Alfa-Bank - Alfa Group

ALFA GROUP FINANCIAL HIGHLIGHTSTotal Assets 7,179,160 12,071,600 14,278,906 20,256,668 32,194,759Cash and Cash Equivalents 405,694 1,460,080 1,217,687 974,066 1,989,289Trading Securities and Investments Available for Sale 552,416 1,128,863 1,507,107 2,557,554 3,943,530Long-term Funding * 341,404 252,723 427,646 1,440,947 3,308,238Shareholders’ Equity ** 2,517,175 4,648,617 5,629,621 6,863,594 9,391,639Profit ** 625,765 1,991,172 771,047 1,417,150 1,664,493Source: Annual audited IFRS combined financial statements.* - Includes non-current: borrowings, customer accounts and due to banks (effectively debt);** - Amount attributable to majority shareholders (excludes minority interest).(’000 USD) 2002 2003 2004 2005 2006Financial Review and Strategic Development of the GroupSUMMARY ANALYSIS OF THE GROUP’S FINANCIAL RESULTS FOR 2006By almost any measure, 2006 was another banner year for the AlfaGroup Consortium. Not only did 2006 mark our second mostprofitable year in our 18-year history, but also all five of ourmajor business segments contributed positively to Group net profits(excluding the effect of redeemable capital – see note 18 of theCombined Financial Statements for further explanation). We ended theyear larger and stronger with financial resources which allow us to beeven more flexible in funding existing businesses and pursuing newinvestment opportunities.After registering profits of US $1.42 billion in 2005, profits for 2006were US $1.66 billion – a year on year increase of 16.9%.Shareholders’ equity (hereinafter is Net assets attributable to equityGrowth of US $1 Invested into MSCI Index, RTS Index and Alfa Group for the 7 Year Period 1 January 2000 through 31 December 2006MSCI EmergingMarkets Index:RTS:ALFA GROUP$1.86 (86%)$10.97 (997%)Qualification of Audit Opinionholders of the Parent Companies in the Combined Balance Sheet) grewfor an eighth straight year to an unprecedented high of US $9.39 billion.Return on shareholders’ equity for 2006 was 20.5% while returnon assets was 6.3%.Balance sheet strength continued to be within acceptable ranges. Theratio of debt to shareholders’ equity increased to 0.35 at the end of2006 from 0.21 at the end of 2005 and the ratio of debt to assetsincreased modestly to 0.10 at the end of 2006 from 0.07 at the end of2005. The Group also continued to benefit from an already strong liquidityposition, which was bolstered by healthy dividend paymentsfrom TNK-BP during 2006.$77.65 (7,665%)*0 1000% 2000% 3000% 4000% 5000% 6000% 7000% 8000%* As measured by change in Group shareholders’ equity (based on historic USD at 31 December 1999). Note that there were no capital contributions into the Group during this 7-year period.During 2006 the Group was engaged in a dispute with Telenor, another shareholder in Ukrainian mobile telecommunications operator CJSCKyivstar GSM (“Kyivstar”), in respect of a shareholder agreement with them. As a result of court rulings, there is an active injunction whichprevents the receipt and use of certain financial information of Kyivstar and accordingly the audit opinion covering our 2006 CombinedFinancial Statements has been qualified by our independent auditors for the inability to obtain sufficient and appropriate audit evidenceabout the carrying amount of our investment in Kyivstar and certain other related items. Based on our assessment (including consultationswith external legal counsel) it is our judgment that the current injunctions do not prevent the Group from exercising significant influenceover Kyivstar and accordingly the Group has accounted for its 43.48% investment in Kyivstar under the equity method of accounting at31 December 2006. Carrying amount of the Group’s investment in Kyivstar of US $800 million 31 December 2006 and the Group’s share of2006 results of Kyivstar have been estimated based on available interim information of Kyivstar.Analysis of the Group’sFinancial Results for 2006by Industry SegmentIn 2006, the Group’s activities spannedfive business segments – FinancialServices (includes banking, asset management,and insurance), Oil & Gas,Investment Group (includes proprietary,for-client and venture investment), RetailTrade and Telecoms. Not only was 2006the 4th consecutive year in which all segmentscontributed positively to the Group’sprofits of US $1.66 billion, but all segments,contributed more net profit in absoluteterms than as compared to 2005 and2004 (see table below for relative profitcontributions in 2006 and 2005).Percentage Breakdown of Alfa Group’s Profitby Industry Segment*2006 2005Oil & Gas 57.9% 76.3%Retail Trade 20.0% 1.6%Telecommunications 11.6% 4.3%Finance Services 10.0% 15.6%Investment Group** 0.5% 2.2%Total 100.0% 100.0%Source: Derived from the Annual audited combinedIFRS financial statements.* - Excludes the effect of redeemable capital. See note18 of the Combined Financial Statements for furtherexplanation. Excludes other segment and eliminations.** - Note that this segment is comprised of results ofA1 and Russian Technologies.Oil&GasOnce again, the contribution from ouroil and gas segment, represented byTNK-BP (including also investmentin Sidanсo and Slavneft), accounted for thelargest part of the Group’s profit (excludingthe effects of redeemble capital) – 57.9% ofaggregate Group profit. This contribution, inrelative terms was, however, significantly lessthan in previous years, as we effectivelyreduced our overall exposure to oil and gas inthe latter part of 2003 by realizing part of ourinvestment by merging our Russian andUkrainian oil and gas assets with BP’s Russianoil interests.In 2006 TNK-BP delivered productiongrowth more than 2%, exceeding the onshoreindustry average of 1.8%. Also,importantly, the Company continued tobalance growth with robust reservereplacement — 23 new licenses wereacquired and a 65% exploration/appraisaldrilling success rate was achieved. Also,during 2006 TNK-BP achieved a veryimpressive 129% (under SEC method)reserve replacement.In the area of downstream, modernization ofthe Ryazan refinery was completed,enabling incremental production of 1 milliontons of high-octane gasoline and 10%reduction of harmful emissions. Also TNK-BP introduced a new type of fuel to theRussian market (BP Ultimate) and beganadvancing popular TNK and BP retail brandsThe financial services segment comprisesAlfa-Banking Group (“Alfa-Bank”), Alfa Capital Management(“АСМ”), Alfa Capital Partners (“АСР”) andAlfaStrakhovanie Group. For the year 2006,Alfa-Bank earned record profit of US $190.3million – 5.4% higher than in 2005, whiletotal assets grew by 54.6% to US $15.2 billionat year-end 2006. The largest contributionto 2006 profit came from the corporatebanking and investment banking operations.At the same time, we continued to make furtherinvestment into the development ofAlfa-Bank’s retail banking projects includingroll-out of branches into regions, consumerfinance, auto lending and mortgage lending.Alfa-Bank is optimistic about its future as itcontinues to realize its strategy of developinga modern, client-oriented universalbank, represented among all principal segmentsof the financial and banking marketincluding retail, corporate, and investmentbanking businesses. Alfa-Bank will continueto focus on introducing new technologiesand cutting-edge service channels and willfocus on increasing its efficiency by optimizingits cost structure and staffing to meetgrowing competition.At the end of 2006, Alfa CapitalManagement’s business strategy wasaligned with a five-year strategic visionproposed by the company’s new managementteam. Following the approval of thenew strategic plan, ACM launched six newmutual funds increasing substantially itsretail product line. In 2006, ACM ranked#4 in Russia by net cash inflow into retailinto new regions including St. Petersburgand Krasnodar. In 2006 CAPEX reached US$2.6 billion – three times higher than in2003 and during 2006 the Company paidmore than US $20 billion in taxes, duties andexcises to state budgets of all levels.While the exposure we have as investors tooil and gas assets is large, it is an exposurewhich we are comfortable given forecastedadvantageous market conditions on worldenergy markets, our perception of a continuingfavorable risk-to-reward ratio of holdingversus selling oil and gas assets, the significantand growing contribution fromother business segments in our Group, andthe advantages provided by our successfulpartnering with BP.Financial Servicesmutual funds, and #3 by assets under managementon the retail mutual funds market.Total assets under management increasedfrom US $346 million in April 2006 to US$498 million by February 2007.In the beginning of 2006, Alfa CapitalPartners managed US $285 million of capitaland during 2006 raised an additionalUS $259 million for its private equity andreal estate funds which focus on Russia,Ukraine and the CIS. By the end of the firstquarter 2007 ACP raised an additional US$77 million to bring total funds under managementto US $621 million. This hasplaced ACP among the leaders in institutionalfund management in Russian andCIS private equity. With fundraising completed,ACP is now focused on the investmentstage of its business which includesinvesting in and partnering withentrepreneurs and real estate developers tohelp them realize their potential in the fastgrowing markets that ACP serves.During 2006, AlfaStrakhovanie, a growingbusiness which offers a full spectrum ofinsurance cover for corporates and for individuals,registered a small net loss of US$14.4 million. This loss was mainly driven byinvestment into the life and accident insurancebusiness lines as well as the continuingexpansion of the Company’s regional network.As an insurance culture continues todevelop in Russia and demand continues toincrease, we expect that AlfaStrakhovaniewill continue to grow its business at least asfast as the Russian insurance market.16 / ALFA GROUP / ANNUAL REPORT 2006 ALFA GROUP / ANNUAL REPORT 2006 / 17