Annual Report and Accounts

Transcription

1 Annual Report and Accounts

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

21 Рrivate Banking Annual Report and Accounts BUSINESS STRUCTURE AND OPEN PRODUCT ARCHITECTURE PRINCIPLE INVESTMENTS Over the past few years, the business structure of the Private Banking division of NOMOS-BANK has evolved from a department to an independent business unit with sales departments, a regional department, a product development department, and its own investment advice unit. In addition to its own products, the Private Banking division also provides access to the best products that the world s leading financial organisations have to offer. This customer service model is based on the open product architecture, which gives a customer a maximum freedom in choosing financial instruments. In recent years, the division has formed a pool of reliable partners offering solutions in the area of financial and non-financial services both in Russia and in many other countries worldwide. When selecting investment ideas for customers, the Private Banking division uses a top-down approach. First, we analyse macroeconomic environment and prevailing market trends. Then we select asset classes, regions, and industries that are most attractive in the mid-term. Finally, we choose the investment opportunities that are the most appropriate for the task at hand. Access to markets across the world enables us to significantly reduce our dependence on the Russian assets, which were mostly underperforming in the first half of. We have implemented a procedure for assessing a customer s risk profile that combines a consultant s personal opinion with the results of a test conducted by an independent outside financial planning service provider. A customer s risk profile makes it possible to estimate his/her risk appetite and to build up an investment strategy that would be most appropriate for that particular customer. BANKING PRODUCTS CUSTOMER SERVICE The classic Private Banking product line has been adapted to meet customers individual needs: the line of deposit accounts varies depending on what a customer requires from his investment; the owners of Private Banking products are offered additional benefits and the possibility of participating in charity projects. The Private Banking division offers customers attractive terms for deposit accounts that may be opened in virtually any liquid currency. Among the unique options offered to customers, there is a Children s deposit account that may serve as an alternative to a cumulative Life Insurance policy when it comes to saving for a child s education. In cooperation with our partners, we have devised various insurance including after programmes: bank card cash protection; cumulative insurance programmes; foreign travel insurance for an entire family. These and other services are available for our customers on special terms. First and foremost, the Private Banking business is based on compliance with the highest customer service standards. It is this approach that enables us to develop long-term relationships with our customers. Like many private banks, the Private Banking division observes the one customer one manager principle, where one manager only deals with one customer, providing him/her with all information and services that this customer requests. STAFF DEVELOPMENT However, the key difference in our offering is that when it comes to individual services, a customer manager may draw on the expertise of our own team of dedicated specialists in various fields, including: loans; investments; tax, legal and lifestyle consultants who support customer managers at meetings and in preparing proposals. LEGAL ADVICE The Private Banking division offers clients a comprehensive approach to managing their wealth. In cooperation with Russia s and the world s largest law firms, the Private Banking division offers assistance in filing tax returns and migration matters. LIFESTYLE Our team of customer managers, their experience and professionalism, is key to the success of the Private Banking business. This is why the division imposes such high requirements on candidates applying for vacancies and thus builds up a strong team oriented toward long-term cooperation and shared values. At present, there are 146 people in the united Private Banking team of NOMOS-BANK and Otkritie Bank, making it one of the largest wealth management businesses in Russia. Our career-planning model has not changed. Our model includes a system of assessing key competencies, structured training sessions that develop hard and soft skills, and a regular employee assessment that identifies the strengths and weaknesses of every employee, determining key opportunities for career development. The Private Banking Group s established system of employee development and motivation is a considerable competitive advantage, which attracts and retains the best professionals. Building a comprehensive staff training, assessment, and development at the Private Banking division has resulted in a low staff turnover with an average employee staying with the Private Banking division for at least 5 years. As part of our lifestyle management business, we offer various types of consulting services, including those concerning children s education, art finance, transactions with luxury goods, real estate investments, health care service programmes for a customer s family members in Russia and abroad, and many other services. The Private Banking customers also enjoy access to exclusive offers from our partners and receive invitations to prestigious worldclass events. The bank s offices also host permanent art exhibitions and hold members-only events with famous artists and fine art experts. PROFESSIONAL AWARDS For the last two years, the Private Banking team of NOMOS- BANK has been Highly Commended in the PWM / The Banker Global Private Banking Awards in the Best Private Bank in Russia category, recognising that the Group s business meets the highest international standards

22 Investment Banking Annual Report and Accounts 6.5. INVESTMENT BANKING OVERVIEW Nikolay Katorzhnov Senior Vice-President, Head of Investment banking Konstantin Bobrov Senior Vice-President, Head of Assets and Liability management Managing its own securities portfolio, the Bank focuses on improving the credit quality of the portfolio, as well as its liquidity and diversification. Fixed-income instruments, including bonds and promisory notes issued by Russian leading banks and companies, as well as sovereign bonds account for over 80% of NOMOS s securities and derivatives portfolio. Most of the fixed income securities portfolio consists of highly liquid instruments that are included in the Lombard List of the Central Bank of Russia. NOMOS s key lines of business in the financial markets are: Proprietary transactions in the FX and money markets, fixedincome instruments markets, and commodities markets (primarily, precious metals); Client-oriented business: on financial a wide range of services (brokerage services, market making), instruments for hedging financial risks (structured products and derivatives), services for the arrangement of long-term and/or equity financing and financing through repurchase transactions. In, NOMOS-BANK arranged for over 20 issues of rouble-denominated bonds for Russian banks and corporations, totalling over RUB 100 billion. NOMOS is one of the largest players on the Russian repo market. Key Figures* 427,055 Number of investment banking clients 249, , , Financial assets at fair value through P&L (FVTPL), million roubles: 170,133 Share of the Investment Banking Segment**: 26.4% 33.0% In revenues*** > 80% of NOMOS securities and derivatives 33.4% portfolio are fixed-income instruments 29.7% 13.1% Investment in securities, million roubles*: 104, % Total: 221, ,361 37,911 Total: 109,374 2,231 34,844 19,191 3,868 3,977 62,628 7,351 29,779 9,372 1,271 12,072 3, Investment banking total assets, million roubles: ,055 82, , , , , ,644 Investment banking total liabilities, million roubles: 238, , ,708 In assets In liabilities 13.1% 33.4% 29.7% 26.4% 33.4% 33.0% 29.7% 26.4% 42 Corporate bonds and Eurobonds Bonds and Eurobonds issued by bank OFZ bonds Municipal bonds and Eurobonds * Data as at December 31, including FVTPL and AFS portfolios. RF Government Eurobonds Derivatve financial instruments Other 238,539 6, % 170,133 6, , % * At the year end. 170,133 4, % ** The amounts relating to Treasury, Asset and Liability management units and Unallocated balances are excluded from the calculation. *** Revenue total operating income before gain on remeasurement of cash flows, provision for impairment losses on interest bearing assets and provision for impairment losses on other transactions, not including Otkritie Bank. 104,162, % ,553

23 Investment Banking Annual Report and Accounts Key Drivers for the Development of the Investment Banking segment FINANCIAL HIGHLIGHTS A WIDE RANGE OF SERVICES FOR ALL CLIENTS CORPORATE, INSTITUTIONAL, AND RETAIL FOCUS ON THE MOST ACTIVE CLIENT GROUPS Arrangement of financing on public debt capital markets (placement of roubledenominated bonds, short-term and bridge financing, support of offerings, market making); Structured products and a wide selection of instruments for hedging risks (FX, interest, and commodities); Close cooperation with Russia s leading banks and major international players in the financial market. The Group s target clients in the debt capital markets are 2nd and 3rd tier issuers and financial institutions with an international credit rating from B- to BB. These are the most active borrowers. In, they accounted for approximately 40% of the market; The Group s target audiences for sales in financial markets are corporate clients and financial institutions with a broad geographical presence (throughout Russia, the CIS and Baltic countries, Eastern Europe); Among the Group s most active corporate clients in currency conversion transactions are coal mining companies and tour operators. in million roubles Y-o-y KEY BALANCE SHEET INDICATORS: Total Segment Assets 249, , % loans and advances to banks and other financial institutions 88,899 82, % financial assets at fair value through profit or loss 104, , % loans to customers , % Total Segment Liabilities 238, , % due to banks and the Central bank of the Russian Federation 190, , % KEY INCOME STATEMENT INDICATORS* Net interest income** 2,716 4, % Trading and foreign exchange results 3,004 1, % Securities 1422 (864) % Precious metals 32 (68) % Foreign currency 1,554 2, % Other derivative instruments (4) % Total operating income before impairment and provisions 6,407 6, % Operating expenses and impairment of buildings and constructions 1,497 1, % Profit before income tax 4,994 5, % * The income statement of Otkritie Bank for the year was not recognized as the Group gained control on December 27,. ** Net interest income before gain from remeasurement of cash flows from the assets acquired as a result of the business combination and before provisions for impairment losses on interest bearing assets. SPECIAL TERMS AND PRODUCTS, INCLUDING THOSE FOR PROFESSIONAL MARKET PLAYERS Direct access for brokerage clients to foreign trading systems at the LSE, NYSE, NASDAQ, and HKEX; The option to quickly transfer a client s rouble balance from its brokerage account to its overnight deposit account; A flexible pricing policy for FX transactions depending on the volume. The table above sets out selected financial information for the Small Business Banking Segment. The financial information is shown as at or for the year ending, and as at or for the year ending. Following the strategy of investing in low-risk instruments during NOMOS managed to keep total income generated by the securities portfolio close to the level generated in (calculated as the sum of interest income and income from the securities revaluation). At the same time, income from FX transactions rose to RUB 2,061 million in (against RUB 1,554 million in ), which was due to an increase in the volume of FX transactions in the interbank market and the volume of client conversions. Integration CLIENTS As part of the integration project with Otkritie Bank, NOMOS- BANK set up a special department for debt capital markets, a department for sales in financial markets. It also enhanced the department of client conversions and is now streamlining business processes and implementing best practice in this area. NOMOS-BANK s Investment Banking Segment is now in charge of providing advanced investment solutions to clients in such areas as repurchase transactions, debt financing, transactions with fixed income instruments, and brokerage services. The Bank launched a new line of business transactions with structured products, which will enable the Bank to offer its clients advanced and competitive financial solutions. NOMOS offers a wide range of services to corporate, institutional, and retail clients. Presently, the Group s clients include a large number of institutional clients and several major corporate clients. The Investment Banking Segment s priorities for further development are to achieve a synergy with the corporate banking unit, increase the number of corporate clients, boost investment product sales, and ultimately increase the Group s profitability. As at the end of the clientele of Investment Banking Segment included over 700 active clients on the Russian market 44 45

24 Investment Banking Annual Report and Accounts REPO TRANSACTIONS CLIENT CONVERSIONS One of the key lines of business within the Investment Banking Segment is providing of financing to clients, secured on the pledge of liquid collateral (shares and/or bonds). Borrowers are institutional and corporate clients. The principal advantages of this type of transaction are low risk (collateral is in each case liquid and being constantly revaluated) and the refinancing opportunity offered by Western and major Russian counterparties. In, the Group significantly increased its portfolio of repurchase transactions. As at end the volume of reverse repo instruments increased to RUB 116,9 billion (RUB54,6 billion as at end ) driven by successful efforts to stimulate the inflow of new clients and to foster relations of trust with the Group s existing clients. NOMOS is one of the largest players in the Russian repurchase transactions market. NOMOS representatives sit on board of committees at the MICEX, the NSMA, etc. In, the total amount of client conversions exceeded USD 4.5 billion. Among the Group s most active corporate clients in the market of conversion transactions are coal mining companies and tour operators. The Bank offers its clients comfortable terms for conversion transactions. The pricing policy is custom-tailored to the volume of a client s transactions. In, conversions made by individuals clients at Otkritie Bank s branches exceeded USD 2.5 billion, which is more than 30% higher as compared to. This growth was due to the good location of the branches, an expansive geographical coverage, and flexible exchange rates. The volume of retail clients conversions made during the year in Otkritie Bank branches, billion USD: DEBT CAPITAL MARKET NOMOS offers its clients all types of services that arrange financing in public debt capital markets, including placement of rouble-denominated bonds, short-term and bridge financing, support of offerings, and market making. The Group most actively cooperates with financial institutions with an international credit rating from B- to BB. In the corporate segment the target clients are 2nd and 3rd tier issuers with an international credit rating from B- to BB. These client groups are also a target for NOMOS- BANK s Corporate Banking Segment. In, NOMOS-BANK arranged for over 20 issues of roubledenominated bonds for Russian banks and corporations, totalling over RUB 100 billion, including RUB 40 billion in two bond issues by Rosneft Oil Company OJSC. In addition, Otkritie Bank arranged for over 40 issues of rouble-denominated bonds for Russian banks and corporations, totalling over RUB 180 billion. One of the key lines of business within the Group s Investment Banking segment its own debt financing programme for NOMOS- BANK. In, NOMOS-BANK arranged for two issues of its own rouble-denominated bonds, totalling RUB 13.4 billion. In, Otkritie Bank debuted as an arranger for an issue of its own mortgage-backed securities, totalling RUB 3.1 billion. BROKERAGE SERVICES In, Brokerage Services Department focused on fine-tuning products for professional players in the securities market. NOMOS- BANK provided its brokerage clients with direct access to foreign trading systems at the LSE, NYSE, NASDAQ, and HKEX. A service was created that was aimed to quickly transfer a client s rouble balance from its brokerage account to its overnight deposit account, which enabled the Bank to boost its competitiveness. In, NOMOS-BANK switched to T+ settlements with clients trading on the Moscow Exchange, providing for partial prepayment. In 2014, the Bank plans to launch direct access to foreign ETD markets (CME). SALES IN FINANCIAL MARKETS STRATEGIC GOALS The financial markets sales specialise in structured products and instruments for hedging financial risks. The wide range of instruments includes products for hedging FX, interest, and commodity risks, as well as solutions for managing free liquidity and optimising the cost of debt financing. The Investment Banking Segment s target audience for this line of business is corporate clients and financial institutions with a broad geographical presence (throughout Russia, the CIS and Baltic countries, and Eastern Europe). Our professional expertise and experience enable us to provide high-quality services to corporate clients and financial institutions on competitive terms. 58 companies used these services in. At the end of, the total volume of transactions reached RUB 244 billion, including transactions with derivative financial instruments and FX transactions which accounted for 94% (RUB 230 billion), and transactions with structured products accounted for 6% (RUB 14 billion). Increasing the profit margin of existing transactions and expanding Group s share in the Russian investment banking sector: Developing structured products and instruments for hedging financial risks for clients of NOMOS and Otkritie FC; Expanding the line of brokerage products by implementing high-tech solutions for low capitalized banks, asset management and investment companies; Developing a debt financing programme for NOMOS

25 Otkritie Bank Annual Report and Accounts 6.6. OTKRITIE BANK OVERVIEW As part of the Group strategy to develop its banking business, Otkritie Bank focuses on development of retail and small business segments. As at December 31, there were 1.8 million retail clients, and 63,000 corporate clients, most of which were small enterprises. IFRS Highlights Stated in RUB bn YOY, % Total assets % Gross loan portfolio % Customer accounts % Equity % Net Profit % Tier 1 capital ratio (per cent) % Total capital ratio (per cent) pp ROAE (per cent) pp ROAA (per cent) pp NIM (per cent) pp LTD (per cent) pp CIR (per cent) pp The Bank was formed in 2010 through a merger of four banks under the Otkritie brand. RBR and Sverdlovsky Gubernsky Bank were acquired by Otkritie FC as part of their financial rehabilitation programme during the financial crisis: Russian Bank of Development (RBR), VEFK Bank, Otkritie Investment Bank, Sverdlovsky Gubernsky Bank. NOMOS-BANK controls, directly 55.5% and indirectly controls 44.5% of Otkritie Bank s shares (at the end of April 2014). Between March 2011 and February 2014, International Financial Corporation (IFC) was among shareholders of the Bank with an initial stake of 15.7%. IFC s exit in February 2014 was part of the strategy for restructuring Otkritie FC s banking group, where minority shareholders invest in shares of NOMOS BANK, which in its turn We believe that the integration project is a big success. We managed to retain all our retail and small business clients who were transferred over to Otkritie Bank a result that we believe is a key efficiency indicator. Of course, there were some operational difficulties along the way, but we have achieved everything that we planned. Evgeny Dankevich Chairman of Managing Board, member of Board of Directors of Otkritie Bank will have stakes in other banks. Until December, the Deposits Insurance Agency (DIA) held a 24.17% interest in Otkritie Bank and, together with Otkritie FC, participated in the financial rehabilitation of RBR in The DIA s stake was sold through a tender to Otkritie Financial Corporation and later to NOMOS-BANK. The table above sets out selected financial information for the Small Business Banking Segment. The financial information is shown as at or for the year ending, and as at or for the year ending. At the end of, the in front of net loan portfolio of Otkritie Bank reached RUB 98.6 billion, accounting for 48.6% of total assets. Retail loans were up 85.8% totalling RUB 73.4 billion, or 68.3% of the loan portfolio. Small business loans grew 6.4% to RUB 10.3 billion, or 10.4% of Otkritie Bank s loan portfolio at the end of. Corporate loans in the meanwhile fell 54.5% to RUB 21.0 billion, accounting for 21.3% of the total loan portfolio as the corporate business was transferred to NOMOS-BANK. At the end of, non-performing loans accounted for 8.1% of gross loan portfolio (RUB 8.6 billion), in line with the structure of Otkritie Bank s loan portfolio which is dominated by higher risk consumer loans that nonetheless yield a higher return. The non-performing loans coverage ratio of Otkritie Bank was 85.5% at the end of. The available for sale securities portfolio declined by 5.8% to RUB 37.5 billion or 18.5% of Otkritie Bank s assets. The portfolio structure is dominated by corporate Eurobonds (RUB 21.3 billion, or 56.8% of the portfolio) and Russian government Eurobonds (RUB 8.3 billion, or 22.1% of the portfolio). Customer accounts reached RUB billion as at the end and represented 80.1% of Otkritie Bank s funding structure. Term deposits accounted for 63.7% of customer accounts, or RUB 90.3 billion at the end of. Net interest income was up 3.5% to RUB 9.0 billion, representing 47.9% of Otkritie Bank s revenues. Net interest income growth was limited due to the increasing in average cost of funding, which stood at 8.1% at the end of (7.6% at the end of ). Trading income was up 69.2% to RUB 3.5 billion, accounting for 18.4% of Otkritie Bank s revenues. It was dominated by foreign exchange transactions to a total of RUB 2 billion. In, Otkritie Bank s net profit declined due to higher loan loss provisions, which were up 9.8% to RUB 1.5 billion, and higher cost of funds coupled with increased operational expenses associated with the Bank s business expansion. The share of customer accounts in Otkritie Bank s liabilities 80.1 % Net profit of Otkritie Bank for was RUB 1.5 billion Loan portfolio structure*, % Net fees and commissions income doubled in and reached RUB 5.5 billion in line with increase of fees from cash transactions and insurance operations. * Net of provision for impairement losses. Petail loans Corporate loans Loans to small businesses clients 48 49

26 Otkritie Bank Annual Report and Accounts THE KEY COMPETITIVE STRENGTHS OF OTKRITIE BANK are its full-service offering, an extensive branch network and an efficient business model. As a result of the Group integration process: As a full-service bank, Otkritie Bank offers a wide range of products and services to individual small business clients. As part of Otkritie Financial Corporation, in addition to traditional banking products, Otkritie Bank also offers investment, pension, and insurance instruments offered by the companies of Otkritie FC. Otkritie Bank operates a wide distribution network. As at December 31, it comprised 517 offices in 229 cities of 50 Russian regions, including 294 minibranches. Otkritie Bank has a strong footprint in the Privolzhsky, Central, Siberian, and Southern federal districts, and is a retail banking leader in the North- Western and the Urals regions. Revenue structure Otkritie Bank business model involves promoting the development of retail and small business segments under the same roof of a full-service retail bank, which gives Otkritie Bank a strong competitive edge. The Bank is rated by international rating agencies and has a B/B Positive Outlook by Standard & Poor s and B/B Stable Outlook by Fitch Ratings. 51 retail offices were transferred from NOMOS-BANK to Otkritie Bank. By the end of the year, 14 new branches were opened, bringing the network total number to 223.The minibranch network grew 4.3 times to 294 mini-branches. Over 1 million bank cards were issued as at the end of, up 42% comparing to the end of. 69 ATMs were launched across Russia during, bringing the total number of Otkritie Bank ATMs to 568. In April, the ATM networks of all banks of the Group (i.e. NOMOS-BANK, the Bank of Khanty- Mansiysk, and Otkritie Bank) were consolidated. The number of ATMs in the consolidated network has reached 2,670 by the end of. The total number of Otkritie Bank ATMs was 568 at the end of By the end of the total amount of the Group ATMs was 2, % 28.9% 18.4% 4.8% Over, the Otkritie Bank has demonstrated high growth rates in its key segments: retail business and small business. Net interest income Net fee and comission income Trading income Other income 2014 OBJECTIVES KEY RESULTS In, Otkritie Bank focused its efforts on integrating with NOMOS-BANK. The integration process commenced in April and is going according to plan as NOMOS-BANK has transferred its retail and small enterprises business to Otkritie Bank and Otkritie Bank transferred its corporate business to NOMOS-BANK. This step has delivered a high performance model for the distributing banking services and products on the consolidated platform of the two banks. Both banks paid attention to ensure that the integration went smoothly and comfortably for all clients. To ensure a smooth transition, 146 employees of NOMOS-BANK joined Otkritie Bank s team. The integration project s objectives are to synchronise product offerings and to transfer to Otkritie Bank a portion of NOMOS- BANK s loan portfolio, liabilities, payroll projects, infrastructure, ATM network, and sales force. In, the product offering synchronisation was completed, while other objectives are in progress and are currently on schedule and to run up to the end of Q The Bank s top strategic objective for 2014 is to: expand the business while boosting the efficiency; complete the integration with NOMOS-BANK. The key operational tasks are: To introduce new products for retail customers and small business clients; To implement the credit conveyor system in small business segment; To enhance cards business and develop payroll services for clients; To expand commission-generating businesses; To build up the loan portfolio at a rate exceeding the market average; To increase the number of mobile and Internet banking clients, with the view to increasing the share of clients with access to Internet banking to 40%; To boost cross-selling opportunities across the Group

27 Information Technology Annual Report and Accounts 6.7. INFORMATION TECHNOLOGY NOMOS-BANK s IT strategy is focused on enhancing the performance of existing IT systems by reducing their fragmentation and consolidating the functions of the local programs at a centralised level. The transfer of all IT systems and processes on the shared platform operated by the Financial Technologies Centre (FTC) enabled the Group to harmonise the processes in all business segments and to arrange for secure centralised electronic data storage. Furthermore, the Group will efficiently monitor its regional business. Vladimir Ivanov Senior Vice-President, Head of IT IT infrastructure development in : NOMOS-BANK completed its backup data processing centre. Similarly to the principal data processing centre, the backup centre supports all of the bank s business processes with minimum switchover time (up to one hour) and without data loss. KEY ACHIEVEMENTS IN IT PRIORITIES AND PROJECTS FOR 2014 TO 2016 In, the crucial IT project was the integration of the Group s IT infrastructure as NOMOS-BANK consolidated two banks of the Group: NOMOS-Siberia (Novosibirsk); NOMOS Regio bank (Khabarovsk). All business processes of the Novosibirsk and Khabarovsk banks were integrated into NOMOS-BANK FTC ABS, which reduced operational and maintenance costs due to the decommissioning of the IT systems of the two consolidated banks. In addition, NOMOS implemented a number of major projects to expand its corporate business: Launch of Cash Management, a new service offered by NOMOS-BANK for corporate clients allowing them to cut their costs and efficiently manage their cash flows; Launch of online conversion services giving corporate clients access to online currency conversions at current forex rates; Launch of the Credit Conveyor in the corporate business segment harmonises and speeds up lending decision-making for corporate clients as it swiftly factors in many aspects of a prospective borrower s financial condition. To complete the centralisation of IT infrastructure in branches; To create a single integrated self-service system for the banks of the Group to enable product standardisation across sales channels, i.e. Internet, ATMs, mobile phones, terminals, etc.; To consolidate and integrate the processing centres of the Group s banks, streamlining the quality of customer servicing for card holders and corporate payroll clients; To unify and integrate risk management systems of NOMOS- BANK s corporate business and Otkritie Financial Corporation. To upgrade and consolidate securities, money market, and FX back offices; To develop software to support corporate clients transaction business, i.e. acquiring and automated cash collection. To develop Internet Banking for corporate clients by: Offering a user-friendly banking tool both to accountants and financial managers of clients; Significantly broadening the range of services available through Internet Banking; Online integration of clients accounting and ERP software; integration with cloud accounting software

28 Corporate Social Responsibility Annual Report and Accounts 6.8. CORPORATE SOCIAL RESPONSIBILITY POLICY Otkritie Financial Corporation handles a number of key socially-oriented events and projects, many of which are known nationwide, such as the Good Deeds charity programme or the strategic partnership with the Spartak football club. Some of our other corporate charitable initiatives include direct support of orphanages and region-level cultural events. COOPERATION WITH SPARTAK FC Otkritie Bank and Spartak Moscow Football Club have entered into a long-term strategic partnership agreement unprecedented in the Russian market. The sponsor s money will be used to: build up the club s infrastructure; support retired athletes and to promote football among children and teenagers. The new Spartak stadium that is under construction in Tushino will be named Otkritie Arena; starting from the /14 season, Spartak players will have the Otkritie logo on their uniforms. URBAN DEVELOPMENT Otkritie FC installed observation binoculars with tenfold magnification at Vorobyovy Gory, Moscow s main observation deck. Thanks to the Corporation, this attraction after tourist Vorobyovy Gory is absolutely free of charge. GOOD DEEDS Good Deeds is a product of cooperation between Otkritie FC and Vera Hospice Charity Fund. As part of this project, Otkritie issued limited edition bank cards and souvenirs featuring characters of the Hedgehog in the Fog cartoon: iphone cases; passport covers; canvas bags; notebooks; T-shirts; Hedgehog in the Fog book gift edition. The design of all the souvenirs was approved by Yuri Norshtein, the author of the iconic cartoon; Otkritie FC purchased the rights to use the characters of the cartoon. Cashback on bank cards (0.5% of all transactions) and proceeds from the sale of the souvenirs are donated to the before Vera Fund. POLYTHEATRE Polytheatre is a joint project between Praktika theatre and the Polytechnic Museum led by Eduard Boyakov. The theatre s shows feature famous actors like Alisa Grebenshchikova, Ingeborga Dapkunaite, Veniamin Smekhov, Alexander Philippenko, Pavel Artemiev, Alisa Khazanova, Artyom Tkachenko, reknowned artists like Galya Solodovnikova and Oleg Kulik, the composer Vladimir Martynov, and poets including Elena Fanaylova, Andrey Rodionov, Vera Polozkova, amongst others. Otkritie FC is the official partner of the theatre. The customers can have their cards issued, make a donation, and buy souvenirs at any Otkritie office in Russia. ROZHDESTVENSKY (CHRISTMAS) DEPOSIT In October, the Private Banking team launched a NOMOS-CHARITABLE Deposit with all interest accruing on such deposits to be donated monthly to Rozhdestvensky. Charity Fund established to support children from the Rozhdestvensky orphanage. NOMOS-BANK quarterly reports to its depositors on the targeted use of funds. Each Private Bank client is recommended to open such a deposit for the minimum amount of RUB 100,000. SCHOLARSHIP PROGRAMMES The Bank of Khanty-Mansyisk offers special scholarship programmes for top state university students in the Khanty-Mansyisk Autonomous District and the Tyumen Region. In, twenty-one students with top academic, scientific, and community performance received scholarships. The Bank of Khanty-Mansyisk also offered the best students internships at the Bank s offices

29 Corporate Social Responsibility Annual Report and Accounts SPORTS Otkritie FC supports the sports initiatives of its employees. This covers the renting of athletic premises, fees for coaches, uniforms, and participation in tournaments. Otkritie football and basketball teams rank highly in prestigious corporate leagues. The Bank of Khanty-Mansyisk sponsors international biathlon and skiing events, as well as regional and national volleyball and basketball tournaments, boxing matches, swimming competitions, and motorsports events. Since 2006, it has been the general sponsor of Ugra, the local professional hockey club that is a two-times winner of the Supreme Hockey League in 2011 and seasons. Now Ugra plays in the Continental Hockey League. DONORSHIP Otkritie regularly holds donor days. The Corporation s employees are invited to donate their blood to children who are treated for cancer at the Federal Research and Clinical Centre of Pediatric Hematology, Oncology, and Immunology. Compensations for donated blood are transferred to the Give Life Foundation and Vera Hospice Charity Fund. Together with the Ugra government, the Bank of Khanty-Mansyisk organised the Ugra Ski Marathon open ski racing competition. More than 1,200 athletes participated in the 5, 25, and 50 km races with a total prize fund of RUB 3 million. CHILDREN SPONSORSHIP Every New Year Otkritie headquarters arranges an initiative to support orphans and children with disabilities. Christmas trees are mounted at the office and are decorated with postcards made by children from orphanages in the Moscow and Ryazan Regions. Each postcard is a wish, and employees are able to take one and help make the children s dreams OPEN UNIVERSITY Open University is the Corporation s large-scale educational initiative. Otkritie headquarters host lectures and roundtables in economics, finance, art, history, and literature by the best faculty members of the Russian Economics School, the Russian State University for the Humanities, and the Lomonosov Moscow State University. These events are open to all employees of the Corporation. come true. In the employees of Otkritie FC donated gifts to 368 children CHRISTMAS FAIR Each year before the New Year and Christmas celebrations, Otkritie hosts a charitable Christmas fair. SUPPORT TO WAR VETERANS AND PEOPLE WITH DISABILITIES NOMOS-BANK, together with the All-Russian Society of the Disabled, supports war veterans and people with disabilities. It also runs charitable programmes for people on low-incomes, people who are no longer able to work, and people with life-long disabilities. Guests are welcome to buy hand-made gifts and souvenirs, including Christmas tree decorations, knitted items, books for children and farmers products, amongst other things

30 Human Resources Annual Report and Accounts 6.9. HUMAN RESOURCES Duration of employment* Employees by gender* Today the Group s employees work in 57 regions of Russia and specialize in more than 30 core functional areas. 17.4% 7.1% 40.8% 17.2% 5.1% 41.7% 29% 71% Olga Selyanina Director of Human Resources Changes to headcount and higher turnover were in line with expectations for the integration of NOMOS into Otkritie FC. In order to manage the integration process adequately and minimise disruption to employees, the Group implemented a special relationship management programme with dismissed employees that focused on helping them find new jobs. The Group believes it is a considerable achievement that it has been able to retain key teams and the best employees across all functions of the Group. Key Figures 17,823 Headcount dynamic* 16,591 Number of employees, January 1 8,430 17,823 7,025 16,591 17,823 16,591 8,430 7,025 5,793 8,363 As at December 31, the Group had 17,890 17,890 employees 17,823 Education distribution* 3.4% 12.1% 1 year 1 3 years 14.3% 22.6% 13.0% 3.1% 3 5 years 5 10 years 10+ years 15.3% 23.1% Women Men Age composition* 24.0% 13.4% 28.7% 26.4% 13.3% 27.4% 5,793 8,430 8,363 Number of employees, December 7, Rotation** 5,793 8,363 17,890 17, % 47.3% 82.2% 81.7% 34.0% 32.9% 17,890 17,823 Higher education Unfinished higher education Vocational training Up to 25 * Including Otkritie Bank numbers. ** Taking into account rotation within the Group. * At the year end. 33.8% 47.3% 58 59

31 Human Resources Annual Report and Accounts NOMOS-BANK INTEGRATION INTO OTKRITIE FC PRIORITY SEGMENTS AND PROJECTS IN In, NOMOS s HR policy was focused on achieving a smooth integration into Otkritie FC s structure and providing organisational and communicational support to employees across all business units during the reassignment of key business segments among of the Group. UNIFIED JOB TITLES SYSTEM In, NOMOS-BANK switched to Otkritie FC s job titles system (adopted by the Corporation in 2011), which allowed streamlining standards within the Corporation and opened up new opportunities for each employee to fully realise their potential. There are eight job levels in the Corporation, from junior assistant to managing Director, each with relevant salary bands and benefits. The distribution of job titles by levels was approved by heads of business units and the Bank s management. UNIFIED PERFORMANCE EVALUATION SYSTEM A shared performance evaluation system and procedures are important elements of a common corporate culture. Starting from 2014, NOMOS-BANK will participate in annual performance reviews for the Corporation s employees as marked the completion of the groundwork required to include NOMOS-BANK into the Corporation s performance evaluation system. UNIFIED SOCIAL POLICY PRINCIPLES Late in, Otkritie FC s management resolved to cover fully the costs of voluntary health insurance of all NOMOS-BANK employees who have been more than a year with the Bank (such costs were only partially covered before). The new health insurance compensation policy for NOMOS-BANK employees reflects the social policy principles of Otkritie FC. As before, health insurance coverage is arranged for NOMOS-BANK employees by Otkritie Insurance, a member company of the Corporation. HR SUPPORT OF NOMOS-BANK REORGANISATION In, NOMOS-BANK continued its efforts to transform its branches into operational offices. The Group was also restructured, in July NOMOS-BANK Siberia and NOMOS-REGIONBANK were reorganised through their consolidation by NOMOS-BANK. During the year, further to its retail business expansion and customer service improvement strategy, Otkritie Bank launched 255 mini-offices in 175 Russian cities. The Group rendered efficient HR support to staff rotation and training as part of both these projects. In, NOMOS-BANK completed the centralisation of all HR document flow at the Group s headquarters, successfully streamlining the work of its regional HR departments and improving HR management quality. HR TRAININGS AND DEVELOPMENT In, the HR focus was on improving the efficiency of training programmes for employees of priority business segments. In particular, the system focused on training new employees in products and new skills STRATEGY AND PRIORITIES NOMOS-BANK CAREERS WEBSITE NOMOS-BANK launched its careers website ( ru/) in September to attract highly skilled candidates and developing specialists. The website contains information about the Bank s key departments, success stories of its employees, business cases for students applying for internship, information about internships, career, promotion, and training opportunities, vacancies, and news. NOMOS offers young specialists and students the potential for an internship which may be arranged as paid internship, internship on a temporary project, or unpaid internship (up to 3 to 4 hours a day). In this way candidates may be offered starting positions at the headquarters, offices, or branches of the Group s banks. Elsewhere across the group, NOMOS-BANK s corporate business launched a programme for developing and retaining high-potential employees. The Private Banking arm of the Group launched a Career Model project with the aim of increasing the transparency of promotion mechanisms and contributing to the professional growth of employees. Thus during the key objectives of the Group s HR Policy were: After a year of change, the developing structure of NOMOS s business continues to define the HR departments overall strategy for To support and aid efficiency of the integration processes in terms of HR; To introduce common HR policy standards across Otkritie FC; To engage, train, and retain the best specialists in the Russian banking industry. The priorities will be: To continue offering the opportunities for product training and improving of professional skills to employees of the Group; To implement individual HR projects targeted at increasing the involvement of the Group s employees; To improve the productivity of the financial incentives system for employees. Changes are planned in the remuneration system for the Group s employees to reflect the international standards in the finance business as well as new remuneration requirements of Russian regulators

32 Annual Report and Accounts Despite a volatile market, and the continuing financial crisis, during the Group generated significant revenues from its operations, while its total assets and loan portfolio significantly outperformed the market average NOMOS S FINANCIAL HIGHLIGHTS: NOMOS s net profit reached RUB billion +15.2% At the end of, the Group s aggregated assets reached RUB billion % Return on average assets, % Financial Performance Review 7.1. Assets 7.2. Liabilities 7.3. Profitability 7.4. Capital Capital RUB billion +54,2% Operating revenues rose to RUB billion +19.0% Return on equity at the end of the year, % 17.5* Net interest income grew +29.7% Net fee and commission income +13.2% 18.3 Victor Tytin Chief Financial Officer * 18% ROE according to management information, net of the capital increase from the October SPO intended for subsequent consolidation of a controlling stake in Otkritie Bank

33 Financial Performance Review Annual Report and Accounts Over, NOMOS earned RUB 17.3 billion in net profit, a record for the Group s 20 year history. In, NOMOS s net interest income grew significantly (up 29.7%) as well as its net commission income (up 13.2%). Net interest margin reached 4.4%* (: 4.9%) pushed down by a higher cost of funding and the consolidation of Otkritie Bank. At the end of, the amount of total assets of the Group taking into account the consolidation of Otkritie Bank reached RUB 1,379.1 billion increasing by 53.2% y-o-y and outperforming the market average growth rate. At the end of total assets of the Group including Otkritie Bank reached RUB 1,379.1billion 7.1. ASSETS LOAN PORTFOLIO Throughout, there were no major changes in NOMOS asset structure. The loan portfolio accounted for 63.8% of total assets, while investments in securities and derivative financial instruments made up another 16.1% of assets. As at December 31, liquid assets represented 33.2% of total assets. The Group s total liabilities reached RUB 1,239.7 billion as at December 31,, having increased by 53.1% y-o-y. The share of deposits in the funding structure amounted to 63.0% from the total liabilities of the Group as at December 31,. At the end of the year the Group s equity totalled RUB billion (end of : 90.4 billion). In October, NOMOS-BANK completed its secondary public offering at the Moscow Exchange raising further RUB 19.1 billion. The SPO s proceeds will be used to achieve the targeted business expansion of NOMOS, in particular to finance the purchase of a controlling stake in Otkritie Bank. Increase by 53.2% y-o-y outperforming the market average growth rate At the end of, the Group s net loan portfolio increased by 48.9%; (underlying growth of 32.2% without taking into account Otkritie Bank numbers). Three major business segments of NOMOS demonstrated high growth (for a detailed operating and financial review of the Group s key business segments please refer to the Operating Review section, page 16). As at December 31,, the retail segment s share of the loan portfolio grew to 19.7% (December 31, : 15.3%). Given the higher margin and overall return in the retail and small business lending segments, NOMOS expects to increase the share of these segments in its loan portfolio % increase of the Group s net loan portfolio at the end of Assets structure The Group s overall rapid business expansion was coupled with a robust risk management policy. As at December 31, nonperforming loans were at 2.9%, marking one of the best results in the market. The cost of risk at the end of was 1.2%. Most provisions formed by the Group are collective (historical) provisions for a standard loan portfolio. For details see page 16 3,4% SECURITIES PORTFOLIO 63,8% Loans to customers 16,1% Securities Due from banks Cash and cash equivalent 9,7% Other assets 7,0% As at December 31, NOMOS invested a total of RUB billion in securities and derivative financial instruments (representing 16.1% of its total assets), of which financial assets at fair value through profit or loss (FVTPL) were RUB billion. Fixed income instruments including bonds and promisory notes of leading Russian banks and corporations, and sovereign bonds, account for 98.3% of NOMOS s FVTPLs. These instruments form the Group s liquidity reserves. At the end of, available-for-sale investments accounted for 17.8% of total investments in securities (or RUB 39.5 billion). Investments in securities and derivative financial instruments reached RUB billion the end of * NIM for NOMOS (not taking into account Otkritie Bank s consolidation) was 4.6% as at December 31,

34 Financial Performance Review Annual Report and Accounts 7.2. LIABILITIES 7.3. PROFITABILITY Customer accounts*, RUB billion 23,9 % 22,4 % 781,5 471,7 Loan to deposit ratio stood at 112.5% at the end of Over, NOMOS earned RUB 17.3 billion in net profit. At the end of the year, ROE totalled 17.5% (: 18.2%). The Group s net profit available to shareholders was RUB 14.9 billion, up 18.5% y-o-y. ROA stood at 1.7% (: 2,0%). Earnings per share was RUB in. Earnings per GDR was USD 2.4 (calculated at exchange rate of RUB 32,7 for 1 USD as at December 31, ). Higher profitability in was driven by:: +29.7% increase in net interest income during Term deposits Current accounts 76,1 % 77,6 % As at December 31, customer accounts comprised 63.0% of the Group s total liabilities (RUB billion). Term deposits were dominated by corporate deposits (55.1%* as at December 31, ), while individuals and small business customers accounted for 41.5% of deposits*. Over the year, the total volume of customer accounts increased by 65.7% to RUB billion (with organic growth not taking into account Otkritie Bank numbers totalling 35.6% to RUB billion). As at December 31, the loan to deposit ratio was 112.5% (end of : 125.2%). As at December 31, the share of customer accounts with maturity range 1-5 years increased notably to 21.0% of the total amount of customer accounts or RUB 164,5 billion (7.0% or RUB 32,8 billion as at December 31, ). NOMOS efficiently manages its interest rates by regularly revising them in relation to both assets and liabilities, and the Bank does not have any significant mismatches in terms of interest risk. Please refer to pages 76 and 180 of this Annual Report for more details regarding interest risk. Interbank funding (which totalled RUB billion as at December 31, ) accounted for 20.7% of the Group s liabilities. In, the interbank loans raised had an average maturity of approximately 119 days and an average effective interest rate of 5.4% making this source of funding both stable and cost-efficient. To diversify its sources of funding, in November NOMOS raised a record USD 240 million syndicated facility. The facility was arranged by leading global and Russian banks and the proceeds will be used to finance the bank s clients in the gold mining industry. For details see page 16 Increase in net interest income by 29,7% to RUB 40,7 billion in line with loan portfolio growth; A 13.2% growth in net fee to and commission income in to RUB 9.0 billion due to the successful development of crosssales initiatives and the share of wallet increase. Most fee and commission income was generated by the Group s clearing operations and trade financing in the corporate and retail segments; The volume of operating expenses was stable during with a minor increase to RUB 22.0 billion (up 2.9% y-o-y). The cost to income ratio (CIR) was 41.3% at the end of, which is one of the best indicators on the market (: 47.8%) CAPITAL NOMOS has maintained its high capital adequacy ratio at stable levels throughout recent years. It s Tier 1 capital adequacy ratio was 10.2% at the end of (end of : 10.8%). The total capital adequacy ratio was 14.4% as at December 31, (16.3% as at December 31, ). In, the Russian Central Bank issued regulation in relation to key Basel III capital requirements. During the year, NOMOS focused on analysing the potential effects on banks business and preparing the groundwork for a smooth transition to new capital adequacy standards from % increase in net fee and commission income during 10.2% Nomos Tier I capital adequacy ratio at the end of * The amounts relating to Treasury, Asset and Liability management units and Unallocated balances are excluded from the calculation. * 18% ROE according to management information, net of the capital increase from the October SPO intended for subsequent consolidation of a controlling stake in Otkritie Bank

35 Annual Report and Accounts The key driver behind the Group s unparalleled growth has been the simultaneous deployment of a conservative risk management policy across all areas of the business 8.1. REVIEW In, NOMOS unveiled a new strategy for developing its banking business as part of Otkritie Financial Corporation and introduced a unified approach to risk management. All banks within Otkritie FC closely coordinated by key Group fucntions, including its risk management; in this way best risk management practices are applied throughout the Corporation. 8 Risk Management 8.1 Review 8.2 Risk Management Framework 8.3 Key Risk Areas and Risk Management Tools 8.4 Credit Risk 8.5 Liquidity Risk 8.6 Market Risks 8.7 Operational Risks 8.8 Anti-money laundering and counter-terrorist financing procedures 8.9 Legal and Reputational Risks Management 8.10 Strategic Risks Priorities Otkritie Bank has concentrated on development of services to small businesses and retail customers and its policies and processeswere used as a base for common risk management standards for the Group s retail business. In, Otkritie Bank has transferred its corporate portfolio to NOMOS-BANK, which, in turn, transferred a major share of its SME loan and retail loan portfolio to Otkritie Bank. The project will be largely completed during As part of the new strategy, NOMOS has focused on ensuring the operations of the Group remained uninterrupted while integrating all components of its risk management system as a part of Otkritie Financial Corporation. The management has paid special attention to minimising operational risks to ensure that NOMOS-BANK s customers are not affected by the integration process. At the same time, NOMOS-BANK concentrated on enhancing its risk management system by integrating the Group s and Otkritie FC s risk management teams and harmonising products and risk management approaches. In, NOMOS also implemented a number of strategic initiatives to improve its corporate governance and to prepare itself for the introduction of legal frameworks for Basel II requirements in Russia. Last year the Bank of Russia issued its regulation governing key capital adequacy ratios of Basel III. The Group thoroughly analysed the Central Bank s new key capital adequacy ratios impact on its banking business and took measures to be ready to switch to new capital adequacy ratios in The Group manages its capital adequacy in accordance with national regulatory requirements and international standards with the view to sustain it on a prudent level. As at December 31,, BaseI I total capital ratio was at the adequate level of 14.4% (combining Tier 1 capital and Tier 2 capital). Late in the year, the Supervisory Board elected new members to its Risk Committee, which will continue to monitor the performance of the Group s common risk management system, agenda of this committee for 2014 is developed and approved. The total capital adequacy ratio of the Group was 14.4% at the end of 68 Anatoliy Predtechenskiy Member of the Management Board and Chief Risk Officer of NOMOS-BANK 69

36 Risk Management Annual Report and Accounts 8.2. RISK MANAGEMENT FRAMEWORK 8.3. KEY RISK AREAS AND RISK MANAGEMENT TOOLS The Bank s risk management framework includes all organisational levels, from the Supervisory Board and its dedicated Risk Committees down to every division and employee whose job duties include risk management aspects. The Group s risk management system covers the main risks which the Group believes are material for its business, including credit, liquidity, market, operational, legal, and strategic risks. The Group monitors these risks individually and in aggregate via regular stress tests carried out to determine its risk exposure under various scenarios. Key Risks and Mitigation Procedures Regular management reports on the Bank s risks contain key risk indicators and are an integral component of the risk management framework. Risk reports are submitted (after preliminary review by Risk committee at the Supervisory Board) to the Risk Committee of the Supervisory Board, the Bank s top management. THE PRINCIPAL ELEMENTS OF THE RISK MANAGEMENT FRAMEWORK ARE: The Bank s Supervisory Board and its Risk Committee set risk management objectives, approve risk management policy, and oversee its implementation by executive bodies. The Supervisory Board and its Risk Committee also includes conduct risk profiling and evaluate risk appetite both for the Bank in general and for each business segment. The Bank s Management Board and other collegial bodies (i.g. credit committees) manage risks on a day-to-day basis to achieve business targets while compying with risk management policies. Internal Audit Department (IAD), an autonomous department reporting to the Bank s Supervisory Board reviews segments of internal controls and risk management procedures, using a risk-based approach to plan its activities. The findings of these reviews are translated into proposals and recommendations to improve the Bank s operations. Autonomous departments, including the Bank s risk management department, report to the Bank s CEO/Chairman of the Management Board, identifying, analysing and evaluating risks, and proposing recommendations to mitigate them. Businesses and other departments of the Bank and their employees are responsible for complying with risk management procedures and policies. Internal normative documents and systems which define methodology, technologies and business processes of risk management. Risk Mitigation procedures and their enhancements in Loan loss provisioning; CREDIT RISK Regular loan portfolio stress testing; Limiting exposure to each corporate borrower by setting sub-limits for balance and off-balance risks; Monitoring risk exposure by counterparty, industry, and financial instrument; Strictly documented risk evaluation and lending decision-making procedures; Multilevel lending decision-making; Collateral policy and loan pricing policy based on client s internal credit rating and probability of default; Loan factory processing in retail business including clients risk-profiling; Fully automated processing of overdue debts in retail business. Additional improvements introduced in : Implemented Early Warning System to identify first signs of falling quality of corporate borrowers; Automated loan conveyor launched for corporate loans; Statistical models developed to evaluate risks in terms of expected losses for medium business segment. LIQUIDITY RISK Monitoring liquidity risk in the short and long term; Setting internal liquidity exposure limits (in addition to statutory ones); Nostro distribution; gathering information on proposed major transactions and clients payments; using money market instruments, including swap and repurchase transactions, to manage short-term liquidity risks; Forming a portfolio of highly liquid securities, which are included into the Lombard List of the Russian Central Bank; Limiting exposure to certain counterparties and groups of affiliated counterparties. Additional improvements introduced in : Developed an emergency plan for liquidity recovery in case of a liquidity crunch, based on previous cases of handling liquidity crises in the banking industry. MARKET RISKS Using analytical techniques and market risk monitoring and evaluation tools (VaR, portfolio exposure limits by asset class and liquidity, scenario-based analysis, sensitivity analysis of debt portfolio, stress tests, etc.); Hedging all positions in excess of exposure limits; Setting exposure limits by type of counterparty and transaction. Additional improvements introduced in : Aggregated all existing limits across all banks of the Goup

37 Risk Management Annual Report and Accounts Key Risks and Mitigation Procedures (continued) 8.4. CREDIT RISK Risk Mitigation procedures and their enhancements in OPERATIONAL RISK ANTI-MONEY LAUNDERING AND COUNTER-TERRORIST FINANCING PROCEDURES LEGAL AND REPUTATIONAL RISKS Harmonising banking procedures; Insurance and outsourcing operational risks; Enhancing IT infrastructure; Developing emergency and contingency procedures; Improving corporate governance; Enhancing the system for gathering and analysing information for operational losses and events connected with operational risks. Additional improvements introduced in : Revamped and improved data collection and analysis system, elaboration of uniform methodological approaches to risk insurance. Comprehensive internal controls system; Know your client checks; New clients screening (when a new account is opened, a bank guarantee is issued, or other services are rendered); Staff training in anti-money laundering and counter-terrorist financing. Additional improvements introduced in : Integration with Otkritie Bank combined the most efficient compliance procedures of the two banks; Updated the Group s internal documents and procedures to reflect legislative changes, which helped to increase clients transparency for the banks. Expert review of the Group s contracts and documents; Harmonised agreements and procedures; Communicating legislative developments within the Group; Legal advice to operational departments; Efficient communication with clients and the media to publicise the Group s core business, its sponsorships, and charitable initiatives. For NOMOS, credit risk, i.e. the risk of contractual default by a borrower or counterparty, mostly arises from its loans to nonfinancial sectors and retail loans. Credit risk is also inherent in investment in corporate debt, loans to counterparty banks, and balances on nostro accounts. The Group bases its credit risk During the share of non-performing loans was adequate at 2.9% as at December 31, (2.0% as at December 31, ). The cost of risk ratio was 1.2% as at December 31, (0.9% as at December 31, ). The coverage ratio amounted to 124.7% as at December 31,, which is adequate for the Group. management policy on common standards for all banks of the Group and relies on the principle of risk analysis, evaluation, and independence of its monitoring from departments assuming the For more details on the risk profile please refer to page 174 of the Group s IFRS financial statements. credit risk. It operates a multilevel system for monitoring and limiting the assumed risk. Credit risk is the main risk for the Group. As at December 31,, the loan portfolio accounted for 63.8% of total assets (RUB billion of RUB billion). The Bank s risks associated with its loan portfolio are mostly concentrated in corporate loans segment which accounts for 62.9% of the loan portfolio. The mortgage loans comprise 30,0% of the Group s retail portfolio. Credit risk NPL, % Provision, % NPL colerage, % Corporate loans Small business loans to corporates Loans to individuals Total loans to customers STRATEGIC RISKS Strict compliance with the adopted strategic business expansion model within Otkritie FC; Coordination of Treasury, Risk Management, and Internal Audit activities. Additional developments in : The Bank s Management Board receives and reviews monthly progress reports on the achievement of business plan targets by business unit and by product; The Bank executed the new strategy and business plan without any material deviations from targets. Credit Risk for the year ended Cost of risk 0.9% 1.2% 0.9% 0.6% Restructured otherwise past due or Impaired loans In accordance with the IFRS, the Group maintains an allowance for impairment losses. For corporate loans, the allowance is determined on a case-by-case basis by risk management departments. The level of allowance for individually impaired loans is defined by risk management department taking into account the potential volume and time of recovery according to the developed woking plan with impaired loan. For the retail portfolio, the allowance amount is calculated based on historical losses, the number of days a loan remains overdue and other factors. For major loans, an individual risk assessment may be performed. Risk management departments regularly stress test the loan portfolio using different scenarios of macroeconomic developments. * The Group does not implement hedge accounting. Impaired loan

38 Risk Management Annual Report and Accounts CORPORATE AND INTERBANK LOANS RETAIL LOANS Making a decision on a loan involves a thorough evaluation of the financial standing and creditworthiness of each borrower and counterparty and analysis of their exposure to macroeconomic factors and regional market conditions. Exposure to each borrower is limited by sub-limits covering balance and off-balance risks. Furthermore, compliance with exposure limits is monitored across counterparties, industries, and types of financial instruments. The risk evaluation procedure and loans origination are regulated by a strict policy. When a prospective transaction with credit risk is initiated, the customer relationship manager first assesses its compliance with the Group s standards. The Bank s lending departments then review the purpose of the loan, the borrower s business (if applicable), financial standing and credit history, and evaluate the quality of the proposed collateral and compliance of the borrower s legal documents with legal requirements. The department responsible for credit risk analysis at the underwriting stage provides an independent opinion regarding the quality and adequacy of the completed review, the level of risk to be assumed, including the adequacy of the assigned credit rating, and feasibility of the proposed transaction structure. This department and major expert teams (including those authorised to evaluate collateral, review legal risks, etc.) are always independent from loanoriginating departments. Opinions by all involved departments are submitted to the relevant collegial body for a final decision regarding feasibility and terms and conditions of the loan transaction, including financial and non-financial covenants, preconditions and conditions precedent. The Group operates a multilevel lending decision-making system in which the decision are made by managers with different levels of seniority, depending on the transaction amount and its conditions. Project financing is always handled on a centralised basis by the Project Financing Investment Committee of the headquarters. The Group s policy requires loan collateral that could cover possible losses on a loan in case of the counterparty s default, considering the Bank s experience in selling such assets. The collateral policy and loan pricing are based on the client s internal credit ranking. For high-risk client segments, only secured loans are issued. Credit risk associated with other credit institutions is managed using conservative estimated exposure limits set by a collegial body upon its review of the counterparty s financial standing and business reputation as well as the Bank s conservative interbank lending policy. Counterparties creditworthiness is monitored on a monthly basis to develop recommendations on resetting existing limits. Loan quality is monitored by independent portfolio monitoring and risk management departments in a close coordination with the Bank s loan originating departments. In, the Bank completed full-scale implementation of the Early Warning System (EWS) to monitor credit quality of its corporate borrowers and to promptly identify any clients with a deteriorating credit profile. Any cases of such deterioration are immediately analysed and reviewed by the Bank s collegial bodies for handling bad assets. Impaired loans are reported to the Substandard Assets Management Directorate to mitigate the Bank s losses, including the legal protection of the Bank s interests in case of any conflicts. In, NOMOS-BANK launched an automated corporate loan conveyor, that will be deployed at branches by the end of The new software will save time on processing corporate loan applications and will enhance loan-monitoring quality, while ensuring strict compliance with the loan application review procedure. In, the Group also creating and developed statistic models for risk evaluation in terms of expected losses for medium enterprises segment. In 2014, it expects to further improve such tools. The Group s mostly sells its retail products through its corporate clients while Otkritie Bank also serves walk-in clients, providing loan portfolio diversification and full coverage of all client segments in the retail market. Retail loan risk are evaluated and monitored by the relevant departments. Mortgage decisions are based on client segmentation by risk level and offer the most favourable conditions to top clients. This results in a high percentage of approved applications in its target segments. Risk is measured based on the client s credit history with other banks, the size of the down payment, the financial position of the client and other parties, as well as other factors. All these measures facilitate to maintain relatively low level of NPLs for this portfolio LIQUIDITY RISK The day-to-day management of NOMOS s liquidity risk is carried out by the Treasury Department within the limits laid down by the Financial Committee. The Group distinguishes between short-term and long-term liquidity risk, both of which are subject to mandatory ratios set by the Central Bank of Russia and the Group s internal restrictions. 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 repurchase transactions. To minimise the risk of unforeseen cash outflow, the Bank has formed its treasury securities portfolio to have a proper liquidity buffer that could be used to secure financing from the Central Bank (i.e. securities on the Lombard List) or quickly sold in the market without any significant depreciation. Long-term liquidity risk is managed through structuring assets and liabilities in terms of their currency, maturities, and specific instruments. The Bank aims to maintain a reasonable level of highly liquid assets and complies with limits on a mismatch between assets and liabilities as well as with limits on exposure to individual counterparties and groups of affiliated counterparties. In, the Group sustained a well-balanced financing structure. It has access to repurchase auctions and to refinancing by Russia s Central Bank against market instruments (securities, precious metals) and non-market assets (commercial loans and guarantees by counterparty banks). Overdue debt processing is fully automated in the Group s retail business. In, the Group developed a strategy for substandard debt management and changed the incentive system for collection staff to boost the efficiency of recovery activities at every stage. In, the Russian Central Bank encouraged the development of financial stability recovery plans for credit institutions. The Group devised an emergency liquidity recovery plan based on previous successful handling liquidity crises. The plan factors in the existing organisational and functional structure, the actual business organisation, and stress test results

39 Risk Management Annual Report and Accounts 8.6. MARKET RISKS Market risk is the risk of losses on transactions with instruments due to the fluctuation of market prices, including interest rates, currency exchange rates, and securities prices (i.e. securities price risk). Otkritie FC for adequate evaluation of exposure concentration and limits reassignment among business segments and quick response to a higher risk for any counterparty. As at December 31, VaR for the Group, including Otkritie Bank OJSC: 8.7. OPERATIONAL RISKS Exposure (RUB million) Position Absolute VaR Relative VaR Currency risk (10,050) % Fixed income securities price risk 184,799 2, % Equity price risk % Total for securities with market risk evaluated based on VaR 185,243 2, % Sensitivity for non-liquid bonds 32,388 2,639 In the managing of its operational risks the Group relies on operational risk management standards required by the Basel Committee for Banking Supervision, relevant Russian laws, and recommendations by the Bank of Russia. Exposure to operational risk is reduced through harmonising banking procedures, insuring and outsourcing operational risks, improving IT systems, developing emergency recovery scenarios, and enhancing corporate governance. Market risk is managed on a day-to-day basis by departments responsible for trading in the financial markets and by risk management departments, which evaluate and monitor exposure to currency and price risks and submit proposals on how to manage this risk to the Financial Markets Investment Committee. In, the Bank added new analytical tools to manage its market risk, revamping the platform for structured products offered to corporate clients, including the revision of risk management policies and procedures. This project will continue in The Group uses several analytical tools, including value at risk (VaR) analysis, portfolio limits by asset class and liquidity, and scenario-based analysis is carried out on a regular basis. Currency risk is primarily managed through analysis of open positions and VaR both for financial markets and for the Bank in general. Currency positions are monitored based on macroeconomic indicators and take into account possible depreciation of the Russian rouble. All positions in excess of applicable limits are hedged. The Bank s policy is to maintain a wellbalanced FOREX position to minimise any exposure to fluctuations of the Rouble and the Central Bank s currency basket. VaR calculation does not include any instruments with insufficient trading history. For such instruments, risk is evaluated based on their sensitivity to interest rate fluctuations. To analyse sensitivity on non-liquid rouble-denominated bonds, the Group uses RPC (yield fluctuation) indicator based on present volatility of daily RGBEY fluctuations (Russian Government Bonds Effective Yield to Redemption) covering the period of 2 to 3 years. The Group assumes RPC for rouble-denominated bonds at 200 bp. Similarly, to analyse sensitivity of non-liquid USD denominated bonds, RPC is based on present volatility of daily USGG5YR Index fluctuations. Overall portfolio sensitivity is an aggregate of individual sensitivities of debt instruments in the portfolio. The Group assesses its exposure to interest risk using gapanalysis, which determines assets sensitivity to interest rate fluctuation and obligations with certain time remaining to maturity or revaluation within certain range. This method is used to evaluate the Group s exposure to interest risk in general. The Bank s Financial Committee manages interest risks by streamlining assets and liabilities by maturities and interest rates and setting ceiling or floor interest rates for raising or investing funds based on gap analysis and analysis of the Bank s interest margin change scenarios. Scenario analysis and stress tests examine potential effects on the Group from changes in market conditions. Additional tests are done for non-liquid instruments and instruments with an indefinite maturity. In addition to base case scenarios, the Group also analyses the worst case scenario. Stress tests involve an imitation model. Financial markets credit risks are managed based on the risk evaluation methodology and setting limits by types of counterparties and transactions. In, committees of Otkritie FC banks started setting limits for issuers, counterparties, and portfolios in a coordinated manner. Currently, the Bank relies on aggregated information about applicable limits and its usage by all banks of The Group identifies, evaluates, and continuously monitors operational risks associated with its business and takes measures to immediately eliminate sources of such risks. It has established a system for gathering and analysing information required to evaluate the Bank s operational risks, including databases for operational losses and events connected with operational risks. In, this system was revamped and improved ANTI-MONEY LAUNDERING AND COUNTER-TERRORIST FINANCING PROCEDURES The Group has developed a comprehensive system of internal controls system to implement anti-money laundering and counter-terrorist financing procedures. Such initiatives involve the Group s Management Board, its top managers, the Financial Monitoring Department, authorised employees of the headquarters departments, and branches. Changes in anti-money laundering and counter-terrorist financing laws in triggered respective amendments to the Group s internal regulations and programmes. Integration with Otkritie Bank opened up an opportunity to use the most efficient components of the two banks compliance procedures in implementing know your customer procedures and preventing any suspicious transactions. To reduce the risk of involvement in improper business relations, the Bank introduced a screening procedure for all new clients (i.e. when a new account is opened, a bank guarantee is issued, or other services are rendered)

40 Risk Management Annual Report and Accounts 8.9. LEGAL AND REPUTATIONAL RISKS PRIORITIES Legal risk management includes an expert assessment of the Group s contracts and documentation, implementation of standard agreements and procedures, internal dissemination of information on legislative changes and legal advice and consultancy for the operating units. Reputational risk management is concerned with maintaining a favourable brand image and reputation in the media and among counterparties. In 2014, NOMOS will prioritise further unification of risk management methodologies at Otkritie FC banks. The Group will also continue to develop a risk-based internal incentive system. The Bank provides efficient channels for customer complaints and feedback. The Public Relations department communicates with the media to explain the Group s core business, as well as its sponsorship and charity programmes. In 2014, the Group will take further steps to minimise its reputational risks in the financial markets. It will introduce a standard for disclosing respective beneficiaries of clients and counterparties STRATEGIC RISKS In, the Bank carried out its business in line with the strategic Deviations from the Bank s strategic targets are analysed on model and budget approved by the Group s Board of Directors a monthly basis and are submitted to the Bank s Management and the Supervisory Board. As part of this model, NOMOS-BANK Board for review. Performance by business segments and focuses on enhancing its corporate and investment businesses, individual products is also analysed every month. Any significant Otkritie Bank focuses on retail, while the Bank of Khanty-Mansiysk deviations from the adopted strategy are analysed to identify proceeds as a universal bank with in-depth regional specialisation. its causes (internal and external). This analysis enables the Bank s Management Board to adjust the strategy and the business plan. This approach to developing its banking business allows to mitigate In, the Bank implemented its strategy and business plan operational risks associated with the fast growth and expansion of without any material deviations from the set targets. various business segments minimising competition for resources within the same entity while also supporting a diversified revenue structure at the Group level and centralised coordination among Treasury, Risk Management, and Internal Audit departments. The Group will continue groundwork for the introduction of Basel II requirements, developing models for quantitative risk evaluation and other Basel II components (capital management and disclosures). In 2014, corporate loans department will also introduce an automated loan system at NOMOS-BANK branches and will further improve overdue debt handling methodology, including the development of an early warning system for investment projects, project financing. In the retail business, the focus will be on fraud prevention through external credit histories and biometric checks. As the level of household debt continues to rise, the Group will prioritise the improvement of overdue debt collection and broadening customer relations before a default occurs. The Group expects to introduce a new IT solution to set flexible debtor relations strategies for each customer segment. In small business lending, the key focus will be on upgrading the technology side of all processes, reducing operational and credit risks through automated loan applications and improving sales management. The Group strives to balance process standardisation and a client-oriented approach. The shift towards non-price competition with a focus on fast decision-making and superior quality of customer services will allow the Group to preserve its rigorous risk management standards. Regarding market risks, the key priority is the further unification of limit-setting policies and risk reports within the banking group, including the introduction of an automated monitoring system for position limits on financial operations within the Group. The creation of a platform for structured products business will be another major project in In 2014, the Group will expand the functions of the Financial Monitoring Department by adding a compliance control system. The Department will develop a compliance strategy and will further improve disclosure of beneficiaries of the Bank s clients and counterparties. The Group will continue to monitor emerging trends in the banking regulation and will cooperate with the Central Bank, in particular within the frameworks of the Russian Banks Association task forces for developing new approaches to banking regulation and analysing international practices. In 2014, the Group s risk management departments will focus on the Central Bank s draft proposals for introducing advanced approaches based on internal ratings and Basel III requirements related to capital and liquidity management

41 Annual Report and Accounts The Group achieved notable progress and success thanks to our highly professional team and the right choice of long-term development strategy 9.1. EFFICIENT CORPORATE GOVERNANCE FRAMEWORK NOMOS-BANK s corporate governance operates on the principle of strict compliance with Russian law and recommendations of the Russian Federal Financial Markets Service and relies on best practice, including aspects of the Combined Code of Corporate Governance. 9 Corporate Governance 9.1 Efficient Corporate Governance Framework 9.2 Share Capital 9.3 General Shareholders Meeting 9.4 Supervisory Board Structure and Proceedings 9.5 Supervisory Board Resolutions in 9.6 Management Board 9.7 Risks Committee 9.8 Audit Committee 9.9 Nominations and Remuneration Committee The Bank discloses information on all material events and facts that concern its business and may influence the Bank s share price, including the details of its shareholding structure (ultimate beneficiaries), and its IFRS and RAS financial statements as required by the Bank of Russia, Stock Exchange MICEX CJSC where the Bank s shares and bonds are listed (A1 list), UK FSA, and the London Stock Exchange (where NOMOS-BANK remains listed). Among eight members of the Supervisory Board are three independent Directors and four non-executive Directors Early in, the Supervisory Board formed three committees: the Audit Committee, the Nominations and Remuneration Committee, and the Strategic Committee; in October, the Risks Committee was formed. The Supervisory Board determines the priority business segments of the Bank and develops and maintains necessary controls over the Bank s executive bodies. To ensure efficient governance, the Bank s executive bodies are highly autonomous. Without due reason the Supervisory Board or the shareholders may not interfere with the routine proceedings of the Bank s executive bodies thereby limiting their ability to handle in a timely fashion any issues related to the Bank s day-to-day operations. The Bank s Board and its President respect their responsibility to the shareholders and see their key objective in diligently discharging their duties associated with managing the day-to-day operations of the Bank to ensure the Bank s profitability and value for investors in the long term. The Bank s Board is chaired by its President and develops a system of clear and pre-defined criteria and procedures for the appointment and replacement of heads of the Bank s departments, an efficient remuneration system, and programmes for training the Bank s employees and improving the level of their skills. The Bank ensures timely and accurate disclosure of material issues related to the Bank s business by complying with legal requirements. The Bank s corporate governance structure maintains an adequate balance between governing bodies, assigns responsibilities, and delegates general governance functions to be carried out by the shareholders and the Supervisory Board and the routine management exercised by the Bank s executive bodies. To further the interests of its shareholders, creditors, clients, business partners, and counterparties, the Bank monitors its compliance with the Corporate Governance Code on an ongoing basis. Ruben Aganbegyan Chairman of Supervisory Board 80 81

42 Annual Report and Accounts CORPORATE GOVERNANCE SCHEME AUDIT COMMITTEE GENERAL SHAREHOLDERS MEETING RISK COMMITTEE SUPERVISORY BOARD APPROVES THE DIRECTOR NOMINATION AND REMUNERATION COMMITTEE PRESIDENT MANAGEMENT BOARD INTERNAL AUDIT DEPARTMENT 82 83

43 Corporate Governance Annual Report and Accounts 9.2. SHARE CAPITAL Since its inception, the Bank has carried out twenty-five issues of common shares and three preferred share issues. Currently, the Bank s share capital consists of 121,014,286 common registered shares and 12,100,000 preferred registered shares with no fixed dividend. The par value of each common and of each preferred share is RUB 50. Common and preferred shares vest in their holders rights as provided by the Joint-Stock Companies Law and the Bank s Articles of Association. All preferred shares are held by a whollyowned subsidiary of the Group. As at April 7, 2014, the Bank s free float was 25.1% of its voting shares in the form of local shares and global depositary shares (with one GDR representing two common shares) listed on both the London and Moscow Stock Exchange. According to applicable Russian law, the Depository Bank may exercise voting rights on behalf of global depository receipts (GDR) holders at the General Shareholders Meeting, provided that such holders or any other persons willing to exercise their rights attached to the Bank s GDRs issued their voting instructions for the aforementioned General Shareholders Meeting, and that the Bank was notified of such persons specifying the number of the shares represented by the GDRs held by each of them. Deutsche Bank Aktiengesellschaft has acted as the Depository Bank under the Depository Agreement with the Bank dated February 21, The Bank s shareholding structure is shown on its website as a flowchart and a list of persons who (directly or indirectly) have material influence on the decisions made by the Bank s governing bodies; the list contains details of the major holders of the Bank s shares (see An Annual General Meeting (AGM) was held on May 29,. At the date of the AGM record date, the number of the Bank s shareholders was 89. Shareholders were notified of the AGM in a manner and within the term required under the Joint-Stock Companies Law and the Bank s Articles of Association. As required according to applicable laws, materials for the AGM were made available for their review by the shareholders at the Bank s headquarters 20 days before the date of said meeting. The meeting was arranged as a physical one, voting was by ballot and by representatives of Computershare Registrator CJSC who maintain the register of shareholders of the Bank and act as the Voting Committee. Shareholders who hold in aggregate 87,970,215 voting shares (representing % of the total number of votes held by the persons entitled to attend the Meeting) voted at the AGM. In, in addition to the AGM, four extraordinary General Shareholders Meetings (EGM) were held, including two arranged by correspondence. Such EGMs mainly resolved: the election of new members to the Bank s Supervisory Board; the reorganisation of the Bank through consolidation of its two regional credit subsidiaries, i.e. NOMOS-REGIONBANK OJSC (city of Khabarovsk) and NOMOS-BANK Siberia (city of Novosibirsk); and the approval of related-party transactions associated with the offering of the additional issue of the Bank s shares SUPERVISORY BOARD STRUCTURE AND PROCEEDINGS 9.3. GENERAL SHAREHOLDERS MEETING The Bank s General Shareholders Meeting is the supreme Within the scope of their authority, shareholders may: governing body of the Bank. Amend or supplement the bank s articles of association, and An annual General Shareholders Meeting is held at least two approve revised articles of association; months and up to six months after the end of each fiscal year. Determine the number of members of the bank s Supervisory An extraordinary Shareholders Meeting may be held upon the Board, elect and remove its members; request of the Bank s Supervisory Board, its Auditor, the Internal Elect and remove members of the bank s internal audit Audit Commission, or shareholders holding at least 10% of the total commission; number of the Bank s voting shares. Approve the bank s auditor; Pay/declare dividends; Approve annual reports, annual financial statements, including the bank s income statement; Approve major and related-party transactions; Increase the bank s authorised capital; Pass other resolutions as may be provided by applicable laws on joint-stock companies. The Supervisory Board is one of the key tools of the Bank s corporate governance involved in matters 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 according to the time schedule approved by the Supervisory Board, or as necessary by the Supervisory Board s Chairman, or as requested by any member of the Supervisory Board, the Bank s Internal Audit Commission, its Auditor, President, or the Board. Members of the Supervisory Board are elected at the General Shareholders Meeting. The extraordinary General Shareholders Meeting held on February 27, re-elected eight members of the Supervisory Board: Vadim Belyaev, Ruben Aganbegyan, Dmitry Romaev, Alexey Karakhan, Mikhail Belyaev, Dmitry Vasiliev, Dmitry Mizgulin, and Alexander Zelenov. Ruben Aganbegyan who chairs the Board of FC Otkritie was elected Chairman of the Supervisory Board. On May 29,, the annual General Shareholders Meeting re-elected the same members of the Supervisory Board as detailed above. Three of the total eight Directors are independent Directors; another four are non-executive Directors. All Directors were nominated by the Supervisory Board for the election at the General Shareholders Meeting based on the recommendations of the Supervisory Board s Nominations and Remuneration Committee. On October 28,, an extraordinary General Shareholders Meeting elected the following eight members of the Supervisory Board: Vadim Belyaev, Ruben Aganbegyan, Dmitry Romaev, Alexey Karakhan, Denis Stepanov, Dmitry Vasiliev, Alexander Zelenov, and Dmitry Mizgulin. Ruben Aganbegyan was re-elected Chairman of the Supervisory Board

44 Annual Report and Accounts SUPERVISORY BOARD MEMBERS Ruben AGANBEGYAN Vadim BELYAEV Dmitry VASILIEV Denis STEPANOV Dmitry ROMAEV Chairman of Supervisory Board Member of the Supervisory Board Member of the Supervisory Board Independent member of the Supervisory Board Member of the Supervisory Board; CEO of NOMOS-BANK Mr. Aganbegyan was appointed Chairman of the Supervisory Board in. He is a member of the Risks Committee and the Audit Committee of the Supervisory Board. Mr. Aganbegyan is the CEO of Otkritie Financial Corporation and the Chairman of its Board. He is a member of the Board of Directors of the Non-profit Organisation National Association of Securities Market Participants and that of the Russian Union of Industrialists and Entrepreneurs. Mr. Aganbegyan sits on the Board of Brunswick Rail, Rostelecom OJSC, and the Russian Exchange Union. Before joining Otkritie, Ruben headed the Moscow Exchange. During his career, he has held various executive positions with Renaissance Capital IC, Troika Dialog IC, and Credit Suisse First Boston. Mr. Aganbegyan graduated from Moscow State Law Academy in Mr. Belyaev has been on the Supervisory Board since ; he is also a member of the Strategic Committee of the Supervisory Board. He chairs the Management Board and is CEO and member of the Board of Directors of Otkritie FC OJSC. Vadim Belyaev founded Otkritie FC in 1997 and today he is the major shareholder of the Corporation (with 24.93% stake). After graduating from Moscow State Institute of Radio Engineering, Electronics and Automation in 1989, Mr. Belyaev obtained his degree in economics from the Finance Academy under the Government of Russia in He is the Chairman of the Board of Gift of Belief fund, supporting incurably ill children. Mr. Vasiliev has been Member of the Supervisory Board since and is also a member of the Board of Directors of USRF (the U.S. - Russia Foundation for Economic Advancement and the Rule of Law) (Washington, D.C., USA), he also serves as Managing Director of the Institute of Corporate Law and Management, Autonomous Non-profit Organization (Moscow, Russia). In 2007, Mr. Vasiliev graduated from the Chartered Institute for Securities and Investment under authorisation of the Financial Services Authority (FSA) (London, UK). He has been approved to act as a professional investment consultant on the UK securities market. In 1994, he completed his Securities Market Development and Regulation studies at the International Institute for Securities Market Development (Washington D.C., USA). Mr. Vasiliev received his degree in Economics from the N.A. Voznesenskiy Leningrad Institute of Finance and Economics majoring in National Economy Planning in A member of the Supervisory Board since, Stepanov also sits on the Audit and Risks Committees of the Supervisory Board. He is currently President of Central Properties. Throughout his career he worked for Arthur Andersen and Alfa Bank; later, he served as Deputy Chairman of the Board and CFO at Zenit Bank. Since 2002, Stepanov has engaged in real estate projects via his company, Central Properties. In 1995, he graduated from the National Economy Academy of the Russian Government with major in Finance and Credit. In 1992, he obtained his degree in Computer-Aided Design from Moscow Machines and Tools Engineering University. Mr. Romaev has been a member of the Supervisory Board since ; he is also a member of the Strategic Committee of the Supervisory Board. He serves as CEO and Chairman of the Board of NOMOS-BANK CJSC, Chairman of Novosibirskiy Municipal Bank OJSC. Mr. Romaev also sits on the Board of Directors of Otkritie FC and Bank of Khanty-Mansiysk. Over the years, Mr. Romaev was a member of the Board and the CFO of Otkritie Financial Corporation. Before joining Otkritie, he held various positions in Sberbank of Russia, KIT Finance Investment Bank OJSC, and Petrocommerce Bank OJSC. In 1999, Mr. Romaev received his MBA from the Dublin Business School. In 1995, he graduated from the Finance Academy of the Russian Government with major in Economics of Banking. In 1993, he got his IT degree from the Tula State Engineering University

45 Annual Report and Accounts SUPERVISORY BOARD MEMBERS 9.5. SUPERVISORY BOARD RESOLUTIONS IN In, one of the key resolutions passed by the Supervisory Board was to elect Mr. Dmitry Romaev CEO of NOMOS-BANK. Alexey KARAKHAN Member of the Supervisory Board Mr. Karakhan has been a member of the Management Board and Supervisory Board since ; he is also a member of the Nominations and Remuneration Committee of the Supervisory Board. Mr. Karakhan is the Managing Director and Deputy CEO for Strategic Communications of Otkritie Financial Corporation and a member of the Board of Directors of Otkritie Brokerage House, Otkritie Management company LLC, Otkritie Insurance OJSC, Otkritie Capital LLC, Bank Otkritie OJSC. During his career, Mr. Karakhan was a Deputy President of Aton, Advisor to the President of Business Russia, and PR Director of Renaissance Capital. Mr. Karakhan graduated from Lomonosov Moscow State University majoring in Journalism in Alexander ZELENOV Independent member of the Supervisory Board Mr. Zelenov has been an independent Director of the Supervisory Board since 2009; he is also a member of the Risks Committee and Audit Committee of the Supervisory Board. He is the Director of the Financial Institutions Department of State Corporation Bank for Development and Foreign Economic Affairs (Vnesheconombank). Mr. Zelenov is also a member of the Board of Directors of GLOBEX Commercial Bank, a member of the Supervisory Board of Joint-Stock Company Commercial Industrial and Investment Bank (Ukraine), a member of the Board of Directors of Russian Standard Bank. Mr. Zelenov graduated from Moscow Financial Institute majoring in International Economic Relations in Mr. Zelenov has a professional degree of certified Director awarded by the UK Institute of Directors. Dmitry MIZGULIN Member of the Supervisory Board Mr. Mizgulin has been a member of the Supervisory Board since He is the President and Chairman of the Management Board and a member of the Board of Directors of the Bank of Khanty- Mansiysk. Mr. Mizgulin has over 20 years of banking experience; he has worked for the Bank of Khanty-Mansiysk since He graduated from the Leningrad Institute of Finance and Economics in 1984 and has PhD in Economics. Mr. Mizgulin was awarded a title of Honoured Economist of Russia. Throughout the year, the Supervisory Board considered a number of other significant issues, including: Decision-making associated with the Bank s reorganisation through the consolidation of NOMOS-REGIONBANK OJSC (the city of Khabarovsk) and NOMOS-BANK Siberia OJSC (the city of Novosibirsk), including but not limited to, regarding provisional authorisation of the consolidation agreement and transfer certificates; approval of share conversion ratios; the convening of n extraordinary General Shareholders Meeting; setting the price for the share purchase from the shareholders who voted against the resolution to reorganise or did not participate in the Meeting; approval of the relevant issue documents; Authorisation of the public offering of the Bank s additional shares at MICEX; determining the offering price and other issue parameters; approval of the relevant issue documents; Reorganisation of certain branches of the Bank as operations offices in order to streamline the Bank s branch network; Continuing efforts to enhance the Bank s internal control and audit to assist its governing bodies in ensuring efficient and highperformance financial and business operations. Preparation for the annual General Shareholders Meeting, including: Provisianal approval of the annual report and annual financial statements of the Bank for the year ; Issuing recommendations regarding distribution of the Bank s net profit; Approval of the Bank s IFRS quarterly statements Nomination of the Bank s Auditor; Issuing recommendations regarding the Auditor s remuneration. Convening extraordinary General Shareholders Meetings of the Bank: approval of agendas; setting the record day for the list of persons authorised to attend the Meeting; approval of voting ballots and the set of documents to be submitted to the shareholders; and transacting other matters associated with preparing and convening the Meeting; Authorisation of an agreement for the maintenance of the Bank s shareholders register with a new registrar, Computershare Registrator CJSC; Review and approval of the Bank s RAS and IFRS financial statements; Review of quarterly reports by the supervisor of the Bank s professional activities in the securities market and the supervisor of the Bank s specialised depository in the securities market; Review of reports on the operation of and approval of work scopes for the Internal Audit

46 Corporate Governance Annual Report and Accounts MANAGEMENT BOARD MEMBERS 9.6. MANAGEMENT BOARD According to the Bank s Articles of Association, the Bank s President chairs the Management Board as part of his/her job duties. The Management Board manages the Bank s day-to-day operations within the scope of the authority set out by the Bank s Articles of Association, the Management Board Regulations, and other in-house regulations of the Bank. The key objective of the Management Board is to ensure the Bank s top performance, notably, to generate profit, increase assets, and protect the rights and legitimate interests of the Bank. Within the scope of its authority, the Bank s Management Board may: Ensure the compliance with the resolutions passed by the general meeting of the bank s shareholders and the Supervisory Board of the bank; 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, streamlining business operations, developing and introducing new banking services; Review reports by the heads of the bank s departments, branches, and representative offices, and issue proposals to streamline their operations; Approve the bank s in-house regulations on matters within the scope of its authority, save any in-house documents to be approved by the general meeting of the bank s shareholders, the Supervisory Board, or the President; Develop a system for evaluating the bank s internal controls, and for following-up on rectification of any identified failures or defects of internal controls and measures taken to rectify them; Monitor the compliance by the bank, its branches, and representative offices of russian laws and regulations; Develop efficient systems for information transfer and exchange to ensure the required information is communicated to parties concerned; and Transact other business as may be provided by the bank s articles of association and in-house regulations. The Bank s Management Board meets weekly, either physically or by correspondence, as the Chairman of the Board may determine. A total of 52 meetings were held in. The percentage of NOMOS-BANK voting shares held by the members of the Supervisory Board and the Management Board: Vadim Belyaev indirectly controls 19.42% of the Bank s voting shares; Ruben Aganbegyan indirectly controls 7.74% of the Bank s voting shares; Dmitry Romaev indirectly controls 3.25% of the Bank s voting shares; Alexey Karakhan indirectly controls 1.58% of the Bank s voting shares. Dmitry ROMAEV President, Chairman of the Management Board, and member of the Supervisory Board Mr. Romaev has been a member of the Supervisory Board since ; he is also a member of the Strategic Committee of the Supervisory Board. He serves as President and Chairman of the Management Board of NOMOS-BANK CJSC, Chairman of Novosibirskiy Municipal Bank OJSC. Mr. Romaev also sits on the Board of Directors of Otkritie FC and Bank of Khanty-Mansiysk. Over the years, Mr. Romaev has been a member of the Board and the CFO of Otkritie Financial Corporation. Before joining Otkritie, he held various positions in Sberbank, KIT Finance Investment Bank OJSC, and Petrocommerce Bank OJSC. In 1999, Mr. Romaev received his MBA from the Dublin Business School. In 1995, he graduated from the Finance Academy of the Russian Government with major in Economics of Banking. In 1993, he got his IT degree from the Tula State Engineering University. Irina GORDEEEVA Deputy CEO, member of the Management Board, Head of Corporate Business Ms. Gordeeva is also a member of the Board of Directors of the Bank of Khanty- Mansiysk. Since 1998, she has held various executive positions with NOMOS-BANK; between 2005 and 2009, she was Senior Vice President of NOMOS-BANK. Ms. Gordeeva received her degree in International Economic Relations from Moscow State University of International Relations (MGIMO) in 1979 followed by a PhD in Economics. Elena BUDNIK Deputy Chairman of Management Board, Head of Retail and Small Business Banking Until March, Elena was Senior Vice President of NOMOS-BANK. Between February and December she headed retail business of Otkritie Bank to be promoted to Deputy Chairman of the Management Board of Otkritie Bank. Before joining the Bank, Ms. Budnik worked for Barclays Bank, OTP Bank, and MDM Bank. She received her degree in Economics from Lomonosov Moscow State University in The key objective of the Management Board is to ensure the Bank s top performance, notably, to generate profit, increase assets, and protect the rights and legitimate interests of the Bank

47 Annual report Annual Report and Accounts MANAGEMENT BOARD MEMBERS 9.7. RISK COMMITTEE The Risks Committee evaluates the Bank s risk management, monitors key risk indicators and risk resilience. The Committee controls the Bank s risk appetite by analysing and setting maximum tolerance levels for certain risks, in particular, credit and market exposure risk limits, and monitors the general overall risk profile of the Group. The Risks Committee of the Supervisory Board is chaired Viktor TYUTIN CFO, member of the Management Board Mr. Tyutin joined NOMOS-BANK in 1996 and served as Chief Accountant and Senior Vice President. His career in accounting and finance started in Viktor received his degree in Automated Management Systems from Moscow Physics and Engineering University in Alexander ROYKO Senior Vice President, member of the Management Board, Head of Structured and Project Financing and Leasing, member of Board of Directors of Bank of Novosibirskiy Municipal Bank Mr. Royko started his career in NOMOS- BANK in 2002 and served as Advisor to the Head of Advisory and Research Office of the Bank s CEO and Management Board, Vice President, and Senior Vice President. Before joining NOMOS-BANK, he was Deputy General Director of Rospechat OJSC. He graduated from Moscow Engineering University of Telecommunication and IT in 1992 majoring in Economics and Telecommunications. Anatoly PREDTECHENSKY Member of the Management Board, member of Board of Directors of NOMOS- BANK, member of Board of Directors of Otkritie Bank Mr. Predtechensky has been with Otkritie FC since 2008 in the positions of Deputy CEO, Deputy Chairman of the Management Board, and Advisor to the Senior Deputy Chairman of the Management Board. Before joining Otkritie, he worked for Inteza, TransCreditBank, Rossiysky Credit and Russobank. In 2000, he received his honours degree from the Finance Academy of the Russian Government. Between 1998 and 1999 he studied financial management at Notre Dame de la Paix (Belgium) under the Russian President s scholarship programme. He has a PhD in Economics. by an independent Director; most members are also independent Directors. Based on the general experience of previous liquidity crises and their handling by banks and taking into account the Bank s organisational and functional structure, the Risks Committee adopted an emergency liquidity recovery plan, the guidelines of the Bank of Russia Recommendations No. 139-T «On Credit Institutions Liquidity Analysis», and best liquidity management practices. The liquidity recovery plan contains the means to determine liquidity reserves and the period during which the Bank may continue its operations uninterrupted (determining liquidity risk appetite) as well as indicators of liquidity crisis threats, liquidity forecasting methods in worst case scenarios in key business segments, and liquidity recovery measures in case of an emergency. MEMBERS OF THE RISKS COMMITTEE OF THE SUPERVISORY BOARD: Dmitry Vasiliev (Chairman of the Committee) In, the Risk Committee focused on managing risk levels, enhancing risk identification and classification procedures, and recommending risk mitigation measures Ruben Aganbegyan Alexander Zelenov (independent member of the Supervisory Board) Denis Stepanov (ndependent member of the Supervisory Board) 92 93

48 Corporate Governance Annual Report and Accounts 9.8. AUDIT COMMITTEE The Audit Committee oversees three main areas: financial statements and accounting policies; internal controls; and internal and external audits. Most members of the Audit Committee are independent Directors NOMINATION AND REMUNERATION COMMITTEE The Nomination and Remuneration Committee assists the Supervisory Board in making HR-related decisions. The Audit Committee is exclusively authorised to evaluate nominees to the Bank s Auditors and prepare its recommendations to the Supervisory Board to be approved by the General Shareholders Meeting, review the Auditor s reports, evaluate performance of the Bank s internal controls, and draft proposals to enhance such controls. In, the Audit Committee conducted quarterly comprehensive reviews of the consolidated performance of NOMOS and the standalone performance of NOMOS-BANK and the Bank of Khanty- Mansiysk as its largest subsidiary. The Audit Committee reviewed the Bank s management reports with focusing on market trends and their impact on the Bank s business and carried out a comparative analysis of the key target financial indicators of the Bank, monitored share price forecasts, and oversaw the achievement of targets. The Bank s Auditor participated in all meetings of the Audit Committee who reported to the Committee members on the findings of such quarterly reviews and audits of the consolidated annual financial statements of NOMOS for fiscal year. In, the Audit Committee of the Supervisory Board nominated Deloitte & Touche CIS to be elected as Auditor at the annual General Shareholders Meeting. The Audit Committee also issued its review of the Auditor s report on NOMOS that was submitted as part of the package for the annual General Shareholders Meeting. The Audit Committee contributed to the further enhancement in of the Bank s internal controls. In the internal audit area, the Audit Committee reviewed the plan and operations reports on the Bank s Internal Control; regular reports by the Bank s Internal Control on major identified breaches, errors, and deficiencies in the operations of NOMOS-BANK and its subsidiaries; and details of follow-up activities to comply with such recommendations and rectify such breaches. In, the Nomination and Remuneration Committee nominated members to the Supervisory Board and Internal Audit Committee of the Bank and approved the draft engagement letter to independent Directors. It also provided its recommendations regarding the remuneration of independent members of the Supervisory Board and the Internal Audit Commission and the refundable disbursements of Supervisory Board members connected with participating in meetings to be approved at the annual General Shareholders Meeting. In May, the annual General Shareholders Meeting approved the maximum total remuneration and compensations to all Supervisory Board members to the amount of RUB 50 million for the year. The remuneration paid to the Supervisory Board members totalled RUB 7.8 million. As recommended by the Nomination and Remuneration Committee, the remuneration was only paid to independent Directors. Total salaries and bonuses paid and accrued by NOMOS-BANK to its Management Board members during amounted to RUB million. NOMOS-BANK did not make any retirement schemes contributions or pay any retirement or similar allowances to its Directors or executives in. In, the Nomination and Remuneration Committee met once. In addition to this formal meeting, members of the Committee had a umber of meetings with the Bank s management to discuss dayto-day business. Total salaries and bonuses paid and accrued by NOMOS-BANK to its Management Board members during amounted to RUB million AUDIT COMMITTEE MEMBERS: Dmitry Vasiliev (Chairman of the Committee; independent member of the Supervisory Board) Ruben Aganbegyan Denis Stepanov Alexander Zelenov NOMINATION AND REMUNERATION COMMITTEE MEMBERS: Ruben Aganbegyan (Chairman of the Committee) Alexey Karakhan The renumeration paid to the Supervisiory board members totalled RUB 7.8 million in Dmitry Vasiliev 94 95

49 Abbreviations Annual Report and Accounts 10. ABBREVIATIONS AFS Available For Sale financial assets ATM An automated teller machine or automatic teller machine BKM Bank of Khanty-Mansiysk CBR Central Bank of Russia CEO Chief Executive Officer CIR Cost income ratio represents the sum of operating expenses divided by the sum of operating income before gain on remeasurement of cash flows, provision for impairment losses on interest bearing assets and provision for impairment losses on other transactions COR Cost of Risk ratio represents the provision on impaired loans to customers divided by the average balance of gross loans to customers in the ame year Credit conveyor Credit applications processing system, an automated workflow system for the processing of credit applications based on IBM BPM. Coupled with a recently implemented scoring solution from Experian, this system is expected to provide NOMOS with advanced IT and business intelligence support for credit applications processing. The system was successfully implemented for consumer retail loans in head office and all branches in May 2011, and was extended for corporate segment in October. In NOMOS plans to implement the «credit conveyer» system to small business segment EGM Extraordinary General Meeting ERP Enterprise Resource Planning ETD Electronic Trade Derivatives FVTPL Financial assets at fair value through profit or loss GDP Gross domestic product GDR Global Depositary Receipt GTB Global Transaction Banking HKEX Hong Kong Stock Exchange HTM Held to Maturity investments IAD Internal Audit Department IFRS International Financial Reporting Standards LBMA London Bullion Market Association Liquid assets include cash and cash equivalents, mandatory cash balances with Bank of Russia, financial assets at fair value through profit and loss, due from other banks and investments available for sale Loan factory the centralized technology on processing of loan applications provided by small business clients. The Loan factory includes the centralised and unified processing and decision making principles tailored to small businesses demand and are automated based on uniform IT platform of the Bank LSE London Stock Exchange LTD Lloan to deposits ratio MICEX Moscow Exchange NASDAQ National Association of Securities Dealers Automated Quotation NIM Net interest margin is calculated as net interest income before provision for impairment losses on interest bearing assets divided by the average balance of such interest bearing assets NOMOS Incorporates NOMOS-BANK and its subsidiaries including BKM NOMOS-BANK Incorporates NOMOS-BANK stand alone NPLs Non-performing loans, that are 90+ days overdue. NPLs Coverage ratio the ratio is calculated as loan loss provision divided by total gross NPLs NYSE New York Stock Exchange OFZ Government bonds issued by the state of Russia OTC market Over-the-Counter market Revenue Revenue is calculated as operating income excluding provision for impairment losses on interest bearing assets and allowance for impairment losses on other transactions RM Risk Management RoAA Return on average assets is calculated as NOMOS Bank s net profit for the year divided by the average balance of its total assets RoAE Return on average equity is calculated as NOMOS s net profit attributable to equity holders of the parent divided by the average balance of equity attributable to equity holders of the parent RPC Rate percentage (points) change RUB Russian Rouble Share of wallet The amount of customers total spending SME Small and medium enterprises USD The United States dollar 96 97

50 Annual Report and Accounts 11.1 CONSOLIDATED FINANCIAL STATEMENTS OPEN JOINT-STOCK COMPANY NOMOS-BANK STATEMENT OF MANAGEMENT S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER Management is responsible for the preparation of the consolidated financial statements that presents fairly the financial position of Open Joint-Stock Company NOMOS-BANK (the Bank ) and its subsidiaries (the Group ) as at and the consolidated results of its operations, cash flows and changes in shareholders equity for the year then ended, in compliance with International Financial Reporting Standards ( IFRS ). 11 In preparing the consolidated financial statements, management is responsible for: Properly selecting and applying accounting policies; Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information; Providing additional disclosures when compliance with the specific requirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the Group s consolidated financial position and financial performance; Stating whether IFRS has been followed, subject to any material departures disclosed and explained in the consolidated financial statements; and Making an assessment of the Group s ability to continue as a going concern. Appendix 11.1 Consolidated financial statements Management is also responsible for: Designing, implementing and maintaining an effective and sound system of internal controls, throughout the Group; Maintaining adequate accounting records that are sufficient to show and explain the Group s transactions and disclose with reasonable accuracy at any time the consolidated financial position of the Group, and which enable them to ensure that the consolidated financial statements of the Group comply with IFRS; Maintaining statutory accounting records in compliance with legislation and accounting standards of the Russian Federation ( RF ); Taking such steps as are reasonably available to them to safeguard the assets of the Group; and Preventing and detecting fraud and other irregularities. The consolidated financial statements of the Group for the year ended were authorized for issue by the Supervisory Board of the Bank on 3 April On behalf of the Supervisory Board President 3 April 2014 Moscow Chief Accountant 3 April 2014 Moscow 99

51 Independent auditors report Annual Report and Accounts INDEPENDENT AUDITORS REPORT Opinion To: Shareholders and the Board of Directors of Open Joint-Stock Company NOMOS-BANK We have audited the accompanying consolidated financial statements of Open Joint-Stock Company NOMOS- BANK and its subsidiaries (collectively the Group ), which comprise the consolidated statement of financial position as at and the related consolidated income statement, consolidated statement of other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s Responsibility for the Consolidated Financial Statements In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as at and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. 3 April 2014 Moscow, Russian Federation Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error. Ploutalova Svetlana Evgenyevna, Partner (certificate no dated 19 March ) Auditor s Responsibility ZAO Deloitte and Touche CIS Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with Russian Federal Auditing Standards and International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. The Entity: OPEN JOINT-STOCK COMPANY NOMOS-BANK Certificate of state registration 2209 dated Certificate of registration in the Unified State Register for legal entities registered before 1 July , of , issued by Moscow Interdistrict Inspectorate of the Russian Ministry of Taxation 39. Address: Russia, , Moscow, Verkhnyaya Radishevskaya 3, bld. 1 Independent Auditor: ZAO Deloitte & Touche CIS Certificate of state registration , issued by the Moscow Registration Chamber on Certificate of registration in the Unified State Register of , issued by Moscow Interdistrict Inspectorate of the Russian Ministry of Taxation 39. Certificate of membership in «NP «Audit Chamber of Russia» (auditors SRO) of , ORNZ

52 Consolidated financial statements Annual Report and Accounts CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER (IN MILLION OF RUSSIAN ROUBLES) CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER (IN MILLION OF RUSSIAN ROUBLES) Notes ASSETS Cash and balances with the Central Bank of the Russian Federation 6 87,832 51,148 Minimum reserve deposits with the Central Bank of the Russian Federation 8,869 6,932 Precious metals 7 5,746 6,402 Financial assets at fair value through profit or loss 8,9,37 181, ,254 Loans and advances to banks and other financial institutions 10,37 133, ,586 Loans to customers 11,37 879, ,564 Investments available-for-sale 12,37 39,532 4,919 Investments held to maturity 201 Investment property 13 8,571 4,761 Property, plant and equipment 14 16,205 11,117 Intangible assets 15 3,509 2,481 Goodwill 1, Other assets 16,37 11,867 4,729 TOTAL ASSETS 1,379, ,903 LIABILITIES AND EQUITY LIABILITIES: Financial liabilities at fair value through profit or loss 9,37 2,866 3,191 Due to banks and the Central Bank of the Russian Federation 17,37 257, ,510 Customer accounts 18,37 781, ,727 Bonds and Eurobonds 19 63,959 42,618 Promissory notes issued 20 61,652 21,145 Deferred income tax liabilities 30 3,378 1,690 Other liabilities 21,37 5,722 4,788 Subordinated debt 22,37 63,459 50,873 TOTAL LIABILITIES 1,239, ,542 EQUITY: Equity attributable to equity holders of the parent: Share capital 7,934 6,504 Treasury shares (932) (605) Share premium 38,883 20,898 Available-for-sale reserve / (deficit) (34) (230) Property, plant and equipment revaluation reserve 1,617 1,302 Retained earnings 58,806 46,811 Total equity attributable to equity holders of the parent 106,274 74,680 Non-controlling interest 24 33,083 15,681 TOTAL EQUITY 139,357 90,361 TOTAL LIABILITIES AND EQUITY 1,379, ,903 Notes Year ended Year ended Interest income 25,37 97,849 66,650 Interest expense 25,37 (57,122) (35,244) NET INTEREST INCOME BEFORE GAIN ON REMEASUREMENT OF CASH FLOWS AND PROVISION FOR IMPAIRMENT LOSSES ON INTEREST BEARING ASSETS 25 40,727 31,406 Gain on remeasurement of cash flows on interest bearing assets acquired in business combination Provision for impairment losses on interest bearing assets 11,37 (9,390) (5,886) NET INTEREST INCOME 31,717 26,445 Trading income/(loss): 26, ,681 Securities (988) 1,335 Foreign currency 1,582 1,013 Precious metals Other derivatives 16 (32) Net fee and commission income 27,37 8,988 7,941 Fee and commission income 27,37 12,155 10,895 Fee and commission expense 27,37 (3,167) (2,954) Net gain on investments available-for-sale Net gain on disposal of loans 11 1,543 1,259 Provision for impairment losses on other transactions 16,21 (30) (111) Shares of profit in associates Gain /(loss) from revaluation of investment property (28) Other income 28, NET NON-INTEREST INCOME 12,477 13,089 OPERATING INCOME 44,194 39,534 OPERATING EXPENSES 29,37 (21,993) (21,381) (Impairment) / recovery of impairment of buildings and constructions 14 (13) 101 OPERATING PROFIT BEFORE INCOME TAX 22,188 18,254 Income tax expense 30 (4,886) (3,239) NET PROFIT 17,302 15,015 Attributable to: Owners of the parent 14,904 12,574 Non-controlling interest 2,398 2,441 EARNINGS PER SHARE From continuing and discontinued operations Basic and diluted (RUR) On behalf of the Supervisory Board On behalf of the Supervisory Board President Chief Accountant President Chief Accountant 3 April 2014 Moscow 3 April 2014 Moscow 3 April 2014 Moscow 3 April 2014 Moscow The accompanying notes are an integral part of these consolidated financial statements The accompanying notes are an integral part of these consolidated financial statements

53 Consolidated financial statements Annual Report and Accounts CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 31 DECEMBER (IN MILLION OF RUSSIAN ROUBLES) CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 DECEMBER (IN MILLION OF RUSSIAN ROUBLES) Notes Year ended Year ended NET PROFIT FOR THE YEAR 17,302 15,015 OTHER COMPREHENSIVE INCOME ITEMS THAT WILL NOT BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS: Net gain resulting from revaluation of property Share in revaluation of property of associate, net of tax 62 Income tax 30 (92) (73) ITEMS THAT MAY BE RECLASSIFIED SUBSEQUENTLY TO PROFIT OR LOSS: Net gain/(loss) resulting on revaluation of available-for-sale financial assets during the year Reclassification adjustment relating to available-for-sale financial assets disposed of in the year (529) (315) Share in revaluation of available-for-sale financial assets of associate, net of tax 53 Income tax 30 (18) (218) OTHER COMPREHENSIVE INCOME AFTER INCOME TAX TOTAL COMPREHENSIVE INCOME 17,856 15,092 Attributable to: Owners of the parent 15,375 12,610 Non-controlling interests 24 2,481 2,482 TOTAL COMPREHENSIVE INCOME 17,856 15,092 Treasury preference shares Property, plant and equipment revaluation reserve Revaluation of investments availablefor sale Total equity attributable to equity holders of the parent company Noncontrolling interest Note Share capital Share premium Retained earnings Total equity 31 DECEMBER ,504 (605) 20,898 1,073 (35) 34,462 62,297 13,413 75,710 Net profit for the year 12,574 12,574 2,441 15,015 Total other comprehensive income for the period, net of tax 233 (197) Sale of subsidiaries (112) 70 Effect of increase/ (decrease) of the Group s shareholding in subsidiaries (4) 2 (407) (409) (63) (472) Dividends paid (39) (39) 31 DECEMBER 6,504 (605) 20,898 1,302 (230) 46,811 74,680 15,681 90,361 Net profit for the year 14,904 14,904 2,398 17,302 Total other comprehensive income for the period, net of tax Share capital increase due to the merge with subsidiary banks (340) Share capital increase issue of ordinary shares 23 1,090 17,985 19,075 19,075 Sale of treasury shares Purchase of treasury shares (3) (53) (56) (56) Sale of property, plant and equipment (44) 44 Acquisition of subsidiaries 5 (3,203) (3,203) 15,095 11,892 Effect of increase/ (decrease) of the Group s shareholding in subsidiaries (174) (22) Other comprehensive income from associate DECEMBER 7,934 (932) 38,883 1,617 (34) 58, ,274 33, ,357 On behalf of the Supervisory Board On behalf of the Supervisory Board President Chief Accountant President Chief Accountant 3 April 2014 Moscow 3 April 2014 Moscow 3 April 2014 Moscow 3 April 2014 Moscow The accompanying notes are an integral part of these consolidated financial statements The accompanying notes are an integral part of these consolidated financial statements

54 Consolidated financial statements Annual Report and Accounts CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER (IN MILLION OF RUSSIAN ROUBLES) Note Year ended Year ended CASH FLOWS FROM OPERATING ACTIVITIES: Interest received 94,264 65,909 Interest paid (54,937) (31,621) Cash received from prepayment of loans acquired in business combination in excess of carrying value Cash received on dealing with securities 384 1,419 Cash received on dealing with precious metals Cash received on dealing with foreign currencies 1, Cash received /(paid) on dealing with other derivatives 71 (116) Fees and commissions received 11,892 10,718 Fees and commissions paid (3,005) (3,068) Other operating income received Operating expenses paid (19,432) (18,995) CASH FLOWS FROM OPERATING ACTIVITIES BEFORE CHANGES IN OPERATING ASSETS AND LIABILITIES 31,489 26,146 CASH INCREASE/(DECREASE) FROM OPERATING ASSETS AND LIABILITIES Minimum reserve deposits with the Central Bank of the Russian Federation (255) (821) Precious metals (626) 2,974 Financial assets and liabilities at fair value through profit or loss (78,402) (26,256) Loans and advances to banks and other financial institutions 72,701 (62,357) Loans to customers (186,874) (153,631) Other assets (4,480) (360) Due to banks and the Central Bank of the Russian Federation 22, ,632 Customer accounts 161,744 92,094 Bonds and Eurobonds, net 20,800 3,375 Promissory notes issued/(redeemed), net 34,845 2,002 Other liabilities (1,390) 246 NET CASH FROM/(USED IN) OPERATING ACTIVITIES BEFORE INCOME TAX 71,925 (6,956) Income taxes paid (4,018) (3,536) NET CASH FROM/(USED IN) OPERATING ACTIVITIES 67,907 (10,492) CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from investments held to maturity repayment Acquisition of subsidiaries net of cash acquired 5 35,037 Purchase of property, plant and equipment 14 (1,049) (771) Proceeds from sale of property, plant and equipment Purchase of intangible assets (745) (769) Purchase of available-for-sale financial assets (1,423) (418) Proceeds from sale of available-for-sale financial assets 5,455 4,747 Purchase of investment property 13 (991) (1,072) Proceeds from sale of investment property 13 1, Dividends received 2 6 Disposal of subsidiaries 462 NET CASH FROM INVESTING ACTIVITIES 38,266 2,845 CASH FLOWS FROM FINANCING ACTIVITIES: Issuance of shares 1,090 Share premium 17,985 CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER (continued) Note Year ended Year ended Purchase of treasury preference shares (56) Proceeds from sale of ordinary shares 263 Redemption of bonds and Eurobonds (4,263) (334) Subordinated debt received 7,609 24,318 Subordinated debt repaid (3,198) (35) Effect of change in ownership interest in subsidiaries (20) Purchase of shares from non-controlling shareholders (447) NET CASH FROM FINANCING ACTIVITIES 19,410 23,502 Effect of exchange rate changes on cash and cash equivalents 680 (300) NET INCREASE IN CASH AND CASH EQUIVALENTS 126,263 15,555 Cash and cash equivalents, beginning of the period 6 70,861 55,306 CASH AND CASH EQUIVALENTS, ENDING OF THE PERIOD 6 197,124 70,861 From the third quarter the Group s treasury department changed the way it manages and monitors its liquidity. As a result as at the Group added to cash and cash equivalents loans to banks and loans under reverse repurchase agreements with original contractual maturity of less than 90 days. Had the Group applied this approach in the following changes would have been made to statement of cash flows for the year ended : As reported Effect As if prepared under new approach Operating activities: Loans ans advances to banks and other financial institutions (62,357) 85,253 22,896 Total cash (used in)/from operating activities (10,492) 85,253 74,761 Net effect 85,253 Line item presentations in cash flow as at : As reported Effect As if prepared under new approach Cash and cash equivalents, opening balance 55,306 25,274 80,580 Cash and cash equivalents, ending balance 70, , ,388 On behalf of the Supervisory Board President 3 April 2014 Moscow During the years ended and the Group obtained non-cash settlements for uncollectible loans to customers, previously originated and net assets acquired through purchase of subsidiary bank. These non-cash settlements were excluded from the consolidated statement of cash flows and presented separately below: Year ended Year ended Notes NON CASH TRANSACTION: Loans to customers settled by means of collateral repossession: Investment property (261) (343) Other assets (obtained through repossession of collateral on uncollectible loans to customers): Property received as a collateral repossession Net assets of subsidiary acquired 25,659 Chief Accountant 3 April 2014 Moscow The accompanying notes are an integral part of these consolidated financial statements The accompanying notes are an integral part of these consolidated financial statements

55 Notes to the consolidated financial statements Annual Report and Accounts NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER (IN MILLION OF RUSSIAN ROUBLES) 1. ORGANISATION OJSC NOMOS-BANK (the Bank ) is a joint-stock bank incorporated in the Russian Federation in The Bank is regulated by the Central Bank of the Russian Federation (the CBR ) and conducts its business under general license number The Bank s primary business consists of commercial activities, trading with securities, foreign currencies and derivative instruments, providing loans and guarantees. The registered office of the Bank is located at 3, Verhnaya Radishevskaya st., Moscow, , Russia. As at the Bank had 23 branches operating in the Russian Federation and 1 representative office abroad. The accompanying consolidated financial statements comprise the accounts of Open Joint Stock Company NOMOS-BANK and its subsidiaries (together the Group ). The consolidated financial statements include the following incorporated subsidiaries: FOR THE YEAR ENDED 31 DECEMBER (continued) Country The Bank s ownership interest/control* Name of incorporation, %, % Type of activity LLC NM-Activ Russian Federation 100/100 Investment management CJSC Mortgage Agent KhMB-1 CJSC Mortgage Agent Nomos Russian Federation Russian Federation (contractual agreement) (contractual agreement) (contractual agreement) Issue of mortgage-backed bonds Issue of mortgage-backed bonds Issue of mortgage-backed bonds (contractual CJSC Mortgage Agent Otkritie 1 Russian Federation agreement) LLC NM-Kapital Russian Federation 100/100 Investment management * The Ownership and control represent the following: Ownership represents the effective ownership interest in the subsidiary by the ultimate parent company OJSC Nomos Bank; Control represents the total % of the voting shares controlled, either directly or indirectly, by the entities of the Group; ** Control is gained due to the terms of the agreement concluded as at 27 December stating that LLC Otkritie N transferes voting rights, belonging to LLC Otkritie N over OJSC Bank Otkritie to the Group, which amounted to 44.52% interest share (Note 5). Additionally, the Group consolidates the following investment funds, as the Group exercises control over them as contractually stipulated: As at and the following shareholders owned the issued shares of the Bank: The Bank s ownership interest/control* Country Name of incorporation, %, % Type of activity OJSC NOMOS-BANK Russian Federation Parent company Parent company Banking activity OJSC Khanty-Mansiysk Bank Russian Federation 51.29/ /51.29 Banking activity OJSC Bank Otkritie Russian Federation 41.17/85.69** Banking activity OJSC Novosibirsk Municipal Bank Russian Federation 99.99/ /86.98 Banking activity BKM Finance Limited Ireland (contractual agreement) (contractual agreement) Issue of securities LLC Yugra-Leasing Russian Federation 51.29/ /100 Finance lease of equipment LLC Group of Project Finance Russian Federation 51.29/ /100 Construction LLC NM-Expert Russian Federation 19.90/ /100 Consulting LLC Promgazcomplekt Russian Federation 100/ /100 Office building ownership OJSC Promestate Russian Federation 100/ /100 Office building ownership CJSC Sovfintrast Russian Federation 100/ /100 Investment management CJSC Upravlyaushaya compania aktivami Russian Federation 99.9/ /99.9 Asset management Nomos Capital Plc. Ireland (contractual agreement) (contractual agreement) Issue of Eurobonds CJSC Erada Russian Federation 100/ /100 Office building ownership LLC NM-Garant Russian Federation 100/ /100 Investment management LLC Leasing-Project Russian Federation 100/ /100 Finance lease of equipment LLC BFK-Invest Russian Federation 100/ /100 Office building ownership LLC Attenium Russian Federation 100/ /100 Investment management LLC NKO Payment System Rapida Russian Federation 100/ /100 Payment system LLC Processing centre Rapida Russian Federation 100/ /100 Processing centre LLC Gikor Russian Federation 100/ /100 Asset management LLC Upravlyaushaya compania NOMOS BANK Russian Federation 100/ /100 Asset management LLC KN-Estate Russian Federation 100/ /100 Office building ownership LLC Nedvizhimost Primorya Russian Federation 100/ /100 Real estate rent activity LLC Invest-Trading Russian Federation 100/ /100 Investment management LLC Vostok-Capital Russian Federation 100/ /100 Investment management Name, %, % ZPIF Universal fund of mixed investments ZPIF KhMB Capital ZPIF Centr (Olma) 100 ZPIF Strategiya Razvitiya 100 ZPIFRE Universal Real estate fund As at the Group also had holdings (50%) in ZAO PK HESCARD, an entity that does not conduct active operations and is insignificant in terms of the Group s financial statements. As at and the Group had 17,890 employees and 10,999 employees, respectively. The Group also operates a number of network supplementary offices and currency exchange offices within the Russian Federation. As at and the Group had respectively 809 and 297 points of sale including branches, supplementary offices and currency exchange offices. The information about acquisitions and disposals of subsidiaries during the years ended and is presented in Note 5., %, % SHAREHOLDERS OF THE BANK (SHAREHOLDERS OF THE FIRST LEVEL): Group OJSC Financial corporation OTKRITIE Non-Government pension funds Other *** TOTAL *** As at other shareholders were as follows:, % SHAREHOLDERS OF THE BANK (SHAREHOLDERS OF THE FIRST LEVEL): Custodian for Global Depository Receipts on London Stock Exchange* Vitalpeake Cyprus Limited Lordline Cyprus Limited Arrowzone Cyprus Limited 7.95 Viewrock Cyprus Limited 7.11 Belfanto Investments Ltd 4.99 Oviresto Investments Ltd 4.91 Other 0.99 TOTAL * Other shareholders include minority shareholders and undisclosed holders of the Global Depository Receipts traded on London Stock Exchange. Holders of GDRs have the option to disclose their information at any time. On disclosure of their information the holders of GDRs have the right to participate in voting

56 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) As at December OJSC Financial corporation OTKRITIE (hereinafter the Parent Company ) is a company that controls the Group. During the Bank has completed the merge of two of its subsidiaries OJSC NOMOS-REGIOBANK and OJSC NOMOS Siberia, the shares of subsidiary banks were converted into the shares of OJSC NOMOS-BANK. As at 5.34% of the shares belongs to the subsidiaries of the Group and recognized as treasury shares. The deal was performed in terms of the Group s organization structure optimization. As at and the following subsidiary companies owned treasury shares of the Bank (their shares in ordinary shares are indicated in the table below): Shareholders of treasury ordinary shares, %, % CJSC Erada (subsidiary company) 2.67 LLC Promgazcomplekt (subsidiary 1.71 company) CJSC Sovfintrast (subsidiary 0.96 company) TOTAL 5.34 As at and the following company owned the outstanding preference shares of the Bank: Shareholder of treasury preference shares, %, % SHAREHOLDER OF TREASURY PREFERENCE SHARES OF THE BANK (SHAREHOLDER OF THE FIRST LEVEL): LLC KN-Estate (subsidiary company) TOTAL SIGNIFICANT ACCOUNTING POLICIES Statement of compliance. These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ) and Interpretations issued by the International Financial Reporting Interpretations Committee ( IFRIC ). These consolidated financial statements have been prepared assuming that the Group is a going concern and will continue operation for the foreseeable future. These consolidated financial statements are presented in million of Russian roubles ( RUB million ), unless otherwise indicated. These consolidated financial statements have been prepared on the historical cost basis except for certain properties, non-current assets held for sale and financial instruments that are measured at revalued amounts or at the lower of carrying amount and fair values less costs to sell or at fair values at the end of each reporting period, as explained in the accounting policies below. Historical cost is generally based on the fair value of the consideration given in exchange for goods and services. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for share-based payment transactions that are within the scope of IFRS 2, leasing transactions that are within the scope of IAS 17, and measurements that have some similarities to fair value but are not fair value, such as net realisable value in IAS 2 or value in use in IAS 36. In addition, for financial reporting purposes, fair value measurements are categorised into Level 1, 2 or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly; and Level 3 inputs are unobservable inputs for the asset or liability. The Group s policy is to recognise transfers into and transfers out of fair value hierarchy levels as of the end of reporting period. The Bank and its consolidated companies, registered in the Russian Federation, maintain their accounting records in accordance with Russian Accounting Standards (RAS), foreign consolidated companies of the Bank maintain their accounting records in accordance with the law of the countries, in which they operate. These consolidated financial statements have been prepared from the statutory accounting records and have been adjusted to conform to IFRS. Functional currency. Items included in the financial statements of each of the Group s entities are measured using the currency of the primary of the economic environment in which the entity operates ( the functional currency ). The functional currency of the parent of the Group is the Russian Ruble ( RUB ). The presentational currency of the consolidated financial statements of the Group is the RUB. All values are rounded to the nearest million Roubles, except when otherwise indicated. Offsetting. Financial assets and financial liabilities are offset and the net amount reported in the statement of financial position only when there is a legally enforceable right to offset the recognised amounts and there is an intention to settle on a net basis, or to realise the assets and settle the liability simultaneously. Income and expense is not offset in the consolidated income statement unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Group. The principal accounting policies are set out below. BASIS OF CONSOLIDATION These consolidated financial statements incorporate the financial statements of the Bank and entities (including structured entities) controlled by the Bank and its subsidiaries. Control is achieved when the Bank: Has power over the investee; Is exposed, or has rights, to variable returns from its involvement with the investee; and Has the ability to use its power to affect its returns. The Bank reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. The ownership interest of the Bank and/or the proportion of voting power of the Bank in the significant subsidiaries as at and are presented in Note 1. When the Group has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Group considers all relevant facts and circumstances in assessing whether or not the Group s voting rights in an investee are sufficient to give it power, including: The size of the Group s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; Potential voting rights held by the Group, other vote holders or other parties; Rights arising from other contractual arrangements; and Any additional facts and circumstances that indicate that the Group has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders meetings. Consolidation of a subsidiary begins when the Group obtains control over the subsidiary and ceases when the Group loses control of the subsidiary. Specifically, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated income statement and other comprehensive income from the date the Group gains control until the date when the Group ceases to control the subsidiary. The acquisition method of accounting is used to account for the acquisition of subsidiaries. The cost of an acquisition is measured at the fair value of the assets given up, shares issued or liabilities undertaken at the date of acquisition. Acquisition related costs are expensed as incurred. The excess of the cost of acquisition, as well as the fair value of any interest previously held, over the fair value of the Group s share of the identifiable net assets of the acquired subsidiary, associate or business at the date of acquisition is recorded as goodwill. Business combinations arising from transfers of interests in entities that are under the control of the shareholder that controls the Group outside the scope of IFRS 3R Business Combinations, and there is no other guidance for such situations under IFRS. The Group elects to account for such transactions prospectively as of the date that common control was established. The assets and liabilities

57 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) acquired are recognised at the carrying amounts recognised previously in the Group controlling shareholder s consolidated financial statements at the date of acquisition. The difference between the consideration paid and the net assets acquired is accounted for directly in equity. The consolidated statement of financial position, consolidated income statement, consolidated statement of other comprehensive income and cash flows for periods prior to the acquisition date are not restated. Profit or loss and each component of other comprehensive income are attributed to the owners of the Group and to the non-controlling interests. Total comprehensive income of subsidiaries is attributed to the owners of the Group and to the non-controlling interests even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Group s accounting policies. All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in full on consolidation. Non-controlling interests. Non-controlling interests represent the portion of profit or loss and net assets of subsidiaries not owned, directly or indirectly, by the Group. Non-controlling interests are presented separately in the consolidated income statement and within equity in the consolidated statement of financial position, separately from parent shareholders equity. Changes in the Group s ownership interests in existing subsidiaries. Changes in the Group s ownership interests in subsidiaries that do not result in the Group losing control over the subsidiaries are accounted for as equity transactions. The carrying amounts of the Group s interests and the non-controlling interests are adjusted to reflect the changes in their relative interests in the subsidiaries. Any difference between the amount by which the non-controlling interests are adjusted and the fair value of the consideration paid or received is recognised directly in equity and attributed to owners of the Bank. When the Group looses control of a subsidiary, a gain or loss is recognized in profit or loss and is calculated as the difference between (i) the aggregate of the fair value of the consideration received and the fair value of any retained interest and (ii) the previous carrying amount of the assets (including goodwill), and liabilities of the subsidiary and any non-controlling interests. All amounts previously recognised in other comprehensive income in relation to that subsidiary are accounted for as if the Group had directly disposed of the related assets or liabilities of the subsidiary (i.e. reclassified to profit or loss or transferred to another category of equity as specified/permitted by applicable IFRSs). The fair value of any investment retained in the former subsidiary at the date when control is lost is regarded as the fair value on initial recognition for subsequent accounting under International Accounting Standard ( IAS ) 39, when applicable, the cost on initial recognition of an investment in an associate or a joint venture. FINANCIAL INSTRUMENTS The Group recognizes financial assets and liabilities in its consolidated statement of financial position when it becomes a party to the contractual obligations of the instrument. Regular way purchases and sales of financial assets and liabilities are recognized using settlement date accounting. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the time frame established by regulation or convention in the marketplace. Financial assets and financial liabilities are initially measured at fair value. Transaction costs that are incremental and directly attributable to the acquisition or issue of financial assets and financial liabilities (other than financial assets and financial liabilities at fair value through profit or loss) are added to or deducted from the fair value of the financial assets or financial liabilities, as appropriate, on initial recognition. Transaction costs directly attributable to the acquisition of financial assets or financial liabilities at fair value through profit or loss are recognized immediately in profit or loss. FINANCIAL ASSETS Financial assets are classified into the following specified categories: financial assets at fair value through profit or loss ( FVTPL ), held to maturity ( HTM ) investments, available-for-sale ( AFS ) financial assets and loans and receivables. The classification depends on the nature and purpose of the financial assets and is determined at the time of initial recognition. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS Financial assets are classified as at FVTPL when the financial asset is either held for trading or it is designated as at FVTPL. A financial asset is classified as held for trading if: It has been acquired principally for the purpose of selling it in the near term; or On initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or It is a derivative that is not designated and effective as a hedging instrument. A financial asset other than a financial asset held for trading may be designated as at FVTPL upon initial recognition if: Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or The financial asset forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or It forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL. Financial assets at fair value through profit or loss are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss excludes any interest earned on the financial asset or interest paid on the financial liability, which are included in the interest income or interest expense in the consolidated income statement. RECLASSIFICATION OF FINANCIAL ASSETS Non-derivative financial assets (other than those designated at fair value through profit or loss upon initial recognition) may be reclassified out of the fair value through profit or loss category in the following circumstances: Financial assets that would have met the definition of loans and receivables at initial recognition (if the financial asset had not been required to be classified as held for trading) may be reclassified out of the fair value through profit or loss category if there is the intention and ability to hold the financial asset for the foreseeable future or until maturity; and Financial assets (except financial assets that would have met the definition of loans and receivables at initial recognition) may be reclassified out of the fair value through profit or loss category and into another category in rare circumstances. When a financial asset is reclassified as described in the above circumstances, the financial asset is reclassified at its fair value on the date of reclassification. Any gain or loss already recognised in the income statement is not reversed. The fair value of the financial asset on the date of reclassification becomes its new cost or amortized cost, as applicable. INVESTMENTS HELD TO MATURITY Debt securities with fixed or determinable payments and fixed maturity dates that the Group has positive intent and ability to hold to maturity are classified as held to maturity investments. Held to maturity investments are measured at amortised cost using the effective interest method less any impairment. If the Group were to sell or reclassify more than an insignificant amount of held to maturity investments before maturity (other than in certain specific circumstances), the entire category would be tainted and would have to be reclassified as available-for-sale. Furthermore, the Group would be prohibited from classifying any financial asset as held to maturity during the current financial year and following two financial years. INVESTMENTS AVAILABLE-FOR-SALE Available-for-sale financial assets are non-derivatives that are either designated as available-for-sale or are not classified as (a) loans and receivables, (2) held to maturity investments or (c) financial assets at fair value through profit or loss. Listed shares and bonds held by the Group that are traded in an active market are classified as AFS and are stated at fair value. The Group also has investments in unlisted shares and units of investment funds that are not traded in an active market but that are also classified as AFS financial assets and stated at cost (because the Group s management considers that the fair value can not be reliably measured). Fair value is determined in the manner described (see Note 34). Gains and losses arising from changes in fair value are recognised in other comprehensive income and accumulated in the investments revaluation reserve, with the exception of impairment losses, interest calculated using the effective interest method, dividend income and foreign exchange gains and losses on monetary assets, which are recognised in profit or loss. Where the investment is disposed of or is determined to be impaired, the cumulative gain or loss previously accumulated in the investments revaluation reserve is reclassified to profit or loss

58 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) The fair value of AFS monetary assets denominated in a foreign currency is determined in that foreign currency and translated at the spot rate at the end of the reporting period. The foreign exchange gains and losses that are recognised in profit or loss are determined based on the amortised cost of the monetary asset. Other foreign exchange gains and losses are recognised in other comprehensive income. AFS equity investments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured are measured at cost less any identified impairment losses at the end of each reporting period. Dividends on available-for-sale equity instruments are recognized in profit or loss in other income when the Group s right to receive the dividends is established. LOANS AND ADVANCES TO BANKS AND OTHER FINANCIAL INSTITUTIONS In the normal course of business, the Group maintains advances and deposits for various periods of time with other banks and other financial institutions. Loans and advances to banks and other financial institutions are initially recognized at fair value, plus incremental direct transactions costs. Loans and advances to banks and other financial institutions are subsequently measured at amortized cost using the effective interest method. Amounts of loans and advances to banks and other financial institutions are carried net of any allowance for impairment losses. LOANS TO CUSTOMERS Loans to customers are non-derivative assets with fixed or determinable payments that are not quoted in an active market, other than those classified in other categories of financial assets. Loans to customers granted by the Group are initially recognized at fair value plus related incremental transaction costs that directly relate to acquisition or creation of such financial assets. Where the fair value of consideration given does not equal the fair value of the loan, for example where the loan is issued at lower than market rates, the difference between the fair value of consideration given and the fair value of the loan is recognized as a loss on initial recognition of the loan and included in the consolidated income statement according to nature of the losses. Subsequently, loans are carried at amortized cost using the effective interest method. Loans to customers are carried net of any allowance for impairment losses. SECURITIES REPURCHASE AND REVERSE REPURCHASE AGREEMENTS In the normal course of business, the Group enters into financial assets sale and repurchase agreements ( repos ) and financial asset purchase and sellback agreements ( reverse repos ). Repos and reverse repos are utilized by the Group as an element of its treasury management. Financial assets subject to a sale and repurchase agreement under which substantially all the risks and rewards of ownership are retained by the Group continue to be shown on the balance sheet and the sale proceeds recorded as a financial liability. Financialassets purchased under reverse repos under which the Group is not exposed to substantially all the risks and rewards of ownership are not recognized on the balance sheet and the consideration paid is recorded as cash placed on deposit collateralized by securities and other assets and are classified within loans and advances to banks/loans to customers. In the event that assets purchased under reverse repo are sold to third parties, the results are recorded in net gains/(losses) on respective assets. Any related income or expense arising from the pricing difference between purchase and sale of the underlying assets is recognized as interest income or expense in the consolidated income statement. The Group enters into securities repurchase agreements and securities reverse repurchase agreements under which it receives or transfers collateral in accordance with normal market practice. Under standard terms for repurchase transactions in the Russian Federation and other Commonwealth of Independent States ( CIS ), the recipient of collateral has the right to sell or repledge the collateral, subject to returning equivalent securities on settlement of the transaction. IMPAIRMENT OF FINANCIAL ASSETS Financial assets, other than those at FVTPL, are assessed for indicators of impairment at the end of each reporting period. Financial assets are considered to be impaired when there is objective evidence that, as a result of one or more events that occurred after the initial recognition of the financial asset, the estimated future cash flows of the investment have been affected. For listed and unlisted equity investments classified as AFS, a significant or prolonged decline in the fair value of the security below its cost is considered to be objective evidence of impairment. For all other financial assets, objective evidence of impairment could include: Significant financial difficulty of the issuer or counterparty; or Breach of contract, such as default or delinquency in interest or principal payments; Default or delinquency in interest or principal payments; or It becoming probable that the borrower will enter bankruptcy or financial re-organisation; or Disappearance of an active market for that financial asset because of financial difficulties. For certain categories of financial asset, such as loans and receivables, assets that are assessed not to be impaired individually are, in addition, assessed for impairment on a collective basis. Objective evidence of impairment for a portfolio of loans and receivables could include the Group s past experience of collecting payments, an increase in the number of delayed payments in the portfolio, as well as observable changes in national or local economic conditions that correlate with default on receivables. For financial assets carried at amortised cost, the amount of the impairment loss recognised is the difference between the asset s carrying amount and the present value of estimated future cash flows, discounted at the financial asset s original effective interest rate. For financial assets carried at cost, the amount of the impairment loss is measured as the difference between the asset s carrying amount and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment loss will not be reversed in subsequent periods. The carrying amount of the financial asset is reduced by the impairment loss directly for all financial assets with the exception of loans and receivables, where the carrying amount is reduced through the use of an allowance account. Subsequent recoveries of amounts previously written off are credited against the allowance account. Changes in the carrying amount of the allowance account are recognised in profit or loss. When an AFS financial asset is considered to be impaired, cumulative gains or losses previously recognised in other comprehensive income are reclassified to profit or loss in the period. For financial assets measured at amortized cost, if, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed through profit or loss to the extent that the carrying amount of the investment at the date the impairment is reversed does not exceed what the amortized cost would have been had the impairment not been recognized. In respect of AFS equity securities, impairment losses previously recognized in profit or loss are not reversed through profit or loss. Any increase in fair value subsequent to an impairment loss i recognized in other comprehensive income and accumulated under the heading of investments revaluation reserve. In respect of AFS debt securities, impairment losses are subsequently reversed through profit or loss if an increase in the fair value of the investment can be objectively related to an event occurring after the recognition of the impairment loss. The change in the impairment is included into consolidated income statement using the provision account (financial assets measured at amortized cost) or by a direct write-off (financial assets measured at cost). Assets recognized in the consolidated statement of financial position are reduced by the amount of the impairment. The factors the Group evaluates in determining the presence of objective evidence of occurrence of an impairment loss include information on liquidity of the debtor or issuer, their solvency, business risks and financial risks, levels and tendencies of default on obligations on similar financial assets, national and local economic tendencies and conditions, and fair value of the security and guarantees. These and other factors individually or in the aggregate represent, to a great extent, an objective evidence of recognition of the impairment loss on the financial asset or group of financial assets. RENEGOTIATED LOANS Where possible, the Group seeks to renegotiate loans rather than to take possession of collateral. This may involve extending the payment arrangements and the agreement of new loan conditions. Once the terms have been renegotiated any impairment is measured using the original effective interest rate as calculated before the modification of terms and the loan is no longer considered past due. There are different risk characteristics associated with renegotiated loans that were impaired before the renegotiation compared to loans that were not renegotiated. The impairment loss allowances on renegotiated loans which are homogeneous and of small balaces are calculated in the same manner as on any other loan in that portfolio using the Group s collective assessment methodology. In making a collective assessment for impairment, loans that are subject to forbearance are grouped together according to their credit risk characteristics. For renegotiated loans which are not of a small

59 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) balance and homogeneous the Group continually reviews them for impairment using an individual or collective impairment assessment, calculated using the loan s original effective interest rate. WRITE OFF OF LOANS AND ADVANCES Loans and advances are written off against the allowance for impairment losses when deemed uncollectible. Loans and advances are written off after management has exercised all possibilities available to collect amounts due to the Group and after the Group has sold all available collateral. Subsequent recoveries of amounts previously written off are reflected as an offset to the charge for impairment of financial assets in the consolidated income statement in the period of recovery. DERECOGNITION OF FINANCIAL ASSETS A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognized where: The rights to receive cash flows from the asset have expired; The Group has transferred its rights to receive cash flows from the asset, or retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; and The Group either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash on hand, unrestricted balances on corresponded and time deposits with the Central Bank of the Russian Federation with original maturity of less or equal to 90 days and amounts on correspondents accounts and due from credit institutions with original maturity of less or equal to 90 days. As at, cash equivalents also include loans to banks and loans under reverse repurchase agreements with contractual maturity of less than 90 days. MINIMUM RESERVE DEPOSITS WITH THE CENTRAL BANK OF THE RUSSIAN FEDERATION Minimum reserve deposits with the Central Bank of the Russian Federation ( CBR ) represent the amount of obligatory reserves deposited with the CBR in accordance with requirements established by the CBR which are subject to restrictions on its availability. Therefore the minimum reserve deposit required by the CBR is not included as a cash equivalent. PRECIOUS METALS Assets and liabilities denominated in precious metals are translated into Roubles at the current rate computed based on the second fixing of the London Metal Exchange rates, using the RUB/USD exchange rate effective at the date. Changes in the bid prices are recorded in net (loss)/gain on operations with precious metals. Loans and advances to banks and customer accounts denominated in precious metals are recognized at fair value, impact resulting from revaluation is included in consolidated income statement. FINANCIAL LIABILITIES AND EQUITY INSTRUMENTS ISSUED Classification as debt or equity. Debt and equity instruments issued by a Group entity are classified as either financial liabilities or as equity in accordance with the substance of the contractual arrangements and the definitions of a financial liability and an equity instrument. Equity instruments. An equity instrument is any contract that evidences a residual interest in the assets of an entity after deducting all of its liabilities. Equity instruments issued by the Group are recognised at the proceeds received, net of direct issue costs. Repurchase of the Bank s own equity instruments is recognized and deducted directly in equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of the Bank s own equity instruments. FINANCIAL LIABILITIES Financial liabilities are classified as either financial liabilities at FVTPL or other financial liabilities. FINANCIAL LIABILITIES AT FVTPL Financial liabilities are classified as at FVTPL when the financial liability is either held for trading or it is designated as at FVTPL. A financial liability is classified as held for trading if: It has been acquired principally for the purpose of repurchasing it in the near term; or On initial recognition it is part of a portfolio of identified financial instruments that the Group manages together and has a recent actual pattern of short-term profit-taking; or It is a derivative that is not designated and effective as a hedging instrument. A financial liability other than a financial liability held for trading may be designated as at FVTPL upon initial recognition if: Such designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise; or The financial liability forms part of a group of financial assets or financial liabilities or both, which is managed and its performance is evaluated on a fair value basis, in accordance with the Group s documented risk management or investment strategy, and information about the grouping is provided internally on that basis; or It forms part of a contract containing one or more embedded derivatives, and IAS 39 Financial Instruments: Recognition and Measurement permits the entire combined contract (asset or liability) to be designated as at FVTPL. Financial liabilities at FVTPL are stated at fair value, with any gains or losses arising on remeasurement recognised in profit or loss. The net gain or loss recognised in profit or loss incorporates any interest paid on the financial liability and is included in the other gains and losses line item in the consolidated income statement. OTHER FINANCIAL LIABILITIES Due to banks, customer accounts, debt securities issued and subordinated debt Due to banks, customer accounts, debt securities issued and subordinated debt are initially recognized at fair value, net of transaction costs. Subsequently, amounts due are stated at amortized cost and any difference between net proceeds and the redemption value is recognized in the consolidated income statement over the period of the borrowings, using the effective interest method. DERECOGNITION OF FINANCIAL LIABILITIES The Group derecognizes a financial asset only when the contractual rights to the cash flows from the asset expire, or when it transfers the financial asset and substantially all the risks and rewards of ownership of the asset to another party. If the Group neither transfers nor retains substantially all the risks and rewards of ownership and continues to control the transferred asset, the Group recognizes its retained interest in the asset and an associated liability for amounts it may have to pay. If the Group retains substantially all the risks and rewards of ownership of a transferred financial asset, the Group continues to recognise the financial asset and also recognises a collateralised borrowing for the proceeds received. On derecognition of a financial asset in its entirety, the difference between the asset s carrying amount and the sum of the consideration received and receivable and the cumulative gain of loss that had been recognized in other comprehensive income and accumulated in equity is recognized in profit or loss. On derecognition of a financial asset other than in its entirety (e.g. when the Group retains an option to repurchase part of a transferred asset), the Group allocates the previous carrying amount of the financial asset between the part it continues to recognize under continuing involvement, and the part it no longer recognises on the basis of the relative fair values of those parts on the date of the transfer. The difference between the carrying amount allocated to the part that is no longer recognised and the sum of the consideration received for the part no longer recognised and any cumulative gain or loss allocated to it that had been recognised in other comprehensive income is recognized in profit or loss. A cumulative gain or loss that had been recognised in other comprehensive income is allocated between the part that continues to be recognised and the part that is no longer recognised on the basis of the relative fair values of those parts. DERIVATIVE FINANCIAL INSTRUMENTS The Group enters into variety of derivative financial instruments to manage its exposure to interest rate and foreign exchange risk, including forwards, swaps and options on foreign currency, precious metals and securities. Derivative financial instruments entered by the Group are not designated as hedges and do not qualify for hedge accounting. Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently stated at their fair value at each reporting date. The fair values are estimated based on quoted market prices or pricing models that take into account the current market and contractual prices of the underlying instruments and other factors. Derivatives are carried as assets when their fair value is positive and as liabilities when it is negative. Derivatives are included in financial assets and liabilities at fair value through profit or loss in the consolidated statement of financial position. Gains and losses resulting from these instruments are included in net gain (loss) on financial assets and liabilities at fair value through profit or loss in the consolidated income statement. Derivative instruments embedded in other financial instruments or other host contracts are treated as separate derivatives if their risks and characteristics are not closely related to those of the host contracts and

60 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) the host contracts are not carried at fair value through profit or loss. An embedded derivative is a component of a hybrid financial instrument that includes both the embedded derivative and the underlying host. FINANCE LEASES Finance leases are leases that transfer substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. The lease is classified as a finance lease if: The lease transfers ownership of the asset to the lessee by the end of the lease term; The lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, at the inception of the lease, it is reasonably certain that the option will be exercised; The lease term is for the major part of the economic life of the asset even if title is not transferred; At the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and The leased assets are of a specialized nature such that only the lessee can use them without major modifications being made. THE GROUP AS A LESSOR The Group as a lessor presents finance leases as loans and initially measures them at an amount equal to the net investment in the lease. Subsequently, the recognition of finance income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Group s net investment in the finance lease. Before commencement date property, plant and equipment purchased for future transfer to finance lease is recognized in the consolidated financial statements as property, plant and equipment purchased to transfer to finance lease at cost. THE GROUP AS A LESSEE At the commencement of the lease term, the Group as a lessee recognizes finance leases as assets and liabilities in its consolidated statement of financial position at amounts equal to the fair value of the leased property or, if lower, the present values of the minimum lease payments. Subsequently, the minimum lease payments are apportioned between the finance charge and the reduction of the outstanding liability so as to produce a constant periodic rate of interest on the remaining balance of the liability. Finance charges are charged directly to profit or loss, unless they are directly attributable to qualifying assets, in which case they are capitalized in accordance with the Group s general policy on borrowing costs. Operating lease payments are recognized as an expense on a straight-line basis over the lease term. Contingent rents are charged as expenses in the periods in which they are incurred. Depreciation of the lease property is charged in accordance with depreciation policy that is applied to property owned by the Group. OPERATING LEASES Operating lease payments are recognized as an expense on a straight-line basis over the lease term. Contingent rents are charged as expenses in the periods in which they are incurred. Depreciation of the lease property is charged in accordance with depreciation policy that is applied to property owned by the Group. PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS Property, plant and equipment (except for land and buildings and constructions) and intangible assets, acquired after 1 January 2003 are carried at historical cost less accumulated depreciation and any recognized impairment loss. Property, plant and equipment (except for land and buildings and constructions) and intangible assets, acquired before 1 January 2003 are carried at historical cost restated for inflation less accumulated depreciation and any recognized impairment loss. Depreciation is charged on the carrying value of property, plant and equipment and is designed to write off assets (less their residual value) over their useful economic lives. Depreciation is calculated on a straight line basis at the following annual prescribed rates: Buildings and constructions 2%-4% Furniture and equipment 7-20% Other property, plant and equipment 14.3%-25% Intangible assets 25% Leasehold improvements are amortized over the life of the related leased asset or the lease period whichever is shorter. Expenses related to repairs and renewals are charged when incurred and included in operating expenses unless they qualify for capitalization. The carrying amounts of property and equipment are reviewed at each reporting date to assess whether they are recorded in excess of their recoverable amounts. The recoverable amount is the higher of fair value less costs to sell and value in use. Where carrying values exceed the estimated recoverable amount, assets are written down to their recoverable amount, impairment is recognized in the respective period and is included in operating expenses. After the recognition of an impairment loss the depreciation charge for property and equipment is adjusted in future periods to allocate the assets revised carrying value, less its residual value (if any), on a systematic basis over its remaining useful life. Land, buildings and constructions held for use in supply of services, or for administrative purposes, are stated in the consolidated statement of financial position at their revalued amounts, being the fair value at the date of revaluation, determined from market-based evidence by appraisal undertaken by professional independent appraisers, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the reporting date. Any revaluation increase arising on the revaluation of such land, buildings and constructions is credited to the property, plant and equipment revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset previously recognized as an expense, in which case the increase is credited to profit or loss for the period to the extent of the decrease previously charged. A decrease in carrying amount arising on the revaluation of such land and buildings is charged as an expense to the extent that it exceeds the balance, if any, held in the property, plant and equipment revaluation reserve relating to a previous revaluation of that asset. Depreciation on revalued buildings is charged to the consolidated income statement. On the subsequent sale or retirement of a revalued property, the attributable revaluation surplus remaining in the property, plant and equipment revaluation reserve is transferred directly to retained earnings. Market value of property is assessed using three methods: The comparable sales method which involves analysis of market sales prices for similar real estate property; The income-based method which assumes a direct relationship between revenues generated by the property and its market value; The costs method, which presumes the value of property to be equal to its recoverable amount less any depreciation charges. INTANGIBLE ASSETS ACQUIRED IN A BUSINESS COMBINATION Intangible assets acquired in a business combination and recognised separately from goodwill are initially recognised at their fair value at the acquisition date (which is regarded as their cost). Subsequent to initial recognition, intangible assets acquired in a business combination are reported at cost less accumulated amortisation and accumulated impairment losses, on the same basis as intangible assets that are acquired separately. The amortization period for intangible assets vary from 5 to 6 years. DERECOGNITION OF INTANGIBLE ASSETS An intangible asset is derecognised on disposal, or when no future economic benefits are expected from use or disposal. Gains or losses arising from derecognition of an intangible asset, measured as the difference between the net disposal proceeds and the carrying amount of the asset, are recognised in profit or loss when the asset is derecognised. IMPAIRMENT OF TANGIBLE AND INTANGIBLE ASSETS OTHER THAN GOODWILL At the end of each reporting period, the Group reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Group estimates the recoverable amount of the cash-generating unit to which the asset belongs. Where a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified. Intangible assets with indefinite useful lives and intangible assets not yet available for use are tested for impairment at least annually, and whenever there is an indication that the asset may be impaired. Recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (or cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in profit

61 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) or loss, unless the relevant asset is carried at a revalued amount, in which case the impairment loss is treated as a revaluation decrease. Where an impairment loss subsequently reverses, the carrying amount of the asset (or a cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (or cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in profit or loss, unless the relevant asset is carried at a revalued amount, in which case the reversal of the impairment loss is treated as a revaluation increase. TAXATION The tax currently payable is based on taxable profit for the year. Taxable profit differs from profit as reported in the consolidated income statement because of items of income or expense that are taxable or deductible in other years and items that are never taxable or deductible. The Group s liability for current tax is calculated using tax rates that have been enacted or substantively enacted by the end of the reporting period. Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred tax liabilities are generally recognized for all taxable temporary differences and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. Deferred tax assets arising from deductible temporary differences associated with such investments and interests are only recognized to the extent that it is probable that there will be sufficient taxable profits against which to utilize the benefits of the temporary differences and they are expected to reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the period in which the liability is settled or the asset realised, based on tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period. The measurement of deferred tax liabilities and assets reflects the tax consequences that would follow from the manner in which the Group expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred income tax assets and deferred income tax liabilities are offset and reported net in the consolidated statement of financial position if: The Group has a legally enforceable right to set off current income tax assets against current income tax liabilities; and Deferred income tax assets and the deferred income tax liabilities relate to income taxes levied by the same taxation authority on the same taxable entity and the Group intends to settle its current tax assets and liabilities on a net basis. Current and deferred tax are recognised as an expense or income in profit or loss, except when they relate to items that are recognised outside profit or loss (whether in other comprehensive income or directly in equity), in which case the tax is also recognised outside profit or loss, or where they arise from the initial accounting for a business combination. In the case of a business combination, the tax effect is included in the accounting for the business combination. The Russian Federation and Ireland also have various other taxes not based on income, which are assessed on the Group s activities. These taxes are included as a component of operating expenses in the consolidated income statement. NON-CURRENT ASSETS HELD FOR SALE Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered principally through a sale transaction rather than through continuing use. This condition is regarded as met only when the asset (or disposal group) is available for immediate sale in its present condition subject only to terms that are usual and customary for sales of such asset (or disposal group) and its sale is highly probable. Management must be committed to the sale, which should be expected to qualify for recognition as a completed sale within one year from the date of classification. When the Group is committed to a sale plan involving loss of control of a subsidiary, all of the assets and liabilities of that subsidiary are classified as held for sale when the criteria described above are met, regardless of whether the Group will retain a non-controlling interest in its former subsidiary after the sale. When the Group is committed to a sale plan involving disposal of an investment, or a portion of an investment, in an associate or joint venture, the investment or the portion of the investment that will be disposed of is classified as held for sale when the criteria described above are met, and the Group discontinues the use of the equity method in relation to the portion that is classified a held for sale. Any retained portion of an investment in an associate or a joint venture that has not been classified as held for sale continues to be accounted for using the equity method. The Group discontinues the use of the equity method at the time of disposal when the disposal results in the Group losing significant influence over the associate or joint venture. After the disposal takes place, the Group accounts for any retained interest in the associate or joint venture in accordance with IAS 39 unless the retained interest continues to be an associate or a joint venture, in which case the Group uses the equity method (see the accounting policy regarding investments in associates or joint ventures above). Non-current assets (and disposal groups) classified as held for sale are measured at the lower of their previous carrying amount and fair value less costs to sell. INVESTMENT PROPERTY Investment property, comprising office and commercial buildings, is held to earn future rentals or for capital appreciation. Investment property is initially measured at cost, including transactions costs. Subsequent to initial recognition, investment property is measured at the fair value amount, determined from market-based evidence by appraisal undertaken by professional independent appraisers. Gains and losses arising from changes in the fair value of investment property are included in income statement in the period in which they arise. An investment property is derecognised upon disposal or when the investment property is permanently withdrawn from use and no future economic benefits are expected from the disposal. Any gain or loss arising on derecognition of the property (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in profit or loss in the period in which the property is derecognised. PROVISIONS Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that the Group will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The amount recognised as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. When a provision is measured using the cash flows estimated to settle the present obligation, its carrying amount is the present value of those cash flows. When some or all of the economic benefits required to settle a provision are expected to be recovered from a third party, a receivable is recognised as an asset if it is virtually certain that reimbursement will be received and the amount of the receivable can be measured reliably. FINANCIAL GUARANTEE CONTRACTS ISSUED AND LETTERS OF CREDIT Financial guarantee contracts and letters of credit issued by the Group provide for specified payments to be made in order to reimburse the holder for a loss incurred such that payments are made when a specified debtor fails to make payment when due under the original or modified terms of a debt instrument. Financial guarantee contracts issued by the Group are initially measured at their fair values and, if not designated as at FVTPL, are subsequently measured at the higher of: The amount of the obligation under the contract, as determined in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets ; and The amount initially recognized less, where appropriate, cumulative amortization recognized in accordance with the revenue recognition policies. In order to determine the value of provisions for guarantees and other off-balance sheet commitments the Group performs the analysis of historical trends based on collected statistical information on collective basis. Based on the statistics on actual loss incurred by the Group during previous periods the calculation of estimated future losses is performed

62 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) CONTINGENCIES Contingent liabilities, which include certain guarantees, letters of credit and commitments loans and unused credit lines, are possible obligations that arise from past events whose existence will be confirmed only by the occurrence, or non-occurrence, of one or more uncertain future events not wholly within the control of the Group; or are present obligations that have arisen from past events but are not recognised because it is not probable that settlement will require the outflow of economic benefits, or because the amount of the obligations cannot be reliably measured. Contingent liabilities are not recognised in the consolidated financial statements but are disclosed unless the probability of settlement is remote. Contingent liabilities are not recognized in the consolidated statement of financial position but are disclosed unless the possibility of any outflow in settlement is remote. A contingent asset is not recognized in the consolidated statement of financial position but disclosed when an inflow of economic benefits is probable. SHARE CAPITAL AND SHARE PREMIUM Share capital and share premium amounts received before 1 January 2003 are recognized at the amount received restated for inflation and after 1 January 2003 are recognized at the amount received. Share premium represents the excess of the amount received over the nominal value of the shares issued. Costs directly attributable to the issue of new shares, other than on a business combination, are deducted from equity net of any related income taxes. Holders of preference shares with non-fixed rate dividend income are entitled to participate in the General Meeting of shareholders with voting rights addressing issues of reorganization and liquidation of the Bank and addressing issues on introducing amendments and additions to the Charter restricting the rights of holders of preferred shares. Each preference share entitles the holder to receive dividends on an equal basis with holders of ordinary shares. Dividends on ordinary shares and preference shares classified as equity are recognized, as a distribution of equity in the period in which they are approved by shareholders. Equity reserves. The reserves recorded in equity (other comprehensive income) on the Group s statement of financial position include: Revaluation of investments available-for-sale reserve which comprises changes in fair value of available-for-sale financial assets; Property, plant and equipment revaluation reserve, which comprises revaluation reserve of land and buildings. GOODWILL Goodwill acquired in a business combination is initially measured at cost, being the excess of the cost of the business combination over the Group s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Following initial recognition, goodwill is measured at cost less any accumulated impairment losses. Where goodwill forms part of a CGU (or group of CGUs) and part of the operation within that unit is disposed of, the goodwill associated with the operation disposed of is included in the carrying amount of the operation when determining the gain or loss on disposal of the operation. Goodwill disposed of in this circumstance is measured based on the relative values of the operation disposed of and the portion of the CGU retained. When subsidiaries are sold, the difference between the selling price and the net assets plus cumulative translation differences and goodwill is recognised in the income statement. For the purposes of impairment testing, goodwill is allocated to each of the Group s cash-generating units (or groups of cashgenerating units) that is expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually, or more frequently when there is indication that the unit may be impaired. If the recoverable amount of the cash-generating unit is less than its carrying amount, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to the other assets of the unit pro rata based on the carrying amount of each asset in the unit. Any impairment loss for goodwill is recognised directly in profit or loss in the consolidated income statement. An impairment loss recognised for goodwill is not reversed in subsequent periods. On disposal of the relevant cash-generating unit, the attributable amount of goodwill is included in the determination of the profit or loss on disposal. Goodwill on acquisitions of subsidiaries is disclosed on face of the consolidated statement of financial position. Investments in associates. An associate is an entity over which the Group has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies. The results and assets and liabilities of associates are incorporated in these consolidated financial statements using the equity method of accounting, except when the investment, or a portion thereof, is classified as held for sale, in which case it is accounted for in accordance with IFRS 5. Under the equity method, an investment in an associate is initially recognised in the consolidated statement of financial position at cost and adjusted thereafter to recognise the Group s share of the profit or loss and other comprehensive income of the associate. When the Group s share of losses of an associate exceeds the Group s interest in that associate (which includes any long-term interests that, in substance, form part of the Group s net investment in the associate), the Group discontinues recognising its share of further losses. Additional losses are recognised only to the extent that the Group has incurred legal or constructive obligations or made payments on behalf of the associate. An investment in an associate is accounted for using the equity method from the date on which the investee becomes an associate or a joint venture. On acquisition of the investment in an associate, any excess of the cost of the investment over the Group s share of the net fair value of the identifiable assets and liabilities of the investee is recognised as goodwill, which is included within the carrying amount of the investment. Any excess of the Group s share of the net fair value of the identifiable assets and liabilities over the cost of the investment, after reassessment, is recognised immediately in profit or loss in the period in which the investment is acquired. The requirements of IAS 39 are applied to determine whether it is necessary to recognise any impairment loss with respect to the Group s investment in an associate. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 Impairment of Assets as a single asset by comparing its recoverable amount (higher of value in use and fair value less costs to sell) with its carrying amount, Any impairment loss recognised forms part of the carrying amount of the investment. Any reversal of that impairment loss is recognised in accordance with IAS 36 to the extent that the recoverable amount of the investment subsequently increases. The Group discontinues the use of the equity method from the date when the investment ceases to be an associate, or when the investment is classified as held for sale. When the Group retains an interest in the former associate and the retained interest is a financial asset, the Group measures the retained interest at fair value at that date and the fair value is regarded as its fair value on initial recognition in accordance with IAS 39. The difference between the carrying amount of the associate or joint venture at the date the equity method was discontinued, and the fair value of any retained interest and any proceeds from disposing of a part interest in the associate or joint venture is included in the determination of the gain or loss on disposal of the associate. In addition, the Group accounts for all amounts previously recognised in other comprehensive income in relation to that associate on the same basis as would be required if that associate or joint venture had directly disposed of the related assets or liabilities. Therefore, if a gain or loss previously recognised in other comprehensive income by that associate would be reclassified to profit or loss on the disposal of the related assets or liabilities, the Group reclassifies the gain or loss from equity to profit or loss (as a reclassification adjustment) when the equity method is discontinued. When the Group reduces its ownership interest in an associate but the Group continues to use the equity method, the Group reclassifies to profit or loss the proportion of the gain or loss that had previously been recognised in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be reclassified to profit or loss on the disposal of the related assets or liabilities. When a Group entity transacts with an associate of the Group, profits and losses resulting from the transactions with the associate are recognised in the Group s consolidated financial statements only to the extent of interests in the associate that are not related to the Group. RETIREMENT AND OTHER BENEFIT OBLIGATIONS In accordance with the requirements of the Russian Federation legislation, pension payments are calculated by an employer as certain percentages of salary expenses and transferred to the Pension fund of the Russian Federation, which transfers them to pension funds selected by employees. The Group does not have obligation to transfer pension payments directly to pension funds selected by employees. This expense is charged to profit or loss in the period in which the related salaries are earned. Upon retirement, all retirement benefit payments are made by the pension funds selected by employees. The Group provides its employees with post-employment benefits in the form of defined contribution plans. The contributions to the defined contribution plan are included in staff costs on accrual basis. In addition, the Group has no post-retirement benefits or other significant compensated benefits requiring accrual

63 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) FOREIGN CURRENCY TRANSLATION In preparing the financial statements of each individual group entity, transactions in currencies other than the entity s functional currency (foreign currencies) are recognised at the rates of exchange prevailing at the dates of the transactions. At the end of each reporting period, monetary items denominated in foreign currencies are retranslated at the rates prevailing at that date. Non-monetary items carried at fair value that are denominated in foreign currencies are retranslated at the rates prevailing at the date when the fair value was determined. Non-monetary items that are measured in terms of historical cost in a foreign currency are not retranslated. Exchange differences on monetary items are recognised in profit or loss in the period in which they arise except for: Exchange differences on foreign currency borrowings relating to assets under construction for future productive use, which are included in the cost of those assets when they are regarded as an adjustment to interest costs on those foreign currency borrowings; Exchange differences on monetary items receivable from or payable to a foreign operation for which settlement is neither planned nor likely to occur (therefore forming part of the net investment in the foreign operation), which are recognised initially in other comprehensive income and reclassified from equity to profit or loss on repayment of the monetary items. For the purposes of presenting these consolidated financial statements, the assets and liabilities of the Group s foreign operations are translated into RUB using exchange rates prevailing at the end of each reporting period. Income and expense items are translated at the average exchange rates for the period, unless exchange rates fluctuate significantly during that period, in which case the exchange rates at the dates of the transactions are used. Exchange differences arising, if any, are recognised in other comprehensive income and accumulated in equity (and attributed to non-controlling interests as appropriate). On the disposal of a foreign operation (i.e. a disposal of the Group s entire interest in a foreign operation, or a disposal involving loss of control over a subsidiary that includes a foreign operation, or a partial disposal of an interest in a joint arrangement or an associate that includes a foreign operation of which the retained interest becomes a financial asset), all of the exchange differences accumulated in equity in respect of that operation attributable to the owners of the Bank are reclassified to profit or loss. In addition, in relation to a partial disposal of a subsidiary that includes a foreign operation that does not result in the Group losing control over the subsidiary, the proportionate share of accumulated exchange differences are re-attributed to non-controlling interests and are not recognised in profit or loss. For all other partial disposals (i.e. partial disposals of associates or joint arrangements that do not result in the Group losing significant influence or joint control), the proportionate share of the accumulated exchange differences is reclassified to profit or loss. Goodwill and fair value adjustments to identifiable assets acquired and liabilities assumed through acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the rate of exchange prevailing at the end of each reporting period. Exchange differences arising are recognised in other comprehensive income. The exchange rates used by the Group in the preparation of the consolidated financial statements as at year-end are as follows: RUB/1 US Dollar RUB/1 Euro RUB/Gold bullion(1 troy ounce) 39, , FIDUCIARY ACTIVITIES The Group also provides depositary services to its customers, which include transactions with securities on their depositary accounts. Assets accepted and liabilities incurred under the fiduciary activities are not included in the Group s consolidated financial statements. The Group accepts the operational risk on these activities, but the Group s customers bear the credit and market risks associated with such operations. SEGMENT REPORTING Operating segments are identified on the basis of internal reports about components of the Group that are regularly reviewed by the chief operating decision maker in order to allocate resources to the segment and to assess its performance. The Group measures information about operating segments in accordance with IFRS. RECOGNITION OF INCOME AND EXPENSE Recognition of interest income and expense. Interest income and expense are recognized on an accrual basis using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts (including all fees on points paid or received that form an integral part of the effective interest rate, transaction costs and other premiums or discounts) through the expected life of the debt instrument, or (where appropriate) a shorter period, to the net carrying amount on initial recognition. Once a financial asset or a group of similar financial assets has been written down (partly written down) as a result of an impairment loss, interest income is thereafter recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. Interest earned on assets at fair value is classified within interest income. Recognition of income on repurchase and reverse repurchase agreements. Interest income/expense on repurchase and reverse repurchase agreements is recognized in the connsolidated income statement based on the difference between the repurchase price accreted to date using the effective interest method and the sale price when such instruments are sold to third parties. When the reverse repo/repo is fulfilled on its original terms, the effective yield/interest between the sale and repurchase price negotiated under the original contract is recognized using the effective interest method. Recognition of fee and commission income. Loan origination fees are deferred, together with the related direct and incremental costs, and recognized as an adjustment to the effective interest rate of the loan. Where it is probable that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are deferred, together with the related direct costs, and recognized as an adjustment to the effective interest rate of the resulting loan. Where it is unlikely that a loan commitment will lead to a specific lending arrangement, the loan commitment fees are recognized in profit or loss over the remaining period of the loan commitment. Where a loan commitment expires without resulting in a loan, the loan commitment fee is recognized in profit or loss on expiry. Loan servicing fees are recognized as revenue as the services are provided. Loan syndication fees are recognized in profit or loss when the syndication has been completed. All other commissions are recognized when services are provided. Recognition of dividend income. Dividend income from investments is recognized when the shareholder s right to receive payment has been established (provided that it is probable that the economic benefits will flow to the Group and the amount of income can be measured reliably). Recognition of rental income. The Group s policy for recognition of income as a lessor is set out in the Leases section of this footnote. 3. CRITICAL ACCOUNTING JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY In the application of the Group s accounting policies the Group management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Critical judgements in applying accounting policies. The following are the critical judgements, apart from those involving estimations (see below), that the Group management has made in the process of applying the Group s accounting policies and that have the most significant effect on the amounts recognised in the consolidated financial statements. Consolidation of Bank Otkritie. The strategy of the Parent Company of the Group with respect to the business combination of NOMOS and OJSC Bank Otkritie, implies that NOMOS will hold a controlling interest in OJSC Bank Otkritie. In accordance with the strategy, the Group purchased from the Parent Company the total of 41.17% shares in OJSC Bank Otkritie : 17.0% shares on 23 August for RUB 5,549 million and another 24.17% shares originally held by the Deposit Insurance Agency on 4 December for RUB 7,915 million

64 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) As described in Note 5, the Group consolidated OJSC Bank Otkritie from 27 December although its voting rights represent 41.17% of the voting rights. This decision was based on the execution of an agreement with LLC Otkritie N stating that LLC Otkritie N irrevocably transfers its voting rights representing 44.52% of the total voting rights over OJSC Bank Otkritie to the Group. As a result of this agreement, the Group has 85.69% of the outstanding voting rights. The Group and OJSC Bank Otkritie are controlled by the Parent company before and after the acquisition of OJSC Bank Otkritie shares by the Group. Therefore, the Group considers the acquisition a common control transaction scoped out of IFRS 3R, Business Combinations. The Group considers it a critical accounting policy because a combination of entities under common control are not addressed in IFRS and therefore, the Group elected to account for this transaction prospectively as of the date it acquired control. The assets and liabilities of OJSC Bank Otkritie were recognised at the carryover basis based on its annual IFRS financial statements. The difference between the consideration paid and the net assets acquired is accounted for directly in equity. The income statement of OJSC Bank Otkritie for the year was not recognized as the Group gained control on 27 December. The Group elects to account for such transactions prospectively as of the date that common control was established. The assets and liabilities acquired are recognised at the carrying amounts recognised previously in the Group controlling shareholder s consolidated financial statements at the date of acquisition. The consolidated statement of financial position, consolidated income statement, consolidated statement of other comprehensive income and cash flows for periods prior to the acquisition date are not restated (Note 5). Impairment of loans and receivables.the Group regularly reviews its loans and receivables to assess for impairment. The Group s loan impairment provisions are established to recognize incurred impairment losses in its portfolio of loans and receivables. The Group considers accounting estimates related to allowance for impairment of loans and receivables a key source of estimation uncertainty because (i) they are highly susceptible to change from period to period as the assumptions about future default rates and valuation of potential losses relating to impaired loans and receivables are based on recent performance experience, and (ii) any significant difference between the Group s estimated losses and actual losses would require the Group to record provisions which could have a material impact on its financial statements in future periods. The Group uses management s judgment to estimate the amount of any impairment loss in cases where a borrower has financial difficulties and there are few available sources of historical data relating to similar borrowers. Similarly, the Group estimates changes in future cash flows based on past performance, past customer behavior, observable data indicating an adverse change in the payment status of borrowers in a group, and national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans. The Group uses management s judgment to adjust observable data for a group of loans to reflect current circumstances not reflected in historical data. The allowances for impairment of financial assets in the consolidated financial statements have been determined on the basis of existing economic and political conditions. The Group is not in a position to predict what changes in conditions will take place in the Russian Federation and what effect such changes might have on the adequacy of the allowances for impairment of financial assets in future periods. For loans to legal entities the Group first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for loans and receivables that are not individually significant. If the Group determines that no objective evidence of impairment exists for an individually assessed loan or receivable, whether significant or not, it includes the loan in a group of loans and receivables with similar credit risk characteristics and collectively assesses them for impairment. Loans and receivables that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on a loan or receivable has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan or receivable and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the loan or receivable s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows. In some cases the observable data required to estimate the amount of an impairment loss on a loan or receivable may be limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in financial difficulties and there is little available historical data relating to similar borrowers. In such cases, the Group uses its experience and judgement to estimate the amount of any impairment loss. The Group estimates the impairment allowance for loans to individuals based on its past loss experience for these types of loans. The significant assumptions used in determining the impairment allowance for loans to individuals are as follows: Management assumes that loss migration rates can be estimated based on historic loss migration pattern using historical data; Management adjusts its past historical loss experience taking into account the current economic situation and the impact of the economic crisis on the quality of the loan portfolio. As at and the gross loans and receivables totaled RUB 912,113 million and RUB 612,466 million, respectively, and allowance for impairment losses amounted to RUB 32,839 million and RUB 21,902 million, respectively. Valuation of financial instruments. The Group uses valuation techniques that include inputs that are not based on observable market date to estimate the fair value of certain types of financial instruments. Note 34 provides detailed information about the key assumptions used in the determination of the fair value of financial instruments, as well as the detailed sensitivity analysis for these assumptions. The Group management believes that the chosen valuation techniques and assumptions used are appropriate in determining the fair value of financial instruments. Since 30 September the Group has applied Debit/Credit value adjustment to determine fair value of financial instruments. In order to measure fair value, credit value adjustments (CVA) are necessary to reflect the credit risk of the counterparty inherent in OTC derivative instruments, derivatives embedded in funded assets designated at fair value and derivatives embedded in traded debt instruments. This amount represents the estimated fair value of protection required to hedge the counterparty credit risk of such instruments. CVA is determined for each counter-party, considering all exposures to that counterparty and is dependent on expected future value of exposures, default probabilities and recovery rates, applicable collateral or netting arrangements, break clauses and other contractual factors. The Group estimates debit valuation adjustments (DVA) to incor porate own credit in the valuation of derivatives, effectively consistent with the CVA methodology. DVA represents the theoretical cost to counterparties of hedging, or the credit risk reserve that a counterparty could reasonably be expected to hold, against their credit risk exposure to the Group. DVA estimate is defined by deal s maturity as well as credit rating assigned to the members of the Group as of reporting date. Impairment of goodwill. Goodwill is reviewed for impairment annually, or more frequently, if events or changes in circumstances indicate that the carrying value may be impaired. Determining whether goodwill is impaired requires an estimation of the value in use of the cash-generating units to which goodwill has been allocated. The value in use calculation requires the Group management to estimate the future cash flows expected to arise from the cash-generating unit and a suitable discount rate in order to calculate present value. The carrying amount of goodwill as at and was RUB 1,999 million and RUB 809 million, respectively. Testing goodwill revealed no evidence of impairment. The recoverable amount of the CGUs have been determined based on value in use calculations, using cash flow projections based on financial budgets approved by senior management covering a five-year period. Projected growth rates used to extrapolate cash flows beyond the budget period assumed to be zero. Testing is carried out by discounting the future cash flows. The discount rates reflect management s, assessment of return on capital employed (ROCE), this is the benchmark used by management to evaluate the performance and future investment proposals. The discount rate applied is calculated by the method of cumulative build up and amounted to 19.19%. Property carried at revalued amounts. Certain property (land and buildings) is measured at revalued amounts. The date of the latest appraisal was. The next revaluation is preliminary scheduled as at The carrying value of revalued property and land amounted to RUB 13,363 million and RUB 8,975 million as at and, respectively. Details of the valuation techniques used are set out in Note 14. Investment property carried at revalued amounts. Investment property is measured at revalued amounts. The date of the latest appraisal was. The next revaluation is preliminary scheduled as at The carrying value of revalued property amounted to RUB 8,571 million and RUB 4,761 million as at and, respectively. Details of the valuation techniques used are set out in Note 13. Allowance for impairment losses for other assets. The impairment for other assets is calculated based on the analysis of assets

65 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) subject to risks and reflects the amount sufficient, in the opinion of the management, to cover relevant losses. The provisions are created as a result of an individual evaluation of assets subject to risks regarding other assets being material individually and on the basis of an individual or joint evaluation of other assets not being material individually. As at and allowance for impairment losses on financial assets amounted to RUB 646 million and RUB 182 million, respectively. Provision for guarantees and other off-balance sheet commitments. The accounting estimates and judgments related to the provision for off-balance sheet commitments is an area of significant management judgment because the underlying assumptions used for both the individually and collectively assessed impairment can change from period to period and may significantly affect the Group s results of operations. As at and provisions for guarantees and other off-balance sheet commitments amounted to RUB 369 million and RUB 362 million, respectively. 4. ADOPTION OF NEW AND REVISED STANDARDS AMENDMENTS TO IFRSS AFFECTING AMOUNTS REPORTED IN THE FINANCIAL STATEMENTS In the current year, the following new and revised Standards and Interpretations have been adopted and have affected the amounts reported in these financial statements. STANDARDS AFFECTING THE FINANCIAL STATEMENTS New and revised Standards on consolidation, joint arrangements, associates and disclosures In May 2011, a package of five standards on consolidation, joint arrangements, associates and disclosures was issued comprising IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IFRS 12 Disclosure of Interests in Other Entities, IAS 27 (as revised in 2011) Separate Financial Statements and IAS 28 (as revised in 2011) Investments in Associates and Joint Ventures. In the current year, the Group has applied for the first time IFRS 10 and IFRS 12 together with the amendments to IFRS 10 and IFRS 12 regarding the transitional guidance. IAS 27 (as revised in 2011) is not applicable to the Group as it deals only with separate financial statements. The impact of the application of these standards is set out below. Impact of the application of IFRS 10. IFRS 10 replaces the parts of IAS 27 Consolidated and Separate Financial Statements that deal with consolidated financial statements and SIC-12 Consolidation Special Purpose Entities. IFRS 10 changes the definition of control such that an investor has control over an investee when a) it has power over the investee, b) it is exposed, or has rights, to variable returns from its involvement with the investee and c) has the ability to use its power to affect its returns. All three of these criteria must be met for an investor to have control over an investee. Previously, control was defined as the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. Additional guidance has been included in IFRS 10 to explain when an investor has control over an investee. Some guidance included in IFRS 10 that deals with whether or not an investor that owns less than 50% of the voting rights in an investee has control over the investee is relevant to the Group. Impact of the application of IFRS 12. IFRS 12 is a new disclosure standard and is applicable to entities that have interests in subsidiaries, joint arrangements, associates and/or unconsolidated structured entities. The relevant disclosures were included in Note 1, 24. Application of the package of five standards did not lead to any additional consolidations or deconsolidations. Amendments to IAS 1 Presentation of financial statements (amended June 2011). The Group has applied the amendments to IAS 1 Presentation of Items of Other Comprehensive Income (effective from annual periods beginning on or after 1 July ). The amendment increases the required level of disclosure within the statement of comprehensive income. The impact of this amendment has been to analyse items within the statement of comprehensive income between items that will not be reclassified subsequently to profit or loss and items that will be reclassified subsequently to profit or loss in accordance with the respective IFRS standard to which the item relates. The financial statements have also been amended to analyse income tax on the same basis. The amendments have been applied retrospectively, and hence the presentation of items of comprehensive income has been restated to reflect the change. Other than the above mentioned presentation changes, the application of the amendments to IAS 1 do not result in any impact on profit or loss, comprehensive income and total comprehensive income. IAS 19 Employee Benefits (revised June 2011) In the current year, the Group has applied IAS 19 (as revised in June 2011) Employee Benefits and the related consequential amendments in advance of their effective dates. The Group has applied IAS 19 (as revised in June 2011) retrospectively and in accordance with the transitional provisions as set out in IAS These transitional provisions do not have an impact on future periods. The amendments to IAS 19 change the accounting for defined benefit schemes and termination benefits. The most significant change relates to the accounting for changes in defined benefit obligations and scheme assets. The amendments require the recognition of changes in defined benefit obligations and in fair value of scheme assets when they occur, and hence eliminate the corridor approach permitted under the previous version of IAS 19 and accelerate the recognition of past service costs. All actuarial gains and losses are recognised immediately through other comprehensive income in order for the net pension asset or liability recognised in the consolidated balance sheet to reflect the full value of the scheme deficit or surplus. Furthermore, the interest cost and expected return on scheme assets used in the previous version of IAS 19 are replaced with a net-interest amount under IAS 19 (as revised in June 2011), which is calculated by applying a discount rate to the net defined benefit liability or asset. IAS 19 (as revised in June 2011) also introduces more extensive disclosures in the presentation of the defined benefit cost. Application of the Amendments to IAS 19 Employee Benefits did not result in significant changes to the Group s consolidated financial statements.the Group doesn t provide benefit plans and long-term compensations. IFRS 13 Fair Value Measurement. IFRS 13 establishes a single source of guidance for fair value measurements and disclosures about fair value measurements. The scope of IFRS 13 is broad; the fair value measurement requirements of IFRS 13 apply to both financial instrument items and non-financial instrument items for which other IFRSs require or permit fair value measurements and disclosures about fair value measurements, except for share-based payment transactions that are within the scope of IFRS 2 Share-based Payment, leasing transactions that are within the scope of IAS 17 Leases, and measurements that have some similarities to fair value but are not fair value (e.g. net realisable value for the purposes of measuring inventories or value in use for impairment assessment purposes). IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions. Fair value under IFRS 13 is an exit price regardless of whether that price is directly observable or estimated using another valuation technique. Also, IFRS 13 includes extensive disclosure requirements. IFRS 13 requires prospective application from 1 January. In addition, specific transitional provisions were given to entities such that they need not apply the disclosure requirements set out in the Standard in comparative information provided for periods before the initial application of the Standard. In accordance with these transitional provisions, the Group has not made any new disclosures required by IFRS 13 for the comparative period (please see Notes 7,8, 9,12,13,14,16 and 34 for the disclosures). Other than the additional disclosures, the application of IFRS 13 has not had any material impact on the amounts recognised in the consolidated financial statements. There is no material impact of CVA and DVA application. Amendments to IAS 1 Presentation of Financial Statements (as part of the Annual Improvements to IFRSs Cycle issued in May ). The Annual Improvements to IFRSs have made a number of amendments to IFRSs. The amendments that are relevant to the Group are the amendments to IAS 1 regarding when a statement of financial position as at the beginning of the preceding period (third statement of financial position) and the related notes are required to be presented. The amendments specify that a third statement of financial position is required when a) an entity applies an accounting policy retrospectively, or makes a retrospective restatement or reclassification of items in its financial statements, and b) the retrospective application, restatement or reclassification has a material effect on the information in the third statement of financial position. The amendments specify that related notes are not required to accompany the third statement of financial position. In the current year, the Group has applied a number of new and revised IFRSs (see the discussion above), which has resulted in material effects on the information in the consolidated statement of financial position as at 1 January. The amendments to IFRS 7 Financial Instruments: Disclosures require entities to disclose information about rights of offset and related arrangements (such as collateral posting requirements) for

66 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) financial instruments under an enforceable master netting agreement or similar arrangement. The Group adopted it, but there is no material effect on the Group financial statements and no additional notes required. NEW AND REVISED IFRSS IN ISSUE BUT NOT YET EFFECTIVE The Group has not applied the following new and revised IFRSs that have been issued but are not yet effective: IFRS 9 Financial Instruments. IFRS 9, issued in November 2009, introduced new requirements for the classification and measurement of financial assets. IFRS 9 was amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition. Key requirements of IFRS 9: All recognised financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement are required to be subsequently measured at amortised cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. All other debt investments and equity investments are measured at their fair value at the end of subsequent accounting periods. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognised in profit or loss. With regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability that is attributable to changes in the credit risk of that liability is presented in other comprehensive income, unless the recognition of the effects of changes in the liability s credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit or loss. Changes in fair value attributable to a financial liability s credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss is presented in profit or loss. Hedge accounting requirements were amended to align accounting more closely with risk management. The standard provides entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 and continuing to apply IAS 39 to all hedges because the standard currently does not address accounting for macro hedging. The amendments made to IFRS 9 in November remove the mandatory effective date from IFRS 9. However, entities may still choose to apply IFRS 9 immediately. The management of the Group anticipate that the application of IFRS 9 in the future may have a significant impact on amounts reported in respect of the Group s financial assets and financial liabilities (e.g. the Group s investments in redeemable notes that are currently classified as available-for-sale financial assets will have to be measured at fair value at the end of subsequent reporting periods, with changes in the fair value being recognised in profit or loss). However, it is not practicable to provide a reasonable estimate of the effect of IFRS 9 until a detailed review has been completed. Amendments to IAS 32 Offsetting Financial Assets and Financial Liabilities. The amendments to IAS 32 clarify the requirements relating to the offset of financial assets and financial liabilities. Specifically, the amendments clarify the meaning of currently has a legally enforceable right of set-off and simultaneous realisation and settlement. The management of the Group does not anticipate that the application of these amendments to IAS 32 will have a significant impact on the Group s consolidated financial statements as the Group does not have any financial assets and financial liabilities that qualify for offset. Annual Improvements to IFRSs (issued in December and effective for annual periods beginning on or after 1 July 2014) The improvements consist of changes to four standards. The basis for conclusions on IFRS 1 is amended to clarify that, where a new version of a standard is not yet mandatory but is available for early adoption; a first-time adopter can use either the old or the new version, provided the same standard is applied in all periods presented. IFRS 3 was amended to clarify that it does not apply to the accounting for the formation of any joint arrangement under IFRS 11. The amendment also clarifies that the scope exemption only applies in the financial statements of the joint arrangement itself. The amendment of IFRS 13 clarifies that the portfolio exception in IFRS 13, which allows an entity to measure the fair value of a group of financial assets and financial liabilities on a net basis, applies to all contracts (including contracts to buy or sell non-financial items) that are within the scope of IAS 39 or IFRS 9. IAS 40 was amended to clarify that IAS 40 and IFRS 3 are not mutually exclusive. The guidance in IAS 40 assists preparers to distinguish between investment property and owner-occupied property. Preparers also need to refer to the guidance in IFRS 3 to determine whether the acquisition of an investment property is a business combination. Unless otherwise described above, the new standards and interpretations are not expected to affect significantly the Group s consolidated financial statements. 5. ACQUISITIONS AND DISPOSALS ACQUISITIONS AND DISPOSAL DURING THE YEAR ENDED 31 DECEMBER The strategy of the Parent Company of the Group with respect to the business combination of NOMOS and OJSC Bank Otkritie implies that NOMOS will hold a controlling interest in OJSC Bank Otkritie. In accordance with the strategy, the Group purchased from the Parent Company the total of 41.17% shares in OJSC Bank Otkritie : 17.0% shares on 23 August for RUB 5,549 million and another 24.17% shares originally held by the Deposit Insurance Agency on 4 December for RUB 7,915 million. As at 27 December the Group concluded an agreement with LLC Otkritie N stating that LLC Otkritie N transfers its voting rights over OJSC Bank Otkritie to the Group without compensation, the terms of the agreement can not be revised and reversed without consent of the Group. Thereby, the Group obtained voting rights equal to 44.52% interest share in addition to 41.17% already owned and achived the power to govern the financial and operating policies of OJSC Bank Otkritie so as to obtain benefits from its activities. Thereby, OJSC Bank Otkritie is consolidated from the 27 December on which control was transferred to the Group. As both the Group and OJSC Bank Otkritie were under common control of OJSC Financial corporation OTKRITIE as of the date of acquisition the transaction was accounted as under common control transaction for the purposes of IFRS reporting. The assets and liabilities of OJSC Bank Otkritie were recognised at the carryover basis based on its annual IFRS financial statements. The difference between the consideration paid and the net assets acquired is accounted for directly in equity. The income statement of OJSC Bank Otkritie for the year was not recognized as the Group gained control on 27 December. The Group elects to account for such transactions prospectively as of the date that control was established. The assets and liabilities acquired are recognised at the carrying amounts recognised previously in the Group controlling shareholder s consolidated financial statements at the date of acquisition. The consolidated statement of financial position, consolidated income statement, consolidated statement of other comprehensive income and cash flows for periods prior to the acquisition date are not restated. The following table presents information on net assets of OJSC Bank Otkritie as of the acquisition date on the carryover basis based on its IFRS financial statements: OJSC Bank Otkritie ASSETS Cash and balances with the Central Bank of the Russian Federation 28,162 Minimum reserve deposits with the Central Bank of the Russian Federation 1,682 Precious metals 65 Financial assets at fair value through profit or loss 483 Loans and advances to banks 22,184 Loans to customers 98,569 Investments available-for-sale 37,451 Property, plant and equipment 5,031 Goodwill 1,190 Intangible assets 1,050 Investment property 4,175 Other assets 2,617 TOTAL ASSETS 202,

67 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) OJSC Bank Otkritie Financial liabilities at fair value through profit or loss 242 Deposits from banks 18,802 Customer accounts 141,817 Bonds and Eurobonds 3,249 Promissory notes 5,189 Deferred income tax liabilities 688 Other liabilities 1,739 Subordinated debt 5,274 TOTAL LIABILITIES 177,000 NET ASSETS 25,659 Parent company s ownership interest (%) 41.17% Consideration paid 13,464 Income from associate* 188 Other comprehensive income from associate* 115 Plus: non-controlling interest 15,095 Less: Net assets (25,659) RESULT FROM THE ACQUISITION (3,203) * The Group assessed the amount of the revaluation of the equity interest previously held as an investments in associate before the acquisition date, which amounted to RUB 188 million (recognized in consolidated income statement as gain from associate) and RUB 115 million (recognized in consolidated stament of other comprehensive income). Non-controlling interest was measured at the non-controlling interest s proportionate share of the acquiree s identifiable net assets. The Group assessed the amount of comprehensive income of acquiree s from date of getting control till reporting date and considers this amount to be immaterial. Net cash outflow on acquisition of subsidiaries Consideration paid (13,464) plus: cash and cash equivalents acquired 48,501 TOTAL 35,037 Had this acquisition been effected at 1 January,, the operating income of the Group from continuing operations would have been RUB 57,655 million, and the profit for the year from continuing operations would have been RUB 18,809 million. The Group management considers these pro-forma numbers to represent an approximate measure of the performance of the combined group on an annualized basis and to provide a reference point for comparison in future periods. The following table represents the uncollectable amount of acquired receivables as well as the gross contractual amount of receivables: Gross contractual amounts receivable Amount not expected to be received ASSETS: Correspondent accounts with the Central Bank of the Russian Federation 2,864 Loans and advances to banks and other financial institutions 22,186 2 Loans to customers 105,934 7,365 Other assets 3, ,264 8,031 Before being acquired by the Group OJSC Bank Otkrytie had the following subsidiaries: CJSC Mortgage Agent Otkritie 1 and ZPIF Centr (Olma). As a result of acquisition the Group also acquired these subsidiaries. In July the Bank has completed the reorganization of two of its subsidiaries NOMOS-REGIOBANK and OJSC NOMOS Siberia by merging them with the Bank. In July the Group founded LLC NM-Aktiv, which provides asset management services. In January, February and August the Group acquired in total additional 13.01% share in OJSC Novosibirsk Municipal Bank and increased its share from 86.98% as at to 99.99% as at. In December the Group founded LLC NM-Kapital, which provides asset management services. In December the Group extinguished shares of ZPIF Strategiya Razvitiya. ACQUISITIONS AND DISPOSAL DURING THE YEAR ENDED 31 DECEMBER In March Group has founded a new investment fund ZPIF Strategiya Razvitiya, which is wholly-owned and was consolidated by the Group as at. The amount of investments in this investment fund is RUB 25 million. In September the Group has sold 11% shares of OJSC Novosibirsk Municipal Bank to minority shareholders and decreased its control from 97.98% as at 2011 to 86.98% as at. In October the Group acquired 49% share in LLC Attenium and increased its share from 51.00% as at 2011 to % as at, as a result share in LLC NKO Payment System Rapida, LLC Processing centre Rapida, LLC Gikor increased from 51% to 100%. In November the Group has sold for RUB 500 million its share in LLC Baltaktiv and LLC Inbank to ICT Group. 6. CASH AND BALANCES WITH THE CENTRAL BANK OF THE RUSSIAN FEDERATION Cash and balances with the Central Bank of the Russian Federation are presented as follows: Cash on hand 35,120 13,707 Balances with the Central Bank of the Russian Federation 52,712 37,441 TOTAL CASH AND BALANCES WITH THE CENTRAL BANK OF THE RUSSIAN FEDERATION 87,832 51,148 For the purpose of consolidated statement of cash flows preparation cash and cash equivalents comprise of the following components: CASH AND CASH EQUIVALENTS: Cash and balances with the Central Bank of the Russian Federation 87,832 51,148 Correspondent accounts with banks 47,246 19,713 Loans to banks with original maturity up to 90 days 51,556 Loans under reverse repurchase agreements with original maturity up to 90 days 10,177 Cash in trust operations and on broker accounts (Note 16) 313 TOTAL CASH AND CASH EQUIVALENTS 197,124 70,

68 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) 7. PRECIOUS METALS Precious metals are presented as follows: Gold in vault 4,867 5,804 Silver in transit Silver in vault Precious metals in coins 58 Gold in transit 45 1 Other precious metals in vault TOTAL PRECIOUS METALS 5,746 6,402 Details of the Group s information about the fair value hierarchy of precious metals and liabilities denominated in precious metals as at and are as follows: Quoted prices in active market (Level 1) Valuation techniques based on observable market data (Level 2) Valuation techniques incorporating information other than observable market data (Level 3) Total 31 DECEMBER Precious metals 5,746 5,746 TOTAL PRECIOUS METALS 5,746 5,746 Deposits from banks 6,641 6,641 Customer accounts 4,438 4,438 LIABILITIES DENOMINATED IN PRECIOUS METALS 11,079 11, DECEMBER Precious metals 6,402 6,402 TOTAL PRECIOUS METALS 6,402 6,402 Deposits from banks 13,846 13,846 Customer accounts 6,366 6,366 LIABILITIES DENOMINATED IN PRECIOUS METALS 20,212 20, FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS As at financial assets at fair value through profit or loss comprise: Interest rate to nominal Maturity date FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS: DEBT SECURITIES: Corporate bonds and Eurobonds 75, % February 2014 February 2045 Bonds and Eurobonds issued by banks 61, % February 2014 June 2035 OFZ bonds 29, % March 2014 February 2036 Municipal bonds 10, % 10.0% April 2014 October 2020 Russian Federation ( RF ) Government Eurobonds 1, % March 2030 TOTAL DEBT SECURITIES 178,924 EQUITY SECURITIES Corporate shares 27 TOTAL EQUITY SECURITIES 27 DERIVATIVE FINANCIAL INSTRUMENTS (NOTE 9) 3,035 TOTAL FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS 181,986 Pledged under repurchase agreements with banks Pledged under repurchase agreements with customers Pledged as collateral with CBR Total collateral Corporate bonds and Eurobonds 75,657 6,820 29,149 35,969 Bonds and Eurobonds issued by banks 61,715 10,682 29,931 1,141 41,754 OFZ bonds 29,778 22,405 2,634 25,039 Municipal bonds 10,664 2,654 3,858 6,512 RF Government Eurobonds 1,110 1,110 1,110 Corporate shares 27 TOTAL FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS* 178,951 20,156 86,453 3, ,384 * Excluding derivative financial instruments. As at financial assets at fair value through profit or loss comprise: Interest rate to nominal Maturity date FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS: DEBT SECURITIES: Bonds and Eurobonds issued by banks 34, % February June 2035 Corporate bonds and Eurobonds 34, % March January 2044 OFZ bonds 19, % February February 2036 Promissory notes of credit institutions 6,833 September March 2014 Municipal bonds 3, % 13% April 2014 November 2017 RF Government Eurobonds 2, % March 2030 TOTAL DEBT SECURITIES : 100,247 EQUITY SECURITIES: Corporate shares 30 TOTAL EQUITY SECURITIES: 30 DERIVATIVE FINANCIAL INSTRUMENTS (NOTE 9) 3,977 TOTAL FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS 104,254 As at the Group changed the presentation of information disclosure on financial assets at fair value through profit or loss pledged uder repurchase agreements. Securities received under reverse repurchase agreement and subsequently pledged under repurchase agreements are now separately disclosed in Notes 17 and 18. Pledged under repurchase agreements with banks Pledged under repurchase agreements with customers Pledged as collateral with CBR Total collateral Bonds and Eurobonds issued by banks 34,302 10,987 8,493 19,480 Corporate bonds and Eurobonds 34, ,824 13,449 OFZ bonds 19, ,172 17,478 Promissory notes of credit institutions 6,833 6,541 6,541 Municipal bonds 3, RF Government Eurobonds 2,231 Corporate shares 30 TOTAL FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS* 100,277 11,918 45,485 57,403 * Excluding derivative financial instruments

69 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) As at and bonds and Eurobonds issued by banks are represented by bonds issued mainly by Russian banks. Corporate bonds and Eurobonds are represented by bonds of Russian companies. Promissory notes are represented by promissory notes issued by Russian banks. Russian State Bonds (OFZ bonds) are Rouble-denominated government securities guaranteed by the Ministry of Finance of the Russian Federation. RF Government Eurobonds are securities issued by the Ministry of Finance of the Russian Federation, and are freely tradable internationally. Municipal bonds are bonds issued by local authorities of the Russian Federation. Corporate shares are actively traded shares in the open market issued by Russian companies. Details of the Group s information about the fair value hierarchy as at and are as follows: Quoted prices in active market (Level 1) Valuation techniques based on observable market data (Level 2) Valuation techniques incorporating information other than observable market data (Level 3) Total 31 DECEMBER Corporate bonds and Eurobonds 74,653 1,004 75,687 Bonds and Eurobonds issued by banks 61,715 61,685 OFZ bonds 29,778 29,778 Municipal bonds 10,664 10,664 RF Government Eurobonds 1,110 1,110 Shares FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS* 177,947 1, , DECEMBER Bonds and Eurobonds issued by banks 34,302 34,302 Corporate bonds and Eurobonds 34,023 34,023 OFZ bonds 19,191 19,191 Promissory notes of credit institutions 6,833 6,833 Municipal bonds 3,667 3,667 RF Government Eurobonds 2,231 2,231 Shares FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS* 93,444 6, ,277 * Excluding derivative financial instruments. 9. DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments are presented as follows: The following table provides information on derivative financial instruments as at and : Nominal Fair value Nominal Fair value amount Asset Liability amount Asset Liability DERIVATIVE FINANCIAL INSTRUMENTS: FOREIGN CURRENCY Forwards (201,952) 1,117 (957) (189,764) 3,786 (1,829) Options 1,052 (806) 32 (32) Currency-interest swaps (28,263) 822 (506) PRECIOUS METALS Settlement forwards 16 (16) Forwards (10,184) 12 (516) (8,481) 92 (19) DEALING SECURITY Forwards 11 (5) Futures 3 (7) OTHER DERIVATIVE Forwards 3 (2) 2 Interest rate swaps 2 (58) 62 (168) TOTAL DERIVATIVE FINANCIAL INSTRUMENTS 3,035 (2,866) 3,977 (2,055) As at financial liabilities at fair value through profit or loss comprise derivative financial instruments in the amount of RUB 2,055 million and other financial liabilities at fair value through profit or loss in the amount of RUB 1,136 million. The primary purpose of the derivatives used by the Group is to reduce currency risk and interest rate risks. Such derivatives have the same term to maturity as the underlying assets. Most of the Group s derivative trading activities relate to deals with customers that are normally offset by transactions with other counterparties. The Group may also take positions with the expectation of profiting from favorable movements in prices, rates or indices. FORWARDS AND FUTURES Forward contracts are contractual agreements to buy or sell a specified financial instrument at a specific price and date in the future. Forwards are customised contracts transacted in the over-the-counter market. The Group has credit exposure to the counterparties of forward contracts. Forward contracts also result in market risk exposure. Futures contracts are transacted in standardised amounts on regulated exchanges and are subject to daily cash margin requirements. The main differences in the risk associated with forward and futures contracts are credit risk and liquidity risk. The Group has credit exposure to the counterparties of forward contracts. The credit risk related to future contracts is considered minimal because the cash margin requirements of the exchange help ensure that these contracts are always honoured. SWAPS Swaps are contractual agreements between two parties to exchange streams of payments over time based on specified notional amounts, in relation to movements in a specified underlying index such as an interest rate, foreign currency rate or equity index. Interest rate swaps relate to contracts taken out by the Group with other financial institutions in which the Group either receives or pays a floating rate of interest in return for paying or receiving, respectively, a fixed rate of interest. The payment flows are usually net, with the difference being paid by one party to the other. Interest rate swaps are used for interest rate risks management and presented as the exchange of interest payments for nominal amount, amortized during the time and nominated in RUB, EUR and USD

70 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) The Group uses interest rate swaps for exchange of fixed interest rate for floating interest rate and vice versa. The floating interest rate is tied to basic interest rate LIBOR on the different terms basis. Interest rate swaps are subject to price risk associated with a change in the price of an underlying asset and credit risk, related to the possibility of violating the terms of the transaction by the counterparty of the deal. OPTIONS Options are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy or sell a specific amount of a financial instrument at a fixed price, either at a fixed future date or at any time within a specified period. The Group purchases and sells options through regulated exchanges and in the over-the-counter markets. Options purchased by the Group provide the Group with the opportunity to purchase (call options) or sell (put options) the underlying asset at an agreed-upon value either on or before the expiration of the option. The Group is exposed to credit risk on purchased options only to the extent of their carrying amount, which is their fair value. Details of the Group s information about the fair value hierarchy as at and are as follows: 10. LOANS AND ADVANCES TO BANKS AND OTHER FINANCIAL INSTITUTIONS Loans and advances to banks and other financial institutions comprise: Loans to banks 76,240 86,566 Correspondent accounts with banks 47,246 19,713 Loans under reverse repurchase agreements 10,177 5,307 Less: allowance for impairment losses (2) TOTAL LOANS AND ADVANCES TO BANKS AND OTHER FINANCIAL INSTITUTIONS 133, ,586 Carrying value of loans under reverse repurchase agreements as at and and fair value of collateral held are presented as follows: Quoted prices in active market (Level 1) Valuation techniques based on observable market data (Level 2) Valuation techniques incorporating information other than observable market data (Level 3) Total 31 DECEMBER Foreign currency forwards 1,117 1,117 Foreign currency option 1,052 1,052 Currency interest swaps Precious metals settlement forwards Precious metals forwards Dealing security forwards Other forwards 3 3 Interest rate swaps 2 2 DERIVATIVE FINANCIAL INSTRUMENTS 3,035 3,035 Foreign currency forwards (957) (957) Foreign currency option (806) (806) Precious metals forwards (516) (516) Currency interest swaps (506) (506) Interest rate swaps (58) (58) Precious metals settlement forwards (16) (16) Dealing security forwards (5) (5) Other forwards (2) (2) FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS (2,866) (2,866) 31 DECEMBER Foreign currency forwards 3,786 3,786 Foreign currency option Precious metals forwards Dealing security forwards 3 3 Other forwards 2 2 Interest rate swaps DERIVATIVE FINANCIAL INSTRUMENTS 3,977 3,977 Foreign currency forwards (1,829) (1,829) Foreign currency option (32) (32) Precious metals forwards (19) (19) Dealing security futures contracts (7) (7) Interest rate swaps (168) (168) Other financial liabilities at fair value through profit and loss (1,136) (1,136) FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS (3,191) (3,191) Carrying value of loans Fair value of collateral Carrying value of loans Fair value of collateral Shares 5,786 6,670 OFZ bonds 1,695 1,791 2,438 2,891 Corporate bonds and Eurobonds 1,243 1,501 1,098 1,367 Municipal bonds 916 1,144 1,371 1,707 Bonds and Eurobonds issued by banks TOTAL 10,177 11,768 5,307 6,408 As at and the loans under reverse repurchase agreements to banks have contractual maturities from January 2014 to March 2014 and January, respectively. As at and included in loans and advances to banks and other financial institutions are guarantee deposits placed by the Group for its operations with plastic cards in the amount of RUB 1,156 million and RUB 702 million, respectively. 11. LOANS TO CUSTOMERS Loans to customers comprise: LOANS TO CORPORATE AND SMALL BUSINESS CLIENTS Corporate loans 563, ,468 Small business loans to corporates 51,040 40,609 Net investments in finance lease 8,558 5,025 Lease contracts to individual entrepreneurs 381 TOTAL LOANS TO CORPORATE AND SMALL BUSINESS CLIENTS 623, ,483 Loans under reverse repurchase agreements Loans under reverse repurchase agreements to legal entities 106,637 49,290 Loans under reverse repurchase agreements to individuals 78 TOTAL LOANS UNDER REVERSE REPURCHASE AGREEMENTS 106,715 49,290 LOANS TO RETAIL BUSINESS CLIENTS Consumer loans 111,260 47,083 Mortgage loans 54,728 38,247 Car loans 8,742 3,875 Credit cards 7,471 2,488 TOTAL LOANS TO RETAIL BUSINESS CLIENTS 182,201 91,693 GROSS LOANS TO CUSTOMERS 912, ,466 Less Allowance for impairment losses (32,839) (21,902) TOTAL LOANS TO CUSTOMERS 879, ,

71 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) The credit quality of loans to customers can be defined based on the Group internal credit quality assessment system which reflects the probability of default of an obligor, i.e. the likelihood that counterparty fails to pay interest, principal and other financial obligations to the Group. As at and interest income on impaired loans to customers, including loans impaired collectively, amounted to RUB 81,440 million and RUB 49,875 million, respectively. As at and interest income on collectively impaired loans to customers amounted to RUB 77,440 million and RUB 44,826 million, respectively. The internal credit quality classification includes four categories: Standard loans, representing loans without any indications of impairment and thus representing the best level of credit quality; Watch list loans, representing loans with some minor indicators of deterioration in credit quality not yet resulting in the impairment of the loan. Such indicators may include minor breaches of loan covenants, some factors of deterioration of financial position of the borrower etc., not yet affecting the ability of the borrower to repay the amounts in due course. Watch list loans are subject to stricter monitoring of financial position, collateral and other enhanced credit risk management tools. Substandard loans, representing loans with certain minor indicators of impairment, which potentially can affect the ability of the borrower to repay the amounts in due course. Such indicators may include deterioration of financial position of the borrower, minor breaches of payment discipline; numerous loan renegotiating. Substandard loans are subject to stricter monitoring of dynamics in financial position, sufficiency of collateral and other instruments of credit risk reduction and other enhanced credit risk management tools. Doubtful loans, representing loans with significant indicators of impairment. Such loans are treated on a case by case basis so as to minimize potential losses for the Group. Otkritie Bank loans consolidated by the Group are presented in each of the categories above in line with the Group s credit quality criteria at their original costs in Otkritie Bank accounting records. Loan loss provision for substandard and doubtful loans is assessed based on the expected level of recovery. When one or more contractual payments are overdue the entire loan is accounted as overdue. The following tables provide an analysis of the credit quality and distribution of loans granted to legal entities and loans under reverse repurchase agreements by the Group s internal credit quality categories, as at : Impairment allowance Impairment allowance to gross loans, % Gross loans Net loans CORPORATE LOANS Standard loans 620,781 5, , % Watch list loans 10, , % Substandard loans 19,121 3,083 16, % Doubtful loans, including 28,330 12,693 15, % not overdue 6,117 2,384 3, % overdue less than 90 days 9,230 2,869 6, % overdue more than 90 days and less than 1 year 7,520 4,491 3, % overdue more than 1 year 5,463 2,949 2, % TOTAL CORPORATE LOANS 678,872 20, , % SMALL BUSINESS LOANS TO CORPORATES Standard loans 46, , % Watch list loans % Substandard loans % Doubtful loans, including 4,755 2,464 2, % not overdue % overdue less than 90 days 1, % overdue more than 90 days and less than 1 year 1,958 1, % overdue more than 1 year 1, % TOTAL SMALL BUSINESS LOANS 51,040 2,731 48, % TOTAL LOANS TO CORPORATE AND SMALL BUSINESS CLIENTS 729,912 23, , % As at the Group has changed presentation of credit quality of loans for the comparative period, In order to enhance presentation on loans to customers components information, the Group disclosed small business loans to individuals together with small business loans to corporates, the changes were made retrospectively. The following tables provide an analysis of the credit quality and distribution of loans granted to corporate and small business clients and loans under reverse repurchase agreements by the Group s internal credit quality categories, as at : Impairment allowance Impairment allowance to gross loans, % Gross loans Net loans CORPORATE LOANS Standard loans 436,029 4, , % Watch list loans 6, , % Substandard loans 22,262 4,526 17, % Doubtful loans, including 14,946 9,403 5, % not overdue 4,888 2,275 2, % overdue less than 90 days 1, % overdue more than 90 days and less than 1 year 5,002 3,730 1, % overdue more than 1 year 3,672 2,595 1, % TOTAL CORPORATE LOANS 479,783 18, , % SMALL BUSINESS LOANS TO CORPORATES Standard loans 38, , % Watch list loans % Substandard loans % Doubtful loans, including 2,456 1, % not overdue % overdue less than 90 days % overdue more than 90 days and less than 1 year % overdue more than 1 year % TOTAL SMALL BUSINESS LOANS 40,990 2,044 38, % TOTAL LOANS TO CORPORATE AND SMALL BUSINESS CLIENTS 520,773 20, , % The following table provides information on loans to individuals as at : Impairment allowance Impairment allowance to gross loans, % Gross Loans Net Loans CONSUMER LOANS Not past due 98, , % Overdue less than 30 days 3, , % Overdue days 2,454 1,148 1, % Overdue days 2,391 1, % Overdue days 3,576 2,232 1, % Overdue more than 365 days 1,035 1, % TOTAL CONSUMER LOANS 111,260 6, , % MORTGAGE LOANS Not past due 51, , % Overdue less than 30 days 1, , % Overdue days % Overdue days % Overdue days % Overdue more than 365 days % TOTAL MORTGAGE LOANS 54, , %

72 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) Impairment allowance Impairment allowance to gross loans, % Gross Loans Net Loans CAR LOANS Not past due 7, , % Overdue less than 30 days % Overdue days % Overdue days % Overdue days % Overdue more than 365 days % TOTAL CAR LOANS 8, , % CREDIT CARD LOANS Not past due 6, , % Overdue less than 30 days % Overdue days % Overdue days % Overdue days % Overdue more than 365 days % TOTAL CREDIT CARDS 7, , % TOTAL LOANS TO RETAIL BUSINESS CLIENTS 182,201 9, , % The following table provides information on loans to retail business clients as at : Impairment allowance Impairment allowance to gross loans, % Gross Loans Net Loans CONSUMER LOANS Not past due 45, , % Overdue less than 30 days % Overdue days % Overdue days % Overdue days % Overdue more than 365 days % TOTAL CONSUMER LOANS 47, , % MORTGAGE LOANS Not past due 37, , % Overdue less than 30 days % Overdue days % Overdue days % Overdue days % Overdue more than 365 days % TOTAL MORTGAGE LOANS 38, , % CAR LOANS Not past due 3, , % Overdue less than 30 days % Overdue days % Overdue days % Overdue days % Overdue more than 365 days % TOTAL CAR LOANS 3, , % Impairment allowance Impairment allowance to gross loans, % Gross Loans Net Loans CREDIT CARD LOANS Not past due 2, , % Overdue less than 30 days % Overdue days % Overdue days % Overdue days % Overdue more than 365 days % TOTAL CREDIT CARD LOANS 2, , % TOTAL LOANS TO RETAIL BUSINESS CLIENTS 91,693 1,581 90, % As at and the Group has entered into transaction to securitize mortgage loans in the amount of RUB 13,547 million and RUB 4,732 million that the Group has origanated. Securitisation is a process whereby finance can be raised from external investors by enabling them to invest in parcels of specified financial assets. The Group accounted for the transaction as a collateralised borrowing and recorded the cash received as a financial liability. Although the Group sold the rights to 100% of the cash flows arising on a portfolio of mortgage loans, it provided guarantees of the performance of the loans. In accordance with the terms of the securitization agreement, if the asset becomes overdue more than 90 days, the Group is obliged to replace it. The Group has determined that substantially all the risks and rewards of the portfolio were retained and, consequently, the loans were not derecognised. The following table summarises the Group s holdings of assetbacked securities, showing the carrying value of the transferred assets, associated liabilities and net position as at: Carrying value of transferred assets 13,547 4,732 Carrying value of associated 10,708 3,758 liabilities Net position 2, Movements in allowances for impairment losses for the years ended and were as follows: Corporate banking Consumer loans Mortgage loans Car loans Credit card loans Total 31 DECEMBER , ,383 Provision charge 5, (435) (7) 31 5,886 Recovery of bad debt written-off Foreign currency revaluation effect (191) (1) (4) (196) Disposal of loans (2,894) (118) (3,012) Bad debt written-off (1,532) (1,532) 31 DECEMBER 20, ,902 Individually impaired 14,673 14,673 Collectively impaired 5, ,229 Gross loans to customers, individually assessed for impairment 38,409 38, DECEMBER 20, ,902 Provision charge 7,409 1, ,390 Recovery of bad debt written-off Foreign currency revaluation effect Disposal of loans (2,728) (15) (2,743) Bad debt written-off (3,206) (636) (30) (23) (43) (3,938) Aquision of OJSC Bank Otkritie 1,242 4, , DECEMBER 23,694 6, ,839 Individually impaired 15,927 15,927 Collectively impaired 7,767 6, ,912 Gross loans to customers, individually assessed for impairment 45,903 45,

73 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) Loans are issued principally within Russia in the following industry sectors: The table below summarizes the amount of loans to individuals secured by collateral, rather than the fair value of the collateral itself: Individuals* 183,877 92,905 Brokerage and dealing in securities 106,715 49,290 Services 95,651 52,869 Wholesale trade 81,847 66,086 Industrial manufacturing 80,754 72,370 Operations with real estate 59,114 49,094 Construction of industrial real estate 51,570 38,865 Housing construction 38,439 28,799 Leasing 36,242 25,997 Other 36,198 30,966 Construction of commercial real estate 33,872 14,111 Mining 33,622 32,603 Retail trade 32,151 23,755 Transport and communication 27,853 22,400 Government finance 4,900 3,152 Energy 4,500 3,814 Agriculture 3,353 3,388 Precious metals extraction 1,455 2,002 GROSS LOANS TO CUSTOMERS 912, ,466 Less Allowance for impairment losses (32,839) (21,902) TOTAL LOANS TO CUSTOMERS 879, ,564 * As at loans to individuals include loans to retail business totaling RUB 182,201 million and small business loans to individuals RUB 1,676 million. Loans collateralized by pledge of real estate 41,565 29,345 Loans collateralized by guarantees of enterprises 8,311 9,339 Loans collateralized by pledge of contract proceeds 6,449 4,387 Loans collateralized by pledge of vehicles and other property 5,924 4,526 Loans collateralized by pledge of securities Loans collateralized by pledge of the Bank s own securities 1 2 Unsecured loans 119,267 44,091 GROSS LOANS TO INDIVIDUALS 182,201 91,693 Less Allowance for impairment losses (9,145) (1,581) TOTAL LOANS TO INDIVIDUALS 173,056 90,112 As at and the Group granted loans to five and five corporate borrowers totalling RUB 47,348 million and RUB agreements, rather than interest rate modification or other enhancements in favour of the borrower. 58,409 million, respectively, which individually exceeded 10% of the Group s equity. Borrowers individually exceeding 10% of the Group equity have good credit history and the loans provided to them are performing within standard loans. As at and the loans under reverse repurchase agreements to customers have contractual maturities from January 2014 to May 2014 and January to November, respectively. As at and renegotiated loans amounted to RUB 5,590 million and RUB 5,572 million respectively, which would be past due or impaired if not renegotiated. Renegotiated loans mainly involve extending of the payment arrangements of the loan Carrying value of loans under reverse repurchase agreements and fair value of collateral held as at and are presented as follows: As at loans to individuals include loans to retail business totaling RUB 91,693 million and small business loans to individuals RUB 1,212 million. The table below summarizes the amount of loans to corporate customers secured by collateral, rather than the fair value of the collateral itself: Loans collateralized by guarantees of enterprises and banks 205, ,672 Loans collateralized by pledge of securities 173, ,385 Loans collateralized by pledge of real estate 118,454 82,398 Loans collateralized by pledge of contract proceeds 51,912 45,708 Loans collateralized by pledge of property 45,090 38,240 Loans collateralized by pledge of the Bank s own securities Unsecured loans 135, ,671 GROSS LOANS TO CORPORATE CUSTOMERS 729, ,773 Less Allowance for impairment losses (23,694) (20,321) TOTAL LOANS TO CORPORATE CUSTOMERS 706, ,452 Carrying value of loans Fair value of collateral Carrying value of loans Fair value of collateral Shares 66,276 82,896 27,883 37,853 Bonds and Eurobonds issued by banks 18,975 19,799 1,209 1,238 Corporate bonds and Eurobonds 11,731 13,226 6,360 7,042 OFZ ,712 1,854 Units of investment funds 9,144 10,710 12,065 19,328 Municipal bonds TOTAL 106, ,251 49,290 67,392 As at loans under reverse repurchase agreements include Group s own subordinated Eurobonds pledged with The components of net investment in finance lease as at and are as follows: carrying amount of RUB 2,620 million. Less than one year 3,890 2,667 From one year to five years 6,593 3,736 More than five years 1,526 1,082 Minimum lease payments 12,009 7,485 Less: unearned finance income (3,451) (2,079) NET INVESTMENT IN FINANCE LEASE 8,558 5,406 Current portion 2,713 1,874 Long-term portion 5,845 3,532 NET INVESTMENT IN FINANCE LEASE 8,558 5,

74 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) As at the Group provided loans to customers in the amount of RUB 7,598 million which were secured by deposits made by the Deposit Insurance Agency ( DIA ) in the amount of RUB 6,160 million. (see Note 18). During the years ended and the Bank sold certain loans to third parties at a discount to nominal value with no recourse and without any service obligations associated with the loans. 12. INVESTMENTS AVAILABLE-FOR-SALE As at investments available-for-sale comprise: Net gain on disposal of loans is represented by: Year ended Year ended Fair value of the consideration received 24,820 5,724 Carrying amount net of provisions (23,277) (4,465) NET GAIN ON DISPOSAL OF LOANS 1,543 1,259 As at investments available-for-sale comprise: Interest rate to nominal Maturity date DEBT SECURITIES: Corporate bonds and Eurobonds 3, % March 2014 March 2020 Bonds and Eurobonds issued by banks % February November 2018 TOTAL DEBT SECURITIES: 4,430 EQUITY SECURITIES: Shares 469 Units of investment funds 19 Share participation in limited liability companies 1 TOTAL EQUITY SECURITIES: 489 TOTAL INVESTMENTS AVAILABLE-FOR-SALE 4,919 Interest rate to nominal Maturity date DEBT SECURITIES: Corporate bonds and Eurobonds 19, % January 2014 January 2044 Bonds and Eurobonds issued by banks 9, % February 2014 April 2022 RF Government Eurobonds 8, % April 2020 March 2030 Municipal bonds 1, % November 2014 August2020 OFZ bonds % Juanuary 2016 TOTAL DEBT SECURITIES 38,288 EQUITY SECURITIES Shares 928 Units of investment funds 315 Share participation in limited liability companies 1 TOTAL EQUITY SECURITIES 1,244 TOTAL INVESTMENTS AVAILABLE FOR SALE 39,532 Pledged under repurchase agreements with banks DEBT SECURITIES: Corporate bonds and Eurobonds 19, Bonds and Eurobonds issued by banks 9,565 1,228 RF Government Eurobonds 8,262 Municipal bonds 1,408 OFZ bonds 1 TOTAL DEBT SECURITIES: 38,288 1,977 EQUITY SECURITIES: Shares 928 Units of investment funds 315 Share participation in limited liability companies 1 TOTAL EQUITY SECURITIES: 1,244 TOTAL INVESTMENTS AVAILABLE-FOR-SALE 39,532 Units of investment funds included in financial assets available-forsale as at and are presented below: OPIF OTKRITIE obligatzii 283 OPIF OTKRITIE Energetika 12 OPIF NOMOS Fond obligatziy OPIF NOMOS Fond aktziy 9 9 TOTAL UNITS OF INVESTMENT FUNDS As at and financial assets available-for-sale are mainly presented by investments issued by Ministry of Finance, local authorities, banks and companies of the Russian Federation. Details of the Group s information about the fair value hierarchy as at and are as follows: Quoted prices in active market (Level 1) Valuation techniques based on observable market data (Level 2) Valuation techniques incorporating information other than observable market data (Level 3) Total 31 DECEMBER Corporate bonds and Eurobonds 17, ,232 19,052 Bonds and Eurobonds issued by banks 8, ,565 RF Government Eurobonds 8,262 8,262 Municipal bonds 1,408 1,408 Corporate shares Units of investment funds OFZ bonds 1 1 INVESTMENTS AVAILABLE-FOR-SALE 36,663 1,202 1,252 39, DECEMBER Corporate bonds and Eurobonds 3, ,888 Bonds and Eurobonds issued by banks Corporate shares Units of investment funds INVESTMENTS AVAILABLE-FOR-SALE 4, ,

75 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) Excluded from the table above were investments in equity securities of unlisted entities classified as available-for-sale securities. The fair value of such securities is not readily measurable accordingly such investments are carried at the acquisition cost. As at and the value of such investments amounted RUB 415 million and RUB 415 million, respectively. The Group invests in certain investment funds where as a result of general market conditions and illiquidity of the bond markets the valuation is based upon inputs other than those readily observable in the market place (Level 3). The following table provides details of the activity with respect to the fair value measurement during the period ending and. AS AT JANUARY 5,651 Aqusition of OJSC Bank Otkritie 1,252 Purchase of shares 16 Disposal of shares (5,655) (Loss)/gains recognized in other comprehensive income (12) AS AT 31 DECEMBER 1, INVESTMENT PROPERTY Investment property comprises: AS AT JANUARY 1 4,761 3,759 Acquisition of OJSC Bank Otkritie 4,175 Acquisitions 991 1,072 Disposals (1,403) (250) Transferred from property and equipment Property transferred to finance lease (193) Property classified as held for sale (170) Gain/ (loss) on property revaluation 178 (28) AS AT DECEMBER 31 8,571 4,761 Investment property owned by the Group were revalued by independent appraisers as at and. The following methods were used for the estimation of their fair value: discounted cash flow method (income approach), integrated cost estimation method (cost based method), method of sales comparison (comparative approach). For the estimation of the final value, certain weights were assigned to the results obtained using different approaches, depending on the degree to which the estimates met the following characteristics: reliability and completeness of the information, specifies the estimated property and other. The fair value of the buildings was determined based on the market comparable approach that reflects recent transaction prices and rental rates for similar properties. In estimating the fair value of the properties, the highest and best use of the properties is their current use. There has been no change to the valuation technique during the year. Included into operating income is investment property rental income for the years ended and totaling RUB 278 million and RUB 135 million, respectively. Operating expenses arising from the investment property during the years ended and totaling RUB 185 million and RUB 32 million, respectively. As at and the Group made an assessment of carrying value of investment property. This assessment resulted in recognition of revaluation profit in the consolidated income statement amounting to RUB 178 million and of impairment loss to RUB 28 million for the years ended and, respectively. Decrease of the carrying value of buildings and other real estate is recognized in the consolidated income statement. Details of the Group s investment properties and information about the fair value hierarchy as at are as follows: Level 1 Level 2 Level 3 Fair value as at Investment property 8,571 8,571 TOTAL 8,571 8,571 Details of the Group s investment properties and information about the fair value hierarchy as at are as follows: Level 1 Level 2 Level 3 Fair value as at Investment property 4,761 4,761 TOTAL 4,761 4, PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment comprise: Buildings and construc-tions Furniture and equipment Other Total Land AT INITIAL/INDEXED/REVALUED COST 31 DECEMBER ,419 2,704 1,181 12,766 Reclasses (157) 205 (256) (208) Revaluation recorded in equity Recovery of impairment Movement in cost related to revaluation (206) (206) Additions Disposals (14) (142) (117) (273) Disposals of subsidaries (28) (28) 31 DECEMBER 483 8,495 2,849 1,464 13,291 Acquisition of OJSC Bank Otkritie 89 4, ,770 Reclasses (2) (71) 240 (399) (232) Revaluation recorded in equity (Impairment)/recovery of impairment (26) 13 (13) Movement in cost related to revaluation (206) (206) Additions ,049 Disposals (2) (7) (243) (428) (680) 31 DECEMBER ,802 3,952 2,118 19,438 ACCUMULATED DEPRECIATION 31 DECEMBER , ,776 Movement in cost related to revaluation (204) (204) Charge for the period Write-off on disposal (123) (57) (180) Write-off on disposal of subsidaries (14) (14) 31 DECEMBER 3 1, ,174 Acquisition of OJSC Bank Otkritie Movement in cost related to revaluation (206) (206) Charge for the period Write-off on disposal (3) (188) (89) (280) 31 DECEMBER 5 2, ,233 NET BOOK VALUE 31 DECEMBER 483 8,492 1, , DECEMBER ,797 1,574 1,268 16,205 As at and land, buildings and constructions owned by the Group were revalued to market prices according to the report of an independent appraiser as described below. As a result, carrying value of these land, buildings and constructions amounted to RUB 13,363 million and RUB 8,975 million, respectively. If land, buildings and constructions were accounted at historical cost restated according to inflation indices less accumulated depreciation and impairment losses, their carrying value would have been RUB 7,643 million and RUB 7,485 million, respectively

76 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) Land, buildings and constructions owned by the Group were revalued by independent appraisers as at and. The following methods were used for the estimation of their fair value: discounted cash flow method (income approach), integrated cost estimation method (cost based method), method of sales comparison (comparative approach). For the estimation of the final value, certain weights were assigned to the results obtained using different approaches, depending on the degree to which the estimates met the following characteristics: reliability and completeness of the information, specifies the estimated property and other. The fair value of the buildings was determined based on the market comparable approach that reflects recent transaction prices and rental rates for similar properties. In estimating the fair value of the properties, the highest and best use of the properties is their current use. There has been no change to the valuation technique during the year. During the years ended and the Group carried out a review of the recoverable amount of its land, buildings and constructions. The review led to the recognition of a impairment loss of RUB 13 million for the year ended and recovery of impairment RUB 101 million for the year ended 15. INTANGIBLE ASSETS Intangible assets are presented as follows:, which has been recognised in consolidated income statement. The recoverable amount of the relevant assets has been determined on the basis of their fair value. The recovery of impairment losses and impairment losses have been presented in the separate line in the consolidated income statement. Details of the Group s buildings and information about the fair value hierarchy as at and are as follows: Level 1 Level 2 Level 3 Land Buildings 12,797 12,797 TOTAL 13,363 13,363 Level 1 Level 2 Level 3 Land Buildings 8,492 8,492 TOTAL 8,975 8,975 As at and included in property, plant and equipment were fully depreciated assets amounted to RUB 1,304 million and RUB 897 million, respectively. Software Customer-related intangible assets Trademark Licences Other Total AT INITIAL COST 31 DECEMBER ,199 1, ,648 Additions DECEMBER 1,822 1, ,416 Acquisition of OJSC Bank Otkritie 334 1, ,210 Additions Disposals (8) (8) 31 DECEMBER 2,920 3, , ,442 ACCUMULATED DEPRECIATION 31 DECEMBER ,021 Charge for the period DECEMBER ,935 Acquisition of OJSC Bank Otkritie 104 1, ,159 Charge for the period Write-off on disposal (2) (2) 31 DECEMBER 1,410 2, ,933 NET BOOK VALUE 31 DECEMBER 1, , DECEMBER 1,510 1, ,509 As at customer related intangible assets include As at customer related intangible assets include core deposit intangible in the amount of RUB 111 million and client core deposit intangible in the amount of RUB 184 million and client relationship in the amount of RUB 163 million. relationship in the amount of RUB 409 million. 16. OTHER ASSETS Other assets are presented as follows: OTHER FINANCIAL ASSETS: Claims to Deposit Insurance Agency on customer accounts repayment 2,685 Accounts receivable 2, Debtors on operations with currency 1,209 Assignment of claims Insuarance broker commission 320 Cash in trust operations and on broker accounts (Note 6) 313 Debtors on spot deals with currency and precious metals Receivables on operations with coins Debtors on operations with securities Settlements on letters of credit 31 Prepayments on operations with precious metals 1 TOTAL OTHER FINANCIAL ASSETS BEFORE ALLOWANCE FOR IMPAIRMENT LOSSES 7,462 1,052 Less Allowance for impairment losses (646) (182) 6, OTHER NON-FINANCIAL ASSETS: Non-current assets held for sale Current income tax assets Prepayments of capital investments Rights on claims against property Taxes other than income tax recoverable Penalties Stationery and inventory Deferred tax assets (Note 30) Other 1, TOTAL OTHER NON-FINANCIAL ASSETS BEFORE ALLOWANCE FOR IMPAIRMENT LOSSES 5,662 4,147 Less Allowance for impairment losses (611) (288) 5,051 3,859 TOTAL OTHER ASSETS 11,867 4,729 Movements in allowances for impairment losses of other assets for the years ended and were as follows. For the years ended AS OF 1 JANUARY Acquisition of OJSC Bank Otkritie 664 Provision charge Recovery of bad debt written-off 4 3 Disposal (2) (11) Bad debt written-off (125) (194) AS OF 31 DECEMBER 1,

77 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) Details of the Group s information about the fair value hierarchy as at and are as follows: Quoted prices in active market (Level 1) Valuation techniques based on observable market data (Level 2) Valuation techniques incorporating information other than observable market data (Level 3) Total 31 DECEMBER Non-current assets held for sale Non-current assets held for sale DECEMBER Non-current assets held for sale Non-current assets held for sale DUE TO BANKS AND THE CENTRAL BANK OF THE RUSSIAN FEDERATION Carrying value of loans Fair value of collateral Carrying value of loans Fair value of collateral RF Government Eurobonds 1,053 1,110 INVESTMENTS AVAILABLE FOR SALE: Corporate bonds and Eurobonds 1,496 1,977 SECURITIES RECEIVED UNDER REVERSE REPURCHASE AGREEMENTS: Shares 39,251 63,698 20,798 31,860 Bonds and Eurobonds issued by banks 3,773 4,422 Corporate bonds and Eurobonds 2,844 3,198 1,102 1,242 OFZ bonds 2,069 2,145 2,553 2,632 Municipal bonds 1,030 1,140 1,595 1,675 TOTAL 126, ,033 67,834 82, CUSTOMER ACCOUNTS Due to banks and the Central Bank of the Russian Federation comprises: Deposits from banks 88, ,528 Loans under repurchase agreements from the CBR 81,603 47,591 Loans under repurchase agreements from banks 45,233 20,243 Deposits from the CBR 24,890 23,638 Correspondent accounts of other banks 9,263 17,510 Syndicated loans 7,795 TOTAL DUE TO BANKS AND THE CENTRAL BANK OF THE RUSSIAN FEDERATION 257, ,510 As at and the Group had deposits from three and five banks amounting to RUB 142,181 million and RUB 131,259 million, respectively, which individually and in aggregate exceeded 10% of the Group s equity. As at carrying value of syndicated loan received by the Group comprised RUB 7,795 million from Russian, OECD and non-oecd banks. The contractual maturity of syndicated loan is November 2014, and the interest rate is tied to three-month LIBOR plus 1.75% margin. As at and the Group had deposits from two and two banks amounting to RUB 4,361 million and RUB 4,208 million, respectively, which were collaterized with the rights of claim with respect to loans to customers totaling RUB 7,022 million and RUB 6,722 million, respectively. As at and the loans under reverse repurchase agreements to banks have contractual maturities from January 2014 to September 2014 and January to March, respectively. Carrying value of loans under repurchase agreements and fair value of assets pledged as at and are presented as follows: Carrying value of loans Fair value of collateral Carrying value of loans Fair value of collateral FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS: Corporate bonds and Eurobonds 25,373 29,149 10,986 12,824 Bonds and Eurobonds issued by banks 24,704 29,931 7,025 8,493 OFZ bonds 21,781 22,405 16,817 17,172 Promissory notes of credit institutions 6,545 6,541 Municipal bonds 3,462 3, Customer accounts comprise: Term deposits 586, ,748 Current accounts 187, ,790 Loans under repurchase agreements 6,810 1,029 Term deposits from Deposit Insurance Agency 1,408 6,160 TOTAL CUSTOMER ACCOUNTS 781, ,727 As at and the Group received funds from five and four customers amounting to RUB 200,329 million and RUB 115,862 million, respectively, which individually exceeded 10% of the Group s equity. As at and demand deposits denominated in units of precious metal which have the alternative to be settled in cash or in precious metals were included in customer accounts. The breakdown is presented below: Gold 4,438 6,366 Silver 1, Palladium Platinum TOTAL CUSTOMER ACCOUNTS DENOMINATED IN PRECIOUS METALS 5,555 7,093 As at the Group provided loans to customers in the amount of RUB 7,598 million which were secured by deposits made by the Deposit Insurance Agency ( DIA ) in the amount of RUB 6,160 million (see Note 11). As at and customer accounts amounting to RUB 2,902 million and RUB 1,896 million, respectively, were held as security against contingent liabilities issued by the Group (see Note 32). Analysis of customer accounts by economic sector is presented below: Individuals 266, ,082 Investment and asset management companies 262, ,241 Industrial manufacturing 39,031 27,686 Services 33,349 21,660 Wholesale trade 29,989 27,807 Insurance 21,326 17,094 Transport and communication 18,770 4,541 Construction of industrial real estate 17,510 15,429 Regional and local budgets funds 13,415 21,034 Operations with real estate 13,007 21,367 Science 12,004 6,960 Construction of commercial real estate 8,564 4,801 Brokerage and dealing in securities 6,810 1,029 Retail trade 5,097 4,295 Precious metals extraction 4,482 7,493 Housing construction 4, Energy 4,241 3,074 Leasing 1,439 1,346 Agriculture Other 18,018 6,789 TOTAL CUSTOMER ACCOUNTS 781, ,

78 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) As at and the loans under reverse repurchase agreements to customers have contractual maturities from January 2014 and January to March, respectively. Carrying value of loans under repurchase agreements and fair value of assets pledged as at and are presented as follows: Carrying value of loans Fair value of collateral Carrying value of loans Fair value of collateral FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS: OFZ bonds 2,630 2,634 Bonds and Eurobonds issued by banks 1,026 1,141 SECURITIES RECEIVED UNDER REVERSE REPURCHASE AGREEMENTS: Shares 3,011 5,099 1,029 2,296 Bonds and Eurobonds issued by banks TOTAL 6,810 9,028 1,029 2, BONDS AND EUROBONDS Bonds and Eurobonds comprise: Bonds and Eurobonds as at comprise: Nominal interest rate, % Currency Start date (year) Maturity date (year) BONDS ISSUED NOMOS, BO-03 Roubles % 5,180 NOMOS, 12th issue Roubles % 5,150 NOMOS, BO-02 Roubles % 5,078 NOMOS, 9th issue Roubles % 4,280 NOMOS, 11th issue Roubles % 3,858 NOMOS,Mortgage-Backed bonds Roubles % 3,758 NOMOS, BO-01 Roubles % 3,337 2nd issue Roubles % 210 TOTAL BONDS ISSUED 30,851 EUROBONDS NOMOS Eurobonds due in US Dollars % 11,767 TOTAL EUROBONDS ISSUED 11,767 TOTAL BONDS AND EUROBONDS ISSUED 42,618 Bonds issued in local market 47,703 30,851 Eurobonds due in ,256 Eurobonds due in 11,767 TOTAL BONDS AND EUROBONDS ISSUED 63,959 42,618 Bonds and Eurobonds as at comprise: Nominal interest rate, % Currency Start date (year) Maturity date (year) BONDS ISSUED NOMOS, BO-06 Roubles % 7,138 NOMOS, BO-05 Roubles % 6,288 NOMOS, BO-03 Roubles % 5,170 NOMOS, BO-02 Roubles % 5,058 NOMOS, 11th issue Roubles % 4,936 KHMB,Mortgage-Backed bonds Roubles % 4,804 NOMOS, 12th issue Roubles % 4,289 NOMOS, BO-01 Roubles % 4,002 OTKRITIE,Mortgage-Backed bonds Roubles % 3,125 OTKRITIE,1 Roubles % 87 NOMOS,Mortgage-Backed bonds Roubles % 2,806 TOTAL BONDS ISSUED 47,703 EUROBONDS NOMOS Eurobonds due in 2018 US Dollars % 16,256 TOTAL EUROBONDS ISSUED 16,256 TOTAL BONDS AND EUROBONDS ISSUED 63,959 The Group is obliged to comply with financial covenants in relation to Eurobonds due in and In accordance with the terms of the covenants the Group should not permit its consolidated total capital ratio as calculated in accordance with the recommendations of the Basel Committee on Banking Regulations and Supervisory Practices (as at the date hereof) to fall below 10%. These recommendations were provided in Committee s paper entitled International Convergence of Capital Measurement and Capital Standards dated July 1988, 20. PROMISSORY NOTES ISSUED Promissory notes issued comprise: as amended in November 1991, and together with any further amendments, guidelines or clarifications up to the date hereof. This calculation should be made by reference to the latest annual consolidated audited accounts of the Group prepared in accordance with IFRS. The Group should also comply with the minimum capital adequacy ratio established by the Central Bank of Russian Federation. The Group has not breached any of these covenants at the end of each quarter in the years ended and. Interest rate to nominal Interest rate to nominal Discount bearing promissory notes 59,165 18,154 Interest bearing promissory notes % 1, ,5% 2,006 Certificates of deposit % % 644 Settlement promissory notes TOTAL PROMISSORY NOTES ISSUED 61,652 21,145 Including: promissory notes held as security against loans to customers Including: promissory notes held as security against guarantees and letters of credit (Note 32 ) 2, Settlement promissory notes are promissory notes sold at face value

79 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) 21. OTHER LIABILITIES 22. SUBORDINATED DEBT Other liabilities comprise: Subordinated debt is presented as follows: OTHER FINANCIAL LIABILITIES: Payable to employees and accrued bonuses 2,259 1,837 Accrued expenses Provisions for guarantees and other off-balance sheet commitments (Note 32) Creditors on operations with foreign currency 250 Payables on settlement operations Creditors on operations with securities Paybles under lease contracts 88 Renumeration to the management company 59 Creditors on sale of precious metals Payables on spot operations with currency, precious metals and securities 2 17 TOTAL OTHER FINANCIAL LIABILITIES 4,250 3,670 OTHER NON-FINANCIAL LIABILITIES: Taxes payable, other than income tax Current income tax liabilities Other liabilities TOTAL OTHER NON-FINANCIAL LIABILITIES 1,472 1,118 TOTAL OTHER LIABILITIES 5,722 4,788 Movements in financial guarantees and provisions for other off-balance sheet commitments for the years ended and were as follows: The following table provides information on subordinated debt as at : Currency Start date (year) Maturity date (year) Nominal interest rate, % Subordinated bonds US Dollars % 16,528 Subordinated bonds US Dollars % 11,605 Subordinated bonds US Dollars % 9,783 Subordinated bonds US Dollars % 6,545 Subordinated loan Roubles % 6,000 Subordinated loan Roubles % 4,900 Subordinated loan US Dollars % 3,416 Subordinated loan Roubles % 1,660 Subordinated loan Roubles % 1,203 Subordinated loan Roubles % 1,064 Subordinated loan Roubles % 200 Subordinated loan Roubles % 190 Subordinated loan Roubles % 170 Subordinated loan Roubles % 95 Subordinated loan Roubles % 60 Subordinated loan Roubles % 40 63,459 The following table provides information on subordinated debt as at : For the years ended AS OF 1 JANUARY Acquisition of OJSC Bank Otkritie 202 Amortisation of accrued commissions on guarantees 21 (46) Provision (release) / charge (216) 27 AS OF 31 DECEMBER Currency Start date (year) Maturity date (year) Nominal interest rate, % Subordinated bonds US Dollars % 15,321 Subordinated bonds US Dollars % 10,751 Subordinated bonds US Dollars % 8,997 Subordinated loan Roubles % 6,000 Subordinated loan Roubles % 4,902 Subordinated bonds US Dollars % 3,198 Subordinated loan Roubles % 1,605 Subordinated loan Roubles % 60 Subordinated loan Roubles % 39 50,873 Subordinated Eurobonds issue in the amount of RUB 3,198 million with contractual maturity in 2018 were repaid in full during. In the event of bankruptcy or liquidation of the Group, repayment of this debt is subordinated to the repayments of the Group s liabilities to all other creditors

80 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) 23. SHARE CAPITAL AND SHARE PREMIUM 24. NON-CONTROLLING INTEREST The table below provides a breakdown of the Bank s issued and fully paid ordinary and preference shares: Non-controlling interest comprises: Issued and fully paid Ordinary shares (Number) Nominal amount (RUB million) Preference shares (Number) Nominal amount (RUB million) 31 DECEMBER ,422,370 4, DECEMBER 92,422,370 4,621 Reacquired (67,080) (3) Reacquired by subsidiaries (6,478,916) (324) Issued 28,591,916 1, DECEMBER 114,468,290 5,724 In accordance with the requirement of IAS 29 Financial reporting in hyperinflationary economies the effect of inflation adjustment applied to the share capital amounts to RUB 1,278 million. In October the Bank has completed public offering on the Moscow Stock Exchange. The increase of share capital amounted to 21,800,000 shares with a par value of RUB 50 each. There are no issued ordinary and preference shares that have not been fully paid. Par value per ordinary and preference share is RUB 50 each. Each ordinary share entitles the holder to cast one vote on all matters within its competence stipulated by the Charter of the Group, to receive non-fixed rate dividend income and to receive property belonging to the Group in the event of liquidation. When shares In July the Bank has increased its share capita, as part of the conversion of shares of two subsidiaries OJSC NOMOS Siberia are issued, each holder of shares shall have pre-emptive right, in proportion to the aggregate amount of their shares. and NOMOS-REGIOBANK into NOMOS-BANK. In the event of the dissolution and liquidation of the Bank, the assets In terms of the conversion procedure 4, shares and 2,391,709 shares were issued with a par value of RUB 50 each. remaining after payment of all debts will be distributed to the holders of ordinary shares on a pro-rata basis. Two issues of shares and reports on the total issue of the Bank s shares of RUB 220 million and RUB 120 million were registered by the CBR as at 8 July. OJSC Novosibirsk Municipal Bank CJSC Mortgage Agent Nomos LLC Inbank OJSC KHANTY- MANSIYSK BANK and it s subsidiaries LLC Attenium LLC NM- Expert OJSC Otkritie- BANK and it s subsidiaries Total 31 DECEMBER , ,413 Effect of (increase)/decrease in share of subsidiaries (purchased from)/sold to non-controlling interest 95 (158) (63) Property, plant and equipment revaluation reserve to non-controlling interest Revaluation of investments available-for-sale attributable to non-controlling interest (2) (19) (21) Disposal of non-controlling share in connection with the sale of the subsidary (112) (112) Dividends paid (39) (39) Profit attributable to non-controlling interest , , DECEMBER ,479 15,681 Effect of (increase)/decrease in share of subsidiaries (purchased from)/sold to non-controlling interest (176) 2 (174) Property, plant and equipment revaluation reserve to non-controlling interest Revaluation of investments available-for-sale attributable to non-controlling interest Acquisition of the new subsidary 15,095 15,095 Profit attributable to non-controlling interest 198 2, , DECEMBER , ,095 33,083 The table below provides a breakdown of the Bank s authorized ordinary and preference shares: The summarised financial information below represents amounts before intragroup eliminations. Authorized Ordinary shares Number) Nominal amount (RUB million) Preference shares (Number) Nominal amount (RUB million) 31 DECEMBER ,377,630 8,369 48,100,000 2, DECEMBER 167,377,630 8,369 48,100,000 2,405 Issued (28,591,916) (1,430) 31 DECEMBER 138,785,714 6,939 48,100,000 2,405 Holders of preference shares with non-fixed rate dividend income are entitled to: participate in the General Meeting of shareholders Share premium represents the excess of contributions received over the nominal value of shares issued or sold. with voting rights addressing issues of reorganization and liquidation of the Bank and addressing issues on introducing amendments and additions to the Charter restricting the rights of holders of preferred shares. Each preference share entitles the holder to receive dividends on an equal basis with holders of ordinary shares. The Group s reserves distributable among shareholders are limited to the amount of its reserves as disclosed in its statutory accounts. Non-distributable reserves are represented by a reserve fund, which is created as required by the statutory regulations, in respect of general banking risks, including future losses and other unforeseen Dividends on ordinary shares and preference shares classified as risks or contingencies. equity are recognized, as a distribution of equity in the period in which they are approved by shareholders. OJSC KHANTY-MANSIYSK BANK AND ITS SUBSIDIARIES Total assets 361, ,676 Total liabilities 325, ,861 Interest income 30,411 22,020 Interest expense 17,921 12,023 Provision for impairment losses on interest bearing assets 3,566 2,615 Net profit 4,393 4,910 OJSC OTKRITIE BANK AND ITS SUBSIDIARIES Total assets 202, ,674 Total liabilities 177, ,

81 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) 25. NET INTEREST INCOME BEFORE GAIN ON REMEASUREMENT OF CASH FLOWS AND PROVISION FOR IMPAIRMENT LOSSES ON INTEREST BEARING ASSETS Net interest income comprises: Year ended Year ended INTEREST INCOME COMPRISES: Interest income on assets recorded at amortized cost 88,575 60,962 Interest income on assets at fair value through profit or loss 9,153 5,414 Interest income on investments available-for-sale TOTAL INTEREST INCOME 97,849 66,650 Interest income on assets recorded at amortized cost: Interest income on loans to customers 80,163 56,201 Interest income on reverse repurchase transactions 5,931 3,881 Interest income on loans and advances to banks and other financial institutions 2, Interest on investments held to maturity 8 30 Total interest income on assets recorded at amortized cost 88,575 60,962 INTEREST EXPENSE COMPRISES: Interest expense on liabilities recorded at amortized cost 57,050 35,154 Interest expense on liabilities at fair value through profit or loss TOTAL INTEREST EXPENSE 57,122 35,244 Interest expense on liabilities recorded at amortized cost comprise: Interest expense on customer accounts 36,383 20,785 Interest expense on due to banks and the Central Bank of the Russian Federation 5,272 4,093 Interest expense on subordinated debt 5,229 3,647 Interest expense on Bonds and Eurobonds issued 4,586 3,280 Interest expense on repurchase transactions 3,241 1,623 Interest expense on promissory notes issued 2,339 1,726 Total interest expense on financial liabilities recorded at amortized cost 57,050 35,154 NET INTEREST INCOME BEFORE GAIN ON REMEASUREMENT OF CASH FLOWS AND PROVISION FOR IMPAIRMENT LOSSES ON INTEREST BEARING ASSETS 40,727 31, TRADING INCOME/(LOSS) Net gain on financial assets and liabilities at fair value through profit or loss comprises: Year ended Year ended First to default credit-linked notes recognized at fair value through profit or loss 15 Financial assets at fair value through profit or loss (988) 1,320 SECURITIES (988) 1,335 Derivatives on foreign currency contracts Net gain on foreign currency operations 1, FOREIGN CURRENCY 1,582 1,013 Derivatives on precious metals contracts (223) 325 Net gain on precious metals PRECIOUS METALS Other derivatives contracts 16 (32) OTHER DERIVATIVES 16 (32) TOTAL TRADING INCOME 761 2,681 The analysis of trading income is based on how the business is organised and the underlying risks managed. Trading income comprises gains and losses on financial instruments at fair value through profit and loss, both realized and unrealized. Foreign currency: foreign currency operations, foreign exchange forward contracts and currency options, impacts of the foreign exchange gains and losses on the allowance on loan losses on foreign currency denominated loans; Precious metals: precious metals operations and precious metals The types of instruments include: Securities: operations with trading securities, trading security forward contracts; Other derivatives: interest rate swap contracts. forward contracts and futures contracts; 27. NET FEE AND COMMISSION INCOME Net fee and commission income comprise: Year ended Year ended FEE AND COMMISSION INCOME: Settlements 6,305 5,613 Documentary operations 2,826 2,398 Insurance broker commission 1, Cash operations 1,133 1,351 Foreign currency conversion operations Brokerage operations Operations with precious metals Operations related to underwriting Depositary services 6 5 Other TOTAL FEE AND COMMISSION INCOME 12,155 10,895 FEE AND COMMISSION EXPENSE: Settlements 2,618 2,464 Cash operations Documentary operations Securities operations Depositary services Other TOTAL FEE AND COMMISSION EXPENSE 3,167 2,954 NET FEE AND COMMISSION INCOME 8,988 7,

82 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) 28. OTHER INCOME 30. INCOME TAX Other income comprises: Year ended Year ended Penalties received Rental income Income on early deposits withdrawal Gain on disposal of property, plant and equipment Dividends received 2 6 Gain from trust operations 41 Gain on construction operations 21 Gain from sale of transport cards on leashold equipment 13 Gain from remeasurement of other assets 8 Other TOTAL OTHER INCOME OPERATING EXPENSES Operating expenses comprise: Year ended Year ended Payroll and bonuses 12,145 11,658 Unified social tax 2,338 2,296 Rent expenses Taxes other than income tax Depreciation of property plant and equipment Amortization of intangible assets Stationery and other office expenses Property, plant and equipment maintenance Payments to the Deposit Insurance Fund Professional services Telecommunications Advertising expenses Security expenses Representation expenses Charity expense Insurance expenses Other expenses TOTAL OPERATING EXPENSES 21,993 21,381 The majority of employees have fixed and variable compensation components, which, together with other benefits, represent their total compensation. The goal is to achieve a sound balance between the variable and the fixed components. Variable compensation is tied to the employee s performance and the Group s total result. This is a way to harmonise the interests of employees and shareholders and motivate long-term value creation in the Group. The Group pays current taxes based on the statutory tax accounts maintained and prepared in accordance with the statutory tax regulations, which may differ from International Financial Reporting Standards. Deferred taxes on temporary differences as at and comprise: The tax rate used for the reconciliations below is the corporate tax rate of 20% payable by corporate entities in the Russian Federation on taxable profits (as defined) under tax law in that jurisdiction. Revaluation of Allowances Revaluation of financial assets and liabilities Amortisation of commissions fixed assets, investment property and assets availablefor-sale Revaluation of accounts in precious metals and foreign currencies Other Tax losses carried forward Total AS AT 31 DECEMBER 2011 (1,893) 320 (163) (497) (447) (200) 12 (2,868) (Charge)/credit to profit or loss 1,050 (645) (142) ,209 (Charge)/credit to other comprehensive income 55 (73) (18) Disposal of subsidiary 5 9 (1) 13 Change in deferred tax asset not recognized (8) AS AT 31 DECEMBER (846) (254) (296) (536) (1,646) (Charge)/credit to profit or loss (1,482) (65) (60) 42 (847) (Charge)/credit to other comprehensive income (18) (92) (110) Acquisition of subsidiary (44) (215) (26) (576) (688) Change in deferred tax asset not recognized 7 (2) (8) AS AT 31 DECEMBER (2,365) (64) (61) (1,150) (24) (3,264) The effective tax rate reconciliation for the years ended and is explained as follows: Year ended Year ended Profit before income tax 22,188 18,254 Statutory tax rate 20% 20% Tax at the statutory tax rate 4,438 3,651 Tax effect due to different tax rates (116) (79) Change in unrecognized deferred tax assets (27) (18) Tax paid in foreign countries and compensated in RF in future 5 (67) Additional tax charge/(reimbursement) related to prior year 186 (600) Permanent tax differences INCOME TAX EXPENSE 4,886 3,239 The permanent tax differences for the years ended and comprises: Year ended Year ended NON-DEDUCTABLE EXPENSES Interest expense on deposits Investment funds loss 58 Employee payments Administrative expenses 30 8 Charity expenses Property expenses Sale of property plant and equipment 15 Effect of intergroup sale of subsidiary 98 Other TOTAL NON-DEDUCTABLE EXPENSES NON-TAXABLE INCOME Income on mortgage agent (51) (6) Other (16) (10) TOTAL NON-TAXABLE INCOME (67) (16) TOTAL PERMANENT DIFFERENCES

83 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) The corporate income tax expense for the years ended and comprises: Year ended Year ended Current income tax expense 3,942 5,066 Deferred tax expense/(benefit) 820 (1,227) Additional tax charge/ (reimbursement) related to prior years 186 (600) INCOME TAX EXPENSE 4,886 3,239 Movement in deferred tax assets for the years ended and comprises: Movement in the tax loss carried-forward for the years ended 31 December and comprises: Year ended Year ended TAX LOSS CARRIED-FORWARD Tax loss at the beginning of the period Increase of tax loss for the period Tax loss used in the current period (1) (61) TAX LOSS AT THE END OF THE PERIOD There were no losses expiring in the current year. The tax loss expires in COMMITMENTS AND CONTINGENCIES In the normal course of business, the Group is a party to financial The Group uses the same credit control and management policies instruments with off-balance sheet risk in order to meet the needs in undertaking off-balance sheet commitments as it does for onbalance operations. of its customers. These instruments, involving varying degrees of credit risk, are not reflected in the consolidated statement of financial position. As at and provision for guarantees and other off-balance sheet commitments were RUB 369 million and The Group s maximum exposure to credit risk under contingent RUB 362 million, respectively. The risk-weighted amount is obtained liabilities and commitments to extend credit, in the event of nonperformance by the other party where all counterclaims, collateral or ings according to the principles employed by the Basel Committee by applying credit conversion factor and counterparty risk weight- security prove valueless, is represented by the contractual amounts on Banking Supervision (Basel I). of those instruments. Year ended Year ended DEFERRED INCOME TAX ASSETS At the beginning of the period Change in deferred income tax asset recorded in other comprehensive income 47 Change in deferred income tax asset recorded in income statement 70 (20) AT THE END OF THE PERIOD EARNINGS PER SHARE AND EARNINGS PER GDR Earnings per share are presented as follows: Movement in deferred tax asset not recognized for the years ended and comprises: Year ended Year ended DEFERRED TAX ASSET NOT RECOGNIZED At the beginning of the period Decrease in deferred tax asset not recognized for the period (27) (18) AT THE END OF THE PERIOD Year ended Year ended EARNINGS PER SHARE RELATED TO CONTINUING OPERATIONS: PROFIT: Net profit for the year 17,302 15,015 LESS: Loss on repurchase of ordinary shares (53) Non-controlling interest (2,398) (2,441) Net earnings attributable to ordinary equity holders 14,851 12,574 Weighted average number of ordinary shares for basic and diluted earnings 96,354,411 92,422,370 per share EARNINGS PER SHARE FROM CONTINUING OPERATIONS BASIC AND DILUTED GDR equivalent of weighted average number of shares* 192,708, ,844,740 EARNINGS PER GDR FROM CONTINUING OPERATIONS BASIC AND DILUTED * The number of GDRs was calculated assuming that two GDRs represent an interest in one ordinary share. As at and the nominal or contract amounts and risk-weighted amounts were: Nominal amount Risk-weighted amount Nominal amount Risk-weighted amount CONTINGENT LIABILITIES AND CREDIT COMMITMENTS Guarantees issued and similar commitments 226, , , ,310 Commitments on loans and unused credit lines 166,024 4, ,582 3,140 Letters of credit and other contingent commitments related to settlement operations 11,296 5,167 6,848 2,181 Less: provisions (Note 21) (369) (362) TOTAL CONTINGENT LIABILITIES AND CREDIT COMMITMENTS (BEFORE DEDUCTING COLLATERAL) Less: promissory notes held as security against contingent liabilities (Note 20) (2,599) (69) Less: deposits held as security against contingent liabilities (Note 18) (2,902) (1,896) TOTAL CONTINGENT LIABILITIES AND CREDIT COMMITMENTS 397, ,748 Operating leases The Group s future minimum rental payments under non-cancellable operating leases of office premises in effect as at and are presented in the table below. Not later than 1 year 1, Later than 1 year and not later than 5 years 3,239 1,076 Later than 5 years TOTAL OPERATING LEASE 5,585 1,692 Fiduciary activities The Group provides depositary services to its customers. As at and the Group had customers securities of 16,421,516, items, and 13,631,420,928 items, respectively, in its nominal holder s accounts. As at and the Group kept in its vault 3,849 kg of gold bullion, 62 kg of silver bullion, 87 kg of palladium bullion, 40 kg of platinum bullion, and 3,587 kg of gold bullion, 5,661 kg of silver bullion, 88 kg of palladium bullion, 31 kg of platinum bullion respectively, owned by the Group s customers. Legal proceedings From time to time and in the normal course of business, claims against the Group are received from customers and counterparties. Management is of the opinion that no material unaccrued losses will be incurred and accordingly no provision has been made in these consolidated financial statements. Taxation Commercial legislation of the RF and countries where the Group operates, including tax legislation, may allow more than one interpretation. In addition, there is a risk of tax authorities making arbitrary judgments of business activities. If a particular treatment, based on management s judgment of the Group s business activities, was to be challenged by the tax authorities, the Group may be assessed additional taxes, penalties and interest

84 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) Such uncertainty may relate to the valuation of financial instruments, valuation of provision for impairment losses and the market pricing of deals. Additionally such uncertainty may relate to the valuation of temporary differences on the provision and recovery of the provision for impairment losses on loans to customers and receivables, as an underestimation of the taxable profit. The management of the Group believes that it has accrued all tax amounts due and therefore no provision has been made in the consolidated financial statements. Russian transfer pricing legislation was amended starting from 1 January, to introduce additional reporting and documentation requirements. The new legislation allows the tax authorities to impose additional tax liabilities in respect of certain transactions, including but not limited to transactions with related parties, if they consider transaction to be priced not at arm s length. As the practice of implementation of the new transfer pricing rules has not yet developed and wording of some clauses of the rules is unclear, the impact of challenge of the Group s transfer pricing positions by the tax authorities cannot be reliably estimated. Pensions and retirement plans Employees receive pension benefits according to the laws and regulations of the Russian Federation. The Group provides its employees with post-employment benefits in the form of defined contribution plans. The Group makes monthly payments to a non-government pension fund for its employees, who in turn will receive a future benefit from the fund. The contributions to the defined contribution plan are included in staff costs on an accrual basis. In there were no payments made to the non-government pension funds. As at payments to the non-government pension fund of RUB 5 million. (in nill). Once the payments to the pension fund are made the Group has no further obligations. Operating Environment Emerging markets such as Russia are subject to different risks than more developed markets, including economic, political and social, and legal and legislative risks. Laws and regulations affecting businesses in Russia continue to change rapidly, tax and regulatory frameworks are subject to varying interpretations. The future economic direction of Russia is heavily influenced by the fiscal and monetary policies adopted by the government, together with developments in the legal, regulatory, and political environment. In March 2014, sanctions have been imposed by the U.S. and E.U. on certain Russian officials, businessmen and companies. These official actions, particularly if further extended, may result in reduced access of the Russian businesses to international capital and export markets, capital flight, weakening of the Rouble and other negative economic consequences. The impact of these developments on future operations and financial position of the Company is at this stage difficult to determine. 33. SEGMENT REPORTING The reportable segments comprise of: Corporate banking full range of banking services provided to large and medium-sized corporate customers, including, among others, direct debt facilities, current accounts, deposits, overdrafts, loan and other credit facilities and a variety of settlement and transactional services. Small business banking services provided to small businesses and individual entrepreneurs, including direct debt facilities, current accounts, deposits, overdrafts, loan and other credit facilities and settlement and transaction services. Investment banking representing trading of fixed income and equity products, foreign exchange, precious metals and derivatives on such products, money market operations, repo, brokerage services and asset management and other investment banking services. Retail banking (including Private Banking) full range of banking services to mass, affluent and wealthy individuals, including customer current accounts, savings, deposits, investment savings products, custody, credit and debit cards, consumer loans and mortgages. Treasury and asset-liability unit treasury, which lends and borrows funds of money market, undertakes the Group s funding through issue of debt securities and attraction of subordinated facilities and conducts foreign exchange operations for internal hedging purposes. This segment is also responsible for accumulation and further redistribution of all funds attracted by other segments. Unallocated balances and/or income and expense items not allocated to any of the Group s business segments in the internal management reporting systems, as they are not initiated by any of the business units and represent part of the Group s routine headquarter activities. The President of the Bank is the chief operating decision maker. Operating results are reviewed regularly by the entity s chief operating decision maker to consider the way resources to be allocated to the segment and assess its performance. Segment information about these businesses is presented below: Corporate banking Small business Internal charges and transfer pricing adjustments have been reflected in the performance of each segment. Revenue sharing agreements are used to allocate external customer revenues to a business segment on a reasonable basis. Retail banking Investment banking Treasury and asset-liability management unit Total Unallocated ASSETS Cash and balances with the Central Bank of the Russian Federation 4,501 3,379 32,905 24,263 22,784 87,832 Minimum reserve deposits with the Central Bank of the Russian Federation 1, , ,280 8,869 Precious metals 5, ,746 Financial assets at fair value through profit or loss ,133 11, ,986 Loans and advances to banks and other financial institutions 55 4,762 82,206 46, ,661 Loans to customers 551,169 48, , ,174 2, ,274 Investments available-for-sale , ,532 Investment property 2,780 4, ,571 Property, plant and equipment 2,929 2,045 8, ,422 16,205 Intangible assets , ,576 3,509 Goodwill , ,999 Other assets 1, ,092 1, ,276 11,867 TOTAL ASSETS 571,099 54, , ,055 89,699 10,130 1,379,051 LIABILITIES Financial liabilities at fair value through profit or loss 48 2, ,866 Due to banks and the Central Bank of the Russian Federation 12,506 3,607 5, ,644 16, ,187 Customer accounts 428,689 49, ,264 25,891 3, ,471 Bonds and Eurobonds 10,736 36,967 16,256 63,959 Promissory notes issued 46,026 1, , ,652 Deferred income tax liabilities 3,378 3,378 Other liabilities 1, , ,536 5,722 Subordinated debt 58,185 5,274 63,459 TOTAL LIABILITIES 488,483 54, , ,708 94,154 11,188 1,239,

85 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) Treasury and Corporate banking Small business Retail banking Investment banking asset-liability management unit Unallocated Total External interest income 58,390 6,552 15,398 16,121 1,388 97,849 External interest expense (25,825) (718) (11,195) (11,887) (7,497) (57,122) Internal funding costs/revenues from Central treasury (13,689) (1,611) 5, ,815 NET INTEREST INCOME BEFORE GAIN ON REMEASUREMENT OF CASH FLOWS AND PROVISION FOR IMPAIRMENT LOSSES ON INTEREST BEARING ASSETS 18,876 4,223 9,985 4,937 2,706 40,727 GAIN ON REMEASUREMENT OF CASH FLOWS AND PROVISION FOR IMPAIRMENT LOSSES ON INTEREST BEARING ASSETS (6,159) (808) (2,023) (20) (9,010) NET INTEREST INCOME 12,717 3,415 7,962 4,937 2,706 (20) 31,717 Fee and commission income 3,881 1,372 6, ,155 Fee and commission expense (168) (60) (2,696) (175) (68) (3,167) Trading and foreign exchange results ,156 (1,043) Other operating income 1, ,370 Net result from other segments* 136 (43) (504) TOTAL OPERATING INCOME BEFORE IMPAIRMENT LOSSES AND PROVISIONS 18,761 4,819 12,397 6,750 1, ,046 Impairment losses of investments available-for-sale and investment property and provisions on other transactions 255 (52) (76) (5) Operating expenses and impairment of buildings and constructions (5,827) (2,999) (9,340) (1,192) (486) (2,162) (22,006) PROFIT BEFORE INCOME TAX 13,189 1,768 2,981 5, (1,950) 22,188 Income tax (4,886) (4,886) PROFIT FOR THE PERIOD 13,189 1,768 2,981 5, (6,836) 17,302 Depreciation and amortization expense (361) (219) (751) (61) (25) (151) (1,568) Capital expenditures ,909 Corporate banking Small business Retail banking Investment banking Treasury and asset-liability management unit Total Unallocated ASSETS Cash and balances with the Central Bank of the Russian Federation 15,482 9,502 26,164 51,148 Minimum reserve deposits with the Central Bank of the Russian Federation 6,932 6,932 Precious metals 6, ,402 Financial assets at fair value through profit or loss , ,254 Loans and advances to banks and other financial institutions ,390 88,899 19, ,586 Loans to customers 422,035 38,947 90,112 39, ,564 Investments available-for-sale 4, ,919 Investments held to maturity Investment property 2,279 1,445 1,037 4,761 Property, plant and equipment 2,567 1,434 4, ,150 11,117 Intangible assets , ,481 Goodwill Other assets 1, ,656 4,729 TOTAL ASSETS 434,888 41, , ,510 52,953 6, ,903 LIABILITIES Financial liabilities at fair value through profit or loss 19 3,172 3,191 Due to banks and the Central Bank of the Russian Federation 6,365 4,091 8, ,904 3, ,510 Customer accounts 267,557 28, ,275 4,559 14, ,727 Bonds and Eurobonds 3,765 27,085 11,768 42,618 Promissory notes issued 7, , ,145 Deferred income tax liabilities 1,690 1,690 Other liabilities ,871 4,788 Subordinated debt 50,873 50,873 TOTAL LIABILITIES 282,279 32, , ,539 81,016 4, ,542 * Represents results from revenue sharing agreements between segments used to allocate certain external revenues between business segments jointly participating in revenue generating activities

86 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) Treasury and Corporate banking Small business Retail banking Investment banking asset liability management unit Unallocated Total External interest income 41,118 5,187 10,664 9, ,650 External interest expense (13,035) (525) (8,019) (7,903) (5,762) (35,244) Internal funding costs/revenues from Central treasury (11,848) (1,212) 4,902 1,057 7,101 NET INTEREST INCOME BEFORE GAIN ON REMEASUREMENT OF CASH FLOWS AND PROVISION FOR IMPAIRMENT LOSSES ON INTEREST BEARING ASSETS 16,235 3,450 7,547 2,716 1,458 31,406 GAIN ON REMEASUREMENT OF CASH FLOWS AND PROVISION FOR IMPAIRMENT LOSSES ON INTEREST BEARING ASSETS (4,889) 253 (325) (4,961) NET INTEREST INCOME 11,346 3,703 7,222 2,716 1,458 26,445 Fee and commission income 3,436 1,372 5, ,895 Fee and commission expense (163) (45) (2,474) (177) (93) (2) (2,954) Trading and foreign exchange results 1, ,004 (1,098) 2 3,274 Other operating income 1, ,013 Net result from other segments* (109) (30) (132) TOTAL OPERATING INCOME BEFORE IMPAIRMENT LOSSES AND PROVISIONS 16,819 5,117 10,982 6, ,673 Impairment losses of investments available-for-sale and investment property and provisions on other transactions (189) 5 (31) 84 (8) (139) Operating expenses and recovery of impairment of buildings and constructions (5,432) (2,860) (8,184) (1,497) (329) (2,978) (21,280) PROFIT BEFORE INCOME TAX 11,198 2,262 2,767 4,994 (157) (2,810) 18,254 Income tax (3,239) (3,239) PROFIT FOR THE PERIOD 11,198 2,262 2,767 4,994 (157) (6,049) 15,015 Depreciation and amortization expense (415) (217) (773) (92) (17) (196) (1,710) Capital expenditures ,540 * Represents results from revenue sharing agreements between segments used to allocate certain external revenues between business segments jointly participating in revenue generating activities. 34.FAIR VALUE OF FINANCIAL INSTRUMENTS VALUATION TECHNIQUES FINANCIAL ASSETS AND LIABILITIES The Group uses a number of methodologies to determine the The following methods and significant assumptions have been applied to estimate the fair values of following financial instruments: fair values of financial instruments for which observable prices in active markets for identical instruments are not available. These Cash and balances with the CBR and minimum reserve deposits techniques include: relative value methodologies based on observable prices for similar instruments; present value approaches of assets, the carrying amount is assumed to be reasonable with the CBR, due to the shot-term environment of these types where future cash flows from the asset or liability are estimated estimate of their fair value. and then discounted using a risk-adjusted interest rate. The estimated fair value of quoted trading securities and derivative financial instruments, comprising financial assets at fair value The principal inputs to these valuation techniques are listed below. through profit or loss category, is determined based on quoted Values between and beyond available data points are obtained by active market prices at the reporting date. interpolation and extrapolation. When utilising valuation techniques, the fair value can be significantly affected by the choice provided during the last quarter to the reporting date is assumed The estimated fair value of loans to banks and to customers for of valuation model and by underlying assumptions concerning to be reasonable estimate of fair value amount for them. The fair factors such as the amounts and timing of cash flows, discount value of loans originated earlier is estimated by application of rates and credit risk. market interest rates effective on the reporting date using discounted cash flows method with the deduction of the allowances Bond prices quoted prices are generally available for government bonds, certain corporate securities and some mortgage- The estimated fair value of promissory notes and bonds compris- for credit losses from the calculated fair value amounts. related products. ing investments available-for-sale category is determined based on the quoted market prices. Where these are not available, fair Interest rates these are principally benchmark interest rates or value is based on expected cash flows discounted using market internal Bank rates effective as at reporting date and quoted interest rates in the swap, bond and futures markets. The fair value of units of investment funds, which have quoted interest rates for similar securities whose market rates are quoted. prices on the active market, is determined based on the quoted Foreign currency exchange rates there are observable markets market prices. For shares in investment funds, which have no both for spot and forward contracts and futures in the world s major quoted prices on the active market the Group uses an independent appraiser s valuation for determining the fair value of such currencies. shares in the investment funds. The fair value of the assets of the Equity and equity index prices quoted prices are generally investment funds is determined by the use of different approaches (income approach, comparative approach and cost approach) readily available for equity shares listed on the world s major stock exchanges and for major indices on such shares. and methods (income capitalization method, company-analogue method, discounted cash flows method, liquidation value Commodity prices many commodities are actively traded in spot method). and forward contracts and futures on exchanges in London, New The fair value of investments held to maturity is determined based York and other commercial centres. on quoted active market prices at the reporting date. Other financial assets and liabilities are mainly represented by In order to determine a reliable fair value, where appropriate, short-term receivables and payables, therefore the carrying management applies valuation adjustments to the pricing information gathered from the above sources. Furthermore, on an ongoing amount is assumed to be reasonable estimate of their fair value. basis, the Group assesses the appropriateness of any model used

87 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) The fair value of term deposits (included in customer accounts and deposits from banks) for term deposits placed during the period of one month to the reporting date is assumed to be fair value amount for them. The fair value of the other term deposits is estimated based on expected cash flows discounted using market interest rates for similar funds. The carrying amount of current customer accounts is assumed to be reasonable estimate of their fair value due to the short-term environment and availability requirements of these types of liability. The fair value of issued bonds, Eurobonds, promissory notes and subordinated liabilities is based on quoted prices. Where these are not available, fair value is based on expected cash flows discounted using market interest rates for similar securities or funds whose market rates are quoted. The valuation techniques have been consistently applied by the Group across the years. The following table compares the carrying amount of financial assets and liabilities to their estimated fair values as at and : Carrying value Fair value Carrying value Fair value FINANCIAL ASSETS Cash and balances with the Central Bank of the Russian Federation 87,832 87,832 51,148 51,148 Minimum reserve deposits with the Central Bank of the Russian Federation 8,869 8,869 6,932 6,932 Financial assets at fair value through profit or loss 181, , , ,254 Loans and advances to banks and other financial institutions 133, , , ,586 Loans to customers 879, , , ,455 Investments available-for-sale 39,532 39,117 4,919 4,504 Investments held to maturity FINANCIAL LIABILITIES Financial liabilities at fair value through profit or loss 2,866 2,866 3,191 3,191 Due to banks and the Central Bank of the Russian Federation 257, , , ,530 Customer accounts 781, , , ,493 Bonds and Eurobonds 63,959 66,275 42,618 43,480 Promissory notes issued 61,652 61,528 21,145 21,298 Subordinated debt 63,459 65,982 50,873 51,996 For the purpose of fair value disclosures, the Group has determined classes of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy as at. Level 1 Level 2 Level 3 Total FINANCIAL ASSETS Cash and balances with the Central Bank of the Russian Federation 87,832 87,832 Minimum reserve deposits with the Central Bank of the Russian Federation 8,869 8,869 Financial assets at fair value through profit or loss 177,947 4, ,986 Loans and advances to banks and other financial institutions 133, ,896 Loans to customers 890, ,420 Investments available-for-sale 36,663 1,202 1,252 39,117 Investments held to maturity FINANCIAL LIABILITIES Financial liabilities at fair value through profit or loss 2,866 2,866 Due to banks and the Central Bank of the Russian Federation 257, ,671 Customer accounts 789, ,313 Bonds and Eurobonds 66,275 66,275 Promissory notes issued 5,953 55,575 61,528 Subordinated debt 46,102 19,880 65,982 The fair values of the financial assets and financial liabilities included in the level 2 and level 3 categories above have been determined in accordance with generally accepted pricing models based on a discounted cash flow analysis, with the most significant inputs being the discount rate that reflects the credit risk of counterparties. There were no transfers between the levels during the year. The reconciliation of Level 3 fair value measurements of financial assets is presented as follows: Available-for-sale Unquoted equities Total 31 DECEMBER Aqusition of OJSC Bank Otkritie 1,252 1, DECEMBER 1,252 1,252 The following table shows the impact of possible alternative assumptions to estimate the fair value of Level 3 instruments. Carrying value Impact of possible alternative assumptions Level 3 Corporate bonds 1,232 (16) 1,216 Shares INVESTMENTS AVAILABLE-FOR-SALE: 1,252 (16) 1,236 The following table provides quantitative information about significant unobservable inputs used to measure financial instruments Level 3 fair value hierarchy: Carrying value Corporate bonds 1,232 Shares 20 INVESTMENTS AVAILABLE-FOR- SALE: 1,252 Net assets value Assessment methodology Discounted cash flows Unobservable inputs Credit risk rate Value of underlying assets Range (weighted average value) % Not applicable 35.CAPITAL MANAGEMENT For Basel I ratio calculation purposes, two tiers of capital are distinguished: Tier I capital is core bank capital and includes paid share capital (less the carrying value of treasury shares), minority interests in the equity of subsidiaries and retained earnings (including their allocations to reserves), less certain deductions, such as goodwill. Tier II capital is supplementary bank capital that includes subordinated debt, hybrid instruments with characteristics of both capital and certain revaluation reserves, such as unrealized gains on the revaluation of financial instruments classified as available-for-sale and property revaluation surplus. The table below presents the composition of capital complying with Basel and discloses the capital -adequacy ratio for the reporting periods ended and : Tier 1 capital 135,775 88,481 Tier 2 capital 56,421 45,310 TOTAL REGULATORY CAPITAL 192, ,791 Risk-weighted assets: Credit risks 1,129, ,989 Market risks 208,274 87,033 TOTAL RISK-WEIGHTED ASSETS 1,337, ,022 Basel ratio 14.37% 16.30% Tier % 10.78% As at and the Group included the subordinated debt received in the computation of total capital, limited to 50% of Tier 1 capital. In the event of bankruptcy or liquidation of the Group repayment of these loans is subordinate to the repayment of the Group s liabilities to all other creditors. The capital adequacy ratios exceeded the minimum ratio of 8 % recommended by the 1988 Basel Capital Accord As at 31 December and, the Group complied with Basel capital requirements. The Bank s overall capital management policy is aimed at the dynamic optimization of capital required for the Bank s expansion and maintenance of sufficient capital adequacy to protect the Bank from unfavorable changes in market conditions and minimize liquidity risk. The capital management policy supports the shareholders vision and strategy of long-term Bank development

88 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) 36. RISK MANAGEMENT POLICY RISK MANAGEMENT SYSTEM Management of risks is fundamental to the Group s business. The risk management functions include: Organizational structure of risk management a structure of the Group s bodies and departments involved in risk management activities; Structure of risk identification and assessment; Risk monitoring and minimizing system; Internal control structure. In the Group the Supervisory Board, Management Board, Financial Committee, credit committee, Risk management department, Treasury department and Operating risk department of the Group are responsible for managing the risks. The Supervisory Board is responsible for general control over the risk management system and determines the strategy of its development. The Management Board is responsible for development of risk management policy including tactical issues. The Financial Committee performs current monitoring of liquidity and market risks. Operating monitoring of credit risk level is performed by a system of credit committees. Direct risk management including assessment and reporting, is performed by: Risk management department in relation to credit risks; Treasury department in relation to the liquidity, interest rate, currency and price risks; Operating risk department in relation to operational risks. The Group s priority is to reduce the exposure to risks by collegial decision making. Strict segregation of duties between departments and officials of the Group, accurately specified instructions and procedures, and determination of competences and authorities of the bodies and their leaders are also essential areas for risk limitation. Appropriate methodologies are used to assess the risk level. Instructions, procedures and methodologies are revised by the Group on a regular basis and updated reflecting the changed market conditions, influence of new products and services proposed by the Group, and improvement of risk managements methods used in banking practice. Risk monitoring structure includes: Setting the limits for risk acceptance on the basis of assessment of acceptance of the respective risk level; Control over the Group s exposure to the risks by: Following the limits; Assessment of the Group s exposure to risks on a regular basis; Compliance control; Meeting the requirements of the Central Bank of the Russian Federation in regard of covering the risks with sufficient equity; Internal audit of risk management systems. The main risks inherent to the Group s operations are those related to: Credit risk; Operational risk; Liquidity risk; Market risk; There have been no significant changes to the Group s risk management policies from those disclosed in the consolidated financial statements for the year ended. The Group presents the following information in relation to its risk management policies as at. CREDIT RISK The Group is exposed to credit risk which is the risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss. The Credit Committee approves new loans and changes and amendments to loan agreements. The Credit Department performs current monitoring. Credit risk for off-balance sheet financial instruments is defined as the possibility of sustaining a loss because any other party to a financial instrument fails to perform in accordance with the terms of the contract. The Group uses the same credit policies in making conditional obligation as it does for on balance sheet financial instruments through established credit approvals, risk control limits and monitoring procedures. MAXIMUM EXPOSURE The Group s maximum exposure to credit risk varies significantly and is dependant on both individual risks and general market economy risks. The following table presents the maximum exposure to credit risk of financial assets and contingent liabilities. For financial assets the maximum exposure equals to a carrying value of those assets prior to any offset or collateral. For financial guarantees and other contingent liabilities the maximum exposure to credit risk is the maximum amount the Group would have to pay if the guarantee was called on or in the case of commitments, if the loan amount was called on. The contractual collateral structure as at and is set out below. The fair value of collateral may differ from the contractual value. Maximum exposure Offset Net exposure after offset Collateral pledged Balances with the Central Bank of the Russian Federation 52,712 52,712 Minimum reserve deposits with the Central Bank of the Russian Federation 8,869 8,869 Financial assets at fair value through profit or loss, excluding equity securities 181, ,959 Loans and advances to banks and other financial institutions 133, ,661 10,177 Loans to customers 879, , ,924 Investments available-for-sale, excluding equity securities and units in investment funds 38,288 38,288 Other financial assets 6,816 6,816 Commitments on loans and unused credit lines 166, ,024 Guarantees issued and similar commitments 225, ,899 4,948 Letters of credit and other contingent commitments related to settlement operations 11,092 11, Maximum exposure Offset Net exposure after offset Collateral pledged Balances with the Central Bank of the Russian Federation 37,441 37,441 Minimum reserve deposits with the Central Bank of the Russian Federation 6,932 6,932 Financial assets at fair value through profit or loss, excluding equity securities 104, ,224 Loans and advances to banks and other financial institutions 111, ,586 5,307 Loans to customers 590, , ,003 Investments available-for-sale, excluding equity securities and units of investment funds 4,430 4,430 Investments held to maturity Other financial assets Commitments on loans and unused credit lines 116, ,582 Guarantees issued and similar commitments 154, ,283 1,950 Letters of credit and other contingent commitments related to settlement operations 6,848 6, Financial assets are graded according to the current credit rating they have been issued by an internationally regarded agency. The highest possible rating is AAA. Investment grade financial assets have ratings from AAA to BBB. Financial assets which have ratings lower than BBB are classed as speculative grade

89 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) The following table details the credit ratings of financial assets(*), excluding loans to customers, held by the Group. Credit ratings for loans to customers are presented in Note 11. ААА AA A BBB <BBB Not rated Total Balances with the Central Bank of the Russian Federation 52,712 52,712 Minimum reserve deposits with the Central Bank of the Russian Federation 8,869 8,869 Financial assets at fair value through profit or loss 49 2, ,656 44,860 4, ,986 Loans and advances to banks and other financial institutions 12,247 31,240 35,542 33,683 20, ,661 Investments available-for-sale 85 21,131 13,985 4,331 39,532 Other financial assets ,232 5,461 6,816 A methodology of evaluation of borrowers-individuals is based on The scoring methodologies are tailor-made for specific products following criteria: education, occupancy, financial position, credit and are applied at various stages over the life of the loan. As a history, property owned by the borrower. Based on information obtained the maximum limit of a loan is calculated. The loan maximum son which would agree to the outstanding balance of loans to result, it is not possible to make a cross-product score compari- limit is calculated with the use of the borrower s debt load ratio. customers for other balances of the consolidated statement of financial position. As such, more detailed information is not being The Group applies internal methodologies to specific corporate presented. loans and groups of retail loans. GEOGRAPHICAL CONCENTRATION The geographical concentration of assets and liabilities is set out below: ААА AA A BBB <BBB Not rated Total Balances with the Central Bank of the Russian Federation 37,441 37,441 Minimum reserve deposits with the Central Bank of the Russian Federation 6,932 6,932 Financial assets at fair value through profit or loss 80 1,660 57,311 36,786 8, ,254 Loans and advances to banks and other financial institutions ,556 38,433 23,366 17, ,586 Investments available-for-sale ,785 1,014 4,919 Investments held to maturity Other financial assets * The above financial assets are classified based on the information provided by the international credit rating agencies. The banking industry is generally exposed to credit risk through its financial assets and contingent liabilities. Credit risk exposure of the Group is concentrated within the Russian Federation. The exposure is monitored on a regular basis to ensure that the credit limits and credit worthiness guidelines established by the Group s risk management policy are not breached. The Group enters into numerous transactions where the counterparties are not rated by international rating agencies. The Group has developed internal models, which allow it to determine the rating of counterparties, which are comparable to rating of international rating agencies. A methodology to determine credit ratings of borrowers has been developed in the Group to assess corporate borrowers. This method allows for calculation and assignment/confirmation of a borrower s rating and rating of collateral for a loan. The system is based on a rating model depending on key performance indicators of the borrower with the possibility of insignificant expert adjustments in case of insufficient objectivity of the benchmark. The method provides for the rating assignment on the basis of the following criteria groups: market indicators of the borrower, goodwill, credit history, transparency and reliability of information, information on business and business environment, relations of the Group and the borrower, financial situation of the borrower, business activity, and collateral provided. The financial situation and business activity are the most important criteria. Therefore, the rating model provides for overall assessment of the borrower and the loan. Currently the rating model is applied only for initial credit application assessment. For credit monitoring purposes the bank classifies performing loans into standard and watch-list categories, based on the range of financial and other quantitative and qualitative indicators of borrowers performance. A model of the borrower s scoring assessment has been developed in the Group to assess and decide on loans to small and medium-size businesses. The scoring model is developed relating to standard loan products and includes key performance indicators of borrowers: financial situation, relations with the borrower, management quality, target use, location, credit history, collateral, etc. The scoring assessment based on the borrower s parameters is one of the main factors for the decision-making process relating to loans. Russia Non-OECD countries OECD countries Total ASSETS Cash and balances with the Central Bank of the Russian Federation 87,832 87,832 Minimum reserve deposits with the Central Bank of the Russian Federation 8,869 8,869 Financial assets at fair value through profit or loss 179,208 1, ,986 Loans and advances to banks and other financial institutions 42,640 33,756 57, ,661 Loans to customers 790,011 85,496 3, ,274 Investments available-for-sale 37,611 1,921 39,532 Other financial assets 6, ,816 TOTAL FINANCIAL ASSETS 1,152, ,130 64,376 1,337,970 Precious metals 5,746 5,746 Investment property 8,571 8,571 Property, plant and equipment 16,205 16,205 Intangible assets 3,509 3,509 Goodwill 1,999 1,999 Other non-financial assets 5, ,051 TOTAL NON-FINANCIAL ASSETS 41, ,081 TOTAL ASSETS 1,193, ,134 64,379 1,379,051 LIABILITIES Financial liabilities at fair value through profit or loss ,564 2,866 Due to banks and the Central Bank of the Russian Federation 201,903 18,879 36, ,187 Customer accounts 753,726 15,644 12, ,471 Bonds and Eurobonds 47,703 16,256 63,959 Promissory notes issued 61,652 61,652 Other financial liabilities 3, ,250 Subordinated debt 15, ,877 63,459 TOTAL FINANCIAL LIABILITIES 1,085,138 35, ,425 1, Deferred income tax liabilities 3,378 3,378 Other non-financial liabilities 1, ,472 TOTAL NON-FINANCIAL LIABILITIES 4, ,850 TOTAL LIABILITIES 1,089,986 35, ,427 1,239,694 OPEN POSITION 103,552 85,853 (50,048)

90 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) Non-OECD countries Total Russia OECD countries ASSETS Cash and balances with the Central Bank of the Russian Federation 51,148 51,148 Minimum reserve deposits with the Central Bank of the Russian Federation 6,932 6,932 Financial assets at fair value through profit or loss 99,110 3,127 2, ,254 Loans and advances to banks and other financial institutions 50,629 12,208 48, ,586 Loans to customers 540,875 48, ,564 Investments available-for-sale 630 4,289 4,919 Investments held to maturity Other financial assets TOTAL FINANCIAL ASSETS 750,371 64,185 55, ,474 Precious metals 6,402 6,402 Investment property 4,761 4,761 Property, plant and equipment 11,117 11,117 Intangible assets 2,481 2,481 Goodwill Other non-financial assets 3, ,859 TOTAL NON-FINANCIAL ASSETS 29, ,429 TOTAL ASSETS 779,795 64,190 55, ,903 LIABILITIES Financial liabilities at fair value through profit or loss 1, ,184 3,191 Due to banks and the Central Bank of the Russian Federation 142,595 20,878 50, ,510 Customer accounts 460,839 8,431 2, ,727 Bonds and Eurobonds 30,851 11,767 42,618 Promissory notes issued 21,145 21,145 Other financial liabilities 3, ,662 Subordinated debt 6,606 6,000 38,267 50,873 TOTAL FINANCIAL LIABILITIES 667,030 35, , ,726 Deferred income tax liabilities 1,690 1,690 Other non-financial liabilities 1,126 1,126 TOTAL NON-FINANCIAL LIABILITIES 2,816 2,816 TOTAL LIABILITIES 669,846 35, , ,542 OPEN POSITION 109,949 28,359 (47,947) MARKET RISK Market risk is the risk that the Group will incur losses due to the unfavorable fluctuations in the market value of financial instruments (including derivatives), foreign exchange rates, prices of precious metals and interest rates. Market risk includes securities price risk, currency risk and interest rate risk. The Group is exposed to currency risk because of its open positions in currencies and precious metals. The source for interest rate and securities price risks are open positions in interest rate and equity instruments which are subject to general and specific market fluctuations. Day-to-day market risk management is performed by the Financial Market Operations Department, the Precious Metals Operations Department and the Treasury Directorate. The Market and Operational Risk Department evaluates the Group s exposure to securities price risk and currency risk and estimates sensitivity of the Group s position to interest rates changes. The Treasury Directorate sets guidelines for the interest rate risks. Financial Market Operations Department manages the open positions within the set of limits on a daily basis to increase the Group s profit. METHODOLOGY ADOPTED BY THE GROUP FOR MARKET RISK MEASUREMENT PURPOSES Market risk the risk of adverse changes in the fair value of future cash flows of financial instruments due to unfavorable changes in market variables such as interest rates, exchange rates and equity prices. The Group estimates the market risk by analyzing the sensitivity of financial instruments to adverse changes in market parameters, as well as by estimating the Value-at-Risk (VaR methodology). The Group has established a system of trading operations limits on the risk characteristics both on the portfolio and individual item level The Group applies VaR model to evaluate the existing positions exposed to the market risk, and to assess the potential economic losses based on a number of parameters and assumptions for various changes in market conditions. Value-at-Risk is an approach which is used to assess the financial risk by estimating the potential negative changes in the market value of the portfolio with a given confidence level (the Group uses confidence level of 99 %) during a certain time interval (the Group considers 10 working days time horizon). Objectives and limitations of VaR calculation methodology The Group uses models to determine possible changes in the market value of trading portfolio based on data for the previous historical periods. In some cases the historical horizon can reach 5 year period. VaR models are designed to measure market risk under normal market conditions. The use of VaR has limitations because it is based on historical changes in market prices and on the assumption that future price movements will follow a certain statistical distribution. The model applied by the Group to assess VaR also has this feature. Specifics of the model is that recent changes in market conditions have more weight in the estimate of the potential risk than older ones. Thus, the model is particularly sensitive to any changes in market volatility. Due to the fact that the method of VaR calculation is mainly based on historical data and may not accurately predict future changes in the risk factors, the probability of significant changes in market conditions may be underestimated in cases of prolonged decay period of market volatility. VaR estimate may be underestimated or overestimated due to the assumptions made conserning risk factors and the correlation between such factors for specific instrument. Despite the fact that the positions may change throughout the day, the VaR reflects the risk at the end of each working day. VaR model does not reflect losses that may occur beyond the level of confidence of 99%. Actual results on trading portfolio may differ from the VaR values. In particular, the VaR model does not give an adequate estimate of the amount of profit or loss while sharp fluctuations on the market caused by crises. In order to determine the reliability of the VaR models, the Group regularly monitors the actual results of the portfolio revaluation, including, the assumptions made for the model and in VaR parameters. Portfolios exposed to market risk are also subject to regular stress testing. This procedure helps the Group to understand the amount of exceptional scale, but possible losses and to provide confidence in the Group s ability to withstand extreme market conditions. VAR CALCULATION ASSUMPTIONS The VaR amount is an estimate, calculated with a confidence level of 99%, of the potential loss that is not expected to be exceeded if the current position, exposed to market risk will not change within ten days period. Confidence level of 99% means that when considering the ten-hundred non-overlapping time periods, amount of loss that exceeds the value of VaR, in average occurs in one of such time periods. When calculating VaR within securities portfolio it is assumed that the value of securities within is changing synchronously and unidirectionally in terms of VaR amount for each security. Thus, the total securities portfolio VaR equals the sum of VaR on its components. Currency VaR is estimated with respect to the position direction and currency rates correlation. Risk management establishes maximum limits on investments in illiquid instruments, as well as the maximum retention period of these instruments and level of acceptable credit risk on the issuers of such securities. Within the limits and parameters established the Group s risk management monitors on an ongoing basis such securities. The assignment of a financial instrument to a category of illiquid instruments is performed by risk management and based on analysis of market liquidity and adequate availability of market quotations. The results of the analysis carried out are submitted to Financial committee. Wherever it is possible and in accordance with the policies of the Group, the instrument is revalued applying valuation models and based on market data. UPDATED METHODOLOGY FOR CALCULATING THE COST OF RISK (VAR) IN In, the Group performed a number of changes to the VaR methodology in order to update and unify methodology approaches applied by the Group risk management

91 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) Major improvements to the VaR assessment methodology of the portfolio of debt instruments. The following improvements were made: Substitution of historical yield series of illiquid bonds to the data on similar liquid issues. Exception of illiquid instruments out of VaR calculation, as sensitivity analysis will be made for them. The key parameter used by the Group for illiquid Rouble denominated bonds portfolio sensitivity calculation is rate percentage change of Russian government bonds effective YTM index provided by Moscow Exchange. RPC is a parameter of yield change which is estimated on the base of annualized volatility of daily changes of corresponding index calculated for the historical period of The key parameter used by the Group for illiquid USD denominated bonds portfolio sensitivity calculation is RPC of US generic 5 year government bonds YTM index provided by Bloomberg. RPC is a parameter of yield change which is estimated on the base of annualized volatility of daily changes of corresponding index calculated for the historical period of 2 3 years. In case of USD denominated bonds sensitivity analysis the Group uses RPC equal 150 bp. The new methodology allows on the one hand to mitigate distortion of VaR due to the lack of statistics regarding illiquid bonds, and on the other hand to put more emphasis on the yield to maturity as a basic risk factor for debt instruments while assessing VaR (bond price derives from the yield), which in turn increases the adequacy of using the VaR model as the main market risk indicator of the Group s bond portfolios. 2 3 years. In case of Rouble denominated bonds sensitivity analysis the Group uses RPC equal 200 bp. The total deviation of VaR results based on the new and the previous approach, does not exceed 1.2% for the whole securities portfolio. As at and data on the VaR assessment in respect for currency and securities price risks calculated by the Group are as follows: Year ended RUB million New aproach Old approach Currency risk Fixed income securities price risk 2,052 2,034 Equity securities price risk TOTAL 2,427 2,614 Sensitivity on illiquid securities 2,639 n\a Year ended Old approach RUB million Minimum Average Maximum Year end Currency risk Fixed income securities price risk Equity securities price risk INTEREST RATE RISK Fair value interest rate risk arises from the possibility that changes in interest rates will affect the value of the financial instruments. Interest rate sensitivity is the relationship between market interest rates Cash flow interest rate risk arises from the possibility that future cash flow of a financial instrument will fluctuate because of changes in market interest rates. and net interest income resulting from the repricing characteristics of assets and liabilities. Interest margins may increase as a result of such changes but may reduce or create losses in the event that unexpected movements arise. The 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 those of term borrowings at fixed interest rates. In practice, interest rates are generally fixed on a short-term basis. Also, interest rates that are contractually fixed on both assets and liabilities are usually renegotiated to reflect current market conditions. The Group manages interest risk by balancing interest bearing assets and liabilities, balancing the structure of assets and liabilities, implementing controls over risks of fund withdrawals and loan prepayments prior to maturity and controls over interest rate changes. The tools used by Financial Committee include stress-testing and setting maximum and minimum rates. The following table presents a breakdown of weighted average effective interest rates in force as at and and thus the potential of the Group for gain or loss. Effective average interest rates are analyzed by categories of financial assets and liabilities to determine interest rate exposure and effectiveness of the interest rate policy used by the Group. RUB USD Other currencies ASSETS: Financial assets at fair value through profit or loss 8.48% 6.24% Loans and advances to banks and other financial institutions 7.77% 0.69% 1.48% Loans to customers 13.41% 8.91% 7.93% Investments available-for-sale 8.91% 4.00% LIABILITIES: Due from banks and the Central Bank of the Russian Federation 6.53% 1.92% 1.93% Customer accounts 7.21% 3.94% 2.71% Bonds and Eurobonds 9.19% 7.25% Promissory notes issued 8.69% 2.93% 2.06% Subordinated debt 8.99% 9.50% RUB USD Other currencies ASSETS: Financial assets at fair value through profit or loss 8.35% 5.58% Loans and advances to banks and other financial institutions 5.99% 1.46% 0.68% Loans to customers 12.03% 9.08% 9.48% Investments available-for-sale 7.83% Investments held to maturity 9.00% LIABILITIES: Due from banks and the Central Bank of the Russian Federation 6.97% 1.79% 1.61% Customer accounts 8.36% 3.94% 4.22% Bonds and Eurobonds 8.80% 6.50% Promissory notes issued 8.69% 5.02% 3.27% Subordinated debt 9.35% 9.76% Interest rate risk is the risk that the interest income of the Group will decrease or it will incur losses in a result of adverse changes in market interest rates

92 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) The following table presents financial and non-financial assets/liabilities maturity based on projected repricing dates for floating rate instruments and expected maturity for fixed rate instruments. These repriсing dates are determined by management and are contained within the risk reports provided to key management personnel. Up to 1 month 1 month to 3 months 3 months to 1 year 1 year to 5 years Over 5 years Assets and liabilities not sensitive to interest rate fluctuations Total ASSETS Cash and balances with the Central Bank of the Russian Federation 79,301 8,531 87,832 Minimum reserve deposits with the Central Bank of the Russian Federation 8,869 8,869 Precious metals 5,746 5,746 Financial assets at fair value through profit or loss 1,218 9,991 29, ,292 22,945 1, ,986 Loans and advances to banks and other financial institutions 99,361 16,680 12, , ,661 Loans to customers 123, , , , , ,274 Investments available-for-sale 26,065 9,715 2,229 1,523 39,532 Investments held to maturity Investment property 8,571 8,571 Property, plant and equipment 16,205 16,205 Intangible assets 3,509 3,509 Goodwill 1,999 1,999 Other assets 11,867 11,867 TOTAL ASSETS 335, , , , ,394 67,569 1,379,051 LIABILITIES Financial liabilities at fair value through profit or loss ,242 2,866 Due to banks and the Central Bank of the Russian Federation 154,694 47,396 40,722 10, , ,187 Customer accounts 171,836 94, , , , ,471 Bonds and Eurobonds 492 4,374 28,158 20,314 10,621 63,959 Promissory notes issued 2,762 14,426 42,125 2, ,652 Deferred income tax liabilities 3,378 3,378 Other liabilities 5,722 5,722 Subordinated debt ,631 45,177 63,459 TOTAL LIABILITIES 330, , , ,537 56, ,132 1,239,694 INTEREST GAP BASED ON PROJECTED REPRIСING DATES (5,375) (21,233) (61,562) 174,139 83,021 INTEREST BASED DERIVATIVE FINANCIAL INSTRUMENTS BASED ON PROJECTED REPRIСING DATES 3,914 (3,914) INTEREST GAP, BASED ON PROJECTED REPRIСING DATES INCLUDING INTEREST-BASED DERIVATIVE FINANCIAL INSTRUMENTS (5,375) (17,319) (61,562) 170,225 83,021 Up to 1 month 1 month to 3 months 3 months to 1 year 1 year to 5 years Over 5 years Assets and liabilities not sensitive to interest rate fluctuations Total ASSETS Cash and balances with the Central Bank of the Russian Federation 37,873 13,275 51,148 Minimum reserve deposits with the Central Bank of the Russian Federation 6,932 6,932 Precious metals 6,402 6,402 Financial assets at fair value through profit or loss 165 9,254 32,271 49,620 9,000 3, ,254 Loans and advances to banks and other financial institutions 93,747 3, ,222 5, ,586 Loans to customers 56,635 64, , ,404 63, ,564 Investments available-for-sale 250 3, ,919 Investments held to maturity Investment property 4,761 4,761 Property, plant and equipment 11,117 11,117 Intangible assets 2,481 2,481 Goodwill Other assets 4,729 4,729 TOTAL ASSETS 195,072 76, , ,034 72,590 53, ,903 LIABILITIES Financial liabilities at fair value through profit or loss ,023 3,191 Due to banks and the Central Bank of the Russian Federation 125,482 39,917 42,866 4,023 1, ,510 Customer accounts 144,347 67, ,747 32, , ,727 Bonds and Eurobonds ,312 22,732 3,750 42,618 Promissory notes issued 5,504 8,244 5,426 1, ,145 Deferred income tax liabilities 1,690 1,690 Other liabilities 4,788 4,788 Subordinated debt 2 1 3,740 10,624 36,506 50,873 TOTAL LIABILITIES 275, , ,200 71,839 40,311 64, ,542 INTEREST GAP BASED ON PROJECTED REPRIСING DATES (80,437) (39,304) (13,364) 202,195 32,279 INTEREST BASED DERIVATIVE FINANCIAL INSTRUMENTS BASED ON PROJECTED REPRIСING DATES 3,344 (152) (3,192) INTEREST GAP, BASED ON PROJECTED REPRIСING DATES INCLUDING INTEREST-BASED DERIVATIVE FINANCIAL INSTRUMENTS (77,093) (39,456) (13,364) 199,003 32,

93 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) SENSITIVITY ANALYSIS The first portion of this calculation is based on the assumption that market interest rates will rise (fall) by two percentage points. The sensitivity analysis applied to the profit and equity as a result of The calculation refers to the immediate effect on consolidated income statement of each scenario for the Group s interest rate positions on floating rate instruments. potential changes in the market interest rates as described below is for twelve months ended and. The second portion is entitled changes in value and calculates the equivalent effect for debt securities in the assets at fair value through profit or loss and available-for-sale category. Equity Net profit Equity Net profit NET INTEREST INCOME FOR THE REPORTING PERIOD Increased interest rates + 2% Decreased interest rates 2% (258) (258) (338) (338) CHANGE IN VALUE Market interest rate + 2% (10,828) (8,979) (3,107) (2,857) Market interest rate 2% 10,828 8, FOREIGN CURRENCY RISK Currency risk is defined as the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates. The Group is exposed to effects of fluctuation in the prevailing foreign currency exchange rates on its financial position and cash flows. The Group s exposure to foreign currency exchange rate risk as at and presented in the table below: USD 1 USD = RUB Euro 1 EUR = RUB Gold 1 ounce = RUB 39, Total RUB Other LIABILITIES Financial liabilities at fair value through profit or loss 886 1, ,866 Due to banks and the Central Bank of the Russian Federation 197,078 41,390 11,899 6, ,187 Customer accounts 683,180 72,104 19,824 4,438 1, ,471 Bonds and Eurobonds 47,703 16,256 63,959 Promissory notes issued 20,312 39,047 2, ,652 Other financial liabilities 3, ,250 Subordinated debt 14,518 48,941 63,459 TOTAL FINANCIAL LIABILITIES 967, ,762 34,141 11,120 2,146 1,234,844 Deferred income tax liabilities 3,378 3,378 Other non-financial liabilities 1, ,472 TOTAL NON-FINANCIAL LIABILITIES 4, ,850 TOTAL LIABILITIES 972, ,767 34,143 11,120 2,146 1,239,694 OPEN BALANCE SHEET POSITION 131,388 16,903 (5,511) (5,690) 2,267 FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS AND SPOT DEALS Payables under forward deals (78,214) (97,076) (21,819) (1,364) (13,663) (212,136) Receivables under forward deals 98,552 82,542 16,418 7,850 6, ,136 Payables under spot deals (577) (1,929) (7) (1,486) (1,213) (5,212) Receivables under spot deals 2,134 1,679 1,399 5,212 Payables under currency-interest swaps (16,067) (12,196) (28,263) Receivables under currency-interest swaps 12,196 16,067 28,263 NET POSITION FOR DERIVATIVE FINANCIAL INSTRUMENTS AND SPOT DEALS 18,024 (10,913) (4,009) 5,000 (8,102) TOTAL OPEN POSITION 149,412 5,990 (9,520) (690) (5,835) CREDIT CONTINGENT LIABILITIES 345,352 49,518 8, USD 1 USD = RUB Euro 1 EUR = RUB Gold 1 ounce = RUB 39, Total RUB Other ASSETS Cash and balances with the Central Bank of the Russian Federation 81,232 2,914 3, ,832 Minimum reserve deposits with the Central Bank of the Russian Federation 8,869 8,869 Financial assets at fair value through profit or loss 140,445 41, ,986 Loans and advances to banks and other financial institutions 65,244 54,247 11, , ,661 Loans to customers 758, ,817 13, ,274 Investments available-for-sale 9,522 30, ,532 Other financial assets 5, ,223 6,816 TOTAL FINANCIAL ASSETS 1,068, ,665 28, ,521 1,337,970 Precious metals 4, ,746 Investment property 8,571 8,571 Property, plant and equipment 16,205 16,205 Intangible assets 3,509 3,509 Goodwill 1,999 1,999 Other non-financial assets 4, ,051 TOTAL NON-FINANCIAL ASSETS 35, , ,081 TOTAL ASSETS 1,103, ,670 28,632 5,430 4,413 1,379,051 USD 1 USD = RUB Euro 1 EUR = RUB Gold 1 ounce = RUB 50, Total RUB Other ASSETS Cash and balances with the Central Bank of the Russian Federation 49, ,148 Minimum reserve deposits with the Central Bank of the Russian Federation 6,932 6,932 Financial assets at fair value through profit or loss 85,948 18, ,254 Loans and advances to banks and other financial institutions 47,459 41,373 9,694 12, ,586 Loans to customers 473, ,253 14, ,564 Investments available-for-sale 4, ,919 Investments held to maturity Other financial assets TOTAL FINANCIAL ASSETS 669, ,061 24,912 12, ,474 Precious metals 5, ,402 Investment property 4,761 4,761 Property, plant and equipment 11,117 11,117 Intangible assets 2,481 2,481 Goodwill Other non-financial assets 3, ,859 TOTAL NON-FINANCIAL ASSETS 22, , ,429 TOTAL ASSETS 692, ,063 24,922 18,221 1, ,

94 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) USD 1 USD = RUB Euro 1 EUR = RUB Gold 1 ounce = RUB 50, Total RUB Other LIABILITIES Financial liabilities at fair value through profit or loss 2, ,191 Due to banks and the Central Bank of the Russian Federation 133,505 48,326 17,066 13, ,510 Customer accounts 407,635 41,873 14,222 6,366 1, ,727 Bonds and Eurobonds 30,851 11,767 42,618 Promissory notes issued 20, ,145 Other financial liabilities 3, ,670 Subordinated debt 12,606 38,267 50,873 TOTAL FINANCIAL LIABILITIES 611, ,750 31,504 20,480 2, ,734 Deferred income tax liabilities 1,690 1,690 Other non-financial liabilities 1,118 1,118 TOTAL NON-FINANCIAL LIABILITIES 2,808 2,808 TOTAL LIABILITIES 614, ,750 31,504 20,480 2, ,542 OPEN BALANCE SHEET POSITION 77,897 22,313 (6,582) (2,259) (1,008) FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS AND SPOT DEALS Payables under forward deals (69,534) (109,263) (15,776) (2,788) (884) (198,245) Receivables under forward deals 85,282 84,658 20,786 5,260 2, ,245 Payables under spot deals (3,654) (4,992) (3,673) (12,319) Receivables under spot deals 2,191 6,442 3, ,319 NET POSITION FOR DERIVATIVE FINANCIAL INSTRUMENTS AND SPOT DEALS 14,285 (23,155) 5,022 2,472 1,376 TOTAL OPEN POSITION 92,182 (842) (1,560) CREDIT CONTINGENT LIABILITIES 256,762 13,236 7, The Group s principal cash flows (revenues, operating expenses) are largely generated in Russian Roubles. As a result, future movements in the exchange rate between the Russian Rouble and US dollar/euro will affect the carrying value of the Group s monetary assets and liabilities. Such changes may also affect the Group s ability to invest in non-monetary assets as measured in US dollars in these consolidated financial statements. OPERATIONAL RISK Operational risk is defined as the risk of losses resulting from inappropriate management and control procedures, fraud, poor business decisions, system errors relating to employee mistakes and abuse by employees of their positions, technical failures, settlement errors, natural disasters and misuse of the Group s property. The Management Board also generally oversees the implementation of risk management processes, including relevant internal policies, adopts internal regulations on risk management, determines limits for monitoring operational risks and allocates duties among various bodies responsible for operational risk management. The Operational Risk Department monitors and controls operational risks and reports to the Supervisory Board. Regular monitoring activities allow to detect in time and to correct deficiencies in the policies and procedures designed to manage operational risk, which can reduce the potential frequency and/or severity of a loss event. In order to minimise operational risk, the Group strives to continuous improvement of its business processes and organisation structure as well as incentivise the staff. LIQUIDITY RISK Liquidity risk refers to the availability of sufficient funds to meet deposit withdrawals and other financial commitments associated with financial instruments as they actually fall due. The liquidity and cash flow risks arise in the case of maturity gap. The liquidity risk is defined as a mismatch of asset and liability maturity periods. The liquidity risk is managed by the Financial Committee of the Group. The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks to be completely matched due to the variety of Group s lending and funding operations. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interestbearing liabilities as they mature, are important factors in assessing the liquidity of the Group and its exposure to changes in interest and exchange rates. Currently, a considerable part of customer deposits are repayable on demand. However, the fact that these deposits are diversified by the number and type of customers and the Group s previous experience indicate that these deposits are a relatively stable and long-term source of finance for the Group. The data presented below on term deposits of individuals are based on the terms of contracts. However, individuals may withdraw deposits at any time. Long-term credits and overdraft facilities are generally not available in Russia. However, in the Russian marketplace, many short-term credits are granted with the expectation of renewing the loans at maturity. As such, the ultimate maturity of assets may be different from the analysis presented above. While financial assets at fair value through profit or loss are shown as less than one month, realizing such assets upon demand is dependent upon financial market conditions. Substantially all of the Group s interest bearing assets and interest bearing liabilities are at fixed rates of interest. Interest bearing assets and liabilities generally have relatively short maturities and interest rates are reprised only at maturity. In order to manage liquidity risk, the Group performs daily monitoring of future expected cash flows on clients and banking operations, which is a part of assets/liabilities management process. The Finance Committee of the Bank sets limits on the minimum proportion of maturing funds available to meet deposit withdrawals and on the minimum level on interbank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand. The following table presents an analysis of liquidity risk as managed by the Group based on contractual maturities and carrying value of assets and liabilities

95 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) The following table presents an analysis of liquidity risk based on carrying value of assets and liabilities. 1 month to 3 months 3 months to 1 year 1 year to 5 years Maturity undefined Total Up to 1 month Over 5 years ASSETS Cash and balances with the Central Bank of the Russian Federation 87,832 87,832 Minimum reserve deposits with the Central Bank of the Russian Federation 8,869 8,869 Precious metals 5,746 5,746 Financial assets at fair value through profit or loss 179, , ,986 Loans and advances to banks and other financial institutions 104,228 16,860 12, ,661 Loans to customers 110, , , , , ,274 Investments available-for-sale ,905 19,384 13,960 1,011 39,532 Investments held to maturity Investment property 8,571 8,571 Property, plant and equipment 16,205 16,205 Intangible assets 3,509 3,509 Goodwill 1,999 1,999 Other assets 4,110 1,719 5, ,867 TOTAL ASSETS 492, , , , ,787 36,828 1,379,051 LIABILITIES Financial liabilities at fair value through profit or loss ,549 2,866 Due to banks and the Central Bank of the Russian Federation 156,108 38,539 49,849 11, ,187 Customer accounts 291,689 94, , , ,471 Bonds and Eurobonds 492 4,374 10,140 38,332 10,621 63,959 Promissory notes issued 2,761 14,427 42,127 2,337 61,652 Deferred income tax liabilities 3,378 3,378 Other liabilities 3,062 1,194 1, ,722 Subordinated debt ,440 51,228 63,459 TOTAL LIABILITIES 454, , , ,053 63,110 3,378 1,239,694 Liquidity gap 37,573 (20,987) (62,596) 83,240 68,677 Stable sources of funding* 131,196 21,284 47,890 (200,370) Adjusted liquidity gap* 168, (14,706) (117,130) 68,677 * For liability risk management purposes, the Group monitors the mismatch between asset and liability contractual maturities. In addition, the Group identifies certain financial instruments which represent a relatively stable source of funds, despite its contractually short maturities. These instruments are correspondent accounts of banks included within Due to banks and the Central Bank of the Russian Federation and customer accounts. 1 month to 3 months 3 months to 1 year 1 year to 5 years Maturity undefined Total Up to 1 month Over 5 years ASSETS Cash and balances with the Central Bank of the Russian Federation 51,148 51,148 Minimum reserve deposits with the Central Bank of the Russian Federation 6,932 6,932 Precious metals 6,402 6,402 Financial assets at fair value through profit or loss 100, , ,254 Loans and advances to banks and other financial institutions 99,104 3, , ,586 Loans to customers 40,809 67, , ,741 64, ,564 Investments available-for-sale 250 4, ,919 Investments held to maturity Investment property 10 4,751 4,761 Property, plant and equipment 11,117 11,117 Intangible assets 2,481 2,481 Goodwill Other assets 1, , ,729 TOTAL ASSETS 299,794 71, , ,132 65,246 21, ,903 LIABILITIES Financial liabilities at fair value through profit or loss 1, ,191 Due to banks and the Central Bank of the Russian Federation 122,139 30,540 43,110 17, ,510 Customer accounts 198,134 67, ,747 32, ,727 Bonds and Eurobonds ,346 21,906 3,750 42,618 Promissory notes issued 5,851 8,244 5,426 1,624 21,145 Deferred income tax liabilities 1,690 1,690 Other liabilities 1,867 1,406 1, ,788 Subordinated debt ,624 39,694 50,873 TOTAL LIABILITIES 330, , ,384 85,093 43,511 1, ,542 Liquidity gap (30,333) (36,694) (36,065) 152,039 21,735 Stable sources of funding* 99,938 18,153 56,301 (174,392) Adjusted liquidity gap * 69,605 (18,541) 20,236 (22,353) 21,735 * For liability risk management purposes, the Group monitors the mismatch between asset and liability contractual maturities. In addition, the Group identifies certain financial instruments which represent a relatively stable source of funds, despite its contractually short maturities. These instruments are correspondent accounts of banks included within Due to banks and the Central Bank of the Russian Federation and customer accounts. These financial instruments are split into homogeneous groups with similar statistical characteristics so that management can estimate the portion of these balances which are not subject to significant risk of reduction in outstanding balances. Large customers with the highest volatility are separated from the groups and pooled together so that management can use a stochastic model that better describes these large customers behaviour on a pool basis. The stable portion is estimated with a preset level of reliability and revised regularly, at least once a quarter. Although management believes that these components of the correspondent and customer accounts are a stable source of funding, the Group considers that customer accounts related to small, homogeneous deposits will mature in three years while all other stable sources of funding will mature in one year from the balance sheet dates

96 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) The following tables show undiscounted cash flows (the gross outflow) of the Group s financial liabilities and off-balance sheet commitments on the basis of their earliest possible contractual maturity. The Group s expected cash flows on these financial liabilities and off-balance sheet commitments may vary significantly from this analysis. 37. TRANSACTIONS WITH RELATED PARTIES Details of transactions between the Group and other related parties are disclosed below: The gross undiscounted cash flows of the Group as at and were as follows: The Group had the following transactions outstanding as at and with related parties: Up to 1 month 1 month to 3 months 3 months to 1 year 1 year to 5 years Over 5 years Maturity undefined Total LIABILITIES Financial liabilities at fair value through profit or loss ,162 2,794 Due to banks and the Central Bank of the Russian Federation 146,643 37,769 38,650 6, ,727 Customer accounts 106,112 96, , , ,531 Bonds and Eurobonds 492 4,860 31,280 50,681 45, ,511 Promissory notes issued 2,762 14,487 42,674 2,259 62,182 Subordinated debt ,800 28,500 66,134 99,626 TOTAL INTEREST BEARING LIABILITIES AT FIXED RATES 256, , , , ,947 1,164,371 Due to banks and the Central Bank of the Russian Federation 508 1,399 12,884 6, ,824 Total interest bearing liabilities at variable rates 508 1,399 12,884 6, ,824 TOTAL INTEREST BEARING LIABILITIES 256, , , , ,606 1,186,195 Financial liabilities at fair value through profit or loss ,095 Due to banks and the Central Bank of the Russian Federation 9,263 9,263 Customer accounts 187, ,151 Promissory notes issued Other liabilities 2, , ,251 TOTAL FINANCIAL LIABILITIES 455, , , , ,676 1,389,269 CONTINGENT LIABILITIES AND OTHER COMMITMENTS 403, ,384 Up to 1 month 1 month to 3 months 3 months to 1 year 1 year to 5 years Over 5 years Maturity undefined Total LIABILITIES Financial liabilities at fair value through profit or loss Due to banks and the Central Bank of the Russian Federation 105,248 28,839 44,466 12, ,008 Customer accounts 92,876 68, ,566 37, ,131 Bonds and Eurobonds ,662 27,034 12,869 59,361 Promissory notes issued 5,840 8,469 5,949 1, ,717 Subordinated debt ,159 18,599 60,200 85,108 TOTAL INTEREST BEARING LIABILITIES AT FIXED RATES 204, , ,912 96,785 73, ,613 Due to banks and the Central Bank of the Russian Federation 66 2,961 4,850 14, ,439 Total interest bearing liabilities at variable rates 66 2,961 4,850 14, ,439 TOTAL INTEREST BEARING LIABILITIES 204, , , ,335 73, ,052 Financial liabilities at fair value through profit or loss 1, ,191 Due to banks and the Central Bank of the Russian Federation 17,510 17,510 Customer accounts 105, ,790 Promissory notes issued Other liabilities 1, , ,670 TOTAL FINANCIAL LIABILITIES 330, , , ,076 73, ,556 CONTINGENT LIABILITIES AND OTHER COMMITMENTS 278, ,075 Related party transactions Average effective interest % Total category as per consolidated financial statements caption Related party transactions Average effective interest % Total category as per consolidated financial statements caption FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS , ,254 Debt securities shareholders of the Group % Equity securities and derivative financial instruments companies controlled by shareholders 24 LOANS AND ADVANCES TO BANKS AND OTHER FINANCIAL INSTITUTIONS, NET , ,586 Correspondent accounts with banks companies controlled by shareholders 14 LOANS TO CUSTOMERS, GROSS 17, ,113 32, ,466 shareholders of the Group 14, % key management personnel % % companies controlled by shareholders 2, % 32, % ALLOWANCE FOR IMPAIRMENT OF LOANS TO CUSTOMERS (6) (32,839) (43) (21,902) shareholders of the Group (6) companies controlled by shareholders (43) INVESTMENTS AVAILABLE-FOR-SALE ,532 3,766 4,919 Debt securities shareholders of the Group % companies controlled by shareholders 3, % Equity securities companies controlled by shareholders 295 OTHER ASSETS , ,729 shareholders of the Group 2 companies controlled by shareholders FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS 162 2, ,191 companies controlled by shareholders Due to banks and the Central Bank of the Russian Federation: 257, ,510 Correspondent accounts of other banks companies controlled by shareholders 36 CUSTOMER ACCOUNTS 15, ,471 4, ,727 Term deposits shareholders of the Group % 1, % key management personnel 1, % 1, % companies controlled by shareholders 6, % 1, % Current accounts shareholders of the Group key management personnel entities under common control 2 companies controlled by shareholders 7,

97 Notes to the consolidated financial statements Annual Report and Accounts FOR THE YEAR ENDED 31 DECEMBER (continued) FOR THE YEAR ENDED 31 DECEMBER (continued) Related party transactions Average effective interest % Total category as per consolidated financial statements caption Related party transactions Average effective interest % Total category as per consolidated financial statements caption OTHER LIABILITIES 704 5, ,788 shareholders of the Group 10 key management personnel companies controlled by shareholders SUBORDINATED DEBT 11,179 63,459 50,873 shareholders of the Group 7, % companies controlled by shareholders 3, % COMMITMENTS ON LOANS AND UNUSED CREDIT LINES 21, ,024 5, ,582 shareholders of the Group 21,500 7 key management personnel companies controlled by shareholders 7 5,665 LETTERS OF CREDIT AND OTHER CONTINGENT COMMITMENTS 11, ,848 companies controlled by shareholders 13 GUARANTEES ISSUED AND SIMILAR COMMITMENTS 3, ,064 1, ,645 shareholders of the Group 3,652 companies controlled by shareholders 161 1,381 Year ended Year ended Key management personnel Total for the Group Key management personnel Total for the Group KEY MANAGEMENT PERSONNEL COMPENSATION: salary bonuses representation expenses 3 5 contribution to non-government pension fund - 4 1, ,145 11,658 Year ended Year ended Related party transactions Total for the Group Related party transactions Total for the Group INTEREST INCOME 97,849 66,650 shareholders of the Group 1,845 key management personnel entities under common control 32 companies controlled by shareholders 2,018 3,401 INTEREST EXPENSE (57,122) (35,244) shareholders of the Group (875) (436) key management personnel (53) (72) entities under common control (6) companies controlled by shareholders (546) (688) GAIN ON REMEASUREMENT OF CASH FLOWS ON INTEREST BEARING ASSETS ACQUIRED IN BUSINESS COMBINATION companies controlled by shareholders 3 PROVISION FOR IMPAIRMENT LOSSES ON INTEREST BEARING (9,390) (5,886) ASSETS shareholders of the Group 1 companies controlled by shareholders 43 (387) TRADING INCOME/(LOSS) 761 2,681 shareholders of the Group 28 7 key management personnel (13) (6) entities under common control 21 companies controlled by shareholders NET GAIN ON INVESTMENTS AVAILABLE-FOR-SALE: companies controlled by shareholders FEES AND COMMISSION INCOME 12,155 10,895 shareholders of the Group 1 1 key management personnel 1 1 entities under common control 1 companies controlled by shareholders FEES AND COMMISSION EXPENSE (3,167) (2,954) entities under common control (4) companies controlled by shareholders (7) OTHER INCOME entities under common control 4 companies controlled by shareholders 9 7 OPERATING EXPENSES (21,993) (21,381) shareholders of the Group (1) key management personnel (1,093) (721) entities under common control (1) (1) companies controlled by shareholders (34) (49)

98 Notes to the consolidated financial statements FOR THE YEAR ENDED 31 DECEMBER (continued) CONTACT INFORMATION 38. SUBSEQUENT EVENTS In January 2014 the Board of Directors of OJSC Khanty-Mansiysk Bank decided to sell 100% share of LLC Yugra-Leasing for consideration of RUB 353 million. The Group does not expect considerable changes in its further activity related to loss of control over LLC Yugra-Leasing. In February 2014 the Parent Company has purchased from the International Finance Corporation (IFC) 14.3% stake of OJSC Bank Otkritie and sold it to the Bank. The consideration paid by the Bank amounted to RUB 4,235 million. NOMOS Investor Relations 3/1, Verkhnyaya Radishchevskaya St., Moscow, Russia, Phone: Fax: Marianna NAUMENKO Investor Relations Olga MOSINA Investor Relations & Financial Institutions Yuri LEKAREV Managing Director, Head of International Funding, Financial Institutions and Investor Relations We support responsible forest management by printing this Annual Report on paper that has been certified by the FSC (Forest Stewardship Council ) 194

99 Consolidated financial statements 3/1, Verkhnyaya Radishchevskaya St., Moscow, Russia, Phone: Fax: