CONTENTS 2 MANAGEMENT REPORT 5 KEY FIGURES OF LATVIA S ECONOMIC DEVELOPMENT, PAREX FINANCIAL HIGHLIGHTS AND RATINGS 6 KEY BUSINESS ACHIEVEMENTS

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2 CONTENTS 2 MANAGEMENT REPORT 5 KEY FIGURES OF LATVIA S ECONOMIC DEVELOPMENT, PAREX FINANCIAL HIGHLIGHTS AND RATINGS 1 6 KEY BUSINESS ACHIEVEMENTS 7 SERVICES 28 PAREX BANKA S STRUCTURE 29 PAREX INTERNATIONAL PRESENCE 30 AWARDS RECEIVED AND BEST TRANSACTIONS OF FINANCIAL STATEMENTS SECTION

3 MANAGEMENT REPORT of the issue was fixed at the level of LVL 5 million. The securities were listed on Riga Stock Exchange. Parex banka is well on track to become the leading provider of investment banking services in the Baltics, which is evidenced by the volume and scope of its services. During 2005, the total with competitive rates, issuing payment cards, providing internet banking and asset management advisory. Parex banka was also planning to start operations in Stockholm (Sweden) through its branch in spring of The subsidiaries of the Bank demonstrated outstanding results amount of Parex banka s participation in syndicated lending during 2005, and their achievements are reflected in their key deals reached USD 41 million, and the number of transactions financial indicators further. constituted 21. Parex banka acted as Co-Manager in the issue of loan-participation notes by the City of Kiev, raising USD 250 mil- During 2005, Parex Bankas, the Lithuanian subsidiary of Parex The year 2005 was another year of success and significant real estate in combination with comparatively low monthly lion with a ten-year maturity for financing of different municipal Group, showed net profit of LTL 7.2 million, which is by 31% more 2 developments for Parex banka. Facing a demanding market, we managed to steadily improve our position. The net profit for the Bank reached another record level amounting to LVL payments on credit. Individual service, competitive product offers, attractive interest rates and fees for services, broad network of representative offices, branches and subsidiaries all projects, including the construction of a new bridge over the Dnieper. The Bank has a dedicated securities brokerage desk offering its customers a broad range of services, constantly than a year ago. Furthermore, the volume of deposits rose by 42% in 2005, rising to LTL 311 million as at 31 December At the end of the reporting period, the volume of loans issued was million, demonstrating almost double growth since the these factors will strengthen the position of Parex banka in the bringing new products and opening new markets for clients, as LTL million, an increase of 16% as to the corresponding MANAGEMENT REPORT year Parex banka s assets increased by 29%, total shareholders equity grew by 23.1% and the volume of attracted deposits increased by 18.3%, including an increase in local retail deposits by 41.5%. The loan portfolio demonstrated strong growth, increasing by 24.9%, including growth in mortgage lending by 47%. As at 31 December 2005, Parex banka has the largest market share in terms of deposits, comprising 19.8%. In terms of assets and capital and reserves Parex banka remains among the leading credit institutions in Latvia with a respective market share of 16.3% and 18.1%. retail banking sector in the Baltics. Payment cards are still another high-growth area for Parex banka, which is active in issuing payment cards in all three Baltic countries. At the end of the reporting period there were more than 242 thousand active cards and, during 2005 alone, more than 68 thousand active cards were added. In 2005, Parex banka became the first and only issuer of American Express credit cards in Latvia by launching American Express Platinum and Gold cards. In October, Parex banka introduced a new credit card, Blue from American Express, thus meeting the customers growing needs. well as providing 24 hr service and pan-baltic and CIS/CEE equity and credit research. With its new OTC platform for energy-related derivatives, Parex banka continues to be a knowledge base in the Baltics offering global commodity derivatives for local investors, particularly energy-related derivatives. Parex banka continues to be internationally acknowledged, and various awards document the competitiveness of our product range. This year Parex banka has been named the Best Bank in Latvia in 2005 by Global Finance Magazine, the Best Bank in the Baltic Region by the Caspian Integration Business Club, the Best Bank in Corporate Lending by business newspaper Bizness & Baltija and the Best Bank in Latvia in 2005 by Euromoney Magazine. figure from Total assets grew by 9% reaching LTL 483 million at the end of the period. During 2005, Parex Bankas completed visual changes in its distribution network in order to comply with the Group s identity guidelines. Significant improvements have been made to the e-banking platform by enhancing the web site and Internet banking portal. Parex Internet bank is one of the best services in this segment in Lithuania. A new mortgage product Flexible loan, new design of VISA Classic credit card, and several new types of deposits are only a few of the changes in the Bank s services delivered to the increasingly demanding customers. The total volume of assets of the Estonian branch together with Parex banka maintains leading positions in the banking sector in During the reporting period, Parex banka continued to diversify the Estonian subsidiary Parex Leasing and Factoring comprised the Baltics and continues strong and stable growth. The Bank s its funding base: the total share of syndicated loans in Bank s Parex banka is one of the leading banks in the area of AML/KYC EUR 79 million and grew by 86% during the year, thus surpassing developments are largely affected by the trends in the national liabilities increased from 6.7% to 11.3%. In July 2005, Parex banka international standard and best practice implementation. It can be the volume of assets in the two smallest Estonian banks. In 2005, economy. The stability of performance of Parex banka is rooted in successfully closed the largest syndicated loan with one of the demonstrated by the fact that in June 2005 the Bank commis- Parex lending portfolio in Estonia reached EUR 50 million and deep understanding of the Bank s customers in the Baltic region, lowest margin ever taken by a Latvian private institution. The sioned the international auditing company Deloitte & Touche to was driven by 37% increase for private individuals and 42% for based on more than 13 years experience servicing them, as well amount of the syndicated facility reached EUR million at a perform an independent review of the Anti-Money Laundering and legal entities. Many customers have shifted their deposits from as on the Bank s Management s ability to seize the opportunities margin of 0.6% over EURIBOR. The year 2005 was also the debut Combating Terrorist Financing (AML/CFT) Program existing at Parex other banks to the Parex banka Estonian branch. The total on the market while effectively managing risks. year for Parex banka in issuing local public notes and Eurobonds. banka. The review has confirmed that the Bank s AML/CFT program volume of deposits at the end of the year 2005 reached EUR 30 The debut Eurobond transaction was joint-led by JP Morgan is in a compliance with the legal and regulatory requirements. million, which is 11 times more than by the end of the previous Lending is one of the key growth areas for Parex banka. The Bank and Credit Suisse First Boston, raising EUR 100 million with a year. Parex Estonian subsidiary Parex Leasing and Factoring had continues to strengthen its positions in mortgage lending in the three-year maturity, and was significantly oversubscribed. The Parex banka continued the international expansion by opening a achieved 15% market share in the segment of railway rolling Baltic States and is planning to increase its market share in this Eurobond was listed on the London Stock Exchange and branch in Berlin (Germany) and becoming the first financial stock leasing by the end of segment by launching new services on the market. In 2005, Parex received great interest from European investors as well as institution of the New EU Member to start operating in Western banka introduced a unique product Mini-payment giving an secondary market support. In March 2005, Parex banka success- Europe. The main services provided by Parex banka s Berlin Parex Express Kredīts (previously, Parex līzings) is a subsidiary of opportunity to acquire a larger, better and more expensive fully completed its public offering of LVL notes. The total volume branch include: servicing customer accounts, offering deposits Parex bank operating in high-margin sector mostly in

4 consumer lending. During 2005, the total loan portfolio of the subsidiary increased by 44%, reaching LVL 8.7 million. Parex Express Kredīts has significantly strengthened its positions in this segment by accelerating client identification procedure, improving administration of non-payers and collection of debts. The subsidiary has a broad distribution network in all regions of Latvia 239 association agreements with business partners, During 2005, Parex Open Pension Fund showed a dynamic growth. Total assets of pension plans grew by 52.4%, reaching LVL 6.8 million. At the end of the reporting period, the number of participants exceeded 19.5 thousand, and the market share of Parex Open Pension Fund in terms of participants comprised 37%. Pension system funds are managed and advised by Parex Asset Management. KEY FIGURES OF LATVIA S ECONOMIC DEVELOPMENT. PAREX FINANCIAL HIGHLIGHTS AND RATINGS including Internet shops, have been signed. Services of Parex Express Kredīts are also available in six branches of Parex banka in the largest Latvia s cities. During the first half of 2005, Parex banka established and acquired several leasing companies in CIS countries and Key figures of Latvia s economic development currently operates Parex Leasing ( Парекс Лизинг ) and Extrole- 2006* MANAGEMENT REPORT The Group s subsidiary Parex Asset Management (PAM) has been growing remarkably strong in size, scope and performance. In 2005, subsidiaries of PAM in Russia, Ukraine and Lithuania obtained licences, which expanded a distribution platform for PAM products in these countries. In December 2005, Parex Asset Management founded a subsidiary Parex Dzīvība, which is planning to start offering a wide range of life insurance services in the second quarter of With over USD 1 billion of assets under management, from which 71% are assets owned within Parex Group, PAM remains the largest asset management company in the Baltic States and the second largest in Eastern Europe with a global outreach from 16 countries, including Japan, Switzerland, Germany, and Sweden. After the merger between PAM and Parex Investment Company at the end of 2005, the total number of Parex funds reached 8 with returns ranging from 2.9% for Parex Conservative Fund to 65.4% for Parex Russian Equity Fund. The total volume of funds more than doubled and asing ( Экстролизинг ) in Moscow, Ekspress leasing ( Экспресс лизинг ) in St. Petersburg, Lasca Leasing ( Ласка Лізинг ) in Kiev and Parex Leasing ( Парекс Лизинг ) in Minsk. A new leasing company named Parex Leasing and Factoring ( Парекс Лизинг энд Факторинг ) was founded in Baku, Azerbaijan. Parex banka selectively operates on CIS markets through its new subsidiaries and adheres to a very cautious policy by concentrating on leasing of transport vehicles as a safe form of credit exposure. We were able to fulfil our performance aspirations with respect to institutional and private investors and clients. We are building on our proven strengths and our reputation as a leading financial institution in the Baltics. The performance and service quality, and thus our esteemed clientele, always remain at the centre of our attention. (% growth in comparable prices) Gross domestic product Private consumption Public consumption Goods and services exports Goods and services imports (% of GDP) External debt Total debt Current account (% of economically active inhabitants) Unemployment level * Source: CSB, PAM projections Financial highlights of Parex Group /% Group Bank Net operating income 89,827 79,383 72,640 64,934 67,305 60,927 5 the market share reached 48% (excluding money market funds, Net profit 33,214 30,175 16,452 15,104 13,423 13,423 the market share reached 89%). Return on equity (ROAE) 23.35% 21.61% 14.03% 12.95% 14.93% 14.93% Return on assets (ROAA) 2.03% 1.94% 1.32% 1.27% 1.33% 1.38% Net interest margin 3.04% 2.82% 3.38% 3.20% 3.12% 2.98% Assets 1,842,336 1,757,009 1,424,481 1,361,442 1,064,652 1,023,415 Deposits 1,317,924 1,252,015 1,105,571 1,058, , ,978 Loans 879, , , , , ,542 Shareholders equity 158, , , , , ,157 Source: Parex banka Valery Kargin Viktor Krasovitsky Guntars Grīnbergs Parex banka s credit ratings President/ Chairman of the Board Chairman of the Council of Directors Chairman of the Council Long-term Short-term Moody s Investors Service Ba1 NP Riga, 3 March, Fitch BB+ B Capital Intelligence BBB- A3

5 KEY BUSINESS ACHIEVEMENTS SERVICES KEY BUSINESS ACHIEVEMENTS 2,000,000 1,750,000 1,500,000 1,250,000 1,000, , ,000 Parex banka s total assets 250, DEPOSITS , , , ,000 80,000 60,000 40,000 20, , , , , , , , , ,200,000 1,000, , , , ,000 0 Parex banka s capital and reserves Parex banka s loans 1,400,000 Parex banka s deposits 1,757, , , ,252, CREDIT CARDS 12 REMOTE BANKING 14 LOAN FOR PRIVATE PERSONS 16 PENSION FUND MANAGEMENT 18 CORPORATE SERVICE 20 INVESTMENT MANAGEMENT 22 BROKERAGE SERVICES 24 INSURANCE 26 GLOBAL PRESENCE

6 8 DEPOSITS BEST DEPOSIT RATES EACH DAY PAREX BANKA S CLIENTS ARE PAID, ON AVERAGE, AN INTEREST OF LVL 63,216 ON THEIR DEPOSITS. Parex banka is always ready to offer competitive interest rates to its clients, as well as to establish flexible and individually suitable terms of deposit. Owing to this policy, which is focused on meeting client s needs, Parex banka can pride itself for attracting the largest volume of deposits among the commercial banks in Latvia. The volume of deposits is increased also by the competitive positioning of Parex banka internationally, appealing to new clients with attractive interest rates. Parex banka offers clients: a wide range of deposit products: from savings accounts and overnight deposits to fiveyear term deposits; an individual approach towards depositor needs, while exploring new opportunities for more attractive terms and interest rates for deposits. Key achievements in 2005 As at 30 December 2005, deposits had increased by nearly 200 million lats, ensuring Parex banka a 20% market share and providing the leading position in Latvia in terms of deposits. Due to the strategic approach and consistently attractive interest rates, the growth of deposits was stable, while interest costs were predictable. Compared to its competitors, Parex banka s growth in deposits was not dependant on temporary increases resulting from marketing campaigns. Goals for 2006 Parex banka will continue to offer deposit products both to retail clients, ensuring competitive interest rates on standard deposits, and to corporate and financial clients. By modifying the levels of liquidity and profitability, to broaden the range of Parex banka deposit products. To improve Parex banka s product range by introducing structured deposits, which in the recent years have become popular in the U.S., Switzerland and other countries. The attractiveness of deposits is linked to popular market indexes, e.g. the price of gold, oil, currency, and other financial instruments. The forecasted growth of deposits will reach 32% in 2006, as it is expected that the volume of resident deposits will grow three times as quickly as the volume of non-resident deposits. 1,400,000 1,200,000 1,000, ,000 Parex banka investments 1,252, , , , THE OLDEST VINE IN THE WORLD IS 400 YEARS OLD, AND EACH YEAR IT YIELDS UP TO 55 KG OF GRAPES. 55 kg

7 CREDIT CARDS CREDIT CARDS ON AVERAGE, 17,160 PURCHASES A DAY ARE MADE USING PAYMENT CARDS ISSUED BY PAREX BANKA. Key achievements in 2005 Parex banka started to issue the prestigious American Express credit cards in Latvia. In April, the clients were offered the prestigious American Express Gold and Platinum credit cards with a high-level of service and extensive benefits. In October, a wider audience was offered a new innovative American Express BLUE credit card, which impresses not only with its unique and transparent design, but also provides one of the most flexible financial arrangements in the Latvian credit card market. The American Express Selects programme of discounts and Parex banka is an exclusive issuer of American Express credit cards in Latvia. This agreement special offers was created confirms that American Express supports Parex banka s activities in the rapidly growing credit card market in Latvia. Parex banka provides credit cards to a broad consumer base, by offering flexible card receipt and credit repayment terms. Parex banka s American Express credit cards guarantee an outstanding level of service and financial freedom. The network of VISA and MasterCard payment cards allows the residents to choose the most suitable debit or credit card with favourable terms of credit. Parex ISIC/ITIC cards for scholars, students and teachers combine the internationally acknowledged ISIC/ITIC network with the advantages of Visa Electron or Visa Classic payment cards. Goals for 2006 It is planned to ensure acceptance of American Express payment cards in all of the most popular trading places in Latvia. Develop the range of credit card products further, adjusting it to fit the needs and desires of various Latvian population segments as close as possible. Introduce Mastercard Standard a new credit card, aimed at a wide range of consumers. Improve on American Express credit card offers and service. Payment cards issued by Parex banka THE LARGEST NUMBER OF ROSES ABOUT 3 MILLION IS SOLD WORLDWIDE ON ST. VALENTINE S DAY. 600, , , , , , , debit cards credit cards

8 EACH DAY, ON AVERAGE, 4,166 TRANSACTIONS ARE CARRIED OUT THROUGH PAREX INTERNET BANK. 120,000 Key achievements in Parex Internet Bank is an electronic settlement system ensuring full 24/7 access to manage finances by ,000 REMOTE BANKING ONLINE BANK A CONVENIENT BANK taking advantage of modern and effective remote payment channels. In an online regime Parex Internet Bank enables to make and configure automatic payments, open a term deposit, apply for payment cards and other banking products, manage securities portfolio and other financial instruments. Parex SMS bank provides information on current account and payment card balance no matter where the client is located. Parex DIGI::FIRMA is a remote account management system, especially suitable for large companies and enterprises with intensive cash flow. It provides: the system allows using multi-level signature system accepted at the company; the possibility to sign a large number of documents simultaneously; compatibility with company s management systems (including accounting software). From a simple remote account management system, Parex Internet Bank has evolved into a unified internet resource, which assists the clients in handling effectively all their banking transactions. Due to a targeted and continuous popularisation of remote payment channels and automatic payments, the number of electronic transfers increased by 69%. The number of Internet banking users increased by 60%. 3.5 million connections to the Parex Internet Bank were registered. Goals for 2006 To extend the range and options of remote payment channels. To offer the latest Internet Bank services also in Western European branches of Parex banka. To continue promoting remote payment solutions, hence considerably increasing the number of electronic payments. 150, ,000 90,000 75,000 60, , , , , , ,000 Users of Parex Internet Bank service 136,405 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2005 Usage of Parex Internet Bank 335,286 THE NUMBER OF WING FLAPS OF THE HUMMINGBIRD REACHES 200 PER MINUTE. 200, , , , ,000 90,000 75,000 60,000 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2005 Payments made through Parex Internet Bank 141,332 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2005

9 PAY THE SAME AMOUNT FOR LARGER AND BETTER HOMES 300, , , , ,000 50,000 Loans to private persons, against a real estate pledge 248,411 Key achievements in 2005 As at 31 December 2005, Parex banka had issued loans totalling LVL 248,411,000 to private persons. The loan portfolio grew by 60.7% compared to This impressive growth confirms the effectiveness of the product development strategy for mortgage lending. The new-type loan Mini-Payment already formed about 30% of new loan transactions per month. LOAN FOR PRIVATE PERSONS 8,210 FAMILIES IN LATVIA LIVE IN HOMES FINANCED BY PAREX BANKA. 14 To continue development of loan services by offering new 15 Mortgage lending to private individuals was one of the top priorities for the year In the last quarter of the year 2005, the Bank introduced a new type of mortgage loan Mini-Payment (Minimaksājums), which differs from common mortgage loans through: accessibility to a wider range of residents; providing clients with an opportunity to purchase larger, better and more expensive real estate for a comparatively lower monthly payment. There is no obligation to repay the whole principal of the loan until the agreed repayment date; at the loan maturity date up to 50% of the real estate market value can remain unpaid; fexible repayment schedule. Payments can be increased at any time based on client s income growth Goals for 2006 attractive products, thus strengthening our position as the leading provider of innovative solutions and products. To continue attracting new clients through referrals from real estate companies, brokers, and new project developers. To improve and develop the branch network, increase personnel competence and client service effectiveness in order to ensure wider availability of loan resources. OF ALL THE WORLD S ANIMALS, THE TORTOISE LIVES IN ITS HOUSE FOR THE LONGEST TIME 152 YEARS.

10 Parex banka offers various state-funded and private pension plans, thus ensuring its clients a secured 16 and prosperous old age. The opportunities provided by Parex pension plans may be used by any 17 PENSION FUND MANAGEMENT PAREX PENSION PLANS PROFITABLE IN 2005, NET ASSETS OF PAREX S THIRD TIER PENSION PLAN GREW BY LVL 2,332,489. private individual or legal entity. Owing to Parex Asset Management, the manager of Parex pension fund assets, Parex pension plans are always highly profitable, thereby providing one of the largest pension capital increases for its clients. After the inception of Parex s third tier pension plans: Balanced and Active pension plans demonstrated an impressive growth 10.30% and 9.79%, respectively (as at 31 December, 2005). Key achievements in 2005 Parex s second tier pension plans increased their market share from 15.5% to 19,4% in terms of number of participants. Thus becoming the second largest second tier pension plan manager in Latvia, ahead of the State Treasury and Unifondi. In comparison to 2004, assets of the third tier pension plan increased by 52.4% (compared to 43.7% in the industry overall) reaching LVL 6.8 million. Such an increase ensured Parex banka a 36.97% market share of the open pension fund market. By the end of the reporting year, the number of participants in third tier pension plan had reached 19,500. Goals for 2006 It is planned to maintain the leading position in terms of profitability of second tier pension plans, and to increase the market share. Since 1 April, Parex Open Pension Fund offers three licensed pension plans with different investment strategies and 7 8% annual return. It is planned to increase the number of participants by 40 45%, and growth in pension plan s assets by 38 40% accordingly. IT TAKES ABOUT 50 YEARS FOR A SMALL PEARL TO GROW.

11 BY THE END OF 2005, THE TOTAL AMOUNT OF THE LOANS GRANTED TO ENTERPRISES BY PAREX BANKA REACHED LVL 564,874,000. CORPORATE SERVICE CORPORATE LENDING Parex banka offers a wide range of loan and other financing services for large, medium-size and small companies and enterprises. The Bank offers innovative forms of lending and flexible credit terms, considering the individual desires, demands and prospects of a client. Parex banka also has representative offices, branches and subsidiaries in 15 countries around the world, therefore corporate lending services are also provided to companies outside Latvia. 1,000, , , , ,000 0 Total loans issued by Parex Group 895, Key achievements in 2005 Parex banka s loan portfolio reached LVL 827,136,000, an increase by 24.9% compared to the year The most significant projects in financing companies were in transport and communications, real estate and trade industries. Compared to the previous year, the largest increase of corporate lending portfolio was in real estate (annual increase by 60%) and manufacturing (increase by 22%). Goals for To maintain the leading position in corporate lending, particu- 19 larly in the real estate, trade, and transport and communications industries. To ensure continuous growth by increasing the financing limits available to existing clients, whilst attracting new clients by using our professional expertise in specific sectors. THERE ARE 48 MILLION SQUARE KILOMETRES OF VIRGIN LAND ON THE EARTH.

12 PAREX ASSET MANAGEMENT MANAGES ASSETS VALUED AT MORE THAN HALF A BILLION LATS. Parex Eastern European 11.66% Balanced Fund 20 The volume of Parex investment funds listed on the Riga Stock 21 INVESTMENT MANAGEMENT PAM ABSOLUTE RETURN Parex Asset Management with its 40 employees and over USD 1 billion assets under management is the largest asset management company in the Baltic States. The company specialises in investments in Central and Eastern European countries, and in CIS securities and real estate markets, offering a full range of investment solutions in these regions. Parex Asset Management offers global investment strategies for local clients, as well as investment consultations and investment portfolio management for international institutional clients interested to invest in the Central and Eastern European region. Parex Asset Management manages the investment portfolio of Parex banka, Parex pension plans and several local investment funds, and investment portfolios of insurance companies and banks. Parex Russian Equity Fund Parex Baltic Sea Equity fund Parex Baltic Real Estate Fund Parex Balanced Fund Parex Eastern European Bond Fund Parex Conservative Fund Returns on Parex Funds 4.45% 2.90% 12.52% 25.32% 37.64% 65.39% 0% 10% 20% 30% 40% 50% 60% 70% EACH DROP OF SALT-WATER CONTAINS APPROXIMATELY ONE BILLION GOLD ATOMS, WHILE THE WORLD S OCEANS CONTAIN ABOUT 70 MILLION TONNES OF GOLD. Key achievements in 2005 In November, Parex Asset Management and Parex Ieguldījumu pārvaldes sabiedrība (Parex Investment Company) merged into one entity Parex Asset Management IPAS. The licensing process of Parex Asset Management subsidiaries and products in Russia, Ukraine and Lithuania was completed, thereby providing the basis for successful distribution of Parex investment products in these countries. Parex investment funds showed decent profitability from 2.9% in Parex Conservative Fund to 65.4% in Parex Russian Equity Fund. All of the open Parex investment funds founded in Latvia and Lithuania were registered for public distribution in both countries. Exchange, increased by 140%, with the market share of investment funds registered in Latvia reaching 48% (or 89%, if excluding money market funds). Parex clients were provided an opportunity to complete transactions with investment funds in Parex subsidiaries and client service centres as well as through the Internet Bank. Goals for 2006 In December 2005, Parex Asset Management established a life insurance subsidiary Parex Dzīvība. It is planned to start operations in the second half of In January, Parex Austrumeiropas sabalansētais fonds (Parex Eastern European Balanced Fund) was registered for public distribution in Sweden. It is also planned to register Parex investment funds for public distribution in Germany and Switzerland. To launch a new Baltic Real Estate fund. To establish a risk capital fund for investments into those prospective enterprises of the Baltic States which are not listed on the stock exchange.

13 600 8, BY PAREX BANKA S BROKERS DAILY. 23 4,000 BROKERAGE SERVICES BROKERAGE SERVICES IN THE SECURITIES MARKET ON AVERAGE, 2,270 FINANCIAL TRANSACTIONS ARE CARRIED OUT Parex banka s brokerage services provide the clients private and institutional investors with: an opportunity to invest in diversified securities markets, from the Baltics to Australia and Japan; an access to convenient electronic stock trading platforms in the Baltic, US and Russian markets; an opportunity to participate first in new stock and bond issues. Financing against the securities pledge Repo operations has gained great popularity. Key achievements in was a year of rapid growth in securities services. The number of transactions and number of clients increased sharply. 28,000 24,000 20,000 16,000 12,000 Transactions 0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov 2004 THE FIRST FOUR MOVES IN CHESS CAN BE MADE IN 318,979,564,000 COMBINATIONS Income from securities service commissions in all securities markets more than doubled during the last year. Evidently, this reflects our clients confidence and interest to work with the Bank in the complicated securities market. USD 000 s 1,600 1,400 1,200 1, Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec USD 000 s 1,400,000 1,200,000 1,000, , , , ,000 Commission Turnover Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Goals for 2006 To offer new products and services. One of the most important projects in the local securities market will be the merger of all three Baltic stock exchanges into one commercial platform. Actively market our fully-fledged brokerage service to both local and foreign institutional clients.

14 INSURANCE CLAIMS PAID IN 2005 TOTALLED LVL 5,878,938. in terms of capital and reserves. The company offers not only a full spectrum of insurance services, but also especially advantageous solutions in the key market segments INSURANCE INSURANCE Parex Insurance Company (Parex Apdrošināšanas kompānija) is the third largest insurance company in Latvia Parex Insurance Company holds a particularly strong position in transport insurance area Parex is ranked third in the market by the total amount of written premiums, holding a 13.6% market share for obligatory insurance (MTPL) and 13.9% market share for voluntary insurance (CASCO). Parex Insurance Company offers MTPL service with after-payment option using payment cards, in cooperation with Latvian commercial banks. Parex Insurance Company has 25 branches currently operating in Latvia, 12 branches in Lithuania, and one branch in Estonia. Key achievements in 2005 Written premiums reached LVL 12.7, ranking the company fourth largest among the non-life insurance companies in Latvia. A total of 205 thousand insurance contracts were signed and the claims paid reached 5.9 million lats. Largest increase in written premiums among the five leading non-life insurance companies of 31%, while maintaining the lowest level of administrative expenses at 33.2%. New branches and selling points were established, covering most regions in Latvia. Increased activity in the Baltic region led to registration and opening of the branch in Estonia. Goals for 2006 The largest Norwegian non-life insurance company Gjensidige Forsikring, which controls about one-third of the Norwegian non-life insurance market acquired 100% of the shares of Parex Insurance Company at the beginning of The new shareholders are planning: to offer greater financial security, improved service, and new products, for instance, by creating joint insurance programmes in Scandinavia and the Baltics; to extend the operations in Lithuania and Estonia, broaden the choice of insurance products, and offer new services to clients Insurance premiums underwritten in 2005 (gain %) 0-5 Balta BTA ERGO Latvija If Latvija Parex Insurance Company A BEE FLIES OVER 4,000 FLOWERS TO GATHER A SPOON OF HONEY.

15 Bank, 26 BRANCHES AND SUBSIDIARIES. Ltd. and Standard Bank London Limited. 27 The debut EUR 100 million Eurobond issue was placed in GLOBAL PRESENCE GLOBAL PRESENCE IN 2005, PAREX BANKA WAS OPERATING IN 43 CITIES AND TOWNS WORLDWIDE THROUGH ITS WIDE NETWORK OF REPRESENTATIVE OFFICES, With an aim to develop the business and gain a maximum success in international markets, Parex banka regularly expands its activities abroad and actively cooperates with international organisations, primarily in raising funding for the Bank. Parex banka has representative offices, branches and subsidiaries in 15 countries around the world, including banking subsidiaries in Switzerland, AP Anlage&Privatbank AG, and in Lithuania, Parex Bankas. Parex banka is an active participant on the syndicated loan markets, it also takes advantage of issuing long-term debt securities in order to diversify the Bank s funding base. Key achievements in 2005 The Bank participated in more than 28 international transactions for the total amount of USD 2 billion. AP Anlage&Privatbank AG continued attracting new clients and increased its assets by EUR 7 million. Net profit for the year constituted EUR 352,000. In summer 2005, AP Anlage&Privatbank representative offices were established in Latvia and Estonia. The syndicated loan was closed at the amount of EUR 188,500,000 in cooperation with ING Bank N.V., Mizuho Corporate cooperation with JP Morgan and Credit Suisse First Boston. The Eurobond attracted strong demand from both private and institutional international investors. Goals for 2006 A syndicated loan of EUR 200,000,000 was signed in cooperation with Mizuho Corporate Bank, Ltd. In cooperation with Deutsche Bank and HSBC, Parex banka placed its new Euro-denominated senior unsecured notes, raising EUR 200 million with a five-year maturity and a % coupon. The Bank will continue its successful track record of raising funds through syndicated loans and bond placements in world debt markets. The Bank will continue to broaden its presence in the Baltics and international markets by using the successful strategies of the Berlin and Stockholm branches in order to determine the depth of the market in the EU for possible future initiatives. A MAN, DURING HIS LIFE, WALKS APPROXIMATELY 121,000 KILOMETRES, WHICH EQUALS THREE STROLLS AROUND THE WORLD IF WALKING ALONG THE EQUATOR LINE.

16 PAREX BANKA S STRUCTURE Council of the Bank Board Internal Audit Department Council of the Directors PAREX GROUP COMPANIES AND REPRESENTATIVE OFFICES Senior Vice President Compliance Supervision PAREX BANKA S STRUCTURE PAREX INTERNATIONAL PRESENCE Senior Vice President Customer Service Vice President Lending Senior Vice President Capital Markets and Investment Banking Vice President Finance and Information Technology Legal Sector Vice President Customer Service Divison: CIS and CEE Internet bank and DIGI Products Division Corporate Lending Division Treasury and Liquidity Management Department Financial Analysis Department Vice President Customer Service Divison: Large Latvian and Western Customers Marketing Division Transport and Energy Sector Clients Lending Division Trading and Brokerage Department Accounting Division Vice President Customer Service Divison: Latvian Individuals and SME Customer Service Division Legal Department Regional Lending and Leasing Division Custody and Funds Administration Department Dealing Operations Clearing Division (Back Office) Vice President Customer Service Division: Transportation and Energy Sector Clients Personnel Development Division Lending Legal Division International Relations Division Methodology Department Vice President Customer Service Division: Latvian Corporate Clients Credit Risk Analysis Division Investment Banking Division Banking Technology Division Banknotes and Cash Delivery Divison Lending Supervision Division Legal Department Correspondent Banking and Global Cash Service Division Credit Administration and Documentary Operations Division Payment Cards Division Lending and Leasing in the CIS Development Division Products and Services Development Division Lending Development Division In Latvia Parex banka Parex Leasing and Factoring Parex Express Credit Parex Insurance Company Parex Asset Management Parex open pension fund Parex brokerage system Parex Life In Estonia Parex banka branch Parex Leasing and Factoring In Sweden Parex banka branch Representative office In Russia Representative offices Parex leasing Express leasing Parex Asset Management In Kazakhstan Representative office In Moldova Representative office In Lithuania Parex Bankas Parex Factoringas ir Lizingas Baltic Polis Parex Investiciju Valdymas In Switzerland AP Anlage & Privatbank AG In Ukraine Representative offices Laska leasing Parex Asset Management Ukraine In Belarus Representative office Parex leasing In Japan Representative office In UK Representative office Loan Workout Committee Marketing and Sales Committee Compliance Committee Marketing Communication Committee Assets and Liabilities Committee Credit Committee Risk Management Committee (RMC) Information Systems Maintenance Committee In Azerbaijan Representative office Parex Leasing and Factoring In Germany Parex banka branch Representative office In Uzbekistan Representative office

17 AWARDS RECEIVED AND BEST TRANSACTIONS OF 2005 FINANCIAL STATEMENTS SECTION AWARDS RECEIVED AND BEST TRANSACTIONS OF 2005 Global Finance Magazine Global Finance Magazine Euromoney Magazine Syndicated Loan USD 65,500,000 Co-arranger April 2005 Syndicated Loan USD 38,000,000 Lead Manager November 2005 Syndicated Loan USD 50,000,000 Lead Manager November 2005 Syndicated Loan USD 65,500,000 Manager August 2005 Eurobond Issue USD 150,000,000 Co Manager June 2005 Syndicated Loan USD 16,000,000 Lead Manager November 2005 Syndicated Loan USD 170,000,000 Manager November 2005 Syndicated Loan USD 60,000,000 Lead Manager April 2005 Syndicated Loan USD 50,000,000 Lead Manager April ECONOMIC AND BANKING ENVIRONMENT IN LATVIA 34 MANAGEMENT OF THE BANK 35 STATEMENT OF RESPONSIBILITY OF THE MANAGEMENT FINANCIAL STATEMENTS: 36 STATEMENTS OF INCOME 37 BALANCE SHEETS AND MEMORANDUM ITEMS 38 STATEMENTS OF CHANGES IN SHAREHOLDER S EQUITY 39 STATEMENTS OF CASH FLOWS 40 NOTES 76 AUDITORS REPORT Eurobond Issue USD 200,000,000 Co-Lead Manager October 2005 Loan Participation Notes USD 250,000,000 Co-Lead Manager October 2005 Loan Participation Notes USD 100,000,000 Co-Manager October 2005

18 ECONOMIC AND BANKING ENVIRONMENT IN LATVIA The well-considered and balanced monetary and fiscal policies have facilitated improvements in the Latvian economy. Thus, Latvia has become one of the most successfully developing countries in Central and Eastern Europe. Lat (LVL), the only legal tender of the Republic of Latvia, is fully convertible against hard currencies without exchange controls. As of 1994, the Bank of Latvia has pegged Lat to the International Monetary Fund Special Drawing Right (SDR), thereby implementing the policy of a fixed national currency exchange rate. Following Latvia s accession to the European Union in 2004, Lat has been pegged to Euro at the rate of 1 EUR = LVL effective from 1 January Since 2 May 2005, Latvia has joined European currency exchange mechanism II. Latvia will have to participate in this mechanism for at least two years, while proving its compliance with the Maastricht criteria. As soon as the Council of the European Union allows Latvia to join the Economic and Monetary Community, Euro will replace the national currency of Latvia for everyday transactions, and the Bank of Latvia will discontinue its independent monetary policy. According to the schedule approved by the Cabinet, Latvia is to be admitted to the Economic and Monetary Community at the beginning of 2008, until then Lat will be the only legal tender of the Republic of Latvia. The banking sector is one of the most developed economic sectors in Latvia and is particularly attractive to foreign investors. This is evidenced by investments of several foreign banks in the share capital of Latvian banks: Swedbank, Skandinaviska Enskilda Banken, Vereins- und Westbank, Norddeutsche Landesbank and Sampo Bank. The restructuring of the Latvian banking sector is nearly completed. Most of the banks are privately owned. At the end of 2005, the state s share in the share capital of banking sector was only 5.3%. Only one bank is fully state-owned. Five major banks held assets comprising two-thirds of the total assets of all Latvian banks. According to a number of foreign experts, banking supervision in Latvia is among the strictest in all Central and Eastern Europe. The supervisory authority is vested in the Financial and Capital Market Commission, which has been established to ensure protection of investors, depositors and insured persons, as well as to enhance the development and stability of financial and capital markets. Many of the regulations on the operations of Latvian credit institutions are stricter than in the EU Member States. The current peg mechanism allows for relative stability and predictability of the national currency, mitigates the foreign currency risks and creates a stable basis for corporate planning and pricing. Official exchange rates of the Bank of Latvia are as follows: 32 As at 31 December 2005 As at 31 December 2004 LVL 1.00= LVL 1.00= USD EUR GBP RUB At the end of October 2005, the cash base (cash in circulation and deposits with the Bank of Latvia) coverage of net foreign assets constituted 114.5%, and net foreign reserves were equivalent to 3 4 months volume of state commodity and non-factored service imports. In 2005, the economy of Latvia continued to exhibit upward development in almost all the significant economic sectors. During the first three quarters of 2005, the GDP of Latvia has grown by 10.1% compared to the respective period in It is projected that the total GDP growth in 2005 will be close to or even exceed the 10% level. More than 4/5 of the growth was generated by the development of five industries: trade, manufacturing, transport and communications, commercial services, and construction. The rapid economic growth and integration into the European Union resulted in an increase of the inflation pressure. During 2005, the consumer price index grew by 7.0%; however, the average inflation rate for the year constituted mere 6.7%. The registered unemployment level reduced from 8.5% of the economically active population at the beginning of the year to 7.5% in the end of November. Starting from 1996, and the only exception being the year 1999, the budget deficit has been lower than 3.0% of the GDP. According to provisional data in 2005, the fiscal deficit has reached the lowest level over the last seven years, with approximately 1% of the GDP. One of the few weaknesses of Latvian economy is still the current account deficit, which in 2005 most probably will amount near to or even exceed 13% of the GDP. Along with the development of the Latvian economy, the foreign trade volume has also grown significantly. Thus, in 2005, the export volume has increased by 33.6% with the import volume also growing by 27.1%. The current account deficit for the time being is covered by foreign direct investments. During the first nine months of 2005, accumulated foreign direct investments increased by 11.8%. The success of economic reforms in Latvia is reflected in the credit ratings assigned by leading foreign rating agencies. The ratings assigned by international credit ratings agencies Standard & Poor s, Moody s and Fitch Ratings are A-, A2, and A-, respectively, for Latvia s long-term liabilities in foreign currency, and A-, A2, and A, respectively, in Lats. The international finance community already for a while has been assessing Latvia as a safe and prospective place for investment. The growing trust of investors in Latvia is proved by the falling risk premium difference of return on government bonds of Latvia and return on the highest quality debt securities of European governments. Banking sector in 2005 As at 31 December 2005, in Latvia there were 22 banks, 1 branch of a foreign bank the Latvian branch of Nordea Bank Finland Plc (Finland). The Latvian banking sector is characterized by its stability. There is a gradual growth in assets, deposits and loans, and commercial banks are operating with profit. Further improvements in the banking system s efficiency are closely linked to the development of the economy, structural reforms, and the development of capital and real estate markets.

19 MANAGEMENT OF THE BANK STATEMENT OF RESPONSIBILITY OF THE MANAGEMENT Council of the Bank as at the date of signing these financial statements: Guntars Grīnbergs Chairman of the Council Andris Bērziņš Deputy Chairman of the Council Kārina Pētersone Member of the Council Gints Poišs Member of the Council Hans Eberhard Berndt Member of the Council During the reporting year, there have been no changes in the Council of the Bank. The Management of AS Parex banka (hereinafter the Bank) is responsible for the preparation of the financial statements of the Bank as well as for the preparation of the consolidated financial statements of the Bank and its subsidiaries (hereinafter the Group). The financial statements set out on pages 6 to 45 are prepared in accordance with the source documents and present fairly the financial position of the Bank and the Group as at 31 December 2005 and 2004 and the results of their operations, changes in shareholders equity, and cash flows for the years then ended. The financial statements are prepared in accordance with International Financial Reporting Standards issued by the International Accounting Standards Board on a going concern basis. Appropriate accounting policies have been applied on a consistent basis, except for changes as disclosed in Note 2. Prudent and reasonable judgements and estimates have been made by the Management in the preparation of the financial statements. The Management of AS Parex banka is responsible for the maintenance of proper accounting records, the safeguarding of the Group s assets, and the prevention 34 Management Board as at the date of signing these financial statements: Valery Kargin President and Chairman of the Management Board Viktor Krasovitsky Deputy Chairman of the Management Board Alexander Kvasov Member of the Management Board Arnis Lagzdiņš Member of the Management Board Jānis Skrastiņš Member of the Management Board Vladislavs Skrebelis Member of the Management Board Gene Zolotarev Member of the Management Board By the decision of the Bank s Council on 23 March 2005, Viktor Krasovitsky has been appointed as the deputy chairman of the Management Board (previously member of the Management Board). During the reporting year, there have been no other changes in the Management Board. Council of Directors as at the date of signing these financial statements: Viktor Krasovitsky Chairman of the Council of Directors Alexsander Kvasov Senior Vice President Responsible for Operations Division, covering client service (retail and corporate), card operations, settlements and branch management. Arnis Lagzdiņš Senior Vice President Responsible for the Group s compliance with regulations and internal procedures. Ēriks Brīvmanis Vice President Responsible for the Bank s and the Group s financial management, asset and liability management, information technology strategic development and implementation, and the Bank s and the Group s accounting systems. Līga Puriņa Vice President Responsible for Lending Operations, covering all lending, credit and leasing facilities to retail and corporate clients. Gene Zolotarev Senior Vice President Responsible for Capital Markets, Trading & Treasury, Investment Banking, Corporate Finance, Investment Products, Trust and Asset Management. Also responsible for managing the Group s strategic development covering investor relations, debt and equity financing, and relationships with international financial institutions. and detection of fraud and other irregularities in the Group. They are also responsible for operating the Bank in compliance with the Law on Credit Institutions, regulations of the Financial and Capital Market Commission, and other legislation of the Republic of Latvia applicable for credit institutions. Valery Kargin President, Chairman of the Management Board Viktor Krasovitsky Chairman of the Council of Directors Guntars Grīnbergs Chairman of the Council Riga, 3 March