Sbank Ar2004 Eng

8/4/2019 Sbank Ar2004 Eng

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Contents

Introduction 3Main Financial Results of the Bank 4

Operational Environment of Sudostroitelny Bank's Activities in 2004 6

Macroeconomic Situation in Russia 6

Development of the Situation in the Banking Sector 9

Results of Sudostroitelny Banks Activities in 2004 12

Client Policy 12

Services to Corporate Clients 13

Services to Retail Clients 15

Services to Financial Institutions 16

Fundamentals of Formation of Value 18

Principles of the Banks Activities 18

The Risk Management Practice 20

Development of Sales Channels 24

Team of Professionals 25

Information Technologies 26

Communication Strategy 26

Prospects of Development 28

Social Responsibility of the Bank 31

Financial Statements 33


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Annual Report 2004


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Main Financial Resultsof the Bank

One of the major indicators of the Bank's activities is

its financial results. In the course of the past year,

Sudostroitelny Bank maintained positive dynamics in

all basic parameters. There was a considerable growth

in the number of corporate clients that the Bank

attracted for its services, which in turn increased

financial flows from both the new and existing corpo-rate clients of the Bank.

The growth in the client base consequently led

to a significant growth in the assets of the

Bank. Compared to the asset-base of 2003,

the Bank assets increased by one third in

2004 (33.6%) reaching RUR 19.1 billion.

The volume of equity capital kept growing and

reached RUR 2.96 billion by the end of the

reporting period. In the rating list of the

50 leading Russian commercial banks

published by the British The Banker,

Sudostroitelny Bank ranked 36th in the termsof equity capital and 37th in the terms of

assets (in accordance with International

Accounting Standards).

In 2004, Sudostroitelny Bank solidified

its positions as one of the largest players

of the exchanging currency and interbankmarkets. The volume of currency trading


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Annual Report 2004

operations with US dollars grew in the report-

ing period by almost 2.7 times and equaled

USD 71 billion; the volume of transactions

with euros reached EUR 11.1 billion.

Financing corporate clients remained one of

the major methods for investing the Bank's

assets during the last year. The consolidated

credit portfolio of Sudostroitelny Bank in the

course of the reporting year grew by 94%

and, as of January 1st 2005, it totaled an

amount in excess of RUR 6.5 billion. During the

same period, the volume of interbank credits

that the Bank extended to its financial insti-tutional clients also grew to RUR 4.14 billion

as of January 1st 2005.

In its strategy to continually enlarge its

resource base, Sudostroitelny Bank increased

its investment portfolio with holdings of the

most liquid forms of securities in the Russianmarket. However, the majority of this type of

investment in the Russian stock market were

corporate bonds (as of January 1st 2005

53% of the portfolio), Russian Eurobonds (20%

of the portfolio) and OVGVZ domestic govern-

ment bonds denominated in foreign currency

(10% of the portfolio). A significant portion of

the investment activities of the Bank stillcorresponds to transactions with bills of

exchange. The results of the reporting year for

bills of exchange portfolio totaled RUR

2.85 billion.

Great attention was traditionally paid to main-

taining high liquidity assets. Reducing of the

amount of funds destined for the Obligatory

Reserve Fund which became possible after

the Central Bank of Russia had reduced the

obligatory provision rate allowed for raising

the resources on the Bank's accounts with

Clearing Center of the Bank of Russia, without

doing any harm to the Bank's cost efficiency.

By the end of the year, the balance on the

Bank's accounts with the Clearing Center

grew by almost 88% and reached RUR

1.86 billion. A significant volume of liquid

resources allowed the Bank to overcome

smoothly payment peaks and, last summer,

to maintain liquidity and solvency during theperiod of instability in the banking sector.

The profit indicators also highlight the effi-

ciency of Sudostroitelny Bank in a very evident

way. The Bank's profit grew in 2004 by more

than 2.5 times and exceeded RUR 280 million.

The stable growth of the Bank's major finan-

cial parameters confirms the correct choice

of the Bank's development strategy and the

management's professional approach to

banking in the emerging market of Russia.

Annual Report 2004


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Operational Environmentof Sudostroitelny Bank's

Activities in 2004

Generally speaking, the long-term political

and economic stabilization of Russia, as well as

the growth of the predictability and forecastability

of macroeconomic processes, have created favor-

able conditions for the further developmentof Sudostroitelny Bank.

Macroeconomic Situation in Russia

The country's considerable positive balance

of payments contributed to the strength-

ening of the Russian currency.

In spite of the initial decrease in the ruble's

exchange rate in the middle of the year 2004,

by the end of the year 2004 its exchange rate

grew from RUR 29.45 to 27.75 to the US dollar,

which constitutes a growth of 5.7%.

In real terms, the actual growth of the ruble

against the US dollar in December 2004,

compared to December 2003, totaled 14.0%,

and 6.0%, respectively, against the euro. In the

course of this entire period, the Bank of Russia

provided for a certain smoothness in the fluc-

tuations of the currency and, when necessary,resorted to ruble or US dollar interventions in


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Annual Report 2004

order to preserve the equilibrium between the

market's supply and demand.

During the major part of the year 2004, the

Bank of Russia prevented any significant

strengthening of the Russian ruble by acquir-

ing excessive amounts of foreign currencies.

As a result, the gold and foreign currency

reserves of the Central Bank of the Russian

Federation grew from 76.9 to 124.5 billion US

dollars.

A significant volume of foreign currency

purchases by the Bank of Russia has also

contributed to the growth of the money supply.

In the year 2004, the volume of monetary

aggregates in this country rose from RUR

3.21 to 4.36 trillion, in other words a 35.8%

growth in these aggregates a most signifi-

cant factor in inflation.

In spite of the slowing down of the inflation

rate from 12% per annum in 2003 to 11.7%

per annum in 2004 the indicator still

exceeded the objective set by the govern-

ment and was considerably different from

that of developed countries. The growth

of the cost of energy resources should alsobe stressed among other important factors

that led to inflation and were of great impor-

tance last year; the same refers to the costs

of production and of services of other natural

monopolies in this country, such as electri-

city and gas.

At the same time, the growth of the money

supply had a positive impact on the situation

in the production sector of the economy. The

volume of industrial production in Russia

increased in 2004 by 6.1% compared to the

previous year. As a matter of fact, positive

dynamics were maintained in most of thenon-extractive sectors of the economy which

proved to be most favorable. In particular

whilst the production volume in the fuel sector

grew last year by 7.1%, the same parameter

in machine-building and metal-working grew

to 11.7% compared to the previous year.

Annual Report 2004


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There have been many factors providing for the

growth of production output. Amongst these,

we can point to the country's stable macro-

economic situation, international market

opportunities that were favourable for Russia,

growth of internal demand from both indus-

try and retail sector. The financial positionof industry, which was indeed stable, did create

conditions that lead to high investment activ-

ity. For example, the volume of investments in

fixed capital in the year 2004 exceeded that

of the level of the previous year by 10.9%.

There was a large demand for loan resources

from enterprises, and it was followed

by growing credit activities (among otherreasons due to the availability of foreign

resources); leasing and factoring operations

were expanding as well. Sudostroitelny Bank

for its part, within this scenario of increased

business activities, sought to react to the

changing needs of the clients by developing the

latest forms of business financing. In the

reporting year, the total volume of the credit

portfolio grew by 94%, totaling RUR 6.5 billion.

Simultaneously, the impact of the positive

tendencies in the production sector of the

economy was not as obvious as in the cost

dynamics of liquid securities. Thus, by the

end of the year 2004, one of the key indicators

of the domestic market the Russian trade

system index (RTS) grew only by 7% (up to

614 points), significantly less than that of the

year before.

The positive pricing dynamics of securities

issued by leading firms in the first months

of the year were followed by falling prices

later in the year, namely due to expectations

for a further rise of interest rates in the USA;

a fall of stock prices in American exchanges;

reduced liquidity of the ruble, and a weakerruble rate all these factors provided for the

growth of sales and a return the pricing levels

of the majority of share quotations to levels in

the beginning of the year 2004.

A new growth wave that occurred in October

through November did not last very long. Eventhough the situation was no more ambiguous

in respect to further world market tendencies

influenced by the results of the US presiden-

tial elections, the position of the US dollar

slackened worldwide, and an afflux of capital

to emerging markets occurred.

Contradictory internal events occurring in

Russia were hindering a more substantial

growth in the value of domestic securities; in

particular, government tax claims against

a number of large companies had a negative

impact on the mood of investors.

Operational Environment of Sudostroitelny Bank's Activities in 2004


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Annual Report 2004

Throughout the year, this environment of

instability in the value of shares on the market

caused the Bank to form its portfolio prima-

rily with ruble and foreign currency denomi-

nated corporate bonds issued by the most

secure issuers (corporate bonds represented

58% of the Bank's portfolio by the end of theyear), because these securities are less

subject to unfavourable fluctuations in such

a volatile market.

In 2004, the income of the population contin-

ued to grow. It rose by 21.3% in comparison

with the previous year and totaled RUR 10.8 tril-lion. Simultaneously their level of consumption

also grew. In fact 70.2% of their expenses

represented the purchase of goods and pay-

ments for services. To finance it the general

population purchased foreign currency to

a greater extent in the year 2004 than in the

previous year. Concomitantly the level of savings

among the population declined.

The existing situation was in great deal condi-

tioned by the lack of any incentive to save

and the absence of any reliable or profitable

investment instruments for surplus resources.

One of the factors not allowing the growth of

the share corresponding to bank deposits in

the structure of expenses of the individuals

was the instability in the banking sector in the

middle of 2004. Under such conditions, the

efforts of Sudostroitelny Bank were aimed at

raising the attractiveness of private deposits;

in the first instance, they were targeting the

wealthiest clients the most stable group of

the population, those less subject to reacting

to current fluctuations in the banking climate.

Development of the Situation inthe Banking Sector

Positive tendencies in the economy of this

country were accompanied by accelerated

developments in the banking sector.

In the reporting year, the assets of domestic

banks grew by 27.4% and reached RUR

7.1 trillion. The growth of capitalizationhowever was a bit slower: according to the

results of the year 2004, the equity capital of

the Russian banking sector increased by

16.1% and totaled RUR 946.6 billion. The faster

growth of bank assets resulted in a lower

index of capital sufficiency in the banking

sector (i. e. the ratio between equity capital

and assets weighted subject to the risk rate).

Thus, during the past year this index lowered

from 19.1% to 17%.

In the year 2004, there was a continual process

of consolidation in bank capital. Within one

year alone, the share of assets correspon-

ding to the five largest banks grew from 42.9%

to 45.1% of the total universe of assets among

Russian banks; the share of assets of the

largest twenty banks grew from 60.4% to

61.6%. By contrast, asset growth amongst

Russian banks with participation of foreign

capital remained stable.


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In the course of the year 2004, the Bank of

Russia continued its policy of seeking out

unreliable banks and removed their licenses.

Large Russian banks carried on with financ-

ing the current needs of its corporate clientele.The year 2004 showed that financial resources

granted to companies outside the financial

sector grew by 39% and equaled RUR 3.15 tril-

lion, or 1.8% of Russia's annual gross domes-

tic product. The growth of demand for credit

resources from the clients of Sudostroitelny

Bank also provided for the increase in the

share of loans in the total volume of the Bank'soperations: in the course of the year 2004,

the amount of credits granted grew from

23.5% to 34.1% in the general structure of

the Bank's assets.

One of the most positive tendencies in the

year 2004 was an increase in the quality of thecredit portfolios of domestic banks and

a further professionalization in the manage-

ment of risk in the banking system. During the

past year the total amount of bad debts

amongst Russian banks as a whole decreased

from 1.6% to 1.4%. Most remarkably due to the

particularly efficient management of risk

Sudostroitelny Bank reduced non-perform-

ing loans to 0.2% of the total portfolio.

During the reporting year, the volume of funds

on the accounts of individuals with Russian

banks grew: the growth totaled 27.9% by

comparison to the previous year, and in

absolute figures it attained RUR 1.96 trillion.

One of the factors that stifled the attraction of

funds to retail accounts was the instability in

the banking sector in the period from May

through the end of June of last year. The

Central Bank's withdrawal of licenses from

a number of quite well-known credit organi-

zations made both retail and corporate clients

rather nervous about the banking sector asa whole, and as a result banks reacted by

significantly lowering credit limits. On the

other hand, a number of banks faced prob-

lems with liquidity due to the lack of a normally

functioning interbank market, which then led

to delays in payments from deposit accounts

and caused panic among private depositors.

Operational Environment of Sudostroitelny Bank's Activities in 2004


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Annual Report 2004

In terms of instability in the Russian banking

industry, the top priority of Sudostroitelny

Bank was minimizing its effects on client

actions and perceptions by reducing the

number of operations in the most risky

market segments. More specifically, the Bank

had to reduce largely the number of its part-ners in the interbank market and to lower

some relevant credit limits. But the shrink-

ing income from this activity was compen-

sated by an adequate growth of transactions

with other financial instruments. The Bank

also managed to avoid the danger of

a massive deposits outflow. Primarily, the

majority of the Bank's clients work with the

Bank for many years and are quite comfort-

able vis-a-vis the Bank's management and its

relationship with clients and their funds;

moreover, the share of retail funds within

the total volume of liabilities was and remains

rather small (less than 1%). Over the whole

period of the so called crisis of trust, Sudo-

stroitelny Bank continued to meet its obliga-

tions to clients uninterruptedly.

In medium-term prospects, we can expect

that positive tendencies in the banking sector

will persist. Within the conditions of height-

ened business activity, the demand for finan-

cial products and services (in the first instance

in the sector of loans) will remain high; it will

provide for development of the banking sector,and in particular for the further capitalization

of banks. Besides this, the expansion of banks

outside the greater Moscow region and the

opening of new subsidiaries and branch

offices will continue for some years to come,

especially in economically attractive regions,

where we can expect much stronger compe-

tition. The approval and the practical implan-

tation of the Law On the System of Private

Deposits Guarantees should assist in restor-

ing people's confidence in banks and conse-

quently in having a positive impact on the

stability of banks' liabilities and the dynamics

of funds attracted by banks.


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Results of Sudostroitelny BanksActivities in 2004

One of strategic objectives of Sudostroitelny Bank

over the course of its 10 years of existence has been,

and is, to provide high quality banking services to its

retail and corporate clientele namely the Bank

makes every effort to provide a fully personalized

approach to each of the clients and to take into account

all their needs.

Client Policy

In the year 2004, Sudostroitelny Bank contin-

ued to attract clients in increasing numbers,

and concomitantly, the volume of client funds

also grew considerably. As of January 1st 2005,

the total amount of clients funds on accounts

exceeded RUR 7.3 billion, thus increasing these

resources in the reporting period by almost

60%, compared to the year 2003.

Over 100 enterprises from different sectors of

the economy became clients of the Bank during

the past year. For example, such companies as

FGUP Rostek (Federal State Unitary Enter-

prise), Expert magazine, Component (a manu-

facturing enterprise), Zhiva Insurance Com-

pany, Russian Sky Air Company (cargo and


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passenger aviation), Nissa Centrum Ltd.,

Master Distribution Systems, Neva-Sport

(distributor of Babolat) are among the new

clients.

The development of various programmes andprojects within the existing agreements with

clients has also contributed to enlarging the

number of companies to which the Bank deliv-

ers products and services, thereby further

diversifying the Banks client base. As an

example, we can mention that as part of the

Banks collaboration with the Aeroflot Corpo-

ration last year, Sudostroitelny Bank issuedon-line bank guarantees for the travel agents

who sell Aeroflot tickets. Also there was an

agreement concerning the acceptance of bank

guarantees provided by other large airline

companies, such as Lufthansa, Delta, Air

China, Air Astana, Tel Aviation, and others.

A major benefit that resulted from this service

was the establishment of business relation-

ship with airline carriers and associated travel

agencies.

The increase in the number of the Banks

clients was in many ways the result of the

high quality of the products and services that

the Bank delivered to them. During the repor-

ting year, Sudostroitelny Bank continued to

develop its range of products and services.

Special attention was paid to providing clients

with competitive interest rates on deposits

and attractive fees for services. This policy did

not dilute the Banks overall profitability since

customers tended to use products and serv-

ices in greater volume and maintained larger

deposits with the Bank.

Personal attention paid to the clients in under-

standing their needs, and an effort to con-

tribute as fully as possible to the satisfaction

of these needs through the delivery of high

quality products and services these actions

best summarize the Banks strategy towards

its clients in the reporting year.

Services to Corporate Clients

Competitiveness and the long-term prospectsof any bank largely depend on its ability to

understand client needs and respond with

innovative products and services.


ued optimizing products and services offered

to clients and developed new high-technology

services, such as innovations in its internet-

banking system.

In this period of steady economic growth and

overall political stability corporations, small,

medium and large, held high expectations for

receiving bank loans. In response to customer

expectations, Sudostroitelny Bank extended

credit judiciously to its most creditworthy

clients in order that they may modernize their

infrastructure and professionalize their ma-

nagement and staff.

Annual Report 2004


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In the proceeding year 2004, the Bank offered

competitive terms to clients through a broad

range of credit instruments. The most popular

among these were the classical commercial

loan, overdrafts on current accounts, and

revolving lines of credit.

By the end of 2004, the overall volume of

credits extended to corporations attained RUR

6.3 billion, the bulk of which were loans issued

to retail enterprises (13.3%) and building

companies (11.4%). During the reporting year

the Bank was involved in both short-term

crediting (replenishment of circulating assets)and medium-term crediting for a period up to

three years (for the production development).

At the same time, the tendency towards longer

terms of crediting persisted; as of January

1st 2005, about a half of the corporate credit

portfolio of the Bank (47.7%) corresponded

to loans with maturities beyond one year.

It is worth mentioning that Sudostroitelny

Bank exercised extreme caution when manag-

ing the risks associated with the loans granted

to its clients. To secure its credits the Bank

required guarantees and different forms of

collateral. Credit limits were established taking

into account the actual solvency of the client.

However, a number of borrowers had a strong

credit history with the Bank and/or funds on

account sufficient to assure that the credit

would be returned these clients were granted

credits without any additional need to cover

them. The time required to review an appli-

cation for a loan usually did not exceed

10 working days from the moment when the

client first provided the Bank with sufficient

documentation. At all times the Bank moni-

tored the financial realities each of its bor-

rowers in order to take a timely trouble-shoot-

ing and taking appropriate measures to solve

potential problems.

In the year in question, corporations medium

and large expanded their international tra-

ding activities, which resulted in an increase

of the demand for the international settle-

ment and trade services that Sudostroitelny

Bank provided.

Sudostroitelny Bank responded to this

demand by enhancing its internet-based

online banking system known as Sbank.Ru

allowing the Bank thereby not only to better

service its clients, but also to emphasize the

preeminence of the Banks commitment to

high-technology and innovation in product

development. By year end over 90% of clientinternational settlements were processed

through Sbank.Ru, and it allowed the Bank to

provide a growing portfolio of products and

services to clients located in different regions

of the country.

With respect to payment services, Sudo-stroitelny Bank expanded its franchise with

retail and service companies by installing its

plastic card POS-terminals in their locales.

In the year 2004, the number of such enter-

prises using this service practically doubled,

and the turnover of retail operations pro-

cessed via plastic cards grew by 44% and

totaled RUR 577 million.

Results of Sudostroitelny Banks Activities in 2004


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Annual Report 2004

For companies involved in foreign trade,

Sudostroitelny Bank offered services related

to the payment of custom duties via a micro-

processor card known as Customs Card. The

ability to pay customs duties directly at the

customs desk, through the use of this card on

a twenty-four hour basis, saved time signifi-cantly for the Banks clients.

Over the course of the last year, corporate cli-

ents increased their interest in the brokerage

services of the Bank. Sudostroitelny Bank

assisted the clients in structuring their invest-

ment portfolios and took care of their deposi-tary operations. The number of securities

held in custody by the Bank amounted to

6.9 million, after having grown by 25% with

respect to the previous year.

The rendering of complex services to clients,

including consultancy on a wide range offinancial and legal issues, as well as compre-

hensive assistance in the development of new

projects and new business directions,

remained some of the basic principles in the

Banks cooperation with corporate clients.

Services to Retail Clients

While responding to the needs of corporate

clients, Sudostroitelny Bank continued to

develop its retail activities. In order to provide

more efficient, rapid, and quality services

to individuals, a department of services to

individuals was formed last March and since

then has become one of the subdivisions of

the Department of the Development of Bank

Projects. The major efforts of the staff of this

new Department were aimed at providing

a tailor-made approach to each clients need,

guaranteeing to the latter complete informa-tion on the products offered by the Bank.

As last years results show, the number of

private customers of Sudostroitelny Bank

grew by 26% and numbered 3,340; the balance

on their accounts grew by 37% and reached

RUR 116.7 million. A significant part of theindividuals among the Banks clients were

drawn from the management and employ-

ees of the companies that are the Banks

corporate clients.

At present, Sudostroitelny Bank offers the

retail customers a variety of cash settlementservices, in particular the transfer of rubles

and foreign currencies, foreign exchange

operations, as well as services provided via the

Sbank.Ru Privat remote access system, which

allows clients to manage their resources

remotely.

Services relating to the issuance and servic-

ing of plastic cards were still very popular

with the retail clients. The total turnover on

plastic card accounts at Sudostroitelny Bank

in the reporting period increased by 9.6 times

and was in excess of RUR 822 million; as of

January 1st 2005, the total amount of plastic

cards issued grew by 66%.


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Results of Sudostroitelny Banks Activities in 2004


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In the year 2004, Sudostroitelny Bank began

offering its clients the American Express

card one of the most prestigious and conven-

ient payment instruments in the world. This

product is of a special interest for business

people as well as for those who travel a lot and

have a high demand for quality service andcomfort during their trips. Besides the pay-

ment functions, the American Express card

provides a number of additional privileges to

the holders. In particular, all the card holders

can use the twenty-four-hour Global Assist

client service; they get considerable discounts

in more than three thousand hotels all over the

world; they have the right to take part in

a bonus program Membership Rewards; whilst

paying for air tickets the card holders become

automatically insured for the whole time of

traveling. The Bank offers the clients several

types of American Express cards: Green, Gold,

Platinum, and Centurion.

Last year the Bank started issuing Diners

Club bank cards nominated in euros. For some

types of cards the Bank provided cardholders

with overdraft facilities.

Sudostroitelny Bank also increased the turn-

over in rendering Visa card services.

In the future, Sudostroitelny Bank plans to

develop new products for retail clients. In

2005, the range of services offered by the

Sbank.Ru Private remote access system will

be broadened; with the use of this system,

retail clients will be able to operate their

accounts without coming to the offices of the

Results of Sudostroitelny Bank s Activities in 2004

Bank. For example, clients may place term

deposits, transfer funds from one account

to another, convert currencies, make pay-

ments for public utilities, etc.

Services to Financial Institutions

Cooperation with other banks is a necessary

part of the business of any financial institution.

Sudostroitelny Bank positions itself in its rela-

tionships with Russian banks as a clearing

bank specializing in the payment and receipt

of foreign currencies. At the same time, Sudo-

stroitelny Bank is not involved in providing

standardized services to its LORO-corre-

spondents; on the contrary it deals with such

banks, as it does with the Banks VIP-clients.

The great confidence that other market play-

ers demonstrate towards Sudostroitelny Bank

allowed for the successful development of its

cooperation with other financial institutions in

2004 in a variety of operations. Due to the

Banks longstanding favourable reputation as

a reliable business partner, Sudostroitelny

Bank concluded the general agreements with

105 partners relating to the terms and condi-

tions for participating in the money market.

Most recently the total number of such agree-

ments equaled 330.

Annual Report 2004


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ua epo 00

As of January 1st, 2005 the Bank established

correspondent relations with 154 banks in

the Russian Federation, CIS, and Baltic States,

and the number of LORO accounts opened in

the Russian rubles and foreign currencies

exceeded 380.

Among the correspondents of Sudostroitelny

Bank are such well-known financial institu-

tions as Sberbank of Russia, Vneshtorgbank,

Deutsche Bank Trust Company Americas

(USA), Deutsche Bank AG (Germany), Raif-

feisen-Centrobank AG (Austria), Commerz-

bank (Germany) and others.

The increase in the number of the Banks

partners on the interbank market was

a favourable factor for increasing the volume

of credit operations. Over the year 2004, the

daily turnover of interbank credit deals was in

the range between RUR 1.2 and 2.5 billion.

Interbank crediting was made within the

margins of unsecured limits for banks-coun-

terparts. Whenever there were no fixed limits,

interbank credits were granted on a collateral

basis, i. e. liquid securities.

In an effort to consolidate its own position on

the interbank market, the Bank paid serious

attention to the optimization of packaging

services of respondent banks in both clearing

transactions of the clients and conversion

and credit deals. The Bank continued to deve-

lop for the provision of correspondent servicesthat would meet the requirements of the latest

technological standards. Special attention

was paid to implementing a flexible tariff and

quotas policy.

The range of competitive services offered and

the large network of correspondents have

allowed Sudostroitelny Bank to become a set-

tlement bank for a good number of counter-

parties.


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Fundamentals of Formation

of ValueThe Banks financial results, its competitiveness, and

its long-term prospects depend on the performance

efficiency of various systems and departments,

a sound marketing strategy, experience and the

professional qualities of its personnel, as well as

many other factors.

In the course of the year 2004, the Bank placed

particular emphasis on fine-tuning its risk

management policies, on expanding the range

of products, and seeking further technological

developments.

Clearly, the professionalism and sense of

responsibility of management and staff were

essential to the defence of existing corporate

relationships, the development of new ones,

and the expansion of income and increase in

profitability of its businesses.

Principles of the Banks Activities

The key factor for the banks successful devel-

opment is an optimal organizational structure,

Annual Report 2004


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goals for each employee creates personal

responsibility for a particular segment of

work and has a positive impact on the final

result of the employees performance.

One of the main principles of SudostroitelnyBanks work is the highly professional financi-

al resources management, which comprises

a certain number of actions aimed at increas-

ing financial resources and reducing the

expenses. In the year 2004, due to a success-

ful technology of budgeting it became possi-

ble to achieve maximum efficiency from the

use of funds, to optimize the process of plan-

ning and monitoring of administrative ex-

penses of each department in particular and

of the Bank in general.

The system of managing and bookkeeping of

the Banks financial resources has a complex

structure and includes short-, mid-, and long-

term planning, monitoring, and evaluation

of the results, information exchange between

the departments, and coordination of their

work.

In the course of elaboration of Sudostroitelny

Banks budget for the reporting year, many

factors were taken into account: tendencies of

the economy development, existing and

predictable parameters of the monetary policy

of the Central Bank of Russia (the interest

rate, the official ruble exchange rate to the

main world currencies, etc.) that determine the

cost dynamics of attraction and investing of the

resources. High-quality planning of income

and expenses allowed the Bank to place its

which would let the bank on one hand carry out

its short-term and long-term strategy, and on

the other hand adapt itself rapidly to ongoing

changes in the external environment.

One of the basic competitive advantages ofSudostroitelny Bank during the whole period

of its existence remains its flexibility, its capa-

bility to take quick decisions. No matter who,

either a department specialist or a top

manager, makes a suggestion regarding

adjustment of any work principles of the

Bank, of client policy, of the product range

structure development, etc., this suggestion

will be collectively studied in the shortest

time possible, and after considered as

reasonable, it will be implemented in practice.

Flexible approach to decision-making helped

Sudostroitelny Bank to make necessary

changes in its fees and interest rates in appro-

priate time, in accordance with the existing

market situation. The Bank established indi-

vidual tariffs for different categories of clients

and adjusted the current lines of activities in

accordance with the latest changes in the

legislative base, regulating banking sector

functioning.

High efficiency of Sudostroitelny Banks

management was based on strict distribution

of responsibilities between the departments.

The existing mechanism of delegation of

authorities guarantees adequacy and time-

liness of decision-making process and dis-

cards doubling of the same functions by

several departments. Definition of tasks and

Fundamentals of Formation of Value


25/57

financial resources in the most profitable way

and to avoid losses. In its turn, serious ap-

proach to the financial and management

accounting gave an opportunity to obtain objec-

tive information on the profitability and

performance of each department, as well as

provided for making the most efficient deci-

sions relating to reduction of the cost of the

bank products and to optimization of expenses.

A traditionally important place in the Banks

activities is given to trouble-shooting and

prevention of illegal financial operations, i.e.

of using the Banks payment system for laun-

dering the gains proceeding from criminal

sources and for financing the terrorism. Last

year several departments of the Bank contin-

ued to work thoroughly in this direction, among

them the Financial Monitoring Department,

Client Department, Legal Department, and

Security Department. Special attention was

paid to direct involvement of each employee

(within the framework of his/her competence)

in revealing transactions of doubtful charac-

ter that are liable to compulsory monitoring.

The successful development of Sudostroitelny

Bank over the past year has confirmed once

again the efficiency of the existing structure of

management and a high level of performance

of the top management.

The Risk Management Practice

Sudostroitelny Bank considers the risk

management as one of crucial factors of the

integrated banking management system.

Throughout all history of its operation, the

Bank consecutively developed the risk manage-

ment system which encompasses a package of

measures designed for minimization and elim-

ination of risks, as well as monitoring and

control of basic types of risks in real time mode.

The present system is currently integrated into

all areas of the Banks activities.

Enhancing of the efficiency of the risk-related

management solutions is one of the primary

concerns of Sudostroitelny Bank. Risk

management is a matter of responsibility of

Financial and Credit Committees of the Bank,

which make collegiate resolutions with the

regard to the level of risks that the Bank can

accept. A special structural subdivision was

created Department of the Risk Analysis. It

provides analysis, evaluation, and current

control of the Banks risks, as well as devel-

ops methodological recommendations for the

risk analysis and control. Furthermore, controlover the risks that appear in the Banks activ-

ities and operative decision-making for their

minimization is one of the main tasks of Inter-

nal Control Department.

Annual Report 2004


26/57

market risk risk of change of market situ-

ation, related to fluctuations of currency rates,

change of interest rates, value of securities

and financial derivatives;

risk of liquidity loss risk of insufficiency of

funds in order to meet the Banks own obli-

gations;

operational risk risk caused by faulty ac-

tions of personnel or by information systems

failures.

In the year 2004, with a purpose to maintain

a high quality of the credit portfolio,

Sudostroitelny Bank continued to pay a spe-

cial attention to the credit risk management.

To define a level of the credit risk related to

each credit product, the Bank applied

methods based on internal rating system,

taking into account the experience of the

leading rating agencies. The Bank set rigid

requirements to the current financial condi-

tion of potential borrowers, exercised overall

evaluation of their financial statements, credit

history, and business reputation. Special

attention was paid to the quality of collateral

and its liquidity. Management and control

over the credit risks were exercised by the

Banks Credit Committee, based on the inde-

pendent expert opinion. The Banks capital

was an estimate basis for determination

of the credit risks level. In accordance with therequirements of the Central Bank of the

Russian Federation, Sudostroitelny Bank

accumulated a sufficient amount of reserves

for possible losses on loans with respect

to risk groups. After granting the credit to

the borrower, the Bank controls the proper

use of the funds and monitors the borrowers

activities in order to detect potential problems

Fundamental documents, regulating the risk

management system in Sudostroitelny Bank

are Limit Policy, Credit Policy, Liquidity Mana-

gement Policy, regulations on the Banks

committees. The present documents govern

the maximum allowable risks related to basic

types of banking operations, designate powers

and responsibility, and specify interaction

procedures between various risk manage-

ment elements.

In the year 2004 the system of risk manage-

ment was improved essentially. In particular,

a Regulation on the System of Evaluation

and Control over the Bank Risks was

approved, which provides for a complex of

activities aiming to prevent potential risks

and to minimize loss in case of their occur-

rence. The Banks experts developed new

methods of analysis of the borrowers finan-

cial condition and of interest rate risk and

liquidity risk evaluation. They optimized the

system of authorities delimitation by the

risk-related management solutions, and the

practice of independent expert opinion was

further developed. A high level of automati-

zation risk management system, which was

achieved in the year 2004, made it possible

to reduce considerably decision-making

process with the regard to the risk manage-

ment.

The risk management system in Sudostroitel-

ny Bank provides for the analysis of the follow-

ing basic risks, arising in the course of the

Banks activities:

credit risk risk of losses in case the

contracting party fails to meet its obligations;


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Development of Sales Channels

At the present time one of the main ways of

development of credit institutions is the expan-

sion of the network of branch offices render-

ing financial services. The correct approach to

the development of a branch-office network

ensures the growth of the client base, opti-

mization of the clients financial flows, and

consolidation of the Banks competitive posi-

tions in the markets of other regions.

In the year 2004, Sudostroitelny Bank suc-

ceeded in efficient functioning of its regional

branch offices in St. Petersburg and Nizhniy

Novgorod. The Bank continued its expansion

in the regions with a high economic activity and

favourable investment climate. In particular,

in the nearest future the Bank plans to openthe branch offices in the cities Yekaterinburg,

Kaliningrad and in the town Ivanovo. Moreover,

it is planned to develop a network of addi-

tional offices in Moscow. The geography of

the new branches is greatly determined by

the direction of financial flows and by the busi-

ness interests of the Banks clients.

The strategic targets of the regional devel-

opment of Sudostroitelny Bank are the need

for consolidation of the resource base, the

optimization of the Banks active operations

structure, and the increase of reliability. Ope-

ning of the new affiliates allows the Bank to

extend the margins of cooperation of the

clients with the Bank, to facilitate the settle-

ments, to raise the level of servicing the

clients in remote regions, to ensure the intro-

duction of principally new banking products.

The development of the affiliate network

should contribute to the gradual increase

in the volume of the Banks activities and its

presence in the regional markets, to the

development of the business connections

and, thus, become an additional catalyst of its

business.

An important task while opening new bran-

ches and additional offices is to maintain com-

mon principles of service and a common ran-

ge of products, as well as to use commonfees and commissions at all the regional and

Moscow branch offices.

Annual Report 2004


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Team of Professionals

Positive dynamics of development, efficiency,

and reliability of Sudostroitelny Bank are in

great measure connected with its competent

and qualified personnel, united by a common

idea and common interests. In the year 2004,

the Banks personnel kept growing the num-

ber of employees increased from 184 up

to 210, and 135 of them (64% of the total

number of employees) are young profession-

als aged under 35.

Development of progressive lines of business of

Sudostroitelny Bank and cooperation with

foreign partners make special demands to the

Banks employees. Due to this fact, it is of great

importance to employ highly professional

bankers that are world-level experts. Thus,

Sergey Panteleev, who has a considerable expe-

rience in the field of corporate clients crediting

(including the experience acquired during his

stay as a trainee with the Standard Federal

Savings Bank, USA), was appointed to the posi-

tion of the Deputy Chairman of the Board.

Besides that, an important event was the desig-

nation of Richard Beesen to the position of theDirector of the International Business Devel-

opment (ex-vice-president of the Citibank,

Bankers Trust Company, and Deutsche Bank

Trust Company Americas); he has a broad expe-

rience of work with the largest international

banks and export agencies. To develop an infra-

structure giving an opportunity for the Bank and

its clients to establish cooperation with the

international financial structures is one of the

tasks of the Department headed by Mr. Beesen.

This will allow the Bank, on one hand, to offer

the clients favourable pricing conditions and, on

the other hand, to develop a new profitable

direction of banking activities.

The extension of the product range and devel-

opment of the new business lines required

from the Banks employees to improve essen-

tially their professional skills. In the year 2004,

the management and the employees of Su-

dostroitelny Bank regularly took part in confer-

ences and seminars held by the Central Bank

of Russia, by different bank associations and

unions, and other financial structures. The

representatives of the Bank participated in

such events as Yalta Interbank Conference,

North-Western Banking Conference, Russian

Bond Congress-2004, international forum

Banks of Russia XXI Century, and others.

The employees of Sudostroitelny Bank con-

stantly improved their general knowledge and

intellectual level; in particular, many of them

aim at obtaining a second higher education or

an academic degree. By the end of the report-

ing year, 154 employees (73%) had higher

education, 8 employees had academic degre-

es, 20 employees were university students,and 14 employees had practical training with

the Bank after they received theoretical knowl-

edge in colleges (among them are Moscow

State University named after Lomonosov,

State Management University, Moscow

Academy of Economics and Law, Financial

Academy of the Russian Federation Govern-

ment, Royal Holloy Institute, London).


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39/57

As a main result of the personnel employ-

ment policy, the Banks team was formed. Its

main characteristics are high professional-

ism and responsibility, interest in the final

result, and concern for the Banks success.

Information Technologies

In the conditions of growing competition within

the banking sector, high level of development

of information technologies remains an impor-

tant advantage of Sudostroitelny Bank. In the

year 2004, the Bank continued to develop new

software products, introducing progressive

technological solutions, aiming to enhance

the efficiency of its own business, to improve

client service, and to ensure fast and safe

operations.

Last year Sudostroitelny Bank enhanced the

complex of on-line services rendered with the

use of internet-banking technologies. Thus,

private clients were proposed to use the

Banks services via Sbank.Ru Private remote

access system. Sbank.Ru Private system

allows private clients to manage their bank

accounts opened with Sudostroitelny Bank inthe real time mode, on a twenty-four hour

basis, seven days a week, from any place in the

world where a computer connected to the

Internet is available. Using this system private

clients can obtain the latest information about

their accounts, make ruble and foreign

currency transfers, control their plastic card

transactions (obtain statements of account,

information about their payment limits and

credit their card accounts), make currency

exchange operations, obtain information about

their credit lines, as well as send messages

to the Bank.

During the reporting year Sudostroitelny Bank

continued to update Sbank.Ru remote access

system for the corporate clients. By the level

of service Sbank.Ru occupies one of the lead-

ing places among the Russian internet-ban-

king systems for the corporations.

Communication Strategy

The development of competent communica-

tion strategy that contributes to constant

expansion of the clients base, and therefore

acts as a catalyst of the Banks business is an

efficient instrument of positioning in the

market of banking services. In the year 2004,

Sudostroitelny Bank placed emphasis on

informing the target audience about the

Banks activities, on maintaining favourable

image in the opinion of current and potential

clients and partners, as well as on stimulat-

ing the sales of various products and services.

Annual Report 2004


40/57

The principal task of the communication policy

remains to produce an image of Sudostroitelny

Bank as a dynamically developing reliable

credit and financial organization. The Bank

invariably adheres to the principles of open-

ness and transparency, timely informing the

public about main results of its activities and

stating its position on different events and

processes of the economical life of this

country. In the reporting year, the managers

and employees of the Bank actively partici-

pated in the discussions organized by the

mass media dedicated to important economic

issues, banking system development issues,

and legal regulations in the financial sphere,

took part in conferences, forums, and cong-resses of professional associations.

Special emphasis in the year 2004 was put on

marketing research with aim to determine

consumer preferences of the Banks clients

and to study distinctive features of the target

audience. According to the research results,decisions were made with respect to correc-

tion of the fees policy, perfection of the product

range, and necessity of advertising in certain

mass media.

Last year advertising campaigns gave to

present and potential customers better infor-mation about Sudostroitelny Bank and its

services and consequently provided for effi-

cient marketing of the new products.

Under the conditions of a tighter integration

of Russia into the global economic space and

internationalization of the foreign economic

relations, Sudostroitelny Bank adheres to the

world business organization standards. For

several years the Bank was actively cooper-

ating with PricewaterhouseCoopers audit

company. Last year together with the experts

of this company the Bank got prepared for the

transition to the International Accounting

Standards (IAS) in accordance with the

methodology of the Central Bank of Russia.

Thus, the financial statements for the year

2004 were for the first time totally transformed

according to the international standards. Tran-

sition to IAS allowed the Bank to providehigher level of business transparency, which

should have a favourable impact on its market

position, and in particular contribute to attrac-

tion of investments and capital at the inter-

national market.


41/57

Prospects of DevelopmentSudostroitelny Bank seeks further consolidation of its

positions in different segments of the financial market,

in the first place in the field of services for corporate

clients, VIP private clients and on the interbank

market.

The Bank keeps following the policy of inde-

pendence from financial and industrial groups;

it contributes to attraction of a wide range of

clients from different economy sectors and to

further industrial and regional business diver-

sification. In the year 2005, it is planned to

attract a number of companies which at

present time are contracting parties of the

existing Banks clients, and to increase the

number of large corporate clients served on

individual basis. Organization of complex indi-

vidual service will provide for the loyalty of

main clients and for the growth of the clients

base. One of the Banks primary goals is tobecome a major settlement bank for a maxi-

mum number of clients.

The management of Sudostroitelny Bank con-

siders the further growth of the clients busi-

ness in connection with the regional market

development, both by promotion the Sbank.Ru

Annual Report 2004


42/57

internet-banking system and through the

development of the branch network. In

medium-term outlook the Bank plans to

ensure its presence in a number of large

cities of Russia, rendering to the clients in

remote regions a full range of services avail-

able to the clients in the head office. During

the year 2005 the Bank plans to reorganize its

representative office in Ivanovo into a branch

office and to open branch offices in Yekate-

rinburg and Kaliningrad. In the years 2006 and

2007 the Bank plans to open offices in such

cities as Volgograd, Rostov-na-Donu, Novosi-

birsk, and Irkutsk. The choice of organiza-

tional and legal forms of the regional Banks

offices is determined by the possibility toexercise a stricter centralized control over

such network. The choice of regions in the first

place will be determined by the needs of the

Banks clients businesses.


ues to increase its clients financing. Consid-erable attention will be paid to documentary

credit operations guarantees and letters of

credit; to own bills of exchange and over-

drafts. In addition it is planned to actively

develop crediting of leasing projects.

In the nearest future such a promising sector

as trade finance should receive considerable

impulse. Besides the growth of the Banks

profit, the development of this sector of busi-

ness will assist to the consolidation of rela-

tionships with Western financial organiza-

tions, recognition of Sudostroitelny Bank in the

international market, and maintenance of

high level of its business reputation. Therefore

it is extremely important to develop relations

with the large European financial organiza-

tions, Ex-Im Bank of the USA, famous export

agencies like Hermes and Coface. An impor-

tant step for the Bank will be participation in

the trade finance programs of the European

Bank for Reconstruction and Development, inthe program of the USDA on financing of im-

porters of agricultural commodities.

Following the needs of its clients, Sudostro-

itelny Bank aims at a further decrease of the

credit resources cost. With this purpose it

was planned to attract considerable assetsvolume on foreign markets, particularly from

international financial organizations. Transi-

tion to the International Accounting Stan-

dards (Banks Financial Statements for the

year 2004 were for the first time formed in

compliance with IAS) and the forthcoming

credit rating by Moodys agency will assist to

the enhancement of the Banks possibilitiesin attracting the foreign loans.

Prospects of Development


43/57

Sudostroitelny Bank plans to increase the

number of individual clients (mainly due to the

services rendered to middle-class clients and

those with above-average income). Taking into

account the specific character of this target

audience, the introduction of an advanced

system of account management via Internet

should become an efficient instrument of

attracting individuals. Besides a complete

package of services connected with the account

managing, it will also include the possibility to

pay for the public utilities etc.

Further development of plastic cards program

of Sudostroitelny Bank plays an important

role in enhancing the quality of the retail client

services. In the nearest future the Bank plans

to raise the status of the membership in Visa

system from Participant up to Principal mem-

ber, and to enter as an associate member

into the MasterCard system. The network of

ATMs will be developed in Moscow and other

cities where the branches and offices of theBank will be located.

Sudostroitelny Bank intends to expand the

service range for small regional and Moscow

banks, in particular by introducing settle-

ments service and opening correspondent

accounts. The Bank seeks to maintain the

position of one of the largest operators in the

foreign exchange and interbank markets.

Among the strategic plans of Sudostroitelny

Bank are the following: an increase of non-

interest income up to 25% of its aggregate

income, an increase of profitability up to 17%,

and a growth of the Banks equity capital due

to the net profit.


44/57

Social Responsibility of the Bank

During all the years of its existence, Sudostroitelny

Bank took an active civil position. Contributing to the

growth of material wealth of clients and thus to consol-

idation of the economy of our country, the Bank at the

same time was aware of the social responsibility of

a large credit institution, and annually destined a part

of its profit for the charitable and socially important

purposes.

The sponsor activities of Sudostroitelny Bank

are systematic.

At the present day one of the key tasks of our

society is to contribute to the formation of a

well-educated and modern Russian individual.

That is why the Bank systematically supports

organizations dealing with education and

culture of the young generation. In the year

2004, donations were made in favour of Suzdal

Orthodox School, which despite all the diffi-

culties started a noble undertaking to revive

the Russian pedagogic traditions. At thepresent day in the four classes of the school

study 30 children, two thirds of which are

from families with low income or from fami-

lies with many children.

Social Responsibility of the Bank


45/57

Taking into account the importance of popu-

larization of healthy style of life, in the year

2004 the Bank continued to support profes-

sional and amateur sport. Within the frame of

cooperation with the Russian Professional

Hockey League the Bank contributed to

a number of events promoting popularization

of this sport. In particular, upon the results of

All Stars 2004 games (between NHL and PHL)

held in Moscow and St. Petersburg in Decem-

ber 2004, the Bank awarded The Best Player

prizes to Andrey Kovalenko and Dmitry

Ryabikin. After closing of the hockey season

the winner of The Best Play-Off Player prize

established by Sudostroitelny Bank was nomi-

nated. The best player of the closing stage ofthe Russian Championship was named Maxim

Sokolov, the goalkeeper of Avangard team

from Omsk, and during the grand closing

of the 2003/2004 season the representatives

of Sudostroitelny Bank awarded him a memo-

rable silver Cup and a money prize.

An important place in the social activities of

the Bank during the reported year was given

to the financial support of the Russian Feder-

ation of the Close Fight and Traditional Karate.

The most socially important is the programme

Doprizyvnik run by the Federation since 1997.

The programme is oriented to the preparation

of teenagers aged 14-16 for the military

service in the Russian Army.

Sudostroitelny Bank pays much attention to

the support of promising and creative young

people. In March July 2004 a chess tourna-

ment for Sudostroitelny Banks Cup took place

between the actual European champion Alexan-

dra Kosteniuk one of the youngest Russian

chess-players and the readers of Kommer-

sant newspaper (3.5 thousand participants

from 32 countries sent their versions of moves

via the Internet and SMS text messages). By the

result of the match Alexandra Kosteniuk

became the winner and was awarded with

a memorable Cup and a money prize.

Sudostroitelny Bank plans to support corpo-

rations and individuals, whose activities are

directed to the intellectual and physical devel-

opment of the society and to strengthening

health of the nation, and in its turn plans to

continue cooperation with children, youth,

and sport organizations of this country.


46/57

Financial Statements

BALANCE SHEET


47/57

BALANCE SHEET

AS OF JANUARY 1, 2005

Credit institution

Commercial Bank Sudostroitelny Bank (Limited Liability Company)

Sudostroitelny Bank Ltd.

Registration number 2999 BIC 044579918

Postal address Sadovnicheskaya St. 5, 115035 Moscow

Thousand rubles

No. Items For the accounting period For the previous

accounting period

I ASSETS

1. Cash 47 336 55 573

2. Funds and accounts with the Central Bank of Russia 1 751 514 1 149 455

2.1. Required provision with the Central Bank of Russia 64 933 249 166

3. Funds with credit institutions 2 337 690 2 430 235

4. Net investments into commercial securities 238 534 172 126

5. Loans and advances to clients, net 12 221 773 9 266 291

6. Net investments into securities held till maturity 452 908 391 200

7. Net investments into securities for resale 227 913 132 813

8. Fixed, tangible, and intangible assets 27 611 18 531

9. Accrued interest 3 980 1 984

10. Other assets 108 158 30 782

11. Total assets 17 417 417 13 648 990

34 Annual Report 2004

II LIABILITIES


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12. Loans from the Central Bank of Russia 0 0

13. Credits from other banks and credit institutions 7 005 574 6 227 996

14. Clients' accounts (non-credit institutions) 4 654 296 3 159 027

14.1. Including personal accounts 213 589 52 836

15. Issued bills of exchange 2 647 907 1 422 319

16. Interest outstanding 88 811 209 516

17. Other liabilities 67 589 39 756

18. Provision for possible losses from term investments and off-balance liabilities 22 809 5 229

and from operations with off-shore residents

19. Total liabilities 14 486 986 11 063 843

III EQUITY

20. Authorized capital (Shareholders' equity) 2 660 000 2 660 000

20.1. Registered common shares 2 660 000 2 660 000

20.2. Registered preference shares 0 0

20.3. Unregistered authorized capital of non-joint stock credit institutions 0 0

21. Treasury shares, bought out from shareholders 0 0

22. Capital surplus 0 0

23. Revaluation of fixed assets 0 0

24. Expenses of future accounting periods, influencing equity capital 149 479 216 085

25. Funds and profit of the previous years at the disposal of the Bank 139 191 34 842

26. Profit (loss) for the accounting period 280 719 106 390

27. Total equity 2 930 431 2 585 147

28. Total liabilities and equity 17 417 417 13 648 990

IV OFF-BALANCE LIABILITIES

29. Irrevocable liabilities of the Bank 3 020 426 3 879 101

30. Guarantees issued by the Bank 339 469 77 290

Certain of the Operations of Section V Trust management accounts that are listed below do not appear on the Balance Sheet because in the accounting period they were

not business lines of the Bank:

1. Cash desk, 2. Securities in trust management, 3. Precious metals, 4. Credits granted, 5. Funds used for other purposes, 6. Trust management settlements,

7. Accrued interest (coupon) income on bonds payed, 8. Current accounts, 9. Expenses on trust management, 10. Loss from trust management, 11. Capital in

trust management, 12. Trust management settlements, 13. Accrued interest (coupon) income on bonds received, 14. Revenues from trust management, 15. Profit

from trust management.

Chairman of the Board A. Golubkov

Chief Accountant E. Zubova

INCOME STATEMENT


49/57

for the year 2004

Credit institution: Commercial Bank Sudostroitelny Bank (Limited Liability Company)


Registration number 2999 BIC 044579918 Postal address Sadovnicheskaya St. 5, 115035 Moscow

Thousand rubles


accounting period

Interest and similar income

1 Interbank credits granted and cash on NOSTRO accounts 374 261 42 009

2 Credits to other clients 1 060 048 353 541

3 Leasing services 0 0

4 Securities with fixed interest rate 72 926 38 545

5 Other sources 1 301 786

6 Total interest and similar income 1 508 536 434 881

Interest and similar expenses

7 Interbank credits attracted and cash on LORO accounts 156 011 36 162

8 Deposits of the clients 5 507 1 735

9 Bills of exchange issued by the Bank 53 981 9 128

10 Total interest and similar expenses 215 499 47 025

11 Net interest income 1 293 037 387 856

12 Net income from operations with securities -28 949 157 562

13 Net income from operations with foreign currency -9 551 -2 921

14 Net income from operations with precious metals and other financial instruments 0 0

15 Net income from revaluation of foreign currency 22 785 -160 764

16 Commission income 98 187 21 340

17 Commission expenses 21 049 12 237

18 Net income from one-time operations -259 244

19 Other operating income, net -5 956 -2 748

20 Management expenses 149 390 52 144

21 Provision for possible losses -905 053 -217 469

22 Profit before taxation 293 802 118 71923 Taxes (including profit tax) 12 999 12 329

24 Net profit for the accounting period 280 803 106 390




REPORT ON THE LEVEL OF CAPITAL SUFFICIENCY


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AND PROVISION FOR LOSSES ON HIGH-RISK LOANS

AND OTHER ASSETS

AS OF JANUARY 1, 2005

Credit institution

Commercial Bank Sudostroitelny Bank ( Limited Liability Company)


Registration number 2999 BIC 044579918

Postal address

Sadovnicheskaya St. 5, 115035 Moscow


accounting period

1 Equity capital, RUR thousand 2 961 750,00 2 669 619,00

2 Real value of the Bank's equity capital sufficiency, % 24,6 22,3

3 Normative value of the Bank's equity capital sufficiency, calculated in accordance 10,0 10,0

with the requirements of the Bank of Russia, %4 Estimated provision for possible losses on loans, RUR thousand 1 304 502,00 418 673,00

5 Provision for possible losses on loans set up in fact, RUR thousand 1 304 502,00 418 673,00

6 Estimated provision for possible losses, RUR thousand 5 802,00 4 158,00

7 Provision for possible losses set up in fact, RUR thousand 5 802,00 4 158,00




51/57


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Facsimile +7 (095) 967 6001

AUDITORS' REPORT

To the participants and the Board of Directors of Sudostroitelny Bank:

We have audited the accompanying balance sheet of Sudostroitelny Bank (the Bank) as at 31 December 2004, and the related statements of income, of cash flows

and of changes in redeemable participants' equity for the year then ended. These financial statements are the responsibility of the Bank's Management.

Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable

assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts

and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by Management,

as well as evaluating the overall financial statement 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 as at 31 December 2004 and the results

of its operations and its cash flows for the year then ended in accordance with International Financial Reporting Standards.

Moscow, Russian Federation

26 September 2005

SUDOSTROITELNY BANK


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Balance Sheet as at 31 December 2004

(in thousands of Russian Rubles)

Note 2004 2003

Assets

Cash and cash equivalents 5 3 098 911 6 709 070

Mandatory cash balances with the Central Bank of the Russian Federation 64 933 249 166

Trading securities 6 3 792 325 3 086 647

Due from other banks 7 5 147 672 632 995

Loans and advances to customers 8 5 593 124 3 029 299

Other assets 9 118 146 28 452

Premises and equipment 10 23 635 262 998

Total assets 17 838 746 13 998 627

Liabilities

Due to other banks 11 7 010 109 6 228 616

Customer accounts 12 4 667 493 3 173 574

Promissory notes issued 13 2 697 481 1 431 739

Other liabilities 14 102 428 72 865

Deferred tax liability 20 88 715 66 553

Total liabilities 14 566 226 10 973 347

Redeemable participants' equity

Charter capital 15 2 936 847 2 936 847

Retained earnings 16 335 673 88 433

Total redeemable participants' equity 3 272 520 3 025 280

Total liabilities and redeemable participants' equity 17 838 746 13 998 627

Approved for issue by the Board of Directors and signed on its behalf on 26 September 2005.

______________________________ ______________________________

Alexei Golubkov Elena Zubova

Chairman of the Board Chief Accountant

SUDOSTROITELNY BANK


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Statement of Income for the Year Ended 31 December 2004


Note 2004 2003

Interest income 17 1 084 076 446 019

Interest expense 17 (322 480) (70 008)

Net interest income 761 596 376 011

Provision for loan impairment 8 (388 670) (58 296)

Net interest income after provision for loan impairment 372 926 317 715

Gains less losses arising from trading securities (6 643) 165 540

Gains less losses arising from trading in foreign currencies 119 219 64 925

Foreign exchange translation gains less losses (87 052) (184 755)

Fee and commission income 18 99 488 22 127

Fee and commission expense 18 (27 028) (17 186)

Gains on origination of assets at rates below market (4 642)

Recovery/(provision) for losses on credit related commitments 22 3 139 (5 785)

Other operating income 2 228 2 891

Operating income 476 277 360 830

Operating expenses 19 (205 846) (119 766)

Gains arising from early retirement of debt 4 456

Profit before tax 270 431 245 520

Income tax expense 20 (23 191) (59 755)

Net profit 247 240 185 765


SUDOSTROITELNY BANK


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Statement of Cash Flows for the Year Ended 31 December 2004

(in thousands of Russian Rubles)Note 2004 2003

Cash flows from operating activities

Interest received 1 066 702 426 343

Interest paid (219 374) (62 375)

(Expenses paid)/income received from trading in trading securities (25 662) 162 472

Income received from trading in foreign currencies 106 265 65 879

Fees and commissions received 99 488 22 127

Fees and commissions paid (27 028) (17 186)

Other operating income received 1 661 2 891

Operating expenses (162 079) (108 361)

Income tax paid (4 027) (2 397)

Cash flows from operating activities before changes in operating assets and liabilities 835 946 489 393

Changes in operating assets and liabilities

Net (increase)/decrease in mandatory cash balances with the Central Bank of the Russian Federation 184 233 (122 487)

Net increase in trading securities (699 610) (2 395 067)

Net (increase)/decrease in due from other banks (4 530 863) 3 718 990

Net increase in loans and advances to customers (2 986 690) (857 953)Net (increase)/decrease in other assets (87 706) 44 069

Net increase in due to other banks 842 332 1 562 644

Net increase in customer accounts 1 501 665 1 361 720

Net increase in promissory notes issued 1 170 820 1 253 909

Net increase/(decrease) in other liabilities 40 228 63 954

Net cash (used in)/from operating activities (3 729 645) 5 119 172

Cash flows from investing activities

Acquisition of premises and equipment 10 (17 139) (9 516)

Proceeds from disposal of premises and equipment 218 998 1 587

Dividend income received 588 9

Net cash (used in)/from investing activities 202 447 (7 920)

Cash flows from financing activities

Capital contributions from shareholders other than share issues 15 1 000 000

Capital distributions to the shareholders other than dividends 16 (2 100)

Net cash from financing activities 997 900

Effect of exchange rate changes on cash and cash equivalents (82 961) (92 539)

Net (decrease)/increase in cash and cash equivalents (3 610 159) 6 016 613

Cash and cash equivalents as at the beginning of the year 6 709 070 692 457

Cash and cash equivalents as at the end of the year 5 3 098 911 6 709 070

SUDOSTROITELNY BANK


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Statement of Changes in Redeemable Participants' Equity for the Year Ended 31 December 2004


Note Share Retained Total

capital earnings shareholders' equity

Balance as at 1 January 2003 1 936 847 (95 232) 1 841 615

Net profit for the year 185 765 185 765

Participants' contributions to the charter capital 15 1 000 000 1 000 000

Distribution to participants 16 (2 100) (2 100)

Balance as at 31 December 2003 2 936 847 88 433 3 025 280

Net profit for the year 247 240 247 240

Balance as at 31 December 2004 2 936 847 335 673 3 272 520



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5, Sadovnicheskaya str., Moscow, 115035, Russia

Tel.: +7 (095) 777-1121, 745-9890

Fax: +7 (095) 959-0888

E-mail: [email protected]

www.sbank.ru

St.-Petersburg branch

Office 6, bld. 25-A, emb. Griboedova,

St.-Petersburg, 191186, Russia

Tel.: +7 (812) 117-2923, 117-2824

Fax: +7 (812) 312-3426


Nizhny Novgorod

3, Novaya str., Nizhny Novgorod, 603000, Russia

Tel./Fax: +7 (8312) 78-0517, 78-0518, 78-0519



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Documents

Sbank Ar2004 Eng