The annual report The annual report

20092009

CLOSED JOINT-STOCK COMPANY

INTERNATIONAL JOINT-STOCK BANK

General information

International Joint-Stock Bank (hereinafter referred to as the Bank or IJS

BANK) was founded as closed joint-stock company, the Shareholders’ agreement was signed on May 12, 1992. The credit institution was registered in the Central Bank of the Russian Federation on August 04, 1992 under No. 1987. The latest edition of the Articles of association of the company was approved by the General Shareholders' Meeting on February 27, 2003, protocol No. 1, the latest amendments to the Articles of association were introduced by the General Shareholders' Meeting on July 04, 2008, protocol No. 2. The State registration of the credit institution was recorded in the Unified State Register of Legal Entities on August 21, 2002, PSRN 1027739097165. TIN 7703025925, KPP code 774401001. The Bank has been a participant of the deposit obligatory insurance system since November 18, 2004.

The Bank operates on the basis of: 1. General License No. 1987 dated September 09, 2003 entitling to

perform the following types of operations in rubles and foreign currency: - attraction of monetary funds of physical persons and juridical persons to deposits; - placement of the attracted monetary funds of physical persons and legal entities on its behalf and at its expense; - opening and keeping of bank accounts for physical persons and legal entities; - payments settlement by order of physical persons and legal entities, including authorized correspondent banks and foreign banks, on their bank accounts; - cash collection and cash services for physical persons and legal entities; - sale and purchase of foreign currency in cash and cashless forms; - issuance of bank guarantees; - monetary funds transfers by order of physical persons without opening bank accounts.

2. License No. 1987 dated September 09, 2003 entitling to perform the following kinds of transactions:

- deposition and placement of precious metals; -other transactions with precious metals.

3. License of a professional participant in the securities market: - No. 077-04147-000100 to conduct depositary activities dated December 20, 2000; - No. 077-04006-100000 to conduct broker activities dated December 21, 2000; - No. 077-04054-010000 to conduct dealer activities dated December 21, 2000; - No. 077-04096-001000 to conduct activities in securities management dated December 21, 2000;

4. License of a stock exchange broker No. 1442 dated September 22, 2009 to make futures and option deals in the stock exchange trading, with no restriction on the period of validity.

The authorized capital was formed in the amount of 300 mln. rubles and

divided into 30 mln. shares of nominal value of 10 rubles each, including 29, 980, 000 ordinary shares, 20, 000 preference shares. IJS BANK consistently demonstrates stable growth rates. The Bank strengthens its positions in all financial market segments, introduces additional products and services, develops new directions of activity. The conducted by the Bank conservative economic policy, carefully designed risk control system, balanced development strategy – have helped the Bank to resist negative economic factors in the post-crisis period, made it possible to keep the progressive movement forward.

In comparison with the year 2008, total assets increased 45% and amounted to 6, 836.31 mln. rubles on the basis of the results of the year 2009. Equity (owned capital) increased 63 % per year and amounted to 1,159.30 mln. rubles. The Bank maintains stable profitability indices: profit after tax equaled to 92,440 mln. rubles.

The key performance indicators of the Bank are Return on Assets and Return on equity (owned capital):

Return on Assets

(%)

Return on equity (%)

1.43% 9.71%

Methodology for indicator calculation: The Return on Assets (ROA) is calculated according to the methodology accepted by

the Bank, as ratio of net profits to average assets for the period. Return on equity (ROE) is calculated according to the methodology accepted by the

Bank, as ratio of net profits to average equity for the period.

Information on Closed Joint-Stock Company “International Joint-Stock

Bank” is presented in electronic version of The Bankers’ Almanac. Information on IJS BANK was regularly presented during the accounting year in the ratings of the following agencies: “RosBusinessConsulting” (“RBC.Rating” http://rating.rbc.ru), “Interfax-CEA” (www.kommersant.ru), “National Rating Agency” (НРА http://ra-national.ru/), BANKIR.RU (http://bankir.ru/rating).

The best ratings of IJS BANK during the year 2009: The 77th place in RBC rating “Top500 of profitable banks in the first half of

the year 2009” (http://rating.rbc.ru/articles/2009/08/27/32539960_tbl.shtml?2009/08/27/32539925).

As of January 1, 2010, IJS BANK takes: the 146th place – in NRA rating “Largest banks as ranked by net profit size

as of January 1, 2010” (http://ra-national.ru/?page=p-4bb04dd0). the 171th place - in NRA rating “Largest banks as ranked by capital size”,

(http://ra-national.ru/?page=p-4bb049d3). the 230 th place – in the rating of banks in the ranking in terms of “Assets”

prepared by BANKIR.RU (http://bankir.ru/rating/1/2010/19).

Priority activities of the Bank. Development Strategy.

Ensuring stable growth, improving the quality of performance and

harmonious business development are in the basis of the Bank's strategic orientation. Implementing the growth strategy IJS BANK focuses on sustainable assets growth and increase in transaction volume. Following this direction the Bank seeks to strengthen its position in the market, ensures stable profit and capital increase, which creates conditions for further development.

Within the framework of its development strategy IJS BANK poses and

meets challenges of business diversification, building client and resource base, development of new segments of work, introduction of advanced banking technologies and the Bank product-line expansion. IJS BANK is striving to become a reliable business partner for its clients that is able to provide broad support in financial services and ensures a decent level of service to everyone regardless of range of activity and exacting demands.

Individual approach, mutual trust and respect of client interests are in the

basis of IJS BANK clientele policy. In 2009, work with clients was built as before with regard to practical requirements and monitoring of constantly changing situation on the Russian banking and financial markets. The retention of the existing customer base and the service quality increase were ones of the major objectives in 2009. In post-crisis conditions, in the formation of the clientele policy the Bank has paid particular attention to the necessity to maintain the liquidity and financial stability at the appropriate level.

Businesses in different industries and service sectors as well as

individual entrepreneurs and physical persons are among the Bank’s clients. In the preceding year public and private entities of most important branches of economy were the basis of the Bank client base, including the following:

machine building enterprises co-operative associations of prospectors insurance companies precious stones and metals wholesale enterprises construction companies enterprises engaging in metals reprocessing developer and real estate companies companies for recreation and entertainment organization investment financial companies publishing and printing companies employment and recruitment agencies law firms leasing companies trading companies

The client base was expanded through attraction of leasing and trading

companies, noncommercial organizations performing functions of self-regulating organizations in town-planning sector. In comparison with the year 2008, balances in clients' ruble accounts have increased by 128%. The number of accounts opened to clients-legal entities in 2009 increased by 55 % in comparison with the year 2008.

Legal entities' deposits in rubles amounted to 1, 607, 400 thous. rubles (10.5 % increase), in dollars – 69, 862 thous. US dollars (18.5% increase). A number of new deposits in rubles and foreign currency were developed for physical persons; three new deposits for physical persons were introduced during the accounting year. The volume of retail deposits in foreign currency increased by 30 % in 2009.

New clients served within payroll card programs were acquired. In order to

provide additional security features to be used for servicing via Internet banking, smart cards and USB-devices have become available to clients. Overdraft facilities were introduced as an additional service provided to the clients within card service, an additional module was implemented in the working automated banking system to maintain accounting for the specified transactions.

The “Migom” transfer system was added to the list of transfer systems available to the Bank clients for transfers without banking account opening – “Contact”, “Blizko”.

During the year of 2009, the Bank has been providing safe deposit services for storage of valuables, settlement of real estate purchase and sales transactions and other transactions on financial contracts in a client-friendly form.

The Bank Client Policy is traditionally based upon information openness, transparency of financial statements, desire to provide proper quality of corporate governance. This promotes customers’ and partners’ confidence in the Bank, contributes to further strengthening of its goodwill in Russian and foreign business circles.

The main direction of the Bank's activity is the support for clients’ foreign economic activity. Thus far implemented methods of cash and settlement services and international settlements, including remote account management systems, allow the Bank to perform clients’ payments carrying out transfers of any urgency and in any currency with minimum cost and with a high degree of reliability. Using the international correspondents network the Bank successfully settles export-import contracts. Customers make payments both using the traditional currencies USD, EUR and JPY, GBP, CHF, SEK, AUD. The Bank maintains an indirect membership in the leading clearing systems of USA and Europe. IJS BANK is one of active users of BESP system of real-time payments in rubles.

funds of credit

institutions; 12.31%

clients' funds; 64.61%

other liabilities;

3.04%

owned capital; 20.03%

Liabilities

The major part of the Bank’s liabilities was formed due to long-term

clients’ funds of the Bank. In 2009 the increment of long-term liabilities amounted to 18.2 %. The Bank constantly pursues the policy of capital strengthening and consequently the owned capital of the Bank equals to 20.03% in the liabilities structure. In 2009 the growth of capital as part of liabilities amounted to 654 mln. rubles. The main part of the increase is connected with the recovery of securities held in the portfolio available for sale.

In 2009 the Bank continued the expansion of its credit portfolio, its volume reached 60.35% of all assets.

Investments in securities make one-fourth of the assets of IJS BANK. The securities portfolio was formed on the basis of the principles of sound liquidity and profitability.

monetary funds; 0.57%

funds in the Central Bank;

2.16% funds in credit institutions;

4.71%

investments in securities; 24.15%

credits; 60.35%

fixed assets; 4.51%

other assets; 3.55%

Assets

In 2009 the Bank took measures for further improvement of the risk management system connected with credit operations. The work on improving the quality of credit portfolio was carried out, the share of truobled credits decreased three times. Individual approach to each project and borrower, thorough analysis of technical-and-economic assessment of credited projects and continuous monitoring of granted credits allow the Bank to promptly control arising credit risks.

The main part of the granted credits has liquid security. As of January 01, 2010, the total credit portfolio of the Bank fully covered loan indebtedness significantly limiting the possibility of financial losses in credit operations.

As of January 01, 2010 the volume of credit portfolio increased by 21.5% (credits to physical persons and legal entities) as compared with January 01, 2009 and amounted to 3, 951, 287.41 thous. rubles while credit risk decreased from 18 % reserve for possible losses as of 01.01.09 to 13 % reserve as of 01.01.10 through quality improvement of granted credits and security in accordance with the requirements imposed by the Central Bank to the reserves level.

In 2009 the Bank continued the work on crediting of investment companies. Furthermore, the proportion of borrowers of this sector in total credit portfolio of the Bank decreased by 22% and as of the end of the year amounted to 38.55% of total granted credits, which reflected general trends in real estate market over the specified period.

The share of credits to trading companies significantly increased and

amounted to 31.48 % (for the year 2009, the growth of this indicator amounted to 29.38%). Companies engaged in trading of construction materials, alcoholic products, jewelry, etc. are among our clients.

The credit portfolio of the Bank for the year 2009

physical persons

0.96%

portfolio in arrears

1.60% trading companies

31.48%

machine building and

other enterprises

4.72%

leasing companies

12.87%

reprocessing of secondary

raw materials

5.23%

gold mining

4.59%

investment portfolio

38.55%

Due to the fact that the risk of giving credits to leasing companies is considerably reduced by means of insurance of the subject of pledge and hedging of repayment risks between lessors – lenders and their lessees, in 2009 IJS BANK resumed lending to leasing companies. By the end of 2009 the share of such credits equaled to 12.87 % (the growth of this indicator amounted to 1.73% for the year 2009). In their turn, the Bank specialists paid a special attention to the creation of flexible lease payments schedule considering individual business requirements to the maximum.

As in the previous years, the Bank credited real sector of economy - machine-building, printing plants, etc. By the end of 2009 the share of such credits equaled to 4.72% (despite the relative decrease in this indicator by 0.56% for the year 2009 the increase in absolute value in the credit portfolio structure equaled to 10.7 %).

In 2009 the Bank resumed active cooperation with gold-mining artels. The share of such credits in the Bank’s portfolio equaled to 4.59% by the end of 2009.

Average profitability of credit transactions including earned interest for 2009 equaled to 14.44% per annum.

Despite the crisis phenomena in the world economy which caused a sharp decline of market indexes, the Bank continued conducting transactions in securities market. The volume of securities portfolio as of 01.01.10 equaled to 2, 066, 995.00 thous. rubles. Furthermore, the portfolio diversification was carried out – extension of deposits to debt financial instruments with fixed interest income of the Russian Federation (external bond loans), of legal entities-residents nominated in rubles, and of legal entities-non-residents nominated in foreign currency and circulating in European trading floors (total amount of deposits equaled to 799, 894.69 thous. rubles increased by 540,851.92 thous. rubles in comparison with 01.01.09). The diversification is carried out using the funds received from the sale of low-profit bills of credit institutions as well as of fractional share of the trading porfolio and portfolio for resale the market prices of which exceeded the acquisition cost.

December 08 March 09

June 09 September 09

December 09 debt instruments

equity instruments

1 456 1 445

1 369 1 322

1 215

254 526 493

698 807

- 200 400 600 800

1 000 1 200 1 400 1 600

The volume of investments in securities, mln. rubles

During many years IJS BANK has been an active participant of the

interbank market. The availability of general cooperation agreements in the market of interbank credits, as well as the considerable volume of unsecured limits, including those from foreign partners, contribute to the effective management of the current liquidity. In 2009 the Bank signed the General Credit Agreement (secured by pledge (blocking) of securities) for the extension of the Bank of Russia credits, earlier there was signed the General agreement on conducting deposit operations in the currency of the Russian Federation using the Reuters dealing system with credit institutions of the Moscow region.

The activity of the bank in the foreign currency market in 2009 in the first turn was directed to the accomplishments of clients and correspondent banks’ requests for purchase and sale of foreign currency based on granting the most favourable exchange rates and settlements terms on transactions. The Bank saved an active position in the internal conversion and currency markets.

In 2009, as in the previous years, the Bank paid much attention to the

optimization of the correspondent network the main directions of which were efficiency improvement of existing correspondent accounts, decrease in transaction costs and reduction of non-performing accounts. The following leading financial institutions are foreign correspondents of the Bank: Deutsche Bank Trust Company Americas, New York, USA; JP Morgan Chase Bank, New York, USA; JP Morgan AG, Frankfurt am Main, Germany; Deutsche Bank AG, Frankfurt am Main, Germany; VTB Bank (Deutschland) AG, Frankfurt am Main, Germany; JPMorgan Chase Bank, London, UK; Russian Commercial Bank Ltd., Zurich, Switzerland; Bank of Tokyo-Mitsubishi Ltd., Tokyo, Japan.

Well-functioning technologies make it possible to respond quickly to any

changes in the market, which is reflected in the regular revision of tariff and interest rate policy. Differentiated approach to tariffs, selection of any telecommunications system – SWIFT, telex, Internet Banking Systems, and optimal conditions to settlement, including prolonged transaction day, provide the possibility for individual approach to each of the Loro-correspondents. The comprehensive service includes rendering of services for all possible directions of cooperation: attraction and allocation of financial resources, payments settlement, securities transactions, conversion and trade finance transactions.

Taking into account modern international tendencies and the increasing importance of

anti-money laundering and counter-terrorism financing in 2009, the Bank continued its in-depth examination of the analysis of the potential and continuing partners. In particular, regular meetings with financial institutions within the Know your Client program, systematic questioning and analysis of financial accounting were carried out, business lines were studied, moreover an active interaction among all the Bank departments was performed, including methodical support providing a complex of measures for studying and identification of credit institutions.

Continuous monitoring of changes in the economic situation in the internal and international financial markets allowed the Bank to manage its financial flow effectively in due time increasing or decreasing its presence in different market segments. Using modern trading and information analysis systems, such as REUTERS, REUTERS DEALING 3000, BLOOMBERG, remote terminals QUIK, MICEX, as well as trading platforms HOT SPOT, Alfa FX allowed the Bank specialists to respond to incoming market information in due time.

In 2009, the principal items of income were interest income from provision

of funds as well as incomes from transactions with securities. The indicator of net interest margin determined in accordance with the Instruction of the Bank of Russia dated April 30, 2008 No. 2005-U “On assessment of banks economic situation” amounted to 5.85% per annum.

INCOME

dividents; 1.24%other; 0.23%

commission income; 1.63%from exchange

transactions; 1.63%

from securities transactions; 21.12%

% income from loans to the Bank's clients; 71.63%

% income from credit institutions; 2.52%

In 2009 the expense patterns did not undergo significant changes, the most

considerable proportion is still accounted for fees for clients’ funds. Personnel costs were also included in operating expenses and amounted to 25.73%. Losses arising from assignment of claims in respect of creduts made the major part of expenses. Expenses for accumulation of reserves equaled to 4.25%. Total reserves generated by the Bank as of the end of 2009 correspond to the actual quality of assets and amounted to 679.98 mln. rubles.

EXPENSES

taxes; 5.00%

operational expenses;

41.33% commission

expenses; 1.24% generation of reserves; 4.25%

on clients' funds; 46.48%

on funds of credit institutions; 1.70%

Prospects for the Bank development for the year 2010

The priority is given to the increasing the return from the existing client

base through the improvement of work with potential clients and further development of business processes in the Bank. The key parameters will be the following – client servicing rate, client satisfaction from cooperation with the Bank, integrated client efficiency (group of clients), stability of client base.

On the basis of marketing analysis of the existing client base, IJS BANK offers the effective set of services for each client category, with diversification of interest rates, amount of fees and rates depending on the client preferences and their planned effectiveness for the Bank:

- expanding the list of services offered to physical persons, improvement and addition of the current services and service technology;

- involvement of new corporate clients with regular turnovers for comprehensive cash management services;

- establishment of mutually beneficial relations with partners, determination of clients’ needs in financial field by providing a wide range of services corresponding to the international practice;

- development of individual servicing programs for different enterprises, rendering of assistance in business development. Priority areas are also as follows:

- attraction of free cash to deposits; - settlement and cash services of corporate clients; - crediting of corporate clients; - crediting of small- and medium-size business; - work in securities market; - currency exchange transactions; - physical persons’ transfers without opening an account.

The Bank will resume the work on optimization of the correspondent

network of the Bank, development of cooperation with Russian and foreign banks, participation in banking events, including international ones, to extent and strengthen mutual business contacts between banks by means of formal and informal meetings in order to increase of the Bank recognition in financial circles. Opening of correspondent accounts in new currencies, for example, in Chinese yuans. A further automation of already existing and new areas of the Bank activities is planned.

During 2010 the Bank plans to continue crediting development of enterprises and organizations. Companies of small- and medium-size business, enterprises of real sector of economy involved in production of goods and services are planned to be priority areas of crediting.

The Bank will make efforts to increase the credit portfolio volume, with

simultaneous improvement of credit quality due to deep analysis and detailed development of projects suggested by clients. Minimization of crediting risk and maintenance of business income at an acceptable for the Bank development level with simultaneous satisfaction of the Central Bank’s requirements by standards.

In conditions of the current uncertainty it is possible to expect a considerable increase in volatility in the financial markets in 2010. Under these circumstances it seems reasonable to keep the existing structure of securities portfolio at the beginning of the year and reduce the investment terms before a constant decrease in the level of market volatility.

In accordance with the decision taken at the Annual General Meeting of Shareholders, IJS BANK profit at the end of 2008 in the amount of 244.909 mln. rubles was distributed as follows: accumulation fund – 240.011 mln. rubles, charity – 4.898 mln. rubles.

As of the end of 2009, the sum allocated for charity amounted to 1.994 mln. rubles.

Report on declared dividend payments on equity issues of the Bank

Constant monitoring and comprehensive assessment of various risks was carried out in the previous year. The Bank performs monthly analysis of its proper financial stability in accordance with the Instruction of the Bank of Russia dated April 30, 2008 No. 2005-U “On assessment of banks economic situation”.

The Bank creates liquidity management system, main elements of which are governed by the new “Policy of liquidity risk management in IJS BANK” adopted in 2009.

The Bank is guided by the following principles regarding liquidity management:

— precautionary principle; — principle of conservative estimates in data analyzing and projection models

generation; — principle of centralization, i.e. centralized liquidity management of the

Bank; — principle of diversification, i.e. the tendency to diversify to the maximum

extent the flows influencing liquidity.

IJS BANK risk management system

Besides daily calculation of obligatory liquidity requirements (on the basis of the method of the Central Bank of the Russian Federation) the Bank performs continuous analysis of perspective liquidity to ensure financial solvency of the Bank within all horizon periods in combination with maximum effective use of resources. In 2009 the Program of perspective liquidity modeling was further developed, that has been functioning in the bank in various modifications since 2007. Now this is a unique Program complex designed for assessment of perspective liquidity of the Bank on the basis of analysis of cash flows in accordance with actual terms of assets disposal, repayment and claiming of obligations. The Program complex encompasses stress-tests of liquidity risk with the use of various scenarios of events related to market situation, status of debtors, creditors and other circumstances influencing the Bank liquidity status.

The acting system of liquidity management facilitates the making of

informed and reasonable decisions on investing in long-term assets alongside with minimization of liquidity risk.

The Bank liquidity requirements within 2009 were far from maximum allowable values and were equal as of the end of the year:

Н2 criterion of the Bank quick liquidity – 81.6% (with the norm of at least 15%), Н3 criterion of the Bank current liquidity – 173.8% (with the norm of at least 50%), Н4 criterion of the Bank long-term liquidity – 70,6% (with the norm not exceeding 120%).

The requirement for capital adequacy as of the end of the year was 18.6% (with the norm of 10%).

The previous year witnessed a significant shift of attention on improving the system of the Bank operational risk management related to possible deficiencies, failures in systems and procedures of management and control over bank processes as well as system errors.

ABS DIASOFT 5 NT has been transferred to a new technological platform,

i.e. in order to ensure continuity and scalability of the Bank activity (2 independent servers located at a distance). Transition to a new version of ABS DIASOFT 5 NT allowed to automate new legislative requirements entered in force in 2009-2010. A new system of antivirus protection and protection of EPS-internet has been introduced as well as other measures on improving of information safety in relation to implementation of the Directives of the Federal Law No. 152-FL “On personal data”. Intrabank software has been developed to ensure intraformal control over forms of reporting submitted to the Bank of Russia. A new system of receiving of obligatory accounting of the Central Bank of the Russian Federation – “Bank activity analysis” – has been introduced into commercial operation.

The Bank employs the “Concept of Information security” designated to

protect information resources from different types of threats, internal and external, intentional and unintentional, to ensure continuity of business activity and to minimize damage due to failures in the system of information safety. Indirect economic benefit of solving the problem of ensuring information safety is significant decrease of level of material, moral, image and other types of damage. Improvement of the “Concept of Information security” is carried out in compliance with the requirements, instructions and recommendations of the main legislative acts of the Russian Federation and regulatory and procedural documents of the Russian Federation of FSTEC of Russia in the sphere of protection of information, main existing international standards in the sphere of information technologies security as well as requirements and orders of the Central Bank of the Russian Federation.

In the course of performing activity in compliance with the Articles of

Association the Bank abides by the norms of the Code of Corporate Conduct approved at the meeting of the Government of the Russian Federation dated November 28, 2001, No. 49 inclusive of peculiarities of internal documents and existing practice.

Auditing organization is approved for verifying the financial status of the Bank every year during the annual meeting of shareholders. In 2009 the auditing organization for the Bank was “AKONT” Auditing Company Ltd. auditing annual financial statements of IJS BANK as well as auditing the Bank financial accounting made in compliance with international standards. There is no affiliation or any property interests (except for payment for auditing services) between auditing organization and the Bank.