VTB Group

Road to 15

VTB is implementing a strategy of efficient growth and business structure improvement aimed at steady growth of the Group’s capitalization and sustainable financial performance. The Group’s success had an effect on the 2010 profit, which amounted to unprecedented RUB 54.8 billion under IFRS. VTB increased its net fee income by half, while cutting its operational expenses. Asset growth and capital efficiency were strengthened due to TransCreditBank consolidation.

VTB is implementing a strategy of efficient growth and business structure improvement aimed at steady growth of the Group’s capitalization and sustainable financial performance. The Group’s success had an effect on the 2010 profit, which amounted to unprecedented RUB 54.8 billion under . VTB increased its net fee income by half, while cutting its operational expenses. Asset growth and capital efficiency were strengthened due to .

In 2010, the Group for the first time in its history was ranked by the Financial Times among 500 largest companies in terms of market capitalization.

The Group reinforced its position in corporate banking, which posted a profit of RUB 35 billion in 2010. Last year, VTB significantly expanded its product range offered to corporate customers, optimized its pricing system for the whole product line, and streamlined its lending procedure. The Bank also improved its service model for various customer segments, and implemented new sales tools.

To create a consolidated corporate investment business, VTB has profoundly restructured its corporate segment. This measure was aimed at strengthening the Group’s market position through higher integration of its commercial and investment segments and enhanced customer relations model. The Bank created Credit Department and Corporate Business Support Directorate. Credit Department is a single body focused on developing VTB Bank corporate business infrastructure and improving service standards. The competence of Corporate Business Support Directorate includes handling bad debt and mitigating potential losses.

In terms of corporate lending, 2010 witnessed steadier market environment and lower anticipation of crisis events, which led to a boost in market activity. The Group took advantage of the recovery in the corporate lending market and increased its credit portfolio to RUB 2.5 trillion, a 19.4% increase year-on-year. VTB’s market share in this segment amounted to 12.2%.

In 2010, VTB Capital topped international rankings (Bloomberg, Dealogic, Thomson Reuters) in key segments of Russian investment banking market. The Group’s investment business was ranked 1^st among underwriters in the debt capital and equity capital markets. In total, from 2008 through 2010, VTB Capital participated in 130 deals in the debt capital and equity capital markets, which allowed it to raise over USD 55 billion worth of investments into Russia.

The year 2010 saw VTB Capital become the leader in bond and Eurobond bookrunning both in Russia and the CIS. Arrangement of VTB Bank Eurobond issues denominated in Singapore dollars and Chinese yuan (RMB), Ukraine sovereign Eurobond issue and JSC Russian Railways Eurobond issue were the milestones of 2010. The offshore VTB Bank RMB Eurobond issue was named “The Deal of the Year” by Euromoney Magazine (in Central and Eastern Europe) and the “Best High Yield Bond Deal of the Year” by Alpha Southeast Asia. In 2010, VTB Capital participated in 13 M&A deals totaling USD 27.4 billion.

The core of VTB Group retail business is Bank VTB24, a major Russian bank offering services to individuals and small businesses. At the end of 2010, the total number of VTB24 active customers amounted to 6.9 million, compared to 5.2 million at the end of 2009. In total, VTB Group had 7.3 million active customers in Russia during the reporting period, including 115,000 small companies at the end of the reporting period.

VTB24 experience and technologies are successfully applied in developing retail banking outside Russia. At the end of the last year, VTB Group banks in the CIS (Ukraine, Armenia, Azerbaijan, Kazakhstan and Belarus) and Georgia provided services to 428,000 individuals. 2010 was the first year of implementing the Group’s new retail strategy based on customer-oriented approach and increased ROE.

The positive results we have achieved allow us to look to the future with confidence.

2011

Russia’s financial system is strengthening along with steady economic growth. The current situation in the banking system allows us to have an optimistic outlook, even though there are still many challenges to be addressed. To achieve efficient development of the financial sector, we need to apply every effort to implement the new 2011-2015 banking sector strategy. Its main objective is to ensure speedy transition to intensive growth based on higher quality of financial services and better efficiency of banking operations.

In the constrained growth environment, VTB switched to increasing efficiency and improving qualitative indicators, focusing on products and business segments with higher ROE. The new strategy envisages a drastic change in the income structure with a shift towards fee income and higher involvement in medium-sized business transactions. We have set the target of 15% ROE in core business lines by 2013. The first steps taken in 2010 under the new strategy contributed to improvement of our financial performance in the past year.

We will continue our systematic work aimed at implementing 2010-2013 VTB Group Development Strategy to shift our business to a new level. In 2011, we expect to raise the Group’s net profit to at least RUB 80 billion.

Diagram: Forecast of asset structure by business lines (2013, %)

Advancing Despite Challenges

The year 2009 turned one of the most economically difficult periods for Russia over the past several years. The global financial and economic crisis seriously affected business environment and financing. Long-term funding got limited. Available liquidity in the global capital markets became strained and credit risks surged. Financial position of most companies in the world market, including VTB counterparties, deteriorated.

Amid the dramatically worsened market environment, top priority for VTB Group became its stable work and sustained performance indicators. Prompt and efficient measures undertaken by VTB included adjusted credit policy, improved risk management and more intensive disposal of non-performing loans. Simultaneously, we tried to find new funding sources, enhance our customer base, and improve cost efficiency.

Owing to such timely measures, the crisis did not only turn out a serious test for VTB Group, but also opened a window of new opportunity. In same aspects, it strengthened VTB competitive edge. Thus, the Group’s guiding role for state measures aimed at supporting the Russian economy increased, which was most evident in lending to the real sector. Being one of the few banks still offering loans, JSC VTB Bank managed to attract new lucrative customers. In 2009, the Group enhanced its positions in all segments of the Russian banking market and became an absolute leader in terms of market borrowings, having increased the funds raised by 35.7%.

Having succeeded in overcoming the crisis, VTB Group made a major breakthrough in its development. Most of the strategic targets set by the end of 2009 were exceeded by:

4%

in assets;

3%

in loan portfolio volume;

21%

in customer accounts;

10%

in fixed incomes (interest, fees and commissions);

16%

in operating cost efficiency;

31%

in retail business share in the net operating income before provisions. VTB24, a retail subsidiary of the Group, retained its position of the second largest retail bank of Russia, having considerably enhanced its business volumes and market shares.

The Energy of Success: New Horizons

In 2007, VTB became the first Russian bank to launch its initial public offering, the largest international bank IPO at the moment. In total, the Bank raised USD 8 billion, with demand for GDRs nine times higher than supply at The London Stock Exchange. Almost all leading US and European investment funds showed interest to it, and more than 120 thousand Russian citizens became VTB shareholders.

For the first time in the Bank’s history, numerous institutional and minority investors became its shareholders. The funds raised from the IPO allowed VTB to join the world’s top 100 banks in terms of capital. It laid a solid foundation for an accelerated growth of VTB’s business and for consolidation of leadership in the Russian and international banking market.

Once VTB was turned into a public company, it became more transparent. Independent directors were attracted to manage the Bank, the Audit Committee was created under VTB Supervisory Council, and the Investor Relations Division was established in the Bank. In 2007, Standard & Poor’s acknowledged VTB as one of the most transparent Russian banks.

While implementing its investment business development strategy, the Bank launched:

• the creation of an investment business unit within VTB Group;
• the establishment of direct and venture investment funds in Russia.

VTB Bank joined the world’s top 100 banks in terms of capital

In particular, together with Russian Venture Company and EBRD, the Bank became a co-founder of the first venture fund in Russia created to finance Russian innovation companies.

VTB consistently expands its presence in the CIS markets by:

• acquiring the controlling interest in Slavneftebank (Belarus);
• completing capitalization of its subsidiary banks in Ukraine and Armenia;
• opening representative offices in Kazakhstan and the Kyrgyz Republic.

At the same time, VTB continued to consolidate its Western Europe subsidiaries.

VTB was the first Russian bank to obtain a license to carry out banking activities in India and China and to open its branches in these two countries. Besides, taking an active part in developing trade and economic relations between Russia and China, the Bank started servicing bank cards of UnionPay, Chinese national processing company.

VTB was the first Russian bank to obtain a license for carrying out banking activities in India and China

In October 2007, despite the global liquidity crisis, VTB successfully placed a USD 2 billion Eurobond loan, unprecedented for Russian banks.

VTB’s high efficiency was confirmed by Global Finance naming it the best commercial bank in Russia in 2007, and by Fitch rating agency declaring it the leader in corporate lending.

In the near future, VTB intends to follow its development strategy, not only gaining further foothold in all major segments of the Russian banking market but also becoming the first and only financial and banking institution to provide services throughout the whole post-Soviet space. By the end of 2010, over 1500 VTB offices will offer a full range of financial services to its customers in more than 20 countries.

Breakthrough Strategy

In 2002, the Russian Government became VTB’s major shareholder, acquiring from the Bank of Russia its participation in VTB’s authorized capital. A new management team headed by President and CEO Andrei Kostin joined the bank with the goal to turn VTB into the country’s leading banking institution operating in all key segments of the Russian banking market, including retail business and investment banking services.

Shortly after, VTB not only significantly increased the investment financing for the economy but also became Russia’s second bank in raising household funds. VTB simultaneously launched two large-scale programs: small business financing and development of mortgage services in Russia, which laid the long-term foundation for its leadership in the retail banking market. The Bank became a leading corporate bond manager and underwriter in Russia.

In 2004, VTB acquired Guta-Bank, and in 2005, launched the most successful project of a specialized retail bank in Russia, VTB 24. The purchase of Promstroybank (St. Petersburg) allowed VTB to significantly strengthen its position in the North-West Region and assert itself as a leader in the Russian banking market. VTB became one of the most dynamically developing credit institutions in Russia, with business growth rates increasingly higher than the market average.

At the same time, VTB launched the process of creating a powerful international banking group to be able to compete with major Western banks. VTB’s priorities abroad included:

• establishment of subsidiary network in the CIS;
• expansion of activity in Western Europe;
• entry into Asian Pacific markets.

VTB Bank became Russia’s second bank in raising household funds

Consistently implementing the plan to expand its presence in external markets, VTB:

• established subsidiary banks in Ukraine, Armenia and Georgia;
• acquired participations in Western Europe banks from the Bank of Russia;
• opened a joint bank in Vietnam, a subsidiary bank in Angola, and a financial company in Namibia.

In 2002, VTB obtained abroad syndicated unsecured loan, which was the largest in the history of the Russian banking system. Three years later, the Bank was the first in Russia to raise the largest subordinated loan, later named by International Financial Review as the best 2005 deal in Eastern Europe. Next year, for the first time in the history of the international financial market, Russian Rouble-denominated unsecured Eurobonds were publicly placed by VTB.

EuroWeek and International Financial Review named this placement the best 2006 deal in Eastern Europe. Later that year, VTB securitized its mortgage loan portfolio, totalling USD 88 million. It was the first issue of mortgage-backed securities in Russia.

JP Morgan Chase Bank and The Bank of New York named VTB the best clearing bank in Russia. The Bank was the first and only Russian custodian, which was awarded an international custody rating of Thomas Murray (Great Britain). The Bank provides international custody services to Russian and foreign investors. Along with Unicredit, Deutsche Bank, Citigroup and ING, VTB was named one of the top 5 custodians in Cross Border category (provision of services to international investors), according to Global Custodian (Great Britain).

VTB Bank is one of the most dynamically developing credit institutions in Russia

In 2006, the Bank completed a large-scale rebranding, and its subsidiaries in Russia and abroad began to use the same brand, VTB:

• Promstroybank was renamed VTB North-West;
• Moscow Narodny Bank in London became VTB Bank Europe plc.;
• Eurobank in Paris became VTB Bank (France);
• the Ukrainian Mriya Bank became VTB Bank (Ukraine).

VTB Supervisory Council approved VTB Group Development Strategy for 2007-2010 aimed to continue strengthening of VTB positions in the domestic and international banking markets.

The Bank registered its new domicile in St. Petersburg, Russia’s northern capital.

Development and Growth

In 1999, VTB completed settlements for forward foreign exchange contracts with foreign banks, and duly discharged all of its obligations for loans borrowed in the external market. VTB retained the highest reliability and financial strength ratings among Russian banks, and its spotless reputation encouraged a rapid flow of new corporate customers.

VTB authorized capital increased to 42.1 billion rubles, and the share of the Bank of Russia in VTB’s capital went up from 96.8 per cent to 99.9 per cent. VTB became the most capitalized credit institution not only in Russia and the CIS but also in the Central and Eastern Europe. In terms of capital, the Bank rose to 222nd place in The Banker’s top 1000 world banks.

Building up steadily the volume of long-term loans to the real economy, VTB was among the first banks in Russia to provide investment and project funding services to its corporate customers.

VTB Bank is the most capitalized credit institution not only in Russia and the CIS, but also in the Central and Eastern Europe

VTB expanded its cooperation with international financial institutions, including the European Bank for Reconstruction and Development. At the same time, the Bank expanded its presence in Western Europe. VTB became a shareholder of East-West United Bank (Luxembourg) and Ost-West Handelsbank (Frankfurt-am-Main), and increased its participation in Donau-Bank (Vienna).

The Bank’s head office moved to a new modern building in the center of Moscow, in Lesnaya Street.

Quality and Reliability

Despite the bank crisis, which broke out in August 1995, VTB actively increased its operations volume. The Bank developed its economy investment funding, raising long-term funds from international financial institutions. In particular, VTB used these resources to fund the high technology investment project to create the first fiber-optic communication line between Moscow and St. Petersburg.

While implementing its strategic plan to develop the banking network abroad and expanding its activity in the international financial markets, VTB:

• established Russian Commercial Bank in Limassol (Cyprus);
• augmented its share in Donau-Bank (Austria) to 51%, thus making it VTB’s third subsidiary bank abroad.

Thomson Bank Watch, a reputable international rating agency, granted VTB the highest rating among all Russian banks. International Investor magazine placed VTB on the list of the world’s 30 highest liquidity banks. Moody’s rated VTB at Russia’s sovereign rating level, thus confirming its high reliability and financial stability. In terms of capital, VTB became 315th in The Banker’s top 1000 world banks.

VTB was one of the first banks in Russia to obtain a license to carry out custody activities in Russia

VTB was one of the first banks in Russia to obtain a license to carry out custody activities, which allowed it to gain a foothold in the Russian custody services market. Euroclear, major international clearing house, selected VTB as a depositary for Russian securities.

In 1997, the government decided to transform VTB from closed joint-stock company into an open JSC. The Bank of Russia became the largest Bank’s shareholder, with 96.8 per cent of stock.

Owing to its careful and conservative policy, VTB managed to ensure stable operational profit. Amid severe financial crisis, which broke out in Russia in 1998, VTB duly provided settlements and made payments under its obligations to customers and counterparts. VTB, unlike many other large credit institutions, managed to avoid bankruptcy. During the 1998 financial crisis, VTB preserved its solvency, which favored further consolidation of the Bank’s market position.