WORKING TOGETHER ANNUAL REPORT

Transcription

1 WORKING TOGETHER ANNUAL REPORT 2008

2 This year has brought new challenges to the Russian economy, challenges that Alfa-Bank is well prepared to face. We will continue our work in all business segments as the largest universal private bank in Russia, and we hope our efforts will translate into excellent results. We believe that we are taking the right steps to improve our operations, and we have confidence in both our employees and our customers. Mikhail Fridman Chairman of the Supervisory Board of Alfa Group Consortium

3 ALFA-BANK 2008* countries 6 branches and offices 364 employees corporate clients retail clients profit (USD million) 230 equity (USD million) gross loan portfolio (USD million) total assets (USD million) * For the purposes of this report, the term Alfa-Bank is used to describe ABH Financial Limited and its subsidiaries. 1

4 ALFA-BANK AWARDS AND RECOGNITION IN 2008 EUROMONEY MAGAZINE Best Bank in Russia GLOBAL FINANCE MAGAZINE Alfa-Click as the Best Internet Bank in Russia Best Domestic Russian Trade Finance Bank Best Equity Research Bank Best Domestic Bank INDEPENDENT EXPERT COUNCIL OF SUPERBRANDS INTERNATIONAL Super Brand of the Year Innovation Award ROSBUSINESSCONSULTING Alfa-Bank Analysts Nominated Among Best Equity Analysts JP MORGAN CHASE BANK Elite Quality Recognition Award PriceWaterhouseCoopers AND SENTEO AWARD «Customer Experience Index 2008: Who is Winning the Retail Banking Race in Russia» NEXTEP GROUP OF COMPANIES AND KOMMERSANT-MONEY MAGAZINE 1st Place in Terms of Client Service Quality MASS MEDIA ANALYSIS AND MONITORING SYSTEM MEDIOLOGIA 1st Place in most frequently quoted Russian bank in the mass media BRAND OF THE YEAR/ EFFIE 2008 AWARDS The «My Alfa» bank card has won the Brand of the Year/EFFIE 2008 Award in the «Financial Institutions, Products and Services» category 2

5 CONTENT Address to OUR Clients and Business Partners 4-5 Board of Directors and Executive Board 8-9 Statement on Key Achievements of 2008 and Strategy for Russian Economy and Banking Sector Review Corporate Banking Investment Banking Retail Banking Alfa Group Family Companies Summarised Consolidated Financial Statements Corporate Directory

6 Mikhail Fridman Chairman of the Supervisory Board of Alfa Group Consortium Address to OUR Clients and Business Partners Alfa-Bank* is proud to present its annual report for It was a difficult year, in which the entire Russian financial sector was put to the test. We are proud to say that Alfa-Bank has passed that test and confirmed its status as Russia s leading private bank. This was possible thanks to the strategic decisions taken over the past few years and the far-sighted, forward-looking policy implemented by Alfa-Bank s management, as well as the solid position built by Alfa-Bank over many years of successful operation. Our 2008 results validate this statement. Last year, Alfa-Bank once again grew its market share in key areas, increased its number of retail clients and continued to work closely with corporate customers. The number of its customers increased even in a period of financial instability, proving that Alfa-Bank has gained the confidence of businesses of all sizes, as well as individuals. Quality and teamwork are vital in complex financial conditions, which is why 2008 was a year of mergers. For example, Alfa-Bank merged all of its divisions that focus on working with retail clients, as well as those involved in the corporate and investment business lines. Combining the retail divisions enabled us to significantly cut costs and offer customers a broader array of products. This approach supported our lending operations during difficult times, creating synergy and, ultimately, making the retail business more profitable. The merger between the Corporate and Investment Banks was seen as a milestone at a time when investment banking is going through a particularly tough time. Alfa-Bank continued its regional expansion in We now operate in all of Russia s key regions and largest cities. We significantly increased our number of branches and almost doubled the size of our ATM network. Not only do we strive to be a universal, nationwide bank, but we also aspire to be a bank trusted by everyone in every corner of our country. In this context, the acquisition of Severnaya Kazna bank was an important step which put us in a dominant position in the Urals region and brought us many new customers. Alfa-Bank is particularly focused on working with small- and medium-sized businesses, as this is one of the most promising segments of the Russian market. For 4

7 Johann Jonaсh Chairman of the Board of Directors Rushan Khvesyuk Chairman of the Executive Board, Member of the Board of Directors example, we have made great strides in developing our lending program for smalland medium-sized enterprises. Also, the use of advanced technology to liaise with companies of various sizes across Russia ensures that Alfa-Bank can provide a highquality service to any business that chooses us as its financial partner. We have strived to develop Alfa-Bank s technological advantage in our work with individual customers, e.g. remote customer service channels. Our efforts have won recognition from our own customers as well as professionals. In 2008, Alfa-Click was named the best Internet banking service in Russia and Central and Eastern Europe. More importantly, however, we have been able to provide a consistent, high-quality service to all Alfa-Bank customers. We continue to work on improving our service tools, optimizing our service range and improving the quality of our customer service. Our efforts have not gone unnoticed by the public, as confirmed by both feedback from our customers and the number of awards given to Alfa-Bank. This year, we once again won the award for the best Russian bank in terms of customer service. We would like to thank all Alfa-Bank employees for their efforts in maintaining our reputation as a bank with an unmatched level of service. Along with its financial activities, Alfa-Bank plays an active role in social and charity programs. We are fully aware of our responsibility for the future of our country and take an active part in cultural and social projects. Alfa-Bank s current charitable initiatives include organizing guest performances of popular international celebrities in Russia, supporting Russian art and literature and assisting young talent. We support the Life Line Charity, which provides financial assistance to children with serious illnesses, and we contribute to the World Wildlife Fund (WWF). This year has brought new challenges to the Russian economy, challenges that Alfa- Bank is well prepared to face. We will continue our work in all business segments as the largest universal private bank in Russia, and we hope our efforts will translate into excellent results. We believe that we are taking the right steps to improve our operations, and we have confidence in both our employees and our customers. Mikhail Fridman Chairman of the Supervisory Board of Alfa Group Consortium Johann Jonaсh Chairman of the Board of Directors Rushan Khvesyuk Chairman of the Executive Board, Member of the Board of Directors 5

8 Almetevsk Kazan Moscow Abakan Arkhangelsk Arzamas Astrakhan Balakovo Barnaul Belgorod Berezniki Buzuluk Chaykovskiy Cheboksary Chelyabinsk Ekaterinburg Elabuga Glazov Ivanovo Izhevsk Kaliningrad Kaluga Kamensk-Uralsky Kamyshin Kemerovo Kirov Krasnodar Kurgan Krasno Kursk Lipetsk Magnitogorsk Megion Mias Murmansk Naberejnye Chelny Neftekamsk Nijnekamsk Nizhnevartovsk Nizhniy Tagil Nizhny Novgorod Novokuznetsk Novorossisk Novotroitsk Noyabrsk Noyabrskiy Omsk Orenburg Orsk Penza Perm Petrozavodsk Pskov Raduzhny Rostov-on-Don Ryazan Samara Sarapul Saratov Sochi St.Petersburg Staryy Oskol Stavropol Sterlitamak Surgut Syktyvkar Syzran Tambov Tolyatti Tomsk Novosibirsk Tver Tuapse Tula Tyumen Ufa Ulyanovsk Ust-Kamenogorsk Uvat Vladimir Vologda Volgograd Voronezh Votkinsk Yaroslavl Zelenogorsk Zheleznogorsk Zlatoust 6 ALFA-BANK ENTITIES Abakan Almetevsk Amsterdam Angarsk Arkhangelsk Arzamas Astrakhan Balakovo Barnaul Belgorod Berezniki Buzuluk Chaykovskiy Cheboksary Chelyabinsk Chita Ekaterinburg Elabuga Glazov Irkutsk Ivanovo Izhevsk Kaliningrad Kaluga Kamensk-Uralsky Kamyshin Karaganda Kazan Kemerovo Kirov Khabarovsk Krasnodar Krasnoyarsk Kurgan Kursk Lipetsk London Magnitogorsk Megion Mias Moscow Murmansk Naberejnye Chelny Nakhodka Neftekamsk New York Nicosia Nijnekamsk Nizhnevartovsk Nizhniy Tagil Nizhny Novgorod Novokuznetsk Novorossisk Novosibirsk Novotroitsk Noyabrsk Noyabrskiy Omsk Orenburg Orsk Penza Perm Petrozavodsk Pskov

9 Yakutsk yarsk Yuzhno-Sakhalinsk Khabarovsk Angarsk Irkutsk Ulan-Ude Chita Vladivostok Nakhodka Raduzhny Rostov-on-Don Ryazan Samara Sarapul Saratov Sochi St.Petersburg Staryy Oskol Stavropol Sterlitamak Surgut Syktyvkar Syzran Tambov Tolyatti Tomsk Tver Tuapse Tula Tyumen Ufa Ulan-Ude Ulyanovsk Ust-Kamenogorsk Uvat Vladimir Vladivostok Vologda Volgograd Voronezh Votkinsk Yakutsk Yaroslavl Yuzhnyy Sahalin Yuzhno-Sakhalinsk Zelenogorsk Zheleznogorsk Zlatoust Alfa Capital Markets: London Alforma Capital Markets Inc.: New-York Amsterdam Trade Bank N.V.: Amsterdam JSC Subsidiary Bank Alfa-Bank (Kazakhstan): Almaty, Astana 7

10 Board of Directors and Executive Board Ildar Karimov Dmitry Member of the Ponomarev Board of Directors Member of the Board of Directors Sergei Mednov Member of the Executive Board, Head of Information Technology Alexander GAFIN Member of the Board of Directors Andrei Sokolov First Deputy Chairman of the Executive Board Andrei Kosogov Member of the Board of Directors Rushan Khvesyuk Chairman of the Executive Board, Member of the Board of Directors Andrew Baxter Deputy Chairman of the Executive Board, Chief Financial Officer Mikhail Fridman Chairman of the Supervisory Board of Alfa Group Consortium Alex Knaster Member of the Board of Directors 8

11 Oleg Sysuev First Deputy Chairman of the Board of Directors Petr Aven President, Member of the Board of Directors Valeriy Novikov Member of the Executive Board, Chief Operating Officer Johann Jonaсh Chairman of the Board of Directors Alexey Marey Member of the Executive Board, Head of Retail Banking Edward Kaufman Member of the Executive Board, Co-head of Corporate- Investment Banking Alexander Lukanov Member of the Board of Directors Vladimir Tatarchuk Deputy Chairman of the Executive Board, Co-head of Corporate- Investment Banking Petr Smida Member of the Board of Directors 9

12 Rushan Khvesyuk Chairman of the Executive Board, Member of the Board of Directors Statement on Key Achievements of 2008 and Strategy for 2009 In 2008, Alfa-Bank s development strategy was closely linked to the current economic situation. The year evidenced that, despite large-scale changes in the national and global economy, Alfa-Bank, as the largest private bank in Russia, remains a reliable financial institution, ready to address any, even most complicated, situations, able to assess own capabilities and losses and continue to move forward demonstrating decent performance and increasing business volume and market share in its priority business segments. This was enabled, among other things, by Alfa-Bank s ability to change and adapt its strategy to the current situation as well as strive to continuous improvement of own operations. This was the aim of some of the large-scale strategic changes in the Bank s structure in 2008: the merger of all retail business units and of Corporate and Investment blocks. Consolidation of Alfa-Bank s retail businesses including mortgage lending and auto finance allowed cutting operating costs and achieving better performance indicators owing to more universal nature of the product line offered and sales channels used. The unified corporate and investment business enables us to create a universal offering for any company, featuring all the products and tools from both corporate and investment banking. Consolidation of business units as well as other extensive work aimed at optimising our business and reducing expenses yielded a 14-percent decrease in profit operating expenses against the plan and improved our cost to income ratio. We also used a significant share of our income to increase provision for loan impairment. In 2008, provisions increased up to $1.2 billion (6.2% of the total loan portfolio) compared to $0.4 billion (2.4% of the total portfolio) at the beginning of the year. This is especially important in the situation of overall financial instability we are experiencing today. In this testing time for the global economy, Alfa-Bank managed to achieve good indicators in most of its priority business lines. Thus, on the basis of performance in 2008, we can speak of a record growth in profit before operating expenses, up to 10

13 On the basis of performance in 2008, we can speak of a record growth in profit before operating expenses, up to $1.21 billion. The Bank s assets grew by 19.4% compared to 2007 reaching $27.1 billion. It is noteworthy that these trends represent an excellent achievement amid financial turbulence as they evidence that the Bank. $1.21 billion. The Bank s total assets grew by 19.4% compared to 2007 reaching $27.1 billion. Outstanding performance was shown by our retail business it succeeded in materially increasing its share in the market of demand deposits, which was 4.86% by the end of Alfa-Bank significantly improved its share on the market of term deposits demonstrating an 83% growth against the year The cumulative amount of demand and term deposits attracted from individuals in 2008 totalled $6.1 billion (compared to $4.9 billion at the end of 2007). It is noteworthy that these trends represent an excellent achievement amid financial turbulence as they evidence that we were able to reverse the negative trend and continue extending our customer base among individuals and grow account balances with Alfa-Bank. As for corporate business, Alfa-Bank paid close attention to the quality and liquidity of collateral. Despite a loan portfolio cutback in accord with the general market trend, Alfa-Bank retained its status on the Russian market, finding itself in the 6th place at the year end in terms of corporate loan portfolio size (or second largest portfolio among private banks). Nuclear, oil & gas, electric power, telecommunications and retail remain our priority industries in corporate lending. Alfa-Bank was actively liaising with reliable corporate borrowers of any scale not only the country s largest entities, but also representatives of small and mediumsized business. A significant number of loans were issued under the long-term SME crediting programme. This group of loans represents a reliable portfolio with high quality security. Much attention was given in 2008 to development of the risk-free segment of our business, particulary settlement operations, and increasing fee and commission income. Milestone events in this context were the launch of settlements between wholesale electricity market participants (GOELRO project) and Alfa-Bank winning the contract for handling weekly settlements between insurance companies. The latter tender was held by the Russian Association of Auto Insurers. Another business line the Bank developed in 2008 was assistance to companies in servicing different types of debt obligations. Operations in debt markets are currently seen as a most promising corporate business development line creating impressive possibilities for companies that have adopted qualitative and strategically correct risk management patterns. 11

14 Statement on Key Achievements of 2008 and Strategy for saw Alfa-Bank preserving and reaffirming its status as the technology leader on the market for financial services both in corporate and retail segments. By the year end Alfa-Bank successfully completed implementing its Eurasia project to create a unified technology platform for all Russian regions. The platform ensures equal opportunities for our corporate customers from all regions of Russia and provides a c c e s s t o h i g h q u a l i t y s o l u t i o n s f o r a l l c o m p a n i e s t h a t o p t e d f o r t h e s e r v i c e s o f Alfa-Bank. In retail banking we were actively developing remote customer service channels, which is fully in line with the current day needs of our retail clients. The number of functions and transactions accessible through the Internet, via mobile phones and Alfa-Bank cash dispensers has grown. The number of Alfa-Click Internet Bank users has nearly doubled reaching 415 thousand clients, while transaction turnover in Alfa-Click increased 200%. Today, we can quite positively say that Alfa-Click is among the best internet banks in Russia as well as in Europe. This is confirmed by awards we received in 2008 as the Best Internet Bank from Global Finance magazine and the Best Internet Bank for Retail Clients in Account Management subcategory in Central and Eastern Europe. The year 2008 was an important milestone from the viewpoint of Alfa-Bank s regional development our corporate customers were able to use the complete range of quality services owing to our Eurasia system, while our retail block completed Alfa-Bank s regional development programme launched in By the end of 2008 we opened 22 new branches, increased the number of operating ATMs up to 2000 and opened four new A-Club offices for high-net-worth clients in the biggest cities St. Petersburg, Ekaterinburg, Novosibirsk and Samara. It should be noted that Alfa-Bank became a leading financial services provider in the Urals region owing to its acquisition of Severnaya Kazna bank with 30 offices across the region. The takeover brought 400 thousand new retail clients and 8 thousand corporate customers to the Bank. We continued developing another competitive advantage that Alfa-Bank enjoys the offering of banking products with added value. Alfa-Bank s co-branding products: payment cards Aeroflot MasterCard Alfa-Bank and Alfa-Bank Cosmopolitan Visa were invariably popular among our customers, produced excellent performance results and won a lot of prestigious awards. The reporting year saw another innovative product created individual design cards. This card project was named My Alfa and is very popular among our customers. The effort of our retail segment to maintain sustainable high level of retail services and customer servicing was recognised by different awards. Thus, Alfa-Bank ranked 12

15 number one in the survey of financial institutions in terms of customer service level conducted jointly by Kommersant-Dengi magazine and NEXTEP Group, outpacing in this parameter all other largest banks operating in the country. The most important for us is, however, the award given by customers themselves. Alfa-Bank received this award for second year running it was recognised as the best out of 50 biggest Russian banks in the joint survey Customer Experience Index 2008: Who is Winning the Retail Banking Race in Russia» by Senteo and PricewaterhouseCoopers. This award is a token that clients understand and value the quality of Alfa-Bank s services while the Bank has chosen the right course and appropriate development strategy. All our employees maintain the high reputation of Alfa-Bank. It is especially important in a complicated financial environment that all the company personnel and management in particular demonstrate their loyalty to the employer in taking strategic decisions and in everyday work, as is the situation with Alfa-Bank. Alfa-Bank, in turn, has always paid and is paying a lot of attention to personnel development and directs substantial funds to various kinds of staff incentive. At this time, when the top priority is achieving high results in the long term, we decided to give up current annual bonuses for top management and replace them by long-term incentive programmes. This initiative has found understanding among Alfa-Bank s management who are aware of this step s importance for further development of Alfa-Bank. If we are to speak of the outlook for banking business in 2009, we have to note that the overall situation in the financial sector may be expected to further deteriorate. Yet, Alfa-Bank views its future quite confidently, adapting its strategy and policy to current circumstances. Today s retail and corporate portfolios of Alfa-Bank are absolutely manageable. Our plans for the year 2009 include further increasing Alfa-Bank s share in the risk-free segment and developing our settlement business. Corporate sector will be focusing on liaising with reliable customers and attracting new companies that were serviced by less sustainable financial institutions and turn to more reliable and convenient banks in an environment of financial instability. In a similar manner, we will increase retail customer base, with clients to whom Alfa-Bank invariably rendered high quality services and offered its competitive advantages. In 2009, an essential focus will be on working with problem loans and developing debt business. In conclusion, I would like to note that financial crisis is a time for a grave economic renewal offering significant opportunities for those who know how to use them, who can think strategically and make plans for the future. 13

16 Petr Aven President, Member of the Board of Directors Russian Economy and Banking Sector Review Russian economy benefited from positive expectations until 2008 Last year, it became apparent that sooner or later, the real economy would be affected by the turmoil on financial markets. After the subprime crisis erupted in summer 2007, it took about a year for the trouble to spread to the real sector. Confidence in financial markets hit rock bottom in fall 2008, paralyzing economic growth and fuelling uncertainty around the globe. The World Bank now forecasts that the global economy will contract by 1.7% in 2009, reflecting weakness in the US economy and a lack of confidence in the global interbank market. The Russian economy fared reasonably well during the first stage of the global crisis, when the turmoil was confined to financial markets. This was mainly due to the low penetration of financial services in Russia. In mid-2008, banking assets were equal to slightly more than 60% of GDP, and corporate loans around 30%. Russian banks were not involved in subprime lending, so they could maintain their mid-2007 growth levels. In fact, banks saw 2007 as an opportunity to gain market share by providing large loans to local enterprises that were cut off from foreign banks. Moreover, in the first half of 2008, corporate loans grew even more rapidly than they did in Figure 1: Key figures for the Russian banking sector in , $ bln, % GDP Assets % GDP 32% 34% 38% 44% 43% 44% 54% 64% 67% Retail deposits % GDP 6% 7% 9% 12% 12% 13% 15% 16% 15% Corporate loans % GDP 10% 13% 15% 18% 20% 19% 23% 28% 30% Retail loans % GDP 0.6% 1.0% 1.3% 2.0% 3.2% 4.7% 7.0% 9.1% 9.3% Source: CBR, Alfa Research Another reason why Russia was insulated from the financial turmoil in 2007 is that its economy was driven by very optimistic expectations on the part of households. Since 2000, real disposable incomes have seen double-digit growth, and the retail lending market rose from 0.6% of GDP in 2000 to the current 9%. Russia s mortgage market, which did not exist in , reached 3% of GDP in Access to retail loans and rising disposable incomes were the two driving forces of consumption growth. 14

17 The global crisis means that Russia must find an internal source of growth if it is to resume rapid economic expansion. In previous years, Russia was viewed as having a rapidly emerging middle class with a high consumption-growth potential. Around 10% of annual household income now comes from rent, suggesting that the general population s wealth is closely linked to the residential real estate market. Therefore, the rapid growth in the value of Russian real estate was another factor that contributed to people s optimism. The final key factor behind Russian households positive outlook in recent years was the increase in investment activity. In 2006, Russia began to provide more funding to its infrastructure projects through the state investment fund, as well as through a number of federal projects. Private companies actively tapped the equity market to fund their projects. Investment growth was spread throughout the country via the creation of public-private partnerships. Russia was expected to account for around 10% of the total investment plans of the world s largest countries in Utility sector reforms also raised expectations that investments would increase. These expectations went into reverse in 2008, when the dramatic decline in oil prices triggered the collapse of the equity market and brought Russia s high dependence on fuel back to the fore. The real economy suffered greatly from the contraction in investment demand both at home and abroad. Industrial growth was 6.3% y-o-y in September but dropped to 0.6% in October and then to -16% in January This drop pushed companies to reduce salaries and cut staff, while banks became more cautious and began to reduce their loan books. As a result, in February 2009 consumption started to fall, triggering a 2.4% y-o-y drop in retail trade. The unemployment rate went up to 8.1% in February 2009, suggesting further deterioration of economic trends. GDP growth was reported at -7% for Like a number of other countries, the Russian government has taken a proactive approach to the economic crisis. During its first stage, in fall 2008, the government and the CBR came up with plans to support local liquidity, which had dried up owing to capital outflow and bank runs. In response to the lack of confidence in the interbank market, the CBR cut the reserve rate and injected up to RUB2 trln into banks, increasing its share from 2% of banks liabilities at the beginning of 2008 to 12% by year-end. Another important measure was the $50 bln VEB rescue package, which gave Russian companies the option to refinance their foreign debt through the State. Government response The second stage of the crisis, which saw the turmoil spread to the real economy, called for making adjustments to fiscal policy. After running a fiscal surplus of 4% of GDP in 15

18 Russian Economy and Banking Sector Review 2008, the Russian government is expected to run a fiscal deficit of some 8% of GDP in While federal budget revenues are expected to drop by around 30% y-o-y in 2009, expenditures have increased by 30% y-o-y. The government expects to use the Stabilization Fund to finance the fiscal deficit. RUB2.7 trln from the fund will be needed to cover the budget shortfall in However, there is some concern that the federal government will not only need to compensate for the decline in its own fiscal revenues, but also for the decline in regional budget revenues. Another concern is that the State will have to continue supporting the banking sector. During the first stage of the crisis in the fall of 2008, the main problem facing banks was an outflow of deposits, which the CBR has since managed to stop. However, banks will now have to restructure a significant portion of their loan books. Russian companies debt burdens total 52% of GDP; this is not high by international standards, but the debt has a short maturity, and up to 40% of it is foreign (similar to Indonesia in 1997). Companies have to pay some $220 bln in the next 12 months, including $120 bln on local ruble loans, $40 bln on foreign-currency-denominated local loans and $60 bln on foreign debt. This represents around 20% of GDP and suggests that a huge amount of debt needs to be restructured. As a result, banks will have to be fully recapitalized, and the minimum cost of recapitalization could be as high as 5% of GDP. Figure 2: Companies debt by country, $ bln and % GDP Country Bank lending to corporate clients, % GDP External debt, % GDP Internal corporate debt through bond issues, % GDP Share of external debt in total debt, % Total corporate debt, % GDP Total corporate debt, $ bln Malaysia % Singapore % Philippines 1997 Thailand 1997 Indonesia 1997 Korea 1997 Russia % % % % % Source: World Bank, Alfa Research Another very important area of restructuring is the consolidation of banking institutions, which needs to be encouraged. There are still over 1,000 banks operating in Russia, but the top 200 account for around 90% of deposits and lending. On the one hand, this means that the number of banks could easily be reduced, and consolidation could even take place among the top 200. However, since more than 900 banks are part of the deposit insurance system, consolidating the smallest banks would do a lot to boost confidence in the banking system. 16

19 Russia will begin to recover only if it focuses more on internal restructuring. The years of rapid economic growth did not give the country an opportunity to lay the groundwork for a long-term recovery. Economic data from the past few years indicate that GDP growth became much more dependent on services starting in Before that, the share of industry in GDP was close to 28%, but it had dropped to 24% by In , the share of the three key non-industrial sectors trade, construction and real estate services rose from 39% to 48%. In 2008, industries contributed only 3% of real GDP growth, while the construction, trade and real estate service sectors accounted for 70%. Russia 2009: Time to put the house in order One of Russia s key problems is still its very low savings rate. Household deposits in Russian banks are still below 20% of GDP. Pension reform has to be revived, as 97% of private pension savings are still in the state pension fund. Pension savings are still a miniscule 1-2% of GDP, and there is little investment in insurance instruments and mutual funds. Household savings do not exceed 10% of annual revenues, and private savings in Russia have very short maturities. In addition, Russia has not managed to reduce its exposure to fuel exports fast enough. The share of fuel in exports is still 60-65%, and it is not declining. To finance its real annual import growth of 20-30%, Russia needs oil prices to keep rising. Meanwhile, growth in commodity extraction and exports has been very weak. In real terms, annual export growth was a mere 6-7% in Paradoxically, while the global financial markets took a very optimistic view of Russia s growth story in , this was not accompanied by an improvement in local trust. Therefore, as soon as oil prices fell and the equity market collapsed, generating fears of an outflow of foreign capital, local confidence in the ruble fell dramatically. Russian households increased their share of foreign-currency-denominated deposits from 13% in mid-2008 to 34% as of February Uncertainty surrounding the ruble exchange rate led Russians to withdraw around 8% of their retail deposits in banks in September- October 2008, reducing liquidity on the interbank market. Meanwhile, in 4Q08 the capital outflow generated by the Russian corporate sector totaled around $50 bln. Another major concern is Russia s high inflation, which is linked to structural problems, especially a lack of competition. A number of developed countries, and even some emerging markets, are now facing deflation. Nevertheless, in Russia price growth has actually accelerated slightly, from 13% in 4Q08 to 14% in 1Q09 on an annual basis. Significantly, this inflation is occurring against a backdrop of falling producer prices, which will most likely be reflected as payment arrears in the real sector. Russia s economic situation is different from that of other countries, so it needs slightly different economic remedies. Russia has low leverage, but it still suffers from low savings and low competition. Therefore, unlike developed countries, which must first address the decline in economic activity resulting from deleveraging, Russia needs to concentrate on supporting private businesses and generating private savings. Support for the banking sector and closer monitoring of banks would also be very important steps in ensuring that Russia improves its economic growth model in the future. 17

20 18 In 2008, Alfa-Bank once again grew it s market share in key areas, increased its number of retail clients and continued to work closely with corporate customers. The number of its customers increased even in a period of financial instability, proving that Alfa-Bank has gained the confidence of businesses of all sizes, as well as individuals.

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22 Vladimir Tatarchuk Deputy Chairman of the Executive Board, Co-head of Corporate- Investment Banking Corporate Banking The year 2008 transformed the global economic and financial environment. These changes affected all sectors of the world economy, and Corporate Banking was no exception. As in other spheres of banking, relationships with corporate customers last year can conveniently be divided into two periods: January-August and September- December. The first half of the year saw Alfa-Bank continue to grow as it had in 2007, which is why its overall financial performance for 2008 was positive and its corporate loan portfolio grew 20%. Alfa-Bank s customer base continued to grow, while Russia s rapid economic growth gave rise to high demand for its financial services. By the end of the year, funds attracted from corporate customers totaled $6.4 bln. The economic turmoil of the second half of the year posed a challenge to the entire Russian banking system and directly affected the customers and borrowers of Russian banks. The change in market conditions did not, however, prevent Alfa-Bank from continuing with its corporate banking operations in accordance with the concept of a universal bank. Alfa-Bank both preserved the complete range of banking products offered to its major customers and its universal offering for small and medium-sized business. We also continued to develop our system for settlement operations as well as other priority projects. To summarize its performance in 2008, Alfa-Bank held onto its position on the Russian market, ending the year as the country s sixth-largest bank in terms of corporate loan portfolio. Our loan portfolio totaled $16.5 bln, and our market share grew by 0.24 ppts (compared with January 1, 2008) to reach 3.47% (the total includes state-owned banks). As of the end of the year, Alfa-Bank had 56,000 corporate clients. The key industries in Alfa-Bank s loan portfolio in 2008 were construction (20% of corporate portfolio), trade and commerce (13%), railway transport (11%), machinery and metal working (7%), power generation (6%), non-ferrous metallurgy (5%), ferrous metallurgy (5%) and financial and investment companies (5%). At the end of the year, the ten largest borrowers accounted for 25.8% of the Alfa-Bank s corporate loan portfolio. The economic background that developed in the second half of the year brought to the fore the issues of debt restructuring, handling troubled borrowers and assessing the risk inherent in debt instruments. In developing its loan portfolio, Alfa-Bank is currently focusing on increasing the security of its loans and ensuring the reliability of its 20

23 To summarize Alfa-Bank performance in 2008, we held onto our position on the Russian market, ending the year as the country s sixth-largest bank in terms of corporate loan portfolio. Our loan portfolio totaled $16.5 bln, and market share grew by 0.24 ppts (compared with January 1, 2008) to reach 3.47% (the total includes state-owned banks). As of the end of the year, Alfa-Bank had 56,000 corporate clients. borrowers. The crisis has made Alfa-Bank better acquainted with its customers and improved their confidence in us, which promotes robust relationships based upon mutual trust. Alfa-Bank is also paying close attention to developing the debt business of its Corporate Bank, in particular by helping companies to service their various debt obligations. In the summer of 2008, Alfa-Bank launched a factoring-financing program for its corporate customers under which they are provided with a dedicated software module that allows them to promptly receive accurate information on the status of receivables due from their buyers. Agama Trade was the first Alfa-Bank client to receive factoring financing. The past year marked an important stage for converging and finally merging our corporate and investment divisions. Today, Alfa-Bank s managers can offer their customers virtually any banking product imaginable, including Corporate Banking, Investment Banking and Retail Banking instruments. This allows us to provide each client with a complete range of banking products and services. Examples of deals in which investment products were sold to the Corporate Bank s customers include the acquisition of 100% of ISTIL Group by Estar Group s shareholders, in which Alfa-Bank acted as exclusive advisor and also lent the acquirer funds to conduct a leveraged buyout. Another example of the universal bank at work was the organization of OOO RVK-Finance s first bond issue. The total nominal value of the issue was RUB1.75 bln, which was placed at a coupon rate of 12% p.a. The bond issue was fully subscribed. OOO RVK-Finance was set up in August 2007 as a centralized entity for tapping the public debt capital markets in order to fund the Rosvodokanal Group s development program. In August 2008, RVK-Finance was assigned a BB- by Fitch Ratings. In 2008, Alfa-Bank devoted a lot of attention to the regional development of its corporate banking division. The financial crisis forced many small, local banks to give way to universal, nationwide financial institutions. Alfa-Bank won the confidence of its corporate customers both in Moscow and in Russian's regions, and it increased its customer base by servicing companies operating in various cities all over the Russian Federation. Alfa-Bank focused on identifying regional leaders in specific industries and selling them comprehensive lending services comprising the whole range of products offered by Alfa-Bank, as well as on working with small and medium-sized companies in the regions. In 2008, Alfa-Bank successfully completed the implementation of Project Eurasia. Launched in late 2006, the program s aim was to create a unified technology platform for all Russian regions. The platform ensures equal opportunities for our corporate customers from all regions of Russia. The innovative Project Eurasia includes five components: a centralized technology platform, unified banking systems and interfaces project eurasia 21

24 Corporate Banking (e-banking based on the Gemini platform), an optimized credit process, a unified product offering, an equally high quality of service and a unified reporting system for all of our customers irrespective of where they are in Russia. The implementation of this program, aimed at centralizing the Corporate Bank, makes quality solutions available to all our customers across the country and without a doubt gives us a major competitive advantage. GOELRO Lending to Small and Medium-Sized Enterprises In 2008, Alfa-Bank launched a system for settlements between participants in the wholesale electricity market. In November 2007, Trading System Administrator, a non-profit partnership, designated Alfa-Bank as the authorized bank for carrying out settlements. The decision to select Alfa-Bank was seen as recognition of its high-tech systems and its manifold settlement capabilities. In developing the GOELRO system named after a plan for reviving the Russian economy in the 1920s Alfa-Bank used state-ofthe-art software applications and technology. Alfa-Bank also took advantage of its vast experience in working with companies in the energy sector. The launch of this project was a milestone in developing our settlement business. The project is especially useful when there is a liquidity shortage, as all market players deposit the settlement funds in their Alfa-Bank accounts. In 2008, we paid special attention to liaising with small and medium-sized businesses and developing services for them in the cities where Alfa-Bank operates. Although many banks suspended their lending programs for this segment, Alfa-Bank continued to extend loans to SMEs, including by accepting pledges of inventory as collateral. The loans were made in Russian rubles, US dollars and euros as one-time loans, loan facilities, bank guarantees or unsecured letters of credit. One advantage of our SME crediting program is its flexible approach to borrowers. Each customer is supported and assisted throughout the relationship by a personal client manager. The SME crediting market witnessed considerable growth in the first half of 2008, while Alfa-Bank s competitive advantages its transparent technology and credit-scoring system ensured the growth of the Alfa-Bank s indicators and made it one of the leaders in this segment. Despite the difficulties on credit markets around the globe, in the second half of 2008 small and medium-sized enterprises proved to be more reliable borrowers because their owners have a personal interest in the success of their businesses. Many small businesses are still rapidly increasing market share, while their owners take their obligations to the bank seriously. It is important to note that loans under the SME program are granted against high-quality security, which allows the bank to accurately assess the exposure associated with each customer. In 2008, Alfa-Bank s overall SME portfolio increased by 42% to $284.1 mln. The Corporate Bank sees this program as one of its priority areas for development in 2009, and it expects performance indicators in this segment to continue to grow. Alfa-Leasing Like all business areas with a prolonged payback period, leasing has suffered substantially from the crisis. For instance, nearly all types of transportation the sector where leasing services enjoy most demand currently demonstrate a significant decline in indicators by up to 40%-50%. Alfa-Bank is successfully coping with the tasks it now faces in connection with restructuring debts, searching for additional security for leasing deals and assisting customers in financial difficulty with finding solutions to their problems. The Corporate Bank is always ready to meet half-way companies that make an effort to fulfill their debt obligations and to continue working with them. 22

25 In 2008, lease payments receivable by the Bank amounted to $1,305.1 mln. The following deals are worthy of special mention: Company Leasing object Financing $, mln Ahmad Tea equipment for a tea-packing factory 1.6 DVTG Group rolling stock (railway cars) Don-Stroy building machinery and equipment 7.8 ETK Group rolling stock (railway cars) 41.2 Irkutskgeophisika Geological seismological equipment 3.4 R&D Enterpris OOO Meta-Invest metal-working equipment 5.8 OOO TD Iskitimtsement rolling stock (railway cars) 20.1 OOO TD NKSZ in-pit machinery and production equipment 22.3 SIBIR Airlines diagnostic equipment and aircraft simulators 2.5 SOK Group car assembly line 7.7 TransContainer rolling stock (railway cars) 43.8 The financial crisis has had a major impact on the operations of banking institutions in the sphere of structured finance. On the one hand, the complexity of the situation is forcing banks to join forces in seeking solutions to various project-financing tasks; on the other hand, financial institutions are not willing to grant loans without highquality security. These two considerations are compelling companies to search for new ways to develop their business and win market share by offering banks the chance to participate in their capital or future profits. Structured Finance All this brings to the fore the most promising projects, such as Nitol Solar s plan to produce polysilicon in Russia. This structured-finance deal, arranged by Alfa-Bank in cooperation with RUSNANO the Russian Corporation for Nanotechnologies demonstrates that long-term and costly projects are possible even in times of crisis. The Bank and RUSNANO will direct over RUB12 bln to the construction in Siberia of innovative facilities to produce raw material for generating environmentally friendly electricity. To date, Alfa-Bank has allocated RUB4.5 bln to Nitol Solar. The need for alternative energy sources is becoming more and more pressing, which is why this project is hugely important for the Russian economy and has attracted the attention of international investors. Production is expected to begin later in The year 2008 saw Alfa-Bank serve as mandated lead arranger of a syndicated loan organized by the European Bank for Reconstruction and Development (EBRD), ING Wholesale Banking and BNP Paribas (Switzerland). This is the first time Alfa-Bank has collaborated with the EBRD on a syndicated loan. The loan was provided to Integra Group Holding Limited, which is part of Integra Group, a leading Russian oilfield services provider. $250 mln in funds will be used to refinance the company s current debt and finance capital expenditures, including environmental actions. Alfa-Bank s share in the syndicated loan amounts to $25 mln. 23

26 Corporate Banking Other participants in the loan include the following well-known banks: ABN AMRO BANK N.V, Morgan Stanley Bank N.A., Commerzbank Aktiengesellschaft, VTB Bank (Deutschland) AG and Aljba Alliance CB Ltd. Cooperation with the EBRD is a sure sign of Alfa-Bank s competitiveness and reliability. Alfa-Bank s participation in this cross-border transaction attests to its readiness to implement initiatives aimed at supporting Russian industry even in the current financial environment. CJSC Alfa-Bank of Belarus and OJSC Alfa-Bank of Russia provided a one-year syndicated loan of $30 mln to OJSC Naftan. The money was used to fund trade contracts between OJSC Naftan and leading Russian oil companies. The deal s structure allows for the possibility of both monetary and documentary settlements, allowing the borrower to optimize the cost of financing. OJSC Naftan processes about 11 mln tons of oil a year. The company's 2008 revenue under IFRS amounted to $3 bln, with net profit of $133 mln. The oil-processing facilities are owned by the State Property Committee of the Republic of Belarus (99.8%). OJSC Naftan s main oil suppliers are OJSC Surgutneftegas and OJSC Rosneft. Trade Finance Trade Finance is enjoying steady demand in this difficult financial period. Alfa-Bank has traditionally been one of Russia s leaders in this market, and for several years running it has received awards from Global Finance magazine as the best trade finance bank in Russia (in 2001, 2003, 2004, 2005, 2007 and 2008). Alfa-Bank confirmed its leading position in the 2008 reporting year: guarantees and import letters of credit issued by Alfa-Bank to corporate customers totaled $1,189.3 mln. The largest trade finance deals funded by Alfa-Bank in 2008 included the noteworthy purchase of equipment for OJSC Stroytransgas as part of the SHBAB2 project in Saudi Arabia, guarantees ensuring that OJSC Severnaya Verf shipyard would honor its shipbuilding contracts, and funding an equipment-import contract with OJSC Admiralteyskiye Verfi shipyards as part of its shipbuilding contracts. Subsidiary Bank Alfa- Bank (Kazakhstan) JSC Subsidiary Bank Alfa-Bank (Kazakhstan) was established in 1994 to ensure prompt and convenient servicing of cash flows between Russia and Kazakhstan. It is a reliable universal financial institution ensuring that Alfa-Bank is able to provide high-quality services to all of its customers with dealings in Kazakhstan: large companies, small and medium-sized enterprises and individuals. Alfa-Bank Kazakhstan s head office is located in Astana. The Bank also has representative offices in Karaganda, Ekibastuz and Ust-Kamenogorsk. The subsidiary bank is a rapidly developing financial institution and one of the leaders in Kazakhstan s banking sector. Figure 3: Performance in 2008 $ mln growth, % Assets % Loan portfolio % Equity capital % Alfa-Bank Kazakhstan is the country s 20th-largest bank in terms of asset value. Its customer base includes 12,000 individuals and 3,000 legal entities. 24

27 The year 2008 brought major changes to Alfa-Bank Kazakhstan s senior management as the Kazakh market took on a larger role in the economic space of the CIS. The changes were also aimed at making Alfa-Bank more active on the country s market, expand its product range and develop new lines of business. This will create new opportunities for Alfa-Bank as a key player on the financial market of Kazakhstan and enable it to deal with the major strategic challenges it now faces. Amsterdam Trade Bank N.V. (ATB) was incorporated in October 1994 in Amsterdam, the Netherlands, and holds a full banking license from the Dutch Central Bank (De Nederlandsche Bank N.V.). In March 2001, Alfa-Bank acquired a 100% interest in ATB. ATB is a member of the SWIFT, TARGET and INTERPAY settlement systems and issues private and corporate MasterCards. Amsterdam Trade Bank N.V.* ATB provides a wide range of banking services, including project finance services, to a range of corporate clients with a particular focus on trade finance involving Russia, other CIS countries and the European Union. ATB also facilitates foreign direct investment in Russia and the CIS. Despite the turbulence on international financial markets in 2008, the bank s business volumes grew, and at the end of 2008, ATB s assets totaled EUR2,921 mln. ATM continued to expand its corporate loan portfolio in close liaison with Alfa-Bank. By the end of 2008, it grew by nearly 22% and amounted to EUR1,701 mln compared with EUR1,395 mln in ATB continues to fulfill its high growth potential by attracting deposits on the Dutch and German retail markets. In 2008, ATB continued to successfully implement its deposit-servicing program in the Netherlands using Internet technology. The volume of total customer accounts attracted as of year-end 2008 was EUR2,350 mln and ATB s net profit for 2008 was EUR30 mln. ATB s equity on 31 December 2008 amounted to EUR223 mln, rising almost 16% over the whole of will be a difficult year for both the Russian and world economies, especially in the financial sector. Alfa-Bank has anticipated potential problems; this is why we are able to acknowledge today that the situation on the lending market will become increasingly critical. In this context, the Corporate Bank will focus on managing problem debts, assisting customers in financial difficulty and and working with debt instruments. Strategic Priorities for 2009 As before, Alfa-Bank will pay special attention to developing the technological aspects of its operations, particularly the implementation of new applications and systems such as the Eurasia platform, which will make customers dealing with Alfa-Bank more convenient. Alfa-Bank will remain Russia s leader in banking technology and will promptly respond to the market s needs in this area. Serving small and medium-sized businesses as part of our SME program will remain a priority in 2009, as these companies have enormous potential for development and growth. At the same time, Alfa-Bank will make an effort to identify leading businesses in all of Russia s regions and in all sectors of its economy, offering them its universalbanking products and high-quality services wherever in the country they may be. * Figures according to Dutch GAAP audited financial statements 25

28 Edward Kaufman Member of the Executive Board, Co-head of Corporate-Investment Banking Investment Banking Equities Head of Equities - Michael Pijiolis Alfa-Direct Director for Internet Transactions with Securities Alexey Potapov Alfa-Capital Ukraine 2008 was the most difficult year for the global investment market for 80 years, since the Great Depression. Leading global economies experienced a severe downfall, causing some major banks and investment companies to go bankrupt. Emerging economies faced problems on a similar scale. In particular, Russia s investment market fell by almost 80%; and trading volumes in bonds dropped 60%. The RTS index decreased from 2300 points to 600 and many banks found themselves on the verge of bankruptcy. In this challenging time, Alfa-Bank not only managed to close the year without losses, but actually generated a significant profit. This huge success was the result of the sound policy adopted by the Investment Bank, our conservative approach to risk and skilful calculation. As in all other financial segments, the situation on the equity market during the first half of 2008 was strikingly different from that of the second half of the year. At the beginning of the year, the volume of transactions conducted by our Markets and Equity Department grew, reaching its peak in May. In the second half of 2008, however, the market experienced a rapid decline alongside a material decrease in oil prices and other resources, whose exports largely determine Russia s economy. During this difficult time, Alfa-Bank did everything in its power to minimize losses and took advantage of the forced operating downturn to renew its team. Today, we are able to say that personnel turnover in the Markets and Equity Department was completed successfully: the Investment Bank entered a challenging 2009 with a robust team of experts specializing in equity sales on both Russian and international markets, Alfa-Direct services and highly professional analysts. Over the course of 2008, Alfa-Bank rapidly developed its Alfa-Direct system of Internet Trading in securities. On December 31, 2008, the online system had 30,000 active client accounts, a 110% increase on year-end 2007 numbers. Even though trading volumes decreased significantly in the second half of the year, Alfa- Bank managed to avoid losses in this segment as well. Operations in Alfa-Direct are continuing, although the number of deals has dropped. Investors have been able to buy and sell foreign currency assets such as Eurobonds and American Depositary Receipts traded on the London stock exchange via Alfa-Direct since December This opportunity is very important during a period of ruble devaluation, as many investors prefer foreign-currency transactions. The advantage of the new service is that the investor does not need to sign any agreements with foreign counterparties or transfer foreign currency to its accounts abroad. Trading in Eurobonds and ADRs can be carried out using the same broker account at Alfa-Bank that clients use for equity transactions on MICEX. Alfa- Bank also tackles all the matters of withholding personal income tax from the client. Our Investment Bank has been present on the Ukrainian market since Our Ukrainian office is engaged in trade transactions with securities, analytical and financial activities. 26

29 In 2008 the RTS index decreased from 2300 points to 600 and many banks found themselves on the verge of bankruptcy. In this challenging time, Alfa-Bank not only managed to close the year without losses, but actually generated a significant profit. In 2008, Alfa-Bank significantly curtailed its business in the Ukraine as a result of the global crisis on the equity market and subsequent decrease in the volume of operations. The Investment Bank supports Alfa-Capital Ukraine with Russian-based resources, while pursuing a conservative cost-cutting policy and waiting for a revival of the local market. Registered in the Republic of Cyprus in 1996, investment company Alfa Capital Holdings (Cyprus) Limited currently has a leading position on the market, both in terms of its complex financial parameters and its product range. Alfa Capital Holdings (Cyprus) Limited holds a European license from the Cyprus Securities and Exchange Commission for providing investment services, a wide range of financial services and financial instruments. The company operates on the key global markets, in Ukraine and in Russia. The company also has an active branch in the UK, Alfa Capital Markets (ACM UK), which arranges deals from Russia and other CIS countries. Alfa Capital Markets (ACM UK) is the London branch of Alfa Capital Holdings (Cyprus) Ltd, which services numerous institutional investors and hedge funds in the UK and continental Europe and works with assets from Russia and other CIS countries. Today Alfa Capital Markets in the UK has a new team of highly qualified and experienced specialists with an excellent knowledge of the market. In the fourth quarter of 2008, the company launched bond-trading operations for the first time. Alforma Capital Markets, Inc. is an investment subsidiary of Alfa-Bank in New York. The company has been operating in the USA since It holds a license from the US Securities and Exchange Commission (SEC) and focuses on working with institutional investors and hedge funds in the USA, Canada and Latin America. Alfa-Bank has always been a leader on the Russian debt market. In 2008, the department focused on working with bonds. Investments in these securities in the fourth quarter of 2008 generated considerable profits for Alfa-Bank. The Debt Securities Division of Alfa-Bank Group trades in a wide range of debt instruments, including government and corporate bonds and promissory notes; repo transactions as required by clients and for Alfa-Bank s own needs; transactions on the debt capital market; sales of fixed income instruments to foreign and Russian customers; and its own analytical surveys of the market. In 2008, the Division reduced its own debt securities portfolio by 40% in August. There were no material losses in the fourth quarter 2008 owing to rigorous controls over credit risk, and the volume of financing deals during the last two weeks of September fell 80%, which enabled the Division to generate profits on repo transactions and financing deals on the basis of overall performance in 2008 and prevent losses from a compulsory close-out of customer positions. Taking advantage of the weakened position of major foreign banks, Alfa-Bank also established trading relations with the biggest pension funds and insurance companies. Because of high volatility on the market, the Investment Bank chose to curtail its operations with derivatives in the middle of 2008 in order to avoid potential losses and risks. Alfa Capital Holdings (Cyprus) Limited Alfa Capital Markets (UK) Chief Executive Officer Simon Roache Alforma Capital Markets (USA) President David Denson Fixed Income and Derivatives Brokerage Head of Department Simon Vine 27

30 Investment Banking Corporate Finance Head of Department Gene Moldavsky Cooperation with International Banks Funding on International Markets Mergers and Acquisitions As the investment division is actively linked to the corporate bank, it was able to do extremely well in the M&A segment. This was accomplished thanks to our active work with the Corporate Bank s customer base and arranging M&A deals for third party clients. The most significant deals included the acquisition of ISTIL Group by ESTAR Group shareholders, which was recognized as the best M&A transaction of 2008 in the CIS, according to EMEA Finance. Alfa-Bank also acted as financial advisor in a number of successful transactions in the power sector, including the sale of TGK-10 to Fortum of Finland. This was the largest deal concluded in 2008 ($3.1 bln) and the most successful M&A transaction in the Russian electric power sector, in terms of the selling price. Another very successful deal was in advising Golden Telecom on its acquisition of a 49% stake in Corbina Telecom. In addition to giving financial advice to Alfa-Bank s clients, the Corporate Finance team also participated in M&A transactions undertaken by Alfa-Bank itself, including the acquisition of Severnaya Kazna bank in the autumn of In 2008, Alfa-Bank participated in six M&A deals, with an aggregate worth of around $6 bln, and ended the year as the number three financial advisor on the Russian M&A market, according to the Mergermarket agency. Debt Capital Markets 2008 provided quite a challenge for the Russian debt market. Alfa-Bank, however, managed to arrange bond placements for a number of companies. In particular, for the first time in the history of the Russian market, Alfa-Bank issued commercial papers for RBC holding (two tranches worth RUB1.5 bln each) and placed bonds worth RUB1.75 bln for RVK Finance of the Rosvodokanal Group. Equity Capital Markets Even though 2008 was not a favorable year for public share offerings globally, Alfa-Bank completed a secondary GDR offering for X5 Retail Group, with the papers distributed among existing shareholders and third-party investors. This transaction was the biggest floatation on the Russian equity market in 2008, with the deal price totaling $1.158 bln, while cumulative demand among third-party investors exceeded the offering by three times. Alfa-Bank devotes a lot of time and effort to developing ties with foreign financial and lending institutions. Alfa-Bank s global correspondent network currently comprises more than 400 banks. Alfa-Bank has correspondent accounts with the leading clearing banks, such as Commerzbank, Wachovia, HSBC and UBS. Alfa-Bank has always viewed the availability of loan facilities offered by foreign partner banks as a key element to ensure our growth. In the current market environment, and considering current-day specifics, only well-established and long-term relations with these banks can create the foundation for effective liaisons. An excellent example of this concept is that the volume of trading and project finance over the difficult 2008 materially exceeded that of the problem-free Alfa-Bank is still able to meet all the clients needs for their international operations, and sees this ability as its competitive advantage. We are convinced that constructive dialogue with our partners from all over the world will inevitably restore the level of trust and business relations that we achieved over the past ten years. In July 2008, Alfa-Bank was granted a syndicated loan for $315 mln to fund clients foreign trade transactions. This deal saw the continuation of our successful record in attracting external borrowing in recent years. For example, in 2007, Alfa-Bank attracted $900 mln in July and $307 mln in November in the form of syndicated loans. 28

31 In June 2008 Alfa-Bank issued medium term notes with an aggregate nominal amount of $400 mln, which carry a fixed coupon of 9.25% per annum and mature in June The bonds were issued as part of a $2 bln Euro Medium Term Note Programme. Issuers particpating in the program are: Alfa MTN Issuance Ltd., Alfa MTN Markets Ltd., Alfa MTN Invest Ltd. and Alfa MTN Projects Limited. According to the terms of the issue, investors can redeem the bonds before maturity, either on June 24, 2011 or earlier if certain conditions are met. Notably, the volume of bilateral credits increased significantly. In 2008, financial institutions from Europe, the USA and Asia acted as lenders of Alfa-Bank, and more than $122 mln obtained under these bilateral agreements contributed to financing purchases of imported equipment and other goods. Alfa-Bank offers its corporate customers a wide range of trade finance products, including services supporting export and import transactions, insurance of exports and imports, issuance of stand-by letters of credit, guarantees and the provision of import and export financing. In addition to the above products, Alfa-Bank engages in financing import contracts using the funds and resources of foreign banks and export credit agencies that are not ready to assume the risk associated with Russian companies directly, but are positive about Alfa-Bank s risk. For several years, Alfa-Bank has offered short-term financing (up to three years) to its customers through direct arrangements with foreign financial institutions and mid-term lending (three to seven years) engaging Euler Hermes of Germany, SACE of Italy, the Export-Import Bank of Korea (South Korea), CESCE of Spain, SERV of Switzerland and other export credit agencies. In 2008, Alfa-Bank arranged more than 20 investment conferences, workshops, non-deal road shows and conference calls in Russia, Ukraine, Switzerland, USA, the Gulf countries, Japan, Singapore and Hong Kong, which were attended by more than 200 Russian and foreign investment funds. The events included conferences on the general development of the Russian share market as well as specialized conferences on performance results and outlooks of Russian companies operating in the oil & gas, banking, agricultural, telecommunications, retail and transportation industries and a workshop on derivative instruments and their use by Russian UITs. A milestone event for Ukraine in 2008 was the Fifth Ukrainian Investment Forum Ukraine 2008: Reality and Prospects hosted by Alfa-Bank and Alfa Capital Ukraine in June. The forum was attended by business leaders and prominent political figures of Ukraine, including the largest portfolio investors. Attendees discussed the future development of Ukrainian businesses, political risks and investment climate improvement opportunities. Alfa-Bank also sponsored the national conference, The Russian Banking Sector: Meeting the Global Challenge that took place on October 31, The conference was attended by over 100 journalists from leading foreign and domestic media. Analysis of the latest trends in the banking sector and forecasts of developments in 2009 were the key topics under discussion at the conference. Representatives from the Russian Ministry of Finance, the Russian Government, the State Duma, the Bank of Russia and other authorities all spoke and Alfa-Bank was represented by Petr Aven, President of Alfa-Bank, and Rushan Khvesyuk, Chairman of the Executive Board. The year 2009 will be a trying time for the Russian investment market. We expect the majority of the challenges to arrive in the second half of the year. In this context, streamlined cooperation between Corporate and Investment Banks as a single business with common customer base and sales channels will be vital. The complete integration of the two divisions will give our customers who use both our corporate and investment bank products qualitative and beneficial offerings, and also ultimately it will improve the profitability of the integrated business unit. Trade Finance Investment Conferences and Events Outlook for

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33 An important area of restructuring is the consolidation of banking institutions, which needs to be encouraged. There are still over 1,000 banks operating in Russia, but the top 200 account for around 90% of deposits and lending. On the one hand, this means that the number of banks could easily be reduced, and consolidation could even take place among the top 200. However, since more than 900 banks are part of the deposit insurance system, consolidating the smallest banks would do a lot to boost confidence in the banking system. 31

34 Alexey Marey Member of the Executive Board, Head of Retail Banking RETAIL BANKING The year 2008 showed that Alfa-Bank s retail business model allows it to achieve strong financial results in any financial environment. Despite a material difference in economic conditions during the first and second halves of the year, our customer relations were invariably productive. Nonetheless, it should be noted that the crucial differences between the two periods (from January to August and from September to December) could not but impact Alfa- Bank s retail business as well as that of all financial institutions in Russia. In the first half of 2008, we saw a continuation of the same trends that shaped 2007: rapid development of the lending and settlement businesses, rising incomes and increasing consumption. In the third and especially in the fourth quarter, however, the balance shifted towards settlement offerings, while lending was pushed to the sidelines. Alfa-Bank managed to be flexible and promptly adapted its product line, fees for its own services and development strategy to the new economic conditions. Our efforts resulted in substantial growth in performance indicators and market share in priority areas and services. Thus, as of December 31, 2008, Alfa-Bank s share of the market for demand deposits received from individuals had increased to 4.86% from 4.41% at the beginning of the year. In November 2008, Alfa-Bank was the only top-ten Russian bank whose overall demand deposits increased in absolute dollar terms. This is evidence that its customers trust Alfa-Bank even in this difficult period. Term deposits placed by customers increased by 75%, from $1.6 bln to $2.8 bln. Our retail business met its 2008 goals despite the changes in the financial climate. The aggregate amount of demand and time deposits increased to $6.1 bln from $4.9 bln in As for lending services for individuals, Alfa-Bank stuck to its conservative policy and focused on preserving its diversified earnings structure. The year 2008 did, however, see Alfa-Bank continue to develop its lending products. The portfolio of general-purpose retail loans amounted to $962 mln, car loans to $705 mln, and mortgage loans to $509 mln. We were very active on the consumer lending market, with loans extended totaling $499 mln owing to our productive efforts in the area of primary and secondary sales. In 2008, we issued 186,000 credit cards, bringing our total number of customers in this area to more than 341,000 at the end of the year. 32

35 Today, Alfa-Bank is represented in all Russian cities with more than 1 mln people, in nearly all cities with more than 500,000 people and in a number of cities with more than 250,000 people. As of December 31, 2008, we had 266 branches across all of Russia s 11 time zones. All in all, our performance in 2008 and so far in 2009 indicates that in an uncertain financial environment, Alfa-Bank is the bank of choice for many customers looking for a stable rate of return accompanied by high-quality service. A landmark event of 2008 was the merger of all retail banking segments into a single business unit. This allowed us to cut costs significantly and gain substantial synergies from productive team work. Today, Alfa-Bank offers both its settlement and credit products to all its customers using a single sales channel. Also in 2008, Alfa-Bank completed the implementation of its regional development plan launched in Today, we are present in all Russian cities with more than 1 mln people, in nearly all cities with more than 500,000 people and in a number of cities with more than 250,000 people. As of December 31, 2008, we had 266 branches across all of Russia s 11 time zones. Thus, our retail banking division has achieved the goal of regional expansion set for it several years ago. Regional development also involves growing Alfa-Bank s share of each individual regional market. This target was also met; Alfa-Bank is successfully competing with the largest nationwide banks as well as local ones, which traditionally enjoy the confidence of people residing in the same region. We are able to do this thanks to the quality of our relations with customers, as well as to our participation in local charities and cultural events. In 2008, Alfa-Bank acquired Severnaya Kazna bank, a major financial institution in the Urals region. This brought us more than 400,000 new customers, making us a leader on this regional market. We are now energetically integrating this business into Alfa-Bank. Most of the customers are concentrated in Yekaterinburg and the Sverdlov Oblast, as well as in Chelyabinsk, Perm, Tyumen and other regional cities. Severnaya Kazna s 31 retail branches will be converted to the Alfa-Bank format using our advanced technology platform. Last year, Alfa-Bank opened 22 new branches that use a high-tech format that is new in Russia and based on the open-space concept. These branches are open 24 hours a day, 7 days a week. Alfa-Bank s number of ATMs rose to 2,000 from 1,250 at the beginning of the year, of which 1,040 are capable of receiving cash deposits. We also installed 200 Cash-In devices intended for depositing cash in bank accounts, primarily to repay loans. Regional Development Our high-net-worth clients are now able to use four new A-Club offices in St. Petersburg, Yekaterinburg, Novosibirsk and Samara. According to our estimates, demand for these services in regional cities is high even during periods of crisis, so in 2009 we will continue to expand this model to more of Russia s largest cities. 33

36 RETAIL BANKING The country s new financial situation led us to make certain changes to our product range, which are now complete. Alfa-Bank now offers three tariff plans (service packages), different payroll-card programs for our customers, and every type of credit product available on the Russian market. Remote Customer Service Channels A strategic priority for all of Alfa-Bank s business units is being able to adapt to the requirements of the market. This is why we are actively improving our technological capabilities and retail banking advantages. For instance, Alfa-Bank is making a major effort to develop remote-banking channels, including via the Internet, mobile phones and ATMs, and to add to the number of services offered via these channels. We believe it is very important that customers find it convenient to use our services, make loan payments and deposit cash into their accounts. Remote-banking allows customers to perform numerous transactions on their own, saving both time and money. In 2008, the number of Alfa-Click Internet Bank users nearly doubled to 415,000. More than 700,000 people use our Alfa-Check SMS banking service. About 20,000 customers use Alfa-Mobile services. Alfa-Bank earned a total of $17.5 mln from remote customerservice channels, nearly three times as much as in Alfa-Click s turnover grew 200% (from RUB20 bln in 2007 to RUB60 bln in 2008). All remote services are interactive. Thus, by using the Alfa-Check service, a user may obtain information on transactions that have been carried out and also initiate certain transactions. For example, he may pay for mobile services or make payments based on templates created using the Internet Bank. The Alfa-Check service may be enabled using Alfa-Click or ATM machines. In other words, it is obvious that remote-banking channels have been integrated into a single platform. Alfa-Bank will continue to develop this service in Alfa-Bank s achievements in the area of remote-banking channels have been recognized with major awards. For example, Global Finance magazine recognized Alfa-Click as the Best Internet Bank in Russia in Alfa-Bank was also named the Best Internet Bank for Retail Clients in the Account Management subcategory in Central and Eastern Europe. Another important service, prepared and technically implemented in 2008 and launched in January 2009, is a joint project between Alfa-Bank and the Yandex.Dengi service, Money from A to Y. The project allows a client to link an account with Alfa-Bank to an electronic wallet with the Yandex.Dengi payment system, giving him maximum remote access to own cash. An instant pay-in to the virtual account is performed using Alfa- Click Internet Bank. If necessary, the unused funds may be returned to Alfa-Bank and used as usual. The project has aroused great interest among Alfa-Bank customers, as both services supplement each other, providing even more opportunities to users of each. My Alfa Another innovative product launched in 2008 was customized banking cards. The project was called My Alfa and allows customers to participate in designing their own banking cards using their home photo archive, their own drawings or a template from Alfa-Bank s 34

37 general gallery. Customers may also use a design developed by other customers. The project is hugely popular among our customers and is the latest in a range of products with added value that Alfa-Bank has been developing successfully for several years. Increasing the array of products on offer is one of our priorities in developing our retail product line. My Alfa banking card was awarded the BRAND OF THE YEAR/EFFIE 2008 prize in the category Financial Institutions, Products and Services. Alfa-Bank s other added-value products are its co-branding projects, such as Aeroflot MasterCard Alfa-Bank and Alfa-Bank Cosmopolitan Visa payment cards. Our experience has shown that cards with additional value perform better than regular payment cards, with the customers behavior differing significantly from that of standard customers. The average monthly turnover on such cards is generally 1.5 times higher than on regular cards, and the number of card owners continues to increase. That is why co-branding projects are of special importance for us, and we pay a lot of attention to developing this initiative. Co-branding Projects The joint program between Aeroflot and Alfa-Bank to issue Aeroflot MasterCard Alfa- Bank cards allows card holders to accumulate points (miles) in a variety of ways by paying for goods and services with their MasterCard. The points can then be used to purchase air tickets. Last year we issued 105,698 Aeroflot MasterCard Alfa-Bank payment cards. This initiative was named the best co-branding project in 2008 by Banki. ru. The award was presented at the annual Banks of the Year ceremony. Alfa-Bank s other co-branding project, launched in 2007 together with Cosmopolitan magazine the Alfa-Bank Cosmopolitan Visa card was also continued. The program is intended primarily for women, as Alfa-Bank Cosmopolitan Visa is a payment card as well as a discount card entitling customers to discounts in partner shops, beauty salons and restaurants. The project won global recognition in 2008, with the Cosmo card design named as the best among all Visa cards issued during the year in Central Europe, the Middle East and Russia. The range of products offered by Alfa s Retail Bank was widened to include products that used to be offered by its mortgage lending and auto finance business units. The unification of the retail business proved to be a strategically important step that was opportunely prepared and completed in The merger changed the organizational structure of the whole segment as well as its separate business lines, eliminated duplicate functions and substantially reduced costs. Alfa-Bank also optimized its rental expenses by combining the offices of retail banking, mortgage lending and auto finance in Moscow as well as in all other regions of Russia. Mortgage Lending and Auto Finance During a period of financial crisis, mortgage and car lending businesses are unable to survive independently; however, they continue to perform well as elements of Alfa- Bank s product range, along with credit or debit cards and term or demand deposits. Nowadays, mortgage and car loans are sold through all existing points of sale, while 35

38 RETAIL BANKING mortgage and car loan sales channels are being used successfully to offer the whole range of Alfa-Bank s retail products. Despite the significant drop in sales of mortgage and car loans in the second half of 2008, these business lines are still operating. Attention is being paid to developing schemes for possible debt-restructuring. Alfa-Bank values its customers and understands that even the most reliable borrowers may encounter problems in a complex financial environment. That is why it is a priority for the mortgage lending business to prepare offerings for customers with financial difficulties. We continue to maintain and ensure the quality of our loan portfolio and collect loans granted in previous years. The auto lending market also changed substantially in September While in the first half of 2008, the business developed rapidly as it had in previous years, the increased cost of funding pushed up prices for car loans while demand simultaneously dropped. All the same, in 2008 we launched an online auto lending program that allows customers to apply for loans on the Alfa-Bank s web site. A customer needs to visit Alfa-Bank in person only when it is time to receive the loan in order to execute the loan agreement. Consumer Lending As for consumer lending, last year marked an important stage in this retail segment s development. In 2008, we concluded agreements with Russia s major consumerelectronics retail chains MVideo, Tekhnosila and Svyaznoy and we negotiated a potential agreement with Evroset. Alfa-Bank is currently present in all nationwide and major regional retail chains and intends to further expand this presence. One of the reasons for this is the existing customer demand for these services even during a financially challenging period; another is the quality of this type of loan portfolio. Having studied the behavior of retail loan portfolios in different countries around the world during various recessions and crises, Alfa-Bank s analysts have concluded that smaller, short-term loans with small monthly payments create the most reliable portfolio from the viewpoint of retail loans during crisis periods. That is why the decision was made to actively develop this business line. As a result, in 2008, especially in the last quarter of the year, Alfa-Bank managed to significantly strengthen its position in this sector. As in the past, Alfa-Bank actively improved its routine operations. This included implementing new technologies and also continuously monitoring client experience in order to further improve the level of service that already bears the distinguished Alfa- Bank brand. Retail businesses cannot just tread water, which is why we are always striving to improve in this area. Awards A confirmation of the high quality of our client services was Alfa-Bank s being named the best of the 50 biggest Russian banks in the joint survey Client Experience Index 2008: Who Is Winning the Retail Banking Race in Russia? by Senteo and PricewaterhouseCoopers. This was the second year in a row that the Bank received this award. Another survey conducted jointly by Kommersant-Dengi magazine and NEXTEP Group also ranked Alfa- Bank number one among financial institutions in terms of customer service. 36

39 The high level of service is ensured by Alfa-Bank s employees. These are people who are interested in making things happen, assisting both each other and our customers. They are our strongest competitive advantage and one that is virtually impossible to replicate. Personnel management starts even before the first interview and continues for as long as an employee works at Alfa-Bank. To retain its title as the best bank in the country in terms of customer service, Alfa-Bank spends a significant amount of money developing its own front-office staff. In our Moscow training center we have created a mock-up bank branch where we hold role-playing and training exercises for future employees. Alfa-Bank has such training centers in other Russian cities as well, including St. Petersburg, Yekaterinburg, Nizhniy Novgorod and Novosibirsk. Another center in Rostov-on-Don is expected to open in the near future. After the basic course, employees are trained in the Quality Service: The Five Steps program, which lasts for eighteen months and is aimed at further improving their qualifications, while Alfa-Bank s frontoffice employees are evaluated by the customers themselves. During a financial crisis, companies win if they are able to improve themselves and adapt their strategy to the needs of the present. Alfa-Bank is one such company. It has priorities in developing its retail business that will remain unchanged in any financial environment. Personnel Management Priorities for 2009 One of these is actively improving remote customer service channels, primarily via the Internet. All Alfa-Bank s initiatives in this area, as well as its efforts focused on improving technological support for its operations, yield excellent results. That is why we will doubtless continue to develop this competitive advantage. For several years, a strategic priority of Alfa-Bank has been developing banking card projects with added value. In addition to our existing programs, we plan to launch several similar initiatives before the year s end. We will continue to pay a lot of attention to high-net-worth customers. Demand for the quality products and exclusive services offered by A-Club is high, both in Moscow and the regions. The Bank plans to open several new A-Club offices in major cities around the country. Finally, Alfa-Bank s permanent strategic objective is to be the best Russian bank in terms of quality of service. Today, Alfa-Bank already has the most important thing: the trust of its customers, as evidenced by the steady growth of its customer base even now, during a period of financial difficulty. To preserve this trust, we need to continuously improve the quality of our services and make Alfa-Bank even more attractive as a universal settlement bank. Alfa-Bank s customers are a special class of people who understand the importance of service and quality banking products, and who are ready to pay for them and seek solutions to their financial problems and opportunities to achieve their goals in any environment. Alfa-Bank is proud of its customers and will continue to make every effort to ensure that in 2009, more people will say that Alfa-Bank is their bank. 37

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41 2008 saw Alfa-Bank preserving and reaffirming its status as the technology leader on the market for financial services both in corporate and retail segments. By the year end Alfa-Bank successfully completed implementing its Eurasia project to create a unified technology platform for all Russian regions. 39