Closed Joint-Stock Company
«Joint Stock Commercial Bank
«ALEF-BANK»
Independent auditor’s report and Financial statements
For the yearended 31 December 2008
Moscow, 2009
Limited Liability Company
VNESHAUDIT CONSULTING
Russia, Moscow
Tel.: +7 (499) 766-9277, 766-9792, 766-9304
Contents
INDEPENDENT AUDITOR’S REPORT
FINANCIAL STATEMENTS AND NOTES:
BALANCE SHEET
INCOME STATEMENT
CASH FLOW STATEMENT
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
Limited Liability Company
VNESHAUDIT CONSULTING
Russia, Moscow
Tel.: +7 (499) 766-9277, 766-9792, 766-9304
19June 2009
To the Management and Shareholders
of CJSC JSCB “Alef-Bank”
Russian Federation, 117292, Moscow, 20 bld. 1 Dmitriya Ulyanova.
INDEPENDENT AUDITOR’S REPORT
- We have audited the accompanying financial statements ofCJSCJSCB «Alef-Bank»(hereinafter – «the Bank»), that includes statement of financial position as of 31.12.2008, statement of aggregated income, cash flow statementandstatement of changes in shareholders’ equityforthe year ended 31 December 2008. Responsibility for preparation of these financial statements is carried by the Management of the Bank.Our responsibility is to express the opinion on these financial statements based on our audit.
- We have conducted our audit in accordance with following standards: International Standards on Auditing, International Financial Reporting Standards (IFRS), and Company’s standards. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Examining depends on auditor’s opinion, including measurement of material misstatement risk arising from fraud or mistake. While measuring risks, an auditor examines the internal control system, at the same time not being obliged to express his opinion on its efficiency. An audit also includes assessing the accounting principles used and significant estimates made by Management, as well as evaluating the overall financial statements presentation. We believe that our audit provides a reasonable basis for our opinion.
- In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank for the period from 01 January to 31 December 2008 including, in accordance with International Financial Reporting Standards.
General director
LLC «Vneshaudit consulting» O.V. Trokhova
1
The notes on pages 9-72 form an integral part of the financial statements.
CJSCJSCB «Alef-Bank»
BALANCE SHEET
as of 31 December 2008
(inthousandsof Russian Rubles,
inclusive of purchasing power
of Russian Rublesas of 31 December 2008)
Assets
Cash and cash equivalents / 5 / 3 069 919 / 2 910 046
Mandatory cash balances with the Central Bank of the Russian Federation / 3 761 / 76 310
Financial assets at fair value through profit or loss / 6 / 163 094 / 48 150
Due from other banks / 7 / 1 217 160 / 1 459 658
Loans and receivables / 8 / 1 319 409 / 2 445 764
Financial assets available for sale / 9 / 66 / 57
Financial assets held to maturity / 10 / 5 046 / 237 738
Premises and equipment / 11 / 14 176 / 11327
Other assets / 12 / 15 106 / 6 002
Total Assets: / 5 807 737 / 7 195 052
Liabilities
Due to other banks / 13 / 35 402 / 129 085
Customers’ accounts / 14 / 3 168 396 / 4 612 094
Debt securities issued / 15 / 4 139 / 7470
Other debts / 16 / 499 467 / 417285
Other liabilities / 17 / 60 832 / 74 571
-including deferred tax liabilities / 36 886 / 38 057
Total liabilities: / 3 768 236 / 5 240 505
Equity
Share capital / 18 / 1 616 887 / 1 616 887
Share premium / 18 / 450 133 / 450 133
Retained earnings of reporting period / 19 / 84 954 / 60 033
Retained earnings of prior years / (112 473) / (172 506)
Total equity: / 2 039 501 / 1 954 547
Total liabilities and equity: / 5 807 737 / 7 195 052
Chairman of the Board,V.V.Doroshko ______
(signature)
seal
Chief Accountant,T.A.Larina
______
(signature)
CJSC JSCB «Alef-Bank»
INCOME STATEMENT
for the year ended 31 December 2008
(in thousands of Russian Rubles,
inclusive of purchasing power
of Russian Rubles as of 31 December 2008)
Interest income / 20 / 403873 / 369 478
Interest expense / 20 / (60 988) / (35 857)
Net interest income / 342 885 / 333 621
Changes in provision for loan impairment / 8 / (504 260) / (100 118)
Net interest income after provision for loan impairmenr / (163 375) / 233 503
Gains less losses from financial assets at fair value through profit or loss / (5 793) / 613
Gains less losses from financial assets available for sale
Gains less losses from trading in foreign currencies / 34 244 / (18 296)
Foreign exchange translation (losses net of gains)/gains less losses / 284 486 / (88 407)
Dividend income / 132
Fee and commission income / 21 / 148 479 / 105 293
Fee and commission expense / 21 / (13 250) / (13 085)
Changes in other provision / 3 829 / (7 518)
Other operating income / 22 / 4 088 / 10 576
Net income (expense) / 294 708 / 222 811
Operating expenses / 23 / (184 875) / (142 988)
Operating income / (expense) / 109 833 / 79 823
Profit / (loss) beforetax / 119 833 / 79 823
Incometaxexpense(reimbursement) / 24 / (24 879) / (19 790)
Net profit / (loss) / 84 954 / 60033
Other items of aggregated income
Premises and equipment revaluation / - / -
Income less expense from foreign exchange translation / - / -
Income tax referred to other items of aggregated income / - / -
Other items of aggregated income less income tax / - / -
Aggregated income for the year / 84 954 / 60033
Chairman of the Board, V.V.Doroshko ______
(signature)
seal
Chief Accountant, T.A.Larina
______
(signature)
CJSC JSCB «Alef-Bank»
CASH FLOW STATEMENT
for the year ended 31 December 2008
(in thousands of Russian Rubles,
inclusive of purchasing power
of Russian Rubles as of 31 December 2008)
Cash from operating activity
Interest received / 410 704 / 366 153
Interest paid / (61 039) / (35 521)
Losses less gains arising from financial assets at fair value through profit and loss / (3 493) / 2 591
Income less expense received from trading in foreign currencies / 34 244 / (18 296)
Fees and commissions received / 148 479 / 105 293
Fees and commissions paid / (13 250) / (13 085)
Other operating income received / 4 088 / 10 576
Operating expenses paid / (176 185) / (137 571)
Tax paid / (33 098) / (16 699)
Cash flows from/(used in) operating activities before changes in operating assets and liabilities / 310 450 / 263 441
Changes in operating assets and liabilities
Net increase/(decrease) in mandatory reserves with the Central Bank of Russian Federation / 72 549 / (30 178)
Net increase/(decrease) in due from financial assets at fair value through profit and loss / (110 867) / 40 530
Net increase/(decrease) in due from other banks / 379 290 / 1089 853
Net increase in loans and advances to customers / 662 131 / (609 092)
Net increase/(decrease) in other assets / 27 970 / 10 181
Net increase/(decrease) in due to other banks / (96 135) / (97 294)
Net increase/(decrease) in customer accounts / (1 638 926) / 843 355
Net increase/(decrease) in other debts / (329)
Net increase/(decrease) in other liabilities / (11 666) / 15 636
Net cash flows from/(used in) operating activities / (405 203) / 1 526 103
Cash flows from investing activity
Changes in financial assets available for sale / - / -
Changes in financial assets held to maturity / 226 754 / (53483)
Changes in investments in daughters / - / -
Changes in premises and equipment / (7 634) / (4301)
Dividends received / - / 132
Net cash flows from/(used in) investing activity / 219 120 / (57 652)
Cash flows from financing activities
Ordinaries issued / - / -
Preferenced shares issued / - / -
Other contribution from shareholders / - / -
Changes in value of debt securities / (3 394) / (19296)
Changes in value of payables / 1 / -
Net cash flows from/(used in) financing activities / (3 933) / (19296)
Effect of exchange rate changes on cash and cash equivalents / 349 889 / (88 244)
Net increase in cash and cash equivalents / 159 873 / 1 360 911
Cash and cash equivalents at the beginning of the year / 5 / 2 910 046 / 1 549 135
Cash and cash equivalents at the end of the year / 5 / 3 069 919 / 2 910 046
Chairman of the Board, V.V.Doroshko ______
(signature)
seal
Chief Accountant, T.A.Larina
______
(signature)
CJSC JSCB «Alef-Bank»
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
for the year ended 31 December 2008
(in thousands of Russian Rubles,
inclusive of purchasing power
of Russian Rubles as of 31 December 2008)
Balance of1January 2008 / 1616887 / 450133 / (112473) / 1954547
Net profit (loss) for the year / - / - / 84954 / 84954
Balance of 1 January 2009 / 1616887 / 450133 / (27519) / 2039501
Chairman of the Board, V.V.Doroshko ______
(signature)
seal
Chief Accountant, T.A.Larina
______
(signature)
1
The notes on pages 9-72 form an integral part of the financial statements.
NOTESTOFINANCIALSTATEMENTS
The order of the information disclosure in the Notes to financial statements of the Bank is presented below. While disclosing the information its necessary to take into consideration the specific character of the Bank’s activity.
1. Principal activity of the Bank
These financial statements include financial statements of CJSC JSCB “Alef-Bank” (hereinafter – the Bank).
Bank was established in the Russian Federation as a joint-stock commercial bank without a limitation of activity term and was granted its general banking license (number 2119) by the Bank of the Russian Federation (hereinafter - “the CBR”) in 1992. The principal activities of the Bank are commercial and retail banking operations in Russia.
As of 31 December 2008, the Bank carried out its main activities in Moscow. The Bank has branches in Kurgan, Lebedyan’ and Lys’va in Russian Federation.
The Bank’s registered address is:
Russian Federation, 117292, Moscow, 20 bld.1 Dmitriya Ulyanova.
The number of the Bank’s employees as at 31 December 2008 was 187 (2007 - 174 empl.).
At 31 December 2008 the 100% shareholder of the Bank is Eastlink Lanker Plc., United Kingdom, part of Eastlink Lanker Group. Principal activities of the shareholder are metallurgy, production of oil extraction equipment, trading of metals on the Westen markets, banking services and corporate consultancy.
The Bank is a participant of State Deposit Insurance System that guarantees a reimbursement up to7 000 RUR (since October 2008) to every single individual in case the CBR calls back the license or applies moratorium on payments.
The notes on pages 9-72 form an integral part of the financial statements.
2. Operating environment of the Bank
Russian Federation.The Russian Federation displays certain characteristics of an emerging market, including relatively high inflation. Despite strong economic growth in recent years, the financial situation in the Russian market significantly deteriorated during 2008, particularly in the fourth quarter. As a result of global volatility in financial and commodity markets, among other factors, there has been a significant decline in the Russian stock market since mid-2008. Since September 2008, there has been increased volatility in currency markets and the Russian Rouble has depreciated significantly against some major currencies. The official United States Dollar (“US Dollar” or “USD”) exchange rate of the CBRF increased from RR 25.37 at 1 October 2008 to RR 29.38 at 31 December 2008 and RR 33.41 at 30 March 2009.
Due to increased market volatility, one-day MosPrime rate fluctuated between 6.83% p.a. and 25.17% p.a. during the period from 31 December 2008 to 30 March 2009.
International reserves of the Russian Federation decreased from USD 557 billion at 30 September 2008 to USD 427 billion at 31 December 2008 to USD 384 billion at 30 March 2009. The commodities market was also impacted by the latest events on the financial markets.
The spot Free On Board price per barrel of Urals oil decreased from USD 91.15 at 29 September 2008 to USD 41.83 at 31 December 2008 and USD 48.96 at 30 March 2009.
A number of measures have been undertaken during September-December 2008 by the Government to support the Russian financial markets, including the following:
In October 2008 the CBR reduced the mandatory reserves ratio to 0.5% and raised the guarantee repayment of individual deposits under the State deposit insurance coverage to RR 700 thousand per individual in case of the withdrawal of a license of a bank or an imposed moratorium on payments by the CBR.
The list of assets which can be pledged under repurchase agreements with the CBR was significantly extended.
The CBR made significant placements to the leading Russian banks collateralised by guarantees issued by third party banks. Refer to Note 15 and 33.
The CBR provided additional liquidity through regular unsecured finance auctions.
The CBR granted subordinated loans up to 950000 Millions ofRussian Rubles.
The Management is unable to predict all developments which could have an impact on the banking sector and the wider economy and consequently what effect, if any, they could have on the future financial position of the Bank..
Impact of the ongoing global financial and economic crisis.The ongoing global financial and economic crisis that emerged out of the severe reduction in global liquidity which commenced in the middle of 2007 (often referred to as the “Credit Crunch”), has resulted in, among other things, a lower level of capital market funding, lower liquidity levels across the banking sector and wider economy, and, at times, higher interbank lending rates and very high volatility in local and international stock and currency markets. The uncertainties in the global financial markets have also led to failures of banks and other corporates, and to bank rescues in the United States of America, Western Europe, Russia and elsewhere. Since September 2008 several medium size Russian banks have been acquired by state-controlled banks and companies due to their liquidity problems. The full extent of the impact of the ongoing crisis is currently not possible to predict.
The volume of wholesale financing has significantly reduced since August 2007. Such circumstances may affect the ability of the Bank to obtain new borrowings or deposits and re-finance its existing borrowings or deposits at terms and conditions similar to those applied to earlier transactions.
The Management is unable to reliably determine the effects on the Bank's future financial position of any further deterioration in the liquidity of the financial markets and the increased volatility in the currency and equity markets. The Management believes it is taking all the necessary measures to support the sustainability and development of the Bank’s business in the current circumstances.
The tax, currency and customs legislation within the Russian Federation is subject to varying interpretations and frequent changes. Furthermore, the need for further developments in the bankruptcy laws, the absence of formalised procedures for the registration and enforcement of collateral, and other legal and fiscal impediments contribute to the challenges faced by banks currently operating in the Russian Federation. The future economic direction of the Russian Federation is largely dependent upon the effectiveness of economic, financial and monetary measures undertaken by the Government, together with tax, legal, regulatory, and political developments.
3. Basis of preparation
These financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) under the historical cost convention, as modified by the initial recognition of financial instruments based on fair value, and by the revaluation of premises, investment property, available-for-sale financial assets, financial instruments categorised as at fair value through profit or loss and all derivative contracts. The principal accounting policies applied in the preparation of these financial statements are set out below. These policies have been consistently applied to all the periods presented, unless otherwise stated.
The Bank maintains its accounting records in accordance with Russian banking regulations. Other subsidiaries maintain their accounting records in accordance with accounting regulations or applicable companies’ law in their respective jurisdictions. These financial statements have been prepared from those accounting records and adjusted as necessary in order to be in accordance with IFRS.
Accounting policies applied in this year corresponds to the policy of last financial year except adoption of new standards taking effect after 1 January 2008.
Some new IFRS standards became obligatory to the Bank since 1 January 2008. Further all newly adopted standards and interpretations are presented as well as their influence on the Bank’s accounting policy. All changes in accounting policy were applied retrospectively with adjustment to retained earnings as at the 1 January 2006.
The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported period.
In Notes 4 there are presented items needed to be estimated thoroughly and being most important for these financial statements.
Key measurement terms
Depending on their classification financial instruments are carried at fair value or amortised cost or historical as described below.
Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. Fair value is the current bid price for financial assets and current asking price for financial liabilities which are quoted in an active market. For assets and liabilities with offsetting market risks, the Bank may use mid-market prices as a basis for establishing fair values for the offsetting risk positions and apply the bid or asking price to the net open position as appropriate. A financial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange or other institution (e.g. financial analytical systems such as “Bloomberg” or “Reuters”) and those prices represent actual and regularly occurring market transactions on an arm’s length basis.
If there is no spot bid quotes on active market, for determination of fair value can be used:
-last bid/ask quote price from an independent source (if there were no serious changes in economic environment before the reporting date);
-actual transaction cost (if there were no serious changes in economic environment before the reporting date).
Valuation techniques such as discounted cash flows models or models based on recent arms length transactions or consideration of financial data of the investees are used to fair value certain financial instruments for which external market pricing information is not available. Valuation techniques may require assumptions not supported by observable market data. Disclosures are made in these financial statements if changing any such assumptions to a reasonably possible alternative would result in significantly different profit, income, total assets or total liabilities.
The applied valuation technique can be chosen for each specific case of fair value determination. At that, if another is not stated, valuation technique, based on stock market and bid/ask quoted prices, is applied.
Amortised cost is the amount at which the financial instrument was recognised at initial recognition less any principal repayments, plus accrued interest, and for financial assets less any write-down for incurred impairment losses. Accrued interest includes amortisation of transaction costs deferred at initial recognition and of any premium or discount to maturity amount using the effective interest method. Accrued interest income and accrued interest expense, including both accrued coupon and amortised discount or premium (including fees deferred at origination, if any), are not presented separately and are included in the carrying values of related balance sheet items.
The effective interest method is a method of allocating interest income or interest expense over the relevant period so as to achieve a constant periodic rate of interest (effective interest rate) on the carrying amount.
The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts (excluding future credit losses) through the expected life of the financial instrument or a shorter period, if appropriate, to the net carrying amount of the financial instrument. The effective interest rate discounts cash flows of variable interest instruments to the next interest repricing date except for the premium or discount which reflects the credit spread over the floating rate specified in the instrument, or other variables that are not reset to market rates. Such premiums or discounts are amortised over the whole expected life of the instrument. The present value calculation includes all fees paid or received between parties to the contract that are an integral part of the effective interest rate.