VTB 2011 ANNUAL REPORT JSC VTB Bank ANNUAL REPORT 2011 1 VTB 2011 ANNUAL REPORT CONTENTS Mission and values Statement of the Chairman of the Supervisory Council Statement of the President and Chairman of the Management Board 1. Financial highlights 2. VTB’s market position 3. The economy and banking sector 4. Management report 4.1. Key events in 2011 4.2. VTB Group strategy 4.3. Review of operating performance 4.3.1. Corporate and investment banking 4.3.2. Retail banking 4.3.3. Other businesses 4.3.4. Business outside of Russia 4.4. Review of financial performance 4.5. Risk management 5. Corporate governance 5.1. Overview of the corporate governance system 5.2. Development of the corporate governance system in 2011 5.3. The General Shareholders Meeting of JSC VTB Bank 5.4. The Supervisory Council of JSC VTB Bank 5.5. The Management Board of JSC VTB Bank 5.6. Remuneration of the members of the Supervisory Council and the Management Board of JSC VTB Bank 5.7. Internal control and audit 5.8. Relations with individual shareholders 5.9. Relations with institutional investors 5.10. Management of VTB Group 6. Corporate social responsibility 6.1. Personnel 6.2. Responsible resource management 6.3. Social programmes 7. Management responsibility statement 8. Summary consolidated financial statements in accordance with IFRS 9. Summary financial statements in accordance with RAS 10. Transactions of JSC VTB Bank 11. Other Group information 11.1. Details of JSC VTB Bank 11.2. Licences of JSC VTB Bank 11.3. Contact information 12. Shareholders’ information The Annual Report is based on the data as of 31 March 2012 available to JSC VTB Bank and its subsidiaries at the time the report was written. 2 VTB 2011 ANNUAL REPORT MISSION AND VALUES Who we are VTB Group is a leading Russian financial institution with a strong presence in key international markets. Our vision VTB Group aims to replicate its successes in the domestic market on a global scale, becoming a premiere player in all of our priority markets. Our mission To provide world-class financial products and services that help to create a prosperous and sustainable future for our customers, stakeholders and society. Our values Trust Gaining and retaining the trust of our customers is VTB Group’s most important value. Reliability VTB Group’s long-term strength is reinforced by leading positions in the financial markets where we operate and our ability to provide local expertise on a global scale. Transparency Our business is open and transparent, and all of our key stakeholders cooperate closely in order to deliver maximum value and visibility. Versatility Our wealth of expertise across a broad range of financial products and services ensures that we offer all of our customers the most comprehensive, flexible and sophisticated solutions that suit their individual needs. Solidarity Knowledge sharing and open communication are fundamental to our team ethos and strengthen our team spirit. While our lines of business are diverse, we are all pulling in the same direction, harnessing the creative insight and potential of each individual member of our team. 3 VTB 2011 ANNUAL REPORT STATEMENT OF THE CHAIRMAN OF THE SUPERVISORY COUNCIL Dear Shareholders, Clients and Partners, I am pleased to present to you the first Annual Report of VTB Group since my appointment as Chairman of the Supervisory Council. Overall 2011 was a positive year, during which a number of milestone events occurred that significantly impacted our results in the reporting year, and which will to a large extent determine the Group’s activities in the short term. The macroeconomic environment in which VTB operated in 2011 was moderately favourable. The Russian economy has continued its recovery at a steady pace, and had returned to its pre-crisis level by the end of the year. Real GDP demonstrated dynamic growth of 4.3%, which corresponds to the 2010 level. The key growth drivers for the positive economic trends during the year were domestic consumption and fixed capital investments. The banking sector also demonstrated strong growth, with aggregate assets increasing by 23% year-on-year. The improvement in the economy and record low levels of inflation fuelled an increased demand for loans from corporate and retail clients. The state-owned banks were the most active during 2011, thanks to their market-leading positions, access to funding at reasonable cost and sensible approach to risk management. These factors enabled VTB Group to achieve impressive organic growth in all its business areas, strengthened by the acquisition of controlling stakes in TransCreditBank and the Bank of Moscow. In 2011, VTB acquired a 94.84% stake in the Bank of Moscow. As a result, we gained access to more than 100,000 new corporate clients and over six million active retail customers. The acquisition also increased the number of branches and sales offices we have in the Moscow region by two and a half times. We intend to develop the Bank of Moscow as a separate universal commercial bank within VTB Group, focusing particularly on the development of business in Moscow and the Moscow region, maintaining and further strengthening our partnership with the Moscow City Government, and enhancing the bank’s expertise in the small and medium-sized businesses segment. At the end of 2010, we acquired a 43.2% stake in TransCreditBank. TransCreditBank was a captive bank within the Russian railway sector providing services to JSC Russian Railways, its subsidiaries and employees. We increased our stake in TransCreditBank to 77.9% by the end of the first quarter of 2012, following an additional share issue and in accordance with our sale and purchase agreement with JSC Russian Railways. In August 2011, the Management Committee of VTB Group approved a development strategy for TransCreditBank, including a plan for its integration. We intend to transfer TransCreditBank’s corporate and investment business to the relevant VTB business units by the end of the second quarter of 2013, and to complete its legal merger with VTB24 by the end of 2013. We believe that the acquisitions of the Bank of Moscow and TransCreditBank are in line with the long-term strategic objectives of VTB, and that they will facilitate the further growth of the Group’s retail and corporate banking businesses. 2011 marked an important event that had a positive impact on the investment climate in Russia, and is directly related to VTB Bank. According to privatisation plans that had previously been announced, the Russian Government sold part of its shareholding, i.e. 10% of the share capital of VTB Bank, on the open market. The sale took place in February 2011 and generated a high level of interest within the investment community, which enabled us to create a pool of investors from the most reputable international investment funds and companies. The Group’s management sees great opportunities for long-term strategic partnerships with these institutions. Having professional institutional investors among our shareholders was an additional incentive to develop VTB’s corporate governance system further. We strive to comply with the international best 4 VTB 2011 ANNUAL REPORT practices of corporate transparency and to meet high standards of compliance. A Strategy and Corporate Governance Committee was therefore established in 2011, in order to optimise the decision-making process of the Supervisory Council on issues of strategic development. The new Committee was founded on the basis of the best Russian and international corporate governance practices. One of the most important results of the Committee’s work during the reporting year was its decision to recommend to the Supervisory Council that dividend payments for 2010-2013 should be set at between 10% and 20% of the full-year net income for the reporting years of 2010, 2011, 2012 and 2013, in accordance with VTB Group’s IFRS financial results. In March 2012, VTB took an unprecedented step to support individual shareholders. The Bank announced an offer to buy back the Bank’s shares from retail investors, who acquired VTB’s shares during the IPO in 2007. The buyback price was equal to the market value of the shares at the time of the IPO. Individual shareholders could sell shares that they held as at 1 February 2012 up to an amount not exceeding the number of shares they purchased during the IPO, and to a limit of RUB 500,000. This offer provided the opportunity to many of our retail shareholders to withdraw from the Bank’s capital without suffering financial loss. We believe that this initiative is a key element in building a solid reputation of VTB Group as a public financial institution. Overall the prospects in 2012 for the financial sector generally, and for VTB Group in particular, are positive. The gradual decrease in tension in the international financial markets, especially in Europe, and rising energy prices give confidence in the future growth of the Russian economy, business activity and consumer demand. I am confident that the strategy of efficient growth that VTB adopted in 2010 will enable us fully to realise these opportunities and to strengthen our market positions in Russia. It will also enable us to take another step towards becoming a banking group that successfully competes in the global marketplace. Chairman of the Supervisory Council of JSC VTB Bank Sergey K. Dubinin 5 VTB 2011 ANNUAL REPORT STATEMENT OF THE PRESIDENT AND CHAIRMAN OF THE MANAGEMENT BOARD Dear Shareholders, Clients and Partners, 2011 was another successful year for VTB Group. Despite the difficult situation in the global economy, VTB has demonstrated strong financial performance by increasing operational efficiency and business volumes across all of its business lines, as well as expanding its geographical footprint.