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           <h1>Letter from the Chairman of the Management Board</h1>
 
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<p>Last year was successful for the Russian banking sector. The ongoing economic recovery stimulated the financial sector, where assets expanded more rapidly than in 2010. Amid revived business activity and improvement in the financial standing of borrowers, lending to the real sector surged.</p>
<p>Bank Vozrozhdenie took full advantage of the favorable market environment and delivered solid results.</p>
<div class="gray_block">FOR 2011 NET INCOME TOTALED RUB 1.6 BILLION, THREEFOLD HIGHER THAN IN 2010 AND ABOVE OUR FORECASTS.</div>

 
<p>We substantially reduced the cost of funding, to a record low 3.7% in the fourth quarter, boosting the net interest margin to 4.3% for the year, compared  with 3.6% in 2010. This year, we intend to boost net income further and do not anticipate any major pressure on margins.</p>
<div class="gray_block">OUR LOAN PORTFOLIO EXPANDED BY 19.2% LAST YEAR. </div>
<p>Growth mainly came from the corporate business, which added up RUB 14.4 billion. In line with our strategy, we concentrated our efforts on lending to the real sector, primarily small and medium-sized enterprises (SMEs), working in close cooperation with regional funds of support. Moreover, we entered the micro-financing market, which focuses on the needs of small companies and private entrepreneurs. We are implementing this project with the European Bank for Reconstruction and Development, which provides the funding and shares technology and experience of working with this segment. A trial run of the micro-financing program was launched in several branches last year, and we intend to extend it in 2012.</p>

 
<p>In the retail segment, the Bank increased consumer financing amid improved demand and growth of real disposable incomes. </p>
<div class="gray_block">IN 2011, ITS CONSUMER LOAN PORTFOLIO REACHED RUB 6.3 BILLION, UP 46.5% YEAR-ON-YEAR, WHILE THE VOLUME OF LOANS DISBURSED TOTALED RUB 5.8 BILLION.</div>
 
<p>We continued to work only with stable and low-risk clients, including people involved in our payroll programs, employees of large corporations, depositors and clients with a solid credit history. At the same time, the Bank was actively promoting mortgage loans  among clients with sufficient collateral and proven creditworthiness, and our mortgage portfolio rose by 57% year-on-year to RUB 9.2 billion, making Bank Vozrozhdenie the seventh largest on the market in this respect<a href="#" class="term" title="Source: RBC Rating"><font class="Apple-style-span" size="1">6</font></a>.</p>
<p>Solid growth of the total loan portfolio further underlined the importance of its quality control . After the liberalization of lending conditions in the first half of 2011, a shortage of liquidity in the second half of the year prompted us to become more cautious and focus on loan portfolio quality. Over the year, the share of non-performing loans (NPLs) fell to 7.7%. Despite substantial improvement, we maintained a conservative provisioning policy: the cost of risk was 1.8%, in line with  the level of 2010.</p>


<p>Elevation of active operations and a fall in interest rates, particularly in the first half of 2011, encouraged us to expand our funding base and reduce borrowing costs. Last year, the composition of our liabilities did not change significantly. Client funds accounted for almost 88% of our liabilities, having soared to RUB 145.1 billion. In addition, due to expiration of deposits opened , at high rates during the peak of the crisis in 2009-10, interest expenses of the Bank fell by almost 20%, supporting the improvement in our profitability . In December, we concluded a RUB 4 billion deal to securitize part of our mortgage portfolio, securing additional long-term resources for developing our operations in 2012.</p>
<p>A substantial contribution to the rise in net income in 2011 came from feegenerating
products. They account for an increase in the top line of almost 22%, while its share in operating income before provisions was 42%, one of the highest in the Russian banking sector.
Last year, we expanded fee and commission operations significantly. In the retail segment, we worked hard to promote payments by bank card. Meanwhile, we launched the “Vbank with You” 
service, which enables individual clients to manage their accounts and make  payments online and via mobile phone. In the corporate segment, we focused on developing remote service channels and promoted comprehensive settlement services for major clients.</p>


<p>A substantial increase in our operations and favorable market conditions reinforced our efforts to enhance efficiency. Operating expenses rose by just 16.3%, while the share of non-personnel costs fell to 41%. As a result, our costto-income ratio before provisions dropped by 7.7 percentage points to 64.8%. We will continue to closely control operating
expenses in the future - enhancing operating efficiency remains a priority for us this year.
As regards the prospects for us and the domestic banking sector in 2012, we are cautiously optimistic. The market has more or less stabilized: the Russian economy is in reasonable shape, demand for credit remains high, and competition has eased. In the second half of the year, we believe that favorable conditions will improve our capital position and attract long-term funding, which will create the necessary foundation for greater lending in the coming years.</p>

<p>Bank Vozrozhdenie’s long-term development prospects largely depend on our ability to adapt to the current market conditions and change in response to the greater needs of clients. In early 2012, together with international consulting company, we launched a project to streamline our operating model and rigorously analyze and transform our management system. An important aspect of this project is retaining the best that we have accumulated throughout years of presence on the Russian market. I am confident that we will continue to develop and become stronger and more attractive to our clients. </p>

 
<p> 
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          <p><b>Dmitry Orlov</b></p>
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