ZENIT BANKING GROUP. 30 June 2018

Transcription

1 . ZENIT BANKING GROUP Interim Condensed Consolidated Financial Information in accordance with International Financial Reporting Standards and Report on Review of Interim Condensed Consolidated Financial Information 30 June 2018

2 Interim Condensed Consolidated Financial Information CONTENTS Report on Review of Interim Condensed Consolidated Financial Information Interim Consolidated Statement of Financial Position... 1 Interim Consolidated Statement of Profit or Loss and Other Comprehensive Income... 2 Interim Consolidated Statement of Changes in Equity... 4 Interim Consolidated Statement of Cash Flows... 5 Selected Notes to the Interim Condensed Consolidated Financial Information 1 Introduction Operating Environment of the Group Summary of Significant Accounting Policies Critical Accounting Estimates and Judgements in Applying Accounting Policies Due from Other Banks Trading Securities Investment Securities Loans and Advances to Customers Customer Accounts Debt Securities Issued Bonds Issued Interest Income and Expense Fee and Commission Income and Expense Administrative and Other Operating Expenses Significant Risk Concentrations Segment Analysis Management of Capital Contingencies and Commitments Fair Value Disclosures Related party transactions... 38

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5 Interim Consolidated Statement of Profit or Loss and Other Comprehensive Income 6 months ended 30 June 3 months ended 30 June Note Interest income 12 9,983,556 13,844,644 4,795,124 7,097,861 Interest expense 12 (5,530,791) (9,784,328) (2,644,393) (4,728,783) Net interest income 4,452,765 4,060,316 2,150,731 2,369,078 Provision for loan impairment (1,119,573) (1,360,099) (434,651) (1,575,673) Net interest income after provision for loan impairment 3,333,192 2,700,217 1,716, ,405 Fee and commission income 13 1,703,938 1,660, , ,721 Fee and commission expense 13 (568,952) (516,035) (299,421) (266,603) Gains less losses/(losses less gains) from trading securities 12,026 82,453 (67,352) 22,752 Gains less losses/(losses less gains) from derivative financial instruments and other financial instruments at fair value through profit and loss 1,267,803 (217,304) 1,051,443 (79,127) (Losses less gains)/gains less losses from trading in foreign currencies (155,272) (71,472) (142,156) 35,056 Foreign exchange translation (losses less gains)/gains less losses (1,039,234) 40,733 (883,451) 100,581 Fair value losses less gains from loans and advances to customers at fair value through profit or loss (573,123) - (297,564) - Gains on revaluation of investment securities at fair value through profit or loss 80,849-13,588 - Impairment of investment securities at fair value through other comprehensive income (before: securities available for sale) (23,131) - (23,131) - Gains less losses / (losses less gains) from investment securities at fair value through other comprehensive income (before: securities available for sale) 39, ,381 (14,375) 107,126 Provision for impairment of investment securities at fair value through other comprehensive income (9,274) - (37,288) - Provision for impairment of investment securities at amortised cost (65,316) (4,226) (18,336) (4,226) Recovery of provision for credit related commitments 373, , ,158 93,649 Recovery of provision for contingent liabilities and impairment of other assets 226,931 73, ,156 25,049 Gains less losses/(losses less gains) on disposal of premises and equipment 1,898 (369) 3,212 (131) (Losses less gains)/gains less losses from disposal of non-current assets held for sale (9,486) 8,367 (16,153) 35 Other operating income 169, ,983 88, ,172 Operating income 4,766,192 4,349,285 2,329,483 1,842,459 Administrative and other operating expenses 14 (4,170,518) (3,656,779) (2,220,197) (1,868,094) Profit before tax 595, , ,286 (25,635) Income tax credit/(expense) 22,319 (47,248) 142,528 67,753 PROFIT FOR THE PERIOD 617, , ,814 42,118 Profit attributable to: Bank s shareholders 615, , ,225 40,340 Non-controlling interest 2,556 3, ,778 Earnings per share, basic and diluted (in RR) Notes No.1-20 form an integral part of this interim condensed consolidated financial information. 2

6 Interim Consolidated Statement of Profit or Loss and Other Comprehensive Income Note 6 months ended 30 June 3 months ended 30 June Profit for the period 617, , ,814 42,118 Other comprehensive loss/(income) that will be reclassified to profit or loss in subsequent periods Investment securities at fair value through other comprehensive income (before: securities available for sale): - Revaluation of securities at fair value (79,907) 143,795 (114,821) 121,602 - Recovery of revaluation reserve (upon disposal) (39,859) (168,381) 14,375 (107,126) Income tax 23,953 4,918 20,089 (2,894) Other comprehensive loss that will be reclassified to profit or loss in subsequent periods, after tax (95,813) (19,668) (80,357) 11,582 Total other comprehensive (loss)/income for the period (95,813) (19,668) (80,357) 11,582 Total comprehensive income for the period 522, , ,457 53,700 Total comprehensive income attributable to: Bank s shareholders 519, , ,868 51,922 Non-controlling interest 2,556 3, ,778 Notes No.1-20 form an integral part of this interim condensed consolidated financial information. 3

7 Interim Consolidated Statement of Changes in Equity Share capital Treasury shares Equity attributable to Bank's shareholders Translation reserve Share premium Revaluation reserve for investment securities (before: securities available for sale) Revaluation reserve for premises and equipment Accumulated loss TOTAL Noncontrolling interest Total equity Balance at 1 January ,698,104 (699,900) 1,545,000 32, , ,230 (5,801,034) 16,455,357 11,409 16,466,766 Profit for the period after tax , ,196 3, ,258 Other comprehensive loss for the period after tax (19,668) - - (19,668) - (19,668) Total comprehensive (loss)/income for the period after tax (19,668) - 642, ,528 3, ,590 Share issue 14,000, ,000,000-14,000,000 Balance at 30 June ,698,104 (699,900) 1,545,000 32, , ,230 (5,158,838) 31,077,885 14,471 31,092,356 Balance at 1 January ,698,104 (699,900) 1,545,000 32, , ,820 (7,263,551) 29,357,541 15,730 29,373,271 Effect of initial application of IFRS 9 (Note 3) (6,814) - (7,091,604) (7,098,418) - (7,098,418) Opening balance at 1 January 2018, restated under IFRS 9 34,698,104 (699,900) 1,545,000 32, , ,820 (14,355,155) 22,259,123 15,730 22,274,853 Profit for the period after tax , ,437 2, ,993 Other comprehensive loss for the period after tax (95,813) - - (95,813) - (95,813) Total comprehensive (loss)/income for the period after tax (95,813) - 615, ,624 2, ,180 Balance at 30 June ,698,104 (699,900) 1,545,000 32, , ,820 (13,739,718) 22,778,747 18,286 22,797,033 Notes No.1-20 form an integral part of this interim condensed consolidated financial information. 4

8 Interim Consolidated Statement of Cash Flows Note 6 months ended 30 June Cash flows from operating activities Interest received 8,755,114 12,999,968 Interest paid (5,201,370) (10,731,279) Fees and commissions received 1,689,589 1,651,415 Fees and commissions paid (568,952) (519,444) Gains incurred on trading securities and derivative financial instruments 209,842 (15,871) Losses from trading in foreign currencies (160,350) (55,109) Other operating income received 189, ,875 Salaries and other staff costs (1,854,126) (1,477,628) Social security expenses (503,058) (422,616) Administrative and other operating expenses paid other than staff costs (1,447,183) (1,822,398) (Income tax paid)/income tax credit (115,548) 84,739 Cash flows from operating activities before changes in operating assets and liabilities 993,745 (60,348) Changes in operating assets and liabilities Net (increase)/decrease in: - mandatory cash balances with the Central Bank of the Russian Federation 152,232 (76,345) - trading securities 3,381,007 (1,206,982) - due from other banks (4,124,892) 1,774,045 - loans and advances to customers (6,121,587) 8,483,524 - other financial assets 362,233 (136,549) - other assets 215, ,491 Net increase/(decrease) in: - due to other banks (6,165,631) (941,621) - customer accounts 4,451,907 1,095,583 - debt securities issued (767,136) (3,270,148) - other financial liabilities 5,008, ,394 - other liabilities 104,812 (16,118) Net cash from/(used in) operating activities (2,508,752) 6,371,926 Cash flows from investing activities Acquisition of investment securities at fair value through other comprehensive income (before: securities available for sale) (4,891,443) (8,001,844) Proceeds from disposal of investment securities at fair value through other comprehensive income (before: securities available for sale) 11,042,721 9,441,384 Acquisition of investment securities at amortised cost (before: securities held to maturity) (13,226,759) (7,407,716) Proceeds from redemption of investment securities at amortised cost (before: securities held to maturity) 8,253,079 3,519,093 Acquisition of premises and equipment (2,396,800) (110,851) Proceeds from disposal of premises and equipment 199,152 49,811 Acquisition of investment properties 23,405 (8,788) Proceeds from disposal of non-current assets held for sale 89, ,055 Net cash used in investing activities (906,701) (2,407,856) Cash flows from financing activities Share - 14,000,000 Proceeds from sale of previously repurchased bonds issued in the domestic market - 3,772,389 Repurchase of bonds in issue on or before the offer date (3,944,970) (14,118,179) Dividends paid (678) - Return of subordinated debt - (8,619,949) Net cash used in financing activities (3,945,648) (4,965,739) Effect of exchange rate changes on cash and cash equivalents 679,020 (125,218) Net decrease in cash and cash equivalents (6,682,081) (1,126,887) Cash and cash equivalents at the beginning of the period 26,962,298 38,415,359 Cash and cash equivalents at the end of the period 20,280,217 37,288,472 Notes No.1-20 form an integral part of this interim condensed consolidated financial information. 5

9 1 Introduction These interim consolidated condensed financial information have been prepared in accordance with International Financial Reporting Standards (IFRS) adopted by the International Accounting Standards Board (IASB) for the six months ended 30 June 2018 for PAO Bank ZENIT (the Bank ) and its subsidiaries (together referred to as the Group ). The Bank was incorporated and is domiciled in the Russian Federation. The Bank is a public joint-stock company and was set up in accordance with Russian regulations. The Group s shareholding structure at 30 June 2018 and 31 December 2017 is as follows 1 : Shareholder Controlled by: Shares with voting rights, % 30 June 2018 Actual ownership interest, % PAO Tatneft named after V.D. Shashina 62.67% 63.16% Tatneft Oil AG PAO Tatneft named after V.D. Shashina 8.45% 8.52% Nabertherm Limited, Rosemead Enterprises Limited M.A. Sokolova, A.V. Sokolov, A.A. Sokolov, T.P. Shishkina, T.A. Zanozina 6.01% 6.06% Fletcher Group Holdings Limited V.S. Lisin. Yu.V. Lisin 5.75% 5.79% M.A. Sokolova, K.O. Shpigun, OOO Sintez Group % 3.66% Viewcom Finance Limited M.A. Sokolova 3.44% 3.46% Gatehill Limited T.P. Shishkina 3.41% 3.43% OOO DANIKOM M.A. Sokolova, T.P. Shishkina 3.09% 3.12% Other % 2.80% Total % % Shareholder Controlled by: Shares with voting rights, % 31 December 2017 Actual ownership interest, % PAO Tatneft named after V.D. Shashina 62.67% 63.16% Tatneft Oil AG PAO Tatneft named after V.D. Shashina 8.45% 8.52% Nabertherm Limited, Rosemead Enterprises Limited M.A. Sokolova, A.V. Sokolov, A.A. Sokolov, T.P. Shishkina, T.A. Zanozina 6.01% 6.06% Fletcher Group Holdings Limited V.S. Lisin, Yu.V. Lisin 5.75% 5.79% M.A. Sokolova, K.O. Shpigun, OOO Sintez Group % 3.66% Viewcom Finance Limited M.A. Sokolova 3.44% 3.46% Gatehill Limited T.P. Shishkina 3.41% 3.43% OOO DANIKOM M.A. Sokolova, T.P. Shishkina 3.09% 3.12% Other % 2.80% Total % % 1 In May 2015, one of the shareholders (A.A. Sokolov) passed away. At the date of signing this interim consolidated financial information, the inheritance transfer of ownership right in Quetin Investments Ltd. s shares constituting a basis for indirect ownership in the Bank s shares through Nabertherm Limited и Rosemead Enterprises Limited was not completed. The Group includes the following consolidated banking subsidiaries, incorporated in the Russian Federation: Own interest and voting shares,% Name Date of acquisition 30 June December 2017 AO AB Devon-Credit (PAO) 2 December % 99.4% Social Development and Construction Bank Lipetscombank (PAO) 29 June % 99.4% AO Bank ZENIT Sochi 15 January % 99.5% Spiritbank (PAO) 8 December ,0% 100,0% 6

10 1 Introduction (Continued) The Bank also owns 100% in OOO ZENIT Finance. In January 2018, OOO Arsenal Group finalised reorganisation through merger into OOO Regionalnoe Razvitie (renamed to OOO Zenit Finance). The Bank has 100% ownership in Zenit Investment Service Inc., incorporated in the British Virgin Islands. On 30 June 2018 the Bank acquired control over OOO Zenit Finance that deals with factoring activities of the Group. Starting from 30 June 2018 the Bank consolidates OOO Zenit Leasing established as a company dealing with leasing activities of the Group. ZPIF 6th Natsionalny terminated operations during the second quarter of Principal activity. The Group s principal business activity is commercial and retail banking operations within the Russian Federation. The Bank has operated under a full banking licence issued by the Central Bank of the Russian Federation ( CBRF ) since The Bank participates in the state deposit insurance programme, which was introduced by Federal Law No.177-FZ, Deposits of individuals insurance in Russian Federation, dated 23 December The State Deposit Insurance Agency guarantees repayment of 100% of individual deposits up to RR thousand per individual in the case of withdrawal of a bank s licence or a CBRFimposed moratorium on payments. The Bank also is licensed by the Federal Commission on Securities Markets for trading in securities. The Group has a wide correspondent network both in Russia and abroad and is involved in co-operation with more than 100 large international institutions in Europe, America and Asia. As of 30 June 2018, the Group had people (31 December 2017: people). Registered address and place of business. The Bank s registered address is: 9 Banny per., Moscow, Russia. Presentation currency. This interim condensed consolidated financial information is presented in Russian roubles (RR). All amounts are indicated in thousands of roubles, unless otherwise stated. 2 Operating Environment of the Group Russian Federation. The Russian Federation displays certain characteristics of an emerging market. Its economy is particularly sensitive to oil and gas prices. The legal, tax and regulatory frameworks continue to develop and are subject to frequent changes and varying interpretations. During 2017 and 1Q 2018, the Russian economy continued to be negatively impacted by low oil prices, ongoing political tension in the region and continuing international sanctions against certain Russian companies and individuals, all of which contributed to the country s economic recession characterised by a decline in gross domestic product. Although the management believes that the measures it is taking are adequate to ensure sustainability of the Group s business in the current environment, unanticipated further change in the situation may have a negative impact on the Group s performance and financial position, while it is currently impossible to assess the impact of such developments. The key rate of the Central Bank of the Russian Federation decreased from 10% p.a. (from 19 September 2016) to 7.25% p.a. (from 26 March 2018). 3 Summary of Significant Accounting Policies Basis of preparation. This interim condensed consolidated financial information of the Group has been prepared in accordance with IAS 34 Interim Financial Reporting and should be read in conjunction with the Group s consolidated financial statements for the year ended 31 December 2017, which have been prepared in accordance with International Financial Reporting Standards (IFRS). This interim condensed consolidated financial information does not contain all notes required for disclosure in the full set of financial statements. 7

11 3 Summary of Significant Accounting Policies (Continued) The functional currency of the Bank and each of the Group s consolidated entities is the currency of the primary economic environment in which the Bank and these entities operate. The Bank s and its subsidiaries functional currency is the national currency of the Russian Federation, Russian roubles ( RR ). The functional currency of Zenit Investment Service Inc. is also Russian roubles as the main operations of the company are performed in Russian roubles. At 30 June 2018, the principal rate of exchange used for translating foreign currency balances was USD 1 = RR (31 December 2017: USD 1 = RR ) and EUR 1 = RR (31 December 2017: EUR 1 = RR ). Accounting policies used in the preparation of this interim consolidated financial information are consistent with the policies applied to the Group s annual consolidated financial statements for the year ended 31 December 2017, except for the changes resulting from the adoption of new and/or revised standards and interpretations that came into effect from 1 January 2018 or any other specified date, as described below. The Group did not early adopt any other standards or interpretations that were issued but did not become effective. The nature and effect of each new standard or interpretation are described below: IFRS 9 Financial Instruments (amended in July 2014). IFRS 9 replaces IAS 39 Financial Instruments: Recognition and Measurement for annual reporting periods beginning on or after 1 January The Group used the optional exemption from restating comparative figures for track record periods relating to classification and valuation, including impairment. The Group did not restate its 2017 comparatives for financial instruments under IFRS 9. Therefore, comparatives for 2017 are reported under IAS 39 and cannot be compared to information for six months ended 30 June Differences in the carrying amount of financial assets and financial liabilities resulting from the adoption of IFRS 9 will be recognised in the opening balance of retained earnings and provisions as at 1 January (a) Classification and measurement Under IFRS 9, financial assets are required to be classified into three measurement categories: those to be measured subsequently at amortised cost, those to be measured subsequently at fair value through other comprehensive income and those to be measured subsequently at fair value through profit or loss. The following assessments were made on the basis of facts and circumstances available at the date of the initial adoption: assessment of business model for holding a group of financial assets; discretionary classification or cancellation of classifications adopted by the entity earlier for certain financial assets and financial liabilities measured at fair value through profit or loss; discretionary classification of certain equity investments. Classification for debt instruments is driven by the entity s business model for managing the financial assets and whether the contractual cash flows represent solely payments of principal and interest (SPPI). Those debt financial instruments, which meet the SPPI criterion, are classified at initial recognition on the basis of business model which is used to manage these instruments: instruments held to collect contractual cash flows are measured at amortised cost; instruments held to collect contractual cash flows and to sell are classified as at fair value through other comprehensive income; instruments held for other purposes are classified as at fair value through profit or loss. 8

12 3 Summary of Significant Accounting Policies (Continued) All debt financial assets that do not meet the SPPI criterion are classified as financial assets at fair value through profit or loss at initial recognition. Under this criterion, debt instruments that do not meet the definition of basic lending arrangement, such as instruments with embedded conversion option or loans without recourse, are assessed at fair value through profit or loss. Securities classified as at fair value through profit or loss under IAS 39 have been classified within debt securities at fair value through profit or loss and carried at fair value through profit or loss because they are not held to collect contractual cash flows and sell. Loans and advances to customers that meet the SSPI criterion are held to collect contractual cash flows and are carried at amortised cost. Loans and advances to customers that do not meet the SPPI criterion are held to collect contractual cash flows, however, as the underlying lending arrangements contain terms and conditions that may affect the contractual cash flows are carried at fair value through profit or loss. Equity financial assets are required to be classified at initial recognition as at fair value through profit or loss, except where a discretionary irrevocable decision was taken to classify an equity financial asset as at fair value through other comprehensive income. For equity financial instruments classified as at fair value through other comprehensive income, all realised and unrealised income and expenses, except for dividend income, are recognised within other comprehensive income without subsequent recycling to profit or loss. Classification and measurement of financial liabilities remain generally unchanged as compared to the current requirements of IAS 39. Derivatives will continue to be carried at fair value through profit or loss. Embedded derivatives will not be separated from the underlying financial asset any longer. (b) Impairment IFRS 9 adoption has radically changed the Group s approach to assessment of loan impairment losses. Instead of the incurred loss approach required by IAS 39, the new forward looking approach that requires recognition of expected credit losses (ECL) is adopted. Since 1 January 2018, the Group has recognised an ECL allowance for all loans and other debt financial assets that are not classified as at fair value through profit or loss and for credit commitments and financial guarantee contracts (together referred to as financial instruments in this section). IFRS 9 impairment requirements do not affect equity financial instruments. ECL allowance is estimated as the sum total of credit losses that are expected to be incurred over the whole lifetime of an asset (lifetime ECL), if the credit risk for this financial asset has significantly increased after its initial recognition. Otherwise, the ECL allowance will be estimated in the amount equal to expected credit losses for 12 months. Twelve-month ECLs constitute a part of the lifetime ECLs and represent ECLs incurred as a result of events of default on a financial instrument that are possible during 12 months after the reporting date. Lifetime ECLs and 12-month ECLs are calculated on an individual or collective basis depending on the nature of the financial instrument portfolio. The Group has adopted a policy for assessing a significant increase in credit risk on a financial instrument at the end of each reporting period from its initial recognition by analysing the changes in risk of default over the remaining lifetime of the financial instrument. According to this policy the Group classifies financial instruments into the following categories: Stage 1, Stage 2, Stage 3 and Purchased or Originated Credit Impaired (POCI). Stage 1: At initial recognition of a loan the Group recognises impairment provision in the amount of 12- month ECLs. Stage 1 also includes financial instruments without any significant increase in credit risk since initial recognition. Stage 1 also incorporates financial instruments, for which credit risk decreased to such extent that they have been transferred from Stage month ECLs are recognised for such assets with interest income calculated on the basis of the asset s gross carrying value. Stage 2: Stage 2 includes financial instruments with a significant increase in credit risk since initial recognition. Stage 2 also comprises financial instruments, for which credit risk decreased to such extent that they have been transferred from Stage 3 These financial instruments are not credit impaired. The Group recognises impairment provision equal to lifetime ECLs for such assets with interest income calculated on the basis of the asset s gross carrying value. 9

13 3 Summary of Significant Accounting Policies (Continued) Stage 3: Stage 3 includes financial instruments with objective impairment indicators identified at the reporting date (credit impaired assets). The Group recognises impairment provision equal to lifetime ECLs for such assets with interest income calculated on the basis of the asset s net book value given the effect of the discounted cash flows on loans. POCI assets represent financial instruments which are credit impaired at initial recognition. Such assets are carried at fair value at initial recognition with interest income subsequently recognised on the basis of credit-adjusted effective interest rate. ECL allowance is recognised or recovered only if there are subsequent significant changes in expected credit losses and to the extent that the amount of ECLs has changed. The model includes operational simplifications for lease and trade receivables. If the Group has no valid expectations for full or partial recovery of the financial asset, gross carrying value of such financial asset should be reduced. Such reduction represents (partial) derecognition of the financial asset. IFRS 9 establishes specific rules for estimating loss allowances and recognising interest income on purchased and originated assets that were credit-impaired already at initial recognition (purchased or originated creditimpaired financial assets, or POCI assets). There were no impairment provisions for POCI assets upon initial recognition. Instead, lifetime expected credit losses on a financial instrument are incorporated in the calculation of effective interest rate. The amount reflecting positive changes in lifetime expected credit losses on a financial asset is recognised as impairment gain, even if it exceeds the amount earlier recorded in profit or loss as impairment loss. This presentation differs from the procedure set out in IAS 39, where impairment provisions can only be recovered to the extent of impairment loss earlier recorded in profit or loss. (c) Staging criteria An assessment is performed at each reporting date to identify a significant increase in credit risk since initial recognition of a financial instrument. Such assessment is performed on the basis of qualitative and quantitative information: Quantitative assessment is performed on the basis of a change in risk of default arising over the expected lifetime of a financial asset. Qualitative assessment implies that a number of factors are important for assessing significant increase in credit risk (restructuring indicative of problems, establishing favourable schedule for repaying loan interest and principal, significant changes in expected results of operations and behaviour of a borrower and other material changes). As of the transition date, the Group recognised lifetime ECLs for loans with no credit rating at their initial recognition date because it would require undue cost or effort to determine whether there has been a significant increase in credit risk since the date of initial recognition. Loans move from Stage 1 to Stage 2 if there is one or a combination of the following factors: loans are over 30 days overdue; internal credit rating deteriorates; there are early warning indicators of an increase in credit risk; a need to change previously agreed on terms of the loan agreement to create more favourable environment for a customer due to his inability to meet current liabilities because of the customer s financial position; full or partial refinancing of the current debt which would not be required if the client did not experience financial difficulties; a customer has no rating at the reporting date (including due to technical reasons); information on future changes in assets that may result in credit losses not considered in the rating systems is identified (e.g. military conflicts in the region that may have a significant impact on future credit quality). 10

14 3 Summary of Significant Accounting Policies (Continued) (d) Default identification process A default is recognised if one or a combination of the following events occur: (e) loans are over 90 days overdue (a rebuttable presumption); a default rating is assigned; restructuring indicative of problems is undertaken; a favourable schedule for repaying loan interest and principal with payments to be made at the end of the term is granted. ECL calculation methodology The ECL calculation technique is described below and involves the use of the following key parameters: Probability of default (PD) This parameter reflects the estimated probability that a default will occur during a certain period of time. The default may occur only at a certain point in time within the considered period provided that the financial asset has not been derecognised before and such asset is still included in the portfolio. Exposure at default (EAD). This parameter reflects the estimated risk at the date of default in future after considering the expected changes in risk after the reporting date, including repayment of principal and interest as scheduled in the contracts or at any other time, expected credit line drawdowns and amounts of interest accrued on overdue payments. For off-balance sheet items (guarantees issued, letters of credit, unused credit lines), the total amount of exposure is equal to the risk before credit conversion factors (CCF). The credit conversion factor represents a proportion of the current unused amount which will be utilised within 12 months before the default (applied to off-balance sheet items). Loss given default (LGD). This parameter reflects the estimated amount of loss arising in case of default at a certain point in time. Since this parameter is affected by the macroeconomic environment, the level of loss at default is actually dependent on the period of time. Depending on the available information on the level of loss, different LGD models are applied. If there is sufficient information on the level of loss, this parameter is estimated by comparing EAD to discounted cash flows (Workout LGD). If such information is limited external data can be used (Implied Market LGD). Impairment losses and impairment recoveries are recognised and disclosed separately from profit or loss from modification of impairment recorded as an adjustment to the carrying value of a financial asset. The ECL estimation approach is presented below: Portfolio provisions for loan losses (PPLL) = EAD * PD 12 months * LGD ECL(k) = EAD * PD lifetime * LGD Stage 1 12-month ECL Performing loan Stage 2 Lifetime ECL Loans with a significant increase in credit risk PPLL, Stage 2 Basic approach: Individual provisions for loan losses (IPLL) = EAD net present value of the expected cash flows For unsecured retail loans: ELC = EAD * BEEL (best estimate of loan losses) Stage 3 Non-performing loan Credit impaired assets (defaults) where: D12 months estimated probability of default over subsequent 12 months; Dlifetime estimated probability of default over lifetime. 11

15 3 Summary of Significant Accounting Policies (Continued) In estimating impairment, the Group uses forward looking information based on the macroeconomic models resulting in direct adjustment of the probability of default. Since the Group does not know with certainty whether such macroeconomic parameters will materialise in future, the scenario cannot be calculated due to uncertainty factors. The Group calculates ECL on an individual basis for a number of watch list loans based on several probabilityweighted scenarios (base, best case and worst case) to estimate the expected amount of unreceived cash discounted at the effective interest rate. Unreceived cash represents a difference between cash flows which an entity was entitled to under the contract and cash flows that the entity expects to receive. (f) Effects of transition to IFRS 9. The tables below present the impact of IFRS 9 adoption on the statement of financial position and retained earnings at 1 January 2018, including the effect of transition from the incurred loss model used under IAS 39 to the expected credit loss model required by IFRS 9. The following table reconciles the carrying amounts of financial assets, from their measurement categories in accordance with IAS 39 into new measurement categories upon transition to IFRS 9 as at 1 January 2018: (In thousands of Russian Roubles) IAS 39 measurement IFRS 9 measurement Amount Reclassification Remeasurement Amount Financial assets Category Other ECL Category Cash and cash equivalents Mandatory cash balances with the Central Bank of Russian Federation Trading securities Trading securities Due from other banks Loans and advances to customers Loans and advances to customers Loans and receivables 26,962, Amortised cost 26,962,298 Loans and receivables 1,915, Amortised cost 1,915,956 At fair value At fair value through profit or through profit or loss 4,968, ,195 8,517 - loss 5,459,025 Trading securities transferred under repo agreements 2,495, At fair value through profit or loss 2,495,578 Loans and receivables 3,313, (11,253) Amortised cost 3,302,695 Loans and receivables 154,175,987 (15,316,072) - (6,833,528) Amortised cost 132,026,386 At fair value Loans and through profit or receivables - 15,316,072 (716,662) - loss 14,599,410 Fair value through other Investment securities Available for sale 14,216,398 (482,195) (138,106) comprehensive income 13,596,097 Investment securities Held to maturity 16,030,737 (854,022) - (118,297) Amortised cost 15,058,418 Investment securities Held to maturity - 854,022 (152,954) - At fair value through profit or loss 701,068 Investment securities Securities available for sale transferred under repurchase agreements 3,975, (55,193) Fair value through other comprehensive income 3,920,746 Investment securities Held-to-maturity securities transferred under repo agreements 15,533, (82,998) Amortised cost 15,450,143 Other financial assets Loans and receivables 619, (54,448) At amortised cost 564,778 12

16 3 Summary of Significant Accounting Policies (Continued) Below is presented reconciliation of impairment provision for financial assets estimated using the incurred loss model provided in IAS 39 and new credit loss allowance estimated using the expected loss model required by IFRS 9 as at 1 January 2018: (In thousands of Russian Roubles) IAS 39 Measurement categories IFRS 9 Impairment provision under IAS 39 or IAS 37 at 31 December 2017 Effect ECL Reclassifica tion Credit loss allowance under IFRS 9 at 1 January 2018 Due from other banks Loans and receivables Carried at amortised cost (29,704) (11,253) - (40,957) Loans and advances to customers Loans and receivables Carried at amortised cost (11,953,331) (6,833,528) - (18,786,859) Loans and advances to customers Loans and receivables At fair value through profit or loss (6,037,364) - 6,037,364 - Investment securities Available for sale Fair value through other comprehensive income - (138,106) - (138,106) Investment securities Held to maturity Amortised cost - (118,297) - (118,297) Investment securities Repurchase receivables at fair value through other comprehensive income Fair value through other comprehensive income - (55,193) - (55,193) Investment securities Repurchase receivables at amortised cost Amortised cost - (82,998) - (82,998) Other financial assets Loans and receivables Amortised cost - (54,448) - (54,448) Provision for credit related commitments (247,785) (709,582) - (957,367) Total (18,268,184) (8,003,405) 6,037,364 (20,234,225) The impact of IFRS 9 adoption on reserves and retained earnings is presented below: Funds and retained earnings Fair value reserve Closing balance under IAS 39 (31 December 2017) 769,325 Disposal of revaluation upon reclassification of investment securities at fair value through other comprehensive income (before: securities available for sale) (8,517) Deferred tax related to the above 1,703 Opening balance restated under IFRS 9 (1 January 2018) 762,511 Retained earnings Closing balance under IAS 39 (31 December 2017) (7,263,551) ECL recognition for assets at amortised cost under IFRS 9 (7,100,525) ECL recognition for credit related commitments (709,582) Revaluation of loans and advances to customers at fair value (716,662) Other revaluations (144,437) ECL recognition for debt securities at fair value through other comprehensive income under IFRS 9 (193,299) Deferred tax related to the above 1,772,901 Opening balance restated under IFRS 9 (1 January 2018) (14,355,155) Total change in equity from applying IFRS 9 requirements (7,098,418) 13

17 3 Summary of Significant Accounting Policies (Continued) IFRS 15 Revenue from Contracts with Customers (issued on 28 May 2014 and effective for the periods beginning on 1 January 2018). The new standard introduces the core principle that revenue must be recognised when the goods or services are transferred to the customer, at the transaction price. Any bundled goods or services that are distinct must be separately recognised, and any discounts or rebates on the contract price must generally be allocated to the separate elements. When the consideration varies for any reason, minimum amounts must be recognised if they are not at significant risk of reversal. Costs incurred to secure contracts with customers have to be capitalised and amortised over the period when the benefits of the contract are consumed. The amendments do not change the underlying principles of the Standard but clarify how those principles should be applied. The amendments clarify how to identify a performance obligation (the promise to transfer a good or a service to a customer) in a contract; how to determine whether a company is a principal (the provider of a good or service) or an agent (responsible for arranging for the good or service to be provided); and how to determine whether the revenue from granting a licence should be recognised at a point in time or over time. However, the interest and commission income that is an integral part of financial instruments and lease agreements is not covered by IFRS 15 and is regulated by other applicable standards (IFRS 9 and IFRS 16 Leases ). Therefore, adoption of this standard will have no impact on a significant part of the Group s income. Before adoption of IFRS 15, the Group assessed variable consideration based on the historic data. Under IFRS 15, revenue is only recognised to the extent that it is highly probable that a significant reversal in the amount of cumulative revenue recognised will not occur when the uncertainty associated with the variable consideration is resolved. The Group applied this requirement in assessing variable consideration and concluded that the impact on its consolidated financial statements is not material. Amendments to IFRS 2 Share-based Payment (issued on 20 June 2016 and effective for annual periods beginning on or after 1 January 2018). The amendments mean that non-market performance vesting conditions will impact measurement of cash-settled share-based payment transactions in the same manner as equity-settled awards. The amendments also clarify classification of a transaction with a net settlement feature in which the entity withholds a specified portion of the equity instruments, that would otherwise be issued to the counterparty upon exercise (or vesting), in return for settling the counterparty s tax obligation that is associated with the share-based payment. Such arrangements will be classified as equity-settled in their entirety. Finally, the amendments also clarify accounting for cash-settled share based payments that are modified to become equity-settled, as follows (a) the share-based payment is measured by reference to the modification-date fair value of the equity instruments granted as a result of the modification; (b) the liability is derecognised upon the modification, (c) the equity-settled share-based payment is recognised to the extent that the services have been rendered up to the modification date, and (d) the difference between the carrying amount of the liability as at the modification date and the amount recognised in equity at the same date is recorded in profit or loss immediately. These amendments did not have any impact on the Group s interim consolidated financial information. Amendments to IFRS 4 Insurance Contracts (issued on 12 September 2016 and effective for annual periods beginning on or after 1 January 2018). The amendments introduce two approaches: an overlay approach and a deferral approach. The amended Standard will give all companies that issue insurance contracts the option to recognise in other comprehensive income, rather than profit or loss, the volatility that could arise when IFRS 9 is applied before the new insurance contracts Standard is issued. In addition, the amended Standard will give companies whose activities are predominantly connected with insurance an optional temporary exemption from applying IFRS 9 until These amendments did not have any impact on the Group s interim consolidated financial information. Annual Improvements to IFRSs cycle (issued on 8 December 2016 and effective for annual periods beginning on or after 1 January 2018 for amendments to IFRS 1 and IAS 28). IFRS 1 was amended and some of the short-term exemptions from IFRSs in respect of disclosures about financial instruments, employee benefits and investment entities were removed, after those short-term exemptions have served their intended purpose. The amendments to IAS 28 clarify that an entity has an investment-byinvestment choice for measuring investees at fair value in accordance with IAS 28 by a venture capital organisation, or a mutual fund, unit trust or similar entities including investment linked insurance funds. Additionally, an entity that is not an investment entity may have an associate or joint venture that is an investment entity. IAS 28 permits such an entity to retain the fair value measurements used by that investment entity associate or joint venture when applying the equity method. The amendments clarify that an entity has such choice regarding each investee. These amendments did not have any impact on the Group s interim consolidated financial information. 14

18 3 Summary of Significant Accounting Policies (Continued) IFRIC 22 Foreign Currency Transactions and Advance Consideration (issued on 8 December 2016 and effective for annual periods beginning on or after 1 January 2018). The interpretation addresses how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part thereof) on the de-recognition of a non-monetary asset or non-monetary liability arising from an advance consideration in a foreign currency. Under IAS 21, the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of the related asset, expense or income (or part thereof) is the date on which an entity initially recognises the nonmonetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine the date of the transaction for each payment or receipt of advance consideration. IFRIC 22 only applies in circumstances in which an entity recognises a non-monetary asset or non-monetary liability arising from an advance consideration. IFRIC 22 does not provide application guidance on the definition of monetary and non-monetary items. An advance payment or receipt of consideration generally gives rise to the recognition of a non-monetary asset or non-monetary liability, however, it may also give rise to a monetary asset or liability. An entity may need to apply judgment in determining whether an item is monetary or non-monetary. These amendments did not have any impact on the Group s interim consolidated financial information. Amendments to IAS 40 Transfers of Investment Property (issued on 8 December 2016 and effective for annual periods beginning on or after 1 January 2018). The amendments clarify the requirements on transfers to, or from, investment property in respect of properties under construction. Prior to the amendments, there was no specific guidance on transfers into, or out of, investment properties under construction in IAS 40. The amendment clarifies that there was no intention to prohibit transfers of a property under construction or development, previously classified as inventory, to investment property when there is an evident change in use. IAS 40 was amended to reinforce the principle of transfers into, or out of, investment property in IAS 40 to specify that a transfer into, or out of investment property should only be made when there has been a change in use of the property; and such a change in use would involve an assessment of whether the property qualifies as an investment property. Such a change in use should be supported by evidence. These amendments did not have any impact on the Group s interim consolidated financial information. 4 Critical Accounting Estimates and Judgements in Applying Accounting Policies The Group makes estimates and assumptions that affect the amounts recognised in the financial statements and the carrying amounts of assets and liabilities within the next financial year. Estimates and assumptions are continually evaluated and are based on management s experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Management also makes certain professional judgements, apart from those involving estimations, in the process of applying the accounting policies. Judgements that have the most significant effect on the amounts recognised in the interim consolidated financial information and estimates that can cause a significant adjustment to the carrying amount of assets and liabilities within the next financial year include: Impairment losses on loans and advances. The Group regularly reviews its loan portfolios to assess impairment. In determining whether an impairment loss should be recorded within profit or loss for the year, the Group makes professional judgements as to whether there is any objective data indicating that there is a measurable decrease in the estimated future cash flows from a portfolio of loans before the decrease can be identified with an individual loan in that portfolio. This evidence may include measurable data indicating that there has been an adverse change in the payment status of borrowers in a group, or national or local economic conditions that correlate with defaults on assets in the group. Management determined loan impairment provisions using the estimated credit loss model required by the applicable accounting standards. Refer to Note 3 for the detailed description of the ECL estimation methodology. 15

19 4 Critical Accounting Estimates and Judgements in Applying Accounting Policies (Continued) Deferred income tax asset recognition. The recognised deferred tax asset represents income taxes recoverable through future deductions from taxable profits, and is recorded in the interim condensed consolidated financial statements. Deferred income tax assets are recorded to the extent that realisation of the related tax benefit is probable. The future taxable profits and the amount of tax benefits that are probable in the future are based on a medium term business plan prepared by management and extrapolated results. The business plan is based on management expectations that are believed to be reasonable under the circumstances and approved by the Group s management. The key assumption of this business plan is profit received in subsequent financial years from expanding the product line and client base. Accounting for investments in ZAO National Non-State Pension Fund As at 30 June 2018 and 31 December 2017, the Group owns 35% in ZAO National Non-State Pension Fund. The Group does not control or have significant influence on ZAO National Non-State Pension Fund. This investment is included in investment securities in accordance with IFRS 9 (in securities available for sale under IAS 39 at 31 December 2017). Income Taxes. Interim period income tax expense is accrued using the estimated effective tax rate that would be applied to expected total annual earnings, i.e. the estimated weighted average annual effective income tax rate is applied to the pre-tax income for the interim period. Going concern. Management prepared this condensed consolidated interim financial information on a going concern basis. In making this judgement management considered the Group s financial position, current intentions, profitability of operations and access to financial resources, and analysed the impact of the economic situation on future operations of the Group. 5 Due from Other Banks 30 June December 2017 Deposits with other banks 2,482,035 2,884,304 Reverse sale and repurchase (reverse REPO) agreements with other banks 5,096, ,348 Expected credit loss allowance (before: provision for impairment) (44,716) (29,704) Total due from other banks 7,533,579 3,313,948 The changes in the expected credit loss allowance of amounts due from other banks during six months ended 30 June 2018 are as follows: Deposits with other banks Reverse repurchase agreements Total Expected credit loss allowance at 1 January 2018 (39,807) (1,150) (40,957) Changes due to changes in credit risk (net) (4,757) 998 (3,759) Expected credit loss allowance at 30 June 2018 (44,564) (152) (44,716) The changes in the provision for impairment of amounts due from other banks during six months ended 30 June 2017 are as follows: Deposits with other banks Reverse repurchase agreements Total Provision for impairment at 1 January 2017 (31,280) (205,554) (236,834) Recovery of provision for impairment , ,329 Provision for impairment at 30 June 2017 (30,470) (77,035) (107,505) 16