Arkhangelsk. page. 11: Perm. page. 43: Nizhny Novgorod 31: Ufa. page 63: Samara. page 51: page

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1 2004 annual report

2 2004 annual report Krasnodar page 23: St.Petersburg page 55: Moscow page 27: Voronezh page 15: Rostov-on-Don page 47: Samara page 51: Arkhangelsk page 11: Perm page 43: Nizhny Novgorod page 31: Ufa page 63: Ekaterinburg page 19: Chelyabinsk page 67: Omsk page 39: Novosibirsk page 35: Stavropol page 59: «RUSSIA IS NOT ONLY MOSCOW AND ST. PETERSBURG. WE SEE AND FEEL TODAY HOW THE FUTURE OF RUSSIA IS TO A GREAT EXTENT BEING BUILT IN THE REGIONS. IT IS REWARDING FOR US TO CONTRIBUTE TO A MORE BALANCED AND MORE RAPID ECO- NOMIC GROWTH IN RUSSIA WITH THE CONTINUING EXPANSION OF OUR REGIONAL NETWORK.» Ilkka Salonen President

3 Five Year Financial Highlights as per IFRS * Balance sheet items At year end, USD 000s Equity 56, , , , ,751 Due to customers 2,245,333 2,032,137 2,061,810 2,212,978 2,637,839 Due to banks 197, , , , ,721 Loans to customers (including lease receivables), net 237, , ,243 1,201,893 1,874,066 Placements with banks, net 1,633,481 1,383,659 1,084, , ,547 Investments in securities, net 349, , , , ,247 Earning assets, net 2,220,584 2,104,083 2,117,508 2,327,896 3,239,860 Total assets 2,555,961 2,466,742 2,504,849 2,808,760 3,614,721 Change year-on-year, % Equity n.a Due to customers Due to banks Loans to customers (including lease receivables), net Placements with banks, net Investments in securities, net Earning assets, net Total assets Incomes, expenses and dividends paid For the year, USD 000s Net interest income after loan impairment provisions 25,139 29,414 26,256 59, ,993 Non-interest income 41,881 78,736 61,842 87,665 86,213 Operating income 67, ,150 88, , ,206 Operating expenses -43,117-48,196-55,036-62,089-75,398 Operating profit (loss) before provisions and taxes 23,903 59,954 33,062 84, ,808 Provisions / reversal of provisions for other losses 1,304-2, ,004 Income tax -1,085-5,189-7,400-25,689-23,397 Net profit (loss) 24,122 52,365 25,062 59,465 89,407 Dividends paid (due for the previous year) ,000 15,000 10,000 Change year-on-year, percent Net interest income after loan impairment provisions Non-interest income Operating income Operating expenses Operating profit (loss) before provisions and taxes Net profit (loss) financial report Ratios, percent Return on average equity Return on average assets BIS total capital ratio Net fee income to total operating income Cost/income ratio Long term Ratings Standard and Poor's long-term credit rating B- B B+ BB- Fitch Rating's long-term rating B B+ BB- BB- *In 2001, IMB merged with Bank Austria Creditanstalt (Russia)

4 sectiontable of contents IMB headoffice building on Prechistenskaya embankment Annual Report General Information 2: Mission Statement 3: Shareholder Structure 4: Main Achievements of : Report of the Board of Directors 6: President s Report 8: Corporate Banking 10: Retail Banking 26: Financial Institutions, Custody Services, and Proprietary Trading 38: Capital Management 46: Asset and Liability Management 50: Risk Management 54: Personnel Development 62: IT Management 66: Serving The Commmunity 70: Outlook For : Report Of The Board Of Management 72: Board of Directors 76: Audit Committee 78: Credit Committee 79: Compensation Committee 80: Inspector 81: Management 82: Contact Details 84: 1 annual report

5 section general information year 2004 General Information Closed Joint-Stock Company International Moscow Bank (IMB) was established as Russia s first bank with a majority of foreign capital. The Bank was registered by the USSR State Bank on October 20, 1989, registration No 1. IMB holds General License No 1 of the Central Bank of the Russian Federation for performing operations in foreign currency, issued on November 15, 1991, updated on October 3, In 2001, IMB merged with Bank Austria Creditanstalt (Russia), previously the Russian subsidiary of Bank Austria. 2 annual report

6 sectionmission statement Mission Statement International Moscow Bank is a Russian commercial bank that seeks to provide first-class financial services to its clients for their benefit and the benefit of IMB s shareholders and employees in order to support the Russian economy. IMB strives to become one of the leading banks in Russia abiding by principles of reliability and quality of client relationships, of fairness of operations and of corporate governance. IMB seeks to build its reputation and success based on the integrity and professionalism of its employees, its loyal customers and on the strength of its owners: HVB and Nordea as its strategic shareholders and BCEN Eurobank, a subsidiary of the Central Bank of Russia, and EBRD as its other shareholders. 3 annual report

7 sectionshareholder structure year 2004 Shareholder Structure As of December 31, 2004 Shareholder Country of origin Holding, percent Bayerische Hypo-und Vereinsbank AG (HVB Group) Germany 46.0 Nordea Bank Finland plc Finland 21.7 Banque Commerciale pour l Europe du Nord (EUROBANK) France/Russia 20.0 European Bank for Reconstruction and Development (EBRD) United Kingdom (HQ) 10.2 Sberbank RF Russia 2.1 In January 2005, Sberbank completed the sale of its shares in IMB to the Bank s strategic shareholders. The shareholder structure as of January 31, 2005, is as follows: Shareholder Country of origin Holding, percent Bayerische Hypo-und Vereinsbank AG (HVB Group) Germany Nordea Bank Finland plc Finland Banque Commerciale pour l Europe du Nord (EUROBANK) France/Russia European Bank for Reconstruction and Development (EBRD) United Kingdom (HQ) annual report

8 sectionmain achievements of 2004 Main Achievements of 2004 IMB s net profit for 2004 totaled $89 million, the largest amount in IMB s 15-year history. In October 2004, IMB s Extraordinary General Shareholder Meeting approved an increase of the Bank s equity by $100 million. At the same time, IMB increased its Tier II capital by extending and increasing its subordinated borrowings, bringing them to a total of $130 million. After the completion of this round of capital increase, IMB s regulatory capital will amount to nearly $500 million and its capital adequacy ratio will be close to 17 percent. In line with its strategy, IMB opened its first regional full branches in Chelyabinsk and Rostov-on-Don, thus becoming the first large foreign-owned bank to have expanded its branch network beyond Moscow and St. Petersburg. In addition, IMB opened three new representative offices in Ufa, Novosibirsk and Omsk; and two new offices were opened in Moscow. In 2004, IMB won the «Elite Quality Recognition Award» from JP Morgan Chase Bank, New York, for the second straight year. The award is given to banks with the best level of payments automation. According to a survey by Global Custodian, the leading magazine covering the international securities services business, IMB s custody service was named among the top three Russian custodians in servicing crossborder clients. On the domestic market, IMB s custody service was named second with «Domestic Top Rating«, the highest rating available. Leasing Review, the Russian specialized industry magazine, named IMB-Leasing, IMB s leasing subsidiary, the fastest growing leasing company in Russia in and the market leader in lease financing of printing equipment in Russia. In October 2004, Fitch Ratings, the international rating agency, confirmed IMB s longterm credit rating «BB-» and upgraded IMB s individual rating from «D» to «C/D» with positive outlook; in December 2004, Standard & Poor s, the international rating agency, raised IMB s long-term credit rating from «B+» to «BB-»; this is the highest rating among privately owned banks in Russia. In December 2004, IMB joined the new Russian federal deposit insurance system. Global Finance magazine named IMB the best trade finance bank in Russia annual report Global Finance magazine named IMB the best foreign exchange bank in Russia 2005.

9 sectionreport of the board of directors year 2004 Report of the Board of Directors Peter O. Kölle Chairman of the Board of Directors Russia s dynamic development since 1999 is one of strong growth and of the development of its regions. IMB, together with many of its clients, has actively benefited from these factors. At the same time, still low levels of intermediation of banks, limited competition from international banks and the relatively low use of financial services by corporations and individuals set the stage for rapid growth of financial services. This environment gives us confidence that there is a good future for IMB s business throughout Russia. 6 annual report In 2004, there have been major developments for IMB. One of the most important developments has been to do with changes in IMB s shareholder structure. Mizuho and Sberbank, IMB s minority shareholders, left IMB as shareholders and remain as trusted friends. HVB is in the process of assuming the role of the majority shareholder (without operating IMB as a wholly-owned subsidiary); and Nordea will increase its share to a blocking minority and carries the responsibilities of a second strategic shareholder. These two strategic shareholders ensure the long-term business model of IMB, which is to be a longterm trusted strategic partner and service provider for its corporate and retail clients. The home markets of HVB and Nordea provide the largest trading partners and investors for Russia. This guaranties a commitment to Russia as a Russian bank in the real economy.

10 sectionreport of the board of directors Of equal importance and to provide funds to support IMB s business growth, the shareholders decided to increase the Bank s capital by $100 million and to allow IMB to borrow $130 million of subordinated loans as supplementary capital. The other shareholders of IMB the Central Bank of Russia through its French subsidiary BCEN and the EBRD have also agreed to contribute additional capital in the form of ordinary and preferred stock and will serve on IMB s Board of Directors like in the past. After the completion of this round of capital increase, IMB s regulatory capital will increase to nearly $500 million and its capital adequacy ratio will be close to 17 percent. This will provide excellent conditions for accelerating IMB s growth. It will enable IMB to expand its corporate lending, accelerate the expansion of its regional network and broaden the range of retail services. scorecards and key performance indicators throughout the organization. IMB showed another year of excellent performance, in fact exceeding our earlier expectations. With record earnings and record profitability, but without compromising credit quality or high service standards at all times, we are happy to present to IMB s shareholders, present and future clients, friends and employees, this Annual Report for In the name of and behalf of the Board of Directors of IMB Peter O. Kölle Chairman of the Board of Directors 7 annual report In its medium-term strategy for , IMB has defined its markets, products, behavioral and service standards. The strategy defines IMB s goal to become one of the leading privately owned banks in Russia both in corporate and retail segments, operating to the highest international standards. To achieve this, IMB will continue its expansion into Russia s regions. Progress in this target will be closely monitored through the introduction of modern controlling mechanisms. They include the introduction of balanced

11 sectionpresident s report year 2004 President s Report On October 19, 2004, International Moscow Bank celebrated its 15th birthday. By international standards, this is a young bank. In Russia, however, it is one of the oldest privately owned financial institutions having survived all the turbulences experienced by the emerging banking system of modern day Russia. The summer months of 2004 gave everyone involved with Russian financial markets a healthy reminder of the fact that not all the members of the banking system are strong enough to survive. IMB went through these somewhat dramatic days without problems; actually the «flight to quality» phenomenon, which is usually experienced in the moments of a banking crisis, even boosted the liquidity of the Bank. Ilkka Salonen President of the Board of Management All in all, 2004 was an eventful year for International Moscow Bank: the distribution network grew; the customer base expanded both in the corporate and private segments; and, the capital base of the Bank was strengthened. Last, but not least, it should be noted that at the end of the summer, we launched the Bank s largest project since its establishment: the change of its core IT banking system. The Bank widened and deepened its presence in the regions by opening three new representative offices (in Ufa, Novosibirsk and Omsk) and by upgrading two of its existing ones into full branches (in Chelyabinsk and Rostov-on-Don). Also the network of automatic teller machines (ATMs) doubled, the emphasis of its growth being on Moscow and St. Petersburg. In order to complete the range of its sales channels, IMB introduced its new internet-banking solution (Enter.IMB) offered to private persons in the last days of annual report The Bank s credit portfolio continued to grow. At the end of 2004, it reached $1.9 billion, 56% percent larger than a year before. From the point of view of reaching its strategic goals, it was important that a good part of this growth came from the regions: the share of regional customers in the Bank s total loan portfolio grew by 5 percentage

12 sectionpresident s report 9 annual report points to 15 percent. The expansion of retail business continued. The number of IMB s retail customers increased by 47 percent to more than 80 thousand. Loans to this customer segment grew aggressively as well. In the midst of all the development projects, the Bank kept its profitability on a good level. Net profit after taxes grew to $89 million, giving a return on average equity of 37.7%. Even though money does not bear «earmarks», it is worth noting that a clear majority of the income stream was generated by customer related activities. In July 2004, the Board of Directors discussed management s proposal for «revisiting» its strategy. The strategic goal set for the Bank remained the same, i.e. to grow profitably and diversify its business profile. The modifications were related to the amounts to be invested in the development of the Bank and to introduce quite explicit targets regarding its market position. The aim of International Moscow Bank is to be among the top five privately-owned banks in all the market segments in which it is engaged. In order to show that the decisions are to be realized and not left in the archives, the shareholders decided, in September 2004, to support the future development of the Bank with a share capital increase. This process will be completed during the first half of 2005 and will further increase IMB s capital base allowing it to speed up its growth. Looking into what we have ahead of us in 2005, one could describe it with the phrase «more of the same». IMB will continue to expand its branch and representative office network both in the regions and in the capital of the country. The implementation of the new core banking system is being vigorously worked on. Product-wise, we expect housing loans to become the fastest growing item on our balance sheet for the retail operations; whereas, corporate banking could well feel the most intensive development pressure in the field of cash management. The change in the business profile and expansion was and will continue to be reflected also in the number and structure of the Bank s staff: the number of members of the IMB family started to increase again; and, at the end of 2004, the headcount reached 1,113. IMB is transforming into a «trans-russian» bank having already 183 employees in 16 cities all over the country. The growth of personnel this year will take place predominantly in retail and in the regional outlets. It has been a pleasure to observe how swiftly our new employees, some of whom are located a few thousand kilometers from the head office, have become integrated into the Bank a process in which the clearly stated ethical rules for the Bank have played a substantial role. The Bank did well in 2004 both from the point of view of its financial performance and of the realization of its strategic goals. These results could only be achieved through the efforts contributed by each member of the Bank s highly qualified staff. I would like to express my sincerest thanks to all of them for the excellent work they did during the whole year. The existence and success of any service organization is based on its ability to take care of its customers needs. We are grateful for the trust displayed to us by our corporate and private customers. We will also do our utmost to keep the quality of our services improving constantly and look forward with great pleasure to continuing to further build on the relationship we have with each of you. Ilkka Salonen President of the Board of Management

13 section corporate banking year 2004 Corporate Banking Corporate banking is IMB s main core business. IMB is proud that it has established relationships with a significant proportion of Russia s largest companies. IMB also provides services to group customers of IMB s shareholders that have business in Russia. IMB has a reputation for service quality and for leadership in certain products for corporate clients. Corporate banking generates about two thirds of the Bank s profits and thus provides a solid foundation for IMB s development. IMB s strategy aims at maintaining its positions in business with Russia s large companies. At the same time, it puts the main focus in the development of its corporate banking on rapid expansion of business with medium-sized companies in Russia s regions. In 2004, IMB s corporate customer base increased significantly. In fact, the year turned out to be the most successful in terms of growth of its customer base. Moreover, the Bank succeeded not only in attracting large enterprises, but also established successful relationships with mid-sized companies, especially in the regions. In 2004, some 80 large companies and over 300 mid-sized companies became IMB s new clients. Significant progress was achieved also in developing relationships with foreign companies. In 2004, as a result of active co-operation with its strategic shareholders, IMB doubled the business volumes with group clients of the strategic shareholders and also welcomed more than 150 new international corporate customers, both large and small, many of them entering the Russian market during Entering New Regions The development of IMB s regional network has been a strategic priority since Last year was an important step in the implementation of this strategy. IMB became the first large foreign-owned bank to open a full branch in regions other than Moscow and St. Petersburg: in 2004, it opened full branches in Chelyabinsk and Rostov-on-Don. At the same time, the Bank continued to expand the network of its representative offices into new regions. In 2004, IMB added three new offices: in Novosibirsk, Omsk and Ufa. Now, apart from Moscow and St. Petersburg, IMB is present in 13 of Russia s regions: the Ural region: full branch in Chelyabinsk and representative offices in Ekaterinburg, Perm, and Ufa; 10 annual report No of customers 1, 500 1, 250 1, The dynamics of corporate customers 2002 H H Large corporates Medium sized corporates Southern Russia: full branch in Rostov-on- Don and representative offices in Krasnodar and Stavropol; the Volga region: representative offices in Samara and Nizhny Novgorod; Northern Russia: representative office in Arkhangelsk; Central Russia: representative office in Voronezh; West Siberia: representative offices in Novosibirsk and Omsk.

14 sectioncorporate banking year 2004 IMB s approach to regional expansion comprises a two-stage process. At the first stage, the Bank opens a low cost representative office. Its principal goals are to provide closer relationships with its existing customers present in the region, establish relationships with new corporate customers and study opportunities for business in the region. At this stage, the Bank markets to its regional customers products and services that do not require a fullbranch presence, focusing primarily on providing various types of financing. In line with IMB s strategy, the Bank continued to diversify its loan portfolio across industries and customer segments. IMB entered industries with which it had hardly worked before, such as mining, services and agriculture. The Bank achieved fast growth of its real estate finance, providing loans mainly for commercial properties (e.g. office buildings, shopping malls, supermarkets, warehouses, etc.). Loan portfolio structure by segment Wherever the results of a representative office look promising, the strategy provides for the second stage: upgrading the office into a full branch. This enables the Bank to offer a broader range of products and services for its corporate customers and extend services to private individuals and SMEs. Large corporates 81% Large corporates 76% Growth of Lending 2004 became yet another year of a lending boom in Russia and for IMB. The total loans outstanding to corporate customers increased by 51 percent to more than $1.8 billion, driven by the expansion of the number of new borrowers and by developing relationships with IMB s existing customers. Medium-sized corporates 10% Consumers 5% SMEs 4% SMEs 2% Medium-sized corporates 15% Consumers 7% As to customer segments, IMB significantly increased its exposure to medium-sized regional companies. IMB s regional network played an active part in providing financing to The dynamics of loans to corporate customers USD millions Dec 02 Mar 03 Jun 03 Sep 03 Dec 03 Mar 04 Jun 04 Sep 04 Dec annual report

15 section corporate banking year annual report the economies of the regions of its presence. In 2004, IMB increased its regional loan portfolio by nearly 130 percent to $300 million. Lending to foreign corporates operating in Russia also increased. Though the main source of financing for foreign subsidiaries in Russia is inter-company lending, many customers look into rouble-denominated financing as an important tool for risk management. At the same time, IMB participated in co-financing foreign-owned companies together with its strategic shareholders and supranational financing agencies. IMB has traditionally had one of the highest quality loan portfolios in the Russian banking industry. This is a result of its commitment to conservative lending practices. In 2004, even though the growth of lending was rapid, IMB was able to maintain a high quality loan book. The Best Trade Finance Bank in Russia In 2004, Global Finance magazine, on the basis of a survey of industry analysts, corporate executives and technology experts, named IMB the «Best trade finance bank in Russia 2005». This award is an acknowledgement of IMB s traditionally strong positions in this sphere in Russia and of the excellent results of Trade finance and documentary business have always been one of the Bank s competitive advantages ensuring it 13 percent of the market of servicing Russian exports. Growth of documentary business in 2004 Guarantees Import related LCs and Collections Export related LCs and Collections 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% Building on this strength, in 2004, IMB achieved significant growth in the volumes of letters of credits (LCs), collection and guarantees issued for its customers. The volume of export LCs increased by 20 percent and import LCs grew by 40 percent. The volume of documentary collections more than doubled. About three quarters of the increase of guarantees came from guarantees for domestic usage. In 2004, IMB actively developed credit-linked documentary business mainly post-financing of import LC payments. This growth came as a result of improving service quality, processes and the framework of its documentary business. IMB worked on developing relationships with its network of some 1,500 correspondent banks worldwide. It succeeded in further reducing the proportion of obligations on documentary instruments that require confirmation by foreign banks. The Bank also finalized a number of credit lines covered by leading international players such as HERMES, Finnvera and US Eximbank. The volume of credit lines obtained from foreign financial institutions is almost 1.5 times the amount in All this allowed the Bank to offer better service to its clients. Bringing Investments to the Russian Economy Close cooperation with its shareholders allows IMB to arrange project and structured finance transactions for Russia s largest companies dealing in oil and mineral resources, pulp and paper, power, telecommunications and transportation. IMB provides assistance to its clients in obtaining large-volume financing with long maturities. Syndicated lending is another business in which IMB ensures for itself leading positions in Russia. Growing demand from Russian borrowers for long-term financing and strong demand for Russian risk coming from international investors create a good environment for arranging syndicated loans. IMB, together with its shareholders, is one of the most active arrangers of syndicated loans for companies from various sectors of the Russian economy. In 2004, IMB leadmanaged a number of facilities totaling over $800 million. The Bank also used its expertise

16 sectioncorporate banking year 2004 by offering syndications for Russian mediumsized companies. Financial Market Products and Services IMB also offers its clients services in arranging and underwriting bond issues on the domestic market. In 2004, IMB successfully participated in arranging and underwriting several corporate and municipal debt issues. The Fastest Growing Leasing Company in Russia Leasing was yet another corporate banking business where IMB showed remarkable achievements in Leasing business is conducted through two wholly-owned subsidiaries. The development of IMB s leasing business has come a long way towards establishing it as one of the leaders in the market. In July 2004, Leasing Review, the Russian specialized industry magazine, named IMB-Leasing the fastest growing leasing company in Russia in and the market leader in lease financing of printing equipment in Russia. Involvement of a considerable part of IMB s clients in foreign trade creates strong demand for financial market products. The most important of these is foreign exchange. In 2004, IMB retained its leading positions in providing financial market products and services for its customers, especially in foreign exchange operations. Despite increasing competition among banks for clients, IMB gained a number of new customers and increased foreign exchange operations with existing clients. As a result, the volume of foreign exchange operations increased by 35 percent for the year. The volume of IMB s foreign exchange operations ,000 4,000 6,000 8,000 10,000 12,000 14,000 USD millions In 2004, the Bank s leasing business continued to demonstrate strong growth. The portfolio of lease financing almost doubled to $124m. IMB-Leasing s fastest growing business in 2004 was with transport companies. At the same time, the company achieved significant progress in diversification of its lease portfolio across industries and regions. The portfolio included lessees from such industries as goldmining, printing, chemicals, cosmetics, etc. With the assistance of IMB s regional offices, IMB-Leasing provided financing to clients in Archangelsk, St. Petersburg, in the Far East, Siberia, and the Volga Region. Responding to companies demand for instruments that can be used for managing their foreign exchange risks, IMB offered its clients foreign exchange forwards. These instruments re-emerged on the Russian market for the first time since the 1998 financial crisis in Russia. Acknowledging IMB s achievements in developing its foreign exchange business in 2004, Global Finance magazine named IMB the best foreign exchange Bank in Russia in The dynamics of leasing portfolio USD millions annual report

17 section retail banking year 2004 Retail Banking Retail banking is IMB s second major line of business. It comprises servicing private individuals and small businesses. Retail banking began to be developed in earnest since 2001 and now is a major growth area. The Bank invests heavily in the development of its distribution network, in new products and in new technologies including a new IT platform that are all necessary for ensuring this growth. At the same time, IMB sets challenging targets for growth of income from retail banking, making sure that the expansion of investments and costs are balanced by the growth of revenues. In 2004, IMB s retail banking, as a separate line of business, became profitable. Its contribution to the Bank s revenues has been growing rapidly and has become substantial; thus, in 2004, retail banking accounted for 40 percent of IMB s net fee income. The year 2004 proved to be successful for retail banking in Russia. Both retail deposits and particularly consumer lending showed dynamic growth, even though the collapse of several small Moscow banks in the summer of 2004 brought back the images of runs on banks by panic-stricken depositors. Some banks suffered badly; however, in general, people s confidence in the Russian banking system was maintained. In 2004, the Bank focused on developing consumer lending, steadily improved its deposit base and devoted much attention to building its distribution channels. In late 2004, IMB joined the newly established federal deposit insurance system. Consumer Lending The development of consumer lending continued to be IMB s top priority in 2004, in line with the Bank s medium-term strategy. The volume of loans outstanding to retail customers more than doubled for the year and reached nearly $140 million by the year-end. The proportion of retail customers who borrowed from IMB increased from 6 percent in 2003 to 15 percent in 2004, while the overall number of retail customers increased by nearly 50 percent to over 80 thousand. IMB continued to be one of the largest providers of automobile loans in Moscow and St. Petersburg. Throughout the year IMB continued to develop its product range, introducing automobile loans for second-hand cars and offering rouble or euro loans in addition to dollar facilities. The Bank worked hard to significantly increase the number of partner car dealers to The dynamics of IMB s retail loan portfolio USD millions Dec 02 Mar 03 Jun 03 Sep 03 Dec 03 Mar 04 Jun 04 Sep 04 Dec annual report

18 section retail banking year annual report more than 100 in Moscow and about 50 in St. Petersburg. During the year, IMB initiated a series of special programs with a number of car dealers in order to create the most attractive offerings across different segments of the automobile market. The Bank developed its relationships with insurance companies to make certain that its clients receive insurance packages that are best suited to their needs. A «car insurance on credit» option was actively marketed too. Much attention was given to improving customer service by streamlining loan arrangement procedures and reducing the amount of paperwork. All these initiatives allowed the Bank to offer one of the most convenient and affordable automobile loans in the market. In October 2004, IMB launched its residential mortgage product. The first reaction of the market to the product was positive. This initial success encouraged IMB to offer some related products, such as loans for building new homes (launched in St. Petersburg) and special purpose loans secured by mortgages. IMB actively developed its relationships with estate agencies and insurance companies. As with IMB s other loan products, the general aim of these efforts was to ensure that it meets customer needs, is affordable and convenient for the customer. IMB sees a bright future for the market of residential mortgages in Russia; therefore, the Bank considers residential mortgages to be its primary retail loan product. IMB also developed special loan products designed for its payroll customers. At first, the Bank offered them consumer loans that were met with a healthy demand. At the very end of 2004, bankcards with overdraft facilities to be offered to payroll customers were also introduced. Personal Deposits and Bankcards The summer banking mini-crisis frayed the nerves of many private depositors and prompted the transfer of household deposits from smaller private banks to large state owned institutions and Russian subsidiaries of foreign banks. Against this background, IMB ended 2004 with $400 million of private individual deposits which represented a 10 percent growth for the year. The Bank also continued to develop its product range in its savings products. USD millions The dynamics of private individual deposits In 2004, IMB s bankcard business grew faster than in previous years. The number of bankcards issued by the Bank increased by 45 percent to more than 60,000. IMB introduced some new bankcard products, such as: American Express cards, MasterCard Medicine bonus card, prepaid Visa Gift and Visa Travel cards. In addition, IMB received the status of an acquirer in the MasterCard International payment system. 70% 60% 50% 40% 30% 20% 10% Growth of IMB s bankcard business 18% 31% 13% 0% Average balance Average turnover Number of cards issued One of the major drivers of bankcard issuance was the enrollment of more corporate and small and medium-sized enterprises (SMEs) as IMB s payroll customers. Over the year, the overall number of such clients grew by nearly 30 percent. Beyond the payroll segment, the fast growth of IMB s bankcard business was driven by consistent marketing activities. Business with SMEs 58% 28% 45% IMB made substantial progress in developing business with small and medium-sized enter-

19 sectionretail banking year 2004 prises. The number of clients increased in 2004 by 20 percent. Growth of business with foreign SMEs was particularly remarkable: in 2004 the number of these clients increased by more than 70 percent, so that foreign-owned small businesses comprise over 40 percent of IMB s total SME clients. The growth of the customer base was accompanied by the rapid growth in lending to them: in 2004, the portfolio of loans outstanding to SME customers doubled. This growth was achieved USD millions The dynamics of loans to SMEs Dec 02 Jun 03 Dec 03 Jun 04 Dec 04 as a result of a considerable simplification of procedures particularly as regards lending. On the basis of the experience which IMB acquired in automobile lending, the Bank introduced a program of issuing micro-loans specifically designed to provide easily accessible and affordable financing for small businesses and private entrepreneurs. Developing Distribution Channels In 2004, IMB emphasized the development of its distribution network. The Bank s strategy provides for building a multi-channel distribution system consisting of a mix of physical channels (offices, ATMs, etc.), electronic channels (Internet banking, Bank-Client system) and telephone channels. Rostov-on-Don. IMB also added two new offices to its network in Moscow. The year under review also marked a significant step in the development of the Bank s ATM network. In 2004, it virtually doubled, as 41 new ATMs were installed in Moscow, 9 in St. Petersburg and 3 in other regions. By the end of the year, the total number of IMB s ATMs reached 101. This growth in numbers was accompanied by the expansion of the number of services available via an ATM. IMB s cardholders can use ATMs now not just for cash withdrawals but also for making payments for services of mobile phone operators, satellite TV, Internet providers and utility bills. The Bank plans to continue extending the range of services available via ATMs. Much emphasis was made on the development of electronic and telephone channels that give clients access to banking services. IMB s Internet access system (Enter.IMB TM ) was significantly upgraded and became more user-friendly and convenient. Customers apparently appreciated the improvements, as the daily number of users increased five-fold. In 2004, IMB also launched its Call-Center Service. Today IMB s customers can obtain all the information about their account movements, the Bank s products and services and any other queries over the phone. The Bank considers the call center to become an important delivery channel and plans further enhancements so that customers will be able to complete transactions and purchase the Bank s products over the phone. 34 annual report Until 2004, IMB s retail banking business was concentrated exclusively in Moscow and St. Petersburg. The year 2004 marked an important change in this development: the Bank embarked on the expansion of its branch network to other regions. Accordingly, IMB s retail banking business made its first steps outside Russia s two capitals. In the final months of 2004, IMB welcomed its first retail clients in Chelyabinsk and

20 sectionfinancial institutions, custody services year 2004 Financial Institutions, Custody Services and Proprietary Trading Business with financial institutions, together with the provision of custody services and proprietary trading complement IMB s range of financial services. They are considered important for supporting IMB s main business lines, the business of IMB s shareholders, and for increasing the Bank s profits. Proprietary trading has always been a substantial source of income, thus providing a solid foundation for development of the Bank. An important trend of recent years, however, has been the reduction of the role of proprietary trading in operating income, in line with IMB s strategy requirement of developing as a customer-related commercial bank. Financial Institutions The year 2004 proved to be successful for IMB in terms of developing its infrastructure for payments and settlements and for securing funding and credit lines from international financial institutions. the functionality of loro accounts that non-residents hold with the Bank. IMB made arrangements for joining a «FlashPayments» system and successfully fulfilled them in the beginning of February Using the network of the HVB Group, FlashPayments enables clients to settle crossborder payments in euros to Germany and Central and Eastern Europe extremely quickly: payments are credited to the recipient s account on the following day. No expansion of lending and risk-assuming activities took place in The liquidity crisis of the Russian banking system in the summer of 2004 prompted the Bank to review and curtail its risk exposure on banks; however, in 2004, IMB did participate in 15 syndicated and bank-to-bank loans for the amount of nearly $50 million to banks in Russia, Kazakhstan and the Ukraine. Thereby, IMB did retain its position of the prime Russian provider of syndicated loans to Russian and CIS banks. 38 annual report IMB maintained correspondent relationships with about 1,500 banks worldwide (including about 350 Russian and foreign banks maintaining accounts with IMB), thus providing optimal coverage of its customers requirements. In 2004, IMB implemented web-based solutions to ensure real-time monitoring of operations in major nostro accounts. Well-managed functionality of the nostro accounts allowed IMB to achieve high straight-through processing ratios and brought it the second consecutive annual «Quality Recognition Award» from JP Morgan Chase Bank, one of IMB s main clearers in US dollars. IMB is positioned as one of the top clearers in Russia for both corporate customers and banks. IMB made a smooth transition to the new foreign exchange regulations in Russia ensuring As in the past, an important aspect of IMB s activities has become compliance with antimoney-laundering measures related to the «Know Your Customer» policies and all other requirements of all the relevant authorities and IMB s counterparties. In line with the Bank of Russia s new regulations, IMB closely monitored relationships with its counterparts in order to avoid any possibilities of becoming implicated in money laundering or financing terrorist activities. Custody services IMB provides custody services for corporates and financial institutions. During the year, the Bank further developed its custody business. It was transferred to a new highly automated depository system that improved service quali-

21 section proprietary trading year 2004 ty. The Bank added new services for its customers, e.g. making «delivery versus payment» settlements on transactions related to transfer of ownership rights on large blocks of shares of Russian companies. The Bank also actively promoted its custody services to foreign clients. In 2004, the market value of assets in IMB s custody increased by more than 25 percent to $2.9 billion. This brought IMB up from 16th to 13th place in the rating of the top 30 largest custodians by PARTAD, the Russian association of registrars, transfer agents and depositories. According to a survey by Global Custodian, the leading magazine covering the international securities services business, IMB s custody was named among the top three Russian custodians in servicing cross-border clients. On the domestic market, IMB s custody was named second with the «Domestic Top Rating», the highest rating available. December 2004, IMB was the seventh largest operator in the GKO/OFZ (Russian government rouble denominated debt) segment and the tenth largest in corporate and municipal bonds. IMB also significantly expanded its range of instruments on the international debt market by starting operations with US notes futures. Operations with these instruments enabled IMB to hedge its income against adverse movements of interest rates. Proprietary Trading Traditionally, foreign exchange operations have always been one of IMB s major activities which stems from the large volume of client foreign exchange business through IMB and its well established reputation as a market-maker. In 2004, Russia s growing foreign trade and the increased volatility of the foreign exchange market contributed to the Bank s success. IMB significantly diversified its proprietary foreign exchange and money market operations. One of the main achievements of the year was the beginning of proprietary trading in derivatives that involve a broad range of such instruments, such as currency futures on the Chicago Mercantile Exchange, forwards and foreign exchange swaps. 42 annual report IMB achieved good results in fixed income trading, although the year 2004 was not particularly good for the Russian fixed income market. The Bank increased its trading activity on the domestic market. For example, according to the MICEX (Moscow Interbank Currency Exchange) polling of major brokers, in

22 sectioncapital management year 2004 Capital Management IMB s capital management strategy is focused on supporting the rapid expansion of its business, sustaining an optimal structure of its capital and maintaining the target capital adequacy that has been defined by the Bank s shareholders. After IMB s recapitalisation in 2000, IMB relied on growth of retained earnings driven by high profitability and on subordinated borrowings as its two sources of capital growth to support the expansion of its balance sheet. This strategy proved to be successful. The year under review was important for IMB s capital management. Firstly, the strategic shareholders made another major step in increasing their percentage in the shareholder structure so that their positions would agree with their role in the overall steering of the Bank. Secondly, the shareholders took measures to increase IMB s capital to ensure its rapid growth and the implementation of its strategy. Accordingly, in April 2004, the Bank bought out the stake held in IMB by Mizuho Corporate Bank Ltd., Tokyo, its minority shareholder. Subsequently, HVB and Nordea purchased these shares from the Bank. amount to $370 million according to IFRS. The HVB Group will hold percent of ordinary stock; Nordea will hold percent, BCEN- Eurobank will hold percent, and the European Bank for Reconstruction and Development (EBRD) 4.81 percent. In addition, the EBRD and BCEN Eurobank will subscribe to $10 million each of the preferred shares. In May November 2004, IMB extended for seven more years its existing $33.5 million worth of subordinated borrowings and obtained additional subordinated loans in US dollars and euros with seven-year maturities bringing the total amount of subordinated borrowings to almost $130 million. It is of particular importance that a substantial part of the new subordinated loans came from international organizations that are neither IMB s shareholders, nor related to IMB in any other way. This indicates growing confidence in IMB and recognition of its excellent prospects. All the subordinated loans were duly registered with the Bank of Russia as Tier II capital. In September 2004, an IMB Extraordinary General Shareholder Meeting approved an increase of the Bank s equity by almost RUB3 billion (about $100 million) by issuing additional ordinary and preferred shares. The capital injection is due to be completed in the first half of At the same time, the shareholders agreed that Sberbank, another minority shareholder in IMB, would sell its stake to HVB and Nordea. The transaction was completed in January annual report After the execution and official registration of all these changes in the shareholder structure and the capital increase, IMB s total equity will

23 section asset and liability mmanagement year 2004 Asset and Liability Management The main goal of IMB s asset and liability management is to guarantee that the Bank has adequate financial resources and liquidity for supporting its business and to ensure an optimal balance between risks and returns. In recent years asset and liability management has been focused on the Bank s transition to an asset-driven growth of the balance sheet, increasing diversification of sources of funding and reduction in cost of funds. The asset and liability management function is performed by the Bank s Asset and Liability Management Committee (ALCO), which meets weekly. Treasury, in cooperation with other relevant units, performs day-to-day ALM and market risk management activities that include overall balance sheet management, market risk management and management of liquidity and funding. Management of liquidity and funding is carried out on the basis of annual and quarterly funding plans based on budget targets, on market conditions and on targets as to the optimal mix of funds by sources, terms and providers. The market risk management function is based on the Bank s market risk policy, methodology and limits. diversification of short-term funding. Retail deposits also remain a noticeable source of funds for the Bank. The Bank s improved long-term ratings allowed changes to its pricing policy, decreasing the borrowing costs of middle and long-term borrowings, and further diversifying corporate and private customers time deposits. Strategic positions managed by Treasury on behalf of ALCO include investment and available-for-sale portfolios of securities, the Bank s strategic foreign exchange position and longterm borrowings. The investment portfolio, consisting predominantly of investments in Russian government bonds, contributed significantly to the overall interest income and serves as an additional liquidity cushion (via repo transactions) for the Bank. In 2004, IMB s ALCO focused on preserving a stable middle- and long-term funding base, on increasing the diversification of short-term funding and on maintaining sufficient liquidity reserves. Special attention was given to ensuring diversification of IMB s funding sources and steady reduction of dependence on large depositors. 50 annual report In February 2004, the Bank issued its first RUB1 billion bonds with a three-year maturity. In July 2004, IMB placed a syndicated loan attracting $200 million. The growth of corporate current accounts was an important driver in the

24 sectionrisk management year 2004 Risk Management Throughout its history, IMB has maintained a fairly conservative risk profile that reflects the risk appetite of the Bank s shareholders and IMB s business philosophy; however, the primary goal of IMB s risk management is to make sure that it does not simply avoid risks, but instead excels in managing risks. The continuing rapid growth of IMB s lending over the past several years has posed a number of new challenges. Accordingly, the Bank adjusts its risk procedures in order to ensure a balanced growth of its loan portfolio and its high quality. In 2004, the quality of the loan portfolio remained at a high level. As of the 2004 yearend, the volume of loans overdue over 30 days was below 0.5 percent of the total loan portfolio. Not a single large loan became overdue in the period. In line with its strategy, IMB continued to reduce loan concentrations. The proportion of the 10 largest exposures in the total loan portfolio decreased from 23 percent at the end of 2003 to 15 percent at the end of Diversification of the loan portfolio across industries also improved. Lending activities are governed by IMB s Credit Policies. The latest version was reviewed, updated and approved by the shareholders in The Bank s Credit Committee approves loans within the limits set by the shareholders; all credit facilities above these limits require approval from the shareholders risk managers. The shareholders monitor the structure and quality of IMB s loan portfolio. Risk managers of IMB and its shareholders hold quarterly meetings for resolving current issues of risk management. Among the most important achievements of 2004 in managing IMB s credit risks were the introduction of an in-house scoring model for retail lending and creation of an effective workout mechanism for overdue retail loans. Although the proportion of overdue loans both in the retail and corporate loan portfolios remained under 1 percent, IMB paid much attention to this issue since the very existence of such a mechanism is a crucial factor for future growth. The dynamics of loan portfolio concentration 97% 100% 90% 85% 85% 80% 70% 63% 66% 60% 50% 40% 30% 20% 35% 47% 23% 15% 10% 0% TOP-10 borrowers TOP-50 borrowers TOP-100 borrowers 54 annual report

25 section risk management year 2004 The development of risk management policies always has to take into account customers needs. The length of the loan approval period is a key indicator of service quality. In order to reduce the Bank s response times to customers loan applications, IMB turned to a wider use of rating evaluations of potential borrowers, and to a systematic monitoring of borrowers current financial performance and developing a system of early-warning indicators of emerging problems. Although the management of credit risk has always been a major concern, other risks are not overlooked. Throughout 2004, the Bank worked on improving its tools and procedures for controlling market risks, specific risk limits and, particularly, on developing controlling procedures for risks associated with derivative instruments. IMB introduced VAR-Navigator, the new in-house system for computing market risk exposures which allows cut computation times and improve in accuracy. IMB started development of a system for monitoring and controlling its operational risks in late 2003 in close cooperation with its strategic shareholders. The major focus was made on the analysis of business processes, developing the Bank s operational map and identifying potential bottlenecks and risk areas. In 2004, IMB further developed its system of operational risk management. The Bank modified certain business processes and introduced new procedures. The major accent was made on the minimization of threats that usually accompany a fast growing business. The structure of IMB s loan portfolio at 2004 year-end 7% 22% 12% 11% 10% Mining and metallurgy Agriculture and food Machinery construction Chemicals Energy Transportation Other manufacturing Telecommunications Trade Russian regional authorities Real estate and construction Other Timber processing 1% 3% 2% 6% 6% 6% 6% 9% 58 annual report

26 sectionpersonnel development year 2004 Personnel Development As any other bank, IMB is in the service industry, and thus its success ultimately depends on the people who actually deliver services to the customers. IMB can only succeed if it has personnel that is well selected, well trained, motivated and properly led. This puts people at the center of the Bank s attention. All personnel must share IMB s corporate culture which is focused on ethical behavior, delivering superior quality and a constant flow of innovations as regards improvements of services, products and processes. The development of corporate culture and steering it in a desired direction is always difficult. It is even more so in a rapidly growing institution that is expanding to Russia s regions. This puts particular emphasis on cultural integration of new team members and development of management. support growth and on training them. Given the current market situation, this becomes more challenging and potentially more costly. As in previous years, IMB actively worked on recruitment of recent graduates. Alongside running the already traditional for IMB two-month internship programs for students, in 2004, IMB extended this practice to longer-term internship programs. The Bank made considerable investments in training its personnel in Russia and abroad. In the last three years, the Bank s training budget increased four-fold. IMB has developed a corporate system of training providing learning opportunities that support critical business needs and enhance current and future competencies of employees. To further improve the effectiveness of training, in 2004, IMB launched its in-house training center project. IMB s Code of Ethics sets out crucial elements of corporate culture and, thus, is an important means of promoting desired behavior in practice. The Bank has experienced professional and committed staff members with considerable length of service in most key management positions. These people provide the foundation of the Bank s corporate culture. IMB holds regular management meetings where the most important issues are discussed. In 2004, IMB launched its internal periodical IMB Bulletin, an important tool for promoting and developing the Bank s corporate culture and team spirit. It informs personnel about important decisions made by the Board of Management and by the Board of Directors, about developments in the Bank and its various units. It is a platform for discussion regardless of one s position. 62 annual report IMB has always made a great effort in selecting and recruiting the right people needed to

27 section IT management year 2004 IT Management The Bank s strategy provides for developing efficient and flexible mass-customized production capacity. This also involves the introduction of new IT solutions with the aim of making the services more accessible and convenient for the customers and cost and time efficient for the Bank. In 2004, IMB launched an ambitious project for replacing its core banking system. The key reasons for embarking on the project was the need to provide technological support for future rapid growth of the customer base and the planned expansion of the Bank s product range. IMB opted for transition to the FlexCube system. Bank actively developed its electronic delivery channels that are of strategic importance for the Bank. In the last several years, IMB was developing a Straight-Through Processing system for making payments. Today over 80 percent of all payments are handled electronically, increasingly relying on the STP system. Another example of IT innovations in IMB was the introduction of an electronic document flow system in the Bank. The system allowed IMB to reduce drastically the amount of paper circulating within the Bank. Alongside transition to the new core banking system, the Bank works on changing its current business processes. It is expected that the employment of new business processes on the basis of the new core system will enable the Bank to reduce costs and improve service quality. The new system will enable the Bank to offer its clients new products and services. A major emphasis will be made on the development of alternative delivery channels, so that the Bank s clients will be able to get access to the Bank s products and services without visiting its offices. To ensure successful implementation of the new core banking system, the Bank set up a team of its best specialists. On its part, the vendor brought into the project its specialists that have vast experience of successful implementation of similar projects in numerous countries. HVB Group and Nordea, IMB s strategic shareholders, lent their support for the project. Their representatives are on the project s steering committee and give assistance in quality assurance. 66 annual report Alongside the FlexCube project, in 2004, IMB worked on developing a number of IT solutions in other areas. For example, the

28 sectionserving the community year 2004 Serving The Community IMB s strategy envisages, among other things, the strengthening of the Bank s corporate citizenship role. IMB s shareholders, management and employees all believe that IMB should be a model corporate citizen in Russia. We work and live in Russia, this is our country, and we are willing to and must contribute to its prosperity. Throughout its history, IMB considered itself a socially responsible institution committed to the highest ethical standards of doing business. The Bank has always had a preference for working with the real sector of the economy, thereby contributing to the country s development. We are confident that our business of lending, providing quality services to clients and finding solutions to their financial problems is not only profitable for ourselves, but also serves the best interests of Russia. Alongside this philosophy, in 2004, as in previous years, IMB was actively involved in charity work. For example, it provided financial assistance to several children s healthcare institutions, financed surgery for seriously ill children and participated in a subscription for «illustrated» books for blind children. It gave support to several organizations of military service veterans and contributed funds to the victims of the horrible tragedies in Beslan in North Ossetia, at Moscow s metro stations and in Arkhangelsk. Importantly, the past year marked the beginning of the Bank s employees active involvement in charity programs. A corporate charity program was launched in December 2004 enabling IMB employees to select targets for joint donations with the Bank. The Bank has committed to match employee contributions. Therefore, IMB s charity programs will be managed to a considerable extent directly by the Bank s personnel. Along with charity projects, IMB participated in sponsorship activities supporting culture and the arts. For example, the Bank sponsored the Annual International Grand Hermitage Music Festival in St. Petersburg and provided financial assistance to The 21st Century Ensemble, an international youth orchestra. In 2004, IMB actively developed a program, launched in 2003, of providing scholarships to the best students in economic departments in Chelyabinsk and Rostov-on-Don. IMB s Board of Management made a decision to make this program permanent starting from IMB s Board of Management has decided that the Bank will contribute to charitable and social projects a fixed percentage of its net profits. The Bank plans to cooperate actively with other banks in carrying out joint charity projects and programs aimed at helping the less fortunate and promoting the development of Russia and its regions. 70 annual report In some charitable activities, IMB participated jointly with some of its clients. IMB, together with Solikamskbumprom, supplied skis, bicycles, summer camp tickets, and many other useful items to children in orphanages and social shelters in the northern part of the Perm oblast and adjacent regions. The Bank intends to continue joint activities with our clients that contribute to the improvement of living conditions in the regions where IMB is present.

29 sectionoutlook for 2005 Outlook For 2005 IMB enters 2005 having all the capital base and funding resources necessary for successful development; therefore, the Bank can concentrate on the realization of its plans. Development will be determined by the vision set out in its strategy: to make it one of the top Russian privately owned commercial banks. This is an ambitious target, for it requires that IMB should develop faster than the Russian banking industry that steams ahead at a vigorous pace. IMB will continue to implement its strategy: it will develop its core businesses, expand its corporate and retail banking, and push ahead with its regional growth. The Bank s target return on equity for 2005 is over 20 percent which is ambitious taking into account the large capital increase. infrastructure. An important target here is to continue the transition to mass customized production in retail on the basis of reengineering its business processes. Most certainly, the Bank has to make sure that the project for transition to the new core banking system goes on schedule: this is the most important project in IMB s investment program for the next three years. IMB will continue to build its team and invest in the development of its people: those who will achieve the goals of the Bank s strategy. The potential of the Russian market of financial services is excellent. IMB has clear plans as to how to take advantage of these opportunities. We see arduous tasks before us, but look forward to it with confidence. IMB will significantly increase the number of its retail customers and add more mediumsized corporate customers in the regions. To achieve this, the focus will be on the expansion of its distribution channels. Three new representative offices are to be opened and four existing representative offices will be turned into full-branches. Nine new offices will be added to IMB s network in Moscow and two more in St. Petersburg. The Bank will continue to expand its ATM network and add new services available via ATMs. Further development of electronic banking is planned. Product-wise, the focus will continue to be on the expansion of lending and the development of origination capacity. In this area, the Bank will continue to develop the range of its credit products and increasingly offer more complex structured deals that provide greater added value to the customer. 71 annual report IMB will continue to invest into the development of its production capacity and business

30 sectionreport of the board of management year 2004 Report Of The Board Of Management Results For 2004 and Dividends On April 22, 2004, the Annual General Shareholder Meeting approved an annual dividend for 2003 of $80.6 per ordinary share to be paid in roubles at the exchange rate on the date of payment. In May 2004, the Bank paid out the dividends declared for 2003, the total amount of payment being $10 million. The dividends were reduced in order to support IMB s capital adequacy; and, the lowered dividend payout rate was a sign of shareholder support to the Bank s development. No dividends have been declared for 2004 and retained earnings as of the date of publication of this report. IMB s net profit for 2004 and retained earnings available for distribution to shareholders is $161 million. Major Transactions Footnote 35 of the financial statements lists transactions with related parties made in the normal course of business. It should be mentioned that the Russian Federal Law «On Joint Stock Companies» gives a more restricted definition of the term related parties as compared to IAS 24 «Related Party Disclosures» to which the appropriate disclosures in the consolidated financial statements conform. Summary of Financial Performance The Bank s Profit In 2004, IMB, together with its consolidated subsidiaries made an IFRS after tax profit of $89,407 thousand, which exceeds the result of the previous by 50 percent, or $30 million. It is the largest profit ever earned by the Bank in its 15-year history. Net interest income was $104.0 million (after loan impairment provisions of $10.0 million), or 75 percent, higher than in In accordance with the Russian Federal Law «On Joint Stock Companies» a major transaction is one whose value is more than 25 percent of the company s total assets. For IMB this means transactions of over $906 million. In 2004, the Bank did not make any transactions involving such amounts. Non-interest income remained at a sufficiently high level totaling $86.2 million ($87.7 in 2003). Operating expenses increased by $15.8 million or 25 percent, to $77.4 million. The Bank s cost ratio (excluding Other provisions) further improved to 39.6 percent from 42.3 percent in 2003 and from 62.5 percent in annual report Related Party Transactions In 2004, the Bank did not make any transactions in which Directors, Senior Management or other persons mentioned in the Federal Law «On Joint Stock Companies» had vested interests. Further information about related party transactions is given in IMB s audited consolidated financial statements. The return on average shareholders equity for 2004 was 37.7 percent, compared to 33.8 USD 000s 250, , , , , Gross operating income

31 sectionreport of the board of management percent in The return on average assets for the year increased to 2.8 percent as compared to 2.2 percent in Shareholders equity increased in 2004 by $78.7 million to $276.8 million, including the retention of the Bank s profits for 2004 and the payment of dividends for Net Interest Income After Loan Impairment Provisions Net interest income improved by 75 percent compared with 2003, to $104.0 million. The major driver of this growth was the rapid expansion of the loan portfolio. USD 000s 140, , , , , , , Interest income from customer loans Interest income from customer lending grew by $58.2 million, or 78 percent and totaled $132.9 million. This was achieved as a result of a 56 percent expansion of IMB s customer loan portfolio and changes in the portfolio s structure. The general decline of 120, Net interest income after provisions lending margins in the Russian market was outweighed by the growth of lending to medium-sized corporate customers and retail customers and by the greater proportion of lending in roubles that generally carry larger margins: the total loans in roubles grew almost two-fold; their share in the loan portfolio came to 24.2 percent, which is the highest level in IMB s history. Interest income from securities remained unchanged at $31.9 million. In 2004, IMB emphasized rouble denominated corporate bonds (that comprised a considerable part of its trading portfolio throughout 2004) in contrast to mostly dollar denominated bonds that predominated in its portfolios in Interest income from placements with banks fell by $1.7 million, as compared to the results of The decrease is attributable to declining average volume of placements with banks due to growth of the proportion of more profitable assets (customer loans) in the Bank s total assets. Interest expense grew by $15.7 million, or 29 percent, which is a result of the expansion of customer deposits and larger borrowings from foreign financial institutions: a syndicated loan ($200 million), subordinated borrowings (around $130 million) and a bond issue (RUB1 billion). The average cost of customer time deposits increased by around 40 basis points and mostly reflected the upward movement of interest rates in US dollars on the international markets. The high reliability of the Bank supported by its improving ratings from major international rating agencies allowed IMB to maintain low margins. Loan Impairment Provision USD 000s 100, , , , , The expenses for creation of provisions for loan impairment for 2004 were only $10.0 million as compared to $13.4 million in The decrease is attributable entirely to the reduction of the general provision for loan impairment that reflected the improving quality of the customer loan portfolio. 73 annual report The provisions established for loan impairment in 2004 were $47.0 million (or 28 percent) compared to $36.6 million in The growth of the provisions was caused by the 56 percent

32 sectionreport of the board of management year 2004 increase of the loan portfolio in 2004 year. The amount of problem loans on the Bank s books practically did not change in 2004 and totaled $9.5 million; all such loans were fully covered by specific loss provisions in 2004, as in percent. Foreign exchange translation gains increased to $10.7 million due to rouble appreciation, in which IMB maintained long position. All in all, net gains from foreign exchange operations rose by $21.3 million, or 78 percent, to $48.5 million. Non-Interest Income The Bank s non-interest income decreased slightly to $86.2 million in 2004 from $87.7 million in A substantial growth of fee income and foreign exchange gains was offset by the decrease of gains from operations with securities. USD 000s 100, , , , , Non-interest income Dealing income Fee income Other income Net fee and commission income rose by $4.2 million, or 13 percent, to $36.3 million. Almost all sources of the Bank s fees and commissions contributed to this growth. Foreign exchange gains from the execution of customer orders grew by $9.9 million, or 48 percent, to $30.5 million driven by growth of demand, particularly from medium-sized and small companies. Dealing gains from proprietary operations increased by $2.9 million, or Operating Expenses IMB s operating expenses increased by $15.8 million, or 26 percent, to $77.4 million. Staff costs rose by $7.5 million or 24 percent. Higher staff costs were partly due to the accrued performance bonus to be paid for the Bank s excellent financial results in Performance bonus excluded, staff costs increased by 17.5 percent due to the expansion of the Bank s retail business and the addition of new branches and representative officers to its network. This also caused a 58 percent increase in outlays on premises and equipment. Taxes other than corporate income tax decreased by $0.8 million, or 24 percent. Depreciation and amortization expense remained virtually the same in 2004 as in the two previous years. USD 000s 90, , , , , , , , 000 Operating costs USD 000s 60, , , , , , 000 Foreign exchange gains 10, Assets Staff costs Premises and equipment Depreciation and amortisation Taxes Other 0 Customer orders Translation gain Proprietary dealing In 2004, IMB s total assets increased by 29 percent to $3 611 million. 74 annual report

33 sectionreport of the board of management There was a significant increase of net loans to customers: in 2004, they increased by $672 million, or 56 percent, to $1 874 million. Their proportion in total assets increased from 43 percent at the end of 2003 to 52 percent at the end of % of total assets 60% 50% 40% 30% 20% 10% 0% Bank placements and customer loans Placements with banks (including reverse repos), net Loans to customers, net Investments in securities decreased by the 2004 year end by 9 percent to $447 million and comprised 12 percent of total assets compared to 18 percent at the end of At the same time, the Bank increased the amount of placements with banks by $285 million, or 45 percent, to $919 million. This brought their proportion in total assets from 23 percent at the end of 2003 to 25 percent at the end of Liabilities The structure of banking liabilities also changed in Customer deposits increased by $425 million, or 19 percent, to $2 638 million. The increase came from growth of both demand deposits (by $207 million) and time deposits (by $218 million); yet the proportion of customer deposits in total liabilities and equity slightly declined from 79 percent at the end of 2003 down to 73 percent at the end of annual report

34 sectionboard of directors year 2004 Board of Directors.. Peter O. Kolle, Chairman of the Board of Directors Age 59. Having obtained a professional license for banking in 1966 at Dresdner Bank, he joined Morgan Guaranty Trust Co. of New York in 1971, and in 1977 Bayerische Vereinsbank hired him as its General Manager in Tokyo. In he was Executive Vice-President and General Manager responsible for the bank s offices in North America working out of New York City. Since 1994 he has been Managing Director at corporate head office in Munich responsible for developing the bank s business in Europe and later in Central and Eastern Europe. Mr. Kölle has an MA from the University of Munich, Germany, an MS from Union College, USA, and an MBA from INSEAD, France. In 2000, he became an IMB Director and at the same time Chairman of the Board of Directors. Dr. Hannu Halttunen, Deputy Chairman of the Board of Directors Age 57. Dr Halttunen entered banking in 1970 with the Bank of Finland. He acquired considerable experience with international economic organizations. In 1980, he earned his PhD degree in political science. In 1985, he joined Kansallis-Osake Pankki as Senior Vice-President and went with the bank through all its mergers. At present, he is Senior Advisor, Corporate and Institutional Banking, at Nordea Bank Finland Plc. In 1993, Dr Halttunen became a member of IMB s Administrative Council (which in 2000 was reorganized into the Board of Directors) and between 1998 and 2000 was Chairman of the Administrative Council. Since 2000, he is Deputy Chairman of the Board of Directors. 76 annual report None of the above mentioned individuals own IMB shares.

35 sectionindependent auditor s report and financials Heinz Meidlinger, Member of the Board of Directors Age 49. Mr. Meidlinger started his banking career in 1970 with Creditanstalt-Bankverein AG and followed it through various mergers, which eventually brought him to Bank Austria that has become part of HVB Group. He acquired vast experience in financial markets operations. Since 2001, he is Treasurer and Executive Director of Bank Austria AG. Mr. Meidlinger is Member of the Supervisory Board in a number of organizations: Bayerische Hypo und Vereinsbank Splitska Banka, Croatia; Bayerische Hypo und Vereinsbank Hungary, Budapest; Bayerische Hypo und Vereinsbank Czech Republic, Prague; Bayerische Hypo und Vereinsbank Slovakia, Bratislava; Bayerische Hypo und Vereinsbank Ukraine, Kiev; Biochim, Bulgaria; Bank Austria Cayman Islands Ltd, Cayman Islands. Mr. Meidlinger became an IMB Director in Patrick Deloziere, Member of the Board of Directors Age 60. Mr. Deloziere began his banking career in 1969 by joining BCEN-EUROBANK and stayed with this bank at various positions ever since. In he was Deputy General Manager of Eurobank and since 1992 has been a Member of its Board. From 1996 to 2001, he was Member of the Supervisory Board of Evrofinance, Moscow (formerly subsidiary of BCEN-EUROBANK). As a «Conseiller du Commerce Extérieur de la France», nominated by the French Prime Minister, Mr. Deloziere has the capacity to advise French Authorities on foreign economic policy issues. He is a graduate of Institut d Etudes Politiques de Paris, France (Economics and Finance). In 1998, he became an IMB Director. Lindsay Forbes, Member of the Board of Directors Age 51. Mr. Forbes has over 20 years of experience in banking. After working for several years as a lawyer, he started his commercial banking career with British banks, and between 1981 and 1994 worked for the British Linen Bank, the investment banking subsidiary of Bank of Scotland where he was active in commercial lending and private equity both in the UK and USA. He became a director of the bank in In 1994, he joined the EBRD, initially concentrating on debt and equity transactions, subsequently as director responsible for East European and CIS countries, and since 2000 as director responsible for commercial equity. He has been a Member of the Supervisory Board and founder member of the Audit Committee of Pliva d.d., a Croatian pharmaceutical company listed in London and is currently on the Investment Committees and Supervisory Boards of various Private Equity funds operating in Russia, Poland and Romania. He is a graduate of Oxford University, UK, and INSEAD, France, and is a qualified Solicitor. He joined IMB s Board of Directors in annual report None of the above mentioned individuals own IMB shares.

36 sectionaudit committee year 2004 Audit Committee The Audit Committee is a standing committee established by the Board of Directors to ensure the adequacy and effectiveness of IMB's control system covering all the activities of the Bank. Lindsay Forbes, Chairman of the Audit Committee See previous page... Hans-Jurgen Kubesch, Member of the Audit Committee Age 53. Mr. Kubesch has over 25 years of experience in banking. After completing his university degree in economics he started his banking career at Bayerische Vereinsbank AG, one of the predecessor banks of HypoVereinsbank AG, Munich, in the Group Audit division. As an HVB Director, he is still active in Group Audit with special assignment in the Business Segment Corporates and Markets. He joined IMB s Audit Committee in January Erik Palmen, Member of the Audit Committee Age 45. Mr. Palmén has 18 years of experience in banking. He started his banking career in the investment banking operations of Union Bank of Finland and continued with business control on group level. For two years, he was in charge of strategic equity holdings in the MeritaNordbanken Group. Since 2000 he has been Head of Group Operational Risk Management in the Nordea Group. Before joining banking, Mr. Palmén was an assistant professor in finance in the Swedish School of Economics and Business Administration in Helsinki. Mr. Palmén has a masters degree in engineering and in finance. He joined IMB s Audit Committee in January annual report None of the above mentioned individuals own IMB shares.

37 sectioncredit committee Credit Committee The Board of Director's Credit Committee is the body authorized by IMB's Board of Directors to make decisions on risk exposures exceeding IMB's Credit Committee's approval authority... Peter O. Kolle, Chairman of the Credit Committee Dr. Hannu Halttunen, Member of the Credit Committee Patrick Deloziere, Member of the Credit Committee 79 annual report None of the above mentioned individuals own IMB shares.

38 sectioncompensation committee year 2004 Compensation Committee The Compensation Committee is appointed by the Board of Directors. It discusses HR and compensation policies, procedures and issues and recommends them for approval to the Board of Directors... Peter O. Kolle, Chairman of the Compensation Committee Dr. Hannu Halttunen, Member of the Compensation Committee Patrick Deloziere, Member of the Compensation Committee 80 annual report None of the above mentioned individuals own IMB shares.

39 section inspector Inspector The Inspector is elected by the Annual General Meeting of Shareholders and is responsible for exercising supervision over the financial and current activities of the Bank in accordance with Article 85 of the Russian Federal Law on Joint Stock Companies. Ala I. Abakumov, Inspector Age 52. Ms Abakumov has considerable and varied banking experience, having worked in the American, European and Russian banking sectors for more than 22 years. She started her banking career in 1977 with Central National Bank, Cleveland, Ohio, USA; then worked in various international positions with Bayerische Vereinsbank between 1984 and 1993, before joining IMB in As a member of IMB s Board of Management, Ms Abakumov was responsible for risk management and controlling and was Deputy President of the Board. Ms Abakumov resigned from IMB s Board of Management in May 2002 and was appointed to the position of Inspector. 81 annual report None of the above mentioned individuals own IMB shares.

40 section management year 2004 Management Ilkka Salonen, President Age 49. Mr. Salonen has over twenty years of banking experience, having begun his career in the Bank of Finland. He joined IMB in 1994 as a Deputy Chairman of the Board of Management, having worked for twelve years in various positions with Kansallis- Osake-Pankki in Finland and in the Soviet Union. He left IMB in 1997 for Merita Nordbanken, but in October 1998, he rejoined IMB as Chairman of the Board of Management. Yuri V. Tverskoy, Deputy President Age 50. Member of the Board in charge of corporate banking. Mr. Tverskoy joined IMB in 1989 having worked for Vnesheconombank since He was a member of the working group charged with the establishment of IMB. 82 annual report None of the above mentioned individuals own IMB shares.

41 section management Irina V. Vinogradova, Member of the Board Age 52. Member of the Board in charge of operations. She started her career in 1975 at Vneshtorgbank of the USSR and has over 26 years of banking experience. Ms Vinogradova has been working for IMB since She joined the Board of Management in Dmitri V. Mokhnachev, Member of the Board Age 40. Member of the Board in charge of retail banking. Mr. Mokhnachev joined IMB in 1992 having worked at the USSR Foreign Ministry for a number of years. He gained his banking experience at various positions at the Bank. In 2002 he was appointed Member of the Board in charge of risk control and regulatory issues. In 2003, as a Board Member he became responsible for the development of retail banking. Ivan A. Rozinsky, Member of the Board Age 37. Member of the Board in charge of risk management, internal audit and compliance control. Mr. Rozinsky has been with IMB since 1993 and worked in various positions in corporate banking. In 2000, Mr. Rozinsky took the degree of Candidate of Sciences in Economics. He became Member of the Board in annual report None of the above mentioned individuals own IMB shares.

42 sectioncontact details year 2004 Contact Details Head Office 9, Prechistenskaya embankment, Moscow , Russia tel.: (+7-095) Call center (+7-095) Enquiries fax: (+7-095) telex: IMBA RU, IMBA RU S.W.I.F.T. code: IMBK RU MM url: Corporate Banking Large Corporate Customers Mr. Evgeny Retyunskiy, Head of Corporate Banking tel.: (+7-095) fax: (+7-095) Corporate Banking Medium-Sized Corporate Customers Mr. Kirill Zhukov-Emelyanov, Head of Customer Relations and Regional Development tel.: (+7-095) fax: (+7-095) Retail Banking Mr. Maxim Kondratenko, Head of Retail Banking Sales tel.: (+7-095) fax: (+7-095) Financial Markets Mr. Andrei Yumatov, General Manager and Head of Financial Markets Division tel.: (+7-095) fax: (+7-095) Treasury Mr. Alexander Morozov, Head of Treasury tel.: (+7-095) fax: (+7-095) Corporate Lending Mr. Andrei Klopotovsky, Head of Corporate Lending tel.: (+7-095) fax: (+7-095) Corporate Banking German / Austrian / CEE Companies Mr. Martin Meesmann, Head of Customer Relations with German / Austrian /CEE Companies tel.: (+7-095) fax: (+7-095) CBD@imbank.ru Corporate Banking Nordic Companies Mr. Esa Teravainen, Head of Customer Relations with Nordic Companies tel.: (+7-095) fax: (+7-095) CBD@imbank.ru Corporate Banking Other Foreign Companies Mr. Timur Kozintsev, Head of Customer Relations with Other Foreign Companies tel.: (+7-095) fax: (+7-095) CBD@imbank.ru Correspondent Banking Mr. Sergei Troshin, Head of Financial Institutions Division tel.: (+7-095) fax: (+7-095) COR@imbank.ru Syndications Mr. Vadim Ulchenko, Head of Syndications Department tel.: (+7-095) fax: (+7-095) SFD@imbank.ru Real Estate Finance Ms. Svetlana Tolmacheva, Head of Real Estate Finance Department Mr. Vadim Ulchenko, Acting Head of Real Estate Finance Department tel.: (+7-095) , fax: (+7-095) SFD@imbank.ru Leasing Mr. Anton Kuprinov, General Director of IMB's Leasing Subsidiary tel.: (+7-095) fax: (+7-095) LEA@imbank.ru Corporate Finance Mr. Oleg Ponomarev, Head of Corporate Finance tel.: (+7-095) fax: (+7-095) CFD@imbank.ru 84 annual report

43 sectioncontact details 85 annual report Project Finance Mr. Dmitry Prozorov, Head of Project Finance, HVB Group tel.: (+7-095) fax: (+7-095) Public Relations Mr. Sergei Levskoy, Head of Public Relations and Advertising Department tel.: (+7-095) fax: (+7-095) Human Resources Ms. Svetlana Philippovich, Head of Human Resources Department tel.: (+7-095) fax: (+7-095) Moscow Branches Prechistenskaya Office 9, Prechistenskaya embankment, Moscow, , Russia Ms. Ekaterina Kozitskaya, Branch Manager tel.: (+7-095) Call center fax: (+7-095) Dmitrovka Office Building 4, 10/2, Bolshaya Dmitrovka Street, Moscow, , Russia Ms. Olga Kozlova, Branch Manager tel.: (+7-095) /1 fax: (+7-095) Kazachy Office 9/1, First Kazachy pereulok, Moscow, , Russia Ms. Julia Usova, Branch Manager tel.: (+7-095) fax: (+7-095) Kosmodamianskaya Office Riverside Business Center, 52/2, Kosmodamianskaya embankment, Moscow, , Russia Ms. Elena Bulgakova, Branch Manager tel.: (+7-095) /4 fax: (+7-095) Leninsky Office Park Place Business Center, 113/1 Leninsky prospekt, Moscow, , Russia Ms. Angela Dashtanyan, Branch Manager tel.: (+7-095) /7 fax: (+7-095) Tverskaya Office Building 1, 28, First Tverskaya Yamskaya Street, Moscow , Russia Mr. Yuri Kapelinsky, Branch Manager tel.: (+7-095) /13 fax: (+7-095) Prospect Mira Office Building 1, 26, Mira prospect, Moscow, , Russia Mr. Sergey Dveriy, Branch Manager tel.: (+7-095) fax: (+7-095) Khamovniki Office 44, Komsomolsky prospect, Moscow, , Russia Ms. Victoria Serova, Branch Manager tel.: (+7-095) fax: (+7-095) Regional Branches St. Petersburg 48/2 Fontanka embankment, St. Petersburg, , Russia Mr. Alexander Konyshkov, Branch General Manager tel.: (+7-812) fax: (+7-812) telex: IMBSP RU S.W.I.F.T. code: IMBK RU MMPET Kirochnaya Office (St. Petersburg) Office 6-N, 11A Kirochnaya Street, St. Petersburg, , Russia Ms. Ekaterina Kuzminskaya, Branch Manager tel.: (+7-812) fax: (+7-812) Chelyabinsk 38, Chelyabinsk, Karl Marx Street, , Russia Mr. Alexey Melnikov, Branch Manager tel.: ( ) fax: ( ) Rostov-on-Don 51, Serafimovich Street, Rostov-on-Don, , Russia Mr. Konstantin Ovcharov, Branch Manager tel.: (+7 863) fax: (+7 863) Representative Offices Arkhangelsk 7, Pomorskaya Street, Arkhangelsk, , Russia Mr. Oleg Gubin, Head of Representative Office tel.: ( ) fax: ( ) Ekaterinburg International Trade Center, 8th floor, 44, Kuibyshev Street, Ekaterinburg, , Russia Mr. Vadim Cherepanov, Head of Representative Office tel.: (+7-343) fax: (+7-343)

44 sectioncontact details year 2004 Krasnodar 26, Rashpilevskaya Street, Krasnodar, , Russia Mr. Yaroslav Artyukh, Head of Representative Office tel.: (+7-861) fax: (+7-861) Nizhny Novgorod 12, Semashko Street, Nizhny Novgorod, , Russia Mr. Maxim Krivda, Head of Representative Office tel.: ( ) fax: ( ) Voronezh 6A, Srednemoskovskaya Street, Voronezh, , Russia Mr. Vitaly Minakov, Head of Representative Office tel.: ( ) fax: ( ) Novosibirsk 34, Oktyabrskaya Street, Novosibirsk, , Russia Mr. Andrey Lemenchuk, Head of Representative Office tel.: ( ) , fax: ( ) Perm 8, Komsomolsky prospect, Perm, , Russia Mr. Alexander Sitnikov, Head of Representative Office tel.: ( ) fax: ( ) Samara 140, Frunze Street, Samara, , Russia Mr. Alexander Mokriy, Head of Representative Office tel.: ( ) fax: ( ) Omsk 65, bld. 1, Gertsena Street, Omsk, , Russia Mr. Bronislav Berdyugin, Head of Representative Office tel.: ( ) , , fax: ( ) Ufa Office 302, 3, Verkhnyaya torgovaya square, Ufa, Ms. Valentina Tikhonravova, Head of Representative Office tel.: ( ) fax: ( ) Stavropol Office 218, 26, Komintern Street, Stavropol, , Russia Mr. Viktor Kuzmenko, Head of Representative Office tel.: ( ) fax: ( ) VKuzmenko@imbank.ru Khamovniki Office 86 annual report