Joint-stock commercial bank “Chelindbank” (open joint-stock company), annual report 2008 (стр. 3 )

The main part of commission incomes of the Bank are given by incomes for cash and settlement services of corporate and private Customers – 619 mln rubles or 87.7% of the total amount of commission incomes. Increase of incomes for cash and settlement services is caused by the growth of volumes of transactions of the Customers of the Bank, implementation of new types of services, improvement of the rate policy. The Bank is developing existing and starting new services that bring commission income: receipt of private payments; money transfers without opening an account; storage of values of Customers and others.

In 2008 the incomes of the Bank from operations with foreign currency increased by 46.5% and were equal to 56 mln rubles. This was explained by considerable volumes of foreign exchange operations of the Customers of the Bank due to the policy of the Bank of Russia in the 4th quarter 2008 for gradual devaluation of ruble.

The profit after taxation for 2008 comprised 305 mln rubles (including post Balance Sheet events) that is 11.8 higher than the similar figure in 2007.

2. Services for Customers

Corporate business

CHELINDBANK provides financial services to corporate Customers from different sectors of economy, with various forms of ownership and volumes of activity. Corporate Customers of the Bank are military and defense enterprises, ferrous and non-ferrous metallurgical companies, chemical production, machine building, food industry, travel and commercial companies, educational institutions and others.

The basis of the customer policy of the Bank is study of the needs of all categories of the Customers, individual approach and efforts to provide all possible banking services of the highest quality. In 2008 the number of corporate Customers and sole traders dealing with the Bank increased by 9.2% and totaled 18.5 thousand.

Corporate customer service programs include cash and settlement services in rubles and foreign currency, attraction of customers’ funds in deposits, lending, conversion operations, trade financing, fulfillment of the functions of the currency control agent, operations with securities and precious metals.

The main competitive advantage of the Bank in terms of cash and settlement services is proper and fast processing of the customers payment orders, and it was again proved in the conditions of liquidity crisis in 2008. During the year the amount of funds in the settlement and deposit accounts of corporate customers increased by 13.9% and reached 6.5 bln rubles. The resource base is well enough diversified – only 61 Customers have account balances of more than 10 mln rubles. The incomes of the Bank from cash and settlement services in 2008 comprised 460 mln rubles that is 18.9% higher than the similar figure in 2007.

To ensure efficiency of non-cash payments the Bank was fulfilling optimization of the corresponding network during the year. For this purpose the Bank opened a correspondent account in rubles at OJSC Bank VTB, and at the same time CHELINDBANK joined the system of banking electronic time payments of the Bank of Russia as a direct member. As of 01.01.2009 the correspondent network of CHELINDBANK is represented by 242 banks in 40 countries of the world and serves as the basis for fulfillment of banking operations in various fields of interbanking business.

The Bank opened a correspondent account in yuans (CNY) at Dalkombank, Khabarovsk that helped to increase quality and expand range of services for foreign economic activity of the Customers. In addition money transfers in yuans have been organized. Taking into account that this currency is not convertible, the Bank developed a scheme for money transfers in US dollars through Wachovia Bank, USA, with conversion into yuans to the beneficiary account.

To learn about the needs of corporate Customers and to know more about their satisfaction by the services of the Bank in the 1st quarter of 2008 the Bank asked the corporate Customers from the Head office and the branches to fill in the questionnaire. The results of the poll showed that the most of the Customers of the Bank were satisfied with the quality of services. To reveal the needs of new Customers there is a special questionnaire to be filled in by new Customers of the Bank which open their settlement accounts. Upon the results of weekly analysis of the questionnaires information about preferences and interests of the Customers is sent to relevant departments of the Bank for further cooperation with the Customers.

To expand range of services provided to the Customers and for the purposes of attraction of new Customers in 2008 Customer service departments of the Bank arranged meetings and negotiations with the Customers, sent offers and description of services to potential clients, and organized workshops for them. The Head office of the Bank worked out and sent to the branches samples of “Commercial offer for corporate Customers of CHELINDBANK” regarding to cash and settlement transactions in rubles and foreign currency, foreign currency control, utilization of Client+Bank system, lending, trade financing, “salary projects” and supporting services, corporate VISA cards, deposits and leasing services.

To arrange package offers of services to corporate Customers of the Bank division of customers’ database has been done into parts. The biggest quantity of Customers who opened settlement accounts in the Bank are working in the following sectors:

§  wholesale and retail sales – 38.7%;

§  manufacturing activity – 11.3%;

§  transport and telecommunications – 8.7%

§  building industry – 7.7%

§  household and other services – 4.6%.

The basis for Customer service activity of the bank is segmentation of the Customers by income that the Bank receives from this customer, distinguishing of VIP customers in the Head Office and branches of the bank, distinguishing of the Customers that are in the federal ownership for the purposes of offering them complex banking services. Those Customers that have their accounts in other banks, but have settlements with Customers of CHELINDBANK are considered to be potential Customers of the Bank of the first turn. Much attention is paid to improvement of price policy of the Bank. Several new price plans were implemented in 2008 – “Reliable partner”, “Successful businessman”, “Trade network”, there were some changes made into the price plan called “VIP Tour”

In the first half of 2008, to promote new technologies of corporate Customer services, the Bank finished connecting managers of the “West Travel” travel network to credit questionnaires for remote disbursement of the loans to pay for the tours. 6 branches of the Bank took part in this activity. These were the branches which work at the same areas with “West Travel” companies: Magnitogorsk, Kasli, Verhniy Ufaley, “Zolotaya Dolina”, Troitsk and “Istok”.

Corporate lending is one of the most popular services of the Bank. The corporate loan portfolio comprised 8.9 bln rubles or 57.6% of the total loan portfolio as of 01.01.2009. During the year the corporate loan portfolio grew by 15.7%. It was done mainly due to the loans with a term of less than 1 year. The share of such loans in the corporate portfolio increased by 2.5% and totaled 43.7% as of 01.01.2009. The share of the loans for the term from one to three years increased by 4.2% and reached 30.6%

Corporate loans in dynamics

Pic. 6

In 2008 it was 5 years since foundation of the first leasing company of the Bank – ChelindLeasing, LLC, and one year since foundation of ChelindLeasing – plus, LLC that works on the basis of the simplified taxation scheme. During the past period of time the group of the leasing companies of the Bank received reputation of the leading leasing companies of the region that is annually confirmed by ratings of various analytical *****ssian association of the leasing companies made a survey of the leasing market upon the results of nine months of 2008. During this survey 84 leasing companies that constitute not less than 60% of the Russian leasing market filled in the questionnaires. The rating list was created upon the results of the survey. The group of the leasing companies of the Bank was ranked as the first by volume of new business among Chelyabinsk leasing companies, as the tenth among the companies of the Urals federal region, and as the 53rd among Russian companies.

The total amount of valid leasing agreements made by the leasing group of the Bank comprised 2.4 bln rubles Vat inclusive as of 01.01.2009, the total number of agreements – 699. During the years of performance in the leasing market the group managed to settle long-term and fruitful cooperation with many enterprises. Only 99 agreements out of 325 signed in 2008 were entered into with new Customers, the rest of 226 agreements were signed with old Customers. The repeated inquiries of the Customers are great evidences of the high quality of provided services and guarantees of stable performance of the companies. In these terms Customers take into account professional level of the employees and quality of operations.

The leasing portfolio of the companies is well diversified not only by type of ownership, but also by industries and value of single deals that allows fulfilling obligations taken by the companies. The leasing deals provided by the group of the companies are mostly funded by the loans of CHELINDBANK. In 2008 the Bank received interest incomes from this kind of activity in the amount of 109.6 mln rubles that was by 38% more than in 2007. The risks of the Bank for such loans are significantly less, and there were no cases of arrears.

Special small business lending programs have been developed by the Bank: loans for business development, unsecured loans and loans for personal needs. Within this program as of 01.01.2009 CHELINDBANK disbursed loans for the total amount o 1.9 bln rubles to more than 4 thousand Customers. The small business loan portfolio grew by 10.2 during the year. The small business loan portfolio increased in 17 branches and decreased in 12. The main gain of small business loan portfolio of the Bank is ensured by two offices – the Head office and Satka branch.

One of the sources for small business lending are the funds provided by the European Bank for Reconstruction and Development (EBRD) within the joint agreements. As of 01.01.2009 the total principal receivable of the EBRD loans for small and medium business was equal to 10 mln US dollars and 260 mln rubles.

“RBC-rating” analysts published the rating of the best small and medium business banks in the 1st half of 2008. CHELINDBANK was ranked as 58 by volumes and 20 by the number of the loans disbursed.

In 2008 CHELINDBANK actively promoted its trade financing services. In the region trade financing services are provided by the branches of major Moscow banks, such as Sberbank, Vneshtorgbank, Raiffeisenbank and some others. Main customers are industrial and commercial companies having foreign economic affairs. One of the main reasons for development of trade financing in Russia is depreciation and moral ageing of the fixed assets. New equipment is mainly purchased abroad. Due to financial crisis some of the foreign banks stopped trade financing operations with Russian partners, and the price of trade financing for commercial contract has grown.

The volume of trade financing credit lines opened for CHELINDBANK by foreign and Russian banks and financial institutions as of 01.01.2009 comprised about 39 mln US dollars. These credit lines can be utilized both for documentary operations within trade financing and for attraction of foreign currency funds for further disbursement of loans to corporate Customers. Total volume of the Bank commitments for these transactions comprised 11,6 mln. USD by the end of the year, including 9,6 mln. USD of documentary commitments and 2 mln. USD of attracted funds for further corporate lending. The credit lines that are used by the Bank most of all are those provided by the EBRD, Ogresbank (Moscow) and Commerzbank (Germany).

Besides the Bank is closely cooperating with Dresdner Bank of Germany regarding import covered letters of credit. Total amount of trade finance transactions carried out in 2008 was equal to 35. For the purpose of more active promotion of documentary operations a new price plan has been implemented. “Letter of credit” price plan is made for providing Customers with 50% discount of the set commission for the rates in the foreign currency in case of active use of these operations for international settlements. Upon the results of 2008 the documentary operations gave an income of 10 mln rubles.

In 2008 CHELINDBANK has accepted more than 1.1 thousand foreign currency control passports. Six authorized branches of the Bank (Trehgorny, Satka, Magnitogorsk, Yuzhnouralsk, Kopeysk and Kalininsky) individually act as agents of foreign currency control with relative accounting of commissions for the incomes of the branch; 22 branches are working within ‘Remote signing of deal passports” scheme. In 2008 the Bank continued active development of signing deal passports via “Client+Bank” system that is a unique product in this segment of the market and is very popular among the Customers of the Bank.

Retail Business

CHELINDBANK is among top retail banks of Russia as of the results of 2008. The evidences of this are ratings published by “RosBusinessConsulting”. CHELINDBANK is ranked as the 40th in the list of the most consumer banks. It is ranked as the 38th in the list of the Banks that provided most of car loans. The total number of car loans disbursed in 2008 comprised 1395, and the total amount was equal to more than 575 mln rubles. CHELINDBANK is the 26th by number of plastic cards, the number of valid cards issued by the Bank comprised more than 332 thousand as of January 1, 2009

The volume of private deposits comprised 10.3 bln rubles as of 01.01.2009, including time deposits – 8.2 bln rubles, current private accounts (including banking cards) – 1.7 bln rubles. During 2008 bank deposits with a term of more than 1 year increased by 12.6% and comprised 6.8 bln rubles. The share of ruble deposits was equal to 90.6% as of 01.01.2009, the share of foreign currency deposits – 9.4%. Beginning from October 2008 there was a tendency for significant growth of foreign currency deposits – their share increased by 2 times: from 4.2% as of the start of the year to 9.4% as of the year end.

To support the interest rates on the market level, and because of the increase of refinancing rate by the Bank of Russia, CHELINDBANK was increasing interest rates for time deposits both for ruble and foreign currency deposits during 2008, Besides, time deposits called “Leader” (with a maturity of 550 days with differentiated interest rate) and “Family capital” (with increased interest rates) were launched. These measures gave an opportunity to the Bank to retain and improve the structure of deposits in future: the share of “long” deposits with a term of more than 1 year in the total amount of private funds including money funds deposited in the accounts by means of banking cards increased from 62.3% to 65.8% during 2008. CHELINDBANK is a leading bank among regional banks by this parameter.

 

с.7

Рис.7

Pic. 7

The Bank offers deposits on demand and for different terms, and deposits with different schemes for interest calculation and storage of funds, and pension deposits. The Bank arranges advertising campaigns for Customers on a regular basis.

9 340 deposits in amount of 1 717.7 mln rubles participated in the advertising campaign titled “The world in the palm”. There were prize drawings for the total value of 200 thousand rubles: home cinema, laptop, digital camera and 20 cash prizes.

2 652 depositors who deposited 766.3 mln rubles in total took part in the campaign under the title “10 billion depositor”. The winner’s prize was increase of the amount of his deposit by 100% in comparison with the initial amount, 30 other depositors got the prizes in the amount of 10 thousand rubles.

“Summer bonus” campaign was held for depositors of CHELINDBANK before summer and vacation season. Any Customer who opened or deposited any time deposit with the amount of 5 thousand rubles was given an opportunity to choose one of the bonus/discount cards from one of the partners of the Bank: travel agencies, dental companies, pharmacies, optic centers, beauty salons, fitness clubs, driving courses, outlet shops, event companies, supermarkets, book shops, companies that sell building materials, computers and household facilities, Internet providers and many others. In total 2.6 thousand time deposits were either opened or deposited during these campaign. The total amount of deposited funds comprised 280.7 mln rubles.

In December 2008 – February 2009 CHELINDBANK held traditional campaign – “New Year Kaleidoscope”. Customers who opened a deposit in the Bank for the amount not less than 10 000 rubles, 300 US dollars or EURO, and for the period not shorter than 366 days participated in this campaign. There were 9 thousand deposits opened during this campaign which total amount was equal to 2 273.2 mln rubles. The total value of prizes comprised 321.7 thousand rubles including 3 top prizes – a washing machine, fridge and TV set and 230 smaller prizes, such as kitchen utensils, electrical tea pots, microwave ovens and vacuum cleaners. This prize drawing took place in the Head Office and in 22 branches of Chelyabinsk region.

During the whole year the Bank was working on improvement of quality of services for retail Customers: there was a questionnaire for Customers in different spheres of their activity, the work of front-office specialists was analyzed. 4 regional branches and 6 city offices of the Bank were examined on the basis of “Secret Customer” program, and upon of its results recommendations were given to the Bank employees.

Since April 2008 CHELINDBANK is included in the list of banks allowed to take part in the national housing program in the territory of Chelyabinsk region. There two subprograms within this project: “State support provided to young families for improvement of living conditions” and “Provision of budget workers with subsidies for purchase and construction of accommodation”. CHELINDBANK was authorized to open and maintain accounts of people who receive budget funds for purchase and construction of accommodation.

“Istok” branch of CHELINDBANK (Snezhinsk) was authorized to take part in the implementation of the city program which gives the right for employees of the state corporation called “ROSATOM” to receive free subsidies for purchase and construction of residential accommodation in . Upon the result of selection CHELINDBANK got the status of THE authorized bank for opening and maintaining the accounts of employees of the main company in Snezhinsk – FGUP RFYAC-VNIITF named after academician E. I. Zababakhin” who received certificates for subsides for purchase and construction of living accommodation.

In 2008 the retail loan portfolio of the Bank increased by 26.8% and comprised 4.7 bln rubles as of January 1, 2009. The most of dynamics was reached during 9 months of 2008 and comprised about 5 bln rubles. In the 4th quarter of 2008 the volume of retail loan portfolio was reduced due to financial crisis and reached the level of the 3rd quarter of 2008. During 2008 the number of renewed loan agreements exceeded 35 thousand for the amount of 4 bln rubles.

Private retail loans in dynamics

Pic. 8

Consumer loans constitute the biggest share of the retail loan portfolio – 69%. Car loans take the second place – 18%, loans for purchase of real estate – 13%. In 2008 the specialists of the Bank acquired new practice of outdoor sales – offer of credit products directly in the company’s premises. This new sales technology turned to be highly demanded. The loan portfolio within “salary projects” grew by 65.7% during the year and reached the level of 817 mln rubles.

In 2008 the Bank was actively promoted its new product called “Credit cards lending within the frameworks of salary projects”. During the year more than 8270 cards were issued which was caused by systematic work in the field of promotion of this product almost in all the branches. The principal receivables of credit cards were dynamically growing during the whole year, and boosted in the 4th quarter of 2008. The growing popularity of this service is proved by filling the credit limit: if in January 2008 card transactions were processed within 6% of the set credit limit, than in December already 54% of the set 450 mln rubles for such type of transactions were used.

International financial crisis made an impact on the strategy of the Bank in the field of retail lending. The main targets for 2009 will be stabilization of the loan portfolio, increase of its quality and increase of commission incomes. In 2009 the Bank will implement more careful lending policy that will lead to strengthening of requirements to borrowers and guarantors that should contribute to improvement of quality of the loan portfolio. Employees of the companies who receive salary within “the salary projects” will remain the most attractive target borrowers for the Bank.

The bank pays great attention to private payment services. This kind of services is developing very fast. This service is implemented on the basis of the module worked out by the Bank. The system of private payments for CHELINDBANK contains option for settlements with vendors at the day of receipt of payment; the payment can be done for any destination including companies that do not have agreements with the Bank. The borrowers of the Bank can pay for the loans in any branch of the Bank. The customers are provided with opportunity to receive information about their current debt amount and early payment for loans. Besides, the Customers of the Bank are able to make payments via “Client+Bank Online” system, with the help of mobile phones and ATM of the Bank.

In 2008 the Bank organized receipt of payment to major companies that provide household services to people of Chelyabinsk and region: OJSC Chelyabenergosbyt, OJSC Chelyabregiongaz, POVV, OAO UTSK, OOO Gorecocenter, biggest Management and Maintenance companies, and Internet providers. These services are based on technologies for electronic exchange of information about accruals made for household services and receipt of payments. Besides, the Bank has arranged receipt of payments to more than 500 companies that are funded by Municipal Treasury Department of Chelyabinsk (kindergartens, schools, adoption centers, etc.), and entered into agreement with the Department of Federal Tax Service for Chelyabinsk region for receipt of tax payments from individuals.

During 2008 the Bank accepted 2.6 mln payments for the amount of more than 6 bln rubles. Incomes from receipt of payments comprised 63 mln rubles that exceeds similar figure of 2007 by 22.8%.

In 2008 the Bank has launched the technology of receipt of payments by outside companies acting as agents of the Bank for receipt of private payments in cash.

CHELINDBANK offers two money transfer systems to its private customers – Western Union and Migom. These services are provided in all branches and offices of the Bank. In 2008 a new non-documentary technology for Western Union payments was implemented. Many branches and offices of the Bank provide money transfer services without opening of the account in foreign currency via

The incomes received from operations with the banking cards increased by 27.5% and comprised 102 mln rubles in 2008. As of January 1, 2009 the Bank issued more than 332 thousand VISA cards, and the card accounts balance totaled 1.6 bln rubles. The Bank entered into 2,5 thousand agreements with enterprises and companies for transfer of the salary of the employees to plastic cards of the Bank, that is 27.3% more than in 2007. There is a 24 hour card customer service created in CHELINDBANK.

The internal infrastructure of the Bank includes 126 ATM in Chelyabinsk and Chelyabinsk region and 448 terminals. CHELINDBANK is constantly increasing range of use of plastic cards. The Bank issues co-branding card “VISA Electron – Transport card of Chelyabinsker” which can be used not only for payments in the shops and cash withdrawals, but for payment of the transport fee in the public transport. In 2008 the number of transport cards issued by the Bank increased 6.6 times and reached 38 thousand. There is a successfully developed project with “Yuzhural ASKO” insurance company, within which the number of issued co-branding cards increased 2.2 times and was equal to 12.8 thousand cards in 2008.

In cooperation with some companies the Bank is issuing local “Bon Appetit” cards designated for settlements in the canteens of the plants and factories.

Table 7

Development of the customer service network for VISA cards of CHELINDBANK

N	Name of item	As of 1.01.2007	As of 01.01.2008	As of 1.01.2009
1.	VISA ATMs	106	111	126
3.	Number of electronic terminals	272	336	448
4.	Number of private customers, thousands	284	315	317
4.1	Number of credit card owners	0,1	0,2	9,2

3. Development of corporate governance and risk management systems

In uncertain economic environment organization of risk management in the banking activity and improvement of corporate government systems is of great importance.

According to the Bank of Russia and commercial banks, during financial crises the growth of the arrears is becoming more and more crucial both in absolute and conditional value. Many companies face total absence of funds because of the decrease of revenue and growth of the accounts receivable due to some independent factors. Thus, we must say that it is impossible to avoid growth of bad debts during systematic crisis.

The Bank is ready to discuss with the Customers who experience or forecast financial difficulties and their problems and try to find ways of their resolution including restructuring of the loan debts. Reduction of the arrears can be done by means of moving the hopeless loan debts for which the provision has been made out of the balance. In 2008 the arrears for 125.7 mln rubles were written off the balance. The activities for collection of bad debts do not stop, but the Bank acquires an opportunity not to accrue interests for such loans and not to pay profit taxes for the incomes which are hardly possible to be received.

Besides, the Bank pays much attention to the increase of organizational level of lending process in the branches in terms of fulfillment of internal procedures and quality of evaluation of loan application, and strengthening of activities in the field of monitoring background of the borrowers. The Bank is continuously improving internal control system within the frameworks of lending processes to ensure real participation of the Bank’s employees in risk control. At the stage of providing loans the pledge should be carefully analyzed. If appearance of problem loans is not always connected with quality of work of an employee, especially in crisis time, problems that appear with collection of the debts are directly related to some mistakes that were made during lending process. Increasing credit risks require additional measures to be taken by the Bank, such as organization of centralized control over non-standard loans in the Head Office.

Internal banking control is very important in crisis environment. To decrease the main baking risks the branches have been controlled for different areas of their activities including:

- corporate and private lending including consumer and mortgage loans;

- individual and corporate deposits;

- opening and maintaining corporate accounts;

- maintaining current accounts of private customers including VISA banking card accounts;

-cash operations including protection of valuables and organization of cash office process;

- quality of management of the branch and HR management;

- own economic operations of the Bank, capital expenses and others;

A great job was done in the field of technical protection of information. In 2008 a specialized software of isco CS-MARS alarm detection system which enables to track and inform of informational administrators of hackers’ attacks, harmful software, reveals unauthorized access and various suspicious actions, and tracks critical situations was set on work. Implementation of technologies for management and monitoring of antivirus software is continued, as well as the updates of weaknesses of system working stations software from the local server of each branch.

In 2008, there was an internal audit of informational security of corporate computers network of the Bank made by Perimeter, LLC. The results were positive. Within the frameworks of the agreement with “AiTi” company, in 2008 there was a quarterly scanning of the corporate network from outside, and physical audit for compliance with the international requirements for security of payment card industry PCI DSS (in August 2008). Upon results of the audit some gaps were pointed out on the basis of which the Remedy Plan was worked out. There were no significant gaps. The VISA requirements are met.

To make normative base of the Bank in compliance with the requirements of the “Conception for informational security of the automated information system of CHELINDBANK”, standards of the Bank of Russia in the field of informational security, international security standards of payment cards industry PCI DSS the Bank has developed and amended about 15 documents in 2008.

During 2008 there was a daily control over various areas of the Bank’s activity including compliance with approved policies and procedures, limits and norms. The revealed gaps were transferred to corresponding departments for revision and elimination. Since January 2008 there was a daily monitoring of the compliance of the credit departments of the Bank with additional requirements set by the Credit Committee and the Board of the Bank for setting the credit risk limit for the Bank’s borrowers. In case of incompliance the requests were sent to departments, and the gaps were eliminated.

In 2008 representatives of the Head office of the Bank of Russia for Chelyabinsk region fulfilled 49 inspections of the Banks offices. Upon the result of each inspection notification was sent to the Head Office of the Bank of Russia, information on results of inspection was delivered to the Board of Directors of the Bank.

The main objectives of the Bank in the field of internal control are as follows: