World Without Barriers. VTB Group. Adding Value. Annual Report

1

AnnualReport

Adding Value

1

3 2

Contents

Missionandvalues 4 StatementoftheChairmanoftheSupervisoryCouncil 6 StatementofthePresidentandChairmanoftheManagementBoard 8 1.Financialhighlights 10 2.VTB’smarketposition 14 3.Theeconomyandbankingsector 17 4.Managementreport 24 4.1.Keyeventsin2014 24 4.2.VTBGroupstrategy 25 4.3.Reviewofoperatingperformance 30 4.3.1.Corporate-Investmentbanking 30 4.3.2.Mid-Corporatebanking 37 4.3.3.Retailbusiness 43 4.3.4.Othernon-bankingfinancialbusiness 49 4.4.Reviewoffinancialperformance 50 4.5.Riskmanagement 55 5.Corporategovernance 68 5.1.Overviewofthecorporategovernancesystem 68 5.2.Developmentofcorporategovernancein2014 69 5.3.TheGeneralMeetingofShareholdersofVTBBank 70 5.4.TheSupervisoryCouncilofVTBBank 71 5.5.TheManagementBoardofVTBBank 91 5.6.RemunerationofthemembersoftheSupervisoryCouncil andtheManagementBoard 97 5.7.Internalcontrolandaudit 98 5.8.Investorrelations 102 5.9.VTBGroupgovernance 105 6.Corporatesocialresponsibility 110 6.1.Personnel 110 6.2.Responsibleresourcemanagement 112 6.3.Socialprogrammes 113 7.Managementresponsibilitystatement 118 8.SummaryconsolidatedfinancialstatementsinaccordancewithIFRS 119 9.TheReportonthecompliancewiththecorporategovernancecode 128 10.OtherGroupinformation 142 10.1.DetailsofVTBBank 142 10.2.Contactinformation 143 11.Shareholderinformation 147

5 4

OurMission

Toprovideworld-classfinancialproductsandservices

thathelptocreateaprosperousandsustainablefuture

forourcustomers,stakeholdersandsociety.

OurValues

Trust.

Gainingandretainingthetrustofourcustomersis

VTBGroup’smostimportantvalue.

Reliability.

VTBGroup’slong-termstrengthis

reinforcedbyleadingpositionsinthefinancialmarkets

whereweoperateandourabilitytoprovidelocal

expertiseonaglobalscale.

Transparency.

Ourbusinessisopenandtransparent,

andallofourkeystakeholderscooperateclosely

inordertodelivermaximumvalueandvisibility.

Mission and Values

Versatility.

Ourwealthofexpertiseacrossabroadrange

offinancialproductsandservicesensuresthatweoffer

allofourcustomersthemostcomprehensive,flexibleand

sophisticatedsolutionsthatsuittheirindividualneeds.

Team.

Ourdedicatedteamofprofessionalsbenefits

fromthesynergyofknowledgeaffordedbyourdiverse

lineofbusinesses,andourGroup’sspiritisenhanced

bytheenergy,creativeinsightandpotentialofeach

memberofourteam.

OurIdentity

VTBGroupistheleadingRussianfinancialinstitution

withastrongpresenceinkeyinternationalmarkets.

OurVision

VTBGroupaimstobecomeapremierplayerinallofour

prioritymarkets.

7 6

minorityshareholdersintheBank’sgovernance structuresthatisunprecedentedforlargeRussian statecompanies.

Strengthening capital and further

development

Maintainingsufficientcapitalisafundamental requirementforanybank,especiallyinvolatile times.InSeptember2014,theGroupsold214 billionroublesworthofnewpreferredshares, convertingsubordinatedloansreceivedin2008as partofaseriesofRussianGovernmentmeasures tosupportthebankingsector.Asaresult,VTB increaseditscoreTier1capital.InDecember2014, theRussianGovernmentplaceda100billionrouble subordinateddepositinVTBBankfromtheRussian NationalWealthFund,thusincreasingVTB’sand theGroup’sTier2capital. ThesedealssignificantlyenhancedtheGroup’s prospectsforfurtherbusinessdevelopment.The economicenvironmentinRussiawillcontinuetobe challengingin2015.However,Iamconfidentthat thequalityofmanagementsystemsinplaceatVTB, combinedwiththeGroup’sconservativeapproach toriskassessment,anditscorestrategicpriorities tailoredtocurrentmarketconditions,willallow VTBtomaintainsustainablegrowthandtofurther strengthenitspositioninthemarket–benefitting clients,shareholdersandtheeconomyasawhole. Chairman

of the Supervisory Council

of VTB Bank  Sergey Dubinin

Corporate governance and

shareholder relations

Inthecurrentenvironment,corporategovernanceand transparencytookonparticularimportanceforthe Group.In2014,theRussianregulatorapprovedanew CorporateGovernanceCode,whichwaspreparedin linewithbestinternationalpractice.Inaccordance withaRussianGovernmentdirective,VTBdeveloped a‘roadmap’toimplementthenewCorporate GovernanceCode,withaviewtocarryingoutmost initiativesoftheroadmapinthefirsthalfof2015. VTBisworkingtoensurethatitsoperationsarein linewithbestinternationalpracticesincorporate governanceandwiththeprinciplessetoutinthe newcode.FurtherinformationontheGroup’s corporategovernancecanbefoundintherelevant partsoftheAnnualReport. Despitethefactthattheintroductionofsectoral sanctionsbytheUnitedStatesandEuropean UnionagainstRussianbankscomplicatedthe Group’sinteractionwithitsinternationalpartners, VTBcontinuedtoworkactivelywithallinvestors andpartners,includinginternationalinstitutional investors.TheGroup’skeyanchorinvestorsheldtheir positionsinVTBthroughouttheyear,demonstrating theinvestmentcommunity’scontinuedtrustand confidenceintheGroup. Effectiveinteractionwithminorityshareholders andtheShareholdersConsultativeCouncil(“SCC”) wasanotherkeyfocusareaforVTB.In2014,SCC memberElenaPopovawasre-electedtothe SupervisoryCouncil.SCCmemberLeonidVolkov waselectedtotheStatutoryAuditCommission, whichensuredalevelofrepresentationfor

Statement of the Chairman

of the Supervisory Council

responsetothesedevelopments,providingtimely supporttosystemicallyimportantbanks.VTB’s managementclosecooperationwiththeBank’s majorityshareholderenabledtheGrouptocontinue financingtherealsectoroftheeconomy,while activelygrowingitsclientbase,andatthesame timeincreasingitsfocusonassetqualityandrisk management.Asaresult,theGroupdelivered strongoperatingresultsandsolidgrowthofitscore incomelines.However,theGroup’sfinancialresults weredownsignificantly,duetoasharpincrease inprovisionchargesforloanimpairment.

VTB Group strategy

Theselatesteconomicdevelopmentsreconfirmedthe validityoftheGroup’snewstrategyfor2014–2016 (“QualityGrowthStrategy”),whichwasapproved byVTB’sSupervisoryCouncilinApril2014.On thebasisofthisstrategy,theVTBalsoprepareda Long-TermDevelopmentProgrammefor2014–2018, whichwasapprovedbytheSupervisoryCouncilin December2014. Theprogrammeisfocusedparticularlyonefficiency, decreasingcostsandstrengtheningtheGroup’srisk-managementsystems.Thesepriorities,aswellasthe morespecificbusinessdevelopmentinitiativesset outintheprogramme,areparticularlyimportantin thecurrentmarketenvironment.Whiledeveloping thisprogramme,VTB’sSupervisoryCounciland managementteamcarriedoutacomprehensiveand timelyanalysisofvariouseconomicdevelopment scenariosandpotentialrisks,whilealsosettingout anumberofconcretemeasuresaimedatincreasing efficiencyandreducingcosts.VTBwasabletostart implementingthesemeasures,whichincluded optimisingstaffinglevels,inthefirsthalfof2014.

Dear shareholders, clients, and partners,

2014sawsignificantchallengesfortheRussian economy,thebankingsector,andforVTBGroup. Theoperatingenvironmentforbanksdeteriorated inanumberofareasthroughouttheyear.Rising geopoliticaltensionsandtheintroductionof economicsanctionsonRussialimitedmajorcredit organisations’abilitytoattractfinance,whilefalling oilpricesandtheroubledepreciationnegatively impactedborrowers,leadingtoacontractionin lendingandasignificantincreaseinprovision charges.Russianfinancialinstitutionsalsoincurred sizeablelossesintheUkrainianmarket. IwouldnotethattheRussianGovernmentand theBankofRussiawereveryeffectiveintheir

9 8

Dear Shareholders, Clients and Partners,

TodaytheRussianeconomyandfinancialsector areonceagainundergoingaseriousstresstest. Thisiswhy,inpresentingthisyear’sAnnual ReportofVTBGroup,Iwouldparticularlynotethat overthepastyeartheGroupdemonstratedthe resilienceofitsbusinessmodeltotheimpactof negativeeconomicandgeopoliticalfactors. Despitethechallengingeconomicenvironment andtheintroductionofmeasuresthateffectively closedoffexternalsourcesoffundingforRussian banks,VTBremainedoneofthemostactive lendersontheRussianmarket.TheGroup’sassets ofsubordinateddebtinlate2014.Timelyand appropriatestatesupportforsystemically importantbanksremainskeytoensuringthe ongoingstabilityofthebankingsectorasawhole, andithasenabledVTBGrouptofocusonproviding fundingtokeysectorsoftheeconomy,aswellas tosupportingstrategicallyimportantprojects. 2014wasthefirstyearintheimplementationof anewVTBdevelopmentstrategyfor2014-2016. Thisstrategyisfocusedonboostingefficiencyand optimisingcosts.Today,thisprocessofresource andcostoptimisationextendsthroughoutthe Groupasawhole,includingmanagementsystems, VTB’sregionalnetworksandsubsidiarybanks, documentprocessingandITinfrastructure.In2014, theGroupsuccessfullyimplementedaheadcount optimisationprogrammeinitscorporatecentre andinthecorporate-investmentbankingbusiness bothinRussiaandabroad.Alltheseinitiativeshad apositiveimpactonourfinancialresults.Despite thesignificantgrowthofourbusiness,theGroup’s staffcostsandadministrativeexpensesin2014 grewmoreslowlythaninthepreviousyear. SeparatingoutoftheGroup’smid-corporate bankingbusinessasaglobalbusinesslineinits ownrightwasakeydevelopmentin2014.This businesshassignificantlong-termdevelopment potentialandisalreadymakinganimportant positivecontributiontoVTB’sassetsandrevenue base.In2014,themid-corporatebankingloan bookexceeded1trillionroubles,11.5%ofthe Group’stotalcustomerloans.Russianregionsform asignificantpartoftheclientbaseinthissegment. 2015promisestobeachallengingyearforthe economy,andthedevelopmentofthebanking

Statement of the President

and Chairman of the Management Board

systemwillbeinfluencedbythesituationinthe capitalandcommoditiesmarkets,aswellasby theCentralBank’smonetarypolicy.Atthesame time,VTB’sstrategicprioritiesremainunchanged: pursueconservativegrowthinkeybusiness segmentswhilecontinuallyimprovingefficiency andkeepingtightcontrolsonspending. Fromthatperspective,itwillbeparticularly importanttocontinuetoimplementstructural transformationacrosstheGroupinRussia.Our firstmajorstepincreatingasingleuniversal bankplatformwillbeamergerofBankofMoscow intoVTBBank.Asingleplatformwillenhance theintegrationbetweentheGroup’sstructures andbusinesslines,andwillallowustodeploy ourcapitalandotherresourcesinthemost efficientwaypossible.IamconfidentthatVTBwill continuetodemonstrateapositivetrendinboth thequalitativeandquantitativeindicatorsofits activityastheRussianeconomyrecovers. Inconclusion,letmethankallourclients, investors,andpartners,andalsotheVTBGroup teamasawholefortheirtrust,supportand professionalismthroughout2014.Iamconfident that,despitewhateverdifficultieswemayface,our ongoingcollaborationwillcreateasolidbasisfor thecontinueddevelopmentoftheeconomyandfor Russiatogrowandflourish. VTB Bank President and Chairman

of the Management Board Andrey Kostin in2014grew39%to12.2trillionroubles,and itsloanbookby38%to9.2trillionroubles.We wereabletosignificantlystrengthenourmarket positionsinkeybusinessareas–theGroup’s marketshareincorporatelendingincreased from15.5%to16.5%,andinretaillendingfrom 13.3%to14.9%. Inadditiontobalancesheetgrowth,theGroup sawasolidperformanceinitscoreincomelines incorporate-investmentbanking,mid-corporate bankingandtheretailbusiness.TheGroup’snet interestincomein2014increased10%compared to2013,andnetcommissionincomegrew14%. Unfortunately,theeconomicslowdowninRussia, thenegativegeopoliticalsituation,weakening roubleandahikeininterestratesattheendofthe yearhadanadverseeffectonourclients’solvency. Wefacedasignificantincreaseinprovisions forloanimpairment,whichledtoareduction intheGroup’snetprofitdespitethestrong operatingresults. Inthisenvironment,wepaidparticularattention tomonitoringrisksandmanagingthequalityof ourassets.AlltheGroup’sbankswereableto adjusttheirlendingpolicyinatimelyway,raising financialrequirementstolendersandcollateral, andalsolimitingtheissuanceofforeign-currency denominatedloans.Theshareofnon-performing loansintheGroup’sloanportfolioattheendof 2014wasatamanageable5.8%,anincreasefrom 4.7%atthestartoftheyear. Inordertominimisethenegativeimpactofthe economicdownturn,theBankputconsiderable effortintostrengtheningitscapitalviathe issuanceofpreferencesharesandtheconversion

11 10

1. Financial highlights

1 Grossloansandadvancestocustomers,includingpledgedunderrepurchaseagreements. 2 Theinformationfor2013ispresentedafterreclassificationdescribedindetailintheVTBGroup’sIFRS  consolidatedfinancialstatementsfor2014. 3 Provisionchargeforloanimpairmentdividedbyaveragegrossloansandadvancestocustomers. 12,191 2012 2013 2014 7,416 8,769 2012 2013 2014 766 947 1,131 2012 2013 2014 359 429 548 3,813 4,383 5,669 2012 2013 2014

Total assets, RUB billion Shareholders’ equity, RUB billion

2012 2013 2014 5,330 6,621 9,150 2012 2013 2014 90.6 100.5 0.8

Customer loans1_{, RUB billion Operating income before provisions for impairment, RUB billion}

Net profit, RUB billion Customer deposits2_{, RUB billion}

2012 2013 2014

Netinterestmargin(NIM) 4.2 4.5 4.1

Costtooperatingincomebeforeprovisions(CIR) 50.5 49.1 43.7

Costofrisk(CoR)3 _{1.2 1.6 3.4}

Returnonequity(ROE) 13.7 11.8 0.1

VTB branch in Shanghai is the only Russian bank

ranked among TOP-100 on the Shanghai Stock

Exchange in terms of RMB trade volume for 2014.

15 14

2. VTB’s market position

VTBGroupisoneoftheleadersintheRussianand internationalfinancialservicesmarket,andisRussia’s secondlargestfinancialgroup.TheGrouphasan extensivebranchnetworkinRussiawithover1,800 offices,andispresentintheworld’skeyfinancial markets.VTB’smajorityshareholderistheRussian Federation.Asof31December2014,theFederalAgency forStatePropertyManagementowned60.93%ofVTB Bank’sordinarysharesandtheMinistryofFinanceowned 100%oftheBank’spreferenceshares.TheRussian Federation’stotalshareintheBank’ssharecapitalis 85.27%.VTBGroupemploysmorethan100,000people. VTBGrouphasaninternationalnetworkthatis uniqueamongRussianbanks.TheGroupprovides servicesintheCIS,Europe,Asia,NorthAmerica andAfrica,furtheringinternationalcooperationand promotingRussianbusinessesaroundtheworld. TheGroup’sinternationaloperationshelptodiversify thebusinessandincreaseprofitabilitybytargeting higher-marginmarkets. Asof31December2014,VTBGroupbanks operatedin23countriesworldwide.IntheCIS, theGrouphasapresenceinArmenia,Ukraine, Belarus,KazakhstanandAzerbaijan.VTBbanks inAustria,GermanyandFranceoperateaspartof VTBEuropeanSubholdingwithVTBBank(Austria) asaparentcompany.TheGrouphassubsidiary andassociatebanksinGreatBritain,Cyprus, Serbia,GeorgiaandAngola;twoVTBbranches inChinaandIndiaandtwobranchesofVTB Capital,PlcinSingaporeandDubai.TheGroup investmentbankingdivisionalsoperformsbroker/ dealeroperationsintheUnitedStatesofAmerica,

Segment Marketshare,% Rank

Corporateloans 16.5 2

Corporateaccountsanddeposits 18.8 2

Retailloans 14.9 2

Retailaccountsanddeposits 9.8 2

VTB Group international presence

VTB Group key businesses

VTB Group in the Russian banking market

4 Netloansandadvancestocustomers,includingpledgedunderrepurchaseagreements. securitiesdealingandfinancialadvisoryinHong Kongandinvestmentbankingoperationsin Bulgaria.InVietnam,theGrouphasestablished VTBVietnam-RussiaJointVentureBank,ajoint venturewiththeBankforInvestmentand DevelopmentofVietnam.

Corporate-Investmentbanking Mid-Corporatebanking Retailbusiness

Servicestolargecorporatecustomers Servicestomid-corporatecustomers Servicestoindividualsand smallbusinesscustomers •Assets:RUB6.7trillion •Customerloans4_{:RUB5.2trillion} •Customerdeposits:RUB2.2trillion •Assets:1.1trillion •Customerloans4_{:0.9trillion} •Customerdeposits:RUB0.6trillion •Assets:RUB3.3trillion •Customerloans4_{:RUB2.0trillion} •Customerdeposits:RUB2.6trillion

17

16 _{VTB Group organisational structure}

JSC VTB Bank

‘‘BankVTB24’’,PJSC ‘‘VTBCapitalHolding’’,CJSC ‘‘Insurancecompany

VTB-Insurance’’,Ltd ‘‘VTBCapitalIBHolding’’,Ltd VTBCapitalplc ‘‘VTBCapital’’,CJSC ‘‘VTBDC’’,LLC ‘‘VTBPensionadministrator’’,Ltd ‘‘LetoBank’’,PJSC ‘‘VTBBank’’,PJSC ‘‘BankofMoscow’’,OJSC ‘‘VTBBank(Belarus)’’,CJSC ‘‘VTBBank(Armenia)’’,CJSC ‘‘VTBBank(Azerbaijan)’’,OJSC ‘‘VTBBank(Georgia)’’,JSC BancoVTBAfrica,S.A. VTBBank(Austria)AG VTBBank(France)SA VTBBank(Deutschland)AG ‘‘VTBBank(Kazakhstan)’’,JSC VTBBankJSCBelgrade ‘‘VTBFactoring’’,Ltd NPFVTBPensionFund,JSC ‘‘VTB-Leasing’’,OJSC ‘‘VTBRealEstate’’,LLC ‘‘VTBSpecialized Depository’’,CJSC ‘‘VTBRegistrar’’,CJSC ‘‘Multicarta’’,Ltd VTBLifeInsurance,CJSC MoscowRe,OJSC ‘‘VTBMedicalInsurance’’JSC

3. The economy and banking sector

3.1 The Russian economy in 2014

In2014,thedropinthepriceofoil,intenseforeign-policyenvironmentandinternationalsanctions leviedagainstanumberofRussiancompanies andindividualshadanegativeimpactonthe stateoftheRussianeconomy.Theheightened uncertaintyandtheworseningoftradeconditions exertedpressureonthelevelofbusinessactivity. Growthinhouseholdconsumptionslowedto1.5% (comparedto5.0%ayearearlier),andthegrowthin governmentspendingdroppedto0.5%(compared to1.1%ayearearlier).RealGDPgrowthwas0.6%, comparedto1.3%in2013. Thepaceofinvestmentinfixedassetscontinuedto declineasaresultofRussiancompanies’reduced accesstoexternalsourcesofcapitalandthe significantincreaseinthecostofborrowinginthe domesticmarket.Fortheyear2014,investments infixedassetsdecreased2.0%,comparedtoan increaseof0.9%ayearearlier.

Russian macroeconomic indicators, % change year-on-year

Industrialproduction  2010  2011  2012  2013  2014 Source: Rosstat. Investmentinfixedassets Retailturnover 6.7 5.9 0.9 9.1 –2.0 3.4 7.3 0.4 5.0 1.7 6.3 6.5 3.9 7.1 2.5 Parentorganisation JSCVTBBank’ssubsidiaries SubsidiariesofJSCVTBBank’ssubsidiaries

19 18 7.7 10.4 9.3 7.4 7.7 2.2 2.3 2.5 1.6 2.2 4.1 1.3 3.4 5.4 3.3 3.3 1.6 –0.4 –0.7 2.0 0.8 2.8 1.4 5.5 4.7 2.7 4.5 0.6 3.4 4.3 Shocksininternationalcommoditiesmarkets, internationalsanctionsoncertainsectorsofthe economyandanumberofotherfactorscontributed toincreasedvolatilityincurrencymarketsand tothedepreciationofthevalueoftherouble againsttheUSdollarby72%fortheyear,reaching 56.3roublestothedollar.Inthesecondhalfof 2014,theCentralBankofRussia(“CBR”or“Bank ofRussia”)adoptedafloatingexchangerateregime whilemaintainingtherighttointerveneincases wherethedestabilisationofcurrencymarkets couldthreatenthecountry’sfinancialstability. Inaddition,againstabackgroundofsignificant fluctuationsintheroubleexchangerateagainst majorworldcurrencies,theCBRincreasedthe keyrateconsiderablyandintroducedanumber ofinstrumentstoallowbankstorefinancein foreigncurrencies. Depreciationoftherouble,restrictionsonforeign tradeandthegrowthofregulatedtariffscreated conditionsforacceleratedinflation.Bytheendof 2014,theconsumerpriceindexhadrisen11.4%, whichwasconsiderablyhigherthantheupperlimitof thetargetrangesetbytheBankofRussia.Thistrend wasseenineverycomponentoftheindex.Foodstuffs increasedby15.4%,non-fooditemsby8.1%and servicesby10.5%.Theincreaseinthepriceof non-fooditemswastheresultoftheimpactofthe exchangerateonpricesandthespeculativedemand fordurablegoodsinthelastmonthsoftheyear. Withtheaimofstabilisingtheroubleexchange rateandcurbinginflationexpectations,whichgrew considerablyagainstthebackgroundofaweakening nationalcurrency,theBankofRussiamaintained atightmonetarypolicy.TheCBRtookseveral  2010  2011  2012  2013  2014

Source: IMF World Economic Outlook Database and Rosstat (for Russia’s GDP).

Russian GDP growth compared to other regions, % year-on-year

World Eurozone CentralandEastern China USA

Europe Russia decisionstoraiseitskeyinterestrateto17.0%, comparedto5.5%atthebeginningof2014,which alsoledtoanincreaseininterestratesonbankloans andaslowdowninlendingbyRussianbanks(taking intoaccountthecurrencyrevaluation). Russia’sexternaldebtsituationremainedstable. AccordingtoBankofRussiaestimates,thecountry’s externaldebtdecreasedbyUSD129.4billionto USD599.5billion.Moreover,externalliabilitiesin thebankingsectordecreasedbyUSD43.3billion toUSD171.1billionasofthebeginningofJanuary 2015,whiletheexternaldebtofcorporateborrowers decreasedbyUSD60.3billiontoUSD376.5billion.

3.2 The Russian banking sector

in 2014

ThemainfactorsdrivinggrowthinRussianbanks’ assetsandliabilitiesduringtheyearwerethe currencyrevaluationandtheincreaseindemandfor loansfromcorporateclientswithlimitedaccessto internationaldebtmarkets.Bankingsectorassets grewby35.2%in2014,comparedto16.0%growth ayearearlier.Therateofpenetrationofbanking services,definedasbanks’totalassetsdividedby GDP,reached109%attheendof2014,increasing from87%attheendof2013. Thedecreaseineconomicgrowthexertedpressure onboththelevelandthequalityofdemandfor credit.Banks’lendingwasalsoconstrainedbythe tighterrequirementsplacedonborrowersinorder tomaintainassetquality.Totalloanstocorporate andretailborrowersin2014increasedby25.9% (comparedtogrowthof17.1%in2013),with theincreaseingrowthprimarilyattributableto corporatelending. Growthinthecorporateandretailsegmentsofthe marketwasmixed.Thecurrencyrevaluationand closureofforeignmarketstoRussianborrowers helpedaccelerategrowthincorporatelendingto 31.3%in2014,comparedto12.7%growthayear 57,423 49,510 41,628 33,805 77,663 6,629 5,911 4,963 4,339 6,923 994 1,012 848 573 589

Assets, RUB billion

Equity, RUB billion

Net profit, RUB billion

Source: Bank of Russia.  2010  2011  2012  2013  2014

21 20 _{earlier.Retailloansincreasedbyjust13.8%last} year,comparedto28.7%in2013,primarilydueto measurestakenbytheCBRaimedatcurbinggrowth inconsumerlendinginRussiaandtheinsignificant shareofforeigncurrencyloansinretaillending. Assetqualityinthebankingsectordecreasedamid slowingeconomicgrowth.Theshareofoverdueloans increasedto4.7%attheendof2014,comparedto 4.2%attheendof2013,largelyduetodeterioration inthequalityoftheretailloanportfolio,wherethe shareofoverdueloansreached5.9%,comparedto 4.4%attheendof2013.Therewasaminorincrease intheshareofoverdueloansinthecorporateloan portfolio,reaching4.2%asof31December2014, comparedto4.1%attheendoftheprecedingyear. Thegrowthinoverdueloansledtoanincreasein loanlossprovisions.Theratioofprovisionstogross loansincreasedto8.5%asof31December2014, comparedto7.4%asoftheendof2013.Inabsolute terms,provisionsincreasedby43%.Theloanloss coverageratioreached180%,comparedto176%at theendof2013. Theincreaseinprovisionchargesforloanimpairment resultedinaconsiderabledecreaseinprofitability inthebankingsector,withthetotalprofitinthe sectorin2014decreasingby40.7%year-on-year, reachingRUB589billion.Inadditiontothecreation ofprovisions,thiswasattributabletothecontraction ofnetinterestmarginamidthesharpincreasein fundingcostsandtheinabilitytocompletelypass thesecostsontocustomers.AccordingtotheCBR, thenumberofunprofitablebanksinRussiagrewfrom 88in2013to126in2014. Depositsfromindividualsincreasedby9.4%in2014, comparedtogrowthof19.0%ayear.Thisslowdown wasaresultofsignificantfluctuationsintherouble exchangerateandadecreaseinrealincome.Atthe sametime,thedepreciationofthenationalcurrency andadecreaseincorporatecapitalexpenditureled toasharpincreaseincorporatedeposits,whichgrew by40.9%fromthebeginningoftheyear(13.2% in2013).Theshareofcustomerdepositsintotal liabilitiesdecreasedto61%asof31December 2014,from68%atthebeginningoftheyear,dueto anincreaseinbankingsectordebttotheCBR.The netloan-to-depositratiofortheyeardecreasedfrom 88%to87%. Banks’capitaladequacyratiodroppedto12.5% attheendof2014,downfrom13.5%attheendof 2013,duetoaconsiderableincreaseinassetsand adecreaseinprofitability. Throughouttheyear,theRussiangovernmentand theCentralBankprovidedsufficientsupporttothe bankingsectorinordertominimisetheimpact ofnegativeexternalfactorsonbanksandtheir customers.Inaccordancewithamendmentsto Russianlegislationadoptedattheendof2014, thegovernmentcreatedadditionalmechanismsto improvethecapitalisationofcreditinstitutions.In addition,theBankofRussiaannouncedattheendof theyeartheintroductionofatemporarymoratorium onrecognitionofnegativerevaluationsoffinancial institutions’securitiesportfolios,andoffered banksatemporaryrighttocalculatetheprudential requirementsforforeign-currencytransactionsusing theexchangerateforthepreviousquarter,andalso improveditsmechanismsforrefinancingbanksin foreigncurrencies.

Russian banking sector: loan portfolio and customer deposits, RUB billion Corporate loans

Corporate deposits

Retail loans

Retail deposits

Source: Bank of Russia.  2010  2011  2012  2013  2014 22,499 19,971 17,715 14,063 29,541 9,957 7,737 5,551 4 ,085 11,331 17,354 15,328 13,701 10,893 24,447 16,958 14,251 11,871 9,818 18,556 22,499 19,971 17,715 14,063 29,541 9,957 7,737 5,551 4 ,085 11,331 17,354 15,328 13,701 10,893 24,447 16,958 14,251 11,871 9,818 18,556 22,499 19,971 29,541 9,957 7,737 5,551 4 ,085 11,331 17,354 15,328 13,701 10,893 24,447 16,958 14,251 11,871 9,818 18,556 9,957 7,737 5,551 4 ,085 11,331 17,354 15,328 13,701 10,893 24,447 16,958 14,251 11,871 9,818 18,556

VTB approved a three-year Quality Growth Strategy

for the Group’s development. Fresh initiatives will

help VTB successfully complete every stage of

the economic cycle and ensure profitable growth

for the benefit of investors.

25 24

4. Management report

January–March VTBGroupestablishedMid-Corporatebankingas aseparateoperatingsegmentandprofitcentre withtheaimofincreasingmarketshareacrossall keyproductlines.Thesegmenthasbeenmakinga significantcontributiontotheGroup’sbalancesheet andrevenues. April VTBGroupannounceditsnewstrategy2014–2016 titled“QualityGrowth”.Amongthemainobjectives outlinedintheStrategyareoptimisationofcostsand stringentcostcontrolacrossallbusinesslines. June TheAnnualGeneralMeetingofshareholderstook placeon19June.Morethan350shareholdersand theirrepresentativestookpartinthemeeting,which wasbroadcastonlineviaVTBBank’swebsite. July VTBBankandBankofMoscowwereaddedtothe listofcompaniessubjecttoUSsanctions,andthe VTBGroup(VTBBankanditssubsidiarybanks outsidetheEuropeanUnion)wereaddedtothe listofcompaniessubjecttoEUsanctions.While theimpositionofsanctionsmadeitmoredifficult fortheGroup’scompaniestoworkwithforeign partnersandcontractors,themeasuresundertaken bytheGroup’smanagementminimisedthenegative impactofthesanctions. September FollowingadecisionofVTB’sExtraordinaryGeneral MeetingofShareholders,theBankissuedpreference sharesworthapproximatelyRUB214billion, havingconvertedsubordinatedloansreceivedby theGroup’sbanksin2008(aspartoftheRussian Government’ssupportpackage)intotheseshares. ThepreferenceshareshaveCommonEquityTier1 treatmentunderBaselIIIandCBRregulations. December TheRussiangovernmentplacedaRUB100billion subordinateddepositinVTBBankfromtheRussian NationalWealthFund.Thedepositwasrecognisedby theCentralBankofRussiaasTier2capital.

4.2. VTB Group strategy

VTBGrouphasbegunimplementingitsnewstrategy for2014–2016(theQualityGrowthStrategy),which wasapprovedbytheBank’sSupervisoryCouncilon 10April2014. Accordingtothestrategy,themainobjectivesforVTB Group’sdevelopmentfor2014–2016areachieving qualitygrowth,maintainingtheGroup’sleadingmarket positions,realisingthepotentialofkeygrowthareasby achievingprofitabilitytargetsanddevelopingeffective riskmanagementsystems.Thepathtoachievingthese goalsinvolvesthefollowingmainpriorities: maintainastrongmarketpositionandimprovethe efficiencyofthecorporateinvestmentbankingbusiness; achievefastergrowthintheretailbusiness–increase marketshareaswellastheshareoftheretailsegment intheGroup’sbusinessoverall; establishthemid-corporatebankingbusinessasa separateprofitcentreandstrengthentheGroup’s positioninthismarketsegment; increaseoperationalefficiencyandinstitutestringent costcontrol; strengthenriskmanagementandcontrolsystemsatthe Grouplevel. Anumberofexternalfactorshadanimpactonthe resultsofthefirstyearofimplementationofthestrategy, includingtheworseninggeopoliticalsituation,adecline ingrowthintheRussianeconomy,theeconomiccrisisin Ukraine,thedevaluationoftheroubleandthesignificant increaseininterestrates.Allofthesefactorsrequired theGrouptocarryoutathoroughriskassessment,to introducechangestocreditproceduresandadjustments tomedium-termdevelopmentplansinvariousareas. Despitethedifficulteconomicsituation,VTBGroup deliveredstrongoperatingresults,expandedits customerbaseandincreaseditsmarketshareinpriority businesssegments,havingestablishedthenecessary

4.1. Key events in 2014

conditionsforlong-termsustainabledevelopmentinline withitsstrategicpriorities. In2014,theGroupsuccessfullycompletedthefollowing structuralchangestosupporttheimplementationofits newstrategy: establishingmid-corporatebankingbusinessasa separateoperatingsegmentandcreatingastructureto managethisbusiness; strengtheningtheroleofthecorporatecentre(the Group’smanagementcentre)byconcentratingkey competenciesinvariousdivisionsofVTBBankand strengtheningcoordinationofglobalbusinesslinesand theactivitiesofsubsidiarycompaniesinallareasof supportandoversight; furtherimprovementoftheGroup’sregional presence,completionofanumberofinitiatives toimproveproductivityandtofreeupcapacity intheexistingnetwork,andthecentralisationof procurementactivities; centralisationofriskmanagementwithintheGroup, withtheestablishmentofcoreunitstomanagecredit risksrelatedtoglobalbusinessareas,theintroduction ofasystemtomeasureanddeterminetheGroup’s riskappetite,andsettinglimitsandtargetvaluesfor riskappetite.

Overview of VTB Bank’s long-term

development programme

OnthebasisofVTBBank’sSupervisoryCouncil-approvedstrategyfor2014–2016,andinaccordance withtherequirementsforcompaniesincludedina specialRussiangovernmentlist(DecreeNo91-rofthe GovernmentoftheRussianFederationasof23January 2003),theBankdevelopedalong-termdevelopment programmefor2014–2018,whichwasapprovedby theSupervisoryCouncilon18December2014. Theprogrammecontainsdetailedlistsofinitiatives toensurethattheBankachievesitsdevelopment goals(amoredetaileddescriptionoftheseinitiatives

27

26

_{Information about the auditor’s conclusions}

regarding the long-term development

programme

InaccordancewithDirectiveoftheGovernmentofthe RussianFederationNo4955p-P13asof17July2014, theBankisthesubjecttoanannualauditinrespect oftheimplementationofitsdevelopmentprogramme (hereinafterreferredtoasthe“Audit”).TheAudit isgovernedbytheBank-approvedStandardsfor ConductinganAuditontheImplementationofJSC VTBBank’sLong-TermDevelopmentProgramme, adocumentthatcontainsinformationaboutthe proceduresoftheplannedaudit,theproceduresfor thecompetitiontoselectanauditor,theconduct oftheaudit,thetimeframeforcompletingaudit-relatedworkandondecisiontakingbasedon theresultsoftheaudit. AtthetimeofpublishingthisAnnualReport,theBank isconductinganAuditoftheimplementationof theprogramme.Thisisbeingdoneinaccordance withtheinstructionsoftheRussianGovernmentand withtheBank-approvedStandardsforConductingan AuditoftheImplementationofJSCVTBBank’sLong-TermDevelopmentProgramme. Inaccordancewiththestandardauditprocedure ontheimplementationoflong-termdevelopment programmesatJSCVTBBank,theresults oftheauditandtheauditor’sresponsewill bepresentedtotheStrategyandCorporate GovernanceCommittee,andtheSupervisory Councilforreview.

Information about the system of key

performance indicators

Thesuccessfulimplementationofthestrategyand developmentprogrammeismanagedthrougha systemofkeyperformanceindicators(KPIs).These KPIsaresetoutinthestrategyanddevelopment programmedocuments,andaredesignedtomotivate relevantemployeestoworktowardsimplementing theGroup’sstrategicobjectives.Inordertoprovide thebasisforfurtherdevelopmentofKPIs,the followingdocumentswereapprovedin2014: TheRegulationontheRemunerationofJSCVTBBank’s ExecutiveBodiesandonKeyPerformanceIndicators (MinutesNo5oftheBank’sSupervisoryCouncilof 5March2015); Alistofkeyperformanceindicatorstomeasurethe performanceofmembersofVTBBank’sManagement Board(MinutesNo26oftheBank’sSupervisory Councilof30December2014); TheMethodforCalculatingandEvaluatingthe KPI“ReturnonShareholderInvestment”(TSR) (MinutesNo26oftheBank’sSupervisoryCouncilof 30December2014); TheProcedureforDeterminingtheExpectedAmount ofRemunerationfortheMembersoftheManagement BoardofJSCVTBBank,DependingontheDegreeof FulfilmentoftheKPIs(MinutesNo26oftheBank’s SupervisoryCouncilof30December2014). Theabove-mentioneddocumentswerepreparedin accordancewiththeGuidelinesfortheUseofKey PerformanceIndicatorsbyStateCorporations,State-OwnedCompanies,StateUnitaryEnterprisesand CommercialEnterprisesinWhoseCharterCapital theRussianFederationoraSubjectoftheRussian FederationHasaShareofMorethan50%(hereinafter “theGuidelines”),jointlydevelopedbyRussia’s MinistryofEconomicDevelopmentandtheRussian FederalPropertyManagementAgency. AspartofimplementingtheinstructionsoftheRussian Government,thecurrentversionoftheRegulation ontheRemunerationofJSCVTBBank’sExecutive BodiesandonKeyPerformanceIndicatorsincludes informationregarding: appropriateremunerationforthetasksperformed, resultsofactivitiesandthelevelofriskstaken; correlationbetweentheremunerationoftheBank’s executivebodiesandtheachievementoftheobjectives for2014canbefoundinthecorresponding sectionsofthisAnnualReport). KeyactivitiesandinitiativesacrosstheGroup’score businesslines. Corporate-Investmentbanking: maintainastrongmarketpositionincorporatelending andinvestmentbanking; strengthenmarketpositioninthecorporatedeposits segmentandincreasetheshareofcurrentaccountsin thedepositbase; furtherdeveloptransactionbankingthroughcross-sellingandexpandingtheproductoffering,increase commissionincome; attractnewclientsbeyondthetop100clients; increasecostefficiency. Mid-Corporatebanking: increasemarketshareacrossallproductlines; maintainanacceptableriskprofileduringaperiodof significantgrowth; establishMid-Corporatebankingasaseparate operatingsegment; achieveconsiderablecostreductionsinthenetwork andheadofficeassociatedwithservicingthemid-corporatebusiness; ensurethesegment’ssignificantcontributiontothe Group’sfinancialresults. Retailbusiness: maintainfast-pacegrowth; expandconsiderablytheofficenetwork(to2,600offices) andtheATMnetwork(to16,000machines); developremoteservices,andincreasetheshareof operationscarriedoutremotely; completethetransitiontoasegment-orientedcustomer approach; furtherdevelopthefederalmodelofworkingwithsmall businesses; investinupgradingtheITplatformandimprove infrastructure. OneoftheGroup’skeystrategicprioritiesfor2014– 2018iscostoptimisation.Thisentails: optimisationofstaffcosts; improvingtheproductivityofbusinessdivisions,aswell assupportandoversightunits; optimisationofVTBGroup’sbranchnetwork; centralisingsupportandoversight,improvingthe efficiencyoftheGroup’sprocurementprocedures. Keyriskmanagementprioritiesinclude: harmonisationoftheGroup’sapproachtorisk managementandcentralisationofriskmanagement withintheGroupthroughthedevelopmentofdetailed Groupstandards; establishmentofacentralisedfunctionforratingclients andforvalidationmodelsattheGrouplevel; introducingmanagementpracticesbasedonrisk-sensitiveperformanceindicators,bydetermining theGroup’sriskappetiteandensuringrisklevels areadheredtoatsubordinatedivisions,andalsoby monitoringtargetindicators; introducingmodernapproachestoportfolioanalysis andstresstesting. Thesepriorityactivitiesshouldbecarriedoutby2018.

29 28 _{andtasksdeterminedinthelong-termprogrammefor} theBank’sdevelopment; correlationbetweenthechiefexecutiveofficer’sKPIs andtheachievementofperformancetargetsofVTB Group,calculatedonthebasisoftheIFRSconsolidated financialstatementsofVTBBankanditssubsidiaries,as determinedinthelong-termdevelopmentprogramme. Thelinkbetweentheexpectedamountofthevariable partofremunerationforVTBBank’sManagement BoardandtheexecutionoftheestablishedKPIsis setintheapprovedProcedureforDeterminingthe ExpectedAmountofRemunerationfortheMembers oftheManagementBoardofJSCVTBBank,as wellasintheemploymentcontractsoftheBank’s seniormanagement. 5 TheyieldontheMICEXFinancialsIndexfortheperiod,calculatedinaccordancewiththeadoptedMethodforCalculatingandEvaluatingtheKPI “ReturnonShareholderInvestment”(TSR),wasnegative.

In accordance with the approved strategic objectives, the following key performance indicators have been established:

Indicator ROE(Returnonequity) TSR–Totalshareholderreturnforagivenyear Netoperatingincomebeforeprovisions CoR(Costofrisk)–Provisionchargeforloanimpairmentdividedbytheaveragecustomerloans Netfeeandcommissionincome CIR(Cost-incomeratio)–Staffcostsandadministrativeexpensesdividedbyoperatingincomebeforeprovisions Tier1CAR(Tier1capitaladequacyratio)

KPIs approved by the Supervisory Council for 2014 and the degree to which they have been achieved:

Keyperformanceindicator 2014 (target) 2014 (actual) Comments ROE 11.0% 0.1% ThedecreaseintheGroup’snetprofitmainly duetothegrowthinprovisionchargesdrivenby geopoliticalandmacroeconomicfactors TSR -19.7%5 _{24.8% Theactualimplementation} oftheKPIexceededtheplan Netoperatingincomebeforeprovisions,RUBbillion 510.0 547.5 Theactualimplementation oftheKPIexceededtheplan CoR 1.9% 3.4% Provisionchargesexceedingtheplan andreducednetprofitasaresultofgeopolitical andmacroeconomicfactors Netfeeandcommissionincome,RUBbillion 69.9 63.1 14%year-on-yeargrowthin2014,exceeding thegrowthrateofnetinterestincome.The10% deviationfromtheplanwasduetotheimpactof thedeterioratingeconomicsituationonclients’ businessactivities CIR 46.3% 43.7% Theactualimplementation oftheKPIexceededtheplan Tier1CAR 10.8% 9.8% Increaseinprovisionchargesduetogeopolitical andmacroeconomicfactors,asindicatedabove

KPIs approved by the Supervisory Council for 2015–2018

Keyperformanceindicator 2015 2016 2017 2018 ROE 14% 15% 15% 15% TSR TheyieldontheMICEXFinancialsIndexfortherelevantreportingperiod,adjustedfor dividendspaidoutduringtheperiodonsharesincludedintheIndex Netoperatingincomebeforeprovisions,RUBbillion 623 743 810 875 CoR,b.p. 199 216 190 174 Netfeeandcommissionincome,RUBbillion 92 118 140 155 CIR 44% 42% 42% 42% Tier1CAR 11.0% 11.3% 11.4% 11.5% InordertoassesstheperformanceofVTBBank’s executivebodies,keyperformanceindicators areformedonthebasisoftheabove-mentioned KPIs,takingintoaccounttheresponsibilities ofVTBBank’srespectivemanagers.Itisalso possibletouseindividualindicatorsforeach respectivemanagertodeterminehowsuccessfully variousprojects/tasks/programmeshavebeen implemented. ThelistofKPIs,theirweightinaccordancewiththe Bank’sdocumentsisdeterminedforthereporting periodbythedecisionoftheSupervisoryCouncil individuallyforeachmemberoftheBoard. Inaccordancewithpoint4.1oftheRegulation ontheRemunerationofJSCVTBBank’sExecutive BodiesandonKeyPerformanceIndicators,the approvedbusinessplan,budget,andBankstrategy canbeusedinsettingtheKPItargets. Inaccordancewithpoint6.1oftheRegulation ontheRemunerationofJSCVTBBank’sExecutive BodiesandonKeyPerformanceIndicators,the variablepartoftheremunerationoftheexecutive bodiescanbedeterminedbytakingintoaccount performanceindicatorsthatmeasurespecific areasofresponsibilityforanyBoardmember (individualtargets)orfortheorganisationingeneral (Grouptargets).

VTB Bank’s programme for disposal of

non-core assets

Managementofnon-coreassetsisanimportantway toimprovetheefficiencyoftheGroup’sbusiness. VTBBankhasaprogrammefordisposalofnon-core assets.Theprogrammewasdevelopedinaccordance withPresidentialDecreeNo596of7May2012on Long-TermNationalEconomicPolicyandaspartof theGroup’sdevelopmentstrategy.Theprogramme wasreviewedandapprovedbytheSupervisory CouncilinNovember2012(assetoutinMinutes No21oftheSupervisoryCouncilmeetingof 26November2012). Basedonadetailedanalysis,theBankidentified anumberofnon-coreassetsthatbecamepartof theprogramme,includingsharesofcompaniesin whichVTBholdsaminoritystake.Themosteffective meansofdivestmentofnon-coreassetsistosell thebusinessorastakeinitinordertorecoverthe investmentsmadethroughloansordirectequity investments.Thetimeframefordisposalofnon-core assetsdependsonmarketconditionsandavailability ofbuyersandprovidedthattheGroupfindssuch transactionsfinanciallyattractive. In2014,theBankdidnotcarryoutanytransactions todisposeofnon-coreassets.

31 30 _{RUB7,205.3billion,anditsmarketshareincorporate} lendingincreasedfrom15.5%to16.5%,thesecond largestamongRussianbanks. TheworseningeconomicsituationinRussia, exchangeratevolatilityandthecrisisinUkrainehad aconsiderablenegativeimpactontheGroup’sclients andledtoanincreaseinprovisionchargesforloan impairment.Inresponsetoadversemacroeconomic conditions,theGroupadjusteditscorporatelending policiestolimitnewissuanceofFX-denominated creditbytighteningcollateralrequirementsand overalloriginationpolicies VTBoffersawiderangeoflendingproducts, providingfinancingforvaryingtimeperiodsandin alltheworld’smajorcurrencies.TheBankalsooffers varioustypesofcreditlines—withdrawdownlimits, creditlimitsorwithacombinationoftheselimits. Besidestraditionalfinancing,VTBalsoofferscomplex creditproducts,includingstructuredrepo,investment andprojectfinancing,debtandequityfinancing services,advisoryservicesonstructuringinvestment projects,tradefinanceservicesanddirectfinancing frominstitutionalinvestorsandcommercialbanks. VTB’sclientshaveaccesstostructuredfinancing productsthatmakeitpossibletosignificantlyreduce interestratesbygrantingtheBankthechoiceofthe currencyforrepayment.Leasingandfactoringproducts areofferedthroughtheGroup’ssubsidiaries,VTB LeasingandVTBFactoring. In2014,creditfacilitiesprovidedbytheGroupwere extensivelyusedininfrastructureprojects,including theconstructionoftheMoscow-StPetersburgM-11 motorway.TheGroupalsocontinuedtoprovide financingfortheconstructionofatollbridgeoverthe KamaRiveraspartofapublic-privatepartnership (PPP)withthegovernmentoftheRepublicof Udmurtia.VTBisthemainlenderontheconstruction oftheWesternHigh-SpeedDiameterprojectin StPetersburg,oneoftheworld’slargestPPPtoll motorwayprojects.Theprojecthasbeennominated

4.3. Review of operating

performance

4.3.1.Corporate-Investmentbanking TheCorporate-Investmentbanking(CIB)global businesslinespecialisesinservicingmajorcorporate clientsthroughlending,sellingtransactionand investmentproducts,aswellasleasingandfactoring servicesacrossallregionswhereVTBGroupis present,includingRussia,theCIS,Europe,Asia, theUSA,theMiddleEastandAfrica. Inordertomaximisetheeffectivenessofitscustomer service,VTBhascreatedadedicatedclientcoverage unitandaseparatecreditunitthatisresponsiblefor maintenanceanddevelopmentofamodernlineof lendingproducts. Theclientcoverageunit’sservicemodeliscentred aroundsectorcoverage,withdedicatedteamsbeing responsiblefordoingbusinesswithclientsfrom therespectivesectorsoftheeconomy,including companiesinthepublicanddefencesectors.This approachenablestheGrouptoimprovethequalityof itssectorexpertiseandbuildproductsandsolutions tailoredtotheneedsofspecificclients. Thestructureofthecreditunitisalsodesignedtotailor customerservicetotheneedsofclientsoperating acrossvariousindustriesandbusinesssegments. ThisallowstheGrouptoimproveitscreditanalysisand thequalityofitscorporateloanportfolio. Alongsidecreditservices,twoimportantstrategicareas forCIBaretransactionbankingandinvestmentbanking. Thetransactionbankingproductlineincludes settlementandcashservices,controlofforeign exchangetransactions,acquiringservices, encashment,remoteservices,financingproducts, centralisedsettlementsandliquiditymanagement,as wellasdocumentarybusinessproducts. TheGroup’sinvestmentbankingbusinessoffersa fullrangeofinvestmentbankingproducts,including tradingoperations,organisingdebtandequity issuance,M&Atransactionsandconsultingservices, privateequity,assetmanagement,FXandinterestrate productsandhedgingstrategies. ThemainCIBobjectivesinrespectoftheVTBGroup’s strategyaremaintainingitsstrongmarketpositions, improvingefficiencyandstringentcostcontrol.

Lending business

TheRussiancorporatelendingmarketsawincreased demandforcreditfromlarge,high-qualityborrowers asinternationaldebtcapitalmarketsgenerally remainedclosedtoissuersfromRussia. Atthesametime,inthesecondhalfoftheyear, theincreaseinthelevelofuncertaintyinthe economy,significantfluctuationsintheexchange rateandbanks’interestratehikesinresponseto theincreaseintheCBR’skeyratehadarestraining effectoninvestmentsbylargecustomersandtheir demandforcredit. Despitechallengingeconomicconditions,the declineinconsumerdemandandtheimposition ofsanctionsbytheUSAandtheEU,VTBGroup’s corporatelendingoutgrewthemarket.During2014, theGroup’sgrosscorporateloansgrewby41.3%to

Segment overview

ShareofVTBGrouptotal,% Assets 42.4% Customerloans(net) 60.8% Revenuesfromexternalcustomers 38.2% Netinterestincome 30.7% Netfeeandcommissionincome 20.8% Provisioncharge6 _43.5% Netoperatingincome 10.5% Staffcostsandadministrativeexpenses 21.7% 6 Includingprovisionchargeforimpairmentofdebtfinancialassetsandprovisionchargeforimpairmentofotherassets,creditrelated commitmentsandlegalclaims. 7 Grossloansandadvancestocustomers,includingpledgedunderrepurchaseagreements.

VTB Group loans to legal entities by economic sector VTB Group loans to legal entities7_{, RUB billion}

Source: VTB Group IFRS consolidated financial statements.

Source: VTB Group IFRS consolidated financial statements for 2014 4,210 5,100 7,205 2012 2011 2013 2014 3,954 2,518 2010 Finance (6.7%)

Trade and commerce (8.4%) Manufacturing (12.8%) Building construction (14.5%) Government bodies (8.6%) Metals (10.9%) Oil and gas (10.8%) Transport (5.8%) Energy (5.7%) Chemical (7.2%) Other sectors (8.6%)

33 32 _{onnumerousoccasionsasthebestprojectfor} infrastructurefinancinginEurope. In2014,theBankprovidedfinancingtoRussian regionsandmunicipalities,whilealsoparticipating inthegovernmentprogrammesaimedtomakecredit availabletotherealeconomy.Asof31December 2014,theBank’sloanportfoliointhesesegments exceededRUB600billion. OneofCIB’sprioritiesistodevelopitstradeand exportfinancebusiness.In2015,VTBplansto expandtradeandexportfinanceintoeveryregion whereitoperates,withaparticularfocuson financingforeigntradebetweenRussiaandChinain cooperationwithChinesebanks. VTBGrouphascontinuedthesuccessfulroll-outof itsgrowthstrategyininternationaldebtmarkets. In2014,theGroupprovidedsovereignloansto theRepublicofAngola,aswellaslinesofcreditfor theIndianindustrialconglomerateEssar.

Customer deposits

VTB’sflexibleinterestratepolicyandtheGroup’stailored approachtoitsclientsmeantitwasabletoreactquickly tochangingmarketconditions,regulatorydecisionsand demandfromRussiancompanies.Throughout2014, VTBtookanumberofstepstoincreasetheappealof itsdepositproducts,includingbyextendingthetime forclientstoplace“overnight”deposits.

TheBankexpandeditsproductlinetoincludelong-termdepositswiththeoptionofearlytermination. TheBankalsostartedofferingtheclientstheoption ofaccruinginterestonspecialbankaccountsand trustmanagementaccounts,aswellastheabilityto transferinterestpaymentstoanotherclientaccount atVTBoranotherbank. ThesestepshelpedtheGroupattractnewclients. Corporatedepositsincreasedby35.9%in2014,to TheGroupcontinuedtodevelopitssettlementand cashmanagementservices,offeringnewtypesof bankaccountsaswellastheabilitytoopenseveral accountsofthesametypeunderasinglebank accountagreement.Anewserviceintroducedaspart oftheCustomerSettlementCentresystemallowsthe controllingentityinagroupofcompaniestomanage thebalanceandmovementoffundsintheaccountsof itsaffiliatecompaniesatotherbanks. VTBhasbeenactivelyinvolvedinlarge-scaleprojects tocentralisemanagementofcashflows,liquidityand financialrisksatleadingRussiancorporations.This hasenabledtheBanktoincreaseitsmarketshare amongRussia’slargestcompanies. During2014,VTBestablishedacentralisedtreasury andintroducedothertransactionbankingproducts formorethan130majorholdingcompaniesinvolving morethan1,250legalentities. In2014,VTB’ssubsidiarybanksinUkraine,Belarus, KazakhstanandWesternEuropesuccessfullyexpanded andimprovedtheirtransactionbankingproducts,and alsocarriedoutextensiveworkondevelopingremote bankingandincreasingsalesefforts. Everyyear,VTBconductscustomersatisfaction surveysregardingitstransactionbankingservices. Customers’responsesaretakenintoaccountwhen planningthefurtherdevelopmentoftheBank’s products,helpingVTBtostayattheleadingedgein thebankingmarket.

Documentary business

Amidtheeconomicslowdown,VTB’sdocumentary businessfocusedonmaintainingitsleadingposition intheRussianmarket,expandingitsdocumentary portfolioandimprovingthequalityofcustomer service,aswellasoptimisinguseoftheBank’s regulatoryandeconomiccapital.In2014,VTB considerablystrengtheneditspositioninthesegment ofrisk-freeexportlettersofcredit,withoperations volumesincreasingtoapproximatelyRUB700billion. Despitelowerlevelsofforeigntradeactivityby Russianclientsthroughouttheyear,VTBwas abletomaintainastablelevelofincomefromits documentarybusiness. Inresponsetogrowinginterestfromexportersfor paymentsinalternatecurrencies,includingRussian roubles,VTBhelpedsomeofRussia’slargest supplierstotheAsia-PacificRegionandtheEUto convertaccountsforexportcontractsintoavarietyof currencies.Forexample,inpartnershipwithaleading supplierofmineralresources,VTBlaunchedapilot projectforpaymentinroublesunderexportcontracts withEUcustomers.

Investment banking

VTBGrouphasRussia’sleadinginvestment bankingfranchiseandcontinuestobeoneof thekeyadvisorsforRussiancorporateclients lookingtoaccessglobalcapitalmarkets.VTB CapitalistheGroup’sinvestmentbankingbrand. Throughout2014,theGroupmaintaineditsleading positioninvarioussegmentsoftheinvestment bankingmarket. Globalmarkets VTBGroupoffersafullrangeofservicesfor fixedincome,equity,andFXtrading,aswellas interestrateandglobalcommoditiesmarkets operations.TheGroupalsoprovidescurrencyand interestrateriskmanagementservices,including hedgingsolutions,aswellasstructuredfinance, structureddepositsandnotes,structuredcreditand hybridproducts. VTBGroupclientsareabletoaccessequitycapital marketsinSouthAfrica,Turkey,Poland,theCzech Republic,Hungary,Israelandseveralothercountries intheMiddleEast.VTBCapitalisamemberof theLondonStockExchange(LSE)andtheWarsaw StockExchange,andalsohasaccesstoanumber ofotherforeignmarketsthroughitsextensive networkoflocalbrokers.

VTB Group deposits of legal entities8_{, RUB billion}

 Current/settlementdeposits  Termdeposits 2012 2011 2013 2014 2010 1,465 2,526 _2,379 2,590 3,520 975 1,877 1,459 1,712 2,651 490 649 920 878 869

Source: VTB Group IFRS consolidated financial statements.

8 Theinformationfor2013ispresentedafterreclassificationdescribedindetailsintheVTBGroup’sIFRSconsolidatedfinancialstatements for2014.Duetorounding,numberspresentedmaynotadduppreciselytothetotals. RUB3,520.3billion(inpartduetotherevaluation offundsdenominatedinforeigncurrencies).VTB Group’smarketshareinthissectorgrewfrom17.8% attheendof2013to18.8%asof31December 2014.TheGrouphasthesecond-largestmarketshare forcorporatedepositsinRussia.

Transaction banking

In2014,theGroupcontinuedtoimprovecustomer serviceinitstransactionbankingbusinessby introducingbestinternationalpracticesandby respondingquicklytodemand.Thisincluded developmentofnewproducts,improvementstosales procedures,andaparticularfocusoncross-selling. VTBcontinuedtoimprovethefunctionalityofits remotebankingsystem,givingclientstheabilityto createandacceptdocumentsthroughtheMobile Clientservice.Inaddition,theoptionofdeferred paymentswasintroduced,aswasasimplified procedureforclientstoregisterfortheremote bankingsystem.