NOMOS BANK AnnuAl RepoRt And Accounts 2012

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1 NOMOS BANK Annual Report and Accounts 2012

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3 Content Section 1: NOMOS at a Glance...2 Section 2: President s Statement...6 Section 3: Chairman s Statement...12 Section 4: Operational review Corporate Banking...14 Retail Banking...17 Small Business Banking...21 Private Banking...24 Investment banking...26 HR report...28 Corporate Social Responsibility...30 Financial review...32 Risk Management...36 Section 5: Corporate Governance Supervisory Board Members...42 Management Board Members...45 Corporate Governance Report...48 Abbreviations...54 Consolidated Financial Statements for 2012 (IFRS)...56

4 NOMOS at a glance NOMOS is the sixth largest banking group in Russia by total assets and the second largest privately-owned Russian universal bank with total assets of RUB billion and equity of RUB 90.4 billion as at 31 December NOMOS provides a full range of banking services to corporate, small business and retail clients. As at 31 December 2012, NOMOS served approximately 13,500 corporate customers, 85,800 small business clients and approximately 1.5 million retail customers, including private banking clients. NOMOS is listed on both the London Stock Exchange (GDRs) and the Moscow Exchange. 13,500 85,800 1,5 mln corporate clients small business clients retail clients 2 NOMOS Annual Report and Accounts 2012

5 Geographical presence: map of branches St Petersburg Tyumen (incl KHMAO) Moscow & Region Point of sales in other regions NOMOS has an extensive branch network of 297 outlets in the economically important regions of Russia, with the majority of its business concentrated in Moscow, St Petersburg, Tyumen (including the Khanty-Mansiysk autonomous district), and the Novosibirsk and Khabarovsk regions. Novosibirsk Khabarovsk As at December 31, 2012 NOMOS had 297 branches and other points of sale in economically important regions of Russia NOMOS Annual Report and Accounts

6 NOMOS at a glance continued NOMOS key operating segments: Corporate: The historical backbone of NOMOS- BANK, focused on mid-sized companies. Loan book grew 31.5% in Retail: Second largest operating segment with a focus on mass/ affluent customers. Loan book grew 55.1% in Investment banking: Serves NOMOS s corporate and high net worth customers; operates in three core areas: interbank and repo market operations, foreign exchange and fixed income. Small business: A relatively new but rapidly expanding business. Loan book grew 30.1% in growth 55.1% 31.5% 30.1% growth of the retail loan portfolio growth of the corporate loan portfolio of the small business loan portfolio 4 NOMOS Annual Report and Accounts 2012

7 The shareholders structure (changed in 2013) On August 9, 2012 PPF Group sold its 26.5% stake in NOMOS with 19.9% acquired by Otkritie FC, 3.5% by Alexander Mamut (co-owner of Polymetal) and 3.1% by Oleg Malis, who later increased their stakes by purchasing more shares of NOMOS from the market. On November 22, 2012 NomGDR Limited made an offer to acquire the Bank s GDRs from NOMOS GDR holders at a purchase price of US$14 per GDR. The offer expired on 5 February 2013 and as a result, 16.1% of total voting stock was purchased by NomGDR. Otkritie FC also made an offer to ICT, a major shareholder of NOMOS, for the purchase of its entire stake in NOMOS. This purchase of stock from ICT will be carried out in a number of steps during 2013 and % 48.8% ICT Group % Deutsche Bank Aktiengesellschaft* % Otkritie FC Securities Limited % Mr. Alexander Mamut % 19.9% 4.9% 5.0% 0.7% Mr. Oleg Malis % Free float local shares % Total The shareholder structure presented as of April 18, For more details, please, refer to page 13 of the Annual Report. * deutsche Bank Aktiengesellschaft serves as the nominal holder of the Bank s GDRs. Information on credit ratings assigned to NOMOS Agency Fitch Moodys Rating BB Ba3 NOMOS Annual Report and Accounts

8 President s statement 2012 a year of impressive performance in line with targets for the year ended 31 December The achieved ROE is in line with the guidance around 20%, but not at its ceiling due to an increased level of funding costs and higher market competition. Vadim Belyaev President of NOMOS-BANK In 2012, despite the turbulence in the markets which restricted liquidity, NOMOS performed across all its operations, whilst also completing the integration of BKM, growing to become the sixth largest banking group in Russia by total assets. Principally, core revenue generation has remained strong, as have the Group s key measures of profitability: ROE to shareholders was strong at 18.3% and net profit attributable to shareholders of RUB 12.6 billion was 25.7% higher than in Earnings per share for 2012 reached RUB and earnings per GDR amounted to US$2.2 NOMOS achieved its goal of rapid and profitable growth in the three core markets in which it operates: corporate, small business and retail/private banking, managing to preserve loan portfolio quality and keep the net interest margin at a satisfactory level. Notably, loans to customers increased at above market rates during 2012 with the net loan portfolio expanding by nearly a third (31.9%), compared with the average market growth rate of 21.5%. Nonetheless, the Group has continued to ensure that its rapid rate of expansion remained balanced by prudent risk management policies and practices and during 2012, maintained a high-quality and well-diversified credit portfolio. Asset quality remained stable throughout the year, underpinned by the Group s cautious approach to provisioning. The cost of risk remained within the guidance of 1%. 6 NOMOS Annual Report and Accounts 2012

9 Successful results of all business segments: strong core revenue generation ROE for 2012 amounted to 18.3% Asset growth ahead of the market average Throughout 2012, the Group focused on improvement of the operating environment and automation of business processes which enabled NOMOS to accelerate the growth of its clients small business and retail credit portfolios significantly without any reduction in asset quality. Furthermore, given the increased competitiveness of the market in order to develop the Retail and Small Business divisions in the most efficient way, NOMOS introduced a new segmentfocused network management model aimed at maximizing financial results. This operating model focused on changes to improve organizational structure, centralization of the back office function, and the transformation of branches into operating offices. NOMOS expanded its distribution network, opening 31 new offices over the year. Balance sheet strength is a key fundamental for NOMOS and it has been over the last few years through the Group s stable and diversified approach to funding focused on both the wholesale and retail markets. Customer deposits are a vital contribution to this strategy and these accounted for 58.3% of total liabilities as at December 31, On the wholesale side, in April 2012 NOMOS-BANK successfully closed a subordinated Eurobond the USD 500 million 7 year offering represented the largest subordinated Eurobond issue by a Russian private bank and marked the longest noncallable subordinated debt transaction out of Russia. This long-term issuance was met with good demand and received over 120 orders with over 20% of demand coming from the US illustrating the Group s ability to successfully raise funding in the markets despite the challenging environment. The Central Bank of Russia approved the inclusion of the deal proceeds in the calculation of NOMOS-BANK s Tier 2 capital and the capital adequacy ratio of NOMOS amounted to 16.3% as at December 31, NOMOS Annual Report and Accounts

10 President s statement continued Major Corporate events of 2012 The key corporate event for NOMOS in 2012 was the acquisition of 19.9% of NOMOS shares by Otkritie Financial Corporation ( Otkritie FC ) in August 2012 and the latter s announcement of the intention to acquire all shares held by ICT Group by the end of 2014 and integrate the Corporation s banking subsidiary (Otkritie Bank) into NOMOS, thereby creating one of Russia s leading financial institutions. On August 9, 2012, PPF Group sold its 26.5% stake in NOMOS with 19.9% acquired by Otkritie FC, 3.5% by Alexander Mamut (coowner of Polymetal) and 3.1% by Oleg Malis. Otkritie FC also made an offer to ICT, a major shareholder of NOMOS, for the purchase of its entire stake at the price of US$14 per GDR. This purchase of stock from ICT is subject to corporate approvals and will be carried out in a number of steps during 2013 and On November 22, 2012, the second stage of the transaction was announced with NomGDR Limited declaring its intention to acquire NOMOS GDR from NOMOS GDR holders at a purchase price of US$14 per GDR. NomGDR Limited is an orphan special purpose vehicle ( SPV ). Otkritie Advisory Services Limited, an indirect wholly-owned subsidiary of Otkritie FC, entered into a call option agreement to acquire, subject to receipt of necessary approvals, all issued and outstanding shares of NomGDR Limited. This voluntary offer was approved by the Supervisory Board based on the fairness opinion produced by Citigroup Global Markets Limited. The offer expired on February 5, 2013, and as a result, 16.1% of total voting stock was purchased by NomGDR. In line with changes in the shareholder structure changes were also made to the management structure as outlined below: Vadim Belyaev, was appointed the President and the Chairman of the Management Board of NOMOS-BANK in November Dmitry Romaev, was appointed Advisor to the President in December 2012, CEO of NOMOS-BANK in March 2013 and First Deputy President of NOMOS-BANK in April In this capacity Dmitry will manage the Bank s operations and coordinate the integration of NOMOS- BANK into Otkritie FC whilst continuing to grow NOMOS core business divisions of corporate and private banking. Dmitry has been a member of the Management Board since April Evgeny Dankevich, was appointed Advisor to the President of NOMOS-BANK in February 2013 and First Deputy President in April Evgeny is responsible for the coordination of Operational and IT processes and the development of the Retail and Small business segments. Evgeny has been also a member of the Management Board since April Elena Budnik, was appointed Senior Vice President of 8 NOMOS Annual Report and Accounts 2012

11 Otkritie Financial Corporation intends to acquire up to 100% of NOMOS shares by the end of % August of NOMOS shares were purchased by Otkritie Financial Corporation in 2012 NOMOS-BANK in December 2012, leading the Bank s Retail Banking business. Elena has been a Deputy Chairman of the Management Board since April Alexey Karakhan, was appointed Senior Vice President of NOMOS-BANK in December 2012, in charge of Strategic Communications and HR. Alexey has been a member of the Supervisory Board since February Changes to the Supervisory Board composition were also proposed and approved at the EGM on 27 February The Board has been reduced to eight members from eleven. Two Directors, Dmitry Mizgulin (BKM) and Alexander Zelenov (VEB), were re-elected, and six new Directors were elected: Vadim Belyaev, Dmitry Romaev, Ruben Aganbegyan, Mikhail Belyaev, Alexey Karakhan, Dmitry Vasiliev. New members of the Audit Committee and Nomination and Remuneration Committee were elected. Dmitry Vasiliev was appointed the Chairman of the Audit Committee, which also includes Mikhail Belyaev, Ruben Aganbegyan and Alexander Zelenov. Ruben Aganbegyan was appointed the Chairman of Nomination and Remuneration Committee, which also includes Dmitry Vasiliev and Alexey Karakhan. These appointments are an important step in the integration strategy of NOMOS and Otkritie FC, ensuring a smooth and swift business consolidation. NOMOS s new management has industry experience that is both broad and deep and the team will be well-suited to meet the current challenges in the financial markets and to create a stronger and more competitive combined business with attractive growth potential. The management team has a proven track record of successfully integrating acquisitions, which is an important strategic advantage for the Group. Looking ahead, NOMOS and Otkritie FC will work together to achieve common strategic and operational objectives whilst ensuring a smooth transition and seamless integration of business processes. A dedicated team has been assigned to combine the two businesses without losing focus on day-to-day operations and an integration strategy has been developed with the help of international advisors. Upon the consolidation of NOMOS controlling stake by Otkritie FC and the integration of Otkritie Bank (Otkritie FC s commercial banking subsidiary) into NOMOS the combined entity will offer a wider unified range of products to a much larger customer base though an expanded office network. NOMOS will maintain the tight focus on catering to clients needs by continuing to provide innovative products that are tailored to their requirements and backed by top standard account management skills. The integration will bring distinct competitive advantages and will enable the combined corporation to realize its ambition to become a leading financial group in Russia. NOMOS Annual Report and Accounts

12 President s statement continued Economic overview Continued increasing demand for more sophisticated banking products Despite the ongoing global financial crisis, Russia s economy performed comparatively well during 2012 growing faster than many EU countries. Inflation remained moderate at 6.6% (6.1% in 2011). Unemployment continued to decline throughout 2012 and reached 5.5% level by the end of 2012 (6.6% in 2011). Russia faced a slight economic slowdown in the second half of 2012, which is expected to continue in 2013 with GDP growth amounting to 3.4% in 2012 (4.3% in 2011) slipping to 3.0% forecast for That said, Russia still has one of the highest levels of forecast real GDP growth amongst the major countries in Europe. Consolidation in the Russian banking sector continued in The total number of licensed banks continued to fall from 978 in 2011 to 956 in 2012, while the share held by the top 30 banks in the total assets of the banking sector increased to 74.6% in 2012 from 74.5% in The possible increase of the capital requirements for Russian banks from the current RUB 90 million to RUB 1 billion by FY15 will accelerate the further consolidation of the banking sector. During 2012 the global economy continued to slow irrevocably on the back of a weak recovery in the United States and the deceleration of growth rates in China. This was exacerbated by a recession in Japan and Europe, the latter driven by the ongoing European sovereign debt issues. The continuing crisis in the Eurozone created volatility in equity markets in many parts of the world. As a result, the Russian stock market experienced steep declines during 2012 in common with other BRIC countries. However the macroeconomic picture in Russia, even considering this slowdown, remains stable. The country runs a current account surplus equivalent to 4.5% of gross domestic product, government debt is low relative to GDP with approximately 3% share and reserves are high, reaching over USD 500 billion. In addition, the price of oil among the most important indicators for the strength of the Russian economy was relatively stable throughout 2012 averaging at $111 per barrel. Given this backdrop, we expect the economy to continue to slow throughout 2013 while the future prospects in the long term remain encouraging. Overview of the banking sector in Russia The Russian banking sector showed considerable growth in 2012: the overall net loan book increased by 21.5% driven primarily by the retail segment which increased its portfolio by 39.5%. Russian banks posted a record 10 NOMOS Annual Report and Accounts 2012

13 amount of net income, which reached Rub 1 trillion (USD 33 billion) in 2012, according to RAS standards and CBR information. At 2012 the Russian banking sector retained an 18.2% ROAE (17.6% in 2011). Total assets held by the banking sector increased by 18.9% (23.1% in 2011). This growth in assets in 2012 was limited by the restricted access to liquidity in the market and increasing funding costs. The level of State support was significant during 2012 and reached RUB 3 trillion, almost half of which came from repo funds. The share of CBR funding of total liabilities of the banking sector was more than 6% as at 2012 (vs.12% in FY09 and 3% in 2011). The sector s Loan to deposit ratio amounted to 116% in 2012 rising slightly from 115% in During 2012, the Russian banking sector overall remained adequately capitalized, although capital ratios continued to deteriorate. However, the asset quality remained stable with sector Cost of Risk at 0.5% and the Non- Performing Loan ratio at 4.5% (4.8% in 2011). The main challenges faced by Russian banks in 2013 will be those created by the difficult economic environment and stricter CBR requirements on local capital adequacy rules and the tightening of rules for unsecured retail lending, which will restrict asset growth and add to the already fragile capital position of many players. On the other hand further improvements in financial market infrastructure relating to the creation of the central depository and euro-clear ability, as well as lower inflation will attract more investors to Russia. All in all, Russia s banking market still offers great potential for growth and consolidation. With a loan to GDP ratio of 44% compared with more than 100% in the Eurozone local banks have ample scope to expand in the years ahead to serve a market that remains significantly underpenetrated. Strategic objectives Over the next two years, NOMOS is to be integrated into Otkritie Financial Corporation (Otkritie FC) to create the leading private financial corporation in Russia. Otkritie Bank will be consolidated with NOMOS which will strengthen NOMOS s position as one of the top five banking groups in the country. The new, combined banking group will be a universal bank with a balanced portfolio of corporate, retail and small business clients. Among the key strategic objectives of NOMOS are to: 1. Facilitate integration into Otkritie FC and to efficiently consolidate Otkritie Bank. 2. Be present in the 45 economically developed regions of Russia, with a special focus on the top ten regions where Otkritie FC would build a significant market share of over 5% in the relevant segments. 3. Create long-term, multi-product relationships with customers in each of the chosen market segments, based on fair pricing, outstanding service and sustained innovation. 4. Maximise cross-selling opportunities between NOMOS and other Otkritie FC entities, including capital markets, insurance and asset management. 5. Enhance operational efficiency by developing a cost efficient operating platform, simplifying and standardising business processes and upgrading IT infrastructure. 6. Continue improving risk management systems. Vadim Belyaev, President of NOMOS-BANK NOMOS Annual Report and Accounts

14 Chairman s Statement Report of the Supervisory Board Performance During 2012 in successfully pursuing its strategy of seeking profitable growth, NOMOS achieved fasterthan-market expansion of its assets and a stable core operating performance. These positive results for 2012 demonstrate the effective management and timely decision-making that guide NOMOS, alongside its enhanced system of corporate governance. As a result, by the end of 2012 NOMOS realized enhanced financial stability and the potential to achieve further profitable growth at above-market rates. Key aspects of the Committee s work in 2012 NOMOS-BANK takes its corporate governance commitments very seriously and aims to deliver a robust set of governance procedures that ensure high-quality and timely dialogue between the Supervisory Board and the Management, effective reporting on operational matters, a strong focus on shareholder value and enhanced risk management. The Bank s corporate governance system is functioning in compliance with the requirements of the Russian and UK legislation. During 2012 three committees were established and successfully functioned under the Supervisory Board: the Audit Committee, Nomination and Remuneration Committee and Risk Committee. In 2012 the Audit Committee rendered considerable support to the Supervisory Board in control and audit of NOMOS s financial statements, provided the relevant recommendations for approval of the quarterly financial statements prepared according to IFRS and annual financial statements prepared according to IFRS and RAS, as well as for assessment of the Bank s auditor activities; in its activities the Audit Committee paid great attention to integration of the efficient internal control system. During 2012 the Audit Committee was headed by an independent director and the majority of the members of the Audit Committee were independent directors. The Nomination and Remuneration Committee provides its recommendations for nomination of the members of the Supervisory Board and remuneration of the senior executives of NOMOS- BANK. In 2012 the Nomination and Remuneration Committee recommended the candidates for the Bank s Supervisory Board to be elected at the Annual General Shareholders Meeting, provided recommendations with respect to remuneration of the members of the Supervisory Board and the Review Commission and approved the Policy on Remuneration of the Bank s Key Employees. In 2012 the Risk Committee of the Supervisory Board performed detailed monitoring of the position of NOMOS-BANK on risks and continued to implement a number of strategic initiatives, including those on determination of the risk appetite and establishment of the risk register. The Supervisory Board, based on the Committees work, ensures efficient control over NOMOS- BANK s financial and operational indicators. During this prolonged period of turbulence in the financial 12 NOMOS Annual Report and Accounts 2012

15 role of the supervisory board Our robust governance procedures ensure high-quality and timely dialogue between the Supervisory Board and the Management Board, via the committees that have been instituted to oversee audit, nominations, remuneration and risk management. risk committee management board corporate governance supervisory board chairman audit committee nomination and remuneration committee markets the market position of NOMOS-BANK was preserved and stability of its business did not suffer, largely due to the intrinsic focus on risk control and risk management. The Main Shareholders In 2012 the shareholding structure of NOMOS changed. In August 2012 PPF Group sold its 19.9% of the Group s voting shares to Otkritie FC Securities Limited, controlled by Otkritie FC, and 6.6% to the companies owned by Alexander Mamut and Oleg Malis. In August 2012 Otkritie FC announced the intention to acquire all shares held by ICT Group by the end of Founded in 1995, Otkritie Financial Corporation is one of Russia s largest financial groups. Through its five core businesses investment banking, brokerage, commercial banking, asset management, and insurance Otkritie FC offers its clients more than eighty financial products and services. The major shareholders of Otkritie FC are Boris Mints and Vadim Belyaev, the founder and the Chairman of the Board of Directors of Otkritie FC. Among the shareholders of Otkritie FC and Otkritie Bank are International Financial Corporation and the Deposit Insurance Agency. In November 2012 NomGDR Limited, an SPV established by Otkritie FC, announced its intention to acquire the global depository receipts (GDRs) of NOMOS-BANK issued according to Rule 144А and Regulation S. The voluntary offer was approved by the Supervisory Board of NOMOS-BANK based on, among other things, the fairness opinion produced by Citigroup Global Markets Limited that the financial conditions offered by NomGDR Limited are beneficial for the holders of GDRs. The Offer Memorandum is available on the following website: ( The voluntary offer was made to investors on 22 November, The offer period ended on 5 February, As a result, 16.1% of total voting stock was bought by NomGDR. Dividend policy To date, NOMOS-BANK has not paid a dividend to shareholders, choosing instead to reinvest all profits into its equity capital. This corresponds to the Bank s strategy aimed at maximizing the profits and ROE. In March 2011, a General Shareholders Meeting approved NOMOS-BANK s dividend policy. The Supervisory Board is responsible for making any proposals on dividend payments. Ruben Aganbegyan, Chairman of Supervisory Board of NOMOS-BANK NOMOS Annual Report and Accounts

16 Operational review Operational review Corporate banking Segment overview for 2012 In 2012 the Corporate Business team once again proved its professionalism and efficiency by achieving its two main strategic goals: to outperform market growth and to report stable financial results. The corporate loan book increased 31.5% in The division s volume of corporate deposits increased 25.6%. Profit before tax for the corporate banking segment was RUB 11.2 billion which is in line with last year s result of RUB 11.3 billion. These achievements are all the more commendable when taking into account the tough competition and the liquidity squeeze on the market due to the outflow of funds from the banking system. Some key factors of the success of NOMOS s corporate banking business are: Its modern product line which continues to satisfy customer requirements. The constant monitoring of the client base. Its ongoing analysis of the market environment and opportunities offered by competitors. Continued improvement in business processes. Control over decision-making. The key success factor to this performance is the effective cooperation of all departments within the Corporate Banking segment, including cooperation between client managers and product managers, the clearly defined hierarchy from head office to branches, and cooperation with other business units of the Group. The regional Corporate Business demonstrated outstanding results in In this segment, the loan book growth rate of 47.3% for the Group excluding BKM was even higher than the average level for the Group. The regional share of guarantees granted increased to 36% of the Group excluding BKM in the total guarantees portfolio. The Corporate Business segment s strategic objective is to diversify the business and to increase its share of smallersized companies. In 2012 the volume of loans provided to companies with revenues of up to RUB 5 billion increased 29% for the Group excluding BKM. The share of this customer cluster in the performance of the Group excluding BKM Corporate segment gradually increased and amounted to 22% of the loan book, 37% of the guarantees portfolio and 29% of the customer deposits as at Mid-cap companies amounted to 66% of the total number of the corporate clients of the Group excluding BKM. In 2012, special attention was paid to business process optimization and automation, which helped to speed up the process of loan consideration and documentation. An Electronic tranche disbursement system was implemented. NOMOS clients are now able to send a disbursement application via the Remote Banking System without going to the bank and receive funds under the loan agreement on the same day (due to optimization of the document flow and client servicing time in the bank. In October 2012, the Credit conveyor system was implemented with the main target of streamlining and speeding up the processing of corporate credit applications, as well as optimizing the corporate client lending procedure. The introduction of the Credit conveyor 14 NOMOS Annual Report and Accounts 2012

17 system resulted in the improvement of service quality provided to corporate clients. Achievemets in 2012 In 2012 the total number of corporate clients increased 19.5% to 13,500. Client numbers: , , ,500 NOMOS continued focusing on increasing share of wallet and its efficient cross-selling strategy enabled NOMOS to increase the average number of products per customer from 2.8 in 2010 to 3.1 as at the end of This was the direct result of the Group s success in developing new loan, deposit and trade finance products, which drove the large increase in the size of the corporate loan portfolio and deposit base, accompanied by a material increase in interest and fee income. Total net loans and advances to customers increased by 31.5% to RUB billion in 2012, with growth predominantly coming from new products and regional expansion outside Moscow. In addition to standard banking products, the Group successfully continued to develop its factoring and guarantees business. As of the end of 2012 the factoring portfolio of the Group was RUB 7.4 billion, 11.8% higher than at the end of The fee and commission income from factoring operations increased 3.7 times to RUB 669 million for 2012 (RUB 183 million in 2011). The total volume of corporate guarantees granted by NOMOS in 2012 increased 42.4% to RUB 205 billion while the number of contracts increased from 6,700 to 9,500, both due to new clients and to an increased share of wallet among existing clients. In 2012, NOMOS-BANK was recognized as the best Russian bank in the precious metals market for the sixth time. The precious metals department of NOMOS- BANK made 8,667 transactions with total turnover about USD 24.7 billion in NOMOS-BANK is one of the leaders on the Russian gold market with a gold purchase volume of 72.3 tons in 2012 with a total value of about USD 3.8 billion. The Bank is also engaged in the purchase and sale of silver and coins. NOMOS-BANK has been an LBMA member since 2011, and it was the first bank in Russia to introduce a precious metals internet trading service. During 2012 NOMOS-BANK focused on the development of cash and settlement services in order to increase the volume of settlement transactions and fee income. Complex settlement products for cash management purposes were introduced, and more flexible service conditions were implemented such as: account statements and opening balance provided to clients by 9am upon request; extended working hours; unified tariff book availability; and foreign exchange services for clients using NOMOS- BANK s internal rates and direct communication with a NOMOS- BANK dealer. Documentary transaction processing was improved by the implementation of unified document forms, part of which is automatically filled in from the Bank s data base. As a result 2012 settlement transaction income was RUB million which is 16.4% higher than in Total customer deposits increased by 25.6% to RUB billion as at 31 December NOMOS- BANK updated its deposit product range from just two standard products at the beginning of 2010 to 31 products by the end of 2012, allowing corporate clients to manage their liquidity more effectively. NOMOS Annual Report and Accounts

18 Operational review continued Industrial Distribution The corporate loan book was welldiversified across industry sectors. The corporate banking business focused on seven key growth sectors during 2012: manufacturing, trade, construction and operations with real estate, leasing, mining, services, transport and communications. Operational highlights of 2012 The table below sets out selected financial information for the Corporate Banking segment for the years ended 31 December 2012 and Corporate business In millions of Roubles Selected financial position data: The successful growth of NOMOS s loan portfolio resulted in an increase in revenues and net interest income, while success in capturing crossselling opportunities was the main factor in the increase in net fee and commission income, which rose 25.3% to RUB 3.3 billion. The majority of net fee and commission income (RUB 2.1 billion) was earned on documentary operations. The division s loan book quality remained stable during 2012 with the share of non-performing loans of 1.8%. For more detail, please refer to the Risk Management Section on page 38 for the Loan portfolio quality and COR analysis. Audited 2011 Audited 2012 Change Y12-Y11 Total segment assets ,1% of which, net loans to clients ,5% Total segment liabilities ,0% of which, client accounts ,6% Selected income statement data: Net interest income* ,9% Net Fee and Commission income ,3% Total operating income before impairment losses and provision ,1% Operating expenses ,5% Profit before tax ,8% Strategic Goals for 2013 NOMOS s strategy for the development of the Corporate Business segment is to continue the successful development of all business areas with the main focus on increasing efficiency. On this basis the key goals of the corporate business are to increase market share, and to ensure profit growth by managing revenues and expenses. The main goals for 2013 are: To enhance relationships with corporate clients and further increase the Group s share of wallet. To expand the client base with an emphasis on maintaining well-diversified exposure across industry sectors. To increase fee revenue and settlement transaction volumes. To expand in the economically significant regions of Russia outside Moscow. * Calculated as net interest income before gain on remeasurement of cash flows and provision for impairment losses on interest bearing assets 16 NOMOS Annual Report and Accounts 2012

19 Retail Banking Segment overview for 2012 The Retail Banking division for the mass/affluent remains one of the priorities for the Group and a very important growth area for NOMOS. Today the business division offers everything from credit products (including term loans, credit cards and mortgages) to current accounts and term deposits, debit cards, settlement and cash services, as well as private banking services. NOMOS retail customers are serviced through a large and growing banking network comprising 297 branches and outlets, 1,825 ATMs, call centres, telesales operations and an innovative internet banking offering. In 2012 the retail segment focused on the loan portfolio growth, control over profitability and improvement of the business process automation. NOMOS s corporate and small business relationships are an important source of new customers for the retail business and we seek to leverage these relationships. The Group is one of the major players of the retail banking market. According to figures from the Central Bank of Russia and based on data prepared in accordance with Russian Accounting Standards, at the end of 2012 NOMOS ranked 18th by volume of retail loan portfolio and 12th by volume of customer deposits with a market share of 1.1% and 1.1% respectively. The retail banking market in Russia continues to experience buoyant demand for credit and financial services and as a consequence, total loans and advances to retail customers of NOMOS grew 55.1% to RUB 90.1 billion during 2012, which is notably higher than the average market growth rate of 39.5%. The Group s portfolio of retail customers deposits increased by 20.4% to RUB billion as at 31 December 2012, in line with average market growth. The significant loan portfolio growth resulted in the strong profitability of the Retail Banking segment which reported net profit of RUB 2.8 billion, almost twice higher than 2011 result. Among the key income drivers were steady growth in net interest income, which increased by 48.5% to RUB 7.5 billion, and a substantial increase of net fee and commission income by 44.1% to RUB 3.2 billion. Such good results were achieved owing to: Successful direct and crossselling campaigns. Development of the product line. Improved efficiency of the branch network. High quality of the customer service, including successful work of the call center and modern technologies (internet banking). Attracting Customers and building a Regional Distribution Network By the end of 2012 the number of the retail customers of the Group amounted to approximately 1.5 million throughout Russia. In 2012, there were both qualitative and quantitative changes in the structure of the Bank s regional network, namely that nine branches were assigned operational office status, which enabled increasing management efficiency, the optimization of certain functions in the area of sales, government relations and administrative work, which helped to reduce administrative expenses. NOMOS Annual Report and Accounts

20 Operational review continued 5.1% 48.7% 4.2% 41.7% Mortgage loan Consumer loans Car loans % 54.1% Improving Product Line and Sales Channels The main loan products of the Group include mortgage and consumer loans, as well as car loans. At the end of 2012, 41.7% of the total amount of loans to individuals were mortgages and 54.1% were cash loans. In 2012 particular attention was paid to the improvement of the business process automation. The introduction of the Credit Conveyor system made it possible to ensure a standardized approach to retail credit risk and was implemented across all the retail loan programs. On the back of the Credit Conveyor system, there were also fraud detection systems introduced, such as the Hunter system which detects credit applications through suspicious information that could indicate fraud. This system allows the Bank to significantly reduce the number of fraudulent credit applications, accelerate the process of credit approval for diligent clients, and reduce the number of errors during the identification of potentially unreliable borrowers was also marked by the dynamic development of NOMOS-BANK s remote services. Customers were offered such services as SMS-Bank, a mobile banking service that comprises multi-platform applications, including those for the ios (iphone, ipad) and Android-based devices. The functionality of internet banking was also expanded: customers now have the opportunity to open deposit accounts and perform operations with current accounts online without having to visit their branch. The applications interface was improved which resulted in an increase of the number of customers who use internet banking. In addition, NOMOS-BANK launched a co-branded offer in cooperation with Transaero, the major air carrier, which consists of a service under Verified by Visa and Маstercard Secure Code programs. Achievements in 2012 The successful results of the Retail Banking business in 2012 achieved the Group s main objectives to increase the consumer and mortgage loan portfolio at higher than average market rates. The loan portfolio growth was accompanied by a conservative risk approach. PRIVATE BANKING NOMOS is making steady progress towards its goal to offer the best 18 NOMOS Annual Report and Accounts 2012

21 Private Banking services of all the private banks operating in Russia. NOMOS-BANK has created a superior infrastructure and cooperation with its partners using an open architecture environment allows NOMOS-BANK to make a broader offering than its competitors. This has resulted in a significant expansion of the deposit base and doubled the number of investment products under the close control of its professional team. More information about the Private Banking segment is given on page 24 of the report. PREMIUM BANKING In 2012, NOMOS-BANK launched a new initiative called Premium Banking. The initiative is targeted at clients with an average balance of over RUB 1 million and as well as the standard banking services offers investment and insurance products and a personal financial planning service to clients. The Premium Banking offering has great potential for development through the successful cooperation of the product and sales divisions and has clear potential to increase the amount of fees and commission income already generated by the Retail Banking segment. The initiative offers numerous opportunities to strengthen the Group s abilities in the retail segment: the ability to issue large loans, a wide product range, a developed infrastructure including remote services, and top class financial planning. At the end of 2012, the number of personal managers servicing the premium segment increased to 70 specialists and the number of customers reached 7,200 individuals. RUB 15.9 billion mortgage loans issued in 2012 RUB 5.0 billion first mortgage-backed securitization deal successfully closed in December 2012 Mortgage Segment At the end of 2012, the Group was ranked among Russia s top 20 Mortgage Market Leaders with RUB 15.9 billion mortgage loans issued during The banks of the Group have developed and are implementing their own mortgage standards and provide opportunities for clients to resolve any housing problem. In February 2012, NOMOS-BANK received RUB billion of unsecured finance from AHML at 8.75% p.a. aimed for the issue of new mortgages within the framework of Program for redemption of mortgage-backed bonds. The loan was repaid in August In December 2012, NOMOS- BANK successfully closed its first mortgage-backed securitization deal to the amount of RUB 5.0 billion. Authorized for placement were 3,753,253 interest bearing housing bonds with an A class mortgage security (public subscription, 8.75% p.a.) and 1,251,084 B class bonds (private subscription in favour of NOMOS- BANK). The nominal value of the securities is RUB 1,000. The bonds mature on November 7, Call Center Results of 2012 The Call Center of NOMOS was opened in December During 2012 the functions of the Call Center were significantly expanded and the number of its employees increased to 166. For example, the establishment of the Sales Department in the Call Center helped increase the number of customers served by the Group s branches and secured new business growth. In 2012, the Call Center processed 81,524 applications with 38,995 (nearly 50%) of those applying customers directed to NOMOS branches. The launch and development of the unified Call Center made it possible to ensure: High standards of customer service. Stable increase in the amount of customers served by the Group s branches. Increase in sales volume. Remote servicing of customers. Improvement in the operational efficiency of the Group network. Increase in customer loyalty. NOMOS Annual Report and Accounts

22 Operational review continued Operational highlights of 2012 The table below sets out selected financial information for the Retail banking segment as at or for the years ended 31 December 2012 and Retail business (in millions of roubles) growth of net interest income which increased by 48.5% to RUB 7.6 billion, as well as the rapid growth of net fee and commission income, which increased by 44.1% to RUB 3.2 billion. The volume of term deposits of retail clients increased during 2012 by 24.0% to RUB billion (RUB 95.7 billion as at end 2011) and the share of term deposits stood at 75.5% Audited 2011 Audited 2012 Change Y12-Y11 Selected financial position data: Total segment assets ,7% of which, net loans to clients ,1% Total segment liabilities ,5% of which, client accounts ,4% Selected income statement data: Net interest income* ,5% Net Fee and commission income ,1% Total operating income before impairment losses ,6% and provision Operating expenses ,5% Profit before tax ,5% * Calculated as net interest income before gain on remeasurement of cash flows and provision for impairment losses on interest bearing assets The major contributors to the 44.1% increase in net fee and commission income were the new loan insurance products that the Group introduced, along with foreign exchange services and payment settlements for clients using the Rapida network. Strategic Goals for 2013 During Otkritie Bank will be consolidated with NOMOS. As a result the expanded branch network will include over 500 offices. The Group will focus on the development of the «light network» concept aimed at increasing the sale of retail banking products and the optimization of the business processes. Among the main objectives of the retail business will be: Along with the successful growth of the loan portfolio, the profitability of the Retail Banking business remained strong. Operating income before impairment losses and provision increased by 40.6% and amounted to RUB 11.0 billion, while profit before tax almost doubled from RUB 1.6 billion for 2011 to RUB 2.8 billion for The main drivers of profit growth in 2012 were the stable of the total retail deposits of the Group as at end At the same time the Group continued focusing on increasing its share of high margin products such as current and saving accounts, which grew 10.4% from RUB 34.9 billion in 2011 to RUB 38.6 billion in 2012, while the share of current accounts of total retail deposits amounted to 24.5% as at end Expansion of retail sales channels and attraction of new customers. Focus on the strengthening of cross-selling capability. Development of the complex products offer for affluent clients. Development of new products. 20 NOMOS Annual Report and Accounts 2012

23 Small Business BANKING Segment overview for 2012 The main goals of the Small Business Banking segment in 2012 were achieving loan portfolio growth, maintaining high profitability and increasing the efficiency of the branch network. In recent years this division has developed from newly-formed business segment to one of the key operating segments for NOMOS. Today, as part of this division, NOMOS provides loans and deposits to small businesses and individual entrepreneurs, settlement and cash services, credit guarantees and payroll services. In the medium to long term, NOMOS aims to become one of the top five small business lenders in Russia by assets. Achievements in 2012 As at 2012 year end, NOMOS s Small Business Banking segment was profitable and welldiversified, showing high growth rates and good portfolio quality. As of 31 December 2012 the net small business loan portfolio increased by 30.1% to RUB 38.9 billion. Net profit reported by the segment amounted to RUB 2.3 billion, which is 86.9% higher compared to 2011 result. During the year the Group actively worked to increase the effectiveness of the national branch network. The creation of a set-up of managing directors in the form of regional heads of the businesses was successfully introduced. The main task of this new network was to ensure increased control over the leveraging of best practice standards of work from head to regional offices. This system enabled clients to reach better specialists and resulted in the effective operational and financial results in the small business banking segment. Clients and regional distribution At the year-end NOMOS had approximately 85,800 small business clients. Also the Group had 10 dedicated offices working with small business clients in Moscow and a further 54 offices in the regions at the end of Industry distribution The Small Business Banking segment remains well-diversified across industry sectors. The key areas of focus in 2012 were trade, manufacturing, services, construction and operations with real estate, transport and communication. Product range and sales channels For the last two and a half years the Group has managed to create and maintain a very comprehensive and profitable product range covering many segments in which small businesses operate. The Group offers a full range of banking products, from the classic loan facilities for business development purposes to more specialized products such as a guarantee of VAT return. The product range includes about 20 standardized loan programs for small business clients which fully enable the division to satisfy the needs of its clients. As well as providing the more traditional banking products to small business clients and some successful cross-selling campaigns, the Group also cooperates with NOMOS Annual Report and Accounts

24 Operational review continued Client numbers: strategic partners, such as insurance and real estate companies, producers and suppliers of the equipment and transport facilities. During 2012 the Group issued more than 1 billion of loans on products, developed together with partners of the Group, including commercial mortgages, car loans, loans issued for state contracts and other innovative products. Among the main partners of the Group are also state bodies which support small business companies in Russia, such as the Fund of Small Enterprise Credit Assistance which provides guarantees for clients when the company collateral is not enough. As of the end of 2012 the Fund of Small Enterprise Credit Assistance provided guarantees for RUB 2 billion on loans issued by NOMOS-BANK to small business clients. NOMOS also cooperates with 29 regional funds, which specialize on providing credit assistance to small business clients and guarantees services in particular. A further program of cooperation with MSP Bank, the Bank for Medium , , ,800 and Small Entrepreneurs, facilitated NOMOS-BANK to receive grants of RUB 2.5 billion in 2011 and RUB 1 billion in These funds were used to issue loans to entrepreneurs as part of the program for preferential financing (financing on better conditions) offered by MSP Bank. During the year, NOMOS-BANK has been focused on the development of its cash settlement services for small business clients and has developed five different packages of this product. This program is aimed at different industry segments and includes a sophisticated range of services with attractive conditions. The division is also actively working on the development of its deposit products range which is particularly innovative as similar products have not yet been introduced to the market in Russia. Market overview About 5.5 million small businesses operate in Russia, including more than 4.5 million individual entrepreneurs. Key industries in which they operate include: wholesale and retail trade, manufacturing, services and agriculture. The current SME share of Russian gross domestic product is about 20.0%, whereas in developed countries it is not less than 50.0%. The Russian Government gives essential support to the development of small businesses but nonetheless, the current volume of loans issued to small business clients remains low: in the beginning of 2013 demand from SMEs for bank financing was estimated at RUB 2.5 trillion, compared to the total amount of bank financing available which was RUB 1.5 trillion. Russia s accession to the WTO was an important and anticipated event of According to many experts, the medium-term influence of the WTO on small businesses in Russia will be neutral/ negative due to the strengthening of global competition. However, Russia and its local enterprises should benefit in the long-term if its economy, politics and business are able to compete with other countries. The following three factors will be key to the successful performance of Russia s SMEs. Firstly, the introduction of innovations and new technologies supported by cost efficiencies such as salary optimization and the increased efficiency of business processes. Secondly, the development of management and marketing functions within organizations, improvement of client relations, the introduction of new sales channels and guarantee programs these will all lead to an increase in the level of customers trust. And finally 22 NOMOS Annual Report and Accounts 2012

25 it is also important to provide small businesses with full access to bank financing based on acceptable business terms as well as increasing financial literacy across the board. Operational highlights of 2012 The table below sets out selected financial information for the Retail banking segment as at or for the years ended 31 December 2012 and In 2012, the NOMOS Small Business segment showed good profitability and also achieved strong operational results through loan portfolio diversification, high growth rates and good quality of the loan portfolio. Improvement in the product range and an effective cross-selling campaign enabled 30.1% loan portfolio SME business (in millions of roubles) Strong operational results in 2012: +30.1% loan portfolio growth to RUB 38.9 billion +15.5% deposit growth to RUB 28.0 billion +33.9% increase in net interest income to RUB 3.5 billion growth during the last year. In 2012 the Group also continued to broaden the funding base. The volume of customer accounts of small business clients increased by 15.5% to RUB 28.0 billion mainly due to the growth in term deposits balances, which were up by 21.9% to RUB 6.1 billion, while the main portion of customer accounts (78.1%) are current accounts of small business clients, which increased by 6.6% to RUB 21.9 billion as at end Net interest income increased Audited 2011 Audited 2012 Change Y12-Y11 Selected financial position data: Total segment assets ,4% of which, net loans to clients ,1% Total segment liabilities ,1% of which, client accounts ,5% Selected income statement data: Net interest income* ,9% Net Fee and commission income ,9% Total operating income before impairment losses ,6% and provision Operating expenses ,3% Profit before tax ,9% by 33.9%, up to RUB 3.5 billion, and net fee and commission income increased by 8.9%, up to RUB 1.3 billion, in line with the increasing volume of settlements and cash operations. NPL loans comprised 4.2% which is in line with the planned indicators for this division. For more details on Loan Loss Provisions and the Cost of Risk, please refer to the Risk Management section on page 38. Strategic Goals for 2013: Implementation of BPM (Business Process Management platform) to increase overall efficiency. Increased focus on microenterprise segment, particularly on companies with revenues up to RUB 20 million per year. Implementation of settlement and cash packages for small business clients. * Calculated as net interest income before gain on remeasurement of cash flows and provision for impairment losses on interest bearing assets Credit Conveyor introduction. NOMOS Annual Report and Accounts

26 Operational review continued Private Banking Overview Since September 2010 the Private Banking division has been actively developed at NOMOS-BANK with the implementation of its open architecture platform principle, which combines in-house and third party solutions and aims to cover the maximum of clients requirements regarding banking and investment products in Russia and abroad. NOMOS-BANK is now able to provide a full range of products and services to the private banking market in Russia including: financial advice, asset structuring, brokerage and investment products, precious metals and real estate services, private equity, structured notes, and lifestyle products. Distribution platform and a cohesive business structure NOMOS-BANK Private Banking clients benefit from the Group extremely strong banking platform with offices in every major Russian city and the broad investment and lifestyle opportunities that this offers. The Group currently has dedicated Private Banking teams in 12 Russian cities (Moscow, St.Petersburg, Nizniy Novgorod, Rostov-na-Donu, Samara, Novosibirsk, Krasnoyarsk, Krasnodar, Ufa, Kaliningrad, Kazan and Habarovsk) and is planning to expand this number to 20 by the end of The Group s Private Banking business structure has been transformed in the last several years from a single department to a sizeable business unit with sales, regional, and product departments. Products tailored to clients requirements In developing the product range the main focus has been on increasing the number of market neutral funds and strategies and structured notes with partial or full capital protection, and expanding advisory services. NOMOS BANK s products are offered through various approaches according to client preferences: long-term financial planning, speculative (self-trading) or idea-trading. For the first client preference, NOMOS-BANK Private Banking offers classic mutual funds and other relative value strategies. The self-trading approach is fulfilled with NOMOS-BANK advisory (brokerage) services. The structured note offering is an example of an idea-linked product where specific underlying assets and market timing play a crucial role and this product makes it possible to invest in almost every tradable and liquid asset, as well as manage risk and maturity though various option strategies. Since 2011 NOMOS-BANK Private Banking has offered its clients term deposits in exotic currencies a tool that enables increased portfolio diversification and provides financial benefits from the attractive rates obtained by the Bank s own derivatives desk. This offering has received a receptive response from clients thanks to the recent opportunities presented by the high yielding Australian dollar, the long term fundamental story of the undervalued Chinese Yuan and many others. The division s volume of deposits in foreign currencies reached RUB 1.3 billion as at the end of 2012 (compared to RUB 0.4 billion as at the end of 2011). NOMOS- BANK investment team also initiated research coverage of the offered currencies which makes it easier for clients to choose the currency that best suits their investment goal and time horizon. In addition, the rates for these exotic deposits are substantial and can be higher than average rate in the home country of each currency. At the moment 24 NOMOS Annual Report and Accounts 2012

27 deposits can be placed in the following: USD, EUR, RUB, AUD, CHF, CNY, JPY, CAD, CZK and GBP. NOMOS-BANK was one of the first Russian banks to introduce financial planning service for its high net worth clients. The NOMOS Private Banking product offering is not limited to banking and investment services. NOMOS-BANK distributes a biweekly newsletter with coverage of upcoming interesting opportunities in the field of real estate, travel and other Lifestyle events. Implementation of new risk management tools During 2012 NOMOS-BANK introduced new elements of risk management into its Private Banking offering. Detailed riskprofiling was implemented as an important tool to evaluate a client s risk tolerance and investment goals. Another important step was the introduction of a new scoring model, which was developed for the counterparty valuation process and is based on both the quantitative and qualitative factors of a partner s business. Operational highlights The Private Banking team of NOMOS-BANK demonstrated impressive results over the last year. The volume of assets under management reached RUB 48.5 billion, more than twice than in 2011 (RUB 19.1 billion). The number of clients increased to 2,594 as at 2012 (compared to 1,760 in 2011). The average deposit account balance was USD 1 million as at 2012, stable since Achievement of industry Awards At the end of 2012 NOMOS-BANK Private Banking received Highly Recommended status from the Financial Times Global Private Banking Awards. NOMOS- BANK is the only bank in Russia that was honored by such an international award. Strategy for continued growth The integration of NOMOS into Otkritie FC during the next years will open new opportunities for private banking clients of NOMOS to have access to a wider range of products and services from industry investment experts. Over the year, the New Model of Aggressive asset management product growth for was established. NOMOS Private Banking plans to increase its investment portfolio from the current level of RUB 2 billion to RUB 30 billion with 50% covered by in-house products. The new projects for 2013 include: Unified Client Relationship Management system to be developed and implemented in Life Style services special consultants will advise private banking clients on life style initiatives in many areas from real estate and travelling to art and design collections. Family office initiatives private banking team specialists will coordinate a full scope of services from banking settlements to personal arrangements and housekeeping matters for ultra high networth individuals and their family members. NOMOS Annual Report and Accounts

28 Operational review continued Investment Banking Segment overview for 2012 During 2012 NOMOS s investment banking operations focused on three core areas: interbank and repo market operations, foreign exchange markets and fixed income. The Investment Banking department provides brokerage and asset management services for NOMOS s corporate, high net worth and private banking clients, and in addition is responsible for managing NOMOS s own liquidity position and currency exposure under the instruction of the Treasury Department. Clients The Investment Banking unit enables NOMOS to offer a full range of services to corporates and wealthy retail clients, including debt capital markets, brokerage and hedging products. It is therefore an important part of NOMOS s strategy of cross-selling additional products to its client base that they would otherwise have to acquire from elsewhere. NOMOS had more than 600 active counterparties and customers on the Russian interbank and repo market at the end of 2012, including more than 300 of the largest banks in Russia. Securities portfolio The securities portfolio makes up the core element of NOMOS s investment banking assets. Most of the Group s securities are held in the FVTPL portfolio (totalling RUB billion as at 2012). The Group also holds a substantially smaller part of the portfolio as Available for Sale comprising RUB 4.9 billion as at the end of NOMOS s exposure in its Held to Maturity portfolio is insignificant at RUB 201 million as at the end of At 2012, almost 90.0% of the FVTPL portfolio comprised high-quality fixed income instruments, including the bonds and Eurobonds of Russian Tier 1 and Tier 2 issuers Russian banks and corporates. The FVTPL portfolio serves as a liquidity cushion that can be easily turned into cash. The Group does not have any exposure outside the Commonwealth of Independent States via its securities portfolio. More than 80% of the assets in the securities portfolio appear on the Lombard list produced by the Central Bank of Russia, which specifies those instruments that can be used as collateral against central bank loans. During 2012 the Treasury Department managed the composition of the FVTPL portfolio with the aim of maintaining liquidity and maximizing the trading income. The trading income earned by the Group on operations with securities amounted to RUB 1.9 billion compared to RUB 0.6 billion loss in In order to optimise the securities portfolio structure and curtail market risk, NOMOS has decided to sell most of the equity instruments in the portfolio during NOMOS bases its market risk management on a system of limits, hedges, portfolio diversification and market monitoring tools. The Group undertakes risk analysis including detailed credit risk reviews of counterparties, Value at Risk analysis, expected shortfall indicators and stress testing. For more details, please refer to Market Risk section in the Risk Management chapter, on page 40. Interbank and Repo Operations Annual turnover in the Russian interbank market reached RUB 5 trillion in 2012, stable compared to 2011 turnover of RUB 5.4 trillion. Reverse repo deals are a nonstandard source of short-term financing provided to the market by Russian banks. NOMOS mainly executes reverse repo deals for low-risk clients with a sound reputation and a strong credit history. By providing loans backed by securities (mostly blue chip equities and Tier 1 or Tier 2 bonds) the Group is attracting additional collateral and so improving the security and quality of the loan book. Reverse repo deals entail 26 NOMOS Annual Report and Accounts 2012

29 relatively low risk due to the reliability of the clients involved, the high quality of collateral and the Group s conservative policy on discounts and margin calls. Foreign Exchange NOMOS-BANK is one of Russia s largest players in the currency spot market with an annual turnover in 2012 of more than US$ 12,167 billion and average daily spot transaction volumes of approximately US$ 48.5 billion. It is therefore able to offer competitive spreads and lots during extended business hours. During 2012, the foreign exchange operations achieved good results due to large volumes of hedging deals carried out on behalf of clients, along with the implementation of effective internal procedures that helped to earn RUB 1.0 billion on foreign currency trading. NOMOS is one of the largest Russian market-makers in currency futures and the OTC forwards market, which clients use to manage their foreign exchange exposure up to 12 months ahead. Access to open credit lines from many Western banks matched by demand from NOMOS clients (principally small, medium and large Russian private banks and corporate clients) allows NOMOS to provide competitive two-sided quotations to its customers. In addition, the Group is active in currency swaps and options transactions. Key Indicators for 2012 The table below sets out selected financial information for the Investment Banking segment for the years ended 31 December 2012 and Investment Banking (in millions of roubles) Strategic Goals for 2013 To continue serving core customers by matching execution skills with strong risk management. To expand cross-selling of capital markets products such as foreign exchange and hedging services to the corporate client base of NOMOS and Otkritie FC. Audited 2011 Audited 2012 Change Y12-Y11 Selected financial position data: Total segment assets ,4% of which, loans to banks and other credit institutions ,5% of which, financial assets at fair value through ,7% profit or loss of which, loans to customers ,2% Total segment liabilities ,5% Selected income statement data: Net interest income * ,5% Trading and foreign exhange result ,5% Securities (598) ,8% Precious metals ,0% Foreign currency ,3% Other derivatives 62 (4) -106,5% Total operating income before impairment losses ,3% and provision Operating expenses ,7% Profit before tax ,6% * Calculated as net interest income before gain on remeasurement of cash flows and provision for impairment losses on interest bearing assets To expand the brokerage business through increased sales of products and services via the customerfacing segments of NOMOS and Otkritie FC. To develop asset management products for NOMOS and Otkitie FC customers. NOMOS Annual Report and Accounts

30 Operational review continued HR section Overview of key Human Resources projects for 2012 The main principle of NOMOS HR policy is to attract and retain the best people and ensure that they are properly motivated and have the right incentives for their role. Over the course of 2012, the number of employees of NOMOS grew by 5.5% and stood at 10,999 by the year-end. The development of motivation system During 2012 the Group successfully implemented an internal project aimed at the introduction and implementation of an updated motivation and compensation system for the regional subsidiaries of the Group. This new system of compensation for business leaders was developed based on the new model of branches management which has already been implemented at the Group level. An updated system of KPIs is an integral part of the Group compensation policy: individual KPIs are defined taking into account the successful implementation of the Group s strategy, market penetration measures, sales volumes, and financial performance. The HR department defines remuneration for employees of NOMOS-BANK (excluding top management and directors) according to the remuneration policy developed by the Remuneration Committee and approved by the Supervisory Board of the Bank. Banking market salaries across the industry are monitored carefully and NOMOS-BANK seeks to remain in line with the market in terms of the total compensation package offered to its staff. This will include a base salary as well as a variable portion based on performance or other contractual criteria. Variable remuneration includes quarterly and annual bonuses related to the achievement of KPIs as well as monthly and quarterly bonuses for cross-selling, attracting new customers or selling priority products. Career development The Group highly appreciates the input of employees into the realization of the strategic objectives of the Group and therefore remains focused on its employees career development. During 2012 NOMOS-BANK introduced a system of career models in several business divisions of the Bank, which make the system of promotion and career development more transparent and understandable for employees. During the year, the career models system was introduced in some departments of the Retail segment and in 28 NOMOS Annual Report and Accounts 2012

31 The main principles of NOMOS HR policy: Attracting and retaining the best people Proper motivation Right incentives the Private Banking segment of NOMOS-BANK. As a result of this evaluation process, 20% of employees who demonstrated the best results were promoted to the next grade. Employees Change Head office ,0% Branches ,2% Total ,5% Working with young graduates The recruitment of young and talented graduates is one of the top priorities of the HR initiatives at NOMOS. By participating in the national student exchange program young graduates and university students have the opportunity to get some business experience and start their careers in the sphere of banking and finance. Since December 2012 NOMOS-BANK has been a partner of the project Lift to the future, where specialists from different businesses enable young people to develop a personalized strategy for study, social development and employment. The Perspective Program One of the main HR Programs at NOMOS is focused on: Identifying and supporting talented employees with leadership potential. Coordinating the exchange of knowledge and best practices between subsidiaries of the Group. Creating career development opportunities for employees. During 2012 NOMOS-BANK successfully completed the Perspective Program aimed at educating its employees who have the greatest potential for career development. 49 employees participated in this program during As a result 31% of participants in the program achieved new positions at NOMOS and a chance to realize their potential in the development of new initiatives at NOMOS. Strategy for 2013 The integration of NOMOS into the structure of Otkritie FC sets a number of new goals for the HR department. The key focus will be on the development of unified HR policy standards, procedures for evaluation, training and hiring of new employees and the unification of the compensation system and employees benefits program. The Group also will continue the development of a unified HR Management system using the modern IT solutions. NOMOS Annual Report and Accounts

32 Operational review continued Corporate Social Responsibility For the Group, corporate social responsibility means more than just donating money. NOMOS and its staff took part in a wide range of social projects. During 2012, NOMOS invested over RUB 170 million in social, sport and modern art projects, in addition to employee volunteering activity. In addition to this activity, BKM also takes part in CSR initiatives that are focused on education and sport. Supporting blood donation An ongoing initiative, NOMOS- BANK has been organizing blood donation days across Russia since In May 2012 the corporate marathon event, Everybody can be a hero, took place and around 619 employees from different cities in Russia participated. The proactive response from employees and their willingness to participate helped collect 270 liters of blood which will go a long way to support those who need it most in hospitals and health centers. Furthermore, the marathon participants also made cash contributions and provided gits for children who need medical support. Supporting children Providing direct financial support to children is a key ongoing principle of NOMOS-BANK. In October and December 2012 the Bank s employees participated in the Time of Angels campaign, which was organized for the second time following the success of the event in Donated funds were used to purchase a much-needed electro generator for Rozhdestvensky orphanage in Kaluga region. In addition to this direct financial support, employees of the Bank also organized an entertainment program for the children. In December 2012 employees participated in NOMOS-BANK s Make a child s wish come true program. Funds raised were used to purchase the presents and organize the Christmas party with games, contests and Christmas Master Classes for children of all ages from the orphanage. Charity deposit program Since October 2012, NOMOS- BANK has been offering customers its private banking charity deposit service, NOMOS-CHARITY, which allows clients of the Bank to help children in need. This is funded by the interest which accrues in the NOMOS-CHARITY savings account which is then credited on a monthly basis to the Christmas Charity Fund to help children at the Christmas Shelter organization. By placing funds in their NOMOS- CHARITY deposit account, private banking customers can be sure that their funds are helping children in need, as the Bank provides them with regular quarterly reports describing the intended use of the funds received. Support for veterans and people with disabilities During 2012 NOMOS-BANK continued to maintian its charitable efforts in other traditional areas, in particular by providing support to war veterans and people with disabilities. The Bank considers it a great honor to help those who fought to defend the country in World War II. In addition to supporting veterans and members of the armed services, NOMOS-BANK provides charitable support to people on low incomes, to those unable to work due to ill-health, and to those who have been disabled since 30 NOMOS Annual Report and Accounts 2012

33 childhood. NOMOS-BANK works closely with the Russian Society of Disabled People to fund initiatives across the country. Sponsorship activity In 2012 for the fourth time NOMOS-BANK supported the Territoria Festival and the School of Modern Art, which is organized in collaboration with the Ministry of Culture and the Presidential Administration. Taking place in autumn, the Territoria Festival program included more than 10 performances with the participation of young actors from all over Russia. The main goal of the Festival is to show creative young people the latest developments and trends in global culture and encourage their development. Providing university grants for students BKM has set up a grant scheme for the funding of the best students from the state universities of Khanty-Mansiysk and the Tyumen Region. In 2012, 15 students with the best records in education, science and social activity received grants. During 2012, BKM also provided the opportunity for the best students to join the internship program at BKM subsidiaries and combine their practical experience with their study and degree work. Sport events BKM sponsors international competitions in a variety of sports such as biathlon and skiing, as well as regional and national competitions in volleyball, boxing, basketball, swimming and motor racing. An example of the success of this initiative by BKM is illustrated by the fact that the Ugra country ski team, based in the Tyumen region, has won the best team award for the last two years running. The team s chief coach has spoken of his high level of appreciation of the monetary support provided by BKM and its President over , which has helped enormously towards the efficiency of the team s training schedule. BKM has also supported the Ugra Ice Hockey Club since its foundation in Ugra has twice won Russia s Major Hockey League, and in the 2010/11 season made its debut in the Continental Hockey League, now ranked as the strongest in Europe. NOMOS Annual Report and Accounts

34 Financial review Financial review In 2012, NOMOS continued to focus on profitability and creating shareholder value. Despite the unstable situation in the market and the continuing global financial crisis, the Group delivered strong core revenue generation of RUB 44.6 billion. In 2012, 49.0% of the combined Group s revenue was generated by the Corporate Business segment and 36.5% by the Small and Retail Business segment*. The Group s net profit in 2012 was RUB 15.0 billion, a 23.7% increase on the 2011 results. Return on average equity (RoAE) was strong at 18.3% (18.2% in 2011). Return on average assets (RoAA) was stable at 2.0% in Net profit attributable to NOMOS shareholders increased 25.7% to RUB 12.6 billion in Total assets of the Group increased 35.9%, outperforming the market average of 18.9%, reaching RUB billion by the end of The Group s strong operating performance was driven by rapid growth in the net loan portfolio (+31.9%) and capital increase (+19.4%) over the year. NOMOS also reported significant increases in net interest income (+11.9%) and net fee and commission income (+29.6%). The Net Interest Margin slightly declined to 4.9% (5.5% in 2011) due to the higher cost of funding. * Calculated as the share of total revenue for business segments excluding the Treasury and asset and liability management unit and unallocated balances % assets 23.7% growth net profit growth Assets: building the loan book The structure of NOMOS s assets remained stable during 2012, with the net loan portfolio accounting for 65.6% of total assets and the Securities portfolio for a further 12.2%. Liquid assets amounted to 31.7% of total assets. The Group s net loan portfolio increased 31.9% in 2012, outperforming the overall market growth of 21.5%. All three core segments of NOMOS lending operations produced strong results, which are described in more detail in the Operational Review. During 2012 NOMOS focused on the development of the Retail and Small Business segments and over the course of the year, the share of the Retail Business segment in the loan book expanded and accounted to 15.3% of the net loan portfolio as at December 31, 2012 (13.0% as at December 31, 2011). NOMOS was satisfied with this trend, given the higher margins and overall profitability of these segments as 32 NOMOS Annual Report and Accounts 2012

35 Asset structure as of December 31, 2012 Securities portfolio structure as of December 31, 2012 Loans to customers 65.6% Investments in securities and other financial assets 12.2% Other assets 22.2% FVTPL 95.3% AFS 4.5% HTM 0.2% Maximising the Securities Portfolio The total value of NOMOS securities portfolio was RUB billion or 11.7% of total assets as at the end of The portfolio was dominated by the FVTPL securities, which stood at RUB billion. 96.2% of the NOMOS FVTPL instruments comprised fixed income securities including bonds and promissory notes issued by top-tier Russian banks and corporates, and sovereign bonds. These holdings are all highly liquid and serve as a liquidity cushion for the Group. The AFS portfolio comprised 4.5% of the overall securities portfolio at the end of 2012, or RUB 4.9 billion. The portfolio included mostly corporate bonds and Eurobonds and equity instruments. The Group does not have any exposure outside the Commonwealth of Independent States. well as their potential for further growth. The structure of loan portfolio by segments is presented on page 38 of the Annual Report. The quality of the loan book remained at a high standard over the year. The share of Non- Performing Loans remained at 2.0% and the Cost of Risk ratio remained stable at 0.9%, demonstrating NOMOS prudent levels of risk management. The Group takes a conservative approach to provisioning for Non-Performing Loans and the reported coverage ratio of 183.0% provides a very conservative safety net for the future. Most of the Loan Loss Reserve represented collective or statistical provisions on the growing nonimpaired loan portfolio. Managing Liabilities 2012 was a difficult year in terms of liquidity as the liquidity squeeze in the market was followed by an increase in the level of funding costs. In this environment the main target for NOMOS was to preserve its margin and to keep the diversified funding structure. NOMOS Annual Report and Accounts

36 Financial review continued Liabilities structure as of December 31, 2012 Customer accounts 58.3% Interbank 26.4% Debt securities issued 7.9% Subordinated debt 6.3% Other 1.2% average effective rate was 3.0%, which represents an extremely cost-effective funding option. The share of funding derived from wholesale markets stood at 36.5% at the end of In April 2012 NOMOS-BANK issued subordinated Eurobonds of USD 500 million for 7 years and 10% coupon rate. This was NOMOS- BANKS s first Eurobond issue pursuant to Rule 144A, which allowed the Bank to access the qualified institutional buyer investor base in the US. This long-term issuance was met with strong demand and received over 120 orders with over 20% of demand coming from the US. In August 2012 NOMOS-BANK issued RUB 5 billion of threeyear bonds with first and second coupons set at 9.15% per annum. On 31 December 2012, customer accounts provided 58.3% (RUB billion) of the Bank s financing, term deposits accounted for 77.6% of customer deposits and current accounts comprised 22.4% of customer deposits. The majority of customer deposits in 2012 came from corporate clients (58.5%) while Retail and Small Business customers accounted for 40.5%*. The rate of growth in deposits was in line with NOMOS s strategy of not paying excessive interest rates in order to safeguard profitability and maintain a stable * Calculated as the share of total customer deposits for business segments excluding the Treasury and asset and liability management unit Net Interest Margin. The cost of funding increased in 2012 to 6.7% compared with 5.9% a year earlier, in line with the general trend in the market over the year and the substantial cost (10%) of subordinated debt attracted by NOMOS-BANK in April During the year, NOMOS effectively re-priced its assets and liabilities and had no notable mismatches in terms of interest rate risk please refer to page 143 of the IFRS statements attached for further details. Interbank funding accounted for 26.4% (RUB billion) of total liabilities in The average duration of interbank placements was approximately 157 days and Creating Profitability with Efficiency NOMOS s strong profit performance in 2012 was the result of several factors. Firstly, healthy growth of the loan portfolio, coupled with an increasing share of higher margin Retail lending in the overall loan portfolio, helped to offset the higher funding costs that NOMOS experienced throughout At the same time, the notable share of current accounts in the deposit base helped to keep funding costs in check. Thanks to these two factors, the Net Interest Margin was maintained at 4.9%. 34 NOMOS Annual Report and Accounts 2012

37 Key profitability indicators in 2012: Secondly, net fee and commission income increased significantly by 29.6% to RUB 7.9 billion in 2012, in line with the Bank s focus on cross-selling fee-based products and increasing its share of wallet. The fee and commission growth came primarily from settlements and documentary operations in the Corporate and Retail segments. Thirdly, during 2012 the Group earned RUB 3.3 billion of trading income and net gain on investments available for sale, which is 35.7% higher compared to the 2011 results with the main driver being operations with securities. In 2012 the Group earned RUB 1.9 billion on operations with securities (RUB 0.6 billion loss in 2011). NOMOS reports all trading portfolio revaluation results via the Profit & Loss statement. The Group does not report in this way on its AFS instruments, which are revalued against equity. Operating expenses increased 23.9% to RUB 21.4 billion in line with the Group s budget and labour inflation. Payroll expenses accounted for 65.3% of the NIM maintained at 4.9% Net fees and commissions income up 29.6% total operating expenses of the Group. The growth in operating expenses was in line with NOMOS s development strategy for the branch network and largely represents investment to develop the Small Business and Retail businesses, where the Group sees a great opportunity for growth. NOMOS Management closely monitored operating expenses and took the necessary steps to optimise spending. The Cost-Income Ratio was 47.8% at the year-end. Strong Capital position The capital adequacy ratios of NOMOS have been strong and stable over recent years. Tier I capital, defined as core bank capital, was 10.8% as at the end of 2012 (12.0% as at the end of 2011). Tier II capital is supplementary and includes among other things Net interest income up 11.9% Cost to income ratio stood at 47.8% subordinated debt, certain revaluation reserves such as unrealised gains/losses on financial instruments classified as available-for-sale, and any property revaluation surplus. The Basel capital ratio was 16.3% as at year end In April 2012 the Group issued subordinated Eurobonds of USD 500 million with a 7 year term. In July 2012 NOMOS-BANK was authorised by the Central Bank of Russia to include the proceeds from its placement of USD 500 million subordinated Eurobonds in its additional capital, thereby increasing NOMOS-BANK s total capital base. Maintaining a prudent capital adequacy level is a high priority for NOMOS. Along with its Western counterparts, the Central Bank of Russia continues to tighten the regulation of how all banks capital is calculated. For example, it has assigned higher risk weightings to certain asset classes and is also considering the introduction of more stringent provisioning rules. NOMOS continuously analyses the potential effects of new regulation and adjusts its business activity and internal policies accordingly. NOMOS Annual Report and Accounts

38 Risk management Risk management Overview of main working aspects for 2012 During 2012 the key risk management focus of was on a) the further development and perfection of the internal processes that assess and control the Bank s risk levels and b) the development a strategy to introduce Basel II/III compliance as Basel II/ III principles will become obligatory in Russia in the medium term. Regarding the improvement of the integrated risk management system the main focus was on the refining of the business planning system based on the level of risk appetite. The risks register, which has been discussed during every meeting of the Audit Committee in the past year, was developed in more detail to focus on credit risk as the main business risk for the Group. The updated risks register received good feedback from the members of the Audit Committee members and served as the background for the planning of internal audit work concerned with rich consideration. During 2012 the Group significantly strengthened the level of risk control including the standard of reporting requirements and methodological aspects of its subsidiaries. The Group aims to continue to develop and unify its risk management policies and procedures in was the first year to employ the Early Warning System for corporate clients, which comprises both a set of warning signals as well as rules for the appropriate reaction and decision to take. The implementation of this Early Warning System helped to improve the level of control over the quality of the Group corporate loan portfolio and the financial standing of the borrowers in particular. The system enabled the credit risk monitoring system to be structured in the most efficient way and to optimize the work with problem corporate customers. During 2012 the Group also tested the new statistical model for awarding internal credit ratings for its mid-sized corporate clients, which are the important demographic of the Group s clientele. As a result of successful testing the model was therefore implemented as a part of the general credit decisionmaking process. In terms of planning for the introduction of Basel II/III capital requirements the Group together with advisors carried out a gap-analysis aimed at identifying the current level of Group compliance with Basel standards. As a result the Group has finalised its strategic plan for the implementation of Basel standards at a Group level. In order to implement the Economic Capital model the Group made a preliminary assessment of the current potential volume of Economic Capital. The Economic Capital concept will be introduced in NOMOS Annual Report and Accounts 2012

39 Key principles of Risk Management The risk management system is implemented at all levels of management: from the Supervisory Board and its dedicated Risk Committee down to every employee whose daily role involves any aspect of risk management. The guiding principles, which are taken into consideration in the structuring of the Group Risk Management function are transparency, independence and adequacy. Structure of the Risk Management function The main bodies involved in the Risk Management process are: The policymaking and monitoring bodies, which comprise the Supervisory Board, the Risk Committee, the Management Board, the Credit Committees and the Financial Committee. The decision-making bodies, which comprise the Chief Risk Officer, the Risk Analysis and Reporting Department, the Risk Strategy and Policy Department, the Market Risk Department, the Operational Risks Analysis Department. The bodies responsible for day-to-day implementation of Risk Management policies and decisions, which comprise the Credit Department, the Credit Risk Management Department, the Retail Risk management Department, the Treasury Department, the Legal Department, the Collateral Department, the Problem Asset Committee, the Problem Loan Department and the Economic Security Department. Internal Audit Department (IAD) the auditor of the Bank s internal controls and risk management system. IAD at NOMOS-BANK takes a risk-based approach to planning its activities. During its regular audits the IAD provides valuable insights into the quality of internal controls and risk-management procedures. Those insights are translated into concrete proposals for improving NOMOS-BANK s practices. The Chief Risk Officer coordinates the development of the Risk Management function and is responsible for the uniform implementation of NOMOS- BANK s Risk Management policies across the Group. He is ultimately responsible for monitoring risk exposure, providing appropriate information to the Management Board, and ensuring compliance with the agreed risk appetite and strategy. Risk Profiling The Bank s systems cover the main areas of risk including credit, liquidity, market, operational, legal, reputational and strategic risks. NOMOS- BANK reviews these risks individually and in aggregate to determine its overall exposure. As part of regular stress testing exercises the Bank also assess risk exposure under certain scenarios. NOMOS analyses and manages its capital adequacy in line with Russian regulatory requirements and international standards. Capital adequacy ratios inform the Group s risk appetite, which is determined alongside the business plan and is expressed in terms of targets and limits for key risk indicators. NOMOS maintains comfortable Capital adequacy levels with a Basel I ratio of 16.3% as of December 31, 2012 (for Total regulatory capital as Tier 1 + Tier 2). NOMOS s current risk profile is disclosed on page 136 of IFRS statements attached to the Annual Report, NOMOS Annual Report and Accounts

40 Risk management continued while trends in the development of the Group s risk profile, along with the key limits and objectives, are set out in NOMOS s Risk Appetite Declaration. The Group s risk appetite for 2013 assumes a conservative approach to Risk Management and a consistent exposure structure. Loan portfolio structure by segment as of 31 December Corporate banking 71,6% 71,4% Retail banking 13,0% 15,3% Small business 6,7% 6,6% Investment banking 8,7% 6,7% 100,0% 100,0% Priorities for 2013 In 2013 the main priority for risk management will be the successful consolidation of best practice risk management practices as NOMOS is integrated with Otkritie FC. At the same time further focus will be on strategic projects aimed at improving the Bank s current risk management system such as the introduction of Basel II/III international standards. Key risk areas and Risk Management approaches The key areas of risk that NOMOS monitors are as follows: credit risk, liquidity risk, market risk and operational risk. These risks are assessed both individually and in aggregate in order to develop appropriate levels of capital adequacy for each area of risk exposure. Credit Risk for the year ended 31 December Cost of risk Credit Risk ,9% ,9% Credit risk is the key risk for NOMOS. The net loan portfolio accounts for 65.6% of total assets (RUB billion out of RUB billion). The main credit portfolio and credit risk is concentrated in corporate business line, as summarized in the table below. NOMOS takes a comprehensive and conservative approach to managing its Credit Risk. It assesses the financial condition and creditworthiness of each borrower and counterparty when entering into a loan transaction and during its life, as well as observing limits on exposure to individual counterparties, industries and certain types of loans and securities. Exposure to any single borrower is further restricted by sub-limits covering on- and offbalance sheet exposures. The Bank operates a multi-level system including head office and Restructured otherwise past due or Impaired loans ,9% ,4% branch-based Credit Committees, the Credit Department, the Credit Risk Management Department, the Collateral Department and the Problem Loan Department. The principle of segregation of duties is reflected in the process for taking lending decisions. The Credit Risk Management Department provides an independent evaluation of each corporate or small business loan application and then issues an opinion to the Credit Committee that will decide whether or not to approve a loan. The Credit Department assigns a preliminary rating to every potential borrower, using an internal points-based system. The grading system and internal ratings are currently being reviewed in order to provide a more detailed and accurate assessment of the borrower s risk profile. Retail credit risk is assessed and controlled by three units involved in the process for approving applications: the Verification Unit, the Fraud Prevention Unit and the 38 NOMOS Annual Report and Accounts 2012

41 Credit risk 31 December NPL, % Provision, % NPL coverage, % Corporate loans 1,8% 2,0% 3,8% 4,5% 210,7% 227,1% Small business loans to corporates 4,2% 3,3% 5,1% 7,1% 121,7% 218,0% Loans to individuals 1,7% 1,7% 1,7% 1,8% 97,8% 102,7% Total loans to customers 2,0% 2,0% 3,6% 4,4% 183,0% 212,7% Underwriting Unit, which makes a final recommendation on each loan application. NOMOS-BANK s policy is to maintain sufficient collateral against loans to cover principal and interest payments for at least one year, as well as costs associated with the potential realization of such collateral. The independent Credit Department undertakes regular monitoring of the quality of the Bank s loan portfolio. Although NOMOS- BANK s conservative approach has ensured that nonperforming loans remain at relatively low levels, unimpaired loans are now monitored in order to identify factors that could lead to potential impairment in future. All overdue loans are managed by the Problem Loan Department in order to maximize potential recovery. In cases where a restructuring and sale of an overdue loan is considered impractical, it will usually be written off. The Group has maintained a high quality loan portfolio, as shown in the table below. In accordance with IFRS, the Group creates allowance for impairment losses when there is objective evidence that the loan is impaired. When testing the loan for impairment NOMOS-BANK takes into account the strength of the client s financial solvency and liquidity as well as the historic loan servicing, general business risks and national and local economic tendencies and conditions, all of which may be affected by future economic conditions. The Group estimates allowances for impairment with the objective of maintaining the impairment allowance at a level believed by management to be sufficient to absorb losses incurred in the Group s loan portfolio. Liquidity Risk Day-to-day management of NOMOS-BANK s liquidity risk is carried out by the Treasury Department within limits laid down by the Financial Committee. NOMOS-BANK distinguishes between shortterm and long-term liquidity risk, both of which are subject to mandatory ratios set by the Central Bank of Russia. Shortterm liquidity risk is managed by the distribution of assets between Nostro accounts, collection of information on proposed major transactions and clients payments, and the use of money market instruments such as swap and repo operations. Long-term liquidity risk is managed with reference to a predetermined structure of assets and liabilities covering currencies, maturities and types of instrument. In its management of long-term liquidity risk, NOMOS-BANK maintains a minimum quantity of highly liquid assets, and observes maturity limits in respect of asset allocation, limits on the maximum permitted imbalance between assets and liabilities, and limits on the concentration of liabilities with individual counterparties and groups of affiliated counterparties. In 2012 NOMOS maintained a balanced funding. Liquidity gap, defined as a mismatch between assets and liabilities of the same maturity, is the key liquidity risk indicator. The matching and/or controlled mismatching of the maturities and interest rates of assets NOMOS Annual Report and Accounts

42 Risk management continued Market risk 31 December 2012 Porfolio RUB million 10 days VAR, RUB million VAR to Portfolio Fixed income securities price risk ,8% Equity securities price risk 92 5,6 6,1% 31 December 2011 Porfolio RUB million 10 days VAR, RUB million VAR to Portfolio Fixed income securities price risk ,5% Equity securities price risk ,5% and liabilities is fundamental to the management of the Group. It is unusual for banks to be completely matched due to the variety of the 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, interest-bearing 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 longterm source of finance for the Group. The Treasury Department constantly monitors deposits behaviour and evaluates the stable part of funding. The stable part is evaluated in a conservative manner, and its revision has to be approved by the Financial Committee. While overall customer deposits level fluctuated throughout 2012, reflecting the overall liquidity situation in the economy, the stable part remained at the relative stable level, with some tendency to increase during the last quarter of the year. NOMOS- BANK enjoys a professional working relationship with the Central Bank of Russia and a high percentage of the securities in its portfolio appear on the Lombard list produced by the Central Bank of Russia, which specifies those instruments that can be used as collateral against central bank loans making it easier for NOMOS to access liquidity. Market Risks The Group monitors and manages market risk in three main areas: interest rates, currencies and securities prices. Market risk is managed by the Market and Operational Risk Department. The Financial Markets Operations Division assesses exposure to currency and securities price risks. The Treasury Department assesses interest rate sensitivity and sets guidelines for exposure to interest rate risk. Overall limits on market risk exposures are generally set by the Management Board, while the Financial Committee sets operational limits on instruments, counterparties, transaction. NOMOS-BANK manages its exposure to market risks using Value-at-Risk analysis. However, although Value-at-Risk is a valuable tool, it has a number of limitations especially in less liquid markets. Therefore, other risk measurement methods are also applied, including gap analysis, stress testing and net interest income sensitivity analysis for interest rate risk. NOMOS-BANK manages interest rate risk principally by matching its assets and liabilities, and establishing limits on the gap between the maturity of assets and liabilities that are exposed to changes in base rates. Currency risk is managed mainly through Value-at-Risk analysis, strict limits on open currency positions, regular monitoring 40 NOMOS Annual Report and Accounts 2012

43 of current and potential losses, currency diversification and compliance with mandatory ratios. Currency positions are monitored against estimated potential Rouble devaluation and other macroeconomic indicators. Any position that exceeds prescribed limits is hedged. NOMOS s strategy is to keep minimal open currency positions. NOMOS open currency position in EUR was negative RUB (-1.6) billion compared with RUB billion of total assets. The Financial Committee sets exposure limits for debt and equity securities to mitigate securities price risk. We target high-quality fixed income issues and maintain low exposure to equities. Operational Risk NOMOS-BANK has established operational risk management systems intended to comply with Basel II guidelines and the requirements of the Central Bank of Russia. Business processes and structures are monitored continuously and changes are implemented to eliminate sources of risk as they are identified. The Operational Risks Department maintains a record of risk identified and remedial actions taken. NOMOS-BANK also buys insurance against a range of operational risks. Anti-Money Laundering and Counter- Terrorist Financing Procedures NOMOS-BANK has put in place internal regulations on antimoney laundering that fully comply with Russian anti-money laundering regulations and related instructions from the Central Bank of Russia. The Bank co-operates with requests from Russia s Federal Service for Financial Monitoring for information concerning entities or operations under investigation. Legal and reputational risk management Legal risk management includes expert assessment of NOMOS-BANK 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 directed at maintaining a favourable brand image and reputation in the mass media and among counterparties. The Bank provides effective channels for customer complaints and feedback, and seeks to ensure that all staff conduct themselves in a transparent manner in line with NOMOS Corporate Governance Code. The Public Relations department liaises with the mass media concerning NOMOS s core activities, as well as its sponsorship and charity programmes. Strategic risks In support of its strategic decision making, NOMOS-BANK regularly monitors and analyses key risk factors and business conditions, and runs scenario analyses and stress tests. The results feed into the setting of risk targets, business strategy and development plans. For the 2012 budgeting cycle, the Bank has strengthened its focus on risk factors in the planning process through the Risk Appetite Declaration. NOMOS Annual Report and Accounts

44 Corporate Governance Supervisory Board members Ruben Aganbegyan Chairman of Supervisory Board Mr. Aganbegyan was appointed Chairman of the Supervisory Board in Currently Mr. Aganbegyan is the CEO of Otkritie Financial Corporation, a Member of the Board of Directors of Non-profit Organisation Russian National Association of Securities Market Participants, Non-Banking Credit Institution National Settlement Depository, All-Russia Public Organisation Russian Union of Industrialists and Entrepreneurs, the National Securities Market Association (self-regulatory non-profit organisation), Settlement Depository Company CJSC, Moscow Exchange MICEX-RTS OJSC, Russian Exchange Union and TMK OJSC. Mr. Agabengyan graduated from Moscow State Law Academy in Vadim Belyaev Member of Supervisory Board Mr. Belyaev has been a Member of the Supervisory Board since He is the Chairman of the Management Board of NOMOS-BANK. Currently Mr. Belyaev is the Chairman of the Board of Directors of Otkritie Financial Corporation, a Member of the Board of Directors of Otkritie Capital and the CEO of Otkritie Securities. During his long and distinguished carreer Mr. Belyaev has been the CEO of Otkritie Investment Group (name changed into Otkritie Financial Corporation Ltd) and the President of Otkritie Financial Corporation (reorganised into Otkritie Financial Corporation OJSC). Mr. Belyaev graduated from Moscow State Institute of Radio Engineering, Electronics and Automation majoring in Engineering in In 2001 he graduated from Finance Academy under the Government of the Russian Federation. 42 NOMOS Annual Report and Accounts 2012

45 Dmitry Vasiliev Member of Supervisory Board, Chairman of Supervisory Board Audit Committee Mr. Vasiliev has been a Member of the Supervisory Board since Currently Mr. Vasiliev is a Member of the Board of Directors of RKS OJSC, USRF (the U.S. Russia Foundation for Economic Advancement and the Rule of Law) (Washington, D.C., USA), Otkritie Bank, Avtokran OJSC and the Managing Director of Autonomous Non-profit Organisation Institute of Corporate Law and Management (Moscow, Russia). During his long and distinguished career, Mr. Vasiliev has been the CEO of Business Consultancy Ltd, a member of the Board of Directors of Gazprom-Kran (Russia), the Managing Director of Investment Bank JP Morgan Plc. and First Deputy CEO for Corporate Governance, Strategy and Property Management of MOSENERGO (Moscow, Russia). Mr. Vasiliev graduated from N.A. Voznesenskiy Leningrad Institute of Finance and Economics majoring in National Economy (qualification economist) in Mr. Vasiliev also graduated from Chartered Institute for Securities and Investment under authorization of the Financial Services Authority (FSA) (London, Great Britain) in He is an approved member to perform professional activities on investment consulting at the securities market of Great Britain. Mr. Vasiliev graduated from International Institute for Securities Market Development within the course Program of Securities Market Development and Regulation (Washington D.C., USA) in Mikhail Belyaev Member of Supervisory Board Mr. Belyaev has been a Member of the Supervisory Board since Currently Mr. Belyaev is the CEO Advisor of Otkritie Financial Corporation, a Member of the Board of Directors of Otkritie Brokerage house and Otkritie Bank. During his long and distinguished career, Mr. Belyaev has also been a Member of the Board of Directors of Otkritie Financial Corporation, the CEO of Otkritie Financial Corporation (reorganised into Otkritie Financial Corporation OJSC on December 01, 2010) and the Chairman of Otkritie Asset Management. Mr. Belyaev graduated from Mozhaiskiy Military Engineering Red Banner Institute majoring in Engineering in1986. Mr. Belyaev graduated from High Banking School (Ukraine, Kiev) majoring in Finance and Credit in Alexey Karakhan Member of Supervisory Board Mr. Karakhan has been a Member of the Supervisory Board since Currently 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. During his career, Mr. Karakhan has been a Member of the Board of Directors of Otkritie Capital, Deputy President of Aton Company, the President s Advisor of Business Russia Organisation and PR Director of Renaissance Capital. Mr. Karakhan graduated from Moscow State University majoring in Journalism in NOMOS Annual Report and Accounts

46 Corporate Governance continued Dmitry Romaev Member of Supervisory Board Mr. Romaev has been a Member of the Supervisory Board and CEO of NOMOS-BANK since Mr. Romaev is a Member of the Board of Directors of Otkritie Brokerage house, a Member of the Management Board, First Deputy Chairman of the Management Board of Otkritie Financial Corporation, a Member of the Board of Directors of Otkritie Capital, the Chairman of the Board of Directors of Otkritie Debt Center, the Chairman of the Board of Directors of Otkritie Asset Management. Over the years, Mr. Romaev has been the Finance Director of Otkritie Financial Corporation, the Head of International Funding and Relations with International Financial Institutions Division of Capital Markets Department of Sberbank, the Finance Director of Otkritie Investment Bank and the Finance Director of Kit Finance. Mr. Romaev graduated from the Tula Labor Red Banner Order Polytechnical Institute in Alexander Zelenov Independent Member of Supervisory Board Mr. Zelenov has been an Independent Member of the Supervisory Board since He is the Director of Financial Institutions Department of State Corporation Bank for Development and Foreign Economic Affairs (Vnesheconombank). Currently 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 Supervisory Board of Belvnesheconombank (the Republic of Belarus), a Member of the Supervisory Board of Joint stock commercial bank Bank of Moscow, a Member of the Board of Directors of Russian Standard Bank, the Vice Chairman of Commission on Banking Technique and Practice of International Chamber of Commerce (ICC) and the Chairman of ICC Russia Banking Commission. 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 Institute of Directors of Great Britain. Dmitry Mizgulin Member of Supervisory Board Mr. Mizgulin has been a Member of the Supervisory Board since He is the President, the Chairman of the Management Board and a Member of the Board of Directors of Khanty-Mansiysk Bank. Mr. Mizgulin has over 20 years of work experience in banking sphere; he has been working at Khanty- Mansiysk Bank since He graduated from Leningrad Institute of Finance and Economics in 1984 and is a Candidate of Economics. Mr. Mizgulin has been awarded a title of Honored Economist of Russia. 44 NOMOS Annual Report and Accounts 2012

47 Management Board members Vadim Belyaev President, Chairman of the Board On November 23, 2012 Mr. Belyaev was appointed as President of NOMOS-BANK and Chairman of the Management Board. Currently Mr. Belyaev is the Chairman of the Board of Directors of Otkritie Financial Corporation, a Member of the Board of Directors of Otkritie Capital and the CEO of Otkritie Securities. During his long and distinguished career Mr. Belyaev has been the CEO of Otkritie Investment Group (name changed into Otkritie Financial Corporation Ltd) and the President of Otkritie Financial Corporation (reorganised into Otkritie Financial Corporation OJSC). Mr. Belyaev graduated from Moscow State Institute of Radio Engineering, Electronics and Automation majoring in Engineering in In 2001 he graduated from Finance Academy under the Government of the Russian Federation. Dmitry Romaev First Deputy President, Member of Management Board Mr. Romaev has been a Member of the Management Board and CEO of NOMOS-BANK since Mr. Romaev is a Member of the Board of Directors of Otkritie Brokerage house, a Member of the Management Board, First Deputy Chairman of the Management Board of Otkritie Financial Corporation, a Member of the Board of Directors of Otkritie Capital, the Chairman of the Board of Directors of Otkritie Debt Center, the Chairman of the Board of Directors of Otkritie Asset Management. Over the years Mr. Romaev has been the Finance Director of Otkritie Financial Corporation, the Head of International Funding and Relations with International Financial Institutions Division of Capital Markets Department of Sberbank, the Finance Director of Otkritie Investment Bank and the Finance Director of Kit Finance. Mr. Romaev graduated from the Tula Labor Red Banner Order Polytechnical Institute in NOMOS Annual Report and Accounts

48 Corporate Governance continued Evgeny Dankevich First Deputy President, Member of Management Board Mr. Dankevich was appointed Advisor to the President of NOMOS-BANK in February 2013 and First Deputy President in April Mr. Dankevich is the President and the Chairman of the Board of Directors of Otkritie Bank. In 2010, he became the General Director of Otkritie Brokerage House; in 2007 the Managing Director of Otkritie FC, and in 2004 the Deputy General Director of Otkritie Asset Management. From 2002 to 2003, Mr. Dankevich was Head of Western Financial Markets with GUTA BANK financial markets client services. Before that, he headed Otkritie Brokerage House trading operations for five years; and earlier (1994 to 1997) he was Active Transactions Director with Osnovaniye Investment Company. Irina Gordeeva Deputy President, Head of Corporate banking, Member of Management Board Ms. Gordeeva is a Deputy President of NOMOS- BANK and a member of the Management Board. She also chairs NOMOS-BANK s Credit Committee. She was Senior Vice-President of NOMOS-BANK from 1996 to 2005 and First Vice-President from Ms. Gordeeva is also a member of the subcommission of the Interbank Co-operation of the Russian-Chinese Commission. Prior to joining NOMOS-BANK she was Deputy Chairman of the Management Board and Head of the Foreign Banking Department at Innovation Bank for Economic Co-operation, from 1991 to Ms. Gordeeva graduated from the Moscow State Institute of International Relations in Elena Budnik Senior Vice-President, Head of Retail Banking, Deputy Chairman of Management Board On December 10, 2012 Ms. Budnik was appointed Senior Vice-President of NOMOS- BANK. In this role, Ms. Budnik will head the Bank s retail business. Before joining NOMOS- BANK, she served as Deputy Chairman of the Board of Otkritie Bank. Prior to that, Ms. Budnik worked at MDM Bank, where she progressed from a Front Office Manager to Head of Retail Products. Then for three years she headed the Department of Retail Sales at OTP Bank. In 2010, Ms. Budnik became Head of the Retail Banking Department at Barclays. 46 NOMOS Annual Report and Accounts 2012

49 Vladimir Rykunov Victor Tyutin Alexander Royko Deputy Chairman of the Management Board, Chief Financial Officer In October 2012 Mr. Rykunov was appointed Deputy Chairman of the Management Board of the Bank. Mr. Rykunov has served as CFO and as a member of the Management Board of NOMOS-BANK since February He joined NOMOS-BANK in 2008 as Counsel to the consulting and analytical group of the President and Management Board of NOMOS-BANK. In 2009, he became First Deputy Chairman of the Management Board and executive director of VEFK Bank. He was previously Chairman of the Management Board of Sobinbank. From he held a series of senior positions at MDM Bank, and from was a member of the management Board of Gloria Bank. Mr. Rykunov holds a PhD in economics from Moscow State Lomonosov University. Senior Vice-President, Member of Management Board Mr. Tyutin is a Senior Vice-President of NOMOS- BANK and a Member of the Management Board, positions he has held since He was Chief Accountant and a Member of the Management Board of NOMOS-BANK from Mr. Tyutin is responsible for Treasury operations and financial monitoring. Senior Vice-President, Member of Management Board Mr. Royko is a Senior Vice-President of NOMOS- BANK and a Member of the Management Board. He is responsible for project finance and leasing. Prior to joining NOMOS-BANK in 2002, he was responsible for financial management at a large Russian printed media distributor. NOMOS Annual Report and Accounts

50 Corporate Governance continued Corporate Governance report Efficient Corporate Governance Framework The corporate governance system of NOMOS-BANK is functioning in compliance with the requirements of the Russian and UK legislation. The Bank publicly discloses information on all important events and facts concerning its activities that may influence the Bank s share price, including information on the beneficial shareholders and producing both IFRS and RAS financial statements to keep the market informed. The General Shareholders Meeting is the supreme governing body of the Bank. The Supervisory Board which is both elected by and accountable to the shareholders ensures strategic management and control over the activities of the executive bodies the Bank s President and the Bank s Management Board. The Executive bodies ensure the current management of the Bank s activities and attainment of the objectives set by the Supervisory Board and the General Shareholders Meeting. During 2012 three committees were established and successfully functioned under the Supervisory Board: the Audit Committee, Nomination and Remuneration Committee and Risk Committee. Share Capital Since incorporation, NOMOS-BANK has carried out 22 issues of shares, including three preference share issues. Currently, NOMOS-BANK s share capital consists of 92,422,370 ordinary registered shares and 12,100,000 preferred registered shares with no fixed dividend. The nominal value of each ordinary and of each preferred share is RUB 50. All preferred shares are held by a wholly owned subsidiary of the Group. All ordinary shares grant identical rights to their holders, as envisaged by Joint Stock Companies Law. The rights granted by ordinary shares and preferred shares are described in detail in the Prospectus for NOMOS s IPO, which is available from the NOMOS-BANK s website. As at December 31, 2012 the free float in NOMOS comprised 20.46% of the shares in issue, with the majority in GDR form listed on London Stock Exchange. In February 2013 NomGDR purchased 16.1% of the total voting shares from NOMOS GDR holders. For GDR holders, the Depositary may exercise the voting rights through its nominee at any General Shareholders Meeting for which the Depositary receives timely voting instructions from holders of GDRs. Deutsche Bank Aktiengesellschaft serves as NOMOS-BANK s Depositary. General Shareholders Meeting The General Shareholders Meeting is the supreme governing body of NOMOS- BANK. An Annual General Shareholders Meeting must be held no less than two months and no more than six months after the end of each fiscal year and the Bank complies with these rules. Extraordinary Shareholders Meetings can be called by the Supervisory Board, by NOMOS-BANK s internal Audit Committee and the external auditor or by shareholders representing at 48 NOMOS Annual Report and Accounts 2012

51 least 10% of the voting shares. The powers of the General Shareholders Meeting include: Amendment of the Bank s charter or approval of a new charter. Election and early dismissal of members of the Supervisory Board. Declaration and payment of dividends. Approval of the composition of the Audit Committee and election of its members. Approval of the external auditor. Approval of related party transactions. Approval of the Annual Report and accounts and financial statements of the Group. In 2012 the General Shareholders Meeting was held on May 24, By the date of closure of the register the number of shareholders of NOMOS- BANK exceeded 100 persons. All shareholders were timely notified about the General Shareholders Meeting. According to the requirements of the Russian legislation and the resolution of the Supervisory Board the shareholders had the right to familiarize themselves with the materials for the meeting in the Bank s head office within 20 days prior to the date of the Annual General Meeting. The meeting was held in the form of joint presence, voting at the meeting was organized through voting bulletins. The functions of the Counting Commission at the Annual General Meeting were performed by OJS Company «R.O.S.T. Registrar». The shareholders who participated in the voting at the Annual General The principal task of the Supervisory Board is to create and deliver sustainable shareholder value by setting Group strategy and overseeing its implementation by the Management. Meeting owned in the aggregate 90,532,370 voting shares, which makes % of the total number of the Bank s voting shares. Structure and Operation of the Supervisory Board The Supervisory Board is one of the most important elements of NOMOS-BANK s corporate governance framework. The principal task of the Supervisory Board is to create and deliver sustainable shareholder value by setting Group strategy and overseeing its implementation by the Management. Meetings of the Supervisory Board are conducted according to an agreed agenda. They may be called by the Chairman or at the request of another member of the Supervisory Board, by NOMOS-BANK s internal auditors, the external auditors or the Management. Members of the Supervisory Board are elected by the General Shareholders Meeting in accordance with the charter of NOMOS-BANK without limit. At the General Shareholders Meeting on 24 May members of the Supervisory Board were elected, including 5 independent, non-executive directors and 4 non-executive directors. 4 candidates were nominated by the Bank s shareholders owning more than 2% of the Bank s voting shares, 7 candidates were nominated by the Supervisory Board for election at the Annual General Shareholders Meeting on the basis of the recommendation of the Nomination and Remuneration Committee of the Supervisory Board. On 27 February 2013 the following changes were approved at the EGM. The Board was reduced to eight members from eleven; two NOMOS Annual Report and Accounts

52 Corporate Governance continued NOMOS-BANK s management team is led by Vadim Belyaev, who was appointed the President of NOMOS- BANK in November Bank s professional activities and specialized depository in the securities market. Approval of the subordinated debt issue. Consideration of internal audit reports and confirmation of the plans of operation of the internal audit department. Directors, Dmitry Mizgulin (BKM) and Alexander Zelenov (VEB), were re-elected, and six new Directors were elected: Vadim Belyaev, Dmitry Romaev, Ruben Aganbegyan, Mikhail Belyaev, Alexey Karakhan, Dmitry Vasiliev. Supervisory Board work in 2012 In 2012 one of the most important resolutions adopted by the Supervisory Board was the appointment of the new President of NOMOS-BANK Vadim Belyaev. In addition, during 2012 the Bank s Supervisory Board considered the following issues: Transformation of several branches of the Bank into operational offices in order to optimize the Bank s branch network, as well as a number of issues related to improvement of the internal control system and in particular: the extending of the functions of the Bank s internal audit subdivision to assess and examine its internal control system and the provision of an independent and objective audit in order to improve the Bank s activities. All resolutions related to the modification of internal controls were adopted on the basis of the recommendations of the Audit Committee of the Supervisory Board and an independent international consultant involved by the Bank to assess the efficiency its internal controls. Preparation of the Annual General Shareholders Meeting, including: Preliminary approval of the Group s Annual Report and financial statements for the year ended December 31, Recommendations for distribution of the Group s net profit. Approval of the quarterly reporting of the Group prepared according to international financial reporting standards. Recommendations regarding the candidate for the position of the Bank s auditor. Consideration of the quarterly reports of the inspector of the Management Board NOMOS-BANK s management team is led by Vadim Belyaev, who was appointed the President of NOMOS-BANK in November The Management Board is accountable both to the General Shareholders Meeting and to the Supervisory Board, to which it reports on a regular basis. The Management Board meets at least once every two weeks, with meetings being called by the CEO or at the request of any member of the Management Board. The main areas of focus for the Management Board are: Implementation of the resolutions of the Bank s General Shareholders Meeting and the Bank s Supervisory Board. Development of the Bank s financial and economic activities and the management of the implementation plans to achieve these. Consideration of the measures to attract new clients, increase monetary resources, improve 50 NOMOS Annual Report and Accounts 2012

53 banking operations, and develop and introduce new banking services. Consideration of the reports of the heads of structural subdivisions, branches and representative offices and development of suggestions on how to optimize these activities. Establishment of the system of assessment of the Bank s internal control procedures, as well as the measures taken for the elimination of any revealed deficiencies in these internal controls. Control over the Bank compliance with Russian legislation. Establishment of efficient systems of data transfer. Interests of Supervisory Board and Management Board members in voting shares of NOMOS: Vadim Belyaev indirectly controls 7.85% of the Bank s voting shares. Nikolai Dobrinov indirectly controls 7.11% of the Bank s voting shares. Dmitri Sokolov indirectly controls 3.9% of the Bank s voting shares. Risk Committee The Risk Committee on a quarterly basis assesses the Bank s risk appetite, indicators of the main risks and riskresistance, and coordinates the During 2012 the Chairman of the Risk Committee of the Supervisory Board was an independent director and the majority of the members of the committee were also independent. work of the management team on risk management. The committee controls the risk appetite by analysis and determination of the maximum level of specific types of risks, including consideration of the limits on credit and market risks, and supervises the total risk profile of the Group. During 2012 the Chairman of the Risk Committee of the Supervisory Board was an independent director and the majority of the members of the committee were also independent. In 2012 the Risk Committee of the Supervisory Board paid particular attention to risk management in structural subdivisions, considered the reports of the heads of risk blocks in corporate, retail and investment business segments, developed recommendations for improvement of the process of identification and revelation of possible risks, as well as making recommendations with regard to taking measures for mitigation of such risks. The Risk Committee considers on a quarterly basis the consolidated report on risks together with the report of the Treasury Department, paying special attention to the management of the Bank s liquidity and credit limit. In 2012 there were four meetings of the Risk Committee of the Supervisory Board. Three meetings were held in Moscow and one in St. Petersburg. Audit Committee The Audit Committee is responsible for the overseeing of three main areas: financial statements and accounting policies; internal controls; and internal and external audits. The Audit Committee is headed by an independent non-executive director and a member of the Supervisory Board. The Majority of the members of the Audit Committee are independent directors. The Audit Committee provides: recommendations to the NOMOS Annual Report and Accounts

54 Corporate Governance continued The Audit Committee is headed by an independent non-executive director and a member of the Supervisory Board. Supervisory Board regarding the appointment of external auditors ready for approval at the Annual General Shareholders Meeting, assessments of the auditor s conclusion, reviews of efficiency of the Bank s internal control procedures, as well as the development of recommendations for the improvement of said procedures. During 2012 the key aspects of the Audit Committee s work included: Review and analysis of the financial statements. Both NOMOS-BANK and BKM s quarterly consolidated and standalone financial statements were considered. Review of the reports of the Bank s management team paying attention to current market tendencies and their influence on the activities of the Group. Comparative analysis of the Bank s Key Performance Indicators; forecasts of earnings per share. The Bank s auditor participated in each meeting of the Audit Committee and submitted to the members of the committee the report on the results of the quarterly review of NOMOS for the relevant quarter and audit of the consolidated reporting of NOMOS for financial year In 2012 the Audit Committee recommended Deloitte & Touche CIS for election as the external auditor of NOMOS-BANK at the Annual General Shareholders Meeting. The Audit Committee prepared an assessment report containing feedback regarding the external auditors opinion and auditors report for 2011, which was submitted among the materials for the Annual General Shareholders Meeting. Due to the activities of the Audit Committee of the Supervisory Board in 2012 there were considerable positive changes in the internal control systems. In particular, the Audit Committee of the Supervisory Board developed recommendations to the Supervisory Board for the extension of the functions of the Bank s internal audit subdivision. It was also recommended that the Supervisory Board approve the Regulation on an Internal Audit Department. During 2012 the Audit Committee considered the following issues regarding the operation of an Internal Audit: planning and reports on the Bank s internal control department, regular reports of the Bank s internal control department to establish any violations and mistakes in the activities of NOMOS- BANK and its subsidiary banks, as well as information on the measures taken to implement any recommendations for improvement to eliminate such violations. In 2012 there were four meetings of the Audit Committee. Three meetings were held in Moscow and one in St. Petersburg in the office of the Bank s branch. In March 2013 new members of the Audit Committee were elected. Dmitry Vasiliev was appointed the Chairman of the Audit Committee, which also includes Mikhail Belyaev, Ruben Aganbegyan and Alexander Zelenov. 52 NOMOS Annual Report and Accounts 2012

55 All Directors and Senior Executives of NOMOS-BANK have Directors & Officers Liability Insurance. Nomination and Remuneration Committee The Nomination and Remuneration Committee assists the Supervisory Board in all matters concerning appointments, Human Resources issues and remuneration. The Nomination and Remuneration Committee is headed by the Chairman of the Supervisory Board. In 2012 the Nomination and Remuneration Committee Recommended the candidates for the Bank s Supervisory Board and the Review Commission. Approved the draft letter of agreement with independent directors. Considered the general system of remuneration and bonus payment to the employees NOMOS-BANK. The Nomination and Remuneration Committee approved the Remuneration Policy for the key personnel of NOMOS- BANK and confirmed that the Policy corresponds to the recommendations made by the Committee. The Nomination and Remuneration Committee issued recommendations for the amount of remuneration for the independent members of the Supervisory Board, the Review Commission and compensation for expenses of the members of the Supervisory Board related to participation in meetings. Directors Remuneration: The ceiling of RUB 50 million on remuneration and compensation for members of the Supervisory Board for 2012 was confirmed by the Annual General Shareholders Meeting held in May In 2012, the total remuneration for members of the Supervisory Board was RUB 21,998 million. Total compensation amounted to RUB 22,289 million. Non- Independent Directors of NOMOS-BANK did not receive any remuneration during The aggregate remuneration paid or accrued by NOMOS-BANK to members of the Management Board for services rendered during the year to 31 December 2012 was RUB 474,8 million. No amount was set aside or accrued by NOMOS-BANK in respect of pension, retirement or similar benefits. No director is responsible for appraising his or her own performance or recommending his or her own level of remuneration for Board approval. All Directors and Senior Executives of NOMOS-BANK have Directors & Officers Liability Insurance through Chartis, the insurance company. The Nomination and Remuneration Committee met once in 2012, and besides the formal meeting, Committee members also had informal discussions with management. In March 2013 new members of the Nomination and Remuneration Committee were elected. Ruben Aganbegyan was appointed the Chairman of Nomination and Remuneration Committee, which also includes Dmitry Vasiliev and Alexey Karakhan. NOMOS Annual Report and Accounts

56 Abbreviations AFS Available For Sale financial assets AHML Agency for Housing Mortgage Lending founded by the Russian Federation Government ATM An automated teller machine or automatic teller machine BKM Bank of Khanty-Mansiysk BRIC A grouping acronym that refers to the countries of Brazil, Russia, India and China CBR Central Bank of Russia CEO Chief Executive Officer CIR Cost income ratio COR Cost of Risk ratio CPI A consumer price index which measures changes in the price level of consumer goods and services purchased by households 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 2013 NOMOS plans to implement the «credit conveyer» system to small business segment. CSR Corporate social responsibility EGM Extraordinary General Meeting EMEA A grouping acronym that refers to the countries of for Europe, the Middle East and Africa FVTPL Financial assets at fair value through profit or loss GDP Gross domestic product GDR Global Depositary Receipt HTM Held to Maturity investments IAD Internal Audit Department IFRS International Financial Reporting Standards 54 NOMOS Annual Report and Accounts 2012

57 KPI Key Performance Indicators LBMA London Bullion Market Association MICEX Moscow Exchange NIM Net interest margin NomGDR Limited NomGDR Limited is an orphan special purpose vehicle ( SPV ). Otkritie Advisory Services Limited, an indirect wholly-owned subsidiary of Otkritie FC, entered into a call option agreement to acquire, subject to receipt of necessary approvals, all issued and outstanding shares of NomGDR Limited. NOMOS Incorporates NOMOS-BANK and its subsidiaries including BKM NOMOS-BANK Incorporates NOMOS-BANK stand alone NPL s Non-performing loans, that are 90+ days overdue. OCP Open currency position 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 ROA Return on Assets ROE Return on Equity RUB Russian Rouble Share of wallet The amount of customers total spending SME Small and medium enterprises US $ The United States dollar VEB The State Corporation The Bank for Development and Foreign Economic Affairs (Vnesheconombank) NOMOS Annual Report and Accounts

58 Consolidated Financial Statements Consolidated Financial Statements continued Open Joint-Stock Company NOMOS-BANK Consolidated Financial Statements For the Year Ended 31 December

59 TABLE OF CONTENTS Statement of management s responsibilities for the preparation and approval of the consolidated financial statements for the year ended 31 December Independent auditors report Consolidated financial statements for the year ended 31 December 2012: Consolidated income statement Consolidated statement of comprehensive income Consolidated statement of financial position Consolidated statement of changes in equity...64 Consolidated statement of cash flows Notes to the consolidated financial statements: 1. Organisation Basis of presentation Significant accounting policies Acquisitions and disposals Non-controlling interest Net interest income before gain on remeasurement of cash flow and provision for impairment losses on interest bearing assets Trading income Net fee and commission income Other income/(expenses) Operating expenses Income tax Earnings per share and earnings per gdr Cash and balances with the Central Bank of the Russian Federation Precious metals Financial assets at fair value through profit or loss Derivative financial instruments Loans and advances to banks and other financial institutions Loans to customers Investments available-for-sale Investments held to maturity Property, plant and equipment Intangible assets Investment Property Other assets Due to Banks and the Central Bank of the Russian Federation Customer accounts Bonds and Eurobonds Promissory notes issued Other liabilities Subordinated debt Share capital and share premium Commitments and contingencies Segment reporting Fair value of financial instruments Capital management Risk management policy Transactions with related parties Subsequent events

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157 Contact information NOMOS Investor Relations 3/1, Verkhnyaya Radishchevskaya St., Moscow, Russia, Phone: Fax: Marianna Naumenko Head of Investor Relations Department Maria Gorbyleva Head of Investor Communications Yuri Lekarev Executive Director, Head of International Business Division

158 NOMOS BANK 3/1, Verkhnyaya Radishchevskaya St., Moscow, Russia, Phone: Fax: