Report on Review of Interim Financial Information of Sovcombank PJSC and its subsidiaries for the six months ended 30 June 2018.

Transcription

1 Report on Review of Interim Financial Information of Sovcombank PJSC and its subsidiaries for the six months ended 30 June 2018 August 2018

2 Report on Review of Interim Financial Information of Sovcombank PJSC and its subsidiaries Contents Page Report on Review of Interim Financial Information 3 Appendices Interim consolidated statement of comprehensive income 5 Interim consolidated statement of financial position 6 Interim condensed consolidated statement of cash flows 7 Interim consolidated statement of changes in equity 8 Notes to 2

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7 Sovcombank PJSC Interim condensed consolidated financial statements Interim condensed consolidated statement of cash flows for the six-month period ended 30 June 2018 For the six months ended 30 June Notes Cash flows from operating activities before changes in operating assets and liabilities 18,140 14,042 (Increase)/decrease in operating assets 12,164 (19,571) Increase/(decrease) in operating liabilities 11,075 31,653 Net cash flows from operating activities before income tax 41,379 26,124 Income tax paid (3,238) (5,361) Cash flows from operating activities 38,141 20,763 Cash flows from investing activities (2,606) (254) Cash flows from financing activities 13,798 (1,680) Net increase/(decrease) in cash and cash equivalents 49,333 18,829 Effect of exchange rate changes on cash and cash equivalents Cash and cash equivalents at the beginning of the period 39,962 21,465 Cash and cash equivalents at the end of the period 12 89,407 40,752 The interim condensed consolidated statement of cash flows is to be read in conjunction with notes 1 to 30 to, and forming an integral part of,. 7

8 Sovcombank PJSC Interim consolidated statement of changes in equity for the six-month period ended 30 June 2018 Interim condensed consolidated financial statements Share capital Other capital contributions Revaluation reserve for property Revaluation reserve for investment securities Perpetual subordinated loans Retained earnings Total equity attributable to shareholders of the Bank Noncontrolling interests Total equity As at 1 January ,716 2, ,588 5,770 52,249 63, ,916 Net profit for the period 13,538 13, ,799 Other comprehensive income for the period (2) (2) (4) (4) Total comprehensive income (2) (2) 13,538 13, ,795 Perpetual subordinated loans received (5,770) 16 (5,754) (5,754) Payments on perpetual subordinated loans (Note (22) (210) (210) (210) Dividends (Note 22) (3,053) (3,053) (3,053) As at 30 June ,716 2, ,586 62,540 68, ,694 As at 1 January ,716 2, ,302 83,798 1,620 85,418 Impact of adopting IFRS 9 (Note 2) (3,357) (3,357) (3,357) Balance as at 1 January 2018 restated under IFRS 9 1,716 2, ,945 80,441 1,620 82,061 Net profit for the period 10,793 10,793 (74) 10,719 Other comprehensive income for the period (7) (7) (14) (14) Total comprehensive income (7) (7) 10,793 10,779 (74) 10,705 Dividends (Note 22) (5,820) (5,820) (5,820) Payments on perpetual subordinated loans (Note 22) (195) (195) (195) Perpetual subordinated bonds issued (Note 22) 5,650 5,650 5,650 Revaluation of perpetual subordinated bonds 629 (629) Accrued interest on perpetual subordinated bonds (169) (169) (169) Tax effect recognized in respect of perpetual subordinated bonds Conversion of a perpetual subordinated loan (Note 22) 6,717 6,717 6,717 Reclassification of the net change in fair value of equity instruments at derecognition (921) 921 Acquisition of subsidiaries (Note 27) 5,636 5,636 As at 30 June ,716 9, (122) 6,279 80,006 97,563 7, ,745 The interim consolidated statement of changes in equity is to be read in conjunction with notes 1 to 30 to, and forming an integral part of,. 8

9 Background Principal activities These interim condensed consolidated financial statements include the financial statements of Public Joint-Stock Company ( PJSC ) Sovcombank (the Bank or Sovcombank ) and its subsidiaries (together referred to as the Group or Sovcombank Group ). The list of principal consolidated subsidiaries included in the consolidated financial statements of Sovcombank Group is disclosed in Note 29. Sovcombank, the parent company of the Group, was established in 1990 as Buoykombank Limited Liability Company in the village of Buoy, Kostroma Region. The current major ultimate beneficial owners acquired the Bank, renamed it into Sovcombank and relocated its head office to the city of Kostroma in In September 2014, the Bank changed its legal form from a limited liability company to an open joint-stock company. In December 2014, the Bank changed its legal form from the open joint-stock company to a public joint-stock company pursuant to regulatory changes in Russia. These reorganizations, first into the open joint-stock company and then into the public joint-stock company, had no effect on the principal activities of the Bank or its shareholder structure. The Bank s registered legal address is 46, prospect Tekstilshchikov, Kostroma, , Russia, and it has general banking license No. 963 issued by the Central Bank of the Russian Federation (the CBR ). The Bank also holds licenses of a professional securities market participant to engage in brokerage, dealer and depositary activity issued by the Federal Securities Market Commission (the FSMC ) on 27 January The Bank is a member of the deposit insurance system managed by State Corporation Deposit Insurance Agency (the DIA ) since 15 September The Group s principal business activities are retail and corporate banking, as well as investment banking services. This includes accepting term deposits and issuing commercial loans denominated in Russian rubles and foreign currencies; providing financial services, including investment banking services; dealing with securities and derivative financial instruments. The Group includes RTS-Tender.ru (a platform enabling access to public procurement) and Fintender.ru (a platform that provides bank guarantees online). Together, the digital platforms enable access to public and municipal procurement for 366 thousand companies, mostly small and medium businesses, as well as individual entrepreneurs. The Group operates primarily in the Russian Federation. The Group has 2,555 offices located in 1,039 cities and towns across 74 constituent entities of the Russian Federation (31 December 2017: 2,418 offices located in 1,031 cities and towns across 74 constituent entities of the Russian Federation). The Group s customers can withdraw and deposit cash though 4,401 ATMs and cash-in terminals (31 December 2017: 4,119 ATMs and cash-in terminals). The Group serves 3.9 million individuals: 3.2 million borrowers, 0.7 million depositors, and 0.19 million corporate customers. The Bank has 15,120 employees (31 December 2017: 11,480 employees). Shareholders The Group s ultimate shareholder is as follows: Ownership, % 30 June 2018 Ownership, % 31 December 2017 Sovco Capital Partners N.V % % As at 30 June 2018 and 31 December 2017, the Group was not ultimately controlled by any single beneficiary owner (Note 22). A group of Russian businessmen, including the key members of Sovcombank management and the Supervisory Board of the Bank, owns Sovco Capital Partners N.V., which is not controlled by any ultimate beneficial owner. Sovco Capital Partners N.V., a legal entity incorporated in the Netherlands, is the legal successor of Sovco Capital Partners B.V. since 30 August Sovco Capital Partners B.V. is a shareholder of the Group since Sovco Capital Partners N.V. is a tax resident of the Russian Federation since 1 January

10 1. Background (continued) Shareholders (continued) The Bank s Supervisory Board comprises seven persons, including the Bank s five major ultimate beneficial owners (individuals who indirectly own a stake in the Bank and have a significant effect on the Bank s decision-making processes), one member of the Bank s Management Board and one independent director. Mr. Mikhail Kuchment is the Chairman of the Bank s Supervisory Board. The Bank is regulated and supervised by the Bank of Russia, a sole regulator of banking and insurance activities, as well as financial markets in the Russian Federation. Operating environment The Group operates predominantly in the Russian Federation. Russia continues to carry out economic reforms and to develop its legal, tax and regulatory frameworks. The Russian economy demonstrates a strong correlation to changes in oil and other commodities prices and to a limited extent is affected by economic sanctions imposed on Russia by a number of countries. The Russian Government and the CBR have taken consistent and effective measures in response to a decline in commodity prices. Floating official exchange rate, inflation targeting and active support of the financial sector lowered the inflation rate and relatively stabilized the Russian economy. The combination of these factors may have a negative impact on the Group s future financial position, results of operations and business prospects. Management believes that it is taking all appropriate measures to support the sustainability of the Group s business in the current circumstances. Basis of preparation General The interim condensed consolidated financial statements for the six-month period ended 30 June 2018 have been prepared in accordance with International Accounting Standard (IAS) 34 Interim Financial Reporting. The interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements, and should be read in conjunction with the Group s annual financial statements as at 31 December These interim condensed consolidated financial statements are presented in millions of Russian rubles (hereinafter, ), unless otherwise indicated. Changes in accounting policies The accounting policies adopted in the preparation of are consistent with those applied by the Group in the preparation of the Group s annual financial statements for the year ended 31 December 2017, with the exception of the adoption of new standards effective as of 1 January The Group has not yet adopted any standards, interpretations or amendments that have been issued but is not yet effective. IFRS 15 Revenue from Contracts with Customers IFRS 15, issued in May 2014 and amended in April 2016, establishes a five-step model that will apply to revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. The standard does not apply to income related to financial Instruments or leases, and therefore does not impact the majority of the Group s income, including interest income, net gains/(losses) from investment securities, lease income regulated by IFRS 9 Financial Instruments and IAS 17 Leases. Adoption of this standard did not have any effect on the financial position or performance of the Group. IFRS 9 Financial Instruments IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement for annual periods on or after 1 January The Group has not restated comparative information for 2017 for financial instruments in the scope of IFRS 9. Therefore, the comparative information for 2017 is reported under IAS 39 and is not comparable to the information presented for Differences arising from the adoption of IFRS 9 have been recognized directly in equity as at 1 January 2018 and are disclosed below. 10

11 2. Basis of preparation (continued) Changes in accounting policies (continued) (а) Classification and measurement Since 1 January 2018, at initial recognition a financial asset is classified as designated at amortized cost, at fair value through other comprehensive income (FVOCI) or at fair value through profit or loss (FVPL). A financial asset shall be measured at amortized cost if both of the following conditions are met and if the Group selected not to measure it at fair value through profit or loss: The financial asset is held within a business model whose objective is to hold financial assets in order to collect contractual cash flows; and The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. A debt instrument shall be measured at fair value through other comprehensive income if both of the following conditions are met and if the Group selected not to measure it at fair value through profit or loss: The financial asset is held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets; and The contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. Under IFRS 9, all debt financial assets that do not meet a solely payment of principal and interest (SPPI) criterion, are classified at initial recognition at fair value through profit or loss (FVPL). Under this criterion, debt instruments that do not correspond to a basic lending arrangement, such as instruments containing embedded conversion options or non-recourse loans, are measured at FVPL. For debt financial assets that meet the SPPI criterion, classification at initial recognition is determined based on the business model, under which these instruments are managed: Debt financial instruments that are managed on a hold to collect basis are measured at amortized cost; Debt financial instruments that are managed on a hold to collect and for sale basis are measured at FVOCI; Instruments that are managed on other basis are measured at FVPL. Equity financial assets are required to be classified at initial recognition as FVPL unless an irrevocable designation is made to classify the instrument as FVOCI. For equity investments classified as FVOCI, all realized and unrealized gains and losses, except for dividend income, are recognized in other comprehensive income with no subsequent reclassification to profit and loss. The classification and measurement of financial liabilities remains largely unchanged from the current IAS 39 requirements. Derivatives will continue to be measured at FVPL. Embedded derivatives are no longer separated from a host financial asset. (b) Impairment The adoption of IFRS 9 has fundamentally changed the Group s accounting for loan impairment by replacing the IAS 39 incurred loss approach with the forward-looking expected credit loss (ECL) approach. Starting 1 January 2018, ECLs are a probability-weighted estimate of credit losses, that is, the present value of all future cash shortfalls. The ECL estimate should reflect an objective amount of losses and is to be calculated through analyzing a range of possible scenarios. The Group uses four key indicators to measure ECLs: The Exposure at Default (EAD) is an estimate of exposure at a future default date. The Probability of Default (PD) is an estimate of the likelihood of default over a given time horizon. The Loss Given Default (LGD) is an estimate of the loss arising on default, based on the difference between the contractual cash flows due and those that the lender would expect to receive, including from the realization of any collateral. It usually expressed as a percentage of the EAD. The Discount Rate is an instrument used to discount expected losses to their present value at the reporting date. The Discount Rate is the effective interest rate (EIR) of the financial instrument or a rate approximating the EIR existing as at the loan issuance date. 11

12 2. Basis of preparation (continued) Changes in accounting policies (continued) Lifetime is the maximum period for measuring ECLs. For credit-related commitments and financial guarantees, this period is equal to the maximum period stipulated in the agreement, when an entity has a present contractual obligation to extend a loan. For credit cards issued to individuals, this period is determined using internal statistical data. Lifetime ECLs (LTECL) comprise losses arising on every possible default event over the remaining life of the financial instrument. The 12-month ECLs (12mECL) is the portion of LTECL that represents the ECLs that result from default events on a financial instrument, which may occur within the 12 months after the reporting date, or, if shorter, the remaining contractual term of the financial instrument. Purchased or originated credit impaired (POCI) assets are financial assets that are credit-impaired at initial recognition. Defaulted and credit-impaired assets. A loan is credit-impaired if a borrower becomes 90 days past due on its contractual payments and if other qualitative factors exist. The definition of default given above applies to all types of the Group s financial instruments. Significant increase in credit risk (SICR). SICR assessment is performed both individually and collectively. Loans to corporate customers and bonds (state, municipal and corporate bonds and bonds of state-owned companies), as well as loans to constituent entities of the Russian Federation and municipalities, interbank loans carried at amortized cost or at FVOCI, are individually assessed for SICR by monitoring events and circumstances listed below. The Group s risk department monitors and analyzes criteria used for SICR identification on a regular basis. The Group concludes that there has been a SICR related to a financial asset if one or more of the following quantitative or qualitative criteria are met: For loans to corporate customers, bonds (state, municipal and corporate bonds and bonds of companies with the state participation), loans to constituent entities of the Russian Federation and municipalities, interbank loans: 31 to 90 days overdue; Inclusion in the list of potentially non-performing loans based on the results of credit risk monitoring procedures. For loans to individuals: 31 to 90 days overdue; Loan renegotiation following adverse changes in the borrower s credit standing and measures taken to recover the loan as at the reporting date. The ECL allowance is based on the credit losses expected to arise over the life of the asset (LTECL), unless there has been no significant increase in credit risk since origination, in which case, the allowance is based on the 12 month expected credit losses (12mECL). The 12mECL is the portion of LTECL that represents the ECLs from default events on a financial instrument, which may occur within the 12-months after the reporting date. Both the LTECL and the 12mECL are calculated on either an individual basis or a collective basis, depending on the nature of the underlying portfolio of financial instruments. The Group has established a policy to perform an assessment, at the end of each reporting period, of whether a financial instrument s credit risk has increased significantly since initial recognition, by considering the change in the risk of default occurring over the remaining life of the financial instrument. Based on the above process, the Group classifies financial instruments as follows: Stage 1: Stage 2: Stage 3: POCI assets: Financial instruments whose credit risk has not significantly increased since the date of initial recognition. The allowance for such instruments is accrued in the amount equal to the 12mECL, and the respective interest income is calculated based on the gross carrying amount. Financial instruments whose credit risk has significantly increased since the date of initial recognition. The allowance for such instruments is accrued in the amount equal to the LTECL, and the respective interest income is calculated based on the gross carrying amount. Credit-impaired financial instruments, with the allowance is made in the amount equal to the LTECL and the interest income is accrued based on amortized cost. Purchased or originated credit-impaired (POCI) assets are assets that are credit-impaired on initial recognition. POCI financial assets are recorded at fair value at initial recognition, and interest income is subsequently recognized based on a credit-adjusted EIR. ECLs are measured as lifetime, and, at the reporting date, the Group records only cumulative changes in LTECL, which have occurred since the date of initial recognition. 12

13 2. Basis of preparation (continued) Changes in accounting policies (continued) The Group performs assessment of credit-impaired assets both on an individual and collective basis. The Group collectively assesses the following types of loans: consumer loans, credit cards, mortgage loans, car loans, loans to small businesses and other loans to customers, as well as some corporate loans. This approach involves splitting the portfolio into homogeneous segments based on borrowers data, including data on failures to perform payment obligations, defaults and historical write-offs. Principles of assessment on an individual and collective basis. When estimating ECLs on a collective basis, the Group calculates PD, LGD and EAD by types of loans. Individual assessment is usually based on expert judgment, which should be regularly reviewed to reduce any differences between estimated and actual losses. Principles of collective assessment. When assessing an ECL allowance on a collective basis, loans are grouped based on similar credit risk characteristics so that the risk exposure within a group is similar as well. Such characteristics include, for example, the type of customer or credit product, etc. The amount of ECLs is determined by estimating credit risk parameters (EAD, PD and LGD) for all future periods over the life of the collectively assessed segment. This method helps to efficiently calculate ECLs for all future periods, which are subsequently discounted to their present value as at the reporting date and aggregated. The discount rate used to calculate ECLs is an initial effective interest rate or a rate approximating it. Below is an overview of the key principles for calculating credit risk parameters. EAD values are determined based on the expected payment schedule depending on the product type. To calculate ECL, two types of PD are used: the12-month and the lifetime PD. The 12-month PD (12mPD) is a loss curve during the 12 months following the reporting date (or over the remaining life of the financial instrument if it is shorter than 12 months). The 12mPD is assessed based on the most recent available data on past default events, and may be adjusted to reflect forecast information; The lifetime PD (LTPD) is a loss curve over the remaining life of the financial instrument. This parameter is assessed based on the most recent available data on past default events, and may be adjusted to reflect forecast information. When calculating the LTPD, the Group applies statistical methods, depending on the segment and type of product, e.g., building LTPD curves based on historical information on default events, the 12mPD extrapolation based on migration matrices, etc. The LGD is an estimate of expected losses on defaulted loans, made by the Group on a collective basis, based on the most recent available statistical data on repayments. (c) Effect of transition to IFRS 9 The following tables set out the impact of adopting IFRS 9 on the statement of financial position and retained earnings as at 1 January 2018 including the effect of replacing IAS 39 incurred credit loss calculations with IFRS 9 ECL. 13

14 2. Basis of preparation (continued) Changes in accounting policies (continued) A reconciliation between the carrying amounts under IAS 39 to the balances reported under IFRS 9 as at 1 January 2018 is as follows: IAS 39 measurement Reclassificat Remeasurement IFRS 9 measurement Financial assets Notes Category Amount ion ECL Other Amount Category Cash and cash equivalents L&R 1 39,962 39,962 AC 2 Mandatory cash balances with the CBR L&R 2,975 2,975 AC Placements with banks L&R 9,338 9,338 AC Financial Instruments at fair value through profit or loss (trade securities and derivatives) FVPL 349, ,141 FVPL FVOCI (equity instruments) Investment securities equity securities at FVOCI А AFS 3 3,935 3,935 Loans to customers L&R 266,245 (883) (4,197) 261,165 AC To: financial assets at FVOCI B (883) (883) Other financial assets at FVOCI n/a FVPL From: loans to customers amortized cost Non-financial assets Deferred tax asset Total assets 672,055 (4,197) 667,858 Financial liabilities Due to banks AC 194, ,135 AC Due to customers AC 358, ,914 AC Debt securities issued AC 15,744 15,744 AC Other borrowed funds AC 15,381 15,381 AC Subordinated debt AC 6,799 6,799 AC Derivative financial liabilities FVPL FVPL Non-financial liabilities Deferred tax liability 5,244 (840) 4,404 Provisions for financial guarantees n/a n/a Total liabilities 1 L&R loans and receivables. 2 AC amortized cost. 3 AFS available for sale. 596,654 (840) 595,814 А B The Group has elected to irrevocably designate its previous AFS equity instruments as equity instruments at FVOCI. The Group s analysis indicated that as at initial recognition, certain loans to customers did not meet the SPPI criterion. Therefore, the Group reclassified such loans previously measured at amortized cost as financial assets at FVPL as at 1 January The impact of transition to IFRS 9 on retained earnings is as follows: Reserves and retained earnings Retained earnings Closing balance under IAS 39 (31 December 2017) 78,302 Revaluation on reclassification of financial assets from measured at amortized cost to measured at FVPL Recognition of ECL under IFRS 9, including those for instruments at FVOCI (4,197) Related deferred tax 840 Opening balance under IFRS 9 (1 January 2018) 74,945 Total changes in equity due to adoption of IFRS 9 (3,357) 14

15 2. Basis of preparation (continued) Changes in accounting policies (continued) The following table reconciles the aggregate opening loan impairment allowances under IAS 39 and provisions for loan commitments and financial guarantee contracts in accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets to the ECL allowances under IFRS 9. Allowance for loan impairment under IAS 39 / IAS 37 as at 31 December 2017 Remeasurement Amortization of credit-impaired assets ECL under IFRS 9 (as at 1 January 2018) Allowance for impairment of Loans to customers (9,025) (4,197) (347) (13,569) Financial guarantees (120) (120) (9,145) (4,197) (347) (13,689) Segment reporting The Group has three operating segments: Retail banking ( Retail ): providing mass market financial services to low- and middle-income retail customers residing primarily in small towns. These services include issuance of mortgage, car and consumer loans, credit and installment cards, accepting term deposits and servicing current accounts, as well as a wide range of insurance products provided by third-party insurance companies and pension funds. Corporate and investment banking ( CIB ): extending loans (both in form of bonds and in form of bilateral loans) and providing investment and banking services, term deposits and settlement and transactional services to the major Russian corporations, state-owned companies and the constituent entities of the Russian Federation. In addition, CIB includes securities trading and own investments of the Group. CIB services also include providing access to small and medium businesses, individual entrepreneurs to public procurement through Group s proprietary electronic platforms, RTS-Tender.ru a digital auction platform for public procurement and Fintender.ru, a platform for online bank guarantees required for public procurement by law. Rosevrobank JSB (Rosevrobank or REB): as at 30 June 2018, financial statements of Rosevrobank formed a part of the Group s consolidated financial statements as a result of a business combination (Note 27). Until the completion of its integration, Rosevrobank results will be recorded as a separate operating segment. Management monitors each segment to assess its performance in order to allocate resources and to make management decisions. In 2018, the Group changed its approach to segment reporting and adjusted comparative data for the previous years. 15

16 3. Segment reporting (continued) For the six months ended 30 June 2018 Retail CIB REB Adjustments Total Revenue Interest income 15,566 20,674 4,896 41,136 Fee and commission income 7,881 2, ,072 Net gain on financial instruments at fair value through profit or loss Net gain on derecognition of financial assets at fair value through other comprehensive income Net foreign exchange gain and net gain on currency derivatives Other operating income 17 3, ,846 Inter-segment revenue 7,215 (7,215) Total revenue 30,679 27,136 6,781 (7,215) 57,381 Expenses Interest expense (10,843) (6,536) (1,367) (18,746) Obligatory deposit insurance (906) (21) (72) (999) Fee and commission expense (1,235) (300) (247) (1,782) Net loss on financial instruments at fair value through profit or loss (2,520) (2,520) Net loss on derecognition of financial assets at fair value through other comprehensive income (76) (76) Allowance for credit losses (2,166) (667) (1,608) (4,441) Other impairment and provisions (7) (799) (18) (824) Personnel expenses (5,779) (1,952) (1,335) (9,066) Other expenses (5,160) (1,048) (447) (6,655) Inter-segment expenses (7,215) 7,215 Total expenses (26,096) (21,134) (5,094) 7,215 (45,109) Segment results 4,583 6,002 1,687 12,272 Income tax expense (1,553) Profit for the period 10,719 For the six months ended 30 June 2017 (restated) Retail CIB Adjustments Total Revenue Interest income 10,147 23,402 33,549 Fee and commission income 7,036 1,570 8,606 Net gain on financial instruments at fair value through profit or loss 4,878 4,878 Net foreign exchange gain and net gain on currency derivatives Other operating income 5 1,338 1,343 Inter-segment revenue 7,922 (7,922) Total revenue 25,111 31,328 (7,922) 48,517 Expenses Interest expense (10,557) (6,388) (16,945) Obligatory deposit insurance* (588) (588) Fee and commission expense (831) (224) (1,055) Allowance for credit losses (1,213) (231) (1,444) Other impairment and provisions (112) (112) Personnel expenses (4,274) (1,591) (5,865) Other expenses (5,137) (87) (5,224) Inter-segment expenses (7,922) 7,922 Total expenses (22,600) (16,555) 7,922 (31,233) Segment results 2,511 14,773 17,284 Income tax expense (3,485) Profit for the period 13,799 * In the six month ended 30 June 2017, for comparability, the line Obligatory deposit insurance was presented separately from the Other expenses. 16

17 3. Segment reporting (continued) The following table presents assets and liabilities of the Group s operating segments: 30 June 2018 Retail CIB REB Total Segment assets 171, , , ,628 Segment liabilities 329, , , , December 2017 Retail CIB Total Segment assets 156, , ,499 Segment liabilities 288, , ,081 Net interest income For the three months ended 30 June For the six months ended 30 June Interest income calculated using the EIR method Loans to individuals 8,429 6,009 16,021 11,340 Loans to corporate customers 5,446 4,329 8,419 8,701 Investment securities Placements with banks and financial institutions Total interest income calculated using the EIR method 15,083 10,434 25,752 20,221 Other interest income Financial instruments at fair value through profit or loss 6,611 5,528 13,313 10,686 Gain on remeasurement of cash flows from interest-bearing assets acquired in business combination Net gains on swaps denominated in foreign currencies 652 1,323 1,073 2,642 Total other interest income 8,261 6,851 15,384 13,328 Total interest income 23,344 17,285 41,136 33,549 Interest expense Due to customers (7,801) (5,817) (14,174) (11,355) Due to banks (984) (1,809) (2,346) (3,844) Other borrowed funds (568) (624) (1,116) (1,131) Promissory notes and bonds issued (302) (291) (631) (535) Subordinated debt (417) (26) (479) (80) Total interest expense (10,072) (8,567) (18,746) (16,945) Obligatory deposit insurance (549) (307) (999) (588) Net interest income 12,723 8,411 21,391 16,016 Gain on remeasurement of cash flows from interest-bearing assets acquired in business combination comprise amounts that would have been recorded in a separate financial statements of Rosevrobank as a reversal of loan loss provisions recorded in previous accounting periods. 17

18 4. Net interest income (continued) The comparative data for the six months ended 30 June 2017 present net gains on swaps denominated in foreign currencies as a separate line in order to ensure comparability with the current period data. Previously, net gains on swaps denominated in foreign currencies formed a part of interest income from placements with banks and financial institutions. The Group enters into swaps denominated in foreign currencies through the Moscow Exchange in order to decrease the cost of funding. Interest expense on Other borrowed funds mainly relates to the interest expense on the loan provided by State Corporation Deposit Insurance Agency for the financial rehabilitation of Express-Volga Bank JSC (hereinafter, the EVB ) in September Fee and commission income For the three months ended 30 June For the six months ended 30 June Financial protection program membership fee 2,672 2,495 4,676 4,413 Plastic card operations 1,398 1,154 2,477 2,058 Commission for issuing bank guarantees , Settlement operations Agent fee for selling insurance products Other , ,462 4,739 11,072 8,606 Net foreign exchange gain/(loss) For the three months ended 30 June For the six months ended 30 June Dealing (3,712) (3,495) (4,462) (136) Net gains on currency derivative financial instruments (4,983) (515) (4,448) (126) Revaluation 9,178 4,021 9, Dealing represents a gain or loss on foreign currency contracts entered into by the Group through the Moscow Exchange in order to hedge long or short foreign currency positions to comply with the regulatory requirements. Net gains on currency derivative financial instruments represents a gain or loss on long-term swap contracts entered into by the Group in order to hedge long or short foreign currency positions to comply with the regulatory requirements. Revaluation represents a gain or loss on the revaluation of net assets and liabilities denominated in foreign currencies. Other operating income For the three months ended 30 June For the six months ended 30 June Bargain purchase gain (Note 27) 3,186 3,186 Disposal of property and equipment Disposal of foreclosed assets Income from operating sublease Gain on asset restructuring 1,089 Other , ,442 1,328 18

19 7. Other operating income (continued) Gain on asset restructuring represents cash received by the Group as a compensation for a conversion of bonds issued by a Russian bank to subordinated debt with the same nominal value and maturity of Personnel expenses For the three months ended 30 June For the six months ended 30 June Payroll, including bonuses (4,205) (2,398) (7,253) (4,649) Payroll-related taxes (1,008) (623) (1,813) (1,216) (5,213) (3,021) (9,066) (5,865) Other general and administrative expenses For the three months ended 30 June For the six months ended 30 June Advertising and marketing (811) (853) (1,388) (1,089) Rent (659) (494) (1,210) (941) Professional and cash collection services (394) (311) (772) (602) Depreciation and amortization (289) (238) (536) (447) Inventory (234) (261) (525) (456) IT support expenses (259) (197) (483) (377) Telecom services and postal expenses (191) (119) (405) (262) Maintenance of property and equipment (189) (166) (349) (290) Transport and business travel expenses (183) (207) (341) (276) Security (72) (53) (119) (102) Property insurance (36) (28) (70) (64) Taxes other than income tax (54) (73) (68) (142) Other (282) (94) (389) (176) (3,653) (3,094) (6,655) (5,224) Other impairment and provisions For the three months ended 30 June For the six months ended 30 June Contingencies (297) 186 (376) 336 Litigations (181) (375) (39) Other assets (26) (359) (333) (380) Foreclosed assets (15) Placements with banks (14) Reversal of impairment of investments in associates 249 (500) (172) (824) (112) 19

20 10. Other impairment and provisions (continued) The movements in other provisions for the six months ended 30 June 2018 and 2017 were as follows: Provisions for other assets Provision for litigations Provisions for contingencies Impairment of investments in associates Total As at 1 January ,602 Charge (reversal) (336) 83 Write-off Redemption of obligations (16) (16) As at 30 June ,669 As at 1 January , ,814 Charge (reversal) (249) 835 Write-off (42) (42) Redemption of obligations (44) (44) As at 30 June , ,563 Income tax expense For the three months ended 30 June For the six months ended 30 June Current income tax 594 (1,119) (1,655) (4,090) Origination of temporary differences (918) (383) (324) (1,502) (1,553) (3,485) The current general income tax rate for legal entities in the Russian Federation is 20%. Cash and cash equivalents 30 June December 2017 Due from the CBR 51,127 24,695 Short-term deposits and reverse REPO transactions with Russian banks and other financial institutions maturing in less than 90 days 16, Nostro accounts with Russian banks and other financial institutions 12,599 8,207 Cash on hand 7,969 5,988 Nostro accounts with OECD banks Short-term deposits with OECD banks maturing in less than 90 days ,407 39,962 Placements with banks 30 June December 2017 Term deposits with banks 8,300 9,307 Bonds of Russian banks held by the Group 32 Total placements with banks 8,300 9,339 Less allowance for impairment (1) Placements with banks, net 8,300 9,338 20

21 Financial instruments at fair value through profit or loss 30 June December 2017 Held by the Group Corporate bonds and Eurobonds 93,678 59,467 Bonds of companies with the state participation 57,972 43,269 Government and municipal bonds 42,292 27,863 Derivative financial instruments 6,752 9,240 Shares in companies with the state participation 252 Corporate shares 204 Total financial instruments at fair value through profit or loss held by the Group 200, ,043 Pledged under sale and repurchase agreements Corporate bonds and Eurobonds 98, ,363 Bonds of companies with the state participation 42,074 69,301 Government and municipal bonds 4,849 33,434 Shares in companies with the state participation 2 Total financial instruments at fair value through profit or loss pledged under sale and repurchase agreements 145, ,098 Total financial instruments at fair value through profit or loss 346, ,141 Securities at fair value through profit or loss The table below presents a breakdown of securities at fair value through profit or loss by industry. 30 June December 2017 Amount, Amount, % % Transport and infrastructure 58, % 46, % Metallurgy 55, % 39, % Government and municipal institutions 47, % 61, % Banks, including state-owned banks 46, % 59, % Leasing 28, % 20, % Petrochemicals 19, % 26, % Manufacturing 17, % 15, % Mining 15, % 16, % Diversified holdings and other financial institutions 14, % 15, % Construction and development 8, % 9, % Telecommunications 7, % 8, % Services 7, % 6, % Trade 5, % 4, % Chemical industry 5, % 5, % Agriculture and food processing 1, % 3, % Energy % 0.0% Other % % 340, % 339, % The table below presents a breakdown of securities at fair value through profit or loss by long-term issuer credit rating assigned by international rating agencies (S&P, Fitch or Moody s). If a security or an issuer has credit ratings from several international rating agencies, only the highest rating is taken into account. 30 June December 2017 Securities at fair value through profit or loss Issuers with credit rating from A+ to A- 2,180 Issuers with credit rating from BBB+ to BBB- 89,773 85,953 Issuers with credit rating from BB+ to BB- 159, ,003 Issuers with credit rating from B+ to B- 53,174 51,533 Unrated issuers 35,930 18,412 Total securities at fair value through profit or loss 340, ,901 21

22 14. Financial instruments at fair value through profit or loss (continued) Securities at fair value through profit or loss (continued) As at 30 June 2018, maturities of these securities were within a range of July 2018 August 2049 (31 December 2017: January 2018 August 2049), the coupon rates were within a range from 3.80% to 11.00% for USD-denominated debt securities; 7.49% for GBP-denominated debt securities, and from 5.18% to 15.00% for RUB-denominated debt securities (31 December 2017: from 3.72% to 11.00% for USD-denominated debt securities, 7.49% for GBP-denominated debt securities, and from 6.29% to 17.00% for RUB-denominated debt securities). As at 30 June 2018, the share of the largest issuer in the aggregate portfolio of securities at fair value through profit or loss was 6.63%. The maturity of bonds of this issuer ranged from April 2020 to April 2041; coupon rate was 5.70%-9.85% (31 December 2017: the share of the largest issuer (a state-owned financial institution) was 6.21%, maturity dates ranged from March 2018 to September 2032; coupon rate was 4.50%-9.75%). Derivative financial instruments The Group manages interest and currency risks by entering into derivative financial instruments (swaps) for trading. The table below shows the fair values of derivative financial instruments, recorded as assets or liabilities in the financial statements, and their notional amounts: Notional amount 30 June December 2017 Fair value Notional Fair value Asset Liability amount Asset Liability Interest rate swaps foreign contracts 119,049 4, ,544 2,056 Interest rate swaps domestic contracts 52,851 2, ,800 1,241 Currency swaps foreign contracts 3, Currency swaps domestic contracts 21, ,392 5,943 Foreign exchange forwards domestic contracts 1, Credit default swaps foreign contracts 24, ,024 15, Commodity contracts foreign contracts 2, Total derivative assets/liabilities 225,623 6,752 1, ,288 9, Loans to customers 30 June December 2017 Loans to individuals Car loans 65,142 56,706 Mortgages 52,116 30,228 Consumer loans 46,034 47,653 Credit cards 10,332 9,222 Total loans to individuals 173, ,809 Loans to corporate customers Loans to corporate customers 134,242 83,262 Loans to small businesses and other loans to customers* 44,284 2,530 Corporate bonds 9,837 10,551 Loans to constituent entities and municipalities of the Russian Federation 7,064 24,887 Bonds of companies with the state participation 4,730 5,933 Government and municipal bonds 4,039 4,298 Total loans to corporate customers 204, ,461 Total loans to customers measured at amortized cost 377, ,270 Less: allowance for loan impairment (16,161) (9,025) Loans to customers measured at amortized cost, net 361, ,245 * This group also includes loans to individuals issued on individual terms, with the amount not exceeding RUB 200 MM. 22

23 15. Loans to customers (continued) Allowance for impairment of loans to customers measured at amortized cost The table below shows the analysis of movements in the allowances for ECL for the loans to individuals for the six months ended 30 June The description of the credit risk measurement system employed by the Group and its approach to ECL measurement are disclosed in Note 2. Consumer loans Stage 1 Stage 2 Stage 3 Total Balance as at 1 January , ,455 5,507 Transfers to Stage 2 (67) 67 Transfers to Stage 3 (31) (611) 642 Reversal/(charge) for the period ,170 Write-offs (1,667) (1,667) Amortization of credit-impaired assets Recovery of amounts previously written off Balance as at 30 June , ,117 5,169 Car loans Stage 1 Stage 2 Stage 3 Total Balance as at 1 January ,728 Transfers to Stage 2 (33) 33 Transfers to Stage 3 (10) (313) 323 Reversal/(charge) for the period Write-offs (397) (397) Recovery of amounts previously written off Balance as at 30 June , ,182 2,469 Mortgages Stage 1 Stage 2 Stage 3 Total Balance as at 1 January ,599 Transfers to Stage 2 (30) 30 Transfers to Stage 3 (13) (186) 199 Reversal/(charge) for the period (71) Write-offs (10) (10) Amortization of credit-impaired assets Recovery of amounts previously written off Balance as at 30 June ,115 1,982 Credit cards Stage 1 Stage 2 Stage 3 Total Balance as at 1 January ,308 Transfers to Stage 2 (27) 27 Transfers to Stage 3 (86) (143) 229 Reversal/(charge) for the period Write-offs (322) (322) Recovery of amounts previously written off Balance as at 30 June ,314 The table below shows the analysis of movements in the allowances for ECL for the loans to corporate customers for the six months ended 30 June Description of the credit risk measurement system employed by the Group and its approach towards ECL measurement are disclosed in Note 2. Loans to corporate customers, government and municipal bonds, corporate bonds and bonds of companies with the state participation Stage 1 Stage 2 Stage 3 POCI assets Total Balance as at 1 January ,965 2,965 Transfers to Stage 2 (2,011) 2,011 Transfers to Stage 3 Reversal/(charge) for the period* 1,356 (21) 191 1,526 Write-offs Recovery of amounts previously written off Balance as at 30 June ,310 1, ,491 23

24 15. Loans to customers (continued) Allowance for impairment of loans to customers measured at amortized cost (continued) Loans to constituent entities and municipalities of the Russian Federation Stage 1 Stage 2 Stage 3 Total Balance as at 1 January Transfers to Stage 2 Transfers to Stage 3 Reversal/(charge) for the period (74) (74) Write-offs Recovery of amounts previously written off Balance as at 30 June Loans to small business and other loans to customers Stage 1 Stage 2 Stage 3 POCI assets Total Balance as at 1 January Transfers to Stage 2 (3) 3 Transfers to Stage 3 (4) (6) 10 Reversal/(charge) for the period Write-offs (55) (277) (332) Recovery of amounts previously written off Balance as at 30 June * The charge of allowance of 998 MM for loans to corporate customers results from consolidation of the loan portfolio as a part of the business combination with Rosevrobank. The respective gain of RUB 998 MM is recorded within interest income as a gain on remeasurement of cash flows from interest-bearing assets acquired in business combination (Note 4). Movements in the allowance for loan impairment for the six months ended 30 June 2017 are presented in a table below. Comparative amounts for the year ended 31 December 2017 comprise credit losses and reflect the results of assessment in accordance with IAS 39. Loans to corporate customers and bonds (state, municipal, corporate bonds and bonds of companies with the state participation) Loans to small businesses and other loans to customers Consumer loans Credit cards Loans to constituent entities and municipalities of the Russian Federation Mortgages Car loans Total As at 1 January 2017 (1,143) (189) (4,848) (829) (361) (357) (7,727) Reversal/(charge) for the period 102 (235) (660) (231) 139 (237) (322) (1,444) Reversal of amounts previously written off (1) (1,234) (158) (60) (1,453) Loans written off as uncollectible 253 1, ,764 As at 30 June 2017 (1,042) (171) (4,776) (722) (222) (608) (319) (7,860) Individual impairment (221) (221) Collective impairment (821) (171) (4,776) (722) (222) (608) (319) (7,639) (1,042) (171) (4,776) (722) (222) (608) (319) (7,860) Total amount of loans, individually determined to be impaired, before deducting any individually assessed impairment allowance 1,103 1,103 24

25 15. Loans to customers (continued) Credit quality of loans to individuals The following table provides information on the credit quality of loans to individuals as at 30 June 2018 : Stage 1 Stage 2 Stage 3 Total Consumer loans - Not overdue 39, ,179 - Overdue less than 30 days 1, ,851 - Overdue from 30 to 89 days ,097 - Overdue from 90 to 179 days 1,319 1,319 - Overdue from 180 to 360 days 2,588 2,588 Total consumer loans 40, ,103 46,034 Allowance for loan impairment (1,720) (332) (3,117) (5,169) Consumer loans, net 39, ,865 Credit cards - Not overdue 8, ,910 - Overdue less than 30 days Overdue from 30 to 89 days Overdue from 90 to 179 days Overdue from 180 to 360 days Total credit cards 9, ,332 Allowance for loan impairment (704) (51) (559) (1,314) Credit cards, net 8, ,018 Mortgages - Not overdue 47, ,572 - Overdue less than 30 days 1, ,105 - Overdue from 30 to 89 days Overdue from 90 to 179 days Overdue from 180 to 360 days Overdue more than 360 days Total mortgages 48,628 1,544 1,944 52,116 Allowance for loan impairment (698) (169) (1,115) (1,982) Mortgages, net 47,930 1, ,134 Car loans - Not overdue 61, ,194 - Overdue less than 30 days 1, ,602 - Overdue from 30 to 89 days Overdue from 90 to 179 days Overdue from 180 to 360 days Total car loans 62, ,677 65,142 Allowance for loan impairment (1,029) (258) (1,182) (2,469) Car loans, net 61, ,673 Total loans to individuals 161,585 3,428 8, ,624 Allowance for loan impairment (4,151) (810) (5,973) (10,934) Loans to individuals, net 157,434 2,618 2, ,690 25