No. 1, 2004

Oil of Russia magazine talks to President of Bank Petrocommerce Vladimir Nikitenko

Bank Petrocommerce is in its 12th year on the Russian banking market, a winner in a long uphill battle for eminence. It emerged as a dynamically developing commercial bank at the turn of the century, gaining recognition both in this country and internationally. Currently, around 250 Petrocommerce branches and offices dot the vast territory stretching, east to west, from West Siberia to the Baltic Sea, and, north to south, from the Barents Sea to the Black Sea. But it is not all there is to its geographic and structural coverage: the bank is developing steadily, dynamically expanding its services web along with its clientele and product range.

Q: Mr. President, 12 years seems a ripe age for a bank that has to operate at the time of transition to a market economy. What is your evaluation of the past period?

A: Petrocommerce came into being in April 1992. In 1998, JSC LUKOIL decided to transfer its financial assets to Petrocommerce. Credit and financial accompaniment of LUKOIL made us master all aspects of the banking business, so that we stepped into the new century as a powerful universal bank using the full range of financial market instruments and having skilled personnel and a technologically developed infrastructure.

Vladimir Nikitenko, President of Bank Petrocommerce, was born in 1958. In 1982, he graduated from the Saratov Financial Institute (majored in finances and lending). His first job as a financier was with the Surgut branch of the USSR State Bank, where he rose through the ranks to Deputy Manager in just two years. His professional qualities and business acumen found recognition in the government bodies of the region, where he worked for five years starting from 1987. In 1992, Vladimir Nikitenko came back to banking, taking the job of Chairman of the Board of Surgut's municipal bank, ACCOBANK. In mid-1990s, when an active development of the Caspian oil- and gas-bearing region began, he was invited to head Kazakhstan's Caspian Bank, which he did in 1996. Since 1998, Vladimir Nikitenko has been head of Bank Petrocommerce.

Today, Petrocommerce runs 17 branches located in Russia's advanced industrial centers and a banking group including four affiliates: two in Russia and two in the CIS. The overall number of points where we sell our products and services, both in Russia and in the CIS, exceeds 250. In all regions where LUKOIL operates we provide it with the full range of banking services, including settlement and cash services, trade financing, export crediting, supporting and documentary operations, and pay card projects. LUKOIL found in the Bank a transparent financial institution and a ramified banking infrastructure, which meets all its corporate requirements. The financial segment gives it no headache, so to speak, and that is one of the important factors enabling it to operate normally. As far as the Bank is concerned, it's an undoubted competitive advantage for it to have such a powerful shareholder, advanced as it is in terms of corporate management standards.

We have created a major universal bank, which is high on the list of the Russian credit and financial leaders. Technologies, product range and infrastructure, developed in the interests of LUKOIL, its subsidiaries and their staff, are universal and capable of promoting its services on the competitive banking market.

Q: Could you name the Bank's most significant achievements and illustrate its 2003 dynamics?

A: The 2003 results will be published after the shareholders approve the Bank's annual report. But it is clear even at this stage that our efficiency and profitability indicators will be comparable with last year's even though they tend to decline in the banking system as a whole. Returns on shareholders' investments (the average for 11 months of 2003) netted 26% in profits per annum. Capital profitability (net profits to own assets) was 20% per annum as of December 1, 2003. Return on assets was 4.1% per annum for the 11 months.

The results for the 11 months illustrate positive development dynamics. Let me give you just some of the figures. Today, our total assets are 26% greater than they were at the start of the year, $1.4 billion; our advances portfolio has increased by 69%, to $677 million. Resources of the Bank's clients, including deposits, added up to $841 million, $236 million owned by physical persons. The total number of VISA cards issued by the Bank was around 240,000. As of late November, the Bank's net profits amounted to $40 million.

In 2003, the Bank considerably expanded its product and services sales network, opening new branches in the cities of Arkhangelsk, Krasnodar and Samara. A number of operating branches opened new sales offices. The Nizhni Novgorod branch, for one, opened additional offices at the Nizhni Novgorod Fair and in the city of Kstovo; the Arkhangelsk branch opened an additional office in Naryan-Mar. The Perm branch moved to a new building with modern infrastructure. The Moscow network also expanded in 2003, with new branches opened in the Victory Square, Prospekt Mira and Krasnaya Presnya. All in all, we have six branches in Moscow.

Q: What new services did the Bank offer in 2003?

A: The new products and services the Bank introduced for the benefit of major companies in 2003 include the Clients' Settlement Center, a systemic complex that makes it possible to make and control, in real time, the payments of companies possessing ramified networks of affiliates or subsidiaries, as well as to carry out budgeting functions.

The Bank successfully floated a domestic bond issue worth one billion rubles. The U.S. Department of Agriculture opened us a credit line for $12.8 million; we stepped up cooperation with export-import agencies; and we repaid the first major syndicated loan. For participants in foreign economic activities, the Bank issued a customs chip card that takes care of customs payments and dues in real time mode right at the customs points. We have a program to develop export-import financing services, which helped the Bank to widen the range of documentary operations, particularly factoring and letters of credit.

Early in 2003, we launched a targeted crediting program to benefit small and medium businesses. Within quite a brief timeframe the Bank went beyond the first symbolic barrier – $10 million – in credits.

Autolending became one of the most popular services among customers and the Bank became one of the Top Ten biggest lenders and of the loan offices offering borrowers the most attractive terms. In early 2003, we offered the Company's staff and other individual customers served by the Bank new types of deposits enabling replenishments, partial withdrawals, interest capitalization, and automatic prolongation. Our new dollar, ruble and euro deposits are geared to both a universal approach and the savings requirements of specific groups, such as young people or people of retirement age. VIP clients can make Rent and De Luxe deposits. Considering savings fluctuations during the year, the Bank also introduced seasonal deposits. In 2003, the Bank started helping its customers make out insurance policies for medical and other expenses. One more service, SMS Bank, was added for the benefit of VISA cards owners, who can now receive real-time SMS messages on their cell phones, describing card operations, and, if need be, block the card. Yet another service, on-line statement, was introduced for plastic cardholders, enabling them to obtain information on the state of their card account via the Internet.

The year 2003 was when the pension reform began to be implemented. We signed an appropriate agreement with the Pension Fund of Russia (PFR) and carried through the necessary organizational and technical measures, which enabled us to offer our customers another service – filing, authenticating and submitting to the PFR an insured person's statement on the chosen managing company trusted to invest pension savings.

Bank Petrocommerce was created in 1992. Bank Petrocommerce Group includes four subsidiary banks, two of which are in Russia and two in other CIS countries. The total number of offices selling its products and services exceeds 250. The Bank runs a network of 17 branches and several offices in Moscow. Bank Petrocommerce is a member of the most influential Russian financial and economic organizations; it is the authorized bank of the State Customs Committee, and a full-fledged member of two international payment systems, VISA Int. and Master Card Int. The Bank is a leading operator (with the market maker status) on the Russian currency and monetary markets. Bank Petrocommerce is among the TOP-20 of Russian lending and financial establishments in all the key indicators, including capital amount, amount of client assets and lending portfolio. Britain's The Banker placed the Bank among the first thousand of world's biggest banks. LUKOIL is its main shareholder (78%).

Q: LUKOIL subsidiaries operate in different regions of Russia and other former USSR republics. What is Petrocommerce's regional strategy?

A: Naturally, Petrocommerce, as a settlements bank for LUKOIL, has geared its regional business to serving the Company's subsidiaries. Their geographic siting followed, as it were, that of LUKOIL, for which reason our biggest cluster of subsidiaries is in West Siberia, where we have branches in a number of towns, such as Kogalym, Langepas, Uray and Pokachi. In Cis-Urals area we have a powerful branch in Perm; in the Republic of Komi we bought Komi Regional Ukhtabank. The Arkhangelsk branch covers North with an additional office in Naryan-Mar; we are planning to open a branch in Murmansk. LUKOIL's refineries in Volgograd and Nizhni Novgorod are served by the branches the Bank has in those cities. Stavropolpromstroybank, a subsidiary of Petrocommerce, services JSC LUKOIL-Severokavkaznefteprodukt and JSC LUKOIL-Neftekhim in Budyonnovsk.

In former USSR republics, we bought a bank in Moldova, where LUKOIL-Moldova operates and our Ukrainian subsidiary, Petrocommerce-Ukraine, serves LUKOIL-Ukraine Holding Company. In a word, we have established a foothold in practically every major region, from West Siberia to Kaliningrad, where LUKOIL operates.

Q: What are the special features of the Bank's catering to LUKOIL's regional subsidiaries?

A: In the first place, let me say that the Bank's presence in a region does not mean that LUKOIL's subsidiaries based in the same region will automatically become its client.

In a number of regions, such as the Stavropol Territory, we had to win stiff competition for our corporate client. Local banks are not averse to competing with us, but they cannot provide systemic service because the technological gap is too wide.

Rates and tariffs are important factors in attracting corporate clients from the LUKOIL Group. We have never practiced dumping but the current lending rates for LUKOIL's regional structures are somewhat – by one or one and a half percent – lower than those we offer other clients.

Along with lending, settlement and cash services are crucial to the Bank's work with LUKOIL's subsidiaries. While on the subject of the Company as a whole, Petrocommerce is the conduit for 65 percent of its ruble flow and about 25 percent of its hard currency one. The average monthly turnover on LUKOIL Group accounts adds up to nearly 100 billion rubles. In the past few years the funds on LUKOIL subsidiaries' settlement accounts in the regions tend to grow. The turnover rate grows with the growth of transaction amounts. It increased two to two and a half times on average compared with the early period in our work with the Company. This means that turnover rates accelerate and the effectiveness of the financial component of the Company's operations is increasing. Technologically, we are very close to providing on-line settlement services and we want to reach a similar level of settlement and cash services at our affiliates as well.

I would like to dwell in particular on services the Bank gives to the staff of regional affiliates. Currently all LUKOIL employees know VISA Petrocommerce plastic cards quite well. In early 2004, we will start issuing Master Card. The Bank's pay card projects function in all main regions where LUKOIL operates. A major card project was launched at JSC LUKOIL-Nizhegorodnefteorgsintez in 2003: more than 5.5 thousand of its employees will soon receive their wages and salaries through our bankcards. In the near future we plan to issue credit (overdraft) cards for the Company's staff. Eventually, we also plan to expand consumer crediting programs for the staff of LUKOIL subsidiaries. I would also like to mention one of our current consumer crediting projects: a mortgage program benefiting the staff of Perm-based

JSC LUKOIL-Permnefteorgsintez.

Q: Could you outline the plans for the Bank's future development in Russia and other countries?

A: Business of Petrocommerce grows more dynamically than that of 30 other leaders of the Russian banking system. If the current trend continues, I think that by 2006 we will attain our strategic goal to become one of the undoubted leaders of Russia's banking system. We are not seeking demonstrative achievements. The objective to increase the Bank's share in the financial markets where it operates is based on realistic calculations and systematic forward expansion.

Internationally, according to The Banker, Great Britain, our Bank moved sixty one points up in just one year, emerging as the world's bank Number 869 in terms of its capital. But our business grows faster than we have the time to capitalize through profits; I think, by late 2004 it will be necessary to raise the Bank's own assets to around $60 million.

Here are some of our short-term tactical goals and aims. The Bank will continue working on the small and medium business credits market, and on the market for consumer lending to physical persons; it will considerably expand its ATM and acquiring points network; and it will step up its beneficial ownership of private assets. The plans to expand our services network are primarily connected with developing retail. During 2004, we plan to open several new branches in Moscow and the Moscow Region. All in all, the Bank intends to open 25 branches in Moscow. Our branches in the regions where they have established presence will expand mostly through opening new additional offices in what we see as the most promising areas.

Our expansion prospects are inseparable from further steps to consolidate the Petrocommerce Financial Group. In line with plans to develop our subsidiary banks, each of which is a multi-branch affair, we plan to open yet another new branch in the North, in the city of Murmansk.

Abroad, the Bank will go on with its borrowing program to bolster up its resources by attracting relatively inexpensive and long-term liabilities. The assets obtained on Western markets will be used to expand lending to the Bank's corporate clients and to further develop trade financing.