Joint-stock commercial bank “Chelindbank” (open joint-stock company), annual report 2008 (стр. 4 )

-  internal control system monitoring – control over functioning of risk management, evaluation and concentration systems with distribution of duties when fulfilling banking operations;

-  control over activity of the Bank as professional member of the securities market;

-  control over management of information flows and informational security;

-  implementation of the event plan for elimination of the gaps revealed by external auditors in the field of informational security.

In 2009 it is planned to have 23 inspections of subsidiary offices of the Bank during which special attention will be paid to credit and operational risks. It is also foreseen to continue work in the field of remote monitoring of fulfillment of decisions made by the Credit Committee of the Head Office and the Board of the Bank, and in the field of expansion of the list of inspected areas.

Possibility to use all tools of refinancing available for regional banks for fast receipt of monetary funds is greatly important in terms of liquidity crises. In 2008 CHELINDBANK considerably expanded its cooperation with the Bank of Russia to use refinancing tools offered by the Bank of Russia for support of liquidity in the banking sector of economy.

The Bank has ratings of Long-term Issuer Default (IDR) ‘B-’ (B minus) assigned on October 8, 2008 by Fitch Ratings, and is included in the first 100 banks of Russia who were authorized by the Bank of Russia to have unsecured loans with maturity of 5 weeks on auction basis, and became the first bank in Chelyabinsk region that entered into General agreement with the Bank of Russia for such type of loans on October 18, 2008. Maximum amount of unsecured loans comprised 2 bln rubles during the period from 28.10.2008 till 27.11.2008. Attracted funds were deposited in the correspondent accounts of the Bank for absolute fulfillment of obligations made to the Customers in terms of making payments on their behalf without interruptions. As of 01.01.2009 all unsecured loans of the Bank of Russia have been repaid.

Besides, the Bank entered into General Loan Agreement for the loans of the Bank of Russia dated as of 21.07.2008 with the pledge of non-market assets (loan portfolio of the Customers) the limit for which was set in amount of 300 mln rubles. In December 2008 three loans equal to 118 mln rubles were received for a three-month term within this Agreement.

Besides, there were daily REPO operations with the Bank of Russia with the pledge of securities included into the Lombard list for amounts from 50 mln rubles to 1 200 mln rubles.

CHELINDBANK continued its cooperation with the Bank of Russia within the frameworks of the loan agreement signed on November 17, 2004 for the loans of the Bank of Russia secured by the pledge (block) of securities. To provide faster settlements and equal and prompt payments for the settlement documents of the customers through the correspondent account in the Regional Office of the Bank of Russia the Bank has used such refinancing tool as payment for settlement documents by means of internal daily loan of the Bank of Russia provided automatically and free of charge. In total, in 2008 the Bank used internal daily loans during 17 days for the total amount of 489 mln rubles.

4. Improvement of banking technologies

CHELINDBANK has automated informational system (AIS) that includes automated banking system (ABS), processing and banking card authorization systems, data warehouse, and other in-house modules. Special departments of the Bank are dealing with development, implementation, maintenance and support of AIS software, promotion and maintenance of telecommunication and banking card business infrastructure, and maintenance of computers and office facilities.

The goal of banking processes automation is improvement of production, increase of reliability of equipment, improvement of quality of services provided, management optimization and fastening technological processes. Banking business automation requires complex and systematic approach to problem solution. While solving automation tasks the following requirements are taken into account:

§  the core of system structure shall take into account further development of banking technologies, so it means that analysis of tasks must be done taking into account perspectives of their development in the nearest future;

§  implemented technologies shall equally provide automation to all sectors of the Bank performance that will prevent appearance of narrow places;

§  it is necessary to provide correlation between the set of program means of the banking business automation, wide network of branches and offices, and employees who know how operate these equipment.

§  technologies shall meet the requirements of present social and banking development, and neither be aside nor far ahead of the general trends of development.

To define further Strategy for development of informational system of the Bank for the Bank created a working group on November 2008. The objective of this group is to develop mutually correlated strategy for development of informational systems of the Bank for .

The following software development projects were completed in 2008:

- receipt of payments for the Bank’s loans in any branch;

- set of works for compliance of IT background of plastic cards with security requirements PCI/DSS;

- organization of electronic data processing for blocked special accounts;

- accounting credit cards transactions;

- development of electronic loan questionnaires and organization of work with requests to the National bureau of credit history;

- organization of distributed Certification center of the Bank;

- transfer of email users to the protected connection via SSL;

- issue of the new version of customers part of access to trades in the MICEX via Internet;

- some other projects.

The main areas of software development in 2009 will be the following:

-  further improvement of private payment system including implementation of this technologies into all ATMs connected to the new CTL controller;

-  implementation of “The New Office” project which goal is implementation of customer-oriented and effective forms of service;

-  development of software titled “Client+Bank online2” aimed at both individuals and corporate customers. Version for individuals is foreseen to be the first stage. After getting feedback about operation of this system the necessary experience will be taken into account for development of the same for corporate customers

-  development of software for centralized accounting of the staff and payroll of the Bank.

To increase reliability of communication systems and telecommunications in 2009 it is foreseen to implement reserve channels with automatic transmission in those branches where this is technically possible. This technology was already worked out in several branches and showed good results. Significant demand for such reserving exists in the branches where there is great volume of salary projects and big number of ATMs installed. The process of replacement of routers for more productive together with transmission to a new ADSL technology is in progress. This transmission is expected to be completed in 2009. New technology allows increasing of consumption capacity of a channel by several times without replacement of equipment.

The main task for plastic card maintenance systems in 2009 will be transmission of all ATMs to a new controller. This is large and time-taking process. Besides, the works for provision of compatibility of Wincor Nixdorf ATMs and CTL controller, there will be big volumes of work related to direct transfer of more than 80 ATMs to a new processing program. The system development for ATMs monitoring is also planned. This system is designated for increasing reliability and quality of ATM network functioning.

To ensure efficient utilization of costs for construction, repair works and technical inventory, the Bank created the Committee for investments into construction and repairs.

5. Development of customer service network

In 2008 CHELINDBANK opened two new offices – subsidiary office of the Head Office in the Northern West of Chelyabinsk, and subsidiary office of Satka branch in Zlatoust. New offices will provide all kinds of the Bank’s services to private Customers. These are loans, money transfers, household payments, deposits, foreign exchange transactions, payments for educational services, mobile payments, plastic card transactions including those made via ATM. Corporate customers may receive such services as cash settlements and cash office services. Small business companies will have an opportunity to get loans within the program of the European Bank for Reconstruction and Development. In December 2008 Troitsky branch of the Bank started working in the new 2-level building with all required conditions to provide high quality services to corporate and private Customers.

Table 8

Development of customer service network

N	Name of item	As of 1.01.2007	As of 1.01.2008	As of 1.01.2009
1.	Branches	29	29	29
2.	Representative offices	2	2	1
3.	Subsidiary offices	16	16	18
4.	In-house cash offices	11	10	9
5.	Outdoor foreign exchange offices	1	-	-
	Total	59	57	57

6. HR Management

High results of the Bank’s performance are achieved by joint efforts of the specialists of the Head office, 29 branches and 28 offices of the Bank. CHELINDBANK is a team of professionals who daily prove their competence and deep knowledge of banking business. The average number of specialists working in the Bank comprises 1.8 thousand people. The Bank has no salary debts. In 2008 the personnel flow ratio reduced from 12 to 10% and reached the target level. To identify satisfaction of the staff with labor environment HR department of the Bank asked the employees to fill in questionnaires. The results of the survey were submitted to the Board.

The Bank pays great attention to training of the staff. The main types of training used by the Bank are external and internal, and the main areas are professional and managerial training. External training includes all educational events held with participation of external consultants and coaches who are not working for the Bank. Internal training suppose that all educational activities are fulfilled by the members of the Bank’s staff. In 2008 33% of employees took part in the training activities. In total there were 920 participations in workshops by the employees of the Bank. The Bank spent 2.7 mln rubles for external training. In 2008 more than 80% of employees working on the management positions in subsidiary offices of the Bank took par in training events. There were 11 workshops for developing personal professionally oriented qualities held for the front-office staff and operational accountants. In 2009 distant training and optimization of training process will be priorities of the Bank’s activity in this field.

In 2008 the Bank fulfilled significant work for training of the staff reserve:

- Regulations for the staff reserve have been worked out;

- Management competence profile is created basing on the results of survey made among the managers of the Bank’s departments;

- Analysis of management staff demand is done; preliminary list of reserve is formed on the basis of complex evaluation; the training plan for reserve has been created.

In 2009 it is foreseen to specify the list of the management staff reserve, the individual planning for activities and development of the reserve will be implemented, and further application of the reserve training plan will be done.

The procedure for search, hire and transfer of the staff has been developed by the Bank. To make this procedure more efficient the Bank acquired electronic versions of standard methods:

-  Brief Intellectual Test;

-  California multi-factor personal questionnaire (CPI);

-  Standardized multi-factor method of survey of personality.

In 2008 the Bank worked out and approved normative documents for single standards of customer service, compliance with principles of professional ethics, implementation of administrative penalties, organization of training and professional practice for students of universities and colleges. In 2009 the Bank is going to approve HR policy of the Bank, recommendations for working out regulations for subsidiary offices and working duties, and other normative documents.

IV. PERSPECTIVES OF DEVELOPMENT OF CHELINDBANK

In 2009 activity of CHELINDBANK will be within conditions of continuing international financial crisis, decrease and uncertainty of financial standing of Russian and regional enterprises, appearance of problems with return of the loans, shortage of time resources. Uncertainty of development of situation in financial markets and real sector of economy demanded to implement a new approach while developing the Bank’s Strategy for 2009.

To ensure improvements of strategic, budget and business planning systems the Bank has created a Budget-planning working group which dealt with several variants of development of the Bank within uncertain external environment. The Budget-planning group worked out a basic forecast of influence of external factors on performance of the Bank in 2009, made a SWOT-analysis, prepared a basic scenario for development of the Bank for 2009, analyzed business plans of the Bank’s offices and departments, and identified potential possibilities for growth of volumes of business and incomes.

In 2009 the Bank will have to work in highly uncertain environment, that is why the Development Strategy of the Bank will be mostly aimed at retention of the present business, increase of its efficiency with focus at separate area of activity that are considered to become points of growth. Thus, instead of Strategy for dynamic development for 2009 the Bank is going to implement the Strategy for increasing efficiency of performance.

The strategy for increasing efficiency of performance is first of all created to retain opportunities of the Bank for further development, that is to ensure liquidity, capital adequacy and profitability of activities. Besides, it is necessary to have fast reaction from the Bank to negative tendencies of development of external and internal factors which are expressed in creation of additional provisions, expenses minimization and cost optimization. At the same time the fields in which it is possible to achieve the growth of demand for banking services should be promptly identified.

To implement the basic scenario for external development and act in accordance with the Strategy for increasing efficiency of performance, the main areas of the Bank’s performance should be the following:

-  keeping liquidity on the high level;

-  identification of key areas of performance to get incomes;

-  reduction of costs and expenses;

-  diversification of the resource base;

-  intensification of risk management system;

-  prompt restructuring of the loan portfolio;

-  intensification of activities in the field of collecting bad debts;

-  improvement of efficiency in utilization of equipment, buildings and premises;

-  reduction of investments of the Bank into fixed assets construction and repair works;

-  support of the Automated informational system of the Bank on the existing level.

The Bank is going to continue working as “a universal bank” in 2009. The Bank also plans to have the scope of its activity at least on the same level than in 2008 with maximum use of possibilities for growth.

Reputation of the Bank during crisis became a valuable asset that helps to improve its market positions even in the uncertain time. Reputation of the Bank is acquired by years of perfect work, constant fulfillment of obligations before Customers, partners, and employees. That is why the main objective for 2009 is to remain reliable partner for all involved parties.

V. REPORT ON PAYMENT OF ANNOUNCED (ACCRUED) DIVIDENDS FOR SHARES OF CHELINDBANK

The General annual shareholders meeting made a decision on May 30, 2008 about accrual of dividends upon the results of performance of the Bank for 2007 by using the following calculation: 6 kopecks per one ordinary share and 15 kopecks per one privileged share. Dividends were accrued and paid on June 17, 20thousand rubles was used for payment of dividends that was equal to 17.7% of the net profit of the Bank for 2007.

The Bank is going to stick to open informational policy and main principles of corporate governance in relations with shareholders. It is foreseen that not less than 10% of the net profit of the Bank will be used for payment of dividends.

VI. LIST OF THE MAIN RISK FACTORS RELATED TO CHELINDBANK’S PERFORMANCE

During financial crisis creation of entire system for management and limitation of risks taken by the Bank is considered to be adequate. The main goal of risk management in the Bank is to retain the risks on the level that do not threat interests of creditors (including depositors) and shareholders of the Bank, that means that the amount of the risks taken should correspond to the amount and structure of the capital.

Independent approach to risk management is done by the Risk Management Department of the Bank. The Bank is dealing with management of the following types of risks: credit risk, market risk, liquidity risk, general interest risk, operational risk, legal risk, risk of loss of business reputation. Risk management process consists of identification, evaluation and control of the risks taken by the Bank. During identification the events that lead to risk should be identified. During evaluation the amounts of expected and unexpected losses caused by the risk should be estimated. Control stage consists of creation of limit system and implementation of other restrictions for the actions of the Bank, and control over their fulfillment.

The following list of documents for improvement of risk management system has been worked out and approved in the Bank: General Manual for Risk Management; Principles for Operational Risk Management; Risk Management for Transactions with Securities; Risk Management Policy in the field of operation with plastic cards; Regulations for organization of control over banking risks. The existing internal documents of the Bank regulating credit risk management, liquidity and market risk management are being amended at the moment.

In the field of risk management the main areas of activity of the Bank in 2009 will be:

§  improvement of risk evaluation process including:

for credit risks – testing and implementing system of credit scores for evaluation of individual borrowers;

for market risks – working out of appraisals based on VAR-models;

for operational risks – creation of appraisals based on accumulation and analysis of data, development and implementation of operational risk indicators;

§  further automation and improvement of control procedures for risk limits fulfillment;

§  support for implementation of new banking products and services by means of adequate risk evaluation and limitation procedures.

In terms of improvement of liquidity risk management the Bank is going to use different tools of refinancing suggested by the Bank of Russia.

VII. LIST OF MAJOR TRANSACTIONS

In 2008 CHELINDBANK had no transactions considered to be major transactions in accordance with the Federal Law “On Joint-Stock Companies”, and other transactions which require approval of the deal in accordance with the Charter of the Bank.

VIII. LIST OF TRANSACTIONS WITH INTEREST

During the reporting year members of the Board and the Board of Directors of the Bank made 16 transactions in which there was interest. The amount of transactions related to application for the loan and documentation of the pledge comprised 2320 thousand rubles, related to setting limits for credit cards – 65 thousand US dollars and 35 thousand euro. All transactions were made in accordance with market conditions after they had been approved by the Board of Directors of the Bank.

IX. MEMBERS OF THE BOARD OF DIRECTORS

The list of members of the Board of Directors of the Bank, and the share of participation of members of the Board of Directors in the Share capital of the Bank are given in Annex 1 to the Annual Report.

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X. BOARD OF THE BANK

Information about General Director and members of the Board of CHELINDBANK, and their share of participation in the Share capital of the Bank is given in Annex 2 to the Annual Report.

XI. CRITERIA FOR DEFINITION AND TOTAL AMOUNT OF COMPENSATION PAID TO THE MEMBERS OF EXECUTIVE BODIES OF THE BANK

In 2008 all payments to the members of the Board of Directors of the Bank were done in accordance with the Regulations for remunerations and compensations paid to the members of the Board of Directors. The total amount of compensation for the last financial year paid to the members of the Board of Directors which are not members of the staff of the Bank in accordance with decision of the General Annual Shareholders’ Meeting dated May 30, 2008 comprised 625.3 thousand rubles. The total amount of compensation for 2008 paid to the members of the Board of Directors which are members of the staff of the Bank (including General Director) was equal to 33 548 thousand rubles. The total amount of compensation for 2008 paid to the members of the Board of the Bank comprised 21 687.6 thousand rubles.

XII. INFORMATION ABOUT COMPLIANCE OF CHELINDBANK WITH CORPORATE GOVERNANCE CODE

Compliance with the Corporate Governance Code is aimed at achievement of mutual understanding between all parties interested in efficient performance of the Bank: shareholders, customers, partners and employees. Principles which serve as the basis for corporate governance system and informational transparency of the Bank contribute to strengthening of trust of shareholders and customers to the management.

In 2008, in accordance with requirements of the existing law, and to provide shareholders and customers of the Bank with opportunity to make reasonable decision, full and genuine information about the Bank was promptly disclosed including information about its financial standing, economic figures, significant events, ownership and management structure. The Regulations for informational policy of the Bank were amended in the accounting year in terms of volumes of information and range of authorized people who have access to the reports.

Presence of independent directors as the members of the Board of Directors and creation of permanent bodies within the Board of Directors, such as the Committee for Strategic Development; the Committee for Audit and Risk Management; Social Policy Committee are aimed at improving efficiency and quality of work of the Board of Directors, and providing members of the Board of Directors with opportunities to participate in all activities related to the management of the Bank and maintain permanent effective control over executive bodies of the Bank in the most important fields.

CHELINDBANK, General Director M. I. Bratishkin

CHELINDBANK, Chief Accountant V. V. Klepikova