Annual Report 2018 Contents

Alfa-Bank 2018 ��4

Alfa-Bank Awards 2018 �� 6

The Board of Directors report on Alfa-bank’s results in its priority business areas �� 10

Board of Directors and Executive Board��12

1. Russian Economy and Banking Sector Overview �� 14

2. Message from Chief Executive Officer ��24

3. Retail Business ��32

4. Corporate Investment Banking�� 40

5. Micro & Small Business ��52

6. Medium Corporate Business ��62

Princinal Factors of Risk in Bank Activity ��68

Bank’s Compliance with Principles and Recommendations of Corporate Management Code ��78

Partners ��88

Financial Statements ��94

Corporate Directory �� 102 ALFA-BANK 2018

752 $1 321 m Offices net profit*

27 359 $7 198 m Employees equity*

538 000 $30 572 m Corporate clients loan portfolio*

16 100 000 $47 199 m Private clients assets*

* According to the consolidated financial statements (IFRS) of ABH Financial Limited Group (hereinafter) 02.2018 07.2018 Alfa-Bank won the main nomination and According to Frank RG’s survey, was named the “Bank of the Year” AlfaTravel was recognized as the Best Travel Card The “Bank of the Year” is an annual professional award established by the information Alfa-Bank won Frank Banking Reward portal Banki.ru in 2017. Award 2018. According to Frank RG’s Bank Reward-Programs in Russia 2018 survey, Alfa- The award is aimed at determining the best Travel was recognized as the best travel card. organizations of the Russian financial market based on the calendar year results, providing The travel card — AlfaTravel Visa — allows customers with reliable and unbiased infor- users to receive up to 11% in the form of miles mation for choosing a reliable partner among that can be used on travel.alfabank.ru and companies, and giving businesses guidelines for a number of other additional free services. It is further development. the most lucrative offer on the travel market.

05.2018 Frank RG Banking Reward Award 2018 is the Alfa Private was awarded Customer first annual award in Russia based on a holis- Experience World AWARDS tic, reliable and structured database within bank reward programs, bank client surveys, In 1Q 2018, Alfa Private won the Customer interviews with leading experts on development Experience World AWARDS in the category and implementation of bank reward programs, 02.2018 ‘employee engagement best practices’ for its as well as the actual dynamics of transactional Alfa-Bank won Best Experience PROservice project. activities under the existing reward programs Marketing Award of leading Russian banks. The PROservice project, a forum designed Alfa-Bank won The Best Sponsor’s Integration to promote sharing good practices, was The survey had several goals: identifying the nomination for implementation of its image launched in 2017. Through PROservice, each main trends of reward program market devel- activities, brand zone and system of non-cash employee of Alfa Private is able to put forward opment, objectively assessing program benefits, settlements at the festival Alfa Future Peo- his/her idea of service improvement and the identifying the most appealing reward programs ple 2017 Best Experience Marketing Awards best ideas are brought to life. of leading banks, developing a tool for config- (Bema). The nomination covered projects uring and fine-tuning reward programs subject

Alfa-Bank’s Alfa-Bank’s Awards related to special activation of brands during The Customer Experience World AWARDS to the bank’s strategy and the target customer a third-party event; the success criteria were honor the best customer experience and since segment chosen. During the survey, the actual quantity and quality of contact with the target 2004 have celebrated and recognised the dynamics of transactional activities of 60 exist- audience, innovation of mechanics for integra- most interesting and successful projects and ing reward programs launched by 16 leading tion into the main program / event concept and initiatives in the customer service sector. The Russian banks were processed and analyzed. growth of sales. award jury — made up of recognized experts in the industry — evaluates candidates against 07.2018 The Best Experience Marketing Awards are the following criteria: positive business impact, RAEX Rating Agency (Expert RA) professional awards in the industry of event- operating efficiency, innovation and creativity, confirmed Alfa-Bank’s credit rating ruAA. based marketing and integrated communi- customer focus, engagement, and leadership. The rating outlook is stable. cations. The awards are given for the best projects according to the Expert Council. The In addition to Alfa Private, the nominees in the The Bank’s rating is based on its strong mar- Awards are focused on developing event-based Employee Engagement Best Practices cate- ket positions and liquidity cushion with an ade- marketing, creating a forum for experience gory were Elementaree, Samsung, Territory quate rating of its capital adequacy and asset sharing and consolidating the community Fitness, Tele2, and Schnider Electric. Winners quality, as well as a high rating of its corporate of professionals. in different categories also include Sberbank governance quality. That the federal authori- of Russia, Rosbank, Azbuka Vkusa, Aeroflot, ties are likely to provide financial and adminis- Yota, etc. trative support to the Bank due to the Bank’s systemically important credit institution status has a strong positive impact on Alfa- Bank’s rating level.

6 Alfa-Bank. Annual Report 2018 7 AWARDS ALFA-BANK’S 08.2018 12.2018 Private Alfa is a TOP1 private bank Alfa-Bank is the Best Russian Bank according to Forbes’ ranking of the Decade

According to Forbes’s annual ranking, Alfa- Alfa-Bank won the milestone 10th SPEAR’S Bank is a TOP1 private bank amongst banks Russia Wealth Management Awards in two rendering private banking services and TOP2 categories: Russia’s Best Bank for Corpo- in the overall ranking. Sberbank is TOP1. rate Clients and the Best Russian Bank of the It should be noted that the Bank moved up one Decade. The awards ceremony was held position compared to its 2017 ranking. on December 17th in the building of the Et Cet- era Theater. This ranking is based on a survey of financiers and banks’ performance indicators. SPEAR’S Russia Wealth Management Awards is an Annual Award for the best representa- 11.2018 tives in the private banking industry, wealth Alfa-Bank won the award in the management and related industries. The award nomination ‘New Technologies in Banks: sponsors in Russia are PBWM.ru portal and IT Project of the Year’ SPEAR’S Russia Magazine; PwC is an independent consultant. The Award was established During «TAdviser Summit: Government. Busi- by and is awarded in a manner similar to the ness. IT» the award ceremony was held for British SPEAR’S Wealth Management Awards, the winners of the TAdviser IT Prize 2018. annually held by SPEAR’S UK in London. Sinimeks and Alfa-Bank received the ‘New Technologies in Banks: IT Project of the Year’ award for creating the Alfa Travel forum for the Bank’s loyalty program partners, allowing them to use open APIs.

12.2018 Alfa-Bank won ComNews Awards

Alfa-Bank’s Instant Bank Card Issue Through Application project, which allows its clients to minimize the time they spend with debit card issues, won the Financial Sector category of ComNews Awards. Digital economy.

ComNews Awards. Digital Economy recognizes companies that have implemented the most significant digital transformation projects in leading economic sectors and areas of public administration and education.

8 Alfa-Bank. Annual Report 2018

We hereby present the Alfa-Bank Annual There is another reason why 2018 was signif- Report 2018. The Bank maintained its posi- icant for Alfa Bank: this year, we determined tion as the biggest private bank in Russia and our development strategy for the near future. demonstrated high results in every primary Two years ago we approved our strategy aimed area of business. In accordance with IFRS at doubling our business, and 2018’s results financial statements of ABHF, the Bank’s have demonstrated that we can achieve this net profit grew by 1,5 times to a substantial objective. Our strategy for 2019-2021 aims amount of $ 1,321 million, and its total equity, to bring the interaction between the Bank and interest and commission income, loan portfolio, its clients to a whole new level. We have formu- and retail and corporate clientele grew. Alfa- lated three main components of our new strat- Bank was ranked highly by leading Russian and egy: active development of the mobile banking international rating agencies and won import- system based on the mobile first principle, digi- ant professional awards. talization of our offices, and transition to the MIKHAIL paperless universal banking concept. Our gen- FRIDMAN Results achieved by business blocks evidence eral task is to improve the technological effec- Member of the Board of Directors high client confidence in Alfa-Bank. Retail Bank tiveness of the Bank’s products and processes, boosted retail deposits to 1.07 trillion rubles and also maximize client service mobility. and ranked third amongst financial institutions in Russia by that parameter. The retail Strategy 2019–2021 is built on concentrated loan portfolio grew to 454 billion rubles. Pre- growth. We will rely on high technologies and

on Alfa-Bank’s results on Alfa-Bank’s mium clients were also active, which increased develop the best financial products and up-to- Alfa Private Business 150% over the past 18 date services. More importantly, we guarantee months. Professional awards are proof of the only the highest quality service to our clients, Bank’s successful collaboration with affluent the level of quality that Alfa-Bank, the first clients. Other products of Retail Bank also private bank in the country, has always prided won awards over the course of the year, which itself on providing. in its priority business areas in its priority business is not surprising considering that the Bank constantly improves and updates its product range.

In terms of collaboration with corporate clients and individual entrepreneurs, Alfa-Bank ener- PETR AVEN, getically engaged with every client segment Chairman of the in 2018. We established ourselves in a new area Board of Directors by providing services to business novices and promising startups. The Bank seeks to accommodate the needs of its corporate clients, which is why we have offered new products and services to businessmen and have expanded functions of the online and mobile business banks. Alfa-Bank won the 2018 SPEAR’S Rus- sia Wealth Management Awards in the category of best corporate bank.

As for the big business segment, the Bank mostly expanded its portfolio in primary eco- VLADIMIR VERKHOSHINSKIY nomic sectors. The number of active small First Deputy and medium business clients reached 200,000 Chairman of the and 53,000, respectively. Operating profit Executive Board,

The Board of Directors Report Report The Board of Directors Member of the increased and the loan portfolio demonstrated Executive Board, significant growth. CEO, Member of the Board of Directors

10 Alfa-Bank. Annual Report 2018 11 REPORT OF DIRECTORS BOARD THE Board of Directors and Executive Board

OSKAR OLEG SYSUYEV ANDREW BAXTER MIKHAIL PETR AVEN VLADIMIR MICHAEL TUCH ANDREW ANDREY ALEXEY SERGEY HARTMANN First Deputy Member of the Board FRIDMAN Chairman VERKHOSHINSKIY Deputy Chairman CHULACK SOKOLOV TCHOUKHLOV SHEVCHENKO Member of the Chairman of the of Directors Member of the Board First Deputy Chairman of the Executive Deputy Chairman Chairman Member of the Executive Member of the Board of Directors Board of Directors, of the Board of Directors of the Executive Board, Board, Member of the Executive of the Board, Deputy Chairman Executive Board President of Directors Member of the Executive of the Executive Board, Member of the Executive of the Executive Board, Director of Network Board, CEO, Member of the Board, Retail Executive Board, Board Chief Financial Officer Management and Board of Directors Business Director Head of Corporate Development Investment Banking ALEXEY MAREY ARTEM LEONTYEV ANDREY IVAN PYATKOV VLADIMIR DENIS OSIN SERGEY POLYAKOV MIKHAIL GRISHIN Member of the Board Member of the Board KOSOGOV Member of the VOEYKOV Member of the Information Technology Member of the Executive of Directors of Directors Member Executive Board, Member of the Executive Board, Micro Director Board, Deputy Chairman of the Board Digital Business Executive Board, & Small Business of the Executive of Directors Director Medium Business Director Board, Legal Affairs Director and Distressed Asset Management Director Russian Economy and Banking Sector Overview 1 Trade war fears immediately provoked a risk- and a state-of-emergency was introduced off scenario, which since mid-2018 caused by the US president from the middle of Febru- the dollar to strengthen, negatively affect- ary 2019 — both of these factors undoubtedly ing EM bond markets. Turkey and Argentina influenced the decision of the Fed to cut its were victims of capital outflows, their cur- US GDP forecast from 2.3 % to 2.1 % for 2019. rencies depreciating 50 % and 30 %, respec- Besides, the accumulation of a number of eco- tively (Figure 1). Almost all EM countries were nomic problems continue to threaten the sta- forced to raise their interest rates by the end bility of the US economic outlook. US economic of 2018: not surprisingly, the strongest rate growth largely relies on the wealth effect hike were seen in Argentina (from almost 30 % associated with the financial market recovery: to 60 % through 2018) and in Turkey (from the S&P index, adjusted to its 10‑year return, 8 % to 24 % over the same period) (Figure 2). remains overheated (Figure 3). Moreover, the As of YE2018, the global economy grew only same concerns are applicable to US house- 3.7 % vs 3.9 % initially expected by the IMF. hold consumption patterns, which are driven by a growing ratio of net asset value to dis- Overview A particular concern that emerged from the posable income; this indicator remains close trade war escalation was related to China’s to its historical high, which again reflects the economic performance. Economic growth substantial role of the wealth effect behind the in the world’s second-largest economy decel- US growth story (Figure 4). erated to 6.6 % y / y in 2018, the slowest pace since 1990. On the back of the trade war esca- The situation in Europe is also fragile: at the lation, Chinese producers faced weak demand beginning of 2018, the IMF forecast French both on the local market and abroad. Local economic growth at 1.9 % for 2018 and Ger- consumption growth in China remains high, but man growth at 2.3 %; however, the actual GDP it decelerated by 1.2pp to 9.0 % y / y in 2018. growth rate in both countries did not exceed Despite significant state efforts to boost local 1.5 %. The situation around Brexit also adds demand, car sales in January 2019 fell 15.8 % pessimism to market sentiment. During last y / y — and market compression is already in its year, investors had been in no doubt that the Russian Economy Economy Russian seventh consecutive month. As for exports, UK would find a way to reach a new agree- despite growth of 10.8 % y / y for the full year, ment with the EU; however, as of March 2019, the rate for 4Q18 came in at just 4 % y / y. the intensity of the political struggle in the

and Banking Sector and Banking Sector UK implies that the risk of exiting from the The situation in developed economies is also EU with no deal cannot be ruled out. a cause for concern. In the US, one area of disquiet is the friction between the presi- Overall, the remaining global concern is the PETR AVEN Chairman of the dent and Congress. From 22 December 2018, scale of the debt burden. The total debt of G20 Board of Directors the US government went into shutdown due countries has practically doubled in nominal to a standoff over budget allocations for 2019, terms over the past 10 years (it grew from

Global economy in 2018: the scenario of growing trade tensions became 60 60,0 a key concern for global investors. According Argentine pesо -50% Policy rate, dec 2017 trade war took the 50 to Fitch estimates, the trade war could affect Turkish lira -28% Policy rate, dec 2018 40 spotlight $ 2tn worth of global trade flows, or almost S.African rand -14% 10 % of global trade. Under the estimates 30 24,0 The key topic of the 2018 global economic of World Economic Forum experts, the effect Brazilian real -15% 20 7,8 8,3 6,5 6,5 agenda was obviously the trade war tensions of a full-scale trade war could be as high 6,0 4,8 Russian ruble -17% 10 3,2 between the US and China. The fears of their as 0.7pp of global economic growth. Taking 28,8 8,0 7,5 7,4 6,0 5,8 4,3 2,9 3,0 0 escalation intensified after the Head of Chi- such figures into account, it is not surprising Indian rupee -8% na’s Communist Party received a mandate that the US Federal Reserve (Fed) eased its Mexican peso 0% India Russia Turkey Mexico Pakistan Malaysia Indonesia Argentina for open-ended presidency in February 2018; monetary policy rhetoric at the end of 2018 -55% -45% -35% -25% -15% -5% Philippines with the introduction of sanctions on steel and and started guiding the market towards Fig. 1: EM exchange rate, % y/y change in 2018 Fig. 2: EM policy rates, % aluminum imports in March 2018 and duties a pause in the rate hike cycle at the beginning Sources: Bloomberg, Аlfa Bank Sources: Bloomberg, Аlfa Bank on imports of some 800 Chinese goods in July, of 2019.

16 Alfa-Bank. Annual Report 2018 17 OVERVIEW SECTOR BANKING AND ECONOMY RUSSIAN 50 7,2 160 Total debt in U.S dollars 236% 240% 170% % GDP China’s corporate debt tn $ 25 45 6,8 140 Total debt in GDP, % (RHS) 230% tn $ (RHS) 40 227% 160% 6,4 120 20 35 % GDP 220% 150% 100 30 6,0 140% 15 25 80 210% 5,6 130% 20 199% 60 120% 10 15 5,2 200% 40 10 110% 4,8 190% 5 5 20 100%

4,4 52 54 57 60 65 70 74 80 85 90 95 100 107 114 120 128 135 0 0 180% 90% 0 1 881 1 885 1 889 1 893 1 897 1 901 1 906 1 910 1 914 1 918 1 922 1 926 1 931 1 935 1 939 1 943 1 947 1 951 1 956 1 960 1 964 1 968 1 972 1 976 1 981 1 985 1 989 1 993 1 997 2 001 2 006 2 010 2 014 2 018 1 960 1 962 1 964 1 966 1 968 1 970 1 972 1 974 1 976 1 978 1 980 1 982 1 984 1 986 1 988 1 990 1 992 1 994 1 996 1 998 2 000 2 002 2 004 2 006 2 008 2 010 2 012 2 014 2 016 2 018 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Fig. 3: Cyclically-adjusted S&P P/E ratio Fig. 4: Households’ net assets value versus disposable Sources: Yale, Аlfa Bank incomes Fig. 5: Total debt G20: tn $, %GDP Fig. 6: China’s corporate debt , % GDP and tn $ Sources: FRED, Аlfa Bank Sources: IMF, Аlfa Bank Sources: Bloomberg, Trading Economy, Аlfa Bank

$ 74tn in 2006 to $ 135tn in 2016) and reached to artificial intelligence constituted up to 30 almost half of the investment growth in fixed Despite solid economic growth, the outlook 236 % of GDP, which is a high over the last articles per month, in June 2018 that figure assets in 2018 was related to projects in Mos- is still pressured by several factors. First of all, 20–30 years (Figure 5). The state of China’s grew to 50, however by December 2018 the cow, about 10 % was attributable to Crimea and monetary conditions remain tight. The aver- debt load, where corporate debt has reached number of articles had dropped to just 10. Such 4 % to investments in the Far East. So, although age Urals oil price remained high at $ 70 / bbl 160 % of GDP, or around $ 20tn (Figure 6) a trend reflects the market’s tiredness of this the contribution of three key investment regions in 2018 and, as a result, Russia’s current is of particular concern. theme — there is a growing understanding declined from 66 % of cumulative investment account surplus reached 7 % of GDP (Figure that the economic benefits of new technolo- growth in 2017 to 60 % in 2018, the concentra- 9), the highest level since 2006, while the ruble There is also a level of disappointment sur- gies will be visible only in the longer term and tion of the investment growth remains signifi- lost 17 % as of YE2018. However, the ruble rounding expectations of technological break- that in the nearest future companies will have cant (Figure 8). depreciation could have been steeper had the throughs that could accelerate global growth to rely on traditional ways to control costs and CBR not stopped currency purchases from and form a new growth model. For the first generate business growth. The third factor behind the growth was the the open market under budget rule in August time in 16 years, Apple recently guided for strong performance of net exports. Due 2018 — it transferred around $ 30bn to the a decline in its revenue forecast for 1Q19. The to a favorable situation in the agricultural sec- MinFin directly from its reserves, reducing FANG+ index, which includes technological Russia 2018: VAT increase, tor, Russia was able to build up export volumes: the forex market demand side by the same giants such as Netflix, Apple and Alphabet pension reform and turmoil cumulative nominal growth of non-oil exports amount. Private capital outflows in 2018 was flat through 2018, having demonstrated reached 14 % y / y as of YE2018. However, reached $ 68 bn, more than double the figure record growth of 58 % y / y in 2017. An anal- on financial markets an important contributor to the net export for 2017. The presence of non-residents, which ysis of press publications suggests declining growth was a decline in imports — although in March 2018 reached 35 % of the OFZ mar- interest on the topic of AI and new technol- Last year can be viewed as quite successful import volumes grew 5 % y / y in nominal terms ket, the highest level in five years, declined ogies: at the beginning of 2018, the num- for Russia. The economy grew 2.3 %, a figure in 2018, in the second half of the year, it has to 25 % of the market as of end-2018. ber of Financial Times publications devoted which exceeded both initial expectations and been cut by 2 % y / y. As a result, growth of net the growth rate of 2017 (+1.6 % y / y). A number exports accounted for around one-third of GDP of factors played in favor of this growth. The growth in 2018. first one was the favorable salary growth pattern. As of YE2018, real salaries grew 6.8 % y / y, Overall, the remaining including growth of 10.2 % in 1Q18. The trend 14% 2011-2013 70 Moscow in salaries followed the pattern observed during Crimea global concern is the 12% 2017-2018 the previous electoral cycle of 2012 (Figure 7). 60 Far East 15 4 10% scale of the debt burden. 50 10 The second important factor behind last year’s 8% 15 The total debt of G20 40 growth were the large investment projects. The 6% 30 countries has practically construction of Kerch Bridge was completed 4% 45 in May 2018. Projects associated with prepara- 20 doubled in nominal terms 2% 36 tions for the World Cup, which took place in 11 10 0% Russian cities during the summer of 2018, pro- over the past 10 years 0 Jul-17 Jul-19 Jul-18 2017 2018 Jan-17 Sep-17 Jan-19 Jan-18 Sep-19 Nov-17 Sep-18

vided support to construction and investment Nov-19 Nov-18 Mar-17 Mar-19 Mar-18 May-17 May-19 May-18 activity in 1H18. As a result, investments in fixed Fig. 7. Real salary growth: 2011-2013 vs 2017-2018, % y/y Fig. 8. Contribution of Moscow, Crimea and Far East to Russia’s assets grew by 4.3 % y / y in 2018 vs. 4.8 % Sources: Rosstat, Alfa Bank investment growth, % y / y in 2017; however, the structure shows that Sources: Rosstat, Alfa Bank

18 Alfa-Bank. Annual Report 2018 19 OVERVIEW SECTOR BANKING AND ECONOMY RUSSIAN 80% % г/г Non-mortage, % y/y 180% 170% 70% 166% The second factor which negatively influenced Mortage, % y/y 160% 148% 60% 135% market sentiment was the Russian govern- 140% 133% 50% 122% 115% 120% ment`s decision to increase VAT from 18 % The second factor which 40% 120% 94% to 20 % from the start of 2019. Despite favor- 30% 100% 89% 92% negatively influenced 20% 80% able oil prices and the fact that state savings 61% 10% 60% on the CBR’s accounts reached RUB8.5tn, market sentiment was the 0% 37% 40% as of end-2018, financing for the new May -10% 20% Decrees declared by President Putin in 2018 Russian government`s -20% 0%

implied some increase in budget expenditures. Jul-11 Jul-12 Jul-17 Jul-13 Jul-15 Jul-16 Jul-18 Jul-14 Jul-10 Jan-11 Jul-09 Jan-12 decision to increase VAT Jan-17 Jan-13 Jan-15 Jan-16 Jan-19 Jan-18 Jan-14 Jan-10 2011 Jan-09 2012 2017 2013 2015 2016 2018 2014 2010 2007 2003 2005 2006 2009 2008 To preserve a low level of budget dependency from 18% to 20% from 2004 on oil prices — the breakeven oil price reached Fig. 11: Mortgage and non-mortgage growth,% y/y Fig. 12: Non mortgage loans per capita, % monthly salary $ 50 / bbl as of end-2018 (Figure 10) — a decision the start of 2019. Sources: CBR, Alfa Bank Sources: CBR, Alfa Bank was taken to finance additional expenditure via a tax increase. However, the tax burden for the Banking sector: Corporate loan growth has shown signs of recov- non-oil economy grew both in 2017 and in 2018 considering that that the state pension fund strong lending ery since mid-2017 and growth accelerated due to tax collection efforts and average deficit increased from 1.1 % of GDP in 2006– in 2H18, recording a rate of 10.5 % y / y in 2018 growth in the tax burden of the non-oil sec- 09 to 2.0–3.5 % of GDP in 2010–13 and the recovery of 2018 after 0.2 % y / y growth in 2017. Despite stronger tor reached around 8 % annually in real terms. ratio of the population 65+ vs. the country’s headline figure, the two trends behind it were Also, the decision to increase VAT brought labor force reached 28 %, vs. the world aver- Retail lending growth reached 22.4 % a deleveraging in the forex-denominated seg- inflationary risks — according to the latest esti- age of 19 %. In 2018, pensioners totaled 36 y / y in 2018, including an acceleration in lending ment and an increase in ruble-denominated loans. mates, the VAT hike added around 0.6–0.7pp mln people, or 25 % of the Russian popula- growth from 13 % y / y to 19 % y / y and the sta- The share of forex-denominated loans dropped to inflation as of end 2018‑early 2019, and the tion vs 29 mln or 20 % population in 2000. bilization of its growth rate at 22 % y / y from to 18 % of total corporate loans as of end-2018, increase in VAT was behind the acceleration As a result, although the annual state pension September 2018 (Figure 11). The growth the lowest level since 2013, reflecting around in inflation from 2.5 % as of YE2017 to 4.3 % fund expenditure currently amounts to around in non-mortgage loans accelerated throughout $ 15bn of redemptions to local banks in 2018 as of end-2018. This forced the CBR to tighten 8 % of GDP, in line with the global average, the last year from 12 % y / y to 21 % as of end-2018 alone. The growth in the ruble-denominated its monetary policy. After the CBR cut its pol- pension replacement ratio (the ratio of retire- despite the CBR efforts to curb its growth: corporate loan book, by contrast, accelerated icy rate to 7.25 % during the summer of 2018, ment income to pre-retirement income) in Rus- from September 2018, the CBR implemented to 13–14 % y / y in 2018 from an average of 5 % it initiated two rate hikes and by YE2018 the sia is only 34 % vs. the global average of 54 %. risk ratios for non-mortgage loans, however y / y in 2017 (see Figure 13). Deleveraging from key rate stood at 7.75 %, essentially, returning However, a cross-country analysis suggests this macroprudential tool gave a rather weak foreign debt was another reason behind the to the level of end-2017. that the average period of time between the result. That said, with the ratio of non-mort- faster recovery in ruble-denominated lending: announcement of reforms and their implemen- gage loans per capita to monthly salaries in 2018, Russian companies redeemed another Finally, last year’s main economic event was tation is five years, while in Russia’s case, the of 133 % as of end-2018 versus 122 % in 2017, $ 14bn net on their foreign debt obligations. the decision to implement pension reform, initial proposal to increase the retirement age the market remains below 170 % seen at the As a result, the share of forex-denominated namely to increase the retirement age from emerged only in 2016, i.e. just two years ago — peak in 2013 (Figure 12). Mortgage growth obligations of Russian companies declined from 55 / 60 to 60 / 65 for women / men. The decision this could explain the negative effect of pen- accelerated from 17 % at the beginning of 2018 30 % of GDP in 2017 to 22 % of GDP in 2018; the to increase the retirement age was inevitable, sion reform to local sentiment. to 25–26 % y / y by the year-end. entire level of corporate debt (debt to local banks and foreign issuers) was however 53 % of GDP in 2018, a level last seen in 2013 (see Figure 14).

120 CA breakeven oil price, $/bbl 10% 114 120 110 20% 50% 100% current account balance, % GDP (RHS) 109 Forex-denominated corporate loans, % loans (RHS) 9% 102 104 % GDP Forex corporate obligations 98 99 18% Ruble-denominated corporate loans, % y/y 45% 90% 100 100 88 8% Ruble corporate obligations 16% 40% 80% 81 78 78 7% 14% 35% 80 80 70% 70 67 6% 62 12% 30% 63 57 60% 60 5% 60 50 10% 25% 47 43 50% 33% 40% 39 4% 8% 20% 30% 36 35 34 29% 22% 40 31 40 40% 20% 45 3% 25 6% 15% 21 24 22 22 24 18 4% 10% 30% 2% 20 20 2% 5% 1% 20% 30% 31% 30% 30% 31% 31% 0 0% 0% 0 0% 10% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Jul-15 Oct-16 Avg-17 Jun-13 Jan-13 Feb-15 Jun-18 Jan-18 Apr-14 Dec-15 Sep-14 Nov-13 Nov-18 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Mar-17 2013 2014 2015 2016 2017 2018 May-16

Fig. 9. CA breakeven oil price, $/bbl. and current account Fig. 10. Federal budget breakeven oil price, $/bbl Fig. 13: Ruble-denominated corporate loans, % y/y and the Fig. 14: Ruble and forex-denominated corporate obligations balance, % GDP Sources: Minfin, Alfa Bank share of forex-denominated corporate loans to total corpo- (local loans and foreign debt), % GDP Sources: Minfin, Rosstat, Alfa Bank rate loans Sources: CBR, Rosstat, Alfa Bank Sources: CBR, Alfa Bank

20 Alfa-Bank. Annual Report 2018 21 OVERVIEW SECTOR BANKING AND ECONOMY RUSSIAN Despite retail deposit growth reaching 9.5 % y / y in 2018 vs. 7.4 % y / y in 2017, we believe that the strength of funding was not as good In 2018, the CBR revoked as it appears. Growth in the ruble-denominated segment decelerated from 10–13 % 77 banking licenses, y / y seen in 2017 to 8.3 % y / y as of year-end leaving Russia with 2018, the lowest level since 2015. This growth seems to rely on the capitalization of inter- 440 banks. Despite est on existing deposits, which represented efforts to clean the around 65 % or RUB1.1tn of the RUB1.7tn in ruble-denominated retail deposit growth sector, the share posted in 2018. An additional concern over of unprofitable banks the strength of the market was the declining maturity of retail deposit funding. The share remained as high as 21%, of current accounts in total retail funding implying that the number increased to 24 %, the highest level since 2010, reflecting that sanctions fears pushed house- of financial institutions holds to shorten the maturity of their savings. will decline further.

In 2018, the CBR revoked 77 banking licenses, leaving Russia with 440 banks. Despite efforts in corporate loans increased to 74 % in 2018 to clean the sector, the share of unprofit- vs. 71 % in 2017. The only area where their able banks remained as high as 21 %, implying share did not perform well was the corporate that the number of financial institutions will deposit segment, where they controlled 62 % decline further. The decline in the number on the market in 2018 vs. 63 % in 2017. Despite of banks is coming hand-in-hand with consol- the CBR not announcing any important bank- idation of the sector and state-owned banks ruptcy cases in 2018, it is still burdened with are benefiting the most. State banks increased banks that have been under restructuring since their share to 65 % of retail deposits and 2017 — and there are no obvious option to sell to 64 % of retail loans in 2018. Their presence these assets.

22 Alfa-Bank. Annual Report 2018 Message from Chief Executive Officer 2 The Bank increased it’s loan portfolio in corpo- Consolidated statements of ABH Financial rate and retail segments, and also improved its Limited speak volumes: the retail deposit port- quality: the share of non-performing loans (90+ folio went up by 9% (31% in the ruble equiv- days) dropped from 2.3% in late 2017 to 1.4%. alent) to $16.4 billion. The raised funds portfolio grew by 32% (to 1.07 trillion rubles). The An increasing number of clients trust Alfa- investment products portfolio grew by 23% Bank with their money. Deposits grew 8.6% year-on-year, largely owing to the doubled year-on-year to $32.1 billion. Our share on the demand of premium clients for investment retail demand deposits market hit a record products. The loan portfolio has also grown high level, which testifies to the high con- significantly—by 38% in the dollar equivalent fidence of customers in the Banking Group (66% in the ruble equivalent) to $6.1 billion. as one of the most reliable financial institutions in Russia. We highlighted the most popular retail products, such as cash loans and credit cards. Rating agencies highly ranked the Banking We also actively developed mortgage lending: Group’s creditworthiness. Our international Alfa-Bank took a position in Russia’s Top 10 credit ratings are the best amongst Rus- issuers of mortgage loans within 18 months. sian private banks and improved during the Our products won special awards last year: for last year. For instance, S&P Global Ratings example, clients loved AlfaTravel Visa, a joint assigned a BB+ long-term credit rating to Alfa- project of Alfa-Bank and Visa, and the pro- Bank. Moody’s Investors Service assigned a Ba1 fessional community recognized AlfaTravel long-term foreign-currency deposit rating Visa as the most profitable travel card (Frank and a Baa3 long-term counterparty risk rat- Banking Reward Award 2018). ing. Fitch Ratings confirmed Alfa-Bank’s BB+ long-term issuer default rating. The Analytical Alfa-Bank was one of the first to connect Credit Rating Agency (ACRA) and the Expert to the Unified Biometric System in 2018. The RA Rating Agency confirmed Alfa-Bank’s credit system enables remote client identification, rating as АА (RU) and ruАА, respectively, with allowing clients to use our services without Executive Officer Executive a stable outlook. having to visit a bank office. We can instantly issue cards to our clients and then deliver them VLADIMIR Business Blocks’ Annual Results in a digital format. Most of our products can VERKHOSHINSKIY be acquired in just a few clicks, meaning there First Deputy

Message from Chief from Chief Message Chairman of the Every key area of our activity strengthened is no need to visit or call the Bank. Executive Board, in 2018. The Bank increased its share on the Member of the Executive Board, retail demand deposits market to a record 10% The private banking segment has shown CEO, Member of the and took the third position amongst Russian substantial growth. In 2018, Forbes recog- Board of Directors banks in terms of the retail deposit portfolio. nized Alfa-Bank as the best private bank for affluent clients in its 2018 rating. We want to create the best private banking service for Key financial results of Alfa-Bank grew Annual Financial Results Russian-speaking clients. A number of unique in 2018. We maintained our leadership among products were presented last year. One the country’s private banks in terms of total According to consolidated IFRS financial state- of them is an application that enables remote assets and equity and credit and deposit port- ments of ABH Financial Limited, Alfa Banking An increasing number implementation of a large number of banking folios. Our business showed an upward trend Group’s net profit increased by over 1,5 times of clients trust operations. Secondly, we have implemented in every priority area. The financial market to $1,321 million in 2018. Our net interest income the country’s first automatic depositary that trusts the Bank, a fact proven by an influx grew by 15.6% to $2,011 million and our net com- Alfa-Bank with their identifies our clients on the basis of palm vein of funds and an increasing number of corpo- mission income increased by 15.6% to $978 mil- money. Deposits grew recognition. Finally, our clients can enjoy a vir- rate and retail clients. lion. Net commission income amounted to 31.2% tual meeting room in order to contact financial of pre-provision operating profits as of late 8.6% year-on-year consultants from a distance. Alfa-Bank was 2018. The Bank compensated operating costs to $32.1 billion. the first on the market to offer affluent clients with net commission income at a record amount a convenient service of encashment and cash of 79.1%. Total assets of the Alfa Banking Group delivery without personal presence. also grew year-on-year to $47,190 million.

26 Alfa-Bank. Annual Report 2018 27 ADDRESS CEO’S As for investment business, we have main- As before, the Bank continued to rapidly draw serve the same purpose. The Bank is closely tained our position in our historically strong clients in the small business segment. Its clien- monitoring service quality. We plan to have Alfa-Bank has areas, such as trade finance and syndicated tele grew by 200,000 companies and individual our clients evaluate each manager via a mobile loans. The Bank closed about 1,300 trade entrepreneurs, and the loan portfolio doubled. application after they visit a bank office. These been successfully finance deals in more than 50 countries Emphasis was put on micro-businesses and evaluations will be taken into account in the collaborating with big in 2018. It won the Best Trade Finance Provid- business novices: we developed special prod- motivation system. ers 2018 award as the best Russian provider ucts with a high degree of process automa- businesses for a long of world trade finance services. tion and technological effectiveness. We also Alfa-Bank has a prominent and strong cor- time. It won the 2018 prepared new popular products for compa- porate culture. We were pleasantly surprised Alfa-Bank retained its leadership on the forex nies of the higher segment, such as electronic by our organizational health index, which was SPEAR’S Russia Wealth market among Russian banks. Last year, banking guarantees for participants in public prepared by leading international consultants. Management Awards it once again topped the reputed professional procurement. Alfa-Bank ranked as one of the world’s Top 10 rating Euromoney FX Survey 2017 in terms banks in terms of corporate culture quality. in the category of best of forex turnover on the CEEMEA market In 2018, Alfa-Bank expanded its range of ser- Alfa DNA is the thirst for primacy and freedom, corporate bank. (Central and Eastern Europe, the Middle East, vices by facilitating successful business devel- intellect, entrepreneurial spirit, and high loy- and Africa). We surpassed serious rivals, such opment. These include the online calculator alty of our team: 2,500 out of 25,000 employ- as JP Morgan, UBS, Goldman Sachs, HSBC, in the Internet bank. The calculator enables ees have been working with the Bank for over Alfa-Bank has been successfully collaborating Citi, and Deutsche Bank. The Bank ranked 27th companies and individual entrepreneurs to cal- a decade, and many have been with us for 15, 20, with big businesses for a long time. It won the in the global rating. As before, we were the only culate the amount of taxes and turnovers or even 25 years. 2018 SPEAR’S Russia Wealth Management Russian bank in the Euromoney global TOP-30 consistent with Federal Law 115-FZ on the Awards in the category of best corporate bank. rating. Suppression of Money Laundering and Spon- FIFA World Cup 2018™ While continuing cooperation with existent cli- sorship of Terrorism. We also implemented ents, we seek to occupy new niches and develop 2018 was also successful for medium corpo- a free online assistant in 2018 to prepare all The FIFA World Cup was the major sporting promising areas. For example, we have started rate business: we saw a record increase in cli- documents required for registering a business event of 2018. Alfa-Bank was named the official to interact with multinational corporations ents, and our growth rates were twice as high with the tax service, a process that takes up to sponsor of the FIFA World Cup 2018 and the (MNC). as those of market majors. As of January 1, 15 minutes. FIFA Confederations Cup 2017. We organized 2019, the number of active clients reached a prominent promotion campaign, as a result We stay true to our industry priorities in the 53,000 in that segment. Operating profit There were other important events in the small of which many companies and individuals big business sector. For instance, the Bank increased by 1.6 times, our loan portfolio grew business segment. First of all, the Bank mark- became our new clients. Meanwhile, existing cli- has increased the number of investment by 1.5 times, and our number of borrowers edly improved its standing as a major player ents gladly took part in loyalty programs, earned loans issued to the agro-industrial sector. practically tripled. As a result, we created in the Internet acquiring market, where our special prizes, and gained bonuses. One of the This is a rapidly developing sector, and it is a separate business unit focused on coopera- share neared 20–25%. Secondly, we reinstated world’s best footballers, Lionel Messi, was the thus wise to strengthen our position in the tion with such companies. trade acquiring services. Finally, Alfa-Bank face of our promotion campaign. area. Today, Alfa-Bank is one of the five lead- became the first Russian bank offering two ers in granting preferential loans to agrarian We enlarged our product range with medium loyalty programs to businessmen: the first was We issued over 100,000 FIFA 2018 cards, brace- enterprises under Russia’s state programs. business’ essentials—for instance, rapid credit FIFA 2018, which helped us draw 10,000 new lets carrying the Cup’s symbols, and rings for We are also committed to other sectors such options. The Bank quickly responded to the clients from small and medium sized business, contactless payments. About 120,000 par- as the mining industry and oil refining. modification of Federal Law 214-FZ by offering and then Alfa-Loyalty, for current business ticipants, including 10,000 new clients, were special account services to developers. In some clients. registered with the FIFA 2018 loyalty program. We emphasize the implementation of new regions, we are the only bank that provides full Special events were organized for Corporate technologies also in the big business segment. services to developers consistent with federal Bank Team Investment Bank clients: a tournament for their In 2018 Alfa-Bank joined R3 Consortium -- laws. We also continue to develop services for children and a clients’ match, which took place an international financial and technological companies engaged in foreign economic activ- The Bank saw some changes in its personnel on the day of the FIFA World Cup 2018 final. association of entities using and develop- ity. The Bank has been a leader in this segment in 2018: the heads of several key departments ing blockchain technologies. The consortium for years. were replaced, and additional top positions were The status of the FIFA World Cup 2018’s spon- comprises global companies, such as Bank established and filled with highly skilled special- sor increased recognition of the Alfa-Bank of America, Credit Suisse, Goldman Sachs, J.P. Another priority is digital service channels for ists. The overall number of employees did not brand on the Russian and global markets. Our Morgan, Barclays, and Deutsche Bank. Alfa- corporate clients. We expanded the functions change much, yet the central office was opti- financial results were also good: existing client Bank is the first Russian member of the sys- of our Internet business bank last year. For mized. It is our task not to reduce the staff but activity increased and we were able to attract tem. Our membership in the consortium allows instance, we added the “credit products” sec- to help our employees become more effective. new clients. us to actively implement blockchain tech- tion, which provides full information about our Our approach will give more time for serving nologies and offer advanced solutions to our credit products regardless of their type. domestic and foreign clients. The active robot- clients. ization and digitalization of routine operations

28 Alfa-Bank. Annual Report 2018 29 ADDRESS CEO’S Strategic Plans for 2019–2021 channels with our clients, but will stick to the Our strategy also includes expanding our cli- mobile first principle (mobile bank clients will entele. The preservation of the current growth Summing up 2018, we can state that Alfa-Bank be served in the first turn). What I mean is that rates will enable us to gain 70% of our earn- We were pleasantly has demonstrated perfect financial results. we will prioritize the mobile bank while still ings from regular business (retail, small and The path towards constant development must maintaining client service at the high market medium business) by 2021. The indicator cur- surprised by our be preserved in order to stay successful in the level in other areas. rently stands at about 50%. organizational health future. Therefore, according to the strategy the primary objective for the next three years A second area of our strategy is the brand-new In retail lending, we aim to increase our portfo- index, which was is to achieve a new technological level. Then approach to bank office operations. Alfa-Bank lio manifold. As a result, our share in the retail prepared by leading we will be able to offer the best service to our is the first bank in Russia to build a network lending market will double. Lending of micro & clients, acquire an indisputable competitive of next-generation offices, where clients will small business is expected to increase approx- international consultants. edge over our rivals, and lay the foundation for not need paper documents but will instead imately four times, compared to current Alfa-Bank ranked raising profitability and market share in every receive the entire range of banking and invest- indicators. primary segment. ment products using their smart phone. As we as one of the world’s achieve a new level of process digitalization, Corporate Investment Business will remain Top 10 banks in terms The Russian banking market is one of the most we will accelerate client service and shift our a source of substantial and stable income for technically advanced in the world. We must routine operations to online channels. Our the entire Bank. It will grow along with the of corporate culture stay attuned to technology and client expe- offices already provide some services using market and maintain its profitability at the quality. rience in order to be prepared for continuous push notifications and SMS messages. Soon, current level. change. Our strategy has a clear focus: it has a new format of our work will be approved and only three main areas, but the Bank plans begin a trial run. We will perfect this format Another development area is the mutually The banking world is changing, but our priori- to become the country’s best in each of them by the end of 2021 and a substantial part advantageous partnership with the lead- ties are unwavering. Our clients are the center within the three upcoming years. of our offices will operate in a new way. ers of various sectors, including Alfa Group. of all our innovations and improvements. These In 2018, Alfa-Group took part in establishing are people and companies who have trusted Smart phones will be the centerpiece of inter- The third strategic initiative is to implement the Corviglia Capital Fund, which facilitates Alfa-Bank with managing their financial well- actions with retail and corporate clients. the concept of Russia’s first paperless univer- interaction with foreign partners and startups. being for years and who are just at the begin- We want our mobile application to be the sal bank. There will be no paper flow in offices The Fund searches for startups that suit our ning of our journey together. These are the best in Russia. Our mobile bank will offer and the back office unless this is required objectives on the Russian and foreign mar- biggest companies of Russia and young start- the broadest range of products and ser- by law or clients. We will further last year’s kets and chooses the best projects. Once that ups that are taking their first steps in busi- vices—some of which are currently available undertaking and boost the implementation is done, we assess the possibility of synergy, ness. These are big capitalists and families at offices only—in a convenient format. The of biometric technologies and electronic digital especially in the field of technological solutions. who are able to move into their first home Bank’s mobile application already allows cli- signatures. The shift to paperless technology thanks to Alfa-Bank’s services. Every client ents to receive a loan within three minutes, link will bring client experience to a whole new level By the middle of 2019, Alfa-Bank will integrate is important to us, and it is our main objective their card to any account, and instantly receive and raise the effectiveness of our operations. the Sentinel Collection Agency, a subsidiary to create instruments that will make commu- a new one. of the Bank. We intend to rapidly increase nication with the Bank even simpler and more Financial Goals for the Coming Years our loan portfolio, so quality control acquires convenient. By making the mobile bank the most conve- special significance. This is why the collection nient way of interaction between the Bank and Key financial goals for the coming years include agency will be integrated into the unified col- its clients, we will ensure that our application a growth of the loan portfolio, commission lection cycle. is in high demand. We have over 5 million active income, and full compensation of operating retail clients, and 65% of them use the mobile costs with risk-free revenue. Our business will Look into the Future application. This is the highest percentage grow alongside operational efficiency. There amongst Russian universal banks. Yet we are are plans to drastically reduce CIR (cost-in- Alfa-Bank is the biggest private bank of the interested in more than merely using remote come ratio) while maintaining high profitability. country, with over 30 years of exciting history channels: we will also use them to increase As a result, the Bank will steadily raise its cap- that both our existing clients and those who sales. We seek to sell more of various products, ital. Retail, micro, small and medium business have not used the Bank’s services are familiar including credit ones, using distant channels. will drive our growth. Several years ago, the with. We are actively developing new technol- This is our biggest priority for the period until Bank set the goal of doubling its share of the ogies, devising new work models, and modern- 2021. market in these segments, and it achieved izing our products and services to meet the a lot. We expect to reach our objectives within expectations of those who choose Alfa-Bank This does not mean that Alfa-Bank’s focus three years. as their financial partner. The annual growth will be limited to the mobile bank. We will in the number of clients shows that our devel- also be developing other communication opment vector has been chosen correctly.

30 Alfa-Bank. Annual Report 2018 31 ADDRESS CEO’S Retail Business 3 As a result, Alfa-Bank competes with market Retail clients’ interest in refinancing their cur- majors for new and current clients through rent obligations was a trend in 2018. Each year, quality service and charges. borrowers increase their financial awareness and learn how to cut their spending on serving The investment product portfolio has also loans. Refinancing is a chance to combine any demonstrated a significant year-on-year loans of other banks into one, settle debt with growth of 40 %. The demand of premium one comfortable payment, reduce the amount clients for investment products nearly dou- of monthly payments, and get additional funds. bled, while the number of private investors enlarged by more than 30 % over the year. The Alfa-Bank always offers competitive credit total value of the investment product portfo- products that meet clients’ needs by actively lio exceeded 289 billion rubles. The Bank plans developing refinancing amongst other areas. to keep high rates of attraction of private The Bank’s program achieves two objectives: investors in the future. refinancing of earlier credits on better terms and acquiring additional funds for current needs. Retail Lending In 2018, Alfa-Bank increased its scope of refi- Lending efforts have also been active. Last nancing other banks’ credits by seven times. year, Alfa-Bank showed a significant increase About 80 billion rubles were issued as loans in the volume of key credit products. Alfa- over this period. Refinancing services were Bank’s retail loan portfolio increased by 38 % most actively used by residents of St. Peters- in the dollar equivalent or by 66 % in the ruble burg and Moscow. equivalent to $ 6.1 billion. The Bank enlarged its share of the retail loans market to 2.82 % over Although Alfa-Bank has only been offering

Retail Business Retail the year. There is high demand for new loans mortgage loans to its clients since the middle and refinancing of loans issued by Alfa-Bank of 2017, the sector is soaring, and the Bank has and other financial institutions. secured a position amongst the Top-10 issuers of mortgage loans. Its share in the mort- The Bank has been surpassing its rivals gage loan market reached 1.4 % in 2018. Last by growing its loan portfolio. Growth was gen- year, the Bank created a number of convenient erated by core credit products, such as cash digital services for mortgage clients, including loans (67 %) and credit cards (55 %). The «100 a personal account where the entire process MICHAEL TUCH days without interest» credit card is in high of mortgage loan approval, including assess- Member of the demand. Mortgage loans have also been on the ment of real estate and insurance, is car- Executive Board, Deputy Chairman rise, including as part of the refinancing ried out online. The Bank receives up to 40 % of the Executive program. of applications online. The convenient and Board, Retail Business Director high-tech process of application and submission of documents by Alfa-Bank’s partners that does not involve Bank employees, i.e. The Retail Bank saw active growth in every key and increased its share on the market from automated identification of questionnaires area of its activity in 2018. Impressive results 3.11 % to 3.75 %. Alfa-Bank’s share on the and main documents of mortgage borrow- were demonstrated in attracting deposits and market of demand accounts grew to 10 %. ers, reduced application processing costs and lending. Saving accounts and deposits in rubles and Last year was unique ruled out mistakes. The period between the foreign currencies are very popular with the in terms of Alfa-Bank’s application’s submission and inclusion in the Last year was unique in terms of Alfa-Bank’s Bank’s clients. The share of demand accounts mortgage conveyer has been reduced to 15 attraction of retail deposits. The Bank saw is high, considering the high level of service, attraction of retail minutes. In 2019, the Bank is set to consolidate a record increase in retail deposits and ranked quality support, and a broad range of services deposits. The Bank saw its status of a key and high-tech actor on the third amongst Russian banks by that param- and transactions that clients can receive and mortgage market. eter. According to consolidated IFRS report perform online via the Internet or mobile bank. a record increase in retail of ABH Financial Limited, over 12 months The Bank encourages clients with high trans- deposits and ranked third Last year, the Bank concentrated on meet- of 2018, the Bank boosted its retail deposit action activity by charging up to 7 % to current ing the demand of current clients — includ- portfolio by 9 % in the dollar equivalent (or accounts and offering 3 % cashback. amongst Russian banks ing employees — for mortgage loans, and 31 % in the ruble equivalent) to $ 16.4 billion, by that parameter. on attracting new clients through refinancing.

34 Alfa-Bank. Annual Report 2018 35 BUSINESS RETAIL AlfaTravel holders get up to 5 % in miles of innovations in 2018. For instance, it con- In 2018, Alfa-Bank started collecting biometric to their bonus account. Bonus terms depend nected to the Unified Biometric System, data of Russian citizens for their registration AlfaTravel holders on the card’s category. Miles can be exchanged implemented the instant card issuance, and with the Unified Biometric System. The service for rail and air tickets, hotel accommodation, developed chat bots and other technologies is provided by 99 Bank offices across Russia. get up to 5 % in miles and a whole range of tourist services. There raising its effectiveness. In addition, the Bank The procedure is free and takes only a few to their bonus account. are no time limits on using miles and bank connected to the Fast Payment System of the minutes. partners facilitate booking tickets from any Central Bank, which is profitable to clients and Bonus terms depend airline, including low cost and charter flights. simplifies money transfers. We view the Fast The Unified Biometric System is a major ele- on the card’s category. Payment System from the angle of client life- ment of the remote identification mechanism Shopping is not the only way to save on trav- time value rather than as a separate product. and will enable Russian citizens to receive elling. The card loyalty program provides financial services without visiting a bank office. This task was successfully accomplished. Now up to 11 % in miles for transactions made The Fast Payment System cuts the period A client who provides biometric data just one the Bank will expand geographic accessibility on the website travel.alfabank.ru, and a range of transfers between client accounts in various time can use the services of any convenient of mortgage loans. In 2018, Alfa-Bank offered of free services, such as cash withdrawal banks, and makes instant loan payments pos- bank at any time and from any part of the the product in five cities. Its presence will abroad, access to accounts in various curren- sible. As a result, the client’s interaction with world, regardless of bank offices’ working spread to at least 15 cities in 2019. Partners, cies, insurance of the card holder and his / her the Bank is convenient, profitable, and accom- hours. Only one procedure is required. such as real estate developers and agents, will family, Internet in roaming, luggage packing, modates the client’s needs. play an important role in promoting mortgage and Priority Pass membership. Program par- Registration with the Unified Biometric Sys- loans. It is our task to make mortgage loans ticipants can also enjoy discount taxi and car The active development of online channels tem is voluntary. A Russian citizen seeking affordable to clients, irrespective of whether rental rates worldwide. was a priority in 2018. More than 58 % of cli- registration must open an account and regis- it is a new loan or refinancing of an old one. ents use remote channels on a monthly basis ter on the Internet portal of public services. In terms of last year’s events, we cannot help and perform their current operations in the Remote service will require Internet access and Winners of the Higher Mortgage League were but mention the 2018 FIFA World Cup. Alfa- mobile bank. Alfa-Bank is pursuing a strategy a web camera on the client’s smart phone, tab- announced in six nominations at the 5th Rus- Bank was the first local sponsor and official of technological leadership and consistently let computer, or personal computer. Alfa-Bank sian Mortgage Congress on February 6, 2019. bank of the 2018 FIFA World Cup. One of the digitalizing routine processes to make clients’ presented an example of receiving the entire Alfa-Bank won the «Breakthrough of the world’s best footballers, Lionel Messi, became daily life more convenient. We have simpli- range of remote services via the Unified Bio- Year» category with the highest year-on-year the face of the Bank’s advertising campaign fied retail processes a lot; clients can receive metric System at the Finopolis Forum. growth in the monthly issuance of mortgage for the event. Over 100,000 FIFA 2018 cards most products — for instance, a card or a cash loans in 2018. The Bank also won the «Mort- were issued during the campaign and many loan — in just two clicks and use them without Alfa-Bank is actively developing online channels gage Loan of the Year» category in the 2018 cardholders took part in the bonus pro- visiting a bank office or calling our client sup- to provide the most innovative service to its «Bank of the Year» Award of the news agency gram and received tickets to FIFA World Cup port center. The activity increased online card clients, including one based on biometric tech- Banki.ru. matches. Bonuses also included FIFA souvenirs sales by 250 %. This simplified range of debit nologies. The development of the Unified Bio- and plush copies of the mascot, Zabivaka the cards increased demand for these products. metric System has boosted active use of remote By offering improved products that meet cli- Wolf. «Football cards» remained active and We will continue to optimize our products and services. Omnichannel service is an important ents’ needs and because of a favorable mar- provided additional benefits to their holders processes to make them maximally simple and aspect of Alfa-Bank’s strategy. We give the ket situation Alfa-Bank was able to achieve after the Cup was over. The Bank also made convenient to use. client a choice of the most advanced and conve- impressive results in lending. The lending contact-less payment bracelets and rings car- nient formats of communication with the bank process has been facilitated a lot. The Bank rying Cup symbols, enabling their users to pay Our mobile application, Alfa-Mobile, was con- while maintaining uniform standards and service intends to keep expanding its mortgage loan for any stadium services using shop terminals. siderably modernized, and the list of avail- quality in offline and remote digital formats. portfolio in every area while pursuing a conser- able operations broadened last year. Now vative risk policy. Another important event of this year was the it can be used to order a pre-approved On the whole, Alfa-Bank adjusted and wid- creation of a renovated range of debit cards. credit card or a loan. In the case of a loan, ened its approach to products and processes Travel Card and Other Interesting All debit cards have free card service and cash money is instantly credited to one’s account. last year. Cross-function teams were set Products withdrawal worldwide. Interest is accrued The mobile application ensures that cards up in every business segment to build integral to the balance if the card is used monthly or if are issued instantly. After applying for the processes in every area of client interaction. Another interesting product, the AlfaTravel there is a certain monthly balance on all cur- card, it takes only a minute to pay for goods The goal is to create the best omnichannel card, a joint product of Alfa-Bank and Visa, rent accounts of the client. or services. The modernized application saw bank for clients who appreciate convenience was offered to clients in 2018. The travel card an increase in users. The Bank also actively and service. For instance, the «cash credit» rapidly became popular and won the 2018 Technologies and Remote Service developed rapid delivery of cards and website team comprises experts in every relevant Frank Banking Reward Award. According sales. Now clients can get a card in any city area, from an IT specialist and a risk manager to the Frank RG survey of 2018 bank reward Retail Bank has been technologically devel- with an Alfa-Bank branch within just two days. to a marketer, who combine their efforts and programs in Russia, AlfaTravel was the most oping in two areas, such as client service and work as a single whole. This format is quite profitable card for travelers. Bank processes. Alfa-Bank made a number new to our market but yields perfect results.

36 Alfa-Bank. Annual Report 2018 37 BUSINESS RETAIL Alfa Private The Bank has chosen the right approach Soon, functions of the Alfa Private mobile to interacting with clients in this segment, application will broaden to include banking, Alfa Private business has practically doubled proven by its top position in the 2018 Forbes investment, lifestyle, and other personal offers. Alfa Private business has over the past 18 months. Apart from classic ranking of financial institutions rendering pri- banking instruments, the fastest development vate banking services. We are grateful to our Last year, Alfa Bank built a unique automated practically doubled over was demonstrated by the investment portfolio clients for their trust and for choosing Alfa- depository with biometric access for premium the past 18 months. and lending. Profitability of the private banking Bank as a reliable financial partner, as well clients. This is the first depository in Russia business has been growing over 40 % year-on- as to our colleagues for commending our based on palm vein recognition. year in the ruble equivalent. The development efforts. Our task is to create the best private Last year, Alfa-Bank became the first bank of Alfa Private invariably relies on client needs banking service for Russian-speaking clients The biometric vein scan is a contact-less in the market to offer individual encashment and, first and foremost, solves tasks that clients in Russia and far beyond. The active develop- procedure performed in infrared light, which and cash transportation services to Alfa-Bank set for the Bank. Client needs are the best way ment of private banking products and services, passes through the palm tissue and is absorbed clients without personal presence. Encashment to develop business, since clients must be sure many of which are unique for Russia, continued by hemoglobin. The vein pattern is strictly is very popular with affluent clients. In the of the Bank’s ability to accomplish any mission. last year. individual and does not change much during its past, clients had to be present during the deliv- lifetime. This type of biometric identification ery of valuables to or from a bank office. Now The Alfa Private investment portfolio For instance, Alfa Private was the first in Rus- is one of the most reliable and, once combined all a client has to do is to sign an additional increased by 250 % over the past 18 months. sia to release a special mobile application for with other individual access control means, agreement for encashment service or the In foreign banks, equities amount to a small affluent clients. Now Alfa Private clients can rules out unauthorized access to safe deposit delivery of valuables and to remotely order the part of the portfolio, while the bulk of clients’ control their finances via the mobile applica- boxes by third parties. This is a safe, private, delivery of money for a particular time. The money is invested. We are advancing towards tion for Apple iPhone. The Alfa Private appli- and convenient way for clients to access their bank can bring the money to any address. a similar model and are constantly working cation gives clients instant access to com- documents and valuables. to improve our offers to investors. Clients prehensive, real-time information about their Outlook and Plans for 2019 in this segment are well aware of the activ- accounts, deposits, insurance products, and A client does not need a bank employee ity of Western banks, and often say that Alfa funds managed by companies of Alfa Group to access their deposit box: access is provided Alfa-Bank has everything it needs to become Private’s investment expertise is better than and the aggregate financial result. Clients by the individual client card and a palm vein the most convenient bank for retail clients: that of Western investment companies. Cli- do not have to visit an office to convert money recognition system. a success-oriented team, brand-loyal clients, ents increasingly opt to invest, for example, at a special rate, receive and activate a card, and a focus on technological leadership. Next to diversify their portfolio and lower country assign a pin code, and immediately start using A virtual meeting room is another innovative year, Alfa-Bank plans to increase its share and bank risks. Portfolios comprising bonds it. We have developed remote authentication project for Alfa Private clients, who can meet of retail service in its business. Further devel- or shares of global issuers can achieve this for most banking operations via the applica- with financial or investment consultants and opment of retail lending, which will increase the purpose. Clients also want to be more active tion and made this service accessible for both hear their recommendations from home. All bank’s share in the market with such key prod- in the decision-making process, so we view the clients and their proxies. The application has they need to do is to put on a VR headset and ucts as credit cards, cash loans, and mortgage advisory model of interacting with our clients a very simple «seamless» navigation and spares connect to the service. The Alfa Private virtual loans, is a priority of 2019. Alfa-Bank’s share as one of the most promising. We launched this the user the need to browse one page after meeting room presents 3D avatars of consul- in the market of deposits will also grow. format in 2018 and expect to foster it in 2019. another since all information is available on one tants, in addition to assets and client liabilities. screen. This is an interactive format for working with The omnichannel service is a major competi- Lending has been rapidly developing in this real numbers that are visualized in charts and tive edge of the Bank, which plans to attract sector. We see a stable demand for various According to the Bank’s studies, most afflu- for performing many other operations. The new clients in 2019 through offices and online financing instruments and are ready to work ent clients prefer to delegate interaction with pilot project was implemented last year and channels. The segments chosen by Alfa-Bank with clients on individual cases. the bank to their proxies, but they need a con- the concept tested by a target group of clients. are highly competitive, not just with private venient financial radar to monitor dynamics The service will soon become widely available. actors but also with state-run banks, which Apart from financial services, private banking of their capital, investments, and funds under have a lower funding cost and a broad network. clients have a high demand for non-financial trust management. We provide this opportu- As a high-tech bank, Alfa-Bank always offers Nonetheless, Alfa-Bank has been demonstrat- consulting services. It is logical for a client nity to our clients via the Alfa Private mobile innovative digital solutions. We know that ing years of growth in most priority segments. to approach a trusted banker in regard to family application. Clients using the Alfa Private our clients travel often or permanently live Its competitive advantages are invariable: high wealth management: structuring of assets and mobile application can see the consolidated abroad and value their time. A visit to a bank quality of products and services, transparency, family capital, real estate management in Rus- result, i.e. all assets divided into categories office may not be convenient, and a chat with simplicity, attention to clients, rapid formal- sia and abroad, purchase of deluxe assets, such of investment, insurance, and bank products. a consultant does not create the effect of per- ization of bank-client relations, and convenient as yachts, planes or pieces of art, education The application provides a convenient oppor- sonal presence, trust-based atmosphere, and service. These factors are vital to our clients plans for children, etc. We are constantly broad- tunity to calculate the cost of assets in the immersion into the context. Yet the virtual and allow us to increase our clientele year after ening the range of our partners and are devel- main currencies of the portfolio and to filter assistant does. year. oping our own competences to be able to solve products by currency, which helps Alfa Private tasks set by our clients in any area. clients make more precise strategic decisions.

38 Alfa-Bank. Annual Report 2018 39 BUSINESS RETAIL Corporate Investment Banking 4

Under these circumstances, Alfa-Bank focused on developing relations with current reliable clients and searching for points of growth and According new promising areas of business development. to consolidated IFRS One of those areas was interaction with mul- financial statements tinational corporations (MNC), i.e. local offices of international companies. A separate business of ABH Financial Limited, segment has been created as a result. Another the CIB block posted important area for the Bank is stronger industrial / sectorial expertise and a focus on the financial results of $ 776 telecom, media, and technology segments. This million or over a half priority will be maintained next year. Banking of the Bank’s total Merging the resources of our corporate and financial results. investment banks was another important

Corporate Corporate achievement of 2018, one that enhanced the synergic effect of their interaction. A middle farming and fisheries. Today, the Bank is one

Investment Investment office was established last year to raise client of the Top 5 institutions providing preferential service effectiveness in Corporate Investment loans to the sector under state programs. Banking. Client managers, who used to service Corporate Bank clients only, started accom- Most of the sector’s significant deals deserve modating the needs of Corporate Investment a special mention. Banking clients last year. In 2018, the Bank opened a 2‑billion-ruble credit line for the Steppe Agro-Holding of AFK Large Business Sistema Group. This money will fund construction of a dairy farm in the Rostov region. The Lending targeted financing will continue on preferential terms under a resolution of the Russian gov- Alfa-Bank once again enlarged its loan port- ernment. The funding will be available for ten folio in 2018. Strong positions in capital, flex- years. The new farm of the Steppe Agro-Hold- ANDREW CHULACK Deputy Chairman ibility, speed, and sectorial expertise enable ing will house 7,000 heads of cattle, including of the Executive Alfa-Bank to successfully compete with state- 3,000 forage-fed cows to produce raw milk Board, Member of the run banks for the largest borrowers, i.e. major by European standards. It will be the big- Executive Board, Head of Corporate players of economic sectors. The Bank has gest farm in the Rostov region. Construction Investment Banking industry priorities of its own, such as the min- will begin in 2019 and more than 150 jobs will ing industry, oil refining, FMCG companies, and be created in the region. industries linked with import substitution, with The Corporate Investment Banking unit indicators on the Russian market. Alfa-Bank a particular emphasis on the agro-industrial Alfa-Bank has taken part in another project achieved a lot in 2018. According to consol- also bolstered the raising of corporate funds. complex. involving the Steppe Agro-Holding. It provides idated IFRS financial statements of ABH Its share on the market of corporate funds long-term financing for building a high-tech Financial Limited, the CIB block posted finan- procurement increased from 3.73 % to 4.11 % Last year, the Bank substantially increased dairy farm in the Pavlovsky district of the cial results of $ 776 million or over a half over the year, while the amount of corporate its volume of investment loans issued to the Krasnodar Territory with a 850‑million-ru- of the Bank’s total financial results. Its share funds increased by 8.3 % to $ 15,658 million. agro-industrial sector. The portfolio grew ble credit line available for ten years. Thanks on the market of corporate lending grew from The share of demand deposits remained stable by over 20 % in the first half of 2018 to 66 bil- to Alfa-Bank’s participation in the state pro- 4.2 % to 4.6 % over the year, while the loan at about 40 %. lion rubles, which evidenced competitive lend- gram of supporting the agro-industrial sector, portfolio reached $ 24,499 million, showing ing terms and trust of agricultural producers the loan was issued at a discounted annual rate a 1.4 % increase since the beginning of the year The trend of a lowering credit margin persisted in Alfa-Bank, a key financial partner of the of no more than 5 %. (excluding FX revaluation effect — 14.4 %). on the market of big business services in 2018, sector. We were able to achieve these results The loan portfolio’s quality also improved, and and rivalry with state-run banks intensified. thanks to Alfa-Bank’s expertise in the agro-in- The Bank sees substantial potential for the the share of non-performing loans (90 days+) dustrial sector. Dynamics were mostly derived dairy industry’s development, readily sup- dropped to 1.3 %, which was one of the lowest from investment projects carried out in crop porting investment projects that aim to build

42 Alfa-Bank. Annual Report 2018 43 BANKING INVESTMENT CORPORATE to invest their funds, the team’s experience Alfa-Bank has a long-standing partnership Alfa-Bank is a key financial partner of ULK and other factors. For instance, in 2017–2018, with the Pipe Metallurgical Company, a major Group. Over recent years, the Bank has been The biggest private Alfa-Bank assigned 4.2 billion rubles for global manufacturer of pipes for the oil and supporting major investment projects and building the first, second, and third stages gas industry. Last year the Bank provided acquisition of assets by ULK Group. The part- bank in the country of a champignon farm in the Kursk region. substantial financing to PJSC Seversky Pipe nership has enabled ULK Group to develop has been supporting Thanks to Alfa-Bank’s support, the Grib- Plant, an affiliate of PJSC Pipe Metallurgical Russia’s largest logging and lumbering enter- naya Raduga company produces 17,000 tonns Company (TMK). The company has achieved prise. ULK Group is implementing four primary promising projects of mushrooms per year. This is the biggest prominent operational results owing to the investment projects with Alfa-Bank’s support. in the field of import champignon farm in Russia as of this moment. management system designed by its shareholder and the stable situation on the pipe In 2016, Alfa-Bank provided a 1.5‑billion-ru- substitution for Alfa-Bank has been cooperating with PRODO market. We appreciate our partnership with ble project for the construction of a pellet years. Group and supporting its investment projects the Pipe Metallurgical Company, and are glad factory in the Arkhangelsk region. In 2017, for about ten years. PRODO Group is a major that such a reliable borrower as TMK continues Alfa-Bank funded the acquisition and modern- agro-industrial holding operating in poultry to choose us on the competitive market of cor- ization of the Pestovo Timber Complex in the high-tech production facilities and effectively and pig farming and meat processing. Group porate lending. Novgorod region, the acquisition of logging use the existent state support mechanisms enterprises are situated in the Central, Sibe- machinery, and the replenishment of oper- to fund agricultural producers at attrac- rian, and Urals federal districts. The Bank Alfa-Bank has also provided a 30‑billion-ru- ating assets. Later on, Alfa-Bank refinanced tive rates on a long-term basis. The Steppe has helped a key enterprise of PRODO Group ble loan to NefteKhimServis, which is build- ULK Group’s loans issued by Sberbank for the Agro-Holding is a long-standing partner to achieve a new development level: massive ing the Yaya Oil Refinery in the Kemerovo construction of lines producing standard- and of Alfa-Bank who has been cooperating with modernization increased the output of PRODO region. Financing was provided within the fine-diameter lumber. Finally, in February us in a number of business areas, includ- Kaluzhskaya Poultry Farm by 31.3 % to 63,000 55‑billion-ruble limit in effect until 2026. The 2018, Alfa-Bank provided ULK Group with ing dairy cattle farming, crop farming, and tonnes of poultry per year. Last year, the Group company will spend the money on building 10 billion rubles for buying production assets agro-trading. The Bank positively evaluates received 1.2 billion rubles from the Bank as part the second stage of the Yaya Oil Refinery and of LLC LPK Sever and LLC Pomorskaya Lum- creditworthiness of the borrower and dairy of the credit line totaling 7.35 billion rubles refinance loan payments of NefteKhimServis. ber Company. market prospects. to fund renovation, modernization, and enlarge- The first stage of the oil refinery is ready in the ment of the Omsky Bekon pig farm in the Omsk north of the Kemerovo region. The refinery Alfa-Bank sees a potential in developing the In 2018, Alfa-Bank opened a 300‑million-ru- region. We are glad to make an input in pro- has an annual capacity of 3.3 million tonnes wood processing sector and highly evaluates ble credit line for LLC Rassvet. The funds will duction modernization, creation of jobs, and of crude. The second stage will be launched the investment appeal of ULK Group. We are pay for the second stage of a 50‑hectare berry improving the quality of regional products. The in 2020 to make petroleum products consis- glad that Alfa-Bank has contributed to the garden in the Sergachsky district of the Nizhny credit lines were approved by the Russian Agri- tent with the Customs Union’s requirements creation of Russia’s largest waste-free lumber Novgorod region. Rassvet develops commercial culture Ministry within the framework of the (Euro 5). Compliance of the Yaya Oil Refinery’s enterprise and intends to develop its partner- production of berries on the basis of European federal program of preferential lending of agri- products with Euro 5 requirements will make ship with ULK Group. farming and storing technologies. The berry gar- cultural producers. The funding period is eight the refinery a significant actor on the oil refin- den has a unique size, output, and diversity in the years. The project will strengthen the entering market of the Siberian and Far Eastern Also, Alfa-Bank provided $ 300 million Nizhny Novgorod region and Russia as a whole. prise’s position on the market: outdated equip- federal districts, which is a huge achievement in financing to Evraz Group. The money repaid The company won the Nizhny Novgorod regional ment will be replaced and output will grow. for the independent private company under Evraz Group’s current debts, extended the government’s award for «Agricultural Invest- the current conditions on the Russian market. loan portfolio, and reduced interest. The ment Project of the Year 2017.» Russia’s first crab boat of project 03070 Rus Alfa-Bank is the chief financial partner of the Bank has a long-term relationship with Evraz was launched in 2018 with Alfa-Bank’s sup- investment project. It realizes the importance Group. While interacting with reliable borrow- The decision to finance LLC Rassvet was made port. The high-tech ship was developed by the of financial support and reliable partnership ers, we are ready not just to issue large loans, on the basis of a comprehensive evaluation. Pella Design Bureau in collaboration with its for the implementation of significant projects comparable with the capacities of the biggest The company enjoyed active support from the client, the Far Eastern company LLC Antey. of the company. state-run banks, but also to rapidly make authorities, which included the project in the The Bank’s loan amounted up to 70 % of total decisions and agree on mutually advantageous program of preferential lending of agricultural investment. We are glad we have supported terms of financing. enterprises. The first stage of the investment the construction of the first domestic crab project has been implemented with financial boat of the latest generation. Alfa-Bank Alfa-Bank and PJSC State Transport Leasing support from Alfa-Bank. has financed construction of fishing ves- Russia’s first crab Company (GTLK) signed a credit agreement sels by domestic shipyards before. We see to open a 19.2‑billion-ruble non-revolving credit The biggest private bank in the country has a big potential of the industry and are ready boat of project line. The agreement expires in late 2025. The been supporting promising projects in the field to finance similar investment projects. 03070 Rus was money financed the company’s current oper- of import substitution for years. Financing ations, including the replenishment of operat- decisions are made by analyzing the borrow- Projects were implemented in other segments launched in 2018 with ing assets. GTLK is one of Alfa-Bank’s oldest er’s business model, the readiness of owners as well in 2018. Alfa-Bank’s support. clients. Our cooperation started many years

44 Alfa-Bank. Annual Report 2018 45 BANKING INVESTMENT CORPORATE ago. Setting a new credit limit for the period Alfa-Bank provided two loans totaling $ 375 Corporate clients of Alfa-Bank who interact aviation market. The service is based on Avi- until 2025 demonstrates mutual trust between million to JSC Atomic Energy Industrial Com- with foreign suppliers are now able to issue ation Fuel Smart Contracts (AFSC) that rely our partners and Alfa-Bank’s keen interest plex, a subsidiary of the Rosatom state corpo- uncovered letters of credit in the Internet bank on the Hyperledger Fabric blockchain platform. in financing the leasing sector. Hopefully, Alfa- ration, for corporate purposes. The first loan Alfa-Business Online. Every stage of the issu- An airline uses the AFSC system to inform the Bank’s support will help GTLK to retain its was issued for 5 years and amounted to $ 225 ance — the submission of an application, coordi- supplier about fuelingthe relevant flight, and leadership on the market of leasing services million, and the second loan of $ 150 million was nation, and signing — is performed online. This to coordinate the amount and price of fuel. and attain dynamic growth of the corporate issued for 4 years. The partnership between significantly cuts the time of issuing an uncov- portfolio. the Bank and the state corporation was estab- ered letter of credit and enables the client For now, the entire aviation market oper- lished in 1997. Alfa-Bank has been a core bank to monitor the status of the processes at every ates on the basis of advanced payments. The Alfa-Bank opened 1.6‑billion-ruble credit of the atomic energy industry for the past five stage. Soon enough, the Bank will expand func- case of Alfa-Bank, S7 Group, and Gazprom- lines to Bosco Di Ciliegi Group, whose pri- years. tions of the service: clients will receive similar neft-Aero shows how to build financial rela- mary shareholder is Mikhail Kusnirovich, for opportunities for ruble-denominated letters tions in a new and much more effective way. a period of about nine years. The money will of credit and international guarantees. Smart contracts will spare airlines the need finance the construction of a modern textile Investment Business to make advance payments, free their financial factory in the Kaluga region. Investment will Also in 2018, Alfa-Bank launched a program resources, and improve their operating assets. total 2.3 billion rubles, including 0.7 billion As for investment business traditionally Alfa- for subsidizing export loans in collaboration The 24 / 7 instant payment service is also appli- rubles to be invested by Bosco Di Ciliegi Group. Bank works in several areas, and Alfa-Bank with the Russian Export Center, and actively cable to other areas using advance payments We are glad to be a financial partner of this is one of the leaders in each these arias and supported clients importing Belarusian hard- or bank guarantees, such as tourist agents interesting and ambitious project. The unique achieves significant results. ware with subsidies provided under the Belarus selling tickets, logistic companies, and port experience of Bosco di Ciliegi in the fashion export support program. forwarders. industry and the good financial standing of the Trade Finance company create every condition for its suc- Innovations. Development of Blockchain The project has become an important stage cessful implementation. Alfa-Bank occupies a leading position on the Technologies in developing solutions based on blockchain global trade finance market. The substantial technology in Alfa-Bank’s eco-system. We see Alfa-Bank provided a three-year 21‑billion- amount of capital allows Alfa-Bank to work Last year, Alfa-Bank joined R3, a consortium great potential in smart contract technology. ruble loan to PJSC MegaFon (LSE: MFON), with major customers, satisfying their needs of the biggest world banks, national financial It enables us to effectively accomplish mis- a leading Russian mobile operator. The money for financing, technology, and competitive regulators, trade associations, and financial sions, which are extremely complicated for tra- will fund redemption of issued and placed ordi- cost of services. In 2018, Alfa-Bank closed institutions aimed at developing solutions ditional banks, and provide the most profitable nary shares and GDR of MegaFon Investments about 1,300 trade finance deals in more than based on blockchain technologies. Barclays, and fastest service to our clients. (Cyprus) Limited, which is 100 % subsidiary 50 countries. The Bank has mature partner- BBVA, Commonwealth Bank of Australia, of PJSC MegaFon. Alfa-Bank has a positive ships with leading international partners, such Credit Suisse, Goldman Sachs, J. P. Morgan, Settlement Business. Direct Exchange outlook for the telecommunication sector and as Commerzbank AG, ING Bank, HSBC Bank, Royal Bank of Scotland, State Street and UBS of Financial Messages based on CyberFT new-economy companies, among them Mega- Credit Suisse, UBS, Citibank, JP Morgan, The were the first member banks of the consor- Platform Fon, and hopes to continue its partnership with Export-Import Bank of Korea, Bank of New tium. Now, the consortium has over 200 mem- the borrower. York Mellon, SMBC, ICBC, Societe Generale, bers. R3 develops solutions based on the Corda Alfa-Bank and Evraz Group have established Natixis, CA-CIB, RBI, Unicredit, and many platform, which Alfa-Bank has successfully a direct exchange of financial messages other global financial institutions. used to separate utility payments in collabora- based on the CyberFT platform. The tech- tion with LLC Kvartplata24. nology sends messages to the Bank directly The Bank’s leading position has been reaffirmed from the client’s ERP system. The channel’s As for investment by a survey carried out by the reputable jour- Membership in R3 gives access to a broad capacity is not limited to ruble and foreign nal Global Finance. Alfa-Bank was recognized community of financial institutions and the currency payments. Alfa-Bank has integrated business traditionally as the best Russian provider of world trade market of developers and integrators of block- every function of the Client-Bank system into Alfa-Bank works finance services and became a laureate of the chain solutions based on the Corda platform. Evraz Group’s customary environment, includ- Best Trade Finance Providers Award 2019. Alfa-Bank has tested the Voltron digital ing operations with forex control documents in several areas, and L / C platform and the MarcoPolo trade finance (supporting documents sent to the Bank, Alfa-Bank is one of the Year after year, our trade finance products platform. The projects are being implemented forex transaction certificates), statements, become more convenient for clients: we develop together with the R3 consortium. and other operations. The integration with leaders in each these remote channels, optimize internal processes, Alfa-Bank gives Evraz direct access from the arias and achieves and build effective infrastructure for inter- In 2018, Alfa-Bank, S7 Group, and Gazprom- ERP system to the main set of banking oper- acting with foreign banks. The well-deserved neft-Aero developed a service for instantly ations, which reduces operational costs and significant results. award evidences the Bank’s effective and paying for jet fuel during aircraft fueling enhances security, convenience, and speed professional response to every current global using blockchain technologies. The solution of settlements. market challenge. makes advance payments unnecessary on the

46 Alfa-Bank. Annual Report 2018 47 BANKING INVESTMENT CORPORATE Many corporations, which interact with sev- being actively upgraded for automated mod- market of borrowings. In 2018, the Bank orga- eral clearing banks, are trying to reduce costs ules used by small and medium business clients nized several syndicates for Belarusian banks: of personnel, administering, and support in order to reduce the period of closing the deal an equivalent of 21 million euros for Mos- In 2018, Alfa-Bank, of various Client-Bank systems. The optimal to three days. Instruments for connecting big cow-Minsk Bank, 151 million euros for Belar- solution is direct integration between clients’ sectorial clients to platform solutions are cur- usbank, and an equivalent of 35 million euros S7 Group, and ERP systems and banks. Support provided rently being improved. for Alfa-Bank (Belarus). In all of these deals, Gazpromneft-Aero by the CyberFT international financial messag- Alfa-Bank acted as the leading organizer, book ing system ISO 20022 allows clients to univer- Payroll products runner, and documentation and payment agent. developed a service for sally interact with partner banks wherever the instantly paying for technology is available. The payroll product team of the Corpo- Loan Capital Markets rate Investment Banking unit also did well jet fuel during aircraft Alfa-Bank is quite experienced in developing in 2018. The most significant deals were done Alfa-Bank has been a leader of the Russian loan fueling using blockchain and implementing API solutions. By fostering with such clients as Svyaznoi, Obyedinyon- capital market for years. In 2018, it organized our technological edge, we seek to create new nye Konditery, John Deere, Petrovax Pharm, 12 placements of Russian ruble bonds for corpo- technologies. integration services and systems that accom- Ramenskoye Airport, Mosselprom (Cherkizovo rate clients totaling about 90 billion rubles. modate the needs of our clients. Group), UTG, among others. Alfa-Bank has long been successfully orga- The results show that Alfa-Bank remains the The National Settlement Depository’s inte- nizing placement of clients’ bonds. In 2018, biggest inter-bank market maker and a tech- gration channel Transit 2.0 was implemented Investment Business it co-organized the issuance of 001R-01 listed nological leader in the field of conversion oper- in 2018, and Alfa-Bank became the first bank bonds of PJSC Nizhnekamskneftekhim (MOEX: ations. Ninety-eight percent of deals closed on the market to demonstrate its readiness As for investment banking, Alfa-Bank tra- NKNC), the largest petrochemical com- with Alfa-Bank’s participation use an elec- to use the new channel. The Dixy company ditionally operates in several areas, and has plex in Russia. The 15‑billion ruble issue had tronic format. Corporate clients perform their has been connected to it. The project has also become a successful market leader in each an annual coupon rate of 9.60–9.80 %. The cou- operations «in one click» in real time, and with been fulfilled with Leroy Merlin. It was the of them. pon rate was fixed at 9.75 % after the offerings. the best available exchange rate. We offer first time self-encashment has been done our clients both regular conversion transac- by hypermarkets. Syndicated loans Additionally, the Bank co-organized the tions and complex products, such as forex risk 10‑billion-ruble issue of PBO-05‑R listed hedging using derivatives. All of this is included Factoring Alfa-Bank was active on the syndicated loan obligations of PJSC Uralkali (MOEX: URKA), in the Investment Banking offer. market in 2018 and won the 2018 Loans a leading world potash producer. That this was Alfa-Bank is stably listed amongst the Top 3 Cbonds Awards for «Best Investment Bank successfully carried out on a volatile market Another focal point of Investment Banking leaders of Russia’s factoring market in terms on CIS Syndication Market.» shows that investors appreciate the credit- is derivatives and other complex products. of its portfolio and occupies second place worthiness and reliability of Uralkali. We hope The Bank used to cooperate with interna- in terms of factoring revenue. Due to its highly Alfa-Bank organized a major deal with the to continue our joint work on the public loan tional companies in selling such products in the diversified portfolio, the Bank interacts with Aktyubinsk Copper Company, who received capital market. past and thereby reduced its margin, but last clients in every business segment, from micro syndicated loans of $ 250 million, and year our team started to handle those prod- to corporate, and has one of the broadest as a result earned the 2018 Loans Cbonds Forex Market Operations, Derivatives ucts independently without seeking external product ranges available on the market. Last Awards in the category of «Best Deal on CIS support. year, Alfa-Bank saw numerous victories and Syndication Market.» Alfa-Bank has been a leader of the Russian forex changes. The launch of new international fac- market for years. Last year, it again topped the Alfa-Direct toring products, including export and import The Bank also closed a $ 30‑million pivotal reputed professional rating Euromoney FX Sur- products, made Alfa-Bank a leader of interna- deal with Amsterdam Trade Bank N. V. It was vey 2017 in terms of forex market turnover The Alfa-Direct mobile terminal, which pro- tional factoring. It implemented an import fac- the first syndicated loan provided to a West- in CEEMEA (Central and Eastern Europe, the vides clients with broad opportunities in buying toring deal, unique for the market, to finance ern borrower by a pool of Russian banks. The Middle East, and Africa), and surpassed world stock, is one of the most advanced solutions credit indebtedness of a foreign company’s deal was made possible thanks to Alfa-Bank’s giants such as JP Morgan, UBS, Goldman Sachs, available on the Russian market in this area. client and simultaneously convert money public offering experience and relations with HSBC, Citi, and Deutsche Bank. The bank’s Financial results of the unit and the profes- into a foreign currency. The Bank will keep syndicate partners. share increased to 12.6 % of total turnover sional awards won by the Alfa-Direct mobile strengthening its positions in this area and of the macro-region’s forex market actors. Alfa- application show the leading position of the broadening the its service’s geographic reach. Over the past few years, Alfa-Bank has orga- Bank occupied the 27th position in the global Investment Bank in this segment. The applica- nized a series of major public offerings for rating, being the only representative of Russia tion is built on state-of-the-art technologies Furthermore, the product digitalizes interac- Belarusian banks of the first echelon, such in the Euromoney Top-30 global rating. Alfa- and its interface was designed to accomplish tion with clients. 99 % of all supporting doc- as Belarusbank, Belagroprombank, the Belarus Bank’s forex desk has been recognized as the objectives rapidly and efficiently. A broker uments are submitted within the framework Development Bank, and others, and has cre- best in Russia by the Moscow International Cur- account can be opened remotely within several of electronic document flow. Solutions are ated proper expertise on the Belarusian rency Association (ММВА Best FX Desk). minutes. After a client is registered with the

48 Alfa-Bank. Annual Report 2018 49 BANKING INVESTMENT CORPORATE exchange, any instruments provided by the Moscow or St. Petersburg Exchanges can be used to close deals via cell phone or com- Alfa-Bank occupied puter. Client interest in this online service has been growing year after year since it can the 27th position be used by both experienced traders and ama- in the global rating, teur investors. being the only The investment business becomes more high- representative of Russia tech year after year. Last year, Alfa-Bank acquired a high-capacity transaction core in the Euromoney Top-30 based on Mail.ru’s Tarantool database man- global rating. agement system. Alfa-Bank and Mail.ru’s joint project drastically accelerated the closure of investment deals and provided an excess FIFA World Cup 2018™ capacity for developing business for the next five years. The new online platform supplies As you know, Alfa-Bank was an official sponsor Alfa-Bank’s clients with consolidated invest- of FIFA World Cup 2018™ and FIFA Confedera- ment deal data from main record systems tions Cup 2017. Special events, such as a tour- in various display variants. As a result, invest- nament for children of Corporate Investment ment business cuts the cost of preparing Banking clients, and a match with Corporate mandatory reports consistent with changing Investment Banking clients on the day of the requirements of regulators. The new trans- FIFA World Cup final, were prepared for big action core processes up to 5,000 deals per business. Such events markedly increase second and creates current reports in various clients’ loyalty and boost the Bank’s image analytical profiles. The implementation of the on the market. Being the official bank of FIFA Tarantool-based transaction core is a key step World Cup 2018™ increased Alfa-Bank brand’s towards technological transformation of the recognizability, helped conclude new deals and Bank’s investment business. We have built the develop partnerships, and yielded significant foundation for every future application, which financial results. will bolster Alfa-Bank’s technological leadership in investment banking. The architecture Outlook and Plans for 2019 provides relevant flexibility, speed, and low cost of IT updates. We are not expecting a serious change in the market situation in 2019: the margin of credit Interaction with Other Blocks products will continue to reduce, competition with state-run banks will grow, and the activity The Corporate Investment Banking unit has of regulators will intensify. Alfa-Bank is pre- long been developing successful cooperation pared for this scenario; it continues to develop with the Retail Bank in the field of payroll proj- credit business and discover new, profitable ects. The joint work continued last year, and niches. The Bank maintains long-standing interaction between Investment Banking and relations with serious clients and these rela- Alfa Private was enhanced. Nowadays, Alfa tions will continue to be developed. We will also Private clients are actively using its services, focus on interacting with companies that are including structured products and M&A deal not yet actively doing business with Alfa-Bank. management. Our partnership with Alfa Pri- The Bank has a substantial competitive edge vate colleagues will continue in 2019. by a number of parameters, well known to our active and potential clients, and we are sure that we have the prerequisites for developing our business and growing alongside the market next year. Alfa-Bank remains the biggest private bank in the country; it is convenient, fast, high-tech, and loyal to its clients

50 Alfa-Bank. Annual Report 2018 Micro & Small Business 5 Client Attraction and Interaction with Micro Business In the past, the Bank In 2018, the Block’s activity over the previous five years was analyzed and its development has mostly worked with strategy was adjusted. Growth rates will stay existent companies, but high in 2019, but it will be no less important to increase the «purse» of every client, we now have interesting its turnover in the Bank, and the revenue offers for startups. it generates. The presence of strong competitors in the market is a powerful incentive to be more active in developing new products Small Business Lending and services and implementing the latest technologies, which makes competition useful for Sale of credit products to small business cli- Business our clients and the bank itself. ents grew a lot in 2018. Alfa-Bank doubled the amount of loans given to small and medium Another special feature of our new strategy business to over 90 billion rubles. Accord- is attention to new businesses. In the past, the ing to the rating agency Expert RA, the Bank Bank has mostly worked with existent com- climbed from the seventh to the fourth posi- panies, but we now have interesting offers for tion amongst major creditors of the small and startups. Any startup might eventually move medium business segment over the past year.

Micro & Small to a higher segment, so Alfa-Bank is ready Alfa-Bank was the absolute leader amongst to foster its success from the beginning. Special major Russian banks participating in the rating offers for micro business make us competitive by the growth of lending of small and medium with digital banks in attracting such clientele. business clients (+101 %).

Micro businesses need special products. Seek- The small business lending result was achieved ing to adjust the pattern of interaction with thanks to the «credit factory,» a technological small businesses and to retain profitability, process in which companies and entrepreneurs the Block divided its client portfolio into four are credited online, on the basis of innovative segments: micro business (with yearly revenue scoring models. The models enable the Bank from zero to 5 million rubles), and companies to rapidly increase the volume of issued loans with yearly revenue from 5 million to 20 million while thoroughly controlling risks. It is no less DENIS OSIN rubles, 20 million to 90 million rubles, and 90 important that the existent range of the Member of the million to 350 million rubles. The attraction Block’s credit products relies on the needs Executive Board, Micro & Small and service of micro businesses must not entail of various categories of clients and specifics Business Director significant costs, which means these processes of their business. must be remote. The technologies we have been developing for a number of years reduced Lending was also boosted in the regions, In 2018, the Micro & Small Business block clientele, and with «digital» market actors the cost of attracting such clients and made including ones where the Bank does not have made much headway in increasing clientele in the small-business segment. Considering their servicing profitable. offices. A simplified financial analysis of bor- and intensifying its activity. The Bank retained the stricter regulation of small businesses, rowers reduced the deal closure period, since high rates in attracting small business clients, high requirements for the quality of borrow- We should not forget that fully remote service a visit by a financial analyst became unneces- increased its database with 200,000 companies ers remained in place. The Bank, which closely is possible for this segment only, considering sary. Now analysts make decisions on the basis and individual entrepreneurs, and boosted its monitors legislative amendments, implemented that the presence of real, «living» managers of available information and documents. active customer base by 24 %, just like in 2017. an effective scoring model in the second half is a strong competitive advantage of Alfa-Bank Demand deposits grew by 29 % to over 157 of 2018 to assess due diligence and compliance over «digital» competitors. Whenever a client Last year, Alfa-Bank was one of the first billion rubles during 2018. Additionally, the loan with regulators’ requirements at the initial choses a bank online, the Bank cannot influence to start receiving applications for business portfolio practically doubled in the same year. stage of interaction with every client. its preferences, while personal attraction gives loans at the preferential annual rate of 6.5 %. us a choice of companies we want to be our Small and medium companies with the annual There was no significant change on the mar- clients. Modern technologies reduce the cost revenue of up to 2 billion rubles and average ket in 2018. The Bank continued to compete of managers’ involvement in the client attrac- personnel of up to 250 persons qualify for with state-run banks, which have a vast tion process. the preferential loan. Funding is provided for

54 Alfa-Bank. Annual Report 2018 55 BUSINESS MICRO & SMALL projects in priority areas, such as agriculture, Last year, individual entrepreneurs were allowed New Products and Services for Our Clients processing industries, construction, transport, to give consent to processing of their personal communication, tourism, healthcare, waste data and credit history online using the Inter- Last year, the Block expanded its product Besides, certain medium treatment, public catering, and consumer ser- net bank. This is an important decision enabling range with interesting offers that caught vices. The preferential rate (6.5 %) is envisaged individual entrepreneurs to receive a final the attention of our clients. The reason for and big companies by the program of federal budget subsidies for decision on the loan’s status without visiting the popularity of the new products is sim- have asked Alfa-Bank lending of small and medium business. Alfa- a bank office. Our next objective is to digitalize ple: we prioritized client needs and feedback Bank is accredited as the program’s desig- the process of signing the credit agreement and in their development. to finance their partners nated bank. lending money to the account. These functions in small business. will appear in the Internet bank in 2019. For instance, small and medium businesses Extensive preparations were made in 2018 are getting keen on participation in public The easier procedure to launch secured lending. We will start offer- Active interaction with the Medium Corpo- procurement under Federal Laws No. 44‑FZ of «fast loans» will ing the product to our clients in 2019. Secured rate Business block in the lending area last and 223‑FZ. A guarantee from a reliable bank lending will enable the Bank to increase the year made it possible to apply the flow lend- is a necessary requirement for participation meet the needs of such volume and period of lending and the average ing method developed by the Small & Micro in tenders held by government clients. In 2018, companies. Another client check without assuming additional risks, Business block to Medium Corporate Business Alfa-Bank offered participants in public pro- and the loan portfolio will grow as a result. clients. The method significantly reduces costs curement held under Federal Laws No. 44‑FZ advantage of these of issuing credits that fit this model — for and 223‑FZ the ability to receive electronic innovations is the lower Another convenient way of lending small instance, electronic bank guarantees, online bank guarantees. Companies and individual businesses is based on official reports, which lending, and express overdrafts. Such products entrepreneurs can receive the guarantee online cost of attracting clients, became available last year. The Bank assesses are very popular with small and medium corpo- by filing their applications on the Bank’s web- which reduces the use financial stability of the potential borrower rate business clients and we can accommodate site. There is no need to visit a bank office and approves a loan on the basis of official their needs in a fast and cheap manner while or to open a transaction account. The online of bank resources. company reports, without analyzing the entire increasing sales of credit products. bank guarantee ranges from 0.5 million rubles amount of the client’s business. The option to 30 million rubles; it is provided without by law in the online mode. The service is free. was previously available only in the Medium The issuance of pre-approved small loans a pledge and a surety. It helps clients avoid questions from the bank Corporate Business segment. Now it also and express overdraft products, is expected and supervisory agencies. applies to the upper segment of Small & Micro to be liberalized in 2019. The Bank foresees Alfa-Bank gives guarantees to all government Business. a modification of the Central Bank’s regula- agencies and state-run companies. For the The Law «On Combating Legalization (Laun- tions in the middle of the year to enable finan- convenience of public procurement partic- dering) of Proceeds from Crime and Financing cial institutions to credit small and medium ipants, the Bank gives its guarantee by the of Terrorism» (115‑FZ) and documents of the business clients by a simplified method in the buyer’s form, which substantially accelerates Central Bank describe signs of suspicious case of loans smaller than 10 million rubles. the bidding process. The guarantee is signed operations. Yet bona fide companies often These adjustments are part of the state pro- with an enhanced qualified electronic signature make transactions that look risky in the eyes Last year, Alfa-Bank was gram stimulating the development of small of the bank. This is an original document that of law because they have no information about one of the first to start businesses, which will be able to fund their is accepted in all tenders and auctions orga- what a violation is and how to operate their current needs and business expansion quickly nized by government agencies and state-run account correctly. Now corporate clients will receiving applications and easily. companies. The Bank sends a paper copy of the have a chance to study legislative requirements for business loans at the guarantee to the client by registered mail. in detail in the Internet bank and apply them Updated norms will enhance Alfa-Bank’s to their operations in order to avoid violations. preferential annual standing in the market of small business lend- Hence, Alfa-Bank has created a convenient, The calculator gives a simple and graphic idea rate of 6.5 %. Small and ing, considering that the simplified procedure affordable and flexible financial instrument of the risk posed by operations. still sets some requirements, such as addi- for small and medium companies that facili- medium companies with tional reserves for the pool of such credits, tates their participation in tenders, fulfillment The service is the first stage of Alfa-Bank’s cli- the annual revenue of up which is not a problem for the country’s first of government orders, and generation of sta- ent information campaign. Soon new functions private bank but might be such for «digital» ble profit. will be added to the Internet bank for corporate to 2 billion rubles and banks. Besides, certain medium and big com- clients to explain and facilitate the implementa- average personnel of up panies have asked Alfa-Bank to finance their Another useful online service for small busi- tion of legislative norms and to support a com- partners in small business. The easier proce- ness has been launched in the risk section fortable business environment for clients. to 250 persons qualify for dure of «fast loans» will meet the needs of such of the Internet bank. This is a calculator the preferential loan. companies. Another advantage of these inno- enabling companies and individual entrepre- In 2018, Alfa-Bank launched an online ser- vations is the lower cost of attracting clients, neurs to calculate the amount of due taxes and vice for business beginners. The online assis- which reduces the use of bank resources. turnover in other operations that are required tant helps entrepreneurs prepare a package

56 Alfa-Bank. Annual Report 2018 57 BUSINESS MICRO & SMALL Also in this last year, the Bank’s corporate A practically universal environment has been As for Internet acquiring, the Bank has been clients received access to a virtual Visa card created for clients: they can apply to connect a market leader because of the volume and In 2018, Alfa-Bank for international settlements, a debit card to the service through every convenient chan- range of services provided in this area. The connected to the corporate client’s trans- nel (Alfa office, Internet bank, or Bank website) Bank accounts for 20 %–25 % of the volume launched an online service action account. It can be used for worldwide and receive the service at the workplace with- of transactions, and its growth exceeded for business beginners. settlements and paying for orders from for- out visiting the Bank. the market’s average in 2018 mostly thanks eign websites. The card is issued and activated to interaction with big partners, whom the The online assistant helps online in the Alfa Business Mobile application The high-quality trade acquiring service with Bank treats to unique technological solu- entrepreneurs prepare (based on iOS and Android). Instant issu- competitive tariffs drew numerous clients tions, from special fiscalization opportunities ance and 24 / 7 worldwide accessibility are to the Bank. The attraction of new clients has to marketplace payment schemes. The total a package of documents particularly important during foreign trips. been increasing at double-digit rates (26 % per annual Internet acquiring turnover exceeded with 15 minutes for Whenever cash or a classic card is lost, a cli- month on the average) since the full-scale trade 335 billion rubles. ent can immediately get a virtual card to pay acquiring service kicked off in August 2018. registering a business one’s expenses. The virtual card can be used In 2018, the Bank started to actively promote with the Federal Tax by means of a smart phone to withdraw money Importantly, trade acquiring promotes attrac- e-commerce products for small and medium from an ATM via the contactless interface tion of new clients to the settlement-and-cash companies. Optimization and automation Service. (NFC reader). The card is virtual, which means segment and full-scale service in Alfa-Bank. of internal processes, simplified client access, it cannot be lost. Whenever a smart phone Over half of trade acquiring clients are new extended list of partners providing fiscaliza- of documents with 15 minutes for registering with a NFC module is stolen, thieves are unable to the Bank. tion services, and online advertising bore fruit, a business with the Federal Tax Service. These to bypass the modern identification means. and the number of applications and connected are the most popular small business forms: In terms of 2019 objectives, there are plans clients more than doubled within six months. an individual entrepreneur and a limited liabil- The product appeared to be very popular. to retain high rates of clientele growth, A client is connected to the Internet acquiring ity company (with one founder). The issuance of such cards has been growing improve quality and connection speed, reduce service within several hours. month after month and the scope of transac- service cost, and broaden the range of integra- The service is very simple and user-friendly: tions is increasing. As of now, the average size tion and technical solutions offered to trade The Bank carries on the active development all a client needs to do is present a Russian of a transaction made by our corporate clients acquiring clients. For instance, the bank will of e-commerce services for clients in all seg- passport (scanned copies of the passport’s using the virtual card is much larger than the be working on QR-code solutions, payments ments, from big corporations to individual first page and the residence registration page). average size of a regular card transaction. made from mobile applications, additional ser- entrepreneurs: The system will automatically prepare a pack- vices for trade acquiring, and trade acquiring age of documents for the Federal Tax Service, Trade and Internet Acquiring services in various payment systems. • new payment methods, primarily the Fast remind the client of his / her unique taxpayer Payment System, an undertaking of the reference number, and help choose the relevant In 2018, Alfa-Bank enhanced its position Russian Central Bank fully supported by the taxation system. as a leader of Internet acquiring and resumed Bank; the trade acquiring service suspended seven There is a broader range of services for indi- years ago. Optimization and • broader interaction with marketplaces and vidual entrepreneurs. The service will suggest payment aggregators; the address of the tax office, where the docu- The Bank decided to resume the trade acquiring automation of internal ments should be submitted, will analyze client service due to its activity in the small business processes, simplified • not a mere Internet acquiring solution, but data, and will book the opening of a transaction segment and high client demand for such service. a full range of services for developing online account in the bank. The first results of trade acquiring sales flow client access, extended business (services for construction and confirmed that our decision was the right one. list of partners launching of a website, promotion manage- The entrepreneur will be provided with a pack- ment, analytical services). age of online documents ready to be sub- Emphasis was put on designing an end product providing fiscalization mitted to the Federal Tax Service, a receipt for clients corresponding to or even surpassing services, and online In 2019, we plan to increase the growth of our for paying the state duty, and details of the market requirements. The Bank’s processes clientele, actively develop partner programs, account reserved in Alfa-Bank. After the tax were streamlined from the moment of filing advertising bore improve the quality of service with new options, authorities register an individual entrepreneur an application to the moment of connecting the fruit, and the number and implement technological solutions optimiz- or a limited liability company with one founder, client’s terminal, which halved the time spent ing transaction costs. the service will send the completed package on connecting the service. of applications and of documents to the Alfa-Bank back office connected clients more in order to open the account. Now over 90 % of clients can start accepting cards no later than ten business days than doubled within six after they file the request with the Bank. months.

58 Alfa-Bank. Annual Report 2018 59 BUSINESS MICRO & SMALL Loyalty Programs for Small Business businessman in Moscow or the Moscow region client service costs and increasing revenue Clients was able to make a video with their advice and generated by each client. In the past, we have send it to the Alfa-Bank Client Club. A panel mostly concluded settlement-and-cash service The Bank accounts for The Bank values its clients. It was the first of experts evaluated the recommendations and agreements with our clients and aimed at risk- in the Russian market to offer a loyalty pro- the most useful videos were published on the free revenue, but now we want to be a univer- 20 %–25 % of the volume gram for small and medium business: the 2018 project website. The authors of the ten best sal bank offering both settlement and credit of transactions, and FIFA loyalty program. videos were awarded with a professional busi- products, such as a business credit card with ness presentation video and souvenirs from the an interest rate of 1 % per month or 12 % per its growth exceeded The program launched by Alfa-Bank in April 2018 FIFA World Cup тм. The authors of the year. This is a unique offer in the market. the market’s average 2017 drew nearly 10,000 active clients in the two best videos received tickets to the Bra- We will continue to master the lending pro- small and medium business segment. As the zil-Serbia match of the 2018 FIFA World Cup cess in 2019: the credit approval period will in 2018 mostly thanks official bank of the 2018 FIFA World Cup Rus- and access to the field. be reduced, and credit limits for reliable clients to interaction with big sia™, Alfa-Bank received the exclusive right will be expanded. to offer bank services to millions of fans during The Entrepreneur’s Parlor project is one more partners, whom the the 2018 FIFA World Cup and the 2017 FIFA initiative of Alfa-Bank aimed at assisting small Indeed, we will also change the range of busi- Bank treats to unique Confederations Cup. Any client could join the business, in which businessmen act as experts. ness services. For instance, Alfa-Bank pre- program by pushing a button in the Internet pared a unique offer for micro business — 1 % technological solutions, or mobile bank, score points for regular trans- For years, small businesses have happily been service package — last year. In 2019, we will from special fiscalization actions, and exchange those points for tickets joining the Alfa-Bank Client Club. The Club’s continue to develop similar offers and imple- to FIFA World Cup™ matches, sport attri- services enable clients — individual entre- ment solutions that have successfully passed opportunities butes, or FIFA souvenirs. preneurs and legal entities — to cut business trials. Attention to micro business will to marketplace payment startup and development costs by more than be a trend of 2019. The main problem of start- About 120,000 participants joined the FIFA 300,000 rubles. This is a result of the broad- ups is that they are short-lived and experience schemes. 2018 corporate loyalty program, including ening network of the Client Club’s partners problems from the beginning. It is our goal almost 10,000 new clients attracted by the and the appearance of new services, which the to help businesses cope with the initial compli- loyalty program itself. The program boosted Bank’s clients receive for free or with a sub- cated stage of their development. This is one transactions of existing clients and helped stantial discount of 10 % to 50 %, in 2018. The of the tasks of the renovated Client Club. attract new clientele. Alfa-Bank Client Club offers about 80 services, Exchange of practices, convenient services, including 15 exclusive ones, to its clients. and quality products will help startups grow The program’s success encouraged and move from one client segment to another, us to develop this area. A new program, Alfa To our knowledge, services provided by the Cli- from a micro business to a small business and, Loyalty, was launched for small and medium ent Club are most actively used by small com- perhaps, a medium business. businesses with annual revenue of up to 3.5 panies with annual revenue of up to 90 million billion rubles in 2018. The Alfa Loyalty terms rubles, for which competition and effective We value our clients and understand that the were based on an analysis of typical trans- business management are especially topical. Bank should not just provide them with qual- actions of small and medium companies and It is our task to create a comfortable environ- ity financial services but also help develop offered prizes that would please any company. ment for the growth and successful operation their business. This is true for beginners and of such companies amid fierce market compe- businessmen who have stayed together with Participants were invited to score bonuses tition. The more successful our clients’ busi- Alfa-Bank for quite some time. Year after year, for standard account transactions and either ness, the better financial results for the bank. we design new products and services for our exchange them for gadgets, such as smart Hence, effective projects are important for clients, listen to their opinions, and tirelessly phones, tablet computers, or notebook com- both small businesses and Alfa-Bank. improve our work to be both a first-choice bank puters, or use the bonuses to pay for the and a reliable partner to business ventures. Bank’s service. The goal of the Alfa Loyalty Outlook and Plans for 2019 program is to give additional advantages to loyal clients and encourage a more active Rapid growth of the small business market use of their accounts in the Bank. is not expected in 2019, considering that many businessmen tend to choose «self-employed Another one of last year’s interesting proj- status» over a legal entity. This means that ects was the Entrepreneur’s Parlor, launched the competition between financial institu- on Entrepreneur’s Day. This is an Internet tions for rendering banking services to small resource featuring recommendations and companies will increase. There is no doubt businessmen sharing their experience. Any that the Bank will stay focused on reducing

60 Alfa-Bank. Annual Report 2018 61 BUSINESS MICRO & SMALL Medium Corporate Business 6 Medium Business Lending

Last year saw high achievements in transac- The Bank is two times tion business and active lending of medium business clients, which tangibly increased the ahead of other market loan portfolio. The bank’s risk portfolio, includ- leaders in terms of its ing all types of credit and guarantee products and letters of credit, grew 60% (by 68 bil- clientele growth. Nearly lion rubles) to 180 billion rubles. Importantly, a quarter of Russian the portfolio was diversified, given a 2,8 time growth in the number of borrowers. medium corporate businesses have an account

Medium We achieved these results by significantly modifying products such as online lending with Alfa-Bank, a serious Business in which credits are approved within one day achievement. on the basis of the client’s scoring map. Alfa-

Corporate Corporate Bank was the first in the market to offer this product, which rapidly won popularity. Fast New Medium Business Products approval of credits for medium businesses gives the Bank a competitive edge and enables One of the new products that has helped clients to deal with current financial prob- us bolster the business’ potential is special lems such as a cash gap. The credit product’s accounts for enterprises engaged in public portfolio grew from 400 million rubles to 4.4 procurement under Federal Law No. 44-FZ “On billion rubles over the past year. The prod- the Contract System for State and Municipal uct’s appearance in Alfa-Bank’s product range Procurement of Goods, Work, and Services.” underlines our wish to accommodate clients’ needs and develop solutions for successful As of October 1, 2018, all participants in pub- business. lic procurements must open special accounts in designated banks for making security The Bank not just actively attracts new bor- deposits. The Russian government designated rowers, but also expands credit limits for Alfa-Bank as one of the banks opening special current clients with a stable financial status. accounts under Federal Law No. 44-FZ. Alfa- While choosing potential borrowers, Alfa-Bank Bank rapidly opens special accounts for its VLADIMIR VOYEIKOV, relies on the classic scheme, highlights finan- clients, who make security deposits as tender Member of the cial risks, and makes a profound analysis of the bidders. Alfa-Bank was one of the first in the Executive Board, deal’s structure. Last year, the Bank stan- market to present full-scale infrastructure for Medium Business Director dardized the credit risk assessment approach companies participating in public and municipal and built a solid system for interacting with procurements. regional and other clients, which significantly Medium Corporate Business became a sep- Apart from clientele growth, the block posted expedited the credit approval process. Another popular product was offered to real arate block in 2018 owing to record clientele a 1,6 time year-on-year increase in operating estate developers: special accounts opened growth and the need to discriminate between revenue to 19 billion rubles in 2018. Another Fast decisions, standard practices, and individ- under Federal Law No. 214-FZ “On Participating mass and medium business objectives. As of important indicator of efficient interaction ual solutions are three areas of medium busi- in Shared-equity Construction of Multi-apart- January 1, 2019, the Bank had 53,000 active with clients is mean transaction revenue, which ness lending, and Alfa-Bank seeks to be ahead ment Residences and Other Real Estate and medium corporate business clients or 46% exceeds the market’s average by 13%. Clients of its competitors in each of those. Amending Certain Laws of the Russian Fed- more than the year before. The Bank is two value the Bank as a reliable and convenient eration.” Special accounts are meant to be times ahead of other market leaders in terms partner and actively make transactions that Work in Regions an instrument of control over spending funds of its clientele growth. Nearly a quarter generate a good commission revenue. properly in construction projects and also of Russian medium corporate businesses As for regional expansion, the Bank operates meant to enhance protection of shareholders. have an account with Alfa-Bank, a serious in 52 cities in 44 regions. Notably, regional Every real estate developer is compelled to open achievement. business has been contributing to the block’s a special account in a designated bank. Financial results not just in million-plus cities but also institutions listed by the Russian government in every city in which Alfa-Bank is present. are allowed to provide service to real estate

64 Alfa-Bank. Annual Report 2018 65 BUSINESS CORPORATE MEDIUM This is because Alfa-Bank offers compre- our clients can enjoy “one-stop” service. This Clients used to wait for one or two days for hensive services and solutions to any issues will simplify the interaction between current their payment schedules, now the response Alfa-Bank was one regarding foreign economic activity, which clients and the Bank and will make Alfa-Bank is given within 10 to 15 seconds, which is the include standard bank products, assistance more attractive to new clients. time needed to open a page with details in the of the first in the to clients in their compliance with legislative Internet bank. market to present full- requirements, search for due-diligence and We regularly audit our products and business reliable partners, and minimization of costs processes, which would have been impossible In December 2018, the Bank offered clients the scale infrastructure through high-level service. without feedback from our clients. According possibility of opening an online deposit. This for companies to last year’s audit performed by McKinsey, is another step to meet our clients halfway. Additionally, the Bank has one of the best con- we achieved 90% NPS, which, clearly, is an Just like retail clients, businesses can deposit participating in public version offers available in the market: it is con- important indicator. their money in one click, without involving the and municipal venient, because service is provided online and back office. commission rates are low. Multiple conversion Remote Service procurements. transactions enable the Bank to offer a fixed Outlook and Plans for 2019 commission rate and exchange rates main- In 2018, the Bank actively developed remote developers to monitor the purpose of payments tained at the interbank level or even lower. This service to corporate clients. Modifications To date, Alfa-Bank has a substantial number and to control the project budget. Alfa-Bank is a colossal competitive advantage actively were made to Internet and mobile bank of medium business clients. In 2019, we will has the competence and methodology to con- used by our clients. services. slightly shift our focus from increasing the trol the expenses of real estate developers. For number of new clients to broadening inter- instance, it has fully digitalized support to spe- Companies engaged in foreign economic activ- For instance, corporate clients received access action with existing clients. Our task is to cial accounts. A developer who makes a payment ity were offered one more convenient service to the “credit product” service, a new option increase the share of the client’s “purse” in the in the customary “client-bank” system attaches last year: “smart telephony,” which automat- in the Internet bank providing detailed infor- Bank, primarily in the field of transaction certifying documents, and payments that meet ically identifies a client and reroutes the call mation on every credit product online. service: transaction and turnover activity and the criteria of Federal Law No. 214-FZ are exe- to the personal forex controller. account balances. To keep companies attracted cuted by the next day. In many regions, the Bank The same corporate client could choose over to the Bank, we will emphasize developing the has become the unquestionable leader or even For complex and non-standard situations, ten credit products for various purposes, such volume of business created by companies that the sole financial institution offering full sup- the Bank has the center consulting on foreign as one-time loans replenishing working assets, became our clients at some point over the past port to real estate developers consistent with economic affairs, where any company, not tender guarantees, credit lines, credit line three years. We will implement the concept the federal law. necessarily an Alfa-Bank client, can receive tranches, framework agreements guarantee- of a universal manager that not just attracts free consultation. Whenever an issue exceeds ing a particular deal, etc. In the past, clients new clients, but also develops relations with Transaction Business the limit of the Bank’s competence, the Bank had to refer to agreements, personal man- existent clientele and promotes cross-sales. connects the applicant directly to its partners agers, and the Bank in order to monitor their Attracting clients requires state-of-the-art with relevant expertise. credit product liabilities. Now the information There is significant business development and convenient solutions and instant response is available online, and the time saved can potential in our market segment, and the Bank to market and legislative alternations and The “smart paperwork” service warns about be used on more important tasks. The service intends to use this potential to keep grow- needs of the segment. Alfa-Bank’s high-tech possible forex violations in the Internet bank. provides information about main terms and ing at higher than average market rates and nature ensures rapid development of products The client receives nine types of notifications details of credit products, and payment sched- markedly increase operating revenue. As a rule, that businesses might need. Alfa-Bank has regarding a changed status of the document, ules can be downloaded in pdf or xlsx formats. medium businesses stay on the market for been a leader in transaction business in the a deadline for the document submission, a long time and adjust to changes in the econ- Russian banking market for years. an expiry of agreements, a receipt of new dec- omy. These types of clients are particularly larations, etc. valuable to any bank, and Alfa-Bank knows Alfa-Bank offers companies not just simple and understands which products and services services, such as account opening and oper- In 2018, the Bank began actively promoting they are interested in, which services are ation, but also products related to foreign a more complex product, hedging of forex risks, Alfa-Bank offers most actively used, and which innovations are economic activity. In order to provide those which rapidly won popularity among our clients. needed to facilitate and foster convenience services, the Bank must be able to offer expert In the past, such instruments were available companies not just simple of their business. We have been providing qual- consultations, actively interact with regula- only to clients of the upper segment, but today services, such as account ity service to such companies for over 20 years, tors, and instantly update products in case we see increased demand for the product in the and pride ourselves on being a convenient, of legislative modifications. The Bank had been medium segment. The possibility of closing opening and operation, prompt, high-tech, and, most importantly, reli- a leader of this segment for years and the such deals in the Internet bank will come next. but also products related able financial assistant to medium businesses. number of Bank clients engaged in foreign economic activity nearly doubled to slightly more In 2019, we plan to offer every main type to foreign economic than 9,000 companies in 2018. of bank product via a single platform so that activity.

66 Alfa-Bank. Annual Report 2018 67 BUSINESS CORPORATE MEDIUM General Principles • Principle of transparency and full disclosure: of Organizing Risk and as part of regular reporting, the executive Princinal Factors officers, collegial bodies and investors are Capital Management provided with unbiased information (timely in the Bank and in full), including for reasonable decision of Risk in Bank making.

• Principle of accountability and involvement • Principle of efficient payroll system: identi- Activity of the supreme management bodies: a coher- fying risk owners and considering the level ent and efficient organizational structure for of risk assumed by them and the risk reali- risk management, responsibility for main- zation horizon in determining remuneration. taining the capital adequacy required, awareness of the level of assumed risks and any • Prudence concept: executing transactions facts of breach of the established risk man- in view of the available capital amount, com- agement procedures and established limits. prehensive analysis of risks resulting from transactions. The Bank places great emphasis on the best In December 2018, the Bank submitted its • Principle of risk culture development: practices for risk management. The Bank’s application to the Bank of Russia in order involvement and pro-active attitude of all primary objective of risk management is an to obtain a permit to use its internal rat- employees to identification, assessment, Risk Management: optimal balance of risk-return, including assur- ing-based models for measuring credit risk. control, and monitoring of risks, efficient ing and maintaining an acceptable level of risk Adopting this measurement approach will communication with relevant subdivisions Organizational Structure up to the established risk appetite and limits. enable the Bank to measure its credit risk and high-quality interaction within the The Bank is continuing to improve its risk man- with greater precision based on its customers’ risk management system, each employee’s The Bank’s system of collegial risk manage- agement as a key element of implementing the specifics. The internal rating-based approach understanding and awareness of their own ment bodies comprises the Board of Directors, Bank’s development strategy. to credit risk assessment will enable the Bank responsibility for risk management within the Board of Directors’ Audit Committee, to manage its business in view of the consumed the scope of their competencies. the Board of Directors’ Staff and Remuner- The Bank bases its risk management system capital and level of assumed risk. ation Committee, the Board of Directors’ on principles consistent with Russian Law, inter- • Principle of continuous risk management Risk Committee, the Executive Board of the national standards and the best practices for The Bank’s major risks are as follows: non-re- process: risk management is an ongoing Bank, the Asset and Liability Management risk management. The Bank has implemented tail credit risk, counterparty credit risk, retail and continuous process, which includes risk Committee, the Credit Committees, including the Internal Capital Adequacy Assessment Pro- credit risk, market risk, operational risk, liquid- identification and analysis. Decision making, the Chief Credit Committee, the Non-Retail cess (ICAAP) both on an entity level and on the ity risk, interest rate risk in the banking book, decision compliance and compliance control Credit Committee, and the Business Develop- Banking Group level. The Bank performs stress and concentration risk as a part of its non-re- are continuous processes and are implement Committee, the Corporate Investment testing of its capital adequacy and takes into tail credit risk. mented to maintain competitive advantages Bank Default Committee, the Operational Risk account significant risks when planning its cap- and ensure stable functioning from a stra- Steering Committee, etc. ital adequacy. The Bank plans its capital ade- Information on the structure of all significant tegic perspective and as an integral part quacy on the basis of stress-testing of its capital risks inherent in the Bank’s activity is disclosed of the Bank’s development. The Board of Directors’ Risk Committee was adequacy in view of significant risk stress-test- on a regular basis in compliance with the Bank established in November 2018. The Committee ing. The Bank exploits its capacity to meet its of Russia’s requirements available on the • Principle of independent risk assessment is responsible for preview, analysis, and prepa- objectives of increasing its profitability and Bank’s website at https://alfabank.ru/about/ and risk control: risk management is based ration of proposals for the Board of Directors expanding business while constantly monitoring annual_report/riskinfo/ on introducing the ‘three independent lines on the following key matters: risk levels to minimize and contain losses that of defense’ concept. The principles and could occur during the course of its activity. Risk management consists of risk assessment, other elements of this concept are set forth • Determining the risk and capital manage- establishment of risk limits, monitoring, con- in detail in Section 4 hereof. ment strategy and its development; The Bank’s risk management relies on improv- trol, reporting, and establishment of internal ing internal methodology and risk manage- risk management processes and procedures. • Principle of risk limitation: the Bank estab- • Determining the risk appetite; ment processes as ways of maintaining and The Bank manages its risks by implement- lishes a system of limits and indicators lim- strengthening its position on the banking ser- ing three independent lines of defense in the iting the assumed risk level. • Aligning the development strategy and vices market. The Bank develops and improves absence of a conflict of interest. the risk management strategy, inter alia, its risk and capital management approaches • Principle of multi-risk treatment: ongoing accounting for new risks; in view of its internal credit risk models while improvement of risk management in view ensuring relevant infrastructure and IT sys- of changes in the environment, new lines • Monitoring efficiency of the risk manage- tems’ development. of business, etc. ment system;

68 Alfa-Bank. Annual Report 2018 69 ACTIVITY IN BANK OF RISK FACTORS PRINCINAL • Developing the risk culture and implement- Credit Risk borrowers, limits on credit risk concentra- The approach to corporate lending is based ing the three lines of defense model; tion for shareholders and insiders, limit on the standard underwriting procedure The Bank identifies credit risk as a principal on the overall large credit exposure); (in view of the borrower’s segment), which • Applying bank risk management techniques risk and assumes thereof, i.e. the risk of fail- includes credit scoring of a potential borrower, and risk measurement models to calculate ure of a borrower/counterparty to fully repay • Limits on concentration of credit risks in the checking the provided collateral quality and the capital adequacy ratio and other statu- a debt when due. Credit risk is categorized into loan portfolio (based on the borrowers’ rat- the compliance of the deal’s structure with the tory ratios. non-retail credit risk, retail credit risk, and ing, on the securitization level subject to the Bank’s policy and limits. The internal models counterparty credit risk. rating, by economic sectors, etc.); for assessing the probability of default have been elaborated for the corporate portfolio’s Fundamentals of the The Bank’s credit risk management processes • Lending limits for particular borrowers/ main segments. Bank’s Risk and Capital provides for: group of related borrowers are established in reliance on assessment of loan quality The bank uses a broad range of techniques Management Strategy • Procedure for loan extension and decisions of the borrower and form the basis of loan to mitigate credit risk by managing both loss on their extension; issuance to a single borrower and manage- factors, such as the probability of default, loss The Risk and Capital Management Strategy ment of the main conditions of loan trans- given default and exposure at default on the deals with the growth and implementation • Procedure of defining the default; actions such as maximum term and amount transaction level, and factors of systemic of the ICAAP. The Strategy aims to estab- of such loan transaction, type and amount risk on the portfolio level. The ability of a bor- lish the fundamental principles of the Bank’s • Establishing limits; of collateral. rower to service the debt is assessed on the system of management of significant risks transaction level. The Bank mitigates the risk and capital by implementing the ICAAP. This • Requirements for collateral and assessment • Administrative limits restrict the powers by accepting various kinds of collateral, sure- is imperative for efficient risk-centered man- methodology; of functional subdivisions and the Bank’s ties of legal entities and individuals, and bank agement of the Bank, fulfilling the Bank’s authorized bodies / employees to make deci- guarantees. development plans (the development strategy) • Measuring credit risk in view of the scope sions on lending to borrowers. approved by the Board of Directors, and safe- of all types of credit risk; The Bank is constantly improving its IT sys- guarding and protecting the interests of the The established limits are regularly monitored, tems to support the introduction of risk Bank’s clients and shareholders. • Processes of credit risk monitoring and controlled, and reviewed. management practices consistent with Basel control; II (including support for calculation of internal As a part of the risk and capital manage- The Bank uses control mechanisms fostering ratings, and management of data quality, col- ment system, the Bank ensures the following • Stress testing processes; risk management efficiency: laterals, and default recognition processes). procedures: • Validation processes; • Preparing regular reports on the condition The procedures for managing the concentra- • Determines the approach to the ICAAP’s of portfolios and regular submission of such tion risk arising due to the Bank’s exposure elaboration and implementation and • Reporting processes. reports to the relevant committee, to large risks, whose occurrence may lead principles of significant risk and capital to material damages able to jeopardize the management; The Bank elaborates and introduces models for • Defining the main principles of the credit Bank’s solvency and ability to continue amidst measuring non-retail and retail credit risk. policy regulating the policy on the depart- growing concern, provide for the processes • Determines its risk appetite; ment’s level, of identification and measurement of concentration risk and establishment of concen- • Determines its significant risks; Non-retail Credit Risk • Regularly analyzing the need to revise policy tration limits. The limits on concentration principles, of credit risks in the Bank’s loan portfolio limit • Plans the structure of capital adequacy and The credit risk assessment framework covers the concentration based on a borrower’s rat- risks; all transaction types with inherent credit risk, • Elaborating the lending principles to ensure ing, securitization level, economic sector, entity concentration risk, and residual risk. a disciplined and focused approach to deci- type, etc. • Aggregates capital requirements and imple- sion making, ments relevant methods; Non-retail credit risk management is described in the Bank’s Lending Policy. • Decision-making based on statistical data, • Organizes the stress-testing process; Credit risk limits on corporate borrowers • Ongoing monitoring of the current lending • Monitors ICAAP implementation as part encompass: process by the Risk Management Depart- of its regular reporting process; ment and the Internal Audit Department • Limits on concentration of credit risks to the to assess its efficiency and introduce • Verifies the efficiency of the ICAAP Bank’s capital (limit on credit risk con- changes, as appropriate. implementation. centration per borrower/group of related

70 Alfa-Bank. Annual Report 2018 71 ACTIVITY IN BANK OF RISK FACTORS PRINCINAL Counterparty Credit Risk in transactions with counterparties incorpo- focuses on the risk-adjusted margin in order • Establishing the limit system and the proce- rated in the countries with a high level of risk. to optimize the profitability of Mass Business dure of establishing limits; Counterparty credit risk management is con- and retail portfolios. sistent with the processes of managing the Individual limits both on a specific counter- • Controlling and monitoring compliance with non-retail credit risk defined by the Lending party and on a group of counterparties. In order to increase the efficiency of retail loan limits; Policy in view of its specifics. The risk is man- repayments, statistical models are used that aged taking the related market, operational, allow detection of loan transactions with a high • Stress testing market risk; and liquidity risk into account. Retail Credit Risk level of exposure to deterioration of a borrower’s payment behavior and use the optimal • Validating the model to measure market risk The process of managing the counterparty The retail credit risk is managed using risk debt collection processes on a timely basis. losses in a stress scenario; credit risk comprises a set of processes of and assessment in deciding on credit products, loan The debt collection process is applied to Mass approaches to risk identification, assessment, portfolio management aimed to build a port- Business borrowers where there is informa- • Market risk reporting. monitoring, and control, as well as reporting. folio least subject to volatility and maintaining tion on deteriorating financial standing of such the target risk-return ratio. Mass Business entity obtained from any inter- The Bank manages market risks according Processes of managing the counterparty credit nal and/or external sources (borrowers / surety to the principles set forth in the Bank’s inter- risk: The limit system is based on the Bank’s Retail provider / turnovers on the borrower’s set- nal documents, including the Policy for Market Lending Policy and Mass Business Lending Pol- tlement accounts maintained with the Bank) Risk Management as approved by the Bank’s • Ensure that transactions with counterpar- icy. The retail credit risk limit encompasses the or where any delinquency occurs under the Executive Board. ties are exercised only subject to preliminary limit on the maximum amount of credit trans- credit facility agreement. assessment of a counterparty’s financial action, the limit on net loan losses and other The exposure of the Bank’s trading book standing and the probability of occurrence limits defined in the procedure established to market risk is managed using limits on the of a counterparty credit risk both before in the Bank. The limits are monitored and con- Market Risk risk metrics used in the Bank and the list completion of settlements and in the pro- trolled on an ongoing basis. of permissible instruments put together by the cess of settling a transaction; The Bank assumes market risks, i.e. risk asso- Asset and Liability Management Committee The automated risk assessment employs ciated with the changing value of the Bank’ (ALMC). • Include the lending limits and trade limits statistical models (scoring) based on the anal- positions caused by changes in the market on counterparties as part of a counterpar- ysis of the existent loan portfolio and fea- indicators: value of issued securities, stock Market risk is managed by establishing a sys- ty’s credit risk limits; tures of borrowers. The scoring makes use indexes, currency exchange rates, book prices tem of limits on the risk metrics used in the of questionnaire-based information, history on precious metals and commodities, and Bank: • Determine the current and potential credit of client-Bank relations, and information from interest rates. risk for derivatives in view of any available external sources (for instance, the Credit His- • Market risk limit in compliance with Bank netting agreement (in connection with the tory Bureau and findings on a mass business The market risk management processes proof Russia Regulation 511-P; available collateral) and without any avail- entity’s performance (to assess mass business vide for: able netting agreement (in connection with credit risk)). The credit risk is assessed using • Limits on the open position in securities and the available collateral); the internal models elaborated in view of the • Defining the trade portfolio structure; derivatives; internal ratings-based approach and scoring • Measure the counterparty credit risk in view models of other types (such as fraud prediction • Carrying out preliminary analysis of avail- • Limits on the open position in foreign of the concentration risk by transaction borrower, etc.). ability of the respective market risk man- currency; types, with respect to groups of related agement system before executing any counterparties, markets, taking into account The following indicators are monitored: transactions with new types of financial • Limits based on the risk measure (VaR the country risk, etc.; approval rates by customer product/segment; instruments or entering new markets; metrics); delinquency levels (both long-term and short- • Regularly monitor the quality of counterpar- term), migration (past due balance roll rates • Methodology for pricing trading portfolio • Other limits and restrictions (metrics for ties and the level of counterparty credit risk. into various delinquency buckets), number instruments, determining the nature and measuring losses in a stress scenario). of contacts made and promises given to mon- types of executed transactions; Limits on the counterparty credit risk itor collection efficiency; actual historical Stock (Quotation) Risk Management encompass: losses by products and vintage; special pilot • Techniques to measure market risk and programs, write-off indicators in each product determine the capital requirements with The stock risk is the risk associated with losses High-level limits on the counterparty risk portfolio; recoveries for each loan portfolio, respect to market risk; incurred by an unfavorable change in quota- encompassing the portfolio concentration lim- stability of risk assessment procedures, results tions of securities (including those assigning its, which limit risks per counterparty (group based on these assessments by product, and • Methodology for pricing trading portfolio management rights) in the trading portfolio of related counterparties), position in trans- efficiency/efficacy of segmentation proce- instruments; and derivatives influenced by factors linked actions with high risk counterparties, position dures. As part of this monitoring, the Bank both to the issuer of securities and financial

72 Alfa-Bank. Annual Report 2018 73 ACTIVITY IN BANK OF RISK FACTORS PRINCINAL derivatives (the special stock issuer risk), and interest rate risk of the bank portfolio is cat- threatening the Bank’s financial stability. The When managing its liquidity, the Bank, on an to general fluctuations of market prices for egorized into the following groups: revalua- liquidity risk is managed by the Treasury and ongoing basis: financial instruments (the general stock risk). tion risk, risk of change in the form and slope the Risk Management Department and con- of a yield curve, and baseline risk. trolled by the ALMC. • Analyzes the level of liquid assets for set- In order to measure the risks to the Bank’s tling liabilities when due; financial instruments in the trading position The processes of managing the interest rate Liquidity risk management accounts for different of investment business, the Bank imposes risk of the bank portfolio provide for: forms of risk manifestation: liquidity risk, unex- • Ensures access to various sources of funding; limits on the open position, risk exposure pected demand risk, market liquidity risk, fund- according to Regulation 511-P, and VaR limits. • Reviewing the list of assets and liabilities ing risk, compliance risk, and concentration risk. • Adjusts its plans in case of funding problems; The stock risk is on the list of risks taken into sensitive to changes in interest rates; account in calculating the above metrics. The Bank maintains a stable funding ratio • Controls compliance of its balance sheet liqui- • Identifying types (sources) of the interest comprising primarily the amounts payable dity ratios with the statutory requirements; Forex Risk Management. rate risk; on corporate and retail deposits, debt securities in issue, payments due to other banks, • Controls compliance of its limits (metrics) The forex risk is a probability of losses aris- • Developing and introducing the metrics for as well as adequate diversified portfolios of liq- with the statutory and internal bank ing as a result of an unfavorable change quantifying the interest rate risk; uid assets in order to be able to respond swiftly requirements; in exchange rates of foreign currencies and/or and calmly to unexpected demand for liquidity. precious metal prices in positions denominated • Establishing limits (early warning indicators) • Maintains the adequate portfolio of short- in foreign currencies and/or precious metals. and metrics of the interest rate risk; The Bank’s liquidity risk management pro- term liquid assets mainly comprising liquid cesses provide for: trade securities placed on the Lombard list In order to mitigate the forex risk in com- • Calculating the values of limits (early warn- of the Bank of Russia, bank deposits and pliance with Bank of Russia Ordinance 178-I ing indicators) and metrics of the interest • Describing the processes of funding need other interbank instruments; dated 28.12.2016 ‘On Establishing Values (Lim- rate risk; determination; its) of Open Currency Positions, Methodology • Controls the amount of short-term inter- for their Calculation and Specifics of Supervi- • Controlling and monitoring limits (early • Process of analyzing the liquidity position bank loans raised to manage its asset-liabil- sion over their Compliance by Credit Institu- warning indicators) on the interest rate risk; for different time horizons; ity mismatch; tions’, the Bank has set limits on the amount of open currency positions at the rate of 20% • Stress testing the interest rate risk • Process of establishing liquidity limits; The Bank manages its liquidity risk by: of the Bank’s equity capital in each currency and the balancing position of 10% of the equity • Validating (assessing the ability to assess • Processes of liquidity management • Monitoring its compliance with the Bank capital in RUB. The Treasury calculates and a risk adequately) the interest rate risk on a daily basis and liquidity management of Russia’s liquidity requirements such as: controls open currency positions, and the Risk metrics for a longer-term horizon; the quick ratio (N2), the current liquidity Management Directorate carries out daily ratio; the current liquidity ratio of a credit monitoring thereof in accordance with the • Elaborating internal documents on interest • Method of analyzing the liquidity of its institution (N3), the long-term liquidity Regulation on Control over the Bank’s Open risk management; assets and stability of its liabilities; ratio; the short-term liquidity ratio (N26), Currency Positions and Open Currency Position the long-term liquidity ratio (N4), the net Reporting by Form 0409634. • Reporting on the interest rate risk. • Processes of restoring the liquidity, inter stable funding ratio (N28); alia, the process of decision making on mobi- The Asset and Liability Management Com- The system of limits is based on the internal lization (sale) of liquid assets, other possible • Ensuring the adequate portfolio of current mittee has established the following internal approaches to assessment of change in the (and the most readily available) methods liquid assets mainly comprising liquid trade limits, which constrain the currency position economic value of capital and sensitivity of raising additional funds in the event securities placed on the Lombard list of the of the Bank directly or indirectly: of interest margin to change in market rates. of liquidity shortage; Bank of Russia (HTM and HFS security The specific type and value of limits and fre- portfolios), bank deposits and other inter- quency of limits’ revision is established by the • Controlling compliance with the liquidity bank instruments; Asset and Liability Management Committee. limits, analyzing the liquidity position, inter Interest Rate Risk of the alia, by currency types, reporting; • Monitoring the amount of short-term inter- Bank Portfolio. bank loans raised to manage its asset-liabil- Liquidity Risk • Process of stress testing; ity mismatch; The interest rate risk of the bank portfolio is the risk of deterioration of the Bank’s finan- The liquidity risk is the risk of the Bank’s • Validating the model for liquidity • Monitoring its daily liquidity position and cial standing caused by decreasing equity, inability to finance its operations, i. e. to ensure management; regular liquidity stress-testing in various declining incomes, and the value of assets asset growth and meet its liabilities when they scenarios covering standard and crisis mar- due to changes in market interest rates. The mature without incurring losses in an amount • Liquidity risk reporting. ket conditions;

74 Alfa-Bank. Annual Report 2018 75 ACTIVITY IN BANK OF RISK FACTORS PRINCINAL • Assessing the Bank’s market position are the heads of the Bank’s subdivisions. The The Bank has approved the Code of Corporate or external factors consistent with exceptional by means of Funding Cost metrics compar- Operational Risk Division of the Risk Manage- Ethics, which lays down the Bank’s mission and but probable events on the Bank’s financial ing the cost of fund-raising by the Bank with ment Department analyzes and assesses per- corporate values. The Bank operates on the stability. As a result, the Bank tests its ability those of its main rival banks; formance of the operational risk management principle of timely and high quality perfor- to maintain financial stability amid an eco- system in the Bank’s subdivisions, organizes mance of its obligations to its clients and nomic crisis and under stress, i.e. material- • Controlling the concentration of fund-rais- implementation of the Bank’s operational risk partners and strict compliance with the laws ization of significant risks that may harm its ings (from one depositor, from TOP-20 management system as a whole, controls the and norms of business ethics. The Bank places financial stability. This assessment is based depositors, from the Bank of Russia, from operational risk management system, provides great emphasis on organizing a full-fledged on the assessment of the amount of capital large government-owned corporations, etc.). professional assistance to employees of the and reliable system of public disclosure in mass required to cover all types of significant risks Bank’s subdivisions at various stages of opera- media and on the Bank’s website. and the calculation of sufficiency of available tional risk management (identification, assess- capital. Operational Risk ment, mitigation, control, and monitoring), Strategic Risk provides methodological support to subdivisions The Bank develops an approach to stress-test- Operational risk is the risk of losses caused and operational risk management training Strategic risk is the risk of an unfavorable ing every significant type of risk, taking into to the Bank as a result of the Bank’s unreliable to employees, provides comprehensive consul- change in various internal and external factors, account the specifics of the Bank’s operational and flawed internal management procedures, tations on the analysis of risks to processes and which may prevent the Bank from accomplish- activity, the amount of capital needed to cover unscrupulous conduct of employees, failures the assessment of risks’ materiality and proba- ing its strategy. possible losses, etc. Capital adequacy is stress- of information or other systems, or as a result bility and the available methods of control. tested by aggregating results of stress-tests of external events. Operational risk includes The Bank controls its strategic risk by making of significant types of risks. The Bank uses the legal risk and regulatory risk, but excludes Key methods for mitigating operational risk managerial decisions based on analysis of the stress-testing results to develop measures strategic risk and reputation risk. controlled at the Bank level encompass: current situation in the banking sector and that may be used in the event of a stressful development prospects, levels of risk, actions scenario. Operational risk is managed using a set of pro- • Elaborating the procedures for executing of the Bank’s competitors, client needs, and cedures for identifying, assessing, monitoring, transactions, separations of powers and possibilities of HR, financial, and technical sup- The Bank comes up with a unified macroeco- reporting, controlling and/or mitigating opera- accountability for transactions that rule out port for pending modifications. The Bank plans nomic scenario of exceptional but probable tional risk. the operational risk occurrence; its product range, tariff policy, development events that can harm or destroy its business of its branch network and asset-and-liability reputation. Scenarios take the Bank’s specifics The following instruments are used to identify • Controlling compliance with the above management, including interest rate manage- and lines of business into account. A crisis sce- and assess operation risks: procedures; ment, budget, and qualitative and quantitative nario is based both on the historical behavior development parameters based on its assess- of macroeconomic variables and hypothetical • Analysis of new processes; • Developing systems designed to automate ments of the above parameters scenarios. Key external macroeconomic factors banking technologies and information secu- of the stress scenario are Russia’s GDP, the • Collection and analysis of operational risk rity systems. The Bank has established its Strategic dollar/ruble exchange rate, the oil price, and events of the Bank; Development Department. The strategic the key rate. A number of additional external The Bank has effective Bankers Blanket Bond planning process encompasses the elabora- factors are also taken into account. • Collection and analysis of operational risk (BBB) tion of a three-year strategic plan subject events of other credit institutions; to approval by the Board of Directors. The risk The Bank modifies, revises, and supplements of losses caused by errors (flaws) as a result the available risk management approaches, • Risk Control Self-Assessment (RCSA); of making decisions defining the Bank’s oper- including approaches to stress-testing of capi- Principles of Other Risk ation and development strategy is estimated tal adequacy, on an ongoing basis. Stress-test- • Key risk indicators (KRI); Management as insignificant. The Board of Directors of the ing scenarios and results have been approved Bank has approved the Development Strategy by the Board of Directors of the Bank. Accord- • Operational risk scenario analysis Risk of Losing Business Reputation for 2018–2021. ing to the results of stress testing (with (stress-testing). (Reputation Risk) a scope until 01.01.2020) carried out at the end Stress-Testing of 2018, the Bank is resilient to stress. As part of the new process analysis, new The risk of losing business reputation (reputa- potential operational risks to the Bank’s pro- tion risk) is the risk of losses as a result of the The Bank assesses its capital adequacy for cesses, products or systems are identified and Bank’s negative image in the eyes of its share- significant types of risk under stress at least assessed at the stage of their development and holders, counterparties, oversight agencies, once a year based on the decisions defin- implementation. and other stakeholders, which may have a neg- ing the strategy for the internal processes ative impact on the Bank’s ability to maintain of capital adequacy assessment. The purpose Owners of operational risks (to the extent that current and/or establish new business relations of stress-testing is to assess the poten- they fall within the functions of their divisions) or ensure ongoing access to sources of funding. tial impact of a stressful change of internal

76 Alfa-Bank. Annual Report 2018 77 ACTIVITY IN BANK OF RISK FACTORS PRINCINAL • Openness and transparency of significant rendering all services related to a registrar’s corporate actions on the condition of the activity to clients of AO Independent Registrar Information (Report) exercise and protection of rights of the Company. JSC NRK-R.O.S.T. is a professional Bank’s shareholders. participant of the securities market and car- on the Bank’s Compliance with ries out its activities related to maintenance the Principles and Guidelines of registers on the basis of license 045-13976- Shareholders’ Rights 000001 dated 03.12.2002 issued by the Bank of Russia and in compliance with Russian Law. of the Corporate Governance Code and Equality

Recommended for Use by the Bank The Bank ensures the rights of its shareholder Bank’s Board of Directors and equal conditions for their exercise. The of Russia procedure of convening, preparing, and holding The Board of Directors exercises strategic a General Shareholders’ Meeting is regulated management of the Bank, supervises bank risk by the Regulation on the General Sharehold- management and the preparation and perfor- ers’ Meeting approved by the General Meeting mance of efficient internal control, oversees The Bank complies with the principles of cor- In compliance with the Code, the Bank pledges of the Bank’s Shareholders. The restated Reg- the activities of the Bank’s executive bodies, porate governance set forth in the Corpo- to be guided by the following general principles ulation was approved in 2018. The amendments and performs other key functions. The Board rate Governance Code recommended for use of corporate governance in its activity: made to the Regulation are primarily related of Directors is accountable to the General by the Bank of Russia (Bank of Russia Letter to redistribution of some of the competencies Shareholders’ Meeting. No. 06-52/2463 of 10 April 2014 ‘On the Cor- • Compliance with laws, other regulations, the of the Bank’s management bodies, bringing porate Governance Code’) in order to ensure Bank’s Charter and internal documents; provisions into compliance with the applicable The Regulation on the Board of Directors effective management in view of the Bank’s Laws, and clarifying processes of convening defines the rights and responsibilities of the ownership structure and the scope of its • Exercise and protection of rights of the and holding meetings. Board of Directors’ members, the procedure activity. Bank’s shareholders; for preparing and holding Board of Directors’ The Shareholders enjoy an equal and fair meetings, and requirements for the Board For the purpose of maintaining and improving • Equal (in compliance with the regulations) opportunity to participate in the attribution of Directors’ members, including excellent the corporate governance standards, in 2013 treatment of the Bank’s shareholders; of profits by means of dividends. The Bank can professional and business reputation, skills and the Bank put in place the Corporate Gover- abstain from paying dividends in the case that experience, enabling them to assess informa- nance Code approved by the Extraordinary • Accountability of the Board of Directors such payment, although it does not formally tion about the Bank’s activity and the market Shareholders’ Meeting (Minutes No 02-2013 to the Bank’s shareholders; breach the law, is economically unfounded situation for the purpose of professional judg- dated 02.12.2013) and drafted it in compli- and creates a false impression of the Bank’s ments in the banking area. ance with current Russian Law, the Regula- • Strategic management of the Bank’s activ- activity. tion of the Bank of Russia and the Corporate ity by the Board of Directors; The revised Regulation on the Board of Direc- Governance Code recommended by the Bank The protection of shareholder property rights tors was approved in 2018. The Regulation was of Russia. • Efficient control of the activity of the Bank’s and the free disposal of shares are ensured brought into accord with the last amendments executive bodies by the Board of Directors; with the Bank’s choice of registrar, which made to the Bank’s Charter. Alfa-Bank’s Corporate Governance Code is an is highly reputed and possesses streamlined internal regulatory instrument that defines the • Enabling the executive bodies to operate and reliable technologies that efficiently As of late 2018, the Board of Directors had basic principles, rules and standards of corpo- reasonably, in good faith, and exclusively account for property titles and ensure that 9 members, one of whom (Mr. Vladimir Verk- rate governance by which the Bank is guided in the Bank’s interests for the purpose shareholders’ rights are exercised. In 2018, hoshinskiy) was also a member of the Bank’s in its activities, including those governing the of efficient management of the Bank’s cur- the Bank’s registrar was AO Independent Executive Board, three of whom (Mr. Mikhail following areas: protection of rights and lawful rent activity and accountability of executive Registrar Company. On 04 February 2019, the Fridman, Mr. Petr Aven, and Mr. Andrei Koso- interests of the Bank’s shareholders, organi- bodies to the Board of Directors and the record of the winding up of AO Independent gov) were the Bank’s ultimate beneficiaries, zation of the activity of the Board of Directors, Bank’s shareholders; Registrar Company as a result of its reorgani- and Mr. Oskar Hartmann was an independent determination of the remuneration system for zation through the merger with JSC Indepen- member of the Board of Directors by the the members of the Board of Directors, exec- • Ensuring the creation and efficient function- dent Registrar Company R.O.S.T. (JSC NRK- criteria prescribed by Bank of Russia Letter utive bodies, and other key managers of the ing of the Bank’s risk management system R.O.S.T.) was entered into the Unified State No. 06-52/2463 of 10 April 2014 ‘On the Cor- Bank, strategic management, coordination and internal control; Register of Legal Entities. Since 05 February porate Governance Code’. In the opinion of the of risk management and organization of inter- 2019, JSC NRK-R.O.S.T. is the successor of all Board of Directors, this balance prevents nal control, information disclosure, and a pro- • Ensuring timely disclosure of reliable and the rights and obligations of AO Independent a conflict of interest between the Bank, its cedure for significant corporate actions. complete information about the Bank; Registrar Company. JSC NRK-R.O.S.T. contin- shareholders and its clients. ues keeping registers of securities holders and

78 Alfa-Bank. Annual Report 2018 79 CODE GOVERNANCE CORPORATE OF THE GUIDELINES AND PRINCIPLES THE WITH COMPLIANCE BANK’S ON THE (REPORT) INFORMATION The activity of the Board of Directors is super- Board of Directors approved the Key Perfor- Bank of Russia Letter No 119-T dated 13 Sep- members of the Board of Directors and reim- vised by the Chairman, who organizes its mance Indicators Annex to the Strategic Plan. tember 2005 ‘On Contemporary Principles for bursing expenses related to the performance work, convenes and chairs meetings of the Organizing Corporate Governance in Credit of their duties. Board of Directors, sets the agenda and form The Board of Directors plays a key role in the Institutions’, and No. 14-T dated 6 February of meetings of the Board of Directors, signs prevention, identification, and settlement 2012 ‘On the Basel Committee on Banking minutes of meetings of the Board of Direc- of internal conflicts between management bod- Supervision Guidance ‘Principles for Enhanc- Risk Management and tors, chairs the General Shareholders’ meet- ies, shareholders, and employees of the Bank. ing Corporate Governance’ and Appendices ing, signs a contract with the Chairman of the The Board of Directors approved the Proce- 9, 10, 11 and 12 to Bank of Russia Ordinance Internal Control System Executive Board on behalf of the Bank, and dure for Preventing a Conflict of Interest in the No. 4336-U dated 3 April 2017, ‘On Assessing performs other functions prescribed by the Bank, which prevents the emergence of a con- Banks’ Economic Situation’ (the report on the The Bank has developed an efficient system Federal Law on Joint Stock Companies, the flict of interest in the process of the Bank’s assessment of corporate government was of risk management and internal control aimed Bank’s Charter, and the Regulation on the activity. The Board of Directors also approved approved by the Board of Directors, Minutes at maintaining an acceptable level of risks and Board of Directors. In the absence of the the Code of Corporate Ethics of AO “Alfa- No. 14-2018 dated 31.01.2018). achieving the Bank’s goals. Chairman of the Board of Directors, his Bank” (Minutes of the Meeting of the Board functions are performed by the First Dep- of Directors No. 21-2015 dated 15.12.2015), In 2018, the Board of Directors also generated Risk Management: Organizational uty Chairman of the Board of Directors, and whose purpose is to lay down standards its report on the assessment of the perfor- Structure in the absence of the latter the work is done of the Bank’s activity and employee conduct mance of the Bank’s Board of Directors, which by a member of the Board of Directors at the aimed at maintaining ethical standards, ser- was considered by the Annual General Share- The Bank’s system of collegial risk manage- discretion of the Board of Directors. vice quality and customer convenience, higher holders’ Meeting of the Bank. ment bodies comprises the Board of Directors, profitability, financial stability and efficiency the Board of Directors’ Audit Committee, the For the purpose of previewing crucial issues of the Bank, its subsidiaries and affiliates. The Board of Directors’ Staff and Remuneration of the Bank’s activity, the Board of Directors Code was posted on the Bank’s website for Remuneration of Members Committee, the Board of Directors’ Risk Com- formed two (2) thematic committees in 2014, the general public. Bank employees and man- mittee, the Executive Board, the Asset and namely the Audit Committee tasked with agement have been personally informed about of Board of Directors, Liability Management Committee (ALMC), the assisting in the Board of Directors’ efficient the Code. The Code was communicated to the Executive Bodies, and Credit Committees, including the Chief Credit control of the Bank’s financial and economic Bank’s employees and members of its man- Committee (CCC), the Non-Retail Credit Com- activity, and the Staff and Remuneration Com- agement bodies. As a part of introducing the Other Key Managers mittee (NRCC), and the Business Development mittee promoting engagement of competent Code’s provisions, the Compliance Department Committee (BDC), the Corporate Investment personnel in Bank management and providing is monitoring the compliance therewith in the The Bank’s principles of short- and long-term Bank Default Committee (DC), the Operational incentives for their successful performance. Bank. In compliance with the Code, the Bank remuneration are based on the Bank’s prof- Risk Steering Committee (ORSC), etc. The has also developed and approved the Regu- itability, and the amount of remuneration Executive Board, the Board of Directors’ Audit The Board of Directors’ Risk Committee was lation on Terms and Procedure for Interest- is sufficient for recruiting and retaining skilled Committee, the Board of Directors’ Staff and established in November 2018. The Board ed-Party Transactions by Employees of OAO personnel by the Bank. Remuneration Committee, the Board of Direc- of Directors’ Risk Committee is responsible for “Alfa-Bank” and/ or their Affiliates (Appendix tors’ Risk Committee are accountable to the the preview, analysis and preparation of pro- 1 to Bank Order No 1206 dated 03.12.2010), In 2018, the Board of Directors approved Board of Directors, while the Risk Management posals for the Board of Directors concerning Bank Order No 980 dated 24.08.2012 on the the revised Human Resources Policy, a sys- Committees are subordinated to the Executive risk determination and capital management Participation of Employees of OAO “Alfa- tem of principles and norms aimed at form- Board. strategy, establishment of risk appetite, mon- Bank” in the Management of Any Legal Entities ing human capital consistent with the Bank’s itoring the efficiency of the risk management Unaffiliated to Alfa-Bank Bank Group, and strategy and mission and its Remuneration Corporate Governance Structure: system, risk culture development and introduc- the Anti-corruption and Anti-bribery Regula- Policy, which regulates the conditions of and tion of the three lines of defense model, appli- tion (Appendix 1 to Bank Order No 1704 dated procedure for remuneration of the Bank The Board of Directors is tasked with organiz- cation of bank risk management techniques 30.12.2015). employees. Prior to that, the above documents ing the risk and capital management system and risk measurement models for calculating were considered by the Board of Directors’ in general, controlling the implementation and the capital adequacy ratio. The Board of Directors assesses the perfor- Staff and Remuneration Committee (Minutes efficiency of the Internal Capital Adequacy mance of the Board of Directors in general, of the meeting (voting in absentia) of the Board Assessment Process (ICAAP) by reviewing The Board of Directors establishes the main its committees, and members of the Board of Directors No. 11-2018 dated 22.08.2018). regular ICAAP reports, reports on capital guidelines for the Bank’s long-term activity, of Directors. In 2018, the Board of Directors planning, stress testing, and auditor’s reports, in particular, approves the Bank’s strategy assessed the Bank’s corporate governance The Board of Directors also approved the Reg- defining its development strategy, approv- and considers the progress of its fulfillment. as recommended by the Bank of Russia Letter ulation on Remuneration and Reimbursement ing the Bank’s risk and capital management In October 2017, the Bank’s Strategic Plan No 11-T dated 7 February 2007 ‘On the List of Expenses Related to Performance of Duties strategy, the Bank’s risk appetite, procedures for 2018–2021 was approved (Minutes of the of Questions for the Assessment of Corporate by Members of the Board of Directors of the for managing the most significant risks, pro- Meeting of the Board of Directors No. 15-2017 Governance by Credit Institutions’ in accor- Bank, which laid down the general principles, cedures for applying the banking risk manage- dated 31.10.2017). In September 2018, the dance with the approaches set forth by the criteria and procedures for remunerating ment techniques and risk measurement models

80 Alfa-Bank. Annual Report 2018 81 CODE GOVERNANCE CORPORATE OF THE GUIDELINES AND PRINCIPLES THE WITH COMPLIANCE BANK’S ON THE (REPORT) INFORMATION General dated 06.08.2015 ‘On the Procedure for the management, and relevant notification of the Shareholders’ IRB Calculation of Credit Risk’ in order to con- Bank’s governance, analysis of efficiency of the Meeting sider the issues of default recognition accord- key control processes and monitoring key con- ing to the established process set forth by the trol indicators. The Risk Management Depart- Sta f and internal document on Default Determination ment, which operates in compliance with the Boards Audit Committee Remuneration and Recovery of Non-Retail Borrowers. Regulation on the Risk Management Depart- of Directors Committee Credit Committee ment, comprises the following subdivisions: the The Business Development Committee (BDC) Integrated Risk Management Directorate (the reviews amendments made to the Retail Lend- Validation Division, the Integrated Risk Man- Chairman of the ing Policy and Mass Business Lending Policy agement Division, and the Risk Reporting and Executive Board before submission to the Executive Board for Control Department), the Corporate, Market, approval, determines the management model and Counter-Party Risks Directorate (the Divi- and launch of new lines of Retail and Mass sion for Analysis of Industry and Regional Proj- The Executive Board Business, makes decisions on assignment ects Risks, the Division for Analysis of Industry of rights of claim in respect to loans extended Projects and Moscow Region Projects, the

Project and Technology to retail borrowers. Counterparties Division, the Methodology, CCC NRCC DC BDC ALMC ORCS Other Committee Modeling and Risk Reporting Division, the Mar- The Asset and Liability Management Commit- ket Risk Management Division), the Retail and Data Quality Management tee (ALMC) is tasked with managing market Small Business Risk Directorate, (the RB Port- Commission risks, interest rate risk in the banking book, folio Analysis Department, Lending Develop- and liquidity risks, optimizing the structure ment and Support Department, the SMB Risk of the Bank’s balance for the purpose of maxi- Management Department, the Department and other documents within the scope of their The Executive Board is tasked with elaborat- mum profitability amid the limited risk, estab- for Statistical Analysis, Predictive Modeling powers, and controlling the appropriate use ing the risk management policy based on the lishing aggregate limits on market risks, inter- and Forecasting), and the Operational Risk of rating systems by the bank. Bank’s risk and capital management strategy, est rate risk in the banking book, liquidity risks, Department. approving the risk and capital management and approving models and methods of their The Board of Directors’ Audit Committee and stress testing procedures, monitoring and assessment. The Chief Risk Officer bears responsibility for is tasked with assessing the efficiency of cur- introducing the risk mitigation measures based organizing and controlling the Bank’s risk man- rent risk management and internal control pro- on the optimal balance of the Bank’s goals and The Operational Risk Steering Committee agement process, the creation and develop- cedures, controlling their management system returns on capital required by shareholders (ORMC) ensures management of operational ment of the Bank’s risk management system, reliability, and proposing ways to improve them and the Bank’s risk appetite, ensuring com- risks, previews operational risk appetite, the oversight of the Bank’s current risk pro- to the Board of Directors. pliance with the ICAAP, maintaining a high- considers assumption of operational risks file, and assessment of the sufficiency of risk er-than-minimal level of capital adequacy, and up to the limit established by the Executive management resources for performing risk The Board of Directors’ Staff and Remunera- considering ICAAP reports. Board, monitors the operational risk level, and management functions, taking into account the tion Committee is tasked with previewing, ana- approves measures, procedures, and tech- complexity, interconnection, and scope of the lyzing, and preparing proposals to the Board The Chief Credit Committee (CCC) con- niques of identification, assessment, monitor- Bank’s risks, risk appetite, and strategy. of Directors on regulating the recruitment and siders and amends principles of the credit ing, control, prevention, and mitigation of oper- remuneration of employees essential to the policy before its approval by the Executive ational risks. The retail credit risk is managed by the Retail Bank’s risk management system and elaborat- Board, is responsible for establishing limits and Small Business Directorate and the Busi- ing and improving the Bank’s internal remuner- and assuming non-retail credit risks within The Data Quality Management Commission ness Development Committee (BDC). The ation documents. the scope of the competencies approved (DQMC) assesses the efficiency of the data non-retail credit risk is managed by the Cor- by the Executive Board, and controls consis- quality management system, makes decisions porate, Market and Counterparty Risks Direc- The Board of Directors’ Risk Committee tency of the loan portfolio’s quality with the on introducing new initiatives to improve data torate (the Methodology, Modeling, and Risk is tasked with previewing, analyzing, and pre- approved policy. quality, approves documents regulating the Reporting Division; the Industry and Regional paring proposals to the Board of Directors data quality management processes, and con- Project Risk Analysis Division; the Industry and on defining the risk and capital management The Non-Retail Credit Committee (NRCC) siders monitoring of data quality indicators. Moscow Region Project Risk Analysis Division; strategy, establishing the risk appetite, con- establishes limits for non-retail clients by sep- the Counterparties Division) and the non-retail trolling the efficiency of the risk management arate types of transactions up to the limits The Risk Management Department is subor- credit committees (the CCC and the NRCC); system, developing the risk culture and intro- established for SCC. dinate to the Chief Risk Officer, is responsible the CCC has the upper hand in this field. Mar- ducing the three lines of defense model, and for the operation of the risk management sys- ket risk is managed by the Corporate, Mar- applying the bank risk management techniques The Corporate Investment Bank’s Default tem, provides general risk management, and ket and Counterparty Risks Directorate (the and risk measurement models to calculate the Committee (DC) was established in accordance ensures the application of the unified principles Market Risk Management Division), the Trea- capital adequacy ratio. with Bank of Russia Regulation No 483-P and methods of identification, assessment, sury, and the Asset and Liability Management

82 Alfa-Bank. Annual Report 2018 83 CODE GOVERNANCE CORPORATE OF THE GUIDELINES AND PRINCIPLES THE WITH COMPLIANCE BANK’S ON THE (REPORT) INFORMATION Committee (ALMC). The operational risk of the Bank’s Executive Board and the order stock market, Russian Laws protecting The Internal Control Department is responsi- is managed by the Operational Risk Division of the Chairman of the Executive Board (here- rights and lawful interests of stock mar- ble for identifying, accounting, and monitoring and the Operational Risk Steering Commit- inafter referred to as the Bank management); ket investors, Russian advertising laws, regular (compliance) risk in the Bank; this is the tee (ORSC). Risk control (middle office) is also and internal documents regulating profes- risk of incurring losses by a credit institution exercised by the Risk Management Depart- • The Bank’s chief accountant (deputies); sional activity on the stock market; from failure to comply with Russian Law, inter- ment (via the Risk Reporting and Control nal documents of a credit institution, and the Department). The Treasury, the Risk Manage- • Heads (deputy heads) of operating divisions ——A structural subdivision controlling com- imposition of sanctions and/or other measures ment Department, and the ALMS manage and established in the Bank’s organizational pliance with Federal Law No 224-FZ dated by supervisory bodies. The Regulation on the control liquidity and interest rate risks. structure in compliance with the resolu- 27 July 2010, ‘On Countering the Illegal Use Internal Control Department gives a detailed tions of the Bank’s Executive Board and of Insider Information and Market Manipu- description of the Internal Control functions. The Corporate Debt Collection Department the Chairman of the Executive Board, head lation and on Amending Certain Legislative (CDCD) is fully independent from the Risk Man- (deputy heads) and the chief accountant Acts of the Russian Federation’; agement Department; it prepares proposals (deputies) of a branch; Disclosure of Bank’s on ways to deal with distressed debt, including ——Other subdivisions and employees acting Information, Bank’s collection strategies, elaborates possible solu- • Heads (deputy heads) of operational and lend- consistently within their office duties and tions for collecting delinquent debt, and pres- ing-and-cash-services offices of the Bank; powers established by the Bank’s internal Information Policy ents them for the CCC’s consideration. The document CDCD implements the approved strategy. The • Subdivisions and employees exercising inter- The Bank discloses information about its activ- CDCD is supervised by the Deputy Chairman nal control according to the powers defined Internal audits are organized by the Bank for ity in compliance with Russian Law on the basis of the Executive Board and reports to the CCC. by the Bank’s internal documents, including: the purpose of systematic independent assess- of principles of reliability, regularity, efficiency, The CCC recognizes debts as distressed. ment of the reliability and efficiency of the risk and a balance between the Bank’s transpar- ——The Internal Audit Service, a structural management and internal control system and ency and observation of its lawful interests. Retail delinquent debt is managed by the Retail subdivision of the Bank operating in com- corporate management practices. and Small Business Directorate, who lays pliance with the Charter, the Regula- For the purpose of transparency, timeliness, down the decision-making rules. The Client tion on the Internal Audit Service, and Internal audits are held by a separate structural and completeness of the Bank’s information Collection Division of the Operational Block’s Chapter 4 of Bank of Russia Regulation subdivision, the Internal Audit Department, disclosure, easy shareholder access to the Retail Service Department is tasked with mea- No 242-P dated 16.12.2003 ‘On Organiz- which is accountable to the Board of Directors. Bank’s documents, and designation of employ- sures towards resuming debt servicing, collecting Internal Controls in Credit Institu- ees responsible for the disclosure of the Bank’s ing delinquent loans, and identifying loans to be tions and Banking Groups’; The Internal Audit Department operates on the information, the Bank has a package of docu- written off as bad debt. A third party, a collec- principles of independence, objectivity, com- ments regulating the information policy: tion agency, can be engaged in the collection ——The Internal Control Service, a structural petence, and professional approach to work, process on the basis of an agency contract subdivision of the Bank operating in com- continuous activity and impartiality, and on the • The Regulation on the Interaction between in specially designated cases. The criteria for pliance with the Charter, the Regulation basis of Russian Law, normative acts of the Subdivisions in the Information Disclo- retail borrowers’ default are set by AO Alfa- on the Internal Audit Service, and Chapter Bank of Russia, and internal audit standards sure by AO “Alfa-Bank” as an Issuer Bank’s methodology of recognizing a default 4.1 of Russia Regulation No 242-P dated set by the International Standards for the Pro- of Securities; and recovering retail borrowers. 16.12.2003 ‘On Organizing Internal Controls fessional Practice of Internal Auditing and the in Credit Institutions and Banking Groups’; Ethics Code of the Institute of Internal Audi- • The list of insider information According to the powers determined by the tors. The Head of the Internal Audit Depart- of AO “Alfa-Bank”; constituent and internal documents of the ——An employee (structural subdivision) des- ment is appointed, dismissed, and transferred Bank, internal control is exercised by: ignated to counteract money laundering to another post by the Chairman of the Bank’s • The Regulation on the Interaction between and terrorism financing that operates Executive Board on the basis of resolutions Subdivisions in the Disclosure of Insider • Management bodies (the General Share- in compliance with Clause 2 Article 7 adopted by the Board of Directors. The Board Information of AO “Alfa-Bank”; holders’ Meeting, the Bank’s Board of Direc- of Federal Law No 115-FZ dated 7 August of Directors approves work plans and reviews tors, the Bank’s Executive Board, and the 2001 ‘On Counteraction of Legitimization reports of the Internal Audit Department. • The Regulation on Commercial and Bank- Chairman of the Executive Board); (Laundering) of Proceeds of Crime and ing Secrets, and the Bank’s Proprietary Financing of Terrorism’; Administratively, the Internal Audit Depart- Information; • Collegial bodies established in compliance ment is subordinated to the Chairman of the with the resolutions of the Bank’s Board ——A stock market professional controller — Bank’s Executive Board, which means: alloca- • The list of information designated as com- of Directors and Executive Board; an employee designated to control com- tion of necessary funds within the approved mercial and banking secrets and the Bank’s pliance of the Bank’s professional activity budget of the Internal Audit Department; proprietary information consistent with • Heads (deputy heads) of operating divisions on the stock market with Russian stock receiving reports on the Internal Audit Depart- relevant laws. established in the Bank’s organizational market laws, normative acts of the fed- ment’s activities; administration of the Inter- structure in compliance with the resolutions eral executive authority in the area of the nal Audit Department’s processes.

84 Alfa-Bank. Annual Report 2018 85 CODE GOVERNANCE CORPORATE OF THE GUIDELINES AND PRINCIPLES THE WITH COMPLIANCE BANK’S ON THE (REPORT) INFORMATION The Bank discloses information on the website The Bank’s management bodies ensure its https://alfabank.ru, and the webpage provided shareholders’ participation in decision-making by a disseminator of stock market information, on significant corporate actions in accordance with Russian Law and the Bank Charter. http://www.e-disclosure.ru/portal/company. aspx?id=1389. The Bank has created a system of interaction between its subdivisions in significant corpo- The Bank discloses information about risks rate actions. The Bank’s subdivisions do their of AO “Alfa-Bank” Group in compliance with best to ensure compliance with the transaction Federal Law No 395-1 dated 02.12.1990 ‘On procedure and duly present transactions for Banks and Banking’, Bank of Russia Ordinance approval by relevant management bodies of the No 4481-U dated 07.08.2017 ‘On the Proce- Bank. dure and Time for Disclosing Information about Accepted Risks, Risk Assessment Procedures, Information on any significant corporate Risk and Capital Management, and Financial actions performed in the course of the Bank’s Instruments of Bank Group Equity Capital operations is disclosed as prescribed by Rus- by Parent Credit Institutions of Bank Groups’ sian law. and AO “Alfa-Bank” Group’s Regulation on the Consolidated Disclosure of Risk Information. Control over compliance with procedures in making decisions on significant corpo- The Bank provides information and documents rate actions is exercised by the Bank’s Audit at the request of shareholders on equal and Committee. unhindered access principles. The Bank’s Internal Audit Service, when assessing the efficiency of the internal control system, may hold sample audits of compli- Significant Corporate ance with the procedures for decision-making Actions on significant corporate actions.

In compliance with the Corporate Governance Code, the Bank primarily views the following actions as significant corporate actions:

• Bank reorganization;

• Changes to (increase or decrease in) the Bank’s share capital;

• Essential amendments to the Bank Charter;

• Major transactions;

• Listing and delisting of the Bank’s shares.

Separation of power between the Bank’s management bodies in decision-making on significant corporate actions is a key element of the corporate governance system aimed at protecting the lawful interests and rights of the Bank’s shareholders and security of the Bank’s assets.

86 Alfa-Bank. Annual Report 2018 Partners Alfa Capital

Alfa Capital Managing Alfa Capital Brief • Alfa Capital ranks first in individual trust Awards Won in 2018 management: 241.7 billion rubles managed Investment Portfolios as of December 31, 2018; • No 1 in the Forbes rating of best banks and • Alfa Capital has been the leader of Russia’s managing companies in the “best Russian of Broad Range of Clients asset management market for over two • Alfa Capital was named the “most effective wealth management company” category; decades; management company” in the 2018 rating Alfa Capital is a major Russian asset man- of management companies by the publishing • Spear’s award laureate in the categories agement company focused on individual trust • More than 343.9-billion-ruble assets man- house Kommersant; of “best management company,” “best management of funds of private and institu- aged as of December 31, 2018; investment consultant” (Andrei Babiyan), tional investors (including strategic manage- • In 2018, Alfa Capital launched Russia’s first and “industry legend” (Andrei Kosogov); ment of individual and mutual funds). • Alfa Capital is the first management com- currency mutual fund, “Technologies 100.” pany in Russia to sell its products online; • Alfa Capital CEO Irina Krivosheyeva was The company has over 1.1 million private inves- ranked as one of the Top-2 management tors. As of December 31, 2018, Alfa Capital • The Russian rating agency Expert RA lists company CEOs in the Top-1000 of Russian has managed 343.9-billion-ruble assets, 88% Alfa Capital amongst the Top-7 manage- managers; of them contributed by private investors, which ment companies by total funds under man- made Alfa Capital the leader amongst non-fi- agement; it ranks first in the market by pri- • Won the Stock Market Elite award in two nancial entities by that parameter. Alfa Capital vate funds under trust management and nominations as “the best management is the first management company in Russia second in the market by mutual funds under company for private investors” and “the to sell its products online. management; best wealth management company” (Andrei Babiyan, Alfa Capital Wealth Director). The Russian rating agency Expert RA assigned • A team of highly skilled specialists with the highest management company rating A++ years of experience in Russian and foreign, to Alfa Capital to attest to the exclusive level including emerging, markets; of its reliability and service quality. • Alfa Capital is rated as А++ (exception- In 2018, Alfa Capital topped the Forbes rat- ally high/the highest level of reliability and ing of best banks and management companies service quality) by the Russian rating agency in the “best Russian wealth management com- Expert RA; pany” category and won the Spear’s award in the “best management company” category. • Alfa Capital is one of the Top-7 managing Alfa Capital CEO Irina Krivosheyeva was ranked companies, ranking second by 51.4-billion-ru- as one of the Top-2 management company ble private and mutual funds under manage- CEOs in the Top-1000 of Russian managers. ment as of December 31, 2018, and posts the Also in 2018, Alfa Capital won the Stock Mar- highest growth of managed assets; ket Elite award in two nominations as “the best management company for private investors” • Alfa Capital has 1.16 million private and “the best wealth management company.” investors;

88 Alfa-Bank. Annual Report 2018 89 CAPITAL ALFA PARTNERS. AlfaStrakhovanie Group

AlfaStrakhovanie Group (The Group) is a major Products category “Best Insurance Company of the AlfaStrakhovanie’s biggest clients and part- Russian insurance group with a universal Year.” AlfaStrakhovanie also topped the peo- ners are: Coca-Cola, Danone, Henkel Rus, service portfolio that includes comprehensive AlfaStrakhovanie cooperates with enterprises ple’s rating of the Insurance News Agency. Hyundai, Aeroflot, Metro Cash & Carry, Yoko- programs of business interests’ protection and and organizations of various scales and sectors hama, X5 Retail Group, Rossiya Airline, Yamal a broad range of retail insurance products. The and provides over 100 insurance programs, In 2018, the company again won the TripAdvi- Airlines, Avilon, Alfa-Bank, the Domodedovo Group comprises AO AlfaStrakhovanie, LLC including life and accident insurance. Corpo- sor Travelers’ Choice Award in the “Best Travel Airport, Bashneft, Volgotanker, Eurosib, AlfaStrakhovanie Life, LLC AlfaStrakhovanie rate clients are offered individual insurance Insurer” category and Global Brand Awards VTB24, Euroset, Reshetnev Information Sat- OMS, and LLC Medicine AlfaStrakhovanie. The plans based on the specifics of their activity. 2018 in the “Best Russian Insurance Brand” ellite Systems, Komsomolskaya Pravda, Mag- companies are listed as systemically significant Retail clients of the Group are offered a broad category. nitogorsk Metallurgical Plant, Vnukovo Inter- insurers by the Russian Central Bank. range of motor insurance, property insurance, national Airport, Metalloinvest, Norilsk Nickel, and travel insurance products. SIBUR, Sodexo Eurasia, Svyaznoi, Oktritie, the AlfaStrakhovanie is the second largest insur- Partners Energia Rocket and Space Corporation, Raif- ance group in Russia (including mandatory AlfaStrakhovanie is an indisputable leader feisenbank, Rosselkhozbank, RusHydro, the health insurance) and the top private insurance of online insurance; its market share nears State Air Traffic Control Corporation, Space The Group has long-standing business rela- group of the country, according to the mag- 25%. Premiums collected by the company Communication, Uralsib, MRSK Holding, Enel tions with major global reinsurance companies azine Forbes. In 2018, the Group controlled in that sector neared 20 billion rubles in 2018. OGK-5, Energostroy, Eon Russia, Unicredit, (Munich Re, Swiss Re, Hannover Re, Gen Re, 10.1% of the market and posted premium The Group presented the first mobile applica- the Roscosmos state corporation, Aeromar, Partner Re, SCOR, Lloyd’s of London), thanks collection of over 346 billion rubles (159 billion tion, AlfaStrakhovanie Mobile, on the market Pulkovo III, Royal Flight, Pobeda Airline, the to which it rapidly and reliably reinsures practi- rubles without mandatory health insurance). in 2015. It could be used to buy a policy, make Sukhoi Holding, the Progress Rocket and Space cally any risk on Russian and foreign markets. an appointment with a doctor, settle a claim, Center, Nordwind Airline, Saratov Airlines, The Group controls 9.8% of the mandatory and use telemedicine, telematics, and other Ural Airlines, Beletiks.ru, Utair, OZON.Travel, health insurance market. AlfaStrakhovanie unique services. More than 3.5 million people Agent.ru, Anywayanyday, OneTwoTrip, Tutu.ru, OMS ranks fourth amongst mandatory health opened their accounts in the mobile application Clients VisaToHome, Svyaznoi Travel, and others. insurers. and on the company’s website in 2018. Since day one, AlfaStrakhovanie has been The Group has over 29 million retail clients developing relations with clients on the princi- Social Activity and Support (including mandatory health insurance) and Awards and Prizes ples of equal partnership and mutually advan- 82,000 corporate clients. It has 270 branches tageous cooperation. The main clients of the for Social Projects and offices across the country. Group are leading Russian banks, big ship AlfaStrakhovanie Group executives have been owners and transportation companies, energy, AlfaStrakhovanie Group is a member of the on the Top 1000 Russian Managers list pre- Reliability and financial stability of AlfaStra- metallurgy, and machine building plants, offices following associations: pared by the Russian Managers Association khovanie are certified by ratings of leading of leading foreign companies, civil and state and the Publishing House Kommersant for over international and Russian rating agencies: organizations and institutions, and individual • All-Russian Insurance Association (ARIA); 13 years in a row. ВВ by Fitch Ratings and ruАA+ by Expert RA. partners. AlfaStrakhovanie Group protects over 29 million people (including mandatory • Russian Association of Motor Insurers In 2018, the company won the Bank of the Year The Group’s equity exceeds 28 billion rubles. Its health insurance) and 83,000 enterprises (RAMI); Award of the Internet portal Banki.ru in the authorized capital stands at 7.5 billion rubles. across the country.

90 Alfa-Bank. Annual Report 2018 91 GROUP ALFASTRAKHOVANIE PARTNERS. • Russian Association of Aviation and Space of Moscow (CCI of Moscow); Insurers (RAASI); • Union of Marine Insurers (UMI). • National Union of Liability Insurers (NULI); AlfaStrakhovanie has been sponsoring the • National Association of Agricultural Galafest family festival for three years. The Insurers (NAAI); organizer is the Galchonok charity, which assists children with central nervous system • Russian Managers Association (RMA); disorders. The festival’s mission is to help the social adaptation of special-needs children. • Russian Union of Travel Industry (RUTI); The company also has a long-standing cooper- • Russian Association of Ecological Insurers ation with the Life Line Fund, saving children (RAEI); with severe medical conditions and annually supporting the Fund’s initiatives, including • Russian Grain Union (RGU); fund-raisers “Somebody’s Life is No Small Thing,” “Celebration of Life,” and “Red Nose — • Association of International Motor Trans- Kind Heart”, and Charity Marathon 5275. port (AIMT);

• Chamber of Commerce and Industry of the Russian Federation (CCI of Russia);

• Chamber of Commerce and Industry

92 Alfa-Bank. Annual Report 2018 to provide a basis for our opinion. The risk performance of the Group audit. We remain of not detecting a material misstatement solely responsible for our audit opinion. Financial resulting from fraud is higher than for one resulting from error, as fraud may involve We communicate with those charged with gov- collusion, forgery, intentional omissions, ernance regarding, among other matters, the Statements misrepresentations, or the override of inter- planned scope and timing of the audit and sig- Extracts from the Auditor`s Report nal control. nificant audit findings, including any significant deficiencies in internal control that we identify To the Shareholders and the Board of Directors of ABH Financial Limited • Obtain an understanding of internal con- during our audit. trol relevant to the audit in order to design audit procedures that are appropriate in the We also provide those charged with governance Our opinion circumstances, but not for the purpose with a statement that we have complied with of expressing an opinion on the effectiveness relevant ethical requirements regarding inde- In our opinion, the consolidated financial statements present fairly, in all material of the internal control of the Group. pendence, and communicate with them all rela- respects, the consolidated financial position of ABH Financial Limited (the “Company”) tionships and other matters that may reason- and its subsidiaries (the “Group”) as at 31 December 2018, and its consolidated financial • Evaluate the appropriateness of account- ably be thought to bear on our independence, performance and its consolidated cash flows for the year then ended in accordance with ing policies used and the reasonableness and where applicable, related safeguards. International Financial Reporting Standards (“IFRS”). of accounting estimates and related disclosures made by management. From the matters communicated with those Responsibilities Auditor’s responsibilities charged with governance, we determine those • Conclude on the appropriateness of man- matters that were of most significance in the of management and for the audit agement’s use of the going concern basis audit of the consolidated financial statements those charged with of the consolidated of accounting and, based on the audit evi- of the current period and are therefore the dence obtained, whether a material uncer- key audit matters. We describe these matters governance for the financial statements tainty exists related to events or conditions in our auditor’s report unless law or regulation consolidated financial that may cast significant doubt on ability precludes public disclosure about the matter Our objectives are to obtain reasonable assur- of the Group to continue as a going concern. or when, in extremely rare circumstances, statements ance about whether the consolidated financial If we conclude that a material uncertainty we determine that a matter should not be com- statements as a whole are free from material exists, we are required to draw attention municated in our report because the adverse Management is responsible for the prepara- misstatement, whether due to fraud or error, in our auditor’s report to the related dis- consequences of doing so would reasonably tion and fair presentation of the consolidated and to issue an auditor’s report that includes closures in the consolidated financial state- be expected to outweigh the public interest financial statements in accordance with IFRS our opinion. Reasonable assurance is a high ments or, if such disclosures are inadequate, benefits of such communication. and for such internal control as management level of assurance, but is not a guarantee that to modify our opinion. Our conclusions are determines is necessary to enable the prepara- an audit conducted in accordance with ISAs will based on the audit evidence obtained up to The certified auditor responsible for the audit tion of consolidated financial statements that always detect a material misstatement when the date of our auditor’s report. However, resulting in this independent auditor’s report are free from material misstatement, whether it exists. Misstatements can arise from fraud future events or conditions may cause is Natalia Mileshkina. due to fraud or error. or error and are considered material if, indi- the Group to cease to continue as a going vidually or in the aggregate, they could rea- concern. In preparing the consolidated financial sonably be expected to influence the economic statements, management is responsible for decisions of users taken on the basis of these • Evaluate the overall presentation, structure 25 February 2019 assessing the ability of the Group to continue consolidated financial statements. and content of the consolidated financial Moscow, Russian Federation as a going concern, disclosing, as applicable, statements, including the disclosures, and matters related to going concern and using As part of an audit in accordance with ISAs, whether the consolidated financial state- N.A. Mileshkina, certified auditor the going concern basis of accounting unless we exercise professional judgment and main- ments represent the underlying transac- (certificate number 01-000197) management either intends to liquidate the tain professional scepticism throughout the tions and events in a manner that achieves AO PricewaterhouseCoopers Audit Group or to cease operations, or has no realis- audit. We also: fair presentation. tic alternative but to do so. • Identify and assess the risks of material • Obtain sufficient appropriate audit evidence Those charged with governance are responsible misstatement of the consolidated financial regarding the financial information of the for overseeing the financial reporting process statements, whether due to fraud or error, entities or business activities within the of the Group. design and perform audit procedures Group to express an opinion on the consoli- responsive to those risks, and obtain audit dated financial statements. We are respon- evidence that is sufficient and appropriate sible for the direction, supervision and

94 Alfa-Bank. Annual Report 2018 95 REPORT AUDITOR’S INDEPENDENT ABH Financial Limited Consolidated ABH Financial Limited Consolidated Statement of Profit or Loss and Other Statement of Financial Position Comprehensive Income In millions of US Dollars Note 2018 2017 Interest income calculated using the effective interest method 25 3 415 3 225 In millions of US Dollars Note 31 December 2018 31 December 2017 Other similar income 25 56 - ASSETS Interest expense 25 (1 460) (1 486) Cash and cash equivalents 7 4 333 5 114 Expenses directly attributable to deposit insurance (91) (62) Mandatory cash balances with central banks 336 327 Net margin 1 920 1 677 Trading securities 8 - 1 201 Net credit loss allowance charge 10 (261) (10) Repurchase receivables relating to trading securities 8 - 191 Net margin after credit loss allowance 1 659 1 667 Financial assets at fair value through profit or loss 8 863 - Fee and commission income 26 1 458 1 225 Repurchase receivables relating to financial assets at fair Fee and commission expense 26 (480) (379) 8 8 - value through profit or loss Gains less losses arising from trading securities (3) (19) Due from other banks 9 4 193 4 075 Gains less losses arising from interest based derivatives (4) (3) Loans and advances to customers 10 29 684 27 742 Gains less losses arising from foreign currencies 27 251 (205) Investments 11 5 822 4 374 Gains less losses arising from investments (11) (9) Repurchase receivables relating to investments 11 78 115 Gains less losses arising from acquisition of own debts 1 (1) Other financial assets 12 980 649 Gains less lossess from investment properties 17 28 Other assets 13 422 399 Loss on disposal of subsidiaries (20) (1) Premises and equipment 14 480 541 Other provisions 11,12,13,34 (3) (38) TOTAL ASSETS 47 199 44 728 Other operating income 28 5 49 Operating expenses 29 (1 236) (1 203) LIABILITIES Profit before tax 1 634 1 111 Due to other banks 15 1 872 2 050 Income tax expense 30 (313) (313) Customer accounts 16 32 106 29 552 Profit for the year 1 321 798 Debt securities issued 17 3 259 3 624 Other comprehensive income: Loan from the SDIA 18 367 388 Items that may be reclassified subsequently to profit or loss: Subordinated debt 19 1 195 1 357 Investments available for sale: Other financial liabilities 21 648 858 - Fair value gains less losses 11 - (4) Other liabilities 22 339 509 - Reclassification adjustments for losses included in profit or loss 11 - 9 Deferred tax liability 30 215 8 Debt investments at fair value through other comprehensive income: TOTAL LIABILITIES 40 001 38 346 - Fair value gains less losses during the period 11 (14) - - Reclassification adjustments for losses included in profit or loss 11 6 - EQUITY Effect of translation of the financial statements of foreign operations (1 497) 329 Share capital 23 1 265 1 265 Net change in hedge of net investment in foreign operations 38 1 106 (269) Perpetual loan participation notes 24 943 695 Income tax on items that may be reclassified to profit or loss 30 (219) 53 Fair value reserve for investments available for sale - 10 Items that will not be reclassified to profit or loss: Fair value reserve for investments at fair value through Revaluation of premises 14 (7) (14) 5 - other comprehensive income Income tax on items that will not be reclassified to profit or loss 30 1 (4) Revaluation reserve for premises 49 55 Other comprehensive (loss)/income for the year (624) 100 Cumulative translation reserve (1 764) (1 167) Total comprehensive income for the year 697 898 Retained earnings 6 656 5 457 Profit attributable to: Net assets attributable to the Company’s owners 7 154 6 315 The Company’s owners 1 325 796 Non-controlling interests 44 67 Non-controlling interests (4) 2 TOTAL EQUITY 7 198 6 382 Profit for the year 1 321 798 TOTAL LIABILITIES AND EQUITY 47 199 44 728 Total comprehensive income attributable to: The Company’s owners 701 896 These consolidated financial statements were approved for issue by the Board of Directors of ABH Financial Limited on 25 Feb- Non-controlling interests (4) 2 ruary 2019 and any further changes require approval of this body. Total comprehensive income for the year 697 898

96 Alfa-Bank. Annual Report 2018 97 STATEMENTS FINANCIAL ABH Financial Limited Consolidated Statement of Changes in Equity

Attributable to the Company’s owners Perpetual loan Fair value reserve Revalua-tion Cumula-tive Non-control-ling In millions of US Dollars Share capital Fair value reserve for Total equity participation notes (Note for investments reserve for transla-tion Retained earnings Total interests (Note 23) investments AFS 24) at FVOCI premises reserve

Balance as at 1 January 2017 1 265 701 6 - 69 (1 275) 4 948 5 714 20 5 734

Profit ------796 796 2 798 Other comprehensive income - - 4 - (11) 107 - 100 - 100

Total comprehensive income - - 4 - (11) 107 796 896 2 898

Realised revaluation reserve - - - - (3) - 3 - - - Discretionary interest payments and redemptions of perpetual - (6) - - - - (43) (49) - (49) loan participation notes (Note 24) Distribution to shareholders (Note 23) ------(250) (250) - (250) Changes of non-controlling interests - - - - - 1 3 4 45 49

Balance as at 31 December 2017 1 265 695 10 - 55 (1 167) 5 457 6 315 67 6 382

Impact of adopting IFRS 9 at 1 January 2018 (Note 5) - - (10) 11 - - (92) (91) - (91)

Restated balance as at 1 January 2018 1 265 695 - 11 55 (1 167) 5 365 6 224 67 6 291

Profit ------1 325 1 325 (4) 1 321 Other comprehensive income - - - (6) (6) (612) - (624) - (624)

Total comprehensive income - - - (6) (6) (612) 1 325 701 (4) 697

Contribution from noteholders (Note 24) - 499 - - - - - 499 - 499 Discretionary interest payments and redemptions of perpetual - (251) - - - - (43) (294) - (294) loan participation notes (Note 24) Disposal of subsidiary - - - - - 15 - 15 5 20 Changes of non-controlling interests ------9 9 (24) (15)

Balance as at 31 December 2018 1 265 943 - 5 49 (1 764) 6 656 7 154 44 7 198

98 Alfa-Bank. Annual Report 2018 99 STATEMENTS FINANCIAL ABH Financial Limited Consolidated Statement of Cash Flows

In millions of US Dollars Note 2018 2017 In millions of US Dollars Note 2018 2017 Cash flows from operating activities Interest received 3 479 3 211 Cash flows from financing activities Interest paid, other than on debt securities issued, loan from the SDIA (1 066) (1 040) Disposal of non-controlling intrest in subsidiaries - 17 and subordinated debt Proceeds from debt securities issued 1 310 1 769 Expense directly attributable to deposit insurance paid (91) (62) Repayment of debt securities issued (1 315) (1 841) Fees and commissions received 1 458 1 220 Interest paid on debt securities issued (244) (284) Fees and commissions paid (475) (378) Repayment of loan from the SDIA (3) - Net loss from financial assets at FVTPL (20) - Interest paid on loan from the SDIA (4) (5) Net income received from trading securities - 106 Repayment of subordinated debt (59) (201) Net income received from trading in foreign currencies 180 (195) Interest paid on subordinated debt (103) (104) Net income received from interest based derivatives (11) 14 Proceeds from perpetual loan participation notes 499 - Other operating income received 19 45 Repayment of perpetual loan participation notes (235) - Staff costs paid (707) (680) Interest paid on perpetual loan participation notes (74) (59) Other operating expenses paid (406) (328)

Income tax paid (355) (213) Net cash used in financing activities (228) (708)

Cash flows from operating activities before changes in operating 2 005 1 700 assets and liabilities Net (decrease)/increase in cash and cash equivalents (285) 466 Cash and cash equivalents at the beginning of the year 7 5 114 4 344 Effect of exchange rate changes on cash and cash equivalents (496) 304 Changes in operating assets and liabilities

Net change in mandatory cash balances with central banks (66) (49) Cash and cash equivalents as at the end of the year 7 4 333 5 114 Net change in financial assets at FVTPL and repurchase receivables 636 - Net change in trading securities and repurchase receivables - 397 Net change in due from other banks (621) (1 012) Net change in loans and advances to customers (6 198) (4 487) Net change in other financial assets and other assets (51) 358 Net change in due to other banks - (1 470) Net change in customer accounts 6 361 6 753 Net change in other financial liabilities and other liabilities (80) (498)

Net cash from operating activities 1 986 1 692

Cash flows from investing activities Acquisition of investments at FVOCI (11 615) - Proceeds from disposal and redemption of investments at FVOCI 9 797 - Acquisition of investments AFS - (1 435) Proceeds from disposal and redemption of investments AFS - 1 573 Acquisition of investments at FVTPL (6) (8) Disposal of investments at FVTPL - 8 Acquisition of investments at AC (658) - Proceeds from redemption of investments at AC 629 - Acquisition of investments HTM - (1 200) Proceeds from redemption of investments HTM - 658 Acquisition of premises, equipment and intangible assets (191) (116) Proceeds from disposal of premises and equipment 1 2

Net cash used in investing activities (2 043) (518)

100 Alfa-Bank. Annual Report 2018 101 STATEMENTS FINANCIAL Corporate Directory

Central Bank’s General License No. 1326 dated January 16, 2015

Central Office Trade Finance Department 27, Kalanchevskaya Str., Managing Director Moscow, 107078 Dina Merkulova Tel: + 7 495 620 9191, Tel: + 7 495 792 5840 + 7 495 974 2515 Telex: 412089 ALFARU Macroeconomic Analysis Center S.W.I.F.T.: ALFA RU MM Bank’s Chief Economist — Macroeconomic E-mail: [email protected] Analysis Center Head www.alfabank.ru, www.alfabank.com Natalia Orlova Tel: + 7 495 795 36 77 Corporate and Investment Banking Director Marketing Department Andrew Chulack Marketing Director Tel: +7 495 745 7896 Alexey Giyazov Tel: +7 495 783 53 18 Retail Business Director Information Policy and Public Relations Michael Tuch Directorate Tel: +7 (495) 974-2515 Director Darya Kozyreva Micro & Small Business Tel: + 7 499 923 6697 Director E-mail: [email protected] Denis Osin Tel: +7 495 783 5318

Wealth Management Department (Alfa Private) Department Head Alina Nazarova Tel: + 7 495 974 2515

Investor Relations Head of Investor Relations Anna Kaminskaya Tel: + 7 495 795 3641 E-mail: [email protected]