks, primarily those with government interest. The net profit before taxation in accordance with Russian Accounting Standards ( RAS ) of the Russian banking industry fell marginally by 1.8% to RUB 994 billion following the record high of over RUB 1 trillion in. This profit decline was due to the higher requirements in banking provisions imposed by the regulator. The rate of growth in provisions for possible loan losses reflected in banks balance sheets jumped from 5.4% in early to 15.3% in December when provisions totalled RUB 2.4 billion. Another factor that pushed down the banking sector s profit was the higher cost of funding and the resulting higher pressure on the interest margin. The total capital adequacy of the Russian banks experienced a minor slip from 13.7% to 13.5%. That said, many medium-sized banks are close to the threshold levels of capital adequacy; given low margins and the introduction of Basel III requirements in Russia in 2014, this means that such banks will need to increase their capital in the very near future. The average ROE of Russian banks fell from 18% in to 15% in. Looking forward, the Russian banking sector still has a strong potential for upside. Compared to the more advanced economies, retail loans account for an insignificant share of GDP (only just higher than 12% of GDP), while the total number of borrowers has not yet reached even half of the economically active population of Russia illustrating the strong growth fundamentals for the future. Total banking assets, trillion roubles Total banking assets GDP of Russia % 80% 70% 60% 50% 40% 30% 20% 10% 0% Share, % * Starting from 1013, expenditures are budgeted based on average oil prices for the last 5 years; any budget receipts in excess of such estimated price are transferred to the Reserve Fund until it reaches 7% of GDP. * Hereinafter the source is the CBR data:

9 Annual Report and Accounts We have created the largest national full service private banking group with an entirely new format based on convenient and prompt customer service, an extended range of products and services, and reliability 6.1. CORPORATE BANKING OVERVIEW Corporate banking is NOMOS-BANK s largest business segment. The Bank serves companies specialising in engineering, fuel and energy, chemistry, metallurgy, as well as in light, food retail, gold mining, transport, and construction. Clients also include companies of the Federal Atomic Energy Agency, trading, constituent entities of the Russian Federation and municipalities. Among the Bank s corporate clients are State companies and organisations. The Bank has always placed a strong emphasis on working with a variety medium-sized businesses in order to diversify its client portfolio by industry and geography. 6 Operation review 6.1 Corporate Banking 6.2 Retail Banking 6.3 Small Business 6.4 Рrivate Banking 6.5 Investment Banking 6.6 Otkritie Bank 6.7 Information Technology 6.8 Corporate Social Responsibility 6.9 Human Resources NOMOS-BANK offers its corporate clients a full range of services: loans and loan facilities; overdraft lending; factoring; corporate and project financing; M&A financing and advice; fund investment; cash settlement services; Key Figures* Number of corporate clients 16,800 13,500 Corporate net loan portfolio, million roubles 551, ,035 Corporate customer accounts, million roubles 428, % 83.6% 16,4 % 267, % international business transactions; foreign currency hedging; documentary transactions; precious metals operations; a payroll card programme; remote banking; products designed specifically for groups of companies. Share of the corporate segment**: In revenues*** 48.2% In net loans 48.9% 62.9% In customer accounts 55.1% 58.5% Irina Gordeeva Deputy President, Head of Corporate banking, member of Management Board 71.5% Term deposits Current accounts 16 * At the year end. ** The amounts relating to Treasury, Asset and Liability management units and Unallocated balances are excluded from the calculation. *** Revenue total operating income before gain on remeasurement of cash flows, provision for impairment losses on interest bearing assets and provision for impairment losses on other transactions, not including Otkritie Bank. 17

10 Corporate Banking Annual Report and Accounts Steady diversification of the corporate loan portfolio Corporate Banking Key Growth Drivers Corporate lending by sector Total gross loans: RUB 572,132 million 5.9 % 3.6 % 8.0 % INTRODUCTION OF NEW TECHNOLOGIES, OPTIMISATION OF BUSINESS PROCESSES Development of remote banking services. Improvement of Global Transaction Banking (GTB) capabilities. Introduction of complex settlement products to manage the Group s liquidity. Expansion and optimisation of the product line. Improvement and automation of existing business processes % 14.5 % 13.2 % 12.5 % 9.6 % 6.6 % 6.3 % 4.2 % 0.4 % EXPANDING THE CLIENT BASE State-of-the-art technology and flexible price plans helped bring new clients to the Bank. Services Non-residential construction Manufacturing Wholesale trade Operations with real estate Residential construction Mining Leasing Transport and communications Retail trade Agriculture Other In, new account holders represented 25% * Maintaining Sustainable Leadership of the Precious Metals Market INCREASING SHARE OF WALLET An efficient cross sales strategy helped the Bank maintain its share of wallet and lay a foundation for future growth. Average number of products per client Member of LBMA (London Bullion Market Association). Russian bank NOMOS-BANK was the first in Russia to in the precious launch an Internet-based precious metals metals market trading service. Tons of gold acquired by the Bank; percentage of annual production of gold in Russia 99.6 tons 41.8% 72.3 tons 31.4% Precious metals operations (Number of deals and 30,4 amount)*, billion USD: 24, ,965 transactions 8,667 transactions tons 230 tons Integration As a result of the integration of NOMOS-BANK into Otkritie Bank, the Group established close relations with Otkritie Insurance, Otkritie Asset Management, Otkritie Depositary Centre, and the Otkritie Brokerage House. Corporate clients were offered new financial services, such as insurance, asset management, private pension plans to complement their already existing services. In future, the Group aims to maximise these synergies, continuing to improve the efficiency of its cross sales approach and increase the share of wallet. * While preparing the consolidated financial statements the Group applied the following x-change rates; 1USD=RUB as at December 31, and 1USD=RUB as at December 31, * Excluding the Bank of Khanty-Mansiysk

11 Corporate Banking Annual Report and Accounts 61 % Financial Highlights in million roubles Y-o-y KEY BALANCE SHEET HIGHLIGHTS: Total segment assets: 434, , % Including loans to customers 422, , % Total segment liabilities: 282, , % Including customer accounts 267, , % KEY INCOME STATEMENT FIGURES:* Net interest income** 16,235 18, % Net services and commission fees income 3,273 3, % Total operating income before impairment losses and provisions 16,819 18, % Operating expenses and recovery of impairment of buildings and constructions 5,432 5, % Profit before income tax 11,198 13, % * The income statement of OJSC Otkritie Bank for the year was not recognized as the Group gained control on December 27,. ** Net interest income before gain on remeasurement of cash flows generated by the assets acquired as a result of the business combination and before provisions for impairment losses on interest-bearing assets. The table above sets out selected financial information for the Small Business Banking Segment. The financial information is shown as at or for the year ending, and as at or for the year ending. In, NOMOS-BANK s loans to customers the after of Corporate Banking Segment grew by 30.6% (by 31.5% in ). Customer accounts of the Corporate Banking Segment grew by 60.2% (by 25.6% in ). Profit before income tax of the corporate segment amounted to RUB 13.2 billion, 17.8% higher than in. The growth was accounted for mainly by the use of state-of-the-art technology that brought new clients to the Bank and high standards of Group customer service. The Bank s corporate loan portfolio quality was stable in : non-performing loans stood at 1.9% (1.8% as at the end of ). For more information about the quality of the loan portfolio of Corporate Banking Segment and the risk cost analysis see the Risk Management section, page 73 of the report. At the end of, the factoring portfolio amounted to RUB 14.7 billion, which is 99% higher than in (RUB 7.4 billion). CLIENTS 58 % 61 % % % 5857 %% In, the total number of corporate clients grew by 24.4% to 16,800. Introducing new 58 state-of-the-art technology, streamlining business processes to the complete 57 % satisfaction of clients, offering flexible price plans and improving sales methods brought % new clients to the Bank. The Corporate Banking strategy is to continue diversifying its business, expanding its share of medium-sized clients with revenue of up to RUB 10 billion. Loans issued to medium-sized businesses of NOMOS Group, excluding BKM, increased by 40.5%, customer accounts by 27.6%. NOMOS is particularly committed to increasing its share of wallet, maximising the income that may be generated from each client, by applying an efficient Group cross sales strategy. In, a client of the Bank used 3.2 products on average; in, Customer accounts of medium-sized businesses (Revenue up to RUB 10 billion per year) 142,356 92, ,614 23,742 18,858 Term deposits Current accounts % % 53 % The share of medium-sized clients 50 % with revenue of up to RUB 10 billion a year *: % Loan portfolio, million roubles 53 % 265,996 61% 189,340 58% 61% 58% 61% Customer accounts, million roubles 58% 57% 142,356 58% 57% 111,560 57% 58% 50% 58% Documentary transactions portfolio, 53% million roubles 50% 54,265 50% 53% 54, ,560 53% Net interest income growth was limited by an increase in the cost of funding in : the average effective interest rate on corporate clients deposits (excluding Otkritie Bank) grew in from 5.8% at the end of to 7.6% at the end of due to the general increase in the funding costs on the market and the increase in the long-term funding share in the Group liabilities. Net non-interest income grew in by 10.4% to RUB 6.0 billion (RUB 5.5 billion in ) and consisted mainly of fee and commission income (61.4% or RUB 3.7 billion at the end of ) % corporate loan growth in REMOTE BANKING Nearly 100% of the Group s corporate clients use remote banking systems. Thanks to its enhanced functionality, ease of use and high reliability, in the Bank s Client-Bank system was ranked among the TOP-5 banks by functionality of remote banking systems for legal entities by Markswebb Rank & Report (Business Internet Banking Rank compiled on the basis of an all-russia banking study). In, the Bank significantly expanded its remote banking system s functionality, enabling its clients receive tranches and place funds on overnight deposits by simply submitting an application, significantly simplifying the handling of payroll registers, and simplifying the execution of documents associated with foreign exchange controls. Procedures for the calculation and transfer of salaries by NOMOS s clients to their employees accounts were made automatic through electronic document processing and an expanded list of document formats. In September, another function the currency conversion system allowing clients to convert currencies online at the stockexchange rate was added to the remote banking system. In addition, Client-Bank software is being now developed for mobile phones and tablets. For details see page 71 * NOMOS only, exclusive of the Bank of Khanty-Mansiysk

12 Corporate Banking Annual Report and Accounts GLOBAL TRANSACTION BANKING* In, NOMOS developed its GTB capabilities. In order to reinforce client teams working at the head office, key branches and operations offices, divisions specialising in GTB product sales were established with a system of ongoing distance learning and certification in the Bank s products set up for client managers. A multi-stage sales control system was also established based on CRM systems and a call centre was set up to improve customer service quality. PRECIOUS METALS In, NOMOS-BANK was named the best Russian bank on the precious metals market for the seventh year in a row. In, Precious Metals Transactions comprised 8,965 deals totalling USD 30.4 billion. NOMOS-BANK is a leader in the gold market by purchasing volumes: in, the Bank purchased 99.6 tons of IMPROVEMENT AND AUTOMATION OF EXISTING BUSINESS PROCESSES During the Credit Conveyor system was launched ensuring transparency, control, and manageability of corporate lending processes. The Group also introduced a mechanism that allows users to apply online for any element of the product line. gold estimated at USD 4.5 billion. The Bank also buys and sells silver and precious metal coins. Since 2011, the Bank has been a member of London Bullion Market Association (LBMA). The Bank was the first in Russia to launch an internet-based precious metals trading service. The electronic document processing system functioned successfully and the average time period for reviewing applications was reduced, meaning the system was quicker and easier to use RETAIL BANKING OVERVIEW Key Figures* Number of retail clients about 3.2 about 1.5 NOMOS-BANK and Otkritie Bank offer their retail customers a full range of banking services, such as loans, bank cards, payments, money transfers, deposits, internet and mobile banking, safety deposit boxes, and investments in unallocated metals accounts. 19.7% Share of retail segment**: 34.4% In revenues*** 15.3% 35.2% 27.8% 25.5% Elena Budnik Deputy Chairman of Management Board, Head of Retail and STRATEGIC OBJECTIVES OF CORPORATE BANKING SEGMENT FOR 2014 Expanding the product line; Optimising the business processes and technologies enabling the Bank to reduce its costs and enhance customer service quality; Upgrade of the Credit Conveyer system; Upgrade of the remote banking services; Development of the e-business channels in customer service; Building the client base while preserving its diversification by industry, with an emphasis on medium-sized businesses; Increasing fee and commission income and the overall value of settlement transactions (with an emphasis on developing GTB capabilities); Introducing a customer service assessment system. * Global Transaction Banking or GTB is a settlement service allowing clients to carry out their daily operations and make settlements by sending and receiving payments in any form using any instruments and any communication channels. Besides, GTB includes the whole range of products (term deposits and call deposits) allowing clients to deposit spare cash, as well as short-term loan programmes. Retail net loan portfolio, million roubles 173,055 Retail customer accounts, million roubles 274,264 46,119 Consumer loans Mortgage Cars loans and others Term deposits 104, % 37, % 6, % 53,944 90, , % 14,778 Current accounts In net loans 19.7% 15.3% 19.7% 15.3% 35.2% In customer accounts34.4% 35.2% 27.8% 34.4% 25.5% 27.8% * At the year end. ** The amounts relating to Treasury, Asset and Liability management units and Unallocated balances are excluded 25.5% from the calculation. *** Revenue total operating income before gain on remeasurement of cash flows, provision for impairment losses on interest bearing assets and provision for impairment losses on other transactions, not including Otkritie Bank

13 Retail Banking Annual Report and Accounts Key Drivers behind Retail Banking Growth Key Drivers behind Retail Banking Growth (continued) STREAMLINING THE PRODUCT OFFERING AND LAUNCH OF NEW PRODUCTS Synergies were achieved through the integration and NOMOS-BANK s retail business transfer to Otkritie Bank; Setting strategic priorities in the retail segment, to be mass market and premium market; EXPANDING THE DISTRIBUTION NETWORK AND GEOGRAPHIC REACH BEYOND MOSCOW 809 branches in 57 Russian regions; The Bank has significant market share in Moscow and the Moscow Region, Saint Petersburg and the Leningrad Region, Tyumen and the Khanty-Mansiysky Autonomous District, Yekaterinburg, Saratov, Novosibirsk, and Khabarovsk; Setting priorities within each division of services; Stepping up high-margin products (current and savings accounts, consumer loans); The bank focuses on rapid expansion of its branch network by adding minibranches; Opening three flagship branches in the new mini format. Launching new card products (Avtokarta, Travel-card, co-branded card with Mnogo.ru; Gold MasterCard with MasterCard PayPass technology); Consolidating ATM networks of NOMOS-BANK, Otkritie Bank, and the Bank of Khanty-Mansiysk including 2,700 ATMs in the covered area. CROSS-SELLING AND PROMOTING PAYROLL PROJECTS The Group effectively combines different sales-channels working with Partners (special offers for employees of qualified companies), Professional products (special offers for payroll clients) and serving walk-in customers, which brings diversification and ensures full coverage of all segments in the retail market; DEVELOPING NEW DISTRIBUTION CHANNELS AND BOOSTING THE QUALITY OF SERVICES THROUGH THE INTRODUCTION OF STATE-OF-THE-ART TECHNOLOGY The number of Internet banking clients more than doubled to reach* , ,680 The average number of products per client was 1.25 at the end of The number of payroll customers reached 739, ,973 Individual clients can now make transfers between accounts with NOMOS-BANK and Otkritie Bank using NOMOS-Link or Otkritie Online. The number of internet banking clients more than doubled; A new Internet bank version is currently being tested with an ungraded, more userfriendly interface; An iphone mobile banking application is prepared to be launched; In 2014, the Bank expects to join the United Clearing System, which will give its payroll card holders favourable conditions for cash withdrawal in more than 20,000 ATMs all over Russia. Payroll cards may be issued with the client s corporate design. A new product underway is a payroll card with an overdraft option. 3-D Secure technology was implemented. * At the year end. ** The NOMOS only, exclusive of the Bank Otkritie

14 Retail Banking Annual Report and Accounts RETAIL BUSINESS STRATEGIC GOALS: growth in quality and increased efficiency through extended cross-sale opportunities, margin growth and effective loan portfolio management. KEY OBJECTIVES: To transfer NOMOS-BANK s retail and small business branch infrastructure and employees to Otkritie Bank: Financial Highlights in billion roubles Y-o-y BALANCE SHEET HIGHLIGHTS Total segment assets 115, , % including loans to customers 90, , % Total segment liabilities 170, , % including customer accounts 157, , % INCOME STATEMENT HIGHLIGHTS* Net interest income** 7,547 9, % Net services and commission fees income 3,162 3, % Total operating income before impairment losses and provisions 10,982 12, % Operating expenses and impairment of buildings and constructions 8,184 9, % Profit before income tax 2,767 2, % * The income statement of OJSC Otkritie Bank for the year was not recognized as the Group gained control on December 27,. ** Net interest income before gain on remeasurement of cash flows generated by the assets acquired as a result of the business combinaation and before provisions for impairment losses on interest bearing assets. 20 NOMOS-BANK s branches in Moscow and the Moscow Region were added to Otkritie Bank s network The table above sets out selected financial information for the Small Business Banking Segment. The financial information is shown as at or for the year ending, and as at or for the year ending. 73 employees of NOMOS-BANK s retail business were transferred to Otkritie Bank. To assign NOMOS-BANK s retail loan portfolio: To transfer payroll projects to Otkritie Bank: As at December 31,, the retail loan portfolio reached RUB billion, a 2.3 x increase year-on-year (RUB 46.1 billion); at the same time, the consumer loans share of the total retail loan portfolio reached 60.3% compared to 51.2% at the end of. The mortgage portfolio rose 42.9% to RUB 53.9 billion, comprising 31.2% of the retail portfolio as at December 31, (end of : RUB 37.7 billion, or 41.9% of the portfolio). As at end, customer accounts of the Retail Banking Segment increased by 74.4% to total RUB billion as at December 31, (December 31, : RUB billion). Term deposits accounted for 75.7% of the total customer accounts of the Retail Banking Segment as at December 31,. In the meantime, the Group continued its effort to build up its offering of high margin products. Thus, as at December 31,, the share of current accounts balances reached 24.3%. 10,5 billion roubles portfolio was assigned over in three stages. 21 agreements were executed (covering 900 clients). Following the Group s robust approach to risk management, in the Group increased the allowance for losses on retail loans to RUB 9.1 billion. The increase in the loan and deposit portfolio was coupled with higher key indicators contributing to the operating revenue of the retail business. Integration During the integration process, one of the Group s priorities was to make the experience as smooth and painless for clients as possible. As at the end of, non-performing loans were 90.8% covered (end of : 97.8%). For more information about the quality of the retail loans portfolio and risk cost analysis please refer to the Risk Management section (page 73). In, net interest inome increased in line with overall retail loan portfolio growth (not including Otkritie Bank). The average effective interest rate on the retail loan portfolio increased from 14.7% in to 15.8% in (not taking into account Otkritie Bank). Net fees and commission income increased by 19.2% year-on-year. In, most fees and commissions were generated by credit risk insurance, currency exchange, and payments through the Rapida clearing system. The retail business integration plan was adopted in April with the objective of building a high-performance model for banking services and products promotion; it involves the incremental transfer of NOMOS-BANK s retail business and clients to Otkritie Bank. The key objective of the integration process was an effective and smooth approach to clients. In, total profit of the retail segment grew 7.7% to RUB. 3.0 billion

15 Retail Banking Annual Report and Accounts CLIENTS LENDING Sale of retail products through corporate business channel remain the key area of the Group s integration plan, according to which Otkritie bank particularly specializes on the small business and retail segments, including street segment where it successfully operates nowadays. Priority client categories of the retail, thousand roubles per month: IN PREMIUM SEGMENT (OTKRITIE-PREMIUM): In this segment, the Bank offers premium The Bank launched a programme for refinancing consumer loans issued by other banks in ten Russian cities; from February 2014, the programme will be available in all regions where the bank is present. New programmes were introduced for employees of the Bank s corporate clients and holders of Otkritie Bank s payroll cards. The interest rate and documents required for raising a loan are now determined individually for each borrower based on his/her paying capacity, credit history, and category. credits cards as well as the investment brokerage, and insurance products of PREMIUM SEGMENT >130 In Moscow and Saint Petersburg: clients whose account balances exceed RUB 1,000,000, or whose monthly income is more than RUB 130,000 Otkritie FC s companies in order to provide a focused wealth management offering. A personal account manager is assigned to each premium client to consult him/her on and financial matters. The Bank opens flagship offices for further customer service improvement in premium segment. MASS SEGMENT >80 <130 In regions: clients whose account balances exceed RUB 700,000, or whose monthly income is more than RUB 80,000 In Moscow and Saint Petersburg: clients with average monthly up to RUB 130,000 IN MASS SEGMENT: The bank offers clients a full range of banking services seeking to balance its loan and deposit products, as well as development of card and commission based products. The Bank clients of this segment have access to new products such as refinancing of the consumer loans obtained in other banks. + 92% growth of retail loan portfolio in 3.2 million number of clients in the Retail Banking Segment <80 In regions: clients with average monthly income between RUB 15,000 and RUB 80,000 Separate category of clients in the mass segment are people of retirement age, for which the Bank also offers a wide range of products and services. 173,055 million roubles size of the retail loan portfolio 28 29

16 Retail Banking Annual Report and Accounts CARDS AND ATMs BRANCH NETWORK The following bank new card products were launched in : Avtocard with a higher cash-back on POS-transactions at petrol stations Travel card with no-fee cash withdrawals and no conversion fees for transactions outside of Russia Co-branded card with Mnogo.ru project with bonuses accrued for payments made using the card At the year end of, NOMOS-BANK together with Otkritie Bank issued 1,6 million bank cards In, considerable effort was put into expanding the Bank s In, three flagship branches were launched in Moscow, in a geographic reach. In, Otkritie Bank focused on adding to its new format designed to meet the higher requirements of clients, network mini-branches (i.e. branches without a front office) selling based on state-of-the-art public space design standards that loans and providing bank cards. Over, the number of minibranches more than quadrupled (from 69 at the end of to 294). challenged people. Clients of the new branches have access to includes, among other things, a friendly environment for physically free Wi-Fi, 24-hour self-service area with new generation ATMs, The consolidated network of NOMOS-BANK and Otkritie Bank an electronic queue management system with a client s card consists of 809 branches in 57 Russian regions. The Bank holds a identification function, large meeting rooms, and a direct line to the significant market share in Moscow and the Moscow Region, Saint Bank s call centre. The interior design uses natural environmentally Petersburg and the Leningrad Region, Tyumen and the Khanti- safe materials. One of the new branches was launched together Mansi Autonomous District, Yekaterinburg, Saratov, Novosibirsk, with Starbucks, the world s largest coffee chain. and Khabarovsk. OTHER DISTRIBUTION CHANNELS AND INTERNET BANKING MasterCard Gold credit cards with MasterCard PayPass technology which allows one-touch payments. To make a payment, you simply tap the card on a PayPass terminal, and if the purchase is less than RUB 1,000, the transaction does not require entering a PIN or signing the receipt. The percentage of clients who use Internet banking grew 73.9% to reach 55,300 as at the end of (end of : 31,800). The total number of Otkritie Online and NOMOS-BANK Online registered users is 340,400, twice the level of (143,680). In, the Bank started testing its upgraded Internet bank system with more a convenient and user friendly interface. Clients can enter their online bank from their accounts with VKontakte or Facebook. STRATEGIC OBJECTIVES OF THE RETAIL BANKING SEGMENT FOR 2014 To improve the security of online card transactions, 3-D Secure technology was introduced to securely process any Internet payments. Online stores that support 3-D Secure require the client to enter, in addition to standard card details, a single-use password sent by SMS. The two-level authentication system prevents unauthorised access to card details and minimises the risk of fraud. All card holders can open deposits online. In April, as part of the banking business integration, the ATM networks of Otkritie Bank, NOMOS-BANK, and the Bank of Khanty-Mansiysk were consolidated all over Russia. As a result of this consolidation, cardholders of the three banks can now withdraw and deposit cash, pay to service providers, check card balance, and have their receipts printed out without commission. As at the end of, the consolidated ATM network consists of 2,670 ATMs in 57 Russian regions. The Bank will complete the key steps of NOMOS-BANK and Otkritie Bank retail business integration. In particular, Otkritie Bank is expected to consolidate 65 distribution outlets of NOMOS-BANK. NOMOS-BANK will also assign its loan portfolio, deposits and payroll projects to Otkritie-Bank. Another priority will be promoting the bank cards business, in particular, by winning new payroll projects and pushing up the volumes and number of cards transactions. The Bank aims to increase the number of its clients using Internet services and raise the percentage of its clients using Internet banking to 40% of the total number of new clients. The Bank expects to launch an iphone application to enable its cardholders to make cash transfers, pay fines, utilities, and other bills, open deposits and search for nearby locations and ATMs. An upgraded Otkritie Online is scheduled to be released offering a number of new value-added functions. Among the new products to be launched are an air PIN (i.e. a mobile PIN code assignment technology), pre-paid cards, packaged insurance products, and joint projects with Lukoil (pre-paid petrol cards) and Spartak football club (cards and Internet banking for Spartak fans)

17 ,8 % Small Business Banking ,0 % Annual Report and Accounts SMALL BUSINESS BANKING OVERVIEW NOMOS aims to become a TOP-5 bank by assets, providing loans to small businesses 38,947 across Russia. The Group offers a wide range of products and services to small businesses and individual entrepreneurs, including lending services, bank guarantees, cash settlement services, and payroll card programmes. The Group co-operates intensively with state institutions to support small businesses through small business and Key Figures* ,1 % 10,8 % 5,5 % 6,6 % 5,5 % 6,3 6,6 % 6,1 % 6,3 % 11,0 % 10,8 % 11,0 % Number of small business clients 141, ,500 5,528 % ,800 6,6 % 5,5 6,3 % % 48,309 6,1 6,6 % % 6,3 % 10,8 % 6,1 % 49,358 11,0 % 28,009 lending assistance fund, and works on improving its small business sales, loans and services, operating through a dense service network covering large areas of the Russian Federation. 10,8 % 11,0 % 5.5% 141,500 85, % 6.3% Share of small business segment** 141, % In revenues*** 85,800 48,309 38, % Steady diversification of the small business loan portfolio Small business lending by sector 15.7% Services Non-residential construction Manufacturing Total gross loans: RUB 51,022 million 5.0% 10.2% 20.4% 8.2% Wholesale trade Operations with real estate Residential construction The Small Business Banking Segment s Key Growth Drivers 0.2% 0.8% 1.3% 8.0% 22.4% Mining Leasing Transport and communications Retail trade Agriculture Other 6.2% 1.6% 85, ,500 85,800 Small business net loan portfolio, million roubles 48,309 38,947 48, % 48,309 49,358 28,009 38,947 In net loans 49, % 28,009 WIDE RANGE OF PROFITABLE PRODUCTS Around 20 standard loan programmes for legal entities and individual entrepreneurs from various industries; Intensive co-operation with state institutions supporting small businesses; Expanding cross sales, entering into new payroll card agreements, increasing the number of payroll cards served by the bank. 38,947 49,358 28,009 49,358 Small business customer accounts, 28,009million roubles In customer accounts 6.6% 5.5% 6.3% 6.1% 6.6% DIVERSIFIED (BY INDUSTRY AND GEOGRAPHY LOAN PORTFOLIO) The portfolio of loans provided to small businesses remains well-diversified by industry; Preference is given to clients from industries with steady growth projections, commerce, manufacturing, services, transport and communications, real estate; Client geography: the Bank has its branches in 57 regions of Russia. 5.5% 49,358 24,6 % 21,9 % 78,1 % 75,4 % 28, % 5.5% 6.3% 6.1% 10.8% 11.0% DEVELOPING GLOBAL TRANSACTION BANKING (GTB) Provides a special offer for small businesses using cash settlement and merchant account services of the banks whose licenses have been revoked: free and prompt opening of a settlement account (within a day) with no service fee charged during the first three months. Term deposits 6.3% 6.6% Current accounts 6.1% 6.3% 10.8% 11.0% * At the year end. 6.1% ** The amounts relating to Treasury, Asset and Liability management 10.8% units and Unallocated balances are excluded from the calculation. *** Revenue total operating income before gain on remeasurement of cash flows, provision for impairment losses on interest bearing assets and provision for impairment losses on other transactions, not including Otkritie Bank % 10.8% 11.0% * NOMOS only, exclusive of the Bank Otkritie. 33

18 Small Business Banking Annual Report and Accounts Small Business Banking Key Growth Drivers (continued) Financial highlights IMPROVING SMALL BUSINESS SALES, LOANS AND SERVICES Introduction of a pilot fast-track loan provision (loan conveyor) system for small and medium-sized businesses in the Moscow Region with loan applications reviewed within 2-3 days; Improvement of the procedure for opening settlement accounts: from now on, settlement accounts are opened within 7 hours from the submission of documents; Expansion of the network of branches serving small and medium-sized businesses; Improvement of remote banking channels. in million roubles Y-o-y KEY BALANCE SHEET HIGHLIGHTS: Total segment assets: 41,020 54, % Including loans to customers 38,947 48, % Total segment liabilities: 32,789 54, % Including customer accounts 28,009 49, % KEY PROFIT AND LOSS STATEMENT HIGHLIGHTS: * Net interest income ** 3,450 4, % Net services and commission fees income 1,327 1, % Total operating income before impairment losses and provisions 5,117 4, % Operating expenses and impairment of buildings and constructions 2,860 2, % Profit before income tax 2,262 1, % * The income statement of Otkritie Bank for the year was not recognized as the Group gained control on December 27,. ** Net interest income before gain from remeasurement of cash flows from the assets acquired as a result of the business combination and before provisions for impairment losses on interest bearing assets. The major objectives of the Small Business Banking in : the consolidation of the small business teams of NOMOS- BANK and Otkritie Bank; the transfer of the loan portfolio to Otkritie Bank s balance sheet: as at end, the small business loan portfolio transferred to Otkritie Bank amounted to RUB 2.6 billion; improving small business sales, lending and services; expanding the client base; developing GTB capabilities; creating a competitive product line; maintaining high profitability and improving the operational efficiency of the Bank s remote banking network and channels. Integration In, small businesses served by NOMOS-BANK were transferred to Otkritie Bank. Prices for cash settlement services and loan products were unified and clients were offered favourable terms of service. As a result, in NOMOS-BANK began transferring over its Small Business loan portfolio to Otkritie Bank. The loan portfolio transfer is expected to be finalised by 1 January At the end of net loan portfolio for the Group increased by 24.0% up to RUB 48.3 billion >10 thousand loans granted in to small businesses in total amount of RUB 43.5 billion NOMOS-BANK s sales team will be transferred to Otkritie Bank to ensure that clients are served to the same standard as before. The transfer will be carried out in several stages and will be completed in The integration process will be accomplished by The table above sets out selected financial information for the Small Business Banking Segment. The financial information is shown as at or for the year ending, and as at or for the year ending. In, the Group increased its small business loan portfolio by 24.0% through improving its product line and producing efficient cross sales. Loan portfolio growth was accompanied by an increase in customer deposits. As at the end of, the volume of customer accounts from small business clients grew by 76.2% to RUB 49.4 billion, mainly due to a 70.2% increase in client deposits. As at December 31,, current accounts balances of small business clients totalled RUB 37.2 billion, comprising 75.4% of total small business customer accounts.. In the course of the year the Bank intensively developed its cross sales initiatives in this business segment. Notably, the Bank signed 2,500 payroll card agreements with various small businesses and issued over 42,000 payroll cards under those agreements. As at the end of, the Bank had 4,500 ongoing payroll card agreements. The net interest income growth was due to the growth of the average effective interest rate on the small business loan portfolio from 14.7% in to 15.8% in (excluding Otkritie Bank). It is worth noting that the cost of funds raised from small business clients remains low (an average of 2.8% p.a. in ) taking into account the meaningful share of current accounts in the funding structure of the small business segment. Following the Group s robust approach to risk management, in the Group increased the volume of its provision for loan losses in small business segment to RUB 2.7 billion as at December 31, (from RUB 2.0 billion in ). As at end, the share of non-performing loans in the small business segment stood at 6.4% of the small business loan portfolio (4.1% as at the end of ). The higher risk associated with loans provided to small businesses is offset by higher returns, thereby ensuring the profitability of the segment. For more information about the small business loan portfolio s quality and the risk cost analysis see the Risk Management section, page 73 of the Report

19 Small Business Banking Annual Report and Accounts CLIENTS AND REGIONAL DISTRIBUTION By the end of, the Group served over Small Businesses in 57 regions of after Russia. LOAN PORTFOLIO STRUCTURE BY INDUSTRY At the end of the number of SME clients reached over 141,5 thousand STRATEGIC OBJECTIVES OF SMALL BUSINESS BANKING SEGMENT FOR 2014: The Bank s portfolio of loans provided to small businesses remains well-diversified by industry. In, preference was given to clients from such industries as commerce, manufacturing, services, real estate, transport and communications because of their positive growth fundamentals % increase in small business loan portfolio in Completing key stages of the integration of NOMOS-BANK s and Otkritie Bank s small business segments; Expanding cash settlement transactions, including increasing transaction volumes and the resultant commission income, providing more bank guarantees by simplifying the provision procedure; Developing GTB capabilities; Putting in operation a Loan factory and further implementation of the Credit Conveyor System; Improving business processes and reducing costs. PRODUCT LINE AND SALES CHANNELS While serving its small business clients, the Bank has developed a wide range of profitable loan products comprising 20 standard loan programmes for legal entities and individual entrepreneurs catering to the needs of small business clients from a variety of industries. Among the Bank s major partners are both non-governmental and state institutions which collaborate to support small businesses. These include small business lending assistance funds acting as sureties for those clients who cannot provide sufficient security. As at the end of, the Bank provided RUB 2.5 billion worth of guarantees in respect of loans granted to its small business clients in Russia. In, the Bank intensively developed its GTB capabilities, improving the procedure for opening settlement accounts by reducing the time required to open a settlement account to 7 hours from the submission of documents: currently, half of all accounts are opened within this timeframe. The Group provides a special offer for small business using cash settlement and merchant account services of the banks whose licenses have been revoked: free and prompt opening of a settlement account (within a day) with no service fee charged during the first three months. As part of its efforts to support small businesses, the Bank, using funds provided by MSP Bank OJSC (Vnesheconombank Group), granted 225 loans totalling RUB 961 million under FIM-Tselevoy and MSP-Sofinansirovanie preferential lending programmes. At the end of, outstanding loans under both programmes amounted to RUB 3.5 billion (comprising 404 clients). In, the Bank introduced a pilot credit conveyor system for small and medium-sized businesses in the Moscow Region - the procedure for reviewing loan applications was optimised in order to be able to provide conclusion on loan applications within 2-3 days and improve the loan portfolio s quality. The new procedure for reviewing loan applications will now be put into regular practice, including at all the Bank s branches

20 Рrivate Banking Annual Report and Accounts 6.4. РRIVATE BANKING Key drivers for business growth in the Private Banking division OVERVIEW NOMOS-BANK offers a full range of Private Banking products and services to the Russian market, including financial planning, asset structuring, brokerage and investment products, investments in precious metals, real estate services, insurance products, and equity investments in Russia and abroad, as well as structured products and lifestyle products. Alina Nazarova Senior Vice-President, Head of Private Banking SYNERGY FROM THE MERGER OF THE PRIVATE BANKING DIVISION OF OTKRITIE BANK AND THAT OF NOMOS-BANK A WIDER REGIONAL PRESENCE The united Private Banking team of NOMOS-BANK and Otkritie Bank employs 146 people and serves over 5,000 customers. It is one of the largest Private Banking businesses in Russia; Organic business growth: the volume of managed liabilities rose by 35% through expanding the customer base, streamlining the product line, and launching new products; Uniform customer service standards fully implemented. Private Banking offices opened in all major Russian cities; Dedicated Private Banking employees work in 16 Russian cities (Moscow, Saint Petersburg, Novosibirsk, Nizhny Novgorod, Rostov-on-Don, Samara, Krasnoyarsk, Krasnodar, Ufa, Kaliningrad, Kazan, Yekaterinburg, Irkutsk, Saratov, Tyumen, and Khabarovsk). Key performance Indicators: 5,000 25% >100 number of customers at the end of Increase in number of customers at the end of billion roubles funds under management at the end of The development strategy of the Private Banking business is based on a comprehensive approach to managing customers assets We have in-house expertise in every area of the financial business and draw on our partners best practices through our open architecture platform. The Private Banking division operates on the open product architecture principle, offering solutions developed both within Otkritie FC and in cooperation with its Russian and foreign partners. This gives our customers the maximum freedom in choosing financial and non-financial instruments and access to the best products from the world s leading financial organisations. Geographic coverage of 16 largest Russian cities (new Private Banking offices opened in Yekaterinburg, Irkutsk, Saratov, and Tyumen in ) The united Private Banking team of NOMOS-BANK and Otkritie Bank employs 146 people and includes professionals in all key Private Banking areas OPEN PRODUCT ARCHITECTURE PRINCIPLE ADVANCED CUSTOMER SERVICE Integration The integration of NOMOS-BANK into Otkritie FC, with its vast experience in brokerage and investment business, has opened up new opportunities for developing the Private Banking business within the Group. Maximum freedom for our customers to choose from different financial instruments; Access to the best products that the world s leading financial organisations have to offer; A full range of Private Banking products and services offered in the Russian market; The product line is adapted as much as possible to meet the individual needs of customers. Compliance with the one customer one manager principle; In-house specialists in various lines of business (loans, investments, taxes, legal services, and lifestyle consultants); Own investment advice department, covering asset classes in Russia and abroad; A wide range of services offered in the lifestyle segment (children s education, art banking, purchase of luxury goods, real estate investments, health care services, insurance, travel, etc.); Well-organised staff administration system, including a career model for every employee; Low staff turnover:an average employee stays with the Private Banking division for at least 5 years; Winner of the Financial Times Global Private Banking Awards as Highly Commended in the Best Private Bank in Russia category in and. The integration of the Private Banking divisions of Otkritie Bank and NOMOS-BANK began in, generating a synergetic effect of increasing volume of liabilities, expanding the customer base, and streamlining the product line. The integration has also introduced uniformed customer service standards. The Private Banking division of Otkritie Bank and NOMOS-BANK has become one of the largest wealth management businesses in Russia