Operations on financial markets

Annual report 2010

# Operations on financial markets

#### Breakdown of Bank Vozrozhdenie’s
turnover in securities operations
in 2010, %

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There was further recovery on financial markets in Russia and globally during 2010. However, currency rates, stock indexes and prices for exchange-traded commodities experienced high levels of volatility as post-crisis instability persisted.

The main driver of the Russian financial market in the reporting period was the high level of banking sector liquidity caused by high lending risks, less concerns over ruble devaluation, and slower inflation. The Central Bank therefore focused mainly on an efficient interest rate policy, greater flexibility in the ruble exchange rate, and measures to stimulate lending by the banking sector. Russian financial markets had a good year in 2010, despite some periods of instability, thanks to strong support from global indexes and energy prices.

The priority for Bank Vozrozhdenie in its financial market business during 2010 was diversification of the securities portfolio to support a high level of liquidity, reduce levels of risk and raise asset yields. To achieve these aims, the Bank focused particularly on operations with debt instruments and on the interbank market.

Total value of operations with securities by Bank Vozrozhdenie in 2010 was RUB42 billion. Transactions were carried out on exchanges (MICEX and the MICEX Stock Exchange) and on the over-the-counter market. The average size of the Bank’s securities portfolio during the year was RUB15 billion.

The greater part of debt security transactions by the Bank were with Central Bank bonds, Russian Eurobonds, and high-quality municipal and corporate Eurobonds, offering an optimal combination of yield with reliability and liquidity. The Bank also bought corporate bonds with quasi-sovereign status, as well as securities of high-quality issuers and municipal bonds with put options or redemption dates within one year. The rising trend of stock market indexes in the second half of 2010 encouraged the Bank to carry out operations with shares of high-quality Russian companies, particularly in the resource sectors (Gazprom, Lukoil and Norilsk Nickel).

The situation in 2010 on the interbank lending market was marked by high levels of liquidity, which helped to reduce interest rate levels and volatility. Rates on overnight credits were 2.5-4% for most of the year. Most operations on the interbank market were at rates close to the fixed rates of the Central Bank.

Bank Vozrozhdenie continued to play an active role on the interbank market in 2010, placing funds in both rubles and foreign currency. Interbank loans were provided both in net form to high-quality banks and secured by high-quality assets.

To ensure liquidity, the Bank placed a significant part of its free cash on deposit accounts at the Central Bank.

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## International funding

There was a major increase of activity on international capital markets in 2010 and Bank Vozrozhdenie continued its cooperation with financial institutions under existing agreements while developing relationships with new foreign partners.

Last year, the Bank drew down second tranches of credit facilities, which were agreed in November 2009 with the European Bank for Reconstruction and Development. These included a US$10.6 million tranche as part of a credit line for loans to micro- and small businesses, and a US$15 million tranche for lending to medium-sized and small businesses. The cost of the second tranches was lower than that of tranches received in 2009, thanks to better conditions on financial markets in the interim.

Growth of foreign trade and import volumes in 2010 helped Bank Vozrozhdenie to pursue its operations in financing foreign trade contracts for clients. Funding and guarantees were obtained under credit lines opened for the Bank by leading foreign financial institutions, including confirmation of letters of credit issued by the Bank and credits for their payment (post-financing). Vozrozhdenie used guarantees of the European Bank of Reconstruction and Development and insurance cover provided by national export agencies in Germany, Italy, Belgium, Austria and other countries to obtain long-term foreign-trade financing.

The Bank closed 27 transactions during 2010 to obtain international credits: 14 short-term credits totaling about US$24 million and 13 long-term credits (three to five years) totaling some US$80 million. Foreign banks issued five guarantees based on warrants of Bank Vozrozhdenie, including tender guarantees and guarantees for execution of obligations and return of deposits.

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## Priorities for operating on the financial markets in 2011

In 2011, the Bank will focus on further diversifying its securities portfolio to maintain adequate liquidity, reduce risks and raise the return on assets. It will continue to carry out operations with government securities, including sub-federal and municipal bonds, as well as Central Bank bonds. On the interbank market, the plan is to place free cash as loans or deposits with other high-quality institutions.

In addition, Bank Vozrozhdenie will continue the work to expand its correspondent network, develop deposits and conversion capacities, and also develop its business opening accounts for other banks as a settlement agent of the Customs Payment System. In the trade finance segment, the Bank will aim to secure larger credit lines and longer maturity periods from foreign banks and to expand the number of its bank counterparties. Amounts borrowed from foreign banks in 2011 are expected to be no lower than in 2010. If the market environment improves, Bank Vozrozhdenie may obtain a syndicated credit to finance the foreign trade operations of its clients.

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© 2011 Bank «Vozrozhdenie»