VAB Bank. Interim Condensed Consolidated Financial Statements. for the six months ended 30 June 2012

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2 CONTENTS REPORT ON REVIEW OF INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS... 3 INTERIM CONSOLIDATED STATEMENT OF FINANCIAL POSITION... 4 INTERIM CONSOLIDATED INCOME STATEMENT... 5 INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME... 6 INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY... 7 INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS... 8 SELECTED EXPLANATORY NOTES Principal activities Basis of preparation Cash and cash equivalents Amounts due from credit institutions Derivative financial instruments Loans to customers Financial investments available-for-sale Investment property Property and equipment Intangible assets Allowances for impairment and provisions Other assets and liabilities Amounts due to credit institutions Amounts due to customers Debt securities issued Subordinated debt Equity Taxation Net fee and commission income Salaries, other employee benefits, other administrative and operating expenses Earnings per share Business combinations Commitments and contingencies Segment information Related party transactions Principal subsidiaries Capital Events after the reporting date SUPPLEMENTARY FINANCIAL INFORMATION Interim Standalone Statement of Financial Position Interim Standalone Income Statement

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5 (All amounts in Thousand of US dollars) INTERIM CONSOLIDATED INCOME STATEMENT For the six months ended Notes For the six months ended 30 June Interest income Loans to customers Amounts due from credit institutions Financial investments available-for-sale Interest expense Amounts due to customers (51 045) (26 358) Amounts due to the National Bank of Ukraine (175) - Debt securities issued (5 602) (5 470) Amounts due to credit institutions (2 601) (1 628) Subordinated debt (2 234) (2 244) (61 657) (35 700) Net interest income Impairment of interest earning assets 4, 6 (15 031) (7 336) Net interest income after impairment of interest earning assets (8 621) Impairment of credit commitments Fee and commission income Fee and commission expense (1 755) (1 412) Net fee and commission income Gains less losses from change in fair value of (1 244) derivative financial instruments Gains less losses from sale of financial investments available-for-sale Gains less losses from foreign currencies: - dealing, net (4 954) translation differences, net (1 524) 533 Other operating income, net Gain on bargain purchase of subsidiary Loss on disposal of subsidiary Other non-interest income Salaries and other employee benefits 20 (12 622) (15 299) Depreciation and amortisation 9, 10 (2 546) (3 392) Other administrative and operating expenses 20 (11 019) (13 059) Impairment of other assets and provisions 11 (1 116) (17) Other non-interest expense (27 303) (31 767) Loss before income tax (13 689) (16 948) Income tax benefit Loss for the period (12 173) (15 265) Loss per share for loss attributable to the equity holders of the Bank, basic and diluted (expressed in USD per share) 22 (0,008) (0,014) 5

6 (All amounts in Thousand of US dollars) INTERIM CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the six months ended Notes For the six month ended 30 June Loss for the period (12 173) (15 265) Available-for-sale financial investments: Gains arising during the period Reclassification adjustments for gains and reversal of losses included in income statement - (618) Income tax effect (83) Currency translation differences 14 (44) Total other comprehensive (loss)/ income 14 (127) Total comprehensive loss for the period (12 159) (15 392) 6

7 Share capital Share premium Accumulated deficit Currency translation reserve Revaluation reserve Revaluation reserve on investments availablefor-sale Total equity VAB Bank (All amounts in Thousand of US dollars) INTERIM CONSOLIDATED STATEMENT OF CHANGES IN EQUITY For the six months ended Attributable to the shareholders of the Bank 1 January ( ) (40 773) Total comprehensive - - (15 265) (44) - (83) (15 392) loss for the period Translation to (219) (73) (6) (1) - presentation currency 30 June ( ) (40 817) January ( ) (40 814) Total comprehensive - - (12 173) (12 159) loss for the period Increase in share capital Translation to (82) (18) 64 - (1) (1) (38) presentation currency ( ) (40 800)

8 (All amounts in Thousand of US dollars) INTERIM CONSOLIDATED STATEMENT OF CASH FLOWS For the six months ended Notes For the six months ended 30 June Cash flows from operating activities Interest income received Interest expense paid (54 599) (36 940) Commission income received Commission expense paid (1 761) (1 412) Gains less losses from dealing in foreign currencies and securities Other operating income received Salaries and benefits paid (11 724) (15 948) Other operating and administrative expenses paid (10 636) (11 499) Cash flow used in operating activities before (9 391) (22 162) changes in Net (increase) /decrease in operating assets Precious metals Amounts due from credit institutions Loans to customers ( ) ( ) Other assets (16 772) (465) Net increase/(decrease) in operating liabilities Amounts due to credit institutions Amounts due to customers Other liabilities 57 (1 002) Net cash flows (used in)/ from operating activities (24 696) before Income tax paid (36) - Net cash flows (used in) / from operating activities (24 696) Cash flows from investing activities Investment property acquisition - (442) Purchase of property, equipment and intangible assets (383) (2 093) Proceeds from sale of property and equipment - 50 Purchase of financial investments available-for-sale ( ) ( ) Proceeds from sale of financial investments available-for-sale Subsidiary acquisition, net of cash acquired - (4 010) Net cash flows used in investing activities ( ) (33 052) Cash flows from financing activities Issue of share capital Issue of debt securities Net cash flows used in financing activities Effect of exchange rate changes on cash and cash (24) 459 equivalents Net change in cash and cash equivalents (16 184) (57 289) Cash and cash equivalents, at 1 January Cash and cash equivalents, at 30 June

9 SELECTED EXPLANATORY NOTES 1. Principal activities PJSC VAB Bank (the Bank ) is the parent company in the Group (the Group ), which consists of the Bank and its subsidiaries as presented in Note 26. VAB Bank was founded on 2 July 1992 as an open joint stock company under the laws of Ukraine. In May 2010 VAB Bank was re-registered as Public Joint Stock Company. The Group accepts deposits from the public and extends credit, transfers payments in Ukraine and abroad, exchanges currencies and provides other banking services to its commercial and retail customers. The Group operates in all regions in Ukraine and has 135 representative and sales offices (31 December ). The Group had employees as at (31 December employees). As at and 31 December 2011 the following shareholders owned the issued shares of the Bank: Shareholders % 31 December 2011 "Quickcom Limited" 9, "RTF Investments Limited " 8,7396 9,9900 "Notifa Trading Limited" 8,5140 9,7600 "Serrant Limited " 8,5140 9,7600 "Actonex Limited" 8,5140 9,7600 "Polybion Limited " 8,5140 9,7600 "Chavarria Trading Limited" 8,5140 9,7600 "Godaxalliance Limited" 8,5140 9,7600 "Proscar Trading Limited" 8,5140 9,7600 "Kirkville Management Limited " 6,6983 5,4000 "Bauman Trade" Ltd 6,0943 6,0800 Other legal entities 4,4463 0,5600 Other individuals 4, Maksimov S.V. - 4,2400 "TBIF Financial Services B.V." - 5,4100 Total % 9

10 2. Basis of preparation The interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group s annual financial statements as at 31 December The Group is required to maintain its books of account in Ukrainian hryvnia and prepare the financial statements for regulatory purposes in accordance with the Regulations on the Organisation of Accounting and Reporting for Ukrainian Banking Institutions ( Ukrainian Accounting Regulations or UAR ) issued by the National Bank of Ukraine and in accordance with Ukrainian Accounting Standards. These consolidated financial statements are based on the Group s statutory books and records, as adjusted and reclassified in order to comply with IFRS. The consolidated financial statements have been prepared under the historical cost convention except as disclosed in the accounting policies below. For example, financial investments available-for-sale have been measured at fair value. These consolidated financial statements are presented in thousands of US dollars ( USD ), unless otherwise indicated. Changes in accounting policies The accounting policies adopted in the preparation of the interim condensed consolidated financial statements are consistent with those followed in the preparation of the Group s annual financial statements for the year ended 31 December 2011, except for the adoption of new Standards and Interpretations as at 1 January 2012, noted below: IAS 12 - Deferred Tax: Recovery of Underlying Assets (Amendment) This amendment to IAS 12 includes a rebuttable presumption that the carrying amount of investment property measured using the fair value model in IAS 40 will be recovered through sale and, accordingly, that any related deferred tax should be measured on a sale basis. The presumption is rebutted if the investment property is depreciable and it is held within a business model whose objective is to consume substantially all of the economic benefits in the investment property over time, rather than through sale. Specifically, IAS 12 will require that deferred tax arising from a nondepreciable asset measured using the revaluation model in IAS 16 should always reflect the tax consequences of recovering the carrying amount of the underlying asset through sale. Effective implementation date is for annual periods beginning on or after 1 January IFRS 7 - Disclosures - Transfers of financial assets (Amendment) The IASB issued an amendment to IFRS 7 that enhances disclosures for financial assets. These disclosures relate to assets transferred (as defined under IAS 39). If the assets transferred are not derecognised entirely in the financial statements, an entity has to disclose information that enables users of financial statements to understand the relationship between those assets which are not derecognised and their associated liabilities. If those assets are derecognised entirely, but the entity retains a continuing involvement, disclosures have to be provided that enable users of financial statements to evaluate the nature of, and risks associated with, the entity s continuing involvement in those derecognised assets. Effective implementation date is for annual periods beginning on or after 1 July 2011 with no comparative requirements. These amendments to IFRSs standards did not have any impact on the accounting policies, financial position or performance of the Group. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. 10

11 3. Cash and cash equivalents Cash and cash equivalents comprise: 31 December 2011 Cash on hand Current account with the NBU Current accounts with other credit institutions Total cash and cash equivalents As at 30 June 2011, current accounts with other credit institutions include USD thousands placed on current accounts with two banks (31 December 2011 USD thousand with one Ukrainian bank). 4. Amounts due from credit institutions Amounts due from credit institutions comprise: 31 December 2011 Deposits with the NBU Guarantee deposits Loans from banks Accrued income 3 - Total amounts due from credit institutions Ukrainian banks are required to keep 100% of the mandatory reserve for the previous month on a separate account with the National Bank of Ukraine (the NBU). This reserve can be formed either by cash or by Ukrainian State bonds. The Bank has formed the mandatory reserve by bonds (Note 7). The average daily requirement for obligatory reserve for the period from 1 to was USD thousand (1 to 31 December 2011 USD thousand). The Bank meets the NBU obligatory reserve requirements as at and 31 December Ukrainian banks are required to keep on a separate account with the NBU the amount equal to allowance for loan impairment (determined on the basis of Ukrainian accounting regulation) created for loans granted in foreign currency to borrowers with no foreign currency income. As at, the Bank placed USD thousand and EUR 477 thousand on such deposit account (31 December 2011 USD thousand). These funds are not available for the Bank s day-to-day operations. As at, the Group placed an equivalent of USD thousand (31 December 2011 USD 309 thousand) as deposits with Ukrainian banks, which were related to deposits received from the same banks and denominated in different currencies. These transactions met the definition of currency swaps and were recorded at fair values which equalled USD 168 thousand (derivative asset) and USD 196 thousand (derivative liability) as at (31 December 2011 USD thousand (derivative asset) and USD thousand (derivative liability)) (Note 5). Allowance for impairment on amounts due from credit institutions was not varied during six months ended 30 June

12 5. Derivative financial instruments Foreign exchange contracts Notional principal 31 December 2011 Fair value Notional Fair value principal Asset Liability Asset Liability Swaps domestic Total derivative assets/liabilities Management believes that offsetting loans with the same counterparty bank nominated in different currencies are, in substance, equivalent to a currency swap, which is a contractual agreement between two parties to exchange movements in foreign currency rates. These transactions have been recorded on a net basis as derivative financial instruments rather than amounts due to/from credit institutions. 6. Loans to customers Loans to customers comprise: 30June December 2011 Corporate lending Consumer lending Residential mortgages Auto lending Other retail lending Finance leases Less Allowance for impairment ( ) ( ) Total loans to customers Loans have been extended to the following types of customers: 31 December 2011 Companies Individuals Total loans to customers

13 6. Loans to customers (continued) Loans are made principally within Ukraine to the following industry sectors: % 31 December 2011 % Agriculture and food processing , ,6 Individuals , ,1 Trade and commerce , ,0 Services , ,5 Lease , ,9 Manufacturing , ,2 Transport , ,7 Building construction , ,2 Media , ,6 Chemical - 0, ,0 Other industries 368 0, ,2 Total loans to customers , ,0 Allowance for impairment of loans to customers A reconciliation of the allowance for impairment of loans to customers by class is as follows: Corporate lending Auto lending Consumer lending Residential mortgages Other retail lending Finance leases At 1 January Charge / (release) for the period Total (1 090) (848) Amounts written off (144) - (28) - (18) - (190) Recoveries Translation to presentation currency At (54) (1) (13) (4) (1) - (73) Individual impairment Collective impairment At Gross amount of loans, individually determined to be impaired, before deducting any individually assessed impairment allowance

14 6. Loans to customers (continued) Corporate lending Auto lending Consumer lending Residential mortgages Other retail lending Finance leases At 1 January Charge / (release) for the period Total (1 519) (2 652) (2 315) (330) Amounts written off (1 878) - (125) (2 003) Recoveries Translation to presentation currency At 30 June 2011 (202) (6) (45) (16) (2) (1) (272) Individual impairment Collective impairment At 30 June Gross amount of loans, individually determined to be impaired, before deducting any individually assessed impairment allowance Loans renegotiated Carrying amount of loans renegotiated comprises: 30 June 2011 Corporate lending Consumer finance Auto lending Other retail lending Residential mortgages Total loans to customers Individually impaired loans Interest income accrued on loans, for which individual impairment allowances have been recognised, for more than sixty days ended, was USD thousand (30 June 2011 USD thousand). The fair value of collateral that the Group holds relating to loans individually determined to be impaired at 30 June 2012 amounts to USD thousand (31 December 2011 USD thousand). In accordance with the NBU requirements, loans may only be written off with the approval of the Management Board, in certain cases, with the respective decision of the Court. 14

15 6. Loans to customers (continued) Collateral and other credit enhancements The amount and type of collateral required depends on an assessment of the credit risk of the counterparty. Guidelines are implemented regarding the acceptability of types of collateral and valuation parameters. The main types of collateral obtained are as follows: For commercial lending charges over real estate properties, inventory, trade receivables and cash deposits; For retail lending mortgages over residential properties, motor vehicles and cash deposits. The Group also obtains guarantees from parent companies for loans to their subsidiaries. Management monitors the market value of collateral, requests additional collateral in accordance with the underlying agreement, and monitors the market value of collateral obtained during its review of the adequacy of the allowance for loan impairment. As at, the structure of the loan portfolio by type of collateral, is as follows: Corporate lending Consumer lending Auto lending Residential mortgages Other lending Finance leases Mortgage Cash deposits Other assets Not covered by collateral Total Total December 2011 Mortgage Cash deposits Other assets Not covered by collateral Total Concentration of loans to customers As at, the Group had a concentration of loans represented by USD thousand due from the ten largest borrowers (25,5% of gross loan portfolio) (31 December 2011 USD thousand or 21,9%). An impairment allowance of USD thousand was recognised under these loans (31 December 2011 USD thousand). 15

16 6. Loans to customers (continued) Collateral repossessed During six months ended the Group took possession of apartments and commercial property with carrying value of USD 212 thousand. The loans and advances to customers include finance lease receivables, which are as follows: Net investment in finance leases, receivable: 31 December 2011 Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years - 19 Net investment in finance leases Financial investments available-for-sale Financial investments available-for-sale comprise: 31 December 2011 Ukrainian State bonds Corporate bonds Corporate shares Total financial investments available-for-sale As at, Ukrainian State bonds issued by the Ministry of Finance of Ukraine with a carrying value of USD thousand were used by the Bank to cover its NBU mandatory reserve requirements (Note 4). As at, Ukrainian State bonds with a carrying value of USD thousand were pledged as collateral under repurchase agreements (31 December 2011 USD thousand) (Note 13). 8. Investment property Six month ended 30 June Investment properties at fair value as at 1 January Additions Fair value gains/(losses) Depreciation (charged for the period) (75) - Translation to presentation currency (12) (110) Total Investment property at fair value as at the end of the period As at revaluation of investment property is carried out. As at 31 December 2011 investment property comprise land with a fair value of USD thousand, buildings with a fair value of USD thousand and apartments with a fair value of USD thousand. 16

17 9. Property and equipment The movements of property and equipment are as follows: Cost or revalued amount Land and buildings Equipment Motor vehicles Furniture and fixtures Leasehold improveme nts Construction in progress 31 December Additions Transfers Disposals - (12) (122) (16) (124) (271) (545) Translation to presentation currency 30 June 2011 Accumulated depreciation Total (4) (5) (1) (2) (3) - (15) December Charge for the period Disposals - (10) (92) - (124) - (226) Translation to presentation currency 30 June 2011 ) Net book value (1) (4) - (1) (2) - (8) December

18 9. Property and equipment (continued) Cost or revalued amount Land and buildings Equipment Motor vehicles Furniture and fixtures Leasehold improvem ents Construction in progress 31 December Additions Transfers (164) - Disposals - (184) (169) (17) (1 156) - (1 526) Translation to presentation currency 30 June 2011 Accumulated depreciation Total (15) (21) (2) (8) (12) (1) (59) December Charge for the period Disposals - (101) (200) (5) (1 138) - (1 444) Translation to presentation currency 30 June 2011 Net book value (2) (16) (2) (3) (10) - (33) December June

19 10. Intangible assets The movements of intangible assets are as follows: Computer software Other intangible assets Total Cost 31 December Additions Disposals (262) (71) (333) Translation to presentation currency (3) - (3) Accumulated depreciation 31 December Charge for the period Disposals ) (137) (65) (202) Translation to presentation currency (1) - (1) Net book value 31 December Cost 31 December Additions Disposals (336) - (336) Translation to presentation currency (10) (1) (11) 30 June Accumulated amortisation 31 December Charge for the period Disposals (318) - (318) Translation to presentation currency (3) - (3) 30 June 2011 (unaudited Net book value 31 December June

20 11. Allowances for impairment and provisions The movements in allowances for other assets and provisions are as follows: Other assets Guarantees and commitments Provision for legal claims 1 January Charge 17 (48) - (31) Write-offs (2) (1 216) - (1 218) Translation to presentation currency Total 9 - (2) 7 30 June January (18) Charge /(release) Write-offs Translation to presentation currency (18) Allowances for impairment of assets are deducted from the related assets. Provision for guarantees and commitments and provision for legal claims are recorded in other liabilities. 20

21 12. Other assets and liabilities Other assets comprise: 31 December 2011 Prepayments for securities Other accrued income Prepayments for services Deferred expenses Prepayments for property and equipment Other prepayments Other prepaid taxes Materials Collateral repossessed Funds in settlement Other Less Allowance for impairment (Note 11) (2 251) (489) Total other assets Other liabilities comprise: 31 December 2011 Provisions for legal claims (Note 11) Accrued employee benefit costs Payables to Individuals Deposits Guarantee Fund Settlements and transit accounts Payables for purchase of assets Deferred income Provisions for losses on credit related commitments (Note 11) Payables for services 2 11 Other Total other liabilities

22 13. Amounts due to credit institutions Amounts due to credit institutions comprise: 31 December 2011 Loans from National Bank of Ukraine Current accounts from other banks Deposits from other banks Other financial liabilities Total amounts due to credit institutions As at, time deposits and loans due to credit institutions include USD thousand short-term loans received under repurchase agreements with Ukrainian banks (31 December 2011 USD thousand). The carrying value of securities pledged under repurchase agreement was USD thousand (31 December 2011 USD thousand) (Note 7). As at, time deposits and loans due to credit institutions include USD thousands loan received from one Ukrainian bank. 14. Amounts due to customers Amounts due to customers comprise: 31 December 2011 Current accounts - Companies Individuals Time deposits - Companies Individuals Total amounts due to customers 628, , Held as securities against letters of credit and guarantees As at, time deposits of companies amounting to USD thousand (57%) were due to ten largest third party customers (31 December 2011 USD thousand (59%)). As at, time deposits of individuals amounting to USD thousand (3%) were due to ten largest customers (31 December 2011 USD thousand (4%)). As at, time deposit of USD thousand (31 December 2011 USD thousand) were pledged as collateral under loans issued by the Bank with a carrying value of USD thousand (31 December 2011 USD thousand). 22

23 15. Debt securities issued Currency Year of issue Year of maturity Interest rate, % 31 December 2011 Eurobonds USD , Total debt securities issued Subordinated debt Currency Year of issue Year of maturity Interest rate, % FMO USD 2 007р р. LIBOR 6m+4,5 Principal amount, original currency 30 June December TBIF EUR 2 009р р. 13, Individual USD 2 009р р. 13, Nove Misto UAH 2 009р р. 13, Individual USD 2 009р р. 13, Individual USD 2 009р р. 13, Individual USD 2 009р р. 13, Individual USD 2 009р р. 13, Total subordinated debt Refer to Note 25 for information about subordinated loans received from related parties. 23

24 17. Equity The movement of fully paid and outstanding shares was as follows: Number of shares Nominal amount Inflation adjustment Translation to presentation currency 31 December (22 399) Translation to presentation currency 30 June 2011 Total (219) (219) (22 618) December (22 978) Increase in share capital (82) (23 060) As at, the Bank s authorised issued share capital comprised (31 December ) ordinary shares, with a nominal value of UAH 1.15 per share (31 December 2011 UAH 1.15 per share). All shares have equal voting rights. Increase in share capital in 2012 at amount UAH thousand (USD thousand) made by unregistered share capital of the Bank, which does not give its holder the right to vote until registration of shares in the legislation. As at, the statutory accounts of the Bank disclosed distributable reserves of USD thousand (as at 31 December 2011 USD thousand) and non-distributable reserves of USD thousand (31 December 2011 USD thousand). Non-distributable reserves are represented by a general reserve fund, which is created as required by Ukrainian legislation, in respect of general banking risks, including future losses and other unforeseen risks or contingencies. 18. Taxation The corporate income tax benefit comprises: 30 June 2011 Deferred tax benefit Total income tax benefit

25 19. Net fee and commission income Net fee and commission income comprises: For six month ended 30 June Credit related commissions Cash and settlement operations Trading commissions Guarantees and letters of credit Securities operations Other Fee and commission income Cash and settlement operations. (1 144) (1 049) Credit related commissions (201) - Currency conversion operations (25) (35) Securities operations - (6) Other (385) (322) Fee and commission expense (1 755) (1 412) Net fee and commission income

26 20. Salaries, other employee benefits, other administrative and operating expenses Salaries and other employee benefits, and other administrative and operating expenses comprise: For six month ended 30 June Salaries and bonuses Social security costs Salaries and benefits Occupancy and rent Tax other than income tax Repairs and maintenance Security Communications Legal, audit and other professional services Collection Marketing and advertising Penalties incurred 86 1 Transportation and vehicles Insurance Other Other administrative and operating expenses Earnings per share Basic earnings per share are calculated by dividing the profit or loss attributable to equity holders of the Bank by the weighted average number of ordinary shares in issue during the period. The Bank has no dilutive potential ordinary shares; therefore, the diluted earnings per share equal the basic earnings per share. For six month ended 30 June Loss attributable to equity holders of the Bank (12 173) (15 265) Weighted average number of ordinary shares in issue (thousands) Basic and diluted loss per share (expressed in USD per share) (0,008) (0,014) 22. Business combinations Within 6 months ended the Bank did not carry out transactions of sale of subsidiaries. 26

27 23. Commitments and contingencies Operating environment The Ukrainian economy while deemed to be of market status continues to display certain characteristics consistent with that of an economy in transition. These characteristics include, but are not limited to, low levels of liquidity in the capital markets, high inflation and the existence of currency controls which cause the national currency to be illiquid outside of Ukraine. The stability of the Ukrainian economy will be significantly impacted by the Government s policies and actions with regard to administrative, legal, and economic reforms. As a result, operations in Ukraine involve risks that are not typical for developed markets. The Ukrainian economy is vulnerable to market downturns and economic slowdowns elsewhere in the world. The global financial crisis has resulted in a decline in the gross domestic product, instability in the capital markets, a significant deterioration in the liquidity of the banking sector, and tighter credit conditions within Ukraine. Whilst the Ukrainian Government continues to introduce various stabilisation measures aimed at supporting the banking sector and providing liquidity to Ukrainian banks and companies, there continues to be uncertainty regarding access to capital and its cost for the Group and its counterparties, which could affect the Group s financial position, results of operations and business prospects. In addition, factors including increased unemployment in Ukraine, reduced corporate liquidity and profitability, and increased corporate and personal insolvencies, have affected the ability of the Bank s borrowers to repay the amounts due to the Bank. In addition, changes in economic conditions have resulted in deterioration in the value of collateral held against loans and other obligations. To the extent that information is available, the Bank has reflected revised estimates of expected future cash flows in its impairment assessment. Whilst management believes it is taking appropriate measures to support the sustainability of the Group s business in the current circumstances, unexpected further deterioration in the areas described above could negatively affect the Group results and financial position in a manner not currently determinable. Legal In the ordinary course of business, the Group is subject to legal actions and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints will not have a material adverse effect on the financial condition or the results of future operations of the Group. Tax and other regulatory compliance Ukrainian legislation and regulations regarding taxation and other operational matters, including currency exchange control and custom regulations, continue to evolve. Legislation and regulations are not always clearly written and are subject to varying interpretations by local, regional and national authorities, and other Governmental bodies. Instances of inconsistent interpretations are not unusual. Management believes that its interpretation of the relevant legislation is appropriate and that the Group has complied with all regulations and paid or accrued all taxes and withholdings that are applicable. At the same time there is a risk that transactions and interpretations that have not been challenged in the past may be challenged by the authorities in the future, although this risk significantly diminishes with passage of time. It is not practical to determine the amount of unasserted claims that may manifest, if any, or the likelihood of any unfavourable outcome. 27

28 23. Commitments and contingencies (continued) Financial commitments and contingencies As at, the Group s financial commitments and contingencies comprise: Credit related commitments 30 June December 2011 Guarantees Letters of credit - - Operating lease commitments Not later than 1 year Later than 1 year but not later than 5 years Later than 5 years Less Provisions for losses on credit related commitments Less Cash held as security against letters of credit and guarantees (18) (18) (6 479) (5 877) Financial commitments and contingencies Financial covenants The Bank is a party to various arrangements with other credit institutions, which contain financial covenants relating to the financial performance and general risk profile of the Bank. Under such covenants, the Bank is required to maintain a minimum international risk based capital adequacy ratio of 12% etc. These financial covenants may restrict the Bank s ability to execute certain business strategies and enter into other significant transactions in the future. As at, the Bank was in breach of a financial covenant, i.e. capital adequacy ratio of 12%. (Note 27). 24. Segment information Retail banking Corporate banking Private banking Treasury Principally handling individual customers deposits, and providing consumer loans, overdrafts, credit cards facilities and funds transfer facilities Principally handling loans and other credit facilities and deposit and current accounts for corporate and institutional customers. Principally handling VIP customers deposits, and providing consumer loans, overdrafts, credit cards facilities and funds transfer facilities. Principally providing investment banking services including corporate finance, merger and acquisitions advice, specialised financial advice and trading. Lease Group function Principally providing financial services, namely financial and operating leases for corporate customers and individuals Other central functions and outstanding balances. 28

29 24. Segment information (continued) For the purpose of segment reporting, inter-segment interest is allocated based on a pool rate derived from Group s cost of borrowings. The following table present income and profit information regarding the Group s operating segments for the six months ended : Revenue Third party, including Corporate banking Retail banking Private banking Treasury Leases Group function Adjustme nts Interest income (10 756) Fee and commission income Net gains from investment securities available-for-sale Net gains from foreign currencies Total (1) - (9 826) (6 478) Other income Inter-segment result, net (26 412) (150) - (8 568) - - Total revenue Interest expense (10 956) (39 891) (2 304) - (939) (9 605) (61 657) Fee and commission expense (348) (981) (431) (3) (1 755) Allowance for loan impairment (56 087) (16 793) 60 - (108) (15 031) Personnel expenses (1 974) (7 346) (277) (223) (895) (1 908) 1 (12 622) Depreciation and amortisation (201) (1 942) (20) (18) (293) (320) 248 (2 546) Other segment expenses (589) (5 237) (58) (55) (368) (3 340) (2 488) (12 135) Segment results (50 068) (14 262) (13 689) Loss before income tax (59 230) (13 689) Income tax benefit (10 495) Loss for the period (47 219) (12 173) Segment assets ( ) Segment liabilities ( ) Other segment information Capital expenditure Property and equipment Intangible assets Commitments Adjustments column represents the difference between the information presented in the Group IFRS interim condensed consolidated financial statements and information presented for management. 29

30 24. Segment information (continued) The following table present income and profit information regarding the Group s operating segments for the six months ended 30 June 2011 : Revenue Corporate banking Retail banking Private banking Treasury Lease Group function Adjustmen ts Third party, including (704) Interest income (15) Fee and commission income Net gains from investment securities available-for-sale Net gains from foreign currencies Total Other income (3 377) 276 Inter-segment result. net (16 426) (161) Total revenue (704) Interest expense (5 516) (19 207) (2 620) - (1 008) (8 489) (35 700) Fee and commission expense Allowance for loan impairment (346) (844) (431) 201 (1 412) (28 345) (4 482) (13) - (632) (117) (7 305) Personnel expenses (3 231) (7 997) (340) (540) (413) (2 877) 99 (15 299) Depreciation and amortisation (372) (1 933) (24) (29) (254) (450) (330) (3 392) Other segment expenses (1 540) (7 211) (97) (146) (780) (4 216) 931 (13059) Segment results (20 476) (14 188) (756) (245) (17 078) Gain on bargain purchase of subsidiary Loss before income tax (18 298) (16 948) Income tax benefit Loss for the period (18 298) (15 265) Segment assets Segment liabilities Other segment information Capital expenditure Property and equipment Intangible assets Commitments

31 25. Related party transactions In accordance with IAS 24 Related Party Disclosures, parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. Related parties may enter into transactions, which unrelated parties might not, and transactions between related parties may not be effected on the same terms, conditions and amounts as transactions between unrelated parties. The outstanding balances of related party transactions at the period end, and related expense and income for the period are as follows: 30 June2011 Sharehold ers Key manageme nt personnel Other related parties Sharehold ers Key managem ent personnel Other related parties Loans outstanding at January Loans issued during the period Loan repayment during the (2 056) period Loans outstanding at the end of the period, Interest income on loans to customers Due to credit institutions at January Due to credit institutions issued during the period Translation to presentation (13) - - currency Due to credit institutions at the end of the period Interest expenses on due to (291) - - credit institutions, net Due to customers at 1 January Due to customers received during the period Due to customers repaid (6 361) (3 584) (22 330) during the period Translation to presentation currency Due to customers at the end of the period, net Interest expenses on due to - (4) (8) (1) (50) (40) customers Subordinated debt at 1 January Translation to presentation (5) - - (639) - currency Subordinated debt at the end of the period, net Interest expense on subordinated debt (969)

32 25. Related party transactions (continued) The aggregate short-term remuneration and other benefits paid to members of the Management Board for the relevant periods are as follows: For six month ended 30 June Salaries and other short-term benefits Social security costs Total key management compensation Principal subsidiaries Subsidiaries Ownership, % Country Industry Date of acquisition / foundation VAB Asset Management LLC 100 Ukraine Asset management services 2006 VAB Express LLC 100 Ukraine Consumer loans 2006 VAB Group LLC 100 Ukraine Consultancy and business management services VAB Leasing LLC 100 Ukraine Leasing financial services Special Purpose Entities The following special purpose entity has been consolidated in these consolidated financial statements: Name Nature of business Country of registration Percentage of ownership directly held by the Bank 31 December 2011 VAB Finance No 1 plc Finance Great Britain 0,00% 0,00% VAB Finance No 1 plc was established as New Issuer of Loan Participation Notes (the substitution for Credit Suisse International by VAB Finance). This company acted as an Issuer for the sole purpose of financing loans to VAB Bank hence being special purpose entity. VAB Finance No 1 plc is incorporated in England and Wales as a public company with limited liability under the Companies Act

33 27. Capital The Bank maintains an actively managed capital base to cover risks inherent in the business primarily on a standalone basis. The adequacy of the Bank s capital is monitored using, among other measures, the ratios established by the Basel Capital Accord 1988 and the ratios established by the NBU in supervising the Bank. The primary objectives of the Bank s capital management are to ensure that the Bank complies with externally imposed capital requirements and that the Bank maintains strong credit ratings and healthy capital ratios in order to support its business and to maximise shareholders value. The Bank manages its capital structure and makes adjustments to it in the light of changes in economic conditions and the risk characteristics of its activities. In order to maintain or adjust the capital structure, the Bank may adjust the amount of dividend payment to shareholders, return capital to shareholders or issue capital securities. No changes were made in the objectives, policies and processes from the previous years. NBU capital adequacy ratio The NBU requires banks to maintain a main capital adequacy ratio and regulatory capital adequacy ratio of 4% and 10% of total assets, computed based on standalone financial statements prepared in accordance with UAR, respectively. Within 6 months ended the Bank meets the regulatory requirements of the NBU regarding performance adequacy and regulatory capital. Capital adequacy ratio under Basel Capital Accord 1988 The Group s capital adequacy ratio, computed in accordance with the Basel Capital Accord 1988, with subsequent amendments including the amendment to incorporate market risks, as at 30 June 2011, comprised: 31 December 2011 Tier 1 capital Tier 2 capita Total capital Risk weighted assets Tier 1 capital ratio 12,2% 10,1% Total capital ratio 16,8% 16,2% These ratios exceeded the minimum ratio of 8% recommended by the Basel Accord. 28. Events after the reporting date Any significant adjusting and not adjusting events within 6 months of 2012 details of which should be disclosed did not occur. 33

34 SUPPLEMENTARY FINANCIAL INFORMATION The following supplementary financial information is not an integral part of Interim condensed consolidated Financial Statements and is presented only for convenience of users of financial statements. It includes Interim condensed standalone statement of financial position and Interim condensed standalone income statement. Interim Standalone Statement of Financial Position As at 30 June December2011 Assets Cash and cash equivalents Precious metals Amounts due from credit institutions Derivative financial instruments Loans to customers Financial investments available-for-sale Investment in subsidiaries Investment property Property and equipment Intangible assets Current income tax assets Deferred income tax assets Other assets Total assets Liabilities and Equity Liabilities Amounts due to credit institutions Derivative financial instruments Amounts due to customers Debt securities issued Subordinated debt Other liabilities Total liabilities Equity Share capital Share premium Accumulated deficit ( ) ( ) Currency translation reserve (47 263) (47 411) Revaluation reserve Unrealised gain on available-for-sale investments Total equity attributable to the shareholders of the Bank Total liabilities and equity