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					Annual Report 2008                                       Bank Saint Petersburg
                                                         Annual Report 2008



CONTENTS
  1   Bank Saint Petersburg at a Glance              4
      Message from the Chairman
  2   of the Supervisory Board and CEO              11

                                                                                       G
                                                                                    BUR
  3   Corporate Governance                          14
                                                                                 RS
                                                                          ETE
      Overview of the Russian Economy
  4                                                20
                                                                      T P
      and the Banking S ector


  5   Financial Review and Management Discussion   26             SAIN CE
  6   Business Units’ Review                       36     B ANK GLAN
  7   Risk Management                               45      A T A
  8   Funding                                      55
  9   Information Technologies                      58
 10   Employees                                    60
 11   Sponsorshi p and Charity                     62
 12   Consolidated Financial Statements            64
 13   Contacts                                     160
Bank Saint Petersburg at a Glance                                                                   Annual Report 2008



1. BANK SAINT PETERSBURG AT A GLANCE




     IN   2008        THE BANK
                                    ENT                           BANK’S ASSET
                                                                               S        FOR 2008
               CONTIN UED TO IMPLEM                           THE
                                                                                70% TO RUB 2
                                                                                               15.7 BILLION
                         O DEVELOP                                    GREW BY           BILLION IN 20
                                                                                                      07
          ITS STRATEGY T               ERSAL BANK AN
                                                     D
                                                                      FRO M RUB 126.6
               AS A FULL -SERVICE UNIV
                                                EN
                                               GTH                       STRENGTHEITIONSNING OF OUR
                                FURTHER STREN                    DUE TO              OS
                                            POSITION                   COMPETITIVE P
                                ITS MARKET ENINGRAD REGION.        IN  THE ST PETER
                                                                                    SBURG MARKET
                                                                                                  .
                        URG AND THE L
          IN ST PETERSB

 4                                                                                                                5
Bank Saint Petersburg at a Glance                                                                                             Annual Report 2008




                  TH T THE R                                 IGHT WAY
      CONVINCERDTAILA BUSINESS
WE ARE S IN THE E                                               IS BASED ON                                               SITUATION
                                                                                                                 ECONOMIC
       TO SUCCES                                                                                     Y CHANGING              NEFIT
                                                                                          THE RAPIDL
       THE FOLLOWING PR
                        INCIPLES:
                                                           e region of o
                                                                         perations;
                                                                                       IN                      INUE TO BE
                                                                                                   WE CONT RELATIONS
                                         coverage in th
                            ide network                                                                  GOOD
            to provide w
                                                           means of a w
                                                                          ide ATM             FROM OUR
                                            the Bank by                                                     MERS,                  .
                             sy access to                            e banking;                 WITH CUSTO               STRENGTHS
             to provide ea
                                       ternet bank,
                                                       and telephon
                                                                                                          NE O F OUR KEY
         network, a u
                       ser-friendly In
                                                            rporate custo
                                                                           mers into           WHICH IS O
                              rong relatio nships with co
              to leverage st                               products.
                                          ities for retail
                        el ling opportun
          good cross-s

 6                                                                                                                                          7
 Bank Saint Petersburg at a Glance                                                                                          Annual Report 2008




                                                                            Financial                             2008
                                                                            Summary                            Key Events


                                                               Net income amounted to              Interfax rankings
                                                               RUB 2.8 billion                     12th rank by retail deposits
                                                               (USD 94.4 million)                  16th by profit
                                                               compared to RUB 2 billion           17th by assets
                                                               (USD w81.1 million) in 2007
                                                                                                   24th by equity


                                                                              70% to
                                                               Total assets increased by
                                                                                                   2nd in terms of loans and deposits
                                                                                                   in the St Petersburg market
                                                               RUB 215.7 billion
                                                               (USD 7.3 billion)                   4 outlets opened and 117 ATMs installed

                                                                                                   number of corporate customers
                                                                       25% and amounted to
                                                               Equity rose by
                                                                                                   increased by 6,600 and reached
                                                                                                   35,000 companies
                                                               RUB 18.8 billion
                                                               (USD 639.8 million)                 number of retail clients increased by
                                                                                                   190,000 and reached 774,000
                                                                                                   individuals

                                  ITY (ROE)                                                16.4%
                         RAGE EQU
                                                               The return on equity was

       RETURN ON 008 AMOUNTED TO 16.4%
                                                                                                   More than USD 200 million attracted
                     AVE                          .                                                on the capital markets
THE
                END OF 2
                                                               Cost to income ratio decreased by
                                               LD                                                  RUB 1.5 billion subordinated loan from
      AS AT THE            UNT T     HE IPO HE                 5.5 percentage points to    34.7%   the Bank’s shareholders


          TAKING INTO ACCO               E LEVEL
                         7, TH E HIGH RO                USED
                        F 200                 PITAL WAS
               HE END O
          AT T                      AT THE CA
                           SHOWS TH                QUICKLY.
                                                    ND
                                     EFFI CIENTLY A


  8                                                                                                                                        9
Bank Saint Petersburg                                                                                                   Annual Report 2008
Annual Report 2008


                                      2. MESSAGE
                                      In spite of the difficulties in the global          stand the crisis and become even stronger af-
                                      economy the year 2008 was successful                terwards.
                                      for the Bank. Our profit increased by
                                      38%, the loan portfolio by 58% and the              It is necessary to recognise the swift and reso-
                                      deposit base by 50%. From the strategic             lute response of the Russian Government and
                                      point of view it is even more important             the Central Bank of Russia during the early
                                      that during a year our retail custom-               stages of the crisis. As a result of their activities
                                      er base grew by almost 200 thousand                 it was possible to quickly stabilise the situation
                                      customers. The corporate client base                on money markets and to avoid the worst sce-
                                      increased as well. In 2008 we expand-               narios. Furthermore, the change of the rouble
                                      ed our market share in St Petersburg,               exchange rate with respect to other currencies
                                      and today we can proudly state that                 promotes the competitiveness of the economy




                       GE
                                      we have improved our position to be-                helping to get out of the crisis more quickly.
                                      come the second largest player on the



                    SA
                                      market.                                             Facing the changes of the global economic en-




     ES
                                                                                          vironment and financial markets we adjusted
                                      The year 2008 marked the end of the era in          our strategy. With limited access to capital mar-
                             n
   M                      rma Board
                                      the global economy and banking sector. In-          kets, growing interest rates and deteriorating

                        i             vestment banking as such virtually disappeared.     real estate markets we were forced to issue

                     Cha sory         Governments on different continents were            fewer long-term loans, particularly mortgages

                  the ervi            forced to inject trillions of dollars to support    and car loans. In spite of this, with the 14.4%


            from e Sup
                                      their banks. Clearly a mere year ago no one         market share, we are one of the largest mort-
                                      could have imagined this scale of crisis.           gage loan providers in St Petersburg.

                 th
             of CEO                   The various reasons for this chaos still remain
                                      to be sorted out in the years to come. At the
                                                                                          The IPO held at the end of 2007 substantially
                                                                                          improved our capital base, increased trustwor-

               and
                                      same time it is clear that the major reasons        thiness on the market, and provided us with an
                                      were the gap between banks owners and               opportunity to grow and improve our market
                                      managers. It is explained by those huge dis-        positions. Our 2008 financial results exceeded
                                      proportions that were inherent for the bank-        some analysts’ 2009 year-end forecasts an-
                                      ing system in the last years with its excessive     nounced at the time of our IPO in 2007.
                                      risk taking, short-term objectives based bonus
                                      systems.                                            Bank’s market share has also grown more in-
                                                                                          tensively than anticipated. In 2008 our share in
                                      Today we are pleased to highlight that our          the St Petersburg corporate loan market grew
                                      business philosophy has helped us to remain a       to 13.9% and in the corporate deposit mar-
                                      focused regional bank, where managers, em-          ket – to 11.8%. Retail banking is another stra-
                                      ployees, and shareholders have the sense of         tegic priority of the Bank. Our share in the re-
                                      ownership and social responsibility for their ac-   tail loan market grew to 7.1%, and in the retail
                                      tions. We feel strong with our strategy and         deposit market – to 9.5%. During that year
                                      believe that our position will enable us to with-   our customer base reached 774,000 private




                                                                                                                                          11
Message                                                                                                Bank Saint Petersburg
                                                                                                       Annual Report 2008


customers and almost 35,000 corporate cus-         half of 2008 so that by the end of the year
tomers. In the rapidly changing economic situ-     they have covered 3.9% of the loan portfolio.
ation we continue to benefit from our good         Given the strong operating results that we are
relations with customers, which is one of our      generating, we can easily afford to raise pro-
key strengths.                                     visions within the next two years up to 12%,
                                                   if required, without need in new capital. The
In 2008 we upgraded our Internet-Bank sys-         history of global economy demonstrates that
tem, by the end of 2008 it was actively used       there were very few crises where banks had
by 27,000 private and 12,000 corporate clients.    to write off more than 10% of their loan port-
In 2008, the number of cards issued by the         folios. This gives us confidence that even in the
Bank reached 590,000 and the number of             worst-case scenario we will overcome all the
ATMs reached 422 machines. That means that         problems.
we successfully implemented our strategy and




                                                                                                              RATE RNANCE
improved the accessibility of services for our     We shall continue to implement our strategy
customers.                                         strengthening our positions in our home re-




                                                                                                           RPO OVE
                                                   gion. Moreover, it is also important to improve
What will the year 2009 bring?                     efficiency in the current year. Along with the


                                                                                                        CO
                                                   rapid growth in the number of clients we need
The year 2009 will certainly be a challenging
one and it will certainly become a test of ev-
erything we have been doing before. The key
                                                   to support the quality of the services provided
                                                   and expand our branch network.
                                                                                                               G ard
                                                                                                                                    o
                                                                                                                                ry B ttee
objective is obviously to keep the quality of      The year 2009 will be an interesting and chal-
the loan portfolio. For this purpose we have       lenging one for all of us.
                                                                                                                            iso
turned our attention to all such customers
                                                                                                                      u perv Commi Board ture
                                                                                                                  - S udit ment Struc
who could face or have already faced prob-         We thank all our employees for remarkable
lems in the new economic situation.                performance and commitment. We also ex-
                                                   press our gratitude to our customers and
                                                                                                                   - A anage olders cy
                                                                                                                    - M hareh d Poli
We understand that the key factor impacting        shareholders for their trust. On behalf of the
our performance for the next couple of years       Bank Saint Petersburg staff we promise you

                                                                                                                     - S ividen
is the quality of loans. For that reason we have   that we shall continue to do our best in the
increased provisions substantially in the second   future as well. Thank you!

                                                                                                                      - D
                      Alexander V. Savelyev                                     Indrek Neivelt
      Chairman of the Management Board                     Chairman of the Supervisory Board




12
Corporate governanse                                                                                                                                                     Annual Report 2008



3. CORPORATE GOVERNANSE
In 2008, Bank Saint Petersburg continued its                                                   Deputy Chairman of the Management Board.        ber of the Board since 2008; born in 1951;
adoption of the best corporate governance       In 2008, the composition of the Supervisory    Holding 1.02% of the voting shares.             Chairman of the Board of Directors of Et-
practices. In the turbulent period the Bank     Board changed slightly as a new indepen-                                                       alon-LenSpetsSMU Construction Holding
benefited a lot from significant business ex-   dent director, Vyacheslav Zarenkov, joined     Felix Vladimirovich Karmazinov: Member          Company; Ph.D. in Economics, Professor; In-
perience of the Supervisory Board members       the Supervisory Board and Alexander Polu-      of the Board since 2006; born in 1943. Gen-     dependent Director. Owns no voting shares.
and their efforts to preserve and to enhance    keev left the Board.                           eral Director of the city water and waste
Bank’s efficiency and profitability. We con-                                                   company “Vodokanal Sankt-Peterburga”; In-
tinued a practice of having several indepen-    Indrek Neivelt: Chairman of the Board since    dependent director. Holding 0.40% of the
dent directors in a company and consider        2005; born in 1967. Head of the Trust IN in-   voting shares.                                  Audit Committee
the work of the Supervisory Board to be         vestment company; Chairman of the Council
successful.                                     of the Estonian Development Fund; Chair-       Dmitry Viktorovich Korzhev: Member of
                                                man of the Board of the Cultural Fund of       the Board since 2006; born in 1964. General     The main purpose of the Audit Committee
As a listed company, Bank Saint Petersburg      Estonia’s President; CEO of the Hansabank      Director of the ZAO “Sovmestny Capital”.        is to assist the Supervisory Board in control-
is a shareholder value driven organization      Group from January 1999 up to April 2005;      Holding 11.35% of the voting shares over        ling the Bank’s operations. The Audit Com-
and we put a special emphasis on the fi-        Independent Director, chairman of the Au-      ZAO “Sovmestny Capital”.                        mittee monitors that the financial and other
nancial and operational transparency of the     dit Committee. Holding 0.81% of the voting                                                     reports are complete and true, controls the
company. Following best practices our Inves-    shares over the Trust IN investment com-       Nina Vasilievna Kukuruzova: Member of           process of its preparation and presentation,
tor Relation Department is benchmarking its     pany.                                          the Board since 1999; born in 1947. Adviser     efficiency of internal control and audit pro-
performance against the international public                                                   to the Chairman of the Management Board;        cedures, risk management. The members of
companies. Investors and shareholders are       Sergei Borisovich Eganov: Member of the        director of the Teachers’ Staff Cultural Cen-   the Audit Committee are appointed by the
able to get the type of information about       Board since 2005; born in 1966. Director of    tre of St Petersburg; member of the Au-         Supervisory Board.
the Bank which is common for public com-        ZAO “NEVA-RUS”; first vice-president of the    dit Committee. Holding 0.03% of the voting
panies.                                         ZAO “Baltiyskiy Bank” from June 2001 up to     shares.                                         As at December 31, 2008, the Audit Commit-
                                                April 2005. Owns no voting shares.                                                             tee included the following members: Indrek
                                                                                               Alexander Vasilievich Savelyev: Mem-            Neivelt, Andrei Ibragimov, Nina Kukuruzova.
                                                Vladimir Alexandrovich Gariugin: Member        ber of the Board since 2001; born in 1954.
Supervisory Board                               of the Board in 1990-2003 and since 2005;      Chairman of the Management Board. Holds
                                                born in 1950. Head of the city subway sys-     29.91% of the voting shares and has a call
                                                tem Petersburg Metropolitan. Holding 0.01%     option agreement with L. Stepanova to buy       Management Board
The Supervisory Board is responsible for gen-   of the voting shares.                          81% in System Technologies Ltd., holding
eral management concerns, except for those                                                     14.50% of the Bank’s voting shares.
which under Russian law are the exclusive       Andrei Taledovich Ibragimov: Member of                                                         Along with the sole executive body – the
responsibility of the General Shareholders’     the Board since 2005; born in 1954. Gen-       Dmitry Emmanuilovich Troitsky: Mem-             Chairman of the Management Board, the
Meeting. According to the Bank’s charter,       eral Director of the law firm ZAO “Musin &     ber of the Board since 2005; born in 1965.      Management Board is a collective execu-
the number of members of the Supervisory        Partners”; member of the supervisory board     Member of the Supervisory Board of the          tive body responsible for the Bank’s day-
Board is decided at the General Sharehold-      of ZAO “Interinvest”; member of the Audit      ÎÀÎ “Ochakovsky Molochny Zavod”. Hold-          to-day management and administration. Its
ers’ Meeting. At the annual General Share-      Committee. Owns no voting shares.              ing 4.63% of the voting shares over ZAO         members are appointed by the Supervisory
holders’ Meeting on April 29, 2008 it was                                                      “NEVA-RUS”.                                     Board for an indefinite period of time, but
determined that the Supervisory Board shall     Elena Viktorovna Ivannikova: Member                                                            the powers of the members may be termi-
consist of 11 members.                          of the Board since 2001; born in 1965. First   Vyacheslav Adamovich Zarenkov: Mem-             nated at any time by a majority vote of the




14                                                                                                                                                                                      15
Corporate governanse                                                                                                                                                      Annual Report 2008



Supervisory Board. The Management Board         ing and Information; employed since 2004.       0.008% of the voting shares.                     dividends on preferred shares do not accu-
currently consists of 11 members.               Owns no voting shares.                                                                           mulate.

In 2008 the composition of the Manage-          Elena Viktorovna Ivannikova: First Deputy                                                        The Bank does not have any obligation to pay
ment Board underwent minor changes. In          Chairman of the Management Board; born          Shareholders Structure                           dividends on ordinary shares. The amount of
June 2008 Vladimir Skatin was appointed a       in 1965; graduated from Kiev University of                                                       dividends to be declared in any fiscal year
member of the Management Board. In Janu-        National Economy; employed since 2001;                                                           and paid is decided at the Bank’s General
ary 2009 Fedor Myasnikov left the Manage-       Chairman of the Asset and Liabilities Man-      On December 31, 2008, the Bank’s share           Shareholders’ Meeting as recommended by
ment Board to become a vice president of        agement Committee. Holding 1.02% of the         capital amounted to RUB 302.25 million and       the Supervisory Board based on the Bank’s
the Bank.                                       voting shares.                                  consisted of 282,150,000 ordinary shares and     net profit for the relevant period determined
                                                                                                20,100,000 preferred shares with a nominal       in accordance with RAS on a stand-alone
Alexander Vasilievich Savelyev: Chairman        Irina Nikolaevna Kovalevskaya: Deputy           value of RUB 1 each. All the ordinary shares     basis.
of the Board; born in 1954; graduated from      Chairman of the Management Board; born          are fully paid for. All ordinary shares repre-
Tupolev Kazan Aircraft University; employed     in 1956; graduated from Moscow Power Tool       sent an equal number of votes conferring
since 2001. Holds 29.91% of the voting shares   and Instrument Institute; employed since        one vote pari passu.
and has a call option agreement with L. Ste-    2005. Holding 0.07% of the voting shares.
panova to buy 81% of System Technologies                                                        During 2008, there have been no major
Ltd., holding 14.50% of the Bank’s voting       Irina Vladimirovna Malysheva: Deputy            changes to the Bank’s shareholder structure.
shares.                                         Chairman of the Management Board; born in       The major stake is still controlled by the
                                                1957; graduated from Penza Polytechnic In-      management of the Bank: it increased from
Konstantin Yurievich Balandin: Deputy           stitute, Financial Academy under the Russian    48.94% as at January 1, 2008 to 55.11% as
Chairman of the Management Board; born          Government, St Petersburg State University      at January 1, 2009. Free float increased from
in 1976; graduated from St Petersburg State     of Economics and Finance; employed since        20.75% as at January 1, 2008 to 21.67% as
University; employed since 2000. Owns no        2005. Holding 0.08% of the voting shares.       at January 1, 2009.
voting shares.
                                                Vladimir Grigorievich Reutov: Deputy
Vladimir Nikolaevich Bobin: Deputy Chair-       Chairman of the Management Board; born
man of the Management Board; born in            in 1963; graduated from St Petersburg State     Dividend Policy
1968; graduated from St Petersburg State        University, Leningrad Shipbuilding Institute;
University; employed since 2007. Owns no        employed since 2001. Holding 0.54% of the
voting shares.                                  voting shares.                                  Bank Saint Petersburg does not have a for-
                                                                                                mal policy for the payment of dividends. Ac-
Pavel Vladimirovich Filimonenok: Deputy         Vladimir Pavlovich Skatin: Deputy Chair-        cording to its charter, the Bank is required
Chairman of the Management Board; born          man of the Management Board; born in            to pay dividends on preferred shares in the
in 1971; graduated from the St Petersburg       1956; graduated from the Leningrad Poly-        amount of at least 11% of such shares’
Institute of Fine Mechanics and Optics; em-     technic Institute and St Petersburg State       nominal value. If the Bank does not declare
ployed since 2001. Holding 0.008% of the        University of Economics and Finance; Ph.D.      dividends on preferred shares at the an-
voting shares.                                  in Economics. Owns no voting shares.            nual shareholders’ meeting, or declares only
                                                                                                partial dividends, the holders of preferred
Vladislav Stanislavovich Guz: Deputy            Olga Dmitrievna Volodina: Deputy Chair-         shares obtain the right to vote as holders
Chairman of the Management Board; born          man of the Management Board; born in            of ordinary shares until such time that the
in 1967; graduated from Leningrad State         1957; graduated from the Moscow Finan-          dividends are paid. During such times when
University, Interindustry Institute of Train-   cial Institute; employed since 2004. Holding    preferred shareholders enjoy voting rights,




16                                                                                                                                                                                       17
Corporate governanse                                                                              Bank Saint Petersburg
                                                                                                  Annual Report 2008


During several years the Bank shows a sus-        proved to be even more relevant taking into
tainable growth rate above the market. This       consideration the global worsening of the
constantly necessitates a new capital base        economic landscape.
and makes payment of significant dividend
amounts inefficient. The general policy,          The following table sets forth the aggre-
though not formal, is to pay minimum divi-        gate amounts of dividends on ordinary and
dends and to keep all the capital available       preferred shares in relation to the financial
for further growth of the Bank. This policy       years as indicated.




FOR THE                   DIVIDENTS              DIVIDENTS         AGGRE
PERIOD          ON ORDINARY SHARES    ON PREFFERED SHARES    DIVIDENTS P
                                                                      RU
                RUB th           %     RUB th           %

2007             39 501          14      2 211          11            4

                                                                                                                               Y
                                                                                                              IEW          NOM
2006             32 396          14      2 211          11            34




                                                                                                          ERV           CO
2005             2 820           14       221           11             3




                                                                                                                     N E ECTOR
2004              2 382          14       221           11             2




                                                                                                  O V          U SSIA G S
                                                                                                          H E R ANKIN
                                                                                                      OF T THE B
                                                                                                       AND




18
Overview of the Russian Economy and the Banking Sector                                                                                                                             Annual Report 2008



4. OVERVIEW OF THE RUSSIAN ECONOMY
   AND THE BANKING SECTOR
In 2001-2007 the Russian economy experi-             pering domestic demand – the key driving         markets including Russia. In 2008 an inflow       flow of deposits and a major liquidity crunch
enced strong growth, demonstrated by an              factor of the GDP increase for the previous      of foreign investments totaled to USD 103.8       within the system. The Central Bank of Russia
average real annual GDP growth of 6.6%. In           years. As a result the GDP growth in 2008        billion compared to record USD 120.9 billion in   (CBR) bravely adopted various measures to
the first half of 2008, GDP growth in Russia         declined to disappointing 5.6% compared to       2007. Together with falling commodity prices      provide liquidity, which helped to calm down
continued at a brisk pace of about 8%, re-           8.1% in 2007, which implies negative figures     it undermined confidence in the prospects of      the situation by the end of the year.
flecting a booming economy and strong mac-           for the last months of the year. Inflation in-   Russian ruble of both institutional and private
roeconomic fundamentals. However, since the          creased by 1.4 percentage points to 13.3%,       investors, leading to a gradual but rapid de-     However, coupled with ruble devaluation and
middle of 2008, the global financial crisis dra-     considerably exceeding the initial government    valuation of national currency towards the        rapid economic downturn, liquidity problem
matically altered the international economic         target for the year – 10.5%.                     end of 2008 and forward to first months of        grew into a full-scale crisis of trust which lim-
outlook, rapidly cooling the Russian economy.                                                         2009. The exchange rate of ruble against US       ited any credit activity in the economy what-
The crisis shocks and the declining commodity        In addition in the second half of 2008, Russia   dollar fell from RUB 24.58 as at September 1,     soever. Accordingly, this process was con-
prices affected all sectors of the economy,          faced a sharp reversal in capital flows as in-   2008 to RUB 33.90 as at April 1, 2009.            stantly accompanied by steady worsening of
revealing the signs of overheating and ham-          vestors worldwide tended to leave emerging                                                         assets quality and numerous defaults in the
                                                                                                      Substantial financial reserves and govern-        corporate bonds market as well as an impres-
                                                                                                      ment’s rapid response helped to limit a neg-      sive increase of lending rates. As a result, in
                                                                                                      ative impact of an early stage of the crisis      2008 customer accounts growth, both retail
                                                                                                      but were unable to prevent it. In the end of      and corporate, totaled to 20.3% compared to
                                                                                                      2008, as a result of falling currency reserves    35.4% in 2007. Corporate lending increased by
                                                                                                      and decelerating economic growth all major        34.3%, while bad debts increased by 209.4%
                                                                                                      rating agencies took negative rating actions      (2007: 51.5% and 22.6% accordingly). Retail
                                                                                                      with Russian sovereign ratings – either low-      lending increased by 35.2%, while bad debts
                                                                                                      ering the rating by one notch or changing its     increased by 54.0% (2007: 57.8% and 87.0%
                                                                                                      outlook to negative.                              accordingly).

                                                                                                      Between 2001 and 2007 the banking sec-            Still, deposits outflow was outweighed by
                                                                                                      tor experienced a sustained period of high        extra liquidity provided in a bail-out effort,
                                                                                                      growth, which was demonstrated by a total         which allowed the total assets of Russian
                                                                                                      assets compound annual growth of more than        banks to increase by impressive 39% year-
                                                                                                      40%. It was to be followed by another pros-       on-year, to RUB 28 trillion. Looking forward,
                                                                                                      perous year – which it really was in the first    limited money supply as CBR continues its
                                                                                                      half of 2008. However, dramatic worsening         battle to prevent sharp ruble devaluation will
                                                                                                      of the global financial situation, triggered by   seriously limit the growth rate of the system
                                                                                                      Lehman Brothers collapse in the second half       in 2009. The other major trend to expect is
                                                                                                      of the year, threatened to even that trend.       a shift of the market towards state-owned
                                                                                                      Russian banks faced an acute stage of the         banks, which enjoy close to unlimited access
                                                                                                      crisis, as local REPO market collapsed leading    to new funding and capital and would be-
                                                                                                      to failure of several top-50 and a number of      come major consolidators within the sector in
(Source: the Central Bank of Russia and the Federal State Statistics Service)                         smaller Russian banks followed by an out-         the years to come.




20                                                                                                                                                                                                  21
Overview of the Russian Economy and the Banking Sector                                                                                                                                                                 Annual Report 2008



St Petersburg                                         (as at October 2008) and together they rep-        St Petersburg is an important Russian eco-                               Russia. In spite of this fact most companies
and the Leningrad Region                              resent a very fast growing and attractive area     nomic, political and cultural centre which is                            claimed the lack of financial resources and
                                                      above Russian average. The city itself is the      developing on the basis of the following driv-                           decline in the business growth. City budget
                                                      fourth largest city in Europe, thus forming a      ing forces:                                                              for 2009 was sequestered by 11% compared
The city of St Petersburg and the Leningrad re-       market easily comparable in terms of size and                                                                               to that of 2008, expected deficit amount-
gion is the market of first priority for the Bank.    potential to the city of Paris or a medium-sized      a favorable geographic position: St Peters-                           ing to RUB 50.8 billion. As a result numer-
It has a population of approximately 6.2 million      European country like Denmark or Finland.          burg is the main port facilitating trade be-                             ous sizable investment projects were frozen
                                                                                                         tween Russia and the EU;                                                 or completely recalled in order to reallocate
                                                                                                                                                                                  the funds in favor of the socially important
                                                                                                            an emerging car manufacturing hub: Ford,                              budget fixtures.
                                                                                                         Toyota, Nissan, GM, and Suzuki have set up
                                                                                                         production units in the area, also giving busi-                          In 2008 total assets of banks operating in St
                                                                                                         ness to SMEs providing their input to the pro-                           Petersburg grew by 25.3%, making up 5.5%
                                                                                                         duction chain;                                                           of the Russian banking system’s total assets.
                                                                                                                                                                                  The crisis made a serious blow to local bank-
                                                                                                             tourism: in 2008, more than 4.2 million                              ing system as 2 of top-5 players in the mar-
                                                                                                         tourists visited St Petersburg;                                          ket – CIT Finance and VEFK bank – failed in
                                                                                                                                                                                  the last quarter of the year. They were both
                                                                                                             transfer to St Petersburg of head offices                            bailed-out by the government companies and
                                                                                                         of such large Russian companies as VTB, Gaz-                             agencies but their future remains highly un-
                                                                                                         promneft, Sovkomflot has led to rapid growth                             clear. In any case the market landscape in St
                                                                                                         of municipal and regional tax collection;                                Petersburg and the Leningrad region is under-
                                                                                                                                                                                  going dramatic changes.
                                                                                                              infrastructure development: there is an
                                                                                                         increasing number of investment projects in                              Customer accounts are traditionally the most
                                                                                                         road construction, transport infrastructure,                             important source of funding for the St Peters-
                                                                                                         housing and public utilities.                                            burg banking system and amounted to RUB
                                                                                                                                                                                  1,080.0 billion by the end of 2008, including
                                                                                                         At an initial stage of the crisis St Petersburg                          retail deposits of RUB 424.7 billion (increased
                                                                                                         and the Leningrad region managed to sustain                              by 19.8% and 17.3%, respectively). Corpo-
                                                                                                         its growth rate higher than the average ones                             rate lending formed 48.9% of St Petersburg
                                                                                                         in Russia. In 2008 index of manufacturing of                             banks’ total assets and increased by 43.6% in
                                                                                                         St Petersburg was estimated at the rate of                               2008. The retail credit portfolio increased by
                                                                                                         104.1% compared to an average of 102.1% in                               51.4% to RUB 230 billion*.




(Source: the Central Bank of Russia, the Federal State Statistics Service,
                                                                                                         * Source: the Central Bank of the Russian Federation (Bank of Russia), the Local Body of the Federal State Statistics Service in St
the St Petersburg Administration)                                                                        Petersburg and Leningrad region, Administration of St Petersburg.




22                                                                                                                                                                                                                                             23
Overview of the Russian Economy and the Banking Sector                             Bank Saint Petersburg
                                                                                   Annual Report 2008




                                                                                                  IEW
                                                                                               REV NT
                                                                                            IAL EME
                                                                                       ANC NAG
                                                                                    FIN MA
                                                                                     A ND SSION
                                                                                          SCU
(Source: the Federal State Statistics Service, the St Petersburg Administration)




                                                                                       DI




24
Financial Review and Management Discussion                                                                                                                                           Annual Report 2008



5. FINANCIAL REVIEW
   AND MANAGEMENT DISCUSSION
In spite of the dramatic worsening of the market   The return on average equity (ROE) as at the     Income Statement Analysis                             other banks in total liabilities increased to 15%
environment we managed to show good finan-         end of 2008 amounted to 16.4%. Taking into                                                             in 2008 from 0.5% in 2007.
cial results and to perform better than the mar-   account the IPO held at the end of 2007, the
ket in the previous year. During 2008 the Bank’s   high ROE level shows that the capital was used   Interest Income                                       In 2008, in order to preserve its competitive-
net income increased by 38% to RUB 2,773.8         efficiently and quickly.                                                                               ness on the deposit market the Bank increased
million from RUB 2,009.2 million in 2007.                                                           For the year 2008, total interest income in-          its interest rates on both retail and corporate
                                                   The cost-income ratio decreased by 5.5 per-      creased by 109% to RUB 19,130.4 million from          deposits.
The major factors contributing to the increase     centage points to 34.7%. In 2008, operating      RUB 9,175.8 million in 2007. This is attributed
in profits were as follows:                        expenses increased by 59%, while net income      to the growth in the Bank’s loan portfolio            Interest expenses on corporate term deposits
    considerable increase of the Bank’s assets,    before provisions grew 84%. Taking into ac-      by 58% to RUB 144,882.5 million from RUB              increased by RUB 1,969.4 million or 115%. The
     customer lending growth by 58% along          count the changes of the economic environ-       91,730.1 million in 2007 as well as increase in in-   share of corporate term deposits on the liabili-
with increased net interest margin;                ment, starting with 4Q 2008 the Bank, took       terest rates throughout the loan book, mainly         ties side increased to 27% in 2008 from 26%
     maintaining the high level of operational     new cost control measures that were imple-       in the 4Q 2008. Customer lending contributed          in 2007. The volume of corporate term depos-
efficiency.                                        mented on all levels.                            to 91% of the total interest income.                  its increased by 81% to RUB 59,236 million.

                                                                                                    In 2008 interest income from other types of           Interest expenses on retail term deposits rose
                                                                                                    assets, mainly from liquidity portfolio and sale      by RUB 1,569.1 million (+112%), reaching the
                                                                                                    and repurchase agreements increased by 113%           volume of RUB 2,974.4 million (31% of inter-
                                                                                                    to RUB 1,638.4 million from RUB 768.6 million         est expense). The share of retail term deposits
                                                                                                    in 2007. In general these components of the           on the liabilities side decreased slightly to 18%
                                                                                                    interest income are still insignificant.              in 2008. The volume of retail term deposits
                                                                                                                                                          increased by 57% to RUB 38,908.1 million.
                                                                                                    Interest Expenses
                                                                                                                                                          Interest expenses on funds attracted on the
                                                                                                    Interest expenses increased by 114% to RUB            capital markets (bonds in issue and other bor-
                                                                                                    9,626.6 million in 2008 from RUB 4,508.3 mil-         rowed funds) increased by RUB 572 million,
                                                                                                    lion in 2007, due to the growth of liabilities, and   or 62%. In aggregate in 2008 the Bank raised
                                                                                                    also because of the increased cost of funding         more than USD 200 million on the capital mar-
                                                                                                    in the second half of 2008.                           kets. The volume of bonds in issue and other
                                                                                                                                                          borrowed funds increased by 37% to RUB
                                                                                                    The fastest growth in interest expenses was           19,532.4 million. The fact that growth of inter-
                                                                                                    demonstrated by “due from other banks” (in-           est expense overcame the growth of volume
                                                                                                    creased by 1,027% to RUB 922.7 million), the          of funds attracted is explained by the signifi-
                                                                                                    most intensive growth of “due from other              cant amount of up-front fees paid in 2008 for
                                                                                                    banks” was demonstrated in 2H 2008; simulta-          the new deals completed.
                                                                                                    neously its share in the interest expense struc-
                                                                                                    ture increased to 9.6% in 2008 from 1.8% in           Net Interest Income
                                                                                                    2007. As a result of funds attracted from the
                                                                                                    Central Bank of Russia the share of due to            As a result of the mentioned trends Net Interest




26                                                                                                                                                                                                    27
Financial Review and Management Discussion                                                                                                                                       Annual Report 2008



                                                                                                   Fee and Commission Expenses                         to a rise in administrative and other operating
                                                                                                                                                       expenses, which grew by 59% in 2008 to RUB
                                                                                                   Fee and commission expenses increased 87% to        3,852.6 million compared to RUB 2,429 million
                                                                                                   RUB 329.1 million from RUB 175.7 million in 2007.   in 2007. The growth of expenses reflects the
                                                                                                   The growth of fee and commission expenses           increase in the number of transactions, open-
                                                                                                   reflects the increase in the volume of services     ing of new outlets, growth in expenses for
                                                                                                   rendered by the Bank to its customers and the       premises maintaining as well as the respective
                                                                                                   subsequent increase in the volume. The volume       increase of the expenses for taxes other than
                                                                                                   of commissions on settlement transactions, com-     on income. Another contributing factor to the
                                                                                                   missions on plastic cards, and cheque settlements   increase in expenses is the inflation rate in
                                                                                                   and commissions on guarantees and letters of        Russia which exceeded 13% last year.
                                                                                                   credit issued amounted to RUB 259.4 million or
                                                                                                   79% of the fee and commission expenses.             Cost control remains the key priority of the
                                                                                                                                                       Bank under current circumstances. As a result,
                                                                                                   Net fee and commission income                       the cost-income ratio improved by 5.5 per-
                                                                                                                                                       centage points to 34.7% in 2008 from 40.2%
                                                                                                   Net fee and commission income grew 56% to           in 2007.
                                                                                                   RUB 1,386 million for 2008 from RUB 889.4 mil-
                                                                                                   lion for 2007.                                      Staff Costs

                                                                                                                                                       Staff costs represent the major item of op-
                                                                                                   Gains Arising from Operations                       erating expense contributing 54% thereof
                                                                                                   with Securities and Foreign Currency                (54% in 2007). Staff costs increased in 2008
                                                                                                                                                       by RUB 746.7 million or 57%. In the second
                                                                                                   Due to an overall drop in the stock market prices   half of 2008, in order to meet the changing
                                                                                                   the Bank experienced the loss from trading se-      economic situation the Bank revised its stra-
Income more than doubled and reached RUB          The bulk of fee and commission income (57%)      curities in 2008 in the amount of RUB 1,258.2       tegic development plans and in the 4Q 2008
9,503.4 million for 2008 from RUB 4,667.6 mil-    comes from cash and settlement operations.       million. At the same time the Bank’s interest in-   the number of employees was cut accordingly
lion in 2007. The Bank’s net interest margin in   Fee and commission income received by the        come included coupon income, which amounted         by around 6%. As of January 1, 2009, the
2008 increased by 1.01 percentage points to       Bank from the service of cash and settlements    to RUB 759.6 million in 2008. Gains from trad-      number of employees increased by 16% (307
6.47% from 5.46% in 2007.                         operations increased to RUB 969.5 million in     ing in foreign currencies amounted to RUB 979.9     employees) compared to 2007 and amounted
                                                  2008 from RUB 548 million (+77%) for the         million and foreign exchange translation gains      to 2,182.
Fee and Commission Income                         previous year.                                   amounted to RUB 381.5 million. Thus an aggre-
                                                                                                   gate result from operations with trading securi-    The staff expense growth rate met those of
Total fee and commission income increased by      Plastic cards operations were the second         ties and foreign currency amounts to RUB 862.8      administrative and operational expenses. In
61% to RUB 1,715.1 million in 2008 from RUB       most significant source of fee and commis-       million (with coupon income) in 2008 compared       2008 the growth in staff expenses was at-
1,065 million in 2007. The growth resulted from   sion income. The income from card business       to RUB 889.1 million (with coupon income) in        tributed to the growth in the number of em-
increased number of Bank’s customers and the      increased to RUB 311.7 million in 2008 from      2007.                                               ployers and the high level of inflation.
growth of the number of transactions. In 2008,    RUB 233.7 million (+34%) in 2007. The num-
the number of Bank’s retail customers increased   ber of cards issued by the Bank in 2008 grew     Administrative and Other                            Expenses, Related to Premises
by 190,000 and reached 774,000 individuals; the   by 26% to 589,000. The number of ATMs            Operating Expenses                                  and Equipment
number of corporate customers increased by        installed rose by 117 to reach 422 as at Janu-
6,600 and reached 35,000 companies.               ary 1, 2009.                                     The growth of business volume corresponds           The Bank’s expenses related to premises,




28                                                                                                                                                                                               29
Financial Review and Management Discussion                                                                                                                                     Annual Report 2008



                                                other expenses. Overall, the costs increased      Balance Sheet Structure                            total assets decreased by 5 percentage points
                                                by 69% in 2008 to RUB 1,319.7 million. This                                                          from 72% in 2007 to 67% in 2008.
                                                increase was primarily due to the expansion
                                                of the Bank’s business and was not accom-         The Bank’s assets for 2008 grew by 70% to          In 2008 the Bank registered the significant
                                                panied by a material change in the expense        RUB 215.7 billion from RUB 126.6 billion in 2007   growth of cash and cash equivalents in total
                                                structure. In 2008, the expenses for office       due to strengthening of our competitive posi-      assets: to RUB 36,841.3 million in 2008 from
                                                rent increased by RUB 121.5 million or 95%,       tions in the St Petersburg market.                 RUB 9,612.4 million (+283%) in 2007; the total
                                                the expenses for taxes other than on income                                                          share of cash and cash equivalents in total as-
                                                increased by RUB 92.4 million or 109% and         In 2008 the volume of loans and advances to        sets rose to 17% in 2008 from 8% in 2007.
                                                the contributions to deposits insurance sys-      customers increased by 58% to RUB 144,882.5
                                                tem increased by RUB 80.5 million or 82%.         million from RUB 91,730.1 million in 2007; the     The volume of customer accounts increased by
                                                                                                  share of loans and advances to customers in        58% to RUB 139,824.5 million; its share on the



                                                Asset Quality


                                                As customer lending remains the core busi-
                                                ness of the Bank and constitutes the major
                                                part of assets we are focused on the asset
                                                quality monitoring and control.

                                                As at the end of 2008, the share of overdue
                                                loans in the Bank’s portfolio amounted to
                                                0.73% of the total volume of loans (0.25%
                                                in 2007). Impaired but not overdue loans
buildings, and equipment increased by 41%       constitute 5.8% of the gross loans. The vol-
to RUB 471.4 million in 2008, primarily due     ume of write-offs during the year remained
to the expenses related to newly purchased      low – RUB 121.8 million, which amounted
assets, as well as the upgrading of soft-       to 0.13% of the loan portfolio as at the be-
ware equipment. The increase in amortiza-       ginning of 2009. The rate of provisions for
tion costs was mainly due to the acquisition    loan impairment increased by 1.13 percent-
of new buildings, premises, and equipment       age points to 3.88% compared to 2.75%
as well as to the market revaluation of the     as at January 1, 2008 in order to meet the
buildings.                                      negative changes in the market environment.
                                                The provision charge in 2008 increased to
Other Administrative                            5.76% compared to 1.86% in 2007. The level
and Operating Expenses                          of coverage of the overdue loans by provi-
                                                sions makes up 5.3.
Other administrative and other operating ex-
penses include rent payments, administrative    The substantial increase in provisions reflects
costs, expenses for professional services and   our concerns on the current economic situa-
security, as well as transport, postal, and     tion and negative market forecasts.




30                                                                                                                                                                                             31
Financial Review and Management Discussion                                                                                                                                                 Annual Report 2008



liabilities side decreased by 5 percentage points   Loans and Advances to Customers                        In 2008, the share of the short-term loans ex-       posure to long-term and medium-term debt
to 65% in 2008 from 70% in 2007. The FX                                                                    ceeded the share of the long-term loans: the         securities as well as minimized its exposure
structure of customer accounts changed con-         Loans to customers grew by RUB 53,152.4 mil-           share of the loans with the term of 1-6 months       to corporate shares. By January 1, 2009, the
siderably, as the share of FX nominated de-         lion in 2008 (+58%) to RUB 144,882.5 million.          amounted to 37.9% of the loan portfolio; the         trading securities portfolio of the Bank (trad-
posits with the lower interest rates decreased      In order to meet the negative changes in the           share of loans with the term of 6-12 months          ing securities and securities pledged under sale
comparing to the share of RUB nominated de-         market environment the Bank modified its credit        amounted to 31.7% of the loan portfolio              and repurchase agreements) predominantly
posits.                                             policy in the second half of 2008 which slowed         (30.7% and 35.0% for 2007 respectively). Due         consisted of RUB bonds (68%) and FX bonds
                                                    down the loan book growth.                             to the growth in the mortgage loans volume           (31%) of Russian companies and Russian fed-
Significant growth was demonstrated by the                                                                 the share of loans with the term over 5 years        eral and municipal government. Corporate
due to other banks line: in 2008 it rose to RUB     Comparing to the growth achieved in 2007               grew from 3.7% in 2007 to 6.5% in 2008.              shares constitute 1% of the trading securities
19,175.8 million from RUB 6,736.9 million in        (312% in retail lending and 120% in corporate                                                               portfolio.
2007 (+184%) mainly due to the CBR fund-            lending) the loan portfolio grew much slower:          Securities Portfolio
ing in the amount of RUB 24,432.5 million. The      by 97% and 56% respectively in 2008.                                                                        Customer Accounts
share of the due to other banks in total li-                                                               The Bank uses the securities portfolio primar-
abilities increased to 15% in 2008 from 0.5%        Loans to individuals increased by 97% to RUB           ily as an instrument of liquidity management         Customer accounts rose by 58% in 2008
in 2007.                                            16,739.5 million from RUB 8,477.1 million. Their       without taking excessive risks.                      to RUB 139,824.5 million compared to RUB
                                                    share in the loan portfolio increased to 11% in                                                             88,728.8 million in 2007. During the 4Q 2008,
                                                    2008. Mortgage lending, with a growth level of         In 4Q 2008, the Bank reclassified certain finan-     the Bank experienced a temporary outflow of
                                                    122%, and a share of 57% of the retail loan            cial assets from trading securities to investment    its corporate and retail deposits which was fully
                                                    book, is the main growth factor within the retail      securities held-to-maturity, loans and advances      compensated by the resumed deposits growth
                                                    loan portfolio. In 2008, the Bank extended 2,083       to customers and due from other banks using          at the end of the year.
                                                    mortgage loans and its mortgage loan portfolio         the Amendment to IFRS (IAS) 39 and IFRS 7.
                                                    grew to RUB 9,495.3 million. In the second half        As at December 31, 2008, the value of se-            The breakdown of our customer accounts be-
                                                    of 2008, with growing retail lending risks and         curities reclassified to loans and advances to       tween corporate and retail remained stable
                                                    deteriorating real estate markets we issued few-       customers amounted to RUB 5,412.3 million;           throughout 2007-2008 and amounts to 65%
                                                    er long-term loans, in particular mortgage loans       the value of securities reclassified to due from     and 35%, respectively.
                                                    and car loans. In spite of this, with the 14.4%        other banks amounted to RUB 2,777.2 million;
                                                    market share, we are among the largest mort-           the value of securities reclassified to investment   Borrowings on the capital markets
                                                    gage loan providers in St Petersburg. The share        securities held-to maturity amounted to RUB
                                                    of car loans in the retail portfolio amounted to       797.4 million (before provisions). The effect of     In the first half of 2008 the Bank continued
                                                    10%. Consumer lending increased by 114% to             reclassification on the Bank’s income amounts        to expand its activity on the internal and inter-
                                                    RUB 5,481.3 million, its share in the retail loan      to RUB 268.1 million.                                national capital markets. The most significant
                                                    book increased to 33% in 2008 from 31% in                                                                   events were raising of USD 100 million syn-
                                                    2007.                                                  As a result of reclassification the Bank’s trad-     dicated loan (with the EBRD acting as a lead
                                                                                                           ing securities portfolio (trading securities and     arranger), USD 35 million bilateral loan from
                                                    Loans to corporate customers grew by 56% or            securities pledged under sale and repurchase         KfW IPEX-Bank and the private placement of
                                                    by RUB 48,139 million to RUB 133,984.9 million         agreements) decreased by 66% to RUB 4,162.9          the USD 75 million Eurobond issue. In aggre-
                                                    for the year 2008. The portfolio structure by          million in 2008 from RUB 12,168.5 million in         gate in 2008 the Bank raised more than USD
                                                    economy sector did not change much. The major          2007. Its share in the balance sheet of the          200 million on the capital markets.
                                                    shares are still contributed by loans for financing    bank decreased to 2% as at the end of 2008
                                                    of heavy machinery and shipbuilding, manufac-          from 12% as at the end of 2007.                      In 2008, we renewed a programme of issuing
                                                    turing, real estate operations, construction, trade,                                                        medium-term notes (EMTN-programme) on
                                                    leasing and financial services, and food industry.     In 2008, the Bank considerably limited its ex-       the Irish Stock Exchange, which simplifies the




32                                                                                                                                                                                                          33
Financial Review and Management Discussion                                                            Bank Saint Petersburg
                                                                                                      Annual Report 2008


entry to the market significantly and reduces      valuation of RUB 1,067.6 million.
the terms of completion of such a transaction.
In terms of size the programme was extended        The Bank’s total capital grew by 31% to RUB
up to USD 1.5 billion.                             24,225.2 million. Along with other factors the
                                                   growth is attributed to raising of 6-year RUB
The volume of bonds in issue and other bor-        1.5 billion subordinated loan from the Bank’s
rowed funds increased by 37% to RUB 19,532.4       shareholders at the end of December 2008.
million.
                                                   The Bank’s Tier 1 and total capital adequacy ra-
Shareholders Equity                                tios under Basel accord as at the end of 2008
                                                   are 9.69% and 14.15% respectively. Total capi-
As at the end of 2008 the Bank’s sharehold-        tal adequacy ratio decreased by 2.3 percent-
ers equity grew by 25% to RUB 18.804.7 mil-        age points because the growth rate of the risk



                                                                                                                                 ITS’
lion primarily due to the retained income in the   weighted assets (52.6%) exceeded the growth



                                                                                                                              UN
amount of RUB 2,732 million and assets re-         rate of total capital.




                                                                                                      BUS
                                                                                                               IN ESS
                                                                                                                                EV IEW
                                                                                                                              R
                                                                                                                                         g
                                                                                                                                 Ba nkin
                                                                                                                           ra te king
                                                                                                                       orpo il Ban nking ies
                                                                                                                    - CReta       a        iv
                                                                                                                               e B ry Act
                                                                                                                     - Privat ta
                                                                                                                      - Proprie
                                                                                                                       -




34
Business Units’ Review                                                                                                                                                                    Annual Report 2008



6. BUSINESS UNITS’ REVIEW
Bank Saint Petersburg’s overall strategic goal       eliminated by resumed deposits growth. On the         The Bank is one of the 25 Russian banks autho-      In 2008, the market witnessed an increased
is to continue to develop as a full-service uni-     other hand, we never stopped lending com-             rized to bid for temporarily free funds of the St   activity of state-controlled corporations and
versal bank and to further strengthen its mar-       pletely as it would have disastrous consequenc-       Petersburg City budget to be placed on deposit.     government agencies as major players to
ket position primarily in St Petersburg and the      es for our customers. Our strong positions on         The Bank takes part in a number of long term        place deposits with commercial banks. Bank
Leningrad region, which remain the market of         the local market allowed us to support our cus-       projects (Morskoy Facade, Ust-Luga port, Ring       Saint Petersburg successfully established itself
strategic importance for the Bank’s business         tomers in this turbulent period. As a result, by      road, etc.) mainly financing the sub-contractors    as one of the authorized banks for a num-
and where the Bank has the strongest com-            the end of 2008, our corporate loans increased        of the government. We provide a wide range of       ber of them. We entered into an agreement
petitive advantage. In order to achieve this goal,   by 56% and amounted to RUB 133.9 billion,             services to a number of municipal enterprises.      with State Corporation “Fund for Assistance
the Bank continues to develop its main busi-         while corporate customer accounts increased           At the same time, business with the municipal       to Reformation of the Housing and Commu-
ness units such as Corporate Banking and Retail      by 55% and amounted to RUB 90.8 billion.              government and municipal enterprises consti-        nal Services” (ZhKH) to attract its temporary
Banking, as well as develops SME Banking and                                                               tutes the insignificant share of the total busi-    free cash funds. Bank was also included to the
Private Banking.                                     The Bank provides a wide range of services to         ness. This makes the Bank dependent upon the        banks cluster to place free cash funds of the
                                                     all types of corporate customers, targeting pri-      city only to a very limited extent.                 state corporation “Rosnanotechnologii.”
                                                     marily medium-sized local and regional compa-
                                                     nies. Flexibility and responsiveness to customers’
Corporate Banking                                    demands, coupled with a quick decision-making
                                                     and excellent expertise in the local market give
                                                     us considerable competitive advantages in ser-
Corporate banking remains the core activity of       vicing this type of companies. The Bank is also
the Bank. It contributes 89% and 65% to the          providing services to a number of large compa-                                                                                    Corporate
total amount of the Bank’s loans and deposits        nies located in St Petersburg and several of the                                                                                  Corporate
respectively. As at the end of 2008, our share       largest Russian corporations as well.
in the St Petersburg corporate loan market is
13.9% (12.9% in 2007) and our share in the           The lion’s share of the Bank’s corporate busi-
corporate deposit market is 11.8% (10.5% in          ness is concentrated in St Petersburg and the
2007). At the end of 2008, the number of             Leningrad region (80% of total loans and 70%
Bank’s corporate customers increased by 6,600        of total deposits). It reflects the core of our
companies and reached 35,000.                        strategy, which is to be focused on our home
                                                     region and to achieve the higher market share
In the second half of 2008, we faced a dra-          here. Being a focused regional bank allows for
matic increase of demand for money from cor-         the building strong personal relationship with
porate customers, influenced by limited lending      customers, which turns out to be the most im-
activity in the economy and strong devaluation       portant strength in corporate banking.
expectations. Accordingly, like every other bank
in Russia, we experienced a temporary outflow        Accordingly, Bank Saint Petersburg can be con-
of up to 10% of corporate deposits during the        sidered “The Bank for the City”. We are commit-
4th quarter which limited our own ability to ex-     ted to provide the best services in order to secure
pand the loan portfolio as well. This trend did      the best future for St Petersburg. Historically
not last longer than a couple of months, and         the Bank has enjoyed a good relationship with
by the end of the year its effects were fully        the local government and municipal enterprises.




36                                                                                                                                                                                                        37
Business Units’ Review                                                                                Annual Report 2008



                         The Bank is a member of the national de-        Retail Banking
                         posit insurance system of the Deposit Insur-
                         ance Agency (DIA). It was authorized by
                         DIA to participate in the tender to perform     Retail banking is another strategic priority of the
                         the insurance compensation payments to          Bank. We are mostly focused on attracting retail
                         the depositors of the failed banks.             deposits and cards settlement business as well as
                                                                         on development of the Internet-Banking system
                         Along with the standard services (cash          and trade acquiring. We enjoy 9.5% market share
                         management, lending, deposit taking, etc.)      in the local retail deposit market compared to 7.8%
                         the Bank significantly increased the volume     in 2007. Retail lending project was also launched
                         of trade finance operations in 2008. In spite   in 2006 targeting mostly on mortgages, and by
                         of challenging market conditions in the sec-    the end of 2008 we also managed to capture
                         ond half of 2008, we continued to develop       7.1% of the retail loan market as well as 14.4% of
                         this business line. Over the previous years,    the mortgage market in St Petersburg. Currently,
                         Bank’s portfolio grew to more than USD          the number of retail customers is 774,000.
                         375 million. In 2008 we financed 118 trade
                         contracts for the amount exceeding USD          Retail business of the Bank was also seriously in-
                         230 million.                                    fluenced by the unfolding crisis. As interest rates
                                                                         grew higher retail lending came actually to a
                         As small and medium-sized enterprises
                         (SME) financing is still underdeveloped in
                         Russia, the Bank sees great prospects in this
                         line of business. That is why SME lending
                         became one of the main priorities in the
                         Bank’s corporate banking strategy. In 2008,
                         we adopted special internal regulations on
                         SME lending and expanded the line of SME
                         banking products. Now SMEs have access to
                         all types of finance in the Bank. Last year
                         the Bank joined several programs led by
                         St Petersburg Government which facilitate
                         SME lending by providing guarantees to the
                         small businesses.

                         In 1Q 2008, the branch network of the Bank
                         was restructured to form 33 outlets in St Pe-
                         tersburg and the Leningrad region and three
                         branch offices in Moscow, Kaliningrad and
                         Nizhny Novgorod. Three level management
                         system was substituted by two level system
                         in order to increase cost efficiency and to
                         speed up the decision making process.




38                                                                                                                     39
Business Units’ Review                                                                                                                                                                   Annual Report 2008



                                                          to provide easy access to the Bank by means
                                                       of a wide ATM network, a user-friendly Inter-
                                                       net bank, and telephone banking;

                                                          to leverage strong relationships with corpo-
                                                       rate customers into good cross-selling oppor-
                                                       tunities for retail products.

                                                       Putting these principles into practice and of-
                                                       fering competitive products, we were able to
                                                       consistently increase our market share from
                                                       the very beginning of the retail project. In
                                                       2008 we upgraded our Internet banking sys-
                                                       tem and continued to extend a line of services
                                                       provided, including launch of the PPC version
                                                       of the Bank’s Internet-Bank system. By the
                                                       end of 2008 the system was actively used by
                                                       27,000 clients.

                                                       Historically the Bank has offered retail custom-
                                                       ers a wide range of current and demand ac-
                                                       counts and term deposits. The share of retail
                                                       deposits as a source of funding remains stable
                                                       over recent years and totals to approximately
                                                       one third of customer accounts. The Bank of-
                                                       fers competitive interest rates and uses vari-
                                                       ous promotion schemes to widen its presence
standstill by the end of the year. At the same         in the market for retail deposits. Having built
time, deposits outflow was not as dramatic as one      strong distribution network and the image of
could have expected. Only around 7% of the de-         “The Bank for the City”, we established the ba-
posits were lost during one of the autumn months       sis for very strong brand recognition in the tar-
which were easily outbalanced in the subsequent        geted market and formed a wide base of loyal
periods. As a result the retail loan book increased    customers, which we plan to extend further.
in 2008 by 97% and amounted to RUB 16.7 billion                                                            having all major products in the line (mort-      from the Visa International payment system.
at the end of the year. Retail deposits increased by   The Bank’s strategy in terms of retail lending      gages, car loans, overdrafts for payroll cards,   Its acquiring equipment and processing center
62% and amounted to RUB 49 billion.                    is limited to low risk products never allowing      etc.), retail lending today is mostly provided    are certified to perform the direct payment
                                                       for basic scoring approach. Accordingly, all as-    on a case by case basis with a view to servic-    operations. As at January 1, 2009, 639 acquir-
We are convinced that the right way to success         sessments are made on an individual basis. In       ing existing borrowers with a good standing       ing agreements were entered into, the Bank
in the retail business is based on the following       order to meet the negative changes of the           rather than to expand on the market.              was servicing 1,533 POS-terminals and 233 im-
principles:                                            market environment we took precautions to                                                             printers at retail and service outlets. The expan-
                                                       limit the retail lending risks in the second half   In 2008, the number of cards issued by the        sion of the card acceptance network became
    to provide wide network coverage in the            of 2008; these measures slowed down the             Bank increased by 119,000 to reach 589,000.       a separate line of business and is regarded as
region of operations;                                  retail loan book growth dramatically. Though        In 2008, the Bank got an acquiring license        priority.




40                                                                                                                                                                                                        41
Business Units’ Review                                                                                                                                                                 Annual Report 2008



                                                                                                          Proprietary Activities                              pared to the volume of the Bank’s business.
                                                                                                                                                              The Bank doesn’t have any exposure to US
                                                                                                                                                              subprime assets, CDOs or ABS conduits.
                                                                                                          Early in 2008 we opted to increase our propri-
                                                                                                          etary activity significantly. Our trading depart-   By January 1, 2009, the securities portfolio
                                                                                                          ment was expanded from 5 to 20 employees            of the Bank predominantly consisted of RUB
                                                                                                          with the corresponding increase within back-        bonds (87%) and FX bonds (12.5%) of Russian
                                                                                                          office and risk management departments. Last        companies and Russian federal and municipal
                                                                                                          year we also started to implement advanced          government. 90% of debt securities belong to
                                                                                                          software to facilitate trading activities. This     the Lombard list of the Central Bank of the
                                                                                                          expansion was meant to reflect the growing          Russian Federation, while remaining 10% are
                                                                                                          importance of financial market instruments in       mostly represented by the debt of our cus-
                                                                                                          our balance sheet at least in absolute terms        tomers, who placed their bonds on Russian
                                                                                                          as well as to provide the Bank with the better      stock exchanges with the Bank acting as a co-
                                                                                                          access to the market while still sticking to low-   underwriter or lead arranger of the issue.
                                                                                                          risk instruments.

                                                                                                          The idea was short of being fully implement-
                                                                                                          ed when the crisis broke out. We saw some
                                                                                                          painful moments during the REPO market
                                                                                                          collapse last September resulting fortunately
                                                                                                          in no losses at all; we also experienced some
                                                                                                          losses, when the markets fell freely month af-
                                                                                                          ter month. Still, we have found ourselves in a
                                                                                                          much stronger position to withstand the crisis.
Private Banking                                                                                           In the first half 2008, our renewed trading
                                                                                                          capabilities enabled us to perform an efficient
                                                                                                          restructuring of our securities portfolios so as
In 2007, we established a special department         “open architecture” principle to form the optimal    to keep its average duration at the level of
to treat our most esteemed customers – Pri-          financial partners hub and thus to choose the        around one year. We significantly enhanced
vate Banking Department. Over this period the        best financial services providers for our clients.   our access to the money market providing us
number of Private Banking clients reached 450,                                                            with an extra liquidity cushion. And we found
which generates an astounding RUB 13.1 billion       In 2008, we launched a number of new ser-            a new source of income as many arbitrage op-
of customers accounts amounting to more than         vices for our PB clients: the special deposit pro-   portunities arise from the currently imperfect
a quarter of our retail deposits.                    grammes; a loyalty programme for holders of          markets.
                                                     the VISA Platinum VIP-Club and VISA Infinite
This service includes financing and cash man-        cards; in September 2008, a specialized web site     The trading securities portfolio of the Bank re-
agement, investment management, and broker           for the VIP customers www.vip.bspb.ru was de-        flects our conservative approach to credit and
and dealer services tailored to individual custom-   signed and put into service. Thanks to the per-      market risk. In 2008, the Bank considerably
ers’ needs. To follow the highest standards the      sonal managers system developed, all our VIP         limited its exposure to long-term and medium-
Bank uses the experience of major international      customers have twenty-four-hour access to the        term debt securities as well as minimized its
banks, which became partners in structuring          high quality professional banking services and       exposure to corporate shares. Accordingly, the
these products for our customers. We use the         advice.                                              stock market risk is almost nonexistent com-




42                                                                                                                                                                                                    43
Bank Saint Petersburg                                                                                                   Annual Report 2008
Annual Report 2008



                                       7. RISK MANAGEMENT
                                       The year 2008 became a real stress-test for          pendency is implemented system-wide in risk
                                       risk management, definitely making a record          management.
                                       for the handbooks of the profession. We saw
                                       many propositions being broken and models            We continue to follow a conservative line in
                                       becoming irrelevant in a sweep of the market         taking risks. The Bank takes only those risks it
                                       movements both in Russia and the rest of the         can measure, understand, and handle in case
                                       world. Immediate consequences may be hard            of an emergency. It is also of a great impor-
                                       to face but in the long-run it is obviously for      tance for the Bank to constantly diversify its
                                       the benefit of the business. No doubt that new       portfolios as it grows larger and larger every
                                       techniques will come into place with increased       year. We permanently modify our risk man-
                                       protection from many imaginable scenarios.           agement policies and techniques to keep pace
                                                                                            with changes in the Bank’s development and
                                       Alas, it will always remain the stress-test of       increase in the number of operations.




  SK GEMENT
                                       the imagination as well since taking risks and




RI NA
                                       pricing them is an integral part of the banking      Thus, in spite of the dramatic changes of the
                                       business. To be in business means taking risks.      environment, the strategic approach to risk
                                       And our aim is not to eliminate all the risks        management remains unchanged. Instead, we
                                       completely, but to achieve an appropriate bal-       have made significant changes to the models
                                       ance between risk and return. Consequently,          and techniques used, modifying various param-


   A   M
                                       an ability to handle risks properly is the key to
                                       success. It is even more important when your
                                       business is growing very fast. Our risk manage-
                                                                                            eters of our estimates and making our expo-
                                                                                            sures much more resistant to risks.



                             isk
                                       ment strategy aims to minimize uncertainties         Our risk management and control system ad-

                         t R Risk sk
                                       leading to potential losses and maintain the sta-    dresses the following types of banking risk:
                       i
                   Creduidity al Ri
                                       bility of the Bank’s business and financial posi-
                                       tion, regardless of the changes in the banking          credit risk;
                 - Liq        on
                          rati Risk
                                       and financial markets. Failure to manage and
                  - Ope t              control risks properly can lead to significant fi-      liquidity risk;

                   - Marke
                                       nancial losses. Moreover, it could damage our
                                       reputation, reducing our customer base, and             operational risk; and

                    -                  decreasing our ability to retain high-qualified
                                       employees. In addition, regulators could im-            market risk (including interest rate risk, cur-
                                       pose limitations on our business.                    rency risk and stock market risk).

                                       The general approach used by the Bank is to
                                       take and, consequently, limit only those risks       Credit Risk
                                       that provide acceptable return and to mini-
                                       mize all others. Risk management is based on         Credit risk refers to the risk that the counter-
                                       a thorough preliminary evaluation of the risks       party can not meet its obligation to the Bank
                                       to be taken and constant monitoring of the           and that pledged assets will not cover the
                                       risky positions opened. The principle of inde-       claim.




                                                                                                                                         45
Risk Management                                                                                                                                                                             Annual Report 2008



We manage credit risk through establishing           Exposure Limits                                         maximum exposure to a party related to             defined by the Credit Policy of the Bank which
internal exposure limits for single borrowers,                                                           the Bank should not exceed 20% of the total            is approved by the Management Board of the
groups of borrowers, and industries. We also         Setting exposure limits is one of the most im-      capital;                                               Bank.
mitigate credit risk by conducting thorough re-      portant instruments of our credit risk manage-
views of prospective borrowers, obtaining col-       ment. In order to set exposure limits and estab-       maximum exposure to any economic sector             The Big Credit Committee is responsible for
lateral, and ongoing monitoring of borrowers’        lish loan loss provisions the Bank analyses the     should not exceed 20% of total loan portfolio;         making credit decisions when the powers of
financial positions.                                 borrowers’ financial position and their ability                                                            the Small Credit Committees are not sufficient.
                                                     to service debt. Exposure limits are set, among        aggregate exposure to construction and real         Consequently, the Management Board is re-
The Bank’s Credit Policy is aimed to build an up-    other things, on the basis of the borrowers’        estate sectors should not exceed 23% of the            sponsible for making credit decisions when the
to-date and effective credit system, to manage       risk groups, their credit history with the Bank     total loan portfolio by the end of 2009;               powers of Big Credit Committee are not suf-
and monitor credit risks.                            and other banks, market position, industry, and         the aggregate of the 20 largest exposures          ficient. The Credit Committees are composed
                                                     transparency level.                                 should not exceed 200% of total capital.               of various departments senior managers whose
Our Credit Policy determines the following as-                                                                                                                  professional activities involve risk assessment.
pects:                                               We revise exposure limits for single borrowers      The Bank is always in compliance with these
                                                     and groups of related borrowers on an annual        limitations, and we realize that diversification of
   loan assessment system;                           basis and monitor the borrowers’ financial con-     our credit portfolio is the key to decreasing risks.   Collateral
                                                     dition and creditworthiness on a regular basis.     These limits have been getting tighter from year
   methods, guidance and procedures used to          Limits for particular borrowers are also revised    to year to lower the loan portfolio concentra-         Our loan portfolio is highly secured, as more than
assess the borrower’s credit standing;               if we receive information indicating changes        tion. Thus, in 2006 the aggregate exposure to          90% of the total loan portfolio has collateral.
                                                     in their financial standing or repayment abil-      construction and real estate sectors was esti-         It is a general policy of the Bank to require col-
   maximum exposure to the industry sectors;         ity. The Bank revises industry exposure limits      mated at the level of 38%; by the end of 2008          lateral, guarantees and/or assurance arrange-
                                                     at least annually when the Credit Policy is ap-     the construction and real estate exposure sector       ments as security for each loan. Acceptable col-
    principles and procedures implemented to         proved, and more often if a particular indus-       declined to 24.6%. As at the end of 2006 the           lateral includes cash, real estate property, land
make and implement credit decisions made by          try undergoes significant changes. We use the       aggregate of the 20 largest exposures was set          leasing rights, securities, industrial equipment,
the Bank and to form provisions;                     same procedures and methodologies for ap-           at the rate of 350% of total capital; by the end       motor vehicles, ships, precious metals, raw ma-
                                                     proving credit-related commitments, as we do        of 2008 the aggregate of the 20 largest expo-          terials, and inventory. In most cases, collateral
    assessment of credit risks associated with       for on-balance sheet credit obligations such as     sures was not to exceed 200% of total capital.         covers at least the principal of the loan, accrued
the loans assessed individually.                     loans.                                                                                                     interest for 180 days, and enforcement costs.
                                                                                                         Credit Committees                                      The value of the Bank’s collateral is re-assessed
The following assessment methods are used to         The strategic plan and the Credit Policy of the                                                            by an independent appraiser or a credit spe-
define the sources of the credit risks:              Bank impose a number of limitations on the          In order to manage credit risk the Bank imple-         cialist semi-annually. We also require that the
                                                     structure of the credit portfolio. These limita-    ments a collective decision-making system              pledged property is insured with pre-approved
    loan portfolio structure analysis by different   tions reflect the Bank’s strategic movement         (except for the standard loans to individuals          insurance companies for decrease of its loss or
directions;                                          towards further diversification, as well as meet    granted under the Bank’s target programs). We          damage risk.
                                                     the requirements of the Bank of Russia and          have credit committees at each branch office
   system analysis of the loan portfolio quality;    international creditors. Presently the Bank takes   and outlet (the Small Credit Committees). The          Most of our retail loans are also secured or
                                                     into account the following key limitations while    Small Credit Committees make credit decisions          guaranteed. Car loans are secured by the ve-
   analysis of the potentially beneficial trends     carrying out credit activities:                     within the powers conferred on them. Their lim-        hicle purchased, which must be fully insured,
associated with the active operations;                                                                   its are determined on the basis of the quality of      and mortgages are secured by the real estate
                                                          maximum exposure to a single borrower          their work in the credit commercial direction for      property purchased, which must also be fully
   credit risk of a counterparty is assessed at      (or a group of related borrowers) should not        the previous periods as well as structure and          insured. We also require that individuals granting
the stage of credit application and customers        exceed 25% of the total capital (internal regu-     quality of their loan portfolios and the level of      security or issuing surety ships must insure their
monitoring.                                          lation accepted in the Credit Policy);              qualification of their employees. The limits are       lives with pre-approved insurance companies.




46                                                                                                                                                                                                           47
Risk Management                                                                                                                                                                                  Annual Report 2008



Provisions for Impairment Losses                      Actions to reduce / limit the credit risk             accordingly. In particular, the requirements to         customer accounts grew significantly and the
                                                                                                            the Bank’s borrowers raised, an amount of the           share of RUB nominated funds decreased. In
The Bank establishes provisions for impairment        Facing the dramatic changes of the market en-         down payment is increased, granting of loans to         order to balance its FX and RUB funding sources
losses on financial assets when there is objec-       vironment in the second half of 2008 the Bank         cover the insurance premium is cancelled, etc.          the Bank used the standard tools: the interest
tive evidence that a financial asset or a group       assumed some preventive measures to limit the                                                                 rates were increased, the loan portfolio growth
of financial assets is impaired.                      credit risks and to diversify the loan portfolio by   Taking into consideration the fact that the loans       slowed down. Besides the Bank used the fund-
                                                      sectors and large loans.                              constitute a significant portion of the Bank’s as-      ing from the CBR, which was available starting
The determination of the provision for impair-                                                              sets, credit risk management is one of our top          from October to strategically and socially im-
ment losses is based on the analysis of the           The Bank’s Credit Policy was changed so as to         priorities.                                             portant banks.
risk involved and reflects the amount which,          tighten the requirements and limit the decision-
in our judgment, is adequate to provide for           making powers of the Small Credit Committees          Liquidity Risk                                          At the same time the Bank has always had
losses incurred.                                      of the Bank’s outlets and branches:                                                                           an opportunity to use its substantial resources
                                                                                                            Liquidity risks refer to the risks arising out of       in foreign currency and highly liquid securities
Provisions are made as a result of an individual         the list of the pledged property which is sub-     mismatches between the maturities of assets             portfolio.
appraisal of risk for financial assets that are       ject for obligatory insurance is expanded;            and liabilities, which may lead to inability of the
individually significant, and an individual or col-                                                         Bank to meet its obligations when they become           As a result of the swift and resolute response
lective assessment for financial assets that are         the percentage of discounts used for deter-        due. It can create a considerable problem, espe-        of Bank’s liquidity management system it was
not individually significant. Impairment losses       mination of collateral value increased;               cially under adverse market conditions, for the         possible to quickly stabilise the situation in the
are recognized in the amount necessary for                                                                  Bank to meet its obligations or be forced to            second half of 2008 and avoid the worst sce-
reduction of assets balance value up to the              the following powers of Small Credit Com-          borrow money on disadvantageous terms.                  narios.
value of the estimated future cash flows dis-         mittees have been cancelled:
counted with respect to the initial effective                                                               Our liquidity risks are limited, due to the fact that   Operational Risk
rate.                                                            to grant loans/guarantees to legal         payment flows are centralized, which improves
                                                            entities without provision (except for the      efficiency and facilitates the control process. To      In line with the proposed Basel II banking reg-
The factors considered by the Bank in deter-                loans for taking part in auctions);             properly manage liquidity risks, the Assets and         ulatory reforms, we regard operational risk as
mining whether it has objective evidence that                                                               Liabilities Management Committee determines             the risk of loss resulting from inadequate or in-
an impairment loss has been incurred include                   to grant loans secured by inventories;       the optimal asset and liability maturity structure,     effective internal processes, people and systems
the borrowers’ or issuers’ liquidity, financial                                                             sets liquidity gap limits, and establishes asset        or from external events, including losses from
position and business and financial risk expo-                  to change initial terms and conditions      and liability diversification policies. The Treasury    fraud, computer system failures, settlement er-
sures, levels of and trends in defaults on simi-            of loan and pledge agreements as well as        manages liquidity on a day-to-day basis. Infor-         rors, model errors, or natural disasters.
lar financial assets, national and local econom-            release of the pledge;                          mation accumulated is submitted to the ALCO
ic trends and conditions, and the fair value of                                                             on a weekly basis. We ensure that the Bank has          Our approach to operational risk is not to elimi-
collateral and guarantees.                                      temporary restrictions on new lending       sufficient liquidity to meet all obligations to cli-    nate it, but rather to decrease it to acceptable
                                                            in the construction and real estate sec-        ents and counterparties on a regular basis.             levels determined by senior management, and
Expecting the negative changes in the general               tors have been introduced and the deci-                                                                 to provide for sufficient information in order to
economic conditions and as a consequence in                 sion-making is now a responsibility of the      In the 4Q 2008 the Bank faced the temporary             make informed decisions about additional con-
the financial position of the Bank’s borrowers              Management Board of the Bank.                   outflow of both retail and customer deposits;           trols required.
as well as growth of delays in 2008 we sig-                                                                 however the volume of outflow did not exceed
nificantly increased the costs of provisions. As      The Bank has also reinforced the existing col-        the indicators used in the Bank’s stress tests.         In 2007 the Bank implemented a regular process
a result the rate of provisions for loan losses       lateral in order to bring it in accordance with the   The essential ruble depreciation against hard           to monitor its operational risk profiles and mate-
rose from 2.75% of the loan portfolio as at           revised Credit Policy of the Bank.                    currencies encouraged a rapid conversion of             rial exposures to operational losses. To facilitate
the end of 2007 to be 3.88% as at the end                                                                   RUB deposits into FX deposits. As a result by           this process, we created a new unit within the
of 2008.                                              Retail credit programs of the Bank are changed        the end of 2008 the share of FX nominated               Banking Risks Department, which is responsible




48                                                                                                                                                                                                                49
Risk Management                                                                                                                                                                                   Annual Report 2008



for operational risk management coordination           ing to participate, are subject to various inter-     The general strategy of the Bank in relation to       kept on the close to zero level, the Bank was not
and the maintenance of a database comprising           nal approvals and sign-offs. No court decisions       market risk management is worked out by the           exposed to currency risk.
operational failures and resulting financial losses.   disadvantageous for our Bank were recorded            Assets and Liabilities Management Committee.
Our systems calling for the regular reporting of       in 2008.                                              The level of market risk in managed by the Risk       Our strategy is to use derivatives for hedging
information to senior managements and the Su-                                                                Management Department (currency and stock             currency risk and not for speculation.
pervisory Board should also support the proac-         In order to manage IT risk, one of the main           market risk) and the Treasury (interest rate risk).
tive management of operational risk, which the         kinds of operational risks, in 2008 the Bank set      The currency and stock market risks limits are        Interest Rate Risk
Basel Committee required in its “sound prac-           up a Technical Policy Committee authorized by         calculated by the Risk Management Department
tices” paper.                                          the Management Board to manage IT infra-              and approved by the Assets and Liabilities Man-       The Bank is exposed to interest rate risk due to
                                                       structure development.                                agement Committee. Ongoing monitoring of              the fact that we have interest gaps, primarily
The Bank uses the following methods for op-                                                                  these limits is executed by back-office.              as a result of lending at fixed interest rates, in
erational risks minimization:                          In December 2008 the Bank put into operation                                                                amounts and for periods that differ from those
                                                       its second data processing centre. It’s up-to-        Currency Risk                                         of funding attracted at fixed interest rates. In-
    preventive method, which includes constant         date IT solutions allow the Bank to use its exist-                                                          terest margins on assets and liabilities having dif-
monitoring of the processes used, bottlenecks          ing IT equipment in a most effective manner, to       Currency risk is the risk that the value of finan-    ferent maturities may change, and the values
analysis and development of internal organiza-         save electricity consumption and maintenance          cial instruments will be influenced by changes        of our assets and liabilities from the assets may
tional structure;                                      costs as well as to enhance the system security.      in exchange rates. The Bank is exposed to the         fluctuate as a result of changes in market in-
                                                       The lack of the second data processing centre         effects of fluctuations in the prevailing foreign     terest rates. The interest rate policy is worked
    provision method, which implies making pro-        had been considered as one of the major op-           currency exchange rates on its financial position     out by the Assets and Liabilities Management
visions for operational losses if necessary (ac-       erational risks of the Bank.                          and cash flows. The ALCO sets position limits         Committee and approved by the Management
tual and prospective); and                                                                                   on foreign currency exposure and the Financial        Board.
                                                       Market Risk                                           Market Operations Department manages open
     insurance method, which implies insuring                                                                currency positions, which enables the Bank to         The ALCO sets interest rate gap limits. The Trea-
against such risks as computer crimes, profes-         Market risks refer to the risk of changes in inter-   minimize losses from significant fluctuations of      sury monitors interest rate gaps and compliance
sional responsibility, etc.                            est rates, exchange rates, and share prices that      exchange rates of foreign currencies.                 with interest rate gap limits and reports to the
                                                       lead to a decline in value of Bank’s assets and                                                             ALCO on a regular basis. The Treasury also mon-
                                                       liabilities, including derivatives.                   At the moment our general policy is to open           itors assets and liabilities sensitive to interest rate
We also practice the system of branch manag-                                                                 currency positions only with respect to main          changes and forecasts possible changes in mar-
ers’ rotation for identification and prevention of     As a result of concluding transactions on the         convertible currencies which are in our custom-       ket interest rates and their impact on the Bank’s
the fraud at the branch level.                         market we take risks of the following open po-        ers’ constant demand. We keep open currency           profitability over time. If the Treasury’s forecasts
                                                       sitions:                                              positions within CBR required limits and monitor      indicate significant exposure to market interest
We conduct the majority of our transactions                                                                  them constantly. In accordance with CBR require-      rate fluctuations, it proposes appropriate matu-
using standard templates approved by the Le-              open currency position forms an exposure to        ments, the aggregate amount of all long or all        rity or pricing changes in assets and liabilities.
gal Department. If this is not the case, the Le-       currency risk;                                        short currency positions must not exceed 20%
gal Department reviews all non-standard docu-                                                                of the Bank’s total capital at the end of each        Since hedging instruments are available for de-
ments before they are used in the course of                interest gaps form an exposure to interest        operational day. Concurrently, a long or short        creasing interest rate risk only to the limited
the relevant transactions. We have internal doc-       rate risk;                                            position with respect to any single currency must     extent, we normally seek to decrease interest
uments and procedures in place that set out                                                                  not exceed 10% of the Bank’s total capital.           gaps.
the job descriptions and responsibilities of our          open positions on equities and debt instru-
personnel. The decision-making capacity and            ments form an exposure to stock market risk.          In order to manage open currency positions we         Stock Market Risk
authority of particular departments and mem-                                                                 hedge currency exchange rates and conduct
bers of management is strictly regulated. The          Therefore, we perceive market risk as a combi-        swap transactions with foreign currency. As           Stock market risk includes risks related to pos-
majority of transactions in which we are go-           nation of above-mentioned three types of risk.        during 2008 Bank’s open currency position was         sible financial losses resulting from unfavorable




50                                                                                                                                                                                                                   51
Risk Management                                                                                                                                                                                    Annual Report 2008



changes in market prices for securities and de-         bonds of Russian high-profile companies and           or terrorist financing activities, and to ensure        cious transactions are identified in real time by
rivatives. In order to manage stock market risk,        Russian federal and municipal government with         that banking services are provided only to bona         running the transaction details against the Fed-
we use certain limits such as:                          duration of at least 1.5 years.                       fide clients.                                           eral Service for Financial Monitoring database.

    limits to operations with trade portfolio se-       In order to meet the consequences of the REPO         The Bank’s procedures relating to the preven-               Record Keeping. We retain all information
curities;                                               market collapse in September 2008 the Bank            tion of money laundering and terrorist financ-          obtained in the course of carrying out anti-
                                                        used the following tools to limit the stock mar-      ing include, but are not limited to:                    money laundering procedures. We also keep
   limits to a specific issuer of securities;           ket risks:                                                                                                    copies of all client corporate and transaction
                                                                                                                  "Know-your-customer” procedures. These              documents and maintain a database contain-
    stop-loss limits within the limits to a specific       limits to the securities issuers with doubtful     procedures require clear identification of clients,     ing information on all clients and transactions in
issuer;                                                 credibility were limited or closed;                   verification of their identity and appraisal of         which they engage, which facilitates identifica-
                                                                                                              the risk of their engaging in prohibited transac-       tion of unusual transactions.
   open position limits.                                    the volume of the REPO operations was             tions. As part of account opening procedures,
                                                        considerably limited because of the high risks        the Bank obtains information concerning each                Confidentiality. We keep all information ob-
Stock market risk management is carried out             associated with these operations (securities not      client’s identity, legal status, legal and beneficial   tained as a result of applying anti-money laun-
through analysing tendencies of major capital           regarded as a good collateral because of their        ownership, counterparties, and banking rela-            dering procedures confidential, except where it
markets. We also use the following methods              high volatility);                                     tionships. Subsequently, we continue to evalu-          is required to report it to the Federal Service for
for the stock market risk minimization:                                                                       ate each client’s business activities, authority to     Financial Monitoring.
                                                           discounts on trading securities pledged under      engage in particular transactions and risk of en-
    diversifying assets and liabilities to form an      reverse REPO agreements are increased;                gaging in illegal activities. Particular attention is      Education. We provide education and train-
optimal structure of financial instruments that                                                               paid to the activities of clients registered in off-    ing of personnel with respect to anti-money
have different degrees of protection against               terms for the REPO contracts are decreased         shore jurisdictions or those engaging in certain        laundering procedures at least once a year.
changes of market interest rates;                       from 1-2 weeks to 1-2 days.                           business activities that are viewed as high-risk,
                                                                                                              such as gambling. We don’t enter into business          The Financial Monitoring Department is respon-
    diversifying the securities portfolio taking into   Anti-Money Laundering Procedures                      relationships with clients that refuse to provide       sible for monitoring the client transactions and
account the liquidity of investments into securi-                                                             sufficient identity and authority information           activities of all of the Bank’s departments for
ties; and                                               Our anti-money laundering policies and pro-           or that are suspected of engaging in money              compliance with the relevant Russian anti-money
                                                        cedures are based on and in compliance with           laundering. We also obtain detailed information         laundering legislation. This department reports
    making provisions for potential depreciation        relevant Russian legislation. We have developed       about our counterparties, financial institutions        directly to the Chairman of the Management
of investments into securities.                         and implemented procedures and operative              and don’t enter into banking relationships (in-         Board. In addition, each of our departments has
                                                        documents aimed at preventing money laun-             cluding correspondent relations and interbank           an officer responsible for anti-money launder-
The Banking Risk Department, the Internal Com-          dering and terrorist financing, including a gen-      lending) with shell banks or banks that have            ing legislation compliance.
pliance Control Department and back office              eral anti-money laundering policy and internal        not implemented anti-money laundering proce-
monitor stock market risk on a regular basis.           control procedures and rules on counteracting         dures.                                                  We pay particular attention to transactions in-
                                                        money laundering and financing of individuals                                                                 volving large sums of money, counterparties
As in August-September 2008 the stock market            and legal entities engaged in terrorist activities,       Detection. Pursuant to the Russian anti-            located in offshore jurisdictions, or significant
risks increased dramatically the Bank consider-         as well as procedures for reporting to the Fed-       money laundering legislation, the Bank identifies       amounts of cash. If monitoring or other infor-
ably limited its exposure to long-term and me-          eral Service for Financial Monitoring. These pro-     transactions that must be monitored and re-             mation about a client that is available indicates
dium-term debt securities as well as minimized          cedures aim, among other things, to minimize          ported, including terrorist financing transactions      that a client may be engaging in money launder-
its exposure to corporate shares. Recently, the         the risk to the Bank of being used as a vehicle       and suspicious transactions. Russian legislation        ing or terrorist financing, the level of monitoring
Bank’s exposure to corporate shares does not            for money laundering or terrorist financing, to       requires banks to monitor and report such               of such client is increased and their activities are
exceed 1% and the Bank’s debt securities port-          protect it from the financial and reputational        transactions to the Federal Service for Financial       analyzed on an ongoing basis, which allows de-
folio predominantly consist of RUB and FX               risks of being associated with money laundering       Monitoring on a daily basis. Unusual and suspi-         tection of money laundering schemes.




52                                                                                                                                                                                                                   53
Bank Saint Petersburg                                                                                          Annual Report 2008
Annual Report 2008



                             8. FUNDING
                             The Bank’s principal sources of funding are             general purposes. This changed dramatically
                             current accounts and term deposits from cor-            in the second half of 2008, with the market
                             porate clients and individuals, which as at the         for wholesale funding coming to a complete
                             end of year 2008 amounted to RUB 139.8 bil-             standstill.
                             lion compared to RUB 88.7 billion at the end
                             of 2007. In 2008, Bank’s customer accounts              On April 16, 2008, the Bank placed a USD
                             grew by 57.6% compared to the average cus-              75 million two-year Eurobond issue at an an-
                             tomer accounts growth rate in the Russian               nual interest rate of 9.975%. The issue was
                             banking sector of 20.3%.                                arranged by Dresdner Kleinwort.

                             Over the last year, there were no significant           On June 26, 2008, Bank Saint Petersburg
                             changes to the customer accounts structure: at          entered into the USD 100 million syndicated




                       ING
                             the end of 2008, 35% of customer accounts               loan agreement with a group of banks led by
                             belonged to individuals and 65% to corpora-             EBRD. The facility was priced at LIBOR plus




                    ND
                             tions (34% and 66% in 2007 respectively).               3.45% for a 4-years tranch (USD 25 million)
                                                                                     and LIBOR plus 2.75% for the 18-months




         FU
                             In 2008 Bank’s funding structure was con-               tranch (USD 75 million). The credit line was
                             siderably influenced by the ruble depreciation          used to finance corporate clients’ projects,
                             against hard currencies which encouraged a              SMEs’ projects and retail business.
                             rapid conversion of RUB deposits into FX de-
                             posits. As a result the share of FX nominated           On July 16, 2008, the Bank entered into a
                             customer accounts grew from 26% to 45%                  9.987% USD 35 million agreement with KfW
                             during 2008. In order to balance its FX and             IPEX-Bank for the term of 5 years. The fund-
                             RUB funding sources Bank used the funding               ing was used by the Bank for granting a loan
                             from the CBR, which was available starting              to Kaliningrad-Avia to finance the terminal
                             from October to strategically and socially im-          construction and equipment for Khrabrovo
                             portant banks. As at the end of 2008, the               airport in Kaliningrad.
                             Central Bank funding amounted to RUB 24.2
                             billion (11% in liabilities) resulting in a decreased   On June 17, 2008, the Bank renewed the pro-
                             share of customer accounts in liabilities (70%          gramme for the issuance of loan participation
                             in 2007 and 65% in 2008).                               notes on the Irish Stock Exchange with J.P.
                                                                                     Morgan Securities as a dealer and arranger. In
                             In the first half of 2008, Bank Saint Peters-           terms of size the programme was extended
                             burg continued its’ activity on the capital mar-        to USD 1.5 billion. With this programme es-
                             kets: we successfully completed a number of             tablished, we have the possibility to execute
                             transactions yielding us more than USD 200              capital market transactions with minimum
                             million to finance clients’ projects and for            preparation time.




                                                                                                                              55
Funding   Bank Saint Petersburg
          Annual Report 2008




                   ION Y
                 AT OG
               RM OL
             FO HN
           IN EC
               T




56
Information Technology                                                                              Bank Saint Petersburg
                                                                                                    Annual Report 2008



9. INFORMATION TECHNOLOGY
The Bank’s IT system is centralized and com-      allow us to use the existing IT equipment in a
prises front-end and external systems, pro-       most effective manner, to reduce electricity
viding services to customers and facilitating     consumption and maintenance costs as well
interaction with other banks, as well as a        as to enhance the system security.
back-end system, which serves as a base for
processing and storage of client information      To meet our strategic goals we implemented
and products. All of the Bank’s systems are       a modern platform for the Bank’s operations
integrated through a special IT transporta-       on the financial markets based on Reuters
tion channel allowing for an information ex-      solutions. It enables us to manage all of the
change on a timely basis.                         transactions performed in a most expedient




                                                                                                                               ES
                                                  way as well as to enhance the effectiveness
Our IT Department consists of approximately       of our risk management procedures. In 2008




                                                                                                                            YE
180 staff members. It allows us to maintain       we launched an Internet-Bank service for
our own in-house IT expertise and to develop      corporate customers and the portable pock-




                                                                                                                    LO
all the major applications ourselves (including   et computer version of Internet-Bank system




                                                                                                                 MP
know-how applications) with the remainder         for retail customers. By the end of the year
being outsourced to a number of well-known        it was actively used by more than 27,000 re-




                                                                                                           E
companies. In 2008 the IT Department was          tail clients and more than 12,000 corporates.
further enforced by new personnel to en-          We also gradually implement the integrated
hance its operational effectiveness; a new        data-warehouse system based on SAP Busi-
division was established to monitor and regu-     ness Object software, which allows for op-
late internal processes.                          erational preparation of Bank’s analytical and
                                                  management reports.
In 2008, we invested RUB 282.9 million to
update and improve our IT system.                 And, of course, all of the Bank’s IT systems
                                                  are protected by an advanced intruder de-
In order to keep up with the expected growth      fense system that provides for close control
of the number of transactions and new IT          over access to the Bank’s information system
trends, we put into operation our second data     and ensures that sophisticated information
processing centre. It’s up-to-date IT solutions   security devices are installed on all software.




                In 2008 we
        continued to modernize our
     core IT systems in order to increase
          its capacity, improve fault
               tolerance, and reduce
                         downtime.

58
Employees                                                                                              Bank Saint Petersburg
                                                                                                       Annual Report 2008



10. EMPLOYEES
In the first half of 2008, the number of          Bank. In 2008, we expanded our training ca-
employees grew rapidly due to the ongo-           pabilities by means of electronic courses avail-
ing expansion of business, the launch of          able on the Training Centre Intranet portal.
new products and services, and opening of
new offices. However, in order to meet the        We cooperate actively with the educational
changing economic situation we had to re-         institutions of St Petersburg. Students pass
vise our plans and the number of employ-          their on-site practice and internships in our
ees was cut accordingly in the 4th quarter of     offices, and those having shown the best
2008 by around 6%. As of January 1, 2009



                                                                                                                      HIP
                                                  professional skills during their training, receive
the number of employees increased by 16%          the opportunity to work with the Bank. In




                                                                                                                   RS
(307 employees) compared to YE 2007 and           2008, 164 students served internships with
amounted to 2,182.                                various departments of the Bank.



                                                                                                                SO ITY
                                                                                                             PON HAR
We put special emphasis on training employ-       The sophisticated KPI system is implemented
ees in our Training Centre. The availability of   system wide, which calculates the compensa-
the Training Centre provides for a systemic ap-


                                                                                                           S
                                                  tion of various units within the Bank in rela-
proach to training employees and allows us to     tion to their results. The variety of problems
be confident about the members of our team        resolved by different units is incorporated in

                                                                                                                 C
                                                                                                            AND
and the prospects of the team as a whole.         this system so as to ensure the connection
The training process is focused on key busi-      between motivation and result, whether it is
ness procedures and techniques used by the        business, functional, or operational.




           The Bank’s HR general policy
        is to build a dedicated professional
      team able to meet challenges
            promptly and with
               a high degree
                        of expertise.




60
Sponsorship and Charity                                                                                 Bank Saint Petersburg
                                                                                                        Annual Report 2008



12. SPONSORSHIP AND CHARITY
Most of our sponsor activities are focused           ly grants from the Bank. In     2008, the Bank
on the long-term programmes aimed to sup-            became a general partner of     the Mikhailovsky
port education for young people. In particu-         Theatre and sponsored the       Spartacus ballet
lar, we have continued with our long-term            as well as the Theatre’s tour   abroad.
project supporting the Orphans’ School #
27 in Kolpino district of St Petersburg. Since       The Bank also finances restoration of the his-
2006, the Bank has been the member of the            torical monuments throughout the city. Last
school board. In 2008 we provided financing          year the Bank has started with preparatory
for the renovation of the orphanage’s dormi-         paper work for the restoration of the Got-
tory block, tripling our support for the School      torp globe of the oldest Russian Museum,
compared to 2007.                                    Kunstkamera.

Bank Saint Petersburg actively participates in       In partnership with the city government the



                                                                                                                                   TED
various art and cultural programs within the         Bank implements a number of programmes
city. Since 1993, we have been implementing a        supporting the veterans of the Great Patriotic


                                                                                                                                DA             NTS
long-term multipurpose incentive called Clas-        War, the victims of the Blockade of Leningrad


                                                                                                                          LI
sics and The Future – a joint project of the         and physically disabled people. Being a part-
Committee on Culture of the Administration           ner of the governor-led program “The Duty”
                                                                                                                        O                E  ME
                                                                                                             NS                       TAT
of St Petersburg, St Petersburg Philharmonic         we have financed medical treatment of the



                                                                                                          CO
Society and Bank Saint Petersburg. Under this        senior citizens of St Petersburg in health in-
initiative the children gifted in music get month-   stitutions.
                                                                                                                                L   S
                                                                                                                             A
                                                                                                                       A NCI
                                                                                                                 FIN

                          We are proud
                    to contribute
          to the ongoing development
        of St Petersburg’s social environment
                and are committed
            to continue our efforts.




62
Consolidated Financial Statements                                                                                                                                Annual Report 2008


CONTENTS
INDEPENDENT AUDITORS’ REPORT                                                        66    18   Due to Banks                                                                   106
CONSOLIDATED FINANCIAL STATEMENTS                                                    68   19   Customer Accounts                                                              107
     Consolidated Balance Sheet
                                                                                          20   Bonds Issued                                                                   109
     Consolidated Income Statement

     Consolidated Statement of Changes in Shareholders’ Equity
                                                                                          21   Other Debt Securities in Issue                                                  110
     Consolidated Statement of Cash Flows                                                 22   Other Borrowed Funds                                                            110
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS                                       72   23   Other Financial Liabilities                                                     113
1    Introduction                                                                    72   24   Other Liabilities                                                               113
2    Operating Environment of the Group                                              73   25   Share Capital                                                                   114
3    Basis of Preparation and Significant Accounting Policies                        74   26   Other Reserves                                                                  115
4    Critical Accounting Estimates and Judgements in Applying Accounting Policies    84   27   Interest Income and Expense                                                     115
5    Adoption of New or Revised Standards and Interpretations                        86   28   Fee and Commission Income and Expense                                          116
6    New Accounting Pronouncements                                                   87   29   Administrative and Other Operating Expenses                                    116
7    Cash and Ñash Equivalents                                                       89   30   Income Taxes                                                                    117
8    Trading Securities                                                             90    31   Earnings per Share                                                             120
9    Securities Pledged Under Sale and Repurchase Agreements                         93   32   Dividend                                                                       120
10   Amounts Receivable Under Reverse Repurchase Agreements                          94   33   Segment Analysis                                                               120
11   Due from Banks                                                                  94   34   Financial Risk Management                                                       123
12   Loans and Advances to Customers                                                96    35   Management of Capital                                                          145
13   Held-to-Maturity Investments                                                   102   36   Contingencies, Commitments and Derivative Financial Instruments                147
14   Other Financial Assets                                                         103   37   Fair Value of Financial Instruments                                             151
15   Premises and Equipment and Intangible Assets                                   104   38   Related Party Transactions                                                     156
16   Other Assets                                                                   105   39   Consolidation of the Special Purpose Entity                                     158
17   Long-Term Assets Held-for-Sale                                                 106   40   Subsequent Events                                                               158



64                                                                                                                                                                            65
Independent Auditors’ Report                                                                                                                                            Consolidated Financial Statements



ZAO KPMG                                                         Telephone      +7 (495) 937 4477
Naberezhnaya Tower Complex, Block C                              Fax            +7 (495) 937 4400/99
18 Krasnopresnenskaya Naberezhnaya                               Internet       www.kpmg.ru
Moscow 123317
Russia




INDEPENDENT
AUDITORS’ REPORT
To the Supervisory Board                           solidated financial statements in accordance        An audit involves performing procedures to          Opinion
of OJSC “Bank “Saint Petersburg”                   with International Financial Reporting Stan-        obtain audit evidence about the amounts and
                                                   dards. This responsibility includes: designing,     disclosures in the financial statements. The        In our opinion, the consolidated financial state-
Report on the Consolidated                         implementing and maintaining internal con-          procedures selected depend on the auditor’s         ments present fairly, in all material respects, the
Financial Statements                               trol relevant to the preparation and fair pre-      judgment, including the assessment of the           consolidated financial position of the Group as
                                                   sentation of financial statements that are          risks of material misstatement of the finan-        at 31 December 2008, and its consolidated fi-
We have audited the accompanying consolidat-       free from material misstatements, whether           cial statements, whether due to fraud or er-        nancial performance and its consolidated cash
ed financial statements of OJSC “Bank “Saint       due to fraud or error; selecting and applying       ror. In making those risk assessments, the          flows for the year then ended in accordance
Petersburg” (the “Bank”) and its subsidiaries      appropriate accounting policies; and making         auditor considers internal control relevant to      with International Financial Reporting Stan-
(the “Group”) which comprise the consoli-          accounting estimates that are reasonable in         the entity’s preparation and fair presentation      dards.
dated balance sheet as at 31 December 2008,        the circumstances.                                  of the financial statements in order to design
and the consolidated income statement, con-                                                            audit procedures that are appropriate in the        ZAO KPMG
solidated statement of changes in sharehold-       Auditors’ Responsibility                            circumstances, but not for the purpose of ex-       1 April 2009
ers’ equity and consolidated statement of cash                                                         pressing an opinion on the effectiveness of the
flows for the year then ended, and a summary       Our responsibility is to express an opinion on      entity’s internal control. An audit also includes
of significant accounting policies and other ex-   these consolidated financial statements based       evaluating the appropriateness of accounting
planatory notes.                                   on our audit. We conducted our audit in accor-      principles used and the reasonableness of ac-
                                                   dance with International Standards on Audit-        counting estimates made by management, as
Management’s Responsibility                        ing. Those standards require that we comply         well as evaluating the overall presentation of
for the Financial Statements                       with relevant ethical requirements and plan         the financial statements.
                                                   and perform the audit to obtain reasonable          We believe that the audit evidence we have
Management is responsible for the prepa-           assurance whether the financial statements          obtained is sufficient and appropriate to pro-
ration and fair presentation of these con-         are free of material misstatement.                  vide a basis for our opinion.




66                                                                                                                                                                                                       67
Consolidated Balance Sheet                                                                                                                                                              Consolidated Income Statement

OJSC “BANK “SAINT PETERSBURG” GROUP                                                                                     OJSC “BANK “SAINT PETERSBURG” GROUP
CONSOLIDATED BALANCE SHEET AS AT 31 DECEMBER 2008                                                                       CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31 DECEMBER 2008
IN THOUSANDS OF RUSSIAN ROUBLES                           NOTE      31 DECEMBER 2008             31 DECEMBER 2007       IN THOUSANDS OF RUSSIAN ROUBLES                        NOTE                2008            2007
ASSETS
Cash and cash equivalents                                   7                       36 841 326             9,612,448    Interest income                                         27             19 130 078        9,175,824

Mandatory cash balances with the Central Bank                                                                           Interest expense                                        27            (9 626 639)      (4,508,261)
                                                                                       212 921              1,551,913
of the Russian Federation
Trading securities                                          8                       2 692 385             11,650,690
                                                                                                                        NET INTEREST INCOME                                                 9 503 439        4 667 563
Securities pledged under sale and repurchase agreements     9                        1 470 526               517,834
Amounts receivable under reverse repurchase agreements      10                               -               916 651    Provision for loan impairment                          11, 12         (3 395 949)     (1,006,886)

Due from banks                                              11                      19 175 864            6 736 881
                                                                                                                        NET INTEREST INCOME
Loans and advances to customers                             12                  144 882 501               91 730 134                                                                        6 107 490        3 660 677
                                                                                                                        AFTER PROVISION FOR LOAN IMPAIRMENT
Investment securities held-to-maturity                      13                         777 591                      -
Other financial assets                                      14                         214 561               155,031    (Losses less gains)/gains less losses
                                                                                                                                                                                              (1 258 323)           71,346
Prepaid income tax                                                                           -               93,946     from trading securities

Premises and equipment                                      15                      6 945 944              3,433,461    Losses less gains from other securities
                                                                                                                                                                                                         -        (22,715)
                                                                                                                        at fair value through profit or loss
Intangible assets                                           15                            974                   1,016
                                                                                                                        Gains less losses from trading in foreign currencies                     979 997          286,322
Other assets                                                16                         362 811              256,207
Long-term assets held-for-sale                              17                       2 137 985                      -   Foreign exchange translation gains less losses                           381 546            57,780

TOTAL ASSETS                                                                215 715 389              126 656 212        Fee and commission income                               28               1 715 123      1,065,048

LIABILITIES                                                                                                             Fee and commission expense                              28             (329 082)         (175,670)

Due to banks                                                18                  32 320 089                  677,266     Provision for impairment
                                                                                                                                                                                13               (19 840)                 -
                                                                                                                        of investment securities held-to-maturity
Customer accounts                                           19                  139 824 479               88,728,772
                                                                                                                        Release of provision
Bonds issued                                               20                        9 933 581             6,587,222                                                            15                       -         33,566
                                                                                                                        for impairment of premises
Other debt securities in issue                              21                       4 336 891             7,425,303
                                                                                                                        Gain on disposal of investments in subsidiary                                    -             871
Other borrowed funds                                        22                      9 598 851              7,641,887
Other financial liabilities                                 23                         231 703                57,012    Other net operating income                                                119 664          89,759

Income tax liabilities                                                                   1 025                      -   Administrative and other operating expenses             29
Deferred income tax liability                              30                           67 125               248,131
                                                                                                                            Staff costs                                                      (2 060 460)        (1,313,797)
Other liabilities                                          24                         596 896               285,556
                                                                                                                            Costs related to Group’s premises
                                                                                                                                                                                                (471 365)       (335 397)
TOTAL LIABILITIES                                                          196 910 640                111 651 149           and equipment

                                                                                                                            Other administrative and operating expenses                        (1 319 732)       (779 831)
SHAREHOLDERS’ EQUITY
Share capital                                               25                      3 564 330             3,564,330
                                                                                                                        PROFIT BEFORE TAX                                                    3 845 018       2 637 959
Share premium                                               25                      9 725 450             9,725,450
Revaluation reserve for premises                                                    2 209 624               1,141,992   Income tax expense                                      30             (1 071 252)       (628,751)
Retained earnings                                                                   3 305 345                573,291
                                                                                                                        PROFIT FOR THE YEAR                                                 2 773 766        2 009 208
TOTAL SHAREHOLDERS’ EQUITY                                                   18 804 749               15 005 063

TOTAL LIABILITIES                                                                                                       BASIC AND DILUTED EARNINGS PER ORDINARY SHARE
                                                                         215 715 389                126 656 212         (IN RUSSIAN ROUBLES PER SHARE)
                                                                                                                                                                                31                   9.8              8.9
AND SHAREHOLDERS’ EQUITY
Approved for issue and signed on behalf of the Supervisory Board on 1 April 2009.


A.V. Savelyev                                                    S.E. Lobach
Chairman of the Board                                            Chief Accountant


68                                                                                                                                                                                                                   69
Consolidated Statement of Changes in Shareholders’ Equity                                                                                                                                                            Consolidated Statement of Cash Flows

OJSC “BANK “SAINT PETERSBURG” GROUP                                                                                        OJSC “BANK “SAINT PETERSBURG” GROUP
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY                                                                  CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR
FOR THE YEAR ENDED 31 DECEMBER 2008                                                                                        ENDED 31 DECEMBER 2008

                                               ATTRIBUTABLE TO EQUITY HOLDERS OF THE BANK                                  IN THOUSANDS OF RUSSIAN ROUBLES                                                               NOTE            2008              2007
                                                                                                                           Cash flows from operating activities
                                       Note.        Share         Share   Revaluation         Retained      Total equity   Interest income received on loans and correspondent accounts                                               17 687 462         8 570 696
                                                   capital     premium     reserve for       earnings/                     Interest income received on securities                                                                         889 472          544 393
                                                                             premises    (accumulated                      Interest on securities pledged under sale and repurchase agreements                                            498 700                  -
                                                                                                                           Interest expense paid on due to banks                                                                       (687 830)            (81 153)
                                                                                                deficit)
                                                                                                                           Interest expense paid on customer deposits                                                               (6 270 843)        (2 617 356)
                                                                                                                           Interest expense paid on other debt securities in issue                                                      (577 452)         (167 958)
BALANCE                                                                                                                    Net (loss)/income received from securities trading                                                         (1 093 151)            93 074
                                               3 483 580     1 925 556      498 698      (1 401 310)       4 506 524       Net income received from trading in foreign currencies                                                       1 109 590           278 351
AS AT 1 JANUARY 2007                                                                                                       Fees and commissions received                                                                                 1 713 520       1 089 385
                                                                                                                           Fees and commissions paid                                                                                   (329 082)          (175 670)
Revaluation of premises                 15              -             -      846 439                  -        846,439     Other net operating income received                                                                            103 606            66 399
Deferred income tax                     15,                                                                                Staff costs                                                                                               (1 918 069)        (1 115 020)
                                                        -             -     (203 145)                 -       (203 145)    Costs related to premises and equipment                                                                       (227 321)       (286 541)
recognised directly in equity           30
                                                                                                                           Other administrative and operating expenses                                                               (1 333 502)          (647 192)
Income recognised directly in equity                    -             -      643 294                  -        643 294     Income tax paid                                                                                          (1 349 064)          (703 853)

Profit for the year                                     -             -             -       2,009,208        2,009,208     CASH FLOWS FROM OPERATING ACTIVITIES
                                                                                                                                                                                                                                     8 216 036         4 847 555
                                                                                                                           BEFORE CHANGES IN OPERATING ASSETS AND LIABILITIES
TOTAL RECOGNISED                                                                                                           Changes in operating assets and liabilities
                                                                                                           2 652 502
INCOME FOR 2007                                                                                                            Net decrease/(increase) in mandatory cash balances with the Central Bank of the Russian
                                                                                                                                                                                                                                      1 338 992          (778 755)
                                                                                                                           Federation
                                                        -             -                                                    Net decrease/(increase) in trading securities                                                              5 212 332       (5 634 528)
                                                                                                                           Net decrease in other securities at fair value through profit or loss                                              24         1 241 984
Share issue                             25        80,750      7,799,894             -                 -     ,7 880 644     Net increase in securities pledged under sale and repurchase agreements                                  (6 337 914)         (501 949)
                                                                                                                           Net decrease/(increase) in amounts receivable under reverse repurchase agreements                             916 150         (916 150)
Dividends declared                                                                                                         Net increase in due from banks                                                                           (9 265 017)       (4 981 649)
    Ordinary shares                     32              -             -             -         (32,396)         (32,396)    Net increase in loans and advances to customers                                                         (48 155 762)       (53 699 211)
                                                                                                                           Net decrease in other financial assets                                                                        (8 109)          (62 519)
    Preference shares                   32              -             -             -           (2,211)          (2,211)   Net increase in other assets                                                                               (50 896)            (16 592)
                                                                                                                           Net increase in due to banks                                                                               31 154 311           261 864
                                                                                                                           Net increase in customer accounts                                                                         45 472 216        43 648 395
                                                                                                                           Net (decrease)/increase in other debt securities in issue                                                (3 071 748)         4 559 283
BALANCE                                                                                                                    Net decrease in other financial liabilities                                                                   (2 901)           (10 097)
                                               3 564 330     9 725 450    1 141 992          573 291       15 005 063      Net increase in other liabilities                                                                            164 830              14 741
AS AT 31 DECEMBER 2007
                                                                                                                           NET CASH FROM/(USED IN) OPERATING ACTIVITIES                                                             25 582 544       (12 027 628)
Revaluation of premises and
                                        15              -             -    1 259 409                  -      1 259 409     Cash flows from investing activities
constructions
                                                                                                                           Acquisition of premises and equipment and intangible assets                                    15        (2 690 703)        (1 117 339)
Deferred income tax                     15,                                                                                Proceeds from disposal of premises and equipment and intangible assets                                       193 627              4 755
                                                        -             -     (251 882)                 -       (251,882)    Proceeds from purchase of investment securities available-for-sale                                          (42 638)                   -
recognised directly in equity           30
                                                                                                                           Cash outflow from disposal of subsidiary                                                                           -           (4 040)
Effect of change in income tax                                                                                             Dividend income received                                                                                      15 997              11 917
                                        30              -             -       60 105                  -         60 105
rate on deferred tax
                                                                                                                           NET CASH USED IN INVESTING ACTIVITIES                                                                    (2 523 717)       (1 104 707)
                                                                                                                           Cash flows from financing activities
Income recognised directly in equity                    -             -     1 067 632                 -       1 067 632    Issue of ordinary shares
                                                                                                                                Share capital                                                                             25                   -            80 750
Profit for the year                                     -             -             -        2 773 766        2 773 766         Share premium                                                                             25                   -         7 732 405
                                                                                                                           Issue of bonds                                                                                              2 176 750        2 454 620
TOTAL RECOGNISED                                                                                                           Proceeds from other borrowed funds                                                                         5 633 730           6 113 621
                                                                                                            3 841 398      Repayment of other borrowed funds                                                                        (4 329 800)        (1 683 781)
INCOME FOR 2008                                                                                                            Interest paid on issued bonds                                                                               (756 481)        (455 063)
                                                                                                                           Interest paid on other borrowed funds                                                                       (611 966)         (312 798)
                                                                                                                           Dividends paid                                                                                               (40 597)           (33 571)
Dividends declared
    Ordinary shares                     32              -             -             -         (39 501)         (39 501)    NET CASH FROM FINANCING ACTIVITIES                                                                      2 071 636         13 896 183
    Preference shares                   32              -             -             -           (2 211)          (2 211)
                                                                                                                           EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS                                           2 098 415              91 932
BALANCE
                                               3 564 330     9 725 450    2 209 624        3 305 345        18 804 749
AS AT 31 DECEMBER 2008                                                                                                     NET INCREASE IN CASH AND CASH EQUIVALENTS                                                              27 228 878            855 780
                                                                                                                           Cash and cash equivalents at the beginning of the year                                                     9 612 448         8 756 668



                                                                                                                           CASH AND CASH EQUIVALENTS AT THE END OF THE YEAR                                               7       36 841 326         9 612 448




70                                                                                                                                                                                                                                                           71
Introduction                                                                                                                                                     Operating Environment of the Group



1. INTRODUCTION
These consolidated financial statements          kiy (31 December 2007: 11.4%) and 11.4%          Registered address and place of busi-                2008 and to USD 384 074 000 thousand as
have been prepared in accordance with In-        (2007: 11.4%) of the shares are controlled       ness. The Bank’s registered address and place        at 1 March 2009.
ternational Financial Reporting Standards        by Mr. Korzhev. The remaining 28.9% (2007:       of business is: 191167, Russian Federation, St
for the year ended 31 December 2008 for          28.3%) of the shares are widely held.            Petersburg, Nevskiy Prospect, 178À.                  Events in the financial markets have affected
OJSC “Bank “Saint Petersburg” (the “Bank”)                                                                                                             the commodity market. The price for Urals
and a controlled special purpose entity BSPB     Principal activity. The Bank’s principal         Presentation currency. These consolidated            blend oil has decreased from USD 96.4 in Sep-
Finance plc (together referred to as the         business activity is commercial banking op-      financial statements are presented in thou-          tember, 2008 to USD 38.1 in December, 2008
“Group” or OJSC “Bank “Saint Petersburg”         erations within the Russian Federation. The      sands of Russian Roubles (“RR thousand”).            and has increased to USD 41.9 in February,
Group”).                                         Bank has operated under a full banking                                                                2009.
                                                 license issued by the Central Bank of the
The Bank was formed in 1990 as an open           Russian Federation (“CBRF”) since 1997. The                                                           The tax, currency and customs legislation with-
joint stock company under the Laws of the        Bank takes part in the state deposit insurance   2. OPERATING                                         in the Russian Federation is subject to varying
Russian Federation as the result of the pri-     system introduced by Federal Law No.177-FZ          ENVIRONMENT                                       interpretations, and changes, which can occur
vatisation process of the former Leningrad       “Deposits of individuals insurance in the Rus-                                                        frequently. Furthermore, the need for further
regional office of Zhilsotsbank. The Bank is     sian Federation” dated 23 December 2003.            OF THE GROUP                                      developments in the bankruptcy laws, the ab-
an open joint stock company.                     The state deposit Insurance agency system                                                             sence of formalised procedures for the reg-
                                                 repayment of 100% of individual deposits         Russian Federation. The economy of the               istration and enforcement of collateral, and
As at 31 December 2008, 29.9% of the or-         up to RR 100 thousand and repayment of           Russian Federation displays certain characteris-     other legal and fiscal impediments contribute
dinary shares of the Bank are controlled by      90% of individual deposits up to a limit of      tics of an emerging market, including a rather       to the difficulties experienced by banks cur-
Mr. A.V. Savelyev (2007: 24.6%). The rest        RR 700 thousand per individual in case of        high rate of inflation. In spite of the recent ac-   rently operating in the Russian Federation. The
of the management of the Bank controls a         the withdrawal of a license of a bank or a       tive economic growth, during 2008, especially        future economic direction of the Russian Fed-
further 10.7% of the ordinary shares of the      CBRF imposed moratorium on payments.             in the fourth quarter, the financial environ-        eration is largely dependent upon the effec-
Bank (2007: 13.3%). As at 31 December 2008,                                                       ment in Russia has considerably deteriorated.        tiveness of economic, financial and monetary
the company “Systemnye Tehnologii” owned         A reorganisation of the Bank’s branches was      As a result of uncertainty in the financial and      measures undertaken by the Government, to-
14.5% of the ordinary shares of the Bank         held in the first part of 2008. The branches     primary markets as well of other factors, there      gether with tax, legal, regulatory, and political
(2007: 11%). Mr. A.V. Savelyev purchased         located in Saint Petersburg were reorganised     has been a significant decrease in the Russian       developments.
a 19% interest in the company “Systemnye         as supplementary offices. As at 31 December      securities markets. Since September 2008 the
Tehnologii”. In addition Mr. A.V. Savelyev has   2008, the Bank had 4 branches within the         currency markets have seen significant volatil-      Russian Banking sector. The second half
an option to purchase 81% of the interest        Russian Federation (2 branches are located       ity and a devaluation of the Russian national        of 2008 saw decreases in the level of liquidity
in the company “Systemnye Tehnologii”. This      in North-West region of Russia, 1 branch is      currency (RR) in relation to certain foreign cur-    in the Banking sector and increases of inter-
option was signed in 2007, in March 2008         in Moscow, 1 branch is in Niznniy Novgorod)      rencies. The official CBRF exchange rate has         bank lending rates, as well as volatility of share
it was extended until 2010 and can be exer-      and 32 supplementary offices. In 2007 the        changed from RR 25.37 for 1 USD as at 1 Oc-          and currency markets.
cised at any time before 1 April 2010. There     Bank had 11 branches within the Russian          tober 2008 to RR 29.38 for 1 USD as at 31
is no contractual agreement between any          Federation (10 branches were located in the      December 2008 and to RR 35.72 for 1 USD as           Several measures to support the Russian Bank-
members of management team and Mr A.V.           North-West region of Russia, 1 branch in         at 1 March 2009.                                     ing sector were taken by the Russian authori-
Savelyev on joint control of the Bank. There     Moscow) and 21 supplementary offices.                                                                 ties including:
is no ultimate controlling party in the Bank.                                                     The international reserves of the Russian Fed-
                                                 Special purpose entity BSPB Finance plc is       eration decreased from USD 556 813 000                   In October 2008 the CBRF decreased the
Other shareholders of the Bank are: 4.6%         used by the Bank for its Eurobond issue (see     thousand as at 30 September 2008 to USD              mandatory reserves ratio to 0.5% and increased
of the shares are controlled by Mr. Troits-      Note 20).                                        427 080 000 thousand as at 31 December               the maximum of deposits fully insured under




72                                                                                                                                                                                                  73
Operating Environment of the Group                                                                                                                    Basis of Preparation and Significant Accounting Policies



the state deposit insurance system to RR 700         ods presented in these consolidated financial         are directly attributable to the acquisition, is-    recognition less any principal repayments, plus
thousand per individual, in case of withdrawal       statements.                                           sue or disposal of a financial instrument. An        accrued interest, and for financial assets less
of the bank’s license or CBRF moratorium on                                                                incremental cost is one that would not have          any write-down for incurred impairment loss-
payments;                                            Consolidation. Subsidiaries are companies             been incurred if the transaction had not taken       es. Accrued interest includes amortisation of
                                                     and other entities (including special purpose         place. Transaction costs include fees and com-       transaction costs deferred at initial recognition
     The list of assets provided as collateral for   entities) in which the Group, directly or indi-       missions paid to agents (including employees         and of any premium or discount to maturity
repurchase agreements with the CBRF was sig-         rectly, has an interest of more than one half         acting as selling agents), advisors, brokers and     amount using the effective interest method.
nificantly increased;                                of the voting rights or otherwise has power           dealers, levies by regulatory agencies and secu-     Accrued interest income and accrued interest
                                                     to govern the financial and operating policies        rities exchanges, and transfer taxes and duties.     expense, including both accrued coupon and
    The terms and conditions of lending with         so as to obtain benefits. The existence and ef-       Transaction costs do not include debt premi-         amortised discount or premium (including fees
the use of certain types of pledge have been         fect of potential voting rights that are pres-        ums or discounts, financing costs or internal        deferred at origination, if any), are not pre-
mitigated, non-collateralized loans are grant-       ently exercisable or presently convertible are        administrative or holding costs.                     sented separately and are included in the car-
ed;                                                  considered when assessing whether the Group                                                                rying values of related balance sheet items.
                                                     controls another entity. Subsidiaries are consoli-    Fair value is the amount for which an as-
    The CBRF is allowed to partially compen-         dated from the date on which control is trans-        set could be exchanged, or a liability settled,      The effective interest method is a meth-
sate losses arising from commercial banks op-        ferred to the Group (acquisition date) and are        between knowledgeable, willing parties in an         od of allocating interest income or interest ex-
erations on the money market, if they arise          de-consolidated from the date that control            arm’s length transaction. Fair value is the cur-     pense over the relevant period so as to achieve
as a result of withdrawal of a correspondent         ceases.                                               rent bid price for financial assets and current      a constant periodic rate of interest (effective
bank’s license;                                                                                            asking price for financial liabilities which are     interest rate) on the carrying amount. The ef-
                                                     The Group holds zero interest in the share            quoted in an active market. For assets and li-       fective interest rate is the rate that exactly dis-
    Subordinated loans have been provided by         capital of a fully consolidated special purpose       abilities with offsetting market risks, the Group    counts estimated future cash payments or re-
the CBRF to increase banks’ capital.                 entity BSPB Finance plc. However, the Group           may use mid-market prices as a basis for es-         ceipts (excluding future credit losses) through
                                                     obtains all the rewards and risks from the ac-        tablishing fair values for the offsetting risk       the expected life of the financial instrument or
                                                     tivities of this company. Refer to Note 39.           positions and apply the bid or asking price to       a shorter period, if appropriate, to the net car-
                                                                                                           the net open position as appropriate. A fi-          rying amount of the financial instrument. The
3. BASIS OF PREPARATION                              Intercompany transactions, balances and unre-         nancial instrument is regarded as quoted in an       effective interest rate discounts cash flows of
   AND SIGNIFICANT                                   alised gains arising from intercompany transac-       active market if quoted prices are readily and       variable interest instruments to the next inter-
                                                     tions are eliminated; unrealised losses are also      regularly available from an exchange or other        est repricing date except for the premium or
   ACCOUNTING POLICIES                               eliminated unless the cost cannot be recovered.       institution and those prices represent actual        discount which reflects the credit spread over
                                                     The Bank and all of its subsidiaries use uniform      and regularly occurring market transactions an       the floating rate specified in the instrument,
Basis of Preparation. These consolidated             accounting policies consistent with the Group’s       arm’s length basis.                                  or other variables that are not reset to market
financial statements have been prepared in ac-       policies.                                                                                                  rates. Such premiums or discounts are amor-
cordance with International Financial Reporting                                                            Valuation techniques such as discounted cash         tised over the whole expected life of the instru-
Standards (“IFRS”) under the historical cost         Key measurement terms. Depending on                   flows models or models based on recent arm’s         ment. The present value calculation includes all
convention, as modified by initial financial in-     their classification financial instruments are car-   length transactions or consideration of finan-       fees and points paid or received between par-
struments fair value recognition, the revalua-       ried at cost, fair value, or amortised cost as        cial data of the investees are used to fair value    ties to the contract that are an integral part of
tion of premises, trading securities, other secu-    described below.                                      certain financial instruments for which exter-       the effective interest rate (refer to income and
rities categorised as at fair value through profit                                                         nal market pricing information is not available.     expense recognition policy).
or loss and financial instruments available-for-     Cost is the amount of cash or cash equiva-            Valuation techniques may require assumptions
sale. The principal accounting policies applied in   lents paid or the fair value of the other con-        not supported by observable market data.             Initial recognition of financial instru-
the preparation of these consolidated financial      sideration given to acquire an asset at the time                                                           ments. Trading securities, derivatives and
statements are set out below. These policies         of its acquisition and includes transaction costs.    Amortised cost is the amount at which the            other securities at fair value through profit or
have been consistently applied to all the peri-      Transaction costs are incremental costs that          financial instrument was recognised at initial       loss are initially recorded at fair value. All other




74                                                                                                                                                                                                             75
Basis of Preparation and Significant Accounting Policies                                                                                                           Notes to the Consolidated Financial Statements



financial instruments are initially recorded at fair   As at 31 December 2008, the official rate of          using the effective interest method is pre-            from a customer due on fixed or determinable
value plus transaction costs. Fair value at initial    exchange used for translating foreign currency        sented in the consolidated income statement            dates and has no intention of trading the re-
recognition is best evidenced by the transac-          balances was USD 1 = RR 29.3804 and EURO              as interest income. Dividends are included in          ceivable. Loans and advances to customers are
tion price. A gain or loss on initial recognition      1 = RR 41.4411 (2007: USD 1 = RR 24.5462              other operating income when the Group’s right          carried at amortised cost.
is only recorded if there is a difference be-          and EURO 1 = RR 35.9332).                             to receive the dividend payment is established.
tween fair value and transaction price, which                                                                All other elements of the changes in the fair          Impairment of financial assets carried
can be evidenced by other observable current           Cash and cash equivalents. Cash and cash              value and gains or losses on derecognition are         at amortised cost. Impairment losses are
market transactions in the same instrument or          equivalents are items which can be converted          recorded in profit or loss as gains less losses        recognised in profit or loss when incurred as
by a valuation technique whose inputs include          into cash within a day and are subject to insig-      from trading securities in the period in which         a result of one or more events (“loss events”)
only data from observable markets.                     nificant change in value. All short term inter-       they arise.                                            that occurred after the initial recognition of the
                                                       bank placements, including overnight deposits,                                                               financial asset and which have an impact on
All purchases and sales of financial instruments       are included in cash and cash equivalents, all        Other securities at fair value through                 the amount or timing of the estimated future
that require delivery within the time frame es-        other interbank placements are recognized in          profit or loss. Other securities at fair value         cash flows of the financial asset or group of
tablished by regulation or market convention           due from banks. Amounts, which relate to              through profit or loss are securities designated       financial assets that can be reliably estimated.
(“regular way” purchases and sales) are re-            funds that are of a restricted nature, are ex-        irrevocably, at initial recognition, into this cat-    If the Group determines that no objective evi-
corded at trade date, which is the date that           cluded from cash and cash equivalents. Cash           egory. The management designates securities            dence exists that impairment was incurred for
the Group commits to deliver a financial in-           and cash equivalents are carried at amortised         into this category only if (a) such classification     an individually assessed financial asset, wheth-
strument. All other purchases and sales are            cost.                                                 eliminates or significantly reduces an account-        er significant or not, it includes the asset in a
recognised when a company becomes a party                                                                    ing mismatch that would otherwise arise from           group of financial assets with similar credit risk
to the contractual provisions of the financial         Mandatory cash balances with the                      measuring assets or liabilities or recognising the     characteristics and collectively assesses them
instrument.                                            CBRF. Mandatory cash balances with the                gains and losses on them on different basis;           for impairment. The primary factors that the
                                                       CBRF are carried at amortised cost and rep-           or (b) a group of financial assets, financial lia-     Group considers whether a financial asset is
Foreign currency translation. Functional               resent non-interest bearing mandatory reserve         bilities or both is managed and its performance        impaired is its overdue status and realisability
currency of the Group’s entities is the currency       deposits which are not available to finance           is evaluated on a fair value basis, in accordance      of related collateral, if any. The following other
of the primary economic environment in which           the Group’s day to day operations and hence           with a documented risk management provi-               principal criteria are also used to determine that
the entity operates. The Bank’s and its sub-           are not considered as part of cash and cash           sion, and information on that basis is regularly       there is objective evidence that an impairment
sidiaries’ functional currency and the Group’s         equivalents for the purposes of the cash flow         provided to and reviewed by the Bank’s top             loss has occurred:
presentation currency is the national curren-          statement.                                            management personnel.
cy of the Russian Federation, Russian Rouble                                                                                                                            any instalment is overdue and the late pay-
(“RR”).                                                Trading securities. Trading securities are            Recognition and measurement of this category           ment cannot be attributed to a delay caused
                                                       securities, classified as financial assets at fair    of financial assets is consistent with the above       by the settlement systems;
Currency monetary assets and liabilities are           value through profit or loss which are classified     policy for trading securities.
translated into Russian Roubles at the official        as held for trading, as they are acquired for                                                                    the borrower experiences a significant fi-
CBRF exchange rate at the respective balance           generating a profit from short-term fluctua-          Due from banks. Amounts due from banks                 nancial difficulty as evidenced by borrower’s
sheet date. Translation differences on mone-           tions in price or trader’s margin, or are securi-     are recorded when the Group advances mon-              financial information that the Group obtains;
tary assets and liabilities are included in foreign    ties included in a portfolio in which a pattern       ey to counterparty banks with no intention of
exchange translation gains and losses in the           of short-term trading exists. The Group clas-         trading the instrument. Amounts due from                  the borrower considers bankruptcy or a fi-
profit or loss. Translation at the rates effective     sifies securities into trading securities if it has   banks are carried at amortised cost.                   nancial reorganisation;
as at the end of the reporting period does not         an intention to sell them within a short period
apply to non-monetary items, including equity          after purchase, within six months.                    Loans and advances to customers. Loans                     there is adverse change in the payment
investments. Effects of exchange rate changes                                                                and advances to customers are recorded when            status of the borrower as a result of changes
on the fair value of equity securities are re-         Trading securities are carried at fair value. In-     the Group advances money to purchase or                in the national or local economic conditions
corded as part of the fair value gain or loss.         terest earned on trading securities calculated        originate an unquoted non-derivative receivable        that impact the borrower;




76                                                                                                                                                                                                               77
Basis of Preparation and Significant Accounting Policies                                                                                                            Notes to the Consolidated Financial Statements



    the value of collateral significantly de-         nancial asset reflects the cash flows that may           profit or loss when incurred as a result of one       Investment securities held-to-maturity
creases as a result of deteriorating market           result from foreclosure less costs for obtaining         or more events (“loss events”) that occurred          are quoted non-derivative financial assets with
conditions;                                           and selling the collateral, whether or not fore-         after the initial recognition of investment se-       fixed or determinable payments and fixed ma-
                                                      closure is probable.                                     curities available-for-sale. A significant or pro-    turity, which the management of the Group
   implementation of the borrower’s invest-                                                                    longed decline in the fair value of an equity         has firm intention and ability to hold to matu-
ment plans is delayed;                                If, in a subsequent period, the amount of the            security below its cost is an indicator that it is    rity. The Group’s management determines the
                                                      impairment loss decreases and the decrease               impaired. If, in a subsequent period, the fair        classification of investment securities held-to-
      the Group expects difficulties in servicing     can be related objectively to an event occur-            value of a debt instrument classified as avail-       maturity at their initial recognition and reas-
the borrower’s debt due to volatility of the          ring after the impairment was recognised (such           able for sale increases and the increase can be       sesses the appropriateness of that classification
borrower’s cash flows caused by its cyclic ac-        as an improvement in the debtor’s credit rat-            objectively related to an event occurring after       at each balance sheet date. Investments held-
tivity or irregularity of proceeds.                   ing), the previously recognised impairment loss          the impairment loss was recognised in consoli-        to-maturity are measured at amortised cost.
                                                      is reversed by adjusting the allowance account           dated profit or loss, the impairment loss is re-
For the purposes of a collective evaluation of        through consolidated profit or loss.                     versed through current period’s consolidated          Promissory notes purchased. Promisso-
impairment, financial assets are grouped on the                                                                profit or loss.                                       ry notes purchased are included in due from
basis of similar credit risk characteristics. Those   Uncollectible assets are written off against                                                                   banks and loans and advances to customers
characteristics are relevant to the estimation of     the related impairment loss provision after all          Advances payable. Advances payable are                based on their substance and are recorded and
future cash flows for groups of such assets by        the necessary procedures to recover the asset            recognised, if the Group made a prepayment            subsequently remeasured and accounted in ac-
being indicative of the debtors’ ability to pay       fully or partially have been completed and the           under a contract for services that are not yet        cordance with the accounting policies for this
all amounts due according to the contractual          amount of the loss has been determined.                  provided, and are recorded at amortised cost.         category of assets.
terms of the assets being evaluated.
                                                      Investment securities available-for-                     Sale and repurchase agreements. Sale                  Derecognition of financial assets. The
Future cash flows in a group of financial assets      sale. This classification includes investment se-        and repurchase agreements (“repo agree-               Group derecognises financial assets when (a)
that are collectively evaluated for impairment        curities which the Group intends to hold for an          ments”) which effectively provide a lender’s          the assets are redeemed or the rights to cash
are estimated on the basis of the contractual         indefinite period of time and which may be sold          return to the counterparty are treated as se-         flows from the assets otherwise expired or (b)
cash flows of the assets and the experience           in response to needs for liquidity or changes in         cured financing transactions. Securities sold un-     the Group has transferred the rights to the
of management in respect of the extent to             interest rates, exchange rates or equity prices.         der such sale and repurchase agreements are           cash flows from the financial assets or entered
which amounts will become overdue as a re-            The Group classifies investments as available            not derecognised. The securities are not reclas-      into a qualifying pass-through arrangement
sult of past loss events and the success of           for sale at the time of purchase.                        sified in the balance sheet unless the trans-         while (i) also transferring substantially all the
recovery of overdue amounts. Past experience                                                                   feree has the right by a contract or custom           risks and rewards of ownership of the assets
is adjusted on the basis of current observable        Investment securities available-for-sale are car-        to sell or repledge the securities, in which case     or (ii) neither transferring nor retaining sub-
data to reflect the effects of current condi-         ried at cost, as the Group can not measure               they are reclassified as repurchase receivables.      stantially all risks and rewards of ownership
tions that did not affect past periods and to         their fair value with sufficient level of reliability.   The corresponding liability is presented within       but not retaining control. Control is retained if
remove the effects of past conditions that do         Dividends on available-for-sale equity instru-           amounts due to banks or customer accounts,            the counterparty does not have the practical
not exist currently.                                  ments are recognised in profit or loss when the          as appropriate.                                       ability to sell the asset in its entirety to an un-
                                                      Group’s right to receive payment is established                                                                related third party without needing to impose
Impairment losses are recognised through an           and it is probable that the dividends will be            Securities purchased under agreements to re-          additional restrictions on the sale.
allowance account to write down the asset’s           collected. All other components of changes in            sell (“reverse repo agreements”) are recorded
carrying amount to the present value of ex-           the fair value are recognised directly in equity un-     as due from banks or loans and advances to            Premises and equipment. Premises and
pected cash flows (which exclude future credit        til the investments are derecognised or impaired,        customers, as appropriate. The difference be-         equipment are stated at cost, restated to
losses that have not been incurred) discounted        the cumulative gain or loss previously recognised        tween the sale and repurchase price is treated        the equivalent purchasing power of the Rus-
at the effective interest rate of the asset. The      in equity is recognised in profit or loss.               as interest income and accrued over the life of       sian Rouble at 31 December 2002 for assets
calculation of the present value of the esti-                                                                  repo agreements using the effective interest          acquired prior to 1 January 2003, or revalued
mated future cash flows of a collateralised fi-       Impairment losses are recognised in consolidated         method.                                               amounts, as described below, less accumulated




78                                                                                                                                                                                                                 79
Basis of Preparation and Significant Accounting Policies                                                                                                        Notes to the Consolidated Financial Statements



depreciation and provision for impairment,            Depreciation. Land is not depreciated. De-           total lease payments are charged to profit or         The non-derivative liability is carried at amor-
where required.                                       preciation on other items of premises and            loss on a straight-line basis over the period of      tised cost.
                                                      equipment is calculated using the straight-          the lease.
Premises of the Group are subject to revaluation      line method to allocate their cost or revalued                                                             Customer accounts. Customer accounts are
on a regular basis. The frequency of revaluation      amounts to their residual values over their esti-    Long term assets held-for-sale. Long                  non-derivative liabilities to individuals, state or
depends upon the movements in the fair values         mated useful lives:                                  term assets and disposal groups (which may            corporate customers and are carried at amor-
of the premises and equipment being revalued.                                                              include both non-current and current as-              tised cost.
The revaluation reserve for premises included in          Premises: 50 years;                              sets) are presented in the balance sheet as
equity is transferred directly to retained earnings                                                        long term assets held for sale if their carrying      Other debt securities in issue. Other
when the surplus is realised, i.e. either on the          Office and computer equipment: 5 years;          amount will be recovered principally through          debt securities in issue include bonds, promis-
retirement or disposal of the asset.                                                                       a sale transaction within twelve months after         sory notes and certificates of deposit issued by
                                                          Leasehold improvements: over the term of         the balance sheet date. These assets are re-          the Group. Debt securities are stated at am-
Construction in progress is carried at cost less      the underlying lease                                 classified when all of the following conditions       ortised cost. If the Group purchases its own
provision for impairment where required. Upon                                                              are met: (a) assets are available for immediate       debt securities in issue, they are removed from
completion, assets are transferred to premises        The residual value of an asset is the estimated      sale in their present condition; (b) the Group’s      the consolidated balance sheet and the differ-
and equipment at their carrying amount. Con-          amount that the Group would currently obtain         management approved and initiated an active           ence between the carrying amount of the li-
struction in progress is not depreciated until        from disposal of the asset less the estimated        programme to locate a buyer; (c) the assets           ability and the consideration paid is included in
the asset is available for use.                       costs of disposal, if the asset were already of      are actively marketed for a sale at a reasonable      other income.
                                                      the age and in the condition expected at the         price; (d) the sale is expected within one year
All other items of premises and equipment are         end of its useful life. The residual value of an     and (e) it is unlikely that significant changes to    Other borrowed funds. Other borrowed
stated at cost less accumulated depreciation          asset is nil if the Group expects to use the as-     the plan to sell will be made or that the plan        funds include liabilities to state or corporate
and impairment losses, if any.                        set by the end of its physical life. The assets’     will be withdrawn. Long term assets or disposal       customers and are carried at amortised cost.
                                                      residual values and useful lives are reviewed,       groups classified as held-for-sale in the current
Costs of minor repairs and maintenance are            and adjusted if appropriate, at each balance         period’s balance sheet are not reclassified or        Derivative financial instruments. Deriva-
expensed when incurred. Cost of replacing             sheet date.                                          re-presented in the comparative balance sheet         tive financial instruments, including foreign ex-
major parts or components of premises and                                                                  to reflect the classification at the end of the       change forwards, futures and swaps, are car-
equipment items are capitalised and the re-           Intangible assets. All of the Group’s intan-         current reporting period.                             ried at their fair value.
placed part is retired.                               gible assets have definite useful life and pri-
                                                      marily include capitalised computer software.        Long term assets and disposal groups held-            All derivative instruments are carried as assets
If impaired, premises and equipment are writ-                                                              for-sale are measured at the lower of carrying        when fair value is positive and as liabilities when
ten down to the higher of their value in use          Acquired computer software licenses are capi-        amount and fair value less costs to sell. Held-       fair value is negative. Changes in the fair val-
and fair value less costs to sell. The decrease in    talised on the basis of the costs incurred to        for-sale premises and equipment (included into        ue of derivative instruments are recognised as
carrying amount is charged to profit or loss to       acquire and bring to use the specific software.      the disposal group) are not depreciated or am-        gains less losses arising from trading in foreign
the extent it exceeds the previous revaluation        Capitalised computer software is amortised on        ortised.                                              currency in the consolidated statement of in-
surplus in equity. An impairment loss recog-          a straight line basis over expected useful lives                                                           come. The Group does not enter into derivative
nised for an asset in prior years is reversed if      of 3 to 4 years. All other costs associated with     Liabilities directly associated with the disposal     financial instruments for hedging purposes.
there has been a change in the estimates used         computer software, eg its maintenance, are           group that will be transferred in the disposal
to determine the asset’s value in use or fair         expensed when incurred.                              transaction are reclassified and presented sep-       Income taxes. Income taxes have been pro-
value less costs to sell.                                                                                  arately in the balance sheet.                         vided for in the consolidated financial state-
                                                      Operating leases. Where the Group is a les-                                                                ments in accordance with Russian legislation
Gains and losses on disposals determined by           see in a lease which does not transfer sub-          Due to banks. Amounts due to banks are                enacted or substantively enacted by the bal-
comparing proceeds with carrying amount are           stantially all the risks and rewards incidental to   recorded when money or other assets are ad-           ance sheet date. The income tax charge com-
recognised in consolidated profit or loss.            ownership from the lessor to the Group, the          vanced to the Group by counterparty banks.            prises current tax charge and deferred tax and




80                                                                                                                                                                                                             81
Basis of Preparation and Significant Accounting Policies                                                                                                        Notes to the Consolidated Financial Statements



is recognised in the consolidated statement of      taxes being levied if the positions were to be        loan immediately after signing the agreement,          Fees integral to the effective interest rate in-
income except if it is recognised directly in eq-   challenged by the tax authorities. The assess-        such commission income related to loan com-            clude origination fees received or paid by the
uity because it relates to transactions that are    ment is based on the interpretation of tax            mitments is recognised as future period profit         entity relating to the creation or acquisition of
also recognised, in the same or a different pe-     laws that have been enacted or substantively          and is included into the loan’s carrying amount        a financial asset or issuance of a financial li-
riod, directly in equity.                           enacted by the balance sheet date and any             upon initial recognition. This amount is amor-         ability, for example fees for evaluating cred-
                                                    known court or other rulings on such issues.          tised on a straight line basis over the life of the    itworthiness, evaluating and recording guar-
Current tax is the amount expected to be paid       Liabilities for penalties, interest and taxes oth-    commitment. At each balance sheet date, the            antees or collateral, negotiating the terms of
to or recovered from the taxation authorities       er than on income are recognised based on             commitments are measured at the higher of              the instrument and for processing transaction
in respect of taxable profits or losses for the     management’s best estimate of the expendi-            (i) the unamortised balance of the amount at           documents. Commitment fees received by the
current and prior periods. Taxable profits or       ture required to settle the obligations at the        initial recognition and (ii) the best estimate of      Group to originate loans at market interest
losses are based on estimates if financial state-   balance sheet date.                                   expenditure required to settle the commitment          rates are integral to the effective interest rate
ments are authorised prior to filing relevant tax                                                         at the balance sheet date.                             if it is probable that the Group will enter into
returns. Taxes, other than on income, are re-       Provisions for liabilities and charges.                                                                      a specific lending arrangement and does not
corded within administrative and other operat-      Provisions for liabilities and charges are non-fi-    Share premium. When shares are issued,                 expect to sell the resulting loan shortly after
ing expenses.                                       nancial liabilities of uncertain timing or amount.    the excess of contributions received, net of           origination.
                                                    Related provisions are provided for where there       transaction costs, over the nominal value of
Deferred income tax is provided using the bal-      is a present obligation (legal or constructive)       the shares issued is recorded as share premium         When loans and other debt instruments become
ance sheet liability method for temporary dif-      as a result of a past event, it is probable that      in equity.                                             doubtful of collection, they are written down to
ferences arising between the tax bases of as-       an outflow of resources embodying economic                                                                   present value of expected cash inflows and in-
sets and liabilities and their carrying amounts     benefits will be required to settle the obliga-       Preference shares. Preference shares that              terest income is thereafter recorded for the un-
for financial reporting purposes. Deferred tax-     tion, and a reliable estimate of the amount of        are not redeemable and with discretionary divi-        winding of the present value discount based on
es are not recorded for temporary differences       the obligation can be made.                           dends, are classified as equity.                       the asset’s effective interest rate which was used
on initial recognition of an asset or a liability                                                                                                                to measure the impairment loss.
if the transaction, when initially recorded, af-    Trade and other payables. Trade payables              Dividends. Dividends are recorded in equity
fects neither accounting nor taxable profit. De-    are accrued when the counterparty performed           in the period in which they are declared. Divi-        All other fees, commissions and other income
ferred tax balances are measured at tax rates       its obligations under the contract and are car-       dends declared after the balance sheet date            and expense items are generally recorded on
enacted or substantively enacted at the bal-        ried at amortised cost.                               and before the financial statements are autho-         an accrual basis by reference to completion of
ance sheet date which are expected to apply                                                               rised for issue are disclosed in the subsequent        the specific transaction assessed on the basis
to the period when the temporary differences        Credit related commitments. The Group                 events note. The statutory accounting reports          of the actual service provided as a proportion
will reverse. Deferred tax assets and liabilities   enters into credit related commitments, in-           of the Bank are the basis for profit distribution      of the total services to be provided.
are netted only within the individual companies     cluding commitments to provide loans, letters         and other appropriations. Russian legislation
of the Group. Deferred tax assets for deduct-       of credit and financial guarantees. Financial         identifies the basis of distribution as the cur-       Fiduciary assets. Assets held by the Group
ible temporary differences are recorded only        guarantees and letters of credit represent ir-        rent year net profit.                                  in its own name, but on the account of third
to the extent that it is probable that future       revocable assurances to make payments in the                                                                 parties, are not reported on the consolidated
taxable profit will be available against which      event that a customer cannot meet its obli-           Income and expense recognition. Interest               balance sheet. The extent of such balances
the deductions can be utilised.                     gations to third parties and carry the same           income and expense are recorded in the profit or       and transactions are indicated in Note 36.
                                                    credit risk as loans. Financial guarantees and        loss for all debt instruments on an accrual basis      Commissions received from fiduciary activities
Uncertain tax positions. The Group’s un-            letters of credit are initially recognised at their   using the effective interest method. This method       are shown in fee and commission income.
certain tax positions are reassessed by the         fair value, which is normally evidenced by the        defers, as part of interest income or expense, all
management at every balance sheet date. Li-         amount of fees received. In the case of com-          fees paid or received between the parties to the       Offsetting. Financial assets and liabilities are
abilities are recorded for income tax positions     mitments to provide loans, if there is a prob-        contract that are an integral part of the effec-       offset and the net amount reported in the
that are determined by the management as            ability that the Group concludes certain loan         tive interest rate, transaction costs and all other    consolidated balance sheet only when there
more likely than not to result in additional        agreements and is not planning to disburse the        premiums or discounts.                                 is a legally enforceable right to offset the




82                                                                                                                                                                                                            83
Basis of Preparation and Significant Accounting Policies                                                                     Critical Accounting Estimates and Judgements in Applying Accounting Policies



recognised amounts, and there is an intention        funds, paid annual leave and sick leave, bo-       certain judgements, apart from those involv-          data indicating that there has been an adverse
to either settle on a net basis, or to realise the   nuses, and non-monetary benefits are accrued       ing estimations, in the process of applying the       change in the payment status of borrowers in
asset and settle the liability simultaneously.       in the year in which the associated services are   accounting policies. Judgements that have the         a group, or national or local economic condi-
                                                     rendered by the employees of the Group.            most significant effect on the amounts recog-         tions that correlate with defaults on assets in
Accounting for the effects of hyperin-                                                                  nised in the consolidated financial statements        the group.
flation. The Russian Federation has previously       Segment reporting. A segment is a distin-          and estimates that can cause a significant ad-
experienced relatively high levels of inflation      guishable component of the Group that is en-       justment to the carrying amount of assets and         The management uses estimates based on his-
and was considered to be hyperinflationary           gaged either in providing products or services     liabilities within the next financial year include:   torical loss experience for assets with credit risk
as defined by IAS 29 “Financial Reporting            (business segment) or in providing products or                                                           characteristics and objective evidence of im-
in Hyperinflationary Economies” (“IAS 29”).          services within a particular economic environ-     Investment securities held-to-maturi-                 pairment similar to those in the portfolio when
IAS 29 requires that the financial statements        ment (geographical segment), which is subject      ty. The management of the Group determines            scheduling its future cash flows. The methodol-
prepared in the currency of a hyperinflation-        to risks and rewards that are different from       whether to reclassify financial assets into held-     ogy and assumptions used for estimating both
ary economy be stated in terms of the mea-           those of other segments. Segments with a ma-       to-maturity in particular to prove its intention      the amount and timing of future cash flows
suring unit current at the balance sheet date.       jority of revenue earned from sales to external    and ability to hold these assets to maturity.         are reviewed regularly to reduce any differ-
It states that reporting operating results and       customers and whose revenue, result or as-         If the Group fails to hold these investments          ences between loss estimates and actual loss
financial position in the local currency with-       sets are ten percent or more of all the seg-       to maturity (except for particular obligations        experience. To the extent that the assessed
out restatement is not useful because money          ments are reported separately. Geographical        – such as sale of insignificant amount of in-         delay in repayment of principal on 5% of the
loses purchasing power at such a rate that           segments of the Group have been reported           vestments shortly before date of maturity)            total loans and advances to customers dif-
the comparison of amounts from transactions          separately within these consolidated financial     the Group will be compelled to reclassify all         fers by +/- one month, the provision would
and other events that have occurred at dif-          statements based on the ultimate domicile of       securities of this type (any remaining held-to-       be approximately RR 85 590 thousand high-
ferent times, even within the same accounting        the counterparty, e.g. based on economic risk      maturity securities) into the category available      er or RR 85 590 thousand lower (2007: RR
period, is misleading.                               rather than legal risk of the counterparty.        for sale and the Group will not be able to            47 250 thousand higher or RR 47 250 thou-
                                                                                                        classify (recognize) any securities as held-to-       sand lower).
The characteristics of the economic environ-                                                            maturity within the two following reporting
ment of the Russian Federation indicate that                                                            periods. Such reclassified investments will be        Revaluation of premises. The fair values of
hyperinflation has ceased effective from 1
                                                     4. CRITICAL ACCOUNTING                             measured at fair value, not at amortised cost.        premises of the Group are determined by us-
January 2003. Restatement procedures of IAS             ESTIMATES AND                                   If all held-to-maturity securities were to be re-     ing valuation methods and are based on their
29 are therefore only applied to assets ac-                                                             classified, their carrying value will decrease by     market value. Market values of the Group’s
quired or revalued and liabilities incurred or as-      JUDGEMENTS IN                                   an amount of RR 36 956 thousand (2007: the            premises are obtained from the report of in-
sumed prior to that date. For these balances,
the amounts expressed in the measuring unit
                                                        APPLYING ACCOUNTING                             Group had no investment securities held-to-
                                                                                                        maturity).
                                                                                                                                                              dependent appraiser, who holds a recognised
                                                                                                                                                              and relevant professional qualification and who
current at as 31 December 2002 are the basis            POLICIES                                                                                              has recent experience in valuation of premises
for the carrying amounts in these consolidated                                                          Impairment losses on loans and ad-                    of similar location and category. The market
financial statements. The restatement was cal-       The Group makes estimates and assumptions          vances. The Group regularly reviews its loan          value was assessed using sales comparison
culated using the conversion factors derived         that affect the amounts recognised in the          portfolio to assess impairment. In determin-          approach i.e. comparison with other premises
from the Russian Federation Consumer Price           consolidated financial statements and the car-     ing whether an impairment loss should be re-          which were sold or are offered for sale. For
Index (“CPI”), published by the Russian Statis-      rying amounts of assets and liabilities within     corded in the profit or loss, the Group makes         details please refer to Note 15. To the extent
tics Agency, and from indices obtained from          the next financial year. Estimates and judge-      judgements as to whether there is any observ-         that the assessed change in the fair value of
other sources for years prior to 1992.               ments are continually evaluated and are based      able data indicating that there is a measurable       the Group’s premises differs by 10%, the ef-
                                                     on management’s experience and other fac-          decrease in the estimated future cash flows           fect of the revaluation adjustment would be
Staff costs and related contributions.               tors, including expectations of future events      from a portfolio of loans before the decrease         RR 426 935 thousand (before deferred tax)
Wages, salaries, contributions to the Russian        that are believed to be reasonable under the       can be identified with an individual loan in that     as at 31 December 2008 (2007: RR 266 810
Federation state pension and social insurance        circumstances. The management also makes           portfolio. This evidence may include observable       thousand).




84                                                                                                                                                                                                          85
Critical Accounting Estimates and Judgements in Applying Accounting Policies                                                                       Adoption of New or Revised Standards and Interpretations



Frequency of revaluation of premises.                     IFRIC 12, Service Concession Ar-                 the available-for-sale category to the loans        struments are traded in a public market or
The premises of the Group are subject to reval-       rangements (effective for annual periods             and receivables category provided the non-          that file, or are in the process of filing, their
uation on a regular basis. The frequency of re-       beginning on or after 1 January 2008); and           derivative financial asset would have met the       financial statements with a regulatory or-
valuation depends upon the movements in the                                                                definition of loans and receivables and the en-     ganisation for the purpose of issuing any
fair values of the premises being revalued. The           IFRIC 14, IAS 19 The Limit on a De-              tity has the intention and ability to hold that     class of instruments in a public market. IFRS
Group’s management uses judgement for de-             fined Benefit Asset, Minimum Funding                 financial asset for the foreseeable future or       8 requires an entity to report financial and
termining the materiality of changes in the fair      Requirements and their Interaction (ef-              until maturity.                                     descriptive information about its operating
values of premises during the reporting period        fective for annual periods beginning on or af-                                                           segments and specifies how an entity should
for deciding whether a revaluation is necessary       ter 1 January 2008).                                 The amendment to IFRS 7 introduces additional       report such information. The management
.                                                                                                          disclosure requirements if an entity has reclas-    does not expect IFRS 8 to significantly af-
Tax legislation. The tax legislation of the           The above interpretations did not significantly      sified financial assets in accordance with the      fect the Group’s consolidated financial state-
Russian Federation is subject to varying inter-       affect the Group’s consolidated financial state-     amendment to IAS 39. The amendments are             ments.
pretations, and changes, which can occur fre-         ments.                                               effective retrospectively from 1 July 2008.
quently. Refer to Note 36.                                                                                                                                     Puttable Financial Instruments and Ob-
                                                      Reclassification of Financial Assets                 Pursuant to these amendments, the Bank re-          ligations Arising on Liquidation – IAS
Related party transactions. In the normal             – Amendments to IAS 39 Financial In-                 classified certain non-derivative financial as-     32 and amendments to Presentation
course of business the Group enters into trans-       struments: Recognition and Measure-                  sets out of trading assets and into loans to        of Financial Statements – IAS 1 (effec-
actions with its related parties. IAS 39 “Financial   ment and further Amendment Reclas-                   customers, due from banks and investment            tive on 1 January 2009). The Amendment
Instruments: Recognition and Measurement”             sification of Financial Assets – Effective           securities held-to-maturity. For details on the     requires certain financial instruments that
requires initial recognition of financial instru-     date and transition. In October 2008 the             impact of these reclassifications, refer to         meet the definition of financial liability to be
ments based on their fair values. Judgement is        IASB issued “Reclassification of Financial As-       Notes 8, 11, 12, 13 of the consolidated finan-      classified as equity instruments. The Group
applied in determining if transactions are priced     sets” (Amendments to IAS 39 “Financial In-           cial statements.                                    is in the process of analysing the impact of
at market or non-market interest rates, where         struments: Recognition and Measurement” and                                                              this amendment on the consolidated finan-
there is no active market for such transactions.      IFRS 7 “Financial Instruments: Disclosures”).                                                            cial statements.
The basis for judgement is pricing for similar
types of transactions with unrelated parties          The amendment to IAS 39 permits an entity to
                                                                                                           6. NEW ACCOUNTING                                   IAS 1, Presentation of Financial State-
and effective interest rate analysis.                 reclassify non-derivative financial assets, other       PRONOUNCEMENTS                                   ments (revised September 2007; ef-
                                                      than those designated at fair value through                                                              fective for annual periods beginning
Special Purpose Entities. Judgement is also           profit or loss upon initial recognition, out of      Certain new Standards and Interpretations           on or after 1 January 2009). The main
required to determine whether the substance           the fair value through profit or loss (i.e., trad-   have been published that are mandatory for          change in IAS 1 is the replacement of the
of the relationship between the Group and a           ing) category if they are no longer held for the     the Group’s accounting periods beginning on         income statement by a statement of com-
special purpose entity indicates that the special     purpose of being sold or repurchased in the          or after 1 January 2009 or later periods and        prehensive income which will also include all
purpose entity is controlled by the Group.            near term, would have met the definition of          which the Group has not early adopted: The          non-owner changes in equity, such as the
                                                      loans and receivables at initial recognition, and    Group plans to adopt these pronouncements           revaluation of available-for-sale financial as-
                                                      the entity has the intention and ability to hold     when they become effective. The Group has           sets. Alternatively, entities will be allowed
                                                      the financial asset for the foreseeable future                                                           to present two statements: a separate in-
5. ADOPTION OF NEW                                    or until maturity. If the financial asset would
                                                                                                           not yet, fully analysed the likely impact of
                                                                                                           these new standards on its financial state-         come statement and a statement of com-
   OR REVISED STANDARDS                               not have met the definition of loans and re-         ments.                                              prehensive income. The revised IAS 1 also
                                                      ceivables, then it may be reclassified out of the                                                        introduces a requirement to present a state-
   AND INTERPRETATIONS                                trading category only in ‘rare circumstances’.       IFRS 8, Operating Segments (effec-                  ment of financial position (balance sheet)
                                                                                                           tive for annual periods beginning on                at the beginning of the earliest comparative
Certain new IFRSs became effective for the            The amendment also permits an entity to              or after 1 January 2009). The standard              period whenever the entity restates com-
Group from 1 January 2008.                            transfer a non-derivative financial asset from       applies to entities whose debt or equity in-        paratives due to reclassifications, changes in




86                                                                                                                                                                                                         87
New Accounting Pronouncements                                                                                                                                                                 Cash and Ñash Equivalents



accounting policies, or corrections of errors.    whether by the entity or by other parties,         purchase method to business combinations.                             business combinations involving only mutual
The Group expects the revised IAS 1 to af-        should receive the same accounting treat-          The requirement to measure at fair value ev-                          entities and business combinations achieved
fect the presentation of its consolidated fi-     ment. The management does not expect this          ery asset and liability at each step in a step                        by contract alone. The management does
nancial statements but to have no impact on       Amendment to IFRS 2 to significantly affect        acquisition for the purposes of calculating                           not expect IFRS 3 to significantly affect the
the recognition or measurement of specific        the Group’s consolidated financial state-          a portion of goodwill has been removed.                               Group’s consolidated financial statements.
transactions and balances.                        ments.                                             Instead, goodwill will be measured as the
                                                                                                     difference at acquisition date between the                            Improvements to International Finan-
IAS 27, Consolidated and Separate Fi-             Measuring Investments in Subsidiar-                fair value of any investment in the business                          cial Reporting Standards (issued in
nancial Statements (revised January               ies, Jointly Controlled Entities and               held before the acquisition, the consideration                        May 2008). In 2008, the International
2008; effective for annual periods                Associates – IFRS 1 and additional                 transferred and the net assets acquired. Ac-                          Accounting Standards Board (IASB)
beginning on or after 1 July 2009).               amendments into IAS 27 Consolidat-                 quisition-related costs will be accounted for                         decided to start annual improvement
The revised IAS 27 will require an entity to      ed and Separate Financial Statements               separately from the business combination                              projects intended to update standards
attribute total comprehensive income to the       (revised in May 2008, effective for                and therefore recognised as expenses rather                           as a means of essential but non-ur-
owners of the parent and to the non-con-          annual periods beginning or after 1                than included in goodwill. An acquirer will                           gent amendments to IFRS.
trolling interests (previously “minority inter-   January 2009). Under these Amendments              have to recognise at the acquisition date a
ests”) even if this results in the non-control-   entities adopting IFRSs for the first time         liability for any contingent purchase consid-                         Various “Improvements to IFRSs” have been
ling interests having a deficit balance (the      when determining the cost of investments           eration. Changes in the value of that liability                       dealt with on a standard-by-standard basis.
current standard requires the excess losses       in subsidiaries, jointly controlled entities and   after the acquisition date will be recognised                         All amendments, which result in account-
to be allocated to the owners of the parent       associates may measure that cost at fair val-      in accordance with other applicable IFRSs, as                         ing changes for presentation, recognition or
in most cases). The revised standard speci-       ue or at carrying amount as previously mea-        appropriate, rather than by adjusting good-                           measurement purpose, will come into effect
fies that changes in a parent’s ownership         sured in unconsolidated financial statements       will. The revised IFRS 3 brings into its scope                        not earlier than 1 January 2009.
interest in a subsidiary that do not result in    prepared according to Russian Accounting
the loss of control must be accounted for         Principles. Pursuant to the Amendment the
as equity transactions. It also specifies how     entity is obliged to recognize pre-acquisition
an entity should measure any gain or loss         net assets of investments objects in profit or     7. CASH AND ÑASH EQUIVALENTS
arising on the loss of control of a subsid-       loss rather than as reimbursement of invest-
iary. At the date when control is lost, any       ments. The management does not expect
investment retained in the former subsidiary      this Amendment to significantly affect the         IN THOUSANDS OF RUSSIAN ROUBLES                                                              2008              2007
will have to be measured at its fair value.       Group’s consolidated financial statements.
                                                                                                     Cash on hand                                                                               6 026 512        2,469,383
The management does not expect IAS 27 to
significantly affect the Group’s consolidated     IFRS 3, Business Combinations (revised             Cash balances with the CBRF (other than mandatory reserve deposits)                       12 901 049         3,437,183
financial statements.                             January 2008; effective for business
                                                  combinations for which the acquisi-                Correspondent accounts and overnight placements with banks

Vesting Conditions and Cancellations              tion date is on or after the beginning                Russian Federation                                                                      1 574 146          374,601
– Amendment to IFRS 2, Share-based                of the first annual reporting period
Payment (issued in January 2008;                  beginning on or after 1 July 2009). The               Other countries                                                                          580 493          3,188,235

effective for annual periods begin-               revised IFRS 3 allows entities to choose to        Settlement accounts with trading systems                                                  15 759 126          143,046
ning on or after 1 January 2008). The             measure non-controlling interests using the
Amendment clarifies that only service condi-      existing IFRS 3 method (proportionate share
                                                                                                     TOTAL CASH AND CASH EQUIVALENTS                                                       36 841 326         9 612 448
tions and performance conditions are vesting      of the acquiree’s identifiable net assets) or
conditions. Other features of a share-based       on the same basis as US GAAP (at fair val-
payment are not vesting conditions. The           ue). The revised IFRS 3 is more detailed in        Currency analysis of cash and cash equivalents                        Interest rate analysis of cash and cash equiva-
Amendment specifies that all cancellations,       providing guidance on the application of the       is disclosed in Note 34.                                              lents is disclosed in Note 34.




88                                                                                                                                                                                                                    89
Trading Securities                                                                                                                                            Notes to the Consolidated Financial Statements



8. TRADING SECURITIES                                                                                 16 April 2014), coupon rates of 7.6% to 11% p.a.
                                                                                                      (2007: 8% to 11.5% p.a.) and yields to maturity
                                                                                                                                                                    Trading securities are carried at fair value which
                                                                                                                                                                    also reflects the credit risk of these securities.
                                                                                                      from 9.2% to 34.8% p.a. as at 31 December                     The Group holds no overdue trading securi-
IN THOUSANDS OF RUSSIAN ROUBLES                                            2008             2007
                                                                                                      2008 (2007: from 6.2% to 7% p.a.), depending                  ties.
Corporate bonds                                                         1 094 549        1 697 080    on the type of bond issue.
Russian Federation Eurobonds                                             956 815          4 074 171                                                                 Analysis by credit quality of debt trading se-
                                                                                                      Corporate shares are shares of Russian com-                   curities outstanding at 31 December 2008 is as
Corporate Eurobonds                                                       338 931                 -
                                                                                                      panies.                                                       follows.
Federal loan bonds (OFZ bonds)                                           266 382         4 476 304

Municipal bonds                                                             1 712          592 958
                                                                                                                            FEDERAL LOAN           RUSSIAN     MUNICIPAL          CORPORATE            CORPORATE           TOTAL
                                                                                                      IN THOUSANDS OF              BONDS        FEDERATION       BONDS                BONDS            EUROBONDS
TOTAL DEBT SECURITIES                                                2 658 389       10 840 513
                                                                                                      RUSSIAN ROUBLES                           EUROBONDS
Corporate shares                                                          33 996            810 177   Group A                     266 382          956 815              925              998 489            153 993     2 376 604

                                                                                                      Group B                           -                -              787               96 060            184 938       281 785
TOTAL TRADING SECURITIES                                            2 692 385        11 650 690
                                                                                                      TOTAL DEBT
                                                                                                                                 266 382          956 815             1 712        1 094 549               338 931 2 658 389
                                                                                                      TRADING SECURITIES
Corporate bonds are interest bearing Russian       15 January 2009 to 22 October 2011, coupon
Rouble denominated securities issued by Rus-       rates of 8.4% to 10.8% p.a. and yields to ma-
sian companies, and are tradable in the Russian    turity from 10.3% to 22.5% as at 31 December       Analysis by credit quality of debt trading securities outstanding at 31 December 2007 is as follows.
market. These bonds have maturity dates from       2008 (2007: no corporate Eurobonds).
26 February 2009 to 12 June 2018 (2007: from                                                                                 FEDERAL LOAN              RUSSIAN             MUNICIPAL               CORPORATE               TOTAL
                                                                                                      IN THOUSANDS OF               BONDS           FEDERATION               BONDS                     BONDS
19 June 2008 to 19 July 2012), coupon rates of     Federal loan bonds (OFZ bonds) are Russian
                                                                                                      RUSSIAN ROUBLES                               EUROBONDS
7–15.2% p.a. (2007: 8.4–13.5% p.a.) and yields     Rouble denominated government securities is-
to maturity from 6.3% to 34.7% p.a. as at          sued by the Ministry of Finance of the Rus-        Group A                     4,476,304             4,074,171             368,205                        -          8,918,680

31 December 2008 (2007: from 8.6% to 16%           sian Federation. These bonds have maturity         Group B                               -                   -              224,753               1,697,080           1,921,833
p.a.), depending on the type of bond issue.        dates from 20 January 2010 to 2 November
                                                   2012 (2007: from 29 April 2009 to 6 February       TOTAL DEBT
Russian Federation Eurobonds are interest bear-    2036), coupon rates of 6% to 10% p.a (2007:                                  4 476 304            4 074 171                592 958              1 697 080          10 840 513
                                                                                                      TRADING SECURITIES
ing securities denominated in USD, issued by the   5.8% to 10%) and yields to maturity from
Ministry of Finance of the Russian Federation,     9.9% to 11.7% p.a. as at 31 December 2008
and are tradable internationally. These bonds      (2007: from 5.9% to 6.8% p.a.), depending on       Debt trading securities of the Group are divided              The Bank is licensed by the Federal Agency of
have maturity dates from 31 March 2030 (2007:      the type of bond issue.                            by credit quality types and parameters into the               the Russian Federation for Financial Markets
31 March 2030), coupon rates of 8.3% p.a.                                                             following groups:                                             for trading in securities.
(2007: 7.5% p.a.) and yields to maturity of 3.3%   Municipal bonds are Russian Rouble denomi-
as at 31 December 2008 (2007: from 5.5%            nated securities issued by the municipal admin-    Group À – debt financial instruments with rat-                In 2008 the Group reclassified certain finan-
p.a.).                                             istrations of Moscow, Moscow Region, Irkutsk       ing of at least BBB-.                                         cial assets from trading securities to investment
                                                   and Samara Regions (2007: municipal adminis-                                                                     securities held-to-maturity, loans and advances
Corporate Eurobonds are interest bearing secu-     trations of St Petersburg and Moscow Region).      Group  – other debt instruments.                             to customers and due from banks. Refer to
rities denominated in USD issued by the Russian    These bonds are issued at a discount to nominal                                                                  Note 11, 12 and 13.
companies and tradable in the Russian market.      value, have maturity dates from 21 April 2009      Currency and maturity analyses of trading se-
Corporate Eurobonds have maturity dates from       to 16 April 2014 (2007: from 21 April 2009 to      curities are disclosed in Note 34.                            Management believes that the decrease in




90                                                                                                                                                                                                                           91
Trading Securities                                                                                                                                                        Securities Pledged Under Sale and Repurchase Agreements



market prices which occurred in the third quar-                            third quarter of 2008 constituted rare circum-
ter of 2008 can be considered a rare event, as                             stances that permit reclassification out of the
                                                                                                                                   9. SECURITIES PLEDGED UNDER SALE
it does not reflect the overall volatility on the                          trading category as at 30 September 2008.                  AND REPURCHASE AGREEMENTS
market which was observed for the past peri-
ods. For those quoted securities identified for                            The carrying value and fair value of all reclassi-
reclassification, the Bank determined that the                             fied financial assets from trading securities are       IN THOUSANDS OF RUSSIAN ROUBLES                                           2008              2007
deterioration of the financial markets during the                          as follows.                                             Corporate bonds                                                        1 364 973                 -

                                                                                                                                   Municipal bonds                                                          105 553           517,834
IN THOUSANDS
                                                                  30 SEPTEMBER 2008                       31 DECEMBER 2008
OF RUSSIAN ROUBLES                                                                                                                 TOTAL SECURITIES PLEDGED UNDER SALE
                                                                                                                                                                                                       1 470 526            517 834
                                                      Carrying value              Fair value   Carrying value*        Fair value   AND REPURCHASE AGREEMENTS
Loans and advances to customers                             5 528 751              5 528 751         5 412 330        4 853 814

Due from banks                                              2 765 954              2 765 954         2 777 232        2 753 093    Securities pledged under sale and repurchase      is 12 days with an effective rate of 9.7% p.a.
Held-to-maturity investments                                     797 019             797 019           797 431          740 635    agreements are represented by corporate and
                                                                                                                                   municipal bonds issued by the municipal ad-       Municipal bonds are purchased at a discount
TOTAL                                                  9 091 725               9 091 725           8 986 993       8 347 542       ministration of Moscow (2007: bonds issued        to nominal value. These bonds have a matu-
                                                                                                                                   by the municipal administration of St Peters-     rity date of 18 December 2011 (2007: from 18
* Carrying value is shown before provision for impairment                                                                          burg).                                            June 2008 to 6 August 2014), coupon rates of
                                                                                                                                                                                     8.0% p.a. (2007: 9% to 10% p.a.) and yields
Income and expense related to the period                                   have been recognised in the consolidated in-            Corporate bonds are interest bearing Russian      to maturity of 9.2% as at 31 December 2008
prior to reclassification, to the period after                             come statement if the reclassification had not          Rouble denominated securities issued by Rus-      (2007: 3.1% to 6.5% p.a.). The term of sale
reclassification and income and expense (af-                               been made are as follows.                               sian companies, and are tradable in the Russian   and repurchase transactions is 12 days with
ter the date of reclassification), which would                                                                                     market. In 2008 these bonds have maturity         the effective rate of 5% p.a. (2007: The term
                                                                                                                                   dates from 19 March 2009 to 12 June 2018,         of the corresponding repurchase agreements
                                      INCOME/(EXPENSES),                 INCOME/(EXPENSES),                 INCOME/(EXPENSES),     coupon rates of 7.1 to 9% p.a. and yields to      is 195 days with an effective rate of 5.3%).
                                        RECOGNISED PRIOR               RECOGNISED AFTER THE             WHICH WOULD HAVE BEEN      maturity from 7.2% to 20.2% p.a. as at 31 De-
IN THOUSANDS                              TO THE DATE OF            DATE OF RECLASSIFICATION                 RECOGNISED, IF THE
OF RUSSIAN ROUBLES                                                                                                                 cember 2008 (2007: no corporate bonds), de-       Analysis by credit quality of securities pledged
                                         RECLASSIFICATION                                             RECLASSIFICATION HAD NOT
                                                                                                    BEEN MADE (AFTER THE DATE      pending on the type of bond issue. The term       under sale and repurchase agreements out-
                                                                                                                                   of the corresponding repurchase agreements        standing at 31 December 2008 is as follows.
Interest income                                      246 789                             116 249                        208 736
Gain less losses
                                                    (513 154)                             10 347                      (530 815)
on operation with securities
Provision for loan impairment                                -                         (160 743)                              -                                                       MUNICIPAL        CORPORATE              TOTAL
                                                                                                                                   IN THOUSANDS OF RUSSIAN ROUBLES                      BONDS              BONDS
Provision for impairment
                                                             -                          (19 840)                              -
of held-to-maturity investments
                                                                                                                                   Group A                                               105 553            401 809           507 362

TOTAL EFFECT                                                                                                                       Group B                                                     -             963 164          963 164
                                                (266 365)                             (53 987)                     (322 079)
ON INCOME STATEMENT
                                                                                                                                   TOTAL SECURITIES PLEDGED UNDER SALE
                                                                                                                                                                                       105 553          1 364 973        1 470 526
As at the date of reclassification the effective                           The reclassification of quoted securities had           AND REPURCHASE AGREEMENTS
interest rate on reclassified financial assets was                         the effect of increasing both basic and diluted
from 2.1% to 42.2% with expected recoverable                               earnings per share for 2008 by RR 0.76 per
cash flows of RR 10 977 249 thousand.                                      share.




92                                                                                                                                                                                                                              93
Securities Pledged Under Sale and Repurchase Agreements                                                                                                                                                             Due from Banks



As at 31 December 2007 securities pledged                             sand (2007: included in customer accounts        Movements in the provision for impairment of due from banks are as follows.
under sale and repurchase agreements of the                           were sale and repurchase agreements in the
Group were included into Group A. For defini-                         amount of RR 492 712 thousand). Refer to         IN THOUSANDS OF RUSSIAN ROUBLES                                                     2008               2007
tion of Group A refer to Note 8.                                      Notes 18 and 19.
                                                                                                                       Provision for impairment of due from banks as at 1 January                           2 467              4,413

As at 31 December 2008 included in due                                Currency and maturity analyses of securities     Provision for/(Recovery of provision)
                                                                                                                                                                                                           25 079             (1,946)
to banks were sale and repurchase agree-                              pledged under sale and repurchase are dis-       for loan impairment of due from banks during the year

ments in the amount of RR 1 221 725 thou-                             closed in Note 34.
                                                                                                                       PROVISION FOR IMPAIRMENT OF DUE
                                                                                                                                                                                                         27 546              2 467
                                                                                                                       FROM BANKS AS AT 31 DECEMBER

10. AMOUNTS RECEIVABLE UNDER
                                                                                                                       As at 31 December 2008, due from banks                       The management believes that the Group is not
    REVERSE REPURCHASE AGREEMENTS                                                                                      in the amount of RR 295 thousand (2007:                      exposed to significant credit risk in relation to
                                                                                                                       RR 2 467 thousand) are impaired.                             amounts due from banks. When making lend-
IN THOUSANDS OF RUSSIAN ROUBLES                                                             2008             2007                                                                   ing decisions, the loans to banks are assessed
                                                                                                                       As at 31 December 2008 the carrying value                    based on a range of factors. After the loan is
Amounts receivable under reverse repurchase agreements with clients                              -          616 518
                                                                                                                       of securities reclassified to due from banks                 granted the Group monitors the borrowers’ fi-
Amounts receivable under reverse repurchase agreements with banks                                -         300 133     amounted to RR 2 777 232 thousand (RR                        nancial position for impairment. For the purpose
                                                                                                                       2 765 954 thousand as at the date of reclas-                 of credit quality evaluation all loans to banks
TOTAL AMOUNTS RECEIVABLE                                                                                               sification). Refer to Note 8.                                are classified as “prime” unless they have any
                                                                                                -        916 651
UNDER REVERSE REPURCHASE AGREEMENTS                                                                                                                                                 signs of impairment or any overdue amounts.
                                                                                                                       Securities reclassified to due from banks
As at 31 December 2008 the Group didn’t                               and corporate bonds with fair value of RR        were analysed by the Group for indica-                       The Group’s loans to banks are not collater-
have amounts receivable under reverse repur-                          1 088 965 thousand).                             tions of significant decrease in future                      alised.
chase agreements (2007: amounts receivable                                                                             cash flows and where necessary a provi-
under reverse repurchase agreements repre-                            Currency and maturity analyses of amounts re-    sion for impairment was accounted for.                       As at 31 December 2008 the estimated fair
sented agreements with customers and banks                            ceivable under reverse repurchase agreements     As at 31 December 2008 the amount of provi-                  value of due from banks amounted to RR
which were secured by Federal loan bonds                              is disclosed in Note 34.                         sion for impairment was RR 27 251 thousand                   19 178 975 thousand (2007: carrying value of
                                                                                                                       (2007: none). The remaining debts recognised                 due from banks approximated their fair val-
                                                                                                                       in due from banks are current.                               ue due to the short-term nature of due from
                                                                                                                                                                                    banks.) Refer to Note 37. The fair value of
11. DUE FROM BANKS                                                                                                     Securities amounting to RR 2 288 931 thou-                   securities reclassified into due from banks as at
                                                                                                                       sand were pledged under sale and repurchase                  31 December 2008 amounted to RR 2 753 093
                                                                                                                       agreements included in due to banks (2007:                   thousand. Refer to Note 8.
IN THOUSANDS OF RUSSIAN ROUBLES                                                             2008             2007      none).
                                                                                                                                                                                    Currency and maturity analyses of due from
Term placements with banks                                                               19 203 410        6,739,348
                                                                                                                       The Bank uses a system of limits for granting                banks are disclosed in Note 34. Interest rate
Provision for impairment                                                                   (27 546)          (2,467)   loans to banks, as shown in Note 34. The cur-                analysis of due from banks is disclosed in
                                                                                                                       rent interbank loan portfolio is an instrument               Note 34. The information on related party bal-
TOTAL DUE FROM BANKS                                                                  19 175 864        6 736 881      of liquidity management for the Group.                       ances is disclosed in Note 38.




94                                                                                                                                                                                                                              95
Loans and Advances to Customers                                                                                                                                  Notes to the Consolidated Financial Statements



12. LOANS AND ADVANCES TO CUSTOMERS                                                                 Movements in the provision for loan impairment during 2008 are as follows.

                                                                                                    IN THOUSANDS
                                                                                                    OF RUSSIAN                          CORPORATE LOANS                         LOANS TO INDIVIDUALS                  TOTAL
IN THOUSANDS OF RUSSIAN ROUBLES                                        2008              2007       ROUBLES
                                                                                                                                Loans to    Investment    Loans to entities   Mortgage    Car loans        Other
Corporate loans                                                                                                                  finance          loans    financed by the        loans                  loans to
                                                                                                                                working                        government                             individuals
   loans to finance working capital                                88 143 276         61,275,836                                  capital
                                                                                                    Provision for loan
                                                                                                    impairment at              1,298,157     1,044,642              89,582       81,282     35,076        44,081    2,592,820
   investment loans                                                39 590 339          21,971,101
                                                                                                    31 December 2007
                                                                                                    Provision for impairment
   loans to entities financed by the government                     6 251 258         2,598,882                                1 910 753      1 115 269             23 783      169 892      44 715      106 458    3 370 870
                                                                                                    during the year
                                                                                                    Amounts written off
Loans to individuals
                                                                                                    during the year as         (119 758)              -                   -           -           -      (2 030)     (121 788)
                                                                                                    uncollectible
   mortgage loans                                                   9 495 278          4,274,713
                                                                                                    Provision for loan
   car loans                                                        1 762 898          1,641,927    impairment at              3 089 152      2 159 911            113 365      251 174      79 791      148 509    5 841 902
                                                                                                    31 December 2008

   other loans to individuals                                       5 481 354         2,560,495


Provision for impairment                                           (5 841 902)       (2,592,820)    Movements in the provision for loan impairment during 2007 are as follows.


TOTAL LOANS AND ADVANCES TO CUSTOMERS                          144 882 501        91 730 134
                                                                                                    IN THOUSANDS
                                                                                                    OF RUSSIAN                          CORPORATE LOANS                         LOANS TO INDIVIDUALS                  TOTAL
At 31 December 2008, the gross carrying           for impairment was RR 133 492 thousand.           ROUBLES
                                                                                                                                Loans to    Investment    Loans to entities   Mortgage    Car loans        Other
value of securities reclassified to loans and     The remaining securities recognised in loans                                   finance          loans    financed by the        loans                  loans to
advances to customers amounted to RR              and advances to customers are current.                                        working                        government                             individuals
                                                                                                                                  capital
5 412 330 thousand (RR 5 528 751 thou-
                                                                                                    Provision for loan
sand as at date of reclassification). Refer to    Securities amounting to RR 2 595 911 thou-        impairment at              1,039,964       439,948              62,666      25,538       13,202       23,438    1,604,756
Note 8.                                           sand are pledged under sale and repurchase        31 December 2006
                                                  agreements included in due to banks (2007:        Provision for impairment
                                                                                                                                  278,961      604,694              26,916       55,744      21,874       20,643    1,008,832
                                                                                                    during the year
Securities reclassified to loans and advances     none). Refer to Note 18.
                                                                                                    Amounts written off
to customers were analysed by the Group                                                             during the year as           (13,008)             -                   -           -           -             -    (13,008)
for indications of significant decrease in fu-    Securities amounting to RR 313 572 thou-          uncollectible

ture cash flows and where necessary a provi-      sand are pledged under sale and repurchase        Disposal of subsidiary        (7,760)             -                   -           -           -             -     (7,760)
sion for impairment was accounted for. As at      agreements included in customer accounts
31 December 2008 the amount of provision          (2007: none). Refer to Note 19.                   Provision for loan
                                                                                                    impairment at              1 298 157     1 044 642             89 582        81 282     35 076        44 081    2 592 820
                                                                                                    31 December 2007




96                                                                                                                                                                                                                      97
Loans and Advances to Customers                                                                                                                                                  Notes to the Consolidated Financial Statements



Economic sector risk concentrations within the customer loan portfolio are as follows.                                                                                CURRENT LOANS     PROVISION FOR       TOTAL CURRENT           PROVISION
                                                                                                                                                                        AND ADVANCES       IMPAIRMENT           LOANS AND     FOR IMPAIRMENT
                                                                                                                                                                       TO CUSTOMERS                           ADVANCES TO         TO CURRENT
IN THOUSANDS OF RUSSIAN ROUBLES                                       2008                         2007              IN THOUSANDS OF RUSSIAN ROUBLES
                                                                                                                                                                   (BEFORE PROVISION                     CUSTOMERS (AFTER           LOANS, %
                                                                                                                                                                     FOR IMPAIRMENT)                        PROVISION FOR
                                                                    Amount            %         Amount          %
                                                                                                                                                                                                               IMPAIRMENT)
Heavy machinery and ship-building                                23 055 028         15.3       8,474,636       9.0
                                                                                                                     Loans and advances to legal entities:
Construction                                                      18 762 462        12.4       11,651,470     12.3
                                                                                                                     Loans collectively assessed for impairment,
Real estate                                                       18 420 612        12.2       16,310,925     17.3
                                                                                                                     but not impaired
Trade                                                            16 860 868         11.2       15,242,550     16.2
                                                                                                                     Standard loans not past due                         111 445 023        3 078 998         108 366 025                2.76
Individuals                                                       16 739 530         11.1       8,477,135      9.0

Leasing and financial services                                     16 174 120       10.7       12 646 781     13.4   Watch list loans not past due                         13 017 112        849 398             12 167 714              6.53

Production and food industry                                      12 668 474        8.4        5,335,203       5.7   Individually assessed loans,
                                                                                                                     for which specific indications
Transport                                                         6 383 059         4.2         2,227,345      2.3
                                                                                                                     of impairment have been identified
Federal and municipal transportation and storage facilities       6 249 267          4.1       2,598,882       2.8
                                                                                                                     Not past due                                          8 775 165        1 056 507            7 718 658              12.04
Telecommunications                                                  2 271 117        1.5       1 499 997       1.6

Chemical industry                                                  2 348 154         1.6       2,622,630,      2.8   6 to 30 days overdue                                   214 489            19 661             194 828                9.17

Energy                                                              1 511 136        1.0         692,993       0.7
                                                                                                                     31 to 60 days overdue                                    47 116            18 211             28 905               38.65
Other                                                             9 280 576         6.3        6 542 407       6.9

                                                                                                                     61 to 90 days overdue                                   48 749            22 348               26 401             45.84
TOTAL GROSS LOANS AND ADVANCES
                                                              150 724 403       100.0       94 322 954      100.0
TO CUSTOMERS (BEFORE IMPAIRMENT)                                                                                     91 to 180 days overdue                                 239 827            119 913             119 914             50.00


                                                                                                                     Uncollectible loans                                     197 392          197 392                     -            100.00

As at 31 December 2008, the Group’s 20 larg-                   Impaired and overdue loans with the total             TOTAL LOANS AND ADVANCES
                                                                                                                                                                       133 984 873        5 362 428          128 622 445               4.00
est borrowers had aggregated loan amounts                      amount of RR 9 847 101 thousand are secured           TO LEGAL ENTITIES
of RR 41 290 618 thousand (2007: RR 29 846                     by collateral with a fair value of RR 23 632 262
                                                                                                                     Loans and advances to individuals:
976 thousand), or 27.4% (2007: 31.6%) of the                   thousand. For the remaining impaired loans of RR
gross loan portfolio before impairment.                        29 716 thousand there is no collateral or it is im-
                                                                                                                     Loans collectively assessed for impairment
                                                               practicable to determine fair value of collateral.
Most loans to customers are secured by col-                                                                              mortgage loans                                    9 495 278          251 174            9 244 104               2.65
lateral. Collateral for loans can comprise bank                During the year ended 31 December 2008 the
deposits, promissory notes issued by the Bank,                 Group obtained assets with the total amount of            car loans                                         1 762 898           79 791            1 683 107               4.53

real estate, property and equipment and other                  RR 2 137 985 thousand by taking control of col-
                                                                                                                         other loans to individuals                        5 481 354          148 509           5 332 845                2.71
collateral.                                                    lateral accepted as security for loans to customers
                                                               (2007: nil). Refer to Note 17.
                                                                                                                     TOTAL LOANS AND ADVANCES TO INDIVIDUALS            16 739 530           479 474         16 260 056                 2.86
Mortgage loans are secured by the underlying
housing real estate.                                           The loans and advances to customers and the
                                                               related provisions for impairment as at 31 De-        TOTAL LOANS AND ADVANCES
                                                                                                                                                                    150 724 403         5 841 902          144 882 501                 3.88
Car loans are secured by underlying car.                       cember 2008 are as follows.                           TO CUSTOMERS




98                                                                                                                                                                                                                                      99
Loans and Advances to Customers                                                                                                                                                                         Notes to the Consolidated Financial Statements


                                                 MORTGAGE LOANS                    CAR LOANS             OTHER LOANS TO            TOTAL LOANS
IN THOUSANDS OF RUSSIAN ROUBLES                                                                               INDIVIDUALS         AND ADVANCES                                                 MORTGAGE                CAR      OTHER LOANS        TOTAL LOANS
                                                                                                                                 TO INDIVIDUALS   IN THOUSANDS OF RUSSIAN ROUBLES                 LOANS              LOANS     TO INDIVIDUALS     AND ADVANCES
                                                                                                                                                                                                                                                 TO INDIVIDUALS
Loans to individuals
                                                                                                                                                  Loans to individuals
Standard loans not past due                              9 267 854                   1 674 170                  5 443 427            16 385 451
    less than 5 days overdue                                   30 950                  14 655                      8 568                 54 173   Standard loans not past due                   4 262 233          1 619 636         2 552 296         8 434 165
    6 to 30 days overdue                                       144 051                 37 186                       2 918               184 155      less than 5 days overdue                           -                107               881               988
    31 to 60 days overdue                                       16 413                  9 783                      15 054                41 250
                                                                                                                                                     6 to 30 days overdue                          7 420             14 393              2 503            24 316
    61 to 90 days overdue                                      21 546                   6 352                       1 053                28 951
                                                                                                                                                     31 to 60 days overdue                         5 060              7 394              1 603            14 057
    91 to 180 days overdue                                     14 464                  10 506                      4 864                29 834
                                                                                                                                                     61 to 90 days overdue                              -                38               388                426
    181 to 365 days overdue                                          -                   7 701                      4 377                12 078
    more than 1 year overdue                                         -                  2 545                       1 093                3 638       91 to 180 days overdue                             -                 21               659               680

TOTAL LOANS AND ADVANCES                                                                                                                             181 to 365 days overdue                            -               338                977              1 315
TO INDIVIDUALS
                                                        9 495 278                  1 762 898                   5 481 354           16 739 530
                                                                                                                                                     more than 1 year overdue                           -                  -             1 188              1 188
PROVISION FOR IMPAIRMENT                                      251 174                 79 791                     148 509              479 474
                                                                                                                                                  TOTAL LOANS AND ADVANCES
                                                                                                                                                                                              4 274 713          1 641 927         2 560 495          8 477 135
TOTAL LOANS AND ADVANCES                                                                                                                          TO INDIVIDUALS
                                                     9 244 104                    1 683 107                 5 332 845           16 260 056
TO INDIVIDUALS                                                                                                                                    PROVISION FOR IMPAIRMENT                        81 282            35 076             44 081           160 439

The loans and advances to customers and the related provisions for impairment as at 31 December                                                   TOTAL LOANS AND ADVANCES
                                                                                                                                                                                             4 193 431         1 606 851          2 516 414         8 316 696
2007 are as follows.                                                                                                                              TO INDIVIDUALS
                                                          CURRENT LOANS                 PROVISION           TOTAL CURRENT             PROVISION
                                                            AND ADVANCES           FOR IMPAIRMENT               LOANS AND       FOR IMPAIRMENT
                                                           TO CUSTOMERS                                       ADVANCES TO           TO CURRENT
IN THOUSANDS OF RUSSIAN ROUBLES                                                                                                                   The Group has estimated loan impairment for               sian economy after period end may give rise to
                                                       (BEFORE PROVISION                                 CUSTOMERS (AFTER             LOANS, %
                                                         FOR IMPAIRMENT)                                    PROVISION FOR                         loans to legal entities based on an analysis of           further deterioration in asset quality.
                                                                                                               IMPAIRMENT)
                                                                                                                                                  the expected future cash flows for impaired
Loans and advances to legal entities:
                                                                                                                                                  loans which was based primarily on collateral.            The Bank estimated loan impairment for loans to
Loans collectively assessed for impairment,
but not impaired                                                                                                                                  The principal collateral taken into account in            individuals based on its past historical loss experi-
Standard loans not past due                                       79 285 170              1 816 875             77 468 295                 2.29   the estimation of future cash flows compris-              ence adjusted for current economic conditions.
Watch list loans not past due                                      3 981 823                232 231              3 749 592                 5.83   es real estate. Valuations for real estate have
    6 to 30 days overdue                                                 11 746                   195                11 551                1.66   been discounted by 30–50 percent to reflect               During the year ended 31 December 2008 the
Individually assessed loans, for which specific indications
                                                                                                                                                  current market conditions.                                Bank renegotiated commercial loans that would
of impairment have been identified
Not past due                                                       2 339 626               213 656               2 125 970                 9.13                                                             otherwise be past due or impaired of RR 9 835
    91 to 180 days overdue                                           45 340                  2 430                  42 910                 5.36   For portfolios of loans for which no indications          197 thousand (2007: RR 1 518 132 thousand).
    181 to 365 days overdue                                              16 235                  1 115              15 120                 6.87   of impairment have been identified, in deter-             Such restructuring activity is aimed at managing
Uncollectible loans                                                  165 879               165 879                          -            100.00   mining the portfolio impairment allowance at              customer relationships and maximising collec-
TOTAL LOANS AND ADVANCES TO LEGAL ENTITIES                      85 845 819              2 432 381             83 413 438                  2.83    31 December 2008 the Group has adjusted                   tion opportunities. This amount does not include
Loans and advances to individuals:                                                                                                                historic loss rates to factor in the deterioration        those loans for which prolondation was included
Loans collectively assessed for impairment                                                                                                        of the loan portfolio, as evidenced by the rate           in the initial conditions of credit agreement.
    mortgage loans                                                 4 274 713                 81 282              4 193 431                 1.90   of increase in the level of impaired and overdue
    car loans                                                      1 641 927                35 076               1 606 851                 2.14   loans, arising from current market conditions.            Loans and advances to customers are classi-
    other individual loans                                        2 560 495                 44 081               2 516 414                 1.72                                                             fied in the group “Standard loans not past due”
TOTAL LOANS AND ADVANCES TO INDIVIDUALS                          8 477 135                160 439              8 316 696                  1.89    The portfolio allowance reflects management’s             when they do not have any overdue payments
TOTAL LOANS AND ADVANCES                                                                                                                          estimate of the losses in the portfolio as at             as at reporting date and the management of
                                                              94 322 954             2 592 820              91 730 134                   2.75     31 December 2008. Deterioration in the Rus-               the Group does not have any information about
TO CUSTOMERS



100                                                                                                                                                                                                                                                        101
Loans and Advances to Customers                                                                                                                                                      Held-to-Maturity Investments



existence of any factors which can influence the       of any factors which may make it doubtful             Analysis of movements in the provision for impairment of held-to-maturity investments during
possibility of the borrower to repay the loan in       whether the borrowers are able to repay the full      2008 is as follows.
full and in time or if there is enough collateral to   amounts owed to the Group on a timely basis.
allow the borrower to repay fully the loan.                                                                  IN THOUSANDS OF RUSSIAN ROUBLES                                                 2008                2007
                                                       Interest recorded in the profit or loss on overdue    Provision for impairment at 1 January                                                   -                -
Loans and advances to customers are classified         and impaired loans during 2008 amounted to            Provision for impairment during the year                                        19 840                   -
in the group “Watch list loans not past due”           RR 612 720 thousand (2007: RR 208 122 thou-
when they have moderate credit risk. The Bank’s        sand).                                                PROVISION FOR IMPAIRMENT AT 31 DECEMBER                                       19 840                    -
analysis of operating and financial position of
the borrower and other information, including          At 31 December 2008, the estimated fair val-          The Group analyses and monitors impairment              Analysis by credit quality of held-to maturity
external environment, indicate the stable posi-        ue of loans and advances to customers was             indicators. As at 31 December 2008 the provision        investments outstanding at 31 December 2008
tion of the borrower, however the analysis of          RR 147 066 652 thousand (2007: RR 93 908 851          for impairment of held-to-maturity investments          is as follows.
the borrower indicates some negative tenden-           thousand). Refer to Note 37.                          was RR 19 840 thousand. The Group holds no
cies, which could impact the ability of the bor-                                                             overdue held-to-maturity investments.
rower to repay its loan in the future on a timely      Currency and maturity analyses of loans and
basis.                                                 advances to customers are disclosed in Note 34.       IN THOUSANDS OF RUSSIAN ROUBLES                               CORPORATE BONDS                      TOTAL
                                                       Interest rate analysis of loans and advances to
                                                                                                             Group                                                                      797 431                797 431
The primary factors that the Group considers           customers is disclosed in Note 34. The informa-
when deciding whether a loan is individually im-       tion on related party balances is disclosed in        TOTAL HELD-TO-MATURITY INVESTMENTS                                        797 431                797 431
paired is its overdue status and/or occurrence         Note 38.

                                                                                                             As at 31 December 2008 the estimated fair               Currency and maturity analyses of held-to-ma-
                                                                                                             value of held-to-maturity investments was RR            turity investments are disclosed in Note 34. In-
13. HELD-TO-MATURITY INVESTMENTS                                                                             740 635 thousand (2007: no held-to-maturity             terest rate analysis of held-to-maturity invest-
                                                                                                             investments). Refer to Note 37.                         ments is disclosed in Note 34.
IN THOUSANDS OF RUSSIAN ROUBLES                                                 2008              2007
Corporate bonds                                                               797 431                -
Provision for impairment                                                      (19 840)               -
                                                                                                             14. OTHER FINANCIAL ASSETS
TOTAL HELD-TO-MATURITY INVESTMENTS                                          777 591                  -
                                                                                                             IN THOUSANDS OF RUSSIAN ROUBLES                               NOTE.                   2008          2007
Corporate bonds are interest bearing Russian           of 7.5–13.8% p.a. and yields to maturity from         Plastic cards receivables                                                             94 241        95,935
Rouble denominated securities issued by Rus-           2.1% to 42.2% p.a. as at 31 December 2008.            Fair value of derivative financial instruments                  36                66 342            17,051
sian companies, and are tradable in the Russian                                                              Investment securities available-for-sale                                          53 978            11,340
market. These bonds have maturity dates from           Movements in the held-to-maturity invest-             Settlements on conversion operations                                                        -       30,681
24 February 2009 to 2 March 2010, coupon rates         ments portfolio is as follows.                        Other securities at fair value through profit or loss                                       -          24

                                                                                                             TOTAL OTHER FINANCIAL ASSETS                                                   214 561          155 031
IN THOUSANDS OF RUSSIAN ROUBLES                        NOTE                    2008               2007
Carrying value as of 1 January                                                      -                    -
                                                                                                             Other financial assets of the Group do not              Investment securities available for sale repre-
Transfers from trading securities                       8                     797 019                    -
                                                                                                             include individually impaired and overdue as-           sent equity securities carried at cost. Their fair
Accrued interest income                                                        31 648                    -
                                                                                                             sets. In 2008, the Group created no pro-                value may not be reliably estimated since they
Interest received                                                             (31 236)                   -
                                                                                                             vision for other financial assets (2007: no             are neither listed on the market nor traded.
CARRYING VALUE AS OF 31 DECEMBER                                            797 431                   -      provision).                                             The Group’s management believes that the




102                                                                                                                                                                                                              103
Other Financial Assets                                                                                                                                                    Premises and Equipment and Intangible Assets



difference between the fair and carrying val-              financial assets approximates their fair value             Construction in progress mainly consists of         in the amount of RR 2 762 028 thousand
ues of the securities available for sale is not            as at 31 December 2008 and 31 December                     construction of head office and refurbishment       (2007: RR 1 502 619 thousand), including RR
material. The Group will sell these securities             2007. Refer to Note 37.                                    of branch premises. Upon completion, assets         1 259 409 thousand recognised as a result of
in case of favourable market movements.                                                                               are transferred to premises and equipment.          revaluation of the premises as at 31 December
                                                           Currency and maturity analyses of other fi-                                                                    2008. As at 31 December 2008 the Group has
The carrying value of all categories of other              nancial assets are disclosed in Note 34.                   The premises of the Group have been revalued        recorded a deferred tax liability of RR 552 406
                                                                                                                      as at 31 December 2008. The revaluation has         thousand related to the amount of revalua-
                                                                                                                      been performed by an independent profes-            tion.
15. PREMISES AND EQUIPMENT                                                                                            sional real estate appraisal company, which is
                                                                                                                      registered in St Petersburg. The basis for the      In respect of the building for which the Group
    AND INTANGIBLE ASSETS                                                                                             appraisal was market value using the sales          previously created an impairment provision,
                                                                                                                      comparison approach.                                the release of provision in the amount of RR
                                       NOTE   PREMISES     OFFICE AND     CONSTRUCTION     INTANGIBLE       TOTAL
IN THOUSANDS                                                COMPUTER       IN PROGRESS        ASSETS                                                                      33 566 thousand was recognised in the con-
OF RUSSIAN ROUBLES                                         EQUIPMENT                                                  The sales comparison approach is based on           solidated income statement as a result of re-
Cost as at 1 January 2007                      1 316 743       632 777           15 167         9 992    1 974 679
                                                                                                                      the direct comparison of the revalued object        valuation as at 31 December 2007.
                                                                                                                      with other objects sold or offered for sale. The
Accumulated depreciation,
                                               (63 672)     (285 682)                  -      (6 999)    (356 353)
amortisation and impairment losses                                                                                    market value of premises is determined by the       If the assets of the Group were recorded at
Net book amount                                                                                                       price which an independent party would pay          cost adjusted to the equivalent of the pur-
                                              1 253 071       347 095            15 167         2 993    1 618 326
as at 1 January 2007
                                                                                                                      for an object similar by its quality and use. The   chasing power of the Russian Rouble as at
Additions                                      553 454        249 166           314 707             12    1 117 339   market value of premises was estimated based        31 December 2002 for the premises pur-
Transfers between categories                           -         14 111         (14 111)             -            -   on information on sales of the comparable           chased before 1 January 2003 less accu-
Disposals                                        (2 001)       (4 377)                 -         (911)     (7 289)    items that took place in the market.                mulated depreciation, their carrying value
Depreciation and amortisation charge    29     (47 576)      (125 250)                 -       (1 078)   (173 904)
                                                                                                                                                                          as at 31 December 2008 would amount to
                                                                                                                      As at 31 December 2008 the carrying value           RR 1 743 247 thousand (2007: RR 1 124 051
Revaluation                                    846 439                -                -             -    846 439
                                                                                                                      includes revaluation of the Group’s premises        thousand).
Release of provision for impairment
                                                 33 566               -                -             -      33 566
through profit or loss
Net book amount
                                              2 636 953       480 745           315 763         1 016    3 434 477
as at 31 December 2007

Cost as at 31 December 2007                   2 668 103       822 399           315 763         6 386    3 812 651    16. OTHER ASSETS
Accumulated depreciation
                                                (31 150)     (341 654)                 -      (5 370)    (378 174)
and amortisation
Net book amount
                                                                                                                      IN THOUSANDS OF RUSSIAN ROUBLES                                             2008             2007
                                              2 636 953       480 745           315 763         1 016    3 434 477
as at 31 December 2007
                                                                                                                      Deferred expenses                                                          143 472           78,900
Additions                                       401 356       448 909         1 840 303           135    2 690 703
                                                                                                                      Advances payable                                                           111 397          155,295
Transfers between categories                    232 613               -       (232 613)              -            -
                                                                                                                      Prepaid taxes other than on income                                         44 353            16,314
Disposals                                      (191 558)       (2 710)                 -             -   (194 268)

Depreciation and amortisation charge    29     (69 420)      (173 806)                 -         (177)   (243 403)    Other                                                                      63 589             5,698

Revaluation                                   1 259 409               -                -             -   1 259 409
                                                                                                                      TOTAL OTHER ASSETS                                                      362 811          256 207
Net book amount as at
                                              4 269 353       753 138         1 923 453           974    6 946 918
31 December 2008

Cost as at 31 December 2008                   4 269 353      1 251 859        1 923 453         6 521    7 451 186    Advances payable include advances made by           payments for repair works of existing premises.
Accumulated depreciation
                                                                                                                      the Group in relation to purchase of new com-       Currency and maturity analyses of other assets
                                                       -     (498 721)                 -      (5 547)    (504 268)
and amortisation                                                                                                      puter software and equipment, as well as pre-       are disclosed in Note 34.




104                                                                                                                                                                                                                105
Long-Term Assets Held-for-Sale                                                                                                                                                                     Due to Banks



17. LONG-TERM ASSETS HELD-FOR-SALE                                                                             pledged under these sale and repurchase agree-
                                                                                                               ments are corporate and municipal bonds with
                                                                                                                                                                  As at 31 December 2008, included in due to
                                                                                                                                                                  banks were sale and repurchase agreements
                                                                                                               the fair value of RR 1 470 526 thousand (2007:     in the amount of RR 1 850 550 thousand.
IN THOUSANDS OF RUSSIAN ROUBLES                                                      2008             2007     no sale and repurchase agreements were in-         Securities pledged under these sale and re-
                                                                                                               cluded in due to banks). Refer to Note 9.          purchase agreements are corporate and mu-
Building                                                                          2 137 985                -
                                                                                                                                                                  nicipal bonds reclassified to due from banks
TOTAL LONG-TERM ASSETS                                                                                         As at 31 December 2008, included in due to         with the carrying value before provision
                                                                               2 137 985                  -
HELD-FOR-SALE                                                                                                  banks were sale and repurchase agreements          of RR 2 288 931 thousand and fair value of
                                                                                                               in the amount of RR 2 099 461 thousand. Se-        RR 2 280 724 thousand. (2007: no sale and
                                                                                                               curities pledged under these sale and repur-       repurchase agreements were included in due
During the fourth quarter of 2008 one of the                 The Group obtained a valuation by an inde-
                                                                                                               chase agreements are corporate and munici-         to banks). Refer to Note 11.
Group’s borrowers defaulted on certain obli-                 pendent valuer and based on this estimates
                                                                                                               pal bonds reclassified to loans and advances
gations to the Group. As a result the parties                that the fair value less costs to sell exceeds
                                                                                                               to customers with the carrying value before        Currency and maturity analyses of banks ac-
mutually agreed that the Group takes owner-                  the carrying value of the asset.
                                                                                                               provision of RR 2 595 911 thousand and fair        counts are disclosed in Note 34.
ship of the collateral it held against the loans.
                                                                                                               value of RR 2 359 782 thousand. (2007: no
Following the completion of the necessary                    The Group has taken the decision to dispose
                                                                                                               sale and repurchase agreements were includ-        Interest rate analysis of customer accounts is
process, during December 2008 the Group                      of the asset at the earliest opportunity as
                                                                                                               ed in due to banks). Refer to Note 12.             disclosed in Note 34.
took ownership of a building which was pro-                  ownership thereof does not form part of its
vided as collateral for the loans.                           core business. The Group expects such sale to
                                                             be completed within one year of the report-
Accordingly the loans were derecognised
and the collateral recognised at the carrying
                                                             ing date of 31 December 2008.
                                                                                                               19. CUSTOMER ACCOUNTS
amount of the loans prior to derecognition as                This asset held-for-sale is included in the as-
an asset held-for-sale. The building comprises               sets of the Unallocated segment. Refer to         IN THOUSANDS OF RUSSIAN ROUBLES                                            2008             2007
a terminal in the North-West region.                         Note 33.
                                                                                                               State and public organizations

                                                                                                                  Current/settlement accounts                                          3 471 690         1 319 910

18. DUE TO BANKS                                                                                                  Term deposits                                                        1 314 564       4 920 868

IN THOUSANDS OF RUSSIAN ROUBLES                                                      2008             2007     Other legal entities

Term placements of banks                                                         27 015 504          635,069      Current/settlement accounts                                         27 843 057       24 040 675

Amounts payable under sale and repurchase agreements                              5 171 736                -      Term deposits                                                       57 921 513       27 738 723

Correspondent accounts and overnight placements with banks                         132 849            42,197      Sale and repurchase agreements                                        239 895           492 712


TOTAL DUE TO BANKS                                                           32 320 089           677 266      Individuals

                                                                                                                  Current/demand accounts                                             10 125 643        5 505 729
As at 31 December 2008 and 31 December                       deposits of RR 24 432 456 thousand placed
                                                                                                                  Term deposits                                                       38 908 117       24 710 155
2007, the carrying value of due to banks ap-                 by Central Bank of Russia (2007: none).
proximated their fair value since due to banks
                                                                                                               TOTAL CUSTOMER ACCOUNTS                                           139 824 479        88 728 772
is short-term. Refer to Note 37.                             As at 31 December 2008, included in due to
                                                             banks were sale and repurchase agreements in
As at 31 December 2008 due to banks included                 the amount of RR 1 221 725 thousand. Securities   State and public organisations exclude government owned profit orientated businesses.




106                                                                                                                                                                                                        107
Customer Accounts                                                                                                                                                                              Bonds Issued



Economic sector concentrations within customer accounts are as follows.
                                                                                                       20. BONDS ISSUED
IN THOUSANDS
                                               2008                            2007
OF RUSSIAN ROUBLES                                                                                     IN THOUSANDS OF RUSSIAN ROUBLES                                               2008               2007
                                             Amount              %            Amount              %
                                                                                                       Eurobonds                                                                   5 911 152         3,065,263
Individuals                                49 033 760          35.1        30 215 884           34.1   Subordinated Eurobonds                                                     3 021 061          2,522,904

Financial services                        26 865 688            19.1        6 563 381            7.4   Bonds                                                                      1 001 368           999,055

Construction                               14 369 467          10.3         8 480 095            9.6   TOTAL BONDS ISSUED                                                      9 933 581         6 587 222
Trade                                      12 520 440           9.0        10 583 808           11.9

Production                                 10 123 534           7.2         5 073 424            5.7   In November 2006, the Group placed 1 250            a maturity of 16 April 2010, nominal coupon rate
Transport                                   5 248 759           3.8         4 674 449            5.3
                                                                                                       interest-bearing US Dollar-denominated Euro-        of 9.975% p.a. and effective interest rate of
                                                                                                       bonds (one bond – USD 100 000). The issue           10.93% p.a. The Group should observe certain
Cities and municipalities                   4 767 666           3.4          6 191 715           7.0
                                                                                                       was arranged by ABN AMRO Bank N.V. and              covenants, relating to the Eurobond issue. Non-
Real estate                                4 309 603             3.1        2 229 305            2.5   Dresdner Bank AG. The issue was registered on       compliance with such covenants may result in
Public utilities                            2 677 793           1.9          4 014 146           4.5
                                                                                                       the Irish Stock Exchange. As at 31 December         negative consequences for the Group including
                                                                                                       2008, the carrying value of these bonds was         growth in the cost of borrowings and declaration
Art, science and education                  2 505 641           1.8          1 471 001           1.7
                                                                                                       USD 125 239 thousand, the equivalent of RR          of default. The Group’s management believes
Communications                               2 116 467           1.5        2 486 462            2.8   3 679 561 thousand (2007: the carrying value        that as at 31 December 2008 and 31 December
Energy                                       1 190 419          0.9          5 001 781           5.6   of these bonds was USD 124 877 thousand, the        2007 the Group fully meets all covenants of the
                                                                                                       equivalent of RR 3 065 263 thousand). These         loan agreements. Refer to Note 36.
Medical institutions                          361 566           0.3           333 909           0.4
                                                                                                       Eurobonds have a maturity of 25 November
Other                                       3 733 676           2.6          1 409 412           1.6   2009, nominal coupon rate of 9.501% p.a. and        In July 2007 the Group placed 1 000 interest-
                                                                                                       effective interest rate of 10.46% p.a. The Group    bearing US Dollar-denominated subordinated
TOTAL CUSTOMER ACCOUNTS                139 824 479            100       88 728 772             100     should observe certain covenants, relating to the   Eurobonds (one bond – USD 100 000). The is-
                                                                                                       Eurobond issue. Non-compliance with such cov-       sue was arranged by J.P. Morgan and UBS. The
As at 31 December 2008, included in cus-             As at 31 December 2008, included in customer      enants may result in negative consequences for      issue was registered on the Irish Stock Exchange.
tomer accounts were sale and repurchase              accounts are deposits of RR 2 091 303 thousand    the Group including growth in the cost of bor-      As at 31 December 2008, the carrying value of
agreements in the amount of RR 239 895               held as collateral for irrevocable commit-        rowings and declaration of default. The Group’s     these bonds was USD 102 826 thousand, the
thousand. Securities pledged under these             ments under import letters of credit (2007: RR    management believes that as at 31 December          equivalent of RR 3 021 061 thousand (2007: the
sale and repurchase agreements are munici-           1 347 709 thousand). Refer to Note 36.            2008 and 31 December 2007 the Group fully           carrying value of these bonds was USD 102 782
pal bonds included in loans and advances                                                               meets all covenants of the loan agreements. Re-     thousand the equivalent of RR 2 522 904 thou-
to customers with the carrying value be-             As at 31 December 2008, the estimated fair val-   fer to Note 36.                                     sand). These subordinated Eurobonds have a
fore provision of RR 313 572 thousand and            ue of customer accounts was RR 141 030 201                                                            maturity of 25 July 2017 with an early redemp-
fair value of RR 290 084 thousand. Refer             thousand (2007: RR 89 118 878 thousand).          On 16 April 2008, the Group placed 750 inter-       tion option at nominal value on 25 July 2012,
to Note 12. (2007: included in customer ac-          Refer to Note 37.                                 est-bearing US Dollar-denominated Eurobonds         nominal coupon rate of 10.5% p.a. and effective
counts were sale and repurchase agree-                                                                 (one bond – USD 100 000). The issue was ar-         interest rate of 11.14% p.a.
ments in the amount of RR 492 712 thou-              Currency and maturity analyses of customer        ranged by Dresdner Bank AG. The issue was
sand. Securities pledged under these sale            accounts are disclosed in Note 34. Interest       registered on Irish Stock Exchange. As at 31 De-    In the event of liquidation of the Bank, the claims
and repurchase agreements were municipal             rate analysis of customer accounts is dis-        cember 2008, the carrying value of these bonds      of repayment of subordinated Eurobonds are
bonds with the fair value of RR 517 834              closed in Note 34. The information on relat-      was USD 75 955 thousand, the equivalent of          subordinated to the claims of all other creditors
thousand). Refer to Note 9.                          ed party balances is disclosed in Note 38.        RR 2 231 591 thousand. These Eurobonds have         and depositors of the Bank.




108                                                                                                                                                                                                     109
Bonds Issued                                                                                                                                                                       Other Borrowed Funds



On 14 June 2006, the Group placed 1 000 000     June 2008 the coupon rate shall be 10.5% p.a.        interest rate of LIBOR + 3.45% p.a. The sec-       In December 2006, the Group attracted a sub-
Russian Rouble denominated interest-bearing     and effective interest rate of 11.27% p.a.           ond tranche of USD 75 000 thousand has the         ordinated loan in the amount of USD 50 000
bonds (one bond – RR 1 000). As at 31 De-                                                            maturity date of 23 December 2009 and inter-       thousand with maturity in March 2012 financed
cember 2008, the carrying value of these        As at 31 December 2008, the estimated fair val-      est rate of LIBOR + 2.75% p.a. The participants    by issuing credit linked notes. The provider of this
bonds was RR 1 001 368 thousand (2007: RR       ue of bonds issued was RR 8 311 133 thousand         of the loan are 14 non-resident banks. As at 31    subordinated loan was Investment bank TRUST.
999 055 thousand). The bonds have maturity      (2007: RR 6 371 661 thousand). Refer to Note 37.     December 2008 the carrying value of this loan      As at 31 December 2008, the carrying value of
date of 22 June 2009. Coupon rate established                                                        was USD 99 898 thousand, the equivalent of         this subordinated loan was USD 49 861 thousand,
for the first four coupon periods was 9.6%      Currency and maturity analyses of bonds is-          RR 2 935 042 thousand. The interest rate on        the equivalent of RR 1 464 948 thousand (2007:
p.a. For the coupon periods starting from 20    sued are disclosed in Note 34.                       this loan is 5.295% for the first tranche and      USD 49 779 thousand, the equivalent of RR
                                                                                                     4.595% for the second tranche as at 31 De-         1 221 894 thousand). This subordinated loan was
                                                                                                     cember 2008.                                       attracted at the fixed interest rate of 11% p.a.
21. OTHER DEBT SECURITIES IN ISSUE                                                                   On 20 June 2008 the Group repaid a syndi-          In December 2008, the Group attracted a sub-
                                                                                                     cated loan in the amount of USD 100 000            ordinated loan from the Bank’s shareholder
IN THOUSANDS OF RUSSIAN ROUBLES                                          2008              2007      thousand arranged by Standard Bank Plc, ZAO        in the amount of EUR 36 690 thousand with
                                                                                                     Standard Bank, Raiffeisen Zentralbank Oster-       maturity in December 2014 financed by issuing
Promissory notes                                                     4 329 290           7,381,245
                                                                                                     reich AG, ZAO Raiffeisenbank, ÎÀÎ VTB Bank         credit linked notes. As at 31 December 2008,
Deposit certificates                                                      7 601            44,058
                                                                                                     and VTB Bank Europe PLC. The participants of       the carrying value of this subordinated loan
TOTAL OTHER DEBT SECURITIES IN ISSUE                               4 336 891         7 425 303       the loan were 16 non-resident banks and 4          was EUR 36 690 thousand, the equivalent of
                                                                                                     resident banks (2007: the carrying value of this   RR 1 520 474 thousand. This subordinated loan
As at 31 December 2008, the estimated fair      Currency and maturity analyses of other debt         loan was USD 101 878 thousand, the equiva-         was attracted at the fixed interest rate of 14.5%
value of other debt securities in issue was     securities in issue are disclosed in Note 34. In-    lent of RR 2 500 719 thousand).                    p.a.
RR 4 422 454 thousand (2007: RR 7 434 146       terest rate analysis of other debt securities in
thousand). Refer to Note 37.                    issue is disclosed in Note 34.                       On 29 November 2007 the Group attracted a          In the event of liquidation of the Bank, the
                                                                                                     syndicated loan in the amount of USD 70 000        claims of repayment of subordinated loans are
                                                                                                     thousand in 2 tranches. The first tranche of USD   subordinated to the claims of all other creditors
22. OTHER BORROWED FUNDS                                                                             44 500 thousand has a maturity date of 21 No-
                                                                                                     vember 2008 and was repaid during 2008. The
                                                                                                                                                        and depositors of the Bank.

                                                                                                     second tranche of USD 25 500 thousand has          On 16 July 2008 the Group attracted a loan ar-
IN THOUSANDS OF RUSSIAN ROUBLES                                          2008              2007      a maturity date of 22 May 2009. The loan is        ranged by KFW IPEX-Bank Gmbh in the amount
                                                                                                     arranged by Commerzbank Aktiengesellschaft,        of USD 35 000 thousand with maturity in July
Syndicated loans                                                      3 682 375         4,893,544
                                                                                                     ICICI Bank Hong Kong branch and UniCredit          2013. The interest rate on this loan is LIBOR +
Subordinated loans                                                    2 985 422          1,221,894
                                                                                                     Group, acting through Bank Austria Credi-          6.12%. As at 31 December 2008 the carrying
Funds attracted from KFW IPEX-Bank Gmbh                               1 070 158                  -
Funds attracted from Nordic Investment Bank                             849 147           706,522
                                                                                                     tanstalt AG. The participants of the loan are 15   value of this loan was USD 36 424 thousand,
Funds attracted from EBRD                                              830 955            745,678
                                                                                                     non-resident banks and 3 resident banks. As at     the equivalent of RR 1 070 158 thousand. The
Funds attracted from Bank of New York, NY                               151 097                  -
                                                                                                     31 December 2008 the carrying value of this        interest rate on this loan is 9.987% p.a.
Funds attracted from Unicreditbank                                      29 697             74,249
                                                                                                     loan was USD 25 436 thousand, the equivalent
                                                                                                     of RR 747 333 thousand (2007: the carrying         On 6 September 2007 and the Group attracted
TOTAL OTHER BORROWED FUNDS                                         9 598 851         7 641 887       value of this loan was USD 69 612 thousand         three tranches and on 20 November 2007 the
                                                                                                     the equivalent of RR 1 708 710 thousand). The      Group attracted one tranche of the credit facility
On 26 June 2008 the Group attracted a syndi-    struction and Development) EBRD in 2 tranches.       interest rate for the second tranche is LIBOR +    provided by Nordic Investment Bank. The Group
cated loan in the amount of USD 100 000 thou-   The first tranche of USD 25 000 thousand             2.25% p.a. As at 31 December 2008 the inter-       allocated the raised amounts for funding certain
sand arranged by (European Bank of Recon-       has the maturity date of 23 June 2012 and            est rates was 4.871% p.a.                          projects. As at 31 December 2008 the carrying




110                                                                                                                                                                                                   111
Other Borrowed Funds                                                                                                                                                             Other Financial Liabilities



value of this loan was USD 28 902 thousand,        On 9 October 2007 the Group attracted the
the equivalent of RR 849 147 thousand (2007:       loan from the UniCredit Bank in the amount
                                                                                                      23. OTHER FINANCIAL LIABILITIES
USD 28 783 thousand, the equivalent of RR          of USD 1 000 thousand and USD 2 000 thou-
706 522 thousand). The loan maturity date          sand with the maturity date 6 April 2009           Other financial liabilities comprise the following.
of these credit facilities is on 3 October 2015.   and 6 October 2008, respectively. As at 31
The interest rate on the loan ranges from LI-      December 2008 the loan in amount of USD
                                                                                                      IN THOUSANDS OF RUSSIAN ROUBLES                             NOTE                 2008           2007
BOR+2.6% p.a. to LIBOR+2.95% p.a., depend-         2 000 thousand was repaid. As at 31 Decem-
ing on maturity dates of the tranches. As at 31    ber 2008, the carrying value of this loan was      Fair value of derivative financial instruments                36                185 766         6,882

December 2008 the interest rate on the loan        USD 1 011 thousand, the equivalent of RR
                                                                                                      Plastic card payables                                                            23 181         24,941
was from 6.638% to 6.988% p.a.                     29 697 thousand (2007: USD 3 025 thousand,
                                                   the equivalent of RR 74 249 thousand). The         Fair value of guarantees and import letters of credit                           22 734          24,337

On 25 October 2006, 26 February 2007 and 27        interest rate on the loan is LIBOR + 2.15% p.a.
                                                                                                      Settlements on conversion operations                                                  -           769
June 2007 the Group attracted three tranches of    As at 31 December 2007 the interest rates was
the loan provided by (European Bank of Recon-      6.494% p.a.                                        Provision for losses on credit related commitments                                  22             83

struction and Development) EBRD in the amount
of USD 10 000 thousand each, which should          In July 2008 a syndicated loan arranged by ABN     TOTAL OTHER FINANCIAL LIABILITIES                                          231 703            57 012
be repaid before November 2011. This loan was      AMRO Bank N.V. was repaid (2007: the carrying
issued for the purposes of funding small and       value of this loan was USD 27 871 thousand,
                                                                                                      The carrying value of all other financial liabili-      Currency and maturity analyses of other fi-
medium businesses. Starting from November          the equivalent of RR 684 115 thousand).
                                                                                                      ties is approximately equal to their fair value as      nancial liabilities are disclosed in Note 34.
2008 the Group started repayment of the loan
                                                                                                      at 31 December 2008 and 31 December 2007.
and as at 31 December 2008 USD 2 000 thou-         The Group should observe certain covenants
                                                                                                      Refer to Note 37.
sand of principal amount was repaid. As at 31      relating to attraction of syndicated loans, sub-
December 2008 the carrying value of this loan      ordinated loans and EBRD funds. Non-compli-
was USD 28 283 thousand, the equivalent of         ance with such covenants may result in nega-
RR 830 955 thousand (2007: RR 30 379 thou-         tive consequences for the Group including
sand the equivalent of RR 745 678 thousand).       growth in the cost of borrowings and declara-
                                                                                                      24. OTHER LIABILITIES
The interest rate on the loan is LIBOR + 3% p.a.   tion of default. The Group’s management be-
As at 31 December 2008 the interest rate on        lieves that the Group fully meets all covenants    IN THOUSANDS OF RUSSIAN ROUBLES                            NOTE                  2008           2007
the loan was 6.265% p.a.                           of the loan agreements. Refer to Note 36.          Commitments to employees                                                     398 484           255 862


On 4 April 2008 the Group attracted a loan in      As at 31 December 2008 the estimated fair val-     Payables                                                                        80 339           1 602

the amount of USD 5 000 thousand provided          ue of other borrowed funds was RR 9 199 354        Taxes payable other than on income                                               70 051         20 226
by the Bank of New York, NY to refinance ex-       thousand (2007: the carrying value of other
port contracts of the Group’s clients. This loan   borrowed funds approximated their estimated        Dividends payable                                            32                   2 626           1 511

has a maturity of 30 March 2009 and interest       fair value). Refer to Note 37.
                                                                                                      Other                                                                           45 396           6 355
rate of LIBOR + 1.5% p.a. As at 31 December
2008 the carrying value of the loan was USD        Currency and maturity analyses of other bor-
                                                                                                      TOTAL OTHER LIABILITIES                                                    596 896          285 556
5 143 thousand, the equivalent of RR 151 097       rowed funds are disclosed in Note 34. The
thousand. As at 31 December 2009 the interest      information on related party balances is dis-
rate was 4.154%.                                   closed in Note 38.                                 Currency and maturity analyses of other liabilities are disclosed in Note 34.




112                                                                                                                                                                                                   113
Share Capital                                                                                                                                                                                           Other Reserves



25. SHARE CAPITAL                                                                                         26. OTHER RESERVES

                                                                                                          In accordance with the Russian legislation, the              dance with Russian Accounting Rules. The Bank’s
                           NUMBER OF     NUMBER OF     ORDINARY        SHARE    PREFERENCE        TOTAL
                         OUTSTANDING   OUTSTANDING       SHARES      PREMIUM        SHARES
                                                                                                          Bank distributes profits as dividends or transfers           reserves under Russian Accounting Rules as at
IN THOUSANDS                                                                                              them to reserves (fund accounts) on the basis
                            ORDINARY    PREFERENCE                                                                                                                     31 December 2008 are RR 3 745 403 thousand
OF RUSSIAN ROUBLES            SHARES        SHARES                                                        of the financial statements prepared in accor-               (2007: RR 3 679 549 thousand).
                          (THOUSAND)    (THOUSAND)

As at 1 January 2007         201,400        20,100     3,306,129    1,925,556      177,451    5,409,136

New shares issued             80,750             -        80,750    7,799,894            -    7,880,644
                                                                                                          27. INTEREST INCOME AND EXPENSE
As at 31 December 2007       282,150        20,100     3,386,879   9,725,450       177,451   13,289,780

New shares issued                  -             -             -            -            -            -
                                                                                                          IN THOUSANDS OF RUSSIAN ROUBLES                                                      2008               2007
                                                                                                          Interest income
AS AT 31 DECEMBER 2008      282 150        20 100     3 386 879    9 725 450      177 451    13 289 780
                                                                                                          Loans and advances to customers                                                  17 491 643         8 407 210
                                                                                                          Trading securities                                                                 759 645           496,350
                                                                                                          Sale and repurchase agreements                                                     498 199                501
                                                                                                          Due from banks                                                                     329 120            179,143
As at 31 December 2008 nominal registered            shares in the event of the Bank’s liquida-
                                                                                                          Investment securities held-to-maturity                                              41 093                   -
amount of the Group’s issued share capital           tion. The preference shares are not redeem-
                                                                                                          Correspondent accounts with banks                                                   10 378              4,570
prior to restatement of capital contributions        able. Preference share dividends are set at
                                                                                                          Other debt securities at fair value through profit or loss                                -           88,050
made before 1 January 2003 to the purchas-           11% p.a. and rank above ordinary dividends.
ing power of the Russian Rouble at 31 De-            If preference dividends are not declared by          TOTAL INTEREST INCOME                                                          19 130 078          9 175 824
cember 2002 is RR 302 250 thousand (2007:            ordinary shareholders, the preference share-
                                                                                                          Interest expense
RR 302 250 thousand). At 31 December                 holders obtain the right to vote as ordinary
                                                                                                          Term deposits of legal entities                                                   3 675 661         1,706,248
2008, all of the Group’s outstanding shares          shareholders until such time that the divi-
                                                                                                          Term deposits of individuals                                                     2 974 356          1,405,253
were authorised, issued and fully paid in.           dend is paid. Dividend payments on prefer-
                                                                                                          Due to banks                                                                       922 687             81,903
                                                     ence shares for the periods where prefer-            Bonds issued                                                                       862 065            527,482
All ordinary shares have a nominal value of          ence shares were given the right to vote are         Other borrowed funds                                                               629 000            390,776
RR 1 per share (2007: RR 1 per share). Each          not subsequently compensated from future             Other debt securities in issue                                                      471 614           275,178
share carries one vote.                              profit of the Bank.                                  Current/settlement accounts                                                         91 256             121,421


The preference shares have a nominal val-            Share premium represents the excess of con-          TOTAL INTEREST EXPENSE                                                          9 626 639          4 508 261
ue of RR 1 (2007: RR 1) and carry no vot-            tributions received over the nominal value of
ing rights but rank ahead of the ordinary            shares issued.                                       NET INTEREST INCOME                                                           9 503 439          4 667 563




114                                                                                                                                                                                                              115
Fee and Commission Income and Expense                                                                                                                                                                      Income Taxes



28. FEE AND COMMISSION INCOME AND EXPENSE                                                               30. INCOME TAXES
IN THOUSANDS OF RUSSIAN ROUBLES                                                2008            2007
Fee and commission income                                                                               Income tax expense comprises the following.
   Commission on settlement transactions                                     711 847        353 447
   Commission on plastic cards and cheque settlements                        311 667         233 107
   Commission on cash transactions                                           257 671        195 033     IN THOUSANDS OF RUSSIAN ROUBLES                                                           2008             2007
   Commission on guarantees and letters of credit issued                     284 141        150 460
   Commission on cash collections                                            74 684           55 371    Current tax                                                                            1 444 035          698,311
   Commission on foreign exchange transactions                                43 217          42 159
                                                                                                        Deferred tax                                                                           (372 783)         (69,560)
   Commission on custody operations                                           12 567           7 731
   Commission on underwriting transactions                                     5 795          26 571
   Other                                                                      13 534           1 169
                                                                                                        INCOME TAX EXPENSE FOR THE YEAR                                                     1 071 252           628 751
TOTAL FEE AND COMMISSION INCOME                                           1 715 123       1 065 048
Fee and commission expense                                                                              The income tax rate applicable to the majority                    ing from 1 January 2009 the income tax rate
   Commission on guarantees and letters of credit                            135 233         63 687     of the Group’s income is 24% (2007: 24%).                         is 20%.
   Commission on plastic cards and cheque settlements                         78 458         49 310     In accordance with the change in the Russian
   Commission on settlement transactions                                      46 249         43 486
                                                                                                        Tax Code approved by the State Duma (Fed-                         A reconciliation between the expected and the
   Commission on banknote transactions                                          19 911        8 688
   Commission on securities                                                    19 755         4 831     eral Law № 224) on 26 November 2008, start-                       actual taxation charge is provided below.
   Commission on foreign exchange transactions                                  7 968            133
   Other                                                                      21 508          5 535
                                                                                                        IN THOUSANDS OF RUSSIAN ROUBLES                                                           2008             2007
TOTAL FEE AND COMMISSION EXPENSE                                            329 082         175 670
                                                                                                        Profit before tax                                                                      3 845 018        2,637,959
NET FEE AND COMMISSION INCOME                                            1 386 041         889 378
                                                                                                        Theoretical tax charge at statutory rate (2008: 24%; 2007: 24%)                         922 804            633,110

                                                                                                           Non deductible expenses                                                               157 234           19,200

29. ADMINISTRATIVE AND OTHER OPERATING EXPENSES                                                            Income tax paid in the current reporting period
                                                                                                                                                                                                   3 725            6,037
                                                                                                           and related to the prior reporting period

                                                                                                           Income on government securities taxed at different rates                             (37 441)          (32,375)
IN THOUSANDS OF RUSSIAN ROUBLES                            NOTE                 2008          2007
Staff costs                                                                 2 060 460       1,313,797      Effect of change in income tax rate                                                   24 930
Property rent expenses                                                        249 076         127,545
Depreciation of premises, equipment                                                                        Other                                                                                       -             2,779
                                                            15                243 403        173,904
and amortisation of intangible assets
Other costs, related to premises and equipment                                227 962        161,493
Contributions to deposits insurance system                                    178 557         98,107
                                                                                                        INCOME TAX EXPENSE FOR THE YEAR                                                     1 071 252           628 751
Taxes other than on income                                                    176 830        84,434
Transportation costs                                                          128 579         93,347
Security expenses                                                             126 262         91,768
Advertising and marketing services                                              74 267        47,643
                                                                                                        Differences between IFRS and Russian statu-                       effect of the movements in these temporary
Postal, cable and telecommunication expenses                                    61 705        45,758    tory taxation regulations give rise to tempo-                     differences is detailed below and is recorded
Charity expenses                                                               40 380          11,518   rary differences between the carrying amount                      at the rate of 20% (2007: 24%), except for
Professional services                                                           13 346        12,609
                                                                                                        of assets and liabilities for IFRS financial re-                  income on state securities that is taxed at 15%
Other administrative expenses                                                 270 730        167,102
                                                                                                        porting purposes and their tax bases. The tax                     (2007: 15%).
TOTAL ADMINISTRATIVE
                                                                          3 851 557      2 429 025
AND OTHER OPERATING EXPENSES

The information on related party transactions is disclosed in Note 38.




116                                                                                                                                                                                                                 117
Income Taxes                                                                                                                                                                   Notes to the Consolidated Financial Statements



                                                 31 DECEMBER      CHARGED TO         CHARGED     31 DECEMBER                                                31 DECEMBER       CREDITED       CHARGED     DISPOSAL OF     31 DECEMBER
                                                                                                                 IN THOUSANDS
IN THOUSANDS OF RUSSIAN ROUBLES                         2007       PROFIT OR     DIRECTLY TO            2008                                                       2006      TO PROFIT      DIRECTLY       SUBSIDIARY           2007
                                                                                                                 OF RUSSIAN ROUBLES
                                                                        LOSS          EQUITY                                                                                  OR LOSS      TO EQUITY
                                                                                                                 Tax effect of deductible temporary
Tax effect of deductible temporary differences                                                                   differences


Provision for loan impairment                          129 393        181 443                -        310 836
                                                                                                                 Provision for loan impairment                    128,432        29 879              -        (28,918)         129 393

Accrued income/expense                                 82 538         (8 927)                -          73 611
                                                                                                                 Accrued income/expense                           39 993         42 545              -               -         82 538
Fair value of trading and other securities                    -        88 087                -         88 087

                                                                                                                 Other                                              5,072        44 641              -          (999)           48 714
Valuation of bonds issued at amortised cost                   -        29 248                -         29 248

Valuation of other borrowed funds
                                                              -         9 458                -          9 458    Net deferred tax assets                         173 497        117 065             -         (29 917)        260 645
at amortised cost

Valuation of investment securities
                                                              -         5 873                -          5 873
held-to-maturity at amortised cost                                                                               Less offsetting
                                                                                                                                                                 (172,931)     (117 065)             -         ,29,351      (260 645)
                                                                                                                 with deferred tax liabilities
Valuation of due from banks                                   -         2 426                -          2 426

                                                                                                                 Recognised deferred tax asset                       566              -             -           (566)                -
Other                                                   48 714         16 623                -         65 337


Net deferred tax assets                               260 645         324 231               -         584 876    Tax effect of taxable
                                                                                                                 temporary differences

Less offsetting with deferred tax liabilities       (260 645)        (324 231)               -      (584 876)
                                                                                                                 Premises and equipment                         (242,710)      (62 841)      (203 145)          31,075       (477 621)

Tax effect of taxable temporary differences
                                                                                                                 Fair valuation of trading
                                                                                                                                                                 (29,224)         11,904             -               -        (17,320)
                                                                                                                 and other securities
Premises and equipment                               (477 621)         37 974        (191 777)       (631 424)

                                                                                                                 Valuation of bonds issued
Fair valuation of trading and other securities        (17 320)          17 320               -               -                                                    (5,242)       (6,435)              -               -         (11,677)
                                                                                                                 at amortised cost


Valuation of bonds issued at amortised cost            (11 677)         11 677               -               -   Valuation of other borrowed funds
                                                                                                                                                                  (1,533)         (625)              -               -         (2,158)
                                                                                                                 at amortised cost
Valuation of other borrowed funds
                                                       (2 158)          2 158                -               -
at amortised cost
                                                                                                                 Other                                           (10,492)        10 492              -               -                -
Other                                                         -       (20 577)               -        (20 577)

                                                                                                                 Gross deferred tax liability                   (289 201)      (47 505)      (203 145)         31 075        (508 776)
Gross deferred tax liability                         (508 776)         48 552        (191 777)       (652 001)


Less offsetting with deferred tax assets              260 645         324 231                -        584 876    Less offsetting with deferred tax assets         172,931       117 065              -        (29,351)        260 645



RECOGNISED DEFERRED                                                                                              RECOGNISED DEFERRED
                                                   (248 131)        372 783       (191 777)        (67 125)                                                  (116 270)        69 560       (203 145)           1 724       (248 131)
TAX LIABILITY                                                                                                    TAX LIABILITY




118                                                                                                                                                                                                                             119
Earnings per Share                                                                                                                                                                                                                   Segment Analysis



31. EARNINGS PER SHARE
Basic earnings per share are calculated by divid-                     The Group has no dilutive potential ordinary                 Retail banking – representing private bank-                  segments. Segment assets and liabilities com-
ing the net profit attributable to equity holders                     shares; therefore, the diluted earnings per             ing services, private customer current accounts,                  prise operating assets and liabilities, being the
of the Bank by the weighted average number                            share equals the basic earnings per share.              savings, deposits, investment savings products,                   majority of assets and liabilities of the Group,
of ordinary shares in issue during the year.                                                                                  custody, credit and debit cards, consumer loans                   but excluding some premises, equipment and
                                                                                                                              and mortgages for individuals.                                    intangible assets, long-term assets held-fo-sale,
IN THOUSANDS OF RUSSIAN ROUBLES                                           NOTES                2008                 2007                                                                        other assets and liabilities and balances on tax-
Profit attributable to the Group’s shareholders                                             2 773 766           2 009 208     Transactions between the business segments                        ation settlements. Internal charges and transfer
Less: preference dividends                                                  32                 (2 211)              (2 211)   are on normal commercial terms and condi-                         pricing adjustments have been reflected in the
Profit attributable to the Bank’s ordinary shareholders                                      2 771 555          2 006 997     tions. Funds are ordinarily reallocated between                   performance of each business segment.
Weighted average number of ordinary shares in issue (thousands)             25                282 150             226 669     segments, resulting in funding cost transfers
                                                                                                                              disclosed in operating income/expense. Interest                   Segment information for the main reportable
BASIC AND DILUTED EARNINGS PER SHARE                                                                                          charged for these funds is based on the market                    business segments of the Group for the years
                                                                                                 9.8                  8.9
(EXPRESSED IN RR PER SHARE)                                                                                                   interest rates. There are no other material items                 ended 31 December 2008 and 2007 is set out
                                                                                                                              of income or expense between the business                         below.

32. DIVIDEND                                                                                                                  IN THOUSANDS
                                                                                                                                                                       CORPORATE
                                                                                                                                                                         BANKING
                                                                                                                                                                                      OPERATIONS
                                                                                                                                                                                     ON FINANCIAL
                                                                                                                                                                                                       RETAIL
                                                                                                                                                                                                      BANKING
                                                                                                                                                                                                                 UNALLOCATED    ELIMINATIONS         TOTAL
                                                                                                                              OF RUSSIAN ROUBLES                                         MARKETS
IN THOUSANDS OF RUSSIAN ROUBLES                                     2008                                 2007                 2008
                                                           Ordinary          Preference        Ordinary         Preference    External revenues                        17 352 085       1 322 727   2 290 053               -              -   20 964 865
Dividends payable as at 1 January                                 1 511                -             475                 -    Revenues from other segments             6 095 549       13 990 594   5 208 077               -   (25 294 220)              -
Dividends declared during the year                            39 501               2 211          32,396              2,211   Total revenues                          23 447 634       15 313 321   7 498 130              -    (25 294 220)   20 964 865
Dividends paid during the year                              (38 386)              (2 211)        (31,360)           (2,211)
                                                                                                                              Total revenues comprise:
Dividends payable as at 31 December                               2 626                -            1,511                -
                                                                                                                                  Interest income                       22 121 763     15 282 812   7 019 723               -   (25 294 220)    19 130 078

DIVIDENDS PER SHARE DECLARED                                                                                                      Fee and commission income              1 210 619         27 867     476 637               -              -      1 715 123
                                                              0.14                0.11            0.14              0.11
DURING THE YEAR (RR PER SHARE)                                                                                                    Other operating income                  115 252          2 642         1 770              -              -       119 664
                                                                                                                              Segment results                           3 158 309        494 240    2 166 537              -              -     5 819 086
                                                                                                                              Unallocated costs                                                                                                (1 974 068)
All dividends are declared and paid in Russian Roubles.                                                                       Profit before tax                                                                                                 3 845 018
                                                                                                                              Income tax expense                                                                                                (1 071 252)

33. SEGMENT ANALYSIS                                                                                                          Profit for the year                                                                                                2 773 766
                                                                                                                              SEGMENT ASSETS                          135 180 942     55 189 946 19 822 036       5 523 056               -    215 715 389
The Group’s primary format for reporting seg-                         drafts, loans and other credit facilities, foreign      SEGMENT LIABILITIES                     95 127 610      51 852 521 49 033 760          956 854              - 196 970 745
ment information is business segments and the                         currency transactions with commercial and
                                                                                                                              Other segment items
secondary format is geographical segments.                            state entities.
                                                                                                                              Capital expenditures                      (659 530)       (110 943)   (447 556)     (1 472 674)              -   (2 690 703)
                                                                                                                              Depreciation and amortisation charge       (70 016)         (8 708)    (46 753)       (117 926)              -     (243 403)
Business Segments. The Group is organised                                   Operations on financial markets – rep-
                                                                                                                              (Provision)/recovery of provision for
on a basis of three main business segments:                           resenting financial instruments trading, loans                                                  (3 049 805)        (25 079)   (321 065)               -              -   (3 395 949)
                                                                                                                              loan impairment
                                                                      and deposits on the interbank market, dealing           Charge for provision for impairment
                                                                                                                                                                                 -       (19 840)            -              -              -      (19 840)
   Corporate banking – representing settle-                           in foreign exchange and derivative financial in-        through profit or loss

ment and current accounts, deposits, over-                            struments.                                              Other non-cash expenses                   (170 869)         (7 039)    (370 611)      (93 431)               -     (641 950)




120                                                                                                                                                                                                                                                  121
Segment Analysis                                                                                                                                                                                         Financial Risk Management



                                    CORPORATE OPERATIONS            RETAIL        UNALLOCATED      ELIMINATIONS          TOTAL     External revenues and assets, other than as       hand, premises and equipment and capi-
IN THOUSANDS                          BANKING ON FINANCIAL         BANKING                                                         detailed below, and credit related commit-        tal expenditure have been allocated based
OF RUSSIAN ROUBLES                                MARKETS
                                                                                                                                   ments have generally been allocated based         on the country in which they are physically
2007                                                                                                                               on domicile of the counterparty. Cash on          held.
External revenues                    8 421 479        811 951     1 097 201                    -               -     10 330 631
Revenues from other segments          4 115 061    7 908 033     2 497 056                     -   (14 520 150)                -
Total revenues                      12 536 540     8 719 984     3 594 257                     -   (14 520 150)     10 330 631     34. FINANCIAL RISK MANAGEMENT
Total revenues comprise:
                                                                                                                                   The risk management function within the           The Supervisory Board is responsible for con-
   Interest income                   11 743 736    8 676 279     3 275 959                     -   (14 520 150)       9 175 824
                                                                                                                                   Group is carried out in respect of financial      sideration of risk at the strategic level, i.e. it
   Fee and commission income           725 064        43 705       296 279                     -               -     1 065 048
                                                                                                                                   risks (credit, market, geographical, currency,    determines the level of risk the Bank may
   Other operating income               67 740              -           22 019                 -               -        89 759
                                                                                                                                   liquidity and interest rate), operational risks   accept to achieve the desired level of profit.
Segment results                      1 813 785     1 035 525       933 929                     -               -     3 783 239
                                                                                                                                   and legal risks.                                  Accordingly, the Supervisory Board establish-
Unallocated costs                                                                                                   (1 145 280)
                                                                                                                                                                                     es benchmarks which determine the Bank’s
Profit before tax                                                                                                    2 637 959
Income tax expense                                                                                                    (628 751)
                                                                                                                                   The primary objectives of the financial risk      risk limits (in particular, the maximum amount
Profit for the year                                                                                                  2 009 208
                                                                                                                                   management function are to establish risk         of write-offs losses, provisions, concentra-
SEGMENT ASSETS                      88 312 289    26 443 344    10 100 698           1 799 881                 -   126 656 212
                                                                                                                                   limits and other risk restrictions and then en-   tion of assets by industry etc.). Starting from
                                                                                                                                   sure that exposure to risks stays within these    the second quarter of 2008 the Supervisory
SEGMENT LIABILITIES                 65 938 191    14 906 375    30 215 884             590 699                 -   111 651 149
                                                                                                                                   limits and restrictions. Geographical risk man-   Board reviews on a monthly basis the reports
Other segment items                                                                                                                agement consists in making decisions about        submitted by the Bank’s management on
Capital expenditures                 (316 756)      (35 333)     (185 086)           (580 164)                 -     (1 117 339)   opening new branches and supplementary            implementation of the Bank’s Strategic de-
Depreciation and amortisation
                                      (54 799)       (5 043)       (32 375)            (81 687)                -      (173 904)
                                                                                                                                   offices and setting limits for operations with    velopment plan together with the report on
charge
                                                                                                                                   counterparties – residents of countries with      implementation of business indicators of the
(Provision for)/recovery of
provision for loan impairment
                                     (910 572)         1 946      (98 260)                     -               -   (1 006 886)     different level of economic development with      Bank’s Corporate plan for the current year.
Release of provision for
                                                                                                                                   due consideration of geographical risk fac-       Reports on the Bank’s lending operations,
                                              -             -                -          33 566                 -        33 566
impairment through profit or loss                                                                                                  tors. The operational and legal risk manage-      which contain information on the credit risk
Other non-cash expenses             (408 331)        (7 964)     (286 243)           (108 356)                 -     (810 894)     ment functions are intended to ensure proper      as the Bank’s main financial risk are also re-
                                                                                                                                   functioning of internal policies and procedures   viewed by the Supervisory Board on a month-
Geographical segments. Segment infor-                           the Group is set out below for the years ended                     to minimise operational and legal risks.          ly basis.
mation for the main geographical segments of                    31 December 2008 and 2007.
                                                                                                                                   The Group’s management risk function in-          The Management Board is responsible for
                                                       NORTH-WEST                 MOSCOW              OTHER              TOTAL     cludes establishment, implementation and          exercising general control over financial risk
IN THOUSANDS OF RUSSIAN ROUBLES                             REGION                                  REGIONS                        monitoring of financial risk management poli-     management. The Management Board has
2008                                                                                                                               cies and procedures to be further updated         approved of the Risk Management Policy,
Segment assets                                            189 715 862            24 451 454        1 548 073        215 715 389    depending on the economic, business and           the compliance with which is supervised by
External revenues                                          18 247 499             2 635 105           82 261        20 964 865     regulatory changes.                               reviews and approvals of quarterly risk man-
Capital expenditures                                      (2 667 876)              (15 738)          (7 089)        (2 690 703)                                                      agement reports. The said reports are pre-
Credit related commitments                                 13 333 702              501 906           155 795         13 991 403    The Group’s main bodies performing the fi-        pared by the Department of Banking Risks
2007                                                                                                                               nancial risk management functions are: the        and contain the description of the Group’s
Segment assets                                            109,150,441             17,505,771               -        126,656,212    Supervisory Board, Management Board, Asset        risk position, both at the consolidated level
External revenues                                           8,932,916              1,397,715               -         10,330,631    and Liability Management Committee, and           and exposure to specific risks. The Bank’s
Capital expenditures                                      (1,097,440)              (19,899)                -         (1,117,339)   Credit Committee.                                 Management Board makes decisions on the
Credit related commitments                                 21 166 509              402,003                 -         21,568,512




122                                                                                                                                                                                                                              123
Financial Risk Management                                                                                                                                    Notes to the Consolidated Financial Statements



risks that may be accepted by the Group or            the management of operational and legal             The Group’s overall approach to credit risk         methods of issue of loans and subsequent
on arrangements to maintain the Group as              risks.                                              management is defined in the Credit Policy,         monitoring of the borrowers, as well as time-
a going concern in case of emergency when                                                                 which is annually approved by the Bank’s            ly obtaining information on the borrowers;
the decision-making process is beyond the             The Bank’s Management Board, Big Credit             Management Board. The Bank’s credit policy
scope of the Asset and Liability Management           Committee and Small Credit Committees of            reflects the general approach to the Group’s              Control over compliance by the Bank’s
Committee and the Credit Committee. Due               the Bank’s branch subdivisions are responsible      credit risk management, credit risk manage-         subdivisions with resolutions adopted by the
to deterioration of the financial markets in          for making decisions on management of the           ment policy, the respective functions of the        Bank’s competent authorities and internal
the fourth quarter of 2008 the Management             Bank’s credit risks. The Bank’s Management          Bank’s subdivisions, particular aspects of          documents (such as credit policy, internal
Board considered the results of stress-tests          Board approves the Credit Policy (a docu-           credit risk management for one borrower or          limits, etc).
of the Bank’s risks, liquidity risk and credit risk   ment containing guidelines on principles and        a group of related borrowers, and the indus-
being the financial risks that the Bank is most       procedures of credit risk management in the         try limits in lending operations.                   The Group management controls credit risks
exposed to during the financial crisis.               Bank and determining authority of the Bank’s                                                            and the loan portfolio quality based on the
                                                      Big Credit Committee and Small Credit Com-          To maintain credit risks at an appropriate level    following reporting forms:
The Asset and Liability Management Com-               mittee). The Bank’s Big Credit Committee and        the Group uses the following risk man-
mittee is responsible for day-to-day financial        Small Credit Committees of the branches and         agement tools:                                      Daily reports which form the basis for man-
risk management (except for the credit risk).         the head office adopt resolutions on separate                                                           agement decisions and are submitted to the
Weekly, the Asset and Liability Management            credit risk-related transactions or determine       For separate borrowers:                             Credit Director and the Deputy Chairman of
Committee adopts resolutions on manage-               credit risk limits for certain borrowers (within                                                        the Management Board, responsible for lend-
ment of the Group’s balance sheet structure           the scope established by the Management                Establishing limits for separate borrowers       ing operations:
and the related liquidity risks, on determin-         Board in the credit policy). Whenever deci-         and groups of related borrowers;
ing and changing market risk limits. The Asset        sions on certain loans are out of the scope                                                                 Changes in the quality categories of loans
and Liability Management Committee coor-              of Small Credit Committees, the respective               Assessment of the borrowers’ financial         in the loan portfolio;
dinates the main principles and procedures            authority is delegated to the Big Credit Com-       position at the moment of the loan applica-
of financial risk management (except for the          mittee and the Bank’s Management Board.             tion and during the term of the loan;                  Calculation of credit risk exposure per one
credit risk) and has the right to make deci-                                                                                                                  borrower or a group of related borrowers.
sions on financial risk management in case of         Since credit risk is the main financial risk of           Evaluation of the market value of the
emergency.                                            the Group, the current management of the            collateral for a loan, evaluation of financial      Weekly and monthly reports submitted for
                                                      Group’s credit risk is mostly performed by          position of guarantors;                             the purposes of meetings conducted by the
The Bank’s Technical Policy Committee re-             its specialized subdivision, the Credit Division,                                                       Bank’s Asset and Liability Management Com-
views the issues of management of opera-              exercising operational control over the credit          Control over availability and safety of the     mittee, Management Board and Supervisory
tional risks, associated with IT infrastructure       risk level.                                         pledge, both preliminary (before the pledge         Board:
of the Bank.                                                                                              agreement is concluded) and subsequent
                                                      Credit risk. The Group takes on exposure to         control within the agreement term;                      Calculation of covenants (industry risks,
The Department of Banking Risks is respon-            credit risk which is the risk that a counterpar-                                                        credit exposure of large customers, loans
sible for the compliance with the Risk Man-           ty will be unable to pay all amounts of the             Control over timely performance of the          granted to related borrowers, calculation of
agement Policy, monitoring of the cumulative          principal debt or interest in full when due.        borrower’s obligations to the Bank;                 cumulative loans granted to the Bank’s 20
bank exposure level, initiating the develop-                                                                                                                  largest borrowers).
ment of methods of assessment of certain fi-          The Group’s maximum exposure to credit risk             Defining the credit quality category of the
nancial and non-financial risk levels, manage-        is primarily reflected in the carrying amounts      loan, which conforms to the credit risk level.          General structure of the loans issued by
ment procedures for these risks, compliance           of respective financial assets on the consoli-                                                          the Bank by branches/additional offices;
by the Bank divisions with existing procedures        dated balance sheet. The impact of possible         For the loan portfolio in general:
and limits restricting the level of these risks.      netting of assets and liabilities to reduce po-                                                             Movement of loans (broken down by the
The Department of Banking Risks coordinates           tential credit exposure is not significant.             Development of uniform procedures and           loans issued, rolled-over, overdue or repaid);




124                                                                                                                                                                                                   125
Financial Risk Management                                                                                                                                 Notes to the Consolidated Financial Statements



     Performance of the Bank’s branches/           Limits established by the Group for                 borrower or a group of related borrowers            ing the maximum debt of counterparty banks
departments in terms of the amount of the          credit risk management purposes:                    (not exceeding 25% of the Bank’s equity es-         when conducting transactions on the inter-
loans granted, borrowers’ industries, etc;                                                             timated in compliance with the recommen-            bank lending market and performing pur-
                                                   1. Limits for separate borrowers and for a          dations provided by the Basel Committee on          chase and sale of financial assets, including
      Performance of the Bank in terms of          group of related borrowers.                         Banking Supervision in April 1998 (Basel I);        term currency operations when the counter-
credit products issued to individual and cor-                                                                                                              party bears the credit risk in settlements. The
porate customers.                                  When establishing limits for groups of bor-              Amount of loans and advances to bor-           respective limits are established for each fi-
                                                   rowers, the Group takes into account both           rowers related to the Bank (not exceeding           nancial institution on the basis of its credit
Decision to grant loans                            the requirements of Russian regulatory au-          20% of the Bank’s equity estimated in com-          quality analysis performed by the Bank’s com-
                                                   thorities and those of global financial institu-    pliance with the recommendations provided           petent collegial bodies (Management Board,
For credit risk management purposes the            tions, which are the Group’s creditors.             by the Basel Committee on Banking Supervi-          Credit Committee). The limits established for
Bank adopted a collegial decision-making                                                               sion (Basel I);                                     resident banks are subject to review at least
system for granting loans (except for com-         The Group establishes individual limits in re-                                                          each quarter. The limits established for non-
mon loans granted to individuals under the         spect of borrowers and groups of related              Cumulative amount of loans, bank guaran-          resident banks are subject to review at least
Bank’s target programs). The branches and          borrowers. When establishing a limit the Bank       tees and sureties provided by the Bank to its       semi-annually.
the head office have Small Credit Committees       takes into account all the information the          shareholders (having the right to 5 and more
which grant loans within the established lim-      Group managed to obtain. When establishing          percent of the Bank’s voting stock) – not           Starting from the second half of September
its. The limits of authority of the Small Credit   an individual limit, the Group performs analy-      exceeding 50% of the Bank’s equity estimat-         2008 the governing bodies of OJSC “Bank
Committees in branches are determined on           sis of the financial statements, cash flows,        ed in compliance with the recommendations           ”Saint Petersburg” took a number of mea-
the basis of their credit performance in the       available credit history of each borrower in        provided by the Basel Committee on Banking          sures, aimed at reducing exposure to credit
previous year, the structure and quality of        a group of related borrowers, the need of           Supervision (Basel I);                              risks arising on granting and servicing of loans
their loan portfolios and qualifications of the    the group of related borrowers in credit re-                                                            to legal entities and individuals as well as at
employees by subdivision. The specific limits      sources, as well as availability of funds for re-        Amount of overdue loans in the loan            diversification of loan portfolio by sectors and
are determined in the Bank’s Credit Policy         demption of the loan. Also the Group takes          portfolio – not exceeding 5%;                       significant credit exposures, including:
approved by the Bank’s Management Board.           into account the property pledged as collat-
                                                   eral for a loan. The Group has established               Ratio of the maximum aggregate risk in         1. Starting from 6 October 2008 restrictions
Decisions on loans beyond the limits of au-        the following priority of collateral based on       the real estate and construction sector to the      were introduced in respect of new loan ap-
thority of Small Credit Committees is taken        liquidity of collateral:                            cumulative loan portfolio less than 25%;            plications from legal entities operating in
by the Credit Committee (preliminary ap-                                                                                                                   the following economic sectors: “Construc-
proval of granting the loan with the Small         1. deposits with the Bank and promissory                Ratio of the maximum risk in any eco-           tion”, “Real estate operations”. The authority
Credit Committee is obligatory). Decisions on      notes issued by the Bank;                           nomic sector to the cumulative loan portfolio       to make the decision on provision of loans/
loans beyond the limits of authority of Credit                                                         of 20%.                                             guaranties to legal entities operating in these
Committee, which authority is limited only by      2. real estate;                                                                                         economic sectors belongs to the Bank’s Man-
the amount of cumulative debt liability of                                                             For off-balance sheet financial instruments         agement Board. The powers formerly allocat-
borrowers, is taken by the Bank’s Manage-          3. guarantees and sureties of legal entities;       the Group uses the same credit policy as it         ed to Credit Committees of supplementary
ment Board (preliminary approval of grant-                                                             does for balance sheet financial instruments,       offices and branches, and the Credit Com-
ing the relevant loan with the Small Credit        4. fixed assets;                                    including transaction approvals, risk mitigating    mittee of the Bank were restricted. The ex-
Committee and Credit Committee is obliga-                                                              limits and monitoring procedures. The borrow-       ceptions are tender participation loans/guar-
tory).                                             5. other assets.                                    er is entitled to use any of the Bank’s offered     anties, decisions on which are taken by the
                                                                                                       products (guarantees, letters of credit, credit     Credit Committee of the Bank, and loans to
The loans to the borrowers related to the          2. Overall loan portfolio limits.                   facilities, etc.) within the established limit.     small and medium size legal entities, decisions
Group are granted with prior consent of the                                                                                                                on which are taken by Small Credit Commit-
Bank’s Supervisory Board.                             Cumulative credit risk exposure to a separate    The Bank uses the system of limits restrict-        tees of supplementary offices and branches




126                                                                                                                                                                                                  127
Financial Risk Management                                                                                                                                Notes to the Consolidated Financial Statements



of the Bank irrespective of the economic sec-          removal of the possibility to include com-       the exception of interest risk), management       Department (back-office) currently monitors
tor they operate in.                               prehensive and collision car insurance pay-          procedures for these risks, and for identifi-     the Bank’s compliance with the limits set.
                                                   ments as a part of the loan;                         cation and analysis of the current risk level.
2. The amendments to the Bank’s Credit Poli-                                                            The management procedure for currency             For currency management purposes the
cy aimed at toughening the requirements and            tightening of requirements in respect of         and other price (equity) risk was significant-    Group uses the system of mandatory limits
limiting authority of Credit Committees of         documentation requirements (employment               ly updated in May 2008 when the Bank’s            established by the CBRF, including limits on
supplementary offices and branches of the          history, earnings certificate only by 2-NDFL,        Management Board approved “Regulation             open position of the Bank in a foreign cur-
Bank in taking decisions on loan provision are     3-NDFL).                                             of management of risks, arising from opera-       rency (up to 10% of the equity estimated in
as follows:                                                                                             tions with financial market instruments”. The     compliance with the CBRF) and the limit on
                                                   Mortgage loans:                                      Department of the Banking Risks reports to        the open position in all foreign currencies (up
   The list of collateral which is subject to                                                           the Group’s management on a regular basis.        to 20% of the equity estimated in compli-
compulsory insurance was expanded;                    increase of initial contribution up to 25 %       The review of the main risks is communicated      ance with the CBRF).
                                                   for apartments and up to 30% for dwelling-           to the Bank’s management and the Asset
    Restriction of Small Credit Committees’        houses and land properties;                          and Liability Management Committee of the         The Group follows a conservative currency
authority to:                                                                                           Bank.                                             risk management policy and opens currency
                                                      removal of the possibility to grant a con-                                                          positions primarily in the currencies most fre-
          grant loans/guaranties to legal enti-    current loan to cover initial contribution.          The Treasury Department is responsible for        quently used in the Russian Federation (US
      ties without collateral (with the excep-                                                          development of methods for evaluation and         Dollars and Euros) below the currency expo-
      tion of tender participation loans);         Geographical risk. The Group’s exposure              procedures of operational management of           sure limits established by the CBRF.
                                                   to geographical risk is limited since substan-       interest risk.
           grant secured loans, which do not       tially all assets and liabilities of the Group are                                                     In addition the Asset and Liability Manage-
      belong to the 1 and 2 categories of          concentrated in the Russian Federation.              Market risk management is defined as a            ment Committee sets a number of additional
      quality of collateral, determined in ac-                                                          method of limitation of possible losses which     limits (restrictions) on the amount of mar-
      cordance with the guideline of CBRF №        Market risks. The Group takes on expo-               can be incurred for by the Group within a         ket risks for financial market instruments,
      254-P dated 26 March 2004 “On the            sure to the market risks arising from open           set period of time due to movements in ex-        through which the Bank is exposed to cur-
      formation of reserves against possible       positions in interest rate, currency and equity      change rates, securities quotations and inter-    rency risk.
      losses on loans, credit and equivalent       products that are exposed to general and             est rates by way of establishing a system of
      debt by credit organisations”.               specific market movements.                           limits on transactions, as well as stop-loss
                                                                                                        limits (maximum loss limits, in case of vio-
           change initial terms of loan and           currency risk (risk of losses due to ex-          lation of which the position is closed) and
      pledge agreements, as well as of re-         change rate fluctuations);                           monitoring their further compliance.
      lease of collateral.
                                                       interest rate risk (risk of losses due to        Currency risk. Currency risk is the risk of
In addition, certain measures were taken to        fluctuations in the levels of market interest        changes in income or carrying value of the
improve collateral on existing facilities and to   rates);                                              Group’s financial instrument portfolio due to
bring it in line with new policies.                                                                     exchange rate fluctuations.
                                                      other price (equity) risk (risk of losses due
3. Changes in the Bank’s lending programs          to movements in quotations of the equity in-         The Department of Financial Markets Opera-
for individual borrowers are as follows:           strument).                                           tions currently manages the open currency
                                                                                                        position within the limits set by the Asset
Car loans:                                         The Department of the Banking Risks is re-           and Liability Management Committee (the
                                                   sponsible for developing methods of apprais-         Department of the Banking Risks prepares
   increase of initial contribution up to 30%;     al of the current level of market risks (with        estimates for these limits). The Operational




128                                                                                                                                                                                                129
Financial Risk Management                                                                                                                                              Notes to the Consolidated Financial Statements



The table below summarises the Group’s exposure to foreign currency exchange rate risk as at                  The table below summarises the Group’s exposure to foreign currency exchange rate risk as at 31
31 December 2008. The Group does not apply the presented currency risk analysis for management                December 2007. The Group does not apply the presented currency risk analysis for management
purposes.                                                                                                     purposes.

IN THOUSANDS OF RUSSIAN ROUBLES                    RR    US DOLLARS           EURO     OTHER         TOTAL    IN THOUSANDS OF RUSSIAN ROUBLES                    RR    US DOLLARS         EURO     OTHER          TOTAL
Assets                                                                                                        Assets
Cash and cash equivalents                  13 022 590      14 442 415      9 340 213   36 108    36 841 326   Cash and cash equivalents                   5 665 183       2 865 412    1 047 342    34 511     9 612 448
Mandatory cash balances with the CBRF          212 921              -              -        -       212 921   Mandatory cash balances with the CBRF        1 551 913              -            -         -      1 551 913
Trading securities                          1 396 639       1 295 746              -        -     2 692 385   Trading securities                          7 576 519       4 074 171            -         -    11 650 690
Securities pledged under sale                                                                                 Securities pledged under sale
                                            1 470 526               -              -        -     1 470 526                                                 517 834               -            -         -       517 834
and repurchase agreements                                                                                     and repurchase agreements
Due from banks                              4 428 663        774 845      13 972 356        -    19 175 864   Amounts receivable
                                                                                                                                                            916 651               -            -         -       916 651
Loans and advances to customers            114 536 137    26 222 624       4 123 740        -   144 882 501   under reverse repurchase agreements
                                                                                                              Due from banks                              1 615 624       3 760 262   1 360 995          -     6 736 881
Investment securities held-to-maturity         777 591              -              -        -       777 591
Other financial assets                        183 621         14 544         16 396         -       214 561   Loans and advances to customers            73 725 930      15 912 001   2 092 203          -     91 730 134

Premises and equipment                      6 945 944               -              -        -    6 945 944    Other financial assets                        154 676             110         245          -       155 031

Intangible assets                                 974               -              -        -          974    Prepaid income tax                            93 946                -            -         -        93 946

Other assets                                  347 213          14 771           827         -       362 811   Premises and equipment                      3 433 461               -            -         -     3 433 461

Long-term assets held-for-sale              2 137 985               -              -        -     2 137 985   Intangible assets                                1 016              -            -         -          1 016
                                                                                                              Other assets                                 254 394             605           27      1 181       256 207
Total assets                              145 460 804     42 764 945     27 453 532    36 108   215 715 389
                                                                                                              Total assets                               95 507 147      26 612 561   4 500 812    35 692    126 656 212
Liabilities
Due to banks                                31 631 760       669 958          17 913      458   32 320 089    Liabilities

Customer accounts                          97 200 435     24 475 408      18 128 629   20 007   139 824 479   Due to banks                                  613 700         55 443        7 550       573        677 266

Bonds issued                                1 001 368       8 932 213              -        -     9 933 581   Customer accounts                          78 146 564      6 447 650    4 128 205     6 353     88 728 772

Other debt securities in issue               3 717 881       396 583        222 427         -     4 336 891   Bonds issued                                 999 055        5 588 167            -         -     6 587 222

Other borrowed funds                                 -     8 078 377       1 520 474        -     9 598 851   Other debt securities in issue              7 100 073         179 115      146 115         -     7 425 303

Other financial liabilities                   209 056           1 730         20 917        -       231 703   Other borrowed funds                                 -      7 641 887            -         -     7 641 887

Income tax liabilities                          1 025               -              -        -         1 025   Other financial liabilities                   36 486            2 337       18 189         -        57 012

Deferred income tax liability                  67 125               -              -        -        67 125   Deferred income tax liability                 248 131               -            -         -       248 131
Other liabilities                             563 179         33 654             63         -      596 896    Other liabilities                            283 202           2 354             -         -       285 556

Total liabilities                         134 391 829     42 587 923     19 910 423    20 465   196 910 640   Total liabilities                          87 427 211      19 916 953   4 300 059     6 926     111 651 149

Less fair value of currency derivatives       119 424               -              -        -       119 424   Less fair value of currency derivatives      (10 169)               -            -         -       (10 169)


NET BALANCE SHEET POSITION,                                                                                   NET BALANCE SHEET POSITION,
                                          11 188 399        177 022      7 543 109     15 643   18 924 173                                              8 069 767       6 695 608      200 753     28 766    14 994 894
EXCLUDING CURRENCY DERIVATIVES                                                                                EXCLUDING CURRENCY DERIVATIVES

CURRENCY DERIVATIVES (NOTE 36)             8 419 723     (1 344 940)    (7 194 207)        -     (119 424)    CURRENCY DERIVATIVES (NOTE 36)            7 730 036      (7 325 320)    (394 547)         -        10 169


NET BALANCE SHEET POSITION,                                                                                   NET BALANCE SHEET POSITION,
                                          19 608 122     (1 167 918)       348 902     15 643   18 804 749                                              15 799 803       (629 712)    (193 794)    28 766    15 005 063
INCLUDING CURRENCY DERIVATIVES                                                                                INCLUDING CURRENCY DERIVATIVES




130                                                                                                                                                                                                                131
Financial Risk Management                                                                                                                                                                                      Notes to the Consolidated Financial Statements



The table below summarises the foreign currency exchange rate risk for the Group’s monetary fi-                                          Movements in other currencies’ exchange                                 on forward currency contracts (forward cur-
nancial instruments as at 31 December 2008 and 31 December 2007.                                                                         rates will have no material effect on the profit                        rency positions).
                                                                                                                                         or loss of the Group.
IN                                                                                                                                                                                                               Since November 2008 the Bank has followed
THOUSANDS                                                                                                                                In 2008 the governing bodies (the manage-                               the CBRF recommendations relating to reduc-
                                AS AT 31 DECEMBER 2008                                      AS AT 31 DECEMBER 2007
OF RUSSIAN                                                                                                                               ment) of OJSC “Bank ”Saint Petersburg” took                             tion of long open currency positions and unde-
ROUBLES                                                                                                                                  a number of measures in order to reinforce                              sirability of changing short currency positions to
                   Monetary          Monetary      DerivativesNet balance       Monetary        Monetary      Derivatives         Net    the currency risk management system, includ-                            long ones for certain currencies.
                    financial         financial                     sheet        financial       financial                    balance
                       assets        liabilities                  position          assets      liabilities                     sheet    ing:
                                                                                                                              position                                                                           Interest rate risk. The Group takes on expo-
Russian Roubles 135 994 692      133 760 500         8 419 723 10 653 915     90 914 153      86 895 878       7 730 036    1 748 311        The major internal Bank’s document de-                              sure to the effects of fluctuations in market inter-
US Dollars        42 750 174      42 554 269       (1 344 940) (1 149 035)     26 611 956      19 914 599     (7 325 320)   (627 963)
                                                                                                                                         termining the currency risk management pro-                             est rates on its financial position and cash flows.
                                                                                                                                         cedure was amended;                                                     As a result of such changes interest margins may
Euros             27 452 705      19 910 360       (7 194 207)     348 138     4 500 785       4 300 059       (394 547)    (193 821)
                                                                                                                                                                                                                 reduce and the Group’s profit may decrease.
Other                 36 108           20 465                 -     15 643         34 511           6 926               -     27 585          In April 2008 the Asset and Liability Man-
                                                                                                                                         agement Committee set tighter internal lim-                             The table below summarises the effective in-
TOTAL            206 233 679      196 245 594         (119 424)   9 868 661   122 061 405      111 117 462         10 169 10 954 112
                                                                                                                                         its on the amount of open currency position                             terest rates by currency for major debt instru-
                                                                                                                                         tougher than those set by the CBRF, including                           ments. The analysis has been prepared based
                                                                                                                                         open currency position limits in principal cur-                         on year-end effective rates used for amortisa-
The currency derivatives position in each col-                         An analysis of sensitivity of the Bank’s net income               rencies and limits on the amount of positions                           tion of the respective assets/liabilities.
umn represents the fair value, at the balance                          (and equity) to changes in the foreign currency
sheet date, of the respective currency that the                        exchange rates based on positions existing as at
                                                                                                                                         IN % P.A.                                                     2008                                            2007
Group agreed to buy (positive amount) or sell                          31 December 2008 and 2007 and a simplified
                                                                                                                                                                                           RR          USD       Euro      Other           RR          USD       Euro     Other
(negative amount). The net total represents                            scenario of a 5% change in USD and Euro to
                                                                                                                                         Assets
fair value of the derivatives.                                         Russian Rouble exchange rates, assuming that all
                                                                                                                                         Cash and cash equivalents                        1.34         0.00       0.04       0.00         0.00         6.54      5.53         0.00
                                                                       other variables remain unchanged is as follows.
                                                                                                                                         Debt trading securities                         13.30         5.60          -          -         7.82         5.53          -           -
                                                                                                                                         Securities pledged under sale and
                                                                                                                                                                                         14.00             -         -          -         6.30             -         -           -
                                                                                                                                         repurchase agreements
                                                                                                                                         Due from banks                                 20.85          3.58       2.06          -          5.31        4.94       4.21           -
IN THOUSANDS OF RUSSIAN ROUBLES                                                                         AS AT 31 DECEMBER 2008           Loans and advances to customers                 15.22        13.29      14.50          -         13.10       12.50      12.10           -

5% appreciation of USD against RR                                                                                           (44 380)     Investment securities held-to-maturity           17.6             -         -          -             -            -         -           -

5% depreciation of USD against RR                                                                                             44 380     Liabilities
                                                                                                                                         Due to banks                                    12.66         7.78          -          -         5.02         3.99          -        0.00
5% appreciation of Euro against RR                                                                                             13 258
                                                                                                                                         Customer accounts
5% depreciation of Euro against RR                                                                                           (13 258)
                                                                                                                                             current and settlement accounts               1.14         0.12      0.08       0.68          0.11        0.02      0.05         0.00
                                                                                                                                             term deposits
IN THOUSANDS OF RUSSIAN ROUBLES                                                                        AS AT 31 DECEMBER 2007                      individuals                           11.06         9.34       8.23          -         9.29         8.53      7.69            -

5% appreciation of USD against RR                                                                                            (31 398)              legal entities                         11.11        7.95        7.17         -         8.38         8.96       7.10           -
                                                                                                                                         Bonds issued                                     11.27       10.80          -          -          9.61       10.90          -           -
5% depreciation of USD against RR                                                                                             31 398
                                                                                                                                         Other debt securities in issue                  10.47         11.01      3.94          -         8.03         9.73       1.24           -
5% appreciation of Euro against RR                                                                                            (9 691)
                                                                                                                                         Other borrowed funds                                -         8.00      14.50          -             -         8.51         -           -
5% depreciation of Euro against RR                                                                                              9 691
                                                                                                                                         The sign “–“ in the table above means that the Group does not have the respective assets or liabilities in corresponding currency.




132                                                                                                                                                                                                                                                                       133
Financial Risk Management                                                                                                                                          Notes to the Consolidated Financial Statements



Interest rate risk management represents            instrument to facilitate rapid change of the         uniformity interest rate revision assumptions,             An analysis of sensitivity of the fair value of
management of the Group’s assets and liabili-       interest rate risk position;                         the Group will evaluate its general exposure to            the Group’s debt securities, which form part of
ties to maximize profit and reduce losses from                                                           the interest rate risk as “exposure to the inter-          the Group’s trading portfolio and other securi-
possible fluctuations of the interest rates and        changes in base interest rates to manage          est rate risk within the period of 30 days + 5/2           ties at fair value through profit or loss of the
the balance sheet structure. The Group be-          the structure of assets and liabilities;             of the exposure to the interest rate risk within           Bank based on a change in the interest rates
lieves that interest rate risk management is                                                             the period of 180 days”. The Group’s exposure              during the next reporting year, assuming that
an important part of the Group management,              changes in the share of the floating rate        to the interest rate risk is determined separate-          all other variables remain unchanged is as fol-
which significantly affects the Group’s finan-      instruments in assets and liabilities.               ly for Russian Roubles and foreign currencies.             lows.
cial performance.
                                                    For management purposes the Group sets the           As at 31 December 2008:
The Group’s interest rate risk management is        forecasted change in the net interest income
performed by the following bodies:                  in case of movement in the rate of the bench-        IN THOUSANDS OF RUSSIAN ROUBLES
                                                    mark market instrument of one percentage             100 bp parallel rise

    Management Board – in terms of strate-          point as an interest rate risk criterion. As the     Trading securities                                                                                 (16 485)

gic management of the balance sheet struc-          benchmark instrument the Group uses Rus-             Securities pledged under sale and repurchase agreements                                            (13 905)

ture;                                               sian Federation bonds as it reflects the cur-        TOTAL                                                                                            (30 390)
                                                    rent interest rates in the national economy of       100 bp parallel fall
     Asset and Liability Management Commit-         the Russian Federation.                              Trading securities                                                                                   16 485
tee – in terms of approval and control over                                                              Securities pledged under sale and repurchase agreements                                              13 905

the structure of the assets and liabilities, man-   On the basis of the pricing mechanism for the        TOTAL                                                                                              30 390
agement of interest rates and portfolio of se-      market securities with fixed income, when the
curities, approval of methods (procedures) of       market level of interest rates is changed, a         As at 31 December 2007:
the interest rate risk evaluation;                  fast (one off) change of net interest income
                                                    takes place related to revaluation of such se-       IN THOUSANDS OF RUSSIAN ROUBLES
    Treasury Department – in terms of evalu-        curities portfolio as a response to movement         100 bp parallel rise
ation of the Group’s exposure to the interest       in the market level of interest rates. The fur-      Trading securities                                                                                (472 950)
rate risks; current management of the bal-          ther revision of rates on other assets and li-       Securities pledged under sale and repurchase agreements                                            (18 478)
ance sheet structure, short-term asset man-         abilities sensitive to changes in interest rates
                                                                                                         TOTAL                                                                                           (491 428)
agement, definition of interest rate risk levels    is extended for a certain period and on the
                                                                                                         100 bp parallel fall
acceptable for the Group and making interest        basis of the Bank’s asset and liability struc-
                                                                                                         Trading securities                                                                                  472 950
rate risk management proposals to the Asset         ture by maturity and according to the existing
                                                                                                         Securities pledged under sale and repurchase agreements                                              18 478
and Liability Management Committee.                 practice of interest rate revision, it is normally
                                                                                                         TOTAL                                                                                             491 428
                                                    completed within 180 days.
In case the existing interest rate movement
forecast predicts a significant reduction of the    For a 30-day period the Group considers the          Identifying the deterioration in the Russian fi-           income from fixed and floating rate finan-
Group’s net interest margin, the Asset and          changes in the net interest income for the first     nancial market in August and early September               cial instruments (except for the debt securi-
Liability Management Committee makes deci-          month from the date of movement in the               2008, the Bank noted the growth of interest                ties which form part of the Group’s trad-
sions to regulate the interest rate risk level.     market interest rates. For a 180-day period the      rate risks and took timely measures to reduce              ing portfolio and other securities recorded
The regulation arrangements of the Group            Group considers the change of the net interest       the debt securities portfolio (primarily bonds             at fair values through profit or loss) based
may include:                                        income for the sixth month from the date of          with long-term maturity/ repurchase offer).                on forecasted movements in interest rates
                                                    movement in the market interest rates. Since all                                                                of financial assets and liabilities for the next
     alterations in the size and structure of       interest rates on financial assets and liabilities   The following table presents the Group’s ex-               reporting period, with all other variables held
the fixed-income investment portfolio as an         will be revised subject to compliance with the       posure to the movement in the net interest                 constant.




134                                                                                                                                                                                                           135
Financial Risk Management                                                                                                                                  Notes to the Consolidated Financial Statements



As at 31 December 2008:                                                                               The Department of Banking Risks controls              in transactions with a certain group of equity
                                                                                                      the equity risk on a daily basis and reports to       instruments.
                                                    INTEREST RATE                   NET INTEREST      the Asset and Liability Management Commit-
IN THOUSANDS OF RUSSIAN ROUBLES
                                                        MOVEMENT                INCOME MOVEMENT       tee the results of the estimates which show           An analysis of sensitivity of the Bank’s net in-
Due from banks                                               (0.36)                       (41 190)    whether the set limits may be exceeded in             come (and equity) to changes in securities pric-
Loans and advances to customers                              (0.36)                      (257 345)    case of a continuous unfavourable situation           es based on positions existing as at 31 Decem-
Due to banks                                                 (0.33)                        68 354     on the equity market, as well as the mat-             ber 2008 and 2007 and a simplified scenario of
Customer accounts                                            (0.33)                        162 587    ters related to possible equity risk mitigation       a 5% change in securities prices is as follows.
Bonds issued                                                 (0.09)                          9 175
Other debt securities in issue                               (0.33)                          7 102
                                                                                                      IN THOUSANDS OF RUSSIAN ROUBLES                                                AS AT 31 DECEMBER 2008
Other borrowed funds                                         (0.38)                         71 483
                                                                                                      5% increase in securities prices                                                                 1 292
Total net interest income movement                                -                         20 166
                                                                                                      5% decrease in securities prices                                                                (1 292)


As at 31 December 2007:
                                                                                                      IN THOUSANDS OF RUSSIAN ROUBLES                                                AS AT 31 DECEMBER 2007
                                                                                                      5% increase in securities prices                                                               40 509
                                                    INTEREST RATE                   NET INTEREST
IN THOUSANDS OF RUSSIAN ROUBLES                                                                       5% decrease in securities prices                                                              (40 509)
                                                        MOVEMENT                INCOME MOVEMENT
Loans and advances to customers                                 0.5                        205,532
Customer accounts                                             (0.2)                         80,707
                                                                                                      The following instruments are applied to man-         Liquidity risk. Liquidity risk is defined as the
Bonds issued                                                  (0.5)                         10,958
                                                                                                      age the equity risk:                                  risk when the maturity of assets and liabilities
Other debt securities in issue                                (0.2)                          9,941
                                                                                                                                                            does not match. The Group is exposed to daily
Other borrowed funds                                          (0.5)                         25,757,
                                                                                                          Diversification of the portfolio of equity        calls on its available cash resources from over-
Total net interest income movement                                -                        332,895
                                                                                                      securities, including setting limits on different     night deposits, current accounts, maturing de-
                                                                                                      types of equity securities;                           posits, loan draw downs, guarantees and from
In 2007 the Group did not evaluate the move-    tee sets the limits restricting possible losses                                                             margin and other calls on cash settled deriva-
ment of the net interest income/(expenses)      related to the effects of the equity risk: cu-             Setting and monitoring compliance with           tive instruments. The Group does not maintain
from correspondent accounts, due from and       mulative limit for the amount of open equity          cumulative and individual limits for equity in-       cash resources to meet all of these needs as
to banks since the Group management fore-       positions, individual limits for the amount of        struments;                                            experience shows that a minimum level of re-
casted a zero movement in the interest rate     open equity position for each issuer, “stop-                                                                investment of maturing funds can be predicted
for these instruments.                          loss” limit.                                               Setting and monitoring compliance with           with a high level of certainty.
                                                                                                      the “stop-loss” limits to reduce the losses of
Other price (equity) risk. The Group takes      If the risk becomes material the mitigation ar-       the Group.                                            The purpose of liquidity management is to cre-
on exposure to the risk of the movements        rangements are determined by the Manage-                                                                    ate and maintain the structure of assets and
in quotations of the equity instruments, pur-   ment Board.                                           Identifying the deterioration of the Russian fi-      liabilities of the Group by categories and ma-
chased by the Group.                                                                                  nancial market in August 2008, the Group took         turities which will enable the Group to ensure
                                                The limits are set based on analysis of the           the following measures to manage equity risk:         timely payments of its obligations and meeting
The Department of Financial Markets Opera-      credit quality of the security issuer and evalu-      sharp decrease (or in some cases - closing) of        demands of the Group’s customers.
tions currently manages the open equity posi-   ation of liquidity and volatility of financial in-    limits on issuers’ equity instruments, where sta-
tions and the corresponding derivative finan-   struments.                                            bility was questioned or which were character-        The Group seeks to maintain a diversified and
cial instruments within the limits set by the                                                         ized by high volatility or a sharp decrease in the    stable structure of liabilities, which comprise
Asset and Liability Management Committee.       The Operational Department (back-office)              market liquidity; increase in the discount for        primarily issued debt securities, long-term and
                                                currently monitors the Bank’s compliance with         reverse repurchase agreements to 25% with             short-term deposits of banks, corporate and
The Asset and Liability Management Commit-      equity limits.                                        maturity decreased to 1 working day.                  retail customer deposits. The Group invests the




136                                                                                                                                                                                                    137
Financial Risk Management                                                                                                                                      Notes to the Consolidated Financial Statements



funds in diversified portfolios of liquid assets,    the Group maintains a portfolio of liquid as-      counterparties in full as they fall due. It is im-       gaps. The Group developed an analytical form
in order to be able to respond quickly and           sets (including trading securities) which can be   plemented based on statistical and chronologi-           to evaluate the liquidity gap through com-
smoothly to unforeseen liquidity requirements.       used for prompt and loss-free repayment of         cal analysis of the balances on customers’ cur-          parison of assets and liabilities by their terms.
In spite of a substantial portion of custom-         the Bank’s debt;                                   rent accounts, forecasted guaranteed random              When attributing assets and liabilities to differ-
ers accounts being on demand, diversification                                                           customer deposits in correspondent accounts,             ent term categories the Group takes into ac-
of these deposits by number and type of de-               In certain cases the management may im-       movement of funds on accounts, analysis and              count both the contractual term and expected
positors, and the past experience of the Group       pose restrictions on some transactions to regu-    processing of the information on the Bank’s              maturity. For example, for current accounts of
would indicate that these customers accounts         late the Group’s balance sheet structure. The      obligations and requirements under term con-             customers the Group uses the statistical data
provide a long-term and stable source of fund-       limits are set when other instruments of liquid-   tracts in short-term periods. The received ana-          on sustainability, and for securities – possible
ing for the Group.                                   ity management are insufficient to maintain        lytical data serves as a basis for management            periods of selling portfolios without losses. The
                                                     liquidity;                                         of the Bank’s liquidity position and replenish-          Group regards equity as a long-term funding
The Group has established a multi-level liquidity                                                       ment of the payment cycle of the Bank and its            source and, therefore, accounts for it by the
management system. On a daily basis the Trea-            Raising long-term funds. During 2008 and       customers with funds from liquid assets.                 longest remaining maturity period. The man-
sury Department controls the Group’s liquidity       2007, the Group raised significant amounts on                                                               agement analyses net liquidity gap and cumu-
position. The long-term liquidity is forecasted      the global long-term debt and equity markets.      Medium-term liquidity (for the period of up              lative liquidity gap.
by the Asset and Liability Management Com-           Refer to Notes 20 and 22.                          to 3 months) monitoring ensures creation of
mittee. In some cases decisions on liquidity may                                                        the asset portfolio which may fully cover (with          The following tables are based on the above
be made by the Management and Supervisory            The Group’s liquidity management policy in-        a certain emergency reserve) all needs of the            principles and show distribution of assets and
Boards who also control the general liquidity        cludes the following:                              current liquidity management within the plan-            liabilities as at 31 December 2008 and 31 De-
of the Group.                                                                                           ning time horizon.                                       cember 2007 by expected maturity periods. This
                                                          Daily forecasts of cash flows by curren-                                                               table is prepared by the Group for management
Liquidity management requires maintaining            cies and calculation of the cash-flow related      Long-term liquidity (over 3 months) monitor-             purposes on the basis of accounting data pre-
sufficient amount of liquid assets to be used        amount of current liquidity reserves;              ing is based on analysis of the Group’s liquidity        pared under the Russian Accounting Principles.
in case of unforeseen circumstances. In accor-
dance with the results of analysis of the mac-            Management of concentration and struc-        As at 31 December 2008:
roeconomic conditions or the state of the bank-      ture of borrowed funds;
                                                                                                                                         DEMAND AND               FROM            FROM            OVER           TOTAL
ing market, as well as the general trends in the                                                        IN THOUSANDS                       LESS THAN            1 TO 6         6 TO 12          1 YEAR
                                                                                                        OF RUSSIAN ROUBLES                   1 MONTH           MONTHS          MONTHS
Group’s activity the management may demand               Development     of   liquidity   maintenance
higher amounts of liquidity, if required. In the     plans;                                             Assets                              75 481 917       57 999 468      46 385 449      39 028 913     218 895 747
third quarter of 2008 the Group’s manage-                                                               Liabilities and equity              69 713 884       57 692 886       24 279 756      67 209 221    218 895 747
ment decided to raise the requirements in re-            Diversification of the funding sources;
                                                                                                        Net liquidity gap                   5 768 033          306 582        22 105 693    (28 180 308)
spect of liquid assets, which allowed the Bank
                                                                                                        Cumulative liquidity gap            5 768 033         6 074 615       28 180 308
to maintain sufficient liquid assets for timely          Control over compliance of the Group with
performance of obligations and maintaining           the statutory liquidity requirements;
adequate liquidity ratio during the financial cri-                                                      As at 31 December 2007:
sis in the third and fourth quarter of 2008.            Setting interest rates for raising/granting
                                                     funds by instruments and periods.                                                   DEMAND AND               FROM            FROM             OVER         TOTAL
                                                                                                        IN THOUSANDS                       LESS THAN            1 TO 6         6 TO 12           1 YEAR
The Group’s management applies the follow-                                                              OF RUSSIAN ROUBLES                   1 MONTH           MONTHS          MONTHS
ing main instruments of liquidity management:        The Bank performs current liquidity manage-
                                                                                                        Assets                              36,032,398       24,674,595       36,403,345      30,146,250    127,256,588
                                                     ment (for the period of up to seven days)
    In the short term the most effective way to      on a daily basis and includes daily estimates      Liabilities and equity              37,750,195        23,012,513      20,279,524      46,214,356    127,256,588

manage liquidity is to manage the volume and         of the level of liquid assets necessary to set-    Net liquidity gap                    (1,717,797)       1,662,082       16,123,821    (16,068,106)

structure of liquid assets. The management of        tle obligations of the Bank to customers and       Cumulative liquidity gap             (1,717,797)        (55,715)      16,068,106




138                                                                                                                                                                                                              139
Financial Risk Management                                                                                                                                           Notes to the Consolidated Financial Statements



When performing its operating activity the           view that it is a reasonable fairer portrayal of    The liquidity position of the Group at 31 December 2008 prepared under IFRS is set out below. The
Bank also focuses on compliance with the re-         the Group’s liquidity position. Mandatory cash      Group does not use the presented analysis by contractual maturity for liquidity management purposes.
quirements of the CB RF on maintaining the           balances with the CBRF are included within
                                                                                                                                           DEMAND AND            FROM         FROM           FROM         MORE          TOTAL
minimum sufficient (maximum allowable) ra-           demand and less than one month as the ma-           IN THOUSANDS                        LESS THAN         1 TO 6      6 TO 12         1 TO 5         THAN
tios of instant (up to 1 day), current (up to        jority of the respective liabilities are also in-   OF RUSSIAN ROUBLES                    1 MONTH        MONTHS       MONTHS           YEARS      5 YEARS
30 days) and long-term (over 1 year) liquidity.      cluded within this category.
                                                                                                         Assets
These ratios are:
                                                                                                         Cash and cash equivalents          36 841 326               -             -             -             -    36 841 326
     Instant liquidity ratio (N2) which is calcu-                                                        Mandatory cash balances
                                                                                                                                                212 921              -             -             -             -       212 921
                                                                                                         with the CBRF
lated as the ratio of highly-liquid assets to
liabilities payable on demand;                                                                           Trading securities                  2 692 385               -             -             -             -     2 692 385

                                                                                                         Securities pledged under sale
                                                                                                                                             1 470 526               -             -             -             -     1 470 526
                                                                                                         and repurchase agreements
    Current liquidity ratio (N3), which is calcu-
lated as the ratio of liquid assets to liabilities                                                       Due from banks                     16 289 612       1 993 181      277 576       600 619        14 876     19 175 864

maturing within 30 calendar days;                                                                        Loans and advances to customers    8 880 603      54 840 163    45 890 167    25 871 524    9 400 044     144 882 501

                                                                                                         Investment securities
                                                                                                                                                      -       235 386       441 293       100 912              -       777 591
   Long-term liquidity ratio (N4), which is cal-                                                         held-to-maturity

culated as the ratio of assets maturing after                                                            Other financial assets                 66 551         94 032              -             -       53 978        214 561

one year to regulatory capital and liabilities                                                           Premises and equipment                       -              -             -             -    6 945 944     6 945 944
maturing after one year.
                                                                                                         Intangible assets                            -              -             -             -          974           974

                                                                                                         Other assets                          135 485         69 739        13 322        72 634         71 631       362 811
According to the Group’s management view
based on daily calculations of the Treasury                                                              Long-term assets held-for-sale               -              -    2 137 985              -             -     2 137 985
Department, within 2008 and 2007 the Bank                                                                Total assets                      66 589 409      57 232 501    48 760 343    26 645 689    16 487 447    215 715 389
complied with the liquidity ratios established
by the CBRF.                                                                                             Liabilities

                                                                                                         Due to banks                       14 952 490      17 367 599             -             -             -   32 320 089
The tables below shows assets and liabilities
                                                                                                         Customer accounts                 58 840 493       51 712 552   27 097 496     2 107 848        66 090    139 824 479
as at 31 December 2008 and 31 December
                                                                                                         Bonds issued                                 -      1 001 368    3 679 561      2 231 591     3 021 061     9 933 581
2007 by their remaining contractual maturity
unless there is evidence that any of these as-                                                           Other debt securities in issue       1 385 777      1 579 854     1 135 566      235 694              -     4 336 891
sets are impaired and will be settled after their                                                        Other borrowed funds                         -      1 047 725    2 481 956     4 353 701      1 715 469     9 598 851
contractual maturity dates in which case the
                                                                                                         Other financial liabilities          209 004            1 210           721        15 161        5 607        231 703
expected date of settlement is used. Some
of the assets and liabilities, however, may be                                                           Income tax liabilities                       -          1 025             -             -             -         1 025

of a longer term nature; for example, loans                                                              Deferred income tax liability                -              -             -       67 125              -        67 125
are frequently renewed and accordingly short                                                             Other liabilities                     197 026        398 693          1 177             -             -      596 896
term loans can have a longer term duration.
                                                                                                         Total liabilities                 75 584 790       73 110 026   34 396 477     9 011 120    4 808 227     196 910 640
Overdue assets are allocated based on their
expected maturity. The entire portfolio of                                                               NET LIQUIDITY GAP                 (8 995 381)    (15 877 525)   14 363 866    17 634 569    11 679 220    18 804 749
trading securities is classified within demand
and less than one month as the portfolio is of                                                           CUMULATIVE LIQUIDITY GAP
                                                                                                                                           (8 995 381)    (24 872 906) (10 509 040)     7 125 529    18 804 749
a trading nature and based on management’s                                                               AS AT 31 DECEMBER 2008




140                                                                                                                                                                                                                     141
Financial Risk Management                                                                                                                                                    Notes to the Consolidated Financial Statements



The liquidity position of the Group at 31 December 2007 prepared under IFRS is set out below.                           Due to the fact that substantially all the fi-        agreements. Many of the loans are issued for
                                                                                                                        nancial instruments of the Group are fixed            project finance and the term of the roll-over
                                   DEMAND AND            FROM         FROM           FROM        MORE          TOTAL    rated contracts, these remaining contractual          is separately specified in the loan agreement.
IN THOUSANDS                         LESS THAN         1 TO 6      6 TO 12         1 TO 5        THAN                   maturity dates also represent the contractual         In accordance with its credit policy the Group
OF RUSSIAN ROUBLES                     1 MONTH        MONTHS       MONTHS           YEARS     5 YEARS
                                                                                                                        interest rate repricing dates.                        issues short-term loans, with the possibility of
Assets                                                                                                                                                                        their further prolongation to finance medium
                                                                                                                        The amounts in the tables above represent             – and long-term projects of borrowers. Cus-
Cash and cash equivalents            9 612 448               -             -             -           -     9 612 448
                                                                                                                        carrying amounts of the assets and liabilities        tomers can extend the maturity of the loans,
Mandatory cash balances
                                      1 551 913              -             -             -           -      1 551 913   as at the reporting date and do not include           subject to approval by the Credit Committee
with CBRF
                                                                                                                        future interest payments.                             and/or the Management Board. Most borrow-
Trading securities                  11 650 690               -             -             -           -    11 650 690
                                                                                                                                                                              ers of the Group take the opportunity to pro-
Securities pledged under sale
                                       517 834               -             -             -           -       517 834    According to current legislation individuals can      long their loans, and this is regularly approved
and repurchase agreements
Amounts receivable under reverse
                                                                                                                        withdraw their deposits placed before con-            by the Bank’s Management Board. For such
                                       916 651               -             -             -           -       916 651
repurchase agreements                                                                                                   tractual maturity, in this case the interest rate     transactions contractual maturity of loans is
Due from banks                       6 666 881         70 000              -             -           -     6 736 881    on their deposits will equal interest rate on         shorter than their expected maturity which
                                                                                                                        demand deposits effective on the date of              may have a negative impact on the liquidity
Loans and advances to customers      10 411 635     28 031 756   31 991 062    17 936 254    3 359 427    91 730 134
                                                                                                                        withdrawal.                                           position of the Group presented above.
Other financial assets                 143 667             24              -             -      11 340       155 031

Prepaid income tax                            -        93 946              -             -                   93 946     Management of the Group believes that the             Liquidity requirements to support calls un-
                                                                                                                        committed unused credit lines it has available,       der guarantees and standby letters of cred-
Premises and equipment                        -              -             -             -   3 433 461     3 433 461
                                                                                                                        as well as the stability of customer accounts         it are considerably less than the amount of
Intangible assets                             -              -             -             -       1 016          1 016   will fully cover the liquidity gap in the tables      the commitment because the Group does
Other assets                            87 645         56 299        31 267        36 066      44 930       256 207
                                                                                                                        above.                                                not generally expect the third party to draw
                                                                                                                                                                              funds under the agreement. The total out-
Total assets                       41 559 364      28 252 025    32 022 329    17 972 320    6 850 174   126 656 212
                                                                                                                        The Group’s management believes that                  standing contractual amount of commitments
                                                                                                                        matching and/or controlled mismatching of             to extend credit does not necessarily repre-
Liabilities
                                                                                                                        the maturities and interest rates of assets and       sent future cash requirements, since many of
Due to banks                          486 439          190 827             -             -           -       677 266
                                                                                                                        liabilities is fundamental to the management          these commitments may expire or terminate
Customer accounts                   44 196 665      30 801 753   12 386 553      1 343 801           -    88 728 772    of the Group. It is unusual for banks ever to         without being funded.
                                                                                                                        be completely matched since business trans-
Bonds issued                                  -       999 055              -    3 065 263    2 522 904     6 587 222
                                                                                                                        acted is often of an uncertain term and of            The main differences between liquidity tables
Other debt securities in issue      2 048 036        4 056 727    1 164 695       155 845            -     7 425 303    different types. An unmatched position po-            prepared under IFRS by contractual maturity
Other borrowed funds                                 2 510 013     1 971 165     2 911 074    249 635      7 641 887    tentially enhances profitability, but can also        and the above tables prepared by the Group
                                                                                                                        increase the risk of losses. The maturities of        for management purposes are as follows:
Other financial liabilities             32 957           4 322       10 458         3 259        6 016        57 012
                                                                                                                        assets and liabilities and the ability to replace,
Deferred income tax liability                 -              -             -       248 131           -       248 131    at an acceptable cost, interest-bearing liabili-      1. The total balance sheet value differs by
Other liabilities                       45 138        239 353           544           521            -      285 556     ties as they mature, are important factors in         the provision for loan impairment of loans
                                                                                                                        assessing the liquidity of the Group and its          and advances to customers recorded by the
Total liabilities                  46 809 235      38 802 050    15 533 415     7 727 894    2 778 555   111 651 149
                                                                                                                        exposure to changes in interest and exchange          Group on the liabilities side for management
NET LIQUIDITY GAP                  (5 249 871)    (10 550 025)   16 488 914    10 244 426    4 071 619   15 005 063     rates.                                                purposes, whereas for the purposes of IFRS
                                                                                                                                                                              financial statements the amount of loans and
CUMULATIVE LIQUIDITY GAP
                                   (5 249 871)    (15 799 896)      689 018    10 933 444 15 005 063
                                                                                                                        The Group provides an opportunity to the              advances to customers is reduced by the pro-
AS AT 31 DECEMBER 2007
                                                                                                                        majority of its borrowers to roll-over credit         vision;




142                                                                                                                                                                                                                     143
Financial Risk Management                                                                                                                                                                                                 Management of Capital



2. For management purposes the Group ac-                        and deposits on demand since these deposits                As at 31 December 2007:
counts for mandatory cash balances with the                     are considered to be a long-term source of
CBRF as an asset, retiring in more than one                     funding of the Group’s transactions. There-                                                        DEMAND AND          FROM         FROM          FROM           MORE         TOTAL
                                                                                                                           IN THOUSANDS                              LESS THAN       1 TO 6      6 TO 12        1 TO 5           THAN
year since the Group may not use these re-                      fore, the current accounts of legal entities               OF RUSSIAN ROUBLES                          1 MONTH      MONTHS       MONTHS          YEARS        5 YEARS
sources to cover the creditors’ demands;                        and individuals have longer maturity periods
                                                                in calculating liquidity for Group management              Liabilities
3. For management purposes the loans and                        purposes.                                                  Due to banks                               486 890       193 758              -            -              -      680 648
advances to customers are recorded by con-
                                                                                                                           Customer accounts                       44 303 999     31 531 577   13 315 456     1 570 520              -    90 721 552
tractual maturity of the total loan amounts                     The tables below show distribution of liabilities
when they fall due, whereas for the purpos-                     as at 31 December 2008 and 31 December                     Bonds issued                                131 940     1 286 192      279 713     4 413 155      3 765 874    9 876 874
es of IFRS financial statements the loans are                   2007 by remaining contractual maturity. The                Other debt securities in issue           2 049 406      4 159 715     1 251 377      166 142              -    7 626 640
broken down by tranches, which is specifically                  amounts in the tables reflect contractual un-
                                                                                                                           Other borrowed funds                          1 355     2 798 127   2 169 488      3 609 423       277 068      8 855 461
relevant for the loans granted to individuals                   discounted cash flows and differ from the
and repaid by equal monthly installments;                       balance sheet amounts which are based on                   Other financial liabilities                  32 592             -             -            -              -       32 592

                                                                discounted cash flows. The Bank does not ap-               Total undiscounted future cash
                                                                                                                                                                    47 006 182   39 969 369    17 016 034     9 759 240     4 042 942    117 793 767
                                                                                                                           flows to settle financial liabilities
4. The Bank also applies internal methods to                    ply the presented analysis by undiscounted
determine the maturity of current accounts                      cashflows in liquidity management.                         Irrevocable undrawn credit lines                  -          449         1 256            50              -         1 755


                                                                                                                           TOTAL FUTURE CASH FLOWS                 47 006 182    39 969 818 17 017 290       9 759 290      4 042 942    117 795 522

As at 31 December 2008:

                                                                                                                           35. MANAGEMENT OF CAPITAL
                                        DEMAND AND           FROM         FROM         FROM         MORE          TOTAL
IN THOUSANDS
                                          LESS THAN        1 TO 6      6 TO 12       1 TO 5         THAN                   The Group’s objectives when managing capital                   (i) Under the current capital requirements
OF RUSSIAN ROUBLES
                                            1 MONTH       MONTHS       MONTHS         YEARS      5 YEARS
                                                                                                                           are (i) to comply with the capital requirements                set by the Central Bank of Russia banks
Liabilities
                                                                                                                           set by the Central Bank of the Russian Fed-                    have to maintain a ratio of regulatory capi-
Due to banks                             15 060 984     18 167 529            -             -            -    33 228 513   eration, (ii) to safeguard the Group’s ability to              tal to risk weighted assets (“statutory capi-
Customer accounts                        59 307 327    54 207 941    28 857 149    2 250 468      102 027    144 724 912
                                                                                                                           continue as a going concern and (iii) to maintain              tal ratio”) above 10%. Regulatory capital is
                                                                                                                           a sufficient capital base to achieve a capital ad-             based on the Bank’s reports prepared under
Bonds issued                                154 497     1 337 209     4 103 934    3 551 410     4 175 763    13 322 813
                                                                                                                           equacy ratio of at least 8% based on the Basel                 Russian statutory accounting standards and
Other debt securities in issue             1 397 712     1 666 155    1 237 753      264 319                  4 565 939    Prudential Requirements for Banks (Basel I).                   comprises.
Other borrowed funds                        58 945       1 242 811    2 785 915     5 174 712    1 723 122    10 985 505

Other financial liabilities                 159 348        49 599             -             -            -      208 947    IN THOUSANDS OF RUSSIAN ROUBLES                               31 DECEMBER 2008                    31 DECEMBER 2007
                                                                                                                           Total capital                                                               23 743 006                         17 786 779
Derivative financial instruments                                                                                           Total regulatory capital                                                          13.0%                             15.7%

    inflow                              (6 798 509)              -            -             -            -   (6 798 509)

    outflow                               6 782 431              -            -             -            -     6 782 431   Compliance with the capital adequacy ratio set                 The Group’s management believes that during
Total undiscounted future cash                                                                                             by the CBRF is monitored monthly with reports                  2007 and 2008 the capital adequacy ratio was
                                         76 122 735    76 671 244    36 984 751   11 240 909    6 000 912    208 020 551
flows to settle financial liabilities                                                                                      containing its calculation reviewed and signed by              not below the set minimum level.
Irrevocable undrawn credit lines                   -          499             -             -            -          499    the Bank’s Deputy Chairman of the Management
                                                                                                                           Board and Chief Accountant, as well as daily with              (ii) Arrangements to safeguard the Group’s
TOTAL FUTURE CASH FLOWS                 76 122 735     76 671 743 36 984 751      11 240 909    6 000 912 207 021 050      calculations of the Treasury Department.                       ability to continue as a going concern are




144                                                                                                                                                                                                                                           145
Management of Capital                                                                                                                          Contingencies, Commitments and Derivative Financial Instruments



performed under the Bank’s Strategic Devel-        and develops the respective plan of increas-           The Group was in compliance with the mini-              basic scenario of the Group’s development
opment Plan and divided into long-term and         ing of assets. In some cases the management            mum capital adequacy ratio agreed on with the           in the altered macroeconomic environment it
short-term capital management.                     uses administrative measures to influence the          creditors of the Bank during 2008 and 2007.             has factored in increased provisions for losses
                                                   balance sheet structure through setting limits                                                                 on loan receivables. This has resulted in the
In the long-term the Bank is planning its busi-    for certain active transactions. The limits are es-    Due to the development of financial crisis              necessity to increase the Group’s capital. In
ness scope under strategic and financial plans     tablished when the economic instruments are            and subsequent wider economic crisis in the             December 2008 the Group decided to attract
developed along with identification of the risks   insufficient in terms of timing and the extent         Russian Federation in the fourth quarter of             a subordinated loan from one of the Group’s
and corresponding capital requirements for         of influence.                                          2008 the Group changed its approach to                  shareholders. For further information refer to
three years and one year, respectively. When                                                              capital planning for 2009. In developing the            Note 22.
the required amount of capital is defined the      (iii) According to the loan agreements with its
Banks determines the sources of its increase:      creditors the Bank has a commitment to main-
borrowings on capital markets, share issue and     tain the minimum capital adequacy ratio of at          36. CONTINGENCIES, COMMITMENTS
the scope thereof. The target scope of busi-       least 11%, which is calculated under the re-               AND DERIVATIVE FINANCIAL INSTRUMENTS
ness and the amount of capital, as well as the     quirements of Basel I (refer to Note 36).
sources of the capital increase are approved by                                                           Litigation. From time to time and in the nor-           As a result, significant additional taxes, penal-
the following collegial management bodies in       This ratio is calculated on a quarterly basis;         mal course of business, third parties’ claims           ties and interest may be assessed. Fiscal periods
order of the established priority: the Asset and   the forecasted amount of capital and capital           against the Group are received. On the basis            remain open to review by the authorities in re-
Liability Management Committee, Manage-            adequacy are defined by the Bank’s Strategic           of its own estimates and internal professional          spect of taxes for three calendar years preced-
ment Board, Supervisory Board of the Bank.         Development Plan which takes into account              advice the management is of the opinion that            ing the year of review. Under certain circum-
                                                   compliance with the capital adequacy require-          no material losses will be incurred in respect of       stances reviews may cover a longer period.
In the short-term, with due account of the ne-     ments.                                                 known claims and accordingly no loss provision
cessity to comply with the CBRF requirements,                                                             has been made in these consolidated financial           The Group’s management believes that its inter-
the Bank determines the capital surplus/deficit    The composition of the Group’s capital calcu-          statements.                                             pretation of the relevant legislation is appropri-
within the period from one to three months         lated in accordance with Basel I is as follows.                                                                ate and the Group’s tax, currency legislation and
                                                                                                          Tax legislation. Russian tax legislation is sub-        customs positions will be sustained. Accordingly,
IN THOUSANDS OF RUSSIAN ROUBLES                      31 DECEMBER 2008           31 DECEMBER 2007          ject to varying interpretations, and changes,           at 31 December 2008 no provision for potential
Capital                                                         24 225 253                 18 505 482     which can occur frequently. Management’s in-            tax liabilities was recorded (2007: no provision).
Tier 1                                                           16 595 125                 13,863,071    terpretation of such legislation as applied to
Paid-in share capital                                            3 564 330                   3,564,330                                                            Capital expenditure commitments. At
                                                                                                          the transactions and activity of the Group may
Reserves and profit                                              13 030 795                  10,298,741                                                           31 December 2008 the Group had contractual
                                                                                                          be challenged by the relevant regional and
Including:
                                                                                                          federal authorities.                                    capital expenditure commitments in respect of
    Share premium                                                9 725 450                   9,725,450
                                                                                                                                                                  reconstruction and purchase of premises total-
    Retained earnings                                            3 305 345                     573,291
                                                                                                          The Russian tax authorities may be taking a             ling RR 370 078 thousand (2007: RR 214 216
Tier 2                                                           7 630 128                   4,642,411
                                                                                                          more assertive position in their interpretation of      thousand). In 2008 the Group allocated the
Revaluation reserves                                             2 209 624                    1,141,992
                                                                                                          the legislation and assessments, and it is pos-         necessary resources in respect of these com-
Subordinated loans                                               5 420 504                   3,500,419
                                                                                                          sible that transactions and activities that have        mitments. Management believes that future
Risk weighted assets                                            171 203 414                112,735,292
                                                                                                          not been challenged in the past may be chal-            net income and funding will be sufficient to
Risk weighted balance sheet assets                              162 035 478                  97,941,613
                                                                                                          lenged. In October 2006, the Supreme Arbitra-           cover this and any similar commitments.
Risk weighted trade assets                                       5 203 563                    9,719,335
                                                                                                          tion Court issued guidance to lower courts on
Risk weighted off-balance-sheet assets                           3 964 373                   5,074,344
                                                                                                          reviewing tax cases providing a systemic road-          In addition during 2007, the Group’s man-
TOTAL CAPITAL ADEQUACY RATIO                                      14.15%                     16.41%       map for anti-avoidance claims, and it is pos-           agement decided to construct new prem-
                                                                                                          sible that this will significantly increase the level   ises for the Head Office scheduled to be
TOTAL TIER 1 CAPITAL                                               9.69%                     12.30%       and frequency of scrutiny by tax authorities.           completed by the end of 2010. The Group’s




146                                                                                                                                                                                                           147
Contingencies, Commitments and Derivative Financial Instruments                                                                                                  Notes to the Consolidated Financial Statements



committed capital expenditure on construction           Operating lease commitments. Where                  commitments. However, the likely amount of            mitments because longer-term commitments
of the new Head Office building amounts to              the Group is the lessee, the future minimum         loss is less than the total unused commitments        generally have a greater degree of credit risk
RR 5 188 000 thousand (2007: RR 3 200 000               lease payments under non-cancellable operat-        since most commitments to extend credit are           than shorter-term commitments.
thousand).                                              ing leases are as follows.                          contingent upon customers maintaining spe-
                                                                                                            cific credit standards. The Group monitors            Outstanding credit related commitments are as
IN THOUSANDS OF RUSSIAN ROUBLES                                              2008                 2007      the term to maturity of credit related com-           follows.
Within 1 year                                                                132 715               58,901
Later than 1 year and not later than 5 years                                113 349               133,108   IN THOUSANDS OF RUSSIAN ROUBLES                                          2008                     2007
                                                                                                            Revocable undrawn credit lines                                        5 263 884                13,124,163
TOTAL OPERATING LEASE COMMITMENTS                                        246 064               192 009      Guarantees issued                                                     2 763 063                4,227,330
                                                                                                            Import letters of credit                                              5 963 957                4,215,264
                                                                                                            Irrevocable undrawn credit lines                                           499                     1,755
Compliance with covenants. The Group                    lender, as well as certain additional information
should observe certain covenants, primarily,            and any other documents upon request.               TOTAL CREDIT RELATED COMMITMENTS                                  13 991 403               21 568 512
relating to loan agreements with foreign and
international financial institutions. Covenants         Non-compliance with such covenants may re-
include:                                                sult in negative consequences for the Group         The total outstanding contractual amount of           on irrevocable liabilities on import letters of
                                                        including growth in the cost of borrowings and      undrawn credit lines, letters of credit, and          credit (2007: RR 1 347 709 thousand). Refer to
General conditions in relation to activ-                declaration of default.                             guarantees does not necessarily represent fu-         Note 19.
ity, such as business conduct and reasonable                                                                ture cash requirements, as these financial in-
prudence, conformity with legal requirements            Credit related commitments. The primary             struments may expire or terminate without             Fiduciary assets. These assets are not in-
of the country, in which the Group is located,          purpose of these instruments is to ensure that      being funded. As at 31 December 2008, esti-           cluded in the Group’s consolidated balance
maintenance of accurate accounting records,             funds are available to a customer as required.      mated fair value of guarantees and letters of         sheet as they are not its assets. Nominal values
implementation of controls, performance of              Guarantees, which represent irrevocable assur-      credit amount to RR 22 734 thousand (2007:            disclosed below are normally different from
independent audits, etc.;                               ances that the Group will make payments in          RR 24 337 thousand). Refer to Note 37.                the fair values of the respective securities. In
                                                        the event that a customer cannot meet its ob-                                                             accordance with the common business practic-
Restrictive covenants, including constraints            ligations to third parties, carry the same credit   As at 31 December 2008, customer ac-                  es no insurance cover was provided for these
(without lender’s consent) in respect of divi-          risk as loans. Documentary letters of credit,       counts include deposits amounting to                  fiduciary assets. The fiduciary assets fall into
dend payments and other distributions, chang-           which are written undertakings by the Group         RR 2 091 303 thousand representing security           the following categories.
es in the shareholders structure, limits on use         on behalf of a customer authorising a third
of assets and some agreements;                          party to draw drafts on the Group up to a                                                                                     2008                   2007
                                                                                                            IN THOUSANDS OF RUSSIAN ROUBLES
                                                        stipulated amount under specific terms and                                                                           NOMINAL VALUE          NOMINAL VALUE
Financial covenants, such as meeting cer-               conditions, are collateralised by the underlying    Corporate shares held in custody of:
tain capital adequacy requirements, credit port-        shipments of goods to which they relate or
                                                                                                                Petersburg Central Registration Company                                         -            170,159
folio diversification, limitation of risks associated   cash deposits and therefore carry less risk than
                                                                                                                Depository Clearing Company                                                   282               573
with the Group’s related and unrelated parties,         a direct borrowing.
the share of overdue balances in the Group’s                                                                    National Depository Centre                                                1 783                  60

credit portfolio, meeting certain requirements          Commitments to extend credit represent un-              other registrars and depositories                                       311 446              72,446
to the level of risk provisions, monitoring the         used portions of authorisations to extend credit        registers of share issuers                                              172 054              172,123
Group’s expenditure pattern;                            in the form of loans. With respect to credit risk
                                                        on commitments to extend credit, the Group is       Municipal bonds held in custody of:
Reporting requirements, obliging the Group              potentially exposed to credit risk as at the year       St Petersburg Settlement and Depository Centre                                58                 58
to provide its audited financial statements to the      end in an amount equal to the total unused




148                                                                                                                                                                                                           149
Contingencies, Commitments and Derivative Financial Instruments                                                                                                                  Fair Value of Financial Instruments



Derivative financial instruments. Con-                   The table below sets out fair values, at the
tracts on currency derivative financial instru-          balance sheet date, of currencies receivable or
                                                                                                                   37. FAIR VALUE
ments entered into by the Group have po-                 payable under foreign exchange forwards and                   OF FINANCIAL INSTRUMENTS
tentially favourable (assets) or unfavourable            futures contracts entered into by the Group.
(liabilities) conditions as a result of fluctua-         The table reflects gross positions before the             Fair value is the amount at which a financial      for new instruments with similar credit risk
tions in foreign exchange rates. The aggre-              netting of any counterparty positions (and                instrument could be exchanged in a current         and remaining maturity. Discount rates used
gate fair values of derivative financial assets          payments) and covers the contracts with set-              transaction between willing parties, other         depend on currency, maturity of the instru-
and liabilities can fluctuate significantly from         tlement dates after 31 December 2008. The                 than in a forced sale or liquidation. The best     ment and credit risk of the counterparty.
time to time.                                            contracts are short term in nature.                       evidence of fair value is price quotations in an
                                                                                                                   active market.                                     Liabilities carried at amortised cost.
                                                                                                                                                                      The fair value of floating rate instruments
                                                             2008                           2007
IN THOUSANDS                                                                                                       The estimated fair values of financial instru-     is normally their carrying amount. The fair
OF RUSSIAN ROUBLES                                   Net asset      Net liability    Net asset     Net liability   ments have been determined by the Group            value of fixed interest rate instruments with
                                                     forwards         forwards       forwards        forwards
                                                                                                                   using available market information, where it       stated maturity, for which a quoted market
Foreign exchange forwards: fair values,                                                                            exists, and appropriate valuation methodolo-       price is not available, was estimated based on
at the balance sheet date, of
                                                                                                                   gies. However, judgement is necessarily re-        expected cash flows discounted at current in-
   USD receivable on settlement (+)                   3 721 043          532 710      1 837 801        149 732     quired to interpret market data to determine       terest rates for new instruments with similar
   USD payable on settlement (-)                     (1 716 510)    (4 554 006)     (3 718 749)    (5 888 658)     the estimated fair value. The Russian Federa-      credit risk and remaining maturity.
                                                                                                                   tion continues to display some characteristics
   Euros receivable on settlement (+)                          -        636 249               -        475 037
                                                                                                                   of an emerging market and economic condi-          Financial guarantees and letters of
   Euros payable on settlement (-)                 (2 689 438)                  -    (794 124)        (75 460)     tions continue to limit the volume of activ-       credit. Financial guarantees and letters of
   RR receivable on settlement (+)                   1 934 047        3 737 760      4 491 467       5 742 313     ity in the financial markets. Market quota-        credit are initially recognised at their fair value,
                                                                                                                   tions may be outdated or reflect distress sale     which is normally evidenced by the amount
   RR payable on settlement (-)                     (1 182 800)       (538 479)     (1 799 344)     (409 846)
                                                                                                                   transactions and therefore not represent fair      of fees received. This amount is amortised on
TOTAL ON FORWARDS                                      66 342        (185 766)         17 051          (6 882)     values of financial instruments. Management        a straight line basis over the life of the com-
                                                                                                                   has used all available market information in       mitment. At each balance sheet date, the
                                                             2008                           2007                   estimating the fair value of financial instru-     commitments are measured at the higher of
IN THOUSANDS
OF RUSSIAN ROUBLES                                   Net asset      Net liability    Net asset     Net liability   ments.                                             (i) the unamortised balance of the amount
                                                       futures          futures        futures         futures                                                        at initial recognition and (ii) the best estimate
Foreign exchange futures:                                                                                          Financial instruments carried at fair              of expenditure required to settle the commit-
fair values, at the balance sheet date, of                                                                         value. Trading securities, other securities at     ment at the balance sheet date.
   USD receivable on settlement (+)                 63 567 837        4 769 701        294 554                 -   fair value through profit or loss are carried in
                                                                                                                   the consolidated balance sheet at their fair       Derivative financial instruments. All
   USD payable on settlement (-)                       (3 404)      (67 662 311)              -                -
                                                                                                                   value. Cash and cash equivalents are carried       derivative financial instruments are carried at
   Euros payable on settlement (-)                             -     (5 141 018)              -                -   at amortised cost which approximates current       fair value as assets when the fair value is
   RR receivable on settlement (+)                       3 404       72 803 329               -                -   fair value.                                        positive and as liabilities when the fair value
                                                                                                                                                                      is negative. Their fair values are based on ob-
   RR receivable on settlement (-)                 (63 567 837)      (4 769 701)     (294 554)                 -
                                                                                                                   Loans carried at amortised cost. The fair          servable market prices. Refer to Note 36.
TOTAL ON FUTURES                                              -               -              -               -     value of floating rate instruments is normally
                                                                                                                   their carrying amount. The estimated fair value    The following table provides fair values of
NET FAIR VALUE                                                                                                     of fixed interest rate instruments is based on     financial instruments by classes and a recon-
                                             14
OF CURRENCY DERIVATIVE                               66 342         (185 766)         17 051         (6 882)       estimated future cash flows expected to be         ciliation of classes of financial assets as at 31
                                             23
FINANCIAL INSTRUMENTS                                                                                              received discounted at current interest rates      December 2008.




150                                                                                                                                                                                                                 151
Fair Value of Financial Instruments                                                                                                                                                   Notes to the Consolidated Financial Statements


.
                                             TRADING    LOANS AND    AVAILABLE-      ASSETS         TOTAL     FAIR VALUE                                                             LIABILITIES CARRIED AT   CARRYING VALUE OF       FAIR VALUE OF
                                                                                                                           IN THOUSANDS OF RUSSIAN ROUBLES
                                              ASSETS   RECEIVABLES    FOR-SALE    HELD-TO-       CARRYING     OF ASSETS                                                                    AMORTISED COST             LIABILITIES         LIABILITIES
    IN THOUSANDS OF RUSSIAN ROUBLES
                                                                         ASSETS    MATURITY      VALUE OF
                                                                                                   ASSETS
                                                                                                                           LIABILITIES
    ASSETS
                                                                                                                           Due,to,other,banks
    Cash and cash equivalents
                                                                                                                               Short-term,placements,of,other,banks                            27 015 504            27 015 504         27 015 504
       Cash on hand                                -    6 026 512             -           -     6 026 512     6 026 512
                                                                                                                               Amounts payable under sale and repurchase
                                                                                                                                                                                                 5 171 736             5 171 736          5 171 736
       Balances with the CBRF                      -   12 901 049             -           -    12 901 049    12 901 049        agreements

       Correspondent accounts and                                                                                              Correspondent accounts and overnight placements
                                                   -    2 154 639             -           -     2 154 639     2 154 639                                                                           132 849               132 849            132 849
       overnight placements with banks                                                                                         of banks

       Settlement accounts                                                                                                 Customer,accounts
                                                   -   15 759 126             -           -    15 759 126     15 759 126
        with trading systems
                                                                                                                               State,and,public,organisations
    Mandatory cash balances
                                                  -       212 921            -           -       212 921        212 921              Current/settlement,accounts                                3 471 690             3 471 690          3 471 690
    with the CBRF
                                                                                                                                     Term,deposits                                              1 314 564             1 314 564           1 320 727
    Trading securities
                                                                                                                               Other,legal,entities
       Corporate bonds                    1 094 549              -            -           -    1 094 549      1 094 549              Current/settlement,accounts                              27 843 057            27 843 057          27 843 057
       Russian federation Eurobonds         956 815              -            -           -      956 815        956 815              Term,deposits                                             57 921 513            57 921 513        58 486 454

       Federal loan bonds                   266 382              -            -           -      266 382        266 382              Amounts payable under sale and repurchase
                                                                                                                                                                                                  239 895               239 895            239 895
                                                                                                                                     agreements
       Corporate Eurobonds                  338 931              -            -           -      338 931        338 931
                                                                                                                               Individuals
       Corporate shares                      33 996              -            -           -       33 996         33 996
                                                                                                                                     Current/demand,accounts                                   10 125 643            10 125 643         10 125 643
       Municipal bonds                         1 712             -            -           -         1 712          1 712
                                                                                                                                     Term,deposits                                             38 908 117            38 908 117         39 542 735
    Securities pledged under sale
                                          1 470 526             -            -           -     1 470 526      1 470 526
    and repurchase agreements                                                                                              Bonds,issued
                                                                                                                               Eurobonds                                                         5 911 152             5 911 152         4 891 653
    Due from banks
                                                                                                                               Subordinated,Eurobonds                                           3 021 061             3 021 061          2 407 280
       Short-term placements with banks            -   19 175 864             -           -    19 175 864     19 178 975
                                                                                                                               Bonds                                                            1 001 368             1 001 368           1 012 200
    Loans and advances to customers
                                                                                                                           Other,debt,securities,in,issue
       Corporate loans
                                                                                                                               Promissory,notes                                                4 329 290             4 329 290           4 414 805
             loans to finance
                                                   -   85 054 124             -           -   85 054 124     86 196 168        Deposit,certificates                                                  7 601                 7 601              7 649
             working capital

             investment loans                      -   37 430 428             -           -   37 430 428     37 772 828
                                                                                                                           Other,borrowed,funds
             loans to entities                                                                                                 Syndicated,loans                                                 3 682 375             3 682 375          3 604 193
                                                   -    6 137 893             -           -     6 137 893     6 210 808
             financed from budget
                                                                                                                               Subordinated,loans                                               2 985 422            2 985 422          2 880 260
       Loans to individuals
                                                                                                                               Funds,attracted,from Kreditanstalt fur Wiederaufbau
                                                                                                                                                                                                1 070 158             1 070 158            969 233
             mortgage loans                        -    9 244 104             -           -    9 244 104      9 616 001        Frankfurt am Main

             car loans                             -    1 683 107             -           -     1 683 107     1 753 608        Funds,attracted,from, Nordic Investment Bank                       849 147               849 147             773 032
                                                                                                                               Funds,attracted,from,EBRD                                         830 955               830 955               797 171
             other consumer loans                  -    5 332 845             -           -    5 332 845      5 517 239
                                                                                                                               Funds,attracted,from Bank of New York, NY                           151 097               151 097            146 216
    Investment securities
                                                  -             -            -     777 591       777 591       740 635         Funds,attracted,from Unicreditbank                                  29 697                29 697             29 249
    held-to-maturity

    Other financial assets                        -      160 583        53 978           -       214 561        214 561    Other financial,liabilities                                            231 703               231 703            231 703


    TOTAL FINANCIAL ASSETS                4 162 911 201 273 195        53 978     777 591     206 267 675   208 417 981    TOTAL FINANCIAL LIABILITIES                                  196 245 594           196 245 594           195 514 934




152                                                                                                                                                                                                                                          153
Fair Value of Financial Instruments                                                                                                                                               Notes to the Consolidated Financial Statements



The following table provides fair values of financial instruments by classes and a reconciliation of                                                                                      LIABILITIES       CARRYING
                                                                                                                                                                                                                             FAIR VALUE
classes of financial assets as at 31 December 2007.                                                                      IN THOUSANDS OF RUSSIAN ROUBLES                                 CARRIED AT         VALUE OF
                                                                                                                                                                                                                          OF LIABILITIES
                                                                                                                                                                                     AMORTISED COST        LIABILITIES

                                         TRADING        ASSETS    LOANS AND    AVAILABLE-       TOTAL      FAIR VALUE    LIABILITIES

IN THOUSANDS                              ASSETS    DESIGNATED   RECEIVABLES    FOR-SALE     CARRYING      OF ASSETS
                                                                                                                         Due,to,other,banks
OF RUSSIAN ROUBLES                                    AT FVTPL                     ASSETS    VALUE OF
                                                                                               ASSETS                        Correspondent accounts and overnight placements of
                                                                                                                                                                                               42,197           42,197           42,197
                                                                                                                             banks
ASSETS
                                                                                                                             Short-term,placements,of,other,banks                            635,069          635,069          635,069
Cash and cash equivalents

   Cash on hand                                 -            -    2 469 383             -    2 469 383      2 469 383    Customer,accounts

   Balances with the CBRF                       -            -     3 437 183            -    3 437 183      3 437 183        State,and,public,organisations

   Correspondent accounts and                                                                                                      Current/settlement,accounts                              1,319,910        1,319,910         1,319,910
                                                -            -    3 562 836             -    3 562 836      3 562 836
   overnight placements with banks
   Settlement accounts                                                                                                             Term,deposits                                           4,920,868        4,920,868         4,926,265
                                                -            -      143 046             -      143 046        143 046
   with trading systems
                                                                                                                             Other,legal,entities
Mandatory cash balances
                                               -            -      1 551 913           -     1 551 913      1 551 913
with the CBRF                                                                                                                      Current/settlement,accounts                            24,040,675       24,040,675        24,040,675

Trading securities                                                                                                                 Term,deposits                                           27,738,723       27,738,723       27,879,699
   Federal loan bonds                  4 476 304             -             -            -    4 476 304      4 476 304              Amounts payable under sale and repurchase
                                                                                                                                                                                              492,712         492,712           492,712
                                                                                                                                   agreements
   Russian federation Eurobonds         4 074 171            -             -            -     4 074 171      4 074 171
                                                                                                                             Individuals
   Corporate bonds                     1 697 080             -             -            -    1 697 080      1 697 080
                                                                                                                                   Current/demand,accounts                                 5,505,729        5,505,729         5,505,729
   Municipal bonds                      592 958              -             -            -     592 958         592 958

   Corporate shares                       810 177            -             -            -       810 177        810 177             Term,deposits                                           24,710,155       24,710,155      24,953,888

Securities pledged under sale
                                               -            -       517 834            -       517 834        517 834    Bonds,issued
and repurchase agreements
Amounts receivable under                                                                                                     Eurobonds                                                     3,065,263,       3,065,263,        3,065,263
                                               -            -       916 651            -       916 651        916 651
reverse repurchase agreements
                                                                                                                             Subordinated,Eurobonds                                        2,522,904        2,522,904         2,307,343
Due from banks
   Short-term placements                                                                                                     Bonds                                                           999,055          999,055          999,055
                                                -            -     6 736 881            -    6 736 881      6 736 881
   with banks
                                                                                                                         Other,debt,securities,in,issue
Loans and advances to customers
                                                                                                                             Promissory,notes                                               7,381,245        7,381,245        7,389,729
   Corporate loans
         loans to finance                                                                                                    Deposit,certificates                                             44,058           44,058            44,417
                                                -            -   59 977 680             -   59 977 680     61 087 942
         working capital
         investment loans                       -            -   20 926 459             -   20 926 459      21 263 747   Other,borrowed,funds
         loans to entities                                                                                                   Subordinated,loan                                              1,221,894        1,221,894        1,260,853
                                                -            -    2 509 300             -    2 509 300      2 537 561
         financed from budget
   Loans to individuals                                                                 -                                    Syndicated,loan                                               4,893,544        4,893,544        4,893,544

         mortgage loans                         -            -     4 193 431            -    4 193 431      4 235 484        Funds,attracted,from,EBRD                                       745,678          745,678           745,678

         car loans                              -            -     1 606 851            -    1 606 851      1 626 873        Funds,attracted,from Nordic Investment Bank                     706,522          706,522           706,522

         other consumer loans                   -            -     2 516 414            -    2 516 414      2 540 726        Funds,attracted,from, Unicreditbank                              74,249           74,249            74,249

Other financial assets                         -           24       143 667        11 340      155 031        155 031    Other,financial liabilities                                          57,012           57,012            57,012


TOTAL FINANCIAL ASSETS               11 650 690            24 111 209 528         11 340 122 871 582      124 433 781    TOTAL FINANCIAL LIABILITIES                                  111 117 462       111 117 462      111 339 809




154                                                                                                                                                                                                                               155
Related Party Transactions                                                                                                                                       Notes to the Consolidated Financial Statements



38. RELATED PARTY TRANSACTIONS
For the purposes of these consolidated financial          ship, attention is directed to the substance of   At 31 December 2007, the outstanding balances with related parties were as follows.
statements, parties are considered to be related          the relationship, not merely the legal form.
if one party has the ability to control the other                                                                                                       SHAREHOLDERS          MANAGEMENT           ENTITIES UNDER
                                                                                                            IN THOUSANDS OF RUSSIAN ROUBLES
party, is under common control, or can exer-              Transactions are entered into in the normal                                                                        OF THE GROUP        COMMON CONTROL
cise significant influence over the other party           course of business with shareholders, manage-     Loans and advances to customers
                                                                                                                                                                3,576               68,826                        -
                                                                                                            (contractual interest rates: 9–15%)
in making financial or operational decisions. In          ment and companies controlled by the Group’s
                                                                                                            Impairment provision for loan portfolio             (59)                (1,530)                       -
considering each possible related party relation-         shareholders and management.
                                                                                                            Customer accounts
                                                                                                                                                              146,179              155,026               1,028,283
                                                                                                            (contractual interest rates: 2–11%)

At 31 December 2008, the outstanding balances with related parties were as follows.

                                                                                                            The income and expense items with related parties for the year 2007 were as follows.
                                             SHAREHOLDERS           MANAGEMENT            ENTITIES UNDER
IN THOUSANDS OF RUSSIAN ROUBLES
                                                                   OF THE GROUP         COMMON CONTROL
Loans and advances to customers
                                                        55                115 974                 193 069
(contractual interest rates: 6.0% – 23.3%)                                                                                                              SHAREHOLDERS          MANAGEMENT           ENTITIES UNDER
                                                                                                            IN THOUSANDS OF RUSSIAN ROUBLES
Impairment provision for loans                                                                                                                                               OF THE GROUP        COMMON CONTROL
                                                        (1)              (2 950)                  (7 228)
and advances to customers                                                                                   Interest income                                     1,915                 7 616                 15 165
Customer accounts                                                                                           Interest expense                                  (8,108)               (2 263)               (30 700)
                                                    711 606              253 059                  783 447
(contractual interest rates: 1.3% – 13.5%)
                                                                                                            Recovery of provision for loan impairment          11,642                  552                  11 486
Other borrowed funds
                                                 1 520 474                      -                       -   Fee and commission income                            299                    129                 14 748
(contractual interest rates: 14.5%)



Other borrowed funds include subordinated                 The income and expense items with related
                                                                                                            Aggregate amounts lent to and repaid by related parties during 2007 were.
debt. Refer to Note 20.                                   parties for the year 2008 were as follows.


                                             SHAREHOLDERS           MANAGEMENT            ENTITIES UNDER                                                SHAREHOLDERS          MANAGEMENT           ENTITIES UNDER
IN THOUSANDS OF RUSSIAN ROUBLES                                                                             IN THOUSANDS OF RUSSIAN ROUBLES
                                                                   OF THE GROUP         COMMON CONTROL                                                                       OF THE GROUP        COMMON CONTROL
Interest income                                       5 157                9 205                  44 546    Amounts lent to related parties
                                                                                                                                                                2,494              102,748                1,163,735
                                                                                                            during the period
Interest expense                                  (72 043)              (24 584)                 (78 838)
                                                                                                            Amounts repaid by related parties
(Provision)/recovery of provision for loan                                                                                                                    180,791               97,782               1,504,635
                                                        58                (1 420)                 (7 228)   during the period
impairment
Fee and commission income                             4 141                  596                   14 468


                                                                                                            In 2008, remuneration of members of                     sion contributions and discretionary bonuses,
                                                                                                            the Supervisory Board and the Manage-                   amounted to RR 472 052 thousand (2007:
Aggregate amounts lent to and repaid by related parties during 2008 were.
                                                                                                            ment Board of the Bank, including pen-                  RR 230 251 thousand).


                                             SHAREHOLDERS           MANAGEMENT            ENTITIES UNDER
IN THOUSANDS OF RUSSIAN ROUBLES
                                                                   OF THE GROUP         COMMON CONTROL
Amounts lent to related parties
                                                    672 174               134 138                892 488
during the period
Amounts repaid by related parties
                                                    675 695               86 990                  699 419
during the period




156                                                                                                                                                                                                         157
Consolidation of the Special Purpose Entity                                                            Bank Saint Petersburg
                                                                                                       Annual Report 2008



39. CONSOLIDATION
    OF THE SPECIAL PURPOSE ENTITY
As at 31 December 2008, the Group has               pose entity, as all financial and operational
consolidated the special purpose entity BSPB        activities of this special purpose entity were
Finance plc. This special purpose entity was        conducted on behalf of the Group and ac-
established in 2006 for the purpose of the          cording to Group’s specific business needs.
Group’s Eurobonds issue.                            The Group had rights to obtain the majority
                                                    of the benefits of the special purpose entity
As at 31 December 2008, the Group exercised         and therefore was exposed to risks incident
its control over the activity of the special pur-   to its activities.




                                                                                                                                  TS
40. SUBSEQUENT EVENTS



                                                                                                                               AC
During January and March of 2009 the Group re-      with a nominal amount of USD 75 000 thousand
purchased its bonds with subsequent cancellation




                                                                                                                 NT
                                                    (full issue) maturing on 16 April 2010 and bonds
from the listing with the total nominal amount      with a nominal amount of USD 40 182 thousand
of USD 115 182 thousand, which include bonds        maturing 25 November 2009.




                                                                                                              CO



158
Contacts                                                                                                                                       Annual Report 2008



Help Desk                       +7 800 555 5050                    +7 812 329 5050

Head Office                     178A, Nevsky pr., St Petersburg, 191167, Russia

Investor Relations Department   ir@bspb.ru



Branch network:
Outlets in St Petersburg                                                             Operational office
Commercial Department                   7, Ostrovsky pl.                             Gatchinsky               32, ul. 25 Oktiabria, Gatchina
Commercial Department-2                 178A, Nevsky pr.
                                                                                     Branches
Energiya                                153, Leninsky pr.
                                                                                     the Leningrad region
Gavansky                                54, Maly pr. V.O.
                                                                                     Proizersky               18, Lenina ul., Priozersk, Leningrad region
Grazhdansky                             36, Grazhdansky pr.
                                                                                     Kirishsky                28, Lenina pr., Kirishi, Leningrad region
Investrbank                             47, Rimskogo-Korsakova pr.
Kolpinsky                               33, Lenina pr., Kolpino
                                                                                     Moscow
Komendantsky                            17, Komendantsky pr.
                                                                                     Branch “Ordynka”         40, build. 2, Bolshaya Ordynka ul., Moscow
Kosmopolis                              13, Vyborgskoe shosse
                                                                                     Outlet “Perunovsky”      3, build. 2, Perunovsky per., Moscow
Kronshtadtsky                           5, Andreevskaya ul., Kronshtadt
Kuibyshevsky                            10, Mokhovaya ul.                            Kaliningrad
Lakhta                                  118, Savushkina pr.                          Kaliningrad branch       34, Teatralnaya ul., Kaliningrad
Lesnoy                                  65, Lesnoy pr.
Ligovsky                                108A, Ligovsky pr.                           Nizhny Novgorod
Moscowsky                               63, build. 1, Varshavskaya ul.               Nizhny Novgorod branch   13, Sovnarkomovskaya ul., Nizhny Novgorod
Na Moskovskom                           171, Moskovsky pr.
Narvsky                                 17, Novoovsiannikovskaya ul.
Nevsky                                  18, Pribrezhnaya ul.
Okhtinsky                               1, Revolutsii shosse
Oktiabrsky                              20, 3rd Line V.O.
Olimp                                   20, Khersonskaya ul.
Petrodvortzovy                          11A, Nikolskaya ul., Petrodvorets
Petrogradsky                            20, Kamennoostrovsky pr.
Petrovsky                               4A, Finliandky pr.
Primorsky                               8, Bolshaya Zelenina ul.
Proletarsky                             7, Ivanovskaya ul.
Pushkinsky                              16, Oktiabrsky bul., Pushkin
Sestroretsky                            7A, Volodarskogo pr., Sestroretsk
Sofiysky                                14, Sofiyskaya ul.
Vyborgsky                               85A, Engelsa pr.
Zelenogorsky                            20A, Lenina pl., Zelenogorsk




160                                                                                                                                                         161
Bank Saint Petersburg: general banking license № 436 of September 19, 1997.

				
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