Letter from the Chairman of the Management Board — Annual report 2010

Annual Report 2010
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- Portrait of the Bank
- Letter from the Chairman of the Management Board
- Strategy
- Main Events of 2010
- The Russian Economy and Banking Sector
- Business Overview
- Shareholder Structure
- Corporate Governance
- Risk Management
- Social Responsibility
- Financial Statements
- Branches in Russia
- Offices of Bank Vozrozhdenie
- Address and Contacts

# Letter from the Chairman of the Management Board

Dear shareholders, colleagues and partners,

Last year, banks saw their business recover following the crisis. The most acute phase of the crisis passed, and the banking sector showed positive signs of rejuvenation amid renewed macroeconomic growth. This trend was demonstrated by both loan growth and improvements in asset quality. The crisis changed the landscape of the banking sector substantially, increasing competition as a whole and strengthening the position of state-owned banks. Moreover, for the first time, Russian banks had to operate in an environment of a low refinancing rate and moderate inflation.

For Bank Vozrozhdenie, 2010 was a transition period to a post-crisis growth model. Strict plans were established across all segments of business based on prevailing market conditions. The key priorities were reducing funding costs and expanding the loan portfolio while maintaining its high quality. The bank has also made internal changes to improve its business processes and offer new high-tech services.

Over the year, the Bank managed to meet its targets. A number of performance indicators approached pre-crisis levels, and in some segments even surpassed them. The key success factor was solid, trust-based relationships with our partners and clients, who not only remained loyal to Bank Vozrozhdenie during the worst of the crisis, but also extended cooperation in the year, despite fierce competition on pricing from state-owned banks. Developing relationships with existing clients formed the core of the Bank’s approach in 2010, and this strategy more than justified itself.

Thanks to support from our clients and partners, the Bank was able to reduce the cost of financing as planned during the year. The average cost of financing under IFRS in 2010 fell from 7.1% to 6.1%, and at year-end the interest-rate spread stood at 6.3%. Client funds grew by more than RUB17.2 billion, 36.7% of which were retail and corporate current accounts, which represent an almost cost-free source of funding.

Client funds remained the principal source of funding for the Bank’s operations. In 2010, the Bank expanded its total loan portfolio by 22.1%, compared to market growth of 12.6%.

As demand for credit rose in 2010, the Bank adhered to its conservative approach to risk management, maintaining its problem-loan reserve coverage under IFRS at almost 100%. Loan-loss provisions grew by RUB1.51 billion as a result of loan-book growth, but its share in the loan portfolio remained almost unchanged. At the same time, the Bank attracted new key client types by extending its credit offering into new areas and by relaxing conditions on a number of loan products. This resulted in a mortgage portfolio of over RUB10 billion, a record high, while corporate lending grew by more than 20%.

Separately, I would like to mention our success with SMEs, which are a key client segment for Bank Vozrozhdenie. With support from the EBRD and regional funds to support small business, in 2010 the Bank increased loans to this segment by 24.5%, to RUB60 billion, having strengthened its position as one of Russia’s leading lenders to SMEs.

Increased competitive pressures from state-owned banks forced us to focus on cross-selling. A cutting-edge CRM system, an active sales strategy and motivated staff have all helped us to achieve significant progress in this area. A high level of non-interest income has always been a competitive advantage of Bank Vozrozhdenie’s business model. It was a major factor in our resilient performance during the crisis, and today is a sound basis for post-crisis growth. In the reporting period, we continued to develop product lines that generate fee income both in the corporate and retail segments. Non-interest income accounted for 45% of operating income before provisions, one of the highest levels among Russian banks. In 2009, we entered into cooperation with the Green Corridor customs-payment system. In 2010, the Bank’s revenue from the project grew by 150%, making us the market leader by payment volumes and confirming our ability to identify promising market segments.

The Bank’s professionalism was noted by the banking community in Russia and abroad. Authoritative UK magazine The Banker named Bank Vozrozhdenie as Bank of the Year in Russia.

For the third year running, leading analysts singled out the Bank as one of Russia’s most influential financial institutions. Moreover, Bank Vozrozhdenie was among 10 Russian banks named by independent international consultancy Brand Finance in its list of the world’s 500 most valuable banking brands.

In 2011, the Bank will keep adhering to a conservative strategy based primarily on working with key client segments. We will adopt a pro-active approach to expanding our loan portfolio, and expect further profit growth if the cost of funding continues to fall, as we saw in 2010. The bottom line will, of course, largely depend on external factors and the speed of the country’s economic recovery. However, we believe that in the next few years, the country should return to its normal pace of economic development, and the banking system to pre-crisis levels of efficiency.

In 2011, Bank Vozrozhdenie celebrates its 20th anniversary. During this time, we and our clients have experienced a huge variety of challenges, but every time we have found an effective solution. I would like to thank all of the Bank’s employees for their professionalism and dedication, and also to express my gratitude to all of our clients for their trust and continued partnership. I am confident that long years of productive cooperation lie ahead.

Dmitry Orlov |

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