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Annual report 2008
Contents
2 Chairman and CEO Statement
7 MDM Bank’s Mission, Vision and Values
8 Key Indicators
10 Legal and Ownership Structure
12 Overview of the Russian Economy and Banking Sector
19 Planned Merger of MDM Bank and URSA Bank
21 Regional Expansion and Branch Network
25 Management Discussion and Analysis
53 Review of Business Units
53 Corporate and Investment Banking
57 Private Banking
59 Retail Banking
63 Small Business Banking
65 Information Technology
67 Corporate Governance and Management
82 Internal Control
84 Risk Management
88 Compliance Control
89 Internal Audit
91 Human Resources
93 Corporate Communications
97 Consolidated Financial Statements
187 Contact Details
188 Principal Correspondent Accounts
189 Licenses
191 Memberships
2 MDM Bank Annual report 2008
Chairman and CEO Statement
OLEG VIYUGIN IGOR KIM
3
Dear shareholders, clients and partners:
2008 marked the next step forward in the progressive development of MDM Bank. During the reported period,
we maintained a stable balance sheet and profitability. This held true even during the second half of the year,
when conditions in the country’s banking sector sharply deteriorated. According to the Company’s IFRS audited
financials for the period, the Bank’s total profit for the year was 3.3 billion rubles, including 1.2 billion rubles
during the second half of the year.
Financial results for the reported period were lower than in 2007, primarily due to the conservative policy MDM
Bank adopted in response to the global financial crisis and the fact the Bank focused on protecting the interests
of its depositors and lenders: while the Bank’s loan portfolio and working assets continued to provide stable
high returns, the conscious decision to sustain a large liquidity cushion negatively affected the Bank’s profit
level. At the same time, the Bank foresaw the difficulties that its borrowers would face in servicing debts during
the serious economic downturn. As a result, MDM abandoned its policy of actively expanding its loan portfolio
and instead chose to build loan loss reserves in advance. This strategic shift decreased potential profits by at
least 3–4 billion rubles.
In our internal policy, we proceeded from the understanding that the crisis, which became pronounced
in the fall of 2008, would continue, and that it would begin to affect the country’s real economy. Russia’s
industrial and financial organizations will need to adapt to a sharp fall in external demand and an almost
complete shut-down of the capital markets. In these new economic conditions, the optimization procedures
undertaken by the Bank at the end of 2008, which helped reduce the annual cost/income ratio to 42.9%,
was clearly a necessary step to preserve shareholder capital, as well as to protect our depositors and
clients from any negative impact of the economic downturn. We plan that this the cost/income ratio will
reach 30–35% in 2009, when the full effect of the optimization measures will be achieved. The Bank also
re-assessed its risk evaluation approach, temporarily limiting lending to those sectors of the economy that
were most sensitive to the crisis, and doing so well in advance of its onset. This led to a temporary decline in
the loan portfolio, which, combined with a decrease in overall risk, allowed the Bank to avoid any balance
sheet liquidity issues without depending on help from Russian monetary authorities. Finally, to strengthen
the liabilities side of the balance sheet, the Bank paid particular attention to attracting retail deposits. In 2008,
the growth in retail deposits reached 80%, bettering our main competitors and for the Russian banking sector
as a whole.
These measures enabled MDM Bank to maintain a strong Basel accord capital adequacy ratio of 17.9%.
The Bank finished 2008 with the highest credit ratings among Russian non-state banks from Standard & Poor’s,
Moody’s and Fitch.
4 MDM Bank Annual report 2008
During the reported period, the Bank continued to implement its strategy of transforming MDM from a financial
institution primarily focused on corporate clients into a fully-fledged universal bank. The Bank gradually
changed the structure of its loan portfolio to place greater emphasis on small- and medium-sized enterprises.
This also led to a greater diversification of liabilities and increased stability. At the end of 2008, S&P increased
the corporate governance rating of the Bank to CGS-6.9 on the Russian scale, which corresponds to its 6+ score
on the international scale.
An important, real step toward implementing this strategy was the decision to merge MDM Bank and URSA
Bank. The merger, which will be finalized in 2009, will enable both banks to make significant progress on
implementing their strategies of increased diversification and better stability in assets and liabilities for
the consolidated bank. Synergies from the merger of the two banks’ competencies in the retail and corporate
sectors, as well as consolidation on the operations side, will allow the merged bank to occupy a leading position
in the Russian banking sector.
MDM Bank is basing its long-term plans on the assumption that the global financial crisis will continue to
negatively affect the Russia’s economy and banking sector. Our asset and liability management and capital
management policies take into account the inevitable decline in quality of the old loan portfolio. In terms of
client services, we understand that our clients need new types of banking products aimed at preserving and
protecting companies’ core businesses and overcoming systemic problems in the context of the current crisis.
With these factors in mind, the Bank maintains its conservative approach to liquidity management and risk
management and intends to carefully monitor and preserve sufficient capital adequacy levels. Despite increased
credit risks, MDM Bank will offer credit resources and a broad range of services to meet today’s challenges to
companies that seek constructive solutions, can effectively use borrowed capital, and are capable of efficiently
running their businesses, either themselves or with the assistance of the bank.
With the goal of completing the merger in 2009, MDM Bank and URSA Bank have independently begun
coordinating their business development and balance sheet management in order to begin the real operational
merger with harmonized businesses and an effective team of managers.
In terms of business results, we have taken a realistic view of 2009. We believe that the measures taken by
banking regulators in developed countries are in line with the measures that have helped overcome banking
crises in many countries. It is reasonable to assume that these actions will help to decrease the level of
accumulated ineffective leverage, to replenish banks capital and to gradually re-establish confidence in
the sector. Eventually positive trends will return to both financial and credit markets. As such, in 2009 we will
concentrate on completing the merger between MDM Bank and URSA Bank and on offering our clients practical
new credit and commission-based products and services that will help them successfully negotiate the the
current global financial crisis. We are convinced that our client-centered approach during the crisis period is
particularly effective, since in the long-term it will build the foundation for faster growth of our clients, and
therefore for MDM Bank as well.
Based on this, in the year to come, the Bank’s management intends to maintain an adequate level of return
on average equity and to sustain a capital adequacy level that corresponds with regulatory requirements. At
the same time, the Bank will seek to minimize risks – focusing on growth through the development of client
relations. We understand that 2009 will be a challenging year for the Bank, but we believe that we have
a management team capable of working efficiently in these new conditions. MDM Bank will remain fully focused
not only on fulfilling its obligations to depositors, creditors and clients, but also on significantly increasing its
base of clients and business partners.
Respectfully yours,
OLEG VIYUGIN IGOR KIM
Chairman of the Board of Directors Chairman of the Management Board
MDM Bank MDM Bank
MDM Asset Management has
developed new investment
strategies and programs
specifically designed for
the current economic situation
7
MDM Bank’s Mission,
Vision and Values
Mission
MDM Bank’s Mission is to be a respected and successful universal financial institution, achieving market
leadership by adhering to globally accepted standards of banking services and principles of corporate ethics.
Vision
MDM Bank strives to ensure consistent high returns on equity capital by pursuing the following goals:
• Provide the highest quality and cost effective services to all our corporate and retail clients;
• Offer products and services that support our clients at each stage of their development, helping them grow
their business and prosperity;
• Extend and deepen our nationwide franchise by developing our business with small- and medium-size
companies and establishing a strong regional presence;
• Ensure exceptional career opportunities to our employees and maintain the highest standards of corporate
governance.
Values
• Expertise. We are guided by the highest professional standards and thorough market analysis; we continuously
augment our capabilities by fostering initiative and professional development of our staff.
• Client focus. A partnership philosophy forms the basis of our client relations. We strive to be a model of
reliability and efficiency for all our counterparties.
• Integrity and confidentiality. We act with honesty and integrity with regard to our employees, clients and
competitors. We comply with both the spirit and the letter of the law.
• Transparency. We support productive communications within the Bank and open relationships with our
external stakeholders.
• Social responsibility. We contribute to the wellbeing of society by offering first-class economic opportunities
to our clients and implementing environmental programs, as well as supporting educational and cultural
projects.
8 MDM Bank Annual report 2008
Key Indicators
Revenue Return on Average Equity
(excl. one-off transactions)
27,000 18
16.6
24,000 16
21,832
21,000 3.6 14
13.0
17,832
22.4 18,000 –8.4 12
13,047
37.0 15,000 10
8.2
12,000 8
9,000 6
6,000 4
3,000 2
0 0
2006 2007 2008 2006 2007 2008
Revenues, RUR mln Change, % ROAE, % Change, pp
Net income Corporate and investment banking: Total operating
income before impairment losses and provisions
14,822
5,516
13,381
5,400 10.8 13,500
4,800 12,000
–40.1 37.0
4,200 10,500
9,735
3,304
66.0
3,320
3,600 9,000
3,000 7,500
2,400 6,000
1,800 4,500
1,200 3,000
600 1,500
0 0
2006 2007 2008 2006 2007 2008
Net income, RUR mln Change, % RUR mln Change, %
Retail banking: Total operating income before Treasury: Total operating income before impairment
impairment losses and provisions losses and provisions
4,751
4,500 1,450
1,386
19.5
3,976
4,000 1,300
3,500 1,050
3,000 135.9 900
90.5
2,500 750
2,087
2,000 600
565
1,500 29.9 450
435
1,000 300
500 150
0 0
2006 2007 2008 2006 2007 2008
RUR mln Change, % RUR mln Change, %
9
Corporate and investment banking results before Retail banking results before
central overhead central overhead
10,120
9,900 2,700
2,452
–9.4
9,172
8,800 13.4 2,400
2,162
49.0
1,686
7,700 28.2 2,100
6,805
6,600 1,800
5,500 1,500
4,400 1,200
3,300 900
2,200 600
1,100 300
0 0
2006 2007 2008 2006 2007 2008
CIB results before centralized costs, RUR mln Change, % Retail results before centralized costs, RUR mln Change, %
Treasury results before Capital adequacy ratio, as per Basel Agreement, %
central overhead
1,341
18
17.9
1,350
17.2
16.0
1,200 16
14.5
1,050 14
13.7
161.8 900 12
10.9
750 10
600 8
492
22.7 450 6
401
300 4
150 2
0 0
2006 2007 2008 2006 2007 2008
Treasure results before centralized costs, RUR mln Change, % Tier I capital ratio Total capital ratio
MDM Bank’s other competitive advantages include:
• The highest international credit ratings among privately-owned Russian banks;
• A stable financial standing, which will allow the Bank to strengthen its market position during
the economic crisis (capital adequacy ratio, as per Basel Agreement totaled 17.9% at the end of 2008);
• The Bank’s shareholders are prepared to provide financial support to the Bank, if necessary;
• A large liquidity cushion (approximately USD 1.6 bln in highly liquid assets at the end of 2008);
• The highest quality corporate governance and transparency among Russian banks, affirmed by Standard
& Poor’s corporate governance score.
10 MDM Bank Annual report 2008
MDM Bank offers retail clients
a broad range of financial
products and services,
including term deposits,
consumer lending, money
transfers
11
Legal and Ownership
Structure
MDM Bank’s subsidiaries include Russian leasing and asset management companies, LTB Bank (based in Riga),
and securities brokerage and investment companies in Cyprus.
AS LTB Bank MDM Asset Management
Asset management
MDM Investments Ltd (Cyprus) LeasingPromHolding
Securities brokerage company Leasing company
MCM Russian Investments (Cyprus)
Investment company
Shareholder Structure
MDM Bank’s principal owners include: Mr. Sergey Popov, as the majority beneficial shareholder (with
an approximately 77% beneficial interest); Olivant Limited, which holds a 9.5% beneficial interest, and
Mr. Martin Andersson with an 8.5% beneficial interest. In addition, the IFC holds a 5% direct interest in
the Bank.
12 MDM Bank Annual report 2008
Overview of the Russian Economy
and Banking Sector
Operating Environment
2008 was the year when the crisis that had started as turmoil in a limited segment of the financial markets –
US subprime mortgages – swept first through the financial industry, then into the real sector of all OECD
countries, and finally, by 3Q 2008, hit Russia. In 1H 2008, world liquidity had still been plentiful enough
to sustain economic growth in Europe and emerging markets, as well as to keep natural resource prices at
elevated levels. Nonetheless, the situation had started to deteriorate by mid-year, when signs of the crisis
began to materialize in Eurozone countries, from there deepening and sweeping through all segments of all
economies, regardless of geographical boundaries. The entire world witnessed a massive and agonizing process
of deleveraging that shook the international banking system and incited a universal flight to safety, as investors
sought secure ports of call in the form of the most liquid and risk-free assets, mainly dollar denominated.
Meantime, in 3Q 2008, as inflated natural resource prices started to plunge, capital headed out of Russia.
The average price for Urals crude in 2008 was USD 92 per bbl, as compared to USD 70 the year before, but
a sharp decline in oil prices in 2H 2008, coupled with a growing net capital outflow in 1Q, 3Q and 4Q 2008,
completely reversed the positive external market conditions of 1H08, leading to the Russian economy’s about-
face from growth to recession.
Russia’s Balance of Payment Performance Over 2008
Current Current Net Private Average
Account Account Capital Capital USD/ Urals Oil
Balance, Balance, Flows, Flight, bn RUR Rate Price, USD/
bln USD as % of GDP bln USD USD Change, % Bbl
1Q 2008 37.3 10.2 –25.7 –15.5 –4.2 95.2
2Q 2008 32.4 7.4 38.2 –8.5 –0.4 116.7
3Q 2008 21.8 4.8 –16.7 –10.6 15.8 112.7
4Q 2008 8.1 1.7 –133.3 –12.6 15.5 53.5
Entire 2008 99.6 6.1* –137.4 –47.3 27.6 91.7 |*| Average for period.
The key factor behind Russia’s buoyant economic growth from 2005 to 1H 2008 was plentiful global liquidity
that propped up both international demand for crude and Russia’s domestic liquidity. A healthy growth in
fixed capital investments (FCI) in Russia that persisted in double digits – reaching as high as 21% in 2007 –
made a record contribution of 4.2pp to total GDP growth that year, and, as the global crisis started to damage
the Russian economy, was at 3pp over 9M 2008 (the most recent data available officially as of the date of this
report’s writing).
In 3Q 2008, Russia posted a net private outflow of near USD 17 bln, which turned out to be only a prelude to
a massive outflow of USD 133 bln in 4Q 2008.
Looking deeper at the Russian balance of payments, we note the following: in 2007, net private capital inflow
had been comparable to the current account surplus and even surpassed it, hitting USD 83 bln vs. USD 77 bln,
respectively, helping Russia’s gold and forex reserves grow by USD 150 bln, which translated to approximately
USD 160 bln worth of net currency purchases (excluding non-dollar reserve component revaluation) by
13
the CBR, according to our estimates. In 2008, according to preliminary data from the Ministry of Finance
of the Russian Federation, the net capital outflow reached as much as USD 138 bln on the back of a record
current accounts surplus of USD 99 bln. While the new methods of measuring international reserves applied
by the CBR since mid-2008 and based on the mark-to-market approach, rather than the earlier amortization-
based approach, makes it difficult to reliably monitor the selling and buying activities of the Central Bank on
the domestic FX market, Ministry of Finance data shows that the Russian Federation’s gross reserve figure
declined by USD 45.3 bln during 2008.
An important factor that provoked intense pressure on the ruble at the end of 2008 – in addition to
the repatriation of funds by foreign investors – was the large volume of external corporate debt, roughly USD
500 bln, of which USD 135 bln was to be paid in the course of one year. The fact total gross Russian external
debt of more than USD 540 bln had approached the gross international reserve amount of USD 580 bln as of
late August 2008, exacerbated by refinancing fears, boosted the demand for hard currency, both for hedging
and speculative purposes.
For several months in 3Q 2008 it appeared that the CBR possessed adequate resources to protect the ruble.
However, the ruble’s convertibility (the absence of any capital control), the drop in oil prices in November
2008 below USD 60 per bbl and the continuing and deepening devaluation of peer currencies against the dollar
finally forced the CBR to start the so-called ‘gradual ruble devaluation’, which by year end had resulted in
a devaluation of 17% vs. the bi-currency basket and approximately 30% vs. the dollar.
Besides FCI, another important driver of Russian economic growth between 2005 and 1H 2008 was fast-
growing consumer demand, which contributed more than 7pp in 2007 and 6.5pp over 9M 2008 to overall GDP
growth . The latter figure is the second highest in history (following the 2007 record). Consumer expenditures
by households rose 13.1% in real terms in 2007 and a further 12.9% over 9M 2008, which outpaced GDP
growth, which was 7.4% over 9M 2008, significantly.
Oil Prices, Industrial Growth and Fixed Capital Investment in Russia in 2005–2008
90 24
70 21
50 18
30 15
10 12
–10 9
–30 6
–50 3
–70 0
–90 –3
01.05 05.05 09.05 01.06 05.06 09.06 01.07 05.07 09.07 01.08 05.08 09.08
Change in oil price, % year-on-year (left axis)
Fixed capital investment, % year-on-year (right axis) Industrial growth (without axis)
Source: State Statistics Service, Reuters, MDM
14 MDM Bank Annual report 2008
Russia’s GDP Growth Components
Investment in growth, %
18 5
15 4
12 3
9 2
6 1
3 0
0 –1
–3 –2
–6 –3
–9 –4
96 97 98 99 00 01 02 03 04 05 06 07 08
Final consumption expenditure
Net export
Gross savings Investment
Source: State Statistics Service, MDM
Total estimated GDP growth for 2008 has been estimated at 5.6% by the Economic Ministry, which effectively
means stagnation began in 4Q 2008, with growth of only 0.5%. However, the consumption boom of 2007
and early 2008, stemming from high domestic liquidity, had so much inertia that in the last month of 2008
Russia’s households showed negative savings – for the first time in the country’s post-1998 history.
In 4Q 2008, all economic indicators sharply deteriorated. According to our internal evaluation (based on
data from the Russian Federation State Statistics Service), industrial production declined 6%; investment
in property, plant and equipment dropped approximately 2%; and real household income decreased
approximately 0.6%. As of end of the year, according to data from the State Statistics Service, the increase in
investment in property, plant and equipment totaled 9.1%; real disposable income grew only 2.7% (compared
with 12% in 2007), and the volume of industrial production rose by only 2%. However, it must be noted that
industrial production growth had already slowed down by the middle of 2008 and many of Russia’s extraction
industries had demonstrated serious indications of stagnation in 2007–2008.
The CBR’s policy throughout 2008, excluding the fourth quarter, was still aimed at ensuring ruble exchange
rate stability and curbing inflation. Throughout 2007 and the early part of 2008 the Russian monetary
authorities were active in sterilizing the excess liquidity that originated from high currency inflows in
the controlled ruble float environment. According to our estimates, in 2008 the federal budget, including
the reserve and the sovereign wealth funds, sucked in approximately 70% of the entire ruble issuance through
currency purchases by the CBR in the first half of the year. Later on, as capital inflows had almost dried up,
ruble issuance by the CBR practically ceased, and the source of liquidity shifted toward borrowing from
the Central Bank and fiscal expenditure. The growth of the broad monetary base totaled a mere RUR 65 bln
over 2008, as compared to RUR 1.4 trn in 2007. M2 expansion was at an unprecedented low of 3% over 2008,
compared to 48% a year ago. As a result, the M2 to GDP ratio fell to the level of early 2007, 31%.
15
Adversely, despite all efforts by the CBR and Ministry of Finance, CPI inflation reached 13.4% in 2008 vs.
11.8% the previous year, its highest level since 2002. The CPI acceleration was mainly attributable to the very
high ruble issuance of late 2007 and to elevated oil prices in 1H 2008 that exceeded USD 100 per bbl and
played on domestic energy prices as well. The late 2008 ruble devaluation had little effect on inflation that
year, as a significant lag occurs before this inflationary factor comes onto play (up to six months).
The Banking Sector
Key developments in 2008
2008 was a very challenging year for the Russian banking system, as it was for almost all banking systems
worldwide. The first half of 2008 was relatively benign for Russian banks, as they still retained access to
capital markets and issued bond placements both locally and internationally. Consolidated banks’ balance
sheets expanded in January-June 2008 by 20% to reach almost USD 1 trn.
However, in the second half of last year the situation changed dramatically. The sequence of events, of which
the bankruptcy of Lehman Brothers was the most significant, hit the Russian banking system hard.
Debt markets shut down completely, while capital flight from Russia intensified. The latter, combined with a sharp
decline in oil prices, led to a significant devaluation of the ruble. Confidence in Russian banks was shaken. As
a result, we saw significant volatility in the deposit base of the banks – specifically a redistribution of market share
in favor of state-controlled giants and a partial conversion of customer accounts into foreign currency.
Needing to stabilize their liquidity positions, banks have significantly scaled down lending activities.
The effects of the “credit squeeze” and financial crisis have started feeding through into the real economy,
which, in turn, has led to the rise in default rates and deterioration of banks’ asset quality.
In dollar terms, the consolidated balance sheet of the banking system shrank in the second half of 2008 –
a first in recent times. 2008 closed with banks’ total assets standing at USD 921 bln, 6.5% lower than the mid-
year high watermark.
In fact, the damage to the Russian banking system could have been far worse if not for unprecedented support
from the regulators. The most important items on the long list of support measures included a significant
expansion of Central Bank of Russia (CBR) refinancing tools, a relaxation of mandatory cash reserves
requirements, large subordinated loan injections into key state banks and select privately-owned banks,
as well as, of course, five bailouts of sizeable banks that had become technically insolvent. There are also
ongoing discussions in the government about further recapitalization of Russian banks. Experience elsewhere
shows that regulators are extremely supportive toward local financial institutions of significant size, as they
see the failure of such institutions as threatening to the sustainability of the entire financial system.
Outlook for 2009
In 2009, the development of the Russian banking sector will be fundamentally affected by the following factors:
• Support from state regulators. We assume that during this period the government and the CBR will
continue to provide liquidity resources for Russian banks. Additionally, we believe that the CBR will continue
to maintain a relatively soft approach on mandatory reserves regulation and oversight.
16 MDM Bank Annual report 2008
• Concentration on re-capitalization issues. It is quite likely that in 2009 the quality of Russian banks’
loan portfolios will continue to deteriorate. The acceleration loan impairment losses will have an extremely
negative effect on profitability and, more importantly, on capital adequacy ratios. During the fourth quarter
of 2008, the negative effect from the increase in past-due debt was largely compensated for by profits
from the revaluation of banks’ net currency position (due to ruble devaluation). However, this was a one-
off event. In 2009, many financial institutions will be required to recapitalize, whether through taking on
subordinated loans, or by issuing preferred and common shares. These capital injections will be financed
primarily by the government and by existing private shareholders of the affected banks.
• Active efforts aimed at strengthening the deposit base. Most wholesale capital markets will likely
remain inaccessible for the majority of Russian banks in 2009. As a result, deposits will be a key source for
bank funding, along with re-financing instruments from the CBR. Russian banks have the possibility to
improve their deposit-to-loans ratio, which stood at 54% at the beginning of 2009.
• Intensive consolidation. We expect that 2009 will see numerous acquisitions in the Russian banking
system: large institutions will actively acquire smaller competitors (which have become cheaper). Some
mergers are possible as well, but the number of mergers will be minimal. The government actively supports
these processes, because it believes that they will help maintain economic and social stability in Russia.
To accelerate these processes, in December 2008, the Russian President signed amendments abolishing
provisions under which all depositors and creditors of a bank had a put option on any liabilities in the event
of structural reorganizations, such as a merger or takeover. The newly signed version of the legislation
grants creditors these rights only in situations in which they are explicitly spelled out in a contract with
the bank.
17
Russian Federation total banking assets, bln USD Deposit/Loans ratio, %
900 100
800 90
80
700
70
600
60
500
50
400
40
300
30
200 20
100 10
0 0
2005 2006 2007 2008 2009 F 2005 2006 2007 2008 2009 F
Source: Data from the Central Bank of Russia and Source: Data from the Central Bank of Russia and
MDM Bank estimates MDM Bank estimates
Russian banks’ total capital adequacy ratio, %
18
16
14
12
10
8
6
4
2
0
2005 2006 2007 2008 2009 F
Source: Data from the Central Bank of Russia and
MDM Bank estimates
MDM Bank applies a bespoke
approach to clients depending
on their needs.
Alcoholic beverages and food
manufacturer OJSC Synergy
MDM Bank Corporate & Investment
Banking client
Vladislav Bazehnov, deputy operations
director of OJSC Synergy
19
Planned Merger of MDM Bank
and URSA Bank
On 3 December 2008, the major shareholders of MDM Bank and URSA Bank announced their intention to
merge the two banks. The new organization will be created based on the legal entity and general banking
license of URSA Bank, but will operate under the brand name of MDM Bank. The planned transaction has
received broad-based support from shareholders, the Central Bank of Russia and the Russian government, as
well as by investors and analysts.
Following the merger, the Bank will have equity of approximately RUR 60 bln and assets of around RUR 500 bln
(based on MDM Bank and URSA Bank Russian Accounting Standards reporting for year-end2008), will become
one of Russia’s leading universal financial institutions and will have significant competitive advantages.
The merged bank will realize considerable advantages from integrating its commercial and financial activities.
At the same time, it will also posses a large and diversified liability base, relying on an extensive regional branch
network with approximately 500 points of sale across Russia.
The strategic rationale for the merger between MDM Bank and URSA Bank is as follows:
• The creation of one of Russia’s largest private banks. The newly merged bank will be one of the five
largest Russian banks and will also be among the top ten competitors for key banking products.
• Complementary structures of business and client bases. The considerable achievements of MDM Bank
in corporate and investment banking will be combined with the successful experience of URSA Bank in
serving retail clients and small- and medium-sized enterprises. Diversifying the product line and business
process will enable the merged bank to strengthen its position in both the retail and corporate sectors.
• Complementary regional presence. MDM Bank has a broad retail network throughout Central and
Western Russia. The home regions of URSA Bank are Siberia, the Urals and the Russian Far East. As a result,
the merged bank will be widely represented in all key Russian regions.
• High corporate governance standards. MDM Bank adheres to best practice corporate governance and acts
on the basis of informational transparency. These guiding principles will also be practiced in the merged
bank.
• Better access to funding. The merged bank will enjoy significant advantages in areas such as attracting retail
deposits. It will be able to more actively and effectively attract deposits due to both its broad geographical
coverage and its reputation as a strong and stable bank. In the current economic situation, retail deposits
have become an increasingly important source of funding; over time, however, debt financing costs will also
come down as the market re-opens.
• Cost and revenue synergies. The merged bank will maintain and strengthen its position in the market
through centralization and optimization of operations, including switching to a unified IT-platform,
decreasing personnel costs, implementing best practices, elimination of duplicate structures, increased
commission revenues from corporate clients through an improved product line and information sharing on
best products in these areas.
20 MDM Bank Annual report 2008
According to the Bank’s business plan, the synergy effect from the merger (measured in monetary terms)
will range from RUR 4.6 bln to RUR 7.3 bln between 2009 and 2011. Approximately 70% of this benefit will
be obtained through cost synergies (including the integration of business processes, network optimization,
personnel cost optimization through increased labor productivity, as well as decreased advertising expenses
because of a strengthened, unified brand), while the other benefits will be obtained through revenue synergies
(RUR 0.6 –1.3 bln) and financial synergies (RUR 0.3 bln). The Bank estimates that the synergetic effect in
2009 will total RUR 0.3 bln.
In 2010 –2011, the merged bank intends to significantly broaden its retail network by opening 400 new
branch banks.
21
Regional Expansion
and the Branch Network
An effective branch network is a key factor for attracting both retail and corporate clients, and it is therefore
integral to the implementation of MDM Bank’s development strategy. The Bank’s branches offer the up-to-date
banking services to a broad spectrum of customers throughout Russia, including large corporations, small- and
medium-sized enterprises, entrepreneurs and individual consumers.
During the reported period, MDM Bank successfully opened 63 new facilities in its branch network. New offices
began working in Moscow, Achinsk, Volgograd, Ekaterinburg, Nevinnomysk, Novosibirsk, Omsk, Rostov-on-
Don, Samara, St. Petersburg, Tuapse, Tyumen and Chita. In total, MDM Bank’s regional Russian network now
has 199 offices.
In 2009, MDM Bank will continue to develop its regional business, and its branch network will play
an increasingly important role in the Bank’s activity. This focus on the local branches and regional business will
allow the Bank to build a close relationship with its clients and offer the full spectrum of high quality services
to its clients.
In 2008, the Bank implemented a matrix structure for network management, according to which control
over MDM’s administrative functions is carried out at the regional level. On a functional level, employees in
the regional networks are fully accountable to the management of the respective business units at the Head
Office.
To improve the work of the Bank’s branch network, to optimize the system of its administrative management
and to centralize the activities of the Bank’s middle and back office, the Bank created three regional centers at
the beginning of 2009. These three regional centers unified the Bank’s work across the whole country.
Regional center directors report to the Network Management unit, which is in turn overseen by head of
the Network Management unit. Within the regions in which they operate, the directors of the regional centers
are charged with responsibility for fulfilling the Bank’s strategic goals. Gradually, MDM’s head office is
transferring business development powers to the local level.
MDM Bank branches, working within regional centers, bear responsibility for their own managerial decisions
in the regions and for providing the Bank’s products and services to clients. Budgeting and operational
management is mainly performed according to the “bottom-up” principle along the management chain.
The Bank uses the same principles in respect to support functions (such as human resources, legal support,
internal audit, corporate communications, etc.) At the same time, the system of branch network management
is based on fostering strong partnerships between functional and regional managers.
22 MDM Bank Annual report 2008
Expanding banking services
for small businesses
is a strategic priority
for MDM Bank.
MDM Bank Small Business Lending
Department client
Mikhail Nepryntsev
Children’s goods retailer
23
Distribution of responsibility within the regional network
Central office Regional center Branch Outlet
• General management • Supervision and • Supervision and control • Sales of services to
and control administrative control over outlet sales small- enterprises and
• Strategic planning, risk • Coordination of business • Middle office individuals
assessment, asset and • HR department at • Sales of services to large • Transactions
liability management, regional level, branch companies, small- and
financial reporting and network development medium- enterprises and
methodology and financial reporting individuals
• Centralized back office
and underwriting
• Call-center
The matrix structure allows the Bank to adjust its branch network activities to the specific conditions prevalent in
each individual region. At the same time, this structure allows the Bank to centralize the functions of its middle
and back offices. Most importantly, this paradigm significantly boosts client services and the effectiveness of all
of the Bank’s structures, while simultaneously cutting costs through economies of scale.
24 MDM Bank Annual report 2008
MDM Bank works
with a broad array
of companies from nearly
every sector of the Russian
economy
Media-corporation VGTRK
MDM Bank Corporate & Investment
Banking client
Maria Sittel, “Vesti” news anchor
25
Management Discussion
and Analysis
Consolidated Performance
The main factors that influenced MDM Bank’s performance in 2008 were:
• The development of the global economic crisis
• The strategic decision by the Bank protect clients and depositors by placing stability and liquidity ahead of
profitability during the time of crisis.
• Increased net interest margin, and increased net interest income
• Increased income from financial operations: early redemption of debt, trading in precious metals
• Securities losses and decreased foreign exchange income
• Impact of early cost optimization measures
• Decreasing asset quality and high coverage ratio of NPLs by loan loss provisions
The Bank’s consolidated net profit for 2008 totaled RUR 3,304 mln (USD 133 mln), a decrease of 40.1% from
the RUR 5,516 mln (USD 216 mln) reported in 2007. Return on average equity was also lower in 2008, at 8.2%
versus 16.6% (excluding a one-off capital gain from sale of premises) for MDM Bank in 2007. The decrease in
net profit and return on average equity (ROAE) is due to substantial deterioration of the economic environment
in the world and in Russia.
A list of metrics reflecting the Bank’s principal strategic objectives determined at the beginning of 2008 is
presented below. The list of indicators reflects, directly and indirectly, the following objectives, which will
facilitate maximum growth of the Bank’s business value if achieved in a balanced way:
• effective use of capital, financial stability and high quality of revenues
• high level of customer service
• productive, competent and loyal staff
• efficient internal processes
26 MDM Bank Annual report 2008
Primary performance indicators
Change Change
RUR mln or % 2008 2007 2007/2008 2006 2006/2007
Revenues 21,832 17,832 22.4% 13,047 36.7%
Net profit 3,304 5,516 (40.1)% 3,320 66.1%
Net interest margin 5.7% 5.2% 0.5 pp 6.1% (0.9) pp
Cost of risk (Provision expense /
Average risk-weighted assets) 3.2% 0.9% 2.3 pp 1.0% (0.1) pp
ROAE 8.2% 17.8% (9.6) pp 13.0% 4.8 pp
ROAA 1.0% 1.9% (0.9) pp 1.8% 0.1 pp
Cost / income 42.9% 48.3% (5.4) pp 51.5% (3.2) pp
Total Assets/Employee 50 56 (6) 55 1
Cost of risk (provisioning expense on
loans to average loans for the year) 3.2% 1.1% 2.1 pp 1.5% (0.4) pp
NPLs to total portfolio (Non-
performing loans / Gross loans) 4.2% 2.0% 2.2 pp 1.3% 0.7 pp
Coverage of NPLs (Provisions / NPLs) 139.3% 163.7% (24.4) pp 197.6% (33.9) pp
Tier I 16.0% 14.5% 1.5 pp 10.9% 3.6 pp
Total Capital ratio 17.9% 17.2% 0.7 pp 13.7% 3.5 pp
Deposits (excluding volatile customer
accounts at Latvian Trade Bank) /
Loans 47.5% 51.7% (4.2) pp 47.1% 4.6 pp
Employees (end of period) 6,563 5,775 788 4,421 1,354
Network (branches, additional offices
and operating offices). 199 164 35 123 41
27
Secondary performance indicators
Change Change
RUR mln or % 2008 2007 2007/2008 2006 2006/2007
ROAE before investments (excluding one-
off items) 9.1% 16.0% (6.9) pp 12.9% 3.1 pp
Operating expenses (before investments)
/ Revenue before result from trading in
securities 39.3% 48.2% (8.9) pp 52.9% 4.7 pp
Operating expenses (before investments)
/ Revenue before result from FX 42.5% 51.2% (8.7) pp 56.1% (4.9) pp
Share of net fees and commissions in
revenue before result from trading in
securities 10.0% 13.4% (3.4) pp 10.3% 3.1 pp
Share of net fees and commissions in
revenue before result from FX 10.8% 14.2% (3.4) pp 10.9% 3.3 pp
Revenue / Average staff (RUR ‘000) 3,486 3,453 33 3,003 450
In 3Q 2008, the Bank’s management and Board of Directors took the decision to focus on shorter-term strategic
goals that would help to ensure MDM Bank’s stability and strength during the crisis. The six tactical goals for
the Bank in 2009 are the following:
Goal Achievements
Increase deposit base by 50% • The Bank has introduced a number of attractive, competitive deposit
products for standard retail clients, high net worth individuals and small
businesses
• Retail term deposits increased 79.9% y-o-y from RUR 14,094 mln on
31 December 2007 to RUR 25,362 mln as of 31 December 2008. This trend
has continued in Q1 2009.
Maintain excess liquidity cushion • As of YE 2008, MDM Bank had USD 1.6 bln in excess liquidity held as
that is adequate for the market cash in overnight accounts. This sum is more than adequate to enable
situation the Bank to meet all international wholesale funding coming due in 2009
(approximately USD 800 mln)
Maintain ROAE of at least 10% • The Bank began taking measures to decrease costs in 3Q 2008, and aims
to reduce operating expenses by 25% y-o-y in 2009.
Increase MDM Bank’s share of profit • MDM Bank’s small business loan portfolio grew by 89.1% from RUR
in strategically important segments 8,214 mln at YE 2007 to RUR 15,529 as of YE 2008
(small and mid-sized companies)
relative to competitors
Maintain international credit • As of YE 2008, MDM Bank had the highest combined ratings from Standard
ratings at levels higher than those & Poor’s, Fitch and Moody’s among privately-owned Russian Banks
of MDM Bank’s leading competitors
Maintain regulatory capital • As of YE 2008, MDM Bank’s regulatory capital adequacy ratio was 14.6%
adequacy ratio (N1) of at least 12% (including post-balance sheet events)
28 MDM Bank Annual report 2008
Review of the Income Statement
Year Ended Year Ended Year Ended
December 31 December 31 December 31
RUR mln 2008 2007 2006
Interest income 32,893 28,345 17,326
Interest expense (15,985) (14,213) (7,269)
Net interest income 16,908 14,132 10,057
Loan impairment losses (6,616) (2,083) (1,741)
Net interest income after loan
impairment losses 10,292 12,049 8,316
(Losses)/gains arising from trading
securities, net (997) 309 457
Gains/(losses) arising from trading in precious
metals, net 504 (22) 50
Gains from foreign exchange, net 914 1,364 1,083
Gains/(losses) from interest-based derivative
financial instruments, net 520 (520) (100)
Gains from early redemption of debt 1,134 – –
Fee and commission income 3,142 2,978 2,022
Fee and commission expense (883) (634) (634)
Other assets impairment losses (518) (3) (2)
Impairment of investment securities held
to maturity (371) – 13
Other provisions (330) – (2)
Other operating income 596 230 125
Operating income 14,003 15,751 11,317
Operating expenses (9,366) (8,622) (6,715)
Result on disposal of premises – 498 (39)
Profit before taxation 4,637 7,627 4,563
Income tax expense (1,333) (2,111) (1,243)
Profit for the year 3,304 5,516 3,320
29
Revenues
The Bank increased its consolidated revenue (excluding the impact of a one-time gain of RUR 498 mln before
tax in 2007) by 22.4% to RUR 21,832 mln (USD 878 mln), primarily due to increases in net interest income and
gains from early redemption of debt.
27,000
24,000
21,832
21,000
17,832
22.4
18,000
13,047
36.7 15,000
12,000
9,000
6,000
3,000
0
2006 2007 2008
RUR mln Change, %
Change Change
2007/2008, 2007/2006,
RUR mln or % 2008 2007 % 2006 %
Interest income
Loans and advances to customers 28,647 23,865 20 14,747 62
Overnight deposits and due from
other banks 2,860 3,098 (8) 1,496 107
Investment securities available
for sale 399 – – – –
Investments securities held to
maturity 66 – – – –
Total interest income on
financial assets not at fair value
through profit and loss 31,972 26,963 19 16,243 66
Trading securities 916 1,361 (33) 792 72
Other financial assets at fair value
through profit and loss 5 21 (76) 291 (93)
Total interest income 32,893 28,345 16 17,326 64
30 MDM Bank Annual report 2008
Change Change
2007/2008, 2007/2006,
RUR mln or % 2008 2008 % 2008 %
Interest expense
Customer accounts (6,628) (4,446) 49 (2,167) 105
Due to other banks (5,758) (4,966) 16 (2,390) 108
Debt securities in issue (3,111) (4,267) –27 (2,483) 72
Subordinated debt (488) (534) –9 (229) 133
Total interest expense (15,985) (14,213) 12 (7,269) 96
Net interest income 16,908 14,132 20 10,057 41
Change Change
Average, % (p.p.) Average, % (p.p.)
2008 2007 2007/2008 2006 2006/2007
Average yield for
Loans 14.0 12.7 1.3 12.0 0.7
Interest-bearing investment
securities 10.8 8.8 2.0 8.3 0.5
loans and other interest-bearing
funds placed in banks 3.6 4.6 (1.0) 4.8 (0.2)
Total interest-bearing assets 11.1 10.5 0.6 10.3 0.2
Average rate paid for
Term deposits 6.6 6.0 0.6 6.4 (0.4)
Other interest-bearing deposits 1.5 0.9 0.6 0.2 0.7
Short-term debt 8.0 8.0 0.0 6.7 1.3
Long-term debt 5.6 5.9 (0.3) 5.2 0.7
Total interest-bearing liabilities 5.5 5.6 (0.1) 4.6 1.0
Net interest income accounted for 77.4% of total revenue, growing by 19.6% during 2008 to RUR 16,908 mln
(USD 680 mln), while net interest margin increased to 5.7%, up from 5.2% in 2007. Two factors contributed to
growth in net interest income in 2008: resumed growth in the corporate loan portfolio in the first two quarters
of 2008 and ongoing repricing in the corporate and small business loan portfolios (discussed below).
31
Net interest margins rose in 2008 despite an increase in interest rates on customer accounts, as increased
borrowing costs corresponded with the overall growth of the gross margin. Relative to 2007, the overall cost of
funds increased by less than asset yields, which resulted in an overall increase of the net interest margin.
Annual data 2008 quarter data
12.4
12 12
11.1
11.1
10.5
10.2
10.3
10 10
8 8
6.5
6.2
6.1
6 6
5.7
5.5
5.6
5.5
5.7
5.3
5.1
4.8
5.2
4 4
2 2
0 0
2007 2008 1Q2008 2Q2008 3Q2008 4Q2008
Yield on Assets, % Yield on Assets, %
Cost of funds, % Cost of funds, %
Net Interest Margin, % Net Interest Margin, %
Net fees and commissions decreased by 3.6% in 2008 to RUR 2,259 mln (USD 91 mln) from
RUR 2,344 mln (USD 92 mln), primarily as a result of a decline in investment banking and brokerage
commissions (2008: RUR 177 mln; 2007: RUR 504 mln), as well as increased commission expenses on
settlement transactions, principally due to the growing number of transactions with debit and credit cards
issued by MDM Bank, in addition to the increased number of transactions with non-MDM Bank cards using
MDM Bank’s acquiring network. Total fee and commission income, however, rose slightly, led by increases in
commissions on settlement and trade finance transactions (2008: RUR 1,834 mln; 2007: RUR 1,417 mln) and
commissions on foreign currency transactions (2008: RUR 545 mln; 2007: RUR 364 mln). As a result, fee and
commission income decreased as a share of net revenues before result from trading in securities to 10% from
13.4% in 2007.
32 MDM Bank Annual report 2008
Change Change
2007/2008, 2006/2007,
RUR mln or % 2008 2007 % 2006 %
Commission on settlement and
trade finance 1,834 1,417 29 1,115 27
Commission on foreign exchange
transactions 545 364 50 344 6
Commission on cash transactions 326 370 (12) 263 41
Commission for business referral 213 275 (23) 79 248
Brokerage and investment banking
commissions 177 504 (65) 211 139
Commission for trust and fiduciary
assets 41 41 – 7 486
Other 6 7 (14) 3 133
Total fee and commission income 3,142 2,978 6 2,022 47
Commission on settlement
transactions (409) (297) 38 (258) 15
Commission on foreign currency
transactions (164) (73) 125 (126) (42)
Commission on cash transactions (133) (185) (28) (73) 153
Commission on banking
transactions (128) – – – –
Other (49) (79) (38) (177) (55)
Total fee and commission
expense (883) (634) 39 (634) –
Net fee and commission income 2,259 2,344 (4) 1,388 69
Net result from trading, including trading in securities, foreign exchange and precious metals, decreased
by 16.8% in 2008 to RUR 941 mln (USD 37.9 mln) from RUR 1,131 mln (USD 44.2 mln) in 2007. The result
was impacted by the turbulence in the capital markets in the first and third quarters, when the Bank recorded
losses from securities trading of RUR 297 mln (USD 12.4 mln) and RUR 575 mln (USD 23.9 mln), respectively,
and a YE 2008 result of RUR (997) mln from trading securities. This was partly offset by net gains from
trading in precious metals (2008: RUR 504 mln; 2007: RUR (22) mln). Additionally, a gain of RUR 1,134 mln
(USD 45.6 mln) from early redemption of debt was recorded in Q4 2008.
33
1,364
1,200
1,083
914
800
457
504
400
309
(997)
0
(22)
50
–400
–800
–1,200
2006 2007 2008
(Losses)/gains arising from trading securities, net, RUR mln
Gains /(losses) arising from trading in precious metals, net, RUR mln
Gains from foreign exchange, net, RUR mln
Operating expenses
Growth in operating expenses in 2008 equaled 8.6%, which compares favorably both to 2007 operating
expenses (28.4%) and the rate of revenue growth in 2008 (22.4%)(2007: 36.7%). This resulted in the overall
cost / income ratio improving from 48.3% to 42.9%. The ratio of operating costs to revenues before trading
results in securities, which is more indicative of efficiency levels, also improved, from 48.2% the previous year
to 39.3% in 2008.
Staff costs, representing 60.6% in 2008 of the Bank’s overall operating cost base, declined by 1.3% to
RUR 5,673 mln (USD 228 mln), despite new staff hires and network expansion (number of personnel increased
by 788 and the Bank increased the number of outlets by 35 in 2008). This was primarily due to cost-saving
efforts undertaken beginning in Q3 2008 and continuing through the end of the year. Average cost per employee
decreased by 18.6% to RUR 905.7 thsd (USD 36.4 thsd) per year, while staff productivity, as evidenced by
revenue per staff, rose by 6.4%, from RUR 3,393 thsd (USD 132.7 thsd) to RUR 3,611 thsd (USD 145.3 thsd).
34 MDM Bank Annual report 2008
3,611
3600
3,393
2,921
3200
2800
2400
2000
1600
1,113
1,052
1200
906
800
400
0
2006 2007 2008
Staff costs per average staff, RUR thsd
Revenue before result from trading in securities per average staff, RUR thsd
Non-staff operating costs grew by 28.4% to RUR 3,693 mln (USD 148.6 mln), a slower pace than in
the previous two years. Over 95% of the increase in non-staff expenses was attributed to depreciation, rent and
other expenses related to property, plant and equipment, which grew in 2008 by RUR 818 mln, an increase of
69%, on branch expansion (all new outlets opened by the Bank are being rented) and increasing rental rates in
the first half of the year. Details of non-staff costs are presented in the table below.
Change Change
2007/2008, 2006/2007,
RUR mln or % 2008 2007 % 2006 %
Depreciation, rent and other
expenses related to property,
plant and equipment 1,999 1,181 69 737 60
Professional services 505 416 21 377 10
Taxes other than on income 439 485 (9) 389 25
Advertising and marketing 238 365 (35) 244 50
Security 197 164 20 157 4
Telecommunications 152 102 49 81 26
Software 130 134 (3) 106 26
Other 33 29 14 52 (44)
Total non-staff operating costs 3,693 2,876 28 2,143 34
35
Provisions and asset quality
In 2008, the Bank maintained its conservative provisioning policy across all asset classes. During the third and
fourth quarters of 2008, the effects of the global economic crisis began to have an increasing impact on credit
quality in the Russian Federation, leaving Russian corporations dependent on refinancing in a challenging
position, and precipitating a decline in asset quality throughout the banking sector.
The Bank’s total provisioning expense, including provision for losses on credit related commitments, was RUR
6,616 mln in 2008 (USD 266.2 mln), up 217.6% from RUR 2,083 mln (USD 81.4 mln) in 2007. Cost of risk, or
the provisioning expense over average risk exposure, increased compared to 2007 levels for the overall loan
portfolio, as well as in the corporate, small business and loans to individuals portfolios.
Cost of risk, %
9
8,2
7,5
6,5
6
5,9
4,5
3,7
3,2
3
3,0
2,2
1,5
1,5
1,4
1,1
0,5
0,3
0
2006 2007 2008
Corporate
Consumer
Small Business
Total
As a result of provisioning, non-performing loans* (NPLs) were comfortably covered by provisions at the end
|*| Non-performing loans are of 2008 across all portfolio segments, with total coverage at 139.3%, despite a significant increase in NPL levels.
defined as loans with princi-
pal and/or interest overdue Going forward, MDM Bank will continue to maintain adequate loan loss provisions in line with the market
by more than 90 days and situation.
other loans classified as non-
performing by management.
A loan is usually classified as
non-performing by manage-
ment if it is not probable that
it will be recovered through
means other than reposses-
sion and subsequent realiza-
tion of collateral.
36 MDM Bank Annual report 2008
Non-performing loans more than doubled in 2008 from 2.0% of gross loans at YE 2007 to 4.2% of gross loans
at YE 2008 (from RUR 3,784 mln to RUR 8,763 mln). This increase was driven primarily by worsening asset
quality in the corporate loan portfolio: NPLs in this portfolio increased from 0.8% to 3.5% of loans to corporate
customers during 2008 (RUR 1,014 mln to RUR 4,756 mln).
Coverage of NPLs, % NPLs (as % of gross loans), %
360 6
6.0
5.9
309.2
300 5
4.8
245.8
240
4.2
4
223.3
3.7
197.6
3.5
199.6
176.0
180 3
163.7
153.3
2.8
137.6
139.3
112.5
117.2
120 2
2.0
1.3
60 1
1.0
0.9
0.8
0 0
2006 2007 2008 2006 2007 2008
Corporate Corporate
Retail Retail
Small Business Small Business
Total Total
Taxation
Tax expense in 2008 amounted to RUR 1,333 mln (USD 53.6 mln), down 36.9% from 2007. The effective tax
rate in 2008 stood at 28.7% (2007: 27.7%; 2006: 27.2%), mainly due to non-deductible losses on securities.
Segments
MDM Bank reported three main reportable operating segments in 2008: Corporate and Investment Banking,
Retail Banking and Central Treasury.
37
Corporate and Investment Banking
Change Change
2007/2008, 2005/2007,
RUR mln or % 2008 2007 % 2006 %
External interest income 24,222 21,859 10.8 13,745 59.0
External interest expense (9,472) (7,311) 29.6 (4,117) 77.6
Internal funding charge (4,208) (5,564) (24.4) (3,526) 57.8
Allowance for capital benefit 1,937 1,811 7.0 1,398 29.5
Net interest income 12,479 10,795 15.6 7,500 43.9
Fee and commission income 1,805 1,831 (1.4) 1,312 39.6
Fee and commission expense (445) (401) 11.0 (459) (12.6)
Trading, other financial assets at
fair value through profit or loss and
foreign exchange results 820 981 (16.4) 1,315 (25.4)
Other operating income 163 175 (6.9) 67 161.2
Total operating income
before impairment losses and
provisions 14,822 13,381 10.8 9,735 37.5
Direct operating expenses (1,739) (2,450) (29.0) (2,363) 3.7
Impairment losses and provisions (5,418) (514) 954.1 (469) 9.6
Reversal of accounting impairment
losses and provisions 5,418 514 954.1 469 9.6
Risk charges (3,911) (811) 382.2 (567) 43.0
Segment result before central
overhead 9,172 10,120 (9.4) 6,805 48.7
Allocation of central overheads (1,387) (940) 47.6 (1,817) (48.1)
Profit before taxation 7,785 9,180 –15.2 4,988 84.0
38 MDM Bank Annual report 2008
Corporate and Investment Banking (CIB) includes deposit taking and lending to corporate clients, leasing,
factoring, settlements, cash management, cash collection, trade finance, syndications, a forfait financing,
export credit agency financing, corporate finance, debt and equity capital markets, money markets, trading
and brokerage in securities, foreign exchange and precious metals, repo transactions, banknote trading, and
trading in derivatives.
Net income before taxes and allocation of central overheads decreased by 9.4% in 2008 to RUR 9,172 mln
(USD 369 mln) from RUR 10,120 mln (USD 395.7 mln) in 2007. At the same time, net interest income rose
15.6% from RUR 10,795 mln (USD 422 mln) to RUR 12,479 mln (USD 502.1 mln) in 2008, primarily due to
rate repricing on the corporate loan portfolio: the weighted average interest rate for RUR loans to corporate
clients increased from 13.9% in 2007 to 17.0% in 2008. The decrease in income before taxation first of all
was due to provision growth in the corporate loan portfolio. The result was also affected by a 29.2% decrease
in direct operating expenses, from RUR 2,450 mln (USD 95.8 mln) in 2007 to RUR 1,739 mln (USD 70 mln)
in 2008, which was primarily due to cost and staff optimizations in line with market developments and
the Bank’s business focus in the third and fourth quarters.
December 31 Average Balance
RUR mln 2008 2007 2006 2008 2007 2006
Total loans, net 142,523 138,024 137,331 121,680 148,411 114,061
Total earning assets 180,756 198,164 187,231 184,148 200,498 172,567
Total assets 210,205 204,833 191,337 236,283 216,956 164,721
Total deposits 94,558 101,775 71,495 116,792 94,204 64,495
39
Retail Banking
Change Change
2007/2008, 2006/2007,
RUR mln or % 2008 2007 % 2006 %
External interest income 7,863 5,467 43.8 2,994 82.6
External interest expense (664) (312) 112.8 (235) 32.8
Internal funding charge (3,848) (2,491) 54.5 (1,315) 89.4
Allowance for capital benefit 444 316 40.5 181 74.6
Net interest income 3,795 2,980 27.3 1,625 83.4
Fee and commission income 1,337 1,141 17.2 552 106.7
Fee and commission expense (353) (225) 56.9 (170) 32.4
Trading, other financial assets at
fair value through profit or loss and
foreign exchange results (41) 72 (156.9) 73 (1.4)
Other operating income 13 8 62.5 7 14.3
Total operating income
before impairment losses and
provisions 4,751 3,976 19.5 2,087 90.5
Direct operating expenses (1,629) (1,447) 12.6 (865) 67.3
Impairment losses and provisions (1,726) (1,564) 10.4 (1,164) 34.4
Reversal of accounting impairment
losses and provisions 1,726 1,564 10.4 1,164 34.4
Risk charges (670) 367 (282.6) 239 53.6
Segment result before central
overhead 2,452 2,162 13.4 1,686 28.2
Allocation of central overheads (2,326) (1,785) 30.3 (1,264) 41.2
Profit before taxation 126 377 (66.6) 180 109.4
40 MDM Bank Annual report 2008
Retail banking includes deposit taking and lending to individuals, small and medium enterprises and individual
entrepreneurs, money transfer and foreign exchange services, a range of banking card products provided to
individual customers, as well as settlements, cash management, and cash collection for small and medium
enterprises.
Net income before taxes and allocation of central overheads increased 13.4% in 2008 to RUR 2,452 mln
(USD 98.7 mln) from RUR 2,162 mln (USD 84.5 mln) in 2007. The increase was due both to net interest
income, which rose 27.3% from RUR 2,980 mln (USD 116.5 mln) to RUR 3,795 mln (USD 152.7 mln) in 2008,
and a 7.4% increase in fee and commission income to RUR 984 mln (USD 39.6 mln) in 2008 from RUR 916 mln
(USD 35.8 mln) in 2007. Net interest income rose both as a result of an increase in the size and margins in
the small business loan portfolio, as well as growth of the retail portfolio. The small business and retail loan
portfolios increased in size by RUR 7,315 mln (USD 249 mln) and RUR 3,611 mln (USD 122.9 mln) respectively,
with small business loans totaling RUR 15,529 mln (USD 528.5 mln) and retail loans totaling RUR 40,460 mln
(USD 1,377.1 mln) at YE 2008. Weighted average interest rates on RUR loans to small businesses rose from
15.5% in 2007 to 18.6% in 2008. Direct operating expenses for retail banking increased by 12.6% from
RUR 1,447 mln (USD 58.2 mln) in 2007 to RUR 1,629 mln (USD 63.7 mln) in 2008, on the back of significant
network expansion during the year. At the same time, the Bank optimized costs for existing offices and staff, as
indicated by operating costs per point of sale (2008: RUR 8.19 mln; 2007: RUR 8.82 mln)
December 31 Average Balance
RUR mln 2008 2007 2006 2008 2007 2006
Total loans, net 52,284 42,287 29,544 48,566 37,484 25,764
Total earning assets 52,284 42,287 33,874 48,566 37,484 25,764
Total assets 53,776 42,825 31,412 49,279 38,343 31,191
Total deposits 20,514 14,669 10,808 17,142 11,585 13,623
41
Central Treasury
Change Change
2007/2008, 2006/2007,
RUR mln ro % 2008 2007 % 2006 %
External interest income 808 1,019 (20.7) 242 321.1
External interest expense (5,608) (6,000) (6.5) (2,888) 107.8
Internal funding charge 4,794 5,419 (11.5) 3,067 76.7
Allowance for capital benefit 108 38 184.2 12 216.7
Net interest income 102 476 (78.6) 433 9.9
Fee and commission income – 6 (100.0) – –
Fee and commission expense (83) (8) 937.5 (3) 166.7
Trading, other financial assets at
fair value through profit or loss and
foreign exchange results 1,365 80 1,606.3 – –
Other operating income 2 11 (81.8) 5 120.0
Total operating income before
impairment losses and provisions 1,386 565 145.3 435 29.9
Direct operating expenses (45) (73) (38.4) (34) 114.7
Direct operating expenses 1,341 492 172.6 401 22.7
Allocation of central overheads (2) (1) 100.0 (7) (85.7)
Profit before taxation 1,339 491 172.7 394 24.6
Central Treasury includes treasury, which undertakes the Bank’s funding and centralized risk management
activities through borrowings, issue of debt securities, use of derivatives for risk management and investing in
liquid assets such as short-term placements.
The segment result before taxation and allocation of central overheads increased 172.6% to RUR 1,341 mln
(USD 54 mln) in 2008 vs. RUR 492 mln (USD 19.2 mln) in 2007. The primary driver of this result was a gain
from the repurchase of MDM Bank’s own debt securities (RUR 1,134 mln; USD 45.6 mln). External interest
income, which primarily represents earnings from the Bank’s placement of its excess liquidity, declined by
42 MDM Bank Annual report 2008
20.7% from RUR 1,019 mln (USD 39.8 mln) in 2007 to RUR 808 mln (USD 32.5 mln) in 2008 as a result of
lower volumes on excess liquidity that were held during the year.
December 31 Average Balance
RUR mln 2008 2007 2006 2008 2007 2006
Total loans, net – – – – – –
Total earning assets 2,940 7,046 7,960 3,232 26,476 5,459
Total assets 56,401 66,985 19,176 36,698 41,554 15,403
Total liabilities 106,675 83,896 62,442 83,375 80,447 n/a*
Balance Sheet Review
December 31 December 31 December 31
RUR mln 2008 2007 2006
Assets
Cash and cash equivalents 77,271 83,434 32,642
Mandatory cash balances with central banks 1,942 5,538 4,030
Due from other banks 31,651 27,834 13,201
Trading securities:
– owned by the Group 194 10,875 13,510
– pledged under sale and repurchase agreements – 2,987 3,624
Derivative financial instruments 3,083 260 255
Available-for-sale financial assets:
– owned by the Group 8,676 290 –
– pledged under sale and repurchase agreements 379 – –
Investment securities held to maturity 108 – –
Loans and advances to customers 194,806 180,311 166,875
Property, plant and equipment and intangible
assets 6,832 5,956 4,443
Other assets 4,175 3,997 4,542
|*| Due to changes in the sector
reporting beetween 2006
Total assets 329,117 321,482 243,122 and 2007
43
December 31 December 31 December 31
2008 2007 2006
Liabilities
Due to central bank 35,575 846 1,526
Due to other banks 97,375 101,516 59,346
Derivative financial instruments 2,372 874 667
Customer accounts 115,071 124,132 92,805
Debt securities in issue 28,700 46,631 52,870
Subordinated debt 5,966 5,066 5,452
Deferred tax liability 980 770 652
Other liabilities 2,004 2,749 2,480
Total liabilities 288,043 282,584 215,798
Equity
Share capital 1,794 1,794 1,736
Share premium 14,198 14,198 9,588
Revaluation of premises 3,143 2,986 1,942
Revaluation of available-for-sale financial assets (1,566) 21 –
Cumulative translation reserve 326 24 (21)
Retained earnings 23,179 19,875 14,079
Total equity 41,074 38,898 27,324
Total liabilities and equity 329,117 321,482 243,122
The Bank’s total assets increased by 2.4% to RUR 329,117 mln (USD 11,202 mln) in 2008, following 32.2%
growth in 2007. The balance sheet grew only during the second quarter of 2008, as the Bank focused primarily
on liquidity, and in 4Q 2008 accelerated efforts to reduce exposure to riskier sectors of the economy and
temporarily significantly reduced new corporate lending pending analysis of the sectors to which the Bank
would seek to lend going forward.
44 MDM Bank Annual report 2008
Total assets, RUR mln
352,384
333,858
360,000
329,117
305,546
300,000
240,000
180,000
120,000
60,000
0
Q1 2008 Q2 2008 Q3 2008 Q4 2008
December 31 Average
RUR mln 2008 2007 2006 2008 2007 2006
Interest-earning assets
Loans 194,806 180,311 166,875 204,168 187,565 123,346
Interest-bearing investment
securities 8,335 12,065 16,360 12,835 15,789 12,969
Loans and other interest-
bearing funds placed in banks 70,746 94,653 38,677 80,368 67,106 31,137
Total assets 329,117 321,482 243,122 328,477 290,019 182,181
Interest-bearing liabilities
Term deposits 78,413 87,852 54,461 89,860 68,391 32,703
Other interest-bearing
deposits 36,658 36,280 38,344 45,148 40,182 38,429
Debt securities in issue and
other obligations 34,666 51,697 58,322 44,715 60,028 38,978
Interbank lending 132,950 102,362 60,872 103,001 84,973 45,945
Total liabilities 288,043 282,584 215,798 288,103 257,848 147,179
Liquidity
Starting from 3Q 2007, the Bank moved to bolster its liquidity position to a level that would be adequate in
response to the unprecedented deterioration in global credit markets. This was achieved mainly through active
management of the corporate loan portfolio. As a result of these efforts, a sizeable excess liquidity cushion was
built up, and a substantial positive liquidity gap was achieved for maturity of up to 12 months, by the end of
2007, and was maintained throughout 2008.
45
The Bank plans to maintain its conservative stance on liquidity, at the expense of profitability and growth,
until economic stability returns and more visibility on international borrowing is achieved. For a more detailed
discussion of liquidity risk management, please refer to note 28 of the Financial Statements.
Lending
The Bank’s overall gross loan portfolio reached RUR 207,009 mln (USD 7,045.8 mln) at the end of 2008,
up 8.0% over the previous year. Gross loans to corporate customers and loan to individuals grew by 13.3%
and 9.8% respectively, while small business loans, a strategic priority for the Bank, grew significantly faster,
increasing 89.1% during 2008. Loans to corporate customers amounted to RUR 137,800 mln (USD 4,690 mln)
and continue to make up the majority of the portfolio, representing 66.6% of gross loans (2007: 65.2%),
while the faster-growing small business portfolio (RUR 15,529 mln; USD 528.5 mln) made up 7.5% of gross
loans, up from 4.4% at YE2007. The remainder is represented by retail lending amounting to RUR 40,460 mln
(USD 1,377 mln), which accounts for 19.5% of gross loans.
Gross Loans, RUR mln
230,008
240 000
207,428
207,009
186,505
189,889
200 000
157,770
137,800
141,056
160 000
125,678
121,585
120 000
80 000
40,460
41,277
38,895
36,849
37,991
40 000
15,529
14,107
10,795
8,214
8,951
0
2007 Q1 2008 1H 2008 Q3 2008 YE 2008
Corporate
Retail
Small Business
Total
The overall composition of the loan portfolio is shown in the table below.
Change Change
RUR mln or % 2008 2007 2007/2008, % 2006 2006-2007, %
Commercial loans 137,800 121,585 13.3 113,330 7.3
Small business loans 15,529 8,214 89.1 4,416 86.0
Net investment in finance lease 2,860 3,727 –23.3 2,095 77.9
Retail loans 40,460 36,849 9.8 28,001 31.6
Investment banking loans 10,360 16,130 –35.8 23,532 –31.5
Total gross loans 207,009 186,505 11.0 171,374 8.8
Credit-related commitments (off-BS) 51,775 62,035 –16.5 41,805 48.4
46 MDM Bank Annual report 2008
The Bank has continued to make progress on increasing the granularity and diversification of its corporate loan
portfolio. Total exposures to the top 20 corporate borrowers represented 17.0% of the total portfolio (including
off-balance sheet and excluding reverse repurchase agreements and margin loans), down from 18.9% in 2007
and 23.7% in 2006.
Significant efforts have been made to preserve industry diversification in the Bank’s loan portfolio. The Bank’s
largest industry exposures at YE 2008 were to Trade, Individuals, Real Estate Management, Manufacturing and
Wholesale Trade. Construction is no longer among the top 5 industries, and exposure to this sector dropped by
35.3% from RUR 22,247 mln (USD 906.3 mln, 12% of gross loans) in 2007 to RUR 14,397 mln (USD 490 mln,
7% of gross loans) in 2008. Since 2006, the Bank’s exposure to the construction sector has fallen both in terms
of its share of the loan portfolio (2008: 7%; 2007: 12%; 2006: 14%) and in absolute terms (2008: RUR 14,397
mln; 2007: RUR 22,247 mln; 2006: RUR 24,381 mln).
The following charts show risk concentrations by economic sector within the customer loan portfolio (excluding
margin loans, reverse repos and other loans of an investment nature).
2006 2007
17%
14% 13%
14% 10%
Retail trade Retail trade
Wholesale trade 9% Wholesale trade
12%
7% Individuals Individuals
Manufacturing Manufacturing
16%
Real Estate 10%
Real Estate
20%
17% Finance Finance
8%
Construction Construction
13%
11% 9%
Other Other
2008
16%
17%
Retail trade
7% Wholesale trade
11%
Individuals
5%
Manufacturing
Real Estate
13% Finance
19%
Construction
12%
Other
The following table shows loan loss provisions for each of the major sectors listed above.
47
Loan Loss Provisions Allocated
2008
Provisions as %
Sector (UPDATE) Amount of Provisions, RUR mln. of gross loans to sector
Retail trade 1,998 5.6
Wholesale trade 2,480 11.2
Individuals 2,859 7.1
Manufacturing 1,569 6.1
Real Estate 727 2.7
Finance 223 1.9
Construction 1,006 7.0
Other 1,341 4.4
Total 12,203 5.9
Loan Currency Breakdown
Change Change
2008/2007, 2007/2006,
RUR mln or % 2008 2007 % 2006 %
Corporate Loans 137,800 121,585 13.3 113,330 7.3
RUR 54,636 59,261 (8) 56,371 5
Currency 83,164 62,324 33 56,959 9
Small Business Loans 15,529 8,214 89.1 4,416 86.0
RUR 15,141 6,738 125 3,531 91
Currency 388 1,476 (74) 885 67
Retail loans 40,460 36,849 9.8 28,001 31.6
RUR 32,114 31,042 3 21,626 44
Currency 8,346 5,807 44 6,375 (9)
The share of foreign exchange loans increased during 2008, primarily due to increasing USD and EUR exchange
rates against the RUR (20% and 15% respectively).
For a more detailed examination of asset quality and provisioning, please refer to Provisions and Asset Quality
section of the Income Statement Review above, and to note 11 of the Financial Statements.
48 MDM Bank Annual report 2008
Securities
The Bank’s exposure to trading securities decreased in 2007 by 98.2% to RUR 194 mln (USD 6.6 mln).
The small amount of securities remaining in the Bank’s portfolio is made up entirely of corporate shares, which
decreased by 87.0% from RUR 1,488 mln in 2007. At the same time, in 3Q 2008, following the introduction of
amendments to IAS 39 and IFRS 7, the Bank reclassified certain debt trading securities to Available For Sale
(RUR 10,009 mln; USD 396.5 mln), Held To Maturity (RUR 1,184 mln; USD 46.9 mln) and loans and advances
to customers (RUR 3,924 mln; USD 155.4 mln). An examination of the impact of these reclassifications can be
found in the audited financial statements 119 of this annual report.
2008 2007 2006
% of % of Change % of Change
share- share- 2008/ share- 2007/
holders' holders' 2007, holders' 2006,
RUR mln or % equity equity % equity %
Fixed income portfolio
– government and municipal
bonds – – 332 0.9 – 1 498 5.5 (77.8)
Due in one year or less – – – – – 1 – –
Over 1 year through 5 years – – 82 0.2 – 288 1.1 (71.5)
Over 5 years through 10 years – – – 0.6 – 506 1.9 –
Over 10 years – – 250 0.6 – 703 2.6 (64.4)
– corporate bonds and
promissory notes 8,335 20.3 11,507 29.6 (27.6) 13,458 49.3 (14.5)
Due in one year or less 5,683 13.8 434 1.1 1,209.4 2,146 7.9 (79.8)
Over 1 year through 5 years 2,544 6.2 10,278 26.4 (75.3) 10,951 40.1 (6.1)
Over 5 years through 10 years 108 0.3 544 1.4 (80.1 346 1.3 57.2
Over 10 years – – 251 0.6 (100.0) 15 0.1 15.7
Total fixed income: 8,335 20.3 11,839 30.4 (29.6 14,956 54.7 (20.8)
Due in one year or less 5,683 13.8 434 1.1 1,210.5 2,147 7.9 (79.8)
Over 1 year through 5 years 2,544 6.2 10,360 26.6 (75.4) 11,239 41.1 (7.8)
Over 5 years through 10 years 108 0.3 544 1.4 (89.7) 852 3.1 22.6
Over 10 years – – 501 1.3 – 718 2.6 (30.2)
VAR (10 days, 99%
confidence) 1,370 3.3 326 0.8 320.2 159 0.6 105.0
Equities
– long positions 1,022 2.5 2,313 5.9 (55.8) 2,178 8.0 6.2
– short positions – – – – – 229 0.8 –
VAR (10 days, 99%
confidence) 131 0.3 411 1.1 (68.1) 497 1.8 (17.3)
49
Customer accounts
Customer accounts at the end of 2008 totaled RUR 115,071 mln (USD 3,916 mln), down by 7.3% from RUR
124,132 mln (USD 5,057 mln) in 2007. The overall decline was driven by a 38% decrease in corporate term
deposits from RUR 68,426 (USD 2,787.6 mln) at YE 2007 to RUR 42,451 mln (USD 1,444.9 mln) at YE 2008,
which made up 36.9% of overall customer accounts as of YE 2008. A more accurate measure of customer
accounts, however, can be made by excluding volatile customer accounts MDM Bank’s 100%-owned subsidiary
Latvian Trade Bank (LTB), which management does not consider for liquidity management purposes due to
the short-term and volatile nature of deposits in this bank. Excluding LTB, customer accounts were stable in
2008, increasing from RUR 96,470 mln (USD 3,930.1 mln) at YE 2007 to RUR 98,347 mln (USD 3,347.4 mln) at
YE 2008. Retail term deposits (including deposits from private banking customers) also grew by 79.9%, reaching
RUR 25,362 mln (USD 863.2 mln) at 31 December 2008. In line with the Bank’s strategy to develop its retail
business and diversify its funding and asset bases, retail deposits now account for 22.0% of customer accounts, vs.
11.4% at the end of 2007.
Customer accounts
Change Change
2008/2007, 2007/2006,
RUR mln or % 2008 2007 % 2006 %
Corporate banking business 78,810 92,422 (15) 68,918 34
Small business banking business 5,224 4,371 20 2,526 73
Retail business 15,289 10,298 48 8,282 24
Private banking 15,748 9,353 68 2,578 263
Total customer accounts by
business line 115,071 116,444 (1) 82,304 41
Other customer accounts – 7,688 – 7,906 (20)
Total customer accounts 115,071 124,132 (7) 90,210 38
The share of current account balances in total customer accounts rose insignificantly from 29.2% at YE 2007 to
31.9% at YE 2008.
According to the updated strategy, the Bank seeks to increase the share of deposits predominantly in the retail
segment in its total liabilities, paying particular attention to diversification and granularity of the deposit base.
Management believes that such deposits represent the most stable funding base in the current environment.
Average amount,
RUR mln Average rate paid, % % of total deposits
Accounts and demand deposits 45,148 1.5 33
Term Deposits 89,860 6.6 67
50 MDM Bank Annual report 2008
International borrowing
During 2008, international markets were largely closed to Russian private banks. Due to its size and highest
credit ratings among private Russian banks, however, MDM Bank was able to raise USD 535 mln from
an IFC A/B syndicated loan in July 2008.
The Bank remains largely opportunistic in 2009, with all plans on syndications and capital market transactions
subject to market conditions.
The following table shows MDM’s international borrowings as of 31 December 2008, 2007 and 2006.
Change Change
2008/2007, 2007/2006,
RUR mln or % 2008 2007 % 2006 %
Included in due to other banks:
Syndicated loans 8,281 24,839 (66.7) 12,560 87.9
Trade finance borrowings 31,570 29,116 8.4 12,648 154.7
Loans from international
financial institutions 29,396 11,515 155.3 660 1644.7
Loans from international
financial institutions:
Unsecured loan participation
notes 11,808 11,043 6.9 14,569 (24.2)
Loan participation notes secured
by diversified payment rights
(“DPR”) 9,791 14,133 (30.7) 13,042 8.4
Loan participation notes secured
by a pool of car loans 1,282 4,153 (69.1) 9,828 (57.7)
Subordinated loan participation
notes 5,966 5,066 17.8 5,452 (7.1)
Total international borrowings 98,004 99,865 (1.8) 68,759 64.1
51
Capital
Following a capital increase completed in 3Q 2007 of RUR 4,668 mln (USD 184 mln) in favor of the International
Financial Corporation (IFC), which is now a 5% shareholder in the Bank, the Bank’s capital base expanded to
a very comfortable level relative to its risk-weighted assets. At YE 2007, the total capital ratio on a consolidated
basis rose to 17.2% from 13.7% at the end of 2006 also due to recapitalization of net income. The Bank’s capital
adequacy ratio as of 31 December 2008 was 17.9%. While management believes that the Bank’s minimum total
capital ratio consistent with its objective to reach an investment-grade credit rating is around 12%, it is likely
that the ratio will remain significantly above this level in 2009. This is mainly due to the restricted ability to
increase leverage by international borrowing due to the ongoing volatility in the global capital markets.
2008 2007 2006
Tier I capital, RUR mln 39,497 35,891 25,382
Tier II capital, RUR mln 4,587 6,494 6,709
Total capital, RUR mln 44,084 42,385 32,091
Total risk-weighted assets, RUR mln 246,646 246,799 233,516
Tier I capital ratio, % 16.0 14.5 10.9
Total capital ratio, % 17.9 17.2 13.7
Dividends
Pursuant to a Resolution of the 26 May 2008 Annual General Shareholders’ Meeting, dividends on ordinary
shares and on preferred registered shares for 2007 were neither accrued nor paid. The Bank’s 2007 profits were
reinvested in the Bank’s development.
52 MDM Bank Annual report 2008
In 2009 MDM Bank will focus
specifically on establishing
long-term relationships with
key clients.
Electronics and home appliances re-
tailer Technosila
MDM Bank Corporate & Investment
Banking client
Igor Roslyakov, head of sales and trade
marketing department at Technosila
53
Review of Business Units
Corporate and Investment Banking
2008 key indicators
• During the reported period, the average volume of funds attracted from MDM Bank’s corporate
clients increased more than 8.3%: accrued liabilities rose from RUR 52,142 mln in 2007 to RUR
56,476 mln in 2008. During the same period, running balances increased more than 44% from
RUR 42,062 mln to RUR 60,016 mln.
• The average increase in the annual loan indebtedness of corporate clients totaled 9.6% – rising
from RUR 127,928 mln in 2007 to RUR 140,148 mln in 2008.
• At the end of 2008, according to Cbonds ratings, MDM Bank was the second largest organizer
of CLN (credit linked notes) issues in the CIS.
• The reliability of the Bank’s professional platform for financial markets was affirmed by
the numerous awards won by MDM in 2008, including MMBA first place prizes in the categories
“Superdealing on the interbank credit market,” “Superdealing on the currency market” and
“Superdealer of the market.” The Bank and its traders regularly top such award categories.
MDM Bank works with all types of companies – from large corporate holdings to individual entrepreneurs –
across nearly all segments of the Russian economy. The Bank’s corporate and investment banking unit offers
a broad range of services to its corporate clients, including deposit accounts, lending, leasing, factoring, cash
management services, collection, trade finance, forfaiting and export financing. Among MDM Bank’s investment
banking services are corporate finance, consulting, inter-bank credit, securities trading and placement, repo,
FOREX operations, hedging, money market and precious metals operations, banknote transactions and
analytical support. Actively working with corporate clients throughout Russia helps MDM Bank diversify its
loan portfolio and to continuously improve its quality.
At the start of 2008, the Bank created the Corporate Finance Department by linking investment banking with
trade finance, project finance and syndications. Combining these separate units into one department allowed
for significant synergistic benefits – not only for the Bank, by creating a platform to effectively interact with
international financial institutions – but also for the Company’s corporate clients by offering them access to
MDM Bank’s highly qualified specialists.
In 2008, MDM Bank conducted a comprehensive industry-based analysis of businesses and developed
a methodology of how to service these companies based on their specific needs within each sector.
The Bank also offered multiple approaches to solving common problems that have occurred during the current
financial crisis, including late payments (related to corporate clients clearing payments), promissory notes and
counter-trade operation settlements.
In addition, the Bank launched working groups to address the needs of debtor companies in sectors of
the Russian economy most affected by the global economic crisis.
During the reported period, MDM Bank significantly broadened and modernized its range of banking products
and services with the goal of increasing corporate customer accounts. In addition, MDM Bank also introduced
54 MDM Bank Annual report 2008
new term deposits with interest paid in advance, and allowed clients to change the currency and/or term of
a deposit without losing accrued interest.
Revenue from inter-bank lending operations in 2008 doubled to USD 12 mln, and daily transaction volumes
totaled approximately USD 500 mln.
During the reported period, revenue from banknote transactions increased two fold to USD 16 mln and
daily transaction volumes totaled USD 100 mln. Operations with derivative instruments brought the bank
an additional USD 4 mln in profit (which also doubled the 2007 figure).
MDM Bank remains one of Russia’s largest traders in the round-the-clock purchase and sale of the world’s
largest currencies and is also one of the leading traders on the domestic FOREX market (in terms of the purchase
and sale dollars for rubles). At the end of 2008, the Bank’s market share totaled 40% and 8%, respectively,
whereas the average daily volume of exchange operations reached USD 2 bln. Revenue from FOREX operations
increased USD 25 mln and reached USD 41 mln.
MDM Bank is one of the largest players on the inter-bank market for precious metal operations. In 2008,
the Bank held approximately an 8% share of the Russian gold market. During the same time, revenue from
these operations increased to USD 20.3 mln from a loss of USD 0.86 mln in 2007.
In 2008, MDM Bank launched a number of large-scale projects within its Project Finance division. At the same
time, the bank was able to raise tied financing from foreign credit institutions for importing companies, which
significantly cut borrowers’ expenses on servicing loans.
Despite the fact foreign banks actively decreased credit lines to Russian companies and financial institutions
during the reported period, MDM Bank’s credit quality remained high. This enabled the Bank to increase
the volume of project and structured financing it offered its clients by 50.7% from 2007 to 2008 (from
USD 223 mln to USD 336 mln).
Despite unfavorable external economic conditions, MDM Bank was able to successfully carry out several
landmark transactions on the Russian market, including organizing the issue of USD 200 mln of Credit Linked
Notes, CLN for OJSC United Aircraft Corporation and attracting USD 90 mln for OJSC Sibirtelecom.
The Bank’s Strategic Consulting and Rating Advisory unit (created at the end of 2007) launched a number of
successful projects during the reported period, including: securing a rating for OJSC Salavatnefteorgsyntez,
supporting the ratings for both OJSC Nizhnekamskneftekhim and OJSC Uralsvyazinform and offering strategic
consulting for both the Uniway group of companies and CJSC Ekonomiko-Finansovaya Energetichesko-
Stroitelnaya korporatsia (EFESk).
In 2009, MDM Bank will focus particularly on developing loyalty programs, creating mechanisms for
maintaining long-term relationships with key clients and forming client profiles (based on individual needs).
The Bank will continue to actively work on attracting customer accounts from its corporate clients. The Bank’s
will increase commission income by developing and introducing new services, broadening the Bank’s product
line and effectively optimizing costs for existing banking products.
The Bank has been able to successfully adapt to the rapidly changing economic conditions of the last year. Our
goal is not simply to survive in these challenging times, but to actively work and support our clients throughout
this period. MDM Bank carefully analyzes global economic trends, as well as capital market dynamics; with
this information and a thorough understanding of these problems, the Bank is able to offer its clients the best
possible financial solutions. In 2009, MDM Bank will focus on the following areas of corporate and investment
banking: debt restructuring services; financing using the CBR Lombard list; developing new credit facilities
(combining debt and equity financing); and offering consulting services to clients to effectively address
the ongoing economic crisis. MDM Bank strives to ensure that all its clients feel supported by the Bank, and that
in turn, these clients are able to use the Bank’s financial products and services – not only to retain but also to
strengthen their market positions during these difficult times.
Unit Key Performance Indicators
Change
2007/2008,
RUR bln or % 2008 2007 %
Revenues 14,574 13,252 10.0
Operating expenses (before overall banking costs) 1,517 2,301 (34.1)
Assets 210,206 204,814 2.6
Liabilities 142,284 164,710 (13.6)
56 MDM Bank Annual report 2008
MDM Bank Private Banking
develops personalized
investment strategies that
balance each client’s appetite
for risk and return
57
Private Banking
2008 key indicators
• Private Banking clients' customer accounts increased 68.3% to RUR 15,749 mln.
• Client base expanded from 605 to 1,041 clients.
• New Swiss franc- and Great British pound-based deposit programs launched together with
a “deposit converter” service.
• Clients offered precious metals trading accounts offering exposure to metals market.
• Mutual funds client base increased 60%.
• Network of offices offering asset management services expanded to 55 throughout
the country.
The Private Banking unit offers VIP clients with more than USD 200,000 in assets a wide array of investment
and banking products and services, including financial planning, consulting and portfolio management.
The open architecture platform offers clients access to an unlimited number of services offered by financial
institutions worldwide. In addition, MDM Bank offers clients its own banking products, which may be adapted
based on each client’s individual needs. The principal target segment for MDM’s private banking unit are
business owners and the senior management of large Russian companies, as well as wealthy foreign clients
seeking access to the Russian market through investment products and banking services.
Structured investment products available through the open architecture platform performed well in 2008.
This program was extremely successful: assets under management in this segment increased from negligible
levels in 2007 to over RUR 800 mln (these assets are not reflected on the balance sheet of MDM Bank, because
the Bank acts as an agent for these products). Beginning in 2008, Private Banking clients were offered precious
metal trading accounts from MDM Bank. In addition, new strategies were developed for portfolio management,
which include greater focus on asset protection, and a new fund of funds was launched, the “MDM-World
of Funds” unit investment fund. The overall cash inflow into “MDM-World of Funds” totaled RUR 56 mln
during the reported period – according to Investfunds, this was the highest cash inflow among Russian funds of
funds in 2008.
MDM Bank cares about its clients and values their time. In 2008, for client convenience MDM Bank began
offering its full array of Private Banking services in Ekaterinburg. In addition, MDM Private Banking
representatives have expanded the list of cities to which they regularly travel. MDM Bank clients now have
access to private banking services in 43 Russian cities.
Since 2001, the Bank’s asset management business has been performed through MDM Bank’s subsidiary
OOO “MDM Asset Management” (referred to throughout the text as MDM AM). The company manages mutual
investment funds, pension funds and pension savings. In December 2008, MDM Bank’s asset management
business was integrated into the Private Banking unit.
In 2009, the Private Banking unit intends to expand its client base, further improve service quality and
broaden its product line to fully meet the needs of MDM Bank clients. The growth in its customer base should
be supported by the synergetic effect from the merger of MDM Bank and URSA Bank. The Private Banking
unit expects client liabilities to grow at the same pace as in 2008. To broaden the regional reach of the Private
58 MDM Bank Annual report 2008
Banking unit and improve the quality of client servicing at the local level, the Bank plans to staff its Tyumen and
Novosibirsk branches with Private Banking unit representatives.
In turn, MDM AM plans to increase the volume of assets under management in 2009 by raising funds from
clients that participate in the state program of co-financing retirement pensions and which had concluded
an agreement on the obligatory pension insurance with the non-state MDM pension fund. In addition, MDM
AM intends to revise the existing investment strategy and introduce new programs that address the needs of
the current economic situation.
Unit Key Performance Indicators
RUR bln or % 2008 2007 Change, %
Revenues 248 129 92.2
Operating expenses (before overall banking costs) 222 149 49.0
Assets under management 1,240 4,809 (74.2)
Client liabilities 15,749 9,417 68.4
59
Retail Banking
2008 key indicators
• Retail client deposits increased more than 50% during the reported period, maintaining positive
momentum even at the end of the year. This once again demonstrated clients’ trust in MDM Bank
as a reliable financial institution.
• The network of MDM Bank ATMs and self-service banking kiosks increased 77% from 707 to
1,258 units.
• MDM Bank placed second in a Senteo International and PricewaterhouseCoopers survey
of the quality of retail banking services in Russia, titled “Index of client impressions 2008:
Who leads the Russian retail banking business?”; the Bank was also among the top three in
a ranking of retail service quality prepared by The Retail Finance magazine and SAS Russia/
CIS company.
The Retail Banking unit works with individuals, small- and medium-sized enterprises and entrepreneurs,
offering clients a broad range of financial products and services, including: cash and settlement services, cash
collection for small- and medium-sized enterprises, money transfers, debit and credit cards, currency exchange
operations, mortgage and car loans, consumer loans, acquiring and a number of term deposits in rubles, dollars
and euros.
In 2008, MDM Bank launched new retail deposits and offered several unique services to its depositors, including
the “Deposit converter” (which enabled clients to transfer a deposit from one currency into another without
losing accrued interest) and the “Deposit time-out” (which allowed clients to withdraw a portion of a deposit
for up to 14 days without losing any interest). In 2008, MDM Bank also launched the “paying card” project,
which combines the advantages of a bank payment card and a term deposit.
In 2008, MDM Bank repeatedly won tenders conducted by the Russian State Deposit Insurance Agency (DIA)
to act as the agent bank to pay out insurance compensation to depositors of troubled banks. About one-third of
all clients that applied for compensation kept their funds in MDM Bank accounts (the overall sum of deposits
exceeded RUR 240 mln), thus illustrating high levels of confidence in the Bank.
The Bank’s acquiring service was also successful during the reported period: volumes increased 80.8% (from
RUR 6,910 to RUR 12,494 mln), whereas the volume of payment acceptance services increased 39.9% (from
RUR 263 to RUR 368 million). In 2008, approximately 1,000 new clients joined the acquiring service, and
the Bank’s terminal network increased 52.5% (from 3,579 to 5,457 units).
MDM Bank conducts a conservative financial and lending policy, thoroughly evaluating the creditworthiness of
potential borrowers. The Bank was one of the first to foresee changes in Russia’s economic outlook. The Bank’s
retail loan portfolio is well-diversified, which allows the Bank to not only successfully develop long-term
relationships with existing clients, but also to actively attract new ones.
60 MDM Bank Annual report 2008
In 2008 MDM Bank launched
new retail deposits and
introduced unique services
for its depositors, including
the Deposit Converter, which
enabled clients to switch term
deposits from one currency
into another without losing
the accrued interest
61
During the reported period, MDM Bank implemented unified standards of service quality for all retail front office
employees. Training methods were developed and have been implemented, including methods for analyzing
complicated situations (which may arise through daily client service work). In the process of the training
program, employees also work out the key competencies of case management and how to effectively promote
banking products and services.
In 2009, the top priority for the Retail Banking unit is to increase profitability, grow volumes and further
improve efficiency levels. The Bank will work to steadily improve the quality of its loan portfolio, which in turn
will increase profitability. MDM Bank also intends to introduce new approaches to developing a full range of
savings products by introducing special offers for target client segments and optimizing sales technologies.
In addition, MDM Bank intends to develop a multi-tiered system to support the whole spectrum of banking
products and to analyze its effectiveness.
Unit Key Performance Indicators
RUR bln or % 2008 2007 Change, %
Revenues 3,146 3,074 2.3
Operating expenses (before overall banking costs) 1,190 1,075 10.7
Assets 39,070 34,840 12.1
Client liabilities 15,289 10,298 48.5
62 MDM Bank Annual report 2008
In 2009 MDM Bank will
continue to develop and
improve its range of services
for small business clients and
will focus on high margin
products.
Meat product manufacturer
“Myasnoi Dom”
MDM Bank Small Business Lending
Department client
Sergey Efimov, company owner
63
Small Business Banking
2008 key indicators
• The small business loan portfolio increased 89% from RUR 8.2 to RUR 15.5 bln.
• New MDM Energy loans totaling more than RUR 400 mln were approved during the year.
• Projects financed by MDM Bank helped Russian companies to save more than USD 100 mln
yearly and decrease greenhouse gas emissions by 250,000 tons of CO2-equivalent.
Small business banking is a strategic priority for MDM Bank. The Bank offers small enterprises a wide array of
banking products and services, including deposits, credit and leasing and cash management services.
In 2008, the Bank conducted a full-scale optimization of its procedures and processes, which helped
improve client interaction with the Bank. Simplified contracts were introduced, procedures for credit decisions
were improved, the pricing system for small business products was modernized, and the Bank’s CRM-systems
were updated.
During the reported period, MDM Bank improved and introduced products targeted at small businesses. One of
the most significant changes was the MDM Micro loan program for private business owners or entrepreneurs. In
addition, the compulsory clause requiring collateral insurance was removed for the MDM Small product. This
change made the product more affordable for a larger number of clients, while at the same time not increasing
the risk for the Bank.
The MDM Energy project, implemented in conjunction with the International Finance Corporation (IFC),
achieved outstanding results during the reported period. This credit product is aimed at increasing the energy
efficiency of Russian enterprises. MDM Energy combines traditional lending with consulting services from
IFC experts. To promote MDM Energy in Russia’s regions, during the reported period, MDM Bank conducted
a series of educational seminars in 30 Russian cities, which more than 600 representatives from small- and
medium-sized businesses attended.
In order to broaden the services offered to small business clients, the Bank launched in December 2008
a consulting program focused on low-cost energy efficiency measures. The program “Economize intelligently”
offers small businesses the opportunity to significantly decrease operating costs without additional investment
and at a minimal cost.
During the reported period, MDM Bank also promoted partner programs developed together with regional
small business support foundations. Work on these programs was carried out at the Bank’s branches in Moscow,
64 MDM Bank Annual report 2008
Perm, Penza and Omsk. MDM Bank also actively developed activities in the field of servicing small business
clients at the regional level – servicing such clients 28 new points of sales throughout Russia.
In 2009, MDM Bank plans to continue to optimize its structure, which will also allow it to decrease operational
costs connected with selling its banking services.
Unit Key Performance Indicators
RUR bln or % 2008 2007 Change, %
Revenues 1,605 902 77.9
Operating expenses (before overall banking costs) 440 372 18.0
Assets 14,706 7,985 84.2
Client liabilities 5,224 4,371 19.5
65
Information Technology
In 2008, MDM Bank focused on continuing improvements and modernizations to its existing IT infrastructure,
laying the foundation for the launch of a completely new core banking system, the first elements of which will
be put into operation in 2009. This system will serve as the basis for reorganizing the Bank’s operational model,
which will play an important role in accomplishing the strategic goal of providing the highest quality service to
clients, while at the same time increasing the effectiveness of the work of all of the Bank’s units.
The Core Banking System
In connection with the planned merger of MDM Bank and URSA Bank in 2009, work will start on introduction of
a fundamentally new IT system that will accelerate transaction processing speed and integrate data processing.
As a result, various business units will be able to access information about clients and use it for cross-selling,
which should significantly increase the efficiency of the Bank’s operations. The core banking system was
launched in January 2009, and a special division has been created to focus on its implementation.
Main Goals of the New System
• To create a centralized database of the Bank’s clients.
• To increase the efficiency of all processes, from opening an account to risk analysis and CRM.
• To support a new client-oriented model of retail business, minimizing input from the middle and back offices
when dealing with the Bank’s clients.
• To significantly decrease risks by using improved technology for processing loan applications, underwriting
and operating the integrated trade system.
• To increase the efficiency of procedures in the Bank’s middle and back offices by centralizing procedures,
obtaining a positive effect for the whole Bank.
In 2009, MDM Bank plans to launch the main elements of its centralized banking system.
Security of the Systems
The security of the Bank’s IT systems is paramount for both MDM Bank and its clients. In 2009, the Bank intends
to significantly modernize the equipment, software and architecture of its IT-systems to ensure maximum
protection from any unauthorized access to the corporate network and client data. At the same time, the clients
and partners of the Bank will continue to be able to obtain full remote access to their accounts and conduct
on-line banking operations.
66 MDM Bank Annual report 2008
System of Credit Applications
In 2009, MDM Bank plans to introduce a new Credit conveyor, which will simplify and centralize the sales
management process. On the back of this system, the Bank will also re-launch other products for retail clients
and small businesses.
Electronic Document Management
The new system of electronic document management was selected as an IT platform for automating the flow of
business documentation. In 2009, the electronic (paperless) document management system for point of sales
will be operational. In the future, the Bank plans to expand this system, including the possibility of achieving
a paperless environment for the Bank’s entire business document flow.
67
Corporate Governance
and Management
MDM Bank’s adheres to global best practice in corporate governance. The Bank’s executive bodies are fully
responsible for defining and implementing business strategy as well as evaluating client, shareholder, and
employee confidence in the Bank.
MDM Bank’s information transparency policy is recognized as being a cornerstone of the Bank’s reputation as
a respected and successful private financial institution. The Bank adheres to the code of corporate conduct.
In 2008, Standard & Poor’s confirmed the Bank’s overall international scale Corporate Governance Score (CGS)
at 6+, and raised its Russian national scale CGS to 6.9 from 6.7.
Board of Directors
The MDM Bank Board of Directors approves and oversees the implementation of the Bank’s strategy and
the fulfillment of the Management Board’s set tasks and performance targets, while also providing support as
necessary.
The members of the Board of Directors are active participants in the Bank’s operations and receive timely access
to information on the Bank’s activities. The Chairman of the Board of Directors is a strong leader and efficiently
manages the Board’s functions.
The Board of Directors combines knowledge and experience, as well as a unified management approach that
facilitates constructive discourse when reviewing Bank issues.
The Board in 2008
Activity highlights in 2008 included:
• Approving MDM Bank’s mission, vision and values;
• Improving the quality of corporate governance, particularly with regard to: making the necessary changes to
the Bank’s internal regulations; optimizing internal processes, specifically interaction between the Board of
Directors and the Management Board; and enhancing information transparency policy;
• Composing a new and efficient risk management system, specifically producing expedited internal and
external communications for risk reporting;
• Adjusting the internal control process by strengthening the functions of the Internal Audit and Compliance
departments, respectively;
• Strengthening management oversight functions by requiring a regular review of the Management Board’s
reports on business development, competitors’ activities, budget performance, market position and the Bank’s
overall results;
• Changing the organizational structure based on business requirements and to fulfill the Bank’s strategic
goals.
68 MDM Bank Annual report 2008
Biographies & Recent Changes
MDM Bank Board of Directors, as of 31 December 2008:
First
Name appointed Other relevant positions and Bio
Oleg Viyugin 2007 Chairman of the Board of Directors
Chairman Member of the Audit and Risk Management Committee
Member of the Strategy Committee
Member of the Nominations and Remuneration Committee
Independent Director
Before joining the MDM Bank Board of Directors in 2007, Oleg headed
the Federal Financial Markets Service of the Russian Federation, a position he
had held since 2004. Between 1999 and 2002, he was Executive Vice-President
at Troika Dialog, Russia’s oldest investment bank.
Oleg has also held a variety of senior positions within the Russian government,
including First Deputy Minister of Finance, First Deputy Chairman of
the Central Bank of Russia, and Extraordinary Advisor to the Prime Minister of
the Russian Federation.
Upon graduating from the Department of Mechanics and Mathematics at
Moscow State University in 1974, Oleg successfully defended his Ph.D. in
physics and mathematics at the same university in 1977.
Sergei Popov 2002 Member of the Board of Directors
Deputy Chairman of the Board of Directors
Sergei joined the MDM Board of Directors in 2002, before which he served
on the boards of several blue-chip Russian companies, including RAO UES of
Russia, Piping Metallurgy Company (TMK), Eurochem, and MDM Industrial
Group, which he co-founded in 2000.
In 1997, Sergei co-founded Trading and Industrial Group MDM, where he took
a senior role in strategy development until 1999. Prior to working at Trading
and Industrial Group MDM, Sergei was a partner and commercial director
at OOO Prodcontract Company. Upon graduating from Urals State Technical
University with a major in heat power engineering in 1993, Sergei became
a partner in the Urals-Siberia Trading and Industrial Company (USTPK), which
specialized in energy and pipe trading as well as supplying raw materials to
Russian metallurgical plants.
Sergei also currently sits on Board of Directors at SUEK, Russia’s leading coal
supplier.
69
Martin 2007 Member of the Board of Directors
Andersson Chairman of the Nominations and Remuneration Committee
Member of the Strategy Committee
Before joining the MDM Board of Directors in 2007, Martin also chaired
the Boards of Directors at Brunswick Rail Leasing (2005-2007) and Brunswick
Capital Limited (2002-2007).
In 1993 Martin co-founded the Brunswick Group, and was appointed CEO
at Brunswick Brokerage in November 1993. In 1999 he became Chairman of
Brunswick UBS Warburg. Between 1992 and 1993, Martin served as an advisor
to the Russian government’s privatization committee, and from 1990, he
worked as a consultant at Booz Allen Hamilton in Mergers & Acquisitions.
Martin also sits on the Board of Directors of SUEK.
Luqman Arnold 2007 Member of the Board of Directors
Chairman of the Strategy Committee
Luqman’s 35-year career has spanned commercial, investment and retail
banking, insurance, asset and wealth management, and has included posts as
President and Chairman of the Group Executive Board of UBS AG and CEO of
Abbey National PLC. He has also worked at BNP Paribas and CSFB.
Sergei 2007 Member of the Board of Directors
Shapiguzov Chairman of the Audit and Risk Management Committee
Independent Director
Since 1990, Sergei has headed FBK, a leading Russian auditing firm, and is
currently a managing partner at the firm. Between 1992 and 1994, he was
director of KPMG’s Russian branch.
Sergei graduated from the Department of Economics at Moscow State
University in 1972. In 1981 he defended a Ph.D. in economics before earning
another degree in applied mathematics and cybernetics from Moscow State
University in 1984.
Edward Nassim 2007 Member of the Board of Directors
Independent Director
Edward has served as Vice President for Europe, Africa, and the Middle East
of the International Finance Council, a World Bank Group member, until his
recent retirement. In his previous role as IFC Director of Operations in Europe
from 1991 to 2006, Edward helped pioneer investments in many sectors of
the Russian economy.
In 1989, Edward was appointed as IFC's first Director of Corporate Finance
Services. He was involved in several transactions worldwide, including
the restructuring and privatizing of some of the first, large state-owned
companies in Czechoslovakia and Poland. Edward has also been involved in
several advisory services initiatives in areas including corporate governance,
improving the business climate in the SME sector, leasing, energy efficiency,
and housing finance.
Edward holds undergraduate and graduate degrees from Imperial College,
London, and an MBA from Harvard Business School.
70 MDM Bank Annual report 2008
Igor Kouzin 2008 Member of the Board of Directors
Member of the Audit and Risk Management Committee
Igor joined MDM Bank as its CEO in October 2008, where he served until
the merger with URSA Bank was announced in December 2008. Igor joined
MDM from DeltaCredit, where he had been CEO since 2004. Igor has ten years’
experience working for fast-growing international financial companies.
Prior to joining DeltaCredit, Igor was Vice President for International Markets
at Sanchez Computer Associates, Inc., a banking technology provider. He also
managed the company’s activities in Central and Eastern Europe as well as Asia.
Igor was one of the founders of Profile Venture Partners, which had its
headquarters in the US, and from 1999 until 2002 he was a managing director
there.
Igor began his career with McKinsey & Company in Toronto and Washington,
D.C., where he participated in the successful initial development, launch
and continued development of several banks. Mr. Kouzin has an MBA from
the University of Chicago’s Graduate School of Business (GSB).
As of 31 December 2008, three Board members have the status of independent directors (as defined in
Paragraph 6 of the Provisions on the Board of Directors of MDM Bank (http://www.mdmbank.com/about/
administration/directors), which corresponds to the independence criteria applied in international practice.
Board Committees
The three board committees that were re-formed in June 2008 and then again in December 2008 following
the election of new members to the Board of Directors are the:
• Strategy Committee;
• Audit and Risk Management Committee;
• Nominations and Remuneration Committee.
In 2008, the committees continued to play an important role as a forum for detailed analysis, as well as for
developing grounded, independent and professional recommendations for the Board of Directors on specific
issues relating to the Bank. Working in close contact with management, the committees ensure efficient
communication between executive management and the Board of Directors. The vast majority of issues are
reviewed by the committees before the Bank’s management discusses them with the Board of Directors, which
receives responses at every meeting from the committees’ respective chairmen, as well as the Chairman of
the Management Board.
The Chairman of the Management Board has a standing invitation to all committee meetings. The members of
the Management Board, as well as other managers and representatives of the Bank, are also frequently invited
to participate for relevant agenda items. Ernst & Young, the Bank’s external IFRS and RAS auditor, regularly
participates in Audit and Risk Management Committee meetings.
71
Strategy Committee
Luqman Arnold Committee Chairman since June 2007
Martin Andersson Committee member since May 2006
Oleg Viyugin Committee member (Independent Director) since June 2007
Sergei Popov Committee member since December 2008
The Strategy Committee is responsible for reviewing all strategy recommendations and any major projects that
will involve a significant commitment of management time or the Bank’s financial resources. The committee
also reviews the annual budget to ensure that it is consistent with long-term strategic goals. Moreover,
the committee monitors and enforces the positions taken by the Board of Directors on strategic issues.
Key Developments in 2008
In 2008, the committee was essential in approving the Bank’s annual budget, taking key decisions on the core
banking system, composing the Bank’s mission, vision and values as well as developing the retail business
strategy.
The committee evaluated the Bank’s regional strategy and operating model during the year, ultimately deciding
to alter the development of the Bank’s regional network to improve the efficiency and productivity of those
business units which develop services for individuals and small businesses.
Beginning in October 2008, the committee became the Bank’s main forum for discussion of the economic
situation in Russia and the world, as well as on measures that the Bank should take in the fast-changing business
environment.
The committee specifically concentrated on the effect of inflation on the quality of the Bank’s loan portfolios,
and developed means to address this issue. The committee supported management’s initiative to switch to
quarterly budgeting for 2009.
At the end of October, the Strategy Committee, during a discussion on working with the Board of Directors,
approved means for quickly informing the Management Board of suggestions on how the Bank should operate
in the unstable economic environment. There was also an in-depth discussion on planning in 2009, resulting
in management being assigned responsibility for developing various response scenarios to potential changes
in the economic climate and to prepare suggestions for various factors. The committee also discussed how
to optimize expenses and improve efficiency and stability, before passing the suggestions to the Board of
Directors.
The Committee’s work resulted in increased business-processes control system efficiency throughout the Bank,
particularly in more precise expense planning and improved business profitability.
72 MDM Bank Annual report 2008
Audit and Risk Management Committee
Sergei Shapiguzov Committee Chairman
(Independent Director) since June 2007
Oleg Viyugin Committee member (Independent Director) since June 2007
Igor Kouzin Committee member since December 2008
The Audit and Risk Management Committee reviews the financial reporting process and ensures the publication
of comparable, transparent and accurate financial information. It reviews the effectiveness of the internal
financial control and risk management systems, as well as the internal and external audit functions, including
appointing the Bank’s independent auditors and reviewing their performance. The committee also evaluates
the procedures for enforcing Bank compliance with legislative and regulatory requirements pertaining to
financial reporting. It provides control over banking risks, sets the Bank’s risk profiles, appraises the effectiveness
of risk level evaluation systems, risk analysis and, if necessary, reviews major transactions.
Key Developments in 2008
In 2008, the Audit Committee initiated a regular review of external auditor recommendations to provide more
efficient results in addressing those recommendations. The committee also regularly reviewed management
reports and Internal Audit Department reports. An independent external audit and risks expert was invited to
work with the committee on a permanent basis.
The Internal Audit Department regularly tests the Bank’s extensive internal control system. The committee
participated in the development and introduction into the Bank’s internal processes of an electronic database
with auditors’ recommendations, which was created in 2008 to improve the internal auditors’ efficiency.
The database tracks in real time how respective departments are fulfilling the recommendations.
The committee reviews all of the Bank’s planning and audit methodology documents during its meetings and
then passes them to the Board of Directors.
The committee has designed a risk-forecasting model that is reviewed at all its meetings, before presenting its
recommendations – based on a detailed study of the economic climate – to the Board of Directors. This enables
the Board to make carefully weighted strategic decisions in the fast-changing market.
MDM Bank’s financial and operating information transparency is highly rated. Standard & Poor’s confirmed
the Bank’s overall CGS-6+ (international scale) and raised the Bank’s Russian national scale from CGS-6.7
to CGS-6.9.
73
Nominations and Remuneration Committee
Martin Andersson Committee Chairman since June 2007
Oleg Viyugin Committee member (Independent Director) since December 2008
Brian Kearns Committee member (external expert) since December 2008
The Nominations and Remuneration Committee provides recommendations on employee policy issues,
including the incentive program. The committee also determines the total volume and system of compensation
for the Bank’s personnel.
The Bank has structured its employee social policy on the principle of solid and long-term relationships, as
reflected in its approach to forming and managing strategic personnel reserves.
Key Developments in 2008
In 2008, the committee sent a team of senior management to study the MDM-INSEAD Bank Leadership Program
at the INSEAD business school, which led to the creation of a training scheme for the Bank’s middle and senior
management.
The committee created a new performance-evaluation scale for the Board of Directors, which was endorsed by
the Chairman and members of the Management Board. Corporate governance was improved significantly and
the interaction between the Bank’s management and employees was optimized via examination of the Board of
Directors and the Chairman of the Management Board.
The committee and the HR Department worked together specifically to implement the Bank’s incentive
program, drafting recommendations on key efficiency indicators for the Management Board’s members. In
conjunction with a professional consultant, the committee began developing a long-term incentive program for
the Bank’s employees.
In the current macroeconomic climate, the committee constantly monitors personnel efficiency and makes
recommendations on the advisability of changing the Bank’s organizational structure.
74 MDM Bank Annual report 2008
Statistics on Corporate Events
General Shareholders’ Meetings:
– Annual (1) May 26, 2008
– Extraordinary (3) August 11, 2008
October 10, 2008
December 15, 2008
Revision Commission Meetings:
– Physical meetings: 3
Board of Directors’ Meetings:
– Physical meetings 8
– By correspondence/phone 8
Board Committee Meetings:
– Комитет по стратегии 8
– Комитет по аудиту и рискам 9
– Комитет по назначениям и вознаграждениям 8
Management Board Meetings:
– Physical meetings 62
– By correspondence/phone 4
75
The Management Board
The Management Board, as of April 2, 2009:
Position
Name with MDM Bank Bio
Igor Kim Chairman of Following the announcement of the planned merger between
the Management MDM Bank and URSA Bank in December 2008, the MDM Bank
Board Board of Directors appointed Igor as CEO and Chairman of
the Management Board of MDM Bank.
Chief Executive Officer
(CEO) Since 2006, Igor had been Chairman of the Board of Directors and
Chairman of the Strategy Committee at URSA Bank, which was
created when Uralvneshtorgbank and Sibacadembank merged.
Prior to the merger, Igor served as Chairman of the Board of
Directors of Sibacadembank, where he began working in 1997,
and Chairman of the Supervisory Board of Uralvneshtorgbank, in
which he had acquired a stake in 2004.
Between 2001 and 2004, Igor served as Chairman of
the Management Board of Bank Caspian in Kazakhstan. He began
his banking career in 1993 at Russky Narodny Bank as Deputy
Chairman of the Management Board.
Igor graduated from Novosibirsk State University with a degree in
Economic Cybernetics in 1990.
Alexey Drobot Deputy Chairman Alexey was appointed Head of Corporate & Investment Banking in
of the Management October 2007, and in November 2007, he joined the Management
Board Board. Previously, Alexey was the Head of MDM Bank’s Corporate
Banking, where he implemented the Bank’s strategic objectives in
Head of Corporate working with corporate clients and managed the Bank’s corporate
& Investment Banking banking divisions.
Alexey joined MDM Bank in 2001 as Head of the Credit
Department of the Novoarbatsky office. Successive
appointments included Deputy Head of the Client Department
of the Sukharevsky office as well as Head of the Central District
Client Department. In 2006, he was appointed Head of the Moscow
Network Development Department, where he managed large
corporate client origination and client services.
Prior to joining MDM Bank in 2001, Alexey worked as Commercial
Director and Deputy General Director of Finance at various
companies. In 1999, he started his career in banking as a senior
credit expert at KMB Bank.
Alexey graduated from the Leningrad Military-Naval College. In
1998, he received a degree from the Norilsk Industrial Institute
and, in 2001, received a degree with honors in Finance and Credit
from the State Academy of Finance.
76 MDM Bank Annual report 2008
Svetlana Deputy Chairwoman Svetlana was appointed Deputy Chairwoman of the MDM Bank
Mironova of the Management Management Board and Head of the MDM Network Management
Board unit in March 2009. She oversees issues relating to the operation,
efficiency and development of the Bank’s regional network.
Head of Network
Management Unit Svetlana joined MDM Bank from URSA Bank, where she
was a deputy general director and head of the Urals division
of the Bank from 2007. From 2005 to 2007, Svetlana was
a deputy general director and management board member at
Sibacadembank, where she was in charge of corporate banking.
Prior to that, from 2002, she headed the Kuzbasskiy branch.
Svetlana began her banking career in 1995 as an accountant
at Russkiy Narodniy Bank. Following Russkiy Narodniy Bank’s
merger with Sibacadembank, she was a directorate head and then
deputy director of the Kusbasskiy branch.
Svetlana graduated from the Novosibirsk Engineering and
Construction Institute in 1993 with a degree in Construction
Economics and Management.
Tatyana Pupkova Deputy Chairwoman Tatyana joined MDM Bank in 2008 as Chief Operating Officer,
of the Management and was appointed Deputy Chairman of the Management Board
Board in 2009.
Chief Operating Prior to joining MDM, Tatyana was Chairman of the Management
Officer Board at Etalonbank (formerly JSC Zheldorbank), a position she
took after resigning from a similar position at Uralvheshtorgbank.
Previously, Tatyana worked at Kaspiyskiy Bank, where she was
promoted from Director of the Operating Department to Deputy
Chairman of the Management Board, and KRAMDS Bank,
a commercial innovation bank in Kazakhstan.
Tatyana holds diplomas and degrees from the Institute of Energy,
the Kazakh State Academy of Management’s Market Institute, and
the Adilet Higher School of Law. She speaks fluent English.
Vadim Sorokin Deputy Chairman Vadim was appointed Chief Financial Officer (CFO) of MDM
of the Management Bank in October 2008. His candidacy for the position of Deputy
Board Chairman of the MDM Bank Management Board was submitted in
November 2008.
Chief Financial Officer
(CFO) Prior to joining MDM Bank, Vadim worked at Deloitte and Touche
(later Deloitte) CIS from 1997 to 2008. He became a partner in
2001 and managed the company’s financial institutions service
practice. From 1989–1997, He worked variously as the financial
director for Eastern European Investment Alliance, vice president
for finance at Alba Alliance Bank as well as the chief accountant
at a transport company. Vadimbegan his professional career at
KPMG.
He is a graduate of the Moscow Finance Institute, with a major in
Accounting, Analysis and Audit.
77
Konstantin Managing Director of Konstantin was appointed as Managing Director of the Direct
Leonov the Direct Investments Investments Management Department in March 2009.
Management The Department works with clients’ problem loans from specific
Department sectors of the economy.
From October 2007 until his recent appointment, Konstantin
was Head of Network Management. He has been a member of
the Bank’s Management Board since January 2008 and has been
with the Bank since 2001. From November 2001 through October
2007, he worked as Head of the MDM Bank Branch in Rostov-on-
Don.
He started his career in banking in December 1995 at the Rostov
branch of JSCB INKOMBANK as a specialist in Securities Trading.
In 1997, he was appointed Head of Securities Trading and in 1999
Head of the Branch. In November 1999, he moved to the Rostov
branch of Vneshtorgbank as Deputy Head of the Branch.
Konstantin graduated from the Rostov-on-Don Institute of
National Economy (RINH) in 1994 with a degree in Finance,
Credit and Monetary Circulation.
Oleg Novolodskiy Head of Risk Oleg joined MDM Bank in April 2009 as Head of Risk
Management Management. His responsibilities include control of credit, market
and operational risks. Oleg will officially join on the Management
Board following approval of his candidacy by the Central Bank of
Russia.
Oleg joined MDM Bank from URSA Bank, where he was Managing
Director in charge of risk management. In March 2006, he joined
URSA from the Central Bank of Russia’s Novosibirsk office as
Managing Director of Sibacadembank. From 1993 to 2006,
Oleg worked in the head office of the Central Bank of Russia’s
Novosibirsk office.
In 1994 Oleg graduated from Novosibirsk State University with
a degree in Economic Cybernetics.
78 MDM Bank Annual report 2008
Tatyana Raimova Member of Tatyana joined MDM Bank in 2008 as Managing Director of Retail
the Management Banking. In March 2009 she became a member of the Management
Board Board.
Managing Director of Prior to joining MDM Bank, Tatyana worked at insurance company
Retail Banking ZapSib ZhASO,, where she managed all business processes.
Between 2007 and 2008, she was Deputy General Director at
URSA Bank, in charge of the Siberian retail banking business,
the processing center, the contact center and the professional
training center.
From 2002 until joining URSA, Tatyana worked at Sibacadembank
as Head of the Credit and Debit Cards Department, prior to
assuming an active role in developing retail banking services.
Tatyana has also held various positions at BashKreditBank
and the Novosibirsk Bank, and has over 12 years experience in
the banking sector.
Tatyana graduated from the Novosibirsk Economics Institute with
a degree in Economics in 1989.
Konstantin Head of Treasury Konstantin was appointed Head of newly-formed Treasury, which
Rogov includes a section of Corporate & Investment Banking, in March
2009. Konstantin will become a formal member of the MDM
Bank Management Board following approval of his candidacy by
the Central Bank of Russia.
From November 2008, Konstantin was Deputy Head of Corporate
& Investment Banking. He joined MDM Bank as the Head of
Treasury in 2003.
Before his career at MDM Bank, Konstantin was Head of
the Treasury Department at Impexbank from 1998. Between 1995
and 1998, Konstantin worked at Russian Credit Bank, where he
was eventually promoted to head the treasury department. He has
worked in the banking industry since 1994, and has experience
dealing with securities trading, liquidity management, as well as
assets and liabilities.
Konstantin graduated from the Moscow Institute of Physics
and Technology in 1993, with a degree in Applied Physics and
Mathematics. In 1997, he graduated from the Russian State
Academy of Finance with a degree in Finance and Credit.
79
Invited to the Management Board on a Permanent Basis
Julia Director of Corporate Julia was appointed Director of Corporate Relations of MDM
Kochetygova Relations Bank in June 2007. She coordinates the Bank’s external relations,
including relations with investors, government organizations and
the press as well as social programs.
Prior to joining MDM Bank, Julia was Director of Governance
Services at Standard & Poor’s (S&P), where her responsibilities
included global management of Corporate Governance Scores
(CGS), business development as well as analytical due diligence
of corporate governance practices in Russia and other emerging
markets. In her previous position at S&P, Julia was responsible for
the company’s business development in Russia and the CIS.
Before joining S&P in 2000, Julia held a number of senior
executive and analytical positions at SKATE Information
and Consulting Agency (1995–1999) as well as teaching and
undertaking research at the Higher School of Economics and
the Institute of Economics at the Russian Academy of Sciences.
Julia graduated from the Plekhanov Moscow Institute of National
Economy as well as the World Bank School of Market Economy.
She holds a Ph. D. in Economics.
Departures New Members*
June 2008 N. Blatova January 2008 K Leonov
November 2008 A. Ilyin February 2008 S. Babayan
November 2008 S. Babayan September 2008 M. Egorov
December 2008 M. Perhirin December 2008 I. Kim
February 2009 O. Mashtalyar December 2008 V. Sorokin
March 2009 M. Egorov March 2009 S. Mironova
April 2009 O. Novolodskiy
|*| Date that the Management
Board Members’
appointment was
approved by the RF Central
Bank.
80 MDM Bank Annual report 2008
MDM Bank Management Structure*
General Shareholders'
Meeting
Board of Directors Board of Directors Internal Audit
Committees: О. Viyugin J. Molotkovskaya
Audit and Risk Management
Strategy Nominations &
Remunerations
Management Board Management Board,
Committees: Chief Executive Officier
Credit, ALCO, Tariffs, I. Kim
Counteragents & Financial
Instruments
Consultative Bodies
Change Management Committee,
Main Management Council,
Extended Management
Council
Group Strategic Business Units Group Corporate Services Centre
Corporate Retail Banking Finance Operations
and Investment T. Raimova V. Sorokin Т. Pupkova
Banking
A. Drobot
Treasury Network Corporate Relations
K. Rogov S. Mironova J. Kochetygova
Private Banking
V. Lewis
Risks Strategic
O. Novolodskiy Development
М. Mazzarelli
Compliance Control
А. Savushkin Business Support
D. Kuznetsov
Distressed Assets
S. Shaporenko Direct Investments
Management
Department
K. Leonov
|*| Information current as at
2 April 2009.
81
Board of Directors and Management Board Compensation
The total paid to members of the Board of Directors for their respective positions, including reimbursement for
expenses incurred when fulfilling their duties, was RUR 91 mln in 2008.
Payments, including accrued reimbursement for expenses, for the Bank’s senior management (particularly
the members of the Management Board and the chief accountant) in 2008 totaled RUR 635 mln.
Dividends
Pursuant to the decision reached by the General Shareholders’ Meeting, as of 26 May 2008, dividends were
not paid for 2007 on either common or preferred shares. Profits from 2007 were earmarked for growing
the Bank.
MDM Bank’s Corporate Governance Awards in 2008
In 2008, Standard & Poor’s (S&P) confirmed the Bank’s overall CGS-6+ (international scale). At the same time,
S&P raised the Bank’s Russian national scale from CGS-6.7 to CGS-6.9.
MDM Bank is confident that adherence to global corporate governance best practices enables the Bank to
maintain its position as a leader in corporate governance and transparency among private Russian financial
organizations.
MDM Bank also received Euromoney’s “The Best Managed Banks in Corporate & Investment Banking in Central
and Eastern Europe for 2007” award, which was presented for the first time in the category of Best Companies
in the CEE, as judged by European banking experts. The Bank performed particularly well in measurements
of its consistency and assuredness when implementing strategy, the success of its operational management,
financial statement transparency, corporate governance standards, as well as the level of disclosure to investors
and analysts.
MDM Bank’s 2007 annual report won first place in the category “Finance” at the annual report competition
held by the Krasnodar region administration in Sochi, Russia.
82 MDM Bank Annual report 2008
Internal Control
The Bank’s internal control system encompasses all levels of management within the Bank and its subsidiaries.
The system involves all internal processes and interactions, and is not restricted to specialized units such as
the Internal Audit Department, Compliance Department or Risk Management. The Bank’s internal control
system aims to achieve the following important objectives:
• Efficient and result-oriented financial and operational procedures for executing banking operations and
other transactions, and asset and liabilities management, including ensuring the integrity of the bank’s assets
and risk management;
• Accurate, complete objective and timely financial statements, as well as accounting, statistical and other
reports (for internal and external users) that are necessary for decision-making by the Bank’s management,
as well as information security;
• Compliance with applicable laws and regulations, including the charter of the credit organization;
• Preventing the Bank or its employees from being drawn into unlawful activity, such as money laundering,
financing of terrorism, as well as ensuring timely presentation of information to the Central Bank of Russia
and other authorities in accordance with the laws of the Russian Federation.
The Bank has a created and approved a Regulation on Internal Control that defines the goals and objectives
of the internal control system, its functioning principles, as well as the bodies and individuals responsible for
internal control.
The Regulation on Internal Control is modified and updated to improve the Bank’s internal control system
when the tasks and internal control functions change, or if the Central Bank of Russia amends the regulatory
acts for internal control in credit organizations in the Russian Federation.
The internal control system is built on the following five elements:
Control Environment
The qualitative features of the Bank’s management and its corporate governance system are defining factors
of a control environment. An important element of the internal control system is the development of a culture
of control. The responsibilities of the Board of Directors and management include drawing attention to
the importance of internal control through their actions and statements. This includes the ethical standards
that that managers demonstrate both within the organization and to third parties. The management bodies of
the bank also bear responsibility for building a corporate culture that underlines and demonstrates to personnel
on all levels the importance of internal control.
In 2008, the Bank continued to refine its corporate governance system, as discussed in the Corporate
Governance and Management section on page 67.
Risk Identification and Assessment
An important element of internal control at MDM Bank is identifying and evaluating risks that the Bank takes
upon itself. The Bank has created a system for banking risk management to achieve this goal.
The functioning of the Bank’s risk management system is controlled on a constant basis in line with the Bank’s
internal documents. The system covers all types of risks that the Bank is exposed to: credit, currency, market,
interest, liquidity, operational, legal, strategic and reputational risks.
83
The Bank has implemented a robust risk management system that covers all potential business and financial
risks. This system is discussed in detail in the Risk Management section on page 84.
Control Activities
Control activities relate to the day-to-day functioning of internal policies and procedures designed to
ensure, among other things, proper segregation of duties to avoid conflicts of interest, proper authorization
of transactions, accounting reconciliations, and analysis of deviations between actual and expected results.
Control activities are a constant part of the bank’s activities and are conducted to eliminate risks identified by
the Bank through its risk identification and evaluation procedures. The activities also include safeguarding
assets and other controls.
Information and communication
A robust management information and communication system is required for the internal control system to
function effectively. An effective system of internal control requires reliable, useful and adequate financial
and operational information, as well as information about compliance with established regulations and
requirements and external information about market events and conditions that is required for decision-
making.
In 2008, the Bank made important strides toward improving the relevance, timeliness and reliability of its
management information, as well as further strengthening controls over confidential information. An internal
communications system was implemented during 2007 (discussed in the Corporate Communications section
on page 93).
Monitoring
The Bank seeks to improve internal control in order to ensure the system’s efficient functioning and taking into
account the changing internal and external factors that influence the Bank.
Monitoring of the internal control system is conducted on an ongoing basis by management and employees
from various departments, including departments that execute banking operations and other transactions, as
well as accounting and financial reporting and the Internal Audit Department.
The Bank’s management reports to the Board of Directors on an annual basis about the status of the internal
control system, evaluates its effectiveness, discusses any shortcomings and steps taken to address them. This
report also includes an evaluation of the effectiveness of the Bank’s capital adequacy monitoring (based both
on Basel requirements and CBR requirements) and an evaluation of internal controls for the preparation of
financial reporting.
An important part of the ongoing monitoring of the internal control system is the work of the Internal Audit
Department, which provides an independent assessment of the adequacy of existing rules and procedures, as
well as their observance. The Internal Audit Department functions independently of the bank’s business and
operational management and has access to all operations conducted by the Bank, including its branch offices
and subsidiaries (see the Internal Audit section on page 89).
The Bank’s external auditors, while not a part of the system of Internal Control, nonetheless play an important
role in evaluation of the system of control over the correctness of the Bank’s financial reporting as well as
offering recommendations regarding the system of Internal Control, based on audit results.
84 MDM Bank Annual report 2008
Risk Management
MDM Bank’s risk management system aims to identify, analyze and manage the Bank’s risk exposure. All Bank
operations that involve risk are conducted within established limits and restrictions, and risk compliance is
constantly monitored. MDM Bank’s risk management is based on three main principles: (1) limiting potential
losses, (2) evaluating risks in a timely fashion, and (3) maintaining clear and effective risk governance.
MDM Bank has established an efficient and reliable risk management system, combining the latest global
standards with procedures established by the Bank. The system encompasses the full range of risks involved
in financial operations, including: credit risk and market risks, which includes stock market, currency and
interest-rate risks, as well as liquidity, operating, legal, reputational and other risks. The Bank has highly
qualified team of experts in the Risk Management unit designing and developing the risk-management
system.
Key Developments in 2008
• The launch of a capital-allocation system for risk, with the key indicators being risk adjusted
return on capital (RAROC) and shareholder value added (SVA).
• The introduction of a social and environmental risk-assessment system into the credit process,
based on International Financial Corporation (IFC) and European Bank for Reconstruction and
Development (EBRD) standards.
• Improving the loan portfolio monitoring method – specifically designed and implemented as
a means to monitor industry loan portfolio risks. Also, the Bank began to assess comprehensively
on a monthly basis the quality of service rendered to the Bank's small- and medium-sized
business clients at its offices, from attracting new clients to working with businesses that have
breached their loan contracts. This enables the Bank to efficiently and swiftly identify problem
areas and to make the necessary changes to the credit process.
• An improved market risk assessment method, specifically in assessing repo risks and determining
fair prices for third-party promissory notes.
At the same time, the global financial crisis caused several changes to Risk Management’s activities, the most
important being the timely introduction of operational measures to minimize risks. Consequently, the Bank
achieved the following:
• Liquidity was maintained at a sufficient level.
• Credit policy was changed, thereby halting simplified credit analysis and significantly raising the standard
of financial solvency required for a client to receive a loan, as well as broadening credit decisions requiring
direct involvement of Risk Management.
• Market risk limits were made more rigorous, specifically to reduce risk in currency operations, debt security,
derivative instruments, margin trading and repo operations.
Plans for 2009
MDM Bank’s main objectives for 2009 will be to maintain liquidity and adjust risk management to reflect
the new economic reality.
The Bank intends to update its credit policy: to define target client groups based on their tolerance indices in
crisis conditions and their credit-analysis parameters, as well as introduce measures to assess risks objectively
and to enable flexibility in making changes to risk management policy. This includes creating a statistical rating
85
system to rate corporate clients and small- and mid-sized business; and to begin using statistical scoring cards
for all retail programs.
There are plans to use qualitative and new quantitative assessment models to improve objectivity and brevity
when assessing operational risks.
In addition to the current early warning indicators for liquidity risk, the Bank plans to design and implement
analogous systems for other major financial risks.
A detailed description of the financial risk management system is presented in Note 28, “Financial Risk
Management”, as an note to the Bank’s audited financial statements. Please also see Note 11, “Loans and
Advances to Customers”, where important credit risk information is discussed in detail.
Operational Risks
Operational risks are direct or indirect losses caused by various factors involving processes, personnel, or
the Group’s technology and infrastructure. Losses can also be caused by external factors differing from credit
and market – as well as liquidity – risks.
Operational Risk Management
The Bank seeks to minimize possible financial losses and damage to the Bank’s reputation, as well as to ensure
the optimization of general expenses, minimize superfluous managerial procedures that may limit initiative,
and utilize new problem solving methods.
The Bank manages operational risks by taking into account recommendations from the Central Bank of
the Russian Federation and the Basel Committee on Banking Supervision, when seeking best practices and
managing operational risks.
The Bank accomplishes this via compilation, monitoring, operational risk minimization and continuous
management.
The Risk unit develops operational risk management methodology, coordinates the risk management procedure
as part of the Bank unit, makes corresponding suggestions to improve operations, as well as presents reports on
the Bank’s level of operational risk to the Management Board.
The management of each department is responsible for controlling risks assigned to it.
The overall operational risk management standards of the Bank include the following:
• Separation of powers, specifically independent operation authorization and operation monitoring;
• Adherence to the requirements of the regulating authorities and legislation;
• Procedures to minimize operational risks;
• Management and procedure documentation;
• Periodic assessment of exposure to operational risks;
• Immediate reporting on losses due to operational risks;
• Maintenance of plans for emergency situations;
86 MDM Bank Annual report 2008
• Professional development, specifically using training programs;
• Ethical business practices;
• All methods to minimize risk, specifically insurance, where it is efficient.
Operational Risk Assessment
Operational risk compilation, analysis and monitoring include the following:
• Collecting information on past operational losses by the Bank;
• Analysis of operational risks for products and processes;
• Compiling operational risks for new products, processes and large transactions.
A risk chart is created based on an analysis of operational risks, using a quantitative rating based on key risk
indicators for each of the Bank’s separate and operations..
Upgraded Operational Risk Management Methods
During 2008, MDM Bank implemented a capital allocation system for overall risk that includes operational risk
assessment. In turn, this motivated the business unit to take measures to lower operational risks on current
transactions.
A tax and legal risk assessment system was also implemented, resulting in the Bank’s full risk assessment
increasing noticeably.
There were no major problems recorded in the operational processes for the fiscal year.
In 2009, the Bank plans to implement quantitative models of operational risk assessment in addition to
the current qualitative models, which will result in improvements in the level of objectivity and speed when
assessing these risks.
87
Additional Risks
The Bank also manages legal, reputational, country and other risks.
Legal Risk
Legal risks concern possible damages to the Bank arising from internal and external legal factors.
Internal risk factors include:
• Non-adherence to the applicable legislation;
• Internal documentation inconsistent with the applicable legislation, as well as the Group’s inability to bring
its activity and internal documents in line with changes in legislation in a timely manner;
• Insufficiently accurate analysis of the legal risks of new products, operations and technology.
External risk factors include:
• An imperfect legal system;
• Breach of contract conditions by the Bank’s clients or counter parties;
• The Bank’s and/or its clients’ subsidiaries being located in jurisdictions of various governments.
Legal risks are managed with the goal of reducing or eliminating possible losses, specifically in terms of court-
awarded monetary funds.
The Legal Department monitors legal risks, while the Tax Department monitors tax risks.
Legal risks are managed according to the following principles:
• Standard contract forms provisionally agreed upon by all respective parties of the Bank, specifically by
the units responsible for risk management that the transaction contains;
• Most transactions are made based on standard contract forms;
• Only in exceptional instances are transactions made based on non-standard contracts that the Legal
Department approves;
• Contracts are signed only after the counter party’s credentials have been verified;
• Utmost attention is paid to the legal risk assessment of the property put up for collateral. The pledgor has to
show a full list of documents that confirm his legal property rights to the object used as collateral.
Reputational Risk
Reputational risks occur when people form a negative opinion of the Bank. These risks are managed according
to the following main principles:
• The Bank fulfills all its obligations in a timely manner to clients and counterparties, and adheres to all
applicable legislation and norms of business etiquette;
• Obligatory due diligence is conducted on counterparties and clients in accordance with the on Anti-Money-
Laundering, Illegal Funds and Anti-Terrorism Acts;
• A system is used to prevent price manipulation on the securities market;
• The MDM Bank Public Relations Department monitors external information on the Bank and sets in motion
steps and previously developed regulations to counter negative information and news flow.
88 MDM Bank Annual report 2008
Compliance Department
In 2008, MDM Bank’s Board of Directors developed and approved the “Policy on Managing Compliance
Risks for MDM Bank and its Subsidiaries.” The document describes the structure of the compliance system
as well as the main regulatory, reputational and financial risks. As per the document, the main principles of
the compliance risks were developed, particularly recommendations to identify and prevent them.
The main compliance principles are as follows:
• Adherence to legislation and internal rules and standards is an absolute requirement for all Bank units and
employees, as well as key to the decision-making system;
• When fulfilling the Bank’s duties, it is not only necessary to adhere to the legislation and requirements of
the regulatory bodies, but also to assess how the Bank’s decisions and actions correspond to its values, and to
take into consideration the interests of all its shareholders;
• MDM Bank is continuously improving its approach to identifying, analyzing and managing compliance risks
and provides the necessary qualification level for its employees in managing these risks.
To fulfill these tasks, the Compliance Control Department was formed, combining two units: the Financial
Monitoring Department, the main functions of which are to develop and fulfill the internal control rules and
other internal organization measures to identify and prevent money laundering and the financing of terrorism;
and the Financial Market Operations Compliance Control Department, which oversees the Bank’s adherence to
required legislation, financial markets legal norms acts, internal rules and professional participant securities
market procedures.
The department’s main tasks are to manage compliance risks efficiently, and to counsel the Bank’s executive
bodies on the laws, rules and standards in relation to compliance risk management. The department also
counsels the Bank’s executive bodies on training personnel on compliance risk issues, develops policies,
procedures and other documents on compliance control, as well as identifies and analyzes compliance risks.
The Compliance Control Department answers directly to the Chairman of MDM Bank’s Management Board
and presents on a regular basis the Management Board and the Board of Directors consolidated reports which
identify risks and detail measures to reduce them.
The Compliance Control Department’s operation in accordance to the “Policy on Managing Compliance Risks to
MDM Bank and its Subsidiaries” has enabled the Bank to minimize its risks and maintain its strong reputation.
89
Internal Audit
The Internal Audit Department’s main goal is to provide for the efficient operation of the Bank’s units by
internally auditing activities and presenting independent and objective recommendations on improving
the quality of the internal control system, risk management and corporate governance.
The department’s employees are on the staff of the Bank’s Head Office, although the department is
an independent structure answering functionally to the Board of Directors’ Audit and Risk Committee, which
independently assesses the operations of the internal auditors. Additionally, for administrative purposes
the department reports to the Chairman of the Management Board to ensure efficient reporting on the internal
control system to the Bank’s senior management.
The Internal Audit Department interacts with the Bank’s external auditor, and, when necessary, informs it on
all current events for the Bank’s activity.
The department’s director reports on a monthly basis to the Audit and Risk Committee and prepares a report
for the Board of Directors twice yearly. The department’s director also participates in weekly management
meetings and is part of the Bank’s Main Management Council.
Key Developments in 2008
In 2008, thirty-six people worked in the Internal Audit Department, including four IT audit specialists. All of
the department’s employees are highly qualified specialists with significant experience working in large global
auditing firms or similar departments in other large banks. Three of the employees are qualified as Certified
Information Systems Auditors (CISA). Four of the department’s employees are part of the Bank’s Revisiory
Commission.
One of the department’s most important activities in 2008 was auditing the Bank’s regional branch offices.
Consequently, the Network Audit Department and the Local Regional Auditors Department were set up as part of
the department’s structure to ensure timely and regular audits, and to monitor implementation of the auditors’
recommendations. Every regional bank has at least one employee in the Internal Audit Department, whose
specialists in the regions operate in accordance to the approved annual plan, assess the efficiency of the internal
control system at the branches, and participate in unscheduled reviews. They answer to the Department’s
director and provide independent and objective spot-audits.
In 2008, the department developed, introduced and began using use the E-DVA automated report and
control system. This system offers a combined database that, from the audits, contains all the department’s
recommendations and comments to the responsible party in the Bank, which can be ranked according to
importance, as well as their completion status. All relevant departments in the Bank’s have access to the E-DVA
system and report online on completing the audit recommendations.
The E-DVA system allows for the following:
• Saving all audit recommendations;
• Constant control over their completion by the responsible employees of the Bank;
• Drawing up analytical reports to assess risks according to the type of the Bank’s activities;
• Operations planning and assessment of work efficiency of the Internal Audit Department;
• Assessing the efficiency of eliminating previous deficiencies in operations by the Bank’s structure units.
90 MDM Bank Annual report 2008
The Department also updated a previously developed risk assessment method which is used to assess risks
yearly and to plan the Department’s activities. The allocation of audited units was revised and supplemented
and the list of factors was updated and is used to assess inherent risk. The Compliance Control Department’s
director and those responsible for corresponding business processes were included in the main expert group to
assess control risk.
The Internal Audit Department’s review plan for 2009 was developed taking a risk-informed approach.
The Bank’s main risk areas are reviewed on a yearly basis. The annual plan incorporates the possibility to
conduct spot audits if the Bank’s management is requested to do so.
At the end of 2008, the Internal Audit Department reviewed the strategy and action plan for the fourth quarter
of 2008. The changes will allow for the following:
• Maximum rational use of the department’s resources;
• Maximum relevance of the audit remarks;
• Timely assessment of risks that arise during a period of financial crisis;
• Reduction in expenses for audits.
Plans for 2009
The department plans to regularly review in 2009 the audit recommendation fulfillment and to follow their
enactment continuously via the E-DVA system. The department plans to initiate a new automated audit
format.
91
Human Resources
MDM Bank Employees
1,400 4,500
4,000
1,200
3,500
1,000
3,000
800 2,500
600 2,000
1,500
400
1, 000
200
500
0 0
Under 18–25 25–30 30–40 40–50 50–60 Above 2007 2008
18 60
Head Office
Male Regional Network
Female
A concerted effort was made in 2008 to implement the plans that fell under the Bank’s comprehensive employee
strategy, approved at the end of 2007.
Systematic integration of professional operations in the Bank’s business strategy became the main focus in
conducting a number of planned events, which transformed the Bank’s Human Resources Department from its
original role as an administrative service unit to a full HR partner for all of the Bank’s business units.
The HR Department’s main task is creating an environment for the Bank’s employees that engenders real
participation from each employee in the business.
In 2008, the following tasks were prioritized: introducing an incentive system; ensuring efficiency in personal
and team operations; improving professional qualifications; and developing personnel.
A new regulatory framework was approved in MDM Bank in 2008, which incorporated the best global HR
practices and took into account business strategy priorities, as well as the specifics of the Bank’s operating
model. An instrument that allowed for the analysis of the Bank’s employees’ functional responsibilities was
developed, thereby enabling systemization of information on the activities of units and individual employees,
and by extension the use of the organization’s professional potential most efficiently.
The personnel records were fully automated during the past year, with all of MDM Bank’s affiliates switching
to a new IT platform that optimizes documentation management and significantly saves work time for HR
specialists.
Hiring personnel
The banking specialist job market in 2008 remained highly competitive. The HR Department constantly
monitored the job market to allow MDM Bank to maintain its position as one of the most attractive employers
in the Russian banking sector. Systematic work on strengthening the Bank’s recruiting team and improving
92 MDM Bank Annual report 2008
the search process in order to attract highly qualified candidates produced excellent results in 2008. In the third
and fourth quarters, 96% of the vacancies in the Main Office and affiliates were filled by the HR Department
itself, without using external recruiting firms.
MDM Bank staff numbers increased in 2008 to 6,563, with practically all of the new employees joining
the Bank’s regional offices as a result of the Bank actively implementing in its regional network the development
strategy during the last year. The Bank’s professional and intellectual potential is highlighted by the fact 5,348
employees have a university education and 366 employees combine work and study in various university
programs.
Training and development
The employee management development program begun in 2007 was successfully concluded in 2008.
The Bank’s senior management last year took the INSEAD course specially designed for MDM Bank. Based on
this, they organized and conducted workshops during which the Bank’s full management team was introduced
to global best practices in the banking business and shared their ideas on improving the Bank’s management
system.
During the development process for the Bank’s structured unit managers, training focused on developing skills
for efficient internal and external communication. At Head Office and in the Bank’s regional branches, 250
mid-level managers participated in specialized training sessions.
In 2008, in-house training and personnel development courses were initiated, with focus shifting from external
training to in-house courses. This optimized training costs while simultaneously ensuring that the Bank’s
employees had the chance to take training programs that were in full compliance with their daily business tasks
and geared toward developing skills necessary for efficient work in a dynamically changing market. Today,
training managers work in all the Bank’s regional branches. Training sessions on sales received high marks
from participants and significantly helped in working with client managers. The business trainers’ value in
quickly responding to business demands was successfully demonstrated at the end of 2008, when the global
financial crisis required adjustments in all of the Bank’s units, and clarification for current and potential clients
regarding the financial situation and the actions taken by the Bank to protect the interests of its investors and
depositors. The “Everyone to the Front Lines for Victory” and “Crisis or New Possibilities?” training sessions
resolved the Bank’s important employee incentive support tasks. From April to December 2008, 2,662 MDM
Bank employees attended internal corporate training sessions developed by the Training and Development
Department in conjunction with the business units. Meanwhile, 887 employees attended external training
sessions.
Outlook for 2009
The process of creating a unified bank presents the HR Department with new and exacting tasks. The most
important goals are rethinking and reorganizing the Bank’s organizational structure, developing optimal
principles to involve employees in business decisions by using internal personnel rotation, as well as forming
the Bank’s strategic employee reserve and a unified value system within the bank. There are also plans to
improve the HR processes, increase employees’ professional qualifications at all levels, strengthen corporate
culture and increase staff loyalty.
93
Corporate Communications
MDM Bank’s information policy has established a systematic and comprehensive approach to transparency that
quickly improved the quality of communications with target audiences. In 2008, Corporate Communications,
which included the Investor Relations Division, the Corporate Social Responsibility Division, the Public
Relations Department and the Internal Communications Division, encompassed the full spectrum of the Bank’s
communications.
As a result of the work of the Investor Relations Division, which is responsible for the quality, efficiency and
availability of information, the Bank remains one of the leaders in the Russian banking system in terms of
information transparency. The Bank’s 2007 Annual Report set a new standard and placed first among other
annual reports in several competitions.
The Public Relations Department structured the Bank’s crisis communication and prepared recommendations
for the Bank’s managers on how to communicate with target audiences. A new section was created on the MDM
Bank website, simplifying the search process for necessary information about the Bank, its products and
services and the situation on the financial markets.
The Corporate Social Responsibility Division in 2008 concentrated its efforts on implementing priorities
approved in the Bank’s Corporate and Social Responsibility (CSR) strategy, such as education and musical
events. Three major long-term programs were launched during the year: Culture, under the name World of
Divine Melodies; Education, under the name World of Young Business People; and Financial Literacy.
The Bank’s initiatives were in demand in the regions, as attested by the following figures:
• The 12 best teachers, who were selected through an open competition, from seven leading regional partner
higher education institutions took part in an exchange program at the Stockholm University School of
Business and received grants to develop modern academic curricula;
• Forty-nine of the best students at partner institutions of higher learning received scholarships from MDM
Bank;
• More than 2,000 people participated in free seminars on financial literacy organized by the Bank;
• More than 18,000 classical music lovers attended concerts organized as part of the World of Divine Melodies
programs.
Detailed information on programs conducted as part of the Bank’s CSR activities is included in MDM Bank’s
first Corporate Social Responsibility Report for 2008.
At the beginning of 2008, the Internal Communications Division polled MDM Bank employees to research
the quality of corporate culture and the internal communications channels. More than 2,500 employees
from 80 of the Bank’s structural units participated in the poll, with the results used to assess the efficiency of
the information channels, the methods and instruments for internal communications, as well as to find out
employee opinions on how to improve the current channels, methods and instruments. The poll results also
helped define the main areas for internal communications development for 2008.
The internal communications system operated successfully, and enabled the following:
• The exchange process between units, various management levels and employees, as well as various regions,
was structured as part of strategic sessions;
• Employees were efficiently informed on strategic and operation decisions;
94 MDM Bank Annual report 2008
• The Bank’s hotline, e-mail and message board provided and fostered feedback from employees.
• A corporate culture was engendered and the Bank’s philosophy, based on its Mission, Vision and Values, was
introduced.
During the year, two consultative organs operated under the Management Board – the Main Management
Council (MMC) and the Extended Management Council (EMC). At the weekly MMC meetings, the directors of
the Bank’s main business units discussed and resolved issues. EMC meetings were convened on a quarterly basis
to discuss important events and key management decisions.
Professional training aimed at improving the communication skills of the Bank’s senior managers increased
the efficiency of the external and internal information companies. Beginning in Moscow, training then spread
to all of the Bank’s regional branches, with 171 of the Bank’s managers of various levels and speakers receiving
training.
In June 2008, work began on updating the corporate intranet site based on better software that offers new
possibilities to integrate employees in the united information media. These possibilities are particularly as
follows:
• Information support for business and corporate communication;
• Work space for each unit, group and employee;
• Knowledge-gathering and management system;
• Information protection.
Plans for 2009
In 2009, the Bank plans to continue improving the information disclosure system and supporting information
transparency for all the main target audiences. The intranet site will be completely updated, which will present
users with considerably more convenient instruments to communicate internally. The new version is set for
launch in May 2009. MDM Bank is also planning to approve a Code of Corporate Ethics and, with the assistance
of various means of communication, to report its basic standards to every employee.
Consolidated Financial Statements
For the Year Ended 31 December 2008
Together with Independent Auditors’ Report
96
Contents
97 Independent Auditor’s Report
98 Consolidated Balance Sheet
99 Consolidated Income Statement
100 Consolidated Cash Flow Statement
101 Consolidated Statement of Changes in Equity
Notes to the Consolidated Financial Statements
102 1. Organisation of the Group and its Principal Activities
103 2. Operating Environment of the Group
104 3. Basis of Preparation
105 4. Significant Accounting Policies
122 5. Cash and Cash Equivalents
123 6. Due from Other Banks
124 7. Trading Securities
125 8. Derivative Financial Instruments
129 9. Available-for-Sale Financial Assets
130 10. Investment Securities Held to Maturity
130 11. Loans and Advances to Customers
140 12. Property, Plant and Equipment and Intangible Assets
141 13. Other Assets
142 14. Due to Central Banks
142 15. Due to Other Banks
143 16. Customer Accounts
144 17. Debt Securities in Issue
146 18. Subordinated Debt
146 19. Other Liabilities
146 20. Share Capital
147 21. Interest Income and Expense
148 22. Gains less Losses from Foreign Exchange
148 23. Fee and Commission Income and Expense
148 24. Other Operating Income
149 25. Operating Expenses
149 26. Income Taxes
151 27. Analysis by Segment
154 28. Financial Risk Management
175 29. Contingent Liabilities and Commitments
177 30. Fair Value of Financial Instruments
180 31. Related Party Transactions
185 32. Principal Subsidiaries
186 33. Subsequent Events
97
CJSC Ernst & Young Vneshaudit Tel: +7 (495) 705 9700
Sadovnicheskaya Nab., 77, bld. 1 +7 (495) 755 9700
Moscow, 115035, Russia Fax: +7 (495) 755 9701
www.ey.com/russia
Independent Auditor’s Report
To the Shareholders and Board of Directors of MDM Bank
We have audited the accompanying consolidated financial statements of MDM Bank and its subsidiaries (the
“Group”), which comprise the consolidated balance sheet as at 31 December 2008, and the consolidated
income statement, consolidated statement of changes in equity and consolidated cash flow statement for the
year then ended, and a summary of significant accounting policies and other explanatory notes.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial
statements in accordance with International Financial Reporting Standards. This responsibility includes:
designing, implementing and maintaining internal control relevant to the preparation and fair presentation
of financial statements that are free from material misstatements, whether due to fraud or error; selecting
and applying appropriate accounting policies; and making accounting estimates that are reasonable in the
circumstances.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with International Standards on Auditing. Those standards require
that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance
whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures
in the financial statements. The procedures selected depend on the auditor’s judgment, including the
assessment of the risks of material misstatement of the financial statements, whether due to fraud or error.
In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation
and fair presentation of the financial statements in order to design audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s
internal control. An audit also includes evaluating the appropriateness of accounting policies used and the
reasonableness of accounting estimates made by management, as well as evaluating the overall presentation
of the financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial
position of the Group as at 31 December 2008, and its financial performance and its cash flows for the year
then ended in accordance with International Financial Reporting Standards.
9 April 2009
98 MDM Bank
Consolidated Balance Sheet as at 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
31 December 31 December
Note 2008 2007
Assets
Cash and cash equivalents 5 77 271 83 434
Mandatory cash balances with central banks 1 942 5 538
Due from other banks 6 31 651 27 834
Trading securities:
- owned by the Group 7 194 10 875
- pledged under sale and repurchase agreements 7 - 2 987
Derivative financial instruments 8 3 083 260
Available-for-sale financial assets 9
- owned by the Group 8 676 290
- pledged under sale and repurchase agreements 379 -
Investment securities held to maturity 10 108 -
Loans and advances to customers 11 194 806 180 311
Property, plant and equipment and intangible assets 12 6 832 5 956
Other assets 13 4 175 3 997
Total assets 329 117 321 482
Liabilities
Due to central bank 14 35 575 846
Due to other banks 15 97 375 101 516
Derivative financial instruments 8 2 372 874
Customer accounts 16 115 071 124 132
Debt securities in issue 17 28 700 46 631
Subordinated debt 18 5 966 5 066
Deferred tax liability 26 980 770
Other liabilities 19 2 004 2 749
Total liabilities 288 043 282 584
Equity
Share capital 20 1 794 1 794
Share premium 14 198 14 198
Revaluation of premises 3 143 2 986
Revaluation of available-for-sale financial assets (1 566) 21
Cumulative translation reserve 326 24
Retained earnings 23 179 19 875
Total equity 41 074 38 898
Total liabilities and equity 329 117 321 482
The consolidated financial statements are approved for issue by the Management Board of MDM Bank and
signed on its behalf on 9 April 2009.
Igor Kim Vadim Sorokin
Chairman of the Management Board Chief Financial Officer
The notes on pages 102 to 186 form an integral part of these consolidated financial statements.
MDM Bank 99
Consolidated Income Statement for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Year ended Year ended
31 December 31 December
Note 2008 2007
Interest income 21 32 893 28 345
Interest expense 21 (15 985) (14 213)
Net interest income 16 908 14 132
Loan impairment losses 11 (6 616) (2 083)
Net interest income after loan impairment losses 10 292 12 049
(Losses)/gains arising from trading securities, net (997) 309
Gains/(losses) arising from trading in precious metals, net 504 (22)
Gains from foreign exchange, net 22 914 1 364
Gains/(losses) from interest-based derivative financial
instruments, net 520 (520)
Gains from early redemption of debt 1 134 -
Fee and commission income 23 3 142 2 978
Fee and commission expense 23 (883) (634)
Other assets impairment losses 13 (518) (3)
Impairment of investment securities held to maturity 10 (371) -
Other provisions 13 (330) -
Other operating income 24 596 230
Operating income 14 003 15 751
Operating expenses 25 (9 366) (8 622)
Gain on disposal of premises - 498
Profit before taxation 4 637 7 627
Income tax expense 26 (1 333) (2 111)
Profit for the year 3 304 5 516
Igor Kim Vadim Sorokin
Chairman of the Management Board Chief Financial Officer
The notes on pages 102 to 186 form an integral part of these consolidated financial statements.
100 MDM Bank
Consolidated Cash Flow Statement for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Year ended Year ended
31 December 31 December
Note 2008 2007
Cash flows from operating activities
Interest received 31 689 28 357
Interest paid (14 669) (13 701)
(Losses)/gains from trading in securities (181) 767
Losses net of gains from interest-based derivative financial instruments (348) (310)
Gains/(losses) from trading in precious metals 160 (768)
Realised gains/(losses) from trading in foreign currencies 2 948 (26)
Commissions received 3 091 2 953
Commissions paid (861) (635)
Other operating income received 243 246
Operating expenses paid (9 104) (8 572)
Income tax paid (1 488) (2 003)
Cash flows from operating activities before changes in operating
assets and liabilities 11 480 6 308
Changes in operating assets and liabilities
Net decrease/(increase) in mandatory cash balances with central banks 4 076 (1 481)
Net increase in due from other banks (1 007) (15 114)
Net (increase) / decrease in trading securities (525) 2 489
Net decrease in other financial assets at fair value through profit or loss 221 1 063
Net increase in available-for-sale assets (390) (263)
Net decrease in investment securities held to maturity 650 -
Net decrease/(increase) in loans and advances to customers 1 745 (20 255)
Net increase in due to central banks 35 000 -
Net (decrease)/increase in due to other banks (21 058) 45 550
Net (decrease)/increase in customer accounts (20 578) 35 088
Net (decrease)/increase in promissory notes issued and deposit certificates (12 483) 2 210
Net increase in other assets less other liabilities (39) (423)
Net cash (used in)/from operating activities (2 908) 55 172
Cash flows from investing activities
Purchase of property, plant and equipment (1 626) (797)
Proceeds from sale of property, plant and equipment 9 1 156
Net cash (used in)/from investing activities (1 617) 359
Cash flows from financing activities
Loan participation notes and bonds issued 1 178 21 813
Loan participation notes repaid/repurchased (11 836) (28 378)
Subordinated debt repaid/repurchased (95) -
Share capital issued - 4 668
Net cash used in financing activities (10 753) (1 897)
Effect of exchange rate changes on cash and cash equivalents 9 115 (2 842)
Net increase in cash and cash equivalents (6 163) 50 792
Cash and cash equivalents at the beginning of the year 5 83 434 32 642
Cash and cash equivalents at the end of the year 5 77 271 83 434
Igor Kim Vadim Sorokin
Chairman of the Management Board Chief Financial Officer
The notes on pages 102 to 186 form an integral part of these consolidated financial statements.
MDM Bank 101
Consolidated Statement of Changes in Equity for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Revalua-
tion of Cumu-
Reva- available- lative
luation for-sale trans-
Share Share of financial lation Retained Total
capital premium premises assets reserve earnings equity
Balance as at 1 January 2007 1 736 9 588 1 942 - (21) 14 079 27 324
Revaluation of premises, net of deferred
tax (Note 12) - - 1 324 - - - 1 324
Revaluation of available-for-sale financial
assets, net of deferred tax (Note 9) - - - 21 - - 21
Currency translation differences - - - - 45 - 45
Total recognised income directly in
equity for the year ended 31 December
2007 - - 1 324 21 45 - 1 390
Profit for the year ended 31 December
2007 - - - - - 5 516 5 516
Total income recognised for the year
ended 31 December 2007 - - 1 324 21 45 5 516 6 906
Disposal of premises (Note 12) - - (280) - - 280 -
Share capital issued 58 4 610 - - - - 4 668
Balance as at 31 December 2007 1 794 14 198 2 986 21 24 19 875 38 898
Currency translation differences - - - - 302 - 302
Revaluation of available-for-sale financial
assets, net of deferred tax (Note 9) - - - (1 587) - - (1 587)
Effect of change in income tax rate - - 157 - - - 157
Total income and expense recognised
directly in equity for the year ended
31 December 2008 - - 157 (1 587) 302 - (1 128)
Profit for the year ended 31 December
2008 - - - - - 3 304 3 304
Total income and expense recognised
for the year ended 31 December 2008 - - 157 (1 587) 302 3 304 2 176
Balance as at 31 December 2008 1 794 14 198 3 143 (1 566) 326 23 179 41 074
Igor Kim Vadim Sorokin
Chairman of the Management Board Chief Financial Officer
The notes on pages 102 to 186 form an integral part of these consolidated financial statements.
102 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
1. Organisation of the Group and its Principal Activities
These consolidated financial statements include the financial statements of MDM Bank (Open Joint Stock
Company) (“the Bank”) and its subsidiaries. MDM Bank and its subsidiaries are hereinafter collectively
referred to as the “Group”.
As at 31 December 2008, the Group operated two banks, one in the Russian Federation and one in Latvia,
securities trading and asset management companies and leasing companies.
MDM Bank, the parent company and the lead operating entity of the Group, has been registered in the Russian
Federation to carry out banking activities since 1993. The Bank operates under a general banking license
issued by the Central Bank of the Russian Federation (“the CBR”). The Bank also has broker and dealer
licenses issued by the Russian Federal Financial Markets Service. The Bank participates in the state deposit
insurance system, which was introduced by the Federal Law #177-FZ “Deposits of individuals insurance in
Russian Federation” dated 23 December 2003. The State Deposit Insurance Agency guarantees repayment of
100% of individual deposits up to RUR 700 thousand per individual in case of the withdrawal of a licence of
a bank or the CBR imposed moratorium on payments.
The Group operates in two major business areas: Corporate and investment banking and Retail banking.
The Group also has a Central treasury, which undertakes the Group’s funding and certain centralised risk
management activities. Refer to Note 27.
The activities of the Group are conducted principally in Russia, although the Group also conducts operations
on international markets.
The Bank’s registered address is: Kotelnicheskaya emb. 33 bld. 1, Moscow, Russian Federation. As at
31 December 2008 the Group has 35 branches (31 December 2007: 35). All branches are located within the
Russian Federation. The Group also operates a number of sub-branches in the Russian Federation and cash
exchange offices and a network of retail micro offices in Moscow. As at 31 December 2008, the total number
of points of sale of MDM Bank’s network was 199 (31 December 2007: 164).
As at 31 December 2008 and 31 December 2007, the Bank’s parent company is ZAO Banking Holding MDM
(Russia). ZAO Banking Holding MDM is a 100% subsidiary of MDM Holding SE, a European company based
in Cyprus.
As at 31 December 2008 and 31 December 2007, Mr. Sergey Popov was the majority beneficial shareholder
of the Group with approximately 77% beneficial interest, Olivant Limited had a 9.5% beneficial interest,
Mr. Martin Andersson had an 8.5% beneficial interest and the International Financial Corporation (the
“IFC”) had a 5.0% direct interest. In addition, Olivant Limited has an option to purchase a further 4.75%
interest. Refer to Note 31 for information on related party transactions.
On 3 December 2008 the shareholders of MDM Bank and URSA Bank (a large privately-owned Russian bank
based in Siberia and the Urals) announced their intent to combine their equity stakes. A detailed integration
plan will be developed simultaneously with the legal merger of the two banks. The integration of the two
banks is expected to be complete within 12-18 months. Prior to the legal merger, both banks will continue to
function independently. Completion of the transaction remains subject to obtaining the necessary approvals
and consents, including those from the Central Bank of the Russian Federation and the Federal Antimonopoly
Service.
For the purposes of these consolidated financial statements, key management personnel of the Group,
collectively, is referred to as “management”.
MDM Bank 103
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
2. Operating Environment of the Group
The Russian Federation displays certain characteristics of an emerging market, including relatively high
inflation.
The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations
and frequent changes. Furthermore, the need for further developments in the bankruptcy laws, the absence
of formalised procedures for the registration and enforcement of collateral, and other legal and fiscal
impediments contribute to the challenges faced by banks currently operating in the Russian Federation.
The future economic direction of the Russian Federation is largely dependent upon the effectiveness of
economic, financial and monetary measures undertaken by the Government, together with tax, legal,
regulatory, and political developments.
Recent volatility in global and Russian financial markets
The ongoing global liquidity crisis which commenced in the middle of 2007 has resulted in, among other
things, a lower level of capital market funding, lower liquidity levels across the banking sector, and, at times,
higher interbank lending rates and very high volatility in stock and currency markets. The uncertainties in
the global financial markets have also led to bank failures and bank rescues in the United States of America,
Western Europe, Russia and elsewhere. Since September 2008 several medium-sized Russian banks have
been acquired by state-controlled banks and companies due to their liquidity problems. The full extent of the
impact of the ongoing financial crisis is proving to be difficult to anticipate or completely guard against.
Despite strong economic growth in recent years, the financial situation in the Russian market significantly
deteriorated during 2008, particularly in the fourth quarter. As a result of global volatility in financial and
commodity markets, among other factors, there has been a significant decline in the Russian stock market since
mid-2008. Since September 2008, there has been increased volatility in currency markets and the Russian Rouble
(RUR) has depreciated significantly against some major currencies. The official US Dollar (USD) exchange rate
of the Central Bank of the Russian Federation increased from RUR 25.37 at 1 October 2008 to RUR 29.38 at
31 December 2008 and RUR 34.01 at 31 March 2009.
Due to increased market volatility, one-day MosPrime rate fluctuated between 4.75% p.a. and 22.67% p.a.
during the fourth quarter.
International reserves of the Russian Federation decreased from USD 557 billion at 30 September 2008 to
USD 427 billion at 31 December 2008.
The commodities market was also impacted by the latest events on the financial markets. The price of Urals
oil for barrel decreased from USD 97.44 as at 30 September 2008 to USD 41.76 as at 31 December 2008.
A number of measures have been undertaken to support the Russian financial markets, including the
following:
• In October 2008 the CBR reduced the mandatory reserves ratio to 0.5%;
• The guarantee repayment of individual deposits under the state deposit insurance scheme was raised to
RUR 700 thousand per individual in case of the withdrawal of a licence of a bank or the CBR-imposed
moratorium on payments;
• The list of assets which can be pledged under repurchase agreements with the CBR was significantly
extended;
• Vnesheconombank (VEB) was appointed to re-finance foreign debt of the largest companies and banks;
• The largest Russian banks meeting certain criteria have been entitled to participate in Ministry of Finance
and CBR deposit auctions, where each bank was allocated a limit of non-collaterised borrowings it might
receive;
• CBR implemented a loss compensation scheme for interbank lending to allow the largest banks support
the medium-sized banks.
The volume of wholesale financing has significantly reduced since August 2007. Such circumstances may
affect the ability of the Group to obtain new borrowings and re-finance its existing borrowings at terms and
conditions similar to those applied to earlier transactions.
104 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Borrowers of the Group may be affected by the lower liquidity situation which could in turn impact their
ability to repay the amounts owed. Deteriorating operating conditions for borrowers may also have an impact
on management’s cash flow forecasts and assessment of the impairment of financial and non-financial assets.
To the extent that information is available, management has properly reflected revised estimates of expected
future cash flows in its impairment assessments.
The amount of provision for impaired loans is based on management’s appraisals of these assets at the
balance sheet date after taking into consideration the cash flows that may result from foreclosure less costs
for obtaining and selling the collateral. The market in Russia for many types of collateral, especially real
estate, has been severely affected by the recent volatility in global financial markets resulting in there being
a low level of liquidity for certain types of assets. As a result, the actual realisable value on foreclosure may
differ from the value ascribed in estimating allowances for impairment.
The fair values of quoted investments in active markets are based on current bid prices (financial assets) or
offer prices (financial liabilities). If there is no active market for a financial instrument, the Group establishes
fair value using valuation techniques. These include the use of recent arm’s length transactions, discounted
cash flow analysis, option pricing models and other valuation techniques commonly used by market
participants. The valuation models reflect current market conditions at the measurement date which may not
be representative of market conditions either before or after the measurement date. As at the balance sheet
date management has reviewed its models to ensure they appropriately reflect current market conditions,
including the relative liquidity of the market and credit spreads.
As a result of the recent volatility in financial markets there are no longer regularly occurring transactions
on an arm’s length basis for some debt available-for-sale financial assets and, as such, in the opinion of
management many financial instruments are no longer being quoted on an active market in accordance
with IAS 39.AG71. Hence fair value as at 31 December 2008 of these instruments has been determined
using a valuation technique. The objective of the valuation technique is to establish what the transaction
price would have been on the reporting date in an arm’s length exchange motivated by normal business
considerations. Determining fair value requires consideration of current market conditions, including the
relative liquidity of the market and current credit spreads. The valuation techniques used by management
to determine fair value in the absence of an active market include discounted cash flow analysis, taking into
consideration market spreads for similar financial instruments quoted in an active market.
Management is unable to reliably determine the effects on the banking sector the Group’s future financial
position of any further deterioration in the liquidity of the financial markets and the increased volatility in
the currency and equity markets. Management believes it is taking all the necessary measures to support the
sustainability and growth of the Group’s business in the current circumstances.
3. Basis of Preparation
(a) Statement of compliance
These consolidated financial statements have been prepared in accordance with the requirements of
International Financial Reporting Standards (“IFRS”).
(b) Basis of measurement
These consolidated financial statements are prepared on the historical cost basis except that financial
instruments held for trading, other financial instruments held at fair value through profit or loss, derivative
financial instruments and available-for-sale financial instruments are stated at fair value, and certain class
of property, plant and equipment are stated at revalued amounts.
(c) Presentation currency
These consolidated financial statements are presented in Russian Roubles (“RUR”). Amounts in Russian
Roubles have been rounded to the nearest million.
(d) Use of estimates and judgements
The preparation of financial statements in accordance with IFRS requires management to make judgements,
estimates and assumptions that affect the application of policies and the reported amounts of assets and
MDM Bank 105
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
liabilities, income and expense. The estimates and associated assumptions are based on historical experience
and various other factors, that are believed to be reasonable under the circumstances, the results of which
form the basis of making the judgements about carrying values of assets and liabilities that are not readily
apparent from other sources. Although these estimates are based on management’s best knowledge of
current events and actions, actual results ultimately may differ from these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates
are recognised in the period in which the estimate is revised if the revision affects only that period, or in the period
of the revision and future periods if the revision affects both current and future periods.
Information about significant areas of estimation uncertainty and critical judgments made by management
in the application of IFRSs that have a significant effect on the amounts recognised in these consolidated
financial statements are described in the following notes:
• Note 2 “Operating environment of the Group” in respect of loan impairment allowance and valuation of
available-for-sale financial assets.
• Note 4 (l) “Significant accounting policies” and Note 11 (a) “Loans and advances to customers” in respect
of loan impairment allowance.
• Note 8 “Derivative financial instruments” in respect of valuation of complex derivative products.
• Note 12 “Property, plant and equipment and intangible assets” in respect of valuation of premises.
• Note 29 (b) “Contingent liabilities and commitments” in respect of tax contingencies.
4. Significant Accounting Policies
The following significant accounting policies have been applied in the preparation of these financial
statements. The accounting policies have been consistently applied and they are consistent with those used in
the consolidated financial statements for the year ended 31 December 2007. Changes in accounting policies
as a result of revised accounting standards are described below in this Note.
(a) Subsidiaries
Subsidiaries are those companies and other entities (including special purpose entities) in which the Group,
directly or indirectly, has an interest of more than one half of the voting rights or otherwise has power to
govern the financial and operating policies so as to obtain benefits from their activities. The existence and
effect of potential voting rights that are presently exercisable or presently convertible are considered when
assessing whether the Group controls another entity. Subsidiaries are consolidated from the date on which
control is transferred to the Group (acquisition date) and are removed from consolidation from the date that
control ceases.
Special purpose entities (“SPEs”) are entities which are created to accomplish a narrow and well-defined
objective, such as the securitisation of particular assets, or the execution of a specific borrowing transaction.
The financial statements of SPEs are included in the consolidated financial statements when the substance of
the relationship between the Group and the SPE indicates that the SPE is controlled by the Group, even if the
Group does not have any direct or indirect shareholdings in the entity.
Intra-group transactions, balances and unrealised gains on transactions between the Group companies
are eliminated. Unrealised losses are also eliminated, but only to the extent that there is no evidence of
impairment. Where necessary, accounting policies of subsidiaries have been changed to ensure consistency
with the policies adopted by the Group.
(b) Functional currency
Functional currency for each Group company has been determined as the currency of the primary economic
environment in which the company operates. The Russian Rouble (“RUR”) has been selected as the functional
currency for the Bank, Group companies domiciled in the Russian Federation and certain Group companies
domiciled outside of the Russian Federation, where it reflects the economic substance of the underlying
events and circumstances. For other Group companies the currencies of the respective countries in which
these companies are domiciled have been selected as their functional currencies.
106 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The results and financial position of each foreign entity of the Group (the functional currency of none of which is
a currency of a hyperinflationary economy) are translated into the presentation currency as follows:
assets and liabilities for each balance sheet presented are translated at the closing rate at the date of that
balance sheet;
(i) income and expenses for each income statement are translated at average exchange rates (unless this
average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction
dates, in which case income and expenses are translated at the dates of the transactions); and
(ii) all resulting exchange differences are recognised as a separate component of equity as cumulative
translation reserve.
When a foreign subsidiary is disposed of through sale, liquidation, repayment of share capital or abandonment of
all, or part of, that entity, the exchange differences deferred in equity are reclassified to profit or loss.
(c) Foreign currency translation
Transactions in foreign currencies are translated to the functional currency of the relevant Group entity at the
foreign exchange rate at the date of the transaction. Monetary assets and liabilities denominated in foreign
currencies are translated to the functional currency at the foreign exchange rates at the respective balance
sheet date. The foreign currency gain or loss on monetary assets and liabilities is the difference between
amortised cost in the functional currency at the beginning of the period, adjusted for interest accrued using
the effective interest rate and payments during the period, and the amortised cost in foreign currency
translated at the exchange rate at the end of the period. Non-monetary items that are measured at historical
cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions.
Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates
at the date when the fair value was determined. Foreign exchange differences arising on translation are
recognised in the consolidated income statement, except for differences arising on translation on available-
for-sale equity instruments, which are recognised directly in equity.
As at 31 December 2008 the principal rates of exchange used for translating foreign currency balances were
RUR 29.3804 to USD 1 and RUR 41.4411 to EUR 1 for US Dollar and Euro, respectively (31 December 2007:
RUR 24.5462 to USD 1 and RUR 35.9332 to 1 EUR for US Dollar and Euro, respectively).
(d) Accounting for the effects of hyperinflation
In periods prior to 1 January 2003 the Russian Federation experienced relatively high levels of inflation and
was considered to be a hyperinflationary economy as defined by International Financial Reporting Standard
IAS 29 “Financial Reporting in Hyperinflationary Economies”.
The characteristics of the economic environment of the Russian Federation indicated that hyperinflation had
ceased effective from 1 January 2003. Restatement procedures of IAS 29 are therefore only applied to non-
monetary assets acquired or revalued and non-monetary liabilities incurred or assumed prior to that date.
For these balances, the amounts expressed in the measuring unit current as at 31 December 2002 are the
basis for the carrying amounts in these consolidated financial statements. The restatement was calculated
using the conversion factors derived from the Russian Federation Consumer Price Index (“CPI”), published
by the Russian Statistics Agency.
(e) Financial assets and liabilities
(i) Classification of financial instruments
Financial instruments at fair value through profit or loss include financial assets or liabilities held for trading
and financial instruments designated at fair value through profit or loss at initial recognition.
A financial instrument is classified as held for trading if it is acquired principally for the purpose of selling it
in the near term or it is a part of a portfolio for which there is evidence of a recent actual pattern of short-term
profit-taking, or it is a derivative (except for a derivative that is a financial guarantee contract or a designated
and effective hedging instrument).
MDM Bank 107
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The Group designates financial assets and liabilities at fair value through profit or loss where either:
- a group of financial assets, liabilities or both is managed and their performance is evaluated on a fair value
basis in accordance with a documented risk management or investment strategy;
- the designation eliminates or significantly reduces a measurement or recognition inconsistency (“an
accounting mismatch”) which would otherwise arise; or
- the financial instrument represents a hybrid (combined) contract that contains an embedded derivative
that significantly modifies the cash flows that would otherwise be required under the contract.
Financial assets and liabilities at fair value through profit or loss are not reclassified subsequent to initial
recognition. Financial instruments at fair value through profit or loss include trading securities, other financial
assets at fair value through profit or loss, derivative financial instruments and trading liabilities.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not
quoted in an active market, other than those that the Group intends to sell immediately or in the near term,
which are classified as held for trading, or those which the Group designates at initial recognition as at fair
value through profit or loss or available-for-sale financial assets. Loans and receivables include cash and cash
equivalents, due from other banks, including central banks, loans and advances to customers, and other
receivables.
Held to maturity investments are non-derivative financial assets with fixed or determinable payments and
fixed maturities that the Group’s management has the positive intention and ability to hold to maturity.
Available-for-sale financial assets are non-derivative financial assets that are designated as available for sale
and are not classified as loans and receivables, held to maturity investments or financial instruments at fair
value through profit or loss. Available-for-sale financial assets may be sold in response to needs for liquidity
or changes in interest rates, exchange rates or equity prices.
Promissory notes purchased are included in trading securities or in loans and advances to customers or in
due from other banks, depending on their substance and are subsequently remeasured and accounted for in
accordance with the accounting policies applicable for these classes of assets.
Financial liabilities, which are not financial liabilities at fair value through profit or loss or financial guarantee
contracts, include debt securities in issue, due to other banks, customer accounts, subordinated debt and
other payables. Debt securities in issue include promissory notes, certificates of deposit, loan participation
notes and bonds issued by the Group.
Management determines the appropriate classification of financial instruments at the time of the initial
recognition.
(ii) Amortised cost measurement principles
Amortised cost is the amount at which the financial instrument was recognised at initial recognition less
any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred
impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition
and of any premium or discount to maturity amount using the effective interest method. Accrued interest
income and accrued interest expense, including both accrued coupon and amortised discount or premium
(including fees deferred at origination, if any), are not presented separately and are included in the carrying
values of related balance sheet items.
Transaction costs are incremental costs that are directly attributable to the acquisition, issue or disposal of
a financial instrument. An incremental cost is one that would not have been incurred if the transaction had
not taken place. Transaction costs include fees and commissions paid to agents (including employees acting
as selling agents), advisors, brokers and dealers, levies by regulatory agencies and securities exchanges, and
transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or
internal administrative or holding costs.
The effective interest method is a method of allocating interest income or interest expense over the relevant period
so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount. The effective
108 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future
credit losses, except that future credit losses are not considered when estimating those cash receipts) through
the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of
the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to
the next interest repricing date except for the premium or discount which reflects the credit spread over the
floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or
discounts are amortised over the whole expected life of the instrument. The present value calculation includes
all fees paid or received between parties to the contract that are an integral part of the effective interest rate
(refer to income and expense recognition policy).
(iii) Fair value measurement principles
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable,
willing parties in an arm’s length transaction. Fair value is the current bid price for financial assets and
current offer price for financial liabilities which are quoted in an active market. For assets and liabilities with
offsetting market risks, the Group may use mid-market prices as a basis for establishing fair values for the
offsetting risk positions and apply the bid or offer price to the net open position as appropriate. A financial
instrument is regarded as quoted in an active market if quoted prices are readily and regularly available
from an exchange or other institution and those prices represent actual and regularly occurring market
transactions on an arm’s length basis.
Where an active market price is not available, fair value is determined using valuation techniques with a maximum
use of market inputs. Such valuation techniques include reference to recent arm’s length market transactions,
current market prices of substantially similar instruments, discounted cash flow and option pricing models and
other techniques commonly used by market participants to price the instrument.
Where discounted cash flow techniques are used, estimated future cash flows are based on management’s
best estimates and the discount rate is a market-based rate at the balance sheet date for an instrument with
similar terms and conditions. Where pricing models are used, inputs are based on market-based measures
at the balance sheet date.
The fair value of a financial liability with a demand feature, such as a demand deposit, is not less than
the amount payable on demand, discounted from the first date that the amount could be redeemed by the
counterparty.
(iv) Initial recognition
Trading securities, derivatives and other financial assets and liabilities at fair value through profit or loss are
initially recorded at fair value. All other financial instruments are initially recorded at fair value plus transaction
costs. Fair value at initial recognition is best evidenced by the transaction price. A gain or loss on initial recognition
is only recorded if there is a difference between fair value and transaction price which can be evidenced by other
observable current market transactions in the same instrument or by a valuation technique whose inputs include
only data from observable markets. Where an initial gain or loss is not based entirely on observable market data,
it is deferred and recognised over the life of the asset or liability on an appropriate basis, or when prices become
observable, or on disposal of the financial asset or liability.
Where the transaction price in a non-active market is different to the fair value from other observable current
market transactions in the same instrument or based on a valuation technique whose variables include only data
from observable markets, the Group immediately recognises the difference between the transaction price and fair
value (a “Day 1” profit) in the income statement. In cases where use is made of data which is not observable, the
difference between the transaction price and model value is only recognised when in the income statement when
the inputs become observable, or when the instrument is derecognised.
All purchases and sales of financial assets that require delivery within the time frame established by
regulation or market convention (“regular way” purchases and sales) are recorded at trade date, which is the
date that the Group commits to deliver a financial asset. All other purchases and sales are recognised on the
settlement date with the change in value between the commitment date and settlement date not recognised
for assets carried at cost or amortised cost; recognised in profit or loss for trading securities, derivatives and
MDM Bank 109
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
other financial assets at fair value through profit or loss; and recognised in equity for assets classified as
available for sale.
(v) Subsequent measurement
Subsequent to initial recognition, financial assets are measured at their fair values, without any deduction
for transaction costs that may be incurred on sale or other disposal, except for:
- loans and receivables and held to maturity investments, which are measured at amortised cost using the
effective interest method;
- investments in equity instruments that do not have a quoted market price in an active market and whose
fair value cannot be reliably measured, which are measured at cost.
Financial liabilities at fair value through profit or loss are measured at their fair value. Financial liabilities, other
than financial liabilities at fair value through profit or loss and financial liabilities that arise when a transfer of
a financial asset carried at fair value does not qualify for derecognition, are measured at amortised cost subsequent
to initial recognition.
Financial assets or liabilities originated at interest rates different from market rates are re-measured at
origination to their fair value, being future cash flows discounted at market interest rates for similar instruments.
The difference between the fair value and the nominal value at origination is credited or charged to the
consolidated income statement as gains or losses on origination of financial instruments at rates different from
market rates. Subsequently, the carrying amount of such assets or liabilities is adjusted for amortisation of the
gains/losses on origination and the related income/expense is recorded as interest income/expense within the
consolidated income statement as part of the effective interest rate.
(vi) Gains and losses on subsequent measurement
All gains and losses arising from changes in the fair value of financial assets and liabilities at fair value
through profit or loss are included in the consolidated income statement in the period in which they arise.
Interest earned on trading securities and other securities at fair value through profit or loss calculated
using the effective interest method is presented in the consolidated income statement as interest income.
Dividends are included in dividend income within other operating income when the Group’s right to receive
the dividend payment is established and it is probable that the dividends will be collected. All other elements
of the changes in the fair value and gains or losses on derecognition are recorded in profit or loss as gains less
losses from trading in securities or gains less losses from other financial assets at fair value through profit or
loss in the period in which they arise.
Interest income on available-for-sale debt securities is calculated using the effective interest method and
recognised in profit or loss. Foreign exchange gains or losses on available-for-sale debt security investments
are recognised in the consolidated income statement. Dividends on available-for-sale equity instruments are
recognised in profit or loss when the Group’s right to receive payment is established and it is probable that
the dividends will be collected. All other elements of changes in the fair value are deferred in equity until the
investment is derecognised or impaired, at which time the cumulative gain or loss is removed from equity to
profit or loss. The Group uses the “last in – first out” (“LIFO”) method for measurement of gains or losses to
be recognised in profit or loss.
110 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
(vii) Derecognition
Financial assets
A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets)
is derecognised where:
- the rights to receive cash flows from the asset have expired;
- the Group has transferred its rights to receive cash flows from the asset, or retained the right to receive
cash flows from the asset, but has assumed an obligation to pay them in full without material delay to
a third party under a ‘pass-through’ arrangement; and
- the Group either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither
transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of
the asset.
Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred
nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset
is recognised to the extent of the Group’s continuing involvement in the asset. Continuing involvement that
takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying
amount of the asset and the maximum amount of consideration that the Group could be required to repay.
Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled
option or similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the
amount of the transferred asset that the Group may repurchase, except that in the case of a written put
option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of
the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the
option exercise price.
The Group also derecognises certain financial assets determined to be uncollectible when they are written
off against provision for impairment. Refer to impairment of financial assets policy below.
Securitisation
As part of its operational activities, the Group securitises financial assets, generally through the transfer
of these assets to special purpose entities that issue debt securities to investors. The transferred assets may
qualify for derecognition in full or in part. Interests in the securitised financial assets may be retained by the
Group and are primarily classified as loans to customers. Gains or losses on securitisations are based on the
carrying amount of the financial assets derecognised and the retained interest, based on their relative fair
values at the date of transfer.
Financial liabilities
A financial liability is derecognised when the obligation under the liability is discharged or cancelled or
expires. Where an existing financial liability is replaced by another from the same lender on substantially
different terms, or the terms of an existing liability are substantially modified, such an exchange or
modification is treated as a derecognition of the original liability and the recognition of a new liability, and
the difference in the respective carrying amounts is recognised in the consolidated income statement.
If the Group purchases its own debt, it is removed from the consolidated balance sheet and the difference between
the carrying amount of the liability and the consideration paid is included in gains or losses arising from early
redemption of debt.
(viii) Offsetting
Financial assets and liabilities are set off and the net amount reported in the consolidated balance sheet only
when there is a legally enforceable right to set off the amounts, and there is an intention either to settle on
a net basis, or to realise the asset and settle the liability simultaneously.
Income and expenses are presented on a net basis only where either the Group has set off the related assets
and liabilities as described above, or for gains and losses arising from a group of similar transactions such as
the Group’s trading activity.
MDM Bank 111
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
(ix) Impairment of financial assets
The Group assesses at each balance sheet date whether there is any objective evidence that a financial asset or
a group of financial assets is impaired. A financial asset or a group of financial assets is deemed to be impaired
if, and only if, there is objective evidence of impairment as a result of one or more events that has occurred after
the initial recognition of the asset (an incurred ‘loss event’) and that loss event (or events) has an impact on the
estimated future cash flows of the financial asset or the group of financial assets that can be reliably estimated.
Objective evidence that financial assets are impaired can include significant financial difficulty, default or
delinquency by a borrower, breach of loan covenants or conditions, restructuring of a loan or advance by the
Group on terms that the Group would not otherwise consider, indications that a borrower or issuer will enter
bankruptcy, the disappearance of an active market for a security, deterioration in the value of collateral, or other
observable data relating to a group of assets such as adverse changes in the payment status of borrowers in the
group, or economic conditions that correlate with defaults in the group.
Financial assets carried at amortised cost
For amounts due from other banks, loans to customers, including net investment in finance leases, and
other financial assets carried at amortised cost, the Group initially assesses individually whether objective
evidence of impairment exists individually for financial assets that are individually significant, and
individually or collectively for financial assets that are not individually significant. If the Group determines
that no objective evidence of impairment exists for an individually assessed financial asset, whether
significant or not, it includes the asset in a group of financial assets with similar credit risks characteristics
and collectively assesses them for impairment. Assets that are individually assessed for impairment and for
which an impairment loss is, or continues to be, recognised are not included in a collective assessment of
impairment.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is measured
as the difference between the assets’ carrying amount and the present value of estimated future cash flows
(excluding future expected credit losses that have not yet been incurred). The carrying amount of the asset is
reduced through the use of an allowance account and the amount of the loss is recognised in the consolidated
income statement. Interest income continues to be accrued on the reduced carrying amount based on the
original effective interest rate of the asset. Changes in impairment provisions attributable to time value are
reflected as a component of interest income.
The present value of the estimated future cash flows is discounted at the financial asset’s original effective interest
rate. If a loan has a variable interest rate, the discount rate for measuring any impairment loss is the current
effective interest rate. The calculation of the present value of the estimated future cash flows of a collateralised
financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the
collateral, whether or not foreclosure is probable. Each asset individually assessed for impairment is assessed on
its merits, and the workout strategy and estimate of cash flows considered recoverable are independently verified
by the Risk Department.
The accuracy of the allowances depends on how accurately future cash flows are estimated for specific
counterparty allowances and how accurately the model assumptions and parameters used in determining
collective allowances predict future cash flows from loans collectively assessed for impairment.
In some cases the observable data required to estimate the amount of impairment loss on a loan may be
limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in
financial difficulties and there is limited available historical data relating to similar borrowers. In such cases,
the Group uses its experience and judgement to estimate the amount of any impairment loss. The assumptions
used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any
differences between loss estimates and actual loss experience.
For the purposes of a collective evaluation of impairment, financial assets are grouped on the basis of similar
credit risk characteristics. Those characteristics are relevant to the estimation of future cash flows for groups
of such assets by being indicative of the debtors’ ability to pay all amounts due according to the contractual
terms of the assets being evaluated. In assessing collective impairment the Group uses statistical modelling of
historical trends of the probability of default, timing of recoveries and the amount of loss incurred, adjusted
for management’s judgement as to whether current economic and credit conditions are such that the actual
112 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
losses are likely to be greater or less than suggested by historical modelling. Default rates, loss rates and the
expected timing of future recoveries are regularly benchmarked against actual outcomes to ensure they
remain appropriate. The estimated period between a loss occurring and its identification is determined by
management for each identified portfolio. In general, the periods used vary between 3 and 12 months.
When a loan is uncollectible, it is written off against the related allowance for loan impairment. Such loans
are written off after all the necessary procedures have been completed and the amount of the loss has been
determined. Subsequent recoveries of amounts previously written off are credited to the provision for loan
impairment in the consolidated income statement.
Held-to-maturity financial investments. For held-to-maturity investments the Group assesses individually whether
there is objective evidence of impairment. If there is objective evidence that an impairment loss has been incurred,
the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of
estimated future cash flows. The carrying amount of the asset is reduced and the amount of the loss is recognised
in the consolidated income statement. If, in a subsequent year, the amount of the estimated impairment loss
decreases because of an event occurring after the impairment was recognised, any amounts formerly charged are
credited to the consolidated income statement.
Available-for-sale financial assets. For available-for-sale financial assets, the Group assesses at each balance
sheet date whether there is objective evidence that an investment or a group of investments is impaired.
In the case of equity investments classified as available-for-sale, objective evidence would include a significant
or prolonged decline in the fair value of the investment below its cost. Where there is evidence of impairment,
the cumulative loss – measured as the difference between the acquisition cost and the current fair value, less
any impairment loss on that investment previously recognised in the consolidated income statement – is
removed from equity and recognised in the consolidated income statement. Impairment losses on equity
investments are not reversed through the consolidated income statement; increases in their fair value after
impairment are recognised directly in equity.
In the case of debt instruments classified as available-for-sale, impairment is assessed based on the same
criteria as financial assets carried at amortised cost. Future interest income is based on the reduced carrying
amount and is accrued using the rate of interest used to discount the future cash flows for the purpose of
measuring the impairment loss. The interest income is recorded in the consolidated income statement. If, in
a subsequent year, the fair value of a debt instrument increases and the increase can be objectively related
to an event occurring after the impairment loss was recognised in the consolidated income statement, the
impairment loss is reversed through the consolidated income statement.
Renegotiated loans. Where possible, the Group seeks to restructure loans rather than to take possession of
collateral. This may involve extending the payment arrangements and the agreement of new loan conditions.
Once the terms have been renegotiated, the loan is no longer considered past due. Management continuously
reviews renegotiated loans so that all criteria are met and that future payments are likely to occur. The loans
continue to be subject to an individual or collective impairment assessment, calculated using the loan’s
original effective interest rate.
(x) Cash and cash equivalents
Cash and cash equivalents are items, which can be converted into cash within a day. All short-term interbank
placements, excluding overnight deposits, are included in due from banks. Amounts which relate to funds
that are of restricted nature are excluded from cash and cash equivalents. Cash and cash equivalents are
carried at amortised cost in the balance sheet.
(xi) Mandatory balances with central banks
Mandatory balances with central banks represent mandatory reserve deposits that are not available to
finance the Group’s day-to-day operations and hence are not considered as part of cash and cash equivalents
in the consolidated balance sheet and consolidated cash flow statement.
MDM Bank 113
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
(xii) Sale and repurchase agreements
Where the Group sells/purchases financial asset and simultaneously enters into an agreement to repurchase/
resell the asset at a fixed price on a future date, the arrangement is accounted for as a secured financing
transaction.
Assets sold subject to sale and repurchase (“repo”) agreements are continued to be recognised in the financial
statements. They are reclassified as pledged assets when the transferee has the right by contract or custom
to sell or repledge the collateral. The counterparty liability is included in amounts due to other banks or to
customers, as appropriate.
Assets purchased under agreements to resell (“reverse repo”) are not recognised in the Group’s financial
statements, and corresponding amounts are recorded as due from banks or loans and advances to customers
as appropriate.
The differences between the sale and repurchase prices are treated as interest and accrued over the life of the
repo/reverse repo agreement using the effective interest method.
If assets purchased under agreement to resell are sold to third parties, the obligation to return securities is
recorded as a trading liability and measured at fair value.
(xiii) Derivative financial instruments
Derivative financial instruments include swap, forward, futures, spot transactions and options in interest
rate, foreign exchange, precious metals and stock markets, and any combinations of these instruments.
Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into
and are subsequently remeasured at fair value. All derivatives are carried as assets when their fair value
is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives are
recognised immediately in the consolidated income statement.
Derivatives may be embedded in another contractual arrangement (a “host contract”). An embedded derivative is
separated from the host contract and it is accounted for as a derivative if, and only if the economic characteristics
and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host
contract, a separate instrument with the same terms as the embedded derivative would meet the definition of
a derivative; and the combined instrument is not measured at fair value with changes in fair value recognised in
the consolidated income statement. Derivatives embedded in financial assets or financial liabilities at fair value
through profit or loss are not separated.
Although the Group enters into derivative instruments for risk hedging purposes, the Group does not have
a formal hedging strategy that would qualify for hedge accounting.
(f) Precious metals
Precious metals are stated at fair value. The net realizable value of precious metals is estimated based
on quoted market prices. The cost of precious metals is assigned using the first-in, first-out cost formula.
Precious metals are recorded within other assets.
Precious metals lent to counterparties are retained in the consolidated financial statements.
Precious metals borrowed are recognised in the consolidated financial statements as customer accounts or
due to banks, as appropriate. The obligation to return them is recorded in the balance sheet at the carrying
value of the precious metals borrowed and related accrued interest. If the borrowed precious metals are sold
to third parties, the obligation to return the borrowed precious metals is recorded in the balance sheet at its
fair value.
(g) Property, plant and equipment
Property, plant and equipment are stated at cost, restated to the equivalent purchasing power of the Russian
Rouble at 31 December 2002 for assets acquired prior to 1 January 2003, or revalued amounts, as described
114 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
below, less accumulated depreciation and impairment losses. Historical cost includes expenditure that is
directly attributable to the acquisition of the assets.
Where an item of property, plant and equipment comprises major components having different useful lives, they
are accounted for as separate items of property and equipment. Subsequent expenditure incurred to replace
a component of an item of property, plant and equipment that is accounted for separately, is capitalised with
the carrying amount of the component being written off. Other subsequent expenditure is capitalised if future
economic benefits will arise from the expenditure. All other expenditure, including repairs and maintenance
expenditure, is recognised in the consolidated income statement when incurred.
Premises of the Group are subject to revaluation on a regular basis. The frequency of revaluation depends upon
the movements in the fair values of the premises being revalued. A revaluation increase for an item of premises is
recognised directly in equity except to the extent that it reverses a previous revaluation decrease recognised in the
consolidated income statement, in which case it is recognised in the consolidated income statement. A revaluation
decrease for an item of premises is recognised in the consolidated income statement except to the extent that it
reverses a previous revaluation increase recognised directly in equity, in which case it is recognised directly in
equity. The revaluation reserve for premises included in equity is transferred directly to retained earnings on the
retirement or disposal of the asset.
Construction in progress is carried at cost less impairment losses. Upon completion, assets are transferred to
property, plant and equipment at their carrying value. Construction in progress is not depreciated until the
asset is available for use.
Gains and losses on disposal of property, plant and equipment are determined by comparing proceeds with
carrying amount and are recorded in the consolidated income statement.
(h) Intangible assets
All of the Group’s intangible assets have a definite useful life and primarily include capitalised computer
software. They are stated at cost less accumulated amortisation and impairment losses. Acquired computer
software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific
software.
Expenditure on research activities is recognised as an expense in the period in which it is incurred. Subsequent
expenditure on intangible assets is capitalised only when it increases the future economic benefits embodied in
the specific asset to which it relates. All other costs associated with computer software, e.g. its maintenance, are
expensed when incurred. Capitalised computer software is amortised on a straight line basis over expected useful
lives.
(i) Depreciation and amortisation
Depreciation/amortisation commences when the asset is available for use or, in respect of internally
constructed assets, from the time an asset is completed and ready for use. Depreciation/amortisation is
applied on a straight-line basis over the estimated useful lives of the assets. The estimated useful lives are
as follows:
years
Premises 40
Fixtures and fittings 6–10
Office, computer and other equipment 4–6
Intangible assets 5–7
The assets’ residual values and useful lives are reviewed annually, and adjusted if appropriate.
(j) Impairment
The carrying amounts of the Group’s assets, other than deferred tax assets, are reviewed at each balance sheet
date to determine whether there is any indication of impairment. If any such indication exists, the assets’
MDM Bank 115
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
recoverable amounts are estimated. For intangible assets that are not yet available for use, the recoverable
amount is estimated at each annual balance sheet date.
An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit
exceeds its recoverable amount.
Impairment losses are recognised in the consolidated income statement unless the asset is recorded at
a revalued amount in which case it is treated as a revaluation decrease.
Recoverable amount
The recoverable amount of an asset is the greater of its fair value less costs to sell and value in use. In assessing
value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount
rate that reflects current market assessments of the time value of money and the risks specific to the asset.
For an asset that does not generate largely independent cash inflows, the recoverable amount is determined
for the cash-generating unit to which the asset belongs.
In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used
to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s
carrying amount does not exceed the carrying amount that would have been determined, net of depreciation
or amortisation, if no impairment loss had been recognised.
(k) Provisions
Provisions are recognised if, as a result of past events, the Group has a present legal or constructive obligation,
that can be estimated reliably, and it is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation. Provisions are determined by discounting the expected future
cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where
appropriate, the risks specific to the liability.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement
is determined by considering the class of obligations as a whole.
A provision for restructuring is recognised when the Group has approved a detailed and formal restructuring
plan, and the restructuring either has commenced or has been announced publicly. Future operating costs
are not provided for.
A provision for onerous contracts is recognised when the expected benefits to be derived by the Group from
the contract are lower than the unavoidable costs of meeting its obligations under the contract. The provision
is measured at the present value of the lower of the expected cost of terminating the contract and the
expected net cost of continuing with the contract. Before a provision is established, the Group recognises any
impairment loss on the assets associated with that contract.
(l) Credit related commitments
In the normal course of business, the Group enters into credit related commitments, comprising undrawn
loan commitments, letters of credit and guarantees, and provides other forms of credit insurance.
Financial guarantees are contracts that require the Group to make specified payments to reimburse the
holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the
terms of a debt instrument.
A financial guarantee liability is recognised initially at fair value net of associated transaction costs, and is
measured subsequently at the higher of the amount initially recognised less cumulative amortisation or the
amount of provision for losses under the guarantee. Provisions for losses under financial guarantees and
other credit related commitments are recognised when losses are considered probable and can be measured
reliably.
116 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Any increase in the liability relating to financial guarantees is taken to the consolidated income statement.
The premium received is recognised in the consolidated income statement on a straight-line basis over the
life of the guarantee.
Financial guarantee liabilities and provisions for other credit related commitments are included within other
liabilities.
(m) Income taxes
Income tax on the profit or loss for the period comprises current and deferred tax. Income tax is recognised in
the consolidated income statement except to the extent that it relates to items recognised directly in equity,
in which case it is recognised in equity.
Taxation has been provided for in the consolidated financial statements in accordance with applicable
legislation currently in force in the respective countries in which the Group operates. Current tax expense
is the expected tax payable on the taxable income for the period, using tax rates enacted or substantively
enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Taxes,
other than on income, are recorded within operating expenses.
Deferred tax is provided using the balance sheet liability method, providing for temporary differences
between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for taxation purposes. The following temporary differences are not provided for: the initial recognition of
assets or liabilities that affects neither accounting nor taxable profit; and differences relating to investments
in subsidiaries where the parent company is able to control the timing of the reversal of the temporary
difference and it is probable that the temporary difference will not reverse in the foreseeable future.
The amount of deferred tax provided is based on the expected manner of realisation or settlement of the
carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance
sheet date.
A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be
available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no
longer probable that the related tax benefit will be realised. The tax effects of income tax losses available
for carry forward are recognised as an asset when it is probable that future taxable profits will be available
against which these losses can be utilised.
Deferred tax assets and liabilities are netted only within the individual entities of the Group.
(n) Income and expense recognition
(i) Interest income and expense
Interest income and expense are recorded in the consolidated income statement for all debt instruments
on an accrual basis using the effective interest method. This method defers, as part of interest income or
expense, all fees paid or received between the parties to the contract that are an integral part of the effective
interest rate, transaction costs and all other premiums or discounts.
Fees integral to the effective interest rate include origination fees received or paid by the entity relating
to the creation or acquisition of a financial asset or issuance of a financial liability, for example fees for
evaluating creditworthiness, evaluating and recording guarantees or collateral, negotiating the terms
of the instrument and for processing transaction documents. Commitment fees received by the Group to
originate loans at market interest rates are integral to the effective interest rate if it is probable that the
Group will enter into a specific lending arrangement and does not expect to sell the resulting loan shortly
after origination. The Group does not designate loan commitments as financial liabilities at fair value
through profit or loss.
(ii) Fee and commission income and expense
Other fees, commissions and other income and expense items are generally recognised on an accrual basis
when the service has been provided. Loan origination fees for loans which are probable of being drawn down
(and are not expected to be sold shortly after recognition), are deferred (together with related incremental
MDM Bank 117
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
costs) and recorded as an adjustment to the effective interest rate on the loan. Where a loan commitment
is not expected to result in the draw-down of a loan, loan commitment fees are recognized on a straight-
line basis over the commitment period. Fees for provision of credit related commitments and other forms of
financial insurance are recognised over the term of the related contract.
Commissions and fees arising from negotiating, or participating in the negotiation of a transaction for a third
party, such as the acquisition of loans, shares or other securities or the purchase or sale of businesses, which
are earned on execution of the underlying transaction are recorded on its completion. Portfolio and other
management advisory and service fees are recognised based on the applicable service contracts, usually on
a time-proportion basis. Asset management fees related to investment funds are recorded rateably over the
period the service is provided. The same principle is applied for wealth management, financial planning and
custody services that are continuously provided over an extended period of time. Performance linked fees
are recognised when the performance criteria are fulfilled.
(iii) Other income and expenses
Dividend income is recognised within other operating income in the consolidated income statement on the
date that the dividend is declared.
Non-interest expenses are recognised at the time the products are received or the services are provided,
unless the expenses result from a constructive obligation, against which a liability and related expense are
recognised in the consolidated financial statements.
(o) Pension costs
Companies within the Group which operate in the Russian Federation contribute to the Russian Federation state
pension schemes, social insurance and employment funds in respect of their employees. The contributions to
these funds are expensed as incurred and included within staff costs in the consolidated income statement.
The Group has no further payment obligation once the contribution has been paid.
(p) Leases
(i) Finance leases where the Group is a lessor
Where the Group is a lessor in a lease which transfers substantially all the risks and rewards incidental to
ownership to the lessee, the assets leased out are presented as a finance lease receivable and carried at the
present value of the future lease payments.
The inception of the lease is the earlier of the date of the lease agreement and the date of commitment by the
parties to the principal provisions of the lease. For purposes of this definition, a commitment should be in
writing, signed by the parties with interest in the transaction, and should specifically set forth the principal
terms of the transaction. At the inception of the lease the amounts to be recognised at the commencement
of the lease term are determined. The commencement of the lease term is the date from which the lessee is
entitled to exercise its right to use the leased asset. However, if the property covered by the lease has yet to
be constructed, installed or has not been acquired by the Group, the commencement of the lease is deemed
to be the date when construction and installation of the property is completed or the property is acquired by
the Group.
On commencement of the lease term, when the Group enters into a finance lease as a lessor, the present value
of the lease payments (“net investment in leases”) is recorded as part of loans and advances to customers.
The difference between the gross receivable and the present value of the receivable is unearned finance
income. Finance income is recognised over the term of the lease using the effective interest method, which
reflects a constant periodic rate of return. Any advance payments made by the lessee prior to commencement
of the lease are recorded as a reduction in the net investment in lease. Finance income from leases is
recognised as part of interest income on loans and advances to customers.
Impairment losses are recognised in profit or loss when incurred as a result of one or more events (“loss
events”) that occurred after the initial recognition of the net investment in leases. The Group uses the same
principal criteria to determine that there is objective evidence that an impairment loss has occurred as for
loans carried at amortised costs disclosed earlier in this note. Impairment losses are recognised through
an allowance account to write down the receivables’ net carrying amount to the present value of expected
118 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
cash flows (which exclude future credit losses that have not been incurred) discounted at the interest rates
implicit in the finance leases. The estimated future cash flows reflect the cash flows that may result from
obtaining and selling the assets subject to the lease.
(ii) Operating leases
Where the Group is the lessee in a lease agreement and the lessor does not transfer substantially all of the
risks and rewards incidental to ownership of the asset, the arrangement is accounted for as an operating
lease. The leased asset is not recognised in the Group’s consolidated balance sheet, and lease expenses are
recognised in the consolidated income statement on a straight-line basis over the period of the lease.
When an operating lease is terminated before the lease period has expired, any payment required to be made
to the lessor by way of penalty is recognised as an expense in the period in which termination takes place.
Where the Group is the lessor in a lease agreement and does not transfer substantially all of the risks and
rewards incidental to ownership of the asset, the arrangement is accounted for as an operating lease.
The leased asset is recognised in the Group’s consolidated balance sheet, and depreciation and lease income
are recognised in the consolidated income statement on a straight-line basis over the period of the lease.
(q) Fiduciary assets
The Group provides custody, asset management and other fiduciary services that result in holding or
placing of assets on behalf of third parties. These assets and income arising thereon are excluded from these
consolidated financial statements as they are not assets of the Group. Commissions received from such
business are shown as fees and commissions received in the consolidated income statement.
(r) Segment reporting
The Group presents segment information by operating segments. A segment is a distinguishable component
of the Group about which separate financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing performance. Refer to
section (s) below.
(s) Changes in accounting policies
The accounting policies applied by the Group in these consolidated financial statements are consistent with
those applied by the Group in the consolidated financial statements for the year ended 31 December 2007,
except for changes resulting from the amendments to IFRS.
IFRS 8 “Operating Segments”. As at 1 January 2008, the Group has early adopted IFRS 8 “Operating
Segments” which is effective for annual periods beginning on or after 1 January 2009 (earlier application
is permitted). IFRS 8 specifies how an entity should report information about its operating segments and
sets out requirements for related disclosures about products and services, geographical areas and major
customers. Operating segments are components of an entity about which separate financial information
is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate
resources and in assessing performance. Financial information is required to be reported on the same basis
as is used internally for evaluating operating segment performance and deciding how to allocate resources
to operating segments. IFRS 8 “Operating Segments” replaces IAS 14 “Segment Reporting”.
As a result, the Group has presented information in Note 27 “Analysis by Segment” in these consolidated
financial statements based on the measures of segment profit and loss, segment assets and other segment
items reported to the chief operating decision maker of the Group (represented by the Management Board
of MDM Bank and Chairman of the Management Board). The Group has also presented a reconciliation of
the total of above measure of reportable segments’ profit and loss to the Group’s profit and loss before tax as
reported in the consolidated financial statements, and the total of the above measure of reportable segment
assets to the total assets of the Group as reported in the consolidated financial statements.
MDM Bank 119
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Reclassification of Financial Assets - Amendments to IAS 39, Financial Instruments: Recognition and
Measurement and IFRS 7 Financial Instruments: Disclosures (issued in October 2008; effective from
1 July 2008). In October 2008, the IASB issued amendments to IAS 39 “Financial Instruments: Recognition
and Measurement”, and IFRS 7 “Financial Instruments: Disclosures”. The amendments to IAS 39 permit
(1) certain reclassifications of non-derivative financial assets (other than those designated under the fair
value option) out of the trading category if they are no longer held for the purpose of selling or repurchasing
them in the near term to either the held to maturity, loans and receivables or available for sale categories
and (2) also allow the reclassification of financial assets from the available for sale category to the loans and
receivables category in particular rare circumstances. Rare circumstances arise from a single event that is
unusual and highly unlikely to recur in the near term. Any reclassified instruments should subsequently be
reviewed for impairment using the IAS 39 impairment rules for the categories into which they are classified.
The amendments to IFRS 7 introduce additional disclosure requirements if an entity has reclassified financial
assets in accordance with the amendments to IAS 39.
The effect of application of amendment to IAS 39 by the Group is as follows:
• The Group has reclassified certain debt trading securities into loans and advances to customers. The Group
identified certain corporate bonds and eurobonds eligible under the amendments (i.e. fixed maturity
instruments which are not quoted in an active market), for which as at 1 July 2008 it had an intent to
hold them to maturity or in the foreseeable future. Under amendments to IAS 39, the reclassifications
were made with effect from 1 July 2008 at fair value at that date. The above bonds are now accounted for
at amortised cost in accordance with accounting policies for loans and advances to customers, including
assessment for impairment.
The deterioration of the global and Russian financial markets during the third quarter 2008 meets the
definition of “rare circumstances” by Amendments to IAS 39. Therefore the Group has also made the
following reclassifications effective from 1 July 2008:
• The Group has reclassified certain debt trading securities into investment securities held to maturity.
The Group identified certain corporate bonds, eligible under the amendments, for which as at 1 July 2008
it had an intention and ability to hold them to maturity. The reclassifications were made with effect from
1 July 2008 at fair value at that date. Investment securities held to maturity are accounted for at amortised
cost and are assessed for impairment in accordance with IAS 39 requirements for this category.
• The Group has reclassified the remaining part of its debt trading securities into available-for-sale financial
assets effective from 1 July 2008, as the Group no longer holds these securities for the purpose of selling or
repurchasing them in the near term. From the reclassification date, the securities are revalued at fair value
directly in equity through the revaluation of available-for-sale financial assets. Assessment for impairment
is performed for these securities in accordance with IAS 39 requirements for available-for-sale financial
assets.
The disclosures below detail the impact of the reclassifications on the consolidated financial statements of
the Group:
31 December 2008 30 June 2008
Carrying value Fair value Carrying and fair value
Trading securities reclassified to available-for-sale
financial assets 8 227 8 227 12 469
Trading securities reclassified to investment
securities held to maturity 108 393 1 234
Trading securities reclassified to loans and advances
to customers 4 369 3 883 4 095
120 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
2008
Would have been recognized
Recognised for reclassified if the reclassifications were
assets not made
Interest income 1 616 1 489
Gains /(losses) arising from trading in securities, net 266 (2 259)
Gains arising from available-for-sale financial assets, net 299 -
Loan impairment losses (157) -
Provision for impairment of investment securities held
to maturity (371) -
Total recognised in profit and loss for the year
(before tax) 1 653 (770)
Revaluation of available-for-sale financial assets (1 953) -
Total recognised in equity (before tax) (300) (770)
As at the reclassification date, effective interest rates on reclassified trading assets ranged from 4% to 18%
with expected recoverable cash flows of RUR 17 714 million.
(t) Comparative information
Certain comparative information has been reclassified to conform to changes in presentation in the current
year, as follows.
In prior periods the Group presented information for Corporate Banking, Retail Banking, Small Business
Banking, Investment Banking and Financial Markets, Private Banking and Asset Management and Central
Treasury segments as reportable business segments. Starting from 1 January 2008, following a change in
internal management reporting and the way how information is presented internally to the chief operating
decision maker of the Group, i) Retail Banking segment now includes the Small Business Banking segment;
and ii) Corporate Banking, Investment Banking and Financial Markets, Private Banking and Asset
Management together are included in the Corporate and Investment Banking segment. The Group has
accordingly changed comparative information presented in Note 27 “Analysis by Segment”.
(u) New standards and interpretations not yet adopted
Certain new standards and interpretations have been published that are mandatory for the Group’s accounting
periods beginning on or after 1 January 2009 or later periods and which the Group has not early adopted:
Puttable Financial Instruments and Obligations Arising on Liquidation - IAS 32 and IAS 1 Amendment
(effective from 1 January 2009). The amendment requires classification as equity of some financial
instruments that meet the definition of a financial liability. The Group does not expect the amendment to
affect its consolidated financial statements.
IAS 1, Presentation of Financial Statements (revised September 2008; effective for annual periods
beginning on or after 1 January 2009). The main change in IAS 1 is the replacement of the income
statement by a statement of comprehensive income which will also include all non-owner changes in equity,
such as the revaluation of available-for-sale financial assets. Alternatively, entities will be allowed to present
two statements: a separate income statement and a statement of comprehensive income. The revised IAS 1
also introduces a requirement to present a statement of financial position (balance sheet) at the beginning of
the earliest comparative period whenever the entity restates comparatives due to reclassifications, changes
in accounting policies, or corrections of errors. The Group expects the revised IAS 1 to affect the presentation
of its financial statements but to have no impact on the recognition or measurement of specific transactions
and balances.
IAS 23, Borrowing Costs (revised March 2008; effective for annual periods beginning on or after
1 January 2009). The revised IAS 23 was issued in March 2008. The main change to IAS 23 is the removal
of the option of immediately recognising as an expense borrowing costs that relate to assets that take
a substantial period of time to get ready for use or sale. An entity is, therefore, required to capitalise such
borrowing costs as part of the cost of the asset. The revised standard applies prospectively to borrowing costs
relating to qualifying assets for which the commencement date for capitalisation is on or after 1 January
MDM Bank 121
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
2009. No changes will be made for borrowing costs incurred to this date that have been expensed, and
management does not expect the revised IAS 23 to affect the Group’s financial statements.
IAS 27, Consolidated and Separate Financial Statements (revised January 2008; effective for annual
periods beginning on or after 1 July 2009). The revised IAS 27 will require an entity to attribute total
comprehensive income to the owners of the parent and to the non-controlling interests (previously “minority
interests”) even if this results in the non-controlling interests having a deficit balance (the current standard
requires the excess losses to be allocated to the owners of the parent in most cases). The revised standard
specifies that changes in a parent’s ownership interest in a subsidiary that do not result in the loss of control
must be accounted for as equity transactions. It also specifies how an entity should measure any gain or
loss arising on the loss of control of a subsidiary. At the date when control is lost, any investment retained
in the former subsidiary will have to be measured at its fair value. The Group does not expect the amended
standard to have a material effect on its consolidated financial statements.
Vesting Conditions and Cancellations—Amendment to IFRS 2, Share-based Payment (issued in January
2008; effective for annual periods beginning on or after 1 January 2009). The amendment clarifies that
only service conditions and performance conditions are vesting conditions. Other features of a share-based
payment are not vesting conditions. The amendment specifies that all cancellations, whether by the entity or
by other parties, should receive the same accounting treatment. The Group does not expect the amendment
to have a material effect on its consolidated financial statements.
IFRS 3, Business Combinations (revised January 2008; effective for business combinations for which
the acquisition date is on or after the beginning of the first annual reporting period beginning on or
after 1 July 2009). The revised IFRS 3 will allow entities to choose to measure non-controlling interests
using the existing IFRS 3 method (proportionate share of the acquiree’s identifiable net assets) or at fair
value. The revised IFRS 3 is more detailed in providing guidance on the application of the purchase method
to business combinations. The requirement to measure at fair value every asset and liability at each step
in a step acquisition for the purposes of calculating a portion of goodwill has been removed. Instead, in
a business combination achieved in stages, the acquirer will have to remeasure its previously held equity
interest in the acquiree at its acquisition date fair value and recognise the resulting gain or loss, if any, in
profit or loss. Acquisition-related costs will be accounted for separately from the business combination and
therefore recognised as expenses rather than included in goodwill. An acquirer will have to recognise at the
acquisition date a liability for any contingent purchase consideration. Changes in the value of that liability
after the acquisition date will be recognised in accordance with other applicable IFRS, as appropriate, rather
than by adjusting goodwill. The revised IFRS 3 brings into its scope business combinations involving only
mutual entities and business combinations achieved by contract alone. The Group is currently assessing the
impact of the amended standard on its consolidated financial statements.
Improvements to International Financial Reporting Standards (issued in May 2008). In 2007, the
International Accounting Standards Board decided to initiate an annual improvements project as a method
of making necessary, but non-urgent, amendments to IFRS. The amendments issued in May 2008 consist
of a mixture of substantive changes, clarifications, and changes in terminology in various standards.
The substantive changes relate to the following areas: classification as held for sale under IFRS 5 in case
of a loss of control over a subsidiary; possibility of presentation of financial instruments held for trading
as non-current under IAS 1; accounting for sale of IAS 16 assets which were previously held for rental and
classification of the related cash flows under IAS 7 as cash flows from operating activities; clarification of
definition of a curtailment under IAS 19; accounting for below market interest rate government loans in
accordance with IAS 20; making the definition of borrowing costs in IAS 23 consistent with the effective
interest method; clarification of accounting for subsidiaries held for sale under IAS 27 and IFRS 5; reduction in
the disclosure requirements relating to associates and joint ventures under IAS 28 and IAS 31; enhancement
of disclosures required by IAS 36; clarification of accounting for advertising costs under IAS 38; amending
the definition of the fair value through profit or loss category to be consistent with hedge accounting under
IAS 39; introduction of accounting for investment properties under construction in accordance with IAS 40;
and reduction in restrictions over manner of determining fair value of biological assets under IAS 41. Further
amendments made to IAS 8, 10, 18, 20, 29, 34, 40, 41 and to IFRS 7 represent terminology or editorial
changes only, which the IASB believes have no or minimal effect on accounting. The Group does not expect
the amendments to have any material effect on its consolidated financial statements.
122 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Other new standards or interpretations. The Group has not early adopted the following other new standards
or interpretations:
• IFRIC 13, Customer Loyalty Programmes (effective for annual periods beginning on or after 1 July 2008).
• IFRIC 15, Agreements for the Construction of Real Estate (effective for annual periods beginning on or
after 1 January 2009).
• IFRIC 16, Hedges of a Net Investment in a Foreign Operation (effective for annual periods beginning on or
after 1 October 2008).
• IFRIC 17, Distribution of Non-Cash Assets to Owners (effective for annual periods beginning on or after
1 July 2009, with earlier application permitted).
• Cost of an Investment in a Subsidiary, Jointly Controlled Entity or Associate - IFRS 1 and IAS 27 Amendment
(revised May 2008; effective for annual periods beginning on or after 1 January 2009).
Unless otherwise described above, the new standards and interpretations are not expected to significantly
affect the Group’s consolidated financial statements.
5. Cash and Cash Equivalents
31 December 2008 31 December 2007
Cash on hand 11 938 5 326
Correspondent accounts with central banks 22 564 11 289
Correspondent accounts and overnight deposits with other
banks 39 096 66 638
Settlement accounts with trading systems 3 673 181
Total cash and cash equivalents 77 271 83 434
Correspondent accounts and overnight deposits with other banks comprise:
31 December 2008 31 December 2007
Investment grade international banks 25 887 59 043
Russian subsidiaries of investment grade international banks - 2 581
Large Russian banks 11 741 1 621
Other Russian banks 1 404 2 715
Other foreign banks 64 678
Total correspondent accounts and overnight deposits 39 096 66 638
Investment grade international banks in the table above are multinational or OECD-based banks with
investment grade ratings as at 31 December 2008 and 31 December 2007, respectively. An investment
grade rating is an international rating of BBB- or above by Standard & Poor’s, BBB- or above by Fitch and
Baa3 or above by Moody’s. Large Russian banks in the table above are the banks included in the top thirty
Russian banks by total assets in accordance with the local accounting standards as at 31 December 2008 and
31 December 2007, respectively.
As at 31 December 2008, the Group had tree counterparties with aggregated balances on correspondent
accounts and overnight deposits greater than 10% of consolidated equity at that date (31 December 2007:
two counterparties). The total aggregate amount of these balances was RUR 19 593 million, or 25% of total
cash and cash equivalents, as at 31 December 2008 (31 December 2007: RUR 56 816 million, or 68% of total
cash and cash equivalents).
As at 31 December 2008 and 31 December 2007 the Group had obligations under its loan participation notes,
secured by the Group’s diversified payment rights (“DPR”), i.e. its rights to funds being transferred to the
Group’s USD and EUR correspondent accounts. As at 31 December 2008, the carrying amount of these notes was
RUR 9 791 million (31 December 2007: RUR 14 133 million). Refer to Note 17.
Geographical and currency analysis of cash and cash equivalents is disclosed in Note 28.
MDM Bank 123
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
6. Due from Other Banks
31 December 2008 31 December 2007
Current interbank loans
Investment grade international banks 11 841 4 824
Russian subsidiaries of investment grade international banks 8 491 5 510
Large Russian banks - 1 467
Other foreign banks 1 120
Other Russian banks 6 796 6 773
Total current interbank loans 27 129 18 694
Reverse sale and repurchase agreements
Investment grade international banks 4 522 7 046
Large Russian banks - 1 549
Other Russian banks - 545
Total reverse sale and repurchase agreements 4 522 9 140
Due from other banks 31 651 27 834
Investment grade international banks in the table above are the multinational or OECD-based banks with
investment grade ratings as at 31 December 2008 and 31 December 2007, respectively. Refer to Note 5.
Large Russian banks in the table above are the banks included in the top thirty Russian banks by total
assets in accordance with the local accounting standards as at 31 December 2008 and 31 December 2007,
respectively.
As at 31 December 2008, the Group had two counterparties with aggregated balances greater than 10%
of consolidated equity at that date (31 December 2007: one counterparty). The total aggregate amount of
these balances was RUR 10 819 million, or 34% of due from other banks balances, as at 31 December 2008
(31 December 2007: RUR 7 046 million, or 25% of due from other banks balances). As at 31 December 2008,
these balances included receivables from a large international bank due under a reverse sale and repurchase
agreement of RUR 4 522 million (31 December 2007: RUR 7 046 million), which were pledged as collateral
for term deposits of RUR 4 515 million (31 December 2007: RUR 7 042 million) received by one of the Group’s
subsidiaries from the same bank. Refer to Note 15.
Securities received as collateral under reverse sale and repurchase agreements are marketable corporate bonds
and equity securities. The following table presents information about the fair value of these securities:
31 December 2008 31 December 2007
Held by the Group 4 828 9 735
Pledged under sale and repurchase agreements
(Notes 11, 15 and 16) - 129
Securities received as collateral under reverse sale and
repurchase agreements 4 828 9 864
Included in due from other banks as at 31 December 2008 were loans to an international bank of
RUR 1 129 million pledged as collateral for interest and principal repayments in respect of loan participation
notes secured by diversified payment rights (31 December 2007: RUR 1 093 million). Refer to Note 17.
Geographical and currency analysis, effective interest rates and maturity structure of due from other banks
are disclosed in Note 28.
124 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
7. Trading Securities
31 December 2008 31 December 2007
- Owned by the Group
Government bonds
Municipal bonds issued by Russian municipalities - 2
Russian Federal loan bonds (OFZ) - 1
Corporate debt and equity securities
Corporate bonds - 3 855
Corporate Eurobonds - 5 212
Promissory notes - 317
Corporate shares 194 1 488
Total trading securities owned by the Group 194 10 875
- Pledged under sale and repurchase agreements
Government bonds
Russian Federal loan bonds (OFZ) - 249
Municipal bonds issued by Russian municipalities - 80
Corporate debt and equity securities
Corporate bonds - 1 226
Corporate Eurobonds - 897
Corporate shares - 535
Total trading securities pledged under sale and
repurchase agreements - 2 987
Total trading securities 194 13 862
Municipal bonds are securities issued by Russian municipalities denominated in Russian Roubles.
Russian Federal loan bonds (OFZ) are securities issued by the Government of the Russian Federation
denominated in Russian Roubles.
Corporate bonds are interest-bearing securities, issued by Russian companies.
Corporate Eurobonds are interest-bearing securities, issued by Russian or foreign companies.
Promissory notes are debt securities of Russian companies denominated in Russian Roubles issued at
a discount to nominal value.
The majority of corporate shares are shares of Russian companies traded in the Moscow Interbank Currency
Exchange (MICEX) or the Russian Trading System (RTS).
The following table provides details of the Group’s debt trading securities as at 31 December 2007:
Yield to
maturity
Maturity Coupon rate per annum per annum
Minimum Maximum Minimum Maximum Average
Municipal bonds issued
by Russian municipalities October 2011 October 2011 9.2% 9.2% 8.5%
Russian Federal loan
bonds (OFZ) November 2021 November 2021 9.0% 9.0% 6.5%
Corporate bonds April 2008 November 2018 6.3% 14.1% 10.5%
Corporate eurobonds April 2009 December 2015 7.5% 11.0% 10.3%
Promissory notes March 2008 July 2008 - - 11.6%
MDM Bank 125
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The following table provides information on the credit quality of the Group’s corporate debt securities based
on Standard & Poor’s, Fitch and Moody’s international ratings as at 31 December 2007:
31 December 2007
Corporate bonds owned by the Group
Credit rating between BB+ and BBB+ 1 961
Credit rating BB and below 1 823
Not rated 5 283
Total corporate bonds owned by the Group 9 067
Promissory notes owned by the Group
Credit rating BB and below 109
Not rated 208
Total promissory notes owned by the Group 317
Corporate bonds pledged under sale and repurchase agreements
Credit rating between BB+ and BBB+ 504
Credit rating BB and below 1 288
Not rated 331
Total corporate bonds pledged under sale and repurchase agreements 2 123
Geographical and currency analysis, effective interest rates and maturity structure of trading securities are
disclosed in Note 28. Information on related party transactions is disclosed in Note 31.
8. Derivative Financial Instruments
The fair values of derivative instruments held by the Group are set out in the following table:
31 December 2008 31 December 2007
Contract/ Fair values Contract/ Fair values
notional notional
amount Assets Liabilities amount Assets Liabilities
Foreign exchange derivative contracts
- currency forwards 83 681 1 337 (1 137) 66 764 245 (421)
- currency futures 6 550 - - 7 478 - -
Precious metals derivative contracts
- precious metals forwards 2 118 10 (6) 1 175 15 (6)
Securities derivative contracts
- securities forwards - - - 754 - (25)
- stock index forwards 5 876 1 175 (1 175) - - -
- written securities put options - - - 245 - -
Other derivative contracts
- cross currency interest rate swaps 2 238 143 (54) 2 002 - (70)
- balance guaranteed cross currency
interest rate swaps 2 198 418 - 5 008 - (352)
- commodity swaps - - - 270 - -
Total recognised derivative assets/
(liabilities) 3 083 (2 372) 260 (874)
126 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Derivative financial instruments are generally traded in an over-the-counter market with professional market
counterparties on standardised contractual terms and conditions or exchange traded. The notional amounts
of certain types of financial instruments provide a basis for comparison with instruments recognised on
the balance sheet but do not necessarily indicate the amounts of future cash flows involved or the current
fair value of the instruments and, therefore, do not indicate the Group’s exposure to credit or price risks.
The derivative instruments become favourable (positive fair value) or unfavourable (negative fair value) as
a result of fluctuations in market rates relative to their terms. The aggregate contractual or notional amount
of derivative financial instruments on hand, the extent to which instruments are favourable or unfavourable
and, thus, the aggregate fair values of derivative financial assets and liabilities can fluctuate significantly
over time.
Currency, precious metal and securities forwards are over-the-counter contracts which establish terms and
conditions of a deal which is settled at a future date.
Currency futures are exchange traded contracts which establish terms and conditions of a deal which is
settled at a future date.
Stock index forwards are over-the-counter contracts whereby one party pays the other party the difference
between a specified index as at contract date and settlement date.
Written securities put options as at 31 December 2007 are put options expired in March 2008 written by
the Group to a major international bank in respect of bonds issued by a Russian entity with a total nominal
amount of USD 10 million, or RUR 245 million. As at 31 December 2007, the market price of the underlying
bonds was significantly above the exercise price. Further, the Group had the right to terminate the options
before maturity under certain conditions related to the price of the underlying bonds. Based on these facts,
management of the Group estimated that, as at 31 December 2007, the fair value of the related liability
was nil.
Cross currency interest rate swaps are over-the-counter contracts whereby one party swaps principal and
interest payments in one currency determined using a fixed or floating interest rate for principal and interest
payments in other currency determined using a floating or fixed interest rate.
Balance guaranteed cross currency interest rate swaps are swap agreements with major international banks,
in which the Group entered as a part of its car loans securitisation transaction. Under the terms of the swap
agreements all RUR or USD denominated fixed rate amounts received by the Group from car loans pledged as
collateral under its loan participation notes are swapped for USD floating rate amounts which are then used
for repayment of the loan participation notes. Refer to Note 17.
Derivatives which are embedded in financial instruments measured at fair value through profit or loss are
not included in the above table. As at 31 December 2007, these derivatives comprised derivatives embedded
into credit-linked leveraged notes of RUR 226 million included within other assets (Refer to Note 13).
The maximum losses of the Group in respect of these embedded derivatives were limited to the carrying
value of the related financial instruments.
MDM Bank 127
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Remaining maturity, fair value and weighted average exchange rate breakdowns for forward and future
currency contracts as at 31 December 2008 are set out in the following table:
Weighted aver- Fair values
Contract/ age contracted
notional amount exchange rates Assets Liabilities
Forwards
Buy USD sell RUR
Less than three months 11 512 29.68 179 -
Between three months and one year 333 23.67 95 -
Buy RUR sell USD
Less than three months 11 865 29.85 2 (126)
Between three months and one year 172 24.59 - (61)
Buy USD sell EUR
Less than three months 24 198 1.40 951 (1)
Buy EUR sell USD
Less than three months 23 053 1.41 - (887)
Buy RUR sell EUR
Less than three months 675 38.56 - (27)
Buy CHF sell USD
Less than three months 2 906 1.08 32 -
Buy USD sell CHF
Less than three months 2 925 1.07 - (9)
Buy JPY sell USD
Less than three months 1 735 90.42 - (18)
Buy USD sell JPY
Less than three months 2 309 90.55 20 -
Buy EUR sell LVL
Less than three months 1 027 0.71 - (7)
Other
Less than three months 971 - 58 (1)
Futures
Buy USD sell RUR
Less than three months 588 25.99 - -
Between three months and one year 2 350 25.14 - -
Buy RUR sell USD
Less than three months 1 002 25.05 - -
Between three months and one year 1 515 25.24 - -
Buy RUR sell EUR
Less than three months 515 36.81
Buy EUR sell RUR
Less than three months 580 37.30 - -
Total 90 231 1 337 (1 137)
128 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Remaining maturity, fair value and weighted average exchange rate breakdowns for forward and future
currency contracts as at 31 December 2007 are set out in the following table:
Weighted aver- Fair values
Contract/ age contracted
notional amount exchange rates Assets Liabilities
Forwards
Buy USD sell RUR
Less than three months 21 536 24.85 22 (128)
Between three months and one year 1 242 25.09 4 (16)
Buy RUR sell USD
Less than three months 19 108 24.74 99 (24)
Between three months and one year 1 122 24.93 5 (5)
Buy USD sell EUR
Less than three months 4 743 1.44 6 (25)
Buy EUR sell USD
Less than three months 772 1.44 1 -
Buy EUR sell RUR
Less than three months 1 407 35.5 - (13)
Buy USD sell CHF
Less than three months 1 366 1.15 - (35)
Buy CHF sell USD
Less than three months 1 380 1.15 27 -
Buy USD sell JPY
Less than three months 6 110 114.2 - (95)
Buy JPY sell USD
Less than three months 6 170 113.9 79 -
Buy EUR sell LVL
Less than three months 823 1.32 - (78)
Other
Less than three months 822 - 2 -
Between three months and one year 163 - - (2)
Futures
Buy USD sell RUR
Less than three months 2 946 25.41 - -
Between three months and one year 982 25.55 - -
Buy RUR sell USD
Less than three months 3 044 25.37 - -
Between three months and one year 506 25.30 - -
Total 74 242 245 (421)
Geographical, currency analysis and maturity structure of derivative financial instruments are disclosed in
Note 28. Information on related party transactions is disclosed in Note 31.
MDM Bank 129
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
9. Available-for-Sale Financial Assets
31 December 2008 31 December 2007
- Owned by the Group
Corporate debt and equity securities
Corporate bonds 3 558 -
Corporate Eurobonds 3 227 -
Promissory notes 1 063 -
Corporate shares 464 -
Investments in mutual funds 364 290
Total available-for-sale financial assets owned by the Group 8 676 290
- Pledged under sale and repurchase agreements
Corporate debt and equity securities
Corporate bonds 379 -
Total available-for-sale financial assets pledged under sale and
repurchase agreements 379 -
Total available-for-sale financial assets 9 055 290
As at 31 December 2008 and 31 December 2007, investments in mutual funds comprise the Group’s share in
a closed mutual investment fund aimed at investment projects in the South of Russia.
The following table provides details of the Group’s debt available-for-sale securities as at 31 December 2008:
Yield to
maturity
Maturity Coupon rate per annum per annum
Minimum Maximum Minimum Maximum Average
Corporate bonds February 2009 October 2011 5.5% 18.0% 43.1%
Corporate Eurobonds January 2009 April 2013 4.0% 13.5% 33.4%
Promissory notes March 2009 November 2009 - - 24.0%
The following table provides information on the credit quality of the Group’s corporate debt securities based
on Standard & Poor’s, Fitch and Moody’s international ratings as at 31 December 2008:
31 December 2008
Corporate bonds owned by the Group
Credit rating BB and below 1 004
Not rated 2 554
Total corporate bonds owned by the Group 3 558
Corporate Eurobonds owned by the Group
Credit rating between BB+ and BBB+ 132
Credit rating BB and below 2 170
Not rated 925
Total corporate bonds owned by the Group 3 227
Promissory notes owned by the Group
Credit rating between BB+ and BBB+ 754
Not rated 309
Total promissory notes owned by the Group 1 063
Corporate bonds pledged under sale and repurchase agreements
Credit rating between BB+ and BBB+ 130
Credit rating BB and below 249
Total corporate bonds pledged under sale and repurchase agreements 379
Geographical and currency analysis and maturity structure of available-for-sale financial assets are disclosed
in Note 28.
130 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
10. Investment Securities Held to Maturity
Included in investment securities held to maturity as at 31 December 2008, are corporate bonds issued by one
Russian company denominated in Russian Rubles with a carrying value of RUR 479 million, a coupon rate
of 7.75% and maturity date of 14 June 2014. As at 31 December 2008 provision for impairment in amount of
RUR 371 million was recognised in respect of these bonds.
11. Loans and Advances to Customers
31 December 2008 31 December 2007
Loans to corporate customers 137 800 121 585
Loans to individuals 40 460 36 849
Investment banking loans 10 360 16 130
Small business loans 15 529 8 214
Net investment in finance leases 2 860 3 727
Gross loans and advances to customers 207 009 186 505
Less: loan impairment (12 203) (6 194)
Loans and advances to customers 194 806 180 311
(a) Loan impairment
Movements in loan impairment by classes of loans to customers for the year ended 31 December 2008 are
as follows:
Net
Loans to Investment Small investment
corporate Loans to banking business in finance
customers individuals loans loans leases Total
Loan impairment as at 1 January 2008 3 135 2 460 23 453 123 6 194
Loan impairment losses during the year 4 039 942 204 835 596 6 616
Transfer of impairment losses on terminated
lease contracts to other assets - - - - (249) (249)
Loans written off during the year as
uncollectible (53) (4) - (26) - (83)
Loans sold during the year (220) (666) - (1) - (887)
Effect of foreign currency translation 392 127 11 59 23 612
Loan impairment as at 31 December 2008 7 293 2 859 238 1 320 493 12 203
Movements in loan impairment by classes of loans to customers for the year ended 31 December 2007 are
as follows:
Net
Loans to Investment Small investment
corporate Loans to banking business in finance
customers individuals loans loans leases Total
Loan impairment as at 1 January 2007 2 896 1 453 18 96 36 4 499
Loan impairment losses during the year 408 1 217 5 364 89 2 083
Loans written off during the year as
uncollectible (81) (8) - - - (89)
Loans sold during the year (38) (163) - - - (201)
Effect of foreign currency translation (50) (39) - (7) (2) (98)
Loan impairment as at 31 December 2007 3 135 2 460 23 453 123 6 194
Loans sold during the year ended 31 December 2008 comprised loans to corporate customers with a gross book
value of RUR 297 million against which an impairment allowance of RUR 220 million was recognised, which
were sold for RUR 44 million, and loans to individuals with a gross book value of RUR 769 million against
which an impairment allowance of RUR 666 million was recognised, which were sold for RUR 67 million.
MDM Bank 131
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Included in loans and advances to customers, as at 31 December 2008, was interest accrued on loans
individually assessed for impairment of RUR 372 million (31 December 2007: RUR 22 million).
The Group has reviewed its loan portfolio as at 31 December 2008 and recognised loan impairment as
follows:
Impairment to
Gross loans Impairment Net loans Gross loans (%)
Loans to corporate customers
Collectively assessed for impairment
Standard loans not past due 90 609 (2 106) 88 503 2.3
Watch list loans not past due 31 055 (682) 30 373 2.2
Total collectively assessed for impairment 121 664 (2 788) 118 876 2.3
Individually assessed for impairment
Watch list loans not past due 5 655 (992) 4 663 17.5
Overdue loans 9 677 (2 709) 6 968 28.0
Non-recoverable loans 804 (804) - 100.0
Total individually assessed for impairment 16 136 (4 505) 11 631 27.9
Total loans to corporate customers 137 800 (7 293) 130 507 5.3
Loans to individuals
Loans to individuals collectively assessed
for impairment
Standard loans to finance purchase of cars 18 874 (1 359) 17 515 7.2
Express loans to finance purchase of cars 3 110 (613) 2 497 19.7
Mortgage loans 14 017 (498) 13 519 3.6
Credit card overdrafts 1 389 (207) 1 182 14.9
Other loans to individuals 3 070 (182) 2 888 5.9
Total loans to individuals 40 460 (2 859) 37 601 7.1
Investment banking loans
Collectively assessed for impairment
Margin loans fully secured by traded securities 1 169 - 1 169 0.0
Reverse sale and repurchase agreements 863 - 863 0.0
Other standard loans 8 305 (215) 8 090 2.6
Total collectively assessed for impairment 10 337 (215) 10 122 2.1
Individually assessed for impairment
Non-recoverable loans 23 (23) - 100.0
Total individually assessed for impairment 23 (23) - 100.0
Total investment banking loans 10 360 (238) 10 122 2.3
Small business loans
Collectively assessed for impairment
Standard loans to legal entities not past due 8 093 (362) 7 731 4.5
Watch list loans to legal entities not past due 2 466 (111) 2 355 4.5
Loans to individual entrepreneurs 3 894 (193) 3 701 5.0
Total collectively assessed for impairment 14 453 (666) 13 787 4.6
Individually assessed for impairment
Watch list loans not past due 23 (5) 18 21.7
Overdue loans 550 (146) 404 26.5
Non-recoverable loans 503 (503) - 100.0
Total individually assessed for impairment 1 076 (654) 422 60.8
Total small business loans 15 529 (1 320) 14 209 8.5
132 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Impairment to
Gross loans Impairment Net loans Gross loans (%)
Net investment in finance leases
Collectively assessed for impairment 1 475 (46) 1 429 3.1
Individually assessed for impairment 1 385 (447) 938 32.3
Total net investment in finance leases 2 860 (493) 2 367 17.2
Total loans and advances to customers 207 009 (12 203) 194 806 5.9
Management of the Group believes that receivables under reverse repurchase agreements and margin loans,
which are fully collateralised by pledge of securities with fair value exceeding the loan amount as at that
date, are not impaired.
As at 31 December 2008 renegotiated loans to corporate customers that would otherwise be past due or
impaired of RUR 16 400 million are included in Group’s loan portfolio (31 December 2007: RUR 572 million).
Such restructuring activity is aimed at managing customer relationships and maximising collection
opportunities.
Express loans to finance purchase of cars are loans for which simplified credit approval procedures are used.
The following table shows gross loans and advances to customers and related loan impairment, as at
31 December 2007:
Impairment to
Gross loans Impairment Net loans Gross loans (%)
Loans to corporate customers
Collectively assessed for impairment
Standard loans not past due 85 182 (1 345) 83 837 1.6
Watch list loans not past due 34 012 (527) 33 485 1.5
Total collectively assessed for impairment 119 194 (1 872) 117 322 1.6
Individually assessed for impairment
Watch list loans not past due 1 362 (248) 1 114 18.2
Overdue loans 15 (1) 14 6.7
Non-recoverable loans 1 014 (1 014) - 100.0
Total individually assessed for impairment 2 391 (1 263) 1 128 52.8
Total loans to corporate customers 121 585 (3 135) 118 450 2.6
Loans to individuals
Loans to individuals collectively assessed for
impairment
Standard loans to finance purchase of cars 19 422 (1 081) 18 341 5.6
Express loans to finance purchase of cars 6 432 (973) 5 459 15.1
Mortgage loans 8 220 (193) 8 027 2.3
Credit card overdrafts 1 363 (145) 1 218 10.6
Other loans to individuals 1 412 (68) 1 344 4.8
Total loans to individuals 36 849 (2 460) 34 389 6.7
Investment banking loans
Collectively assessed for impairment
Margin loans fully secured by traded
securities 2 098 - 2 098 -
Reverse sale and repurchase agreements 12 090 - 12 090 -
Other standard loans 1 942 (23) 1 919 1.2
Total investment banking loans 16 130 (23) 16 107 0.1
MDM Bank 133
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Impairment to
Gross loans Impairment Net loans Gross loans (%)
Small business loans
Collectively assessed for impairment
Standard loans to legal entities not past due 6 220 (205) 6 015 3.3
Watch list loans to legal entities not past due 510 (15) 495 2.9
Loans to individual entrepreneurs 1 187 (11) 1 176 0.9
Total collectively assessed for impairment 7 917 (231) 7 686 2.9
Individually assessed for impairment
Overdue loans 137 (62) 75 45.3
Non-recoverable loans 160 (160) - 100.0
Total individually assessed for impairment 297 (222) 75 74.7
Total small business loans 8 214 (453) 7 761 5.5
Net investment in finance leases
Collectively assessed for impairment 2 315 (32) 2 283 1.4
Individually assessed for impairment 1 412 (91) 1 321 6.4
Total net investment in finance leases 3 727 (123) 3 604 3.3
Total loans and advances to customers 186 505 (6 194) 180 311 3.3
The following table shows the ageing analysis of loans to individuals as at 31 December 2008:
Impairment to
Gross loans Impairment Net loans Gross loans (%)
Standard loans to finance purchase of cars
- Not past due 16 620 (56) 16 564 0.3
- Overdue less than 30 days 681 (56) 625 8.2
- Overdue 30-89 days 390 (133) 257 34.1
- Overdue 90-179 days 182 (135) 47 74.2
- Overdue 180-360 days 234 (212) 22 90.6
- Overdue more than 360 days 767 (767) - 100.0
Total loans to finance purchase of cars 18 874 (1 359) 17 515 7.2
Express loans to finance purchase of cars
- Not past due 2 251 (13) 2 238 0.6
- Overdue less than 30 days 165 (13) 152 7.9
- Overdue 30-89 days 109 (33) 76 30.3
- Overdue 90-179 days 61 (42) 19 68.9
- Overdue 180-360 days 116 (104) 12 89.7
- Overdue more than 360 days 408 (408) - 100.0
Total express loans to finance purchase
of cars 3 110 (613) 2 497 19.7
Mortgage loans
- Not past due 13 065 (42) 13 023 0.3
- Overdue less than 30 days 389 (48) 341 12.3
- Overdue 30-89 days 216 (83) 133 38.4
- Overdue 90-179 days 77 (62) 15 80.5
- Overdue 180-360 days 125 (118) 7 94.4
- Overdue more than 360 days 145 (145) 0 100.0
Total mortgage loans 14 017 (498) 13 519 3.6
134 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Impairment to
Gross loans Impairment Net loans Gross loans (%)
Credit card overdrafts
- Not past due 1 088 (12) 1 076 1.1
- Overdue less than 30 days 75 (11) 64 14.7
- Overdue 30-89 days 54 (26) 28 48.1
- Overdue 90-179 days 30 (23) 7 76.7
- Overdue 180-360 days 58 (51) 7 87.9
- Overdue more than 360 days 84 (84) 0 100.0
Total credit card overdrafts 1 389 (207) 1 182 14.9
Other loans to individuals
- Not past due 2 770 (26) 2 744 0.9
- Overdue less than 30 days 151 (29) 122 19.2
- Overdue 30-89 days 44 (26) 18 59.1
- Overdue 90-179 days 27 (24) 3 88.9
- Overdue 180-360 days 30 (29) 1 96.7
- Overdue more than 360 days 48 (48) 0 100.0
Total other loans to individuals 3 070 (182) 2 888 5.9
Total loans to individuals 40 460 (2 859) 37 601 7.1
The following table shows the ageing analysis of loans to individuals as at 31 December 2007:
Impairment to
Gross loans Impairment Net loans Gross loans (%)
Standard loans to finance purchase of cars
- Not past due 17 762 (70) 17 692 0.4
- Overdue less than 30 days 519 (44) 475 8.5
- Overdue 30-89 days 207 (87) 120 42.0
- Overdue 90-179 days 156 (120) 36 76.9
- Overdue 180-360 days 276 (258) 18 93.5
- Overdue more than 360 days 502 (502) - 100.0
Total loans to finance purchase of cars 19 422 (1 081) 18 341 5.6
Express loans to finance purchase of cars
- Not past due 5 048 (39) 5 009 0.8
- Overdue less than 30 days 301 (29) 272 9.6
- Overdue 30-89 days 167 (70) 97 41.9
- Overdue 90-179 days 147 (104) 43 70.7
- Overdue 180-360 days 301 (263) 38 87.4
- Overdue more than 360 days 468 (468) - 100.0
Total express loans to finance purchase of cars 6 432 (973) 5 459 15.1
Mortgage loans
- Not past due 7 847 (31) 7 816 0.4
- Overdue less than 30 days 161 (19) 142 11.8
- Overdue 30-89 days 67 (29) 38 43.3
- Overdue 90-179 days 82 (57) 25 69.5
- Overdue 180-360 days 53 (47) 6 88.7
- Overdue more than 360 days 10 (10) - 100
Total mortgage loans 8 220 (193) 8 027 2.3
MDM Bank 135
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Impairment to
Gross loans Impairment Net loans Gross loans (%)
Credit card overdrafts
- Not past due 1 138 (6) 1 132 0.5
- Overdue less than 30 days 52 (6) 46 11.5
- Overdue 30-89 days 42 (14) 28 33.3
- Overdue 90-179 days 23 (15) 8 65.2
- Overdue 180-360 days 34 (30) 4 88.2
- Overdue more than 360 days 74 (74) - 100.0
Total credit card overdrafts 1 363 (145) 1 218 10.6
Other loans to individuals
- Not past due 1 313 (9) 1 304 0.7
- Overdue less than 30 days 26 (2) 24 7.7
- Overdue 30-89 days 13 (3) 10 23.1
- Overdue 90-179 days 8 (4) 4 50.0
- Overdue 180-360 days 12 (10) 2 83.3
- Overdue more than 360 days 40 (40) - 100.0
Total other loans to individuals 1 412 (68) 1 344 4.8
Total loans to individuals 36 849 (2 460) 34 389 6.7
The table below shows the ageing analysis of loans to corporate customers which were individually assessed
for impairment, as at 31 December 2008:
Impairment to
Gross loans Impairment Net loans Gross loans (%)
Watch list loans not past due 5 655 (992) 4 663 17.5
Overdue loans
- Overdue less than 30 days 1 661 (170) 1 491 10.2
- Overdue from 30 to 90 days 6 113 (1 792) 4 321 29.3
- Overdue from 90 to 180 days 942 (214) 728 22.7
- Overdue from 180 to 360 days 918 (509) 409 55.4
- Overdue more than 360 days 43 (24) 19 55.0
Total overdue loans 9 677 (2 709) 6 968 28.0
Non-recoverable loans
- Overdue less than 360 days 147 (147) - 100.0
- Overdue more than 360 days 657 (657) - 100.0
Total non-recoverable loans 804 (804) - 100.0
Total loans to corporate customers
individually assessed for impairment 16 136 (4 505) 11 631 27.9
136 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The table below shows the ageing analysis of loans to corporate customers which were individually assessed
for impairment, as at 31 December 2007:
Impairment to
Gross loans Impairment Net loans Gross loans (%)
Watch list loans not past due 1 362 (248) 1 114 18.2
Overdue loans
- Overdue less than 30 days 15 (1) 14 6.7
Total overdue loans 15 (1) 14 6.7
Non-recoverable loans
- Overdue less than 360 days 113 (113) - 100.0
- Overdue more than 360 days 901 (901) - 100.0
Total non-recoverable loans 1 014 (1 014) - 100.0
Total loans to corporate customers
individually assessed for impairment 2 391 (1 263) 1 128 52.8
The table below shows the ageing analysis of small business loans which were individually assessed for
impairment, as at 31 December 2008:
Impairment to
Gross loans Impairment Net loans gross loans (%)
Watch list loans not past due 23 (5) 18 21.7
Overdue loans
- Overdue less than 30 days 149 (19) 130 12.8
- Overdue 30-90 days 229 (67) 162 29.3
- Overdue 90-180 days 73 (28) 45 38.4
- Overdue 180-360 days 94 (31) 63 33.0
- Overdue more than 360 days 5 (1) 4 20.0
Total overdue loans 550 (146) 404 26.5
Non-recoverable loans
- Overdue less than 360 days 350 (350) - 100.0
- Overdue more than 360 days 153 (153) - 100.0
Total non-recoverable loans 503 (503) - 100.0
Total small business loans individually
assessed for impairment 1 076 (654) 422 60.8
The table below shows the ageing analysis of small business loans which were individually assessed for
impairment, as at 31 December 2007:
Impairment to
Gross loans Impairment Net loans gross loans (%)
Overdue loans
- Overdue less than 30 days 54 (4) 50 7.4
- Overdue 30-90 days 16 (9) 7 56.3
- Overdue 90-180 days 35 (21) 14 60.0
- Overdue 180-360 days 32 (28) 4 87.5
Total overdue loans 137 (62) 75 45.3
Non-recoverable loans
- Overdue less than 360 days 128 (128) - 100.0
- Overdue more than 360 days 32 (32) - 100.0
Total non-recoverable loans 160 (160) - 100.0
Total small business loans individually
assessed for impairment 297 (222) 75 74.7
MDM Bank 137
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The table below shows the ageing analysis of finance lease contracts which were individually assessed for
impairment, as at 31 December 2008:
Impairment to
Gross loans Impairment Net loans Gross loans (%)
Watch list contracts not past due 83 (24) 59 28.9
Overdue finance lease contracts
- Overdue less than 30 days 293 (31) 262 10.6
- Overdue 30-90 days 283 (29) 254 10.2
- Overdue 90-180 days 256 (125) 131 48.8
- Overdue 180-360 days 367 (193) 174 52.6
- Overdue more than 360 days 103 (45) 58 43.7
Total overdue finance lease contracts 1 302 (423) 879 32.5
Total finance lease contracts
assessed for impairment 1 385 (447) 938 32.3
The table below shows the ageing analysis of finance lease contracts which were individually assessed for
impairment, as at 31 December 2007:
Impairment to
Gross loans Impairment Net loans Gross loans (%)
Overdue financial lease contracts
- Overdue less than 30 days 1 055 (33) 1 022 3.1
- Overdue 90-180 days 357 (58) 299 16.2
Total overdue finance lease contracts 1 412 (91) 1 321 6.4
Total financial lease contracts
individually assessed for impairment 1 412 (91) 1 321 6.4
Non-performing loans comprise loans with principal or/and interest overdue by more than 90 days and
other loans classified as non-performing by management. A loan is usually classified as non-performing
by management if it is not probable that it will be recovered through means other than repossession and
subsequent realization of collateral.
The amounts of non-performing loans as at 31 December 2008 and 31 December 2007 are as follows:
31 December 2008 31 December 2007
Loans to corporate customers 4 756 1 014
Loans to individuals 2 439 2 186
Investment banking loans 23 -
Small business loans 750 227
Net investment in finance leases 795 357
Total non-performing loans 8 763 3 784
The loan portfolio as at 31 December 2008 included overdue loans totalling RUR 17 608 million
(31 December 2007: RUR 5 306 million).
138 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
(b) Collateral
The following table provides an analysis of the loan portfolio, net of impairment, by types of collateral as at
31 December 2008:
Other
Motor realisable Other No
Securities Real estate vehicles collateral collateral collateral Total
Loans to corporate customers 8 025 21 896 216 31 352 58 075 10 943 130 507
Loans to individuals - 13 519 20 011 - - 4 071 37 601
Investment banking loans 2 032 - - - 3 721 4 369 10 122
Small business loans 10 5 850 1 395 2 721 3 281 952 14 209
Net investment in finance leases - - 1 287 1 078 2 - 2 367
Total 10 067 41 265 22 909 35 151 65 079 20 335 194 806
The following table provides an analysis of the loan portfolio, net of impairment, by types of collateral as at
31 December 2007:
Other
Motor realisable Other No
Securities Real estate vehicles collateral collateral collateral Total
Loans to corporate customers 7 721 22 926 89 27 753 53 888 6 073 118 450
Loans to individuals - 8 027 23 800 - 1 2 561 34 389
Investment banking loans 14 188 - - 1 919 - - 16 107
Small business loans - 292 44 94 6 776 555 7 761
Net investment in finance leases - - 813 2 791 - - 3 604
Total 21 909 31 245 24 746 32 557 60 665 9 189 180 311
The amounts shown in the tables above represent the carrying value of the loans, and do not necessarily
represent the fair value of the collateral.
Other realisable collateral is collateral, which, in the opinion of the Group’s management, the Group will be
able to sell to reduce losses in case of a loan default.
Other collateral is collateral which the Group may not be able to sell easily in the market in order to recover
the loan. Such collateral may include goods in turnover, corporate or personal guarantees and it is used by
the Group as a tool in the process of negotiations with the borrower in case of loan default.
Loans issued to finance purchase of cars are secured by underlying cars. The majority of credit card overdrafts
and other loans to individuals are not secured. Mortgage loans are secured by underlying real estate.
Loans to corporate customers individually assessed for impairment with gross value of RUR 10 804 million
were secured by collateral with fair value of RUR 6 257 million, as at 31 December 2008 (31 December 2007:
loans individually assessed for impairment with gross value of RUR 71 million were secured by collateral
with fair value of RUR 99 million). There was no collateral or it is impracticable to determine fair value of
collateral for other overdue or impaired loans.
During the year ended 31 December 2008 the Group obtained assets by taking control of collateral accepted
as security with fair value of RUR 264 million (31 December 2007: assets with fair value of RUR 129 million),
of which assets totalling RUR 113 million were sold by the Group in the same period (31 December 2007:
assets with fair value of RUR 49 million).
Securities received as collateral under reverse sale and repurchase agreements are marketable corporate bonds
and equity securities. The following table presents information about the fair value of these securities:
31 December 2008 31 December 2007
Held by the Group 1 590 7 273
Pledged under sale and repurchase agreements (Notes 6, 15 and 16) - 8 370
Securities received as collateral under reverse sale and repurchase
agreements 1 590 15 643
MDM Bank 139
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
(c) Finance leases
Loans and advances to customers include finance lease receivables, which are analysed as follows:
31 December 2008 31 December 2007
Gross investment in finance leases, receivable:
- Not later than 1 year 2 087 2 189
- Later than 1 year and not later than 5 years 1 353 2 390
- Later than 5 years - 37
Less: Unearned finance income (580) (889)
Net investment in finance leases 2 860 3 727
Net investment in finance leases are analysed as follows:
31 December 2008 31 December 2007
Net investment in finance leases, receivable:
- Not later than 1 year 2 001 1 767
- Later than 1 year and not later than 5 years 859 1 930
- Later than 5 years - 30
Net investment in finance leases 2 860 3 727
(d) Pledged loans and asset securitisation
The Group has transferred a pool of loans to individuals to finance the purchase of cars to Taganka Car Loan
Finance plc, an entity which is in substance controlled by the Group. Accordingly, the financial statements
of Taganka Car Loan Finance plc are consolidated into these consolidated financial statements and the loans
are included in the consolidated balance sheet. These loans are pledged by the Group as collateral under
secured loan participation notes issued by the Group. As at 31 December 2008, the amount of loans pledged
was RUR 2 195 million (31 December 2007: RUR 4 745 million). As at 31 December 2008, the carrying
amount of the notes was RUR 1 282 million (31 December 2007: RUR 4 153 million). Refer to Note 17.
(e) Concentration analysis
As at 31 December 2008, credit exposure to ten largest borrowers (or groups of borrowers), excluding claims under
reverse repurchase agreements fully secured by traded securities, totalled RUR 22 470 million, or 11% of the
gross loan portfolio of the Group (31 December 2007: RUR 20 778 million, or 11% of the gross loan portfolio).
Economic sector risk concentrations within the customer loan portfolio are as follows:
31 December 2008 31 December 2007
Amount % Amount %
Individuals 40 460 19 36 849 20
Retail trade 35 507 17 24 276 13
Real estate 26 719 13 24 971 13
Manufacturing 25 576 12 17 239 9
Wholesale trade 22 104 11 15 759 9
Construction 14 397 7 22 247 12
Finance 11 769 5 18 706 10
Ore 7 172 3 3 661 2
Chemicals 3 820 2 2 744 1
Transport 3 392 2 3 983 2
Food and agriculture 3 316 2 1 289 1
Oil and gas 3 273 2 2 836 1
Metallurgy 2 501 1 3 553 2
Communication 1 529 1 1 750 1
Energy and atomic power 1 071 1 1 036 1
Other 4 403 2 5 606 3
Gross loans and advances to customers 207 009 100 186 505 100
140 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Geographical and currency analysis, effective interest rates and maturity structure of loans and advances to
customers are disclosed in Note 28. Information on related party transactions is disclosed in Note 31.
12. Property, Plant and Equipment and Intangible Assets
The reconciliation of the carrying amount of property, plant and equipment and intangible assets as at
31 December 2008 and as at 1 January 2008 is presented below:
Office, Total Total property,
computer property, plant and equip-
and other Fixtures and plant and Intangible ment and intangi-
Premises equipment fittings equipment assets ble assets
Net book amount as at
1 January 2008 4 928 800 224 5 952 4 5 956
Cost or valuation
Opening balance 4 928 1 499 299 6 726 14 6 740
Additions (Note 27) 145 866 285 1 296 184 1 480
Disposals - (37) (22) (59) - (59)
Effect of foreign currency
translation - 4 - 4 2 6
Closing balance 5 073 2 332 562 7 967 200 8 167
Accumulated depreciation,
amortisation and impairment
Opening balance - 699 75 774 10 784
Depreciation and amortisation
charge (Note 27) 145 346 53 544 45 589
Disposals - (30) (13) (43) - (43)
Effect of foreign
currency translation - 3 - 3 2 5
Closing balance 145 1 018 115 1 278 57 1 335
Net book amount as at
31 December 2008 4 928 1 314 447 6 689 143 6 832
The reconciliation of the carrying amount of property, plant and equipment and intangible assets as at
31 December 2007 and as at 1 January 2007 is presented below:
Office, Total Total property,
computer property, plant and
and other Fixtures plant and Intangible equipment and
Premises equipment and fittings equipment assets intangible assets
Net book amount as at
1 January 2007 3 855 525 60 4 440 3 4 443
Cost or valuation
Opening balance 3 879 1 046 97 5 022 11 5 033
Additions (Note 27) 62 486 246 794 3 797
Disposals (654) (34) (44) (732) - (732)
Elimination of accumulated
depreciation of revalued assets (101) - - (101) - (101)
Effect of foreign
currency translation - 1 - 1 - 1
Revaluation 1 742 - - 1 742 - 1 742
Closing balance 4 928 1 499 299 6 726 14 6 740
MDM Bank 141
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Office, Total Total property,
computer property, plant and
and other Fixtures plant and Intangible equipment and
Premises equipment and fittings equipment assets intangible assets
Accumulated depreciation,
amortisation and impairment
Opening balance 24 521 37 582 8 590
Depreciation and amortisation
charge (Note 27) 96 203 46 345 2 347
Disposals (19) (26) (8) (53) - (53)
Effect of foreign currency
translation - 1 - 1 - 1
Elimination of accumulated
depreciation of revalued assets (101) - - (101) - (101)
Closing balance - 699 75 774 10 784
Net book amount as at
31 December 2007 4 928 800 224 5 952 4 5 956
As at 31 December 2007 premises of the Group were revalued by management based on the results of
independent appraisals performed by an independent firm of appraisers, which resulted in a revaluation
increase of RUR 1 742 million. As at 31 December 2008 the Group has assessed the market value of its
premises and concluded that the market value is not materially different from their carrying value.
Included in the net book value of premises as at 31 December 2008 was RUR 3 929 million (31 December 2007:
RUR 3 929 million) representing the revaluation surplus.
The net book value of premises that would have been recognised under the historical cost method was
RUR 1 282 million as at 31 December 2008 (31 December 2007: RUR 1 186 million).
The gross book value of fully depreciated property, plant and equipment that was still in use was
RUR 347 million as at 31 December 2008 (31 December 2007: RUR 229 million).
13. Other Assets
31 December 2008 31 December 2007
Amounts in course of settlement 1 086 708
Claims and repossessed collateral on terminated finance lease contracts 840 -
Current income tax prepayment 735 48
Trade debtors and prepayments 632 554
Prepaid taxes other than income tax 291 592
Precious metals 263 856
Settlements on securities transactions 187 280
Advances to suppliers of equipment for finance leases 162 517
Deferred tax asset 108 -
Credit-linked leveraged notes - 226
Other 548 221
Gross other assets 4 852 4 002
Less: other assets impairment (677) (5)
Other assets 4 175 3 997
142 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Movements in other assets impairment are as follows:
Year ended Year ended
31 December 2008 31 December 2007
Other assets impairment as at 1 January 5 2
Net charge to other assets impairment during the year 518 3
Transfer of loan impairment losses on terminated lease
contracts 249 -
Write-offs (95) -
Other assets impairment as at 31 December 677 5
Claims and repossessed collateral on terminated finance lease contracts represent equipment repossessed
from non-performing debtors on finance lease arrangements and claims to insurance companies on
agreements where the lease equipment has been destroyed or significantly damaged to the extent qualifying
for termination of the leased agreement.
Credit-linked leveraged notes are financial assets designated at fair value through profit or loss. Credit-linked
leveraged notes as at 31 December 2007 were notes issued by a major international bank, the repayment
amount of which was linked to the market price of a certain bond issued by a Russian entity. Credit-linked
leveraged notes, as at 31 December 2007, comprised notes with a nominal amount of USD 9 million or
RUR 221 million, a coupon rate of 17.24% and a maturity date of 20 February 2008.
Specific provisions are recorded against other assets if impairment is identified. The recoverable amount of
other financial assets is calculated based on discounted expected future cash flows the recoverable amount
of other non-financial assets represents the higher of fair value less costs to sell and value in use.
Included in other assets impairment losses for the year ended 31 December 2008 is the amount of
RUR 329 million representing the write-off of capitalised expenses on new core banking system development,
for which no future economic benefits are expected to be received in the foreseeable future due to the decision
of the management of the Group to suspend program’s development; and the amount of RUR 249 million
representing provision for impairment of repossessed collateral on terminated finance lease contracts
transferred from loan impairment losses at termination of the contracts; and provisions for other impaired
assets in the amount of RUR 99 million.
Geographical and currency analysis and maturity structure of other assets are disclosed in Note 28.
14. Due to Central Banks
Due to central banks represent sale and repurchase agreements in the amount of RUR 317 million
(31 December 2007: RUR 846 million) collaterised by the eligible available for sale financial assets with a fair
value of RUR 369 and uncollaterised term deposits in the amount RUR 35 258 million. As at 31 December 2008
the total limit of such uncollaterised deposits available to the Group comprised RUR 45 928 million.
Geographical and currency analysis and maturity structure of due to central banks are disclosed in Note 28.
15. Due to Other Banks
31 December 2008 31 December 2007
Trade finance facilities 31 570 29 116
Loans from international financial institutions 29 396 11 515
Term deposits from other banks 15 634 15 648
Bilateral structured financing 9 073 7 042
Syndicated loans 8 281 24 839
Correspondent accounts and overnight deposits of other banks 3 421 6 039
Sale and repurchase agreements - 7 317
Total due to other banks 97 375 101 516
MDM Bank 143
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
As at 31 December 2008, the Group had four counterparties with aggregate balances greater than 10%
of consolidated equity at the date (31 December 2007: six counterparties). The total aggregate amount
of these balances was RUR 39 610 million or 41% of due to other banks balances (31 December 2007:
RUR 38 928 million, or 38% of due to other banks balances).
Included in due to other banks balances, as at 31 December 2008, were term deposits received from a large
international bank of RUR 4 515 million (31 December 2007: RUR 7 042 million), in respect of which
the Group pledged its receivable under a reverse sale and repurchase agreement from the same bank of
RUR 4 522 million (31 December 2007: RUR 7 046 million) as collateral. Refer to Note 6.
The following table presents information about assets sold under sale and repurchase agreements with other
banks:
31 December 2008 31 December 2007
Securities received as collateral under reverse sale and
repurchase agreements, fair value (Notes 6, 11 and 16) 369 7 425
Trading securities, carrying value (Note 7 and 16) - 2 674
Total assets sold under sale and repurchase agreements
with other banks 369 10 099
In August 2008, the Group obtained a syndicated loan from an international financial institution in total
amount of USD 535 million (equivalent to RUR 15 719 million as at 31 December 2008). The loan bears
a floating interest rate and is repayable in two tranches: tranche A in the amount of USD 500 million is
repayable in July 2009 and tranche B in the amount of USD 35 million is repayable in March 2012.
Geographical and currency analysis, effective interest rates and maturity structure of due to other banks are
disclosed in Note 28.
16. Customer Accounts
31 December 2008 31 December 2007
State organisations
- Current/settlement accounts 4 1
- Term deposits 10 600 4 016
Other legal entities
- Current/settlement accounts 31 587 30 867
- Term deposits 42 451 68 426
- Sale and repurchase agreements - 1 316
Retail customers
- Current/demand accounts 5 067 5 412
- Term deposits 25 362 14 094
Total customer accounts 115 071 124 132
The following table presents information about assets sold under sale and repurchase agreements with
customers:
31 December 2008 31 December 2007
Securities received as collateral under reverse sale and
repurchase agreements, fair value (Notes 6, 11 and 15) - 1 074
Trading securities, carrying value (Note 7 and 15) - 313
Total assets sold under sale and repurchase agreements
with customers - 1 387
144 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Economic sector concentrations within customer accounts are as follows:
31 December 2008 31 December 2007
Amount % Amount %
Individuals 30 429 27 19 506 16
Trade 27 214 24 41 194 33
Finance 25 488 22 32 706 26
Manufacturing 15 073 13 11 655 9
State 10 604 9 4 017 3
Mining and oil 2 448 2 13 143 11
Intergovernmental organisations - - 1 142 1
Other 3 815 3 769 1
Total customer accounts 115 071 100 124 132 100
As at 31 December 2008, aggregate balances of the ten largest customers (or groups of customers) totalled
RUR 39 705 million or 35% of total customer accounts (31 December 2007: RUR 53 852 million, or 43% of
total customer accounts).
As at 31 December 2008, the Group had three customers with aggregated accounts greater than 10% of
consolidated equity at the date (31 December 2007: four customers). The total aggregate amount of
these accounts was RUR 20 958 million or 18% of the total customer accounts (31 December 2007:
RUR 39 216 million or 32% of the total customer accounts).
Included in customer accounts, as at 31 December 2008, was an amount of RUR 8 577 million held as collateral
for irrevocable commitments under import letters of credit (31 December 2007: RUR 17 561 million).
Geographical and currency analysis, effective interest rates and maturity structure of customer accounts are
disclosed in Note 28. Information on related party transactions is disclosed in Note 31.
17. Debt Securities in Issue
31 December 2008 31 December 2007
Unsecured loan participation notes 11 808 11 043
Loan participation notes secured by diversified payment rights (“DPR”) 9 791 14 133
Promissory notes 5 370 9 771
Loan participation notes secured by a pool of car loans 1 282 4 153
Domestic bonds 422 6 007
Deposit certificates 27 1 524
Total debt securities in issue 28 700 46 631
Loan participation notes, bonds issued, promissory notes and deposit certificates are unconditional debt
instruments issued by the Group.
As at 31 December 2008 loan participation notes and bonds comprised the following issues:
Carrying amount Issue date Maturity Coupon rate
Russian bonds denominated in RUR 422 9 October 2007 1 October 2009 8.5%
Tranche C (junior) loan participation notes
secured by a pool of car loans: 1 282 23 October 2006 14 November 2013 Libor + 3.3%
Loan participation notes secured by diversified
payment rights denominated in EUR 4 616 21 November 2006 15 December 2011 Euribor + 2%
Loan participation notes secured by diversified
payment rights denominated in USD 5 175 21 May 2007 15 June 2012 Libor + 2%
Unsecured loan participation notes
denominated in USD 10 273 25 January 2007 25 January 2010 7.8%
Unsecured loan participation notes
denominated in USD 1 535 6 March 2008 2 March 2009 8.0%
MDM Bank 145
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
As at 31 December 2007 loan participation notes and bonds comprise the following issues:
Carrying amount Issue date Maturity Coupon rate
Russian bonds denominated in RUR 6 007 9 October 2007 1 October 2009 8.5%
Loan participation notes secured
by a pool of car loans:
- tranche A (senior) 957 23 October 2006 14 November 2013 Libor + 1%
- tranche B (sub-senior) 1 879 23 October 2006 14 November 2013 Libor + 1.6%
- tranche C (junior) 1 317 23 October 2006 14 November 2013 Libor + 3.3%
Loan participation notes secured by
diversified payment rights denominated
in EUR 6 440 21 November 2006 15 December 2011 Euribor + 2%
Loan participation notes secured by
diversified payment rights denominated
in USD 7 693 21 May 2007 15 June 2012 Libor + 2%
Unsecured loan participation notes
denominated in USD 10 547 25 January 2007 25 January 2010 7.8%
Unsecured loan participation notes
denominated in USD 496 23 October 2007 21 October 2008 11.0%
Maturity dates in the tables above represent latest contractual dates when the last payment under the notes is
due. Loan participation notes secured by diversified payment rights and loan participation notes secured by
a pool of car loans have quarterly and monthly repayments, respectively. Loan participation notes secured by
a pool of car loans may be repaid before contractual repayment dates in case of earlier repayment of underlying
car loans. As at 31 December 2008, the expected repayment date of loan participation notes secured by
a pool of car loans is 15 August 2009 for tranche C (31 December 2007: 15 March 2008, 15 November 2008
and 15 August 2009 for tranches A, B and C, respectively).
In October 2007, the Group repurchased its own fixed rate RUR denominated bonds with an aggregate
nominal amount of RUR 6 000 million issued in October 2006 from investors at par value under the early
redemption option. The bonds were reissued by the Group in October 2007 with a discount of 2.4% to par
value, and a coupon rate of 8.5%. In October 2008, the Group repurchased 90.6% of these bonds with an
aggregate nominal amount of RUR 5 346 million from investors at par value under the early redemption
option. The bonds have a maturity date in October 2009.
In October 2006, the Group issued three tranches of loan participation notes totaling USD 403.1 million
secured by a pool of car loans with a carrying value of RUR 2 195 million, as at 31 December 2008
(31 December 2007: RUR 4 745 million). Total amounts of tranche A, tranche B and tranche C notes on the
issue date were USD 270.9 million, USD 77.4 million, and USD 54.8 million, respectively. The issue proceeds
net of transaction costs amounted to USD 395 million. The notes have monthly repayments. Under the
conditions of the notes, more senior tranches are repaid first. During year ended 31 December 2008, the
Group fully repaid Tranches A and B of the notes. As a part of this transaction, the Group entered into balance
guaranteed cross currency interest rate swap agreements with major international banks. Under conditions
of the swap agreements, all RUR or USD denominated fixed rate amounts received by the Group from car
loans pledged as collateral under its loan participation notes are swapped for USD floating rate amounts
which are then used for repayment of the loan participation notes. Refer to Notes 8 and 11.
In November 2006, the Group issued floating rate loan participation notes of USD 200 million and
EUR 225 million secured by the Group’s diversified payment rights, i.e. its rights to funds being transferred
to the Group’s USD and EUR correspondent accounts. The issue proceeds net of transaction costs amounted
to USD 198 million and EUR 223 million. The principal of the notes is repaid quarterly by equal installments
with a final maturity on 15 December 2011. In May 2007, the Group issued additional loan participation
notes of USD 350 million secured by the Group’s diversified payment rights while loan participation notes of
USD 200 million issued in November 2006 were repaid. The issue proceeds net of transaction costs amounted
to USD 345 million. The principal of the notes is repaid quarterly by equal installments with a final maturity
on 15 June 2012. Included in due from other banks balances, as at 31 December 2008 are loans to a large
146 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
international bank of RUR 1 129 million (31 December 2007: RUR 1 093 million) pledged as collateral for
interest and principal repayments in respect of these notes. Refer to Note 6.
In January 2007, the Group issued fixed rate loan participation notes with an aggregate nominal amount of
USD 425 million. The issue proceeds net of transaction costs amounted to USD 423 million.
In March 2008, the Group issued fixed rate loan participation notes with an aggregate nominal amount of
USD 53 million. The issue proceeds net of transaction costs amounted to RUR 1 151 million.
Geographical and currency analysis, effective interest rates and maturity structure of debt securities in issue
are disclosed in Note 28.
18. Subordinated Debt
31 December 2008 31 December 2007
Subordinated loan participation notes 5 966 5 066
Total subordinated debt 5 966 5 066
In July 2006, the Group issued USD 200 million fixed rate subordinated unsecured notes maturing in July 2011
with a coupon rate of 9.75% per annum. The issue proceeds net of transaction costs were USD 199 million.
In case of bankruptcy, the repayment of the subordinated loan participation notes shall be made after
repayment in full of all other liabilities of the Bank.
Geographical and currency analysis, effective interest rates and maturity structure of subordinated debt are
disclosed in Note 28.
19. Other Liabilities
31 December 2008 31 December 2007
Settlements with suppliers and other creditors 1 401 940
Accrued staff compensation expenses 274 710
Taxes other than income tax payable 109 46
Settlements on conversion operations 39 801
Liabilities from credit related commitments 38 101
Current income tax payable 8 112
Other 135 39
Total other liabilities 2 004 2 749
Included in liabilities from credit related commitments as at 31 December 2008 was a provision for losses
in respect of credit related commitments of RUR 38 million (31 December 2007: RUR 44 million). Refer to
Note 29.
Geographical and currency analysis, maturity structure of other liabilities are disclosed in Note 28.
20. Share Capital
The share capital of the Bank has been contributed by shareholders in Russian Roubles. Shareholders are
entitled to dividends and any capital distribution in Russian Roubles.
As at 31 December 2008 and 31 December 2007, share capital of the Bank consisted of 2 265 738 authorized,
issued and fully paid ordinary shares with a fixed nominal value of 500 Russian Roubles and 50 050 authorized,
issued and fully paid preference shares with a fixed nominal value of 500 Russian Roubles.
MDM Bank 147
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Ordinary shares carry the right to vote at annual general and extraordinary meetings, right to receive
dividends and a residual interest in the assets of the Bank after deducting all its liabilities on liquidation. All
ordinary shares provide equal rights to their owners.
Preference shares have no right of conversion or redemption. Preference shares carry the right to vote at
annual general and extraordinary meetings in respect of issues that influence the interests of preference
shareholders, including reorganisation and liquidation. Preference shares are entitled to receive the same
dividends as dividends attributable to ordinary shareholders. If the dividend is not paid, preference shares
carry the right to vote at annual general and extraordinary meetings until dividends are paid. Dividends are
not cumulative. In the event of liquidation preference shareholders are entitled to receive declared unpaid
dividends and the par value of the preference shares (“liquidation value”).
Dividends payable to the Bank’s shareholders are restricted to the maximum retained earnings of the Bank,
which are determined in accordance with legislation in the Russian Federation. As at 31 December 2008,
the Bank’s reserves available for distribution amounted to RUR 20 459 million (31 December 2007:
RUR 21 428 million). No dividends on ordinary or preference shares have been declared during the year
ended 31 December 2008 and 31 December 2007.
The share capital of the Bank, as at 31 December 2008 and 31 December 2007, comprised the following:
Nominal value Inflation adjustment Total share capital
Ordinary shares 1 133 534 1 667
Preference shares 25 102 127
Total share capital 1 158 636 1 794
21. Interest Income and Expense
Year ended Year ended
31 December 2008 31 December 2007
Interest income
Loans and advances to customers 28 647 23 865
Overnight deposits and due from other banks 2 860 3 098
Investment securities available for sale 399 -
Investments securities held to maturity 66 -
Total interest income on financial assets not at fair value
through profit or loss 31 972 26 963
Trading securities 916 1 361
Other financial assets at fair value through profit and loss 5 21
Total interest income 32 893 28 345
Interest expense
Customer accounts (6 628) (4 446)
Due to other banks (5 758) (4 966)
Debt securities in issue (3 111) (4 267)
Subordinated debt (488) (534)
Total interest expense (15 985) (14 213)
Net interest income 16 908 14 132
Included in interest income on loans to customers the year ended 31 December 2008 was RUR 724 million in
respect of interest income from finance leases (31 December 2007: RUR 604 million).
Information on related party transactions is disclosed in Note 31.
148 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
22. Gains less Losses from Foreign Exchange
Year ended Year ended
31 December 2008 31 December 2007
Gains less losses from trading in foreign currencies 2 895 (609)
Foreign exchange translation gains less losses (1 981) 1 973
Total gains less losses from foreign exchange 914 1 364
Information on related party transactions is disclosed in Note 31.
23. Fee and Commission Income and Expense
Year ended Year ended
31 December 2008 31 December 2007
Commission on settlement and trade finance transactions 1 834 1 417
Commission on foreign currency transactions 545 364
Commission on cash transactions 326 370
Commission for business referral 213 275
Commission for brokerage and other services of an investment
banking nature 177 504
Commission for trust and fiduciary services 41 41
Other 6 7
Total fee and commission income 3 142 2 978
Commission on settlement transactions (409) (297)
Commission on foreign currency transactions (164) (73)
Commission on cash transactions (133) (185)
Commission on banking transactions (128) -
Other (49) (79)
Total fee and commission expense (883) (634)
Net fee and commission income 2 259 2 344
Information on related party transactions is disclosed in Note 31.
24. Other Operating Income
31 December 2008 31 December 2007
Gains less losses arising from available for sale financial assets 299 -
Release of provision for losses on credit related commission 6 5
Gains less losses from other financial assets at fair value from
profit or loss - 2
Other income 291 223
Other operating income 596 230
MDM Bank 149
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
25. Operating Expenses
Year ended Year ended
31 December 2008 31 December 2007
Staff costs 5 673 5 746
Depreciation, rent and other expenses related to property,
plant and equipment 1 999 1 181
Professional services 505 416
Taxes other than on income 439 485
Advertising and marketing 238 365
Security 197 164
Telecommunications 152 102
Software 130 134
Other 33 29
Total operating expenses 9 366 8 622
Information on related party transactions is disclosed in Note 31.
26. Income Taxes
Income tax expense comprises the following:
Year ended Year ended
31 December 2008 31 December 2007
Current tax charge 687 2 417
Deferred taxation movement due to origination and reversal of
temporary differences and movement in valuation allowance 646 (306)
Income tax expense 1 333 2 111
As at 31 December 2008, the income tax rate applicable to the majority of the Russian entities of the Group’s
income was 24% (31 December 2007: 24%). As at 31 December 2008, the income tax rate applicable to
income of non-Russian entities of the Group ranged from 0% to 15% (31 December 2007: from 0% to 15%).
Effective from 1 January 2009, the income tax rate in the Russian Federation has been reduced to 20%.
Accordingly, the deferred tax balances have been reviewed as at 31 December 2008 to reflect that change.
The reconciliation between the expected and the actual income tax expense is provided below:
Year ended Year ended
31 December 2008 31 December 2007
Profit before taxation 4 637 7 627
Theoretical income tax expense at the applicable statutory rate 1 113 1 830
Tax effect of items taxed at different tax rates 173 (164)
Tax effect of items which are not deductible or assessable for
taxation purposes, and other items of a non-temporary nature 195 466
Previous year overpayment (53) -
Unrecognised net deferred tax asset movement (2) (21)
Effect of change in tax rate (93) -
Income tax expense 1 333 2 111
150 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Movements in temporary differences for the year ended 31 December 2008:
Effect of
Movement Movement Effect of change in tax
charged/ recorded change in tax rate recorded
1 January (credited) to directly to rate recorded in profit or 31 December
2008 profit or loss equity in equity loss 2008
Tax effect of deductible/
(taxable) temporary differences
Impairment allowances
and provisions (128) 345 - - (36) 181
Accruals 563 (1 113) - - 75 (475)
Property, plant and equipment (1 019) 305 157 (38) (595)
Securities (2) (444) 475 (88) 75 16
Tax loss carry forwards - 26 - - (4) 22
Other (182) 139 - - 22 (21)
Gross deferred tax liability (768) (742) 475 69 94 (872)
Less unrecognised deferred tax
asset (2) 2 - - - -
Net deferred tax liability (770) (740) 475 69 94 (872)
Deferred tax asset - 108
Deferred tax liability (770) (980)
Movements in temporary differences for the year ended 31 December 2007:
Movements
charged/ Movement
(credited) recorded directly 31 December
1 January 2007 to profit or loss to equity 2007
Tax effect of deductible/(taxable)
temporary differences
Impairment allowances and provisions (396) 268 - (128)
Accruals 393 170 - 563
Property, plant and equipment (699) 98 (418) (1 019)
Securities 53 (49) (6) (2)
Other 20 (202) - (182)
Gross deferred tax liability (629) 285 (424) (768)
Less unrecognised deferred tax asset (23) 21 - (2)
Net deferred tax liability (652) 306 (424) (770)
Deferred tax asset - -
Deferred tax liability (652) (770)
Deferred income taxes are calculated on all temporary differences under the liability method using the
income tax rates applicable to entities of the Group.
As at 31 December 2008 and 31 December 2007, the Group did not recognise a deferred tax liability in respect
of its investments in subsidiaries as the Group was able to control the timing of the reversal of the temporary
differences and it was not probable that the temporary differences will reverse in the foreseeable future.
In the context of the Group’s current structure, tax losses and current tax assets of different companies may
not be offset against current tax liabilities and taxable profits of other companies and, accordingly, taxes may
accrue even where there is a net consolidated tax loss. Therefore, a deferred tax asset of one company of the
Group may not be offset against a deferred tax liability of another company.
As at 31 December 2007, a net deferred tax asset in respect of net deductible temporary differences of
RUR 2 million has not been recorded as it was not probable that the relevant entity of the Group will have
sufficient taxable profit that will allow the Group to benefit from the deferred tax asset.
MDM Bank 151
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
27. Analysis by Segment
The Group is organised into three main reportable operating segments:
• Corporate and investment banking – includes deposit taking and lending to corporate clients, leasing,
factoring, settlements, cash management, cash collection, trade finance, syndications, a forfait financing,
export credit agency financing, corporate finance, debt and equity capital markets, money markets,
trading and brokerage in securities, foreign exchange and precious metals, repo transactions, banknote
trading, and trading in derivatives.
• Retail banking – includes deposit taking and lending to individuals, small and medium enterprises and
individual entrepreneurs, money transfer and foreign exchange services, a range of banking card products
provided to individual customers, also settlements, cash management, and cash collection for small and
medium enterprises.
• Central treasury – includes treasury, which undertakes the Group’s funding and centralized risk
management activities through borrowings, issue of debt securities, use of derivatives for risk management
and investing in liquid assets such as short-term placements.
The Group evaluates performance of its operating segments on the basis of profit and loss before tax not
including non-recurring gains and losses, such as results on disposal of property, plant and equipment or results
from business combinations. The accounting policies of the operating segments of the Group are the same as
those described in the summary of significant accounting policies (refer to Note 4), except for the following:
• the Group records risk charges on operating segments representing cost of credit risk associated with new
operations of the segment originated in the reporting period;
• at the same time the Group does not include impairment losses and provisions in accordance with IFRS in
determination of the segment profit and loss;
• the Group records an allowance for capital benefits representing internal notional interest income earned
on risk-weighted capital allocated to operating segments to finance the activities of the segment.
The Group has in place a procedure for allocating depreciation and amortisation expense between operating
segments of the Group to determine segment profit or loss. However, the Group does not allocate net book
value of certain property, plant and equipment between operating segments to determine segment assets.
Such property, plant and equipment are included in “Unallocated” category in reconciliation of the total of
segment assets to total assets of the Group.
All assets and liabilities of operating segments are subject to mandatory placement/funding through the
Central treasury, which results in internal funding charges related to such placement/funding. Such charges
are calculated using internal rates, which are based on current market borrowing rates. Internal funding
charges result for Central treasury also includes notional expense incurred by Central treasury for use of
nominal amount of monetary capital of the Group for further funding of other operating segments.
The capital is further allocated to each operating segment to cover risks associated with its assets. Such risk-
weighted capital is subject to placement in Central treasury by other segments. The result of this adjustment
is presented as an allowance for capital benefit for each operating segment.
The Group also has a central administrative function that manages its premises and certain corporate costs.
Cost sharing agreements are used to allocate central costs to operating segments on a reasonable basis.
The majority of operations, credit related commitments, capital expenditure, and revenues of the Group
relate to residents of the Russian Federation.
Segment breakdown of assets and liabilities of the Group is set out below:
31 December 2008 31 December 2007
Assets
Corporate and investment banking 210 205 204 833
Retail banking 53 776 42 825
Central treasury 56 401 66 985
Unallocated assets 8 735 6 839
Total assets 329 117 321 482
152 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
31 December 2008 31 December 2007
Liabilities
Corporate and investment banking 158 034 174 125
Retail banking 21 382 15 791
Central treasury 106 675 83 896
Unallocated liabilities 1 952 8 772
Total liabilities 288 043 282 584
Segment information for the operating segments of the Group for the year ended 31 December 2008 is set
out below:
Corporate and Retail Central Consolidated
investment banking banking treasury Unallocated Group
External interest income 24 222 7 863 808 - 32 893
External interest expense (9 472) (664) (5 608) (241) (15 985)
Internal funding charge1 (4 208) (3 848) 4 794 3 262 -
2
Allowance for capital benefit 1 937 444 108 (2 489) -
Net interest income 12 479 3 795 102 532 16 908
Fee and commission income 1 805 1 337 - - 3 142
Fee and commission expense (445) (353) (83) (2) (883)
Trading, other financial assets at
fair value through profit or loss
and foreign exchange results 820 (41) 1 365 230 2 374
Other operating income 163 13 2 113 291
Total operating income
before impairment losses and
provisions 14 822 4 751 1 386 873 21 832
3
Direct operating expenses (1 739) (1 629) (45) - (3 413)
Impairment losses and provisions (5 418) (1 726) - (685) (7 829)
Reversal of accounting impairment
losses and provisions4 5 418 1 726 - (7 144) -
Risk charges5 (3 911) (670) - 4 581 -
Segment result before central
overhead 9 172 2 452 1 341 (2 375) 10 590
Allocation of central overheads6 (1 387) (2 326) (2) (1 754) (5 469)
Investment spending7 - - - (484) (484)
Profit before taxation 7 785 126 1 339 (4 613) 4 637
Income tax (1 333) (1 333)
Net profit for the year 3 304
1
Refer to description of internal funding charges above. The amount included in “Unallocated” category represents notional income on
placement of monetary capital to central treasury.
2
Refer to description of allowance of capital benefit above. The amount included in “Unallocated” category represents a reconciling item to the
total consolidated profit of the Group.
3
Direct operating expenses represent part of total operating expenses of the Group directly attributable to operating segments.
4
Refer to description of segment accounting policies used above. Impairment losses and provisions in accordance with IFRS are not included
in determination of segment profit and loss.
5
Refer to description of risk charges above. The amount included in “Unallocated” category represents a reconciling item to the total
consolidated profit of the Group.
6
Allocation of central overheads represents part of total operating expenses of the Group incurred by the central cost centers of the Group,
allocated to operating segments based on internal allocation rules.
7
Part of operating expenses of the Group representing ongoing costs of development of the distribution network, long-term venture projects
and other similar costs. These costs are not internally allocated to operating segments.
MDM Bank 153
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Segment information for the operating segments of the Group for the year ended 31 December 2007 is set
out below:
Corporate and
investment Retail Central Consolidated
banking banking treasury Unallocated Group
External interest income 21 859 5 467 1 019 - 28 345
External interest expense (7 311) (312) (6 000) (590) (14 213)
Internal funding charge1 (5 564) (2 491) 5 419 2 636 -
2
Allowance for capital benefit 1 811 316 38 (2 165) -
Net interest income 10 795 2 980 476 (119) 14 132
Fee and commission income 1 831 1 141 6 - 2 978
Fee and commission expense (401) (225) (8) - (634)
Trading, other financial assets at
fair value through profit or loss
and foreign exchange results 981 72 80 - 1 133
Other operating income 175 8 11 527 721
Total operating income
before impairment losses and
provisions 13 381 3 976 565 408 18 330
Direct operating expenses3 (2 450) (1 447) (73) - (3 970)
Impairment losses and provisions (514) (1 564) - (3) (2 081)
Reversal of accounting impairment
losses and provisions4 514 1 564 - (2 078) -
Risk charges5 (811) (367) - 1 178 -
Segment result before central
overhead 10 120 2 162 492 (495) 12 279
Allocation of central overheads 6
(940) (1 785) (1) (1 743) (4 469)
Investment spending7 - - - (183) (183)
Profit before taxation 9 180 377 491 (2 421) 7 627
Income tax (2 111)
Net profit for the year 5 516
1
Refer to description of internal funding charges above. The amount included in “Unallocated” category represents notional income on
placement of monetary capital to central treasury.
2
Refer to description of allowance of capital benefit above. The amount included in “Unallocated” category represents a reconciling item to the
total consolidated profit of the Group.
3
Direct operating expenses represent part of total operating expenses of the Group directly attributable to operating segments.
4
Refer to description of segment accounting policies used above. Impairment losses and provisions in accordance with IFRS are not included
in determination of segment profit and loss.
5
Refer to description of risk charges above. The amount included in “Unallocated” category represents a reconciling item to the total
consolidated profit of the Group.
6
Allocation of central overheads represents part of total operating expenses of the Group incurred by the central cost centers of the Group,
allocated to operating segments based on internal allocation rules
7
Part of operating expenses of the Group representing ongoing costs of development of the distribution network, long-term venture projects
and other similar costs. These costs are not internally allocated to operating segments
154 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Capital expenditures and depreciation and amortisation charge for the operating segments of the Group for
the year ended 31 December 2008 is set out below:
Corporate and
investment Retail Central Consolidated
banking banking treasury Unallocated Group
Capital expenditures (Note 12) 117 326 3 1 034 1 480
Depreciation and amortisation
charge (Note 12) 38 93 - 458 589
Capital expenditures and depreciation charge for the operating segments of the Group for the year ended
31 December 2007 is set out below:
Corporate and
investment Retail Central Consolidated
banking banking treasury Unallocated Group
Capital expenditures (Note 12) 356 441 - - 797
Depreciation and amortisation
charge (Note 12) 7 23 - 317 347
Outstanding credit related commitments for the operating segments of the Group as at 31 December 2008
and 31 December 2007 are set out below:
31 December 2008 31 December 2007
Corporate and investment banking 50 051 51 854
Retail banking 1 724 10 181
Total credit related commitments (Note 29) 51 775 62 035
The majority of Group’s revenues from external customers are attributed to customers domiciled in Russian
Federation (including subsidiaries and affiliates of these customers registered outside Russian Federation).
Revenues from external customers domiciled in foreign countries are not significant.
28. Financial Risk Management
Taking risk is core to the financial business. The Group’s aim is to achieve an appropriate balance between
risk and return and minimize potential adverse effect of risk on the Group’s financial performance. Major
financial risks to which the Group is exposed include credit, market, liquidity, and other risks.
(a) Risk management framework
The Group’s risk management policies aim to identify, analyze and manage the risks to which the Group is
exposed.
Risk management function within the Group is based on the following main principles:
• Limitation of potential losses – the Group’s transactions associated with risks are performed within
a system of limits/restrictions on certain types of risk.
• Timeliness of risk assessment – all new products and transactions of the Group are analyzed for associated
risks. Based on the results of the risk analysis, a system of limits/restrictions and appropriate controls are
implemented for this product/transaction.
• Risk management activities – based on the assessment of changes in the external and internal risk factors,
appropriate steps are taken to either accept, avoid, mitigate or pass on the risks, in order to achieve optimal
risk-reward balance for the Group. Clear segregation of duties between corporate management structures
and business-units ensures effective risk management and should eliminate conflicts of interests.
Risk management functions are allocated in the Group in the following way.
The Board of Directors of MDM Bank has overall responsibility for the oversight of risk management, the
management of key risks and approving major risk management principles, policies and procedures.
MDM Bank 155
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The Audit and Risk Committee of the Board of Directors of MDM Bank is responsible for overseeing the
internal control framework and assessing the adequacy of risk management and compliance policies and
procedures. It meets regularly and provides recommendations to the Board of Directors of MDM Bank on
development of the framework, as well as its views on the quality of risk management and compliance.
The Management Board of MDM Bank is responsible for monitoring and implementation of risk mitigation
measures and making sure that both the Group and the Bank operate within the established risk
parameters.
Credit, market and liquidity risks at both the portfolio and major transaction levels are managed and
controlled by the Senior Credit Committee, Senior Committee on Counterparties and Financial Instruments
and Asset and Liability Management Committee (ALCO).
The Risk Department of MDM Bank is responsible for overall risk management and compliance functions,
ensuring the implementation of common principles and methods for identifying, measuring, managing and
reporting both financial and non-financial risks. The Risk Department develops the methodology for risk
measurement and performs independent risk analysis of products and programs submitted for approval and
limits on specific clients/operations, performs portfolio analysis on current products and programs, and
develops a number of aggregated risk limits (i.e. industry/sector limits, limits on insurance of pledges by
insurance companies etc.). Additionally, the Risk Department prepares monthly reports on risk management
covering all the main risks, including credit, market, liquidity and operational risks, which are reported to
the Board of Directors and the Management Board of MDM Bank.
The business units of the Group manage risks within their functional duties.
The Internal Audit Department of MDM Bank audits the Group’s business units to check their compliance
with the internal policies of the Group, reports its findings to the Board of Directors and management of the
Group and proposes remedial actions for the findings.
The main risk management policies and procedures currently used by the Group and details of major measures
aimed at increasing the effectiveness and quality of risk management which are planned for implementation
in the current financial year, are described below.
(b) Credit Risk
Credit risk is the risk of losses as a result of the non-performance, late or partial performance by a debtor
of its contractual financial obligations to the Group. Credit risk arises principally from credit transactions,
transactions with counterparties on the financial markets, purchase of debt securities and other on and off
balance sheet credit exposures.
For risk reporting purposes, the Group considers and consolidates all elements of credit risk exposures such
as individual debtor default risk, country and industry risk.
For risk management purposes, credit risk arising from positions in trading securities and other financial
assets at fair value through profit or loss is managed and reported as a market risk exposure.
(i) Credit risk management
The Group limits concentrations of exposure to individual customers, counterparties and issuers (for
securities), groups of related customers, as well as exposure by industry/sector etc.
To limit potential losses arising from credit risk, all transactions involving credit risk (including sale and
repurchase agreements and other transactions with collateral) are performed within established limits.
The process of developing and setting limits is aimed at minimizing conflicts of interest.
The application to establish a limit is originated by the relevant client managers.
156 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Credit risk analyses are performed either by the Credit Department or the Risk Department (in respect of
limits for financial institutions: banks, funds and investment companies, etc.).
The credit risk limits are then approved by the Senior Credit Committee, by the Senior Committee on
Counterparties and Financial Instruments (in respect of limits for financial institutions) or by an authorized
underwriter.
In order to facilitate efficient decision-making, the Group has established a hierarchy of authority for approval
of credit risk limits depending on the type and amount of the exposure to risk.
Authority to approve corporate and retail exposures subject to credit risk operated during the major part of
year ended 31 December 2008 was allocated as follows:
The Senior Credit Committee approves credit risk management policies and procedures, new standard
products and programs for corporate, small business and retail customers of the Group, and approves
all credit risk limits above RUR 250 million. The Senior Credit Committee includes the heads of client,
investment, credit, collections and retail units of the Group. The chairman of the Senior Credit Committee is
the Head of the Risk Department (with the veto right).
Applications for limit setting or new standard product/program approval are subject to independent
assessment by the Risk Department prior to being passed on to the Senior Credit Committee. The Risk
Department assesses risks and provides recommendations to the members of the Senior Credit Committee
on mitigating risks identified.
In order to facilitate efficient decision-making for limits approval procedure, authority to approve limits for
lower amounts were delegated as follows:
• Authority to approve small limits within the retail lending programs approved by the Senior Credit
Committee is delegated to Junior credit committees for retail lending in branches (for customers of
regional branches). Such authority varies depending on standard credit products: auto loan, mortgage
loan, consumer loan and credit card, etc.
• Authority to approve small limits (up to RUR 10 million) within the small business lending programs
approved by the Senior Credit Committee is delegated to Junior credit committees for standard lending
products in branches and to Small Business Lending Division (for customers of the Head Office).
• Authority to approve limits to corporate and small business customers within the small business lending
programs approved by the Senior Credit Committee, which requires control of basic covenants, rather than
detailed financial analysis is delegated to underwriters of the Credit Department. The authority is limited
to RUR 30 million per customer. The underwriters are authorized by the Head of the Risk Department.
• Authority to approve all other credit limits to corporate, small business and retail customers within
RUR 250 million is delegated to underwriters of the Risk Department.
The authority to approve deals with financial institutions subject to credit risk operated during the major
part of the year ended 31 December 2008 is allocated as follows:
The Senior Committee on Counterparties and Financial Instruments approves credit risk management
policies and procedures, for the Group’s operations on financial markets, and approves all credit risk limits
above USD 25 million. The Senior Committee on Counterparties and Financial Instruments includes the
Chief Financial Officer of MDM Bank and the head of investment unit of the Group. The chairman of the
Senior Committee on Counterparties and Financial Instruments is the Head of the Risk Department. All
limits over USD 75 million must be approved by the Chairman of the Management Board of MDM Bank (who
has a veto right).
Applications for limit setting are subject to independent assessment by the Risk Department prior to being
passed on to the Senior Committee on Counterparties and Financial Instruments. The Risk Department
assesses risks and provides recommendations to the members of the Senior Committee on Counterparties
and Financial Instruments on mitigating risks identified.
MDM Bank 157
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Authority to approve credit limits to financial institutions within USD 25 million is delegated to underwriters
of the Risk Department.
At the end of 2008 the Group undertook a number of crisis management steps on toughening the approach to
decision making in the area of approval/ change of credit limits:
• powers of business units on decision-making are reduced significantly: amounts eligible for approval
by Junior Credit Committees in regional branches were lowered and transferred at the level of Regional
banks;
• decision-making on corporate clients is transferred to the level of the Senior Credit Committee, on financial
institutions – to the level of the Senior Committee on counterparties and financial instruments;
• approval of limits on small and medium business is transferred to the level of underwriters of the Risk
Department.
The above measures are aimed to improve prudence of limit approval decision in the complex current
environment where previously used procedures may lead to inadequate decisions.
The Group’s activities may give rise to settlement risk at the time of settlement of transactions. Settlement
risk is the risk of loss due to the failure of a counterparty to honor its obligations to deliver cash, securities
or other assets as contractually agreed. For certain types of transactions the Group mitigates this risk by
conducting settlements through settlement/clearing agents to ensure that a trade is settled only when
both parties have fulfilled their contractual settlement obligations. Acceptance of settlement risk on free
settlement transactions requires transaction specific and/or counterparty specific settlement limits which
form part of the credit risk limits.
(ii) Policies for credit risk analysis and setting credit risk limits
Credit analysis is performed using approved methodologies. These methodologies include a methodology for
analyzing the financial standing of debtors and a methodology for the assessment of collateral.
Analysis of debtor financial standing is performed using all the information on the debtor available to the
Group in accordance with methodology applied. This analysis includes assessment of current and expected
debtor financial position and the current business of the debtor. Generally, the group of companies of the
debtor is evaluated as a whole, provided that all members of the group accept responsibility for the loan.
Analysis of the expected creditworthiness of individuals within retail lending is performed based on the
current income and profile of the customer using scoring models which are based on statistical analysis of
defaults by individual lending program.
The Group internally assesses collateral using methodologies developed for each type of collateral. Valuations
performed by third parties, including independent appraisal firms authorized by the Group, may serve as the
external data used for such assessment.
The Group normally accepts the following types of property as collateral:
• in the commercial and industrial sector, charges over business assets such as premises, equipment, stock
and debtors;
• in the commercial real estate sector, mortgages and/or charges over the properties being financed;
• in the financial sector, charges over financial instruments such as debt securities and equities;
• in the retail sector, mortgages over residential properties, and charges over motor vehicles or other
valuables.
Collateral is not generally held over loans and advances to banks, except where securities are held as collateral
in reverse repurchase agreements and secured lending lines. Collateral is not held against exposures to
securities.
158 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The Group usually requires collateral, equipment and products to be insured for any loss or damage by
approved insurance companies.
At the end of 2008 the Group undertook a number of crisis management steps aimed at toughening the
approach to risk assessment during the crisis period:
• simplified procedures on limits approval were suspended, clients are considered only on the basis of the
detailed analysis of their credit status. Overall minimal requirements to the financial position of clients
were increased;
• approval of limits for lending to construction industry and several other industries which in the opinion of
the Group will be most affected by the crisis were suspended;
• all limits on purchase of debt securities (bonds, promissory notes) to the Group’s proprietary position were
suspended;
• uncollaterised lending was suspended, discounts rates on collateral received were raised, additional
procedures were performed to increase collateral on existing loans;
• in retail lending the Group has now suspended all products, except consumer lending: represented by high
margin loans in small amounts and relatively short term with monthly annuity repayments. Significant
changes were made to the client scoring techniques to exclude most clients with higher probability of default:
clients are accepted only if their income is supported by documents; maximum share of annuity payment in
the client’s free cash flow was lowered; other potential client “portrait” features were amended.
The Group also analyzes other risks arising from the business of the debtor or transactions being financed.
Other risks include the following:
• Ecological/social risks are the reputation risks of the Group and credit risks arising from the debtor’s non-
compliance with environmental, health, safety, non-discrimination and other legal requirements regulating
ecological, labor and social activities, as well as from environmental damage by third parties to the debtor’s
activities and property. In 2008 the Group adopted the Policy of ecological risk management. Assessment of
this risk is based on the standards of International Finance Corporation and European Bank for Reconstruction
and Development and is performed for all credit risk limits for corporate and small business clients.
• Compliance risk is the risk that the debtor will face difficulties in servicing the loan due to claims against
the debtor by the regulatory authorities.
• Reputation risk is the risk from the possible association of the Group with the illegal activities of its
customer. Generally, in order to mitigate reputation risk all the Group’s customers are subject to a check by
the Security Department.
• Legal risk is the risk of potential losses due to weaknesses in the legal framework or insufficient analysis
of legal issues during preparation of credit documentation.
The main principles for setting limits include:
• the financial position of the debtor (current and expected) should allow the debtor to repay outstanding
loans on a timely basis, without the Group having to realize collateral (which is an important but secondary
factor in limit setting);
• the intended use of lending products within a limit should be consistent with the business of the debtor;
• sources of repayment of lending products should be identifiable and their existence should be validated;
• other risks identified should be acceptable.
Risk-Adjusted Return on Capital (RAROC) is the a key measure for evaluation of risk-reward of the considered
limit.
(iii) Credit risk measurement
The quantitative assessment of credit risk is based on the “expected loss model”, as recommended by the Basel
Committee on Banking Regulations and Supervisory Practices (the “Basel Committee”). The “expected loss
model” can be contrasted with impairment allowances required under International Accounting Standard 39
“Financial Instruments: Recognition and Measurement” (“IAS 39”), which are based on losses that have been
incurred as at the balance sheet date (the “incurred loss model”) rather than expected losses. The “expected loss
model” calculates expected losses for various credit exposures based on the probability of default (PD), exposure
at default (EAD) and loss given default (LGD).
MDM Bank 159
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The Group assesses the probability of default of individual counterparties using internal rating tools tailored to
the various categories of debtor, industry/sector and different standard credit products/programs. They have
been developed internally and combine statistical analysis with credit and risk department officer judgment and
are validated, where appropriate, by comparison with externally available data.
The exposure at default is the expected amount of the exposure at the time of default.
Loss given default is estimated based on the historical recovery rate and typically varies by type of
counterparty, type and availability of collateral or other credit risk mitigation tools.
Information on the credit quality of the Group’s loan portfolio and impairment allowances recorded under
IAS 39 is presented in Note 11.
(iv) Policies for providing credit products within established limits
When providing credit products within established limits the Group implements a set of procedures to
mitigate the risk of conflict of interests and operating risks:
• A client relationship unit initiates the issue of a credit product within the established limit.
• The supporting unit (middle-office) prepares credit documentation and monitors compliance with the
terms of the limit.
• The Operations Department executes the transaction and records it in the Group’s accounting systems.
(v) Principles for credit risk monitoring
Credit risk monitoring comprises two components:
• Monitoring of established limits
The Group regularly monitors the payment discipline of debtors, availability and value of collateral, financial
standing of debtors, their ecological/social risks and compliance with other covenants established under the
limits.
Corporate clients and small business clients are usually monitored by supporting units (middle-office) of the
Group. Financial institutions are monitored by the Risk Department.
Based on the monitoring results, the Credit Department performs regular assessment of the credit exposures
for any indications of individual impairment. If necessary, the Group implements steps to mitigate credit risk.
These may include revision of limit terms, request for additional collateral etc. In certain cases recovery of
the loan is delegated to the special department responsible for collection of bad debts.
• Portfolio-based monitoring
Apart from monitoring individual risk limits, the Risk Department also periodically assesses credit risk for
the loan portfolio as a whole and for individual standard programs and products.
Such analysis includes analysis of the default rates for portfolios, adequacy of impairment losses recognized,
level of industry and geographical concentration, and portfolio diversification.
If negative trends are identified, the Risk Department analyzes the trends and initiates required changes to
the credit policies and methodology of the Group.
(vi) Allowance for loan losses
The Group establishes an allowance for loan losses that represents its estimate of losses incurred in its loan
portfolio.
160 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The Group writes off a loan balance against related allowances for loan losses when the Group’s Senior Credit
Committee determines that the loans are uncollectible and when all necessary steps to collect the loan are
completed. For smaller balance standardized loans, write off decisions are generally based on a product
specific past due status. Generally, overdue loans are written off when overdue more than one year or if the
debtor is declared bankrupt.
(vii) Maximum exposure to credit risk
The Group’s maximum exposure to on balance sheet credit risk is generally reflected in the carrying amounts
of financial assets on the balance sheet. The impact of possible netting of assets and liabilities to reduce
potential credit exposure is not significant.
Credit risk for off balance sheet financial instruments is defined as the possibility of sustaining a loss as
a result of another party to a financial instrument failing to perform in accordance with the terms of the
contract. The Group uses the same procedures and methodologies, as defined by the Group’s credit policy,
for approving credit related commitments (undrawn loan commitments, letters of credit and guarantees) as
it does for on balance sheet credit obligations (loans). The Group’s maximum exposure to off balance sheet
credit risk is reflected in Note 29 “Contingent liabilities and commitments”.
For analysis of concentration of credit risk in respect of loans and advances to customers refer to Note 11
“Loans and advances to customers”.
(viii) Changes in the credit risk management process
The Group constantly takes steps to improve its risk management systems in line with international best
practices. During the year ended 31 December 2008 the Group:
• Improved the limits approval procedure, by implementation of the underwriting system as described in
section (i) of this Note.
• Implemented system of capital at risk allocation integrated with the credit risk management system.
Expected and actual RAROC (Risk-Adjusted Return on Capital) is now considered as one of the key risk-
reward measures.
• Established the procedure for ecological/social risks evaluation as part of credit approval process
based on standards of International Finance Corporation and European Bank for Reconstruction and
Development.
• Improved methods of monitoring the loan portfolio. In particular, the Group has developed and introduced
procedures of monitoring sector risks of the loan portfolio. The procedures now allow to carry out more
prudent industry risk limit policy. Additionally, the Group has introduced monthly assessment of the
quality of small and medium business lending procedures of the Bank’s branches, including sales and
selection of new customers and work with customers that breached lending limits. The above monitoring
procedures identify problem areas on a more timely and accurate basis and to take relevant corrective
actions to the lending procedures.
In 2009 the major objective of the Group will be to adjust its credit risk management policy and procedures
to the new economic environment:
• Definition of target groups of clients, based on their sustainability in the crisis environment, and key
indicators for their credit analysis;
• Optimization of the product range for all types of clients;
• Introduction of decision making systems which allow more accurate risk assessment, identification of
potential crisis areas in advance and to change risk management policies flexibly: statistical rating and
scoring models, increased frequency of stress-testing of the loan portfolio, system of Early Warning
Indicators etc.;
• Development of restructuring programs for current loans of “good” retail clients of the Group (those
which have not committed any significant defaults) who have temporary financial difficulties, but overall
assessment shows that those clients will be able to service and repay their debt at mutually acceptable
terms.
MDM Bank 161
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
(c) Market risk
Market risk is the risk that movements in market prices, including foreign exchange rates, interest rates,
credit spreads and equity prices will have an adverse affect on the Group’s income or the value of its financial
instruments. Market risk comprises interest rate risk, currency risk and other price risks. Market risk arises
from open positions in interest rate, currency and equity financial instruments, which are subject to general
and specific market movements and changes in the level of volatility of market prices.
(i) Market risk management
The objective of market risk management is to manage and keep market risk exposures within acceptable
parameters, whilst optimizing the return on risk.
Market risk management is based on proper allocation of risk management functions with the objective to
limit potential losses.
Market risk is managed through the system of limits, which includes position limits, loss limits, and limits
on certain deal parameters. The system of limits sets the acceptable risk level at any point of time, including
intra-day positions. Compliance with limits is controlled on a daily basis.
The Asset and Liability Committee (ALCO) is responsible for managing the Group’s market risk. The committee
approves market risk limits based on recommendations of the market risk unit of Risk Department.
The limit structure corresponds to the volume and structure of the Group’s operations in the financial
markets.
Use of new types of financial instruments is permitted only after approval by ALCO which includes the
following procedures:
• The front-office unit initiates the procedure of setting the required limits, including market risk limits.
• The Risk Department performs a detailed analysis of a proposed transaction, develops market risk
assessment procedures, establishes appropriate risk limits and develops required control procedures.
• The Risk Department submits recommendations to ALCO on acceptability of the proposed transaction,
risk limits and control procedures.
(ii) Quantitative assessment of market risk
To obtain an accurate assessment of market risk, the Group revalues its positions to current market prices
on a daily basis and calculates volatilities of the risk factors. Results of such calculations are incorporated
into the quantitative assessment of market risks for its trading positions using the Value-at-Risk (“VaR”)
methodology. VaR is a technique that estimates the potential losses that could occur on risk positions
as a result of movements in market rates and prices over a specified time horizon and to a given level of
confidence. The VaR model used by the Group is based upon a 99 percent confidence level and assumes
a 10-day holding period. The Group applies a linear VaR model. Potential movements in market prices
are determined with reference to market data for at least the last 12 months. Back-testing of the model is
performed at least once every six months.
A summary of the VaR estimates in respect of foreign currency risk and securities price risk for the Group’s
portfolio of trading securities and liquid available-for-sale financial instruments (liquid instruments are
defined as those which the Group will be able to liquidate within 10 days) as at 31 December 2008 and
31 December 2007 is as follows:
31 December 2008 31 December 2007
Foreign exchange risk 80 36
Fixed income securities price risk 1 370 326
Equity securities price risk 131 411
162 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Although VaR is a valuable tool in measuring market risk exposures, it has a number of limitations, especially
in less liquid markets, which include the majority of the debt and equity instruments traded in Russia:
• The use of historical data as a basis for determining future events may not encompass all possible
scenarios.
• A 10-day holding period assumes that all positions can be liquidated or hedged within that period. This is
considered to be a realistic assumption in almost all cases but may not be the case in situations in which
there is severe market illiquidity for a prolonged period.
• The use of a 99% confidence level does not take into account losses that may occur beyond this level. There
is a one percent probability that the loss could exceed the VaR.
• As VaR is only calculated on an end-of-day basis, it does not necessarily reflect exposures that may arise
on positions during the trading day.
Due to the above limitations of the VaR methodology the Group additionally performs stress-testing of the
risk positions using scenarios of unfavourable changes of the major risk factors. Further, the limitations of
the VaR methodology are recognized by supplementing VaR limits with limits of open positions for financial
instruments and risk exposures and limits of sensitivity to risk factors.
In addition, the Group performs scenario stress-testing for trading positions on a monthly basis to model the
possible financial impact of exceptional market scenarios on individual trading portfolios and the Group’s
overall position.
(iii) Price risk
Price risk is the risk that movements in market prices resulting from factors associated with issuers of financial
instruments (specific risk) and general changes in the market prices of financial instruments (general risk)
will have an adverse affect on the Group’s income or the value of its financial instruments.
Price risk for financial instruments held within the Group’s trading portfolios is managed by setting limits on
investments in financial instruments taking into account their liquidity, setting stop-loss limits for trading
portfolios, and maintaining a diversified structure of portfolios.
Positions in securities are monitored centrally across the Group.
(iv) Currency risk
Currency risk is the risk that movements in foreign exchange rates will have an adverse affect on the Group’s
income or the value of its portfolios of financial instruments.
Currency risk mainly results from open foreign currency positions. All transactions with currency risk
exposure are performed within limits on open foreign currency positions. Such limits are established taking
into consideration expected future movements in foreign exchange rates which are based on historical
volatilities, scenario modeling and expert estimates.
Traders manage currency risk in respect of the Group’s trading foreign currency positions which are opened
within the limits established by the ALCO.
The Treasury Department manages currency risk in respect of the currency mismatch between non-trading
assets and liabilities (structural foreign currency position). The Group’s target is to maintain a risk neutral
structural foreign currency position.
Transactions are generally performed in three major currencies: the Russian rouble, US dollar and Euro.
For the purposes of currency risk management the Group applies a system of controls over overall open
foreign currency positions, and trading positions which are monitored on real-time basis.
MDM Bank 163
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
As at 31 December 2008, the Group has the following positions in different currencies:
Other
RUR USD EUR currencies Total
Assets
Cash and cash equivalents 28 405 43 353 5 282 231 77 271
Mandatory cash balances with central banks 415 - - 1 527 1 942
Due from other banks 9 737 14 749 7 122 43 31 651
Trading securities
- owned by the Group 194 - - - 194
- pledged under sale and repurchase agreements - - - - -
Derivative financial instruments 2 2 996 49 36 3 083
Available-for-sale financial assets
- owned by the Group 6 033 2 574 58 11 8 676
- pledged under sale and repurchase agreements 379 - - - 379
Investment securities held to maturity 108 - - - 108
Loans and advances to customers 101 640 75 809 16 841 516 194 806
Property, plant and equipment and intangible assets 6 820 - - 12 6 832
Other assets 3 447 307 403 18 4 175
Total assets 157 180 139 788 29 755 2 394 329 117
Liabilities
Due to central bank 35 575 - - - 35 575
Due to other banks 11 455 73 041 12 877 2 97 375
Derivative financial instruments 215 1 244 894 19 2 372
Customer accounts 58 122 44 757 11 988 204 115 071
Debt securities in issue 2 994 20 940 4 766 - 28 700
Subordinated debt - 5 966 - - 5 966
Deferred tax liability 879 101 - - 980
Other liabilities 1 738 140 99 27 2 004
Total liabilities 110 978 146 189 30 624 252 288 043
Net balance sheet position 46 202 (6 401) (869) 2 142 41 074
Off balance sheet net notional position (4 564) 6 692 (248) (1 880) -
Net position 41 638 291 (1 117) 262 41 074
Credit related commitments 25 035 20 719 5 842 179 51 775
Currency classification of monetary assets and liabilities is based on the currency in which they are
denominated. Investments in equities have been attributed to the currency of the country where the issuer
of the equity instrument is resident (predominantly, the Russian Rouble and the Russian Federation,
respectively). Currency classification of tangible assets (precious metals, property, plant and equipment)
and prepayments has been based on the functional currency used to record them.
The Group has extended loans and advances denominated in foreign currencies. Depending on the revenue
stream of the borrower, the possible appreciation of the currencies in which loans and advances have been
extended against the Russian Rouble may adversely affect the borrower’s repayment ability and therefore
increase the likelihood of future loan losses.
164 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
As at 31 December 2007, the Group had the following positions in different currencies:
Other
RUR USD EUR currencies Total
Assets
Cash and cash equivalents 21 759 58 298 3 150 227 83 434
Mandatory cash balances with central banks 3 883 - - 1 655 5 538
Due from other banks 9 478 14 751 3 605 - 27 834
Trading securities
- owned by the Group 7 504 3 370 1 - 10 875
- pledged under sale and repurchase agreements 2 090 897 - - 2 987
Derivative financial instruments 104 44 - 112 260
Available-for-sale financial assets 290 - - - 290
Loans and advances to customers 98 926 68 036 13 341 8 180 311
Property, plant and equipment and intangible
assets 5 942 - - 14 5 956
Other assets 2 335 703 88 871 3 997
Total assets 152 311 146 099 20 185 2 887 321 482
Liabilities
Due to central bank 846 - - - 846
Due to other banks 15 850 76 949 8 714 3 101 516
Derivative financial instruments 29 754 91 - 874
Customer accounts 71 228 49 969 2 799 136 124 132
Debt securities in issue 13 182 26 205 7 244 - 46 631
Subordinated debt - 5 066 - - 5 066
Deferred tax liability 752 18 - - 770
Other liabilities 2 446 186 14 103 2 749
Total liabilities 104 333 159 147 18 862 242 282 584
Net balance sheet position 47 978 (13 048) 1 323 2 645 38 898
Off balance sheet net notional position (9 228) 11 947 (1 721) (998) -
Net position 38 750 (1 101) (398) 1 647 38 898
Credit related commitments 28 024 26 793 7 140 78 62 035
(v) Interest rate risk
Interest rate risk is the risk that movements in interest rates will have an adverse affect on the Group’s revenue
or the value of its portfolios of financial instruments.
The Group is exposed to the effects of fluctuations in the prevailing levels of market interest rates on its
financial position and cash flows. Interest margins may increase as a result of such changes but may also
reduce or create losses in the event that unexpected movements arise.
Management of interest rate risk is performed through analysis of the structure of assets and liabilities by
repricing dates (gap-analysis).
Dynamic modeling of balance sheet structure is performed for different scenarios of movement in interest
rates. Apart from gap-analysis the Group assesses the duration of its assets and liabilities. Interest rate risk is
measured for the Group as a whole on a consolidated basis.
The impact of changes in interest rates on the Group’s profit before tax is assessed as a key measure of interest
rate risk.
All new products and transactions of the Group are evaluated from the interest rate risk perspective prior to
starting these transactions.
MDM Bank 165
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
ALCO is responsible for the Group’s asset and liability management. ALCO delegates day-to-day management
of the interest rate mismatch to the Treasury Department. The Risk Department independently monitors
compliance with limits established to control interest rate risk.
The table below summarises the effective average interest rate, by major currencies, for major monetary
financial instruments. The analysis has been prepared on the basis of weighted average interest rates for the
various financial instruments using period-end effective interest rates.
31 December 2008 31 December 2007
% %
EUR and EUR and
other other
RUR USD currencies RUR USD currencies
Assets
Due from other banks:
- Current interbank loans 20.4 1.2 2.0 6.4 5.2 3.8
- Reverse sale and repurchase agreements - 5.1 - 10.0 6.7 -
Trading securities:
- Municipal bonds issued by Russian
municipalities - - - 8.5 - -
- Russian Federal loan bonds (OFZ) - - - 6.5 - -
- Corporate bonds - - - 11.3 - -
- Corporate Eurobonds - - - 8.4 10.3 -
- Promissory notes - - - 12.0 - -
Other financial assets at fair value
through profit or loss - - - - 12.8 -
Loans and advances to customers:
- Loans to corporate customers 17.0 13.4 10.9 13.9 12.0 10.7
- Loans to individuals 13.3 11.1 9.8 13.5 11.4 9.4
- Investment banking loans 10.4 14.3 - 9.5 9.7 -
- Small business loans 18.6 14.4 14.4 15.5 13.2 13.0
- Net investment in finance lease 31.2 22.9 34.0 31.4 22.4 31.2
Liabilities
Due to central banks 12.0 - - - - -
Due to other banks:
- Bilateral structured financing - 4.9 - - 6.5 -
- Syndicated loans 8.5 2.7 5.7 - 5.5 6.4
- Trade finance facilities 2.8 4.6 5.5 6.4 6.3 5.8
- Loans from international
financial institutions - 4.5 - - 6.7 -
- Term deposits from other banks 18.7 1.7 4.1 4.4 4.7 4.5
- Sale and repurchase agreements 10.0 2.7 - 6.3 7.1 -
Customer accounts:
- Term deposits 8.5 8.2 8.4 7.8 5.4 5.4
- Sale and repurchase agreements - - - 6.3 5.1 -
Debt securities in issue:
- Unsecured loan participation notes - 8.1 - - 8.2 -
- Loan participation notes secured by
diversified payments rights - 4.1 5.8 - 7.6 7.5
- Loan participation notes secured by
a pool of car loans - 9.6 - - 9.4 -
- Promissory notes 9.3 6.9 5.0 6.4 6.5 5.6
- Bonds 10.8 - - 11.5 - -
- Deposit certificates 9.3 - - 11.7 - -
Subordinated debt - 8.2 - - 10.0 -
166 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The table below summarises the Group’s exposure to interest rate risks as at 31 December 2008. Included in
the tables are the assets and liabilities at carrying amounts, categorised by the earlier of contractual repricing
or maturity dates.
Non
Less than From 1 to From 6 to From 1 to More than interest
1 month 6 months 12 months 3 years 3 years bearing Total
Assets
Cash and cash equivalents 77 271 - - - - - 77 271
Mandatory cash balances with
central banks 1 036 369 355 178 4 - 1 942
Due from other banks 23 217 7 653 780 1 - - 31 651
Trading securities
- owned by the Group - - - - - 194 194
- pledged under sale
and repurchase agreements - - - - - - -
Derivative financial instruments 1 240 63 1 350 400 30 - 3 083
Available-for-sale financial assets
- owned by the Group 307 3 090 2 156 2 164 131 828 8 676
- pledged under sale and
repurchase agreements - 130 - 249 - - 379
Investment securities held to
maturity - - - - - 108 108
Loans and advances to customers 21 955 62 119 30 612 39 989 40 131 - 194 806
Property, plant and equipment and
intangible assets - - - - - 6 832 6 832
Other assets 4 149 5 20 1 - - 4 175
Total assets 129 175 73 429 35 273 42 982 40 296 7 962 329 117
Liabilities
Due to central banks 1 317 34 258 - - - - 35 575
Due to other banks 18 340 54 784 7 574 5 716 10 961 - 97 375
Derivative financial instruments 1 050 45 1 250 27 - - 2 372
Customer accounts 61 227 22 051 20 973 10 565 255 - 115 071
Debt securities in issue 623 13 865 3 898 10 270 44 - 28 700
Subordinated debt 286 - - - 5 680 - 5 966
Deferred tax liability - - - - - 980 980
Other liabilities 2 004 - - - - - 2 004
Total liabilities 84 847 125 003 33 695 26 578 16 940 980 288 043
Interest rate sensitivity gap 44 328 (51 574) 1 578 16 404 23 356
Off balance sheet net notional
position 3 757 28 (516) (929) (2 221)
Interest rate sensitivity gap,
including interest-based
derivative financial instruments 48 085 (51 546) 1 062 15 475 21 135
MDM Bank 167
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The Group’s exposure to interest rate risks as at 31 December 2007 is set out below:
Non
Less than From 1 to From 6 to From 1 to More than interest
1 month 6 months 12 months 3 years 3 years bearing Total
Assets
Cash and cash equivalents 83 434 - - - - - 83 434
Mandatory cash balances with
central banks - - - - - 5 538 5 538
Due from other banks 18 773 8 486 303 - 272 - 27 834
Trading securities
- owned by the Group - 274 159 4 171 4 783 1 488 10 875
- pledged under sale
and repurchase agreements - - - 513 1 939 535 2 987
Derivative financial instruments - - - - - 260 260
Available-for-sale financial assets - - - - - 290 290
Loans and advances to customers 23 742 55 843 30 481 39 215 31 030 - 180 311
Property, plant and equipment and
intangible assets - - - - - 5 956 5 956
Other assets - 226 - - - 3 771 3 997
Total assets 125 949 64 829 30 943 43 899 38 024 17 838 321 482
Liabilities
Due to central bank 846 - - - - - 846
Due to other banks 42 582 24 228 17 415 11 455 5 836 - 101 516
Derivative financial instruments - - - - - 874 874
Customer accounts 69 618 29 747 17 975 6 758 34 - 124 132
Debt securities in issue 6 738 18 007 11 188 10 666 32 - 46 631
Subordinated debt 211 - - - 4 855 - 5 066
Deferred tax liability - - - - - 770 770
Other liabilities - - - - - 2 749 2 749
Total liabilities 119 995 71 982 46 578 28 879 10 757 4 393 282 584
Interest rate sensitivity gap 5 954 (7 153) (15 635) 15 020 27 267
Off balance sheet net notional
position 6 400 (816) (380) (4 668) (536)
Interest rate sensitivity gap,
including interest-based
derivative financial instruments 12 354 (7 969) (16 015) 10 352 26 731
Loan participation notes secured by a pool of car loans have been presented in the above tables based on the
maturity of car loans pledged under the notes.
The management of interest rate risk by monitoring the interest rate gap is supplemented by monitoring the
sensitivity of the Group’s profit before tax to various interest rate scenarios.
An analysis of sensitivity of the Group’s profit before tax for the period to changes in the market interest rate
based on a simplified scenario of a 100 basis point (bp) parallel fall or rise in all yield curves (assuming no
asymmetrical movement in yield curves and a constant balance sheet position) is as follows:
31 December 2008 31 December 2007
Other Other
RUR million RUR currencies Total RUR currencies Total
100 bp parallel increase 123 252 375 199 115 314
100 bp parallel decrease (123) (252) (375) (199) (115) (314)
168 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
(vi) Changes in the market risk management process
In 2008 the Group improved its market risk assessment methodology, including assessment of risks related to
securities purchased under reverse sale and repurchase agreements, and fair value measurement technique
for promissory notes purchased.
At the end of 2008 the Group tightened its market risk limit system in respect to change in market risk level,
in order to reduce risks for currency, fixed income, derivatives, margin trading operation risk.
In 2009 the Group is planning to implement Early Warning Indicators system in its market risk management
framework.
(d) Liquidity risk
Liquidity risk is the risk that the Group will encounter difficulty in meeting obligations from its financial
liabilities. The Group is exposed to daily calls on its available cash resources from overnight deposits,
current accounts, maturing deposits, loan drawdowns, guarantees and from margin and other calls on cash-
settled derivative instruments. The Group does not maintain cash resources to meet all of these needs as
experience shows that a minimum level of reinvestment of maturing funds can be predicted with a high level
of certainty. Liquidity risk exists when the maturities of assets and liabilities do not match. The matching
and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental
to the management of financial institutions, including the Group. It is unusual for financial institutions to
ever be completely matched since business transacted is often of an uncertain term and of different types.
An unmatched position potentially enhances profitability, but can also increase the risk of losses.
(i) Liquidity risk management
The Group’s approach to management of liquidity is to ensure that it will always have sufficient liquidity to
meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable
losses or taking risk of damage to the Group’s reputation.
The Group seeks to actively support a diversified and stable funding base comprising debt securities in issue,
long-term and short-term loans from other banks, core corporate and retail customer deposits, accompanied
by holding diversified portfolios of highly liquid assets, in order to be able to respond quickly and smoothly
to unforeseen liquidity requirements.
The liquidity management policy of the Group requires:
• projecting cash flows by major currencies and considering the level of liquid assets necessary in relation
thereto;
• maintaining a diverse range of funding sources;
• managing the concentration and profile of funding;
• maintaining debt financing plans;
• maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any
interruption to cash flows;
• maintaining liquidity and funding contingency plans;
• monitoring balance sheet liquidity ratios against regulatory requirements.
The Treasury Department receives information from business units regarding the liquidity profile of their
financial assets and liabilities and details of other projected cash flows arising from projected future
business. The Treasury Department then provides for an adequate portfolio of short-term liquid assets to
be maintained, largely made up of short-term liquid trading securities, loans to banks and other inter-bank
facilities, to ensure that sufficient liquidity is maintained within the Group as a whole.
The daily liquidity position is monitored and regular liquidity stress testing under a variety of scenarios
covering both normal and more severe market conditions is performed by the Treasury Department. Under
the normal market conditions, liquidity reports covering the liquidity position of the Group are presented to
senior management on a weekly basis. Decisions on the Group’s liquidity management are made by the ALCO
and implemented by the Treasury Department.
MDM Bank 169
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
(ii) Liquidity risk measurement
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.
The tables below show the carrying amounts of assets and liabilities of the Group by their remaining
contractual maturity, with the exception of loan participation notes secured by a pool of car loans, which
have been presented based on their expected repayment dates (refer to Note 17), and trading securities
owned by the Group, which are shown in the category “Demand and less than 1 month” based on the fact
that management believes that all of these trading securities could be liquidated within one month in the
normal course of business.
The position as at 31 December 2008 is set out below:
Less than From 1 to From 6 to From 1 to 3 More than No stated
1 month 6 months 12 months years 3 years maturity Total
Assets
Cash and cash equivalents 77 271 - - - - - 77 271
Mandatory cash balances
with central banks 1 036 369 355 178 4 - 1 942
Due from other banks 23 217 7 653 780 1 - - 31 651
Trading securities
- owned by the Group - - - - - 194 194
- pledged under sale and
repurchase agreements - - - - - - -
Derivative financial instruments 1 240 63 1 350 400 30 - 3 083
Available-for-sale financial assets
- owned by the Group 307 3 090 2 156 2 164 131 828 8 676
- pledged under sale and
repurchase agreements - 130 - 249 - - 379
Investments securities held
to maturity 108 - - - - - 108
Loans and advances to customers 21 432 60 753 30 813 41 606 40 202 - 194 806
Property, plant and equipment and
intangible assets - - - - - 6 832 6 832
Other assets 4 149 5 20 1 - - 4 175
Total assets 128 760 72 063 35 474 44 599 40 367 7 854 329 117
Liabilities
Due to central banks 1 317 34 258 - - - - 35 575
Due to other banks 17 153 23 019 22 303 19 957 14 943 - 97 375
Derivative financial instruments 1 050 45 1 250 27 - - 2 372
Customer accounts 61 227 22 051 20 973 10 565 255 - 115 071
Debt securities in issue 335 5 594 5 418 16 605 748 28 700
Subordinated debt 286 - - - 5 680 - 5 966
Deferred tax liability - - - - - 980 980
Other liabilities 1 996 8 - - - - 2 004
Total liabilities 83 364 84 975 49 944 47 154 21 626 980 288 043
Net liquidity gap 45 396 (12 912) (14 470) (2 555) 18 741 6 874 41 074
Cumulative liquidity gap 45 396 32 484 18 014 15 459 34 200 41 074
170 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The position as at 31 December 2007 is set out below:
Less than From 1 to From 6 to From 1 to More than No stated
1 month 6 months 12 months 3 years 3 years maturity Total
Assets
Cash and cash equivalents 83 434 - - - - - 83 434
Mandatory cash balances with
central banks 3 010 1 129 747 529 123 - 5 538
Due from other banks 18 773 8 486 303 - 272 - 27 834
Trading securities
- owned by the Group 10 875 - - - - - 10 875
- pledged under sale and
repurchase agreements 2 865 122 - - - - 2 987
Derivative financial instruments 198 54 8 - - - 260
Available-for-sale financial assets - - - - - 290 290
Loans and advances to customers 22 483 51 657 28 218 44 148 33 805 - 180 311
Property, plant and equipment and
intangible assets - - - - - 5 956 5 956
Other assets 3 723 274 - - - - 3 997
Total assets 145 361 61 722 29 276 44 677 34 200 6 246 321 482
Liabilities
Due to central bank 846 - - - - - 846
Due to other banks 28 239 31 381 17 707 18 373 5 816 - 101 516
Derivative financial instruments 275 235 196 168 - - 874
Customer accounts 69 618 29 747 17 975 6 758 34 - 124 132
Debt securities in issue 2 596 6 490 12 850 20 531 4 164 - 46 631
Subordinated debt 211 - - - 4 855 - 5 066
Deferred tax liability - - - - - 770 770
Other liabilities 2 690 17 4 38 - - 2 749
Total liabilities 104 475 67 870 48 732 45 868 14 869 770 282 584
Net liquidity gap 40 886 (6 148) (19 456) (1 191) 19 331 5 476 38 898
Cumulative liquidity gap 40 886 34 738 15 282 14 091 33 422 38 898
The following table shows the contractual maturities of trading securities of the Group:
31 December 2008 31 December 2007
Demand and less than 1 month - -
From 1 to 6 months - 274
From 6 to 12 months - 159
From 1 to 3 years - 4 684
More than 3 years - 6 722
No stated maturity 194 2 023
Total trading securities 194 13 862
Management believes that in spite of a substantial portion of customer accounts being on demand (customer
current/settlement accounts), diversification of these funds by number and type of depositors, and the past
experience of the Group indicates that these deposits provide a long-term and stable source of funding for
the Group.
The following table shows the undiscounted cash flows on the Group’s financial liabilities and unrecognized
loan commitments on the basis of their earliest possible contractual maturity. The gross nominal (inflow)/
outflow disclosed in the table is the contractual, undiscounted cash flow on the financial liability or
commitment. Loan participation notes secured by a pool of car loans have been presented based on their
MDM Bank 171
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
expected repayment dates (refer to Note 16). The Group’s expected cash flows on these financial liabilities
and unrecognized loan commitments vary significantly from this analysis.
The position of the Group as at 31 December 2008 was as follows:
Demand Total gross
and less nominal
than From1 to 6 From 6 to From 1 to More than (inflow)/ Carrying
1 month month 12 months 3 years 3 years outflow amount
Non-derivative liabilities
Due to central bank 1 328 35 664 - - - 36 992 35 575
Due to other banks 17 214 23 424 23 024 21 090 18 647 103 399 97 375
Customer accounts 56 912 26 226 23 317 12 580 288 119 323 115 071
Debt securities in issue 1 224 6 773 5 114 17 180 1 000 31 291 28 700
Subordinated debt 286 - 286 6 711 - 7 283 5 966
Other financial liabilities 1 920 - - - - 1 920 1 958
Gross settled derivative financial
instruments
- Inflow (84 133) (5 769) (1 006) (944) (82) (91 934) (674)
- Outflow 84 141 5 759 946 849 86 91 781 612
Total 78 892 92 077 51 681 57 466 19 939 300 055 284 583
Credit related commitments 29 855 15 098 4 530 1 927 365 51 775 51 737
The position of the Group as at 31 December 2007 was as follows:
Demand Total gross
and less nominal
than From 1 to 6 From 6 to From 1 to More than (inflow)/ Carrying
1 month month 12 months 3 years 3 years outflow amount
Non-derivative liabilities
Due to other banks 29 203 32 038 18 480 20 833 9 266 109 820 102 362
Customer accounts 69 855 29 999 19 213 7 890 45 127 002 124 132
Debt securities in issue 2 984 7 352 14 220 22 878 4 653 52 087 46 631
Subordinated debt 239 - 239 957 5 388 6 823 5 066
Other financial liabilities 2 493 17 4 38 - 2 552 2 552
Gross settled derivative
financial instruments
- Inflow (57 680) (10 648) (3 850) (1 750) (168) (74 096) (260)
- Outflow 57 799 10 743 3 996 1 885 178 74 601 874
Total 104 893 69 501 52 302 52 731 19 362 298 789 281 357
Credit related commitments 42 937 7 063 7 164 4 715 156 62 035 61 991
The Bank also calculates mandatory liquidity ratios on a daily basis in accordance with the requirement of
the CBR. These ratios include:
• Instant liquidity ratio (N2), which is calculated as the ratio of highly-liquid assets to liabilities payable on
demand.
• Current liquidity ratio (N3), which is calculated as the ratio of liquid assets to liabilities maturing within
30 calendar days.
• Long-term liquidity ratio (N4), which is calculated as the ratio of assets maturing after one year to capital
and liabilities maturing after one year.
172 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
MDM Bank was in compliance with the above ratios during the year ended 31 December 2008 and year ended
31 December 2007. The following table presents the mandatory liquidity ratios for MDM Bank calculated as
at 31 December 2008 and 31 December 2007:
Requirement 31 December 2008 31 December 2007
Instant liquidity ratio (N2) Minimum 15% 120.9% 124.8%
Current liquidity ratio (N3) Minimum 50% 132.4% 118.9%
Long-term liquidity ratio (N4). Maximum 120% 72.1% 71.2%
(iii) Changes in the liquidity risk management processes
To improve the liquidity risk management system, at the end of 2007 the Bank introduced a system of early
warning indicators. The system of early warning indicators is aimed at identifying an increase in liquidity
risk at the early stages. The system is based on day-to-day monitoring of a number of the Bank’s balance sheet
ratios, market indicators of financial market conditions as well as other external available data.
(e) Country risks
Country risk is the risk of losses as a result of foreign counterparties failing to meet their obligations due to
economical, political and social changes in the respective country.
The majority of the operations of the Group are located in Russia. The Group accepts other country risk only
after performing a separate analysis.
The majority of the operations of the Group are located in Russia. The geographical analysis of the Group’s
assets and liabilities as at 31 December 2008 is set out below:
Non-OECD
Russia OECD countries countries Total
Assets
Cash and cash equivalents 51 184 25 428 659 77 271
Mandatory cash balances with central banks 415 - 1 527 1 942
Due from other banks 15 287 16 363 1 31 651
Trading securities
- owned by the Group 194 - - 194
- pledged under sale and repurchase agreements -
Derivative financial instruments 1 106 347 1 630 3 083
Available-for-sale financial assets
- owned by the Group 8 676 - - 8 676
- pledged under sale and repurchase agreements 379 - - 379
Investments securities held to maturity 108 - - 108
Loans and advances to customers 192 914 723 1 169 194 806
Property, plant and equipment and intangible assets 6 812 - 20 6 832
Other assets 3 947 10 218 4 175
Total assets 281 022 42 871 5 224 329 117
Liabilities
Due to central banks 35 575 - - 35 575
Due to other banks 17 557 76 278 3 540 97 375
Derivative financial instruments 760 409 1203 2 372
Customer accounts 110 886 832 3 353 115 071
Debt securities in issue 2 997 25 703 - 28 700
Subordinated debt - 5 966 - 5 966
Deferred tax liability 879 101 - 980
Other liabilities 1 894 36 74 2 004
Total liabilities 170 548 109 325 8 170 288 043
Net position 110 474 (66 454) (2 946)
MDM Bank 173
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The geographical analysis of the Group’s assets and liabilities as at 31 December 2007 is set out below:
Non-OECD
Russia OECD countries countries Total
Assets
Cash and cash equivalents 23 420 58 673 1 341 83 434
Mandatory cash balances with central banks 3 883 - 1 655 5 538
Due from other banks 15 524 11 870 440 27 834
Trading securities
- owned by the Group 10 875 - - 10 875
- pledged under sale and repurchase
agreements 2 987 - - 2 987
Derivative financial instruments 114 50 96 260
Available-for-sale financial assets 290 - - 290
Loans and advances to customers 178 181 1 087 1 043 180 311
Property, plant and equipment and
intangible assets 5 932 - 24 5 956
Other assets 3 555 240 202 3 997
Total assets 244 761 71 920 4 801 321 482
Liabilities
Due to central bank 846 - - 846
Due to other banks 17 845 77 706 5 965 101 516
Derivative financial instruments 539 322 13 874
Customer accounts 74 982 20 699 28 451 124 132
Debt securities in issue 12 804 33 799 28 46 631
Subordinated debt - 5 066 - 5 066
Deferred tax liability 752 18 - 770
Other liabilities 2 535 4 210 2 749
Total liabilities 110 303 137 614 34 667 282 584
Net position 134 458 (65 694) (29 866)
The majority of credit related commitments, as at 31 December 2008 and 31 December 2007, are related to
residents of the Russian Federation.
The geographical classification of financial assets, liabilities and credit related commitments has been based
on the country in which the counterparty is located. The classification of tangible assets (precious metals,
property, plant and equipment) has been based on the country in which they are physically held.
As at 31 December 2008, loans and advances to customers of RUR 12 143 million (31 December 2007:
RUR 17 958 million), included in the above tables as being with Russian counterparties, have been granted
to subsidiaries and affiliates of these Russian counterparties located outside of the Russian Federation.
(f) Capital management
(i) Capital management policy
The Group’s policy is to maintain a strong capital base so as to maintain investor, creditor and market
confidence and to sustain future development of its business.
The Central Bank of Russia sets and monitors regulatory capital requirements for MDM Bank, the lead
operating entity of the Group. The Central Bank of Latvia sets and monitors capital requirements for Latvian
Trade Bank.
Under the current capital requirements set by the CBR banks have to maintain a ratio of capital to risk
weighted assets (“statutory capital adequacy ratio”) above the prescribed minimum level. As at 31 December
2008, this minimum level is 10% (31 December 2007: 10%).
174 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
MDM Bank was in compliance with the statutory capital adequacy ratio during the year ended 31 December
2008 and 31 December 2007. As at 31 December 2008, the statutory capital of MDM Bank on a standalone
basis was RUR 41 500 million (31 December 2007: RUR 35 850 million). The statutory adequacy capital ratio
of MDM Bank as at 31 December 2008 was 14.6% (31 December 2007: 14.4%).
The Group and the Bank also are subject to minimum capital requirements established by covenants under
liabilities incurred by the Bank or the Group, including capital adequacy levels calculated in accordance with
the requirements of the Basle Accord, as defined in the International Convergence of Capital Measurement
and Capital Standards (updated April 1998) and Amendment to the Capital Accord to incorporate market
risks (updated November 2005), commonly known as Basel I. As at 31 December 2008 and 31 December
2007, such minimum capital requirements for total capital ratio was 12%.
The following table shows the composition of the Group’s capital position calculated in accordance with the
requirements of the Basle Accord, as at 31 December 2008 and 31 December 2007:
31 December 2008 31 December 2007
Tier 1 capital
Share capital 1 794 1 794
Share premium 14 198 14 198
Cumulative translation reserves 326 24
Retained earnings 23 179 19 875
Total tier 1 capital 39 497 35 891
Tier 2 capital
Asset revaluation reserve 1 577 3 007
Subordinated debt (unamortised portion) 3 010 3 487
Total tier 2 capital 4 587 6 494
Total capital 44 084 42 385
Risk-weighted assets
Banking book 241 232 225 322
Trading book 5 414 21 477
Total risk weighted assets 246 646 246 799
Total capital expressed as a percentage of risk-weighted
assets (“total capital ratio”) 17.9 17.2
Total tier 1 capital expressed as a percentage of risk-
weighted assets (“tier 1 capital ratio”) 16.0 14.5
The risk-weighted assets are measured by means of a hierarchy of risk weights classified according to the
nature of – and reflecting an estimate of credit, market and other risks associated with – each asset and
counterparty, taking into account any eligible collateral or guarantees. A similar treatment is adopted for
off-balance sheet exposure, with some adjustments to reflect the more contingent nature of the potential
losses.
The Group and the Bank have complied with all externally imposed capital requirements as at
31 December 2008 and 31 December 2007.
The management of the Group believes that a 10% tier I capital ratio and a 12% total capital ratio, calculated
in accordance with the requirements of the Basle Accord, are the appropriate minimum capitalization levels
for the Group and MDM Bank.
The allocation of capital between specific operations and activities is, to a large extent, driven by optimization
of the return achieved on the capital allocated. Although maximization of return on risk-adjusted capital is
the principal basis used in determining how capital is allocated within the Group to particular operations
or activities, it is not the sole basis used for decision making. Account is also taken of synergies with other
operations and activities, the availability of management and other resources and the fit of the activity with
MDM Bank 175
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
the Group’s longer term strategic objectives. The Group’s policies in respect of capital management and
allocation are regularly reviewed by the Board of Directors of MDM Bank through approval and review of
annual budgets, including those for various business segments of the Group.
(ii) Changes in the capital management policy
In the end of 2007 the Group established a policy of allocation of capital by individual transactions and
activities. This policy includes:
• the methodology of calculation of capital at risk allocated to individual transactions and activities;
• the methodology of calculation of capital used for each segment of the Group’s business;
• the methodology of calculation of RAROC and shareholder value added (SVA).
Target returns on allocated capital and of the SVA amounts were set for the Group and individual business
units within the Group in 2008 budgets.
29. Contingent Liabilities and Commitments
(a) Legal proceedings
In the ordinary course of business, the Group is subject to legal actions and complaints. Management believes
that the ultimate liability, if any, arising from such actions or complaints, will not have a material adverse
effect on the financial condition or the results of future operations of the Group.
(b) Tax legislation
The Group operates in a number of tax jurisdictions. In the normal course of business, management must
interpret and apply existing legislation to transactions with third parties and its own activities.
Current Russian tax legislation is principally based on the form in which transactions are documented and
the underlying accounting treatment as prescribed by Russian Accounting Rules. The interpretation of
Russian tax legislation by the tax authorities and court practice, which are constantly changing, in the future
may focus less on the form and more on the substance of a transaction. Recent events within the Russian
Federation suggest that the tax authorities are taking a more assertive position in their interpretation and
enforcement of tax legislation. Tax years remain open to normal audit by the Russian tax authorities for three
years; during such time any change in interpretation or practice, even if there is no change in Russian tax
legislation, could be applied retroactively. The interpretation and practice in other jurisdictions in which the
Group operates are also changing, sometimes with retroactive effect.
In management’s opinion, the Group is in substantial compliance with the tax and other laws governing its
operations in Russia and in other tax jurisdictions. However, a risk remains that the relevant authorities could
take different positions with regard to interpretative issues or that court practice could develop adversely to
positions taken by the Group and the effect on the financial position of the Group, should the authorities
succeed in asserting their positions, could be significant.
In August 2008, MDM Bank received the final results of the tax audit for 2005-2006 from the Federal Tax
Service of the Ministry of Finance. In accordance with the resolution, the tax authorities have assessed
additional taxes against MDM Bank of approximately RUR 194 million and fines and penalties at a maximum
of RUR 63 million.
The Bank filed a complaint in arbitration to overrule the tax inspectors’ claim. The final hearing on the
issue took place on 20 February 2009 in St. Petersburg Arbitration Court and the complaint of the Bank
was upheld by the Court, while the inspectors’ claim was overruled. The tax authorities are entitled to
take an appeal on this ruling due to Federal Tax Service internal requirements regardless of the arbitration
perspectives. Accordingly, the Group has not recorded provisions in respect of the above contingencies in
these consolidated financial statements.
(c) Capital commitments
As at 31 December 2008, the Group had capital commitments mainly in respect of the development of its
branch network and system enhancements, totalling approximately RUR 132 million (31 December 2007:
RUR 315 million).
176 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
(d) Operating lease commitments
Where the Group is the lessee, the future minimum lease payments under non-cancellable operating leases
are as follows:
31 December 2008 31 December 2007
Not later than 1 year 503 547
Later than 1 year and not later than 5 years 1 559 1 483
Later than 5 years 417 552
Total operating lease commitments 2 479 2 582
During the year ended 31 December 2008 RUR 869 million was recognised as an expense in the consolidated
income statement in respect of operating leases (31 December 2007: RUR 486 million).
(e) Credit related commitments
Credit related commitments comprise letters of credit, guarantees and undrawn loan commitments.
The contractual amount of these commitments represents the value at risk should amounts under the
contract be fully drawn upon.
Guarantees and standby letters of credit carry the same credit risk as loans. Documentary and commercial
letters of credit – which are written undertakings by the Group on behalf of a customer authorising a third
party to draw drafts on the Group up to a stipulated amount under specific terms and conditions – are
collateralised by the underlying shipments of goods to which they relate and therefore carry less risk than
a direct loan. The primary purpose of undrawn loan commitments is to ensure that funds are available to
a customer as required. With respect to credit risk on commitments to extend credit, the Group is potentially
exposed to loss in an amount equal to the total unused commitments. However, the likely amount of such
potential loss is less than the total unused commitments, as most commitments to extend credit are contingent
upon customers maintaining specific credit standards.
Outstanding credit related commitments are as follows:
31 December 2008 31 December 2007
Letters of credit 25 340 28 125
Undrawn loan commitments 19 296 18 282
Guarantees issued 7 139 15 628
Total credit related commitments 51 775 62 035
The Group creates provisions for losses on a collective and individual basis for its credit related
commitments.
Movements in provision for losses on credit related commitments are as follows:
Year ended Year ended
31 December 2008 31 December 2007
Provision for losses on credit related commitments as at
1 January 44 50
Effect of foreign currency translation 3 (1)
Provision during the year (9) (5)
Provision for losses on credit related commitments as at
31 December (Note 19) 38 44
The total outstanding contractual amount of guarantees, letters of credit and undrawn loan commitments
does not necessarily represent future cash requirements, as these commitments may expire or terminate
without being funded.
Currency analysis of credit related commitments is disclosed in Note 28. Information on related party
transactions is disclosed in Note 31.
MDM Bank 177
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
(f) Fiduciary assets
The Group provides custody services to its customers, whereby it holds securities on behalf of customers
and receives fee income for providing these services. These securities are not assets of the Group and are not
recognised in the consolidated balance sheet.
The Group also provides asset management services to individuals, trusts, retirement benefit plans and other
institutions, whereby it holds or invests funds received at the discretion of the customer. The Group receives
fee income for providing these services. Assets for which the Group provides asset management services to its
customers are not assets of the Group and are not recognised in the consolidated balance sheet. The Group is
not exposed to any credit risk relating to such placements, as it does not guarantee these investments.
As at 31 December 2008, total assets for which the Group provides asset management services to its customers
were RUR 1 240 million including mutual funds of RUR 180 million and discretionally managed portfolios
of RUR 868 million (31 December 2007: RUR 4 809 million including mutual funds of RUR 304 million and
discretionally managed portfolios of RUR 4 505 million).
30. Fair Value of Financial Instruments
The Group has performed an assessment of its financial instruments, as required by IFRS 7 “Financial
Instruments: Disclosures”.
The estimated fair value of cash and cash equivalents, which is comprised of cash, correspondent accounts
with central banks, correspondent accounts, overnight deposits with other banks and other floating rate
placements is their carrying value.
The estimated fair value of mandatory cash balances with central banks represents the amount proportionate
to the discounted amount of estimated future cash flows on due to other banks, customer accounts and debt
securities in issue to which these mandatory cash balances relate.
The estimated fair value of fixed rate balances due from other banks, including central banks, is calculated
based on discounted expected future principal and interest cash flows.
The estimated fair value of quoted trading securities, derivative financial instruments and other financial
assets at fair value through profit or loss and available-for-sale financial assets is based on quoted market
prices at the balance sheet date without any deduction for transaction costs. For securities and derivative
financial instruments not traded in an active market, the fair value is estimated by using valuation techniques,
which include the use of recent arm’s length transactions, discounted cash flow analysis and other valuation
techniques commonly used by market participants.
The estimated fair value of loans and advances to customers represents the discounted amount of estimated
future cash flows expected to be received.
The estimated fair value of due to other banks and customer accounts balances, which are payable on demand,
is their carrying value. The estimated fair value of due to other banks and customer accounts balances,
which are not payable on demand, and other borrowed funds, which are not quoted in an active market, is
calculated based on discounted expected future principal and interest cash flows.
The estimated fair value of debt securities in issue and subordinated debt is based on quoted market prices at
the balance sheet date without any deduction for transaction costs.
The estimated fair value of all other financial instruments represents the discounted amount of estimated
future cash flows expected to be received or paid.
Where discounted cash flow techniques are used, estimated future cash flows are based on management’s
best estimates and the discount rate is a market-based rate for a similar instrument at the balance sheet
date.
178 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The estimates of fair value are intended to approximate the amount for which a financial instrument could
be exchanged between knowledgeable, willing parties in an arm’s length transaction. However given the
uncertainties and the use of subjective judgment, the fair value should not be interpreted as being realisable
in an immediate sale of the assets or settlement of liabilities.
The following table summarises the fair values of major financial assets and liabilities:
31 December 2008 31 December 2007
Carrying value Fair value Carrying value Fair value
Cash and cash equivalents 77 271 77 271 83 434 83 434
Mandatory cash balances with central banks 1 942 1 822 5 538 5 274
Due from other banks 31 651 31 496 27 834 27 853
Trading securities:
- owned by the Group 194 194 10 875 10 875
- pledged under sale and repurchase agreements - - 2 987 2 987
Derivative financial instruments 3 083 3 083 260 260
Available-for-sale financial assets:
- owned by the Group 8 676 8 676 290 290
- pledged under sale and repurchase agreements 379 379 - -
Investment securities held to maturity 108 393 - -
Loans and advances to customers:
- Loans to corporate customers 130 507 128 252 117 326 117 054
- Loans to individuals 37 601 37 602 35 513 35 513
- Investment banking loans 10 122 10 064 16 107 16 114
- Small business loans 14 209 13 201 7 761 7 676
- Net investment in finance lease 2 367 2 287 3 604 3 591
Due to central bank (35 575) (35 558) (846) (846)
Due to other banks
- Correspondent accounts and overnight deposits of
other banks (3 421) (3 421) (6 039) (6 039)
- Bilateral structured financing (9 073) (8 977) (7 042) (7 042)
- Syndicated loans (8 281) (8 063) (24 839) (24 906)
- Trade finance facilities (31 569) (31 931) (29 116) (29 008)
- Loans from international financial institutions (29 396) (28 783) (11 515) (11 273)
- Term deposits from other banks (15 634) (15 699) (15 648) (15 680)
- Sale and repurchase agreements - - (7 317) (7 395)
Derivative financial instruments (2 372) (2 372) (874) (874)
Customer accounts:
- State organisations
Current/settlement accounts (4) (4) (1) (1)
Term deposits (10 600) (10 584) (4 016) (4 021)
- Other legal entities
Current/settlement accounts (31 587) (31 587) (30 867) (30 867)
Term deposits (42 451) (42 486) (68 426) (68 416)
Sale and repurchase agreements - - (1 316) (1 316)
MDM Bank 179
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
31 December 2008 31 December 2007
Carrying value Fair value Carrying value Fair value
- Retail customers
Current/demand accounts (5 067) (5 067) (5 412) (5 412)
Term deposits (25 362) (25 377) (14 094) (14 069)
Debt securities in issue:
- Unsecured loan participation notes (11 808) (9 946) (11 043) (10 825)
- Loan participation notes secured by diversified
payment rights (“DPR”) (9 791) (9 861) (14 133) (14 239)
- Promissory notes (5 370) (5 329) (9 771) (9 708)
- Loan participation notes secured by a pool of car loans (1 282) (1 288) (4 153) (4 161)
- Bonds (422) (427) (6 007) (6 122)
- Deposit certificates (27) (25) (1 524) (1 527)
Subordinated debt (5 966) (5 990) (5 066) (5 099)
The following table shows an analysis of financial instruments recorded at fair value, between those whose
fair value is based on quoted market prices, those involving valuation techniques where all the model inputs
are observable in the market, and those where the valuation techniques involve the use of non-market
observable inputs as at 31 December 2008:
Valuation Valuation
techniques techniques based
Quoted based on market on non-market
market price observable inputs observable inputs Total
Financial assets
Trading securities
- owned by the Group 170 24 - 194
- pledged under sale and repurchase
agreements - - - -
Derivative financial instruments - 3 083 - 3 083
Available-for-sale financial assets
- owned by the Group 5 488 2 738 450 8 676
- pledged under sale and repurchase
agreements 379 - - 379
Financial liabilities
Derivative financial instruments - 2 372 - 2 372
180 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The following table shows an analysis of financial instruments recorded at fair value, between those whose
fair value is based on quoted market prices, those involving valuation techniques where all the model inputs
are observable in the market, and those where the valuation techniques involve the use of non-market
observable inputs as at 31 December 2007:
Valuation Valuation
techniques techniques based
Quoted based on market on non-market
market price observable inputs observable inputs Total
Financial assets
Trading securities
- owned by the Group 5 907 4 968 - 10 875
- pledged under sale and repurchase
agreements 2 938 49 - 2 987
Derivative financial instruments 260 - - 260
Other financial assets at fair value through
profit or loss - 226 - 226
Available-for-sale financial assets - - 290 290
Financial liabilities
Derivative financial instruments - 874 - 874
31. Related Party Transactions
For the purposes of these consolidated financial statements, parties are considered to be related if one party
has the ability to control the other party or exercise significant influence over the other party in making
financial or operational decisions as defined by International Financial Reporting Standard IAS 24 “Related
Party Disclosures”. In considering each possible related party relationship, attention is directed to the
substance of the relationship, not merely the legal form.
Related parties comprise immediate and indirect parent companies and ultimate beneficiaries of the Group,
directors and key management personnel, and other related parties. Other related parties are entities, which
are under common control with the Group, and entities, which are significantly influenced by the Group’s
beneficiaries, directors and key management personnel. As at 31 December 2008, these primarily consisted
of Joint Stock Company Siberian Coal Energy Company (SUEK) (coal and energy), holding companies for
SUEK, and other fellow subsidiaries. Joint Stock Company Mineral and Chemical Company EuroChem
(mineral fertilizers) was a related party until May 2007.
Banking transactions are entered into in the normal course of business with the related parties. These
include settlements, loans, deposit taking, trade finance, securities and foreign currency transactions. These
transaction are priced mainly on normal market terms.
The following table shows credit exposure of the Group to related parties as at 31 December 2008 and
31 December 2007:
31 December 2008 31 December 2007
Amount % of Total assets Amount % of Total assets
Total credit balance sheet exposure
(net of impairment) 111 0.1 205 0.1
Total credit on and off balance sheet
exposure (net of impairment) 111 0.1 205 0.1
MDM Bank 181
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The outstanding balances as at 31 December 2008 with related parties are as follows:
(d) Other related parties
(b) (c) Immediate
Directors and Companies
(a) and key indirect parent controlled
Benefi- manage- companies of by key
ciaries ment the Bank SUEK management Other Total Total
Assets
Due from other banks - - - - 24 - 24 24
Trading securities
- Corporate shares - - - 2 - - 2 2
Available-for-sale financial
assets
- Corporate bonds - - - - 41 - 41 41
Loans and advances to
customers (gross) - 37 - 8 - - 8 45
Loan impairment - (1) - - - - - (1)
Total assets - 36 - 10 65 - 75 111
Liabilities
Due to other banks - - - - 530 - 530 530
Customer accounts
- Current accounts 6 42 41 155 - 1 722 1 877 1 966
- Term deposits 1 378 423 - 658 - - 658 2 459
Total liabilities 1 384 465 41 813 530 1 722 3 065 4 955
The results of transactions with related parties for the year ended 31 December 2008 are as follows:
(d) Other related parties
(b) (c)
Directors Immediate and Companies
(a) and key indirect parent controlled
Benefi- manage- companies of my key
ciaries ment the Bank SUEK management Other Total Total
Interest income on amount
due from other banks - - - - 5 - 5 5
Interest income on loans
and advances to customers - 3 - 5 - - 5 8
Loan impairment reversal - (1) - 2 - - 2 1
Interest expense on
customer accounts (146) (26) - (160) - (2) (162) (334)
Results from trading in
foreign currencies - - - 243 7 28 278 278
Operating expenses - (726) (64) - - - - 790
Fee and commission
income/(expenses) - - - 5 6 - 11 11
182 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The outstanding balances as at 31 December 2007 with related parties are as follows:
(c)
Immediate and (d) Other related parties
(b) indirect parent
(a) Directors and key companies of the
Beneficiaries management Bank SUEK Other Total Total
Assets
Trading securities
- Corporate shares - - - 7 - 7 7
Loans and advances to
customers (gross) - - - 200 - 200 200
Loan impairment - - - (2) - (2) (2)
Total assets - - - 205 - 205 205
Liabilities
Customer accounts
- Current accounts 13 19 13 702 - 702 747
- Term deposits 951 199 - 2 462 124 2 586 3 736
Total liabilities 964 218 13 3 164 124 3 288 4 483
The results of transactions with related parties for the year ended 31 December 2007 are as follows:
(c)
(b) Immediate and (d) Other related parties
Directors indirect parent
(a) and key companies
Beneficiaries management of the Bank SUEK Other Total Total
Interest income on
loans and advances to
customers - - - 58 - 58 58
Interest income received
from securities issued by
related parties - - - 13 - 13 13
Loan impairment reversal - - - 4 - 4 4
Interest expense on
customer accounts (14) (11) (47) (2) (244) (246) (318)
Net trading gain from
trading in securities
issued by related parties - - - 15 - 15 15
Results from trading in
foreign currencies - - (3) 12 - 12 9
Net fee and commission
income - - - 7 - 7 7
Operating expenses - (934) - (81) - (81) (1 015)
(a) Transactions with beneficiaries of the Group
As at 1 December 2008 and 31 December 2007 term deposits from beneficiaries had remaining maturities
less than one year. The table below summarises information about average effective interest rates and
outstanding balances of term deposits from beneficiaries:
31 December 2008 31 December 2007
RUR USD EUR Total RUR USD EUR Total
Outstanding balances 33 645 700 1 378 797 86 68 951
Average effective
interest rate, % 10.8 9.2 9.6 9.4 11.0 7.2 6.8 10.3
MDM Bank 183
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The table below summarises information about average balances of term deposits of beneficiaries of the
Group:
Year ended 31 December 2008 Year ended 31 December 2007
RUR 1 078 21
USD 159 123
EUR 147 63
(b) Transactions with the members of the board of directors and key management personnel
The total remuneration of the members of the Board of Directors of MDM Bank, including discretionary
compensation, amounted to RUR 91 million for the year ended 31 December 2008 (31 December 2007:
RUR 86 million). MDM Bank’s Board of Directors was composed of 7 members, as at 31 December 2008
(31 December 2007: 7 members), all of them non-executive. The Board has elected three Board Committees:
Audit and Risk Committee, Strategy Committee, and Nomination and Remuneration Committee. Boards
stand for re-election every year under Russian law.
Key management personnel comprise members of the Management Board of MDM Bank, heads of core
business units and the Chief accountant of MDM Bank. As at 31 December 2008, key management personnel
comprised of 10 persons (31 December 2007: 11 persons).
The total remuneration of key management personnel, including discretionary compensation, is as follows:
Year ended Year ended
31 December 2008 31 December 2007
Salary and bonuses 596 716
Contributions to the Russian Federation State pension fund 1 1
Termination benefits 38 131
Total remuneration of key management personnel 635 848
The Group does not provide post-employment, share-based or other long-term benefits to the directors and
key management personnel.
The table below summarises information about average effective interest rates and outstanding balances of
term deposits from the directors and key management personnel:
31 December 2008 31 December 2007
RUR USD EUR Total RUR USD EUR Total
Outstanding balances 42 270 111 423 163 15 21 199
Average effective interest
rate, % 10.8 9.1 9.4 9.4 9.5 8.6 5.8 9.0
The table below summarises information about the remaining maturity of deposits from the directors and
key management personnel:
31 December 2008 31 December 2007
Term deposits due to customers
Up to one year remaining maturity 59 172
From 1 to 5 years remaining maturity 364 27
184 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
(c) Transactions with immediate and indirect parent companies of the Bank
The table below summarises information about average balances with immediate and indirect parent
companies of the Bank and entities controlled by these companies:
Year ended 31 December 2008 Year ended 31 December 2007
Term deposits due to customers
RUR 192 618
USD 46 1
EUR 34 1
(d) Transactions with other related parties
The table below summarises information about average effective interest rates and outstanding balances
with other related parties:
31 December 2008 31 December 2007
RUR USD EUR Total RUR USD EUR Total
Due from other banks
Outstanding balance 24 - - 24 - - - -
Average effective interest
rate, % 12.0 - - 12.0 - - - -
Corporate shares
Outstanding balance 2 - - 2 7 - - 7
Corporate bonds
Outstanding balance 41 - - 41 - - - -
Coupon rate, % 10.1 - - 10.1 - - - -
Loans and advances to
customers
Outstanding balance 8 - - 8 200 - - 200
Average yield to maturity, % 26.5 - - 26.5 10.8 - - 10.8
Current accounts 1 876 1 - 1 877 - - - -
Term deposits due to
customers
Outstanding balance 658 - - 658 2 462 124 - 2 586
Average effective interest
rate, % 8.5 - - 8.5 8.4 6.0 - 8.3
Due to other banks
Outstanding balance 150 380 - 530 - - - -
Average effective interest
rate, % 8.5 2.6 - 6.4 - - - -
Balances on current accounts of other related parties are on terms similar to those for third parties.
MDM Bank 185
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
The table below summarises information about average balances with other related parties:
Year ended 31 December 2008 Year ended 31 December 2007
Corporate bonds
RUR 2 -
Corporate shares
RUR 7 7
Loans and advances to customers
RUR 99 200
Term deposits due to customers
RUR 5 383 2 462
USD 29 124
Credit related commitments
RUR - -
Due to other banks
RUR 70 -
USD 524 -
EUR 98 -
The table below summarises information about the remaining maturity of balances with other related parties:
31 December 2008 31 December 2007
Loans and advances to customers
Up to one year remaining maturity 8 200
Term deposits
Up to one year remaining maturity 658 2 586
32. Principal Subsidiaries
Included in the table below is the list of the principal subsidiaries of the Group, as at 31 December 2008 and
31 December 2007.
Voting rights/ Voting rights/
equity owned, % equity owned, %
Name Jurisdiction 31 December 2008 31 December 2007
Banking
Latvian Trade Bank Latvia 100.0 100.0
Securities trading
MDM Investments Limited Cyprus 100.0 100.0
MCM Russian Investments Limited Cyprus 100.0 100.0
Asset management
MDM Asset Management Russia 100.0 100.0
Leasing
LeasingPromHold Russia 100.0 100.0
MDM Leasing Russia 100.0 100.0
Special purpose entities for financing transactions
MDM International Funding plc Ireland 100.0 100.0
Taganka Car Loan Finance plc Ireland 100.0 100.0
MDM DPR Finance Company S.A. Luxemburg 100.0 100.0
MDM ECP Limited Ireland 100.0 100.0
186 MDM Bank
Notes to the Consolidated Financial Statements for the Year Ended 31 December 2008
(expressed in millions of Russian Roubles – refer to Note 3)
Latvian Trade Bank is a commercial bank licensed by the Central Bank of Latvia to perform banking
operations.
MDM Investments Limited is a company licensed by the Cyprus Securities and Exchange Commission
specializing in securities brokerage, trading on its own account and asset management.
MCM Russian Investments Limited is a company that specializes in trading in securities on its own account
and providing margin loans to customers of MDM Investments Limited.
MDM Asset Management is a company licensed by the Russian Federal Financial Markets Service to manage
third-party assets and collective investment schemes.
LeasingPromHold is a company specializing in provision of leasing services to corporate customers of the Group.
MDM International Funding plc, Taganka Car Loan Finance plc, MDM DPR Finance Company S.A. and MDM
ECP Limited are special purpose entities used for financing transactions in international capital markets
such as loan participation note issues, asset securitisations, future flows (DPR) securitisations etc. These
SPEs are controlled by the Group through the predetermination of the activities of SPEs, having rights to
obtain the majority of benefits of the SPEs, and retaining the majority of the residual risks and rewards
related to the SPEs.
33. Subsequent Events
In April 2009 the Group acquired 84% of the share capital of OAO Moskvichka. The company’s main asset
is premises in Moscow with a fair value of RUR 839 million. The purchase consideration paid by the Group
was RUR 702 million.
187
Contact Details
Head Office
Address: 33/1 Kotelnicheskaya Embankment, Moscow, 115172, Russia
Call Center (24 hours): +7(495) 797-9500
fax (general): +7(495) 797-9501
Small business Lending: +7(800) 333-0800
Cardholder Support Center (24 hours): +7(495) 795-2500
Telex 414121 MDMD RU
S.W.I.F.T. MOBW RU MM
Bloomberg MDMG
Reuters MBWM, MDMM, MDMB
X-400 C: USSR, A: SOVMAIL
SPRINT MDMBANK/CUSTOMERS
Website: www.mdmbank.ru; www.mdmbank.com
Settlements
Ms. Tatyana Berezhnova,
Head of Interbank Transactions
Tel.: +7(495) 960-2258
E-mail: korr@mdmbank.com
Investor Relations
Mr. Sam VanDerlip
Head of Investor Relations
Tel.: +7(495) 221-3075
Fax: +7(495) 221-3076
E-mail: sam.vanderlip@mdmbank.com
Public Relations
Mr. Pavel Nefedov
Head of Public Relations
Tel.: +7(495) 363-2741
Fax: +7(495) 363-2742
E-mail: pavel.nefedov@mdmbank.com
188 MDM Bank Annual report 2008
Principal Correspondent Accounts
Account No. 30101810900000000466
RUR
OPERU of MosKovsky GTU of the Bank of Russia
Account No. 890-0514-841
USD BANK OF NEW YORK,
One Wall Street, 8th Floor, New York, NY, 10286 USA, S.W.I.F.T: IRVTUS3N
Account No. 100947414900
EUR DEUTSCHE BANK AG
12, Taunusanlage 60262 Frankfurt/Main, Germany, S.W.I.F.T: DEUTDEFF
Account No. 0230-69226.05Z
UBS AG
CHF
P.O. Box 8098, Zurich, Switzerland, Global Services Financial Institutions, S.W.I.F.T:
UBSWCHZH80A
Account Nо. 0314319 0000 GBP 000 LDN
DEUTSCHE BANK AG
GBP
Winchester House 1, Great Winchester Street, London, EC2N 2DB U.K., SORT CODE
405081, S.W.I.F.T : DEUTGB2L
Account No. 99-40-390-349
SEK SVENSKA HANDELSBANKEN
Blasiehomstorg 11, 106 70 Stockholm, Sweden, S.W.I.F.T: HANDSESS
Account No. 7001.02.05954
NOK DNB NOR BANK ASA, (formerly DEN NORSKE BANK ASA) Stranden 21, 0250 Oslo,
Norway, S.W.I.F.T: DNBANOKK
Account No. 3996052575
DKK DEN DANSKE BANK
Holmens kanal 2-12, DK-092, Copenhagen K, Denmark, S.W.I.F.T: DABADKKK
Account No. 653-0423130
JPY BANK OF TOKYO – MITSUBISHI
7-1 Marunouchi 2-Chome, Chiyoda-ku, Tokyo, 100, Japan, S.W.I.F.T: BOTKJPJT
Account No. 1702795061015
BYR BELVNESHECONOMBANK
Myasnikov Str., 32, 220050 Minsk, Belarus, МFО 226, S.W.I.F.T: BELBBY2X
Account No. LV16LATC0073000430330
UAH LATVIJAS TIRDZNIECIBAS BANKA
4 Trijadibas iela, LV-1048 Riga, Latvia, S.W.I.F.T: LATCLV22
189
Licences
MDM Bank
Activity General Banking License
Issuing body Central Bank of Russia
Number and date № 2361 of 31.03.2008
Activity Precious Metals Operations
Issuing body Central Bank of Russia
Number and date № 2361 of 31.03.2008
Activity Gold Export
Issuing body Ministry of Economic Development and Trade of Russia
Number and date № LG0270805506749 of 30.05.2008
Activity Silver Export
Issuing body Ministry of Economic Development and Trade of Russia
Number and date: № LG0270805506750 of 30.05.2008
Activity Exchange Broker
Issuing body Federal Securities Market Commission of Russia
Number and date № 861 of 24.08.2006
Activity Custody Operations
(professional securities market participant)
Issuing body Federal Securities Market Commission of Russia
Number and date № 177-03942-000100 of 15.12.2000
Activity Brokerage Operations
(professional securities market participant)
Issuing body Federal Securities Market Commission of Russia
Number and date № 177-02956-100000 of 27.11.2000
Activity Dealing Operations
(professional securities market participant)
Issuing body Federal Securities Market Commission of Russia
Number and date № 177-03060-010000 of 27.11.2000
Asset Management Operations
Activity (professional securities market participant)
Issuing body Federal Securities Market Commission of Russia
Number and date № 177-03134-001000 of 27.11.2000
190 MDM Bank Annual report 2008
MDM Bank has been a member of the deposit insurance system since 15 December 2004.
MDM Asset Management
Activity Managing investment funds, mutual funds and private pension funds
Issuing body: Federal Securities Market Commission of Russia
Number and date: № 21-000-1-00045, issued on 24 January 2001
Activity Securities Management
Issuing body: Federal Financial Markets Service
Number and date: № 077-11425-001000, issued on 17 July 2008
Latvian Trade Bank
Activity Credit Institution
Issuing body: Financial and Capital Market Commission of the Republic of Latvia
Number and date: № 06.01.02.01.010/82 of 4 December 1991 (over-issued on 10 January
2004 as a result of over-registration in the company registry of
the Republic of Latvia)
MDM Investments Limited
Activity 1) Broker and Depository
2) Securities Management
3) Financial Consulting
Issuing body: Securities and Exchange Commission
Number and date: № SIF/038/04, issued on 26.07.2004
191
Memberships
• Association of Russian Banks, Moscow
• Moscow Interbank Currency Exchange (MICEX) ZAO, Moscow
• MICEX Stock Exchange ZAO, Moscow
• National Association of Stock Market Participants (SRO), Moscow
• St. Petersburg Stock Exchange ZAO, St. Petersburg
• Moscow Stock Exchange, Moscow
• Russian Trading System (RTS), Moscow
• National Stock Association (SRO), Moscow
• National Currency Association, Moscow
• Moscow International Currency Association, Moscow
• Association of Russian Regional Banks, Moscow
• ROSSWIFT, Moscow
• US-Russia Business Council, Washington, DC, U.S.A.
• National Council for Corporate Governance
The Bank has adopted and fully observes in its operations the principles and norms of professional ethics
developed by the associations, exchanges and partnerships of which it is a member.
192 MDM Bank Annual report 2008
Annual Report 2008
This Report is available in Russian and English. In the event of any discrepancy between the texts of the Russian
and English versions, the text in the Russian version shall prevail.
Detailed information on related-party transactions is provided in Annex 1 to this Report, which is available in
PDF format on the Bank’s website at www.mdmbank.ru.
The Bank was not involved in any major transactions in 2008, as defined by the Russian Law On Joint-Stock
Companies.
Annex 1 shall be viewed as an integral part of this Annual Report.
Design and special photography Agey Tomesh
