Consolidated annual report

Transcription

1 Consolidated annual report Consolidated financial statements of Equa bank a.s.

2 Consolidated group Supervisory Boards of Equa bank a.s. Consolidated financial statements of Equa bank a.s Basic economic indicators Non-consolidated financial statements of Equa bank a.s. Organisational structure of Equa bank a.s Contents Report of the Board of Directors of Equa bank a.s. Independent Auditor's report Contacts Board of Directors of Equa bank a.s. Report on relations between related parties 13 69

3 Consolidated group 03 Contents

4 Consolidating entity Equa bank a.s. Registered office: Karolinská 661/ Praha 8 Czech Republic Registration No.: Registered in the Commercial Register kept by the Municipal Court in Prague, Section B, Insert Consolidated entity Equa Financial Services s.r.o. Registered office: Karolinská 661/ Praha 8 Czech Republic Registration No: Registered in the Commercial Register kept by the Municipal Court in Prague, Section C, Insert , on 30 December The sole shareholder Equa Sales & Distribution s.r.o. Registered office: Equa Group Limited B2, Industry Street, Qormi, QRM 3000 Republic of Malta Registration No: C48269 Equa bank s shares are not listed on any stock exchange. Karolinská 661/ Praha 8 Czech Republic Registration No: Recorded in the Commercial Register kept by the Municipal Court in Prague, section C, insert on 15 July Consolidated group 04

5 Basic economic indicators 05 Contents

6 Basic indicators Profitability and efficiency ratios Capital adequacy ratio (%) Total assets (MCZK)* Registered capital (MCZK)* Net profit/loss (MCZK) 106 (283) Net profit/loss on a consolidated basis (MCZK)* (51) (382) Number of employees (at 31/12)* ,78 14,93 Average FTE number* Y Y Number of employees As at 31 December 2016, EB had 487 employees and ESD 107 employees. The FTE for EB was 494 and for ESD Return on average assets (ROAA) (%) 0,25 (0,76) Return on average assets (ROAA) (%)* (0,01) (0,012) Y Y Return on average equity (Tier 1) (ROAE) (%) 4,30 (10,50) Return on average equity (Tier 1) (ROAE) (%)* (0,02) (0,14) Assets per employee (MCZK)* Administrative costs per employee (MCZK)* (1) (1) * Data is stated on a consolidated basis. Basic economic indicators 06

7 Capital Total capital (MCZK) of which: Tier 1 capital (MCZK) Tier 2 (T2) capital Capital requirements Total capital requirements (MCZK) of which: Capital requirement for credit risk according to the standardized approach (MCZK) Capital requirement for operational risk (MCZK) Capital requirements for credit valuation adjustment risk (MCZK) Capital adequacy for 2016 is stated on an IFRS basis (on a CAS basis for 2015). Capital adequacy is stated for the Bank individually, as the regulatory consolidated group differs from the accounting consolidated group. Basic economic indicators 07

8 Information on Capital and Capital Requirements Reconciliation of regulatory capital and balance sheet equity items as at 31 December 2016 Point 1 (a) Information on capital and capital requirements pursuant to Article 437(1)(a) of Regulation (EU) 575/2013 Regulatory capital in MCZK Equity in MCZK Equity in MCZK acc. to CAS Registered capital paid up Retained profits (126) (126) - Current period loss Accumulated other comprehensive income (OCI) Revaluation of assets and liabilities Reserve funds and share premium Deferred tax liabilities relating to other intangible assets (-) Prudent valuation adjustments (2) - - (-) Deferred tax assets that rely on future profits and do not arise from temporary differences (214) - - (-) Intangible assets other than goodwill (663) - - Total capital fulfilling Tier 1 requirements Total capital Total Tier 2 capital Capital ratios As at 31 December 2016 Capital ratio of the liable entity Point 2(a) As at the end of the reported period Capital ratio for equity capital Tier 1 11,71 % Capital ratio for Tier 1 capital 11,71 % Capital ratio for total capital 12,78 % The Bank has published the compulsory disclosures in accordance with Part Eight of the Regulation (EU) No. 575/2013 from 26 June 2013 on its website under the Important Documents: Basic economic indicators 08

9 Capital requirements for credit risk classified by individual exposure classes in MCZK As at 31 Dec 2016 As at 31 Dec 2015 Overall risk exposures Risk-weighted exposures for credit risk, counter-party risk, dilution risk and free delivery risk Overall SA risk-weighted exposures for credit risk SA risk-weighted exposures excluding securitised exposures Exposures to institutions Exposures to corporates Retail exposures Exposures secured by mortgages on immovable property Exposures in default Shares Other exposures Overall risk exposures for operational risk Operational risk BIA approach Overall risk exposures for value adjustments by credit risk - - Standardised method - - Basic economic indicators 09

10 Report of the Board of Directors of Equa bank a.s. 10 Contents

11 Report of the Board of Directors by 19% to CZK 40 billion. Client loans increased year on year by 18% to CZK 32 billion. The Bank s equity grew by 20% to CZK 3.6 billion. The Bank s operating revenues grew year on year by 30%. In 2016, we also managed to successfully conclude the extensive expansion of our branch network. During less than two years, we opened 25 new branches and at present have 59 places of business. The size of our business network ranks us among medium-size banks. Dear clients, business partners and colleagues, Petr Řehák CEO, Chairman of the Board of Directors 2016 was a turning point for Equa bank. For the first time in our five-year history, we managed to achieve profit after tax of 106 million Czech crowns for the entire year. This is a significant milestone in our bank s development and a great success in the current market environment. Our management s positive result has been supported by a balanced product portfolio, a long-term high and stable sales performance in all business areas and exemplary discipline at the expense side, in prudent risk management and operating effectiveness. Achieving profitable economic activity confirms to us that the strategy and business model we chose at the beginning of our entry in the market is functional and attractive; not only for us, but especially for our clients. In 2016, we managed to increase the number of clients by 39% to a quarter of million and thus became one of the most dynamically growing banks on the Czech market. Equa bank s total assets increased year on year by 20% and exceeded CZK 44 billion. Client deposits increased Just as in previous years, in 2016 we presented several innovations. For example, we introduced to the market a mortgage loan for construction and advantageous mobile phone tariffs for our clients. We offered payment terminals and payment gates to our corporate clients. In 2016, we successfully completed the permit procedure of the European Investment Fund. In the second half of the year, we began to offer corporate loans within the COSME programme with an EIF guarantee. We have thus become one of three banks currently offering EIF guarantees on the Czech market brought us many awards from both the general and the professional public. In the Zlatá koruna (golden crown) contest, evaluating the best financial products on the Czech market, we were awarded six medals. We were most pleased by first place in the Award of the Public, which we defended with our Current Account from Equa bank for the third time in a row. We understand this as well as the other five awards to be positive feedback and simultaneously an obligation for the future to continue to be a fair, open and decent bank, offering products and services that clients want to use and actively utilize. In 2016, we continued to support volunteer and charity projects. For the third time, we organized a corporate volunteer day, in which several dozens of the Bank s employees took part. In one day, we provided support and funding to five non-profit organizations. In addition, we Report of the Board of Directors 11

12 supported 14 non-profit projects through other volunteer and charity events held during the year was the most significant and most successful year in Equa bank s history on the Czech market to date. I am firmly convinced that our positive management trend will continue in the upcoming period. We will continue to develop and improve our products and services so that we can remain a quality, reliable and long-term partner for our clients. I would like to thank our clients for the confidence they expressed us in 2016 and all employees of Equa bank for their dedication and enthusiasm they display every day. Awards for Equa bank in 2016 In the Zlatá Koruna (golden crown) 2016 financial awards, Equa bank defended the Public Award for the third time and won a total of six medals. Equa bank received six medals in the Zlatá Koruna contest for the best financial products in the Czech market. It fared well among professionals as well as with the public, which chose Equa bank s current account as the product of the year on the internet. Entrepreneurs participating in the voting were satisfied with Equa bank s business account and decided to award it with second place for the second year in a row. Professionals ranked the business account similarly and also awarded second place to the current account, the gold card and the minute loan. Petr Řehák CEO Chairman of the board of directors Report of the Board of Directors 12

13 Board of Directors of Equa bank a.s. 13 Contents

14 Board of Directors As at 31 December 2016 Petr Řehák Chairman of the Board of Directors since 22 October 2012, member of the Board of Directors since 3 April 2012, CEO Pavel Sedláček Member of the Board of Directors since 1 August 2013, Chief Operations Officer (born on 19 November 1971, 15 years of experience in banking and financial consulting) (born on 30 December 1974, 18 years of experience in banking) Leoš Pýtr Member of the Board of Directors since 14 October 2008, Chairman of the Board of Directors till 22 October 2012 Monika Kristková Member of the Board of Directors since 3 April 2012, Chief Financial Officer (born on 1 April 1973, 19 years of experience in banking and financial consulting) (born on 17 December 1955, 34 years of experience in banking) Brett Belcher Member of the Board of Directors since 1 June 2016, Chief Risk Management Officer (born on 16 January 1968, 20 years of experience in banking) Changes In 2016, following changes were made: - Brett Belcher has been a member of the Board of Directors since 1 June 2016 Board of Directors of Equa bank a.s. 14

15 Supervisory Board of Equa bank a.s. 16 Contents

16 Supervisory Board as at 31 December 2016 Changes In 206, following changes were made: Members of the Supervisory Board Peter Bramwell Cartwright Chairman of the Supervisory Board since 29 June 2011 (born on 16 December 1965, 33 years of experience in the banking and financial sector) - as of 11 February 2016 Ondřej Hák has been appointed for another term Jeffrey Clay Coombs Member of the Supervisory Board since 1 January 2015 (born on 8 June 1982, 11 years of experience in the banking and financial sector) Ondřej Hák Member of the Supervisory Board since 31 January 2013 (born on 24 January 1976, 18 years of experience in the banking and financial sector) Additional Information In accordance with the Act on Accounting no. 563/1991 Coll., as amended In 2016, Equa bank a.s. did not undertake or support any research, development, environmental protection or labour relation related activities. The accounting unit does not have any foreign branch. Supervisory Board of Equa bank a.s. 16

17 Furthermore, Mr. Peter Bramwell Cartwright is active in the following entities: Anacap Financial Partners LLP Aldermore Group plc Aldermore Bank plc Equa Group Limited Xbridge Acquisitions Limited Xbridge Holdings Limited Xbridge Limited Brightside Insurance Services Limited Brightside Group Limited Belvedere Bidco Limited Belvedere Midco Limited Belvedere Holdings (Guernsey) Ltd Assurone group Porto Group Holdings Limited Furthermore, Mr Jeffrey Coombs is active in the following entities: Anacap Financial Partners LLP member of the company s management Credoma a.s. Equa Holdings Limited Assurone group Supervisory Board of Equa bank a.s. 17

18 Non-consolidated financial statements of Equa bank a.s. 18 Contents

19 Balance sheet Company name: Equa bank a.s. Registered office: Karolinská 661/4, Praha 8 Registered office: Business activity: Bank Bank code: 6100 Date of preparation of the financial statements: 27 January 2017 as at 31 December 2016 The data is stated in MCZK Item ASSETS Line No. Current period Past period Cash in hand and balances with central banks State zero coupon bonds and other securities eligible for refinancing with the central bank of which: a) securities issued by government institutions Receivables from customers credit union members of which: a) repayable on demand b) other receivables Receivables from customers credit union members of which: a) repayable on demand b) other receivables Debt securities b) issued by other entities Ownership interests with controlling influence Intangible fixed assets Tangible fixed assets of which: land and buildings for operating activities Other assets Prepaid expenses and accrued income Total assets Non-consolidated financial statements Equa bank a. s. 19

20 Balance sheet as at 31 December 2016 The data is stated in MCZK Item LIABILITIES Line No. Current period Past period Payables to banks and credit unions of which: a) repayable on demand b) other payables Payables to customers credit union members of which: a) repayable on demand b) other payables Other liabilities Deferred income and accrued expenses Provisions of which: c) other Subordinated debt Registered capital of which: a) paid-up registered capital Capital funds Revaluation gains (losses) of which: a) on assets and liabilities Profit (loss) for the accounting period (283) LIABILITIES Total Non-consolidated financial statements Equa bank a. s. 20

21 Off-balance sheet items Company name: Equa bank a.s. Registered office: Karolinská 661/4, Praha 8 Registered office: Business activity: Bank Bank code: 6100 Date of preparation of the financial statements: 27 January 2017 as at 31 December 2016 The data is stated in MCZK Item OFF-BALANCE SHEET ASSETS Line No. Current period Past period Commitments and guarantees provided Receivables from spot transactions Receivables from fixed term transactions Receivables written off OFF-BALANCE SHEET ASSETS Total The data is stated in MCZK Item OFF-BALANCE SHEET LIABILITIES Line No. Current period Past period Commitments and guarantees received Collaterals and pledges received Liabilities from spot transactions Liabilities from fixed term transactions OFF-BALANCE SHEET LIABILITIES Total Non-consolidated financial statements Equa bank a. s. 21

22 Income statement Company name: Equa bank a.s. Registered office: Karolinská 661/4, Praha 8 Registered office: Business activity: Bank Bank code: 6100 Date of preparation of the financial statements: 27 January 2017 for the year ended 31 December 2016 The data is stated in MCZK Item Line No. Current period Past period Interest income and similar income of which: interest on debt securities Interest expense and similar expense 3 (245) (304) 4 Commission and fee income Commission and fee expense 10 (186) (129) 6 Gain or loss from financial operations Other operating income Other operating expenses 13 (43) (50) 9 Administrative expenses 14 (814) (907) of which: a) employee expenses (466) (481) of which: aa) wages and salaries 15 (361) (371) ab) social and health insurance 16 (105) (110) b) other administrative expenses 17 (348) (426) Depreciation, additions and utilisation of provisions and adjustments to tangible and intangible fixed assets Release of adjustments and provisions to receivables and guarantees,income from written-off receivables 19 (81) (18) Write-offs, additions and use of adjustments and provisions to receivables and guarantees 21 (287) (251) 16 Release of other provisions Additions and use of other provisions 25 (10) (3) 18 Share of profits or losses from ownership interests with controlling or significant influence Current year profit (loss) from ordinary activities before tax (218) 23 Income tax 31 (27) (65) 24 Net profit (loss) for the period 106 (283) Non-consolidated financial statements Equa bank a. s. 22

23 Statement of changes in equity Company name: Equa bank a.s. Registered office: Karolinská 661/4, Praha 8 Registered office: Business activity: Bank Bank code: 6100 Date of preparation of the financial statements: 27 January 2017 for the year ended 31 December 2016 The data is stated in MCZK Registered Share Reserve Capital funds Revaluation Profit Total capital premium funds gains (losses) (loss) Balance at 1/1/ (358) Transfers to funds Net profit (loss) for the period (283) (283) Utilisation of funds (358) FX gains (losses) and revaluation gains (losses) not included in profit or loss Balance at 31/12/ (283) Balance at 1/1/ (283) Transfers to funds Net profit (loss) for the period Utilisation of funds (283) FX gains (losses) and revaluation gains (losses) not included in profit or loss (2) - (2) Balance at 31/12/ Non-consolidated financial statements Equa bank a. s. 23

24 1. Basic information (a) Description and principal activities of the Bank Establishment and description of the Bank Company name and registered office: Equa bank a.s. ( the Bank ) was incorporated and registered in the Commercial Register on 6 January 1993 as IC Banka, a.s., which initiated its business activity in April In May 2007 IC Banka, a.s. was taken over by the Italian banking group Banco Popolare, and on 10 September 2007 was renamed to Banco Popolare Česká republika, a.s. In June 2011 the Bank was taken over by Equa Group Limited, with its registered office at B2, Industry Street, Qormi, QRM 3000, Republic of Malta, which is the Bank s sole shareholder. The Bank was subsequently renamed to Equa bank a.s. on 27 June The principal activities of the Bank are retail and corporate banking. Equa bank a.s. Karolinská 661/ Praha 8 Czech Republic Identification number Obligatory published information according to the 8th part of the European parliament setting and European Council no. č. 575/2013 from 26 June 2013 the Bank public on its web sites in the section Obligatory published information on the following address: Non-consolidated financial statements Equa bank a. s. 24

25 Members of the board of directors and supervisory board as at 31 December 2016 Members of the board of directors Changes in the board of directors and supervisory board in the accounting period In 2016, following changes were made: Board of directors - Brett Belcher has become new member of the board of directors since 1 June Supervisory board - Since 11 February 2016 Ondřej Hák has been appointed for another term. Petr Řehák (Chairman) Pavel Sedláček Leoš Pýtr Monika Kristková Brett Belcher Organisational structure The internal organisational and management structure respects the regulatory requirements for segregation of duties. In the course of 2016, the Bank s organisational and management structure was continuously adjusted to changes connected with goals and strategy of the Bank. All changes were considered and implemented taking into account compliance with the internal standards set by the internal management and control system, and taking into account regulatory requirements as stipulated by Decree No. 163/2014 Coll., on the performance of the activity of banks, credit unions, investment firms and securities dealers, as amended. Members of the supervisory board Peter Bramwell Cartwright (Chairman) Jeffrey Coombs Ondřej Hák The Bank s organisational structure consists of separate organisational units arranged in a linear management structure. It comprises divisions managed by individual members of the board of directors; divisions are further divided into organisational units. The organisational structure includes bank branches, financial centres and mini branches. Pursuant to Act No. 21/1992 Coll. on Banks, as amended, internal audit department has a special position within the Bank s organisational structure. Internal audit carries out its activity independently and reports directly to the Bank s board of directors. Non-consolidated financial statements Equa bank a. s. 25

26 2. Accounting policies used (b) Basis of preparation The financial statements have been prepared on the basis of accounting maintained in accordance with: Act No. 563/1991 Coll. on Accounting, as amended, Decree No. 501/2002 Coll., implementing certain provisions of Act No. 563/1991 Coll., on Accounting, as amended, for banks and other financial institutions, Czech Accounting Standards for financial institutions. These financial statements are non-consolidated financial statements and include the balance sheet, income statement, statement of changes in equity and notes to financial statements containing description of accounting policies adopted and explanatory comments. The financial statements have been prepared on an accrual basis, meaning that transactions have been presented in the financial statements in the period to which they relate in terms of substance and time, and on a going concern basis. The financial statements have been prepared under the historical cost convention, except for selected financial instruments that are stated at fair value. All amounts are in millions of Czech crowns (MCZK), unless otherwise stated. Numbers in brackets represent negative amounts. As at 31 December 2016 the Bank does not prepare annual report, relevant information will be included in consolidated annual report. The accounting policies adopted in the preparation of the Bank s financial statements are set out below: (a) Transaction date Depending on the type of transaction, the transaction date is defined as the date of payment or collection of cash; the date of purchasing or selling of foreign currency or securities; date of payment or collection from a customer's account; date of order to a correspondent to make a payment, settlement date of the bank s payment orders with the CNB clearing centre, the value date according to a statement received from a bank s correspondent (statement means SWIFT statement, bank s notice, received medium, bank statement or other documents); the trade date and settlement date of transactions with securities, foreign currency, options or other derivatives; the date of issue or receipt of a guarantee or opening credit commitment; the date of acceptance of values into custody. Accounting transactions involving the purchase or sale of financial assets with a usual term of delivery (spot transactions), as well as fixed term and option contracts, are recorded in off-balance sheet accounts from the trade date until the settlement date. Where financial assets that are classified in portfolios subsequently measured at fair value are involved, the financial assets are revaluated starting from the purchase trade date to the sale trade date. A financial asset or its part is derecognised from the balance sheet if the Bank loses control over the contractual rights to the asset in whole or in part. The Bank loses this control if it exercises the rights to the benefits defined in the contract, if these rights expire, or if these rights are waived by the Bank. Financial liabilities are recognised in the balance sheet at the moment the Bank becomes a party to a contractual arrangement regarding the financial instrument, and derecognised at the time the liability terminates, i.e. when the obligation defined by the contract is discharged or cancelled, Non-consolidated financial statements Equa bank a. s. 26

27 (b) Recognition of income and expenses Interest income and expense on interest-bearing financial instruments are recognised in the income statement on an accrual basis, in Interest income and similar income or Interest expense and similar expense. Fees and commissions directly related to granting a loan are accrued over the term of the loan and are recognised in the income statement in Interest income and similar income. Commissions related to unrealised deals or these which could not be directly assigned to the particular deals are included in the income statement in Commission and fee expense. Other fees and commissions are recognised in the income statement in Commission and fee income, resp. Commission and fee expense, in the period when the services are provided. Realised and unrealised gains and losses from trading derivatives, FX transactions and translation of assets and liabilities in foreign currencies are recognised in Gain or loss from financial operations. The Bank does not distinguish between realized and unrealized gains and losses from FX transactions and translation of assets and liabilities in foreign currencies. (c Reverse repo transactions collaterized loan in Due to banks and cooperative savings associations or Due to customers credit union membersciations. In the case of accepted loan collaterized by securities received in reverse repo transactions, are these securities recorded in the off-balance sheet as Collaterals and pledges received and are remeasured at fair value in the off-balance sheet. The amount received from the sale is treated as accepted collaterized loan in Due to banks and cooperative savings associations. Income or expense arising from resale commitments as the difference between the selling and purchase price is accrued over the period of the transaction and charged to the income statement as Interest income and similar income or Interest expense and similar expense. (d) Participation interests with controlling influence A participation interest with controlling influence is one where the Bank is a majority shareholder. In this case, the Bank has controlling influence over the entity s management and fully governs its activity. Such influence arises from participation in registered capital, or from agreement or articles of association regardless of the percentage of participation. Transactions where securities are purchased under a commitment to resell (resale commitment) are treated as collateralised lending transactions. Securities (such as treasury bills) received as a collateral to loans provided within reverse repo transactions are recorded in the off-balance sheet as Collaterals and pledges received and are remeasured at fair value in the off-balance sheet. The amount of the loan provided is recognised as Receivables from banks and cooperative savings associations or Receivables from customers credit union members. Securities, which are sold under the commitment to buy back for a fixed price within reverse repo transactions, are still recognised in the balance sheet in the same portfolio as before reverse repo transaction and valuated in the same method as the rest of portfolio, e.g. at fair value with gains/losses from revaluation charged to equity in case available for sale securities. The amount received from the sale is treated as accepted Participation interests with a controlling influence are valued using the equity method. The equity valuation method (based on the share in the equity of an entity in which the Bank has its participation interest) means that the participation interest with controlling influence is valued at acquisition cost on its acquisition date. The value of the participation interest is subsequently decreased by the amount of dividends or other contributions received from profit distribution, and increased by a share in the profit or decreased by a share in the loss generated by the subsidiary after the acquisition date, and recorded with a corresponding doubleentry in the income statement. The value of participation interests is further decreased or increased by the shares of changes in equity of a subsidiary that have not been included in the subsidiary s income statement. The equity valuation method uses data from the subsidiary s financial statements. Gains (losses) arising from the final revaluation of participation interests with controlling influence are recognised in the income statement. Non-consolidated financial statements Equa bank a. s. 27

28 (e) Receivables from banks and customers Receivables are carried at cost reduced by any impairment loss. Accrued interest income and fees is part of the carrying amount of receivables. Receivables are reviewed for recoverability, which is the basis for determining the impairment loss in respect of individual receivables. Unless the Bank writes off the portion of receivables corresponding to the impairment loss, an adjustment is created for that portion of receivables. The method of creating adjustments in the appropriate accounting period is described in note 28. Adjustments created by debiting expenses are reported under Write-offs, creation and use of adjustments and provisions for receivables and guarantees. The Bank also accrues interest income from risky receivables. Adjustments to accrued interest income are established, at 100% in accordance with Decree No. 163/2014 Coll., on the performance of the activity of banks, credit unions and investment firms as amended. The adjustments are recorded in sub-ledger accounts for the purpose of determining the income tax liability. The tax deductible portion of total adjustments created in the accounting period for credit losses is calculated in accordance with the requirements of Section 5 ( Banking reserves and adjustments ) and Section 8 ( Adjustments to receivables from debtors ) of Act No. 593/1992 Coll., on Reserves, as amended. Losses from ceded receivables represents the difference between the sale price and the gross value of ceded receivables. Gross amount of ceded receivables represents their nominal value including accrued interests and fees in case of sold receivables or their amortized value including accrued interests and fees in case of purchased receivables. Debt securities purchased in IPO, such as bills of exchange, are presented by the Bank as part of Receivables from customers. These securities are booked at the cost and subsequently remeasured to the amortized value calculated using the effective interest rate. The bank assess at least on an annual basis (at the date of financial statements) the possibility of permanent impairment of securities purchased in IPO, which would be booked as an adjustment decreasing the accounting outstanding value of these securities. Loans which were provided by a syndicate of banks ( syndicated loans ) are recognized in the balance sheet in the amount of a propotion to the total loan exposure including accrued interests and fees related to this proportion. (f) Securities The Bank classifies all debt securities in available for sale portfolio. Receivables are written off based on an individual assessment and decision of the Credit Risk Committee, taking into account the number of days past due, the financial position and legal background. The write-off of unrecoverable receivables is accounted for as Write-offs, creation and use of adjustments and provisions for receivables and guarantees in the income statement. If a fully adjusted receivable is written off, the adjustments are reduced by the written off amount and correspondingly the use of provisions is increasing in the account "Write offs, creation and use of provisions and reserves of receivables and guarantees" in the income statement. Recoveries of loans previously written off are included in the income statement in Release of adjustments and provisions for receivables and guarantees, income from written-off receivables. These securities are initially measured at aquisition costs and subsequently revaluated to the fair value. For all securities in the bank's portfolio, the fair value represents market price quoted on a public market on which the relevant instrument is actively traded. State bonds and treasury bills are reported in the balance sheet in State zero coupon bonds and other securities eligible for refinancing with the central bank, corporate bonds are reported in the balance sheet in Debt securities Gains/losses from fair value revaluation of available for sale securities after deffered tax adjustments are charged to equity in Gains (losses) from revalution. The amortisation of premiums, resp. discount and Non-consolidated financial statements Equa bank a. s. 28

29 interest income from available for sale securities is recognised in Interest income and similar income. Foreign exchange gains and losses from securities denominated in foreign currency are recognised in Gain or loss from financial operations. (g) Creation of provisions A provision represents a probable cash outflow of uncertain timing or amount. Provisions are created if the following criteria are met: a present obligation (legal or constructive) exists as a result of a past event, it is probable or certain that an outflow of economic benefits will be required to settle the obligation ( probable means a probability exceeding 50%), and the amount of the obligation can be estimated reliably. Provisions to liabilities in foreign currency are created in foreign currency. (h) Tangible and intangible fixed assets Tangible and intangible fixed assets are stated at historical cost and are depreciated on a straight-line basis over their estimated useful lives. The depreciation period for each category of tangible and intangible fixed assets is as follows: Technical improvement of fixed asset increases the original cost of the particular fixed asset and are depreciated according to the particular depreciation plan of the fixed asset. The following low-value assets are recorded under fixed assets and depreciation starts in the period in which they are acquired: low-value tangible assets costing more than TCZK 20 and less then TCZK 40, or low-value intangible assets costing more than TCZK 40 and less then TCZK 60, or low-value tangible and intangible assets of any acquisition cost with an expected useful life of more than one year. Intangible fixed assets costing less than TCZK 40 and tangible fixed assets costing less than TCZK 20 with useful lives of less than one year are charged to the income statement in the period in which they are acquired. (i) Foreign currency translation Upon initial recognition, transactions realised in foreign currencies are translated to Czech currency using the Czech National Bank ( CNB ) exchange rate for the respective foreign currency. As at the balance sheet date, items expressed in foreign currency are translated, depending on the nature of the item, as follows: Software Bank systems Buildings Fixtures and fittings Equipment 3-8 years 2-8 years 50 years 5-10 years 3-5 years monetary assets and liabilities in foreign currency are translated using the CNB exchange rate published on the balance sheet date; non-monetary assets and liabilities at historical cost expressed in foreign currency are translated to Czech currency using the historical CNB exchange rate published on the date of the transaction; non-monetary assets and liabilities at fair value expressed in foreign currency are translated to Czech currency using the current CNB exchange rate published on the date of fair value measurement. Foreign exchange gains or losses arising from the translation of foreign currency assets and liabilities are recognised in the income statement as Gain or loss from financial operations. Non-consolidated financial statements Equa bank a. s. 29

30 (j) Financial derivatives Financial derivatives held by the bank include FX swaps based on which the Bank purchases and at the same time sells the same amount of one currency to another currency at the two different dates, and IR swaps for interest hedging based on which the participants regularly do the IR swaps payments one of the participants makes (receives) a payment based on float interest rate and the other makes (receives) a payment based on fix interest rate. Trading derivatives Although the vast majority of the Bank s foreign exchange swaps are held for hedging purposes, they do not meet the conditions for hedge accounting; therefore all foreign exchange swaps are classified as trading derivatives. Bank classifies as trading derivatives also interest rate swaps that are not designated at the initial recognition as hedging, resp. interest rate swaps that are not part of defined hedging relationships. Trading derivatives are recognised in the balance sheet at fair value. Positive fair values of derivatives are recognised in assets under Other assets. Negative fair values of derivatives are recognised in liabilities under Other liabilities. Gains and losses from changes in fair value are recorded in the income statement under Gain or loss from financial operations. Hedging derivatives Hedging derivatives represent interest rate swaps that the Bank designated as hedging in the initial recognition and that are part of defined hedging relationships. Hedged risk is interest rate risk arising from the time mismatch of interest-rate sensitive assets and liabilities and some off-balance sheet items. Interest rate swaps designated as hedging meet all of the following conditions: the hedge is in line with the Bank s interest rate risk management strategy; the hedge relationship is formally documented at the inception of the hedge, comprising exact definition of hedging instruments attributable to the hedged risk and procedures for measuring of the hedge effectiveness; the hedge relationship is expected to be effective throughout its duration; the effectiveness of the hedge can be objectively measured; changes in the fair value of hedging instruments attributable to the hedged risk are within a range of %. The Bank uses hedge of interest rate risk on porfolio basis that is disclosed as a Fair Value hedge. Hedging derivatives are recognised in the balance sheet at fair value. Positive fair values of derivatives are recognised in assets under Other assets. Negative fair values of derivatives are recognised in liabilities under Other liabilities. Gains and losses from the revaluation of hedged items and hedging instruments attributable to the hedged risk of interest sensitive instruments are recorded in the income statement under Interest income and similar income or Interest expense and similar expense. The effectiveness of the hedge is assessed retrospectively and prospectively on monthly basis. The Bank will cease to recognise a derivative as a hedging derivative if any of the following events occurs: the hedging derivative expires or is prematurely terminated, the hedge no longer meets the conditions for classifying the derivative as a hedging derivative, the Bank decides to stop designating the derivative as a hedging derivative. In the case of the above events, any adjustments arising from changes in the fair value of hedged instruments measured at cost are henceforth amortised to profit or loss no later than date of maturity of the hedged item. (k) Taxation Tax non-deductible expenses are added to, and non-taxable income is deducted from, the profit for the period to arrive at the taxable income. The tax liability is further adjusted by tax allowances and relevant credits. Deferred tax is provided on all temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes multiplied by the income Non-consolidated financial statements Equa bank a. s. 30

31 tax rate expected to be valid for the next period. A deferred tax asset is recognised only if it is highly probable that it will be utilised in future accounting periods. 3. Net interest income (l) Finance leases Assets acquired under finance leases are recorded under Tangible fixed assets when the legal title is transferred to the Bank. Lease payments are charged directly to the income statement as Other administrative expenses. (m) Correction of errors in previous accounting periods and accounting policy changes Expenses or revenues of previous accounting periods are charged to the profit and loss account of the current period, unless the corrections relate to fundamental errors relating to previous periods. Corrections of fundamental errors in the recording of accrued income and expenses and changes in accounting policies are recognised in "Retained earnings or accumulated losses from previous years" in the Bank's balance sheet. In the accounting period since 1 January until 31 December 2016 the Bank provided neither correction of errors nor accounting policy changes. MCZK Interest income and similar income from loans deposits reverse repo transactions with the CNB 3 2 government bonds trading derivatives 3 2 transactions with hedging derivatives (4) 2 revaluation of hedged items 2 5 Total Interest expense and similar expense from deposits trading derivatives 7 5 transactions with hedging derivatives (1) (2) revaluation of hedged items - 7 subordinated debt 6 - Total Net interest income Interest income and expense of the Bank are realized mainly from transactions with clients who are residents of the Czech Republic (more than 99% of total interest income and expense). Non-consolidated financial statements Equa bank a. s. 31

32 4. Fees and commissions 5. Gain or loss from financial operations MCZK MCZK Commission and fee income from Payments and account maintenance Lending Gain/(loss) from trading derivatives transactions Gain/(loss) from sale of government bonds (9) (6) 9 - Insurance fees Total Commission and fee expense Payments Commissions on deposit products Gain/(loss) from sale of corporate bonds 3 - Foreign exchange gain/(loss) Total Gain or loss from financial operations are realized in the Czech market. Card transaction fees Premium Other 4 4 Total Commission and fee income and expense are realized mainly from transactions with clients who are residents of the Czech Republic. Non-consolidated financial statements Equa bank a. s. 32

33 6. Other operating income and expenses MCZK Operating income Income from sale of fixed assets - 2 Income from servicing agreement with EFS 7 2 Service providing Other income 15 5 Total Administrative expenses MCZK Wages and salaries paid to employees Social security and health insurance Other employee expenses 5 6 of which: Wages and salaries paid to: members of the board of directors and other executives members of the supervisory board - - Total employee expenses Operating expenses Contribution to the deposit insurance fund Costs to sell fixed assets 1 2 Other expenses 29 1 Total Information technologies Rent and related expenses Advertisement and marketing Audit, legal and tax advisory Leased assets from Equa Financial Services s.r.o. (hereinafter EFS ) Other Other administrative expenses Total The average number of the Bank s employees was as follows: Employees Members of the board of directors 5 5 Members of the supervisory board 3 3 Total Non-consolidated financial statements Equa bank a. s. 33

34 8. Income and expense by operating segments Business segments Retail Banking Corporate Banking MCZK Interest income and similar income Interest expense and similar expense (178) (255) (41) (39) (26) (10) (245) (304) Commission and fee income Commission and fee expense (186) (129) (186) (129) Gain or loss from financial operations Other Total 9. Receivables from banks MCZK Reverse repo transactions with the CNB Term deposits 3 3 Nostro accounts 9 25 Advances granted to banks Receivables from banks Reverse repo transactions with the CNB of MCZK (2015: MCZK 3 000) are secured by a transfer of state treasury bills, whose market value as at 31 December 2016 was MCZK (2015: MCZK 2 939) and is recorded in the off-balance sheet under Collaterals and pledges received. Non-consolidated financial statements Equa bank a. s. 34

35 10. Receivables from customers (a) Classification of receivables from customers MCZK Standard Special mention Substandard Doubtful Loss Individual adjustment to receivables from customers (301) (206) Total Portfolio adjustment to receivables from customers (96) (64) Net receivables from customers (b) Analysis of receivables from customers by sector MCZK Financial institutions Non-financial institutions Government sector 4 6 Households / self-employed Resident individuals Non-residents Total The amounts in the above table are stated net of the portfolio adjustment to receivables from customers. Non-consolidated financial statements Equa bank a. s. 35

36 (c) Analysis of receivables from customers by sector and type of security received MCZK Bank guarantee Mortgage Bank deposit Unsecured Total As at 31 December 2016 Financial institutions Non-financial institutions Government sector Households / self-employed Resident individuals Non-residents Total As at 31 December 2015 Financial institutions Non-financial institutions Government sector Households / self-employed Resident individuals Non-residents Total The amounts in the above table are stated net of the portfolio adjustment to receivables from customers. Non-consolidated financial statements Equa bank a. s. 36

37 11. State zero coupon bonds and other securities eligible for refinancing with the central bank MCZK ISIN code Issuer Maturity date Currency Interest rate Amortized book value As at 31 December 2016 Debt securities available for sale Revaluation at fair value Total book value CZ MFČR CZK proměnlivá CZ MFČR CZK proměnlivá CZ MFČR CZK proměnlivá Total As at 31 December 2015 Debt securities available for sale CZ MFČR CZK proměnlivá CZ MFČR CZK proměnlivá CZ MFČR CZK proměnlivá CZ MFČR CZK proměnlivá CZ MFČR CZK proměnlivá Total The Bank classifies all state bonds and other securities as available for sale. During 2016, the Bank sold government bonds with a total nominal value of MCZK 435 and realized gain of MCZK 9. The Bank measures state bonds and other securities at fair value, gains/losses from revaluation are charged to equity in Gains (losses) from revaluation. After taking into account deferred tax, the gain from revaluation amounts to MCZK 46 (2015: MCZK 51). Non-consolidated financial statements Equa bank a. s. 37

38 12. Debt securities MCZK ISIN code Issuer Maturity date Currency Interest rate Amortized book value As at 31 December 2016 Debt securities available for sale Revaluation at fair value Total book value CZ dluhopis FINEP I. 3,75/ CZK 3, SK EPH Financing SK EUR 4, Total As at 31 December 2015 Debt securities available for sale CZ Škoda Transportation CZK SK EPH Financing SK EUR 4, Total During 2016, the Bank sold corporate bonds Škoda Transportation with total nominal value MCZK 150 and realized gain of MCZK 3. The Bank measures corporate debt securites at fair value, gains/losses from revaluation are charged to equity in Gains (losses) from revaluation. After taking into account deferred tax the gain from revaluation amounts to MCZK 3 (2015: MCZK 0). 13. Participation interests with controlling or substantial influence (a) Participation interests with controlling influence MCZK Company name As at 31 December 2016 Equa Financial Services s. r. o. Registered office Karolinská 661/4, Praha 8 Principal activity Lease of real estate, housing and commercial premises, manufacture, trade and services not listed in Annexes 1 to 3 of the Trade Licensing Act Registered capital Other components of equity Share in equity Share of voting rights Book value % 100% 12 Total Non-consolidated financial statements Equa bank a. s. 38