B.I.N.BANK (JOINT-STOCK COMPANY)

Transcription

1 B.I.N.BANK (JOINT-STOCK COMPANY) Independent Auditors Report Interim Condensed Consolidated Financial Report 6 months Ended (Unaudited)

2 B.I.N.BANK (JOINT-STOCK COMPANY) TABLE OF CONTENTS Page STATEMENT OF MANAGEMENT S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE INTERIM CONDENCED CONSOLIDATED FINANCIAL STATEMENTS 1 INDEPENDENT AUDITORS REPORT 2 INTERIM CONDENSED CONSOLIDATED FINANCIAL REPORT FOR THE 6 MONTHS ENDED 30 JUNE : Interim condensed consolidated income statement 3 Interim condensed consolidated balance sheet 4 Interim condensed consolidated statement of changes in equity 5 Interim condensed consolidated statement of cash flows 6-7 Selected notes to the interim consolidated financial statements 8-34

3 B.I.N BANK (JOINT-STOCK COMPANY) STATEMENT OF MANAGEMENT S RESPONSIBILITIES FOR THE PREPARATION AND APPROVAL OF THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE 6 MONTHS ENDED 30 JUNE The following statement, which should be read in conjunction with the independent auditors responsibilities stated in the report of the independent auditors set out on page 2, is made with a view to distinguishing the respective responsibilities of management and those of the independent auditors in relation to the interim condensed consolidated financial statements of B.I.N.BANK (Joint-Stock Company) (the Bank ) and its subsidiaries (collectively the Group ). Management is responsible for the preparation of interim consolidated financial statements that present fairly the financial position of the Group at, the results of its operations, cash flows and changes in equity for the six months then ended, in accordance with International Accounting Standard 34 Interim Financial Reporting (IAS 34). In preparing the interim consolidated financial statements, management is responsible for: Selecting suitable accounting principles and applying them consistently; Making judgments and estimates that are reasonable and prudent; Stating whether IAS 34 have been followed, subject to any material departures disclosed and explained in the interim consolidated financial statements; and Preparing the consolidated financial statements on a going concern basis, unless it is inappropriate to presume that the Group will continue in business for the foreseeable future. Management is also responsible for: Designing, implementing and maintaining an effective and sound system of internal controls, throughout the companies consolidated in these interim financial statements; Maintaining proper accounting records that disclose, with reasonable accuracy at any time, the financial position of the Group, and which enable them to ensure that the interim consolidated financial statements of the Group comply with IAS 34; Maintaining statutory accounting records in compliance with legislation and accounting standards of the Russian Federation; Taking such steps as are reasonably available to them to safeguard the assets of the Group; and Detecting and preventing fraud, errors and other irregularities. The interim consolidated financial statements as at and for the six months then ended were authorized for issue on 10 September by the Group s Board of Directors. On behalf of the Board: President Chairman of the Board Mikail Osmanovich Shishkhanov Acting Chief Accountant Svetlana Aleksandrovna Ayvaz 10 September 10 September Moscow Moscow 1

4 ZAO Deloitte & Touche CIS Business Center Mokhovaya 4/7 Vozdvizhenka St., Bldg. 2 Moscow, Russia Tel: +7 (495) Fax: +7 (495) INDEPENDENT AUDITORS REPORT ON REVIEW OF INTERIM FINANCIAL INFORMATION To the Shareholders and Board of Directors of B.I.N.BANK (Joint-Stock Company): We have reviewed the accompanying interim condensed consolidated balance sheet of B.I.N.BANK (Joint-Stock Company) and its subsidiary (collectively the Group ) as of and the related interim condensed consolidated statements of income, changes in equity and cash flows for the six-month period then ended, and a summary of significant accounting policies and other explanatory notes. Management is responsible for the preparation and fair presentation of this interim financial information in accordance with International Accounting Standard 34 Interim Financial Reporting ( IAS 34 ). Our responsibility is to express a conclusion on this interim financial information based on our review. Scope of Review We conducted our review in accordance with International Standard on Review Engagements 2410, Review of Interim Financial Information Performed by the Independent Auditor of the Entity. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believe that the accompanying interim consolidated financial information does not present fairly, in all material respects, the financial position of the Group as of, and of its financial performance and its cash flows for the six-month period then ended in accordance with IAS September Moscow Member of Deloitte Touche Tohmatsu

5 B.I.N.BANK (JOINT-STOCK COMPANY) INTERIM CONDENSED CONSOLIDATED INCOME STATEMENT FOR THE SIX MONTH PERIOD ENDED 30 JUNE (in Russian Roubles and in thousands) Notes (unaudited) (unaudited) Interest income 5, 26 3,953,999 2,365,786 Interest expense 5, 26 (2,209,972) (1,225,505) NET INTEREST INCOME BEFORE PROVISION FOR IMPAIRMENT LOSSES ON INTEREST BEARING ASSETS 1,744,027 1,140,281 Initial recognition adjustment on interest bearing assets (212,221) (430,828) Provision for impairment losses on interest bearing assets 6 (266,515) (333,006) NET INTEREST INCOME 1,265, ,447 Net (loss)/gain on financial assets at fair value through profit or loss 7 (63,710) 11,082 Net gain on foreign exchange operations 8 200, ,296 Fee and commission income 9 822, ,782 Fee and commission expense 9 (81,708) (113,283) Other income 22,209 41,485 NET NON-INTEREST INCOME 899, ,362 OPERATING INCOME 2,164,804 1,281,809 OPERATING EXPENSES 10, 26 (1,368,184) (1,130,777) (Provision)/recovery of provision for impairment losses on other transactions 6 (3,842) 22,086 PROFIT BEFORE INCOME TAX 792, ,118 Income tax expense 11 (172,628) (94,202) NET PROFIT 620,150 78,916 Attributable to: Equity holders of the parent 548,631 17,530 Minority interest 71,519 61,386 EARNINGS PER SHARE Basic and diluted (RUR) On behalf of the Board: President Chairman of the Board Mikail Osmanovich Shishkhanov Acting Chief Accountant Svetlana Aleksandrovna Ayvaz 10 September 10 September Moscow Moscow The notes on pages 8 to 34 form an integral part of these interim condensed consolidated financial statements. The Independent Auditors Report is on page 2. 3

6 B.I.N.BANK (JOINT-STOCK COMPANY) INTERIM CONDENSED CONSOLIDATED BALANCE SHEET AS AT 30 JUNE (in Russian Roubles and in thousands) Notes (unaudited) ASSETS: Cash and balances with the Central Bank of the Russian Federation 13 2,824,261 5,096,235 Precious metals 14 28,319 28,227 Financial assets at fair value through profit or loss 15 9,228,926 1,847,397 Due from banks 16 4,482,961 10,699,313 Loans to customers 17, 26 44,184,567 38,611,611 Property, plant and equipment , ,839 Current income tax assets 27,554 22,098 Other assets , ,749 TOTAL ASSETS 62,126,267 57,018,469 LIABILITIES AND EQUITY LIABILITIES: Due to banks 20 4,565,136 3,616,246 Customer accounts 21, 26 44,031,642 37,342,917 Debt securities issued 22 5,652,595 8,831,083 Provisions 25 17,216 30,888 Other liabilities ,152 45,405 Total liabilities 54,391,741 49,866,539 EQUITY: Equity attributable to equity holders of the parent: Share capital 24 4,959,052 4,959,052 Share premium 24 2,500,594 2,500,594 Accumulated deficit (210,078) (758,709) Total equity attributable to equity holders of the parent 7,249,568 6,700,937 Minority interest 484, ,993 Total equity 7,734,526 7,151,930 TOTAL LIABILITIES AND EQUITY 62,126,267 57,018,469 On behalf of the Board: President Chairman of the Board Mikail Osmanovich Shishkhanov Acting Chief Accountant Svetlana Aleksandrovna Ayvaz 10 September 10 September Moscow Moscow The notes on pages 8 to 34 form an integral part of these interim condensed consolidated financial statements. The Independent Auditors Report is on page 2. 4

7 B.I.N.BANK (JOINT-STOCK COMPANY) INTERIM CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY FOR THE SIX MONTH PERIOD ENDED 30 JUNE (in Russian Roubles and in thousands) Share capital Share premium Accumulated deficit Total equity attributable to equity holders of the parent Minority interest Total equity ,959,052 2,500,594 (1,063,991) 6,395, ,696 6,779,351 Dividends declared on - ordinary share (17,090) (17,090) Net profit for the period (unaudited) ,530 17,530 61,386 78,916 (unaudited) 4,959,052 2,500,594 (1,046,461) 6,413, ,992 6,841,177 4,959,052 2,500,594 (758,709) 6,700, ,993 7,151,930 Dividends declared on - ordinary share (37,554) (37,554) Net profit for the period (unaudited) , ,631 71, ,150 (unadited) 4,959,052 2,500,594 (210,078) 7,249, ,958 7,734,526 On behalf of the Board: President Chairman of the Board Mikail Osmanovich Shishkhanov Acting Chief Accountant Svetlana Aleksandrovna Ayvaz 10 September 10 September Moscow Moscow The notes on pages 8 to 34 form an integral part of these interim condensed consolidated financial statements. The Independent Auditors Report is on page 2. 5

8 B.I.N.BANK (JOINT-STOCK COMPANY) INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE SIX MONTH PERIOD ENDED 30 JUNE (in Russian Roubles and in thousands) Notes (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Profit before income tax 792, ,118 Adjustments for: Provision for impairment losses on interest bearing assets 266, ,006 Initial recognition fair value adjustment on interest bearing assets 212, ,828 Provision/(recovery of provision) for impairment losses on other transactions 3,842 (22,086) Amortization of discount/(premium) on issued securities 47, ,027 Depreciation and amortization 62,731 41,822 Property disposal expenses 8,126 - Change in interest accruals, net 184, ,468 Unrealized gain on foreign exchange operations (50,501) (28,288) Cash flows from operating activities before changes in operating assets and liabilities 1,527,473 1,146,895 Changes in operating assets and liabilities (Increase)/decrease in operating assets: Minimum reserve deposit with the Central Bank of the Russian Federation (291,685) (268,762) Due from banks 5,207,174 2,193,639 Financial assets at fair value through profit or loss (7,214,620) 60,847 Precious metals (92) (1,800) Loans to customers (6,074,280) (10,446,998) Other assets (305,236) (50,005) Increase/(decrease) in operating liabilities Due to banks 988,444 1,276,318 Customer accounts 6,622, ,965 Other liabilities 41,881 32,858 Cash inflow/(outflow) from operating activities before taxation 501,727 (5,797,043) Income tax paid (178,084) (77,559) Net cash inflow/(outflow) from operating activities 323,643 (5,874,602) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property, plant and equipment (407,223) (150,565) Proceeds on sale of property, plant and equipment - 2,653 Net proceeds on net purchase of investments available-for-sale (12,000) (2,684) Net cash outflow from investing activities (419,223) (150,596) 6

9 B.I.N.BANK (JOINT-STOCK COMPANY) INTERIM CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED) FOR THE SIX MONTH PERIOD ENDED 30 JUNE (in Russian Roubles and in thousands) Notes (unaudited) (unaudited) CASH FLOWS FROM FINANCING ACTIVITIES: (Repayment of)/proceeds from debt securities issued, net (2,900,819) 6,280,351 Dividends paid 312 (76) Net cash (outflow)/inflow from financing activities (2,900,507) 6,280,275 Effect of changes in foreign exchange rate on cash and cash equivalents (1,588) (59,036) NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS (3,258,325) 196,041 CASH AND CASH EQUIVALENTS, beginning of year 13 6,252,357 4,293,754 CASH AND CASH EQUIVALENTS, end of year 13 2,994,032 4,489,795 Interest received and paid by the Group during amounted to RUR 3,936,947 thousand and RUR 2,006,978 thousand, respectively. Interest received and paid by the Group during amounted to RUR 1,887,746 thousand and RUR 1,009,887 thousand, respectively. On behalf of the Board: President Chairman of the Board Mikail Osmanovich Shishkhanov Acting Chief Accountant Svetlana Aleksandrovna Ayvaz 10 September 10 September Moscow Moscow The notes on pages 8 to 34 form an integral part of these interim condensed consolidated financial statements. The Independent Auditors Report is on page 2. 7

10 B.I.N.BANK (JOINT-STOCK COMPANY) SELECTED NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE SIX MONTH PERIOD ENDED 30 JUNE (UNAUDITED) (in Russian Roubles and in thousands, unless otherwise stated) 1. ORGANISATION B.I.N.BANK (Joint-Stock Company) (the Bank ) is an open joint-stock bank, which was incorporated in the Russian Federation with head office in Moscow in The Bank is regulated by the Central Bank of the Russian Federation (the CBR ) and conducts its business under general license number 2562, and renders a complete package of banking services to corporate clients engaged in various industries as well as to individuals. The registered office of B.I.N.BANK (JSC) is located at: 5a Grodnenskaya St., Moscow, , Russian Federation. As at the Bank has 36 branches operating in the Russian Federation and 16 sub-branches in Moscow and 12 representative offices. The Bank is a parent company of a banking group (the Group ) which includes the following enterprise consolidated in the financial statements: The Bank ownership interest/voting rights, % Name Country of operation As at As at JSCB Vyatka-Bank Russian Federation 4.98% (90.03%) 4.98% (90.03%) Joint-Stock Commercial Bank Vyatka-Bank (JSCB Vyatka-Bank ) is engaged in banking activities within the Russian Federation. The financial statements of JSCB Vyatka-Bank were consolidated into the Bank s financial statements beginning 1 January Though B.I.N.BANK (JSC) does not have control over JSCB Vyatka-Bank through direct holding. It has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. The Group provides services to several groups of companies, which operate mostly in the real estate management. As at and the loans issued to such companies constituted 24% and 27% of the total loan portfolio, respectively (Note 17). Thus, there is a concentration of operations and assets in respect of such companies. As at and, the following shareholders owned the issued shares. Legal shareholders: LLC TradeWest 19.99% 19.99% LLC TITON 19.99% 19.99% CJSC Universal Assets 19.99% 19.99% LLC Business Centre Zubarevsky 17.88% 17.88% CJSC Chaika Plaza 9.20% 9.20% OJSC IK Nadezhnost 3.23% 3.23% LLC Spetspromavtomatika 2.96% 2.96% CJSC PFK BIN 2.96% 2.96% CJSC Rossiysky Neftyanoy Export 2.93% 2.93% Other 0.87% 0.87% Total 100% 100% 8

11 Ultimate shareholders: Shishkhanov Mikail Osmanovich 87.07% 67.05% Gutseriev Sait-Salam Safarbekovich 6.19% 6.19% Kerimov Suleiman Abusaidovich % Other 6.74% 6.77% 100% 100% Effectively from 29 December the shareholding structure of B.I.N.BANK was changed by eliminating 4 nominal holding companies which transferred their stakes to other actual holding companies. The restructuring is aimed to increase transparency of the shareholding structure of B.I.N. BANK and resulted in no material changes in beneficiary owners stakes in share capital of B.I.N. BANK. These consolidated financial statements were authorized for issue by the Bank s Management Board on 10 September. 2. BASIS OF PRESENTATION Accounting basis This consolidated interim condensed financial report of the Group has been prepared in accordance with International Accounting Standard 34 ( IAS 34 ). Accordingly, it do not include all of the information required by International Financial Reporting Standards ( IFRS ) issued by the International Accounting Standard Board (the IASB ). These consolidated interim condensed financial report should be read in conjunction with annual consolidated financial statements of the Group as of and year then ended which were authorized to for issue on 10 April. This consolidated interim condensed financial report is presented in thousands of Russian Roubles ( RUR ), unless otherwise indicated. This financial report has been prepared under the historical cost conversion, except for the measurement at fair value of certain financial instruments and according to International Accounting Standard 29 Financial Reporting in Hyperinflationary Economies ( IAS 29 ). The Group applied IAS 29 from the date it was incorporated until 1 January Hyperinflation ceased to exist in the Russian Federation from 1 January 2003 for IAS 29 purposes. The Group maintains its accounting records in accordance with the Russian law. This consolidated interim condensed financial report has been prepared from the Russian statutory accounting records and have been adjusted to conform to IAS 34. Adjustments to this consolidated interim condensed financial report include reclassifications of certain assets and liabilities, income and expenses into the respective items of the balance sheet and income statement in order to reflect the economic substance of the transactions. Since the results of the Group s operations closely relate to and depend on changing market conditions, the results of the Group s operations for the interim period are not necessarily indicative of the results for the year. Key assumptions The preparation of financial statements in conformity with IAS 34 requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Estimates that are particularly susceptible to change relate to the provisions for impairment losses and the fair value of financial instruments. 9

12 Key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period include: Impairment allowance for loans to customers 1,864,191 Loans to customers are measured at amortized cost less allowance for impairment losses. The estimation of allowance for impairment losses involves an exercise of judgment. It is impracticable to assess the extent of the possible effects of key assumptions or other sources of uncertainty on these balances at the balance sheet date. Taxation is discussed in Note 25. Functional currency The functional currency of these financial statements is the Russian Rouble. 3. SIGNIFICANT ACCOUNTING POLICIES Basis of consolidation The consolidated financial statements incorporate the financial statements of the Bank and entity controlled by the Bank (its subsidiary) made up to end of reporting period. Control is achieved where the Bank has the power to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. On acquisition, the assets and liabilities and contingent liabilities of a subsidiary are measured at their fair values at the date of acquisition. Any excess of the cost of acquisition over the fair values of the identifiable net assets acquired is recognized as goodwill. Any deficiency of the cost of acquisition below the fair values of the identifiable net assets acquired (i.e. discount on acquisition) is credited to the consolidated income statement in the period of acquisition. The minority interest is stated at the minority s proportion of the fair values of the assets and liabilities recognized. Subsequently, any losses applicable to the minority interest in excess of the minority interest are allocated against the interests of the parent. The equity and net income attributable to equity holders of the parent and to minority shareholders interests are shown separately in the balance sheet and income statement, respectively. The results of subsidiaries acquired or disposed of during the year are included in the consolidated income statement from the effective date of acquisition or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the financial statements of subsidiaries to bring the accounting policies used into line with those used by the Group. All significant intra-group transactions, balances, income and expenses are eliminated on consolidation. 10

13 Recognition and measurement of financial instruments The Group recognizes financial assets and liabilities on its balance sheet when it becomes a party to the contractual obligation of the instrument. Regular way purchase and sale of the financial assets and liabilities are recognized using settlement date accounting. Regular way purchases of financial instruments that will be subsequently measured at fair value between trade date and settlement date are accounted for in the same way as for acquired instruments. Financial assets and liabilities are initially recognized at fair value plus, in the case of a financial asset or financial liability not at fair value through profit or loss transaction costs that are directly attributable to acquisition or issue of the financial asset or financial liability. The accounting policies for subsequent re-measurement of these items are disclosed in the respective accounting policies set out below. Cash and cash equivalents Cash and cash equivalents include cash on hand, unrestricted balances on correspondent and time deposit accounts with the Central Bank of the Russian Federation with original maturity within 90 days, advances to banks in countries included in the Organization for Economic Co-operation and Development ( OECD ), except for margin deposits for operations with plastic cards, and government debt securities carried at fair value through profit or loss, which may be converted to cash within a short period of time. For purposes of determining cash flows, the minimum reserve deposit required by the Central Bank of the Russian Federation is not included as a cash equivalent due to restrictions on its availability. Precious metals Assets and liabilities denominated in precious metals are translated at the current rate computed based on the second fixing of the London Metal Exchange rates using the RUR/USD exchange rate effective at the date. Changes in the bid prices are recorded in other income on operations with precious metals in the income statement. Due from banks In the normal course of business, the Group maintains advances and deposits for various periods of time with other banks. Due from banks with a fixed maturity term are subsequently measured at amortized cost using the effective interest method. Those that do not have fixed maturities are carried at amortized cost based on expected maturities. Amounts due from credit institutions are carried net of allowance for impairment losses, if any. Financial assets and liabilities at fair value through profit or loss Financial assets at fair value through profit or loss represent securities acquired principally for the purpose of selling them in the near future, or are a part of portfolio of identified financial instruments that are managed together and for which there is evidence of a recent and actual pattern of short-term profit taking or securities that upon initial recognition are designated by the Group at fair value through profit or loss. Financial assets at fair value through profit or loss are initially recorded and subsequently measured at fair value. The Group uses quoted market prices to determine fair value for financial assets at fair value through profit or loss. Fair value adjustment on financial assets at fair value through profit or loss is recognized in the consolidated income statement for the period. The Group does not reclassify financial instruments in or out of this category while they are held. Derivative financial instruments are entered into by the Group principally for managing currency and liquidity risks and include forwards on foreign currency. No derivatives are used by the Group for hedging purposes. 11

14 Repurchase and reverse repurchase agreements The Group enters into sale and purchase back agreements ( repos ) and purchase and sale back agreements ( reverse repos ) in the normal course of its business. Repos and reverse repos are utilized by the Group as an element of its treasury management and trading business. A repo is an agreement to transfer a financial asset to another party in exchange for cash or other consideration and a concurrent obligation to reacquire the financial assets at a future date for an amount equal to the cash or other consideration exchanged plus interest. These agreements are accounted for as financing transactions. Financial assets sold under repo are retained in the consolidated financial statements and consideration received under these agreements is recorded as collaterized deposit received. Assets purchased under reverse repos are recorded in the consolidated financial statements as cash placed on deposit which is collaterized by securities and other assets. In the event that assets purchased under reverse repo are sold to third parties, the results are recorded with the gain or loss included in net gains/(losses) on respective assets. Any related income or expense arising from the pricing difference between purchase and sale of the underlying assets is recognized as interest income or expense. Loans to customers Loans to customers are non-derivative assets with fixed or determinable payments that are not quoted in an active mark other than those classified in other categories of financial assets. Loans granted by the Bank are initially recognized at fair value plus related transaction costs. 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 as a loss on initial recognition of the loan and included in the income statement. Subsequently, loans are carried at amortized cost using the effective interest method. Loans to customers are carried net of any allowance for impairment losses. Write off of loans and advances Loans and advances are written off against allowance for impairment losses in case of uncollectibility of loans and advances, including through repossession of collateral. Loans and advances are written off after management has exercised all possibilities available to collect amounts due to the Group and after the Group has sold all available collateral. The decision on writing off bad debt against allowance for impairment losses for all major, preferential, unsecured and insider loans should necessarily be confirmed with a procedural document of judicial or notary bodies certifying that at the time of the decision the debt could not be repaid (partially repaid) with the debtor s funds. Impairment of financial assets The Group accounts for impairment losses of financial assets when there is objective evidence that a financial asset or group of financial assets is impaired. Impairment losses are measured as the difference between carrying amounts and the present value of expected future cash flows, including amounts recoverable from guarantees and collateral, discounted at the financial asset s original effective interest rate, for financial assets which are carried at amortized cost. If in a subsequent period the amount of the impairment loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognized, the previously recognized impairment loss is reversed. For financial assets carried at cost, the impairment losses are measured as the difference between the carrying amount of the financial asset and the present value of estimated future cash flows, discounted at the current market rate of return for a similar financial asset. Such impairment losses are not reversed. 12

15 The determination of impairment losses is based on an analysis of the risk assets and reflects the amount which, in the judgment of management, is adequate to provide for losses incurred. Provisions are made as a result of an individual appraisal of risk assets for financial assets that are individually significant, and an individual or collective assessment for financial assets that are not individually significant. The change in impairment losses is charged to profit, and the total of impairment losses is deducted in arriving at assets as shown in the consolidated balance sheet. Factors that the Group considers in determining whether it has objective evidence that an impairment loss has been incurred include information about the debtors or issuers liquidity, solvency and business and financial risk exposures, levels of and trends in delinquencies for similar financial assets, national and local economic trends and conditions, and the fair value of collateral and guarantees. These and other factors may, either individually or taken together, provide sufficient objective evidence that an impairment loss has been incurred in a financial asset or group of financial assets. The Group accounts for impairment losses on financial assets at amortized cost using allowance account, for financial assets measured at cost through direct write off. It should be understood that estimates of losses involve an exercise of judgment. While it is possible that in particular periods the Group may sustain losses that are substantial relative to the allowance for impairment losses, it is the judgment of management that the allowance for impairment losses is adequate to absorb losses incurred on the risk assets. Property, plant and equipment Property, plant and equipment acquired after 1 January 2003 are carried at historical cost less accumulated depreciation. Property, plant and equipment, acquired before 1 January 2003 are carried at historical cost restated for inflation less accumulated depreciation. Depreciation on assets under construction and those not placed in service commences from the date the assets are ready for their intended use. Depreciation of property, plant and equipment is charged on the carrying value of property, plant and equipment and is designed to write off assets over their useful economic lives. It is calculated on a straight line basis at the following annual prescribed rates: Buildings 2% Furniture and equipment 15-25% The carrying amounts of property, plant and equipment are reviewed at each balance sheet date to assess whether they are recorded in excess of their recoverable amounts, and where carrying values exceed this estimated recoverable amount, assets are written down to their recoverable amount. An impairment is recognized in the respective period and is included in operating expenses. After the recognition of an impairment loss the depreciation charge for property, plant and equipment is adjusted in future periods to allocate the assets revised carrying value, less its residual value (if any), on a systematic basis over its remaining useful life. Taxation Income tax expense represents the sum of the current and deferred tax expense. The current tax expense is based on taxable profit for the year. Taxable profit differs from net profit as reported in the consolidated income statement 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. 13

16 Deferred tax is the tax expected to be payable or recoverable on temporary differences between the carrying amounts of assets and liabilities in the 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 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. Deferred tax liabilities are recognized for taxable temporary differences arising on investments in subsidiaries and associates, and interests in joint ventures, except where the Group is able to control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The carrying amount of deferred tax assets is reviewed at each balance sheet 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 calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset is realized. Deferred tax is charged or credited in the consolidated income statement, except when it relates to items charged or credited directly to equity, in which case the deferred tax is also dealt with in equity. Tax balances are off-set and presented on a net basis if: The Group has a legally enforceable right to set off current tax assets against current tax liabilities; and Deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on the same taxable entity. The Russian Federation 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 income statement. Due to banks and customers and debt securities issued Customer and bank deposits and debt securities issued are initially recognized at fair value. Subsequently amounts due are stated at amortized cost and any difference between carrying and redemption value is recognized in the consolidated income statement over the period of the borrowings using the effective interest method. Provisions Provisions are recognized when the Group has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate of the obligation can be made. Financial guarantee contracts issued and letters of credit Financial guarantee contracts and letters of credit issued by the Group are credit insurance that provides for specified payments to be made to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due under the original or modified terms of a debt instrument. Such financial guarantee contracts and letters of credit issued are initially recognized at fair value. Subsequently they are measured at the higher of (a) the amount recognized as a provision and (b) the amount initially recognized less, where appropriate, cumulative amortization of initial premium revenue received over the financial guarantee contracts or letter of credit issued. 14

17 Share capital and share premium Contributions to share capital, made before 1 January 2003 are recognized at their cost restated for inflation. Contributions to share capital, made after 1 January 2003 are recognized at cost. Share premium represents the excess of contributions over the nominal value of the shares issued. Gains and losses on sales of treasury stock are charged or credited to share premium. External costs directly attributable to the issue of new shares, other than on a business combination, are deducted from equity net of any related income taxes. Dividends on ordinary shares are recognized in equity as a reduction in the period in which they are declared. Dividends that are declared after the balance sheet date are treated as a subsequent event under International Accounting Standard 10 Events after the Balance Sheet Date ( IAS 10 ) and disclosed accordingly. Retirement and other benefit obligations In accordance with the requirements of the Russian legislation pension system provides for calculation of current payments by the employer as a percentage of current total disbursements to staff. Such expense is charged in the period the related salaries are earned. Upon retirement all retirement benefit payments are made by pension funds selected by employees. The Group does not have any pension arrangements separate from the State pension system of the Russian Federation. In addition, the Group has no post-retirement benefits or other significant compensated benefits requiring accrual. Recognition of income and expense Interest income and expense are recognized on an accrual basis using the effective interest method. The effective interest method is a method of calculating the amortized cost of a financial asset or a financial liability (or group of financial assets or financial liabilities) and of allocating the interest income or interest expense over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash payments or receipts through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying amount of the financial asset or financial liability. Once a financial asset or a group of similar financial assets has been written down (partly 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. Interest income also includes income earned on investments in securities. Other income is credited to income statement when the related transactions are completed. Loan origination fees are deferred, together with the related direct costs, and recognized as an adjustment to the effective interest rate of the loan. All other commissions are recognized when services are provided. Foreign currency translation Monetary assets and liabilities denominated in foreign currencies are translated into RUR at the appropriate spot rates of exchange ruling at the balance sheet date. Foreign currency transactions are accounted for at the exchange rates prevailing at the date of the transaction. Profits and losses arising from these translations are included in net gain on foreign exchange operations. 15

18 Rates of exchange The exchange rates at the year-end used by the Bank in the preparation of the consolidated financial statements are as follows: RUR/USD RUR/EUR RUR/Gold (1 gramm) Offset of financial assets and liabilities Financial assets and liabilities are offset and reported net on the balance sheet when the Group has a legally enforceable right to set off the recognized amounts and the Group intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. In accounting for a transfer of a financial asset that does not qualify for derecognition, the Group does not offset the transferred asset and the associated liability. Fiduciary activities The Group provides depositary services to its customers that include transactions with securities on their depo accounts. Assets accepted and liabilities incurred under the fiduciary activities are not included in the Group s financial statements. The Group accepts the operational risk on these activities, but the Group s customers bear the credit and market risks associated with such operations. Segment reporting A segment is a distinguishable component of the Group that is engaged either in providing products or services (business segment) or in providing products or services within a particular economic environment (geographical segment), which is subject to risks and rewards that are different from those of other segments. Segments with a majority of revenue earned from sales to external customers and whose revenue, result or assets are ten per cent or more of all the segments are reported separately. Geographical segments of the Group have been reported separately within these consolidated financial statements based on the ultimate domicile of the counterparty, e.g. based on economic risk rather than legal risk of the counterparty. 4. PRIOR PERIOD RECLASSIFICATIONS The following reclassification has been made to the financial statements for six months ended to conform to the presentation for six months ended. Nature of reclassification As previously issued report As reclassified Nature of reclassification Interest income 1,934,958 2,365,786 Initial recognition fair value adjustment on interest bearing assets - (430,828) Initial recognition fair value adjustment on interest bearing assets 16

19 5. NET INTEREST INCOME Interest income Interest on loans to customers 3,580,626 2,116,063 Interest on due from banks 203, ,869 Interest on debt securities 170,212 79,854 Total interest income 3,953,999 2,365,786 Interest expense Interest on customer accounts 1,863, ,914 Interest on due to banks 184,051 81,882 Interest on debt securities issued 162, ,709 Total interest expense 2,209,972 1,225,505 Net interest income before provision for impairment losses on interest bearing assets 1,744,027 1,140, ALLOWANCE FOR IMPAIRMENT LOSSES, OTHER PROVISIONS The movements in allowance for impairment losses on interest earning assets were as follows: Loans to customers ,023,623 Provision 333,006 1,356,629 1,597,676 Provision 266,515 1,864,191 The movements in allowances for impairment losses on other transactions were as follows: Provision on other assets Guarantees and other commitments Total ,086 22,086 Recovery of provision for the period - (22,086) (22,086) ,888 30,888 Provision/(recovery of provision) for the period 17,514 (13,672) 3,842 17,514 17,216 34,730 Allowance for impairment losses on provision on other assets is deducted from other assets and allowance for impairment losses on guarantees and other commitments is shown in liabilities. 17

20 7. NET (LOSS)/GAIN ON FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS For the and, net (loss)/gain on assets financial assets at fair value through profit or loss of RUR (63,710) thousand and RUR 11,082 thousand, respectively, represents net (loss)/gain on debt securities. 8. NET GAIN ON FOREIGN EXCHANGE OPERATIONS Net gain on foreign exchange operations comprises: 6 month ended 6 month ended Foreign exchange operations, net 210, ,027 Translation differences, net (9,840) (7,731) Total net gain on foreign exchange operations 200, , FEE AND COMMISSION INCOME AND EXPENSE Fee and commission income and expense comprise: Fee and commission income: Organization of financing for clients 260, ,589 Settlements 206, ,237 Cash operations 223, ,595 Documentary operations 99,240 40,952 Other operations 33,286 27,409 Total fee and commission income 822, ,782 Fee and commission expense: Documentary operations 26, Settlements 22,125 88,234 Cash operations 21,454 17,083 Other operations 13,329 7,745 Total fee and commission expense 81, ,283 18

21 10. OPERATING EXPENSES Operating expenses comprise: Staff costs 636, ,310 Operating lease 140, ,878 Unified social tax 125,715 83,483 Taxes, other than income tax 89,579 65,288 Depreciation and amortization 62,731 41,822 Deposits insurance 61,489 30,078 Professional services 51,325 33,661 Security costs 24,003 26,631 Repairs and maintenance expense 22,926 40,609 Telecommunication services 22,071 28,387 Advertising and marketing expenses 17,718 68,066 Transportation and business trip expenses 16,244 11,132 Stationery and other office expenses 15,613 6,276 Donations 8,188 33,506 Other 73,548 61,650 Total operating expenses 1,368,184 1,130, INCOME TAXES The Group provides for taxes based on the tax accounts maintained and prepared in accordance with the tax regulations of countries where the Group and its subsidiaries operate and which may differ from International Financial Reporting Standards. The Group is subject to certain permanent tax differences due to non-tax deductibility of certain expenses and a tax free regime for certain income. Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Temporary differences as at and relate mostly to different methods of income and expense recognition as well as to recorded values of certain assets. Temporary differences as at and comprise: Deferred assets: Financial assets at fair value through profit or loss 136,752 1,087 Due from banks and loans to customers 121, ,484 Other assets 93, ,399 Property, plant and equipment 18,993 - Total deferred assets 371, ,970 Deferred liabilities: Property, plant and equipment - (113,431) Other (4,232) - Total deferred liabilities (4,232) (113,431) Net deferred assets 366, ,539 Net deferred tax asset at the statutory tax rate (24%) 88,047 71,169 Less: valuation allowance (88,047) (71,169) Net deferred tax asset

22 Relationships between tax expenses and accounting profit for the six months ended and are explained as follows: Profit before income tax 792, ,118 Statutory tax rate 24% 24% Tax at the statutory income tax rate 177,809 41,548 Tax effect on income taxed at different rates 12,458 (2,360) Tax effect of permanent differences (34,517) 23,563 Change in valuation allowances 16,878 31,451 Income tax expense (current) 172,628 94, EARNINGS PER SHARE Profit: Net profit for the period, attributable to equity holders of the parent 548,631 17,530 Weighted average number of ordinary shares for basic and diluted earnings per share 17,075,000 17,075,000 Earnings per share basic and diluted (RUR) CASH AND BALANCES WITH THE CENTRAL BANK OF THE RUSSIAN FEDERATION Cash 1,051,460 1,566,698 Balances with the Central Bank of the Russian Federation 1,772,801 3,529,537 Total cash and balances with the Central Bank of the Russian Federation 2,824,261 5,096,235 The balances with the Central Bank of the Russian Federation as at and include RUR 1,204,343 thousand and RUR 912,658 thousand, respectively, which represent the obligatory minimum reserve deposits with the CBR. The Bank is required to maintain the reserve balance at the CBR at all times. Cash and cash equivalents for the purposes of the statement of cash flows comprise the following: Cash and balances with the CBR 2,824,261 5,096,235 3,764,925 Government debt securities at fair value through profit or loss 1,147, , ,514 Loans and advances to banks in OECD countries 226,526 1,124,556 1,255,967 4,198,375 7,165,015 5,566,406 Less minimum reserve deposits and foreign currency deposits with the CBR (1,204,343) (912,658) (1,076,611) Total cash and cash equivalents 2,994,032 6,252,357 4,489,795 20

23 14. PRECIOUS METALS As at and precious metals are represented by gold bullion in vault. 15. FINANCIAL ASSETS AT FAIR VALUE THROUGH PROFIT OR LOSS Financial assets at fair value through profit or loss comprise: Interest rate to nominal % Interest rate to nominal % Government Bonds: U.S. Treasury strips 0-5% 5,996,431 - Russian State Bonds (OFZ) 9% 1,652, % 943,048 Eurobonds of the Ministry of Finance of the Russian Federation (OVGVZ) 3% 13,483 3% 1,176 7,662, ,224 Municipal Bonds Government of Moscow bonds 10% 1,988 10% 4,965 1,988 4,965 Corporate Bonds: Bonds of OJSC Russneft 9% 240,637 9% 201,362 Bonds of "Mosskomercbank" 9% 100,238 Bonds of "Sedmoy kontinent" 8% 100,192 - Bonds of "OGK-6" 8% 99,890 - Bonds of "Sibirberegfinans" 10% 99,378 - Bonds of "Promtraktor" 11% 89,210 - Bonds of "AK Bars" 8% 78,836 Bonds of "Koks" 9% 75,211 - Bonds of "RMK-Fininans" 9% 68,709 - Bonds of "Nomos" 8% 64,978 Bonds of "MKB" 10% 60,855 Bonds of "Sobinbank" 12% 46,839 Bonds of Centrotel 14% 46,291 14% 29,879 Bonds of "Moitk" 9% 45,450 - Bonds of "Ochakovo" 9% 26,071 - Bonds of "Miraks" 11% 19,289 - Bonds of "OGK-5" 8% 18,840 - Bonds of "Pyaterochka" 10% 10,479 - Bonds of "Uralsvinform" 10% 10,236 - Bonds of Gazprom 8% 4,945 8% 4,916 Bonds of "Kopeika" 9% 3,027 Bonds of "Hydro OGK" 8% 2 Bonds of Zenit - - 8% 121,518 Other 9,999 1,309, ,674 21

24 Interest rate to nominal % Interest rate to nominal % Promissory notes of financial institutions: Promissory notes of JSCB Rus Bank 4% 91,133 10% 104,085 Promissory notes of Moskommertsbank LLC % 32,984 Promissory notes of JSCB Dalnevostochniy 2% 59, Promissory notes of JSCB Ak Bars Bank 7% 56,667 8% 58,017 Promissory notes of JSCB NOMOS-BANK - - Promissory notes of JSCB Moscow Credit Bank 4 % 19,783 11% 38,204 Promissory notes of JSCB Sobinbank % 28,930 Promissory notes of JSCB Absolut Bank - 10% 75,834 Promissory notes of JSCB Alpha Bank - 8-9% 66,759 Promissory notes of JSCB Bank Petrocommerce - 8% 48,105 Promissory notes of JSCB Probusiness Bank % 39,001 Promissory notes of JSCB Slavinvest Bank 9% 28,308 11% 28,297 Promissory notes of JSCB Soyuz - 9% 10, , ,534 Total financial assets at fair value through profit or loss 9,228,926 1,847,397 As at and included in assets at fair value through profit or loss is accrued interest income on debt securities amounting to RUR 49,875 thousand and RUR 26,226 thousand, respectively. As at and assets at fair value through profit or loss included Russian State Bonds (OFZ) pledged under repurchase agreements with other customers amounting to RUR 492,245 thousand and RUR 14,168 thousand, respectively. All the agreements as at and have maturity have maturity less than 10 days (Note 21). 16. DUE FROM BANKS Due from banks comprise: Loans and advances to banks 4,085,230 7,088,133 Loans under reverse repurchase agreements - 3,250,651 Correspondent accounts with other banks 397, ,529 Total due from banks 4,482,961 10,699,313 22