CONTENTS THE CHAIRMAN OF THE BOARD STATEMENT ......................................................................................... / 2 / THE CHAIRMAN OF THE MANAGEMENT BOARD STATEMENT ................................................................ / 4 / MISSION, VISION, VALUES ....................................................................................................................... / 6 / KEY FINANCIAL PERFORMANCE INDICATORS ......................................................................................... / 7 / LEGAL STRUCTURE AND SHAREHOLDERS .............................................................................................. / 10 / OVERVIEW OF THE RUSSIAN ECONOMY AND THE BANKING SECTOR ................................................. / 12 / STRATEGY ............................................................................................................................................... / 19 / MANAGEMENT DISCUSSION AND ANALYSIS ........................................................................................ / 22 / BUSINESS LINES ....................................................................................................................................... / 42 / Retail Banking ...................................................................................................................................... 42 Small- and Medium-Sized Business ....................................................................................................... 46 Corporate Business ............................................................................................................................... 47 Private Banking .................................................................................................................................... 49 REVIEW OF BUSINESS UNITS .................................................................................................................. / 51 / Territorial Banks ................................................................................................................................... 51 The Treasury ........................................................................................................................................ 52 CORPORATE GOVERNANCE AND MANAGEMENT ................................................................................ / 56 / INTERNAL CONTROL .............................................................................................................................. / 66 / RISK MANAGEMENT ............................................................................................................................... / 69 / COMPLIANCE CONTROL ....................................................................................................................... / 80 / INTERNAL AUDIT .................................................................................................................................... / 82 / HUMAN RESOURCES .............................................................................................................................. / 84 / CORPORATE COMMUNICATIONS ......................................................................................................... / 90 / INFORMATION TECHNOLOGIES ............................................................................................................ / 95 / CONSOLIDATED FINANCIAL STATEMENTS ............................................................................................ / 97 / CONTACT DETAILS .............................................................................................................................. / 183 / PRINCIPAL CORRESPONDENT ACCOUNTS ......................................................................................... / 184 / LICENSES .............................................................................................................................................. / 186 / NON-PROFIT INSTITUTION MEMBERSHIPS......................................................................................... / 189 / Contents / 2 / ......................................................................................................................................................................................... Annual Report 2010 / МDМ Bank THE CHAIRMAN OF THE BOARD OF DIRECTORS STATEMENT Dear Shareholders, Clients, Employees and Partners, In 2010, the Russian economy and banking system gradually recovered from effects of the global financial crisis. Despite growing optimism due to a revival in the world economy, it is generally acknowledged that global development risks remain. For Russia, these risks are heightened by abrupt changes in the foreign economic situation – which would drain capital, foster rouble exchange rate volatility and worsen economic dynamics and companies’ financial performance. The Russian economy demonstrated relatively limited growth and low investment activity in 2010. During the reporting period, there was a considerable reduction in interest rates, both for attracting funds and for providing credit that expands the pool of available loans to solvent and successful companies. However, borrowers’ post-crisis behaviour is now characterized by more prudent assessment of debt burden and servicing costs. The crisis manifested that transactional lending – aimed at rapid loan origination primarily based on formal criteria in pursuit of capturing the largest possible market share – always results in increased risks to the equity of financial institutions. In this sense, the Bank’s shift to a preference for reasonable income with a controlled risk level coincides with the interests of those borrowers who have taken a more balanced and critical approach vis-`a-vis credit organizations. Contents THE CHAIRMAN OF THE BOARD OF DIRECTORS STATEMENT .......................................................................................................................................... / 3 / In the course of decisions made in the past year, MDM term motivation fund. Instituted in 2011, this Bank’s Board of Directors addressed the challenge of program ensures that members of this Fund share enlarging the Bank’s business by developing mutually in the Bank’s earned profits. As of today, more than beneficial long-term partnerships with such prudent 500 Bank managers participate in this fund. borrowers. The Bank has also worked to ensure In 2011, MDM Bank’s management faces that its managers have developed a fundamental several challenges, from completing the transition understanding of selected core industries that to the described business model, to improving asset have sustainable development prospects, as well quality and thereby securing our target return on as providing bank managers with the necessary equity of 15%. I am confident that these tasks will expertise to adequately identify the profiles of solvent be accomplished. The gradual economic recovery and responsible clients in the retail lending sector. expected in 2011 will support the Bank’s efforts, This issue has become central in the Bank’s helping us achieve the goals that we have set approach to building its loan portfolio. Transitioning ourselves. to the new approach has required serious efforts On behalf of MDM Bank’s Board of Directors, on the part of management. Qualities that are now I would like to thank all of you for your cooperation, essential to a successful client manager include: support and trust. a personalized approach to each client, an in-depth understanding of client needs, as well as a strong ability to design and offer a set of products and services that are suitable to the clients and the Bank. In line with this choice, the Bank expresses a moderate appetite for risk and prefers stability and balanced income while shareholders expect a moderate yet stable return on equity of 5-7% over inflation, regardless of market conditions. Management’s task is to secure this level of return, maintaining a high-quality client portfolio. Kind regards, Based on a Board decision designed to promote long-term partnerships, top and senior managers, OLEG VIYUGIN as well as key officers that positively contribute to Chairman of the Board of Directors the Bank’s performance, are eligible to join a long- MDM Bank Contents / 4 / ......................................................................................................................................................................................... Annual Report 2010 / МDМ Bank THE CHAIRMAN OF THE MANAGEMENT BOARD STATEMENT 2010 will be remembered in the history of MDM Bank as the year during which we improved the quality of our service to target clients, ensured the long-term stability of the Bank’s business model, and built sustainable competitive advantages. The Bank also used the year to implement changes and projects aimed at developing a comprehensive understanding of regional and industry-specific characteristics, first of all, in the Bank’s priority ‘home’ markets and those economic sectors that are strategically important for the Bank. Despite the complicated macroeconomic background, we managed to achieve a great deal. The Bank established a decentralized management structure with a larger scope of authority and responsibility devolved to branch and client managers – our “field bankers”. This approach enables us to provide quality services to clients on an individual basis in a fast and flexible manner while at the