ANNUAL REPORT Life is open for discoveries. otkritiefc.ru

Transcription

1 ANNUAL REPORT Life is open for discoveries otkritiefc.ru

2 Otkritie Financial Corporation Banking Group at a Glance 2 Statement of the Chairman of the Supervisory Board 4 Statement of the Chairman of the Management Board 6 Market Review 10 Operational Review 16 Financial Overview 56 Russian Economy in 10 Russian Banking Sector Overview 13 Corporate Banking 16 Investment Banking 22 Retail Banking 28 Small Business Banking 36 Рrivate Banking 41 IT 45 Corporate Social Responsibility 47 Human Resources 51 Financial Highlights 56 Risk Management and Control 60 Corporate Governance 78 Appendix 106 Priorities 60 Key Risk Areas and Risk Management Tools 60 Credit Risk 62 Liquidity Risk 69 Market Risks 69 Operational Risk 71 Financial Monitoring 71 Legal Risks 72 Reputational Risks 73 Strategic Risks 73 Regulatory Risks Priorities 75 Corporate Governance Overview 78 Share Capital 80 General Shareholders Meeting 81 Supervisory Board 83 Management Board 94 Control 98 Compliance with the Corporate Governance Code 100 Abbreviations and Definitions 106 Summary Consolidated IFRS Financial Statements 108 Contacts 120

3 2 Otkritie Financial Corporation Bank 3 Otkritie Financial Corporation Banking Group at a Glance Otkritie Financial Corporation Banking Group is the largest privately-owned banking group in Russia. It is ranked among the world s top 350 banking groups and among the top 10 banking groups in Eastern Europe 1 Otkritie Financial Corporation Banking Group is a universal banking group focusing on four key segments: corporate banking, retail banking, small business banking, and investment banking. The Group consists of two banks: Otkritie Financial Corporation Bank and Khanty-Mansiysk Otkritie Bank 1 4 No. No. by assets among Russian private banking groups 2 by assets among the largest Russian banks 2 BB by S&P, Ba3 by Moody's Otkritie Financial Corporation Bank ratings Total assets 3 3,363.6 billion roubles Total loan portfolio net of provisions 2,565.8 billion roubles Net profit 6.6 billion roubles Regional Network Regional Branch Network in Seven Key Regions of Presence Shareholders of Otkritie Financial Corporation Bank 500 branches and other points of sale 55 Russian regions of presence 7 key regions 42 Otkritie Financial Corporation Bank 35.3 % % 64.7 % 5 St. Petersburg and Leningrad Region 264 Khanty-Mansiysk Otkritie Bank Otkritie Holding Free float Moscow and Moscow Region Volgograd and Volgograd Region Yekaterinburg and Sverdlovsk Region Khabarovsk and Khabarovsk Region Tyumen (including Khanty-Mansiysk Autonomous Region and Yamalo-Nenetsk Autonomous Region) Moscow and Moscow Region Tyumen (Khanty-Mansiysk Autonomous Region and Yamalo-Nenetsk Autonomous Region) St. Petersburg and Leningrad Region Novosibirsk and Novosibirsk Region Novosibirsk and Novosibirsk Region Volgograd and Volgograd Region Yekaterinburg and Sverdlovsk Region 5 2 Khabarovsk and Khabarovsk Region Total number of clients 29,377 clients in corporate banking 3.4 million clients in retail banking 163,121 clients in small business banking 1 Source: The Banker, as at the end of. 2 Based on Interfax CEA ranking in accordance with RAS financial statements as of December 31,. 3 Unless specified otherwise, all highlights referred to in this Report are based on the consolidated financial statements audited by an independent auditor and prepared in accordance with IFRS. 4 Including non-governmental pension funds, which hold 24.0% of ordinary shares, and other shareholders (11.3% of ordinary shares). 5 Including subsidiaries holding 4.1% of interest.

4 4 Otkritie Financial Corporation Bank 5 Statement of the Chairman of the Supervisory Board The year was one of the most challenging in the last decade for the Russian economy in general, and for the banking sector in particular. Among other factors, a steep fall in oil prices and turbulent foreign exchange markets put a lot of pressure on businesses and financial institutions. Otkritie Financial Corporation Banking Group s performance, however, has proven that our strategy is working and sustainable in the challenging environment. Despite lower margins in the banking sector, in net profit earned by the Group increased by 12.4% to RUB 6.6 billion. I would like to highlight that this achievement is the result of our efforts across all key business segments and demonstrates that our business model is well-balanced. The Group s assets increased by 29.6% and reached RUB 3.4 trillion, strengthening our position among the top four largest Russian banking groups. The worsening macroeconomic situation stipulated the notable decline in the amount of high-quality borrowers in the market. In this environment we have chosen a strategy of higher efficiency over market growth, and we believe it is now the right time to focus on the large-scale internal restructuring program which we have already initiated and expect to complete in a few years time. as defined by the state recapitalization program. In our retail business, growth will be mostly driven by mortgage loans which are on the rise even under the current conditions, as a result of government support initiatives. In turbulent, it became vital for banks to prove that they are reliable and deserve to be trusted. Otkritie Financial Corporation Banking Group worked hard to further strengthen the confidence of our clients, investors, and partners. As a sign of its confidence, the Russian government included Otkritie Financial Corporation Banking Group in the list of systemically important credit institutions in Russia and in the capital support program funded with Russian Federation government bonds, thus increasing the capital of Otkritie Financial Corporation Banking Group by RUB 65.2 billion in. We also managed to sustain our excellent reputation in the global markets. The syndicated loan raised by the Group in the international market in the amount of USD million was the only syndicated loan raised by Russian banks in. Our performance demonstrates that even in the most difficult of times we are able to see and grasp opportunities which emerge in the market. And it gives us confidence as we look towards the future. In the mid-run, despite the comfortable liquidity buffer we do not intend to boost the loan portfolio. We will, however, increase our corporate loan portfolio in 2016 with focus on priority industries, Life is open for discoveries Dmitry Romaev President, Chairman of the Supervisory Board otkritiefc.ru

5 6 Otkritie Financial Corporation Bank 7 Statement of the Chairman of the Management Board was yet another difficult year for the Russian economy: both banks and their clients from different industries had to respond to arising challenges. Amid stormy markets, Otkritie Financial Corporation Banking Group focused on its business efficiency, risk management, promoting an integrated approach to customer relationship management, and improving customer experience. The above objectives were also our priority in the process of the integration of Petrocommerce Bank, which merged into Otkritie Financial Corporation Bank in June. Providing the highest quality of service to LUKOIL Group companies, strategically important clients of the Group, was one of the key factors driving the expansion of our client base throughout. Another crucial segment in which we made significant achievements during is innovative service channels. We believe that the success of remote banking is crucial for the future development, and in the long run the ability to offer user-friendly remote banking services will be a must for a successful financial institution. With that in mind, in, we launched our Tochka project proving our small business clients with complete remote access to our clearing and payment services. We also partnered with Rocketbank, a mobile banking leader, which became a member of the Otkritie Financial Corporation Banking Group in The Group reported solid financial results. In, its net profit reached RUB 6.6 billion, exceeding by 12.4% the result. In, RoAE grew to 7.7% (6.2% in ). Our performance demonstrates our resilience, while the projects we implemented form a solid platform for expanding our business and strengthening our leadership across all key business segments of Otkritie Financial Corporation Banking Group. Life is open for discoveries Evgeny Dankevich Chairman of the Management Board otkritiefc.ru

6 MARKET REVIEW Life is open for discoveries otkritiefc.ru

7 10 Otkritie Financial Corporation Bank 11 Market Review Market Review Russian Economy in Economy Overview Unemployment Throughout, the Russian economy continued to adapt to new external conditions; measures taken by the Central Bank of the Russian Federation and the Russian government prevented the economy from free fall, and the financial system from further destabilisation Economic Growth Breakdown; Annual GDP Growth Components in Comparable Prices, % y-o-y Consumer demand Capital expenditure Change in inventory Exports Imports Real GDP growth Source: Rosstat; Otkritie Financial Corporation Bank. Domestic Demand and Net Exports; Effect on Annual GDP Growth in Comparable Prices, % Net exports Domestic demand Source: Rosstat; Otkritie Capital Research Department Early in, the situation was very tense: oil prices crashed from USD per barrel in September to just USD 45.2 per barrel in January, and the economic outlook was highly uncertain. The Russian economy, however, proved to be more resilient than analysts expected. In, economic activity slowed down by 3.7%. While the Russian budget was still well balanced, industrial output experienced a moderately downward trend, falling 3.4% year-onyear. Industrial output was supported by export-oriented industries and import substitution strategies in certain segments (primarily the food industry). However, it would be premature to discuss a rebound in economic activity as uncertainty in the market remains high, consumer demand remains weak, and households are still in a saving mode. As compared with previous recessions in Russia over the last two decades (1997 to 1998, and 2008 to 2009), the current downward move is smoother. After a 7.8% downturn in 2009, the economy grew 4.5% in 2010; now, there are no grounds to project such a dramatic reversal of the trend. The key driver behind the economic slowdown in Russia in was shrinking consumer demand which had been on a downward trend since 2012, due to both external shocks and domestic structural limitations. Since 2012, growth in household spending has been slowing down and in reached a record low of 9.6% (in real terms) for more than 20-year period. Over, domestic consumer demand in the private sector was affected by reduced purchasing power (due to a rapidly depreciating rouble and double-digit inflation), a contraction of retail lending (with the exception of mortgages which were supported by the government to a certain extent), weaker real disposable income (which fell by 4.3% vs a 0.7% decline in ), and higher savings amid greater uncertainty. Investment activity remained weak amid turbulent markets, lack of access to international capital markets, and the higher cost of rouble funding. In, capital expenditure dropped by 8.4% (as compared with a 1.5% decline in ) despite favourable dynamics reported by mining industries, although the government s anti-crisis package did provide certain support to investment. Weaker investment and consumer activity put downward pressure on imports. Therefore, net exports contributed to annual output growth and fuelled the GDP growth. According to the official forecasts, the government expects GDP to fall by 0.2%, assuming an average 2016 Urals oil price of USD 40.0 per barrel. Unemployment Rate as Percentage of Economically Active Population, % Unemployment rate Seasonally adjusted unemployment rate Real wage growth (right scale) Source: Rosstat; Otkritie Capital Research Department. Inflation Inflation Growth Breakdown; Effect on Consumer Price Index, % y-o-y Core inflation Food Other components Overal CPI Source: Rosstat; Otkritie Capital Research Department Balance of Payments 2013 Current Account Balance, % of GDP Source: Bank of Russia; Otkritie Capital Research Department Since 2009, the unemployment rate has been steadily declining. In, against the background of continuing economic decline the positive trend reversed: the unemployment rate increased by 0.4% to reach 5.6% as at the end of (5.2% as at end of ). In, the inflation rate reached 12.9% (vs 11.4% in ), fuelled primarily by a weaker rouble (which depreciated by 58.9% against the U.S. dollar and by 33.4% against the Euro), unfavourable oil prices, geopolitical instability, and foreign trade restrictions. In the last quarter of, however, consumer price growth began to slow, mostly due to the high base effect which is also likely to persist in Lower inflation In, the current account surplus widened to reach 5.2% of GDP, or USD 69.6 billion (vs 2.8% of GDP, or USD 58.4 billion in ). The effect of a shrinking trade surplus (from USD billion in to USD billion in ) was offset by a positive movement in the balance of services and investment income, partly due to a drop in debt service expenses, given the general decline in foreign corporate debt between and. However, the current unemployment rate is still relatively low and is a result of the Russian market adjustment to worsening macroeconomic conditions primarily by slowing wage growth and increasing part-time employment. is also driven by weak consumer demand, a moderately tight monetary policy, wage suppression in the public sector, and a good harvest. On the other hand, rouble depreciation between December and January 2016 put upward pressure on prices, slowing the decline in annual inflation rates, and keeping inflationary expectations high, which expose to a risk the achievement of the inflation target of 4.0% for 2017 set by the Bank of Russia. In, net private capital outflows from Russia comprised USD 58.1 billion (vs USD billion in ), or 4.4% of GDP. Unlike the previous years, the net capital outflow was dominated by private foreign debt repayments. The most notable decline was seen in the foreign liabilities of banks both through disposals of overseas assets and accumulation of funds from current account operations. Therefore, in, the Bank of Russia s reserve assets were up USD 1.7 billion, as compared with a USD billion decrease in.

8 12 Otkritie Financial Corporation Bank 13 Market Review Russian Banking Sector Overview Fiscal Policy Highlights Federal Budget Deficit, % of GDP New Challenges Source: Russian Ministry of Finance; Otkritie Capital Research Department In, federal budget revenues fell 1.7 bps to 16.9% of GDP. The effect of reduced foreign trade was partially offset by higher federal budget revenues in the form of profit tax and VAT paid by non-oil and gas companies. Federal budget expenditures grew by 5.2% yearon-year to reach 19.3% of GDP, driven by double-digit growth in expenses associated with national security and social policy (primarily the indexation of pension benefits). At the same time, a 24.2% reduction in expenses related to the national economy held down the rate of federal expenditures growth, and, therefore, the federal budget deficit widened to RUB 1,945.1 billion, or 2.4% of GDP. Early in 2016, as the oil supply remained well in excess of demand, the Chinese economy continued cooling down, and the U.S. Federal Reserve raised interest rates, oil prices plummeted further (the Urals oil price fell to USD per barrel). This, in turn, triggered depreciation of national currencies and impairment of financial assets in emerging markets, including in Russia. Highly volatile oil prices drove wider fluctuations in Russian financial asset prices and the rouble exchange rate. As of January 1, 2016, according to the Ministry of Finance, Russia s domestic government debt represented by rouble-denominated securities reached RUB 5.6 trillion, demonstrating almost no change from the level reported in (a 1.8% increase). Foreign government debt (including federal guarantees) was reported as of the same date at USD 50.0 billion, down USD 4.4 billion year-on-year. As a result, the debt burden of the Russian budget is still relatively low, at roughly 14.0% of GDP (including government guarantees), giving Russia a competitive edge over most developing countries and supporting its sovereign credit ratings. As of early 2016, the Russian Reserve Fund and the Russian National Wealth Fund totalled USD billion, or 11.0% of GDP. This turbulence made a continuing recession a possibility, especially in light of the high debt burden of Russian companies, and interest rate risks for both banks and borrowers. As before, the floating rate partially offsets the negative effects of the low prices of energy carriers; however, the balance of payments and the economy will need to further adapt to lower prices for most products exported by Russia. Banking Assets, RUB billion 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, Banking assets GDP of Russia Share, % (right scale) Source: Bank of Russia; Rosstat. 110% 100% 90% 80% 70% 60% 50% 40% 30% In, the Russian banking sector experienced a quite dramatic deceleration of growth. Banking assets in Russia grew by 6.9% (a decline by 1.6% year-on-year net of rouble depreciation) 1. In, the aggregate loan portfolios of Russian banks expanded by 7.6% to RUB 44.0 trillion (0.1% growth year-on-year net of rouble depreciation; 12.9% growth in ); corporate loans grew by 12.7% totalling RUB 33.3 trillion (2.5% growth year-onyear net of rouble depreciation; 13.0% growth in ). Retail loans shrank by 5.7% (a decline by 6.3% year-on-year net of rouble depreciation; 12.5% growth in ). Similar to, the slower pace of growth in was primarily due to the notable reduction in consumer loans other than mortgages by most Russian banks. Customer accounts increased by 19.8% in (8.9% growth year-on-year net of rouble depreciation; 15.7% growth in ), outpacing the growth in the banks loan portfolio. In contrast to, this dynamic was mostly fuelled by retail business: retail deposits were up 25.2% (16.8% growth year-on-year net of rouble depreciation; 2.5% decline in ). Corporate deposits and accounts grew by 15.6% (2.7% net of rouble depreciation; 18.8% growth in ). After the Bank of Russia raised the key refinancing rate late in, funding from the Bank of Russia as the percentage of the banking sector liabilities slid from 12.0% at the end of to 6.5% at the end of. In, profit of the Russian banking sector fell to RUB billion (RUB billion in ). Similar to, weaker financial performance was due to higher loss provisions (which totalled roughly RUB 1.4 trillion) and the higher cost of funding as the Bank of Russia raised interest rates. Therefore, RoAE of Russian banks fell to 2.7% in compared with 8.7% in. Late in, the Russian government, the Bank of Russia, and the Deposit Insurance Agency (DIA) embarked on a programme to support the Russian banking sector. Certain measures were already taken in : RUB 800 billion recapitalisation of major national and regional banks by means of federal bonds; prolongation and/or conversion of subordinate loans extended under the government bailout package into other instruments that would be included in the capital adequacy formula. These measures helped to increase the aggregate capital adequacy in the banking sector from 12.5% in late to 12.7% in late. 1 Hereinafter data are sourced by the Central Bank of the Russian Federation at

9 OPERATIONAL REVIEW Life is open for discoveries otkritiefc.ru

10 16 Otkritie Financial Corporation Bank 17 Operational Review Operational Review Corporate Banking Priorities Corporate Loan Portfolio Breakdown by Industry as at the Year End Gennady Zhuzhlev Senior Vice President, member of the Management Board, Head of Corporate Banking In, Otkritie Financial Corporation Bank focused on the following priorities in its corporate business development: to successfully complete the merger with Petrocommerce Bank and to provide the highest level of service to its clients (as a result of the merger with Petrocommerce Bank, the number of Otkritie Financial Corporation Bank s corporate clients grew from 19,760 to 29,377 in ); to focus on managing risks and strengthening credit risk control; to focus on reducing the funding costs by increasing the share of current accounts balances in the funding structure, and on improving the quality of settlements and cash services to generate risk-free income. Throughout, Otkritie Financial Corporation Bank continued its efforts to strengthen the Group s positions in the corporate segment by broadening its client base and promoting relations with large and medium-sized businesses. The Bank managed to expand its business despite volatile markets by constantly improving the level of services provided. Its objective is to be a partner, rather than a mere counterparty to its clients. In, the Bank expanded its product offering, in particular, capitalizing on synergies between its corporate business and investment banking. million roubles % million roubles % Operations with real estate 128, , Services 109, , Industrial manufacturing 81, , Housing construction 53, , Leasing 44, , Construction of industrial and commercial real estate 72, , Mining 97, , Wholesale trade 62, , Transport and communication 26, , Retail trade 21, , Agriculture 3, , Operations with securities 23, Key Figures 1 In the loan portfolio Other 58, , Gross corporate loans 782, , % Number of Corporate Clients Corporate Net Loan Portfolio, million roubles 42.7% Corporate Customer Accounts, million roubles 19,760 29,377 In the loan portfolio 754, ,911 In the deposit portfolio 542, ,237 Corporate Business Share 2, % 30.3% 42.7% 48.1% 57.9% In the net loan portfolio In the deposit portfolio In operating income (revenue) In before operating provisions income (revenue) In the loan portfolio In the deposit portfolio before provising 30.3% 42.7% 48.1% 57.9% 43.6% 47.4% In the deposit portfolio 1 As at the year end. In operating income (revenue) before provising 2 The amounts relating to Treasury, 48.1% Asset and Liability management units and Unallocated balances are excluded from the calculation. 43.6% 57.9% 47.4%

11 18 Otkritie Financial Corporation Bank 19 Operational Review Key Corporate Banking Objectives for Financial Highlights (IFRS) Target Key Results/Achievements in Focusing on risk management Improving business processes and technologies/ Reducing costs Expanding the client base Stepping up commissions and clearing operations enhancing credit risk control: the Bank developed and tested the frameworks for monitoring risk factors and the system for early detection of disruptions in clients businesses; maintaining loan portfolio quality: NPL 90+ ratio accounted for 3.5% at the end of, compared to 1.4% at the end of ; extending rouble-denominated loans to clients from priority industries; focusing on highly liquid collateral. reducing costs of network points through automation and centralisation; optimising the network, maintaining a high quality of services through network configuration improvement. maintaining the growing number of new corporate clients: a 25.0% growth of client base, from 19,760 clients as at January 1,, to 24,693 clients as at January 1, 2016, excluding the effect of the merger with Petrocommerce Bank; diversification of the client base. net fee and commission income earned by the corporate business grew by 12.9% to RUB 5.1 billion (a 21.4% growth in ); the volume of settlements increased: the number of outgoing transfers grew by 9.6% year-on-year (from 4,844,560 transactions in to 5,311,292 transactions in ). million roubles Y-o-y, % Key balance sheet figures Total assets of the segment 782, , including net loans to clients 762, , Total liabilities of the segment 669, , including customer accounts 592, , Key profit & loss figures Net interest income 1 25,882 36,352 40,5 Net fee & commission income 4,507 5,090 12,9 Total operating income before impairment losses and provisions for other transactions 25,065 17, Operating expenses 6,462 8,177 26,5 Profit before income tax 17,900 7, Net interest income before gain from remeasurement of cash flows from assets acquired as a result of business combinations and before allowance for impairment of interest-bearing assets. Note: The financial highlights are shown as of December 31,, for the year ended on December 31, ; and as of December 31,, for the year ended on December 31,. Comments on Financial Highlights (IFRS) During, the Group did not focus on loan portfolio growth but concentrated mostly on working with existing clients and risk management aspects. The corporate net loan portfolio declined by 1.2% to RUB billion (a 38.4% growth in ). This dynamic is the result of new business lending and revaluation of loans denominated in foreign currencies (which accounted for 23.7% of the corporate loan portfolio as at the end of ), on the one hand. On the other hand, by pursuing a conservative approach to managing its risks in light of market instability, the Bank significantly increased its provisions for losses by 165.6%, which ultimately reduced the volume of total loan portfolio net of provisions. In, customer accounts of the corporate business segment declined by 8.5%. Considering available comfortable liquidity buffer the Bank did not offer higher rates on new deposits while a number of corporate deposits matured in accordance with existed schedule. The corporate segment posted a pre-tax profit of RUB 7.7 billion in despite the tightening margins and considerable allocations to loan loss provisions. The key profit drivers in were net interest income, net fee and commission income, and tight control over operating expenses, which increased by 26.5%, thereby not exceeding the target level despite the high inflation rate and merger with Petrocommerce Bank in. Net fee and commission income dominated the structure of non-interest income generated by the corporate business in, totalling 76.8% or RUB 5.1 billion. A 12.9% year-on-year increase in fee and commission income in was due to growth in commissions from settlements (up 74.1%) and commissions from transactions with precious metals and foreign currencies (up 79.8%).

12 20 Otkritie Financial Corporation Bank 21 Operational Review Product Offering Precious Metals Market In, the Bank improved its product offering in the following ways: by offering tailor-made packages designed to meet the clients needs; by adapting its products and services to make sure that they are in compliance with the law; by developing and improving its products and services in accordance with banking best practices. Among the products introduced in are: Direct 1C Integration This is a full-scale solution for direct document exchange (transfer orders, account statements, etc.) with 1C: Enterprise software. Mobile Business Application The Group introduced a mobile business application which offers the functionality to upload digital signature certificates and online opportunity of documents authorization. Budget Monitoring The Group introduced a budget monitoring tool for the clients. This tool was developed by the Bank in-house with maximum flexibility allowing to meet all of the customers' demands. Online Account Opening The Group implemented and launched the pilot version of an online account opening service. The clients are now able to apply for an account through the Bank s website, as well as to set up a package of documents necessary to open an account, and to register online in the remote banking system. Cash Management The clients can deposit cash generated from the business activities to their bank accounts using the Group s ATMs with cash-in function. Virtual Overnight With this solution, interest accrues daily on account balances; cash remains on the client s current account without the need to transfer it to the deposit account. SWIFT-based Account Reporting The clients can now request that the Bank sends to their head offices reports on account transactions via SWIFT, as well as to ask the Bank to process information on the status of their accounts with other banks received via SWIFT and to forward to them the resulting reports. Volume of Precious Metals Bullions Acquired by Otkritie Financial Corporation Bank, tons Source: Otkritie Financial Corporation Bank Total Precious Metals Transactions Turnover, USD billion Source: Otkritie Financial Corporation Bank Leading Positions in the Precious Metals Market Otkritie Financial Corporation Bank has been a leader in the Russian precious metals market for many years. The Bank has major Russian gold miners among its clients. Over the course of, the Bank acquired tons of precious metals in bullions, an increase of 59.7% year-on-year, while the turnover of precious metal transactions totalled USD 20.8 billion. Otkritie Financial Corporation Bank has opened more than 100 correspondent accounts in precious metals for Russian and foreign banks. Using its well-established trade relations with foreign partners, including major international banks, the Bank supplies precious metals to European countries, India, UAE, China and CIS countries. Strategic Objectives of Corporate Banking for 2016 In 2016, in the corporate banking segment the Group intends to: broaden its client base; use a tailor-made approach to customer relations; In, Otkritie Financial Corporation Bank became an accredited member of the Shanghai Gold Exchange (SGE) and is entitled to operate in the Shanghai free trade zone. This gives the Bank access to the Chinese market, which dominates the world s production and use of gold. The SGE access guarantees that the Bank can now offer its clients the most favourable conditions for gold bullion purchase in the Russian market. Since 2011, Otkritie Financial Corporation Bank has been a member of the London Bullion Market Association (LBMA). improve its product offering through synergies between corporate and investment banking; focus on risk-management.

13 22 Otkritie Financial Corporation Bank 23 Operational Review Investment Banking Priorities Financial Highlights (IFRS) Konstantin Tserazov Senior Vice President, member of the Management Board, Head of Investment Banking was in general a success for the investment banking of Otkritie Financial Corporation Banking Group. Investment banking was primarily focused on currency and interest rate derivatives, striving to offer integrated solutions to its clients. The Bank managed to build a new debt capital markets team with over 20 new fixed income and interest rate traders hired over the course of. In, Otkritie Financial Corporation Bank arranged a large number of roubledenominated bond issues of Russian clients (corporations, Russian regions, and financial institutions). In 2016, the Bank intends to remain among the top 3 bond arrangers and plans to prioritise tailor-made solutions for major clients. million roubles Y-o-y, % Key balance sheet figures Total assets of the segment 1,467,951 2,135, including net loans and advances to banks and other financial institutions 30,721 56, including financial assets at fair value through profit or loss 291, , including net loans to clients 789,317 1,534, Total liabilities of the segment 1,162,573 1,704, including due to banks 957,297 1,564, Key profit & loss figures Net interest income 1 5,194 (8,726) n.a. Financial results from trading and FX operations (7,290) 30,892 n.a. Key Figures 1 Total operating income before impairment losses and provisions for other transactions (1,520) 16,233 n.a. Operating expenses 1,680 2, Number of Investment Banking Clients 1,157 Investment Banking Assets, million roubles 2,135,046 Investment Banking Net Loan Portfolio, million roubles 1,534,215 Profit/(loss) before income tax (3,202) 13,725 n.a. 1 Net interest income before gain from remeasurement of cash flows from assets acquired as a result of business combinations and before allowance for impairment of interest-bearing assets. Note: The financial highlights are shown as of December 31,, for the year ended on December 31, ; and as of December 31,, for the year ended on December 31, ,467,951 В активах 789, % Investment Banking Liabilities, million roubles 1 As at the year end. 1,162,573 1,704,009 Investment Banking Share 2, % In total assets В активах В пассивах 67.1% 57.5% 60.4% 52.6% In total liabilities В пассивах 2 The amounts relating to Treasury, Asset and Liability management units and Unallocated balances are excluded from the calculation. 57.5% 60.4% 52.6% Comments on Financial Highlights (IFRS) In, growth in investment banking assets was driven by larger volumes of repo transactions. As collateral for reverse repo transactions, Otkritie Financial Corporation Banking Group accepted highly liquid securities included into the Bank of Russia s Lombard List. The Group continued investing in low-risk securities in, thus sustaining its liquid assets. Financial assets reported at fair value through profit or loss accounted for 9.0% of the Group s assets as of December 31, (11.3% as of December 31, ). The investment banking segment of the Group posted RUB 13.7 billion profit in, attributable primarily to trading and FX transactions. In, investment banking earned RUB 30.9 billion from trading operations, including RUB 14.9 billion from securities trading, and RUB 16.6 billion from FX transactions. The significant part of trading income from operations with securities was attributable to the positive mark-to-market revaluation of the fixed income securities portfolio in.

14 24 Otkritie Financial Corporation Bank 25 Operational Review Key Investment Banking Objectives for Fixed Income Target Key Results/Achievements in Promoting investment banking solutions Diversifying revenues by adding and enhancing new business segments Investment Banking Solutions, Coverage and Sales in, the Group closed transactions with major clients, including those among the top 5 largest Russian corporations, and successfully completed a buy-back of a corporate client s Eurobonds; the Group designed a number of financing strategies involving reverse repo transactions with 14 companies of the Russian top 30; as part of the effort to offer the clients integrated solutions, the Group designed a range of novelty products, such as non-deliverable precious metals hedging arrangements (including option strategies), forward instruments, open forward contracts on bonds (i.e. repo + FX swaps + loan facility); the Group upgraded its solutions for financing, hedging, debt optimisation and management. the Bank hired a new debt capital markets team, strengthening its positions in the primary segment of the domestic debt market. As a result, the Bank broadened its product and service offering and increased fee and commission income from the debt capital markets; Otkritie Financial Corporation Bank became the first issuer to register a new instrument, a RUB billion exchange-traded bond programme. The Bank has already placed two RUB 5.0 billion tranches under this programme; the Bank acted as the arranger of a RUB 8.0 billion subordinated Eurobond issue. The deal was successfully closed despite shrinking primary market for Russian issuers. In, Otkritie Financial Corporation Bank formed the investment banking solutions, coverage, and sales department with the responsibility for: designing and marketing integrated solutions to strategically important clients; selling financial instruments developed by the investment banking segment. This department focuses on the Bank s corporate clients from among Russia s top 100 companies (according to Expert RA and Forbes). This department deals in FX, interest rate, and commodity derivatives, currency conversions, structured investments, credit derivatives, repo transactions; it also handles securities issues, and provides access to Russian and international trading platforms. In, this function was involved in transactions with the total value exceeding USD 1.0 billion. Repo Transactions Debt Markets Otkritie Financial Corporation Bank offers its clients a wide range of instruments in the fixed income market. The number of active clients continued to rise throughout, and is dominated by major asset managers, banks, and insurance companies. The Bank s own securities portfolio is designed and managed by the investment portfolio department, which pursues a moderately conservative approach and generally makes investments of a strategic nature. The fixed income portfolio is a vital tool enabling the Bank to quickly raise liquidity in the market, if necessary. In, Otkritie Financial Corporation Bank entered into repo transactions with major financial institutions in Russia, including Sberbank, Russian Agricultural Bank, Vnesheconombank, Citibank, Credit Suisse Bank, Gazprombank, UniCredit Bank, Bank Saint Petersburg, Raiffeisenbank, China Construction Bank, etc. According to the Moscow Exchange, in Otkritie Financial Corporation Bank s trading volumes in repurchase agreements topped RUB 12.5 trillion, of which RUB 2.3 trillion was attributable Over the course of, Otkritie Financial Corporation Bank continued to expand its operations across the segments of corporate and subfederal bonds, Eurobonds, and asset securitisation instruments. Throughout, Otkritie Financial Corporation Bank took consistent measures to limit its risks and reduce the duration of the fixed income portfolio. Certain changes in the investment structure during the year helped the Bank to increase its portfolio liquidity and to raise the share of instruments from the Bank of Russia s Lombard List as high as around 92.6%. As of December 31,, the Group s fixed income portfolio totalled RUB billion (RUB billion as of December 31, ). to equity repurchase agreements, RUB 8.1 trillion to bond repurchase agreements, and RUB 2.1 trillion to government bond repurchase agreements. For comparison purposes, in Otkritie Financial Corporation Bank posted trading volumes in repo of RUB 5.4 trillion, of which RUB 1.8 trillion was attributable to equity repurchase agreements, RUB 2.1 trillion to bond repurchase agreements, and RUB 1.5 trillion to government bond repurchase agreements. Otkritie Financial Corporation Bank was ranked fifth in Cbonds annual ranking of Russia s top bond arrangers in, and placed fourth in Bloomberg s rating of bond market arrangers in Russia. In December, the Bank won the Cbonds Award for Best Investment Bank/Company for Tier II & III Issuers.

15 26 Otkritie Financial Corporation Bank 27 Operational Review Financial Market Transactions Client Conversions Sales in Financial Markets Otkritie Financial Corporation Bank offers its clients a full range of services in the financial markets with the highest level of customer service which is guaranteed by the team of top professionals, the extensive experience in the financial markets, and the excellent reputation. The Bank s counterparties include over 300 financial institutions and corporations classified as professional traders in the financial markets of Russia, the CIS, and other countries. The Bank has maintained business relations with leading credit institutions globally and has direct access to financial markets via loan facilities extended by major international liquidity providers. Despite turbulent financial markets throughout, Otkritie Financial Corporation Bank s team managed not only to maintain its client base, but also to attract new clients. The Group saw demand coming from the corporate clients both for plain vanilla hedging instruments (such as forward contracts or options), as well as for more complex structured solutions. The Bank s volume of trades in FX and interest rates derivatives exceeded RUB billion in (RUB billion in ), and In, Otkritie Financial Corporation Bank won the Dealer of the Year Award of the Moscow International Forex Association, while sustaining its position as a leading market maker in the Russian financial market: No. 1 in the interbank lending market according to DELTA; Top 3 in the FX section of the Moscow Exchange; Top 5 in the spot FX market. In, the Bank posted a 12.0% increase in its trading volumes year-onyear, while its trading volumes in the organised market grew by 24.0%. in commodity derivatives fell to RUB 0.8 billion (1.7 billion in ); roughly 90.0% of the transactions were fully covered, and, therefore, did not entail any additional credit risk for the Bank. Otkritie Financial Corporation Bank raised RUB 8.0 billion in structured deposits. In mid-, the Group launched an interest rate, commodity, and volatility derivative trading desk, and was able to develop a portfolio of trading strategies, earning additional income from managing this portfolio. Brokerage During the first six months of, the market was highly volatile which drove the Bank s income from currency conversion above estimates. By the end of, however, the corporate clients began to lose their appetite for risk and speculation in the FX market. The volume of currency conversions by individuals exceeded USD 1.4 billion in, and the volume of trades by corporations was in excess of USD 15.0 billion. In, Otkritie Financial Corporation Bank enhanced the performance of its front office and back-office IT solutions and launched a solution aimed at clients who use HFT technologies in their businesses. The Bank was therefore able to attract groups of clients handling large volumes of trades in organised markets. Strategic Objectives of Investment Banking for 2016 The key objectives of investment banking for 2016 include: focus on clients business segments; focus on fee and commission income growth; Over the year, Otkritie Financial Corporation Bank continued its project for automation of the FX conversion process and procedure, with the view to enhance the quality of operations and mitigate operational risks associated with currency conversion. In 2016, the Bank works on providing its clients with online access to the EBS platform and continues to provide its brokerage to clients in the international exchange-traded derivative markets (CME). focus on the clientele expansion and the efficiency of the client base and customers relations management (maximising earnings per client).

16 28 Otkritie Financial Corporation Bank 29 Operational Review Retail Banking Priorities Key Retail Banking Objectives for Alexey Karchazhkin Senior Vice President, Head of Retail Banking Key Figures 1 In, Otkritie Financial Corporation Banking Group focused on managing integration processes and enhancing the quality growth of its client base. Improving business processes and promoting remote banking channels remained high on the Group s agenda. Special attention was paid to achieving excellence in customer service and implementing an integrated approach to customer relations. Considering a large-scale reorganization, priority has been given to improving the quality of business which, in turn, is impossible without introducing state-of-the-art banking solutions and streamlining the product offering to fully meet the clients demands for advanced solutions and low risk. Target Key Results/Achievements in Integration with Khanty-Mansiysk Otkritie Bank Premium segment development Otkritie Financial Corporation Banking Group s mortgage business was transferred over to Khanty-Mansiysk Otkritie Bank; existing holders of Petrocommerce Bank and Otkritie Financial Corporation Bank cards were transferred to Khanty-Mansiysk Otkritie Bank; centralised processing of incoming customer requests by Khanty-Mansiysk Otkritie Bank s call centre; operations and service model developed to rebrand the Petrocommerce s branch network. Black Edition and Aeroflot Black Edition premium packages were developed and launched; first premium customer service areas were launched across Moscow offices; premium products were introduced across the retail network; strategic partnership with Renaissance Insurance Company; qualitative growth was achieved in the segment over : interest income grew by 144.0% year-on-year to RUB million; fee and commission income increased by 75.0% to RUB million; deposit portfolio increased by 124.0% to RUB 45.8 billion. Number of Retail Clients, million Retail Net Loan Portfolio, million roubles Retail Customer Accounts, million roubles 313, , , ,115 Retail Business Share, % 2 In the net loan portfolio In the loan portfolio In the loan portfolio 6.8% 10.8% 6.8% 10.8% In the deposit portfolio In the deposit portfolio 43.9% 30.7% 43.9% 30.7% In operating income (revenue) before In operating provising income (revenue) before provisions provising 28.9% 44.4% 28.9% 44.4% Retail Gross Loan Portfolio Breakdown by Type, million roubles 13, ,647 76, ,433 15, ,587 68, ,809 Consumer loans Mortgage loans Car and other loans Customer Funds, million roubles Total customer accounts Retail business: Term deposits Current accounts 417, ,115 77, , ,513 70,802 1,255,898 1,022,995 1 As at the year end. 2 The amounts relating to Treasury, Asset and Liability management units and Unallocated balances are excluded from the calculation. Enhancing remote banking Boosting efficiency Promoting card and transaction business ios and Android mobile applications regularly were updated adding new user functionality; instant money transfers to third party issuers cards was launched; automated payroll accrual was launched, so that funds are transferred to clients online; the number of remote banking users grew from 55,000 to 100,000. customer relations management was centralised and optimised; details of the Group s retail clients were transferred to a new centralised IT platform. new cards were launched and promoted (Premium Black Edition, Pension Card, LUKOIL-Otkritie-MasterCard co-branded card, Aeroflot MasterCard co-branded card in World and Black Edition versions, co-branded card with Rocketbank); since November, the card products are available in three packages: Premium, Optimum, and Basic. Over the last two months of, more than 20,000 contracts were entered into for such packages, of which Premium accounted for 16%, Optimum for 48%, and Basic for 36%; in, the Group s banks issued roughly 2.8 million cards (vs 2.0 million in ).

17 30 Otkritie Financial Corporation Bank 31 Operational Review Financial Highlights (IFRS) million roubles Y-o-y, % Key balance sheet figures Total assets of the segment 253, , including net loans to clients 191, , Total liabilities of the segment 332, , including customer accounts 313, , Key profit & loss figures Net interest income 1 21,806 21, Net fee & commission income 6,115 3, Total operating income before impairment losses and provisions for other transactions 16,292 14, Operating expenses 16,029 16, Profit before income tax 131 (2,505) n.a. 1 Net interest income before gain from remeasurement of cash flows from assets acquired as a result of business combinations and before allowance for impairment of interest-bearing assets. Note: The financial highlights are shown as of December 31,, for the year ended on December 31, ; and as of December 31,, for the year ended on December 31,. Comments on Financial Highlights (IFRS) To manage the quality of its retail portfolio, in late 2013, Otktitie Financial Corporation Banking Group revised its retail business growth strategy to focus on cross-selling to payroll clients and mortgage borrowers. As of December 31,, the Group s retail gross loan portfolio shrank by 3.5% to RUB billion as the Group continued to tighten its lending standards, particularly in retail segment. Over the year, the business growth tactics was focused on low-risk loans. The mortgage portfolio grew by 10.6% to RUB 76.3 billion, and mortgage loans accounted for 37.9% of the retail loan portfolio compared with 33.0% in. Retail customer funding increased by 57.9% in and reached RUB billion as of December 31,, driven, inter alia, by the successful merger with Petrocommerce Bank. Another driver of retail customer funding growth was the increase of deposits denominated in foreign currencies 41.3% as at the end of compared with 31.5% as at the end of. The positive dynamics of retail deposits over amid volatile markets is yet another proof of the clients trust in the Group s banks. As of December 31,, deposits accounted for 84.4% of the retail customer funding. At the same time, the Group continued to increase retail customer current accounts, which reached RUB 77.4 billion as of December 31,, up by 9.4% year-on-year. Cards In, operating income of the retail segment decreased by 13.0% due to a 42.3% drop in net fee and commission income (to RUB 3.5 billion) which was triggered by lower loan origination and lower agency commissions. Net interest income of the retail segment remained flat in. In, operating expenses grew by 3.1% which is well below the inflation rate of 12.9%. During, the Group s banks issued roughly 2.8 million cards (2.0 million cards in ). The Group launched new card products in as follows: Premium Black Edition Card for Premium Clients, February Premium Black Edition package includes banking and non-banking services and premium level benefits which are available to premium clients on favourable conditions. Card holders have access to a wide range of benefits such as higher interest rates on deposits and card balances, free cash withdrawals at ATMs worldwide, favourable exchange rates for cash withdrawals in foreign currencies, special mortgage conditions, and other nonbanking services. Over, the Group issued more than 14,500 World Black Edition cards. In, the retail business posted a loss of RUB 2.5 billion due to the continuing economic slowdown, rouble depreciation, and the resulting increase in interest rates which triggered a higher cost of risk in the retail segment. Please refer to the "Risk Management and Control" section of this Report (p. 65) for the retail loan portfolio quality overview. Pension Card, February This product was designed for the retired clients who can earn interest on their card balances and receive cash back on purchases at pharmacies. No issuance or service fee applies to these cards. Effective December, the Group cancelled the fee for cash withdrawals made with Pension cards at ATMs worldwide. Over, approximately 40,000 retirees chose Otkritie s Pension card.

18 32 Otkritie Financial Corporation Bank 33 Operational Review LUKOIL-Otkritie-MasterCard, March LUKOIL-Otkritie-MasterCard is a co-branded World MasterCard and LUKOIL card with MasterCard PayPass technology. Card holders earn LUKOIL reward program points on petrol purchases at LUKOIL petrol stations and other eligible purchases; such points can be further used to pay for petrol and other items at LUKOIL retail stations. Over, about 13,000 LUKOIL cards were issued. Aeroflot MasterCard, August In August, the Group launched new co-branded cards with Aeroflot MasterCard, which offers unique conditions for earning bonus miles up to four miles for each RUB 50 spent. The Aeroflot co-branded card is available in two versions: the World and Black Editions. The Aeroflot Black Edition card offers the same package of benefits as the Group s regular Black Edition card. In, the Group issued around 12,500 Aeroflot World cards, and around 5,500 Aeroflot Black Edition cards. Partnership with Rocketbank In early December, Khanty- Mansiysk Otkritie Bank became the service bank for new Rocketbank clients, whose funds will be managed and cards processed by Khanty-Mansiysk Otkritie Bank. As part of their strategic partnership, the two banks plan to launch co-branded products, while Khanty- Mansiysk Otkritie Bank intends to use Rocketbank technologies to promote its products and services. The first co-branded card has already been launched and will be issued to all new Rocketbank clients who will enjoy special conditions. Payroll Projects Mortgage Lending Throughout, the Group promoted its services and functions packaged by its banks as part of payroll projects: the Group s banks implemented major payroll projects involving the issuance of up to 6,000 payroll cards and value-added specialised technological components; the banks implemented a solution for automated crediting of salaries, In, despite the challenging economy, the Group issued RUB 8.0 billion worth of mortgages. In the third quarter of, Otkritie Financial Corporation Bank completed its mortgage portfolio securitisation in the amount of RUB 5.0 billion. The mortgage portfolio grew from RUB 69.0 billion as at the end of to RUB 76.3 billion as at the end of. In, Khanty-Mansiysk Otkritie Bank was one of the first to qualify for the Russian government state-supported mortgage programme. The bank issued RUB 4.5 billion in subsidised loans which accounted for 56.1% of all mortgage loans originated in. Khanty- Mansiysk Otkritie Bank is ranked 10th among 37 banks which participate in the state-supported mortgage programme. and now funds are credited to clients accounts online; over, the Group issued more than 200,000 payroll cards with total balances amounting to RUB 1.6 billion as at year-end; the Group centralised the payroll projects support function and established a dedicated call centre to improve the level of customer service. In, Khanty-Mansiysk Otkritie Bank joined the programme of federal government assistance to members of the military and launched a Military Mortgage option, which is a strategically important project for Otkritie Financial Corporation Banking Group. The Group partnered with leading developers to offer its clients subsidised interest rates for the first year of the mortgage, and the mortgage rate for the customers starts from 7.0% per annum. The Group launched a number of joint marketing campaigns to promote tailor-made offers for the clients. 24 developers partnered with the Group in the subsidy programme, and the Group issued more than RUB 1.0 billion worth of mortgage loans.

19 34 Otkritie Financial Corporation Bank 35 Operational Review ATMs and Payment Terminals As at the end of, Otkritie Financial Corporation Banking Group s ATM network consisted of more than 3,200 ATMs in 55 regions across Russia. In, the Bank of Russia and Joint Stock Company National System of Payment Cards (NSPK) started the program of issuance and acquiring of national payment cards called Mir ( World in Russian). The federal law On the National Payment System prescribes that all retailers and service outlets that accept bank cards as a means of payments for goods and services must accept national payment cards as well. According to this Federal law, employees of state companies will receive salaries only on national payment cards. Otkritie Financial Corporation Banking Group joined the payment system Mir and launched issuance and acquiring of national payment cards in all regions of its presence. All of these measures helped the Bank to grow the number of clients who access the Bank s products and services at least twice per month via the Internet or the mobile banking application to 100,000 people by the end of. Those who chose to become the Bank s client in via the Internet, were able to do so without visiting the offices. The courier can deliver the card together with all the documents to be signed upon client s request. In, the Group worked hard to promote online sales of the deposit products and launched a pilot project for deposits issuance online, similar to the cards. The clients can also apply for mortgage loans online without visiting the offices: the couriers deliver all necessary documents at the clients convenience. These measures helped to increase the number of new customers through the Internet. In, more than 50,000 new transactions were conducted by clients via the Bank s website. Technologies Strategic Objectives of Retail Banking for 2016 In, one of Otkritie Financial Corporation Banking Group s strategic priorities was to promote digital channels as a way of starting new business lines and boosting the efficiency of existing ones. The objective was to become the digital champion. It is a long-term objective which the Bank pursues across all of its business segments. To achieve this, IT processes must be as flexible as possible, and at the same time the Bank should shift its focus on digital services and innovative solutions development. To this end, Khanty-Mansiysk Otkritie Bank formed a special digital department which bridges IT and business and operates in line with the best practice of combining absolutely independent business thinking and modern IT culture. The Bank introduced state-ofthe-art business methods, switching from vertically integrated product development to Agile principles which allowed it to timely and regularly update the products and processes. For clients, this means the ability to access any banking service in just a few clicks via their mobile devices. In, the Bank released updates for ios and Android products every few weeks, providing the customers with new features which they requested over the year. For example, everyone can now become the client of the Group via the mobile application, or open a card, term deposit, or savings account in roubles or in a foreign currency online. A service for instant money transfers to cards issued by other banks was launched. Based on customer feedback, the existing functions were improved, so it is now much easier to exchange currencies, make transfers to companies, or to find the nearest ATM. The Bank launched a user-friendly transfer amount calculator, as well as many more features. The key objectives of retail banking for 2016 include: to further enhance the Bank s retail business efficiency; to improve the Internet banking services; to promote its card and transaction businesses with a focus on premium segment clients; to increase the client base.

20 36 Otkritie Financial Corporation Bank 37 Operational Review Small Business Banking В портфеле кредитов Priorities Key Figures 1 1.4% 2.3% Larisa Shvetsova Senior Vice President, Head of Small Business Banking In, the small business segment of the Group focused on building long-term relations with small companies and individual entrepreneurs by improving customer experience based on a clientoriented business approach. Over, as part of the reorganisation of Otkritie Financial Corporation Banking Group, the Group continued to transfer Petrocommerce Bank s small business assets to Khanty-Mansiysk Otkritie Bank. The key objective behind this process was to maintain the high level of service and to retain clients. The Group managed to successfully complete the integration of small business assets while sustaining the client base as of December 31,. Throughout, the Group remained focused on maintaining the quality of its loan portfolio and managing its risks. In, Otkritie Financial Corporation Banking Group promoted its business in partnership with government and nongovernment organisations supporting small businesses, such as SME Bank (JSC Russian Bank for Small and Medium Enterprises Support) and the Credit Guarantee Agency. Number of Small Business Clients Small Business Share, % 2 139, ,121 Small Business Net Loan Portfolio, million roubles Customer Accounts of Small Business Clients, million roubles В портфеле депозитов 51,492 In the net loan portfolio In the deposit portfolio In operating income (revenue) В операционных доходах (выручке) before provisions В портфеле кредитов В портфеле депозитов до формирования резервов 1.4% 2.3% В портфеле кредитов 33, % 2.3% 4.6% 4.2% 40,637 43, % 4.2% 9.0% 10.5% Key Small Business Banking Objectives for Target Key Results/Achievements in Improving efficiency Reducing risk appetite Integration the Bank designed a product offering consisting of high-margin products which meet the key needs of small businesses; underwriting and decision-making fuctions were centralised; the initial client verification system was improved; the Group streamlined loan conveyor processes; the Group designed processes to manage assets with a higher risk of default. eligibility criteria for collateral were strengthened; the Bank seized granting unsecured loans and loans with flexible repayment schedules. maintaining a high level of customer service; focusing on retaining clients and sustaining the client base. В портфеле депозитов 4.6% 4.2% В операционных доходах (выручке) до формирования резервов Small Business Loan Portfolio Breakdown by Industry as at the Year End 9.0% 10.5% million million roubles % roubles % В операционных доходах (выручке) до Retail формирования trade резервов 10, , Services 7, , Wholesale trade 7, , % Operations with real estate 10.5% 3, , Industrial manufacturing 3, , Transport and communication 3, , Construction of industrial and commercial real estate 1, , Agriculture Leasing Mining Housing construction Other 4, , Gross small business loans 44, , As at the year end. 2 The amounts relating to Treasury, Asset and Liability management units and Unallocated balances are excluded from the calculation.

21 38 Otkritie Financial Corporation Bank 39 Operational Review Financial Highlights (IFRS) Tochka Project million roubles Y-o-y, % Key balance sheet figures Total assets of the segment 49,020 44, including net loans to clients 40,637 33, Total liabilities of the segment 44,135 55, including customer accounts 43,185 51, Key profit & loss figures Net interest income 1 4,550 5, Net fee & commission income 2,310 2, Total operating income before impairment losses and provisions for other transactions 5,113 7, Operating expenses 4,198 3, Profit before income tax 833 3, Net interest income before gain from remeasurement of cash flows from assets acquired as a result of business combinations and before allowance for impairment of interest-bearing assets. Note: The financial highlights are shown as of December 31,, for the year ended on December 31, ; and as of December 31,, for the year ended on December 31,. Comments on Financial Highlights (IFRS) In, in the small business segment the Group focused on managing the quality of the existing loan portfolio and expanding its funding and transaction service business. Over the year, the small business net loan portfolio declined by 16.5% to RUB 33.9 billion primarily due to the conservative approach to managing risks: new loan origination was limited with focus on collateral liquidity and conservative approach to provisioning. In, funds raised from small businesses were up 19.2% year-on-year to RUB 51.5 billion. Small business customer funding growth was fuelled by transaction business development, while the number of customer growth was factored by the successful merger of Otkritie Financial Corporation Banking Group with Petrocommerce Bank. Higher operating income and pre-tax profit were due to a 12.2% increase in net interest income and an 8.1% growth in net fee and commission income driven by larger volumes of cash and settlement transactions in the segment. Operating expenses of the small business segment shrank by 9.5% which is attributable to efficient integration processes within the Group and launch of high-tech solutions. Tochka project is a remote banking services launched by Otkritie Financial Corporation Banking Group in. Tochka ( tochka is the Russian for point ) is an Internet banking service targeted at small and medium businesses. It does not have physical offices; all matters are handled online, and documents necessary to open an account are delivered to the clients by a courier. Tochka clients have 24/7 online access to the full range of banking services: the clients are able to manage their accounts, make transfers between accounts, issue invoices to counterparties, pay invoices, etc. This project, however, is not just an online cabinet; it provides the variety of services, so that the clients need fewer solutions and tools to run their businesses. In, monthly sales of Tochka packages exceeded 2,000 accounts. Over the year, the Tochka client base built up from zero to more than 15,000 clients. As the service model does not involve physical contact with offices and is highly automated, the Group serves businessmen across entire Russia, from Petropavlovsk-Kamchatsk to Kaliningrad. To achieve it, Tochka runs 21 hours a day for external payments, and 24 hours a day for internal payments. Over the year, Tochka team upgraded the project s Internet bank and mobile applications on an ongoing basis. In summer, Tochka won three of four awards from Markswebb Rank & Report, and in autumn the Group released the updated version of Tochka website and Internet bank. In 2016, the Group expects to complete the redesign of ios and Android mobile applications. Tochka is compatible with most common accounting solutions, such as Elba, Moye Delo, 1C, Contour, Bukhgalteriya, Knopka, and almost a hundred of others. Tochka has partnered with Wheely, Google, MegaFon, Solomoto, and Promoexpert. In 2016, the project team expects to expand the functionality of mobile applications, widen its partner network, and step up its client base across Russia.

22 40 Otkritie Financial Corporation Bank 41 Operational Review Private Banking Transaction Banking Priorities Over, small business service and operation model launched in reached its design capacity. The Bank s network reached its maximum performance in terms of product sales per manager. The Bank s network transformation carried out to boost sales and enhance service level for small businesses proved its success, and not only allowed to broaden the client base, but also to increase customer funds by 19.2% to RUB 51.5 billion as at the end of. By the end of, the active client base increased by 33.0% to 96,000. It is dominated by so-called micro clients which account for 78.0% of the clientele, with 4.5% attributable to credit products, and the rest are represented by small business segment. Over, the Bank stepped up the number of products per company and the client activity in its relations with the Bank. These factors drove net fee and commission income up 8.1% to RUB 2.5 billion, while number of products per client (net of loans) stood at 2.5 in. In, the transaction business team partnered with Tochka project to promote Platforma, an Internet platform for small business where clients can get to know each other, look for partners, and promote their products and services. The Bank intends to continue its work on this project in Launch of a new process for connecting to the Bank s Internet bank boosted the business rapid growth and made the Bank s services more available to clients. The new highly secure process enables the clients to connect to the Internet bank within a day. Alina Nazarova Senior Vice President, Head of Private Banking During, Otkritie Financial Corporation Banking Group focused its Private Banking strategy on preserving clients investments with the aim of distributing assets across financial instruments to match individual client profiles. Special attention was given to currency and country diversification of the clients portfolios. This approach helped to keep the clients investments safe despite the turbulent macroeconomic environment. In, the Group launched two strategically important projects: the boutique M&A Private Banking initiative, and a range of socially-oriented investment products. M&A Private Banking M&A Private Banking is a boutique which provides the Private Banking clients with access to direct investment opportunities in the real segments of the economy. Socially-Oriented Investment Products Socially responsible investing offers a vehicle for investing in incomegenerating instruments, while contributing to social advancement and making the world a better place. Such products involves investments in improving the environment and promoting pharmaceutical research. In selecting the investment tools, attention was paid not only to conventional economic ratios, such as risk to income, but also to ethical considerations. The socially-oriented investment products line of Otkritie Financial Corporation Banking Group includes mutual investment funds, structured strategies, and life insurance solutions. In terms of industry, the socially-oriented investment portfolio is dominated by biotech and medicine. Strategic Objectives of Small Business Banking for 2016 Key Figures 1 The key objectives of small business banking for 2016 include: to maintain the business volumes and higher penetration of the small business products; to launch new digital technologies; to enhance the efficiency of collection efforts; to focus on risk management. +1,400 new Private Banking clients 7,100 overall number of clients +42% growth of Private Banking customer accounts +21% growth of the investment portfolio (to RUB 32.2 billion) The Group s Private Banking division is presented in 21 cities of Russia: Moscow, Saint-Petersburg, Rostov-on-Don, Novosibirsk, Krasnodar, Kaliningrad, Saratov, Samara, Ufa, Nizhny Novgorod, Khabarovsk, Kazan, Krasnoyarsk, Yekaterinburg, Irkutsk, Khanty- Mansiysk, Tyumen, Nizhnevartovsk, Surgut, Volgograd, and Perm. 1 As at year end.

23 42 Otkritie Financial Corporation Bank 43 Operational Review Key Private Banking Objectives for Investments Target Key Results/Achievements in Regional network Integration Common standards Private Banking geography expanded to Volgograd and Perm growing from 18 to 20 regional offices. As part of the upgrade of the Private Banking outlets, designated Private Banking areas were launched in Yekaterinburg, Ufa, Kazan, Khabarovsk, Krasnoyarsk, and Krasnodar. in, the integration of Khanty-Mansiysk Bank s Private Banking arm with Otkritie Financial Corporation Bank were completed, and the merger of Otkritie Financial Corporation Bank with Petrocommerce Bank were launched. The main focus during the year was made on offering the common product line to Private Banking clients of the Group. at any of the Private Banking outlets, the clients can always expect the same high level of service, flexibility, and customized experience. The Group is committed to long-term partnership based on the deep insight into the clients needs and financial objectives. Legal and Tax Advice In, the efforts in the Private Banking segment were focused on building strategies denominated in foreign currencies, primarily in U.S. dollars. The priority was to put together diversified investment portfolios with a focus on capital protection. Average return on client portfolios developed with the support of Private Banking investment advisors was between 8% and 12% per annum in U.S. dollars. The Group partnered with new issuers, adding their instruments to the proposal, thus managing the exposure and reducing overall portfolio risk. Another priority was building relations with reputable international partners. The clients have access to investment strategies from major global banks with at least an A rating by Fitch Agency. In, the Group launched 29 strategies, and most of these generated return in line with original expectations. Product offering Customer service Offices Client reports the product offering has been adapted to meet the individual needs of the clients as closely as possible. In, the Group introduces new deposit solutions to its offering, enhanced the investment advisory mix, and launched socially responsible investing and financial planning initiatives. The Group also launched in parallel innovative investment and insurance solutions and a new service called Insurance Consultant. The Lifestyle division expanded its partner base considerably. Private Banking adheres to a one window approach. Each client has his or her individual private banking account manager with whom the client may discuss all matters, from opening a deposit to selling or acquiring business assets. the Group launched a designated Private Banking office at Moscow headquarters in Letnikovskaya street; The Group continued to open designated Private Banking offices across its regional network. the Group continued enhancing the consolidated client reporting function by adding new reports. For the clients convenience, a single report now contains information about their banking solutions, cards, loans, and investment products. M&A Given rapid developments in the Russian legislation, especially in terms of taxation, the Private Banking division regularly holds round tables and arranges one-on-one consultations for To handle M&A projects, the Group builds an M&A investment boutique. This boutique gives the Private Banking clients access to M&A opportunities offered by Otkritie Financial Corporation its clients with the best market experts. The Group focused on taxation of transactions involving foreign accounts, capital amnesty, de-offshorisation, and foreign companies. Bank s clientele. This initiative will help the customers to find investment targets or investors without turning to the market.

24 OPERATIONAL RE- VIEW 44 Otkritie Financial Corporation Bank 45 Operational Review IT Lifestyle Achievements Professional Awards Otkritie Private Banking offers its clients preferred access to exclusive offers from more than 200 companies operating in the premium service market such as investment in real estate, both in Russia and abroad, immigration and citizenship planning, art investing, education abroad, etc. In 2016, Otkritie Private Banking was among the top 10 in Euromoney s Private Banking Russia Survey for the second year in a row, significantly improving Strategic Objectives of Private Banking for 2016 The key objectives of Private Banking for 2016 include: to streamline business process in order to improve customer experience; to extend client base; Private Banking offices provide a space for displaying paintings and artworks, and hosting exhibitions. Over the year, the Group arranged 15 exhibitions of famous artists, such as Ekaterina Vorona, Aron Buch, Viktor Dynnikov, the Totibadze brothers, and others. its position. Global Banking & Finance Review named Otkritie Private Banking the best in Russia for the second consecutive year. to launch Private Banking areas in Rostov, Tyumen, Khanty-Mansiysk, Volgograd, Perm, Irkutsk, and Kaliningrad; to open a Private Banking flagship office in Moscow. Kirill Menshov Vice President, Head of IT at Otkritie Financial Corporation Bank and Khanty-Mansiysk Otkritie Bank In, the Group s key IT project was integration of Otkritie Financial Corporation Bank s and Petrocommerce Bank s IT infrastructures. This project involved merging internal IT services and processing centres, as well as consolidation of reporting. During 2016, the Group expects to continue with this integration project and have scheduled processes to centralise IT systems and harmonize client services across both banks Otkritie Financial Corporation Bank made a number of upgrades to its IT infrastructure during : to enhance remote banking solutions for corporate clients: the Bank broadened its online integration with clients 1C-Enterprise-based accounting and ERP systems, as well as with cloud-based accounting systems; a new application, Manager s Portal, was launched giving executives of the Bank s clients a user-friendly tool to monitor cash flows and accept payments based on pre-set protocols; the Group completed the development of functionality of online account opening and connection to online banking services; now the clients can reserve account numbers in advance and automatically prepare the necessary package of documents; thus the Group minimised the required number of contacts with the Bank s offices at the early stage; the Bank optimised business processes and algorithms for the calculation of charges and commissions, which facilitated the increase in the volume of broker deals executed by the Bank; a solution was implemented to support the merger of Otkritie Financial Corporation Bank with Petrocommerce Bank: direct payments were set up between Petrocommerce s branches and Otkritie Financial Corporation Bank s branches; host-to-host connections were set up among the banks processing centres; a statutory reporting consolidation system was designed; banks securities portfolios, business contracts, and budgets were consolidated. As a result of the consolidation of Petrocommerce Bank s and Otkritie Financial Corporation Bank s data processing centres (DPC) and network infrastructures, the Group was able to reduce the costs of common low-level IT infrastructure maintenance while improving the reliability of crucial IT systems. Otkritie Financial Corporation Bank completed the development and implementation of the corporate business transaction conveyor, a tool that harmonises and speeds up the decision-making for individual transaction business services and fees for corporate clients. Otkritie Financial Corporation Bank streamlined and centralised its correspondent account management, and improved its clearing infrastructure. In, key achievements of Khanty- Mansiysk Otkritie Bank in IT included: IT infrastructure optimisation: Khanty-Mansiysk Otkritie Bank fully harmonised its IT landscape across its branches, and enforced common IT standards of customer support; consolidation of all business services on a single client platform: Khanty- Mansiysk Otkritie Bank provided a common platform for remote banking services, client identification for the purposes of incoming calls to the common call centre, and registration of loan applications at the loan conveyor; migration of Otkritie Financial Corporation Bank s terminal equipment to Khanty-Mansiysk Otkritie Bank s retail business: the

25 46 Otkritie Financial Corporation Bank 47 Operational Review IT Priorities and Projects for 2016 and 2017 Bank upgraded low-efficiency devices, and proceeded with the consolidation of Khanty-Mansiysk Otkritie Bank, Otkritie Financial Corporation Bank, and Petrocommerce Bank machines in the common processing centre to ensure their most efficient maintenance; introduction of Agile processes: Khanty-Mansiysk Otkritie Bank successfully rolled out Agile software development processes across the Digital, CRM, and Corporate Data segments. The bank implemented procedures to speed up the delivery of scheduled upgrades from two months to two weeks. Demo-days were introduced during which Agile teams hold open presentations of completed upgrades before their release; dynamics CRM Launch: Khanty- Mansiysk Otkritie Bank lunched Dynamics, a service CRM solution to process calls and serve clients at its call centre. The new tool has the functionality to create product profiles for clients and to promote cross selling. The new card activation process cut the time needed to set a PIN-code in half. Khanty-Mansiysk Otkritie Bank has planned a number of optimisation initiatives to reduce the cost of ITsolutions ownership and to enhance remote service channels. Its strategic projects aim: the merger of Khanty-Mansiysk Otkritie Bank with Otkritie Financial Corporation Bank; to design a common concept (architecture) for data storage and analysis at Khanty-Mansiysk Otkritie Bank; to align infrastructure, telecommunication systems, and data storage systems; to implement an optimisation programme initiated and managed by the IT team together with outside consultants with the goal of reducing Khanty-Mansiysk Otkritie Bank s costs. The overall optimisation effect is expected to exceed RUB 200 million; to improve the quality of the bank s services delivered via remote channels through the implementation of state-of-the-art online banking platforms; to launch a new platform for processing of mortgage and card applications and to roll out target services processes in Khanty- Mansiysk Otkritie Bank s call centre and across its network. Otkritie Financial Corporation Bank has scheduled a number of projects: to harmonise IT systems and align business processes across the Bank s branches consolidated in and : Otkritie Financial Corporation Bank will be the processing bank for all plastic cards issued; all of the branches will run Otkritie Financial Corporation Bank s automated banking system in their operations; branch clients (both retail and corporate) will use the common online banking solution; to further promote remote banking services; to optimise the Group s network infrastructure; to develop wider managerial reporting generation based on the corporate data warehouse; to harmonise and consolidate risk management frameworks; to streamline the business processes of the investment and treasury desks back offices; to harmonise and automate the management processes for substandard assets; to introduce Asset Liability Management software (i.e. an integrated solution for managing the Bank s assets and liabilities based on common rules, funding, and liquidity risk evaluation); to upgrade the corporate CRM solution (product catalogue, calculation of potential banking product consumption, business planning, mobile application). Corporate Social Responsibility General Information Otkritie Financial Corporation Bank has implemented a large array of social programmes and projects in the area of corporate social responsibility (CSR) at the federal and regional levels. Some of these initiatives are widely publicised, such as the Group s partnership with Spartak Moscow Football Club, or the Good Deeds charitable project. The Group is also involved in many social projects and initiatives in the form of direct aid and support to those most in need. Social initiatives have become an integral part of Otkritie Financial Corporation Bank s day-to-day business. The Group is committed to improving the life of its employees and their families, offering assistance to those in need, playing an active role in the society, and sharing the principles of social responsibility.

26 48 Otkritie Financial Corporation Bank 49 Operational Review Good Deeds Polytechnic Museum Good Deeds is a joint project between Otkritie Financial Corporation Bank and the Vera Hospice Charity Fund. As part of this project, all of the Bank s offices across Russia now issue limited edition bank cards and sell souvenirs featuring characters from the Hedgehog in the Fog cartoon. The Good Deeds cards are MasterCards and are available in Standard and Platinum versions. The project souvenirs include iphone cases, passport covers, canvas bags, notebooks, T-shirts, and gift editions of the Hedgehog in the Fog book. Otkritie Financial Corporation Bank purchased the rights to the cartoon characters from its author, Yuri Norstein, who approved the design of all souvenirs. Cash back on bank cards (1.0% of all transactions) and proceeds from the sale of souvenirs are donated directly to the Vera Fund to support terminally ill patients. In, the Bank partnered with M.Video stores across Russia and held a charitable campaign distributing Good Deeds merchandise in exchange for donations. Later, Coffeemania, a Moscow-based chain of coffee houses, joined the Group s charity program. Each visitor who purchased a Good Deeds cake received a complimentary Otkritie Financial Corporation Bank-branded souvenir featuring characters from the Hedgehog in the Fog cartoon. All proceeds from the sale of Good Deed cakes were donated directly to the Vera Hospice Charity Fund. Puppet Theatre Otkritie Financial Corporation Bank has long been a partner and a sponsor to the Polytechnic Museum, one of the largest science museums in the world. The Bank sponsors the renovation project of the Museum s historical building on Novaya Square in Moscow. With the Bank s financial aid, the Museum opened its new exhibition, Made in Russia, at the Exhibition of Otkritie Financial Corporation Bank has partnered with the Saint Petersburgbased Koukly (Puppets) Children s Integration Theatre for a few years. The Puppets Theatre is the first professional theatrical venue fully equipped to accommodate children with special needs. With the Bank s financial National Economy Achievements (VDNKh), transferred its assets and the Polytechnic library to the Moscow Technopolis, and launched a lecture hall and science laboratories for children at ZIL Culture Centre. The Bank was the strategic partner for the Museum s joint project with the New York World Science Festival, Polytech, an annual festival of science and curiosity. assistance, the atre has now its own building with a stage and can create both travelling and stationary shows. Every month, the atre holds charitable performances in orphanages and foster homes specifically adapted for children with limited mobility and hearing impairment. Partnership with Spartak Football Club In, Khanty-Mansiysk Otkritie Bank and Spartak Moscow Football Club entered into a long-term strategic partnership agreement which is unprecedented for the Russian market. As a result of this partnership, the exclusive home stadium of Spartak the first one in the club s almost one hundred year history was opened in Moscow s Tushino district in and named Otkritie Arena. Starting with the /15 season, Spartak players jerseys feature the Khanty-Mansiysk Otkritie Bank logo. Otkritie Arena will be one of the venues to host FIFA matches during the 2018 FIFA World Cup in Russia. Sponsorship funds are used to upgrade Spartak s infrastructure, to promote youth football, and to support sports veterans. In, Otkritie Arena was named Moscow s best sports venue by the Moscow City department responsible for urban policy development. Otkritie Financial Corporation Bank issued a collectible coin in featuring Spartak Moscow FC s emblem on one side and Otkritie Arena stadium on the other. The double sided embossed 925 sterling silver coin weights 31.1 grams and is presented in a Spartak and Otkritie-branded designer package. Christmas Fair Sponsoring Children Each year before New Year s and Christmas, Otkritie Financial Corporation Bank s head office hosts a charitable holiday fair. Guests can buy hand-made gifts and souvenirs, such as Christmas Otkritie Financial Corporation Bank s head office runs a programme to support orphans and children with physical disabilities during the New Year s holiday season. Holiday trees at the office are decorated with postcards made by tree ornaments, gingerbread houses, children s books, farm products, and much more. A portion of the proceeds from the charity fair are donated to the Bank s charitable and social initiatives. adopted children with special needs. Each postcard lists a wish, and every employee can pick a card and make a dream come true. In, the Bank s employees gave gifts to 368 children.

27 50 Otkritie Financial Corporation Bank 51 Operational Review Human Resources Blood Donation Priorities For six years in a row, Otkritie Financial Corporation Bank hosts a donor day when the Bank s employees have a chance to donate blood for the patients of the Dmitry Rogachev Haematology and Oncology Centre. Donor compensations are transferred to the Podari Zhizn charitable foundation or the Vera Hospice Charity Fund. In, the HR function was primarily focused on supporting integration processes within Otkritie Financial Corporation Banking Group. As part of the business reorganisation, over the year, the Group s HR aimed to: retain key employees; align HR-related matters and boost the efficiency of decision making; provide robust HR support to reorganisation processes. Alina Ryzhenkova Head of HR Sports Otkritie Financial Corporation Bank has traditionally sponsored international sports events. In particular, the Bank supports biathlon, skiing, and regional and national competitions in volleyball, boxing, basketball, swimming, and car racing. For ten years, the Bank has been the general sponsor of Ugra, a professional hockey club playing in the Continental Hockey League. The Ugra Hockey Club was the Supreme Hockey League champion twice and won the Bratina Cup in 2008/2009 and 2009/2010. The Bank and the government of the Khanty-Mansiysk Autonomous Region (Ugra) organised the third Ugra Ski Marathon open international ski racing competition, which is part of the Russialoppet series and the FIS Marathon Cup. More than 1,200 athletes participate in 5 km, 25 km, and 50 km races. The Bank also supports sports initiatives among its employees. Otkritie Financial Corporation Bank s football, volleyball, and basketball teams rank high in corporate leagues and interbank competitions. Duration of Employment as at the Year End, % year or less 1-3 years Education 3-5 years Breakdown as at the Year End, % 5-10 years 10+ years Headcount Dynamics year or less 1-3 years 3-5 years 5-10 years 10+ years 40.8 Rotation 40.4 % 16, ,904 15,705 Rotation 40.4 % ,149 6,348 5,149 6, Higher education Undergraduate Higher education higher education Vocational Undergraduate training higher education Vocational training Age Composition as at the Year End, % Up to Rotation 46.8 % Rotation 47.3 % 17,890 15,705 17,890 16,904 Rotation 46.8 % Year-beginning headcount Hired Dismissed Year-end headcount Year-beginning headcount Hired Dismissed Year-end headcount 17,823 16, ,823 17,890 Rotation 47.3 % 17,890 7,156 8,142 7,156 8,142 8,430 8,363 8,430 8,363

28 52 Otkritie Financial Corporation Bank 53 Operational Review Financial Incentive Risk Management Online Learning Opportunities Corporate Staff Development Programmes Throughout, the Group continued its efforts to improve its financial incentive risk management process in line with the Russian laws. The Group s banks streamlined their approaches to remuneration schemes aligning these schemes with the nature and scope of the banks operations, performance of the banks, and the level and structure of risks assumed. Key functions of Otkritie Financial Corporation Bank s HR include shape up developing managerial culture and enhancing managers capabilities. The Bank s staff development programmes aim to widen and deepen managers knowledge about HR management approaches and principles, and to train them in key leadership skills and competencies necessary to build a foundation for further growth. Boosting business skills has traditionally been the priority of the Group s HR management team. In, Otkritie Financial Corporation Bank continued to implement its Keys to Efficient Management initiative more than 120 new managers and executives of the Bank participated in the programme. During, Otkritie Financial Corporation Bank s Supervisory Board and Khanty-Mansiysk Otkritie Bank s Board of Directors approved regulations governing the procedure for paying bonuses to certain staff categories in accordance with the Bank of Russia's guidelines. Khanty-Mansiysk Otkritie Bank implemented a similar management development project in the Manager Training School. As part of the integration project, in, Otkritie Financial Corporation Bank launched the large-scale Efficient Communication training programme targeted at branch employees. The programme has been designed to boost performance, efficiency and teamwork, and to enhance communication skills. Over the year, the bank held 13 trainings in efficient communications attended by more than 160 employees across a variety of functions. To improve its employees skills, Khanty-Mansiysk Otkritie Bank arranged 70 trainings. In, the Bank s HR department focused on developing sales skills, and conducted trainings in customer service, cross selling, active sales, and deposit product sales. Youth Programmes Strategic Objectives for 2016 One of HR s priorities is to provide the Group s employees with online learning opportunities, thereby significantly reducing the cost of education, and providing employees with a vast access to the educational resources of Otkritie Financial Corporation Banking Group. Over, more than 2,000 employees of Khanty-Mansiysk Otkritie Bank, from across all regions in Russia, benefited from Virtual Classroom, a webinar service. The Bank s employees completed 178,000 online training courses over the year. The Group s banks have internship programmes in place for students and recent graduates of leading Russian universities; the Group selects interns for hire based on the results of their responses to real-life business cases. HR-related strategic objectives for 2016 include: enhancing the performance of the Group s management team to facilitate the achievement of its strategic goals; Otkritie Financial Corporation Bank launched a library of online training courses in Corporate Banking products, a unique project for the Russian banking sector. The library s content is constantly updated. This project facilitates the adaptation of newly hired employees and enables the Group to update the knowledge base on a larger scale. In, more than 550 employees received online product trainings. The internship programmes of the Group enable students to learn about the functions of the Group s departments, to participate in business projects, to help the employees with their day-to-day duties, and to receive their first work experience. The Group offers permanent employment to the most promising interns. completing harmonisation of the main HR management functions as part of the Group s integration.

29 FINANCIAL OVERVIEW Life is open for discoveries otkritiefc.ru

30 56 Otkritie Financial Corporation Bank 57 Financial Overview Financial Overview Financial Highlights Assets Profitability Sergey Kovtun Chief Financial Officer Securities Portfolio As of December 31,, Otkritie Financial Corporation Banking Group s assets increased by 29.6% to RUB 3,363.6 billion (a 12.0% increase year-on-year excluding foreign currency revaluation). Throughout, there were no major changes in the Group s asset structure: the net loan portfolio accounted for 76.3% of total assets, while the share of investment in securities and derivatives made up 14.0% of total assets. As of December 31,, liquid assets accounted for 21.6% of total assets. Over the year, the Group s net loan portfolio increased by 43.8% (a 23.2% increase year-on-year excluding foreign currency revaluation) and reached RUB 2,565.8 billion (RUB 1,784.8 in ). The loan loss provision (LLP) ratio stood at 3.4% as of December 31, (2.2% as of December 31, ). Cost of risk ratio amounted to 4.0% for (2.4% for ) 1. For more details on the loan portfolio quality analysis, please refer to page 65, "Credit Risk" of "Risk Management and Control section". Net profit of Otkritie Financial Corporation Banking Group for grew by 12.4% year-on-year to reach RUB 6.6 billion. Return on average equity (RoAE) for increased to 7.7% (6.2% for ). Total operating income (before provision for impairment losses) of the Group for amounted to RUB 99.4 billion, up 48.1% year-on-year. The key driver of the Group s revenue growth in was a significant increase of non-interest income (revaluation gain, including mark-to-market revaluation of the trading securities portfolio). Net interest income in declined to RUB 49.9 billion (the decrease compared to result occurred in line with higher funding costs during ). Net fee and commission income in declined by 11.6% compared to result to RUB 11.7 billion. In, the Group earned RUB 36.2 billion of trading income. The significant part of trading income from operations with securities was attributable to the positive mark-tomarket revaluation of the fixed income securities portfolio in. Liabilities As of December 31,, Otkritie Financial Corporation Banking Group s investment in securities and derivative financial instruments totalled RUB billion or 14.0% of total assets, of which financial assets at fair value through profit and loss (FVTPL) accounted for RUB billion. More than 79.9% of FVTPL portfolio of Otkritie Financial Corporation Banking Group is represented by fixed income instruments, including bonds As of December 31,, the Group s customer accounts totalled RUB 1,255.9 billion, up 22.8% year-onyear (a 15.1% increase year-on-year excluding foreign currency revaluation). Term deposits represented 82.3% of customer funds, while current accounts made up 17.7%. The funds of corporate customers made up 43.2% of customer and promissory notes issued by major Russian banks and companies, and sovereign bonds. These securities form the Group s liquidity cushion. As at the end of, available-for-sale investments (AFS) accounted for 14.2% of total investments in securities and derivative financial instruments (or RUB 67.3 billion). This portfolio consists of bonds issued by leading Russian banks, corporations and sovereign bonds. funds as of December 31,, while the share of retail and small business segment amounted to 43.5% of customer accounts. As of December 31,, the loan to deposit ratio including promissory notes issued to clients stood at 100.9% (127.7% as of December 31, ) 1. Capital Adequacy The Cost-Income Ratio (operating expenses to operating income before provision for impairment) declined to 44.4% for (54.8% in ). Net interest margin stood at 3.8% in (4.5% in ). In, Otkritie Financial Corporation Banking Group capital increased to RUB billion (RUB billion in ). In May, the Group received from the Deposit Insurance Agency additional capital in the form of government bonds in amount of RUB 65.2 under a subordinated loan agreement as a part of the state recapitalisation program. These bonds were included in Tier II capital. Total capital adequacy ratio stood at 15.7% as of December 31,. 1 Excluding repo transactions.

31 RISK MANAGEMENT AND CONTROL Life is open for discoveries otkritiefc.ru

32 60 Otkritie Financial Corporation Bank 61 Risk Management and Control Risk Management and Control Priorities Anatoly Predtechensky Deputy Chairman of the Management Board, Chief Risk Officer Risk management is the essential element of the Group s strategy, one of the priority segments of its activities, and a key factor in decision-making process. Throughout, Otkritie Financial Corporation Banking Group increased its risk management-related efforts in order to: enhance the risk evaluation tools, decision-making procedures, risk monitoring, and interaction among the departments between the banks of the Group in the risk management process across all business segments; harmonise risk management approaches in the banks of the Group, Key Risk Areas and Risk Management Tools Key Risks and Risk Management in Type of Risks Risk Management Improvement Areas in Credit risk Liquidity risk Market risks in particular, in connection with Otkritie Financial Corporation Bank merger with Petrocommerce Bank in ; as part of the implementation of the Basel Committee s guidelines, in the banks of the Group fine-tuned their capital adequacy evaluation process in line with the capital adequacy evaluation internal procedures (CAEIP). The Group adopted regulatory frameworks to regulate CAEIP approaches to all types of risks, as well as CAEIP reporting. harmonization of the approaches to evaluation of credit risk associated with the loan portfolio of Petrocommerce Bank which merged with Otkritie Financial Corporation Bank in ; the statistic risk evaluation models were enhanced to assess the level of expected losses (PD and LGD models); improvement of the risk management framework for transactions with structured products, including setting and monitoring credit exposure limits; streamlining the provision forecasting methods and tools in line with Russian and international standards in the medium term. maintaining a well-balanced funding structure, managing the concentration level in the resource base. commitment to risk management continuity as Petrocommerce Bank merged with Otkritie Financial Corporation Bank in ; further development of the market and credit risk management methods and processes in relation to derivative transactions; introduction of the unified approach to stress test for securities portfolios of the banks of the Group; development and improvement of the process for monitoring and supervising open currency positions. Type of Risks Risk Management Improvement Areas in Operational risk Anti-money laundering and counter-terrorist financing procedures Legal risks Reputational risks Strategic risks Regulatory risks Stress testing update of business processes in the following areas: conversion of foreign currency loans, account origination, setting of target insurance limits in network units, etc; minimization of operational risks while developing new banking products or streamlining new ones; strengthening of the efficiency of the insurance practice; carrying out a full-scale internal and external risk survey in respect of the Group s assets risk resilience; harmonisation of the operational risk management tools at Petrocommerce branch (formerly, Petrocommerce Bank) following its merger with Otkritie Financial Corporation Bank. upgrade of the policy for implementation of internal controls to prevent the legalisation (laundering) of proceeds from crime and terrorist financing; improvement of know your client policy in respect of new clients (when entering into bank account agreements, receiving bank guarantees, rendering broker services, performing transactions without opening an account and other services); maintaining of the highest quality and consistency of the suspicious client transactions monitoring procedure in order to identify and prevent the laundering of proceeds from crime and terrorist financing in a timely manner; implementation of the steps to ensure that banks of the Group comply with FATCA; carrying out the trainings for employees of the banks of the Group on anti-money laundering and counter-terrorist financing issues. constant monitoring of regulatory changes and timely updating of the contract specimen database; communication of regulatory changes within the banks of the Group and carring out of the special trainings for employees of the Bank on legislation updates; update of internal legal risks map by source of risk and level of risk; update of the guidelines for verification of the counterparties. boosting the communication channels of Otkritie Financial Corporation Banking Group's core business, sponsorship and charity events to clients and media; further development of procedures for verifying the reputation of clients and counterparties having business relations with Otkritie Financial Corporation Banking Group. strategy development for the Group, Otkritie Financial Corporation Bank, and Khanty-Mansiysk Otkritie Bank; implementation of the development strategy of Otkritie Financial Corporation Banking Group; monitoring the executuion of business plans by banks of the Group; preparation of financial recovery guidelines by Otkritie Financial Corporation Bank and Khanty-Mansiysk Otkritie Bank. upgrade of the scoring methodology; streamlining of audit and testing programmes and sampling criteria; update of procedures to follow-up the audit findings. implementation of regular stress test procedures based on the Bank of Russia's macroeconomic and banking sector forecasts. Stress tests are used to review potential threats for compliance with capital adequacy requirements posed by various risk factors and to evaluate the possible need for additional capital.

33 62 Otkritie Financial Corporation Bank 63 Risk Management and Control Credit Risk Credit risk the risk of contractual default by a borrower or counterparty is the most significant risk that the Group faces Credit Risk Management Aspects in Credit risk mostly arises from the loans to the non-financial sector and retail loans, corporate debt (promissory notes and bonds), loans to other banks and interbank operations. The Group offers its corporate clients a wide range of credit products, such as working capital financing, factoring, leasing, project finance and documentary products (such as guarantees, letters of credit etc.). The substantial part of the retail portfolio is the mortgage business with low LTV (loan-to-value) loans issued under standard programmes. Throughout, the Bank managed its credit risk taking into account sanctions introduced against a number of Russian banks and corporations, limited access to external capital markets, the volatile rouble and interest rates, and the dramatic deterioration in both the international and domestic economic environments. In, Otkritie Financial Corporation Banking Group continued to follow its credit policy adjusted in aimed at limiting exposure to new clients and to focus primarily on building relations with existing clients. The banks of the Group took a proactive approach to managing their relations with corporate clients in order to convert their foreign currency-denominated loans into rouble-denominated loans throughout. The Group managed to convert most of its foreign currency-denominated loans into rouble-denominated loans at favourable exchange rates. In origination of new loans, the Group focused on clients with liquid collateral, solid cash flows to service the debt and an acceptable debt burden. The banks of the Group adhered to a conservative limit-setting policy in relation to financial market transactions, In making its lending decisions, the banks of the Group, in addition to evaluating borrowers and counterparties financial conditions and creditworthiness, analyse their exposure to macroeconomic factors and regional market conditions, the quality of collateral, and make sure that the requested loan currency matches the customer s revenue currency. maintaining risk limits introduced in. The current policy is aimed at preventing losses from operations with placement of the Group s liquid assets and losses from the Group s investment in fixed income securities for liquidity management purpose. The Group toughened its requirements for instruments qualifying for its liquidity management purposes. Throughout, Otkritie Financial Corporation Banking Group worked hard to further improve its limit-setting methodology for repo transactions and enhanced risk management by means of transaction margining. In, the Group updated and adjusted its early warning signs (EWS) procedure for working capital financing and factoring financing to reflect the current economic conditions. Otkritie Financial Corporation Bank's analysis and review experience of watch list and problem loans, accumulated in and in cooperation with lending and business units, was incorporated in the Bank s regulations. Special attention was given to the list of early warning signs update, which is essentially important in the existing economic environment and helps Otkritie Financial Corporation Bank to identify the potential difficulties of the borrowers at the early stages. The revised early warning signs (EWS) procedure was approved in Q The first reporting period covered by the updated EWS monitoring is Q4 (based on the annual financial statements). Introduction of the revised EWS procedure helped Otkritie Financial Corporation Bank: to revise the procedure for identifying and reviewing the early warning signs of assets deterioration in order to communicate them in a timely manner to the Bank s management and risk management unit; to revise the list of early warning signs of assets deterioration and the level of their consideration depending on the type and quantity of signs, thus optimising and distributing the workload across the Bank s collegial bodies; to introduce mandatory quarterly monitoring of all the early warning signs of assets deterioration for all borrowers and key guarantors in accordance with the matrix of departments responsible for such signs. In, as part of its efforts to enhance the risk and capital management framework, the banks of the Group designed and adopted regulations on stress tests of credit risk to the corporate portfolio. Stress tests are carried out on a regular basis using the Bank s own macroeconomic scenarios with a twoyear horizon, as well as with scenarios of the International Monetary Fund and the Bank of Russia. As part of the credit risk sensitivity analysis, the banks of the Group evaluate provisions and capital adequacy for the assumed stress scenarios. Otkritie Financial Corporation Banking Group relies on stress testing results in its decision-making. During, Otkritie Financial Corporation Bank developed a harmonised approach to quantitative credit risk evaluation based on the results of statistic data from all corporate loan portfolio segments (PD and LGD models); the models were adjusted to reflect the and macroeconomic landscapes. In, Otkritie Financial Corporation Bank improved its loan portfolio quality forecasting methodology and tools and designed the indicators used to determine its risk appetite. As more stringent requirements were applied to prospective retail borrowers, new loans origination declined sharply. In retail banking, the Group focused on lending to its employees, to employees of its corporate clients and mortgage lending. The volume of loans issued to small businesses declined, and new loans were provided mainly on secured basis. In, special attention was given to improving business processes and controlling the efficiency of watch list loans management, as well as harmonization of approaches to small business customers relations management. During, market interest rates remained stable with a smooth downward trend in the first six months of (the key interest rate declined from 17.0% at the beginning of to 11.0% as of August 4, and remained unchanged through the second half of the year). Measures taken by the Bank of Russia to stabilise the Russian money market sustained, to a certain extent, interest rates in the economy. At the same time, as oil prices resumed their downward fall, inflation risks remained high and sent the rouble into another devaluation cycle as the Russian currency accelerated its decline in the second half of.

34 64 Otkritie Financial Corporation Bank 65 Risk Management and Control Otkritie Financial Corporation Bank's interest rate policy fully reflected market trends. Interest rates on loans and deposits were reduced in a timely manner to reflect the real funding costs in the economy. Over the year, the rouble exchange rate was highly volatile due to the abandonment by the Bank of Russia of its targeted exchange rate practice. Main Principles of Credit Risk Management in the Group's Banks The Group s banks use the unified approaches while implementing the credit policy, considering the following aspects: the principle of business units responsibility: client and (credit) product units are responsible for risk taking; performance results including the level of risk taken and realised are included in the motivation system; the rule of regular monitoring of particular clients and the portfolio dynamics is used to implement changes in the conditions of lending facilities as well as credit rules and procedures; the principle of independence of risk management units: risk analysis, evaluation and control are entrusted to risk management divisions that participate in structuring, approving and monitoring of risk and report directly to the Chairman of the Management Board of the bank; the decision making process on loans is delegated based on the size and complexity of a transaction. It may be reviewed by the Management Board, Major Credit Committee or Small Credit Committee in order to minimise risk and to consider the volume of risk appetite; As a result, by mid-, the rouble dropped to as low as USD/RUB 55.5 and EUR/RUB 61.5, further rebounding to USD/RUB 72.9 and EUR/RUB 79.7 at year-end. The Russian economy remains highly dependent on hydrocarbon prices, primarily oil prices, which affects both the rouble exchange rate, and the revenues of the Russian government's budget. pricing takes into account key risk factors associated with a transaction which creates economic incentives both for the client and the Bank s business units so that the Bank s resulting risk profile is minimised through maturity, collateral, and a system of sureties and guarantees on loans. According to IFRS requirements, the Group makes provisions for potential losses on impaired loans. Risk management divisions calculate collective provisions based on historical losses and individual provisions based on a conservative estimate of the expected recovery, considering the work-out plan developed for the problem asset management. For retail portfolios and small business portfolios, provisions are calculated on collective assessment principle based on historical loss data, considering the product category, impairment period and internal statistics on recovery for the pools of problem loans. Individual assessment may be carried out for loans of significant volume and small business loans. As at the end of, Otkritie Financial Corporation Banking Group initiated consultations with international auditors to introduce the new IFRS 9 Standard, which involves significant transformation of existing practices for quantitative portfolio assessment and provisioning for portfolios. Over the year, Otkritie Financial Corporation Bank continued its efforts to enhance and streamline its corporate loan conveyor, originally launched in In, the Decree of the Bank of Russia No.3624-U, dated April 15,, On the Requirement for Credit Institutions and Banking Groups Risk and Capital Management Frameworks (the Decree No.3624-U ) came into effect. Under this Decree, credit institutions are required to design their internal capital adequacy evaluation system based on criteria and approaches recommended by the Bank of Russia. According to Decree No.3624-U, credit institutions with assets of RUB 500 billion or more are to align their existing risk and capital management procedures with the Decree by December 31,. To comply with the Decree, in Otkritie Financial Corporation Bank designed its risk and capital The Quality of the Loan Portfolio of Otkritie Financial Corporation Banking Group as of December 31, management strategy and major risks management policy. These documents were approved by the Bank s Supervisory Board within the required by the Bank of Russia timeline. Otkritie Financial Corporation Bank's risk and capital management strategy is a regulatory document of the top level which sets forth objectives, principles and approaches on which the Bank relies in managing its aggregate risks in terms of capital adequacy, in evaluating the Bank s performance and in determining the risk appetite measures for Otkritie Financial Corporation Bank's major risks management policies describe tools and procedures used by the Bank in managing its major risks, including measures of risk appetite, major risks evaluation and control procedures, the process of generating risk reports, and the stress tests frequency for the major risks categories. A multi-level control and reporting framework has been designed by the Bank as part of CAEIP to support timely managerial decision-making for risk and capital management purposes. The share of Non-performing Loans (NPL, %) Provision Ratio, % Corporate business Small business Retail business Total loans to customers

35 66 Otkritie Financial Corporation Bank 67 Risk Management and Control Corporate and Interbank Loans The Group has built a multi-level limit system of the decision-making process. Decisions are made by credit committees of the banks branches within the scope of their competencies, head office credit committees and the Management Board of the Group s banks, depending on the transaction value and other parameters. Over, lending decision-making powers were mostly delegated to the head office credit committees of the Group s banks. The Group s banks extend loans in accordance with the Lending Policy. All of the Group s banks require loan collateral that can be easily sold and is adequate to cover losses in the event of default (based on the experience of collateral management). Only secured loans can be provided to higher-risk customers. The risk evaluation and loan approval policies and procedures in the banks of the Group are strictly subordinated. When a prospective transaction is initiated, the customer relationship manager first assesses the transaction compliance with the Group s standards. The credit departments then review the purpose of a loan, the business of a borrower and other parties of a transaction (if applicable), i.e. the borrower s financial standing and credit history, the quality of the proposed collateral and the borrower s compliance with legal requirements. The department responsible for credit risk analysis provides an independent opinion regarding the credit transaction. All review units (including those authorised to evaluate collateral and review legal risks) are independent from the loan-origination client and business units. Once a review is complete, the relevant collegial body makes a final decision regarding the loan and its parameters based on a review results. Apart from the borrower s financial standing and creditworthiness assessment lending decisions also involve a review of the borrower s vulnerability to macroeconomic factors and regional market conditions. Exposure to a single borrower or a group of related borrowers sometimes can be subject to sub-limits, taking into the account onbalance and off-balance risk position. In, the Group streamlined and updated its exposure management methods and tools for decision-making purposes, thereby improving timeliness, accessibility, and completeness of information regarding borrowers of the same group. This information is used by business divisions, on the Bank level and on the Group level including problem assets management unit. The banks of the Group regularly monitor the compliance with exposure limits by borrower, group of related borrowers, industry, and type of financial instrument. In order to minimise the credit exposure and adequately assess the credit exposure in relation to financial market transactions, the banks of the Group stipulated the conservative limits definition system based on the types of customers and categories of transactions. The limits are defined by the collegial body based on a review of counterparties financial standing and business reputation. Counterparty creditworthiness is verified monthly, and recommendations are issued to review current limits, if necessary. Loan quality is monitored by portfolio monitoring and risk management teams in close cooperation with loanorigination units. The early warning system (EWS) helps to promptly identify clients with a deteriorating credit profile. Any red flags are reported to the collegial bodies, which approved the loan, or to the Committee for problem asset management. The problem asset management unit deals with impaired loans and takes measures to mitigate the Group s losses, including legal protection of the Group s interests. In, the Group completed the reorganisation of Otkritie Financial Corporation Bank through the merger with Petrocommerce Bank. The responsible units within Otkritie Financial Corporation Bank supported the smooth continuation of all processes during the merger with Petrocommerce Bank; loan-origination and back office units maintained the high quality of service, despite a much higher workload. The merger affected all aspects of the Bank s business. This triggered harmonisation of methods across all processes of lending and evaluation of all types of risk. The quality review of loans/assets, lending decision-making, and loan monitoring (including EWS) in relation to loans issued by Petrocommerce Bank is carried out now in line with the guidelines adopted and approved by Otkritie Financial Corporation Bank. Petrocommerce s watch list and problem loans are managed in accordance with Otkritie Financial Corporation Bank s standards. The loan book of Petrocommerce Bank was fully integrated into Otkritie Financial Corporation Bank s loan portfolio. No material changes were made in terms of loan quality assessment in accordance with Russian standards, as they were already fully in-line with the requirements of the Bank of Russia's Regulation No.254-P dated March 26, 2004 On the Procedure of Forming by Credit Institutions of Provisions for Loans and Similar Debt. The IFRS-based asset quality evaluation methodology has been significantly revised, from dividing impaired assets into buckets depending on the delay and creating allowance based on a recommended discount level to individual assessment of impaired assets.

36 68 Otkritie Financial Corporation Bank 69 Risk Management and Control Liquidity Risk Retail and Small Business Loans Retails risks are managed by the retail risk department and retail lending division, which verify, detect fraud, analyze and assess risks, evaluate and monitor credit decisions. In, the corporate channel remained the main channel for retail lending. Products included the Partner package (targeted at employees of the approved companies) and the Professional package (targeted at payroll clients). In, due to the economic slowdown and market volatility, the volumes of loans provided to retail clients were insignificant, with a focus on lending to existing clients. Khanty-Mansiysk Otkritie Bank prioritised less risky payroll customers and employees of its corporate customers. Since, Khanty-Mansiysk Otkritie Bank has been following a more disciplined approach to its risk appetite and introduced new scoring models, with more stringent minimum requirements for new customers and manual processing of applications. Otkritie Financial Corporation Bank halted its retail lending, mortgage programmes and small business financing. These segments are now exclusively served by Khanty-Mansiysk Otkritie Bank, which is now responsible for developing the retail and small business segments of the Group. In, Khanty-Mansiysk Otkritie Bank focused on mortgage programmes for its most reliable customers. The bank uses a loan factory tool that segments clients by risk level and offers the most favourable conditions to top clients. This results in a high percentage of approvals. The level of credit risk is measured based on a client s credit history with other banks, the volume of down payment, the financial position of a client and other parties of a transaction and other factors. As economic conditions changed, the Bank introduced more stringent criteria for client financial standing and credit history. In, Khanty-Mansiysk Otkritie Bank targeted its SME lending policy at reducing credit and operational risks and making the lending process more efficient by centralizing certain lending processes, decision-making, transaction conditions monitoring, and provisioning. The financial criteria and collateral screening criteria were revised to reflect a more conservative policy. Khanty-Mansiysk Otkritie Bank performs on-going monitoring of loans and reviews of borrowers financial statements to detect any changes in their creditworthiness, in addition to monitoring compliance with the loan conditions and collateral reviews. These measures help Khanty-Mansiysk Otkritie Bank to identify signs of borrowers financial difficulties at the early stages and to take measures to protect Bank s interests. In, Khanty-Mansiysk Otkritie Bank continued its efforts to increase its debt recovery rate and: enhanced outbound calling capabilities through implementation of technical upgrades, thus improving the quality of communications with clients; designed behaviour models offering clients tailor-made loan repayment schemes; launched a Pre-Collections unit to identify clients who have difficulties repaying their debt before such debt becomes overdue; incorporated Petrocommerce s nonperforming loans management tools into the Group s corporate non-performing loans management program. Liquidity risk is the risk that the banks of the Group will not be able to perform its obligations in a timely manner and in full, whether in normal circumstances or due to contigencies Market Risks Market risk is the risk that the banks of the Group will incur losses due to the unfavorable fluctuations in the market value of financial instruments (including debt securities), foreign exchange rates and interest rates The banks of the Group maintain sufficient liquid assets to perform their obligations and to comply with requirements of the Bank of Russia and internal limits. The day-to-day management of the Group s liquidity risk is carried out by the Treasury Department within the limits defined by the Financial Committee. The Group distinguishes between short-term and long-term liquidity risk. Short-term liquidity risk is managed by the distribution of assets between nostro accounts, collection of information on proposed major transactions and clients payments, and the use of money market instruments such as swap and REPO transactions. To minimise the risk of unforeseen cash outflow, the banks of the Group have formed a treasury securities portfolio to have a proper liquidity buffer that could be used to insure financing from the Bank of Russia (i.e. securities from the Lombard List) or quickly sold in the market without any significant decline in value. In, the banks of the Group upgraded internal procedures to evaluate the necessary capital adequacy level in order to cover market and interest rate risks, and regulatory capital was reallocated to cover market risk. As part of their effort to enhance trading portfolio market risk management tools, the banks of the Group set additional market exposure limits on portfolios of securities, financial derivatives, and open forex positions of individual desks. Long-term liquidity risk is managed through structuring assets and liabilities in terms of their currency, maturities, and instruments. For liquidity risk management purposes the banks of the Group maintain the adequate structure of liabilities by maturity and comply with limits on a mismatch between assets and liabilities as well as with limits on exposure to individual counterparties and groups of affiliated counterparties. The Group sustaines a well-balanced financing structure. The banks of the Group have an access to REPO auctions and to refinancing options provided by the Bank of Russia against market instruments (securities, precious metals) and non-market assets (commercial loans and guarantees by counterparty banks). In this way the banks of the Group provided access to rouble and foreign currency resources for their clients. In, the banks of the Group continued to streamline the market risk evaluation methodology, inter alia, implemented new algorithms for the automatized market risk evaluation. Market risk is managed on a day-to-day basis by departments responsible for trading in the financial markets and by risk management departments. The latter evaluate and monitor exposure to currency and price risks and submit proposals on market risk limits to the Financial Markets Committee.

37 70 Otkritie Financial Corporation Bank 71 Risk Management and Control Operational Risk Otkritie Financial Corporation Banking Group Value-at-Risk as of December 31, 1 Type of risks Position, million roubles Absolute VaR / Risk via sensitivity, million roubles Relative VaR, % Currency risk 48,230 3, Fixed income securities market risk 336,172 4, Equity market risk 9,657 1, Total for securities with market risk evaluated based on VaR The banks of the Group run the VaR tool and regularly apply scenario-based analysis to manage the market risk. Currency risk is managed by analysing open currency positions and VaR both for financial markets and for the banks of the Group in general. Currency positions are monitored for potential exchange rates fluctuations. All positions in excess of applicable limits are hedged. The banks of the Group's policy is to maintain of a well-balanced currency position in order to minimise any exposure to fluctuations of the Russian Rouble against the FX basket. 345,829 6, Sensitivity for illiquid securities 6, Operational risk involves potential losses caused by improper management and control procedures, fraud, poor business decisions, system failures due to employee errors or abuses, technical malfunctions, calculation errors, natural disasters and improper use of the Group's property The banks of the Group identify, evaluate and monitor operational risks, undertake measures for their immediate elimination on a constant basis. The Group utilizes and constantly upgrades the system of gathering and analysis of the information necessary for evaluation of operational risks of the banks. This system implies, inter alia, databases with information on operational risks losses and events. In, in order to manage its operational risks, the banks of the Group: tested a new operational risk management solution system; revised its operational risk management policy; designed an operational risk management training module for Otkritie Financial Corporation Bank employees; began testing employees to assess their skills in operating the operational risk management tool; engaged an external expert to assess the risk resilience of two head offices and two branches of Group s banks; the expert issued a positive opinion regarding risk resilience and offered a lower premium for property insurance for the next period; integrated operational risk management into the Group s risk insurance process in terms of coordination, contract approval, covered risks, and insurance coverage conditions. Operational risk exposure is reduced by harmonising banking procedures, risks insurance and outsourcing part of operational risks, improving corporate governance frameworks and IT systems, and developing emergency recovery scenarios and contigency plans. 1 For consolidation purposes 10-day 99% VaR is implemented. Otkritie Financial Corporation Banking Group is exposed to interest rate risk, principally as a result of lending at fixed interest rates in amounts and for periods which differ from the borrowing terms of the funding base Interest rate risk is managed by the ALM Committees, which define the appropriate structure of assets and liabilities by maturity and interest rates and set the ceiling or floor volume for raising or investing funds based on the GAP-analysis and the interest margin change scenarios. The banks of the Group assess their exposure to interest risk using GAPanalysis to determine the sensitivity of assets and liabilities to interest rate fluctuation. Scenario analysis and stress tests ensure adequale evaluation of the possible influence of drastic market fluctuations on the Group's business. Significant attention is paid to assessment of illiquid instruments and instruments with nondefined maturity. The worst case scenario is under special control. In this case stress tests are based on the imitation principle. The increased volatility in FX markets and drastic rouble depreciation against main international currencies continued in. Russian companies and banks had limited access to capital markets, Russian issuers were downgraded, and the Bank of Russia increased the refinancing rate significantly. In this volatile environment, the banks of the Group banks paid close attention to open currency positions, interest rate risk management, risks associated with derivatives transactions as well as monitoring and limitation of credit exposure to financial markets transactions. In order to mitigate risks, the banks of the Group took a number of measures such as: review of exposure to certain counterparties, ceiling REPO discounts, open currency position limits (including monitoring and analysis of open currency positions on a daily basis). The banks of the Group also implied more stringent requirements for transactions with derivative financial instruments. Financial Monitoring The banks of Otkritie Financial Corporation Banking Group follow the common approaches while implementing and updating the internal control system in terms of anti-money landering and counterterrorist financing Initiatives to combat money laundering and terrorist financing involve specialists at all levels of the Group s banks, from the Management Board and top managers to financial monitoring and compliance control teams, to authorised staff and other employees. The employees regularly participate in special trainings and workshops to improve their skills and learn about changes to laws and regulations. The banks of the Group also regularly updates training courses and tutorials available in the specialized Banking Tests software. The banks of the Group amended their internal regulations and programs to reflect changes to money laundering and terrorist financing laws in. The banks of the Group have adopted and pursued effective know your customer procedures (applicable when a new account is opened, a bank guarantee is issued, or other services are rendered) in the form of complete screening. The purpose behind such screening is to minimise the risk of the Group s involvement in high-risk suspicious transactions (including transit operations). To identify and prevent suspicious customers transactions in a timely manner, in, the banks of the Group reconfigured their banking software for certain types of transactions, and added new reports to detect high-risk deals at early stages and promptly take measures to discontinue them.

38 72 Otkritie Financial Corporation Bank 73 Risk Management and Control Reputational Risks Legal Risks To gather more information about their customers and their counterparties, the banks of the Group purchased a new solution, Compliance Control, developed by SPARK company. The new tool facilitates the quick assessment of a client s business scope, its solvency, a search of information about the client s affiliates, and a review of risk indicators calculated by the SPARK IT solution. The compliance department applies reputational risk criteria and ratios specially designed to mitigate the risk of doing business with untrustworthy clients and counterparties. Depending on the reputational risk ratio, the banks of the Group resolve whether a customer (counterparty) is reliable enough to conduct operations with. Compliance is an integral part of the risk management framework and is especially relevant after international sanctions were introduced against Legal risk management includes an expert assessment of the contracts and documentation of the banks of the Group. To mitigate their legal risks, the banks of the Group implement standard agreements and procedures, share information on legislative changes, and carry out regular consultancy and training events for staff, including operational divisions. Residual risks arising during banking activity are minimised and approved using legal risk maps depending on the client and transaction type. In, Otkritie Financial Corporation Bank merged with Petrocommerce Bank. Regulators did not raise any objections in connection with the legal aspects of the a number of Russian companies and individuals. By being able to quickly detect those clients or counterparties who are subject to sanctions, the banks of the Group materially reduce the risk of having their payments in foreign currency blocked or the risk of losing their business reputation in the global capital markets. The banks of the Group have launched a procedure for identifying clients taxable under FATCA. Banks of the Group developed guidelines and posted questionnaires and checklists on their websites; Banks of the Group arranged FATCA compliance trainings for their staff. As Petrocommerce Bank merged into Otkritie Financial Corporation Bank in, the Group embarked on a project for implementing a common AML/TF internal controls framework. merger. Otkritie Financial Corporation Bank s legal department reviewed the internal regulations of the merged bank and initiated the transfer of new branches to the Group s regulations and proceedings. This process will continue in Otkritie Financial Corporation Bank has drafted service agreements for LUKOIL Group, one of the key partners of Petrocommerce Bank. Throughout, Otkritie Financial Corporation Bank updated its internal regulations and standard contract forms to reflect regulatory changes, such as amendments made to the Russian Civil Code, Tax Code, the Law On Insolvency/ Bankruptcy, etc. Strategic Risks In, Otkritie Financial Corporation Banking Group adopted the Group s development strategy covering the period up to As outlined in these strategy documents, the Group s objective is to retain its leading position as the largest private universal banking group in Russia and an efficient industry consolidator competing with government-owned banks The Group continuously works to manage its reputational risks by promoting its positive image and solid reputation in the mass media and among counterparties. The banks of the Group maintain open communication channels with clients and the media to provide information about their core business. Each office of the Group has an information stand with client information and a feedback book. Online contact forms make it easy In, Otkritie Financial Corporation Bank merged with Petrocommerce Bank and rebranded its offices as Otkritie branches. These rebranded branches focus on serving LUKOIL Group and its employees. The Group s risk management department has embarked on the project of integrating risk management frameworks and harmonising risk management approaches in the reorganised bank. This process will continue in In, Otkritie Financial Corporation Bank and Khanty-Mansiysk Otkritie Bank both designed and approved Guidelines for Financial Stability Recovery Plan. The purpose of these documents is to set up a procedure for planning measures for clients to contact the banks with questions regarding banking activities. The Public Relations department reaches out to the media to obtain coverage of Otkritie Financial Corporation Banking Group s banks core businesses and the Group s sponsorship and charity programmes. The banks' managers regularly meet with journalists to talk about important developments in the Group s business. to restore financial stability and ensure continuity of banking operations in the event of material deterioration in the bank s financial position under a few scenarios, including the worst case scenario. The guidelines describe stress testing mechanisms and tools to be used to restore financial stability. These documents are required by the Bank of Russia. To mitigate the strategic risk, the banks of the Group regularly review deviations of their actual performance from business plan targets. Such review findings are regularly reported to the governing bodies of the banks of the Group.

39 74 Otkritie Financial Corporation Bank 75 Risk Management and Control Regulatory Risks 2016 Priorities In, to enhance regulatory risk mitigation, the banks of the Group improved the weighted scoring model which allowed to better document the results of identified breaches and match them against the possibility of real regulatory risk In accordance with the requirements of the Bank of Russia's Regulation No. 242-P the banks of the Group have an internal control service whose key role is to monitor regulatory risks. The banks of the Group apply unified regulatory risk management techniques. Over the year, the internal controls services of the banks of the Group enhanced their procedures and tools aimed at performing their key responsibilities, and: streamlined audit programmes; specified the areas to be audited and tests to be carried out; revised sampling criteria; designed sampling techniques to detect unusual transactions using software filters and algorithms; improved monitoring of regulatory risk mitigation measures to be carried out to follow up on completed audits and control checks; developed the procedure for on-going monitoring of key risk indicators involving quarterly identification of exposure concentration in business processes/departments (some of indicators are designed to detect internal fraud); finalised consolidated reports on inquiries (complaints, applications) from the Group s customers. The key internal controls functions are: monitoring regulatory risk when introducing new banking products and services by participating in the approval of the internal regulations; analysis of regulatory risk levels by business segments; development and implementation of new and improved guidelines for audits; monitoring of measures carried out by the Group s employees to minimise regulatory risks; analysis and monitoring of regulatory risks based on the findings of supervisory bodies audits; review of the dynamics in customers inquiries (complaints, applications); issuance of recommendations for the Group s management regarding regulatory risk management. The Group s internal controllers carry out audits to detect, evaluate, and minimise regulatory risks across the Group s business segments. Such audits are performed in strict compliance with applicable methodology and schedules, which is essential to prevent misrepresentation of consolidated regulatory risk hedging. The Group assesses its regulatory risk using its own scoring model which takes into account: the systemic nature of breaches depending on the frequency of such breaches; the specific nature of breaches depending on the type of such breaches. Internal controls departments of the banks of the Group carry out audits of those business segments which are most exposed to regulatory risk. Otkritie Financial Corporation Banking Group intends to further monitor changes in banking regulation, in close cooperation with the Bank of Russia, including joint work on task forces organised by the Association of Russian Banks to propose new approaches to banking oversight and to introduce international practices One of the Group s priorities for 2016 is improving its capital adequacy evaluation internal procedure in light of the upcoming transfer to the common corporate approach to CAEIP for banking groups effective January 1, Amid the challenging economic environment and the volatile rouble, the Group will also focus on enhancing its stress testing capabilities. Stress tests results will be the basis for developing current and medium-term roadmaps for the Group. In 2016, the Group intends to increase its efforts to upgrade its corporate and retail loan portfolio management tools, to further invest in techniques for managing watch list and problem loans (in particular, by expanding the use of individual approaches to customers facing financial difficulties) both in corporate and retail segments. The Group will continue monitoring the market and economic situations to plan its capital adequacy, and will proceed with the groundwork for implementing the Basel Committee s standards across the Group s business segments. Over 2016, the Group expects to prepare for the introduction of new approaches to asset impairment evaluation as part of the loan portfolio quality assessment according to IFRS 9. The Group plans to complete most methodological, technical, and organisational works in 2016 to ensure piloting of provisioning standards in 2017 and the smooth transition to new provisioning methods starting from January 1, 2018.

40 CORPORATE GOVERNANCE Life is open for discoveries otkritiefc.ru

41 78 Otkritie Financial Corporation Bank 79 Corporate Governance Corporate Governance Corporate Governance Overview Highlights Otkritie Financial Corporation Bank s corporate governance operates in strict compliance with the Russian laws and the recommendations of the Central Bank of the Russia Federation, including the Corporate Governance Code recommended by the Bank of Russia s Letter No /2463 dated April 10, (hereinafter the Corporate Governance Code) and relies on the best practices, including the generally accepted corporate governance principles developed by the Organisation for Economic Cooperation and Development (OECD). Otkritie Financial Corporation Bank is a public company whose equities and bonds are traded on the Moscow Exchange (Closed joint-stock company MICEX Stock Exchange ). The Bank's shares are included in the top level quotation list. Otkritie Financial Corporation Bank s corporate governance framework regulates the relations among its executive bodies, the Supervisory Board, shareholders, and other stakeholders. Otkritie Financial Corporation Bank s corporate governance aims at balancing efficient management of the Bank with shareholders interests and rights. The existing corporate governance structure assigns responsibilities and delegates general governance functions carried out by the General Shareholders Meeting and the Supervisory Board and routine management carried out by its executive bodies. The scope of powers of the Bank s governing bodies is determined by the Russian Federal Law On Joint-Stock Companies and the Bank s Articles of Association. The Bank s executive bodies are highly autonomous. The Supervisory Board and shareholders may not, without due cause, interfere in the routine proceedings of the Bank s executive bodies or limit their ability to run the Bank s day-to-day operations. The Bank s Management Board, led by its Chairman, establishes a system of clear criteria and procedures for the appointment and replacement of heads of the Bank s departments, an efficient remuneration system, and staff training and development programmes. To ensure the interests of its shareholders, creditors, clients, business partners and counterparties, Otkritie Financial Corporation Bank continually monitors its compliance with the Corporate Governance Code. In, Otkritie Financial Corporation Bank continued its efforts to enhance its corporate governance with key initiatives including: adoption of the revised Corporate Governance Code and revised Regulations of the Supervisory Board Committees; adoption of the Development strategy of Otkritie Financial Corporation Bank and Otkritie Financial Corporation Banking Group for 2019, including the development strategy of corporate governance; adoption of HR and remuneration policy; adoption of risk and capital management strategy. Corporate Governance Framework INTERNAL AUDIT COMMISSION CHAIRMAN OF THE MANAGEMENT BOARD In line with the principle of transparency, Otkritie Financial Corporation Bank makes regular and timely disclosures and makes available true and complete information about its business, while balancing its commitment to transparency and its business interests. The Bank discloses information on its business activities to all stakeholders in accordance with the Russian law, the Bank of Russia s regulations and the GENERAL SHAREHOLDERS' MEETING MANAGEMENT BOARD SUPERVISORY BOARD INTERNAL AUDIT DEPARTMENT Approves the Director requirements of the Moscow Exchange. The Bank timely discloses its IFRS and RAS financial statements, securities issuer s quarterly reports, its ownership structure, material events and facts that concern its business and may influence the Bank s share price in order to ensure shareholders and investors ability to make informed investment decisions. This information is also available on the Bank s website. AUDIT COMMITTEE RISK COMMITTEE STRATEGY COMMITTEE NOMINATION AND REMUNIRATION COMMITTEE

42 80 Otkritie Financial Corporation Bank 81 Corporate Governance Share Capital General Shareholders Meeting Share Capital Overview General Information Dividend Policy Since its inception, Otkritie Financial Corporation Bank has carried out 27 issues of common shares and three issues of preferred shares. In, Otkritie Financial Corporation Bank completed its reorganisation through the merger with Petrocommerce Bank. Petrocommerce Bank s common stock was converted into additional shares of Otkritie Financial Corporation Bank. As at the end of, Otkritie Financial Corporation Bank s share capital amounted to RUB 8,462,902,450 and consisted of 157,158,049 common shares and 12,100,000 preferred registered shares with no fixed dividend. The par value of each ordinary and each preferred share is RUB 50. Common and preferred shares vest in their holders rights as provided by the Russian Federal Law On Joint-Stock Companies and the Bank s Articles of Association. All preferred shares are held by the Bank s subsidiary. Otkritie Financial Corporation Bank does not pay dividends to its shareholders and reinvests the profit into its capital to finance its business expansion. Resolutions to pay dividends and (or) otherwise to use the retained profit are passed by General Shareholders The Bank s shares are listed on the Moscow Exchange in the top level quotation list. As at December 31,, the Bank s shareholders are over 600 corporations and individuals; the major shareholder is Otkritie Holding, directly and indirectly (via subsidiaries) owning 64.71% of the Bank s voting shares. The Bank s shareholding structure is presented on its website as a flowchart and includes a list of holders who have control over or material influence on the Bank (please visit ru/about/holders/). Members of the Bank s Supervisory Board and Management Board are not shareholders of the Bank. Meetings based on recommendations made by the Supervisory Board. The revised Regulation on the Dividend Policy of Otkritie Financial Corporation Bank was approved by the Supervisory Board on April 7,. The annual General Shareholders Meeting was held on June 26, in the form of attendance meeting in person and voting by ballot The General Shareholders Meeting is the supreme governing body of Otkritie Financial Corporation Bank. Each shareholder may exercise its right to directly participate in managing the Bank by voting on agenda matters at the General Shareholders Meeting. The General Shareholders Meeting is convened by a resolution of the Supervisory Board in accordance with applicable Russian laws and the Bank s Articles of Association. An annual General Shareholders Meeting is held at least two months and up to six months after the end of each fiscal year. An extraordinary General General Shareholders Meeting Competencies Within the scope of their authority, shareholders may: amend or supplement the Bank s Articles of Association and to approve the revised Articles of Association; pass resolutions to reorganise or liquidate the Bank; determine the number of members of the Bank s Supervisory Board, elect and terminate the power of its members; elect and remove members of the Bank s Internal Audit Commission; approve the Bank s Auditor; pay (declare) dividends; approve annual reports, annual financial statements of the Bank; approve major and related-party transactions; increase the Bank s authorised capital in cases provided by the laws on joint-stock companies and the Bank s Articles of Association; Shareholders Meeting may be held upon the request of the Bank s Supervisory Board, its Auditor, the Internal Audit Commission, or upon the request of shareholders holding at least 10% of the Bank s voting shares. According to the Bank s Articles of Association, a notice of the form, date and time of the General Shareholders' Meeting, the record date of the list of persons entitled to attend such General Shareholders Meeting, and such General Shareholders Meeting agenda is to be given to the shareholders in a manner prescribed by the Bank s Supervisory Board in preparing such General Shareholders Meeting. authorise the buyback by the Bank of its outstanding shares in cases provided by the laws on joint-stock companies and the Bank s Articles of Association; pass a resolution to delist the Bank s shares and (or) other securities convertible into shares; pass other resolutions as may be provided by applicable laws on joint-stock companies and the Bank s Articles of Association. During, two extraordinary General Shareholders Meetings were held in the form of attendance meeting in person to discuss agenda issues and to pass resolutions on matters put to vote. Representatives of JSC Independent Registrar Company, the Bank s registrar maintaining its share register, acted as the Counting committee at the General Shareholders Meetings.

43 82 Otkritie Financial Corporation Bank 83 Corporate Governance Supervisory Board Shareholders were notified of the General Shareholders Meeting in accordance with the requirements of the Russian Federal Law On Joint-Stock Companies and the Bank s Articles of Association. As provided by the applicable laws and resolved by the Supervisory Board, materials for the meeting were made available for review by the shareholders at the Bank s headquarters 20 days before the date of the General Shareholders Meeting. Key Resolutions Passed by the General Shareholders Meetings in In, General Shareholders Meetings passed the following key resolutions: to reorganise the Bank through the merger with Petrocommerce Bank; to increase the Bank s share capital; to amend the Bank s Articles of Association; to limit the remuneration of the members of the Bank s Supervisory Board for the period of ; to reinvest the Bank s profit into its equity (capital) 1 ; The notice of the General Shareholders Meeting and information (materials) to be made available to persons entitled to attend the General Shareholders Meeting were sent in the form of electronically signed e-documents to the nominee shareholder (CJSC National Settlement Depositary (NSD)) by the deadline specified by laws and the Bank s Articles of Association. The nominee shareholder, in turn, forwarded this information to its depositors. to approve the ; to determine the number of the Bank s Supervisory Board members and to elect the members; to determine the number of members to sit on the Bank s Internal Audit Commission and to elect the members; to approve the Bank s auditors appointment; to approve related-party transactions. General Information The Supervisory Board is one of the key elements of Otkritie Financial Corporation Bank s corporate governance. The Supervisory Board carries out the strategic governance of the Bank, defines the key risk management and internal control systems principles and approaches, supervises the activities of the Bank s executive bodies and carries out other crucial functions. The Supervisory Board makes decisions related to the Bank s business within the scope of its authority under the Russian law, the Bank s Articles of Association and the Supervisory Board Regulations. Its meetings are called as provided by the time schedule approved by the Supervisory Board, or as necessary by the resolution of the Supervisory Board s Chairman, or as requested by any member of the Supervisory Board, the Bank s Internal Audit Commission, its Auditor, the Chairman of the Management Board, or the Management Board. Members of the Supervisory Board are elected by the General Shareholders Meeting. Shareholders holding in aggregate at least 2% of the Bank s voting shares are entitled to nominate members to the Supervisory Board. Supervisory Board members are elected by cumulative vote at a General Shareholders Meeting. In, as part of the effort to promote and enhance corporate governance, the Supervisory Board focused on boosting the efficiency of the risk management system, aligning the Bank s Development strategy with the current economic environment, strengthening internal controls, supporting staff incentive schemes, and maintaining the transparency of the Bank s businesses. Supervisory Board Role 1 In, the State corporation Deposit Insurance Agency included Otkritie Financial Corporation Bank into the list of banks eligible for capital increase approved by the Government of the Russian Federation. According to the Procedure and Conditions of Investing of the Russian Federation s Contribution into State Corporation Deposit Insurance Agency ( the Agency ) Assets into Subordinated Obligations and Preferred Stocks of Banks approved by the Agency s Board of Directors, the banks qualifying for capital increase are required, in addition to the subordinated loan agreement, to enter with the Agency into a business monitoring agreement which includes, inter alia, their obligation to limit remuneration of the Supervisory Board members for three years after receipt of the federal government bonds, as well as the obligation to increase their equity (capital) by at least 50% of their subordinated obligations by reinvesting at least 75% of their profit into their equity. In order to ensure unbiased decisionmaking and to balance the interests of various shareholder groups, there are independent directors serving on the Bank s Supervisory Board. The Supervisory Board carries out the strategic governance of the Bank, defines its priority business segments, identifies the key risk management and internal control systems principles and approaches, measures to maintain the Bank s financial stability and corporate governance frameworks, and carries out other crucial functions. The Supervisory Board sets agendas for the Bank s General Shareholders Meetings. The Supervisory Board sets up efficient executive bodies and monitors their activities.

44 84 Otkritie Financial Corporation Bank 85 Corporate Governance Supervisory Board Members The Supervisory Board determines the Bank s policy aimed at timely and full disclosure of information on its business to its shareholders, prospective investors, and other stakeholders, as well as monitors proper setup and efficiency of the Bank s reporting system. The Supervisory Board recognizes its responsibility to the Bank and its shareholders and sees its mission in performing, diligently and in good faith, its duties to govern the Bank in a manner ensuring support for and increasing the Bank s share price and facilitating exercise by the shareholders of their rights. In making its decisions, the Supervisory Board recognises the need to remain In, members of the Supervisory Board before the annual General Shareholders Meeting of the Bank were: Ruben Aganbegyan (Chairman of the Supervisory Board), Vadim Belyaev, Dmitry Vasiliev, Alexander Zelenov, Alexey Karakhan, Dmitry Mizgulin, Dmitry Romaev, and Denis Stepanov. Members of Otkritie Financial Corporation Bank s Supervisory Board as at the end of elected by the General Shareholders Meeting held on June 26, were: Ruben Aganbegyan, Dmitry Romaev, Alexey Karakhan, Dmitry Vasiliev, Alexander Zelenov, Denis Stepanov, and Dmitry Mizgulin. Ruben Aganbegyan, the Chairman of Otkritie Holding s Management Board, was elected to be the Supervisory Board s Chairman. fair to all shareholders without giving preference to any group. The Supervisory Board designs an efficient system for identifying and resolving prospective conflicts of interests and maintains an on-going dialogue with shareholders. In approving the risk management policy, the Supervisory Board seeks to strike the right balance between risks and return, subject to applicable laws, the Bank s bylaws and Articles of Association. Among other things, under this policy, when entering into transactions or deals associated with higher risk of equity or investment loss, the Bank should consider a reasonable risk level and compliance of the risk to be assumed with thresholds set by the risk management policy. Directors independence criteria are determined in accordance with the recommendations of the Corporate Governance Code. In line with these criteria, the Bank positioned Dmitry Vasiliev, Alexander Zelenov and Denis Stepanov as independent directors. Of seven members of the Supervisory Board as at the end of, three were independent directors, and three were non-executive directors. All members were nominated by the Supervisory Board for election at the General Shareholders Meeting based on the recommendations of the Supervisory Board s Nominations and Remuneration Committee. Changes after the Reporting Date In line with the best international corporate governance standards, including the corporate governance principles developed by the Organisation for Economic Cooperation and Development (OECD) and the recommendations of the Basel Committee on Banking Supervision, The extraordinary General Shareholders Meeting held on February 10, 2016 elected new members of the Supervisory Board, increasing the number of the members from seven to nine. In addition to the existing Supervisory Board s members, i.e. Dmitry Vasiliev, Denis Stepanov, Alexey Karakhan, Dmitry Romaev, and Alexander Zelenov who were all elected at the annual General Shareholders Meeting, four new members were elected: Evgeny Dankevich, Elena Budnik, Dmitry Popkov, and Olga Plaksina. the Bank highly values the importance of independent directors. Their role is to boost shareholder and investor confidence by ensuring effective control over the Bank s operations and factoring in the interests of all stakeholders (including minority shareholders) in decisions vital to the Bank s business. All members were nominated for election at the Bank s extraordinary General Shareholders Meeting. Between February 12, 2016 and April 1, 2016, the Chairman of the Supervisory Board was Dmitry Vasiliev. Effective April 2, 2016, Dmitry Romaev is the Chairman of the Supervisory Board. New members were added to the Supervisory Board in order to strengthen corporate governance.

45 86 Otkritie Financial Corporation Bank 87 Corporate Governance Members of Otkritie Financial Corporation Bank Supervisory Board 1 Dmitry Romaev Elena Budnik Dmitry Vasiliev Evgeny Dankevich Alexander Zelenov Alexey Karakhan Chairman of the Supervisory Board, non-executive director, Chairman of the Strategy Committee of the Supervisory Board Non-executive director, member of the Supervisory Board Independent director, member of the Supervisory Board, Chairman of the Audit Committee and the Risk Committee of the Supervisory Board, member of the Nomination and Remuneration Committee of the Supervisory Board Chairman of the Management Board, member of the Supervisory Board, member of the Strategy Committee of the Supervisory Board Independent Director, member of the Supervisory Board, member of the Risk Committee, the Audit Committee and the Nomination and Remuneration Committee of the Supervisory Board Non-executive director, member of the Supervisory Board, member of the Strategy Committee of the Supervisory Board Mr. Romaev serves as President of Otkritie Financial Corporation Bank, chairs the Board of Directors at Otkritie Asset Management and Otkritie Debt Centre and sits on the Board of Directors at Otkritie Holding, Khanty-Mansiysk Otkritie Bank, Otkritie Capital, Otkritie Broker, and Otkritie Capital International Limited. Earlier, Mr. Romaev was a member of the Management Board and CFO of Otkritie Holding. Before joining Otkritie Financial Corporation Bank, Mr. Romaev held various positions at Sberbank, KIT Finance Investment Bank, and Petrocommerce Bank. Mr. Romaev was born in In 1993, he received an IT degree from Tula State Engineering University. In 1997, he graduated from the Finance Academy of the Russian Government with a major in Banking. In 1999, Mr. Romaev received his MBA from Dublin Business School. Dmitry Romaev is not a shareholder of the Bank. Ms. Budnik is a member of the Board of Directors of TRUST Bank, Chairperson of the Management Board and a member of the Board of Directors at Khanty-Mansiysk Otkritie Bank. Throughout her career, Ms. Budnik worked at MDM Bank, headed Retail Sales at OTP Bank and headed Retail Products at Barclays Bank. Ms. Budnik was born in In 2004, she graduated from Lomonosov Moscow State University majoring in Economics. Elena Budnik is not a shareholder of the Bank. Mr. Vasiliev serves as Managing Director at the Institute of Corporate Law and Management, an Autonomous non-profit organisation (Moscow, Russia). He is also a member of the Supervisory Board of the National Pension Association, a non-profit partnership for promoting social stability and improving the pension system, and a member of the Board of Directors of United Company RUSAL Plc. During his career, Mr. Vasiliev headed the Federal Securities Market Commission, was a top manager at Mosenergo OJSC and Managing Director at JP Morgan. Mr. Vasiliev was born in In 1984, he received his degree in Economics from Leningrad Institute of Finance and Economics named after N.A. Voznesensky majoring in National Economy Planning. In 2007, Mr. Vasiliev graduated from the Chartered Institute for Securities and Investment (London, UK). He has been approved to act as a professional investment consultant in the UK securities market. Mr. Dankevich chairs the Management Board of Otkritie Financial Corporation Bank, and also is a member of the Boards of Directors of Khanty- Mansiysk Otkritie Bank, TRUST Bank, Otkritie Broker, LUKOIL-GARANT Non-state Pension Fund, Kineshma City Power Network, Northern River Shipping Company, FINSTROY, and a member of the Moscow Exchange Counsil. During his career, Mr. Dankevich worked at GUTA-BANK, Otkritie Brokerage House, and Osnovaniye Investment Company. Mr. Dankevich was born in In 1990, he graduated from the Moscow Institute of Electronics. In 1993, he received his degree in Financial Management from the Russian Presidential Academy of National Economy and Public Administration. Evgeny Dankevich is not a shareholder of the Bank. Mr. Zelenov is the Director of the Financial Institutions Department at the State Corporation Bank for Development and Foreign Economic Affairs (Vnesheconombank). Mr. Zelenov is also a member of the Boards of Directors of GLOBEX Commercial Bank and Russian Standard Bank, and a member of the Supervisory Board of Prominvestbank (Ukraine). Mr. Zelenov was born in In 1977, he graduated from Moscow Financial Institute majoring in International Economic Relations. He has a professional degree of certified directors awarded by the Institute of Directors (UK). Alexander Zelenov is not a shareholder of the Bank. Mr. Karakhan is Deputy CEO and a member of the Management Board of Otkritie Holding, General Director of Otkritie N, and a member of the Board of Directors at Otkritie Broker and Otkritie Asset Management. During his earlier career, Mr. Karakhan was a member of the Board of Directors of Otkritie Capital, Deputy General Director for strategic communications at Aton and Advisor to the President of the Russian Public Organization Delovaya Rossiya. Between 2004 and 2009, Mr. Karakhan headed the Communications department at Renaissance Group companies (Renaissance Capital, Renaissance Credit, and Renaissance Investment Management). Mr. Karakhan was born in In 2003, he graduated from Lomonosov Moscow State University majoring in Journalism. Alexey Karakhan is not a shareholder of the Bank. Dmitry Vasiliev is not a shareholder of the Bank. 1 Background profile of the Supervisory Board members whose powers were terminated in can be found in Otkritie Financial Corporation Bank s for (R. Aganbegyan, V. Belyaev, D. Mizgulin). Please, visit reports/.

46 88 Otkritie Financial Corporation Bank 89 Corporate Governance Supervisory Board Proceedings and Resolutions in Olga Plaksina Non-Executive Director, member of the Supervisory Board Ms. Plaksina is a member of the Board of Directors of Otkritie Holding, Chairperson of the Management Board and a member of the Board of Directors at IFD Kapital, CEO and a member of the Board of Directors at Management Group; Advisor to CEO and Chairperson of the Board of Directors at Management Centre Asset Management; Chairperson of the Board of Directors at PanAtlantic Exploration Company, Kapital Investment Company, PanAtlantic Energy Group Limited, SITTECH; a member of the Board of Directors of Kapital Group Asset Management, Kapital Asset Management CJSC, Kapital Management Company Ltd, the Fund for Target Capital Formation for Social Programmes Support; Director of PanAtlantic Global Holding Ltd and Reserve Invest Holding (Cyprus) Limited. Dmitry Popkov Non-Executive Director, member of the Supervisory Board Mr. Popkov is Deputy CEO and a member of the Management Board at Otkritie Holding, a member of the Board of Directors of TRUST Bank. Earlier in his career, Mr. Popkov worked at Manufacturing and Construction Bank, was Financial Markets Director at Petrocommerce Bank, and Deputy Head of Capital Markets and Investment Banking at Otkritie Capital. Mr. Popkov was born in In 1996, he received his degree in Finance and Credit from Saint Petersburg University of Economics and Finance. Dmitry Popkov is not a shareholder of the Bank. Denis Stepanov Independent Director, member of the Supervisory Board, member of the Audit Committee and the Risk Committee of the Supervisory Board, Chairman of the Nomination and Remuneration Committee of the Supervisory Board Since 2002, Mr. Stepanov has been the President of Central Properties. Throughout his career, he worked for Arthur Andersen and Alfa Bank, and later was Deputy Chairman of the Management Board and CFO at Zenit Bank. Mr. Stepanov was born in In 1992, he obtained his degree in Computer-Aided Design from Moscow Machines and Tools Engineering University. In 1995, he graduated from the Russian Presidential Academy of National Economy and Public Administration majoring in Finance and Credit. Denis Stepanov is not a shareholder of the Bank. Participation of the Supervisory Board Members in the Board s Meetings in Members of the Supervisory Board in Participation in the Board s meetings Ruben Aganbegyan 100% Dmitry Vasiliev 97% Alexander Zelenov 73% Alexey Karakhan 97% Dmitry Mizgulin 64% Dmitry Romaev 100% Denis Stepanov 82% The Supervisory Board carries out the strategic governance of the Bank, defines key risk management and internal control systems principles and approaches, supervises the activities of the Bank s executive bodies and implements other crucial functions. In, the Bank s Supervisory Board held 33 meetings and passed, among others, the following resolutions: to convene and prepare for the General Shareholders Meetings, including to approve their agendas, to set the record day for the list of persons authorised to attend the meetings, to approve voting ballots and the package of documents to be submitted to shareholders, to decide other matters associated with preparing for and convening the General Shareholders Meetings; to review and to approve the Bank s RAS and IFRS financial statements; to approve the Development strategy of the Bank and Otkritie Financial Corporation Banking Group for 2019; to approve the Bank s revised Dividend Policy; to approve the Bank s revised Corporate Governance Code and Information Policy; to approve the revised Regulations on the Supervisory Board s Committees, including the Nomination and Remuneration, Strategy, and Audit Committees; to approve the Bank s bylaws governing its risk and capital management procedures; to approve the revised HR policy for the Bank s financial incentive risk management; to review and approve the Internal Audit Department s reports on the operation and the scope of work; to review and to approve quarterly reports by the supervisor of the professional activities in the securities market and the supervisor of the specialised depository of the Bank; to review and approve an issuer s quarterly reports; to authorize bond issues, to approve bond prospectus and to make the decision regarding bond issuance; to amend the Regulations on the Bank s branches. During her career, Ms. Plaksina worked at PricewaterhouseCoopers in Moscow and New York. She was also a member of the Russian State Duma s expert committee on tax reform, chaired the Tax Committee at the Russian National Association of Securities Market Participants, and was a member of Petrocommerce Bank s Board of Directors. Ms. Plaksina was born in In 1996, she graduated from the State Academy of Management named after S. Ordzhonikidze majoring in Economic Analysis of Mathematical and Software support for Management. Olga Plaksina is not a shareholder of the Bank. Supervisory Board Committees In, the Supervisory Board approved the revised Regulations governing the work of the Bank s Supervisory Board Committees, including that of the Nomination and Remuneration Committee, Risk Committee, Strategy Committee, and Audit Committee. The Regulations were revised to reflect changes in the Russian laws, requirements and recommendations of the Bank of Russia, including the Corporate Governance Code, and the requirements of the Moscow Exchange to maintain the Bank s shares in the top level quotation list, as well as to comply with international best practice. In, the Risk Committee and the Audit Committee each consisted of three independent directors and one nonexecutive director, while the Nomination and Remuneration Committee had three members, including two independent directors and one non-executive director, and the Strategy Committee consisted of two directors, one of them nonexecutive. The Supervisory Board has formed its Risk Committee, Audit Committee, Strategy Committee, and Nomination and Remuneration Committee.

47 90 Otkritie Financial Corporation Bank 91 Corporate Governance Risk Committee of the Supervisory Board Until February 10, 2016, the Risk Committee members were Ruben Aganbegyan (non-executive director), Dmitry Vasiliev (Chairman of the Committee, independent director), Alexander Zelenov (independent director), and Denis Stepanov (independent director). Risk Committee members effective February 12, 2016: Dmitry Vasiliev (Chairman, independent director) Alexander Zelenov (independent director) Denis Stepanov (independent director) Dmitry Romaev (non-executive director; effective February 1, 2016). The Risk Committee of the Supervisory Board evaluates Otkritie Financial Corporation Bank s risk appetite, monitors key risk indicators and overall risk resilience, and adjusts risk management operations. The Committee keeps the Bank s risk appetite under control by analysing and identifying risk tolerance for any given risk, reviewing credit and market exposure limits, and mapping the Group s overall risk profile. In, the Risk Committee focused on developing recommendations for measures to mitigate risks and manage risk levels. In, the Committee held three meetings to discuss the strategy for improving the Bank s risk management capabilities as part of the Internal Procedure for Capital Adequacy Evaluation, as well as key indicators of risk appetite. During these meetings, the Committee approved the Bank s risk reports and reviewed risks associated with corporate lending, project financing, financial markets, and treasury, and discussed the level of risk of factoring operations. Special attention was given to developing operational risk management frameworks and preventing fraud in lending. The Committee addressed questions associated with an early warning and monitoring system for overdue debts and conducted an analysis of the Bank s loan portfolio quality and its short-term liquidity based on stress tests. Audit Committee of the Supervisory Board Until February 10, 2016, the Audit Committee members were Ruben Aganbegyan (non-executive director), Dmitry Vasiliev (Chairman of the Committee, independent director), Alexander Zelenov (independent director), and Denis Stepanov (independent director). Audit Committee members effective February 12, 2016: Dmitry Vasiliev (Chairman, independent director) Alexander Zelenov (independent director) Denis Stepanov (independent director) Dmitry Romaev (non-executive director; effective February 1, 2016). The Audit Committee assists the Supervisory Board in maintaining the efficient operation of the Bank s internal controls system, ensuring the preparation and submission of complete and accurate financial statements of the Bank, monitoring the compliance with Russian laws and the Bank s internal regulations, and preserving the Bank s assets. The Committee supervises: the Bank s financial statements and accounting policies; the Bank s internal controls system; internal and external audit. Matters reserved for the Committee include assessing nominations to the Bank s auditors and preparing recommendations to the Supervisory Board to be approved by the annual General Shareholders Meeting; approving the auditor s report; evaluating the effectiveness of the Bank s internal controls and developing proposals to boost their effectiveness. In, the Committee held nine meetings to review the Bank s annual financial and consolidated financial statements and the auditor s report on the Bank s financial statements, and to approve the Bank s auditor for. Ernst & Young was approved as Otkritie Financial Corporation Bank s auditor for IFRS-based financial statements, and Business Systems Development AKG was approved as the Bank s auditor for RAS financial statements. The Committee prepared recommendations to the Supervisory Board regarding auditors remuneration and net profit distribution. The Committee regularly approves plans and reviews reports of the Bank s internal audit and control departments. The Audit Committee cooperates with the Bank s external auditor, reviews findings of completed audits, and prepares its opinion on the auditor s report on the Bank s annual financial statements. Efforts made by the Audit Committee in contributed to further improvement of the Bank s internal controls system. Nomination and Remuneration Committee of the Supervisory Board Until February 12, 2016, the Nomination and Remuneration Committee members were Ruben Aganbegyan (non-executive director), Denis Stepanov (Chairman of the Committee, independent director), and Dmitry Vasiliev (independent director). Nomination and Remuneration Committee members effective February 12, 2016: Denis Stepanov (Chairman of the Committee, independent director) Dmitry Vasiliev (independent director) Alexander Zelenov (independent director). The Nomination and Remuneration Committee assists the Bank s Supervisory Board in monitoring and controlling the remuneration system and evaluating its compliance with the Bank s strategy, the nature and scope of its operations, its performance, and the level and combination of assumed risks. In, the Committee held four meetings. The Nomination and Remuneration Committee of the

48 92 Otkritie Financial Corporation Bank 93 Corporate Governance Compensations and Remunerations to Collegiate Bodies of Otkritie Financial Corporation Bank in Supervisory Board Type of Compensation Amount, RUB thousand Remuneration 6,668 Payroll Bonuses Total 6,668 Management Board Type of Compensation Amount, RUB thousand Payroll 352,972 Bonuses 404,034 Compensation 1,013 Total 758,019 Supervisory Board nominated Supervisory Board and Internal Audit Commission members for election at the annual General Shareholders Meeting and issued recommendations to the General Shareholders Meeting regarding the amount of remuneration paid to independent members of the Supervisory Board and the amount of compensation for expenses incurred by Supervisory Board members attending meetings to be further approved by the annual General Shareholders Meeting. The Committee discussed the Bank s HR policy on managing incentive risk and the procedure for paying bonuses to riskassuming employees. The Nomination and Remuneration Committee also reviews and submits to the Supervisory Board for approval documents associated with bonuses for internal control and risk management employees. The Committee members regularly meet with the Bank s management to discuss routine HR policy matters, including the new hiring process. The Main Aspects of Otkritie Financial Corporation Bank's Remuneration Policy The Bank s staff remuneration consists of the fixed and variable components. The Bank s policy on the variable part of remuneration aims at increasing the Bank s efficiency and profitability while reducing the costs associated with the achievement of objectives and targets, and enhancing the performance and quality of work of each department and employee. The variable part of compensation is based on the key performance indicators (KPIs) approach that reflects individual performance, department performance, and the Bank s overall performance considering the risk and responsibility taken. The total volume of the variable part of compensation is based on quantitative and qualitative indicators that reflect significant risks and profitability by business segment. The Bank s annual General Shareholders Meeting approved a maximum of RUB 50 million in remuneration and compensation for all members of the Supervisory Board for. The total amount actually paid to Supervisory Board members in was RUB 6.7 million. As recommended by the Nomination and Remuneration Committee, remuneration was only paid to independent directors. Strategy Committee of the Supervisory Board Until February 10, 2016, the Strategy Committee members were: Ruben Aganbegyan (Chairman of the Committee, non-executive director) Dmitry Romaev. The Strategy Committee members effective April 2, 2016: Dmitry Romaev (Chairman of the Committee, non-executive director) Evgeny Dankevich (executive director) Alexey Karakhan (non-executive director). The key function of the Strategy Committee is to assist the Supervisory Board in designing the Bank s development strategy. The Committee prepares proposals to define priority segments of the Bank s business, evaluates the alignment of the Bank s business plans with its strategic targets, reviews the Bank s development options, drafts proposals regarding the Bank s development strategy to be further reviewed and approved by the Supervisory Board, and follows up on the implementation of the Bank s development strategy approved by the Supervisory Board. In, the Strategy Committee held three meetings to set up strategic targets for financial and business planning, reviewed and analysed the revised Regulation on Dividend Policy, and the Development Strategy of the Bank and Otkritie Financial Corporation Banking Group for Corporate Secretary In 2016, the Supervisory Board approved the Regulation on the Corporate Secretary which sets up the eligibility criteria for the corporate secretary candidate, its appointment and removal procedure, status, functions, powers, and responsibilities. The corporate secretary carries out his/her functions in accordance with applicable Russian laws, the Bank s Articles of Association, Regulation on the Bank s Corporate Secretary, and other bylaws of the Bank, as well as the resolutions approved at the General Shareholders Meeting and by the Bank s Supervisory Board. The fixed part of compensation includes payroll and other payments, which are guaranteed by the Bank. The variable part of compensation includes performance-based bonuses. Otkritie Financial Corporation Bank paid and accrued a total of RUB million in salaries and bonuses to its Management Board members in. The Bank did not contribute to retirement plans or pay any retirement or similar allowances to its directors or executives in.

49 94 Otkritie Financial Corporation Bank 95 Corporate Governance Management Board General Information Executive Bodies Role The key objective of the Management Board is to ensure the Bank's highly efficient performance, maximum profit generation, protection of the rights and legitimate interests of the Bank The Management Board is the collegiate executive body of Otkritie Financial Corporation Bank and manages the Bank s day-to-day operations within the scope of its authority as determined by applicable laws, the Bank s Articles of Association, the Regulation on the Management Board, and other bylaws of the Bank. The Management Board reports to the General Shareholders Meeting and the Supervisory Board. The Supervisory Board determines the number of the Management Board members and elects and terminates their power. The Chairman of the Management Board coordinates the work of Management Board. Within the scope of its authority, the Bank s Management Board may: ensure the compliance with resolutions passed by the General Shareholders Meeting and the Supervisory Board; arrange for the drafting of annual and other financial and business plans of the Bank and ensure such plans are implemented; transact any matters associated with winning new clients and enhancing cash flows, improving banking operations, developing and launching new banking services; review the management reports by the heads of the Bank s departments, branches, and representative offices, and issue proposals to streamline their operations; approve internal regulations on matters within the scope of its authority, except for any internal documents to be approved by the General Shareholders Meeting, the Supervisory Board, or the Supervisory Board Chairman; develop the Bank s internal controls evaluation system and control system to follow-up on the rectification of any identified failures or defects of internal control and measures to rectify them; monitor the compliance by the Bank, its branches and representative offices with Russian laws and regulations; review the materials and findings of regular audits of internal controls system; assign responsibility for implementing resolutions by the General Shareholders Meeting and the Supervisory Board and implementing the Bank s strategy and policy regarding the design and operation of internal controls; develop efficient systems for information transfer and exchange to ensure that necessary information is communicated to relevant parties; solute other matters as stipulated by the Bank s Articles of Association and bylaws. The Bank s Management Board meets weekly, either in the form of physical presence or by correspondence, as resolved by the Chairman of the Management Board. A meeting may be convened by the Bank s Supervisory Board or at the request of at least two members of the Management Board. In, total of 73 meetings were held. The Bank s executive bodies report to the Bank s shareholders and to the Supervisory Board. The Bank s Articles of Association authorise the Supervisory Board to form executive bodies and terminate their powers and to approve conditions of employment contracts with members of the Bank s executive bodies, including remuneration and other incentives. To ensure effective governance, the Bank s executive bodies are highly autonomous. The Supervisory Board and shareholders may not, without due cause, interfere in the routine proceedings of the Bank s executive bodies or limit their ability to handle the Bank s day-to-day operations. The Bank s Management Board and its Chairman acknowledge their responsibility to shareholders and see their mission in managing the Bank s day-to-day operations fairly and skilfully to ensure its profitability and long-term appeal for investors. The executive bodies are responsible for the timely and efficient implementation of decisions adopted by the Supervisory Board and the General Shareholders Meeting. Changes in Otkritie Financial Corporation Bank Management Board Members 1 At the end of, the Management Board members were: Dmitry Romaev (Chairman of the Management Board), Irina Gordeeva, Sergey Kovtun, Elena Korekhova, Natalia Matyunina, Anatoly Predtechensky, Vladimir Rykunov, Viktor Tyutin, and Svetlana Friedman. In July, Sergey Kovtun, CFO of Otkritie Financial Corporation Bank, was elected to the Management Board. Effective September 1,, Elena Budnik was removed from her position as Management Board member due to her election as the Chairperson of TRUST Bank s Management Board; in October, Roman Vlasov resigned as a Management Board member. In January, February and May 2016, Irina Gordeeva, Natalia Matyunina, Viktor Tyutin, Sergey Kovtun and Elena Korekhova left their positions on the Management Board respectively. Effective April 2, 2016, Evgeny Dankevich was appointed as Chairman of the Management Board, and Dmitry Romaev the Chairman of the Bank s Supervisory Board. In April 2016, Konstantin Tserazov, Senior Vice President, Head of Investment Banking, and Gennady Zhuzhlev, Senior Vice President, Head of Corporate Banking, were elected to the Management Board. Presently, the members of the Management Board are: 1 Background profile of the Management Board members whose powers were terminated in and 2016 can be found in Otkritie Financial Corporation Bank s Annual Report for (R. Vlasov, I. Gordeeva, N. Matyunina, V. Tyutin), available in English, and in the Quarterly Issuer s Report for the Q4 (S. Kovtun, E. Korekhova), available only in Russian. Please, visit reports/ and openinfo/quarterly_reports/. Background profile of Elena Budnik is given in the Supervisory Board section on page 86 of this Report.

50 96 Otkritie Financial Corporation Bank 97 Corporate Governance Members of Otkritie Financial Corporation Bank Management Board Evgeny Dankevich Gennady Zhuzhlev Anatoly Predtechensky Vladimir Rykunov Svetlana Fridman Konstantin Tserazov Chairman of the Management Board, member of the Supervisory Board, member of the Strategy Committee of the Supervisory Board Member of the Management Board, Senior Vice President Deputy Chairman of the Management Board, Senior Vice President First Deputy Chairman of the Management Board Member of the Management Board, Senior Vice President Member of the Management Board, Senior Vice President Mr. Dankevich chairs the Management Board of Otkritie Financial Corporation Bank, and is a member of the Boards of Directors of Khanty-Mansiysk Otkritie Bank, TRUST Bank, Otkritie Broker, LUKOIL-GARANT Nonstate Pension Fund, Kineshma City Power Network, Northern River Shipping Company, FINSTROY, and a member of the Moscow Exchange Counsil. During his career, Mr. Dankevich worked at GUTA-BANK, Otkritie Brokerage House and Osnovaniye Investment Company. Mr. Dankevich was born in In 1990, he graduated from the Moscow Institute of Electronics. In 1993, he received his degree in Financial Management from the Russian Presidential Academy of National Economy and Public Administration. Evgeny Dankevich is not a shareholder of the Bank. Before joining Otkritie Financial Corporation Bank, Mr. Zhuzhlev was Deputy Chairman of the Management Board at the Eurasian Development Bank, CEO and Head of the Central Regional Directorate at Uralsib, CEO and Head of Corporate Lending at NIKoil Investment and Banking Group, Deputy Head of Lending at MDM Bank, Commercial Director at Financial Information Analytical Centre, and Head of Financial Markets Risk Management at MDM Bank. Mr. Zhuzhlev was born in In 1996, he received his bachelor s degree in Engineering and Technology from Moscow State Aviation Technological University named after K.E. Tsiolkovsky; in 1999, he graduated from Moscow International Higher Business School (MIRBIS) specialising in Finance and Credit. Gennady Zhuzhlev is not a shareholder of the Bank. Mr. Predtechensky was Deputy CEO of Otkritie Holding between March 2008 and April Since 2013, he has been heading Risks at Otkritie Financial Corporation Bank. Since 2013, Mr. Predtechensky has been a member of the Supervisory Board of National Clearing Centre Bank. Since, he has been a member of the Board of Directors at LUKOIL-GARANT Non-state Pension Fund. Before joining Otkritie Holding, Mr. Predtechensky worked for Inteza, TransCreditBank. Mr. Predtechensky was born in In 2000, he graduated with honours from the Financial University under the Government of the Russian Federation. In 1998 and 1999, he studied Financial Management at Notre Dame de la Paix (Belgium) under the Russian Presidential scholarship programme. He holds a PhD in Economics. Between 2010 and 2013, Mr. Rykunov was a CFO at Otkritie Financial Corporation Bank. From 2013 till June, he was the Chairman of the Management Board of Petrocommerce Bank. In June, Mr. Rykunov became a member of the Management Board of Otkritie Financial Corporation Bank. In June 2016, Mr. Rykunov was appointed First Deputy Chairman of the Management Board of Otkritie Financial Corporation Bank. Earlier in his career, Mr. Rykunov worked at Sobinbank, MDM Bank, VEFK Bank (which later changed its name to Petrovsky Bank), and Gloria Bank. Mr. Rykunov was born in In 1991, he graduated from Lomonosov Moscow State University majoring in Economics. He holds a PhD in Economics. Vladimir Rykunov is not a shareholder of the Bank. In 2008, Ms. Fridman was appointed Vice President at Petrocommerce Bank. In 2013, she took the position of Advisor to Otkritie Financial Corporation Bank s CEO. In January, Ms. Fridman was appointed a Senior Vice President. She has been a member of the Management Board of Otkritie Financial Corporation Bank since June. Ms. Fridman was born in In 1994, she received her degree in Finance and Lending from the Financial University under the Government of the Russian Federation. She holds a PhD in Economics. Svetlana Fridman is not a shareholder of the Bank. Mr. Tserazov also serves on the Board of Directors at Otkritie Capital and is a member of the Board of Directors of the National Securities Market Association (a selfregulatory organisation of professional securities market participants). Mr. Tserazov joined Otkritie Capital in April 2013 as Managing Director. In September 2013, he joined Otkritie Financial Corporation Bank. Prior to that, Mr. Tserazov was Deputy Head of Global Markets at Sberbank CIB (formerly, Troika Dialog). Mr. Tserazov was born in In 2003, he graduated from the Financial University under the Government of the Russian Federation majoring in International Economics. In 2002, he received his master s degree in Banking and Finance from Université Paris V (René Descartes). Konstantin Tserazov is not a shareholder of the Bank. Anatoly Predtechensky is not a shareholder of the Bank.

51 98 Otkritie Financial Corporation Bank 99 Corporate Governance Control Internal Audit Commission Independent Audit The Internal Audit Commission supervises the Bank s financial and business operations. The Commission monitors the Bank s compliance with laws and regulations governing its business, the setup of internal controls, as well as the legality of the Bank s operations (using screening or random audits), cash balances, and property. The Internal Audit Commission reports its findings to the General Shareholders Meetings and submits its opinion whether the Bank s balance sheet and profit and loss statements fairly present the Bank s affairs, together with recommendations to rectify the identified deficiencies. The Bank s General Shareholders Meeting defines the number of Internal Audit Commission s members and elects them until the next annual General Shareholders Meeting. The Internal Audit Commission s proceedings are governed by the Regulation on the Bank s Internal Audit Commission approved by the General Shareholders Meeting (minutes No. 4 dated September 23, ). By the resolution of the annual General Shareholders Meeting held on June 26,, the members of the Internal Audit Commission were Natalia Andreeva (internal controls and audit advisor) and Svetlana Tselminsh (CFO at Otkritie Holding). The annual General Shareholders Meeting held on June 26,, by recommendation of the Supervisory Board, resolved to approve Business Systems Development AKG as the Group s auditor for RAS-based financial statements in, and Ernst & Young as its auditor for IFRS-based financial statements for. These auditors were selected based on the positive experience of their work with other companies of Otkritie Holding. The Bank s Supervisory Board nominates auditors to be further approved by the General Shareholders Meeting. Auditors are appointed by the General Shareholders Meeting as provided by Article 48 of the Federal Law On Jointstock Companies. In, no remuneration was paid to the Internal Audit Commission members. Internal Audit Frameworks Information on Internal Audits conducted in In : Otkritie Financial Khanty- Corporation Mansiysk Bank Otkritie Bank Regular audits Off-schedule audit assignments Each of the credit institutions which are members of Otkritie Financial Corporation Banking Group has set up stand-alone internal audit teams as required by the Bank of Russia s Regulation No. 242-P dated December 16, 2003 On Internal Controls Setup in Credit Institutions and Banking Groups. The internal audit teams of Otkritie Financial Corporation Bank and Khanty- Mansiysk Otkritie Bank function in line with their respective banks Articles of Association and internal regulations governing such teams activities and setting forth common corporate internal audit approaches and standards generally described by higher level corporate bylaws. The mission of the internal audit teams is to directly assist the respective bank s management and the management of Otkritie Financial Corporation Banking Group in sustaining their efficient operation by carrying out internal audits of business affairs, issuing independent and unbiased recommendations to streamline internal controls over financial transactions and operations, risk management, and corporate governance. Audits are planned based on a riskoriented approach; therefore, annual audit schedules most likely cover highest risk areas which require priority attention of each bank s management. In, internal audit teams recommended 397 and 558 measures (for Otkritie Financial Corporation Bank and Khanty-Mansiysk Otkritie Bank, respectively) to mitigate and manage banking risks and boost the efficiency of business processes. Of the above measures, 241 and 415, respectively, were implemented.

52 100 Otkritie Financial Corporation Bank 101 Corporate Governance Compliance with the Corporate Governance Code Statement of the Chairman of the Supervisory Board Corporate Governance Code Statement of the Chairman of Otkritie Financial Corporation Bank s Supervisory Board on Compliance with the Corporate Governance Principles Established by the Corporate Governance Code Otkritie Financial Corporation Bank builds its business based on the corporate governance principles established by the Corporate Governance Code, approved by the Bank of Russia on April 10,. In, the Bank continued to enhance and streamline its corporate governance and increase its business transparency. The Bank strives to ensure fair and equal treatment of all stakeholders as they exercise their rights to participate in the management of the Bank s business. The Bank s corporate governance frameworks and practices guarantee equal conditions for holders of shares of the same category (type), including minority shareholders and non-russian shareholders, and their equal treatment by the Bank. Otkritie Financial Corporation Bank s objective is to comply with the principles of the Corporate Governance Code, approved by the Bank of Russia. Corporate governance principles adopted by the Bank are aimed at building trust in relations connected with the management of the Bank s business and are designed to support efficient operations, boost business value and financial resilience, and ensure the Bank remains attractive to investors and profitable. The corporate governance framework created by the Bank guarantees all shareholders and stakeholders unrestricted access to complete and reliable information about the Bank s business allowing them to make balanced investment decisions. Unconditional compliance with the principles, on which the Bank s Corporate Governance Code is built, is one of the Bank s priorities for further development its corporate governance framework. In doing its business, the Bank relies on the principles of the Corporate Governance Code approved by the Bank of Russia on April 10,, and strives to fully observe its provisions in the Bank s day-to-day operations The Bank s Articles of Association and bylaws clearly define the scope of authority and functions of the Supervisory Board and provide delimitation of powers among the Supervisory Board, executive bodies, and the General Shareholders Meeting. Key aspects of the Bank s corporate governance model and practice The Bank s corporate governance is a system of relations among its shareholders, management bodies, employees, counterparties, and other stakeholders. By improving its corporate governance system, Otkritie Financial Corporation Bank seeks to achieve the following goals: to guarantee shareholders rights and interests; to build an effective management system; to reasonably distribute powers among and control over governing bodies; to exercise effective control over financial and business operations; to maintain a transparent ownership structure and full disclosure of information; to ensure legal compliance and observance of ethical standards; to build effective cooperation with employees and provide them with fair remuneration; to comply with the principles of social responsibility and partnership with stakeholders. The Bank facilitates the exercise of its shareholders rights by engaging an independent registrar with an excellent reputation in the securities market and adequate technical capabilities and control systems in place to ensure proper recording of share ownership and to maintain the shareholders register. The corporate governance practices adopted by the Bank guarantee shareholders their right to participate in the management of the Bank s business and in the Bank s profit and protect their title to shares from any infringements. Dmitry Romaev President, Chairman of the Supervisory Board

53 102 Otkritie Financial Corporation Bank 103 Corporate Governance Methods of Evaluating Compliance with Corporate Governance Principles Established by the Corporate Governance Code General Shareholders Meetings are planned to ensure that shareholders can attend without incurring significant costs or time burden, and that all shareholders are treated fairly. Shareholders have the right to receive regular, timely information about the Bank s business which is sufficient to make informed decisions regarding their disposal of their shares. To secure and protect the above right, the Bank complies with statutory disclosure requirements and goes even further by providing its stakeholders with more details on its business on a voluntary basis. In doing its business, the Bank has zero tolerance for any actions aimed at manipulating corporate control. In evaluating its compliance with the corporate governance principles, the Bank relied, among others, on the Bank of Russia s recommendations set forth in its Letter No. IN-06-52/8 dated February 17, 2016 On Disclosure in a Public Joint-stock Company s Annual Report of the Report on Compliance with Corporate Governance Code Principles and Recommendations. Compliance with the corporate governance principles was evaluated by analysing and comparing the Corporate Governance Code principles and recommendations against internal regulations adopted by the Bank s authorized bodies, including its Articles of Association, Regulations, Policies, and Corporate Governance Code. Corporate Governance Evaluation The Bank seeks to constantly improve its corporate governance and regularly takes measures to enhance it The Bank carries out an on-going works to ensure comprehensive and precise evaluation of the corporate governance framework and the Bank s compliance with the best international practice, Russian laws, and Corporate Governance Code. In accordance with the principles proposed by the Basel Committee on Banking Supervision, the Bank has designed its Regulation of Corporate Governance Evaluation which requires that such evaluations to be carried out at least once per year and must include both an audit of corporate governance as well as interviews with the Bank s employees concerning professional ethics. If needed, Supervisory Board members may engage independent experts to evaluate the Bank s corporate governance. In, the Bank evaluated the following aspects of its corporate governance: distribution of powers among governing bodies; proceedings of the Supervisory Board, including its relations with executive bodies (the Management Board and the Chairman of the Management Board); adoption of the Development strategy of the Bank and monitoring of its implementation; coordination of banking risk management; preventing conflicts of interests among shareholders, members of the Supervisory Board, Bank s executive bodies, its employees, creditors, customers, and other clients; relations with affiliates; setting up rules and procedures to ensure compliance with professional ethics principles; coordination of information disclosure; monitoring of internal control system. The report containing findings of the audit was reviewed by the Supervisory Board. The principles and practical approaches used by the Bank to set up its corporate governance were recognized as generally compliant with the Corporate Governance Code and the Basel Committee on Banking Supervision.

54 APPENDIХ Life is open for discoveries otkritiefc.ru

55 106 Otkritie Financial Corporation Bank 107 Appendiх Appendix Abbreviations and definitions Term Description Term Description 1C / 1C: Enterprise AFS AML/TF Asset Liability Management ATM CAEIP Cash back CME CPI CSR DIA EBS ERP EWS FATCA Federal Securities Market Commission FVTPL FX / forex Gap-analysis GDP HFT HR IFRS IT Specialised software for accounting and budgeting for legal entities Available for sale financial assets Anti-money laundering and terrorism financing An integrated software system for managing bank s assets and liabilities based on common rules, financing, and liquidity risks Automatic teller machine Capital adequacy evaluation internal procedure Percentage to be repaid to a client after some time Chicago Mercantile Exchange, one of the largest commodity exchanges in the world Consumer price index Corporate social responsibility Deposit Insurance Agency Electronic Broking Services, an electronic platform used to execute FX transactions with market makers Enterprise Resource Planning, software designed to manage company resources. ERP system is a software package for the implementation if the ERP strategy Early warning signs Foreign Trade Account Tax Compliance Act Predecessor of the Federal Financial Markets Service of Russia Financial assets at fair value through profit or loss Foreign exchange Interest risk analysis method based on the analysis of maturity gaps (mismatch) of a bank s non-trading interest-sensitive balance sheet and off-balance assets and liabilities Gross domestic product High frequency trading Human resources International Financial Reporting Standards Information technology Khanty-Mansiysk Otkritie Bank KPI LBMA LTV M&A NPL NSPK OECD Otkritie Financial Corporation Bank Otkritie Financial Corporation Banking Group (Group) Otkritie Holding PD, LGD models Petrocommerce Bank RAS REPO, Repurchase agreement RoAE Rosstat Bank of Russia SGE SME Bank SWIFT USD VaR VAT Khanty-Mansiysk Otkritie Bank PJSC Key performance indicators London Bullion Market Association Loan to Value ratio Mergers and acquisitions Non-performing loans more than 90 days overdue Joint Stock Company National System of Payment Cards, the operator of Mir National Payment System Organisation for Economic Cooperation and Development Public Joint-Stock Company Bank Otkritie Financial Corporation Otkritie Financial Corporation Banking Group, including Otkritie Financial Corporation Bank PJSC and Khanty-Mansiysk Otkritie Bank PJSC Otkritie Holding OJSC Probability of default, Loss given default, credit risk assessment models Petrocommerce Bank OJSC Russian accounting standards An agreement to buy or sell securities with the obligation to sell or buy them back after a certain time at a pre-agreed price Return on average equity Federal State Statistics Service of the Russian Federation Central Bank of the Russian Federation Shanghai Gold Exchange JSC Russian Bank for Small and Medium Enterprises Support Society for Worldwide Interbank Financial Telecommunications United States Dollar Value at Risk Value-added tax

56 108 Otkritie Financial Corporation Bank 109 Appendiх Summary Consolidated IFRS Financial Statements Report of the Independent Auditor on the Summary Consolidated Financial Statements To the Supervisory Board of Public Joint-Stock Company Otkritie Financial Corporation Bank The accompanying summary consolidated financial statements, which comprise the summary consolidated statement of financial position as at December 31,, the summary consolidated statement of profit or loss, the summary consolidated statement of other comprehensive income, the summary consolidated statement of changes in equity, the summary consolidated statement of cash flows for the year then ended, and related notes, are derived from the audited consolidated financial statements of Public Joint-Stock Company Otkritie Financial Corporation Bank and its subsidiaries (together the Group ) for the year ended December 31,. We expressed an unqualified audit opinion on those consolidated financial statements in our report dated April 5, The summary consolidated financial statements do not contain all the disclosures required by the International Financial Reporting Standards. Reading the summary consolidated financial statements is, therefore, not a substitute for reading the audited consolidated financial statements of the Group. Management s Responsibility for the Summary Consolidated Financial Statements The Management of the Group is responsible for the preparation of a summary of the audited consolidated financial statements on the basis described in Note to the summary consolidated financial statements. Auditor s Responsibility Our responsibility is to express an opinion on the summary consolidated financial statements based on our procedures, which were conducted in accordance with International Standard on Auditing (ISA) 810, Engagements to Report on Summary Financial Statements. Opinion In our opinion, the summary consolidated financial statements derived from the audited consolidated financial statements of the Group for the year ended December 31, are consistent, in all material respects, with those consolidated financial statements, on the basis described in Note to the summary consolidated financial statements. April 5, 2016 Moscow, Russia Summary Consolidated Statement of Financial Position as of December 31, (in millions of Russian roubles) Assets December 31, December 31, Cash and cash equivalents 175, ,792 Obligatory reserves with the Central Bank of the Russian Federation 8,982 10,541 Precious metals 7,985 2,312 Financial assets at fair value through profit or loss 304, ,174 Loans and advances to banks and other financial institutions 62,888 35,650 Loans to customers 2,565,823 1,784,784 Financial assets available for sale 67, ,843 Financial assets held to maturity 100,758 61,189 Investment property 5,286 7,473 Property and equipment 18,692 15,231 Intangible assets 9,048 1,978 Goodwill 1,788 1,788 Deferred income tax assets 2, Other assets 32,750 17,685 Total assets 3,363,551 2,595,863 Liabilities Financial liabilities at fair value through profit or loss 63,935 94,096 Amounts due to banks and the Central Bank of the Russian Federation 1,630,775 1,041,599 Amounts due to customers 1,255,898 1,022,995 Bonds and Eurobonds 99, ,666 Promissory notes and certificates issued 8,463 58,727 Deferred income tax liabilities 5,704 3,877 Other liabilities 22,160 5,128 Subordinated loans 61,068 96,939 Total liabilities 3,147,516 2,438,027

57 110 Otkritie Financial Corporation Bank 111 Appendiх Summary Consolidated Statement of Financial Position as of December 31, (continued) (in millions of Russian roubles) Summary Consolidated Statement of Profit or Loss for the Year Ended December 31, (in millions of Russian roubles) December 31, December 31, Equity Share capital 9,741 9,076 Treasury shares (929) (929) Share premium 59,098 59,098 Perpetual subordinated loans and bonds 17,185 Revaluation reserve for investments available for sale 600 (3,269) Revaluation reserve for property and equipment 1,701 1,822 Retained earnings 97,130 65,430 Total equity attributable to shareholders of the Bank 184, ,228 Non-controlling interests 31,509 26,608 Total equity 216, ,836 Total equity and liabilities 3,363,551 2,595,863 For the Year ended December 31 Interest income 239, ,202 Interest expense (190,079) (86,597) Net interest income before gain from remeasurement of cash flows from and allowance for impairment of interest-bearing assets 49,918 65,605 Gain from remeasurement of cash flows from interest-bearing assets acquired in business combination 6, Allowance for impairment of loans to customers and amounts due from banks (49,225) (21,838) Net interest income/(expense) after allowance for loan impairment 6,936 43,780 Trading income 36,204 (10,342) Securities 13,881 (15,204) Foreign currency 22,993 6,378 Precious metals (623) (2,267) Other derivatives (47) 751 Net fee and commission income 11,658 13,192 Fee and commission income 16,521 17,364 Fee and commission expense (4,863) (4,172) Loss from initial recognition of financial instruments, restructuring and early repayment (4,877) Net gain/(loss) from financial assets available for sale 955 (1,910) Net gain/(loss) from disposal of loans 1,949 (1,012) Other impairment and provisions (3,032) (1,166) Loss from revaluation of investment property (84) (189) Gain from a bargain purchase of subsidiaries 1,039 Signed and authorized for release on behalf of the Management Board of the Bank E.Dankevich Chairman of the Management Board E.Elagina Chief Accountant Other income 2,611 1,774 Non-interest income 46, Operating income 53,359 44,127 Operating expenses (44,163) (36,775) Revaluation of buildings and structures (722) (30) April 5, 2016

58 112 Otkritie Financial Corporation Bank 113 Appendiх Summary Consolidated Statement of Profit or Loss for the Year Ended December 31, (continued) (in millions of Russian roubles) Summary Consolidated Statement of Comprehensive Income for the Year Ended December 31, (in millions of Russian roubles) For the Year ended December 31 Profit before income tax expense 8,474 7,322 Income tax expense (2,059) (1,855) Net gain from disposal of subsidiaries 199 Net gain from discontinued operations 415 Profit for the period 6,614 5,882 Attributable to: - shareholders of the Bank 12,844 7,077 - non-controlling interests (6,230) (1,195) 6,614 5,882 Earnings per share attributable to shareholders of the parent, basic and diluted (RUB) For the Year ended December 31 Profit for the period 6,614 5,882 Other comprehensive income Net other comprehensive income not to be reclassified to profit or loss in subsequent periods Revaluation of buildings and structures Income tax effect (82) (103) Other comprehensive income for the period, net of tax Other comprehensive income to be reclassified to profit or loss in subsequent periods Reclassification adjustment relating to available for sale financial assets disposed of during the period (955) (8,133) Net losses from investment securities available for sale 8,553 1,910 Income tax related to components of other comprehensive income (1,520) 1,245 Other comprehensive income/(expense) for the period, net of tax 6,078 (4,978) Total comprehensive income for the period 13,019 1,301 Attributable to: - shareholders of the Bank 17,029 4,105 - non-controlling interests (4,010) (2,804) 13,019 1,301 Signed and authorized for release on behalf of the Management Board of the Bank E.Dankevich Chairman of the Management Board E.Elagina Chief Accountant April 5, 2016 Signed and authorized for release on behalf of the Management Board of the Bank E.Dankevich Chairman of the Management Board E.Elagina Chief Accountant April 5, 2016

59 114 Otkritie Financial Corporation Bank 115 Appendiх Summary Consolidated Statement of Changes in Equity for the Year Ended December 31, (in millions of Russian roubles) Share capital Treasury shares Share premium Perpetual subordinated loans and bonds Revaluation reserve for investments available for sale Revaluation reserve for property and equipment Retained earnings Total equity attributable to shareholders of the Bank Non-controlling interests Total equity January 1, 7,934 (932) 38,883 (34) 1,617 58, ,274 33, ,357 Profit for the period 7,077 7,077 (1,195) 5,882 Other comprehensive income for the period (3,235) 263 (2,972) (1,609) (4,581) Total comprehensive income for the period (3,235) ,105 (2,804) 1,301 Issue of share capital 1,142 20,213 21,355 21,355 Sale of treasury shares 3 2 (57) Effect of the change in the Group s shareholding in subsidiaries (1) (563) (564) (3,671) (4,235) December 31, 9,076 (929) 59,098 (3,269) 1,822 65, ,228 26, ,836 January 1, 9,076 (929) 59,098 (3,269) 1,822 65, ,228 26, ,836 Profit for the period 12,844 12,844 (6,230) 6,614 Other comprehensive income for the period 3, ,185 2,220 6,405 Total comprehensive income for the period 3, ,844 17,029 (4,010) 13,019 Disposal of plant and equipment (437) 437 Perpetual subordinated loans and bonds 17,185 17,185 9,457 26,642 Effect of business combination ,896 19,561 19,561 Interest paid on perpetual subordinated loans and bonds (772) (772) (244) (1,016) Effect of the change in the Group s shareholding in subsidiaries (302) (7) December 31, 9,741 (929) 59,098 17, ,701 97, ,526 31, ,035 Signed and authorized for release on behalf of the Management Board of the Bank E.Dankevich Chairman of the Management Board E.Elagina Chief Accountant April 5, 2016

60 116 Otkritie Financial Corporation Bank 117 Appendiх Summary Consolidated Statement of Cash Flows for the Year Ended December 31, (in millions of Russian roubles) For the Year ended December 31 For the Year ended December 31 Cash flows from operating activities Interest received 204, ,884 Interest paid (180,024) (86,850) Cash received from prepayment of loans acquired in business combination in excess of carrying amount 6, Fees and commissions received 16,217 17,691 Fees and commissions paid (4,863) (4,170) Gains less losses from trading securities 6,994 4,064 Cash received/(paid) on dealing with precious metals 978 (2,229) Cash paid on dealing in foreign currencies and foreign currency derivatives (33,344) (2,671) Cash (paid)/received on dealing with other derivatives (435) 72 Other income received 1,381 2,405 Other operating expenses paid (39,815) (34,411) Cash flows from operating activities before changes in operating assets and liabilities (22,595) 39,797 Increase/(decrease) in cash from operating assets and liabilities Obligatory reserves with the Central Bank of the Russian Federation 3,611 (1,672) Precious metals (4,996) 5,505 Financial assets at fair value through profit or loss 27,230 (126,162) Loans and advances to banks and other financial institutions (26,237) (12,523) Loans to customers (674,387) (896,682) Other assets (10,675) 2,211 Amounts due to banks and the Central Bank of the Russian Federation 630, ,961 Amounts due to customers 56, ,046 Promissory notes and certificates (repaid)/issued, net (54,019) (1,329) Other liabilities (1,627) 15 Net cash from / (used in) operating activities before income tax (77,142) 39,167 Income tax paid (401) (3,732) Net cash from / (used in) operating activities (77,543) 35,435 Cash flows from investing activities Acquisition of investments held to maturity (37,446) (16,948) Proceeds from redemption of investments held to maturity 11,233 17,058 Acquisition of investment property (647) (914) Proceeds from sale of investment property 5, Purchase of property and equipment (1,627) (1,704) Proceeds from sale of property and equipment 2, Purchase of intangible assets (557) (387) Purchase of financial assets available for sale (47,076) (80,010) Proceeds from sale of financial assets available for sale 118,616 44,026 Dividends received Acquisition of subsidiaries, net of cash 20,726 Sale of subsidiaries (5) 648 Net cash from / (used in) investing activities 71,083 (36,306) Cash flows from financing activities Proceeds from issue of bonds and Eurobonds 22,166 74,188 Redemption and purchase of bonds and Eurobonds (57,588) (32,192) Issue of shares 1,142 Share premium 20,215 Proceeds from sale of treasury shares 56 Repayment of subordinated loans (36,081) (1,174) Interest paid on perpetual subordinated loans (1,016) Effect of the change in shareholding in subsidiaries (7) (4,235) Net cash from / (used in) financing activities (72,526) 58,000 Effect of exchange rates changes on cash and cash equivalents 329 (461) Net (decrease) / increase in cash and cash equivalents (78,657) 56,668 Cash and cash equivalents at the beginning of the reporting period 253, ,124 Cash and cash equivalents at the end of the reporting period 175, ,792

61 118 Otkritie Financial Corporation Bank 119 Appendiх Summary Consolidated Statement of Cash Flows for the Year Ended December 31, (continued) (in millions of Russian roubles) Non-cash transactions During periods ended December 31, and December 31,, the Group made non-cash settlements on a non cash basis for loans issued to customers in previous periods that were deemed to be uncollectible and also the Group recognized net assets received through acquisition of a subsidiary bank. The mentioned non-cash settlements were excluded from the consolidated statement of cash flows and presented separately as follows: For the Year ended December 31 Loans to customers repaid through foreclosure of collateral (1,503) (310) Repossession of the property pledged as collateral 1, Share capital 665 Retained earnings (665) Note to the Summary Consolidated Financial Statements Basis for Preparation The summary consolidated financial statements are extracted from the full set of the Group s consolidated financial statements in accordance with International Financial Reporting Standards ( IFRS ) as at December 31, and for the year then ended. The summary consolidated financial statements comprise the summary consolidated statement of financial position as at December 31,, summary consolidated statement of profit or loss, summary consolidated statement of comprehensive income, summary consolidated statement of changes in equity and summary consolidated statement of cash flows for the year then ended as they were included in the complete set of consolidated financial statements. The summary consolidated financial statements do not contain the disclosures presented in the complete set of consolidated financial statements, namely summary of principal accounting policies and other explanatory information, as required by IFRS. The audited consolidated financial statements are disclosed on the corporate website of Public Joint- Stock Company Bank Otkritie Financial Corporation at the following address: reports-and-publications/financialstatements/. Signed and authorized for release on behalf of the Management Board of the Bank E.Dankevich Chairman of the Management Board E.Elagina Chief Accountant April 5, 2016

62 120 Otkritie Financial Corporation Bank Contacts Otkritie Financial Corporation Bank 2/4 Letnikovskaya Str., Moscow, Russia Tel.: Fax: Marianna Naumenko Investor Relations Daria Churilova Investor Communications Yuri Lekarev Senior Vice President