JOINT STOCK COMMERCIAL BANK FORUM

Transcription

1 JOINT STOCK COMMERCIAL BANK FORUM Independent Auditors Report Financial Statements For the Year Ended 31 December 2003

2 JOINT STOCK COMMERCIAL BANK FORUM TABLE OF CONTENTS Page INDEPENDENT AUDITORS REPORT 1 FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003: Profit and loss account 2 Balance sheet 3 Statement of changes in shareholders equity 4 Statement of cash flows 5 Notes to financial statements 7-35

3 ЗАТ Делойт енд Туш ЮСК ZAT Deloitte & Touche USC Бізнес-центр Київ-Донбас Business Center Kyiv-Donbas вул. Пушкінська, 42/4 42/4, Pushkinska St. Київ Kyiv Україна Ukraine Тел. / Tel.: +38 (044) Факс / Fax: +38 (044) INDEPENDENT AUDITORS REPORT To the Shareholders of the Joint Stock Commercial Bank Forum : We have audited the accompanying balance sheet of the Joint Stock Commercial Bank Forum (hereinafter the Bank ) as of 31 December 2003 and the related profit and loss account and statements of changes in shareholders equity and cash flows for the year then ended. These financial statements are the responsibility of the Bank s management. Our responsibility is to express an opinion on these financial statements based on our audit. The financial statements as of 31 December 2002 and the year then ended were audited by another auditor, whose report dated 31 March 2003 expressed an unqualified opinion with regard to these financial statements. We conducted our audit in accordance with International Standards on Auditing. Those Standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements present fairly, in all material respects, the financial position of the Bank as of 31 December 2003, and the results of its operations and its cash flows for the year then ended, in accordance with International Financial Reporting Standards. 5 March 2004 Audit.Tax.Consulting.Corporate Finance. A member firm of Deloitte Touche Tohmatsu

4 JOINT STOCK COMMERCIAL BANK FORUM PROFIT AND LOSS ACCOUNT FOR THE YEAR ENDED 31 DECEMBER 2003 (in Ukrainian Hryvnias and in thousands) Notes Interest income 4,26 107,709 66,251 Interest expense 4,26 (57,293) (34,481) NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 50,416 31,770 Provision for loan losses 5 (19,034) (11,247) NET INTEREST INCOME 31,382 20,523 Net (loss)/gain on trading securities (242) 69 Net gain on foreign exchange operations 6 2,975 1,721 Fee and commission income 7,26 16,443 9,538 Fee and commission expense 7,26 (2,288) (1,356) Net gain on investment securities Other income NET NON-INTEREST INCOME 17,189 10,195 OPERATING INCOME 48,571 30,718 OPERATING EXPENSES 8,26 (33,113) (23,774) PROFIT BEFORE OTHER PROVISIONS AND LOSSES, INCOME TAX 15,458 6,944 (Provision)/Recovery of provision for losses on other transactions 5 (890) 182 PROFIT BEFORE INCOME TAX 14,568 7,126 Income tax expense 9 (5,955) (3,046) NET PROFIT 8,613 4,080 The notes on pages 7 to 35 form an integral part of these financial statements. The Independent Auditors' Report is presented on page 1. 2

5 JOINT STOCK COMMERCIAL BANK FORUM BALANCE SHEET AS OF 31 DECEMBER 2003 (in Ukrainian Hryvnias and in thousands) Notes ASSETS: Cash and balances with the National Bank of Ukraine ,076 60,691 Loans and advances to banks, less allowance for loan losses 5,11 244, ,550 Trading securities 12 21,326 2,174 Loans and advances to customers, less allowance for loan losses 5,13,26 731, ,523 Investment securities: - securities held-to-maturity 5,14 6, securities available for sale, less allowance for impairment 5, Investment in non-consolidated subsidiaries Fixed and intangible assets, less accumulated depreciation 16 36,491 24,468 Income tax assets 9 1,139 2,833 Other assets, less allowance for losses 5,17 5,000 3,315 TOTAL ASSETS 1,161, ,682 LIABILITIES AND SHAREHOLDERS EQUITY LIABILITIES: Loans from the National Bank of Ukraine 18 61,145 21,169 Deposits from banks , ,897 Customer accounts 20,26 698, ,567 Debt securities issued 21 16, Provisions 5,22,25 1, Income tax liabilities 9 1, Other liabilities 23 2,958 1,416 - Total liabilities 1,027, ,240 FINANCIAL COMMITMENTS AND CONTINGENCIES - - SHAREHOLDERS EQUITY: Share capital ,744 78,744 Revaluation reserve 4,975 - Retained earnings/(accumulated deficit) 311 (8,302) Total shareholders equity 134,030 70,442 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 1,161, ,682 The notes on pages 7 to 35 form an integral part of these financial statements. The Independent Auditors' Report is presented on page 1. 3

6 JOINT STOCK COMMERCIAL BANK FORUM STATEMENT OF CHANGES IN SHAREHOLDERS EQUITY FOR THE YEAR ENDED 31 DECEMBER 2003 (in Ukrainian Hryvnias and in thousands) Share capital Revaluation reserve Retained earnings/ (Accumulated deficit) Total shareholders equity 31 December ,471 - (12,382) 52,089 Share capital paid in 14, ,273 Net profit - - 4,080 4, December ,744 - (8,302) 70,442 Share capital increase 50, ,000 Revaluation result on fixed assets - 6,632-6,632 Deferred tax liability related to fixed assets revaluation - (1,657) - (1,657) Net profit - - 8,613 8, December ,744 4, ,030 The notes on pages 7 to 35 form an integral part of these financial statements. The Independent Auditors' Report is presented on page 1. 4

7 JOINT STOCK COMMERCIAL BANK FORUM STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2003 (in Ukrainian Hryvnias and in thousands) Notes CASH FLOWS FROM OPERATING ACTIVITIES: Profit before income taxes 14,568 7,126 Adjustments for: Provision for loan losses 5 19,034 11,247 Provision/(recovery of provision) for impairment of securities (6) Provision/(recovery of provision) for losses on other transactions (176) Dividend income (7) (15) Depreciation charge and impairment of fixed and other intangible assets 16 3,958 2,340 Loss on sale of fixed and intangible assets (69) (371) Net change in accruals (615) 12,586 Cash flow from operating activities before changes in operating assets and liabilities 37,759 32,731 Changes in operating assets and liabilities (Increase)/decrease in operating assets: Minimum reserve deposit with the National Bank of Ukraine (26,114) 2,999 Loans and advances to banks (108,372) (41,828) Trading securities (19,103) (117) Loans and advances to customers (356,487) (158,597) Other assets (1,734) (554) Increase in operating liabilities: Deposits from banks 124,129 53,684 Customer accounts 333, ,044 Other liabilities 1,521 1,365 Cash (outflow)/inflow from operating activities before income taxes (14,783) 67,727 Income tax paid (5,319) (5,110) Net cash (outflow)/inflow from operating activities (20,102) 62,617 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed and intangible assets (10,291) (13,438) Proceeds on sale of fixed and intangible assets 1 96 Purchase of investment securities (6,556) - Proceeds from sale and redemption of investment securities - 2 Net cash outflows from investing activities (16,846) (13,340) CASH FLOWS FROM FINANCING ACTIVITIES: Share capital increase 24 50,000 - Sale of treasury shares 24-14,273 Proceeds from debt securities issued 15,092 - Repayment of debt securities issued - (4,509) Net cash inflows from financing activities 65,092 9,764 5

8 JOINT STOCK COMMERCIAL BANK FORUM STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 DECEMBER 2003 (CONTINUED) (in Ukrainian Hryvnias and in thousands) Notes NET INCREASE IN CASH AND CASH EQUIVALENTS 28,144 59,041 EXCHANGE RATES CHANGES EFFECT ON CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD 10 64,053 4,454 CASH AND CASH EQUIVALENTS AT END OF THE PERIOD 10 92,276 64,053 Interest paid and received by the Bank in cash during the year ended 31 December 2003 amounted to UAH 102,763 thousand and UAH 62,226 thousand, respectively. Interest paid and received by the Bank in cash during the year ended 31 December 2002 amounted to UAH 53,177 thousand and UAH 30,718 thousand, respectively. The notes on pages 7 to 35 form an integral part of these financial statements. The Independent Auditors' Report is presented on page 1. 6

9 JOINT STOCK COMMERCIAL BANK FORUM NOTES TO THE FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2003 (in Ukrainian Hryvnias and in thousands) 1. ORGANISATION Bank Forum (the Bank ) is a joint-stock commercial bank which was incorporated in Ukraine on 7 December 1993 as closed joint-stock company Lad-Credit Bank. The address of its registered office is as follows: 7 Verkhovnoy Rady Blvd., Kyiv, Ukraine. The Bank is regulated by the National Bank of Ukraine (the NBU ) and conducts its business under license number 62 dated 31 January The Bank's primary business consists of commercial activities, trading with securities, foreign currencies, originating loans and guarantees, and other banking activities. The Bank has 8 branches in the Ukraine. The number of employees of the Bank as of 31 December 2003 and 2002 was 643 and 364, respectively. As of 31 December 2003, the following shareholders owned the Bank. Shareholder % SK Provita 41.4 Elmak Ltd 16.8 Kontinintal-Ukraina Ltd 16.2 Euro Finans Ltd 15.8 Other 9.8 Total These financial statements were authorized for issue by the Management Board on 5 March BASIS OF PRESENTATION Accounting basis These financial statements of the Bank have been prepared in accordance with International Financial Reporting Standards ( IFRS ). These financial statements are presented in thousands of Ukrainian Hryvnias ( UAH ), unless otherwise indicated. These financial statements are prepared on accrual basis under the historical cost convention modified for the measurement at fair value of available-for-sale investment securities, financial assets and financial liabilities held for trading, and according to International Accounting Standard ( IAS ) 29 Financial Reporting in Hyperinflationary Economics. The Bank maintains its accounting records in accordance with Ukrainian law. These financial statements have been prepared from the Ukrainian statutory accounting records and have been adjusted to conform with IFRS. 7

10 Shareholders equity as at 31 December 2003 and 2002 and profit for the years then ended are reconciled between Statutory Accounting Legislation and IFRS as follows: Equity Profit/(loss) Equity Profit/(loss) Statutory Accounting Legislation 141,233 7,582 77,461 5,340 IAS 29 application 5,634-5,634 - Additional accruals 1,698 1, Depreciation (463) 1,165 (1,628) 652 Provisions for losses (13,655) 984 (14,639) (3,641) Revaluation of fixed assets (1,215) Fair value adjustments, net (520) (677) Deferred taxation 1,374 (1,682) 3,056 1,050 Other, net (56) 142 (198) (269) International Financial Reporting Standards 134,030 8,613 70,442 4,080 In accordance with IAS 29 the economy of the Ukraine was considered to be hyperinflationary during 2000 and prior years. As of 1 January 2001, the Ukrainian economy is no longer considered to be hyperinflationary and the values of the Bank s non-monetary assets, liabilities and shareholders equity as stated in measuring units as of 31 December 2000 have formed the basis for the amounts carried forward to 1 January The preparation of financial statements in conformity with IFRS 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 losses on loans and impairment and the fair value of financial instruments. Measurement currency The measurement currency of these financial statements is UAH. 3. SIGNIFICANT ACCOUNTING POLICIES Investments in non-consolidated subsidiaries Investments in corporate shares where the Bank owns more than 20% of share capital, but does not have ability or intent to control or exercise significant influence over operating and financial policies, or non-consolidation of such companies does not have a significant effect on the financial statements taken as a whole, or the Bank intends to resell such investments in the nearest future, as well as investments in corporate shares where the Bank owns less than 20% of share capital, are accounted for at fair value or approximated cost, or at cost of acquisition, if the fair value of investments cannot be determined. Management periodically assesses the carrying values of such investments and provides allowances for impairment, if necessary. Recognition and measurement of financial instruments The Bank recognizes financial assets and liabilities on its balance sheet when, and only when, it becomes a party to the contractual provisions of the instrument. Regular way purchase and sale of the financial assets and liabilities are recognized using settlement date accounting. Financial assets and liabilities are initially recognized at cost, which is the fair value of consideration given or received, respectively, including or net of any transaction costs incurred, respectively. The accounting policies for subsequent re-measurement of these items are disclosed in the respective accounting policies set out below. 8

11 Cash and cash equivalents Cash and cash equivalents include cash, unrestricted balances on correspondent and time deposit accounts with the National Bank of Ukraine (the NBU ) 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, 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 National Bank of Ukraine is not included as a cash equivalent due to restrictions on its availability (Note 10). Loans and advances to banks In the normal course of business, the Bank maintains advances or deposits for various periods of time with other banks. Loans and advances to 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 cost. Amounts due from credit institutions are carried net of any allowance for losses. Trading securities Trading securities represent debt and equity securities held for trading that are acquired principally for the purpose of generating a profit from short-term fluctuations in price or dealer s margin. Trading securities are initially recorded at cost which approximates fair value of the consideration given and subsequently measured at fair value. The Bank uses quoted market prices to determine fair value for the Bank s trading securities. When market prices are not available or if liquidating the Bank s position would reasonably be expected to impact market prices, fair value is determined by reference to price quotations for similar instruments traded in different markets or management s estimates of the amounts that can be realized from an orderly disposition over a period of time, assuming current market conditions. Fair value adjustment on trading securities is recognized in profit and loss for the period. Originated loans Loans originated by the Bank are financial assets that are created by the Bank by providing money directly to a borrower or by participating in loan facility, other that those that are originated with the intent to be sold immediately or in the short term, which are classified as trading investments. Loans granted by the Bank are initially recognized in accordance with the policy stated above. The difference between nominal amount of consideration given and the amortized cost of loans issued at other than market terms is recognized in the period the loan is issued as initial recognition adjustment discounting using market rates at inception and included in profit and loss account. Loans to customers with fixed maturities are subsequently measured at amortized cost using the effective interest method. Those that do not have fixed maturities are carried at cost. Loans and advances to customers are carried net of any allowance for loan losses. Write off of loans Loans are written off against allowance for loan losses in case of uncollectibility of loans and advances, including through repossession of collateral. Loans are written off in accordance with the current legislation. Non-accrual loans Loans are placed on non-accrual status when interest or principal is delinquent for a period in excess of 90 days, except when all amounts due are fully secured by cash or marketable securities and collection proceedings are in process. Interest income is not recognized if recovery is doubtful. Subsequent payments by borrowers are applied to either principal or delinquent interest based on individual arrangements with the borrower. A non-accrual loan are restored to accrual status when all principal and interest amounts contractually due are reasonably assured of repayment within a reasonable period. Allowance for losses The Bank establishes an allowance for losses of financial assets when it is probable that the Bank will not be able to collect the principal and interest according to the contractual terms of financial assets, which are carried at cost or amortized cost. The allowance for losses is defined 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 original effective interest rate of the financial asset. For financial assets that do not have fixed maturities, expected future cash flows are discounted using periods during which the Bank expects to realize the loan. 9

12 The determination of the allowance for loan losses is based on an analysis of the loan portfolio and reflects the amount which, in the judgment of management, is adequate to provide for losses inherent in the loan portfolio. Specific provisions are made as a result of a detailed appraisal of risk assets. In addition, provisions are carried to cover potential risks, which although not specifically identified, are present in the loan portfolio judging by the previous experience. The change in the allowance for loan losses is charged to profit and the total of the allowance for loan losses is deducted in arriving at loans and advances to customers and banks. Management's evaluation of the allowance is based on the Bank s past loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and current economic conditions. It should be understood that estimates of loan losses involve an exercise of judgment. While it is possible that in particular periods the Bank may sustain losses, which are substantial relative to the allowance for loan losses, it is the judgment of management that the allowance for loan losses is adequate to absorb losses inherent in the loan portfolio. Securities held-to-maturity Securities held-to-maturity are debt securities with determinable or fixed payments. The Bank has the positive intent and ability to hold them to maturity. Such securities are carried at amortized cost, less any allowance for impairment plus accrued coupon income. Amortized discounts are recognized in the interest income using the effective interest method over the period to maturity. Securities available-for-sale Securities available-for-sale represent debt and equity investments that are intended to be held for an indefinite period of time. Such securities are initially recorded at cost which approximates the fair value of the consideration given. Subsequently the securities are measured at fair value, with such re-measurement included in the profit and loss account, plus accrued coupon income. The Bank uses quoted market prices to determine fair value for the Bank s securities available-for-sale. If such quotes do not exist, management estimation is used. Non-marketable securities that do not have fixed maturities are stated at cost, less allowance for impairment unless there are other appropriate and workable methods of reasonably estimating their fair value. The financial result of sales of securities available-for-sale that are valued at cost and no fair value exist for them is calculated using LIFO method. Fixed and intangible assets Fixed and intangible assets are carried at historical cost less accumulated depreciation and any accumulated impairment loss, except for buildings which are revalued as of 31 December 2003 to reflect the change of their fair value less accumulated depreciation. Fixed and intangible assets, acquired before 1 January 2003 are carried at historical cost restated for inflation less accumulated depreciation and any accumulated impairment loss. 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 fixed and intangible assets is designed to write off assets over their useful economic lives and is calculated on a straight line basis at the following annual prescribed rates: Buildings 2% Computers and office equipment 20% Motor vehicles 25% Furniture and fittings 10% Intangible assets 25% Leasehold improvements Length of lease The carrying amounts of fixed and intangible assets 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 other administrative and operating expenses. After the recognition of an impairment loss the depreciation charge for fixed assets 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. 10

13 Leasehold improvements are amortized over the life of the related leased asset. Expenses related to repairs and renewals are charged when incurred and included in other administrative and operating expenses unless they qualify for capitalization. Impairment loss If the recoverable amount of an asset is less that its carrying amount, the carrying amount of the asset is reduced to its recoverable value. The difference being an impairment loss is recognized as an expense in the profit and loss account for the year in which it arises. Finance leases Leases that transfers substantially all the risks and rewards incident to ownership of an asset. Title may or may not eventually be transferred. Whether a lease is a finance lease or an operating lease depends on the substance of the transaction rather than the form of the contract. The lease classified as a finance lease if: the lease transfers ownership of the asset to the lessee by the end of the lease term; the lessee has the option to purchase the asset at a price which is expected to be sufficiently lower than the fair value at the date the option becomes exercisable such that, at the inception of the lease, it is reasonably certain that the option will be exercised; the lease term is for the major part of the economic life of the asset even if title is not transferred; at the inception of the lease the present value of the minimum lease payments amounts to at least substantially all of the fair value of the leased asset; and the leased assets are of a specialised nature such that only the lessee can use them without major modifications being made. Bank as lessor The Bank presents leased assets as loans equal to the net investment in the lease. Finance income is based on a pattern reflecting a constant periodic rate of return on the net investment outstanding. Initial direct costs are recognized as expenses when incurred. Operating leases Leases of assets under which the risks and rewards of ownership are effectively retained with the lessor are classified as operating leases. Bank as lessee Lease payments under operating lease are recognized as expenses on a straight-line basis over the lease term and included into operating expenses. Bank as lessor The Bank presents assets subject to operating leases in the balance sheets according to the nature of the asset. Lease income from operating leases is recognized in profit and loss account on a straight-line basis over the lease term as other operating income. The aggregate cost of incentives provided to lessees is recognized as a reduction of rental income over the lease term on a straight-line basis. Initial direct costs incurred specifically to earn revenues from an operating lease are recognized as an expense in the profit and loss account in the period in which they are incurred. Taxation Taxes on income are computed in accordance with the laws of Ukraine. Deferred taxes, if any, are provided on items recognized in different periods for financial reporting purposes and income tax purposes, using the balance sheet liability method at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled. Deferred tax liabilities, if any, which result from temporary differences, are provided for in full. Deferred tax assets are recorded to the extent that there is a reasonable expectation that these assets will be realized. Deferred income tax assets and liabilities are offset when: the Bank has a legally enforceable right to set off the recognized amounts of current tax assets and current tax liabilities; the Bank has an intention to settle on a net basis, or to realize the asset and settle the liability simultaneously; the deferred tax assets and the deferred tax liabilities relate to income taxes levied by the same taxation authority in the each future period in which significant amounts of deferred tax liabilities and assets are expected to be settled or recovered. 11

14 Ukraine also has various other taxes, which are assessed on the Bank s activities. These taxes are included as a component of operating expenses in the profit and loss account. Deposits from banks and customers Customers and bank deposits are initially recognized at cost, which amounts to the issue proceeds less transaction costs incurred. Subsequently amounts due are stated at amortized cost and any difference between net proceeds and the redemption value is recognized in the profit and loss account over the period of the borrowings using the effective interest method. If the Bank purchases its own debt, it is removed from the balance sheet and the difference between the carrying amount of a liability and the consideration paid is included in net interest income. Debt securities issued Debt securities issued represent certificates of deposit and bonds issued by the Bank to customers. They are accounted according the same principles used for customer and bank deposits. Provisions Provisions are recognized when the Bank 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. Share capital Share capital is recognized at restated cost. Share capital contributions made in the form of assets other than cash are stated at their fair value at the date of contribution. Treasury stock is recorded at restated cost. 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 shareholders 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 IAS No. 10 Events After the Balance Sheet Date and disclosed accordingly. Retirement and other benefit obligations The Bank does not have any pension arrangements separate from the State pension system of Ukraine, which requires current contributions by employer calculated as a percentage of current gross salary payments; such expense is charged in the period the related salaries are earned. In addition, the Bank has no post-retirement benefits or significant other compensated benefits requiring accrual. Contingencies Contingent liabilities are not recognized in the financial statements unless it is probable that an outflow of resources will be required to settle the obligation and a reliable estimate can be made. A contingent asset is not recognized in the financial statements but disclosed when an inflow of economic benefits is probable. Recognition of income and expense Interest income and expense are recognized on an accrual basis calculated using the effective yield method. The recognition of interest income is suspended when loans become overdue by more then 90 days. Interest income includes also interest income earned on investment and trading securities. Commissions and other income are credited to income when the related transactions are completed. Loan origination fees, when significant, are deferred (together with related direct costs) and recognized as an adjustment to the loans effective yield. Non-interest expenses are recognized on an accrual basis. Foreign currency translation Monetary assets and liabilities denominated in foreign currencies are translated into Ukrainian Hryvnias 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 transaction. Profits and losses arising from these translations are included in net gain on foreign exchange operations. 12

15 Rates of exchange The exchange rates and prices on precious metals at year-end used by the Bank in the preparation of the financial statements are as follows: 31 December December 2002 UAH /USD UAH /EUR Offset of financial assets and liabilities Financial assets and liabilities are offset and reported net on the balance sheet when the Bank has a legally enforceable right to set off the recognized amounts and the Bank intends either to settle on a net basis or to realize the asset and settle the liability simultaneously. Reclassifications Certain reclassifications have been made to the financial statement as of 31 December 2002 to conform to the presentation as of 31 December NET INTEREST INCOME Net interest income comprises: Interest income Interest on loans and advances to customers 98,046 62,167 Interest on loans and advances to banks 8,613 3,362 Interest on debt securities 1, Total interest income 107,709 66,251 Interest expense Interest on customer accounts (44,478) (21,674) Interest on deposits from banks (12,212) (12,515) Interest on debt securities issued (603) (292) Total interest expense (57,293) (34,481) Net interest income before provision for loan losses 50,416 31, ALLOWANCE FOR LOSSES AND IMPAIRMENT AND PROVISIONS The movements in allowance for losses on interest earning assets, were as follows: Loans and advances to banks Loans and advances to customers Total 31 December 2001 (65) (11,971) (12,036) Provision (1,558) (9,689) (11,247) Exchange rate differences - (6) (6) 31 December 2002 (1,623) (21,666) (23,289) Provision (2,299) (16,735) (19,034) Exchange rate differences - (79) (79) 31 December 2003 (3,922) (38,480) (42,402) 13

16 The movements in allowances for other losses, were as follows: Investment securities availablefor-sale Other assets Guarantees and other commitments Total 31 December 2001 (76) (15) (782) (873) Recovery / (Provision) 6 (8) Write- offs Exchange rate differences - - (1) (1) 31 December 2002 (70) (17) (599) (686) Provision (223) (49) (618) (890) Exchange rate differences - - (5) (5) 31 December 2003 (293) (66) (1,222) (1,581) Allowances for losses on assets are deducted from the related assets. Provisions for claims, guarantees and commitments are recorded in liabilities. 6. NET GAIN ON FOREIGN EXCHANGE OPERATIONS Net gain on foreign exchange operations comprise: Dealing, net 2,733 1,157 Translation differences, net Total net gain on foreign exchange operations 2,975 1, FEES AND COMMISSIONS INCOME AND EXPENSE Fees and commissions income and expense comprise: Fees and commissions income: Settlements 7,565 4,986 Foreign exchange operations 5,614 2,489 Off-balance sheet operations 1, Credit services Cash operations Operations with securities Other operations Total fees and commissions income 16,443 9,538 Fees and commissions expense: Settlements (844) (488) Off-balance sheet operations (694) - Credit services (472) (380) Foreign exchange operations (45) (149) Operations with securities (40) (23) Other operations (193) (316) Total fees and commissions expense (2,288) (1,356) 14

17 8. OPERATING EXPENSES Salary and bonuses 12,134 8,686 Depreciation of fixed and intangible assets 3,958 2,789 Social security costs 3,302 2,207 Insurance expenses 2, Communication expenses 2,023 1,477 Advertising and marketing expenses 1,693 1,124 Operating lease expense 1,639 1,027 Repairs and maintenance expense 986 1,023 Security expenses Payments to deposit insurance fund Miscellaneous office expenses Travel and transportation expenses Sponsorship and charity Professional services fees Business trips Taxes, other than income tax Loss on fixed assets disposals Other 19 1,125 Total operating expenses 33,113 23, INCOME TAXES The Bank provides for taxes based on the statutory tax accounts maintained and prepared in accordance with the Ukrainian statutory tax regulations which may differ from International Financial Reporting Standards. During the years ended 31 December 2003 and 2002, the Ukrainian s tax rate for corporations profits was 30%. According to the new tax code that came into effect from 1 January 2004, the corporate income tax rate will be reduced to 25%. The income tax expenses consists of the following: Current income tax expense 5,676 4,307 Deferred tax expense/(benefit) 279 (1,261) Income tax expense 5,955 3,046 Relationships between tax expenses and accounting profit for the years ended 31 December 2003 and 2002 are explained as follows: Profit before income taxes 14,568 7,126 Statutory tax rate 30% 30% Theoretical tax at the statutory tax rate 4,370 2,138 Tax effect of permanent differences 1, Non-deductible expenses 1, Tax relief - (21) Other permanent differences - (50) Effect of changes in income tax rate Income tax expense 5,955 3,046 15

18 Income tax assets and liabilities consist of the following: Current tax assets Deferred tax assets 893 2,829 Income tax assets 1,139 2,833 Current tax liabilities 1, Deferred tax liabilities - - Income tax liabilities 1, The Bank is subject to certain permanent tax differences due to non-tax deductibility of exchange losses and other expenses and tax-free regime under local tax regulations. 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 of 31 December 2003 and 2002 relate mostly to different methods of income and expense recognition as well as to recorded values of certain assets. Temporary differences as of 31 December 2003 and 2002 comprises: Deferred assets: Loans to banks and customers 4,109 3,579 Accrued expenses Tax loses carried forward - 68 Total deferred assets 4,457 3,986 Deferred liabilities: Investment securities (1,430) - Fixed assets (477) (849) Revaluation of fixed assets (1,657) - Accrued income - (308) Total deferred liabilities (3,564) (1,157) Net deferred tax asset 893 2,829 Deferred income tax asset At the beginning of the period 2,829 1,568 Charged to expense/(benefit) (279) 1,261 Charged to equity (1,657) - At the end of the period 893 2,829 16

19 10. CASH AND BALANCES WITH THE NATIONAL BANK OF UKRAINE Cash on hand 20,594 10,273 Balance with the National Bank of Ukraine 93,482 50,418 Total cash and balances with the National Bank of Ukraine 114,076 60,691 The balances with National Bank of Ukraine as of 31 December 2003 and 2002 include UAH 45,206 thousand and UAH 19,092 thousand, respectively, which represents the minimum reserve deposits required by the NBU. The Bank is required to maintain the reserve balance at the NBU at all times. Cash and cash equivalents for the purposes of the statement of cash flows comprise: Cash and balances with the National Bank of Ukraine 114,076 60,691 Loans and advances to banks in OECD countries 23,406 22,454 Less minimum reserve deposit with the National Bank of Ukraine (45,206) (19,092) Total Cash and cash equivalents 92,276 64, LOANS AND ADVANCES TO BANKS Loans and advances to banks comprise: Loans to banks 128,665 81,044 Advances to banks 119,739 58,036 Accrued interest income on loans and advances to banks Less allowance for loan losses (3,922) (1,623) Total loans and advances to banks 244, ,550 Movements in allowances for loan losses for the years ended 31 December 2003 and 2002 are disclosed in Note 5. As of 31 December 2003 and 2002 the Bank had 9 and 3 loans and advances totaling UAH 161,029 thousand and UAH 19,050 thousand, respectively, which individually exceeded 10% of the Bank s equity. As of 31 December 2003 and 2002 the Bank had loans and advances to banks totaling UAH 224,071 thousand and UAH 115,286 thousand, respectively, which represent significant geographical concentration in Ukraine forming 90% and 83% of the loans and advances to banks, respectively. During 2003, the Bank simultaneously placed with and received short-term funds from Ukrainian banks in different currencies. As of 31 December 2003 and 2002, the Bank placed equivalent of UAH 61,971 thousand and UAH 31,868 thousand, respectively as deposits with Ukrainian banks, which received as mutual finance from the same banks (see Note 19). 17

20 12. TRADING SECURITIES Interest to nominal 2003 Interest to nominal 2002 Corporate bonds OJSC AKB Nadra (USD nominated) 10.5% 21,326 - Shares Dniprjanka LTD - 1,692 Promissory notes Total trading securities 21,326 2,174 As of 31 December 2003 included in trading securities is accrued interest income on debt securities amounting to UAH 49 thousand. 13. LOANS AND ADVANCES TO CUSTOMERS Loans and advances to customers comprise: Originated loans 759, ,379 Accrued interest income on loans and advances to customers 10,446 5,810 Less allowance for loan losses (38,480) (21,666) Total loans and advances to customers 731, ,523 Loans collateralized by real estate 330, ,095 Loans collateralized by goods in turnover 189, ,025 Loans collateralized by equipment 126,418 82,391 Loans collateralized by cash 9, Loans collateralized by corporate guarantees 1,633 - Loans collateralized by precious stones/metals - 62 Loans collateralized by others 86,236 56,830 Unsecured loans 15,186 1,209 Accrued interest income on loans and advances to customers 10,446 5,810 Less allowance for loan losses (38,480) (21,666) Total loans and advances to customers 731, ,523 Movements in allowances for loan losses for the years ended 31 December 2003 and 2002 are disclosed in Note 5. As of 31 December 2003 and 2002 the Bank had 11 and 9 loans totaling UAH 184,589 thousand and UAH 140,034 thousand, respectively, which individually exceeded 10% of the Bank s equity. As of 31 December 2003 and 2002 the Bank had loans totaling UAH 566,496 thousand and UAH 365,079 thousand, respectively, which represent significant geographical concentration in Kyiv region forming 75% and 91% of the loan portfolio, respectively. As of 31 December 2003 and 2002 the Bank had loans totaling UAH 817 thousand and UAH 558 thousand, respectively, which represent loans to employees of the Bank, including loans to management amounting to UAH 266 and UAH 37 thousand, respectively. 18

21 In 2000, the Bank has been appointed as an agent to service the EBRD Micro and Small Enterprises financing credit line. Also, in 2001 the Bank was appointed to serve the EBRD Middle and Small Enterprises financing credit line. As at 31 December 2003, loans granted by the Bank under these programs amounted to UAH 34,506 thousand (UAH 33,815 thousand net of allowance). As at 31 December 2002, the amounts were UAH 15,433 thousand ( UAH 14,025 thousand net of allowance). As at 31 December 2003, sub-loans granted by the Bank under a loan agreements with the German- Ukrainian Fund ( GUF ) amounted to UAH 4,956 thousand (UAH 4,857 thousand net of allowance). As at 31 December 2002, the amounts were UAH 2,501 thousand (UAH 2,427 thousand net of allowance). Analysis by industry Trade 378, ,671 Service 107,011 48,639 Real estate construction 55,805 10,634 Chemical 35,976 14,440 Food processing 33,481 6,394 Manufacturing 29,972 38,277 Metallurgy 19,217 5,834 Agriculture 18,868 12,784 Machine-building 3,327 - Information technologies Individuals 56,169 11,021 Other 20,376 1,685 Accrued interest income on loans and advances to customers 10,446 5,810 Less allowance for loan losses (38,480) (21,666) Total loans and advances to customers 731, , INVESTMENT SECURITIES 19 Securities available-for-sale Securities held-to-maturity 6,634 - Less allowance for impairment (293) (70) Total investment securities 6,634 - Movements in allowances for impairment for the years ended 31 December 2003 and 2002 are disclosed in Note 5. During the year ended 31 December 2003 available-for-sale securities amounting to UAH 208 thousand were received from customers as repayment of a loan. Held-to-maturity securities comprise: Maturity 2003 Maturity 2002 Securities held-to-maturity - Akvapark LTD November 27, , Shidno-promyslovyj bank LTD February 24, ,880 - Total securities held-to-maturity 6,634 - As of 31 December 2003 included in securities held-to-maturity was accrued interest income on debt securities amounting to UAH 78 thousand.

22 15. INVESTMENTS IN NON-CONSOLIDATED SUBSIDIARIES Investments in non-consolidated subsidiaries comprise: %% in equity Investment in non-consolidated subsidiary companies: - Non-state pension fund Forum 84% Forum Security 90% 8 8 Total investments in non-consolidated subsidiaries There are no appropriate or workable methods of reasonably estimating fair value of these investments, therefore, these investments are stated at cost. The Companies stated in the table above are not involved in active operations, and their financial statements were not consolidated into these financial statements because this would not have had a significant effect on the Bank s financial statements as a whole. During the years ended 31 December 2003 and 2002 received dividends amounting to UAH 7 thousand and UAH 15 thousand, respectively, were capitalized. 16. FIXED AND INTANGIBLE ASSETS Building Computers and office equipment Motor vehicles Furniture and fittings CIP Intangible assets Total At cost 31 December ,824 5,816 2,754 4,361 5, ,801 Additions 4,366 3,425 1,376 1,571 2,342-13,080 Disposals - (443) (1,023) (334) (2,789) - (4,589) Transfer (1,622) Revaluation 7, , December ,210 9,131 3,174 6,283 3,153 1,315 48,266 Accumulated depreciation 31 December 2002 (1,284) (2,805) (1,345) (1,371) - (528) (7,333) Charge for the period (1,059) (1,221) (915) (538) - (225) (3,958) Disposals Revaluation (1,348) (1,348) 31 December 2003 (3,691) (3,782) (1,685) (1,864) - (753) (11,775) Net book value 31 December ,519 5,349 1,489 4,419 3, ,491 Net book value 31 December ,540 3,011 1,409 2,990 5, ,468 Buildings include premises occupied by the Bank and leasehold improvements. As of 31 December 2003 fixed and intangible assets with a book value of UAH 15,283 thousand were pledged to secure short-term loans received by the Bank from Oschadbank. As of 31 December 2003 the cost and accumulated depreciation of buildings was stated at revalued amounts. Valuation was performed by an independent appraiser. During the year ended 31 December 2003 fixed assets with net book value amounting to UAH 1,004 thousand were transferred to loans to customers as financial lease. 20

23 17. OTHER ASSETS Other assets comprise: Deferred expenses 3,545 1,477 Prepayments and receivables on other transactions 766 1,056 Materials Debtors on operations with securities Accrued income Other Less allowance for losses on other assets (66) (17) Total other assets 5,000 3,315 As of 31 December 2003 and 2002, deferred expenses comprise mainly prepayments for insurance amounted to UAH 1,521 thousand and UAH 855 thousand, respectively, and interest on deposits to individuals paid in advance amounted to UAH 1,279 thousand and zero, respectively. As of 31 December 2003 and 2002, prepayments and receivables on other transactions comprise mainly prepayments for property and equipment amounted to UAH 423 thousand and UAH 1,016 thousand, respectively. Movements in allowances for losses for the years ended 31 December 2003 and 2002 are disclosed in Note LOANS FORM NBU Main amount of loans from NBU are represented by loans in freely convertible currency, which have been provided under the EBRD Micro and Small Enterprises and Middle and Small Enterprises financial credit lines each bearing an interest rate of LIBOR+3%. These loans were granted with demand from Bank to comply with economic indicators as determined by the EBRD. The rest of the loans from NBU as of 31 December 2003 and 2002 amounted to UAH 26,000 thousand and zero, respectively, are loans received form NBU bearing interest rate equals NBU refinancing rate. As of 31 December 2003 and 2002 included in loans form NBU were accrued interest expense amounting to UAH 169 thousand and UAH 119 thousand, respectively. 19. DEPOSITS FROM BANKS Deposits from banks comprise: Demand deposits 93,888 37,687 Time deposits 152, ,013 Accrued interest expense on deposits from banks Total deposits from banks 246, ,897 As of 31 December 2003, included into deposits from banks is UAH 130,610 thousand with 3 Ukrainian banks. During the year ended 31 December 2003, the Bank simultaneously received from and placed shortterm funds with Ukrainian banks in different currencies as mutual finance (see Note 11). 21

24 20. CUSTOMER ACCOUNTS Customer accounts comprise: Repayable on demand 217, ,928 Time deposits 463, ,561 Funds received form the GUF 6,737 4,212 Accrued interest expense on customer accounts 9,743 5,866 Total customer accounts 698, ,567 The Bank used to enter into loan agreements with the GUF for the purpose of financing small and medium enterprises. In the year 2002 the Bank entered into successive loan agreements amounted to EUR 500 thousand, but attracted only EUR 250 thousand. In the year 2003 the Bank does not entered into new loan agreement, but used the rest of the amount contracted in the year 2002 in the amount of EUR 250 thousand. As of 31 December 2003 and 2002, customer accounts amounting to UAH 76,473 thousand (10.95%) and UAH 20,729 thousand (5.74%) were due to 3 customers, respectively which represents significant concentration. As of 31 December 2003 and 2002, customer accounts repayable on demand amounting to UAH 11,685 thousand and UAH 5,837 thousand, respectively, and time deposits amounting to UAH 5,709 thousand and UAH 130 thousand, respectively, were due to related parties referred to in Note DEBT SECURITIES ISSUED Debt securities issued comprise: Discount bearing bonds 9,962 - Certificates of deposit 5, Discount /Interest free promissory note Accrued interest expense on debt securities issued Total debt securities issued 16, Discount on the bonds is amortized over the life of the bond and is recorded in interest expense on debt securities issued using the effective interest rate method. As of 31 December 2003 interests rates on certificates of deposit constituted 11% for the certificates denominated in foreign currency and 15% for the certificates denominated in UAH. As of 31 December 2002 all certificates of deposit were denominated in UAH and were bearing interest rates from 14% to 18%. 22. PROVISIONS Provisions comprised of the provision for guarantees and credit related commitments. Movements in provisions for the years ended 31 December 2003 and 2002 are disclosed in Note 5. 22

25 23. OTHER LIABILITIES Deferred income 2, Settlement on other transactions Taxes payable, other than income tax Other Total other liabilities 2,958 1, SHAREHOLDERS EQUITY As of 31 December 2003 and 2002 share capital authorized, issued and fully paid comprised of 11,000,000 and 6,000,000 ordinary shares, respectively, with par value of UAH 10 each. All shares are ranked equally and carry one vote. During the year ended 31 December 2003 the Bank issued 5,000,000 ordinary shares. During the year ended 31 December 2002 the Bank sold 1,427,300 treasury ordinary shares. The Bank s distributable reserves are limited to the amount of its reserves as disclosed in its statutory accounts. As of 31 December 2003 and 2002, the statutory accounts of the Bank disclosed distributable reserves of UAH 15,245 thousand and UAH 10,173 thousand, respectively, and the amount of non-distributable reserves was UAH 2,209 thousand and UAH 1,948 thousand, respectively. Non-distributable reserves are represented by a general reserve fund, which is created as required by the statutory regulations, in respect of general banking risks, including future losses and other unforeseen risks or contingencies. The reserve has been created in accordance with the Bank s statutes, that provide for the creation of a reserve for these purposes of not less than 25% of the Bank s share capital reported in statutory books. 25. FINANCIAL COMMITMENTS AND CONTINGENCIES In the normal course of business the Bank is a party to financial instruments with off-balance sheet risk in order to meet the needs of its customers. These instruments, involving varying degrees of credit risk, are not reflected in the balance sheet. The Bank s maximum exposure to credit loss under contingent liabilities and commitments to extend credit, in the event of non-performance by the other party where all counterclaims, collateral or security prove valueless, is represented by the contractual amounts of those instruments. The Bank s uses the same credit control and management policies in undertaking off-balance sheet commitments as it does for on-balance operations. The risk-weighted amount is obtained by applying credit conversion factors and counterparty risk weightings according to the principles employed by the Basle Committee on Banking Supervision. 23