JSB ROSEVROBANK International Financial Reporting Standards Condensed Interim Financial Information and Report on Review 30 June 2014

Transcription

1 International Financial Reporting Standards Condensed Interim Financial Information and Report on Review 30 June 2014

2 CONTENTS REPORT ON REVIEW CONDENSED INTERIM FINANCIAL INFORMATION Condensed Interim Statement of Financial Position... 1 Condensed Interim Statement of Profit or Loss and Other Comprehensive Income... 2 Condensed Interim Statement of Changes in Equity... 3 Condensed Interim Statement of Cash Flows... 4 NOTES TO THE CONDENSED INTERIM FINANCIAL INFORMATION 1 Introduction Operating Environment of the Bank Basis of Preparation and Summary of Significant Accounting Policies Critical Accounting Estimates, and Judgements in Applying Accounting Policies Adoption of New or Revised Standards and Interpretations New Accounting Pronouncements Cash and Cash Equivalents Trading Securities Due from Other Banks Loans and Advances to Customers Due to Other Banks Customer Accounts Subordinated Loans Interest Income and Expense Fee and Commission Income and Expense Administrative and Other Operating Expenses Segment Analysis Financial Risk Management Capital Management Contingencies and Commitments Fair Value Related Party Transactions... 39

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5 Condensed Interim Statement of Profit or Loss and Other Comprehensive Income Note Six months ended 30 June 2014 Six months ended 30 June 2013 Interest income Interest expenses 14 ( ) ( ) Expenses directly associated with deposit insurance (52 963) (42 444) Net interest income Provision for loan impairment 10 ( ) ( ) Net interest income after provision for loan impairment Fee and commission income Fee and commission expense 15 ( ) ( ) Losses less gains from trading securities ( ) ( ) Losses less gains from other securities at fair value through profit or loss (5 568) Gains less losses from trading in foreign currencies Foreign exchange translation gains Provision for other financial assets (6 715) (10 739) Provision for impairment of premises (301) (23 741) Gains from revaluation of investment properties (Losses) / gains from disposal of loans 10 (2 513) Other operating income Staff costs ( ) ( ) Administrative and other operating expenses 16 ( ) ( ) Profit before tax Income tax expense ( ) ( ) Profit for the period Other comprehensive income: Items that will not be reclassified to profit or loss: Revaluation of premises and land Income tax recorded in other comprehensive income (8 612) (23 124) Other comprehensive income for the period Total comprehensive income for the period The notes set out on pages 5 to 41 form an integral part of this condensed interim financial information. 2

6 Condensed Interim Statement of Changes in Equity Share capital Share premium Revaluation reserve for premises and land Retained earnings Total equity Balance at 1 January Profit Other comprehensive income Total comprehensive income for the six months ended 30 June Balance at 30 June Balance at 1 January Profit Other comprehensive income Total comprehensive income for the six months ended 30 June Balance at 30 June The notes set out on pages 5 to 41 form an integral part of this condensed interim financial information. 3

7 Condensed Interim Statement of Cash Flows Note Six months ended 30 June 2014 Six months ended 30 June 2013 Cash flows from operating activities before changes in operating assets and liabilities Net cash from operating activities Net cash used in investing activities (31 054) ( ) Effect of exchange rate changes on cash and cash equivalents ( ) Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the period Cash and cash equivalents at the end of the period The notes set out on pages 5 to 41 form an integral part of this condensed interim financial information. 4

8 1 Introduction This condensed interim financial information for the six months ended 30 June 2014 has been prepared for (the Bank ) in accordance with International Accounting Standard 34 Interim Financial Reporting ( IAS 34 ). The Bank was incorporated and is domiciled in the Russian Federation. The Bank is an open joint-stock company limited by shares and was set up in accordance with Russian regulations. The Bank's shareholding structure as at 30 June 2014 and as at 31 December 2013 is provided below. Shareholder Ownership 30 June 2014 Ownership 31 December 2013 REG Holding Limited 73.8% 73.8% DEG Deutsche Investitions und Entwicklungsgesellschaft mbh 5.7% 5.7% Rekha Holdings Limited 8.1% 8.1% АК RATTO HOLDINGS LIMITED 1.4% 1.4% European Bank for Reconstruction and Development 11.0% 11.0% Total 100.0% 100.0% At 30 June 2014, the Bank is ultimately controlled by S.A. Grishin (31 December 2013: S.A. Grishin). Principal activity. The Bank s principal business activity is commercial and retail banking operations within the Russian Federation. The Bank has operated under a full banking license issued by the Central Bank of the Russian Federation ( CBRF ) since The Bank participates in the state deposit insurance scheme, which was introduced by Federal Law #177-FZ Deposits of individuals insurance in Russian Federation dated 23 December The State Deposit Insurance Agency guarantees repayment of 100% of individual deposits up to RR 700 thousand per individual in the case of the withdrawal of a licence of a bank or a CBRF imposed moratorium on payments. The Bank has the licenses required for securities storage and trading, as well as for other transactions with securities, including brokerage and dealing activities, depository and asset management functions. The activities of the Bank are regulated by the CBRF and the Federal Service for Financial Markets. The Bank has six branches (31 December 2013: six branches) in the following Russian cities: Saint Petersburg, Rostov-na-Donu, Novosibirsk, Samara, Yekaterinburg and Chelyabinsk (31 December 2013: the same). The Bank also has ten settlement and cash offices (31 December 2013: nine settlement and cash offices) in the following Russian cities: Belgorod, Voronezh, Vladimir, Kirov, Kostroma, Oryol, Penza, Perm, Tver, Ulyanovsk (31 December 2013: Belgorod, Vladimir, Kirov, Kostroma, Oryol, Penza, Perm, Tver, Ulyanovsk). The Bank also has thirteen (31 December 2013: thirteen) representative offices in Moscow and one (31 December 2013: one) additional office in Saint Petersburg. The Bank s registered address and principal place of business is: 24, Vavilova Street, Moscow, Russian Federation, Presentation currency. This condensed interim financial information is presented in thousands of Russian roubles. 5

9 2 Operating Environment of the Bank The Russian Federation displays certain characteristics of an emerging market. Its economy is particularly sensitive to oil and gas prices. The legal, tax and regulatory frameworks continue to develop and are subject to varying interpretation (Note 20). The recent political and economic turmoil witnessed in the region in the first half of 2014, in particular the events in Ukraine, have had and may continue to have a negative impact on the Russian economy, including weakening of the Russian Rouble, rising interest rates, reduced liquidity and making it harder to raise international funding. These events, including uncertainty and volatility of the financial markets, the threat of current and future international sanctions against the Russian Federation and Russian officials may have a significant impact on the Bank s operations, the effect of which is difficult to predict. Management determined loan impairment provisions using the incurred loss model required by the applicable accounting standards. These standards require recognition of impairment losses that arose from past events and prohibit recognition of impairment losses that could arise from future events, including future changes in the economic environment, no matter how likely those future events are. Thus final impairment losses from financial assets could differ significantly from the current level of provisions. Refer to Note Basis of Preparation and Summary of Significant Accounting Policies Basis of preparation. This condensed interim financial information has been prepared in accordance with IAS 34 and should be read in conjunction with the Bank s financial statements for 2013, which have been prepared in accordance with the International Financial Reporting Standards (IFRS). The accounting policies and methods of computation applied in the preparation of this condensed interim financial information are consistent with those disclosed in the annual financial statements of the Bank for the year ended 31 December 2013, except for income tax. These policies have been consistently applied to all the periods presented, unless otherwise stated. Income taxes. Income tax expense is recognised in this condensed interim financial information based on management s best estimates of the effective annual income tax rate expected for the full annual financial year. Costs are accrued and recognised in the interim period only if it would also be appropriate to accrue or recognise such costs at the end of the financial year. Changes in presentation. Where necessary, corresponding figures have been adjusted to conform to the presentation of the current year amounts. The Bank changed the disclosure of losses from assets placed at rates below market because the management sticks to the opinion that these expenses are of the same nature as staff costs. Six months ended 30 June 2013 (before reclassification) Effect of reclassification Six months ended 30 June 2013 (after reclassification) Statement of profit or loss and other comprehensive income Losses from assets placed below market (10 342) Staff costs ( ) (10 342) ( ) 6

10 4 Critical Accounting Estimates, and Judgements in Applying Accounting Policies The Bank makes estimates and assumptions that affect the amounts recognised in the condensed interim financial information and the carrying amounts of assets and liabilities within the next financial year. Estimates and judgements are continually evaluated and are based on management s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognised in the financial statements and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include: Impairment losses on loans and advances. The Bank regularly reviews its loan portfolios to assess impairment. When determining whether an impairment loss should be recorded in profit or loss for the year, the Bank makes judgements whether there is any observable data indicating that there is a measurable decrease in the estimated future cash flows from the loan portfolio before the decrease can be identified with an individual loan in that portfolio. This evidence may include observable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the portfolio when scheduling its future cash flows. The methodology and assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. A 10% increase or decrease in actual loss experience compared to the future cash flows estimates used would result in an increase or decrease in loan impairment losses of RR thousand (31 December 2013: RR thousand), respectively. Valuation of premises, land and investment properties. Premises, land and investment properties of the Bank are subject to revaluation on a regular basis. The frequency of revaluation depends on the movements in the fair values of the premises being revalued. The Bank s policy is to engage into the revaluation an internationally recognised independent appraisal firm having recognised and relevant professional qualifications and recent experience of valuation of assets with similar location and category. Fair value of premises, land and investment properties is based on the direct comparison of the revalued object with other objects sold or offered for sale. If there is no market based evidence of fair value, fair value is estimated using the income approach. Accounting for subordinated loans from VEB. The Russian government provided assistance to the Russian financial system by instructing the Russian State Corporation Bank Razvitiya i Vneshneekonomicheskoy Deyatelnosti ( VEB ) to grant subordinated loans to selected banks. This was done through Federal Law 173-FZ of 13 October 2008 On additional measures aimed at supporting the financial system of the Russian Federation. In October 2008, the Bank received the subordinated loan from Vnesheconombank of RR thousand with maturity in November 2017 and interest rate of 8.0% p.a. Due to its unique terms and conditions, its subordinated nature and the absence of observable current market transactions providing evidence of a market rate for such instruments, the loan was originally recognised and is subsequently carried on the statement of financial position at amortised contractual value. If there was evidence that the market interest rate for the loan was higher than the contractual interest rates, the amortised contractual value of the loan would have been replaced by (i) the amortised value of the loan determined based on the fair value of the loan at the date of origination and (ii) the unamortised value of the government grant embedded in such a low interest loan; there would have been no impact on the profit or loss, since the increased effective interest rates would have been offset by the amortisation of the government grant. 7

11 4 Critical Accounting Estimates, and Judgements in Applying Accounting Policies (Continued) Accounting for change of interest rate on the subordinated loans from VEB. In accordance with amendments to Federal Law 173-FZ approved in July 2011, the interest rate on the stated above subordinated loan was reduced from 8.0% per annum to 6.5% per annum. All the other terms of the loan remain unchanged. The Bank accounted for reduction of interest rate stated above according with IAS 39 Financial Instruments: Recognition and Measurement and tested this change for materiality. Since the change was found to be insignificant the Bank accounted for the change of interest rate stated above as prospective adjustment of the effective interest rate. The Bank could have used an alternative option and accounted for the mentioned reduction of interest rate in accordance with IAS 20 Accounting for Government Grants and Disclosure of Government Assistance, in that case the difference between the previous and revised carrying value of the loan would be recorded as government grant deferred income and would be amortised through interest expense until the loan s maturity date. Tax legislation. Russian tax, currency and customs legislation is subject to varying interpretations. Refer to Note 20. Valuation of related party transactions. In the normal course of business the Bank enters into transactions with its related parties. IAS 39 requires initial recognition of financial instruments based on their fair values. Judgement is applied in determining if transactions are priced at market or non-market interest rates, where there is no active market for such transactions. The basis for judgement is pricing for similar types of transactions with unrelated parties and effective interest rate analysis. Terms and conditions of related party balances are disclosed in Note Adoption of New or Revised Standards and Interpretations The following new standards and interpretations became mandatory for the Bank from 1 January 2014: Offsetting Financial Assets and Financial Liabilities - Amendments to IAS 32 (issued in December 2011 and effective for annual periods beginning on or after 1 January 2014). The amendment added application guidance to IAS 32 to address inconsistencies identified in applying some of the offsetting criteria. This includes clarifying the meaning of currently has a legally enforceable right of set-off and that some gross settlement systems may be considered equivalent to net settlement. The amendments did not have any impact on the Bank's financial information. Amendments to IFRS 10, IFRS 12 and IAS 27 Investment Entities (issued on 31 October 2012 and effective for annual periods beginning 1 January 2014). The amendment introduced a definition of an investment entity as an entity that (i) obtains funds from investors for the purpose of providing them with investment management services, (ii) commits to its investors that its business purpose is to invest funds solely for capital appreciation or investment income and (iii) measures and evaluates its investments on a fair value basis. An investment entity will be required to account for its subsidiaries at fair value through profit or loss, and to consolidate only those subsidiaries that provide services that are related to the entity's investment activities. The amendments did not have any impact on the Bank's financial information. Furthermore, the IASB has issued the following pronouncements not yet adopted in Russia: 8

12 5 Adoption of New or Revised Standards and Interpretations (Continued) IFRIC 21 Levies (issued on 20 May 2013 and effective for annual periods beginning 1 January 2014). The interpretation clarifies the accounting for an obligation to pay a levy that is not income tax. The obligating event that results in a liability is the event identified by the legislation that triggers the obligation to pay the levy. The fact that an entity is economically compelled to continue operating in a future period, or prepares its financial statements under the going concern assumption, does not create an obligation. The same recognition principles apply in interim and annual financial statements. The application of the interpretation to liabilities arising from emissions trading schemes is optional. The amendment did not have any impact on the Bank's financial information. Amendments to IAS 36 Recoverable Amount Disclosures for Non-financial Assets (issued in May 2013 and effective for annual periods beginning 1 January 2014; earlier application is permitted if IFRS 13 is applied for the same accounting and comparative period). The amendments remove the requirement to disclose the recoverable amount when a CGU contains goodwill or intangible assets with indefinite life time but there has been no impairment. The amendments did not have any impact on the Bank's financial information. Amendments to IAS 39 Novation of Derivatives and Continuation of Hedge Accounting (issued in June 2013 and effective for annual periods beginning 1 January 2014). The amendments will allow hedge accounting to continue in a situation when a derivative, which has been designated as a hedging instrument, is novated (i.e. parties have agreed to replace their original counterparty with a new one) to effect clearing with a central counterparty in accordance with laws or regulations, if specific conditions are met. The amendments did not have any impact on the Bank's financial information. 6 New Accounting Pronouncements Certain new standards and interpretations have been issued that are mandatory for the reporting periods beginning after 1 July 2014 and which the Bank has not early adopted. IFRS 9 Financial Instruments: Classification and Measurement (issued in July 2014 and effective for annual periods beginning on or after 1 January 2018). Key features of the new standard are: Financial assets are required to be classified into three measurement categories: those to be measured subsequently at amortised cost, those to be measured subsequently at fair value through other comprehensive income (FVOCI) and those to be measured subsequently at fair value through profit or loss (FVPL). Investments in equity instruments are always measured at fair value. However, management can make an irrevocable election to present changes in fair value in other comprehensive income, provided the instrument is not held for trading. If the equity instrument is held for trading, changes in fair value are presented in profit or loss. 9

13 6 New Accounting Pronouncements (Continued) Classification for debt instruments is driven by the entity s business model for managing the financial assets and whether the contractual cash flows represent solely payments of principal and interest (SPPI). If a debt instrument is held to collect, it may be carried at amortised cost if it also meets the SPPI requirement. Debt instruments that meet the SPPI requirement and are held in a portfolio where an entity both holds to collect assets cash flows and sells assets may be classified as FVOCI. Financial assets that do not contain cash flows that are SPPI must be measured at FVPL (for example, derivatives). Embedded derivatives are no longer separated from financial assets but will be included in assessing the SPPI condition. Most of the requirements in IAS 39 for classification and measurement of financial liabilities were carried forward unchanged to IFRS 9. The key change is that an entity will be required to present the effects of changes in it s own credit risk of financial liabilities designated at fair value through profit or loss in other comprehensive income. IFRS 9 introduces a new model for the recognition of impairment losses the expected credit losses (ECL) model. There is a three stage approach which is based on the change in credit quality of financial assets since initial recognition. In practice, the new rules mean that entities will have to record an immediate loss equal to the 12-month ECL on initial recognition of financial assets that are not credit impaired (or lifetime ECL for trade receivables). Where there has been a significant increase in credit risk, impairment is measured using lifetime ECL rather than 12-month ECL. The model includes operational simplifications for lease and trade receivables. Hedge accounting requirements were amended to align accounting more closely with risk management. The standard provides entities with an accounting policy choice between applying the hedge accounting requirements of IFRS 9 and continuing to apply IAS 39 to all hedges because the standard does not address accounting for macro hedging. Amendments to IAS 19 "Defined Benefit Plans: Employee Contributions" (issued in November 2013 and effective for annual periods beginning 1 July 2014). The amendment allows entities to recognise employee contributions as a reduction in the service cost in the period in which the related employee service is rendered, instead of attributing the contributions to the periods of service, if the amount of the employee contributions is independent of the number of years of service. The Bank is currently assessing the impact of the amendments on its financial statements. Annual Improvements to IFRSs 2012 (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014, unless otherwise stated below). The improvements consist of changes to seven standards. IFRS 2 was amended to clarify the definition of a vesting condition and to define separately performance condition and service condition ; The amendment is effective for share-based payment transactions for which the grant date is on or after 1 July IFRS 3 was amended to clarify that (1) an obligation to pay contingent consideration which meets the definition of a financial instrument is classified as a financial liability or as equity, on the basis of the definitions in IAS 32, and (2) all non-equity contingent consideration, both financial and non-financial, is measured at fair value at each reporting date, with changes in fair value recognised in profit and loss. Amendments to IFRS 3 are effective for business combinations where the acquisition date is on or after 1 July IFRS 8 was amended to require (1) disclosure of the judgements made by management in aggregating operating segments, including a description of the segments which have been aggregated and economic indicators which have been assessed in determining that the aggregated segments share similar economic characteristics, and (2) a reconciliation of segment assets to the entity s assets when segment assets are reported. 10

14 6 New Accounting Pronouncements (Continued) The basis for conclusions on IFRS 13 was amended to clarify that the deletion of certain paragraphs in IAS 39 upon publishing of IFRS 13 was not made with an intention to remove the ability to measure shortterm receivables and payables at invoice amount where the impact of discounting is immaterial. IAS 16 and IAS 38 were amended to clarify how the gross carrying amount and the accumulated depreciation are treated where an entity uses the revaluation model. IAS 24 was amended to include, as a related party, an entity that provides key management personnel services to the reporting entity or to the parent of the reporting entity ( the management entity ), and to require to disclose the amounts charged to the reporting entity by the management entity for services provided. The Bank is currently assessing the impact of the amendments on its financial statements. Annual Improvements to IFRSs 2013 (issued in December 2013 and effective for annual periods beginning on or after 1 July 2014). The improvements consist of changes to four standards. The basis for conclusions on IFRS 1 is amended to clarify that, where a new version of a standard is not yet mandatory but is available for early adoption; a first-time adopter can use either the old or the new version, provided the same standard is applied in all periods presented. IFRS 3 was amended to clarify that it does not apply to the accounting for the formation of any joint arrangement under IFRS 11. The amendment also clarifies that the scope exemption only applies in the financial statements of the joint arrangement itself. The amendment of IFRS 13 clarifies that the portfolio exception in IFRS 13, which allows an entity to measure fair value of a group of financial assets and financial liabilities on a net basis, applies to all contracts (including contracts to buy or sell non-financial items) that are within the scope of IAS 39 or IFRS 9. IAS 40 was amended to clarify that IAS 40 and IFRS 3 are not mutually exclusive. The guidance in IAS 40 assists preparers in distinguishing between investment property and owner-occupied property. Preparers also need to refer to the guidance in IFRS 3 to determine whether the acquisition of an investment property is a business combination. The Bank is currently assessing the impact of the amendments on its financial statements. IFRS 14 Regulatory Deferral Accounts (issued in January 2014 and effective for annual periods beginning on or after 1 January 2016). IFRS 14 permits first-time adopters to continue to recognise amounts related to rate regulation in accordance with their previous GAAP requirements when they adopt IFRS. However, to enhance comparability with entities that already apply IFRS and do not recognise such amounts, the standard requires that the effect of rate regulation must be presented separately from other items. The Bank does not expect the amendments to have a material effect on its financial statements. Amendments to IFRS 11 Accounting for Acquisitions of Interests in Joint Operations (issued on 6 May 2014 and effective for the periods beginning on or after 1 January 2016). This amendment adds new guidance on how to account for the acquisition of an interest in a joint operation that constitutes a business. The Bank is currently assessing the impact of the amendments on its financial statements. Clarification of Acceptable Methods of Depreciation and Amortisation Amendments to IAS 16 and IAS 38 (issued on 12 May 2014 and effective for the periods beginning on or after 1 January 2016). In this amendment, the IASB has clarified that the use of revenue-based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset. The Bank is currently assessing the impact of the amendments on its financial statements. 11

15 6 New Accounting Pronouncements (Continued) IFRS 15 "Revenue from Contracts with Customers" (issued on 28 May 2014 and effective for the periods beginning on or after 1 January 2017). The new standard introduces the core principle that revenue must be recognised when the goods or services are transferred to the customer, at the transaction price. Any bundled goods or services that are distinct must be separately recognised, and any discounts or rebates on the contract price must generally be allocated to the separate elements. When the consideration varies for any reason, minimum amounts must be recognised if they are not at significant risk of reversal. Costs incurred to secure contracts with customers have to be capitalised and amortised over the period when the benefits of the contract are consumed. The Bank is currently assessing the impact of the new standard on its financial statements. Equity Method in Separate Financial Statements Amendments to IAS 27 (issued on 12 August 2014 and effective for annual periods beginning 1 January 2016). The amendments will allow entities to use the equity method to account for investments in subsidiaries, joint ventures and associates in their separate financial statements. 12

16 7 Cash and Cash Equivalents 30 June December 2013 Cash on hand Cash balances with the CBRF (other than mandatory reserve deposits) Correspondent accounts and overnight placements with other banks - Russian Federation other countries Settlement accounts (plastic cards) with trading systems and banks Total cash and cash equivalents Trading Securities 30 June December 2013 Corporate bonds Federal loan bonds (OFZ) Promissory notes Corporate Eurobonds Municipal bonds External government loan bonds (OVOZ) Corporate shares Total trading securities Trading securities include securities pledged to the CBRF and ZAO ACB National Clearing Centre as collateral with respect to borrowed funds, with the fair value of RR thousand at 30 June 2014 (31 December 2013: nil). They include corporate bonds of RR thousand, municipal bonds of RR thousand, corporate Eurobonds of RR thousand and other securities of RR thousand. Refer to Note 11. These securities were pledged without the right to sell or repledge this collateral. At 30 June 2014 and 31 December 2013, the Bank did not have any past due or impaired trading securities issued. Interest rate analysis of trading securities at 30 June 2014 is provided in the table below: 30 June 2014 Carrying value Coupon rate Yield to maturity from to from to Corporate bonds % 13.0% 7.6% 13.4% Federal loan bonds (OFZ) % 7.6% 8.1% 8.4% Promissory notes % 13.6% Corporate Eurobonds % 9.3% 5.3% 10.3% Municipal bonds % 10.0% 8.0% 8.2% External government loan bonds (OVOZ) % 7.9% 8.4% 8.4% Corporate shares Total trading securities % 13.0% 3.7% 13.6% 13

17 8 Trading Securities (Continued) Interest rate analysis of trading securities at 31 December 2013 is provided in the table below: 31 December 2013 Carrying value Coupon rate Yield to maturity from to from to Corporate bonds % 14.0% 7.1% 13.4% Federal loan bonds (OFZ) % 7.4% 6.2% 8.0% Promissory notes % 12.2% Corporate Eurobonds % 11.5% 6.0% 8.8% Municipal bonds ,2% 10.0% 7.7% 8.4% Corporate shares Total trading securities % 13.0% 3.7% 13.6% 9 Due from Other Banks 30 June December 2013 Term placements with other banks Loans collateralised by shares (reverse repurchase agreements) Restricted deposits related to letters of credit Less: Provision for impairment of due from other banks (1 099) (1 099) Total due from other banks Maturity analysis of amounts due from other banks is disclosed in Note

18 10 Loans and Advances to Customers 30 June December 2013 Loans and advances to legal entities - large loans medium loans loans to small business loans to legal entities collateralised by shares (reverse sale and repurchase agreements) Total loans and advances to legal entities Loans and advances to individuals - Consumer loans Car loans Mortgage loans Loans to legal entities collateralised by shares (reverse sale and repurchase agreements) Total loans and advances to individuals Total loans and advances to legal entities and individuals before provision for loan impairment Less: Provision for loan impairment ( ) ( ) Total loans and advances to customers Loans to one borrower or a group of related borrowers with an aggregate open limit above RR thousand are recognised as large loans. Medium loans include loans to one borrower or a group of related borrowers not meeting criteria below applied to loans small business, with an aggregate open limit below RR thousand. Loans to one borrower or a group of related borrowers are recognised as loans to small business based on certain criteria. Such criteria include: average number of employees not more than 100 people; annual revenue from sale of goods net of VAT does not exceed RR thousand; the borrower (a group of borrowers) is an individual entrepreneur or a legal entity being a private entrepreneur, with involvement of government, foreign parties, public and religious organisations, charity and other funds limited to 25%; aggregate open limit per borrower (a group of borrowers) is not above RR thousand. 15

19 10 Loans and Advances to Customers (Continued) At 30 June 2014, loans collateralised by shares (reverse sale and repurchase agreements) were effectively collateralised by securities purchased under reverse sale and repurchase agreements at fair value of RR thousand (31 December 2013: RR thousand). The Bank may sell or repledge these securities. As at 30 June 2014 and 31 December 2013, these funds were collateralised by shares of large Russian entities. The movements in the provision for loan impairment during the six months ended 30 June 2014 are as follows: In thousands of Russian Roubles Loans and advances to legal entities Large Medium Loans to loans loans small business Loans and advances to individuals Consumer loans Car loans Mortgage loans Total Provision for loan impairment at 1 January Provision (459) (48 506) Provision for loan impairment at 30 June

20 10 Loans and Advances to Customers (Continued) The movements in the provision for loan impairment during the six months ended 30 June 2013 are as follows: In thousands of Russian Roubles Loans and advances to legal entities Large Medium Loans to loans loans small business Loans and advances to individuals Consumer loans Car loans Mortgage loans Total Provision for loan impairment at 1 January Provision for loan impairment Recovery of provision on sold loans - ( ) (19 187) - - (30 114) ( ) Amounts written off as uncollectible - - (16 943) (16 943) Provision for loan impairment at 30 June During the first six months of 2014, the Bank sold to external entities impaired loans with a gross value of RR 109 thousand, the selling price was RR 61 thousand. The Bank also recovered impaired loan with a gross value of RR thousand by virtue of collateral in the amount of RR thousand. During the first six months of 2013, the Bank sold to external entities impaired loans with gross value of RR thousand and provisions for impairment in the amount of RR thousand for RR thousand, out of which RR thousand were received in real estate, RR thousand in cash and RR thousand in rights of claim. 17

21 10 Loans and Advances to Customers (Continued) Economic sector risk concentrations within the customer loan portfolio are as follows: 30 June December 2013 Amount % Amount % Individuals State organisations Other goods trade Services Real estate Metallurgy Construction Motor vehicles and component trade Consumer goods trade Heavy industry Light industry Finance Equipment trade Food product trade Processing industry Other Total loans and advances to customers (before provision for loan impairment) State and public organisations include state-controlled borrowers. These entities represent companies with different types of activities. 18

22 10 Loans and Advances to Customers (Continued) Analysis by credit quality of loans to legal entities outstanding at 30 June 2014 is as follows: Large loans Medium loans Loans to small business Reverse sale and repurchase agreements Loans before provision for impairment Impairment loss provision Loans less provision for impairment Provision-to-loan ratio before provision Collectively assessed for impairment Not past due loans - 1st quality category ( ) % - 2nd quality category ( ) % Overdue loans - less than 30 days overdue (569) % - 31 to 60 days overdue (270) % - 61 to 90 days overdue (900) % - 91 to 180 days overdue (38 817) % to 365 days overdue (28 551) % - over 365 days overdue ( ) % Total collectively assessed for impairment ( ) % Individually assessed for impairment Not past due loans - 1st quality category ( ) % - 2nd quality category ( ) % - 3d quality category ( ) % - 4th quality category ( ) % Overdue loans - less than 30 days overdue (28 891) % - over 365 days overdue ( ) % Total individually assessed for impairment ( ) % Total loans and advances to customers (before provision for loan impairment) ( ) % 19

23 10 Loans and Advances to Customers (Continued) Analysis by credit quality of loans to individuals outstanding at 30 June 2014 is as follows: Consumer loans Car loans Mortgage loans Reverse sale and repurchase agreements Loans before provision for impairment Provision for impairment Loans less provision for impairment Provision-to-loan ratio before provision Collectively assessed for impairment Not past due loans - 1st quality category (75 720) % - 2nd quality category (8 546) % - 4th quality category (2 178) % Overdue loans - less than 30 days overdue (8 372) % - 31 to 60 days overdue (75 772) % - 61 to 90 days overdue (26 216) % - 91 to 180 days overdue (74 073) % to 365 days overdue ( ) % - over 365 days overdue ( ) % Total collectively assessed for impairment ( ) % Individually assessed for impairment Not past due loans - 1st quality category % - 4th quality category (18 646) % Total individually assessed for impairment (18 646) % Total loans and advances to customers (before provision for loan impairment) ( ) % 20

24 10 Loans and Advances to Customers (Continued) Analysis by credit quality of loans to legal entities outstanding at 31 December 2013 is as follows: Large loans Medium loans Loans to small business Reverse sale and repurchase agreements Loans before provision for impairment Provision for impairment Loans less provision for impairment Provision-to-loan ratio before provision Collectively assessed for impairment Not past due loans - 1st quality category ( ) % - 2nd quality category ( ) % Overdue loans - less than 30 days overdue (3 340) % - 31 to 60 days overdue (11 700) % - 61 to 90 days overdue (10 860) % - 91 to 180 days overdue (2 169) % to 365 days overdue (23 503) % - over 365 days overdue ( ) % Total collectively assessed for impairment ( ) % Individually assessed for impairment Not past due loans - 1st quality category ( ) % - 2nd quality category ( ) % - 3d quality category ( ) % - 4th quality category ( ) % Overdue loans to 365 days overdue (635) % - over 365 days overdue ( ) % Total individually assessed for impairment ( ) % Total loans and advances to customers (before provision for loan impairment) ( ) % 21

25 10 Loans and Advances to Customers (Continued) Analysis by credit quality of loans to individuals outstanding at 31 December 2013 is as follows: Consumer loans Car loans Mortgage loans Reverse sale and repurchase agreements Loans before provision for impairment Provision for impairment Loans less provision for impairment Provision-to-loan ratio before provision Collectively assessed for impairment Not past due loans - 1st quality category (78 297) % - 2nd quality category (4 862) % Overdue loans - less than 30 days overdue (5 185) % - 31 to 60 days overdue (75 539) % - 61 to 90 days overdue (39 026) % - 91 to 180 days overdue ( ) % to 365 days overdue ( ) % - over 365 days overdue ( ) % Total collectively assessed for impairment ( ) % Individually assessed for impairment Not past due loans - 1st quality category % - 4th quality category (18 733) % Total individually assessed for impairment (18 733) % Total loans and advances to customers (before provision for loan impairment) ( ) % 22

26 10 Loans and Advances to Customers (Continued) Current loans are classified to four quality categories. The first quality category includes loans with insignificant credit risk, i.e. financial losses due to non-performance or improper performance by the borrower of its loan obligations are remote. The provision rate for such loans does not exceed 5%. The second category includes loans with medium credit risk and the provision rate not exceeding 10%. The third quality category includes loans with an acceptable risk of uncollectibility. The provision rate for such loans does not exceed 50%. The fourth quality category includes loans with a high risk of uncollectibility. The provision rate for such loans is over 50%. The primary factors that the Bank considers when determining whether a loan is impaired are its overdue status and the borrower s financial position. When making a decision on loan impairment, the Bank also monitors the state of collateral and any claims to the borrower raised by tax, law enforcement bodies and counterparties, and control over turnover on the Bank's accounts. Any significant exposures to customers with deteriorating creditworthiness are reported to, and reviewed by, the management. On the basis of this analysis the Bank makes decisions on loan impairment. Fair value of loans and advances to customers is disclosed in Note 21. At 30 June 2014, loans and advances to customers - legal entities include assets provided as collateral on attracted interbank loans with the carrying value of RR thousand (31 December 2013: RR thousand). Refer to Note 20. The maturity analysis of loans and advances to customers is disclosed in Note 18. The information on related party balances is disclosed in Note Due to Other Banks 30 June December 2013 Correspondent accounts and overnight placements of other banks Loans from other banks Loans from the CBRF and National Clearing Centre Total due to other banks At 30 June 2014, loans from other banks included borrowed funds from the CBRF in the amount of RR thousand and from National Clearing Centre in the amount of RR thousand (31 December 2013: nil). Refer to Note 8. Maturity analysis of amounts due to other banks is disclosed in Note 18. The information on related party balances is disclosed in Note

27 12 Customer Accounts 30 June December 2013 Legal entities Current/settlement accounts Term deposits Individuals Current/demand accounts Term deposits Total customer accounts Total current customer accounts Total term customer accounts Economic sector concentrations within customer accounts are as follows: 30 June December 2013 Amount % Amount % Individuals Trade Culture, science and education Services Construction Manufacturing State and public organisations Finance Other Total customer accounts % % Trade sector includes the following types of trade: consumer goods trade, motor vehicles and components trade, equipment trade, food product trade and other goods trade. Manufacturing sector includes light industry, heavy industry and processing industry. Economic sector concentrations and maturity analysis of customer accounts are disclosed in Note 18. The information on related party balances is disclosed in Note Subordinated Loans Counterparty Currency Rate Maturity date 30 June December 2013 Salvaje Ltd RR 12.0% VEB RR 6.5% REG Holding USD 12.0% Total subordinated loans

28 13 Subordinated Loans (Continued) The maturity analysis of subordinated loans is disclosed in Note 18. The information on related party balances is disclosed in Note 22. The subordinated debt ranks after all other creditors in case of liquidation. 14 Interest Income and Expense Six months ended 30 June 2014 Six months ended 30 June 2013 Interest income Loans and advances to customers Debt trading securities Due from other banks Correspondent accounts and overnight placements with other banks Income on other securities through profit or loss Total interest income Interest expense Term deposits of individuals ( ) ( ) Term deposits of legal entities ( ) ( ) Term placements of other banks ( ) ( ) Current customer accounts ( ) (90 625) Subordinated loans ( ) ( ) Promissory notes issued (23 131) (23 607) Correspondent accounts of other banks (18 636) (11 998) Total interest expense ( ) ( ) Expenses directly associated with deposit insurance (52 963) (42 444) Net interest income

29 15 Fee and Commission Income and Expense Six months ended 30 June 2014 Six months ended 30 June 2013 Fee and commission income Settlement transactions Guarantees issued Cash transactions Cash collection Brokerage operations Depository operations Trade finance Other Total fee and commission income Fee and commission expense Settlement transactions ( ) ( ) Cash transactions (82 725) (82 666) Guarantees received (5 114) (8 764) Transactions with foreign currencies (3 724) (1 429) Trade finance (863) (863) Other (8 107) (8 323) Total fee and commission expense ( ) ( ) Net fee and commission income Administrative and Other Operating Expenses Six months ended 30 June 2014 Six months ended 30 June 2013 Depreciation of premises and equipment Operating lease of premises Taxes other than on income Expenses related to premises and equipment Software maintenance Administrative expenses Telecommunications Advertising and marketing services Insurance Entertainment expenses and sponsorship Other Total administrative and other operating expenses Included in staff costs for the six months ended 30 June 2014 are statutory social security and pension contributions of RR thousand (the six months ended 30 June 2013: RR thousand). The information on related party balances is disclosed in Note

30 17 Segment Analysis (a) Description of products and services from which each reportable segment derives its revenue For management purposes the Bank s activity is split into operating segments based on the Bank s organisational structure. For the purposes of this financial information the operating segments are grouped into the following main reportable segments: Corporate banking representing settlement and current accounts, deposits, overdrafts, loan and other credit facilities, bank guarantees, foreign currency and cash transactions with organisations. Treasury representing securities trading, loans and deposits on the interbank market, Loro and Nostro accounts, transactions with foreign currency and derivative financial instruments. Retail banking representing private banking services, private customer settlement accounts, savings, deposits, investment savings products, custody, credit and debit cards, consumer loans, mortgages and car loans. International business representing transactions on the international market related to attracting bilateral loans and syndicated loans, transactions with letter of credit. (b) Measurement of reportable segment profit or loss, assets and liabilities Transactions between the reportable segments are conducted on normal commercial terms and conditions. Funds are ordinarily reallocated between segments, resulting in funding cost transfers charged at transfer rates disclosed in operating income/expense. These transfer rates represent internal cost of attracted/placed resources for each group of assets and liabilities which were created based on the maturity of financial instruments. Transfer rates are calculated by adding additional components characterising country risk (for assets and liabilities denominated in foreign currencies), credit risk, current liquidity position and payment for covering operating expenses to the risk-free market rate. There are no other material items of income or expense between the reportable segments. Internal charges and transfer pricing adjustments have been reflected in the performance of each reportable segment. The Bank analyses segments' activities on a quarterly basis. Operating analysis is based on weekly and monthly reports, where the Bank's results are not split by segments and presented on a more aggregated basis. (c) Factors that management used to identify the reportable segments The Bank s segments are strategic business units that focus on different customers. They are managed separately because each business unit requires different marketing strategies and service level. The Managing Board of the Bank is the Bank s supreme operational management body which allocates resources and assesses performance of the segments based on quarterly reports. The Managing Board of the Bank analyses profitability of each segment in order to make a decision on allocating resources and assessing segment performance. Segment reporting and results submitted for the management s analysis are prepared in accordance with the key principles of IFRS. 27

31 17 Segment Analysis (Continued) (d) Information about reportable segment profit or loss, assets and liabilities Segment information for the main reportable segments of the Bank for the six month periods ended 30 June 2014 and at 30 June 2014 accordingly is set out below: In thousands of Russian Roubles Corporate banking Treasury Retail banking International business Transfers 3 Total Six months ended 30 June 2014 Interest income Interest expense ( ) ( ) (55 129) (48 472) - ( ) Transfer income Transfer expense 1 ( ) ( ) ( ) (5 751) - ( ) Expenses associated with deposit insurance (48 918) - (4 045) - - (52 963) Fee and commission income Fee and commission expense ( ) (16 202) (12 169) (2 221) - ( ) Gains less losses from trading in foreign currencies Provision 2 ( ) (13) (29 420) - - ( ) Losses less gains from trading in securities 4 ( ) ( ) Foreign exchange translation gains Other operating income (692) (4 938) Gain from sale of outstanding loans (2 513) (2 513) Administrative and other operating expenses 4 ( ) ( ) ( ) (5 213) - ( ) Segment result ( ) (51 428) At 30 June 2014 Segment assets Segment liabilities

32 17 Segment Analysis (Continued) Segment information for the main reportable business segments of the Bank for the six months ended 30 June 2013 and as at 31 December 2013 is set out below: In thousands of Russian Roubles Corporate banking Treasury Retail banking International business Transfers 3 Total Six months ended 30 June 2013 Interest income Interest expense ( ) (81 312) (47 375) ( ) - ( ) Transfer income Transfer expense 1 ( ) ( ) ( ) (43) - ( ) Expenses associated with deposit insurance (39 343) - (3 101) - - (42 444) Fee and commission income Fee and commission expense ( ) (9 063) (6 350) (9 156) - ( ) Gains less losses from trading in foreign currencies Provision 2 ( ) (815) ( ) - - ( ) Losses less gains from trading in securities - ( ) ( ) Foreign exchange translation gains Other operating income (12 613) (2 687) (1 899) Gain from sale of outstanding loans Administrative and other operating expenses 4 ( ) ( ) ( ) (5 258) - ( ) Segment result ( ) At 31 December 2013 Segment assets Segment liabilities Transfer rates are the rates used for management accounting purposes to record income and expense from transactions of internal resource placement and attraction. They are a component of the Bank s internal resource reallocation mechanism and, correspondingly, of the system of efficiency evaluation by banking transaction type and risk management system. 2 Provision includes provision for loan impairment and provision for impairment of other financial assets. 3 Transfers reflect transfer income from equity financing of reportable segments. 4 Other operating expenses include operating expenses (including staff costs) and also gains and losses from real estate revaluation. 29

33 17 Segment Analysis (Continued) (d) Information about reportable segment profit or loss, assets and liabilities (continued) Differences between segment analysis and the statement of financial position and the statement of profit or loss and other comprehensive income are from differences between analysis performed by the management and IFRS approaches. Given the customers' geography, all the income has been substantively received from Russian customers. (e) Reconciliation of reportable segment revenues, profit or loss, assets and liabilities 30 June June 2013 Total segment result Interest expense on subordinated loan ( ) ( ) Rental income Profit before tax June December 2013 Total reportable segment liabilities Subordinated loans Income tax liabilities Total liabilities

34 18 Financial Risk Management For the six months ended 30 June 2014, there were no significant changes in the risk management system as compared to Significant exposures. At 30 June 2014, the Bank had 10 largest groups of borrowers with aggregated loan amounts of RR thousand (31 December 2013: RR thousand), or 24.4% (31 December 2013: 25.2%) of the gross loans and advances to customers, and 20 largest groups of borrowers with aggregated loan amounts of RR thousand (31 December 2013: RR thousand), or 33.1% (31 December 2013: 33.2%) of the gross loans and advances to customers. At 30 June 2014, the Bank had 10 largest clients with aggregated customer accounts of RR thousand (31 December 2013: RR thousand), or 10.8% (31 December 2013: 9.1%) of the customer accounts, and 20 largest clients with aggregated customer accounts of RR thousand (31 December 2013: RR thousand), or 15.4% (31 December 2013: 13.1%) of the customer accounts. At 30 June 2014, amounts due to other banks included liabilities of RR thousand (31 December 2013: nil) received from the CBRF. Refer to Note 11. Currency risk. The table below summarises the Bank s exposure to foreign currency exchange rate risk: In thousands of Russian Roubles Monetary financial assets 30 June December 2013 Derivative Net Monetary Monetary financial position financial financial instruments assets liabilities Monetary financial liabilities Derivative financial instruments Net position Russian ( ) Roubles US Dollars ( ) Euro and other currencies ( ) ( ) (39 337) Total (5 046) (4 209) Derivatives presented above are monetary financial assets or monetary financial liabilities, but are presented separately in order to show the Bank s gross exposure. 31

35 18 Financial Risk Management (Continued) Liquidity risk. The Bank monitors its liquidity position using expected contractual maturities of assets and liabilities, which may be summarised as follows at 30 June 2014: In thousands of Russian Roubles Demand and less than 1 month From 1 to 6 months From 6 to 12 months From 1 to 5 years More than 5 years Total Monetary financial assets Cash and cash equivalents Mandatory cash balances with the CBRF Trading securities Due from other banks Loans and advances to customers Other financial assets Total monetary financial assets at 30 June Monetary financial liabilities Due to other banks Customer accounts Promissory notes issued Subordinated loans Other financial liabilities Total monetary financial liabilities at 30 June Net liquidity gap at 30 June 2014 ( ) ( ) Net cumulative liquidity gap at 30 June 2014 ( ) ( ) ( ) Net cumulative liquidity gap at 31 December ,381,419 ( ) ( ) The portfolio of trading securities and the portfolio of other securities at fair value through profit and loss are classified within demand and less than one month as these securities are acquired for liquidity management purposes and there is an active market where transactions with these securities occur frequently. 32

36 19 Capital Management The Bank s objectives when managing capital are (i) to comply with the capital requirements set by the CBRF, (ii) to safeguard the Bank s ability to continue as a going concern and (iii) to maintain sufficient capital base to achieve capital adequacy ratio of at least 8% based on the Basel Accord dated April 1998 (generally known as Basel I). Compliance with statutory capital ratios set by the CBRF is monitored daily. The Bank submits to the CBRF reports outlining capital adequacy ratio calculations reviewed and signed by the Bank s Chief Executive Officer and Chief Accountant. The Bank manages its capital primarily on the basis of regulatory requirements (statutory capital ratio N1.0 capital adequacy ratio with the minimum set by the CBRF at 10%). Ratio N1.0 calculated at 30 June 2014 is 11.6%. The Bank also calculated capital adequacy ratio based on the Basel I as required by certain covenants. As at 30 June 2014 the capital adequacy ratio calculated in accordance with Basel I was 14.4% (at 31 December %). The ratio complies with all special limitations set. Regulatory capital is based on the Bank s reports prepared under Russian accounting standards and presented in the table below. No comparative data is provided below due to amendments in the relevant Russian legislation as of 1 January 2014: 30 June 2014 Core capital Additional capital Amounts deducted from core and additional capital ( ) Total capital in accordance with the CBRF requirements Risk weighted assets Capital adequacy ratio (N1.0) 11.6% 33

37 19 Management of Capital (Continued) The table below shows the level of the Bank's capital adequacy as at 30 June 2014 and 31 December 2013 calculated in accordance with the requirements of the Basel I: 30 June December 2013 Tier 1 capital Share capital Share premium Retained earnings Total Tier 1 capital Tier 2 capital Revaluation reserve for premises and land Subordinated loans Total Tier 2 capital Total capital Risk weighted assets Credit risk Market risk Total risk weighted assets Tier 1 core capital adequacy ratio (Tier 1 capital to risk weighted assets) 12.2% 12.1% Total core capital adequacy ratio (Total capital to risk weighted assets) 14.4% 14.5% During the six months ended 30 June 2014 and 2013 and at 30 June 2014 and 30 June 2013, the Bank complied with (1) the capital adequacy ratio calculated in accordance with requirements set by Basel I, above the prescribed minimum level (8%); and with (2) N1.0 capital adequacy ratio calculated in accordance with requirements set by the CBRF, above the prescribed minimum level (10%). 20 Contingencies and Commitments Legal proceedings. From time to time and in the normal course of business, claims against the Bank may be received. On the basis of its own estimates and internal professional advice management is of the opinion that no material losses will be incurred in respect of claims and accordingly no provision has been made in this financial information. Tax legislation. Russian tax legislation which was enacted or substantively enacted at the end of the reporting period, is subject to varying interpretations when being applied to the transactions and activities of the Bank. Consequently, tax positions taken by management and the formal documentation supporting the tax positions may be successfully challenged by relevant authorities. Russian tax administration is gradually strengthening, including the fact that there is a higher risk of tax transactions review without a clear business purpose or with tax incompliant counterparties. Fiscal periods remain open to a review by the authorities in respect of taxes for three calendar years preceding the year of the review. Under certain circumstances reviews may cover longer periods. 34

38 20 Contingencies and Commitments (Continued) The Russian transfer pricing rules took effect in Significant amendments were introduced with the effect from 1 January The new transfer pricing rules appear to be more technically elaborate and, to a certain extent, better aligned with the international transfer pricing principles developed by the Organisation for Economic Cooperation and Development (OECD). The new legislation provides the possibility for tax authorities to impose additional tax liabilities in respect of controlled transactions (transactions with related parties and some types of transactions with unrelated parties), provided that the transaction price is not arm's length. Management believes that its pricing policy is arm's length and it has implemented internal controls to be in compliance with the new transfer pricing legislation. Due to specific features of implementation of the Russian transfer pricing rules, the impact of any challenge of the Bank s transfer prices cannot be reliably estimated; however, it may be significant to the financial conditions and/or the overall operations of the Bank. As Russian tax legislation does not provide definitive guidance in certain areas, the Bank from time to time adopts interpretations of such uncertain areas that reduce the overall tax rate of the Bank. While management currently estimates that the tax positions and interpretations that it has taken can probably be sustained, there is a possible risk that outflow of resources will be required should such tax positions and interpretations be challenged by the relevant authorities. The impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the Bank. The management of the Bank believes that its interpretation of the relevant legislation is appropriate and the Bank s tax, currency and customs positions will be sustained. Therefore, at 30 June 2014 the management has not made any provision for potential tax liabilities (31 December 2013: nil). Compliance with covenants. The Bank has to comply with certain covenants, primarily related to loans from other banks and syndicated loans. These covenants include: General business covenants, such as business conduct and reasonable prudence, conformity with legal requirements of the country, in which the company is located, maintenance of accurate accounting records, implementation of controls, performance of independent audits, etc.; Restrictive covenants, including constraints (without lender s consent) in respect of dividend payments and other distributions, and changes in the shareholding structure, restrictions on individual types of activities, use of assets and certain types of transactions; Financial covenants, such as meeting certain liquidity and capital adequacy requirements, the amount of certain type of liabilities, risk per customer, profit before taxes to total assets ratio, amount of related party transactions; and Reporting covenants, obliging the Bank to provide its audited financial statements to the lender, as well as certain additional financial information and any other documents upon request. Non-compliance with such covenants may result in negative consequences for the Bank including growth in the cost of borrowings and declaration of default. The Bank was in compliance with all covenants as at 30 June

39 20 Contingencies and Commitments (Continued) Capital expenditure commitments. At 30 June 2014, the Bank had no significant capital commitments (31 December 2013: no significant capital commitments). Credit related commitments. The primary purpose of these instruments is to ensure that funds are available to a customer as required. Guarantees and standby letters of credit, which represent irrevocable assurances that the Bank will make payments in the event when a customer cannot meet its obligations to third parties, carry the same credit risk as loans. Documentary and commercial letters of credit, which are written undertakings by the Bank on behalf of a customer authorising a third party to draw drafts on the Bank up to a stipulated amount under specific terms and conditions, are collateralised by the underlying shipments of goods to which they relate or cash deposits and, therefore, carry less risk than a direct borrowing. Commitments to extend credit represent unused portions of authorisations to extend credit in the form of loans, guarantees or letters of credit. With respect to credit risk on commitments to extend credit, the Bank is potentially exposed to loss in an amount equal to the total unused commitments. However, the likely amount of loss is less than the total unused commitments, as most commitments to extend credit are contingent upon customers maintaining specific credit standards. The Bank monitors the term to maturity of credit related commitments because longer-term commitments generally have a greater degree of credit risk than shorter-term commitments. Outstanding credit related commitments are as follows: Note 30 June December 2013 Guarantees issued Import letters of credit Total credit related commitments At 30 June 2014, no provision for credit related commitments was required (31 December 2013: nil). Assets pledged and restricted. At 30 June 2014 and 31 December 2013, the Bank had the following assets pledged as collateral: 30 June December 2013 Assets pledged Related liability Assets pledged Related liability Loans and advances to customers (refer to Note 10) Trading securities (refer to Note 8) Total In addition, mandatory cash balances with the CBRF in the amount of RR thousand (31 December 2013: RR thousand) represent a mandatory reserve deposit which is not available to finance the Bank s day to day operations. 36

40 21 Fair Value Fair value is the amount at which a financial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation. Fair value measurements are analysed by level in the fair value hierarchy as follows: (i) level one are measurements at quoted prices (unadjusted) in active markets for identical assets or liabilities, (ii) level two measurements are valuation techniques with all material inputs observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices), and (iii) level three measurements are valuations not based on observable market data (that is, unobservable inputs). Management applies judgement in categorising financial instruments using the fair value hierarchy. If a fair value measurement uses observable inputs that require significant adjustment, that measurement is a Level 3 measurement. The significance of a valuation input is assessed against the fair value measurement in its entirety. Financial instruments carried at fair value. Trading securities, other securities at fair value through profit or loss for the year and derivative financial instruments are carried in the condensed statement of financial position at fair value. Fair values were determined based on quoted market prices. Cash and cash equivalents are carried at amortised cost which approximates current fair value. Assets carried at amortised cost. The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received, discounted at current interest rates for new instruments with similar credit risk and remaining maturity. Discount rates used depend on the currency, maturity of the instrument and credit risk of the counterparty. Liabilities carried at amortised cost. The estimated fair value of fixed interest rate instruments with stated maturity, for which a quoted market price is not available, was estimated based on cash flows discounted at interest rates for new instruments with similar credit risk and remaining maturity. The fair value of liabilities repayable on demand or after a notice period ( demandable liabilities ) is estimated as the amount payable on demand, discounted from the first date that the amount could be required to be paid. Discount rates used were consistent with the Bank s credit risk and also depend on currency and maturity of the instrument as described above. Financial guarantees and letters of credit. Financial guarantees and letters of credit are initially recognised at their fair value, which is normally evidenced by the amount of fees received. This amount is amortised on a straight line basis over the life of the commitment. At each reporting date, the commitments are measured at the higher of (i) the unamortised balance of the amount at initial recognition and (ii) the best estimate of expenditure required to settle the commitment at the reporting date. Financial derivatives. All derivative financial instruments are carried at fair value as assets when the fair value is positive and as liabilities when the fair value is negative. Their fair values are based on observable market prices. At 30 June 2014 and 31 December 2013, fair value of financial assets and liabilities carried at amortised cost approximates their carrying value at these dates. 37

41 21 Fair Value (Continued) The fair value hierarchy levels for financial instruments carried at fair value are set out below: Quoted price in an active market (Level 1) 30 June December 2013 Valuation Quoted price in technique with an active market inputs (Level 1) observable in markets (Level 2) Valuation technique with inputs observable in markets (Level 2) FINANCIAL ASSETS Trading securities - Corporate bonds Federal loan bonds (OFZ bonds) Promissory notes Corporate Eurobonds Municipal bonds External government loan bonds (OVOZ) Corporate shares Other securities at fair value through profit or loss - Eurobonds Other financial assets Foreign exchange forward contracts TOTAL FINANCIAL ASSETS CARRIED AT FAIR VALUE Quoted price in an active market (Level 1) 30 June December 2013 Valuation Quoted price in technique with an active market inputs (Level 1) observable in markets (Level 2) Valuation technique with inputs observable in markets (Level 2) FINANCIAL LIABILITIES Other financial liabilities - Foreign exchange forward contracts TOTAL FINANCIAL LIABILITIES CARRIED AT FAIR VALUE

42 22 Related Party Transactions For the purposes of this condensed interim financial information, parties are considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial or operational decisions. When considering each possible related party relationship, attention is focused on the substance of the relationship, not merely the legal form. As at 30 June 2014 and 31 December 2013, all shareholders were classified as related parties because they have significant influence on management decisions. At 30 June 2014, the outstanding balances with related parties were as follows: Shareholders 1 Entities under shareholders control Key management personnel 2 Loans and advances to customers (before impairment) USD, contractual rate 11-12% p.a Euro, contractual rate 8-11% p.a RR, contractual rate 6-16% p.a Provision for loan impairment at the year end Due to banks, USD, contractual rate 3% p.a Current and settlement accounts, contractual rate 0% p.a Term customer deposits Euro, contractual rate 2-4% p.a RR, contractual rate 0-10% p.a USD, contractual rate 2-4% p.a Subordinated loans USD, contractual rate 12% p.a Guarantees issued by the Bank The income and expense items with related parties for the first six months of 2014 were as follows: Shareholders 1 Entities under shareholders control Key management personnel 2 Interest income Interest expense (89 741) (12 767) (483) Fee and commission income Rental income Fee and commission expense (74) - (25) Other administrative and other operating expenses paid (140) (16 488) 28 39

43 22 Related Party Transactions (Continued) At 31 December 2013, the outstanding balances with related parties were as follows: Shareholders 1 Entities under shareholders control Key management personnel 2 Loans and advances to customers as at the year end (before impairment) USD, contractual rate 11-12% p.a Euro, contractual rate 8-9% p.a RR, contractual rate 6-14% p.a Provision for loan impairment at the year end Due to banks, USD, contractual rate 4% p.a Current and settlement accounts, contractual rate: 0% Term customer deposits Euro, contractual rate 2-3% p.a RR, contractual rate 6-11% p.a USD, contractual rate 2-4% p.a Subordinated loans USD, contractual rate 12% p.a Guarantees issued by the Bank The income and expense items with related parties for the first six months of 2013 were as follows: Shareholders 1 Entities under shareholders control Key management personnel 2 Interest income Interest expense (96 403) (4 786) (1 442) Fee and commission income Rental income Other administrative and other operating expenses paid (77) (11 757) (2 403) 1 Shareholders including members of the Managing Board, who are at the same time employees of the Bank and its shareholders. 2 Key management personnel employees of the Bank, who have significant influence in making management decisions, except for those set out in footnote 1. 40

44 22 Related Party Transactions (Continued) Compensation to the key management personnel, including those who are shareholders of the Bank, is presented below: Expense for the six months ended 30 June 2014 Accrued liability at 30 June 2014 Expense for the six months ended 30 June 2013 Accrued liability at 31 December 2013 Short-term benefits: - Salaries Accrued employee benefit costs Post-employment benefits: - State pension and social security costs Total

45