RIETUMU BANKA AS. Condensed Interim Bank Separate and Group Consolidated Financial Statements For the six month period ended 30 June 2016

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1 RIETUMU BANKA AS Condensed Interim Bank Separate and Group Consolidated Financial Statements For the six month period ended

2 Contents Report of Council and Board of Directors 3 Independent auditors Report 7 Condensed Interim Bank Separate and Group Consolidated Income Statement Condensed Interim Bank Separate and Group Consolidated Statement of Other Comprehensive Income Condensed Interim Bank Separate and Group Consolidated Statement of Financial Position Condensed Interim Bank Separate and Group Consolidated Statement of Cash Flows Condensed Interim Bank s Separate Statement of Changes in Shareholders Equity Condensed Interim Group Consolidated Statement of Changes in Shareholders Equity Notes to the Condensed Interim Bank Separate and Group Consolidated Financial Statements

3 Report of Council and Board of Directors Rietumu Banka AS Dear Shareholders, Customers and Business Partners The Rietumu Bank Group continued its successful development and closed first half of 2016 with net profit after tax of EUR 53 million which represents a 48.3% increase compared to first half of The Group s revenues are diversified between interest and commission and despite the low interest rate environment the Group continued to operate very efficiently with a cost to income ratio of 33.7% and operating income per employee of EUR 98 thousand. Quality and Individual approach The Group offers a wide-ranging range of banking products to corporate customers and high net worth individuals. The Group has extensive experience in the EU and CIS countries and its customers operate in Latvia, the Baltic States, Western Europe, Russia and other CIS countries. The Group understands the business environments in both Western and Eastern Europe. Recently the Group has been focusing on larger privately owned businesses to which we can offer a broader range of products. Given the geographical area that the Group operates in, the current turbulent geopolitical and economic environment has resulted in elevated risks in these regions. Exchange rate volatility and especially the devaluation of the Russian Ruble in 2014 and 2015 resulted in significant challenges to the Group and our customers. Although the Ruble exchange rate has stabilized in the first half of 2016 it still represents risks and challenges to many of our customers. By maintaining close contact to our clients through our extensive network of representative offices, we have continued to successfully cooperate with our customers. In developing new products our emphasis has always been on employing the latest technologies. The Bank follows a very conservative lending policy while offering innovative and individually tailored products that suit the requirements of each individual customer the best. The Group focused on industries that have not been significantly affected in times of crises and need significant efforts to grow its trade finance and transport finance businesses. By focusing on trade finance business the Bank also offered its customers new opportunities to develop their international expansion. Trade finance as well as developing new lending markets such as Ireland and the United Kingdom are the areas the Bank will focus on in developing its lending business. The major non-banking companies include leasing and consumer finance companies, repossessed real estate and other repossessed collateral maintenance companies and asset management and financial companies. It is the Bank s strategy as much as possible to fully integrate its subsidiaries into the Bank s management and control systems. The activities of Group companies are financed by the Bank via capital investments and loans. In most cases the Bank owns 100% of the shares of its subsidiaries. Financial review The Group closed first half of 2016 with after tax profit attributable to the Bank s shareholders of EUR million. The Group generated for its shareholders an annualized after tax return on equity of 23.11% (first half of 2015: 19.98%) and an annualized after tax return on assets of 2.88% (first half of 2015: 2.02%). Income distribution was well diversified across the business units of the Group with many of the Group s business units contributed to the increase in net profit. Operating income reached EUR m which represents an increase of 38.3% from The Group s goal is to maintain a cost to income ratio of less than 40% and in 2016 this ratio reached 33.7%. For the first half of 2016 the Group reached a profit margin of 53% compared to 54% in During 2016, Visa Inc. completed the purchase of Visa Europe from all European participating banks. As a result of this sale the Bank realized a profit of EUR m from the cash settlement and EUR 2 m from deferred payment. The Bank was also given 8,991 Visa Inc. preference shares with a face value of USD 1. These preference shares are accounted for in available for sale at a price of USD 4.6 m. 3

4 As at the Group s total assets were EUR 3,599 m. This represents a decrease of 5.1% compared to 2015 and this slow-down is due to the general economic situation in the region we operate in as well as the Bank purposefully changing the focus on larger customers resulting in the loss of some smaller customers. The Bank follows a conservative approach to asset allocation with 48% of the Bank s assets invested in liquidity management portfolios. 31% of the liquidity management portfolio is invested in short term money market placement with large mainly European banks. During the first half of 2016 loans and receivables due from customers decreased by 7% to EUR 1,025 m. The decrease was due to the Bank downsizing its CIS portfolio. The Bank expects lending to the European Union and trade finance to start compensating for the decrease in the CIS pending portfolio. The Group follows a conservative lending policy that focuses on creating specific and tailor made products to meet customer s expectations. However, impairment expenses on loans have increased to EUR m in 2016 compared to EUR m in 2015 reflecting an increase in non-performing loans. Loans and receivables due from customers represent 28% of total assets and since 2010 this ratio has not exceeded 45%. The Bank increased its bond portfolio during 2016 to reach a total of EUR 827 million (2015: EUR 674 million). The bond portfolio is invested in a widely diversified range of bonds with an average maturity of 2.5 years. The funding sources of the Group remained unchanged in that the Group finances its activity through current accounts and deposits due to customers and shareholders equity. Current accounts and deposits due to customers were EUR 2,885 m down 10% compared to The fall in deposits was due to the general economic environment and a refocusing of the Bank customer base to larger customers. Current accounts represented 88.16% of total deposits balances. Term deposits amounted to EUR 341 m as at 30 June 2016 and included in this are EUR 114 m of subordinated deposits. The average tenor of term deposits is 4.2 years with the average effective interest rate in 2016 of 2.1%. The Group total shareholders equity reached EUR 464 m as of representing a 1.6% increase from The Group total capital adequacy ratio was 22.3% (2015: 19.2 %). The Bank has always aimed to maintain high capital adequacy ratios and this has been the basis for maintaining financial stability and growth in the Group for more than 20 years. The first 6 months of 2016 presented many new opportunities to the Bank and we believe that the remainder of the year will also prove to be very successful. We owe our success to our customers and business partners and the trust that they have placed in us. We are looking forward to continue developing the Bank in 2016 successfully. 4

5 Financial results of the Group (6 months) Rietumu Banka AS 31 December June 2015 (6 months) 31 December June 2014 (6 months) At period end (EUR 000) Total assets 3,599,227 3,794,153 3,630,036 3,477,763 3,081,738 Loans and receivables due from customers 1,024,737 1,101,772 1,102,137 1,041, ,853 Current accounts and deposits due to customers 2,884,668 3,203,992 3,165,111 3,082,706 2,686,514 Total shareholder s equity 464, , , , ,193 For the period (EUR 000) Net profit before income tax 56,062 81,176 41,315 87,021 42,523 Net profit after tax 53,230 70,043 35,894 74,130 35,630 Net interest income 39,014 83,158 40,865 76,936 36,275 Net fee and commission income 20,299 44,124 20,943 45,722 21,469 Capital adequacy ratio 19.9% 19.2% 18.7% 19.0% 21.4% 22.3%* 19.5%* 22.3%* Financial results of the Bank (6 months) 31 December June 2015 (6 months) 31 December June 2014 (6 months) At period end (EUR 000) Total assets 3,594,833 3,785,767 3,629,119 3,475,041 3,075,059 Loans and receivables due from customers 1,077,979 1,151,789 1,153,662 1,087,989 1,011,542 Current accounts and deposits due to customers 2,912,301 3,231,558 3,189,229 3,107,957 2,698,365 Total shareholders equity 442, , , , ,470 For the period (EUR 000) Profit before income tax 54,145 81,940 43,029 83,786 44,330 Profit for the period 51,294 72,179 37,617 71,500 37,643 Net interest income 34,147 76,330 37,575 69,902 33,053 Net fee and commission income 20,161 43,684 20,807 45,488 21,151 Capital adequacy ratio 20.3% 19.4% 19.0% 18.9% 21.8% 22.7%* 20.0%* 22.9%* * Capital adequacy rate, including profit for 6 months (upon receiving the Financial and Capital Market Commission permission) 5

6 Statement of management responsibility Rietumu Banka AS The management of the AS Rietumu Banka (the Bank) is responsible for the preparation of the condensed consolidated interim financial statements of the Bank and its subsidiaries (the Group) as well as for the preparation of the condensed interim financial statements of the Bank. The condensed Group consolidated and Bank s separate interim financial statements are prepared in accordance with IAS 34 Interim Financial Reporting on a going concern basis. Appropriate accounting policies have been applied on a consistent basis. Prudent and reasonable judgments and estimates have been made by the management in the preparation of the condensed interim financial statements. The condensed Group consolidated and Bank s separate interim financial statements on pages 9-61 are prepared in accordance with the source documents and present the financial position of the Group and the Bank as at and the results of its performance and cash flows for the six month period ended. The management of the Bank is responsible for the maintenance of proper accounting records, the safeguarding of the Group s and the Bank s assets and the prevention and detection of fraud and other irregularities. The management is also responsible for operating the Bank in compliance with the Law on Credit Institutions, the regulations of the Financial and Capital Markets Commission, and other legislation of the Republic of Latvia applicable to credit institutions. 6

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9 CONDENSED INTERIM BANK SEPARATE AND GROUP CONSOLIDATED INCOME STATEMENT Note 6 month period ended Group Bank 6 month period ended 30 June 2015 Group Bank Interest income 7 52,169 47,024 51,849 48,138 Interest expense 7 (13,155) (12,877) (10,984) (10,563) Net interest income 39,014 34,147 40,865 37,575 Fee and commission income 8 33,499 33,305 33,532 33,433 Fee and commission expense 9 (13,200) (13,144) (12,589) (12,626) Net fee and commission income 20,299 20,161 20,943 20,807 Net gain on financial instruments at fair value through profit or loss 1, Net foreign exchange gain 10,984 10,750 11,487 12,114 Net realised gain on available-for-sale assets 10 31,137 31, Share of loss of equity accounted investees (net of income tax) (12) - (4) - Other income/(expense) 11 3,873 2,154 3,163 3,331 Operating Income 106,427 98,364 76,977 74,011 Impairment losses 12 (14,508) (15,882) (8,653) (8,330) General administrative expenses 13 (35,857) (28,337) (27,009) (22,652) Profit before income tax 56,062 54,145 41,315 43,029 Income tax expense 14a,b (2,832) (2,851) (5,421) (5,412) Profit for the period 53,230 51,294 35,894 37,617 Attributable to: Equity holders of the Bank 52,747 35,473 Non-controlling interest The accompanying notes on pages 19 to 61 are an integral part of the condensed interim Bank separate and Group consolidated financial statements. The condensed interim Bank separate and Group consolidated financial statements as set out on pages 9 to 61 are authorised for issue on 28 July 2016 by: Chairman of the Board Alexander Pankov Member of the Board Rolf Paul Fuls 9

10 CONDENSED INTERIM BANK SEPARATE AND GROUP CONSOLIDATED STATEMENT OF OTHER COMPREHENSIVE INCOME Note 6 month period ended 6 month period ended 30 June 2015 Profit for the period 53,230 51,294 35,894 37,617 Items that are or may be reclassified to profit or loss Foreign currency translation differences for foreign operations (2,028) - (2,211) - Available-for-sale financial assets net change in fair value (20,705) (20,151) 4,436 4,678 Related tax 14c (519) (519) - - Other comprehensive income for the period (23,252) (20,670) 2,225 4,678 Total comprehensive income for the period 29,978 30,624 38,119 42,295 Attributable to: Equity holders of the Group 29,495 37,698 Non-controlling interest The accompanying notes on pages 19 to 61 are an integral part of the condensed interim Bank separate and Group consolidated financial statements. The condensed interim Bank separate and Group consolidated financial statements as set out on pages 9 to 61 are authorised for issue on 28 July 2016 by: Chairman of the Board Alexander Pankov Member of the Board Rolf Paul Fuls 10

11 Condensed Interim Bank Separate and Group Consolidated Financial statements CONDENSED INTERIM BANK SEPARATE AND GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION Note 31 Dec Dec 2015 ASSETS Cash and balances with the central bank , , , ,816 Financial instruments at fair value through profit or loss 16 15,485 1,044 16,439 1,166 Loans and receivables due from banks , , , ,803 Loans and receivables due from customers 18 1,024,737 1,077,979 1,101,772 1,151,789 Reverse repo , ,102 88,566 88,566 Available-for-sale assets , , , ,789 Non-current assets held for sale Held-to-maturity investments , , , ,901 Investments in subsidiaries 21-29,945-28,882 Equity accounted investees Investment property 24 85,082 10,260 82,968 8,447 Property and equipment 22 45,458 7,840 46,492 8,150 Intangible assets 23 4,503 2,584 4,005 2,910 Current tax asset 4,955 4,409 3,625 3,218 Deferred tax asset Other assets 25 20,282 21,337 22,187 22,330 Total Assets 3,599,227 3,594,833 3,794,153 3,785,767 The accompanying notes on pages 19 to 61 are an integral part of the condensed interim Bank separate and Group consolidated financial statements. The condensed interim Bank separate and Group consolidated financial statements as set out on pages 9 to 61 are authorised for issue on 28 July 2016 by: Chairman of the Board Alexander Pankov Member of the Board Rolf Paul Fuls 11

12 CONDENSED INTERIM BANK SEPARATE AND GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION Note 31 Dec Dec 2015 LIABILITIES AND SHAREHOLDERS EQUITY Financial instruments at fair value through profit or loss Due to Bank of Latvia 120, , Deposits and balances due to banks 26 39,717 39,716 50,390 49,710 Current accounts and deposits due to customers 27 2,884,668 2,912,301 3,203,992 3,231,558 Issued debt securities 28 56,078 56,078 55,784 56,785 Current tax liability Deferred tax liability 3, , Other liabilities and accruals 29 30,734 23,140 23,751 14,663 Total Liabilities 3,134,864 3,152,320 3,337,284 3,352,926 Share capital , , , ,916 Share premium 30 52,543 52,543 52,543 52,543 Revaluation reserve 1,354-1,364 - Fair value reserve 2,028 4,707 23,252 25,377 Currency translation reserve (3,545) - (1,517) - Other reserves Retained earnings 230, , , ,982 Total Equity Attributable to Equity Holders of the Bank 451, , , ,841 Non-controlling Interest 12,799-13,848 - Total Shareholders Equity 464, , , ,841 Total Liabilities and Shareholders Equity 3,599,227 3,594,833 3,794,153 3,785,767 The accompanying notes on pages 19 to 61 are an integral part of the condensed interim Bank separate and Group consolidated financial statements. The condensed interim Bank separate and Group consolidated financial statements as set out on pages 9 to 61 are authorised for issue on 28 July 2016 by: Chairman of the Board Alexander Pankov Member of the Board Rolf Paul Fuls 12

13 CONDENSED INTERIM BANK SEPARATE AND GROUP CONSOLIDATED STATEMENT OF CASH FLOWS 6 month period ended 6 month period ended 30 June 2015 Note CASH FLOWS FROM OPERATING ACTIVITIES Profit before income tax 56,062 54,145 41,315 43,029 Amortization and depreciation 22, 23 1, , (Gain)/Loss from sale of investment property - - (153) - Revaluation of property, plant and equipment (102) Revaluation of investment property 1, Share of loss of equity accounted investees (Losses) on disposal of property and equipment 22 (103) - - Impairment losses 12 14,508 15,882 8,653 8,330 Increase in cash and cash equivalents before changes in assets and liabilities, as a result of ordinary operations 73,984 70,841 51,418 52,234 Decrease in financial instruments at fair value through profit or loss , (Increase)/Decrease in loans and receivables due from banks term deposits (139,450) (139,450) 195, ,007 (Increase)/Decrease in loans and receivables from customers 63,172 60,117 (69,234) (74,003) (Increase) in receivable under reverse repurchase (45,536) (45,536) (46,185) (46,185) agreements (Increase) in available-for-sale assets (102,070) (101,795) (368,156) (364,795) (Increase)/Decrease in other assets (2,232) (1,478) (1,883) (2,070) Increase/(Decrease) in derivative liabilities (81) (81) Increase in term deposit deposits due to banks (Decrease)/Increase in current accounts and deposits from customers (319,324) (319,257) 82,405 81,272 Decrease in non-current assets held for sale Increase in amounts payable under repurchase agreements 120, , Increase in other liabilities and accruals 6,983 8,477 5,127 3,433 Increase/(Decrease) in cash and cash equivalents from operating activities before corporate income tax (343,077) (346,884) (148,803) (154,480) Corporate income tax paid (4,972) (3,940) (7,022) (6,557) Net cash and cash equivalents from operating activities (348,049) (350,824) (155,825) (161,037) CASH FLOW FROM INVESTING ACTIVITIES Purchase of property and equipment and intangible assets 22,23 (1,383) (1,236) (845) (719) Proceeds from sale of property and equipment and other assets (Purchase) of investment property - (37) (2,774) (260) (Increase)/decrease in equity investments in other entities and acquisition of subsidiaries - (6) - - Consideration paid for acquisition of subsidiaries (10) - (2) (16) (Increase) in held-to-maturity financial assets (49,265) (48,957) (98,593) (98,124) Sale of non-controlling interest (699) - (1,501) - Acquisition of Investment property (1,653) Cash and cash equivalents used in / from investing activities (53,010) (50,236) (103,691) (99,110) The accompanying notes on pages 19 to 61 are an integral part of the condensed interim Bank separate and Group financial statements. 13

14 CONDENSED INTERIM BANK SEPARATE AND GROUP CONSOLIDATED STATEMENT OF CASH FLOWS Note 6 month period ended 6 month period ended 30 June 2015 CASH FLOW FROM FINANCING ACTIVITIES Shares issued ,453 4,453 Share premium ,741 9,741 Issued debt securities 28 - (707) Interest on issued debt securities Dividends paid (21,785) (20,952) (2,830) (2,242) Other borrowed funds Cash and cash equivalents from financing activities (21,491) (21,659) 12,153 12,741 Net cash flow for the period (422,550) (422,719) (247,363) (247,406) Cash and cash equivalents at the beginning of the period 1,651,735 1,651,276 1,698,340 1,699,103 Cash and cash equivalents at the end of the period 15 1,229,185 1,228,557 1,450,977 1,451,697 The accompanying notes on pages 19 to 61 are an integral part of the condensed interim Bank separate and Group consolidated financial statements. The condensed interim Bank separate and Group consolidated financial statements as set out on pages 9 to 61 are authorised for issue on 28 July 2016 by: Chairman of the Board Alexander Pankov Member of the Board Rolf Paul Fuls 14

15 CONDENSED INTERIM BANK S SEPARATE STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY Share capital Share premium Revaluation reserve Fair value reserve Other reserves Retained earnings Total equity Balance at 1 January ,843 33,882 - (2,658) , ,380 Total comprehensive income Profit for the period ,617 37,617 Other comprehensive income , ,678 Transactions with shareholders recorded directly in equity Preference shares issued (Note 30) 4, ,453 Share premium received (Note 30) - 9, ,741 Dividends paid (17,487) (17,487) Balance at 30 June ,296 43,623-2, , ,382 Total comprehensive income Profit for the period ,562 34,562 Other comprehensive income , ,357 Transactions with shareholders recorded directly in equity Preference shares issued (Note 30) 3, ,620 Share premium received (Note 30) - 8, ,920 Balance at 31 December ,916 52,543-25, , ,841 Total comprehensive income Profit for the period ,294 51,294 Other comprehensive income (20,670) - - (20,670) Transactions with shareholders recorded directly in equity Dividends paid (20,952) (20,952) Balance at 168,916 52,543-4, , ,513 The accompanying notes on pages 19 to 61 are an integral part of the condensed interim Bank separate and Group consolidated financial statements. The condensed interim Bank separate and Group consolidated financial statements as set out on pages 9 to 61 are authorised for issue on 28 July 2016 by: Chairman of the Board Alexander Pankov Member of the Board Rolf Paul Fuls 15

16 CONDENSED INTERIM GROUP CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY Attributable to Equity Holders of the Bank Foreign Share Share Revaluation Fair value currency translation Other Retained Noncontrolling Total capital premium reserve reserve reserve reserves earnings Total interest Equity Balance at 1 January ,843 33,882 1,387 (5,036) , ,628 4, ,903 Transactions with shareholders recorded directly in equity Preference shares issued (Note 30) 4, ,453-4,453 Share premium received (Note 30) - 9, ,741-9,741 Dividends paid (17,487) (17,487) - (17,487) Transactions with non controlling interest Transaction with third parties related to units of funds controlled by the Group ,201 2,297 Dividends paid to non-controlling interest (588) (588) Change in ownership interest Loss of control in fund with non-controlling interest (Note 38) (1,860) (1,860) Purchase of subsidiaries with non-controlling interest (26) 169 Total comprehensive income Profit for the period ,473 35, ,894 Other comprehensive income ,436 (2,211) - - 2,225-2,225 Other Depreciation of revalued property - - (10) Balance at 30 June ,296 43,623 1,572 (600) (2,168) , ,324 4, ,747 The accompanying notes on pages 19 to 61 are an integral part of the condensed interim Bank separate and Group consolidated financial statements. 16

17 CONDENSED INTERIM GROUP CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY Share capital Share premium Attributable to Equity Holders of the Bank Revaluation reserve Fair value reserve Foreign currency translation reserve Other reserves Retained earnings Total Noncontrolling interest Total Equity Balance at 30 June ,296 43,623 1,572 (600) (2,168) , ,324 4, ,747 Transactions with shareholders recorded directly in equity Preference shares issued (Note 30) 3, ,620-3,620 Share premium received (Note 30) - 8, ,920-8,920 Change in ownership interest Loss of control in fund with non-controlling interest (Note 38) ,860 1,860 Purchase of subsidiaries with non-controlling interest - - (195) (195) (25) (220) Transactions with non controlling interest Transactions with third parties related to units of funds controlled by the Group (96) (96) 7,383 7,287 Total comprehensive income Profit for the current period ,942 33, ,149 Other comprehensive income , ,506-24,506 Other Depreciation of revalued property - - (14) Other reserve transfer (1) Balance at 31 December ,916 52,543 1,364 23,252 (1,517) , ,021 13, ,869 The accompanying notes on pages 19 to 61 are an integral part of the condensed interim Bank separate and Group consolidated financial statements. 17

18 CONDENSED INTERIM GROUP CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY Share capital Share premium Attributable to Equity Holders of the Bank Revaluation reserve Fair value reserve Foreign currency translation reserve Other reserves Retained earnings Total Noncontrolling interest Total equity 000 EUR 000 EUR 000 EUR 000 EUR Balance at 31 December ,916 52,543 1,364 23,252 (1,517) , ,021 13, ,869 Transactions with shareholders recorded directly in equity Dividends paid (20,952) (20,952) - (20,952) Transactions with non controlling interest Transaction with third parties related to units of funds controlled by the Group (699) (699) Dividends paid to noncontrolling interest (833) (833) Change in ownership interest Total comprehensive income Profit for the period ,747 52, ,230 Other comprehensive income (21,224) (2,028) - - (23,252) - (23,252) Other Depreciation of revalued property - - (10) Balance at 168,916 52,543 1,354 2,028 (3,545) , ,564 12, ,363 The accompanying notes on pages 19 to 61 are an integral part of the condensed interim Bank separate and Group consolidated financial statements. The condensed interim Bank separate and Group consolidated financial statements as set out on pages 9 to 61 are authorised for issue on 28 July 2016 by: Chairman of the Board Alexander Pankov Member of the Board Rolf Paul Fuls 18

19 1 Background These condensed interim separate and consolidated financial statements include the financial statements of JSC Rietumu Banka (the Bank ) and its subsidiaries (together referred to as the Group ). There have been no significant changes in Group structure since 31 December JSC Rietumu Banka was established in the Republic of Latvia as a joint stock company and was granted its general banking licence in The principal activities of the Bank are deposit taking and customer accounts maintenance, lending and issuing guarantees, cash and settlement operations and operations with securities and foreign exchange. The activities of the Bank are regulated by the Bank of Latvia and the Financial and Capital Market Commission ( FCMC ) of the Republic of Latvia. The registered address of the Bank s head office is Vesetas Street 7, Riga, Latvia. 2 Basis of preparation (a) Statement of compliance These condensed interim separate and consolidated financial statements (the financial statements ) are prepared in accordance with International Financial Reporting Standard IAS 34 Interim Financial Reporting. These condensed interim separate and consolidated financial statements do not include all of the information required for a complete set of annual financial statements and should be read in conjunction with the Bank Separate and Group Consolidated Financial Statements as at and for the year ended 31 December The audited financial statements as at and for the year ended 31 December 2015 are available at the Bank s web site: The Board approved the condensed interim separate and consolidated financial statements for issue on 28 July The shareholders have the power to reject the separate and consolidated financial statements prepared and issued by management and the right to request that new financial statements be issued. (b) Basis of measurement The condensed interim separate and consolidated financial statements are prepared on the historical cost basis except for the following: - financial instruments at fair value through profit or loss are stated at fair value; - available-for-sale assets are stated at fair value; - owner occupied buildings which are stated at revalued amounts being the fair value at the date of valuation less subsequent accumulated depreciation; - investment property which is stated at fair value. (c) Functional and Presentation Currency These financial statements are presented in thousands of euro (EUR 000 s). The functional currencies of principal subsidiaries of the Bank are EUR except for the subsidiaries listed below: RB Securities Ltd. Rietumu Asset Management funds Rietumu Leasing Ltd. USD (US dollar) USD (US dollar) BYR (Belarus rouble) 19

20 3 Significant accounting policies The accounting policies applied by the Bank and the Group in these condensed interim separate and consolidated financial statements are the same as those applied by the Bank and the Group in their financial statements as at and for the year ended 31 December Taxes on income in the interim periods are accrued using the tax rate that would be applicable to the expected total annual earnings. Adoption of new or revised standards and interpretations Certain new standards, interpretations and amendments to the existing standards have been published that become effective for the accounting periods beginning on or after 1 January 2016 or later periods and which are not relevant to the Group or are not yet endorsed by the EU. The Group is in the process of evaluating the potential effect if any of these new standards and interpretations. 4 Risk management All aspects of the Bank s and the Group s risk management objectives and policies are consistent with those disclosed in the financial statements as at and for the year ended 31 December The Bank and the Group have exposure to the following risks: market risk credit risk liquidity risks There have been no significant changes to sensitivities of financial assets and liabilities to financial risks other than presented in Note 39 compared to the quantitative information as presented in Bank s and the Group s financial statements for the year ended 31 December 2015, and therefore they are not disclosed in these condensed interim financial statements. 5 Capital management The Financial and Capital Market Commission sets and monitors capital requirements for the Bank and the Group. The Bank and the Group defines as capital those items defined by statutory regulation as capital. Under the current capital requirements set by the Financial and Capital Market Commission, banks must maintain a ratio of capital to risk weighted assets ( statutory capital ratio ) above the prescribed minimum level. As at, the individual minimum level is 15.8%. The Bank was in compliance with the FCMC determined individual capital ratio during the six-month periods ended 30 June 2016 and 30 June 2015, as well as during the year ended 31 December The Group s risk based capital adequacy ratio, as at, was 22.3% (31 December 2015: 19.2% and 30 June 2015: 19.5%). The Bank s risk based capital adequacy ratio as at was 22.7% (31 December 2015: 19.4% and 30 June %). The Bank s and the Group s capital position is calculated in accordance with the requirements of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012. Calculations are performed based on prudential consolidation group according to the Regulation No 575/2013 p

21 6 Use of estimates and judgments The preparation of interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities, income and expense. Actual results may differ from these estimates. In preparing these condensed interim financial statements, the significant judgements made by management in applying the Group s accounting policies and the key sources of estimation uncertainty were the same as those applied to the financial statements as at and for the year ended 31 December Allowance for credit losses on loans and receivables; Determining fair value of financial instruments; Impairment of available for sale financial assets; Impairment of held to maturity financial instruments; Determining fair value of property; Impairment of assets shown under other assets; Impairment of investment in subsidiaries; Impairment of goodwill; Useful life of equipment; Deferred tax asset recoverability; Consolidation of investment funds; Acquisition of new subsidiaries. 7 Net interest income Six months ended 30 June Interest income Loans and receivables due from customers 41,480 36,367 44,503 40,807 Loans and receivables due from banks 1,883 1,871 1,239 1,232 Financial instruments at fair value through profit or loss Available for sale assets 4,525 4,525 2,762 2,762 Held-to-maturity investments 3,921 3,904 3,014 3,006 Amounts receivable under reverse repurchase agreements ,169 47,024 51,849 48,138 Interest expense Current accounts and deposits due to customers 6,496 6,481 7,304 7,299 Deposits and balances due to financial institutions 1,266 1, Other interest expense 5,393 5,145 3,524 3,263 13,155 12,877 10,984 10,563 Included within interest income from loans and receivables due from customers for the six months period ended is interest income of EUR 3,896 thousand (30 June 2015: EUR 2,420 thousand) relating to impaired loans issued by the Bank and by Group of EUR 3,955 thousand (30 June 2015: EUR 2,514 thousand). 21

22 8 Fee and commission income Six months ended 30 June E-commerce 9,779 9,779 10,026 10,026 Money transfers 8,871 8,871 9,383 9,383 Commission income from payment cards 5,126 5,126 5,167 5,167 Commission from account servicing 3,990 3,990 4,680 4,680 Revenue from customer asset management and brokerage commissions 2,796 2,581 2,456 2,427 Commission from documentary operations Cash withdrawals Remote system fee Other 2,346 2,367 1,417 1,347 9 Fee and commission expense 33,499 33,305 33,532 33,433 Six months ended 30 June E-commerce 5,842 5,842 5,296 5,296 Payment card expenses 4,137 4,137 3,866 3,866 Agent commissions 1, ,068 1,068 On correspondent accounts Brokerage fees Cash withdrawal fees Other ,100 1,141 13,200 13,144 12,589 12, Net realised gain on available-for-sale assets Six months ended 30 June Equity instruments 30,958 30, Debt instruments ,137 31, During 2016, Visa Inc. completed the purchase of Visa Europe from all European participating banks. As a result of this sale the Bank realized a profit of EUR m from the cash settlement and EUR 2 million from deferred payment. 22

23 11 Other income/(expense) Six months ended 30 June Rental income from operating leases 1, , Penalties received Gain/(loss) from sale of investment property 42 (7) Gain/(loss) from sale of property and equipment (4) Profit/(loss) from revaluation of investment property (Note 24) (1,524) Gain/loss from disposal of subsidiary shares Negative goodwill write-off (Loss)/Recovery of assets written off (134) Dividends received ,330 Other 2, ,873 2,154 3,163 3, Impairment losses Six months ended 30 June Impairment losses Loans and receivables due from customers (16,424) (16,102) (10,567) (10,231) Available-for-sale financial assets - (1,494) (1) - Other financial assets (632) (685) - - Other non-financial assets (15) (12) (112) (45) (17,071) (18,293) (10,680) (10,276) Reversals of impairment losses Loans and receivables due from customers 2,561 2,409 2,027 1,936 Available-for-sale financial assets Other non-financial assets ,563 2,411 2,027 1,946 Net impairment losses (14,508) (15,882) (8,653) (8,330) 23

24 13 General administrative expenses Six months ended 30 June Employee compensation 12,042 9,422 9,302 8,139 Payroll related taxes on employee compensation 2,641 2,132 2,234 1,917 Provision for bonus and payroll related taxes 2,120 2,120 2,128 2,112 Taxes other than on corporate income and payroll 2,953 2,407 1, Professional services 2,501 2, Repairs and maintenance 1, , Depreciation and amortization 1, , IT related costs 1,094 1, Rent 1,006 1, ,826 Salaries to Board of Directors and Council 1, ,603 2,026 Representative offices Communications and information services Travel expenses Advertising and marketing Charity and sponsorship Representation Credit card service Insurance Employee health insurance Subscription of information Audit services Security Office supplies (stationery) Other 2,594 2,145 2,393 2,380 Reverse of provisions for the management bonus (393) (393) (1,718) (1,718) 35,857 28,337 27,009 22,652 24

25 14 Income tax expense (a) Income tax expense recognized in profit and loss Six months ended 30 June Current tax expense Current tax expense 3,203 2,750 6,068 5,704 Deferred tax (371) 101 (647) (292) Total income tax expense in the profit and loss 2,832 2,851 5,421 5,412 The tax rate applicable in countries in which group entities operate: Latvia 15.00% 15.00% Belarus 18.00% 18.00% Cyprus 12.50% 12.50% Russia 20.00% 20.00% Azerbaijan 20.00% 20.00% (b) Reconciliation of effective tax rate: The Group 30 June 2015 % % Profit before tax 56,062 41,315 Income tax at the applicable tax rate 7, % 6, % Effect of different tax rate in other countries % % Tax relief on donations (254) (0.45%) (183) (0.44%) Non-deductible expenses % % Tax exempt income (4,945) (8.82%) (866) (2.10%) Tax paid in foreign countries (27) (0.05%) (58) (0.14%) 2, % 5, % The Bank % Profit before tax 54,145 43, June 2015 % Income tax at the applicable tax rate 8, % 6, % Non-deductible expenses % % Tax exempt income (5,485) (10.13%) (866) (2.01%) Tax relief on donations (248) (0.46%) (183) (0.43%) Tax paid in foreign countries (27) (0.05%) (114) (0.26%) 2, % 5, % 25

26 14 Income tax expense, continued (c) Income tax recognized in other comprehensive income and directly in equity Group Deferred tax expense Tax Base Deferred income tax 30 June 2015 Tax Base Deferred income tax Change in revaluation reserve - - (12) 2 Change in fair value reserve* (20,705) (519) 4,436 - Total income tax recognised in other comprehensive income (20,705) (519) 4,424 2 Bank Deferred tax expense Tax Base Deferred income tax 30 June 2015 Tax Base Deferred income tax Change in fair value reserve* (20,151) (519) 4,678 - *Decrease in the fair value reserve in the amount of EUR 24,167 thousand (Group) and EUR 23,613 thousand (Bank) relates to the revaluation of securities the gains of which are not subject to income tax. The increase by EUR 3,462 thousand relates to the revaluation of the securities that are subject to income tax. 15 Cash and balances with the central bank Cash and balances with central bank comprised of the following items: 31 Dec Dec 2015 Cash 3,120 3,079 4,671 4,619 Balances due from the Bank of Latvia 715, , , ,197 Total 718, , , ,816 Cash and cash equivalents consist of the following: 31 Dec Dec 2015 Cash 3,120 3,079 4,671 4,619 Balances due from the Bank of Latvia 715, , , ,197 Demand loans and receivables due from banks (38,896) (38,896) 819, ,170 Demand deposits and balances due to banks 549, ,607 (49,710) (49,710) Total 1,229,185 1,228,557 1,651,735 1,651,276 26

27 16 Financial instruments at fair value through profit or loss 31 Dec Dec 2015 Bonds - with rating from AAA to A 1,098-1, with rating from BBB+ to BBB- 12,920-8, non-investment grade 362-5, not rated Equity investments Derivative financial instruments Financial assets at fair value through profit or loss 15,485 1,044 16,439 1,166 Derivative financial instruments (274) (274) (19) (19) Financial liabilities at fair value through profit or loss (274) (274) (19) (19) The Bank and the Group classify trading and derivative financial instruments and trading portfolio under this category. Derivative financial assets and liabilities The Group 31 Dec 2015 Carrying value Notional amount Carrying value Notional amount Assets Forward contracts 570 8, ,636 Option premium 290 n/a 283 n/a Swap contracts Total derivative financial assets Liabilities Forward contracts 274 8, ,038 Total derivative liabilities

28 16 Financial instruments at fair value through profit or loss, continued The Bank 31 Dec 2015 Carrying value Notional amount Carrying value Notional amount Assets Forward contracts 570 8, ,686 Option premium 290 n/a 283 n/a Total derivative financial assets Liabilities Forward contracts 274 8, ,038 Total derivative liabilities Loans and receivables due from banks 30 June 30 June 31 Dec 31 Dec Demand accounts Latvian commercial banks 3,673 3,429 3,144 2,996 OECD banks 491, , , ,148 Other non-oecd banks 54,135 53,811 37,285 37,026 Total Demand accounts 549, , , ,170 Deposit accounts OECD banks 161, ,083 15,000 15,000 Other non-oecd banks - - 6,633 6,633 Total loans and deposits 161, ,083 21,633 21,633 Concentration of placements with banks 710, , , ,803 As at the Bank and the Group had balances with three banks (three as at 31 December 2015), which exceeded 10% of the total loans and receivables due from banks. The gross value of these balances was EUR 260,148 thousand as of (31 December 2015: EUR 296,356 thousand). 28

29 18 Loans and receivables due from customers 31 Dec Dec 2015 Companies Finance leases 15,352-17,609 - Loans 920,841 1,021,508 1,034,907 1,133,827 Individuals Finance leases 33,650-33,939 - Loans 144, , , ,610 Specific impairment allowance (87,928) (86,480) (93,285) (91,648) Collective impairment allowance (1,517) - (2,473) - Net Loans and receivables from customers 1,024,737 1,077,979 1,101,772 1,151,789 (a) Finance leases Loans and receivables from customers include the following finance lease receivables for leases of certain property and equipment where the Group is the lessor: 31 Dec Dec 2015 Gross investment in finance leases, receivable Less than one year 22,127-26,598 - Between one and five years 39,457-39,168 - Total gross investment in finance leases 61,584-65,766 - Unearned finance income (12,582) - (14,218) - Net investment in finance lease before allowance 49,002-51,548 - Impairment allowance (1,603) - (2,706) - Net investment in finance lease 47,399-48, Dec Dec 2015 The net investment in finance leases comprises: Less than one year 18,744-20,721 - Between one and five years 28,655-28,121 - Net investment in finance lease 47,399-48,842-29

30 18 Loans and receivables due from customers, continued (b) Credit quality of loan portfolio (i) The Group Ageing structure of loan portfolio As at Total EUR 000 Of which not past due on the reporting date Of which past due by the following terms More Less than than days days days days Net carrying value of overdue loans Net carrying amount 1,024, ,486 29,669 96,734 22,474 85, ,251 Out of which impaired 172,419 44, ,128 21,270 48, ,836 Assessed fair value of collateral 1,543,438 1,231,665 53, ,771 23, , ,773 As at 31 Dec 2015 Net carrying amount 1,101, ,322 57,477 45,796 42,451 61, ,450 Out of which impaired 189,829 72,898 4,641 42,775 17,883 51, ,931 Assessed fair value of collateral 1,541,860 1,274,016 96,094 31,308 46,183 94, ,844 The Bank As at Total EUR 000 Of which not past due on the reporting date Of which past due by the following terms Less than 30 days days days More than 180 days Net carrying value of overdue loans Net carrying amount 1,077, ,007 30,223 96,036 22,365 85, ,972 Out of which impaired 174,402 47, ,666 21,246 48, ,319 Assessed fair value of collateral 1,603,639 1,293,932 52, ,073 23, , ,707 As at 31 Dec 2015 Net carrying amount 1,151, ,014 56,164 44,617 42,309 61, ,775 Out of which impaired 190,971 75,157 4,618 41,795 17,810 51, ,814 Assessed fair value of collateral 1,603,155 1,339,924 92,844 30,129 46,040 94, ,231 30

31 18 Loans and receivables due from customers, continued (ii) Analysis of loan by type of collateral The following table provides the analysis of the loan portfolio, net of impairment, by types of collateral. The Group EUR June 2016 % of loan portfolio 31 December 2015 % of loan portfolio Commercial buildings 331, , Commercial assets pledge 319, , Traded securities 70, , Land mortgage 64, , Mortgage on residential properties 44, , Without collateral 40, , Guarantee 31, , Deposit 7, , Non-traded securities 1, , Other 113, Total 1,024, ,101, The Bank EUR June 2016 % of loan portfolio 31 December 2015 % of loan portfolio Commercial buildings 364, , Commercial assets pledge 344, , Traded securities 70, , Land mortgage 64, , Mortgage on residential properties 44, , Without collateral 42, , Guarantee 31, , Deposit 7, , Non-traded securities 1, , Other 106, Total 1,077, ,151, The amounts shown in the table above represent the carrying value of the loans, and not the fair value of the collateral. 31

32 18 Loans and receivables due from customers, continued (iii) Impaired loans 30 June June Dec Dec 2015 Impaired loans gross 260, , , ,619 Specific impairment allowance (87,928) (86,480) (93,285) (91,648) Net Loans and receivables from customers 172, , , ,971 Fair value of collateral related to impaired loans 189, , , ,404 When reviewing loans the Bank and the Group set the following categories for individual loans to assess their credit risk: The Group Gross Specific impairment allowance Collective impairment allowance 31 Dec 2015 Gross Specific impairment allowance Collective impairment allowance Standard 870,971 (1,737) (801) 936,123 (2,240) (817) Watch 129,701 (22,560) (34) 156,186 (23,575) (22) Substandard 64,099 (24,919) (100) 38,571 (15,191) (85) Doubtful 42,437 (32,197) (123) 52,641 (39,713) (106) Lost 6,974 (6,515) (459) 14,009 (12,566) (1,443) Total 1,114,182 (87,928) (1,517) 1,197,530 (93,285) (2,473) The Bank Gross Specific impairment allowance 31 Dec 2015 Gross Specific impairment allowance Standard 922,060 (1,737) 984,643 (2,240) Watch 132,373 (22,863) 158,392 (23,815) Substandard 64,066 (25,024) 38,254 (15,192) Doubtful 40,752 (31,648) 50,830 (39,083) Lost 5,208 (5,208) 11,318 (11,318) Total 1,164,459 (86,480) 1,243,437 (91,648) 32

33 18 Loans and receivables due from customers, continued (iv) Movements in the impairment allowance Movements in the loan impairment allowance for the and year ended 31 December 2015 are as follows: EUR Dec Dec 2015 Allowance for impairment Balance at 1 January 95,758 91,648 90,271 86,813 Sale of subsidiary Charge for the period: Specific impairment allowance 16,169 16,102 25,610 25,600 Collective impairment allowance Reversal of specific impairment allowance loss Specific impairment allowance (2,493) (2,409) (4,360) (4,781) Collective impairment allowance (68) - (167) - Effect of foreign currency translation (854) (809) 2,468 2,415 Write offs (19,322) (18,052) (18,469) (18,399) Balance at the end of period 89,445 86,480 95,758 91,648 (v) Restructured loans As at, the Group held restructured loans of EUR 255,275 thousand (31 December 2015: EUR 237,037 thousand) and the Bank held restructured loans of EUR 262,597 thousand (31 December 2015: EUR 243,062 thousand). Main forms of restructuring were the reduction of the interest rate, and postponing of interest payments or principal amounts. 33