From solid foundations to new heights

Transcription

1 From solid foundations to new heights 2008 Annual Report

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3 2008

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5 Our Mission Identity VTB Group is the leading Russian financial institution with global presence and scale. Vision VTB will be a champion in all our target markets. Mission To provide world-class financial services for a sustainably better future for our customers, our shareholders and our society. Values Customer confidence. Our customers confidence is our most important value. Reliability. Our prominent position in financial markets, our international expertise and our global scale guarantee our strength and reliability. Transparency. Our business is open and transparent with a focus on partnership and cooperation. Versatility. Our expertise in different financial areas allows us to offer to all our customers comprehensive and sophisticated solutions. Team spirit. Our dedicated team of professionals has the advantage of the synergy of knowledge, potential, energy and creative insight of each team member.

6 Annual Report Statement of the Chairman of the Supervisory Council Dear shareholders, clients and partners, 2008 will go down as a year of global financial crisis unprecedented in both its scale and nature. Last year began with optimism but ended amidst extremely uncertain prospects. The growing tendency of capital outflow from developing markets that started at the beginning of 2009, combined with the recordbreaking drop in oil prices, indicated that the Russian economy was not immune to this crisis. The worsening situation on foreign markets has further exacerbated the economic fallout from the crisis and it has impacted all the world s leading countries without exception. Given these conditions, the Russian government began introducing anti-crisis measures to ease the pressure on the domestic market. These measures were intended to support liquidity in the banking sector, the bank loans system and the operating capacity of business. Photoxpress The stability of Russia s financial sector is a key focus of the government s anti-crisis policies. In October 2008, a new law on Additional Measures for Supporting the Financial System of the Russian Federation was passed to provide

7 Statement of the Chairman of the Supervisory Council 3 assistance to the banking sector. With it, the share of government reserves in the liabilities of the banking sector has grown from 0.2% to 12%. In the fourth quarter of 2008, in accordance with this law, VTB received a subordinated loan of 200 billion roubles. VTB has used these funds to finance its customers in core industries and to support the interbank market. It is this support from the Russian government that allows VTB to play a key role as a state agent, providing lending support and maintaining liquidity in the vital sectors of the Russian economy. From September to December 2008, the Bank provided over 800 billion roubles of financing to the real sector of the economy. VTB has taken measures to weather the current downturn, including revising its loan policy, adopting new risk management protocols and optimising operations to handle troubled loans. Throughout the year, the Supervisory Council worked closely with the Management Board. We particularly focused on updating our corporate governance system to reflect international best practice, which is crucial for the cooperation of all our groups of shareholders. In 2008, VTB s Supervisory Council approved a Code of Corporate Conduct, a Code of Ethics and Regulations on Information Policy. The next step in creating a quality governance system will be the planned increase of the number of independent directors on the Supervisory Council from 2 to 4 in This recommendation will be proposed at the Bank s Annual General Meeting of shareholders. The economic outlook for the global economy remains uncertain, with projected negative GDP growth for 2009 in many economies, including Russia. VTB remains focused on maintaining its fundamentals to ensure the Bank s stability. I would like to extend our gratitude to our employees, clients and shareholders for their continued support and to assure everyone that VTB remains intensely focused on delivering on its strategy and objectives in these turbulent times. Deputy Prime Minister of the Government of the Russian Federation Finance Minister of the Russian Federation, Chairman of the Supervisory Council of JSC VTB Bank Alexei Kudrin

8 Annual Report Statement of the President and Chairman Dear shareholders, clients and partners, In 2008, we witnessed fundamental changes in the global economy. By the second half of the year, it became clear that the crisis was international and that Russia would not be immune to it. Massive shifts in international financial markets and in the banking sector virtually shut down capital markets, caused an acute need among Russian companies for short-term financing and, correspondingly, slowed growth rates. The banking sector underwent a shift in its priorities, and many domestic banks found themselves unable to take on new lending risks. VTB, however, remained resilient in this difficult environment and maintained its strategic vision, while simultaneously introducing significant innovations to its operations. Despite the extremely negative environment, the Bank ended 2008 in the black. VTB s net profit was US$ 212 million. At the same time, the Group s assets grew 36% to US$ 126 billion. All of VTB s divisions showed stable growth, confirming the Group s status as one of Russia s leading financial institutions. The impressive growth in VTB s assets was primarily due to the high growth of its credit portfolio which increased more than 50% in 2008 to US$ 90.2 billion. We experienced growth, not only in the relatively favourable conditions in the first half of the year, but also during the difficult second half. As a result, VTB s market share in Russia s corporate lending segment grew from 10.7% to 12.7%. In the retail segment, VTB showed equally impressive results, with a market share of 8.8%, compared with 5.9% at the end of 2007.

9 Statement of the President and Chairman Given the limited access to liquidity, one of the Group s key goals became attracting client funds to supplement and expand its deposit base. Thanks to its strong market position, high brand recognition and targeting, VTB achieved retail deposits growth of nearly 13% year-on-year. With this increase, VTB has strengthened its position as the number two bank in this market segment in Russia. Retail clients have confidence in the Bank s dependability and have shown a high degree of loyalty to the Bank. This trust is extremely important to us and we are determined to justify it by improving the quality and range of our products and services. Given the unfolding crisis, the growth in retail deposits was an affirmation of VTB s strategy to develop actively its retail business. By the end of 2008, the Group s retail network consisted of over 500 offices across the country. The process of expanding our retail network is now complete and we believe this foundation will help us to expand our position in this market further. In the corporate segment, due to the significant devaluation of the rouble in the second half of 2008 and limited access to funding sources in the market, there was a slight decline in corporate clients deposits. The financing resources made available through state support of the banking sector, however, ensured the stability of VTB s funding sources. In April 2008, the Group launched an investment banking division. In less than a year, we have created an effective investment bank with a professional team of 500 that offers the full spectrum of investment banking services. Even though the crisis has necessitated revisions to its development plan, it has already become a leading player in several key market segments. Start-up expenditures were substantially less than expected and, given the significant growth in revenues from this division, we expect to receive a return on our investment sooner than originally planned. The high volatility of the financial markets and the worsening situation among Russian borrowers has required us to take appropriate and timely steps to control and minimise risks. Our approach to lending has changed significantly, with stricter requirements on new borrowers. Our risk-monitoring system for existing clients liabilities has been updated, and the process for working with nonperforming debtors has been optimised with the creation of the Debt Centre, a specialised company within the Group. We simultaneously centralised our data collection system, introduced an early-warning mechanism and sped up the decision-making process for handling non-performing assets. These measures have all contributed to the Group s current stability. Reducing costs has become a priority area and is seen as an important stabilising factor. VTB has implemented a series of measures to optimise operating expenses. Specifically, administrative costs have been reduced and a moratorium on hiring has been introduced throughout the entire Group. There have been headcount reductions at several divisions of VTB. Given the difficult market conditions, the Bank decided not to pay out bonuses to the Management Board in Despite the investment required to develop our retail network and launch the investment bank, the Group was able to improve the ratio of costs to core income in its primary business, lowering it to 51.9%, compared with 63.7% at the end of tested the strength of the entire Russian banking system will be just as challenging, with the potential risks of a further deterioration in the financial situation for companies and an increase in unemployment. These factors directly impact our lending risk and the amount of funding available to the Bank and we have therefore focused our attention on the issue of capitalisation. The Russian government has declared its commitment to increase VTB s Tier 1 Capital by 5

10 Annual Report up to 200 billion roubles as part of its efforts to recapitalise the banking sector. This will help the Group expand its loan portfolio and continue to support the Russian economy. A new share issue will be considered at the Annual General Meeting of shareholders in June We believe that the process of increasing the Bank s capital could be completed by October will be a difficult year for the Russian economy, but we plan to continue financing the real domestic economy and providing the necessary liquidity to the market. One of our priorities in 2009 is to preserve our client base and provide support to clients operating in difficult market conditions. We shall continue to modernise our risk management system and concentrate our efforts on controlling expenses and the quality of assets. I am certain that the anti-crisis measures that the Bank is adopting will help us successfully overcome this period of instability and that, ultimately, we shall emerge from this crisis stronger than ever. I would like to express my gratitude to our colleagues for their professionalism, hard work and cooperation. I would also like to thank VTB s shareholders, clients and partners for their support and I wish you all success in VTB Bank President and Chairman of the Management Board Andrei Kostin

11 Contents 7 1. VTB Group highlights Financial and operating highlights VTB Group's market position in Russia Key events in Overview of the Russian economy and banking sector Review of financial performance Operating performance in VTB Group structure Corporate business division Retail business division Investment banking division Treasury operations Other financial services Strategic objectives for the Group Risk management and internal controls Risk management policy, organisation and structure System of internal controls Corporate governance Overview of the corporate governance system The Supervisory Council of JSC VTB Bank The Management Board of JSC VTB Bank Remuneration of members of the Supervisory Council and the Management Board The President and Chairman The Group Management Committee Corporate social responsibility Employees Health and safety Customers Shareholders Community support Management report Responsibility statement by management Summarised consolidated financial statements in accordance with IFRS Summarised financial statements in accordance with RAS Transactions of JSC VTB Bank Major transactions of JSC VTB Bank Interested party transactions of JSC VTB Bank Other Group information Main correspondent accounts Licences Membership of non-profit organisations Contact information Shareholders information 110

12 From astute insight

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14 8 From astute insight to super flight VTB played a special role in supporting the Russian economy as one of the cornerstone banks. The Bank significantly expanded its volume of lending to strategically important companies. This lending was funded by the State in order to support key sectors of the Russian economy.

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16 Annual Report VTB Group highlights Financial and operating highlights Total assets, US$ million Net profit, US$ million 17, , , , , , , In 2008, the Group's assets grew 35.9% to US$ billion. Total loans up 50.3% year-on-year to US$ 90.2 billion, reflecting strong increases in both corporate and retail lending. Total shareholders equity, US$ million Loans and advances to customers (gross), US$ million 10,722 20,533 30,235 60,021 90, ,709 5, Customer deposits, US$ million 6, , , , , , Data on VTB Group are presented in accordance with international accounting standards. 37,098 37,

17 1. VTB Group highlights 2008 Key performance indicators Return on assets (ROA) 1.5% 2.4% 2.6% 2.2% 0.2% Return on equity (ROE) 8.2% 17.7% 19.7% 12.3% 1.3% Cost/Income* 65.2% 54.0% 50.8% 53.6% 80.1% Cost/Core income** 74.6% 68.6% 66.3% 63.7% 51.9% * Excluding cost/income from non-banking activities. ** Core income includes net interest income and net fee and commission income before provisions and excluding one-off items. Excluding cost from non-banking activities. Operational network and personnel, at year end Points of sale in Russia and the CIS 932 1,020 Points of sale in Russia of which VTB Employees (total) 35,945 41,992 Employees (in Russia) 29,976 34,189 Long-term credit ratings of VTB Bank * Standard and Poor s BB+ BBB BBB+ BBB+ BBB BBB Moody s Investors Service Ba1 Baa2 Baa2 Baa2 Baa1 Baa1 Fitch Ratings BBB BBB BBB+ BBB+ BBB+ BBB * as of 20 May VTB Group's market position in Russia Segments Market share Rank Market share Rank Market share Rank Market share Rank Market share Rank Corporate loans 6.8% 2 9.4% 2 9.0% % % 2 Corporate accounts and deposits 4.5% 2 7.4% 2 8.7% % % 2 Retail loans 1.3% % 6 2.6% 4 5.9% 3 8.8% 2 Retail accounts and deposits 2.8% 2 5.2% 2 4.7% 2 4.8% 2 5.7% 2 Source: VTB Bank estimates are based on RAS financial results of VTB Bank, VTB24 and VTB North-West, Central Bank of Russia data. VTB includes in its estimates The Société Générale Group consisting of Bank Société Générale Vostok, Rosbank, Rusfinans, Deltacredit. Excluding Rosbank from Société Générale s results, VTB ranked 3 rd by the size of the retail portfolio in 2006 and 2 nd in 2007.

18 Annual Report Key events in 2008 January VTB Bank received an Elite Quality Recognition Award from JP Morgan Chase Bank N. A. for the high level of interbank payments in US dollars made between 2000 and Global Custodian Magazine assigned the highest rating to VTB Bank. The rating is conducted annually according to clients opinions of the quality of services provided by custodians. VTB is the only Russian banking depositary to have received the highest rating. February The Bank opened a representative office in Almaty (the Republic of Kazakhstan) and a branch in New Delhi (India). VTB received a banking licence and opened a branch in Shanghai, China, given its experience in cooperation with Chinese banks and its leading position in servicing foreign trade between Russian and China. Euromoney Magazine named VTB the Leading Real Estate Commercial Bank in Russia At the annual ceremony of europaproperty.com, VTB was recognised as Russian Bank of the Year for work with the commercial real estate in March A new branch of Vietnam-Russia Joint Venture Bank (VRB) was opened in Ho Chi Minh (Vietnam). VTB Bank launched a new investment bank focusing on debt and equity securities issuance, corporate finance, direct investments, asset management, M&A and ECM advisory services in Russia and abroad. April VTB s website, devoted to the Bank s IPO, was recognised as The Best Corporate Site at the IPO Olympus 2007 ceremony. Global Finance Magazine rewarded VTB for the highest efficiency achieved by Russian banks in the FOREX market. VTB Bank was awarded the Financial Olympus 2007 National Award for the best corporate bank in the category Results and Success. VTB received the Moscow Mayor award for active participation in implementing municipal social programmes. May The Bank placed the largest single tranche Eurobond issue in the history of VTB, worth US$ 2 billion in the international capital markets and the largest ever made by a financial institution from the CIS and CEE region. VTB Bank won the Capital Markets Elite National competition in 2007, organised by the National Association of Capital Markets Participants, in the Best Custodian Bank category. June VTB issued a EUR 1 billion Eurobond at a fixed rate of 8.25% maturing in June 2011, which is the largest eurodenominated issue by an emerging market financial institution. July Deutsche Bank AG Awards for the quality of arranging payments in 2007 in two currencies US dollars and Euros (US$ STP Excellence Award and EUR STP Excellence Award ). August The Republic of Kazakhstan s Agency for Regulation and Supervision of Financial Markets and Financial Organisations granted an approval to open VTB Bank (Kazakhstan). October VTB Bank completed the 100% consolidation of Bank VTB North-West shares, an important step in the programme for integrating the bank within VTB Group and developing the banking business in the North-West region. VTB Bank and China Exim Bank signed an Individual Loan Agreement exceeding US$ 18.5 million within the framework of the Third Russian-Chinese Economic Forum. The agreement is designed to develop mutually rewarding interbank relationships, increase Russia-China trade turnover and enhance the financing of the Russian import of telecommunications equipment and services from China. The Energy of Success, VTB s corporate magazine, was voted 2008 Best Corporate Title for Customers at the 5 th Anniversary All-Russia Corporate Press Forum, Corpress November VTB Bank signed cooperation agreements with Banco de la Nacion (Peru), Banco de Comercio Exterior (Bancoex, Venezuela), the Cyprus Stock Exchange and Sumitomo Mitsui Banking Corporation Europe Limited, aimed at further developing and strengthening foreign trade relationships between Russia and other countries. VTB Bank received custodian status for Russian companies under the Bank of New York Mellon GDR Program, thus becoming a fully-fledged partner of global custodians. December The Energy of Success was voted the best in the Corporate Newsletter category at the 9 th International PROBA-IPRA Golden World Awards. VTB completed the acquisition of a 51% stake in AF Bank (Azerbaijan).

19 2. Overview of the Russian economy and banking sector 2. Overview of the Russian economy and banking sector 13 In the first half of 2008, high global oil prices fuelled the growth of the Russian economy which in turn led to strong growth in industrial production, and increases in capital investments and consumer spending. These positive trends began to reverse however, in the second half of 2008, with the onset of the global financial crisis. Despite the impacts of the economic turmoil, Russia ended 2008 with GDP growth of 5.6% in real terms. Industrial production peaked in April 2008, but growth fell to 2.1% for the reporting period of 2008, led primarily by a reduction in demand from exporters and a sharp decline in oil and metals prices. According to the Central Bank, Russia's gross foreign debt increased US$ 19 billion to US$ billion as at 31 December Government debt declined US$ 14 billion in 2008 while private sector debt increased US$ 33 billion. In terms of GDP, gross foreign debt declined from 36% of GDP in 2007 to 29% of GDP at the end of In the first half of 2008, high global oil prices fuelled the growth of the Russian economy. These positive trends began to reverse however, in the second half of 2008, with the onset of the global financial crisis. While in the first half of 2008 the rouble strengthened against the dollar, this trend was reversed in the second half of the year, resulting in a managed rouble devaluation. The pressure on the rouble came from the more than 60% decline in oil prices in the second half of the year. A hike in inflation resulted from record mineral resources prices in the first half of the year and expectations of rouble devaluation in the second half. According to Rosstat, inflation rose from 11.9% in 2007 to 13.3% in The net capital outflow from the Russian private sector reached US$ 130 billion in 2008, replacing a record capital inflow of US$ 83 billion in This was primarily due to changes in investment sentiment and the lack of access to international capital markets for Russian issuers. In 2008, the federal budget surplus totalled US$ 68 billion (4.1% of GDP). The gross amount of reserves in the Reserve Fund and Welfare Fund, which were first established as the Stabilisation Fund, increased from US$ 157 billion in 2007 to US$ 225 billion in In 2008, the Russian banking sector was hit by the global financial crisis and faced the problems of a declining economy, rising credit risk and slowing growth rates. Real growth of Russian GDP compared with other countries during , CAGR 1.9% 2.8% 2.8% 4.9% 5.8% 7.3% Source: Data of the IMF World Economic Outlook Database World average Euro area United Kingdom USA Central and Eastern Europe Russia

20 Annual Report Growth of GDP, industrial production and capital investments, % Russia s national debt, US$ billion Capital investments Industrial production GDP Source: Data of the Russian Ministry of Economic Development Total debt Amount of internal debt Amount of foreign debt Source: Data of the Central Bank of Russia and the Ministry of Finance of the Russian Federation In 2008, the Russian banking sector was hit by the global financial crisis and faced the problems of a declining economy, rising credit risk and slowing growth rates. The banking sector s total assets increased 39.2% compared with 43.3% growth in the previous year, due to the allocation of funds by the Central Bank of Russia (CBR) and Vnesheconombank (VEB) in the form of unsecured and subordinated loans. A significant decrease in the value of the rouble against the world s leading currencies had a negative impact on customers account balances at the end of Corporate deposits increased 24.2%, and retail deposits were up 14.5%, compared with increases of 76.2% and 36.0% respectively in The share of foreign currency deposits increased in 2008 as a result of significant currency exchange rate changes. While, in 2007, corporate deposits in foreign currencies accounted for 29.6% of total deposits and retail deposits for 13%, in 2008 these figures were 37.3% and 26.7%, respectively. The liquidity crisis in the international financial markets in August 2007 affected banks ability to attract relatively low-cost financing from abroad. At the same time, it was a limiting factor for the growth of banks loan portfolios. In addition, banks reconsidered their credit assessment approaches due to the developing negative trends in the Russian economy, particularly in the construction and retail sectors. In 2008, loans provided to corporate customers and to individuals increased 35.6% and 35.2%, respectively.

21 2. Overview of the Russian economy and banking sector Banking system indicators, RUB billion Russian banking sector loan portfolio, RUB billion 15 28, , ,811 13, , , ,586 2,672 2, ,966 14, , ,693 4, , ,269 1, Individual loans 7, Corporate loans* 947 Source: Data of the Central Bank of Russia 178 Assets Equity Net profit Source: Data of the Central Bank of Russia The state has already provided, and continues to provide further substantial support to the financial sector in the form of loans to banks and private institutions. Russian banking sector customer deposits, RUB billion 1,977 2,030 2,755 2,721 3,794 4,015 5,159 5,907 7,074 8, * Including non-banking financial institution, state financial organisations and non-budgetary funds, excluding promissory notes. ** Including budgetary funds, state non-budgetary funds, current and savings accounts of companies and organisations, settlement accounts and deposits of legal entities, factoring and forfeiting transactions. Individual deposits Corporate deposits** Source: Data of the Central Bank of Russia

22 Annual Report Review of financial performance Net profit of US$ 212 million. Total loans up 50.3% year-on-year to US$ 90.2 billion, reflecting strong increases in both corporate and retail lending Total customer deposits stable at US$ 37.5 billion, with retail deposits up 12.8% to US$ 12.1 billion Core income of US$ 5.2 billion, a 70.9% increase year-on-year Net interest margin up to 4.8% from 4.4% in 2007 Provisioning charge, as a proportion of average gross loan portfolio, up to 3.2% from 1.3% in 2007 Total BIS capital ratio 2 at 17.3% 1 Net interest income before provisions Interest income grew 82.1% in 2008 to US$ 9,809 million from US$ 5,387 million in The main source of interest income, which accounted for 88.3% of the total, was loans granted to VTB clients. Income from loans to VTB customers grew 101.3% year-onyear to US$ 8,682 million from US$ 4,314 million, due to an increase in the credit portfolio of the Group as well as an increase in the weighted average interest rate from 10.4% to 11.3%. In 2008, interest income 2. Bank for International Settlement capital ratio is the key figure for international banks. Expressed in %, it is the ratio between their capital and their risk-weighted position for regulatory purposes. from loans to customers grew more than twice as fast as the loan portfolio. Other interest income received from other banks and securities increased 5.0% to US$ 1,127 million. Interest expense increased 85.2% in 2008 to US$ 5,242 million from US$ 2,831 million in The increase in interest expense was mainly due to the overall deterioration of the economic situation and, as a result, the higher cost of funding for VTB. Customer deposits were the main component of VTB s interest expense, accounting for 49.7% of the total. In 2008, interest expense on customer deposits increased 106.9% year-on-year to US$ 2,608 million (from US$ 1,260 million). The main driver of the increase was the higher weighted average interest rate on deposits, which rose to 6.1% in 2008 from 4.7% in In 2008, interest expense from external borrowing debt securities issued (including subordinated debt), loans due to banks and other borrowed funds increased 67.7% to US$ 2,634 million, with 83.1% growth in the volume of externally borrowed funds. The cost of external market borrowing remained practically unchanged in 2008 at 5.7% compared with 5.6% in 2007, despite worsening economic conditions in the second half of the year. As a result, net interest income before provisions grew 78.7% in 2008, to US$ 4,567 million. The net interest margin, calculated as a ratio of net interest income before the provision charge for impairment to average interest-earning assets, increased to 4.8% in 2008, compared with 4.4% in 2007.

23 3. Review of financial performance Net fee and commission income Provision charge for impairment 17 Total fee and commission income grew 22.3% in 2008 to US$ 779 million from US$ 637 million in Fee and commission income was mainly generated by commissions on settlement transactions, which accounted for 54% of the total. Income from commission on settlement transactions grew 34.7% in 2008 to US$ 419 million. Other major sources of fee and commission income growth were guarantees issued and trading finance. The revenue generated by these items more than doubled in 2008 to US$ 145 million (from US$ 66 million in 2007), as a result of VTB s efforts to develop its documentary and guarantee business. Total fee and commission expense increased 53.8% in 2008 to US$ 123 million from US$ 80 million in 2007, whereas commission paid by VTB in 2008 on settlement transactions was US$ 61 million and stood at US$ 29 million for cash transactions. The increase in fee and commission expense in 2008 resulted from the overall growth in the Bank s operations, in particular on interbank and currency markets. Net fee and commission income, excluding the oneoff gain 3, increased 17.8% year-on-year in 2008 to US$ 656 million (from US$ 557 million), mainly due to the growth of the Bank s clients operations and the expansion of the client base. 2 Core income Core income, defined as net interest income before provisions and net fee and commission income excluding one-off items 3, was up 70.9% to US$ 5,223 million year-on-year, reflecting strong top-line growth and improved underlying profitability in both corporate and retail lending. 3. Depositary appointment fee of US$ 57 million in During the reporting period, VTB Group made provisions for loan impairment following the expected worsening economic situation and, as a consequence, an anticipated increase in non-performing loans. The Group provisioned US$ 2.5 billion, or 3.2%, of the average gross loan portfolio, as compared with 1.3% in Gains less losses from financial assets and extinguishment of liabilities In 2008, the Group received a US$ 41 million gain from operations with financial assets. This was primarily as a result of VTB s effective trading strategy and risk hedging, as well as the application of the amendment to IAS 39 Financial Instruments: Recognition and Measurement, which allows the reclassification of financial assets held for trading to investment securities held-to-maturity and to loans and advances to customers or due from other banks, depending on the availability or lack of active markets in these securities and the Bank s intention and ability to hold them for the foreseeable future or until maturity. If the reclassification of debt securities had not been made, the Group would have recognised a loss of US$ 146 million for 2008 in respect of these securities. In addition, a net gain of US$ 349 million from the buy-back of VTB s own bonds had a positive impact on the Group s net profit in Operating expenses Operating expenses, defined as staff costs and administrative expenses, grew 39.2% in 2008 to US$ 2,711 million, as a result of the larger scale of the Group s business and continued inflationary

24 Annual Report pressure in the Russian economy. During the year under review, the bank opened 176 new retail outlets and also launched its investment banking business. Operating expenses grew at a much slower pace than core income, which reflects the Group s tighter control of costs. In particular, VTB postponed its relocation to a new office, cut its administrative expenses, carried out headcount reductions in some units and introduced a moratorium on new hires across the Group. The cost to core income ratio was 51.9% in 2008, having improved from 62.7% in Operating expenses grew at a much slower pace than core income, which reflects the Group s tighter control of costs. Net profit Net profit was US$ 212 million in 2008, compared with US$ 1.5 billion in The key factor that affected net profit was the growth in provisions for loan impairments. In the fourth quarter of 2008 alone, the Group created provisions of US$ 1,102 million, while the provisioning charge for the whole year stood at US$ 2,482 million, compared with US$ 526 million in at the end of 2008 from 14.6% in 2007, the share of cash and short-term funds as well as that of mandatory cash balances with central banks increased substantially, reaching 11.5% of total assets at the end of 2008, compared with 6.5% in the previous year. This increase was mainly due to the receipt of funds from the placement of a subordinated loan with Vnesheconombank in the fourth quarter of By the end of the year, the total amount of cash items on the Group s balance sheet stood at US$ 14,162 million. Loans and advances to customers The total gross loan portfolio grew 50.3% in 2008 to US$ 90,208 million from US$ 60,021 million. Loans and advances to customers, net of allowance for impairment, grew 48.5% in 2008 to US$ 86,984 million. At the year end, the largest share of the loan portfolio comprised of the finance Loan portfolio breakdown by currency (excluding provisions for impairment) as of 31 December 2008 Assets The Group s assets increased 35.9% in 2008 and totalled US$ 125,848 million. The key factor contributing to this increase was the growth in corporate and retail lending. The share of net loans and advances to customers as a percentage of total assets increased to 69.1% at the end of 2008, up from 63.2% at the end of Following a two-fold decrease in the total securities portfolio to US$ 5,986 million, the share of securities as a percentage of total assets declined to 7.0% USD (43.0%) RUB (53.4%) EUR (2.4%) Other (1.2%) Source: Consolidated IFRS financials of VTB Group for 2008

25 3. Review of financial performance segment 4 (19% of the Group s gross loan portfolio), the construction segment (14%), the retail segment (10%) and the individual loan segment (15%). At the end of reporting period, mortgages to individuals made up 49.2% of total loans to individuals. 3 The corporate loan portfolio grew 47.2% year-on-year in 2008 to US$ 77,034 million from US$ 52,339 million, and accounted for 85.4% of the Group s total loan portfolio by the end of Loans to individuals grew 71.5% year-on-year in 2008 to US$ 13,174 million. Loan portfolio quality The quality of VTB s loan portfolio remains adequate, despite the worsening macroeconomic environment. The share of overdue and rescheduled loans in the gross loan portfolio was 2.4% by the end of 2008, compared with 1.4% at the end of The allowance for loan impairment increased to 3.6% of the total gross loan portfolio as compared to 2.5% in 2007, while its coverage for overdue and rescheduled loans remained at the comfortable level of 147.6% as at 31 December of subordinated debt in the Group s overall liabilities increased to 6.8% from 1.5%, and the share of other borrowed funds increased to 25.7% from 6.8% at the end of The total amount of funds provided by the government in the form of subordinated debt, CBR deposits and re-financing funds from VEB was US$ 28 billion. Customer deposits Customer deposits remained unchanged in 2008 at US$ 37,503 million. Retail deposits increased by 12.8% year-on-year to US$ 12,052 million. Corporate deposits declined 3.6% year-on-year to US$ 25,451 million, as a result of the significant rouble depreciation in the second half of 2008 (about 60% of corporate deposits were roubledenominated). The growth of corporate deposits was also affected by a contraction of corporate funds as market liquidity tightened. Customer deposits breakdown by currency as of 31 December Liabilities VTB s liabilities grew 47.8% year-on-year to US$ 112,501 million in 2008 from US$ 76,108 million in At the same time, the growth in VTB s resource base was accompanied by significant changes in its structure. The share of customer deposits in VTB s total liabilities decreased to 33.3% in 2008 from 48.7% in 2007, while the share of debt securities issued declined to 17.0% from 21.7%, respectively. Over the course of the year, these resources were replaced by funds received as part of governmental support. As a result, the share USD (25.5%) RUB (57.4%) EUR (15.2%) Other (1.9%) Source: Consolidated IFRS financials of VTB Group for Includes loans made for M&A, to holding companies, to insurance and leasing companies, and to other non-bank investment companies.

26 Annual Report Debt securities issued The debt securities issued by VTB Group increased 15.6% year-on-year in 2008 to US$ 19,063 million, compared with US$ 16,489 million in Among the largest public deals during the reporting year were two Eurobond issues denominated in US dollars and Euros in the aggregate amount of US$ 3.3 billion. These bonds were issued within the framework of the existing Euro Medium Term Notes (EMTN) Programme, which was registered in September 2007 to attract debt financing in the international capital markets. Furthermore, in May 2008, VTB Bank placed US$ 2 billion of Eurobonds, despite the prevailing difficult situation in the global capital markets. At the time, VTB Bank was the largest issuer of a singletranche of Eurobonds completed by any financial institution in the CIS and Central and Eastern Europe. The Bank issued a further EUR 1 billion of Eurobonds in June 2008 which, at the time, was the largest Eurodenominated bond issue by a financial institution in emerging markets. In June 2008, VTB also signed a US$ 1.4 billion two-tranche syndication loan, with the first tranche totalling US$ 1 billion and being due in June 2011, and the second tranche amounting to US$ 400 million and being due in December At the time, it was the largest syndicated loan for any financial institution in the CIS and Central and Eastern Europe since the beginning of VTB s total equity increased 21.5% in 2008 to US$ 20,641 million. At the end of 2008, VTB had a total BIS capital adequacy ratio of 17.3%, up from 16.3% at the end Total Equity VTB s total equity increased 21.5% in 2008 to US$ 20,641 million. At the end of 2008, VTB had a total BIS capital adequacy ratio of 17.3%, up from 16.3% at the end VTB s capital adequacy ratio was materially supported through a VEB subordinated debt issue in the fourth quarter of 2008 of RUB 200 billion at a rate of 8% and a maturity of 11 years. The Tier 1 capital adequacy ratio stood at 10.5% at the end of 2008, down from 15.0% in the previous year. The growth of the loan portfolio had an effect on the capital position which was further affected by the more than 20% devaluation of the rouble in the second half of The effect of the rouble devaluation on Tier 1 capital was US$ 1.8 billion. In 2008, VTB Group issued bonds on the Russian debt market totalling approximately RUB 26 billion.

27 4. Operating performance in Operating performance in VTB Group structure 5 VTB Group ( VTB or the Group ) includes JSC VTB Bank ( VTB Bank or the Bank ) and its subsidiary banks and companies. VTB Group 1 Russia CIS Europe Asia/Africa VTB Bank VTB24 VTB Bank North-West VTB Capital VTB Leasing VTB Insurance VTB Factoring VTB Debt Centre VTB Bank (Ukraine) VTB Bank (Belarus) VTB Bank (Armenia) VTB Bank (Georgia) VTB Bank (Azerbaijan) VTB Bank (Kazakhstan) VTB Bank Representative office in Kazakhstan VTB Bank Representative office in Kyrgyz Republic VTB Bank (Austria) VTB Bank (France) 2 VTB Bank (Germany) 2 VTB Capital plc (Great Britain) 3 Russian Commercial Bank (Cyprus) Russian Commercial Bank AG (Switzerland) VTB Bank Representative office in Italy VTB Bank Branch in China (Shanghai) VTB Bank Representative office in China (Beijing) VTB Bank Branch in India VTB Capital (Namibia) Banco VTB Africa S.A. VTB Capital plc Branch in Singapore 3 Vietnam-Russia Joint Venture Bank 4 1. Banks, principal financial companies and representative offices of VTB Group. 2. Consolidated in VTB Bank (Austria) results. In 2008, VTB integrated its corporate business in Europe and formed a sub-holding within VTB Bank (Austria) which included VTB Bank (Germany) and VTB Bank (France). 3. Consolidated in VTB Capital results. 4. An associated company, not part of VTB Group, but in which VTB exercises a significant influence due to the size of its shareholding. VTB Bank was incorporated in 1990 as the Bank of Foreign Trade of the Russian Federation. Over the past 18 years, VTB Bank has developed into a universal financial and banking institution with a strong 1 presence in Russia and an expanding presence in the CIS, Western Europe, Africa and Asia, both through organic growth and a series of strategic acquisitions. 5. The structure of VTB Group as at 31 March The Group s business franchise is divided into three distinct areas of expertise: corporate, retail and investment banking. Through its corporate banking division, the Group provides a broad range of commercial banking services and products to large and medium sized companies and financial institutions. The investment banking division provides services to leading Russian companies. The Group s retail banking division offers a full spectrum of services and products to retail and small business customers.

28 Annual Report 2008 VTB Group international presence (subsidiaries and representative offices, including branches abroad) 22 Russia Great Britain Belarus Germany Ukraine France Switzerland Austria Georgia Italy Аrmenia Cyprus Azerbaijan Kazakhstan Kyrgyzstan China India Vietnam Singapore Angola Namibia Subsidiary bank Financial company Representative office Branch VTB Capital plc branch

29 4. Operating performance in 2008 The core of VTB is its Russian banking business, which is complemented by a geographically diversified branch network for corporate and retail services and financial companies. As at 31 December 2008, VTB Group s Russian branch network comprised 693 points of sale. Breakdown of corporate loans by industry as at 31 December VTB Group s operations include two subsidiary banks in Russia, a number of financial companies (VTB Leasing, VTB Insurance, VTB Capital, etc.), subsidiary banks in Ukraine, Armenia, Georgia and Belarus, as well as six banks in Western Europe (Great Britain, France, Austria, Germany, Cyprus and Switzerland), a subsidiary bank in Angola and a financial company in Namibia. VTB Bank also has representative offices in Italy, Kazakhstan, Kyrgyz Republic and China. VTB Capital plc (United Kingdom) operates a subsidiary in Singapore. In 2008, VTB Group increased its international presence through the acquisition of AF-Bank 6 in Azerbaijan, the registration of a subsidiary bank in Kazakhstan (the Group expects to receive a banking licence in the second quarter of 2009), and the opening of VTB Bank branches in India (New Delhi) and China (Shanghai). 2 Finance (22%) Тrade and commerce (11%) Manufacturing (9%) Building construction (17%) Metals (9%) Oil and Gas (6%) Food and agriculture (3%) Transport (6%) Other (17%) Source: Consolidated IFRS financials of VTB Group for Corporate business division The majority of VTB Group s corporate business is dedicated to providing banking services to large and medium sized corporate clients. In 2008, VTB Group fulfilled the objectives which were established for its corporate business in spite of changed market conditions. The Group s market share in the corporate lending segment rose to 12.7% from 10.7% in Furthermore, despite the prevailing lack of financing in the market, VTB maintained its market share of the corporate deposits segment at 10.2%. In 2008, VTB continued to provide a wide range of credit products to its corporate clients. VTB Group s loan portfolio increased 47.2% year-on-year to 6. Renamed as VTB Bank (Azerbaijan). US$ 77.0 billion, compared with US$ 52.3 billion in the previous year, despite the stricter credit policy introduced by the Bank in the second half of 2008 in response to the developing financial crisis. In 2008, the Bank showed flexibility in its approach to the changes in the economy and adapted its product portfolio to the current needs of its clients. As a result of the lack of liquidity and limited lending activity, the Bank experienced an increase in demand for documentary letters of credit and bank guarantees in the market. VTB offered a wide range of banking products and services to its clients in this area, including an interest charge on cash cover provided by the client for an import documentary letter of credit as at the date of opening and settlement using credit guarantees based on the specifics of the client s industry.

30 From vast resources

31

32 24 From vast resources to bright results Given the limited access to liquidity, one of the Group s key objectives became attracting client funds to expand its deposit base. Thanks to its strong market position, high brand recognition and targeting, VTB achieved retail deposits growth of nearly 13% year-on-year.

33 25

34 Annual Report The Bank utilised the benefits of its Group structure, and conducted transactions with the participation of its subsidiary banks. During the year, VTB Bank introduced a number of measures to improve its service model for its key client segments. In particular, the Bank launched an institute of product managers in order to identify more efficiently its corporate clients product needs. VTB has further developed the IT infrastructure of its corporate business. The Bank is undertaking a number of projects to enable the generation of necessary information on clients transactions in an online format. In 2009, VTB plans to complete in its affiliate network the rollout of the complex automated system for documentary letters of credit and bank guarantees which is already functioning in its head office. Services for large clients In 2008, VTB had 3,700 large clients, including financial institutions. During the year, VTB played a special role in supporting the Russian economy as one of the cornerstone banks. The Bank significantly expanded its volume of lending to strategically important companies. This lending was funded by the State in order to support key sectors of the Russian economy. In particular, VTB extended loans to defence, car manufacturing, transport, non-ferrous and ferrous metals, oil and coal mining companies. Among them were NPO Saturn, AutoVAZ, Rosoboronexport, Mechel, Evraz Group, Russian Aluminium, UGMK and SUEK. Furthermore, VTB continued to finance social housing projects, and provided loans to retail food chains, including Seventh Continent, X5 Retail Group, Lenta, Dixy and Holiday. Nevertheless, VTB tightened its lending policies and reduced lending limits for retail and real estate sectors, recognising the increased lending risks, but excluding large national players where it has fixed individual limits for each company. In 2008, the Group continued to be involved in a number of State investment projects and provided co-financing for the construction of Sheremetyevo-3 terminal complex; infrastructure projects in Sochi for the Olympic Games; a civil aviation construction project for Sukhoi Concern, SSJ-100; and a federal investment programme in Energoatom Concern, the State nuclear power entity. In 2008, whilst facing the global financial crisis, VTB was focused on attracting deposits from its large corporate customers as one of its priorities. The bank was particularly successful in attracting deposits from Top ten corporate lending deals in 2008 Name of client Total deal size Transaction type ALROSA RUB 44.2 billion Refinancing of short-term liabilities DON-Stroy Group RUB 16.4 billion Financing of housing construction projects UGMK-Holding US$ million Corporate loan AFI Development Group RUB 9.9 billion Corporate loan for the construction of the Moscow-city complex RUSAL Krasnoyarsk RUB 9.0 billion Corporate loan JSC Southern Kuzbass RUB 8.6 billion Financing of working capital needs JSC Terminal US$ 264 million Financing for the construction of the Sheremetyevo-3 airport complex NPO Saturn RUB 7.4 billion Corporate loan Sozdanie Investment Group RUB 5.7 billion Financing for the construction of the Park Pobedy business centre AutoVAZ RUB 2.5 billion Corporate loan FGUP Rosoboronexport US$ 112 million and RUB 2.8 billion Corporate loan Source: VTB

35 4. Operating performance in 2008 Corporate deposits, in US$ million 25,000 customer care, shortening the decision-making process and offering the full range of the Group s banking and financial products. VTB has established cooperation between its corporate banking and the newly established investment banking business which allowed it to offer clients the most in-demand products and services ,000 5,000 16,781 9,634 16,223 9,228 In 2008, whilst facing the global financial crisis, VTB was focused on attracting deposits from its large corporate customers as one of its priorities Current deposits Term deposits Source: Consolidated IFRS financials of VTB Group for 2008 clients in the nuclear, energy, oil, ferrous metals, telecommunications and insurance sectors. OGK-3, Atomenergoproject, Surgutneftegas, MegaFon and the Agency for Home Mortgage Lending (AHML) were among its largest clients. The Bank increased the volume of clients overnight deposits 14 times year-on-year to above RUB 40 trillion (approximately US$ 1,470 million) and was active in attracting and placing corporate clients deposits using Reuters-Dealing and BS-Client remote dealing systems. In 2008, VTB significantly improved its customer care in order to strengthen its position and further develop its client relationships. VTB launched several marketing campaigns to promote its commissionbased products, including documentary letters of credit and bank guarantees for international settlement transactions. The Bank also successfully introduced a pilot programme to sell its products proactively to customers, aimed at improving its At the end of 2008, the Bank opened a Centre of Financial Services, a specialised service office in Moscow for state companies, from which to serve entities such as Russian Technologies. In 2009, VTB plans to expand the services of the Centre of Financial Services to include other large state corporations. This would allow it to shorten the time required to process loans and to manage the overall cash flows of state companies. Services for medium sized clients In 2008, the Bank provided services to 27,470 medium sized clients. VTB s loan portfolio of medium sized clients increased 1.5 times year-on-year by 31 December Since 2005, VTB has offered a dedicated service model which provides standard loan products to medium sized customers at VTB head office and in branches, thus avoiding duplication. VTB also offers a wide range of banking products and services, including the structuring of sophisticated transactions. The Bank met its internal targets with regard to the growth of its medium sized regional corporate customers and grew nearly twice as fast as the rest of the Russian banking sector in The Bank made a range of improvements to its sales of credit products and advanced its risk assessment techniques. It has further developed