Annual report 2009 Contents Mission and values 3 Statement of the Chairman of the Supervisory Council 4 Statement of the President and Chairman 6 1. Financial highlights 8 2. VTB’s market position 10 3. The economy and financial sector 12 4. Management report 15 4.1. Key events in 2009 15 4.2. VTB Group strategy 16 4.3. Review of operating performance 17 4.3.1. Corporate banking 17 4.3.2. Retail banking 21 4.3.3. Investment banking 28 4.3.4. Other businesses 32 4.4. Review of financial performance 34 4.5. Risk management 40 5. Corporate governance 50 5.1. Overview of the corporate governance system 50 5.2. The General Shareholders Meeting of JSC VTB Bank 51 5.3. The Supervisory Council of JSC VTB Bank 52 5.4. The Management Board of JSC VTB Bank 59 5.5. The President and Chairman of JSC VTB Bank 64 5.6. Remuneration of the members of the Supervisory Council and the Management Board 64 5.7. Internal control and audit 64 5.8. Shareholder and investor relations 67 5.9. Management of VTB Group 68 6. Corporate social responsibility 72 6.1. Personnel 72 6.2. Social programmes 74 7. Management responsibility statement 77 8. Сonsolidated financial statements in accordance with IFRS 78 9. Transactions of JSC VTB Bank 176 10. Other Group information 177 10.1. Details and correspondent accounts of JSC VTB Bank 177 10.2. Licences 178 10.3. Contact information 179 11. Shareholders’ information 184 The Annual Report is based on the data as at 31 March 2010, available for JSC VTB Bank and its subsidiaries at the time the report was written. Mission and values Mission To provide world-class financial services for a sustainably better future for our customers, our shareholders and our society. Values Customer confidence Our customers’ confidence is our most important value. Reliability Our prominent position in financial markets, our international expertise and our global scale guarantee our strength and reliability. Transparency Our business is open and transparent with a focus on partnership and cooperation. Versatility Our expertise in different financial areas allows us to offer all customers comprehensive and sophisticated solutions. Team Spirit Our dedicated team of professionals has the advantage of the synergy of knowledge, potential, energy and creative insight of each team member. Vision VTB will be a champion in all our target markets. Identity VTB Group is the leading Russian financial institution with global presence and scale. 3 Statement of the Chairman of the Supervisory Council Dear shareholders, clients and partners, In looking back at 2009, we are pleased that within the overall context of the global economic crisis Russia managed to avoid the worst fears of the market. The domestic economy largely overcame the issues posed by the crisis and even entered the first stage of economic recovery. The current state of the national banking sector can also be considered in a positive light as, in general, it has already achieved stability. The measures undertaken by the Government and the Bank of Russia to support banks in the second half of 2008 and throughout 2009 generally overcame the lack of liquidity in the market and maintained the stability of the financial system by meeting the credit supply needs of the real economy. Furthermore, by the end of the year, it was evident that the large-scale crisis of bad debt, which had been predicted by some experts, had also been avoided. At the same time, there remain major problems for our financial sector, as the limited diversification of resources and the low availability of loans to companies and individuals is still an issue in the market. Early solutions to these problems will be the key factors in putting the country back on a path to further economic growth. I am pleased to note that VTB passed through the crisis steadfastly. The Group not only maintained financial stability, but also continued to develop its main business areas. Despite significantly worsening economic conditions, VTB managed to increase its market share in both its corporate and retail businesses. At the same time, VTB Group took the leading position in the Russian market for investment banking services. This positive outcome has been driven by timely decision-making and proper prioritisation. At the end of 2008, the Supervisory Council approved the core guidelines for the Bank’s activities during the period of financial instability and, in the reporting period, the VTB management team concentrated their efforts to implement anti-crisis measures in a most efficient manner. In analysing the 2009 results, it is important to note the speed with which the Bank’s Supervisory Council and its executive management interacted. It was these prompt and effective decisions at the operational level of governance that enabled the Bank to maintain strong positions in its operating markets even at the most critical stages of the crisis. In 2009, VTB Bank issued and placed an additional RUB 180 billion of ordinary shares. The Bank required this secondary placement in order to increase its capital and lending volumes to the real sector of the economy. The funds raised were used to accumulate assets in the Bank’s corporate and retail businesses. Most of the placed VTB shares were purchased by the State and this acquisition was a profitable investment of budgetary resources by the State as VTB’s share price had risen by 45% since placement by the end of 2009. While fulfilling its anti-crisis objectives, VTB remained focused on further development of its corporate governance system in accordance with international best practice. In 2009, two new independent directors became members of the Supervisory Council. This step is intended to enhance the transparency of Council’s decisions and to enable better responsiveness to the interests of shareholders. The results of the anti-crisis programme encouraged the Supervisory Council to set a new objective to prepare a strategy for the Bank’s development from 2010 to 2013, taking into account the new conditions created by the external environment and the Bank’s business priorities. The main objective of the new strategy is to increase VTB shareholder value and the efficiency of all the Group’s business areas. It is expected that the new strategy will be adopted in the middle of 2010. 4 During the reporting period, the Group introduced a number of serious limitations with regard to the remuneration and compensation of the management team. Nevertheless, we consider that the creation of an effective incentive scheme for managers is one of the key factors contributing to VTB’s dynamic development and its growth in shareholder value. That is why, in 2009, the Staff & Remuneration Committee, which is responsible for developing a strategy for VTB in this area, was formed under the auspices of the Supervisory Council. The Supervisory Council, together with the Committee, intends to develop an employee long-term motivation plan for senior managers of the Group whose activities directly influence the stock market value. The purpose of the programme is to strictly align the remuneration of the management team with specific financial results and attaining targets for the growth in shareholder value. 2010 is expected to be a turning point for VTB Bank. We must move forward from successfully implementing the anti-crisis programme to realising a long-term strategy of maximising the Bank’s value. Our shareholders are anticipating that we can successfully accomplish this objective and I am confident that VTB has the potential to achieve its new strategic goals. I would like to extend our gratitude to the Bank’s shareholders and partners for their support during the crisis, and to our clients for their loyalty and trust. Deputy Prime Minister of the Government of the Russian Federation – Finance Minister of the Russian Federation, Chairman of the Supervisory Council of JSC VTB Bank Alexei L. Kudrin 5 Statement of the President and Chairman Dear shareholders, clients and partners, The global financial crisis, which was fully manifested in Russia during 2009, presented a serious challenge for VTB Group. Nevertheless, we managed to minimise its impact and produce significant achievements across all of our business areas. VTB made considerable progress in the development of its retail bank, VTB24, and its investment bank, VTB Capital, both of which are already contributing significantly to revenue and operating profits of the Group. Due to our secure funding structure, we also succeeded in expanding our customer base by strengthening relationships with corporate clients during the year. In 2009, VTB retained its leading positions in corporate banking and increased its lending market share in Russia from 12.7% at the end of 2008 to 13.0%. The first half of 2009 was characterised by a marked economic slowdown which inevitably impacted the ability of many corporate customers to meet their obligations. The priority in this climate has been to rigidly monitor the loan book and stay close to customers. This has enabled VTB to identify potential problems at an early stage and work with customers to identify strategies to support the business while protecting the interests of the Bank and shareholders. As one of the few banks open for business throughout the crisis, VTB was able to win major customers in key sectors of the economy. The bank’s readiness, despite a conservative approach to risk, to engage constructively with businesses and support them when other sources of finance were unavailable, was appreciated by both existing clients and those who, as a result of the crisis, have become clients for the first time. The strategic role that VTB played in refinancing industry leaders in Russia has opened up new perspectives for both the corporate and investment banking going forward.