ANNUAL REPORT | 2005bta.kz/en/files/en_investor_reports_bta_2005_annual...NOTES TO THE 2005...

ANNUAL REPORT | 2005

Key Financial RatiosRatio 2005 2004 2003

Profitabilityratios

Return on averaged common shareholders’ equity 26,8% 20,8% 22,1%

Return on averaged total shareholders’ equity 26,1% 20,7% 22,1%

Return on average value of assets 1,9% 1,3% 1,4%

Net interest margin 4,4% 5,2% 5,2%

Net interest spread 3,4% 4,4% 4,3%

Non-interest expense/net interest income before provision plus

non-interest income 37,0% 33,3% 39,4%

Non-interest expense/net interest income before provision for losses 58,0% 57,2% 68,0%

Operating expenses as % of average value of total assets 2,40% 2,8% 3,3%

Balancesheetandcapitaladequacyratios

Deposits from clients as % of total assets 30,7% 36,7% 37,6%

Total net loans to clients as % of all assets 65,7% 64,0% 62,3%

Total shareholders’ equity as % of all assets 8,7% 7,6% 7,3%

Marketable assets as % of total assets 30,7% 31,1% 32,2%

Measured risk of fixed capital adequacy ratio 16,11% 14,58% 14,34%

CONTENTS

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INTROdUCTION 7

MANAGEMENT BOARd 15

BRANCH dIRECTORS 17

BACKGROUNd INFORMATION ON JSC BANK TURANALEM 19

SOCIAL ENvIRONMENT ANd CHARITABLE GIvING 25

KAzAKHSTAN ECONOMIC GROwTH IN 2005 29

BTA GROUP GROwTH 35BTAGroupPosition 36CorporateGovernanceRegime 37HumanResourcesPolicy 38InformationTechnology 39RiskManagementandQualityofAssets 40

BTA GROUP KEy LINES OF BUSINESS 43

CommercialLending 44 CorporateBusiness 44 SmallandMedium-SizedBusinessFinancing 45 RetailFinancing 47InternationalBusiness 49 PositionsinCIS 49 TradeFinancing 49 SyndicatedLoans 50InvestmentBanking 52InsuranceBusiness 53PensionFundServices 54MortgageMarket 55LeasingServices 56OtherLinesofBusiness 56 CreditCards 56 DepositOperations 57 InternationalCapitalMarkets 58

�annual report | 2005 5�

GROUP FINANCIAL STANdING OvERvIEw 61

Summary 62ProfitandLossAccount 62

TotalInterestIncome 62

InterestExpense 63

NetInterestIncomebeforeProvisionforPotentialLosses 64

ProvisionsforPotentialLosses 64

Non-InterestIncome 65

Non-InterestExpense 66FinancialStanding 68 TotalAssets 68 TotalLiabilities 70 Shareholders’Equity 70Off-BalanceArrangements 71CapitalAdequacy 72

CONSOLIdATEd FINANCIAL STATEMENTS 75

ReportofIndependentAuditors 76ConsolidatedBalanceSheets 77ConsolidatedStatementsofIncome 78ConsolidatedStatementsofChangesinShareholders’Equity 79ConsolidatedStatementsofCashFlows 81

NOTES TO THE 2005 CONSOLIdATEd FINANCIAL STATEMENTS 83

INTROdUCTION

�

MukhtarAblyazovChairman

of the Board of Directors

JSC Bank TuranAlem

annual report | 2005 ��

DearShareholders,PartnersandClientsofBankTuranAlem!

2005 once again established Bank TuranAlem as the leading bank in Kazakhstan.

Last year, despite increased competition in the financial sector, the BTA Group further established itself in Kazakhstan’s Financial Market and was first to enter CIS markets.

Among the most significant events that occurred in 2005, I would like to point to, were the equity investments made by the ORIX Corporation of Japan and International Finance Corporation in BTA’s Leasing Company, along with the establishment of the BTA Kazakhstan Pension Fund which was a result of the merger of two major pension funds – NPF Kourmet and NPF Kazakhstan.

In October 2005, BTA also implemented the Code of Corporate Governance, which was evidence of the growth of the Bank and its commitment to making BTA more attractive to its current and potential investors. The Code was drafted in compliance with the current laws of Kazakhstan; meaning it is in line with international standards, as well as corporate conduct practices, which continue to evolve in Kazakhstan along with ethical requirements for companies operating within the capital market. The Code allowed BTA to clearly define the roles and responsibilities of the Bank’s Supervisory Board and Management Board, and it enabled us to increase transparency and improve our operational efficiency.

Realising very well that the future prosperity of Kazakhstan depends largely on the sustainable development of its financial sector, the BTA Group has made significant strides in putting in place advanced systems in order to manage its risks and has focused on doing its business in a more innovative and socially responsible manner. We believe, that considering the growth & spread of globalisation, along with the expected accession of Kazakhstan into the World Trade Organisation, one should make systemic efforts in order to make the country’s banking sector more competitive. Aggressive efforts, currently being undertaken by Kazakhstan’s financial institutions within various international markets, allows them to gain a universal experience, and makes the country more attractive to investors and offers more opportunities to get long-term, and less expensive financing.

BTA is keen on taking part in the implementation of Kazakhstan’s industrial and innovative development strategy. We are also committed to diversifying the way business is conducted. The Bank has been active in supporting small and medium-sized businesses; meaning it has focused on supporting companies operating in the agricultural and construction sectors, and on implementing mortgage financing programs. At the same time, the number of large corporate clients of BTA is steadily increasing.

We are a socially responsible financial group, who believe it is important to carry out business in line with the best international practices and to offer the best quality services to our clients.

Our Bank has been able to achieve progress largely thanks to you – our shareholders, clients and partners. Systemic changes, along with a well-thought out and consistent approach to making them happen, combined with Western management practices and professional experience in CIS markets, are already yielding results and allowing us to be even more optimistic about our future.

Mukhtar Ablyazov, Chairman of the Board of Directors

JSC Bank TuranAlem

10

SaduakasMameshtegiChairman

of the Management Board

JSC Bank TuranAlem

annual report | 2005 1110

DearClients,Shareholders,Partners,andStaffMembersoftheBank:

I am pleased to present our annual report for 2005, which has been another successful year in the 80-year history of the Bank.

Bank TuranAlem is the leading bank in Kazakhstan’s financial sector and the Bank enjoys the confidence of its clients and while being acknowledged by many in Kazakhstan and other International business communities. In 2005, Bank TuranAlem once again established itself as a financial institution that has taken a leading position in the Financial Market, and we have experienced rapid growth even beyond our own expectations.

In 2005, we conducted a large-scale audit of functions and restructured the Bank in order to improve its operational efficiency and profitability and to make it more competitive. Our team is now one of the best professional teams in the industry. We continue emphasising the importance of transparency, a strong reputation, and corporate governance along with strategic planning.

The Net Income of Bank TuranAlem was 2.2 times more than in 2005 versus 2004, in which we reached $110m U.S. Dollars. In order to meet the requirements of the regulators for capital, the Bank also increased its capital by some 74% allowing it to reach the level of $941m U.S. Dollars. We are now the largest commercial bank in Kazakhstan in terms of capital.

2005 was a successful year for both the Bank and Kazakhstan. BTA’s strategic goals relate closely to the country’s economic development. These include, active support for small and medium-sized businesses and the agricultural sector, along with an industrial and innovative strategy currently being pursued by the Government.

In an attempt to accomplish our goals in June 2005, BTA signed a Memorandum of Cooperation with an Association entitled, Forum of Kazakhstan Entrepreneurs and a Public Association entitled, Independent Association of Entrepreneurs with the express goal of creating a common effort to better develop small and medium-sized businesses and to enable them to have a greater impact on the country’s economy. In 2005, the Bank provided financing worth some $1b 248m U.S. Dollars to businesses.

Apart from financing the real economy, the Bank has been also focused on the retail business. In 2005, BTA’s individual deposit market shares rose to nearly 21.2%. Also, we were chosen to enter into an agency contract with the Kazakhstan Deposit Insurance Fund in order to indemnify the depositors of Nauryz Bank. The Fund did not make its choice accidentally – Bank TuranAlem was the first bank that became a member of the Fund and that was proof of its financial sustainability and extensive branch network (of which there are now 22 branch offices and 197 cash and settlement centers). In order to raise our quality of service and offer better non-cash settlement services, BTA also acquired 400 ATM machines in 2005.

In the last few years, Bank TuranAlem has also been rapidly expanding its business in CIS countries. We now have offices in Russia, the Ukraine, Belarus, Kyrgyzstan, Georgia, Tajikistan, Armenia and China.

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Prizes awarded by leading foreign specialised magazines and ratings assigned by rating agencies are evidence of the international acknowledgement & recognition of the Bank. In 2005, the BTA Group was awarded by the well-known British professional magazine, Euromoney, as “The Best Bank in the CIS” and as “The Best Bank in Central Asia”. Apart from CIS banks and BTA, the magazine rated another 15 to 20 banks in Kazakhstan. The Bank’s subsidiary – JSCTuranAlemSecurities – was awarded as “The Best Equity House in Kazakhstan”.

“The Banker” magazine gave BTA, “The Bank of the Year 2005” award in Kazakhstan. Its experts also noted that Bank TuranAlem had established itself as a market-oriented financial institution. Despite increased competition, the Bank’s income increased considerably providing a 25-percent return on capital. Positive developments and performance of BTA followed from efforts made by the Bank to cut costs and generate more interest and non-interest income.

It is also worth mentioning a “Golden” diploma awarded by Kazakhstan’s Stock Exchange. BTA became the only quoted company awarded such a diploma. Acknowledging BTA thestockmarketleader is primarily the result of the Bank’s longstanding aggressive operations in the market. During the entire year of 2005, BTA has held a leading position in the domestic financial market both in the Foreign Exchange Trading segment and the Securities Trading segment.

I would like to conclude by stating than Bank TuranAlem, as one of the leading banks in Kazakhstan, has also operated & carried out its business in a socially responsible manner. Social responsibility now is something more than just charity. It has become an integral part of business. In 2005, BTA was actively involved in implementing projects for supporting the national cinema, classical art masters, Kazakhstan’s sports sphere, education, along with our special veterans and talented youth. To us, social responsibility means among other things, investing in the future of our clients and in the future of Kazakhstan.

The business community, governmental authorities and the public, all have a common goal that is to enable the country to achieve better living standards for all people. In order to accomplish this, we believe the most important thing we can do is to contribute to the sustainable development of our country, and to make it more competitive internationally.

Saduakas MameshtegiChairman of the Management Board

JSC Bank TuranAlem

12annual report | 2005 1312

MANAGEMENT BOARd

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YerkinTatishev

First Deputy Chairman

AbilakimZhumakhmetov

Deputy Chairman

AzatBattakov

Deputy Chairman

BolatBaimirov

Deputy Chairman

GenrigKholodzinskyi

Deputy Chairman

SauleDzholdybayeva

Senior Economist, Member of the Board

BakhytOtarbekov

Managing Director, Member of the Board


Branch Director Address TelephoneNumber

“Astana”Branch AidosMukatayev 27, Seyfullin str., Astana 8 (3172) 910-200

AlmatyBranch SanatAbenov 55, Aiteki bi str., Almaty 8 (3272) 500-112

AktobeBranch DaniyaEspayeva 77, Abylkair khan str., Aktobe 8 (3132) 956-111, 521-111

AksayBranch MaratTurganov 1, Central lane, Aksay 8 (31133) 2-02-06

AtyrauBranch TalgatOrashayev 58, Taymanov str., Atyrau 8 (3122) 586-705

EastKazakhstanBranch RomanKuzmenko 21/1, Gorky str., Ust’-Kamenogorsk 8 (3232) 290-400

JezkazganBranch KairatKenjegarin 20, Titov str., Jezkazgan 8 (3102) 723-001

JambylBranch JamalMedeuva 75, Jeltoksan str., Taraz 8 (3562) 453-758

WestKazakhstanBranch MirgatAkhmetov 69/1, Amanjolov str., Uralsk 8 (3112) 51-41-31

KaragandaBranch KairatAlimkulov 11а , Alikhanov str., Karaganda 8 (3212) 411-282, 501-075

KulsaryBranch AmangeldyMyrzagaliyev 62, Izbasov str. Kulsary 8 (31237) 2-44-30, 2-44-31

KyzylordaBranch JorabekPrmanov 53, Jakhayev str., Kyzylorda 8 (32422) 26-19-37, 26-14-37

KokshetauBranch BakytOspanov 2, Momyshuly str., Kokshetau 8 (3162) 25-33-60, 25-47-24

KostanayBranch LyazzatKalkulova 114, Al-Farabi str., Kostanay 8 (3142) 54-23-24

MangistauBranch ErbolJumagazin 63, md. 14, Aktau 8 (3292) 43-72-03

PavlodarBranch NurlanAnapiyanov 22, Bekturov str., Pavlodar 8 (3182) 55-09-54, 55-16-18

NorthKazakhstanBranch MeiramBotybayev 60 А, Brusilovskyi str., Petropavlosk 8 (3152) 46-52-70

SemipalatinskBranch KairatJuaspayev 53, Urankhayev str., Semipalatinsk 8 (3222) 551-800

TemirtauBranch YerlanSerikov 35/1, md. 6, Temirtau 8 (3213) 93-05-20

TaldykorganBranch NugurbekAbulgazin 158, Abylai khan str., Taldykorgan 8 (3282) 240-616

EkibastuzBranch IvanSkorodievskyi 91, Stroytelnaya str., Ekibastuz 8 (31835) 6-20-84

SouthKazakhstanBranch NurgaliBerkinbayev 82, Tauke khan str., Shymkent 8 (3252) 537-084, 537-105

BRANCH dIRECTORS

BACKGROUNd INFORMATIONON JSC BANK TURANALEM

2020

The history of JSC Bank TuranAlem relates naturally to the history of the Republic of Kazakhstan. Having gained a lot of valuable experience from our predecessors, which include the Industrial and Construction Bank and Vnesheconombank in which BTA managed to survive a complex period of change and transition into the 21st century. In the process, today we have become a sustainable and rapidly growing bank, a reliable partner for our customers, and a credible representative of Kazakhstan’s banking sector.

SovietEra

The history of BTA dates back to 1925 when a branch of the USSR Industrial and Construction Bank was first opened in Kazakhstan. Tyuryabek Osmanov - the first Kazakh banker – was appointed as its General Manager on October 15th. It was during this period that Tyuryabek Osmanov ran the country’s largest bank in the 1920s at a time when Soviet power was being established. Just over 1 1/2 years later, under his supervision, the Kazakhstani branch of Promstroybank surpassed RoK Gosbank and took up a leading position in Kazakhstan. The bank provided financing mostly to general industry and provided loans to trading companies.

The fate of Kazakhstan’s first banker is typical of that of many other people in the Stalinist era. In 1937, he was detained, accused of being involved in anti-Soviet activities and sentenced to death. That’s how the life of the outstanding organiser of Kazakhstan’s financial sector ended. He was acquitted posthumously in the late 1950s. In 1972, the USSR government rewarded the merits of Kazakhstan’s first banker.

By stating, “along with others, Tyuryabek Osmanov was the one who really put into place, the lending financial system in Kazakhstan.”

Promstroybank will always be perceived as a bank that played an active role in developing the industry and construction sectors in Kazakhstan, dating back to the older Soviet Period in which it was involved in constructing such famous mountainous tourist centers as Medeo and Shymbulak, the Republic Palace and Central Stadium in Almaty, along with establishing such large industrial and mining facilities as the Balkhashtsvetmet smelter, and the Ulbinsk Titanium and Magnesium plant etc.

YerzhanTatishev

Between late 1980s and early 1990s, all the former Soviet Union republics were going through a transitional period in which there was a lot of change and transformation taking place and during this time Kazakhstan gained its independence. The Kazakhstan branch of the USSR Industrial and Construction Bank was renamed in 1991 as the Joint-Stock Bank Turan Bank.

In about the same year – in 1992 – Kazakhstan’s Vnesheconombank, which during Soviet times, had acted as a bank to service the country’s all foreign trade transactions and at that time had the best international skills in the FSU republics, was renamed Alembank Kazakhstan. Alembank became one of the country’s finest financial institutions and was the first bank to conduct international transactions. It was also the first bank involved in the international inter-bank systems (SWIFT, REUTERS) and was the first bank to join the VISA International and MasterCard systems. In addition, it was the first bank in Kazakhstan that actually put in place its own payment system. In 1994, the first credit card, “AlemCard” was issued in Kazakhstan.


Turan Bank and Alem Bank were among the five top banks in Kazakhstan. However, later in the 1990s they faced large challenges, typical of the entire national economy, namely non-payments and inflation. The Kazakh government passed a resolution on merging the two banks into TuranAlem Bank.

A team of young managers headed by the talented financier, Yerzhan Tatishev, joined the bank. Having gained experience from both Turan Bank and Alem Bank as a basis, the new team reformed its management structure and a new stage in the history of BTA was begun in 1997.

In 1997–1998 another event occurred at Bank TuranAlem and that was “privatisation.” A consortium of domestic investors paid some $72 mn for a controlling interest. BTA was corporatized and renamed JSC Bank TuranAlem in 2003. Yerzhan Tatishev became the leader of the BTA Financial Group that had been established by him and his team.

As a result, JSC Bank TuranAlem has become the leading bank in Kazakhstan in all major lines of business – corporate, retail, international and small and medium-sized business financing.

In 2004, our shareholders, executives and the staff of the bank, the country’s banking and financial sectors suffered an irreparable loss. Yerzhan Tatishev, the head of BTA, died. He was the one, who as the Chairman of the Management Board had determined the bank’s development strategies and policies.

Yerzhan Tatishev was known as a person who made bold managerial decisions; he also promoted the professionalism of his staff and united them into a team. His role was instrumental in laying the foundation of success achieved by BTA. Yerzhan Tatishev will be always remembered by many as a person who made major contributions to the success of JSC Bank TuranAlem.

SuccessmadebyBTAGroup

In January 2005, at a meeting of the Supervisory Board, Saduakas Mameshetegi was unanimously appointed the Chairman of the Management Board of JSC Bank TuranAlem. Prior to this appointment, since 1999, he had served as the Vice Chairman of the Management Board of BTA. As the newly appointed Chairman of the Board, the country’s business community has readily acknowledged him. In particular, since 1998, he has been re-elected more than once as Chairman of the Exchange Council of Kazakhstan Stock Exchange.

In May 2005, Mukhtar Ablyazov, a symbolic figure, a good manager and a businessman, well known in Kazakhstan and CIS countries, was elected the Chairman of the Supervisory Board of JSC Bank TuranAlem. Mukhtar Ablyazov and Kazakhstan’s Prime Minister, Danial Akhmetov, met to discuss the potential involvement of the banking sector in implementing the government’s investment projects involving large goals and requiring considerable financial injections. After Mukhtar Ablyazov joined the bank, a number of significant decisions were made, including the unanimous approval of the Bank’s revised articles of association and of the Code of Corporate Governance.

The new management team has continued pursuing the same policies and the leading position in the financial market has been maintained. BTA Group enjoys strong confidence from its national and foreign

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customers and cooperation with many of them has been taken to a new level so that now they are also partners.

In 2005, one of major strategic goals was accomplished which was to enter the financial markets in the CIS and abroad.

Bank TuranAlem’s long-term strategy thru 2015, provides for business within the CIS and its financial markets. The plan is to diversify its markets and broaden its range of products, and to also achieve sustainable and rapid growth. Bank TuranAlem is about to take up key positions in the banking sectors of other countries in which it will attract international investment and export its own financial services.

SOCIAL ENvIRONMENT ANd CHARITABLE GIvING

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JSC Bank TuranAlem is a socially responsible company. Our activities go beyond charitable giving; they have become a part of life for not only the bank but of the Group as a whole. Humanitarian investment is the core of the image and reputation of the Bank and we believe it is important to invest in our community.

The Bank cares about the moral and spiritual development of the country and our aim is to invest in the future of Kazakhstan.

ConcertsintheHomeland

In 2005, JSC Bank TuranAlem expanded its cooperation with the art masters. BTA in association with Marat Bisengaliyev, and the Cultural Public Foundation took the lead in holding the global premiere of the classics composed by the Kazakh composer Almas Serkebayev in Almaty and Astana. The outstanding violinist Marat Bisengaliyev, and famous singer Maira Mohamedkyzy, joined in with unique singer Erik Kurmangaliyev, virtuoso pianist Temirzhan Yerzhanov, and prime ballet dancer Saule Rakhmedova – along with internationally acknowledged artists in performing some of the best scenes and presenting Kazakh art and soul to the rest of the world. They also performed at several concerts that were opened by the hymn of Bank TuranAlem. The stars were accompanied by well-known Marat Bisengaliyev’s Philharmonic Orchestra and conducted by Aidar Torybayev.

The60thAnniversaryoftheGreatVictory

The 60th anniversary of the victory in the Great Patriotic War was probably the most significant event of last year. As a sponsor, the bank provided 50mn Tenge to restore the city’s principle Victory Memorial in the park named after the 28 Panfilov Guardsmen. With the sponsorship of the bank, a monument of 14,000 Kazakhstani soldiers who died in the battle to liberate Belarus was also built in Minsk in May 2005.

The80thAnniversaryoftheBank

In 2005, a book about the glorious history of Bank TuranAlem was published. BTA is proud of being related to the first industrial bank in Kazakhstan established back in the first capital of the country, which was Kzylorda. The Promstroybank was involved in the financing of a number of remarkable construction projects of the 20th century including the Turksib (Turkestan-Siberian Railway) and the Karmetkombinat (Karaganda Metallurgical Integrated Works, currently called Ispat Karmet) which was related to two notable Kazakh figures – the first being Kazakhstan’s banker Tyuryabek Osmanov and the legendary Baurzhan Momyshuly who had been with the bank in the 1930s.

BTA organised and financed the production of a documentary TV series entitled, The Great Construction which looked at the great challenges faced on the path to independence, democratic progress and the development & transition to a market economy in Kazakhstan. It also highlighted the better standards of living of our people who through hard work finally have been able to overcome many of the hardships of the period of transition.


KazakhstanGoldenCollection

BTA has served as a model of a socially responsible financial institution maintaining and developing the moral and spiritual values of the Kazakh people and cultural heritage of their ancestors. In a few years of cooperation with the National Film Studio Kazakh film named after Shaken Aimanov, 12 glorious feature films were given back to the people of Kazakhstan. In early 2005, with support from JSC Bank TuranAlem, the Yerzhan Tatishev Foundation was set up and sponsored the restoration, and rewriting on advanced carriers along with the broadcasting of the first ten old feature films constituting the most valuable possession of the Kazakh Film Studio. Old copies were not suitable for broadcasting or rewriting on other carriers. And now Kazakhstan has some 5,000 copies of the films on DVDs, and 10,000 copies on VHS. The first 10 films of the Kazakh film’s Golden Collection are now for sale and another 20 are expected to be released soon. The golden collection of domestic feature films will eventually be given back to Kazakhstani viewers.

Nomad

Bank TuranAlem also took part in financing the grandiose project – the first Kazakh blockbuster entitled, Nomad. The President of the Republic of Kazakhstan, Nursultan Nazarbayev, has long dreamed of creating a historical film about the Kazakhs that would draw attention to the country worldwide.

About 150 cinematographers from 30 different countries of the world including, Kazakhstan, Russia and the U.S. all took part in making the film.

With support from BTA, the film was presented in July 2005 in Astana and Almaty. The film is about the Kazakh peoples’ dream in the 18th century of becoming independent and its goal was to serve as the starting point of the national cinematography’s recovery and today that dream has become a reality.

Restoration

Social initiatives taken by Bank TuranAlem are not limited just to Kazakhstan.

Under the program to celebrate the 1000th anniversary of Kazan (Russia) BTA contributed to restoring the Blagoveshchensk Cathedral in Kazan Kremlin. The temple, which is a part of Historical Monuments UNISEF Program, was restored to all of its former beauty. The restored cathedral was solemnly reopened on the day the Kazan icon of Virgin Mary was given back and the 450th anniversary of the Kazan Eparchy of the Russian Orthodox Church was celebrated. The reopening of the cathedral was preceded by a meeting between the Patriarch of Moscow and the All Russia Aleksy the Second, along with the President of Tatarstan, Mintimer Shaimiyev.

The Yerzhan Tatishev Foundation sponsored the overhaul of School # 16 named after Yuri Gagarin located in the town of Kentau. School #16 was opened in 1960 and is now one of the best schools in Kentau. Yerzhan Tatishev, the late head of Bank TuranAlem, attended that school as well.

By the beginning of the new academic year the structure of the school has become much more cosy and comfortable and computers have been provided along with a library and reading room which is being renovated.

KAzAKHSTAN ECONOMICGROwTH IN 2005

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MacroeconomicPerformance

In the last few years Kazakhstan’s economy has been growing rapidly. The growth is generally being driven by better general macroeconomic performance, proper monetary and fiscal policies, favourable commodity prices and ongoing structural reform.

ThetablebelowprovidesinformationonKazakhstan’sGDPasoftheDecember31st,2003,2004,and2005:

2005 2004 2003

Nominal GDP (Billion Tenge) 7 453 5 543 4 612 Real GDP Growth (%) 9,4 9,4 9,3 GDP per capita (, 000 Tenge) 492,1 369,2 309,3 Population at the end of each year (million people) 15,22 15,07 14,95

In 2005, in contrast to preceding years, industrial growth was slow (4.6%). As a result, rapid GDP growth was driven primarily by the high price of Kazakhstan’s strategic exports, which primarily included oil and gas.

Individual income continued to increase in 2005, and that was the major factor contributing to a stronger domestic demand for goods and services in the consumer market, which in turn supported the strong imports of mostly food products and manufactured goods.

In 2005, imports amounted to $17.4 bn or 136% versus 2004, in which exports amounted to nearly $27.8 bn (139% versus 2004).

The Kazakh Ministry of Finance reported that the surplus of Kazakhstan’s budget had been 46.7 bn Tenge or 0.6% of GDP as of the January 1st, 2006. Kazakhstan’s budget revenues amounted to 2,098.5 bn Tenge as of the January 1st, 2006 while expenditures and loans amounted to 1,953.4 bn Tenge.

In 2005, Kazakhstan’s international reserves also grew significantly. The country’s international reserves, including funds raised by the National Fund, grew by 4.7% in 2005 reaching $15,085 mn.

The real average monthly wage grew by nearly 12% in 2005. Expected overall growth of real wages created a healthy economic environment enabling greater economic growth and positive developments in the banking sector.

Economic sustainability and the attractive investment environment in Kazakhstan generally enhanced the country’s image. Kazakhstan was the first CIS country that received an investment rating from leading international rating agencies.


Regulators

Since 2004, the Kazakh Agency for Regulating and Supervising the Financial Market and Financial Institutions has been responsible for regulating and supervising the country’s financial markets.

Having delegated regulatory powers to a newly established authority, the National Bank of Kazakhstan enjoys a special status of the only central bank in the CIS focused solely on acting as a classical central bank.

New realities on the ground resulted in a shifting focus of policies pursued by the National Bank of Kazakhstan. Beginning January 1st, 2004, the National Bank of Kazakhstan has primarily focused on providing price stability. In the last few years, inflation has been kept at a relatively stable low level: 6.4% as of the end of 2001, 6.6% as of the end of 2002, 6.8% as of the end of 2003, 6.7% as of the end of 2004, and 7.5% as of the end of 2005.

Monetary policies pursued by the National Bank of Kazakhstan in 2005 allowed for the maintenance of the sustainable development of the country’s financial market.

PensionFunds

There were 14 pension funds (called the “funds”) in Kazakhstan as of the January 1st, 2006 and they had a network of 76 branch offices and 75 regional offices across the country.

In 2005, the individual pension accounts of subscribers (recipients) making mandatory contributions to the funds grew by some 9.2% (or 638,932) reaching 7.6 mn.

PensionSectorKeyPerformanceParameters

2005 2004 2003

Pension Assets (Billion Tenge) 648,6 484,0 368,3

GNPF share (%) 19% 22% 25%

Number of Individual Pension Accounts 7 613 369 6 974 437 6 164 316

GNPF share (%) 30% 35% 38%

Pension Assets (% of GDP) 8,7% 8,7%, 8,0%

According to the above-stated key performance parameters, subscribers’ pension savings grew annually. As a result in 2005, pension savings grew by 164.6 bn Tenge (34%) reaching 648.6 bn Tenge by the January 1st, 2006. The shares of the JSC Pension Fund GNPF (the “GNPF”) established by the government, during its time to support development of the pension system in Kazakhstan, has visibly declined. For example, in 2005, the shares of GNPF fell from 22% of the total pension savings to 19% thus determining the future development of private pension funds.

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Ten organisations are currently engaged in managing pension assets and of them, three are pension funds licensed to independently manage pension assets. These include JSC PF GNPF, JSC PF of Halyk Bank of Kazakhstan and JSC PF BTA Kazakhstan.

Net income from investing pension assets was added to the subscribers’ individual pension accounts, which grew, by 40.4 bn Tenge (35.3%) in 2005 reaching 155.1 bn Tenge by the January 1st, 2006.

The total capital of the funds amounted to 11,932.6 mn Tenge at the end of 2005. That included a total authorised capital of 6,198.9 mn Tenge or 51.9% of capital. The capital of the funds has generally increased by 3,827.8 mn Tenge or 47.2% in 2005.

The funds invested internally, also generated funds in government securities worth 2,149.7 mn Tenge (24.9% of total investment), non-government securities worth 3,590.2 mn Tenge (41.7%) and invested in deposits with commercial banks worth some 2,883.3 mn Tenge (33.4%).

BankingSector

Steps taken by the NBK and the AFS to stabilise the banking sector continue to have a positive impact on the sector and they support:

• the growing confidence of the public in banks resulting in the growth of bank deposits;

• a steady Tenge rate as a result of the flexible exchange rate of the Tenge. In cases of considerable flows of foreign exchange into the domestic market, the National Bank will not allow for the appreciation of the Tenge in amounts making exports much less competitive;

• much stronger risk management in terms of capital adequacy, liquidity, currency position value, and the quality of the loan portfolio as a result of which the banking sector was eventually “cleared of” being seen as unstable & unreliable. The reputation of banks has been improved due to the implementation of prudential standards and various techniques of regulating risk management and the consistent implementation of the IAS.

All three developments have had a considerable impact on Kazakhstan’s financial sector.

The banking sector has been impacted directly by sustainable economic development and fiscal and monetary policies pursued by the government and the National Bank.

The capital of commercial banks grew by 69.3% in 2005 totalling some 587.2 bn Tenge. The assets of the banking sector totalled some 4, 515.1 bn Tenge in 2005 growing by 68% versus the 2004 figure. Total loans and deposits in the banking sector also grew in 2005. Many banks loan portfolios (including inter-bank loans) grew by 1,249.1 bn Tenge (68.9%) in 2005 reaching 3,062.0 bn Tenge.

Bank deposits have totalled some 2,523.0 bn Tenge as of January 1st, 2006, which was 56.9% more than the 2004 levels. Individual deposits grew some 33.2% in 2005.


The growth in deposits is the obvious evidence of the growing public confidence in Kazakhstan’s banking sector recognised as the most advanced banking sector in the CIS.

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Recent trends in international markets have also had a positive impact on Kazakhstan’s macroeconomic growth. Growth trends in Kazakhstan’s economy are very likely to continue in the midterm.

BTA GROUP GROwTH

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BTA Group Position BTAGroupMission

We strive to be the best in providing opportunities and value to our customers by offering advanced financial solutions and reliable partnerships through innovation, creativity and global presence.

BTAGroupVision

The Bank TuranAlem Group is a leading financial institution that also works hard to offer quality financial services throughout the CIS.

CorporateValues

IntegrityandResponsibility: Integrity underlies all of what we do and how we operate our business as a financial institution. We make sure that every employee carefully adheres to our moral principles and values and we strive to act responsibly and make sure arrangements are respected & promises kept in our dealings with employees, suppliers, the government and the public.

Respect: We also make it a point to respect every individual’s rights.

AspirationtoImprovement: We continue to improve the quality of our products and services by supporting innovation, high professional standards, and encouraging the entrepreneurial spirit of our employees.

TeamworkandCooperation: We believe that in order to make progress, you must first learn to work together. We have made it our goal to learn from each other and it is our aim to maintain an effective moral climate and culture of cooperation, built on openness and mutual support.


Corporate Governance Regime Corporate governance is one of the highest priorities of the Group.

On October 14th, 2005 the bank’s Code of Corporate Governance was discussed and approved at a general meeting of our shareholders. It was drafted in line with the best practices of the national and international corporate governance.

TheCodeprovidesthefollowing:• Protecting the rights and interest of our shareholders;• The Supervisory Board and the Management Board will work hard to manage the company effectively;• Ensuring transparency and accuracy of disclosure;• Legitimate operations & ethical behaviour;• Pursuing effective dividend policies;• Pursuing effective human resource policies;• Environmental protection;• Establishing policies to resolve corporate conflicts.

Corporategovernanceandoversightboardsareasfollows:• General meeting of shareholders• Supervisory Board• Management Board headed by the Chairman of the Board• Internal audit committee• External auditor.

Majorbusinessdecisionsaremadeatthegeneralmeetingsofshareholderswithinitscompetenceand are determined by the articles of association, and by the Supervisory Board. Our day-to-dayadministrativedecisionsaremadebyourManagementBoardandtheChairmanoftheManagementBoard.

The bank has made a significant effort and continues to work on bringing its operations into compliance with the Code. In particular, the following Supervisory Board sub-committees have been established: Audit; Risk Management, Nominations; Remuneration and Business Ethics. In order to implement the Code, the respective bylaws are being drafted and approved.

The main purpose of the Code of Corporate Governance is to improve the bank’s internal corporate procedures in dealing with conflicts of interest, prohibitions against job abuse and insider trading information. And disclosure is another important step the bank is taking to improve on its corporate governance practices.

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Human Resources Policy BTA aims at offering the best quality service in every country that it operates in and we feel it is important to stay in line with the best international practices of banking. This sets new challenges for our staff and all staff members must maintain high corporate standards.

Significant efforts are being made to draft and implement a code of conduct/behaviour and to put in place a system of values.

The Strategic Committee, established last year, is working to formalize its mid-term strategic goals and human resources policies are being continually being improved in line with our changing strategy. A special method of communicating our mission and vision is being utilized by the bank’s top managers and line managers which has allowed us to put together a good team of people who have the common goal of service excellence.

HR policies emphasize building upon human capacities, providing opportunities to utilize potential and therefore remaining committed to retaining human capital. We believe this serves as one of the major competitive advantages of BTA.

The main aim of HR policies is to build on the bank’s human resources in order to better implement our strategy. The current HR policies go beyond just recruiting, training and retaining promising staffs. It also means putting into place a competitive compensation system and optimising business processes. They also provide for ensured security and the effectiveness of the business, while supporting the implementation of the strategy by taking a systemic approach to identifying and training future business leaders.

Last year, a number of projects were implemented in order to establish corporate standards within the continuous HR management process and to better optimise our key HR guidelines. That facilitated progress in shaping and enhancing the image of a “preferred employer” and modelling the interaction of the bank within its external and internal environments.

The high skills of our banking staff are maintained and improved through continued training and refresher training courses that take into account our corresponding business needs. In addition, the bank has a system in place to share its experiences within the bank by presenting projects implemented successfully by BTA staff members.

Our current compensation system is designed to ensure both internal fairness and external competitiveness. A system of rewards is also being improved on.

Recruitment systems in place provide equal opportunities to everyone. Staffs are thereby selected to meet the bank/position needs, which then allows us to build a more quality staff, it also helps in decreasing our staff turnover while having a positive impact on the overall performance of the bank. The bank relies not only on the experience but also on the enthusiasm and capacity of our young staff members.

3�annual report | 2005 3�3�

Information Technology Bank TuranAlem has always been a pioneer of IT largely due to its specialised IT subsidiary Force Technology LLP.

In 2005, Bank TuranAlem increased its investment in IT which allowed the Group on the one hand to improve its business process management and on the other hand to offer better consumer services and develop new products for our customers.

In its operations, the bank uses the most advanced IT, in order to meet our increasing business needs.

The integrated Bank System of the customer-server architecture IB System Object, implemented on the Linux-Oracle platform, has allowed us to fully automate such operations which include the following services: cash and settlement services for our customers, cash operations, lending operations, letters of credit and deposit operations with corporate clients, deposit operations with individual clients, retail lending, inter-bank settlements, currency payments, currency trading and currency non-trading operations. The IBS has also allowed us to put in place improved accounting and reporting systems, along with transmitting e-documents et al to clients, and the automated operation of cash and settlement centers. The system is being utilized at all branch offices of the bank.

The goal of investment in IT was to put in place new systems that would work primarily in the favour of our customers. It has also allowed us to develop new products & services.

The Internet banking system entitled, Personal Cash and Settlement Center has also been put into place. It allows our clients to access our corporate website in order to view their credit card accounts, pay their cable TV and mobile bills, effect transfers using credit cards etc. The plan is to further promote and upgrade the system and add new services to the list of online services already being offered to our customers.

BTA has also been responsive to the wishes of our large corporate clientele. In 2005, it continued making efforts to put in place the BTA Internet banking system in which large companies can be better serviced by BTA.

In regard to the retail business, a number of new products were also developed in 2005 such as: Multicurrency, Bonus +1%, Loyalty Bonus, deposit certificates, and car loans. The Trade Innovation system was designed by MiSys in order to service all export/import financing operations, including conventional letters of credit, encashment operations, financing using promissory notes, syndicated loans and direct payments against invoices.

The current corporate IT network also provides online access to the databases of all BTA branch offices. This allows us to quickly and more effectively respond to changing customer needs while concurrently reducing the cost of services and increasing their quality.

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Risk Management and Quality of Assets Financial markets represent a complex, volatile and high-tech environment where business is associated with diverse current and identified risks. In order to secure the bank, one should put in place an effective system in order to manage risks and implement adequate controls.

The bank has to date, created a framework for managing risks in line with Basel II and regulations issued by regulators. On September 30th, 2005, the Kazakhstan Agency for Regulating and Supervising Financial Markets and Financial Institutions implemented the Basel II Guidelines (standard approach) and Kazakhstan’s commercial banks were ordered to follow. In light of the new rules in line with the Basel II, operational and market risks have to be quantified and processes set up, and the managing of credit risks have to be tightened. The bank analyses and measures risks taken and monitors potential losses on a systemic basis and in regard to this, BTA has also put into place a system to strategically manage risks. The Risk Management strategy provides for identifying, measuring, optimising and monitoring risks.

The bank’s Supervisory Board is primarily responsible for managing risks that sometimes arise from its operations. The Risk Committee, Credit Committee and Asset and Liabilities Management Committee are boards that have been set up to assist the Supervisory Board in discharging its duties. Credit risk departments, at the Head Office of the bank and its branch offices are responsible for managing credit and country risks, and our Analytical Center is responsible for managing liquidity, market and prudential risks, and the internal audit department. While our Legal Department is responsible for managing operational and legal risks, our Marketing Department is responsible for managing our reputation.

Thebank’sriskmanagementfunctionsfocusonthefollowingspecificissues:• Business integration and risk management (risk management has been integrated into business planning and strategies; it is an integral part of corporate governance and is a part of BTA’s internal controls);• Independence and centralisation of risk management processes (risk management functions accountable to the Supervisory Board); • Standard operations and technology (all risk policies are to be clearly formalised and officially documented);• Identifying and measuring risks (all risks are to be measured using specific methods);• Looking at risks that could arise from new instruments and operations, which are then monitored and measured; • Limits (all risks are to be managed within limits); and• Reporting risks (all risks are to be comprehensively communicated within the bank).

JSC Bank TuranAlem also works hard at providing the best quality in loan portfolios. We have improved our system of managing loan portfolio risks and are in the process of improving our internal risk controls. Our strategy is to phase out the significant increase in the number of loans made and to focus more on strategically profitable customers that can be offered a wide range of other services.

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2005 2004 2003

Opening Reserve 30 160 15 271 10 166

Debiting (8 682) (8 129) (6 762)

Rehabilitations 3 474 3,767 1,476

Provisions 15 359 19 251 10 391

Closing Reserve 40 311 30 160 15 271

Ratio of Provisions into the Loan Portfolio 5,6% 6,7% 6,0%

Ratio of Provisions for Bad Loans 66,2% 69% 86,2%

There is also our Risk Management Department at the bank that operates independently of a lending function and is responsible for monitoring loan portfolio quality. The department is responsible primarily for classifying the loan portfolio by risk.

Loans are classified as either standard, problems of the 5th category, or are considered risky. Standard loans are perceived as being highly creditworthy. Loans classified as bad or risky have low creditworthiness and may lead to a loss. Unsatisfactory loans with inevitably low creditworthiness usually show specific negative signs that something bad may happen in the future and repayment of the loan becomes doubtful.

QualityoftheLoanPortfolio

2005 2004 2003

Classified loans /gross loans 8,5% 9,8% 7,2%

Non-performing loans /gross loans 0,6% 0,6% 0,7%

Provisions/gross loans 5,6% 6,7% 6,0%

The table below provides information on changes in provisions for the impairment of assets in the past three years and loan portfolio provisioning levels. Our managing executives are confident that conservative provisioning policies will make the bank’s financial standing even more reliable.

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BTA GROUP KEy LINES OF BUSINESS

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Commercial Lending

CorporateBusiness

Bank TuranAlem is a major lender to the leading corporations in Kazakhstan. The bank provides the required financing to corporations contributing to the country’s overall real economic growth and development. Recent considerable growth, in the bank’s loan portfolio, has had a positive impact on the country’s rate of economic growth. In 2005, the corporate loan portfolio (including loans to small and medium-sized businesses) grew by some 57.3% reaching 601 bn Tenge or $4.48 bn as of the December 31st, 2005.

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Loanstocustomers.Privatecompanies;publiccompaniesandmunicipality-ownedcompanies

The bank also provides loans to all major and emerging economic sectors. Our loan portfolio has been diversified by sector.

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Breakdownofthecorporateloanportfoliobysector,2005

Trade 24,8%

ConstructionSector 19,1%

ManufacturingSector 17,7%

OilandGas 12,1%

Agribusiness 10,8%

Transport 4,6%

PowerSector 3,6%

Others 3,3%

Services 2,5%

Telecoms 0,8%

PublishingBusiness 0,7%

SmallandMedium-SizedBusinessFinancing

The strategic goal of the nation is to become less reliant on the volatile international price of oil, given that Kazakhstan is a major supplier of oil to international markets. Global economic practice shows that the only way to accomplish this goal is to diversify the economy. This can be achieved by developing small and medium-sized businesses.

Small business development would also allow us to address various issues such as: social (unemployment, building the capacity of economically active groups), the economy (increasing tax revenues, along with economic and GDP growth) and the political sphere (securing the country’s sovereignty).

Realizing the crucial role that small and medium-sized businesses play in the transition to a more sustainable market economy and social welfare, along with the support and development of small and medium-sized businesses, is a priority to both the government and the financial sector.

Priority development of small and medium-sized businesses is stated in Kazakhstan’s Development Strategy to 2030; the framework of which was set up for developing the SMSB which was established in Kazakhstan’s Law On Government Support for Small Business; including practical steps being taken to support and develop national and regional programs for business.

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The growing needs of small and medium-sized businesses for financing is the most topical issue in Kazakhstan right now and it is determining the important role that commercial banks and other financial institutions play in supporting them.

In its development strategy JSC Bank TuranAlem has made it one of its top priorities to finance the small and medium-sized business segment and to actively assist them in getting them established.

As a result of our strategy, in 2005 alone, some 34,000 loans worth over 165 bn Tenge were made. As of January 1st, 2006 the small business portfolio of the bank amounted to 88,427 mn Tenge that is 31,877 mn Tenge or 56% more than the 2004 levels. SMSBs account for about 11% of the bank’s total portfolio.

As of January 1st, 2006 the bank’s small business portfolio, consists mostly of loans made to trading companies (33.5% of the bank’s total SMSB portfolio). However, it should be noted that recently the number of loans made to companies operating in the real economy have increased.

Thebreakdownofthesmallandmedium-sizedbusinessloanportfoliobysector,2005

Trade 33,5%

Others 27,4%

ConstructionSector 12,6%

GeneralIndustry 12,4%

Agriculture 9,6%

TransportandTelecoms 4,5%

In response to the growing needs of small businesses BTA has also begun providing loans to agricultural companies and small businesses in remote rural areas. A pilot project was launched in the east and south of Kazakhstan in early May 2005 and in the Kostanai, Kokshetau and Petropavlovsk Regions in July.

Cooperation with the EBRD, under the Kazakhstan Small Business Program launched in 1998, has to date yielded significant results. Bank TuranAlem has been actively involved and has become the leader of the Program. Every forth loan made under the Kazakhstan Small Business Program was launched by the EBRD and was provided for by our bank.


Since 1998, the bank has made over 47,000 loans worth about $310 mn. To date over 14,000 small and medium-sized businesses have been financed under the Program and outstanding loans total some $117 mn.The small business loan portfolio is quit diversified and allows us to mitigate our financial risks. Despite the simpler procedures and minimal set of documents to be provided by potential borrowers, the quality of the portfolio is strong. In the past five years, after the Program was launched, the non-repayment rate has been below 1% as of January 2006 and overdue debt has accounted for only 0.67% of the total portfolio.

The best point about cooperation with the EBRD under the Kazakhstan Small Business Program, is that really small businesses have a chance of getting financing. The average size of a loan made under the Program is about $6,000. In other words, any experienced businessman, regardless of the size of his/her business may get a loan from our bank.

Since June 2004, all branch offices of Bank TuranAlem have been involved in a specially designed Program to lend to Small and Medium-Sized Businesses entitled CreditPro. Under this Program, loans are made to meet working capital requirements and to acquire fixed assets; meaning that loans under international lines of finance, bank guarantees and letters of credit are issued. The CreditPro Program is being implemented in phases and is scheduled to be fully put into operation in the next several years. The small and medium-sized business market is also researched on a constant basis in order to identify needs, requirements and the interests of customers so that we can continue to offer quality products and services and develop new services.

Under the Loyalty Program of the CreditPro Club, in an effort to facilitate dialogue between the business community and banks, regional business workshops were held in 2005 for small and medium-sized businesses.

RetailFinancing

In 2005, Bank TuranAlem continued to be active in the retail financing market.

By the end of 2005 outstanding individual loans amounted to 86,842 mn Tenge that was 1.8 times more than levels by the end of 2004.

In 2005, the bank offered retail loans worth 59,169 mn Tenge and that was 25,777 mn Tenge more than the 2004 levels.

The amount of consumer loans made to individuals rose from 33,243 mn Tenge to 63,725 mn Tenge, or by 192%.

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The growth of the consumer loan portfolio was driven mostly by mortgage loans (9,187 mn Tenge) and loans to meet urgent needs (5,556 mn Tenge).

As of January 1st, 2006 mortgage loans amounted to 24,516 mn Tenge and the number of accounts reached 9,741. As compared to 2004, mortgage loans grew by almost 2.1 times. Mortgage loans also accounted for nearly 38.5% of all consumer loans.

In 2005, the bank’s focus in retail financing was to further establish contacts with partners and to develop new sales channels including: car dealers and construction companies who were actively involved in cooperation. As a result, the bank managed to increase the average monthly number of car loans by more than 5 times from 120 mn Tenge to 700 mn Tenge while mortgage loans and loans secured by other properties increased in the year by some 14,600 mn Tenge.

In addition, 2005 was the year, in which the bank expanded its salary card and credit card business. 473 companies became clients of the bank; 26,380 credit cards were issued and limits worth 1,120 mn Tenge were set. By January 1st, 2005 express loans, made under salary card projects, amounted to nearly 1,600 mn Tenge whereas at the beginning of 2005 the bank did not provide express loans.

Apart from the above-mentioned programs, another promising segment for the bank to focus on in 2006 can be found in the retail financing market and education loans. In 2005, the respective product was developed and a General Agreement with the Financial Center under the Kazakh Ministry of Education was signed.

Bank TuranAlem doesn’t just provide retail loans but it also advises clients on financial planning. Our goal is to become a financial consultant and serve as a trusted partner for our customers.

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ConsumerLoans

��annual report | 2005 ��

International Business

PositionsinCIS

One of the biggest challenges for JSC Bank TuranAlem is to implement a strategy to expand into CIS markets in order to establish a common banking market of Kazakhstan and the CIS in line with policies pursued by the presidents of CIS countries declaring the ideals of the Eurasian Economic Community.

The Regional Expansion strategy generally has been put into effect today and will be carried out all the way leading up to 2008 with the ultimate goal of the BTA Group having a stronger presence in the financial service markets of CIS countries and becoming one of the ten largest banks in the CIS in both public and private financial institutions.

The Geographical diversification of BTA also provides for mitigating economic, political and banking risks and the broadening coverage of financial markets.

Currently, our operation offices are engaged in promoting an entire range of services of the BTA Group in local markets and in which their business is primarily based on partnerships with banks on the grounds of offering them to make the best of the opportunities they have.

Our offices are able to advise banks and customers on optimal financing solutions; including structured deals, that can be acted on at information and methodology centers.

TradeFinancing

JSC Bank TuranAlem has long been the leading commercial bank in Kazakhstan in terms of trade & financing which is one of the priority lines of business for the bank. BTA offers a wide range of services in advising customers on foreign trade transactions; it structures deals with different terms and tenors, and offers help with various export/import transactions such as: documentary letters of credit, bank guarantees, standby letters of credit, documentary encashment, forfeiting and factoring.

In 2005, our trade financing transactions, totalled over $2.8 bn and by the end of 2005, the portfolio amounted to over $1.5 bn.

Cooperation with export credit agencies and Eximbanks also makes it possible to finance projects in the trading sector and is the bank’s focus. As of January 1st, 2006 such deals made in the last five years have amounted to over $300 mn. To date, import transactions are financed not only in Kazakhstan but also in other CIS countries.

Along with this, the confidence of foreign financial institutions in the bank continues to grow. By the end of 2005 the bank has established active contacts with more than 600 correspondent banks worldwide. Of

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them, 230 open lines of credit worth over $2 bn for up to 36 months make up the trading transactions for our customers.

Foreign partners of our customers more and more take the direct liabilities of BTA without acknowledgment from prime banks.

JSC Bank TuranAlem intends to further focus on such strategic lines of business such as, trade financing, providing a consistently high quality of service for clients, partnering and taking a professional approach to every single transaction.

SyndicatedLoans

Syndicated loans are one of the ways to raise funds in order to finance transactions made by the bank’s customers in the trading sector. Starting back in 1999, the bank succeeded in getting syndicated loans and since then, such loans have amounted to $1.8 bn, and by the end of 2005 the syndicated loan portfolio totaled some $997 mn.

In 2005, the bank continued in its efforts to raise funds within international capital markets; every single deal was special, thus bringing something new to Kazakhstan’s market. These deals were seen as being exemplary and unusual for Kazakhstan’s banking sector. In the initial first six months of the year three deals were completed. In April 2005 the bank made a deal with the Islamic Bank of Development and the financing which was worth $50 mn under the Murabah Agreement provided for under Islamic Law and financing through the Suldcshine certificate worth some $30 mn. Also, in June of 2005, the bank received the country’s first mid-term syndicated loan worth some $110 mn. These two deals are completely new in the Kazakh market as they set new benchmarks not only in terms of cost, purpose and tenor of financing but also in terms of investors that have never invested in the region before. It should also be noted that the purpose of all the earlier loans syndicated to BTA and other Kazakhstani banks was to finance transactions in the trading sector. It was the first time that proceeds of the loan, worth $110 mln, were used to meet the bank’s working capital requirements setting a new benchmark in the entire CIS.

In September 2005, the bank again completed an exemplary deal in Kazakhstan’s market – it received a global syndicated loan worth $777 mln. The size of the loan and the number of banks involved in syndication, 73 banks in all, allowed for regarding the loan as then, the largest one in the history of Kazakhstan and CIS. Geographically, the diverse syndicate of banks, often take on different approaches to measuring the risks and the fact of a 200% over subscription, are evidence of the internationally accepted creditworthiness of the bank.

As the bank’s financial performance consistently improves, and it rapidly becomes more competitive in Kazakhstan and the CIS, the confidence of international financial institutions in the bank grows thus resulting in a lower risk of financing the bank and, consequently, a lower interest rate on future loans.


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200320042005 2002 2001 2000 1999

Borrowings MarginonLIBORonLoans

Apart from acting as a borrower in the syndicated loan market, since 2004 the bank has acted vigorously as lender and since then it has taken part in five deals in order to provide syndicated loans to banks in the CIS. In doing so, the bank was involved on both a funded and non-funded basis. In 2005, the bank also got involved in syndicated loans to two CIS banks: Absolut Bank in Russia and Kreshchatik Bank in the Ukraine. It should also be noted; that with its extensive experience and long credit record in the syndicated loan market, the bank intends to arrange for syndicated loans to CIS banks and has started taking the initial steps to expand this business.

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Investment Banking JSC TuranAlem Securities (the “TAS”) is a leading investment firm of: local brokers, financial consultants, securities issuers, offering consultants, investment managers and investment deals facilitators. The TAS’s focus now is to help develop the business of its customers by offering a broad range of services. Relations with customers are the greatest value and foundation for the company’s business. This is an important business philosophy, and it affects development strategies and services and their quality relies on a strengthened the customer relationship.

The firm’s Quality Management System was successfully certified for compliance with BS EN ISO 9001:2000. This certificate is acknowledgement of the good quality of services offered by the firm, and of the transparency of technology, and the responsibility of its staff members, along with our individual approach to meet the unique needs of every customer. In July 2005, the Euromoney Conference, gave The Best Investment House inKazakhstan award to TuranAlem Securities.

In 2005, JSC TuranAlem securities once again proved its leading position in the corporate securities market grabbing over 22% of it. TuranAlem Securities was the first broker that put into place a Risk Management system. The purpose of the Risk Management system is to ensure the maximum security of assets and capital by minimising the exposure that could unexpectedly and drastically bring the firm’s resources down. The firm measures and manages all risks, while taking into account all operational risks and risks taken by the issuers of securities.

The TAS has extensive credentials in managing its investments, which in many ways have become key and it has established a basis for building the required infrastructure, including strong analytical functions. Temporarily available funds are managed at the TAS, while taking into consideration the customer’s investment preferences. Therefore, the recent customer portfolio it manages as a trustee has grown considerably and now amounts to nearly $87 mn.

TAS staff members are also experienced in arranging and completing deals to attract additional capital, including IPO (in national, Russian and international markets), searching for investors and strategic partners, arranging for the issuing and offering of shares and bonds. A comprehensive approach to addressing such issues, such as the attraction of capital and promising to offer the best and most unique solutions in meeting all customer needs, has its advantages. The TAS has also been actively involved in the issuing and offering of corporate securities. The firm has to date issued corporate securities worth an estimated $285 mn. TuranAlem Securities was also awarded by the Kazakhstan Stock Exchange as, TheBestFinancialConsultant.

The firm also provides support: in mergers and takeovers, corporate asset restructuring and management; along with this it facilitates deals in the trading business, assists management teams while buying out the companies they run, and helps organise holding companies.

TuranAlem Securities in association with the JSC National Innovative Fund established the country’s first local venture fund entitled, “The JSC Areket High Technology Fund.” The purpose of the fund is to attract investment in new and ongoing projects (which show great potential) for development and commercialising innovations along with transferring, borrowing and upgrading innovative technology.

In order to provide Kazakhstani investors with greater investment opportunities, on March 19th, 2005 TuranAlem Securities developed a new product called, the Public Mutual Fund BTA Dokhodny (meaning “profitable”). Mutual


funds make it possible to earn investment income without large sums of money and the fund is able to accumulate small amounts into the common market along with providing significant capital. It offers the opportunity to save money and offers security from market and infrastructure risks.

JSC TuranAlem Securities is, above all, a client-friendly firm operating in a transparent, technological and reliable manner.

Insurance BusinessThe Kazakhstan insurance market started growing more rapidly a few years ago and has a good potential to grow further. The insurance penetration rate is measured as the ratio of insurance premiums to GDP in Kazakhstan and makes up about 0.9% of the overall insurance business and 0.02% of the life insurance business.

The following three subsidiaries of the BTA Group offer such insurance services as: BTA Strakhovanije Insurance (property and liability insurance), BTA Strakhovanije Zhizni Life Insurance (life and annuity insurance) and BTA Zabota Care (health and employee compensation).

With the increase in individual and corporate income, as well as the growth of consumer and mortgage lending, both now contribute to the growth of the needs of individuals and banks for insurance. BTA’s insurance companies are now one of top three insurers in all the strategically significant segments of the insurance market, which includes: car insurance, home insurance, medical insurance and employee compensation insurance. In the life insurance market, we are absolute leaders with a market share of over 90%.

We have emphasized putting into place a Quality Management system and reducing costs. Last year alone, business processes at BTA Strakhovanije improved significantly and that allowed us it to accelerate significantly the claim settlement processes applied to car insurance concurrently bringing losses from insurance fraud down. Phasing out some excessively regulated types of mandatory insurance and focusing on major classical types of insurance and groups considerably increased the growth of revenues and income.

Mandatory insurance of the employer’s liability for any damage to the health or life of the employee, implemented in the middle of 2005, made it possible for the employee compensation insurance market to grow. In addition, the number of Kazakhstani employers, providing mandatory medical insurance as part of compensations they offer their employees, has greatly increased. In order to better utilize such opportunities more effectively, a decision was made about renaming the insurance subsidiary KBS Garant to BTA Zabota and to view it as a company that deals primarily with the health and employee compensation insurance business. The bankruptcy of the USSR’s Gosstrakh, an insurance monopoly company, that occurred in the early

1990’s and the subsequent years of hyperinflation have considerably undermined the confidence of Kazakhstanis in long-term savings and insurance. Bank TuranAlem chose to restore this strategically significant segment of the insurance market by establishing in 1999 the first life insurance company in independent Kazakhstan. From day one, the company offered a classical long-term saving insurance services. In 2005, BTA Strakhovanije Zhizni managed to bring its income from insurance premiums up by almost 90% by offering bank insurance,

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expanding its chain of distributors and using multi-channel sales. A new automated information system was also put into place. It allowed for a considerable increase in the quality of service being offered to customers and of insurance product distributors, and it improved accounting and management processes.

In 2005, we continued to implement corporate governance standards and today we emphasize corporate risk management policies, accounting policies improvement, and money laundering counteraction. Financial and actuary audits are regularly conducted by external international auditors and actuaries at all BTA insurance subsidiaries. We intend to further institutionally develop our insurance subsidiaries by implementing international best practice, improving the efficiency of management and raising the proficiency of our staff.

Pension Fund Services The merger of the two major pension funds “Kurmet” and “Kazakhstan” – resulted in the consolidation of pension assets, while advancing our services technology, and it further qualified our labour and leadership in the pension market.

The subsidiary of the BTA, “Pension Fund BTA Kazakhstan” is licensed to independently manage your pension assets. Assets managed as a trustee now total some 47.6 bn Tenge that accounts for 7.33% of the growing pension funds market.

Between December 2002 and December 2005 the nominal income of the BTA Kazakhstan Pension fund accounted for 23.16% that was 22.62% higher than cumulative inflation and 4.24% higher than average market income.

Investment portfolio of JSC PF BTA Kazakhstan can be broken down as follows:

NBKnotes 8,06%

BondsissuedbytheRoKMinistry 19,36%

SharesissuedbyAlistedissuers 25,45%

BondsissuedbyAlistedissuers 26,90%

BondsissuedbyBlistedissuers 0,27%

Depositswithcommercialbanks 19,96%

BreakdownofinvestmentportfolioofJSCPFBTAKazakhstanasof01/01/2006

Such diversity allows us to ensure greater liquidity and the required yield you look for in your investment.

5�annual report | 2005 555�

Mortgage Market In 2005, the mortgage market continued growing rapidly in Kazakhstan. At the beginning of 2005 the mortgage loan portfolio nationwide amounted to 99.4 bn Tenge and by the end of the year it more than doubled reaching 220.5 bn Tenge.

In 2005, JSC BTA Ipoteka provided mortgage loans worth 29.2 bn Tenge and it is still one of the leading players in the mortgage market. The mortgage loan portfolio of JSC BTA Ipoteka includes loans in off-balance accounts totalling over 41.6 bn Tenge.

The company signed the Memorandum of Cooperation in implementing the National Residential Construction Program in 2005–2007 with the Kazakh government and is now one of most active partners in the program. The company serves as a partner of the JSC Kazakhstan Mortgage Company.

JSC BTA Ipoteka was one of the first companies that started cooperating successfully with the Kazakhstan Mortgage Insurance Fund and now offers a wide range of products with the first instalment being lowered by 10%.

The company has 15 branch offices across Kazakhstan so that over 65% of the people living in urban areas can now get loans from BTA Ipoteka. In 2005, the company started using its franchising system across both Kazakhstan and other CIS countries.

Following the resolution passed by the Management Board of Kazakhstan Stock Exchange (the “KASE”) June 10th, 2005 JSC BTA Ipoteka was awarded with the diploma, For Pursuit of Transparency among B-listed companies.

On September 23rd, 2005, the 2004 Annual report of JSC BTA Ipoteka took first place For Being Informative in the contest of annual reports held by the National Business magazine.

On October 11th, 2005 a blank loan worth $20 mn was obtained from Dresdner Bank AG for 1-1/2 years.

On November 9th & 10th, 2005 JSC BTA Ipoteka held an international conference on mortgage lending in CIS countries in order to establish its contacts with potential partners and financial institutions throughout CIS countries.

5656

Leasing Services The BTA Group is also very present in the leasing service market through its dedicated subsidiary BTA ORIX Leasing.

The company was set up in 2000 as OJSC BTA Leasing in which the bank owned 100% of its shares. In October 2005 the ORIX Corporation of Japan, ORIX Leasing Pakistan and International Finance Corporation invested in the equity of the company and it was renamed JSC BTA ORIX Leasing. The company’s credit policies primarily focus on offering leasing services to Kazakhstan’s small and medium-sized business owners and it covers virtually all priority sectors of the economy including: construction, agriculture, oil refining, services, and transportation etc.

BTA ORIX Leasing is now the largest commercial leasing companies in Kazakhstan with an authorised capital of $10 mn. With its 2005 results, the company is now one of the three largest commercial leasing companies in Kazakhstan in terms of both a leasing portfolio and financial performance. In 2005, the company’s leasing portfolio amounted to $32 mn (42-percent growth versus 2004).

The European Bank for Reconstruction and development opened a line of credit worth $5 mn for BTA ORIX Leasing. In September 2005, the company entered into a $5 million agreement with the International Finance Corporation without a bank guarantee.

In addition, BTA ORIX Leasing has the most extensive network of direct offices in different regions of Kazakhstan and ten offices as opposed to four in 2004.

On December 30th, 2005 BTA ORIX Leasing issued common coupon bonds worth 2 bn Tenge for 3 years. The bonds were A-rated and this was the company’s first issue.

The company also plans to open branch offices in a number of CIS countries.

Other Lines of BusinessCreditCards

In 2005, the bank issued around 125,000 new credit cards maintaining a leading position in this market. As compared to 2004 the growth was 40%. CREDO credit cards are becoming increasingly popular among customers.

In order to provide 24-hour access to cash, JSC Bank TuranAlem is broadening its chain of multifunctional ATM machines allowing customers to not only to withdraw cash but also to pay various bills including cellular phone


service bills. At the end of 2005 the bank had 295 ATM machines and that was 68% more than 2004 levels with a market share of 17%. The bank also plans to expand its non-cash payment business using credit cards. By the end of 2005 JSC Bank TuranAlem had entered into contracts for accepting credit card payments with some 478 stores and retailers.

The focus of the bank in the credit card business is to transition from the current credit cards to a microprocessor platform in 2006.

DepositOperations

Retail bank operations are becoming an increasingly significant line of business for the bank. The Savings business is a special business.

In 2005 Bank TuranAlem was offering a broad range of savings & retail bank products along with services including checking accounts, term deposits, special deposits and investment banking products. It is the second largest in terms of the number of customers in Kazakhstan after the People’s Savings Bank. Since 1999 the bank has been increasing its presence in the retail product and service market and it has expanded its branch networks in those spheres that offer a good potential to do retail business, especially in the east and west of Kazakhstan. The bank intends to continue improving on its retail network in the next three years in order to make the best of opportunities provided by the growing demand for retail bank services in the market. BTA aims at focusing on offering a set of services to individuals in a quality-based, fast and convenient manner.

2005 2004 2003

800

600

400

200

0

101000

76266

58905

RetailTermDeposits

100000mnTenge

5�5�

InternationalCapitalMarkets

To BTA 2005 was different from previous years because the bank focused more on increasing its quality of its presence in international capital markets rather than increasing the number of loans offered in Kazakhstan. The focus was to diversify the sources of finance and establish processes simplifying borrowing.

By offering in early 2005, Eurobonds worth $350 mn with a fixed rate for 10 years, the bank strengthened its position among investors specializing in fixed- yield instruments to which the bank has been offering all issued Eurobonds since 2001.

BTA was also the first Kazakhstani bank that offered 3-year Eurobonds worth $200 mn with a flexible rate, thereby finding a new class of investors investing primarily in instruments with flexible yields. The offering was done under the Mid-Term Eurobond Program, the “MTEP” which was a set of legal instruments listed on the London Stock Exchange making it possible to get successive issues of debt instruments of various types and tenors. Under the MTEP, the bank may issue a series of various types of Eurobonds (both at fixed and flexible rates & with a Zero coupon offering premiums and discounts etc). The Eurobonds can also be utilized with various currencies at any time requiring spending much less time and resources than in the case of a single issue. Such issues may be both public and private. The MTEP also offers opportunities to have a constant bilateral dialogue between the bank itself and its investors.

With the goal of diversifying the investor base the bank was the first of Kazakhstan’s banks that went for Eurobonds denominated in Russian roubles. In October 2005 under the Rouble Bond Program the BTA issued bonds worth some 3 bn roubles for 4 years. The issue went very well because the bonds were offered to the Russian investors at value at which bonds then issued by the prime Russian issuers, Russia blue chip resident companies were offered. The bank is in the position of doing it again under the Program, if required.

Apart from operations in the debt capital market, the bank was also actively expanding its investor base in commercial capital markets. By tradition, the bank widely used such instruments as syndicated loans. With the help of this instrument the largest loan worth $777 mn was obtained. A syndicated loan organised in line with the Murabah Islamic Financing guidelines was another significant event that occurred. Based on a constant bilateral dialogue with Western European investors the bank became the first Kazakhstani bank that got Shuldschine financing – a sort of short-term commercial note.

Having focused on the expansion of its investor base and the broadening of the range of international financing products in 2005, the bank both strengthened its presence in international markets and provided Kazakhstani banks with access to new forms and sources of international financing and it also enhanced the image of Kazakhstan’s financial sector as one of the best developed in emerging markets.

It should be noted that BTA’s activity in international markets supports the implementation of the best practices of international institutions, bank technology and products in Kazakhstan’s financial sector.

GROUP FINANCIALSTANdING OvERvIEw

6262

Summary In 2005, the Group generated 14,706 mn Tenge of net income and 5,297 Tenge of earnings per dissolved shares versus 6,581 mn Tenge of net income and 3,807 Tenge of earnings per “dissolved” shares generated in 2004. The increased net income in 2005 versus 2004 reflects mainly the Group’s asset growth.

Returns on average common shareholders’ capital accounted for 26.8% in 2005 versus 20.8% in 2004.

Profit and Loss Account ThetablebelowprovidesagrossbreakdownoftheGroup’snetinterestincome:

mn Tenge

2005 2004 2003

Interest rate on loans to customers 69 789 45 444 26 263

Interest rate on securities 6 524 3 682 4 257

Interest rate on deposits with other banks 1 973 701 298

Totalinterestincome 78286 49827 30818

Interestexpense 45699 26106 16591

Net interest income before provision for potential losses 32 587 23 721 14 227

Provisions for potential losses 15 359 19 251 10 391

Netinterestincomeafterprovisionforpotentiallosses 17228 4470 3836

TotalInterestIncome

In 2005, total interest income grew by 57.1% reaching 78,286 mn Tenge from 49,827 mn Tenge in 2004 mostly due to the 64% growth of average annual income-bearing assets: from 479,380 mn Tenge in 2004 to 787,546 mn Tenge in 2005.

The average return on income-bearing assets accounted for 10.6% in 2005 versus 10.8% in 2004.


mn Tenge

2005 2004 2003

Amounts due to the National Bank, government and financial institutions 126 277 408

Interest on loans and advances from banks 11 029 6 040 3 954

Interest on customer accounts 13 575 8 730 6 177

Interest on issued debt securities 20 969 11 059 6 052

Total 45699 26106 16591

In 2005, interest income coming from loans to customers grew by 54% reaching 69,789 mn Tenge versus 45,444 mn Tenge in 2004 due to the 67-percent growth of the Group average with an annual loan portfolio balance of 347,134 mn Tenge in 2004 and 579,923 mn Tenge in 2005.

The effect of the bank’s loan portfolio growth was levelled by a decrease in the average return on loans. As of December 31st, 2005, the interest rate on Tenge-denominated loans varied from 10 to 20%, and the average weighted interest rate accounted for 19.7%; the interest rate on the U.S. Dollar-denominated loans varied from 10 to 18%, with an average weighted interest rate accounting for 11.3%. The total average return on loans accounted for 13.3% in 2005 versus 13.5% in 2004.

Interest income coming from the Group’s securities portfolio grew significantly in 2005 by 77.2% reaching 6,524 mn Tenge from 3,682 mn Tenge in 2004.

In 2005, the average annual balance on the Group’s securities portfolio, including financial assets at fair market value through profit or loss (held-for-trade assets) and available-for-sale securities grew by 30% reaching 140,133 mn Tenge versus 107,744 mn Tenge in 2004 reflecting the bank’s goal of increasing its liquidity. The average return on the securities portfolio rose to 4.7% in 2005 from 3.4% in 2004.

Interest income coming from bank deposits grew by 2.8 times in 2005 reaching 1,973 mn Tenge versus 701 mn Tenge in 2004. The increase in income from deposits with banks was driven by the growth of the average annual balance on deposits with banks by 2.4 times in 2005 reaching 14,857 mn Tenge versus 6,016 mn Tenge in 2004.

InterestExpense

ThetablebelowprovidesinformationontheGroup’sinterestexpenseinthegivenperiods:

6�6�

In 2005, interest expenses grew 75% reaching 45,699 mn Tenge versus 26,106 mn Tenge in 2004. The increase in the bank’s interest expense was driven by the greater inter-bank borrowings of the Group, the issue of debt securities, and the growth of the deposit base, as well as an increase in the average interest rate on debt.

In 2005, the average portfolio of customer deposits bearing interest expense (corporate and retail ones) grew 45% reaching 266,712 mn Tenge versus 183,514 mn Tenge in 2004. The growth of deposits resulted from the general economic growth in Kazakhstan and the related growth of confidence of customers in Kazakhstan’s banks.

Average rate customer deposits bearing interest expense accounted for 5.1% in 2005 and 4.8% in 2004.

In 2005, interest expenses on issued securities grew 90% reaching 20,969 mn Tenge versus 11,059 mn Tenge in 2004. Such growth resulted mostly from an increase in the amount of issued securities.

NetInterestIncomebeforeProvisionforPotentialLosses

In 2005, net interest income before provision for potential losses grew 37.4% reaching 32,587 mn Tenge versus 23,721 mn Tenge in 2004.

The bank’s net interest margin determined as a ratio of net interest income before provision for potential losses to some average income-bearing assets accounted for 4.4% in 2005 versus 5.2% in 2004. A decrease in the margin was driven mostly by the decrease in average interest rates on income-baring assets that were partly compensated by the stabilization of interest rates on amounts due.

The bank is careful to constantly keep track & monitor the interest margin and spread. Despite a decrease in the margin, the bank is sure that it will be capable of maintaining an adequate spread between the cost of financing and interest on loans.

ProvisionsforPotentialLosses

In 2005, the Group’s allowances for impairment of assets declined 20% reaching 15,359 mn Tenge versus 19,251 mn Tenge in 2004 demonstrating better quality in the Group’s loan portfolio. Accordingly, provisions for potential loses from loans accounted for 5.6% of total loans as of December 31st, 2006 versus 6.7% s of December 31st, 2004.

In 2005, net write-offs reached 5,208 mn Tenge (gross write-offs reached 8,682 mn Tenge less 3,474 mn Tenge of returns) versus 4,362 mn Tenge in 2004 (gross write-offs of 8,129 mn Tenge less 3,767 mn Tenge of returns).


mn Tenge 2005 2004 2003Net income on fees and commissions 12 454 8 994 6 319Net gain on held-for-trade securities 3 015 38 589Net gain on foreign exchange operations 794 7 595 2 553Gain/loss from underwriting 539 (478) (260)Additional profit 1 139 567 1 002

Total 17941 16716 10203

FeeIncome

In 2005, the net income from commissions and fees grew by 38.5% reaching 12,454 mn Tenge versus 8,994 mn Tenge in 2004. Such growth was driven by the growth of commission income from documentary trade financing operations, transfers and from commissions and fees coming from cash operations.

Gain/LossonHeld-For-TradeSecurities

In 2005, the Group’s net income from held-for-trade securities amounted to 3,015 mn Tenge versus a net income of 38 mn Tenge in 2004 that was driven by the Group’s active operations to trade securities in both its internal and external markets.

Gain/LossonForeignExchangeOperations

Gain and losses resulting from the revaluation of assets and liabilities in foreign exchanges were reflected in the profit and loss account as gain minus loss on foreign exchange operations. In 2005, this declined almost 10-fold reaching 794 mn Tenge versus 7,595 mn Tenge in 2004 that was driven largely by fluctuations of the exchange rates of main currencies (USD, EUR, GBP, RUB) that created a loss on the revaluation of foreign exchange exceeding the gains from revaluation.

Also, the lower rates of the main currencies resulted in lower gains on the revaluation of other financial assets denominated in the foreign exchange (BTA subordinated coupon bonds).

Gain/(Loss)OnUnderwriting

The Group made progress in underwriting in 2005 and thus generating 539 mn Tenge of net income versus 478 mn Tenge of loss in 2004 that was driven by an increase in collected insurance premiums and better performance of the Group’s insurance companies in the insurance market.

OtherIncome

In 2005, additional income doubled reaching 1,139 mn Tenge versus 567 mn Tenge in 2004 mostly due to an increase in income from leases and other operations not related to banking.

Non-InterestIncomeThetablebelowprovidesinformationontheGroup’snon-interestincomeinthegivenperiods:

6666

mn Tenge

2005 2004 2003

Salaries and social benefits to staff 6 930 4 388 3 432

Depreciation and amortisation 892 1 029 926

Deposit insurance 446 371 306

Loss on retirement of subsidiary 850 - -

Administrative and operating expenses 1 704 922 832

Total: 10822 6710 5496

In 2005, non-interest expense grew by 61% reaching 10,822 mn Tenge versus 6,710 mn Tenge in 2004. The increase in non-interest expenses in 2005 was driven by increases in expenses for salaries and social benefits for staff and for administrative and other operating expenses.

StaffSalariesandSocialBenefits

In 2005, salaries and other social benefits grew by 57.9% reaching 6,930 mn Tenge versus 4,388 mn Tenge in 2004 as a result in the increase in the number staff members in order to expand the Group’s business.

DepreciationandAmortisationCharge

In 2005, the depreciation and amortisation charge declined by 13.3% reaching 892 mn Tenge versus 1,029 mn Tenge in 2004. This was a decrease that was driven by revised depreciation shares for some fixed assets.

DepositInsuranceIn 2005, the deposit insurance charge grew 20.2% reaching 446 mn Tenge versus 371 mn Tenge in 2004. The change in the deposit insurance charge was driven by the growth of the Group’s deposit portfolio.

LossonRetirementofSubsidiary

Losses in the retirement of the subsidiary reached 850 mn Tenge due to the cessation of consolidation of the following companies: Kazco Construction LLP, Samal Properties LLP and Real Estate Commerce LLP.

Non-InterestExpense

ThetablebelowprovidesabreakdownoftheGroup’snon-interestincomeingivenperiods:


mn Tenge

2005 2004 2003

Taxes excluding income tax 1 051 940 614

Expenses for repair and maintenance 659 403 754

Advertising 1 108 744 447

Legal services and consultancy 390 358 388

Other provisions for losses 1 642 2 293 338

Lease 1 141 794 312

Security guards 457 361 279

Communications 480 343 292

Others 1 144 612 760

Total: 8072 6848 4184

OtherAdministrativeandOperatingExpenses

ThetablebelowprovidesabreakdownoftheGroup’sadministrativeandoperatingexpensesingivenperiods:

In 2005, other administrative and operating expenses grew by 17.9% reaching 8,072 mn Tenge versus 6,848 mn Tenge in 2004. Expenses for adverting, leases, security, office repairs and maintenance were the primary driver of such expenses.

In 2005, legal and consultancy expenses grew insignificantly (8.9%) reaching 390 mn Tenge versus 358 mn Tenge in 2004. Such expenses resulted from further borrowings and the significant efforts made by the Group in new lines of business.

In 2005, expenses for leases grew 43.7% reaching 1,141 mn Tenge versus 794 mn Tenge in 2004. In 2005, expenses for security personnel grew 26.6% reaching 457 mn Tenge versus 361 mn Tenge in 2004. Repair and maintenance expenses in 2005 grew 63.5% reaching 659 mn Tenge versus 403 mn Tenge in 2004. Increases in such expenses were driven by an increase in the number of the Group’s assets required to expand its business.

6�6�

In 2005, taxes excluding income tax reached 1,051 mn Tenge versus 940 mn Tenge in 2004 reflecting 11.8-percent growth driven by an increased value-added tax.

In 2005, advertising expenses grew 48.9% reaching 1,108 mn Tenge versus 744 mn Tenge in 2004 mostly driven by more significant advertising efforts to expand the business and offer new products.

In 2005, other expenses grew 86.9% reaching 1,144 mn Tenge versus 612 mn Tenge in 2004 reflecting mainly expenses incurred in relation to the Group’s growth.

TaxationKazakhstan’s taxation laws do not provide for consolidating tax returns. Accordingly, the bank and its subsidiaries submit tax returns and pay taxes individually.

In 2004, the Group’s income tax expenses reached 1,047 mn Tenge or the effective rate of 13.73% while the Group’s effective rate in 2005 declined to 9.64% due to exemptions on such taxes as the tax on income from government securities transactions, a tax on investment and mortgage loans and financial leasing. Income tax amounted to 1,569 mn Tenge in 2005.

In 2005, income tax provided by the Kazakh Tax Code and applicable to the Group (excluding subsidiaries in other countries) accounted for 30%. Despite the fact that the bank and its subsidiaries are expanding their business the executives are sure that the Group’s effective rate of tax on any further taxable income will be lower than the rate provided in Kazakhstan’s Tax Code.

TotalAssetsIn 2005, the Group’s total assets grew by 61.4% reaching 997,805 mn Tenge as of December 31st, 2005 versus 618,302 mn Tenge as of December 31st, 2004. The growth of total assets was driven mostly by the 66.1-percent growth of the loan portfolio from 409,517 mn Tenge to 680,385 mn Tenge, the 2.3-time growth of cash and cash equivalents (by 67,391 mn Tenge), and the 19.6-percent growth of the securities portfolio (by 25,050 mn Tenge).

In 2005, other assets grew insignificantly - 4.7% - reaching 7,019 mn Tenge versus 6,701 mn Tenge in 2004.

Financial Standing


mn Tenge

2005 Other 2004 Other 2003 Other Tenge Currency Total Tenge Currency Total Tenge Currency Total

Cash and cash equivalents

57 134 61 997 119131 34 225 17 515 51740 15 093 6 598 21691

Obligatory reserves 10 791 0 10791 6 971 0 6971 3 706 0 3706

Financial assets at fair value through profit or loss

18 852 91 400 110252 46 125 56 057 102182 11 648 49 943 61591

Amounts due by credit institutions

4 059 19 617 23676 425 6 140 6565 78 5 915 5993

Assets available for sale

2 462 39 944 42406 1 283 24 143 25426 868 3 871

Securities held to maturity

- - - - - - 3 26 285 26288

Loans to customers 163 450 557 246 720696 109 992 329 158 439150 78 426 176 692 255118

Investment in associates

1 288 917 2205 - 331 331 - - -

Other assets 5 749 1 342 7091 6 633 491 7124 6 307 364 6671

Total assets

263 785 772 463 1036248 205 654 433 835 639489 116 129 265 800 381929

ThetablebelowprovidesabreakdownoftheGroup’stotalassetsminusprovisionsbycurrency:

7070

mn Tenge

Asof31/12/05 Asof31/12/04 Change,%

Shareholders’equity

Authorised capital:

Common shares 33 276 22 405 48,5

Preferred shares 3 055 840 3,6 times

Bought-in equity capital (348) (516) -32,6

Revaluation reserve 510 2 429 -79,0

Retained earnings 30 213 14 099 2,1 times

Additional paid-in capital 19 184 5 996 3,2 times

Totalshareholders’equity 85890 45253 89,8

Minority stake 1 218 1 677 -26,9

Totalshareholders’equityincludingminoritystake 87108 46920 85,7

TotalLiabilities

As of December 31st, 2005 the bank’s total liabilities reached 910,697 mn Tenge which is 59% more than those as of December 31st, 2004 (571,382 mn Tenge). The growth of total liabilities was driven by the 117,930 mn Tenge growth of debt securities issued by the bank, the 144,716 mn Tenge growth of amounts due to credit institutions and the 80,004 mn Tenge growth of deposits at the bank.

Other liabilities reached 10,083 mn Tenge as of December 31st, 2005 or 2.5% more than in 2004 (9,838 mn Tenge as of December 31st, 2004).

In line with International Financial Reporting Standards financial instruments are to be estimated on a conditional basis and have to be accounted for as liabilities. Therefore the bank’s repurchasable convertible preferred shares have been accounted for as liabilities. As of December 31st, 2005 repurchasable convertible preferred shares were accounted for as financial liabilities and consisted of 568,870 shares (518,253 shares in 2004).

Shareholders’Equity

ThetablebelowprovidesabreakdownoftheGroup’sshareholders’equityasofthegivendates:


As of December 31st, 2005 the total shareholders’ equity had reached 85,890 mn Tenge (8.6% of total assets) versus 45,253 mn Tenge (7.3% of total assets) as of December 31st, 2004. As of December 31st, 2005 total shareholders’ equity including minority stake had reached 87,108 mn Tenge versus 46,920 mn Tenge as of December 31st, 2004.

As of December 31st, 2005 the bank’s paid-in capital consisted of 3,421,516 common and 305,520 non-repurchasable convertible preferred shares (2,334,435 common and 84,021 non-repurchasable convertible preferred shares as of December 31st, 2004).

Off-Balance ArrangementsThe Group has also been using some financial instruments with off-balance risks in its day-to-day operations in order to meet its customers’ needs. Such instruments, including guarantees, letters of credit, forwards and options have different credit risks and are reflected on the bank’s balance sheet.

As of December 31st, 2005 the Group has issued letters of credit total worth 81,900 mn Tenge (64,845 mn Tenge as of December 31st, 2004), guarantees worth 55,683 mn Tenge (46,204 mn Tenge as of December 31st, 2004) and liabilities for non-disbursed loans worth 33,112 mn Tenge (44,878 mn Tenge as of December 31st, 2004). All forward contracts for delivery were carried during 2005 (as of December 31st, 2004 forward contracts amounted to 3,045 mn Tenge).

The bank’s maximal credit risk for guarantees and letters of credit is represented by the amount of these deals. It is assumed that most liabilities will be repaid without the actual disbursement of the amounts; and the amount of liabilities does not necessarily represent future cash liabilities.

As of December 31st, 2005 provisions for losses on contingent liabilities have reached 3,478 mn Tenge versus 2,031 mn Tenge as of December 31st, 2004.

In regard to the off-balance liabilities the Group has been pursing the same credit controls and management policies as applied to on-balance operations.

7272

mn Tenge

Asof31December

2005 2004 2003

Assets 1 172 002 764 300 465 024

1st tier capital 85 380 41 984 25 948

1sttiercapitaladequacyratio 10,91% 8,73% 8,93%

2nd tier capital 42 929 30 070 16 607

Total capital 128 309 72 054 42 555

Less investment 2 205 1 876 870

1st and 2nd tier capital 126 104 70 178 41 685

Totalassetsweightedbyrisk 782534 481182 290652

Capitaladequacyratio(1stand2ndtiercapital) 16,11% 14,58% 14,34%

According to ratios set out by the Bank of International settlements (the “BIS”) to keep track of capital adequacy, the bank’s 1st tier capital adequacy had accounted for 10.91% as of December 31st, 2005 versus 8.73% as of December 31st, 2004; capital adequacy ratio estimated as the ratio of the 1st tier and the 2nd tier capital to assets weighted by risk accounted for 16.11% as of December 31st, 2005 versus 14.58% as of December 31st, 2004.

In 2005, shareholders of the bank approved an increase in the bank’s authorised capital by 360,431 (24.9%) repurchasable preferred shares and 1,087,081 (75.1%) common shares. As of December 31st, 2005 the bank had issued 221,499 repurchasable preferred shares and 1,087,081 common shares.

Capital AdequacyThe table below provides some information on the bank’s 1st and 2nd tier capital, and capitaladequacyratioweightedbyrisksbasedontheGroup’sconsolidatedfinancialstatementspreparedinlinewiththeIFRS:

CONSOLIdATEdFINANCIAL STATEMENTS

7676

Report of Independent AuditorsTotheShareholdersandBoardofDirectorsofJSCBankTuranAlem–

We have audited the accompanying consolidated balance sheets of JSC Bank TuranAlem (the “Bank”) and its subsidiaries (together the “Group”) as of December 31, 2005 and 2004, and the related consolidated statements of income, changes in shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with International Standards on Auditing. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Group as of December 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for the years then ended in accordance with International Financial Reporting Standards.

Ernst and Young LLP

February 23, 2006Almaty, Kazakhstan


CONSOLIDATEDBALANCESHEETS(Millions of Kazakhstani Tenge)

December31 Notes 2005 2004 2003

Assets

Cash and cash equivalents 5 119.131 51.740 21.691

Obligatory reserves 6 10.791 6.971 3.706

Financial assets at fair value through profit or loss 7 110.252 102.182 61.591

Amounts due from credit institutions 8 23.676 6.038 5.993

Investment securities:

• available-for-sale securities 9 42.406 25.426 871

• held-to-maturity securities - - 26.288

Investments in associates 10 2.205 331 -

Loans to customers 11 680.385 409.517 239.847

Property and equipment 1.940 9.396 6.745

Other assets 7.019 6.701 6.332

Totalassets 997.805 618.302 373.064

Liabilities

Amounts due to the Government and the NBK 14 844 4.424 5.190

Amounts due to credit institutions 15 293.047 148.331 121.786

Amounts due to customers 16 306.714 226.710 140.318

Debt securities issued 17 300.009 182.079 74.174

Other liabilities 10.083 9.838 4.318

Totalliabilities 910.697 571.382 345.786

Shareholders’equity 18

Share capital:

• common shares 33.276 22.405 16.244

• preferred shares 3.055 840 -

Treasury stock (348) (516) (628)

Additional paid-in capital 19.184 5.996 1.413

Securities revaluation reserve 492 375 -

Property and equipment revaluation reserve 18 2.054 1.737

Retained earnings 30.213 14.099 7.182

85.890 45.253 25.948

Minority interest 1.218 1.667 1.330

Totalshareholders’equity 87.108 46.920 27.278

Totalliabilitiesandshareholders’equity 997.805 618.302 373.064

Financialcommitmentsandcontingencies 19 Signed and authorized for release on behalf of the Board of the Bank

Saduakas K. Mameshtegi – Chairman of the Board

Saule S. Yusupova – Chief Accountant

February 23, 2006

7�7�

CONSOLIDATEDSTATEMENTSOFINCOME(Millions of Kazakhstani Tenge)

YearsendedDecember31 Notes 2005 2004 2003

Interestincome

Loans 69.789 45.444 26.263

Securities 6.524 3.682 4.257

Deposits with other banks 1.973 701 298

78.286 49.827 30.818

Interestexpense

Debt securities issued (20.969) (11.059) (6.052)

Deposits from customers (13.575) (8.730) (6.177)

Deposits and loans from credit institutions (11.155) (6.317) (4.362)

(45.699) (26.106) (16.591)

Netinterestincomebeforeimpairment 32.587 23.721 14.227

Impairment charge 12 (15.359) (19.251) (10.391)

Netinterestincome 17.228 4.470 3.836

Fee and commission income 20 12.943 9.297 6.456

Fee and commission expense 20 (489) (303) (137)

Feesandcommissions 20 12.454 8.994 6.319

Gains less losses from financial assets at fair value through profit or loss 21 3.015 38 589

Gainslesslossesfromforeigncurrencies:

• dealing 1.977 1.517 1.980

• translation differences (1.183) 6.078 573

Income (loss) from insurance operations 539 (478) (260)

Other income 22 1.139 567 1.002

Non interest income 5.487 7.722 3.884

Salaries and other employee benefits 23 (6.930) (4.388) (3.432)

Administrative and other operating expenses 23 (7.083) (4.537) (3.919)

Depreciation and amortisation (892) (1.029) (926)

Taxes other than income tax (1.051) (940) (614)

Loss on disposal of subsidiaries (Note 2) (850) - -

Other provisions 12 (1.642) (2.293) (338)

Other (446) (371) (451)

Non interest expense (18.894) (13.558) (9.680)

Incomebeforeincometaxexpense 16.275 7.628 4.359

Income tax expense 13 (1.569) (1.047) (266)

Netincomeafterincometax 14.706 6.581 4.093

Attributable to:

Equity holder of the parent 14.307 6.728 4.133

Minority interest in net income (loss) 399 (147) (40)

Netincome 14.706 6.581 4.093

Basic earnings per share (in Kazakhstani Tenge) 24 5.638 3.862 3.246

Diluted earnings per share (in Kazakhstani Tenge) 24 5.297 3.807 3.246


December31,2002

11.931 - (195) 28 854 - 2.977 15.595 1.010 16.605

Revaluation of property and equipment

- - - - 955 - - 955 – 955

Release of property and equipment revaluation reserve on usage of previously revalued assets

- - - - (68) - 68 – – –

Release of property and equipment revaluation reserve on disposal of previously revalued assets

- - - - (4) - 4 – – –

Total income for the year recognized directly in equity

- - - - 883 - 72 955 – 955

Net income / (loss)

- - - - - - 4.133 4.133 (40) 4.093

Total income

- - - - 883 - 4.205 5.088 (40) 5.048

Sale of common shares

4.313 - - 1.222 - - - 5.535 360 5.895

Sale of preferred shares

- - - 163 - - - 163 – 163

Purchase of treasury shares

- - (433) - - - - (433) – (433)

December31,2003

16.244 - (628) 1.413 1.737 - 7.182 25.948 1.330 27.278

Fair value change of available-for-sale securities, net of tax

– – – – – 375 – 375 – 375

Revaluation of property and equipment

– – – – 534 – – 534 – 534


– – – – (173) – 173 – – –


– – – – (44) – 44 – – –

Total income for the year recognized directly in equity

– – – – 317 375 217 909 – 909

Net income / (loss)

– – – – – – 6.728 6.728 (147) 6.581

Total income

– – – – 317 375 6.945 7.637 (147) 7.490


6.161 – – 4.087 – – – 10.248 484 10.732


– 840 – 457 – – – 1.297 – 1.297


– – (28) – – – – (28) – (28)

Sale of treasury shares

– – 140 39 – – – 179 – 179

Dividends – preferred shares – – – – – – (28) (28) – (28)

December31,2004

22.405 840 (516) 5.996 2.054 375 14.099 45.253 1.667 46.920

CONSOLIDATEDSTATEMENTSOFCHANGESINSHAREHOLDERS’EQUITY(Millions of Kazakhstani Tenge)

ShareCapital–CommonShares

ShareCapital-PreferredShares

TreasuryStock

AdditionalPaid-inCapital

PropertyandEquipmentRevaluationReserve

SecuritiesRevaluationReserve

RetainedEarnings

Total MinorityInterest

TotalShare-holders’Equity

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CONSOLIDATEDSTATEMENTSOFCHANGESINSHAREHOLDERS’EQUITY(continued)(Millions of Kazakhstani Tenge)

December31,2004

22.405 840 (516) 5.996 2.054 375 14.099 45.253 1.667 46.920

Fair value change of available-for-sale securities, net of tax

− − − − − 535 − 535 − 535

Realised fair value change of available-for-sale securities

− − − − − (418) − (418) − (418)


− − − − (133) − 133 − − −


− − − − (1.903) − 1.903 − − −

Totalincomerecognizeddirectlyinequity

− − − − (2.036) 117 2.036 117 − 117

Net income

− − − − − − 14.307 14.307 399 14.706

Total income

− − − − (2.036) 117 16.343 14.424 399 14.823


10.871 − − 11.029 − − − 21.900 − 21.900


− 2.215 − 2.159 − − − 4.374 − 4.374


− − 466 − − − − 466 − 466

Sale of treasury shares

− − (298) − − − (298) − (298)

Dividends – preferred shares

− − − − − − (229) (229) (20) (249)

Minority interest on acquisition

− − − − − − − − 762 762

Minority interest on disposal

− − − − − − − − (1.590) (1.590)

December31,2005

33.276 3.055 (348) 19.184 18 492 30.213 85.890 1.218 87.108

ShareCapital–CommonShares

ShareCapital-PreferredShares

TreasuryStock

AdditionalPaid-inCapital

PropertyandEquipmentRevaluationReserve

SecuritiesRevaluationReserve

RetainedEarnings

Total MinorityInterest

TotalShare-holders’Equity


CONSOLIDATEDSTATEMENTSOFCASHFLOWS(Millions of Kazakhstani Tenge)

YearsendedDecember31, 2005 2004 2003Cashflowsfromoperatingactivities:

Net income before income tax expense 16.275 7.628 4.359

Adjustments for:

Depreciation and amortization 892 1.029 926

Impairment charge and other provisions 17.001 21.544 10.729

Unrealised foreign exchange loss / (gain) 1.587 (2.394) 723

Minority interest (399) 147 40

Unrealised gain on financial assets held at fair value (296) (519) (2.879)

Reserve for insurance claims 1.424 1.493 983

Loss from disposal of subsidiaries 850 − −

Loss from disposal of property and equipment 182 30 63

Operatingincomebeforechangesinnetoperatingassets 37.516 28.958 14.944

(Increase)decreaseinoperatingassets:

Obligatory reserves (3.820) (3.265) (975)

Financial assets at fair value through profit or loss (6.421) (44.347) (29.327)

Amounts due from credit institutions (17.939) (589) 5.196

Loans to customers (283.355) (200.937) (133.724)

Other assets (3.475) (308) (1.044)

Increase(decrease)inoperatingliabilities: Amounts due to the Government and the NBK (3.578) (754) 2.581Amounts due to credit institutions 154.043 34.167 67.346Amounts due to customers 72.741 93.885 38.601

Other liabilities (3.311) 1.456 (3.962)

Netcashflowsusedinoperatingactivitiesbeforeincometaxes (57.599) (91.734) (40.364)

Income tax paid (1.300) (897) (300)

Netcashflowsusedinoperatingactivities (58.899) (92.631) (40.664)

Cashflowsfrominvestingactivities Proceeds from sale of subsidiaries 1.944 - -Investments in associates (1.874) (331) -Net purchases of available-for-sale securities (17.273) (1.545) (871)Purchase of held-to-maturity securities - - (8.505)Purchase of property and equipment (5.487) (2.758) (1.914)Proceeds from sale of property and equipment 4.504 385 1.698

Netcashflowsusedininvestingactivities (18.186) (4.249) (9.592)

Cashflowsfromfinancingactivities: Sale of common shares 21.900 10.248 5.535Sale of preferred shares 4.374 1.297 163Purchase of treasury shares (298) (28) (433)Sale of treasury shares 466 179 -Dividends paid on preferred shares (229) - -

Debt securities issued 117.931 116.292 46.587

Netcashflowsfromfinancingactivities 144.144 127.988 51.852Effects of exchange rate changes on cash and cash equivalents 332 (1.059) (462)Netchangeincashandcashequivalents 67.391 30.049 1.134Cash and cash equivalents at the beginning of the period 51.740 21.691 20.557Cash and cash equivalents at the end of the period 119.131 51.740 21.691

Supplementary information:

Interest received 53.805 42.728 26.854

Interest paid 39.405 22.342 14.329

NOTES TO THE 2005CONSOLIdATEd

FINANCIAL STATEMENTS

��

Principal Activities JSC Bank TuranAlem (the “Bank”) and its subsidiaries (together the “Group”) provide retail and corporate banking services, insurance services, leasing and other financial services in Kazakhstan. The parent company of the Group is JSC Bank TuranAlem, which was registered as a closed joint stock company in 1997 and was reregistered as an open joint stock company in 1998. Due to a change in legislation introduced in 2003, the Bank was reregistered as a joint stock company on September 26, 2003. The Bank is incorporated and domiciled in the Republic of Kazakhstan. Note 2 lists the Bank’s subsidiaries.

The address of the Bank’s registered office is: 97 Zholdasbekov Street, Samal-2, Almaty, 050051, Republic of Kazakhstan.

The Bank accepts deposits from the public and extends credit, transfers payments within Kazakhstan and abroad, exchanges currencies and provides other banking services to its commercial and retail customers. The Bank is the second largest bank in Kazakhstan in terms of total assets. Its head office is located in Almaty, Kazakhstan. At December 31, 2005, it had 22 regional branches and 197 cash settlement units (2004 – 22 regional branches and 189 cash settlement units, 2003 - 22 regional branches and 188 cash settlement units) located throughout Kazakhstan and representative offices in Yerevan, Armenia; Baku, Azerbaijan; Minsk, Belarus; Shanghai, China; Tbilisi, Georgia; Bishkek, Kyrgyz Republic; Moscow, Russia; Ekaterinburg, Russia; Dushanbe, Tajikistan; and Kiev, Ukraine.

The Bank’s common shares and certain of its debt securities are listed on the Kazakhstan Stock Exchange (“KASE”). Certain of the Group’s debt securities are listed on the London and Luxemburg Stock Exchanges with secondary listing on KASE.

As of December 31, 2005, members of the Board of Directors and Management Board owned 889 shares (0.03% of share capital) (2004 – 475,980 shares or 20.69%, 2003 – 475,213 shares or 28.33%). The Group had 4,793 employees as of December 31, 2005 (2004 - 3,817, 2003 - 3,221).


Basis of Preparation General

These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) which comprise standards and interpretations approved by the International Accounting Standards Board, and International Accounting Standards (“IAS”) and Standing Interpretations Committee interpretations (“SIC”) approved by the International Accounting Standards Committee that remain in effect. These financial statements are presented in millions of Kazakh Tenge (“KZT”), except per share amounts and unless otherwise indicated. The KZT is utilized as the shareholders, the managers and the regulators measure the Group’s performance in KZT. In addition, the KZT, being the national currency of the Republic of Kazakhstan, is the currency that reflects the economic substance of the underlying events and circumstances relevant to the Group. Significant foreign currency positions are maintained as they are necessary to meet customers’ requirements, manage foreign currency risks and achieve a proper assets and liabilities structure for the Group’s balance sheet. Transactions in other currencies are treated as transactions in foreign currencies.

The Group maintains its records and prepares its financial statements for regulatory purposes in accordance with IFRS.

The consolidated financial statements are prepared under the historical cost convention modified for the measurement at fair value of financial assets at fair value through profit or loss and derivative contracts as required by IAS 39 “Financial Instruments: Recognition and Measurement” and estimated market value accounting for buildings, included in property and equipment as allowed by IAS 16 “Property, Plant and Equipment”.

The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts. The most significant estimates with regards to those financial statements relate to the allowances for impairment of assets, reserves for insurance claims, income taxes, fair values of securities and properties, and other provisions. These estimates are based on information available as of the date of the financial statements. Actual results, therefore, could differ from these estimates.

Reclassifications

Where necessary, comparative information in respect of the balance sheet as at December 31, 2004 and 2003 have been reclassified, in order to comply with the current presentation requirements of IFRS. The following are the main reclassifications:

�6�6

Balancesheet:

Investments in associates

- 331 331 Investments in associates are reclassified from other assets.

Available-for-sale investment securities

23.881 1.545 25.426 Equity investments are reclassified to available-for-sale investments.

Other assets

8.577 (1.876) 6.701 Investments in associates and available-for-sale investments reclassified to

relevant categories.

StatementsofIncome:

Interest expense on debt securities issued

10.395 664 11.059 Withholding tax paid to non-residents is reclassified to Interest expense on

debt securities issued from Taxes other than income tax.

Taxes other than income tax

1.604 (664) 940

CashFlowStatement:


- (331) (331) Investments in associates reclassified from other assets.

Purchase of available-for-sale securities

- (1.545) (1.545) Equity investments are reclassified to available-for-sale investments.

Other assets

(2.184) 1.876 (308) Investments in associates and available-for-sale investments reclassified

to relevant categories.

Aspreviouslyreported

Reclassification Asreportedherein

Comments

2004


Balancesheet:


- 871 871 Equity investments are reclassified to available-for-sale investments.

Other assets

7.203 (871) 6.332 Investments in associates and available-for-sale investments reclassified to

relevant categories.

StatementsofIncome:

Interest expense on debt securities issued

5.711 341 6.052 Withholding tax paid to non-residents is reclassified to Interest expense on

debt securities issued from Taxes other than income tax.

Taxes other than income tax

955 (341) 614

CashFlowStatement:

Purchase of available-for-sale securities

- (871) (871) Equity investments are reclassified to available-for-sale investments.

Other assets

(1.915) 871 (1.044) Investments in associates and available-for-sale investments reclassified

to relevant categories.

Aspreviouslyreported

Reclassification Asreportedherein

Comments

2003

Bank had no investments in associates as at December 31, 2003.

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ConsolidatedSubsidiaries

Theconsolidatedfinancialstatementsincludethefollowingsubsidiaries:

TuranAlemSecuritiesJSC

100,00% Kazakhstan 13.12.97 Securities trading and asset management 13.12.97

BTAIpotekaJSC

100,00% Kazakhstan 20.11.00 Consumer mortgage lending 20.11.00

TuranAlemFinanceB.V.

100,00% The Netherlands 22.05.01 Issuance of debt securities 21.05.01

TuranAlemFinanceLLP

100,00% Russia 22.06.04 Issuance of bills of exchange 28.09.04

BTALifeInsuranceJSC(formerlyLifeInsuranceCompanyDynastyJSC)

66,00% Kazakhstan 22.07.99 Life insurance 30.03.01

PensionFundBTAKurmet-KazakhstanJSC

76,83% Kazakhstan 16.09.98 Pension fund 16.09.98

InsuranceCompanyBTAZabotaJSC(formerlyKBSGarant)

57,53% Kazakhstan 12.01.99 Property and casualty insurance 04.04.01

ForceTechnologyLLP

– Kazakhstan 09.04.02 IT services –

2005CountrySubsidiary Holding,

%Dateofincorpo-ration

Industry Dateofacquisi-tion

Although the Bank did not own any shares in Force Technology, as at and for the years ended December 31, 2005, 2004 and 2003 it was treated, in accordance with SIC-12 “Consolidation – Special Purpose Entities”, as subsidiary because at those dates the Bank controlled and benefited directly from its operations.

During 2004, the Group increased its share in the paid-in share capital of Kazakhstan Pension Fund (“KPF”) from 65.97% to 87.75%. In accordance with the restructuring plan approved by the General Meeting of the Shareholders on September 24, 2004 JSC NOAPF “Kurmet” (“Kurmet”) and JSC NGAPF “Kazakhstan” were combined into a new entity JSC “Accumulated Pension Fund BTA Kurmet-Kazakhstan”on January 25, 2005. The Group’s share in the paid-in share capital of JSC Pension Fund BTA Kurmet- Kazakhstan has become 76.83%


During 2005 the following subsidiaries and special purpose entities were deconsolidated from the Group’s consolidated financial statements:

JSCBTAORIXLeasing(formerlyJSCBTALeasing)

On June 24, 2005, the Group’s share in the paid-in share capital of JSC BTA ORIX Leasing decreased from 100.00% to 45.00% as a result of disposal of the Group’s 55.00% shareholding to other shareholders.

JSCBTAInsurance

On July 7, 2004, the Group’s share in the paid-in share capital of JSC Insurance Company BTA decreased from 66.00% to 49.00% as the minority shareholders have contributed additional capital into BTA Insurance. However, as at and for the year ended December 31, 2004 the Group has retained control over the operations of BTA Insurance.

In 2005 the Bank ceased to exercise effective control over the operations of BTA Insurance through the loss of the Bank’s representatives in BTA Insurance’s Board of Directors. In addition, the Bank discontinued to benefit from more favourable terms of business.

LLPTuranAlemCapital

On October 22, 2005, the Group sold 25.00% of its share in the share capital of LLP TuranAlem Capital to ‘‘Kazinvestcapital’’ and on 10 November 2005, the Group sold additional 65.01% of the share capital of this entity to Solent Management Ltd.

RealEstateCommerceandKazcoConstruction

Although the Bank did not own any shares in Kazco Construction, Samal Properties, Real Estate Commerce and Force Technology, as at and for the years ended December 31, 2004 and 2003 they were treated, in accordance with SIC-12 “Consolidation – Special Purpose Entities”, as subsidiaries because at those dates the Bank controlled and benefited directly from their operations.

During 2005 Real Estate Commerce repaid its debt on notes payable to the Bank and Bank ceased to exercise effective control over the entity. Kazco Construction accumulated funds to repay its debt to the Bank. In addition, the Bank lost its seats in the Board of Directors of both companies.

�0�0

The2004and2003consolidatedfinancialstatementsincludethefollowingsubsidiaries:

TuranAlemSecuritiesJSC

100,00% 100,00% Kazakhstan 13.12.97 Securities trading and asset management 13.12.97

BTAIpotekaJSC

100,00% 100,00% Kazakhstan 20.11.00 Consumer mortgage lending 20.11.00

BTAORIXLeasingJSC(formerlyBTALeasingJSC)

100,00% 100,00% Kazakhstan 31.08.00 Leasing 14.09.00

TuranAlemFinanceB.V.

100,00% 100,00% The Netherlands 22.05.01 Issuance of debt securities 21.05.01

TuranAlemFinanceLLP

100,00% – Russia 22.06.04 Issuance of bills of exchange 28.09.04

TuranAlemCapital

100,00% – Russia 25.06.04 Commercial activities 28.09.04

DynastyJSC

66,00% 66,00% Kazakhstan 22.07.99 Life insurance 30.03.01

KurmetPensionFund

66,00% 72,47% Kazakhstan 16.09.98 Pension Fund 16.09.98

JSCInsuranceCompanyBTA

49,00% 66,00% Kazakhstan 08.09.98 Property and casualty insurance 08.09.98

KazakhstanPensionFund

87,75% 65,97% Kazakhstan 22.06.99 Pension Fund 06.07.99

KBSGarantJSC

57,53% 57,53% Kazakhstan 12.01.99 Property and casualty insurance 04.04.01

KazcoConstruction

– – Kazakhstan 14.01.99 Construction –

SamalProperties

– – Kazakhstan 17.02.99 Property management –

RealEstateCommerce

– – Kazakhstan 16.04.02 Property management –

ForceTechnology

– – Kazakhstan 09.04.02 IT services –

CountrySubsidiary Holding,% Industry Dateofacquisi-tion

2004 2003Dateofincorpo-ration


In 2004, the Group established two 100% owned subsidiaries in Russia: TuranAlem Finance on June 22, 2004, and TuranAlem Capital on June 25, 2004.

On September 3, 2003, the Group increased its share from 66.00% to 72.47% in the paid-in share capital of Kurmet Pension Fund.

On November 25, 2003, the Group increased its share from 50.40% to 65.97% in the paid-in share capital of KPF.

Thefollowingassociatesareaccountedforundertheequitymethodandincludedintootherassets:

2005

Associates

Holding,% Country Activities Shareinnetincome/(loss)

Totalassets

Totalliabilities


BTAInsuranceJSC

49,00% Kazakhstan Insurance 26 2.438 1.554 884

BTAORIXLeasingJSC(formerlyBTALeasingJSC)

45,00% Kazakhstan Leasing 26 5.153 3.703 1.450

AstanaeximbankCJSC

49,20% Belarus Bank 45 3.599 2.536 1.063

CommercialBankBTASilkRoadJSC(formerlyCommercialBankSilkRoadJSC)

49,00% Georgia Bank (53) 1.635 1.185 450

BTAInvestbankCJSC(formerlyMezhinvestbankCJSC)

48,87% Armenia Bank (37) 1.575 670 905

AstanaeximbankCJSC

49,00% Belarus Bank 5 2.045 1.072 973

2004

Associates

Holding,% Country Activities Shareinnetincome/(loss)

Totalassets

Totalliabilities


�2�2

ChangesinAccountingPoliciesIn 2005 the Group adopted new accounting standards that were mandatory for financial years beginning or after January 1, 2005. The amounts and disclosures for the years ended December 31, 2005 and 2004 have been prepared reflecting the impact of the adoption of these new standards. Where necessary, comparative information for all periods presented has been amended accordingly. The changes in accounting policies having effects on the consolidated financial statements of the Group are discussed below.

IFRS 3“BusinessCombinations”and IAS36“ImpairmentofAssets” (revised in2004) IFRS 3 applies to accounting for business combinations for which the agreement date is on or after March 31, 2004. Upon acquisition the Group initially measures the identifiable assets, liabilities and contingent liabilities acquired at their fair values as at the acquisition date hence causing any minority interest in the acquiree to be stated at the minority proportion of the net fair values of those items.

The goodwill acquired in a business combination is recognized as an asset and initially is measured at cost, being the excess of the cost of the business combination over the acquirer’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities recognized in accordance with IFRS 3.

Goodwill relating to acquisitions from March 31, 2004 is not amortized but is reviewed for impairment annually or more frequently if events or changes in circumstances indicate that the carrying amount may be impaired. As at the acquisition date, any goodwill acquired in acquisitions from March 31, 2004 is allocated to each of the cash-generating units expected to benefit from the combination’s synergies. Impairment is determined by assessing the recoverable amount of the cash-generating unit, to which the goodwill relates. Where the recoverable amount of the cash-generating unit is less than the carrying amount, an impairment loss is recognized.

Additionally, for business combinations for which the agreement date is before March 31, 2004, the adoption of IFRS 3 and IAS 36 has resulted in the Group ceasing goodwill amortization and to test for impairment annually at the cash generating unit level from January 1, 2005 (unless an event occurs during the year, which requires the goodwill to be tested more frequently).

IAS27“ConsolidatedandSeparateFinancialStatements”

Minority interests in net assets of the Group’s subsidiaries are presented within equity, separately from the parent shareholders’ equity.

IAS 39 “Financial Instruments: Recognition and Measurement” (amended in2004)

Financial Assets at Fair Value through Profit or Loss

A new category of financial instruments has been introduced, “Financial assets at fair value through profit or loss”. This category includes trading financial assets designated into this category at initial recognition.


These assets are measured at fair value with recognition of gains or losses on re-measurement to fair value in net profit or loss. Management of the Group decided to designate as “financial assets at fair value through profit or loss” all debt and equity securities, except for investments in equity instruments that do not have a quoted market price in an active market, loans issued available-for-sale and held-to-maturity instruments. Such designation is performed at initial recognition of the respective assets. The financial assets at fair value through profit or loss are initially recognised at cost and subsequently re-measured at fair value based on their market value. In determining market value, all financial assets at fair value through profit or loss are valued at the last bid price.

Summary of Accounting Policies Subsidiaries

Subsidiaries, which are those entities in which the Group has an interest of more than one half of the voting rights, or otherwise has power to exercise control over their operations, are consolidated. Subsidiaries are consolidated from the date on which control is transferred to the Group and are no longer consolidated from the date that control ceases. All intercompany transactions, balances and unrealised gains on transactions between group companies are eliminated; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred. Where necessary, accounting policies for subsidiaries have been changed to ensure consistency with the policies adopted by the Group.

AcquisitionofsubsidiariesThe purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest.

The excess of purchase consideration over the fair value of the Group’s share of identifiable net assets is recorded as goodwill. If the cost of the acquisition is less than the fair value of the Group’s share of identifiable net assets of the subsidiary acquired the difference is recognised directly in the consolidated statements of income.

Minority interest is the interest in subsidiaries not held by the Group. Minority interest at the balance sheet date represents the minority shareholders’ portion of the fair value of the identifiable assets and liabilities of the subsidiary at the acquisition date and the minorities’ portion of movements in equity since the date of the combination. Minority interest is presented within equity.

Losses allocated to minority interest do not exceed the minority interest in the equity of the subsidiary unless there is a binding obligation of the minority to fund the losses. All such losses are allocated to the Group. Increasesinownershipinterestsinsubsidiaries

The differences between the carrying values of net assets attributable to interests in subsidiaries acquired and the consideration given for such increases are charged or credited to retained earnings.

��

Investmentsinassociates

Associates are entities in which the Group generally has between 20% and 50% of the voting rights, or is otherwise able to exercise significant influence, but which it does not control or jointly control. Investments in associates are accounted for under the equity method and are initially recognised at cost, including goodwill. Subsequent changes in the carrying value reflect the post-acquisition changes in the Group’s share of net assets of the associate. The Group’s share of its associates’ profits or losses is recognised in the consolidated statements of income, and its share of movements in reserves is recognised in equity. However, when the Group’s share of losses in an associate equals or exceeds its interest in the associate, the Group does not recognise further losses, unless the Group is obliged to make further payments to, or on behalf of, the associate.

Unrealised gains on transactions between the Group and its associates are eliminated to the extent of the Group’s interest in the associates; unrealised losses are also eliminated unless the transaction provides evidence of an impairment of the asset transferred.

Financialassets

Financial assets in the scope of IAS 39 are classified as either financial assets at fair value through profit or loss, loans and receivables, held-to-maturity investments, or available-for-sale financial assets, as appropriate. When financial assets are recognised initially, they are measured at fair value, plus, in the case of investments not at fair value through profit or loss, directly attributable transaction costs. The Group determines the classification of its financial assets at initial recognition and, where allowed and appropriate, re-evaluates this designation at each financial year-end.

All regular way purchases and sales of financial assets are recognised on the trade date i.e. the date that the Group commits to purchase or sell the asset. Regular way purchases or sales are purchases or sales of financial assets that require delivery of assets within the period generally established by regulation or convention in the marketplace.

Financialassetsatfairvaluethroughprofitorloss

Financial assets are classified as “financial assets at fair value through profit or loss” if they are acquired for the purpose of selling in the near term. Derivatives are also classified as “financial assets at fair value through profit or loss” unless they are designated and effective hedging instruments. Gains or losses on “financial assets at fair value through profit or loss” are recognised in the consolidated statements of income.

Held-to-maturityinvestments

Non-derivative financial assets with fixed or determinable payments and fixed maturity are classified as held-to-maturity when the Group has the positive intention and ability to hold to maturity. Investments intended to be held for an undefined period are not included in this classification. Held-to-maturity investments are subsequently measured at amortised cost. This cost is computed as the amount initially recognised minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initially recognised amount and the maturity amount. This calculation includes all fees and points paid or received between parties to the contract that are an integral part of the effective interest rate, transaction costs and all other premiums and discounts.


For investments carried at amortised cost, gains and losses are recognised in the consolidated statements of income when the investments are derecognised or impaired, as well as through the amortisation process.

Loansandreceivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market. Such assets are carried at amortised cost using the effective interest method. Gains and losses are recognised in the consolidated statements of income when the loans and receivables are derecognised or impaired, as well as through the amortisation process.

Available-for-salefinancialassets

Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale or are not classified in any of the three preceding categories. After initial recognition available-for sale financial assets are measured at fair value with gains or losses being recognised as a separate component of equity until the investment is derecognised or until the investment is determined to be impaired at which time the cumulative gain or loss previously reported in equity is included in the consolidated statements of income. However, interest calculated using the effective interest method is recognised in the consolidated statements of income.

The fair value of investments that are actively traded in organised financial markets is determined by reference to quoted market bid prices at the close of business on the balance sheet date. For investments where there is no active market, fair value is determined using valuation techniques. Such techniques include using recent arm’s length market transactions, reference to the current market value of another instrument, which is substantially the same, and discounted cash flow analysis.

Offsetting

Financial assets and liabilities are offset and the net amount is reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or to realise the asset and settle the liability simultaneously.

RelatedParties

Related parties include the Bank’s shareholders, key management personnel, investees and affiliated companies.

CashandCashEquivalents

Cash and cash equivalents consist of cash on hand, amounts due from National Bank of Kazakhstan (the “NBK”) – excluding obligatory reserves, and due from other financial institutions that mature within ninety days of the date of origination and are free from contractual encumbrances.

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ObligatoryReserves

Obligatory reserves represent mandatory reserve deposits and cash which are not available to finance the Bank’s day to day operations and, hence, are not considered as part of cash and cash equivalents for the purpose of the consolidated cash flow statements.

AmountsDuefromOtherFinancialInstitutions

In the normal course of business, the Group maintains current accounts or deposits for various periods of time with other banks. Amounts due from other financial institutions with a fixed maturity term are subsequently measured at amortized cost using the effective interest method. Those that do not have fixed maturities are carried at cost. Amounts due from other financial institutions are carried net of any allowance for impairment.

RepurchaseandReverseRepurchaseAgreements

Repurchase and reverse repurchase agreements are utilized by the Group as an element of its treasury management. These agreements are accounted for as financing transactions.

Securities sold by the Bank under repurchase agreements are accounted for as financial assets at fair value through profit or loss and funds received under these agreements are included in amounts due to other financial institutions or amounts due to customers. Securities purchased under agreements to resell (‘reverse repos’) are recorded as amounts due from other financial institutions or as loans to customers.

Securities purchased under reverse repurchase agreements are not recognized in the financial statements, unless they are sold to third parties, in which case the purchase and sale are recorded with the gain or loss included in gains less losses from financial assets through profit or loss. The obligation to return them is recorded at fair value as a trading liability.

Any related income or expense arising from the pricing spreads of the underlying securities is recognized as interest income or expense, accrued using the effective interest method, during the period that the related transactions are open.

DerivativeFinancialInstruments

In the normal course of business, the Group enters into various derivative financial instruments, primarily forwards in the foreign exchange markets. Such financial instruments are primarily held for trading and are initially recognized in accordance with the recognition of financial instruments policy and subsequently are measured at their fair value. Their fair values are estimated based on quoted market prices or pricing models that take into account the current market and contractual prices of the underlying instruments and other factors. Derivatives, for which offsetting is performed are carried as assets (unrealised gain) when fair value is positive and as liabilities (unrealised loss) when it is negative. Other derivative assets and liabilities are accounted for separately at their fair values. Gains and losses resulting from these instruments are included in


the accompanying consolidated statements of income as gains less losses from financial assets through profit or loss.

Derivative instruments embedded in other financial instruments are treated as a separate derivative if their risks and characteristics are not closely related to the host contracts and the host contracts are not carried at fair value with unrealised gains and losses reported in income. An embedded derivative is a component of a hybrid (combined) financial instrument that includes both the derivative and a host contract with the effect that some of the cash flows of the combined instrument vary in a similar way to a stand-alone derivative. At December 31, 2005, 2004 and 2003 embedded derivatives held by the Group were not material. Gains arising from changes in the value of derivatives are included in the consolidated statements of income as gains less losses from financial assets through profit or loss.

Leases

I.Finance–GroupasLessor

The Group presents leased assets as loans equal to the net investment in the lease. Finance income is based on a pattern reflecting a constant periodic rate of return on the net investment outstanding. Initial direct costs are included in the initial measurement of the lease receivables.

II.Operating–GroupasLessee

Leases of assets under which the risks and rewards of ownership are effectively retained with the lessor are classified as operating leases. Lease payments under operating lease are recognized as expenses on a straight-line basis over the lease term and included in administrative and operating expenses.

III.Operating–GroupasLessor

The Group presents assets subject to operating leases in the balance sheets according to the nature of the asset. Lease income from operating leases is recognized in the consolidated statements of income on a straight-line basis over the lease term as other operating income. The aggregate cost of incentives provided to lessees is recognized as a reduction of rental income over the lease term on a straight-line basis. Initial direct costs incurred specifically to earn revenues from an operating lease are recognized as an expense in the consolidated statements of income in the period in which they are incurred.

Taxation

The current income tax charge is calculated in accordance with the regulations of the Republic of Kazakhstan and other tax authorities, and of the cities in which the Group has offices, branches or subsidiaries. Deferred income tax is provided, using the liability method, on all temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

Deferred income tax liabilities are recognized for taxable temporary differences:• except where the deferred income tax liability arises from goodwill amortization or the initial recognition of an asset or liability in a transaction that is not a business combination and, at the same time of the transaction, affects neither the accounting profit nor taxable profit or loss; and

��

• in respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint ventures, except where the timing of the reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax assets are recognized for deductible temporary differences, carry-forward of unused tax assets and unused tax losses, to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, carry-forward of unused tax assets and unused tax losses can be utilised:

• except where the deferred income tax asset relating to the temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the same time of the transaction, affects neither the accounting profit nor taxable profit nor loss; and• in respect of deductible temporary differences associated with investments in subsidiaries, associates and interest in joint ventures, deferred tax assets are only recognized to the extent that it is probable that the temporary difference will reverse in the foreseeable future and taxable profit will be available against which the temporary difference can be utilised.

AllowancesforImpairmentofFinancialAssets

The Group assesses at each balance sheet date whether a financial asset or group of financial assets is impaired.

Assetscarriedatamortisedcost

If there is objective evidence that an impairment loss on financial assets carried at amortised cost has been incurred, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not been incurred) discounted at the financial asset’s original effective interest rate (i.e. the effective interest rate computed at initial recognition). The carrying amount of the asset shall be reduced through use of an allowance account. The amount of the loss shall be recognised in the consolidated statements of income.

The calculation of the present value of the estimated future cash flows of a collateralised financial asset reflects the cash flows that may result from foreclosure less costs for obtaining and selling the collateral, whether or not the foreclosure is probable.

The allowances are based on the Group’s own loss experience and management’s judgment as to the level of losses that will most likely be recognized from assets in each credit risk category by reference to the debt service capability and repayment history of the borrower. The allowances for impairment of financial assets in the accompanying consolidated financial statements have been determined on the basis of existing economic and political conditions. The Group is not in a position to predict what changes in conditions will take place in Kazakhstan and what effect such changes might have on the adequacy of the allowances for impairment of financial assets in future periods.If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised, the previously recognised impairment loss is reversed. Any subsequent reversal of an impairment loss is recognised in the consolidated statements of income, to the extent that the carrying value of the asset does not exceed its amortised cost at the reversal date.

When a loan is uncollectible, is it written off against the related allowance for loan impairment. Such loans are written off after all necessary procedures have been completed and the amount of the loss has been determined.


Subsequent recoveries of amounts previously written off decrease the amount of allowance for loan impairment in the consolidated statements of income.

Available-for-salefinancialassets

If an available-for-sale asset is impaired, an amount comprising the difference between its cost (net of any principal payment and amortisation) and its current fair value, less any impairment loss previously recognised in the consolidated statements of income, is transferred from equity to the consolidated statements of income. Reversals of impairment losses in respect of equity instruments classified as available-for-sale are not recognised in the consolidated statements of income. Reversals of impairment losses on debt instruments are reversed through the consolidated statements of income if the increase in fair value of the instrument can be objectively related to an event occurring after the impairment loss was recognised in the consolidated statements of income.

DerecognitionofFinancialAssetsandLiabilities

Financialassets

A financial asset (or, where applicable a part of a financial asset or part of a group of similar financial assets) is derecognised where:

• the rights to receive cash flows from the asset have expired;• the Group has transferred its rights to receive cash flows from the asset, or retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a ‘pass-through’ arrangement; and• the Group either (a) has transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

Where the Group has transferred its rights to receive cash flows from an asset and has neither transferred nor retained substantially all the risks and rewards of the asset nor transferred control of the asset, the asset is recognised to the extent of the Group’s continuing involvement in the asset. Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Group could be required to repay.

Where continuing involvement takes the form of a written and/or purchased option (including a cash-settled option or similar provision) on the transferred asset, the extent of the Group’s continuing involvement is the amount of the transferred asset that the Group may repurchase, except that in the case of a written put option (including a cash-settled option or similar provision) on an asset measured at fair value, the extent of the Group’s continuing involvement is limited to the lower of the fair value of the transferred asset and the option exercise price.

Financialliabilities

A financial liability is derecognised when the obligation under the liability is discharged or cancelled or expires.

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Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognised in the consolidated statements of income.

PropertyandEquipment

Property and equipment, except buildings, are stated at the lower of cost less accumulated depreciation and any accumulated impairment for diminution in value. Buildings are stated in the consolidated balance sheets at their revalued amounts, being the fair value on the basis of their existing use at the date of revaluation, less any accumulated depreciation and subsequent accumulated impairment losses. Revaluations of buildings are performed with sufficient regularity such that the carrying amount does not fluctuate materially.

Any revaluation increase arising on the revaluation of such land and buildings is credited to the property and equipment revaluation reserve, except to the extent that it reverses a revaluation decrease for the same asset previously recognised as an expense, in which case the increase is credited to the consolidated statements of income to the extent of the decrease previously charged. A decrease in the carrying amount arising on the revaluation of such buildings is charged as an expense to the extent that it exceeds the balance, if any, held in the property and equipment revaluation reserve relating to a previous revaluation of that asset. On the subsequent sale or retirement of a revalued property, the attributable revaluation surplus remaining in the revaluation reserve is transferred to retained earnings.

Depreciation of assets under construction and those not placed in service commences from the date the assets are ready for their intended use. Depreciation is calculated on a straight-line basis over the following estimated useful lives:

Years

Buildings 50

Furniture and fixtures 4-10

Computers 4

Office equipment 7

Leasehold improvements are amortized over the life of the related leased asset. The carrying amounts of property and equipment are reviewed at each balance sheet date to assess whether they are recorded in excess of their recoverable amounts, and where carrying values exceed this estimated recoverable amount, assets are written down to their recoverable amount. An impairment is recognized in the respective period and is included in other administrative and operating expenses.

Expenses related to repairs and renewals are charged when incurred and included in administrative and operating expenses unless they qualify for capitalization.


AmountsDuetotheNBK,OtherFinancialInstitutionsandtoCustomers

Amounts due to the NBK, other financial institutions and to customers are initially recorded in accordance with the financial instruments recognition policy. Subsequently, amounts due are stated at amortized cost and any difference between net proceeds and the redemption value is recognized in the consolidated statements of income over the period of the borrowings using the effective interest method. If the Group purchases its own debt, it is removed from the consolidated balance sheets and the difference between the carrying amount of the liability and the consideration paid is recognised in net interest income.

DebtSecuritiesIssued

Debt securities issued represent bonds issued by the Group. They are accounted for according to the same principles used for amounts owed to other financial institutions and to customers.

Provisions

Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the obligation can be made.

RetirementandOtherBenefitObligations

The Group does not have any pension arrangements separate from the State pension system of Kazakhstan, which requires current withholdings by the employer calculated as a percentage from current gross salary payments; such expense is charged in the period the related salaries are earned and included in salaries and benefits in consolidated statements of income. The Group has contributed social tax to the budget of the Republic of Kazakhstan for its employees. In addition, the Group has no post-retirement benefits or significant other compensated benefits requiring accrual.

ShareCapital

ShareCapital

Ordinary shares and non-redeemable preference shares with discretionary dividends are both classified as equity. External costs directly attributable to the issue of new shares, other than on a business combination, are shown as a deduction from the proceeds in equity. Any excess of the fair value of consideration received over the par value of shares issued is recognised as additional paid-in capital.

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Treasuryshares

Where the Bank or its subsidiaries purchases the Bank’s shares, the consideration paid, including any attributable transaction costs, net of income taxes, is deducted from total equity as treasury shares until they are cancelled or reissued. Where such shares are subsequently sold or reissued, any consideration received is included in equity. Treasury shares are stated at weighted average cost.

Dividends

Dividends are recognised as a liability and deducted from equity at the balance sheet date only if they are declared before or on the balance sheet date. Dividends are disclosed when they are proposed before the balance sheet date or proposed or declared after the balance sheet date but before the financial statements are authorised for issue.

Contingencies

Contingent liabilities are not recognized in the financial statements but disclosed. Contingent liabilities are not recognized nor disclosed if the probability of an outflow of resources embodying economic benefits is remote. A contingent asset is not recognized in the consolidated financial statements but disclosed when an inflow of economic benefits is probable.

TrustActivities

Assets held in trust or in a fiduciary capacity are not treated as assets of the Group and, accordingly, are not included in these consolidated financial statements.

IncomeandExpenseRecognition

Interest income and expense are recognised on an accrual basis calculated using the effective interest method. Loan origination fees for loans issued to customers are deferred (together with related direct costs) and recognised as an adjustment to the effective yield of the loans. Fees, commissions and other income and expense items are generally recorded on an accrual basis when the service has been provided. Portfolio and other management advisory and service fees are recorded based on the applicable service contracts. Asset management fees related to investment funds are recorded over the period the service is provided. The same principle is applied for custody services that are continuously provided over an extended period of time.

UnderwritingIncome(Loss)

Underwriting income (loss) includes net written insurance premiums and commissions earned on ceded insurance reduced by the net change in the unearned premium reserve, claims paid, the provision of insurance losses and loss adjustment expenses, and policy acquisition cost.


Net written insurance premiums represent gross written premiums less premiums ceded to reinsurers. Upon inception of a contract, premiums are recorded as written and are earned on a prorata basis over the term of the related policy coverage. The unearned premium reserve represents the portion of the premiums written relating to the unexpired terms of coverage and is included within other liabilities in the accompanying consolidated balance sheets.

Losses and loss adjustments are charged to the consolidated statements of income as incurred through the reassessment of the reserve for losses and loss adjustment expenses.

Commissions earned on ceded reinsurance contracts are deferred and amortized over the period in which the related commissions are earned.

Policy acquisition costs, comprising commissions paid to insurance agents and brokers, which vary with and are directly related to the production of new business, are deferred, recorded in the accompanying consolidated balance sheets within other assets, and are amortized over the period in which the related written premiums are earned.

ReserveforInsuranceLossesandLossAdjustmentExpenses

The reserve for insurance losses and loss adjustment expenses are included in the accompanying consolidated balance sheets within other liabilities and is based on the estimated amount payable on claims reported prior to the balance sheet date, which have not yet been settled, and an estimate of incurred but not reported claims relating to the reporting period.

Due to the absence of prior experience, the reserve for incurred but not reported claims (“IBNR”) was established as being equal to the expected loss ratio for each line of business times the value of coverage, less the losses actually reported.

The methods for determining such estimates and establishing the resulting reserves are continuously reviewed and updated. Resulting adjustments are reflected in current income.

Reinsurance

In the ordinary course of business, the Group cedes insurance. Such reinsurance arrangements provide for greater diversification of business, allow management to control exposure to potential losses arising from legal risks and provide additional capacity for growth. Reinsurance assets include balances due from reinsurance companies for paid and unpaid losses and loss adjustment expenses, and ceded unearned premiums. Amounts receivable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policy. Reinsurance is recorded gross unless a right of offset exists and is included in the accompanying consolidated balance sheets within other assets.

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Reinsurance contracts are assessed to ensure that underwriting risk, defined as the reasonable possibility of significant loss, and timing risk, defined as the reasonable possibility of a significant variation in the timing of cash flows, are transferred by the Group to the reinsurer.

ForeignCurrencyTranslation

The consolidated financial statements are presented in Kazakh Tenge, which is the Bank’s functional and presentation currency. Transactions in foreign currencies are initially recorded in the functional currency rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are retranslated into KZT at the market exchange rate quoted by KASE at the balance sheet date. Gains and losses resulting from the translation of foreign currency transactions are recognised in the consolidated statements of income as gains less losses from foreign currencies - translation differences. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined.

Differences between the contractual exchange rate of a certain transaction and the market exchange rate on the date of the transaction are included in gains less losses from foreign currencies. The market exchange rates at December 31, 2005, 2004 and 2003, were KZT 133.98, KZT 130.00 and KZT 144.22 to USD 1, respectively.

Significant accounting judgementsand estimates Judgements

In the process of applying the Group’s accounting policies, management has made the following judgements, apart from those involving estimates, which have the most significant effect on the amounts recognised in the consolidated financial statements:

• Although the Bank did not own any direct share in the capital of a company Force Technology, as at and during the years ended December 31, 2005 and 2004, it was treated as a subsidiary, in accordance with SIC-12 “Consolidation – Special Purpose Entities”, since during 2005 and 2004 the Bank controlled and benefited directly from this company’s operations;

• Revised IAS 32 restricts the classification of a financial instrument with contingent settlement provisions as equity. Accordingly, liability element of Convertible Preferred Shares (the “CPS”) was transferred to Amounts due to credit institutions.


Estimationuncertainty

The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below:

Allowanceforimpairmentofloansandreceivables

The Bank regularly reviews its loans and receivables to assess impairment. The Bank uses its experienced judgement to estimate the amount of any impairment loss in cases where a borrower is in financial difficulties and there are few available historical data relating to similar borrowers. Similarly, the Bank estimates changes in future cash flows based on the observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans and receivables. The Bank uses its experienced judgement to adjust observable data for a group of loans or receivables to reflect current circumstances.

TaxationKazakh tax, currency and customs legislation is subject to varying interpretations, and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and state authorities. As such, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for five calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods.

As at 31 December 2005 management believes that its interpretation of the relevant legislation is appropriate and that the Group’s tax, currency and customs positions will be sustained.

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Cash and Cash Equivalents Cashandcashequivalentscomprise:

Interestratesofthereverserepurchaseagreements,timedepositsandloansareasfollows:

2005 2004 2003Interestrate Interestrate Interestrate

Time deposits with contractual maturity of less than 90 days 1,0%–6,0% 8,0% – 13,7% –

Reverse repurchase agreements with contractual maturity of 90 days or less

3,0%–9,0% 0,8% – 3,0% 2,0% - 8,0%

Loans to other Kazakh banks and credit institutions with contractual maturity of less than 90 days

7,0%–11,0% 10,0% – 12,0% 10,5%-13,0%

The Group has entered into reverse repurchase agreements with Kazakhstani banks. The subject of these agreements were mainly treasury bills of the Ministry of Finance and sovereign bonds of the Republic of Kazakhstan.

At December 31, 2005, balances with top ten banks accounted for 59.74% of total cash and cash equivalents and represented 81.70% of the Group’s total shareholders’ equity (2004 – ten banks accounted for 24.70% of total cash and cash equivalents and represented 25.40% of the Group’s total shareholders’ equity; 2003 – ten banks accounted for 16.37% of total cash and cash equivalents and represented 11.57% of the Group’s total shareholders’ equity).

2005 2004 2003

Time deposits with contractual maturity of 90 days or less 32.020 1.825 –

Current accounts with the National Bank of Kazakhstan (“NBK”) 21.906 13.500 632

Current accounts with other financial institutions 23.421 11.955 2.734

Cash on hand 17.657 12.542 9.784

Reverse repurchase agreements with contractual maturity of 90 days or less 14.345 11.814 8.405

Loans to other banks and credit institutions with contractual maturity of 90 days or less 9.782 104 136

Cash and cash equivalents 119.131 51.740 21.691


Obligatory ReservesObligatoryreservescomprise:

2005 2004 2003 Due from the NBK 10.791 5.081 3.706

Cash on hand allocated to obligatory reserves - 1.890 -

Obligatoryreserves 10.791 6.971 3.706

Under Kazakh legislation, the Bank is required to maintain certain obligatory reserves, which are computed as a percentage of certain liabilities of the Bank. Such reserves must be held in either non-interest bearing deposits with NBK or in physical cash and maintained based on average monthly balances of the aggregate of deposits with NBK and physical cash. The use of such funds is, therefore subject to certain restrictions.

Financial Assets at Fair value through Profit or LossFinancialassetsatfairvaluethroughprofitorlosscomprise:

2005 2004 2003

Debt securities:

Bonds of international financial organizations 52.095 26.404 37.473

Sovereign bonds of OECD countries 23.875 20.614 –

Bonds of public agencies 10.092 – –

Treasury bills of the Ministry of Finance of the Republic of Kazakhstan 8.165 10.472 3.800

Notes of the NBK 6.772 29.854 6.683

Corporate bonds 3.237 6.059 3.555

Sovereign bonds of the Republic of Kazakhstan 2.891 5.358 9.605

Municipal bonds 708 1.037 33

107.835 99.798 61.149

Equity securities 2.417 2.384 442

Financialassetsatfairvaluethroughprofitorloss 110.252 102.182 61.591

Subject to repurchase agreements 48.823 11.826 15.773

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Interestratesandmaturityofdebtsecuritiesfollow:

2005 2004 2003

% Maturity % Maturity % Maturity

Bonds of international financial organizations

2,4%–6,1% 2006-2013 2,4%-7,1% 2005-2013 4,4% – 7,1% 2005 – 2013

Sovereign bonds of OECD countries

2,5%–6,0% 2006–2009 3,5% – 4,1% 2008 – –

Bonds of public agencies

3,9%–4,9% 2007–2009 – – – –

Treasury bills of the Ministry of Finance of the Republic of Kazakhstan

5,5%–8,3% 2006–2014 5,5% – 8,3% 2005 – 2014 6,1% – 16,9% 2004 – 2008

Notes of the NBK

2,3%–3,1% 2006 0,3% – 3,4% 2005 5,0% – 5,5% 2004

Corporate bonds

2,4%–9,0% 2006–2020 3,5% – 12,0% 2005 – 2014 7,4% – 13,0% 2004 – 2013

Sovereign bonds of the Republic of Kazakhstan

11,1% 2007 11,1% 2007 11,1% – 13,6% 2004 – 2007

Municipal bonds

8,5–8,6% 2006–2008 8,5% – 8,6% 2005 – 2008 6,3% – 8,6% 2004 – 2006

Amounts due from Credit Institutions AmountsduefromcreditinstitutionsasofDecember31,comprise:

2005 2004 2003

Loans 23.676 6.565 5.993

Less – Allowance for impairment (Note 12) – (527) –

Amountsduefromcreditinstitutions 23.676 6.038 5.993

As of December 31, 2005, amounts due from top ten credit institutions comprised 94% of total amounts due from credit institutions (December 31, 2004 – ten comprised 94%, December 31, 2003 – nine comprised 100%).


2005 2004 2003% Maturity % Maturity % MaturityBonds of international financial organizations

3,8%–6,1% 2007–2013 4,4% – 7,5% 2011 – 2013 – –

Bonds of public agencies

4,9% 2007 − − – –

Sovereign bonds of OECD countries

5,3% 2009 − − – –

Sovereign bonds of the Republic of Kazakhstan

11,1% 2007 − − – –

Corporate bonds

2,4%–4,9% 2007–2009 − − – –

Notes of the NBK

2,3%–3,1% 2006 − − – –

Treasury bills of the Ministry of Finance of the Republic of Kazakhstan

5,5%–8,3% 2006–2014 − − – –

Interestratesandmaturitiesofamountsduefromcreditinstitutionsfollow:

2005 2004 2003 % Maturity % Maturity % Maturity

Loans 4,0%–12,8% 2006–2014 4,0% – 20,0% 2005 – 2008 4,0% – 12,0% 2004 – 2008

Available-for-Sale Investment SecuritiesAvailable-for-saleinvestmentsecuritiesasofDecember31,comprise:

2005 2004 2003Bonds of international financial organizations 34.292 23.881 −Bonds of public agencies 3.407 − −Sovereign bonds of OECD countries 1.316 − −Sovereign bonds of the Republic of Kazakhstan 734 − −Corporate bonds 549 − −Notes of the NBK 423 − −Treasury bills of the Ministry of Finance of the Republic of Kazakhstan 44 − − 40.765 23.881 −Equity securities 1.641 1.545 871Available-for-saleinvestmentsecurities 42.406 25.426 871

Interestratesandmaturitiesofthesesecuritiesare:

Available-for-sale investment securities were transferred from held-to-maturity securities on September 29, 2004, following a change in management’s intent with regard to the underlying securities.

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Aggregatedassetsandliabilitiesofassociates 2005 2004 2003

Total assets 14.400 2.045 –

Total liabilities 9.648 1.072 –

Net assets 4.752 973 –

Aggregatedprofitofassociates 2005 2004 2003

Net profit/(loss) 103 117 –

Held-to-maturityinvestmentsecuritiescomprised:

2005 2004 2003

Carrying Nominal Carrying Nominal Carrying Nominalvalue value value value value value

Bonds of international financial organizations

– – – – 26.288 24.611

Bonds of international financial organisations carried interest at rates ranging from 4.375% to 6.125% per annum and mature between 2011 and 2013.

Investments in AssociatesMovementininvestmentsinassociateswas:

2005 2004 2003

Balance, beginning of the period 331 – –

Purchase cost 1.867 326 –

Share of net income (loss) 7 5 –

Investmentsinassociates,endoftheperiod 2.205 331 –

Thefollowingtableillustratessummarisedfinancialinformationoftheassociates:

For the general information, please refer to Note 2.


Loans to CustomersLoanstocustomerscomprise:

2005 2004 2003

Loans to customers 719.233 429.906 252.774

Overdrafts 588 593 293

Financial leasing 284 7.158 1.718

Promissory notes 577 739 55

Factoring 14 754 278

720.696 439.150 255.118

Less – Allowance for loan impairment (Note 12) (40.311) (29.633) (15.271)

Loanstocustomers 680.385 409.517 239.847

As of December 31, 2005, the annual interest rates charged by the Bank ranged from 10% to 20% per annum for KZT-denominated loans ( 2004 – from 12% to 30%; 2003 – from 20% to 33%) and from 10% to 18% per annum for US Dollar-denominated loans ( 2004 – from 12% to 24%; 2003 – from 12% to 26%).

Grossloanshavebeenextendedtothefollowingtypesofcustomers:

2005 2004 2003

Private companies 598.525 378.266 219.838

Individuals 120.162 57.405 27.222

State companies 1.908 2.829 7.506

State budget or local authorities 83 282 518

Other 18 368 34

Loanstocustomers,gross 720.696 439.150 255.118

As of December 31, 2005, the Group had a concentration of loans represented by KZT 110,893 due from the ten largest borrowers that comprised 15.39% of the total gross loan portfolio (2004 – KZT 72,196, 16.44%; 2003 – KZT 67,204, 26.34%) and represented 127% of the Group’s total shareholders’ equity (2004 – 154%; 2003 – 246%). Allowances amounting to KZT 9,197 were made against these loans as at December 31, 2005 (2004 – KZT 4,933; 2003 – KZT 2,657).

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Loansaremadetothefollowingsectors:

2005 % 2004 % 2003 %

Wholesale trade 137.903 19,1% 86.582 19,7% 53.538 21,0%

Individuals 120.162 16,7% 57.405 13,0% 27.222 10,7%

Construction of roads and industrial buildings 74.410 10,3% 40.478 9,2% 10.759 4,2%

Oil & gas 72.645 10,1% 37.295 8,5% 29.841 11,7%

Agriculture 64.987 9,0% 45.271 10,3% 32.506 12,7%

Housing construction 40.158 5,6% 21.806 5,0% 7.104 2,8%

Food industry 36.256 5,0% 41.030 9,4% 30.350 11,9%

Mining 31.164 4,3% 20.924 4,8% 15.242 6,0%

Transport 27.869 3,9% 20.001 4,6% 3.541 1,4%

Chemical industry 25.025 3,5% 12.160 2,8% 9.254 3,6%

Energy 21.491 3,0% 8.874 2,0% 3.558 1,4%

Retail trade 11.005 1,5% 5.174 1,1% 1.480 0,6%

Production of machinery and equipment 7.690 1,1% 5.631 1,3% 1.991 0,8%

Financial services 7.066 1,0%

Real estate activities 5.960 0,8% 4.678 1,0% 7.173 2,8%

Telecommunication 4.886 0,7% 3.857 0,9% 4.612 1,8%

Publishing 3.927 0,5% 3.860 0,9% 549 0,2%

Metallurgical industry 3.564 0,5% 1.865 0,5% 7.125 2,8%

Hospitality 1.776 0,2% 3.607 0,8% 362 0,1%

Production of rubber and plastic articles 1.750 0,2% 1.301 0,3% 1.243 0,5%

Research & development 1.466 0,2% 516 0,1% -

Textile and leather industry 939 0,1% 4.675 1,0% 688 0,3%

Other 18.597 2,7% 12.160 2,8% 6.980 2,7%

720.696 100,0% 439.150 100,0% 255.118 100,0%


Allowances for Impairmentand Provisions Themovementsinallowancesforimpairmentofinterestearningassets,wereasfollows:

Duefromcreditinstitutions Loanstocustomers Total

AtDecember31,2002 - 10.166 10.166

Impairment charge - 10.391 10.391

Write-offs - (6.762) (6.762)

Recoveries - 1.476 1.476

AtDecember31,2003 - 15.271 15.271

Impairment charge 527 18.724 19.251

Write-offs - (8.129) (8.129)


AtDecember31,2004 527 29.633 30.160

Impairmentcharge - 15.359 15.359

Write-offs (527) (8.155) (8.682)


December31,2005 - 40.311 40.311

Themovementsinallowancesforotherlossesandprovisionswereasfollows:

Otherassets Otherprovisions Total

December31,2002 109 244 353

Provision 230 108 338

Write-offs - (33) (33)

December31,2003 339 319 658

Provision 561 1.732 2.293

Write-offs (496) (20) (516)

Recoveries 19 - 19

December31,2004 423 2.031 2.454

Provision - 1.642 1.642

Write-offs (459) (195) (654)

Recoveries 108 - 108

December31,2005 72 3.478 3.550

Allowances for impairment of assets are deducted from the related assets. Provisions for letters of credit and guarantees are recorded within other liabilities.

11�11�

Taxation Thecorporateincometaxexpensecomprises:

2005 2004 2003

Current tax charge 1.569 796 266

Current tax of prior periods (Note 19) – 251 –

Incometaxexpense 1.569 1.047 266

The Bank and its subsidiaries, other than TuranAlem Finance B.V. (“TAF BV”) and TuranAlem Finance (“TAF”) are subject to taxation in the Republic of Kazakhstan. TAF BV is subject to income tax in the Netherlands. TAF is subject to income tax in Russian Federation. Reconciliation between income tax expense in the accompanying consolidated financial statements and income before taxes multiplied by the statutory tax rate for the years ended December 31 is as follows:

2005 2004 2003

Accountingprofitbeforeincometax 16.275 7.628 4.359

Incometaxcomputedatthestatutorytaxrateof30% 4.883 2.288 1.308

Non-deductible interest expenses 243 475 361

Non-deductible impairment charge 18 13 165

Non-deductible business expenses 351 414 580

Losses (income) of subsidiaries taxed at different rates (329) (384) 108

Income tax of prior years (Note 19) – 251 –

Non taxable income on government securities (1.431) (507) (897)

Non taxable income on long-term loans granted for the modernization of property and equipment (2.700) (2.130) (1.230)

Other permanent differences 1.136 – –

Change in unrecognised deferred tax assets (602) 627 (129)

Incometaxexpense 1.569 1.047 266


Deferred tax balances, calculated by applying the statutory tax rates in effect at the respective balance sheet dates to the temporary differences between the tax basis of assets and liabilities and the amounts reported in the financial statements, comprised the following at December 31:

2005 2004 2003Taxeffectofdeductibletemporarydifferences:

Allowances for impairment and provisions for other losses 42 20 –

Tax losses carried forward – 447 –

Property and equipment 195 109 –

Other 10 130 101

Grossdeferredtaxassets 247 706 101

Unrecognised deferred tax assets (108) (706) (79)

Deferredtaxasset 139 – 22

Taxeffectoftaxabletemporarydifferences:Property and equipment – – (22)

Other (139) – –

Deferredtaxliability (139) (22)

Deferredtaxliability,net – – –

Tax loss carry-forward represents losses which arose from changes in the fair market value of certain securities. Losses from such securities are deductible only to the extent that they can be offset against gains from similar securities. In accordance with the tax legislation, such losses can be carried forward and offset against gains from similar securities during a period of 3 years from the year a loss occurs.

Kazakhstan currently has a single Tax Code that regulates main taxation matters. The main taxes include value added tax, income tax, social taxes, and others. Implementing regulations are often unclear or nonexistent and few precedents have been established. Often, different opinions regarding legal interpretation exist both among and within government authorities; thus creating uncertainties and areas of conflict. Tax declarations, together with other legal compliance areas (as examples, customs and currency control matters) are subject to review and investigation by a number of authorities, which are enabled by law to impose severe fines, penalties and interest charges. These facts create tax risks in Kazakhstan substantially more significant than typically found in countries with more developed tax systems. Management believes that the Group is in substantial compliance with the tax laws affecting its operations; however, the risk remains that relevant authorities could take different positions with regard to interpretive issues.

Deferred tax assets have not been recognised due to the uncertainties surrounding their realisation in the future.

116116

Amounts due to the Government and the NBKAmountsduetotheGovernmentandtheNBKconsistofthefollowing: 2005 2004 2003

Amounts due to the Government:

Interest bearing – KZT denominated 427 826 1.192

Interest bearing – EUR denominated 317 424 504

Interest bearing – USD denominated 68 115 207

Non-interest bearing 4 17 29

Amounts due to the NBK:

Deposits – 3.000 3.000

Loans 28 42 258

AmountsduetotheGovernmentandtheNBK 844 4.424 5.190

2005 2004 2003Interest Maturity Interest Maturity Interest Maturityrate rate rate

Amounts due to the Government:

Non interest bearing

– 2006 – 2005 – 2006 – 2004 – 2006

Interest bearing:

KZT denominated

0,5%–10,0% 2006–2010 up to 10,0% 2005 – 2010 up to 12,5% 2004 – 2010

USD denominated

2,9% 2011 4,6% 2011 1,3% 2011

EUR denominated

5,0% 2010 5,0% 2010 4,6% – 5,0% 2010 – 2011

Amounts due to the NBK:

Deposits – – 6,5% 2005 6,5% 2004

Loans

– 2006–2015 – 2005 – 2015 2,9% 2004

InterestratesandmaturityoftheamountsduetotheGovernmentandtheNBKfollow:


Amounts due to Credit Institutions Amountsduetocreditinstitutionscomprise:

2005 2004 2003

Syndicated bank loans 134.249 51.447 48.809

Loans from OECD based banks and financial institutions 126.371 61.774 46.845

Pass-through loans 7.939 7.206 4.011

Loans from Kazakh banks and financial institutions 6.744 12.359 3.637

Loans from other banks and financial institutions 6.265 5.163 3.369

Redeemable Convertible Preferred Shares 5.581 5.075 4.735

287.149 143.024 111.406

Interest-bearing placements from non OECD banks 3.081 729 289

Interest-bearing placements from Kazakh banks 2.322 4.524 8.508

Loro accounts 495 54 1.583

5.898 5.307 10.380

Amountsduetocreditinstitutions 293.047 148.331 121.786

InterestratesandmaturitiesofamountsduetocreditinstitutionsasofDecember31,follow:

2005 2004 2003

% Maturity % Maturity % Maturity

Syndicated bank loans

4,3%–6,1% 2006–2008 3,5% – 4,7% 2005 – 2007 3,3% – 3,7% 2004 – 2005

Loans from OECD based banks and financial institutions

1,0%–6,9% 2006–2017 1,0% – 6,0% 2005 – 2009 1,1% – 9,7% 2004 – 2009

Pass-through loans

6,0%–7,3% 2006–2008 4,7% – 8,1% 2005 – 2008 5,0% – 10,2% 2004 – 2006

Loans from Kazakh banks and financial institutions

5,4%–7,0% 2006 4,6% – 5,3% 2005 3,0% – 5,2% 2004

Loans from other banks and financial institutions

2,0%–6,2% 2006 1,7% – 4,7% 2005 1,9% – 4,6% 2004 – 2005

Interest-bearing placements from non OECD based banks

1,0%–7,9% 2006 3,2% – 7,9% 2005 4,5% 2004

Interest-bearing placements from Kazakh banks

1,0%–7,0% 2006 2,6% – 7,0% 2005 2,1% – 5,5% 2004

Loro accounts

upto2,0% – up to 2,0% – up to 2,0% –

11�11�

2005 2004 2003 Quantity % Quantity % Quantity %

Preferredshares:

Raiffeisen Zentralbank Osterreich (“RZB”) 351.139 61,73 293.115 56,56 162.115 33,48

European Bank for Reconstruction and Development 73.500 12,92 73.500 14,18 73.500 15,18

International Finance Corporation 73.500 12,92 73.500 14,18 73.500 15,18

The Netherlands Development Finance Company 70.678 12,42 70.678 13,64 44.112 9,11

KIB Asset Management 53 0,01 53 0,01 – –

Semey Mill Factory – – 7.407 1,43 – –

DEG – – – – 130.988 27,05

568.870 100,00 518.253 100,00 484.215 100,00

At December 31, 2005, pass-through loans represent credit lines provided to the Bank, through the Government of the Republic of Kazakhstan, by international financial organizations. Loans are granted to borrowers, based on the Bank’s analysis of their creditworthiness, under terms and conditions comparable to similar credit facilities. At December 31, 2005 amounts received under pass-through loans had been advanced to borrowers and included within loans to customers in the accompanying consolidated balance sheets. There were no undrawn balances of credit lines at December 31, 2005 (2004 – no undrawn balances, 2003 – USD 4 million).

RedeemableConvertiblePreferredShares

Holders of the redeemable convertible preferred shares have the right at any time, but not later than December 31, 2006, to convert all or any part of their redeemable convertible preferred shares into common shares of the Bank. At December 31, 2005, nominal value of the redeemable convertible preferred share was KZT 10,000 (equivalent of USD 74.64) (2004 – KZT 10,000 (equivalent of USD 76.92); 2003 – KZT 10,000 (equivalent of USD 69.34)), the quoted market price per common share was KZT 22,868 (equivalent of USD 170.68) (2004 – KZT 13,689 (equivalent of USD 105.30); 2003 – KZT 12,900 (equivalent of USD 89.45)), and the net assets value per share (as measured by the underlying net asset value of the Group divided by the number of shares outstanding) was KZT 23,476 (equivalent of USD 175.11) (2004 – KZT 19,673 (equivalent of USD 151.33); 2003 – KZT 16,672 (equivalent of USD 115.60)).

AsofDecember31,2005,2004and2003,thefollowingholdersownedtheoutstandingredeemableCPS:


Conversion of redeemable convertible preferred shares is performed when a shareholder prior to May 1, 2006 files an application for conversion. The Convertibility Period is terminated on December 31, 2006.

Upon the expiration of the Convertibility Period, i.e. on December 31, 2006, and only in the event the Bank fails to sell 55% of the aggregate of the Bank’s issued common shares to an OECD based bank with total assets of not less than USD 60 billion and a financial strength rating of not less than D+ (“Strategic Investor”), each holder of the redeemable convertible preferred share shall have the right to redeem all or any portion of the redeemable convertible preferred shares in cash.

The Bank is obligated to offer to redeem the redeemable convertible preferred shares (“Redemption offer”) at the USD equivalent of the redeemable convertible preferred shares Purchase Price at the offer date (the “Purchase Price”) if any person makes a Shareholder Protection Tender Offer (“Tender Offer”), i.e. an offer to purchase 30% or more of the Bank’s common share capital, and the respective Tender Offer Price for each redeemable convertible preferred share is less than the redeemable convertible preferred shares Purchase Price. If the holders of the redeemable convertible preferred shares accept the redemption offer, the Bank is then obligated to redeem the shares.

In accordance with revised International Accounting Standard 32 “Financial Instruments: Disclosure and Presentation” financial instruments with contingent settlement provision should be recorded as liabilities. At December 31, 2005 redeemable convertible preferred shares accounted for as financial liability consisted of 568,870 shares (2004 – 518,253, 2003 – 484,215). All shares are KZT denominated and have a nominal value of KZT 10,000 each.

During the year ended December 31, 2005, the Bank issued 50,617 redeemable convertible preferred shares at a premium of KZT 6,639 per share. ( 2004 – 26,631 redeemable convertible preferred shares at a premium of KZT 2,833 per share, and 7,407 redeemable convertible preferred shares at a premium of KZT 6,639 per share, 2003 – 57,493 redeemable convertible preferred shares at a premium of KZT 2,833 per share) (Note 18).

Financialcovenants

In accordance with the contractual terms of the foreign bank loans, the Bank is required to maintain certain financial ratios, particularly with regard to its liquidity, capital adequacy, and lending exposures. In addition, and in accordance with the terms of certain of those loans, the Bank is required to obtain the approval of the lender before distributing any dividends to the common shareholders other than dividend shares. Management believes that the Bank is in compliance with the covenants of all debt agreements the Bank has with other banks and financial institutions.

120120

Amounts due to CustomersTheamountsduetocustomersincludedbalancesincustomercurrentaccounts,timedeposits,andcertainotherliabilities,andincludethefollowing: 2005 2004 2003

Time deposits 218.626 155.593 96.018

Current accounts 81.454 65.095 40.388

Guarantee and restricted deposits 6.634 6.022 3.912

Amountsduetocustomers 306.714 226.710 140.318

Guarantee and restricted deposits represent customer’s collateral under letters of credit and guarantees issued by the Bank on behalf of clients.

Interestratesandmaturitiesofamountsduetocustomersfollow:

2005 2004 2003 KZT USD/EURO KZT USD/EURO KZT USD/EURO denominated denominated denominated denominated denominated denominated

% % % % % %

Time deposits 1%–12% 2%–8,5% 1% – 13% 2,5% – 8,5% 1% – 14,5% 3% – 8,5%

Current accounts upto2% upto1% up to 3% up to 1% up to 4% up to 2%

Guarantee and other restricted deposits – – – up to 9% – up to 9%

2005 2004 2003

KZT USD/EURO KZT USD/EURO KZT USD/EUROdenominated denominated denominated denominated denominated denominated

Maturity Maturity Maturity Maturity Maturity Maturity

Time deposits

2006–2010 2006–2007 2005 – 2006 2005 – 2009 2004 – 2005 2004 – 2005

Guarantee and other restricted deposits

2006 2006–2007 2005 2005 2004 2004

Currentaccountsaredueondemand.Maturitiesofotheramountsduetocustomersfollow:

At December 31, 2005 the Bank’s ten largest customers accounted for approximately 37.19% of the total amounts due to customers (2004 – 26.17%; 2003 – 22.26%).


Theamountsduetocustomersincludedbalancesincustomercurrentaccountsandtermdeposits,andwereanalysedasfollows:

2005 2004 2003Timedeposits:

Commercial entities 109.739 72.439 30.106

Individuals 101.000 76.266 58.905

Governmental entities 7.887 6.888 7.007

Currentaccounts:


Individuals 15.970 10.718 10.032

Governmental entities 5.558 5.878 2.203

Guaranteeandotherrestricteddeposits:


Individuals 3.931 2.113 249

Governmental entities 39 218 62

Amountsduetocustomers 306.714 226.710 140.318

Ananalysisofcustomeraccountsbysectorfollows:

2005 % 2004 % 2003 %

Individuals 120.901 39,4% 89.097 39,3% 69.186 49,3%

Oil and gas 55.154 18,0% 29.290 12,9% 6.852 4,9%

Metallurgy 49.524 16,1% 30.171 13,3% 15.070 10,7%

Non-credit financial organizations 13.069 4,3% 9.230 4,1% 1.907 1,4%

Construction 12.114 3,9% 7.161 3,2% 5.439 3,9%

Wholesale trading 10.387 3,4% 12.774 5,6% 12.479 8,9%

Mining 7.170 2,3% 360 0,2% 410 0,3%

Transportation 5.828 1,9% 7.904 3,5% 1.448 1,0%

Retail trade 2.356 0,8% 6.158 2,7% 2.042 1,5%

Machinery and equipment production 2.221 0,7% 2.074 0,9% 6.556 4,7%

Agriculture 2.045 0,7% 3.259 1,4% 2.738 2,0%

Chemical processing 1.949 0,6% 2.803 1,2% 347 0,2%

Energy industry 1.440 0,5% 7.605 3,4% 3.021 2,2%

Communication 790 0,3% 736 0,3% 432 0,3%

Textile and leather industry 703 0,2% 838 0,4% 41 –

Food industry 576 0,2% 952 0,4% 389 0,3%

Hotel and hospitality 326 0,1% 370 0,2% 102 0,1%

Entertainment 268 0,1% 281 0,1% 166 0,1%

Other 19.893 6,5% 15.647 6,9% 11.693 8,2%

306.714 100,0% 226.710 100,0% 140.318 100,0%

122122

debt Securities Issued DebtsecuritiesissuedasofDecember31,consistedofthefollowing:

2005 2004 2003USD notes with fixed rate 194.356 143.057 61.294

USD notes with floating rate 26.988 – –

USD and KZT subordinated notes 42.369 29.250 13.528

KZT notes 18.979 – –

RUR notes 13.980 – –

RUR promissory notes – 9.340 –

USD promissory notes 672 – –

297.344 181.647 74.822

Own USD notes held by the Group (103) (1.297) (482)

Own KZT notes held by the Group (77) – –

Own USD and KZT subordinated notes held by the Group – (337) (8)

297.164 180.013 74.332

Plus unamortized premium 1.616 1.928 –

Less unamortized discount (2.179) (1.166) (485)

Less unamortized cost of issuance (977) (725) (340)

295.624 180.050 73.507

Interest accrued 4.385 2.029 667

Debtsecuritiesissued 300.009 182.079 74.174

Theinterestratesandmaturitiesofthesedebtsecuritiesissuedfollow:

2005 2004 2003% Maturity % Maturity % Maturity

USD notes with fixed interest rate

7,9%–10,0% 2007–2015 7,9% – 10,0% 2007 – 2014 7,87% – 11,5% 2004 – 2010

USD notes with floating interest rate

3monthLIBOR+1,65% 2008 – – – –

USD and KZT subordinated notes

7,0%–12,0% 2009–2015 9,4% – 12,0% 2009 – 2014 8,0% – 12,0% 2009 – 2013

KZT notes

8,5%–10,0% 2010–2015 – – – –

RUR notes

6,4% 2006–2009 – – – –

USD promissory notes

6monthLIBOR+1,5% 2006 – – – –

RUR promissory notes – – 10,0% 2005 – –


The subordinated notes at December 31, 2005, 2004 and 2003, are unsecured obligations of the Group and are subordinated in right of payment to all present and future senior indebtedness and certain other obligations of the Group.

In accordance with the terms of the USD Notes, the Bank is required to maintain certain financial ratios particularly with regard to its liquidity, capital adequacy, and lending exposures. Management believes that the Bank maintains these ratios as of December 31, 2005.

Shareholders’ Equity AsofDecember31,2005,2004and2003,thefollowingshareswereoutstanding.

Commonshares Non-redeemableCPS

Numberofauthorizedshares

Numberofsharesissued

Placementvalue(KZT)

Additionalpaid-in-capital(KZT)

Numberofauthorizedshares

Numberofsharesissued

Placementvalue(KZT)

December31,2002

1.287.023 1.276.635 11.931 426.722 – – 28

Increase in share capital

432.125 400.634 4.313 143.275 – – 1.385

December31,2003

1.719.148 1.677.269 16.244 569.997 – – 1.413


615.287 657.166 6.161 204.004 84.021 840 4.583

December31,2004

2.334.435 2.334.435 22.405 774.001 84.021 840 5.996


1.087.081 1.087.081 10.871 360.431 221.499 2.215 13.188

December31,20053.421.516 3.421.516 33.276 1.134.432 305.520 3.055 19.184

All shares are KZT denominated and have a nominal value of KZT 10,000 each. Share capital is recorded net of transaction costs and net of adjustments made during 1997 to adjust the opening balances of the Bank following the combination of Turan Bank and Alem Bank.

At December 31, 2005, the Group held 16,600 of the Bank’s shares as treasury stock (2004 – 33,450; 2003 – 41,104).

12�12�

During the year ended December 31, 2005, the Bank issued 121,110 non-redeemable CPS at a premium of 6,639 KZT per share, 100,389 non-redeemable CPS and 1,087,081 common shares at a premium of 10,146 KZT per share (2004 – 59,151 non-redeemable CPS and 775 common shares at a premium of 2,833 KZT per share, and 24,870 non-redeemable CPS and 615,287 common shares at a premium of 6,639 KZT per share; 2003 – 431,350 common shares at a premium of 2,833 KZT per share). Additional paid in capital as at December 31, 2005 includes a premium of KZT 336 million on redeemable CPS classified as liability (2004 – KZT 124 million; 2003 – KZT 163 million) (Note 15).

AsofDecember31,thefollowingshareholdersheldtheoutstandingshares:

2005 2004 2003

Shareholders: % % %

Commonshares: Central Securities Depository CJSC (nominee holder) 24,18 22,32 11,73Bank of New York (nominee holder) 10,92 16,23 26,48HAWSBROK 9,07 10,02 10,12SP-CreditPriveSA 8,97 10,00 10,10Agroinvest LLP 8,03 – –Torland Production INC 7,02 – –VALAXIS Asset Management SA 6,40 9,51 9,61InvestCapital Company LLP 4,79 4,79 –Yassi Invest LLP 5,98 – –Refgen Technologies INC 4,80 – –Orken-Invest LLP 4,33 – –Management 0,03 20,69 28,33RESMI COMMERCE – 3,92 –Finance Company Progress OJSC – 2,52 3,46Others 5,48 – 0,17 100,00 100,00 100,00

DividendsonCPS

The convertible preferred shares carry a dividend of 10.25% per annum on nominal value. These dividends are cumulative.

2005 2004 2003 % % %

Non-redeemableCPS:

JSC Pension Fund Kurmet-Kazakhstan (nominal holder) 59,42 89,01 –

JSC Halyk Pension Fund 18,53 – –

Agroinvest LLP 15,48 10,99 –

JSC TuranAlem Securities (nominal holder) 6,57 – –

100,00 100,00 –


Natureandpurposeofotherreserves

Revaluationreserveforpropertyandequipment

The revaluation reserve for property and equipment is used to record increases in the fair value of buildings and decreases to the extent that such decrease relates to an increase on the same asset previously recognised in equity.

Unrealisedgains(losses)oninvestmentsecuritiesavailable-for-sale

This reserve records fair value changes on available-for-sale investments.

Commitments and Contingencies Legalactionsandclaims

The Group is subject to various legal proceedings related to business operations. The Group does not believe that pending or threatened claims of these types, individually or in aggregate, are likely to have any material adverse effect on the Group’s financial position or results of operations.

The Group assesses the likelihood of material liabilities arising from individual circumstances and makes provision in its financial statements only where it is probable that events giving rise to the liability will occur and the amount of the liability can be reasonably estimated. No provision has been made in these financial statements for any of the contingent liabilities mentioned above.

Following an inspection by the Kazakhstan tax authorities with respect to years ended December 31, 2002 and 2003, the tax authorities claimed KZT 275 million in unpaid taxes from the Bank. The claim arose primarily due to the introduction of changes in Kazakhstan tax laws with respect to which there was no satisfactory authoritative interpretation. Whilst the Bank has admitted liability for KZT 251 million in unpaid taxes, part of the tax claim in the amount of KZT 24 million remained in dispute until end of 2004 and was resolved in 2005 in favour of the Bank by the decision of the Supreme court of Kazakhstan.

TaxContingencies

Various types of legislation and regulations are not always clearly written and their interpretation is subject to the opinions of the local tax inspectors and the Ministry of Finance of the Republic of Kazakhstan. Instances of inconsistent opinions between local, regional and national tax authorities are not unusual. The current regime of penalties and interest related to reported and discovered violations of Kazakhstan laws, decrees and related regulations is severe. Penalties include confiscation of the amounts at issue (for currency law violations), as well as fines of generally 50% of the taxes unpaid.

126126

The Group believes that it has paid or accrued all taxes that are applicable. Where legislation concerning the provision of taxes is unclear, the Group has accrued tax liabilities based on management’s best estimate. The Group’s policy is to recognize provisions in the accounting period in which a loss is deemed probable and the amount is reasonably determinable.

Because of the uncertainties associated with the Kazakhstan tax system, the ultimate amount of taxes, penalties and interest, if any, as a result of past transactions, may be in excess of the amount expensed to date and accrued at December 31, 2005. Although such amounts are possible and may be material, it is the opinion of the Group’s management that these amounts are either not probable, not reasonably determinable, or both.

FinancialCommitmentsandContingencies

AsofDecember31,theGroup’sfinancialcommitmentsandcontingenciescomprisedthefollowing: 2005 2004 2003

Undrawn loan commitments 33.112 44.878 25.443

Commercial letters of credit 81.900 64.845 45.141

Guarantees 55.683 46.204 24.447

170.695 155.927 95.031

Less: cash collateral (6.634) (6.022) (1.882)

Less: provisions (3.478) (2.031) (319)

Financialcommitmentsandcontingencies 160.583 147.874 92.830

The Group requires collateral to support credit-related financial instruments when it is deemed necessary. Collateral held varies, but may include deposits held in the bank, government’s and international prime financial organisations’ securities, and other assets.

TrustActivities

The Group provides custody services for third parties which involve the Group making allocation and purchase and sales decisions in relation to securities. Those securities that are held in a fiduciary capacity are not included in these consolidated financial statements. As at December 31, 2005 such securities held in this capacity were KZT 73,721 (2004 – KZT 67,477; 2003 – KZT 40).

DeliverableForwardContracts

Forward foreign exchange contracts are agreements to purchase or sell a specific quantity of a foreign currency or precious metals at an agreed-upon price with delivery and settlement at a specified future date.


2005 2004 2003

Notional UnrealizedGains Notional UnrealizedGains Notional UnrealizedGainsAmount Amount Amount

Deliverable forward contracts:

USD-KZT contracts with Kazakh counteragents

- – 845 – 11.474 359

USD-EUR contracts with Kazakh counteragents

– – 35 – 1.004 5

EUR-KZT contracts with Kazakh counteragents

– – 35 – – –

RUR-KZT contracts with Kazakh counteragents

– – 2.000 132 – –

USD-RUR contracts with Kazakh counteragents

– – 130 – – –

All deliverable forward contracts were fulfilled during the period ended December 31, 2005.

Such contracts include only deliverable contracts. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from movements in currency exchange rates. TheGroupwasapartytothefollowingdeliverableforwardcontracts:

12�12�

Fees and Commissions Net fee and commission income for the years ended December 31 was made from the followingsources:

2005 2004 2003

Letters of credit and guarantees issued 4.566 3.448 2.519

Settlement and cash operations 2.729 2.100 1.543

Transfer operations 2.291 1.747 1.158

Foreign currency trading 1.107 849 606

Asset management fees 909 379 275

Brokerage services 338 161 27

Other 1.003 613 328

Feeandcommissionincome 12.943 9.297 6.456

Brokerage services (139) (66) (4)

Transfer operations (129) (64) (48)

Foreign currency trading (61) (52) (59)

Custodian services (24) (75) (24)

Other (136) (46) (2)

Feeandcommissionexpense (489) (303) (137)

Netfeeandcommissionincome 12.454 8.994 6.319


Gains Less Losses From Financial Assets at Fair value Through Profit or LossGainslesslossesfromfinancialassetsatfairvaluethroughprofitorlossfortheyearsendedDecember31comprisedthefollowing:

2005 2004 2003

Dealing 2.718 (26) (204)

Revaluation 297 64 793

3.015 38 589

Other Income OtherincomefortheyearsendedDecember31comprisedthefollowing:

2005 2004 2003

Rent 663 332 442

Penalties 123 112 446

Currency transportation – 1 26

Other 353 122 88

1.139 567 1.002

130130

Salaries and Administrative and Other Operating ExpensesSalariesandotheremployeebenefitsandadministrativeandotheroperatingexpensescomprise:

2005 2004 2003

Salaries and bonuses 6.022 3.888 2.845

Social security costs 758 431 545

Other payments 150 69 42

Salariesandotheremployeebenefits 6.930 4.388 3.432

Occupancy and rent 1.141 794 312

Marketing and advertising 1.108 744 447

Security 827 361 279

Repair and maintenance of property and equipment 659 403 754

Business travel and related expenses 547 311 180

Data processing 510 355 157

Communications 480 343 292

Legal services and consultancy 390 358 388

Transportation expenses 306 155 158

Loss on disposals of property and equipment 182 30 63

Office supplies 159 71 75

Customs duties 7 3 53

Other 767 609 761

Administrativeandotheroperatingexpenses 7.083 4.537 3.919


Earnings per Share Basic earnings per share is calculated by dividing the net income for the year attributable to common shareholders by the weighted average number of shares outstanding during the year. The Bank did not declare or pay any dividends to common shareholders during 2005, 2004 and 2003. During 2005 the Bank declared dividends to the CPS shareholders amounting to KZT 229 (2004 – 28, 2003 - nil).

For the diluted earnings per share, the weighted average number of shares in issue is adjusted to assume conversion of potential dilutive shares. The Group had one type of dilutive shares: convertible preferred shares. For the convertible preferred shares, the number of shares that could have been converted at the contractual conversion price is added to the shares outstanding, net income is adjusted to the amount of dividends on CPS.

ThefollowingreflectstheincomeandsharedatausedinthebasicanddilutedearningspersharecomputationsfortheyearsendedDecember31:

2005 2004 2003

Net income attributable to common shareholders for basic earnings per share, being net income less dividends declaredon convertible preferred shares (in KZT millions) 14.077 6.700 4.133

Net income attributable to common and potential commonshareholders for diluted earnings per share (in KZT millions) 14.307 6.728 4.133

Weighted average number of common shares for basic earningsper share 2.496.801 1.734.692 1.273.425

Weighted average number of common and potential commonshares for diluted earnings per share 2.700.877 1.767.127 1.273.425

AreconciliationoftheweightedaveragenumberofcommonsharesandtheweightedaveragenumberofpotentialcommonsharesfortheyearsendedDecember31isasfollows:

2005 2004 2003

Weighted average number of common shares for basic earningsper share 2.496.801 1.734.692 1.273.425

Weighted average number of common shares resulting fromthe potential conversion of the convertible preferred sharesinto common shares 204.076 32.435 −

Weighted average number of common and potential commonshares 2.700.877 1.767.127 1.273.425

132132

Risk Management PoliciesManagement of risk is fundamental to the banking business and is an essential element of the Group’s operations. The main risks inherent to the Group’s operations are those related to credit, liquidity and market movements in interest and foreign exchange rates. A summary description of the Group’s risk management policies in relation to those risks follows.

CreditRisk

The Group is exposed to credit risk which is the risk that a counter party will be unable to pay amounts in full when due. The Group structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or groups of borrowers, and to industry segments. Limits on the level of credit risk by borrower and product, by industry sector, by region are approved quarterly by the Board of Directors. Where appropriate, and in the case of most loans, the Group obtains collateral. Such risks are monitored on a continuous basis and subject to annual or more frequent reviews.

The exposure to any one borrower, including banks and brokers, is further restricted by sub-limits covering on and off-balance sheet exposures which are established by the Credit Committee. The maximum credit risk exposure, ignoring the fair value of any collateral, in the event other parties fail to meet their obligations under financial instruments is equal to the carrying value of financial assets as presented in the accompanying financial statements and the disclosed financial commitments.

The Group maintains strict control limits on net open derivative positions, the difference between purchase and sale contracts, by both amount and term. At any one time the amount subject to credit risk is limited to the current fair value of instruments that are favourable to the Group (i.e. assets), which in relation to derivatives is only a small fraction of the contract or notional values used to express the volume of instruments outstanding. This credit risk exposure is managed as part of the overall lending limits with customers, together with potential exposures from market movements. Collateral or other security is not usually obtained for credit risk exposures on these instruments, except where the Group requires margin deposits from counter parties.


Concentrationoffinancialassetsandliabilities

Thegeographicalconcentrationoffinancialassetsandliabilitiesissetoutbelow:

2005 Kazakhstan OECD CISandothernonOECD Total countries

Assets:

Cash and cash equivalents 68.909 45.358 4.864 119.131Obligatory reserves 10.791 – – 10.791

Financial assets at fair value through

profit or loss 23.495 86.757 – 110.252

Amounts due from credit institutions 12.296 28 11.352 23.676

Available for sale securities 2.133 39.015 1.258 42.406

Loans to customers 580.272 10.765 129.659 720.696

Investments in associates 1.017 – 1.188 2.205

Other assets 6.094 9 988 7.091 705.007 181.932 149.309 1.036.248 Liabilities:

Amounts due to the Government and

the NBK 844 – – 844

Amounts due to credit institutions 73.480 212.178 7.389 293.047

Amounts due to customers 301.947 3.745 1.022 306.714

Debt securities issued 61.884 223.947 14.178 300.009

Other liabilities 6.191 237 3.655 10.083 444.346 440.107 26.244 910.697 Netbalancesheetposition 260.661 (258.175) 123.065 125.551

13�13�

2004 2003

Kazakhstan OECD CISandothernon Total Kazakhstan OECD CISandothernon Total OECDcountries OECDcountries

Assets:


41.791 7.832 2.117 51.740 18.178 2.742 771 21.691

Obligatory reserves

6.971 – – 6.971 3.706 – – 3.706


52.829 49.353 – 102.182 23.486 38.105 – 61.591

Amounts due from credit institutions2.889 – 3.676 6.565 5.729 –

264 5.993

Available for sale securities

1.913 22.188 1.325 25.426 202 3 666 871

Held-to-maturity securities

– – – – – 26.288 – 26.288

Loans to customers

330.961 9.607 98.582 439.150 222.904 – 32.214 255.118


– – 331 331 – – – –

Other assets

7.072 – 52 7.124 6.671 – – 6.671

444.426 88.980 106.083 639.489 280.876 67.138 33.915 381.929

Liabilities: Amounts due to the Government and the NBK

4.424 – – 4.424 5.190 – – 5.190

Amounts due to credit institutions

21.356 119.725 7.250 148.331 12.131 107.622 2.033 121.786

Amounts due to customers

221.168 3.148 2.394 226.710 140.318 – – 140.318

Debt securities issued

29.247 143.492 9.340 182.079 13.849 60.325 – 74.174

Other liabilities

9.838 – – 9.838 4.318 – – 4.318

286.033 266.365 18.984 571.382 175.806 167.947 2.033 345.786

Netbalancesheetposition158.393 (177.385) 87.099 68.107 105.070 (100.809) 31.882 36.143


The above tables do not include the effect of allowances for loans’ impairment and other assets, which amounted to KZT 40,383, KZT 30,583 and KZT 15,610 as of December 31, 2005, 2004 and 2003, respectively.

MarketRisk

The Group takes on exposure to market risks. Market risks arise from open positions in interest rate and currency products, all of which are exposed to general and specific market movements. The Group manages market risk through periodic estimation of potential losses that could arise from adverse changes in market conditions and establishing and maintaining appropriate stop-loss limits and margin and collateral requirements.

With respect to undrawn loan commitments the Group is potentially exposed to loss in an amount equal to the total amount of such commitments. However, the likely amount of loss is less than that, since most commitments are contingent upon certain conditions set out in the loan agreements.

CurrencyRisk

The Group is exposed to effects of fluctuation in the prevailing foreign currency exchange rates on its financial position and cash flows, which are monitored daily. The Board of Directors sets limits on the level of exposure by currencies, by branches and in total. These limits also comply with the minimum requirements of the Agency of the Republic of Kazakhstan on Regulation and Supervision of Financial Market and Financial Organizations (the ‘‘FMSA’’).

136136

The above tables do not include the effect of allowances for impairment of loans, due from credit institutions and other assets totalling KZT 40,383, KZT 30,583 and KZT 15,610 as of December 31, 2005, 2004 and 2003, respectively.

Freely convertible currencies represent mainly USD amounts, but also include currencies from other OECD countries. Non-freely convertible amounts relate to currencies of CIS countries, excluding Kazakhstan.

The Group’s principal cash flows (revenues, operating expenses) are largely generated in KZT. As a result, future movements in the exchange rate between KZT and USD or EUR will affect the carrying value of the Group’s USD and EUR denominated monetary assets and liabilities.

Assets:


57.134 58.798 3.199 119.131 34.225 15.608 1.907 51.740 15.093 5.723 875 21.691

Obligatory reserves

10.791 – – 10.791 6.971 – – 6.971 3.706 – – 3.706


18.852 91.400 – 110.252 46.125 56.057 – 102.182 11.648 49.943 – 61.591

Amounts due from credit institutions

4.059 10.642 8.975 23.676 425 3.560 2.580 6.565 78 5.915 – 5.993


2.462 39.751 193 42.406 1.283 24.143 – 25.426 868 3 – 871

Held-to-maturity securities – – – – – – – – 3 26.285 – 26.288

Loans to customers

163.450 548.852 8.394 720.696 109.992 320.903 8.255 439.150 78.426 176.665 27 255.118


1.288 138 779 2.205 – – 331 331 – – – –

Other assets

5.749 1.233 109 7.091 6.633 354 137 7.124 6.307 343 21 6.671

263.785 750.814 21.649 1.036.248 205.654 420.625 13.210 639.489 116.129 264.877 923 381.929

Liabilities:

Amounts due to the Government and the NBK

458 386 – 844 3.885 539 – 4.424 4.263 927 – 5.190


12.859 280.079 109 293.047 20.252 128.062 17 148.331 9.125 112.618 43 121.786


144.122 161.736 856 306.714 122.789 102.447 1.474 226.710 69.043 70.596 679 140.318


55.769 230.061 14.179 300.009 23.925 148.814 9.340 182.079 7.598 66.576 – 74.174

Other liabilities

9.423 560 100 10.083 9.276 552 10 9.838 3.982 324 12 4.318

222.631 672.822 15.244 910.697 180.127 380.414 10.841 571.382 94.011 251.041 734 345.786

Netbalancesheetposition41.154 77.992 6.405 125.551 25.527 40.211 2.369 68.107 22.118 13.836 189 36.143

2005KZT Freely Non Total convertible convertible

TheGroup’sexposuretoforeigncurrencyexchangerateriskfollows:




InterestRateRisk

Interest rate risk arises from the possibility that changes in interest rates will affect the value of the financial instruments.

The Group is exposed to interest rate risk as a result of mismatches or gaps in the amounts of assets and liabilities and off balance sheet instruments that mature or reprice in a given period. The Group manages this risk by matching the repricing of assets and liabilities through risk management strategies.

The interest rates earned and incurred by the Group on its assets and liabilities are disclosed in the relevant notes to these consolidated financial statements.

A significant portion of the Group’s assets and liabilities reprice within one year. Accordingly there is a limited exposure to interest rate risk. As of December 31, the effective average interest rates by currencies for interest generating/ bearing monetary financial instruments were as follow:

2005 2004 2003

KZT ForeignCurrency KZT ForeignCurrency KZT ForeignCurrency


3,9% 4,5% 3,2% 3,4% 6,9% 7,7%


2,7% 4,0% 2,0% 10,5% 2,5% 2,0%

Investment securities:

• available-for-sale securities 6,3% 3,3% – 3,8% – –

• held-to-maturity securities– – – – – 4,4%

Loans to customers

19,7% 11,3% 18,0% 11,7% 16,7% 12,5%


4,9% 4,9% 5,9% 5,1% 6,5% 4,4%


9,1% 5,7% 6,2% 4,3% 8,5% 4,2%


7,5% 5,4% 6,3% 6,0% 9,4% 5,1%


9,9% 8,7% 8,0% 9,0% 1,6% 12,3%

13�13�

Lessthan1month 1to3months 3monthsto1year 1to3years Over3years Pastdue Total

Assets:


109.442 9.689 – – – – 119.131

Obligatory reserves

– – – 10.791 – – 10.791


13.285 – 14.944 47.604 34.419 – 110.252


801 3.296 7.405 2.022 10.152 – 23.676

Available-for-sale Securities

444 2.867 206 9.926 28.963 – 42.406

Loans to customers

33.378 66.522 216.953 99.412 295.508 8.923 720.696


– – – – 2.205 – 2.205

Other assets

271 3.740 451 58 2.571 – 7.091157.621 86.114 239.959 169.813 373.818 8.923 1.036.248

Liabilities:

Amounts due to the Government and NBK

35 – 101 203 505 – 844


62.221 10.270 170.411 36.280 13.865 – 293.047


114.886 59.379 99.086 27.852 5.511 – 306.714


– 26.967 672 38.375 233.995 – 300.009

Other liabilities

1.944 3.562 2.821 1.095 661 – 10.083179.086 100.178 273.091 103.805 254.537 – 910.697

Netinterestsensitivitygap

(21.465) (14.064) (33.132) 66.008 119.281 8.923 125.551

Cumulativeinterestsensitivitygap

(21.465) (35.529) (68.661) (2.653) 116.628 125.551

The Group monitors its interest rate margins on a regular basis and consequently does not consider itself exposed to significant interest rate risk or consequential cash flow risk.

The following tables provide an analysis of banking assets and liabilities grouped on the basis of the remaining period from the balance sheet date to the contractual repricing date, which are shown as if they can be repriced within one month as management is able to liquidate those securities within a short period of time.

2005



Assets:


51.175 565 – – – – 51.740

Obligatory reserves

– – – 6.971 – – 6.971


3.851 12.305 27.373 32.472 26.181 – 102.182


2.125 617 823 1.188 1.682 130 6.565


– 382 111 30 24.903 – 25.426

Loans to customers

25.776 26.666 120.075 93.352 169.468 3.813 439.150


– – – – 331 – 331

Other assets

4.128 1.819 119 131 927 – 7.124

87.055 42.354 148.501 134.144 223.492 3.943 639.489

Liabilities:


83 3.006 168 488 679 – 4.424


14.252 19.976 102.093 7.583 4.427 – 148.331


114.079 30.888 49.786 26.380 5.577 – 226.710


13.536 112 2.145 25.600 140.686 – 182.079

Other liabilities

7.161 1.704 567 318 88 – 9.838

149.111 55.686 154.759 60.369 151.457 – 571.382

Net interest sensitivity gap

(62.056) (13.332) (6.258) 73.775 72.035 3.943 68.107

Cumulative interest sensitivity gap

(62.056) (75.388) (81.646) (7.871) 64.164 68.107

2004

1�01�0


Assets:


21.567 124 – – – – 21.691

Obligatory reserves

– – – 3.706 – – 3.706


521 2.778 8.803 21.305 28.184 – 61.591


1.926 144 1.129 1.829 965 – 5.993


– – – – 871 – 871

Held-to-maturity securities

– – – – 26.288 – 26.288

Loans to customers

21.918 25.454 106.059 36.795 60.056 4.836 255.118

Other assets

3.820 294 295 2.262 – – 6.671

49.752 28.794 116.286 65.897 116.364 4.836 381.929

Liabilities:


3.071 1 604 614 900 – 5.190


22.927 10.023 63.799 20.924 4.113 – 121.786


59.009 19.252 50.598 8.678 2.781 – 140.318


– – 15.048 14.422 44.704 – 74.174

Other liabilities

4.143 33 25 65 52 – 4.318

89.150 29.309 130.074 44.703 52.550 – 345.786

Net interest sensitivity gap

(39.398) (515) (13.788) 21.194 63.814 4.836 36.143

Cumulative interest sensitivity gap

(39.398) (39.913) (53.701) (32.507) 31.307 36.143

2003

1�0annual report | 2005 1�11�0

The above tables do not include the effect of allowances for loans’ impairment and other assets, which amounted to KZT 40,383, KZT 30,583 and KZT 15,610 as of December 31, 2005, 2004 and 2003, respectively.

LiquidityRiskLiquidity risk refers to the availability of sufficient funds to meet deposit withdrawals and other financial commitments associated with financial instruments as they actually fall due. In order to manage liquidity risk, the Group performs daily monitoring of future expected cash flows on clients’ and banking operations, which is a part of assets/liabilities management process. The Board sets limits on the minimum proportion of maturing funds available to meet deposit withdrawals and on the minimum level on interbank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand.

The following tables provide an analysis of banking assets and liabilities grouped on the basis of the remaining period from the balance sheet date to the contractual maturity date, except financial assets at fair value through profit or loss.

1�21�2

Assets: Cash and cash equivalents

76.004 33.438 9.689 – – – – 119.131

Obligatory reserves

– – – – 10.791 – – 10.791


110.252 – – – – – – 110.252


47 754 3.296 7.405 2.022 10.152 – 23.676

Available-for-sale Securities

– 444 2.867 206 9.926 28.963 – 42.406

Loans to customers

746 32.632 65.986 207.423 106.060 298.926 8.923 720.696


– – – – – 2.205 – 2.205

Other assets

248 23 3.740 451 58 2.571 – 7.091187.297 67.291 85.578 215.485 128.857 342.817 8.923 1.036.248

Liabilities:


– 35 – 101 203 505 – 844


279 61.942 6.175 148.213 48.435 28.003 – 293.047


81.869 33.017 59.379 99.086 27.852 5.511 – 306.714


– – – 672 38.375 260.962 – 300.009

Other liabilities

1.860 84 3.562 2.821 1.095 661 – 10.083

84.008 95.078 69.116 250.893 115.960 295.642 – 910.697

Net position

103.289 (27.787) 16.462 (35.408) 12.897 47.175 8.923 125.551

Accumulated gap

103.289 75.502 91.964 56.556 69.453 116.628 125.551

2005

Ondemand Lessthan1month

Pastdue1to3months

3monthsto1year

1to3years

Over3years

Total



24.366 26.809 565 – – – – 51.740

Obligatory reserves

– – – – 6.971 – – 6.971


102.182 – – – – – – 102.182


57 2.068 617 823 1.188 1.682 130 6.565

Available- for- sale investment securities

– – 382 111 30 24.903 – 25.426

Loans to customers

3.488 22.288 26.666 110.320 96.876 175.699 3.813 439.150


– – – – – 331 – 331

Other assets

4.379 80 1.819 119 131 596 – 7.124

134.472 51.245 30.049 111.373 105.196 203.211 3.943 639.489

Liabilities:


– 83 3.006 168 488 679 – 4.424


54 14.198 19.976 77.821 22.051 14.231 – 148.331


63.186 50.893 30.888 49.786 26.380 5.577 – 226.710


4.196 9.340 112 2.145 25.600 140.686 – 182.079

Other liabilities

7.109 52 1.704 567 318 88 – 9.838

74.545 74.566 55.686 130.487 74.837 161.261 – 571.382

Net position

59.927 (23.321) (25.637) (19.114) 30.359 41.950 3.943 68.107

Accumulated gap

59.927 36.606 10.969 (8.145) 22.214 64.164 68.107

2004


Pastdue1to3months

3monthsto1year

1to3years

Over3years

Total

1��1��

2003


13.162 8.405 124 – – – – 21.691

Obligatory reserves

– – – – 3.706 – – 3.706


61.591 – – – – – – 61.591


50 1.876 144 1.129 1.829 965 – 5.993


– – – – – 871 – 871

Held-to-maturity investment securities

– – – – – 26.288 – 26.288

Loans to customers

– 21.918 25.454 76.059 51.795 75.056 4.836 255.118

Other assets

3.668 152 294 295 2.262 – – 6.671

78.471 32.351 26.016 77.483 59.592 103.180 4.836 381.929

Liabilities:


– 3.071 1 604 614 900 – 5.190


1.533 21.394 10.023 47.591 27.383 13.862 – 121.786


41.286 17.723 19.252 50.598 8.678 2.781 – 140.318


– – – 15.048 14.422 44.704 – 74.174

Other liabilities

3.900 243 33 25 65 52 – 4.318

46.719 42.431 29.309 113.866 51.162 62.299 – 345.786

Net position

31.752 (10.080) (3.293) (36.383) 8.430 40.881 4.836 36.143

Accumulated gap

31.752 21.672 18.379 (18.004) (9.574) 31.307 36.143


Pastdue1to3months

3monthsto1year

1to3years

Over3years

Total

1��annual report | 2005 1�51��

The above tables do not include the effect of allowances for impairment of loans, due from credit institutions and other assets totalling KZT 40,383, KZT 30,583 and KZT 15,610 as of December 31, 2005, 2004 and 2003, respectively.

The Group’s capability to discharge its liabilities relies on its ability to realise an equivalent amount of assets within the same period of time. The maturity gap analysis does not reflect the historical stability of current accounts. Their liquidation has historically taken place over a longer period than indicated in the tables above. These balances are included in amounts due in less than one month in the tables above. While trade and available-for-sale securities are shown at demand, realizing such assets upon demand is dependent upon financial market conditions. Significant security positions may not be liquidated in a short period of time without adverse price effects.

Fair values of Financial Instruments The following disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of IAS 32 “Financial Instruments: Disclosure and Presentation”. Fair value is defined as the amount at which the instrument could be exchanged in a current transaction between knowledgeable willing parties in an arm’s length transaction, other than in forced or liquidation sale. As no readily available market exists for a large part of the Group’s financial instruments, judgment is necessary in arriving at fair value, based on current economic conditions and the specific risks attributable to the instrument. The estimates presented herein are not necessarily indicative of the amounts the Group could realize in a market exchange from the sale of its full holdings of a particular instrument.

The following methods and assumptions are used by the Group to estimate the fair value of financial instruments not carried at fair value.

AmountsDuefromandtoCreditInstitutions

For assets maturing within one month, the carrying amount approximates fair value due to the relatively short- term maturity of these financial instruments. For the assets and liabilities maturing in over one month, the fair value was estimated as the present value of estimated future cash flows discounted at the appropriate year-end market rates.

LoanstoCustomers

The estimate was made by discounting the scheduled future cash flows of the individual loans through the estimated maturity using prevailing market rates as of the respective year-end.

1�61�6

2005 2004 2003

CarryingAmount FairValue CarryingAmount FairValue CarryingAmount FairValue

Financial assets

Loans to customers, gross

720.696 720.738 439.150 443.423 255.118 256.986

Financial liabilities


293.047 302.262 148.331 151.957 121.786 117.896


300.009 314.860 182.079 192.838 74.174 78.456

InvestmentSecurities

Non-marketable available-for-sale securities are represented by corporate shares and shares of associates and subsidiaries held for disposal. The total carrying amount of these securities approximates their fair values.

AmountsDuetoCustomersInterest rates charged to customers closely approximate market interest rates and accordingly, the carrying amounts approximate fair values.

DebtSecuritiesIssued

Market values have been used to determine the fair value of debt securities traded on an active market. For other debt securities, the fair value was estimated as the present value of estimated future cash flows discounted at the year-end market rates.

Thefollowingtablesetsoutthecarryingamountandfairvaluesofmonetaryassetsandliabilitiesnotcarriedattheirfairvalues:


Related Party Transactions In accordance with IAS 24 “Related Party Disclosures”, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.

In considering each possible related party relationship, attention is directed to the substance of the relationship, and not merely the legal form. Group’s related parties include shareholders and entities which exercise significant influence over the Group’s key management personnel.

Related parties may enter into transactions which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties. AsofDecember31,2005,2004and2003,theGrouphadthefollowingtransactionswithrelatedparties:

Loans to customers, gross 12.000 720.696 1.445 439.150 276 255.118

Amounts due to credit institutions 7.353 293.047 14.956 148.331 1.508 121.786

Amounts due to customers 321 306.714 266 226.710 128 140.318

Commitments and guarantees 8.485 170.695 2.444 155.927 748 95.031

Allowance on impairment of loans (355) (40.311) – (29.633) – (15.271)

2005

Relatedpartytransactions

Totalcategory

2004


Totalcategory

2003


Totalcategory

FortheyearsendedDecember31,theGrouphadthefollowingtransactionswithrelatedparties:

Interest income 1.241 78.286 371 49.827 71 30.818

Interest expense (312) (45.699) (639) (26.106) (113) (16.591)

Fee and commission 117 12.454 45 8.994 10 6.319

Impairment charge on loans (355) (15.359) – (18.724) – (10.391)

2005


Totalcategory

2004


Totalcategory

2003


Totalcategory

The aggregate remuneration and other benefits paid to members of the Management Board and Board of Directors for 2005 was KZT 389 (2004 - KZT 335; 2003 - KZT 290).

1��1��

BalanceSheetNotionalAmount RiskWeightedAmount 2005 2004 2003 2005 2004 2003Total assets 1.172.002 764.300 465.024 782.534 481.182 290.652

Capital BIS% 2005 2004 2003 2005 2004 2003

Tier 1 capital 85.380 41.984 25.948 10,91% 8,73% 8,93%

Tier 2 capital 42.929 30.070 16.607

Gross available capital 128.309 72.054 42.555 – – –

Less investments (2.205) (1.876) (870) – – –

Tier 1 + Tier 2 capital 126.104 70.178 41.685 16,11% 14,58% 14,34%

Included in the table above are the following transactions with related parties outstanding as of December 31, 2005, 2004 and 2003:

• Operations with associates such as: loans – including provisioning matters, interest free financial assistance, deposits placed with the Group and guarantees and letters of credit to investees, and mutual investments.

• Shareholders: loans – including provisioning matters, deposits placed with the Group, and guarantees and letters of credit.

• Members of Board of Directors: loans - including provisioning matters, deposits placed with the Group, total remuneration paid during the year.

Capital Adequacy FMSA requires banks to maintain a capital adequacy ratio of 12% of risk-weighted assets. In 2005, 2004 and 2003, risk-weighted assets calculated in accordance with the FMSA requirements were derived from the Group’s consolidated financial statements prepared in accordance with IFRS. As of December 31, 2005, the Group’s capital adequacy ratio on this basis exceeded the statutory minimum.

The Group’s international risk based capital adequacy ratio, computed in accordance with the Basle Accord guidelines, as of December 31, 2005, 2004 and 2003, exceeded the minimum ratio of 8% recommended by the Basle Accord for Tier 1 and Tier 2 capital adequacy ratio and assessed based on credit risks approach.

1��annual report | 2005 1��1��

2005 Totaloperatingincome Totalassets Capitalexpenditure Amount Share% Amount Share% Amount Share%

Kazakhstan 30.133 86% 877.997 88% – –

Russia 5.036 14% 119.808 12% – –

Total 35.169 100% 997.805 100% – –


Kazakhstan 19.439 92% 559.911 91% – –

Russia 1.747 8% 58.391 9% – –

Total 21.186 100% 618.302 100% – –


Kazakhstan 13.150 94% 348.677 93% – –

Russia 889 6% 24.387 7% – –

Total 14.039 100% 373.064 100% – –

Segment InformationThe Group does not have separately identifiable business segments. The geographic analysis of total assets is based on customer domicile whereas operating income and capital expenditure is based on the location of the office in which the transactions and assets are recorded. Geographic segment reporting is presented in the following table. Segmentation is based on the structure as of December 31.

Subsequent Events On January 6, 2006, the Bank has obtained a permission from the FMSA to found a special purpose subsidiary, BTA Finance Luxembourg S.A, to be incorporated in Luxembourg as a public limited liability company. On January 20, 2006 the Bank has attracted USD 400 million, through issuance, by BTA Finance Luxembourg S.A., of perpetual preferred securities.

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Acronymsandabbreviations

JSC Joint-stock Company

AFS The Kazakh Agency for Regulating and Supervising Financial Markets and Financial

Institutions

BTA Bank TuranAlem

GDP Gross Domestic Product

BTAGroup Group of Bank TuranAlem

EBRD European Bank for Reconstruction and Development

Mn Million

Bn Billion

SMB Small and Medium-sized Businesses

IAS International Accounting Standards

NBK National Bank of Kazakhstan

RoK Republic of Kazakhstan

CSC Cash and Settlement Center

RF Russian Federation

CIS Commonwealth of Independent States

USSR Union of Soviet Socialist Republics

USA United States of America

TF Trade Financing

ECA Export Credit Agencies

IFC International Finance Corporation

RZB Raiffeisen Zentralbank Oesterreich AG

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