Inecobank CJSC. Interim Financial Statements For the first quarter of 2017

Transcription

1 Interim Financial Statements For the first quarter of 2017

2 Contents Interim statement of Comprehensive Income... 3 Interim statement of Financial Position... 4 Interim statement of Changes in Equity... 5 Interim statement of Cash Flows... 6 Compliance with the mandatory ratios set by the Central Bank of the RA... 7 Notes to the Interim Financial Statements... 8

3 Interim statement of comprehensive income 31/03/ /03/2016 note Interest and similar income 4 6,510,167 6,392,240 Interest and similar expense 4 (2,902,228) (3,136,253) Net interest income 3,607,939 3,255,987 Fee and commission income 5 366, ,725 Fee and commission expense 6 (112,858) (142,005) Net fee and commission income 254, ,720 Net gain (loss) on financial instruments at fair value through profit or loss (5,850) 99,563 Net foreign exchange income (loss) 7 205, ,673 Net gain (loss) on available-for-sale financial assets 45,971 (4,325) Other operating income 8 410, ,940 Operating income 4,518,507 4,055,558 Income from change in fair value of contingent consideration 5,561 - Impairment losses 9 (988,315) (931,642) Personnel expenses (818,212) (905,524) Other general administrative expenses 10 (631,554) (659,833) Profit (loss) before income tax 2,085,987 1,558,559 Income tax expense (380,726) (386,284) Profit (loss) for the year 1,705,261 1,172,275 Other comprehensive income, net of income tax Revaluation reserve for available-for-sale financial assets: - Net change in fair value 102, ,799 Total comprehensive income for the year 1,808,246 1,336,074 The statement of comprehensive income is to be read in conjunction with the notes to, and forming part of, the financial statements. 3

4 ASSETS Inecobank CJSC Interim statement of financial position note 31/03/ /12/2016 (not audited) (not audited) Cash and cash equivalents 11 43,997,566 40,892,884 Available-for-sale financial assets - Held by the Bank 12 15,559,231 20,689,709 - Pledged under sale and repurchase agreements 12 13,102,685 2,580,688 Loans and advances to banks 13 1,724,929 1,901,172 Reverse repurchase agreements 14 1,237,617 1,574,060 Loans to customers ,885, ,154,904 Property, equipment and intangible assets 16 4,656,842 4,778,646 Other assets 17 3,339,632 3,641,962 Total assets 242,504, ,214,025 LIABILITIES Deposits and balances from banks 18 1,460,845 1,482,169 Repurchase agreements 12,804,705 2,535,884 Current accounts and deposits from customers ,747, ,359,870 Other borrowed funds 20 73,690,224 74,949,509 Current tax liability 220,548 78,380 Deferred tax liabilities 21 1,958,317 1,935,076 Other liabilities 22 1,010,490 1,069,334 Total liabilities 196,892, ,410,222 EQUITY Share capital 23 14,545,680 14,545,680 Share premium 7,753,923 7,753,923 Main reserve 3,500,000 3,500,000 Revaluation surplus for buildings 24 1,576,515 1,581,182 Revaluation reserve for available-for-sale financial assets , ,670 Retained earnings (accumulated losses) 17,257,276 15,547,348 Total equity 45,612,049 43,803,803 Total liabilities and equity 242,504, ,214,025 The statement of financial position is to be read in conjunction with the notes to, and forming part of, the financial statements. 4

5 Inecobank cjsc Interim statement of changes in equity Share capital Share premium Main reserve Revaluation surplus for land and building Revaluation reserve for availablefor-sale assets Retained earnings AMD'000 The same intermediate period of the previous financial year (cumulative from the beginning of the year) Balance as of 01 January 2016 (audited) 14,545,680 7,753,923 3,500,000 1,599,848 (166,232) 13,532,427 40,765,646 Net gain /loss of the period ,172,275 1,172,275 Other comprehensive income , ,799 Dividends Internal movements, (4,665) - 4,665 - Transfer to main reserve Depreciation of revaluation surplus for land and building (4,665) - 4,665 - Balance as of 31 March 2016 (not audited) 14,545,680 7,753,923 3,500,000 1,595,183 (2,433) 14,709,367 42,101,720 Total Share capital Share premium Main reserve Revaluation surplus for land and building Revaluation reserve for availablefor-sale assets The same intermediate period of the current year (cumulative from the beginning of the year) Retained earnings Total Balance as of 01 January 2017(not audited) 14,545,680 7,753,923 3,500,000 1,581, ,670 15,547,348 43,803,803 Net gain /loss of the period ,705,261 1,705,261 Other comprehensive income , ,985 Dividends Shares issued Internal movements, (4,667) - 4,667 - Transfer to main reserve Depreciation of revaluation surplus for land and building (4,667) - 4,667 - Balance as of 31 March 2017 (not audited) 14,545,680 7,753,923 3,500,000 1,576, ,655 17,257,276 45,612,049 The statement of changes in equity is to be read in conjunction with the notes to, and forming part of, the financial statements. 5

6 Interim statement of cash flows 01/01/ /03/ /01/ /03/2017 NAME notes AMD'000 AMD' Cash flow from operating activities x x Net cash flow before the change of operating assets and liabilities 2,495,000 2,820,878 Interests received 5,887,772 6,175,685 Interests paid (2,677,056) (2,993,688) Commissions received 376, ,859 Commissions paid (141,524) (112,858) Gains/(losses) from available-for-sale assets (4,325) 45,971 Gains/(losses) from foreign exchange 229, ,530 Recovery of written-off assets 493, ,173 Salary and other payables to employees (868,274) (782,335) Other income received and expenses paid from operating activities (308,067) (90,286) Cash flow from the changes of operating assets and liabilities (6,538,006) 1,525,904 Decrease/(increase) in operating assets (3,221,968) (3,708,114) including decrease/(increase) of loans and advances (1,543,725) 676,710 decrease/(increase) in securities held for trading and for sale (2,536,056) (5,218,224) decrease/(increase) in other operating assets 857, ,400 Increase/(decrease) in opreating liabilities (3,316,038) 5,234,018 including increase/(decrease) in liabilities to customers (2,820,353) 5,398,570 increase/(decrease) in other opreating liabilities (495,685) (164,552) Net cash flow from operating activities before profit tax (4,043,006) 4,346,782 Profit tax paid (188,330) (233,000) Net cash flow from operating activities (4,231,336) 4,113,782 2.Cash flow from investing activities x x Decrease (increase) of investments in share capital of other org. - - Decrease (increase) in capital investments in property and equipment and intangible assets (69,683) (38,226) Purchase of property and equipment and intangible assets (69,683) (41,624) Disposal of property and equipment and intangible assets - 3,398 Net cash flow from investing activities (69,683) (38,226) 3. Cash flow from financing activities x x Dividends paid - - Shareholders investments in share capital - - Increase (decrease) of funds borrowed from the Central Bank of the RA 1,269,466 1,077,505 Increase (decrease) of other funds borrowed (8,788,872) (2,098,652) Increase (decrease) of securities issued by the Bank - - Net cash flow from financing activities (7, 519, 406) (1, 021, 147) Influence of the change of the foreign currency exchange rate on cash and cash equivalents 456,960 50,273 Net increase/(decrease) in cash and cash equivalents (11,363,465) 3,104,682 Cash and cash equivalents at the beginning of the period 11 58,244,672 40,892,884 Cash and cash equivalents at the end of the period 11 46,881,207 43,997,566 The statement of cash flows is to be read in conjunction with the notes to, and forming part of, the financial statements. 6

7 Compliance with the mandatory ratios set by the Central Bank of the RA 01/03/ /03/2017 NORMS Actual value Compulsory value set by the Central Bank of Armenia Any non compliance during reporting quarter Minimal required paid-in capital (AMD'000) 22,299,603 50,000 Compliant Minimal required total (own) capital (AMD'000) 36,802,151 30,000,000 Compliant N1ª minimal ratio of total capital to risk-weighted assets 15.62% 12.0% Compliant N2(1) minimal ratio of high-liquid assets to total assets in all currencies 27.98% 15.0% Compliant N2(11) minimal ratio of high-liquid assets to total assets in convertible currencies 23.68% 4.0% Compliant N2(2) minimal ratio of high-liquid assets to demand liabilities in all currencies % 60.0% Compliant N2(21) minimal ratio of high-liquid assets to demand liabilities in convertible currencies % 10.0% Compliant N3(1) Maximum risk of one borrower 10.92% 20.0% Compliant N3(2) Maximum risk on major borrowers 65.57% 500.0% Compliant Maximum risk of one borrower related to the Bank 0.21% 5.0% Compliant Maximum risk of all borrowers related to the Bank 1.52% 20.0% Compliant Minimal obligatory reserves at the Central Bank of RA in drams X 2.0% Compliant in foreign currencies X 18.0% Compliant Maximum ratio of total foreign currency position to total capital (without derivatives)* 1.18% 10.0% Compliant Maximum ratio of each foreign currency position to total capital USD 1.1% 7.0% Compliant EUR 0.06% 7.0% Compliant RUB 0% 7.0% Compliant Other currencies X X Compliant *) with derivatives - respectively 1.18%, 1.1%, 0.06% and 0%. The interim financial statements for the third quarter were prepared on the basis of the general analogical forms set by the Central Bank of the RA. 7

8 1 Background Inecobank CJSC Principal activities These interim financial statements comprise the financial statements of "Inecobank" CJSC (the Bank). Inecobank" CJSC is a closed joint stock company, established in The Bank was registered by the Central Bank of Armenia in October 1996 and has a general banking license No. 68. The principal activities of the Bank are deposit taking, lending and operations with securities, gold bullion and foreign exchange. The activities of the Bank are regulated by the Central Bank of Armenia ( the CBA ). The Bank conducts business throughout the Republic of Armenia from its head office and twenty two branches. The majority of the Bank s assets and liabilities are located in the Republic of Armenia. On March 25, 2016, Joint extraordinary General Meeting of Inecobank CJSC and Procredit Bank CJSC shareholders announced the decision of reorganizing the above mentioned banks by merging Procredit Bank CJSC with Inecobank CJSC. The merger took place on May 7, 2016 which leaded to the discontinuation of Procredit Bank CJSC activities as a separate legal entity. Legal address of the Bank is 17 Toumanyan Street, Yerevan, , RA. Legal addresses of the branches are: Gyumri Branch 6 Alek Manukyan Street, Gyumri, RA Vanadzor Branch 75 Tigran Mets Street, Vanadzor, RA Armavir Branch 17 Hanrapetutyun Street, Armavir, RA Koryun Branch 105/1 Teryan Street, Yerevan, RA 18 Abovyan Branch 18 Abovyan Street, Yerevan, RA Arabkir Branch 49-1 Komitas Street, Yerevan, RA Hrazdan Branch 46/100 Ogostos 23 Street, Hrazdan, RA Nor Norq Branch 15/9-17/1 Gai ave., Nor Norq, Yerevan, RA Malatia Branch 39/3 Raffu Street, Yerevan, RA Shengavit Branch 22/3 Bagratunyatc Street, Yerevan, RA Abovyan Branch 7/3 Sahmanadrutyan Square, Abovyan, RA Tigran Mets Branch 29A-95 Tigran Mets, Yerevan, RA Ashtarak Branch 2 Nerses Ashtaraketci Square, Ashtarak, RA Lori Branch 41 Tigran Mets Street, Vanadzor, RA Artashat Branch 1 Kharazyan, Artashat,RA Zeytun Branch 51/9 Paruyr Sevak street, Yerevan, RA Armavir Branch 2 33/1 Yerevanyan Street, Armavir, RA Ajapnyak Branch 192/8 Bashinjaghyan street, Yerevan, RA Komitas Branch 39/78 Komitas ave., Yerevan, RA Khorenatsi branch 15 Khorenatsi str., "Elite Plaza" Business Center Mashtots Branch 18 Mashtots avenue, 52/1 building, Yerevan, RA Shengavit Branch 2 15 Bagratunyats street, Yerevan, RA The average number of employees within the bank is 785, of which 54 is the supporting staff. 8

9 Shareholders Inecobank CJSC The Bank s shareholders are: Mr. Avetis Baloyan (27.4%), Mr. Karen Safaryan (23.67%), European Bank for Reconstruction and Development (22.7%), DEG Deutsche Investitions-und Entwicklungsgesellschaft mbh (9.58%), International Financial Corporation (7.1%) and others (9.55%). Related party transactions are detailed in note 29. Armenian business environment Armenia is experiencing political and economic changes that have affected, and may continue to affect, the activities of enterprises operating in this environment. Consequently, operations in Armenia involve risks that typically do not exist in other markets. In addition, the contraction in the capital and credit markets has further increased the level of economic uncertainty in the business environment. The financial statements reflect management s assessment of the impact of the Armenian business environment on the operations and the financial position of the Bank. The future business environment may differ from management s assessment. 2 Basis of preparation Statement of compliance The accompanying financial statements are prepared in accordance with International Financial Reporting Standards ( IFRS ). Basis of measurement The financial statements are prepared on the historical cost basis except that financial instruments at fair value through profit or loss and available-for-sale assets are stated at fair value, and land and buildings are revalued periodically. Functional and presentation currency The functional currency of the Bank is the Armenian Dram (AMD) as, being the national currency of the Republic of Armenia, it reflects the economic substance of the majority of underlying events and circumstances relevant to them. The AMD is also the Bank s presentation currency for the purposes of these financial statements. Financial information presented in AMD is rounded to the nearest thousand. Use of estimates and judgments Management makes a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with IFRS. Actual results could differ from those estimates. 9

10 3 Significant accounting policies The following significant accounting policies are consistently applied in the preparation of the financial statements. Changes in accounting policies are described at the end of this note. Foreign currency transactions Transactions in foreign currencies are translated to the respective functional currency at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. The foreign currency gain or loss on monetary items is the difference between amortised cost in the functional currency at the beginning of the period, adjusted for effective interest and payments during the period, and the amortised cost in foreign currency translated at the exchange rate at the end of the reporting period. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Foreign currency differences arising on retranslation are recognised in profit or loss, except for differences arising on the retranslation of available-for-sale equity instruments, which are recognised in other comprehensive income. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rate at the date of the transaction. The official rate of exchange prevailing at 31 March 2017 was AMD = USD 1 (31 December 2016: AMD = USD 1). Cash and cash equivalents The Bank includes cash and nostro accounts with commercial banks and the CBA in cash and cash equivalents. Financial instruments Classification Financial instruments at fair value through profit or loss are financial assets or liabilities that are: acquired or incurred principally for the purpose of selling or repurchasing in the near term part of a portfolio of identified financial instruments that are managed together and for which there is evidence of a recent actual pattern of short-term profit-taking derivative financial instruments (except for derivative financial instruments that are designated and effective hedging instruments) or, upon initial recognition, designated as at fair value through profit or loss. The Bank may designate financial assets and liabilities at fair value through profit or loss where either: the assets or liabilities are managed and evaluated on a fair value basis the designation eliminates or significantly reduces an accounting mismatch which would otherwise arise or, 10

11 the asset or liability contains an embedded derivative that significantly modifies the cash flows that would otherwise be required under the contract. All trading derivatives in a net receivable position (positive fair value), as well as options purchased, are reported as assets. All trading derivatives in a net payable position (negative fair value), as well as options written, are reported as liabilities. Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market, other than those that the Bank: intends to sell immediately or in the near term upon initial recognition designates as at fair value through profit or loss upon initial recognition designates as available-for-sale or, may not recover substantially all of its initial investment, other than because of credit deterioration. Held-to-maturity investments are non-derivative financial assets with fixed or determinable payments and fixed maturity that the Bank has the positive intention and ability to hold to maturity, other than those that: the Bank upon initial recognition designates as at fair value through profit or loss the Bank designates as available-for-sale or, meet the definition of loans and receivables. Available-for-sale assets are those financial assets that are designated as available-for-sale or are not classified as loans and receivables, held-to-maturity investments or financial instruments at fair value through profit or loss. Management determines the appropriate classification of financial instruments at the time of the initial recognition. Derivative financial instruments and financial instruments designated as at fair value through profit or loss upon initial recognition are not reclassified out of at fair value through profit or loss category. Financial assets that would have met the definition of loan and receivables may be reclassified out of the fair value through profit or loss or available-for-sale category if the entity has an intention and ability to hold it for the foreseeble future or until maturity. Other financial instruments may be reclassified out of at fair value through profit or loss category only in rare circumstances. Rare circumstances arise from a single event that is unusual and highly unlikely to recur in the near term. Recognition Financial assets and liabilities are recognized in the statement of financial position when the Bank becomes a party to the contractual provisions of the instrument. All regular way purchases of financial assets are accounted for at the settlement date. Measurement A financial asset or liability is initially measured at its fair value plus, in the case of a financial asset or liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or liability. Subsequent to initial recognition, financial assets, including derivatives that are assets, are measured at their fair values, without any deduction for transaction costs that may be incurred on sale or other disposal, except for: 11

12 loans and receivables which are measured at amortized cost using the effective interest method held-to-maturity investments that are measured at amortized cost using the effective interest method investments in equity instruments that do not have a quoted market price in an active market and whose fair value can not be reliably measured which are measured at cost. All financial liabilities, other than those designated at fair value through profit or loss and financial liabilities that arise when a transfer of a financial asset carried at fair value does not qualify for derecognition, are measured at amortized cost. Amortized cost is calculated using the effective interest method. Premiums and discounts, including initial transaction costs, are included in the carrying amount of the related instrument and amortized based on the effective interest rate of the instrument. Where a valuation based on observable market data indicates a fair value gain or loss on initial recognition of an asset or liability, the gain or loss is recognised immediately in profit or loss. Where an initial gain or loss is not based entirely on observable market data, it is deferred and recognised over the life of the asset or liability on an appropriate basis, or when prices become observable, or on disposal of the asset or liability. 12

13 Fair value measurement principles Inecobank CJSC The fair value of financial instruments is based on their quoted market price at the reporting date without any deduction for transaction costs. Where a quoted market price is not available, fair value is determined using valuation techniques with a maximum use of market inputs. Such valuation techniques include reference to recent arm s length market transactions, current market prices of substantially similar instruments, discounted cash flow and option pricing models and other techniques commonly used by market participants to price the instrument. Where discounted cash flow techniques are used, estimated future cash flows are based on management s best estimates and the discount rate is a market related rate at the reporting date for an instrument with similar terms and conditions. Where pricing models are used, inputs are based on market related measures at the reporting date. The fair value of derivatives that are not exchange-traded is estimated at the amount that the Bank would receive or pay to terminate the contract at the reporting date taking into account current market conditions and the current creditworthiness of the counterparties and own credit risk. Gains and losses on subsequent measurement A gain or loss arising from a change in the fair value of a financial asset or liability is recognized as follows: a gain or loss on a financial instrument classified as at fair value through profit or loss is recognized in profit or loss a gain or loss on an available-for-sale asset is recognized as other comprehensive income in equity (except for impairment losses and foreign exchange gains and losses on debt financial instruments available-for-sale) until the asset is derecognized, at which time the cumulative gain or loss previously recognised in equity is recognized in profit or loss. Interest in relation to an available-for-sale asset is recognized as earned in profit or loss using the effective interest method. For financial assets and liabilities carried at amortized cost, a gain or loss is recognized in profit or loss when the financial asset or liability is derecognized or impaired, and through the amortization process. Derecognition A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire or when the Bank transfers substantially all the risks and rewards of ownership of the financial asset. Any rights or obligations created or retained in the transfer are recognized separately as assets or liabilities. A financial liability is derecognised when it is extinguished. The Bank also derecognises certain assets when it writes off balances pertaining to the assets deemed to be uncollectible. 13

14 Repurchase and reverse repurchase agreements Securities sold under sale and repurchase ( repo ) agreements are accounted for as secured financing transactions, with the securities retained in the statement of financial position and the counterparty liability included in amounts payable under repo transactions. The difference between the sale and repurchase prices represents interest expense and is recognized in the profit or loss over the term of the repo agreement using the effective interest method. Securities purchased under agreements to resell ( reverse repo ) are recorded as amounts receivable under reverse repo transactions. The difference between the purchase and resale prices represents interest income and is recognized in the profit or loss over the term of the repo agreement using the effective interest method. If assets purchased under agreement to resell are sold to third parties, the obligation to return securities is recorded as a trading liability and measured at fair value. Offsetting Financial assets and liabilities are offset and the net amount reported in the statement of financial position when there is a legally enforceable right to set off the recognized amounts and there is an intention to settle on a net basis, or realize the asset and settle the liability simultaneously. Property and equipment Owned assets Items of property and equipment are stated at cost less accumulated depreciation and impairment losses, except for land and buildings which are stated at revalued amounts as described below. Where an item of property and equipment comprises major components having different useful lives, they are accounted for as separate items of property and equipment. Leased assets Leases under which the Company assumes substantially all the risks and rewards of ownership are classified as finance leases. Equipment acquired by way of finance lease is stated at the amount equal to the lower of its fair value and the present value of the minimum lease payments at inception of the lease, less accumulated depreciation and impairment losses. Revaluation Land and buildings are subject to revaluation on a regular basis. The frequency of revaluation depends on the movements in the fair values of the land and buildings being revalued. A revaluation increase on an item of land and building is recognised as other comprehensive income directly in equity except to the extent that it reverses a previous revaluation decrease recognised in profit or loss, in which case it is recognised in profit or loss. A revaluation decrease on an item of land or buildings is recognised in profit or loss except to the extent that it reverses a previous revaluation increase recognised as other comprehensive income directly in equity, in which case it is recognised directly in equity. 14

15 Revaluation surplus is transferred to retained earnings at the amount equal to the difference between depreciation based on the revalued carrying amount of the asset and depreciation based on the asset s original cost. Depreciation Depreciation is charged to profit or loss on a straight-line basis over the estimated useful lives of the individual assets. Depreciation commences on the date of acquisition or, in respect of internally constructed assets, from the time an asset is completed and ready for use. Leasehold improvements are depreciated over the shortest of the asset useful life and lease term. Land is not depreciated. The estimated useful lives are as follows: - buildings 50 years - computers 5-7 years - vehicles 5 years - other fixed assets 5-7 years Intangible assets Intangible assets, which are acquired by the Bank, are stated at cost less accumulated amortisation and impairment losses. Acquired computer software licenses are capitalised on the basis of the costs incurred to acquire and bring to use the specific software. Amortisation is charged to profit or loss on a straight-line basis over the estimated useful lives of intangible assets. The estimated useful lives are as follows: Impairment Financial assets carried at amortized cost Financial assets carried at amortized cost consist principally of loans and other receivables (loans and receivables). The Bank reviews its loans and receivables to assess impairment on a regular basis. A loan or receivable is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the loan or receivable and that event (or events) has had an impact on the estimated future cash flows of the loan that can be reliably estimated. Objective evidence that financial assets are impaired can include default or delinquency by a borrower, breach of loan covenants or conditions, restructuring of a loan or advance on terms that the Bank would not otherwise consider, indications that a borrower or issuer will enter bankruptcy, the disappearance of an active market for a security, deterioration in the value of collateral, or other observable data relating to a group of assets such as adverse changes in the payment status of borrowers in the group, or economic conditions that correlate with defaults in the group. 15

16 The Bank first assesses whether objective evidence of impairment exists individually for loans and receivables that are individually significant, and individually or collectively for loans and receivables that are not individually significant. If the Bank determines that no objective evidence of impairment exists for an individually assessed loan or receivable, whether significant or not, it includes the loan in a group of loans and receivables with similar credit risk characteristics and collectively assesses them for impairment. Loans and receivables that are individually assessed for impairment and for which an impairment loss is or continues to be recognised are not included in a collective assessment of impairment. If there is objective evidence that an impairment loss on a loan or receivable has been incurred, the amount of the loss is measured as the difference between the carrying amount of the loan or receivable and the present value of estimated future cash flows including amounts recoverable from guarantees and collateral discounted at the loan or receivable s original effective interest rate. Contractual cash flows and historical loss experience adjusted on the basis of relevant observable data that reflect current economic conditions provide the basis for estimating expected cash flows. In some cases the observable data required to estimate the amount of an impairment loss on a loan or receivable may be limited or no longer fully relevant to current circumstances. This may be the case when a borrower is in financial difficulties and there is little available historical data relating to similar borrowers. In such cases, the Bank uses its experience and judgement to estimate the amount of any impairment loss. All impairment losses in respect of loans and receivables are recognized in profit or loss and are only reversed if a subsequent increase in recoverable amount can be related objectively to an event occurring after the impairment loss was recognised. When a loan is uncollectable, it is written off against the related allowance for loan impairment. The Bank writes off a loan balance (and any related allowances for loan losses) when management determines that the loans are uncollectable and when all necessary steps to collect the loan are completed. Financial assets carried at cost Financial assets carried at cost include unquoted equity instruments included in available-for-sale assets that are not carried at fair value because their fair value can not be reliably measured. If there is objective evidence that such investments are impaired, the impairment loss is calculated as the difference between the carrying amount of the investment and the present value of the estimated future cash flows discounted at the current market rate of return for a similar financial asset. All impairment losses in respect of these investments are recognized in profit or loss and can not be reversed. Available-for-sale assets Impairment losses on available-for-sale assets are recognised by transferring the cumulative loss that has been recognised in other comprehensive income to profit or loss as a reclassification adjustment. The cumulative loss that is reclassified from other comprehensive income to profit or loss is the difference between the acquisition cost, net of any principal repayment and amortisation, and the current fair value, less any impairment loss previously recognised in profit or loss. Changes in impairment provisions attributable to time value are reflected as a component of interest income. 16

17 For an investment in an equity security available-for-sale, a significant or prolonged decline in its fair value below its cost is objective evidence of impairment. If, in a subsequent period, the fair value of an impaired available-for-sale debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised in profit or loss, the impairment loss is reversed, with the amount of the reversal recognised in profit or loss. However, any subsequent recovery in the fair value of an impaired available-for-sale debt security is recognised in other comprehensive income. Non financial assets Other non financial assets, other than deferred taxes, are assessed at each reporting date for any indications of impairment. The recoverable amount of non financial assets is the greater of their fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. For an asset that does not generate cash inflows largely independent of those from other assets, the recoverable amount is determined for the cash-generating unit to which the asset belongs. An impairment loss is recognised when the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. All impairment losses in respect of non financial assets are recognized in profit or loss and reversed only if there has been a change in the estimates used to determine the recoverable amount. Any impairment loss reversed is only reversed to the extent that the asset s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortisation, if no impairment loss had been recognised. Provisions A provision is recognized in the statement of financial position when the Bank has a legal or constructive obligation as a result of a past event, and it is probable that an outflow of economic benefits will be required to settle the obligation. If the effect is material, provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and, where appropriate, the risks specific to the liability. A provision for restructuring is recognised when the Bank has approved a detailed and formal restructuring plan, and the restructuring either has commenced or has been announced publicly. Credit related commitments In the normal course of business, the Bank enters into credit related commitments, comprising undrawn loan commitments, letters of credit and guarantees, and provides other forms of credit insurance. Financial guarantees are contracts that require the Bank to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due in accordance with the terms of a debt instrument. A financial guarantee liability is recognised initially at fair value net of associated transaction costs, and is measured subsequently at the higher of the amount initially recognised less cumulative amortisation or the amount of provision for losses under the guarantee. Provisions for losses under financial guarantees and other credit related commitments are recognised when losses are considered probable and can be measured reliably. 17

18 Financial guarantee liabilities and provisions for other credit related commitment are included in other liabilities. Share capital Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of ordinary shares are recognised as a deduction from equity, net of any tax effects. Share premium Any amount paid in excess of par value of shares issued is recognised as share premium. Dividends The ability of the Bank to declare and pay dividends is subject to the rules and regulations of the Armenian legislation. Dividends in relation to ordinary shares are reflected as an appropriation of retained earnings in the period when they are declared. Taxation Income tax comprises current and deferred tax. Income tax is recognised in profit or loss except to the extent that it relates to items of other comprehensive income or transactions with shareholders recognised directly in equity, in which case it is recognised within other comprehensive income or directly within equity. Current tax expense is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the reporting date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following temporary differences are not provided for: goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit and temporary differences related to investments in subsidiaries and associates where the parent is able to control the timing of the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantially enacted at the reporting date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the temporary differences, unused tax losses and credits can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. 18

19 Income and expense recognition Inecobank CJSC Revenue is recognized to the extent that it is probable that the economic benefits will flow to the Bank and the revenue can be reliably measured. Expense is recognized to the extent that it is probable that the economic benefits will flow from the Bank and the expense can be reliably measured. The following specific criteria must also be met before revenue is recognized: Interest income and expense Interest income and expense for all interest-bearing financial instruments, except for those classified as held for trading or designated at fair value through profit or loss, are recognised within interest income and interest expense in the income statement using the effective interest method. Once the recorded value of a financial asset or a group of similar financial assets has been reduced due to an impairment loss, interest income continues to be recognized using the original effective interest rate applied to the new carrying amount. Fee and commission income and expenses Loan origination fees for loans issued to customers are deferred (together with related direct costs) and recognised as an adjustment to the effective yield of the loans. Fees, commissions and other income and expense items are generally recorded on an accrual basis when the service has been provided. Portfolio and other management advisory and service fees are recorded based on the applicable service contracts. Asset management fees related to investment funds are recorded over the period the service is provided. The same principle is applied for wealth management, financial planning and custody services that are continuously provided over an extended period of time. Net trading income Net trading income comprises gains less losses related to trading assets and liabilities, and includes all realized and unrealized fair value changes, interest, dividends and foreign exchange differences related to trading assets and liabilities. Net trading income also includes gains less losses from trading in foreign currencies. Standards, amendments and interpretations not yet applied by the Bank At the date of authorization of these financial statements, certain new standards, amendments and interpretations to the existing Standards have been published but are not yet effective. The Bank has not early adopted any of these pronouncements. Management anticipates that all of the pronouncements will be adopted in the Bank s accounting policy for the first period beginning after the effective date of the pronouncement. Information on new standards, amendments and interpretations that are expected to be relevant to the Bank s financial statements is provided below. Certain other new standards and interpretations have been issued but are not expected to have a material impact on the Bank s financial statements. IFRS 9 Financial Instruments has been issued in phases and replaces International Financial Reporting Standard IAS 39 Financial Instruments: Recognition and Measurement. The first phase of IFRS 9 was issued in November 2009 and relates to the classification and measurement of financial assets. The second phase regarding the classification and measurement of financial liabilities was published in October The third phase of IFRS 9 was issued in November 2013 and relates to general hedge accounting. The standard was finalized and published in July The final phase relates to a new expected credit loss model for calculating impairment. The Bank recognises that the new standard introduces many changes to accounting for financial instruments and is likely to have a significant impact on the financial statements. The Bank has 19

20 not yet analysed the impact of these changes. The Bank does not intend to adopt this standard early. The standard will be effective for annual periods beginning on or after 1 January 2018 and will be applied retrospectively with some exemptions. Various Improvements to IFRS are dealt with on a standard-by-standard basis. All amendments, which result in accounting changes for presentation, recognition or measurement purposes, will come into effect after 1 January The Bank has not yet analysed the likely impact of the improvements on its financial position or performance. 4 Net interest and similar income Interest income 31/03/ /03/2016 Loans to customers 5,803,030 5,927,112 Available-for-sale financial assets 672, ,656 Loans to banks 11,012 18,617 Amounts receivable under reverse repurchase agreements 23,145 17,855 6,510,167 6,392,240 Interest expense Other borrowed funds 1,249,260 1,440,998 Current accounts and deposits from customers Amounts payable under repurchase agreements 1,515,919 1,451, , ,144 Deposits and balances from banks 24,290 39,152 2,902,228 3,136,253 Net interest income 3,607,939 3,255,987 20

21 5 Fee and commission income 31/03/ /03/2016 Plastic cards 185, ,655 Money transfers 90,837 82,404 Cash withdrawal transactions 22,591 28,011 Account services 35,561 46,006 Guarantee and letter of credit issuance 16,056 21,967 Other 16,193 6,682 Total 366, ,725 6 Fee and commission expense 31/03/ /03/2016 Credit card maintenance services 87,951 84,099 Other 24,907 57,906 Total 112, ,005 Net commission income 254, ,720 7 Net profit/(loss) from trading activities 31/03/ /03/2016 Net gain from foreign exchange trading activities 216, ,283 Net loss from foreign exchange revaluation (11,054) (56,610) Total 205, ,673 8 Other operating income 31/03/ /03/2016 Fines and penalties received 424, ,095 Other expenses on banking operations (13,801) (30,155) 410, ,940 21

22 9 Net assignments to the asset possible loss reserve 31/03/ /03/2016 Loans to customers 988, , General administrative expenses 31/03/ /03/2016 Depreciation and amortisation 159, ,865 Operating lease expense 144, ,250 Repairs and maintenance 69,363 66,376 Advertising and marketing 22,465 29,675 Office supplies 18,859 21,132 Payments to Deposit Guarantee Fund 60,058 31,200 Communications 16,583 23,725 Security 14,792 29,403 Insurance 26,931 25,048 Professional services 48,387 10,747 Fees paid to the credit bureаu 9,777 16,754 Other 40,506 73, , , Cash and cash equivalents 31/03/ /12/ /03/2016 Cash on hand 7,903,073 7,823,076 9,301,402 Nostro accounts with the CBA 31,861,589 31,236,315 26,196,199 Nostro accounts with other banks - rated A- to A+ 2,540, ,741 10,975,224 -rated BBB 33, , ,357 - rated from BB- to BB+ 1,344,348 15,967 54,417 - rated below B+ - 61,884 30,338 -not rated 314, , ,270 Total nostro accounts with other banks 4,232,904 1,833,493 11,383,606 Total cash and cash equivalents 43,997,566 40,892,884 46,881,207 The Bank mainly uses credit ratings per Fitch in disclosing credit quality 22

23 The nostro accounts represent balances with the Central Bank of Armenia related to settlement activity. Nostro accounts include non-interest bearing mandatory minimum reserve deposits calculated against the attracted funds: 2% for the AMD funds, and 18% for the funds in foreign currencies, which are set in accordance with the regulations issued by the CBA. Withdrawability of these deposits is not restricted however the Bank may be exposed to penalties if the minimum average balance is not periodically maintained. The deposited funds in the CBA represent a non-withdrawable deposit in the CBA for membership in ArCa. 12 Available-for-sale assets Held by the Bank 31/03/ /12/2016 Debt and other fixed-income instruments - Armenian Government treasury bills 11,754,833 16,874,621 - Eurobonds of the Republic of Armenia 3,773,513 3,784,209 - Corporate bonds international financial institutions Equity instruments - Corporate shares (at cost) 30,885 30,879 Total 15,559,231 20,689,709 Pledged under sale and repurchase agreements - Armenian Government treasury bills 13,102,685 2,580,688 Investments without a determinable fair value Available-for-sale investments stated at cost include unquoted equity securities in the money transfer and financial services industry. There is no market for these investments and there have not been any recent transactions that provide evidence of the current fair value. In addition, discounted cash flow techniques yield a wide range of fair values due to the uncertainty regarding future cash flows in this industry. 13 Loans and advances to banks 31/03/ /12/2016 Credit card settlement deposit with the CBA 220, ,000 Loans and term deposits with banks Largest 10 Armenian banks 1,493,114 1,559,862 Rated A- to A+ - 17,123 Rated from BBB- to BBB+ - - Not rated - - Regular way purchase agreements - foreign exchange spot transactions Rated from BB- to BB+ - - Rated from B- to B+ - - Not rated 11,815 4,187 Total loans and advances 1,724,929 1,901,172 23

24 14 Amounts receivable under reverse repurchase agreements 31/03/ /12/2016 Medium and small Armenian financial institutions 1,237,617 1,574,060 Collateral As of 31 March 2017 amounts receivable under reverse repurchase agreements were collateralized by securities with the following fair values: In AMD /03/ /12/2016 Armenian Government Treasury Bills 1,300,988 1,658,859 Total 1,300,988 1,658, Loans to customers 31/03/ /12/2016 Loans to legal entities Loans to large corporates 52,038,137 51,990,773 Loans to small and medium size businesses 52,538,798 55,158,622 Total loans to legal entities 104,576, ,149,395 Loans to individuals 60,453,609 58,942,819 Gross loans to customers 165,030, ,092,214 Impairment allowance (6,144,694) (5,937,310) Net loans to customers 158,885, ,154,904 Movements in the loan impairment allowance during the first quarter of 2017 were as follows: Impairment allowance as at the beginning of the period Loans to legal entities Loans to retail customers Total 3,954,499 1,982,811 5,937,310 Impairment losses 201, , ,315 Net write-offs (168,096) (612,834) (780,931) Impairment allowance as at at the end of the period 3,988,400 2,156,294 6,144,694 24

25 Movements in the loan impairment allowance during 2016 were as follows: Loans to legal entities Loans to retail customers Total Impairment allowance as at the beginning of the period 3,318,137 1,204,160 4,522,297 Impairment losses 1,855,044 2,754,017 4,609,061 Net write-offs (1,218,682) (1,975,366) (3,194,048) Impairment allowance as at the end of the period 3,954,499 1,982,811 5,937,310 Credit quality of loans to costomers The following table provides information on the credit quality of loans to costomers as at 31 March 2017: Gross loans Impairment allowance Net loans Impairment to gross loans % Loans to corporates 104,576,935 3,988, ,588, % Loans to retail customers 60,453,609 2,156,294 58,297, % Total loans to customers 165,030,544 6,144, ,885, % The following table provides information on the credit quality of loans to costomers as at 31 December 2016: Gross loans Impairment allowance Net loans Impairment to gross loans % Loans to corporates 107,149,395 3,954, ,194, % Loans to retail customers 58,942,819 1,982,811 56,960, % Total loans to customers 166,092,214 5,937, ,154, % Past due but not impaired loans Past due loans and advances include those that are only past due for a few days. Analysis of past due but not impaired loans by class is provided below. Loans to corporate customers Less than 30 days 31 to 60 days 61 to 90 days More than 91 days 31/03/2017 Total 24,556 16,740 13,268 50, ,069 25