Golomt Bank Report - 2003 English

Contents Letter from the Chairman of the Board of Directors Letter from the President and CEO Golomt Bank Vision, Mission, Goals, Strategy and Credo

Golomt Bank today 4 6 9

Mongolian macroeconomy Real sector Money supply Foreign trade Banking and financial market Unemployment

14 15 16 18 18 19

Golomt Bank awards in 2003

20

Golomt Bank organizational structure Retail Banking Division Financial Control Division Treasury Division Supports Division Human Resource Report Information & Technology Report

21 22 23 23 23 24 25

Major Projects/Achievements Bodi Tower Golomt Bank for social development and wellbeing of children "Golden Key" children savings deposit Mongolian students discount card "Golden Ear" RMB card service

26 27 28 29 30 31

Golomt Bank business operations Lending Card service External relations Direct marketing Consulting service Internet banking service Electronic banking service Online banking service

32 33 35 36 36 37 38 39 39

Financial report Asset management Deposits Own equity Financial performance Financial performance ratios

40 41 41 41 42 42

Risk management report Credit risk Liquidity risk Market risk Operational risk

43 44 45 45 46

Independent Auditor's Report

2003 059,1 788,8 797,2 280,8 939,7 792,8 089,4

2002 79 304.8 32 337.4 22 885,1 20 980,2 44 093,2 5 701,6 819,9

1 10 271 4 294 28 334 41 900

1 10 213 2 344 4 388 33 347

Return on equity Cost/income ratio Fee income/total income ratio

11.12% 85.2% 29.65%

14.38% 83.80% 25.79%

Liquidity ratio Own equity to total assets ratio Foreign currency risk ratio

57.79% 15.36% 27.51%

58.53% 14.18% 12.77%

Total assets Loans Foreign assets Current account deposits Savings account deposits Own equity Net profit (after tax) Shareholder company Number of branches Number of employees Number of borrowers Number of cardholders Number of customers

114 46 39 26 66 9 1

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BOLD Luvsanvandan Chairman of the Governing Board

It is my pleasure to report to our esteemed business partners, clients and customers the performance of Golomt Bank in 2003. On behalf of the Board of Directors and shareholders of the Golomt Bank I would like to express our full satisfaction with regard to the Golomt Bank operations over the past year. While we assessed highly the results of our work produced last year, we have developed a very optimistic plan for the year 2004. We consider that Golomt Bank has achieved its objectives by way of expanding operations in the Mongolian banking and financial market and introducing many new products and services. As a result the total assets of Golomt Bank grew by 44 percent and reached 15 percent of the total assets of the banking system by the end of 2003. We can proudly state that the Bank impressive results in growth and expansion of operations were due to our successful cooperation with customers, clients and business partners. Based on our achievements Golomt Bank was awarded in 2003 with awards for "Outstanding Business Development" by the Visa International, for "Best Partner in Mongolia Market" by the Mastercard International, "The Best Banking and Financial Brand of Mongolia" by Chamber of Trade and Industry of Mongolia and PR Association, "The Best Student Representative" by the Union of Mongolian Students. We can assure you that we will be further carrying out successfully our activities and introducing many innovations relying on the full confidence of our customers. Taking this opportunity I would like to express once again our gratitude for your confidence and cooperation and our best wishes for success in your business and activities. We extend our best wishes for expansion and development of our continued cooperation and mutual benefit.

BOLD Luvsanvandan Chairman of the Governing Board

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BAYASGALAN Danzandorj President and CEO

The overall economic prospects and legal and political environment were relatively stable and there were no significant changes related to the banking sector in 2003. It should be mentioned that the Government and the Central Bank played a significant role in ensuring further sustainable development of the Mongolian banking and financial sector and creating favourable conditions for the banking sector operations, including Golomt Bank. In 2003 Golomt Bank total assets increased by 44 percent and reached MNT 114.1 billion, thus advancing our position in the banking and financial market. The competition at the Mongolian banking and financial market has significantly intensified from year to year and last year the banking and financial institutions continued to compete mainly in terms of product pricing. Due to severe price competition banks were not able to reduce the cost of borrowed funds. On the other hand, the trend in the decline in lending rates continued throughout 2003. In the conditions of mounting competition Golomt Bank though proposed to clients and customers favourable and competitive prices. Though it did not pursue a policy to compete by pricing, its primary objective was to gain the confidence of its clients and customers in order to become the most credible bank. As a result, the total number of customers increased by approximately 86%. In 2003 Golomt Bank has made significant steps towards reducing substantially the Bank risk and advancing its competitive position by increasing its capital by 3 billion tugrugs. In the last year, our bank's net income after tax increased to MNT 1.1 billion and the bank paid income tax of MNT 767 million to the state budget. Golomt Bank since its establishment has aimed to introduce new and modern products and services in the Mongolian banking and financial market in order to meet the demands of clients and customers. In the course of the past year several new products have been initiated and introduced by Golomt Bank to the market. In 2003 new products and services, like childrens' "Golden Key" savings account, "the Golden Ear" RMB card service in cooperation with the Agricultural Bank of the People's Republic of China , "Mongolian students discount card" have been introduced. Also the cooperation with Visa International, Mastercard International has been expanded and Visa International Visa Electronic and Mastercard International Maestro cards have been newly introduced, thus making more diversified the choices of our products and services.

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In order to advertise and familiarize the clients with bank products and services and provide them with in-depth knowledge about the banking services the advanced method of direct marketing was initiated and this has given us very positive results. With the objective to save the time of the clients as well as to provide the different types of the bank services from a single point and in order to provide with business advice, Premier Banking service was expanded and Consultancy Unit for business and other issues was established. Last year we paid special attention to providing high quality services rather than expanding our services in quantitative terms. The mortgage loans to the individuals were initiated using the funding under the Asian Development Bank project and from our own resources. Small credits have been increased and credit card services have been activated through the Branch offices and centers. While we expanded the scope of our products and services, we also faced a growing demand to expanding our external relations and ensuring a more flexibility to our services. In 2003 we concluded the agreements on cooperation with the Agricultural Bank of China, with CIC of France, and Rabobank of Holland as well as renewing our agreements with some correspondent banks to manage efficiently our funds. In order to promote foreign investment and businesses to Mongolia from foreign countries new credit opportunities were created by concluding agreements with the Export and Import Bank and the Land Bank of Taiwan and the Samsung Corporation of Korea. We also streamlined and activated our products and services, internet and electronic banking, on-line banking, which were introduced by Golomt Bank in the previous years. We paid special attention to the reliability of bank information technology and developed and started to utilize new accounting, credit, saving management information software programs. "One of our main objectives is to contribute to the development of Mongolia and to invest for the future so that the future generations will be able to inherit from us the most valuable things". Last year the Bodi Tower, a combination of modern and classic construction design, was commissioned and occupied. Within the framework of the "Investment and Productivity Year" we have donated 101 million tugrugs to the city of Ulaanbaatar. We also initiated our activities aimed to the benefit of our children who determine the future of the country and we selected the World Vision organization amongst other international and non-governmental organizations in this area and we are actively cooperating with this organization.

Esteemed business partners and customers, I am proud to state that Golomt Bank has achieved its goals planned for 2003 and produced even better results beyond our expectations. We are fully conscious that we are at the intial stage of our productive activitity and we have to advance further and create more. Therefore, we plan 2004 to be the year of business success and new productivity. We consider that cooperation with our customers, borrowers, cardholders is of great significance. We extend to our business partners, customers, foreign and domestic clients, organizations and individuals and to all Mongolian people our best wishes for success in their activities and well-being. We wish you all this year to be the most successful year.

BAYASGALAN Danzandorj President and CEO

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Golomt Bank Vision, Mission, Goals, Strategy and Credo Vision

Strategy

To be the market leader in Mongolia, a reputable and credible bank with sound international standard banking practices

To introduce new technologies

Mission To be the market leader in innovation and the supplier of the best customer oriented banking and financial services and the most efficient bank with talented employees contributing to the social and economic development of the country

Goals To restructure and reorganize the Bank as a public company, the shares of which are freely traded on the stock exchange. To gain the leading position in the market and sustain it for long- term. To introduce and develop advanced technologies in all the activities of the bank. To develop actively all types of credit facilities and to minimize loan losses. To maximize balance on the current accounts as a percentage of the total deposits and to increase long-term customer deposits. To streamline the payment card market, to strengthen the bank's leading position and increase the number of the cardholders and volume of card transactions.

to introduce the latest achievements in information technology in its activities on a continuous basis and to make constant upgrading.

To provide the market with a high quality and premium service to introduce successfully traditional and new types of financial services to the targeted market based on customer demand. to streamline and to sustain the new types of customer services.

To attract new customers and to build customer loyalty to analyze demands of different segments of customers and to operate efficiently in respond to those demands. to provide customers with efficient, friendly and high quality services. to care about customers and to create an atmosphere of trust and confidence.

To create a team of capable and professional staff. to strengthen the Bank human resources and to create favourable conditions for the personal development of every employee. to improve efficiency by increasing each employee's productivity. to make an annual assessment of each employee's merit and contribution and to create incentives to work effectively and increase their responsibility. to ensure that the Bank and the employee both develop and advance.

To introduce new types of financial services.

To contribute to the social and economic development of the country. to make a major contribution to the social and economic development of the country in a comprehensive way. to carry out activities directed to protecting the environment and making better the lives of children who are the country's future.

Strategic planning and marketing. to introduce the new types of customer services on the basis of actual assessment of the business environment by ensuring flexible price policy, providing accurate and timely information and advertising, prioritizing and activating marketing. to create an image of a bank which highly values customers. to establish Bank branches and units first in our neighbouring countries and later in other foreign countries

Management Team

TSERENDAVAA Namuu Director of Information Technology Department

BOLD Canbat Director of Marketing Department

SUGAR Dashbazar Director of Back Office

ENKHTUVSHIN Sodnomtseren Director of Card Center

OYUN-ERDENE Lamjav Director of Investment & Project Finance Department

GANBOLD Galsan Vice President & Director of Supports Division

GANKHUYAG Gombosuren Vice President & Director of Treasury Division

CHIMEGMUNKH Munkhuu Vice President & Director of Financial Control Division

MUNKHTUR Dagva Vice President & Director of Corporate Banking Division

GANBAT Jamiyan Director of Internal Audit Department

NATSAGDORJ Namkhai Director of Branch Management

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Macroeconomy The overall economic situation of Mongolia was characterized by positive trends in recent years and the economic growth has been stable. The preliminary budget performance for 2003 indicates that the total revenues and grants of Mongolia's consolidated budget total to MNT535.8 billion and total expenditure and net lending amount to MNT 616.5 billion by widening the budget deficit to MNT 80.8 billion, which is by MNT 9.1 billion higher compared to the previous year. The budget current revenue has amounted to MNT 526.4 billion and current expenditure has totalled to MNT 446.3 billion, which made the current balance with surplus of MNT 80.1 billion.

Real Sector The real growth of GDP reached 1% in 2001, picked up to 4% in 2002 and preliminary performance for 2003 has indicated the growth rate of 5.3 % in 2003 by increasing the nominal GDP to MNT 1,359.7 billion. The positive growth of GDP in recent years indicate the improvement of overall economic situation and creation of favourable conditions for business environment, thus deepening confidence of banking institutions, clients and customers. GDP growth (in 1995 relative prices) 6.0% 5.0% 4.0% 3.0% 2.0% 1.0%

Source: Statistical bulletin

0.0% 1999

2000

2001

2002

2003

In 2003 the overall industrial output grew to MNT 276.6 billion (in 1995 relative prices) with increase of 2% or MNT 5.5 billion compared to the previous year. The reason for this performance of the industrial sector was due to increases in the oil and gas exploration, in cigarette production, in publishing and recording, in wood processing and manufacturing, in metal processing and production, in clothing and sewing and fur processing. The industrial output growth also was due to a 1% increase in electricity, energy and water supply, a 6.7% increase in manufacturing and processing, despite a 1% decline in the minerals and mining sector. According to the preliminary estimates the total number of livestock has reached 25.8 million heads in 2003, including the 7.9 million newlyborns and 1.3 million heads were lost, which was 1.6 million less than in the previuos year. In 2003 the output of the three staple crops was 165 thousand tons of cereals, 78.7 thousand tons of potatoes and 59.6 thousand tons of vegetables, which are by 39.2 thousand tons of cereals, 19.9 thousand tons of potatoes, 26.8 thousand tons of vegetables higher than in the previous year. Growth in construction and maintenance was 23.7% in 2003. In the housing sector under Housing sector financing project funded by ADB concessional loan 500 individuals have borrowed 5.6 billion tugrugs out of which 88% were allocated for purchase of condominiums, 8,9% were for completion of construction of private houses and 2% was allocated to Condominium Associations for maintenance and repair works. In 2003 all types of transport have carried 17.6 million tons of goods and by counting 167.9 million passengers, which are higher by 4.1 million tons of load and increase by 58.8% or 62.2 million people compared with the previous year. In the communication sector a new advanced technology has been introduced and foreign investment and technical and economic cooperation has been actively underway. In 2003 all aimags and cities have been covered by the mobile phone network with increase of 8.8 thousand mobile phone centers as well as increase of 62.6 thousand mobile phone users.

The preliminary performance for 2003 show that per capita GDP income has reached USD 476.4, growing by 4.8% compared with the previous year and by 24.1% compared to 1999.

The marcoenomic stability and the creation of the favourable banking and financial environment has influenced the growth of the wholesale and retail trade and other services.

GDP Real Growth by Sectors

Money supply 1996-1999 annual average growth rate(%)

2000

GDP

3.4

1.1

1.0

4.0

5.5

3.5

Industry

0.6

2.7

16.5

4.7

0.5

7.0

Agriculture, hunting and forestry

5.0

-15.3

-19.2

-11.1

4.5

-9.1

Construction

-3.0

-14.6

10.8

18.5

12.6

14.0

Transport and communication

10.9

25.2

14.9

16.2

16.5

15.9

Trade

7.8

26.1

9.8

13.3

9.6

10.9

All types of services

3.2

2.7

-0.2

6.0

-2.0

1.2

Source: Statistical bulletin

2002 2003

2004

2000-2003 annual average growth rate (%)

Within the framework of the stabilization policy in the banking sector the main objectives of the State monetary policy were directed to restoring the confidence of the individuals, companies, foreign and domestic investors in the banking sector, to protecting their rights, and to deepening the scope of the financial intermediation. Money supply growth has accelerated in average by 27.5% during 2000-2003 years reaching MNT 703.3 billion at the end of 2003. The stable sources of the increase in money supply come mainly from increases in tugrug and foreign currency savings deposits.

Financial Intermediation Factors 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 2000

2001

Money supply/GDP, (%)

2002

2003

Savings/GDP, (%)

17

18

The money supply to GDP ratio has accelerated to 51.6% in 2003 from 24.8% in 2000 and the savings deposits to GDP ratio has increased to 26.7% in 2003 from 8.9% in 2000, thus indicating the growth of the domestic savings and showing the evidence of restoring confidence in the financial sector. In 2003 interbank loans and repo deals of the central bank bills totalled MNT 347 billion and the annual average weighted interest rate of the deals was around 10%. Banks in average daily holding of central bank bills amounted to MNT 42.4 billion and by the end of the year the total amount of the central bank bills sold to the banks amounted to MNT 76 billion. The annual average weighted interest rate was raised to 11.5%, which is by 1.5 unit higher than in the previous year. In order to meet the demands of the free market and remove the exchange rate distortions at the market the Bank of Mongolia has started to announce daily the exchange rates of major currencies. The exchange rate fluctuations show that the value of tugrug against US dollar and euro have weakened by 3.8% and by 24.9%. The tugrug has also depreciated against Japanese yen by 16.4% , against Chinese yuan by 3.8% and against Russian rouble by 12.7%. The development in the banking sector has been stable and the public confidence has been restored and favourable conditions for foreign investment have been created. Though those developments led to the increase of foreign currency supply, the dollarization affects the national currency tugrug by weakening its value. A major indicator of the dollarization process is the increase of ratio of foreign currency savings to money supply totalling to 35.6% or a growth by 7 points. Foreign currency savings deposits (1)

Money M2 (2)

Ratio 1 to 2

2000

69,063.1

258,842.6

26.7%

2001

87,318.6

331,064.3

26.4%

2002

135,186.1

470,125.6

28.8%

2003

250,218.9

703,332.4

35.6%

Source: Statistical bulletin

In the last three years inflation has declined by 3.5% compared to 1996-1999. Inflation is estimated to 4.7% in 2003. In the past year the increase in the price level by 3.1 points is due to increase of 7.7 % in food basket price in the consumer price index compared with the previous year. However, the quarterly price fluctuations have substantially declined and stabilized, which now enables forecast price changes in the economy to be more effective.

Inflation 10.0%

10.0% 8.1%

8.0%

8.0%

6.0%

4.7%

4.0% 2.0% 0.0%

1.6%

1999

2000

Source: Statistical bulletin

2001

2002

2003

Foreign trade In 2003 the preliminary performance of foreign trade indicated that the total turnover of foreign trade has reached USD1,387.5 million with exports amounting to USD600.2 million and imports totalling to USD787.3 million. Total foreign trade turnover has grown by 14.2% with increase in exports by 14.5% and with rise in imports by 14%. As a result the foreign trade deficit reached USD187.1 million at the end of 2003. Economic growth, ratio of the average price growth rate of exported to imported goods, foreign investment growth and increase of private transfers from individuals working abroad have accounted for most of the growth in recent years. The world market price fluctuations of the main export goods directly affect our export revenue. The average prices of the major export products at the world market are the following: Unprocessed cashmere (1kg)

Processed cashmere (1 kg)

Copper concentrates (1 ton)

Gold (1 ounce)

1996-1999 average

19.5

50.8

344.2

317.5

2000

30.5

70.1

323.1

276.6

2001

18.1

55.0

273.4

276.4

2002

16.5

48.3

255.6

296.8

2003

35.7

45.6

287.2

351.8

2000-2001 average

25.2

54.7

284.8

300.4

Source: Customs foreign trade statistical bulletin

Banking and financial market In 2003 the Agricultural Bank and the Trade and Development Bank was privatized to the foreign investors. Also the Savings Bank has started to operate on commercial terms and the Chinggis Khaan Bank was newly established. At the end of 2003 the number of commercial banks remained at 17 and the number of non-banking financial institutions has reached 88, thus intensifying competition. The banking sector total assets have reached MNT 766.8 billion or 56.4% of GDP, thus indicating the significance of the banking and financial sector in the country's economic development. The total loans lent from the banking sector to companies and individuals has reached MNT 442.1 billion or 32.5% of GDP with increase of MNT 210.7 billion or 91% in comparison with 2002. A major part or 84.2% of total loans was lent in Ulaanbaatar and the remaining part was disbursed in rural areas. The loan portfolio of performing loans could be divided by types ownership, as 3.5% to the public sector and 96% to the private and other sectors. The total non-performing loans from banks have increased by 1.1% in comparison with the previous year and have risen by 0.2% in comparison to 2001, though it has declined by 15.6% compared to 2000. Total non-performing loans from banks have accelerated to MNT 36.7 billion with increase of MNT 21.1 billion, representing 8.3% of total loan portfolio. The weighted average interest rate on loans in tugrugs has declined by 1.9 points and reached 31.5% and on loans in foreign currency has decreased by 0.2 points and reached 19.6%.

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In the reporting period the total amount of the current accounts has increased by 80% and the savings accounts have accelerated by 72%, thus showing the increase of the public confidence in the banking sector as well as the significant progress in the development of the banking and financial sector. At the end of 2003 the size of the own capital of the banking sector has increased by 80% and has reached MNT 110.4 billion indicating the growing economic capacity of the banks.

The Golomt Bank Awards in 2003

Visa International

Outstanding Business Development

MasterCard

Best Partner in Mongolia Market

Unemployment In 2003 the number of unemployed people registered at the Employment Agency has reached 33.3 thousand or 3.5%, which is by 8% or 2.5 thousand higher than in the previous year.

International

The Mongolian Chamber

The best brand of banking

of Trade and Commerce

and financial sector

and PR Association

Union of Mongolian

Special award "To the benefit

Students

of students, youth"

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Structure of The Golomt Bank

Retail Banking Division The Retail Banking Division is in charge of implementing the marketing policy aimed at advancing the Golomt Bank and its competitive position in the banking and financial market, creating and introducing new products and services to the market, accelerating and improving the quality of services, providing high quality and efficient services and managing the operations of the branch offices of the Bank.

Shareholders

Supervisory Board of Shareholders

Governing Board

Internal Audit Department

President & CEO Credit Committee Board of Executive Directors Asset & Liability Committee

Corporate Banking Division

Corporate & SME lending

Retail Banking Division

Card center

Treasury Division

Back office

Financial Control Division

Marketing & New product development

Risk management

Investment and Project Finance

Premier banking

Customer Service

International Dept.

Information Technology

Strategy & Planning

Microlending

Branch management

Back office

Trading in FX & Money markets

Legal service for the bank

Risk management

Branches

Treasury department

Supports Division

Human resources

Premises & Administration

Security service

Accounting & Financial control (MIS)

The Golomt Bank has 2 branches offices and 9 sub-branches. Through its branches the Golomt Bank operates and provides the customers with efficient service seven days a week and 24 hours a day. In order to provide the customers with efficient services the installation of the most advanced bank software program and computer internal network was considered essential. Therefore, special attention has been given to the improvement of the banking software program and to the introduction of the latest computer technology. During the last five years the software program has been completely renewed 2 times and total investment has amounted to hundreds of thousand. As the Bank scope and size and the number of customers have been constantly increasing the number of transactions are gone up significantly. For instance, the number of interbank settlement transactions has reached 200 thousand, which was 30% higher than in the previous year. Therefore, in order to overcome this challenge a new main objective has been put forward to establish on-line banking based on the latest technology. In 2003 the Bank branch offices have attracted 18,727 new customers who have opened current and savings accounts. Also through branch offices the domestic Master cards have been distributed. The loans made by the Bank branches are closely supervised and monitored and around 13% of total loans have been disbursed through the branch offices in the past year. In future the Bank will pay a special attention to making the interest rate on the loans lent through the branch offices more flexible. The automatization and installation of the accounting software system of the Bank branch offices has been fully completed and a 24-hour branch offices have been connected to the on-line network within Ulaanbaatar. As a result the customers, savings deposit holders and borrowers were provided with a 24-hour service 7 days a week. In order to improve the Bank branch office management the project titled "the Best Management Team" has been organized on a competitive basis amongst all workers and the results have been announced. The Bank workers have actively participated in this event and have established their teams and in order to advance and accelerate the operations of some branch offices have decided to implement their projects in 2004. Also several professional training programs and seminars have been organized for the Bank divisions and branch offices staff. All the staff have participated in the training seminar titled "Smiling banker" organized to improve the ability and capability to provide high quality service to customers, to change the ways of handling the customers and smiling at them which has resulted in a positive outcome and gained the appreciation of customers.

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Financial Control Division Financial Control Division is in charge of the Golomt Bank policy on assets and liabilities management, accounting policy, determination of the principal guidelines of the banking and financial operations, assessment and evaluation of the performance, preparation of the consolidated balance sheet, supervision and monitoring of reporting, carrying out research and analyses and reporting on the outcome. The division is also responsible for risk management, evaluation and assessment, preparation of a long- and a short-term strategic plan, budget preparation, monitoring of implementation, determination of bank service fees, tariffs, interest rates and charges, provision of necessary financial information to the management, divisions, departments and units.

Treasury Division The Treasury Division is in charge of implementing the assets and liabilities policy approved by the Bank Assets and Liabilities Committee, ensuring and making efficient the Bank payment processing capacity and positioning optimally the funds to increase its profitability. Within the scope of the basic responsibilities the division is also in charge of developing the optimal structure of foreign currency reserve, establishing a proper risk management system, participating in the bills trading, carrying out foreign exchange at the request of customers, and taking part within the set limits in the foreign currency trading. The Treasury Division is also responsible for establishing the correspondent banking relations with other banks, promoting and expanding the Bank external relations, providing services related to foreign trade such as letter of credit, guarantee and money order as well as cooperating with other international banking and financial institutions and other organizations in the area of funding and liquidity management.

Supports Division Supports Division within the scope of its basic activities is in charge of efficient execution and settlement of all types of bank payments according to the related procedures and instructions, compilation and preparation of the supporting documents and information for the accounting. The division is also in charge of the following activities: to introduce information technology in the banking operations, to coordinate the information flow between different divisions and units, to provide information related to the daily and strategic planning activities, to create conditions for proper operation of information technology, software system and their further updating and renewal. to ensure and create conditions for the Bank units to carry out activities within the legal framework, to develop legal procedures, instructions and agreements, to monitor and supervise, to represent the Bank in the legally related matters. to ensure security of the Bank operations, to organize the registry, the correspondence flow of documents, filing and archiving, to create necessary working conditions for bank units, to provide them with necessary transport, material and technical facilities.

to supply the Bank with capable personnel, to train and carry out on-job training, to manage internal staff movements and to develop and implement the Bank's human resources management policy. Human Resource Management Report In 2003 58 employees were recruited, out of which a majority or 38 persons were employed at the Bank account centers, 16 persons were recruited at the Head Office staff and 4 persons were employed as the support staff. The year 2003 has been announced as the "Training Year" and the Bank staff has been actively involved in the domestic training programs organized by the Banking Training Centre and other organizations as well as in overseas training programs. For staff training and development over 70 million tugrugs was invested by the Bank. Over 100 of the bank staff have participated in the training programs in the areas of legal framework, marcoeconomic analysis, bank management, standardization of the banking and financial sector, payment and settlement, accounting, banking marketing, banking supervision organized by the Banking Training Centre, the Ministry of Finance and Economy and other domestic institutions. Around 20 of the managing staff have been actively involved in training at the joint MBA Program of the Institute of Finance and Economics and the Handong University of Korea, training programs in financial management, international housing financial system, management training, banking management and marketing in Sweden, Malaysia, Luxembourg, USA and Taiwan. In addition in-house training was organized for the Bank staff in English language training, bank products and services, corporate culture and skills, introduction to new procedures and instructions. Also the student scientific conferences were organized with the support of the Golomt Bank and students were assisted with provision of background materials and preparation of scientific works and reports. The system of transferring knowledge and skills by the staff participated in training programs to the other staff and using on-job training methods have been very fruitful and useful for daily work. The Bank strives to keep the employees healthy and to develop a corporate culture. In 2003 the Bank organized many sporting events, in which approximately 900 employees have actively participated and over 10 thousand tugrugs was spent.

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Information Technology Report In 2003 Information Technology Division has implemented successfully several projects, including renewal and updating the bank software program, coordination and management of the information flow between the Bank's different divisions and units. 1. "The Glaxy" banking accounting integrated system "The Glaxy" banking accounting integrated system has enabled the full automatization of the Bank accounting, settlement and internal operations and has been developed by "ECM" company in the internet environment. Currently all branch office and units use the software system. "The Glaxy" system has been developed in the Windows environment and this is the only integrated banking system entirely developed by the Mongolian software developers. The software system consists of the following programs: Banking accounting software MIS management and analysis software Savings software program Loans and loans information data base software program Phone banking software program Internet banking software program Electronic banking software program "Internet banking", "Electronic banking" software programs have been initiated and introduced by the Golomt Bank, as a new service to the customers, current and savings deposit holders, individuals and organizations. 2. "Core banking system" card payment and settlement system The system connects the banking accounting, payment and settlement with the card system. The card "Core banking system" connects all the card payments, discounts and promotions with the internal accounting system and enables it to execute payments efficiently by the card holding organizations, card issuing or financing banks. 3. "Online banking" service The Bank Head Office and Branch offices have been connected with high speed fibre optical on line network. As a result the Bank Head Office, 1st Account center and all 24-hour Branch offices were able to operate on-line and the customers and deposit holders could come and do banking at any branch of the Bank. 4. The Bank internal information exchange-intranet information system By introducing the Bank internal information network software program the Bank employees were able to receive information related to the work and other issues in real time, to express their views and opinions, exchange knowledge, to send text files in Mongolian, photos and to use time more efficiently and improve the work productivity.

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The Bodi Tower "The Bodi Tower" complex is our major real estate investment in the Mongolia economy and the construction sector. The complex has a unique and creative construction design and system, which enables it to provide finest conditions for the inhabitants. In 2003 "The Bodi Tower" complex, a combination of the modern and classic design has been commissioned and officially opened. The complex has started a new page not only in the history of the Golomt Bank but also in the productive activity of Ulaanbaatar. It should be especially mentioned here that the complex, of which construction work had started in February 2001 and completed in October 2003, has become a symbol of the Bank's future stable operations and growth as well as the biggest investment. It is the result of joint collaboration between the Bank shareholders and the management team. The complex was built with the most modern facilities, communication and information systems are provided with high speed channels, heating, airconditioning, electricity, water supply are programmed and fully automated, security and alarm systems are remote and distance sensitive, and there is a smoke control system. The professionals made assessment of the building, as "an intelligent construction system". The construction design and work has been executed jointly by the Korean "AUM&Lee architectic associates", "Uniworks" and the Mongolian and Russian joint "Incon" company. Also architect U. Ganbold, awarded by the prize of the Mongolian Union of Architects, engineers-consultants B. Baasanjav, A.Tsogt, A,Tsogtjav, E.Battzorig have contributed their outstanding knowledge and skills to the construction of the building. One part of the complex is the building of the Golomt Bank Head Office. The building has a very convenient and necessary facilities for customers and the working conditions for the bank staff meets all the modern banking construction standards. The Bank Head Office building provides with all faciltities for meeting with customers and clients with 5 meeting and conference rooms, which ensures the confidentiality and convenience for customers and clients.

Golomt Bank works to the benefit of social development and the wellbeing of children We have actively participated in the development of Ulaanbaatar and have contributed 101 million tugrugs to the city investment and productivity. We support the cultural and sporting activities directed to the benefit and wellbeing of children, cooperating actively and donating to the development activities of different organizations as well as universities and institutes. The organizations with which we have been actively cooperating include the Mongolian Handball Union, the Art Council of Mongolia and the World Vision. Within the framework of the Ulaanbaatar year of investment and productive work we have started the operation of "the Bodi Tower" complex as well as we contributing to the Ulaanbaatar city development fund by donating 101 million tugrugs. Golomt Bank for the benefit and wellbeing of children. We have paid special attention to the benefit and the future wellbeing of children, which is a main indicator of social development. In the past year the Golomt Bank has concluded an agreement with the World Vision, an organization which carries out actitivities to the benefit of children in Mongolia. The World Vision was chosen amongst other non-governmental organizations in Mongolia and it has been agreed to cooperate and to support the activities aimed to the benefit and well-being of children. Within the scope of this cooperation on the Mother and Children Day we have opened the savings accounts for 75 orphans and poor children. Also the Golomt Bank has sponsored "the Smiling child" national assembly organized by the World Vision under the "Children in difficult circumstances" program. The Golomt Bank has given also presents to the participants of the assembly. Children were very happy and we still continue to receive the letters of gratitude from participants. In addition in order to make contribution to the benefit and wellbeing of the Mongolian children on a continuing basis we have created a new type of savings account titled "the Golden key", in which a certain amount of the accrued interest rate on the savings will be contributed and donated to the childrens fund.

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30

"The Golden Key" children savings deposit

"Mongolian Students Card"

"If you help a child today from the bottom of your heart the child life might change forever".

The Golomt Bank has introduced for the first time in Mongolia a card payment instrument for Mongolian students enabling them to use the latest technologies in the financial market and to be in line with the world class standard.

In 2003 we have initiated and introduced a new long-term savings deposit account titled "the Golden key". The savings deposit account has an interest rate of 1.25% per month and 0.05 points will be donated to the "The Golomt Bank Children Fund" for funding the non-formal education project aimed at improving the education environment for children of vulnerable groups of the society. The fund will also finance the following activities: at the initiation of Golomt Bank in order to develop children's abilities and talent to organize different types of cultural, sport, scientific competitions. for purpose of spending children leisure in a useful and correct way to establish sport and game centers. to assist in the development of children with outstanding ability by way of financing education expenses etc. The Golomt Bank has given presents to children, "the Golden key" new savings deposit holders as well as to children savings deposit owners whose deposit amount reached a certain threshold. The children were greatly pleased.

The first Visa Electronic and Maestro "Mongolian students discount cards" were handed over to students on September 1, 2003. By owning those cards students not only learn to manage own finances but the cards enable students to purchase with discounts goods and servcies. As of today over 120 merchants are covered by the discount network and this is considered the biggest discount network in the history of Mongolia's financial and service sectors. We have aimed to include in the network those organizations and companies which are in demand by students. As a result the library, public transport, recreational centers, educational centers, internet cafes and catering services were included into the network. Since the issuance of the first discount card 11 thousand students became owners of the Visa Electronic and Maestro "Mongolian students cards".

31

"The Golden Ear" RMB card service The Golomt Bank Card service center in cooperation with the Agricultural Bank of China started to distribute the"Golden Ear" Maestro debit cards in November 2003. The RMB cards can be used only in China and when you travel to China cash or non-cash payments can be easily and efficiently executed without any risk. "The Golden Ear" card advantages: to protect from cash loss, theft or purchasing fake banknotes. to pass through the Mongolian and Chinese customs and border points without any limitations and obstacles. to make cash and non-cash payments from the card in China. to transfer funds from and to the card as well as to transfer the funds from Mongolia to the owner of the card who travels in China. the card is not expensive and provides you with the facility to make cash and noncash payments with less cost as well as enables to manage and control your funds. the card expiry period is not given, thus it is not necessary to renew the card. only with assistance of your confidential PIN code number it is possible to make payments, thus security and protection is fully ensured.

Business Operation

33

34

Lending In the reporting period the Bank paid special attention to the quality of loan products. The Bank has initiated the loans for housing, financed from its own and project sources, small size credits have been increased and credit services via card have been activated. In 2003 the Golomt Bank disbursed loans amounting to 90.8 billion tugrugs and received loan repayment of 78.5 billion tugrugs. The total amount of loan portfolio reached 46.8 billion tugrugs by year-end. In comparison with the last year loan disbursement increased 11.3 %, loan portfolio growth was 44,7%, thus rising the market share of the Golomt Bank to 12%. Out of total loans disbursed 97.3% was financed from its own resources and 2.7% was financed from project resources. The percentage of total loans disbursed to the industrial sector was 44%.

As a result during the last year total loans amounting to 6.6 billion tugrugs were disbursed through the Bank Branch Offices. The Golomt Bank has been selected to participate in the ADB funded Housing development project. Under the project individuals were lent the funds for the period of 10 years with annual 12% interest rate starting from May 2003. Also the Bank has started to disburse loans for housing from its own sources to individuals and companies. These loans were disbursed also in Orkhon aimag through the Bank Branch Offices. The loans amounting to 546 million tugrugs were disbursed to 50 borrowers for purchase of condominiums, building of houses or improvement of housing conditions last year.

Loans, by sectors 15%, Micro loan

3%, Mortgage 4%, Financial service

Retail, 16% Other, 8% Construction & Agriculture, 7%

3%, Health & Education 6%, Infrastructure 16%, Manufacturing

Mining, 7% Manufacturing of food products, 15%

In addition to disbursing loans from our own sources we have implemented "The Private Sector Development Project" in cooperation with the World Bank and the Government of Mongolia, the ADB "Employment Generation Project" and "Housing Development Project" and we have paid special attention to introducing to the market the cost reduction of our loan products. During the past period we have also introduced to the market our several new products and we have pursuing a policy of increasing the share of some products in the total loan portfolio. In order to support the financial sector development and to promote small businesses loans were made to the non-banking financial institutions and the savings and credit cooperatives. Under "the Private Sector Development" project 4 subproject were selected and over 642 million tugrugs loans were disbursed as well as employment generating projects loans amounting to 1 billion tugrugs were lent to 150 borrowers with the creation of 700 new jobs. Guided by objective to increase loans disbursement and make credits approachable to small businesses the Bank Branch Offices authority to disburse loans has been increased and loans disbursement through Branch Offices has been intensified.

Guided with the objective "to enable each person with permanent income the right to borrow" the Bank has issued international credit cards to 92 individuals and over 1000 people were issued domestic credit cards amounting to 499.5 million tugrugs. In order to finance the short-tem financial needs of the cardholders the installment credit (with permanent charges) has been introduced and credits were allotted to 130 customers amounting to 33.5 million tugrugs. Also within the scope of the card service agreements with different business entities the disbursement of business loans has been initiated.

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36

Card Service

External Relations

In the reporting period the Bank Card Center pursued an objective of increasing its market share and to be leading company in the card business. In order to fulfill the objective the planned activities were implemented and the necessary action was taken to coordinate the work between different divisions and departments. As a result the Golomt Bank Card Center has become the most capable, creative and experienced team in the Mongolian card business and we will be working to ensure that this position will be further advanced and strengthened.

We paid a special attention to expansion of our external relations and concluded new agreements with major foreign banks and renewed agreements with banks, with which we had previously cooperated, on more beneficial terms.

Golomt Bank is the only bank in Mongolia, which issues both Visa and MasterCard cards. In 2003 the Bank successfully implemented several new projects in the card payment market. New affiliate members Golomt Bank as a principal member of Visa International and MasterCard International has sponsored Zoos and Capitron banks to become MasterCard International affiliate members, thus increasing the number of participants in the Mongolian card payment system. The new entrant banks have been assisted by Golomt Bank and have been successfuly operating and obtaining the benefits from the card business. The Bank is continuing its efforts to recruit more sub-members and actively cooperated with Visa International and MasterCard International in this area. Visa Electronic and Maestro Cards The Bank has managed to increase the number of products and services and to issue to customers for the first time in Mongolia Visa Electronic from Visa International and Maestro card from MasterCard International. Thus new services, as a Visa Electronic and Maestro cards have become available and foreign organizations started to use the services which was not available in Mongolia in the past. The Golomt Bank Card Center newly developed its business plan at the second half of 2003 and set the specific goals in its activities, which resulted in making 153000 transactions of 28.300 cardholders amounting to 13.9 billion tugrugs.

Golomt Bank has a leading postion in foreign exchange settlement and its share of foreign assets in the banking sector reached 30%. In 2003, we established correspondent banking relations with 3 new banks and our total balances of our accounts with foreign banks amounted to MNT 37 billion, a 76.2% increase over the previous year. In 2003 in order to promote our external relations the following activities have been implemented: In 2003 we newly concluded agreements on cooperation with the Agricultural Bank of China, CIC of France and Rabobank of Holland. Thanks to the agreements, the bank started to do yuan business and now we have access to major foreign equity and bond markets. Agreements were renewed with HSBC and Union Bank of California to manage foreign reserves more efficiently and to increase international business profitability. In order to promote foreign investment the new credit opportunities have been created by concluding agreements with the Export and Import Bank and the Land Bank of Taiwan and the Samsung Corporation of Korea. The Bloomberg international financial market information and trading system was installed and experimental activities for investing in foreign financial market were carried out.

Direct Marketing We have moved beyond the traditional methods of marketing in Mongolia and have introduced the latest and advanced Direct Marketing into our card business. The main objective of "Direct Marketing" team was to increase the profitability of the card business, attract more customers, increase the number of current and savings accounts and advertise and make publicity about Bank's other activities "Direct Marketing" team's first task was to increase the number of organizations and individuals, which receive salaries and wages by use of cards. This type of direct marketing method was never used in Mongolia in the past, thus this type of direct marketing towards customers, advertising and new methods of introduction were very successful and useful. The Direct Marketing has influenced the operations of the Bank Card Center in the following way: Number

Growth

Over 120

182%

Appr. 7300

150%

Total number of organizations receiving wages and salaries with use of cards Total number of cash card holders

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38

Consulting service

Internet banking

We introduced a new service - Premier Banking to the Mongolian banking and financial market. Last year this service was expanded and consulting service was introduced.

Several years have passed since banks and financial institutions in many countries started to use internet banking service. This modern and the most efficient delivery channel was introduced to the Mongolian banking and financial market a year ago. We consider that we were able to bring to our customers the most comprehensive and integrated service to our customers.

Premier Banking since its establishment in March 2001 has been expanding and successfully operating for three years. Until 2003 this service was mostly directed to attracting the deposits of individuals with higher income and the larger corporations and to provide them with efficient services. Since last year the scope of this service has been expanded and Premier Banking activities was reorganized into two main directions: Private banking service unit - high quality and efficient bank services are rendered to bigger customers from a single unit in the bank. Consulting service unit - advice and consulting on business and other issues will be provided to individual and corporate customers at their request.

The statistical figures indicate that today there are 80 thousand internet users in Mongolia, out of which over 13 thousand people are authorized internet users. It means that for many people the use of internet banking service will save time, will enable them not to encounter difficulties, such as the bank working hours, location or transport issues, as well will provide many services from one point.

The Consulting service unit carries out the following activities: Business consulting: to provide consultancy on developing the customer business plan for a new or established business, making analysis and preparing the related documents. Financial advice: to improve the customer financial management, to advise on optimal allocation of funds. Credit advice: to provide advice on business credit, housing credit, project credit and all information related to credit. Consulting to non-banking financial institutions and credit and savings cooperatives: to provide advice to the customers of the new non-banking financial institutions and credit and savings cooperatives as well as to the customers of the established nonbanking financial institutions and credit and savings cooperatives on ways of improvement of these institutions. Training: Training in business management, strategic management, marketing, financial management, management accounting. Golomt Bank internet banking is protected by Cisco and Thawte security systems and it provides high confidentiality and, prevents from any unauthorized access. Golomt Bank invested substantially in internet banking. In 2003 the number transactions amounting to MNT 2.2 billion were executed via internet.

39

Electronic banking Electronic banking was designed in such a way that it suits more the needs of larger sized companies and organizations in which transactions are made with a limited number of authorized signatures as well as it meets efficiently daily demands to settle payments. Organizations are able to make payments without going to the bank and using a special program software, which saves time, resources as well as ensuring security. Currently over 100 companies use electronic banking software and apply electronic payment system automatically without going to the bank. Moreover the phone line and electronic signature of the organization are checked each 6 months by the Bank as well as payments requested by e-mail are also monitored on a daily basis and provide high security protection.

Online banking service The integrated banking software program developed by Mongolian software programmers and engineers suitable to the Mongolian banking and financial market conditions was connected to the highly integrated and structured online computer network covering 75% of Branch offices and account centers. Those branches covered by the network handle over 98% of total assets of the Bank. Using the computer network Golomt Bank is able to carry out its activities on-line 24 hours a day and 7 days a week. It should be mentioned here that on-line banking is one of our products and services. This service is important that it provides a facility to make transactions and payments through any Branch office or execute your payment or transaction within a short period of time. For instance, the interbank payment and interbranch payment is executed within 10 minutes. It is also efficient to use on-line mode for banking services : To produce the Bank reporting to different levels of management within a short period of time, thus creating the opportunity to develop correctly and efficiently the bank policies and activities. To create the Bank information databases, such as the credit information internal database and to use it for the bank activities. To improve the supervison system of the activities of the bank internal units, branch offices, account centers and contribute to the production of the effective and efficient cost saving system.

Financial Report

41

42

Asset management

Financial performance

In 2003 the Golomt Bank total assets reached MNT 114.1 billion increasing by MNT 34.8 billion or 43.8% over the previous year.

In 2003 Golomt bank total income reached MNT 12.4 billion, total expenses amounted to MNT 9.2 billion and income tax of MNT 767 million has been paid to the state. The Bank's net profit after tax amounted to MNT 1.1 billion. In addition Golomt Bank established additional loan provisions of MNT 1.4 billion.

At the end of the year MNT 9.3 billion or 8.1% of total assets was composed of Central Bank bills and the Bank has periodically engaged in the Central Bank's bills trading, which amounted to MNT 85 billion. Also MNT 46.8 billion or 41% of total assets consisted of loans to companies and individuals. Last year in order to ensure asset risk management, the Bank pursued an objective to keep loan portfolio less than 50% of the total assets. The Bank weighted average annual interest rate for MNT was 28.91% and for foreign currency was 19.73% with regard to loans.

Investment in securities

8%

Loans and advances

(in million tugrugs) Interest income Interest expense Net interest income Non-interest income Operating expense Net operating profit

6%

Other assets

Also interest income increased by 48.9%, non-interest income increased by 14% and interest expense accelerated to 43.5% and operating expense increased by 60.6%.

41%

2003 6,821 3,808 3,013 1,973 2,306 2,680

2002 10,157 5,466 4,691 2,250 3,704 3,237

32%

Deposits and placements with other banks

Operating expense was composed of 18% salaries and bonuses, 19% rental of premises, 7% communication costs, a total of 44% of total operational expenses.

13%

Bank Reserve and placements with the Central Bank 0%

10%

20%

30%

40%

50%

Performance ratios Deposits In 2003 the Golomt Bank customer deposits reached MNT 104.3 billion, an increase of MNT 30,7 billion or 41.7% over the previous year. By the end of the year 25.2% of the total liabilities was current deposits, 64.2% - savings deposits and 10.6% - banking and non-banking institutions deposits. Although there was strong competition in the market, the Bank interest rates for current and savings deposits were not changed. However, as a result of several measures taken to meet customers' needs and to offer high quality, efficient and convenient services, the current account deposits increased by MNT 5.3 billion or 25.3% and the savings account deposits increased by MNT 22.8 billion or 51.8%.

(in million tugrugs) 2002

2003

Current accounts

20,980.2

26,280.8

Savings accounts

44,093.2

66,939.7

8,529.8

11,045.8

Other sources

Own equity In 2003 Golomt Bank increased its paid-up capital by MNT 3 billion, accrued profit by MNT 1.1 billion and and its own equity reached MNT 9.8 billion, which is up by 71.8% over the previous year.

Golomt Bank fulfilled the prudential requirements by the Bank of Mongolia and it demonstrated the following performance ratios. The return on assets declined to 0.96% or by 0.07 points, compared with the previous year. Cost to income ratio increased to 85.2% or by 1.4 points. It can be explained by the factor that during the course of the year the bank decreased its lending rates whereas the the bank borrowing rates remained unchanged. Return on equity decreased to 11.13% - a decrease by 3.25 points over the previous year due to the increase in equity at the end of the year. Net income on fees and commissions to operating income ratio increased to 29.65%, which shows the trend of decreasing weight of the interest income on the total income.

Return on assets Return on equity Cost/Income ratio Net income on fees and commissions to operating income ratio

2003 1.03% 14,38% 83,80% 25.79%

2002 0.96% 11.13% 85.20% 29.65%

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44

Risk Management Report

Golomt Bank principal risk indicators /2003-12-31/

Bank operations compared to other businesses is a high risk and dynamic business and its stable operations and growth are greatly dependent on ensuring the establishment and maintenance of successful risk management system. Within the framework of Golomt Bank organizational restructuring in 2001, special efforts were made towards improving the risk management and early warning system and creating a control environment in order to meet the current banking operations requirements. Golomt Bank has the following risk management structure:

Indices Tier I risk weighted capital ratio Required level (in percentage) Risk weighted capital ratio

15.61%

Required level (in percentage)

10.00%

Above the required ratio

Required level (in percentage) Above the required ratio

Assets and Liabilities Committee

-5.61% 103,972,761.2 9.66% 5.00% -4.66%

1. Credit risk

Financial Control Division

Corporate Banking Division

5.00% -10.61%

Tier I core capital ratio

Internal Audit Department

15.61%

Above the required ratio

Total assets last 6 months average /in thousand tugrugs /

CEO

Results

Treasury Division

Card Center

Supports Division

Financial Control Divison is in charge of supervision over the Bank operations, in-depth analysis of the bank risk, development and introduction of risk management methods and practices as well as submission of report and information to the management. The Bank Credit Division is in charge of credit risk management and control, Treasury Division is in charge of foreign exchange risk management issues and Supports Division is in charge of operating activities risk control issues. The Bank Internal Audit Department is responsible for implementing its activities independently from the management, any other division and unit and is in charge of supervising the Bank Head office, Branch offices, divisions and units' activities in accordance with legal and regulatory requirements as well as ensuring on-site superivison for identifying, reducing and controlling risk.

In an environment of intense price competition between banks and non-bank financial institutions the Bank focused on ensuring high quality of loan products and pursued an objective to create an effective credit system to meet its customers' needs. In 2003 the loans to total assets ratio reached 40%. While in the previous year the ratio of non-performing loans to total loans was 9.7%, it reduced to 9.5% a decrease of 0.2 points in 2003. The Bank had constantly fulfilled and met the prudential requirement from the Bank of Mongolia that loans and guarantees to individual Bank shareholders, chairman of the Board of Directors, members, executive directors, employees and their related parties' should not exceed 5% of the equity of the bank and that the accumulated total amount should be less than 20% of the equity. The Bank pursued a policy of expansion and diversification of loans into different sectors of the economy on the basis of analysis of general trends of sectoral development and economic outlook. According to the National Statistical Office preliminary estimates of economic performance for 2003 GDP reached MNT 1359.7 billion and economic growth rate was estimated at 3.5% in real terms due to 3.8% increase in construction, trade, transport and communication sectors, 1.1% increase in agriculture and 0.4% increase in industry. Although the industrial production had developed highly intensively in the previous years, it stabilized and grew by 1.4% in 2003 due to a 0.2% increase in mining sector, 2.6% increase in manufacturing and processing sector and 2.3% increase in energy and electricity. The growth of the real sector of the economy created a favourable environment for further economic develoment. However, indepth analysis and assessment of the current situation of economic sectors and its future prospects are greatly needed.

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46

2. Liquidity risk

Currency risk indicators /2003-12-31/

Within the scope of primary reponsibilities of the Bank to have the ability to pay the customer on first demand the Bank made special effort towards developing and sustaining an optimal level between liquidity funds and financial return. Last year, as before the Bank fulfilled constantly the reserve and liquidity requirements of the Bank of Mongolia. Liquidity indicators /2003-12-31/

Indicators Liquidity ratio Required level Above required ratio

MNT 35% 18% -17%

2003.12. 31 Foreign currency 70% 18% - 52%

2002 58% 18% - 40%

Percent

Liquid assets/Total liabilities

63.49%

Cash(Current+Savings deposits)

77.29%

Short-term assets/Short-term liabilities

113.04%

Short term assets/total assets

90.44%

Loans /total assets

41.02%

Loans /total liabilities

49.30%

3. Market risk In 2003 the competition in the banking and financial market was intensive. In the conditions of mounted competition banks, non-banking financial institutions and credit and savings cooperatives continued to reduce the interest rates on loans and increased interest rates on deposits in the course of 2003. These trends have affected significantly the level of market average interest rate. The Bank closely monitored the interest rate developments at the market and periodically adjusted the interest rates on long-term time deposits and pursued a policy of controlling interest rate risk by sustaining optimal ratios between interest bearing assets and liabilities. In the second half of 2003 the world economic situation improved and US trade deficit and budget deficit widened. These developments led to US Dollar depreciation against other currencies. The fall of US dollar did not have a significant impact due to limited exposure to other major currencies as well as hedging and protection policy. We received on a timely basis the market information and made forecasts of exchange rates to manage and control risk. The Bank's exposure to foreign currency exchange risk by major currencies are as follows by year-end:

Main currencies USD

EUR

JPY

GBP

CHF

Other currencies

Total currency USD

In thousand tugrugs

A. Foreign assets

55,770

2,051

672,387

63

83

1,345

B. Foreign liabilities

54,513

2,278

2,811

187

1

231

57,950 67,685,740

(98)

14

(550,000)

-

-

(604)

(5,826) (6,804,939)

D. Foreign currency open position

1,159

(213)

119,576

(124)

83

510

2,366

2,764,019

E. Own equity /in million tugrugs/

10,046

10,046

10,046

10,046

10,046

10,046

10,046

10,046

F. Risk ratio

13.5%

-3.1%

13.0%

-2.6%

0.8%

5.9%

27.5%

27.5%

15.0% ±40.0%

±40.0%

C. Off-balance accounts

Other liquidity ratios internally monitored were as follows at the year end: Indicators

Indicators

Required level

±15.0% ±15.0%

±15.0% ±15.0% ±15.0%

Unfulfilled percentage

-1.5%

-18.1%

-2.0%

Exchange rate of the BOM

1,168

1,460

10.92

-17.6% -14.2% 2,073

935.70

66,143 77,254,698

-9.1%

-12.5%

1,168

1,168

4. Operational risk The Bank internal supervision department activities aimed at controlling and preventing all types of risks related to Bank operations, as accounting, cash management, trading, property, security, legal and regulatory framework, documentation, personnel and information technology. In the process of controlling the aforementioned risks a special attention was paid to market relations, employment, health and social protection and security issues. In order to prevent any risks related to the legal and regulatory framework the Bank legal advisor reviews and imposes control on the agreements and documentations from the legal point of view. Taking into consideration full automatization of the banking operations, online accounting and transaction processess, internet banking and increasing information technology risk, special measures were taken to ensure the full utilization of the information system at the high professional level, protection of the computer network from outside interference, provision of security and confidentiality for the customers and the Bank, prevention of professional types of crime and improvement of internal security system.

-12.5%

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Locations and addresses of Golomt Bank Head Office and Branch Offices Balance Sheet

GOLOMT BANK HEAD OFFICE Ulaanbaatar 210620A Sukhbaatar Square 3 E-mail: [email protected] Web: http://www.golomtbank.com Phone: (976-11) 311530, 311971 Fax: (976-11) 312307, 311958

BRANCH OFFICE Orkhon aimag 1st Branch Bayan-Undur soum Amar Street Phone: (01 352)-25100, 25200

(in million tugrugs) Assets

Sub-branch No.4 Sukhbaatar duureg State Center for Citizens Registration and Information Phone:350267

6,712.9

10,364.5

14,910.8

8,300.2

22,650.3

37,009.9

Securities

6,494.3

10,695.7

9,276.4

Loans /net

22,780.7

32,337.4

46,788.8

Fixed Assets

1,945.1

2,245.3

2,390.9

Other assets

1,029.4

1,011.7

3,682.4

47,262.5

79,304.8

114,059.1

Total assets

Deposits from other financial institutions Loans from other financial institutions Other liabilities

2001

2002

2003

39,556.0

65,073.4

93,220.5

92.8

893.8

1,683.5

4,242.0

6,915.4

7,892.2

501.9

720.6

1,470.2

Total liabilities

44,392.4

73,603.2

104,266.3

Paid-up capital

2,071.7

4,083.2

7,085.0

798.4

1,618.4

2,707.8

Retained earnings Own equity Total liabilities and capital funds Sub-Branch No.1 Chingeltei duureg, Ulaanbaatar 46 Khuldaldaany Street 6/2 Phone: 326231, 311530

2003

Deposits with other financial institutions

Customers' deposits Sub-branch No.6 Sukhbaatar duureg Solongo Service Center Phone: 320814, 318479

2002

Cash and placement with BOM

Liabilities Darkhan-Uul aimag 2nd Branch Darkhan soum 13th baga Phone: (01 372)-27136

2001

2,870.1

5,701.6

9,792.8

47,262.5

79,304.8

114,059.1

Sub-branch No.7 Songino Khairkhan duureg Tsambagarav service center Phone: 681267, 680347

Income Statement

Sub-branch No.2 Bayanzurkh duureg 15 microdistrict Bayantseel company premises Phone: 456829

Sub-branch No.3 Khan-Uul duureg Airport Phone: 983205

Sub-branch No. 8 Bayangol duureg 3 microdistrict Phone: 368602, 305419

Cashier Office 1 Sukhbaatar duureg Ulaanbaatar hotel Phone: 313942

2001

2002

2003

Interest income

4,613.1

6,820.5

10,156.8

Interest expenses

2,289.7

3,807.5

5,466.2

Net interest income

2,323.3

3,013.0

4,690.6

Non interest income

1,439.1

1,973.3

2,249.6

Operating expenses

2,060.2

2,306.3

3,704.0

Profit before provisions

1,702.2

2,680.0

3,236.2

Provisions

1,050.1

1,255.4

1,399.9

Profit before taxation

652.1

1,424.5

1,836.3

Taxation

267.0

604.5

746.9

Profit after taxation

385.1

820.0

1,089.4

Independent Auditor's Report

3

Golomt Bank of Mongolia LLC Report of the Auditors

Income statement for the year ended 31 december, 2003

Note To the Board of Directors of Golomt Bank of Mongolia LLC We have audited the accompanying financial statements of Golomt Bank of Mongolia LLC as at 31 December 2003 set out on pages 3 to 36. These financial statements are the responsibility of the Bank's directors. Our responsibility is to express an opinion on these financial statements based on our audit.

4

10,156,803

6,820,549

Interest expense

5

(5,466,216)

(3,807,522)

4,690,587

3,013,027

2,249,632

1,973,259

6,940,219

4,986,286

(3,703,999)

(2,306,321)

3,236,220

2,679,965

(1,399,917)

(1,255,440)

1,836,303

1,424,525

(746,922)

(604,549)

1,089,381

819,976

Non-interest income

6

Operating profit Operating expenses

7

Profit before provisions In our opinion, the financial statements have been properly drawn up in accordance with applicable International Financial Reporting Standards and the Regulations issued by Bank of Mongolia so as to give a true and fair view of the financial position of the Bank as of 31 December 2003 and of the results and the cash flows for the year then ended.

2002 MNT '000

Interest income

Net interest income We conducted our audit in accordance with applicable 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 the directors, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

2003 MNT '000

Provisions

8

Profit before taxation Taxation

9

Profit after taxation

Ulaanbaatar 18 March 2004

The accompanying notes form an integral part of the financial statements.

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5

Golomt Bank of Mongolia LLC

Golomt Bank of Mongolia LLC

Balance sheet as at 31 december 2003

Statement of changes in equity for the year ended 31 december 2003

Note

2003 MNT '000

Statutory fund MNT '000

2002 MNT '000

Assets Cash and short term funds Deposits and placements with other banks and financial institutions Investment in securities Loans and advances Other assets Tax recoverable Property, plant and equipment Total assets

10

5,252,245

3,814,560

11 12 13 14 15 16

46,668,373 9,276,445 46,788,774 3,662,109 20,261 2,390,869 114,059,076

29,200,216 10,695,667 32,337,372 1,011,673 2,245,312 79,304,800

Liabilities Deposits from customers Deposits and placements of other banks and financial institutions Loans from Bank of Mongolia Government loan Loans from foreign financial institutions Other liabilities Provision for taxation Total liabilities

17

93,220,499

65,073,394

18 19 20 21 22

1,683,465 1,074,000 320,000 6,498,162 1,470,199 104,266,325

893,795 1,024,000 170,000 5,721,374 683,379 37,248 73,603,190

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7,084,990 2,707,761 9,792,751

4,083,230 1,618,380 5,701,610

114,059,076

79,304,800

14,522,277

5,632,157

At 1 January 2002

Retained earnings MNT '000

Total equity and liabilities Commitments and off balance sheet items

27

The accompanying notes form an integral part of the financial statements.

MNT '000

2,071,700

798,404

2,870,104

Profit for the year

-

819,976

819,976

Issue of shares

2,011,530

-

2,011,530

4,083,230

1,618,380

5,701,610

Profit for the year

-

1,089,381

1,089,381

Issue of shares

3,001,760

-

3,001,760

7,084,990

2,707,761

9,792,751

At 31 December 2002

At 31 December 2003

Equity Statutory fund Retained earnings Total equity

Total

The accompanying notes form an integral part of the financial statements.

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Golomt Bank of Mongolia LLC

Golomt Bank of Mongolia LLC

Cash flow statement for the year ended 31 december 2003

Cash flow statement (contd.) for the year ended 31 december 2003 2003 MNT '000

2002 MNT '000

1,836,303

1,424,525

409,775 2,010 1,374,489 19,588 5,840 (2,652) -

282,008 18,523 1,255,440 (21,351) (6,825)

3,645,353

2,952,320

(15,825,891) (2,651,925)

(10,682,248) (119,163)

28,147,105 789,670 786,820 14,891,132

25,517,440 801,225 260,126 18,729,700

(804,431) 14,086,701

(645,906) 18,083,794

1,413,382 5,304 (578,093) 840,593

(4,194,582) 59,196 (631,541) (4,766,927)

Cash flows from financing activities Increase in statutory fund 3,001,760 Increase in Loan from Bank of Mongolia 50,000 Net increase in loans from government and foreign financial institutions 926,788 Net cash flow from financing activities 3,978,548

2,011,530 238,200 2,435,138 4,684,868

Cash flows from operating activities Profit before taxation Adjustments for :Depreciation of property, plant and equipment Property, plant and equipment written off Net provisions for loan losses Provision for other assets Provision for investment securities Gain on disposal of property, plant equipment Interest accrued on government securities Operating profit before working capital changes Increase in operating assets:Loans and advances Other assets Increase in operating liabilities Deposits from customers Deposits and placements of other banks and financial institutions Other liabilities Cash generated from operations Income tax paid Net cash flow from operating activities Cash flow from investing activities Net decrease / (increase) in investment securities Proceeds on disposal of property, plant and equipment Purchase of property, plant and equipment Net cash flow from investing activities

2003 MNT '000

2002 MNT '000

Net increase in cash and cash equivalents

18,905,842

18,001,735

Cash and cash equivalents brought forward

33,014,776

15,013,041

Cash and cash equivalents carried forward

51,920,618

33,014,776

5,252,245

3,814,560

46,668,373 51,920,618

29,200,216 33,014,776

Cash and cash equivalents comprises: Cash and short term funds Deposits and placement with other banks and financial institutions

The accompanying notes form an integral part of the financial statements. The accompanying notes form an integral part of the financial statements.

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Golomt Bank of Mongolia LLC Notes to the financial statements - 31 december 2003 1. Corporate information The Bank is principally engaged in the business of provision of banking and financial services pursuant to License No. 8 issued by Bank of Mongolia. There have been no significant changes in the nature of these activities during the year. The Bank is a limited liability company, incorporated and domiciled in Mongolia. The registered address and the principal place of business of the Bank is Sukhbaatar Square 3, Ulaanbaatar 210620A, Mongolia. The holding company of the Bank is Mongolia.

Bodi International Limited, a company incorporated in

These financial statements of the Bank for the year ended 31 December 2003 were authorised for issue by the Board of Directors in accordance with a resolution of the directors on 18 March 2004.

2. Basis of preparation These financial statements have been prepared in accordance with applicable International Financial Reporting Standards and the Regulations issued by Bank of Mongolia. The financial statements have been prepared under the historical cost convention. The reporting currency used in the financial statements is the Mongolian Togrog, which is denoted by the symbol MNT, shown rounded to the nearest thousand.

3. Significant accounting policies a. Interest Income and Expense Interest income and expense are recognised in the income statement for all interest bearing instruments on an accrual basis using the effective yield method based on the actual purchase price. The recognition of interest income is suspended when loans are outstanding for more than ninety days, in accordance with the requirements of Bank of Mongolia. On commencement of suspension, previously accrued interest not received is clawed-back. Recognition of interest subsequent to suspension is on a cash basis. Interest recognition will resume on an accruals basis when the uncertainties surrounding the recoverability are removed and the loan is reclassified as performing. b. Fee and Commission Income Fee and commission income are generally recognised on an accrual basis when the service has been provided. Types of fees and commission income derived by the Bank relate mainly to deposit box fees, loan processing fees, current account withdrawal fees, and money transfer commissions.

c. Foreign Currencies Transactions in foreign currencies are initially recorded in Togrog at rates of exchange ruling at the date of the transaction. At each balance sheet date, foreign currency monetary items are translated into Togrog at exchange rates ruling at that date, unless hedged by forward foreign exchange contracts, in which case the rates specified in such forward contracts are used. Nonmonetary items initially denominated in foreign currencies, which are carried at historical cost are translated using the historical rate as of the date of acquisition and non-monetary items which are carried at fair value are translated using the exchange rate that existed when the values were determined. All exchange rate differences are taken to the income statement. The principal exchange rates used for every unit of foreign currency ruling at the balance sheet date used are as follows:

United States Dollar Great Britain Pound European Euro Japanese Yen Swiss Francs

2003 1,168.00 2,073.40 1,460.20 10.92 935.70

2002 1,125.00 1,804.00 1,169.40 9.38 804.00

d. Loans and Advances and Provision for Loan Loss Loans originated by the Bank by providing money directly to the borrower at draw down are categorised as loans and advances. Third party expenses, such as legal fees, incurred in securing a loan are treated as part of the cost of the transaction. All loans and advances are recognised when cash is advanced to borrowers. Provisions for loan loss are made as considered necessary having regard to both specific and general factors. In determining the need for provisions, management considers, among other things, the financial position of the borrowers, the value of any collateral and guarantees received, industry performance, current economic conditions and past experiences. Provisions made during the year are charged against the income statement. The maturity of the loan portfolio is presented in Note 13 which shows the remaining period of loans from the balance sheet date to the contractual maturity. Long-term credits are generally not available in Mongolia except for programs set up by international financial institutions and under government financing arrangements. However, in the Mongolian marketplace, short-term credits are granted with the expectation of renewing the loans at maturity. e. Taxation The Bank provides for income tax based on its income for financial reporting purposes, adjusted for items which are not assessable or deductible for income tax purpose, in accordance with the regulations of the Mongolian Government and is measured using the tax rates that have been enacted at the balance sheet date.

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3. Significant accounting policies (contd.) f. Cash and Cash Equivalents For the purposes of the cash flow statement, cash and cash equivalents consist of cash and short term funds, deposits and placements with other banks and financial institutions that are readily convertible to cash with insignificant risk of changes in value.

i.

Deposits From Customers Deposits from customers are stated at cost which is the fair value of the consideration to be paid in the future for deposits received.

j.

Impairment of Assets The Bank reviews the carrying amounts of its assets to that those assets have suffered an impairment loss. If measured by comparing the carrying values of the Recoverable amount is the higher of net selling price reference to discounted future cash flows.

g. Investment Securities Investment securities are securities that are acquired and held for yield or capital growth and are usually held to maturity. Government bonds and Securities and Bank of Mongolia Treasury Bills are stated at cost adjusted for amortisation of premiums or accretion of discounts, where applicable, to maturity dates.

An impairment loss is charged to the income statement immediately, unless the asset is carried at revalued amount. Any impairment loss of a revalued asset is treated as a revaluation decrease to the extent of any available previously recognised revaluation surplus for the same asset. Reversal of impairment losses recognised in prior years is recorded when there is an indication that the impairment losses recognised for the asset no longer exist or have decreased.

Quoted investments are stated at the lower of cost and market value. Unquoted investments are stated at cost and where applicable, adjusted for amortisation of premiums or accretion of discounts to maturity dates. Provision is made for diminution in value which is other than temporary. On disposal of the investment securities, the differences between the net disposal proceeds and their carrying amounts are charged or credited to the income statement. h. Property, Plant and Equipment Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. The policy for the recognition and measurement of impairment losses is in accordance with Note 3 (j). The estimated useful lives used by the Bank are as follows :-

Buildings Office equipment and vehicles Computers

2003 40 years 10 years 5 years

2002 40 years 2 - 10 years 4 - 10 years

Assets under construction are not depreciated. Depreciation of these assets begins when the related assets are placed in service. Upon disposal of an item of property, plant or equipment, the difference between the net disposal proceeds and the net carrying amount is recognised in the income statement. With effect from the current year, the Bank changed the annual depreciation rate for furniture, fixtures and vehicles from 2 - 10 years to 10 years and computers from 4 - 10 years to 5 years to better reflect their useful lives. The effect on the financial statements of this change in accounting estimate is not material.

determine whether there is any indication any such indication exists, impairment is assets with their recoverable amounts. and value in use, which is measured by

k. Sale and Repurchase Agreements Securities sold subject to a linked repurchase agreements ('repos') are retained in the financial statements as trading or investments securities and the counterparty liability is included in amounts due to other financial instituitions or as appropriate. Securities purchased under agreement to resell ('reverse repos') are recorded as amount due from other financial instituitions or as appropriate. The difference between sale and repurchase price is treated as interest and accrued over the life of the repo agreements using the effective yield method. l.

Employee Benefits (I) Short Term Benefits Wages, salaries and other salary related expenses are recognised as an expense in the year in which the associated services are rendered by employees of the Bank. Short term accumulating compensated absences such as paid annual leave are recognised when services rendered by employees that increase their entitlement to future compensated absences, and short term non-accumulating compensated absences such as sick leave are recognised when absences occur. (II) Defined Contribution Plans As required by the law, companies in Mongolia make contributions to the government pension scheme, Social Security and Health Fund. Such contributions are recognised as an expense in the income statement as incurred.

m. Operating Leases Lease payments for operating leases, where substantially all risk and benefits remain with the lessor, are charged as an expense in the income statement on a straight-line basis over the term of the relevant lease.

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3. Significant accounting policies (contd.)

5. Interest expense

n. Financial Instruments Financial instruments are recognised in the balance sheet when the Bank has become a party to the contractual provisions of the instrument. The accounting policies on recognition and measurement of these items are disclosed in their respective accounting policies. Financial instruments are classified as liabilities or equity in accordance with the substance of the contractual arrangement. Interest, dividends and gains and losses relating to a financial instrument classified as a liability, are reported as expense or income. Distributions to holders of financial instruments classified as equity are charged directly to equity. Financial instruments are offset when the Bank has a legally enforceable right to offset and intends to settle either on a net basis or to realise the asset and settle the liability simultaneously. (I) Equity Instruments Statutory fund is classified as equity and dividends are recognised in equity in the period in which they are declared. (II) Derivative Financial Instruments Derivative financial instruments are not recognised in the financial statements on inception. Forward Foreign Exchange Contracts The underlying foreign currency assets or liabilities are translated at their respective hedged exchange rate and all exchange gains or losses are recognised as income or expense in the income statement in the same period as the exchange differences on the underlying hedged items. Exchange gains and losses arising on contracts entered into as hedges of anticipated future transactions are deferred until the date of such transaction, at which time they are included in the measurement of such transaction.

4. Interest income

Loans and advances Deposits and placements with other banks and financial institutions Bank of Mongolia Treasury Bills Government bonds and Securities

2003 MNT '000 9,326,074

2002 MNT '000 6,091,956

247,726 520,546 62,457 10,156,803

218,157 477,622 32,814 6,820,549

Current account deposits Time and demand account deposits Loans from foreign financial instituition Placements by other financial instituitions

2003 MNT '000 365,292 4,641,602 416,297 43,025 5,466,216

2002 MNT '000 163,072 3,305,140 338,612 698 3,807,522

2003 MNT '000

2002 MNT '000

603,972 543,296 642,901 1,790,169

663,057 500,792 314,727 1,478,576

141,008 212,734 2,652 103,069 459,463

162,227 215,980 21,351 95,125 494,683

2,249,632

1,973,259

6. Non Interest income

Fees and commision income: Service charges and fees Credit cards advance fees Other fee income

Other income: Realised foreign currency gain Unrealised foreign currency gain Gain on disposal of property, plant and equipment Other operating income

Total non-interest income

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7. Operating expenses

9. Taxation 2003 MNT '000

Personnel costs - Salaries and related expenses Depreciation of property, plant and equipment Travelling Rental of premises Entertainment Advertisement Communications Safety expenses Service charges Stationery Other operating expenses Write-off of property, plant & equipments

667,183 409,775 193,682 688,669 10,671 133,132 254,459 49,805 692,983 117,101 484,529 2,010 3,703,999

2002 MNT '000 550,998 282,008 178,722 227,024 12,982 64,829 172,218 24,466 350,724 79,661 344,166 18,523 2,306,321

Mongolian taxation based on results for the year - Current - (Over)/underprovision in prior years

Of which: - Head office - Branches

2003 22 218 31 271

2002 22 164 27 213

130 141 271

110 103 213

8. Provisions

Provision for loan losses less writebacks Provision for investment securities Provision for other assets

2003 MNT '000 1,255,440 1,255,440

747,186 (264) 746,922

583,579 20,970 604,549

A reconciliation of income tax expense applicable to profit before taxation at the statutory income tax rate to income tax expense at the effective income tax rate of the Bank is as follows:

Income tax at statutory rates based on profit before taxation Tax exempt income Non-deductible expenses (Over)/underprovision in prior year Tax expense for the year

2003 MNT '000 709,521 (24,982) 62,647 (264) 746,922

2002 MNT '000 544,810 (13,126) 51,895 20,970 604,549

Management believes that the Bank is in substantial compliance with the tax laws affecting its operations.

10.Cash and short term funds

Cash and bank balances denominated in local currencies Cash and bank balances denominated in foreign currencies 2003 MNT '000 1,374,489 5,840 19,588 1,399,917

2002 MNT '000

Mongolian legal entities must individually report taxable income and remit income taxes thereon to the appropriate authorities. The income tax rate for banks profits is 15% for the first MNT100 million of taxable income, and 40% on the excess of taxable income over MNT100 million. Interest income on government bonds is not subject to income tax. The provision for probable loan losses is deductible for income tax purposes.

The average number of persons employed by the Bank during the year was made up as follows:

Directors and head of departments Officers Clerks

2003 MNT '000

2003 MNT '000 2,379,209 2,873,036 5,252,245

2002 MNT '000 1,890,379 1,924,181 3,814,560

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11. Deposits and placements with other banks and financial institutions

Current accounts with Bank of Mongolia Placements with other banks and financial institutions

2003 MNT '000 9,658,508 37,009,865 46,668,373

13.Loans and advances 2002 MNT '000 6,549,949 22,650,267 29,200,216

Balances with Bank of Mongolia are maintained in accordance with Bank of Mongolia requirements and bear no interest. The balances maintained with Bank of Mongolia are determined at set percentages based on 15 days average cash balances. Placements with other banks and financial institutions represent foreign currency current accounts maintained with foreign and local financial institutions, which are generally denominated in United States Dollar ("USD") and EURO and bear interest at annual rates ranging from 0.53% to 1.02% (2002: 0.25% to 6.40%) per annum.

12.Investment in securities

Bank of Mongolia treasury bills Government bonds Promissory notes Accretion of discounts Provision for impairment losses

2003 MNT '000 8,568,085 538,098 9,106,183 176,102 (5,840) 9,276,445

2002 MNT '000 10,538,842 156,825 10,695,667 10,695,667

Bank of Mongolia treasury bills are interest bearing short term bills with maturities of less than three months, and are issued at a discount. The effective annual interest rates of these bills range from 0.97% to 17.00% (2002 : 7.99% to 11.98%) per annum. Government bonds are issued by the Ministry of Finance and Economy with maturities ranging from 60 days to 720 days. Annual interest rates are in the range of 5.04% to 14.18% (2002: 4.55% to 11.95%) per annum. Promissory notes are issued by a private corporation with a 150 days maturity period. The annual interest rate is 21.6% (2002: nil) per annum.

Short term loans Term loans Credit cards Staff loans Accrued interest Gross loans and advances Provision for loan losses - specific - general Net loans and advances

Maturity structure Maturing within one year One to five years After five years

2003 MNT '000 42,926,216 7,877,251 281,504 288,311 710,313 52,083,595

2002 MNT '000 29,873,407 4,830,210 855,137 194,515 499,431 36,252,700

(4,825,717) (469,104) 46,788,774

(3,624,774) (290,554) 32,337,372

2003 MNT '000

2002 MNT '000

38,256,068 7,280,489 1,252,217 46,788,774

23,739,932 8,488,761 108,679 32,337,372

Loans and advances analysed by their economic purpose are as follows:

Trading Processing related industries Mining Construction Transportation Power, gas and water supply Hospitality Small medium enterprises Leasing Health and Education Agriculture Others

2003 MNT '000 19,421,270 16,699,633 3,798,901 2,860,658 1,622,492 1,470,870 1,137,902 607,365 587,295 572,795 344,724 2,959,690 52,083,595

2002 MNT '000 10,665,530 11,592,740 4,838,150 3,099,570 139,236 549,389 1,417,736 1,320,677 324,778 262,830 623,831 1,418,233 36,252,700

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13.Loans and advances (contd.)

13.Loans and advances (contd.)

Movements in the non-performing loans ("NPL") are as follows: 2003 MNT '000 6,099,950 4,016,439 (5,073,776) 117,374 5,159,987 (4,825,717)

2002 MNT '000 5,054,748 8,017,423 (6,582,056) (395,519) 5,354 6,099,950 (3,624,774)

334,270

2,475,176

Gross NPL ratio as a percentage of gross total loans

9.9%

16.8%

Net NPL ratio as a percentage of net total loans

0.7%

7.7%

Balance at beginning of year NPL during the year - gross Recoveries/regularised during the year Amount written off Exchange difference Gross balance at end of year Less: Specific provision Net balance at year end

Movements in the provision for loan losses are as follows:

Specific Provision Balance at beginning of year Provision made during the year Amount written back in respect of recoveries Amount written off Exchange difference Balance at end of year

2003 MNT '000

2002 MNT '000

3,624,774 1,395,974 (200,008) 4,977 4,825,717

2,857,463 1,162,240 (395,519) 590 3,624,774

At 31 December 2003, all loans and advances to borrowers are denominated in Togrog except for USD loans amounting to MNT25,720 million. Interest rate ranges from 6% to 42% per annum (2002 : 6% to 42% per annum). Loans and advances amounting to approximately MNT46,924 million at 31 December 2003 (2002 : MNT30,153 million) were classified as normal and provided with a 1% loss reserve. Further, loans amounting MNT5,160 million as at 31 December 2003 (2002 : MNT6,100 million) were classified as NPLs and provisions of MNT4,826 million (2002 : MNT3,625 million) have been allocated against these NPLs. The provision for possible loan losses is considered adequate by the management based upon their formal review and analysis of existing credits using their knowledge of prevailing and anticipated economic conditions.

14.Other assets

Prepaid expenses Consumables and other inventory Land held for sale Other receivables Less: Provision for other assets Net balance of other assets

General Provision Balance at beginning of year Provision made during the year Exchange difference Balance at end of year

2002 MNT '000

290,554 178,523 27 469,104

193,280 93,200 4,074 290,554

280,784 3,731,637 (69,528) 3,662,109

2002 MNT '000 479,918 124,037 239,797 219,386 1,063,138 (51,465) 1,011,673

2003 MNT '000 20,261

2002 MNT '000 -

15.Tax recoverable

Tax recoverable 2003 MNT '000

2003 MNT '000 3,217,942 232,911

Tax recoverable represents the excess of tax paid compared to the taxation payable and is subject to the approval from the Mongolian Tax Authority ("MTA").

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16.Property, plant and equipment

17.Deposits from customers (contd.)

Buildings

Leasehold Office Construction Total improvements equipment in progress and vehicles MNT '000 MNT '000 MNT '000 MNT'000 MNT '000 At cost Balance at beginning of year Additions Disposals Transfers Adjustment Write-offs Balance at end of year

Accumulated depreciation Balance at beginning of year Charge for the year Disposals Write-offs Balance at end of year

1,007,494 -

30,538 -

1,638,021 396,683 (6,789) 335,405

1,007,494

30,538

(16,232) 2,347,088

96,918 54,621 151,539

9,840 3,054 12,894

269,751 181,410 (335,405) (18,099) 97,657

593,734 352,100 (4,137) (14,222) 927,475

-

2,945,804 578,093 (6,789) (18,099) (16,232) 3,482,777

700,492 409,775 (4,137) (14,222) 1,091,908

Net Book Value At 31 December 2003

855,955

17,644

1,419,613

97,657

2,390,869

At 31 December 2002

910,576

20,698

1,044,287

269,751

2,245,312

15,544

3,054

263,410

-

282,008

Depreciation charge for 2002

17.Deposits from customers

Current account deposits Demand account deposits Time deposits Government deposits Other deposits

2003 MNT '000 26,280,795 19,291,117 44,917,365 1,892,537 838,685 93,220,499

2002 MNT '000 20,980,163 14,285,001 28,245,878 880,897 681,455 65,073,394

(i) The maturity structure of time deposits from customers is as follows:

Due within six months Six months to one year One year to three years

2003 MNT '000 31,512,785 6,734,583 6,669,997 44,917,365

2002 MNT '000 25,668,573 865,917 1,711,388 28,245,878

2003 MNT '000 20,045,851 71,282,111 1,892,537 93,220,499

2002 MNT '000 1,447,076 62,745,421 880,897 65,073,394

(ii) The deposits are sourced from the following customers:

Business enterprises Individuals Government

Current account and other deposits generally bear no interest, however for depositors maintaining current account balance above a precribed limit,interest is provided at annual rates of approximately 1.2% (2002: 1.2%) per annum and between 3.0% to 3.6% (2002: 3.0% to 3.6%) per annum for foreign currency and local currency accounts respectively. Foreign currency demand deposits bear interest at an annual rate of approximately 3.6% (2002: 3.6%) per annum, while local currency demand deposits at approximately 7.2% (2002: 7.2%) per annum. Interest rates for time deposits vary for different types of accounts. Foreign currency time deposits bear interest at an annual rate of approximately 0.7% to 7.2% (2002: 0.7% to 7.2%) per annum, while for local currency time deposits, at a range of approximately 1.3% to 14.4% (2002: 1.2% to 14.4%) per annum. Foreign currency government deposits bear interest at an annual interest at 6.0% to 7.2% (2002: 6.0% to 7.2%) per annum, while local currency government deposits, at a range of 12.0% to 14.4% (2002: 12.0% to 14.4%) per annum.

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18.Deposits and placements of other banks and financial institutions

Foreign currency current account deposits Local currency current account deposits Obligation on securities sold under repurchase agreements

2003 MNT '000 1,379,194 304,271 1,683,465

21.Loans from foreign financial institutions (contd.) 2002 MNT '000 153,383 40,412 700,000 893,795

Foreign currency and local currency current deposits are placed by local commercial banks and generally bear no interest.

19.Loans from Bank of Mongolia

Loans from the bank

2003 MNT '000 1,074,000

2002 MNT '000 1,024,000

These borrowings bear an interest rate of 10% (2002: 10%) per annum. The final repayment of these borrowings is due in July 2005 in accordance to the repayment schedule.

20.Government loan

Loan from government

2003 MNT '000 320,000

2002 MNT '000 170,000

The interest rate of the loan is fixed at 6% (2002: 6%) per annum. The loan is repayable within a year in accordance to the repayment schedule.

21. Loans from foreign financial institutions

Foreign funded loans: World Bank Loan I World Bank Loan II World Bank Loan III Berliner Bank Loan Asian Development Bank

2003 MNT '000

2002 MNT '000

3,075,422 2,177,796 327,825 488,446 428,673 6,498,162

3,153,086 1,913,221 259,164 395,903 5,721,374

World Bank Loan I The World Bank USD loan amounts to USD2.6 million or MNT3.0 billion (2002: USD2.7 million or MNT3.2 billion). The World Bank loan is channeled to various borrowers under the Private Sector Development Credit Programme. The interest rate of the World Bank loan is variable and calculated on the LIBOR 6 months USD rate +3% (2002: LIBOR 6 months USD rate +3%). The repayment of the loan is in accordance with the repayment schedule with the final payment due in March 2010. World Bank Loan II The World Bank MNT loan balance stands at MNT2.2 billion (2002: MNT1.9 billion) respectively. The World Bank loan is channeled to various borrowers under the Private Sector Development Credit Programme. The interest rate of the World Bank loan is variable and calculated on the LIBOR 6 months USD rate +3% (2002: LIBOR 6 months USD rate +3%). The final repayment of the loan is in accordance with the repayment schedule with the final repayment due in June 2009. World Bank Loan III The loan is utilised for staff training purposes. The interest rate of the loan is fixed at 2% (2002 : 2%) per annum with principal repayment commencing on November 2004 and final repayment due in May 2019 in accordance with the repayment schedule. Berliner Bank Loan The Berliner Bank loan is used to finance the purchase of a building in Germany. The interest rate of the loan is 7.45% (2002: 7.45%) per annum. The Bank commenced principal repayments in June 1996 and the final repayment is due in September 2025 in accordance with the repayment schedule. Asian Development Bank The loan from the Asian Development Bank was obtained during the year. The loan were subsequently disbursed to housing loan borrowers. The interest rate on the loans is between 8% to 8.2% (2002: nil) per annum. Terms of repayment of the loan are in accordance with the respective repayment schedule.

22.Other liabilities

Payables Foreign remittance under request Delay on clearing settlement Other payables

2003 MNT '000 244,089 627,757 230,390 367,963 1,470,199

2002 MNT '000 149,311 59,205 435,898 38,965 683,379

24

25

23.Statutory fund

At the beginning of the year Issued during the year At the end of the year

24.Risk management policies (contd.) 2003 MNT '000 4,083,230 3,001,760 7,084,990

2002 MNT '000 2,071,700 2,011,530 4,083,230

At 31 December 2003 the statutory fund was wholly owned by Bodi International Limited.

24.Risk management policies Management of risk is fundamental to the banking business and is an essential element of the Bank's operations. The main risks inherent to the Bank's operations are those related to credit exposures, liquidity and market movements in interest rates and foreign exchange rates. A description of the Bank's risk management policies in relation to those risks are as follows: Credit risk The Bank is exposed to credit risk which is the risk that a counter party will be unable to pay amounts in full when due. The Bank structures the levels of credit risk it undertakes by placing limits on the amount of risk accepted in relation to one borrower, or group of borrowers, and to industry segments. Such risks are monitored on a revolving basis and subject to an annual or more frequent review. Limits on the level of credit risk by borrower and product are approved regularly by the Bank's management team. Exposure to credit risk is managed through regular analysis of the ability of borrowers and potential borrowers to meet interest and capital repayment obligations and by changing these lending limits where appropriate. Exposure to credit risk is also managed in part by obtaining collaterals. Apart from deposits and placements with other bank financial instituitions amounting to MNT36.1 billion (2002: MNT21.0 billion) and property, plant and equipment amounting to MNT507 million (2002: MNT523 million), all banking assets and liabilities were geographically concentrated in Mongolia. Credit related commitments The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guanrantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event that a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Currency risk The Bank is exposed to effects of fluctuations in the prevailing foreign currency exchange rates on its financial position and cash flows. The Bank's management sets limits on the level of exposure by currencies (primarily USD) and in total.

The Bank's concentration of assets and liabilities are as follows:

MNT Assets Cash and short term funds Deposits and placements with other banks and financial institutions Investment in securities Loans and advances Other assets Tax recoverable Property, plant and equipment

2003 (MNT'000) Foreign currencies

Total

2,379,209

2,873,036

5,252,245

1,727,290 8,734,727 18,919,482 3,257,406 20,261 1,883,607 36,921,982

44,941,083 541,718 27,869,292 404,703 507,262 77,137,094

46,668,373 9,276,445 46,788,774 3,662,109 20,261 2,390,869 114,059,076

32,213,755

61,006,744

93,220,499

304,271 1,074,000 320,000 2,602,212 5,926 36,520,164

1,379,194 3,895,950 1,464,273 67,746,161

1,683,465 1,074,000 320,000 6,498,162 1,470,199 104,266,325

Net position

401,818

9,390,933

9,792,751

Commitments and other off balance sheet items

558,576

12,160,267

12,718,843

Liabilities Deposits from customers Deposits and placements of other banks and financial institutions Loans from Bank of Mongolia Government loan Loans from foreign financial institutions Other liabilities Provision for taxation

26

27

24.Risk management policies (contd.)

24.Risk management policies (contd.)

MNT Assets Cash and short term funds Deposits and placements with other banks and financial institutions Investment in securities Loans and advances Other assets Property, plant and equipment

1,890,379

2002 (MNT'000) Foreign currencies 1,924,181

The contractual maturities of banking assets and liabilities for the year ended 31 December 2003 are as follows (MNT '000): Total

2,083,765 10,695,667 14,556,919 912,295 1,722,561 31,861,586

27,116,451 17,780,453 99,378 522,751 47,443,214

29,200,216 10,695,667 32,337,372 1,011,673 2,245,312 79,304,800

24,827,657

40,245,737

65,073,394

740,412 170,000 3,838,719 56,820 37,248 29,670,856

153,383 1,024,000 1,882,655 626,559 43,932,334

893,795 1,024,000 170,000 5,721,374 683,379 37,248 73,603,190

Net position

2,190,730

3,510,880

5,701,610

Commitments and other off balance sheet items

1,282,202

4,349,955

5,632,157

Liabilities Deposits from customers Deposits and placements of other banks and financial institutions Loans from Bank of Mongolia Government loan Loans from foreign financial institutions Other liabilities Provision for taxation

Less than 3 months

3,814,560

Liquidity risk The Bank is exposed to frequent calls on its available cash resources from demand deposits, maturing deposits and loan drawdowns. The Bank maintains liquidity management with the objective of ensuring that funds will be available at all times to honor all cash flow obligations as they become due. The Reserve department sets limits on the minimum proportion of maturing funds available to cover such cash outflows and on the minimum level of interbank and other borrowing facilities that should be in place to cover withdrawals at unexpected levels of demand.

Assets Cash and short term funds 5,252,245 Deposits and placements with other banks and financial institutions 39,795,061 8,734,727 Investment in securities Loans and advances 15,969,538 Other assets 3,662,109 Tax recoverable Property, plant and equipment 240 73,413,920 Liabilities Deposits from customers 49,457,021 Deposits and placements of other banks and financial institutions 1,099,465 Loan from Bank of Mongolia Government loan Loans from foreign financial instituitions 317,110 Other liabilities 1,470,199 52,343,795

3 to 6 months

6 months to 1 year -

1 to 5 years -

6,552,000 314,304 541,718 7,839,286 14,447,244 20,261

Over 5 years -

Total -

5,252,245

7,008 7,280,489 1,252,217 -

46,668,373 9,276,445 46,788,774 3,662,109 20,261

85 21,238 14,933,089 14,803,047

902,256 1,467,050 2,390,869 8,189,753 2,719,267 114,059,076

30,358,898

6,734,583

6,669,997

-

93,220,499

-

-

584,000

-

1,683,465

320,000

772,800 -

301,200 -

-

1,074,000 320,000

335,220 31,014,118

Net liquidity gap

21,070,125 (16,081,029)

Accumulated gap

21,070,125

386,312 4,047,687 1,411,833 6,498,162 1,470,199 7,893,695 11,602,884 1,411,833 104,266,325 6,909,352 (3,413,131) 1,307,434

4,989,096 11,898,448

8,485,317 9,792,751

9,792,751

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24.Risk management policies (contd.)

24.Risk management policies (contd.)

The contractual maturities of banking assets and liabilities for the year ended 31 December 2002 are as follows (MNT '000): Less than 3 months

3 to 6 months

Assets Cash and short term funds 3,814,560 Deposits and placements with other banks and 18,189,050 financial institutions Investment in securities 10,545,667 Loans and advances 6,151,180 Other assets 1,011,673 Property, plant and equipment 370 39,712,500 Liabilities Deposits from customers Deposits and placements of other banks and financial institutions Loan from the Bank of Mongolia Government loan Loans from foreign financial institutions Other liabilities Provision for taxation

6 months to 1 year -

1 to 5 years

Over 5 years

Total

-

-

-

3,814,560

575,151 8,075,068 150,000 5,911,078 11,677,674 -

2,360,947 8,488,761 -

108,679 -

29,200,216 10,695,667 32,337,372 1,011,673

2,207 28,654 622,367 1,591,714 6,638,436 19,781,396 11,472,075 1,700,393

2,245,312 79,304,800

Interest rate risk The Bank is exposed to the effects of fluctuations in the prevailing levels of market interest rates on its financial position and cash flows. Interest rate risk is measured by the extent to which changes in market interest rates impact margins and net income. To the extent the term structure of interest bearing assets differs from that of liabilities, net of interest income will increase or decrease as a result of movements in interest rates. The Bank's expected repricing and maturity dates do not differ significantly from the contract dates, which are disclosed in the liquidity risk table above. Interest rate risk is managed by increasing or decreasing positions within limits specified by the Bank's management. These limits restrict the potential effect of movements in interest rates on interest margin and on the value of interest sensitive assets and liabilities. The Bank's interest rate policy is reviewed and approved by the Reserve department. The Bank's average effective interest rates per annum in 2003 and 2002 for monetary financial instruments are as follows: 2003

32,378,135 19,856,760 12,838,499

-

-

65,073,394

MNT

2002 USD

MNT

USD

Interest earning assets 893,795

-

-

-

-

893,795

-

170,000

-

1,024,000 -

-

1,024,000 170,000

3,098,653 1,304,482 4,122,653 1,304,482

5,721,374 683,379 37,248 73,603,190

315,210 683,379 37,248 34,307,767

635,147 367,882 20,661,907 13,206,381

Net liquidity gap

5,404,733 (14,023,471)

Accumulated gap

5,404,733

6,575,015

(8,618,738) (2,043,723)

7,349,422

395,911

5,305,699 5,701,610

5,701,610

Placement with other banks Bank of Mongolia treasury bills Government bonds Promissory Notes Loans and advances

- 0.53%-1.02% 0.97%-17.00% 5.04%-14.18% 21.6% 6%-42% 18%-30%

- 0.25%-6.40% 7.99%-11.98% 4.55%-11.95% 6%-42% 18%-36%

Interest bearing liabilities Demand deposits from customers Time deposits from customers Current account deposits from customers Government deposits Government loan Loans from Bank of Mongolia Loans from foreign financial instituitions

7.2% 1.3%-14.4%

3.6% 0.7%-7.2%

7.2% 1.2%-14.4%

3.6% 0.7%-7.2%

3.0%-3.6% 12.0%-14.4% 6% -

1.2% 6.0%-7.2% 10%

3.0%-3.6% 12.0%-14.4% 6% -

1.2% 6.0%-7.2% 10%

10.0%-14.4% 2.00%-7.45%

7.5%-12.3% 2.00%-7.45%

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25.Related party disclosures

25.Related party disclosures (contd.)

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. The Bank is controlled by Bodi International Limited which owns 100% of the Bank. A number of banking transactions are entered into with related parties in the normal course of business. These include loans, deposits and foreign currency transactions. These transactions were carried out on commercial terms and at market rates. The volumes of related party transactions, outstanding balances as at the year end, and relating expense for the year are listed below.

2002 MNT '000

61 305 1,790 20,266 23 55,299 12,186 44,403 5,835 140,168

238,030 147 238,177

2003 MNT '000

2002 MNT '000

a) Deposits from customers: Bodi Insurance Co. Limited Bodi International Co. Limited Bodicom Co.Limited Smartcard Co.Limited Bodi Computer Co.Limited EBG Properties Co.Limited MPC Co.Limited Bodi Automotive Co.Limited SB Logistic Co.Limited

b) Purchase of computers and software from: Bodicom Co.Limited Smartcard Co.Limited Bodi Computer Co.Limited MPC Co.Limited

67,427 75,808 143,235

8,481 42,696 45,549 123,883 220,609

Bodicom Co.Limited Smartcard Co.Limited. MPC Co.Limited Bodi Insurance Co.Limited EBG Properties Co.Limited

2002 MNT '000

c) Purchase of motor vechicles from: Bodi Automotive Co.Limited

-

15,456

544 544 544 712 544 2,888

607 607 607 607 607 3,035

e) Lease agreement with Bodi International Co. Limited In November 2002, the Bank moved to its new Head Office located at Sukhbaatar Square 3, Ulaanbaatar, Mongolia. The building is owned by the holding company, Bodi International Co.Ltd. The bank entered into a lease agreement for 6 years until the year 2008. The bank has prepaid the lease payment amounting to MNT3.2 billion. f) Loans to key management personnel Total outstanding balance as at 31 December 2003 of loans granted to key management personnel amounts to MNT82.5 million (2002: MNT63.9 million). The loans to Bank's employees bear interest rate of 6% (2002: 6%) per annum. Directors' Remuneration The executive director received remuneration totalling MNT5.4 million (2002 : MNT3.6 million). The non-executive director received fees totalling MNT5.4 million (2002 : MNT3.6 million).

26.Capital adequacy Bank of Mongolia requires commercial banks to maintain a core capital adequacy ratio of 5% and risk weighted capital ratio of 10%, compiled on the basis of total equity and total assets as adjusted for their risk. The capital adequacy ratios of the Bank as at 31 December are as follows:

Core capital ratio Risk weighted capital ratio 2003 MNT '000

2002 MNT '000

d) Rental of garage to:

As at 31 December, balances with related parties included: 2003 MNT '000

2003 MNT '000

Tier I capital Statutory fund Retained earnings Total Tier I Capital/ Capital Base

2003 15.36% 15.36%

2002 14.18% 14.18%

7,084,990 2,707,761 9,792,751

4,083,230 1,618,380 5,701,610

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33

26.Capital adequacy (contd.)

27.Commitments and off balance sheet items (contd.)

Breakdown of risk weighted assets in the various categories of risk weights are as follows: 2003 (MNT'000) Assets Risk Weighted % 0 10 20 50 100 Total

23,420,670 37,213,395 21,280 56,292,644 116,947,989

7,442,679 10,640 56,292,644 63,745,963

2002 (MNT'000) Assets Risk Weighted 20,873,539 23,029,852 13,146 36,345,910 80,262,447

4,605,970 6,573 35,594,357 40,206,900

27.Commitments and off balance sheet items a. Financial Commitments and Off Balance Sheet Items In the normal course of business, the Bank incurs certain commitments with legal recourse to its customers. No material losses are anticipated as a result of these transactions.

Guarantees and letter of credits Lease commitments Foreign exchange commitments Other off balance sheet items

2003 MNT '000 456,781 372,402 11,409,051 2,284,043 14,522,277

2002 MNT '000 206,099 738,458 4,687,600 5,632,157

As at 31 December 2003, the bank has one guarantee which is fully collaterised. Total value of the guarantees amounts to approximately MNT47 million. The balance of MNT410 million relates to 3 letter of credits which matures subsequent to year end. b. Lease Commitments The Bank has lease commitments in respect of various office premises, all of which are classified as operating leases. A summary of these commitments are as follows:-

Within a year More than 1 year and less than 5 years 5 years and more

2003 MNT '000 103,578 190,856 77,968 372,402

2002 MNT '000 108,594 308,382 321,482 738,458

e. Foreign exchange commitments and derivatives In the normal course of the business, the Bank enters into foreign currency exchange contracts with third parties. As at 31 December 2003, the Bank has 10 open positions (2002: 2 open positions) on foreign currency exchange forward contracts worth approximately MNT11.4 billion (2002: MNT4.7 billion). d. Other off balance sheet items. At 31 December 2003, other off balance sheet items represents loans written off on non-performing loans and the interest suspended.

28.Fair values of financial assets and liabilities Financial instruments comprise financial assets and financial liabilities. The fair value of a financial instrument is the amount at which the instrument could be exchanged or settled between knowledgeable and willing parties in an arm’s length transaction, other than in a forced or liquidation sale. Almost all of the financial instruments as at 31 December 2003 are short term in nature with maturities of less than one year. The estimated fair values of those financial assets and financial liabilities as at the balance sheet date approximate their carrying amounts as shown in the balance sheets due to the relatively short term maturity of the financial instruments.

34

29.Comparative figures Certain comparative figures have been reclassified to conform with current year's presentation. 2003 MNT '000

2002 MNT '000

3,814,560

10,364,509

29,200,216

22,650,267

65,073,394 1,024,000 5,721,374 683,379 37,248

64,192,497 880,897 6,745,374 720,627 -

5,632,157

951,335

Assets Cash and short term funds Deposits and placements with other banks and financial instituitions Liabilities Deposits from customers Government deposits Loans from Bank of Mongolia Loans from foreign financial institutions Other liabilities Provision for taxation Commitments and off Balance Sheet Items

30.Subsequent event Two letter of credits issued in favour of a defaulted borrower amounting to MNT314 million crystallised subsequent to the year end. The amount has been recognised as a loan and a full provision has been provided on the amount as at 31 December 2003.

31.Currency All amounts are in Mongolian Togrog unless otherwise stated.

32.Mongolian translation These financial statements are also prepared in the Mongolian language. In the event of discrepancies or contradictions between the English version and the Mongolian version, the English version will prevail.