imb_report_block 16/3/06 16:45 Page 1 Annual 01 report

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1 01 Annual

2 imb block 16/3/06 16:46 Page 2 IMB GENERAL INFORMATION International Moscow Bank turned 16 last October. Despite our young age, we have gone through more than many much older banks. Our most important achievement of this period is the ability to build IMB s brand as a trustworthy and reliable partner for our customers. General information // Mission statement // Shareholder structure // Main achievements of // Largest deals of //

3 annual General Information Shareholder structure As of December 31, annual I. Closed joint-stock company International Moscow Bank (IMB) was established as Russia s first bank with a majority of foreign capital. II. The bank was registered by the USSR State Bank on October 20, 1989, registration no. 1. III. IMB holds general license no. 1 of the Central Bank of the Russian Federation issued on November 15, 1991, updated on September 5,. IV. In 2001, IMB merged with Bank Austria Creditanstalt (Russia), previously the Russian subsidiary of Bank Austria. V. Today, IMB is one of the largest Russian universal banks, providing a wide range of banking services to companies, private individuals and financial institutions. Mission Statement I. International Moscow Bank is a Russian commercial bank that seeks to provide first-class financial services to its clients for their benefit and for the benefit of IMB s shareholders and employees in order to support the Russian economy. II. IMB strives to become one of the leading banks in Russia abiding by principles of reliability and quality of client relationships, fairness of operations and corporate governance. III. 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 and EBRD as its other shareholders. 04 Bayerische Hypo-und Vereinsbank AG (HVB Group) With total assets amounting to $570 billion, HVB Group is the second largest bank in Germany, and its subsidiary Bank Austria Creditanstalt is a market leader in Austria. Besides Germany and Austria HVB s core market is Eastern Europe. With 57,874 employees in 2055 offices in 41 countries, HVB Group serves more than 9.8 million clients, out of which 3.9 million are in Eastern Europe. HVB Group concentrates on corporate and retail banking which are supplemented with customer-oriented capital market activities worldwide. The HVB Group is a member of the UniCredit Group which holds the leading position in the economic hub of Italy, Germany, Austria and Central and Eastern Europe. UniCredit has over 140,000 employees, 7,000 branches and over 28 million customers. Voting shares % Nordea Bank Finland PLC (Nordea Group) The Nordea Bank Finland is one of the leading banks in Finland. Together with Sweden s Nordbanken, Norway s Christiania Bank and Denmark s Unibank it forms Nordea, one of the largest Scandinavian banking groups. Nordea Bank Finland is a universal commercial bank that provides all kinds of banking services to corporate and private clients. With its large network of branches throughout Finland and a number of financial institutions in Northern Europe and the Baltic countries, the Nordea Group controls a significant share of the banking services market in this region. Voting shares % BCEN-Eurobank (France) BCEN-Eurobank was founded in Paris in 1921 under French law. The bank specializes in providing services for trade between Russia and Western Europe, mainly France. Since January, , it is a subsidiary of Vneshtorgbank. Voting shares % European Bank for Reconstruction and Development (EBRD) European Bank for Reconstruction and Development is an international financial institution, founded in It has an international AAA rating. The purpose of EBRD is to help Central and Eastern European countries as well as CIS countries to set up a market economy. EBRD aids the development of the private sector in the economies of the region, strengthens their financial and legal institutions, and helps to develop the infrastructure necessary to the private sector. Voting shares 4.81 %

4 annual Main achievements of Largest deals of annual I. IMB s net profit for totaled $106 million, the largest amount in IMB s history. II. In May, IMB completed a capital increase from RUB 8 billion to RUB 11 billion through a placement of new ordinary and preferred shares. As a result, Bayerische Hypound Vereinsbank AG (HVB), the major shareholder of IMB, became the controlling shareholder with over 52% of voting shares. III. In, IMB opened 3 full-scale regional branches in Voronezh, Krasnodar and Perm and 3 new regional representative offices in Kazan, Saratov and Volgograd. By the end of the year, the Bank s distribution network covered 18 regions. IV. In, 5 new offices in Moscow and 1 in St. Petersburg were opened. V. Fitch Ratings, the international rating agency, upgraded the Bank s Long-term foreign currency rating to BBB. This is the same as the sovereign rating of the Russian Federation and the highest rating among privately-owned banks in Russia. The long-term local currency rating was assigned at BBB+, one notch higher than the sovereign rating. VI. Standard&Poor s Rating Services raised IMB s longterm foreign-currency rating to BB with a positive outlook. It is the highest rating among privately-owned banks in Russia. VII. According to the Agent Banks in Emerging Markets Survey by Global Custodian Magazine, IMB Custody was awarded a Top-Rated status for servicing cross-border non-affiliated clients. IMB has taken the express route to the top in Russia: from unrated to toprated in just three years In many questions, the scores touched perfection. VIII. Leasing Review, the Russian specialized industry magazine, named IMB-Leasing, IMB s leasing subsidiary, the Most Dynamic Leasing Company in Russia in for the second consecutive year. IX. Global Finance magazine named International Moscow Bank, the Best Trade Finance Bank in Russia JSC Kyshtym Electrolytic Copper Plant USD 100,000,000 Syndicated pre-export finance facility Mandated Lead Arranger Local Agent EuroChem Mineral and Chemical Company USD 35,000,000 USD 37,500,000 USD 35,000,000 Working capital financing «Oil Company «Rosneft» USD 50,000,000 Working capital financing JSC «Russian Standard Bank» RUB 1,255,000,000 RUB 2,750,000,000 Syndicated loans Khrunichev State Research and Production Space Center USD 50,000,000 Syndicated loan Mandated Lead Arranger, Facility Agent «Northgas» RUB 1,800,000,000 Working capital financing «Uralkali» USD 25,000,000 Working capital financing LLC «Kapstroimontazh» USD 20,000,000 Syndicated loan JSC«Russian Railways» RUB 1,500,000,000 RUB 1,000,000,000 Working capital financing «Rolf» USD 65,000,000 Syndicated loan Mandated Lead Arranger JSC«TransTelecom» RUB 1,540,000,000 Promissory notes issue Arranger, Underwriter NK «Russneft Brjansk» USD 63,000,000 Syndicated project finance Underwriter Lead Manager Lead Arranger, Agent «Magnezit Group Ltd» RUB 1,500,000,000 Bond Issue Arranger, Underwriter, Payment Agent «Highland Gold Mining Ltd» RUB 750,000,000 Bond Issue Arranger, Underwriter, Payment Agent JSC «GT-TEC Energo» RUB 1,500,000,000 Bond Issue Arranger, Underwriter, Payment Agent

5 imb block 16/3/06 16:46 Page 8 IMB AT A GLANCE The year was the second year of IMB s rapid growth. At the year-end, total assets amounted to $5,528 million a 53 percent growth on the result of Letter from the Board of Directors // President s Letter // Report of the Board of Management //

6 Letter from the Board of Directors annual In, Russia was again one of the most dynamic markets in the world. The country benefited from its position as the second largest oil exporter and from the strong boom in domestic demand. Russia s GDP grew by 6.4% in, real disposable income by 8.9% and capital investment by 10.5%. Very significantly, the Russian regions are continuing to join the growth partners of Moscow and St. Petersburg. PRESENT NOW IN 18 REGIONS WITH A CONSTANTLY EXPAND- ING CUSTOMER BASE AND WITH A HIGHER THAN AVERAGE PROFITABILITY, IMB REINFORCED ITS IDENTITY AS THE BEST BANK FOR CLIENTS AND EMPLOYEES IN RUSSIA. 11 Peter O. Kolle Chairman of the Board of Directors.. In Russia's financial markets, IMB and other banks are experiencing a continuing credit boom. As a result, the Russian banking system s assets increased by 37%, and now reach 45% of the country s GDP. Retail banking business once again showed very high growth: in, total loans to private individuals grew by 91%. Deposits also grew much faster than the economy: this is a clear indication that more and more private money is employed in the banking system. It is indeed a pleasure to cite such statistics and facts because they clearly demonstrate the correctness of IMB s strategic assumptions and outlook. In identifying its goal to become one of the leading privately-owned banks in Russia both in corporate and retail segments, IMB concentrated its resources on strengthening and expanding its corporate relationships and, geographically and product-wise, on expansion into the regions and into retail. IMB has done more than just participate in Russia s dynamic growth: it has succeeded in improving its position in the market. It was able to extend its market share to 1.7% of total assets of the Russian banking system. Present now in 18 regions with a constantly expanding customer base and with a higher than average profitability, it capitalized on the benefits of this rapid growth, and reinforced its identity as the best bank for clients and employees in Russia. was an eventful year for IMB s shareholders, too. IMB's majority shareholder, the HVB Group, was acquired by the second largest Italian bank UniCredit (UCI). This event was not just an acquisition of one bank by another. IMB's new majority shareholder does not see itself as a bank attached to a particular country, but as a "Truly European Bank". The UCI Group is not Italian, German or Austrian it is European, with all of Europe's diversity and values. The Group is present in 24 European countries and in more than 40 countries around the world. It occupies the third place by market capitalization in the Eurozone.

7 annual Letter from the Board of Directors Letter from the Board of Directors annual The UCI Group is now by far the most important and biggest financial group in Eastern Europe with more than twice as many assets, branches and clients than the next competitor, covering 17 countries and holding about 14% of the market. It will also be a strong contributor to IMB in terms of expertise, being one of the leading retail banks in Europe. THE STRENGTH OF THE SHAREHOLDERS GIVES A STRONG IMPETUS FOR THE CONTINUING POSITIVE DEVELOPMENT OF IMB AND WILL RAISE THE BANK TO A NEW LEVEL. IMB HAS GREAT PLANS FOR THE NEAR FUTURE. WE WANT IT TO BE ONE OF THE LEADING BANKS IN RUSSIA. Nordea, IMB s other strategic shareholder, continues to demonstrate strong growth in its home markets and posted a 19% ROE, well above its target. It is not only the largest financial group in the Nordic countries, but has announced that it plans to quadruple its market capitalization in the future. For BCEN-Eurobank, the year was also marked by a change of its main shareholder. On December 28,, following a decision of the Russian governmental authorities, all shares of BCEN-Eurobank that were owned by the Central Bank of Russia were acquired by Vneshtorgbank, who became Eurobank s main shareholder. The European Bank for Reconstruction and Development (EBRD) continues to be by far the largest investor in Russia, assisting in the consolidation and reform processes of the Russian banking sector. In, EBRD focused on the development small and medium-sized enterprise (SME) financing. During the Board of Directors conducted five regular meetings, as well as many meetings of the various Committees of the Board. A fast growing organization needs on-line real time monitoring in order to give timely impulses, directions and decisions to Management to develop and implement appropriate strategies. The Director's actions and behavior have an immediate impact on IMB, and also reflect on the shareholders in terms of reputation, risk profile and share price. We are proud of IMB s achievements in. The past development and strategic attainments inspire all of us to look forward with positive expectations. We expect that the Russian economy will continue to grow strongly. All shareholders regard Russia as one of their most significant and interesting areas of expansion. The strength of the shareholders gives a strong impetus for the continuing positive development of IMB and will raise the Bank to a new level IMB has great plans for the near future. We want it to be one of the leading banks in Russia. Finally, on behalf of the Board of Directors, I would like to thank all the employees of IMB for their high service standards and would like to thank all our customers and partners. We appreciate having the opportunity to be of service to you in the future, in as professional and as trustworthy a manner as in the past. In the name of, and on behalf of the Board of Directors of IMB.. Peter O. Kolle Chairman of the Board of Directors

8 President s Letter annual Since 2003, it has become a good tradition that each year s results are the best in IMB s history. is no exception from this tradition: yet again, it proved to be the most successful year in the bank s history. IMB was able to meet and, in some cases, even exceed its ambitious financial and strategic targets. 15 Ilkka Salonen President of the Board of Management Economic environment For a commercial bank, the state of the economy it is operating in is, of course, a vital issue. In this respect, all the banks operating in Russia continued to sail with a strong tailwind throughout. The volume of goods and services produced on the territory of the Russian Federation was more than 6 % higher than a year before. The disposable income of the population continued to grow even faster and this boosted the retail business of the banks. Stability and confidence in the future are two major factors supporting banking business. In this respect, was a good year. The country s sovereign rating was upgraded by all the major international rating agencies reflecting the increasingly strong state of government finances. The fact that Russia is today among the top five countries as measured by the size of its foreign exchange reserves would have sounded impossible just a few years ago. The increased confidence in the country s future was reflected by the fact that last year the net capital flows turned towards Russia for the first time in the post- Soviet era. In the books of national accounting, this was seen as a strong growth of investments. This statement is true whether we talk about foreign direct investments or the trend to widen the production capacity by companies in successful industries (especially, of course, extraction and house building) as well as improvement of the infrastructure. SINCE 2003, IT HAS BECOME A GOOD TRADITION THAT EACH YEAR S RESULTS ARE THE BEST IN IMB S HISTORY. IS NO EXCEPTION FROM THIS TRADITION: YET AGAIN, IT PROVED TO BE THE MOST SUCCESSFUL YEAR IN THE BANK S HISTORY. Inflationary pressure is obviously high when a country s terms of trade improve so dramatically as has been the case for Russia in 2004 and. The Central Bank of Russia has had a gigantic task to try to bring the inflation figure to a single-digit number without letting the economy become contaminated with the so-called Dutch disease where domestic industries become noncompetitive due to a strengthening currency. The fight continues.

9 annual President s Letter President s Letter annual Banking system development The role of the domestic banking system in Russia has grown substantially in a comparatively short time. For the sixth straight year, the assets of the banking system expanded at a double-digit rate with last year s growth even exceeding that of The total assets of the banks as a proportion of GDP reached 45 percent, a level still considerably lower than can be seen in most European countries and even in the Anglo-Saxon economies. But it is already of the magnitude which does not allow systemic crisis without serious implications for all parts of the national economy. The growth of the Russian banking system continues to be driven by the dynamics of the loan books of the financial institutions. In particular, loans to individuals expand at a rate which in most countries would cause some anxiety regarding stability of the economy. In Russia, this can still be explained by the low level of leverage maintained by households. It should also be mentioned that voices of concern, one could say well justified, have been raised concerning the delinquency rates shown by some institutions heavily engaged in consumer lending. They are so high that, in order to keep the business sustainable, the margins charged on the loans have to be extraordinarily high, too. The problem often is that a financing offering to the customer is made in such a way that it is difficult for a non-professional to calculate the ultimate cost of the loan. Therefore, there is a risk that the borrower is not in a position to measure correctly the burden of the loan when he/she takes it. If the customer would know the effect of all the fees and service charges on the total cost of the consumer loan, he/she might make a different decision than the one made without being appropriately informed. At International Moscow Bank, we always inform the customer about the full cost of the loan. 16 THE FIGHT FOR MARKET SHARE WILL BE THE NAME OF THE GAME, ESPECIALLY IN RETAIL BANKING. THIS FIGHT WILL DEMAND FROM THE BANKS THE CREATION AND IMPLEMENTA- TION OF CLEARLY STATED STRATEGIES, AS WELL AS THE ABIL- ITY TO KEEP THE COSTS OF EXPANSION UNDER CONTROL. In the past, one of the problems for local banking business has been insufficient liquidity, especially in longer maturities. High commodity prices bring in a great deal of money to the banking system, and this has clearly helped to increase efficiency of the interbank market. It is also good to see that confidence the banks have in each other is becoming stronger, too. At the same time, one sees that the confidence of the people towards the banks is restoring, slowly but steadily. The 17 deposit base from individuals is growing fast; and, the usage of banking services is becoming more and more popular. Undoubtedly, the implementation of the deposit insurance system has played its role in this development. Outlook for 2006 If we look forward to the year 2006, the prospects for the Russian economy continue to be benign. The expansion of the GDP will continue at a greater pace than in most other large economies in the world. It also seems to be the case that the Central Bank of Russia will manage to bring inflation down to single-digit figures. With the help of still relatively high commodity prices in the world markets, Russia will continue to build up both its foreign exchange reserves and the stabilization fund. It is clear that there is a chance that things can go wrong. For Russia, the major indicator to be followed is still the price of oil. A considerable price decline could trigger off a reaction in the markets that could bring instabilities into the picture. At a minimum, the prices of traded Russian securities could suffer heavily from such a drop. In banking, too, growth will remain fast, looking both at the absolute figures and in relation to other sectors of the economy. Good growth opportunities will inevitably lead to new market entries; and, the competition will drive the yields down in every field of the banking business. The fight for market share will be the name of the game, especially in retail banking. This fight will demand from the banks the creation and implementation of clearly stated strategies, as well as the ability to keep the costs of expansion under control. The existing banks will use all their resources for expanding their sales networks both in Moscow and in the regions. One of the unknown factors in the banking industry is the true quality of assets. Quite a few poor credit decisions have been hidden behind the high commodity prices. If the flow of liquidity towards the country slows down substantially and some of the companies show worsening performance, one will see a true stress-test of the Russian banks risk management systems. The year 2006, however, is most likely to be a good one for banks working in Russia. Perhaps the biggest problem will be to find additional capital needed to facilitate the growth of the banks loan books. Scarcity of capital might well lead to an increasing number of mergers and acquisitions in the financial industry throughout the year, both cross-border and between pure Russian parties. It also cannot be excluded that some of the best banking names might tap the capital markets in search of fresh capital. Actually, there seems to be a shortage of Russian banking names traded on stock exchanges in and outside of Russia.

10 annual President s Letter President s Letter annual USD m Total assets and loans to customers (net), USD millions USD m ciency remained enviable: for every rouble earned, the bank spent only 45 kopecks a level which can be well regarded even in the already established financial markets, not to speak of rapidly developing ones. During recent years, IMB has held the highest credit ratings among the privately owned banks in Russia. This continued to be the case also in. In the course of the year, Fitch brought IMB s rating to BBB which means that we are one of the few financial institutions operating in Russia having an investment grade rating. Standard and Poor s upgraded the bank s rating also by one notch to BB, thereby giving it the position of the highest rated nongovernment-owned bank in Russia total assets loans to customers (net) Our development in and plans for the future The year was the second year of IMB s rapid growth. At the year-end, total assets amounted to $5,528 million a 53 percent growth on the result of The main engine of this growth was the loan portfolio. IMB s lending continued its fast expansion for the third year in a row and, with net loans reaching $3,151 million at the end of, this represents a 70 percent increase on the 2004 result. In addition, compared to the size of the bank s loan portfolio at the end of 2002, when IMB s growth truly began, the present volumes have increased almost five-fold which illustrates the huge change in IMB s business profile in the recent past. Growth in risk taking would not have been possible had not the shareholders supported IMB with a capital increase. A new share issue of RUB 3 billion was registered in. At the very end of the year, the bank also added another $30 million to its second tier capital in the form of a subordinated loan granted by Bank Austria Creditanstalt. Quality of the loan portfolio has not been affected by the fast growth. Even though this is in many ways due to the exceptionally benevolent macroeconomic environment, high level of professionalism of the bank s risk managers has contributed to this good result. The customer base continues to become more diversified, too. For instance, loans to individuals account already for 11 percent of the total loan portfolio, up from 7 percent a year before. The proportion of fee income coming from services sold to individuals continues to be high. It is important to stress that the growth was not achieved at the cost of profitability. On the contrary, net profit after tax rose to a record high: $105.7 million. This means a 16 percent growth on the result of 2004 and represents a 28.0 percent return on average equity, well above the levels expected by the shareholders of the bank. IMB s effi Implementing IMB s strategy The ability to deliver additional value to the shareholders is the cornerstone for the existence of any commercial organization. In order to achieve this consistently every year, the company has to deliver with respect to its strategic goals. In, IMB continued to successfully implement its strategy that was defined back in In many ways I see that in, we passed the no-return point in the bank s expansion to the regions and retail and, what is more important, the results achieved clearly show that we are on the right track. Bank S&P Fitch Moody s Sberbank BBB Baa2 Vneshtorgbank BBB BBB Baa2 IMB BB BBB Gazprombank BB Baa2 Bank of Moscow BBB Baa2 Promstroibank-SPB BBB Baa2 Raiffeisenbank Baa2 Alfa-bank BB B+ Ba2 Uralsib B Ba3 Rosbank B B Ba3 Source: Reuters (as of February 9, 2006) International Moscow Bank turned 16 last October. Despite its young age, it has gone through more than many much older banks. It has seen the disappearance of the country it was established in, the currency crisis of 1994, the credit crisis of 1995, the stock market crash of 1997, the financial meltdown of 1998 and the summer of 2004 liquidity mini-crisis. Our most important achievement of this period, however, is not that the bank witnessed all these events and still managed to remain among the largest Russian banks, but the ability to build IMB s brand as a trustworthy and reliable partner for our customers.

11 annual President s Letter President s Letter annual Business-wise, two critically important changes have been made. Firstly, IMB has diversified from a monolithic corporate bank to a more universal institution present in most developed Russian regions. Secondly, it has changed from a traditional consortium bank into an institution consolidated into one of the leading European banks, Bayerische Hypo-und Vereinsbank AG. IN MANY WAYS I SEE THAT IN, WE PASSED THE NO-RETURN POINT IN THE BANK S EXPANSION TO THE REGIONS AND RETAIL AND, WHAT IS MORE IMPORTANT, THE RESULTS ACHIEVED CLEARLY SHOW THAT WE ARE ON THE RIGHT TRACK. The migration from equal shareholdings started immediately after the 1998 financial crisis when two of the existing shareholders, HVB Group and Nordea, became the strategic shareholders of the bank. In, IMB completed the process of registration of a share issue which had already started in the autumn of As a result of this, the share of HVB Group in IMB s capital increased above the magic 50-percent threshold (actually to 52.9%), whereas Nordea brought its share up to 26.4%, which means that they hold a blocking minority. The two other shareholders, BCEN-Eurobank (15.9%) and EBRD (4.8%) continue to support the bank s business, but system-wide support comes from the majority owner. The important difference between today s situation and the consortium bank mode is that there is now a single shareholder who is strongly committed to the bank s further growth and development. At the same time, it should be stressed that IMB s ambitions did not change with the appearance of a majority owner. Reaching a position among the top five banks in any business area the bank is engaged, remains IMB s strategic goal. In a similar manner, expansion to Russia s regions continues, and so in 2006, IMB will open a presence in a number of new regions. There are also some other things that have not changed during the years, the most important of which is IMB s business philosophy. From the very first days of the bank, it has been built on the idea that customers needs come first and are the focus of IMB s attention. IMB has always strived to be a bank with which a customer would want to build a lasting relationship rather than a one-shot transaction oriented institution. When expanding the business to retail banking, this philosophy has not changed. In light of this philosophy, we are not in the business of just selling products. IMB exists in order to improve the lives of its customers by resolving their financial problems. This means that we have to try to understand the customer in every aspect and to excel in responding to the changing needs of the members of every customer segment. This will put us in a position to be able to provide solutions customized to the customers specific needs. It is clear also that the bank has to be able to present to the market up-to-date products processed efficiently so as to keep pricing competitive. Service quality and customer relations Despite the rapid growth of Russia s banking sector and the great progress in service quality demonstrated by leading banks in recent years, customers in Russia are still underprovided as regards quality of banking services. This is where IMB wants to make a difference. What is service quality? For us, the final judge is our customer. We are doing our best to ensure that our clients would comment as follows: I. IMB is my trusted long-term partner that really understands my financial needs and helps to find solutions to my problems. II. This bank promises what it can do and always does what it has promised. III. At IMB, they always welcome me, always listen to me and do their best to help me. Following our business strategy targets, we strive to be the best quality service provider for our customers. In pursuit of this target, in, we developed and began implementing a system of improving customer service quality based on the principles of friendly comfortable banking and regular quality control. FOLLOWING OUR BUSINESS STRATEGY TARGETS, WE STRIVE TO BE THE BEST QUALITY SERVICE PROVIDER FOR OUR CUS- TOMERS. It is clear that the customer wants to receive high quality services at a competitive price. From this stems a continuous need to monitor and improve the bank s business processes. In, a great deal was done to improve the quality of services offered throughout the retail network. Clear standards were set for every type of service and also control procedures were put in place. The main aim was to decrease the clients waiting/processing times, and so make the lives of the customers better. In 2006, we will work hard to find places for improvement in the already well-functioning business processes. Considerable attention will be given to ensuring uniformity, to the extent possible, of the processes in all the regions. In the product strategy, the focus is primarily on those products which are in high demand from our target customers. Another priority is to make sure that once a prod-

12 annual President s Letter President s Letter annual USD m uct has been marketed, it works as has been promised with minimal problems. As in previous years, in, the major focus was on the development of lending, both in corporate and retail segments. This is natural in the environment of the ongoing credit boom in Russia. In corporate banking, the major products were various types of loans. In, remarkable progress was made in the expansion and diversification of the corporate loan book with rouble loans being a tremendous success with our customers. At the same time, all Russian banks have to adjust to new trends that emerged in recent years. With Russia becoming increasingly bankable for all the major players in the financial markets, it has become quite clear that large Russian corporate customers are using more and more marketable instruments to obtain financing. IMB has traditionally been quite strong in its relationships with large Russian corporations, and we will continue to be so. Now, IMB just has to adjust its offerings to this customer group. IMB s capacity to organize domestic bond issues has improved; and, after becoming part of a global player, the bank can also now compete as an arranger in international bond issues and in structured transactions. Corporate loan portfolio (net), USD millions 2003 large companies 2004 medium-sized companies What is common to large and medium-sized corporations is the need to manage cash flows more efficiently. Throughout, IMB worked on developing cash management offerings. This menu of services will continue to be improved upon during 2006: more features will be added to the cash management instruments to ensure that the product suits the needs of our customers. Medium-sized corporations are increasingly interested in products like leasing, factoring and investment banking (Mergers & Acquisitions) services. In leasing, during the 22 USD m % 7% Loan portfolio structure by segment, % 15% 23 77% 11% 2004 large corporates medium-sized companies consumers SME s 1% 14% last several years, IMB has already established itself as one of the frontrunners. In January 2006, a decision was taken to start building a factoring unit. In the M&A field, IMB s highly professional team closed a number of deals in. As experience shows, the fact that IMB has no interest in such deals other than representing and advising either the buyer or the seller, is highly appreciated by our customers. In retail banking in, IMB s loans to individuals more than doubled. The leading product was the automobile loan. Since the beginning of the year, housing loans started to increase. For at least the next year, the growth in lending for households will continue at a very rapid pace. Housing loans will continue to expand at the fastest rate, but the positive economic environment will also support automobile and consumer loans. The presence of the car manufacturers has begun to be palpable in the financing part of the sales process of cars. IMB has actively explored possibilities to create partnerships with the leading car producers and reached its first agreement with RCI, the financing arm of Renault, which covers Nissan financed sales as well. According to the partnership agreement, IMB and RCI will structure the most attractive and competitive credit platform in order to provide Nissan and Renault customers and official dealers with a wide range of first-class credit services. Participation in this kind of partnerships will provide IMB with an opportunity to considerably improve its car loan products utilizing the vast experience of one of the international leaders in automobile finance. By the end of, the Bank reached a pilot phase of developing real credit cards. This product will be used to simplify financing of purchases of durable and semidurable consumer goods by our customers. 74%

13 annual President s Letter President s Letter annual Thousands Retail loan portfolio and customer base dynamics 2002 loans to private individuals (right axis) number of retail customers (left axis) Banking is one of the very few industries where one s competitor can at the same time be a counterpart and often even a customer. Throughout its history, IMB has been offering services to Russian banks, starting from traditional interbank products (foreign exchange and money market) to more structured ones, like co-operation in the field of trade financing. In, IMB was among the first banks in Russia to introduce financing secured by proceeds from consumer lending. Two high-profile transactions of this kind were lead managed by IMB: for Russian Standard Bank in April and November,, and for Home Credit Bank later in December,. With the rouble showing more and more stability and with the CBR s policy to reduce foreign exchange regulations, banks from abroad will show an increased interest to hold rouble accounts, something IMB has always been promoting. Distribution network In the last couple of years, IMB has widened its sales network dramatically. After the merger with Bank Austria Creditanstalt in 2001, we had only 6 outlets in Mocow, a branch in St.Petersburg and two representative offices in Yekaterinburg and Perm. Now we have 15 offices in Moscow, 3 in St.Petersburg, branches in Perm, Chelyabinsk, Rostov-on-Don, Krasnodar and Voronezh as well as 11 representative offices in other regions. In, the bank expanded and strengthened its sales network in Moscow and St. Petersburg and created an operational presence through full-service branch offices in three new regions (Krasnodar, Perm and Voronezh). In three more regions (Saratov, Kazan and Volgograd) we are better able to reach our corporate customers through the recently opened representative offices USD millions In 2006, the process will continue, and a number of new outlets will open their doors in Moscow and St. Petersburg. We will also continue to upgrade our representative offices into full branches. Our network of regional representative offices will be also expanded by introduction of several offices in new regions. All in all, the number of IMB s branches and representative offices will be over 50 by the end of This is a substantial investment, but this work is high on the list of IMB s priorities: it is precisely the small number of points of service that has been perhaps the biggest obstacle to bringing the quality of service to the high level we strive to achieve. Along with the opening of branches, IMB will also increase substantially the number of ATMs in all the regions of the bank s operating presence. There are strong indications that the number of users of electronic and mobile banking services is growing; therefore, we will also improve the functionality of these entry points to the bank. It deserves to also be mentioned that the role of the Call Center has grown in a very short time, both as a sales point and provider of information to the customers. Required resources Personnel It is fair to say that the goals set by the management of the bank constitute a tall order to the personnel. At the end of the day, the quality of service depends crucially upon the people who provide this service for the customers. It is our personnel who can make the difference whether we achieve our strategic target or not. In order to reach our ambitious business targets, we need solid professionals who are highly motivated and, most importantly, share the basic values and ideas of how to do business in an IMB way. The challenge to recruit, train, motivate and retain the right kind of talents is the most crucial one any bank faces: the old saying, banking is a people business has not lost its importance. The change in IMB s business profile has had a strong influence on the structure of the bank s personnel. If, back in 2002, the total number of the employees was 1,000 and only 100 were working outside Moscow (and this being mainly in St. Petersburg), at the end of, the respective figures were already 1,500 and 300. When plans are completed for 2006, the headcount of the bank will have grown to exceed 2,000 and already more than one-third of the staff is not located in Moscow. The most challenging part of managing such a diverse team of people is to maintain common values and to retain the crucial elements in the bank s corporate culture: integrity, transparency, respect and aspiration for professional excellence.

14 annual President s Letter President s Letter annual During, the Human Resources Department worked under intense pressure and was able to introduce new training systems both for the staff and the managers. The work, however, is far from over and the efforts continue. IMB was one of the first employers in Russia to introduce a pension plan to its employees in It became clear last year that the rules of that coverage had to be changed, and so, with support from the Board of Directors and from the Chairman of IMB s Audit Committee, Mr. Lindsay Forbes, a new defined contribution system was put in place. The work to improve the HR system of the bank will continue in 2006, especially in the fields of incentive systems (both annual performance bonuses and long-term incentives) and management training. Information Technology The big issue for IMB s information technology development in was, of course, ensuring progress according to schedule for migration to the new IT platform, FlexCube. The bank chose a twostep approach, by which the retail services will migrate in the course of 2006; and then, in 2007, the rest of the bank will follow. There are also issues to be tackled outside the core system project. There is an urgent need to improve automation of business processes in the leasing business. The start-up factoring business will also require sophisticated solutions in technology. These are important goals for I WOULD LIKE TO EXPRESS THE DEEP GRATITUDE OF ALL OF US WORKING IN INTERNATIONAL MOSCOW BANK TO OUR CUSTOMERS FOR THE TRUST YOU SHOW IN US. At the same time, the bank has embarked on a reorganization of the IT function in the bank. The goal is to make sure that the IT capabilities of the bank and its IT services are aligned with the bank s strategic goals. If we want to be the best quality service providers in the Russian financial services markets, our IT has to contribute strongly towards this. Importantly, the IT function should excel in providing excellent service to its internal customers their colleagues. Capital Banking is a business where the potential to grow is determined by the availability of capital. The Russian banking system is growing at such a pace that keeping up with it requires more than IMB s profitability level, in itself quite good by any measure, can allow. Hence, the management yet again approached its shareholders with a request for additional capital. The response has been positive; and, the issue is presently discussed by the shareholders. There are reasons to believe that in the second half of 2006, new equity capital will be booked on the bank s balance sheet. 27 IMB has been one of the pioneers in effectively utilizing the market of subordinated loans. This will also continue to be the case during this year. The fact that IMB has become a member of the first Truly European Bank which was born in the end of through the merger between UniCredit and HVB, gives comfort that there will be capital available to support IMB s profitable growth in the years to come. THE IMB TEAM DID WORK EXTRAORDINARILY HARD IN. I WOULD LIKE TO WARMLY THANK YOU AND YOUR FAMILIES FOR THE CONTRIBUTION EACH OF YOU MADE DURING THE LONG HOURS SPENT AT YOUR DESKS. Social responsibility International Moscow Bank has always been a bank with a strong social conscience. We believe that every institution should share part of its success with the less fortunate members of society. This work has been going on throughout the existence of the bank and will continue in the future. In addition to traditional charity work, IMB has started an internal program urging its employees to look for objects of charity; and, the bank has made a commitment to match the contributions collected by the employees. Last year several such programs were realized; and, this practice will continue to take place in IMB intends to further consolidate its position in Corporate Citizenship program in We plan more social activities in Russia and strive to involve more of our clients, partners, and employees in the bank s social programs. Our plans are very ambitious, but achievable. There are only two prerequisites. First and foremost, we will have to be able to retain the trust of our existing customers. The support in the form of feed-back we receive from our clients is vital for the bank s further development. I would like to express the deep gratitude of all of us working in International Moscow Bank to our customers for the trust you show in us. Please be assured that we will do all we can to show that we deserve this trust. Secondly, we need professionals to take the bank to new levels of quality and sophistication. The IMB team did work extraordinarily hard in. I would like to warmly thank you and your families for the contribution each of you made during the long hours spent at your desks. Ilkka Salonen President of the Board of Management

15 Report of the Board of Management annual Results for and Dividends On April 21,, the Annual General Shareholder Meeting approved the 2004 annual dividend at $ per ordinary share to be paid in roubles at the exchange rate on the date of payment (RUR/USD 27.74). In May, the Bank paid out the dividends declared for 2004, the total amount of payment being $14 million. No dividends have been declared for as of the date of publication of this. IMB s net profit for and retained earnings available for distribution to shareholders amounts to $244.4 million. 29 Major Transactions 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 $1,502 million (based on Russian accounting standards calculation). In, the Bank did not make any transactions involving such amounts. Related Parties Transactions In, 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 parties transactions is given in IMB s audited consolidated financial statements. THE IMB GROUP REPORTS AN AFTER TAX NET PROFIT OF $105.7 MILLION FOR THE YEAR, WHICH EXCEEDS THE RESULTS OF THE PREVIOUS YEAR BY 16 PERCENT, OR $14.6 MILLION. IT IS THE LARGEST PROFIT EVER EARNED BY THE BANK IN ITS 16-YEAR HISTORY. Footnote 28 of the consolidated financial statements lists transactions with related parties made in the normal course of business in accordance with the requirements of IAS 24 Related Party Disclosures. Summary of Financial Performance The Bank s Profit In accordance with International Financial Reporting Standards (IFRS), the IMB Group s an after- tax net profit of $105.7 million for the year, which exceeds the results of the previous year by 16 percent, or $14.6 million. It is the largest profit ever earned by the Bank in its 16-year history. Net interest income was $149.5 million (after a loan impairment provision of $17.5 million) and was by $59.1 million, or 65 percent, higher than in 2004.

16 annual Report of the Board of Management Report of the Board of Management annual Non-interest income remained at a high level totaling $100.7 million ($102.0 in 2004). Operating expenses increased by $33.3 million, or 43 percent, to $110.7 million. The Bank s cost ratio increased to 44.9 percent from 39.2 percent in 2004, but remains relatively low. The return on average shareholders equity for was 28.0 percent, compared to 38.4 percent in The return on average assets for the year decreased to 2.4 percent as compared to 2.8 percent in The declines in these profitability ratios occurred as a result of the increase of shareholders equity through the injection of additional capital and the subsequent considerable growth of the customer loan portfolio that resumed in the second half-year. Shareholders equity increased in by $200.5 million to $477.2 million, including the Bank s profits for and the payment of dividends for Total assets increased during the year from $3,605 million to $ 5,528 million. Net Interest Income after Loan Impairment Provisions Net interest income after loan impairment provisions improved by 65 percent compared with 2004, to $149.5 million. Net interest income before provisions significantly exceeded the previous year s result by $67 million and reached $167 million. The major driver of this growth was the rapid expansion of the loan portfolio. This growth, of course, also led to the creation of additional provisions for loan impairment, which totaled $17.5 million for the financial year. Interest income from customer lending grew by $101.7 million, or 77 percent and reached $235 million. This was achieved as a result of a 70 percent growth of IMB s customer loan portfolio and changes in the portfolio s structure. The general decline of lending margins in the Russian market was outweighed by the growth of lending to SMEs and private customers (its total share in the loan portfolio increased from 8% in 2004 to 12% in ) and by the larger proportion of lending in roubles that generally carry higher margins (the share of roubles loans in the loan portfolio was 36 percent). Interest income from investment securities reached $16.1 million which is lower than the previous year result by 12 percent due mainly to a decrease of IMB s position in Russian Government Eurobonds from $173 million at the 2004 year-end to $101 million at the year-end because of redemptions in both Available-for-sale and Held-to maturity portfolios. The average volume of the total investment portfolio during was $229 million. Interest income from placements with banks increased by $25.6 million, as compared to the results of 2004, driven by two factors: a higher average volume of placements with banks $1,233 million in versus $887 million in 2004, and a higher gross rate (3.7% vs. 1.9%). Net interest income after provisions, USD millions USD m USD m Interest expense grew by $58.5 million, or 85 percent, which is the result of the expansion of customer deposits (average amount increased by $811 million) attracted by higher interest rates on RUR and USD deposits. The average cost of customer time deposits increased by around 70 basis points. The increased volume of subordinated borrowings (the average balance rose from $64 million in 2004 to $141 million in ) led to additional interest expenses of $5 million. The high reliability of the Bank supported by its improving long-term ratings from major international rating agencies (Standard & Poor s: BB/Positive; Fitch: BBB/Stable) allowed IMB to maintain lower funding margins. Loan Impairment Provision In, the provision for loan impairment expense amounted to $17.5 million, as compared to $10.0 million in The increase is attributable entirely to the substantial growth of the gross loan portfolio (by 69% or $ 1,313 million). The provisions established for loan impairment as at the year-end were $60.1 million compared to $47.0 million in The amount of non-performing loans reduced in by $4.4 million (and totaled $5.0 million); all such loans where fully covered by specific loss provisions both in and in Non-Interest Income The Bank s non-interest income decreased to $100.7 million in from $102.0 million in 2004 (by 2%). The substantial growth of securities trading gain and fee income was not able to totally counterbalance the decrease in gains from foreign exchange revaluation, caused by the appreciation of the rouble. Net fee and commission income rose by $6.3 million, or 17 percent, to $42.6 million versus 2004 results. All the major income generating divisions ed significant increases over the last year. In particular, the growth in commissions from customer account handling (plus $ 2.0 million) and

17 annual Report of the Board of Management Report of the Board of Management annual Non-interest income, USD millions Operating expenses, USD millions USD m USD m USD m USD m dealing income fee income other income staff costs premises and equipment depreciation and amortisation taxes other retail services (plus $ 5.1 million) were primarily attributable to the Bank s regional and retail expansion in. Fees from documentary business rose by $ 1.1 million. Loan-related fees increased by 7%. The reduction in fees from customer operations with foreign exchange by $ 1.8 million is explained by decreased regulatory requirements regarding obligatory sales of export currency revenues: from 50% in 2004 to 10% in. As a consequence of overall business activity growth in Russia and increased revenues of exporters, the volume of FX turnover significantly increased in the ing year. Foreign exchange gains from the execution of customer orders grew by $5.3 million, or 16 percent, to $39.1 million. Dealing gains from proprietary operations amounted to $4.5 million. Gains from financial derivatives operations equaled $1.2 million. Revaluation of non-monetary items was minus $13.6 million and deteriorated the total net gains from foreign exchange operations driven by exchange rate reduction. In year-to year comparative it decreased by $20.2 million. Operating Expenses IMB s operating expenses (including provisions/reversal of provisions for off-balance sheet items) increased by $33.3 million, or 43 percent, to $110.7 million in. Staff costs rising by $16 million, 41 percent mainly caused the increase due to the expansion of the Bank s retail business and the addition of new branches and representative offices to its network. This expansion also carried with it a 45 percent increase of expenditures on premises and equipment. Provisions for guarantees and commitments were released in in the amount of $1.5 million, compared to provisions being created in 2004 ( $2.0 million). Depreciation and amortization expense increased by $1.8 million to $7.8 million at the year-end. In 2004, amortization of goodwill was included in operating expenses in the amount of $2.5 million. In accordance with IFRS 3, starting January 1, 32 33, goodwill will no longer be amortized, but will be tested each year for possible impairment. Assets In, IMB s total assets increased by 53 percent to $5,528 million. There was a significant increase of net loans to customers: in, they increased by $1,300 million, or 70 percent, to $3,151 million. Their proportion in total assets increased from 51 percent at the end of 2004 to 57 percent at the end of. Investments in securities increased at the year-end by 131 percent to $1,063 million and comprised 19 percent of total assets compared to 13 percent at the end of Time deposits due from banks increased by $171 million, or 75 percent, to $400 million. Their proportion in total assets grew from 6 percent at the end of 2004 to 7 percent at the end of. Obligatory reserves with the CBR increased by $ 39.9 million to $111.3 million. Liabilities Customer deposits increased by $1,120 million, or 43 percent, to $3,753 million. The increase came from growth of both demand deposits (by $176 million or 22%) and time deposits (by $944 million or 51%); yet, the proportion of customer deposits in total liabilities and equity slightly declined from 73 percent at the end of 2004 down to 68 percent at the end of. The amount of subordinated liabilities increased in by 18 percent due to an additional subordinated loan in the amount of $30 million booked in November,. Share Capital In, the Group issued additional 142,609 ordinary and 34,782 preferred shares with a par value of 16,820 Roubles. The preferred shares have a minimum annual dividend payment of 13% and are cumulative. The issue was registered by the CBR in May,. As a result, the share capital of IMB increased by $106.4 million or 76 percent.

18 imb block 16/3/06 16:46 Page 34 SUPPLEMENTARY INFORMATION In the last couple of years, IMB has widened its sales network dramatically. Now we have 15 offices in Moscow, 3 in St. Petersburg, branches in Perm, Chelyabinsk, Rostov-on-Don, Krasnodar and Voronezh as well as 11 representative offices in other regions. Head Office // Moscow Offices // Regional Branches // Representative Offices //