VTB Bank (Armenia) cjsc. Financial Statements For the year ended 31 December 2008

Transcription

1 Financial Statements For the year ended 31 December

2 Contents Independent Auditors Report...3 Income Statement...4 Balance Sheet...5 Statement of Cash Flows...6 Statement of Changes in Shareholders Equity...7 Notes to the Financial Statements...8 2

3 ABCD KPMG Armenia cjsc 8th floor, Erebuni Plaza Business Center, 26/1 Vazgen Sargsyan Street Yerevan 0010, Armenia Telephone (10) Fax (10) Internet Independent Auditors Report To the Board of Directors VTB Bank (Armenia) cjsc Report on the Financial Statements We have audited the accompanying financial statements of VTB Bank (Armenia) cjsc (the Bank ), which comprise the balance sheet as at 31 December, and the income statement, statement of changes in shareholders equity and statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory notes. Management s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with International Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatements, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. Auditors Responsibility Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with relevant ethical requirements and plan and perform the audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity s internal control. An audit also includes evaluating the appropriateness of accounting principles used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. KPMG Armenia, an Armenian closed joint stock company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative 3

4 Income Statement for the year ended 31 December The income statement is to be read in conjunction with the Notes to, and forming part of, the financial statements. 4

5 Balance Sheet as at 31 December ASSETS Notes Cash 2,973,702 3,147,552 Due from the Central Bank of the Republic of Armenia 11 5,135,579 4,835,610 Placements with banks and other financial institutions 12 6,794,811 4,290,375 Amounts receivable under reverse repurchase agreements - 960,392 Loans to customers 13 69,362,033 40,592,960 Available-for-sale assets - Held by the Bank 14 1,389,253 5,616,841 - Pledged under sale and repurchase agreements 14 4,381,002 - Property and equipment 15 7,215,234 7,465,762 Intangible assets 281, ,988 Other assets 16 1,683,506 2,224,236 Total Assets 99,216,769 69,376,716 LIABILITIES AND SHAREHOLDERS EQUITY Deposits and balances from banks and other financial institutions 17 41,137,270 17,978,840 Amounts payable under repurchase agreements 18 4,381,312 - Current accounts and deposits from customers 19 27,443,454 28,553,691 Income tax payable 733,865 - Other liabilities , ,275 Deferred tax liability ,093 1,149,548 Total Liabilities 75,313,787 48,494,354 Shareholders Equity Share capital 22 13,775,692 13,775,692 Share premium 130, ,557 Revaluation reserve for buildings 3,734,957 4,410,697 Revaluation reserve for available-for-sale assets 37,583 (2,488) Retained earnings 6,224,193 2,567,904 Total Shareholders Equity 23,902,982 20,882,362 Total Liabilities and Shareholders Equity 99,216,769 69,376,716 Commitments and contingencies The balance sheet is to be read in conjunction with the Notes to, and forming part of, the financial statements. 5

6 Statement of Cash Flows for the year ended 31 December CASH FLOWS FROM OPERATING ACTIVITIES Notes Interest and fee and commission receipts 10,896,444 5,993,542 Interest and fee and commission payments (3,181,737) (1,644,309) Net receipts from foreign exchange 1,238, ,492 Net receipts from available-for-sale assets 5,458 51,818 Other income/(expenses) 125,264 (73,885) General administrative expenses (3,383,623) (2,773,665) (Increase)/decrease in operating assets Placements with banks and other financial institutions (79,708) (626,917) Amounts receivable under reverse repurchase agreements 959, ,295 Loans to customers (29,423,273) (21,920,653) Available-for-sale assets (62,567) (391,893) Other assets (37,284) 77,476 Increase/(decrease) in operating liabilities Deposits and balances from banks and other financial institutions 22,385,148 12,245,321 Amounts payable under repurchase agreements 4,379,577 (1,653,329) Current accounts and deposits from customers (755,349) 4,664,970 Other liabilities 120, ,132 Net cash provided from operating activities before taxes paid 3,187,180 (4,589,605) Income tax paid (237,085) (380,413) Cash flows from operations 2,950,095 (4,970,018) CASH FLOWS FROM INVESTING ACTIVITIES Net purchases of property and equipment (531,537) (579,380) Cash flows from investing activities (531,537) (579,380) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issuance of share capital - 6,380,014 Cash flows from financing activities - 6,380,014 Net increase in cash and cash equivalents 2,418, ,616 Effect of changes in exchange rates on cash and cash equivalents 167,317 (830,857) Cash and cash equivalents at the beginning of the year 11,659,024 11,659,265 Cash and cash equivalents at the end of the year 29 14,244,899 11,659,024 The statement of cash flows is to be read in conjunction with the Notes to, and forming part of, the financial statements. 6

7 Statement of Changes in Shareholders Equity for the year ended 31 December Revaluation Share capital Share premium Revaluation reserve for buildings reserve for available-for-sale assets Retained earnings Total equity Restated balance at 1 January 7,395, ,557 2,588,143 (18,524) 1,467,598 11,563,452 Net income for the period , ,997 Net unrealized gains on available-for-sale assets, net of deferred tax of AMD 14,373 thousand ,490-57,490 Net realized gains on availablefor-sale assets transferred to the income statement on disposal, net of deferred tax of AMD 10,364 thousand (41,454) - (41,454) Revaluation of buildings, net of deferred tax of AMD 533,216 thousand - - 2,132, ,132,863 Realisation of buildings revaluation reserve upon depreciation - - (188,143) - 188,143 - Realisation of buildings revaluation reserve upon disposal - - (122,166) - 122,166 - Total recognised income and expense 2,938,896 Shares issued 6,380, ,380,014 Balance at 31 December 13,775, ,557 4,410,697 (2,488) 2,567,904 20,882,362 Net income for the period ,980,549 2,980,549 Net unrealized gains on available-for-sale assets, net of deferred tax of AMD 11,110 thousand ,437-44,437 Net realized gains on availablefor-sale assets transferred to the income statement on disposal, net of deferred tax of AMD 1,092 thousand (4,366) - (4,366) Realisation of buildings revaluation reserve upon depreciation - - (285,508) - 285,508 - Realisation of buildings revaluation reserve upon disposal - - (390,232) - 390,232 - Total recognised income and expense 3,020,620 Balance at 31 December 13,775, ,557 3,734,957 37,583 6,224,193 23,902,982 The statement of changes in shareholders equity is to be read in conjunction with the Notes to, and forming part of, the financial statements. 7

8 1 Background Principal activities VTB Bank (Armenia) cjsc was established in the Republic of Armenia (RA) as a closed joint stock company in 2001 as the legal successor of USSR Savingsbank Armenian branch. The Bank has a general banking license. The Bank is a member of the state deposit insurance scheme in RA. The principal activities of the Bank are deposit taking and customer accounts maintenance, lending and issuing guarantees, cash and settlement operations and operations with securities and foreign exchange. The activities of the Bank are regulated by the Central Bank the Republic of Armenia ( CBA ). The Bank has 78 branches (: 89) from which it conducts business throughout the Republic of Armenia. The registered address of the Bank s head office is 46 Nalbanyan Street, Yerevan, Republic of Armenia. The majority of the Bank s assets and liabilities are located in the Republic of Armenia. The average number of people employed by the Bank during the year was 882 (: 944). Shareholders The Bank is wholly-owned by VTB Bank ojsc (Russian Federation) ( parent Bank ). A significant part of the Bank s funding is from the parent bank and fellow subsidiaries. Related party transactions are detailed in Note 28. Armenian business environment Republic of Armenia has been experiencing political and economic change which has affected, and may continue to affect, the activities of enterprises operating in this environment. Consequently, operations in the Republic of Armenia involve risks, which do not typically exist in other markets. In addition, the recent contraction in the capital and credit markets has further increased the level of economic uncertainty in the environment. The accompanying financial statements reflect management s assessment of the impact of the Armenian business environment on the operations and the financial position of the Bank. The future business environment may differ from management s assessment. 2 Basis of preparation Statement of compliance The accompanying financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ). Basis of measurement The financial statements are prepared on the historical cost basis except that available-for-sale assets are stated at fair value, and buildings are stated at revalued amounts. Functional and presentation currency The national currency of the RA is the Armenian Dram ( AMD ). Management has determined the Bank s functional currency to be the AMD as it reflects the economic substance of the underlying events and circumstances of the Bank. The AMD is also the Bank s presentation currency for the purposes of these financial statements. Financial information presented in AMD has been rounded to the nearest thousand. 8

9 Use of estimates and judgments Management has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with IFRS. Actual results could differ from those estimates. In particular, information about significant areas of estimation uncertainty and critical judgments in applying accounting policies is described in the following notes: Loan impairment - Note 13 Buildings revaluation - Note 15 3 Significant accounting policies The following significant accounting policies have been applied in the preparation of the financial statements. The accounting policies have been consistently applied. Foreign currency transactions Transactions in foreign currencies are translated to the appropriate functional currency at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date are translated to the functional currency at the foreign exchange rate ruling at that date. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated to the functional currency at the foreign exchange rate ruling at the date of the transaction. Foreign exchange differences arising on translation are recognised in the income statement. Cash and cash equivalents The Bank considers cash, nostro accounts and demand deposits with the CBA and other banks to be cash and cash equivalents. Financial instruments Classification Financial instruments at fair value through profit or loss are financial assets or liabilities that are: acquired or incurred principally for the purpose of selling or repurchasing in the near term; part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking; derivative financial instruments (except for derivative financial instruments that are designated and effective hedging instruments); or, upon initial recognition, designated by the Bank as at fair value through profit or loss. The Bank designates financial assets and liabilities at fair value through profit or loss where either: the assets or liabilities are managed and evaluated on a fair value basis; the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise; or the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. 9

10 All trading derivatives in a net receivable position (positive fair value), as well as options purchased, are reported assets. All trading derivatives in a net payable position (negative fair value), as well as options written, are reported liabilities. Financial assets and liabilities at fair value through profit or loss are not reclassified subsequent to initial recognition. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that: the Bank intends to sell immediately or in the near term; the Bank upon initial recognition designates as at fair value through profit or loss; the Bank upon initial recognition designates as available- for-sale; or the Bank may not recover substantially all of its initial investment, other than because of credit deterioration. Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intention and ability to hold to maturity, other than those that: the Bank upon initial recognition designates as at fair value through profit or loss; the Bank designates as available-for-sale; or meet the definition of loans and receivables. Available-for-sale assets are those financial assets that are designated as available-for-sale or are not classified as loans and receivables, held-to-maturity investments or financial instruments at fair value through profit or loss. Recognition Financial assets and liabilities are recognized in the balance sheet when the Bank becomes a party to the contractual provisions of the instrument. All regular way purchases of financial assets are accounted for at the settlement date. Measurement A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability. Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred on sale or other disposal, except for: loans and receivables which are measured at amortized cost using the effective interest method; held-to-maturity investments which are measured at amortized cost using the effective interest method; and investments in equity instruments that do not have a quoted market price in an active market and whose fair value can not be reliably measured which are measured at cost. 10

11 All financial liabilities, other than those designated at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortized cost. Amortized cost is calculated using the effective interest rate method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument. Where a valuation based on observable market data indicates a fair value gain or loss on initial recognition of an asset or liability, the gain or loss is recognised immediately in the income statement. Where an initial gain or loss is not based entirely on observable market data, it is deferred and recognised over the life of the asset or liability on an appropriate basis, or when prices become observable, or on disposal of the asset or liability. Fair value measurement principles The fair value of financial instruments is based on their quoted market price at the balance sheet date without any deduction for transaction costs. If a quoted market price is not available, the fair value of the instrument is estimated using pricing models or discounted cash flow techniques. Where discounted cash flow techniques are used, estimated future cash flows are based on management s best estimates and the discount rate is a market related rate at the balance sheet date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the balance sheet date. The fair value of derivatives that are not exchange-traded is estimated at the amount that the Bank would receive or pay to terminate the contract at the balance sheet date taking into account current market conditions and the current creditworthiness of the counterparties. Gains and losses on subsequent measurement A gain or loss arising from a change in the fair value of a financial asset or liability is recognized as follows: a gain or loss on a financial instrument classified as at fair value through profit or loss is recognised in the income statement; a gain or loss on an available-for-sale financial asset is recognized directly in equity through the statement of changes in shareholders equity (except for impairment losses and foreign exchange gains and losses) until the asset is derecognized, at which time the cumulative gain or loss previously recognised in equity is recognized in the income statement. Interest in relation to an available-for-sale financial asset is recognized as earned in the income statement calculated using the effective interest method. For financial assets and liabilities carried at amortized cost, a gain or loss is recognized in the income statement when the financial asset or liability is derecognized or impaired, and through the amortization process. Derecognition A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire or when the Bank transfers substantially all the risks and rewards of ownership of the financial asset. Any rights or obligations created or retained in the transfer are recognized separately as assets or liabilities. A financial liability is derecognised when it is extinguished. The Bank also derecognises certain assets when it writes off balances pertaining to the assets deemed to be uncollectible. 11

12 Repurchase and reverse repurchase agreements Securities sold under sale and repurchase ( repo ) agreements are accounted for as secured financing transactions, with the securities retained in the balance sheet and the counterparty liability included in amounts payable under repo transactions. The difference between the sale and repurchase prices represents interest expense and is recognized in the income statement over the term of the repo agreement using the effective interest rate method. Securities purchased under agreements to resell ( reverse repo ) are recorded as amounts receivable under reverse repo transactions. The difference between the purchase and resale prices represents interest income and is recognized in the income statement over the term of the repo agreement using the effective interest rate method. If assets purchased under agreement to resell are sold to third parties, the obligation to return securities is recorded as a trading liability and measured at fair value. Offsetting Financial assets and liabilities are offset and the net amount reported in the balance sheet when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. Property and equipment Owned assets Items of property and equipment are stated at cost less accumulated depreciation and impairment losses, except for buildings which are stated at revalued amounts as described below. Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment. Leased assets Leases under which the Bank assumes substantially all the risks and rewards of ownership are classified as finance leases. Equipment acquired by way of finance lease is stated at the amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses. Revaluation Buildings of the Bank are subject to revaluation on a regular basis. The frequency of revaluation depends upon the movements in the fair values of the buildings being revalued. A revaluation increase on an item of building is recognised directly in equity except to the extent that it reverses a previous revaluation decrease recognised in the income statement, in which case it is recognised in the income statement. A revaluation decrease on an item of buildings is recognised in the income statement except to the extent that it reverses a previous revaluation increase recognised directly in equity, in which case it is recognised directly in equity. The revaluation reserve is transferred to retained earnings calculated as the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset s original cost or when the asset is retired or disposed of. 12

13 Depreciation Depreciation is charged to the income statement on a straight-line basis over the estimated useful lives of the individual assets. Depreciation commences on the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and ready for use. The estimated useful lives are as follows: Buildings Computers and communication equipment Furniture and fittings Motor vehicles Other 20 years 3 years 5 years 5 years 5 years Intangible assets Intangible assets, which are acquired by the Bank, are stated at cost less accumulated amortisation and impairment losses. Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful life of intangible assets is 10 years. Impairment Financial assets carried at amortized cost Financial assets carried at amortized cost consist principally of loans, other receivables and unquoted available-for-sale debt securities ( loans and receivables ). The Bank reviews its loans and receivables, to assess impairment on a regular basis. A loan or receivable is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the loan or receivable and that event (or events) has had an impact on the estimated future cash flows of the loan that can be reliably estimated. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, breach of loan covenants or conditions, restructuring of a loan or advance by the Bank on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, deterioration in the value of collateral, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers in the group, or economic conditions that correlate with defaults in the group. The Bank first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for loans and receivables that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed loan or receivable, whether significant or not, it includes the loan in a group of loans and receivables with similar credit risk characteristics and collectively assesses them for impairment. Loans and receivables that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. 13

14 If there is objective evidence that an impairment loss on a loan or receivable has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan or receivable and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the loan or receivable s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows. In some cases the observable data required to estimate the amount of an impairment loss on a loan or receivable may be limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in financial difficulties and there is little available historical data relating to similar borrowers. In such cases, the Bank uses its experience and judgment to estimate the amount of any impairment loss. All impairment losses in respect of loans and receivables are recognized in the income statement and are only reversed if a subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. When a loan is uncollectable, it is written off against the related allowance for loan impairment. The Bank writes off a loan balance (and any related allowances for loan losses) when the Bank s management determines that the loans are uncollectible and when all necessary steps to collect the loan are completed. Financial assets carried at cost Financial assets carried at cost include unquoted equity instruments included in available-for-sale assets that are not carried at fair value because their fair value can not be reliably measured. If there is objective evidence that such investments are impaired, the impairment loss is calculated as the difference between the carrying amount of the investment and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. All impairment losses in respect of these investments are recognized in the income statement and can not be reversed. Non financial assets Other non financial assets, other than deferred taxes, are assessed at each reporting date for any indications of impairment. The recoverable amount of non financial assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. All impairment losses in respect of non financial assets are recognized in the income statement and reversed only if there has been a change in the estimates used to determine the recoverable amount. Any impairment loss reversed is only reversed to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. 14

15 Non current assets held for sale The Bank classifies buildings from Property and Equipment as Property held for sale included within other assets when management becomes committed to a plan to sell the asset and the sale is expected to qualify for recognition as a completed sale within one-year from the date of classification. These assets are measured at the lower of their carrying amount and fair value less costs to sell. Credit related commitments In the normal course of business, the Bank enters into credit related commitments, comprising undrawn loan commitments, letters of credit and guarantees, and provides other forms of credit insurance. Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. A financial guarantee liability is recognised initially at fair value net of associated transaction costs, and is measured subsequently at the higher of the amount initially recognised less cumulative amortisation or the amount of provision for losses under the guarantee. Provisions for losses under financial guarantees and other credit related commitments are recognised when losses are considered probable and can be measured reliably. Financial guarantee liabilities and provisions for other credit related commitment are included within other liabilities. Share capital Dividends The ability of the Bank to declare and pay dividends is subject to the rules and regulations of the Armenian legislation. Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared. Taxation Income tax comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The temporary differences from the initial recognition of assets or liabilities that affect neither accounting nor taxable profit are not provided for. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the balance sheet date. 15

16 A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences, unused tax losses and credits can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Income and expense recognition Interest income and expense are recognised in the income statement using the effective interest method. Loan origination fees, loan servicing fees and other fees that are considered to be integral to the overall profitability of a loan, together with the related direct costs, are deferred and amortized to the interest income over the estimated life of the financial instrument using the effective interest rate method. Other fees, commissions and other income and expense items are recognised when the corresponding service has been provided. New Standards and Interpretations not yet adopted A number of new Standards, amendments to Standards and Interpretations are not yet effective as at 31 December, and have not been applied in preparing these financial statements. Of these pronouncements, potentially the following will have an impact on the Bank s operations. The Bank plans to adopt these pronouncements when they become effective. The Bank has not yet analysed the likely impact of these new standards on its financial statements. IAS 1 Presentation of Financial Statements (Revised), which is effective for annual periods beginning on or after 1 January 2009, specifies how an entity should present changes in equity not resulting from transactions with owners and other changes in equity in its financial statements, and introduces certain other requirements in respect of presentation of information in the financial statements. Amendments to IAS 39 Financial Instruments: Recognition and Measurement Eligible Hedged Items, which is effective for annual periods beginning on or after 1 July 2009, which introduce additional application guidance which clarifies that changes in the cash flows or fair value of a hedged item above or below a specified price or variable can be designated. Amendment to IAS 18 Revenue, which is effective for annual periods beginning on or after 1 January 2009, provides guidance on transaction costs related to originating a financial asset, which is aligned with the definition of transaction costs as included in IAS 39. Amendments to IAS 39 Financial Instruments: Recognition and Measurement and IFRS 7 Financial Instruments: Disclosures, which are applicable to reclassifications of financial assets on or after 1 July, permit an entity to reclassify non-derivative financial assets, other than those designated at fair value through profit or loss upon initial recognition, out of trading category in certain circumstances. 16

17 4 Net interest income Interest income Loans to customers 8,913,600 4,330,647 Available-for-sale assets 374, ,886 Placements with banks and other financial institutions 231, ,807 Other 69,036 22,214 Interest expense 9,588,677 4,762,554 Deposits and balances from banks and other financial institutions 1,793, ,640 Current accounts and deposits from customers 1,399, ,817 Amounts payable under repurchase agreements 67,049 49,142 3,260,637 1,649,599 5 Fee and commission income Account maintenance and cash withdrawal fees 490, ,399 Servicing state and local budgets and state pension fund 361, ,444 Settlement fees 317, ,068 Servicing utility payments 194, ,521 Credit card fees 104,584 93,808 Guarantee and letter of credit issuance fees 25,067 18,671 Other 44,790 44,840 1,538,080 1,397,751 6 Net foreign exchange income Net gain on spot transactions 1,238, ,492 Net gain/(loss) from revaluation of financial assets and liabilities 42,684 (53,447) 1,280, ,045 7 Other income Fines and penalties from customers 104,212 40,013 Gain on disposal of property and equipment 41,506 53,360 Other income 207,842 31, , ,675 17

18 8 Other expenses Loss on disposal of property and equipment 184,800 81,616 Other expenses 126, , , ,891 9 General administrative expenses Employee compensation 1,745,457 1,724,158 Depreciation and amortization 854, ,596 Repairs and maintenance 295, ,834 Taxes other than on income 228, ,343 Payroll related taxes 201, ,762 Communications and information services 184, ,895 Security 121, ,037 Office supplies 100,571 94,032 Rent and occupancy 73,056 38,983 Advertising and marketing 71,567 49,535 Professional services 42,498 41,707 Travel expenses 42,127 49,715 Other 163, ,143 4,123,853 3,695, Income tax expense Current tax expense Current year (1,015,487) (232,246) Deferred tax benefit/(expense) Origination and reversal of temporary differences 226,473 (12,112) Total income tax expense in the income statement (789,014) (244,358) The Bank s applicable tax rate for current and deferred tax is 20% (: 20%). 18

19 Reconciliation of effective tax rate: % % Income before tax 3,769,563 1,034,355 Income tax at the applicable tax rate 753,913 20% 206,871 20% Non-deductible costs 35,101 1% 37,487 4% 789,014 21% 244,358 24% 11 Due from the Central Bank of the Republic of Armenia Nostro accounts 5,135,579 4,835,610 Nostro accounts include non-interest bearing mandatory minimum reserve deposits calculated in accordance with regulations issued by the CBA at 8% to 12% from the attracted funds. Withdrawability of these deposits is not restricted but the Bank may be exposed to penalties if the minimum average balance is not periodically maintained. 12 Placements with banks and other financial institutions Not impaired or past due Nostro accounts OECD banks 5,206,469 3,136,549 Other foreign banks 778, ,465 Largest 10 Armenian banks 126,095 73,848 Other Armenian banks 24,215 - Accrued interest on nostro accounts Total nostro accounts 6,135,725 3,675,934 Loans, deposits and other placements Receivables under currency repurchase agreements with largest 10 Armenian banks 659,086 - Loans to largest 10 Armenian banks - 614,441 Total loans, deposits and other placements 659, ,441 6,794,811 4,290,375 Included in nostro accounts with OECD banks: AMD 2,454,493 thousand is with banks rated Aaa, AMD 2,239,523 thousand is with banks rated Aa3, AMD 248,837 thousand is with banks rated A2 and AMD 263,616 thousand with banks rated Baa2. The ratings are per Moody s. 19

20 Concentration of placements with banks and other financial institutions As at 31 December and the Bank had 3 banks and financial institutions, whose balances exceeded 10% of total placements with banks and other financial institutions. The gross value of these balances as of 31 December and were AMD 5,415,236 thousand and AMD 3,622,167 thousand, respectively. 13 Loans to customers Corporate and state loans Loans to the Government of the RA 8,633,406 9,188,814 Loans to large corporates 15,215,973 9,993,931 Loans to small and medium size companies and individuals-entrepreneurs 16,319,816 4,686,049 Total commercial loans 40,169,195 23,868,794 Loans to individuals Mortgage loans 12,475,306 4,987,006 Loans collateralized by gold 7,287,487 5,625,274 Auto loans 2,218, ,399 Agricultural loans 1,448,222 1,479,117 Credit cards 604,378 52,051 Consumer loans 341, ,855 Other loans 6,311,838 3,145,115 Total loans to individuals 30,687,351 17,184,817 Gross loans to customers 70,856,546 41,053,611 Impairment allowance (1,494,513) (460,651) Net loans to customers 69,362,033 40,592,960 Movements in the loan impairment allowance for the year ended 31 December are as follows: Balance at the beginning of the year 460, ,495 Net charge for the year 1,226, ,647 Net write-offs (192,446) (472,491) Balance at the end of the year 1,494, ,651 20

21 Credit quality of corporate and state loan portfolio The following table provides information on the credit quality of the corporate and state loan portfolio as at 31 December : Loans to the Government of the RA Loans for which no impairment has been identified Gross loans Impairment Net loans Impairment to gross loans % - Not overdue 8,633,406-8,633,406 0% Total loans to the Government of the RA 8,633,406-8,633,406 0% Loans to large corporates Loans for which no impairment has been identified: - Not overdue loan with a related party * 9,262,406-9,262,406 0% - Not overdue other loans 5,953, ,187 5,849, % Total loans to large corporates 15,215, ,187 15,111, % Loans to small and medium size companies and individuals-entrepreneurs Loans for which no impairment has been identified: - Not overdue 15,194, ,909 14,928, % Impaired loans: - Not overdue 425,058 64, , % - Overdue less than 90 days 612,571 10, , % - Overdue more than 90 days and less than 270 days 87,401 1,530 85, % Total loans to small and medium size companies and individuals-entrepreneurs 16,319, ,264 15,977, % Total corporate and state loans 40,169, ,451 39,722, % * For this loan to a related party the parent Bank has issued an irrevocable offer to purchase the loan from the Bank at loan carrying value. 21

22 The following table provides information on the credit quality of the corporate and state loan portfolio as at 31 December : Loans to the Government of the RA Loans for which no impairment has been identified Gross loans Impairment Net loans Impairment to gross loans % - Not overdue 9,188,814-9,188,814 0% Total loans to the Government of the RA 9,188,814-9,188,814 0% Loans to large corporates Loans for which no impairment has been identified: - Not overdue 9,993, ,896 9,817, % Total loans to large corporates 9,993, ,896 9,817, % Loans to small and medium size companies and individuals-entrepreneurs Loans for which no impairment has been identified: - Not overdue 4,090,076 72,473 4,017, % Impaired loans: - Overdue less than 90 days 9, , % - Overdue more than 90 days and less than 270 days 586,449 10, , % Total loans to small and medium size companies and individuals-entrepreneurs 4,686,049 83,022 4,603, % Total corporate and state loans 23,868, ,918 23,608, % The Bank has estimated loan impairment for corporate and state loans based on an analysis of the future cash flows for impaired loans and based on its past loss experience adjusted for economic risk factor for portfolios of loans for which no indications of impairment has been identified. The amount of the impairment allowance is measured as the difference between the carrying amount of the loan and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the loan original effective interest rate. In determining the impairment allowance for corporate loans, the following key assumptions were used: Management have assumed a historic annual loss rate of 1.2%; Management have used economic risk factor of 1.5 to adjust the impairment allowances derived solely from historical loss experience. Changes in these estimates could effect the loan impairment provision. For example, to the extent that the net present value of the estimated cash flows differs by one percent, the loan impairment provision on corporate loans as of 31 December would be AMD 310,893 thousand lower/higher. As at 31 December and the Bank does not have renegotiated corporate and state loans that would otherwise be past due or impaired. 22

23 Analysis of collateral The following table provides the analysis of the corporate and state loan portfolio, net of impairment, by types of collateral as at 31 December : % of loan portfolio % of loan portfolio Real estate 18,453,841 46% 11,318,269 48% Borrower settlement account 10,953,746 28% 1,358,296 6% Motor vehicles and equipment 958,391 2% - 0% Cash 521,441 1% - 0% Inventory 201,919 1% 1,020,339 4% Other collateral - 0% 282,515 1% Corporate guarantees - 0% 440,643 2% Unsecured 8,633,406 22% 9,188,814 39% Total 39,722, % 23,608, % Loans to the Government of the RA are unsecured. Loans collateralized by borrower settlement account include the loan to a related party for which the parent Bank has issued an irrevocable offer to purchase the loan when the offer is accepted by the Bank. The amounts shown in the table above represent the carrying value of the loans, and do not necessarily represent the fair value of the collateral. The fair value of collateral of overdue corporate loans is at least equal to 90% of their carrying amounts as at 31 December and. During the year ended 31 December the Bank obtained real estate by taking ownership of the collateral held as security for corporate loans with AMD 9,068 thousand carrying value (31 December : 176,731). Repossessed properties are made available for sale in an orderly fashion and the Bank does not generally occupy repossessed properties for its business use. Analysis of movements in the impairment allowance Movements in the loan impairment allowance by classes of corporate loans for the year ended 31 December are as follows: Loans to large corporates Loans to small and medium size companies Total Loan impairment allowance as at 1 January 176,896 83, ,918 Loans written off during the year as uncollectible - (53,442) (53,442) Loan impairment losses/(recoveries) during the year (72,709) 312, ,975 Loan impairment allowance as at 31 December 104, , ,451 Movements in the loan impairment allowance by classes of corporate loans for the year ended 31 December are as follows: Loans to large corporates Loans to small and medium size companies Total Loan impairment allowance as at 1 January 360, , ,300 Loans written off during the year as uncollectible - (392,948) (392,948) Loan impairment losses during the year (183,136) 312, ,566 Loan impairment allowance as at 31 December 176,896 83, ,918 23

24 Credit quality of loans to individuals The following table provides information on the credit quality of loans to individuals portfolios as at 31 December : Gross loans Impairment Net loans Impairment to gross loans % Mortgage loans - Not past due 10,892, ,482 10,671, % - Overdue less than 30 days 741,622 15, , % - Overdue days 526,730 10, , % - Overdue days 260,465 5, , % - Overdue days 54,419 1,102 53, % Total mortgage loans 12,475, ,530 12,222, % Loans collateralised by gold - Not past due 7,242,173 31,931 7,210, % - Overdue less than 30 days 24, , % - Overdue days 8, , % - Overdue days 12, , % Total loans collateralised by gold 7,287,487 32,131 7,255, % Auto loans - Not past due 2,071,805 22,109 2,049, % - Overdue less than 30 days 39,159 7,580 31, % - Overdue days 51,909 23,956 27, % - Overdue days 45,327 23,168 22, % - Overdue days 10,450 7,015 3, % Total auto loans 2,218,650 83,828 2,134, % Agricultural loans - Not past due 1,220,182 14,714 1,205, % - Overdue less than 30 days 82,089 16,114 65, % - Overdue days 74,920 34,599 40, % - Overdue days 35,565 19,143 16, % - Overdue days 35,466 30,210 5, % Total agricultural loans 1,448, ,780 1,333, % Credit cards - Not past due 579,599 7, , % - Overdue less than 30 days % - Overdue days 24,248 14,585 9, % Total credit cards 604,378 22, , % Consumer loans - Not past due 315,342 3, , % - Overdue less than 30 days 9, , % - Overdue days 3, , % - Overdue days 8,649 2,919 5, % - Overdue days 4,571 2,298 2, % Total consumer loans 341,470 10, , % Other loans - Not past due 5,258, ,343 4,815, % - Overdue less than 30 days 299,046 25, , % - Overdue days 353,619 29, , % - Overdue days 353,208 29, , % - Overdue days 47,073 3,973 43, % Total other loans 6,311, ,211 5,779, % Total loans to individuals 30,687,351 1,048,062 29,639, % 24

25 The following table provides information on the credit quality of loans to individuals portfolios as at 31 December : Gross loans Impairment Net loans Impairment to gross loans % Mortgage loans - Not past due 4,756,351 39,444 4,716, % - Overdue less than 30 days 129,609 1, , % - Overdue days 64, , % - Overdue days 29, , % - Overdue days 6, , % Total mortgage loans 4,987,006 41,356 4,945, % Loans collateralised by gold - Not past due 5,606,000 39,242 5,566, % - Overdue less than 30 days 11, , % - Overdue days 5, , % - Overdue days 1, , % Total loans collateralised by gold 5,625,274 39,377 5,585, % Auto loans - Not past due 933,063 7, , % - Overdue less than 30 days 9, , % - Overdue days 4, , % - Overdue days 16,644 8,322 8, % Total auto loans 964,399 17, , % Agricultural loans - Not past due 1,418,994 15,888 1,403, % - Overdue less than 30 days 27, , % - Overdue days 13, , % - Overdue days 8, , % - Overdue days 10, , % Total agricultural loans 1,479,117 16,561 1,462, % Credit cards - Not past due 50, , % - Overdue less than 30 days 1, , % - Overdue days % Total credit cards 52, , % Consumer loans - Not past due 872,920 6, , % - Overdue less than 30 days 16,567 1,657 14, % - Overdue days 8,284 1,657 6, % - Overdue days 26,573 13,287 13, % - Overdue days 7,511 7, % Total consumer loans 931,855 31, , % Other loans - Not past due 2,937,578 50,187 2,887, % - Overdue less than 30 days 78,950 1,349 77, % - Overdue days 39, , % - Overdue days 35, , % - Overdue days 53, , % Total other loans 3,145,115 53,733 3,091, % Total loans to individuals 17,184, ,733 16,984, % 25