PUBLIC JOINT STOCK COMPANY UKRSOTSBANK Consolidated Financial Statements and Independent Auditor s Report for the Year Ended 31 December 2015

Transcription

1 Consolidated Financial Statements and Independent Auditor s Report for the Year Ended 31 December 2015

2 Consolidated Financial Statements and Independent Auditor s Report for the Year Ended 31 December 2015 ПУБЛІЧНЕ АКЦІОНЕРНЕ ТОВАРИСТВО «УКРСОЦБАНК» К Pages року Statement of management s responsibilities for the preparation and approval of the consolidated financial statements for the year ended 31 December Consolidated statement of financial position 4 Consolidated statement of profit or loss 5 Consolidated statement of comprehensive income or loss 6 Consolidated statement of changes in equity 7-8 Consolidated statement of cash flows 9-10 Notes to the consolidated financial statements Independent auditor s report

3 Statement of Management s Responsibilities for the Preparation and Approval of the Consolidated Financial Statements for the Year Ended 31 December 2015 Management is responsible for the preparation of the consolidated financial statements that present fairly the consolidated financial position of PUBLIC JOINT STOCK COMPANY UKRSOTSBANK (the Bank ) and its subsidiaries (collectively, the Group ) as at 31 December 2015, and the results of its operations, cash flows, and changes in equity for the year then ended, and a summary of significant accounting policies and other explanatory information, in compliance with International Financial Reporting Standards ( IFRS ). In preparing the consolidated financial statements, management is responsible for: Properly selecting and applying accounting policies; Presenting information, including accounting policies, in a manner that provides relevant, reliable, comparable, and understandable information; Providing additional disclosures when compliance with the specific requirements of IFRSs is insufficient to enable users to understand the impact of particular transactions, other events, and conditions on the Group s financial position and financial performance; Stating whether IFRS have been followed, subject to any material departures disclosed and explained in the consolidated financial statements; and Making an assessment of the Group s ability to continue as a going concern. Management is also responsible for: Designing, implementing, and maintaining an effective and sound system of internal controls, throughout the Group; Maintaining adequate accounting records that are sufficient to show and explain the Group s transactions and disclose with reasonable accuracy at any time the financial position of the Group, and which enable them to ensure that the consolidated financial statements of the Group comply with IFRS; Maintaining accounting records in compliance with the legislation of Ukraine; Taking such steps as are reasonably available to them to safeguard the assets of the Group; and Preventing and detecting fraud and other irregularities. The consolidated financial statements for the year ended 31 December 2015 were approved by the Group s management on 14 April

4 Consolidated Statement of Financial Position as at 31 December 2015 (Notes) 31 December December 2014 (Restated) Assets: Cash and cash equivalents 4 10,293,349 5,014,672 Mandatory reserves with the National Bank of Ukraine - 79,005 Other financial assets at fair value through profit or loss 5 4,250 1,232,345 Due from banks 34,848 7,884 Loans and receivables from customers 6 36,403,808 32,947,356 Securities available for sale ,471,609 Investment property 8 1,196,558 1,128,914 Current income tax receivable 81,865 81,151 Deferred tax assets 9 203, ,745 Property and equipment and intangible assets 10 3,821,653 3,712,641 Other assets 11 2,168,409 1,860,083 TOTAL ASSETS 54,208,620 47,942,405 Liabilities: Due to banks 12 10,724,897 16,650,172 Customer accounts 13 26,762,073 23,349,368 Other financial liabilities at fair value through profit or loss 4,934 3,650 Debt securities issued by the Group 50,141 64,623 Provisions for liabilities 7,865 8,977 Other liabilities , ,457 Subordinated debt 15 2,423,425 1,589,919 TOTAL LIABILITIES 40,465,191 41,925,166 Equity: Share capital 16 7,866,182 2,594,671 Other additional capital and share premium reserve 16 8,179,647 2,807,204 Merger reserve 16 16,684 16,684 Reserves and other funds 16 2,332,222 2,332,222 Revaluation reserves 16 2,384,824 2,196,792 Accumulated loss -7,036,130-3,930,334 TOTAL EQUITY 13,743,429 6,017,239 TOTAL LIABILITIES AND EQUITY 54,208,620 47,942,405 4

5 Consolidated Statement of Profit or Loss for the Year Ended 31 December 2015 ПУБ, unless otherwise indicated For the year ended 31 December (Notes) (Restated) Interest income 17 3,459,141 3,577,685 Interest expense 18-2,322,707-2,248,285 Net interest income before allowance for impairment losses on interest-bearing assets 1,136,434 1,329,400 Fee and commission income 19 1,034, ,159 Fee and commission expense , ,610 Result on operations with securities held for trading - 7,817 Result on transactions with other financial instruments at fair value through profit or loss ,773 1,394,543 Result on disposal of securities available for sale 4,513 10,162 Result on foreign exchange operations 272, ,128 Result on foreign currency revaluation -1,861,479-1,568,571 Result on sale and repurchase of treasury shares - 1,476 Result on disposal of investments in subsidiaries - 46 Charges to allowance for impairment of loans and receivables from customers and other financial liabilities 22-2,234,592-4,253,000 Charges to allowance for impairment of accounts receivable and other financial assets -14,771-14,211 Provision for liabilities Other operating income , ,002 Administrative and other operating expenses 24-2,178,004-1,941,115 Loss before income tax -2,942,401-3,904,774 Income tax expense (-)/benefit , ,603 Loss for the year -3,108,048-3,367,171 Weighted average number of shares basic and diluted (in thousands) 16 44,028,140 18,457,355 Basic and diluted losses per ordinary share (in Hryvnias)

6 Consolidated Statement of Comprehensive Income or Loss for the Year Ended 31 December 2015 For the year ended 31 December (Notes) (Restated) Loss (-) for the year -3,108,048-3,367,171 Other comprehensive income: Items that will not be reclassified subsequently to profit or loss (-): Gain on property revaluation 166, ,826 Effect on income tax attributable to other comprehensive income and loss (-) -30,038-54,689 Items that may be reclassified subsequently to profit or loss (-): Revaluation of securities available for sale - -48,816 Gain and loss (-) on disposal of securities available for sale reclassified to profit or loss (-) 65,204 33,535 Effect on income tax attributable to other comprehensive income and loss (-) -11,725 6,733 TOTAL OTHER COMPREHENSIVE INCOME: 190, ,589 TOTAL COMPREHENSIVE LOSS: -2,917,764-3,126,582 6

7 Consolidated Statement of Changes in Equity for the Year Ended 31 December 2015 (Notes) Share capital Other additional capital and share premium reserve Merger reserve Reserves and other funds Property and equipment revaluation reserves Securities available for sale revaluation reserves Accumulated Total equity loss (-) and retained earnings As at 1 January ,940,375 2,809, ,191 2,332,222 2,123,967-44, ,996 9,145,448 Comprehensive income and loss (-): Loss for the year ,367,171-3,367,171 Other comprehensive income or loss (-) ,137-8, ,589 Total comprehensive income or loss (- ): ,137-8,548-3,367,171-3,126,582 Realized result on revaluation , ,833 - Issue of shares as a result of 16 combination 653, , Operations with shareholders: Purchase of treasury shares -10,297-10, ,841 Sale of treasury shares 11,086 8, ,214 Total operations with shareholders: 789-2, ,627 As at 31 December ,594,671 2,807,204 16,684 2,332,222 2,250,271-53,479-3,930,334 6,017,239 7

8 Consolidated Statement of Changes in Equity (Notes) Share capital Other additional capital and share premium reserve Merger reserve Reserves and other funds Property and equipment revaluation reserves Securities available for sale revaluation reserves Accumulate Total equity d loss (-) and retained earnings As at 1 January ,594,671 2,807,204 16,684 2,332,222 2,250,271-53,479-3,930,334 6,017,239 Comprehensive income and loss (-): Loss for the year ,108,048-3,108,048 Other comprehensive income ,805 53, ,284 Total comprehensive income and loss (-): ,805 53,479-3,108,048-2,917,764 Realized result on revaluation ,252-2,252 - Operations with shareholders: Debt forgiveness by UniCredit Bank 16 Austria AG - 5,372, ,372,511 Debt conversion by UniCredit Bank 16 Austria AG 5,271, ,271,511 Purchase of treasury shares Sale of treasury shares Total operations with shareholders: 5,271,511 5,372, ,643,954 As at 31 December ,866,182 8,179,647 16,684 2,332,222 2,384, ,036,130 13,743,429 8

9 Consolidated Statement of Cash Flows for the Year Ended 31 December 2015 For the year ended 31 December Cash flows from operating activities: Loss for the year -3,108,048-3,367,171 Adjustments to: Depreciation and amortization 369, ,320 Charges to allowance for impairment of loans and receivables from customers and other financial liabilities 2,234,592 4,253,000 Amortization of discount and premium -79, ,575 Result on operations with securities held for trading - -7,817 Result on revaluation of other financial instruments at fair value through profit or loss -937,773-1,383,384 Result on foreign currency revaluation 1,861,479 1,568,571 Interest income accrued -2,772,090-2,511,521 Interest expense accrued -68,720 39,727 Result on disposal of investments in subsidiaries Result on disposal of property and equipment and intangible assets -18,559-43,184 Income taxes 165, ,603 Other non-cash movements -19,222 43,095 Net cash flows from operating activities before changes in operating assets and liabilities -2,372,410-1,743,588 Increase (-)/ decrease in operating assets and decrease (-)/ increase liabilities: Net decrease in mandatory reserves with the National Bank of Ukraine 79,005 1,174,023 Net decrease in securities held for trading - 270,429 Net increase (-)/ decrease in due from banks -25,477 18,249 Net decrease in loans and receivables from customers 6,791,340 5,809,522 Net decrease in other assets 358, ,866 Net decrease in due to banks -2,477,137-4,812,757 Net decrease in customer accounts -1,629,027-2,666,998 Net decrease (-)/ increase in debt securities issued by the Group -14,482 17,981 Net increase/ decrease (-) in other liabilities 212,874-16,930 Net cash generated from/ used in (-) operating activities, before income tax 923,654-1,794,203 Income taxes paid -5,199-14,757 Net cash generated from/ used in (-) operating activities 918,455-1,808,960 9

10 Consolidated Statement of Cash Flows For the year ended 31 December Cash flows from investing activities: Purchase of investments in subsidiary -749,910 - Proceeds from disposal of shares 749,910 - Purchase of securities available for sale ,887 Proceeds from sale and repayment of securities available for sale 1,830,470 1,427,573 Proceeds from repayment of other financial assets at fair value through profit or loss 2,141, ,249 Purchase of property and equipment -37,208-1,235 Proceeds from disposal of property and equipment 20, ,598 Purchase of intangible assets -230, ,275 Proceeds from disposal of subsidiary - 46 Net cash used in investing activities 3,724,547 1,383,069 Cash flows from financing activities: Treasury shares repurchased ,841 Treasury shares sold ,214 Repayment of due to banks ,740 Net cash used in financing activities ,367 Reconciliations For the year ended 31 December Cash and cash equivalents as at 1 January 5,014,672 4,916,975 Net cash generated/used (-) 4,642, ,258 Effect of official exchange rate changes on cash and cash equivalents 635, ,955 Cash and cash equivalents as at 31 December 10,293,349 5,014,672 Interest received by the Group for the year ended 31 December 2015 amounted to UAH 607,882 thousand (for the year ended 31 December 2014: UAH 932,589 thousand). Interest paid by the Group for the year ended 31 December 2015 amounted to UAH 2,391,427 thousand (for the year ended 31 December 2014: UAH 2,208,588 thousand). 10

11 for the Year Ended 31 December 2015 (1) General information 12 (а) Organization structure 12 (b) Shareholders 12 (c) Subsidiaries 12 (2) Basis of preparation 13 (а) Statement of compliance 13 (b) Operating environment in Ukraine 13 (c) Going concern 13 (d) Basis of accounting 14 (e) Functional and presentation currency 14 (f) Hyperinflationary accounting 14 (g) Use of judgments, estimates, and assumptions 14 (h) Prior period restatements and reclassifications 16 (3) Summary of significant accounting policies 18 (4) Cash and cash equivalents (5) Other financial assets at fair value through profit or loss (6) Loans and receivables from customers 31 (7) Securities available for sale 36 (8) Investment property 36 (9) Deferred tax assets 37 (10) Property and equipment and intangible assets 39 (11) Other assets 41 (12) Due to banks 41 (13) Customer accounts 42 (14) Other liabilities 42 (15) Subordinated debt 42 (16) Equity 43 (17) Interest income 44 (18) Interest expense 44 (19) Fee and commission income (20) Fee and commission expense (21) Result on transactions with other financial instruments at fair value through profit or loss 45 (22) Charges to allowance for impairment of loans and receivables from customers and other financial liabilities (23) Other operating income (24) Administrative and operating expenses 46 (25) Income tax expense (-)/ benefit (26) Guarantees and commitments issued (27) Fair value measurement 48 (28) Related party transactions (29) Segment reporting (30) General risk management 55 (31) Subsequent events 66 11

12 (1) General information (а) Organization structure PUBLIC JOINT STOCK COMPANY UKRSOTSBANK (the Bank ) was incorporated as an open joint stock company under the laws of Ukraine and registered with the National Bank of Ukraine on 27 September 1991 under the name of Joint Stock Commercial Bank of Social Development Ukrsotsbank. In June 2010, the Bank was re-registered as a public joint stock company in accordance with the changes in the Ukrainian legislation that came into effect in 2009 and established two legal forms for joint stock companies: public and private. Effective from 1 September 2011, the Bank has been operating in the market of Ukraine under the UniCredit Bank trade mark, meanwhile retaining its legal name of PUBLIC JOINT STOCK COMPANY UKRSOTSBANK. Effective from 5 October 2011, the Bank has been operating based on the general banking license # 5 issued by the National Bank of Ukraine. The Bank has a general license issued by the National Bank of Ukraine for conducting foreign currency transactions. In accordance with the effective legislation and based on the respective licenses issued by the National Commission for Securities and Stock Market of Ukraine, the Bank is involved in depositary activities as a securities custodian and professional trader of securities in the stock market: brokerage, dealing, and underwriting activities. Effective from 2 September 1999, the Bank has been a member of the Individual Deposit Guarantee Fund. The Bank specializes in rendering banking services to companies operating in various industries, government authorities, and individuals. The services include attracting deposits and granting loans, investing in securities, foreign exchange operations and payments, fund transfers within Ukraine and abroad. Registered address of the Bank is at: 29 Kovpaka Str., Kyiv, 03150, Ukraine. As at 31 December 2015, the Bank had 265 outlets within 5 macro regions (31 December 2014: 318 outlets within 5 macro regions). Effective from 2007, the Bank is a member of one of the largest banking groups in Europe UniCredit Group (UniCredito S.p.A., Italy). In the banking services market of Ukraine, UniCredit Group was also represented by PUBLIC JOINT STOCK COMPANY UNICREDIT BANK (PJSC UNICREDIT BANK ). On 2 December 2013, the General Shareholders Meeting of the Bank and PJSC UNICREDIT BANK approved a decision about re-organization through merger of PJSC UNICREDIT BANK with the Bank. Upon completion of the merger process, the Bank became a legal successor of all the assets, rights, and obligations transferred by PJSC UNICREDIT BANK to the full extent, and PJSC UNICREDIT BANK, in its turn, ceased to exist. (b) Shareholders As at 31 December 2014 the Bank s primary shareholders were represented by UniCredit Bank Austria AG directly owning 37.35% of the Bank s share capital, Private Joint Stock Company ( PrJSC ) FERROTRADE INTERNATIONAL directly owning 35.58% of the Bank s share capital, and UniCredit S.p.A., Italy, directly owning 26.48% of the Bank s share capital. UniCredit Bank Austria AG is a parent of PrJSC FERROTRADE INTERNATIONAL, thus, it indirectly controlled 72.93% of the Bank s share capital. In November 2015, PrJSC FERROTRADE INTERNATIONAL sold its shareholding in the Bank s share capital to UniCredit Bank Austria AG which, as at the disposal date, amounted to 11.35%. As at 31 December 2015 principal shareholders of the Bank were UniCredit Bank Austria AG directly owning 91.37% of the Bank s share capital and UniCredit S.p.A. directly owning 8.44% of the Bank s share capital UniCredit Group owns the shareholding of % (31 December 2014: %) in UniCredit Bank Austria AG and, thus, through UniCredit Bank Austria AG, indirectly controls 99.81% (31 December 2014: 99.41%) of the Bank s share capital. On 31 December 2015, UniCredit Group announced about signing a binding agreement on the transfer of the shareholding of UniCredit Group in the Bank to ABH Holdings S.A. (ABHH) in exchange of additionally issued 9.9% of shares in ABHH. Before the agreement is completed, which is expected in 2016, and upon its approval by the regulatory authorities of Ukraine, the ultimate controlling party of the Bank is UniCredit Group. A significant portion of funds comes from UniCredit Bank Austria AG. As a result, the Bank is economically dependent on UniCredit Bank Austria AG. Detailed information on related party transactions is disclosed in Note (28). UniCredit Group and UniCredit Bank Austria AG prepare consolidated financial statements that are available to the public. (c) Subsidiaries The consolidated financial statements include the financial statements of the Bank and its subsidiaries (collectively, the Group ). A list of subsidiaries is as follows: Name of entity Country of Type of activities 31 December December incorporation 2014 LLC SIC AMC Ukrsots Asset management Ukraine 100.0% 100.0% Real Estate company PrJSC FERROTRADE Ukraine Dormant 100.0% - 12

13 Name of entity Country of incorporation Type of activities 31 December December 2014 INTERNATIONAL LLC Ukrsotsbud Ukraine Construction 100.0% 99.0% MVIF Ukrsotsbud CND Ukraine Share investment fund % LLC BDK-Consulting Ukraine Consulting services % In March 2014, the Bank s Supervisory Board took a decision to discontinue operations of its subsidiaries, LLC Ukrsotsfinance and LLC BDK-Consulting, through liquidation. In November 2015,the Bank purchased 100% in the share capital of PrJSC FERROTRADE INTERNATIONAL from UniCredit Bank Austria AG, and the Bank s Supervisory Board took a decision to discontinue operations of its subsidiary, LLC SIC AMC Ukrsots Real Estate. These consolidated financial statements were approved for issue by the Group s management on 12 April (2) Basis of preparation (а) Statement of compliance These consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standards Board ( IASB ) and Interpretations issued by the International Financial Reporting Standards Interpretations Committee ( IFRS IC ). (b) Operating environment in Ukraine In 2015, an armed conflict with separatists continued in certain parts of Luhanska and Donetska regions, and a peaceful resolution of the conflict did not occur as it was foreseen by the Minsk agreements. The situation with Crimea, an autonomous republic of Ukraine, that was effectively annexed by the Russian Federation in 2014, remained unchanged. In 2015, the Ukrainian economy was going through a recession, a gross domestic product has contracted by 10% (for the year ended 31 December 2014: 7%), and an annual inflation rate reached 43% (for the year ended 31 December 2014: 25%). Unfavorable conditions in markets where Ukraine s primary commodities were traded were influencing further devaluation of Hryvnia against major foreign currencies. The Ukrainian companies and banks continued to suffer from lack of funding from domestic and international financial markets. The National Bank of Ukraine (the NBU ) extended its range of measures that were introduced in 2014 and aimed at limiting the outflow of foreign currency from the country, inter alia, a mandatory sale of foreign currency earnings, certain restrictions on purchases of foreign currencies on the interbank market and on usage of foreign currencies for settlement purposes, limitations on remittances abroad. In early 2015, the Government of Ukraine agreed with the IMF a four-year program for USD 17.5 billion loan aimed at supporting the economic stabilization of Ukraine. The program defines economic reforms that must be undertaken by the Government of Ukraine to reinstate a sustainable economic growth in the mid-term perspective. In 2015, political and economic relationships between Ukraine and the Russian Federation remained strained that led to a significant reduction in trade and economic cooperation. On 1 January 2016, a free-trade element of Ukraine s association agreement with the European Union has come into force. In late 2015, the Russian Federation denounced the free trade zone agreement with Ukraine and further trade restrictions were announced by both countries. Stabilization of the economic and political situation depends, to a large extent, upon the ability of the Ukrainian Government to continue reforms and the efforts of the NBU to further stabilize the banking sector, as well as upon the ability of the Ukrainian economy in general to respond adequately to changing markets. Nevertheless, further economic and political developments, as well as the impact of the above factors on the Group and its customers are currently difficult to predict. (c) Going concern These consolidated financial statements have been prepared on the assumption that the Group is a going concern and will continue in operation for the foreseeable future. For the year ended 31 December 2015, total comprehensive loss amounted to UAH -2,917,764 thousand, and accumulated loss as at 31 December 2015 amounted to UAH -7,036,130 thousand. These conditions indicate a significant uncertainty as to the Group s ability to continue as a going concern without further support of its shareholders. Management believes that the going concern assumption is appropriate for the Group due to its sufficient liquidity, i.e. the excess of current financial assets over current financial liabilities by UAH 4,167,331 as at 31 December 2015, support of its shareholders, and based on historical experience that short-term obligations could be refinanced in the normal course of business. Also, management is planning to undertake the following measures in order to reduce the level of loss and improve its capital adequacy ratio: 13

14 Perform additional capitalization by the Bank s shareholders in the period from 2016 to According to the Action Plan on Increase of the Bank s Capital based on the diagnostics held by the National bank of Ukraine, the share capital should be increased by UAH 10,645,000 thousand, in particular, to UAH 3,793,000 thousand until 1 April 2016, UAH 4,098,000 thousand until 1 September 2016, and UAH 2,754,000 thousand until 1 January 2018 (Note (31)). The capital increase is going to be realized through the conversion to capital of the existing debt on due from banks; Optimize operating expenses of the Group through the improvement of cost efficiency and rationalization of the Group s regional network; Restructure non-performing loans and receivables from customers. (d) Basis of accounting These consolidated financial statements have been prepared under the historical cost convention, except for certain property items that are measured at revalued amounts in accordance with the requirements of IAS 16 Property, Plant, and Equipment and the measurement of certain financial instruments according to IAS 39 Financial Instruments: Recognition and Measurement, leasing transactions that are within the scope of IAS 17, as well as repossessed collaterals in accordance with IAS 2 Inventories that are recorded at the lower of cost and net realizable value. The Group maintains its accounting records in accordance with the Ukrainian legislation. These consolidated financial statements have been prepared from the statutory accounting records maintained in accordance with IFRS and regulations of the National Bank of Ukraine and have been adjusted for transactions for which there are differences between IFRS and law of Ukraine. These adjustments and reclassifications include certain measurement adjustments and reclassifications to reflect the economic substance of underlying transactions, including reclassifications of certain assets and liabilities, income and expense to appropriate consolidated financial statement captions. (e) Functional and presentation currency Items included in the financial statements of each entity of the Group are measured using the currency that best reflects the economic substance of the underlying events and circumstances relevant to that entity (the functional currency ). The functional currency of these consolidated financial statements is Ukrainian Hryvnia ( UAH ). The consolidated financial statements are presented in Hryvnias and in thousands, unless otherwise indicated. The Group used the following year-end foreign currency exchange rates in preparing these consolidated financial statements: 31 December December 2014 UAH/USD UAH/EUR (f) Hyperinflationary accounting In accordance with IAS 29 Financial Reporting in Hyperinflationary Economies, the economy of Ukraine was treated as hyperinflationary before 31 December Effective from 1 January 2001, the economy of Ukraine was no longer considered to be hyperinflationary, thus, the carrying amounts of non-monetary assets, liabilities, and equity stated in the measuring units at the end of 31 December 2000 have been used as the basis for the amounts carried forward. (g) Use of judgments, estimates, and assumptions The preparation of the consolidated financial statements requires that management make judgments, estimates, and assumptions that affect the reported carrying amounts of assets and liabilities, income and expense, and disclosure of contingent assets and liabilities at the reporting date. Although those estimates are based on the most recent information available to management on current events and circumstances, actual results may differ from those estimates depending on different assumptions or conditions. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. The following are critical judgments regarding application of the Group s accounting policies made by management while preparing the consolidated financial statements and key sources of estimation uncertainty. Impairment of loans and receivables from customers Allowance for impairment of financial assets The Group regularly analyzes its granted loans to assess for impairment. The Group considers the accounting estimates related to the allowance for impairment of loans to be a key source of estimation uncertainty because (a) they are highly susceptible to change from period to period, as the assumptions of potential losses relating to impaired loans are based on recent quality of loan portfolio, and (b) any significant difference between the Group s estimated losses and actual losses would require the Group to record provision which could have a material impact on its consolidated financial statements in future periods. 14

15 The Group uses management s judgment to estimate the amount of any impairment loss in cases where a borrower has financial difficulties, and there are few available sources of historical or macroeconomic data relating to similar borrowers or forecasting data relating to a borrower s business. Similarly, the Group estimates changes in future cash flows based on past performance, past customer behaviour, observable data, and forecasts indicating an adverse change in the payment status of borrowers in a group, and national or local economic conditions that correlate with defaults on assets in the group. Management uses estimates based on historical loss experience for assets with credit risk characteristics and objective evidence of impairment similar to those in the group of loans. The Group uses management s judgment to adjust observable data for a group of loans to reflect current circumstances not reflected in historical data. Considering the current economic developments and, in the first hand, the effective legislation, the Group s management believes that the sale of collateralized property may take a long period of time. The amount of allowances for impairment of financial assets in the consolidated financial statements have been determined on the basis of internal models for credit risk analysis and existing economic and political conditions based on management s judgments. In accordance with the information available, the Group reflected the revised estimates of the estimated future cash flows in its assessment of impairment. However, the Group is not in a position to predict what changes in conditions will take place in Ukraine and what effect such changes might have on the adequacy of the allowances for impairment of financial assets in future periods. Management assesses impairment by estimating the probability of loans repayment and recovery of outstanding amounts based on the analysis of individually significant loans (and, for individually insignificant loans, on a collective basis) by grouping loans under similar characteristics of credit risk. The Group determines the cost of buildings and structures (properties) obtained as a collateral under lending transactions at fair value. Since, as at 31 December 2015, there was no active market available for certain buildings and structures, and the existing property valuation standards and rules do not contain an algorithm for determining the market value in crisis conditions, in reality, when determining the value of the collateralized property, its assessed value is used which was arrived at mainly through the judgment of professional appraisers, and not from the analysis of market factors. Fair value measurements in respect of properties require using judgments and assumptions regarding comparability of property items and other factors. Based on the above, the allowance for impairment of loans and receivables from customers may be affected as a result of applying the assessed values of properties obtained as a collateral in the crisis conditions or their consequences. Accounting estimates related to the property appraisals in the absence of the active market-based prices are considered to be a key source of uncertainty due to the fact that: (i) they are highly susceptible to change from period to period, and (i) a potential impact from recognition of such estimates may be material. As at 31 December 2015, in the absence of active property market and considering a significant uncertainty as to the control over the assets obtained as a collateral under lending transactions in Crimea and Donetsk and Luhansk regions, the Group was unable to assess the adequacy of allowances for impairment of loans and receivables from customers attributable to those regions of Ukraine. Provisions for financial guarantees and other contingencies Provisions for financial guarantees and other contingencies are measured in accordance with IAS 37 Provisions, Contingent Liabilities, and Contingent Assets, which requires application of management s estimation and judgment. Valuation of property (buildings and land) The Group s properties (buildings and land) are measured at fair value. As at 31 December 2014, the Group performed revaluation of its buildings, other than those located in Crimea and Donetsk and Luhansk regions, in accordance with the situation described in Note (2b). As at 31 December 2015, the Group performed revaluation of its buildings, other than those located in Crimea and Donetsk and Luhansk regions, in accordance with the situation described in Note (2b). To assess the fair value of property items, management engages external independent appraisers. The fair values of properties are measured using the sales comparison method that is based on prices of recent transactions with similar property items and income approach. Assessment of the fair value of buildings requires making judgments and using assumptions regarding comparability of property items and other factors. Note (27) describes key assumptions used in estimating the fair values of buildings and land. Fair value of financial instruments If a quoted market price is available for an instrument, the fair value is calculated based on the market price. When valuation parameters are not observable in the market or cannot be derived from observable market prices, the fair value is derived through analysis of other observable market data appropriate for each product and pricing models which use a mathematical methodology based on accepted financial theories. Pricing models take into account the contractual terms of the securities as well as market-based valuation parameters, such as interest rates, volatility, exchange rates and credit rating of a counterparty. Where market-based valuation parameters are not available, management makes a judgment as to its best estimate of that parameter in order to determine a reasonable 15

16 reflection of how the market would be expected to price the instrument. In exercising this judgment, a variety of tools is used, including similar observable data, historical data and extrapolation techniques. The Group considers that the accounting estimates and assumptions related to valuation of financial instruments where quoted markets prices are not available is a key source of estimation uncertainty because: (a) they are highly susceptible to change from period to period because they require that management make assumptions about interest rates, volatility, exchange rates, the credit rating of the counterparty, valuation adjustments and specific feature of the transactions and (b) the impact that recognizing a change in the valuations would have on the assets reported in the consolidated statement of financial position as well as its income/(expense) could be material. Had management used different assumptions regarding interest rates, volatility, exchange rates, credit rating of a counterparty, offer date and valuation adjustments, a larger or smaller change in the valuation of financial instruments where quoted market prices are not available would have resulted in a material impact on the Group s net profit and loss reported in the consolidated financial statements. Note (27) summarizes details on the valuation techniques applied and key assumptions used in determining the fair value of financial instruments. Initial recognition of related party transactions In the course of normal business activities, the Group transacts with its related parties. IAS 39 requires accounting for financial instruments at initial recognition at fair value. In view of absence of an active market for such transactions, to determine whether the transactions were performed at market or non-market prices, judgments are used. Such judgments are based on pricing for similar financial instruments and transactions therewith, including analysis of effective interest rates and parameters of the arrangements made. Deferred tax assets Deferred tax assets are recognized for all deductible temporary differences to the extent that it is probable that taxable profit will be available against which the deductible temporary differences can be utilized. Estimation of probability is based on management s forecast of future taxable profit and is supplemented with subjective judgments by management of the Group. Tax legislation Due to the presence in the Ukrainian commercial legislation, and tax legislation in particular, of provisions allowing more than one interpretation, and also due to the practice developed in a generally unstable environment by the tax authorities of making arbitrary judgment of business activities, if a particular treatment based on management s judgment of the Group s business activities was to be challenged by the tax authorities, the Group may be assessed additional taxes, penalties and interest. Tax records remain open to review by the tax authorities for three years. Other sources of uncertainty While the Ukrainian Government has introduced a range of stabilization measures aimed at providing liquidity to Ukraine s banks and companies, there continues to be uncertainty regarding the access to capital and cost of capital for the Group and its counterparties, which could affect the Group s consolidated financial position, results of operations, and business prospects. Management is unable to reliably estimate the effects on the Group s consolidated financial position of any further deterioration in the liquidity of the financial markets and the increased volatility in the currency and equity markets. Management believes it is taking all necessary measures to support the sustainability and growth of the Group s business in the current circumstances. (h) Prior period restatements and reclassifications The Group s consolidated financial statements have been revised by management, thus, some restatements and reclassifications of certain assets and liabilities in the consolidated statement of financial position and certain income and expense items in the consolidated statement of profit or loss have been made in order to properly present finance lease agreements. Management has decided not to present the consolidated statement of financial position as at 1 January 2014, since it believes the changes are not material to the consolidated financial statements taken as a whole. The effect of changes on the consolidated financial statements for the year ended 31 December 2014 is as follows: Consolidated statement of financial position As previously reported 31 December 2014 Restatements As currently and reported reclassifications Assets: Other financial assets at fair value through profit or loss 1,247,176-14,831 1,232,345 Loans and receivables from customers 32,630, ,453 32,947,356 Investment property 1,434, ,438 1,128,914 16

17 Property and equipment and intangible assets 3,722,874-10,233 3,712,641 Other assets 1,860, ,860,083 INFLUENCE ON ASSETS 40,895,926-14,587 40,881,339 17

18 As previously reported 31 December 2014 Restatements and reclassifications As currently reported Liabilities: Other financial liabilities at fair value through profit or loss 5,095-1,445 3,650 INFLUENCE ON LIABILITIES 5,095-1,445 3,650 Equity: Accumulated loss -3,917,192-13,142-3,930,334 INFLUENCE ON EQUITY -3,917,192-13,142-3,930,334 INFLUENCE ON LIABILITIES AND EQUITY -3,912,097-14,587-3,926,684 Consolidated statement of profit or loss For the year ended 31 December 2014 As previously Restatements and As currently reported reported reclassifications Interest income 3,576, ,577,685 Result on transactions with financial instruments at fair value through profit or loss 1,407,929-13,386 1,394,543 Other operating income 300, ,002 Loss before income tax -3,891,632-13,142-3,904,774 Loss for the year -3,354,029-13,142-3,367,171 (3) Summary of significant accounting policies The principal accounting policies applied in preparation of these consolidated financial statements are set out below. Basis of consolidation The consolidated financial statements incorporate the financial statements of the Bank and its subsidiaries. Control is achieved where the Bank: Has power over the investee; Is exposed, or has rights, to variable returns from its involvement with the investee; and Has the ability to use its power to affect its returns. The Bank reassesses whether or not it controls an investee if facts and circumstances indicate that there are changes to one or more of the three elements of control listed above. When the Bank has less than a majority of the voting rights of an investee, it has power over the investee when the voting rights are sufficient to give it the practical ability to direct the relevant activities of the investee unilaterally. The Bank considers all relevant facts and circumstances in assessing whether or not the Bank s voting rights in an investee are sufficient to give it power, including: The size of the Bank s holding of voting rights relative to the size and dispersion of holdings of the other vote holders; Potential voting rights held by the Bank, other vote holders, or other parties; Rights arising from other contractual arrangements; and Any additional facts and circumstances that indicate that the Bank has, or does not have, the current ability to direct the relevant activities at the time that decisions need to be made, including voting patterns at previous shareholders meetings. Consolidation of a subsidiary begins when the Bank obtains control over the subsidiary and ceases when the Bank loses control of the subsidiary. Specifically, income and expense of a subsidiary acquired or disposed of during the year are included in the consolidated statement of profit or loss from the date the Bank gains control until the date when the Bank ceases to control the subsidiary. Gain or loss and each component of other comprehensive income and loss are attributed to the owners of the Bank and to non-controlling interests. Total comprehensive income of the subsidiaries is attributed to the owners of the Bank and to non-controlling interests even if this results in the non-controlling interests having a deficit balance. When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Group s accounting policies. In preparing the consolidated financial statements, all intragroup balances, income, and expense relating to transactions between members of the Group are eliminated in full on consolidation. 18

19 19

20 Foreign currency transactions The Group s consolidated financial statements are presented in Ukrainian Hryvnias ( UAH ), the currency of primary economic environment in which the Group operates (its functional currency). Monetary assets and liabilities denominated in currencies, other than the Group s functional currency (foreign currencies), are translated into UAH at the official exchange rates prevailing at the reporting date. Income and expense denominated in foreign currencies are translated at the official exchange rates ruling at the dates of their generation (and not on settlement dates) and, when the cash method is applied, at the exchange rates prevailing on settlement dates. Differences between the contractual exchange rates under certain foreign currency denominated transactions and the official exchange rates established by the National Bank of Ukraine at the dates of the relevant transactions are included in results on foreign exchange operations. Recognition and measurement of financial instruments The Group recognizes financial assets and liabilities in its consolidated statement of financial position when it becomes a party to the contractual obligation of the instrument. Regular way purchases and sales of the financial assets and liabilities are recognized using settlement date accounting. All other transactions of purchases or sales of financial instruments are recognized when a business entity becomes a party of the agreement regarding the financial instrument s purchase. According to the provisions of IAS 39, financial assets are classified into the following specified categories: financial assets at fair value through profit or loss, loans and receivables, held to maturity investments, or available for sale financial assets. Financial assets and liabilities are initially recognized at fair value plus, in the case of a financial asset or financial liability not recognized at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. Subsequently, financial assets and liabilities are carried at fair value, cost, or amortized cost depending on their classification. The accounting policies for subsequent reflection of each type of financial instruments are disclosed in the respective accounting policies set out below. Key valuation techniques used to assess financial instruments 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, regardless of whether that price is directly observable or estimated using another valuation technique. In estimating the fair value of an asset or a liability, the Group takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date. Fair value for measurement and/or disclosure purposes in these consolidated financial statements is determined on such a basis, except for leasing transactions that are within the scope of IAS 17 Leases, and measurements that have some similarities to fair value but are not fair value, such as net realizable value in IAS 2 Inventories or value in use in IAS 36 Impairment of Assets. In addition, for consolidated financial statements, fair value measurements are categorized into Level 1, 2, or 3 based on the degree to which the inputs to the fair value measurements are observable and the significance of the inputs to the fair value measurement in its entirety, which are described as follows: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date; Level 2 inputs are inputs, other than quoted prices included within Level 1, that are observable for the asset or liability either directly or indirectly; and Level 3 inputs are unobservable inputs for the asset or liability. Initial cost Initial cost is the amount of cash or cash equivalents paid or the fair value of other resources given to acquire an asset at the acquisition date, including transaction costs. Measurement at initial cost is applied for investments in equity which are not quoted in the active market and the fair value of which cannot be measured reliably. Transaction costs Transaction costs are the costs that are directly attributable to acquisition, issue or disposal of a financial asset or liability and which would not be paid, unless the transaction happened. Expenditure for transaction costs does not include premiums or discounts on debt instruments, finance charges, internal administrative expense or storage costs. Amortized cost The amortized cost of a financial instrument is the amount at which the financial asset or liability is measured at initial recognition minus principal repayments, plus interest accrued, plus (or minus) the cumulative amortization using the effective interest rate method of any difference between that initial amount and the maturity amount, and, for financial assets, less any subsequent impairment. Effective interest rate method The effective interest rate method is a method of calculating the amortized cost of a financial asset or financial liability and of allocating interest income or expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts or payments (except for future losses related to loan granting) through the expected life of the financial instrument, or, where appropriate, a shorter period, to the net carrying amount of the financial asset or financial liability. 20

21 Gains and losses on subsequent measurement A gain or loss arising from the change in the fair value of a financial instrument classified as financial asset at fair value through profit or loss is recognized in the consolidated statement of profit or loss. A gain or loss arising from the change in the fair value of a financial asset available for sale is recognized directly in other comprehensive income (except for impairment losses and gains and losses from exchange differences of debt financial instruments available for sale) until the asset is derecognized, when cumulative gains or losses previously recognized in other comprehensive income are reclassified to the consolidated statement of profit or loss. Interest related to a financial asset available for sale is recognized in the consolidated statement of profit or loss of the period when earned and calculated by using the effective interest rate method. A gain or loss arising from financial assets and liabilities carried at amortized cost is recognized in the consolidated statement of profit or loss when the financial asset or financial liability is derecognized or impaired and in the course of amortization. De-recognition of financial assets and liabilities Financial assets A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is derecognized where: The contractual rights to receive cash flows from the asset have expired; The Group has transferred its rights to receive cash flows from the asset or retained the right to receive cash flows from the asset, but has assumed an obligation to pay them in full without material delay to a third party under a pass-through arrangement; and The Group either (a) has transferred substantially all the risks and rewards from the asset, or (b) has neither transferred nor retained substantially all the risks and rewards from the asset, but has transferred control over the asset. A financial asset is derecognized when it has been transferred and the transfer qualifies for de-recognition. A transfer requires that the Group either: (a) transfers the contractual rights to receive cash flows from the asset; or (b) retains the right to receive cash flows from the asset but assumes a contractual obligation to pay those cash flows to a third party. After a transfer, the Group reassesses the extent to which it has retained the risks and rewards of ownership of the transferred asset. If substantially all the risks and rewards have been retained, the asset remains in the consolidated statement of financial position. If substantially all of the risks and rewards have been transferred, the asset is derecognized. If substantially all the risks and rewards have been neither retained nor transferred, the Group assesses whether it has retained control over the asset. If it has not retained control, the asset is derecognized. Where the Group has retained control over the asset, it continues to recognize the asset to the extent of its continuing involvement. Financial liabilities A financial liability is derecognized when the obligation is discharged, cancelled, or expires. Where an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the consolidated statement of profit or loss. Cash and cash equivalents Cash and cash equivalents include cash and coins on hand, unrestricted cash balances on (nostro) accounts with the National Bank of Ukraine and other banks, and high-liquid financial assets with initial maturities up to three months with insignificant risk to fair value fluctuations and those used by the Group to manage its current liabilities. Cash of mandatory reserves with the National Bank of Ukraine is not treated as cash equivalent due to the existing restrictions to its withdrawal. Cash and cash equivalents are carried in the consolidated statement of financial position at amortized cost. Due from banks In the normal course of business, the Group maintains advances or deposits for various periods of time with other banks. Balances of due from banks with fixed maturity are subsequently measured at amortized cost using the effective interest rate method. Those balances that do not have fixed maturities are carried at amortized cost based on their expected maturities. Balances of due from banks are carried, net of allowance for impairment, if any. Loans and receivables from customers Loans and receivables from customers are non-derivative assets with fixed or determinable payments that are not quoted in an active market, other than those classified in other categories of financial assets. Loans granted by the Group are initially recognized at fair value, plus related transaction costs that directly relate to acquisition or creation of such financial assets. Where the fair value of consideration given does not equal the fair value of the loan, for example, where the loan is issued at lower than market rates, the difference between the fair value of consideration given and the fair value of the loan is recognized in the consolidated statement of profit or loss. Subsequently, loans are carried at amortized cost using the effective interest rate method. Loans and receivables from customers are carried net of any allowance for impairment. Loans write-off Loans are written off against allowance for impairment in case of uncollectibility, including through repossession of collateral. Loans are written off after management has exercised all possibilities available 21

22 to collect amounts due to the Group and after the Group has sold all available collateral, and the respective decision of the court is rendered. Subsequent recoveries of amounts previously written off are included in other income. Loans restructuring is performed by the Group, whenever possible, instead of claims for collateral in order to prevent the quality deterioration of its loan portfolio and create favorable conditions for borrowers in meeting their debt obligations. Restructuring involves using the following methods in different combinations and sequences, which include: rescheduling of interest and principal payments; adjusting the nominal interest rate on the loan; changing the maturity dates of the loans (extending); capitalizing the loan overdue amounts; capitalizing term and overdue interest; changing the currency of accounts payable; reassigning or transferring loan outstanding amounts. Management monitors on a consistent basis the restructured loans in order to ensure and assess the possibility of borrowers to make future payments of interest and principal of the loan. Non-performing loans Loans are assigned with a non-performing status when interest or principal is delinquent, and further recovery of interest income is doubtful. The Group s management decides to assign the loan with a non-performing status and initiate the loan recovery through judicial proceedings. Repurchase and reverse repurchase agreements Securities sold under repurchase agreements ( repos ) are accounted for as collateralized financing transactions, and the securities sold continue to be carried in the consolidated statement of financial position, while the counterparty s liabilities are included in repayment amounts under the repurchase agreements within deposits and due from banks or current accounts and deposits from customers, as appropriate. The difference between selling and purchase back prices represents the interest expense and is recognized in the consolidated statement of profit or loss over the term of the purchase back agreement by using the effective interest rate method. Securities purchased under sale back agreements ( reverse repos ) are accounted for as amounts receivable under the sale back agreements in due from banks or loans to customers, as appropriate. The difference between purchase and sale prices represents the interest income and is recognized in the consolidated statement of profit or loss over the term of the sale back agreement by using the effective interest rate method. In the event that assets purchased under reverse repurchase are sold to third parties, liabilities on the return of the securities are accounted for as liabilities and are measured at fair value. Derivative financial instruments In the normal course of business, the Group enters into derivative financial instrument operations, including currency swaps and forward contracts to earn income and to manage currency and liquidity risks, and for trading. Derivatives entered into by the Group are not designated as hedges and do not qualify for hedge accounting. Derivatives are initially recognized at fair value at the date a derivative contract is entered into and are subsequently re-measured at fair value at each reporting date. Derivatives are carried as assets when their fair value is positive and as liabilities when it is negative. Derivatives are included in other financial assets at fair value through profit or loss or other liabilities in the consolidated statement of financial position. Gains and losses resulting from these instruments are included in results on revaluation of other financial instruments at fair value through profit or loss in the consolidated statement of profit or loss. Fair values are measured using a technique described in Note (27). Derivatives may be embedded in other agreements ( host contracts ). Embedded derivatives are separated from host contracts and treated as separate derivatives if their risks and characteristics are not closely related to those of the host contracts, if a separate instrument with the same terms as an embedded derivative qualifies for a derivative definition, and if a combined instrument is not measured at fair value through profit or loss. Derivatives that are embedded in financial assets or financial liabilities at fair value through profit or loss are not separated. Securities available for sale Securities available for sale are investments in debt instruments and equity that are expected to be held for an indefinite period of time and which may be sold to cover liquidity needs or due to changes in interest rates and market prices. Such investments are carried at fair value. Gains or losses from the re-measurement of securities available for sale to the fair value are recognized in other comprehensive income, except for impairment losses and profits, until the cumulative gain or loss initially recognized in other comprehensive income is excluded from equity and included in the consolidated statement of profit or loss for the year; and interest income accrued using the effective interest method is recognized directly in the consolidated statement of profit or loss. The Group uses quoted market prices to determine the fair value for the Group s investments available for sale. If the market for investments is not active, the Group establishes fair value by using a valuation technique. Valuation techniques include using recent arm s length market transactions between knowledgeable, willing and independent parties, reference to the current fair value of another, substantially identical instrument, discounted cash flow analysis, and other applicable methods. If there is a valuation technique commonly used by market participants to price the instrument, and that technique has been demonstrated to provide reliable estimates of prices obtained in actual market transactions, the Group uses that technique. When there is objective evidence that available for sale financial assets have been impaired, the cumulative loss previously recognized in other comprehensive income is removed from equity and recognized in the profit or loss. 22

23 And the cumulative loss is calculated as the difference between the purchase cost (reduced by the amount of the principal repayments and amortization) and current fair value, less any impairment losses recognized in the profit or loss. Reversals of such impairment losses on debt instruments, which are objectively related to events occurring after the impairment recognized in the profit or loss, are carried in the consolidated statement of profit or loss for the period. Reversals of such impairment losses on equity instruments are not recognized in the consolidated statement of profit or loss and consolidated statement of comprehensive income and loss. Due to banks, customer accounts, debt securities issued by the Group and subordinated debt Due to banks, customer accounts, debt securities issued by the Group and subordinated debt are initially recognized at fair value. Subsequently, the amounts due are stated at amortized cost, and any difference between net proceeds and the redemption value is recognized in the consolidated statement of profit or loss over the period of the borrowings using the effective interest rate method. Offsetting Financial assets and financial liabilities are offset and the net amount reported in the consolidated statement of financial position only when there is a legally enforceable right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liability simultaneously. Income and expense is not offset in the consolidated statement of profit or loss unless required or permitted by any accounting standard or interpretation, and as specifically disclosed in the accounting policies of the Group. Precious metals Precious metals are recognized at a lower of net realizable value or purchase cost. Net realizable value of precious metals is determined based on the quoted market prices. Purchase cost of precious metals is determined using first-in, first-out (FIFO) method. Precious metals are included in other assets. Property and equipment and intangible assets Property and equipment. Property and equipment are carried at historical cost (acquisition cost), less any accumulated depreciation and any impairment loss, except for buildings and land that are measured at revalued amounts. Historical cost of property and equipment includes expenses directly related to acquisition of an asset. Costs of internally generated assets include cost of materials and staff costs, other expenses directly related to bringing the asset to a working condition in accordance with its intended use, costs of disassembly and transfer of items and restoration of the site the assets are located on, as well as capitalized expense in respect of respective assets. The software acquired, which forms a functionality element of the respective equipment, is capitalized in the cost of this equipment. Buildings and land are carried in the consolidated statement of financial position at their revalued amounts, being the fair value at the date of revaluation, determined from market-based evidence by appraisal undertaken by professional appraisers, less any subsequent accumulated depreciation and subsequent accumulated impairment losses. Revaluations are performed with sufficient regularity such that the carrying amount does not differ materially from that which would be determined using fair values at the reporting date. To determine the fair values of buildings, management engages independent professional appraisers. The methods applied in determining the fair values presuppose a comparison of recent sales of similar buildings and income approach. Any revaluation increase arising on the revaluation of such buildings is recognized in other comprehensive income, except to the extent that it reverses a revaluation decrease for the same asset previously recognized in profit or loss. Any revaluation decrease arising on the revaluation of such buildings is recognized in profit or loss, except for the cases when it reverses a revaluation increase for the same asset previously recognized in other comprehensive income. Operating leases. Leases of assets under which the risks and rewards of ownership are effectively retained with a lessor are classified as operating leases. Where the Group is a lessee, lease payments under operating leases are recognized as expenses in the period in which they arise and included into other operating expenses. When the Group acts as a lessor, operating lease items are carried in the consolidated statement of financial position. Rental income from operating leases is recognized in the period in which it arises and recognized in the consolidated statement of profit or loss in other income over the term of the relevant lease. Depreciation. Depreciation is accrued in profit or loss using a straight-line method over useful lives of specific assets. Depreciation is charged from the date when a respective asset becomes available for use. Land is not depreciated. Estimated useful lives of property and equipment items are as follows: Buildings years Office furniture and equipment 5 10 years Electronic systems and equipment 4 10 years Other fixed assets (vehicles and other) 6 10 years Expenditures to repairs of the leased premises are recognized as assets and included in profit or loss using the straight-line method over the shorter of a lease period or useful life of the improved premises held under leases. 23

24 Depreciation methods, useful lives, and residual values are reviewed at each reporting date and, if required, adjusted accordingly. Intangible assets. Intangible assets acquired by the Group are carried at acquisition cost, less accumulated amortization and impairment losses. Computer software licenses obtained are capitalized based on the costs incurred to purchase and put into operation a particular software product. Amortization is recognized in the consolidated statement of profit or loss using a straight-line method over useful lives of intangible assets from the date when they are ready for their intended use, since it best reflects the expected model of future economic benefits embodied in these assets. Estimated useful lives of intangible assets with definite useful lives are in the period from 1 to 10 years. Amortization methods, useful lives and residual values are reviewed at each reporting date and, if required, adjusted accordingly. The carrying amounts of property and equipment and intangible assets are reviewed at each reporting date to assess whether they are recorded in excess of their recoverable amounts. Where carrying values exceed the estimated recoverable amount, assets are written down to their recoverable amount. Impairment is recognized in the respective period as losses in the consolidated statement of profit or loss. After the recognition of an impairment loss, the depreciation charge for property and equipment is adjusted in future periods to allocate the assets revised value, less its residual value (if any), on a systematic basis over its remaining useful life. An item of property and equipment and intangible assets is derecognized upon disposal or when no future economic benefits are expected to arise from the continued use of the asset. Any gain or loss arising on the disposal or retirement of an item of property and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognized in the consolidated statement of profit or loss. Construction in progress is accounted for at cost. Upon completion of construction, the assets are transferred to the category of buildings and constructions at cost. Construction in progress items are not depreciated until the moment they are ready for their intended use. Investment property Non-current assets are classified as investment property when they are represented by property items (land, buildings, or part of a building, or their combination) and are held by the Group for the receipt of lease (rental) payments or capital appreciation, or both. At initial recognition of the investment property, the Group measures and carries it at cost, which includes the purchase price of the property and all expenditures directly attributable to its acquisition. Expenditures on routine service, repairs and maintenance of the investment property items are included in the consolidated statement of profit or loss when incurred. Subsequent to initial recognition, the Group carries the investment property items at historical cost (cost), net of accumulated depreciation and recognized impairment loss. The Group uses a straight-line method for depreciation of all its investment property items (except for the land plot) and the useful life from 20 to 50 years. The land plot is not depreciated. Finance leases Finance leases are leases that transfer substantially all the risks and rewards incidental to ownership of an asset and title may or may not eventually be transferred. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction, rather than the form of an agreement. The lease is classified as finance lease if: The lessor transfers ownership of the asset to the lessee by the end of the lease term; The lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, at the inception of the lease, it is reasonably certain that the option will be exercised; The lease term is for the major part of the economic life of the asset even if title is not transferred; At the inception of the lease, the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and The leased assets are of a specialized nature such that only the lessee can use them without major modifications being made. The Group as a lessor recognizes assets under finance leases in its consolidated statement of financial position and presents them as receivables from customers and initially measures them in the amount equal to net investment in the lease. Subsequently, the recognition of finance income is based on a pattern reflecting a constant periodic rate of return on the Group s net investment in the finance lease. Other assets Other assets are carried at acquisition cost, net of impairment losses, except for collateral repossessed and assets held for sale. 24

25 Collateral repossessed and assets held for sale are measured at lower of actual cost or net realizable value. Actual cost is determined using first-in, first-out method and includes cost of inventory purchase, production and other costs incurred to deliver inventories to their present location and bring to their present condition. In addition, actual cost includes a respective portion of production overheads calculated on the basis of normal production capacity of an entity. Net realizable value is an estimated selling price in the course on normal business activities, less estimated cost to complete and sell. 25

26 Recognition of impairment of assets Financial assets carried at amortized cost. Financial assets carried at amortized cost comprise mainly due from banks, loans and receivables from customers, and other assets. Management reviews its loan portfolio to assess impairment on a regular basis. A loan or receivable (or a group of loans or receivables) is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the loan or receivable and that event (or events) has an impact on the estimated future cash flows of the loan or receivable (or the group of loans or receivables) that can be reliably estimated. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, breach of loan covenants or conditions, restructuring of a loan or advance on terms that the Group would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, deterioration in the value of collateral, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers in the group, or economic conditions that correlate with defaults in the group. Management first assesses whether objective evidence of impairment exists individually for loans and advances that are individually significant, and individually or collectively for loans and advances that are not individually significant. If no objective evidence of impairment exists for an individually assessed loan, whether significant or not, it includes the loan in a group of loans with similar credit risk characteristics and collectively assesses them for impairment. Loans that are individually assessed for impairment and for which an impairment loss is or continues to be recognized are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on a loan has been incurred, the amount of the loss is measured as the difference between the loan s carrying amount and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral (excluding future losses that have not been incurred) discounted at the loan 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 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, management uses its experience and judgment to estimate the amount of any impairment loss. The assumptions used for estimating both the amount and timing of future cash flows are reviewed regularly to reduce any differences between loss estimates and actual loss experience. All impairment losses in respect of loans and receivables are recognized 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 recognized. Financial assets carried at cost. Financial assets carried at cost include unquoted equity instruments included in available for sale assets that are not carried at fair value because their fair value can not be reliably measured. If there is objective evidence that such investments are impaired, the impairment loss is calculated as the difference between the carrying amount of the investment and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. Such impairment losses are not reversed. The Group accounts for impairment of financial assets carried at amortized cost through the use of the allowance account, and the financial assets carried at cost using direct write-offs. Available for sale financial assets. Impairment losses on available for sale assets are recognized by transferring a cumulative loss that has been recognized directly in equity (other comprehensive income) to profit or loss as a reclassification adjustment. The cumulative loss reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortization, and the current fair value, less any impairment loss previously recognized in profit or loss. For an investment in an equity instrument available for sale, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. If, in a subsequent period, the fair value of an impaired available for sale debt instrument increases and the increase can be objectively related to an event occurring after the impairment loss was recognized in profit or loss, the impairment loss is reversed, with the amount of the reversal recognized in profit or loss. However, any subsequent recovery in the fair value of an impaired available for sale equity instrument is recognized in other comprehensive income. Non-financial assets Other non-financial assets, other than deferred taxes, are assessed at each reporting date for any indication of impairment. The recoverable amount of non-financial assets is the greater of their fair value, less costs to sell, and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to 26

27 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 recognized when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. All impairment losses in respect of non-financial assets are recognized in profit or loss and reversed only if there has been a change in the estimates used to determine the recoverable amount. Any impairment loss is reversed only to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Provisions for liabilities A provision for liabilities is recognized in the consolidated statement of financial position when the Group 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, provision 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 recognized when the Group has approved a detailed and formal restructuring plan, and the restructuring has either commenced or has been announced publicly. Future operating costs are not provided for. Share capital Contributions to share capital are recognized at cost. Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognized as a deduction from equity, net of any tax effects. Preference shares that are redeemable and carry mandatory dividends are classified as liabilities. Acquired rights of the Bank s treasury shares is deducted directly from equity. A gain or loss arising from purchase, sale, issue or cancellation of the Bank s treasury shares is not included in profit or loss. The carrying amount of the share capital includes the effect of hyperinflation accumulated before Dividends. Dividends on ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared. Dividends on preference shares are declared and accrued on the basis of the minimum amount of dividends required to be paid under the terms of the Bank s Charter, which cannot be less than 5.0% of the nominal value of preference shares. Dividends that are declared after the reporting date are treated as a subsequent event under IAS 10 Events after the Reporting Period and disclosed accordingly. The Bank may declare and pay dividends only in accordance with the rules and regulations of the Ukrainian laws. Other additional capital and share premium reserve Other additional capital arises when the Group receives additional contributions from its shareholders, compensations for the guarantees obtained, and on operations with shareholders, resulting that the contractual amounts differ from the fair value of the item sold. Share premium arises when the contributed funds exceed the nominal value of the shares issued. Gains and losses on the sale of treasury shares are included in share premium reserve. Revaluation reserves The reserves recorded in equity (other comprehensive income) in the Group s consolidated statement of financial position represent the revaluation reserve of fair value of available for sale financial assets and the revaluation reserve of buildings and land. Credit related commitments In the normal course of business, the Group 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 requiring that the Group makes 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. Management treats such contracts as insurance arrangements, and accounts them accordingly. In this respect, the Group treats the guarantee contract as a contingent liability until such time as it becomes probable that the Group will be required to make a payment under the guarantee. Accordingly, provisions for losses under financial guarantees and other credit related commitments are recognized when losses are considered probable and can be measured reliably. Recognition of income and expense Discounts and premiums on financial instruments at fair value through profit or loss are not amortized and recognized in profit or loss from these financial instruments. Interest income and expense are recognized in profit or loss using the effective interest method. Once a financial asset or a group of similar financial assets has been written down as a result of an impairment loss, interest income is thereafter recognized using the rate of interest used to discount the future cash flows for the purpose of measuring the impairment loss. 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 amortized to interest income over the estimated life of the financial instrument using the effective interest method. A similar approach is applied for 27

28 deposits transaction costs are included in amortized cost of deposits and amortized to interest expense using the effective interest rate method. For instruments that have no estimated cash flows, such as revolving credit lines, overdrafts, and deposits on demand, fees and commissions and transaction costs closely related to such instruments are not included in their amortized cost. These fees and commissions and transaction costs are deferred and amortized on a straight-line basis over the life of such financial instruments. Other fees and commissions and other income and expenses items are recognized in profit or loss when the respective service is provided Staff costs Salary related costs, contributions to the state social funds, expense on annual paid vacations, payments of sick leaves, bonuses and non-cash benefits are accrued in the year when the respective services were provided by employees. In accordance with the requirements of the Ukrainian legislation, the Group makes contributions (payments) to the following state social funds: the State Pension Fund of Ukraine, social security, unemployment, and professional accident insurance funds. Contributions paid to the state social funds are recognized as the Group s expense when incurred. In addition, in accordance with the retirement benefit agreement entered into between the Bank and a non-government pension fund, the Bank is obliged to make monthly contributions to this non-government pension fund. Such charges amount to 1% of the main salary of the Bank s employees who have more than one year of service. The charges are expensed in the period they are made and included in staff costs and administrative and other expense. Staff costs include amounts of provision for vacations and bonuses. The Group has no other obligations under post-retirement benefits or other significant compensated benefits requiring accrual. Taxation Income tax expense represents the sum of the current and deferred tax expense. Current income tax expense is based on taxable profit for the year. Taxable profit differs from net profit as reported in the consolidated statement of profit or loss because it excludes items of income or expense that are taxable or deductible in other years and it further excludes items that are never taxable or deductible. The Group s current tax expense is calculated using tax rates that have been enacted during the reporting period. Deferred income tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in the consolidated financial statements and the corresponding tax bases used in the computation of taxable profit, and is accounted for using the balance sheet liability method. Deferred income tax liabilities are generally recognized for all taxable temporary differences, and deferred tax assets are recognized to the extent that it is probable that taxable profits will be available against which deductible temporary differences can be utilized. Such assets and liabilities are not recognized if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and liabilities in a transaction that affects neither the tax profit nor the accounting profit. The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profits will be available to allow all or part of the asset to be recovered. Deferred tax is recognized in the consolidated statement of profit or loss, except when it relates to items related directly to equity, in which case the deferred tax is also recognized within equity. Deferred income tax assets and deferred income tax liabilities are offset and reported net in the consolidated statement of financial position if: The Group has a legally enforceable right to set off current income tax assets against current income tax liabilities; and Deferred income tax assets and the deferred income tax liabilities relate to income taxes levied by the same taxation authority on the same taxable entity. Ukraine also has various other taxes which are assessed on the Group s activities. These taxes are included as a component of operating expenses in the consolidated statement of profit or loss. Segment reporting An operating segment is a component of the Group that is engaged in business activities from which it may earn revenues and incur expenses (including revenues and expenses relating to transactions with other components of the Group); whose operating results are regularly reviewed by the chief operating decision maker to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. Adoption of new and revised IFRSs In the current year, the Group has adopted the following new and revised Standards and Interpretations: Amendments to IAS 19 Employee Benefits Defined benefit plans: employee contributions; Annual Improvements to IFRSs Cycle; Annual Improvements to IFRSs Cycle. The Group has not applied the following new and revised IFRSs that have been issued but are not yet effective: 28

29 Standards and Interpretations Effective for accounting periods beginning on or after: IFRS 14 Regulatory Deferral Accounts 1 January 2016 IFRS 9 Financial Instruments 1 January 2018 IFRS 15 Revenue from Contracts with Customers 1 January 2018 IFRS 16 Leases 1 January 2019 Amendments to IAS 1 Presentation of Financial Statements Disclosure initiative 1 January 2016 Amendments to IFRS 11 Joint Arrangements Accounting for acquisition of interests in joint operations 1 January 2016 Amendments to IAS 16 Property, Plant, and Equipment and IAS 41 Agriculture Agriculture: bearer plants 1 January 2016 Amendments to IAS 16 Property, Plant, and Equipment and IAS 38 Intangible Assets Clarification of acceptable methods of depreciation and amortization 1 January 2016 Amendments to IAS 27 Separate Financial Statements Equity method in separate financial statements 1 January 2016 Amendments to IFRS 10 Consolidated Financial Statements, IFRS 12 Disclosure of Interests in Other Entities, and IAS 28 Investments in Associates and Joint Ventures 1 January 2016 Investment entities: applying the consolidation exception Amendments to IFRS 12 Disclosure of Interests in Other Entities Recognition of deferred tax assets for unrealized losses 1 January 2017 Amendments to IAS 7 Statement of Cash Flows Disclosure initiative 1 January 2017 Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Effective date is not Associates and Joint Ventures Sale or contribution of assets between an investor and determined its associate or joint venture Annual Improvements to IFRSs Cycle 1 January 2016 IFRS 9 Financial Instruments (2014). A finalized version of IFRS 9 which contains accounting requirements for financial instruments, replacing IAS 39 Financial Instruments: Recognition and Measurement. The standard contains requirements in the following areas: Classification and measurement. Financial assets are classified by reference to the business model within which they are held and their contractual cash flow characteristics. The 2014 version of IFRS 9 introduces a fair value through other comprehensive income category for certain debt instruments. Financial liabilities are classified in a similar manner to under IAS 39, however, there are differences in the requirements applying to the measurement of an entity s own credit risk; Impairment. The 2014 version of IFRS 9 introduces an expected credit loss model for the measurement of the impairment of financial assets, so it is no longer necessary for a credit event to have occurred before a credit loss is recognized; Hedge accounting. Introduce a new hedge accounting model that is designed to be more closely aligned with how entities undertake risk management activities when hedging financial and non-financial risk exposures. IFRS 15 Revenue from Contracts with Customers. IFRS 15 provides a single, principles based five-step model to be applied to all contracts with customers. The five steps in the model are as follows: (1) Identify the contract with the customer; (2) Identify the performance obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to the performance obligations in the contracts; (5) Recognize revenue when (or as) the entity satisfies a performance obligation. Guidance is provided on topics such as the point in which revenue is recognized, accounting for variable consideration, costs of fulfilling and obtaining a contract, and various related matters. New disclosures about revenue are also introduced. IFRS 16 Leases IFRS 16 specifies on recognition, measurement, presentation and disclosure of lease. The Standard provides a single lessee accounting model eliminating the distinction between operating and finance leases. Exceptions are contracts with the lease term of twelve months or less or the underlying asset has a low value. Lessors continue to classify leases as operating or finance, with IFRS 16 s approach to lessor accounting substantially unchanged from its predecessor, IAS

30 Management is currently assessing the impact on adoption of IFRS 9 Financial Instruments, IFRS 15 Revenue from Contracts with Customers, and IFRS 16 Leases. As to other Standards and Interpretations, management estimates their adoption in the future periods will not have a significant effect on the Group s consolidated financial statements. 30

31 (4) Cash and cash equivalents 31 December December 2014 Cash 1,332,192 1,316,794 Current accounts with the National Bank of Ukraine 744,094 1,218,903 Deposit certificates of the National Bank of Ukraine 3,059,232 1,952,574 Current accounts and term deposits with other banks with original maturities up to three months 5,157, ,401 Total 10,293,349 5,014,672 As at 31 December 2015, cash balances with five banks amounted to UAH 4,764,302 thousand or 92.4% of current accounts and term deposits with other banks with original maturities up to three months (31 December 2014: UAH 358,583 thousand or 68.1%). Ratings of internationally acknowledged rating agencies (Fitch, Moody s, Standard&Poor s) in respect of current accounts and term deposits with other banks with original maturities up to three months were as follows: 31 December December 2014 AAA/AA- 949, ,791 A+/A- 124, ,447 BBB+/BBB- 4,017, ,759 ВВ+/ВВ- 24,611 - CCC+/CCC- 23,328 - Not rated 18,671 24,404 Total 5,157, ,401 (5) Other financial assets at fair value through profit or loss 31 December December 2014 Embedded derivative on government bonds of Ukraine at indexed cost - 1,230,674 Forward agreements on currency purchases 4,250 1,671 Total 4,250 1,232,345 As at 31 December 2014, the Bank held in its portfolio of securities available for sale government bonds at indexed cost calculated on maturities at the weighted average exchange rate changes of UAH against USD used in the interbank market during the calendar month preceding the one in which bonds were initially placed and repaid. Host contracts on government bonds at indexed cost were included in securities available for sale (Note (7)) in the amount of UAH 1,123,415 thousand as at 31 December As at 31 December 2015, government bonds at indexed cost were repaid in full. (6) Loans and receivables from customers 31 December December 2014 Legal entities: 25,117,982 22,054,793 Short-term and long-term loans 24,182,858 20,890,829 Finance leases 621, ,453 Current accounts 251, ,544 Factoring agreements 57,023 65,069 Guarantees paid 5,079 66,898 Individuals: 30,968,904 24,601,059 Personal loans secured by mortgage 15,080,126 11,654,330 Mortgage loans 10,971,895 8,775,060 Car lending 2,168,789 2,056,549 Credit cards and loans to private individuals, including salary secured loans 877, ,701 Finance leases 3, December December 2014 Other loans 1,866,529 1,364,419 31

32 Total, before allowance for impairment losses 56,086,886 46,655,852 Total, net of allowance for impairment losses 36,403,808 32,947,356 Allowance for impairment losses -19,683,078-13,708,496 Impairment to loans, before allowance for impairment, % Movements in allowance for impairment for the years ended 31 December 2015 and 2014 are disclosed in Note (22). Impairment of loans and receivables from customers For all loans that are considered individually significant, the Group assesses on a case-by-case basis at each reporting date whether there is any objective evidence that the loan is impaired. Objective evidence of impairment exists when a loan is past due for more than 90 days or another loss event has occurred. Identification of a loss event for individual assessment involves analysis of the following aspects of the borrower s financial position as significant financial difficulties; breach of contract, such as default or delinquency in interest or principal payments; and it becoming probable that the borrower will enter bankruptcy or financial re-organization. For those loans and receivables from customers where objective evidence of impairment exists, impairment losses are determined considering the following aspects: the aggregate exposure of the Group to the customer; and the amount and timing of expected loan receipts and recoveries. For individually insignificant loans and receivables from customers and for individually significant loans where no specific impairment was identified, the collective assessment is based on appropriate historical trends of default. For collective assessment purposes, exposures are divided into homogeneous groups with similar risks and characteristics. The Group utilizes a statistical analysis of historical trends of default and amount of consequential loss, based on the delinquency of loans within a portfolio of homogeneous loans. Default probability rates and loss rates are regularly benchmarked against actual outcomes to ensure they remain appropriate. The impairment losses for collectively assessed loans is determined taking into account the following aspects: Probability of default for loans and receivables from customers of certain homogeneous groups and certain delinquency buckets. Probability of default in specified loss confirmation period horizons are estimated by the Group using historical data and migration matrixes approach and are based on 12 month history of migrations. Management believes that 12 month period is sufficient for the incurred but not reported loss to be identified; Estimated cash receipts from sale of the collateral are assessed using a discount of 25% to 70% to the fair value of collateral; Cash recoveries after default, other than resulting from collateral repossession and sale. Allocation of loans and receivables from customers by valuation approaches as at 31 December 2015 was as follows: Loans before allowance for impairment Allowance for impairment Loans, net of allowance for impairment Impairment to loans, before allowance for impairment, % Legal entities: 25,117,982-5,634,736 19,483, Loans with indication of impairment identified on an 16,937,426-5,036,571 11,900, individual basis Loans with indication of impairment identified on a collective basis Individuals: Loans with indication of impairment identified on an individual basis Loans with indication of impairment identified on a collective basis Total 8,180, ,165 7,582, ,968,904-14,048,342 16,920, ,791,027-2,078, , ,177,877-11,969,796 16,208, ,086,886-19,683,078 36,403,

33 Allocation of loans and receivables from customers by valuation approaches as at 31 December 2014 was as follows: Loans before allowance for impairment Allowance for impairment Loans, net of allowance for impairment Impairment to loans, before allowance for impairment, % Legal entities: 22,054,793-3,964,198 18,090, Loans with indication of impairment identified on an individual basis 11,505,484-3,199,498 8,305, Loans with indication of impairment identified on a collective basis 10,549, ,700 9,784, Individuals: 24,601,059-9,744,298 14,856, Loans with indication of impairment identified on an individual basis 1,950,809-1,561, , Loans with indication of impairment identified on a collective basis 22,650,250-8,182,614 14,467, Total 46,655,852-13,708,496 32,947, Aging of loans and receivables from customers that were past due as at 31 December 2015 was as follows: Loans before allowance for impairment Allowance for impairment Loans, net of allowance for impairment Impairment to loans, before allowance for impairment, % Legal entities: 25,117,982-5,634,736 19,483, Not past due 11,837,038-1,337,406 10,499, Overdue less than 30 days 888, , , Overdue days 1,269, ,706 1,082, Overdue days 1,562, ,837 1,316, Overdue more than 360 days 9,560,045-3,743,199 5,816, Individuals: 30,968,904-14,048,342 16,920, Not past due 3,701, ,392 3,389, Overdue less than 30 days 174,157-42, , Overdue days 485, , , Overdue days 745, , , Overdue more than 360 days 25,861,776-13,308,560 12,553, Total 56,086,886-19,683,078 36,403, Aging of loans and receivables from customers that were past due as at 31 December 2014 was as follows: Loans before allowance for impairment Allowance for impairment Loans, net of allowance for impairment Impairment to loans, before allowance for impairment, % Legal entities: 22,054,793-3,964,198 18,090, Not past due 11,966, ,961 11,432, Overdue less than 30 days 498,899-26, , Overdue days 2,134, ,196 1,947, Overdue days 4,867,012-1,477,879 3,389, Overdue more than 360 days 2,587,295-1,738, , Individuals: 24,601,059-9,744,298 14,856, Not past due 5,223,372-59,808 5,163, Overdue less than 30 days 245,082-30, , Overdue days 314,345-61, , Overdue days 2,117, ,274 1,468, Overdue more than 360 days 16,700,526-8,942,910 7,757,

34 Total 46,655,852-13,708,496 32,947, Included in loans and receivables from customers were amounts due under finance leases that were presented as follows: 31 December December 2014 Minimum lease payments Present value of minimum lease payments Minimum lease payments Present value of minimum lease payments Up to 1 year 70,149 68,156 32,285 28,596 From 1 to 5 years 493, , , ,833 Over 5 years 324, ,189 7,533 6,024 Unearned finance income under finance leases -262, ,753 - Net investments in finance leases 625, , , ,453 Assignment of loans During 2015 the Group entered into agreements on assignment of loans with the carrying value of UAH 241,799 thousand to third parties. Right of claim under those loans is transferred from the Group to third parties at the moment of payment by third parties of the price of the assigned right of claim in full. The Group continues to reflect as loans and receivables from customers the loans assigned, since, until the date of full settlement by third parties, the Group has not transferred all significant risks and rewards related to those loans. Partially received cash from third parties under the loan assignment agreements are included in other liabilities (Note (14)). Collateral Amounts of loans and receivables from customers, before allowance for impairment losses, by types of collateral as at 31 December 2015 were as follows: Legal entities Individuals Total Loans secured by cash 515,310 1, ,831 Loans secured by bank guarantees 307, ,385 Loans secured by properties and property rights thereto 9,470,951 14,929,843 24,400,794 Loans secured by equipment and other movable property, guarantees of individuals and legal entities 13,149,524 7,181,179 20,330,703 Loans secured by securities 83,470 1,074 84,544 Unsecured loans 1,591,342 8,855,287 10,446,629 Loans and receivables from customers, before allowance for impairment 25,117,982 30,968,904 56,086,886 Amounts of loans and receivables from customers, before allowance for impairment losses, by types of collateral as at 31 December 2014 were as follows: Legal entities Individuals Total Loans secured by cash 932,830 13, ,740 Loans secured by bank guarantees 53,935-53,935 Loans secured by properties and property rights thereto 9,410,932 14,902,018 24,312,950 Loans secured by equipment and other movable property, guarantees of individuals and legal entities 10,547,190 3,475,634 14,022,824 Loans secured by securities 27, ,240 Unsecured loans 1,081,968 6,209,195 7,291,163 Loans and receivables from customers, before allowance for impairment 22,054,793 24,601,059 46,655,852 Amounts in the tables above represent loans secured by a respective type of collateral, but not the fair value of the collateral itself. Although collateral can be an important mitigation factor of credit risk, it is the Group s policy to lend on the basis of the customer s capacity to repay, rather than rely primarily on the value of collateral offered. The Group performs a detailed estimation of collateral at the moment of lending and subsequently monitors changes in its value for the 34

35 loans secured by mortgage of residential and commercial properties or construction items on different stages of completion. If indication for loan impairment exists, the Group performs an individual assessment of collateral. Provisions for transactions secured by collateral are estimated with reference to cash flows that might be received as a result of repossession, less any costs required to obtain and sell the collateral, irrespective of the fact whether it is probable to repossess it. Costs to sell the collateral are determined as the amount that might be received from the sale of the collateral based on its market value, period of the collateral, and analysis of historical data on recoveries under similar collaterals. As at 31 December 2015, estimated difference between the Group s actual losses on impairment of loans with individual indication of impairment identified and impairment losses on those loans that would be incurred if they were provided unsecured amounted to UAH 3,173,490 thousand (31 December 2014: UAH 2,285,069 thousand. As at 31 December 2015, estimated difference between the Group s actual losses on impairment of loans with no individual indication of impairment identified and impairment losses on those loans that would be incurred if they were provided unsecured amounted to UAH 12,141,859 thousand (31 December 2014: UAH 8,024,184 thousand). During the year ended 31 December 2015, the Group repossessed collateral for the amount of UAH 861,377 thousand (31 December 2014: UAH 507,883 thousand) on loans and receivables from customers. The carrying value of the collateral repossessed by the Group as at 31 December 2015 amounted to UAH 2,905,454 thousand (31 December 2014: UAH 2,520,350 thousand) The collateral repossessed by the Group as at 31 December 2015 was as follows: Investment property Property and equipment Other assets Buildings 1,156, ,586 1,999,910 Land 18, , ,998 Electronic systems and equipment - 112,609 8, ,189 Other ,357 Total 1,174, ,299 1,617,498 2,905,454 The collateral repossessed by the Group as at 31 December 2014 was as follows: Investment property Property and equipment Other assets Total Buildings 1,035, ,374 1,611,033 Land 71, , ,322 Electronic systems and equipment - 113, ,892 Other ,103 Total 1,107, ,443 1,298,491 2,520,350 As at 31 December 2015, loans and receivables from customers granted to top ten borrowers (or groups of borrowers) amounted to UAH 11,042,765 thousand, which was 19.7% of total amount of loans and receivables from customers, before allowance for impairment losses (31 December 2014: UAH 9,317,086 thousand or 20.0%) As at 31 December 2015, loans and receivables from customers granted to top twenty borrowers (or groups of borrowers) amounted to UAH 15,035,209 thousand, which was 26.6% of total amount of loans and receivables from customers, before allowance for impairment losses (31 December 2014: 12,493,831 thousand or 26.8%). As at 31 December 2015 and 2014, loans and receivables from customers attributable to Crimea, Donetsk and Luhansk regions were as follows: 31 December December 2014 Crimea: 1,443,722 1,010,773 Receivables, before allowance for impairment 3,041,937 2,267,004 Allowance for impairment -1,598,215-1,256,231 Impairment to loans, before allowance for impairment, % Donetsk and Luhansk regions: 5,696,879 4,464,864 Receivables, before allowance for impairment 7,911,597 5,719,393 Allowance for impairment -2,214,718-1,254,529 Impairment to loans, before allowance for impairment, % Total Crimea and Donetsk and Luhansk regions: 7,140,601 5,475,637 Receivables, before allowance for impairment 10,953,534 7,986,397 Allowance for impairment -3,812,933-2,510,760 Impairment to loans, before allowance for impairment, % Total 35

36 As at 31 December 2015, loans and receivables from customers, before allowance for impairment, attributable to Crimea, Donetsk and Luhansk regions amounted to UAH 10,953,534 thousand, which was 19.5% of total amount of loans and receivables from customers, before allowance for impairment (31 December 2014: UAH 7,986,397 thousand, or 17.1% of total amount of loans and receivables from customers, before allowance for impairment). Maximum credit risk exposure on loans and receivables from customers attributable to Crimea, Donetsk and Luhansk regions as at 31 December 2015 amounted to UAH 7,140,601 thousand (31 December 2014: UAH 5,475,637 thousand). (7) Securities available for sale 31 December December 2014 Listed Non listed Listed Non listed Debt securities - - 1,471,504 - Shares Total, before allowance for impairment ,471, Allowance for impairment Total, net of allowance for impairment ,471, As at 31 December 2015, government bonds of Ukraine attributable to debt securities available for sale were repaid in full (31 December 2014: UAH 1,471,504 thousand). As at 31 December 2014, included in government bonds of Ukraine were indexed value bonds with the fair value of host contract in the amount of UAH 1,123,415 thousand. The fair value of an embedded derivative on those bonds that was separated and presented as a financial asset at fair value through profit or loss (Note (5)) amounted to UAH 1,230,674 thousand. Ratings of internationally acknowledged rating agencies (Fitch, Moody s, Standard&Poor s) in respect of issuers of available for sale securities in the Bank s portfolio were as follows: 31 December December 2014 Lower than В - 1,471,504 Not rated Total 60 1,471,609 As at 31 December 2014, non-rated government bonds of Ukraine were included to lower than В category based on the sovereign rating of Ukraine. Long-term sovereign rating of Ukraine in foreign and national currencies, according to the classification of Standard&Poor s, as at 31 December 2014, was determined to be at the level of CCC- and ССС+ with a negative forecast, respectively. (8) Investment property 31 December December 2014 Land 18,333 20,349 Properties 1,178,225 1,108,565 Total 1,196,558 1,128,914 For the year ended 31 December CHANGES Net book value at the beginning of the period 1,128,914 1,540,208 Repossessed collateral 399,670 66,823 Transfers from other assets 165, ,395 Transfers from property and equipment to intangible assets 2,446 - Depreciation charges -29,001-32,273 Disposals -324, ,640 Transfers to other assets -146, ,599 Net book value at the end of the period 1,196,558 1,128,914 Cost 1,257,620 1,170,914 36

37 Accumulated depreciation -61,062-42,000 As at 31 December 2015, included in investment property were items for the total amount of UAH 315,233 thousand (31 December 2014: UAH 316,847 thousand) leased by the Group under operating leases containing an embedded derivative that the counterparty could acquire a title of the property at the end of the lease at a fixed price before expiration of the lease agreement. As at 31 December 2015, included in other financial liabilities at fair value through profit or loss was the value of the embedded derivative amounting to UAH 2,427 thousand (31 December 2014: UAH 3,624 thousand). Included in other operating income under operating leases was income on the investment property leased for the year ended 31 December 2015 for the total amount of UAH 171,210 thousand (for the year ended 31 December 2014: UAH 116,721 thousand) (Note (23)). The fair value of investment property as at 31 December 2015 amounted to UAH 1,903,713 thousand (31 December 2014: UAH 1,331,209 thousand). The fair value of investment property of the Group as at 31 December 2015 and 2014 was derived from the valuation held as at 1 December 2015 and The fair value was determined by applying the method of market comparable sales reflecting prices of recent transactions with similar property items and the income method. In estimating the fair value of property items, the best use was considered to be their current use. During the year, no changes occurred relating to valuation techniques. (9) Deferred tax assets The Group measures its income tax base don the data tax accounting maintained and prepared in accordance with the requirements of the tax legislation of Ukraine. Starting from 1 January 2015, the Group s profits before tax are calculated by adjusting the financial result before income tax as determined in the consolidated financial statements in accordance with International Financial Reporting standards by the differences defined by the provisions of the Tax Code of Ukraine. Deferred tax assets recognized referred to the following: 31 December December 2014 Loans and receivables from customers and due from other banks 326, ,739 Other financial assets at fair value through profit or loss ,492 Securities available for sale 3,262 29,995 Property and equipment and intangible assets -65,822-47,826 Other assets and liabilities 33,205 41,873 Due to banks and customers Tax losses carried forward 641, ,695 Deferred tax assets unrecognized -735,649-70,091 Total 203, ,745 Tax losses are recognized based on management s determination that it is probable that sufficient taxable income will be available against which the unused tax losses can be utilized, and no changes in tax laws will occur that could adversely affect the Group s ability to claim for such assignment to future periods. The life of tax losses is not limited in accordance with the effective tax legislation. However, in accordance with amendments to the Tax Code of Ukraine that came into effect in 2012, accumulated tax losses of the Group as at 31 December 2011 may be used with certain limitations. Annual limit for the use of those tax losses during the period from 2012 to 2015 was 25% of their balance as at 31 December Effective from 2016, any unused tax losses and tax losses arising during the reporting period may be used in full, provided there is sufficient available taxable profit. Tax effect on components of other comprehensive income was as follows: For the year ended 31 December Gain and loss (-) on disposal of securities available for sale Gain on revaluation of Before income tax Tax expense After income tax Before income tax Tax expense After income tax 65,204-11,725 53,479-15,281 6,733-8, ,843-30, , ,826-54, ,137 37

38 property Total 232,047-41, , ,545-47, ,589 38

39 Movements in recognized deferred tax assets and liabilities for the years ended 31 December 2014 and 2015 related to: Loans and receivables from customers and due from other banks Other financial assets at fair value through profit or loss Securities available for sale Property and equipment and intangible assets Other assets and liabilities Due to banks and customers Tax losses carried forward Deferred tax assets unrecognized 1 January 2014 Other comprehensive income and loss (-) Profit or loss 31 December 2014 Other comprehensive income and loss (-) Profit or loss 31 December , , , , ,932-16, , , ,492-27,420 6,733-4,158 29,995-11,725-15,008 3,262 1,611-54,689 5,252-47,826-30,038 12,042-65,822 33,208-8,665 41, ,668 33, , , , , , ,091-70, , ,649 Total -83,534-47, , ,745-41, , ,820 (10) Property and equipment and intangible assets Property and equipment used in primary activities: 31 December 31 December Land Buildings 2,550,305 2,459,675 Office furniture and fixtures 24,449 30,516 Electronic systems and equipment 189, ,111 Other 120, ,056 Total 2,884,938 2,845,557 Movements in property and equipment for the year ended 31 December 2015 were as follows: CHANGES Land Buildings Office furniture and fixtures Net book value at the beginning of 199 2,459,67 Electronic Other Total systems and equipment 30, , ,056 2,845,557 the period 5 Increase ,261 4,279 34,448 31, ,691 Additions and repossessions ,279 34,448 31,663 70,615 Capitalized expenditure on improvements Revaluation increase recognized in other comprehensive income Revaluation increase recognized in profit or loss - 10, , , ,407-4, ,113 39

40 CHANGES Land Buildings Office furniture and fixtures Electronic systems and equipment Decrease ,631-10,346-65,247-46, ,310 Disposals - -4,958-2,543-12,472-8,977-28,950 Depreciation charges - -79,687-7,803-52,775-37, ,374 Revaluation decrease recognized in other comprehensive income - -11, ,564 Revaluation decrease recognized in profit or loss - -3, ,976 Transfers to investment property - -2, ,446 Net book value at the end of the 2,550, period 5 24, , ,633 2,884,938 Cost 239 2,591,500 93, , ,254 3,548,880 Accumulated depreciation - -41,195-69, , , ,942 Movements in property and equipment for the year ended 31 December 2014 were as follows: CHANGES Land Buildings Office furniture and fixtures Electronic systems and equipment Other Total Net book value at the beginning of the period 53 2,367,645 36, , ,051 2,836,434 Increase ,423 5,362 23,384 21, ,165 Additions and repossessions - 1,837 5,362 23,102 21,779 52,080 Capitalized expenditure on improvements - 3, ,554 Revaluation increase recognized in other comprehensive income , ,528 Revaluation increase recognized in profit or loss - 3, ,003 Decrease ,393-10,993-73,811-48, ,042 Disposals ,718-1,699-16,398-11, ,623 Depreciation charges - -69,542-9,294-57,413-37, ,286 Revaluation decrease recognized in other comprehensive income - -8, ,702 Revaluation decrease recognized in profit or loss - -4, ,431 Net book value at the end of the period 199 2,459,675 30, , ,056 2,845,557 Cost 199 2,825,981 97, , ,947 3,778,044 Accumulated depreciation ,306-66, , , ,487 Other During the year ended 31 December 2015, the Group repossessed the collateral to property and equipment in the amount of UAH 29,092 thousand (for the year ended 31 December 2014: UAH 21,017 thousand). Buildings of the Group are carried at revalued amounts which are their fair values at the revaluation date, less any subsequently accumulated depreciation and subsequently accumulated impairment losses. As at 31 December 2015 and 2014, the Bank reassessed the buildings included in property and equipment based on the valuation held as at 1 December 2015 and 2014, respectively. The fair values of buildings were determined based on the comparison method that reflected prices of recent transactions to similar property and income approach. In assessing the fair values of properties, the best use is considered to be their current use. During the year, no changes occurred in the valuation technique. Main assumptions relate to conditions, quality and location of the buildings used for comparison. Total 40

41 Intangible assets: 31 December December 2014 Software and licenses 936, ,617 Copyright and other intangible assets Total 936, ,084 Movements in intangible assets for the years ended 31 December 2015 and 2014 were as follows: For the year ended 31 December CHANGES Net book value at the beginning of the year 867, ,815 Additions 230, ,375 Disposals Amortization charges -160, ,825 Net book value at the end of the year 936, ,084 Cost 1,373,967 1,169,412 Accumulated amortization -437, ,328 As at 31 December 2015, intangible assets included an integrated comprehensive banking system FlexCube with the carrying amount of UAH 423,415 thousand (31 December 2014: UAH 428,831 thousand). The FlexCube system has been developed to integrate fully all operating processes of the Group and represents a corporate standard of UniCredit Group. Its total amortization period is 10 years. (11) Other assets 31 December December 2014 Other non-financial assets: 1,932,721 1,638,066 Precious metals 5,903 4,402 Materials 7,568 7,223 Taxes, other than current tax assets 174, ,200 Deferred expense 103,598 97,008 Prepayments 57,836 59,693 Leasehold improvements 3,574 4,591 Repossessed collateral and assets held for sale 1,631,027 1,337,045 Advances to employees 2,786 2,606 Allowance for impairment -53,585-44,702 Other financial assets: 235, ,017 Income accrued 126,569 92,875 Receivable on transactions with banks and customers 215, ,367 Allowance for impairment of financial assets -106,078-80,960 Receivables from customers on apartments sold under instalments - 17,735 Total 2,168,409 1,860,083 During the year ended 31 December 2015, collateral in the amount of UAH 165,708 thousand (for the year ended 31 December 2014: UAH 134,395 thousand) was transferred to investment property (Note (8)). (12) Due to banks 31 December December 2014 Current accounts of other banks 344, ,079 Term deposits of other banks 2,525,955 3,214,617 Borrowings from banks 7,854,807 13,216,476 Total 10,724,897 16,650,172 As at 31 December 2015, included in term deposits of other banks was USD-denominated deposit from Bank Pekao S.A. in the amount of UAH 2,472,068 thousand with floating interest rate of 1 month USD LIBOR rate plus 4.23% p.a. maturing in April 2017 (31 December 2014: USD-denominated deposits from Bank Pekao S.A. in the amount of UAH 41

42 3,201,017 thousand with floating interest rates ranging from 1 month USD LIBOR rate plus 3.12% p.a. to 1 month USD LIBOR rate plus 4.23% p.a. and maturing from April 2014 to January 2016). As at 31 December 2015, included in borrowings from other banks was a USD-denominated loan aimed at project funding of small and medium business received from the European Investment Bank in the amount of UAH 913,259 thousand at the floating interest rate of 3 month USD LIBOR rate plus 0.89% p.a. with the repayment schedule in equal instalments every three months starting from December 2016 to 2023 (31 December 2014: UAH 608,237 thousand). As at 31 December 2015, due to banks placed by entities under common control of UniCredit Group amounted to UAH 9,806,372 thousand, or 91.4% of the total amount of due to banks (31 December 2014: UAH 15,994,991 thousand, or 96.1%). (13) Customer accounts 31 December December 2014 Current accounts 11,614,760 10,114,071 Term deposits 15,147,313 13,235,297 Total 26,762,073 23,349,368 As at 31 December 2015, term deposits of top ten customers (or groups of customers) amounted to UAH 2,912,862 thousand or 19.2% of the total term deposits (31 December 2014: UAH 2,048,110 thousand or 15.5%). As at 31 December 2015, term deposits of top twenty customers (or groups of customers) amounted to UAH 3,747,932 thousand or 24.7% of the total term deposits (31 December 2014: UAH 2,671,888 thousand or 20.2%). During the year ended 31 December 2015, the Group placed registered deposit certificates among its individual customers for the periods of 6 months and 1 year. As at 31 December 2015, carrying value of the deposit certificates placed amounted to UAH 595,187 thousand (31 December 2014: nil). Weighted average rate of return on the certificate placed amounted to 20.1% in UAH, 6.2% in USD, and 5.1% in EUR. (14) Other liabilities 31 December December 2014 Other financial liabilities: 367, ,747 Transit accounts 19,197 5,082 Loans assigned but not derecognized 82,131 - Preference shares Other expenses accrued 30,503 23,373 Accounts payable for acquisition of assets and services 165, ,292 Liabilities under finance guarantees issued 62,830 4,850 Provisions for other liabilities of the Group 7,368 6,649 Other liabilities: 124,003 84,710 Liabilities to employees 68,681 46,492 Deferred income 28,526 16,907 Payment to the Individual Deposit Guarantee Fund 26,796 21,311 Total 491, ,457 (15) Subordinated debt On 27 July 2009, the Group entered into an agreement with The European Bank for Reconstruction and Development (EBRD) on subordinated debt (as subsequently amended) according to which EBRD agreed to grant a USD-denominated loan to the Group repayable in one singe instalment on 29 July As at 31 December 2015, the carrying amount of the subordinated debt was UAH 2,423,425 thousand (31 December 2014: UAH 1,589,919 thousand), including interest accrued in the amount of UAH 31,084 thousand (31 December 2014: UAH 19,455 thousand). As at 31 December 2015, interest rate under the agreement with EBRD on subordinated debt was 6 month USD LIBOR plus 2.5% p.a. (31 December 2014: 6 month USD LIBOR plus 2.5% p.a.). In 2013, the shareholder, UniCredit Bank Austria AG, provided an unconditional guarantee to EBRD regarding repayment of the full amount of the Bank s subordinated debt. In the event of bankruptcy or liquidation of the Group, repayment of this debt is subordinate to the repayments of the Group s liabilities to all other creditors. The Group is obligated to comply with all covenants under all financial liabilities established by the agreement on subordinated debt. 42

43 As at 31 December 2015 and 2014, the Group did not comply with some covenants established by the subordinated loan agreement with EBRD. Non-compliance with such covenants does not lead to the requirement of immediate repayment of the subordinated debt. (16) Equity Share capital: 31 December December 2014 Nominal value of ordinary shares 7,739,032 2,467,521 Effect of hyperinflation 127, ,150 Total 7,866,182 2,594,671 The nominal share capital was represented as follows:, other than the number of shares 31 December December 2014 Number of shares Amount Number of shares Amount Authorized, issued and paid shares: Ordinary shares 77,390,328,095 7,739,032 24,675,214,419 2,467,521 Preference shares 5,013, ,013, Total 7,739,533 2,468,022 Nominal value of ordinary and preference shares was UAH 0.1 per share as at 31 December 2015 and Preference shares were classified as other liabilities (Note (14)). Holders of ordinary shares have equal voting rights, as well as equal rights to dividend distribution and capital return. Preference shares do not have voting rights, but are vested with preference rights to asset distribution in the event of liquidation or bankruptcy. Minimum guaranteed dividends under preference shares amount to 5.0% p.a of the nominal value of the shares. Dividends in such an amount were declared in In 2015, the Group placed 52,715,113,676 ordinary shares of the total nominal value of UAH 5,271,511 thousand. Sales amount was UAH 5,271,511 thousand, of which UAH 5,271,510 thousand was contributed by UniCredit Bank Austria AG through the conversion of the Group s debt. Other additional capital. During the year ended 31 December 2012, the Group sold a portfolio of impaired loans with the carrying amount of UAH 1,013,744 thousand, the cost of which, before allowance for impairment losses, was UAH 2,849,291 thousand and the allowance for impairment amounted to UAH 1,835,547 thousand, to its parent, UniCredit Bank Austria AG, for the consideration of UAH 2,504,847 thousand. The result from sale of this portfolio in the amount of UAH 1,177,971 thousand, net of the deferred tax effect of UAH 313,132 thousand, was reflected as other additional capital and share premium reserve. During the year ended 31 December 2015, the Bank entered with its parent, UniCredit Bank Austria AG, into an agreement on debt forgiveness under the borrowings in the amount of UAH 5,372,511 thousand. This transaction represents an operation with owners acting in accordance with their powers of owners and, correspondingly, the result on the transactions was included in other additional capital. Reserves and other funds. In accordance with the Ukrainian legislation, the Group may distribute all profits as dividends or transfer them to reserves and other funds as specified in the Charter. Subsequent use of the amounts transferred to reserves may be legally restricted; amounts transferred to reserves typically must be used for the purpose designated when the transfer is made. In addition, the distributable reserves are limited to the balance of accumulated reserves determined in accordance with legislative and regulatory requirements. Revaluation reserves include the reserves for revaluation of property and equipment and securities available for sale. Property and equipment revaluation reserves. The revaluation reserve relates to revaluation of property and equipment and is not available for distribution to owners. Reserves for revaluation of securities available for sale. The reserve for revaluation of securities available for sale represents a cumulative net change in the fair value of available for sale financial assets in the Bank s portfolio. Provision for merger. As a result of merger of PJSC UKRSOTSBANK and PJSC UNICREDIT BANK on 2 December 2013, the Bank issued 6,535,076,700 ordinary shares. On 14 January 2014, the issue of ordinary shares by PJSC UKRSOTSBANK was registered with the National Commission for Securities and Stock Market. In the period from 21 January 2014 to 7 February 2014, 653,507,670 ordinary shares of PJSC UNICREDIT BANK were exchanged for 6,535,076,700 ordinary shares of PJSC UKRSOTSBANK. The difference between the carrying value of PJSC UKRSOTSBANK s share capital, including the effect of hyperinflation, and its nominal value as at 31 December 2015 and 2014 is included in provision for merger. 43

44 Losses per share: For the year ended 31 December Weighted average number of shares basic and diluted (in thousands) 44,028,140 18,457,355 Loss for the year -3,108,048-3,367,171 Basic and diluted losses per ordinary share (in Hryvnias) During the reporting period, no financial instruments with a dilutive effect were outstanding. Therefore, basic losses per share equal diluted losses per share. Losses per share are calculated on the basis of the average number of shares outstanding. (17) Interest income For the year ended 31 December Cash and cash equivalents 229,341 66,371 Securities held for trading - 32,134 Securities available for sale 95, ,425 Due from banks 4,917 4,049 Loans and receivables from customers 3,129,659 3,183,706 Total 3,459,141 3,577,685 Included in interest income for the year ended 31 December 2015 was interest income accrued on financial assets with indication of impairment identified on an individual basis and financial assets with no indication of impairment identified on an individual basis that were past due for more than 90 days in the amount of UAH 961,293 thousand (for the year ended 31 December 2014: UAH 844,851 thousand). Included in interest income for the year ended 31 December 2015 was interest income accrued on financial assets with no indication of impairment identified on an individual basis that were past due for less than 90 days in the amount of UAH 2,168,366 thousand (for the year ended 31 December 2014: UAH 2,338,855 thousand). Total interest income on the assets not at fair value for the year ended 31 December 2015 amounted to UAH 3,363,917 thousand (for the year ended 31 December 2014: UAH 3,254,126 thousand). (18) Interest expense For the year ended 31 December Due to banks -504, ,456 Customer accounts -1,745,033-1,642,186 Debt securities issued by the Group -6,734-9,504 Subordinated debt -66,102-36,114 Other Total -2,322,707-2,248,285 (19) Fee and commission income For the year ended 31 December Guarantees issued 34,020 32,510 Management, brokerage, and consulting services: 82,374 69,160 - foreign exchange operations 74,269 65,049 - administration of securities 3,866 2,679 - consulting services 4,239 1,432 Servicing debit and credit cards 466, ,564 Servicing payments 366, ,587 Factoring transactions 4,880 5,021 Other services: 79, ,317 - loans to customers 7,286 42,137 - agent fees 44,276 66,405 - rental of safe and deposit boxes 16,076 11,949 44

45 cash transfers 11,735 9,456 - accounts with other banks Total 1,034, ,159 (20) Fee and commission expense For the year ended 31 December Guarantees received -85,619-52,756 Servicing payments -236, ,387 Agent fees ,599 Other services Total -322, ,610 (21) Result on transactions with other financial instruments at fair value through profit or loss For the year ended 31 December Result on transactions with: other financial assets at fair value through profit or loss 1,061,750 1,426,059 other financial liabilities at fair value through profit or loss -123,977-31,516 Total result on transactions with other financial instruments at fair 937,773 1,394,543 value through profit or loss Result on transactions with other financial instruments at fair value through profit or loss: realized, net 918, ,408 change in fair value, net 19,047 1,066,135 Total result on transactions with other financial instruments at fair value through profit or loss 937,773 1,394,543 (22) Charges to allowance for impairment of loans and receivables from customers and other financial liabilities For the year ended 31 December Losses on impairment of loans and receivables from customers -2,184,101-4,254,876 Losses (-) and gains on impairment of other financial liabilities -50,491 1,876 Total -2,234,592-4,253,000 Movements in allowances for impairment during the year ended 31 December 2015 and 2014 were as follows: Loans and Other financial Total receivables from customers liabilities As at 1 January ,618,118-3,169-7,621,287 Impairment losses -4,254,876 1,876-4,253,000 Translation differences -5,008,678-2,992-5,011,670 Bad debt write-off 2,892,560-2,892,560 Effect of loans disposed 280, ,616 As at 31 December ,708,496-4,285-13,712,781 As at 1 January ,708,496-4,285-13,712,781 Impairment losses -2,184,101-50,491-2,234,592 Translation differences -5,982,267-7,435-5,989,702 Bad debt write-off 1,378,269-1,378,269 45

46 Loans and receivables from customers Other financial liabilities Effect of loans disposed 813, ,517 As at 31 December ,683,078-62,211-19,745,289 Impairment losses also include the time-value interest component of impaired loans in the amount of UAH 1,526,188 thousand (for the year ended 31 December 2014: UAH 616,005 thousand). Details of impairment losses on loans and receivables from customers are provided in Note (6). (23) Other operating income Total For the year ended 31 December Recovery of costs 13,240 11,817 Other income: 270, ,185 Operating lease income (rentals) 171, ,721 Income on loans written off against the allowance 55,039 90,853 Gain on disposal of property and equipment and intangible assets 18,559 43,184 Other income on card operations 5,642 20,591 Gain on early repayment of deposits 15,298 8,946 Recovery of provision for constructive liabilities Gain on sale of inventories 3,586 2,490 Fines, penalties received 917 5,074 Total other operating income 283, ,002 (24) Administrative and operating expenses For the year ended 31 December Indirect taxes and duties -42,666-28,883 Administrative expenses: -1,295, ,550 Advertising, marketing, and communications -19,373-14,612 Non-performing loan management -193, ,692 Staff related costs -19,732-15,665 Information communication technology expenses -420, ,046 Consulting and professional services -116,178-35,634 Utilities and property maintenance -92,167-76,330 Operating leases -67,505-66,759 Depreciation on property and equipment and investment property -206, ,559 Amortization charges on intangible assets -160, ,825 Result on property and equipment revaluation 137-1,428 Other administrative expenses: -211, ,930 - surveillance and security services -60,616-69,465 - insurance -10,902-7,894 - mail services -3,161-3,946 - materials and stationery -27,296-19,214 - transportation -1,067-1,440 - membership fees -105,349-79,676 - other -2,762-2,295 Other operating expenses: -31, ,594 - other taxes accrued -6,238-76,179 - write-off shortages of cash and valuables in outlets -1,372-39,113 - depreciation of leased property improvements -2,263-5,936 - card operation costs -4,106-4,673 - other -17,751-24,693 Staff costs: -597, ,158 46

47 payroll -378, ,352 - charges to social insurance funds -116, ,663 - payments to external pension funds other -102,600-60,215 Total administrative and other operating expenses -2,178,004-1,941,115 (25) Income tax expense (-)/ benefit Starting from 1 January 2015, amendments to the tax legislation came into effect which significantly change general rules to assessment of the taxation item, as well as modify the taxation procedure regarding provisioning and settlement of uncollectible debts. Reconciliation of effective tax rate For the year ended 31 December Current income tax expense (-) Changes in deferred taxes -161, ,235 Current income tax for the prior period (-) -4,423 - Income tax expense (-)/benefit -165, ,603 For the year ended 31 December Loss (-) before income tax -2,942,401-3,904,774 Statutory tax rate 18% 18% Estimated tax benefit at the statutory tax rate 529, ,859 Tax effect of change in the unrecognized deferred tax asset -665,558-70,091 Effect of changes in tax rates - -1,642 Tax effect of other permanent differences -25,298-93,523 Current income tax for the prior period (-) -4,423 - Income tax expense (-)/benefit -165, ,603 Effective tax rate 5.63% % (26) Guarantees and commitments issued 31 December December 2014 Guarantees issued to: 320, ,163 - banks 3,277 17,479 - customers 317, ,684 Letters of credit issued to customers 457, ,454 Allowance for impairment -62,211-4,285 Total 715, ,332 Movements in allowance for impairment for the years ended 31 December 2015 and 2014 are disclosed in Note (22). As at 31 December 2015, guarantees were secured by a collateral of deposits in the amount of UAH 68,850 thousand (31 December 2014: UAH 34,011 thousand). As at 31 December 2015, letters of credit were secured by a collateral of deposits in the amount of UAH 18,086 thousand (31 December 2014: nil). As at 31 December 2015, commitments in the amount of UAH 620,375 thousand were liabilities to ten customers (31 December 2014: UAH 595,051 thousand). As at 31 December 2015 and 2014, the Group had no unused non-cancellable lending commitments. 47

48 Capital construction and other commitments In December 2011, the Group entered into an agreement with IBM for the period of ten years on outsourcing of IT services. In accordance with terms and conditions of this agreement, IBM shall ensure support and maintenance of several IT systems of the Group (including equipment, software, staff and costs). As at 31 December 2015, total commitments on purchases under this agreement amounted to UAH 333,114 thousand (31 December 2014: UAH 627,208 thousand), with the commitment relating solely for the purchase of intangible assets. 31 December December 2014 Future payments under the agreement with IBM Within twelve months 59,068 93,915 From one to five years 179, ,549 Over five years 94, ,744 Total 333, ,208 Operating lease obligations 31 December December 2014 Future minimum lease payments Within twelve months 9,688 7,658 From one to five years 37,807 28,840 Over five years 140, ,756 Total 188, ,254 Taxation. Starting from 1 January 2015, the tax reform has been partially implemented in Ukraine. In particular, it significantly changed general rules for assessment of an item of taxation, as well as terms and procedures for submission of tax returns. In accordance with the Tax Code requirements, the item of taxation shall be determined based on the profit before income tax (upon certain adjustments) as defined in the taxpayer s financial statements submitted to the tax authorities together with the tax returns. However, the Tax Code has not regulated a rather broad range of transactions arising from the need to reflect in tax reports intermediary balances accounted for in the Group s consolidated financial statements as at 31 December Such an uncertainty may refer to estimation and reflection of financial instruments in accounting, allowances for impairment losses, and pricing on the basis of arm s length transactions and operations with shareholders, which, in turn, may result in assessment of additional tax liabilities, fines, and penalties, if tax authorities challenge certain interpretations based on the Group s management s estimates. The Group s management believes it has accrued all effective taxes based on its interpretation of the tax legislation. Litigation. Claims to the Group mainly relate to attempts to invalidate loan, mortgage, and warranty agreements. Management believes that no material losses will be incurred as a result of resolution of these claims and, accordingly, no provision has been made in these consolidated financial statements. (27) Fair value measurement The following table analyzes financial and non-financial assets and liabilities which are measured at fair value upon initial recognition on a recurring and non-recurring basis. Financial and non-financial assets and liabilities are grouped into categories depending on the level in fair value hierarchy based on the inputs. Assets: Other financial assets at fair value through profit or loss 31 December 2015 Level 1 Level 2 Level 3 Total - 4,250-4,250 Securities available for sale Land and buildings - - 2,550,544 2,550,544 Liabilities: Other financial liabilities at fair value through profit or loss - 4,934-4,934 48

49 Assets: Other financial assets at fair value through profit or loss 31 December 2014 Level 1 Level 2 Level 3 Total - 1,232,345-1,232,345 Securities available for sale - debt securities - 1,471,504-1,471,504 - shares Land and buildings - - 2,459,874 2,459,874 Liabilities: Other financial liabilities at fair value through profit or loss As at 31 December 2015 and 2014, no transfers occurred between Levels 1 and 2. 3,650 3,650 The following table provides information about how the fair values of these financial assets and financial liabilities were determined (in particular, the valuation techniques and inputs used): Assets/liabilities Securities available for sale Other financial assets and liabilities at fair value through profit or loss Land and buildings Level of fair value hierarchy Valuation techniques and key inputs Discounted cash flows. Future cash flows are estimated based on the inputs that are observable, either directly or indirectly, and the estimates use one or more observable quoted prices for orderly transactions in the markets that are not considered active Discounted cash flows. Future cash flows are estimated based on both observable and unobservable inputs. Unobservable inputs include assumptions regarding future financial performance of the issuer and its risk profile Embedded derivatives on indexed government bonds of Ukraine Fair value is determined based on the modified valuation model of European currency options (the Garman-Kohlhagen formula is a variant on the Black-Scholes option pricing). Observable inputs used are: average weighted exchange rate of UAH against USD in the inter-bank market; yield on ordinary government debt securities; yield on USDdenominated securities assigned with CCC rating; historical volatility of UAH/USD exchange rate Embedded derivatives for a lessee on purchase of a property item Fair value is determined based on the valuation model of American options based on the quadratic approximation. The option price is actually the cost of European option adjusted for the early exercise premium. European option is measured on the basis of the Black- Scholes-Merton formula. Observable inputs used are: yield on USDdenominated securities assigned with CCC rating, current cost of property which is an underlying asset for option, embedded volatility of a property item which is an underlying asset for option, with reference to the type of property (commercial, trade, and other) and regional location determined as historical volatility based on information about USD-denominated property prices for, at least, three recent years provided by independent information agencies Forward agreements on currency purchases Fair value is determined by discounting the estimated future price differences realized. Observable inputs used are: quoted spot and swap points for relevant currency pairs; minimum alternative yield on market transactions The Bank engages independent appraisers to determine the fair value of its land, buildings, and office premises by using the sales comparison method, and for items for which there are no market analogs, the income method is applied. In the sales comparison method, the prices of market-based sales of comparable property and land plots in the immediate proximity are adjusted with reference to differences in main parameters (such as floor space of the property). The main parameter 49

50 used in this valuation technique is the price per square meter of a property item and land plot Financial instruments not measured at fair value Except for the information stated below in the table, management believes that the carrying amount of financial assets and financial liabilities recognized in the consolidated financial statements approximated their fair values: 31 December December 2014 Loans and receivables from customers Customer accounts Total unrecognized change in unrealized fair value Carrying amount Fair value Unrecognized profit or loss (-) Carrying amount Fair value Unrecognized profit or loss (-) 36,403,808 35,374,792-1,029,016 32,947,356 31,157,059-1,790,297 26,762,073 26,778,169 16,096 23,349,368 23,363,657 14,289-1,012,920-1,776,008 Fair value of foreign currency denominated loans to individuals is impracticable to estimate reliably due to the fact that, because of certain regulatory restrictions imposed by the National Bank of Ukraine, the market for those financial instruments during 2015 and 2014 was not available, and it is not possible to obtain sufficient marketable data or apply another valuation technique to such instruments. As at 31 December 2015, the carrying amounts of such loans were UAH 1,919,443 thousand (31 December 2014: UAH 748,005 thousand). Levels of fair value hierarchy for assets and liabilities not measured at fair value The following tables summarize the levels of fair value measurement for assets and liabilities not measured at fair value, but which are disclosed in these consolidated financial statements: As at Level 1 Level 2 Level 3 Total Loans and receivables from 31 December ,455,349 33,455,349 customers 31 December ,409,054 30,409,054 Customer accounts 31 December ,778,169-26,778, December ,363,657-23,363,657 Investment property 31 December ,903,713 1,903, December ,331,209 1,331,209 Fair values of financial liabilities included in Level 2 of fair value hierarchy above were determined in accordance with generally accepted pricing models based on the analysis of discounted cash flows, with a discount rate being the most significant observable input. Fair values of financial liabilities included in Level 3 of fair value hierarchy above were determined in accordance with generally accepted pricing models based on the analysis of discounted cash flows, with a discount rate reflecting the credit risk of counterparties being the most significant observable input. (28) Related party transactions The following table summarizes balances on related party transactions as at 31 December 2015: UniCredit Bank Austria AG Key management personnel Entities under common control Total Assets: Cash and cash equivalents 3,420,194-79,420 3,499,614 Due from banks 33, ,434 Other financial assets at fair value through profit or loss 4, ,250 Loans and receivables from customers Other assets 18, ,383 Total assets 3,476, ,420 3,555,717 50

51 UniCredit Bank Austria AG Key management personnel Entities under common control Liabilities: Due to banks 7,327,287-2,479,085 9,806,372 Customer accounts - 1,783 70,278 72,061 Other liabilities ,080 80,080 Total liabilities 7,327,287 1,783 2,629,443 9,958,513 Guarantees issued - - 3,277 3,277 Guarantees received 496,328-30, ,491 The following table summarizes balances on related party transactions as at 31 December 2014: UniCredit Bank Austria AG Key management personnel Entities under common control Total Assets: Cash and cash equivalents 82,078-32, ,298 Loans and receivables from customers Other assets 51, ,761 Total assets 133, , ,591 Liabilities: Due to banks 12,787,559-3,207,432 15,994,991 Customer accounts - 12,449 66,927 79,376 Other liabilities 18,911-71,066 89,977 Total liabilities 12,806,470 12,449 3,345,425 16,164,344 Guarantees issued ,433 10,433 Guarantees received 99,390-31, ,794 Related party transactions for the year ended 31 December 2015 were as follows: UniCredit Key Entities under Total Bank Austria AG management personnel common control Interest expense -337, , ,035 Fee and commission income Fee and commission expense -80, ,384 Result on transactions with other financial instruments at fair value 28, ,339 through profit or loss Administrative expense staff costs 17,225-10,731-36,321-29,827 Administrative expenses other ,886-73,886 Other operating income - - 2,652 2,652 Related party transactions for the year ended 31 December 2014 were as follows: UniCredit Bank Austria AG Key management personnel Entities under common control Total Interest income Interest expense -387,259-1,480-96, ,542 Fee and commission income Fee and commission expense -44, ,947 Result on transactions with other financial instruments at fair value 27, ,418 through profit or loss Administrative expense staff costs - -16,043-1,992-18,035 Administrative expenses other ,184-30,184 Other operating income - - 1,785 1,785 During the year ended 31 December 2015, the Group placed 52,715,113,676 ordinary shares for the total nominal value of UAH 5,271,511,368. The placement price amounted to UAH 5,271,511,367.57, of which UAH Total 51

52 5,271,510, was contributed by UniCredit Bank Austria AG through the conversion of the Group s debt (Note (16)). In November 2015, PrJSC FERROTRADE INTERNATIONAL which, as at 31 December 2014, owned 35.58% in the Bank s share capital disposed of its shareholding which, at the date of sale, amounted to 11.35% in the Bank s share capital to UniCredit Bank Austria AG (Note (1б)). The Group acquired from UniCredit Bank Austria AG 100% shares (877 thousand units) in PrJSC FERROTRADE INTERNATIONAL at the price of UAH 855 per share. During the year ended 31 December 2015, the Group repurchased a portfolio of impaired loans that had been sold by the Group to UniCredit Bank Austria AG in 2012 (Note (16)) and recognized this portfolio at the fair value which, at the date of recognition, amounted to UAH 292,855 thousand. The remaining contractual maturities of balances with related parties as at 31 December 2015 were as follows: Within 1 month From 1 to 3 months From 3 months to 1 year Over 1 year UniCredit Bank Austria AG: Cash and cash equivalents 3,420, ,420,194 Due from banks ,434-33,434 Other assets - 18, ,383 Due to banks 1,826,353-1,900,834 3,600,100 7,327,287 Other liabilities 496, ,328 Receivables on forward agreements on currency purchases Payables on forward agreements on currency purchases Key management personnel: Loans and receivables from customers Total 315, , , , Customer accounts 77 1, ,783 Entities under common control: Cash and cash equivalents 79, ,420 Due to banks 1, ,477,095 2,479,085 Customer accounts 70, ,278 Other liabilities 53,292 26, ,080 Guarantees issued 3, ,277 Guarantees received 30, ,163 The remaining contractual maturities of balances with related parties as at 31 December 2014 were as follows: Within From 1 to 3 From 3 Over 1 month months months 1 year Total to 1 year UniCredit Bank Austria AG: Cash and cash equivalents 82, ,078 Other assets 8,678-42,452-51,130 Due to banks 176,560-3,322,496 9,288,503 12,787,559 Other liabilities 18, ,911 Guarantees received 99, ,390 Receivables on forward currency purchase agreements , ,599 Payables on forward currency purchase agreements , ,237 52

53 Within 1 month From 1 to 3 months From 3 months to 1 year Over 1 year Key management personnel: Loans and receivables from customers Customer accounts 309 7,525 4,615-12,449 Entities under common control: Cash and cash equivalents 32, ,220 Other assets Due to banks 946-1,579,155 1,627,331 3,207,432 Customer accounts 41,418 13,005 12,504-66,927 Other liabilities 71, ,066 Guarantees issued 10, ,433 Guarantees received 31, ,404 (29) Segment reporting The Group s segment reporting format is based on the internal reporting structure of business segments. The information refers to the services rendered within segments and provided to the Group s management responsible for operating decision making in order to allocate resources and assess the segments activities. For internal management reporting purposes, the Group s operations are divided into the following segments: Corporate business Corporate business covers the segment of large corporates (multinational corporations, public sector) and mediumsized companies. Retail business Retail business covers private customers and small businesses. A legal entity is defined as small business if its consolidated turnover is less than UAH 50,000 thousand per year. Private business Private business covers individuals meeting the list of basic criteria, in particular: high ranking officials of the country; individuals from one of the following ratings (for the recent year): TOP-100 richest people in Ukraine, TOP- 100 best managers of Ukraine, executives/founders of international/multinational companies (current customers of corporate business), individuals with the funds placed on deposit/current accounts in excess of UAH 2,000 thousand. Treasury Treasury business comprises treasury activities. The responsibilities of Treasury also cover the results of trading in securities of any type, trading operations in foreign currencies, and other trading activities. Results of attracting cash from other banks are attributed to Treasury only if the receipt of such funds is a part of a commercial agreement. Other operations Other operations cover all other aspects not assigned to business segments. In particular, they cover relationships with members of UniCredit Group and subsidiaries of the Group. Methods Intersegment pricing is done taking into account various inputs and current market rates. Direct costs are allocated to individual business segments from which they arise. Indirect costs are allocated pro rata to the number of personnel, floor space of premises, etc. depending on the expenditure items. Overhead costs are allocated pro rata to the number of personnel, revenues, direct and indirect costs. The result of each business segment is measured by profit before tax generated by each specific segment. For each business segment the Management Board reviews internal management reports on at least monthly basis. The operating cost/income ratio is one of the key ratios used for controlling business segments. Presentation of information in management reports differs from the presentation of the amounts disclosed in the consolidated statement of profit or loss. Total 53

54 External and intersegment net interest margin: Corporate business Retail business Private business For the year ended 31 December Treasury Other Total operations External net interest margin Intersegment net interest margin Net interest margin ,444, , ,305 3, ,817 1,136, ,386, , ,694 68, ,929 1,329, ,593 82, ,265-19, , , , ,808-86, , , ,090 79,960-16, ,866 1,136, , ,014 42,114-17, ,643 1,329,400 Information about business segments revenues, expenses and results Net interest margin Net fees and commission income Net profit or loss(-) on trading operations and changes in fair value Net other expenses(-) and income Net non-interest income OPERATING INCOME OPERATING EXPENSE OPERATING PROFIT AND LOSS Charges (-) for liabilities Charges to allowance for impairment of loans and other financial liabilities Result on disposal of property and equipment and intangible assets Loss (-) and profit before income tax Corporate business Retail business Private business For the year ended 31 December Treasury Other Total operations , ,090 79,960-16, ,866 1,136, , ,014 42,114-17, ,643 1,329, , ,435 8,249 5,455-96, , , ,189 3, , , , , , , , , ,393 37, ,338 54,385 1, , , ,021-8, , ,796 92, , ,731 9, , , , , ,037 4, , , , ,933 1,017,821 89, , ,334 1,420, ,617 1,025,051 46,233 83,977 77,685 2,095, , , ,890-6,417-1,170,508-2,146, , ,443-6,206-5, ,176-1,790, , ,878-20, ,467-1,754, , , ,608 40,027 78, , , ,104,659-1,130, ,234, ,647,595-2,605, ,253, ,559 18, ,184 43, , ,724-19, ,467-1,736,462-2,942, ,233-2,223,797 40,027 78, ,307-3,904,774 54

55 Additions of property and equipment and intangible assets Depreciation and amortization charges Ratios: Operating expense as interest to operating income, % Allowance for impairment as interest to net interest margin, % Corporate business Retail business Private business Treasury Other operations Total , , , , ,745-76, , , , , ,580 1, , % 62.6% 122.4% 3.0% % 151.1% % 62.8% 13.4% 6.5% % 85.4% % % 0.8% 0.0% 0.0% % % % 0.0% 0.0% 0.0% % Information about business segments assets and liabilities as at 31 December 2015 and 2014: Corporate Retail Private Treasury Other Total business business business operation s ASSETS LIABILITIES 31 December December December December 2014 (30) General risk management 17,962,691 19,023, ,814 17,147 16,947,188 16,859, , ,959 8,707,639 14,695,886 2,846,626 3,292 7,137,325 12,813,898 2,591,724 1,471 17,075, ,869, ,211, ,380, ,208, ,942, ,465, ,925,16 6 Management of risk is fundamental to the Group s business and is an essential element of the Group s operations. The main risks inherent to the Group s operations are those related to credit exposures, liquidity, market and operational risks. Risk management framework The process of risk management in the Group involves all types of businesses which have an influence on the parameters of its risks. Risk management within the Group is realized on all levels of organization from top management to the levels where risks are assumed. Furthermore, the Group provides for a clear segregation of risk management functions, tasks, duties and authorities and also a clear scheme of duties and responsibilities according to this segregation. In particular, the following functional and structural bodies are involved in the process of risk management in the Group: Supervisory Board within its functions and responsibilities to owners of the Group, depositors/counterparties and banking supervisory authorities; Management Board within its functions and responsibilities to the Bank s Supervisory Board, depositors/counterparties and banking supervisory authorities; Risk Management Division within its functions involving identification, quantitative and qualitative risk assessment, control and monitoring of risks; Back-offices within their functions of control over compliance with the established requirements; 55

56 Front-offices within their functions involving the acceptance of risks by the Group. Risk Management Division occupies a very important place in the Group's organization structure and comprises all departments in which risk management functions are concentrated. Risk Management Division is completely independent (structurally and financially) from the Group's units that directly accept risks (front-offices) and units responsible for recording the risks assumed and reviewing their sizes (back-offices). Risk Management Division has the following structure: Strategic Risk Management Department that includes Credit Policies and Processes Unit, Market Risk Unit and Operational Risk Unit; Corporate Credit Operations Department that includes Corporate Underwriting Unit, Corporate Monitoring Unit, Corporate Special Credit Unit, Corporate Loans Management Section, Valuation Department; Retail Credit Operations Department that includes Risk Departments in 5 commercial macro-regions, Credit Processes Quality Management & Network Support Unit, Retail Underwriting Unit, Retail Risk Monitoring Unit, Retail Special Credit Unit, Workout Unit, Risk Management and Provision Calculation Department. The leader of Risk Management Division is Chief Risk Officer (CRO) who is directly subordinate to the First Deputy of the Chairman of the Bank s Management Board General Manager of the Bank and CRO of UniCredit Bank Austria AG. CRO is a member of the Bank s Management Board as well as a member of Asset and Liability Management Committee (ALMC), and Credit & Investment Committee (CIC). Main functions of Risk Management Division include the following: Ensure realization of quantitative and qualitative assessment or formalized analysis on the basis of the indicators defined in respect of the risks assumed by the Group or which may arise in the course of its activities; Develop risk measurement methodologies and submit them for approval by the Management Board; Develop infrastructure for data obtaining from other systems, create a system of automatic data input and processing relating to risks, and ensure consistent monitoring and assessment of various risks; Develop and update means of risk analysis and methodologies for new and existing models, including their backtesting; Accumulate observations (historical data) for comparative analysis; Monitor data regarding positions and prices, market positions; Identify and monitor limit excesses; Analyze probable scenarios; Estimate collateral; Monitor credit portfolio and provision; Workout activities; Prepare general overviews of risk exposures and report about them to ALMC or the Management Board (or, if required, to the Supervisory Board); Prepare recommendations concerning further tactics of risk management on the basis of the Bank s risk analysis performed and all factors that can mitigate it (insurance, hedging, etc.), as well as a development degree of certain risk management systems, including establishing limits and other restrictions as far as banning certain operations, and submit recommendations for consideration of ALMC or the Management Board; Prepare recommendations to the Supervisory Board and the Management Board concerning the capital required for covering extraordinary losses and the losses identified (determined) and measured by using the worst scenario method; Assist the Supervisory Board and the Management Board in developing and maintaining risk management policies, regulations and procedures. Credit risk Credit risk is the risk of a financial loss to the Group if a customer or counterparty fails to meet (or untimely fulfils) its contractual obligations, and arises principally from loans and receivables from other banks and customers. Credit risk arises mainly due to loans and receivables from banks and customers. General principles and approaches to credit risk management are defined by the system of credit policies of the Group. The Group defines and reviews on an annual basis its credit strategy which determines main objectives, tailored composition of the loan portfolio, and system of limits. For risk management reporting purposes, the Group analyzes all elements of credit risk exposure, such as individual customer and counterparty default risk, as well as industry risk. For the credit risk assessment purposes, the Group has adopted internal risk management tools in accordance with the requirements of UniCredit Group. The Group assesses borrowers based on their financial performance results, credit history with the Bank, as well as a level of risk associated with loans extended to a particular borrower. The Group performs financial analyses of borrowers on a quarterly basis. A special assessment system is used to analyze the creditworthiness of borrowers. Customers ratings of corporate borrowers are based on the following basic approaches: Assessment of the customer s financial position (quantitative analysis); 56

57 Condition of a company and its position in the market (qualitative analysis); Additional factors (factors indicating to a potential deterioration in credit quality in the future). The Group manages its credit risk by establishing limits in relation to a single borrower and a group of borrowers, and by complying with exposure limits established by the National Bank of Ukraine. The following bodies are responsible for approving credit and investment transactions: The Supervisory Board reviews and approves credit exposures exceeding 25% of the authorized share capital; Credit & Investment Committee (Corporate Business) reviews and approves credit exposures up to 25% of regulatory capital; Corporate Business Credit Committee at the Bank s Head Office (HO) reviews and approves credit exposures within the following limits of total borrower s/debtor group's exposure: - For medium corporate clients up to UAH 20,000 thousand per borrower/debtor group (other than cash collateralized loans) and up to UAH 40,000 thousand per borrower/debtor group (including cash collateralized loans); - For large corporate and international customers up to UAH 40,000 thousand per borrower/debtor group; Authorized officials of commercial macro-regions and the Bank s HO, by using a double signature scheme, approve credit operations for customers with the following limits of total borrower's/debtor group's exposure: - For small/medium/large/international corporate customers up to UAH 10,000 thousand (other than cash collateralized loans) and up to UAH 20,000 thousand (including cash collateralized loans); - For individuals up to UAH 15,000 thousand (other than cash collateralized loans) and up to UAH 25,000 thousand (including cash collateralized loans). Credit and Investment Committee is responsible for the system of approval authorities in the Group it may delegate (within certain limits and for certain transactions and/or certain categories of customers) to designated persons or collective bodies the authority, determine the membership of these individuals/collective bodies, their eligibility criteria (available quorum), operating procedures, including decision making and formalizing procedures. Credit Committee for Restructuring Doubtful/Non-performing Loans to Customers of Retail Business approves amendments to material terms and conditions of credit transactions with doubtful/non-performing loans to retail business customers, including debt restructuring through the issue of a new loan to repay the existing one; capitalization of interest accrued, settlement of a portion of the debt and write off (remission) of partly or fully accrued but not paid interest, penalty, fines; provides permissions to voluntary sale of collateralized property. The authorities are provided in the amount of limits/outstanding principal amounts that do not exceed UAH 5 million or its equivalent in foreign currency at the official exchange rate established by the National Bank of Ukraine at the date of decision making with regards to one borrower/a group of related parties. Authorized officials of the Bank s Head Office, by using a double signature scheme, approve terms and conditions for restructuring/repaying non-performing loans to corporate business customers in the amount up to UAH 20,000 thousand. To mitigate its credit risks, the Group has introduced several restructuring techniques for borrowers that suffered difficulties in loan repayment. These measures include, but are not limited to, the following: Increase requirements to collateral quality and coverage; Cease lending activities denominated in foreign currencies; Cooperate actively with collection companies; Focus on existing customers based on a relationship approach ; Decrease volumes of trading in securities and reduce the number of reverse repurchase transactions. The value of guarantees and commitments issued exposed to credit risk (Note (26)) represents the maximum credit exposure as at 31 December 2015 and Corporate lending In making its lending decisions, the Group assesses potential borrowers on the basis of their financial positions as reflected in their financial statements, their credit history with the Bank and other financial institutions, and the amount of risk involved in lending to a particular borrower, using a rating scale. A missing credit history with the Group or lack of credit history in general is not an absolute barrier to granting a loan, provided the Group receives sufficient information to assess the borrower s business and its financial position. However, when the Group grants a loan to a borrower with no credit history, it sets certain conditions, such as a requirement to transfer a certain part of the customer s banking operations to the Group for a certain period and charging a higher interest rate, or requiring additional collateral or guarantees from such a borrower. When assessing risks associated with a particular borrower, the Group takes into account the borrower s business and other factors, such as the quality of its management, its main business activities, geographic location, suppliers, customers, other debts, financial stability, turnovers, likely return on the loan, liquidity of the proposed collateral and whether it is sufficient in view of the credit risk. The Group also considers the weighted average credit risk associated with the industry in which the borrower operates. 57

58 As for the credit risk relating to corporate business, authorized officials of commercial macro-regions analyse, on a regular basis, a borrower s ability to meet interest and principal repayment obligations and make recommendations to Credit & Investment Committee in respect to the exposure limits to individual borrowers, where appropriate. In the event the loan amount exceeds the limits assigned to the authorized officials of commercial macro-regions, the credit monitoring unit, based on the reports of branches, analyses a borrower s ability to meet interest and principal repayment obligations and makes recommendations to the authorized officials/credit bodies of higher levels of approval authorities. This analysis is performed on a monthly basis. Retail lending Consumer loans are subject to a standardized approval procedure. Loans are subject to maximum limits depending on the applicant s income, stability of future earnings, liquidity and quality of collateral. The authorized officials of commercial macro-regions (or, if a branch limit is exceeded, authorized officials/credit bodies of higher levels of approval authorities) review a credit application and make a relevant decision as to whether to grant a loan. The Group consistently monitors the performance of individual credit exposures and regularly reassesses the creditworthiness of its customers. The reviews are based on an analysis of overdue payments and other information obtained by the Group. In light of this information, the borrower s internal credit rating may be revised. Once a loan is classified as impaired, it is automatically transferred from the relevant credit unit to a specialized Bank unit dealing with recovery of non-performing loans. The Workout Unit coordinates the work of branches on the recovery of non-performing loans and also undertakes its own actions on the recovery of loans. The basic means of problem loan recovery include enforcement on the pledged property to recover funds from the debtor or guarantor and initiation of bankruptcy procedures on the debtor. Off-balance sheet risks The Group applies the same policies to manage its off-balance sheet risks as to its on-balance sheet risks. Provisions may be required depending on the characteristics of a counterparty and character of its operations. Market risk Market risk is defined as a risk to incur losses on both on and off-balance sheet positions due to market prices fluctuations (i.e. interest rates, equity prices, foreign exchange rates, etc.). The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimizing the return on risk. In the market risk management area, the Group uses uniform processes, methods, rules and limit system, which ensure a consistent group-wide risk management, with reference to local market conditions. These procedures provide for aggregate data and make available major risk parameters. Market Risk Unit is responsible for analysis and assessment of market risk on a daily basis, regular market risk stress-testing, and ensuring timely control over actual or potential market risks. Results of market risk assessment and control as well as stress testing results are reported to ALMC on a monthly basis. ALMC is responsible for market risk management in line with the policies approved by the Management Board. Market risks comprise foreign currency risk, interest rate risk, credit spread risk, equity risk, commodity risk, and volatility risk. Foreign currency risk Foreign currency risk is defined as the risk that the value of assets, liabilities or off-balance sheet items denominated in foreign currencies will fluctuate due to changes in foreign exchange rates. The basic principles of foreign currency risk management system in the Group are determined by Foreign Currency Risk Management Policies that are developed and updated by Market Risk Unit in accordance with UniCredit Group s standards and taking into account the requirements of the Ukrainian legislation. Foreign currency risk is mitigated by setting limits to long and short currency positions in each currency, including local. The set currency limits are approved by UniCredit Bank Austria AG and recognized by ALMC. The following principles are used by the Group to mitigate its foreign currency risk exposures: Enter into high risk currency transactions only after their prior authorization within the established limits; Analyze on a daily basis relevant market conditions; Calculate open positions in each currency and monitor their compliance with the established limits on a daily basis. In the event the Group exceeds the limits, it undertakes to bring its positions within the limits established. In 2015, the Group performed monthly exchange rate risk stress tests in order to assess a potential impact of fluctuations in exchange rates. Stress tests are performed to main currencies and reflect potential profits (losses) as a result of changes in foreign currency exchange rates. 58

59 The following table presents currency positions of the Group in respect of foreign exchange rate fluctuations as at 31 December 2015: UAH USD EUR Other currencies Total Non-derivative financial assets Cash and cash equivalents 4,869,958 4,856, , ,939 10,293,349 Debt and equity securities Due from banks ,848-34,848 Loans and receivables from customers 13,271,135 21,696,905 1,158, ,948 36,403,808 Other financial assets 205,990 8,097 17,210 4, ,688 Total non-derivative financial assets 18,347,143 26,561,812 1,664, ,278 46,967,753 Receivables on forward currency purchase agreements , ,240 Total financial assets 18,347,143 26,561,812 1,664, ,518 47,282,993 Non-derivative financial liabilities Due to banks 47,846 10,606,089 66,315 4,647 10,724,897 Customer accounts 14,838,855 9,889,948 1,947,668 85,602 26,762,073 Debt securities issued by the Group 50, ,141 Other financial liabilities 186,535 41, , ,853 Subordinated debt - 2,423, ,423,425 Total non-derivative financial liabilities 15,123,377 22,961,020 2,153,489 90,503 40,328,389 Other financial liabilities at fair value through profit or loss 4, ,934 Payables on forward currency purchase agreements - 315, ,798 Total financial liabilities 15,128,311 23,276,818 2,153,489 90,503 40,649,121 Currency position on nonderivative and derivative financial instruments 3,218,832 3,284, , ,015 The following table presents currency positions of the Group in respect of foreign exchange rate fluctuations as at 31 December 2014: UAH USD EUR Other currencies Total Non-derivative financial assets Cash and cash equivalents 4,275, , ,401 46,812 5,014,672 Mandatory reserves with the National Bank of Ukraine 79, ,005 Debt and equity securities 1,123, , ,471,609 Due from banks - 7, ,884 Loans and receivables from customers 11,304,020 20,129,056 1,240, ,860 32,947,356 Other financial assets 169,324 47,438 5, ,017 Total non-derivative financial assets 16,951,051 20,989,744 1,481, ,688 39,742,543 Other financial assets at fair value through profit or loss 1,230, ,230,674 Receivables on forward currency purchase agreements , ,599 Total financial assets 18,181,725 20,989,744 1,481, ,287 41,297,816 UAH USD EUR Other currencies Total 59

60 Non-derivative financial liabilities Due to banks 35,863 16,593,546 18,186 2,577 16,650,172 Customer accounts 13,371,762 8,276,573 1,636,971 64,062 23,349,368 Debt securities issued by the Group 64, ,623 Other financial liabilities 89,981 23,575 59, ,747 Subordinated debt - 1,589, ,589,919 Total non-derivative financial liabilities 13,562,229 26,483,613 1,714,979 67,008 41,827,829 Other financial liabilities at fair value through profit or loss 3, ,650 Payables on forward currency purchase agreements - 255,491 68, ,237 Total financial liabilities 13,565,879 26,739,104 1,783,725 67,008 42,155,716 Currency position on nonderivative and derivative financial instruments 4,615,846-5,749, , ,279 Other currencies are mainly represented by Swiss Francs (CHF) and Russian Rubles (RUB). As at 31 December 2015, the following table presents the Group s sensitivity analysis to 20% (31 December 2014: 40%) increase and decrease in USD and EUR rates against UAH. 20% (31 December 2014: 40%) is the sensitivity rate used when reporting foreign currency risk internally to the Group s key management personnel and represents management s assessment of the possible change in foreign currency exchange rates. The sensitivity analysis includes only outstanding foreign currency denominated monetary items and adjusts their translation at the end of the period for 20% (31 December 2014: 40%) change in foreign currency exchange rates. Effect of foreign exchange rates fluctuations on profit and loss and equity is presented in the table below: 31 December December % -20% +40% -40% USD 538, ,739-1,885,790 1,885,790 EUR -80,191 80,191-99,274 99,274 Other currencies 101, , , ,676 Effect of UAH/USD exchange rate fluctuation on profit and loss and equity in case of 40% devaluation/revaluation as at 31 December 2014 of Ukrainian Hryvnia, adjusted for the value of USD-indexed government bonds of Ukraine, comprises profit/loss effect in the amount of UAH 1,113,649 thousand. Limitations of sensitivity analysis The above tables demonstrate the effect of a change in a key assumption, while other assumptions remain unchanged. In reality, there is a correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and the obtained results should not be interpolated or extrapolated. The sensitivity analyses do not take into consideration that the Group s assets and liabilities are actively managed. Additionally, the consolidated financial position of the Group may vary at the time that any actual market movement occurs. As investment markets move past various trigger levels, management actions could include selling investments, changing investment portfolio allocation and taking other protective action. Consequently, the actual impact of a change in the assumptions may not have any impact on the liabilities, whereas assets are held at market value in the consolidated statement of financial position. In this situation, the different measurement bases for liabilities and assets may lead to volatility in equity. Other limitations in the above sensitivity analyses include the use of hypothetical market movements to demonstrate potential risk that only represent the Group s view of possible near-term market changes that cannot be predicted with any certainty; and the assumption that all interest rates move in an identical fashion. 60

61 Geographical concentration Assets and Liabilities Management Committee monitors the risk of changes in the legislation and regulatory environment and assesses their impact on the Group s activities. Such an approach allows the Group mitigating the potential losses from fluctuations in the investment climate of Ukraine. As at 31 December 2015, all assets of the Group were represented by assets under transactions with the companies operating in Ukraine, other than balances on the accounts with banks in OECD countries, in the amount of UAH 5,080,514 thousand (31 December 2014: UAH 481,336 thousand) and balances on the accounts with banks in non- OECD countries in the amount of UAH 70,291 thousand (31 December 2014: UAH 30,134 thousand). Interest rate risk Interest rate risk is the risk that future cash flows or fair value of financial assets and liabilities will fluctuate due to changes in marketable interest rates. The basic principles of functioning of interest rate risk management system in the Group are determined by Interest Rate Risk Management Policies that are developed and updated by Market Risk Unit in accordance with UniCredit Group s standards and taking into account the requirements of the Ukrainian legislation. Interest risk management is realized on permanent basis in accordance with the internal guidelines and UniCredit Group s standards. ALMC manages the process of interest rate risk management by considering the respective managerial reports and making managerial decisions to optimize assets and liabilities structure. Analytical reports on the Group s exposure to interest rate risk are submitted for consideration of ALMC. In the event limits are excessed, action plans should be developed for interest rate gaps reduction and consequential interest rate risk decrease. The Group broadly applied floating interest rates for new and restructured loans in the period from 2010 to 2015 in order to reduce the general level of interest rate risk. Interest rate risk is managed by Market Risk Unit using the GAP analysis method, whereby the difference or gap between rate sensitive assets and rate sensitive liabilities is determined and analysed. The basis point value (BPV) sensitivity analysis is used for assessment of the Bank s interest rate risk exposure on a daily basis. BPVs split by time buckets and currencies are subject to internal limits. In 2015 and 2014, monthly interest rate risk stress tests were used by the Group in order to assess impact of possible changes in interest rates. Stress tests are performed for interest rates in main currencies and reflect potential profits (losses) in the event of changes in interest rates. Average effective interest rates of major interest bearing financial assets and liabilities were as follows: 31 December December 2014 UAH Foreign currencies UAH Foreign currencies Cash and cash equivalents 12.3% 0.2% 5.4% 0.3% Due from banks % Loans and receivables from customers 11.2% 4.5% 15.2% 5.9% Securities available for sale % 7.6% Due to banks 0.0% 3.4% 0.0% 3.5% Customer accounts 17.2% 5.9% 15.6% 5.7% Debt securities issued by the Group 12.0% % - Subordinated debt - 3.0% - 2.8% The following table summarizes sensitivity analyses in respect of interest rate risk. Impact on profit or loss and equity is presented as follows: 31 December December % -1% +1% -1% Sensitivity of financial assets 274, , , ,326 Sensitivity of financial liabilities -403, , , ,955 Net impact on profit or loss and equity -129, , , ,629 Identifying risk sources is performed through the analysis of the existing structure of interest-bearing assets and liabilities. The Group assesses its interest rate risk based on the sensitivity analysis towards interest rate fluctuations, i.e. changes in the market value of instruments and portfolios as a result of general changes in the yield curve by a certain number of basis points. In accordance with the methodology, the scenarios applied include a shift of the whole curve by 1 interest point (+/-100 basis points). Sensitivity of interest rates is calculated on the basis of a scenario, under which all interest rate curves are treated as being changed in an identical fashion irrespective of a type of financial instrument or currency. Estimates include interest rate risk by all positions of the Group for instruments with fixed and floating interest rates as specified by a respective model. 61

62 Liquidity risk Liquidity risk arises in the general funding of activities and in the management of positions. Liquidity risk refers to the availability of sufficient funds to meet financial commitments of the Group. The basic principles of functioning of the liquidity risk management system in the Group are determined by Liquidity Risk Management Policies that are developed and updated by Market Risk Unit in accordance with UniCredit Group s standards and taking into account the requirements of the Ukrainian legislation. According to UniCredit Group s standards, the Group deals with the liquidity risk as a primary risk in banking business by introducing and monitoring short-term and structural liquidity limits. In this context, the liquidity situation for the next few days and months, as well as for longer periods is analyzed against standard scenario and stress scenarios. Management s approach to liquidity management is to ensure, as far as possible, that the Group will always have sufficient liquidity to meet its liabilities when due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group s reputation. The Group s policy in liquidity risk management is based on liquidity risk gap model ( GAP ). It is based on calculation of liquidity gaps between assets and liabilities by maturity and currency to identify funding needs. The Group uses statistical/quantitative behavioral models for the treatment of items without contractual terms of repayment. The tables below present the analysis of overall liquidity risk based on the carrying amount of financial assets and liabilities as recorded in the consolidated statement of financial position. The tables have been drawn on the basis of information about contractual maturities. The contractual remaining maturities of financial assets and liabilities as at 31 December 2015 were as follows: Within 1 month From 1 to 3 months From 3 months to 1 year From 1 to 5 years Over 5 years Maturity undefined Non-derivative financial assets Cash and cash equivalents 10,293, ,293,349 Debt and equity securities Due from banks , ,848 Loans and receivables from customers 19,826, ,960 4,357,631 6,491,187 4,866,786-36,403,808 Other financial assets 99,494 18, ,099 1,680 1, ,688 Total non-derivative financial assets 30,219, ,348 4,507,578 6,492,867 4,867, ,967,753 Receivables on forward currency purchase agreements 315, ,240 Total financial assets 30,534, ,348 4,507,578 6,492,867 4,867, ,282,993 Non-derivative financial liabilities Due to banks 1,838, ,932,023 6,582, ,409-10,724,897 Customer accounts 17,008,527 3,807,359 5,682, ,470 98,204-26,762,073 Debt securities issued by the Group - 50, ,141 Other financial liabilities 340,564 26, ,853 Subordinated debt 31, ,392, ,423,425 Guarantees and commitments issued 715, ,640 Total non-derivative financial liabilities 19,934,477 3,885,177 7,614,536 9,140, , ,044,029 Other financial liabilities at fair value through 4, ,934 profit or loss Payables on forward currency purchase agreements 315, ,798 Total financial liabilities 20,255,209 3,885,177 7,614,536 9,140, , ,364,761 Liquidity gap 10,279,118-3,004,829-3,106,958-2,647,858 4,399, Cumulative liquidity gap 10,279,118 7,274,289 4,167,331 1,519,473 5,918,673 5,918,232 Total 62

63 The contractual remaining maturities of financial assets and liabilities as at 31 December 2014 were as follows: Within 1 month From 1 to 5 years Over 5 years Maturity undefined Total From 1 to 3 months From 3 months to 1 year Non-derivative financial assets Cash and cash equivalents 4,664, , ,014,672 Mandatory reserves with the 79, ,005 National Bank of Ukraine Debt and equity securities 37, , , ,471,609 Due from banks - 3,942 3, ,884 Loans and receivables from customers 16,176,762 1,913,310 4,167,860 7,112,001 3,577,423 32,947,356 Other financial assets 136,001 1,907 74,746 8,354 1, ,017 Total non-derivative financial assets 21,093,259 2,902,089 5,048,303 7,120,355 3,578, ,742,543 Other financial assets at fair value through profit or loss - 296, , ,230,674 Receivables on forward currency purchase agreements , ,599 Total financial assets 21,093,259 3,198,126 6,307,539 7,120,355 3,578, ,297,816 Non-derivative financial liabilities Due to banks 265,667 90,454 5,363,022 10,595, ,579-16,650,172 Customer accounts 15,187,718 3,649,804 4,050, ,037 27,091-23,349,368 Debt securities issued - 64, ,623 by the Group Other financial liabilities 173, ,747 Subordinated debt 19, ,570, ,589,919 Guarantees and commitments issued Total non-derivative financial liabilities Other financial liabilities at fair value through profit or loss 827, ,332 16,473,723 3,804,909 9,413,754 12,600, ,670-42,655, , ,650 Payables on forward currency purchase agreements , ,237 Total financial liabilities 16,473,723 3,804,909 9,738,282 12,603, ,670-42,983,048 Liquidity gap 4,619, ,783-3,430,743-5,483,109 3,215, Cumulative liquidity gap 4,619,536 4,012, ,010-4,901,099-1,685,337-1,685,232 The amounts disclosed in the following tables do not correspond to the amounts recorded in the consolidated statement of financial position, since the information below includes aging of financial liabilities by maturities which reflects the total balance of contractual payments (including payment of interest) that are not recognized in the consolidated statement of financial position using the effective interest rate method. 63

64 The contractual remaining maturities of undiscounted cash flows of financial liabilities as at 31 December 2015 were as follows: Within 1 month From 1 to 3 months From 3 months to 1 year From 1 to 5 years Over 5 years Maturity undefined Due to banks 1,853,048 56,254 2,129,811 6,759, ,629 - Customer accounts 17,196,441 3,939,590 5,801, ,900 99,866 - Total 11,176, ,225,78 7 Debt securities issued by the Group - 51, ,496 Other financial liabilities 340,564 26, ,853 Subordinated debt 36,429-36,033 2,601, ,673,872 Guarantees and commitments issued Payables on forward currency purchase agreements 715, , , ,798 The contractual remaining maturities of undiscounted cash flows of financial liabilities as at 31 December 2014 were as follows: Within 1 month From 1 to 3 months From 3 months to 1 year From 1 to 5 years Over 5 years Maturity undefined Due to banks 266, ,605 5,759,536 10,919, ,861-17,417,65 1 Customer accounts 15,272,696 3,831,864 4,235, ,111 27,572-23,827,96 6 Debt securities issued by the Group - 65, ,513 Other financial liabilities 173, ,747 Subordinated debt 22,801-22,429 1,751, ,796,863 Guarantees and commitments issued 827, ,332 Payables on forward currency purchase agreements , ,237 Management consistently assesses its liquidity risk by identifying and monitoring changes in funding required in order to maintain liquidity in terms of the requirements established by the National Bank of Ukraine and those established by UniCredit Bank Austria AG. Standards and requirements of UniCredit Bank Austria AG describe basic principles for liquidity risk management, the process of liquidity risk management, functions and authority distribution, principles of management reporting structure and other matters. Management reporting consists of the daily short-term liquidity report and monthly structural liquidity report prepared in accordance with the requirements of UniCredit Group. In 2015 and 2014, the Group used monthly stress-testing procedures based on six group-wide scenarios (including combined one), as well as a local scenario that represent different potential changes in financial variables. Outcomes of stress tests represent the Group s ability to survive in case of a scenario occurrence and are used to adjust liquidity risk management strategies, policies and positions and to develop effective contingency plans. ALMC is responsible for operational liquidity management and timely first level control over compliance with shortterm and structural liquidity limits. Market Risk Unit is responsible for regular liquidity risk stress-testing and ensuring timely second level control over compliance with short-term and structural liquidity limits. Results of liquidity risk control as well as stress test results are reported to ALMC on a monthly basis. ALMC is responsible for liquidity risk management in line with the policies approved by the Management Board. Operational risk The Group defines as operational a risk of loss due to errors, infringements, interruptions, damages caused by internal processes or personnel or systems or caused by external events. Total 64

65 Operational risk management function in the Group has been organized in accordance with local regulatory requirements and UniCredit Group s standards. The Group's operational risk management activities are regulated by policies and procedures developed according to international sound practice in operational risk management. The Management Board is responsible for the effective oversight over operational risk exposure. To improve efficiency of operational risk management, in 2014, the Group created at the Management Board a permanent executive body, Operational and Reputational Risk Committee. It is responsible for performing consulting and monitoring functions related to the systems of operational and reputational risk management. To centralize control over functioning of operational risk management system, within Strategic Risk Management Department, a specialized Operational Risk Unit was established, which is responsible for maintaining all aspects of operational risk management activities within the Group, reviewing the compliance with the requirements of operational risk management standards and polices, providing regular reports to Operational and Reputational Risk Committee and the Parent regarding operational risk exposures. Operational Risk Unit interacts with other Group s units on the issues of data collection and validation, operational risk exposure analysis, performing scenario analysis, monitoring operational risks through key risk indicators, introducing mitigation (control) risk actions. Special attention in the Group s ORM system is given to identifying, recording and validating operational events. The Group has built a decentralized model of operational loss data collection. Data loggers that are in charge of operational loss data collection and reporting were assigned within each competence line of the Group. Moreover, Operational Risk Unit fulfils an on-going monitoring of operational loss trends in the local market to ensure timely reporting to top management. Scenario analysis is a key element in the Group s operational risk control activities, since scenarios are forward looking analyses aiming to improve the Group s understanding of its risk profile. The risk scenarios are developed by analyzing internal losses, external events that are deemed relevant to the Group, audit findings regarding banking processes, as well as experts judgments about banking products. Analyses results, in terms of duration of the worst case scenarios and risk mitigation (control) proposals, are included in special reports prepared by Operational Risk Unit. Such reports are communicated to business/process owners, Operational and Reputational Risk Committee, and the Parent on a regular basis. The process of operational risk monitoring in the Group is based on observation of movements in key operational risk indicators that is introduced in all key business processes of the Group. The monitoring of movements in key indicators is provided on a regular basis depending on the indicator nature, but not less than once a quarter. Risk indicators values are compared with the indicative limits. In the event the limits are excessed, which is a warning signal of the increased risk levels, risk owners analyze reasons for such an increase and introduce mitigating measures to reduce/localize the risk. Every year, the system of key operational risk indicators is subject to reviewing and testing for effectiveness in monitoring the respective operational risks. The reviews result in introducing new indicators and gauging the existing indicators for effective risk monitoring purposes. Reports on operational risk indicators are regularly provided to process and risk owners for feedback, identification of critical issues and improvement of monitoring methodology. Operational risk management is included into the process of decision making to insure the Group s operational risks and provides support in analyzing exposures to operational risks, effective risk coverage and franchises. The Management Board, based on the proposals of Operational and Reputational Risk Committee, is responsible for decision making with regards to the issues on insurance processes related to the overall system of the Group s operational risk mitigation (control). Capital management The Group s policies in capital management aims to support the sustainable level of equity to ensure proper confidence of investors, lenders and other market participants, as well as sustainable business in the future. This requires special attention to the impact of capital on shareholders returns and therefore, the Group recognizes the need to balance the increased profitability, which is made possible by the increase in debt and equity ratios and the benefits and stability, which are ensured by the stability of financial position. To determine a real level of the capital considering its business risks, the Group consistently monitors the quality of its assets and off-balance sheet liabilities, adjusts correspondingly their values by creating provisions for estimated (potential) losses from counterparties obligations. The capital structure of the Group consists of debt, which includes subordinated debt disclosed in Note (15) and equity, comprising share capital, reserves, retained earnings/accumulated loss (-) and other additional capital as disclosed in the consolidated statement of changes in equity. The following table presents the Group s regulatory capital resources for capital adequacy purposes in accordance with the principles employed by the Basel Committee: 31 December December 2014 Paid in capital 16,045,829 5,401,875 65

66 Reserves -4,687,224-1,581,428 Less: Intangible assets -936, ,084 Total Tier 1 capital 10,421,890 2,953,363 Subordinated debt 1,440,040 1,256,371 Preference shares Total Tier 2 capital (restricted to 100% of Tier 1 capital) 1,440,541 1,256, December December 2014 Total regulatory capital 11,862,431 4,210,235 Capital adequacy ratios: Tier 1 capital 25% 7% Total capital 28% 10% Quantitative measures established by regulation to ensure capital adequacy require that the Group maintain minimum amounts and ratios of total (8%) and Tier 1 capital (4%) to risk weighted assets. (31) Subsequent events On 10 February 2016, the Bank s Supervisory Board took a decision to discontinue operations of PrJSC FERROTRADE INTERNATIONAL through its liquidation. On 10 February 2016, the Bank s Supervisory Board took a decision on approving the Bank s capitalization plan. According to this plan, the Bank s share capital is going to be increased by UAH 10,645,000 thousand (UAH 3,793,000 thousand until 1 April 2016, UAH 4,098,000 thousand until 1 September 2016, and UAH 2,754,000 thousand until 1 January 2018) On 31 March 2016 Extraordinary General Meeting of Shareholders decided to increase the share capital of the Bank on UAH 3,800,000 thousand through private placement of additional ordinary shares of nominal value of the existing number of 38,000,000,000 pieces by additional contributions of shareholders. On 6 April 2016 the Management board approved the results of the private placement of ordinary registered shares in amount according to the agreements concluded with the owners in the private placement 38,000,000,000 pieces totaling UAH 3,800,000 thousand, of which 99.99% bought UniCredit Bank Austria AG 66

67 INDEPENDENT AUDITOR S REPORT To Shareholders and Management Board of PUBLIC JOINT STOCK COMPANY UKRSOTSBANK : We have audited the accompanying consolidated financial statements of PUBLIC JOINT STOCK COMPANY UKRSOTSBANK (the Bank ) and its subsidiaries (jointly, the Group ), which comprise the consolidated statement of financial position as at 31 December 2015, and the consolidated statement of profit or loss, the consolidated statement of comprehensive income or loss, the consolidated statement of changes in equity, and the consolidated statement of cash flows for the year then ended, and a summary of significant accounting policies and other explanatory information. Management s responsibility for the consolidated financial statements Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards ( IFRS ) and for such internal control system as management determines is necessary to enable the preparation of the consolidated financial statements that are free from material misstatement, whether due to fraud or error. Auditor s responsibility Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor s judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Group s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Group s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our qualified audit opinion.

68 Basis for qualified opinion As discussed in Note (2b) to the consolidated financial statements, Crimea annexation by the Russian Federation and the military actions in Lugansk and Donetsk regions of Ukraine caused significant uncertainty regarding recoverability of assets located in those regions. In the absence of real estate market and given significant uncertainty regarding the control over assets and collaterals, the Group was not able to determine the sufficiency of the loan loss provision as at 31 December 2015 and 31 December 2014 for the loans granted to the borrowers located in Crimea, Donetsk and Luhansk regions with the net book value of UAH 7,140,601 thousand and UAH 5,475,637 thousand, respectively, and related provision charge, interest income, and deferred tax charge for the years ended 31 December 2015 and 2014, respectively. Due to the same circumstances the Group was not able to determine impairment losses related to the real estate items located in Crimea, Donetsk and Luhansk regions with the carrying values of UAH 450,847 thousand and UAH 247,527 thousand as at 31 December 2015 and 2014, respectively. We were unable to obtain information necessary to evaluate the effect of these departures from IFRS on the accompanying consolidated financial statements. As at 31 December 2015, the Group recorded the allowance for impairment losses for loans to customers in the amount of UAH 19,683,078 thousand. The management has not applied consistently the methodology of collateral valuation for portfolio assessment and of cash flow projections for assessment of certain individually significant loans. Had the management consistently considered the market value of collateral for loans assessed on portfolio basis and additional impairment indicators, such as overdue payments for individually significant loans, the additional provision for impairment losses in the amount of UAH 3,550,030 thousand would have been required as of 31 December Accordingly, related provision charge would have been increased by UAH 3,550,030 thousand, net income and shareholders equity of the Group would have been decreased by UAH 3,550,030 thousand, respectively. Qualified opinion In our opinion, except for the effects of the matters described in the Basis for Qualified Opinion paragraph, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Group as at 31 December 2015, and its consolidated financial performance and consolidated cash flows for the year then ended in accordance with International Financial Reporting Standards. Emphasis of matter We draw your attention to Note (2b) to the consolidated financial statements. The impact of the continuing economic crisis and political turmoil in Ukraine and their final resolution are unpredictable and may adversely affect the Ukrainian economy and the operations of the Group. The Group s ability to continue as a going concern is significantly dependent on further financial support from its shareholders. Our opinion is not qualified in respect of this matter. 14 April