ABLV Bank, AS. Statement of Information Disclosure for Riga, 25 February 2015 (updated 16 March 2015)

Transcription

1 ABLV Bank, AS Statement of Information Disclosure for 2014 Riga, 25 February 2015 (updated 16 March 2015)

2 Statement of Information Disclosure Complying with Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012, which sets forth the procedure for disclosing the information on the risks pertaining to operations of banks and investment brokerage companies, on purposes, methods, and policies of risk management, on own funds requirements, and internal capital adequacy assessment, as well as the remuneration policy and practices, this Statement of Information Disclosure is provided. Statement of Information Disclosure is provided at the consolidation group level. ABLV Bank, AS (hereinafter referred to as the bank) is the parent company of the consolidation group, to which information disclosure requirements apply. The list of the entities constituting the consolidation group, conforming to the International Financial Reporting Standards as adopted by the European Union, as well as basic information on risk management and capital management, is disclosed in the bank s consolidated annual report 2014 available at the bank's web page. There is no current or foreseen practical or legal impediment to the prompt transfer of the elements of own funds or repayment of liabilities between the parent company and subsidiary companies of the group. The bank and its subsidiary companies (hereinafter referred to as the group) are consolidated using the full consolidation method. Proportional consolidation methods are not applied. For the supervision purposes pursuant to the FCMC regulations No. 51 Regulations on the Methods for Consolidation and Consolidated Reports, dated 26 March 2014, the entities constituting the consolidation group are as follows: Company Country of incorporation Registration number ABLV Bank, AS LV ABLV Bank Luxembourg, S.A. LU B ABLV Corporate Services Holding Company, LV Pillar Holding Company, KS LV Pillar Management, LV Pillar 2 & 14, LV Pillar 3, LV Pillar 4 & 6, LV Pillar 7 & 8, LV Pillar 9, LV Pillar 10, LV Pillar 11, LV Pillar 12, LV Pillar 18, LV Pillar 19, LV Elizabetes Park House, LV Schaller Kyncl Architekten Riga, LV Pillar Parking, LV New Hanza City, LV ABLV Asset Management, IPAS LV ABLV Capital Markets, IBAS LV AmberStone Group, AS LV ABLV Private Equity Management, LV ABLV Private Equity Fund 2010, KS LV Vaiņode Agro Holding, LV

3 Subsidiary companies that are not consolidated and investments in those share capital made by the bank, do not constitute a decrease in the bank s own funds when calculating it: Company Country of incorporation Registration number Vaiņodes Agro, LV Vaiņodes Bekons, LV Gas Stream, LV Bio Future, LV IZ SPV, LV NR SPV, LV Orto klīnika, LV Orto māja, LV GP Electro, LV ABLV Consulting Services, AS LV ABLV Corporate Services, LV ABLV Corporate Services, LTD CY HE Pillar, LV The actual amount of own funds of the subsidiary companies not included in the consolidation group for the supervision purposes corresponds to or exceeds the required amount. ABLV Bank, AS, organizational structure: Meeting of Shareholders Council Audit Committee (AC) Internal Audit Department (IAD) Board Asset Evaluation Committee (AEC) Chief Executive Officer (CEO) Deputy Chief Executive Officer (dceo) Chief Operating Officer (COO) Chief Compliance Officer (CCO) Chief Financial Officer (CFO) Chief Information Officer (CIO) Chief Risk Officer (CRO) Asset and Liability Management Committee (ALCO) Corporate and Private Clients Service Division (CPCSD) Product Development Division (PDD) Clients Control Committee (CCC) Investment Strategy Committee (ISC) Business Technologies Division (BTD) Large Loans Committee (LLC) Development Committee (DC) Financing Division (FD) Operations Accounting Division (OAD) Clients Monitoring Committee (CMNC) Compliance Division (CD) Transfer Pricing Committee (TPC) Financial Markets Division (FMD) Information Technologies Division (ITD) Small Loans Committee (SLC) Risk Management Division (RMD) Remuneration Committee (RC) Administrative Division (AD) Financial Accounting Division (FACD) Mortgage Loans Division (MLD) Secretariat of the Board (SB) Security Department (SD)

4 Structure of ABLV Group: Banking services ABLV Bank Luxembourg, S.A. (Luxembourg) ABLV Bank, AS Investment management services Advisory services partner 40,89% (90%) 2 (91.83%) 3 ABLV Private Equity Management, partner 1 ABLV Private Equity Fund 2010, KS AmberStone Group, AS ABLV Asset Management, IPAS ABLV Capital Markets, IBAS ABLV Consulting Services, AS ABLV Corporate Services Holding Company, 60% 70% Orto klīnika Vaiņode Agro Holding ABLV Corporate Services, ABLV Corporate Services, LTD (Cyprus) Orto māja Vaiņodes Agro Vaiņodes Bekons Gas Stream Bio Future IZ SPV NR SPV Overtaken property management and investments in real estate partner New Hanza City, Pillar, Pillar Holding Company, KS partner 4 GP Electro, 91,60% Pillar 3, Pillar 4 & 6, PIllar 7 & 8, Pillar 9, Pillar 10, Pillar 11, Pillar 12, Pillar 2 & 14, Pillar 18, Pillar 19, Pillar Parking, Pillar Management, Elizabetes Park House, Schaller Kyncl Architekten Riga, 1 General partner having the right to represent ABLV Private Equity Fund 2010, KS. 2 of the voting share capital (90% of the total share capital). 3 of the voting share capital (91.83% of the total share capital). 4 General partner having the right to represent Pillar Holding Company, KS. Information on Governance Arrangements To ensure suitability of the members of the Council and the Board and for the provision of diversity, there is a normative document Policy on the Assessment of the Suitability of Officials and the Provision of Diversity in the Structure of the Council and the Board (POL 052) developed. The Policy stipulates the organization of implementing the assessment of the suitability of the members of the Council and the Board and the provision of diversity in the structure of the Council and the Board, the frequency of assessing the suitability of the members of the Council and the Board, and the procedure for making the decisions on suitability. The mentioned Policy is revised once a year. Initially, the suitability of the members of the Council and the Board is assessed when nominating a new member to the position at the Council or the Board, before the nominee is elected to the position or starts performing the position duties. If due to objective reasons the assessment of the suitability of the member of the Council and the Board is not performed prior to the election, the assessment is performed as soon as possible, however within 6 weeks following the election of the member of the Council or the Board at the latest. The suitability of the members of the Council and the Board is reassessed upon the following: - re-election of the member of the Council or the Board; - changes in the powers, duties, or required competence of the member of the Council or the Board; - appearance of doubts regarding the knowledge, experience, or reputation of the member of the Council or the Board.

5 Within the assessment of the suitability of the members of the Council and the Board, the overall structure of the Council or the Board, and collective knowledge and competence required to be possessed by the Council and the Board are taken into consideration, as well as diversity in the Council and the Board is ensured as much as possible regarding the characteristics of a specific person (diversity in terms of age, gender, geographic origin, education, professional qualification, and experience, including experience outside the particular sector and international experience). Upon assessment of available information, the decision on suitability of an official with regard to the members of the Council and the Board is made by the Council. The member of the Council whose suitability is reassessed at the Council session does not take part in the respective session. If during the initial assessment the Council concludes that a member of the Council or the Board is not suited to the position, this official is not nominated for election to the respective position. If this official is already elected to the position or the fact that the official is not suitable for the position is revealed during the reassessment, the Council makes the decision on required measures (for example, more accurate definition or reallocation of duties of the official, training of the official, recalling the official from the position) in order to ensure the suitability or replacement of this official with another person. When making the decision, the particular situation and the reasons for non-compliance of the member of the Council or the Board are taken into consideration. If during the suitability assessment it is concluded that a member of the Council, member of the Board, or the Head of Internal Audit Department is not suited to the position, the FCMC is immediately informed of the same. The Policy has been developed and is implemented pursuant to FCMC Regulations No. 112 Regulations on the Issue of Credit Institution and Credit Union Operating Licences, Obtaining Permits Regulating the Operation of Credit Institutions and Credit Unions, Settlement of Documents and Provision of Information, FCMC Regulations No. 233 Regulations for Establishing the Internal Control System, FCMC Recommendations No. 166 Recommendations for the Assessment of the Suitability of the Members of the Board and the Council and Key Function Holders, and the guidelines of the Personnel Policy (POL.011). Risk management Basic information on risk management is disclosed in Notes of the bank s consolidated annual report 2014 available at the bank's web page. Risk management of the bank s affiliate companies is completely integrated in the bank s risk management process, thus ensuring unified approach and use of single methods within the group. For the risk management purposes, there are risk management policies developed, alongside other internal normative documents that set forth the basic principles and procedures of risk management, functions and responsibility of the structural units/officials, hedging limits, as well as their control and reporting system. The risk management policies are approved by the bank s Council, and their introduction and efficiency are supervised by the Board and the Chief Risk Officer (CRO), whereas their implementation is ensured by respective structural units. The bank s Council approves the risk management strategy and policies, reviews the report on risk management prepared by the Board, and assesses the risk management efficiency, as well as permanently supervises the Board s work. The bank s Board is in charge of developing and approving the risk management policies and other internal normative documents that set forth the basic principles and procedures of risk management, as well as in charge of controlling the compliance with them. The risk management policies and other internal normative documents are regularly reviewed and improved, and we consider implemented risk management systems to be appropriate for the Bank s risk profile, sufficient, and facilitating the achievement of strategic objectives. There are several collegiate bodies functioning in the bank for the purpose of ensuring the risk management efficiency and control: - the Loans Committee ensures credit risk assessment, introduction of restrictions, and control over credit risk limits, as well as makes decisions on granting or refusing the loans; - the Asset and Liability Management Committee ensures efficient management of resources, assessment of the risks pertaining to these operations, and introduction of the restrictions, as well as control over the set risk limits; - the Investment Committee ensures efficient management of the financial assets of the customers of the bank s affiliate companies, assessment of the risks pertaining to these operations, and introduction of the restrictions, as well as control over the set risk limits; - the Asset Evaluation Committee ensures assessment of the assets and off-balance sheet obligations of the bank and the bank s affiliate companies, determines the amount of provisions, supervises debt recovery, and also ensures supervision of the compliance with the set asset evaluation, classification, and provisioning guidelines;

6 - the Clients Control Committee ensures supervision of the customers activities in order to prevent the attempts of using the bank for money laundering and terrorism financing; - the Clients Monitoring Committee ensures reviewing of the reports prepared on the basis of the supervision (monitoring) of the customers activities and makes the decisions on those. The bank and its affiliate companies identify and control the risks associated with their operations, and management of these risks. The risk control is ensured by several particular structural units, namely: - departments of the Compliance Division (compliance risk, and money laundering and terrorism financing risk); - departments of the Information Technologies Division (IT/IS security); - Public Relations Department of the Product Development Division (reputational risk); - Financial Control Department (strategy and business risk, including fee income/expense volatility risk); - departments of the Risk Management Division (financial risks and operational risk). The Internal Audit Department, subordinated directly to the Council, assesses the efficiency of the risk control function, performs independent supervision of the internal control system, alongside assessment of its adequacy and efficiency, in order to aid the bank's/affiliate company's Council, Board, and heads of structural units in performing their functions more efficiently. Reporting procedure In risk management and risk control processes various reports are used, which are supplied to the management and heads of the structural units involved in risk management with respective frequency daily, weekly, monthly, quarterly, semi-annual, and annual reports. The report on achievement of strategic objectives and compliance with indicators is supplied to the bank s Council and the Board once per quarter, and it contains quantitative indicators on credit risk, foreign exchange risk, interest rate risk, liquidity risk, operational risk, and capital adequacy set in the Risk Management Strategy. Once per year, the reports on management of all material risks and their amount, on results of internal capital assessment, and on functioning of the internal control system are submitted to the Council and the Board. The bank performs stress tests and reports their results to the bank s Council and the Board. Stress tests are performed twice a year for liquidity risk and credit risk, and once per year for operational risk and determining of the capital buffers. The liquidity stress test scenarios also cover market risk and reputational risk. The report on compliance with the limits and restrictions for liquidity risk, foreign exchange risk, operational risk, country risk, and exposures applying different breakdowns, as well as report on the financial plan fulfilment (strategy and business risk management), are submitted to the Board once per quarter. For the sake of operational control and decision-making, the reports are sent to the committees involved in risk management, members of the Board, and heads of the structural units involved in risk management. The following monthly reports are provided the report on early warning indicators for liquidity risk, calculation of the reduction in economic value for interest rate risk management, report on the financial plan fulfilment for strategy and business risk management, report on operational risk events, and report on capital adequacy. Weekly and daily reports and notices are used for foreign exchange risk, liquidity risk, exposure limitation, operational, reputational and compliance risk management, as well as for ensuring capital adequacy. Material risks are determined by identifying the major types of operations and analyzing their associated risks. The most material risks associated with the bank s operations are the following: credit risk, market risk, operational risk, money laundering and terrorism financing risk, liquidity risk, other non-quantifiable activity risks. The group and the bank constantly assess and control the risks both each one separately according to the risk type and of comprehensive assessment performed under capital adequacy assessment, and capital adequacy report is made on the basis of the group s/bank s risk profile. The group/bank continue to strengthen their position, retaining and improving their high capitalization and liquidity: Indicator Group Bank Tier 1 capital ratio 11.93% 11.86% Capital adequacy ratio 18.64% 18.80% Liquidity ratio % Liquidity coverage ratio (LCR) 818% 810%

7 The bank considers that major credit risk pertains to credits, investments in debt securities, and claims on credit institutions. To assess the credit risk impact on the bank s operations, stress tests are performed with regard to the loan portfolio, claims on credit institutions, and debt securities, as well as the bank's investments in affiliate companies related to real estate. Stress test results are taken into account when planning the Bank s further operations implementation of new crediting products, determination of limits on existing and new crediting products, exposure amount broken down by countries and regions, investment activities, as well as determination of other restrictions. The bank maintains cautious approach to market risk in its securities positions that are also associated with the liquidity risk, interest rate risk, and credit risk. Operational risk pertains to all business activities. Operational risk is assessed to be low the operational risk losses are small, and those amounted to EUR thousand in The liquidity risk profile is affected by the structure of financing. The short-term funds raised by the bank are invested in highly liquid assets only, and the sources of financing are diversified by issuing medium-term debt securities. The risk profile is managed and supervised on the basis of the established risk management system. Risk management departments permanently supervise the bank s operations taking into account the limits and restrictions set on the risks, as well as determined target levels. Own funds, compliance with the capital requirements, and internal capital assessment Basic information on capital management, including summarized information on all elements of own funds and their constituents, as well as capital adequacy, is disclosed in Note 33 of the bank s consolidated annual report 2014 available at the bank's web page. Internal capital assessment is a component of maintaining capital adequacy, and it is regulated by the bank s Capital Adequacy Maintenance Policy, developed in accordance with the Credit Institution Law and taking into account the requirements of Regulation (EU) No 575/2013, the Regulations on Establishing an Internal Control System, the Regulations for Calculating the Minimum Capital Requirements, and the Regulations on the Internal Capital Adequacy Assessment Process issued by the FCMC. Within the process of internal capital assessment, the bank ensures that its own funds, in terms of their amount, elements and share, are sufficient for covering existing and possible risks pertaining to the bank s current and planned operations. Internal capital assessment process includes several stages, namely: - estimating the amount of capital at the bank s disposal; - determining the amount of capital required for covering risks; - determining the capital buffer; - determining the total amount of the required capital; - planning the capital at least for three following years and determining the desired level of capital: capital adequacy planning, as a component of the bank s overall planning process, is performed based on the financial plan for the following three years, approved by the bank s Board; making the forecast, both expected market changes (external factors) and changes in the bank (internal factors) are considered, including changes in main strategic areas; during planning, the need for additional capital and its raising possibilities are considered. The bank applies the following approach for internal capital assessment: - the amount of capital required for covering the risks for which regulatory minimum capital requirements are set is determined by the bank following Regulation (EU) No 575/2013, making adjustments in accordance with the FCMC Regulations on the Internal Capital Adequacy Assessment Process, if necessary; - the amount of capital, as well as the amount of capital buffer, required for covering other material risks for which no regulatory minimum capital requirements are set is determined by the bank following simplified methods of the Regulations on the Internal Capital Adequacy Assessment Process, additionally assessing the applicability of those methods to the bank s operations, or using internal models or methods developed by the bank.

8 Own funds items of the group s balance sheets for financial reporting purposes and supervisory purposes as at 31 December 2014 are the following: EUR'000 Shareholders equity Group, for financial reporting purposes Group, for supervisory purposes Paid-in share capital 32,650 32,650 Share premium 66,270 66,270 Reserve capital and other reserves 2,174 2,174 Fair value revaluation reserve of available-for-sale financial assets (1,504) (1,504) Retained earnings brought forw ard 66,762 68,043 Retained earnings for the period 63,353 62,893 Non-controlling interests 12,337 11,092 Total shareholders equity 242, ,618 The difference between the group s own funds items for financial reporting purposes and for supervisory purposes arises due to different scope of consolidation. The applied consolidation methods for the group s financial reporting purposes and supervisory purposes are the same.

9 Capital instruments main features template for 2014 is the following: Issue 1 Applicant Increase of ABLV Bank, AS share capital by issuing personnel shares, dated ABLV Bank, AS, registration No , hereinafter referred to as the Bank Increase of ABLV Bank, AS share capital by issuing registered shares, dated ABLV Bank, AS, registration No , hereinafter referred to as the Bank Increase of ABLV Bank, AS share capital by issuing personnel shares, dated ABLV Bank, AS, registration No , hereinafter referred to as the Bank 2 Unique identifier N/A N/A N/A 3 Legislation governing the instrument The Commercial Law of the Republic of Latvia, hereinafter referred to as the Commercial Law The Commercial Law of the Republic of Latvia, hereinafter referred to as the Commercial Law The Commercial Law of the Republic of Latvia, hereinafter referred to as the Commercial Law Regulatory procedure 4 CRR provisions during transitional Common equity Tier 1 capital Common equity Tier 1 capital Common equity Tier 1 capital 5 CRR provisions after transitional period Common equity Tier 1 capital Common equity Tier 1 capital Common equity Tier 1 capital 6 Respective solo/(sub-) consolidated/ solo and (sub-)consolidated Solo Solo Solo 7 Instrument type Personnel shares Shares Personnel shares 8 Amount recognized in the regulatory capital 9 Nominal amount of the instrument 9a Issue price of the instrument EUR (one hundred fifty-five thousand eight hundred nine euro) EUR (one hundred fifty-five thousand eight hundred nine euro) New ly issued personnel shares are completely paid for by the Bank out of the Bank s retained earnings brought forw ard to the amount of EUR (one hundred fifty-five thousand eight hundred nine euro) EUR (tw enty-seven million tw enty-eight thousand eight hundred ninety-seven euro and 10 cents) EUR (tw o million tw o hundred forty-three thousand sixtytw o euro) Sale price of one share equals EUR (tw elve euro and 5 cents), including the share s nominal value of EUR 1.00 (one euro) and the share premium of EUR (eleven euro and 5 cents) EUR (tw o hundred forty-nine thousand tw o hundred thirty euro) EUR (tw o hundred forty-nine thousand tw o hundred thirty euro) New ly issued personnel shares are completely paid for by the Bank out of the Bank s retained earnings brought forw ard to the amount of EUR (tw o hundred forty-nine thousand tw o hundred thirty euro) 9b Redemption price of the instrument N/A N/A N/A 10 Accounting classification Shareholders' ow n funds Shareholders' ow n funds Shareholders' ow n funds 11 Initial issue date Perpetual or w ith maturity Perpetual Perpetual Perpetual 13 Original maturity date Perpetual Perpetual Perpetual 14 Call option subject to prior approval by supervisory authorities NO NO NO Discretional call date, possible call 15 N/A N/A N/A dates, and redemption amount Later call dates on respective 16 N/A N/A N/A instances Coupons/dividends 17 Fixed or floating dividends/coupons Floating rates Floating rates Floating rates 18 Coupon rate and any index related to the same N/A N/A N/A 19 Existence of dividend stopper arrangements NO NO NO 20a Fully discretionary, partially discretionary, or mandatory (in terms of time) 31 If reducible, reduction trigger N/A N/A N/A 32 If reducible, complete w rite off or partial reduction Pursuant to provisions of the Commercial Law, the meeting of shareholders is competent to determine the terms and procedure of dividend payments, and those are approved by the decision of the meeting of the Bank's shareholders, subject to prior receipt of permission from the Financial and Capital Market Commission. 20b Fully discretionary, partially The amount of dividends is determined by the meeting of the Bank s shareholders by making the decision on discretionary, or mandatory (in terms of distribution of the Bank s profit of the previous year, subject to prior receipt of permission from the Financial and 21 Existence of step up arrangements or other incentive to redeem NO NO NO 22 Non-cumulative or cumulative N/A N/A N/A 23 Convertible or non-convertible Non-convertible Non-convertible Non-convertible 24 If convertible, conversion trigger N/A N/A N/A 25 If convertible, fully or partially N/A N/A N/A 26 If convertible, conversion rate N/A N/A N/A 27 If convertible, mandatory or optional conversion N/A N/A N/A 28 If convertible, specify the type of the instrument to be converted into N/A N/A N/A 29 If convertible, specify the issuer of the instrument to be converted into N/A N/A N/A 30 Reduction features NO NO NO N/A N/A N/A 33 If reducible, permanently or temporarily N/A N/A N/A If reduced temporarily, restoration mechanism Position in the subordination hierarchy in case of liquidation (specify the type of the instrument standing above the instrument in the hierarchy) Non-compliant features during transitional period If yes, specify the non-compliant features N/A N/A N/A N/A N/A N/A NO NO NO N/A N/A N/A

10 Transitional own funds disclosure template, pursuant to Regulation No 1423/2013, as at 31 December 2014 is as follows: EUR'000 Position Common equity Tier 1 capital Amount as at the information disclosure date Capital instruments and share premium accounts related to those 98,920 Amount subject to the procedure applicable before Regulation (EU) No 575/2013 or the residual amount set forth in Regulation (EU) No 575/2013 of w hich: shares 29,385 of w hich: personnel shares 3,265 of w hich: share premium 66,270 Retained earnings 68,043 Accumulated other comprehensive income (ant other reserves to report unrealised gains and losses in accordance w ith applicable accounting 630 Minority interests (the amount that qualifies for inclusion in consolidated Common Equity Tier 1 capital) 8,966 (8,568) Independently review ed interim profits less any foreseeable charge or dividend 32,936 Common equity Tier 1 capital: regulatory adjustments Intangible assets (6,072) Total regulatory adjustments to common equity Tier 1 capital (6,072) Common equity Tier 1 capital 203,423 Tier 1 capital 203,423 Tier 2 capital: reserves and instruments Capital instruments and share premium accounts related to those 114,458 Tier 2 capital 114,458 Total capital 317,881 Total risk-w eighted assets 1,705,246 Capital ratios and reserves Common equity Tier 1 capital (percentage of exposure value) 11.93% Tier 1 capital (percentage of exposure value) 11.93% Total capital (percentage of exposure value) 18.64% Institution s specific buffer requirement (percentage of exposure value) 42,631 of w hich: the requirement for the capital conservation buffer 42,631 Common equity Tier 1 capital available for meeting the buffer requirement (percentage of exposure value) Direct and indirect holdings in capital of the financial sector entities in w hich the institution has no significant investment (the amount does not exceed the Deferred tax assets that arise from temporary differences (the amount does not exceed the threshold of 10%) 7.43% 1,140 1,603

11 Credit risk Credit risk assessment is performed for loan portfolio, debt securities, claims on credit institutions, and other assets. The amount of capital required for covering credit risk is determined by applying the standardised approach described in Regulation (EU) No 575/2013 and adjusting the amount of capital required for covering credit risk based on results of the stress test pessimistic scenario taking into account the increase in calculated provisions in accordance with the stress test pessimistic scenario, as well as planned changes in the minimum capital requirements within the stress test period pursuant to the financial plan and the stress test pessimistic scenario. Credit risk assessment for the bank s loan portfolio is performed based on the scenario analysis, assessing the probability of counterparties insolvency, loan recoverable amount, and their possible changes following possible changes in macroeconomic indicators. The amount of capital required for covering credit risk is determined based on assessing the following parts of the loan portfolio: mortgage loans; loans granted for real estate development and investments; business loans to legal entities, not related to real estate development and investments; loans secured by pledge of investment portfolio. Card credits, consumer loans, overdrafts, brokerage accounts, and security deposits are not accounted for in stress tests due to their small portion in the total loan portfolio. Sensitivity analysis is performed on each portfolio part. The bank s possible losses arising out of the loan portfolio are calculated defining 2 possible scenarios: basic and pessimistic ones. The scenarios should reflect possible impact of negative events on the bank s risk level, financial and capital indicators. A negative event is considered to be an event the probability of which is extremely small but yet possible, and such event causes additional losses for the bank. Considering the defined scenarios, their impact on minimum capital requirements to loan portfolio as at the end of examination period is determined. Calculation takes account of loans shifts between degrees of risk due to increasing insolvency and decreasing real estate prices, and also of lower net loan balance due to making allowances. Possible losses under claims on credit institutions and securities portfolio are calculated based on assessing the probability of insolvency occurrence in accordance with ratings assigned by external credit assessment institutions (credit rating agencies) and the summarized statistics on the possible amount of defaulted obligations in each rating group. The bank s possible losses arising out of claims on credit institutions and securities portfolio are calculated defining 2 possible scenarios: basic and pessimistic ones. Considering the defined scenarios, their impact on minimum capital requirements is determined. Calculation takes account of the claims on credit institutions and securities portfolio shifts between degrees of risk due to rating downgrades, as well as portfolio net balance changes due to making allowances. The bank applies the standardised approach to calculate minimum capital requirements under credit risk. The bank nominated the rating agency Standard & Poor s Ratings Services for credit assessment, and ratings assigned by this agency are used to determine the risk degree of the securities of all exposure categories and of the claims on credit institutions. Credit rating of the issue (if any) is considered the primary one for debt securities, otherwise the rating of this issuer s similar issue is used, but if there is no such rating, then the respective issuer s credit rating is applied. To ensure more efficient management of the credit risk related to assessment of current and prospective cooperation with credit institutions, the bank has developed an internal credit institution assessment model. Using this model, the bank determines the limits for cooperation with credit institutions and controls compliance with the set limits pursuant to internal regulations.

12 The group s exposure values after application of the credit risk mitigation substitution approach and the average amount of exposures as at 31 December 2014 are as follows: EUR'000 Exposure class Exposure value as at the end of the reporting period Exposure value after credit risk mitigation as at the end of the reporting period Average amount of exposures over the reporting period Central governments or central banks 1,340,612 1,713,792 1,189,687 Regional governments or local authorities 57,350 86,694 52,173 Public sector entities 111,818 8,127 53,178 Multilateral development banks 114, ,978 91,437 International organisations Institutions 1,370,473 1,090,260 1,221,914 Corporates 687, , ,112 Pool of retail exposures 259, , ,233 Secured by immovable property 19,198 19,198 18,044 Past due exposures 24,821 24,821 32,056 Associated w ith particularly high risk ,143 Covered bonds 93,277 93,277 69,348 Units or shares in collective investment undertakings 12,011 12,011 3,187 Equity exposures 8,250 8,250 2,168 Other items 205, , ,955 TOTAL 4,307,427 4,307,427 3,884,398 The bank s exposure values after application of the credit risk mitigation substitution approach and the average amount of exposures as at 31 December 2014 are as follows: EUR'000 Exposure class Exposure value as at the end of the reporting period Exposure value after credit risk mitigation as at the end of the reporting period Average amount of exposures over the reporting period Central governments or central banks 1,321,911 1,681,271 1,178,076 Regional governments or local authorities 47,713 80,944 47,887 Public sector entities 111,818 8,127 53,178 Multilateral development banks 114, ,271 90,881 Institutions 1,310,820 1,038,528 1,185,641 Corporates 664, , ,784 Pool of retail exposures 259, , ,233 Secured by immovable property 19,198 19,198 18,044 Past due exposures 24,821 24,821 32,027 Associated w ith particularly high risk ,188 Covered bonds 93,277 93,277 69,348 Units or shares in collective investment undertakings Equity exposures 115, ,469 28,972 Other items 134, , ,525 TOTAL 4,219,129 4,219,129 3,832,977

13 Concentration risk Concentration risk is analyzed using simplified method and results of the stress tests, additionally suitability of the applied method is assessed. Within loan portfolio concentration risk analysis, the following is performed: individual concentration analysis; sector concentration risk analysis; collateral concentration risk analysis; currency mismatch risk analysis. Individual concentration of claims on credit institutions is assessed as well, and individual concentration and currency mismatch concentration risk is assessed for securities. Overall amount of capital required for covering concentration risk is calculated as total of the named constituents. For credit risk and concentration risk limitation, loan portfolio target levels and limits are set, the basic information on which is disclosed in Note 35 of the consolidated annual report Breakdown of the group s loans by significant industries as at 31 December 2014 is as follows: EUR'000 Loans Mortgage loans to private individuals Other loans to private individuals Construction Energy Financial and insurance activities Impaired loans 28,781 2, , , ,010 Past due, but not impaired loans, incl.: 37,286 1, , ,280 1, ,339 less than 30 days 26, ,280 1, , to 59 days 10, , , to 89 days 1, ,572 more than 90 days Neither past due, nor impaired loans Real estate management Agriculture and forestry Manufacturing Trading Transportation and logistics 265,458 35,131 1,095 4, , ,514 6,618 3,346 59,418 10,951 55, ,802 Total net loans 331,525 38,903 1,390 4, , ,922 6,626 5,556 63,021 11,488 55, ,151 Allow ances for impaired loans 21,593 5, , ,190 Changes over the year (17,571) (2,296) (501) , (19,149) Allow ances for not impaired loans 1, ,188 Changes over the year 1,280 (1,173) 7 (2) (38) (76) (3) (2) (15) 465 (4) 439 Other industries Total Breakdown of the bank s loans by significant industries as at 31 December 2014 is as follows: EUR'000 Loans Mortgage loans to private individuals Other loans to private individuals Construction Energy Impaired loans 28,781 2, , ,833 Past due, but not impaired loans, incl.: 37,286 1, , ,280 1, ,339 less than 30 days 26, ,280 1, ,384 Financial and insurance activities 31 to 59 days 10, , , to 89 days 1, ,572 more than 90 days Neither past due, nor impaired loans Real estate management Agriculture and forestry Manufacturing Trading Transportation and logistics 265,458 35,126 1,095 3, , ,514 5,204 3,346 59,417 10,951 55, ,075 Total net loans 331,525 38,898 1,390 3, , ,922 5,212 5,556 63,020 11,488 55, ,247 Allow ances for impaired loans 21,593 5, , ,190 Changes over the year (17,571) (2,296) (501) , (19,149) Allow ances for not impaired 1, ,187 loans Changes over the year 1,280 (1,173) 7 (2) (38) (74) (3) (2) (15) 465 (4) 441 Other industries Total

14 Breakdown of the group s loans by significant geographical areas as at 31 December 2014 is as follows: Loans Latvia EMU countries Other EU member states Other OECD countries International organisations Other countries EUR'000 Impaired loans 35, ,135 37,012 Past due, but not impaired loans, incl.: 40, ,303 43,337 less than 30 days 28, , to 59 days 10, ,584 12, to 89 days 1, ,572 more than 90 days Neither past due, nor impaired loans Total 497,305 27,349 14,204 12, , ,802 Total net loans 573,610 27,407 14,348 13, , ,151 Breakdown of the bank s loans by significant geographical areas as at 31 December 2014 is as follows: Loans Latvia EMU countries Other EU member states Other OECD countries International organisations Other countries EUR'000 Impaired loans 34, ,135 35,834 Past due, but not impaired loans, incl.: 40, ,303 43,337 less than 30 days 28, , to 59 days 10, ,584 12, to 89 days 1, ,572 more than 90 days Neither past due, nor impaired loans Total 497,861 18,075 14,203 12, , ,075 Total net loans 572,988 18,133 14,347 13, , ,246 Market risk Since the bank s trading portfolio is insignificant (<5% of assets), to determine the amount of capital required for covering market risk the bank applies the standardised approach described in Regulation (EU) No 575/2013, alongside performing additional assessment and making respective adjustments in the amount of capital required for covering market risk as mentioned below. Minimum capital requirements for foreign exchange risk, calculated applying the standardised approach, are compared with total foreign exchange VaR calculated using the internal model developed by the bank, and the largest of these values is used. Foreign exchange VaR is calculated for each currency with 99% confidence level and 1-year holding period. When calculating the aggregate foreign exchange VaR, correlation between currencies is taken into account. Minimum capital requirements for position risk of trading portfolio equity instruments, calculated applying the standardised approach, are compared with VaR calculated using the internal model developed by the bank and based on the historical simulation method, potential losses are determined by maximum relative difference in equity prices during the previous year, given the average holding period of the portfolio positions and 99% confidence level. The largest of these values is used. Market risk of non-trading portfolio is assessed, and capital required for it is calculated based on assessment of interest rate risk in non-trading portfolio, liquidity risk, credit risk, and foreign exchange risk (in terms of the overall assets and liabilities structure). Interest rate risk in non-trading portfolio The bank applies the simplified method to determine the amount of capital required for covering the interest rate risk in non-trading portfolio.

15 Operational risk The capital requirements for covering operational risk are determined by the bank as equal to the minimum capital requirements calculated applying the basic indicator approach. Assessing its adequacy, the bank considers the following: the bank s actual operational risk losses since establishment of the operational risk event database; internal audit evaluation of operational risk management system efficiency; available information on operational risk events within the sector; additional possible risks not covered by minimum requirements; results of the performed operational risk stress tests. For performing stress test, VaR (Value at Risk) methodology OpVaR is used, the value of which represents potential unexpected losses. The parameters used for OpVaR calculated by the bank are the following: confidence level 99.9%; time horizon (holding period) one year; historical data (risk event database); information on external events registered in the operational risk event database; business development projected within the time horizon in accordance with the financial plan for the year. Money laundering and terrorism financing risk The amount of capital required for covering money laundering and terrorism financing risk is determined by the bank according to the internal model developed in the bank based on the simplified method, using the following: portion of non-residents deposits in the total deposits; portion of deposits placed by customers to which enhanced due diligence should be applied in the total deposits; changes in the amount of non-residents deposits during the last calendar year; amount of trust operations; amount of capital required for covering money laundering and terrorism financing risk. The customers to which enhanced due diligence should be applied are identified in accordance with the FCMC Regulations for Enhanced Customer Due Diligence. In addition to the determined amount of capital required for covering money laundering and terrorism financing risk, the share of capital based on the assessment of the bank s internal control system efficiency is calculated. For assessing internal control system quality (ICSQ) under prevention of money laundering and terrorism financing, expert evaluation method is applied, where the following persons are considered experts: Chief Compliance Officer (CCO), Head of Compliance Division, Head of Corporate and Private Clients Service Division, Head of Financial Control Department, and Head of Internal Audit Department. For assessing ICSQ under prevention of money laundering and terrorism financing, the average of evaluations provided by the experts is used. For assessing quality of internal control system under prevention of money laundering and terrorism financing, a grade between 1 and 4 is applied, and adjustment factor and capital required for ICSQ are calculated based on this grade. The calculated amount of capital for ISCQ is added to the required amount of capital calculated applying the simplified method. Liquidity risk The amount of capital required for covering liquidity risk is determined by the bank based on the results of liquidity risk stress tests. The amount of required capital is stated to be equal to the value of available-for-sale securities portfolio losses (including negative revaluation reserve) and costs of overcoming liquidity crisis, making additional assumptions, if necessary. Other risks Since some risks are difficult to assess in quantitative terms, the bank establishes qualitative and efficient environment for managing those risks. The amount of capital required for covering other risks is determined based on the simplified method, additionally assessing the suitability of this method to the bank s operations. The assessment of the method suitability is based on qualitative and quantitative assessment of respective risks, and estimation of possible losses.

16 The following risks are included in other non-quantifiable risks: reputational risk; compliance risk; strategy and business risk; fee income/expense volatility risk. Reputational risk Reputational risk represents a potential damage to reputation, which might cause negative publicity, decrease in revenues, expensive litigation, customer base reduction, or loss of key personnel. Reputational risk is a non-quantifiable risk, and the consequences and losses that may be caused by this risk are very difficult to determine. Reputational risk management in the bank is governed by the Reputational Risk Management Policy. The methods used for reputational risk management are the following: risk identification and assessment; risk monitoring; risk control and prevention; development of crisis communication and action plan. For reputational risk assessment, there are reputational risk assessment criteria and indicators set, the changes in which warn of changes in the risk level. Reputational risk is assessed applying the expert evaluation method, where the following persons are considered experts: officer of the Risk Analysis Department, Head of Public Relations Department, Chief Operating Officer (COO), Chief Risk Officer (CRO), and Deputy Chief Executive Officer (dceo). Reputational risk assessment scale based on all available information is the following: low risk; moderate risk; significant risk; very high risk. Monitoring measures are taken in order to timely find out and to immediately react to the information published in mass media about the group s companies or related persons, which could influence the level of reputational risk. Monitoring performance and reporting to the management, in case of detecting the information that might have negative impact on the reputation, is ensured by the Head of Public Relations Department. Rules for Reputational Crisis Communication are developed in the group/bank with the aim of ensuring quick and coordinated actions by all structural units, as well as appropriate communication between them, in order to possibly prevent crisis situations and mitigate the damage to the bank s operations, reputation, and image caused by such situations. Measures for reputational risk mitigation are the following: control over compliance with legislative requirements; analysis of reputational risk factors, influence on financial indexes and data of the company; ensuring and control over timely settlements with the customers and cooperation partners; control of the bookkeeping accounting data and reports reliability; improvement of professional skills of the officers. Compliance risk Compliance risk is the risk of losses being incurred by the bank or affiliate company, or application of legal obligations or sanctions to them, or reputation loss, due to the fact that the bank or affiliate company fails to abide by, or violates, compliance laws, rules and standards. Compliance risk is a non-quantifiable risk, and the consequences and losses that may be caused by this risk are difficult to be determined. The compliance risk management is set forth in the Compliance Risk Management Policy. Basic elements of the compliance risk management are as follows: exploration of compliance laws, rules and standards, and identification of problems and critical areas; analysis of the compliance risk and consequences of its occurrence; determination and implementation of measures aimed at compliance risk prevention (risk mitigation); compliance risk monitoring.