Citi s Value Proposition: A Mission of Enabling Growth and Progress

Transcription

1 annual report

2 Citi s Value Proposition: A Mission of Enabling Growth and Progress Citi s mission is to serve as a trusted partner to our clients by responsibly providing financial services that enable growth and economic progress. Our core activities are safeguarding assets, lending money, making payments and accessing the capital markets on behalf of our clients. We have 200 years of experience helping our clients meet the world s toughest challenges and embrace its greatest opportunities. We are Citi, the global bank an institution connecting millions of people across hundreds of countries and cities. We protect people s savings and help them make the purchases from everyday transactions to buying a home that improve the quality of their lives. We advise people on how to invest for future needs, such as their children s education and their own retirement, and help them buy securities such as stocks and bonds. We work with companies to optimize their daily operations, whether they need working capital, to make payroll or export their goods overseas. By lending to companies large and small, we help them grow, creating jobs and real economic value at home and in communities around the world. We provide financing and support to governments at all levels, so they can build sustainable infrastructure, such as housing, transportation, schools and other vital public works. These capabilities create an obligation to act responsibly, do everything possible to create the best outcomes, and prudently manage risk. If we fall short, we will take decisive action and learn from our experience. We strive to earn and maintain the public s trust by constantly adhering to the highest ethical standards. We ask our colleagues to ensure that their decisions pass three tests: they are in our clients interests, create economic value, and are always systemically responsible. When we do these things well, we make a positive financial and social impact in the communities we serve and show what a global bank can do.

3 Message from Marc Luet 4 AO Citibank 7 Consolidated Financial Statements (IFRS) 8 annual report

4 Message from Marc Luet Dear clients, partners and colleagues, Stabilization was the overriding theme for the Russian economy in. Thanks to a prudent and farsighted strategy, Citi Russia was well positioned to continue its growth and serve as a reliable partner for our clients. As reported in rubles, revenues totaled RUB billion (+21 %) and net profit reached billion (+27 %). In IFRS reporting, this came to USD million (-0.89%) and USD (-2.24%) million, respectively. These result in a return on assets (ROA) of nearly 3%, which is among the best for our peer group in Russia. Our success can be attributed to growth across a number of different businesses. As the volume of mergers and acquisitions increased for the third straight year in Russia, Citi was in high demand as a trusted international transaction advisor and coordinator. For example, Citi played a key role in the one of the most significant cross-border M&A activity in Russia in the sale of major stakes in Rosneft s giant Vankor oil field to a group of Indian companies. This was not only the largest M&A deal of the year in Russia (totaling nearly USD 3 billion), it was also the largest 4

5 ever acquisition by an Indian consortium outside of India. In Citi employed for the first time a new escrow solution under Russian law for two foreign entities, supporting the sale and purchase of a confectionary plant in the Novgorod region. The parties required a solution for the counterparty risk mitigation during the period of statutory reregistration of ownership over the plant. Citi is the only international bank on the Russian market offering such an escrow product under Russian law following changes in Russia s Civil Code in. Debt capital markets took on a clear course toward recovery in, as corporate debt placements from Russia reached USD 30 billion, nearly twice the volume as the previous year. This growth was driven by both liability management and new issuance. We helped our clients take advantage of better pricing conditions to refinance their debt and secure funds for working capital and investment projects. With Citi s support, Lukoil successfully returned to the market with a $1 billion bond offering, the first 10-year corporate bond out of Russia since Citi also coordinated EuroChem s return to the international capital markets with a new benchmark $500 million 3.5-year Eurobond. These transactions, along with others for Sovcomflot, VimpelCom and Credit Bank of Moscow, among others, earned Citi the No.3 spot in the league tables of Eurobond arrangers for Russia according to Cbonds. Citi s award-winning cash management solutions are a core revenue generator for us and also one of the main reasons both global corporations and local majors choose Citi. Every year Euromoney surveys major bank clients and in Citi was again named Best Cash Management Bank in Central & Eastern Europe. We also earned Euromoney s titles for Best Investment Bank in the Emerging Markets, Best Bank for Transaction Services and Best Bank for Financial Institutions. Another highlight of the year was the solid performance of our consumer banking business, which posted its second best financial results since its inception nearly 15 years ago. This was primarily achieved through transformation of infrastructure: optimization of our ATM network while waiving customer fees at other ATMs; closure of antiquated branches followed by selective reopening after deep renovation. The launch of an updated Citi Mobile app was one of the major milestones for the consumer business. Apart from the modern look and feel and refreshed design, this version has new features such as Citi Snapshot, Touch ID and Card Linkage. This launch is in line with our mobile first strategy. In addition, we now have an absolutely new tool to communicate with customers in September we started to use the Viber messenger, inspired by the fact that more than 70% of mobile phone users in Russia prefer messengers. Our market share in custody service continued to grow, as we boosted our assets under custody by one-third. This is one of the reasons why Citi Russia was named Best Custodian by the Global Investor/ISF magazine in. Our emphasis on digital is well supported by data. More and more customers are becoming familiar with digital technologies: 53% of financially active customers use on-line banking and mobile banking, more than half of our 5

6 personal loans come from digital channels while 30% of credit cards are sold digitally. Yet even as we focus on automation and optimization, we understand very well that the more transactions our customers can perform themselves, the higher their expectations will be from direct human contact in branches or via CitiPhone. As a result, in we managed to improve our service level and saw our biggest drop in complaints ever. This is evidence that we are advancing toward our goal to create a remarkable experience for our customers. External surveys also reinforce this for example, Citi was recognized for Special Excellence in Customer Service at the Retail Finance Awards. In addition to, and in parallel with, our business goals, we also pursue environmental and social progress in the communities where we live and work. In, we invested $1 million in longterm programs in Russia to advance financial inclusion, prepare young people for the 21 st century economy and spur economic opportunity for low-income residents in cities. We take very seriously our responsibility to use our many strengths and resources to contribute to the greater public good. We strive to be a reliable community member just as we strive to be a reliable business partner and a reliable financial institution. In, Forbes magazine for the third time in four years recognized Citi as the most reliable bank in Russia. This recognition is a tribute to the strong position of our bank in the Russian market and to the hard work of our people, who are so focused on delivering top-quality products and services. Citi s long-term strategy in Russia continues to demonstrate its sustainability and profitability. Our results over the past year confirm once again that Citi has not only chosen the right strategy, but also has the right tools and people to successfully implement it. Sincerely, For the fifth time, Citi was recognized by the Leaders of Corporate Philanthropy for the best social programs. The award-winning program in helps vulnerable youth develop the skills necessary to find gainful employment. Marc Luet, Citi Country Officer in Russia Division Head for Russia, Ukraine, Kazakhstan, Turkey, Poland & Israel This care for the community is an indelible part of our corporate culture. In, more than 1000 Citi employees together with their families and friends turned out to for Citi s Global Community Day in June, drawing public attention to the problems of vulnerable youth and helping to generate more than 1 million rubles in donations for local charities. 6

7 AO Citibank Citi is the leading global bank with a history spanning more than 200 years and which serves more than 200 million customer accounts and does business in more than 160 countries and jurisdictions. Citi provides consumers, corporations, governments and institutions with a broad range of world-class financial products and services, including consumer banking and credit, corporate and investment banking, securities brokerage, transaction services and wealth management. AO Citibank is part of Citi. Our clients have access to the full spectrum of banking services and are provided with integrated and innovative financial solutions. Citi was one of the first international banks to enter the Russian market in Today, Citi is one of the largest and best capitalized banks in the country. More than 3,000 institutional clients and over 600,000 retail customers are served by Citi s 3,000 employees in 11 cities across Russia. Citi s clients have access to the full spectrum of banking services and are provided with integrated and innovative financial solutions. In Forbes magazine once again recognized Citi as the most reliable bank in Russia. This recognition is a tribute to the strength, sustainable positions of Citi in Russian market and to the hard work of our people, who are so focused on delivering top-quality products and services. You will find more detailed information at Awards The Most Reliable Bank in Russia by Forbes Best Corporate/Institutional Digital Bank in CEE (including Russia) by Global Finance Citi Russia Won Retail Finance Awards in Special Excellence in Customer Service Category Best Custodian by the Global Investor/ISF magazine Best Prime Broker according to the survey of National Alternative Investment Management Association Best Regional Cash Manager Bank in Central & Eastern Europe by Euromoney Cash Management Survey Best Investment Bank in the Emerging Markets according to Euromoney and other awards. 7

8 INTERNATIONAL FINANCIAL REPORTING STANDARDS Financial Statements for the year ended 31 December Independent Auditors Report 9 Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December 12 Statement of Financial Position as at 31 December 13 The statement of cash flows as at 31 December 14 Statement of Changes in Equity for the year ended 31 December 15 Notes to, and forming part of, the Financial Statements for the year ended 31 December Background Basis of preparation Significant accounting policies Interest income and interest expense Fee and commission income and fee and commission expense Net gains on securities Net foreign exchange income General administrative expenses Income tax expense Cash and cash equivalents Loans and deposits with banks and other financial institutions Financial instruments held for trading Loans to customers Financial instruments available-for-sale Property and equipment Goodwill Deposits and balances from banks and other financial institutions Current accounts and deposits from customers Other liabilities Share capital Corporate governance and internal control Risk management Credit related commitments Operating leases Contingencies Related party transactions Financial assets and liabilities: fair value and accounting classifications Capital management Average effective interest rates Maturity analysis Currency analysis 61 8

9 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER JSC KPMG 10 Presnenskaya Naberezhnaya Moscow, Russia Telephone +7 (495) Fax +7 (495) /99 Internet Independent Auditors Report To the Shareholder and the Board of Directors of AO CB Citibank Opinion We have audited the financial statements of AO CB Citibank (the Bank ), which comprise the statement of financial position as at 31 December, the statements of profit or loss and other comprehensive income, changes in equity and cash flows for the year then ended, and notes, comprising significant accounting policies and other explanatory information. In our opinion, the accompanying financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards (IFRS). Basis for Opinion We conducted our audit in accordance with International Standards on Auditing. Our responsibilities under those standards are further described in the Auditors Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Bank in accordance with the independence requirements that are relevant to our audit of the financial statements in the Russian Federation and with the International Ethics Standards Board for Accountants Code of Ethics for Professional Accountants (IESBA Code), and we have fulfilled our other ethical responsibilities in accordance with the requirements in the Russian Federation and the IESBA Code. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Responsibilities of Management for the Financial Statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Bank s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Bank or to cease operations, or has no realistic alternative but to do so. Audited entity: AO Commercial bank Citibank. Entered in the Unified State Register of Legal Entities, Registration No Moscow, Russian Federation. Independent auditor: JSC KPMG, a company incorporated under the Laws of the Russian Federation, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. Entered in the Unified State Register of Legal Entities, Registration No Member of the Self-regulated organisation of auditors Russian Union of auditors (Association). The Principal Registration Number of the Entry in the Register of Auditors and Audit Organisations: No

10 INTERNATIONAL FINANCIAL REPORTING STANDARDS Auditors Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditors report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards on Auditing will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with I International Standards on Auditing, we exercise professional judgment and maintain professional skepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Bank s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditors report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditors report. However, future events or conditions may cause the Bank to cease to continue as a going concern. Evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Report of findings from procedures performed in accordance with the requirements of Federal Law dated 2 December 1990 No On Banks and Banking Activity Management is responsible for the Bank s compliance with mandatory ratios and for maintaining internal control and organising risk management systems in accordance with requirements established by the Bank of Russia. In accordance with Article 42 of Federal Law dated 2 December 1990 No On Banks and Banking Activity (the Federal Law ), we have performed procedures to examine: the Bank s compliance with mandatory ratios as at 1 January 2017 as established by the Bank of Russia; and compliance of elements of the Bank s internal control and organisation of its risk management systems with requirements established by the Bank of Russia. These procedures were selected based on our judgment and were limited to analyses, inspections of documents, comparisons of the Bank s internal policies, procedures and methodologies to applicable requirements established by the Bank of Russia, as well as recalculations, comparisons and reconciliations of numerical data and other information. Our findings from the procedures performed are reported below. Based on our procedures with respect to the Bank s compliance with mandatory ratios as established by the Bank of Russia, we found that the Bank s mandatory ratios as at 1 January 2017 were within the limits established by the Bank of Russia. 10

11 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER We have not performed any procedures on the accounting records maintained by the Bank other than those which we considered necessary to enable us to express an opinion as to whether the Bank s financial statements present fairly, in all material respects, the financial position of the Bank as at 31 December, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards. Based on our procedures with respect to compliance of elements of the Bank s internal control and organisation of its risk management systems with requirements established by the Bank of Russia, we found that: ĹĹ ĹĹ ĹĹ ĹĹ ĹĹ as at 31 December, the Bank s Internal Audit Department was subordinated to, and reported to, the Board of Directors, and the risk management function was not subordinated to, and did not report to, divisions accepting relevant risks in accordance with regulations and recommendations issued by the Bank of Russia; the Bank s internal documentation, effective on 31 December, establishing the procedures and methodologies for identifying and managing the Bank s significant credit, operational, market, interest rate, legal, liquidity and reputational risks, and for stress-testing was approved by the authorised management bodies of the Bank in accordance with regulations and recommendations issued by the Bank of Russia; as at 31 December, the Bank maintained a system for reporting on the Bank s significant credit, operational, market, interest rate, legal, liquidity and reputational risks, and on the Bank s capital; the frequency and consistency of reports prepared by the Bank s risk management and Internal Audit Department during, which cover the Bank s credit, operational, market, interest rate, legal, liquidity and reputational risk management, was in compliance with the Bank s internal documentation. The reports included observations made by the Bank s risk management function and Internal Audit Department as to their assessment of the effectiveness of the Bank s procedures and methodologies, and recommendations for improvement; as at 31 December, the Board of Directors and executive management of the Bank had responsibility for monitoring the Bank s compliance with risk limits and capital adequacy ratios as established by the Bank s internal documentation. With the objective of monitoring effectiveness of the Bank s risk management procedures and their consistent application during the Board of Directors and executive management of the Bank periodically discussed reports prepared by the risk management function and Internal Audit Department, and considered proposed corrective actions. Our procedures with respect to elements of the Bank s internal control and organisation of its risk management systems were performed solely for the purpose of examining whether these elements, as prescribed in the Federal Law and described above, are in compliance with the requirements established by the Bank of Russia. The engagement partner on the audit resulting in this independent auditors report is: Lukashova N.V. JSC KPMG 30 May 2017 Moscow, Russian Federation 11

12 INTERNATIONAL FINANCIAL REPORTING STANDARDS Statement of Profit or Loss and Other Comprehensive Income for the year ended 31 December Notes Interest income 4 31,726,646 28,696,638 Interest expense 4 (8,739,317) (10,580,915) Net interest income 22,987,329 18,115,723 Fee and commission income 5 10,822,521 11,052,792 Fee and commission expense 5 (3,800,882) (3,957,304) Net fees and commissions 7,021,639 7,095,488 Net gains on securities 6 630,962 1,070,439 Net foreign exchange income 7 7,915,081 13,644,398 Other income 2,167,120 1,921,548 Net non-interest income 17,734,802 23,731,873 Operating income 40,722,131 41,847,596 Origination of impairment losses on loans to customers 13 (1,070,678) (2,534,777) (Origination) recovery of impairment losses on other assets (69,065) 23,465 General administrative expenses 8 (24,244,301) (20,741,331) Profit before income tax 15,338,087 18,594,953 Income tax expense 9 (3,500,060) (4,045,206) Profit for the period 11,838,027 14,549,747 Other comprehensive income Items that are or may be reclassified subsequently to profit or loss Revaluation reserve for financial instruments available-for-sale: - Net change in fair value of financial instruments available-for-sale, net of income tax 1,657,200 3,352,919 - Net change in fair value of financial instruments available-for-sale transferred to profit or loss, net of income tax (558,797) (400,508) Total items that are or may be reclassified subsequently to profit or loss 1,098,403 2,952,411 Other comprehensive income, net of income tax 1,098,403 2,952,411 Total comprehensive income for the period 12,936,430 17,502,158 Marc Luet President Kanat Sharlapaev Chief Financial Officer The statement of profit or loss and other comprehensive income is to be read in conjunction with the Notes to, and forming part of, the financial statements. 12

13 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER Statement of Financial Position as at 31 December Notes ASSETS Cash and cash equivalents 10 54,206,166 71,029,887 Obligatory reserves with the Central Bank of the Russian Federation 3,792,279 2,465,283 Loans and deposits with banks and other financial institutions ,062, ,938,565 Financial instruments held for trading 12 31,206,394 32,208,827 Loans to customers ,971, ,405,897 Global corporations 13 68,632,241 88,599,438 Local corporate customers 13 21,726,596 32,208,991 Individuals 13 45,613,063 45,597,468 Financial instruments available-for-sale 14 52,921,233 43,044,888 Pledged under overnight loans 13,678,736 11,855,366 Property and equipment 15 1,327,589 1,138,423 Goodwill ,779 Deferred tax assets 9 95,125 93,796 Other assets 2,935,808 2,211,362 Total assets 445,518, ,736,707 LIABILITIES Financial instruments held for trading 12 3,140,904 5,861,285 Deposits and balances from banks and other financial institutions 17 42,557,424 44,529,966 Current accounts and deposits from customers ,786, ,219,114 Corporate customers 209,995, ,490,385 Individuals 122,791, ,728,729 Other liabilities 19 4,146,396 3,175,684 Total liabilities 382,631, ,786,049 EQUITY Share capital 20 2,099,023 2,099,023 Additional paid in capital 20 1,227,310 1,227,310 Revaluation reserve for financial instruments available-for-sale (158,816) (1,257,219) Retained earnings 59,719,571 60,881,544 Total equity 62,887,088 62,950,658 Total liabilities and equity 445,518, ,736,707 Marc Luet President Kanat Sharlapaev Chief Financial Officer The statement of financial position is to be read in conjunction with the Notes to, and forming part of, the financial statements. 13

14 INTERNATIONAL FINANCIAL REPORTING STANDARDS The statement of cash flows as at 31 December Notes Cash flows from operating activities Interest and fee and commission receipts 42,140,125 39,250,255 Interest and fee and commission payments (12,530,124) (14,377,723) Net receipts (payments) from foreign exchange 4,880,327 (5,429,754) Net receipts from securities 745, ,720 Other receipts 1,887,312 1,450,574 Cash payments to employees and suppliers (23,731,804) (19,178,710) Operating cash flows before changes in operating assets and liabilities 13,391,017 1,969,362 (Increase) decrease in operating assets Obligatory reserves with the Central Bank of the Russian Federation (1,326,996) 532,746 Loans and deposits with banks and other financial institutions (49,525,863) 22,625,545 Financial instruments held for trading (92,696) (18,350,861) Loans to customers 21,860,674 (4,305,788) Financial instruments available-for-sale (11,289,741) (11,382,616) Other assets (815,726) 1,955,367 Increase (decrease) in operating liabilities Deposits and balances from banks and other financial institutions (995,937) 4,743,059 Current accounts and deposits from customers 36,031,157 27,167,785 Other liabilities 1,316,537 (2,690,374) Net cash provided from operating activities before income tax paid 8,552,426 22,264,225 Income tax paid (3,544,588) (4,653,470) Net cash provided from operating activities 5,007,838 17,610,755 Cash flows from investing activities Net purchases of property and equipment (510,796) (183,448) Net cash used in investing activities (510,796) (183,448) Cash flows from financing activities Dividend payment (13,000,000) (14,250,000) Net cash used in financing activities (13,000,000) (14,250,000) Net (decrease) increase in cash and cash equivalents (8,502,958) 3,177,307 Effect of changes in exchange rates on cash and cash equivalents (8,320,763) 2,295,622 Cash and cash equivalents as at the beginning of the period 71,029,887 65,556,958 Cash and cash equivalents as at the end of the period 10 54,206,166 71,029,887 Marc Luet President Kanat Sharlapaev Chief Financial Officer The statement of cash flows is to be read in conjunction with the Notes to, and forming part of, the financial statements. 14

15 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER Statement of Changes in Equity for the year ended 31 December Share capital Additional paid in capital Revaluation reserve for financial instruments available-for-sale Retained earnings Total Balance as at 1 January 2,099,023 1,227,310 (4,209,630) 60,581,797 59,698,500 Profit for the period ,549,747 14,549,747 Other comprehensive income Items that are or may be reclassified subsequently to profit or loss: Net change in fair value of financial instruments available-for-sale, net of income tax - - 3,352,919-3,352,919 Net change in fair value of financial instruments available-for-sale transferred to profit or loss, net of income tax - - (400,508) - (400,508) Total items that are or may be reclassified subsequently to profit or loss - - 2,952,411-2,952,411 Total other comprehensive income - - 2,952,411-2,952,411 Total comprehensive income for the period - - 2,952,411 14,549,747 17,502,158 Dividends paid (14,250,000) (14,250,000) Balance as at 31 December 2,099,023 1,227,310 (1,257,219) 60,881,544 62,950,658 Profit for the period ,838,027 11,838,027 Other comprehensive income Items that are or may be reclassified subsequently to profit or loss: Net change in fair value of financial instruments available-for-sale, net of income tax - - 1,657,200-1,657,200 Net change in fair value of financial instruments available-for-sale transferred to profit or loss, net of income tax - - (558,797) - (558,797) Total items that are or may be reclassified subsequently to profit or loss - - 1,098,403-1,098,403 Total other comprehensive income - - 1,098,403-1,098,403 Total comprehensive income for the period - - 1,098,403 11,838,027 12,936,430 Dividends paid (13,000,000) (13,000,000) Balance as at 31 December 2,099,023 1,227,310 (158,816) 59,719,571 62,887,088 Marc Luet President Kanat Sharlapaev Chief Financial Officer The statement of changes in equity is to be read in conjunction with the Notes to, and forming part of, the financial statements. 15

16 INTERNATIONAL FINANCIAL REPORTING STANDARDS Notes to, and forming part of, the Financial Statements for the year ended 31 December 1. Background (a) Organisation and operations AO CB Citibank (the Bank) was established in the Russian Federation as a limited liability company and in 1993 was granted its general banking licence. The Bank converted to a closed joint-stock company in November 2001 and is a part of the international financial company, Citigroup, headquartered in the United States and operating in over 100 countries. The principal activities of the Bank are deposit taking, lending, and foreign exchange and securities transactions, which are conducted through its head office in Moscow and branch in St.Petersburg. As at 31 December, the Bank also has branches in Samara, Rostov-on-Don, Ekaterinburg, Nizhny Novgorod, Volgograd and Ufa, which provide banking services to individuals. The activities of the Bank are regulated by the Central Bank of the Russian Federation (the CB RF). The Bank became a member of the state deposit insurance system in the Russian Federation on 3 February The Bank s registered office is 8-10, building 1, Gasheka str., Moscow. (b) Russian business environment The Bank s operations are primarily located in the Russian Federation. Consequently, the Bank is exposed to the economic and financial risks on markets of the Russian Federation, which display emerging-market characteristics. Legal, tax and regulatory frameworks continue to be developed, but are subject to varying interpretations and frequent changes that, together with other legal and fiscal impediments, contribute to the challenges faced by entities operating in the Russian Federation. The conflict in Ukraine and related events has increased the perceived risks of doing business in the Russian Federation. The imposition of economic sanctions on Russian individuals and legal entities by the European Union, the United States of America, Japan, Canada, Australia and others, as well as retaliatory sanctions imposed by the Russian government, has resulted in increased economic uncertainty including more volatile equity markets, a depreciation of the Russian Rouble, a reduction in both local and foreign direct investment inflows and a significant tightening in the availability of credit. In particular, some Russian entities, including banks, may be experiencing difficulties in accessing international equity and debt markets and may become increasingly dependent on Russian state banks to finance their operations. The longer term effects of recently implemented sanctions, as well as the threat of additional future sanctions, are difficult to determine. Management of the Bank believes that it takes all the necessary efforts to support the economic stability of the Bank in the current environment. The financial statements reflect management s assessment of the impact of the Russian business environment on the operations and the financial position of the Bank. The future business environment may differ from management s assessment. 2. Basis of preparation (a) Statement of compliance The accompanying financial statements are prepared in accordance with the requirements of International Financial Reporting Standards (IFRS). (b) Basis of measurement These financial statements are prepared on the historical cost basis except that financial instruments at fair value through profit or loss and available-for-sale financial instruments are stated at fair value. 16

17 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER (c) Functional and presentation currency The functional currency of the Bank is the Russian Rouble (RUB) as, being the national currency of the Russian Federation, it reflects the economic substance of the majority of underlying events and circumstances relevant to them. In previous reporting periods before 1 January 2005 the Bank used US Dollar (USD) as a functional currency. Beginning from 1 January 2005 because of the enforcement of new IAS 21 The Effect on Changes in Foreign Exchange Rates (revised in 2003) the Bank revised its functional currency, and as a result changed it from USD to RUB. The RUB is also the presentation currency for the purposes of these financial statements. As at 31 December, the official exchange rate was RUB for 1 USD and as at 31 December the official exchange rate was RUB for 1 USD. Financial information presented in RUB is rounded to the nearest thousand. (d) Use of estimates and judgements The preparation of financial statements in conformity with IFRS requires management to make judgments, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results could differ from those estimates. Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected. Information about significant areas of estimation uncertainty and critical judgments in applying accounting policies is described in the following notes: loan impairment estimates Note 13 estimates of fair value of financial assets and liabilities Note 27. (e) Changes in accounting policies and presentation The Bank has adopted the following amendments to standards with a date of initial application of 1 January : Disclosure Initiative (Amendments to IAS 1). These amendments clarify the materiality principle. In particular, it has been made explicit that companies should disaggregate line items in the statement of financial position and in the statement of profit or loss and other comprehensive income if this provides helpful information to users; and can aggregate line items in the statement of financial position and in the statement of profit or loss and other comprehensive income if the line items are immaterial. Following these amendments the Bank presented detalisation of items of the statement of financial position. 3. Significant accounting policies The following significant accounting policies are applied in the preparation of the financial statements. The accounting policies are consistently applied by the Bank to all periods presented in these financial statements except for disclosure initiative described in Note 2(e). Future changes in accounting policies are described at the end of this Note. (a) Goodwill Goodwill arises from acquisitions of subsidiaries. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. (b) Foreign currency transactions Transactions in foreign currencies are translated to the functional currency of the Bank at exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary 17

18 INTERNATIONAL FINANCIAL REPORTING STANDARDS items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments or qualifying cash flow hedges to the extent that the hedge is effective, which are recognised in other comprehensive income. (c) Cash and cash equivalents The Bank includes cash and nostro accounts with the CB RF and nostro accounts with banks and other financial institutions in cash and cash equivalents. The obligatory reserves with the CB RF are not considered to be a cash equivalent due to restrictions on their withdrawability. Cash and cash equivalents are carried at amortised cost in the statement of financial position. (d) (i) Financial instruments Classification Financial instruments at fair value through profit or loss are financial assets or liabilities that are: acquired or incurred principally for the purpose of selling or repurchasing in the near term part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking derivative financial instruments (except for derivative financial instruments that are designated and effective hedging instruments) or, upon initial recognition, designated by the Bank as at fair value through profit or loss. The Bank may designate financial assets and liabilities at fair value through profit or loss where either: the assets or liabilities are managed, evaluated and reported internally on a fair value basis the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise or, the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. All trading derivatives in a net receivable position (positive fair value), as well as options purchased, are reported as assets. All trading derivatives in a net payable position (negative fair value), as well as options written, are reported in financial statements as liabilities. Management determines the appropriate classification of financial instruments in this category at the time of the initial recognition. Derivative financial instruments and financial instruments designated as at fair value through profit or loss upon initial recognition are not reclassified out of the at fair value through profit or loss category. Financial assets that would have met the definition of loans and receivables may be reclassified out of the at fair value through profit or loss or available-for-sale category if the Bank has an intention and ability to hold them for the foreseeble future or until maturity. Other financial instruments may be reclassified out of the at fair value through profit or loss category only in rare circumstances. Rare circumstances arise from a single event that is unusual and highly unlikely to recur in the near term. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the Bank: intends to sell immediately or in the near term upon initial recognition designates as at fair value through profit or loss upon initial recognition designates as available-for-sale, or may not recover substantially all of its initial investment, other than because of credit deterioration. Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intention and ability to hold to maturity, other than those that: the Bank upon initial recognition designates as at fair value through profit or loss the Bank designates as available-for-sale, or meet the definition of loans and receivables. 18

19 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER Available-for-sale financial assets are those non-derivative financial assets that are designated as available for sale or are not classified as loans and receivables, held-to-maturity investments or financial instruments at fair value through profit or loss. (ii) Recognition Financial assets and liabilities are recognised in the statement of financial position when the Bank becomes a party to the contractual provisions of the instrument. All regular way purchases of financial assets are accounted for at the settlement date. (iii) Measurement A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability. Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred on sale or other disposal, except for: loans and receivables which are measured at amortised cost using the effective interest method held-to-maturity investments that are measured at amortised cost using the effective interest method, and investments in equity instruments that do not have a quoted market price in an active market and whose fair value cannot be reliably measured, which are measured at cost. All financial liabilities, other than those designated at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortised cost. (iv) Amortised cost The amortised cost of a financial asset or liability is the amount at which the financial asset or liability is measured at initial recognition, minus principal repayments, plus or minus the cumulative amortisation using the effective interest method of any difference between the initial amount recognised and the maturity amount, minus any reduction for impairment. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortised based on the effective interest rate of the instrument. (v) Fair value measurement principles Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date in the principal, or in its absence, the most advantageous market to which the Bank has access at that date. The fair value of a liability reflects its non-performance risk. When available, the Bank measures the fair value of an instrument using quoted prices in an active market for that instrument. A market is regarded as active if transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis. When there is no quoted price in an active market, the Bank uses valuation techniques that maximise the use of relevant observable inputs and minimise the use of unobservable inputs. The chosen valuation technique incorporates all the factors that market participants would take into account in these circumstances. The best evidence of the fair value of a financial instrument at initial recognition is normally the transaction price, i.e., the fair value of the consideration given or received. If the Bank determines that the fair value at initial recognition differs from the transaction price and the fair value is evidenced neither by a quoted price in an active market for an identical asset or liability nor based on a valuation technique that uses only data from observable markets, the financial instrument is initially measured at fair value, adjusted to defer the difference between the fair value at initial recognition and the transaction price. Subsequently, that difference is recognised in profit or loss on an appropriate basis over the life of the instrument, but no later than when the valuation is supported wholly by observable market data or the transaction is closed out. If an asset or a liability measured at fair value has a bid price and an ask price, the Bank measures assets and long positions at the bid price and liabilities and short positions at the ask price. 19

20 INTERNATIONAL FINANCIAL REPORTING STANDARDS Portfolios of financial assets and financial liabilities that are exposed to market risk and credit risk that are managed by the Bank on the basis of the net exposure to either market or credit risk, are measured on the basis of a price that would be received to sell the net-long position (or paid to transfer the net-short position) for a particular risk exposure. Those portfolio-level adjustments are allocated to the individual assets and liabilities on the basis of the relative risk adjustment of each of the individual instruments in the portfolio. The Bank recognises transfers between levels of the fair value hierarchy as of the end of the reporting period during which the change has occurred. (vi) Gains and losses on subsequent measurement A gain or loss arising from a change in the fair value of a financial asset or liability is recognised as follows: a gain or loss on a financial instrument classified as at fair value through profit or loss is recognised in profit or loss a gain or loss on an available-for-sale financial asset is recognised as other comprehensive income in equity (except for impairment losses and foreign exchange gains and losses on debt financial instruments available-forsale) until the asset is derecognised, at which time the cumulative gain or loss previously recognised in equity is recognised in profit or loss. Interest in relation to an available-for-sale financial asset is recognised in profit or loss using the effective interest method. For financial assets and liabilities carried at amortised cost, a gain or loss is recognised in profit or loss when the financial asset or liability is derecognised or impaired, and through the amortisation process. (vii) Derecognition The Bank derecognises a financial asset when the contractual rights to the cash flows from the financial asset expire, or when it transfers the financial asset in a transaction in which substantially all the risks and rewards of ownership of the financial asset are transferred or in which the Bank neither transfers nor retains substantially all the risks and rewards of ownership and it does not retain control of the financial asset. Any interest in transferred financial assets that qualify for derecognition that is created or retained by the Bank is recognised as a separate asset or liability in the statement of financial position. The Bank derecognises a financial liability when its contractual obligations are discharged or cancelled or expire. The Bank enters into transactions whereby it transfers assets recognised on its statement of financial position, but retains either all risks and rewards of the transferred assets or a portion of them. If all or substantially all risks and rewards are retained, then the transferred assets are not derecognised. In transactions where the Bank neither retains nor transfers substantially all the risks and rewards of ownership of a financial asset, it derecognises the asset if control over the asset is lost. In transfers where control over the asset is retained, the Bank continues to recognise the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred assets. The Bank writes off assets deemed to be uncollectible. (viii) Derivative instruments Derivative financial instruments include swaps, forward contracts, futures, spot transactions and options in interest rates, foreign exchanges, precious metals and stock markets, and any combinations of these instruments. Derivatives are initially recognised at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. All derivatives are carried as assets when their fair value is positive and as liabilities when their fair value is negative. Changes in the fair value of derivatives are recognised immediately in profit or loss. Derivatives may be embedded in another contractual arrangement (a host contract). An embedded derivative is separated from the host contract and is accounted for as a derivative if, and only if the economic characteristics and risks of the embedded derivative are not closely related to the economic characteristics and risks of the host contract, 20

21 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the combined instrument is not measured at fair value with changes in fair value recognised in profit or loss. Derivatives embedded in financial assets or financial liabilities at fair value through profit or loss are not separated. Although the Bank trades in derivative instruments for risk hedging purposes, these instruments do not qualify for hedge accounting. (e) Repurchase and reverse repurchase agreements Securities sold under sale and repurchase (repo) agreements are accounted for as secured financing transactions, with the securities retained in the statement of financial position and the counterparty liability included in amounts payable under repo agreements within deposits and balances from banks and other financial institutions or current accounts and deposits from customers, as appropriate. The difference between the sale and repurchase prices represents interest expense and is recognised in profit or loss over the term of the repo agreement using the effective interest method. Securities purchased under agreements to resell (reverse repo) are recorded as amounts receivable under reverse repo agreements within loans and deposits with banks and other financial institutions or loans to customers, as appropriate. The difference between the purchase and resale prices represents interest income and is recognised in profit or loss over the term of the reverse repo agreement using the effective interest method. If assets purchased under agreement to resell are sold to third parties, the obligation to return securities is recorded as a trading liability and measured at fair value. (f) Offsetting Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognised amounts and there is an intention to settle on a net basis, or realise the asset and settle the liability simultaneously. (g) (i) Property and equipment Owned assets Items of property and equipment are stated at cost less accumulated depreciation and impairment losses. 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 Leases in terms of which the Bank assumes substantially all the risks and rewards of ownership are classified as finance leases. Property and equipment acquired by way of a finance lease is stated at the amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses. Leases in terms of which the Bank does not assume substantially all the risks and rewards of ownership are classified as operating leases and lease payments are expensed as incurred. (iii) Depreciation Depreciation is charged to profit or loss 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. Land is not depreciated. The estimated useful lives are as follows: Buildings Equipment Leasehold improvements 50 years 3 to 12 years 5 to 10 years 21

22 INTERNATIONAL FINANCIAL REPORTING STANDARDS (h) Impairment The Bank assesses at the end of each reporting period whether there is any objective evidence that a financial asset or group of financial assets is impaired. If any such evidence exists, the Bank determines the amount of any impairment loss. A financial asset or group of financial assets is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the financial asset (a loss event) and that event (or events) has had an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, breach of loan covenants or conditions, restructuring of a financial asset or group of financial assets that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, deterioration in the value of collateral, or other observable data related to a group of assets such as adverse changes in the payment status of borrowers in the group, or economic conditions that correlate with defaults in the group. In addition, for an investment in an equity security available-for-sale a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. (i) Financial assets carried at amortised cost Financial assets carried at amortised cost consist principally of loans and other receivables (loans and receivables). The Bank reviews its loans and receivables to assess impairment on a regular basis. Management first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for loans and receivables that are not individually significant. If management determines that no objective evidence of impairment exists for an individually assessed loan or receivable, whether significant or not, it includes the loan in a group of loans and receivables with similar credit risk characteristics and collectively assesses them for impairment. Loans and receivables that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on a loan or receivable has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan or receivable and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the loan or receivable s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows. In some cases the observable data required to estimate the amount of an impairment loss on a loan or receivable may be limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in financial difficulties and there is little available historical data relating to similar borrowers. In such cases, the Bank uses its experience and judgment to estimate the amount of any impairment loss. All impairment losses in respect of loans and receivables are recognised in profit or loss and are only reversed if a subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. When a loan is uncollectable, it is written off against the related allowance for loan impairment. The Bank writes off a loan balance (and any related allowances for loan impairment) when management determines that the loans are uncollectible and when all necessary steps to collect the loan are completed. (ii) Financial assets carried at cost Financial assets carried at cost include unquoted equity instruments included in available-for-sale financial assets that are not carried at fair value because their fair value can not be reliably measured. If there is objective evidence that such investments are impaired, the impairment loss is calculated as the difference between the carrying amount of the 22

23 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER investment and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. All impairment losses respect of these investments are recognised in profit or loss and can not be reversed. (iii) Available-for-sale financial assets Impairment losses on available-for-sale financial assets are recognised by transferring the cumulative loss that is recognised in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment allowance attributable to time value are reflected as a component of interest income. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale equity security is recognised in other comprehensive income. (iv) Non financial assets Other non financial assets, other than deferred taxes, are assessed at each reporting date for any indications of impairment. The recoverable amount of goodwill is estimated at each reporting date. The recoverable amount of non financial assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. All impairment losses in respect of non financial assets are recognised in profit or loss and reversed only if there has been a change in the estimates used to determine the recoverable amount. Any impairment loss reversed is only reversed to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. An impairment loss in respect of goodwill is not reversed. (i) Provisions A provision is recognised in the statement of financial position when the Bank has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for restructuring is recognised when the Bank has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Future operating costs are not provided for. (j) Taxation Income tax comprises current and deferred tax. Income tax is recognised in profit or loss except to the extent that it relates to items of other comprehensive income or transactions with shareholders recognised directly in equity, in which case it is recognised within other comprehensive income or directly within equity. Current tax expense is the expected tax payable on the taxable profit for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax assets and liabilities are recognised in respect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. Deferred tax assets and liabilities are not recognised for the following temporary differences: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit and temporary differences 23

24 INTERNATIONAL FINANCIAL REPORTING STANDARDS related to investments in subsidiaries, where the parent is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow the manner in which the Bank expects, at the end of the reporting period, to recover or settle the carrying amount of its assets and liabilities. Deferred tax assets and liabilities are measured at the tax rates that are expected to be applied to the temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date. Deferred tax assets are 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 taxable profit will be available against which the deductible temporary differences can be utilised. (k) Share capital Ordinary shares Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares and share options are recognised as a deduction from equity, net of any tax effects. Dividends The ability of the Bank to declare and pay dividends is subject to the rules and regulations of the Russian legislation. Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared. (l) Credit related commitments In the normal course of business, the Bank enters into credit related commitments, comprising undrawn loan commitments, letters of credit and guarantees, and provides other forms of credit insurance. Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. A financial guarantee liability is recognised initially at fair value net of associated transaction costs, and is measured subsequently at the higher of the amount initially recognised less cumulative amortisation or the amount of provision for losses under the guarantee. Provisions for losses under financial guarantees and other credit related commitments are recognised when losses are considered probable and can be measured reliably. Financial guarantee liabilities and provisions for other credit related commitment are included in other liabilities. Loan commitments are not recognised, except in the following cases: loan commitments that the Bank designates as financial liabilities at fair value through profit or loss if the Bank has a past practice of selling the assets resulting from its loan commitments shortly after origination, then the loan commitments in the same class are treated as derivative instruments loan commitments that can be settled net in cash or by delivering or issuing another financial instrument commitments to provide a loan at a below-market interest rate. (m) Income and expense recognition Interest income and expense are recognised in profit or loss using the effective interest method. Loan origination fees, loan servicing fees and other fees that are considered to be integral to the overall profitability of a loan, together with the related transaction costs, are deferred and amortised to interest income over the estimated life of the financial instrument using the effective interest method. 24

25 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER Other fees, commissions and other income and expense items are recognised in profit or loss when the corresponding service is provided. The Bank acts as an agent for insurance providers offering their insurance products to consumer loan borrowers. Commission income from insurance represents commissions for such agency services received by the Bank from such partners. It is not considered to be integral to the overall profitability of consumer loans because it is determined and recognised based on the Bank s contractual arrangements with the insurance provider rather than with the borrower. The Bank does not participate in the insurance risk, which is entirely borne by the partner; commission income from insurance is recognised in profit or loss when the Bank provides the agency service to the insurance company. The borrowers have a choice whether to purchase the insurance policy. A consumer loan customer s decision whether or not to purchase an insurance policy does not effect the stated interest rate offered to that customer. Dividend income is recognised in profit or loss on the date that the dividend is declared. Payments made under operating leases are recognised in profit or loss on a straight-line basis over the term of the lease. Lease incentives received are recognised as an integral part of the total lease expense, over the term of the lease. (n) New standards and interpretations not yet adopted The following new standards, amendments to standards, and interpretations are not yet effective as at 31 December, and are not applied in preparing these financial statements. The Bank plans to adopt these pronouncements when they become effective. The Bank has not yet analysed the likely impact of the new standards, amendments to standards, and interpretations on its financial position or performance. IFRS 9 Financial instruments IFRS 9 Financial instruments, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement, and includes requirements for classification and measurement of financial instruments, impairment of financial assets and hedge accounting. Classification and measurement IFRS 9 contains three principal classification categories for financial assets: measured at amortised cost, fair value through other comprehensive income (FVOCI) and fair value through profit or loss (FVTPL). The classification of financial assets under IFRS 9 is generally based on the business model in which a financial asset is managed and its contractual cash flow characteristics. The standard eliminates the existing IAS 39 categories of held-to-maturity, loans and receivables and available-for-sale. Under IFRS 9, derivatives embedded in contracts where the host is a financial asset in the scope of the standard are not separated. Instead, the whole hybrid instrument is assessed for classification. Equity investments are measured at fair value. IFRS 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. Impairment IFRS 9 replaces the incurred loss model in IAS 39 with an expected credit loss model. The new impairment model applies to financial assets measured at amortised cost and FVOCI, lease receivables, certain loan commitments and financial guarantee contracts. The new impairment model generally requires to recognise expected credit losses in profit or loss for all financial assets, even those that are newly originated or acquired. Under IFRS 9, impairment is measured as either expected credit losses resulting from default events on the financial instrument that are possible within the next 12 months ( 12-month ECL ) or expected credit losses resulting from all possible default events over the expected life of the financial instrument ( lifetime ECL ). Initial amount of expected credit losses recognised for a financial asset is equal to 12-month ECL (except for certain trade and lease receivables, and contract assets, or purchased or originated credit-impaired financial assets). If the credit risk on the financial instrument has increased significantly since initial recognition, the loss allowance is measured at an amount equal to lifetime ECL. Financial assets for which 12-month ECL is recognised are considered to be in stage 1; financial assets that have experienced a significant increase in credit risk since initial recognition, but are not defaulted are considered to be in stage 2; and financial assets that are in default or otherwise credit-impaired are considered to be in stage 3. 25

26 INTERNATIONAL FINANCIAL REPORTING STANDARDS Measurement of expected credit losses is required to be unbiased and probability-weighted, should reflect the time value of money and incorporate reasonable and supportable information that is available without undue cost or effort about past events, current conditions and forecasts of future economic conditions. Under IFRS 9, credit losses are recognised earlier than under IAS 39, resulting in increased volatility in profit or loss. It will also tend to result in an increased impairment allowance, since all financial assets will be assessed for at least 12-month ECL and the population of financial assets to which lifetime ECL applies is likely to be larger than the population with objective evidence of impairment identified under IAS 39. Calculation of expected credit losses is likely to be based on the PDxLGDxEAD approach (at least for some portfolios), depending on the type of the exposure, stage at which the exposure is classified under IFRS 9, collective or individual assessment, etc. Hedge accounting The general hedge accounting requirements aim to simplify hedge accounting, aligning the hedge accounting more closely with risk management strategies. The standard does not explicitly address macro hedge accounting, which is being considered in a separate project. IFRS 9 includes an accounting policy choice to continue to apply the hedge accounting requirements of IAS 39. Transition The classification and measurement and impairment requirements are generally applied retrospectively (with some exemptions) by adjusting the opening retained earnings and reserves at the date of initial application, with no requirement to restate comparative periods. IFRS 9 is effective for annual reporting periods beginning on or after 1 January Early adoption of the standard is permitted. The Bank does not intend to adopt the standard earlier. The Bank has not started a formal assessment of potential impact on its financial statements resulting from the application of IFRS 9 neither has initiated any specific actions towards the preparation for implementation of IFRS 9. Accordingly, it is not practicable to estimate the impact that the application of IFRS 9 will have on the Bank s financial statements. Currently the Bank is in the process of development of IFRS 9 implementation plan. Other amendments The following new or amended standards are not expected to have a significant impact of the Bank s financial statements. Disclosure Initiative (amendments to IAS 7 Statement of Cash Flows); Recognition of Deferred Tax Assets for Unrealised Losses (amendments to IAS 12 Income Taxes); Classification and Measurement of Share-based Payment Transactions (amendments to IFRS 2 Share-Based Payment). Various Improvements to IFRS are dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for presentation, recognition or measurement purposes, will come into effect not earlier than 1 January The Bank has not yet analysed the likely impact of the improvements on its financial position or performance. 26

27 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 4. Interest income and interest expense Interest income Loans to customers 18,634,991 20,456,879 Loans and deposits with banks and other financial institutions and amounts receivable under reverse repo agreements 7,947,100 4,583,083 Financial instruments held for trading and available-for-sale 5,144,555 3,656,676 31,726,646 28,696,638 Interest expense Current accounts and deposits from customers 8,521,353 9,732,541 Deposits and balances from banks and other financial institutions and amounts payable under repo agreements 217, ,374 8,739,317 10,580, Fee and commission income and fee and commission expense Fee and commission income Settlement fees 3,466,434 3,452,890 Guarantees issued and letter of credit fees 1,464,355 1,455,646 Custody fees 1,134, ,273 Commissions from insurance companies 1,132,100 1,158,283 Annual credit card maintenance fees 853,877 1,014,827 Transaction processing fees 801, ,307 Cash withdrawal fees 757, ,175 Brokerage and underwriting fees 652, ,894 Credit card late payment fees 272, ,628 Cash transaction fees 108, ,630 Investment fund fees 61,848 78,075 Other 117, ,164 10,822,521 11,052,792 Fee and commission expense Settlement fees 2,338,405 2,607,499 Cash transportation fees 363, ,350 Customs card transaction fees 298, ,573 Commissions to insurance companies 251, ,775 Guarantees received fees 242, ,545 Other 306, ,562 3,800,882 3,957,304 27

28 INTERNATIONAL FINANCIAL REPORTING STANDARDS 6. Net gains on securities Realised and unrealised net (loss) gain from financial instruments held for trading (67,534) 569,804 Realised net gain from financial instruments available-for-sale 698, , ,962 1,070, Net foreign exchange income Net gain (loss) from foreign exchange transactions and derivative financial instruments 7,926,986 (6,617,049) Net (loss) gain from revaluation of financial assets and liabilities in foreign currency (11,905) 20,261,447 7,915,081 13,644, General administrative expenses Employee compensation and social insurance expenses 7,891,222 7,750,502 Intercompany charges for retail information technical support and other services 7,353,497 4,611,812 Taxes other than income tax 2,365,674 1,960,896 Repairs and maintenance 1,743,571 1,392,198 Occupancy 1,486,486 1,591,254 Communications and information services 535, ,865 Insurance 513, ,063 Advertising and marketing 365, ,152 Depreciation 286, ,646 Outsourcing costs 222, ,333 Travel 155, ,048 Security 75,740 84,749 Other 1,248,691 1,260,813 24,244,301 20,741, Income tax expense Current tax expense Current year tax expense 3,775,989 4,666,322 Deferred tax expense Origination and reversal of temporary differences (275,929) (621,116) Total income tax expense 3,500,060 4,045,206 In and the applicable tax rate for current and deferred tax is 20%. 28

29 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER Reconciliation of effective tax rate The reconciliation between the expected tax expense to the actual income tax expense is as follows. Profit before tax 15,338,087 18,594,953 Income tax expense at the applicable statutory tax rate 3,067,617 3,718,991 Non-deductible costs 583, ,533 Income taxed at lower tax rates (150,993) (160,318) Income tax expense 3,500,060 4,045,206 Deferred tax assets and liabilities Temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes give rise to net deferred tax assets as at 31 December and. The deductible temporary differences do not expire under current tax legislation. The tax loss carry-forwards expire in Movements in temporary differences during the years ended 31 December and are presented as follows: Balance 1 January Recognised in profit or loss Recognised in other comprehensive income Balance 31 December Loans and deposits with banks and other financial institutions (98,285) (55,544) - (153,829) Financial instruments held for trading (326,683) 122,418 - (204,265) Loans to customers (235,858) (166,472) - (402,330) Financial instruments available-for-sale 243, ,424 (274,600) 135,514 Other assets 86, , ,511 Property and equipment 80,730 (84,150) - (3,420) Other liabilities 267,208 (115,636) - 151,572 Tax loss carry-forward 76,496 (19,124) - 57,372 93, ,929 (274,600) 95,125 Balance 1 January Recognised in profit or loss Recognised in other comprehensive income Balance 31 December Loans and deposits with banks and other financial institutions - (98,285) - (98,285) Financial instruments held for trading (42,360) (284,323) - (326,683) Loans to customers (285,387) 49,529 - (235,858) Financial instruments available-for-sale 264, ,019 (738,103) 243,690 Other assets (21,373) 107,871-86,498 Property and equipment 40,469 40,261-80,730 Other liabilities 159, , ,208 Tax loss carry-forward 95,620 (19,124) - 76, , ,116 (738,103) 93,796 29

30 INTERNATIONAL FINANCIAL REPORTING STANDARDS Income tax recognised in other comprehensive income The tax effects relating to components of other comprehensive income comprise: Amount before tax Income tax Income tax Amount before tax Income tax Income tax Net change in fair value of financial instruments available-for-sale 2,071,499 (414,299) (838,230) 4,191,149 (838,230) 3,352,919 Net change in fair value of financial instruments available-for-sale transferred to profit or loss (698,496) 139, ,127 (500,635) 100,127 (400,508) Other comprehensive income 1,373,003 (274,600) (738,103) 3,690,514 (738,103) 2,952, Cash and cash equivalents Cash 3,391,276 5,944,008 Nostro account in the Central Bank of the Russian Federation 11,937,468 10,056,024 Nostro accounts in banks and other financial institutions Citigroup entities 29,017,346 37,782,549 Other Russian banks and financial institutions MICEX Group 6,824,071 10,511,709 Other banks and financial institutions 481, ,335 OECD banks and financial institutions 2,546,969 5,864,215 Large Russian banks 7,083 7,047 Total nostro accounts in banks and other financial institutions 38,877,422 55,029,855 54,206,166 71,029,887 The Bank includes 30 largest Russian banks in terms of total assets in large Russian banks. Concentration of cash and cash equivalents As at 31 December and, exposures to counterparties, which individually comprised more than 10% of total cash and cash equivalents, are as follows: Citigroup 29,017,346 37,782,549 Central Bank of the Russian Federation 11,937,468 10,056,024 MICEX Group 6,824,071 10,511,709 47,778,885 58,350,282 30

31 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 11. Loans and deposits with banks and other financial institutions Loans and deposits Central Bank of the Russian Federation 40,026,902 24,000,000 Citigroup entities 37,698,015 46,657,653 Large Russian banks 18,811,169 20,683,975 OECD banks 5,743 5 Other Russian banks and financial institutions 203,175 1,983,862 96,745,004 93,325,495 Amounts receivable under reverse repo agreements Large Russian banks 30,972,104 17,307,361 MICEX Group 29,840,491 15,305,709 Other Russian banks and financial institutions 5,504,708-66,317,303 32,613, ,062, ,938,565 The Bank includes 30 largest Russian banks in terms of total assets in large Russian banks. No loans and deposits with banks and other financial institutions are impaired or past due. As at 31 December, the fair value of financial assets collateralising reverse repo agreements is RUB 76,198,717 thousand (31 December : RUB 37,227,837 thousand). Concentration of loans and deposits with banks and other financial institutions and amounts receivable under reverse repo agreements As at 31 December and, exposures to banks and other financial institutions and amounts receivable under reverse repo agreements, which individually comprised more than 10% of total loans and deposits with banks and other financial institutions and amounts receivable under reverse repo agreements, are as follows: Central Bank of the Russian Federation 40,026,902 24,000,000 Citigroup 37,698,015 46,657,653 MICEX Group 29,840,491 15,305, ,565,408 85,963,362 31

32 INTERNATIONAL FINANCIAL REPORTING STANDARDS 12. Financial instruments held for trading Financial assets held for trading Unpledged Debt and other fixed income securities Russian Government bonds (OFZ) 13,141,609 18,792,888 Russian Government Eurobonds 12,959,104 8,636,538 Gazprombank bonds ,100,725 27,429,436 Derivative financial instruments Foreign exchange contracts 5,105,669 4,769,229 Interest rate swaps - 10,162 5,105,669 4,779,391 31,206,394 32,208,827 No financial assets held for trading are past due. Financial liabilities held for trading Derivative financial instruments Foreign exchange contracts 3,140,904 5,851,119 Interest rate swaps - 10,166 3,140,904 5,861,285 Interest rate swaps Fair value Notional amount Asset Liability Interest rate swaps 6,768,169 10,162 (10,166) 32

33 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER Foreign exchange contracts The table below summarises, by major currencies, the contractual amounts of forward exchange contracts outstanding as at 31 December and with details of the contractual exchange rates. Foreign currency amounts presented below are translated at rates ruling at the reporting date. The resultant unrealised gains and losses on these unmatured contracts are recognised in profit or loss and in financial instruments held for trading, as appropriate. Nominal buy amount Gain (loss) Weighted average contracted exchange rate Nominal buy amount Gain (loss) Weighted average contracted exchange rate Spot foreign exchange contracts to buy US Dollars and sell Russian Roubles 25,298, ,293 0,02 27,676,759 55,113 0,01 Spot foreign exchange contracts to buy Russian Roubles and sell US Dollars 12,144,001 91,538 61,11 20,449, ,118 72,49 Spot foreign exchange contracts to buy US Dollars and sell Euro 252,761-1,665 1,05 45, ,09 Spot foreign exchange contracts to buy Euro and sell US Dollars 865,726 3,212 0,95 160, ,92 Spot foreign exchange contracts to buy Euro and sell Russian Roubles 229,078-3,579 0,02 119, ,01 Spot foreign exchange contracts to buy Russian Roubles and sell Euro 232,094 3,562 64,79 431, ,7 Spot foreign exchange contracts to buy other currencies and sell other currencies 176, ,7 41, ,08 Deliverable forward contracts to buy US Dollars and sell Russian Roubles 24,255,431 (1,456,197) 0,02 12,791,856 2,016,747 0,02 Deliverable forward contracts to buy Russian Roubles and sell US Dollars 24,747,082 1,878,522 66,18 27,204,785 (2,708,121) 67,17 Deliverable forward contracts to buy Euro and sell Russian Roubles 8,562, ,909 0,01 11,641,934 1,734,374 0,01 Deliverable forward contracts to buy Russian Roubles and sell Euro 16,024,027 2,244,703 74,32 22,880,365 (2,002,786) 75,36 Deliverable forward contracts to buy US Dollars and sell Euro 1,030, ,387 1,28 2,945, ,631 1,19 Deliverable forward contracts to buy Euro and sell US Dollars 2,417, ,782 0,89 9,812, ,577 0,89 Deliverable forward contracts to buy US Dollars and sell Kazakhstani Tenge 1,032,700-32, ,100, ,339 0,01 Deliverable forward contracts to buy Kazakhstani Tenge and sell Russian Roubles 1,051,854-25,715 5,41 1,065,464-8,555 4,8 Deliverable forward contracts to buy Russian Roubles and sell British Pounds 797, ,746 88,93 440,031-69,808 91,04 Deliverable forward contracts to buy British Pounds and sell Russian Roubles 538, ,252 0,01 227,300 54,126 0,01 Deliverable forward contracts to buy Swedish Crowns and sell US Dollars 739,622-80,43 8,09 263,433 2,568 8,39 Deliverable forward contracts to buy Russian Roubles and sell Swedish Crowns 657, ,535 8,79 264,854-21,756 8,38 Deliverable forward contracts to buy British Pounds and sell US Dollars 432,908-9,572 0,8 169,063-6,258 0,65 Deliverable forward contracts to buy Russian Roubles and sell Chinese Yuan 390,589 24,611 9,18 454,807 (20,113) 10,62 33

34 INTERNATIONAL FINANCIAL REPORTING STANDARDS Nominal buy amount Gain (loss) Weighted average contracted exchange rate Nominal buy amount Gain (loss) Weighted average contracted exchange rate Deliverable forward contracts to buy Chinese Yuan and sell US Dollars 390,091-3,134 6,96 453,061 (5,009) 6,52 Deliverable forward contracts to buy Japanese Yen and sell US Dollars ,54 1,245,677 8, ,17 Deliverable forward contracts to buy Russian Roubles and sell Japanese Yen ,251,842 (113,034) 0.56 Deliverable forward contracts to buy other currencies and sell other currencies 918,22 25,564 30,92 942,866 (15,544) 26,85 Option contracts to buy Euro and sell Russian Roubles 1,628,021 7,368 0,01 914,584-0,01 Option contracts to buy Russian Roubles and sell Euro 1,352,795-7,368 76,79 983,347-74,12 Option contracts to buy US Dollars and sell Russian Roubles 1,425,438 16,350 0,01 1,343,401-0,02 Option contracts to buy Russian Roubles and sell 1,288,959-16,35 67,08 1,499,054-65,31 US Dollars Option contracts to buy other currencies and sell other currencies 621,897-40,6 907,154-36, Loans to customers Loans to legal entities Loans to global corporations 69,239,404 89,431,148 Loans to local corporate customers 21,918,807 32,511,347 Loans to individuals Credit cards 24,171,223 23,050,521 Consumer loans 22,337,762 23,626,330 Staff loans 233, ,736 Mortgage loans 198, ,697 Overdrafts 11,192 24,109 Gross loans to customers 138,110, ,199,888 Impairment allowance (2,138,594) (2,793,991) Movements in the loan impairment allowance for the years ended 31 December and are as follows: Balance at the beginning of the year 2,793,991 2,596,151 Net charge 1,070,678 2,534,777 Write-offs (1,726,075) (2,336,937) Balance at the end of the year 2,138,594 2,793,991 34

35 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER Credit quality of loans to legal entities The Bank reviewed its loan portfolio to legal entities and did not identify loans that have indicators of impairment as at 31 December. Global corporations are international public companies, generally with investment grade ratings, for which no defaults have occurred. Local corporate customers are generally large-scale entities established in Russia, for which the Bank has not experienced late payments. The following table provides information on the credit quality of loans to legal entities as at 31 December : Gross loans Impairment allowance Net loans Impairment to gross loans % Loans to global corporations Standard loans non-impaired 69,239, ,163 68,632, Loans to local corporate customers Standard loans non-impaired 21,918, ,211 21,726, Total loans to legal entities 91,158, ,374 90,358, The following table provides information on the credit quality of loans to legal entities as at 31 December : Gross loans Impairment allowance Net loans Impairment to gross loans % Loans to global corporations Standard loans non-impaired 89,431, ,710 88,599, Loans to local corporate customers Standard loans non-impaired 32,481, ,083 32,179, Overdue less than 30 days 29, , Total loans to local corporate customers 32,511, ,356 32,208, Total loans to legal entities 121,942,495 1,134, ,808, Loans included in overdue less than 30 days were repaid in January as delay in repayment was due to technical reasons. The Bank estimates loan impairment based on its past historical loss experience on these types of loans, and assumes 0.9% collective rate (31 December : 0.9%). Changes in these estimates could affect the loan impairment allowance. For example, to the extent that the net present value of the estimated cash flows differs by plus/minus one percent, the impairment allowance for loans to legal entities as at 31 December would be RUB 903,588 thousand lower/higher (31 December : RUB 1,208,084 thousand). Analysis of movements in the impairment allowance for loans to legal entities Movements in the loan impairment allowance for loans to legal entities for the years ended 31 December and are as follows: Balance at the beginning of the year 1,134, ,927 Net (recovery) charge (334,692) 165,139 Balance at the end of the year 799,374 1,134,066 35

36 INTERNATIONAL FINANCIAL REPORTING STANDARDS Credit quality of loans to individuals The following table provides information on the credit quality of loans to individuals collectively assessed for impairment as at 31 December : Gross loans Impairment allowance Net loans Impairment to gross loans % Credit cards Not overdue 22,636, ,796 22,309, Overdue less than 30 days 996,584 68, , Overdue days 132,287 68,243 64, Overdue days 109,934 71,334 38, Overdue days 105,075 83,602 21, Overdue days 80,242 67,983 12, Overdue days 68,777 62,012 6, Overdue more than 180 days 42,264 42, Total credit cards 24,171, ,056 23,380, Consumer loans Not overdue 21,479, ,909 21,201, Overdue less than 30 days 528,278 43, , Overdue days 169,939 52, , Overdue days 99,205 46,900 52, Overdue days 58,781 40,553 18, Overdue more than 120 days 2,085 2, Total consumer loans 22,337, ,421 21,874, Staff loans Not overdue 233,115 2, , Total staff loans 233,115 2, , Mortgage loans Not overdue 119,519 1, , Overdue 79,472 72,201 7, Total mortgage loans 198,991 73, , Overdrafts Not overdue 2, , Overdue 8,735 8, Total overdrafts 11,192 8,999 2, Total loans to individuals 46,952,283 1,339,220 45,613,

37 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER The following table provides information on the credit quality of loans to individuals collectively assessed for impairment as at 31 December : Gross loans Impairment allowance Net loans Impairment to gross loans % Credit cards Not overdue 21,403, ,279 21,077, Overdue less than 30 days 860, , , Overdue days 189,033 89,301 99, Overdue days 170,127 96,391 73, Overdue days 100,670 75,839 24, Overdue days 120,128 97,381 22, Overdue days 127, ,688 12, Overdue more than 180 days 79,595 79, Total credit cards 23,050,521 1,008,278 22,042, Consumer loans Not overdue 22,550, ,040 22,285, Overdue less than 30 days 576,072 53, , Overdue days 226,141 75, , Overdue days 166,699 75,143 91, Overdue days 104,267 71,727 32, Overdue more than 120 days 2,786 2, Total consumer loans 23,626, ,166 23,083, Staff loans Not overdue 299,736 3, , Total staff loans 299,736 3, , Mortgage loans Not overdue 159,587 1, , Overdue 97,110 81,690 15, Total mortgage loans 256,697 83, , Overdrafts Not overdue 2, , Overdue 21,313 21, Total overdrafts 24,109 21,667 2, Total loans to individuals 47,257,393 1,659,925 45,597, The Bank estimates loan impairment based on its past historical loss experience on these types of loans. The significant assumptions used in determining the impairment losses for loans to individuals include management s assumption that loss migration rates are constant and can be estimated based on a 12 month historic loss migration pattern, considering the current economic environment. Changes in these estimates could affect the loan impairment allowance. For example, to the extent that the net present value of the estimated cash flows differs by plus/minus three percent (31 December : three percent), the 37

38 INTERNATIONAL FINANCIAL REPORTING STANDARDS impairment allowance for loans to individuals as at 31 December would be RUB 1,368,392 thousand lower/higher (31 December : RUB 1,367,924 thousand). Analysis of movements in the impairment allowance for loans to individuals Movements in the loan impairment allowance by classes of loans to individuals for the year ended 31 December are as follows: Credit cards Consumer loans Staff loans Mortgage loans Over-drafts Total Balance at the beginning of the year 1,008, ,166 3,344 83,470 21,667 1,659,925 Net charge (recovery) 740, ,944 (1,002) (10,068) (12,668) 1,405,370 Write-offs (957,386) (768,689) (1,726,075) Balance at the end of the year 791, ,421 2,342 73,402 8,999 1,339,220 Movements in the loan impairment allowance by classes of loans to individuals for the year ended 31 December are as follows: Credit cards Consumer loans Staff loans Mortgage loans Over-drafts Total Balance at the beginning of the year 928, ,200 1,354 30,895 5,930 1,627,224 Net charge 1,183,078 1,116,258 1,990 52,575 15,737 2,369,638 Write-offs (1,103,645) (1,233,292) (2,336,937) Balance at the end of the year 1,008, ,166 3,344 83,470 21,667 1,659,925 Industry and geographical analysis of the loan portfolio Loans to customers were issued primarily to customers located within the Russian Federation who operate in the following economic sectors: Manufacturing 48,549,319 72,155,639 Individuals 46,952,283 47,257,393 Trade 19,603,488 26,181,326 Financial intermediation 8,393,035 10,308,334 Telecommunication 2,470, ,301 Mining 2,301,426 3,782,599 Other 9,839,976 9,396,296 Gross loans to customers 138,110, ,199,888 Impairment allowance (2,138,594) (2,793,991) Analysis of collateral Analysis of collateral for loans to legal entities Loans issued to global corporations with the net carrying amount of RUB 60,135,895 thousand (31 December : RUB 82,904,188 thousand) are secured by guarantees of parent companies and/or other Citigroup entities. Loans to global corporations with the net carrying amount of RUB 8,496,346 thousand (31 December : RUB 5,695,250 thousand) are not secured. The majority of loans to local corporate customers are secured by guarantees of their parent companies. 38

39 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER Analysis of collateral for loans to individuals Mortgage loans are secured by underlying residential property. Credit cards, overdrafts and consumer loans are not secured. For mortgage loans with the net carrying amount of RUB 125,589 thousand (31 December : RUB 173,227 thousand) management believes that the fair value of collateral is at least equal to the carrying amount of individual loans at the reporting date. During and the Bank did not obtain assets by taking possession of collateral for loans to individuals. Loan maturities The maturity of the loan portfolio is presented in Note 30, which shows the remaining periods from the reporting date to the contractual maturities of the loans. Due to the short-term nature of the loans issued by the Bank, it is likely that many of the loans will be prolonged at maturity. Accordingly, the effective maturity of the loan portfolio may be significantly longer than the term based on contractual terms. Concentration of loans to customers As at 31 December and, there were no exposure that individually comprised more than 10% of total loans to customers. 14. Financial instruments available-for-sale Unpledged Debt and other fixed income securities Russian Government bonds (OFZ) 30,769,458 24,473,462 US Government bonds 5,995,716 3,603,448 Gazprom Eurobonds 1,190,366 1,463,430 Vneshtorgbank Eurobonds 930,325 1,126,716 Agency on Mortgage Crediting (AIZhK) Eurobonds 352, ,076 Vnesheconombank bonds - 183,975 Equity securities National Bureau of Credit Histories 4,410 4,410 National Settlement Depository 39 - Other 5 5 Pledged under overnight loans Debt and other fixed income securities Russian Government bonds (OFZ) 12,995,407 11,182,183 Agency on Mortgage Crediting (AIZhK) bonds 515, ,460 Rosselkhozbank bonds 151, ,551 Russian Government Eurobonds 16,266 21,172 52,921,233 43,044,888 No financial instruments available-for-sale are impaired or past due. 39

40 INTERNATIONAL FINANCIAL REPORTING STANDARDS 15. Property and equipment Land, buildings and leasehold improvements Equipment Total Cost At 1 January 2,774,288 2,583,788 5,358,076 Additions 71, , ,796 Disposals (429,177) (241,546) (670,723) At 31 December 2,417,097 2,781,052 5,198,149 Depreciation At 1 January (1,901,659) (2,317,994) (4,219,653) Depreciation charge (137,755) (149,069) (286,824) Disposals 420, , ,917 At 31 December (1,618,854) ( 2,251,706) (3,870,560) Carrying value at 31 December 798, ,346 1,327,589 Land, buildings and leasehold improvements Equipment Total Cost At 1 January 2,734,128 2,697,160 5,431,288 Additions 40, , ,448 Disposals - (256,660) (256,660) At 31 December 2,774,288 2,583,788 5,358,076 Depreciation At 1 January (1,653,553) (2,391,118) (4,044,671) Depreciation charge (248,106) (155,540) (403,646) Disposals - 228, ,664 At 31 December (1,901,659) (2,317,994) (4,219,653) Carrying value at 31 December 872, ,794 1,138, Goodwill In goodwill that arose on the acquisition of ABN-Amro s custody business in January of 2005 was written-off by the Bank. 40

41 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 17. Deposits and balances from banks and other financial institutions Vostro accounts 23,523,706 21,899,840 Term deposits 19,033,718 22,630,126 Concentration of deposits and balances from banks and other financial institutions As at 31 December and, exposures that individually comprised more than 10% of total deposits and balances from banks and other financial institutions are as follows: Citigroup 8,636,982 12,970,371 National Clearing Centre 7,144,532 8,692,746 15,781,514 21,663, Current accounts and deposits from customers Current accounts and demand deposits 261,783, ,396,715 Term deposits 71,003,644 81,822, ,786, ,219,114 Concentration of current accounts and deposits from customers As at 31 December and, there are no current accounts and demand or term deposits from customers that individually comprised more than 10% of total current accounts and deposits from customers. 19. Other liabilities Other financial liabilities Settlements 2,257,967 1,702,701 Other financial liabilities 7,764 29,674 Total other financial liabilities 2,265,731 1,732,375 Other non-financial liabilities Settlements with employees 1,171,109 1,124,297 Other tax payable 364, ,472 Income tax payable 244,253 12,852 Other non-financial liabilities 101, ,688 Total other non-financial liabilities 1,880,665 1,443,309 41

42 INTERNATIONAL FINANCIAL REPORTING STANDARDS 20. Share capital The Bank converted from a limited liability company to a closed joint-stock company in November In conjunction with this change in the legal form, the Bank issued 1,000 ordinary shares at RUB 1 million per share in exchange for the partners previous interest and RUB 763,950 thousand in retained earnings. In accordance with the Charter the Bank has the right to issue additional 6,000 ordinary shares at RUB 1 million per share and 2,000 preference shares at RUB 1 million per share. At 31 December, 1,000 ordinary shares remain issued and outstanding. The Bank received additional paid in capital of RUB 1,227,310 thousand from Citigroup in 2007, however no additional shares were issued. On 30 June, according to the decision of the sole shareholder the Bank declared dividends in the amount of RUB 6,500 thousand per share from retained earnings, which in total amount to RUB 6,500,000 thousand. These dividends were paid to Citigroup Netherlands B.V. on 15 July. On 19 September, according to the decision of the sole shareholder the Bank declared dividends in the amount of RUB 6,500 thousand per share from retained earnings, which in total amounts to RUB 6,500,000 thousand. These dividends were paid to Citigroup Netherlands B.V. on 29 September. 21. Corporate governance and internal control Corporate governance framework The Bank operates as a joint stock company in accordance with the Russian law. The supreme governing body of the Bank is the General Shareholders meeting that is called for annual or extraordinary meetings. The General Shareholders meeting makes strategic decisions on the Bank s operations. The General Shareholders meeting elects the Board of Directors. The Board of Directors is responsible for overall governance of the Bank s activities. Russian legislation and the Charter of the Bank establish lists of decisions that are exclusively approved by the General Shareholders meeting and that are approved by the Board of Directors. As at 31 December, the Board of Directors includes: Ivanova Maria Lvovna Chairman of the Board of Directors Nikolaeva Natalia Yurievna Korshilov Denis Nikolaevich Teano Christopher Luet Marc Raoul Marie Smolyanova Victoria Aleksandrovna Potoma Marek Bolshakov Alexey Nikolaevich Serebryakova Polina Sergeevna Ducsai Evelin Katalin. During the year ended 31 December the following changes occurred in composition of the Board of Directors: From 1 January till 17 March the Board of Directors consisted of: Ivanova Maria Lvovna, Nikolaeva Natalia Yurievna, Korshilov Denis Nikolaevich, Petrescu Florin, Rozhkov Viktor Sergeevich, Teano Christopher and Luet Marc Raoul Marie. From 18 March till 7 April the Board of Directors consisted of: Ivanova Maria Lvovna, Nikolaeva Natalia Yurievna, Korshilov Denis Nikolaevich, Petrescu Florin, Rozhkov Viktor Sergeevich, Teano Christopher, Luet Marc Raoul Marie and Smolyanova Victoria Aleksandrovna. From 8 April till 29 June the Board of Directors consisted of: Ivanova Maria Lvovna, Korshilov Denis Nikolaevich, Petrescu Florin, Rozhkov Viktor Sergeevich, Teano Christopher, Luet Marc Raoul Marie and Smolyanova Victoria Aleksandrovna. 42

43 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER From 30 June till 1 December the Board of Directors consisted of: Ivanova Maria Lvovna, Nikolaeva Natalia Yurievna, Korshilov Denis Nikolaevich, Rozhkov Viktor Sergeevich, Teano Christopher, Luet Marc Raoul Marie, Smolyanova Victoria Aleksandrovna, Potoma Marek and Bolshakov Alexey Nikolaevich. On 2 December the following composition of the Board of Directors was approved: Ivanova Maria Lvovna, Nikolaeva Natalia Yurievna, Korshilov Denis Nikolaevich, Teano Christopher, Luet Marc Raoul Marie, Smolyanova Victoria Aleksandrovna, Potoma Marek, Bolshakov Alexey Nikolaevich, Serebryakova Polina Sergeevna and Ducsai Evelin Katalin. Operating activities of the Bank are managed by the sole executive body of the Bank (the President) and collective executive body of the Bank (the Management Board). Executive bodies of the Bank are accountable to the Board of Directors and to the General Shareholders meeting. The General Shareholders meeting elects the President. The executive bodies of the Bank are responsible for implementation of decisions of the General Shareholders meeting and the Board of Directors of the Bank. As at 31 December, the Management Board includes: Luet Marc Raoul Marie Chairman of the Management Board Nikolaeva Natalia Yurievna Belyaev Ruslan Valerievich Belaya Natalia Viktorovna Berner Mikhail Borisovich Klochko Svetlana Anatolievna. During the year ended 31 December the following changes occurred in composition of the Management Board: From 1 January till 17 March the Management Board consisted of: Luet Marc Raoul Marie, Nikolaeva Natalia Yurievna, Belyaev Ruslan Valerievich, Korotkov Sergey Aleksandrovich, Belaya Natalia Viktorovna and Berner Mikhail Borisovich. From 18 March till 7 April the Management Board consisted of: Luet Marc Raoul Marie, Nikolaeva Natalia Yurievna, Belyaev Ruslan Valerievich, Korotkov Sergey Aleksandrovich, Belaya Natalia Viktorovna, Berner Mikhail Borisovich and Klochko Svetlana Anatolievna. From 8 April till 8 June the Management Board consisted of: Luet Marc Raoul Marie, Belyaev Ruslan Valerievich, Korotkov Sergey Aleksandrovich, Belaya Natalia Viktorovna, Berner Mikhail Borisovich and Klochko Svetlana Anatolievna. From 9 June till 1 December the Management Board consisted of: Luet Marc Raoul Marie, Belyaev Ruslan Valerievich, Belaya Natalia Viktorovna, Berner Mikhail Borisovich and Klochko Svetlana Anatolievna. On 2 December the Management Board had been elected in the following composition: Luet Marc Raoul Marie, Nikolaeva Natalia Yurievna, Belyaev Ruslan Valerievich, Belaya Natalia Viktorovna, Berner Mikhail Borisovich and Klochko Svetlana Anatolievna. Internal control policies and procedures The Board of Directors and the Management Board have responsibility for the development, implementation and maintaining of internal controls in the Bank that are commensurate with the scale and nature of operations. The purpose of internal controls is to ensure: proper and comprehensive risk assessment and management proper business and accounting and financial reporting functions, including proper authorisation, processing and recording of transactions completeness, accuracy and timeliness of accounting records, managerial information, regulatory reports, etc. reliability of IT-systems, data and systems integrity and protection prevention of fraudulent or illegal activities, including misappropriation of assets compliance with laws and regulations. 43

44 INTERNATIONAL FINANCIAL REPORTING STANDARDS Management is responsible for identifying and assessing risks, designing controls and monitoring their effectiveness. Management monitors the effectiveness of the Bank s internal controls and periodically implements additional controls or modifies existing controls as considered necessary. The Bank developed a system of standards, policies and procedures to ensure effective operations and compliance with relevant legal and regulatory requirements, including the following areas: requirements for appropriate segregation of duties, including the independent authorisation of transactions requirements for the recording, reconciliation and monitoring of transactions compliance with regulatory and other legal requirements documenting of controls and procedures requirements for the periodic assessment of operational risks faced, and the adequacy of controls and procedures to address the risks identified requirements for the reporting of operational losses and proposed remedial action development of contingency plans training and professional development ethical and business standards and risk mitigation, including insurance where this is effective. There is a hierarchy of requirements for authorisation of transactions depending on their size and complexity. A significant portion of operations are automated and the Bank put in place a system of automated controls. The internal control system in the Bank comprises: the governing bodies of the Bank the revision commission (the controller) Chief Accountant (and her deputies) of the Bank Heads of branches (and their deputies) and chief accountants (and their deputies) of branches the Internal Audit Department is the Bank s division acting on the basis of the Statute approved by the Board of Directors for the internal control purposes and assistance to the governing bodies of the Bank in ensuring effective functioning of the Bank, and performing on a constant basis review and assessment of internal control system efficiency based on the principles of independence and impartiality in compliance with the Statute of the Internal Audit Department approved by the Board of Directors and in compliance with the internal audit plan. The Internal Audit Department is headed by the Head of the Internal Audit Department who is elected and dismissed by the Board of Directors. The Head of the Internal Audit Department is accountable to the Board of Directors other employees, divisions and functions that are responsible for compliance with the established standards, policies and procedures, including: ĹĹ the responsible employee of the Anti-Money Laundering and Financing of Terrorism and Anti-Corruption Department performing responsibilities in accordance with the Internal Control Rules of Anti-Money Laundering and Financing of Terrorism and Anti-Corruption introduced by the Compliance and Control Department and approved by the President of the Bank other divisions and (or) responsible employees of the Bank, including: ĹĹ ĹĹ ĹĹ ĹĹ the professional securities market participant controller a regular employee of the Bank satisfying the qualification requirements of the Federal Service for Financial Markets of the Russian Federation, who is responsible for the arrangement and implementation of the internal control over the Bank s activity as a professional securities market participant, and acting on the basis of the Instruction on Internal Control the Compliance and Control Department is the Bank s division, acting on the basis of the Statute of the Compliance and Control Department, and assisting the management of the Bank in performing control over compliance with the Russian and international legislation (compliance). The Head of the Compliance and Control Department informs the President on the statement of the compliance-control in the Bank, disadvantages in the internal compliance-control system, actions on elimination of the detected disadvantages; communicates with the corporate services and authorities of the Russian Federation; consults and organises trainings of the employees on compliance-control issues the executive officer a regular employee of the Bank responsible for the internal control implementation for the purposes of counteracting unlawful usage of insider information and market manipulation, acting on the basis of the Instruction on Internal Control the Division of Risk Management and Control over Currency Transactions of the Finance Department is a division of the Bank acting on the basis of the Statute of the Division of Risk Management and Control over Currency Transactions approved by the Chief Financial Officer, specialising on performing control over the compliance of the Bank s daily transactions with the approved accounting policy and policy of control over expenses for the purposes of correct accounting and recording, on control over the compliance with the 44

45 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER ĹĹ market risk limits and independent reconciliation of the financial results of the Bank s transactions on financial markets, coordinating of the internal control procedures on the faithfulness of the financial statements performed by the divisions of the Bank on routine basis, including reconciliation of the account balances and review of the terms of balances being on the off-balance accounts the Currency Control Division of the Operational Department a division of the Bank acting on the basis of the Statute of the Currency Control Division approved by the Head of the Operational Department and in compliance with the legal acts imposed by the CB RF and internal procedures, approved by the Heads of operational departments of the Bank. The main functions of the Internal Audit Department include the following: audit and efficiency assessment of the system of internal control as a whole, fulfillment of the decisions of key management structures audit of efficiency of methodology of assessment of banking risks and risk management procedures, regulated by internal documents in the Bank (methods, programmes, rules and procedures for banking operations and transactions, and for the management of banking risks) audit of reliability of internal control system over automated information systems audit and testing of fairness, completeness and timeliness of accounting and reporting function and the reliability (including the trustworthiness, fullness and objectivity) of the collection and submission of financial information audit of applicable methods of safekeeping the Bank s property assessment of economic reasonability and efficiency of operations and other deals audit of internal control processes and procedures audit of the Compliance and Control Department and the Risk Department. The Compliance and Control Department conducts compliance activities focused primarily on regulatory risks faced by the Bank. The main functions of the Compliance and Control Department include the following: identification of compliance risk and regulatory risk monitoring of events related to regulatory risk, including probability of occurrence and quantitative assessment of its consequences monitoring of regulatory risk preparation of recommendations on regulatory risk management coordination and participation of design of measures to decrease regulatory risk monitoring of efficiency of regulatory risk management participation in preparation of internal documents on regulatory risk management, anti-corruption, compliance with corporate behaviour rules, code of professional ethics and minimisation of conflicts of interest analysis of dynamics of clients complaints analysis of economic reasonableness of agreements with suppliers participation in interaction with authorities, self-organised organisations, associations and financial market participants. Russian legislation, including Federal Law dated 2 December 1990 No On Banks and Banking Activity, Direction of the CB RF dated 1 April 2014 No U On Requirement to the Head of the Risk Management Service, the Head of the Internal Control Service, the Head of the Internal Audit Service of the Credit Organisation establish the professional qualifications, business reputation and other requirements for members of the Board of Directors, the Management Board, Heads of the Internal Audit Department, the Compliance and Control Department and the Risk Department and other key management personnel. All members of the Bank s governing and management bodies meet with these requirements. Management believes that the Bank complies with the CB RF requirements related to risk management and internal control systems, including requirements related to the Internal Audit Department, the Compliance and Control Department, and that risk management and internal control systems are appropriate for the scale, nature and complexity of operations. 45

46 INTERNATIONAL FINANCIAL REPORTING STANDARDS 22. Risk management Management of risk is fundamental to the business of banking and is an essential element of the Bank s operations. The major (significant) risks faced by the Bank are those related to market risk, credit risk, liquidity risk, and operational, legal and reputational risks. Risk management policies and procedures The risk management policies aim to identify, analyse and manage the risks faced and to set appropriate risk limits and controls, and to continuously monitor risk levels and adherence to limits. Risk management policies and procedures are reviewed regularly to reflect changes in market conditions, products and services offered and emerging best practice. The Bank has developed a system of reporting on significant risks and capital. As at 31 December, the Bank s internal documentation establishing the procedures and methodologies for identification, managing and stress-testing the Bank s significant risks, was approved by the authorised management bodies of the Bank in accordance with regulations and recommendations issued by the CB RF. The Board of Directors has overall responsibility for the oversight of the risk management framework, overseeing the management of key risks and reviewing its risk management policies and procedures as well as approving significantly large exposures. The Management Board is responsible for monitoring and implementation of risk mitigation measures and making sure that the Bank operates within the established risk parameters. The Head of the Risk Department is responsible for the overall risk management and compliance functions, ensuring the implementation of common principles and methods for identifying, measuring, managing and reporting both financial and non-financial risks. He reports directly to the President and indirectly to the Board of Directors. The Risk Department is not subordinated to, and does not report to, divisions accepting relevant risks. The Board of Directors and management bodies of the Bank have responsibility for controlling the Bank s compliance with risk limits and capital adequacy ratios as established by the Bank s internal documentation. With the view of controlling effectiveness of the Bank s risk management procedures and their consistent application the Board of Directors and management bodies of the Bank periodically receive reports prepared by the Internal Audit Department and the Risk Department, discuss the contents of these reports and consider proposed corrective actions. Credit, market and liquidity risks both at the portfolio and transactional levels are managed and controlled through a system of Credit Committees and an Asset and Liability Management Committee (ALCO). In order to facilitate efficient and effective decision-making, the Bank has established a hierarchy of Credit Committees depending on the type and amount of the exposure. Both external and internal risk factors are identified and managed throughout the organisation. Particular attention is given to identifying the full range of risk factors and determination of the level of assurance over the current risk mitigation procedures. Apart from the standard credit and market risk analysis, the Risk Department monitors financial and non-financial risks by holding regular meetings with operational units in order to obtain expert judgments in their areas of expertise. In compliance with the Bank s internal documentation the Risk Department and Internal Audit Department frequently prepare reports, which cover the Bank s significant risks management. The reports include observations as to assessment of the effectiveness of the Bank s procedures and methodologies, and recommendations for improvement. Market risk Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises currency risk, interest rate risk and other price risks. Market risk arises from open positions in interest rate, currency and equity financial instruments, which are exposed to general and specific market movements and changes in the level of volatility of market prices. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, whilst optimising the return on risk. 46

47 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER Overall authority for market risk is vested in the ALCO, which is chaired by the President. Market risk limits are approved based on recommendations of the Risk Department s Market Risk Management Division. The Bank manages its market risk by setting open position limits in relation to financial instruments, interest rate maturity and currency positions and stop-loss limits. They are monitored and reassessed on a regular basis. The Bank monitors market risks by modelling the result of a fixed change in the monitored market factor while keeping other factors constant. The potential change in the portfolio value is then defined depending on the current sensitivity of the opened position to the changes in the market factors. In addition, the Bank uses a wide range of stress tests to model the financial impact of a variety of exceptional market scenarios on individual trading portfolios and the overall position. Stress tests provide an indication of the potential size of losses that could arise in extreme conditions. The stress tests carried out by the Bank include risk factor stress testing, where stress movements are applied to each risk category and ad hoc stress testing, which includes applying possible stress events to specific positions. The Bank also utilises Value-at-Risk (VAR) methodology to monitor market risk of its trading positions. The Bank does not solely rely on its VAR calculations in its market risk measurement due to inherent risk of usage of VAR. The limitations of the VAR methodology are recognised by supplementing VAR limits with other position and sensitivity limit structures, including limits to address potential concentration risks within each trading portfolio, and gap analysis. Interest rate risk The Bank is exposed to interest rate risk as its interest bearing assets and liabilities have different maturity dates, periods of interest rate changes and volumes during these periods. For variable interest rates, the Bank is exposed to a basis risk due to the different mechanisms of setting different interest rates, such as Libor or MosPrime. The interest rate risk management activities are aimed at optimising net interest income in accordance with the Bank s strategy. The Bank holds trading positions in various financial instruments. The Bank s activities are conducted based on the requirements of customers. In accordance with the estimated demand from customers, the Bank holds a portfolio of financial instruments and maintains access to the financial markets through the quoting of bid and ask prices and by trading with other market makers. These positions are also held for the purpose of speculation on the expected future developments of financial markets. The speculative expectation and market making thus aim to maximise net income from trading. An analysis of sensitivity of profit or loss and equity (net of taxes) as a result of changes in the fair value of financial instruments held for trading and financial instruments available-for-sale as at 31 December and due to changes in the interest rates based on a simplified scenario of a 200 basis point (bp) symmetrical fall or rise in all yield curves is as follows: Profit or loss Equity Profit or loss Equity 200 bp parallel increase (1,170,593) (3,087,419) (1,138,559) (3,002,723) 200 bp parallel decrease 1,170,593 3,087,419 1,138,559 3,002,723 An analysis of sensitivity of profit or loss and equity (net of taxes) to changes in interest rate repricing risk based on a simplified scenario of a 200 basis point (bp) symmetrical fall or rise in all yield curves and positions of all interest bearing assets and liabilities existing as at 31 December and is as follows: Profit or loss Equity Profit or loss Equity 200 bp parallel increase (1,869,443) (1,869,443) (2,192,939) (2,192,939) 200 bp parallel decrease 1,869,443 1,869,443 2,192,939 2,192,939 47

48 INTERNATIONAL FINANCIAL REPORTING STANDARDS Currency risk The Bank has assets and liabilities denominated in several foreign currencies. Foreign currency risk arises when the actual or forecasted assets in a foreign currency are either greater or less than the liabilities in that currency. For further information on the exposure to currency risk at year end refer to Note 31. The measurement of the currency risk is based on the currency exposure in the individual currencies. The currency exposure calculated for individual currencies is subject to the simulation of a standardised change in the currency rate in comparison with the functional currency (appreciation of the currency monitored), and the value of the currency exposure at the new level of the currency rate is calculated. The difference between the calculated values represents the potential change in the value of the portfolio in a particular currency and is compared with the limit. The limits are usually symmetrical, i.e. limiting the maximum long and short position to the same extent. A more comprehensive approach is provided by the calculation of VAR. The Bank also carries out stress testing of the currency risk while adhering to the same methodology, but the fixed movement in exchange rates is replaced with the movement in currency rates defined for stress testing purposes. The Bank sets currency risk limits based on its net currency exposure in individual currencies and with respect to the total currency exposure. An analysis of sensitivity of profit or loss and equity (net of taxes) to changes in the foreign currency exchange rates based on positions existing as at 31 December and and a simplified scenario of a 20% change in USD and other currencies to RUB exchange rates is as follows: Profit or loss Equity Profit or loss Equity 20% appreciation of USD against RUB 491, ,849 (17,314) (17,314) 20% depreciation of USD against RUB (491,849) (491,849) 17,314 17,314 20% appreciation of other currencies against RUB 406, ,947 (80,278) (80,278) 20% depreciation of other currencies against RUB (406,947) (406,947) 80,278 80,278 Credit risk Credit risk is the risk of financial loss to the Bank if a customer or counterparty to a financial instrument fails to meet its contractual obligations. The Bank has developed policies and procedures for the management of credit exposures (both for recognised financial assets and unrecognised contractual commitments), including guidelines to limit portfolio concentration and the establishment of Credit Committees, which actively monitor credit risk. The credit policy is reviewed and approved by the Management Board. The credit policy establishes: procedures for review and approval of loan applications methodology for the credit assessment of borrowers (legal entities and individuals) methodology for the credit assessment of counterparties, issuers and insurance companies methodology for the evaluation of collateral credit documentation requirements procedures for the ongoing monitoring of loans and other credit exposures. Corporate loan applications are originated by the relevant client managers and are then passed on to the Loan Department, which is responsible for the corporate loan portfolio. Analysts reports are based on a structured analysis focusing on the customer s business and financial performance. The loan application and the report are then independently reviewed by the Risk Department s Credit Risk Management Division and a second opinion is given accompanied by a verification that credit policy requirements are met. The Credit Committee reviews the loan application on the basis of submissions by the Loan Department and the Risk Department. Individual transactions are also reviewed by the Legal, Accounting and Tax departments depending on the specific risks and pending final approval of the Credit Committee. 48

49 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER The Bank continuously monitors the performance of individual credit exposures and regularly reassesses the creditworthiness of its borrowers. The review is based on the customer s most recent financial statements and other information submitted by the borrower, or otherwise obtained by the Bank. Retail loan applications are reviewed by the Retail Lending Division through the use of scoring models and application data verification procedures developed together with the Risk Department. Apart from individual customer analysis, the whole credit portfolio is assessed by the Risk Department with regard to credit concentration and market risks. The maximum exposure to credit risk is generally reflected in the carrying amounts of financial assets in the statement of financial position and unrecognised contractual commitment amounts. The impact of possible netting of assets and liabilities to reduce potential credit exposure is not significant. The maximum exposure to credit risk from financial assets at the reporting date is as follows: ASSETS Cash equivalents 50,814,890 65,085,879 Loans and deposits with banks and other financial institutions 163,062, ,938,565 Financial instruments held for trading 31,206,394 32,208,827 Loans to customers 135,971, ,405,897 Financial instruments available-for-sale 52,916,779 43,040,473 Other financial assets 2,175,640 1,650,847 Total maximum exposure 436,147, ,330,488 The maximum exposure to credit risk from unrecognised contractual commitments at the reporting date is presented in Note 23. The Bank monitors concentrations of credit risk by industry/sector and by geographic location. For the analysis of concentration of credit risk in respect of loans to customers refer to Note 13. As at 31 December and, the Bank has debt securities issued by the Government of the Russian Federation, credit risk exposure to whom exceeded 10% of maximum credit risk exposure. The credit risk exposure for these financial instruments as at 31 December is RUB 69,865,578 thousand (31 December : RUB 63,106,243 thousand). In accordance with the requirements of the CB RF, the Bank also calculates on a daily basis mandatory maximum risk exposure ratio per borrower or group of related borrowers (N6), which regulates (mitigates) the Bank s credit risk in respect of a borrower or group of related borrowers and sets the maximum ratio of the total liabilities of a borrower (borrowers within a group of related borrowers) owed to the Bank, to the Bank s own funds (capital) and mandatory maximum large risks exposure ratio (N7), which regulates (mitigates) the Bank s credit risk in respect of large exposures of the Bank and sets the maximum ratio of the total large exposures of the Bank to the Bank s own funds (capital). As at 1 January 2017 and, the maximum level of N6 ratio set by the CB RF was 25%, N7 800%. The N6 ratio calculated by the Bank as at 1 January 2017 was 19.1% (1 January : 19.4%) and was in compliance with limits set by the CB RF. The N7 ratio calculated by the Bank as at 1 January 2017 was 158.4% (1 January : 213.0%) and was in compliance with limits set by the CB RF. Offsetting financial assets and financial liabilities The disclosures set out in the tables below include financial assets and financial liabilities that: are offset in the Bank s statement of financial position or are subject to an enforceable master netting arrangement or similar agreement that covers similar financial instruments, irrespective of whether they are offset in the statement of financial position. 49

50 INTERNATIONAL FINANCIAL REPORTING STANDARDS Similar agreements include derivative clearing agreements, global master repo agreements and global master securities lending agreements. Similar financial instruments include derivatives, repo agreements, and reverse repo agreements, and securities borrowing and lending agreements. The Bank s derivative transactions that are not transacted on an exchange are entered into under International Derivative Swaps and Dealers Association (ISDA) Master Netting Agreements. In general, under such agreements the amounts owed by each counterparty that are due on a single day in respect of transactions outstanding in the same currency under the agreement are aggregated into a single net amount payable by one party to the other. In certain circumstances, for example when a credit event such as a default occurs, all outstanding transactions under the agreement are terminated, the termination value is assessed, and only a single net amount is due or payable in settlement transactions. Repo, reverse repo transactions, and securities borrowings and lendings are covered by master agreements with netting terms similar to those of ISDA Master Netting Agreements. The above ISDA and similar master netting arrangements do not meet the offsetting criteria in the statement of financial position. This is because they create a right of set-off of recognised amounts that is enforceable only following an event of default, insolvency or bankruptcy of the Bank or the counterparties. In addition, the Bank and its counterparties do not intend to settle on a net basis or to realise the assets and settle the liabilities simultaneously. The Bank receives and accepts collateral in the form of marketable securities in respect of repo, and reverse repo agreements. Such collateral is subject to the standard industry terms of the ISDA Credit Support Annex. This means that securities received/given as collateral can be pledged or sold during the term of the transaction, but must be returned on maturity of the transaction. The terms also give each counterparty the right to terminate the related transactions upon the counterparty s failure to post collateral. The tables below show financial assets and financial liabilities subject to offsetting, enforceable master netting arrangements and similar arrangements as at 31 December and : Gross amount of recognised financial liability/ asset offset in the statement of financial position Net amount of financial assets/liabilities presented in the statement of financial position Related amounts subject to offset under specific conditions Financial instruments Cash collateral received Net amount Types of financial assets/liabilities Derivative financial instruments - assets - 2,800,365 1,034,694-1,765,671 Reverse repo agreements - 66,317,303 66,317, Total financial assets - 69,117,668 67,351,997-1,765,671 Derivative financial instruments - liabilities - 3,086,341 1,034,694-2,051,647 Total financial liabilities - 3,086,341 1,034,694-2,051,647 Gross amount of recognised financial liability/ asset offset in the statement of financial position Net amount of financial assets/liabilities presented in the statement of financial position Related amounts subject to offset under specific conditions Financial instruments Cash collateral received Net amount Types of financial assets/liabilities Derivative financial instruments - assets - 4,690,688 2,137,041-2,553,647 Reverse repo agreements - 32,613,070 32,613, Total financial assets - 37,303,758 34,750,111-2,553,647 Derivative financial instruments - liabilities - 4,507,890 2,137,041-2,370,849 Total financial liabilities - 4,507,890 2,137,041-2,370,849 50

51 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER Liquidity risk Liquidity risk is the risk that the Bank will encounter difficulty in meeting obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. Liquidity risk exists when the maturities of assets and liabilities do not match. The matching and/or controlled mismatching of the maturities and interest rates of assets and liabilities is fundamental to liquidity management. It is unusual for financial institutions ever to be completely matched since business transacted is often of an uncertain term and of different types. An unmatched position potentially enhances profitability, but can also increase the risk of losses. The Bank maintains liquidity management with the objective of ensuring that funds will be available at all times to honor all cash flow obligations as they become due. The liquidity policy is reviewed and approved by the Management Board. The Bank seeks to actively support a diversified and stable funding base comprising long-term and short-term loans from other Citigroup entities, core corporate and retail customer deposits, accompanied by diversified portfolios of highly liquid assets, in order to be able to respond quickly and smoothly to unforeseen liquidity requirements. The liquidity management policy requires: projecting cash flows by major currencies and considering the level of liquid assets necessary in relation thereto maintaining a diverse range of funding sources managing the concentration and profile of debts maintaining debt financing plans maintaining a portfolio of highly marketable assets that can easily be liquidated as protection against any interruption to cash flow maintaining liquidity and funding contingency plans monitoring liquidity ratios against regulatory requirements. The Bank monitors daily its liquidity position. Liquidity reports covering the liquidity position of the Bank along with the stress testing simulations are regularly presented to the ALCO. The Bank also calculates mandatory liquidity ratios on a daily basis in accordance with the requirements of the CB RF. As at 1 January 2017 and, the Bank is in compliance with these ratios. The following table shows the mandatory liquidity ratios calculated as at 1 January 2017 and. Requirement 1 January 2017, % 1 January, % Instant liquidity ratio (N2) Not less than 15% Current liquidity ratio (N3) Not less than 50% Non-current liquidity ratio (N4) Not greater than 120% The following tables show the undiscounted cash flows from financial liabilities and credit related commitments on the basis of their earliest possible contractual maturity. The total gross inflow and outflow disclosed in the tables is the contractual, undiscounted cash flow on the financial liability or commitment. For issued financial guarantee contracts, the maximum amount of the guarantee is allocated to the earliest period in which the guarantee can be called. These expected cash flows can vary significantly from the actual future cash flows. 51

52 INTERNATIONAL FINANCIAL REPORTING STANDARDS The liquidity position as at 31 December is as follows: Less than 1 month 1 to 3 months 3 to 6 months 6 months to 1 year More than 1 year Total gross outflow (inflow) Carrying amount Non-derivative liabilities Deposits and balances from banks and other financial institutions 41,292, , , ,445-42,577,147 42,557,424 Current accounts and deposits from customers 318,932,635 6,105,015 3,835,549 3,129,063 1,367, ,369, ,786,989 Other financial liabilities 2,265, ,265,731 2,265,731 Derivatives - Inflow (68,475,269) (27,550,699) (25,171,667) (7,501,089) (4,234,620) (132,933,344) (5,105,669) - Outflow 67,818,947 27,004,893 24,769,940 7,167,523 3,652, ,413,579 3,140,904 Total liabilities 361,834,184 6,152,390 3,876,203 3,044, , ,692, ,645,379 Credit related commitments 102,536, ,536, ,536,488 The liquidity position as at 31 December is as follows: Less than 1 month 1 to 3 months 3 to 6 months 6 months to 1 year More than 1 year Total gross outflow (inflow) Carrying amount Non-derivative liabilities Deposits and balances from banks and other financial institutions 44,030, , , ,577,250 44,529,966 Current accounts and deposits from customers 313,484,167 7,577,159 4,918,652 2,303, , ,922, ,219,114 Other financial liabilities 1,732, ,732,375 1,732,375 Derivatives - Inflow (75,787,027) (36,335,668) (16,316,837) (13,556,117) (7,055,142) (149,050,791) (4,779,391) - Outflow 76,484,187 36,880,514 16,555,558 13,625,435 6,356, ,901,843 5,861,285 Total liabilities 359,944,223 8,348,204 5,477,903 2,373,189 (60,689) 376,082, ,563,349 Credit related commitments 98,367, ,367,410 98,367,410 For further information on the exposure to liquidity risk at year end refer to Note 30. Operational risk Operational risk is the risk of direct or indirect loss arising from a wide variety of causes associated with the Bank s processes, personnel, technology and infrastructure, and from external factors other than credit, market and liquidity risks, such as those arising from legal and regulatory requirements and generally accepted standards of corporate behavior. Operational risks arise from all of the Bank s operations. 52

53 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 23. Credit related commitments Guarantees and letters of credit The Bank issues guarantees and letters of credit on behalf of its customers. These instruments bear a credit risk similar to that of loans granted. The amounts outstanding based on the contractual maturity of the instruments are as follows: Guarantees issued maturing in: - 19,734, ,533,922 1,072, ,780,170 2,774, , , , , ,061 15, ,797-21,936,976 24,079,847 Letters of credit issued maturing in: - 242, , , ,677 The contractual maturity of the above instruments is the latest date that the Bank may be called to honour its obligation under the instrument. Undrawn loan commitments The Bank has outstanding credit related commitments to extend loans. These credit related commitments take the form of approved loans and credit card limits and overdraft facilities. At 31 December, the Bank had the following undrawn loan commitments: Loans to individuals Loans to legal entities Total Overdrafts 41,489 17,563,323 17,604,812 Credit cards 46,459,336-46,459,336 Unused credit lines - 16,368,070 16,368,070 46,500,825 33,931,393 80,432,218 At 31 December, the Bank had the following undrawn loan commitments: Loans to individuals Loans to legal entities Total Overdrafts 28,092 20,668,648 20,696,740 Credit cards 45,838, ,838,302 Unused credit lines - 7,509,844 7,509,844 45,866,334 28,178,552 74,044,886 53

54 INTERNATIONAL FINANCIAL REPORTING STANDARDS The Bank applies the same credit risk management policies and procedures when granting credit commitments, financial guarantees and letters of credit as it does for granting loans to customers. The contractual amounts of credit related commitments are set out in the above table by category. The amounts reflected in the table for credit related 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 reporting date if the counterparties failed completely to perform as contracted. The total outstanding contractual credit related commitments above do not necessarily represent future cash requirements, as these credit related commitments may expire or terminate without being funded. The majority of loan and credit line commitments do not represent an unconditional credit related commitment by the Bank. Based on management s estimate, no provisions are required against guarantees and letters of credit issued by the Bank. 24. Operating leases Leases as lessee Future lease payments (net of VAT and operating costs) under operating leases in effect at 31 December and are detailed below: Less than 1 year 1,358,866 2,113,863 Between 1 and 5 years 4,578,444 7,859,550 More than 5 years 3,843,288 5,653,402 9,780,598 15,626,815 During RUB 1,486,486 thousand is recognised as an expense in profit or loss in respect of operating leases (: RUB 1,591,254 thousand). 25. Contingencies Taxation contingencies The taxation system in the Russian Federation is relatively new and is characterised by frequent changes in legislation, official pronouncements and court decisions, which are often unclear, contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to review and investigation by a number of authorities who have the authority to impose severe fines, penalties and interest charges. A tax year remains open for review by the tax authorities during the three subsequent calendar years; however, under certain circumstances a tax year may remain open longer. Recent events within the Russian Federation suggest that the tax authorities are taking a more assertive position in their interpretation and enforcement of tax legislation. These circumstances may create tax risks in the Russian Federation that are substantially more significant than in other countries. Management believes that it has provided adequately for tax liabilities based on its interpretations of applicable Russian tax legislation, official pronouncements and court decisions. However, the interpretations of the relevant authorities could differ and the effect on the financial position, if the authorities were successful in enforcing their interpretations, could be significant. Starting from 1 January 2012 new transfer pricing rules came into force in Russia. These provide the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of controllable transactions if their prices deviate from the market range or profitability range. According to the provisions of transfer pricing rules, the taxpayer should sequentially apply five market price determination methods prescribed by the Tax Code. Tax liabilities arising from transactions between companies are determined using actual transaction prices. It is possible, with the evolution of the interpretation of transfer pricing rules in the Russian Federation and changes in the 54

55 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER approach of the Russian tax authorities, that such transfer prices could be challenged. Since the current Russian transfer pricing rules became effective relatively recently, the impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the Bank. Insurance The insurance industry in the Russian Federation is in a developing state and many forms of insurance protection common in other parts of the world are not yet generally available. The Bank does not have full coverage for its premises and equipment, business interruption, or third party liability in respect of property or environmental damage arising from accidents on Bank s property or relating to operations. Until the Bank obtains adequate insurance coverage, there is a risk that the loss or destruction of certain assets could have a material adverse effect on operations and financial position. Litigation In the ordinary course of business, the Bank is subject to legal actions and complaints. Management believes that the ultimate liability, if any, arising from such actions or complaints, will not have a material adverse effect on the financial condition or the results of future operations of the Bank. 26. Related party transactions Control relationships The Bank s parent is Citigroup Netherlands B.V., headquartered in Netherlands. The party with ultimate control over the Bank is Citigroup Inc., which produces publicly available financial statements. Transactions with directors and executive officers All remuneration is in the form of short term employee benefits. The total remuneration of directors and executive officers was RUB 344,531 thousand and RUB 313,785 thousand for the years ended 31 December and, respectively. Loans to directors and executive officers totalled RUB 22,642 thousand and RUB 37,668 thousand as at 31 December and, respectively. The average effective interest rates for these loans were 8.8% and 7.3% as at 31 December and, respectively. Current accounts and deposits from directors and executive officers totalled RUB 187,720 thousand and RUB 197,388 thousand as at 31 December and, respectively. The average effective interest rates for these deposits were 9.7% and 10.6% as at 31 December and, respectively. Transactions with other Citigroup entities The following balances and average effective interest rates were outstanding with other Citigroup entities as at 31 December and : Carrying amount Average effective interest rate Carrying amount Average effective interest rate Nostro accounts in banks and other financial institutions 29,017,346-37,782,549 - Loans and deposits with banks and other financial institutions 37,698, % 46,657, % Financial assets held for trading derivatives 512,812-1,803,136 - Other assets 43, Deposits and balances from banks and other financial institutions 8,636, % 12,970, % Financial liabilities held for trading derivatives 2,400,281-1,986,570 - Other liabilities 27,692-3,495-55

56 INTERNATIONAL FINANCIAL REPORTING STANDARDS As at 31 December and, the majority of forward exchange contracts and interest rate swaps are entered into with other Citigroup entities for a term less than one year. Amounts included in profit or loss for the years ended 31 December and in relation to transactions with other Citigroup entities are as follows: Interest income 244, ,136 Interest expense (149,758) (175,318) Net (loss) gain from foreign exchange contracts (9,793,628) 2,208,601 Fee and commission income 16,699 46,456 Fee and commission expense (65,040) (108,077) Other income 1,297, ,636 General administrative expenses (7,353,497) (4,611,812) Amounts of guarantees issued to other Citigroup entities as at 31 December and are as follows: Guarantees issued to other Citigroup entities 2,290,582 5,474,168 Amounts of guarantees received from other Citigroup entities as at 31 December and are as follows: Guarantees received from other Citigroup entities for corporate loans issued and undrawn facilities 79,328,920 95,185,564 As at 31 December and, the majority of guarantee contracts with other Citigroup entities are carried out on market terms for a term less than one year. 27. Financial assets and liabilities: fair value and accounting classifications Accounting classifications and fair value The estimates of fair value are intended to approximate the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants at the measurement date. However, given the uncertainties and the use of subjective judgment, the fair value should not be interpreted as being realisable in an immediate sale of the assets or transfer of liabilities. Fair values of financial instruments held for trading and financial instruments available-for-sale are based on quoted market prices or dealer price quotations at the reporting date without any deduction for transaction costs. If there are no available quoted market prices, fair value is determined by cash flow discounting and other methods, used by market participants. The objective of valuation techniques is to arrive at a fair value determination that reflects the price that would be received to sell the asset, or paid to transfer the liability in an orderly transaction between market participants at the measurement date. The following assumptions are used by management to estimate the fair values of financial instruments as at 31 December : the estimation of the fair value of loans to legal entities was made by using discounting future cash flows at discount rates of 10.9% in RUB, 2.9% in USD and 1.2% in other currencies 56

57 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER the estimation of the fair value of loans to individuals was made by using discounting future cash flows at discount rates of 16.9% in RUB and 5.3% in USD the estimation of the fair value of deposits from customers was made by using discounting future cash flows at discount rates of 7.9% in RUB, 0.6% in USD and 0.2% in other currencies. The following assumptions are used by management to estimate the fair values of financial instruments as at 31 December : the estimation of the fair value of loans to legal entities was made by using discounting future cash flows at discount rates of 12.6% in RUB, 2.7% in USD and 2.6% in other currencies the estimation of the fair value of loans to individuals was made by using discounting future cash flows at discount rates of 19.3% in RUB and 5.1% in USD the estimation of the fair value of deposits from customers was made by using discounting future cash flows at discount rates of 9.3% in RUB, 0.4% in USD and 0.4% in other currencies. As a result of performed assessment as at 31 December and, management concluded that the fair value of all financial assets and liabilities approximates their carrying amount. Fair value hierarchy The Bank measures fair values using the following fair value hierarchy, which reflects the significance of the inputs used in making the measurements: Level 1: quoted market price (unadjusted) in an active market for an identical instrument. Level 2: inputs other than quotes prices included within Level 1 that are observable either directly (i.e., as prices) or indirectly (i.e., derived from prices). This category includes instruments valued using: quoted market prices in active markets for similar instruments; quoted prices for similar instruments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data. Level 3: inputs that are unobservable. This category includes all instruments where the valuation technique includes inputs not based on observable data and the unobservable inputs have a significant effect on the instrument s valuation. This category includes instruments that are valued based on quoted prices for similar instruments where significant unobservable adjustments or assumptions are required to reflect differences between the instruments. The tables below analyse financial instruments measured at fair value as at 31 December and, by the level in the fair value hierarchy into which the fair value measurement is categorised. The amounts are based on the values recognised in the statement of financial position: Level 1 Level 2 Market quotes Valuation techniques based on market observable inputs Total Financial instruments held for trading - assets 26,100,725 5,105,669 31,206,394 Financial instruments held for trading - liabilities - 3,140,904 3,140,904 Financial instruments available-for-sale 52,916,779-52,916,779 Level 1 Level 2 Market quotes Valuation techniques based on market observable inputs Total Financial instruments held for trading - assets 27,429,436 4,779,391 32,208,827 Financial instruments held for trading - liabilities - 5,861,285 5,861,285 Financial instruments available-for-sale 43,040,473-43,040,473 57

58 INTERNATIONAL FINANCIAL REPORTING STANDARDS The fair value of unquoted equity securities available-for-sale with the carrying value of RUB 4,454 thousand as at 31 December (31 December : RUB 4,415 thousand) cannot be determined. The tables below show analysis of the fair value of financial instruments not measured at fair value as at 31 December and by the level in the fair value hierarchy: Level 2 Level 3 Total fair value Total carrying amount Loans to customers - 136,091, ,091, ,971,900 Current accounts and deposits from customers 333,448, ,448, ,786,989 Level 2 Level 3 Total fair value Total carrying amount Loans to customers - 165,794, ,794, ,405,897 Current accounts and deposits from customers 328,354, ,354, ,219, Capital management The CB RF sets and monitors capital requirements for the Bank. The Bank defines as capital those items defined by statutory regulation as capital for credit institutions. The Bank calculates the amount of capital and capital adequacy ratios for prudential purposes in accordance with Provision of the CB RF dated 28 December 2012 No. 395-P On Methodology of Calculation of Own Funds (Capital) of the Credit Organisations (Basel III). As at 31 December, minimum levels of basic capital ratio (ratio N1.1), main capital ratio (ratio N1.2), own funds (capital) ratio (ratio N1.0) are 4.5%, 6.0% and 8.0%, accordingly (31 December : 5.0%, 6.0% and 10.0%, accordingly). Starting from 1 January the Bank should comply with capital buffers: capital conservation buffer and countercycle buffer. As at 31 December minimum levels of capital buffers are 0.625% and 0%, accordingly. The Bank maintains capital adequacy at the level appropriate to the nature and volume of its operations. The Bank provides the territorial CB RF office that supervises the Bank with information on mandatory ratios in accordance with the set form. The Bank controls on a daily basis compliance with capital adequacy ratios. In case values of capital adequacy ratios become close to limits set by the CB RF and Bank s internal policy this information is communicated to the Management Board and the Board of Directors. The Bank is in compliance with the statutory capital ratios as at 1 January 2017 and. The calculation of capital adequacy based on requirements set by the CB RF as at 1 January 2017 and is as follows: 1 January January Base capital 45,371,320 44,836,433 Main capital 45,371,320 44,836,433 Own funds (capital) 55,167,597 55,924,770 Risk-weighted assets 365,751, ,291,894 Ratio N1.1 (%) Ratio N1.2 (%) Ratio N1.0 (%)

59 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 29. Average effective interest rates The table below displays average effective interest rates for interest bearing assets and liabilities as at 31 December and. These interest rates are an approximation of the yields to maturity of these assets and liabilities. Average effective interest rate Average effective interest rate RUB USD Other currencies RUB USD Other currencies Interest bearing assets Loans and deposits with banks and other financial institutions and amounts receivable under reverse repo agreements 9.9% 1.5% 0.3% 10.4% 0.6% - Financial instruments held for trading 7.9% 3.3% - 6.7% 3.3% - Loans to customers 15.8% 3.2% 1.6% 16.3% 2.7% 2.6% Financial instruments available-for-sale 7.2% 1.7% 4.1% 6.7% 2.1% 4.1% Interest bearing liabilities Deposits from banks and other financial institutions 1.3% 0.0% 0.0% 4.6% - - Current accounts and deposits from customers - Current accounts and demand deposits 0.9% 0.0% 0.0% 0.5% 0.1% 0.1% - Term deposits 8.1% 0.5% 0.1% 9.5% 0.4% 0.4% 30. Maturity analysis The following table shows all assets and liabilities as at 31 December by their remaining contractual maturities with the exception of securities included in financial instruments held for trading and financial instruments availablefor-sale except equity instruments. Such securities are shown in the category Less than 1 month as management believes they are liquid assets which can be sold quickly in response to liquidity needs, if necessary. Less than 1 month 1 to 3 months 3 to 6 months 6 months to 1 year More than 1 year No maturity Total Assets Cash and cash equivalents 54,206, ,206,166 Obligatory reserves with the Central Bank of the Russian Federation ,792,279 3,792,279 Loans and deposits with banks and other financial institutions 150,736,457 12,325, ,062,307 Financial instruments held for trading 27,170,924 1,272,843 1,540, , ,260-31,206,394 Loans to customers 62,285,609 23,779,990 8,259,692 8,140,948 33,505, ,971,900 Financial instruments available-for-sale 52,916, ,454 52,921,233 Other assets 2,319, ,708 73,533 29,477 72,972-2,935,808 Property and equipment ,327,589 1,327,589 Deferred tax asset ,125 95,125 Total assets 349,635,053 37,819,391 9,873,424 8,650,593 34,320,893 5,219, ,518,801 59

60 INTERNATIONAL FINANCIAL REPORTING STANDARDS Less than 1 month 1 to 3 months 3 to 6 months 6 months to 1 year More than 1 year No maturity Total Liabilities Financial instruments held for trading 732, ,649 1,202, , ,592-3,140,904 Deposits and balances from banks and other financial institutions 41,288, , , , ,557,424 Current accounts and deposits from customers 318,809,109 6,049,390 3,747,181 2,962,398 1,218, ,786,989 Other liabilities 2,217, , ,670 49, ,389-4,146,396 Total liabilities 363,048,655 8,264,555 6,208,107 3,501,504 1,608, ,631,713 Net position as at 31 December (13,413,602) 29,554,836 3,665,317 5,149,089 32,712,001 5,219,447 62,887,088 Net position as at 31 December (21,997,725) 16,641,462 8,710,800 14,399,830 41,294,595 3,901,696 62,950,658 Cumulative net position as at 31 December (13,413,602) 16,141,234 19,806,551 24,955,640 57,667,641 62,887,088 - Cumulative net position as at 31 December (21,997,725) (5,356,263) 3,354,537 17,754,367 59,048,962 62,950,658 - Management uses deposits and other sources of financing, provided by members of Citigroup for managing negative gap in short-term liquidity. Also, relying on previous experience management believes that current accounts and demand deposits is a stable source of financing, although in accordance with the Russian legislation, term deposits of individuals may be withdrawn before maturity at any time, forfeiting in the most of the cases the accrued interest. Such deposits are shown in the table above in accordance with their contractual maturities. Overdue loans to customers are shown in the category Less than 1 month in the table above. As at 31 December and, the contractual maturities of term deposits of individuals are as follows: Less than 1 month 3,698,462 7,263,641 From 1 to 3 months 5,043,504 6,140,342 From 3 to 6 months 3,699,669 4,678,084 From 6 months to 1 year 2,799,399 2,126,364 More than 1 year 1,159, ,845 16,400,606 20,747,276 As at 31 December and, the contractual maturities of securities included in financial instruments held for trading and financial instruments available-for-sale are as follows: From 1 to 3 months 677,484 - From 3 to 6 months 8,169,327 4,652,628 From 6 months to 1 year - 2,961,594 More than 1 year 70,170,693 62,855,687 79,017,504 70,469,909 60

61 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 31. Currency analysis The following table shows the currency structure of assets and liabilities at 31 December. Roubles USD Other currencies Total Assets Cash and cash equivalents 16,646,589 13,916,668 23,642,909 54,206,166 Obligatory reserves with the Central Bank of the Russian Federation 3,792, ,792,279 Loans and deposits with banks and other financial institutions 109,094,574 41,842,473 12,125, ,062,307 Financial instruments held for trading 23,439,401 7,530, ,620 31,206,394 Loans to customers 112,274,051 19,626,669 4,071, ,971,900 Financial instruments available-for-sale 44,788,560 6,942,307 1,190,366 52,921,233 Other assets 2,645, ,767 10,765 2,935,808 Property and equipment 1,327, ,327,589 Deferred tax assets 95, ,125 Total assets 314,103,444 90,138,257 41,277, ,518,801 Liabilities Financial instruments held for trading 2,788, ,197 52,705 3,140,904 Deposits and balances from banks and other financial institutions 35,161,351 6,739, ,149 42,557,424 Current accounts and deposits from customers 209,946,412 89,803,157 33,037, ,786,989 Other liabilities 3,768, ,214 62,912 4,146,396 Total liabilities 251,664,035 97,158,492 33,809, ,631,713 Net recognised position as at 31 December 62,439,409 (7,020,235) 7,467,914 62,887,088 Effect of foreign currency exchange contracts as at 31 December (5,169,796) 10,094,291 (4,924,495) Net position as at 31 December 57,269,613 3,074,056 2,543,419 62,887,088 61

62 INTERNATIONAL FINANCIAL REPORTING STANDARDS The following table shows the currency structure of assets and liabilities at 31 December. Roubles USD Other currencies Total Assets Cash and cash equivalents 17,160,697 22,847,825 31,021,365 71,029,887 Obligatory reserves with the Central Bank of the Russian Federation 2,465, ,465,283 Loans and deposits with banks and other financial institutions 73,011,468 52,927, ,938,565 Financial instruments held for trading 21,006,797 9,201,345 2,000,685 32,208,827 Loans to customers 120,645,216 37,498,537 8,262, ,405,897 Financial instruments available-for-sale 36,829,268 4,751,336 1,464,284 43,044,888 Other assets 1,698, ,400 9,254 2,211,362 Property and equipment 1,138, ,138,423 Goodwill 199, ,779 Deferred tax assets 93, ,796 Total assets 274,249, ,729,540 42,757, ,736,707 Liabilities Financial instruments held for trading 73,412 3,349,597 2,438,276 5,861,285 Deposits and balances from banks and other financial institutions 33,623,761 8,789,288 2,116,917 44,529,966 Current accounts and deposits from customers 194,386,566 99,938,672 33,893, ,219,114 Other liabilities 2,918, , ,519 3,175,684 Total liabilities 231,002, ,233,441 38,550, ,786,049 Net recognised position as at 31 December 43,247,415 15,496,099 4,207,144 62,950,658 Effect of foreign currency exchange contracts as at 31 December 20,313,195 (15,604,311) (4,708,884) Net position as at 31 December 63,560,610 (108,212) (501,740) 62,950, May 2017 Marc Luet President Kanat Sharlapaev Chief Financial Officer 62