31. Financial Risk Management

The risk management function within the Group is carried out in respect of major types of risks: credit, country, market, liquidity and operational risks. Market risk includes interest rate risk, equity risk and currency risk. The Group’s risk management policies are designed to identify risk carrying operations and allocate key functions within the risk management system of the Group.

The Bank’s Management Board under authority delegated by the Shareholders Meeting sets the Group’s general risk policy as well as specific policies for managing each type of major risk. The Bank’s Assets and Liabilities Management Committee (ALMC) and Credit and Investment Committee (CIC) in Head Office set limits for operations that create risk exposure according to principles determined by risk policies of the Group and initiated by the departments responsible for risk monitoring and control. The riskcontrolling departments operate separately from the business departments involved in developing operations with clients.

The Group performs stress-testing for all major types of risk at least once a year. Test results are reviewed and discussed by Group Management.

The Supervisory Board is informed about all main types of risk on a quarterly basis.

In 2011 the Group launched a project on implementing an integrated risk management system which comprises the following key components:

—  Management of aggregated risks of the Group using economic capital concept and scenarios methodology, including stress scenarios

— Defining risk appetite through a set of parameters for the level of risk the Group is capable and/or willing to accept to provide a target return to the shareholders in line with the strategic plans, as well as maintaining the risk of the Group at the level approved

— Developing and using risk models compliant with the Basel committee requirements and their validation by the departments independent from the model developers

— Risk identification system ensuring the timely identification and proper measurement of all risks of the Group.

The Group plans to implement this system in full by 2014.

Credit Risk. The Group is exposed to credit risk, which is a risk of a counterparty being unable to meet its credit obligations in whole or in part when due. The Group’s risk management policy aims at increasing competitive advantage of the Group by expanding the list of counterparties and the range of credit products, implementing systemic approach to credit risk to maintain or bring down the level of credit risk losses, optimisation of credit portfolio structure by industry, region and product.

The Group’s maximum exposure to credit risk is reflected in the carrying amounts of financial assets in the consolidated statement of financial position. For guarantees and commitments to extend credit, the maximum exposure to credit risk is the amount of the commitment. Refer to Note 32.

The Group applies the following basic methods of credit risk management:

— prevention of credit risk by identifying, analysing and assessing potential risks before entering the transaction creating risk exposure

— limiting credit risk by setting exposure or risk limits

— structuring of transactions

— monitoring and control of credit risk level.

Assessment of the Group’s credit risk is made in aggregate, by individual portfolios of credit risk bearing assets, by individual counterparties, transactions and groups, by country, geographic region and by industry.

The Group operates a system of internal ratings based on economic-mathematical models for estimating the probability of default of counterparties and transactions. Assessment of individual credit risks of the Group’s counterparties in transactions which carry credit risks depends on the counterparty category:

— corporate customers, credit institutions, financial companies, individual entrepreneurs, sovereigns, subjects of the Russian Federation and municipal entities, insurance and leasing companies are all assessed on the basis of the system of credit ratings and expected cash flow models or other important indicators

— individuals are assessed based on their creditworthiness in accordance with the Bank’s internal regulatory documents and express assessment.

The Group’s system of credit ratings provides a differentiated assessment of probability of default/non-execution by the counterparties of their obligations by analysing quantitative (financial) and qualitative factors of credit risk, materiality of their impact on the ability of the counterparty to serve and repay their obligations.

The Group’s internal procedures provide for a multi-factor approach, the factor list being standardised depending on the counterparty category.

Risk factors related to counterparty’s creditworthiness and its volatility, ownership structure, business reputation, credit history, cash flow and financial risks control, transparency, position of the client in the industry and the region, strength of support from local administration and parent companies (in case of a holding) as well as the so-called early warning factors are subject to mandatory monitoring and control. Based on the analysis of these risk factors, the probability of default is assessed and graded by counterparty/transaction with their subsequent classification ratings.

The Group closely monitors its credit risk concentration and compliance with prudential regulations of the Bank of Russia, making analysis and forecast of credit risk level. In analysis, monitoring and management of credit risk concentration the following methods are used:

— a distributed criteria mechanism for identifying legally and economically related borrowers, followed by the centralised maintenance of a uniform hierarchical list of groups of related borrowers

— control of large loans per borrower in groups of related borrowers

— identifying groups of borrowers by industry, country and region.

The system of controlling and monitoring credit risk level is based on the principles stipulated by the Group’s internal regulatory documents that provide for a preliminary, current and follow-up control of transactions creating exposure to credit risk, of keeping within set risk limits and their timely update.

The Group developed a multi-tier system of limits to separate credit risk of lending business and operations on financial markets. At the same time, the Group operates a multi-dimensional system of authority limits to determine the level of decision-making for each loan application. Each territorial unit is assigned a risk profile, which defines the discretionary powers of the unit to take independent decisions, depending on the risk category of the requested loan. In its turn, the risk category of the requested loan depends on the aggregate risk limit and the risk category of the borrower/group of related borrowers. Thus, the system of differentiated risk levels decision-making authority allows the Group to optimise the lending process. Despite the fact that the existing system of limits provides for proper management of credit risk, the Group is further developing its limits methodology

.

In 2011, the Bank expanded its new individual lending “Credit Factory” technology to individual housing loans, the last of the major groups of individual loan products. This technology provides for a comprehensive analysis of the borrower using information from various sources and databases, centralisation of analytical and decision-making functions and high level of pre-loan processing automatisation.

During 2010-2011, the Bank progressed towards an intra-bank automated lending system to achieve end-to-end automation of the lending process comprising:

- capture and maintenance of customer data (contact information, financial statements for different periods etc.)

- initiation of the loan

- creating a team of representatives from various departments of the Bank to work with the loan

- identification of the group of related borrowers using a set of relevant criteria

- automatic rating of the borrowing client/project and determining the level of expected loss on default using appropriate economic and mathematical models

- automated determination of the appropriate decision-making level for the transaction

- automated request for, allocation and maintaining limits on the product/client/ group of related borrowers

- automated processes of loan approval with the record of all resolutions and approvals

- automated on-going monitoring of the client (financial state of the client, intragroup relationship etc.)

- report generation.

This automated system has optimised the loan process improving control over credit risk. Currently, the Group starts implementing an automated system of integrated corporate credit risk control to monitor the current state and change dynamics and to make projections of credit risk, meeting the Basel Committee requirements.

Using the macroeconomic scenarios, the Group conducts sensitivity analyses of credit risk level by both counterparty and corporate portfolio to identify macro factors of maximum correlation with the counterparties’ probability of default. Statistics on radical changes of macro factors is used in stress scenarios for ratings models for the purpose of stress testing. The Group monitors debt recovery at all phases of debt collection. Identification of problem areas/phases in the process of debt recovery, drop in debt recovery ratio and non-performing loans growth in territorial units, customer or product segments, all contribute to the optimisation of the lending//collection process.

In 2011 the “Tallyman” system was implemented making the base for automated debt collection process for individual loans at an early stage of delays in loan repayments. Credit risk for financial instruments not recognised in the statement of financial position is defined as the possibility of sustaining a loss as a result of another party to a financial instrument failing to perform in accordance with the terms of the contract. The Group uses the same credit policies in making conditional obligations as it does for financial instruments recognised in the statement of financial position through established credit approvals, risk control limits and monitoring procedures.

Country risk is the risk of losses due to the default by sovereign and other counterparties in a particular country for reasons other than the standard risks (caused by the Government actions but beyond the control of the counterparties).

Risk exposure of the Group when financing non-residents or foreign Governments is minimised by assessment of the country related risk and setting country risk limits. Assessment of country risks is based on the ratings by international rating agencies (Fitch, Moody’s, S&P), the nominal GDP, the level of economic development of the country and its strategic relevance for the group. Countries without international ratings are assessed in accordance with internal procedures, which include the analysis of risk factors related to sovereign solvency, current development trends, efficiency of external debt management, offshore status, international reputation, public policy and domestic political situation. To reduce the country risk, transactions with counterparties are conducted within the risk limits on the countries concerned.

Market Risk. Market risk is the possibility of the Group’s financial losses as a result of unfavorable movements in exchange rates, equity prices, interest rates, precious metal prices. The Group manages its market risk in accordance with the Policy of the Bank on Market Risk Management. The main goal of Market Risk Management is to optimise risk/return ratio, minimise loss given unfavorable developments and to reduce the deviation of actual financial result from the expected result.

The Group categorises market risk into:

— interest rate risk

— equity risk

— currency risk.

The Group manages its market risks through securities portfolios management and control over positions in currencies, interest rates and derivatives. For this purpose the ALMC sets limits on securities portfolios, open positions, stop-loss and other limits. Market risk limits are updated at least once a year and controlled constantly. The ALMC determines market risk management methodologies and sets limits on particular operations. The Regional Head Offices have their own assets and liabilities management committees that set limits for operations of the Regional Head Offices on the basis of the methodologies and limits set by ALMC of the Bank.

Market risk limits are set on the basis of the value-at-risk analysis, scenario analysis and stress testing as well as regulatory requirements of the Bank of Russia.

The Group makes market risk assessment both by components and in aggregate, determining the diversification effect.

Market risks are controlled by monitoring of operations on foreign exchange and securities market by departments independent of trading divisions. Monitoring of market risks implies continual control over trading deals.

Interest Rate Risk. The Group takes on exposure to the effects of fluctuations in the prevailing levels of market interest rates on the value of debt securities and cash flows.

The Group defines two types of interest rate risk:

1. Interest rate risk on debt securities at fair value through profit or loss or other comprehensive income

The Group is exposed to interest rate risk of its investments in debt securities portfolio, when changing interest rates impact the fair value of bonds. Trading operations with bonds are performed only by the Bank’s Head Office.

For managing and limiting interest rate risk across the debt securities portfolio, the ALMC guided by the market risk policy sets the following limits and controls: aggregate limits for bond categories and currencies, limits on investing in one issue of the issuer, loss limits on trading operations, limits on the maturities structure of investments in bonds, minimum return of investments and limits on repo and reverse repo agreements. This type of interest rate risk is assessed using Value-at-Risk (hereinafter — VaR) methodology.

The Group also assesses interest rate risk by bonds type: aggregate for the securities at fair value through profit or loss and for the securities available for sale.

2. Interest rate risk resulting from maturities mismatch (interest rates repricing) across assets and liabilities that are interest rate sensitive (interest rate risk of non-trading positions)

The Group accepts risk of market interest rate fluctuations effect on cash flows. Interest rate risk of non-trading positions is a result of unfavourable interest rate movement and includes:

— the risk of a parallel shift, change in the slope and shape of the yield curve resulting from the maturities (repricing) mismatch of assets and liabilities sensitive to interest rate changes

— basis risk, which results from a mismatch in the degree of interest rate sensitivity, of assets and liabilities with similar maturity (repricing term)

— risk of early repayment (repricing) of interest rate sensitive assets and liabilities.

Increasing interest rates can drive the cost of borrowed funds up faster and at a higher growth rate than return on investments, thus worsening financial results and interest rate margin, whereas decreasing interest rates can decrease return on working assets faster than the cost of borrowed funds.

The objective of managing this type of market risk is to reduce the impact of market interest rates on net interest income. To manage interest rate risk, the ALMC sets maximum interest rates on corporate deposits/ current accounts and minimum rates on corporate loans, minimum rate of return on investments into securities and limits on investments into long-term assets bearing inherently the maximum interest rate risk. The Bank’s Management Board approves fixed interest rates on deposits from individuals and individual loans for the Bank’s Head Office and Regional Head Offices, which require preliminary approval from the ALMC. As a rule interest rates on retail loans and deposits depend on loan and deposit maturity date, amount and the client’s category. ALMC of each regional bank approves interest rates for corporate clients taking into account the regional market situation and the efficiency of the regional bank’s transactions on the assets and liabilities side as well as the limits on interest rates set by the ALMC of the Bank’s Head Office for corporate funds and placements.

This type of interest rate risk is assessed using the scenario analysis. Forecasting of possible changes in interest rates is carried out separately for Russian Rouble positions and positions in foreign currency. The indicative rate for 3 month-term loans at the Moscow interbank market (MOSPRIME 3M) is used as the base rate for an estimation of rates volatility on rouble positions and LIBOR 3M and EURIBOR 3M — for positions in foreign currency.

The table below shows the impact of bps interest rates increase and decrease on profit before tax as at 31 December 2011:

Change in profit before tax as at 31 December 2011 (in mln of Russian Roubles) RR positions Foreign currency position Total
Decrease in interest rates by 290 bps 22,200 - 22,200
Increase in interest rates by 412 bps (31,529) - (31,529)
Decrease in interest rates by 31 bps - 968 968
Increase in interest rates by 83 bps - (2,608) (2,608)

The table below shows the impact of bps interest rates increase and decrease on profit before tax as at 31 December 2010:

Change in profit before tax as at 31 December 2010 (in mln of Russian Roubles) RR positions Foreign currency position Total
Decrease in interest rates by 173 bps 4,943 - 4,943
Increase in interest rates by 311 bps (8,887) - (8,887)
Decrease in interest rates by 25 bps - 299 299
Increase in interest rates by 55 bps - (672) (672)

The sensitivity analysis above shows changes in profit before tax given a parallel shift of the yield curve across all interest rate sensitive positions i.e. when interest rates move by the same value for all maturities. In addition, interest rate risk is assessed considering the following simplifications: (the calculations disregard possible early repayment or call of instruments).

Equity Price Risk. The Group is exposed to equity price risk through investments in corporate shares that may lose value when their market quotations change. In order to limit equity price risk the ALMC shortlists the issuers eligible for investing, sets limits for the aggregate investments in equities, limits on investment into a single issuer and stop-loss limits for the aggregate trading portfolio. The regional offices do not perform trading operations with shares.

Equity price risk analysis is based on the VaR methodology.

Currency Risk. Currency risk results from fluctuations in the prevailing foreign currency exchange rates. The Group is exposed to foreign exchange risk on open positions (mainly US dollar/RUB and EUR/RUB exchange rate fluctuations).

As part of managing foreign exchange risk, the Group sets sublimits for open foreign exchange positions for Regional Head Offices. Besides, limits and control system are in place for arbitrage operations which sets open position limits for foreign currencies, limits on operations on the international and domestic markets and stop-loss limits.

The Bank’s Department for managing operations with currency and precious metals undertakes daily aggregation of the currency position of the Group and takes measures for maintaining the Group’s currency risk exposure at a minimum level. The Group uses swaps, forwards and USD futures contracts tradable on MICEX as the main instruments for risk management.

The table below summarises the Group’s exposure to foreign exchange risk in respect of monetary assets, liabilities and notional positions on currency derivatives as at 31 December 2011. Foreign exchange risk on forward and future contracts is represented by their notional positions. Foreign exchange options are disclosed in the amount that reflects theoretical sensitivity of their fair value to reasonable change in exchange rates.

In mln of Russian Roubles Russian Roubles USD EURO Other Total
Assets          
Cash and cash equivalents 488,731 58,934 20,889 57,011 625,565
Mandatory cash balances with central banks 99,515 562 113 1,015 101,205
Debt trading securities 47,918 17,085 2,348 2,609 69,960
Debt securities designated at fair value through profit or loss 30,615     203 30,818
Due from other banks 23,667 8,122 70 3,238 35,097
Loans and advances to customers 6,074,370 1,385,518 157,379 102,433 7,719,700
Debt securities pledged under repurchase agreements 178,440 65,840 44 484 244,808
Debt investment securities available for sale 696,631 73,415 39,445 14,907 824,398
Debt investment securities held to maturity 273,376 12,917 84 139 286,516
Other financial assets (less fair value of derivatives) 93,081 17,053 1,265 517 111,916
Total monetary assets 8,006,344 1,639,446 221,637 182,556 10,049,983
Liabilities          
Due to other banks 404,596 98,860 21,032 7,897 532,385
Due to individuals 4,959,608 366,553 265,212 134,946 5,726,319
Due to corporate customers 1,517,442 524,619 88,236 75,517 2,205,814
Debt securities in issue 64,427 181,824 1,789 20,667 268,707
Other borrowed funds 339 222,268 19,803 1,610 244,020
Other financial liabilities (less fair value of derivatives) 145,480 48,289 830 1,521 196,120
Subordinated debt 303,293 225 - - 303,518
Total monetary liabilities 7,395,185 1,442,638 396,902 242,158 9,476,883
Net monetary assets/ (liabilities) 611,159 196,808 (175,265) (59,602) 573,100
Foreign exchange derivatives 6,003 (167,429) 167,550 16,214 22,338
Credit related commitments (Note 32)) 1,406,337 594,064 113,353 41,792 2,155,546

The table below summarises the Group’s exposure to foreign exchange risk in respect of monetary assets, liabilities and notional positions on currency derivatives as at 31 December 2010.

In mln of Russian Roubles Russian Roubles USD EURO Other Total
Assets          
Cash and cash equivalents 519,447 111,079 41,781 47,294 719,601
Mandatory cash balances with central banks 50,532 792 93 261 51,678
Debt trading securities 52,516 9,354 1,510 17 63,397
Debt securities designated at fair value through profit or loss 78,738 - 4,233 - 82,971
Due from other banks 2,086 8,452 2,484 13 13,035
Loans and advances to customers 4,322,771 954,172 123,606 88,838 5,489,387
Debt securities pledged under repurchase agreements 15 72,646 - 556 73,217
Debt investment securities available for sale 1,020,150 55,075 38,179 17,165 1,130,569
Debt investment securities held to maturity 352,996 4,478 298 419 358,191
Other financial assets (less fair value of derivatives) 98,217 6,657 1,195 110 106,179
Total monetary assets 6,497,468 1,222,705 213,379 154,673 8,088,225
Liabilities          
Due to other banks 63,932 64,811 2,053 3,872 134,668
Due to individuals 4,214,842 262,845 267,768 89,004 4,834,459
Due to corporate customers 1,265,948 407,369 88,167 55,188 1,816,672
Debt securities in issue 110,350 141,627 2,236 18,486 272,699
Other borrowed funds - 163,883 7,332 40 171,255
Other financial liabilities (less fair value of derivatives) 44,018 1,752 720 1,131 47,621
Subordinated debt 303,299 214 - - 303,513
Total monetary liabilities 6,002,389 1,042,501 368,276 167,721 7,580,887
Net monetary assets/ (liabilities) 495,079 180,204 (154,897) (13,048) 507,338
Foreign exchange derivatives 63,914 (215,079) 128,121 13,573 (9,471)
Credit related commitments (Note 32) 621,754 561,599 107,667 35,122 1,326,142

The Group provides loans and advances to customers in foreign currencies. Fluctuations of foreign currency exchange rates may negatively affect the ability of borrowers to repay loans, which will in turn increase the probability of loan loss.

The Group’s analysis of currency risk is based on the VaR methodology described below.

Value-at-Risk, VaR. The VaR methodology is one of the main instruments of assessing market risk of the Group. VaR allows to estimate the maximum financial loss with a defined confidence level of probability and time horizon. The Group calculates VaR using the historical modeling methodology. This method allows to evaluate probability scenarios of future price fluctuations on the basis of past changes taking into account market indicators correlations (e.g. interest rates and foreign exchange rates).

VaR is calculated using the following assumptions:

— historical data on changes in financial market indicators comprising of 500 trading days preceding the reporting date

— the market indicators used include currency exchange rates, bond, equity and precious metal prices

— movements in financial market indicators are calculated over a 10-day period i.e. an average period when the Group is able to close or hedge its positions exposed to market risk

— a 99% one-way confidence level is used, which means that losses in the amount exceeding VaR are expected by the Group a maximum of once every 100 trading days or not more than 5 times within a 2 year period.

For evaluating the adequacy of the applied VaR calculation model the Group regularly back-tests the model by comparing the modeled losses with actual losses.

Despite the fact that VaR allows to measure risk, its shortcomings must be taken into account such as:

— past price fluctuations are not sufficient to assess accurately future price fluctuations

— calculation of financial market price indicators over a 10-day period is based on the assumption that the Group will be able to close (or hedge) all positions within this period. This assessment may be far from accurate in measuring risk exposure at the time of reduced market liquidity, when the period of closing (or hedging) the Group’s positions may increase

— using 99% one-way confidence level of probability does not provide for estimating losses with a probability below 1%

— VaR is calculated based on end-of-day position and misses the intra-day risks accepted by the Group.

Taking into account the shortcomings of the VaR methodology the Group applies scenario analysis and stress-testing to have a better understanding of market risk exposure.

To measure interest rate risk for non-trading positions, the Group applies scenario analysis rather than the VaR methodology.

The table below shows the interest rate, equity and currency risk calculation using the VaR methodology as at 31 December 2011:

In mln of Russian Roubles Value as at 31 December 2011 Average value for 2011 Maximum value for 2011 Minimum value for 2011 Impact on equity Impact on profit
Interest rate risk on debt securities 41,706 35,289 63,479 21,780 2.8% 13.4%
Equity price risk 9,872 9,304 10,724 7,386 0.7% 3.2%
Currency risk 5,379 5,359 6,911 2,447 0.4% 1.7%
Market risk including diversification effect 42,962 37,558 64,633 28,781 2.8% 13.8%
Diversification effect 13,995 - - - 0.9% 4.5%

The table below shows the interest rate, equity and currency risk calculation using the VaR methodology as at 31 December 2010:

In mln of Russian Roubles Value as at 31 December 2010 Average value for 2010 Maximum value for 2010 Minimum value for 2010 Impact on equity Impact on profit
Interest rate risk on debt securities 40,074 48,428 56,852 33,768 3.2% 23.0%
Equity price risk 9,439 13,165 20,675 5,252 0.8% 5.4%
Currency risk 1,910 2,431 3,064 1,359 0.2% 1.1%
Market risk including diversification effect 46,621 56,140 67,639 38,572 3.8% 26.8%
Diversification effect 4,802 - - - 0.4% 2.8%

Data in the tables above are calculated on the basis of the Bank’s internal management accounting system which is based on the statutory accounting reports of the Bank.

Liquidity Risk. Liquidity risk is defined as the risk of mismatch between the maturities of assets and liabilities. The Group is exposed to daily calls on its available cash resources from overnight deposits, customer’s current accounts, term deposits, loan drawdowns, guarantees and from margin and other calls on cash settled derivative instruments. The Group does not maintain cash resources to meet all of the above mentioned needs, as according to historical data a minimum level of reinvestment of maturing funds can be predicted with a high level of certainty. Liquidity risk is managed by the ALMC.

The Group liquidity risk management is aimed at ensuring timely and complete fulfillment of its payment obligations at minimum cost. For this purpose the Group:

— maintains a stable and diversified liabilities structure including both term resources and funds on demand

— reserves capacity for immediate borrowing of funds on financial markets

— invests in highly liquid assets diversified by currencies and maturities for quick and effective coverage of unexpected gaps in liquidity.

Policy and Procedures. The Finance department performs analysis and forecasts, and advises Management on the regulation of current and short-term liquidity of the Group. Analysis, forecasts and proposals on regulation of medium-term and long-term liquidity are produced by the Finance department of the Bank. Liquidity position and execution of requirements on managing the liquidity risk are controlled by the ALMC of the Bank. Liquidity risk is assessed, managed and controlled on the basis of “Policies of the Bank for Management and Control of Liquidity” and the guidelines of the Bank of Russia and the Basel Committee for Banking Supervision.

Provisions of this Policy lay down the guidelines for organising the liquidity management in the Regional Head Offices of the Bank. The Management Board of the Bank’s Regional Head Office is responsible for efficiently managing and controlling the Regional Head Office liquidity. It is also responsible for monitoring limits and controls required by the Group’s internal regulations. Guided by the limits, controls, requirements and policies, the Regional Head Office selects evaluation methods and the necessary level of liquidity and develops and implements measures to ensure liquidity. In case of insufficient liquidity, the Treasury provides funds to the Regional Head Office (according to an established procedure) for the required amount.

Liquidity risk management includes the following procedures:

— forecasting payment flows by major currencies to ensure the necessary volume of liquid assets to cover liquidity deficit

— forecasting assets and liabilities structure based on scenario analysis to control the required volume of liquid assets from a medium-term and long-term perspective

— forecasting and monitoring liquidity ratios compliance with regulatory and internal policy requirements

— control over liquidity reserves of the Group to assess maximum opportunities for the Group to attract funds from various sources in different currencies

— diversification of funding sources in different currencies taking into account maximum amounts, cost of funding and maturity

— stress-testing and planning actions for restoring the required liquidity level in unfavorable conditions or during crisis periods.

The tables below show distribution of undiscounted contractual cash flows (taking into account future interest payments) on liabilities by remaining contractual maturities.

The analysis of undiscounted cash flows on the Group’s liabilities by remaining contractual maturity at 31 December 2011 is set out below:

In mln of Russian Roubles On demand and less than 1 month From 1 to 6 months From 6 to 12 months From 1 to 3 years More than 3 years Total
Liabilities          
Due to other banks 356,164 119,818 48,210 12,756 1,588 538,536
Due to individuals 1,639,662 1,584,936 1,271,450 1,757,423 229,390 6,482,861
Due to corporate customers 1,626,081 194,267 78,459 341,649 14,668 2,255,124
Debt securities in issue 42,100 38,473 18,932 62,045 144,436 305,986
Other borrowed funds 317 23,449 54,083 160,839 20,433 259,121
Other liabilities (including derivative financial instruments) 187,393 18,677 2,607 13,130 4,996 226,803
Subordinated debt 1 129 19,516 39,218 400,892 459,756
Total liabilities 3,851,718 1,979,749 1,493,257 2,387,060 816,403 10,528,187
Credit related commitments 2,155,546 - - - - 2,155,546

The analysis of undiscounted cash flows on the Group’s liabilities by remaining contractual maturity at 31 December 2010 is set out below:

In mln of Russian Roubles Demand and less than 1 month From 1 to 6 months From 6 to 12 months From 1 to 3 years More than 3 years Total
Liabilities          
Due to other banks 69,683 43,515 19,642 787 2,648 136,275
Due to individuals 1,157,004 1,302,046 891,456 1,475,067 256,027 5,081,600
Due to corporate customers 1,442,153 124,428 92,195 173,099 2,003 1,833,878
Debt securities in issue 37,554 52,194 60,752 40,041 113,097 303,638
Other borrowed funds 393 16,680 83,357 71,424 7,233 179,087
Other liabilities (including derivative financial instruments) 44,069 5,785 302 1,329 253 51,738
Subordinated debt 2 8 19,509 39,223 420,392 479,134
Total liabilities 2,750,858 1,544,656 1,167,213 1,800,970 801,653 8,065,350
Credit related commitments 1,326,142 - - - - 1,326,142

The above analysis is based on undiscounted cash flows on liabilities of the Group taking into account all future payments (including future payments of interest throughout the life of the relevant liability). The liabilities were included in the time intervals according to the earliest possible repayment date. For example:

— Demand liabilities (including demand deposits) are included in the earliest time interval

— Guarantees issued are included in the earliest period they may be called.

However, in accordance with the Civil Code of the Russian Federation, individuals have the right to withdraw their deposits from any accounts (including time deposits) prior to maturity if they forfeit their right to accrued interest. The Group utilises a wide range of market instruments to maintain its liquidity on the level sufficient for timely execution of the current and forecasted financial obligations including the disposal of liquid assets or funding in domestic and international markets.

The derivative contracts entered into by the Group may be deliverable or settled on net basis. If the derivatives are closed by delivery of underlying asset, inflow and outflow of funds occur simultaneously.

The table below shows assets and liabilities at 31 December 2011 by their remaining expected maturity. Following principles underlying gap analysis presentation and the Group liquidity risk management are based on the mix of CBR initiatives and the Bank’s practice:

- Cash and cash equivalents represent highly liquid assets and are classified as “on demand and less than 1 month”

- Trading securities, securities designated at fair value through profit or loss and highly liquid portion of investment securities available for sale, including those pledged under repurchase agreements are considered to be liquid assets as these securities could be easily converted into cash within a short period of time. Such financial instruments are disclosed in gap analysis tables as “on demand and less than 1 month”

- Investment securities available for sale which are less liquid are disclosed according to remaining contractual maturities (for debt instruments) or as “no stated maturity” (for equities)

- Investment securities held to maturity including those pledged under repurchase agreements are classified based on the remaining maturities

- Loans and advances to customers, amounts due from other banks, other assets, debt securities in issue, amounts due to other banks, other borrowed funds and other liabilities are included into gap analysis tables based on remaining contractual maturities

- Customer deposits diversification by number and type of depositors and the past experience of the Group indicate that such accounts and deposits provide a longterm and stable source of funding, and as a result they are allocated per expected time of funds outflow in the gap analysis table on the basis of statistical data accumulated by the Group during the previous periods and assumptions regarding the “permanent” part of current account balances.

The liquidity position of the Group’s assets and liabilities as at 31 December 2011 is set out below.

In mln of Russian Roubles On demand and less than 1 month From 1 to 6 months From 6 to 12 months From 1 to 3 years More than 3 years No stated maturity Total
Assets              
Cash and cash equivalents 625,565 - - - - - 625,565
Mandatory cash balances with central banks 27,803 10,662 8,920 47,652 6,168 - 101,205
Trading securities 101,973 - - - - - 101,973
Securities designated at fair value through profit or loss 51,993 - - - - - 51,993
Due from other banks 18,919 - 1,774 - 332 - 35,097
Loans and advances to customers 253,271 1,043,352 1,243,324 - 2,702,153 - 7,719,700
Securities pledged under repurchase agreements 163,661 - 39,045 82,103 16,030 - 300,839
Investment securities available for sale 869,221 35 2,832 3,147 8,432 862 884,529
Investment securities held to maturity 668 11,739 9,048 116,856 148,205 - 286,516
Deferred income tax asset - - - - - 7,823 7,823
Premises and equipment - - - - - 359,903 359,903
Other assets 138,249 35,691 29,934 39,659 19,080 97,343 359,956
Total assets 2,251,323 1,115,325 1,334,877 2,767,243 2,900,400 465,931 10,835,099
Liabilities            
Due to other banks 373,094 118,933 36,720 3,172 466 - 532,385
Due to individuals 1,243,652 739,229 654,132 2,725,999 363,307 - 5,726,319
Due to corporate customers 973,964 88,003 50,772 1,081,799 11,276 - 2,205,814
Debt securities in issue 35,293 36,734 17,880 53,545 125,255 - 268,707
Other borrowed funds 206 19,688 52,337 151,969 19,820 - 244,020
Deferred income tax liability - - - - - 21,207 21,207
Other liabilities 185,810 47,501 9,633 11,944 6,541 3,729 265,158
Subordinated debt - - - 224 303,294 - 303,518
Total liabilities 2,812,019 1,050,088 821,474 4,028,652 829,959 24,936 9,567,128
Net liquidity surplus/(gap) (560,696) 65,237 513,403 (1,261,409) 2,070,441 440,995 1,267,971
Cumulative liquidity surplus/ (gap) at 31 December 2011 (560,696) (495,459) 17,944 (1,243,465) 826,976 1,267,971 -

The liquidity position of the Group’s assets and liabilities as at 31 December 2010 is set out below.

In mln of Russian Roubles On demand and less than 1 month From 1 to 6 months From 6 to 12 months From 1 to 3 years More than 3 years No stated maturity Total
Assets              
Cash and cash equivalents 719,601 - - - - - 719,601
Mandatory cash balances with central banks 10,880 8,987 6,089 22,095 3,627   51,678
Trading securities 66,168 - - - - - 66,168
Securities designated at fair value through profit or loss 106,875 - - - - - 106,875
Due from other banks 150 9,998 2,111 345 431 - 13,035
Loans and advances to customers 186,302 745,278 998,398 1,960,855 1,598,554 - 5,489,387
Securities pledged under repurchase agreements 81,493 - - - - - 81,493
Investment securities available for sale 1,183,231 1,460 2,404 13,748 7,543 2,535 1,210,921
Investment securities held to maturity   13,069 5,541 177,661 161,920 - 358,191
Deferred income tax asset - - - - - 7,518 7,518
Premises and equipment - - - - - 283,756 283,756
Other assets 122,498 14,745 20,080 7,587 21,395 53,599 239,904
Total assets 2,477,198 793,537 1,034,623 2,182,291 1,793,470 347,408 8,628,527
Liabilities
Due to other banks 68,222 44,771 18,312 1,555 1,808 - 134,668
Due to individuals 1,040,936 859,810 582,571 2,004,184 346,958 - 4,834,459
Due to corporate customers 861,805 34,828 18,788 897,122 4,129 - 1,816,672
Debt securities in issue 34,706 44,831 56,175 35,944 101,043 - 272,699
Other borrowed funds 83 15,019 81,152 68,042 6,959 - 171,255
Deferred income tax liability - - - - - 15,921 15,921
Other liabilities 45,165 23,870 10,513 4,179 492 7,954 92,173
Subordinated debt - - - 214 303,299 - 303,513
Total liabilities 2,050,917 1,023,129 767,511 3,011,240 764,688 23,875 7,641,360
Net liquidity surplus/(gap) 426,281 (229,592) 267,112 (828,949) 1,028,782 323,533 987,167
Cumulative liquidity surplus/ (gap) at 31 December 2010 426,281 196,689 463,801 (365,148) 663,634 987,167  

The Management believes that matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to the management of the Group. It is unusual for banks ever to be completely matched since business transacted is often of an uncertain maturity with deviation from contract terms being observed. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The maturities of assets and liabilities and the ability to replace, at an acceptable cost, interest-bearing liabilities as they mature, are important factors in assessing the liquidity of the Group and its exposure to changes in interest and exchange rates.

Operational Risk. Operational risk and losses connected with it arise from deficiencies in operational management, technologies and information systems in use, unauthorised actions or errors of the staff, or by external events.

The Group considers management of operational risk as part of its overall risk management system. To manage operational risk, the Group uses appropriate Policies for prevention and/or minimisation of operational risk.

The Group’s Policies for Operational Risk Management include segregation of duties, overall reglamentation of business processes and internal procedures, control over credit limit discipline, rules and procedures for deals and transactions execution, action plan for information security, continuity and recovery in case of emergency and ongoing professional development of staff across the Group’s hierarchy.

Management of operational risk depends on the volume of transactions, multi-branch operational structure and diversity of information systems in place.

The Group monitors operational risk data, collects, analyses and systematises the loss data and monitors losses caused by processes and operations exposed to operational risk.

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