AS Citadele banka Risk management and capital adequacy report for 2016

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2 INTRODUCTION As stipulated in the part eight of the Regulation (EU) No 575/2013 the institution at least annually should disclose information on the major risks of its operations and its risk management objectives and policies and information on capital requirements. The objective of this report is to disclose additional detailed information on risk management and capital adequacy at consolidated level. Consolidated figures as at 31 December 2016 are disclosed. This report is not audited and the audit of these figures is not required. Information on the remuneration policy, its impact on risk, detailed quantitative information on remuneration for AS Citadele banka Group is disclosed in a separate report which is available at the Groups web page. This report is presented in thousands of Euros (EUR 000 s). If not specified otherwise, all figures represent amounts as at 31 December CONSOLIDATION GROUP AS Citadele banka (thereon the Bank), registration number , is the parent company of the Group. In the consolidation group for regulatory purposes (thereon the Group) companies are included as per requirements of Regulation (EU) No 575/2013; in the consolidation group for the accounting purposes in accordance with International Financial Reporting Standards (IFRS) as adopted in the European Union. Name of the company Business profile Bank s share (%) Country Consolidation method AS Citadele banka Banking 100 LV Full AB Citadele bankas Banking 100 LT Full AP Anlage & Privatbank AG Banking 100 CH Full SIA Citadele līzings un faktorings Leasing 100 LV Full UAB Citadele faktoringas ir lizingas Leasing 100 LT Full OU Citadele Leasing & Factoring Leasing 100 EE Full SIA Citadele Express Kredīts Other financial services 100 LV Full AS CBL atklātais pensiju fonds Pension fund 100 LV Full IPAS CBL Asset Management Investment management company 100 LV Full OOO Mizush Asset Management Ukraine Investment management company 100 UA Full SIA PR Speciālie projekti Support services 100 LV Full Calenia Investments Limited Support services 100 CY Full SIA Rīgas pirmā garāža Support services 100 LV Full SIA RPG interjers Support services 100 LV Full SIA CBL Cash Logistics Support services 100 LV Full SIA Hortus Residental Support services 100 LV Full SIA Hortus Commercial Support services 100 LV Full SIA Hortus Land Support services 100 LV Full SIA Hortus TC Support services 100 LV Full SIA Hortus MD Support services 100 LV Full SIA Hortus JU Support services 100 LV Full SIA Hortus RE Support services 100 LV Full SIA Hortus BR Support services 100 LV Full SIA Hortus NI Support services 100 LV Full Subsidiary which is not included in the consolidation for regulatory purposes and investment in which is not deducted from regulatory capital for capital adequacy calculation purposes. Name of the company Business profile Bank s share (%) Country Consolidation method AAS CBL Life Life insurance 100 LV Full There are no immediate or foreseeable legal obstacles for capital element transferability or liability repayment between the Group s mother company and its subsidiaries. In certain jurisdictions all profits may not be paid out in dividends. Specific part from accumulated profits has to be set aside for reserves. These reserves are freely available to the respective company for unlimited and immediate use to cover risks or losses, when such are incurred. AS Citadele banka 2

3 GOVERNANCE In order to ensure that the Bank s Supervisory Board and Management Board members and key function holders are suitable for their position and represent diversity, the Bank has developed internal regulation document AS Citadele banka s policy on the assessment of the suitability of members of the Supervisory Board and Management Board and key function holders. The policy has been developed in accordance with the Credit Institution Law of the Republic of Latvia, the Financial and Capital Market Commission (further FCMC) Recommendations No.166 Recommendations on the assessment of the suitability of members of management board and supervisory board and key function holders, the FCMC Regulation No.112 Regulation on the issuance of licences for performance of the operations of credit institutions and credit unions, the receipt of permissions regulating the specific operations of credit institutions and credit unions, the confirmation of documents and provision of information and FCMC Regulation No.233 Regulation on establishment of internal control system. The policy is reviewed once a year. The policy prescribes the procedure and the frequency of the assessment of the suitability of members of the Bank s Supervisory Board and Management Board and key function holders, as well as procedure for decision making on the suitability. The initial suitability assessment is performed when a new member is nominated to the Bank s Supervisory Board or Management Board prior to his/her election or prior to the date of commencement of his/her duties, but not later than within 6 weeks after the election of the member of the Supervisory Board or the Management Board. The reassessment of suitability is performed in the following cases: - in case of the annual assessment of the suitability of a member of the Supervisory Board or the Management Board; - if a member of the Supervisory Board or the Management Board is re-elected to his/her position; - if changes are made to the responsibilities of a member of the Supervisory Board or the Management Board or in the competences required to carry out such responsibilities; - if there is a doubt about the reliability, competence or reputation of a member of the Supervisory Board or the Management Board. The suitability assessment is performed taking into consideration the overall composition of the Supervisory Board and the Management Board, as well as the knowledge and competence collectively necessary for the Supervisory Board and the Management Board, awareness and personal qualities in order to properly carry out the duties assigned to the members of the Supervisory Board in relation to the supervision of the Management Board activities, and to the Management Board in relation to the Bank s and the Group s operational management. The suitability assessment of members of the Supervisory Board and the Management Board is performed by the Remuneration and Nomination Committee. The Supervisory Board approves the composition and also regulations of this committee. The suitability assessment of key function holders is performed by the Responsible Person Assessment Committee. The Management Board approves the composition and also regulations of this committee. Each member of the Management Board is responsible for specific scope of operations of the Group. The suitability assessment process ensures that members of the Management Board have adequate level of necessary knowledge and competence in relation to specific scope of operations of the Group under responsibility of each member of the Management Board, as well adequate necessary collective knowledge and competence. RISK MANAGEMENT The Group considers risk management to be an essential component of its management process. The Group believes that it pursues prudent risk management policies that are aligned with its business and which aim to achieve effective risk mitigation. In order to assess and monitor complex risk exposures, the Group applies a wide range of risk management tools in conjunction with risk committees. Members of risk committees represent various operations of the Group in order to balance business and risk orientation within respective risk committees. The Group s risk management principles are set out in its Risk Management Policy. The Group adheres to the following key risk management principles: - the Group aims to ensure that it maintains low overall risk exposure, diversified asset portfolio, limited risks in financial markets and low levels of operational risk; - the Group aims to ensure an acceptable risk level in all operations. Risks are always assessed in relation to their expected return. Risk exposures that are not acceptable are avoided, limited or hedged; - the Group does not assume high or uncontrollable risks irrespective of the return they provide, and assumes risks only in economic fields and geographical regions in relation to which it believes it has sufficient knowledge and expertise; - risk management is based on each Group s employee s responsibility for the transactions carried out by him/her and awareness of the related risks; AS Citadele banka 3

4 - risk limit system and strict controls are essential risk management elements. Control over risk levels and compliance with the imposed limits is achieved by the existence of structured risk limit systems for all material risks. The aim of the risk management in the Group is to facilitate the achievement of the Group s goals, successful development, long-term financial stability, and to protect the Group from unidentified risks. The Bank has appointed a Risk Director (CRO) who is a member of the Bank's Management Board and whose responsibilities do not include the duties related to the activities under control. The Risk Director has a direct access to the Bank's Supervisory Board. The Risk and Governance Committee, which is subordinated to the Bank's Supervisory Board, has been established in the Bank. The main task of the Risk and Governance Committee is to provide support to the Bank's Supervisory Board in relation to the monitoring of the Group's risk management system. The Risk and Governance Committee established by the Bank's Supervisory Board provides recommendations to the Bank's Management Board regarding improvements of the risk management system. Risk management within the Group is controlled by an independent unit the Risk and Compliance Sector. The main risks to which the Group is exposed are: credit risk, market risk, interest rate risk, liquidity risk, currency risk and operational risk. For each of these risks the Group has approved risk management policies and other internal regulations defining key risk management principles and processes, functions and responsibilities of units, risk concentration limits, as well as control and reporting system. The Bank s Supervisory Board approves risk management policies and ensures control of efficiency of the risk management system. The Bank's Management Board and Risk Director ensure implementation of the risk management policies and development of internal regulations for the management of each material risk within the Group. In order to assess and monitor material and complex risk exposures, the Bank's Management Board establishes risk committees. Members of risk committees represent various units of the Group in order to ensure the balance between the units responsible for risk monitoring and control and the units with business orientation. The Group continuously assesses and controls risks both on an individual basis by type of risk and by performing a comprehensive assessment within the capital adequacy assessment process. Each member of the Group is responsible for risk control and management. Each employee of the Group is responsible for the compliance with the principles set out in the Group s internal regulations. Risk management process includes the following elements: risk identification, risk assessment and decision making, risk management and control, risk monitoring and reporting. The Group regularly, at least once a year, identifies and describes the types of material risks inherent in its operations by assessing what types of risks may have a negative impact on achieving its performance targets and projected financial results. In order to identify the types of material risks, quantitative and qualitative criteria are used and the results of the process are documented. For all types of identified material risks the aims of risk management are defined and risk appetite is determined. In addition, the development of internal regulations in relation to risk management of those risks is ensured, including risk identification and assessment methods, adequate risk restriction and control procedures, such as quantitative restrictions and limits, or control measures that reduce unquantifiable risks, risk appetite, procedures for reporting the information on risks, risk levels assumed and trends thereof to the Group s management bodies, as well as other information necessary for decision making, risk management policy and control procedures, including procedures for control of compliance with the restrictions and limits set, segregation of duties, approval rights and responsibilities. Risk assessment and decision making include selection, approval and documentation of risk assessment methodology, regular risk assessment, establishment of the risk restriction and controlling system and setting the acceptable level of risks within this system, decision making on assuming the risks. Risk assessment includes the determination of qualitative and quantitative impact of the source of each identified risk using generally accepted methodology which is adequately documented. The Group makes a decision in relation to each identified and assessed risk whether the Group accepts such risk or takes the necessary measures for its mitigation, or ceases activities related to this risk. The Group does not assume risks with the impact exceeding the risk appetite determined for each respective type of risk regardless of the economic benefits that might result from assuming such risk. Risk management and control include the compliance with the level of risk acceptable for the Group including the compliance with the limits restricting the amount of risk. Monitoring and reporting includes regular assessment of the existing level of risk against the desirable level of risk, trend analysis, regular reporting to the relevant unit heads, the Bank s Management Board and the Supervisory Board. The integral part of the risk management is risk stress testing. Stress testing process ensures regular identification and assessment of risks inherent to the Group s current and future operations, as well as assessment of the impact of different extraordinary and adverse events on the Group s operations, in order to provide support to responsible employees of the Group in management decision-making process at different levels of management (e.g. strategic planning, determination and correction of the risk appetite, capital planning, liquidity management, etc.). The Group s Internal Audit Division regularly monitors the implementation of risk management policies and other internal regulations, as well as provides recommendations regarding improvements of the risk management system. AS Citadele banka 4

5 CAPITAL ADEQUACY CALCULATION Capital adequacy refers to the sufficiency of the Group s capital resources to cover credit risks and market risks arising from portfolio of assets and off-balance sheet exposures and other operational risks. Capital adequacy ratio is calculated in accordance with Regulation (EU) 575/2013. Minimum capital requirements are calculated for credit risks, counterparty credit risk, dilution risk, position risk, foreign currency open position risk, commodities risk, settlement risk, operational risk and credit valuation adjustment. The regulation defines not only capital adequacy calculation methods, bet also defines eligible capital elements and limitations for inclusion of these in own funds. The capital adequacy calculation in accordance with FCMC regulations (Basel III framework, Pillar I as implemented by EU and FCMC): 31/12/2016 Group Common equity Tier 1 capital Paid up capital instruments 156,556 Retained earnings and eligible profits 95,568 Deductible other intangible assets (3,052) Other capital components, deductions and transitional adjustments, net (7,069) Tier 2 capital Eligible part of subordinated liabilities 53,254 Total own funds 295,257 Risk weighted exposure amounts for credit risk, counterparty credit risk and dilution risk Central governments or central banks 33,518 Regional governments or local authorities 849 Public sector entities 67 Multilateral development banks 2,461 Institutions 92,763 Corporates 742,291 Retail 138,350 Secured by mortgages on immovable property 272,040 Exposures in default 90,797 Items associated with particularly high risk 32,810 Claims on institutions and corporates with a short-term credit assessment 337 Collective investments undertakings 11,041 Equity 12,822 Other items 126,296 Total exposure amounts for position, foreign currency open position and commodities risk Traded debt instruments 2,850 Equity - Foreign Exchange 7,044 Commodities Total exposure amounts for settlement - Total exposure amounts for operational risk 223,140 Total exposure amounts for credit valuation adjustment 1,109 Total risk exposure amount 1,790,585 Total capital adequacy ratio 16.5% Common equity Tier 1 capital ratio 13.5% AS Citadele banka 5

6 Capital instruments main features template Ordinary shares Subordinated liabilities: Agreement 1 Subordinated liabilities: Agreement 2 Subordinated liabilities: Publicly listed unsecured bonds Capital instruments main features 1 Issuer AS Citadele banka AS Citadele banka AS Citadele banka AS Citadele banka 2 Unique identifier (e.g. CUSIP, ISIN or Bloomberg identifier for private placement) Governing law(s) of the instrument Latvia Latvia English Latvia Regulatory treatment 4 Transitional CRR rules Common Equity Tier 1 Tier 2 Tier 2 Tier 2 5 Post-transitional CRR rules Common Equity Tier 1 Tier 2 Tier 2 Tier 2 6 Eligible at solo/(sub-)consolidated/ solo & (sub-)consolidated Solo & consolidated Solo & consolidated Solo & consolidated Solo & consolidated 7 Instrument type (types to be specified by each jurisdiction) Ordinary shares Subordinated liabilities Subordinated liabilities Subordinated liabilities Amount recognised in regulatory capital (currency in million, as of most recent reporting date) EUR million - EUR 13.3 million EUR 40.0 million 8 9 Nominal amount of instrument EUR million EUR 35.7 million EUR 19.0 million EUR 40.0 million 9a Issue price EUR million EUR 35.7 million EUR 19.0 million EUR 40.0 million 9b Redemption price - EUR 35.7 million EUR 19.0 million EUR 40.0 million 10 Accounting classification Shareholders' Equity Liabilities at amortised cost Liabilities at amortised cost 11 Original date of issuance Various (1) 22/05/ /09/2009 (2) 06/12/ Perpetual or dated Perpetual Dated Dated Dated 13 Original maturity date No Maturity 20/12/2017 (3) 8/8/ /12/ Issuer call subject to prior supervisory approval Yes Yes Yes Yes 15 Optional call date, contingent call dates and redemption amount Subsequent call dates, if applicable Coupons / dividends 17 Fixed or floating dividend/coupon Floating Floating Floating Fixed 18 Coupon rate and any related index % (5) 8.30% (5) 6.25% 19 Existence of a dividend stopper Fully discretionary, partially discretionary or mandatory (in 20a terms of timing) Discretionary Fixed Fixed Fixed Fully discretionary, partially discretionary or mandatory (in terms of amount) Discretionary Fixed Fixed Fixed Liabilities at amortised cost 20b 21 Existence of step up or other incentive to redeem Noncumulative or cumulative Non-cumulative Non-cumulative Non-cumulative Non-cumulative 23 Convertible or non-convertible Non-Convertible Convertible Convertible Non-Convertible 24 If convertible, conversion trigger(s) If convertible, fully or partially - Fully or partially Fully or partially - 26 If convertible, conversion rate - 1) In line with law, fair and nondiscriminatory 2) Share subscription price Subordinated lenders optional, AS Citadele banka mandatory 1) In line with law, fair and nondiscriminatory 2) Share subscription price - Subordinated lenders optional, AS Citadele banka mandatory - 27 If convertible, mandatory or optional conversion - 28 If convertible, specify instrument type convertible into - Voting shares Voting shares - 29 If convertible, specifiy issuer of inctrument it converts into - AS Citadele banka AS Citadele banka AS Citadele banka 30 Write-down future No No No No 31 If write-down, write-down triger(s) If write-down, full or partial If write-down, permanent or temporary If temporary write-down, description of write-up mechanism Position in subordination hierarchy in liquidation (specify instrument type immediately senior to instrument) Subordinated to subordinated liabilities Subordinated to other nonsubordinated liabilities Subordinated to other nonsubordinated liabilities 36 Non-compliant transitioned features No No No No 37 If yes, specify non-compliant features Subordinated to other nonsubordinated liabilities (1) As at 1/1/2015 Citadele share capital was EUR 146,556 thousands. On 20 April 2015 the capital was increased by EUR 10 million. (2) On 20 April 2015 a portion of subordinated liabilities amounting to EUR 18.4 million was repaid to Latvian Privatisation Agency and EUR 11.2 million subordinated liabilities transferred from Latvian Privatisation agency to European Bank for Reconstruction and Development (subordinated liabilities: agreement 2). The maturity of the outstanding subordinated liabilities to European Bank for Reconstruction and Development (subordinated liabilities: agreement 2) was extended to The Group s and Bank s capitalisation was positively affected by changes in the subordinated liabilities and the increase in the Bank s share capital. (3) On 4 January 2017, AS Citadele banka made an early repayment of the EUR 34.7 million subordinated loan outstanding and the accrued interest of EUR 0.98 million to the State Joint Stock Company Privatisation agency. This was made possible by previously issued subordinated bonds in the amount of EUR 40 million. According to the Base Prospectus, the aim of the subordinated bond issuance, among others, was early repayment of the outstanding amount of subordinated debt to SJSC Privatisation agency. The remaining proceeds from the issuance is planned to be used to strengthen the overall capital of AS Citadele banka and to facilitate the execution of the Bank s growth strategy across the Baltics. (5) The coupon rate is updated semi-annually. AS Citadele banka 6

7 The Group s own funds disclosure template in accordance with Commission Implementing Regulation (EU) No 1423/2013 Annex VI Regulation (EU) No 575/2013 Article Reference Common Equity Tier 1 (CET1) capital: Instruments and reserves 1 Capital Instruments and the related share premium accounts 156, (1), 27, 28, 29, EBA list 26 (3) of which: ordinary shares 156,556 EBA list 26 (3) 2 Retained earnings 95, (1) (c) 3 Accumulated other comprehensive income (and other reserves, to include unrealised gains and losses under the appropriate accounting standards) 1, (1) 3.a Funds for general banking risk - 26 (1) (f) Amount of qualifying items referred to in the Article 484 (3) and the 4 related share premium accounts subject to phase out from CET1-486 (2) Public sector capital injections grandfathered until 1 January (2) 5 Minority interest (amount allowed in consolidated CET1) - 84, 479, a Independently reviewed interim profits net of any foreseeable change or dividend - 26 (2) 6 Common Equity Tier 1 (CET1) capital before regulatory adjustments 253,921 Sum of lines 1 to 5.a Common Equity Tier 1 (CEt1) capital: regulatory adjustments 7 Additional value adjustments (negative amount) (1,020) 34, Intangible assets (net of related tax liability) (negative amount) (3,052) 36 (1) (b), 37, 472 (4) 9 Empty set in the EU - 10 Deferred tax assets that relay on future profitability excluding these arising from temporary differences (net of related tax liability where the conditions in Article 38 (3) are met) (negative amount) (22,821) 36 (1) (c), 38, 472 (5) 11 Fair value reserves related to gains or losses on cash flow hedges - 33 (1) (a) Negative amounts resulting from the calculation of expected loss 12 amounts - 36 (1) (d), 40, 159, 472 (6) 13 Any increase in equity that results from securitised assets (negative amount) - 32 (1) 14 Gain or loss on liabilities valued at fair value resulting from changes in own credit standing 33 (1) (b) 15 Defined-benefit pension fund assets (negative amount) 36 (1) (e), 41, 472 (7) 16 Direct and indirect holdings by an institution of own CET1 instruments (negative amount) - 36 (1) (f), 42, 472 (8) 17 Direct, indirect and synthetic holdings of CET1 instruments of financial sector entities where those entities have reciprocal holdings with the institution designated to inflate artificially the own funds of the institution (negative amount) - 36 (1) (g), 44, 472 (9) 18 Direct, indirect and synthetic holdings of CET1 instruments of financial sector entities where the institution does not have a significant investment in these entities (amount above 10% threshold and net of eligible short positions) (negative amount) - 36 (1) (h), 43, 45, 46, 49 (2) and (3), 79, 472 (10) 19 Direct, indirect and synthetic holdings by the institution of the CET1 instruments of financial sector entities where the institution does not have a significant investment in these entities (amount above 10% threshold and net of eligible short positions) (negative amount) - 36 (1) (i), 43, 45, 47, 48 (1) (b), 49 (1) to (3), 79, 470, 472 (11) 20 Empty set in EU - Exposure amount of the following items which qualify for a RW of 20.a 1250%, where the institution opts for the deduction alternative - 36 (1) (k) of which: qualifying holdings outside the financial sector (negative 20.b amount) - 36 (1) (k) (i), 89 to c of which: securitisation positions (negative amount) - 36 (1) (k) (ii), 243 (1) (b), 244 (1) (b), d of which: free deliveries (negative amount) - 36 (1) (k) (iii), 379 (3) 21 Deferred tax asset arising from temporary differences (amount above 10% threshold, net of related tax liability where the conditions in Article 38 (3) are met) (negative amount) - 36 (1) (c), 38, 48 (1) (a), 470, 472 (5) 22 Amount exceeding the 15% threshold (negative amount) - 48 (1) of which: direct and indirect holdings by the institution of the CET1 instruments of financial sector entities where the institution has a 23 significant investment in these entities - 36 (1) (i), 48 (1) (b), 470, 472 (11) 24 Empty set in the EU - 25 of which: deferred tax assets arising from temporary differences panta 1. punkta c) apakšpunkts, 38. pants, 48. panta 1. punkta a) apakšpunkts 25.aLosses for the current financial year (negative amount) - 36 (1) (a), 472 (3) 25.bForeseeable tax charges relating to CET1 items (negative amount) - 36 (1) (l) Regulatory adjustments applied to Common Equity Tier 1 in respect of 26 amounts subject to pre-crr treatment - Regulatory adjustments relating to unrealised gains and losses pursuant 26a to Article 467 and 468 (3,281) 467, 468 Amount to be deducted from or added to Common Equity Tier 1 capital 26b with regard to additional filters and deductions required pre CRR Qualifying AT1 deductions that exceed the AT1 capital of the institution 27 (negative amount) - 36 (1) (j) Regulatory corrections related to deferred tax assets in accordance with Article , Total regulatory adjustments to Common Equity Tier 1 (CET1) (11,917) Sum of lines 7 to 20.a, 21, 22, and 25.a to Common Equity Tier 1 (CET1) capital 242,004 Lines 6 less 28 Additional Tier 1 (At1) capital: instruments 30 Capital instruments and the related share premium accounts - 51, 52 of which: classified as equity under applicable accounting 31 standards - AS Citadele banka 7

8 32 of which: classified as liabilities under applicable accounting standards - 33 Amounts of qualifying items referred to in Article 484 (4) and the related share premium accounts subject to phase out from AT1-486 (3) Public sector capital injections grandfathered until 1 January (3) 34 Qualifying Tier 1 capital included in consolidated AT1 capital (including minority interests not included in row 5) issued by subsidiaries and held by third parties - 85, 86, of which: instruments issued by subsidiaries to phase out (3) 36 Additional Tier 1 (AT1) capital before regulatory adjustments - Tabulas 30., 33. un 34. rindas summa Additional Tier 1 (AT1) capital: regulatory adjustments 37 Direct and indirect holdings by an institution of own AT1 instruments (negative amount) - 52 (1) (b), 56 (a), 57, 475 (2) 38 Direct, indirect and synthetic holdings of the AT1 instruments of financial sector entities where those entities have reciprocal cross holdings with the institution designed to inflate artificially the own funds of the institution (negative amount) - 56 (b), 58, 475 (3) 39 Direct, indirect and synthetic holdings of the AT1 instruments of financial sector entities where the institution does not have a significant investment in those entities (amount above 10% threshold and net of eligible short positions) (negative amount) - 56 (c), 59, 60, 79, 475 (4) 40 Direct, indirect and synthetic holdings by the institution of the AT1 instruments of financial sector entities where the institution has a significant investment in those entities (net of eligible short positions) (negative amount) - 56 (d), 59, 79, 475 (4) 41 Regulatory adjustments applied to additional tier 1 in respect of amounts subject to pre-crr treatment and transitional treatments subject to phase out as prescribed in Regulation (EU) No 575/2013 (i.e. CRR residual amount) - Residual amounts deducted from Additional Tier 1 capital with regard to deduction from Common Equity Tier 1 capital during the transitional 472, 472 (3) (a), 472 (4), 472 (6), 472 (8) (a), 472 (9), 41a period pursuant to article 472 of Regulation (EU) No 575/ (10) (a), 472 (11) (a) Of which: items to be detailed line by line, e.g. material net interim losses, intangibles, shortfall of provisions to expected losses etc. - Residual amounts deducted from Additional Tier 1 capital with regards to deductions from Tier 2 capital during the transitional period pursuant 41b to article 475 of Regulation (EU) No 575/ , 477 (3), 477 (4) (a) Of which: items to be detailed line by line, e.g. reciprocal cross holdings in Tier 2 instruments, direct holdings of non-significant investments in the capital of other financial sector entities, etc. - Amount to be deducted from or added to Additional Tier 1 capital with 41c regard to additional filters and deductions required pre-crr - 467, 468, 481 Qualifying T2 deductions that exceed the T2 capital of the institution (negative amount) - 56 (e) Total regulatory adjustments to Additional Tier 1 (AT1) capital - Sum of lines 37 to Additional Tier 1 (AT1) capital - Line 36 less line Tier 1 capital (T1 = CET1 + AT1) 242,004 Sum of lines 29 and 44 Tier 2 (T2) capital: instruments and provisions 46 Capital instruments and the related share premium accounts 53,254 62, 63 Amount of qualifying items referred to in Article 484 (5) and the related 47 share premium accounts subject to phase out from T2-486 (4) Public sector capital injections grandfathered until 1 January (4) 48 Qualifying own funds instruments included in consolidated T2 capital (including minority interests and AT1 instruments not included in rows 5 or 34) issued by subsidiary and held by third parties - 87, 88, of which: instruments issued by subsidiaries subject to phase out (4) 50 Credit risk adjustments - 62 (c) and (d) 51 Tier 2 (T2) capital before regulatory adjustments 53,254 Tier 2 (T2) capital: regulatory adjustments 52 Direct and indirect holdings by an institution of own T2 instruments and subordinated loans (negative amount) - 63 (b) (i), 66 (a), 67, 477 (2) 53 Holdings of the T2 instruments and subordinated loans of financial sector entities where those have reciprocal cross holdings with the institution designated to inflate the own funds of the institution (negative amount) - 66 (b), 68, 477 (3) 54 Direct and indirect holdings of the T2 instruments and subordinated loans of financial sector entities where the institution does not have a significant investment in those entities (amount above 10% threshold and net of eligible short positions) (negative amount) - 66 (c), 69, 70, 79, 477 (4) 54a of which: new holdings not subject to transitional arrangements - 54b of which: holdings existing before 1 January 2013 and subject to transitional arrangements - 55 Direct and indirect holdings by the institution of the T2 instruments and subordinated loans of financial sector entities where the institution has a significant investment in those entities (net of eligible short positions) (negative amount) - 66 (d), 69, 79, 477 (4) 56 Regulatory adjustments applied to tier 2 in respect of amount subject to pre-crr treatment and transitional treatments subject to phase out as prescribed in Regulation (EUR) No 575/2013 (i.e. CRR residual amounts) - Residual amounts deducted from Tier 2 capital with regard to deductions from Common Equity Tier 1 capital during the transitional period 56a pursuant to article 472 of Regulation (EU) No 575/ of which: items to be detailed line by line, e.g. material net interim losses, intangibles, shortfall of provisions to expected losses etc , 472 (3) (a), 472 (4), 472 (6), 472 (8) (a), 472 (9), 472 (10) (a), 472 (11) (a) AS Citadele banka 8

9 56b Residua amounts deducted from Tier 2 capital with regard to deductions from Additional Tier 1 capital during the transitional period pursuant to article 475 of Regulation (EU) No 575/ , 475 (2) (a), 475 (3), 475 (4) (a) of which: items to be detailed line by line, e.g. reciprocal cross holdings in AT1 instruments, direct holdings of non significant investments in capital of other financial sector entities, etc.. - Amount to be deducted from or added to Tier 2 capital with regards ro additional filters and deductions required pre CRR - 467, 468, c 57 Total regulatory adjustments to Tier 2 (T2) capital - Sum of lines 52 to Tier 2 (T2) capital 53,254 Line 51 less line Total capital (TC = T1 + T2) 295,257 Sum of line 45 and line 58 Risk weighted assets in respect of amounts subject to pre-crr treatment and transitional treatments subject to phase out as prescribed in Regulation (EU) No 575/2013 (i.e. CRR residual 59a amounts) of which: items not deducted from CET1 (Regulation (EU) No 575/2013 residual amount) (items to be deducted line by line, e.g. deferred tax assets that rely on future profitability net of related tax liabilities, indirect holdings of own CET1, etc.) of which: items not deducted from AT1 items (Regulation (EU) No 575/2013 residual amount) (items to be detailed line by line, e.g. reciprocal cross holdings in T2 instruments, direct holdings of non-significant investments in the capital of other financial sector entities, etc.) Items not deducted from T2 items (Regulation (EU) No 575/2013 residual amount) (items to be detailed line by line, e.g. indirect holdings of own T2 instruments, indirect holdings of other financial sector entities, indirect holdings of significant investments in the capital of other financial sector entities etc.) 60 Total risk weighted assets 1,790, , 472 (5), 472 (8) (b), 472 (10) (b), 472 (11) (b) 475, 475 (2) (b), 475 (2) (c), 475 (4) (b) 477, 477 (2) (b), 477 (2) (c), 477 (4) (b) Capital ratios and buffers 61 Common Equity Tier 1 (as a percentage of risk exposure amount) 13.5% 92 (2) (a), Tier 1 (as a percentage of risk exposure amount) 13.5% 92 (2) (b), Total capital (as a percentage of risk exposure amount) 16.5% 92 (2) (c) Instruction specific buffer requirements (CET1 requirement in accordance with article 92 (1) (a) plus capital conservation and countercyclical buffer requirements, plus systemic risk buffer (G-SII or O-SII buffer), expressed as a percentage of risk exposure amount 2.5% CRD 128, 129, of which: capital conservation buffer requirement 2.5% 66 of which: countercyclical buffer requirement 0.0% 67 of which: systemic risk buffer requirement - 67.a of which: Global Systematically Important Institution (G-SII) or Other Systematically Important Institution (O-SII) buffer - CRD 131 Common Equity Tier 1 available to meet buffers (as a percentage of risk exposure amount) 9.0% CRD [non relevant in EU regulation] - 70 [non relevant in EU regulation] - 71 [non relevant in EU regulation] - Capital ratios and buffers 72 Direct and indirect holdings of the capital of financial sector entities where the institution does not have a significant investment in those entities (amount below 10% threshold and net of eligible short positions) - Direct and indirect holdings by the institution of the CET 1 instruments of financial sector entities where the institution has a significant investment in those entities (amount below 10% threshold and net of 73 eligible short positions) 4, (1) (i), 45, 48, 470, 472 (11) 74 Empty set in the EU (1) (h), 45, 46, 472 (10), 56 (c), 59, 60, 475 (4), 66 (c), 69, 70, 477 (4) Deferred tax assets arising from temporary differences (amount below 10% threshold, net of related tax liability where the conditions in Article 38 (3) are met) 3, (1) (c), 38, 48, 470, 472 (5) Applicable caps on the inclusion of provisions in Tier 2 Credit risk adjustments included in T2 in respect of exposures subject to standardized approach (prior to the application of the cap) - 62 Cap on inclusion of credit risk adjustments in T2 under standardised approach) - 62 Credit risk adjustments included in T2 in respect of exposures subject to internal ratings-based approach (prior to the application of the cap) - 62 Cap for inclusion of credit risk adjustment in T2 under internal ratingsbased approach - 62 Capital instruments subject to phase-out arrangements (only applicable between 1 January 2013 and 1 January 2022) 80 Current cap on CAT1 instruments subject to phase out arrangements (3), 486 (2) and (5) Amount excluded from CET1 due to cap (excess over cap after 81 redemptions and maturities) (3), 486 (2) and (5) 82 Current cap on AT1 instruments subject to phase out arrangements (3), 486 (2) and (5) Amount excluded from AT1 due to cap (excess over cap after 83 redemptions and maturities) (3), 486 (2) and (5) 84 Current cap on T2 instruments subject to phase out arrangements (3), 486 (2) and (5) 85 Amount excluded from T2 due to cap (excess over cap after redemptions and maturities) (3), 486 (2) and (5) AS Citadele banka 9

10 CREDIT RISK Credit risk is the risk that the Group will incur a loss from debtor s non-performance or default. The Group is exposed to credit risk in its lending, investing and transaction activities, as well as in respect of the guarantees issued to or received from third parties and other off-balance sheet commitments to third parties. Credit risk management is performed pursuant to the Credit Risk Management Policy. The goal of credit risk management is to achieve a diversified asset portfolio which generates profits that correspond to the assumed level of risk. The Group executes risk transactions which according to the Group s assessment have probability of default acceptable to the Group and which meet the risk appetite determined by the Group. The assessment of a client s creditworthiness is based on the client s ability to repay the loan, while the Group accepts the collateral in order to minimise losses in case of default. The Group assumes only a measurable and manageable credit risk. The increased interest rate cannot compensate a high credit risk unacceptable for the Group. The aim of the Group s employee remuneration policy is to prevent the remuneration of such activities which facilitate the assuming of unacceptably high credit risk to the Group. The Group performs regular assessment of the sources of credit risk which may have a negative impact on the Group s performance targets including projected financial results. Based on the identified sources of credit risk the Group performs regular assessment of the compliance of the credit risk management system with the Group s credit risk management objectives and the necessity to improve the credit risk management policy and other internal regulations of credit risk management. Credit risk management is based on an adequate assessment of a credit risk and a proper decision-making in relation to such risk. In cases when significant risk is to be undertaken, the credit risk analysis is performed by an independent units of the Risk and Compliance Sector. The credit risk analysis consists of an assessment of customer s creditworthiness and collateral quality and liquidity. The analysis of a legal entity s creditworthiness includes an assessment of the industry in which it operates, as well as an analysis of its credit history and current and forecasted financial situation. The assessment of a private individual s creditworthiness consists of the analysis of its credit history, income and debt-to-income ratio analysis, as well as an analysis of applicable social and demographic factors. In cases of material risks, lending decisions are taken by the Credit Committee and approved by the Bank s Management Board. In relation to the acquisition of corporate bonds, the Group always analyses the business profile and financial performance of the issuer, taking into consideration the credit ratings assigned to it by international rating agencies, as well as market-based indicators. Sovereign bonds are assessed similarly, but with an emphasis on different fundamental factors, including the country s economic strength, institutional strength, financial strength of the government, political risks and other relevant factors. When concluding credit risk transactions the Group requires collateral and/or guarantee to secure fulfilment of the obligations in accordance with the Group s internal regulations regarding the necessity of requesting collateral and/or guarantee in order to conclude specific credit risk transaction. Upon assessment of the collateral the Group takes into consideration the value of collateral offered, its re-sale options and the possible future changes in its value. The most common types of collateral to secure fulfilment of the obligations arising from credit risk transactions are real estate, movable property, and financial pledge. The real estate and specific types of movable property defined in the Group s internal regulations, which are offered to the Group as collateral to secure fulfilment of the obligations under the credit risk transaction, shall be appraised and insured pursuant to the procedures prescribed in the Group s internal regulations. Financial pledge shall be valued pursuant to the procedures prescribed by the Group s internal regulations. The Group performs revaluation of the value of collateral on a regular basis. After a loan is issued or a fixed income security is acquired, the customer s financial position and the issuers risk indicators, such as credit rating changes, are monitored on a regular basis in order to timely identify potential credit quality deterioration. The loan monitoring process covers monitoring of financial results, financial position and cash flows of the borrower, loan repayment discipline and assessment of collateral quality. In order to estimate the potential losses under different economic conditions at least annually the Group performs stress testing and scenario analysis in respect of selected clients, loan portfolio or its parts, specific types of collateral or credit risk transactions. During stress testing and scenario analysis the Group also assesses the impact of the possible critical situations on the Group s credit risk and its ability to overcome the critical situations identified, as well as analyses the possible action plan. The Group reviews its loan portfolio and securities portfolio on a regular basis to assess its structure, quality and concentration levels, as well as to evaluate portfolio trends and to control credit risk level. The Group takes measures for limiting credit risk concentration by diversifying the portfolio and setting credit risk concentration limits. To limit its credit risk, the Group has set the following concentration limits: individual counterparty and issuer limits, maximum exposure limit linked to a particular risk class of counterparty/issuer, limit for internally risk weighted exposures in a particular country/sector combination, limit for groups of mutually related customers, limit for large risk exposures, limit for transactions with the Group s related parties, industry limit, limit by customer type, loan product type, collateral type, intra-group transactions. The Group monitors industry credit risk concentration by regular analysis of industry financial indicators and industry development trends in domestic, regional and global markets. The Group regularly assesses the necessity to review current credit risk limits or establish new credit risk limits taking into consideration the laws and regulations of the Republic of Latvia and other applicable laws and regulations, changes in the Group s operations and external circumstances having impact on its operations, the compliance of credit risk AS Citadele banka 10

11 limits with the overall market and economic situation. Credit risk limits are approved by the Bank s Management Board. Control of compliance with credit risk concentration limits, credit risk identification, monitoring and reporting is the responsibility of the Risk and Compliance Sector. In addition to the credit risk, which is inherent in the Group s loan portfolio and fixed-income securities portfolio, the Group is also exposed to credit risk as a result of its banking relationships with multiple credit institutions which it maintains in order to process customer transactions in a prompt and efficient manner. The Group manages its exposure to commercial banks and brokerage companies by monitoring on a regular basis the credit ratings of such institutions, conducting due diligence of their credit profiles and monitoring the individual exposure limits applicable to counterparties set by the Financial Market and Counterparty Risk Committee (further FMCRC). The Group s exposures to derivative counterparties arise from its activities in managing liquidity and credit risks through short term derivatives that do not expose it to material counterparty risk. None of the Group s derivative exposures is overdue. In order to calculate credit risk capital requirement the Group applies standardised approach. For the minimum credit risk capital requirement calculation the Group uses ratings assigned by the following external credit rating institutions: Moody s Investors Service Ltd, Fitch Ratings and Standard & Poor s Rating Services. Ratings assigned by the external credit rating institutions are used in the risk weighted value calculation for the following risk transaction categories: credit institutions and securities. Exposure value Exposure value of an asset item is its accounting value remaining after specific credit risk adjustments, additional value adjustments and other own funds reductions related to the asset item have been applied. The exposure value of an off-balance sheet item is a specified percentage of its nominal value after reduction of specific credit risk adjustments. Exposure amounts for credit risk Central governments or central banks Institutions Corporates Retail Secured by mortgages on immovable property Other positions Exposure value 1,200, , , , , ,320 Exposure net of value adjustments and provisions 1,173, , , , , ,734 Average exposure value in 2016* 934, , , , , ,239 * calculated as arithmetic average of exposure values after credit risk mitigation as at the beginning of the year and as at the end of each quarter of the respective year. Exposure value for credit risk, split by geographic regions Central governments or central banks Institutions Corporates Retail Secured by mortgages on immovable property Other positions Latvia 849,485 1, ,625 76, , ,328 Lithuania 116,106 1,294 94, ,591 77,438 23,999 Estonia 25, , ,039 18,204 United States 10,592 69,295 65, ,732 United Kingdom 8,989 6,847 29, Netherlands 4,992 43,185 48, Switzerland 107,588 43,159 15, ,694 Germany 7,181 29,727 20, ,254 All other countries 70, , , ,306 70,109 AS Citadele banka 11

12 Delinquency structure of exposure value for credit risk, split by geographic regions Gross exposure value: Not past due, Not past due, not impaired impaired Less than 29 days Past due, not impaired days 90 and more days Past due, impaired Less than 89 days 90 and more days Latvia 1,881,219 45,215 12,344 4,344 4,573 7,954 29,854 Lithuania 433,454 6,805 21,519 4,700 4,210 1,885 4,978 Estonia 168, ,185 3, ,040 United States 151, United Kingdom 46, Netherlands 96, Switzerland 173, Germany 60, All other countries 452,243 24, Risk exposure impairment allowance, split by country of residence Impairment allowance Latvia (74,976) Lithuania (8,742) Estonia (6,554) United States (5) United Kingdom (8) Netherlands (209) Switzerland (1) Germany (17) All other countries (6,910) Exposure value for credit risk, split by remaining contractual maturity Central governments or central banks Institutions Corporates Retail Secured by mortgages on immovable property Other positions Less than 29 days and delayed 765, , ,942 4,951 2,850 72, days 122,220 14,511 46,099 11,250 5,562 16, days 20,314 15,644 49,431 18,318 10,586 14, days 17,061 47, ,450 33,929 22,943 52, days 258, , , ,758 78,666 97,490 More than 1800 days and undated 16,134 3, ,016 14, , ,869 Exposure value for credit risk, split by industries Central governments or central banks Institutions Corporates Retail Secured by mortgages on immovable property Other positions Agriculture, forestry and fishing ,664 8,610-5,062 Manufacturing ,605 10, ,940 Electricity, gas, steam and air conditioning supply , Construction ,333 4, ,413 Wholesale and retail trade; repair of motor vehicles and motorcycles ,945 21,958 2,494 9,443 Transporting and storage ,749 25, ,356 Accommodation and food service activities ,838 2, Financial and insurance activities 623, , , ,957 Real estate activities ,897 11,634 2,442 33,453 Professional, scientific and technical activities - - 8,229 4, ,674 Public administration and defence; compulsory social security 576, ,945 Private individuals , ,439 87,087 All other positions - 77, ,797 11, ,160 AS Citadele banka 12