HSBC Bank Armenia cjsc. Financial Statements for the year ended 31 December 2005

Transcription

1 Financial Statements for the year ended 31 December 2005

2 Contents Independent Auditor s Report 2 Income Statement 3 Balance Sheet 4 Statement of Cash Flows 5 Statement of Changes in Shareholders Equity 6 Notes to the Financial Statements 7-33

3 Income Statement for the year ended 31 December 2005 Address: 9 V. Sargsyan Street, Yerevan , Republic of Armenia The income statement is to be read in conjunction with the notes to and forming part of the financial statements. 2

4 Income Statement for the year ended 31 December 2005 Address: 9 V. Sargsyan Street, Yerevan , Republic of Armenia Notes 01/01/05-31/12/05 01/01/04-31/12/04 Interest income 3 3,352,637 2,679,204 Interest expense 4 (200,624) (311,484) Net interest income 3,152,013 2,367,720 Dividend income - - Fee and commission income 1,201,143 1,217,734 Fee and commission expense (95,424) (91,826) Net income/(loss) from investments held for trading 5 3,356 (688) Net loss from investments available-for-sale Net income from investments held-to-maturity - 1,826 Net foreign exchange gain 7 1,161, ,272 Other operating income 8 99, ,779 Operating income 5,521,756 4,712,817 Impairment losses 9 77,212 (50,621) General administrative expenses 10 (2,049,336) (1,446,633) Other operating expenses 11 (374,865) (708,529) Profit/(loss) on investments accounted for under the equity method - - Profit before taxes 3,174,767 2,507,034 Income tax 12 (330,674) (278,330) Profit after taxes 2,844,093 2,228,704 Dividends on preference shares - - on ordinary shares - - Basic earning per share Diluted earnings per share Retained earnings 2,844,093 2,228,704 The income statement is to be read in conjunction with the notes to and forming part of the financial statements. 3

5 Balance Sheet as of 31 December 2005 Address: 9 V. Sargsyan Street, Yerevan , Republic of Armenia Notes 31/12/ /12/2004 Assets Cash and balances with the Central Bank of Armenia 13 13,469,171 11,124,744 Other balances with the Central Bank of Armenia 14 32,747 40,534 Precious metals bullions - - Accounts and deposits in precious metals - - Financial investments held for trading 15 1,173, ,337 Placements with other banks 16 26,800,923 37,332,839 Other placements Loans and other advances to customers 18 16,377,079 9,357,027 Investments available-for-sale 19 6,828,431 8,148 Amounts receivable from banking operations , ,433 Lease receivables Investments held-to-maturity 22 5,350,155 7,426,927 Investments in share capital of other entities 22/1 - - Capital investments in property, plant and equipment and intangible assets of the Bank ,846 Property, plant and equipment and intangible assets , ,515 Deferred tax asset - - Interest receivable , ,339 Other assets , ,247 Total assets 71,550,211 66,975,936 Liabilities Due to the Central Bank of Armenia Due to other banks , ,830 Other borrowings , ,306 Current accounts and deposits from customers 30 60,812,358 57,298,336 Due to the Government of the Republic of Armenia 1,079,362 1,165,199 Lease payables Deposit certificates issued by the Bank - - Other securities issued by the Bank Provisions Amounts payable 33 16,149 43,224 Deferred tax liability 3,359 16,929 Interest payable 39,768 11,981 Other liabilities 34 2,160,097 1,082,519 Total liabilities 64,609,976 61,003,324 Equity Share capital 35 2,437,600 2,437,600 Reserves General reserve 365, ,640 Revaluation reserves 36 (76,470) - Accumulated profit 36/1 4,213,465 3,169,372 Total equity 6,940,235 5,972,612 Total equity and liabilities 71,550,211 66,975,936 The balance sheet is to be read in conjunction with the notes to and forming part of the financial statements. 4

6 Statement of Cash Flows for the year ended 31 December 2005 Address: 9 V. Sargsyan Street, Yerevan , Republic of Armenia 01/01/05-31/12/05 01/01/04-31/12/04 Net cash flows from operating activities (8,001,964) 9,408,127 Net cash flows before changes in operating assets and liabilities 3,024,234 2,635,230 Interest receipts 3,346,763 2,784,773 Interest payments (199,912) (351,899) Loss recovery 629 1,901 Dividends received - - Net commissions received 1,218,776 1,206,879 Salary paid and other related payments (1,032,297) (743,882) Taxes paid (309,725) (262,542) Net cash flows from changes in operating assets and liabilities (11,026,198) 6,772,897 Decrease/(increase) of allocated funds (6,711,777) 7,997,473 Increase/(decrease) of attracted resources 2,540,600 (1,127,189) Decrease/(increase) of investments held for trading and available-for-sale (7,828,239) 31,915 Decrease/(increase) of finance lease receivables - - Net cash flows from other operating activities 973,218 (129,302) Net cash flows from investing activities 1,824,789 (167,406) Decrease/(increase) of investments held-to-maturity 2,036,738 (41,131) Decrease/(increase) of investments in share capital of other entities - - Decrease/(increase) of capital investments in property, plant and equipment and intangible assets (335) - Purchase of property, plant and equipment and intangible assets (214,411) (128,326) Disposal of property, plant and equipment and intangible assets 2,797 2,051 Net cash flows from other investing activities - - Net cash flows from financing activities (1,798,668) (1,650,000) Dividends paid (1,800,000) (1,650,000) Increase/(decrease) of borrowings received from the Central Bank of Armenia - - Increase/(decrease) of borrowings received from banks 1,332 - Increase/(decrease) of other borrowings received - - Increase/(decrease) of other securities issued by the Bank - - Investments of shareholders in share capital - - Increase/(decrease) of finance lease payables - - Net cash flows from other financing activities - - Effect of changes in exchange rates on cash and cash equivalents (4,602) 7,571 Net cash flows (7,980,445) 7,598,292 Cash and cash equivalents at the beginning of the period 44,484,961 36,886,669 Cash and cash equivalents at the end of the period 36,504,516 44,484,961 The statement of cash flows is to be read in conjunction with the notes to and forming part of the financial statements. 5

7 Statement of Changes in Shareholders Equity for the year ended 31 December 2005 Address: 9 V. Sargsyan Street, Yerevan , Republic of Armenia Share capital General reserve Revaluation reserve Accumulated profit Total Balance as at 31 December ,437, ,640 3,051 2,590,668 5,396,959 Result of changes in accounting policies and adjustment of - fundamental errors Restated balance 2,437, ,640 3,051 2,590,668 5,396,959 Profit and loss recognised directly in equity - - (3,051) - (3,051) Investments in share capital Dividends (1,650,000) (1,650,000) Profit after taxes ,228,704 2,228,704 Balance as at 31 December ,437, ,640-3,169,372 5,972,612 Balance as at 31 December ,437, ,640-3,169,372 5,972,612 Result of changes in accounting policies and adjustment of fundamental errors Restated balance 2,437, ,640-3,169,372 5,972,612 Profit and loss recognised directly in equity - - (76,470) - (76,470) Investments in share capital Dividends (1,800,000) (1,800,000) Profit after taxes ,844,093 2,844,093 Balance as at 31 December ,437, ,640 (76,470) 4,213,465 6,940,235 The statement of changes in shareholders equity is to be read in conjunction with the notes to and forming part of the financial statements. 6

8 Notes to thefinancial Statements for the year ended 31 December Background (a) Principal activities of the Bank HSBC Bank Armenia cjsc ( the Bank ) was registered as a closed joint stock company in Armenia in The Bank provides a wide spectrum of financial and banking services and operates from its head office and branch located in the capital of Armenia. The average number of persons employed by the Bank during the year was 140 (2004: 123). (b) Armenian business environment 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 that do not typically exist in other markets. 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 Accounting standards Basis of preparation (a) Statement of compliance The Bank maintains its accounting records in accordance with the legislative requirements of the Republic of Armenia. (b) Basis of measurement The financial statements are prepared on a fair value basis for financial assets and liabilities held for trading and available for sale financial assets, except those for which a reliable measure of fair value is not available. Other financial assets and liabilities and non-financial assets and liabilities are stated at amortised cost or historical cost. (c) Measurement and presentation currency The national currency of the Republic of Armenia is the Armenian Dram ( AMD ). Management have determined the Bank s measurement 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. The Armenian Dram is not a convertible currency outside the Republic of Armenia. Financial information presented in AMD has been rounded to the nearest thousand. (d) Going concern The accompanying financial statements have been prepared on a going concern basis, which contemplates the realisation of assets and the satisfaction of liabilities in the normal course of business. 7

9 Notes to thefinancial Statements for the year ended 31 December 2005 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. (e) Foreign currency transactions Transactions in foreign currencies are translated to AMD at the foreign exchange rate ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated at the foreign exchange rate ruling at the closing date. Foreign exchange differences arising on translation are recognised in the income statement. Non-monetary assets and liabilities denominated in foreign currencies, which are stated at historical cost, are translated to drams at the foreign exchange rate ruling at the date of the transaction. The official exchange rate prevailing at the year-end was AMD = USD 1 (as of 31 December 2004: AMD = USD 1). (f) Cash and cash equivalents The Bank considers cash, balances with the Central Bank of Armenia (CBA), except for deposits with the CBA, which are blocked as collateral for bank cards, and balances with correspondent banks to be cash and cash equivalents. The minimum reserve deposit with the CBA is considered to be a cash equivalent due to absence of any restrictions on its withdrawability. (g) (i) Financial instruments Classification Trading instruments are those that the Bank principally holds for the purpose of short-term profit taking. These include investments and derivative contracts that are not designated and effective hedging instruments, and liabilities from short sales of financial instruments. Originated loans and receivables are loans and receivables created by the Bank providing money to a debtor other than those created with the intention of short-term profit taking. Originated loans and receivables comprise loans and advances to banks and customers other than purchased loans. Held-to-maturity assets are financial assets with fixed or determinable payments and fixed maturity that the Bank has the intent and ability to hold to maturity. (ii) Recognition The Bank recognises financial instruments held for trading and available-for-sale assets on the date it commits to purchase those instruments and assets. Held-to-maturity assets and originated loans and receivables are recognised on the day they are transferred to or originated by the Bank. (iii) Measurement Financial instruments are measured initially at cost, including transaction costs. Subsequent to initial recognition all trading instruments and all available-for-sale assets are measured at fair value, except that any instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured is stated at cost, including transaction costs, less impairment losses. 8

10 Notes to thefinancial Statements for the year ended 31 December 2005 All non-trading financial liabilities, originated loans and receivables and held-to-maturity assets are measured at amortised cost less impairment losses. (iv) Gains and losses on subsequent measurement Gains and losses arising from a change in the fair value of all trading instruments are recognised in the income statement, and gains and losses on all available-for-sale instruments are recognized directly in equity. (h) Derecognition A financial asset is derecognised when the Bank looses control over contractual rights that comprise that asset. This occurs when the rights are realised, expire or are surrendered. A financial liability is derecognised when it is extinguished. Assets held for trading that are sold are derecognised and corresponding receivables from the buyer for the payment are recognised as of the date the Bank commits to sell the asset. The Bank uses the specific identification method to determine the gain or loss on derecognition. Held-to-maturity instruments and originated loans and receivables are derecognised on the day they are transferred by the Bank. (i) (i) Property and equipment Owned assets Items of property and equipment are stated at cost less accumulated depreciation (refer below) and impairment losses (refer to (k) 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. (ii) Leased assets Operating leases, under the terms of which the Bank does not assume substantially all the risks and rewards of ownership, are expensed. (iii) 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, fixtures and fittings Computer equipment Motor vehicles Other property, plant and equipment 5 to 20 years 3 years 5 years 5 years (j) (i) Intangible assets Intangible assets Intangible assets, which are acquired by the Bank, are stated at cost less accumulated amortisation and impairment losses. 9

11 Notes to thefinancial Statements for the year ended 31 December 2005 (ii) Amortisation Amortisation is charged to the income statement on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful live is 3 years. (k) Impairment The carrying amounts of the Bank s assets, other than deferred tax assets, are reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, the assets recoverable amounts are estimated. An impairment loss is recognised whenever the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. (i) Calculation of recoverable amount The recoverable amount of the Bank s investments in held-to-maturity securities and receivables is calculated as the present value of expected future cash flows, discounted at the original effective interest rate inherent in the asset. The recoverable amount of the Bank s trading investments is their fair value. The recoverable amount of other assets is the greater of their net selling price and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pretax 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. (ii) Reversals of impairment An impairment loss in respect of a held-to-maturity security or receivable is reversed if the subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. In respect of other assets, an impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss 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 in prior years with respect to this asset. (l) Interest bearing borrowings Interest-bearing borrowings are recognised initially at cost, net of any transaction costs incurred. Subsequent to initial recognition, interest-bearing borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over the period of the borrowings. When borrowings are repurchased or settled before maturity, any difference between the amount repaid and the carrying amount is recognised immediately in the income statement. (m) Taxation Income tax on the profit or loss for the year comprises current and deferred tax. Income tax is recognised in the income statement except to the extent that it relates to items recognised directly to equity, in which case it is recognised in equity. 10

12 Notes to thefinancial Statements for the year ended 31 December 2005 Current tax 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 for 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. 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. (n) Comparative information Comparative information has been reclassified to conform to changes in presentation in the current year. (o) Interest income and expense Interest income and expense is recognized in the income statement as it accrues, taking into account the effective yield of the asset or an applicable floating rate. Interest income and expense includes the amortisation of any discount or premium or other differences between the initial carrying amount of an interest bearing instrument and its amount at maturity calculated on an effective interest rate basis. (p) Fee and commission income Fee and commission income is recognized when the corresponding service is provided. (q) Pensions Pensions are provided by the State through mandatory contributions by companies and employees. The Bank does not have a pension scheme for its employees. 11

13 Notes to thefinancial Statements for the year ended 31 December Interest income 01/01/05-31/12/05 ( 000 AMD) 01/01/04-31/12/04 Interest income on correspondent account with the CBA ,991 Interest income on other placements with the CBA 23,875 1,749 Interest income on correspondent accounts with resident banks - - Interest income on placements with resident banks and other financial institutions 4,544 1,853 Interest income on correspondent accounts with non-resident banks 170, Interest income on placements with non-resident banks and other financial institutions 712, ,900 Interest income on loans and advances to resident legal entities and institutions 1,274, ,845 Interest income on loans and advances to non-resident legal entities and institutions Interest income on loans and advances to resident individuals 399, ,667 Interest income on loans and advances to non-resident individuals 14,850 12,599 Interest income on loans and advances to the employees of the Bank 17,095 11,012 Interest income on loans and advances to the related parties 19,464 19,063 Interest income on investments in treasury bills 715, ,191 Interest income on investments in other securities - - Other interest income - - 3,352,637 2,679,204 12

14 Notes to thefinancial Statements for the year ended 31 December Interest expense 01/01/05-31/12/05 ( 000 AMD) 01/01/04-31/12/04 Interest expense on resources from the CBA by repurchase agreements - - Interest expense on other resources from the CBA - - Interest expense on correspondent accounts with resident banks - - Interest expense on other resources from resident banks and other financial institutions 86 1,440 Interest expense on correspondent accounts with non-resident banks - - Interest expense on other resources from non-resident banks and other financial institutions 2,986 1,056 Interest expense on bank accounts and demand deposits of resident legal entities and institutions 38,104 18,716 Interest expense on bank accounts and demand deposits of resident individuals 15,776 14,235 Interest expense on bank accounts and demand deposits of non-resident legal entities and institutions Interest expense on bank accounts and demand deposits of non-resident 2,105 individuals 1,831 Interest expense on demand deposits of other non-residents - - Interest expense on term deposits of resident legal entities and institutions 43,354 58,331 Interest expense on term deposits of resident individuals 19,818 14,118 Interest expense on term deposits of non-resident legal entities and institutions 1,365 5,941 Interest expense on term deposits of non-resident individuals 7,544 9,141 Interest expense on term deposits of other non-residents - - Interest expense on repurchase and swap agreements signed with resident legal entities and institutions - - Interest expense on repurchase and swap agreements signed with resident individuals - - Interest expense on repurchase and swap agreements signed with non-resident legal entities and institutions - - Interest expense on repurchase and swap agreements signed with non-resident individuals - - Interest expense on due to the RA Government 15 2,910 Interest expense on accrued but non-collected interest from non-performing - assets - Other interest expense 69, , , ,484 Included in other interest expenses are amounts payable to the Deposit Guarantee Fund of AMD 65,997 thousand (2004: AMD 179,484 thousand), which are calculated on the accounts of individual customers, at 0.05% per quarter (2004: 0.5% per annum). 5 Net income/(loss) from investments held for trading 01/01/05-31/12/05 ( 000 AMD) 01/01/04-31/12/04 Net gain/(loss) from sale of investments held for trading 506 4,210 Net gain/(loss) from revaluation of investments held for trading 2,850 (4,898) 3,356 (688) 13

15 Notes to thefinancial Statements for the year ended 31 December Net loss from investments available-for-sale 01/01/05-31/12/05 ( 000 AMD) 01/01/04-31/12/04 Net gain/(loss) from sale of investments available-for-sale - - Net gain/(loss) from revaluation of investments available for sale Net foreign exchange gain 01/01/05-31/12/05 ( 000 AMD) 01/01/04-31/12/04 Net gain/(loss) from sale of foreign exchange 1,165, ,701 Net gain/(loss) from revaluation of foreign exchange (4,602) 7,571 1,161, ,272 8 Other operating income 01/01/05-31/12/05 ( 000 AMD) 01/01/04-31/12/04 Income from operations with guarantees, letters of acceptance and credit and trustee management 64,242 79,727 Net income from derivatives Net income from disposal of property, plant and equipment (3,809) (3,044) Income on penalties and fines received 2, Income from factoring - - Net income received from operations with precious metals bullions and commemorative coins - - Extraordinary income 29, ,322 Other income 7,897 43,578 99, ,779 14

16 Notes to thefinancial Statements for the year ended 31 December Impairment losses 01/01/05-31/12/05 ( 000 AMD) 01/01/04-31/12/04 Provision on correspondent accounts and deposits Opening balance - - Provision charge - - Reversal of provision - - Net provision charge - - Closing balance - - Provision on loans provided Opening balance (94,515) (48,270) Provision charge (1,072) (45,659) Reversal of provision 95,144 - Net provision charge 94,072 (45,659) Loans written off to off-balance sheet 656 1,315 Repayment of loans written off to off-balance sheet (629) (1,901) Closing balance (416) (94,515) Provision on investments held-to-maturity Opening balance (4,962) - Provision charge - (4,962) Reversal of provision 4,962 - Net provision charge 4,962 (4,962) Investments written-off - - Closing balance - (4,962) Provision on receivables and other assets Opening balance - - Provision charge (21,822) - Reversal of provision - - Net provision charge (21,822) - Receivables written off to off-balance sheet 21,822 - Repayment of receivables written off to off-balance sheet - - Closing balance - - Total provision on assets Opening balance (99,477) (48,270) Provision charge (22,894) (50,621) Reversal of provision 100,106 - Net provision charge 77,212 (50,621) Assets written off to off-balance sheet 22,478 1,315 Repayment of assets written off to off-balance sheet (629) (1,901) Closing balance (416) (99,477) Provision on off-balance sheet contingencies Opening balance - - Provision charge - - Reversal of provision - - Net provision charge - - Closing balance - - Total provision on assets and off-balance sheet contingencies Opening balance (99,477) (48,270) Provision charge (22,894) (50,621) Reversal of provision 100,106 - Net provision charge 77,212 (50,621) Assets written off to off-balance sheet 22,478 1,315 Repayment of assets written off to off-balance sheet (629) (1,901) Closing balance (416) (99,477) 15

17 Notes to thefinancial Statements for the year ended 31 December General administrative expenses 01/01/05-31/12/05 ( 000 AMD) 01/01/04-31/12/04 Expenses on salary calculated and equivalent payments 1,066, ,107 Expenses on contributions to the state social security fund 60,892 45,150 Training courses 23,305 5,741 Business trip expenses 3,795 8,902 Rent of the Bank s building and other property, plant and equipment 84,777 72,676 Insurance expenses 139, ,430 Maintenance expenses on the Bank s equipment 15,881 17,461 Maintenance and security expenses on the Bank s buildings 60,243 67,459 Audit and consulting services 30,094 42,641 Communication 34,849 67,616 Transport 8,233 9,309 Taxes, duties and other mandatory payments 5,311 5,979 Office and organisational expenses 57,396 39,565 Expenses on provision and repayment of loans - - Other administrative expenses 458, ,597 2,049,336 1,446, Other operating expenses 01/01/05-31/12/05 ( 000 AMD) 01/01/04-31/12/04 Penalties and fines paid 2,783 2,596 Advertising and representation expenses 29,520 31,895 Expenses on factoring - - Amortization expenses on property, plant and equipment and intangible assets 253, ,910 Expenses on acceptance of guarantees and promissory notes, and operations with letters of credit and powers of attorney - - Extraordinary expenses - 341,158 Other operating expenses 89,176 94, , , Income tax 01/01/05-31/12/05 ( 000 AMD) 01/01/04-31/12/04 Profit before taxes 3,174,767 2,507,034 Income tax at applicable tax rate (10%) 317, ,703 Net non-deductible expenses and non-taxable income 18,271 28,556 Deferred tax (5,074) (929) Income tax 330, ,330 The profits tax in Armenia is 20% (2004: 20%). However, the Bank is granted favourable profit tax status and pays profits tax at 50% of the standard rate and starting from 15 January 2006 the Bank will be taxed at the ordinary tax rate. 16

18 Notes to thefinancial Statements for the year ended 31 December Cash and balances with the Central Bank of Armenia ( 000 AMD) Cash and equivalent payment documents 4,009,572 7,192,607 Correspondent accounts with the CBA 5,159,599 3,932,137 Deposits in the CBA 4,300,000 - Provision on receivables and other assets ,469,171 11,124, Other balances with the Central Bank of Armenia ( 000 AMD) Repurchase and swap agreements with the CBA - - Due from the CBA 32,747 40,534 32,747 40, Financial investments held for trading Government securities of the Republic of Armenia 1,172, ,101 Government securities of other countries - - Non-government securities of the Republic of Armenia - - Non-government securities of other countries - - Receivables on factoring - - Derivative instruments 1,198 2,236 Provision on receivables and other assets - - 1,173, , Placements with other banks Correspondent accounts and demand deposits with resident banks - - Correspondent accounts and demand deposits with non-resident banks 23,035,345 33,360,217 Term deposits in resident banks - - Term deposits in non-resident banks 3,600,397 3,946,765 Loans to resident banks 112,548 - Loans to non-resident banks - - Repurchase and swap agreements with resident banks - - Repurchase and swap agreements with non-resident banks - - Due from resident banks - - Due from non-resident banks 52,633 25,857 Provision on deposits, correspondent accounts and loans ,800,923 37,332,839 17

19 Notes to thefinancial Statements for the year ended 31 December Other placements Demand deposits in other non-resident financial organisations - - Term deposits in other non-resident financial organisations - - Loans to other resident financial organisations - - Loans to other non-resident financial organisations - - Repurchase and swap agreements with other resident financial organizations - - Repurchase and swap agreements with other non-resident financial organizations - - Provision on deposits and loans Loans and other advances to customers Loans to resident legal entities and institutions 10,625,341 6,342,160 Loans to non-resident legal entities and institutions 1, Loans to resident individuals 4,527,581 2,359,809 Loans to non-resident individuals 218,067 86,947 Loans to employees of the Bank 517, ,911 Loans to related parties 488, ,530 Repurchase and swap agreements with resident legal entities and institutions - - Repurchase and swap agreements with non-resident legal entities and institutions - - Repurchase agreements with resident individuals - - Repurchase agreements with non-resident individuals - - Provision on loans provided (416) (94,515) 16,377,079 9,357, Investments available-for-sale Government securities of the Republic of Armenia 6,815,509 - Government securities of other countries - - Non-government securities of the Republic of Armenia 13,500 13,500 Non-government securities of other countries Receivables on factoring - - Loss from market price adjustment of securities (1,357) (1,357) Provision on investments in securities (4,962) 6,828,431 8,148 18

20 Notes to thefinancial Statements for the year ended 31 December Amounts receivable from banking operations Dividends to be received - - Receivables on trustee management - - Letters of credit and bank guarantees 319, ,492 Hedging derivative instruments - - Other receivables 11,193 79,941 Provision on receivables and other assets , , Lease receivables Lease receivables - - Financial income not received - - Provision on receivables and other assets Investments held-to-maturity Government securities of the Republic of Armenia 5,350,155 7,426,927 Government securities of other countries - - Non-government securities of the Republic of Armenia - - Non-government securities of other countries - - Receivables on factoring - - Provision on impairment of investments held to maturity - - Provision on receivables and other assets 5,350,155 7,426,927 22/1 Investments in share capital of other entities Investments in share capital of other entities accounted for under the equity method - - Investments in share capital of other entities accounted for by cost method - - Provision on impairment of investments in share capital of other entities

21 Notes to thefinancial Statements for the year ended 31 December Capital investments in property, plant and equipment and intangible assets of the Bank Capital investments in property, plant and equipment - 4,376 Capital investments in intangible assets - - Capital investments in leased property, plant and equipment , , Property, plant and equipment and intangible assets 01/01/05-31/12/05 Assets in use Land, buildings, fixtures and fittings Computer equipment Motor vehicles Other property, plant and equipment and intangible assets Total Carrying value At the end of the prior year 331, ,500 49, ,079 1,035,324 Additions 16,672 19,173 11,046 23,386 70,277 Disposals (6,012) (3,678) - (2,146) (11,836) At the end of the current year 341, ,995 60, ,319 1,093,765 Depreciation Opening balance 98, ,936 29, , ,942 Accumulated amortisation 18,528 12,654 10,060 24,760 66,002 Disposals (5,414) (3,292) - (1,665) (10,371) Closing balance 111, ,298 39, , ,573 Net carrying value At the end of the prior year 232, ,564 20,062 67, ,382 At the end of the current year 229, ,697 21,048 65, ,192 Assets not in use Carrying value At the end of the prior year 6,193 63, ,827 88,662 Additions 5, ,295 11, ,510 Disposals (8,564) (29,404) (71) (5,830) (43,869) At the end of the current year 3, , , ,303 Depreciation Opening balance 4,750 42, ,015 55,529 Accumulated amortisation 5,286 61,183-9,389 75,858 Disposals (7,504) (26,700) (57) (4,467) (38,728) Closing balance 2,532 76, ,937 92,659 Net carrying value At the end of the prior year 1,443 21, ,812 33,133 At the end of the current year , , ,644 20

22 Notes to the Financial Statements for the year ended 31 December Interest receivable Accrued interest 309, ,339 Interest income not recognised , , Other assets Receivables 68,160 56,995 Advances to employees and suppliers 13,617 12,214 Advances to the budget and with respect to mandatory social security payments - - Provision on receivables and other assets - - Expenses of future periods 89,620 93,707 Small value items 44,593 46,778 Securities sold under repurchase agreements - - Securities sold under swap agreements - - Other assets 117, , , , Due to the Central Bank of Armenia Loans received from the CBA - - Repurchase and swap agreements with the CBA Due to other banks Correspondent accounts and demand deposits of resident banks 16, ,639 Correspondent accounts and demand deposits of non-resident banks 84,018 57,191 Term deposits of resident banks - - Term deposits of non-resident banks - - Loans from resident banks - - Loans from non-resident banks 1,332 - Repurchase and swap agreements with resident banks - - Repurchase and swap agreements with non-resident banks - - Other amounts due to resident banks - - Other amounts due to non-resident banks , ,830 21

23 Notes to the Financial Statements for the year ended 31 December Other borrowings Bank accounts and demand deposits of other resident financial organizations 346, ,683 Bank accounts and demand deposits of other non-resident financial organizations 37,483 84,175 Term deposits of other resident financial organisations 13,688 9,448 Term deposits of other non-resident financial organisations - - Loans from other resident financial organisations - - Loans from other non-resident financial organisations - - Repurchase and swap agreements with other resident financial organizations - - Repurchase and swap agreements with other non-resident financial organizations , , Current accounts and deposits from customers Bank accounts and demand deposits of resident legal entities and institutions 15,678,476 15,438,237 Bank accounts and demand deposits of non-resident legal entities and institutions 6,673,173 6,125,742 Bank accounts and demand deposits of resident individuals 21,288,476 21,392,660 Bank accounts and demand deposits of non-resident individuals 7,241,574 8,806,421 Demand deposits of other non-residents - - Term deposits of resident legal entities and institutions 2,193, ,981 Term deposits of non-resident legal entities and institutions 19, ,391 Term deposits of resident individuals 6,231,488 2,771,709 Term deposits of non-resident individuals 1,486,336 1,847,195 Term deposits of other non-residents - - Repurchase and swap agreements with resident legal entities and institutions - - Repurchase and swap agreements with non-resident legal entities and institutions - - Repurchase and swap agreements with resident individuals - - Repurchase and swap agreements with non-resident individuals ,812,358 57,298, Lease payables Lease payables - - Financial expenses not incurred

24 Notes to the Financial Statements for the year ended 31 December Other securities issued by the Bank Interest bearing securities - - Non-interest bearing securities - - Other securities issued Amounts payable Dividends to be paid - - Payables on trustee management agreements - - Liabilities on deposits insurance 16,149 43,224 Other payables ,149 43, Other liabilities Settlement liabilities with payment documents 659, ,439 Payables and transit accounts 501, ,726 Future period income 56,827 5,824 Other liabilities 942, ,530 2,160,097 1,082, Share capital Number of shares authorised by the Bank 609, ,400 Nominal value of the shares authorised by the Bank 4 4 Number of shares issued and fully paid 609, ,400 Nominal value of shares issued and fully paid 4 4 Number of shares issued but not allocated - - Nominal value of the shares issued but not allocated - - Number of shares allocated but not paid - - Nominal value of shares allocated but not paid - - Number of shares repurchased by the Bank - - Nominal value of shares repurchased by the Bank - - Number of shares outstanding at the beginning and at the end of the year

25 Notes to the Financial Statements for the year ended 31 December Revaluation reserves Not realised profit/loss from revaluation of investments available-for-sale (76,470) - Revaluation reserve of property, plant and equipment - - Other provisions - - (76,470) - 36/1 Accumulated profit Profit/loss of the current period 2,844,093 2,228,704 Retained earnings/loss of the previous period 1,369, ,668 4,213,465 3,169,372 24

26 Notes to the Financial Statements for the year ended 31 December Maturity analysis of assets and liabilities per balance sheet captions Up to 30 days 31 days to 90 days 91 days to 1 year 1 year to 5 years More than 5 years No maturity Total Demand Assets Cash and balances with the CBA 13,469, ,469,171 Other balances with the CBA 32, ,747 Precious metals bullions Accounts and deposits in precious metals Financial instruments held for trading - 39,192 74, , , ,173,243 Placements with other banks 23,087,978 3,712, ,800,923 Other placements Loans and other advances to customers 1,044, ,607 1,862,962 2,666,231 8,756,727 1,322,043-16,377,079 Investments available-for sale - 385, ,639 5,560, ,384-12,922 6,828,431 Amounts receivable from banking operations 9,954 94, , ,386 Lease receivables Investments held-to-maturity - 159, ,588 1,178,262 3,569, ,350,155 Investments in share capital of other entities Capital investments in property, plant and equipment and intangible assets of the Bank Property, plant and equipment and intangible assets , ,836 Deferred tax asset Interest receivable - 116,592 85, , ,246 Other assets 215,255 39,878 29,660 48, ,715 Total assets 37,859,614 5,271,982 2,923,330 10,508,469 13,106,736 1,322, ,037 71,550,211 25

27 Notes to the Financial Statements for the year ended 31 December 2005 Demand Up to 30 days 31 days to 90 days 91 days to 1 year 1 year to 5 years More than 5 years No maturity Total Liabilities Due to the CBA Due to other banks 101, ,501 Other borrowings 383,694 9,187-4, ,382 Current accounts and deposits from customers 50,881,699 5,678,236 1,451,792 2,786,425 14, ,812,358 Due to the Government of the Republic of Armenia 1,079, ,079,362 Lease payables Deposit certificates issued by the Bank Other securities issued by the Bank Provisions Amounts payable , ,149 Deferred tax liability , ,359 Interest payable - 3,087 21,659 15, ,768 Other liabilities 813, , , , ,160,097 Total liabilities 53,259,540 5,796,408 2,221,678 3,318,144 14, ,609, Currency analysis AMD Hard currency Soft currency Total Assets 21,629,908 49,819, ,409 71,550,211 Equity and liabilities 21,720,729 49,794,528 34,954 71,550,211 Net foreign currency position (90,821) 25,366 65,455-26

28 Notes to the Financial Statements for the year ended 31 December Interest rate risk Demand Up to 1 month 1 month to 3 months 3 months 1 year More than 1 year Prior year Current year Prior year Current year Prior year Current year Prior year Current year Prior year Current year Resources attracted 31,210,077 28,235,071 2,781,964 5,687,423 1,704,831 1,744,416 1,239,978 2,804,143 23,300 - In AMD 1,083,703 2,388, , , , , ,805 1,699,536 10,231 - In foreign currency 30,126,374 25,846,299 2,215,759 5,548,493 1,587,900 1,189, ,173 1,104,607 13,069 - Resources allocated 38,256,927 19,471,509 3,893,490 9,311,633 2,008,256 2,561,222 4,572,795 11,178,136 9,794,670 13,632,467 In AMD 3,972, ,274 4,975, , ,004 1,988,306 7,923,094 5,128,900 4,787,120 In foreign currency 34,284,256 19,471,175 3,535,216 4,336,425 1,420,250 1,765,218 2,584,489 3,255,042 4,665,770 8,845,347 27

29 Notes to the Financial Statements for the year ended 31 December /1 Credit risk Standard Controlled Non-standard Doubtful Assets Loans, including 1 Loans to non-residents 3,819, Loans to residents, including: 16,270, Industry 4,718, Agriculture 72, Construction 58, Transport and communication 36, Trade 5,143, Public food and other areas of service 601, Financial sector 112, including resident banks 112, Consuming loans, including: 5,484, secured by real estate 4,678, secured by car 216, Other sectors of economy 43, Receivables 23,747, Investment securities 12, Contingencies and commitments At any time the Bank has outstanding commitments to extend credit. These commitments take the form of approved loans, credit card limits and overdraft facilities. At 31 December 2005 interest rates on loans subject to commitments range from 6.25% to 30% (2004: 8% to 30%). Outstanding loan commitments have a commitment period that does not extend beyond the normal underwriting and settlement period of one year. The Bank provides financial guarantees and letters of credit to guarantee the performance of customers to third parties. These agreements have fixed limits and generally extend for a period of up to one year. Expirations are not concentrated in any period. The contractual amounts of commitments and contingent liabilities are set out in the following table by category. The amounts reflected in the table for commitments assume that amounts are fully advanced. The amounts reflected in the table for guarantees and letters of credit represent the maximum accounting loss that would be recognised at the balance sheet date if counterparties failed completely to perform as contracted. Off-balance sheet items Loan guarantees 64, ,448 Other guarantees 284,395 36,326 Unused part of credit lines 2,121,224 2,610,726 Unused part of credit cards 1,148, ,999 Unused part of overdrafts 417, ,261 Letters of credit 324, ,940 4,360,393 4,736,700 28

30 Notes to the Financial Statements for the year ended 31 December 2005 The total outstanding contractual commitments to extend credit indicated above does not necessarily represent future cash requirements, as many of these commitments will expire without being advanced in whole or in part. Of the above listed commitments, AMD 543,685 thousand (2004: AMD 334,889 thousand) were secured by cash deposits. (i) Litigation Bank management is unaware of any significant actual, pending or threatened claims against the Bank. (ii) Taxation contingencies The taxation system in the Republic of Armenia is relatively new and is characterised by numerous taxes and frequently changing legislation which is often unclear, contradictory, and subject to interpretation. Often, differing interpretations exist among numerous taxation authorities. Taxes are subject to review and investigation by a number of authorities, who are enabled by law to impose severe fines, penalties and interest charges. These facts may create tax risks in the Republic of Armenia substantially more significant than in other countries. Management believes that it has adequately provided for tax liabilities based on its interpretation of tax legislation. However, the relevant authorities may have differing interpretations and the effects could be significant. 29

31 Notes to the Financial Statements for the year ended 31 December Concentration of assets, liabilities and off-balance sheet items Residents Non-residents Total Assets Cash and balances with the CBA 13,469,171-13,469,171 Other balances with the CBA 32,747-32,747 Precious metals bullions Accounts and deposits in precious metals Financial instruments held for trading 1,172, ,173,243 Placements with other banks 112,548 26,688,375 26,800,923 Other placements Loand and other advances to customers 16,158, ,749 16,377,079 Investments available-for-sale 6,827, ,828,431 Amounts receivable from banking operations 325,826 4, ,386 Lease receivables Investments held-to-maturity 5,350,155-5,350,155 Investments in share capital of other entities Capital investments in property, plant and equipment and intangible assets of the Bank Property, plant and equipment and intangible assets 544, ,836 Deferred tax asset Interest receivable 281,060 28, ,246 Other assets 226, , ,715 Total assets 44,501,819 27,048,392 71,550,211 Liabilities Due to the CBA Due to other banks 16,151 85, ,501 Other borrowings 359,899 37, ,382 Current accounts and deposits from customers 45,391,878 15,420,480 60,812,358 Due to the Government of the Republic of Armenia 1,079,362-1,079,362 Lease payables Deposit certificates issued by the Bank Other securities issued by the Bank Provisions Amounts payable 16,149-16,149 Deferred tax liability 3,359-3,359 Interest payable 37,046 2,722 39,768 Other liabilities 1,618, ,476 2,160,097 Total liabilities 48,522,465 16,087,511 64,609,976 Off-balance sheet items Loan guarantees 64,827-64,827 Other guarantees 257,854 26, ,395 Unused part of credit lines 2,121,224-2,121,224 Unused part of credit cards 1,069,790 78,911 1,148,701 Unused part of overdrafts 417, ,078 Letters of credit 324, ,168 Total off-balance sheet items 4,254, ,452 4,360, Pledged assets As of 31 December 2005 and 31 December 2004 the Bank did not have any pledged assets. 30

32 Notes to the Financial Statements for the year ended 31 December Related parties The outstanding balances and average interest rates of related party transactions as at 31 December 2005 are as follows: Management of the Bank Persons having significant interest in the capital of the Bank Parties related to persons having significant interest in the capital of the Bank and management of the Bank Individuals Legal entities Banks Interest income/(expense) included in the income statement ASSETS Loans Amount 439,572-35, ,265 Interest rate 4.12% % - - Overdrafts Amount ,493 Interest rate Credit Cards Amount 9,479-3, Interest rate 19.52% % - - Correspondent accounts Amount , Interest rate % Deposits Amount ,473 48,087 Interest rate % LIABILITIES Correspondent accounts Amount ,150 - Interest rate % Overdrafts Amount ,332 (1,187) Interest rate % Bank accounts Amount 61,405-32,635 1,170 - (264) Interest rate 0.46% % 0.00% - * 43. In related parties note related parties are disclosed in accordance with the requirements of the Law on banks and banking activities of the Republic of Armenia. According to ASRA 24 holding companies, which directly, or indirectly through one or more intermediaries, control, or are controlled by, or are under common control with, the reporting enterprise are considered as related party. According to the above definition claims to HSBC Group banks, out of which AMD 4,881,174 thousand is not included in the above table, will be considered as transactions with related parties. The mentioned amount is placed with those banks of HSBC Group, which have the highest ratings as per Moody s rating agency. Interest income from related party banks and interest expense from all related parties are included under appropriate general headings in Note 3 and Note 4 accordingly. 31